“You want to pursue it for the intellectual challenge, for the reward of being correct about your investment decisions, and for the opportunity to help others. Those would be the three primary reasons I would counsel you to pursue a career in investing. If you start out just doing it because you want to make a lot of money, I doubt that you will be as successful.”— Mason Hawkins
Mason Hawkins: Background & bio
Mason Hawkins is the founding member and the chairman of Southeastern Asset Management Incorporation, which was established in 1975.
Hawkins had a relatively short career before starting his own firm. From 1972 to 1973, he was the Director of Research Atlantic National Bank and then from 1974 to 1975 he held the same position at the First Tennessee Investment Management.
In 1975, Hawkins was one of the three partners who founded Southeastern Asset Management Inc. The company has a value of $23, 594 million (as of 2012). In 2009, the fund showed an incredible performance with an annual return of about 54%.
According to Hawkins, his father gave him the first edition of the Intelligent Investor and the second edition of Security Analysis while he was still in school; however, investment was never his prime focus. The same books were a part of his higher education and thus, early groundwork helped him achieve success in the form of his firm, Southeastern Asset Management Inc.
Southeastern Asset Management Inc.
Southeastern Asset Management Inc. is an independently owned business that serves as an adviser to the Longleaf Partners Group, including Longleaf Partners Fund, Longleaf Partners International Fund and Longleaf Partners Small Cap Fund.
The firm also guides institutional accounts including endowments, foundations, and public and private retirement funds. Southeastern Asset Management has a competitive edge over its competitors due to the following reasons:
- Investment Record – Southeastern Asset Management has managed to record positive returns for its investors for the last 36 years in the industry. The management attributes these successes to its hard-core discipline, unending research and quality personnel that strives to over deliver in every aspect.
- Long-Term Scope – It is nature of the market to go up and down on a periodic basis. This results in profits as well as losses for investors. The managers at Southeastern do not dwell over the negative returns for a long time, even though the causes are investigated thoroughly. As a result, investment managers focus on a long term view that that drives them towards the bottom line.
- Management Insight – The powerhouse top management at the company is well-connected and boasts of many profitable deals that have arisen as a result of personal nature of those connections. The fact that the company is established on a very large scale only aids this means of capturing successful ventures.
- Organized Investment Team – The biggest strength of the investment managers at the Southeastern Asset Management Company is the level of discipline practiced by the managers. The model has been in existence since over three decades and it has only been improved since then.
- Interest Alignment – Investment managers are expected to own a certain number of units in their portfolios which aligns their interests with other investors. This enables them to take a long term view on their stock picks instead of concentrating on short term gains. Southeastern Asset Management trusts that it can distribute greater long-standing total returns and reduce the threat of investment failure by possessing equity securities in a portfolio of 18-22 competitive and well-managed businesses acquired at massive discounts to their book values.
Longleaf Partners Group
Longleaf Partners Funds is a suite of mutual funds and UCITS funds that Southeastern Asset Management, the investment advisor to the Longleaf Partners Funds, created in 1987 as a way for Southeastern employees to invest alongside their clients. This alignment of incentives is a critical element of the firm’s ethos and code of ethics still today. Collectively, Southeastern’s employees and affiliates are the largest shareholders in the Longleaf Funds with over $1billion invested.
Since 1975, Southeastern Asset Management’s investment philosophy has been to consistently employ our time-tested value approach to long-only equity investing based on owning strong businesses with good people at deeply discounted prices. We seek to reduce risk and deliver positive absolute returns for our investors over time.
Led by investment veterans CEO and Founder Mason Hawkins and CIO Staley Cates, Southeastern is 100% employee-owned and manages both the Longleaf Partners Funds and separately managed accounts for institutional clients.
Full list of downloadable Longleaf shareholder letters can be found here.
Longleaf’s third quarter shareholder letter:
The worst performing sector in the S&P 500 and MSCI World Indices was energy, down 9.1% and 9.5% respectively. With the unusually cool summer, natural gas prices fell 7%, crude 13%, and coal 13%. Within the sector, exploration and production companies (E&Ps) such as Chesapeake, Murphy, and CONSOL, suffered more than the average, which was helped by subgroups such as refining and storage and transportation. While lower energy prices rather than company specific disappointments in our energy names drove declines, they did not impact our appraisals of these three companies because our models already incorporated lower commodity prices based on the futures curve pricing and the marginal cost of production in our various plays. Higher commodity prices would likely lift their stocks, but these three companies do not require a rise in energy prices for intrinsic values to be recognized. At Chesapeake, CEO Doug Lawler is continuing to drive value recognition in ways he can control – selling non-core assets at reasonable prices, reducing debt, and increasing operating efficiencies in both corporate and production activity. He is building additional upside with $2–3 billion of annual discretionary capital spending that management projects should deliver strong returns on capital, even without higher commodity prices.
Neither is Murphy’s CEO, Roger Jenkins, relying on higher commodity prices for value recognition. The company is selling its U.K. downstream assets and announced the sale of 30% of its Malaysian assets at a price above our appraisal. Moreover, Jenkins built value by repurchasing shares as they became more discounted, a move he properly viewed as buying their proven barrels of oil for much less than it would cost to drill new wells or buy other plays. CONSOL is more than its category of “coal and consumable fuels.” In fact, management has been selling coal assets, and more than half of our appraisal is attributable to gas reserves in the Marcellus and Utica shale plays. To monetize production value in the recent quarter, Executive Chairman Brett Harvey and CEO Nick Deluliis successfully completed an initial public offering (IPO) for a midstream Master Limited Partnership (MLP) at metrics above both our appraisal and the projected price. The company’s variety of assets, including the Baltimore port terminal, provide multiple options for gaining value recognition without reliance on commodity price increases.
Outside the U.S.
Melco International, the Macau gaming company held in the International and Global Funds, fell alongside all Macau gaming stocks. There has been a meaningful drop in VIP revenues. The causes include China’s crackdown on corruption causing wealthier people to keep a lower profile away from Macau, slower Chinese economic growth hurting property sales that boosted gambler credit, and liquidity challenges faced by junket operators who organize VIP visits and extend credit to them. Other pressures impacting the stocks are difficult to quantify, such as tighter transit visa requirements, wage inflation and labor unrest, UnionPay credit card restrictions, and a smoking ban starting in October. The negative news flow did not impact our conviction in Melco. Our appraisal already incorporated lower growth in both VIP and mass revenues than most sell-side analysts had previously assumed for the year. Over 80% of Melco’s EBITDA (earnings before interest, taxes, depreciation and amortization) comes from the mass, non-VIP segment that is still growing gross gaming revenue at 15%. This important mass market has margins several times higher than the margins on VIPs whose revenues are split with junket operators. 100% hotel occupancy also has limited growth this year, but planned new hotels should increase visitation over the next few years as should the new Hong Kong–Macau bridge that will allow passengers at the Hong Kong airport to arrive in Macau in half an hour. Melco has a nearterm supply advantage with its Studio City casino and hotel opening in Q3 2015. Despite analyst downgrades on Macau gaming stocks, Melco is estimated to have high EBITDA growth in 2015 and 2016. The company began repurchasing shares in Melco Crown in September, and our partner, CEO Lawrence Ho, has bought more stock personally in the last five months.
OCI, owned by Longleaf Small-Cap, International, and Global, consists of a legacy construction business and the much larger nitrogen fertilizer business. Natural gas is the primary component in nitrogen fertilizer production, and during the quarter, gas supply interruptions impacted production at OCI’s two Egyptian plants, weighing on the short term stock price. Management anticipates that plant utilization will improve over the next year with several factors increasing gas supply: Egypt has begun to import liquid natural gas for the power sector, the cement industry is switching from natural gas to petroleum coke, and the major producers have begun to return to Egypt to ramp up exploration in the wake of a more stabilized government. We assume a continued low utilization rate of 50% in our appraisal, but even at this rate, the plants are cash flow positive. OCI’s other plants around the world are operating at or near full capacity with low cost gas and higher prices for Ammonia and Urea, two primary outputs. The long-term case for OCI remains compelling as the company is the low cost industry leader in nitrogen fertilizer, essential for world food production. In the next 12-18 months the company will have higher production and lower capex with the opening of a greenfield plant in Iowa and the completion of the Beaumont, Texas extension. The company is also building the largest methanol plant in the country in Texas. CEO Nassef Sawiris has built and monetized substantial value historically; specifically, he has added enormous value for Southeastern’s clients and our partners in the Longleaf Funds through his work at Texas Industries and Lafarge. Most recently, he announced that in early 2015 OCI will separate the fertilizer and construction businesses to remove the conglomerate discount in the stock price.
Mason Hawkins: Investment philosophy
Mason Hawkins, along with his partners, is a value investor. When considering prospective investments, he looks for three things, “good business, good people, and a good price.”
Like many successful investors, Hawkins achieves a superior business performance by investing in businesses with solid balance sheets. He believes that trading at intrinsic value and having a capable management are important factors for long-term success.
Hawkins believes that it is best to have a concentrated portfolio with only the finest securities as his firm holds less than 25 stocks in each portfolio. According to Hawkins, if you could acquire a business for half of its assets, it is a safe investment and should definitely be pursued.
In his interview with Graham and Dodd, Hawkins said that his dad, Ben Graham, John Templeton, Warren Buffet, and his partner at Southeastern Asset Management, Staley Cates honed his investment style and taught him everything he knows.
- Investment scope is for the long term which allows strategy development and profit opportunities.
- Unpredictability in stock prices allows for growth prospects and buy/sell opportunities. In short, it is crucial for portfolio growth.
- A margin of safety is set into place according to the Price to Value ratio.
- Securities are not picked just because they are available at discount. They should be supported with acceptable rates of returns.
- Investments also need to be justified by a qualified management that is crucial for the success of its securities.
- Portfolios are concentrated in 18-22 securities which gradually expands with higher returns.
- Bottom-up type of company analysis guarantees higher returns by investing only into top class companies and businesses.
Longleaf Partners Fund
Mason Hawkins: Quotes
“A free, open-market society spawns entrepreneurship and increases the rights and responsibilities of each citizen. Perpetuating an entrepreneurial environment is one of America’s greatest challenges as well as our brightest hope. The collective welfare of our workers, savers (investors) and successors depends upon successful new business formations. Without the revenue from these dynamic, rapidly growing enterprises, the regnant demands of our body politic will clearly go unfunded…”
“We’ve averaged less than 20% turnover over the long-run, which means our average holding period is 5 years. We sell businesses when they approach their intrinsic value and there is no longer a margin of safety. We also might sell a company if we can improve our position by 100%”
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