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It's not easy to trash a mutual fund with an outstanding long-term record like

(LLPFX) - Get Longleaf Partners Fund Report

Longleaf Partners.


Waste Management


, the nation's largest garbage collection and disposal company, has been doing just that.

At the end of December, Longleaf Partners, a mid-cap value fund, had 16.4% of its assets in Waste Management, a stock that has lost more than two-thirds of its value since accounting and management problems surfaced last July.

Waste Management's problems have become, in large part, Longleaf Partners' problems. In the third quarter of 1999 the fund lost 15.3% of its value, and half that decline was attributable to Waste Management.

For the full year, Longleaf Partners gained a paltry 2.2% while the

S&P MidCap 400

index rose 13.3%. This year, the fund is off 11%.

Though Longleaf Partners' 16.3% annual return over the last 10 years ranks it above 92% of its peers, the fund's Waste Management stake and its resulting downturn should be a vivid reminder that even the best funds can take big hits for misguided picks.

The hit was especially painful for Longleaf Partners because it has a very concentrated portfolio -- at the end of 1999, it owned only 24 stocks, and its top five holdings commanded 46.9% of its assets.

Longleaf's No. 1 holding Waste Management was plagued by problems in the second half of 1999. In early July, the company announced its second-quarter earnings would fail to meet expectations. Later that month, the company again lowered forecasts, retracting the earlier announcement and dismissing its chief financial officer and general counsel. That disappointment broadened into an accounting scandal and resulted in a hefty charge. New management was installed in November, but the stock has yet to begin a comeback.

Longleaf's managers, Mason Hawkins, Staley Cates and John Buford, aren't the only ones mired in Waste Management's sludge.

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Legg Mason Value Trust's Bill Miller, the best fund manager of the past decade, had 2.6% of his fund's assets in Waste Management at the end of January, and that stake is partly responsible for the fund's -9% performance so far this year.

What is it about Waste Management that looked so attractive to these sharp stock-pickers?

A spokeswoman for Longleaf Partners pointed to shareholder reports (available on the fund's

Web site) for the managers' thoughts on the stock.

"No matter what the stock price does short-term, if the company's value rises, we will be successful over time," wrote Hawkins and Cates in a Dec. 1 report to shareholders. "That is why, after only six months since the price declined, we are not ready to throw in the towel on Waste Management."

Legg Mason's Miller apparently agrees. In a Feb. 20

New York Times

article, Miller named Waste Management as a stock for the next 10 years.

"You want a business that is relatively insulated from competition, where the barriers to success are high," Miller is quoted as saying. "It is very difficult to build a dominant waste management company."

In Longleaf Partner's third-quarter report, that fund's managers express similar sentiments.

"The company has the best landfill and collection assets in the industry. (And) its assets are impossible to duplicate in today's environmentally conscious society," the managers write. "The industry has become an oligopoly with most markets having only one primary competitor creating an environment for firm pricing."

The fund, which had closed to new investors last June, just before Waste Management's problems surfaced, lost $483 million in assets in the second half of 1999. It reopened to new investors Feb. 1.

Any decision to invest in the fund now would be a bet that Waste Management, under the leadership of Maury Myers, who became chief executive in November, is a turnaround story.

If Miller, Hawkins and company are right, the market eventually will get over Waste Management's management problems and focus on its dominant position in its business.

If so, the trash talking about Longleaf Partners will end.

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Dear Dagen aims to provide general fund information. Under no circumstances does the information in this column represent a recommendation to buy or sell funds or other securities.