1Q26 Partners Fund Commentary

Longleaf Partners fell 4.46% in Q1 2026, trailing the S&P 500's 4.33% decline as markets rewarded simplicity and punished companies requiring explanation. The fund's managers observed an abnormal disconnect: stocks that detracted over 50 basis points individually combined for 650 basis points of portfolio drag, yet the underlying free cash flow per share of these companies declined less than 25 basis points in aggregate. This mismatch—where short-term earnings disappointed but long-term cash generation remained intact—gave managers confidence in their positioning and prompted stepped-up engagement with portfolio companies. The quarter saw energy stocks drive value index gains, but managers questioned whether oil majors' 40% price moves reflected genuine long-term value creation or short-term earnings power. They noted that value investors who paid higher multiples for growth over the past decade had rougher quarters, while those focused on low multiples of current earnings performed better. Longleaf's more eclectic approach—emphasizing business quality and management alongside valuation—delivered returns between these extremes. Managers highlighted solid execution at FedEx (where the Federal Express segment delivered record holiday margins and Network 2.0 optimization), CNH (approaching cyclical trough with margin expansion potential), and the Rayonier-PotlatchDeltic merger, while noting post-merger weakness in Rayonier did not reflect underlying value creation. The fund ended the quarter with a price-to-value ratio in the mid-50s%, a rare level managers said bodes well for absolute returns. They exited Louisiana-Pacific, PayPal, and Walt Disney to concentrate in higher-conviction holdings and remain positioned to benefit if private credit stress exposes weaker balance sheets, which the portfolio has minimal direct exposure to.