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In 2001, a group of Harvard Management Company investment professionals left the firm and established their own firm. Phil Gross and Robert Atchinson, joined by seven colleagues, launched Adage Capital Management at the end of the academic year. Gross had spent 18 years at HMC, where he initially worked as a healthcare and retail analyst and later became a partner. Atchinson also worked at HMC from 1991 to 2001. Gross’ and Atchinson’s team at HMC exceeded the S&P 500 (NYSEARCA:SPY) index each year during the 10 years before their departure, outperforming the index by an average of 4.5 percentage points annually. HMC president and CEO Jack Meyer called their departure “a major disappointment.” In order to have access to their expertise, HMC hired Adage to manage $1.8 billion and held a minority interest in Adage.

Below is a list of top 20 positions in Adage Capital Management’s portfolio at the end of September.

CompanyName

Ticker

Value

Activity

EXXON MOBIL CORP

XOM

497175

-5%

APPLE INC

AAPL

486462

-12%

TYCO INTERNATIONAL

TYC

321962

9%

COCA COLA CO

KO

293024

-10%

INTL BUSINESS MACHS

IBM

283462

2%

CHEVRON CORP NEW

CVX

266897

-5%

RAYTHEON CO

RTN

266092

11%

PFIZER INC

PFE

258144

1%

MICROSOFT CORP

MSFT

255405

17%

A T & T INC

T

237950

-18%

JOHNSON & JOHNSON

JNJ

235643

-22%

WILLIAMS COS

WMB

227578

16%

WELLS FARGO & CO NEW

WFC

191872

18%

GOOGLE INC

GOOG

176896

14%

T J X COMPANIES INC NEW

TJX

163670

-23%

GENERAL ELECTRIC CO

GE

162380

-41%

PROCTER & GAMBLE CO

PG

161516

-18%

ORACLE CORP

ORCL

156274

-8%

INTEL CORP

INTC

153874

-4%

JPMORGAN CHASE & CO

JPM

153829

-1%

Adage’s portfolio value was reduced from $26.9 billion at the end of June to $21.1 billion at the end of September. At the end of June, Adage had 663 different positions and the number was reduced to 644 at the end of the third quarter. Adage sold out 114 positions in total during the third quarter. For instance, Adage had $77.3 million invested in United Technologies Corp (NYSE:UTX) at the end of June, but according to its latest 13F, the fund did not own any shares of the stock at the end of September. UTX only returned 1.59% since the end of September, while SPY gained 2.82% during the same period. In addition to UTX, Adage also sold out its stakes in Tessera Technologies (NASDAQ:TSRA), Target Corp (NYSE:TGT), and National Semiconductor Corp (NSM).

Adage was bullish about Tyco International Ltd (NYSE:TYC). The fund increased its stakes in TYC by 9% over the third quarter. It reported to own $322 million worth of TYC and the stock was the third largest position in its portfolio as of September 30. TYC returned 9.40% since the end of September, beating the market by more than 6 percentage points. Adage also increased its position in Raytheon Co (NYSE:RTN) by 11% to $266 million and its position in Microsoft Corp (NASDAQ:MSFT) by 17% to $255 million. RTN returned 6.63% so far since the end of the third quarter, outperforming the 2.82% of SPY. MSFT was down 1.62% in the same period, but as a value stock with 3.29% dividend yield, MSFT was quite popular among hedge funds we tracked. For example, Jean-Marie Eveillard, Boykin Curry, and Ken Fisher all had over $400 million invested in MSFT.

During the third quarter, Adage bought new stakes in Warren Buffett’s Berkshire Hathaway Inc (NYSE:BRK.B). The fund reported to own $136 million worth of the stock at the end of the third quarter. The position gained 2.60% so far since the end of September. Adage also opened a new position in Cephalon Inc (NASDAQ:CEPH). Adage reported to own $127 million worth of CEPH on September 30. Cephalon was acquired by Teva Pharmaceuticals Industries Ltd on October 14.

Adage was also bullish about Exxon Mobil Corp (NYSE:XOM), Apple Inc (NASDAQ:AAPL), Coca Cola Co (NYSE:KO), International Business Machines Corp (NYSE:IBM), Chevron Corp (NYSE:CVX), Pfizer Inc (NYSE:PFE), and AT&T Inc (NYSE:T). These are conservative bets that should deliver solid returns over the long term. We like Phil Gross and Robert Atchinson’s Adage Capital Management. They aren’t well-known but they have an outstanding track record. We believe that by focusing on the best stock picks of Adage Capital Management, investors are likely to outperform the market in the long term.

Disclosure: I am long MSFT, T.

Source: Adage Capital's Top Stock Picks