Did Hedge Funds Drop The Ball On Markel Corporation (MKL) ?

Abigail Fisher

Sun, Mar 31, 2019, 7:03 PM

Hedge funds are known to underperform the bull markets but that's not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Index returned approximately 13.1% in the first 2.5 months of this year (including dividend payments). Conversely, hedge funds’ top 15 large-cap stock picks generated a return of 19.7% during the same 2.5-month period, with 93% of these stock picks outperforming the broader market benchmark. An average long/short hedge fund returned only 5% due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds' stock picks rather than directly investing in hedge funds. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Markel Corporation (NYSE:MKL).

Markel Corporation (NYSE:MKL) investors should be aware of an increase in hedge fund interest of late. MKL was in 24 hedge funds' portfolios at the end of the fourth quarter of 2018. There were 20 hedge funds in our database with MKL positions at the end of the previous quarter. Our calculations also showed that MKL isn't among the 30 most popular stocks among hedge funds.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's flagship best performing hedge funds strategy returned 20.7% year to date (through March 12th) and outperformed the market even though it draws its stock picks among small-cap stocks. This strategy also outperformed the market by 32 percentage points since its inception (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Let's go over the fresh hedge fund action surrounding Markel Corporation (NYSE:MKL).

What have hedge funds been doing with Markel Corporation (NYSE:MKL)?

At Q4's end, a total of 24 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 20% from one quarter earlier. On the other hand, there were a total of 17 hedge funds with a bullish position in MKL a year ago. With hedgies' sentiment swirling, there exists an "upper tier" of notable hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).

According to Insider Monkey's hedge fund database, Charles Akre's Akre Capital Management has the most valuable position in Markel Corporation (NYSE:MKL), worth close to $532.6 million, comprising 6.7% of its total 13F portfolio. Sitting at the No. 2 spot is Renaissance Technologies, managed by Jim Simons, which holds a $238.4 million position; 0.3% of its 13F portfolio is allocated to the stock. Some other hedge funds and institutional investors that are bullish include Brian Ashford-Russell and Tim Woolley's Polar Capital, Francois Rochon's Giverny Capital and Ken Griffin's Citadel Investment Group.

As one would reasonably expect, key money managers were leading the bulls' herd. Select Equity Group, managed by Robert Joseph Caruso, initiated the largest position in Markel Corporation (NYSE:MKL). Select Equity Group had $8.7 million invested in the company at the end of the quarter. Greg Poole's Echo Street Capital Management also initiated a $7.9 million position during the quarter. The other funds with brand new MKL positions are John Overdeck and David Siegel's Two Sigma Advisors, D. E. Shaw's D E Shaw, and Hoon Kim's Quantinno Capital.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Markel Corporation (NYSE:MKL) but similarly valued. We will take a look at First Republic Bank (NYSE:FRC), International Flavors & Fragrances Inc (NYSE:IFF), Loews Corporation (NYSE:L), and Waters Corporation (NYSE:WAT). This group of stocks' market valuations are closest to MKL's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position FRC,15,600397,-8 IFF,21,166189,-1 L,21,314064,-3 WAT,32,894358,9 Average,22.25,493752,-0.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 22.25 hedge funds with bullish positions and the average amount invested in these stocks was $494 million. That figure was $1102 million in MKL's case. Waters Corporation (NYSE:WAT) is the most popular stock in this table. On the other hand First Republic Bank (NYSE:FRC) is the least popular one with only 15 bullish hedge fund positions. Markel Corporation (NYSE:MKL) is not the most popular stock in this group but hedge fund interest is still above average. 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 15 most popular stocks among hedge funds returned 19.7% through March 15th and outperformed the S&P 500 ETF (SPY) by 6.6 percentage points. Unfortunately MKL wasn't in this group. Hedge funds that bet on MKL were disappointed as the stock lost 2.8% and underperformed the market. If you are interested in investing in large cap stocks, you should check out the top 15 hedge fund stocks as 13 of these outperformed the market.

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

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