It's filing season for the investment funds, and the 13-F filings are an excellent source of ideas, both for individual plays and also for emerging investment themes. One of the best managers to watch is value investor Seth Klarman at the Baupost Group.
Klarman's track record is the envy of many. From its inception in 1983 through Dec. 31, his Baupost Limited Partnership Class A fund has earned an average annual return of 16.5% net of fees compared to 10.1% for the S&P 500. During the "lost decade" of 1998 to 2008, Baupost's fund crushed the S&P, returning 15.9% for the period vs. a loss of 1.4% for the S&P.
Klarman is well known for making bets against the crowd, and his track record demands that investors pay close attention. In the most recent quarter, Baupost remained steadfast to its holdings in energy master limited partnerships (MLPs), an asset class that I believe the market is still mispricing. Baupost did not exactly stand pat, though -- the fund shuffled quite a bit within the space.
Baupost completely sold out of its investment in Atlas Pipeline Holdings (AHD) . Compared to other MLPs, Atlas hasn't been keeping up, and its performance and balance sheet is weakening relative to its peers.
Baupost sold off 50% of its holdings in Linn Energy (LINE) , my favorite MLP in the space today. Linn's commodity price hedges are the some of best in the industry; nearly 100% of its production over the next three years is hedged at significantly higher gas and oil prices. And even after the 50% position reduction, Baupost still holds a meaningful block of Linn Energy. I will be curious to what the fund does next quarter. Nonetheless, with a yield of 14% supported by solid commodity price hedges, Linn is still a solid bet.
Finally, Baupost did increase its stake in another master limited partnership, BreitBurn Energy Partners (BBEP) as the stock price continued to decline. At $8 a share, the MLP was yielding over 25%, but the company recently had to suspend the payment to secure attractive financing. MLPs that must cut its dividend payments can lose many investors who simply own the stock for the income. Breitburn knows this and is working diligently to restore it as soon as possible. Baupost's increased position should offer comfort to investors.
Baupost's biggest position continues to be its stake in News Corp. (NWS.A) , a company that Klarman believes has assets that are substantially worth more than the whole company is trading for. News Corp. does hold some valuable, irreplaceable media assets, which now include The Wall Street Journal.
Another theme in Baupost's holdings is its various holdings in the biopharmaceutical industry. Its biggest position in the space -- and the fund's second-largest holding after News Corp. -- is Theravance (THRX) . Baupost owns nearly 20% of the company.
Klarman and company also own 12% of PDL Biopharma (PDLI) and also hold PDL's recent spinoff, Facet Biotech (FACT) . Facet is noteworthy because the stock is trading for about $9.35 a share and the company has about $14 a share in cash, or $13 a share after debt. Interestingly enough, Baupost also owns over 11% of Facet.
While the recent market rally has caused the stock price many of Baupost's holdings to appreciate -- in some cases by more than 100% -- Klarman invests in situations where the opportunity for multifold returns exists. His ideas are always worth taking seriously -- for many of them, it might not be too late to jump on board.
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