11/16/98 GOOD THINGS HAPPEN TO THOSE WHO WAIT

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GOOD THINGS HAPPEN TO THOSE WHO WAIT

Anyone looking for encouragement to wade back into the stock market got some recently when Southeastern Asset Management reopened Longleaf Partners Fund. One of the premier vehicles for patient, value-oriented investors, the $3 billion fund closed its doors to newcomers way back in September, 1995, when Memphis-based managers O. Mason Hawkins and G. Staley Cates couldn't find enough inexpensive stocks to buy.
That frustrating situation dragged on, even into last June, when as much as 15% of the fund sat idling in cash. Now, with the broad stock market still off sharply from its July peak, it's a new world for these investment cheapskates. Hawkins and Cates, two of the most publicity-shy money managers around, aren't talking. But Southeastern Executive Vice-President Lee Harper reports that by the end of October, Longleaf had just 1.5% of its assets in cash, ''and that's spoken for. It's just sitting on the trading desk waiting to get invested.''
Longleaf is not climbing out on this limb alone: Third Avenue Value Fund, run by dean of value investors Martin Whitman, reopened on Oct. 15 as it, too, is finding fresh investment opportunities. But through October, the fund is down 4.1% for the year.
With a total of $10 billion under management, Southeastern is extending its bets with a new foreign-stock fund, Longleaf Partners International, which opened on Oct. 26. Its manager, J.P. Morgan veteran Andrew McDermott, is based in Tokyo and has invested all but 5% of the fund's initial $25 million. He has 34% in Canada and 27% in Japan, with the balance scattered around the globe. Unlike many international-stock funds, Longleaf intends to hedge the fund's foreign-currency risk.
Back in Memphis at the flagship fund, Longleaf was up 4.7% through Oct. 31, vs. a 1.1% gain for its mid-cap stock benchmark, the Standard & Poor's MidCap 400 Index. The fund typically holds big positions for four or five years in just 20 to 30 stocks. The strategy, says Harper, ''is to buy good businesses run by good people at significantly discounted prices.'' Hawkins and Cates find those stocks first by figuring what the company underlying a stock is worth to a private buyer based on its cash flow and liquidation value. Then they check how the stockmarket is valuing the business.
LONELY CHOICES. If the markEt values the business at 60% or so less than what their pencil work tells them it's worth, they get interested. And, of course, the cheaper the better, a preference that led them into such lonely spots as Japanese financial stocks and News Corp. (NWS), Rupert Murdoch's global media company, when few saw its potential.
Since midsummer, Hawkins and Cates have been adding to stakes in some earlier acquisitions, such as package shipper FDX (FDX), which now makes up nearly 10% of the fund. Longleaf in the last quarter has also added a handful of names (table). Among them: United HealthCare (UNH), Hilton Hotels (HLT), and Canadian Pacific (CP), each among the fund's top 10 positions.
Longleaf is also searching among ''the industries that have been the most beat up--oil and gas stocks, financials, and the lodging area,'' says Harper. ''We haven't seen an environment like this since 1990,'' when the U.S. last slipped into recession. Today, Longleaf's price-to-value ratio--the amount of money the fund has paid for its stocks divided by Hawkins' and Cates's estimate of the stocks' total intrinsic value--is at 50%. That's as low as it has ever been, Harper says.
But when will that intrinsic value be realized? Southeastern cautions prospective investors they should expect to wait at least five years. One other warning: Since Longleaf plans to make a higher-than-usual capital gains distribution on Nov. 17, new investors should wait to buy shares for taxable accounts until after that date.
Since Longleaf Partners' inception in 1987, the fund has boasted an enviable record. A $10,000 initial investment in Longleaf was worth $59,419 at the end of September, compared with $55,684 for $10,000 in the Standard & Poor's 500-stock index and $41,776 for the average midcap fund that invests in growth and value stocks, according to Morningstar. Moreover, the outperformance came with 17% less-than-average risk. Will Longleaf Partners be able to maintain that happy balance? Says Morningstar analyst Bill Rocco: ''If my mom called today and said, 'Great-Aunt Gerda died, and I've got a lot of extra money,' I'd point her in this direction.''
Robert Barker

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TABLE: Inside Longleaf Partners Fund

PHOTO: Staley Cates

PHOTO: O. Mason Hawkins