Two of the most successful professional investors in Memphis took a crack at those questions Thursday night in front of a room full of uneasy customers. Mason Hawkins and Staley Cates, the CEO and president of Southeastern Asset Management, said they expect their Longleaf Partners mutual funds to recover their "horrible" 2008 losses and then some in the next five years.
"We've never owned better companies at cheaper prices across our three funds" said Hawkins, who started the Partners fund in 1987. "Longleaf's future returns should be special. We're acutely aware that they need to be to make up for 2008."
The Partners fund lost over 50 percent of its value last year, compared to about 35 percent for the market averages. The fund is up 23 percent this year. Longleaf has about $22 billion in assets under management compared to $43 billion in 2007. Managers and employees are required to eat their own cooking, and they have suffered along with investors.
The annual meeting of shareholders (of which I am one) was held at Bridges, an architecturally striking building north of downtown. There was an outdoor reception with drinks and appetizers. A row of long black sedans manned by chauffeurs lined the street in front of the entrance. I thought the crowd of perhaps 500 people was smaller than previous meetings at the Memphis Botanic Gardens.
The dark interior fit the market mood. Hawkins and Cates spoke -- too rapidly and too softly for those in the back to hear well -- in front of a gray climbing wall. There wasn't a light on in the place. It was like they were speaking from the mouth of a cave. Employees or hired help recorded it. Yes, there were slides, but someone should tell the bosses that while shunning the spotlight, figuratively, is one thing, speaking to a crowd is another.
Hawkins and Cates and legendary investor Warren Buffett, "the oracle of Omaha," share some of the same beliefs in straight talk and buy-and-hold investing and have sort of a mutual admiration society. Earlier this year, Longleaf made its first investment in Buffett's Berkshire Hathaway company. It has gone up.
The questioning was gentle and some of it was necessarily technical. It seemed strangely detached from current events. I didn't hear the name "Obama" mentioned and there was only one specific reference to the stimulus package in the 75-minute meeting. Much of the discussion was about Longleaf's discarded losers, including General Motors, UBS, Saks, and Office Depot. While the meeting was going on, the nightly news was reporting that GM lost $6 billion in the first quarter. Longleaf finally sold its GM stock and bonds after taking big losses. Cates called it a "screw-up."
"We should have been more rigorous in running our worst case" for both GM's car business and financing arm, GMAC, he said. Better days are ahead for Longleaf and its investors, Cates said, but it could be a while. The funds still hold such battered stocks as Dell, eBay, Sun Microsystems and FedEx.
"Where we've earned our spurs is coming out of bear markets," Cates said.