Weitz Value Fund Commentary: AON, LBTYA, TGT, MON, VRX, DIS, HPQ
Wallace R. Weitz & Bradley P. Hinton
The Value Fund declined-10.7% in the quarter, compared to losses of-13.9% and-14.7% for the S&P 500 and Russell 1000, respectively. Concern over Europe's worsening financial condition overshadowed otherwise steady, if unspectacular, underlying operating results for the majority of our portfolio companies. AON(-18%) (AON), Liberty Global(-19%) (LBTYA) and several of the Fund's construction materials holdings detracted from third quarter performance as growing macroeconomic fears led to a general flight from companies with cyclical exposure (real or perceived) and/or financial leverage. Conversely, Target (+5%) (TGT) was a positive contributor to performance during the quarter. Target's new retailing initiatives appear to be gaining traction with customers, as evidenced by an acceleration in comparable store sales.
For the calendar year-to-date, the Fund declined-4.8% versus a loss of-8.7% for the S&P 500 and a loss of-9.3% for the Russell 1000. Global consultant Accenture plc (+10%) (ACN), seed and trait developer Monsanto (+9%) (MON), and defense contractor Lockheed Martin (+7%) (LMT) were each rewarded for strong business performances over the past several quarters. Martin Marietta Materials(-30%) (MLM) was the biggest detractor from year-to-date performance. A combination of slowing economic growth in the U.S. and limited visibility on public infrastructure funding continued to pressure the stock. While acknowledging the road ahead could be bumpy, we believe governments will find ways to continue investing in physical infrastructure and thus added to our position.
The third calendar quarter was an active one for the Fund. Unprecedented volatility during August and portions of September presented long-term business owners with some attractive opportunities. Many pundits have noted (some with frustration) the increased correlation amongst stocks, with a seeming lack of regard in some instances for differences in quality, competitive positioning and future growth. These are the kind of environments where we as stock pickers get excited. Against this backdrop, we made new investments in three companies (which are highlighted in the following paragraphs), closed positions in two others (Monsanto and Procter & Gamble), and shifted capital amongst existing holdings where valuations warranted.
Valeant Pharmaceuticals (VRX) is a multinational specialty pharmaceutical company with operations throughout North America, Central & Eastern Europe and Latin America. Valeant brings a unique, financially-driven approach to the business of manufacturing and selling drugs. The company's lack of product concentration, U.S. government reimbursement exposure and patent risk are key pillars in our investment thesis. CEO Michael Pearson is a talented owner/operator who we trust to do intelligent things with the ample excess cash flow Valeant generates.
The Walt Disney Co. (DIS) made a return appearance to the Fund during the quarter. The quality of Disney's brand(s), media networks and park and resort assets are, of course, a poorly kept secret. This has created a dearth of opportunities over time for value-conscious owners to own shares despite our admiration for the company and its culture. Fears of a retreating consumer and a weakening in global advertising demand gave us what we believe was an attractive entry point for a world-class asset during the third quarter. While not yet a full position, we will continue to look for opportunities to add to our stake on any future weakness.
Lastly, we initiated a position in Hewlett-Packard (HPQ) during the final week of the third quarter. Following a string of controversial decisions and poor execution by its former management, investor sentiment toward the company reached all-time lows. We acknowledge HP will undoubtedly face challenges in the near-term as it reformulates its strategy, integrates Autonomy and rebuilds customer trust under new CEO Meg Whitman. Nonetheless, we believe HP's portfolio includes a number of very attractive and entrenched businesses worth far more than the less than 5x trailing earnings we paid to acquire them.
The Value Fund tilts toward our best larger company ideas. At quarter end, 87% of the Fund's assets were invested in companies with market capitalizations exceeding $10 billion. In keeping with recent history, the Fund remains relatively concentrated with its top twenty holdings representing 73% of Fund assets. Residual cash was relatively unchanged versus a quarter ago at 13% of net assets.