PORTFOLIO MANAGER'S DISCUSSION & ANALYSIS – PARTNERS III OPPORTUNITY FUND
DECEMBER 31, 2009
Portfolio Manager: Wallace R. Weitz
The Partners III Opportunity Fund returned +42.0% for the 2009 calendar year, compared to a return of +26.5% for the S&P 500. For the fourth calendar quarter, the Fund increased 2.2% compared to a 6.0% gain for the S&P 500. Technology companies Microsoft (+18%) and Google (+25%) continued to generate impressive returns during the quarter. Our managed care stocks also posted greater than 20% gains as the more extreme legislative proposals lost steam in Washington. Liberty Media – Capital tacked another 14% onto its five-fold increase for the year, and Burlington Northern rose 24% after Berkshire Hathaway announced plans to acquire the railroad company at a healthy premium.
Coinstar declined 16% during the quarter, paring some of the stock’s healthy gain for the year. We think Coinstar’s stock is much more volatile than the company’s growing underlying business, and we increased our position during the quarter. Intelligent Systems fell 28% after rising 76% in the third quarter. We have owned this micro-cap stock for more than 18 years, and we raised our stake through a rights offering last summer. Between the company’s prosaic ChemFree business (industrial parts washers) and its CoreCard software unit, we think entrepreneurial CEO Leland Strange has enough raw material to one day reward patient shareholders. Finally, the Fund’s short positions detracted modestly from the quarter’s results, which is not unusual in a rising stock market.
Liberty Media – Starz was the Fund’s largest purchase during the quarter, representing 4.1% of net assets. The Starz tracker made its debut as a separately traded stock in November. While the name is new, the core assets have been in the Liberty Media corporate family for years. The Starz cable television channels have attractive recurring revenue streams that generate plenty of free cash flow. The company also has significant net cash on the balance sheet that management can use to grow the business or shrink the equity. With these assets in the hands of skilled capital allocators, we expect reasonable per share value growth over the next several years.
We increased our stake in Liberty Global after they announced the acquisition of German cable company Unitymedia. We think the deal makes financial and strategic sense, and we look forward to watching Mike Fries and his team integrate and grow this business. We also doubled our holdings of both Ticketmaster and Interval Leisure, two of the spin-offs from Barry Diller’s IAC/InterActiveCorp. Both companies are market leaders with terrific cash flow engines, operating in currently out-of-favor industries. We sold Discovery Communications and Lowe’s Companies when the stocks approached our estimates of intrinsic value. We further re-shaped our media holdings by selling News Corporation and eliminating our exposure to DIRECTV Group.
The Fund is 76% "net long" at quarter end, little changed from the September quarter. Long positions equal 94% of net assets and short positions approximate 18% of net assets. The Fund’s short positions remain concentrated in broad-based small and mid-cap stock ETF’s.
Click here to obtain December 31, 2009 performance information.
Investors should consider carefully the investment objectives, risks, and charges and expenses of the Fund before investing. The Fund’s Prospectus contains this and other information about the Fund and should be read carefully before investing. Portfolio composition is subject to change at any time and references to specific securities, industries, and sectors referenced in this letter are not recommendations to purchase or sell any particular security. Current and future portfolio holdings are subject to risk. See the Schedule of Investments in Securities included in the Fund’s quarterly report for the percent of assets of the Fund invested in particular industries or sectors.
Weitz Securities, Inc. is the distributor of the Weitz Funds.