Monday, December 25, 2006

The Warren Buffett of Mutual Fund Investing?

No, I am not talking about Peter Lynch, although Mr. Lynch is arguably one of the best mutual fund managers and investors of his era. Nope, the gentleman I am referring to runs a mutual fund company that is quite simply unique amongst its peers. Consider the firm's statement of principles found on the first page of the prospectus:

1. "We will treat your if it were our own."

2. "We will remain significant investors with you..."

Sound familiar? Buffett and Munger subscribe to the same principles at Berkshire Hathaway by "eating our own cooking." Mutual funds are not exactly known for their high insider ownership, although a few diamonds in the rough can be found.

The fellow I am referring to is none other than Mason Hawkins, investment guru extraordinaire and chairman of Longleaf Partners, a value oriented mutual fund family. The word partner in the company name is richly deserved...each investor in Longleaf is viewed as a long term partner.

I must admit, I have known of Mr. Hawkins for some time now, but it was only recently that I discovered where Mr. Hawkins earned his MBA...the University of Georgia. As a current MBA candidate at UGA, I was euphoric that UGA boasts as an alumnus one of the greatest money managers of our time....who adheres to the value principles espoused by Ben Graham. Needless to say, my recent discovery sent me on a search to learn as much as I could about Mr. Hawkins and the his wonderful canvas, Longleaf.

To really appreciate Mr. Hawkin's partnership approach with his investors, all you need to do is consider how Longleaf came to be. Longleaf was basically started by Mr. Hawkins in 1987 when he introduced it to Southeastern Asset Management. Since 1975, SAM was a respected value oriented firm. Longleaf was created so Mr. Hawkins could essentially pool his money alongside his clients without creating the conflict of interest that can arise when money managers buy and sell for their own accounts. Mr. Hawkins bought all the same securities held by SAM and then put all his and his colleagues money into it. If that ain't eating your own cooking, I don't know what is. Mr. Hawkins went even further when he prohibited Southeastern's employees from investing in any of their bonuses and profits outside of about a true partnership with your clients.

I recently uncovered a gem of a paper written a few years back about Longleaf and Mr. Hawkins that really illustrates the viewpoints of Longleaf and its founders:

When Mr. Hawkins was a high school senior, he read Graham's "The Intelligent Investor" and remarked,

"The single thing that Graham talks about that allows for success is establishing firmly what a company is worth. Only if you've done rigorous analytical work that has a high probability of being right can you control your emotions and act against the collective mind-set of the moment."

Staley Cates, a colleague at Longleaf aptly says,

"We believe risk goes down when you put your money only in the investments you understand very well."

The folks at Longleaf have been compounding money in excess of thier respective benchmarks for a long time. With a track record like that, Longleaf would have no problem attracting funds. Instead Longleaf decided to close out two of its funds several years ago and forgo all those lucrative asset management fees. When Mr. Hawkins decided to close the funds to new investors, he was doing so at peak performance and could have attracted capital at the snap of a finger. Instead, as all true intelligent investors do, he chose not to.

"If we'd kept the Funds open, we could have maximized our fee income but we would have damaged our record and impaired our ability to compound our own capital as well as our customers'. So we closed them."

Mr. Hawkins will only reopen the funds when the economics are right to put more assets to other words when stocks are cheap. Indeed since 1995 when Mr. Hawkins closed the Partners Fund to new investments and in 1997 when he closed the Small Cap, Mr. Market has created pockets of opportunities to reopen them and as a result, both new and existing partners have been handsomely enriched. While there are several mutual fund outfits that align their interests with those of outside shareholders, I haven't come across any that are as methodical about it as Longleaf.

It's really important to consider that Mr. Hawkins and his team could have gotten very rich a lot quicker by running their funds geared at maximizing short term profits, but instead they choose to get rich slowly alongside their partners. According to Charlie Munger, "why should it be easy to get rich?" And that is exactly how it should be.

Each year Longleaf hosts a annual shareholder meeting that gives their investor's a chance to get their questions answered. Like Berkshire, Longleaf strives to treat their shareholders fairly and in the process, Mason Hawkins, like Warren Buffett, is beating the pants off mutual fund managers.


Anonymous said...

You write very well about "Mr. Hawkins and the his wonderful canvas, Longleaf." Your arguments are concise and logical. However, when I looked up the history of Longleaf Partners (LLPFX), I found that it signficantly underperformed as compared to the S&P 500 over the course of its history. The same is true of the Longleaf Small Cap fund (LLSCX). Only the Longleaf Internationl Fund (LLINX) has outperformed the S&P 500, and it has only existed since 1999.

Therefore, while your underlying arguments make sense, I don't see the evidence of Mr. Hawkin's genius, at least as far as can be seen in Longleaf. He is probably not the best example of your thesis.

Anonymous said...

I doubted the comment made by sara b about Longleaf funds underperforming, so I looked up the historic performance figures for myself.

== Data from Morningstar ==
Longleaf Partners LLPFX
The fund has a 10 year annualized return of 11.38% compared to 4.63% for the S&P 500 Index.

Source: Morningstar

Longleaf Partners Small-Cap LLSCX
The fund has a 10 year annualized return of 13.40% compared to 6.65% for the S&P 500 Index.

Source: Morningstar

Longleaf Partners International LLINX
The fund has a 5 year annualized return of 19.32% compared to -3.26% for the EAFE Index.

Source: Morningstar

Data retrieved on 28 Sep 2007.

== Data from Longleaf 2006 annual report ==
Longleaf Partners Fund
The fund has a 10 year average annual return of 12.77% compared to 8.42% for the S&P 500 Index.

The fund has a lifetime average annual return of 14.26% compared to 10.74% for the S&P 500 Index.

Longleaf Partners Small-Cap Fund
The fund has a 10 year average annual return of 14.51% compared to 9.44% for the Russell 2000 Index.

The fund has a lifetime average annual return of 12.77% compared to 11.08% for the Russell 2000 Index.

Longleaf Partners International Fund
The fund has a 5 year average annual return of 11.47% compared to 14.98% for the EAFE Index.

The fund has a lifetime average annual return of 15.47% compared to 8.01% for the EAFE Index.

Source: 2006 Longleaf Partners Annual Report