Longleaf Q3 Letter

[bttmline]

http://www.longleafpartners.com/pdfs/10_q3.pdf

 

Trimming some positions that ran up this year, but still finding opportunities.  They think they are about 60 P/V across funds.

[Guest Bronco]

Smart guys - they are buying (have bought) Loews.

 

 

[A_Hamilton]

This letter is just silly. 15% (mid-teens) returns on their portfolios going forward with a current $25 billion under management?!? Delusions of grandeur.

[Zorrofan]

This letter is just silly. 15% (mid-teens) returns on their portfolios going forward with a current $25 billion under management?!? Delusions of grandeur.

 

Why must we always attack? Longleaf is a highly respected firm with a very decent longterm record through one of the most difficult investing periods since the great depression. Let us debate different viewpoints not attack.....

 

cheers

Zorro

[StubbleJumper]

Where did this 15% business come from?  I thought they said their goal was inflation plus 10%, which would be somewhere between 10-11%!  They further said that they currently hold a group of companies that have a cash flow yield of 10% which they think could ultimately yield mid-teens....but that was not stated as a goal or a promise to investors.

 

 

[A_Hamilton]

"We believe mid-teen returns are acheivable based solely on the metrics of the businesses we own."

 

That's where the 15% business comes in.

 

Additionally, when FFH is 91% hedged and Longleaf is claiming "mid-teens" returns are possible from here, someone is going to be wrong. I happen to trust FFH's analysis of the situation, and so just have no idea where they expect 15% returns to come from in a long only portfolio of equities.

[T-bone1]

I think they could both be right . . .

 

FFH is a leveraged and risk-averse insurance company that is rightfully afraid of a temporary loss of capital

 

SEAM is a long-only equity manager for clients who want exposure to equities

 

If stocks are cheap right now, but there is the possibility of some bumps along to way to fair value, then both companies are right.

[StubbleJumper]

"We believe mid-teen returns are acheivable based solely on the metrics of the businesses we own."

 

That's where the 15% business comes in.

 

Additionally, when FFH is 91% hedged and Longleaf is claiming "mid-teens" returns are possible from here, someone is going to be wrong. I happen to trust FFH's analysis of the situation, and so just have no idea where they expect 15% returns to come from in a long only portfolio of equities.

 

 

There's no inconsistency between FFH and Longleaf.  FFH is taking a macro view, and Longleaf is taking a micro view.  What Longleaf specifically said was that the specific companies that they own have a good enough cashflow yield that they could result in a mid-teens return...."based solely on the metrics" of those companies and presumably ignoring broader market overvaluation.  Fairfax is saying that they believe that the broader market is overvalued, but they too are buying specific companies with attractive metrics.  The decision to hedge is really an effort to protect the insurance company from having statutory capital vaporized temporarily should equity markets tank again.

 

I would suggest that 15% is ambitious, but there were certainly periods during the summer when you could have bought any number of very large caps with the prospect of a 8% or 10% return.  It wouldn't be a big leap for Longleaf to do a shade better.

 

 

[ExpectedValue]

FFH has to be more risk averse and focus on the macro just because if their investments go south their cost of capital might rise due to ratings downgrades.

[SharperDingaan]

 

Keep in mind that if you buy & hold, a 10% return just means a double every 8 yrs. Any interim dividend receipt or inflation experience simply drives the future value up quicker, reduces the time to double, & increases the compound return. All of which is gravy.

 

Do nothing but buy good quality equities, cheaply, and hedge on an ongoing basis against a material downturn - & you're almost guaranteed a double within 5 yrs (14.87% ROI). Longleafs inflation + 10% is pretty conservative. Same thing with Prems 15% target.

 

The real elegance is in what happens to these portfolios if there is an extended period of asset deflation & consumer price inflation.

 

SD

[A_Hamilton]

I'm really floored at people's reaction to my comment that mid-teens (or 15% returns as I stated originally) return expectations seem "silly" for a large money manager like Longleaf who has $25+ billion under management. Now, I realize the past decade was a tough one, but to put into perspective how difficult this feat has been over the past decade, exactly 1 manager in Morningstar's list of All US Diversified Stock Funds (3325 funds) with a 10 year history has a return greater than 15%- CGM Focus (17.39%). The average return is 2.39%, and as we all know, there is survivorship bias in 10 year fund numbers.

 

I know a lot of people on this board have put up fantastic returns in their PAs, but between market impact in trading, institutionalization of purchase and sell decisions, skid from the delays due to the instiutionalization of idea flow, etc, these types of returns are just fantastical as a return expectation for a large money manager, especially when the market is trading at or above its historical averages as it appears to be today. They come out with this as their Q1 2009 letter, "Ok," but today? Ain't gonna' happen. 

[beerbaron]

I'm really floored at people's reaction to my comment that mid-teens (or 15% returns as I stated originally) return expectations seem "silly" for a large money manager like Longleaf who has $25+ billion under management. Now, I realize the past decade was a tough one, but to put into perspective how difficult this feat has been over the past decade, exactly 1 manager in Morningstar's list of All US Diversified Stock Funds (3325 funds) with a 10 year history has a return greater than 15%- CGM Focus (17.39%). The average return is 2.39%, and as we all know, there is survivorship bias in 10 year fund numbers.

 

I know a lot of people on this board have put up fantastic returns in their PAs, but between market impact in trading, institutionalization of purchase and sell decisions, skid from the delays due to the instiutionalization of idea flow, etc, these types of returns are just fantastical as a return expectation for a large money manager, especially when the market is trading at or above its historical averages as it appears to be today. They come out with this as their Q1 2009 letter, "Ok," but today? Ain't gonna' happen.   

 

FFH also stated they were aiming at a 15% ROE and their portfolio investments are 22B...

 

BeerBaron

[Myth465]

Doesnt FFH want a return on BV, and isnt BV levered quite a bit.

[beerbaron]

Of course they are levered, but that leverage could work both ways.

 

I can't recall is it BV/share, BV or ROE they target at 15%?

 

Anyway, would'n long term BV/Share growth and ROE go hand in hand if the reserves estimates are proper.

 

BeerBaron

[Swizzled]

 

I've been following their holding in CHK for a long time and have been following CHK directly for even longer.

 

I'm very close to making CHK a core position as I've seen at least a dozen transactions in 2010 that validate a value per share for CHK of more than 2x the current stock price.

 

I've written a few times on the company (below).  Was wondering if anyone else had any thoughts.

 

http://valueinvestorcanada.blogspot.com/search/label/CHK

[Parsad]

I can't recall is it BV/share, BV or ROE they target at 15%?

 

It's 15% ROE they've specifically mentioned, but I think the assumption is 15% growth in book value per share for all the shareholders.  Assuming Fairfax manages risks adequately, and writes about 100% combined ratio, all they have to do is get 6% on that $22B and hit their target.  That's a far cry from what Longleaf has to do.  If I had to bet one way or the other, I don't think Longleaf will do 13-17% (mid-teens) long-term going forward on the size of asset base they are managing.  Cheers!

[Viking]

I believe FFH stated 15% increase per year in mark to market BV.

[Zorrofan]

You might want to check out the Longleaf Way thread for a good discussion of SD vs CHK.

 

cheers

Zorro