Renaissance Technologies is well regarded as one of the most successful hedge funds over the last 30 years, having outperformed the vast majority of other hedge funds and the broader market over that time-frame. In fact, the fund has averaged an approximate 35% return per year after fees since 1989.
The hedge fund, run out of Long Island, New York, owes its success to the vision and competence of its Director, President and CEO, James H. Simons, a rarely seen or heard from fund manager who uses complex mathematical modeling to determine transactions. Most of his higher employees appear more likely to work at NASA than conquer Wall Street, but year after year they do seem to do so.
While most of the time we cannot get a glimpse into the secret and proprietary models and conclusions of this fund, 4 times a year they must file with the SEC, delineating the main equity transactions made in the prior quarter (just equities, not debt or private placements). Renaissance just filed that 13F. Therefore, we now know what large positions Renaissance took in the first quarter of 2011, and from which it departed.
The Main 13F Transactions at Renaissance Technologies
As for the additions made, Renaissance’s 13F indicates five new large positions taken (4 worth over $100 million). In ascending size order, the fifth largest was in Emerson Electric Co. (EMR), where the fund purchased just over 1 million shares, valued at approximately $60 million as of March 31. Emerson is a global industrial equipment, component and engineering company whose products and expertise are utilized in the production of many industrial goods and machine technologies. EMR appears to be a bet on continued efforts by companies to generate efficiencies in the production of products, and a general bet towards continued ramping up of industrial production around the world.
Staples Inc. (SPLS) was Renaissance’s fourth largest new investment. In the first quarter, the fund purchased about 5.76 million shares valued at approximately $112 million as of March 31. SPLS has since fallen considerably on the back of poor earnings and a relatively negative outlook. The fund is likely taking the view that SPLS will survive this difficult environment and is likely to benefit from other competitors slowly exiting the market due to their lower probability of surviving the decreased consumer demand and increased Internet competition within the industry.
Exxon Mobil Corp. (XOM) was Renaissance’s third largest new investment, where the fund acquired about 1.68 million shares of the oil giant, valued at approximately $142 million as of March 31. XOM is a mega-cap oil company that is likely familiar to the readers. The reasons Renaissance may have for investing in XOM are varied, but likely include commodity appreciation, increased demand for energy and decreasing oil supply. Another key reason may be XOM’s long track record of performance through good and bad markets.
General Electric Co. (GE) was Renaissance’s second largest new investment. The fund acquired about 7.5 million shares of the conglomerate, valued at approximately $150 million. The once admired company has been under pressure over the last few years after its business model diverted from its core industrial, electrical and medical divisions, to rely most heavily upon its financial division. That division ended up letting the shareholders down during the recent crisis, but having survived, GE now has large losses to carry forward. Further, GE has also become a central player in the implementation of many government green programs.
The largest new investment made by Renaissance in the first quarter was in Target Corp. (TGT), where the fund acquired about 3.8 million shares of the merchandiser, valued at approximately $191 million. This position appears to be a value play, as TGT is a retailer that should appeal to a more frugal consumer. TGT is a well-known and popular retailer, but its stock has been under pressure and flat-lined over the last few months. This position is likely based upon a belief that TGT will continue to expand as individuals run to the lower cost retailers. This may also be based upon a belief that many competitors will not be able to survive this economy.
Beyond Renaissance’s purchases, the 13F also indicates what the fund sold. While several sales were noted, three were in positions valued at about $100 million or more. Renaissance sold 896,200 shares of Franklin Resources Inc. (BEN), valued at about $99 million. The financial institution did perform well since the economic downturn, and this may indicate Renaissance predicts a correction is coming.
Renaissance also sold 1.9 million shares of Potash Corp. of Saskatchewan (POT), valued at just over $100 million. Potash sells chemicals essential for fertilizing and has performed well over the last year on the back of increased commodity costs and an acquisition attempt that fell through. The largest sale by Renaissance was in Hewlett-Packard Co. (HPQ), where Renaissance sold about 3 million shares of the technology giant, valued at just under $130 million as of March 31. HPQ underperformed its industry and sector over the recent past, since its public CEO change and concerns over increased competition.
It is more difficult to gauge what Renaissance is doing than the average hedge fund, because the fund often utilized complex options and futures strategies. It seems apparent that Renaissance’s largest transactions indicate a desire to eliminate some of its higher risk investments, preferring strong brands with long track records of surviving capricious markets. The removal of POT also appears to indicate that the fund believes at least much of the commodities move is behind us. Generally speaking, this appears to be a capital preservation policy, though SPLS has not been so successful in preserving capital thus far.
The theme, though, does seem to indicate a desire to get out of those positions that have a higher correlation to the market in general and into names that have a greater likelihood of trading according to their fundamentals. This indicates that Renaissance may believe a broader market correction is due. Some may argue that one is well overdue, but opinions will certainly differ on this. Of course, that is how markets are made.
Additional disclosure: Each investment should be considered relative to the total portfolio and its objectives.