“The best thing we can report about Longleaf’s 2002 results, I guess, is the fact that they are over.” –Â Mason Hawkins
For more than 40 years, Mason Hawkins (Trades, Portfolio) has operated his own investment advisory firm, and a family of mutual funds. He started the firm as a good value investor should – he wanted to capitalize on the stock market crash and bear market of 1973-74.
For the following 30 years he turned in strong, albeit volatile, returns for his investors. By the mid-2000s he was widely feted for his investing skills.
For nine of the last 10 years, he has fought to keep up with the Standard & Poor's 500, but his performance in 2016 was much better, and he has kept the benchmark in sight year to date.
Will he be able to maintain the pace or even get ahead of the S&P?
Who is Hawkins?
This guru’s father may have sensed Hawkins' true calling sooner than the guru himself. His father gave him copies of the “Intelligent Investor” and “Security Analysis” when he was a high school student. Hawkins wasn't much interested at that time, but his interest changed when he attended the University of Florida, where he earned a B.A. in finance, and the University of Georgia, where he received an M.B.A., again in finance. He later earned a chartered financial analyst designation.
After spending the early 1970s as a director of research at a bank and later an investment management company, he and two partners launched Southeastern Asset Management Inc. in 1975. The new firm was launched to make the most of opportunities created by the 1973-74 stock market crash and bear market.
Hawkins and his colleagues launched a mutual funds division, Longleaf Partners Funds in 1987, and Southeastern has been its investment adviser since then.
Public recognition includes:
- Institutional Investor magazine’s Lifetime Achievement Award in 2005.
- Along with Chief Information Officer Staley Cates, he was named Morningstar’s Equity Manager of the Year in 2006.
- Hawkins’ investment approach and leadership were featured in David Swenson’s 2005 book, “Unconventional Success.”
To understand Hawkins’ popularity in the mid-2000s, review this GuruFocus excerpt from his performance table:
Hawkins is currently chairman, CEO and principal of Southeastern.
Unless otherwise noted, the biography is based on information on the Hawkins Resource Page at ValueWalk and at Wikipedia.
Hawkins brings a wealth of experience to the role. As we will see later, that includes often superb performances in the first half of the 2000s but less effectiveness since the 2008 crash.
What is Southeastern Asset Management?
On its website, the firm describes itself as “a privately owned, global investment management firm founded in 1975 and the investment adviser to the Longleaf Partners Funds.”
The funds company was created so employees could invest alongside their clients. The website reports employees and affiliates are the largest shareholders in the funds. Longleaf invests in four categories: U.S. Large Cap, U.S. Small Cap, Non-U.S. and Global. There are four funds for U.S. investors and three for non-U.S. investors.
U.S. investors
- Longleaf Partners Fund (LLPFX): This fund was closed to new investors in June; it aims for long-term capital growth through owning a small portfolio (currently 18) of mainly large-caps. It has net assets of $3.4 billion.
- Small Cap Fund (LLSCX): Long-term capital growth is its objective, through investments in a small group (currently 17) of American small-caps. It has net assets of $4.2 billion. Closed to new investors since 1997.
- International Fund (LLINX): Long-term capital growth through investments in a limited number (currently 19) of international or non-U.S. companies. Its net asset value is $1.2 billion.
- Global Fund (LLGLX): Long-term capital growth through holding U.S. and non-U.S. companies. Currently portfolio holds 21 securities and has a net asset value of $200 million.
Non-U.S. investors
- Longleaf Partners US UCITS Fund (LNGPUSI): equivalent of the Partners American Fund; net assets of $9.2 million distributed among 15 holdings.
- Longleaf Partners Global UCITS Fund (LLPSQUE): equivalent to the American Global Fund; net assets of $200 million spread among 21 holdings.
- Longleaf Partners Asia Pacific UCITS Fund (LPAPIUS): Invests in a limited number of companies in Asia, Japan, Australia and New Zealand; net assets of $42.6 million distributed among 26 holdings.
In all funds, the manager seeks to identify and buy securities trading well below their intrinsic value.
At the end of June, Southeastern was managing $19.8 billion of assets, some of which was in private, separate accounts. That’s substantial but down considerably compared to the firm’s holdings before the 2008 crash, and as shown in this GuruFocus chart:
Hawkins and his firm have grown their assets under management many fold because of historically outstanding performances pre-2008, but the AUM has continued to fall since 2010.
Hawkins’ investment strategies
At the Southeastern website, they describe their investment strategy this way:
“[We are] consistently employing our time-tested, global value investment process that relies on in-depth, fundamental company research and rigorous security selection. We apply this same investment discipline across all funds. We believe the key to our decades-long success has been high-conviction investing with a long-term time horizon in strong businesses with good people at deeply discounted prices.”
Breaking that out, we see the following principles and beliefs:
- Time-tested: This means Hawkins and associates have been using much the same strategy since the firm’s inception in 1975.
- Global value process: As value investors, they subscribe to the central tenet of buying quality companies at discounted prices and holding them for a long period. In addition, they look for such price/value relationships around the world.
- Fundamental research: They subject candidate companies to stringent criteria when assessing their financials, market positions and other quantifiable measures. They refer to this research as in depth, meaning they research a relatively small number of companies but research them intensively.
- Same discipline across funds: Hawkins believes his investing strategy need not be confined to any type of stock or any geographic region.
- High conviction: Having done that intensive research, they are prepared to commit themselves to individual names despite the short-term ups and downs. Turnover in the four U.S. funds averages 32% over the past five years; that’s a relatively low figure considering these are funds with around 20 companies each.
Summing up, Hawkins believes they have enjoyed long-term success through “high-conviction investing with a long-term time horizon in strong businesses with good people at deeply discounted prices.”
Turning to risk management, the firm uses this diagram to show its thinking and processes:
Southeastern targets a discount of 50% when shopping for new names. The following Southeastern chart shows how it sees such an investment playing out:
By and large, Hawkins is a relatively conventional value investor, but standing apart to some extent by his high-conviction portfolios of approximately 20 stocks each.
Hawkins’ holdings
This table, from the Longleaf Partners fact sheet, shows the fund’s top 14 holdings, as of June 30:
And this table shows the sectoral composition of the Partners portfolio:
According to the Risk Management page at the Southeastern website, they generally do not like to exceed a 15% position in any industry but have not applied it to this fund.
The guru has made his own way in sectoral and stock picks. Few other gurus have as much interest in Industrials and Telecommunication Services. At the individual holdings level, his list of stock holdings shows names not often seen on the lists of other gurus.
Longleaf Partners fund performance
This GuruFocus chart shows the performance of the Longleaf Partners Fund over the past 10 years:
Investor returns: These are one-, three-, five-, 10- and 15-year investor returns as shown in this Morningstar table:
A highly volatile fund, we note that Partners experienced a near 51% loss in 2008, followed by a near 54% return in 2009. That’s a good comeback, but to get back to even (and start generating positive returns), Hawkins needed subsequent gains of slightly more than 100%. He made a good start in 2009 and 2010, but those years have not been enough to stay ahead of the S&P 500.
Conclusion
In asking whether Hawkins can get ahead and stay ahead of the S&P 500, it must be noted he has a couple of factors in his favor.
First, he has proven power in generating above-average numbers, but he also had some bad years, and on a couple of occasions he has caught pneumonia when the market caught the flu.
Second, in another year and four months, the near-51% loss of 2008 will no longer appear in his 10-year performance chart. What’s more, his first year on the new 10-year average will be the 54% gain logged in 2009. That will make a big difference in perceptions of his performance.
Theoretically, his aim to buy stocks for a 50% discount should provide protection for his portfolio, but as seen in the 2015 results that hasn’t proven to be enough to maintain benchmark-beating averages.
For those planning to emulate Hawkins’ investing strategy or buy into his funds, fasten your seatbelts.
Disclosure: I do not own shares in any of the companies or funds listed in this article, nor do I expect to buy any in the next 72 hours.
