Nothing tests the mettle of a value investor like watching a large portfolio holding slowly and steadily melt down. Yet that’s exactly what happened last spring to Mason Hawkins and his partner, Staley Cates, the veteran investment officers of Memphis‘ Southeastern Asset Management.Chesapeake Energy, one of the biggest positions in their flagship mutual fund, Longleaf Partners, was hit by a barrage of negative publicity as its brash billionaire chief executive, Aubrey McClendon, came under fire for alleged self-dealing. This, after Hawkins and Cates had long defended McClendon and his aggressive spending on acquisitions. Short-sellers swarmed Chesapeake’s shares, which sank as much as 47% in less than two months.
Chesapeake’s shares have recovered somewhat, but they have dampened what would have otherwise been a great year for Longleaf Partners fund. In 2011 Chesapeake and other portfolio duds like Cemex and Bank of New York Mellon contributed to an embarrassing 2.9% loss for the fund, versus a 2.1% gain for the S&P 500.
Fact is, over the last decade you would have done better investing in a passively managed broad market index ETF than in either Southeastern’s Longleaf Partners or International fund.
Of course, Southeastern is not the only noted value money manager experiencing hard times. It’s been a lost decade for many legendary funds, including Legg Mason Value Trust, Tweedy, Browne Value Fund and even Warren Buffett’s Berkshire Hathaway, which has failed to keep pace with the S&P 500 over the last ten years. “Longleaf was hurt, even more than most value funds,” says Morningstar analyst Gregg Wolper. “There’s no glossing over how badly the fund did during the financial crisis and after.”