Were Hedge Funds Right About Brookfield Asset Management Inc. (BAM)?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thoughtBrookfield Asset Management Inc. (NYSE:BAM) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Is Brookfield Asset Management Inc. (NYSE:BAM) the right investment to pursue these days? Investors who are in the know were betting on the stock. The number of bullish hedge fund bets increased by 3 in recent months. Our calculations also showed that BAM isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

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 58 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.

Israel Englander of Millennium Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so we are checking out this tiny lithium stock. Keeping this in mind we’re going to take a glance at the fresh hedge fund action surrounding Brookfield Asset Management Inc. (NYSE:BAM).

What have hedge funds been doing with Brookfield Asset Management Inc. (NYSE:BAM)?

At Q1’s end, a total of 37 of the hedge funds tracked by Insider Monkey were long this stock, a change of 9% from the fourth quarter of 2019. By comparison, 26 hedge funds held shares or bullish call options in BAM a year ago. With the smart money’s capital changing hands, there exists an “upper tier” of notable hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).

The largest stake in Brookfield Asset Management Inc. (NYSE:BAM) was held by Akre Capital Management, which reported holding $318.3 million worth of stock at the end of September. It was followed by Markel Gayner Asset Management with a $256.7 million position. Other investors bullish on the company included Citadel Investment Group, Horizon Asset Management, and Third Avenue Management. In terms of the portfolio weights assigned to each position Greenlea Lane Capital allocated the biggest weight to Brookfield Asset Management Inc. (NYSE:BAM), around 17.04% of its 13F portfolio. Third Avenue Management is also relatively very bullish on the stock, dishing out 7.04 percent of its 13F equity portfolio to BAM.

As aggregate interest increased, specific money managers were leading the bulls’ herd. Locust Wood Capital Advisers, managed by Stephen J. Errico, created the most outsized position in Brookfield Asset Management Inc. (NYSE:BAM). Locust Wood Capital Advisers had $16.3 million invested in the company at the end of the quarter. Peter Muller’s PDT Partners also made a $7.1 million investment in the stock during the quarter. The following funds were also among the new BAM investors: Seth Fischer’s Oasis Management, David Rodriguez-Fraile’s BlueMar Capital Management, and Anand Parekh’s Alyeska Investment Group.

Let’s go over hedge fund activity in other stocks similar to Brookfield Asset Management Inc. (NYSE:BAM). We will take a look at CNOOC Limited (NYSE:CEO), Activision Blizzard, Inc. (NASDAQ:ATVI), Boston Scientific Corporation (NYSE:BSX), and Illinois Tool Works Inc. (NYSE:ITW). This group of stocks’ market valuations match BAM’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 51.25 hedge funds with bullish positions and the average amount invested in these stocks was $1652 million. That figure was $886 million in BAM’s case. Activision Blizzard, Inc. (NASDAQ:ATVI) is the most popular stock in this table. On the other hand CNOOC Limited (NYSE:CEO) is the least popular one with only 11 bullish hedge fund positions. Brookfield Asset Management Inc. (NYSE:BAM) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.3% in 2020 through June 30th and surpassed the market by 15.5 percentage points. Unfortunately BAM wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); BAM investors were disappointed as the stock returned 11.9% during the second quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

Disclosure: None. This article was originally published at Insider Monkey.