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Sunday, April 29th, 2012
against the wind

I had lunch with a successful hedge fund manager the other day and we talked a bit about career risk (I had just published my piece on the pressures on the decision making of asset managers related to Apple).  He said that clients and therefore managers are getting more and more short term in their thinking.  We talked about the effect on the business and how to get past that.

Then I happened to see the quarterly report for Longleaf Partners Fund (LLPFX).  The narrative portion focused on how the managers of the fund think about risk — and how they try to reduce it.  Conspicuously absent was the notion of career risk, for the managers court it rather than avoid it, seeing the opportunity that can come from not playing the market’s game.  The performance numbers that were given tell the tale of what has resulted:  A great long-term track record, but some intervals that featured outperformance and some of notable underperformance.  Exactly the kind of pattern that drives gatekeepers nuts, at least the ones who prize consistency above all else.

This is an interesting case study for due diligence.  The fund is concentrated and uses a value mentality, but ends up in the “large blend” part of the Morningstar grid and at times even “large growth.”  Which is probably fine with the portfolio managers, since one of them was quoted in 2003 as saying, “Investments can’t be divided into value and growth.  It’s insane to think that way.”

Speaking of Morningstar, this fund illustrates the differences in its rating systems.  Under the new forward-looking system, the analyst rates the fund as “Gold,” but it only gets two stars because of its lumpy performance record.

That record is shown above (from the earliest information I have; the fund started in 1987).  The top panel shows the fund’s total return, along with that of the S&P 500, the benchmark it uses for comparison.  The lower panel is the relative performance, where the good times and the bad times can be readily seen.

The fund seems destined to run against the wind of market expediency.  Whether that will result in good numbers this quarter or this year I have no idea, but I’m sure that’s not the right question.  (Chart:  Bloomberg terminal.)