Mason Hawkins’ Longleaf Partners discussion webcast transcript for the first quarter ended March 31, 2015.
Mason Hawkins’ Longleaf Partners 1Q15 partners discussion webcast transcript
Mason Hawkins: This August, we will celebrate Southeastern Asset Management’s 40th anniversary. Over our four decades of operations and through seven market cycles, I think it’s fair to say, we’ve had our core investment tenets tested and confirmed, and we’ve learned a great deal.
Investing is putting money out where you’re assured of getting it back with an adequate return. As Ben Graham said, everything else is speculation. All of our capital commitments since we founded Southeastern in 1975 have been premised on adhering to this investing definition. It’s our internal imperative. Buying competitively entrenched, advantaged businesses, managed by honorable and capable people, at prices significantly below corporate intrinsic values gives you the best chance to compound capital at above average rates with low risks, risks defined as the probability of permanent capital loss.
While it is important to have a large margin of safety of value over price to protect against unforeseen events, and/or analytical errors, over time, the quality of the business and the quality of the management matter more. FedEx and Fred Smith; Aon and Greg Case; Level 3 and Jeff Storey; Vail and Rob Katz; and C. K. Hutchison Holdings and Li Ka-Shing are exemplary combinations within our four portfolio mandates of uniquely advantaged businesses stewarded by most exceptional corporate leaders.
Because great investments are rare, you must be extremely disciplined and patient until you find one. When you do, you must trust your qualitative assessments and your appraisal, move with alacrity, commit a material percentage of your portfolio’s assets, and be willing to look stupid in the short run.
Most managers aren’t willing to look foolish because of the career risk. As the largest owners of the Longleaf Funds, we see our boss and worst critic each morning in the mirror when we shave. Equity investment success depends upon the price one pays for a business’ future free cash flow generation. You need to be approximately right on the latter, and parsimonious with regard to the future.
Because we’re concentrated, convicted, long term fundamental investors focused on absolute returns, our portfolios will never resemble an index, and our returns can vary materially from market benchmarks. Right now, our Longleaf Partners Small Cap Fund is leading the performance race in its universe, and many believe Southeastern has magic ability in that arena. Yet, some think we are ineffective in managing our large U.S., international and global strategies. That is interesting, because the same team that is being lauded for brilliantly executing its small cap is the same one applying identical investment disciplines and decision-making in our other mandates.
We are highly confident our large U.S., international, and global portfolios’ relative returns should look as stellar as small cap’s. Headwinds – the soaring dollar, collapsing energy prices and the resetting of goals from Macau – that have pressured our relative returns in U.S. large cap, international and global will weaken or reverse.
Most market participants almost always want to put their money in what has most recently worked. In fact, a number of pre-submitted questions for today’s call asked us to open the Small Cap Fund. We won’t. Indexing, after a six year bull market, is working as more dollars are forced into those securities that have gone up the most. The last time we saw this much passive momentum chasing was in the late 1990s. It ended very badly. In fact, it’s taken almost 16 years and a significant change in its composition for the NASDAQ index to get back to even.
Speculative juices are flowing again. Over the last year, as in 1999, some 80 percent of the IPOs (Initial Public Offerings) that have come public were underwritings of unprofitable companies. It’s critical to remember, the speculator is most optimistic when prices are the highest, and most despondent when they are lowest, and that the number of good investment opportunities is inversely related to speculator psychology.
We think the proper focus for investors is not what has worked, but what will work going forward. We have recently invested significant capital in our active, engaged, non-small cap strategies because we believe they will significantly outperform their passive benchmarks and because it is where we see terrific, absolute return opportunity.
Our recent quarterly letter clearly delineates why we think our beliefs are valid.
See full transcript below.