PORTFOLIO MANAGERS' DISCUSSION & ANALYSIS – VALUE FUND
DECEMBER 31, 2009
Co-Portfolio Managers:
Wallace R. Weitz & Bradley P. Hinton
The Value Fund returned +27.6% for the 2009 calendar year, compared to a +26.5% return for the S&P 500. For the fourth calendar quarter, the Fund increased 3.3% 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. Burlington Northern rose 24% after Berkshire Hathaway announced plans to acquire the railroad company at a healthy premium, while XTO Energy rose 13% on news that Exxon Mobil would purchase it in an all-stock transaction. Fort Worth was apparently the place to be for deals! Finally, our managed care stocks posted greater than 20% gains as the more extreme legislative proposals lost steam in Washington.
The Fund’s building products stocks declined modestly during the fourth quarter. We sold the last of our USG stock at a loss to help fund additional buys of Martin Marietta Materials and Vulcan Materials. USG may have more upside if the economy and housing in particular bounce back sharply, but we think the aggregates companies have better downside protection if the recovery takes more time. Apollo Group fell 18% amid concerns about the company’s revenue recognition policies and continued negative headlines about the for-profit education industry. Our view is that the issues are manageable and the stock is very cheap. We also bought more shares of Dell (-6%) as the stock slid back under $14 after another mildly disappointing quarterly report.
We purchased two new companies during the quarter, Monsanto Company and Accenture plc. Monsanto is a leading provider of agricultural products to farmers, in particular branded seeds, genomics and herbicides. The company enjoys a strong competitive position and a long structural tailwind, as yield-enhancing technologies continue to gain acceptance around the globe. The stock declined intra-quarter on short-term concerns about the initial effectiveness of new advanced products, which we think are overblown. Accenture is a leading management consulting, technology services and outsourcing company domiciled in Dublin. The company has a terrific business that has generated significant free cash flow throughout a very challenging environment. Accenture has a desirable, long-tenured client list and a pristine balance sheet. When business conditions eventually turn, we think their results may surprise to the upside.
We eliminated the Fund’s positions in Wells Fargo and American Express. In both cases, investors exercised our covered calls after the stocks posted large gains off the March lows. As anticipated, Liberty Media – Entertainment no longer exists as a separately traded stock. After a series of steps, investors received DIRECTV Group ("DTV") shares plus shares in a new tracking stock called Liberty Media – Starz. While we continue to hold DTV shares, we sold our shares of the small-cap Starz tracker. By any name, this package of securities has been highly profitable for investors. Finally, we sold a small remaining position in Cumulus Media, leaving the Fund’s residual cash position at 21% of net assets at quarter end.
The Value Fund continues to tilt toward our best larger company ideas, with more than 60% of the Fund’s stock investments in companies with market caps greater than $10 billion. This Fund also owns more truly global companies with strong brands and durable businesses. In addition to newcomers Monsanto and Accenture, examples include Microsoft, United Parcel Service, Wal-Mart, Procter & Gamble and Diageo. As investors rushed to maximize near-term recovery returns, we believe the market at times placed too little value on many of these world-class companies.
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.