Seth Klarman started managing the Baupost Group hedge fund in 1982, just after graduating from Harvard Business School. Since then, he has guided the massive hedge fund (11th largest in the world) to outperform the S&P 500 by over 10%. Klarman has used the same strategy for almost 30 years; he buys positions in stocks that he feels are severely undervalued.
Klarman’s strategy is simple; he looks for stocks that are priced near their liquidation values so that once the market value normalizes, he is able to achieve very large returns. It also means that if, per chance, the stock never rebounds, Klarman has very little to lose. He calls it the “Margin of Safety” and even wrote a book describing his unique investing method. While the book is out of print now, it is a cult classic, commonly earning between $1,500 and $2,000 in auction.
Klarman’s “margin of safety” method of investing typically means that his portfolio is filled with lesser known equities and big names that have fallen from grace (BP anyone?). Historically, this method has served him well, but, as of late, his performance has left something to be desired. Since the end of the second quarter, his top stock picks in his 13F portfolio underperformed the S&P 500; his picks lost over 12% compared to the S&P 500’s 10.5% loss during the same period.
Company | Ticker | Value (x1000) | Activity | Return |
VIASAT INC | 434928 | 0% | -21% | |
NEWS CORP | 337185 | 0% | -8% | |
MICROSOFT CORP | 312000 | New | -3% | |
THERAVANCE INC | 287866 | -0% | -17% | |
BP PLC | BP | 243595 | New | -8% |
ALLIED NEVADA GOLD | 119490 | 38% | 12% | |
ALERE INC | 113522 | 0% | -33% | |
AVEO PHARMA | 91364 | 26% | -20% | |
ENZON PHARMA | 90459 | 0% | -21% | |
CAPITALSOURCE INC | 67403 | 0% | -13% | |
THERAVANCE INC Bond | THRX | 56355 | 0% | -17% |
PDL BIOPHARMA | 54370 | -12% | -3% | |
BREITBURN ENERGY P | 48650 | -17% | -6% | |
SYNERON MEDICAL | 46532 | 156% | -20% | |
ALLIANCE ONE INTL | 28381 | 0% | -1% | |
CENTRAL PAC FINL | 25200 | New | -23% | |
ITURAN LOCATION | 23751 | 0% | -12% | |
MULTIMEDIA GAMES | 11489 | -3% | -2% | |
IDENIX PHARMA | 6279 | New | -17% | |
AUDIOVOX CORP | 5870 | -27% | -15% | |
SYCAMORE NETWORKS | SCMR | 5004 | 125% | -24% |
Once again, gold was Klarman’s saving grace; his position in Allied Nevada Gold returned 12%. It seems his concerns about the economy and his predictions about the performance of gold were spot on. Chuck Royce of Royce and Associates is also a fan of the commodity stock.
Klarman’s lowest return was from the in vitro and in vivo diagnostic company Alere, Inc; he lost 33% in his position since the end of June. Brookside Capital and Jeffrey Uben’s Valueact Capital hold large positions in the company as well, but while Klarman and Brookside are holding steady, Ubben has started to reduce his position in the company. Klarman also lost big in the telephone company Sycamore Networks, in which he lost 24%, and the state commercial bank, Central Pacific Financial Corp, in which he lost 23%.
We like Klarman. He has been consistent in generating double-digit returns for the Baupost Group but his recent downturn is an issue. Investors are cautioned against jumping on board Klarman’s picks, at least until the market starts to turn around.
Disclosure: I am long MSFT.
