(PUB) Morningstar FundInvestor - page 969

3 Morningstar FundInvestor December 2013
Evaluating Slumps
Historically, Longleaf has done well in downturns,
so Longleaf Partners‘ LLPFX 2008 loss of 50.6%
shocked some shareholders. It’s a sobering lesson
that nearly all focused funds have so much issue-
specific risk that they are vulnerable to such losses.
Longleaf’s managers have the highest reported
investment in their funds, so they felt the pain, too.
The fund’s 2008 loss was caused largely by a high
level of exposure to the global economy in names
like General Motors GM, CEMEX CX, and Chesa-
peake Energy CHK. Some of these names roared
back in 2009, and with hindsight they had some hits
and mistakes such as Dell and GM. Five years hence,
Longleaf has rewarded shareholders who stayed
around with a 26.6% annualized return for a top 5%
return in the category. More important, the fund’s
returns since 1987 are twice that of the average
large-blend fund and well ahead of the S&P 500.
See the graph.
Those great returns come at the price of occasional
controversy, though. Longleaf doesn’t seek to fight
companies in court, but it’s going to happen when you
buy stocks at big discounts. Sometimes management
wants to keep that great deal to itself or it turns out
the discount exists because management wasn’t as
upright as hoped.
The firm’s latest fight with Dell worried Longleaf
shareholders on two fronts: First, why were they
involved with a lousy company that appeared to be
obsolete? Second, is it worth their time to engage
in a fierce takeover battle and legal fight? Staley
Cates and Mason Hawkins produced a study that
shows they’ve actually had strong results in com-
panies where they file a 13D motion, and they argue
Dell had much more value than the diminishing PC
business. I do think there’s something to the second
point. Cates says he probably spent a third of his
time for a month or two on the Dell mess, and the
same for Chesapeake in 2012 . Dell wasn’t a winner
for the fund, but Chespeake was.
Longleaf, Royce, and Montag funds have largely trounced their benchmarks since inception despite some sizable setbacks along the way. However, it requires a lot of
patience from shareholders.
Data from 04/1987–11/2013.
The Long Run Growth of $10,000
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
200,000
160,000
120,000
80,000
40,000
p Aston/Montag & Caldwell Growth p Longleaf Partners p Russell 2000
p Royce Pennsylvania Mutual p Longleaf Partners Small Cap p S&P 500