April 1, 2013
Dear Fellow Shareholder:
Calendar 2013 is off to an excellent start and the Funds’ fiscal year ending March 31 was a very good one. The capsule table below shows results for our stock funds for the quarter, trailing 12 months and 3 year periods compared to the S&P 500. The comparisons are gratifying.
|Period Ended 3/31/13|
|Qtr||1 Year||3 Year|
|Partners III -|
Our Performance Summary shows results for all of our Funds over a number of time periods going back to 1983. We think the longer-term results are far more significant than the shorter (and we say this regardless of how good recent numbers have been). Past results don’t predict, but as we approach the 30th anniversary of our firm, we think it is fair to speculate that three decades of performance may indicate that our approach “has legs.” The two Funds that opened on June 1, 1983, have provided average annual returns of 12.7% and 13.4%, after fees and expenses, which are greater than the S&P 500’s return of 10.6% for the same time period. Thanks to the power of compounding, these modest incremental returns have made a big difference to investors over the past (nearly) 30 years:
|June 1, 1983 - March 31, 2013|
|Avg Ann.Return||CumulativeReturn||$10,000Grew To|
|Partners III -|
|Past performance does not guarantee future results|
The Federal Reserve continues to manipulate interest rates through its current version of “quantitative easing.” This has created some opportunities for traders of longer-term bonds, but we have chosen to remain very conservatively positioned in our bond portfolios. As a result, we have earned our (very) modest coupon interest and little in the way of capital appreciation. The Short-Intermediate Income Fund-Institutional Class earned 1.1% in the first quarter and 3.7% over the past year, while the Nebraska Tax-Free Income Fund earned 0.4% and 2.0%, respectively, in those periods. And speaking of long-term records, Short-Intermediate Income Fund-Institutional Class has averaged 5.9% per year for 24 years (cumulative 303.3%) and Nebraska Tax-Free Income Fund has gained 5.3% over 28 years (cumulative of 310.9%). We applaud Tom Carney’s discipline in not chasing yield in this very difficult fixed income environment.
The Balanced Fund is invested in stocks, which showed similar excellent gains to those of the stock funds, and bonds (including cash equivalents) whose returns were muted by our very defensive fixed income positioning. In this difficult environment, the Balanced Fund earned very respectable returns of 6.6% in Q1 and 10.0% for the past year vs. 6.4% and 9.8%, respectively, for the “Blended Index."
Over the past several quarters, economic growth in the U.S. has been slow, Europe’s recession has deepened as it wrestles with saving the Euro-Zone, and China’s growth has slowed. Japan struggles to shake its two “lost decades” and the threat of “currency wars” has unsettled global trade. Nevertheless, most of our companies managed to show earnings growth and to grow the value of their businesses at least modestly. Their stocks generally rose.
The lists of contributors to both first quarter and fiscal year performance contain several familiar names. Liberty “offspring” (Media, Interactive, Global and Ventures) are prominent. Redwood Trust was particularly strong, and a few newer holdings like Valeant were helpful.
Several of our companies got boosts from positive investor reaction to acquisitions. Some were small—Iconix acquired licenses which will generate future royalty income. Some were larger—Liberty Media agreed to buy a 27% interest in Charter Communications, a major cable company. Liberty and John Malone certainly know cable and we expect this purchase to enhance the business value of Liberty Media. Liberty Global is buying Virgin Media, a major UK cable company, and Valeant bought Medicis, a major dermatology drug manufacturer and distributor. In each case, we believe our companies have paid reasonable prices for investments that will enhance the values of their businesses.
In one case, our stock went up because of what it didn’t do. DIRECTV was seriously considering the purchase of Vivendi’s Brazilian telecom assets. This would have been a very large acquisition and investors feared that it might cause DTV to curtail its stock repurchase program. When DTV pulled out of the bidding, relieved investors bid the stock up over 10%.
Michael Dell’s bid to take Dell private sparked a sharp rise in Dell shares. The stock, which had languished in the $8-10 range last fall, rose above the $13.65 takeover bid price. The proposal met with a firestorm of resistance from some long-time holders, but as the required analysis shifted from long-term business fundamentals to merger arbitrage, we were content to sell at a slight premium to the initial bid.
Another tarnished technology company, Hewlett-Packard, provided a more positive experience. We first bought HPQ in the low $20’s with the thought that a company with $3-4 per share earning power would trade considerably higher when negative news gave way to “adequate” news. Last fall, as investors chased Apple up to $700 per share on the assumption that iPads would replace PC’s and make printing obsolete, HPQ fell below $12. We believed that Meg Whitman was making progress in stabilizing the company and we bought more at various prices down into the $11’s. Over the past few months, we have enjoyed a strong rebound to $23 (Period ending 3/31/13), and we have taken profits in the majority of our shares. This is not our preferred type of investment—our first choice is the great (growing) business at a reasonable price—but we will occasionally indulge in this type of “deeper value” situation.
Other stocks participated in the rising market without apparent “catalysts.” Some of these may have gotten ahead of themselves, but their values are growing and we are happy to hold them for longer term gains.
The results have been good and we expect our portfolios to continue to generate positive returns over time. There is little doubt, though, that stock prices have been rising faster than underlying business values. We do not try to “time” the market, but as individual stocks’ price-to-value ratios rise (i.e. the stocks get more expensive), we often trim our holdings. We have been doing some of this lately, and cash positions in our stock funds at March 31 range from 13% to 32%.
There are two related parts to our investing approach. (1) We want to buy the right companies at the right prices (deep discount to their “business value”). This is by far the most important part. (2) We also want to improve our odds by investing more aggressively when the valuations are favorable and to hold onto cash reserves when the opportunity set is less attractive. We believe that cash has “option” value—being able to respond quickly to buying opportunities has contributed to our results over the years. Today, we are optimistic about the long-term prospects for our companies but we have plenty of liquidity available if Europe, or some other “surprise,” sets off a market decline that we can take advantage of.
We look forward to seeing you at our 30th annual meeting on May 23rd at Happy Hollow Country Club. It has been a good 30 years and we are looking forward to the next 30. As another note in passing, on April 1st the name of our Adviser was changed from Wallace R. Weitz & Company to Weitz Investment Management, Inc. This is really a non-event for our shareholders. The change merely makes it clearer that we manage institutional separate accounts as well as mutual funds.