Longleaf Partners Small-Cap Fund advanced a robust 4.60% in the first quarter, far exceeding the Russell 2000 Index’s -1.52% decline. For the one-year and longer periods, the Fund’s performance also surpassed the index. A number of our stocks had double-digit gains, including several of our most undervalued businesses coming out of 2015. Most of our companies generated solid operating results, and management activity helped drive higher appraisals. Not only were our absolute returns well beyond our goal of inflation plus 10%, but our relative results also benefitted from our lack of exposure to health care, which was among the top performing index sectors in 2015 but was the Russell 2000’s worst performing sector in the quarter.
Stock prices in the first quarter embodied Ben Graham’s description of “Mr. Market,” whose manic short-term swings are driven by investor emotions. The market fell -15.9% at its February 11 low point but then rallied over 17% by the end of March, a 3300 basis point swing. While economic and political uncertainties fostered the volatility, our appraisals proved much more stable, highlighting the importance of anchoring investment decisions to the long-term cash flows and underlying asset values of each company. Continue Reading »