Were Hedge Funds Right About Waddell & Reed Financial, Inc. (WDR)?

Reymerlyn Martin

Sat, May 9, 2020, 7:42 PM 5 min read

Hedge funds don't get the respect they used to get. Nowadays investors prefer passive funds over actively managed funds. One thing they don't realize is that 100% of the passive funds didn't see the coronavirus recession coming, but a lot of hedge funds did. Even we published an article near the end of February and predicted a US recession. Think about all the losses you could have avoided if you sold your shares in February and bought them back at the end of March.

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We have processed the filings of the more than 835 world-class investment firms that we track and now have access to the collective wisdom contained in these filings, which are based on their December 31 holdings, data that is available nowhere else. Should you consider Waddell & Reed Financial, Inc. (NYSE:WDR) for your portfolio? We'll look to this invaluable collective wisdom for the answer.

Waddell & Reed Financial, Inc. (NYSE:WDR) investors should be aware of an increase in hedge fund sentiment of late. Our calculations also showed that WDR isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).

[caption id="attachment_26397" align="aligncenter" width="400"]

Ray Dalio of Bridgewater Associates[/caption]

We leave no stone unturned when looking for the next great investment idea. For example, this investor can predict short term winners following earnings announcements with 77% accuracy, so we check out his stock picks. A former hedge fund manager is pitching the "next Amazon" in this video; again we are listening. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now we're going to take a look at the new hedge fund action encompassing Waddell & Reed Financial, Inc. (NYSE:WDR).

What have hedge funds been doing with Waddell & Reed Financial, Inc. (NYSE:WDR)?

At Q4's end, a total of 21 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 5% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards WDR over the last 18 quarters. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Arrowstreet Capital was the largest shareholder of Waddell & Reed Financial, Inc. (NYSE:WDR), with a stake worth $34 million reported as of the end of September. Trailing Arrowstreet Capital was GAMCO Investors, which amassed a stake valued at $23.1 million. Fisher Asset Management, Citadel Investment Group, and Winton Capital Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Factorial Partners allocated the biggest weight to Waddell & Reed Financial, Inc. (NYSE:WDR), around 0.75% of its 13F portfolio. Quantinno Capital is also relatively very bullish on the stock, earmarking 0.3 percent of its 13F equity portfolio to WDR.

As one would reasonably expect, specific money managers were leading the bulls' herd. Winton Capital Management, managed by David Harding, created the biggest position in Waddell & Reed Financial, Inc. (NYSE:WDR). Winton Capital Management had $7.7 million invested in the company at the end of the quarter. Ray Dalio's Bridgewater Associates also made a $0.2 million investment in the stock during the quarter. The only other fund with a brand new WDR position is Andrew Weiss's Weiss Asset Management.

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Waddell & Reed Financial, Inc. (NYSE:WDR) but similarly valued. These stocks are KKR Real Estate Finance Trust Inc. (NYSE:KREF), Denny's Corporation (NASDAQ:DENN), Re/Max Holdings Inc (NYSE:RMAX), and IGM Biosciences, Inc. (NASDAQ:IGMS). All of these stocks' market caps are similar to WDR's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position KREF,9,38889,-2 DENN,21,158298,0 RMAX,17,79279,7 IGMS,12,319601,1 Average,14.75,149017,1.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.75 hedge funds with bullish positions and the average amount invested in these stocks was $149 million. That figure was $125 million in WDR's case. Denny's Corporation (NASDAQ:DENN) is the most popular stock in this table. On the other hand KKR Real Estate Finance Trust Inc. (NYSE:KREF) is the least popular one with only 9 bullish hedge fund positions. Waddell & Reed Financial, Inc. (NYSE:WDR) 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 1.0% in 2020 through May 1st but beat the market by 12.9 percentage points. Unfortunately WDR wasn't nearly as popular as these 10 stocks and hedge funds that were betting on WDR were disappointed as the stock returned -12.6% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.