Were Hedge Funds Right About Mostly Avoiding Marsh & McLennan Companies, Inc. (MMC)?

Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Marsh & McLennan Companies, Inc. (NYSE:MMC).

Marsh & McLennan Companies, Inc. (NYSE:MMC) was in 38 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 38. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. MMC shareholders have witnessed an increase in hedge fund sentiment of late. There were 37 hedge funds in our database with MMC holdings at the end of March. Our calculations also showed that MMC isn’t among the 30 most popular stocks among hedge funds (click for Q2 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.

In the eyes of most investors, hedge funds are viewed as underperforming, outdated investment tools of years past. While there are more than 8000 funds trading at present, Our researchers hone in on the top tier of this club, around 850 funds. These money managers handle bulk of all hedge funds’ total capital, and by monitoring their unrivaled equity investments, Insider Monkey has uncovered a few investment strategies that have historically surpassed Mr. Market. Insider Monkey’s flagship short hedge fund strategy defeated the S&P 500 short ETFs by around 20 percentage points per annum since its inception in March 2017. Our portfolio of short stocks lost 34% since February 2017 (through August 17th) even though the market was up 53% during the same period. We just shared a list of 8 short targets in our latest quarterly update .

Tom Gayner of Markel Gayner Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Keeping this in mind we’re going to review the recent hedge fund action regarding Marsh & McLennan Companies, Inc. (NYSE:MMC).

How have hedgies been trading Marsh & McLennan Companies, Inc. (NYSE:MMC)?

At second quarter’s end, a total of 38 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 3% from one quarter earlier. By comparison, 29 hedge funds held shares or bullish call options in MMC a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Diamond Hill Capital was the largest shareholder of Marsh & McLennan Companies, Inc. (NYSE:MMC), with a stake worth $175.2 million reported as of the end of June. Trailing Diamond Hill Capital was Polar Capital, which amassed a stake valued at $155.2 million. Markel Gayner Asset Management, Arrowstreet Capital, and Echo Street Capital Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Bishop Rock Capital allocated the biggest weight to Marsh & McLennan Companies, Inc. (NYSE:MMC), around 5.64% of its 13F portfolio. Gillson Capital is also relatively very bullish on the stock, dishing out 5.09 percent of its 13F equity portfolio to MMC.

Consequently, some big names have been driving this bullishness. Gillson Capital, managed by Daniel Johnson, established the most valuable position in Marsh & McLennan Companies, Inc. (NYSE:MMC). Gillson Capital had $28.4 million invested in the company at the end of the quarter. Munir Javeri’s 3G Sahana Capital Management also made a $25.1 million investment in the stock during the quarter. The following funds were also among the new MMC investors:  Renaissance Technologies, John D. Gillespie’s Prospector Partners, and Seth Cogswell’s Running Oak Capital.

Let’s also examine hedge fund activity in other stocks similar to Marsh & McLennan Companies, Inc. (NYSE:MMC). These stocks are Uber Technologies, Inc. (NYSE:UBER), Petroleo Brasileiro S.A. – Petrobras (NYSE:PBR), CSX Corporation (NYSE:CSX), Air Products & Chemicals, Inc. (NYSE:APD), Vale SA (NYSE:VALE), The Sherwin-Williams Company (NYSE:SHW), and Autodesk, Inc. (NASDAQ:ADSK). All of these stocks’ market caps are similar to MMC’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 50.7 hedge funds with bullish positions and the average amount invested in these stocks was $2284 million. That figure was $847 million in MMC’s case. Uber Technologies, Inc. (NYSE:UBER) is the most popular stock in this table. On the other hand Petroleo Brasileiro S.A. – Petrobras (NYSE:PBR) is the least popular one with only 29 bullish hedge fund positions. Marsh & McLennan Companies, Inc. (NYSE:MMC) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for MMC is 42.9. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 23% in 2020 through October 30th and surpassed the market again by 20.1 percentage points. Unfortunately MMC wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); MMC investors were disappointed as the stock returned -2.9% since the end of June (through 10/30) 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.