During the quarter, we eliminated our position in H&R Block and replaced it with BMC Software (BMC). We had owned Block in the Fund since 2000, and its price roughly doubled during a period when the price of the S&P was basically unchanged. Despite a good point-to-point return, we could have made more money had we sold Block after two years. Expectations that one of several new CEOs could eliminate the recurring operational shortfalls in the tax preparation business proved optimistic and losses in sub-prime mortgages prevented business value from growing as we expected.
Our newest addition, BMC Software, is a leading provider of enterprise service management software. The need for BMC’s products, which allow IT programs to function smoothly on a broad array of devices, grows as the number of devices grows. As one BMC manager told us, “The worst day, nowadays, for an IT manager is when his CEO gets a new iPad.” In addition to liking BMC’s products, we liked the company’s aggressive share repurchases and its valuation, which is much lower than the multiple of sales at which many similar companies have been acquired. After our purchase, we were pleased to see a large stake purchased by activist investor Elliott Associates, which shares our view that BMC is undervalued.