Though estimates vary, it is widely accepted that no more than 400 to 500 managers control about four-fifths of the hedge fund world’s total asset base. Considering the fact that there were a little over 8,000 active hedgies at the end of last year, this paints an astonishing picture of the sheer concentration that has occurred in this industry.
This is an important point to consider, because at Insider Monkey, we’ve discovered how to capitalize on this phenomenon. By focusing on the best picks of this upper tier, we’ve developed several ways that have helped retail investors immensely. Our small-cap strategy outpaced the broader indexes by 18% a year for more than a decade in our back tests, and since we started sharing these picks with the public, we’ve beaten the market by 18 percentage points in only 5 months (see how to capitalize on this strategy yourself).
A look at the latest round of 13F filings with the SEC indicates an intriguing trend is occurring in this space: a shift toward deeply discounted financial stocks. In fact, of the smart money’s five favorite companies in this sector, four saw an inflow of money last quarter. Let’s take a look.
At the No. 1 spot, American International Group, Inc. (NYSE:AIG) is no surprise. We originally reported over a week ago that AIG had displaced Apple as hedgies’ favorite stock heading into 2013. At the end of the fourth quarter, 142 of the funds we track held long positions in the insurer, an increase of 17% from the previous quarter. Of this group, Bruce Berkowitz’s $3 billion position is by far the largest, accounting for more than 40% of his total equity portfolio. Dan Loeb (see Loeb and Third Point’s profile) and Brian Jackelow are two of the 15 other managers with over 10% of their holdings allocated to AIG.
Citigroup Inc. (NYSE:C), meanwhile, takes the No. 2 spot on this list with 108 hedge funds invested. Citi’s focus on emerging market-activity is a key reason why the smart money is bullish. Over the next half-decade, analysts forecast its EPS growth to outpace all but two of its peers in the money center banking industry. Of the funds we track, David Tepper and George Soros (see Soros’s full portfolio) hold two of the top three largest positions in Citigroup.
With 93 hedge funds reporting long positions, JPMorgan Chase & Co. (NYSE:JPM) is the third most popular financial stock. Three notable managers—Julian Robertson, Whitney Tilson and Mike Vranos—sold out of JPM last quarter, though “magic formula” man Joel Greenblatt and Rob Citrone were a few of the many who established positions (see the full list here). Like Citigroup and AIG, JPMorgan trades at a discount to its book value per share—about 9% in this case.
Bank of America Corp (NYSE:BAC) sits in a tie with JPM with 93 hedgies invested at the end of last quarter. In terms of capital inflows, Bank of America actually saw the second highest of this group behind AIG, and fifth in our entire equity universe.
That’s quite a statistic, but what does it actually mean?
In short, this indicates that the funds who were bullish at the end of Q3 used Q4 to bolster their positions. Despite double-digit gains in recent months, Bank of America’s book valuation actually trades at a whopping 48% discount to parity—the lowest in its industry. Like AIG, Bruce Berkowitz holds the largest BAC position of the funds we track.
Wells Fargo & Company (NYSE:WFC) takes the final spot of this top five, and was the only stock of the bunch to see a capital outflow last quarter. Eighty hedge funds held long positions in the bank at the end of Q4, a decrease of 11% from the previous quarter. Interestingly, Warren Buffett did make Wells Fargo his new No. 1 holding, ahead of Coca-Cola for the first time since we began tracking the Oracle in 2010. An underrated benefit of the bank’s Buffett-connection is its ability to play a key role in Berkshire’s acquisition financing, and an above-average dividend yield is an added bonus.
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