Quick Take: Following a contrarian strategy can be difficult, says Wallace Weitz, manager of Weitz Partners Value Fund (WPVLX). “It sometimes takes awhile for the market to care about our holdings,” he says of the stocks he buys for less than they’re worth. In particular, Weitz looks for companies with free cash flow. With a 20% turnover, he often waits for some holdings to pay off.
But Weitz’s long-term returns — he’s been managing the fund since 1994 — suggests his patience has been rewarded. Weitz Partners Value is the third-best-performing large-cap value fund for the ten years through last month: The fund rose 15.5%, on average, versus 9.8% for large-cap value funds.
Recent returns, however, have been somewhat less competitive, something Weitz says can happen since he avoids many of his peers’ stock picks. For the one-year period through January, the fund was up 31.3%, versus a 33.9% gain for the peer group.
Weitz says his holdings can range widely among investment styles and market capitalizations. According to Standard & Poor’s, the fund’s returns suggest the portfolio generally consists of value stocks, although their market capitalizations have varied.
Weitz’s contrarian approach includes a willingness to hold cash when he thinks valuations have gotten too high, since, he says, “Good ideas are hard to find.” The fund’s cash position — currently about 25% — appears to have helped keep the portfolio’s volatility moderately low. The fund’s three-year standard deviation is slightly less than the average for large-cap value funds, a category that is lower, on average, than that of many fund investment styles.
The Full Interview:
S&P: What is your basic investment philosophy?
WEITZ: We look for understandable businesses that generate discretionary cash flow. We don’t stay in any one style box, and we’re agnostic about market capitalization. We look for stocks that are cheap based on their underlying value. We like to buy things for less than they’re worth.
S&P: How do you look for attractively priced stocks?
WEITZ: Something may be cheap due to a low price/earnings ratio or undervalued assets, such as apartments for a REIT. Quantitative criteria, such as p/e or discounted cash flow, are handy tools, but not the sole reasons to invest. We may consider a company with temporary problems that will be resolved, or a company that is too boring for most investors. A cable company may have no earnings for ten years as it builds capacity.
S&P: Would you describe a company that reflects your independent approach?
WEITZ: We bought Costco Wholesale (COST) when it had a disappointing quarter. For some time, we thought it was a terrific company, but we weren’t willing to pay the stock price. We bought the stock at 28 and it’s come back to 38. Also, when the Clinton health-care proposals scared investors, we were able to buy health-care companies at 10 to 11 times earnings.
S&P: Do you generally focus on certain sectors?
WEITZ: We don’t feel compelled to be broadly diversified, so several industry categories aren’t in the fund. We’ll own companies without earnings like Comcast Holdings (CCZ), holding companies like Berkshire Hathaway, and growth companies like Costco.
Our portfolio tends to be more concentrated than most. The fund may have 50 to 60 positions, with the top-ten holdings accounting for 40% to 50% of the portfolio.
S&P: What are the major themes of the fund currently?
WEITZ: For a long time, financial services, broadly defined, has been our largest group, ranging from banks, to insurance companies, to mortgage companies like Countrywide Financial (CFC). Media and entertainment is another well-represented group. In the last five years, we’ve had several real estate holdings, including Forest City Enterprises (FCEa), Host Marriott (HMT), and some REITs.
S&P: What sectors have you been considering recently?
WEITZ: In recent months, we’ve looked at health care. We’ve found interesting companies with setbacks, including HCA Inc. (HCA), Triad Hospitals (TRI), First Health Group (FHCC), and Laboratory Corp. Amer Hldgs (LH). These companies are facing changes in Medicare. They have a lot to be afraid of, and it’s unclear how the situation will be resolved.
S&P: What is your turnover?
WEITZ: We tend to be very patient, so our turnover is very low at about 20%. You need the courage of your convictions, but it may take years for the process to unfold. As long as a company progresses, we’re happy to hold it. Good ideas are hard to find, and transaction costs add up.
S&P: Can you mention some long-standing holdings?
WEITZ: In our top-ten holdings, Berkshire Hathaway (BRKa) has been a holding for 20 years, Liberty Media `A` (L) for at least six years, Costco since the mid 1990s, and GreenPoint Finl (GPT) for over five years.
S&P: What are the fund’s largest positions?
WEITZ: As of December 31, they included Liberty Media `A` (L), Berkshire Hathaway, Comcast, and Host Marriott.
S&P: What’s your view of the Comcast’s proposed acquisition of Disney?
WEITZ: I like Brian Roberts and the management of Comcast, and would like to see them run Disney. I could see Comcast increasing its offer for Disney by 10%.
S&P: What is the fund’s cash position?
WEITZ: Cash is now about 25% of the fund. It’s been as high as 36%, but that’s not a market timing call. Typically, our cash level is about 10%. We sell stocks when we think they’re expensive.
S&P: Why have the fund’s long-term returns been competitive?
WEITZ: I think our approach works well over time. We had a very good 2000, but a lousy 2002, when we held Adelphia and Qwest Communications Intl (Q). Adelphia was a fraud, and frauds are difficult to predict.
Recently, we’ve been hurt because we didn’t buy stocks that our peers did. It sometimes takes awhile for the market to care about our holdings. In the meantime, we often buy more at lower prices.
– Bill Gerdes