"Tracking Seth Klarman’s Baupost Group Holdings"
"Seth Klarman is the president of Baupost Group, a Boston hedge fund that he founded in 1983. Assets under management have grown from $27 Million to well over $22 Billion in the last 28 years. Performance was also outstanding with the average annual return clocking in at 19% during the life of the funds. Baupost Group’s investment philosophy is value investing with an emphasis on risk management and focus on absolute returns. His book “Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor” released in 1991 is a good source that describes the philosophy in detail. The book is out of print and is very hard-to-find with the result that a fresh copy goes in the $1000 range.  Another source that describes how the fund operates is his letters to investors, some of which are published with permission on the Internet. His 1995 letter to shareholders has the following quote that succinctly portrays his investment style:“The Baupost Fund is managed with the intention of earning good absolute returns regardless of how any particular financial market performs. This philosophy is implemented with a bottom-up value investment strategy whereby we hold only those securities that are significantly undervalued, and hold cash when we cannot find alternatives. ”Seth Klarman was not that well known in the early years possibly because Baupost Group underperformed the S&P 500 index in the 1990s when many other hedge funds were posting jaw-dropping returns. The underperformance was not a huge surprise as he has stressed his focus on absolute returns. The continuation of the quote above makes this point clear:“Further, we prefer investments, when we can find them at attractive prices, that involve a catalyst for the realization of underlying value. This serves to reduce the volatility of our results and de-emphasizes market movements as the source of our investment returns. Positions with catalysts tend to lag a rapidly rising stock market (like this past year's) and outperform a lackluster or declining one (like we used to have every few years!).”The value of that focus became evident in the last ten years when his funds vastly outperformed the market – in a flat or down market Baupost’s focus on absolute returns pays dividends!Since the early 1990s, Seth Klarman became increasingly bearish on the US stock market. The asset allocation in the US stock market averaged in the mid-20s during that period. The following allocation listed in his 1997 letter gives an indication of how diversified his investments are at any given time:The low allocation to US Equities and the large cash allocation in the huge bull market of the period are understandable, given his focus on value investing and absolute returns. Below is a look at his allocation to US equities in the last seven years:Amazingly, through the 10-year period when the US market remained flat, his allocation to US equities actually dropped into the mid-teens range and has remained there even through corrections. Basically, he continues to find better opportunities outside the US stock market. Also, he considers US equities, in general, as being overvalued and speculative. The thinking is evident from the following quote from a June 2010 interview – “The market has gone up so much that, based on valuation, it is overvalued again to a meaningful degree where the expected returns logically from here can be as low as the low single digits or zero for the next several years” – S&P 500 was at 1064 at the time. For investors attempting to follow Seth Klarman’s philosophy or picks, there are several challenges:Seth Klarman rarely gives interviews and so outside of his book and the contribution (preface) to the 2008 reissue of Benjamin Graham and David Dodd’s classic book “Security Analysis”, there is very little information out there.As his allocation to US equities is comparatively small, any analysis of his history of holdings that can be derived from the mandatory 13F filings do not give a complete picture.Seth Klarman invests in many special situations that need deep knowledge in the areas concerned to invest successfully. Specifically, he invests in such areas as thrift conversions, financially distressed and bankrupt securities, other types of liquidations, etc. To follow such strategies, an individual investor needs to study those areas and that can quickly become a full-time job making it impractical for individual investors to implement. His homeruns in 2008 included such investments as CIT bonds which he first bought when they were priced at 65 cents to 75 cents on the dollar. Most investors will find it hard to follow that trade, let alone holding them and buying more when it eventually fell to the low 40s.Although his allocation to US equities is limited, studying the individual holdings over the years can be worthwhile for investors attempting to follow his philosophy/trades. Below is a look at his US holdings over the last three years:News Corporation (NWSA) is a top long-term holding that has been in the portfolio since 2004. The stake accounted for almost 50% of his US holdings initially. It still accounts for about 15% of the US portfolio currently. Seth Klarman is bullish on the stock even though it has not moved in the last six years.Viasat Incorporated (VSAT) is a top holding that was initiated in 2008 with a modest stake of 3% of the US portfolio. It now accounts for about 18% of the portfolio. The stake was increased by more than four-times during the market lows of 2009 and then doubled again in 2010. Seth Klarman has become increasingly bullish in the last three years and is sitting on significant gains.In the 2nd quarter of 2011, Seth Klarman added two new large-cap issues: Microsoft (MSFT) and BP Plc (BP). This is significant in that the stakes are large and it is rare for him to buy into large-cap stocks. News Corporation (NWSA) was the only large-cap in his portfolio previously. Microsoft has increased by around 10% from the lows of the period when Seth Klarman bought the stock while BP Plc (BP) stock price has remained flat. These are good choices for investors attempting to follow his trades.Seth Klarman continues to have several small and mid-caps in the portfolio. Significant mid-cap positions include Alere Inc (ALR), Allied Nevada Gold (ANV), Capitalsource Inc (CSE), and Theravance (THRX). Significant small-cap positions include Aveo Pharmaceuticals Inc (AVEO), Enzon Pharmaceuticals (ENZN), PDLI Biopharma Inc (PDLI), and Syneron Medical Ltd (ELOS). Those are very good hunting grounds for value investors looking for ideas."