40-24B2 1 g25335e40v24b2.htm 40-24B2 e40v24b2

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

40-24B-2

SALES LITERATURE OF REGISTERED
MANAGEMENT INVESTMENT COMPANY

Investment Company Act file number 811-4923

LONGLEAF PARTNERS FUNDS TRUST
(Exact name of registrant as specified in charter)

c/o Southeastern Asset Management, Inc.
6410 Poplar Avenue; Suite 900
Memphis, TN 38119
(Address of principal executive offices) (Zip code)

Registrant’s Telephone Number, Including Area Code - (901) 761-2474

 


 

(LONGLEAF LOGO)
 
LONGLEAF PARTNERS FUNDS ®
 
QUARTERLY REPORT
at September 30, 2010
 
PARTNERS FUND
SMALL-CAP FUND
INTERNATIONAL FUND
 
MANAGED BY:
SOUTHEASTERN ASSET MANAGEMENT, INC.®
Memphis, TN


 

 
Cautionary Statement
 
One of Longleaf’s “Governing Principles” is that “we will communicate with our investment partners as candidly as possible,” because we believe our shareholders benefit from understanding our investment philosophy and approach. Our views and opinions regarding the investment prospects of our portfolio holdings and Funds are “forward looking statements” which may or may not be accurate over the long term. While we believe we have a reasonable basis for our appraisals and we have confidence in our opinions, actual results may differ materially from those we anticipate. Information provided in this report should not be considered a recommendation to purchase or sell any particular security.
 
You can identify forward looking statements by words like “believe,” “expect,” “anticipate,” or similar expressions when discussing prospects for particular portfolio holdings and/or one of the Funds. We cannot assure future results and achievements. You should not place undue reliance on forward looking statements, which speak only as of the date of this report. We disclaim any obligation to update or alter any forward looking statements, whether as a result of new information, future events, or otherwise. Current performance may be lower or higher than the performance quoted herein. Past performance does not guarantee future results, fund prices fluctuate, and the value of an investment may be worth more or less than the purchase price. Call (800) 445-9469 or go to www.longleafpartners.com for current performance information and www.longleafpartners.com/misc/prospectus.cfm for the Prospectus and Summary Prospectus, both of which should be read carefully before investing to learn about fund investment objectives, risks and expenses.
 
The price-to-value ratio (“P/V”) is a calculation that compares the prices of the stocks in a portfolio to Southeastern’s appraisal of their intrinsic values. P/V represents a single data point about a Fund, and should not be construed as something more. We caution our shareholders not to give this calculation undue weight. P/V alone tells nothing about:
 
  The quality of the businesses we own or the managements that run them;
  The cash held in the portfolio and when that cash will be invested;
  The range or distribution of individual P/V’s that comprise the average; and
  The sources of and changes in the P/V.
 
When all of the above information is considered, the P/V is a useful tool to gauge the attractiveness of a Fund’s potential opportunity. It does not, however, tell when that opportunity will be realized, nor does it guarantee that any particular company’s price will ever reach its value. We remind our shareholders who want to find a single silver bullet of information that investments are rarely that simple. To the extent an investor considers P/V in assessing a Fund’s return opportunity, the limits of this tool should be considered along with other factors relevant to each investor.
 
© 2010 Longleaf Partners Funds Trust. All Rights Reserved.
LONGLEAF, LONGLEAF PARTNERS FUNDS and the pine cone logo are registered trademarks of Longleaf Partners Funds Trust. SOUTHEASTERN ASSET MANAGEMENT, INC. is a registered trademark.


 

 
CONTENTS
 
     
  1
     
Longleaf Partners Fund (Partners Fund)
   
  6
  8
  9
  10
     
Longleaf Partners Small-Cap Fund (Small-Cap Fund)
   
  12
  14
  15
  16
     
Longleaf Partners International Fund (International Fund)
   
  19
  22
  23
  24
     
  27
     
  Back Cover


 

 
 
Longleaf Partners Funds
 
TO OUR SHAREHOLDERS:
 
All three Longleaf Funds made substantial gains in the quarter. Results far exceeded inflation plus 10% over the last three months but were less than the relevant indices. Thus far in 2010 both the Partners Fund and International Fund remain well ahead of their benchmarks, and each Fund has exceeded its benchmark over the last twelve months. The Funds have delivered superior long-term returns. Market volatility continued with September accounting for much of the quarter’s gain. We are continuing to find compelling opportunities for the three Funds.
 
                                                         
    Cumulative Returns through September 30, 2010  
    Since IPO(1)     20 Year     10 Year     5 Year     1 Year     YTD     Q3  
 
Partners Fund (4-8-87 IPO)
    1019.6 %     874.9 %     66.3 %     (1.2 )%     11.8 %     6.6 %     8.4 %
S&P 500 Index
    570.1       465.8       (4.2 )     3.2       10.2       3.9       11.3  
                                                         
Small-Cap Fund (2-21-89 IPO)
    700.8       778.6       125.1       19.5       16.7       8.7       9.6  
Russell 2000 Index
    491.1       607.2       48.0       8.3       13.4       9.1       11.3  
                                                         
International Fund (10-26-98 IPO)
    194.7       NA       76.4       9.5       7.4       5.9       16.4  
EAFE Index
    57.6       NA       28.8       10.2       3.3       1.1       16.5  
                                                         
Inflation plus 10%
    (2 )      958.1       219.4       75.4       11.1       8.0       3.2  
 
(1) During the inception year, the S&P 500 Index and the EAFE Index were available at month-end only. The S&P 500 Index value at 3-31-87 and the EAFE Index value at 10-31-98 were used to calculate performance since inception.
 
(2) Inflation plus 10% since inception for the Partners, Small-Cap and International Funds was 1622.6%, 1249.6% and 308.3%, respectively.
 
                                         
    Average Annual Returns through September 30, 2010  
    Since IPO(1)     20 Year     10 Year     5 Year     1 Year  
 
Partners Fund
    10.8 %     12.1 %     5.2 %     (0.2 )%     11.8 %
S&P 500 Index
    8.4       9.1       (0.4 )     0.6       10.2  
                                         
Small-Cap Fund
    10.1       11.5       8.5       3.6       16.7  
Russell 2000 Index
    8.6       10.3       4.0       1.6       13.4  
                                         
International Fund
    9.5 %     NA       5.8 %     1.8 %     7.4 %
EAFE Index
    3.9       NA       2.6       2.0       3.3  
 
See pages 8, 14 and 22 for additional performance information.


1


 

 
Longleaf Partners Funds
LETTER TO SHAREHOLDERS
 
The number of on-deck prospective investments remains higher than normal. Our analysts have presented numerous new ideas for consideration; we are fully invested; our most difficult decisions are choosing between great companies we own and qualified new ones; and we have added ten names across the three Longleaf portfolios over the last six months. Investor fear driven by global macro concerns is fueling our research productivity. During the quarter Investors Intelligence reported that the spread between bulls and bears had fallen to levels not seen since March of 2009.1( The New York Times noted on October 1 that “fixed income markets have seen greater inflows than equities did during the tech bubble of 2000.”2( Record low interest rates in many developed countries imply macro concerns about a double-dip recession and/or deflation. Conversely, gold’s record highs and the concomitant “flight to safety” prognosticate higher inflation. Evidence of the macro obsession and utter disregard for individual company merits comes in various forms – individual stock movements are highly correlated with overall market moves; macro funds have increased in number and net flows; and perhaps most tellingly, the Wall Street Journal recently quoted one research firm as declaring that “Stock picking is a dead art form.”3(
 
Not only are investors concerned about sovereign debt, growing deficits, and lackluster economic growth, they also extrapolate the “lost decade” as representative of what most developed markets will deliver in the future. Our conservative and growing company appraisals, our long-term time horizon, and that of our clients give us the ability to seize the opportunity created by short-term macro worries and the mispricing of superior global businesses.
 
Overwhelming pessimism coupled with the Funds’ single-digit ten year returns have led some to ask if Southeastern’s goal of inflation plus 10% is still relevant and achievable. It is certainly relevant, and we are confident it is achievable over the coming decade. We and our clients require positive real rates of return to fund retirement, pay tuitions, and support charitable causes. As business owners via equities we demand a meaningful premium for the risks inherent in owning versus lending. For over 80 years corporate bonds have generated 5.9% per year, or a real rate closer to 3%. Additionally, as active equity investors we should deliver a premium to the market over time. Over a 40 year history international stocks have delivered a nominal 10.2% annually, and U.S. stocks have done 9.9%.4( Inflation plus 10%
 
 
(1 Investors Intelligence, September 1, 2010, “Advisors Sentiment.”
(2 New York Times, October 1, 2010, “Cautious Positions May Be Overdone.”
(3 Wall Street Journal, September 24, 2010, “Macro Forces in Market Confound Stock Pickers.”
(4 Historic market data sourced from 2010 Ibbotson Stocks, Bonds, Bills and Inflation Classic Yearbook, pages 25 and 152.


2


 

 
Longleaf Partners Funds
LETTER TO SHAREHOLDERS
 
corresponds with our view that over market cycles we should deliver positive returns that properly compensate us for ownership versus lending and that provide a meaningful premium to what an unmanaged basket of securities will produce. Our absolute goal does not imply, however, a “market neutral” approach that tries to remove market volatility from our results via shorting, derivatives, or other methods. While we will suffer from the headwinds and benefit from the tailwinds of equity market cycles, our long-term results should add excess returns above the market’s net moves.
 
For the majority of the Funds’ lives, we have exceeded inflation plus 10%. We analyzed annual cumulative returns assuming an investment was made at the outset of every year in each Fund. Over the 529 measuring periods shareholder results exceeded our goal 56% of the time. The huge markdowns of 2008 dominate recent data. Prior to 2008 we exceeded a real 10% return in 69% of the periods. The Funds have also delivered a substantial premium to their indices. The same cumulative return data shows that the Funds outperformed their benchmarks in 74% of the periods, including the last two years.
 
For our current partners the important question is not whether we achieved our goal in the past, but whether inflation plus 10% is realistic from this point. We believe mid-teen returns are achievable based solely on the metrics of the businesses we own. The collective free cash flow yield of our companies is approximately 10% today – meaning that if revenues and expenses show no improvement, the businesses will deliver an annual free cash flow return of 10%. In addition, most of our investees have excess capacity that will allow them to grow their revenues in mid-single digits over the next 5 years with little or no expansionary capital spending. Beyond these implied double-digit returns that our holdings can generate in a static spending mode, additional gains will come if P/E’s migrate to historic averages. Finally, hindsight bias is fostering the expectation that the substantially lower ten year average returns of the last decade will be repeated in the next. Ironically, this hindsight is a poor predictor since the mathematic probability of returning to more normal multiples of earnings and cash flow is much higher following a prolonged period of depressed stock prices. The Longleaf Funds’ companies are worth a great deal more than their current prices, with P/Vs in the low-60%s range. Those values are conservative and growing. In more macro terms, given that both U.S. and international markets have delivered approximately 10% per year over multiple decades, and given the S&P 500’s current 10 year performance of (0.4)% and EAFE’s paltry 2.6%, the law of averages would argue for a significantly more rewarding decade than the last for equity owners. We have the portfolio foundation to deliver our goal without a market reversion to the mean, but the rampant pessimism surrounding stocks and the level of macro-based fear increases the likelihood of a tailwind.


3


 

 
Longleaf Partners Funds
LETTER TO SHAREHOLDERS
 
We have included several articles to provide additional perspective on how discounted equities are (New York Times) and the compelling case for some of our core holdings (Value Investor Insight). If you are interested in the 20 page reprint of the August 9, 2010 Outstanding Investor Digest article on Southeastern, you may order a printed copy at http://www.longleafpartners.com/about/gen_articles.cfm. We are grateful for your partnership. We believe the outstanding quality both of what we own and our management partners, as well as the discounted prices of those businesses, will be particularly rewarding.
 
Sincerely,
 
     
-s- O. Mason Hawkins, CFA   -s- G. Staley Cates, CFA
O. Mason Hawkins, CFA   G. Staley Cates, CFA
Chairman & CEO   President
Southeastern Asset Management, Inc.    Southeastern Asset Management, Inc.


4


 

 
(LOGO)
Intentionally Left Blank
 


5


 

 
 
Partners Fund
 
 
Longleaf Partners Fund gained 8.4% in the quarter, bringing the year-to-date return to 6.6%. By contrast the S&P 500 is up 3.9% for 2010 after adding 11.3% over the last three months. The Fund’s results for 10+ years are well ahead of the benchmark but below our absolute return goal following the “lost decade” for stocks which included 2008 markdowns.
 
                                         
    Cumulative Returns at September 30, 2010  
    4-8-87 IPO     20 Year     15 Year     10 Year     1 Year  
 
Partners Fund
    1019.6 %     874.9 %     228.5 %     66.3 %     11.8 %
S&P 500 Index
    570.1       465.8       155.5       (4.2 )     10.2  
Inflation plus 10%
    1622.6       958.1       476.8       219.4       11.1  
 
See page 8 for additional performance information.
 
Volatility continued in the third quarter, enabling us to make productive changes to the portfolio. We filled the Campbell Soup and Loews positions initiated in the second quarter. We also scaled back several of the best performing stocks including DIRECTV(DTV), Yum! Brands(YUM), Pioneer Natural Resources, and Intercontinental Hotels. We sold Verizon because we were unable to establish a meaningful position before the price moved well above our buying limit. Proceeds from these sales as well as the cash we held at the outset of the quarter funded new positions in Travelers and Vulcan Materials. Travelers, one of the best managed insurance companies in the industry, is trading below book value as the combination of low interest rates and soft pricing have hurt earnings. CEO Jay Fishman is using the historically low multiple to aggressively retire shares and thereby grow value per share. Vulcan owns unusually high quality U.S. aggregate assets, which the current construction depression has allowed us to buy at a very cheap price.
 
Because the third quarter accounted for most of the year-to-date return, the largest performance contributors overlap for the two periods. DTV, up 23% over the last three months and 25% for the year, grew its subscriber base in the U.S. and increased ARPU (average revenue per user). In Latin America revenues rose over 20% and margins grew substantially. Not only have operating results added to DTV’s value, but Michael White has been aggressively retiring discounted shares while managing the balance sheet extremely well.
 
YUM rose 19% in the quarter bringing the stock’s return in 2010 to 34%. While the U.S. Taco Bell and Pizza Hut franchises have increased revenues, the company’s China business remains the highest return and fastest growing part of the company. YUM’s advantages in China include strong Chinese management, broad brand recognition, scale far exceeding any competitor, and a comprehensive supply chain


6


 

 
Partners Fund
MANAGEMENT DISCUSSION
 
that the company controls. Because the value growth has been so strong, the stock still sells below intrinsic worth.
 
At Liberty Interactive, QVC grew across all geographies and gained share. The QVC spinoff has a target date of early 2011. Liberty Interactive rose 31% in the quarter and is up 26% for the year. Pioneer Natural Resources has appreciated 35% this year following a 9% gain in the quarter. Pioneer has seen increasing interest in the Permian Basin, where it has a strong position. Management and the board continue to focus on growing and monetizing value as evidenced by the sale of 45% of the company’s interest in the Eagle Ford earlier in the year.
 
Cemex and Level 3 fell 12% and 14% respectively, making them the largest performance detractors in the quarter and the year. Regarding Cemex, all construction remained weak in the U.S. with little residential and commercial construction coupled with slow stimulus spending and a delay in a transportation bill from Congress. Mexican volumes were somewhat light, but Latin America, the Middle East, and Asia grew. The company remains competitively entrenched in an oligopoly that has pricing power even amidst large unit declines. Cemex’s U.S. operations made $2.4 billion of EBITDA at the peak; today the U.S. breaks even. Without any help from one of its largest markets, the company is currently producing around $0.80 per share of free cash flow, and the stock is $8.50. Level 3 has irreplaceable fiber assets, and demand for bandwidth is growing rapidly with the increasing movement of data and video across multiple platforms. The company’s pace for adding new direct customers has been disappointing. The contribution margin from increasing top line growth is substantial. Translating obvious demand into strong organic revenue growth in the near term will determine success. We are unhappy with Level 3’s operating results and stock price. You can assume that we are neither oblivious nor idle.
 
Because of the Fund’s tax loss carry forwards, sales in 2010 will not trigger a capital gain distribution. The Fund’s remaining loss carry forwards equate to 7% of NAV. The Partners Fund’s P/V is in the low-60%s range, below the historic average. We continue to find new opportunities that meet our criteria, and we have added one new investment since the end of September. Value growth has returned as most businesses have improved from 2009 levels. Given the competitive strengths of our operating businesses and the value of the underlying assets at many companies, our capable management partners should be able to deliver double-digit value growth over the next several years even if economic growth remains anemic.


7


 

 
 
(LINE CHART)
 
AVERAGE ANNUAL RETURNS
for the periods ended September 30, 2010
                         
    Partners
    S&P 500
    Inflation
 
    Fund     Index     Plus 10%  
 
Year-to-Date
    6.64 %     3.89 %     8.03 %
One Year
    11.79       10.16       11.11  
Five Years
    (0.24 )     0.64       11.89  
Ten Years
    5.22       (0.43 )     12.31  
Twenty Years
    12.06       9.05       12.52  
Since Public Offering 4-8-87
    10.84       8.43       12.89  
 
Past performance does not predict future performance, Fund prices fluctuate, and the value of an investment at redemption may be worth more or less than the purchase price. The Fund’s performance results in the table shown above do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. The S&P 500 Index is shown with all dividends and distributions reinvested. Because the S&P 500 Index was available only at month-end in 1987, we used the 3-31-87 value for performance since public offering. This index is unmanaged and is not hedged for foreign currency risk. Prior to 2010 the Fund used currency hedging as a routine investment strategy. The U.S. Bureau of Labor Statistics compiles the monthly CPI-U values used to calculate inflation. Seasonally adjusted inflation data is presented for periods less than one year. Current performance may be lower or higher than the performance quoted. Please call (800)445-9469 or view Longleaf’s website (www.longleafpartners.com) for more current performance information.


8


 

 
 
TABLE OF PORTFOLIO HOLDINGS
at September 30, 2010
 
                 
          Net
 
          Assets  
 
Common Stock
            94.6 %
DIRECTV 
    8.9          
Chesapeake Energy Corporation
    7.4          
Dell Inc. 
    7.3          
The Walt Disney Corporation
    6.1          
Pioneer Natural Resources Company
    5.9          
Yum! Brands, Inc. 
    5.3          
Aon Corporation
    5.2          
Loews Corporation
    4.5          
The Bank of New York Mellon Corporation
    4.5          
NKSJ Holdings, Inc. 
    4.5          
The Travelers Companies, Inc. 
    4.5          
Campbell Soup Company
    4.4          
Cemex S.A.B. de C.V. ADS
    4.3          
Liberty Media Holding Corporation – Interactive
    4.2          
FedEx Corporation
    4.0          
InterContinental Hotels Group PLC
    3.4          
Telephone and Data Systems, Inc. 
    2.7          
Koninklijke Philips Electronics N.V. 
    2.6          
Vulcan Materials Company
    2.1          
Level 3 Communications, Inc. 
    1.7          
Willis Group Holdings Public Limited Company
    1.1          
Corporate Bonds
            1.4  
Level 3 Communications, Inc. 
    1.4          
Cash Reserves
            3.3  
Other Assets and Liabilities, net
            0.7  
                 
              100.0 %
                 
 
PORTFOLIO CHANGES
January 1, 2010 through September 30, 2010
 
     
New Holdings
 
Eliminations
 
Campbell Soup Company
InterContinental Hotels Group PLC ADR
Loews Corporation
NKSJ Holdings, Inc. (The NipponKoa Insurance Company, Ltd)(a)
The Travelers Companies, Inc.
Verizon Communications Inc.
Vulcan Materials Company
 
Berkshire Hathaway Inc.
Marriott International, Inc.
The NipponKoa Insurance Company, Ltd.(a)
Verizon Communications Inc.
 
(a)  Corporate action changed name (previous listing)


9


 

 
at September 30, 2010 (Unaudited)
 
 
                         
              % of
 
    Share
    Market
  Net
 
    Quantity     Value   Assets  
Common Stock
                       
Air Freight & Logistics
                       
FedEx Corporation
    3,669,629     $ 313,753,280       4.0 %
                         
Capital Markets
                       
The Bank of New York Mellon Corporation
    13,571,000       354,610,230       4.5  
                         
Computers & Peripherals
                       
Dell Inc.*
    44,277,665       573,838,538       7.3  
                         
Construction Materials
                       
Cemex S.A.B. de C.V. ADS* (Foreign)
    39,615,680       336,733,280       4.3  
Vulcan Materials Company
    4,514,800       166,686,416       2.1  
                         
              503,419,696       6.4  
                         
                         
Diversified Telecommunication Services
                       
Level 3 Communications, Inc.*(b)
    142,006,754       133,102,931       1.7  
                         
Food Products
                       
Campbell Soup Company
    9,594,179       342,991,899       4.4  
                         
Hotels, Restaurants & Leisure
                       
InterContinental Hotels Group PLC (Foreign)(b)
    14,910,925       266,090,763       3.4  
InterContinental Hotels Group PLC ADR (Foreign)(b)
    126,728       2,273,500        
Yum! Brands, Inc.
    8,994,483       414,285,887       5.3  
                         
              682,650,150       8.7  
                         
                         
Industrial Conglomerates
                       
Koninklijke (Royal) Philips Electronics N.V. (Foreign)
    3,121,000       98,092,340       1.2  
Koninklijke (Royal) Philips Electronics N.V. ADR (Foreign)
    3,406,731       106,698,815       1.4  
                         
              204,791,155       2.6  
                         
                         
Insurance
                       
Aon Corporation
    10,442,812       408,418,377       5.2  
Loews Corporation
    9,395,300       356,081,870       4.5  
NKSJ Holdings, Inc. (Foreign)
    56,402,000       354,032,678       4.5  
The Travelers Companies, Inc.
    6,769,960       352,714,916       4.5  
Willis Group Holdings Public Limited Company (Foreign)
    2,800,000       86,296,000       1.1  
                         
              1,557,543,841       19.8  
                         
                         
Internet and Catalog Retail
                       
Liberty Media Holding Corporation – Interactive
Series A*
    24,460,224       335,349,671       4.2  
 


10


 

 
Partners Fund - PORTFOLIO OF INVESTMENTS
at September 30, 2010 (Unaudited)
 
 
                         
              % of
 
    Share
    Market
  Net
 
    Quantity     Value   Assets  
                         
Media
                       
DIRECTV – Class A*
    16,736,333     $ 696,733,543       8.9 %
The Walt Disney Corporation
    14,510,000       480,426,100       6.1  
                         
              1,177,159,643       15.0  
                         
                         
Oil, Gas & Consumable Fuels
                       
Chesapeake Energy Corporation
    25,596,576       579,762,446       7.4  
Pioneer Natural Resources Company(b)
    7,133,900       463,917,517       5.9  
                         
              1,043,679,963       13.3  
                         
                         
Wireless Telecommunications Services
                       
Telephone and Data Systems, Inc.
    1,530,800       50,210,240       0.6  
Telephone and Data Systems, Inc. – Special
    5,666,200       160,636,770       2.1  
                         
              210,847,010       2.7  
                         
                         
Total Common Stocks (Cost $6,845,771,581)
            7,433,738,007       94.6  
                         
                         
                         
    Principal
           
    Amount            
Corporate Bonds
Diversified Telecommunication Services
                       
Level 3 Communications, Inc., 15% Convertible
Senior Notes due 1-15-13(b)(c)
(Cost $100,062,000)
    100,062,000       112,319,595       1.4  
                                   
 
Short-Term Obligations
Repurchase Agreement with State Street Bank,
0.01% due 10-1-10, Repurchase price $259,901,072
(Collateral: $262,885,000 U.S. Treasury Bills/Bonds,
0.14%-0.24%, due 12-30-10 to 12-31-11, Value $265,103,558)
    259,901,000       259,901,000     3.3  
                       
Total Investments (Cost $7,205,734,581)(a)
            7,805,958,602     99.3  
Other Assets and Liabilities, Net
            57,452,430     0.7  
                       
Net Assets
  $7,863,411,032     100.0 %
             
Net asset value per share   $25.69        
             
*  Non-income producing security.
(a)  Aggregate cost for federal income tax purposes is $7,226,695,118. Net unrealized appreciation of $600,224,021 consists of unrealized appreciation and depreciation of $1,793,501,293 and $(1,193,277,272), respectively.
(b)  Affiliated issuer, as defined under Section 2(a)(3) of the Investment Company Act of 1940 (ownership of 5% or more of the outstanding voting securities of the issuer.)
(c)  Illiquid and board valued.
Note:  Companies designated as “Foreign” are headquartered outside the U.S. and represent 16% of net assets.
 


11


 

 
 
Small-Cap Fund
 
 
Longleaf Partners Small-Cap Fund rose 9.6% in the third quarter and is up 8.7% for the year, surpassing our absolute return goal of inflation plus 10%. The Russell 2000 delivered 11.3% in the quarter and 9.1% thus far in 2010. Over longer time periods the Fund has outperformed the benchmark.
 
                                         
    Cumulative Returns at September 30, 2010  
    2-21-89 IPO     20 Year     15 Year     10 Year     1 Year  
 
Small-Cap Fund
    700.8 %     778.6 %     384.5 %     125.1 %     16.7 %
Russell 2000 Index
    491.1       607.2       165.3       48.0       13.4  
Inflation plus 10%
    1249.6       958.1       476.8       219.4       11.1  
 
See page 14 for additional performance information.
 
During the quarter we trimmed two of our largest holdings, tw telecom and Pioneer Natural Resources, following significant price increases. We added to several of our most discounted names and filled out the Martin Marietta Materials position that we initiated in the second quarter. We have several names “on deck” and have acquired one new holding since quarter-end.
 
Most stocks in the portfolio rose over the last three months. DineEquity(DIN) was the most substantial contributor to return, gaining 61% in the quarter and 85% for the year-to-date. The company made progress in moving Applebee’s to a franchise model by announcing the sale of some restaurants. More importantly, the company successfully refinanced its debt, pushing maturities out meaningfully and putting the company on solid footing. Although comp sales declined slightly at IHOP and were down 2.7% at Applebee’s, these numbers were better than the market expected. The company’s substantial free cash flow coupled with store sales is enabling DIN to reduce its debt. tw telecom, the Fund’s largest position, gained 11% in the quarter as Larissa Herda and her team grew the customer base and delivered better-than-expected services revenue in all segments of its fiber network business.
 
Both Pioneer Natural Resources and Dillard’s rose over the last three months, and these two stocks have been among the top contributors in 2010, appreciating 35% and 29% respectively. Pioneer has seen increasing interest in the Permian Basin, where it has a strong position. Management and the board continue to focus on growing and monetizing value as evidenced by the sale of 45% of the company’s interest in the Eagle Ford earlier in the year. Dillard’s is benefitting from the company’s reduced cost structure and inventory management. Margins are growing. Management’s focus on selling stores at good prices and aggressively repurchasing discounted stock has led to meaningful value growth.


12


 

 
Small-Cap Fund
MANAGEMENT DISCUSSION
 
Level 3 declined 14% in the quarter and has been the primary detractor from performance this year. The company has irreplaceable fiber assets, and demand for bandwidth is growing rapidly with the increasing movement of data and video across multiple platforms. The company’s pace for adding new direct customers has been disappointing. The contribution margin from increasing top line growth is substantial. Translating obvious demand into strong organic revenue growth in the near term will determine success. We are unhappy with Level 3’s operating results and stock price. You can assume that we are neither oblivious nor idle.
 
The Fund remains attractively priced in the low-60%s P/V range. Even more compelling is the quality of the competitively entrenched businesses we own. Values have begun to grow following a number of reductions in 2008-2009, and organic growth should further increase values going forward. Additionally our corporate partners have substantial free cash flow and/or cheap available capital to pursue various capital allocation options including share repurchases, merger and acquisition activity, and/or strategic sales. Our taxable shareholders not only have the portfolio upside, but also have the tax benefit of loss carry forwards equivalent to 7% of NAV.


13


 

 
 
 
(LINE CHART)
AVERAGE ANNUAL RETURNS
for the periods ended September 30, 2010
                           
    Small-Cap
    Russell 2000
    Inflation
 
    Fund     Index     Plus 10%  
 
Year-to-Date
    8 .68 %     9.12 %     8.03 %
One Year
    16 .72       13.35       11.11  
Five Years
    3 .62       1.60       11.89  
Ten Years
    8 .45       4.00       12.31  
Twenty Years
    11 .48       10.28       12.52  
Since Public Offering 2-21-89
    10 .11       8.57       12.80  
 
Past performance does not predict future performance, Fund prices fluctuate, and the value of an investment at redemption may be worth more or less than the purchase price. The Fund’s performance results in the table shown above do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. The Russell 2000 Index is shown with all dividends and distributions reinvested. This index is unmanaged and is not hedged for foreign currency risk. Prior to 2010 the Fund used currency hedging as a routine investment strategy. The U.S. Bureau of Labor Statistics compiles the monthly CPI-U values used to calculate inflation. Seasonally adjusted inflation data is presented for periods less than one year. Current performance may be lower or higher than the performance quoted. Please call (800)445-9469 or view Longleaf’s website (www.longleafpartners.com) for more current performance information.


14


 

 
 
TABLE OF PORTFOLIO HOLDINGS
at September 30, 2010
 
                 
          Net
 
          Assets  
 
Common Stock
            96.9 %
tw telecom inc. 
    9.6          
Fairfax Financial Holdings Limited
    7.5          
Fair Isaac Corporation
    6.8          
Dillard’s Inc. 
    6.3          
Pioneer Natural Resources Company
    5.9          
Texas Industries, Inc. 
    5.3          
DineEquity, Inc. 
    5.2          
Service Corporation International
    4.8          
Wendy’s/Arby’s Group, Inc. 
    4.7          
Everest Re Group, Ltd.
    4.4          
The Washington Post Company
    4.4          
Martin Marietta Materials, Inc.
    4.4          
Ruddick Corporation
    4.1          
Willis Group Holdings Public Limited Company
    4.0          
Markel Corporation
    3.8          
Worthington Industries, Inc. 
    3.8          
Potlatch Corporation
    3.4          
Olympus Corporation
    3.4          
Level 3 Communications, Inc.
    2.6          
Sealed Air Corporation 
    2.5          
Cash Reserves
            3.1  
Other Assets and Liabilities, net
             
                 
              100.0 %
                 
 
PORTFOLIO CHANGES
January 1, 2010 through September 30, 2010
 
     
New Holdings
 
Eliminations
Martin Marietta Materials, Inc.
Sealed Air Corporation
 
Discovery Communications, Inc. –
  Class C
The First American Corporation


15


 

 
at September 30, 2010 (Unaudited)
 
                         
                % of
 
    Share
    Market
    Net
 
    Quantity     Value     Assets  
Common Stock
Containers & Packaging
                       
Sealed Air Corporation
    2,923,959     $ 65,730,598       2.5 %
                         
Construction Materials
                       
Martin Marietta Materials, Inc.
    1,478,000       113,761,660       4.4  
Texas Industries, Inc.(b)
    4,390,320       138,382,886       5.3  
                         
              252,144,546       9.7  
                         
                         
Diversified Consumer Services
                       
Service Corporation International(b)
    14,447,000       124,533,140       4.8  
                         
Diversified Telecommunication Services
                       
Level 3 Communications, Inc.*
    72,882,000       68,312,299       2.6  
tw telecom inc.*(b)
    13,527,621       251,207,922       9.6  
                         
              319,520,221       12.2  
                         
                         
Food & Staples Retailing
                       
Ruddick Corporation(b)
    3,107,459       107,766,678       4.1  
                         
Health Care Equipment & Supplies
                       
Olympus Corporation (Foreign)
    3,408,000       89,241,591       3.4  
                         
Hotels, Restaurants & Leisure
                       
DineEquity, Inc.*(b)
    2,978,100       133,954,938       5.2  
Wendy’s/Arby’s Group, Inc.(b)
    27,087,000       122,704,110       4.7  
                         
              256,659,048       9.9  
                         
                         
Insurance
                       
Everest Re Group, Ltd. (Foreign)
    1,335,000       115,437,450       4.4  
Fairfax Financial Holdings Limited (Foreign)
    480,000       195,470,891       7.5  
Markel Corporation*
    288,000       99,241,920       3.8  
Willis Group Holdings Public Limited Company (Foreign)
    3,398,000       104,726,360       4.0  
                         
              514,876,621       19.7  
                         
                         
Media
                       
The Washington Post Company – Class B
    289,000       115,429,490       4.4  
                         
Metals & Mining
                       
Worthington Industries, Inc.(b)
    6,581,000       98,912,430       3.8  
                         
Multiline Retail
                       
Dillards, Inc. – Class A(b)
    6,909,748       163,346,443       6.3  
                         
Oil, Gas & Consumble Fuels
                       
Pioneer Natural Resources Company
    2,345,000       152,495,350       5.9  
                         
Real Estate Investment Trusts
                       
Potlatch Corporation(b)
    2,627,155       89,323,270       3.4  
 


16


 

 
Small-Cap Fund - PORTFOLIO OF INVESTMENTS
at September 30, 2010 (Unaudited)
 
                         
                % of
 
    Share
    Market
    Net
 
    Quantity     Value     Assets  
                         
Software
                       
Fair Isaac Corporation(b)
    7,216,400     $ 177,956,424       6.8 %
                         
Total Common Stocks (Cost $2,448,663,584)
            2,527,935,850       96.9  
                         
                         
                         
    Principal
             
    Amount              
Short-Term Obligations
                       
Repurchase Agreement with State Street Bank,
0.01% due, 10-1-10, Repurchase price $79,645,022
(Collateral: $76,195,000 U.S. Treasury Bonds,
1.66%, due 5-31-17, Value $81,242,919)
    79,645,000       79,645,000       3.1  
                         
Total Investments (Cost $2,528,308,584)(a)
            2,607,580,850       100.0  
Other Assets and Liabilities, Net
            233,374        
                         
Net Assets
  $ 2,607,814,224       100.0 %
                 
Net asset value per share
    $23.66          
                 
 
*  Non-income producing security.
(a)  Aggregate cost for federal tax purposes is $2,530,227,285. Net unrealized appreciation of $79,272,266 consists of unrealized appreciation and depreciation of $532,992,312 and $(453,720,046), respectively.
(b)  Affiliated issuer, as defined under Section 2(a)(3) of the Investment Company Act of 1940 (ownership of 5% or more of the outstanding voting securities of the issuer.)
Note:  Companies designated as “Foreign” are headquartered outside the U.S. and represent 19% of net assets.
 


17


 

 
(LOGO)
Intentionally Left Blank
 


18


 

 
International Fund
 
 
Longleaf Partners International Fund returned 16.4% in the third quarter and 5.9% for the year-to-date. Performance for the quarter was roughly in line with the EAFE index’s return of 16.5% and well above our inflation plus 10% absolute annual return goal. The Fund’s year-to-date return exceeds the EAFE’s 1.1% by a wide margin, but trails our absolute return goal slightly. The cumulative results below highlight the significant relative outperformance over longer periods.
 
                         
    Cumulative Returns through September 30, 2010  
    10-26-98 IPO     10 Year     1 Year  
 
International Fund
    194.7 %     76.4 %     7.4 %
EAFE Index
    57.6       28.8       3.3  
Inflation plus 10%
    308.3       219.4       11.1  
 
See page 22 for additional performance information.
 
Most names in the portfolio were positive performers in the quarter, with Genting, ACS, Cheung Kong, Hochtief and Carrefour contributing the most substantial gains. Genting added the most for the quarter and year-to-date, returning 46% and 52% over the two periods respectively. The company’s Singapore casino that opened early this year already is generating revenue at an annual run rate of Singapore $3.5 billion. The casino has had 20,000-30,000 visitors daily, and management has increased its annual visitor estimate from 13 million to 15 million. Additionally, Genting recently won the rights to redevelop the Aqueduct Racetrack in Queens to operate New York City’s first slot machine casino, which represents the opportunity to expand in a new market.
 
Cheung Kong returned 31% in the quarter after reporting positive results across all its businesses. Ports rebounded nicely; Hong Kong property sales added to balance sheet cash levels; the retail business continued to grow revenues and operating income margins; and the previously loss-making 3G business grew subscribers and is expected to produce positive operating income this year. CEO Li Ka Shing has purchased over 15 million shares in Cheung Kong in 2010, an incredible amount of insider buying that takes his ownership of the company over 42%.
 
ACS and Hochtief each rose over 40% in the quarter, following ACS’s zero premium, all-share bid to acquire the remaining 70% of Hochtief that it does not already own. The management team at ACS, under the leadership of owner-operator Florentino Perez, consistently has created value for shareholders through disciplined operations and smart capital allocation. Both companies trade at a significant discount to our appraisal values.
 
The second quarter purchase of Carrefour has already shown results, returning 34% over the last three months. Lars Olofsson’s transformation plan is on track to cut


19


 

 
International Fund
MANAGEMENT DISCUSSION
 
€500 million of costs this year. The company successfully launched its reinvented hypermarket model in Europe in the quarter. The core French business reported positive organic revenue growth and increased its market share. Additionally, Carrefour put its Thailand, Malaysia, and Singapore operations up for sale as part of Olofsson’s plan to exit non-core markets where the company is not the number one or two player. Carrefour bought in shares at a discount, with plans to retire 6% of total outstanding shares by next spring.
 
Yum!Brands(YUM), which rose 19% in the quarter, has been one of the top contributors in 2010 after gaining 34%. The U.S. Taco Bell and Pizza Hut franchises have increased revenues, but the company’s China business remains the highest return and fastest growing part of the company. YUM’s advantages in China include strong Chinese management, broad brand recognition, scale that far exceeds any competitor, and a comprehensive supply chain that the company controls. Because the value growth has been so strong, the stock still sells at a discount. The international value of YUM is far higher than the U.S. value, which is the basis for owning this stock in Longleaf Partners International Fund.
 
Cemex was the largest detractor from performance for the quarter and the year, declining 12% and 25% respectively. All construction remained weak in the U.S. with little residential and commercial construction coupled with slow stimulus spending and a delay in a transportation bill from Congress. Mexican volumes were somewhat light, but Latin America, the Middle East, and Asia grew. The company remains competitively entrenched in an oligopoly that has pricing power even amidst large unit declines. Cemex’s U.S. operations made $2.4 billion of EBITDA at the peak; today the U.S. breaks even. Without any help from one of its largest markets, the company is currently producing around $0.80 per share of free cash flow, and the stock is $8.50. Japan Petroleum declined 8% in the quarter and is down 14% this year. The company trades at a significant discount to its book value, but we have been disappointed that management has not taken steps to create shareholder value. Although Olympus posted a 10% gain over the last three months, the stock’s 18% decline in 2010 places it among the primary detractors from Fund performance.
 
Market volatility continued in the third quarter giving us the opportunity to add to several positions including the relatively new stake in Vodafone. We also initiated a new position in C&C Group, which produces the dominant Irish and UK premium alcoholic cider brand. At the outset of the quarter Accor successfully spun out its service voucher business into a new company trading under the name Edenred. Both Edenred and Accor meet our criteria of good businesses, managed by shareholder-oriented, capable operators, and both trade at a discount to intrinsic value. As prices


20


 

 
International Fund
MANAGEMENT DISCUSSION
 
rallied later in the quarter we trimmed positions in Genting and Accor. We also trimmed Benesse, NKSJ Holdings, and Japan Petroleum to fund more compelling ideas including C&C and a new name added in October.
 
Because of the Fund’s tax loss carry forwards, sales in 2010 will not trigger a capital gain distribution. The Fund’s remaining loss carry forwards equate to 9% of NAV. As global macro concerns – rather than an analysis of individual business values – continue to drive stock prices, we are finding many compelling investment opportunities. The portfolio today holds less than one position worth of cash, and our on-deck list of prospective investments is diversified across geographies and industries. Even after a rally in prices in the past two months, the portfolio trades at a P/V in the low-60%s, equivalent to the Fund’s long-term average. Your partners at Southeastern are adding to our investments in the International portfolio, and we encourage others to do the same.
 
Note: All stock return numbers are stated in US dollars rather than local currencies since the Fund is reported in USD.


21


 

 
 
(GRAPH B)
 
AVERAGE ANNUAL RETURNS
for the periods ended September 30, 2010
                         
    International
    EAFE
    Inflation
 
    Fund     Index     Plus 10%  
 
Year-to-Date
    5.86 %     1.07 %     8.03 %
One Year
    7.43       3.27       11.11  
Five Years
    1.82       1.97       11.89  
Ten Years
    5.84       2.56       12.31  
Since Public Offering 10-26-98
    9.48       3.89       12.52  
 
Past performance does not predict future performance, Fund prices fluctuate, and the value of an investment at redemption may be worth more or less than the purchase price. The Fund’s performance results in the table shown above do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. The EAFE Index is shown with all dividends and distributions reinvested. Because the EAFE was available only at month-end in 1998, we used the 10-31-98 value for performance since public offering. This index is unmanaged and is not hedged for foreign currency risk. Prior to 2010 the Fund used currency hedging as a routine investment strategy. The U.S. Bureau of Labor Statistics compiles the monthly CPI-U values used to calculate inflation. Seasonally adjusted inflation data is presented for periods less than one year. Current performance may be lower or higher than the performance quoted. Please call (800)445-9469 or view Longleaf’s website (www.longleafpartners.com) for more current performance information.


22


 

 
 
TABLE OF PORTFOLIO HOLDINGS
at September 30, 2010
 
                 
          Net
 
          Assets  
 
Common Stock
            96.4 %
NKSJ Holdings, Inc. 
    9.6          
Cheung Kong Holdings Limited
    9.3          
Fairfax Financial Holdings Limited
    8.6          
ACS, Actividades de Construccion Y Servicios, S.A.
    8.3          
Hochtief AG
    5.6          
Carrefour S.A. 
    5.2          
Accor S.A. 
    4.9          
Yum! Brands, Inc. 
    4.7          
Genting Berhad
    4.4          
Willis Group Holdings Public Limited Company
    4.1          
Olympus Corporation
    4.0          
Dell Inc. 
    4.0          
Cemex S.A.B. de C.V. ADS
    3.9          
Seven Bank, Ltd. 
    3.8          
Vodafone Group plc
    3.0          
Edenred S.A.
    2.9          
Diageo plc 
    2.6          
Japan Petroleum Exploration Co., Ltd. 
    1.9          
Benesse Holdings Inc. 
    1.7          
C&C Group plc 
    1.7          
Shanda Interactive Entertainment Limited ADR
    1.2          
Shanda Games Limited ADR
    1.0          
Cash Reserves
            3.8  
Other Assets and Liabilities, net
            (0.2 )
                 
              100.0 %
                 
 
PORTFOLIO CHANGES
January 1, 2010 through September 30, 2010
 
     
New Holdings
 
Eliminations
 
C&C Group plc
Carrefour S.A.
Edenred S.A. (Accor S.A.)(a)
NKSJ Holdings, Inc.
(The NipponKoa Insurance Company, Ltd. and Sompo Japanese Insurance Company, Inc.)(a)
Shanda Games Limited ADR
Shanda Interactive Entertainment Limited ADR
Vodafone Group plc
Vodafone Group plc ADR
 
Daiwa Securities Group, Inc.
Koninklijke Philips Electronics N.V. ADR
Linde AG
The Nipponkoa Insurance Company, Ltd.(a)
Sompo Japanese Insurance Company, Inc.(a)
 
  (a)  Corporate action changed name (previous listing)


23


 

 
at September 30, 2010 (Unaudited)
 
                                     
                        % of
 
              Share
    Market
  Net
 
              Quantity     Value   Assets  
Common Stock
                                     
   
Beverages 
                       
   
C&C Group plc (Ireland)
    8,158,501     $ 35,479,481       1.7 %
   
Diageo plc (United Kingdom)
    3,195,000       55,008,309       2.6  
                             
                          90,487,790       4.3  
                                     
                                     
                                     
   
Commercial Banks
                       
                                     
   
Seven Bank, Ltd. (Japan)
    45,148       80,853,210       3.8  
                                     
                                     
   
Commercial Services & Supplies
                       
                                     
   
Edenred S.A.* (France)
    3,064,500       60,701,782       2.9  
                                     
                                     
   
Computers & Peripherals
                       
   
Dell Inc.* (United States)
    6,476,800       83,939,328       4.0  
                                     
                                     
   
Construction & Engineering
                       
                                     
   
ACS, Actividades de Construccion Y Servicios, S.A. (Spain)
    3,515,000       175,500,825       8.3  
                                     
   
Hochtief AG (Germany)
    1,355,000       117,334,569       5.6  
                             
                          292,835,394       13.9  
                                     
                                     
                                     
   
Construction Materials 
                       
   
Cemex S.A.B. de C.V. ADS* (Mexico)
    9,605,000       81,642,500       3.9  
                                     
                                     
   
Diversified Consumer Services
                       
                                     
   
Benesse Holdings, Inc. (Japan)
    750,100       36,121,251       1.7  
                                     
                                     
   
Food & Staples Retailing
                       
                                     
   
Carrefour S.A. (France)
    2,055,000       110,420,461       5.2  
                                     
                                     
   
Health Care Equipment & Supplies
                       
                                     
   
Olympus Corporation (Japan)(b)
    3,218,500       84,279,360       4.0  
                                     
                                     
   
Hotels, Restaurants & Leisure
                       
                                     
   
Accor S.A. (France)
    2,836,000       103,555,716       4.9  
                                     
   
Genting Berhad (Malaysia)(b)
    29,182,200       93,776,295       4.4  
                                     
   
Yum! Brands, Inc. (United States)
    2,130,000       98,107,800       4.7  
                             
                          295,439,811       14.0  
                                     
                                     
                                     
   
Insurance 
                       
                                     
   
Fairfax Financial Holdings Limited (Canada)
    444,000       180,810,574       8.6  
                                     
   
NKSJ Holdings, Inc. (Japan)
    32,205,600       202,153,024       9.6  
                                     
   
Willis Group Holdings Public Limited Company (Ireland)
    2,785,000       85,833,700       4.1  
                             
                          468,797,298       22.3  
                                     
                                     
                                     
   
Oil, Gas, & Consumable Fuels
                       
                                     
   
Japan Petroleum Exploration Co., Ltd. (Japan)
    1,047,300       39,455,660       1.9  
 


24


 

 
International Fund - PORTFOLIO OF INVESTMENTS
at September 30, 2010 (Unaudited)
 
                                     
                        % of
 
              Share
    Market
  Net
 
              Quantity     Value   Assets  
                                     
                                     
   
Real Estate Management & Development
                       
                                     
   
Cheung Kong Holdings Limited (Hong Kong)
    12,893,000     $ 195,417,723       9.3 %
                                     
                                     
   
Software
                       
                                     
   
Shanda Games Limited ADR* (China)
    3,899,000       20,898,640       1.0  
                                     
   
Shanda Interactive Entertainment Limited ADR* (China)
    649,000       25,408,350       1.2  
                             
                          46,306,990       2.2  
                                     
                             
                                     
   
Wireless Telecommunication Services
                       
                                     
   
Vodafone Group plc (United Kingdom)
    8,901,000       21,966,551       1.0  
                                     
   
Vodafone Group plc ADR (United Kingdom)
    1,681,235       41,711,440       2.0  
                             
                  63,677,991       3.0  
                             
   
Total Common Stocks (Cost $1,793,743,789)
            2,030,376,549       96.4  
                             
 
                                     
                Principal
           
                Amount            
Short-Term Obligations
                       
Repurchase Agreement with State Street Bank, 0.01% due 10-1-10, Repurchase price $80,861,022 (Collateral: $78,180,000 U.S. Treasury Bonds, 0.83% due 9-30-14, Value $82,479,900)
    80,861,000         80,861,000     3.8  
                         
Total Investments (Cost $1,874,604,789)(a)
              2,111,237,549     100.2  
Other Assets and Liabilities, Net
              (5,236,579)     (0.2 )
                         
Net Assets
  $ 2,106,000,970     100.0 %
               
Net asset value per share
    $14.46        
               
 
*  Non-income producing security.
(a)  Also represents aggregate cost for federal income tax purposes. Net unrealized appreciation of $236,632,760 consists of unrealized appreciation and depreciation of $442,988,956 and $(206,356,196), respectively.
(b)  A portion designated as collateral for forward currency contracts.
Note:  Country listed in parenthesis after each company indicates location of headquarters.
 


25


 

 
International Fund - PORTFOLIO OF INVESTMENTS
at September 30, 2010 (Unaudited)
 
COUNTRY WEIGHTINGS
 
                   
    Equity
      Net
 
    Only       Assets  
 
Japan
    21.8 %       21.0 %
France
    13.5         13.0  
Hong Kong
    9.6         9.3  
United States
    9.0         8.7  
Canada
    8.9         8.6  
Spain
    8.6         8.3  
Ireland
    6.0         5.8  
United Kingdom
    5.9         5.6  
Germany
    5.8         5.6  
Malaysia
    4.6         4.4  
Mexico
    4.0         3.9  
China
    2.3         2.2  
                 
      100.0 %       96.4  
                 
Cash, other assets and liabilities, net
              3.6  
                 
                100.0 %
                 
 


26


 

 
Longleaf Partners Funds
 
 
The following additional information may be obtained without charge, upon request, by calling (800) 445-9469, Option 1, or on the Funds’ website at www.longleafpartners.com, or on the SEC’s website at www.sec.gov.
 
Proxy Voting Policies and Procedures
 
A description of Longleaf’s Proxy Voting Policies and Procedures is included in the Statement of Additional Information (SAI).
 
Proxy Voting Record
 
Information regarding how the Funds voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is contained in Form N-PX.
 
Quarterly Portfolio Holdings
 
Longleaf files a complete schedule of portfolio holdings for the first and third quarters of each fiscal year on Form N-Q, which is available on the SEC’s website, and may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. (please call (800) SEC-0330 for information on the operation of the Public Reference Room).
 
In addition to Form N-Q, Longleaf publishes reports for each fiscal quarter. These reports include complete schedules of portfolio holdings, as well as performance updates and management discussion. We furnish Longleaf’s Quarterly Reports in lieu of Form N-Q to shareholders who request information about our first and third quarter portfolio holdings, and Semi-Annual and Annual Reports for requests related to the second and fourth quarters, respectively.
 
Fund Trustees
 
Additional information about Fund Trustees is included in the Statement of Additional Information (SAI).


27


 

 
Longleaf Partners Funds
 
Contact us at www.longleafpartners.com or
(800) 445-9469
 
FUND INFORMATION OPTION 1
To request a Prospectus, Statement of Additional Information (including Longleaf’s Proxy Voting Policies and Procedures), financial report, application or other Fund information from 8:00 a.m. to 8:00 p.m. Eastern time, Monday through Friday.
 
DAILY FUND PRICES OPTION 2
For automated reporting 24 hours a day, seven days a week.
 
ACCOUNT INFORMATION OPTION 3
For account balance and transaction activity, 24 hours a day, seven days a week. Please have your Fund number (see below) and account number ready to access your investment information.
 
SHAREHOLDER INQUIRIES OPTION 0
To request action on your existing account from 9:00 a.m. to 6:00 p.m. Eastern time, Monday through Friday.
 
CORRESPONDENCE
 
     
By regular mail:
  By express mail or overnight courier:
Longleaf Partners Funds
  Longleaf Partners Funds
P.O. Box 9694
  c/o BNY Mellon
Providence, RI 02940-9694
  101 Sabin Street
    Pawtucket, RI 02860
    (508) 871-8800
 
PUBLISHED DAILY PRICE QUOTATIONS
Daily net asset value per share of each Fund is reported in mutual fund quotations tables of major newspapers in alphabetical order under the bold heading Longleaf Partners as follows:
 
                 
            Transfer Agent
  Status to
Abbreviation   Symbol   Cusip   Fund Number   New Investors
Partners
  LLPFX   543069108   133   Open
Sm-Cap
  LLSCX   543069207   134   Closed 7-31-97
Intl
  LLINX   543069405   136   Open


 

September 30, 2010
Longleaf Partners Fund
PHILOSOPHY
The Fund seeks to achieve superior long-term performance by acquiring equity securities of competitively entrenched, financially strong, well-managed companies run by capable managements at market prices significantly below our assessment of their business value, and selling these stocks when they approach our appraisal. We view equity investments as ownership in a business enterprise. We determine business or intrinsic value through financial analysis and established disciplines which we have consistently applied for 35 years. Equities purchased at prices substantially less than their intrinsic worth should protect capital from significant loss and should also appreciate substantially when the market ultimately recognizes corporate value.
OBJECTIVE/POLICY STATEMENT
Longleaf Partners Fund seeks long-term capital growth by investing primarily in a limited number of mid and large cap companies believed to be significantly undervalued.
FUND MANAGEMENT
The Fund is managed by Southeastern Asset Management, Inc.®, a Memphis based firm. Founded in 1975, the firm has 58 employees and manages over $32 billion in assets.
INVESTMENT PARTNERSHIP
To align employee interests with those of shareholders and prevent conflicts of interest, Southeastern’s Code of Ethics requires all employees to limit their investment in publicly traded equity securities to the Longleaf Partners Funds (unless granted prior clearance.) The independent members of the Board of Trustees also must invest at least as much as their annual Trustees’ fees in the Funds.
GOVERNING PRINCIPLES
  We will treat your investment in Longleaf as if it were our own.
 
  We will remain significant investors with you in Longleaf.
 
  We will invest for the long-term, while striving to maximize returns and minimize business, financial, purchasing power, regulatory and market risks.
 
  We will choose our equity investments based on their discounts from our appraisal of their corporate intrinsic values, their financial strengths, their managements, their competitive positions, and our assessment of their future earnings potential.
 
  We will concentrate our assets in our best ideas.
 
  We will not impose loads, exit fees or 12b-1 charges’ on our investment partners.
 
  We will consider closing the Funds to new investors if closing would benefit existing shareholders.
 
  We will discourage short-term speculators and market timers from joining us, the long-term investors in Longleaf.
 
  We will continue our efforts to enhance shareholder services.
 
  We will communicate with our investment partners as candidly as possible.
(LONGLEAF PARTNERS FUNDS LOGO)
Longleaf Partners Funds®
(800) 445-9469
www.longleafpartners.com

 


 

(LONGLEAF PARTNERS FUNDS LOGO)
Longleaf Partners Funds®
(800) 445-9469
www.longleafpartners.com
All data as of 9/30/10
PORTFOLIO MANAGERS
Mason Hawkins, CFA
Southeastern since 1975
Staley Cates, CFA
Southeastern since 1986
PORTFOLIO COMPOSITION
         
Equities
    95 %
Bonds
    1 %
Cash & Other
    4 %
 
       
Total
    100 %
PARTNERS FUND PROFILE
     
Initial Public Offering:
  4/8/87
 
   
Net Assets:
  $7,863 million
 
   
YTD Expense Ratio:
  0.91%; No loads, 12b-1, exit or performance fees
 
   
YTD Turnover:
  27.4%
 
   
Investment Suitability:
  Appropriate for investors with a time horizon over 5 years
 
   
Symbol & Cusip:
  LLPFX; 54306910-8
 
   
Net Asset Value:
  $25.69
TOP TEN HOLDINGS — 21 Total Holdings in Fund
             
DIRECTV
  satellite broadcaster     8.9 %
Chesapeake Energy
  natural gas exploration & production     7.4 %
Dell
  information technology     7.3 %
Walt Disney
  entertainment and broadcasting     6.1 %
Pioneer Natural Resources
  oil & gas exploration & production     5.9 %
Yum! Brands
  franchisor/owner-Taco Bell, KFC, Pizza Hut     5.3 %
Aon Corportation
  insurance brokerage & consulting     5.2 %
Loews Corporation
  opportunistic diversified holding company     4.5 %
Bank of New York Mellon
  securities services & asset management     4.5 %
NKSJ Holdings
  Japanese non-life insurance     4.5 %
 
         
 
 
Total
    59.6 %
 
         
AVERAGE ANNUAL
PERFORMANCE — as of 9/30/10
                                 
    l Year   5 Years   10 Years   20 Years
Longleaf Partners Fund
    11.8 %     (0.2 )%     5.2 %     12.1 %
S&P 500 Index
    10.2 %     0.6 %     (0.4 )%     9.1 %
Inflation + 10%
    11.1 %     11.9 %     12.3 %     12.5 %
PERFORMANCE — Yearly Returns
         
1988
    35.2 %
1989
    23.3 %
1990
    (16.4 )%
1991
    39.2 %
1992
    20.5 %
1993
    22.2 %
1994
    9.0 %
1995
    27.5 %
1996
    21.0 %
1997
    28.3 %
1998
    14.3 %
1999
    2.2 %
2000
    20.6 %
2001
    10.3 %
2002
    (8.3 )%
2003
    34.8 %
2004
    7.1 %
2005
    3.6 %
2006
    21.6 %
2007
    (0.4 )%
2008
    (50.6 )%
2009
    53.6 %
Returns do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Current performance may be lower or higher than the performance quoted. Please call (800) 445-9469 or view Longleaf’s website www.longleafpartners.com for more current performance information and www.longleafpartners.com/misc/prospectus.cfm for a copy of the current Prospectus and Summary Prospectus, which should be read carefully for a discussion of investment objectives, management fees, expenses, and risks. Prior to 2010, the Fund used currency hedging as an investment strategy. Fund returns and those of the unmanaged S&P 500 Index include reinvested dividends and distributions. The U.S. Bureau of Labor Statistics compiles the monthly CPI-U values used to calculate inflation. Past performance is no guarantee of future performance, fund prices fluctuate, and the value of an investment at redemption may be more or less than purchase price.

 


 

September 30, 2010
Longleaf Partners Small-Cap Fund
PHILOSOPHY
The Fund seeks to achieve superior long-term performance by acquiring equity securities of competitively entrenched, financially strong, well-managed companies run by capable managements at market prices significantly below our assessment of their business value, and selling these stocks when they approach our appraisal. We view equity investments as ownership in a business enterprise. We determine business or intrinsic value through financial analysis and established disciplines which we have consistently applied for 35 years. Equities purchased at prices substantially less than their intrinsic worth should protect capital from significant loss and should also appreciate substantially when the market ultimately recognizes corporate value.
OBJECTIVE/POLICY STATEMENT
Longleaf Partners Small-Cap Fund seeks long-term capital growth by investing primarily in a limited number of small companies believed to be significantly undervalued.
FUND MANAGEMENT
The Fund is managed by Southeastern Asset Management, Inc.®, a Memphis based firm. Founded in 1975, the firm has 58 employees and manages over $32 billion in assets.
INVESTMENT PARTNERSHIP
To align employee interests with those of shareholders and prevent conflicts of interest, Southeastern’s Code of Ethics requires all employees to limit their investment in publicly traded equity securities to the Longleaf Partners Funds (unless granted prior clearance.) The independent members of the Board of Trustees also must invest at least as much as their annual Trustees’ fees in the Funds.
GOVERNING PRINCIPLES
  We will treat your investment in Longleaf as if it were our own.
 
  We will remain significant investors with you in Longleaf.
 
  We will invest for the long-term, while striving to maximize returns and minimize business, financial, purchasing power, regulatory and market risks.
 
  We will choose our equity investments based on their discounts from our appraisal of their corporate intrinsic values, their financial strengths, their managements, their competitive positions, and our assessment of their future earnings potential.
 
  We will concentrate our assets in our best ideas.
 
  We will not impose loads, exit fees or 12b-1 charges on our investment partners.
 
  We will consider closing the Funds to new investors if closing would benefit existing shareholders.
 
  We will discourage short-term speculators and market timers from joining us, the long-term investors in Longleaf.
 
  We will continue our efforts to enhance shareholder services.
 
  We will communicate with our investment partners as candidly as possible.
(LONGLEAF PARTNERS FUNDS LOGO)
Longleaf Partners Funds®
(800) 445-9469
www.longleafpartners.com

 


 

(LONGLEAF PARTNERS FUNDS LOGO)
Longleaf Partners Funds®
(800) 445-9469
www.longleafpartners.com
All data as of 9/30/10
PORTFOLIO MANAGERS
Mason Hawkins, CFA
Southeastern since 1975
Staley Cates, CFA
Southeastern since 1986
PORTFOLIO COMPOSITION
         
Equities
    97 %
Cash & Other
    3 %
 
       
Total
    100 %
 
       
SMALL-CAP FUND PROFILE
     
Initial Public Offering:
  2/21/89; closed to new investors
 
   
Net Assets:
  $2,608 million
 
   
YTD Expense Ratio:
  0.93%; No loads, 12b-1, exit or performance fees
 
   
YTD Turnover:
  11.7%
 
   
Investment Suitability:
  Appropriate for investors with a time horizon over 5 years
 
   
Symbol & Cusip:
  LLSCX; 54306920-7
 
   
Net Asset Value:
  $23.66
TOP TEN HOLDINGS — 20 Total Holdings in Fund
             
tw telecom
  telecommunications provider     9.6 %
Fairfax Financial Holdings
  property/casualty insurance     7.5 %
Fair Isaac
  credit scoring software     6.8 %
Dillard’s
  department store retailer     6.3 %
Pioneer Natural Resources
  oil & gas exploration & production     5.9 %
Texas Industries
  construction materials     5.3 %
DineEquity
  developer/franchisor of restaurants     5.1 %
Service Corp International
  funeral home/cemetery operator     4.8 %
Wendy’s/Arby’s
  fast food restaurant operator     4.7 %
Everest Re
  reinsurance     4.4 %
 
         
   
Total
    60.4 %
AVERAGE ANNUAL
PERFORMANCE — as of 9/30/10
                                 
    l Year   5 Years   10 Years   20 Years
Longleaf Partners Small-Cap Fund
    16.7 %     3.6 %     8.5 %     11.5 %
Russell 2000 Index
    13.4 %     1.6 %     4.0 %     10.3 %
Inflation + 10%
    11.1 %     11.9 %     12.3 %     12.5 %
PERFORMANCE — Yearly Returns
         
1989*1
    21.5 %
1990*
    (30.1 )%
1991*
    26.3 %
1992
    6.9 %
1993
    19.8 %
1994
    3.6 %
1995
    18.6 %
1996
    30.6 %
1997
    29.0 %
1998
    12.7 %
1999
    4.1 %
2000
    12.8 %
2001
    5.5 %
2002
    (3.7 )%
2003
    43.9 %
2004
    14.8 %
2005
    10.8 %
2006
    22.3 %
2007
    2.8 %
2008
    (43.9 )%
2009
    49.3 %
 
1   Partial year, initial public offering on 2/21/89-12/31/89.
 
*   From public offering through 3/31/91 Fund was managed by a different portfolio manager
Returns do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Current performance may be lower or higher than the performance quoted. Please call (800) 445-9469 or view Longleaf’s website www.longleafpart-ners.com for more current performance information and www.longleafpartners.com/misc/prospectus.cfm for a copy of the current Prospectus and Summary Prospectus, which should be read carefully for a discussion of investment objectives, management fees, expenses, and risks. Fund returns and those of the unmanaged Russell 2000 Index include reinvested dividends and distributions. The U.S. Bureau of Labor Statistics compiles the monthly CPI-U values used to calculate inflation. Past performance is no guarantee of future performance, fund prices fluctuate and the value of an investment at redemption may be more or less than purchase price.


 

September 30, 2010
Longleaf Partners International Fund
PHILOSOPHY
The Fund seeks to achieve superior long-term performance by acquiring equity securities of competitively entrenched, financially strong, well-managed companies run by capable managements at market prices significantly below our assessment of their business value, and selling these stocks when they approach our appraisal. We view equity investments as ownership in a business enterprise. We determine business or intrinsic value through financial analysis and established disciplines which we have consistently applied for 35 years. Equities purchased at prices substantially less than their intrinsic worth should protect capital from significant loss and should also appreciate substantially when the market ultimately recognizes corporate value.
OBJECTIVE/POLICY STATEMENT
Longleaf Partners International Fund seeks long-term capital growth by investing primarily in a limited number of foreign companies of all sizes believed to be significantly undervalued.
FUND MANAGEMENT
The Fund is managed by Southeastern Asset Management, Inc.®, a Memphis based firm. Founded in 1975, the firm has 58 employees and manages over $32 billion in assets.
INVESTMENT PARTNERSHIP
To align employee interests with those of shareholders and prevent conflicts of interest, Southeastern’s Code of Ethics requires all employees to limit their investment in publicly traded equity securities to the Longleaf Partners Funds (unless granted prior clearance.) The independent members of the Board of Trustees also must invest at least as much as their annual Trustees’ fees in the Funds.
GOVERNING PRINCIPLES
  We will treat your investment in Longleaf as if it were our own.
 
  We will remain significant investors with you in Longleaf.
 
  We will invest for the long-term, while striving to maximize returns and minimize business, financial, purchasing power, regulatory and market risks.
 
  We will choose our equity investments based on their discounts from our appraisal of their corporate intrinsic values, their financial strengths, their managements, their competitive positions, and our assessment of their future earnings potential.
 
  We will concentrate our assets in our best ideas.
 
  We will not impose loads, exit fees or 12b-1 charges on our investment partners.
 
  We will consider closing the Funds to new investors if closing would benefit existing shareholders.
 
  We will discourage short-term speculators and market timers from joining us, the long-term investors in Longleaf.
 
  We will continue our efforts to enhance shareholder services.
 
  We will communicate with our investment partners as candidly as possible.
(LONGLEAF PARTNERS FUNDS LOGO)
Longleaf Partners Funds®
(800) 445-9469
www.longleafpartners.com

 


 

(LONGLEAF PARTNERS FUNDS LOGO)
Longleaf Partners Funds®
(800) 445-9469
www.longleafpartners.com
All data as of 9/30/10
PORTFOLIO MANAGERS
Mason Hawkins, CFA
Southeastern since 1975
Scott Cobb
Southeastern since 2006
Staley Cates, CFA
Southeastern since 1986
Ken Siazon
Southeastern since 2006
PORTFOLIO COMPOSITION
         
Equities & Forwards
    96 %
Cash, Bonds & Other
    4 %
 
       
Total
    100 %
INTERNATIONAL FUND PROFILE
     
Initial Public Offering:
   10/26/98
 
   
Net Assets:
   $2,106 million
 
   
YTD Expense Ratio:
   1.37%; No loads, 12b-1, exit or performance fees
 
   
YTD Turnover:
   20.5%
 
   
Investment Suitability:
   Appropriate for investors with a time horizon over 5 years
 
   
Symbol & Cusip:
   LLINX; 54306940-5
 
   
Net Asset Value:
   $14.46
TOP TEN HOLDINGS — 22 Total Holdings in Fund
             
NKSJ Holdings
  non-life insurance     9.6 %
Cheung Kong
  ports, real estate, & telecom     9.3 %
Fairfax Financial Holdings
  property/casualty insurance     8.6 %
ACS Actividades
  construction, infrastructure & energy     8.3 %
Hochtief AG
  infrastructure construction     5.6 %
Carrefour
  global retailer     5.2 %
Accor
  hotels     4.9 %
Yum! Brands
  franchisor/oumer-Taco Bell, KFC, Pizza Hut     4.7 %
Genting Berhad
  casino operator     4.5 %
Willis Group
  insurance broker     4.1 %
 
         
 
 
Total
    64.8 %
 
         
COUNTRY WEIGHTINGS
                 
    Equity   Net Assets
Japan
    21.8 %     21.0 %
France
    13.5 %     13.0 %
Hong Kong
    9.6 %     9.3 %
US
    8.9 %     8.6 %
Canada
    8.9 %     8.6 %
Spain
    8.6 %     8.3 %
Ireland
    6.0 %     5.8 %
UK
    5.9 %     5.6 %
Germany
    5.8 %     5.6 %
Malaysia
    4.6 %     4.5 %
Mexico
    4.0 %     3.9 %
China
    2.3 %     2.2 %
 
             
Total
    100 %     96.4 %
Cash/Other
    N/A       3.6 %
AVERAGE ANNUAL PERFORMANCE — as of 9/30/10
                         
    l Year   5 Years   10 Years
Longleaf Partners International Fund
    7.4 %     1.8 %     5.8 %
MS EAFE Index
    3.3 %     2.0 %     2.6 %
Inflation + 10%
    11.1 %     11.9 %     12.3 %
PERFORMANCE — Yearly Returns
         
1998*
    9.0 %
1999
    24.4 %
2000
    25.9 %
2001
    10.5 %
2002
    (16.5 )%
2003
    41.5 %
2004
    10.2 %
2005
    12.9 %
2006
    17.1 %
2007
    15.3 %
2008
    (39.6 )%
2009
    23.2 %
 
*   Partial year, initial public offering 10/26/98
All returns and those of the unmanaged and unhedged index include reinvested dividends and distributions, but do not reflect the deduction of taxes. Current performance may be lower or higher than the performance quoted. Please call (800) 445-9469 or view Longleaf’s website www.longleafpartners.com for more current performance information and www.longleafpartners.com/misc/prospectus.cfm for a copy of the current Prospectus and Summary Prospectus, which should be read carefully for a discussion of investment objectives, management fees, expenses, and risks. Prior to 2010, the Fund used currency hedging as an investment strategy. The U.S. Bureau of Labor Statistics compiles the monthly CPI-U values used to calculate inflation. Past performance is no guarantee of future performance, fund prices fluctuate, and the value of an investment at redemption may be more or less than purchase price.