Weitz Investment Management Value Fund Q1 2022 Commentary

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The Value Fund’s Institutional Class returned -7.96% for the first quarter, compared to -4.60% for the S&P 500 and -5.13% for the Russell 1000. For the year ended 31 March 2022, the Fund’s institutional category returned +8.80% compared to +15.63% for the S&P 500 and +13.27% for the Russell 1000.

The headwinds we have been discussing over the past few quarters have intensified, to say the least, in the first quarter of 2022. Investors face a ground war in Europe, widespread and persistent inflation, a significant shift in domestic monetary policy from looser to tighter, the continuation of dysfunctional fiscal policy debates in Washington, and so on. Uncertainty is high. Given this set of conditions, the stock market has been reasonably resilient. Our businesses are generally posting strong financial results, at least so far, and they are adapting fluidly to rapidly changing conditions.

Zooming out, the Fund had three exceptional years (09/2018 to 09/2021) of absolute and relative returns, which were followed by two quarters below par. Part of the recent shortfall is due to sector allocation, as we did not own energy and were too exposed to communication services. Some were due to ill-timed stock picking, as we had a few pockets of the “bad” stocks.

Quarterly trends come and go, and we’ll see how enduring some of them turn out. For example, the energy sector has posted gains of almost 50% since last fall, after several years of dismal returns. Energy stocks are heavily influenced by commodity prices – companies often don’t achieve acceptable returns on capital through cycles – and we simply aren’t ahead of the research in this area. We don’t lose sleep over missing out on these short-term bargains.

We are firmly focused on business analysis and stock selection. Here, the news remained mostly favorable, with a few exceptions. Yield differentials between winners and losers have been significant lately. We welcome the dispersion, which should play on the strengths of our approach to quality investment at discount prices. If we are right more often than wrong and the good quarters outnumber the bad, greater differentiation should benefit investors in the Fund over time.

Berkshire Hathaway (BRK.A, BRK.B), Aon plc (AON), Charles Schwab (SCHW) and Visa (V) were the top quarterly contributors to the Fund. We reduced our positions in three of the four stocks close to our value estimates. Meta Platforms (FB), CarMax (KMX), Liberty Broadband (LBRDA) and CoStar Group (CSGP) were the Fund’s main quarterly detractors.

We bought more shares of each at significant discounts to our value estimates. Our trading behavior has followed our price discipline, which rarely results in instant gratification. Instead, as the old adage goes, our methodical approach is to “sell the high and buy the cheap” to help set the table for future returns.

The Fund’s financial stocks also posted exceptional gains over the year, rewarding patience and discipline. Alphabet (GOOG, GOOGL), Aon plc, Berkshire Hathaway, Charles Schwab and Danaher (DHR) were the main contributors to the exercise. Each posted returns of over 30% on large position sizes, generating high “slugging percentages” for the portfolio. With a focused strategy, one of the keys to long-term success is being right – in the long run – on our most important positions.

Meta Platforms, formerly Facebook, has failed to meet this standard for the past 12 months. The sharp drop in Meta shares was frustrating and we could have managed the position size more skillfully. Research analyst Jon Baker provided a fresh look at the company and our investment thesis in the latest Analyst Corner column. While the stock is expected to remain volatile, we believe it is now valued to deliver what could be exceptional returns over time.

Other critics of the exercise include Fidelity National Information Services (FIS), CarMax, CoStar Group and Liberty Broadband. The FIS has been our most disappointing investment in the Covid era. Unlike Meta, the stock is trading well below our average cost. The company itself has been relatively durable, but the stock certainly hasn’t. While the core elements of our bullish thesis remain firmly intact, hindsight tells us that we could have waited for a better entry. Based on today’s share price, which is what matters now, we believe the risk/reward balance is favourable. Similarly, we consider CarMax, CoStar Group and Liberty Broadband to be among the Fund’s most discounted holdings, and we added to our positions in all of them.

As bank stocks rallied early in the first quarter, we sold the Fund’s JPMorgan Chase (JPM) holdings at a substantial profit. We also added a new position in Gartner (IT) as tech-adjacent stocks continued to fall. Gartner is the leading provider of subscription research services for IT and business professionals (think senior executives, among others). The company has an attractive “build once, sell many times” business model that should sound familiar to long-time investors in the Fund. While Gartner isn’t screaming “cheap” on current earnings, we’re drawn to the company’s sustainability, business momentum, and cash flow growth potential.

The portfolio is focused and well aligned with our vision of successful large cap investing. We have concentrated our holdings in 27 companies, with the top ten representing 47% of the portfolio. Each position is important enough to matter, but none can individually make or break our results. Our current estimate is that the portfolio is trading at a price/value ratio in the mid-80s. We believe that more core stocks now have a chance of making healthy gains over a multi-year period. Others are assessed for adequate return potential primarily from expected growth in trading value per share.


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)

18.05

4.47

0.77

4.6

Aon PLC (AON)

8.47

3.50

0.29

3.1

The Charles Schwab Company (SCHW)

0.03

3.24

0.17

2.9

Visa, Inc. (V)

2.52

4.19

0.10

4.3

Gartner, Inc. (IT)

1.52

2.36

0.06

2.8

THE BEST DETRACTORS

Come back (%)

Average weight (%)

Contribution (%)

% of net assets

Meta Platforms, Inc. (FB)

-34.17

4.43

-1.73

4.3

CarMax, Inc. (KMX)

-26.06

2.96

-0.84

2.7

Liberty Broadband Corp. – Class C (LBDRK)

-16.07

4.74

-0.80

4.6

CoStar Group, Inc. (CSGP)

-16.10

4.26

-0.65

4.5

Laboratory Corp. of America Holdings (LH)

-16.09

3.60

-0.58

3.5

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) 8.0%, Fidelity National Information Services, Inc. (FIS) 3.4%, JPMorgan Chase & Co. (JPM) 0.0%.


Average annual total returns (%)

AS OF 03/31/2022

YTD

1 year

3 years

5 years

10 years

Since inception*

Creation date

Net expenditure

Gross expenditure

Value Fund – Investor (WVALX)

-8.00

8.63

17.13

13.86

11.56

10.69

09/05/1986*

1.04%

1.04%

Value Fund – Institutional (WVAIX)

-7.96

8.80

5:35 p.m.

14.10

11.74

10.74

07/31/2014

0.88%

0.88%

Russell 1000®

-5.13

13.27

18.69

15.81

14.52

10.96

S&P 500®

-4.60

15.65

18.91

15.98

14.62

10.98

*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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