A Weitz Fund to Win in Downturns

NEW YORK ( TheStreet) -- Weitz Funds can boast about some strong long-term track records. During the past 15 years, Weitz Partners Value ( WPVLX) returned 9.7% annually, outdoing the S&P 500 by 3.6 percentage points and topping 97% of large blend funds, according to Morningstar. Weitz Value ( WVALX) also produced stellar results, returning 8.8% and surpassing 98% of peers in the large value category.

But the Weitz funds are only for patient shareholders. Diehard value investors, the Weitz managers take stocks that have delivered disappointing earnings or fallen out of favor. As a result, the funds sometimes trail the markets for long periods. In 2008, both Weitz funds lagged most of their peers.

For many investors, the best choice may be one of the company's younger funds, Weitz Partners III Opportunity (WPOIX). Partners III outdid most peers in 2008. During the past five years, the fund topped Weitz Partners Value and Weitz Value by 3 percentage points annually.

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Partners III has gained an edge by sometimes selling short, a strategy that the other Weitz funds don't use. When markets look rich, the fund shorts ETFs. During the turmoil of the fourth quarter of 2008, the fund had 23% of assets in short positions, including ETFs that track real estate and small-cap stocks. Short holdings can record gains when markets fall, and the shorts helped Partners III outdo Weitz Value by 3 percentage points for the quarter.

The short positions don't always pay off. In the fourth quarter of 2011, the fund shorted SPDR S&P 500 ( SPY), a move that hurt returns in a period of rising markets. But most often the short positions have hit the mark, helping to reduce volatility and limit losses in downturns.

Like the other Weitz funds, Partners III looks for growing businesses that are selling for big discounts to their fair values. The portfolio managers maintain tight discipline. They often track a high-quality company for years, waiting for an earnings miss or other problems that will cause the shares to dip and present a buying opportunity.

An unloved holding is Grand Canyon Education ( LOPE), a for-profit university. In recent years, many for-profit stocks have struggled after Congress imposed tighter standards for student loans. The new rules were introduced because of complaints that the institutions recruited unqualified students who were dropping out and defaulting on government loans.

Although its stock may have suffered along with competitors, Grand Canyon has avoided many of the problems that plague the industry, says Weitz portfolio manager Dave Perkins. The company focuses on providing degrees to qualified adults in such fields as nursing, where there is a demand for employees.

As a result, Grand Canyon has a solid record for placing students in jobs. Enrollment is increasing partly because the school has relatively low tuition. "Grand Canyon is cheaper than comparable state schools," says Perkins.

The Weitz managers like to buy companies that dominate niches. The aim is to find businesses that can grow steadily for years without facing much competition. Holdings include Laboratory Corporation of America ( LH), a leading provider of medical tests, and Google ( GOOG), which maintains its tight grip on the search business.

A holding that dominates a small niche is National CineMedia ( NCMI). The company provides advertising programs that are shown on 17,000 movie screens before feature films start. National CineMedia is likely to maintain its exclusive position because most of its shares are owned by theater chains. Weitz portfolio manager Andrew Weitz says that 650 million customers a year see the programs and viewers pay close attention to the ads. "When you are in a theater, there is no fast-forward button, and you cannot TiVo an ad away," he says.

Weitz rarely takes pharmaceutical stocks because they typically come with too much risk. To be successful, drug developers must spend heavily on research that may never produce profits. The Weitz managers recently bought a drug maker that does little R&D, Valeant Pharmaceuticals ( VRX). Instead of trying to discover new cures, Valeant buys companies with existing products that have been mismanaged. The company specializes in low-priced generics and over-the-counter drugs that have come off patent.

"They have done a great job of breathing new life into old products," says Perkins.
Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.