Weitz Value Fund Q4 Letter To InvestorsVW Staff
Weitz Value Fund commentary for the fourth quarter 2014.
The Weitz Value Fund’s Investor Class gained +4.0% during the fourth quarter, compared to an increase of +4.9% for both the S&P 500 and Russell 1000. For the calendar year, the Fund’s Investor Class returned +9.5% versus advances of +13.7% and +13.2% for the S&P 500 and Russell 1000, respectively. We are generally pleased with these results in light of the Fund’s conservative positioning throughout 2014. Following the sixth consecutive year of upward trending equity markets, we begin 2015 with the Fund’s estimated aggregate weighted average price-to-value (a measure of the collective discount of the stocks in our portfolios) in the mid-to-upper 80s and a more moderate residual cash position of 17% of net assets after a busy fourth quarter.
Weitz Value Fund: Largest contributors to fund performance
Liberty Global (+18%), Liberty Interactive (+22%) and Express Scripts (+20%) were the largest contributors to Fund performance during the fourth quarter. Liberty Global obtained regulatory clearance for the acquisition of Ziggo, the largest cable operator in the Netherlands, and following close expects to resume aggressively repurchasing its shares. Rumors of a potential takeover attempt by British phone company Vodafone Group also helped lift LGI’s stock beginning in late November. Liberty Interactive completed the reattribution of its Digital Commerce companies to Liberty Ventures during the quarter in exchange for stock. Its core asset, shopping network QVC, reported solid third quarter results and should be a beneficiary of improved consumer health in the U.S. Against muted investor expectations, Express Scripts’ shares benefitted from steady third quarter operating results, a better than feared 2015 selling season and gradually improving customer service levels.
Valeant Pharmaceuticals (+22%), Berkshire Hathaway (+27) and DIRECTV (+25%) were the largest contributors to the Fund’s calendar year performance. In mid-November, Valeant Pharmaceuticals abandoned its hostile bid for Allergan in response to a superior offer from rival drug maker Actavis. Investors cheered management’s price discipline and shifted their attention to the company’s attractive organic growth profile and the prospect of future value-enhancing acquisitions. Berkshire Hathaway enjoyed yet another strong year driven by underlying strength in its insurance and industrial businesses. DIRECTV reached an agreement to be acquired by AT&T in May at what we believe is an attractive price. We trimmed a portion of our position during the fourth quarter to fund more attractive long-term opportunities.
Weitz Value Fund: Largest detractors to Fund performance
Range Resources (-21% for the quarter, -36% for the calendar year), Apache Corporation (-33%, -26% year) and eBay were the largest detractors to Fund performance for the quarter and full year. Energy stocks in general finished 2014 on a sour note following a 46% decline in the price of crude oil and a significant drop in the price of domestic natural gas. Research suggests that both commodities presently trade well below the marginal cost of production. While we cannot point to when either will rebound or at what pace, we believe rising demand for both oil and natural gas over time will eventually push prices back up to levels that incent incremental production. Near quarter end, we sold our stake in Apache and used the proceeds to increase the Fund’s stake in Range and smaller holding Pioneer Natural Resources. This swap accomplished two things: 1) it allowed us to focus our energy investment in two higher quality, higher conviction producers trading at similar discounts to Apache, and 2) it allowed us to realize a tax loss on our APA shares which will offset future gains. We remain on the hunt for additional bargains amidst the present downturn.
The fourth quarter brought other recycling opportunities as well. We sold our position in Walt Disney as it reached our intrinsic value estimate and reallocated the proceeds (as well as some residual cash) to Twenty-First Century Fox. Disney was a textbook Weitz investment — we moved quickly and decisively to establish a position during what turned out to be a brief window of opportunity, leveraging diligence work that was already complete. It also serves as a reminder that even great businesses get cheap from time to time. Fox is a skilled creator and owner of media content, boasting a portfolio that includes numerous cable networks (22 regional sports networks, Fox News, FX, etc.) as well as global television and film studios. We remain attracted by the company’s strong position in news and sports (two categories we expect to continue to deliver live and engaged audiences), visible affiliate fee growth opportunities, recurring cash flows and shareholder friendly capital allocation.
Weitz Value Fund: Closed and new positions
In addition, we closed the Fund’s stake in eBay during the quarter and purchased new positions in MasterCard and Motorola Solutions. MasterCard needs little introduction given its global brand and long-held position as the world’s second largest payment platform. Concerns over a slowdown in global economic growth and regulatory changes in Europe afforded us the opportunity to begin building a position in the low $70s. Motorola Solutions is now a pure play provider of public safety communication infrastructure. Its core business is characterized by a well-entrenched competitive position, long product cycles and strong excess cash flow generation. Barton Hooper further details our investment thesis in this quarter’s Analyst Corner. Finally, we harvested a successful multi-year investment in Microsoft as it reached our estimate of intrinsic value.
The Value Fund invests primarily in our best larger company ideas. As of calendar year end, the Fund’s weighted average market cap was approximately $78 billion and its top twenty holdings represented approximately 67% of net assets.
Weitz Value Fund: Quarterly Fund Performance
|3-Year||5-Year||10-Year||Since Inception (5/9/1986)|
|Russell 1000 Value||4.98%||13.45%||20.89%||15.42%||7.30%||10.56%|
Click here to see our Full Performance Summary, including current to the most recent month end. The performance numbers above reflect the deduction of the Fund’s Institutional Class annual operating expenses which as stated in its most recent Prospectus are 1.11% (estimated gross) and 0.99% (estimated net) of the Fund’s Institutional Class net assets. The returns assume redemption at the end of each period and reinvestment of dividends. Total returns show include fee waivers and expense reimbursements, if any; total returns would have been lower had there been no waiver of fees and/or reimbursements of expenses by the Adviser. This information represents past performance and past performance does not guarantee future results. The investment return and the principal value of an investment in the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Current performance may be higher or lower than the performance data quoted above.
Investors should consider carefully the investment objectives, risks, and charges and expenses of the Fund before investing. The Fund’s Prospectus contains this and other information about the Fund and should be read carefully before investing. Portfolio composition is subject to change at any time and references to specific securities, industries, and sectors referenced in this letter are not recommendations to purchase or sell any particular security. Current and future portfolio holdings are subject to risk. See the Schedule of Investments included in the Fund’s quarterly report for the percent of assets of the Fund invested in particular industries or sectors.
Weitz Securities, Inc. is the distributor of the Weitz Funds.