1Q24 Small-Cap 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 commentary explains how a small-cap fund beat its benchmark in the first quarter of 2024, returning 6.85% vs. the Russell 2000's 5.18%. The fund's stocks trade about 35-40% below what they're worth (called P/V ratio). Top performer Oscar Health surged 64%, while Anywhere Real Estate fell 24% due to potential changes in real estate commissions. The key insight: managers who actively buy back cheap shares can create value. For ordinary investors, it shows why picking the right small companies matters, but warns that industry shifts can hurt even cheap stocks.
Southeastern (Longleaf Partners) Small-Cap Fund Q1 2024 Performance The Southeastern (Longleaf Partners) Small-Cap Fund returned 6.85% in the first quarter of 2024, outperforming the Russell 2000 Index (5.18%) and the Russell 2000 Value Index (2.90%), while achieving its absolute annualized return t
Theme and Background
This chapter discusses the performance, portfolio characteristics, and investment activities of the Longleaf Partners Small-Cap Fund for the first quarter of 2024. In terms of market environment, small-cap stocks overall underperformed large-cap stocks (which remained driven by a few mega-cap growth stocks), and value investing strategies faced headwinds relative to growth strategies.
Core Thesis
The author's core investment argument is that despite the underperformance of small-cap indices and growth strategies, a differentiated portfolio constructed through selective stock picking can still outperform the benchmark. The fund achieved a quarterly return of 6.85%, outperforming the Russell 2000 Index (5.18%) and the Russell 2000 Value Index (2.90%), and met its absolute annualized return target of inflation plus 10%. Counterintuitive judgment: In a quarter where value investing faced overall pressure, the fund's portfolio companies achieved value growth through actions such as discounted share buybacks by management partners.
Key Arguments and Data
Performance Comparison Data:
| Metric | Small-Cap Fund | Russell 2000 | Russell 2000 Value |
|---|---|---|---|
| 1Q24 Return | 6.85% | 5.18% | 2.90% |
| 1-Year Return | 23.16% | 19.71% | 18.75% |
| 3-Year Annualized Return | 1.03% | -0.10% | 2.21% |
| 5-Year Annualized Return | 5.37% | 8.10% | 8.16% |
| 10-Year Annualized Return | 5.88% | 7.57% | 6.87% |
| Since Inception Annualized Return | 9.88% | 9.24% | 9.99% |
Fund P/V ratio in the mid-60% range, cash at 16.5%, holding 17 stocks
Fund Characteristics:
- P/V Ratio: Mid-60% range (i.e., stock price at approximately 35-40% discount to intrinsic value)
- Cash Allocation: 16.5%
- Number of Holdings: 17
Top Five Contributors and Detractors:
| Top Five Contributors | Quarterly Return | Contribution to Return | Portfolio Weight (3/31/24) |
|---|---|---|---|
| Oscar Health | 64% | 3.62% | 5.3% |
| CNX Resources | 18% | 1.13% | 6.3% |
| White Mountains | 19% | 0.97% | 4.8% |
| Park Hotels & Resorts | 16% | 0.72% | 4.9% |
| Hyatt | 22% | 0.70% | 2.7% |
Small-Cap Fund returned 6.85% in Q1, 23.16% over one year, and 9.88% annualized since inception
| Top Five Detractors | Quarterly Return | Contribution to Return | Portfolio Weight (3/31/24) |
|---|---|---|---|
| Anywhere Real Estate | -24% | -1.33% | 4.1% |
| Boston Beer Company | -12% | -0.52% | 3.7% |
| Ingles | -11% | -0.50% | 3.9% |
| Douglas Emmett | -3% | -0.07% | 2.1% |
| Atlanta Braves Holdings | -1% | -0.06% | 4.4% |
Companies/Assets Involved
1. Oscar Health (Bullish, Largest Contributor): Health insurance and software platform. CEO Mark Bertolini emphasized in a January meeting that 2024 revenue is expected to grow over 30%, with additional margin opportunities. The company's technology platform has transitioned from a non-earning asset to a contributor. The fund reduced its position after the strong performance but it remains among the top five holdings.
2. CNX Resources (Bullish, Contributed 1.13%): Natural gas company. In a weak natural gas price environment, CNX has more hedging protection than peers and a strong balance sheet, supporting a double-digit annualized buyback pace. CEO Nick DeIuliis and Chairman Will Thorndike focus on long-term free cash flow and per-share value growth. Competitor EQT's decision to restructure its pipeline business with upstream operations in the Appalachian Basin validated a similar move CNX had already completed in 2020. The fund added to its position when the discount widened.
3. White Mountains Insurance Group (Bullish, Contributed 0.97%): Insurance group. Net cash balance sheet, defensive positioning. The recent acquisition of Bamboo (California home insurance) is viewed as a contrarian opportunistic move by CEO Manning Rountee. The fund reduced its position after the strong performance.
4. Anywhere Real Estate (Bearish, Largest Detractor): Real estate brokerage franchisor. The industry was affected by a settlement in a lawsuit by the National Association of Realtors regarding buyer commission structures. Anywhere had already resolved its own portion of the litigation in advance and does not bear the large compensation reported recently. The author believes the company would trade at single-digit multiples of growing free cash flow under normal conditions, but near-term value growth is lacking.
5. Boston Beer Company (Detractor): Quarterly return -12%, contribution -0.52%.
6. Ingles (Detractor): Quarterly return -11%, contribution -0.50%.
In Q1, Oscar Health led with a 64% return contributing 3.62%, while Anywhere Real Estate lagged with a -24% return detracting 1.33%
7. Park Hotels & Resorts (Contributor): Quarterly return 16%, contribution 0.72%.
8. Hyatt (Contributor): Quarterly return 22%, contribution 0.70%.
Portfolio Activity:
- Opened 1 new position (a company previously held successfully)
- Added to CNX Resources
- Closed 2 positions: Knife River and Masonite (due to loss of confidence in management)
Investment Insights
1. Structural Opportunity in Small-Cap Value Stocks: The fund's P/V ratio in the mid-60% range implies the portfolio overall still has approximately 35-40% discount potential. With management partners realizing value growth through actions like buybacks, there is significant upside potential.
2. Focus on Management Partner Actionability: Cases like CNX Resources and White Mountains demonstrate that management's ability to create value through discounted buybacks, contrarian acquisitions, and other actions is a key variable in stock selection.
3. Beware of Industry Structural Change Risk: The Anywhere Real Estate case shows that changes in commission structures in the real estate brokerage industry can have long-term impacts on business models. Even if the company has resolved its litigation, industry uncertainty remains a risk.
4. Tech Platform Transition from Cost to Profit Item is a Key Inflection Point: Oscar Health's technology platform transitioning from a non-earning asset to a contributor was a key catalyst for valuation re-rating. A similar logic can be applied to other companies with technology platforms.