Seth Klarman said his $28.5 billion Baupost Group identified opportunities last year in energy after oil prices plunged, as other prospects for finding bargains dried up.
“Baupost wasted no time in redirecting additional investment team members into the energy area to sift through the carnage,” Mr. Klarman, 57, wrote in a year-end letter to investors, which was obtained by Bloomberg News.
Baupost Group added to positions in Cheniere Energy Inc., Antero Resources Corp. and other energy companies in the fourth quarter, according to a filing by the Boston-based firm, as the price of oil plunged. Cheniere became the firm's biggest single stock position in the quarter valued at $972 million as of Dec. 31.
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Mr. Klarman, a bargain hunter and author of the 1991 book “The Margin of Safety,” is viewing energy as an area of opportunity as the Federal Reserve's monetary stimulus has inflated asset prices and boosted stock markets in the U.S. to record levels. Baupost's cash balances grew as profitable sales couldn't be completely reinvested. Returns of 7% to 8% across Baupost's funds in 2014 lagged behind the S&P 500 Index's 14% gain, including reinvested dividends.
“The broader market climbed relentlessly higher with no significant correction,” he wrote. “Bargains became increasingly scarce as the year progressed.”
BUYING ENERGY
Baupost added about 5.1 million Antero shares to bring its stake in the oil and natural gas producer to 7.85 million, valued at $318.5 million, according to the filing with the Securities and Exchange Commission. The firm purchased 2.6 million shares of liquefied natural gas producer Cheniere, and 2.5 million shares of Kosmos Energy Ltd., an oil and gas explorer and producer, in the fourth quarter, according to the filing.
Baupost also sold almost 32 million shares valued at $1.08 billion of Micron Technology Inc., which was previously the firm's biggest position. The firm still has 19.7 million shares worth $689.9 million as of the end of the year.
Money managers who oversee more than $100 million in equities in the U.S. must file a Form 13F within 45 days of each quarter's end to list those stocks as well as options and convertible bonds. The filings don't show non-U.S. securities, holdings that aren't publicly traded, or cash.
REGULARLY OUTBID
In the letter, Baupost said it was regularly outbid on loan portfolios, private equity and real estate, often by 20% to 30% or more.
“At their winning bids, investors were buying these assets at paltry (sometimes even zero) returns to our base-case assumptions,” Mr. Klarman wrote. “This was reminiscent of 2006-2007 behavior.”
Mr. Klarman challenged the Fed's easy-money policy of purchasing bonds to keep interest rates low, which he said has artificially pushed up securities lacking strong fundamentals. He also criticized Fed officials, who he said worsened the nation's wealth disparity through their policies.
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“Today's feel-good moment is bound to be replaced by an environment that feels much worse,” he wrote. “How cynical it is for people like Fed chair Janet Yellen and Boston Fed president Eric Rosengren to decry growing economic inequality when it is their own policies that are exacerbating the gaps.”
Mr. Klarman said his firm's performance last year was a “tale of two halves,” where it reported high single-digit returns in the first half driven by gains from the $3.9 billion sale of Idenix Pharmaceuticals Inc. to Merck & Co. It also benefited from technology stocks, real estate investments and the liquidations of positions in the Lehman Brothers Holdings Inc. estate. The firm's returns declined in the second half of 2014, a period with “few resounding successes and several minor mistakes,” according to the letter.
Diana DeSocio, a spokeswoman at Baupost, declined to comment.
