Stocks & Sectors Top Hedge Funds Are Buying (and Selling)

05/27/2013 7:00 am EST

Focus: STOCKS

Hedge funds increased their bets in consumer discretionary, and Google was present in majority of the funds’ portfolios in the first quarter of 2013, notes the staff at FactSet.

The 50 largest hedge funds increased their equity exposure by over 5% in Q1 2013.

This quarter, Boeing Co. (BA) was the favorite allocation of the funds. The stock experienced $1.6 billion in inflows, which amounted to nearly 250% of its Q4 value in the funds’ aggregate portfolio. Boeing’s shares are up 28.2% year-to-date (“YTD”), compared to 15.7% for the S&P 500 (SPY) (SPX).

However, the largest dollar-value increase in equity exposure arose from the January IPO of Norwegian Cruise Line Holdings Ltd. (NCLH), which was backed in part by Apollo Global Management LP.

It’s also interesting to note that, though the funds sold some exposure in Google, Inc. (GOOG), the technology company was present in majority (62%) of the 50 hedge funds’ portfolios. This distinction was previously held by Apple (AAPL). Two quarters ago, Apple was held just as widely as Google, and it was the largest equity holding of nearly one-fourth of the funds. However, by Q1 2013, Apple was held by only 40% of the funds, with only four carrying it as the top stock holding.

While the top 50 hedge fund managers largely increased their exposure to equities, the funds also made significant reductions to their stakes in two successful stocks in 2013: News Corp. (NWS) and American International Group Inc. (AIG). The funds reduced their holding in News Corp. by 20.3%, and the stock represented the largest individual equity sale in three of the 50 hedge funds. In addition, the funds reduced their exposure to AIG by 16.2%. With these sales, fund investors seem to be predicting a slowdown or reversal for these two issues, as AIG and News Corp. have had very similar YTD returns as Boeing in 2013: 27.2% and 28.8%, respectively.

At the country-level, the top 50 hedge funds continued their home country bias by adding primarily to US equities (90% of the top 50 funds are domiciled in the US). Stocks domiciled in Australia, on the other hand, received the largest decline in country exposure. This was primarily due to sales of Aurizon Holdings Ltd., a local Australian freight transportation and infrastructure company.

NEXT PAGE: Where Are Hedge Funds Overweighting

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Sector-Level: Funds Add to Overweight Consumer Discretionary Exposure
On the sector-level, the top 50 hedge funds added the most exposure to their overweight position in the Consumer Discretionary sector (XLY). The funds made large purchases in CBS Corp. (CBS), Virgin Media Inc. (VMED), and Comcast Corp. (CMCSA), and also benefitted from the new exposure to Norwegian Cruise Line Holding (NCLH) and Liberty Media Corp. (LMCA) (which was spun off from its Starz assets in January). VMED was also the largest equity purchase for three of the 50 funds, including Third Point Management Co. LLC, which disclosed a 4.1% position in the company.

As a result, the 50 largest hedge funds showed a 20.1% weighting in the Consumer Discretionary sector at the end of Q1, which was 8.5 percentage points larger than the sector’s weight in the S&P 500 index. On the other hand, the Information Technology sector was the only group to experience outflows in Q1. This trend was driven by sales of Symantec Corp. (SYMC), Oracle Corp. (ORCL), Facebook Inc. (FB), and Yahoo! Inc. (YHOO). Though these sales contributed to an underweight portfolio exposure in the Information Technology sector (XLK) (-1.7 percentage points), the Consumer Staples sector (XLP) remained the most underweight group relative to the S&P 500. The sector’s weight of 6.4% in the aggregate portfolio was 3.6 percentage points smaller than its weight in the S&P 500 index.

Funds Overweight AIG, EQIX, HAIN, TTWO
On the security-level, LyondellBasell Industries (LYB) was the most overweight equity of S&P 500 constituents in the aggregate portfolio (+2.5 percentage points*), but this was primarily due to Apollo Capital Management’s 15.2% stake in the company. Other overweight exposures included AIG, which, despite its overall reduction in the portfolio in Q1, was the next largest active weight relative to the S&P 500 (+1.2 points, but down from +1.6 points in Q4). On the other end of the spectrum, Exxon Mobil Corp. (XOM) was the most underweight holding of all S&P 500 stocks, with a portfolio weight 2.4 percentage points lower than its exposure in S&P 500 index. Other underweight equities in the portfolio included Berkshire Hathaway Inc. (BRK-B) and Wal-Mart Stores Inc (WMT).

In looking at S&P 400 mid-cap stocks, the hedge funds pared exposure to their most heavily-weighted position during Q1 2013: Equinix Inc. (EQIX). The funds’ holding of the provider of network-neutral data center and co-location services decreased from 6.8 percentage points above that of the S&P 400 index to 6.5 points over the quarter. Equinix was a positive bet in 2012, returning 103.4%, but the stock has only returned 10.5% year to date (“YTD”) versus 17.6% for the S&P 400 Mid-Cap index.

NEXT PAGE: Top 50 Holdings of Top Hedge Funds

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Within small-cap stocks, the funds’ again reduced their most overweight holding for the second consecutive quarter. Hain Celestial Group Inc. (HAIN), a natural and organic beverage, snack food, and personal care company, was overweight by 4.8 percentage points versus the S&P 600 in Q3 2012, but only +3.9 points in Q4 2012 and +3.7 points in Q1 2013. The stock has continued to outperform though. Its 47.9% gain in 2012 has been followed by a return of 22.3% YTD (versus 16.2% for the S&P 600). In addition, the funds added to their next largest overweight position in small-caps: Take-Two Interactive Software Inc. (TTWO) (+2.2 percentage points versus +1.8 points in Q4). The developer of interactive entertainment through its Rockstar Games and 2K labels underperformed in 2012 but has returned 44.5% YTD.

Top 50 Holdings: Top 50 Hedge Funds
Market value is in millions of dollars and represents the market value held by the top 50 hedge funds at the end of the quarter. The market value change measures the total position change of each security multiplied by its quarter-end price. “% Port” indicates the weight of the stock in an aggregated equity portfolio of the top 50 hedge funds. “% Shares Out” indicates the proportion of the shares outstanding of the stock owned by the aggregated portfolio of the top 50 hedge funds and the “Total” and “50 Highest” lines show the average for this item*. “# of companies” indicates the number of funds (out of the top 50) holding the stock.

Most Widely Held Hedge Fund Stocks Table

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Activist Shareholders: Positions Taken in SVU, GRPN, NUAN
The “SharkWatch50″is a FactSet compilation of the 50 most significant activist investors. In Q1, the nine SharkWatch activist investors within the top 50 hedge funds disclosed several large, new positions. JANA Partners LLC, which just broke into the top 50 hedge funds this quarter, took 5.5% and 3.3% stakes in the depressed shares of SUPERVALU Inc. (SVU) and Groupon Inc. (GRPN) (the companies lost 69.6% and 76.4%, respectively, in 2012). In addition, the activist fund also announced a 9.1% stake in Oil States International (OIS), in conjunction with a statement of interest in splitting the oilfield services and accommodations segments of the company. Since the April 29 announcement, OIS’s shares have returned 31.8%. In addition, several other SharkWatch funds previously disclosed material positions prior to the recent release of 13F filings. ValueAct Capital Management took an 8.2% stake in Invensys PLC, a diversified technology group, and Icahn Associates disclosed a 10.0% position in Nuance Communications Inc. (NUAN), a voice and language solutions company.

By the Staff of FactSet

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