Were Hedge Funds Right About Piling Into Aon plc (AON)?

Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in Aon plc (NYSE:AON)? The smart money sentiment can provide an answer to this question.

Aon plc (NYSE:AON) was in 57 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 51. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. AON has experienced an increase in hedge fund sentiment recently. There were 47 hedge funds in our database with AON positions at the end of the first quarter. Our calculations also showed that AON 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.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 56 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Andreas Halvorsen of Viking Global

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar 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. Now we’re going to take a look at the latest hedge fund action surrounding Aon plc (NYSE:AON).

How have hedgies been trading Aon plc (NYSE:AON)?

Heading into the third quarter of 2020, a total of 57 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 21% from the previous quarter. The graph below displays the number of hedge funds with bullish position in AON over the last 20 quarters. 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, Eagle Capital Management was the largest shareholder of Aon plc (NYSE:AON), with a stake worth $1241.4 million reported as of the end of September. Trailing Eagle Capital Management was Viking Global, which amassed a stake valued at $569.3 million. BlueSpruce Investments, Farallon Capital, and Citadel Investment Group 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 BlueSpruce Investments allocated the biggest weight to Aon plc (NYSE:AON), around 11.03% of its 13F portfolio. Steel Canyon Capital is also relatively very bullish on the stock, setting aside 10.97 percent of its 13F equity portfolio to AON.

As industrywide interest jumped, key money managers were leading the bulls’ herd. Farallon Capital, established the largest position in Aon plc (NYSE:AON). Farallon Capital had $331.4 million invested in the company at the end of the quarter. Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital also initiated a $109.3 million position during the quarter. The other funds with brand new AON positions are Brian Ashford-Russell and Tim Woolley’s Polar Capital, Peter Seuss’s Prana Capital Management, and Anand Parekh’s Alyeska Investment Group.

Let’s also examine hedge fund activity in other stocks similar to Aon plc (NYSE:AON). We will take a look at Atlassian Corporation Plc (NASDAQ:TEAM), Honda Motor Co Ltd (NYSE:HMC), Workday Inc (NASDAQ:WDAY), Edwards Lifesciences Corporation (NYSE:EW), Baxter International Inc. (NYSE:BAX), Itau Unibanco Holding SA (NYSE:ITUB), and Biogen Inc. (NASDAQ:BIIB). This group of stocks’ market values resemble AON’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 46.4 hedge funds with bullish positions and the average amount invested in these stocks was $2030 million. That figure was $4755 million in AON’s case. Workday Inc (NASDAQ:WDAY) is the most popular stock in this table. On the other hand Honda Motor Co Ltd (NYSE:HMC) is the least popular one with only 10 bullish hedge fund positions. Aon plc (NYSE:AON) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for AON is 77.3. 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 positive signal but 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 29.2% in 2020 through October 16th and beat the market by 19.7 percentage points. Unfortunately AON wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on AON were disappointed as the stock returned 10.8% since the end of June (through 10/16) 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 many of these stocks already outperformed the market so far this year.

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