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Most people take credit for winning. Wally Weitz takes credit for losing.
"Over the years, our investors have gotten used to seeing our funds zig while the market zagged," the manager of Weitz Value Fund (WVALX) wrote to his shareholders at the end of September, when the fund was down 4% for the year, 9 percentage points worse than the market. "In the third quarter of calendar 2007, we outdid ourselves."
They surely did, tumbling 7.7% in those three months, in large measure because Countrywide Financial (CFC, news, msgs), ground zero of the subprime meltdown, is their third-largest holding. Redwood Trust (RWT, news, msgs), another mortgage company, is also a big holding, and here's how Weitz described it to his shareholders:
"The vast majority of our stocks fit the 'good, but early' category. For example, Redwood Trust's business performed as we had hoped and expected, yet its stock was down 39%. Having built liquidity for two years in anticipation of the very mortgage chaos that is unfolding this year, they are very well positioned for the future, and we consider it one of the cheapest stocks we own."
And by the same token, Weitz Value is one of the cheapest great mutual funds you could buy. And it's not the only one. Dodge & Cox Stock (DODGX), another legendary value fund, soared an average of more than 15% in each of the last five years but this year was ahead only 0.6% as of Nov. 14.
Yacktman Fund (YACKX), the No. 1 fund of 2002, when it beat the market by 33 percentage points, is up just 2.7% this year. Packed amid the cheap growth stocks it bought, like Coca-Cola (KO, news, msgs) and Pfizer (PFE, news, msgs), are AmeriCredit (ACF, news, msgs), an auto lender down 50% this year, and home lender Freddie Mac (FRE, news, msgs), down 33%.
The value style of investing, practiced with great skill by these outstanding mutual funds, outperforms the rival growth style over long periods because the market is ruled by emotion and is too quick to discard quality companies when it tries to root out junk. Managers like Weitz, Yacktman and the Dodge & Cox team have cooler heads -- and don't mistake the one for the other.
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Right now, however, growth is in the driver's seat, and the whole value category is in the bargain basement. This doesn't happen often: Going back to 1929, value stocks always outperform growth except when, as now, a slowing economy temporarily drives up the market price for growth's consistent, recession-resistant earnings.
As soon as next year, and almost certainly for at least three of the next five years, these great value funds will resume delivering above-market, double-digit returns. I can be so sure because they always have under their current managers, who in every instance have remained true to their style whether the market rewarded them or not.
Nearly every investor claims to be a contrarian. These folks really are.
Against the wind
Morningstar sums up Wally Weitz like this: "Weitz owns Wallace Weitz & Co. and is a major shareholder in the firm's funds. We believe he is one of the best fund managers in the business."Weitz has been at the helm of this fund since 1986. His first fund, launched in 1983, Weitz Value Partners (WPVLX), is similar to this one but managed with greater attention to tax efficiency. Since most mutual-fund investors enter via retirement plans like 401(k)s, this isn't a top priority for them, and the newer fund is also larger. Together they have assets of $4.35 billion.
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Weitz runs a concentrated portfolio of about 40 names. Since he eschews the most popular, and therefore expensive, stocks he is without energy names and slight on industrial materials. Instead he is very heavy on financials -- with 37% of assets, nearly twice the market weight -- and media companies such as Liberty Media (LCAPA, news, msgs) and The Washington Post (WPO, news, msgs).
Weitz Value tends to be out of sync with the market much of the time. Returns were negative in 2002, which was true of most funds, and in 2005, when it wasn't. It beat the market by 29 percentage points in 2000 and 12 in 2001.
Continued: The good years outweigh the bad
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