Steve Romick on FPA Crescent Q3 call, also see his Q3 letter (although this post has much more commentary). Also see: FPA Paramount Fund Explains Their Investment Process, FPA Perennial Fund CC Call: The Long Case For O’Reilly, FPA New Income: Decline In Mortgage Debt Eclipsed By Increase In Other Types Of Consumer Credit, FPA International Value Fund: Case Study On UK Manufacturer and FPA Capital: Finding Value In Select Small Caps In Tough Market.
The Crescent Portfolio characteristics… as one would expect given our shareholders letters, as we’ve mentioned, there’s been more opportunity in larger caps… larger cap companies, which are somewhat less expensive than small caps.
And that explains the higher market capitalization. And our continued focus on high-quality larger companies also shows up in the debt-to-capital that actually shows up as negative because many of our companies have a tremendous amount of cash on their books. Albeit some of these U.S. companies have it overseas and, in order to bring it back to the U.S., would have to repatriate it and pay taxes.
And if you also will look at the valuations in our portfolio, this portfolio on a P/E basis is slightly more expensive than its historic average. And on a price-to-book basis, it’s about at its average.
Our Crescent allocations at the end of the quarter… you can see that our total market exposure… net market exposure is about 54%, which is actually down from 66% at the end of last year, at the end of 2012. And it’s gone down by quarter. With the stock market up around 25% since the end of last year, this shouldn’t be any great surprise to anyone.
The return of the market has largely been driven by—not just in the U.S., but overseas as well—by market P/E expansion… so by P/E multiple expansion. So the light blue portion of this bar chart that you see is the amount of the return that comes from multiple expansions. As you can see, in most cases it is by far and away the largest percentage of the return.
And that of course leads to the fact that the historic P/Es that you see here on a trailing basis are slightly higher than the market averages have been since various points in time. And we show those various points in time here. And there’s no mistaking the fact that this large P/E is to a very a large degree a function of the very low U.S. Treasury that we see today.
Steve Romick FPA Crescent Full audio file, slides and transcript below, enjoy!