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Weitz Investments calls 2014's market tough for active managers

Apr 9, 2014 @ 12:51 pm

By Carl O'Donnell

stocks, bonds, equities, fixed income, weitz, valuation, interest rates, duration, fair value
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After last year's 29.6% rally in the S&P 500, the stock market this year is challenging active managers who are looking for good deals, according to Wallace Weitz, founder and president of Weitz Investment Management.

In a letter to investors issued April 1, Weitz Investment Management said most stocks in the company's portfolio are hovering at between 85% and 90% of fair value, rather than the 50% to 60% that the money manager would prefer.

“Economic conditions are pretty good, and the pain and fear from the bear market is behind us,” Mr. Weitz said in an interview. “But you have excess money and complacent investors, so it seems like prices have inflated a little ahead of themselves.”

Mr. Weitz said he doesn't see any sectors of the stock market that are significantly undervalued and thinks that investors are more likely to find value on a company-by-company basis. Because of that, the company has put about 20% to 30% of its stock portfolio into cash, with the hope that increased volatility will present some attractive buying opportunities, he said.

(He could be onto something: Market stems sell-off but volatility is here to stay)

Weitz Investment Management, which works largely with financial advisers and holds around $6 billion in assets under management, evaluates companies based on discounted future cash flows projected forward for decades. These predictions don't change very much with the daily vicissitudes of the markets, so big sell-offs — like the crash of 2009 — play to the company's advantage, Mr. Weitz said.

“The biggest frustration we face is watching clients make emotional mistakes,” he said, noting that some investors tend to pull out near the bottom of the market only to buy back in when prices rise.

Despite the company's contrarian philosophy, its funds' returns have been similar to the market. The company's Value Fund (WVALX), for example, returned 22.43% over the five-year period ending March 31, 15.52% over the comparable three-year period and 19.66% in the past 12 months. The S&P 500, meanwhile, gained 21.16%, 14.66% and 21.86% over those time periods, respectively.

Weitz Investment Management also invests in fixed income, where returns have been more modest. The company's Short Intermediate Fixed Income Fund (WEFIX) has gained 4.52% in the five-year period ending Dec. 31, 2.41% in the comparable three-year period and 1.11% last year. This is still significantly better than the Barclay's Intermediate U.S. Government/Credit Index, which earned 3.96%, 2.91%, and -0.86% over the same periods.

The company is mainly treating bonds as a safe haven, sticking with high-quality debt that has an average duration of only two years, thereby minimizing both interest rate and credit risk. While the investment management firm isn't averse to taking credit risk, “the spreads between junk bonds and Treasuries are record small, so we wouldn't be getting paid for the risk we would be taking,” Mr. Weitz said.

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