Take a Look at the Top Stock Picks of this Multi-Billion Dollar Fund

Cantillon Capital Management is a New York-based long/short equity hedge fund founded by William Von Mueffling in 2003. Mr. Mueffling holds an MBA from Columbia Business School and prior to founding Cantillon, he had worked at Deutsche Bank and Lazard Asset Management. According to Cantillon Capital Management’s recently submitted 13F with the SEC, the US equity portfolio of the fund at the end of September was worth almost $4.7 billion, down from the $5.0 billion disclosed as of the end of June. Cantillon runs a fairly concentrated portfolio by hedge funds standards with open positions in 24 stocks as of September 30, and quarter-over-quarter turnover of only 5.26%. Technology and finance are the fund’s two most preferred sectors to invest, accounting for 34% and 32% respectively of the equity portfolio value at the end of September. In this article we are going to dissect the fund’s top five equity holdings at the end of the third quarter and try to gauge the reasons why Cantillon is betting on them.

Why are we interested in the 13F filings of a select group of hedge funds? We use these filings to determine the top 15 small-cap stocks held by these elite funds based on 16 years of research that showed their top small-cap picks are much more profitable than both their large-cap stocks and the broader market as a whole; yet investors have been stuck (until now) investing in all of a hedge fund’s stocks: the good, the bad, and the ugly. Why pay fees to invest in both the best and worst ideas of a particular hedge fund when you can simply mimic the best ideas of the best fund managers on your own? These top small-cap stocks beat the S&P 500 Total Return Index by an average of nearly one percentage point per month in our backtests, which were conducted over the period from 1999 to 2012. Even better, since the beginning of forward testing at the end of August 2012, the strategy worked just as our research predicted and then some, outperforming the market every year and returning 102% over the last 37 months, which is more than 53 percentage points higher than the returns of the S&P 500 ETF (SPY) (see more details).

#5 Willis Group Holdings PLC (NYSE:WSH)

Shares Owned by Cantillon Capital Management (as of September 30): 8.32 million shares

Value of Holding (as of September 30): $340.932 Million

Cantillon added an additional 532,000 shares of the London-based insurance company during the third quarter. The stock of Willis Group Holdings PLC (NYSE:WSH) has declined steadily since May this year, but the recovery it made during October has let to the stock trading flat for the year. On November 6, the company affirmed to its shareholders that it supports its merger with Towers Watson & Co. (NASDAQ:TW) as proposed by Institutional Shareholder Services (ISS). For the third quarter of fiscal 2015 the company reported disappointing numbers on October 27. While the Street was expecting it to report EPS of $0.17 on revenue of $870.41 million, it reported EPS of $0.14 on revenue of $846 million. Jeffrey Ubben‘s ValueAct Capital was the largest shareholder of Willis Group Holdings PLC (NYSE:WSH) at the end of June among the hedge funds tracked by us; it owned over 18.4 million shares of the company.

#4 Ecolab Inc. (NYSE:ECL)

Shares Owned by Cantillon Capital Management (as of September 30): 3.25 million shares

Value of Holding (as of September 30): $357.116 Million

Moving on, shares of Ecolab Inc. (NYSE:ECL) more or less have held on to the gains they made during the first two months of the year and currently trade with year-to-date gains of 10.36%. During the third quarter Cantillon sold a paltry 6,900 shares of the company. On November 5, Ecolab Inc. (NYSE:ECL)’s  energy services subsidiary, Nalco Champion,  acquired the assets and operations of Ultra Fab Industries Ltd., a Canadian firm that manufactures specialized chemical injection systems for the oil and gas industry. On November 2, Ecolab declared its fiscal 2015 third quarter earnings. Although the EPS of $1.28 that it reported came in-line with analysts’ expectation, it missed revenue estimates of $3.55 billion by delivering $3.45 billion in revenue. Richard Chilton‘s Chilton Investment Company reduced its stake in Ecolab by 79% to 155,569 shares during the second quarter.

#3 Analog Devices, Inc. (NASDAQ:ADI)

Shares Owned by Cantillon Capital Management (as of September 30): 7.5 million shares

Value of Holding (as of September 30): $423.068 Million

The stock of integrated circuits manufacturer Analog Devices, Inc. (NASDAQ:ADI) performed remarkably well during the first half, but the 11.4% decline suffered during the third quarter narrowed their year-to-date gains to some 8%. Even though Cantillon sold 18,000 shares of the company during the July-September period, Analog Devices, Inc. (NASDAQ:ADI) still accounted for 9.02% of the fund’s equity portfolio at the end of September. On October 14, reports emerged that Analog Devices was in talks with smaller rival Maxim Integrated Products Inc. (NASDAQ:MXIM) regarding a potential merger. Following this news, shares of both Analog Devices and Maxim Integrated Products spiked and on the same day analysts at BMO Capital Markets upgraded the stock of Analog Devices to ‘Outperform’ from ‘Market Perform’ and raised their price target to $66 from $63. Dmitry Balyasny‘s Balyasny Asset Management initiated a stake in the company during the second quarter by purchasing almost 1.78 million shares.

#2 Fidelity National Information Services (NYSE:FIS)

Shares Owned by Cantillon Capital Management (as of September 30): 8.06 million shares

Value of Holding (as of September 30): $540.642 Million

Just like the two companies discussed previously, Cantillon Capital Management also slightly reduced its stake in Fidelity National Information Services (NYSE:FIS) by 18,850 shares during the third quarter. Though the stock of the company rose almost by 9% during the third quarter, it couldn’t help Fidelity National Information Services (NYSE:FIS) to retain its position as Cantillon’s largest holding in terms of value. Recently, shares of the company have slumped by more than 12% in a single day after it reported its fiscal 2015 third quarter earnings on November 3. While the Stree had expected it to declare EPS of $0.91 on revenue of $1.64 billion, Fidelity National Information Services reported EPS of $0.90 on revenue of $1.60 billion. After Cantillon, Ken Griffin‘s Citadel Investment Group was the largest shareholder of the company at the end of the second quarter among the hedge funds we cover; it owned slightly over 5 million shares.

#1 Alphabet Inc (NASDAQ:GOOG)

Shares Owned by Cantillon Capital Management (as of September 30): 888,378 shares

Value of Holding (as of September 30): $555.395 Million

Finally, due to Cantillon increasing its stake by 126% or 496,215 shares during the July-September period, Alphabet Inc (NASDAQ:GOOG) emerged as the fund’s largest equity holding at the end of the third quarter. The better than expected numbers that the company has reported in its last two quarterly results has helped its stock to break the trading range that it was confined to for almost the last two years and it currently trades with year-to-date gains of 32.2%. For the third quarter, Alphabet Inc (NASDAQ:GOOG) reported EPS of $7.35 on revenue of $18.68 billion, compared to EPS of $6.35 on revenue of $16.51 billion delivered a year earlier. Andreas Halvorsen‘s Viking Global increased its stake in the company by 67% to over 2.7 million shares during the second quarter.

Disclosure: None