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At Longleaf, 'Partners' Is More Than a Name

Shareholders rank high at this boutique.

Gregg Wolper, 03/12/2010

One of the more discouraging aspects of the recent financial crisis was the exposure of misbehavior among certain members of the corporate and investment worlds. In a few cases, these actions are alleged to have been illegal, while in many other cases, they were simply distasteful or showed a lack of respect for shareholders.

Mutual fund firms mostly have steered clear of ethical problems this time, but they're not immune from scandal. Headline-grabbing misdeeds can occur. Perhaps what's more informative, though, is the way that shareholders are regarded on a mundane day-to-day basis. Fund companies vary greatly in the manner in which they treat fund shareholders.

For this reason, Morningstar's fund analysts focus attention on stewardship of capital. In recent months, we have published a series of columns providing new reviews of the stewardship practices of a number of families. Lately, we've taken a look at Federated, Janus, and Putnam. Today we examine a firm whose stewardship practices rise well above the levels of those three competitors: Southeastern Asset Management, advisor to the Longleaf Partners funds.

Consistent Approach, Impressive Results
In nearly all respects, Southeastern Asset Management acts in a shareholder-friendly manner. Unlike many rivals, the firm has not created a broad lineup of funds in order to gather as many assets as possible or to increase the chances that at least one of its funds would be performing well at all times. Instead, the firm relies on a single investment approach, in which its managers have specialized for decades: a value-oriented, low-turnover, contrarian style targeting superior results over the long term.

As a result, Southeastern has only three funds. It hasn't come out with a new one since 1998, when Longleaf Partners International LLINX arrived on the scene. Southeastern also closes funds to new investors when the managers think they've run out of ideas for putting money to work. In fact, all three Longleaf funds were closed to new investors for a year and a half until mid-2006, when the International fund reopened. The firm's flagship offering, Longleaf Partners Fund LLPFX, reopened only after the sharp decline of stock prices in 2008 provided more investment opportunities for the managers. Longleaf Partners Small-Cap LLSCX remains closed.

The firm's dedication to its investment style, and to its core beliefs, has served its funds well over time. To be sure, there have been some painful stretches of underperformance (most notably in 2008). But over the 23 years from its April 1987 inception through early March 2010, Longleaf Partners Fund has beaten the S&P 500 Index by more than 2.5 percentage points on an annualized basis, a hefty margin. The other Longleaf funds also have outstanding records over the long term versus their benchmarks and peers. And while a couple of managers have left in recent years (neither went to another fund firm), Mason Hawkins, who founded Southeastern in 1975, and Staley Cates, who joined in 1986 and became a manager a few years later, have stayed in place--and have continued to set the tone.PAGEBREAK

You Know Where They Stand
Meanwhile, Southeastern is a model of clear and detailed disclosure. The Longleaf Partners web site provides a statement of "governing principles" as well as additional documents that collectively make Southeastern's style of investing, its ethics policies, and its core beliefs as clear as possible to prospective and current shareholders. As one example, the literature for the flagship Longleaf Partners Fund actively discourages investments from anyone who has a time frame of less than five years.

The communication doesn't stop there. For many years, the Longleaf funds have published lengthy and detailed quarterly letters that list every purchase and sale during the period and usually discuss the reasoning behind each of these decisions. The reports also provide the managers' thoughts about other long-term holdings, as well as broader issues in the economy or stock market, if the managers think those are relevant at the time. These reports, going back to the mid-1990s, are available in an easy-to-access archive on the Longleaf web site.

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