The Partners III Opportunity Fund’s Institutional Class returned +19.48% in the first calendar quarter compared to +13.65% for the S&P 500 and +14.04% for the Russell 3000. For the fiscal year ended March 31, the Partners III Opportunity Fund’s Institutional Class returned +11.25% compared to +9.50% for the S&P 500 and +8.77% for the Russell 3000.
Investors flipped the script between the final quarter of 2018 and the first quarter of 2019. At the start of the year, we believed conditions were favorable for good returns going forward but were surprised by the strength and speed of the current rebound.
We are nevertheless pleased to deliver strong absolute and relative performance for both the quarter and fiscal year periods. As we wrote in Value Matters, these first quarter results would make for good annual returns, so we will not expect this pace to continue. That said, we still feel that conditions warrant a more assertive posture, and the Fund’s effective net long position remains in the low 80% range.
The performance discussion for both the calendar quarter and fiscal year is dominated by Intelligent Systems (INS, Financial) ( “INS,” +147% in the first quarter; +525% for the fiscal year). Until somewhat recently, Intelligent Systems was a small, unknown technology company, whose CoreCard operation provides processing for credit card providers and software that helps clients manage various credit programs. Although not a traditional start-up (INS has created or incubated technology businesses for over 35 years), its CoreCard operation has recently disclosed the signing of several new important client relationships that have transformed the company’s trajectory. Despite an under the radar profile, CoreCard’s doubling of revenue and transition from loss making to profit generating has not gone unnoticed by investors or, lately, the press. Growth comparisons are always skewed by the onboarding of new clients, and while we (and management) believe CoreCard’s growth prospects remain strong, the pace of growth will certainly slow. Nevertheless, the financial results clearly demonstrate the profile of the business has changed and has captured Wall Street’s imagination.
Beyond INS, quarterly performance by our other equity holdings was generally strong and broad-based. Core positions Liberty Broadband (+27%) and Mastercard (+25%) joined INS on the honor roll, as did prior quarter laggards Liberty Global (+17%) and Colfax (+42%). This broad strength was more than sufficient to overcome the headwind created by the quarter’s top detractor, our index short position against the S&P 500 (+14%). Berkshire Hathaway (-2%) simply didn’t participate in the rally, but its outsized portfolio weighting lands it in the detractors’ ledger. Qurate Retail’s (-18%) decline was more meaningful, as investors fret its investment in online and digital commerce is too late, too expensive and can’t compete with Amazon. We agree that retail competition is fierce, but we feel the stock’s decline has been too punitive.
For the fiscal year, payments companies Mastercard (+35%) and Visa (+31%) joined INS as top contributors, thanks to their continued strong results. Liberty Global (-20%) and DXC Technology (-25%) joined Qurate Retail (-36%) and our short against the S&P500 (+9%) as the top detractors. Liberty Global recently announced an agreement to sell its troubled Swiss business at a very attractive price. This transaction, along with the pending sale of its German and Eastern European businesses to Vodafone, has the potential to unlock significant value for shareholders if and when they close. Our “return-to- par” investment thesis for DXC Technologies (an Analyst Corner feature in 2018) remains intact, though it may take time for the market to respond as it repositions and improves its business mix.
We were fairly active in the first quarter. The net of this activity left the Fund’s long and short books relatively unchanged from a percentage of gross assets perspective, but we believe better positions the portfolio going forward. In broad strokes, we trimmed to manage the position size of several large, high-conviction holdings such as Liberty Broadband and Berkshire Hathaway while exiting our remaining small positions in Liberty Braves and Discovery. We also sold our remaining Allergan shares in order to continue building initial positions in newer portfolio entrants such as Amazon and Black Knight.
We also initiated new positions in online travel agency Booking Holdings (BKNG, Financial) and enterprise content control platform provider Box (BOX, Financial). Both are examples of opportunities the Internet has unleashed upon our economy. Shareholders are likely familiar with (and probably have used) one of Booking’s many online consumer-oriented platforms (Priceline.com, Booking.com, OpenTable, Kayak, etc.). The tailwind of travel and leisure bookings transitioning from offline to online models, while no longer in the early stages, still has plenty of runway left, and Booking will continue to be a primary beneficiary of this secular growth. Box provides software solutions that help businesses transition to the cloud with services such as enabling collaboration between groups, managing access to sensitive data and helping secure against threats, to name a few. As the complexity of Box’s solutions has grown, so has the selling process for its sales force, and investors have grown impatient as new sales bookings have recently slowed. We believe the slowdown is temporary. Box’s market opportunity is huge, and we believe they’re on the right path to capture it.
Looking ahead, we think it unlikely that the stock market can keep up the first quarter’s breakneck pace, though we can’t know for certain. Regardless, we remain focused on investing in good businesses with strong competitive positions, able management and strong balance sheets that can capitalize on whatever opportunities come their way. We like our collection of businesses and feel that the conditions are still favorable for good long-term shareholder returns. As always, we appreciate your trust and the opportunity to invest our capital alongside yours.
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.
Performance data represents past performance, which does not guarantee future results. The investment return and the principal value of an investment in the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Current performance may be higher or lower than the performance data quoted. Performance data current to the most recent month end may be obtained at weitzinvestments.com.
Average annual total returns for the Fund’s Institutional Class for the one-, five- and ten-year periods ended March 31, 2019, were 11.25%, 3.99% and 13.74%, respectively. Returns assume reinvestment of dividends and redemption at the end of each period, and reflect the deduction of annual operating expenses, which as stated in the most recent Prospectus are 1.63% of the Fund’s Institutional. Returns also include fee waivers and/or expense reimbursements, if any; total returns would have been lower had there been no waivers or reimbursements.
Average annual total returns for the S&P 500 and the Russell 3000 indices for the one-, five- and ten-year periods ended March 31, 2019, were 9.50%, 10.91%, 15.92% and 8.77%, 10.36%, 16.00%, respectively. Index performance is hypothetical and is shown for illustrative purposes only. Comparative returns are the average returns for the applicable period of the reflected indices. The S&P 500® is an unmanaged index consisting of 500 companies generally representative of the market for the stocks of large-size U.S. companies. The Russell 3000® Index measures the performance of the largest 3,000 U.S. companies representing approximately 98% of the investable U.S. equity market. Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indices. Russell® is the trademark of Russell Investment Group.
Effective Net Long means (i) the sum of a portfolio’s long positions (such as common stocks, or derivatives where the price increases when an index or position rises), minus (ii) the sum of a portfolio’s short positions (such as, derivatives where the price increases when an index or position falls).
As of March 31, 2019: Amazon.com, Inc. comprised 1.7% of Partners III Opportunity Fund’s net assets; Berkshire Hathaway Inc.-Class B 10.4%; Black Knight, Inc. 1.8%; Booking Holdings Inc. 1.1% Box, Inc.-Class A 1.2%; Colfax Corp. 3.0%; DXC Technology Co. 3.5%; Intelligent Systems Corp. 11.4%; Liberty Broadband Corp.-Series A & C 6.8%; Liberty Global plc-Class C 6.3%; Markel Corp. 2.0%; Mastercard Inc.-Class A 5.0%; Qurate Retail, Inc.-Series A 1.2%; SPDR S&P 500 ETF Trust -15.0%; Visa Inc.-Class A 4.9%. Portfolio composition is subject to change at any time. Current and future portfolio holdings are subject to risk.
