One of the most widely followed and profitable value investors, Seth Klarman (Trades, Portfolio) told clients that in 2015 his firm Baupost Group lost money for the third year in its history.
According to a letter and investor update reported by Business Insider, his fund’s public investments portfolio lost 6.7% and private investments portfolio gained 2.4%, while the Standard & Poor’s 500 Index ended the year down 0.73%. The slide broke Klarman’s run of six consecutive years of positive returns. He is said to have returned 17% on an annualized basis since his fund’s inception in 1982.
Like many investors in their 2015 shareholder letters, Klarman used some space to bemoan a market overly kind to a few companies and punishing to energy names, where he had 39% of his portfolio invested at the end of the third quarter. Klarman, who likes stocks temporarily battered into having a pronounced “margin of safety” – to the extent that he wrote a book titled, “Margin of Safety” – can sometimes misidentify these. His head of public investments, Jim Mooney, described two of their mistakes in the letter:
“Our loss on Micron resulted from the fact that we remained overly optimistic about our long-term thesis after it should have become apparent that the company’s widening cost disadvantage compared to its largest competitor, Samsung Electronics (XKRX:005930, Financial), would result in lower than expected profit margins. It also should have been clearer to us that the company was more vulnerable to the decline in PC DRAM pricing than we had believed. By the time we decided to sell nearly all of our remaining position, the stock was lower – a frustrating coda to an otherwise tremendously successful investment that achieved total lifetime profitability of over $900M.”
Micron (MU, Financial), Klarman’s fourth largest position at mid-year, took up merely 0.25% of the portfolio after a 95% reduction in the third quarter. Year to date, the stock extended its decline, falling 26% to trade around $10.48 per share in mid-afternoon.
In the second case, biopharmaceutical company Keryx (KERX, Financial), Klarman’s team overestimated initial prescriptions for Auryxia, the company’s approved drug for dialysis patients. Though this only slightly lowered Baupost’s estimate of intrinsic value, it had a significant effect on the stock.
“The market, however, took a much harsher view and punished the stock, driving it down to almost 70% in less than three months from about $10 to almost $3 a share. Although this certainly was not good news for our mark-to-market P&L, we believe it was a significant overreaction, and we were able to take advantage of the opportunity by investing additional capital on a private basis at what we believe is an incredibly attractive valuation. This, of course, is a great illustration of the fact that even in circumstances when we reduce our own expectations, price declines can far exceed what we judge to be warranted.”
Keryx closed Monday at $3.36 per share, down 33.5% year to date and 2.3% for the day. On Oct. 14, Klarman increased his Keryx position by 63% to 42,016,276 million shares, totaling 34.6% of the company.
In addition to the stocks he discussed, Klarman had losses in his top positions, with Cheniere Energy Inc. (LNG, Financial), down 40%; ViaSat Inc. (VSAT, Financial), down 8.4%; and Alcoa Inc. (AA, Financial), down 29.5% since October.
In retrospect, the long-term investor said he dodged many fallen knives but could have been more patient.
“What had, for many investors, been a growing pool of red ink during the year turned into a bloodbath by year-end,” he said. “To repurpose Warren Buffett (Trades, Portfolio)’s famous quote about managements and businesses, when a talented investment team confronts an exceptionally challenging market, sometimes the market wins (at least in the short run)."
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