Klarman Adds to AIG, Drops Allied Nevada and Genworth

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Seth Klarman is a legendary value investor. His fund, The Baupost Group, is one of the largest hedge funds in the world, with assets totaling nearly $30 billion.

As of its 13F filing last week, the fund was fairly active in the first quarter, exiting some stakes while dramatically increasing others. As of the end of March, the fund held positions in more than 20 stocks.

The most interesting of Klarman’s portfolio shifts involved AIG (NYSE: AIG), Genworth Financial (NYSE: GNW) and Allied Nevada Gold (NYSEMKT: ANV).

Klarman dramatically increased his stake in AIG

During the first quarter, Klarman bought roughly 5 million shares of AIG, bringing his total holdings to nearly 12 million shares.

AIG is now his fund’s third largest holding, accounting for about 15% of the total portfolio. Of course, Klarman isn't alone in liking the insurer -- it’s a veritable darling among fund managers, becoming the most commonly held stock back in February.

At a Value Investing Congress early in May, Whitney Tilson laid out the case for AIG quite clearly: with the government exiting, AIG’s management should be incentivized to produce better results going forward. Meanwhile, internal reforms have produced a better, simpler company.

One has to wonder if perhaps Klarman, as a value investor, has been selling shares since March. AIG’s stock has been on a tear, and with it, it’s price-to-earnings ratio has exploded to the upside. Late last year, AIG was trading with a single digit PE; today, it's nearly 30 -- much greater than the S&P 500’s.

Is the gold run over?

The Baupost Group sold its entire position in Allied Nevada Gold in the first quarter, dramatically reducing the fund’s exposure to the precious metal. As a gold miner, Allied Nevada’s stock has largely traded in tandem with the price of gold in recent years.

That appears to have been a great trade, as shares of Allied Nevada have dropped more than 50% since the beginning of April.

Unfortunately for him, Klarman wasn't wise enough to get out of gold-related stocks completely: he held his 21.6 million shares of NovaGold into April. Although the fund might have sold that position since, NovaGold has tumbled by almost 40% in less than two months.

By dumping Allied Nevada, but keeping NovaGold, Klarman might've been conflicted on whether to buy into the notion that great gold bull market has ended.

Klarman no longer likes Genworth

In addition to getting out of Allied Nevada, Klarman also sold his entire stake in Genworth Financial -- all 15 million shares.

Over the last year, Genworth has been a tremendous performer, rallying over 120%. As a value investor, Klarman might have worried that the stock was becoming a bit overvalued. Of course, that rally has continued since the end of March, with shares adding another 7.8% -- perhaps Klarman sold out too soon.

Genworth is to some extent a play on the US housing market -- the company has a substantial US mortgage insurance business. But it’s also globally diversified, with an Australian mortgage insurance business that could be IPOed.

Analysts at BTIG downgraded Genworth earlier in the month, lowering their rating to Neutral. Although they continue to believe that the stock is undervalued on a sum-of-the-parts basis, they believe there are few near-term catalysts to push shares higher.

Following The Baupost Group

Investors should never blindly follow the 13Fs of any fund manager -- by the time they're released, they are several weeks out of date. Further, as fund managers don't have to disclose their short positions, they fail to tell the whole story.

But that said, it’s worth paying attention to the filings from some of the largest funds, if for nothing else than to look for investment trends and generate potential trading ideas.

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Joe Kurtz has a long position in Genworth Financial. The Motley Fool recommends American International Group. The Motley Fool owns shares of American International Group and has the following options: Long Jan 2014 $25 Calls on American International Group. Try any of our Foolish newsletter services free for 30 days. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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