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Investing in a Fertile Crescent
10/14/2010 12:00 pm EST
Russel Kinnel, director of fund research and editor of Morningstar FundInvestor, and analysts Ryan Leggio and Christopher Davis like a go-anywhere fund with a stellar track record.
Steven Romick has been the lead manager for FPA Crescent (FPACX) since its inception in 1993. Romick is a dyed-in-the-wool value investor, and he’ll invest across the market-cap spectrum to find bargains.
Romick describes himself and the fund as a free-range chicken. His aim is to deliver equity-like results but with less exposure and volatility than an equity-only fund. He is willing to go wherever the bargains are and doesn’t apologize for holding cash when he can’t find compelling risk/reward opportunities. Cash has averaged more than 20% over the past decade.
Historically, he’s emphasized smaller names, though the fund’s market capitalization has risen dramatically in recent years. Romick invests across asset classes, buying stocks, bonds, and convertibles that offer the prospect of market-beating returns. He’ll also take short positions in stocks, but does so conservatively and to lower overall portfolio volatility.
Romick is finding values in large-cap, quality stocks such as Wal-Mart Stores (NYSE: WMT) and Johnson & Johnson (NYSE: JNJ). This is in stark contrast to the bargains he was finding a decade ago in small-cap stocks.
The fund also owns some oil drillers, because they are trading at discounts to their replacement value and at single-digit P/Es (on normalized earnings). Romick also makes forays into high-yield debt, but has been selling into the rally. He cut his high-yield stake to 19% in June from 28% in March.
Any way you slice it, performance has been stellar here. The fund lagged tremendously in 1999 as its small-cap stocks got cheaper, but, ever since then, it hasn’t let up.
Its 20.55% loss in 2008 was good enough to beat 90% of peers, and the fund was able to top peers again in 2009’s strong market. This year, the fund is slightly trailing its peers. That’s because the big cash stake yields nothing, and oil drillers and some health-care companies have lagged.
The fund isn’t cheap compared with moderate-allocation funds (its expense ratio is 1.17%—Editor), but given that it’s really run more like an equity fund, we cut it some slack. While fees could be slightly cheaper given the large asset base of the fund today, Romick is shareholder-friendly in many other ways.
He is a large investor in the fund (more than $1 million) and regularly closes it when it gets too big. In February 2005, he closed the fund on the concern that unrestrained growth in assets might impair investment flexibility. The fund reopened again in October 2007 only after receiving net redemptions and finding more securities [in which] to invest.
It may be hard to categorize this fund, but it has done its job for shareholders over the long haul. Shareholders should continue to expect strong downside protection thanks to Romick’s aversion to losing money and his strong stock-picking skills.
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