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Should You Jump Into Longleaf?

Steven Goldberg

Longleaf Partners International, which recently re-opened, is an intriguing fund from a first-class fund firm. But it has been hurt by its policy of hedging much of its exposure to foreign currencies.



Longleaf Partners is one of the best value shops in the country. Until recently, however, all three of its funds had been closed to new investors. But Longleaf Partners International (symbol LLINX) has now re-opened to new investors. (Read more about the reopening.)

Over the past few years, the fund has been a laggard. It trailed the MSCI EAFE index, the most popular foreign benchmark, by ten percentage points in 2004 and one percentage point in 2005, and is behind by six percentage points so far this year. Consequently, the fund's longer-term record looks shabby, too, just now: It trails EAFE by almost three percentage points per year, on average, over the past five years.

The Longleaf way

Why should you even consider a fund with such an uninspiring record? Because even though Longleaf funds can be maddeningly streaky, they have always rewarded shareholders over the long term.

Getting into a well-run fund after a long, bad spell is a smart move. Longleaf's managers buy a stock only when it is selling at a discount of 40% or more to their judgment of a company's intrinsic value. Alas, such beaten-down companies often stay beaten down for years before the market finally recognizes their value.

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Take the firm's flagship fund, Longleaf Partners. Over the last 15 years, the fund has returned an annualized 15% -- beating the SP 500 by more than four percentage points per year, on average. Over the past ten years, it has returned an annualized 13% -- again more than four percentage points per year ahead of the SP. But it trailed the SP every year from 1995 through 1999 and lagged the index in both 2004 and 2005.

The Longleaf style calls for finding a few good stocks, loading up on them and waiting patiently. International owns just 21 stocks, and it generally holds a stock five years or more. Not surprisingly, the fund's performance is quite different year-to-year from EAFE's. At the same time, the fund is less volatile the most foreign funds.

Co-managers Mason Hawkins, Staley Cates and Andrew McDermott possess all the qualities you want in fund managers. They're highly disciplined, intelligent investors and incredibly patient with their stocks. They also put their money where their mouths are: They have essentially all their stock money in Longleaf funds.

Hop aboard?

This fund is a good choice for investors willing to be as patient with it as the managers are with their stocks. My main concern: Longleaf Partners hedges much of its exposure to foreign currencies. Their reasoning is sound: Hawkins and company say they are stockpickers not currency prognosticators. What's more, says fund official John Barton, "Over long periods of time, currency fluctuations tend to even out."

Maybe so. But the U.S. has enormous trade and budget deficits. While the dollar has already fallen substantially, hurting the fund's relative performance (the fund has not benefited from the dollar's decline to the extent that unhedged foreign funds have), it's hard to see the dollar's long-term path not continuing downwards. Dodge & Cox International (DODFX), my favorite foreign fund, hardly ever hedges away its foreign currency exposure. To my way of thinking, exposure to foreign currencies is part of the long-term diversification you want from investing in a foreign stock fund.

Should you think differently, Longleaf is among your best choices. Interestingly, the managers are finding some of their best buys among U.S. stocks. Currently, U.S. stocks comprise 20% of the fund's assets. For years, the managers write in their most recent shareholder report, they were turning up foreign stocks that were so attractive that they ended up adding them to their domestic funds, too. Now, they're finding U.S. stocks too good not to add to the foreign fund. Keep those U.S. holdings in mind if you like your funds pure.

Manager's picks

Favorite U.S. stocks include Dell (DELL), until recently the glamour computer maker; YUM Brands (YUM), the fast food giant, and Rupert Murdoch's media empire, News Corp. (NWS). All the U.S. companies the fund holds stakes in conduct the bulk of their business overseas.

American Depositary Receipts (ADRs) that the managers like include Canadian cable and satellite television firm Shaw Communications (SJR), Philips Electronics (PHG) and British insurance broker Willis Group Holdings (WSH).



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