Longleaf's 2025 Moves: Skin in the Game or Just Noise?

The numbers tell a clear story. The Longleaf Partners Fund returned -0.33% in the third quarter and -1.18% in December. Year-to-date, it trails the broader market badly, lagging the S&P 500's 17.88% gain. For a fund built on a philosophy of buying at a deep discount, that flat performance has been a source of frustration. The manager's own letter last quarter expressed unhappiness, highlighting the fund's focus on investments in real assets and brands that generate growing free cash flow.

That focus is the core of the stated investment discipline. The manager's philosophy is one of strict value: buying at 60% or less of our appraisal of intrinsic worth. The goal is to own high-quality businesses with durable competitive advantages and, crucially, growing free cash flow. The fund's approach is concentrated and patient, with a three-to-five-year investment horizon and a willingness to hold cash if no compelling bargains appear. This isn't a trading strategy; it's a bet on the market eventually recognizing the true economic value of these companies.

The tension here is between the stated philosophy and the recent results. The fund's model is built for volatility, aiming to buy when others are fearful. Yet in a year where the S&P 500 rallied strongly, the fund's deep-value, high-quality approach has been left behind. The manager's unhappiness is a signal that the "smart money" within the firm sees a gap between its disciplined buying and the market's current trajectory. It's a classic setup where the skin in the game-Southeastern employees and trustees as the largest shareholder group-means the managers themselves are bearing the brunt of this lag. The question for investors is whether this is just temporary noise or a sign that the fund's value framework is struggling to find its footing in today's market.

The Smart Money's Trades: What's Actually Happening

The fund's actions in the third quarter provide a clearer signal than its quarterly letter. It made three new purchases, including a leading building materials manufacturer. That move aligns with the stated philosophy of buying high-quality businesses at a discount. The fund's own rules are explicit: a company's market price must be 60% or less of our appraisal to qualify. Buying a well-known industrial firm fits that disciplined, value-focused playbook.

The Small-Cap Fund's recent highlight of White Mountains Insurance Group (WTM) offers another data point. The fund noted the stock's 5.43% one-month return in its letter. While the fund itself didn't hold WTM, its mention of the stock's performance suggests it's watching the market's recognition of value in financial services. The fact that hedge funds increased their holdings of WTM by 30% in that quarter shows the broader smart money is also rotating into undervalued financials. This is the kind of market behavior the Longleaf model aims to exploit.

Crucially, the fund's strategy of selling when stocks approach their appraisal value is the flip side of its buying rule. It's a disciplined exit plan that ensures capital is redeployed into new bargains. The fund's three-to-five-year investment horizon and low turnover rate are designed to avoid the noise of short-term trading. This isn't a momentum play; it's a patient hunt for mispriced assets. The recent purchases and the focus on WTM's rebound are both examples of this process in action.

The bottom line is that the fund's trades match its stated skin-in-the-game philosophy. It's buying at a discount, watching for recognition, and holding for the long term. The lagging performance is a result of the market's current trajectory, not a deviation from the model. The smart money within the firm is sticking to its guns, waiting for the market to eventually pay attention.

Catalysts, Risks, and What to Watch

The setup for Longleaf is now clear. The fund's value approach is working as designed, but it's being tested by a market that has moved on. The catalysts for a turnaround are external-market recognition of the fund's holdings. The risks are internal, stemming from the very discipline that defines it. Here's what to watch.

First, the next 13F filing is the most immediate signal. It will show whether the fund is deploying cash into new value traps as the rally continues, or if it's simply holding dry powder, waiting for a deeper dip. The fund's philosophy is to hold cash if no compelling bargains appear. In a market that has rallied strongly, that patience can look like inaction. The next filing will reveal if the manager's skin in the game means they are still hunting for that 60% discount, or if they are letting the cash sit while the market marches higher.

The key risk is that the manager's own 60% discount thesis is too conservative. This is the core tension. The fund's model is built for volatility and deep value, but the market has been in a sustained momentum phase. If the fund's hurdle is too high, it risks missing out on a broader rally that may not be driven by deep value but by growth and speculation. The risk isn't a loss of capital, but a continued lag in performance as the market's focus shifts away from the traditional value playbook.

The ultimate test, however, is the fund's own internal math. Management plans to improve margins and increase share repurchases to boost the ~10x free cash flow multiple to the mid-teens. This is the payoff for the patient investor. The fund's strategy of buying at a discount and then holding for the long term only works if the underlying businesses can execute on operational improvements. The upcoming earnings reports from its holdings will be the first real-world test of that margin expansion and buyback plan. If those results materialize, the fund's multiple could compress upward, validating the long-term thesis. If they don't, the fund's lagging performance may persist, and the market's momentum could leave it further behind. The smart money is waiting to see which path the businesses take.