Professional Documents
Culture Documents
Webcast Transcript
May 6, 2015 11:00 AM ET
Disclosure Information:
The statements and opinions expressed are those of the speaker and are as of the date of
this presentation. All information is historical and not indicative of future results and
subject to change. Reader should not assume that an investment in the securities
mentioned was or would be profitable in the future. This information is not a
recommendation to buy or sell. Past performance does not guarantee future results.
Before investing in any Longleaf Partners fund, you should carefully consider the
Funds investment objectives, risks, charges, and expenses. For a current Prospectus
and Summary Prospectus, which contain this and other important information, visit
longleafpartners.com. Please read the Prospectus and Summary Prospectus carefully
before investing.
Average annual returns for the Longleaf Partners Funds are their respective indices for
the one, five, ten, and since inception periods ended March 31, 2015 are as follows:
Longleaf Partners Fund: 3.50%, 11.35%, 5.82%, 11.14% (inception April 8, 1987). S&P
500: 12.73%, 14.47%, 8.01%, 9.70%.
Longleaf Partners Small-Cap Fund: 13.35%, 16.50%, 10.52%, 11.60% (inception
February 21, 1989). Russell 2000: 8.21%, 14.57%, 8.82%, 9.86%.
Longleaf Partners International Fund: -17.61%, 3.20%, 2.84%, 7.59% (inception
October 26, 1998). MSCI EAFE: -0.92%, 6.16%, 4.95%, 4.69%.
Longleaf Partners Global Fund: -9.73% (1 year), 8.04% since inception December 27,
2012. MSCI World: 6.03%, 14.70%.
Returns reflect reinvested capital gains and dividends but not the deduction of taxes an
investor would pay on distributions or share redemptions. Performance data quoted
represents past performance; past performance does not guarantee future results. The
investment return and principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost. Current
performance of the fund may be lower or higher than the performance quoted.
Performance data current to the most recent month end may be obtained by visiting
longleafpartners.com
The total expense ratios for the Longleaf Partners Funds are as follows: Partners
Fund 0.91%. Small-Cap 0.91%, International Fund 1.25%, Global Fund 1.58%.
The expense ratio of the Partners and Small-Cap Funds is subject to a fee waiver to the
extent the Funds normal annual operating expenses exceed 1.5% of average annual net
assets. The expense ratio of the International Fund is subject to a fee waiver to the extent
the Funds normal annual operating expenses exceed 1.75% of average annual net assets.
The expense ratio of the Global Fund is subject to a fee waiver to the extent the Funds
normal annual operating expenses exceed 1.65% of average annual net assets.
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RISKS
The Longleaf Partners funds are subject to stock market risk, meaning stocks in the Fund
may fluctuate in response to developments at individual companies or due to general
market and economic conditions. Also, because the Funds generally invest in 15 to 25
companies, share value could fluctuate more than if a greater number of securities were
held. Mid-cap stocks held may be more volatile than those of larger companies. As it
relates to the Small-Cap Fund, smaller company stocks may be more volatile with less
financial resources than those of larger companies. As it relates to the International and
Global Funds, investing in non-U.S. securities may entail risk due to non-US economic
and political developments, exposure to non-US currencies, and different accounting and
financial standards. These risks may be higher when investing in emerging markets.
Funds distributed by ALPS Distributors, Inc. Southeastern Asset Management serves as
advisor to the Longleaf Partners Fund. Southeastern Asset Management and ALPS
Distributors are unaffiliated.
Fund holdings are subject to change and holding discussions are not recommendations to
buy or sell any security. Current and future holdings are subject to risk.
The Top 10 holdings of each Fund as of March 31, 2015 are as follows:
Partners Fund: Level (3) Communications, 10.6%; CK Hutchinson, 10.1% Loews, 8.2%;
Philips, 6.6%; Vivendi, 5.5%, CNH Industrial, 5.0%, McDonalds, 4.9%, CONSOL
Energy, 4.9%; Scripps Networks, 4.5%; Wynn Resorts, 4.5%.
Small-Cap Fund: Level (3) Communications, 9.7%; Graham Holdings, 9.6%;
DreamWorks, 7.2%; Everest Re, 5.4%; Vail Resorts, 5.1%; Consol Energy, 5.1%; OCI,
4.4%; Rayonier, 4.4%; Viasat, 4.4%; Hopewell, 4.4%.
International Fund: CK Hutchinson, 9.5%; EXOR, 7.6%; Lafarge, 7.3%; Melco
International, 6.9%; Adidas, 6.5%; K Wah International, 5.5%; OCI, 5.4%; Vivendi,
5.0%; BR Properties, 4.9%; Philips, 4.8%.
Global Fund: Level (3) Communications, 9.0%; CK Hutchinson, 8.8%; Loews, 6.5%;
Adidas, 5.6%; Melco International, 5.5%; EXOR, 5.0%; McDonalds, 4.9%; Vivendi,
4.9%; Philips, 4.8%; Everest Re, 4.8%.
P/V (price to value) is a calculation that compares the prices of the stocks in a portfolio
to Southeasterns appraisal of their intrinsic values. The ratio represents a single data
point about a Fund and should not be construed as something more. P/V does not
guarantee future results, and we caution investors not to give this calculation undue
weight.
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The S&P 500 Index is an index of 500 stocks chosen for market size, liquidity and
industry grouping, among other factors. The S&P is designed to be a leading indicator of
U.S. equities and is meant to reflect the risk/return characteristics of the large cap
universe. An index cannot be invested in directly.
The Russell 2000 Index measures the performance of the 2,000 smallest companies in the
Russell 3,000 Index, which represents approximately 10% of the total market
capitalization of the Russell 3000 Index. An index cannot be invested in directly.
MSCI EAFE Index (Europe, Australasia, Far East) is a broad based, unmanaged equity
market index designed to measure the equity market performance of 22 developed
markets, excluding the US & Canada. An index cannot be invested in directly.
MSCI World Index is a broad-based, unmanaged equity market index designed to
measure the equity market performance of 24 developed markets, including the United
States. An index cannot be invested in directly.
Definitions for terms used include:
Free Cash Flow (FCF) is a measure of a companys ability to generate the cash flow
necessary to maintain operations. Generally, it is calculated as operating cash flow minus
capital expenditures.
EV/EBITDA is a ratio comparing a companys enterprise value and its earnings before
interest, taxes, depreciation and amortization. Enterprise Value (EV) is the measure of
the aggregate value for a company. It measures the theoretical price an investor would
have to pay to acquire a particular company.
Earnings Per Share is the portion of a company's profit allocated to each outstanding
share of stock.
P/E (Price Earnings) Ratio is the market price of a company's share divided by the
earnings per share of the company.
Price to Free Cash Flow compares a company's market price to its annual free cash flow.
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Lee Harper:
Mason Hawkins:
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Case; Level 3 and Jeff Storey; Vail and Rob Katz; and C. K.
Hutchison Holdings and Li Ka-Shing are exemplary combinations
within our four portfolio mandates of uniquely advantaged
businesses stewarded by most exceptional corporate leaders.
Because great investments are rare, you must be extremely
disciplined and patient until you find one. When you do, you must
trust your qualitative assessments and your appraisal, move with
alacrity, commit a material percentage of your portfolios assets,
and be willing to look stupid in the short run.
Most managers arent willing to look foolish because of the career
risk. As the largest owners of the Longleaf Funds, we see our boss
and worst critic each morning in the mirror when we shave.
Equity investment success depends upon the price one pays for a
business future free cash flow generation. You need to be
approximately right on the latter, and parsimonious with regard to
the future.
Because we're concentrated, convicted, long term fundamental
investors focused on absolute returns, our portfolios will never
resemble an index, and our returns can vary materially from
market benchmarks. Right now, our Longleaf Partners Small Cap
Fund is leading the performance race in its universe, and many
believe Southeastern has magic ability in that arena. Yet, some
think we are ineffective in managing our large U.S., international
and global strategies. That is interesting, because the same team
that is being lauded for brilliantly executing its small cap is the
same one applying identical investment disciplines and decisionmaking in our other mandates.
We are highly confident our large U.S., international, and global
portfolios relative returns should look as stellar as small caps.
Headwinds - the soaring dollar, collapsing energy prices and the
resetting of goals from Macau - that have pressured our relative
returns in U.S. large cap, international and global will weaken or
reverse.
Most market participants almost always want to put their money in
what has most recently worked. In fact, a number of pre-submitted
questions for todays call asked us to open the Small Cap Fund.
We wont. Indexing, after a six year bull market, is working as
more dollars are forced into those securities that have gone up the
most. The last time we saw this much passive momentum chasing
was in the late 1990s. It ended very badly. In fact, its taken
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percent free cash flow yield has usually contrasted to rates at any
given time.
Lets now look at the other variables to move us from the simple
price to free cash flow multiple to total return expectations for us,
and for the broad market as defined by the S&P and the U.S.
Inverting these multiples to turn them into yields, we start the race
against the market with a 9 percent free cash flow yield, while the
market starts with less than a 5 percent free cash flow yield.
When you then try to determine the future organic growth rate of
these yields, theres another important point of distinction between
our investees and the broad markets. We have large weightings in
names like Level 3, FedEx, Exor, C&H, Adidas, and Philips,
which, for various reasons, are earning subpar margins, but are
raising them as we speak. So, by definition, those companies in
our portfolios will feature earnings rising faster than revenues, but
for the broader market, margins are at such high levels that we
think they can only decline. That would mean earnings growth
lower than revenue growth.
Our portfolios, therefore, have a 9 percent going in free cash flow
yield, positioned to grow much faster than Mr. Markets 5 percent
peaky free cash flow yield. Additionally, the reinvestment of that
free cash flow yield and other capital provides another advantage
for our portfolios versus the indices. Our companies are doing
very shrewd things overall with their capital allocation to boost the
future expected return even more. While many businesses in the
indices are primarily buying back their own stock at historically
high multiples or paying huge multiples for acquisitions. High
priced stock buy backs and high multiple acquisitions within the
indices should end up as low return choices. This is especially true
in the U.S. within the S&P 500.
The total expected cash return is mostly under the control of our
management teams and impacted most directly by the quality of
the businesses we own. Other factors which will impact eventual
total return will include the downside of any bad surprises at our
companies, the upside of closing the price to value gap and returns
on all other capital allocation activities beyond just the coupon of
the business.
So, to summarizefor Longleaf, we expect 9 percent from our
aggregate free cash flow coupon plus earnings growth greater than
organic revenue growth, plus high returns from capital allocation.
Price to value gaps closing should hopefully at least offset negative
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Staley Cates:
I will start, and then I will toss it over to Scott and Ken. We are
still seeing more opportunities non-U.S. versus the U.S., and
actually, to the question, we are at basically the maximum
allowable percentage in the Partners Fund of non-U.S. holdings,
and that limit is about 30 percent.
The Small Cap Fund, we have not quite the full, maximal,
allowable amount, but we have more non-U.S. exposure than
we've had at any time since the Asian crisis, actually.
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Lee Harper:
Staley Cates:
Sure. Taking this joyful topic last part first, the reasons for
underperformance in those two funds for the 5 and 10, we talked
about it in the last call, and we've hopefully articulated clearly in
the written communications as well, but basically, in the Partners
Fund, there are some external factors, there are some self-inflicted
mistakes, and theres some endpoint stuff.
The biggest endpoint points of interest, I guess, are this last year of
energy, which we've talked about quite a bit, and we'll talk about
more today, has seriously put the hurt on the one year number,
which is a poor way to finish the endpoint. And then, at the
beginning, we came out of the best relative time we've actually
ever had, from 00 to 03. Within that period, the biggest selfinflicted mistake would've been Dell, which was a large enough
weighting to really hurt us on the 5 year, and even hurt on the 10
year. We've also talked about why that kind of mistake is not
going to replicate.
And then, in the international fund, its been a bit of the same story
in that the one year number thats been such a tough final endpoint
has been a huge function of some of the Macau and China stuff
that Ken alluded to, which we are actually still very long term
optimistic about. And then on the self-inflicted part within that
range, HRT would've been the worst. Again, we've tried to talk at
length about why that is one of those mistakes that is not
replicated.
For the bigger picture of, is it harder for active managersits very
interesting to us that this is almost like a repeating cycle in that this
happens about every decade where you're in the late stages of a
bull market, so an active manager actually gets more careful, not
less, but some of the stuff going on thats crazy gets crazier and
then works, and wed point to the health care sector as Exhibit A of
that, which has also been one of the underperforming sectors of us
versus the market. That is all the more reason to not pursue that,
even though thats bringing in fresh money by the day.
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Another part of this whole active versus passive bubble is that this
stuff, of course, feeds on itself for a little while, as we were in one
of those years in 2014 where passive wins, and its low cost, and
Bogle wins and Vanguard wins and all the other headlines you see
as well as anecdotal and statistical flow evidencestrength begets
strength, and even more money comes into these funds, although,
for reasons we tried to lay out, that doesnt go on forever.
Another factor feeding that passive spiral is share repurchase
activity itself. Its not a small number that company flows into the
same S&P 500 names has looked a whole lot like mutual fund
investor flows into those names, and again, that can feed it short
term, but that does not win out in long term value.
Mason Hawkins:
Lee Harper:
All right. One of the things that Staley touched on was energy,
where we are with energy now.
What impact has the decline in energy prices had on our
companies and the portfolios? Whats the opportunity for them
going forward? How has the recent decline impacted how we
think about investing in commodity based businesses, and about
how much of the portfolio we're willing to have in those types of
businesses?
Ross, do you want to start on the
Ross Glotzbach:
Sure, I'll talk about some of the specific companies, and Staley can
talk about the portfolio parts.
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Commodity prices have come down versus this time last year. We
have to face that reality and consider that impact on our values, so
this has not been a positive for values, but I will say, this is largely
something thats outside of our companies control, and the things
where they do have control over, they are delivering very strongly.
We can talk about CONSOL, that is buying back shares, thats
doing two IPOs this year at solid values for some of their assets,
both highlighting and realizing value. We can talk about Murphy,
who sold their minority interest in their Malaysian assets at a very
good price, at a very good time, and now has a very good balance
sheet. We can talk about Chesapeake, who sold their assets in kind
of the Southern Marcellus and Utica play for a very good price to
Southwestern, and was almost half their market cap for 10 percent
of their production at the time they sold that, to get that company
in a better, financially flexible position.
So we didn't panic in the early part of this year when other
participants were panicking in the oil and gas markets. We
actually have added to some of our holdings, theres new ones in
the Small Cap Fund that have performed well so far. We've got
Holly, California Resources and two other smaller ones that all are,
again, going on offense based on what they can control and will
emerge from this downturn stronger than they entered into it.
Staley can talk about the portfolio stuff.
Staley Cates:
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than a flat out price increase, but its the same kind of beneficial
economics.
So these things are the quality that we usually demand, and at any
given time, the straight up commodity names are going to be a
small percentage of the portfolio, and then last thing on this, when
we do have those, we have to have such a low cost provider status
and such a physical advantage as we have at something like a
Chesapeake, and we have to have great people managing those, as
we have at all three of the names in the Partners Funds that we've
talked about, and some of the small cap ones to be named later.
Lee Harper:
Ken Siazon:
Okay. This is Ken, and I'll start and maybe hand it off to Manish if
he has something to add.
So, the investment thesis on Macau is really unchanged in that we
continue to believe that Macau will be the only place where
gambling is allowed in China, and as the economy grows, as more
infrastructure gets put into place, that enables more Chinese to visit
Macau, and the gaming business will continue to grow over the
long term. Hotels are at very high occupancy rates. The average
stay of an overnight guest is only two days, and shortage of rooms
will be alleviated by over 12,000 new hotel rooms to open in
Macau by 2018, which is going to increase room capacity by
almost 50 percent.
However, the impact of the anti-corruption campaign of the
Chinese government has been significant, and conspicuous
consumption, whether gaming or sales of luxury watches or
fashion items has been deeply affected in China. VIP as well as
premium mass gross gaming volumes in Macau have been
negatively affected, and industry gross gaming revenues are down
about 40 percent in April year to date this year versus last year.
With most of that decline coming from the VIP segment, this
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Yeah, not much. I guess just one quick thing is, we couldnt stress
enough the importance of new infrastructure thats going to come
through in the next few years. I mean, any way you look at the
Macau market, its highly underpenetrated. I mean, the mainland
visitation penetration rate of Macau is still less than 2 percent. So,
as the new hotel rooms come through, as the Hong Kong-ZhuhaiMacau Bridge comes through and the railway network and the
light rail and the ferry it will make it a lot more accessible for
mainland Chinese to visit Macau, and that should really drive the
mass market. Thats what we are betting on. VIP has been always
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And this is StaleyId wrap that up by echoing the very last thing
Manish just said, which is, of all the things you heard, if I could
leave you with one, it would be that emphasis on mass, the stuff
you read about Macau and all the most terrifying parts of bad
stories about Macau happens within VIP as opposed to mass. And,
as Ken mentioned, mass is 80 percent of profits at Melco. This is a
bet on the long term growth of mass rather than a bet that the
corruption crackdown either lessens or that the VIPs come back, or
that there is some healing on that side of it. We can justthats
what gives us the opportunity to buy the stock cheaply, but thats
not a bet we have to make, and so its all about the long term
growth of mass.
Lee Harper:
Mason Hawkins:
This is Mason
Its early investment days for Level 3. As many of you know, their
global network carries and protects critical data that enables
computing in the cloud, the Internet of Things (i.e., big data), more
streaming and the worldwide proliferation of mobile devices. The
companys costs are predominantly fixed, and their growing
revenues have high contribution margins. The operating profit
leverage is huge, and Level 3s free cash flow generation is
exploding.
Furthermore, on top of the value that we ascribe to the future free
cash flow production, the company has two most valuable nonearning assets: a significant excess inventory of dark fiber, and 10
unused underground fiber-optic conduits. These assets are unique
and becoming much more important as bandwidth capacity
shrinks. Our three to five year expectation for the stock at Level 3
is, I guess, best summarized as saying high,; and, we are very
thankful that we have this large weighting in our portfolios.
Lee Harper:
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I will start that, and anybody, especially Ken and Scott, that went
to jump in, please do.
So, for the first part of that, on FX rates, that is, as they change
daily, we do mark those real time. I mean, that is what it is. That
does not involve projecting them out, that is just redoing our
appraisals every time there is new information. That would
include how FX changes, which has obviously been volatile
recently.
On a longer term FX look, this really gets back to inflation
differentials, which you can see in short term interest rates and the
cost of hedging, and thats what really is instructive as we do our
discount rates in different geographies to try to incorporate an
inflation differential through a high discount rate, all of which is
kind of clued by FX expected differentials.
The strong dollarso, the part of the question about the strong
dollar, we've listed that in some of our MD&A, but that has been a
huge headwind for us, both in calendar 2014 and year to date 15,
especially in the International and Global Funds, but even in the
Partners Fund.
The last part of the question, though, that is then begged by the
damage thats been done by the strong dollar is, does that make us
re-evaluate the hedging or look at that differently. We do try to
look at everything with a fresh piece of paper all the time, but
where we continue to come out on this is that we dont bring value
to the currency equation. I mean, we can all look at purchasing
power, and we would all have our hunches, but not enough to act
on them.
And whats especially different now than when we started the
International Fund with hedging is that it is so easy for our
shareholders to hedge on their own, and that was really not the
case when we started this fund. We're also a concentrated manager
with low turnover, so our shareholders usually have a pretty good
idea on what those currency exposures are, and since everybody in
our shareholder base can feel pretty differently about this topic, we
think its another reason not to hedge, that shareholders can do it
themselves to the extent that theyd like.
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Okay.
Mason Hawkins:
I might also add that the cost to hedge is a very big consideration
over the long term.
Lee Harper:
Josh Shores:
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venture with Sapa, called Sapa with Norsk Hydro, and they still
have some real estate and some various other non-core assets that
we trust they'll sell in a disciplined fashion at the right time. And
the key here is, you've got the right partners allocating capital, and
guys that we know have an excellent track record and a strong
vested interest in going and getting and realizing that value.
So, from todays level, if you strip out that non-core stuff, you're
still seeing core BCG, strong local brands trading at about 13 times
free cash flow, 13 times net incomebasically, the same there
and eventually you're going to get there, because you're partnering
with the right guys. And, under certain strategic scenarios, that 13
times while, on an organic basis, is worth high teens could be
worth substantially more than that.
So, we like that one, and we like the guys that we're partnered
with. Most importantly, back to Masons original comments on
what makes a good investment, we see permanent capital loss is
difficult with these kinds of brands. We still see good upsides
when we really like who we're partnered with there. So we're very
appreciative of what Mr. Hagen and his team have done,
particularly over the last 12 months, but also before that, seem to
think that theres more room for them to go, and we look forward
to seeing that happen. Scott?
Scott Cobb:
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Ken Siazon:
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There are some companies in the Hong Kong property space who
are taking advantage of this arbitrage between high physical
property prices and low prices in capital markets, but basically
selling land bank at 3 to 4 percent cap rates and reinvesting the
proceeds in high cap rate property stocks. If you follow this
industry, you'll notice that insider buying has also remained pretty
elevated in the Hong Kong real estate industry even today.
With regards to C. K. Hutchison, which is one of our largest
positions in both the International Fund as well as the U.S.
domestic fund, we think the property business accounts for roughly
a third of the value of C. K. Hutchison. So, even though they are
the single largest component of the Hang Seng Property Index at
24 to 25 percent, actually only a third of the value is actually
coming out of the property business. We think that the shares are
worth north of 200, and the property business will be spun off on
June 3rd.
So, there was an independent appraiser recently as part of this
restructuring exercise who recently valued C. K. Hutchison at 241
a share, of which the property value was around 98 a share. We
think C. K. Hutchison will continue to spin off and IPO divisions
at the right time. I think their retail arm, Watsons, is a good
candidate for an IPO in the next few years, and at some point, it
will also make sense for them to monetize their European mobile
telecom business in the next few years.
Lee Harper:
Okay.
Staley Cates:
This is Staley. I would just add that, as Ken talked about on those
numbers, Cheung Kong falls in the category of perceived as the
property developer in Hong Kong and China, but their true
economic value is so much bigger than that. This is, to us, a
Berkshire Hathaway looking thing. This is an incredible CEO,
incredible family ownership, amazing capital allocation and yet
they're some of the best sellers of assets that we've ever seen.
But the most encouraging thing about this restructuring is, we
would've thought that a great way to unlock value would've been
for them to just spin off or not continue to control publicly traded
Hutch, and they did one better than that by first taking in all of
Hutch and then taking the property that was in both of those
entities, and spinning that into the standalone property company
that Ken was talking about, they really isolated the whole level of
cheapness. I mean, its a fantastic thing, the stock price has
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Mason Hawkins:
Staley Cates:
Lee Harper:
One other thing you referenced in your comments, too, was that
part of our insulation, at least on our appraisals is that we have,
we're using such higher discount rates than the current rates would
warrant.
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Staley Cates:
Right.
Mason Hawkins:
One of our questions that we've received recently, and more than
once, was, were we worried about regulations as it relates to health
care and utilities? And our response was, we were worried about
valuations, not regulations. And the valuation concerns are, that
free money and zero interest rates in many cases are driving some
of that speculative fervor and pushing prices to levels that we think
offer very low return and risk adjusted rates.
So anyway, again, we're reminded that you're not forced to do
anything in this world unless it makes sense and it falls within your
circle of abilities, and within the disciplines that you think are
important.
Lee Harper:
Ross Glotzbach:
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So, its undervalued, its a good business, and they're good people.
Lee Harper:
Mason Hawkins:
Yeah, wed like to close with the following. We believe that you
wont find a more committed, more engaged, and more equitably
aligned manager with more capital invested alongside our partners
than at any point in our history because we believe we'll produce
good returns with minimal risk, and that our disciplines and 40
years of applying them give us a substantial edge against our peers.
We thank you for your co-investment.
LLP000309
11/30/15
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