The Partners III Opportunity Fund’s Institutional Class returned +0.93% in the second calendar quarter compared to +3.43% for the S&P 500 and +3.89% for the Russell 3000. For the calendar year to date, the Partners III Opportunity Fund’s Institutional Class returned +2.75% compared to +2.65% for the S&P 500 and +3.22% for the Russell 3000.
Stock price volatility, particularly after a period of prosperity, is sure to cause some investors anxiety. But, taking advantage of occasional bouts of investor fear and greed (and their propensity to switch back and forth between them) is a cornerstone of our investment philosophy. As a result, we’ve used the market’s recent unrest in the first half of the year to add several new businesses to our portfolio. Dusting off the buy tickets is certainly more enjoyable, although given the Fund’s effective net long position remains conservative at 66%, we are unlikely to be described as extra bullish. As noted in our Quarterly Letter to Shareholders, there remain plenty of headwinds for investors to contend with. Nevertheless, we’ll keep our collective heads down and look for opportunities such as those described below.
The Fund’s long exposure grew to 96% of net assets as we continued to build our initial positions in last quarter’s new holdings (CarMax, Oracle, Markel and Tupperware Brands) and added three new companies to the portfolio. We added social networking giant Facebook (FB, Financial) during the quarter as it works to recover from recent election and privacy controversies. These issues are far from simple, but we believe Facebook’s position as the dominant social network remains well entrenched, with plenty of interesting opportunities for additional value creation through their other platforms: Instagram, Messenger and WhatsApp. We also initiated a new position in specialized semiconductor provider Marvell Technology Group (MRVL, Financial). Marvell’s acquisition of Cavium (another semiconductor company) required approvals of regulators in both the U.S. and China, and shares were temporarily pressured as heated trade rhetoric had the potential to scuttle the deal. Regulators ultimately approved the deal, closing in early July, and we expect Marvell shareholders to benefit from this value-creating transaction. Our final “new” position is Perspecta (PRSP, Financial), the public sector-focused IT contractor spun out from another portfolio holding DXC Technologies. We bought additional shares of Perspecta as it appeared to suffer from technical pressures common to spin-offs in their early days of trading separately.
Although we didn’t fully exit any long positions this quarter, we sold nearly all our shares of XO Group (XOXO, Financial) (+54% and a top contributor to quarterly performance) at a healthy profit. Longtime shareholders will recall XO entered the portfolio as TheKnot.com. A few years into our holding period, XO installed the current management team, led by CEO Michael Steib and CFO Gillian Munson, who successfully leveraged The Knot’s strength in the bridal market to build an enviable advertising and services business catering to an incredibly attractive audience. The business model has resonated with brides, advertisers, vendors and the investment community alike, and the recent rally saw shares trading above our base case business value. Intelligent Systems (+70%), a maker of software that facilitates credit card payments and other financial services, was the Fund’s top performer. Sparsely traded, the company’s shares have benefited lately from increased investor interest and willingness to pay up for scarce shares. LabCorp (+11%) and payments companies Mastercard (+12%) and Visa (+11%) round out our top contributors.
The Fund’s top (long) detractor for the quarter was Liberty Broadband (LBRDA, Financial) (-11%), a holding company that owns a significant stake in U.S. broadband and cable TV provider Charter Communications. Progress in Charter’s integration of Time Warner Cable and Bright House Networks has come in fits and starts, making it difficult for analysts to forecast results in any given quarter. We continue to have strong conviction in Charter’s long-term opportunities and position as an advantaged provider of broadband connectivity. Investors are encouraged to read our Analyst Corner feature on Charter for a more in-depth discussion. Liberty Global (LBTYA, Financial) (-13%) also underperformed in the quarter despite the announcement of a deal to sell its German cable assets at an attractive multiple. Investors seemed disappointed the transaction announcement didn’t include a commitment for how management will use the proceeds, and they showed some concern over the outcome of what is sure to be a lengthy regulatory review. We understand management’s desire to maintain flexibility, given an expected deal close in mid-2019, and trust they will allocate the proceeds in a manner that creates value for all shareholders. Berkshire Hathaway, the Fund’s largest holding as of June 30, was down 6% for the quarter. Our large position size in the security turned an otherwise modest decline into a top detractor for the quarter. Finally, our shorts against ETFs that track the S&P 500 and the Nasdaq 100, combined, were the largest detractors to performance for the quarter. The portfolio’s short exposure remained relatively unchanged at 30%.
We’re pleased to have had the opportunity to purchase several new investments so far this year and look forward to reporting to you on their progress in the quarters and years to come. Of course, our work is never finished, and our team remains on the hunt for additional opportunities to put capital to work. Thank you for the opportunity to invest alongside you.
