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Holly LaFon
Holly LaFon
Articles (7846) 

Wally Weitz's Partners III Opportunity Fund 2nd Quarter Commentary

Discussion of holdings and outlook

September 07, 2017 | About:

The Partners III Opportunity Fund’s Institutional Class returned +0.59% in the second calendar quarter, compared to +3.09% for the S&P 500 and +3.02% for the Russell 3000. For the calendar year to date, the Partners III Opportunity Fund’s Institutional Class returned +5.86%, compared to +9.34% for the S&P 500 and +8.93% for the Russell 3000.

Although the Fund delivered positive absolute returns in the second quarter, our conservative positioning continues to restrain performance relative to the indices. As described more fully in our Quarterly Letter to Investors, we believe that stocks (and bonds) remain expensive, and we have been unwilling to chase the handful of stocks driving the indices higher. Nevertheless, against a backdrop of continued strong index returns, the Fund’s short positions in ETFs tracking the S&P 500 (+3%), Nasdaq 100 (+4%), and Russell 2000 (+3%) collectively represent the largest detractor to quarterly performance. Among our long positions, we also experienced pressure from Liberty Global’s European tracking stock (-11%) as investors grew increasingly frustrated by inconsistent near-term operating performance, particularly execution of its new build plans at U.K. subsidiary Virgin Media. We remain confident in Liberty’s management and long-term strategy and believe its shares more than discount near-term operating woes.

Liberty Ventures (NASDAQ:LVNTA) (+18%), one of the more complicated members of John Malone’s Liberty family, is a top ten holding of the Fund and was the quarter’s top contributor. During the quarter, Ventures announced an agreement to acquire General Communications (GCI), the largest cable provider in Alaska. The deal will also create a much more straightforward company, principally cable assets in Alaska and shares of publicly traded Charter Communications and Liberty Broadband. Investors immediately cheered this simplification, particularly the elimination of its tracking stock structure, and bid Ventures’ shares higher. While a positive first step, we are further encouraged by the flexibility the new company will have to ultimately realize the value of its holdings in Charter and Liberty Broadband. QVC Group (+23%) delivered strong gains as signs emerged of operating improvements in QVC’s U.S. operations (where a slowdown previously triggered a significant stock price decline in the second half of 2016). And, as Ventures’ tracking stock sibling, investors were similarly pleased by the proposed elimination of QVC’s tracking stock structure. Finally, perceived takeover potential at Interval Leisure Group (+32%) led to its shares trading above our business value estimate, leading us to close our position.

As might be expected, in a period of elevated valuations, the Fund has been a net seller of equities. Overall, our long exposure declined modestly to 86% of net assets during the quarter, while our short exposure declined slightly less to 32% of net assets. Our Effective Net Long position at quarter end was 54%, a decline of two percentage points.

In addition to exiting Interval Leisure, we also closed our position in Twenty-First Century Fox (NASDAQ:FOXA). Media companies in general have seen heightened volatility as investors wrestle with the proliferation of entertainment options available to today’s consumer. In this rapidly changing environment, we have greater conviction that cable providers, given their ability to offer broadband Internet service, have a stronger hand to play–and the cable industry represents a significant portion of the Fund’s invested assets. Thus, as Fox shares recovered from recent declines, we elected to close the position. The Fund also eliminated a small position in National CineMedia. Valuation also drove trims of Liberty Expedia Holdings and Redwood Trust.

We redeployed a portion of these proceeds into LabCorp and Visa (NYSE:V). Although not exceedingly cheap at current prices, we believe the long-term outlook for these business value “compounders” remains solid. We also initiated a new position in IT consultancy DXC Technologies. We believe the stock price does not appropriately reflect the opportunity for management to rationalize its recent purchase of Hewlett-Packard’s Enterprise Service business, and that even at modest multiples of improved earnings a few years out, there is potential for a profitable trade.

Our estimated price-to-value (P/V) of the Fund’s long holdings remains in the mid-upper 80% range, somewhat higher than usual. Nevertheless, we are encouraged by owning solid businesses that continue to grow their business values. As noted in our Quarterly Letter, any amount of caution (even if seemingly warranted) has lately been counterproductive to returns. That said, the raw material for triggering market volatility is in place, and we look forward to taking advantage of it.

Contributions to performance are based on actual daily holdings. Securities may have been bought or sold during the quarter. Return shown is the actual quarterly return of the security or combination of share classes. Source for return shown is FactSet Portfolio Analytics.


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