At The Motley Fool, we understand that it often pays to zig when Wall Street zags. Still, that doesn't mean we blithely ignore what leading fund managers are buying and selling. And hedge funds, which are rarely in lockstep with the broader market, can be a particularly valuable source of insight.
Every quarter, fund managers managing more than $100 million must disclose their quarter-end holdings publicly by filing Securities and Exchange Commission Form 13F. The form lists all U.S.-traded securities held by the manager at the end of the quarter. While the form does not disclose the manager's short positions or the manager's intraquarter trades, it can shine a bright light onto his or her "long" stock bets. To help us make use of 13F data, we turned to Motley Fool partner AlphaClone, a research and investment management firm that tracks hedge fund public disclosures, and develops investment strategies based on them.
Q4 2010 update
Value investor Mohnish Pabrai is the founder and managing partner of Pabrai Investment Funds. Pabrai invests primarily in smaller, out-of-favor companies, and he tends toward a concentrated portfolio (with 10-20 holdings). The total market value of Pabrai's disclosed equity holdings for the quarter ended Dec. 31, 2010, was $271.5 million, spread across 15 holdings. Here's a chart showing the portfolio's industry allocations:
The fund's 10 largest positions (shares held) and associated changes as of Dec. 31 were:
- PotashCorp (NYSE: POT ) -- increased 0.9%
- Brookfield Properties (NYSE: BPO ) -- no change
- Cresud (Nasdaq: CRESY ) -- reduced 20.2%
- POSCO (NYSE: PKX ) -- increased 167.4%
- CapitalSource (NYSE: CSE ) -- no change
- International Coal Group (NYSE: ICO ) -- reduced 2.3%
- Horsehead Holding (Nasdaq: ZINC ) -- reduced 0.1%
- Air Transport Services (Nasdaq: ATSG ) -- reduced 43.4%
- Terex (NYSE: TEX ) -- reduced 4.7%
- Pinnacle Airlines (Nasdaq: PNCL ) -- reduced 0.7%
As you can see, during the quarter, the fund added substantially to its position in POSCO. On the sell side, the fund sold out its position in Leucadia National and cut back substantially on Harvest Natural.
Is it worth paying attention to Pabrai's moves? According to AlphaClone's back-test simulation, anyone who invested in Pabrai's 10 largest holdings at the time they were disclosed publicly each quarter would have returned 161.4% since 2005, versus 24.9% for the S&P500 (including dividends) as of March 22. Here's a chart showing AlphaClone's back-test model:
The strategy above buys/sells its holdings each quarter, five trading days after the SEC's filing window for Form 13F closes.
Selected Q4 2010 commentary
Mohnish Pabrai's primary focus continues to be basic materials, which makes up 35% of the portfolio. Major stocks from this sector include Potash, POSCO, Horsehead, and Teck Resources. The other sectors of focus are services, transportation, and financial sectors, which combine to make up 36% of the portfolio. Here's where the firm is winning currently and losing currently:
Two winners for the quarter were International Coal Group and Pinnacle Airlines, both up more than 45% in the three months that ended Dec. 31, 2010. As its name would suggest, International Coal is a coal producer -- but its production is centered domestically on northern and central Appalachia rather than internationally. The company has a market capitalization of $2.2 billion and trades at a pricey P/E of more than 70. It also has a five-star rating (the highest) from the Motley Fool CAPS community.
POSCO, the South Korean steel company with roots going back to 1968, saw shares drop 5.5% for the quarter. But like International Coal, POSCO has a five-star CAPS rating. After the devastating earthquake in Japan, POSCO has started receiving huge orders from the country.
So there you have it, the blow by blow of Pabrai Mohnish's latest moves and why it can matter to your portfolio. Tell us what you think in the comments below.