The Partners III Opportunity Fund’s Institutional Class returned +11.42% in the second quarter, compared to +20.54% for the S&P 500 (the Fund’s primary benchmark) and +22.03% for the Russell 3000. For the calendar year to date, the Fund’s Institutional Class returned -6.59% compared to -3.08% for the S&P 500 and -3.48% for the Russell 3000.
The stock market came roaring back in the second quarter, recovering much of the prior quarter’s losses. High-quality companies with long growth runways once again led the market’s charge and were our top performers as well. Within our portfolio, these strong performers included technology companies Facebook (FB, Financial) (Q2: +36%) and Alphabet (GOOG, Financial)(GOOGL) (Q2: +22%), as well as the “tech-adjacent” payment network businesses of Visa (V, Financial) (Q2: +20%) and Mastercard (MA, Financial) (Q2: +23%). Liberty Global (LBTYA, Financial) (Q2: +37%) also received high marks from investors for its plan to merge its U.K. broadband business with wireless carrier O2 in a 50/50 joint venture. The transaction highlights the value of this asset to a well-informed, strategic buyer and affirmed our thesis that its shares traded at a discount to the “sum of its parts”. Over time, we anticipate management will take additional actions to realize the value of its broadband networks and shrink the discount to our estimate of value. On a year-to-date basis, Amazon (AMZN, Financial) (YTD: +49%) joined Facebook (YTD: +10%) and Alphabet (YTD: +6%) on the honor roll of top contributors. Additionally, we realized profits by exiting our long position in the Financial Select Sector ETF (FINU, Financial) at profit and locked in gains from our S&P 500 ETF (YTD: -3%) short by covering over one-third of the position during the first quarter market slide, rounding out our top five performers.
Given the strength of the second-quarter rally, our short position against index ETFs tracking the S&P 500 (Q2: +20%) and Nasdaq 100 (Q2: +30%) were the top detractors to performance. EverArc (LSE:EVRA, Financial) (Q2: -13%) unwound its first-quarter gains, as potential “safe haven” trades lost some luster, while modest declines at Markel (Q2: -1%) and Berkshire Hathaway (Q2: -2%) meant their stock prices generally remained at the “starting line” while the rest of the portfolio raced ahead.
Berkshire (BRK.A)(BRK.B, Financial) (YTD: -21%) is also our top detractor to year-to-date results. Shareholders appeared frustrated that CEO Warren Buffet had not deployed any of the company’s sizeable cash war chest during the market swoon (either by buying new businesses or buying in their own stock). Mr. Buffett has cautioned that an economic recovery would not be immediate, and it will take time to understand potential fundamental changes to our economy and human behavior. Although its shares have lagged the market, we feel Berkshire Hathaway is built for such times, and will again prove its value. Long-time holding Redwood Trust (RWT, Financial) (YTD: -56%) also remains a top detractor in 2020. While management’s efforts to shore up the balance sheet and enhance liquidity (including a dividend reduction) have been well received, a recovery in the non-agency mortgage market (and therefore Redwood’s own investment portfolio) has yet to take hold. Shares have recovered somewhat from their March lows, and we continue to monitor our position closely. Liberty SiriusXM’s (LSXMA) (YTD: -27%) second-quarter gains were insufficient to lift it from our year-to-date detractor roster, nor was Markel’s (MKL) quarter of “treading water” sufficient to shed this undesirable distinction.
Activity within the long book was balanced. In addition to our sale of the Financial Select Sector ETF and other portfolio trims, we also sold our remaining shares of DXC Technology (DXC). Investors (including us) have been frustrated by the halting progress in DXC’s digital transformation. Although we continue to see opportunity in DXC’s shares (and may return in the future), we elected to harvest a tax loss and pursue more timely opportunities. On the buy side, we initiated a new position in global insurance brokerage and human capital consultant Aon plc (AON), and we continued to add to our holdings of CoStar Group (CSGP), Charles Schwab (SCHW) and Vulcan Materials (VMC). In the short book, we re-established a modest short position in SiriusXM (SIRI). As a reminder, Liberty SiriusXM (which we are long) owns 71% of SiriusXM yet trades at a discount to the public market value of its stake. Our short position both hedges a portion of our long position against a decline in value of SiriusXM and allows us to monetize a portion of the trading discount. We also added modestly to our Nasdaq short position. These actions, combined with market appreciation of the underlying indices, increased our short position to 16% of net assets. With the long book unchanged at 91% of net assets, the Fund’s effective net long position is 75% of net assets, down five percentage points from last quarter.
The views and opinions expressed here are those of the portfolio managers as of 07/20/2020, are subject to change with market conditions and are not meant as investment advice. For informational purposes only. Not an investment recommendation.
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