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3 Stocks Value Investing Legend Seth Klarman Bought in Q3 (and 2 He Dumped)

Billionaire investing legend, author and philanthropist Seth Klarman founded Baupost Group in 1982 and has grown it into one of the largest and most successful hedge funds in the world since. The fund currently controls about $30 billion in assets and manages a 13F portfolio containing $13.06 billion in holdings as of September 30.

The iconic value investor, whose 1991 book on the subject (Margin of Safety) sells for obscene amounts on Amazon, recently took aim at the short-termism which appears to be heavily infecting both the market and corporate boardrooms. During a speech he gave on October 1 during celebrations for the opening of Klarman Hall at Harvard Business School, Klarman questioned the wisdom of management teams being focused solely on their company’s share price and on creating value primarily, or only, for shareholders.

“What longer-term good would this possibly accomplish?” Klarman wondered. “And does anyone really believe that shareholders are the only constituency that matters: not customers, not employees, not the community, or the country, or planet Earth?”

BAUPOST GROUP Seth Klarman

As short-termism, which clashes with the fund’s investment philosphy, has grown, Baupost’s returns have struggled to keep up with the market, especially when it comes to its small- and mid-cap stock picks. Our analysis of the fund’s historical holdings revealed that between 2008 and 2016, those picks returned just 0.45% per month on average, widely trailing the S&P 500’s 0.68% monthly returns during that time. Despite slowing returns, Klarman remains one of the wealthiest people on planet Earth, as according to Forbes’ real time ranking of the world’s billionaires, he has an estimated personal wealth of $1.5 billion, placing him 1,476th on that list.

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Consistent with his value investing approach, the billionaire’s hedge fund made only a small number of moves in its highly concentrated portfolio during Q3, opening new positions in six stocks while selling out of just one former holding. Communications stocks continued to grow in weighting within Baupost’s 13F portfolio, rising to 31.19% by the end of Q3, compared to just 8.17% a year earlier. Utilities also jumped to 6.87% from just 1.73% in the middle of 2018. On the other hand, Baupost has cut its exposure to nearly every other sector in recent quarters, including energy, IT, finance, and real estate. Baupost largely eschews popular stocks as well, as it owned just one of the 30 Most Popular Stocks Among Hedge Funds on September 30.

On the next page we’ll look at five of Seth Klarman’s most noteworthy moves made during the third quarter as he positioned his fund’s 13F portfolio for the closing stretch of 2018.

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