Value Investing Vet Mason Hawkins Steps Down

Hawkins has picked the next CEO of Southeastern Asset Management, who takes over after a years-long rough period for value investors.

Illustration by II

Illustration by II

Mason Hawkins, the 70-year-old founder, chairman, and CEO of Southeastern Asset Management, is retiring as CEO, Institutional Investor has learned. He will remain on as chairman of the board.

Ross Glotzbach — now president and head of research — will succeed Hawkins, who founded the global value manager in 1975. Glotzbach, 38, will continue leading research for the Memphis-based manager, which has $14.1 billion in assets. Hawkins will also stay on as a portfolio manager for the firm’s four funds. Southeastern advises institutional and retail clients through its Longleaf Partners Funds.

Hawkins is part of a retiring generation of active managers who pioneered the institutional business beginning in the 1960s, when pension funds started building sophisticated investment portfolios. “At the outset, we thought we could create a firm founded on Ben Graham’s discipline,” Hawkins said in an interview, referring to the father of value investing. “That’s what we did and after 43 years we’re continuing to pursue exactly that.”

Hawkins said he’s contrarian by nature, and the last few years of rising markets have reminded him of early days. “In the early ’70s, everybody was focused on what had been working and chasing momentum. The two dominant trust companies were promoting that you could pay anything for a stock. We all know what happened,” said Hawkins.

Founder-led asset managers have frequently struggled with succession. Large investment organizations, such as BNY Mellon, and holding companies like Affiliated Managers Group buy all or part of boutiques and smaller asset managers in order to transition leadership and equity to the next generation. “A lot of firms are named after their founders and they go away. That’s not us,” said Glotzbach in a phone interview. “Mason didn’t call it Mason Hawkins Capital, he called it Southeastern.”

“It takes a certain generosity of the founder to not maximize the exit,” added vice chairman Staley Cates. “The present value of our culture is unusually important to us. We’re determined to strengthen that under Ross,” he added.

Southeastern, which is 100 percent employee-owned, will remain independent, the executives said. Employees’ equity savings are required to be invested in Southeastern’s funds — an unusual rule in place that aligns the firm’s interests with outside stakeholders.

As an independent firm, Hawkins said Southeastern has made tough decisions — at least from a revenue perspective — like closing funds when investment opportunities thinned. One of its best performing products, the Longleaf Partners Small-Cap Fund, has been closed to new investors since 1997. The flagship Longleaf Partners Fund has closed a number of times, most recently in June 2017.

Southeastern started investing outside the U.S. in the late 1998 amid the Asian crisis. It is a concentrated value manger that takes an activist stance — the firm calls it an engaged approach — to public companies. It primarily works with management behind the scenes, but goes public about the changes it wants a company to make when it sees fit. In contrast to many active managers, Southeastern holds stocks for an average of five years. Each fund holds about 20 stocks. “Why invest in your 22nd favorite stock, when you can just own more of your favorite?” asks Glotzbach. Southeastern’s vehicles have high active share — a financial statistic that means their holdings depart significantly from the corresponding index. “We’re not a fake active manager,” added Glotzbach.

Southeastern — like many of its value peers — has faced performance challenges. Some managers struggled to find value-oriented stocks during the long bull market that may have ended last year. Unlike a lot of managers, the firm is willing to hold non-trivial cash positions.

The Longleaf Partners Fund has generated an average annual return of 6.15 percent over five years ending Sept. 30, 2018, while the S&P gained 13.95 percent annually during the same period. The small-cap fund underperformed the Russell 2000 by about 1 percentage point annually over five years. Both funds have outperformed benchmarks over 20 years and since inception.

“We’re not blind to our business challenges,” Glotzbach said. “The best way to manage our risks is to build the right base of long-term clients. We’ve never taken hot money when it’s coming at us. And now that active is about to outperform, we’re not going to take it now.” He emphasized that the firm has stuck by its strategy, but made “some improvements on the margins over the past couple of years.” They included a new compensation plan for analysts to more clearly reflect accountability on a stock-by-stock basis, while also encouraging teamwork. Southeastern has formalized a devil’s advocate process to rigorously test investment theses for potential weaknesses and has instituted structured weekly research calls.

Glotzbach believes Southeastern’s international funds — which face less passive competition than U.S. strategies — deserve to be bigger. The firm may also reopen the small-cap fund if it finds the right partners and investment opportunities.

“We are our largest shareholders,” added Cates. “We see our bosses in the mirror in the morning. Those people are more difficult on our decision-making than outsiders.”