By: Jake Mann
Though exact estimates vary, it is widely accepted that about half of all American households hold at least one share of a publicly traded company's stock, be it through direct or indirect ownership. Keeping this reality in mind, it's self-evident that the legendary investors of our day- the David Einhorns and the Warren Buffetts, if you will- are truly the crème de la crème.
We have teamed up with MarketWatch to create the Billionaire Hedge Fund Index to measure just how talented the smart money's elite is at stock picking. The Index tracks over 40 billionaire fund managers, and uses a consensus-based weighting criterion to order its holdings. After a full year of its existence, the results are truly exemplary. In 2012, this index has returned 24.3% vs. 16.0% for the S&P 500 ETF (SPY). That's an outperformance of 8.3 percentage points.
Historically speaking, imitating hedge funds' top picks outperformed the market by 2 percentage points a year, and their most popular small-cap investments generated an outperformance of more than 15 percentage points.
With that being said, we're going to reveal the top five holdings of the Billionaire Hedge Fund Index, so retail investors can begin to learn how to best prepare their portfolios for the future.
Apple Inc. (AAPL) was tied for first among the 40-plus billionaires tracked by the Index, with 18 mega-investors holding at least $10 million worth of the stock at the end of the last 13F-filing period with the SEC. Apple's swoon has been well-documented by all corners of the blogosphere, but shares are still up more than 11% since the start of 2012.
The tech giant is clearly oversold at its current levels, and the company has a number of potential growth drivers- a deal with China Mobile (CHL), a smart TV and a dividend hike among chief importance- that can push shares to a fairer price. Some of the top name investors in Apple include David Tepper, Dan Loeb and David Einhorn.
Google Inc. (GOOG) also has 18 billionaires invested, and since the beginning of last year, it has outperformed Apple by more than 2 percentage points. Lone Pine Capital's Stephen Mandel, one of the most successful of Julian Robertson's "Tiger Cubs," owns the most Google shares of the 400 or so hedge funds we track.
Amid continually declining cost-per-click averages, Google beat the Street's earnings estimates in its latest quarterly financials, but revenues fell a bit flat. Investors have still been bullish on the company's prospects in 2013, and its growth story is still clearly intact. One intriguing project to watch is Google's in-house development of a so-called "X Phone." It's too early to predict what an entry into the smartphone manufacturer's circle will mean for shareholders, but ardent investors should stay on top of this situation.
American International Group, Inc. (AIG), meanwhile, has the third-heaviest weighting in the Billionaire Hedge Fund Index with 14 billionaires holding long positions. Many notable investors- including George Soros and Louis Bacon- established positions in the last 13F-filing period.
It appears that the primary bullish thesis on AIG is its settlement of the Treasury Department's crisis-era bailout package. The insurer is now a leaner, meaner multinational, and its shares have gained 56.5% since the start of 2012. The company still trades at a mere 0.55 times its book value, indicating that there are still plenty of reasons for value-seeking investors to push AIG higher.
Citigroup, Inc. (C) has 13 billionaires invested, including Ken Griffin and his fund, Citadel Investment Group. Griffin upped his stake in the banking behemoth by 213% in the third quarter, and shares have rewarded this move, popping 28.1% since last October. Over the longer run, Citigroup's return has been equally as impressive, and it's easy to see why this stock is an integral part of the Billionaire Hedge Fund Index. On a book value basis, Citigroup still trades at a 20% discount to the rest of its "Big Four" peers, and a greater focus on emerging markets should attract more growth-oriented investors moving forward.
Nexen Inc. (NXY) also has 13 billionaires invested, as shares of the energy company have gained 6% since the end of September. This is a merger arbitrage play. Nexen was finally granted approval from the Canadian government to be acquired by Chinese CNOOC Limited (CEO) late last year, but the agreement is still pending approval from U.S. officials. Shares of Nexen still trade at a 2.7% discount to CNOOC's offer price of $27.50 a share.