The Partners III Opportunity Fund's Institutional Class returned +5.45% in the fourth quarter compared to +7.18% for the Russell 3000. For the calendar year, the Partners III Opportunity Fund's Institutional Class returned -22.46% compared to -19.21% for the Russell 3000.
Positive returns for the fourth quarter were a welcome sight but hardly sufficient to heal the wounds inflicted over the first nine months of 2022. The dominant narrative was the Federal Reserve's war against inflation waged via a campaign of sizeable interest rate hikes. After each hike, investors scrutinized subsequent economic data releases, searching for evidence that might justify hope that the Fed could “pivot” away from additional tightening. To date, the Fed has yet to reach that conclusion, repeatedly disappointing investors and leaving the setup for 2023 far from certain. The Fed remains steadfast in their communication that interest rates must rise further, and potentially stay elevated for an extended period, to truly tame inflation (and consumers' inflation expectations). Futures markets, meanwhile, suggest traders are positioned for the Fed to reverse course and cut rates in the back half of the year.
The performance of the U.S. economy (and corporate profits by proxy) will ultimately tip the scales one way or the other. As investors, we always consider whether there are more headwinds or tailwinds in the economy, but we ultimately shy away from outright predictions. Whether the Fed successfully engineers the desired “soft landing” or if the economy tips into recession, we believe the best path forward is owning high-quality companies led by management teams that can adapt to changing economic conditions, ably protecting their businesses while also looking to capitalize on new opportunities. Such companies are not immune to stock price volatility, but we believe the ability to compound business value per share over time will ultimately win the day.
The portfolio enjoyed broad gains during the quarter, including four of our top five holdings (Berkshire Hathaway (BRK.B, Financial), Markel (MKL, Financial), MasterCard (MA, Financial) and Visa(V, Financial)) earning top marks in the quarter. CoreCard's (CCRD, Financial) +33% return this quarter also secured it a spot on the quarterly honor roll. On a calendar year basis, however, positive returns were difficult to come by. Both Berkshire Hathaway and Markel were among the top contributors for the year, joined by Schwab (SCHW, Financial), CoStar (CSGP, Financial) and 2022 portfolio entrant Danaher (DHR, Financial) — the common theme among them being “winning by not losing.”
Unfortunately, the performance story of the year is told by the Fund's detractors. We've written at length in prior quarters about Meta's (META, Financial) struggles to adapt both to changes in Apple's iOS platform, as well as pivots to new formats like short-form video (Reels) and platform investments in the metaverse that have dragged shares lower all year. Now, weakening ad spending across all channels has added insult to injury, and concerns have spread to the other dominant digital ad player, Alphabet (GOOG, Financial) — parent of Google and YouTube. Amazon (AMZN, Financial), perhaps the ultimate “COVID beneficiary,” has seen its shares dip below pre-pandemic levels as investors brace for a potential recession's impact both on retail spending as well as slowing adoption of Amazon's cloud infrastructure service, Amazon Web Services. Higher financing costs and volatile vehicle prices have wreaked havoc on all used car sellers, but CarMax (KMX, Financial) shares have been doubly hit as management continues to invest in capabilities that improve the used car buying experience both online and “on the lot.”
Meta, Alphabet, Amazon and CarMax were all top detractors for the quarter and calendar year periods (FIS (FIS, Financial) and Liberty Broadband (LBRDA, Financial), respectively, complete the quarterly and calendar-year detractor lists.) To varying degrees, each is managing through cyclical challenges during a period of substantial investor pessimism. Drawdowns of this magnitude are painful, and it may be prudent for management to moderate the pace of some investments, but we remain encouraged by their long-term focus. In the short run, cutting spending indiscriminately to “defend earnings” may lessen the pain of a drawdown, but it seldom grows a company's business value — the ultimate prize. We added to both CarMax and Meta on weakness, and all four remain core holdings.
The Fund's short position against an ETF tracking the S&P 500 index was a modest drag on quarterly returns but contributed to performance for the calendar year (our Nasdaq 100 ETF short, closed earlier in 2022, also produced positive returns). During the quarter, we re-established a short position against SiriusXM (SIRI, Financial) common shares. Portfolio holding Liberty SiriusXM's (LSXMA, Financial) primary asset is a controlling, 82% stake in the satellite radio and entertainment company. By shorting a portion of the underlying SiriusXM shares, we neutralize a modest portion of our economic exposure to SiriusXM. On the long side, we were pleased to reestablish a new position in Microsoft at attractive levels while also trimming several stronger performers. At quarter end, the Fund's long exposure was 98% of Fund assets, short exposure of 4% of Fund assets, and an effective net long position of 94%.
Data is for the quarter ending 12/31/2022. Holdings are subject to change and may not be representative of the Fund's current or future investments. Contributions to performance are based on actual daily holdings. Returns shown are the actual returns for the specified period of the security. Additional securities referenced herein as a percent of the Fund's net assets as of 12/31/2022: Apple, Inc., 0.0%; CoStar Group, Inc., 3.2%; Danaher Corp., 2.6%; Invesco QQQ Trust, 0.0%; Liberty Broadband Corp., 5.0%; Liberty Media Corp-Liberty SiriusXM, 5.0%; Microsoft Corp., 2.3%; SPDR S&P 500 ETF Trust†, -3.7%; Sirius XM Holdings, Inc.†, -0.5%; The Charles Schwab Corp., 4.7%.
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 01/20/2023, 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.
