PORTFOLIO MANAGERS' DISCUSSION & ANALYSIS – PARTNERS VALUE FUND

DECEMBER 31, 2009

Co-Portfolio Managers: 
Wallace R. Weitz & Bradley P. Hinton

The Partners Value Fund returned +31.3% for the 2009 calendar year, compared to a +26.5% return for the S&P 500. For the fourth calendar quarter, the Fund increased 1.3% compared to a 6.0% gain for the S&P 500. Health care stocks dominated the list of quarterly contributors. Managed care companies WellPoint (+23%) and UnitedHealth (+22%) rose as the more extreme legislative proposals lost steam in Washington. LabCorp (+14%) and Omnicare (+7%) also posted significant dollar gains. Microsoft’s stock increased another 18% as the company reported solid quarterly results and launched the Windows 7 release.

Coinstar declined 16% during the quarter, paring some of the stock’s healthy gain for the year. This small-cap stock is much more volatile than the company’s underlying business, which continues to make reasonable progress. Investors remain concerned about the Redbox division’s difficult relationships with a few movie studios, and the potential impact on DVD kiosk profitability. We have factored in lower margin assumptions and still think the stock is cheap. Several other holdings fell by five or six percent during the quarter (Redwood Trust, Dell, Washington Post and Willis Group). While these declines held back the Fund’s returns, they otherwise were not particularly noteworthy.

We bought a handful of new companies during the quarter. Liberty Media – Starz is the Fund’s largest new position at 2.5% 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 this raw material in the hands of skilled capital allocators, we expect reasonable per share value growth over the next several years.

Other purchases included a trio of for-profit education companies (ITT Educational Services, Strayer Education and Apollo Group), auto parts retailer AutoZone, insurance broker Brown & Brown and software company ACI Worldwide. In aggregate these six stocks represent less than four percent of net assets, so all have room to grow at the right prices. We sold home improvement retailer Lowe’s as the stock approached our revised value estimate, eliminated Liberty Media – Entertainment prior to its merger with DIRECTV Group and exited American Express when investors exercised our covered calls.

Partners Value remains a flexible fund with a go-anywhere mandate. We invest in companies of any size, in any sector, as long as we think the stocks trade at a significant discount to our estimate of intrinsic value. At quarter end we owned 9 larger companies with market caps greater than $10 billion, 17 medium-sized companies with market caps between $2 and $10 billion, and 11 smaller companies with market caps below $2 billion. The Fund’s residual cash position was just under 20% of net assets at quarter end.

Click here to obtain December 31, 2009 performance information.