Wally Weitz's Second Quarter 2013 Letter To ShareholdersVW Staff
Wally Weitz: Dear Fellow Shareholders: Our stock funds enjoyed a good second quarter and an excellent first half of 2013. Both relative and absolute results were strong. The table below summarizes results for the stock funds and the S&P 500 (INDEXSP:.INX) over the past six months, one year and three years. Our Performance Summary shows results for all of our Funds over a number of time periods going back to 1983.
The bond market reacted very negatively to the Federal Reserve’s hints in June that it might slow its purchases of bonds. Our bond funds are positioned very defensively and in contrast to funds which held longer-term bonds, the year-to-date decline in the Short-Intermediate Fund – Institutional Class (-0.2%) was negligible.
The Balanced Fund is designed for investors who want to own both stocks and bonds and who want to delegate asset allocation decisions to us. It earned a very healthy 8.4% in the first half of 2013 as its stocks performed well and its conservative bond portfolio protected it from the bond market decline.
Market Commentary To Shareholders
For most of the second quarter, the stock market continued the advance that began last fall. For the last three quarters, our companies’ business values have grown, but their stock prices have risen faster. It seems that the Federal Reserve’s “Quantitative Easing” or “QE” (buying $85 billion of bonds on the open market every month) has created excess liquidity and that some of it has found its way into stock prices.
The rally faltered in mid-June when Fed Chairman Ben Bernanke mentioned that the Fed might begin “tapering” its purchases of bonds. In the ensuing “taper-tantrum,” the S&P 500 (INDEXSP:.INX) declined 6%, the bond market swooned and emerging markets went into convulsions. Fed officials immediately shifted to damage control mode, explaining that they were “not taking away the punchbowl,” but merely slowing the pace of adding liquor to the punch. Richard Fisher, president of the Dallas Fed, quipped, “I don’t want to go from ‘Wild Turkey’ to ‘Cold Turkey’ overnight.” At this point, stocks began to recover, and the bond market settled down, but it is clear that investor expectations are unrealistic—we cannot have both economic growth and perpetual QE.