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How To Ride Seth Klarman's Coattails
Mebane Faber 02.25.10, 6:00 AM ET
While relatively unknown to the public, Seth Klarman is a superstar in institutional investing circles. His out-of-print book Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor regularly sells for nearly $1,000 on eBay and Amazon. Why are investors so anxious to hear what he has to say? From 1983 to 2008 his hedge fund, the Baupost Group, returned 16.5% a year, outperforming the S&P 500 by more than 6% a year. In the 10 years ending Dec. 31, 2008, he beat the market by an impressive 14.5% a year. Those returns are net of all hedge fund fees and include only one losing year.
Even more impressive is that Klarman achieved this record with no leverage and minimal amounts of shorts, often while holding significant amounts of cash approaching nearly half of all funds under management.
While Klarman is at heart a traditional bottom-up value stock picker, he does often dabble in distressed debt, spinoffs, bankruptcies, SPACs and other esoteric investments. If only one word is to be used to describe what Baupost does, that word should be "mispricing", due to overreaction.
While most individuals do not have access to invest in Klarman's Baupost Group, they can, however, use his investment acumen to manage their portfolio. The SEC publishes on its Web site the holdings of every institutional and hedge fund manager overseeing more than $100 million once a quarter in a filing known as the 13-F. Even though the data is 45 days delayed after the end of the quarter, this matters little for a manager like Klarman who holds stocks for long periods of time, thus making him an ideal target to piggyback.
Using my Web site AlphaClone, from 2000–09, simply buying his top 20 stock picks, equally weighting them and rebalancing the portfolio quarterly, when the picks became public, would have resulted in returns of 14.35% per year vs. –0.85% for the S&P 500. That tracks Klarman's performance quite nicely, and thoroughly beat the S&P in this recent "lost decade."
Klarman is a deep value investor, and he obsesses over risks. One of the metrics he focuses on is liquidation value. As he details in his book, liquidation value is a worst-case, rock-bottom value in which only tangible assets are considered and intangibles, such as going-concern value, are not. Thus stocks or other securities selling below their liquidation value are attractive to Baupost.
One example is Enron, postbankruptcy. According to Klarman's 2006 speech at Columbia University, Baupost had one analyst exclusively analyze Enron for four years. The company had lots of cash but complex liabilities intertwined among more than 1,000 subsidiaries and shell companies. While the debt traded at 15 cents on the dollar, Klarman thought he would get from 30 cents to 40 cents. In the end he received more than 50 cents.
Says Klarman: "I think to take the next step and be a portfolio manager, you need both a sense of history and a vivid sense of risk. When Warren Buffett put out a job description for his replacement, he said, 'This person will need to be able to imagine things that have never happened before.' I think that's very, very important."
Because of his long-term record of success, Klarman is an ideal investor to piggyback, or simply to use as an idea farm to cull for new stock ideas. What is Klarman buying and selling now?
One interesting stock Baupost owns is Facet Biotech (FACT). Facet is a $420 million market capitalization biotech company trading for around $16.50 a share. Facet is a classic value-investor setup that was a spinoff from parent PDL Biopharma (PDLI) in December 2008. Facet contains the former R&D operations and a stocked product pipeline including five drugs in testing for multiple sclerosis and cancers. Even more importantly Facet was spun off with a pristine balance sheet including $300 million in cash currently equating to about $13 a share. Klarman owns 3.5 million shares of Facet representing around 14% of the outstanding shares of the company.
Biogen Idec recently made a $17.50-per-share tender offer for the stock. While Klarman has been talking about the stock since it was $6 a share, both Facet and Klarman feel the offer is inadequate, and Facet recently entered into an agreement with Baupost to increase their ownership limit from 15% to 20% of the total outstanding shares of Facet common stock.
While the company is burning cash, there is a nice share price floor due to the cash cushion and Biogen Idec offer. Klarman states, "The best investors do not target return; they focus first on risk, and only then decide whether the projected return justifies taking each particular risk."
Klarman has recently been buying shares of Enzon Pharmaceuticals , a $425 million biopharmaceutical oncology company with four drugs on the market and numerous others in the pipeline. Trading at around $9 per share, the stock is still down significantly from its 2000 bubble highs of around $70 per share, and Klarman now owns 18% of the company.
Klarman also added to his ViaSat position. ViaSat is a $1 billion satellite communications company that caters to enterprises and governments where Klarman owns approximately 14% of the company as well.
Other large positions include News Corp., Capitalsource, Domtar and Theravance.
How To Ride Seth Klarman's Coattails
Mebane Faber 02.25.10, 6:00 AM ET
While relatively unknown to the public, Seth Klarman is a superstar in institutional investing circles. His out-of-print book Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor regularly sells for nearly $1,000 on eBay and Amazon. Why are investors so anxious to hear what he has to say? From 1983 to 2008 his hedge fund, the Baupost Group, returned 16.5% a year, outperforming the S&P 500 by more than 6% a year. In the 10 years ending Dec. 31, 2008, he beat the market by an impressive 14.5% a year. Those returns are net of all hedge fund fees and include only one losing year.
Even more impressive is that Klarman achieved this record with no leverage and minimal amounts of shorts, often while holding significant amounts of cash approaching nearly half of all funds under management.
While Klarman is at heart a traditional bottom-up value stock picker, he does often dabble in distressed debt, spinoffs, bankruptcies, SPACs and other esoteric investments. If only one word is to be used to describe what Baupost does, that word should be "mispricing", due to overreaction.
While most individuals do not have access to invest in Klarman's Baupost Group, they can, however, use his investment acumen to manage their portfolio. The SEC publishes on its Web site the holdings of every institutional and hedge fund manager overseeing more than $100 million once a quarter in a filing known as the 13-F. Even though the data is 45 days delayed after the end of the quarter, this matters little for a manager like Klarman who holds stocks for long periods of time, thus making him an ideal target to piggyback.
Using my Web site AlphaClone, from 2000–09, simply buying his top 20 stock picks, equally weighting them and rebalancing the portfolio quarterly, when the picks became public, would have resulted in returns of 14.35% per year vs. –0.85% for the S&P 500. That tracks Klarman's performance quite nicely, and thoroughly beat the S&P in this recent "lost decade."
Klarman is a deep value investor, and he obsesses over risks. One of the metrics he focuses on is liquidation value. As he details in his book, liquidation value is a worst-case, rock-bottom value in which only tangible assets are considered and intangibles, such as going-concern value, are not. Thus stocks or other securities selling below their liquidation value are attractive to Baupost.
One example is Enron, postbankruptcy. According to Klarman's 2006 speech at Columbia University, Baupost had one analyst exclusively analyze Enron for four years. The company had lots of cash but complex liabilities intertwined among more than 1,000 subsidiaries and shell companies. While the debt traded at 15 cents on the dollar, Klarman thought he would get from 30 cents to 40 cents. In the end he received more than 50 cents.
Says Klarman: "I think to take the next step and be a portfolio manager, you need both a sense of history and a vivid sense of risk. When Warren Buffett put out a job description for his replacement, he said, 'This person will need to be able to imagine things that have never happened before.' I think that's very, very important."
Because of his long-term record of success, Klarman is an ideal investor to piggyback, or simply to use as an idea farm to cull for new stock ideas. What is Klarman buying and selling now?
One interesting stock Baupost owns is Facet Biotech (FACT). Facet is a $420 million market capitalization biotech company trading for around $16.50 a share. Facet is a classic value-investor setup that was a spinoff from parent PDL Biopharma (PDLI) in December 2008. Facet contains the former R&D operations and a stocked product pipeline including five drugs in testing for multiple sclerosis and cancers. Even more importantly Facet was spun off with a pristine balance sheet including $300 million in cash currently equating to about $13 a share. Klarman owns 3.5 million shares of Facet representing around 14% of the outstanding shares of the company.
Biogen Idec recently made a $17.50-per-share tender offer for the stock. While Klarman has been talking about the stock since it was $6 a share, both Facet and Klarman feel the offer is inadequate, and Facet recently entered into an agreement with Baupost to increase their ownership limit from 15% to 20% of the total outstanding shares of Facet common stock.
While the company is burning cash, there is a nice share price floor due to the cash cushion and Biogen Idec offer. Klarman states, "The best investors do not target return; they focus first on risk, and only then decide whether the projected return justifies taking each particular risk."
Klarman has recently been buying shares of Enzon Pharmaceuticals , a $425 million biopharmaceutical oncology company with four drugs on the market and numerous others in the pipeline. Trading at around $9 per share, the stock is still down significantly from its 2000 bubble highs of around $70 per share, and Klarman now owns 18% of the company.
Klarman also added to his ViaSat position. ViaSat is a $1 billion satellite communications company that caters to enterprises and governments where Klarman owns approximately 14% of the company as well.
Other large positions include News Corp., Capitalsource, Domtar and Theravance.
