Longleaf Partners fell 11 percent in the first quarter, during which it was opened to new investors for the first time in 3-1/2 years.

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

The pair, named Morningstar’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 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, Tenn.-based company’s Web site. “The cost, however, has far exceeded our worst-case estimates.”

Rohner took over as chief executive in October.

Longleaf Partners fell 11 percent in the first quarter, during which it was opened to new investors for the first time in 3 1/2 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 and Cates. Zurich-based 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 2 million shares by March 31, the decline of UBS brought its stake to a value of $396.2 million, the report said.

UBS has announced $38 billion in credit writedowns, the biggest of any European bank, and a first-quarter loss of 11.5 billion francs ($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 declined about 35 percent this year through May 13.

Longleaf Partners has fallen 2.2 percent in 2008, beating more than three-fourths of rival funds that invest in large company stocks, according to data compiled by Chicago-based Morningstar. During the past 12 months, the fund has lost 9.2 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.