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VOL. 123 | NO. 226 | Tuesday, November 18, 2008

Longleaf Managers See Brighter Days Ahead

By Andy Meek

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Memphians Mason Hawkins and Staley Cates apparently consider themselves “the luckiest managers in the mutual fund world.”

That’s the way they put it in the quarterly report released last week for the Longleaf Partners family of mutual funds they manage. They used those words to describe themselves because they have in large part not been abandoned by shareholders of their funds – even though those funds have taken quite a beating this year.

The Longleaf Partners fund, Longleaf Partners International fund and Longleaf Partners Small-Cap fund each have lost about half their net asset value so far in 2008. To get an idea about the reason for the financial pain, holdings of the trio of funds include FedEx Corp., Sun Microsystems, General Motors and Dell Inc., all of which have troubles of their own.

GM is teetering on the brink of bankruptcy. Stock analyst Keith Schoonmaker said Memphis-based FedEx took a “one-two punch” in 2008 in the form of lower package density combined with increases in jet and diesel fuel prices. Sun – a computer, computer parts and computer software vendor – announced last week it is cutting at least 6,000 jobs.

Fortunate days?

Meanwhile, the managers of the Longleaf Partners funds wrote in their third quarter shareholder update that they are lucky. The reason for their good fortune is they have “loyal and long-term fellow shareholders” who have continued to support the funds even as dark days appear to be on the horizon for the global economy.

“For those with the conviction, fortitude and time horizon to live through this volatility, we firmly believe that their patience will be rewarded,” the fund managers wrote to shareholders.

The quarterly report comes on the heels of a flurry of communication over the past several weeks from the managers of the Longleaf Partners funds who also are executives of the Memphis firm Southeastern Asset Management. Hawkins is chairman and CEO of the firm, and Cates is its president.

The money managers sent a letter to shareholders last month in which they promised a conservative appraisal of the funds’ economic picture as an “anchor against fear.” They arranged a conference call for shareholders on Oct. 7 for which the executives received more than 300 e-mails with questions in anticipation of the conference call.


The Q3 report adds context to the picture and represents a transparent assessment of the funds’ situation from its managers.

Investors are being urged to stay calm. “Some pundits are talking depression and positing that today’s environment is somewhat analogous to the 1930s,” Hawkins told investors during the conference call. “We strongly disagree and believe that such talk is not only irresponsible but is not supported by the facts.”

Among the themes of the Q3 report, Longleaf’s managers assure shareholders they know what the companies in their portfolios are worth and that many of the executives whose companies are included in the portfolios have much of their net worth tied to their own stocks.

As a further show of confidence, each director on the board of directors overseeing the Longleaf funds has much of their wealth tied up in the funds, according to Chicago-based investment research firm Morningstar Inc. The directors have more than $100,000 invested in the funds, and most of them have more than $100,000 in each of the three funds.

The Q3 report is available at the funds’ Web site, www.longleafpartners.com.

“We are confident that the Longleaf portfolios will deliver large returns coming out of the bear market because of the competitive and financial strength of our holdings, the extreme undervaluation of their shares, and the numerous and aggressive share repurchases at these discounted price levels,” the fund managers assured investors in the report.

PROPERTY SALES 23 23 1,365
MORTGAGES 21 21 1,068
BUILDING PERMITS 117 117 3,173