The Partners Value Fund’s Institutional Class returned -8.68% for the first quarter compared to -4.60% for the S&P 500 and -5.28% for the Russell 3000. For the fiscal year ended March 31, 2022, the Fund’s Institutional Class returned +4.35% compared to +15.65% for the S&P 500 and +11.92% for the Russell 3000.

It was a challenging and disappointing start to the year for the Fund. The crosswinds we discussed in recent quarters gathered intensity, to put it mildly. Investors are facing a ground war in Europe, broad-based and persistent inflation, a prominent shift in domestic monetary policy from easing to tightening, continued dysfunctional fiscal policy debates in Washington, and so on. Uncertainty is high. Given this set of conditions, the stock market has been reasonably resilient.

Businesses are generally reporting solid financial results, at least so far, and they are adapting fluidly to rapidly evolving conditions. Our company value estimates are mostly steady or increasing, with a few notable exceptions. Their stock prices are another story. Seventeen of the Fund’s positions endured double-digit price declines in the quarter. While Meta Platforms (FB) – formerly Facebook – was the highest-profile detractor, most of the markdowns were concentrated in our mid-cap holdings.

When we combine lower stock prices with stable-to-higher business values, the outlook for future returns brightens. Of course, we need to be right about our value estimates, and macro risks to earnings are elevated, to be sure. Still, our team estimates that the portfolio trades at a price-to-value in the low 80s, which provides a healthy cushion against near-term forecasting errors. As valuation-sensitive investors, we like our hand.

Berkshire Hathaway (BRK.A, BRK.B), Markel (MKL), Aon plc (AON), Charles Schwab (SCHW), and Visa (V) were the Fund’s largest quarterly contributors. These financial stocks served as life rafts in otherwise choppy market waters.

Meta Platforms, CarMax (KMX), Liberty Broadband (LBRDA), Axalta Coating Systems (AXTA), and LKQ (LKQ) were the Fund’s largest quarterly detractors. But the bigger story is the long tail of detractors that further impacted quarterly results.

In insurance parlance, frequency was as relevant as severity. The silver lining is that we think these declines will prove to be temporary rather than permanent.

The Fund’s financial stocks delivered exceptional fiscal year gains. Berkshire Hathaway, Aon plc, Charles Schwab, and Markel joined familiar face Alphabet (GOOGL, GOOG) as top contributors. Each posted robust returns on hefty position sizes, driving strong “slugging percentages” for the portfolio. We trimmed our Schwab and Aon holdings as their stocks traded near our value estimates. This activity reflected our valuation discipline, which is to, as the old saying goes, methodically “sell the dear and buy the cheap” to improve the Fund’s return potential.

CarMax, Meta Platforms, Liberty Latin America (LILA), CoStar Group (CSGP), and MarketAxess Holdings (MKTX) were the Fund’s largest fiscal-year detractors. CarMax, Meta, and CoStar are among our highest conviction positions, and we added to each during the quarter at attractive prices. Liberty Latin America has a “whippy” (frequently changing direction) stock that is often more volatile than the revenues and margins of the underlying business. And while our value estimate for MarketAxess declined considerably, our thesis and the company’s critical role in electronic bond trading for the next decade remain intact.

We added a new position in Gartner (IT) as tech-adjacent stocks continued their fall from grace during the quarter. Gartner is the leading provider of subscription-based research services to IT and business professionals (think C-suite executives, among others). The company has an attractive “create once, sell many times” business model that should sound familiar to long-time Fund investors. While Gartner does not scream “cheap” on current earnings, we are drawn to the company’s durability, business momentum, and extended glide path of capital-light, double-digit revenue, and cash flow growth potential.

We believe that investing in businesses of all sizes, using our Quality at a Discount framework, is an enduring advantage of a multi-cap strategy. Recent mid-cap additions such as Gartner, AutoZone (AZO), Dun & Bradstreet (DNB), First Republic Bank (FRC), HEICO (HEI), IDEX (IDEX), and MarketAxess align with our collective vision for a successful “go anywhere” equity portfolio. If 2022’s early volatility continues, we think active managers with a broad mandate will have even more opportunities to add value and earn their keep.

Valuation remains our North Star, and we think our stocks are reasonably priced. Business value growth has been solid and generally encouraging. As mentioned, our current estimate is that the portfolio trades at a price-to-value in the mid-80s – a level that suggests ample long- term return potential from both our mid- and large-cap holdings.

Top Relative Contributors and Detractors

For the QUARTER ending 03/31/2022

Holdings are subject to change and may not be representative of the Fund’s current or future investments. Contributions to performance are based on actual daily holdings. Returns shown are the actual returns for the specified period of the security. Additional securities referenced herein as a percent of the Fund’s net assets as of 03/31/2022: Alphabet Inc. – Class C (GOOG) 8.2%, AutoZone, Inc. (AZO) 2.2%, CoStar Group, Inc. (CSGP) 4.4%, Dun & Bradstreet Holdings, Inc. (DNB) 1.8%, First Republic Bank (FRC) 2.1%, Gartner, Inc. (IT) 1.6%, HEICO Corp. – Class A (HEI) 3.1%, IDEX Corp. (IEX) 1.5%, Liberty Latin America Ltd. – Class C (LILAK) 2.4%, MarketAxess Holdings, Inc. (MKTX) 1.7%.

Average Annual Total Returns (%)

*Denotes the Funds inception date and the date from which Since Inception Performance is calculated.

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.