Monday was the deadline for investment managers to publicly disclose their end-of-second-quarter holdings. Financial reporters typically report on the changes in the portfolios of a small group of well-known investors, completely overlooking one of the greatest investors of the last 30 years because of his low public profile (he is followed by a small number of bloggers).

19% annualized over 27 years!
Seth Klarman founded the Baupost Group in 1982. In his oldest fund, Klarman compounded money at an annualized average rate of 19% over the 27-year period through 2009 (the most recent reliable number I could find). That's an extraordinary record, and Klarman achieved it with no leverage and while frequently maintaining substantial cash positions.

Finding value in 2 large-cap names
So what did Klarman do in the second quarter? Baupost's most significant action was establishing sizeable positions in two well-known names: Microsoft (Nasdaq: MSFT) and BP (NYSE: BP). At the end of the second quarter, the combined positions were worth almost $600 million, or roughly a quarter of the aggregate value of reported holdings. Note that BP never got as cheap during the second quarter as yesterday's closing price; for Microsoft, the maximum discount to yesterday's closing price didn't even reach 7%. Both investments dovetail with the theme of high-quality large-cap stocks, which appears to finally be gaining some purchase in the market.

  • Add Microsoft to My Watchlist.
  • Add BP to My Watchlist.

He's pretty good on the macro picture, too
As a bottom-up fundamental investor, Klarman focuses on individual stocks. Nevertheless, the credit crisis and its aftermath have forced value investors to pay more attention to macroeconomic factors. On that front, Klarman is proving a quick study. During an interview in May 2010 (PDF link), he warned:

...we can be lulled into thinking all is well, that the United States will always be rated triple-A. Treasury Secretary Timothy Geithner speaks as if—at least in his public statements—he has been lulled into thinking that the United States will always be triple-A. That kind of thinking guarantees that someday the United States will no longer be triple-A.

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