3Q25 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 why a small-cap fund lagged the market—not because of poor strategy, but because it deliberately avoided overpriced stocks. With cash at 13%, the fund prefers waiting for better opportunities rather than chasing hot, unprofitable companies. It holds firms with real assets and strong cash flows, trading at 10–12 times free cash flow (a measure of earnings power), which could rise to 15 times. For ordinary investors, this is a reminder to stay cautious in late-cycle markets and focus on companies that actually generate cash.
Southeastern (Longleaf Partners) Small-Cap Fund Q3 2025 Report The fund's P/V ratio stands at a high 60%, with cash accounting for 13.2% and holdings in 18 stocks. The fund returned 2.03% in the third quarter, trailing the Russell 2000's 12.39% and the Russell 3000's 8.18%. Core View: Despite recent
Theme and Background
This chapter is the opening section of Southeastern (Longleaf Partners) Small-Cap Fund’s third-quarter 2025 report. The report notes that the fund’s current P/V ratio is in the high-60% range, cash accounts for 13.2%, and the portfolio holds 18 stocks. The author argues that while the fund’s recent relative performance has lagged market indices, this is not a failure of the investment strategy but an inevitable consequence of actively avoiding overvalued assets in the late stages of a bull market.
Core Thesis
The author’s core investment argument is: It is better to lag the market in the short term than to chase overvalued assets and risk permanent capital loss. Since improving the investment process in the fourth quarter of 2022, the fund has achieved long-term double-digit returns and protected capital during difficult periods. However, in the current late-cycle bull market, relative underperformance is a byproduct of the improved strategy. The author explicitly states that the fund’s holdings are based on real assets and brands, and the current 10–12x free cash flow (FCF) multiples have room to rise to 15x, while broad market indices are unlikely to grow.
Contrarian / Consensus-defying judgments:
- The fund does not participate in the current market’s speculative frenzy for unprofitable stocks, calling it a “classic late-cycle signal.”
- The author believes broad market indices are “unlikely to grow” from current levels, while the fund’s holdings have upside in FCF multiples.
- The fund actively maintains a high cash position (13.2%) in the late bull market, preferring to lag rather than chase highs.
Fund P/V ratio in the high-60% range, cash at 13.2%, 18 holdings
Key Arguments and Data
1. Performance Comparison: The fund returned 2.03% in the third quarter, significantly trailing the Russell 2000’s 12.39% and the Russell 3000’s 8.18%. However, since the process improvement in Q4 2022, the fund has achieved long-term double-digit returns.
| Metric | 3Q | YTD | 1 Year | 3 Year | 5 Year | 10 Year | Since Inception |
|---|---|---|---|---|---|---|---|
| Small-Cap Fund | 2.03% | 6.36% | 4.68% | 13.66% | 8.14% | 7.49% | 9.73% |
| Russell 3000 | 8.18% | 14.40% | 17.41% | 24.12% | 15.74% | 14.71% | 11.05% |
| Russell 2000 | 12.39% | 10.39% | 10.76% | 15.21% | 11.56% | 9.77% | 9.32% |
| Russell 2000 Value | 12.60% | 9.04% | 7.88% | 13.56% | 14.59% | 9.23% | 9.95% |
Small-Cap Fund returned 2.03% in Q3, 6.36% YTD, and 9.73% annualized since inception, underperforming the Russell 2000’s 12.39% and Russell 2000 Value’s 12.60%
2. Market Overheating Signals:
- In Q3, unprofitable stocks in the Russell 2000 (over 30% of the index) outperformed profitable stocks by nearly 1,500 basis points.
- “Circular vendor financing” emerged (similar to the Lucent Technologies playbook in 2000).
- Fermi, a company with no revenue, went public at a valuation exceeding $10 billion, planning to borrow billions to build power plants for data centers.
3. Fund Holdings Valuation: The fund’s current FCF multiples are 10–12x. The author believes that with management controlling costs, repurchasing shares, and steady revenue growth, FCF multiples could rise to 15x.
Companies/Assets Involved
Top three holdings: CNX Resources (6.1%), Becle (6.1%), White Mountains (5.8%)
| Company | Weight | Role/Key Data | Bullish/Bearish |
|---|---|---|---|
| CNX Resources | 6.1% | Hedging matures, share buybacks continue, Deep Utica resource potential emerging; stock expected to exceed $50 | Bullish |
| Becle | 6.1% | Position built at deep discount; headquartered in Mexico but over half of value from the U.S.; alcohol sector near negative sentiment bottom | Bullish |
| White Mountains | 5.8% | Insurance holding company; increased stake at a discount; recently sold controlling stake in Bamboo for nearly 4x return | Bullish |
| Gruma | 5.5% | Global leader in tortillas and corn flour; value has grown steadily since position initiated in 2019; recently increased buybacks | Bullish |
| Mattel | 5.1% | In its strongest position in a decade; North American sales down 16% short-term due to tariff adjustments, but international sales up 7%; end-market sales healthy | Bullish |
| TripAdvisor | 5.1% | Viator and TheFork growing faster than mature business; activist investor Starboard filed a 13D | Bullish |
| Rayonier | 4.6% | New position; announced a merger of equals with PotlatchDeltic, generating real synergies | Bullish |
| PotlatchDeltic | 3.5% | Merging with Rayonier; expected to become the fund’s largest holding | Bullish |
| Clearwater Paper | Not disclosed | Paperboard market weak; management evaluating capacity conversion; currently trading at low-single-digit mid-cycle FCF multiples | Bullish (short-term pressure) |
| Kodak | Not disclosed | Preferred securities credit profile improving; author views as a different category from other holdings | Neutral |
Other significant holdings include Gruma (5.5%), Mattel (5.1%), TripAdvisor (5.1%), Rayonier and PotlatchDeltic (4.6% and 3.5%)
Investment Implications
1. Maintain a Defensive Stance: The fund prefers to lag the market rather than chase highs. Investors should be wary of market overheating signals (surge in unprofitable stocks, circular financing, high-valuation IPOs of revenue-less companies) and avoid chasing overvalued assets in the late bull market.
2. Focus on Real Assets and Cash Flow: The fund’s holdings are concentrated in companies with real assets and brands that generate free cash flow. Current 10–12x FCF multiples have room to rise, while broad market indices are unlikely to grow.
3. Focus on Management Capital Allocation: Several holdings (CNX, White Mountains, Gruma, Mattel) enhance per-share value through buybacks, asset sales, and mergers. Investors should prioritize companies with strong capital allocation track records.
4. Be Wary of Tariffs and Policy Uncertainty: Mattel and Clearwater Paper are both affected by tariffs, but the author views this as a short-term factor with unchanged long-term fundamentals.