I always enjoy reading the shareholder reports for the Longleaf Partners Fund (FUND:LLPFX). The fund has provided excellent historical returns, and its portfolio managers clearly and regularly discuss their philosophy, perspective, and portfolio moves with shareholders. As very patient, value-oriented investors, they have a strategy that encompasses many characteristics I incorporate into my own stock-picking. Given their clear communications and my close observation of them for more than a decade, it's pretty easy for me to understand what they're thinking.

The biggest news in the most recent annual report: After finding it difficult to put money to work for a couple of years -- cash reached 26% of assets at the end of 2004 because of a dearth of ideas -- the managers found sufficient investment opportunities to bring cash down to 0.5% at the end of 2005. This change doesn't necessarily mean that the overall stock market is cheap, but it does at least indicate that the market offers pockets of attractive valuations.

More encouragingly, for the first time in at least two years, the commentary explicitly states that investors are encouraged to put money in the fund -- a clear signal that its managers believe that holdings are attractively priced (and more good investment opportunities are available). You should always be skeptical when a fund's managers encourage investment in their own fund, but in this case, the Longleaf team has a history of being particularly straightforward.

Value in large caps
During 2005, Longleaf initiated substantial positions in four publicly traded securities: Dell (NASDAQ:DELL) for 7.7% of the year-end portfolio, Liberty Media (NYSE:L) for 4.8%, Anheuser-Busch (NYSE:BUD) for 3.9%, and Sprint Nextel (NYSE:S) for 2.6%. Other new positions are spinoffs, splits, private placements, or de minimus. These four new positions are all large-capitalization companies that were market darlings at one point in the past decade.

Since Longleaf picks its holdings on a stock-by-stock basis, with little regard for market segments, the similarity of these holdings gives credence to investing scuttlebutt that the market's large-cap growth segment currently offers the most attractive opportunities in the U.S. equity markets. Of course, the attractive valuation of some holdings in this market segment doesn't mean that such value will be realized immediately. The market goes at its own pace, and the managers at Longleaf are patient, willing to wait years for the market to realize a security's true vale.

Since I read Longleaf's reports on a quarterly basis, I know that they began buying all of the new names except Sprint Nextel before the fourth quarter. Interestingly, however, they continued to meaningfully build their positions in each of their other holdings. During the fourth quarter, the fund increased its Dell holdings more than 54%, making it the portfolio's largest position. While many people might think that Dell's glory days are over, these smart investors believe (in a big way) that the stock and company continue to have a very bright future.

Not too much selling
Longleaf Partners Fund didn't sell much during the year. The only holding eliminated was Diageo (NYSE:DEO), a position the fund bought in 2003. Among continuing holdings, the fund trimmed its stakes in Vivendi Universal and FedEx (NYSE:FDX), which have been held for several years. Despite the reductions, these holdings each still represent more than 5% of the year-end fund portfolio. I assume these positions were lowered because the valuation of these stocks has risen over their holding period, and the managers wanted to redeploy some of the capital in more attractively valued opportunities.

I've been watching Longleaf's investment in General Motors with keen interest. The fund is a longtime holder of this company, and it increased its stake earlier in the year when the stock price dipped. I suspect that Longleaf's investment thesis considers the breakup value of the company much greater than its current stock price. While I respect the managers' opinion and process, I've steered clear of this automaker, fearing that much of the value of its non-North American auto operations would be surrendered to employees and retirees rather than to shareholders.

I have been wondering how Longleaf responded during the fourth quarter, when GM's stock fell to multi-decade lows. Longleaf typically backs up the truck and dramatically increases its holdings when this situation occurs. However, the fund managers made no change in their holdings during the quarter. This static position may reflect that the fund had already spent most of its cash and lacked ideas to sell to fund a greater purchase. But my suspicion is that the managers' evaluation of the long-term value of the franchise has deteriorated over the past year. Whatever they're thinking, they clearly have many ideas that they prefer to GM, despite a significant reduction in the company's stock price.

Final thoughts
 I reviewed the recently released Longleaf Partners annual report for this article because I admire (OK, adore, actually) their fund. But you can glean similar information from many other high-quality funds. I also eagerly await reports from the Oakmark, Dodge & Cox, Third Avenue Value, and Davis families.

If you're just interested in discovering a specific fund's holdings without reading manager commentary, the free area of Morningstar.com is the best source I've found. Type in a fund's symbol, click on "portfolio," then "Top 25 Holdings," and you'll find the fund's biggest holdings as of its last reporting date. The site also indicates whether positions have been opened, built up, or reduced since the last reporting period. That's handy information, since it helps you to better understand the manager's most recent moves.

Of course, there are some drawbacks to the information you get from mutual funds. The reports are dated when you receive them, and it's unlikely that you'll get a flash alert when the fund manager's perspective changes. For this reason, I find that reports from funds with a long-term, low-turnover style are much more valuable than those of funds with rapid turnover in their portfolios. You also have to remember that the moves of a mutual fund manager are made in the context of that fund's investment strategy and existing portfolio, which may be very different from your own situation.

Finally and most importantly, no investment manager is perfect. While overall historical performance may be great, some dogs exist in almost every portfolio. Longleaf Partners has held its stake in GM for several years as the stock price has continued to fall. The holding may end up being a great one for the fund, but so far it has not.

Despite these caveats, individual investors can glean terrific information from good mutual funds' reports. Speaking of which, I'd better run. My Treo is flashing -- a reminder that I'm supposed to be doing some more research on Dell.

If you need help determining what which funds could be great sources of information, you can always get some Foolishly good ideas from Shannon Zimmerman in Motley Fool Champion Funds . Sign up today for a 30-day free trial subscription.

Fool contributor Warren Gump spends too much time reading business periodicals and mutual fund commentary, but at least he loves it. Warren owns shares of Anheuser-Busch, Liberty Media, and the Longleaf Partners Fund. FedEx and Dell are Motley Fool Stock Advisor picks. Dell and Anheuser-Busch are Motley Fool Inside Value picks. Diageo is a Motley Fool Income Investor pick. The Fool has a strict disclosure policy.