LETTER TO SHAREHOLDERS
JUNE 30, 2009 – QUARTERLY REPORT
July 18, 2009
Dear Fellow Shareholders:
Our stock funds enjoyed an excellent second calendar quarter as each gained over 16%. For the first six months of 2009, each of the Funds is solidly in the black, with gains +6.0% for the Value Fund, +11.6% for Partners Value, +14.3% for Hickory, and +18.3% for Partners III. During this period, the S&P 500 gained +3.2%.
Corporate bonds also showed strong gains in the quarter as fears about the economy and credit quality moderated. This was good for our Balanced Fund (+12.9% for the first half) and the Short-Intermediate Income Fund (+6.3%).
The table below shows investment results over various time periods (after deducting all fees and expenses) for our four stock funds and for the S&P 500 (larger companies), the Russell 2000 (smaller companies) and the Nasdaq Composite (a proxy for technology companies).
|
Total Returns* |
Average Annual Total Returns* |
|||||||||
|
3 Mos. |
6 Mos. |
1 Year |
3 Year |
5 Year |
10 Year |
15 Year |
20 Year |
25 Year |
||
|
Value |
16.9% |
6.0% |
-22.5% |
-13.3% |
-5.8% |
0.2% |
8.4% |
8.9% |
N/A |
|
|
Partners Value** |
16.7 |
11.6 |
-14.7 |
-9.8 |
-3.4 |
1.1 |
9.4 |
9.8 |
11.6 |
|
|
Hickory |
16.3 |
14.3 |
-18.7 |
-12.3 |
-4.2 |
-2.3 |
8.2 |
N/A |
N/A |
|
|
Partners III** |
16.5 |
18.3 |
-8.1 |
-7.9 |
-1.7 |
4.6 |
10.9 |
11.0 |
12.3 |
|
|
S&P 500# |
15.9 |
3.2 |
-26.2 |
-8.2 |
-2.2 |
-2.2 |
6.9 |
7.8 |
10.1 |
|
|
Russell 2000# |
20.7 |
2.6 |
-25.0 |
-9.9 |
-1.7 |
2.4 |
6.6 |
N/A |
N/A |
|
|
Nasdaq Composite# |
20.3 |
17.0 |
-19.1 |
-4.6 |
-1.4 |
-3.2 |
6.6 |
7.5 |
8.5 |
|
These performance numbers reflect the deduction of each Fund’s annual operating expenses. The current annual operating expenses for the Value, Partners Value, Hickory and Partners III Opportunity Funds, as stated in the most recent Prospectus are 1.22%, 1.21%, 1.31% and 1.82%, respectively, of each Fund’s net assets. This information represents past performance and past performance does not guarantee future results. The investment return and the principal value of an investment in any of the Funds will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Current performance may be higher or lower than the performance data quoted above. Performance data current to the most recent month-end may be obtained at www.weitzfunds.com/performance/monthly.asp.
* All performance numbers assume reinvestment of dividends (except for the 15, 20 and 25 year Nasdaq numbers for which reinvestment of dividend information was not available).
** Performance of the Partners Value and Partners III Opportunity Funds (collectively, the "Funds") is measured from June 1, 1983, the inception of Weitz Partners II Limited Partnership ("Partners II") and Weitz Partners III Limited Partnership ("Partners III"), respectively. As of December 31, 1993, the Partners Value Fund succeeded to substantially all of the assets of Partners II and as of December 30, 2005, the Partners III Opportunity Fund succeeded to substantially all of the assets of Partners III (together with Partners II, the "Partnerships"). The investment objectives, policies and restrictions of the Funds are materially equivalent to those of the respective Partnerships and the Partnerships were managed at all times with full investment authority by Wallace R. Weitz & Company. The performance information includes performance for the period before the Funds became investment companies registered with the Securities and Exchange Commission. During these periods, neither Partnership was registered under the Investment Company Act of 1940 and therefore was not subject to certain investment restrictions imposed by the 1940 Act. If either Partnership had been registered under the 1940 Act during these periods, the Partnership’s performance might have been adversely affected.
# Index performance is hypothetical and is for illustrative purposes only.
Portfolio Review
Most of our stocks participated in the rally off the March lows. Some of the strongest were stocks that had declined the most during the previous six months. These included companies perceived to be particularly dependent on consumer spending and access to credit. Energy and other commodity businesses also recovered strongly after the breathtaking declines from their highs in mid-2008.
A few of our favorites, most notably Berkshire Hathaway, continued to languish even though their business values have been stable or growing. We would prefer that all of our stocks went up all the time, but as long as the underlying business does well, we believe that the stock price will eventually reflect that value.
Outlook
The recession that began over a year ago is not an ordinary one. The housing and credit bubbles which spawned the recession were enormous. A good deal of the economic growth of the U.S. and the rest of the world was fueled with cheap, easily available credit.
Now, with the bursting of these bubbles, businesses and individuals are being forced to pay back old debts and to pay cash for new purchases. Despite massive intervention by the Federal Reserve and Treasury to supply alternative sources of credit, the "unwinding" or "deleveraging" of the economy has caused a recession and rising unemployment. The resulting bear market that began in 2007 erased roughly one-half of stock market values as of its March low point. No sectors were unscathed.
We appear to have passed the "liquidity crisis" stage that saw the collapse of several commercial and investment banks and insurance companies last fall and have settled into a more "normal" period of rising unemployment, very weak consumer demand and continued stress for the economy. There are some signs of hope and recovery ("green shoots"), but much of the economic news contains sober reminders that we are in for a long period of sub-par economic activity.
This new stage is dreary, but it does NOT have to be a disaster for investors. The economic environment is weak, and that imposes a headwind on business in general, but well-managed companies with strong finances are finding ways to cope with their situations. They are bringing out lower-priced "value" products, entering new market segments, stepping up R&D, cutting costs, taking market share from weaker competitors, acquiring assets and businesses that are available at bargain prices and buying back their own shares. These companies are maintaining, and in some cases growing, the values of their businesses.
The other major factor that determines investor success is paying the right price for a stock (or bond). Generally speaking, stock prices have been much more volatile than business values. This has given us a chance to buy good businesses at very attractive prices at times like last fall and early March of this year, and in some cases, to realize substantial gains within weeks or months that might ordinarily take years to earn. We do not generally aspire to short-term trading profits, but our margin of out-performance vs. the S&P 500 in the first half of 2009 is partly a result of these opportunities.
Going forward, our working assumption is that the economy, and business values, will gradually bottom and recover slowly and unevenly. Eventually, a new bull market will begin, probably months before the economic and corporate earnings news has turned positive. This process might take another year or two (or longer). During this time, investors will inevitably lurch from optimism to pessimism and we are likely to see wide price swings in both directions as we have over the past nine months.
For those who like visualizations, the drawing below may be useful. Notice we have not been specific about price levels or time periods—this is an illustration, not a prediction. The smooth, dotted line represents the gradual bottoming and recovery of the economy and business values. The erratic, solid line represents stock prices as they gyrate in response to alternate periods of investor hope and despair. Our guess is that we may be at a point like X and that we will see more volatile moves that take the market generally sideways before we arrive at Y, the beginning of a new bull market. In the meantime we have cash reserves and will buy stocks when they sell at big discounts to the companies’ business values and sell them if they prematurely reach "full" value. If, by chance, this is the beginning of a new bull market, our cautious position may dampen our returns, but we own a collection of stocks that we believe have lots of upside potential and we should participate when the time comes.
One thing we will not try to do is to avoid all temporary downticks in the value of our portfolios. Obviously, taking the extreme position of going to 100% cash in the fall of 2007, or even in the summer of 2008, would have saved us considerable grief. Unfortunately, though, if we had tried to get out of stocks every time we sensed stock market "danger" over the past 39 years, we would probably have produced much lower returns and higher tax bills. Warren Buffett, in writing about the money managers whom he has chosen to succeed him at Berkshire Hathaway, said that each had suffered declines in line with the S&P 500 last year, but that he would not have been pleased if they had moved to cash and avoided these (presumably) temporary losses. The logic is not that avoiding losses is undesirable, but that jumping into and out of the stock market (or mutual funds) to avoid losses cannot be done successfully.
So, 2009 is off to a good start and we are generally upbeat about the outlook for the next few years. There will be anxious moments, but we believe we are past the extreme crisis period of last year. We certainly appreciate the patience and support of our shareholders.
Sincerely,
 |
 |
| Wallace R. Weitz | Bradley P. Hinton |
| Co-manager Value and Partners Value | Co-manager Value and Partners Value |
| Portfolio Manager Hickory and Partners III | Portfolio Manager Balanced |
| wally@weitzfunds.com | brad@weitzfunds.com |
Investors should consider carefully the investment objectives, risks, and charges and expenses of the Funds before investing. The Funds’ Prospectus contains this and other information about the Funds 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 Funds’ quarterly report for the percent of assets of each Fund invested in particular industries or sectors.
Weitz Securities, Inc. is the distributor of the Weitz Funds.