Southeastern: The Exceptional Opportunity in Small-Cap Value

On April 9, 2020, Memphis-based Southeastern Asset Management announced that it was re-opening its Longleaf Partners Small-Cap Fund (LLSCX). It closed the fund to new investors in August 1997 to manage its size against any potential liquidity constraints that would limit the opportunity set and to avoid diluting its shareholders, given rising cash at that time. The fund remained closed to new investors for more than two decades over the course of various market conditions.

I interviewed two of the fund’s managers, Staley Cates and Ross Glotzbach, on May 18. I previously interviewed Staley in 2015, when we discussed Southeastern’s methodology and approach to value investing. Please reference that interview for information on those topics.

Why did you reopen the fund after 23 years?

Ross Glotzbach: First and foremost, it was the right thing for existing clients. It will lead to a better portfolio, both quantitatively and qualitatively. There are new stocks we want to buy. There are existing investments we want to add to. Historically, when the price-to-value ratio in our fund has been below 60%, it's been a great time to add. It's been below 50% at times over the last two months. We have a low price-to-free-cash-flow ratio, in the single digits, as well.

Another key thing about making this decision now is that not only is it good for existing clients, of which we are a very large one ourselves, it's when you get the best new clients. Small-cap value has not been a hot place to be in recent years. For people who join us now, we will be setting things up for a great long-term relationship, instead of having performance chasers come in at the top.

We designed this reopening in a thoughtful way. We are only targeting $2.5 billion of AUM. If we get there quicker with a performance bounce-back, that's great. We'll close again. We've shown over the years that we focus on doing the right thing for those clients who are already with us.