The Partners III Opportunity Fund’s Institutional Class returned +3.92% in the second quarter, compared to +8.55% for the S&P 500 and +8.24% for the Russell 3000. Year to date, the Fund’s Institutional Class returned +11.51%, compared to +15.25% for the S&P 500 and +15.11% for the Russell 3000.
Over much of the past year, predictions of a powerful economic rebound were reflected by the strong performance in equity markets. These predictions were borne out by both good corporate earnings and strong economic data released during the second quarter. Stocks enjoyed another quarter of strong, broad-based gains. Our two largest long positions, Berkshire Hathaway (BRK.B, Financial) and Google parent Alphabet (GOOG, Financial), delivered excellent to outstanding quarterly and year-to-date returns, pacing portfolio gains for both time periods. Berkshire’s contribution to the Fund’s performance was further magnified by its large weighting. As investors began to account for the profitability of Alphabet’s traditional services and the potential upside from newer offerings like Google Cloud Platform, the company’s stock increased by 43% in the first half of the year. Summit Materials (SUM, Financial) was another quarterly and year-to-date contributor thanks to investor enthusiasm for potential infrastructure programs gaining traction in Washington.
Not surprisingly, this year’s strong rally made our short positions against ETFs tracking the S&P 500 and Nasdaq 100 the Fund’s top detractors to quarterly and year-to-date results. That said, the breadth of the recovery resulted in few outright detractors among our long equity exposures. Payment processing software provider Intelligent Systems (INS, Financial) continues to be impacted by COVID-19 in its core professional services delivery market of India. INS has struggled to sufficiently hire and train new employees to handle growth from existing and new potential clients. This delayed growth expectation has weighed on shares, particularly in the second quarter. Special purpose acquisition companies (SPACs) have generally fallen out of investor favor, and although Everarc (LSE:EVRA, Financial) shares were never fully caught up in the SPAC excitement, shares traded lower as the air was let out of the group more broadly. This price drop occurred despite Everarc’s announcement of plans to purchase Perimeter Solutions, a maker of firefighting products and specialty lubricants. In general, investors seem to have taken little notice, but we are eager to learn more as the company discloses additional information in the coming months.
In May, call options written against our shares of Summit Materials were exercised, thereby calling away our remaining position in the company. We also sold our remaining shares of Box (BOX, Financial) and AutoZone (AZO, Financial). Summit and Box were “late bloomers” within our portfolio but ultimately drove solid returns. AutoZone, on the other hand, raced off the starting line before we finished building our initial position. Rather than purchase additional shares at elevated prices, we opted to lock in an early profit. No new positions were initiated during the quarter, although we continued adding to last quarter’s new holding, Dun & Bradstreet (DNB, Financial). We remain optimistic that management’s investments in technology and other process enhancements will help the company return to organic growth, and we have added to our position at what we believe are attractive prices.
Within the short book, our index ETF short positions were unchanged during the quarter. We actively responded to the volatility in SiriusXM (SIRI, Financial) shares by closing our short position and then reestablishing it as the stock ran back to $7. As a quick reminder, our small SiriusXM short position allows us to monetize a portion of the discount we estimate to be embedded in our much larger Liberty SiriusXM (LSXMA, Financial) holdings. For a more detailed understanding of our investment thesis, shareholders are encouraged to read our upcoming Analyst Corner feature on Liberty SiriusXM. These activities resulted in a decline of the portfolio’s effective net long position to 74% of net assets (down from 79% of net assets last quarter).
As we wrote in this quarter’s Value Matters, the U.S. economic recovery is underway and our companies are doing well, measured both by higher stock prices and rising business values. Valuations across the broader market are elevated and have potentially pulled forward some portionof future returns. However, we believe that by investing in quality businesses led by talented management teams, and by taking advantage of (inevitable) volatility, we can protect and grow our investors’ capital over the years.
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 07/22/2022, 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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