The Partners III Opportunity Fund’s Institutional Class returned +3.73% in the second calendar quarter compared to +4.30% for the S&P 500 and +4.10% for the Russell 3000. For the calendar year to date, the Partners III Opportunity Fund’s Institutional Class returned +23.94% compared to +18.54% for the S&P 500 and +18.71% for the Russell 3000.
At the halfway mark in 2019, the U.S. equity market continued its march higher, albeit to a slower beat. During the quarter, the Fund largely kept up with the broader equity market, and year to date remains comfortably ahead of its benchmarks. Driving the quarterly result, Liberty Broadband’s (+13%) and Berkshire Hathaway’s (+6%) large portfolio positions magnified the impact of their stock price outperformance, earning them top marks this quarter. Liberty Global (+10%) shares have perked up, as investors perceive European regulators as likely to approve the sale of its German and other Eastern European assets to Vodafone this summer. Sales trends improved across CarMax’s (+24%) physical dealerships, and investors expressed enthusiasm at the company’s introduction of its digital sales capabilities. Finally, Mastercard (+13%) rounded out the top five. Visa (+11%) deserves an honorable mention as well, as combined our investments in payment networks would claim the title “Top Contributor.”
The quarter’s top detractor, Intelligent Systems (INS, Financial) (-10%), saw its stock pull back after more than doubling in the first quarter. It remains our top contributor year to date (by a wide margin). Shares may continue to be volatile in the near-term as the company attracts new fans and skeptics alike. Nevertheless, we remain comfortable with the company’s growth trajectory and long-term prospects. Alphabet (-8%) shares were pressured by first-quarter growth that fell short of lofty expectations and by a perceived heightening of regulatory scrutiny.
DXC Technology (-14%) and Qurate Retail (-23%) are very different businesses that share the same theme of digital transformation. DXC is pivoting away from outdated data center and other outsourcing contracts, and instead focusing on building new capabilities to help clients progress towards their own digital futures. Qurate Retail (QRTEA, Financial) must adapt its traditional video commerce experience to new forms of digital distribution and also develop new marketing proficiencies to attract new customers through online channels—all while integrating the acquired HSN business into QVC. Business migrations of these magnitudes are not easy, and progress comes in fits and starts. Nevertheless, trading at single-digit multiples of earnings, the companies’ stock prices seem to suggest their efforts are wasted. We disagree and added to both positions during the quarter.
The Fund’s S&P 500 index short position, our final top detractor, remained unchanged from last quarter (15% of net assets). Our net effective long declined modestly to 80% of net assets from 82% last quarter. We opportunistically pared back several of this quarter’s winners to manage position sizes. We also sold out of Marvell Technologies and Liberty Media’s Formula One tracking stock as both rebounded from their December lows. The sales were partially offset by opportunistic purchases such as the DXC and Qurate buys described above, as well as continued “filling out” of our positions in Markel, Charles Schwab and Box.
As described in this quarter’s Value Matters letter to shareholders, there seem to be plenty of reasons to be wary, but attempting to sidestep every possible problem hasn’t historically proved effective for investors. Instead, we look to invest in businesses that can not only withstand adversity, but take advantage of it. We like the collection of businesses we own and appreciate the opportunity invest alongside you.
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.
