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Southeastern turned 50 this 12 months. Whereas the small-cap technique at Southeastern has not been round for all 50 years, we’ve got seen loads of several types of environments in small-cap investing over that point. This 12 months was a type of years the place the underlying developments at our holdings had been higher than the inventory value returns vs. our absolute objective of inflation plus 10% and a wierd Russell 2000. To clarify this, let’s break the returns of the Russell 2000 into the next buckets: 20%+ winners, center floor, 20%+ decliners.
The starkest distinction this 12 months between our portfolio and the market was within the huge winners bucket, the place over 35% of the Russell 2000 was up a mean of 70%+ this 12 months vs. solely 15% of our portfolio up a mean of 30%. As we wrote final quarter, because the market lows of April/Might, decrease high quality, unprofitable corporations within the index have been on a tear. This continued within the fourth quarter with unprofitable vs. worthwhile firm common outperformance of simply over 500 foundation factors. The excellent news is that “decrease high quality rallies” can revert swiftly and strongly (see Fund Analysis Group’s 3Q25 Portfolio Insights ), which is able to work in our favor through the inevitable flip.
The second bucket price discussing contains these investments that returned between -20% to +20% this 12 months. The Small-Cap Fund had 75% of its portfolio on this group vs. the Russell 2000’s mid-40s%, and the Fund’s common efficiency on this group was higher than the index’s 0% return. Not a lot else to say right here, apart from that we had a number of optimistic developments on this group that features key holdings on offense reminiscent of White Mountains (WTM), CNX (CNX) and the soon-to-merge pair of Rayonier (RYN) and PotlatchDeltic (PCH).
The ultimate bucket consists of 20%+ decliners. The Fund did nicely right here with solely 10% of the portfolio on this class with a mean lack of 30% vs. the index at 15-20% and 40-50%. Now we have not misplaced everlasting capital in our holdings right here in mixture and sit up for higher years forward for these we talk about under.
Alongside these traces, within the first half of the 12 months, it was good to carry money and a comparatively steady Kodak (KODK) place. Because the 12 months went on, these two components of the portfolio grew to become relative efficiency headwinds. There’s nice information for the go ahead on each fronts for a pair causes. First, we had been capable of get truthful worth for our Kodak convertible most well-liked holding once we offered it within the fourth quarter. Don’t anticipate us to make different investments like this going ahead. Second, whereas money ended up having an immaterial impression on the portfolio for the 12 months, we like having some dry powder to allocate as we go into 2026 with market multiples a lot greater than they had been earlier in 2025.
Because it has now been three years since we first wrote concerning the “3 Guidelines” course of enhancements we made in 2022, it’s time for an replace. A key lesson is how a lot these guidelines assist us when going into a brand new title, and due to this fact how a lot better positioned we at the moment are concerning subsequent purchase or sale choices on that title. Alongside these traces, the leverage rule stays a very powerful. Adherence to this rule has protected us from leverage pitfalls, but it surely ought to have been in place earlier in order that we might higher navigate conditions on a few of the extra economically delicate and leveraged shares that delivered optimistic returns this 12 months for the general market, reminiscent of Kodak and Wherever Actual Property (HOUS). The holding firm rule additionally stays useful for our course of, and we don’t have something new so as to add on it.
Alternatively, it’s unlikely we’d have gotten all three guidelines precisely proper three years in the past, so we do have a change to the obese rule. We’re shifting our restrict from the preliminary 6.5% to eight% for just a few causes:
- Now we have extra information on the present analysis crew’s historic picks and don’t see materials variations in efficiency between 6% weights and eight% weights. Moreover, there haven’t been any new materially detrimental overweights within the final three years with the present crew.
- Now we have had funding success with our distinctive model of engagement for many years and hope to have the ability to communicate extra on this as 2026 progresses; this transformation offers us extra engagement heft going ahead.
- An 8% max will even assistance on tax effectivity, with fewer trims of performing shares which might be rising their worth per share and getting acknowledged for it.
Southeastern carried out nicely in 2000 (and 1987, however our information shouldn’t be as clear again then), however much less so in different downturn years. We’ll finish this a part of the letter with some necessary factors about our portfolios now that make this second extra like 1999:
Whereas we’ve got traditionally finished a great job of discovering the appropriate steadiness of corporations and industries throughout the small-cap technique, we’ve got typically not struck the right combination of leveraged investments. The excellent news is that we’re assured that our particular person investments are a lot much less leveraged now than they had been in 2007 and 2021. Since 2022, we’ve got been monitoring the bond and debt yields of our portfolios on a weighted common foundation. We’re capable of apply the identical methodology to our portfolios from 2007 and 2021 (information earlier than then is extra restricted). The distinction is materials, as spreads to the US 10-year treasury for our holdings at present are roughly half the degrees they had been in 2007 and 2021. This can be a sturdy signal that the bond market, which may typically be higher than the inventory market at detecting early draw back danger, validates the resilience of our portfolio at present. Once we mix a robust monetary place with nice companions on offense, we should always win. We’ll element this confidence as we now flip to our notable contributors and detractors.
Notable Contributors & Detractors
Beclé – Main producer of tequila and whiskeys Beclé contributed this 12 months. The corporate was severely undervalued within the first quarter once we took benefit of a share value dislocation to buy throughout peak US/Mexico tariff uncertainty. The corporate has sturdy manufacturers that we all know nicely having beforehand owned the corporate in our non-US technique, despite the fact that many of the worth now comes from the US regardless of the corporate’s Mexican itemizing. Beclé’s present undervaluation is additional difficult by the market’s cautious outlook on the alcohol trade, which has continued all year long (and led to us including to the place within the second half of the 12 months). The corporate has aligned companions within the Beckmann household, and proudly owning roughly 30% of the rising, international tequila market with 200+ 12 months previous manufacturers at 10x or much less FCF energy positions us nicely for the long-term.
GCI Liberty (GLIBA) – Alaskan communications firm GCI Liberty was a optimistic contributor for the 12 months. We bought GCI after it spun out of Liberty Broadband (LBRDA) in July. GCI holds the primary place in each shopper and enterprise broadband in Alaska, whereas additionally proudly owning the second largest wi-fi community. Their belongings are primarily irreplicable because of the location, local weather, and terrain of Alaska. A mix of engaging tax attributes from the spin and a enterprise that might be producing vital FCF within the close to time period which might permit GCI to be the subsequent iteration of Liberty Media (FWONA). All-time nice Southeastern accomplice John Malone will stay Chairman at GCI regardless of stepping again from most different boards, and he has proven his perception within the firm by means of each insider buys and totally backstopping a not too long ago accomplished $300 million rights providing. The inventory appreciated because the market higher understood it post-spin, however the firm nonetheless trades at a large low cost to Decrease 48 telecom belongings regardless of having a a lot better aggressive place.
Graham Holdings (GHC (GHC)) – Diversified conglomerate GHC carried out strongly all year long. The corporate’s Kaplan training section has a number of subparts which might be lastly again to development in mixture after a multi-year turnaround has borne fruit. It’s encouraging that broadcast tv M&A has elevated this 12 months, which might give GHC a novel alternative to develop and understand its worth on this section. The healthcare section continued its sturdy development and appears to be navigating a management change nicely. Total, GHC stays on offense with its sturdy internet money steadiness sheet and overfunded pension. Our P/V Podcast with CEO Tim O’Shaughnessy from earlier this 12 months stays a great hear if you want to study extra on the corporate.
Mattel (MAT) – Kids’s toy, media, and shopper merchandise creator Mattel was a contributor for the quarter and the 12 months. The corporate is in its strongest place in over 10 years, and there are a number of methods to win. Over 80% of Mattel’s worth comes from rising energy manufacturers like Sizzling Wheels, Barbie, and UNO. Mattel has a robust steadiness sheet which allowed materials inventory repurchases of $600 million in 2025, and we consider further share repurchase will come at these discounted costs in 2026. Essentially, the toy enterprise continues to develop and gross margins stay sturdy at 50%. Mattel has a promising owned IP (mental property) outlook for 2026 with the Masters of the Universe and Matchbox films, together with two video video games, being launched.
Oscar Well being (OSCR) – Healthcare insurance coverage firm Oscar was a contributor for the 12 months as above-market membership development and sustained expense self-discipline bolstered confidence within the firm’s positioning throughout the particular person medical health insurance market. We exited our place within the third quarter because the P/V hole closed and trade dangers grew to become extra obvious. The following drama across the expiration of enhanced Reasonably priced Care Act (ACA) subsidies underscores the continuing coverage uncertainty and challenges going through ACA-centric insurers like Oscar. Total, the funding was profitable for us, aided by administration’s execution by means of a unstable trade backdrop.
Boston Beer (SAM) – Alcoholic beverage firm Boston Beer was a detractor for the 12 months as alcohol consumption confronted headwinds. Quantity declines at Twisted Tea, the corporate’s largest model, weighed on the inventory. Twisted’s pricing had gotten slightly overextended, however the firm is actively working to repair this drawback and has additionally efficiently fended off quite a few opponents that entered the onerous tea house over the previous few years. Moreover, Actually remains to be having issue returning to development after a number of tough years however is now a a lot smaller a part of the corporate. Boston Beer has regularly confirmed itself as among the best innovators within the trade, as proven once more by its new and profitable vodka-based product Solar Cruiser, which is within the technique of a nationwide rollout and might be key to getting the corporate again to development. Now we have been happy by the pace at which administration has corrected margin issues that arose within the aftermath of the onerous seltzer growth, and we nonetheless consider there’s additional room for enchancment. Founder Jim Koch stepped again into the CEO seat in August for the primary time in nearly 25 years after former CEO Michael Spillane stepped down. The corporate nonetheless has a internet money place and is one in all our largest share repurchasers. We expect repurchase is a good use of capital for a shopper packaged items firm with high quality manufacturers that trades at 1x income, all at a time that it could possibly be an acquisition goal amidst trade consolidation.
Clearwater Paper (CLW) – Packaging firm Clearwater Paper was a detractor for the 12 months. We purchased shares of Clearwater in April. The inventory has since offered off because the already weak strong bleached sulfate (SBS) paperboard market confirmed few indicators of enhancing. The market has been depressed and under mid-cycle as a result of oversupply issues that had been exacerbated by a competitor conversion earlier this 12 months. Clearwater continues to function nicely what it might probably management, as evidenced by assembly synergy targets from a big and opportunistic acquisition accomplished final 12 months. The clearest method the oversupply drawback might be mounted is thru capability closures, however assist can also be coming within the type of tariffs on competing European capability, in addition to a weaker greenback that makes these imports much less interesting. Administration has a robust capital allocation monitor file and not too long ago determined to give attention to share repurchase after working an evaluation on a excessive return however time-consuming venture. We agree with this choice because the enterprise trades at a low single-digit a number of of rising mid-cycle FCF.
Empire State Realty (ESRT (ESRT)) and Alexander’s (ALX) – Within the fourth quarter of 2024, we had been trimming our place in New York actual property firm ESRT, because it had been a robust performer and the P/V hole had closed. This 12 months, each ESRT and its peer Alexander’s (which was a brand new place in 2025) confronted inventory market headwinds as New York actual property sentiment shifted. Now we have added to each at nice costs. It’s an fascinating dynamic the place the on-the-ground outcomes are stronger than the headlines, with region-wide leasing tendencies far outpacing weak inventory value efficiency. The inventory market worries about Mayor Mamdani, however that concern is now within the inventory costs, plus it stays to be seen how actually business-unfriendly his administration might be. New York actual property has made it by means of loads (town going broke within the Seventies, 9/11, COVID, and many others.) traditionally. These two shares traded at or above our value determinations through the not-great de Blasio administration and are uniquely undervalued vs. friends at present. Each of our holdings are on offense with a number of methods to develop worth per share and a willingness to promote belongings right into a extra attractively priced non-public market.
Park Accommodations & Resorts (PK) – Lodge REIT Park Accommodations & Resorts was a detractor for the 12 months. The corporate offered off as a result of worries about how an uneasy macro surroundings will impression a leisure-focused resort firm. The enduring Hilton Hawaiian Village, Park’s most dear property, remains to be recovering from each a labor strike in 2024 and diminished Japanese inbound journey on account of the weaker yen. The corporate has continued down the trail of promoting non-core motels and has so far obtained engaging costs, whereas share repurchases have additionally occurred. We offered our place earlier within the 12 months as a result of a mixture of recycling capital into higher concepts and by no means getting our place to a traditional weight.
Portfolio Exercise
After a extra lively first 9 months of the 12 months, we had no new purchases through the quarter whereas we exited our Kodak place as famous above.
Throughout the 12 months we bought seven new holdings: Shenandoah Telecommunications (SHEN), TripAdvisor (TRIP), Becl, Alexander’s, Clearwater Paper, GCI Liberty and Rayonier. Along with Kodak, we exited seven different holdings: Wherever Actual Property, Liberty Stay (LLYVA), Howard Hughes (HHH), Hyatt (H), Oscar Well being, Park Accommodations and Westrock Espresso (WEST).
Outlook
On the communications aspect of Southeastern, we’ve got been happy with the suggestions on our Analysis Views notes. Count on these to proceed in 2026 and past. Our P/V Podcasts will not be going away, however we solely had one final 12 months for just a few firm particular causes. Count on extra (however persevering with our give attention to high quality over amount) of those going ahead together with some exterior podcast appearances, one in all which has already been recorded this month.
2025 had many optimistic indicators for Southeastern. The most effective stays the February by means of April volatility round Liberation Day once we stored your cash protected and materially outperformed the market. We need to stress that we’re not merely constructing a portfolio for dangerous instances solely, however there might be advantage in all markets from proudly owning actual corporations on offense in a time when extreme hypothesis is widespread. Comprehensible, sturdy, FCF producing belongings run by nice companions ought to win when the tide goes out and at present’s fads like prediction markets, bizarre types of crypto, and overhyped IPOs inevitably disappoint.
Thanks on your partnership. This is to the subsequent 50 years.
Longleaf Companions Small-Cap Fund 2025 Annual Commentary
All information as of December 31, 2025
Fund Traits
Editor’s Be aware: The abstract bullets for this text had been chosen by Looking for Alpha editors.
