Longleaf Partners Fund declined 0.53% in the first quarter, holding up better than the S&P 500, which fell 4.60%. In a volatile quarter for markets across the globe, our companies made solid progress across the board. Our investments in US natural gas company CNX Resources and US gas pipeline operator Williams were our strongest performers, up 51% and 30% respectively, as demand for domestic natural gas increased and energy prices skyrocketed due to Russia’s invasion of Ukraine. We wrote more extensively on our views on the expected impact of the ongoing conflict here. In a time of uncertainty, we saw a complexity discount impact stock performance at some of our holdings including top detractor, media and internet holding company IAC. However, our appraisal values grew nicely across most of our businesses thanks to our aligned management teams that are taking steps to create value for shareholders.
We encourage you to watch our video with Portfolio Managers Ross Glotzbach and Staley Cates for a more detailed review of the quarter.
Contribution To Return
Holdings are subject to change. Past performance does not guarantee future results.
- CNX Resources (CNX, Financial) –CNX appreciated as energy prices increased dramatically, and the critical nature of natural gas infrastructure and its ability to support Europe in limiting its dependence on Russia as an energy source was broadly recognized. CNX saw the benefits of its extensive share buyback program over the last year+ with free cash flow (FCF) nearing $3 per share. CNX increased the diversity and depth of experience of its board and executive management team in the quarter with the addition of Robert Agbede as a board director, Ravi Srivastava as President of New Technologies, and Hayley Scott as Chief Risk Officer.
- Williams (WMB, Financial) –Williams similarly benefitted from the positive natural gas tailwinds in the quarter. We scaled back our position on the back of strong performance but remain confident in the business. Its infrastructure positions Williams to be an important part of the renewable energy transition in the US through joint projects with the likes of Orsted in wind and other alternative energy solutions.
- IAC (IAC, Financial)–The conglomerate discount on this digital holding company grew wider in the quarter amidst a period of broad uncertainty and continued technology stock declines. Unlike most of its tech peers, IAC began the year already uniquely discounted and today trades at less than half of our appraisal value and less than 10x estimated free FCF per share power. Underlying holding Angi (previously Angie’s List) reported a disappointing quarter. Angi represents only 25% of value but swings the market perception and stock price since it is also publicly traded. The market is not yet giving credit to the Dotdash Meredith deal creating a digital publishing leader, given the lack of near-term reporting clarity since the deal just closed and 2022 is a transition year. Additionally, IAC’s underlying holdings in carsharing company Turo and casino and online gaming company MGM remain not properly recognized by the market. CEO Joey Levin and Chairman Barry Diller have a history of creating value-accretive catalysts to close the price to value gap.
- AMG (AMG, Financial) –In one of the bigger disconnects between stock price performance and appraisal value growth, AMG declined in line with a generic US money manager, correlating to the S&P 500. AMG’s reality is much more compelling, given its managers are a diversified mix of US and Global public equities, private equity, wealth management, and fund-of-funds. Our appraisal grew strongly in the quarter as private equity affiliate Baring Asia sold for 30x EBITDA (earnings before interest, taxes, depreciation and amortization) or mid-teens expected 2023 earnings (more than double where AMG is valued today) for a combination of cash and EQT AB shares.
- Lumen (LUMN, Financial) –Lumen reported weak organic revenue growth and guided more weakness for 2022. We expect revenue growth to kick back in towards the end of 2022, and the huge FCF coupon helped offset value decline from the weaker guidance. The other factor weighing on the stock price was largest shareholder Temasek’s partial sale of its 10% position in the quarter, creating uncertainty and a share price overhang. We have a 13D filed and continue to urge the company to take steps to address the significant price-to-value gap, including continued share buybacks.
- Liberty Broadband (LBRDA, Financial) –A new position in 4Q 2021, holding company Liberty Broadband also suffered from a widening of a market-imposed holdco discount in an uncertain quarter. Liberty’s stakes in Charter and Alaskan cable company GCI also faced near-term concerns over slowing industry broadband additions, but these businesses have over a decade of pricing power history and are well positioned to weather an inflationary environment. We have a high degree of respect for our partners in John Malone and Greg Maffei, who are focused on growing value per share and are actively repurchasing discounted shares to help close the price-to-value gap.
Portfolio Activity
After adding five new positions in the second half of last year, we built out several of these newer holdings in the first quarter but did not buy any new businesses. We trimmed some of our stronger performers. We remain fully invested with just under 5% cash, and our on-deck list is growing longer amid market volatility. New investments have a high hurdle to qualify given our conviction in our current holdings and the steep discount of the portfolio, which trades at a price-to-value (P/V) in the Mid-60s%.
Outlook
In a challenging period of global uncertainty – amid fears of a potential world war, ongoing COVID concerns, rising interest rates/growing inflation and the potential for a pending recession – we were pleased with the solid progress made and value growth seen across our portfolio holdings. We own companies that have pricing power that can price through cost increases and grow their profitability as a result. Our companies come from a position of financial strength with aligned, proven management teams that can take proactive steps to manage through challenging market environments.
Data and discussion as of March 31, 2022
Before investing in any Longleaf Partners Fund, you should carefully consider the Fund’s investment objectives, risks, charges, and expenses. For a current Prospectus and Summary Prospectus, which contain this and other important information, visit https://southeasternasset.com/account-resources. Please read the Prospectus and SummaryProspectus carefully before investing.
RISKS
The Longleaf Partners Fund is subject to stock market risk, meaning stocks in the Fund may fluctuate in response to developments at individual companies or due to general market and economic conditions. Also, because the Fund generally invests in 15 to 25 companies, share value could fluctuate more than if a greater number of securities were held. Mid-cap stocks held by the Fund may be more volatile than those of larger companies.
A 13D filing is generally required for any beneficial owner of more than 5% of any class of registered equity securities, and who are not able to claim an exemption for more limited filings due to an intent to change or influence control of the issuer.
As of March 31, 2022, the top ten holdings for the Longleaf Partners Fund: Lumen, 10.1%; CNX Resources, 6.9%; FedEx, 6.1%; Mattel, 5.5%; MGM Resorts, 5.5%; Discovery, 5.4%; IAC, 5.3%; Affiliated Managers Group, 5%; General Electric, 4.9% and CK Hutchison, 4.8%. Fund holdings are subject to change and holdings discussions are not recommendations to buy or sell any security. Current and future holdings are subject to risk.
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