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LONGLEAF PARTNERS FUNDS'
MASON HAWKINS, C.T. FITZPATRICK & STALEY CATES
(continued from preceding
page)
Hawkins: Recent bouts of market fear coupled with specific company shortfalls from consensus quarterly earnings [estimates] have enabled us, we think, to buy wisely in compelling investment opportunities … [and make] significant progress in our domestic portfolios. We've added to existing holdings that we know very well … at attractive prices. We acquired several new positions at prices below 60% of our conservative appraisals. And these investments have decreased the levels of low-yielding cash reserves that we held in each of our funds….
Our corporate values per share as well as our ownership in certain businesses increased as many of our corporate partners moved to repurchase shares aggressively. This progress has lowered our funds' composite price-to-value ratios and increased our implied future returns. And we've recently added materially to our own personal stakes in each of the Longleaf funds….
AGGRESSIVE SHARE REPURCHASES? CHECK….
How have stocks done? Well, pick your index….
Hawkins: If you look at macro figures pertaining to the S&P 500, you
draw a completely different conclusion than you do if you look at the Value Line Index. During the
10 years ended June 30th, the S&P compounded at 18.8%. For the 10 years ended June 30th, the Value
Line Index compounded at 6.0%. So if you'd been invested in the average company in America over the
last 10 years through the Value Line 1,700 largest companies, you would have clipped about a 6%
compounding rate. That is about half of what we would have earned if we had just parked our money
in a long bond over that same 10-year period.
If you'd invested in very, very large companies as indicated by the S&P 500
over the last decade, you did quite well. But the average company in America has done significantly
less well in that same 10-year period.
As for the NASDAQ, the five largest companies in that index accounted for
over 100% of its returns in 1998. So there's very disparate information out there as it relates to
investing in equities.
That said, we couldn't care less. But hooray for volatility.
Hawkins: All of that is just commented on - because we're not driven
by any of it. We're not index buyers of the Value Line, the S&P 500 or the NASDAQ. We're long-term
investors seeking tremendous value at a discount in the hopes that we can find a few companies that
will give us great compounding, deferral of taxes and a good, net after-tax return over the long
run. And in an environment like today where we've had this great amount of increased volatility,
we're beginning to find companies that really meet our requirements and our qualification criteria.
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