The largest positions in the portfolio at Seth Klarman (Trades, Portfolio)'s Boston-based hedge fund, Baupost Group, always attract plenty of attention.
Everyone wants to see what the storied value investor is buying and selling, and where he thinks there is value to be found in the market.
The smaller positions in his portfolio, however, generally attract less attention.
There are plenty of smaller positions in Baupost's equity portfolio. The hedge fund, which manages around $30 billion in assets for clients, has approximately $11 billion invested in equities. The remainder is spread between cash and debt (although 13F filings do not detail cash and credit holdings).
Klarman's holdings
The largest position in the equity portfolio, according to the most recent filings with the Securities and Exchange Commision, was Liberty Global PLC (LBTYK, Financial). At the end of the second quarter, Klarman owned $1.1 billion of this company, making it a 10.4% portfolio weight in the equity section of Baupost's fund.
At the other end of the spectrum, we have companies like XPO Logistics Inc. (XPO, Financial). This was a new addition to the portfolio in the second quarter. Klarman acquired 1.5 million shares of the logistics business, a position that was worth approximately $87 million at the end of the quarter. It accounts for just 0.8% of the overall equity portfolio and a much smaller percentage of Baupost's total assets under management.
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Smallest holdings
The two smallest equity holdings are Gossamer Bio Inc. (GOSS, Financial) and Paratek Pharmaceuticals Inc. (PRTK, Financial). Together, the hedge fund has just $37 million invested in these two businesses, which is just slightly more than 0.1% of total assets under management.
Paratek is the smallest investment here. Baupost has just $9.5 million invested in the business, which seems like an unbelievably miniscule amount.
The question is, what does Klarman like about these two companies? He obviously doesn't think they are going to become the next big thing, because if he did, he would have allocated more money toward them. At the same time, the positions are so small that even if these stocks triple in value, they are going to have a relatively insignificant effect on the hedge fund's overall performance.
Take Gossamer, for example. Baupost has invested $27 million in this one pharmaceutical business. With around $30 billion in assets under management, to have an impact of just 1% on performance, shares of Gossamer would have to rise in value more than 10 times. Even if this is the best pharmaceutical company in the entire world, the chances of this happening are fairly slim.
Speculation
Gossamer went public at the beginning of this year with six drugs in its development pipeline. The company is expecting results from clinical trials in 2020 and had $464 million of cash on the balance sheet at the end of June, which management believes is enough to support the business for the foreseeable future. All of its treatments are in stage one or two testing, so it will be some time before the company sees any results.
As we don't know what he is thinking, perhaps it's better to overlook Klarman's position here, as it seems to me there's a lot that could go wrong for this business as it tries to commercialize its intellectual property.
Paratek is another curious investment. The company did generate some sales in the second quarter, but it remains heavily loss-making and is investing in stage two studies of new treatments. Once again, this business does not immediately seem to have any attractive qualities.
While I'm not Klarman, it is highly likely he sees something the rest of the market is overlooking. But with a position of just $9.5 million in the stock, perhaps he's not too convinced.
Disclosure: The author owns no stocks mentioned.
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