Our 2018 third quarter performance for the Institutional share class was +6.11% compared with S&P 500 Total Return at +7.71%. For the trailing twelve months ending September 30, 2018, performance for the Institutional share class was +23.15% compared with S&P 500 Total Return at +17.91%.
Through our years at the firm, we have pursued the idea that we can achieve better-than-average results by focusing on great Compounding Businesses. Such companies are evidenced by superior Business Models, People, and abundant Reinvestment opportunity. When we find such businesses we strive not to pay too much.
Two important questions we are often asked are “How does a business make it into your portfolio?” and “Why sell a position?” Although Business Models and Reinvestment matter greatly, inevitably the answer is the People. Getting a spot in the portfolio is very much a “job interview” for the chief executive and team. We know that the opportunity and risk of any business will shift over time. As such, does the chief executive earn the right to captain through those seas? We recall how Berkshire Hathaway was a struggling textile mill until a great captain came along. Over time, the captain was able to set the Business Model and Reinvestment straight. Many of our recent portfolio moves are best understood as reflections on leadership.
Our top five performing positions this quarter were O’Reilly Automotive, Mastercard, Visa, Markel, and Ubiquiti Networks. The five largest detractors from performance this quarter were Constellation Software, Dollar Tree, Moody’s, SBA Communications, and TD Ameritrade. Across the board, our long-term investment theses are largely unchanged. Mainly, the stock price movements were around quarterly noise. At Dollar Tree DLTR, all eyes are on the lackluster Q2 performance of the Family Dollar business, acquired three years ago. Dollar Tree has made good progress on cost structure and consumables merchandising despite a difficult competitive environment. However, successful merchandising of non-consumable items remains elusive. Long-time company insider Gary Philbin just entered his second year as CEO and captain of this ship. We take a long view and see durable advantages of the business extending many, many years. But Gary’s leadership is central to the opportunity.
We continue to find targeted buying opportunities, notably this year with new positions in KKR & Co KKR and Focus Financial Partners FOCS. We frequently wish we had more cash to pursue current opportunities and have “dry powder” for future opportunities that arise. We are mindful of the extraordinary recent results of the Fund and the stock market generally, propelled by a strong economy, enormous corporate tax cuts, and fading memories of crises past. Not all times will feel so good, so we continue to be mindful of risks.
Our investment process remains constant. Thank you again for your continued support.
Chuck, Tom, & John
The composition of the sector weightings and fund holdings are subject to change and are not recommendations to buy or sell any securities. Cash and Equivalents include asset backed bonds, corporate bonds, municipal bonds, investment purchased with cash proceeds for securities lending, and other assets in excess of liabilities.
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