Longleaf Makes Money On John Malone's Complex TransactionsVW Staff
To Longleaf Shareholders
We are pleased to report that all four Longleaf Funds posted positive returns in the first quarter of 2014. Aside from the Global Fund, which is less than two years old, each Longleaf Fund also surpassed our absolute return goal and outperformed its respective index over the last five years. Interestingly, while health care stocks comprised half of the benchmarks’ returns in the first quarter, these stocks were not in the Funds because these companies, especially pharmaceuticals, rarely meet our discount criteria. Despite our absence from this sector and our higher than normal cash balances, the Small-Cap, International, and Global Funds all exceeded their respective indices in the quarter.
During the inception year, the S&P 500 and the EAFE Index were available only at month-end; therefore the S&P 500 value at 3/31/87 and the EAFE value at 10/31/98 were used to calculate performance since inception.
Returns reflect reinvested capital gains and dividends but not the deduction of taxes an investor would pay on distributions or share redemptions. Performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance of the fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by visiting longleafpartners.com
The total expense ratios for the Longleaf Partners Funds are: Longleaf Partners Fund 0.91%, Longleaf Small-Cap Fund 0.92%, Longleaf Partners International Fund 1.29%, and Longleaf Partners Global Fund 2.19%. The Partners and Small-Cap Funds’ expense ratios are subject to a fee waiver to the extent a Fund’s normal annual operating expenses exceed 1.5% of average annual net assets. The Longleaf International Fund’s expense ratio is subject to a fee waiver to the extent the Fund’s normal annual operating expenses exceed 1.75% of average annual net assets. The Longleaf Global expense ratio is subject to a fee waiver to the extent the Funds’ normal operating expenses exceed 1.65% of average annual net assets.
During the quarter we exited DIRECTV (DTV), a highly successful core holding in our U.S. and Global accounts for over a decade. We discuss our DTV experience not to showcase one winner, but because the investment illustrates the process and approach we follow for holdings across all mandates and highlights some of Southeastern’s unique research strengths.
History of DTV Investment (based on Longleaf Partners Fund)Sometimes we can own a company in indirect ways that create part of the discount to intrinsic worth. In the case of DTV, we owned the underlying business via three different stocks over our thirteen-year holding period as shown on the chart that follows. Initially, in 2001 we bought GMH, the tracking stock that General Motors created for the Hughes division that included all of its satellite businesses. By early 2004, the company had been spun fully out of GM and renamed DIRECTV Group. Over the following four years, we opportunistically added to and trimmed our position. In early 2008, John Malone exchanged Liberty Media’s (LMDIA) News Corp shares (NWS) for the 40+% of DTV that NWS owned. We previously had purchased Liberty Media Corp, the precursor to LMDIA, and the 2008 transaction increased our underlying ownership in DTV. Throughout 2008, we swapped DTV for LMDIA which traded at a steeper discount to underlying value. In the financial crisis, although DTV’s business remained remarkably stable, LMDIA shares became severely discounted when debt at other Liberty affiliates cast a shadow on LMDIA. We made sure we understood the obligations of each Liberty entity and John Malone’s intentions, and then took LMDIA to a “double weight” (10%) position while maintaining our direct DTV stake. In 2009, LMDIA and DTV merged. Over the next four years, the intrinsic value of the company grew as did the stock price. We trimmed our position as the price-to-value (P/V) gap closed and completely exited in the first quarter of 2014 when the stock reached our appraisal. Because of the strength of DTV’s franchise and management partners, value could continue to build unabated. We followed our discipline to exit when the price reached our appraisal, leaving no margin of safety in the stock.
See Full PDF here: ShareholderLetter1Q14