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Baker Brothers’ 102 Stock Portfolio: Top 10 Holdings Analyzed


Updated on March 29th, 2021 by Nikolaos Sismanis

Founded in 2000 by Julian Baker and Felix Baker, Baker Bros. Advisors is a private hedge fund based out of New York City. The two brothers are still at the helm of the fund, and along with around 25 employees cater to 3 clients. The fund has grown rapidly over the years due to its extraordinary returns, and currently boasts approximately $26.5B of assets under management (AUM). Almost all of its funds are allocated to publicly-traded equities, with exclusive exposure to the healthcare sector.

Investors following the company’s 13F filings over the last 3 years (from mid-February 2018 through mid-February 2021) would have generated annualized total returns of 26.7%. For comparison, the S&P 500 ETF (SPY) generated annualized total returns of 12.50% over the same time period.

You can download an Excel spreadsheet with metrics that matter of Baker Brothers Advisors’ current 13F equity holdings below:

 

Keep reading this article to learn more about Baker Brothers Advisors.

Table Of Contents

Baker Brothers’ Philosophy and Strategy

Brothers Julian and Felix Baker have earned their guru-like status on Wall St., having delivered an exceptional track record of annualized returns over the years. Julian has a business background from Harvard, while Felix has a Ph.D. in Immunology from Stanford. Together, they have combined their individual expertise to generate superior returns, by focusing solely on the biotech industry.

They grew from $250 million in AUM in 2003 into $26.5 billion worth of AUM as of February 15, 2021. Their impressive quality is their consistency, proven by their 20%+ annualized returns achieved over the past three years, implying no signs of a slowdown.

The fund’s strategy includes utilizing a fundamentally-driven way of investing to come up with its investment decisions, also known as “bottom-up investing”. Unlike top-down investing, which suggests studying the bigger picture of economic factors to make investment decisions, bottom-up investing involves looking at the company-specific fundamentals such as a business’s financials, cash flows, and the merit of its goods and services. This is crucial when investing in the biotech industry, as each company is very unique, requiring niche knowledge to understand its business model.

The fund’s philosophy stands in holding its investments ordinarily for three years, though its higher-conviction investments can be seen held for longer. Additionally, Baker Bros. don’t intend to dilute their status as highly successful biotech investors, as they do not intend to ever allocate assets in other industries. Still, some minor stakes in the industrials sector had been reported in the past.

Finally, the two brothers don’t believe in diversifying the fund’s portfolio. Instead, they emphasize that focusing on specific companies, which they can analyze and understand deeply and place concentrated positions in their securities can generate superior returns over the long term.

Baker Brothers Investments’ Portfolio & 3 Largest Public-Equity Investments

Upon looking in Baker Bros’ portfolio one can see that it holds 102 individual stocks, questioning the fund’s disbelief in diversification. However, the fund’s investing philosophy does hold up, as the top 10 holdings account for 82.7% of the total capital invested, confirming their inclination towards high-conviction investments.

Source: 13F filing, Author

BeiGene, Ltd. (BGNE):

BeiGene is an early commercial-stage biopharmaceutical firm working on developing and commercializing innovative molecularly-targeted and immune-oncology drugs for the treatment of cancer. It is the fund’s largest holding by far, occupying nearly 1/4 of its total portfolio. This is quite odd since the company is based in Beijing, China, which means that the fund’s due diligence process has to go next-level due to the weaker Chinese reporting standards.

Despite the uncertainty surrounding BeiGene, the company has developed into a fully-integrated global biotechnology company with operations in China, the United States, Europe, and Australia, and a robust pipeline of pharmaceuticals, strengthening its reputation. Nonetheless, BeiGene produces miniature revenues against its $29.4B market cap, indicating that investors are betting heavily on the company’s long-term prospects.

Baker Bros trimmed its stake by 12% last quarter, though the fund still owns around 13% of the company.

Incyte Corporation (INCY):

Incyte Corporation focuses on the discovery, development, and commercialization of various therapeutics. Its flagship products include JAKAFI, which is a drug for the treatment of myelofibrosis and polycythemia, and Iclusig, a kinase inhibitor to treat chronic myeloid leukemia.

Unlike many biotech companies which are pre-revenue, Incyte has been growing its top and bottom line for years. Revenues have expanded from around $169 million in 2010 to $2.67 billion over the past 4 quarters. The company is expected to produce FY2021 EPS of $3.26, suggesting a forward P/E ratio of ~24.

EPS over the medium term is then expected to grow by around 25%, since Incyte is an industry-leader, essentially monopolizing its areas of treatment. In that regard, the valuation seems quite compressed. However, the industry is full of risks, and when the company’s patents expire, competition is likely to rise at some point.

The fund owns around 14.6% of the company, despite its quite substantial market cap of $17 billion.

ACADIA Pharmaceuticals Inc. (ACAD):

ACADIA Pharmaceuticals focuses on the development and commercialization of small molecule drugs aimed at unmet medical needs in central nervous system disorders. The company features extraordinary revenue growth, at a 3-year CAGR of 52.%. The bottom line has never been positive, with losses widening as sales are growing. Earlier in March, Acadia announced deficiencies identified by the FDA about its marketing application for Pimavanserin in hallucinations and delusions associated with dementia-related psychosis. Consequently, shares plunged by a massive 45%, with no signs of recovery over the next couple of weeks.

This is one of the fund’s highest conviction picks, as the Baker Bros, own around 26% of the company’s shares, which they hold since 2010. While the fund has made great gains since, the recent plunge has definitely compressed its unrealized gains, as the position was held stable QoQ.

Final Thoughts

The Baker brothers have built a truly special hedge fund. Specializing in a sector that is challenging to understand by most investors, the firm has significantly outperformed the overall market by a wide margin with its concentrated biotech portfolio. Investors that are familiar with biotech companies are likely to find some hidden gems amongst their holdings.

Simultaneously, however, most of them comprise very risky pre-revenue firms, that should only be considered upon having a great understanding of their business model. Hence, retail investors should be wary of just “copying” the fund’s portfolio.

 

Additional Resources:

Viking Global’s 75 Stock Portfolio: Top 10 Holdings Analyzed

Lone Pine Capital’s 37 Stock Portfolio: Top 10 Holdings Analyzed

Slate Path Capital’s 20 Stock Portfolio: Top 10 Holdings Analyzed

Akre Capital’s 26 Stock Portfolio: Top 10 Holdings Analyzed

Appaloosa Management’s 35 Stock Portfolio: Top 10 Holdings Analyzed

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