Weitz Investment Management Partners III Opportunity Fund Q1 2022 Commentary

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The Institutional Class of the Partners III Opportunity Fund returned -5.09% in the first quarter of 2022, compared to -4.60% for the S&P 500 and -5.28% for the Russell 3000. For the year ended on March 31, 2022, the Fund generated a return of -0.53%. % against +15.65% for the S&P 500 and +11.92% for the Russell 3000.

The year began with a murky investment outlook that only worsened during the first quarter. The Omicron wave of Covid-19 cases peaked in early January, but global supply chains are far from healthy. By the end of 2021, supply shortages combined with sustained and massive monetary and fiscal stimulus had already fanned the flames of inflation. Anticipating a hawkish change within the Federal Reserve, investors started the year by repricing assets for a higher interest rate environment. The outbreak of war in Ukraine caused senseless death and destruction, further disrupting global markets. Energy prices rose further as importers of Russian oil and natural gas sought alternative sources of supply. Market conditions remain buoyant, and although markets have recovered some of their intra-quarter decline, we expect further volatility to come.

The fund’s performance over the quarter was broadly in line with the indices. For the year, overall portfolio prices were flat while broader indices rose. This share price performance is disappointing on a relative basis, but we are encouraged by the progress of the underlying companies we hold. When estimates of our company’s value increase despite stagnant stock prices, we believe the outlook for future performance improves. Today, our long equity portfolio trades at an estimated price-to-value ratio in the 80s, down from 90s a year ago. Of course, returns are not set on a fixed schedule, but due to price declines and our stock cuts and additions, the portfolio is more attractive than a year ago.

The best performers in the quarter were a pair of insurers, Berkshire Hathaway (BRK.A, BRK.B), our largest portfolio and Markel (MKL). Insurers generally benefit from a strong economy, as pricing tends to improve and the volume of risks to be insured increases. We also expect higher interest rates to translate into higher investment income as insurers recycle premium “float” into higher yielding securities. Both Berkshire and Markel have excellent management and top marks as opportunistic capital allocators.

Shares of Charles Schwab (SCHW) and Visa (V) produced marginally positive returns, effectively gaining without losing. Amazon.com (AMZN) stock fell slightly during the quarter, but opportunistic buying helped the position contribute positively to the Fund. Berkshire and Markel also topped the charts for the year. Joining them were Google parent Alphabet (GOOG, GOOGL), Aon (AON) and Charles Schwab. All three returned around 30% in the first nine months of the fiscal year and outperformed in the first quarter (also mostly by not losing).

A trio of companies (Facebook parent Meta Platforms (FB), CoreCard (CCRD) and CarMax, KMX) feature in our top detractor tables for the quarter and fiscal year. Changes to Apple’s mobile operating system (AAPL) have temporarily impacted the growth of Meta’s advertising business, just as the company’s investment in Instagram’s “Reels” feature is accelerating before full monetization. (Shareholders can read research analyst Jon Baker’s in-depth discussion of current events impacting Meta and why we’re bullish about the company in our recent analyst’s corner characteristic.)

CoreCard (formerly Intelligent Systems) struggled early in the year to hire and train staff to handle new and existing customer growth. Apple-related headlines have also taken a bite out of CoreCard stock lately, as reports suggest Apple is considering a transition of its credit card and other financial services to in-house built solutions. Such a move would create revenue headwinds for its partners, which CoreCard is widely considered to be. We are monitoring these developments and testing our model accordingly.

Shares of CarMax fell as the supply of used cars is tight and the increasingly negative impact of inflation could reduce the used car dealership’s volumes in the near term. Longer term, however, we remain optimistic that CarMax’s investments in its omnichannel (in-store, online or hybrid) shopping experience, combined nationwide, positions them for success going forward. .

Liberty Broadband (LBRDA) and Liberty SiriusXM (LSXMA) round out the list of quarterly detractors, while Fidelity National Information Services (FIS) and Dun & Bradstreet (DNB) complete the array of fiscal detractors.

Our short index positions relative to ETFs that track equity indices provided useful ballast during the first quarter decline, but were otherwise detrimental for the year. During the quarter, we hedged approximately 20% of our short position in the S&P 500 and 50% of our short position in the Nasdaq 100 at progressively lower prices. Among our long stocks, we significantly increased high-conviction holdings Amazon.com, CoStar Group, CarMax and Meta Platforms while trimming Berkshire, Markel, Charles Schwab and all of our remaining Aon stocks.

We have also sold nearly half of our modest remaining holdings of Qurate common stock (QRTEA), but retain a larger exposure to Qurate’s 8% preferred stock.

At the end of the quarter, our effective long exposure stood at 95% and our effective short exposure at 15%, resulting in an effective net long position of 80% of net assets (vs. gross, 22% gross short position and 76% net long as of December 31, 2021).


Main contributors and relative detractors

For the TRIMESTER ending 03/31/2022

TOP CONTRIBUTORS

Come back (%)

Average weight (%)

Contribution (%)

% of net assets

Berkshire Hathaway Inc. Class B (BRK.B)

18.04

10.82

1.84

11.7

Markel Corporation (MKL)

7:47 p.m.

6.61

1.32

6.4

SPDR S&P 500 ETF Trust (SPY)†

-5.41

-13.48

0.98

12.2

Invesco QQQ Trust (QQQ)†

-9.10

-4.48

0.75

2.9

The Charles Schwab Company (SCHW)

0.25

3.08

0.15

2.8


THE BEST DETRACTORS

Come back (%)

Average weight (%)

Contribution (%)

% of net assets

Meta Platforms, Inc. (FB)

-34.40

5.17

-1.92

5.5

CoreCard Corporation (CCRD)

-29.36

3.58

-1.17

2.9

Liberty Broadband Corp. Class A and C

(LBDRA/K)

-16.80

5.47

-0.99

5.1

CarMax, Inc. (KMX)

-25.70

3.12

-0.82

3.4

Liberty Media Corp. – A&C Freedom Series

SiriusXM (LSXMA/K)

-10.08

6.59

-0.76

6.4

The holdings are subject to change and may not be representative of the Fund’s current or future investments. Performance contributions are based on actual daily holdings. Returns shown are actual returns for the security’s specified time period. Additional securities referenced here as a percentage of the Fund’s net assets as of 03/31/2022: Alphabet Inc. – Class C (GOOG) 7.3%, Amazon.com, Inc. (AMZN) 4.5%, Aon PLC (AON) 0.0%, Apple, Inc. (AAPL) 0.0%, CoStar Group, Inc. (CSGP) 3.5%, Dun & Bradstreet Holdings, Inc. (DNB) 3.0%, Fidelity National Information Services, Inc. (FIS) 4.5%, Qurate Retail, Inc. – Class A (QRTEA) 0.4%, Qurate Retail, Inc. Preferred Stock (QRTEP) 3.0%, Visa, Inc. (V ) 5.6%.


Average annual total returns (%)

AS OF 03/31/2022

YTD

1 year

3 years

5 years

10 years

Since the creation of the Fund

Creation date

Net expenditure

Gross expenditure

Partners III Opportunities Fund – Investor (MUTF:WPOIX)

-5.18

-1.02

8.86

7.69

7.94

11.85

01/08/2011

1.88%

1.88%

Partners III Opportunity Fund – Institutional (MUTF: WPOPX)

-5.09

-0.53

9.48

8.29

8.43

11.98

06/01/1983*

1.43%

1.43%

Russell 3000®

-5.28

11.92

18.22

3:39 p.m.

14.28

11.29

S&P 500®

-4.60

15.65

18.91

15.98

14.62

11:55 a.m.

*Indicates the inception date of the Fund and the date from which performance since inception is calculated.


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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.

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