Here's What Seth Klarman Is Buying

At The Motley Fool, we understand that it often pays to zig when Wall Street zags, but that doesn't mean that we don't pay attention to what leading fund managers are buying and selling. And hedge funds that aren't always in lockstep with the broader market can be a particularly valuable source of insight.

Every quarter, fund managers overseeing more than $100 million must disclose their quarter-end holdings publicly by filing Securities and Exchange Commission Form 13-F. The form lists all U.S.-traded securities the manager held at the end of the quarter. Although the form doesn't disclose the manager's short positions or the manager's intraquarter trades, it can shine a bright light on his or her "long" stock bets. To help us make use of 13-F data, we turned to Motley Fool partner AlphaClone, a research and investment-management firm that tracks hedge fund public disclosures and develops investment strategies based on them.

Q2 2011 update
Seth Klarman founded Baupost Group back in 1982. Klarman is a successful investor with a lot to teach us. He sticks to his value-investing principles so diligently that at times, a lack of ready bargains drives him to keep a large chunk of his assets in cash.

Why should you look at Baupost Group's moves? According to AlphaClone's back-test simulation, anyone who invested in this hedge fund's 10 largest long positions at the time they were disclosed publicly each quarter would have returned 270% since 2000, versus a loss of 1% for the S&P 500 (including dividends).

The total market value of Baupost Group's disclosed equity holdings as of June 30, 2011 -- the latest quarter for which data is available -- was $2.35 billion across just 20 holdings. The company's 10 largest positions and associated changes in number of shares were:

Viasat (NAS: VSAT) -- unchanged.
News Corp. (NYS: NWS) -- unchanged.
Microsoft (NAS: MSFT) -- new.
Theravance (NAS: THRX) -- reduced 0.3%.
BP (NYS: BP) -- new.
Allied Nevada Gold (NYS: ANV) -- increased 37.5%.
Alere (NYS: ALR) -- unchanged.
Aveo Pharmaceuticals (NAS: AVEO) -- increased 25.8%.
Enzon Pharmaceutical (NAS: ENZN) -- unchanged.
Capitalsource (NYS: CSE) -- unchanged.

During the quarter, the Baupost Group also increased its position in Syneron Medical and Sycamore Networks. Among the stocks that it reduced its exposure to are Audiovox and PDL Biopharma (NAS: PDLI) . PDL Biopharma collects licensing fees for its many valuable patents, and then has to invest that money well. The company isn't growing briskly, but it's paying a steep dividend near 10% these days.

Selected Q2 2011 commentary
Baupost Group has 37% of its assets in the technology sector, up from 29% a few quarters ago. Healthcare makes up another 25%, while the services sector has seen a recent decline down to 16%. Many technology companies these days are sporting very attractive prices -- and Klarman's group has clearly noticed.

Here's where the firm is winning, losing, and making new bets:

Recent winner
Aveo Pharmaceuticals was a big winner for the company, gaining about 54% during the quarter. Investors are excited about its promising kidney cancer drug tivozanib, and the company has other cancer-fighting drugs in earlier-stage trials, as well. The company has a two-star (out of five stars) rating at Motley Fool CAPS.

Recent loser
Theravance didn't do so well, dropping 8% in the quarter. With just a one-star rating in Motley Fool CAPS many investors are worried about its tepid revenue growth, though others are hopeful about the company's lung-drug partnership with GlaxoSmithKline.

New bets
The company's largest new additions are Microsoft and BP. BP is seen by many as having been overly punished for the Gulf spill disaster -- and while investors wait for its fortunes to change, it's paying a dividend of around 4.6%. Microsoft, meanwhile, is attractive for many reasons, including the scope of its opportunities. It has enough money to buy other big and successful companies outright. It's also getting good reviews for its latest Windows Phone technology. Microsoft already pays a solid dividend near 2.5%, and with its tens of billions of dollars, it's in a good position to hike that considerably.

During the quarter, Baupost Group also started new positions in Central Pacific Financial and Idenix Pharmaceuticals.

We should never blindly copy any investor's moves, no matter how talented the investor. But it can be useful to keep an eye on what smart folks are doing. 13-F forms can be great places to find intriguing candidates for our portfolios.

Longtime Fool contributor Selena Maranjian owns shares of Microsoft and GlaxoSmithKline, but she holds no other position in any company mentioned. Click here to see her holdings and a short bio. The Motley Fool owns shares of CapitalSource, GlaxoSmithKline, and Microsoft. Motley Fool newsletter services have recommended buying shares of Microsoft and GlaxoSmithKline, as well as creating a bull call spread position in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

At the time thisarticle was published

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