By Kim Palacious
This is part of a new series of investigative journalism, to report what the media has not reported or piece together many facts into an interesting article about famous investors, recent events etc.
Seth Klarman’s Collective Wisdom: Risk Analysis Is The Key To Investment Success
Please note this article is based on publicly available information, however ValueWalk just received Baupost's 2018 letter moments ago and will have exclusive coverage shortly. Seth Klarman is widely regarded as one of the best value investors the world has ever seen. Over the past few decades, his hedge fund, the Boston-based Baupost, has achieved Read More
Which information would you rather be privy to? The location of Jimmy Hoffa’s body, the secret recipe for Coca Cola, or the inside scoop on what The Baupost Group’s Seth Klarman is really buying? If you knew the answer to the third, you might find yourself in a position to buy the answers to the second and first; at a lifetime gain of 20% since its 1983 inception, those lucky enough to be Baupost clients have seen staggering returns.
But how indicative are its public holdings of its complete portfolio? Of the rumored $23B under investment, only ~$3B have been disclosed via its 13Fs. That means some $20B are distributed among the many categories which need not be disclosed, according to SEC rules: short positions, commodities, currencies, and trading activity in other markets, not to mention any domestic equities that might reveal the fund’s investment strategy.
Is it all as secretive as it sounds? A glance at the most recent two Baupost Group 13Fs, however small a part of the portfolio it represents, reveals quite a bit. Add in what the rumor mill is saying and what Klarman himself has revealed in recent weeks, and greater insight into the whole of the $23B portfolio might be achieved.
What the 13F Says
A 26% increase in disclosed Q3 2011 holdings (that’s an incremental $620m in investment) over those reported at the end of Q2 saw most of the increase go toward larger positions in BP (a $252m increase has nearly doubled Baupost’s position), PDL BioPharma (+$33m, a 64% increase over Q2), and new positions in three additional companies: Hewlett-Packard ($464m), Genworth Financial ($57m), and NovaGold Resources ($32m). A fourth company—News Corporation—also saw a “new” $67m investment in subordinated shares, though Baupost already had a $335m position in News Corp Class A shares, which it had decreased by $10m by the end of Q3 (two years ago, it held Class B shares as well).
Significant disinvestment was seen in Viasat (-$85m, or 20%) and Alere (-$52m, or 46%). Baupost sold its positions with Capital Source (-$59m) and Audiovox ($-6m) altogether. Aside from the aforementioned, Baupost reduced its position in another 11 of the remaining 15 legacy holdings, rebalancing its portfolio by a few billion dollars here and there to support an apparent shift in industry focus.
A 6% surge in both Basic Materials and Technology company holdings concurred with a 8% drop in Health Care holdings in the overall industry-level distribution (huge purchases in Hewlett-Packard and BP were largely responsible for the distribution swing). There was another phenomenon: at times, Baupost remained loyal to a sector (Gold, for one) but reallocated funds among firms in related businesses, indicating in which portfolio companies Baupost anticipates the brightest outlook.
An investor who copied Baupost’s holdings on September 30th would have earned a 15.5% return by December 20th, just 81 days later.
What the Rumor Mill Says
To begin, some speculate that the Baupost portfolio holds as much as 30%, or ~$9B, in cash. When added to disclosed holdings, that leaves some 60% or $18B, allocated to other investments.
Two rumored foreign investments include UK-based Spirit Pub Company, and South African retail giant, Edcon. According to sources close to the Baupost Group, the fund has invested in the pub giant’s bonds, in support of the entity’s long-term expansion strategy (which includes both an owned and leased restaurant and pub portfolio). The company saw sales growth of 6%-7% in the most recent quarter among existing locations. Announced plans include a complete refurbishment of the Chef Brewer brand, and an expansion of the Fayre Square, Flaming Grill, and John Barras brands
Edcon was founded in South Africa and has been in business since 1929; it has seen expansion to five African nations and now has upwards of 1,000 retail stores that play in everything from clothing, to footwear, to textiles (CFT); the company has grown by acquisition and . It continues to grow geographically as well as in terms of product and brand diversification and is the leading CFT retailer in South Africa; Baupost reportedly admires its business model.
Also noted by insiders were Baupost’s lack of confidence in the pulp and paper sector (certainly a response to the demise of the print media industry), which reportedly culminated in Baupost shorting bonds in NewPost Paper, which primarily supplied stock to print magazine and catalog distributors and was the largest coated paper manufacturer in North America. The Cerberus-owned paper maker filed for Chapter 11 protection in September. It had $3B in debt but had secured $600M in bankruptcy financing from lenders including J.P. Morgan Chase, Barclays, and Wells Fargo. The company lost money every year since the 2005 Cerberus $2.3B LBO.
Other reported activity includes the purchase of Targacept (TRGT) subsequent to a November 8th announcement that Phase 3 clinical trials of TC-5214, an adjunct antidepressent therapy, did not show tangible effects compared to those seen in patients receiving a placebo. Though shares of Targacept fell 60% on news of the announcement, and saw additional double-digit drops in the weeks since, the company remains undervalued vis-à-vis its market cap; where as cash per share is valued at $5.49, it last traded (on December 23rd) at $5.29.
What Seth Klarman Says
In the words of the Baupost head himself, in a November interview with Charlie Rose, Seth Klarman views himself at only the first stage of his interpreted view of Warren Buffet’s method of investing. Said Klarman, “Warren evolved through three stages. He evolved from buying cigar butts and getting the last few puffs for free, to buying great businesses at really cheap prices, to buying and holding great companies at so-so prices… I’m still in phase 1. We’re still buying cigar butts.” The referenced second stages practiced by Buffett, buying great companies at great prices and buying great companies at so-so prices, seemed off of the table for Klarman, who clearly indicated such strategies would be in the distant future, if they are yet to come.