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What Is Seth Klarman's $25 Billion Hedge Fund Doing With British Petroleum?

By Jason Hall – Feb 28, 2014 at 11:20PM

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During the past couple of years, Baupost Group has bought and sold shares of British Petroleum every single quarter.

Every quarter, large money managers have to disclose what they've bought and sold via "13F" filings. While Fools don't always (or even usually) follow what the big money does, we can often glean an idea or two by tracing their footsteps.

Seth Klarman's Baupost Group has been one of the most successful hedge funds since its founding in 1982, reportedly averaging mid- to high-teens in annual return, during a period where the market has averaged closer to half that. The thing is, Klarman has managed these consistently excellent returns by focusing more on preservation of capital and eschewing risk than on outsized returns. Sounds like someone we could all learn a thing or two from. Let's take a look at his recent actions with British Petroleum (BP -1.65%), and see what we can learn. 

Not the Oracle of Boston

Klarman has been successful, like Warren Buffett, but using a very different method. Source: Mark Hirschey

One of the interesting things about Klarman is how he's managed amazing returns -- and just as amazing, only lost money in two years since 1982 -- while constantly changing his portfolio's makeup. Often called a value investor, Klarman is no Warren Buffett when it comes to how he manages Baupost's portfolio. Buffett has said that his ideal holding period for a stock is forever, while Klarman regularly changes allocations, rarely keeping the same share count from even one quarter to the next, and often holds as much as half the fund in cash. 

Take BP, for example: Going back to the December 2011 13F filing, Baupost has either sold or bought more than 1.4 million shares of BP stock every single quarter, except two. This most recent quarter saw the smallest activity in the past two years, with the fund only buying a net 68,000 shares, adding to the 5.6 million already held. 

Why all this activity?
First off, let's accept the fact that, whatever method or reasoning behind Klarman's activity, trying to replicate it is probably a bad idea. Even worse would be trying to follow his moves, because you'd likely be getting the opposite result of whatever Baupost is getting. And that's assuming that the result Klarman is getting -- which we don't know -- is worthwhile to begin with. Here's a look at buys of BP shares versus sells of BP shares, against BP's stock price movement during the period:

BP data by YCharts

The green arrows represent quarters when Baupost was a net buyer, and the red arrows represent quarters when it was a net seller. Additionally, just because the fund was a net buyer or seller during a quarter doesn't mean the hedge fund only bought or only sold in any given quarter. To the contrary, you can just about guarantee that Baupost did some of both every quarter, based on whatever metrics they are using to determine buy and sell prices. 

Why BP?
I'm not going to attempt to answer that question with regards to Baupost. Let's face it -- this is one of the largest hedge funds in the world, with billions in capital, and access to a talented team of professionals. Do you have access to that? Then I'll state again... it's probably a bad idea to try and replicate what Klarman and Baupost are up to. I will, however, attempt to give some reasons why you would consider British Petroleum. 

Today's BP under Bob Dudley is far removed from the "growth at any cost" days of Tony Hayward.

Today's BP is a changed company from the BP of Tony Hayward and the Deepwater Horizon disaster in the Gulf of Mexico. Current CEO Bob Dudley -- the executive placed in charge of handling the disaster, and then replacing Hayward -- has made efforts to shift BP's focus away from growth, and back toward profitability following 2010's loss of more than $3.7 billion. In a video following the company's earnings report earlier this year, Dudley said this:

In these times, we need to be more focused, more simple, more clear... We've had the best exploration year in at least a decade... Many good things happening within the company. We are going to live within the capital discipline that we said, we will probably keep our capital (spending) flat in 2014 versus 2013, between $24 billion and $25 billion.

BP produced $23 billion in profits in 2013, versus $11 billion in 2012, and in no small part due to Dudley and his team's efforts to maintain discipline with capital spending, with an intense focus on getting return for every dollar invested, whether in production, exploration, or in the company's midstream operations. 

Final thoughts: Don't be an echo. Own your investment choices
Seth Klarman has an impeccable track record, but his method of investing isn't something that can be mirrored based on 13F filings. BP has a number of positive attributes, including a solid leader in Bob Dudley, who has molded BP into a much more disciplined company that is focused on profits, not scale. This bodes well for the company. Does it belong in your portfolio? Whatever you decide, don't make your decision based on Seth Klarman's actions.

Jason Hall has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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