Tracking 2011 Q1 Moves by Seth Klarman and Bruce Berkowitz

by: Davy Bui

Being a value investor, I always take great interest to see what long-established value gurus like Seth Klarman and Bruce Berkowitz are doing with their portfolios. While 13F-HR filings are incomplete snapshots at best as they detail no information on bonds, foreign stocks and other esoteric asset classes, some insight may still be gleaned from examining what these money managers are doing and perhaps even a new investment idea can be found.

Seth Klarman may be the most enigmatic of the renown value investors. Klarman wrote an infamous book on value investing called "Margin Of Safety" which is now out of print and fetches hundreds of dollars second-hand. With an excellent track record of outperformance that stretches over decades, Klarman's Baupost Fund is a recognized bastion of outstanding investing. Whereas many value investors profess a love of simplicity when seeking investment opportunities, Klarman craves complexity to help weed out the competition. While investors such as myself prefer established free cash flows selling at discounts, Klarman seemingly prefers hidden balance sheet values that don't jump out on cursory examination. Of all the professional investors I follow, Klarman's filings are often the least scrutable due to this philosophy.

  • For the first time in over four years since I have monitored its filings, Baupost opened a position in a gold mining stock, Allied Nevada Gold (NYSEMKT:ANV). Klarman has expressed concern over the US fiscal situation for some time now and one can surmise that he is now putting that concern into action by moving into precious metals. It must be noted Baupost's reported the value of its ANV stake at $87M is a miniscule investment for a $24B fund. Even compared to the stock's market cap of $2.9B, Baupost's position is hardly an all-in bet. Again, these 13F-HR filings are incomplete information -- Klarman could be implementing other strategies to protect against the weakening US financial situation.
  • Baupost made other small moves in pharmaceutical stocks [Regeneron Pharmaceuticals (NASDAQ:REGN), PDL BioPharma (NASDAQ:PDLI) , Aveo Pharmaceuticals (NASDAQ:AVEO)] and reduced its stake in Breitburn Energy Partners (BBEP) by 30%. Again, these transactions ranged between $20M - $40M and can hardly be considered outsized bets for the $24B Baupost Fund.
  • In absolute dollar terms, Baupost's largest transaction was selling 35% of its CapitalSource (NYSE:CSE) stake, bringing the listed value from $114M to $74M.

Bruce Berkowitz of Fairholme Capital is a value investor closer to my own style. In fact, I must admit some gratification in seeing four of my current portfolio holdings [Brookfield Asset Management (NYSE:BAM), Cisco (NASDAQ:CSCO), GlaxoSmithKline (NYSE:GSK), Telefonica S.A. (NYSE:TEF)] listed among Fairholme's eight new Q1 holdings. He places a strong emphasis on free cash flow though he is not adverse to buying into sectors such as financials or energy that don't fit a traditional FCF approach. Examining his filings through the years sugggest Berkowitz may employ something akin to a sector rotation strategy, though it's difficult to discern whether this strategy is intentional or simply a result of buying sectors fallen out-of-favor with Wall Street.

  • The new stake in Brookfield Asset Management resulted from the sale of Fairholmes' General Growth Properties (NYSE:GGP) position to BAM. Underscoring my sector rotation observation, GlaxoSmithKline was one of four new big pharma buys, the other three being AstraZeneca (NYSE:AZN), Eli Lilly (NYSE:LLY), Bristol-Myers Squibb (NYSE:BMY). In total, these new pharma positions totaled $29M. Berkowitz also bought $28M worth of Telefonica, a stock I discussed in detail last week. For a firm managing billions of dollars, $60M or so is hardly a huge bet. For comparison sake, Berkowitz also opened a new $614M position in Cisco Systems -- now that's a big bet. I outlined my CSCO buy thesis on Seeking Alpha a few weeks ago.
  • In other sector rotation moves, Berkowitz sold off his remaining health insurance plays, Wellcare (NYSE:WCG) and Humana (NYSE:HUM). He also greatly reduced his exposure to domestic telecom, selling 90% of his stakes in ATT (NYSE:T) and Verizon (NYSE:VZ).

You can view all of their 2011 Q1 portfolio moves in spreadsheet format:

Disclosure: I am long BAM, CSCO, GSK, TEF.