1Q23 Global Fund Commentary
Southeastern Asset Management is a Memphis-based deep-value firm founded in 1975 by O. Mason Hawkins to exploit the bargains left by the 1973-74 bear market. Its flagship Longleaf Partners Funds (launched 1987) invest employees' own money alongside clients'. Following Graham's discipline and its "Business, People, Price" framework, it runs concentrated books of 15-25 undervalued stocks held for the long term — famously closing funds to new investors when opportunities were scarce. CEO and Head of Research Ross Glotzbach now leads the firm, which publishes quarterly Longleaf fund commentaries and Research Perspectives notes.
In plain words
This report covers how the Longleaf Partners Global Fund performed in early 2023. The key takeaway: by avoiding banks and overpriced tech stocks (like Apple and Microsoft), the fund beat the market. The manager thinks the tech rally may be short-lived, and the banking crisis has created bargains in unfairly sold-off companies. For example, Warner Bros Discovery and General Electric, which previously struggled, are now rebounding. For regular investors, the lesson is: don't chase hype; market turmoil can reveal good companies at cheap prices.
Longleaf Partners Global Fund’s first-quarter 2023 report shows a fund return of 14.84%, outperforming the FTSE Developed Index’s 7.62%. The market was dominated by two factors: the banking crisis triggered by the collapse of Silicon Valley Bank (SVB) and the short-term rebound in technology/growth
Theme and Background
This section is the opening part of the Longleaf Partners Global Fund's first-quarter 2023 report. It primarily reviews the fund's performance during the quarter, the market environment, and the fund manager's views on current market hotspots (the banking crisis and the tech stock rebound). The report notes that the market was dominated by two factors: the banking crisis triggered by the collapse of Silicon Valley Bank (SVB), and the short-term rebound in technology/growth stocks following their decline in 2022.
Core Thesis
The author's core investment argument is: By avoiding banks and overvalued tech stocks, the fund successfully outperformed the index, and the report argues that current market dislocations will create attractive investment opportunities. The author believes that the first-quarter tech stock rebound (especially Apple and Microsoft) is likely a short-term phenomenon, as these companies remain overvalued. Meanwhile, the report argues that within the banking crisis, there are both good banks unfairly sold off and banks chasing yield, but the fund has long avoided the banking sector due to high leverage and transparency issues.
Key Arguments and Data
Fund P/V ratio at low 60% level, cash position at 5.2%, holding a total of 27 stocks
- Fund Performance: First-quarter return of 14.84%, outperforming the FTSE Developed Index's 7.62%.
- Market Structure: As of March 9 (the day before SVB's collapse), financials accounted for 23% of the MSCI World Value index, with banks representing 11%. The fund had no direct exposure to banks and limited holdings in information technology stocks.
- Tech Stock Assessment: The author believes that large-cap tech stocks like Apple and Microsoft remain overvalued, and the first-quarter rebound is likely a short-term phenomenon.
- Banking Sector Assessment: The author argues that current market dislocations will ultimately create attractive investment opportunities, but the fund will continue to adhere to discipline while evaluating these opportunities.
- Portfolio Adjustments: The fund's activity in the first quarter was above average, with 6 new positions opened, 2 sold, and 13 reduced. New positions span sectors including financial services/information technology (non-bank), consumer discretionary, building products, branded consumer goods, and media/entertainment.
- Benchmark Change: The fund changed its benchmark from the MSCI World to the FTSE Developed. However, the author emphasizes that as a long-term fundamental investor, this benchmark change does not affect return targets. The annualized return difference between the two indices since the fund's inception is only 20 basis points.
Global Fund's first-quarter return of 14.84% outperformed the FTSE Developed's 7.62%, but since inception, its annualized return of 4.43% lags behind the benchmark's 9.23%
Companies/Assets Involved
Warner Bros Discovery topped the quarter with a 59% total return and a 2.83% contribution, followed by General Electric and Millicom at 47% and 50%, respectively
| Company/Asset | Role | Key Data | Bullish/Bearish |
|---|---|---|---|
| Warner Bros Discovery (WBD) | Largest contributor in Q1 | Return +59%, portfolio weight 5.7% | Bullish: Management's integration plan is clear, free cash flow is growing, net debt/EBITDA expected below 4x by end of 2023 and 3x or lower by end of 2024 |
| General Electric (GE) | Major contributor in Q1 | Return +47%, portfolio weight 4.3% | Bullish: Spin-off plan is being executed, healthcare business has been divested, remaining company remains undervalued, CEO Larry Culp is improving operations |
| Millicom | Major contributor in Q1 | Return +50%, portfolio weight 5.5% | Bullish: Received third-party acquisition interest, Xavier Niel holds 21% stake, valuation is extremely low |
| FedEx | Major contributor in Q1 | Return +33%, portfolio weight 5.4% | Bullish: Strong pricing power, ground business exceeded expectations, repurchasing discounted shares, long-term EPS potential exceeds $20 |
| MGM Resorts | Major contributor in Q1 | Return +32%, portfolio weight 5.2% | Bullish: Double-digit growth in Las Vegas, Macau business recovering, repurchasing shares at a 20% discount |
| Lumen | Largest detractor in Q1 | Return -49%, portfolio weight 1.9% | Bearish: Weak revenue, guidance cut by $500 million, but the author believes a strategic sale or separation of the consumer business is key to unlocking value |
| Affiliated Managers Group | Detractor in Q1 | Return -10%, portfolio weight 5.0% | No clear judgment |
| CNX Resources | Detractor in Q1 | Return -5%, portfolio weight 5.7% | No clear judgment |
| Warner Music Group | Detractor in Q1 | Return -4%, portfolio weight 2.8% | No clear judgment |
Lumen ranked last with a -49% total return and a -2.62% negative contribution, followed by Affiliated Managers Group with a -10% return as the second worst
Investment Implications
- Avoid banks and overvalued tech stocks: The author argues that banks are difficult to understand and value over the long term due to high leverage and transparency issues, while large-cap tech stocks (e.g., Apple, Microsoft) remain overvalued. The first-quarter rebound is likely a short-term phenomenon, and investors should be cautious.
- Focus on high-quality companies that have been overly punished: The fund's largest contributors in Q1 were its biggest detractors in prior years (e.g., WBD, Millicom). The author believes these companies' fundamentals are improving and still have significant upside.
- Use market volatility to build positions: The fund took advantage of first-quarter volatility to open several new positions in companies it has tracked for a long time, spanning consumer discretionary and branded consumer goods. These companies were discounted by the market due to recession fears but possess long-term franchise value and non-peak profit margins.
- Focus on spin-off and restructuring opportunities: GE's spin-off plan (separating aviation and power businesses by 2024) is believed to highlight the intrinsic value of each business. A similar logic may apply to other companies.