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Wally Weitz's Partners III Opportunity Fund 1st-Quarter Commentary

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Apr 23, 2021
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The Partners III Opportunity Fund's Institutional Class returned +7.30% in the first quarter compared to +6.17% for the S&P 500 and +6.35% for the Russell 3000. For the fiscal year ending March 31, 2021, the Fund returned +40.11% compared to +56.35% for the S&P 500 and +62.53% for the Russell 3000.

The "reopening" trade that began in earnest with positive vaccine trial results in November continued into the first quarter of the new year. Cyclical businesses that depend on a stronger economy, as well as industries that depend on their customers' ability to be physically present (travel, hospitality, and live events to name a few), have been leading the market higher. Conversely, "stay at home" winners took a breather, as did many of the market's growth darlings as investors were forced to contemplate a future with higher interest rates.

Against this backdrop, the Fund delivered solid returns in the first quarter, with CarMax (

KMX, Financial) and Summit Materials (SUM, Financial) sharing the top contributor title. The nationwide rollout of CarMax's omnichannel buying experience (at a dealership, online, or a combination of the two) continues to win fans in the form of new customers and investors alike. Summit enjoyed outsized gains as investors began to anticipate how the new presidential administration's infrastructure plans may result in healthy incremental demand for years to come. Berkshire Hathaway's (BRK.B, Financial) outperformance, modest by comparison but magnified by its portfolio weight, was also a top contributor.

Enterprise software providers CoStar Group (

CSGP, Financial) and Black Knight (BKI, Financial) both lagged for the quarter as software companies generally fell out of favor, while Liberty Broadband's (LBRDA, Financial) modest decline reflects investors' general belief that a government controlled by Democrats (specifically, the Federal Communications Commission) may create a less friendly regulatory environment for cable/broadband providers. Broadband providers have been a popular "political football" for many years, but we judge drastic regulatory changes that negatively impact our investments to be unlikely.

With the benefit of hindsight, we can see that the recent fiscal year began near the pandemic market trough. Given the powerful market rally, twelve-month returns across nearly the entire portfolio were very strong. Berkshire's solid stock performance, coupled with its large position size, earned it the top-contributor moniker for the trailing twelve months. Alphabet (

GOOG, Financial) and Facebook (FB, Financial) shares prospered as pandemic lockdowns reinforced the importance and dominance of their digital advertising businesses. LabCorp's (LH, Financial) COVID-related businesses have generated temporarily elevated earnings and cash flow. Shares rose further as management announced a review of the company's structure and capital allocation strategy in response to an activist campaign. Detractors were few and mostly immaterial, with modest declines experienced by EverArc (LSE:EVRA, Financial), Liberty Latin America (LILA), and a collection of call options written during the fiscal year.

The top detractors for the quarter and fiscal year were our short positions in ETFs tracking the S&P 500 and Nasdaq 100. Although we report the isolated impact of these shorts each quarter, investors should note they are managed as an integrated piece of the overall portfolio. On a standalone basis, they not surprisingly produced a headwind during the recent prolific rally (just as they provided ballast during last year's market drawdown). We flex the size of these short positions in response to overall market conditions and lean toward (or away from) one index or another under different valuation environments. We also utilize them (and other tools, like options) to manage our long equity exposures. For example, if several of the businesses we own temporarily see their valuations become stretched, increasing the index short position allows us to reduce a portion of that equity risk exposure without selling shares (and potentially realizing taxable gains for shareholders) and remove the potential "timing" decision of when to buy them back.

We were active on both the buy and sell sides of the trading ledger during the quarter. We trimmed several positions on strength and to manage position sizes (including Berkshire Hathaway, CarMax, Intelligent Systems Corporation (INS), Qurate Retail (QRTEA) and Charles Schwab (SCHW)). Although we did not exit any positions during the quarter, investors may note that we have call options written against our full position in Summit Materials. As mentioned earlier, we sometimes use options to manage our long equity exposures. In Summit's case, investors' infrastructure enthusiasm drove up both Summit's equity and the premiums (i.e., the price of a call or put option) for option contracts for its shares. By selling call options on our shares and collecting these premiums, we earn some additional "rent" on our shares. Additionally, should Summit's equity price exceed the "strike" prices of these options at their expiration, we believe the potential sale proceeds combined with the premiums already collected would represent an attractive return. Our trims funded new positions in Dun & Bradstreet (DNB) (detailed below) and AutoZone (AZO) (a specialty retailer of auto parts and the subject of research analyst Jon Baker's upcoming Analyst Corner feature which provides a deeper dive into our expectations and investment thesis). Our trims also allowed us to continue building our FIS position and make opportunistic additions to Box (BOX), Aon (AON), Liberty Broadband and others. In total, our gross long exposure (97% of net assets) and short exposure (18% of net assets) remain generally unchanged, resulting in an effective net long position of 79% of net assets.

Dun & Bradstreet collects and provides proprietary data used by businesses to understand the credit risk of their counterparties. Under the management of its Chairman Bill Foley and CEO Anthony Jabbour, who both joined the company in 2019, Dun & Bradstreet has moved to modernize its technology, improve its sales and contracting practices, invest in new data and capabilities to enhance its value to customers, and evaluate potential acquisitions to boost each of these efforts. Our positive experience with Black Knight (where Foley and Jabbour are also Chairman and CEO, respectively) bolsters our confidence in these efforts while the market takes a "wait and see" approach.

Looking ahead, we are optimistic about global economies reopening, and we feel confident in the ability of our companies to navigate the impact of the pandemic. That said, we are mindful that markets have rebounded ahead of these events, and we remain cautious that the magnitude and speed of the economic recovery may not perfectly align with investor expectations. We believe our portfolio of growing, quality businesses are well-positioned for the next several years, with any interim volatility being a potential opportunity for long-term-minded investors.

The opinions expressed are those of Weitz Investment Management and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through 04/22/2021, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor's specific objectives, financial needs, risk tolerance and time horizon.

Data quoted is past performance and current performance may be lower or higher. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate, and shares, when redeemed, may be worth more or less than their original cost. Please visit weitzinvestments.com for the most recent month-end performance.

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