The Longleaf Partners Fund

Southeastern: A Compelling Time To Invest Outside The U.S.

Josh Shores, CFA serves as a principal and director of Southeastern Asset Management, Inc. Mr. Shores has been with the firm since 2007 and joined as senior analyst. He is a C.F.A. charter holder. He received a B.A. in Philosophy and Religious Studies from University of North Carolina in 2002.

Q3 hedge fund letters, conference, scoops etc

The Longleaf Partners Fund

He is a manager of the Longleaf Partners International Fund (LLINX).

I spoke with Josh on December 6.

I’d like to start off with the last sentence from your most recent commentary: “Given the deeper discounts and broader opportunity set, the payoff patterns outside of the U.S. could be particularly compelling.” The mix of industries, particularly in developed Europe and Asia, explain at least some of the differences in valuations from those in the U.S. What else are you seeing outside the U.S.?

As you know, we very much view the world from a bottoms-up point of view. While we’ll look at the macro and top-down environment, and the multiples on market indices, we fully recognize that there are others who are much better placed to make a call on that. We question how reliable making those type of macro calls can be.

We’re purely looking bottoms up, as would a private equity investor, at what companies are worth, how competitively advantaged they are and how durable that is. Are the people good operators and capital allocators? And can we buy it at a sufficient margin of safety?

When we do that, we end up with hundreds and hundreds of appraisals on different companies across the world. We aggregate those on an equal-weighted basis, and say “Okay, here’s roughly where these regions – Europe, Asia Pacific broadly, the U.S., the Americas ex-US – are trading.” On that metric, we compare cheapness to full value.

That tends to be not overly dissimilar from the top-down approach, but it washes through most of the noise. Because when we do this on a bottoms-up basis, the $8 billion cap is equal weighted with the $800 billion cap. We’re not trying to outsmart the index methodology per se; we’re just looking for great bottoms-up best ideas and where we should allocate our time.

On that perspective, the U.S. is fully to overvalued. That hasn’t changed at all, despite the volatility in recent weeks – severely so, in some regards. Europe has gone from being about fairly valued over the last six months. But with a 10% to 20% country-by-country retracement, it is slightly undervalued. The Asia Pacific region is broadly the cheapest in the world, for understandable reasons from a bottoms-up point of view. There’s a lot of opportunity in that environment.

When you read that last sentence of our commentary, we’re basically saying where we want to allocate capital today. The broadest, deepest opportunity set is in European and Asian Pacific markets.

You’re perfectly right that the S&P 500 has a much higher weight of global champion tech companies. Leave aside whether those are cheap, fully valued or fairly valued. We’re not trying to answer that question. We’re just asking, “What is the biggest, broadest, deepest opportunity set?” That we see as outside the U.S.

According to the latest data from Morningstar, your cash position is slightly above 7%. How does that compare to historical levels and is this reflective of the expanded opportunity set you are seeing?

We are perhaps different from other funds in that our decision making is purely bottoms up. Cash isn’t set top down. Whether we have 10%, 5% or no cash is driven by whether we are finding things that meet our criteria from a business, people, price, engagement, margin of safety, private-equity-in-a-public-market point of view. If we are, we buy it, irrespective of where the cycle is or whether there’s some big macro call. If you’ve got a great opportunity with a great business and great management, you don’t try to guess, for example, if there’s going to be a downturn in Germany or how Brexit’s going to play out. You look out five or 10 years, and say, “This is a great opportunity.”

Cash builds from the bottom up, and over our 20-year fund history, it’s averaged about 10%. For us, having a 5% position in cash is essentially fully invested. Opportunities, when they come are sometimes fast moving. As Buffett says, “If you want to shoot rare, fast-moving elephants, you need to have a loaded gun.” We need to have 5% cash to take advantage of opportunities.

Read the full article here by Robert Huebscher, Advisor Perspectives


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