Mason Hawkins and Staley Cates, managers of the $12.1 billion Longleaf Partners Fund, said loading up on shares of UBS AG was an "unforced error" that led to their third straight quarterly decline.

The pair, named Morningstar Inc.'s top U.S. stock-fund managers in 2006, are known for finding companies they consider cheap compared with underlying value. In the fourth quarter, their Southeastern Asset Management Inc. bought 32 million UBS shares, raising its stake in Switzerland's largest bank fivefold after the stock had dropped 13 percent in the first nine months.

"Our case assumed that new management led by Marcel Rohner would return the firm to its roots as the world's best private bank at minimal cost," the managers wrote in a quarterly shareholder report posted May 13 on the Memphis company's Web site. "The cost, however, has far exceeded our worst-case estimates."

Rohner took over as chief executive officer in October.

Longleaf Partners fell 11 percent in the first quarter, during which it was opened to new investors for the first time in 31/2 years. The Standard & Poor's 500 index declined 9.5 percent in the same period.

Southeastern Asset's International Fund, which also holds UBS, fell 11.5 percent, compared with the 8.9 percent drop by the MSCI EAFE Index.

"The funds made meaningful headway in spite of one unforced error," wrote Hawkins, 60, and Cates, 43. UBS fell 43 percent during the first quarter.

Longleaf Partners held 11 million UBS shares worth more than $506 million as of Dec. 31. Though the fund added two million shares by March 31, the decline of UBS reduced the value of its stake to $396.2 million, the report said.

UBS has announced $38 billion in credit write-downs, the biggest of any European bank, and a first-quarter loss of $10.9 billion. Rohner exited the municipal-bond business and plans to sell subprime assets. The company will cut 2,600 jobs in its securities business and focus on the unit that manages money for wealthy clients.

"If the management acts as promised, UBS should be a tremendous investment from this point," the Southeastern managers wrote.

UBS accounted for 3.9 percent of the fund's assets as of March 31. The stock has declined 35 percent through May 13.

Longleaf Partners has gained 0.1 percent in 2008, beating more than three-fourths of rival funds that invest in large-company stocks, according to data compiled by Morningstar. The S&P 500 has declined 3.7 percent this year, including reinvested dividends. During the last 12 months, the fund has lost 6.1 percent, trailing 87 percent of peers.

"The fund is not guaranteed for a smooth performance, but over the long term it has proven its value," Gregg Wolper, an analyst with Morningstar, said in an interview. "The managers have the courage to stick with stocks that they believe in."

Morningstar dropped its rating on the fund on May 2 to three stars from its second-highest rating of four stars. The fund has a Sharpe ratio of 0.39, compared with 0.45 for competing funds, Morningstar data show. A higher Sharpe ratio means better risk-adjusted returns.

Longleaf Partners, founded in 1987, reopened to new investors in January, citing investment opportunities of about $1.5 billion.

Lee Harper, a vice president of Southeastern Asset, said Hawkins and Cates declined to comment.

Longleaf Partners' largest holding is Dell Inc., the world's second-biggest maker of personal computers. Dell, which accounts for 8.2 percent of the fund's assets, tumbled 19 percent in the first quarter.

The fund's second-biggest holding is Chesapeake Energy Corp. The producer of natural gas rose 18 percent from January through March, the most among the fund's holdings.

During the first quarter, the fund added shares in Dell, Internet auctioneer eBay Inc., and drugstore chain Walgreen Co.

Ebay declined 10 percent during the first quarter. Walgreen was mostly unchanged in that period.

Longleaf Partners Fund sold shares of wireless carrier Sprint Nextel Corp. and cable-television company Comcast Corp. in the first three months of the year to focus on what it deemed "higher-quality, more discounted businesses," according to the letter.

Comcast, based in Philadelphia, rose 6.3 percent in the first quarter. Sprint tumbled 49 percent as it struggled to stem customer defections.

Longleaf Partners

Managers:

Mason Hawkins, Staley Cates.

Assets:

$12.1 billion.

Performance:

Up 0.1 percent in 2008.

Key holdings:

Dell Inc., Chesapeake Energy Corp., Liberty Media Holding Corp.

Ticker:

LLPFX.