The Partners III Opportunity Fund’s Institutional Class returned +0.91% in the fourth quarter compared to +11.03% for the S&P 500 and +9.28% for the Russell 3000. For the calendar year, the Partners III Opportunity Fund’s Institutional Class returned +12.45% compared to +28.71% for the S&P 500 and +25.66% for the Russell 3000.
As outlined in our latest Value Matters, the investment landscape of 2021 was tricky. The economic recovery remained underway, bolstering corporate profits. Meanwhile, the Federal Reserve’s quantitative easing program continued to artificially depress interest rates, thereby increasing the multiple investors were willing to pay for higher earnings. At the same time, investors rotated between different “trades” in quick succession, for example, favoring “reopening plays” one day and “stay at home” stocks another. Against an increasingly uncertain backdrop, we erred on the side of capital preservation (a stance that has, for now, proved premature).
Google parent Alphabet (GOOG, Financial)(GOOGL, Financial) was the Fund’s top contributor for 2021, gracing the Fund’s top-contributor list in all four quarters. Alphabet shares rose 65% in 2021, while its earnings appeared on track to double. Even after these gains, we believe the stock continues to trade at a discount. Berkshire Hathaway (BRK.B, Financial), our largest long equity holding, was the Fund’s second-largest contributor in 2021 and was a top-three contributor in three quarters. Berkshire’s broad collection of businesses continues to benefit from the ongoing economic recovery, while its investment portfolio enjoyed another year of strong gains. Financial services firm Charles Schwab (SCHW, Financial) took bronze medals for the fourth quarter and calendar year. Brokerage account balances are higher, and investors are anticipating better profit margins for the bank’s lending business in the quarters ahead. Other notable quarterly contributors were Dun & Bradstreet (DNB, Financial) and Liberty SiriusXM (LSXMA, Financial). Summit Materials (SUM, Financial) and LabCorp (LH, Financial) rounded out the top-five contributors for the calendar year.
Fidelity National Information Services (FIS, Financial) and CoStar Group (CSGP, Financial) appear on the Fund’s list of detractors for both the quarter and calendar year. We have detailed our investment thesis for both in recent Analyst Corner features (available on our website). Of late, FIS’s collection of mission- critical software and payment services to financial services clients has fallen out of favor as investors chase the theme of “disruption.” But if the company successfully executes its business plan, we believe the stock can move higher over the next few years. CoStar has a lengthy runway in both its commercial real estate information and services businesses, as well as online residential rental marketplace Apartments.com. We believe the company will continue to compound value and deliver returns for years to come. Liberty Broadband (LBRDA, Financial) (26% owner of Charter Communications (CHTR, Financial)) shares suffered a modest decline in the quarter, as recent slowdowns in broadband customer additions fueled fears of renewed competition. Our outlook remains positive, as Charter continues to grow, generate free cash flow, and repurchase its stock at attractive prices. We added to all three positions during the quarter.
The continued market rally resulted in negative returns for the Fund’s short positions against ETFs tracking the S&P 500 and Nasdaq 100 indexes. These positions were the Fund’s top detractors for the quarter and year. As mentioned previously, capital preservation was top of mind as we navigated through an uncertain year. Our index short positions provide downside protection from potential market selloffs and provide a means of reducing the Fund’s equity exposure without outright selling shares of owned business (thereby avoiding realizing gains and, ideally, allowing business value compounding to continue to work in our favor). Despite challenging crosscurrents, these (and other) indices closed the year near all-time highs. However, capitalization-weighted index returns appear to be increasingly driven by a handful of the very largest companies, while a broad swath of the public company universe has declined substantially from their highs of the year. In our estimation, this is another indication that investors should still proceed with caution.
Although we did not actively add to our short positions, market appreciation increased the Fund’s short exposure to nearly 22% of net assets. We did not add any new businesses to the portfolio during the fourth quarter, but we did purchase additional shares of CarMax (KMX, Financial), Meta Platforms (FB, Financial) (Facebook’s parent company), and Visa (V, Financial) (alongside the purchases mentioned above). We sold our remaining shares of Vulcan Materials (VMC, Financial) along with material trims of LabCorp, Aon (AON) and Schwab. Portfolio activity resulted in a long exposure of 98% of Fund assets, and the Fund had an effective net long position of 76%, unchanged from the prior quarter.
As we begin 2022, we believe the year may be adventurous for investors. Although we’re cautious about the overall environment, we are encouraged by the curated collection of companies in the portfolio. We encourage you to read the latest Value Matters which details several investments we think will serve us well in the years to come. While they may not avoid temporary markdowns in a correction, we believe they can survive and grow business value in almost any environment and, eventually, that value will be reflected by their stock prices.
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 01/19/2022, 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.
