Headwaters Capital, an investment management firm, published its third-quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly portfolio net return of 2.8% was recorded by the fund for the third quarter of 2021, outperforming the Russell Mid Cap Index that delivered a -0.9% return for the same period. You can take a look at the fund’s top 5 holdings to have an idea about their best picks for 2021.
Headwaters Capital, in its Q3 2021 investor letter, mentioned Fair Isaac Corporation (NYSE: FICO) and discussed its stance on the firm. Fair Isaac Corporation is a San Jose, California-based data analytics company with an $11.3 billion market capitalization. FICO delivered a -21.54% return since the beginning of the year, while its 12-month returns are down by -9.35%. The stock closed at $400.96 per share on October 8, 2021.
Here is what Headwaters Capital has to say about Fair Isaac Corporation in its Q3 2021 investor letter:
“Top Detractor: Fair Isaac Corporation (FICO) -21%. FICO declined during the quarter due to concerns that the FICO score will play an increasingly smaller role in the consumer credit ecosystem. Comments from multiple press outlets as well as upstart lending platforms implied that consumer lenders are moving away from using the FICO score as part of their credit decisioning process. However, I believe much of this narrative is either misunderstood or was already known by the market. The rapid adoption of buy now pay later (BNPL) payment options, which don’t require the use of a credit score, have added further fuel to the narrative of the FICO score’s obsolescence. I believe BNPL is actually expanding credit access as opposed to taking share from credit cards, but this remains to be seen. A third concern is pending decisions from the FHFA which could allow the use of alternative credit scores for GSE backed mortgages. While all three of these items are clearly an overhang for the stock, I continue to believe the FICO score will remain the dominant credit score for the consumer lending ecosystem. As noted in previous letters, the FICO score represents a consistent, independent and low-cost score that all industry participants (consumers/lenders/regulators) can utilize. Furthermore, the FICO score is deeply embedded into the consumer lending ecosystem, creating high switching costs for migrating to an alternative score with minimal (if any) benefits.”
Based on our calculations, Fair Isaac Corporation (NYSE: FICO) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. FICO was in 28 hedge fund portfolios at the end of the first half of 2021, compared to 27 funds in the previous quarter. Fair Isaac Corporation (NYSE: FICO) delivered a -23.49% return in the past 3 months.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
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Disclosure: None. This article is originally published at Insider Monkey.
