(This post is part of our series on tracking hedge fund portfolios. If you’re unfamiliar with tracking investments they disclose via SEC filings, check out our series preface on hedge fund filings.)
Next up is RBS Partners, the parent company of Eddie Lampert’s hedge fund ESL Investments. Prior to forming ESL, Lampert worked with Robert Rubin at Goldman Sachs’ risk arbitrage department. Lampert graduated from Yale where he was a member of the skull and bones secret society, as well as Phi Beta Kappa. He runs highly concentrated portfolios and his focus has long been on the retail sector, most notably through his ownership of Sears Holdings (SHLD). He has graced Forbes’ billionaire list but was also one of the top hedge fund losers in 2008. In terms of recent investment activity, we saw that Lampert bought AutoNation (AN) shares and his Sears Holdings purchased Bill Ackman’s stake in Sears Canada. Our coverage of RBS also includes Lampert’s 2010 annual letter.
The positions listed below were their long equity, note, and options holdings as of March 31st, 2010 as filed with the SEC. All holdings are common stock unless otherwise denoted:
Brand New Positions n/a
Increased Positions n/a
Reduced Positions Wells Fargo (WFC): Reduced position by 62.7% SLM (SLM): Reduced by 62.1% Acxiom (ACXM): Reduced by 60.1% Genworth Financial (GNW): Reduced by 7.7% Sears Holdings (SHLD): Reduced by 7% Capital One (COF): Reduced by 4.91% AutoZone (AZO): Reduced by 4.33% AutoNation (AN): Reduced by 3.33%
Positions They Sold Out of Completely Bank of America (BAC)
Eddie Lampert’s Entire Portfolio (by percentage of assets reported on 13F filing)
Lampert obviously runs a highly concentrated portfolio so there’s not a lot to cover in terms of changes. We want to quickly point out that while it *appears* as if Lampert was trimming positions in Sears, AutoNation, and AutoZone, that’s not the case. As we detailed previously, Lampert was distributing these shares to some of his different investment vehicles as well as to investors in his funds.
Be advised that since this filing he has actually bought AN shares which we detailed in April. In terms of selling, Lampert actually sold over 60% of his stakes in Acxiom, SLM Corp, and Wells Fargo. He also sold entirely out of his small stake in Bank of America (BAC). Other than that, there’s not a whole lot to update you on.
Assets reported on RBS Partners’ 13F filing were $12.2 billion this quarter. Data from the SEC is aggregated and sorted automatically by Alphaclone, our source for hedge fund tracking, replicating, and performance backtesting (Market Folly readers can receive a special free 30 day trial). Remember that these filings are not representative of the hedge fund’s entire base of AUM.
“I’m more worried about the world broadly than I’ve ever been in my whole career.” ~ Seth Klarman
Those haunting words were uttered yesterday at the CFA Institute’s annual conference in Boston according to Reuters‘ coverage. Are you concerned yet? You probably should be. When the investment manager from Baupost Group speaks, you listen. After all, Baupost Group has averaged 20% annual gains. Klarman went on to say, “Given the recent run-up, I’d be worried that we’ll have another 10 years of zero returns.” That should inspire some confidence, right?
Reuters had two intriguing articles regarding Klarman’s recent remarks here and here. Essentially, Klarman is quite concerned about inflation and has purchased far out of the money puts on bonds. These aren’t the type of puts that he’ll make money on if interest rates go to 5% either. Nope. Klarman is betting on extreme inflation that would require interest rates of 10% for him to make money on the play… that’s how far ‘out of the money’ he is.
While we can’t confirm this, it sounds an awful lot like Julian Robertson’s constant maturity swap (CMS) trade he put on a while back (see also our explanation of curve steepener trades). Very loosely speaking, these are somewhat like buying far out of the money puts on long term treasuries. They’re likely to expire worthless, but if the scenario does play out, these trades can pay out over 50x. While we can’t confirm the exact vehicle he’s selected for this play, Klarman is merely seeking insurance should this drastic event occur as he wants to hedge out the potential risk.
In terms of current investment pursuits, the Baupost Group manager is looking at private commercial real estate. He doesn’t like publicly traded REITs here because they’ve rallied too much. This is largely in line from what we’ve seen out of hedge fund land as many hedgies have been short commercial real estate plays to no avail as everyone seems to think they are overpriced and destined for a correction.
Just a few days ago we detailed the latest portfolio update on Baupost Group and saw that Klarman added a couple of new equity positions. However, the main thing to take away from that update confirms what Klarman recently stated at the conference: Baupost is sitting on a ton of cash. The assets on their 13F filing (mainly US equities) only totaled around $1.7 billion and the firm manages $22 billion. While we know Klarman has also invested in distressed assets, do the math there. Apparently Baupost is sitting on over $6 billion in cash (30% of assets) and don’t see many opportunities to put that money to work.
Klarman is notorious for always keeping cash on the sidelines should he find opportunities. However, now is clearly not one of those times as he has debated returning some of the money to investors. A compelling investment landscape from over a year ago is clearly no more. The opportunities seem fewer and farther between and it’s very apparent Klarman is concerned given the drastic run-up in equities. Many managers feel we’re not out of the proverbial woods yet so now would probably be as good a time as ever to review Seth Klarman’s lessons from the financial crisis. While Seth Klarman doesn’t speak in public very often, those interested in hearing him will have the opportunity at the upcoming Ira Sohn investment conference.
For our recent coverage of Baupost Group’s portfolio, check out their new positions in ADC Telecommunications and Solar Capital. We’ll leave you with some closing remarks from Klarman: “We’d rather underperform a huge bull market than get clobbered in a bear market.” A true investment manager indeed.
Sen. Chris Dodd, D-Conn., has snuck a last-minute compromise on derivatives into the financial reform bill, the Washington Post reports. He didn’t change any of the original tough language on the controversial financial products. But now any legal action is postponed for two years, pending the results of a thorough study. Who’s responsible for that study? A new council of regulators headed by Tim Geithner, who has already expressed concern about the measure and is as likely as not to kill it altogether. Early reactions to the compromise have not been terribly positive. Sen. Blanche Lincoln, D-Ark., who originally crafted the provisions on derivatives, said she remains “fully committed” and will fight efforts to tone the measures down. The banks aren’t thrilled, either. One lobbyist predicted an “immediate chilling effect,” saying, “Markets crave certainty. All this does is introduce a comic amount of uncertainty.”
After a series of unpopular policy changes and privacy-breaching technical glitches, Facebook founder Mark Zuckerberg might have to relent, at least temporarily, in his efforts to get users to share more information. According to the Wall Street Journal, he has consistently pushed to make profiles open by default, leaving users responsible for implementing privacy controls. But the company is meeting increasing resistance from users. That’s going to be a big problem as Facebook attempts to turn members’ personal data into a lucrative ad business without driving them away from the site. Meanwhile, the company is getting unwanted attention from the FTC as the agency investigates how social networks use members’ data, saying they “raise privacy concerns.”
The New York Times looks at one of America’s favorite sources of imported crude: Canada’s oil sands. But while extracting oil from tarry rock might seem less risky than offshore drilling, safety precautions are facing heightened scrutiny. Oil sands come with their own set of environmental issues, including toxic byproducts, but the biggest risk may be the pipelines transporting the crude from Canada to the United States. Critics say regulators have waived a major safety standard for the pipes and there are no protocols or plans in the event of a spill. In the wake of the Deepwater Horizon, limits on offshore drilling could mean more oil running through the pipeline, but the spill has also stoked safety concerns. Nevertheless, “Looking ahead, its importance is only going to get bigger,” says an oil historian and chairman of energy consulting firm IHS CERA.
To head off the risk of another “flash crash” like we saw on May 6, regulators want to install a new set of circuit-breakers for stocks. The Journal reports that starting in mid-June, the SEC will launch a six-month pilot program to test a measure which would pause trading if the market moved 10 percent in fewer than five minutes. If they like the results, they’ll adopt the curbs permanently. Stock market execs have been positive about the new rules. NYSE Euronext’s COO calls the change a “good step toward restoring faith in the markets.” The New York Times says tech giants could find themselves in a symbiotic relationship with cow manure. Companies like Google (GOOG) and Microsoft (MSFT) need land and electricity for their computer processing facilities. Traditionally, they’ve stuck them in cities or industrial areas, but space is less plentiful these days. So a recent Hewlett-Packard (HPQ) research paper suggests a novel solution. Dairy farmers, who have to deal with an enormous amount of cow manure, could build waste-to-fuel centers and then provide tech companies with the necessary land and power. The study says a farmer could recoup his investment in two years. “Information technology and manure have a symbiotic relationship,” quips the director of the HP lab that produced the report.
In more conventional news from Hewlett-Packard, good, old-fashioned hardware is rescuing the company from the recession, says the Wall Street Journal. This quarter, the company’s profits are up 28 percent year-on-year, and that’s despite sluggish sales in both software and tech services. Instead, traditional equipment like servers and personal computers are both growing, with revenues up 31 percent and 21 percent, respectively. HP expects these sales will keep growing, but the future’s less certain for services and software.
We wanted to quickly highlight that BloombergTV recently had Bill Ackman of hedge fund Pershing Square on to talk about financial regulation and the ratings agencies. The conversation stems from Ackman’s battle with MBIA where he shorted the stock and over the course of six years eventually won. This story is detailed in Christine Richard’s new book Confidence Game that we recently reviewed. In order to help change the system, Ackman is in favor of Sheila Blair’s proposal which he talks about in the interview.
Embedded below is the video and Email readers will need to come to the site to view it:
Jeff Saut, Chief Investment Strategist over at Raymond James, thinks the market is in the middle of a bottoming process. In his latest market commentary, he mentions that the market’s ‘convalescing period’ could take anywhere from two to eight weeks. He is looking to accumulate stocks during this period and has advised to ready your ‘buy list’ of preferred names you want to own. In the weeks leading up to the pullback, Saut had advocated caution and raised cash levels. The market initially declined recently from the flash crash and then rallied sharply back but did not breach the 50 day moving average. As such, he thinks a re-test of the recent low is in order and he anticipates it will hold.
In terms of what specifically to invest in, Saut had a few recommendations. He in particular likes Brazil as the country has plenty of fresh water, agricultural commodities and energy. While he has been somewhat cautious on emerging markets in the near-term, he is quite bullish for the long-term. For fund investors, he mentions the new Dreyfus Brazil Equity Fund (DBZAX) and for individual stocks he recommends CPFL Energia (CPL). Regarding non-Brazilian recommendations, Saut again mentions 7% yielding Enterprise Partners (EPD) which is on Raymond James’ focus list. He mentioned this last time around when he advised to selectively upgrade the stocks in your portfolio.
Jeff Saut ends his commentary by saying, “Indeed, market historians should recall that after a selling climax what typically happens is a one-to-three-session throwback rally followed by a downside retest attempt of those ‘lows.’ Sometimes the ‘lows’ are marginally broken, but most of the time they are not. I continue to invest accordingly.”
Embedded below is Jeff Saut’s latest market commentary:
Saut was right in his call to be cautious and raise cash a few weeks ago. We’ll have to see if he’s correct again if the market does start to bottom here and trade higher. However, many market pundits are calling for the market to go decisively lower, so no we wait. For more from Jeff Saut, you can see his past investment strategy here.