Longleaf Partners International is a solid choice. But it has trailed its pack. By Katy Marquardt, Staff Writer October 31, 2006 It makes sense to invest in a fund that's stuck in a rut, if you understand -- and accept -- the reasons for the fund's underperformance. Case in point: Longleaf Partners International.The fund reopened to new clients with much fanfare in July. Much of that attention stems from Longleaf's reputation as an upstanding boutique mutual fund company (see Brands You Can Trust, Sept.). But International, which buys ultra-cheap stocks, has been lethargic lately. Its annualized return of 14% over the past three years to September 1 places it in the bottom 10% of diversified foreign funds (excluding small-company funds). It lagged its peers by an average of eight percentage points a year. Longleaf's managers, all of whom have been with the fund since its 1998 inception, take their bargain-hunting mission seriously. Led by O. Mason Hawkins, they look for stocks that trade at 40% or more below their estimate of the underlying company's value. Longleaf cites three reasons for the recent performance. First, the $3-billion fund (symbol LLINX; 800-445-9469) mostly avoided hot emerging-markets stocks. Second, it had as much as 30% of assets in cash. Third, the managers, who believe their expertise is in picking stocks rather than guessing exchange swings, hedge the fund's exposure to foreign currencies to some degree. This policy helps when the dollar is strong but hurts when the buck weakens, which has been the case for most of the past few years. Advertisement The fund differs from its peers in other ways. It holds only 19 stocks, and 20% of its assets are in U.S. companies, including a big slug in Dell, that derive a majority of sales overseas (other top holdings as of June 30 were NipponKoa Insurance, Shaw Communications, Philips Electronics and Renault). If you can live with these quirks, Longleaf International is a solid choice.