- You might call them boring businesses, but with a bit of portfolio rebalancing and buying more on the dips, Klarman’s positions will probably deliver his required 20% return per year over the long term.
- In the U.S., he is overweigh LNG, refineries, communications, and pharma.
- A few investing lessons can be derived from his current portfolio.
As much as I hate bureaucracy and filing required market regulator forms and various statistical Central Bank inquiries, I must say that I love when others do it as I can get a pretty tasty free lunch from it.
You probably know that an institutional fund manager has to disclose their U.S. portfolio positions in a 13F form no longer than 45 days after the end of the quarter with some exceptions. For example, when the manager thinks that disclosure would significantly affect share price, they can postpone disclosing, but we can get a pretty good picture of the things a specific fund is doing.
In this article, I’ll dig deep into Seth Klarman’s Baupost Group portfolio and their latest 13-F filing. This will allow us to see how a hard-core value investor is positioned in this relatively overvalued market.
Klarman’s U.S. Portfolio
Klarman’s U.S. portfolio was $8.5 billion at the end of the last quarter, or approximately 28% of his $30 billion portfolio.
Before going deeper, it’s important to know that he held approximately 25% of the portfolio in cash and that the average cash position of his fund over time has been 33%. So, if you are overweight the U.S., Klarman’s portfolio suggests you should rethink your portfolio weights.
On the topic of portfolio concentration vs. diversification, Klarman is more inclined to the concentration side as his 5 top holdings account for 45% of the U.S. portfolio. You can read more about portfolio diversification vs. concentration in our article available here.
Let’s Dig Into Seth’s Portfolio
In the figure below, you can find Seth’s top 10 positions. We’ll look at them from an individual perspective and try to learn as much as we can in order to make our portfolio as ‘margin of safety-ish’ as possible.
What immediately strikes me is the sector allocation. Cheniere is in the LNG business, PBR is a petroleum refiner, Viasat, Twenty First Century Fox, Qorvo are all in communications and we can put Dell in the same bucket, Colony Northstar is an REIT with a 7.61% yield, while Allergan and Theravance are two pretty different pharmaceutical companies. So, communications, energy, and pharma is where Seth is finding bargains now.
Let’s take a deeper look at Cheniere. The book value is negative at -$5.62. Hm, so much for a margin of safety investment. Trailing earnings per share are also negative at -$1.03, but that’s significantly lower than 2016 earnings of -$2.67 and -$4.15 in 2015.
What’s also significant is the growth in revenue which went from $271 million in 2015 to $1.2 billion in 2016, and the trailing revenue is $2.4 billion. Also, it’s very important to note that average capital spending in the last 5 years was $4.5 billion, thus almost twice current revenue. So where does Seth see the value and the margin of safety?
Well, the margin of safety and value aren’t obvious to everyone and you certainly miss them if you run a screen on your data terminal. However, by looking at what Cheniere is, it’s easy to grasp the value behind it.
The company has been heavily investing in order to become the largest physical natural gas consumer in the U.S., and a top 10 global LNG shipping capacity holder with the goal of becoming a completely integrated LNG chain company. Given the estimated doubling of the LNG industry in the next 20 years and the huge required investments we have seen Cheniere do in the last few years, the margin of safety and value become clearer.
Figure 2: Cheniere’s investment thesis is oriented toward the next 100 years – there is the value. Source: Cheniere.
Lesson learned: if the value is obvious, it will probably be overpriced. Managing to position yourself into mis-priced future values is a great investing opportunity not to be missed.
With Viasat, Klarman is sitting on significant gains as he acquired most of his position around 2009. It’s almost a 4-bagger for him, and thus not a relevant stake to analyze now.
Figure 3: VSAT’s stock performance in the last 10 years. Source: Nasdaq.
Twenty First Century Fox is a company that Klarman has been steadily buying since 2015 and 2016, and the stock price is still close to his cost price. Its revenue has been pretty stable over the last 10 years, but margins have been continually improving, the forward P/E ratio is at 11.4, there is a nice dividend yield of 1.3%, and the company has been buying 3% of itself through buybacks lately. Thus we can assume that Klarman sees FOX as a bargain and will accumulate until someone is willing to pay a fair premium for it or the market recognizes the value in FOX’s stability and growing cash flows.
Colony Northstar is an REIT with a 7.6% yield, thus it’s probably a nice return on capital for Klarman in this environment. Synchrony Financial is a very stable financial company that has been slowly growing over the last few years and boasts a P/E ratio of just 11.
Allergan, one of the largest global pharmaceuticals is a pure value play. Its stock price is $240 which is where Klarman started buying. He then increased his position when the stock price fell below $200 and below the current book value of $200. He later rebalanced by selling part of it his position last quarter, the part that he acquired below $200. So the situation here is simple, the book value is the margin of safety with Allergan.
At first, Klarman’s portfolio doesn’t look sexy at all. On the contrary, it looks extremely boring as there is an REIT, LNG company, stable film company, and other companies that almost never reach news headlines. However, such companies clearly illustrate Klarman’s strategy, which is to slowly and almost unnoticeably accumulate wealth by patiently buying into companies where the value, which doesn’t have to be the book value, isn’t yet recognized, be it in the form of future cash flows, market share, stability, sector exposure, etc.
The lessons to take away from Klarman’s current portfolio are in line with what we have discussed in our Margin of Safety book analysis. Thus, patience, going where others don’t dare to go, increasing one’s position if prices fall, and rebalancing when prices increase in order to reach alpha.
A final note. Value isn’t always obvious, but a trained eye like Klarman’s is able to see it far in advance and properly calculate the risk and reward.