Seth Klarman's Baupost Group Sells Capitalsource Shares (CSE) ~ market folly

Monday, November 16, 2009

Seth Klarman's Baupost Group Sells Capitalsource Shares (CSE)

This is the third quarter 2009 edition of our hedge fund portfolio tracking series. If you're unfamiliar with tracking hedge fund movements or SEC filings, check out our series preface on hedge fund 13F filings.

We're baaaack. 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 denoted.

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 (NWS-A), Theravance Notes, Theravance (THRX), and RHI Entertainment (RHIE).

Removed Positions (Positions they sold out of completely)
GHL Acquisition
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 (NWS-A): 21.68%
  2. Capitalsource (CSE - including positions in common stock and various notes): 19.53%
  3. Theravance (THRX - including positions in common stock and notes): 12.34%
  4. Liberty Media (LMDIA): 9.68%
  5. Breitburn Energy Partners (BBEP): 7.12%
  6. Viasat (VSAT): 5.97%
  7. Facet Biotech (FACT): 4.47%
  8. Domtar (UFS): 2.97%
  9. Alliance One (AOI): 2.91%
  10. Syneron (ELOS): 1.76%
  11. Ituran Location and Control (ITRN): 1.31%
  12. Enzon Pharmaceutical (ENZN): 1.26%
  13. RHI Entertainment (RHIE): 1.13%
  14. Multimedia Games (MGAM): 0.98%
  15. Audiovox (VOXX): 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 (HRZ) and had been selling shares of Facet Biotech (FACT). Not to mention, we already covered the fact that Baupost sold out of PDL Biopharma (PDLI). 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 (CSE). 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. Secondly, we also saw that Baupost sold completely out of their News Corp B shares position (NWS). This is interesting because they retained their full position in the A shares (NWS-A) 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 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. Firstly, keep in mind that Baupost typically keeps a lot of cash on hand. Secondly, 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. Thirdly, he also mentioned that he is starting to like illiquid investments here and so that could also count for some of the assets. And lastly, remember that 13F's 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 of 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.

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