(PUB) Morningstar FundInvestor

December 2013

Morningstar FundInvestor

3

Those great returns come at the price of occasional controversy, though. Longleaf doesn’t seek to fight companies in court, but it’s going to happen when you buy stocks at big discounts. Sometimes management wants to keep that great deal to itself or it turns out the discount exists because management wasn’t as upright as hoped. The firm’s latest fight with Dell worried Longleaf shareholders on two fronts: First, why were they involved with a lousy company that appeared to be obsolete? Second, is it worth their time to engage in a fierce takeover battle and legal fight? Staley Cates and Mason Hawkins produced a study that shows they’ve actually had strong results in com- panies where they file a 13 D motion, and they argue Dell had much more value than the diminishing PC business. I do think there’s something to the second point. Cates says he probably spent a third of his time for a month or two on the Dell mess, and the same for Chesapeake in 2012 . Dell wasn’t a winner for the fund, but Chespeake was.

Evaluating Slumps Historically, Longleaf has done well in downturns, so Longleaf Partners ‘ LLPFX 2008 loss of 50 . 6% shocked some shareholders. It’s a sobering lesson that nearly all focused funds have so much issue- specific risk that they are vulnerable to such losses. Longleaf’s managers have the highest reported investment in their funds, so they felt the pain, too. The fund’s 2008 loss was caused largely by a high level of exposure to the global economy in names like General Motors GM , CEMEX CX , and Chesa- peake Energy CHK . Some of these names roared back in 2009 , and with hindsight they had some hits and mistakes such as Dell and GM . Five years hence, Longleaf has rewarded shareholders who stayed around with a 26 . 6% annualized return for a top 5% return in the category. More important, the fund’s returns since 1987 are twice that of the average large-blend fund and well ahead of the S & P 500 . See the graph.

The Long Run

Growth of $10,000

p Aston/Montag & Caldwell Growth

p Longleaf Partners

p Russell 2000

200,000

p Royce Pennsylvania Mutual

p Longleaf Partners Small Cap

p S&P 500

160,000

120,000

80,000

40,000

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Longleaf, Royce, and Montag funds have largely trounced their benchmarks since inception despite some sizable setbacks along the way. However, it requires a lot of patience from shareholders. Data from 04/1987–11/2013.