Seth Klarman's Baupost Group Loves Capitalsource (CSE): 13F Filing ~ market folly

Wednesday, August 19, 2009

Seth Klarman's Baupost Group Loves Capitalsource (CSE): 13F Filing

This is the second quarter 2009 edition of our ongoing hedge fund portfolio tracking series. Before reading this update, make sure you check out our series preface on hedge fund 13F filings.

The third fund in our series is Seth Klarman's Baupost Group. Klarman started working for them at age 25 after receiving his Harvard MBA and now runs the show. This solid value focused firm has seen an annual compounded return of 20% and their long-term timeframe and focus on equities makes them ideal for tracking and cloning. In fact, they are one of the few funds selected to be included in our MarketFolly custom portfolio that is seeing 25.8% annualized returns. Baupost as a hedge fund was recently ranked 13th overall in Alpha's 2009 hedge fund rankings. We highly recommend reading up on Klarman and his investment methodology. He has detailed his investment process in a now out of print book, Margin of Safety where he provides a "how-to" on risk-averse value investing.

Baupost has been pretty active prior to the 13F with other SEC filings and we've been right there to cover them all. Most recently, they sold completely out of PDL Biopharma (PDLI). They also sold out of their Omnova (OMN) position. Back in May, we also saw that Baupost went activist on Breitburn Energy Partners (BBEP) with a 13D filing. The shares are also reflected below in the 13F filing.

We've covered Baupost in-depth on the blog and have assembled quite a list of resources including:

- Klarman's interview from the annual Graham & Dodd breakfast

- Recent thoughts from Seth Klarman

- An interview with Seth Klarman

Definitely check those out if you are interested in reading more about Baupost and their activity. Unfortunately though, they are currently closed to new investors.

The following were Baupost's long equity, note, and options holdings as of June 30th, 2009 as filed with the SEC. We have not detailed the changes to every single position in this update, but we have covered all the major moves. All holdings are common stock unless otherwise denoted.

Some New Positions (Brand new positions that they initiated in the last quarter):

Some Increased Positions (A few positions they already owned but added shares to)
Alliance One (AOI): Increased by 43%

Some Reduced Positions (Some positions they sold some shares of - note not all sales listed)
Domtar (UFS): Reduced by 4% (Thanks to a reader for pointing out that UFS underwent a 1/12 reverse split and after that transaction they only sold some of their shares).
News Corp (NWS): Reduced by 92%
PDL Biopharma (PDLI): Reduced by 18% (Note this information is already dated, Baupost sold completely out of their position recently)
Horizon Lines (HRZ): Reduced by 18.6%
News Corp (NWS-A): Reduced by 10%

Removed Positions (Positions they sold out of completely)
Exterran (EXH)
Linn Energy (LINE)
Omnova Solutions (OMN) - we covered their sales of OMN a few weeks ago
All the rest of their sales were positions that were less than 0.2% of their portfolio each: Acergy (ACGY), GHL Acquisition (GHQ), Prepaid Legal (PPD), Borders Group (BGP), Columbus Acquisition (BUS-WS), Media & Entertainment Holdings (TVH-WS), MBF Healthcare (MBH-WS)

Top 15 Holdings (by % of portfolio)

  1. News Corporation (NWSA): 17.8% of portfolio
  2. Capitalsource (CSE): 11.55% of portfolio
  3. Capitalsource (CSE) Bonds: 10.71% of portfolio
  4. Theravance (THRX): 10.5% of portfolio
  5. Liberty Media (LMDIA): 8.95% of portfolio
  6. PDL Biopharma (PDLI): 7.94% of portfolio as reported on the 13F. However, they recently filed an amended 13G and sold completely out of PDLI.
  7. Breitburn Energy Partners (BBEP): 5.18% of portfolio
  8. Domtar (UFS): 4.25% of portfolio
  9. Facet Biotech (FACT): 3.23% of portfolio - note that Baupost filed an amended 13D in late April and has gone activist with their investment
  10. Capitalsource (CSE) Bonds (2nd set): 2.7% of portfolio
  11. Alliance One (AOI): 2.66% of portfolio
  12. Viasat (VSAT): 2.5% of portfolio
  13. Theravance (THRX) Bonds: 2.4% of portfolio
  14. iStar Financial (SFI-F) Preferred F Bond: 2.04% of portfolio
  15. Syneron Medical (ELOS): 1.77% of portfolio

Since the 13F reports positions Baupost held as of June 30th, 2009, PDL Biopharma is included in the filing. However, in a more up-to-date filing, we see that Baupost has sold completely out of PDLI. This just goes to show that you have to track all the documents filed by a hedge fund, not just the 13F.

Capitalsource remains a massive position for Klarman as he holds common stock and 2 sets of bond positions. In total, his Capitalsource position represents 24.96% of his portfolio. This brings us to another caveat: when we say 'portfolio' when discussing 13F filings, we merely mean the amount of assets reported directly on the 13F filing. Since 13F's do not include short positions, cash, or holdings in other markets, a given hedge fund's actual assets under management are almost always larger than what is defined on the 13F. So, take these percentage weightings with a slight grain of salt as they are based on a percentage of overall long US equity, options, and note exposure. In reality, the portfolio weightings are a little bit more watered down than what our calculations show if you were to base it off total assets under management. So, just keep that in mind.

Klarman's Baupost has notoriously had a lot of cash on the sidelines as they wait to deploy it when they see compelling opportunities. And, throughout the crisis they've begun to put cash to work and we've seen some of that activity unfold. The only real addition this time around was Baupost's purchase of some more Alliance One (AOI) shares. The vast majority of Baupost's portfolio remained flat and this is exactly why we track them. They are focused value players that assemble positions with the aim of holding them longer term. This makes their portfolio easier to track and is why we have included them in our custom MarketFolly portfolio that is seeing 28.5% annualized returns. Their low turnover means easier and more accurate cloning.

One move we saw that was interesting was their sale of most of their News Corp 'B' shares (NWS). While they still sold 10% of their 'A' shares (NWSA) position, they definitely dumped a lot more of their NWS holding. We just thought that was intriguing and worth noting.

Lastly, we also want to touch on a move that is not reflected in the 13F filing but happened very recently. In late July it was revealed that Baupost has provided financing to CIT Group (CIT) along with numerous other hedge funds and firms. Supposedly, the loan is backed by $30 billion worth of assets. You can read the specifics of the deal in our hedge fund news update.

Assets from the collective holdings reported to the SEC via 13F filing were $1.2 billion this quarter compared to $1.1 billion last quarter, so just a slight uptick. This is just one of the 40+ prominent funds that we'll be covering in our Q2 2009 hedge fund portfolio series. So far, we've already covered the holdings of Bill Ackman's Pershing Square Capital Management and David Einhorn's Greenlight Capital. Check back each day as we cover prominent hedge fund portfolios.

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