At the end of last week, Seth Klarman (Trades, Portfolio)'s hedge fund, the Boston-based Baupost, filed its 13F report with the SEC for the third quarter of 2021.
These reports provide investors with an interesting sna-shot into successful investors' portfolios, although they should only be used as a starting point for further research. The filings show the investments held in the portfolios of funds with more than $100 million in assets under management at the end of each calendar quarter. However, they only detail U.S.-listed equity positions. They do not include cash, credit or international equity holdings. Therefore, these reports only provide a small window into the assets of these firms.
What's more, they only show the U.S. equities owned at one point in time. They do not show when the positions were acquired or why a manager like Klarman decided to buy the stock.
Major additions
With that in mind, the most significant addition to Baupost's equity portfolio in the third calendar quarter was Dropbox Inc (DBX, Financial). The hedge fund acquired around 9.3 million shares in the cloud storage company, giving it a 2.6% portfolio weight. I should note that this figure only relates to Baupost's equity portfolio, which accounts for only 30% of overall fund assets.
The second-largest addition was Archaea Energy Inc (LFG, Financial). Baupost acquired 3.5 million shares in this company during the third quarter, giving it a 0.6% weight in the portfolio.
The largest equity holding in the portfolio as of the quarter's end remains Liberty Global (LBTYK, Financial). This made up 15% of Baupost's equity portfolio at the end of September, and it has been a core position for the fund since the end of 2019.
Liberty Global is not the only Liberty company in Baupost's portfolio. The fund also owns a position in Liberty Sirius XM (LSXMK, Financial). Klarman and team boosted this position by 40% to 4% of the equity portfolio in the quarter. Including the different share classes of these two firms in Baupost's portfolio, around 25% of Baupost's overall equity portfolio is invested in these two Liberty entities.
In terms of single position size, the largest overall change to the portfolio was the sale of Translate Bio. This position made up 4% of the overall equity portfolio at the end of the second quarter of 2021. However, Baupost reported that it no longer has the position in the third quarter.
One does not have to look hard to find out why. French pharmaceutical giant Sanofi (SNF) announced that it would be acquiring Translate Bio at the beginning of August. The deal closed in the middle of September. The acquirer offered $38 per share in cash. This was a substantial premium to the price Baupost originally paid for the holding. The hedge fund acquired a position worth 17.5 million shares between the second quarter of 2018 and the third quarter of 2019. During this period, the stock traded in the range of between around $7 and nearly $13. It looks as if the hedge fund could have earned a profit of as much as 442% on its initial purchases. The initial stake was worth as much as $200 million for the fund, implying a very attractive return on investment.
Merger arbitrage
Another significant removal from the portfolio was Shaw Communications (SJR, Financial)(TSX:SJR.B, Financial). This 7.5 million share position was worth around 1.8% of the equity portfolio at the end of the second quarter.
Currently the subject of a potential takeover, Baupost acquired the position in the second quarter of 2021 after the merger had been announced, suggesting this was a merger arbitrage play on potential regulatory clearance.
The 26 billion Canadian dollar ($20 billion) buyout offer is worth C$40.50 per share, compared to the current stock price of C$37.00. Looking at the decision to sell the holding before the deal cleared, it seems as if Baupost's view on the merger going through might have changed in the past few months, or perhaps the firm believes the easy money has already been made with the deal, or that the combined company won't be worth sticking around for.
