Seth Klarman's Baupost Group Q3 Portfolio: Two Changes of Note

We're kicking off our Q3 2009 portfolio tracking with the hedge fund that was most requested by readers: Seth Klarman's Baupost Group. This should come as no surprise given Baupost's amazing 20% annual compounded return. While Warren Buffett is often singled out as the greatest investor out there, one other man could very well be mentioned in the same sentence. We're talking of course about Seth Klarman. If you want to learn how to invest like Seth Klarman, then we'd highly recommend picking up his very hard to find book, Margin of Safety, where he provides a "how-to" on risk averse value investing.

Klarman received his MBA from Harvard and then went on to work for Baupost at age 25. Nowadays, it's his show to run. Baupost is one of the select few funds we have included in our Market Folly custom portfolio that is seeing over 26% annualized returns by combining 3 hedge fund portfolios into a cohesive whole. (Head over to Alphaclone to see the hedge fund portfolio replication in action as our portfolio is about to be re-balanced with new holdings.)

Keep in mind that the positions listed below were Baupost's long equity, note, and options holdings as of September 30th, 2009 as filed with the SEC. We don't cover every single minor portfolio maneuver, as we instead focus on all the big moves. All holdings are common stock unless otherwise noted.

Some New Positions (Brand new positions that they initiated last quarter):
Enzon Pharmaceuticals (ENZN)

Some Increased Positions (Positions they already owned but added shares to):
Viasat (VSAT) - Increased position by 148%

Some Reduced Positions (Some positions they sold shares in):
Capitalsource (CSE) - Reduced position by 41%
Syneron (ELOS) - Reduced position by 32%
Facet Biotech (FACT) - Reduced position by 20%
Audiovox (VOXX) - Reduced position by 6%

Flat Positions (Holdings with no change in position size)
Alliance One (AOI), Breitburn Energy (BBEP), various Capitalsource notes, Domtar (UFS), Ituran Location and Control (ITRN), Liberty Media (LMDIA), Multimedia Games (MGAM), News Corp (NWSA), Theravance Notes, Theravance (THRX), and RHI Entertainment (RHIE).

Removed Positions (Positions they sold out of completely):
GHL Acquisition (GHQ)
iStar Financial (SFI)
Horizon Lines (HRZ)
KBL Healthcare (inactive)
News Corp (NWS)
PDL Biopharma (PDLI)

Top 15 Holdings by percentage of assets reported on 13F filing:

1. News Corp: 21.68%
2. Capitalsource (including positions in common stock and various notes): 19.53%
3. Theravance (including positions in common stock and notes): 12.34%
4. Liberty Media: 9.68%
5. Breitburn Energy Partners: 7.12%
6. Viasat: 5.97%
7. Facet Biotech: 4.47%
8. Domtar: 2.97%
9. Alliance One: 2.91%
10. Syneron: 1.76%
11. Ituran Location and Control: 1.31%
12. Enzon Pharmaceutical: 1.26%
13. RHI Entertainment: 1.13%
14. Multimedia Games: 0.98%
15. Audiovox: 0.90%

Many of Baupost's moves detailed in their 13F filing we've already covered here on Market Folly. This just goes to show why it's prudent to track the full spectrum of SEC filings. We already knew that Baupost had sold out of Horizon Lines and had been selling shares of Facet Biotech. Not to mention, we already covered the fact that Baupost sold out of PDL Biopharma. The only new addition to Baupost's portfolio was Enzon Pharmaceuticals, and we had already disclosed this addition earlier on the blog as well.

So, there's really not a whole lot of new information revealed in their 13F filing apart from two changes. The first major change we see was that Klarman sold 41% of his common stock in Capitalsource. We saw Thomas Steyer's hedge fund Farallon Capital also sell some CSE common as well recently. While Baupost trimmed their stake there, the rest of their position in Capitalsource via various notes remained unchanged. Second, we also saw that Baupost sold completely out of their News Corp B shares position. This is interesting because they retained their full position in the A shares but dumped the B shares. Maybe they saw something in regards to valuation or arbitrage there, who knows. One thing is clear though: they prefer NWSA over NWS. Keep in mind though that the bulk of their holdings in News Corp has always been through the A shares and that their B shares position was much smaller. Also, in terms of positions Baupost already held but added to, Viasat (VSAT) fits the bill. They've been adding to this name very recently as they just filed a 13G on VSAT.

Assets from the collective holdings reported to the SEC via 13F filing were $1.35 billion this quarter compared to $1.26 billion last quarter, so there's a slight uptick. Observant readers will note that Baupost in reality has an assets under management (AUM) base of around $20 billion, so there's quite a gap here. First, keep in mind that Baupost typically keeps a lot of cash on hand. Second, Klarman has been out recently saying that equities are not as attractive as previously so it doesn't sound like he'll be too active there. Third, he also mentioned that he is starting to like illiquid investments here and so that could also count for some of the assets. And last, remember that 13Fs do not include short positions, holdings in other markets (foreign markets, futures, etc.) or cash. So, all of the above combined helps to bridge the gap between 13F reported assets and their actual AUM.

Please keep in mind that when we state "percentage of portfolio," we are referring to the percentage of assets reported on the 13F filing. Since these filings only report longs (and not shorts or cash positions), the percentages are skewed. Realistically, the position percentages are more watered down in their actual hedge fund portfolio.

We'll continue to monitor Baupost's 13G and 13D filings as that seems to be where the bulk of their action comes in. For more resources on Klarman and Baupost, check out the following:

- Klarman's interview from the annual Graham & Dodd breakfast
- Recent thoughts from Seth Klarman
- An interview with Seth Klarman

This is just one of the 40+ prominent funds that we'll be covering in our Q3 2009 hedge fund portfolio series. Baupost is the first fund we've covered but check back in each day as we'll be cranking out updates daily, identifying what the top hedge funds are investing in.

Comments

[sclem7]

I wouldn't trust this guy with an old pair of my gym socks.

2009 Nov 18 11:13 AM

[Daniel Eskin]

sclem7 - clearly you're making way more than 20% annualized a year to not be trusting him =)

I've been following Seth Klarman on Gurufocus for quite some time and I really respect him as long-term focused investor. His book was really insightful too. If anybody wants it, I managed to snag a PDF of it about a year ago. Feel free to e-mail me at [e-mail] if you want a copy!

For more analysis, check out my blog at: youngandinvested.com

2009 Nov 18 11:35 AM

[Dividend Inc]

Greetings Daniel Eskin,

It seems odd to unabashedly market your blog through the use of your Deloitte email address offering material that is in violation of the copyright of the author. While the author doesn't receive royalties from the book anymore, I doubt that Mr. Klarman would agree that unmitigated distribution of copywritten material is an acceptable practice.

Why don't you provide us with a review or highlight of the book instead. Your analysis and thoughtfulness might inspire others to do more work on understanding Mr. Klarman's investing. That would seem to lend more credibility to your name and the blog that you're promoting.

Suffice to say, you have besmirched your team at Young and Invested and possibly the audit firm you work for. I hope Deloitte doesn't endorse such strategies when providing "consultation" for their auditing services.

2009 Nov 18 12:21 PM

[Gus McRae]

does anyone know what Baupost's 2008 return was? I have not seen that number anywhere. Given his limited interest in shorting and his value orientation, I would assume it was down, perhaps significantly. If not, the guy may walk on water after all.

2009 Nov 18 12:24 PM

[Daniel Eskin]

Greetings Dividend Inc,

It seems odd that you're highly concerned with what e-mail address I'm using for personal reasons and that has any implications on my own integrity or that of the firm I work for. My views published are my own only and do not have anything to do with where I work. On a sidenote, your wasted time to think of words like "besmirched" and "unabashedly" hasn't contributed anything to this author's discussion either.

Suffice to say, thank you for contacting me and I have deleted the file in question.


Oh wait, just kidding. Unlike certain other individuals, such as yourself, I have a sane and practical view of the world and do not deny to pirating a file here or there. Please delete all copyrighted, trademarked and protected programs, files, videos and songs off your computer before making public accusations... and you might want to send your message to Seth himself and another few millions people in the United States to tell them to delete all protected songs and files from their systems.

You're free to demand anything you want. So am I. I demand that you cease and desist sending comments like this, since they're frivolous and meaningless. Where should I send the bill for the consumed diskspace and bandwidth?

Thanks for your entertainment.

On Nov 18 12:21 PM Dividend Inc wrote:

> Greetings Daniel Eskin,
>
> It seems odd to unabashedly market your blog through the use of your
> Deloitte email address offering material that is in violation of
> the copyright of the author. While the author doesn't receive royalties
> from the book anymore, I doubt that Mr. Klarman would agree that
> unmitigated distribution of copywritten material is an acceptable
> practice.
>
> Why don't you provide us with a review or highlight of the book instead.
> Your analysis and thoughtfulness might inspire others to do more
> work on understanding Mr. Klarman's investing. That would seem to
> lend more credibility to your name and the blog that you're promoting.
>
>
> Suffice to say, you have besmirched your team at Young and Invested
> and possibly the audit firm you work for. I hope Deloitte doesn't
> endorse such strategies when providing "consultation" for their auditing
> services.

2009 Nov 18 01:40 PM

[Daniel Eskin]

Check out gurufocus.com for summaries of returns of all well known financial firms - this one is definitely on there.


On Nov 18 12:24 PM Gus McRae wrote:

> does anyone know what Baupost's 2008 return was? I have not seen
> that number anywhere. Given his limited interest in shorting and
> his value orientation, I would assume it was down, perhaps significantly.
> If not, the guy may walk on water after all.

2009 Nov 18 01:41 PM

[roy piper]

I have an original copy of Margin Of Safety, which sells for .....hold on....$700 on the net. It is an awesome work of finance. I think Seth is THE under-rated investor of our time. Always like hearing what he is up to.

2009 Nov 18 01:44 PM

[Dividend Inc]

Point taken. Thanks for the response Daniel.


On Nov 18 01:40 PM Daniel Eskin wrote:

> Greetings Dividend Inc,
>
> It seems odd that you're highly concerned with what e-mail address
> I'm using for personal reasons and that has any implications on my
> own integrity or that of the firm I work for. My views published
> are my own only and do not have anything to do with where I work.
> On a sidenote, your wasted time to think of words like "besmirched"
> and "unabashedly" hasn't contributed anything to this author's discussion
> either.
>
> Suffice to say, thank you for contacting me and I have deleted the
> file in question.
>
>
> Oh wait, just kidding. Unlike certain other individuals, such as
> yourself, I have a sane and practical view of the world and do not
> deny to pirating a file here or there. Please delete all copyrighted,
> trademarked and protected programs, files, videos and songs off your
> computer before making public accusations... and you might want to
> send your message to Seth himself and another few millions people
> in the United States to tell them to delete all protected songs and
> files from their systems.
>
> You're free to demand anything you want. So am I. I demand that you
> cease and desist sending comments like this, since they're frivolous
> and meaningless. Where should I send the bill for the consumed diskspace
> and bandwidth?
>
> Thanks for your entertainment.
>
> On Nov 18 12:21 PM Dividend Inc wrote:

2009 Nov 18 02:42 PM

[MateState]

Who are you?
The cap of the world?

Daniel was nice to provide a link to something that is otherwise unreachable and as you said no royalty related anymore!

Go fight the billions of illegal songs, movies, etc. downloaded every minute around the globe instead of picking up on something tiny as this one

Shame on you!


On Nov 18 12:21 PM Dividend Inc wrote:

> Greetings Daniel Eskin,
>
> It seems odd to unabashedly market your blog through the use of your
> Deloitte email address offering material that is in violation of
> the copyright of the author. While the author doesn't receive royalties
> from the book anymore, I doubt that Mr. Klarman would agree that
> unmitigated distribution of copywritten material is an acceptable
> practice.
>
> Why don't you provide us with a review or highlight of the book instead.
> Your analysis and thoughtfulness might inspire others to do more
> work on understanding Mr. Klarman's investing. That would seem to
> lend more credibility to your name and the blog that you're promoting.
>
>
> Suffice to say, you have besmirched your team at Young and Invested
> and possibly the audit firm you work for. I hope Deloitte doesn't
> endorse such strategies when providing "consultation" for their auditing
> services.

2009 Nov 19 12:27 PM

[Geebo]

Was the cat fight really necessary? This about investing.

2009 Nov 23 03:17 PM