Steven Romick’s FPA Crescent Fund letter to shareholders for the third quarter 2014. We are big fans of Steve Romick and particularly liked this line (in the conclusion) ‘In the midst of writing this letter, volatility has picked up and stock markets have declined. Needless to say, given our cash position and ability to deploy capital, it has been a while since we have had so much fun coming into the office.’

Dear Shareholders:

The FPA Crescent Fund declined 0.96% in the third quarter but has risen 4.02% year-to-date. The S&P 500 returned 1.13% and 8.34% in the same periods, respectively. Our average risk exposure was 54.6% in the third quarter and 54.3% year-to-date.

FPA Crescent Steve Romick

The top five winners and the top five losers exactly offset each other, each group affecting the portfolio by 0.98%. There wasn’t much news involving the securities in the list below. Some of the winners were at or ahead of Wall Street’s earnings expectations, while some of the losers were behind. Nevertheless, there was nothing of note that has caused us to deviate from our longer-term view of these companies. Once again, quarterly price movement seemed like more noise than anything else.

With FPA Crescent’s broad charter, we have the ability to go long and short. When one public company owns part of another, we sometimes short the business we do not want exposure to, thereby creating a “stub” investment. Naspers Limited (ADR) (OTCMKTS:NPSNY) (JSE:NPN)/Tencent Holdings Ltd (HKG:0700) (OTCMKTS:TCEHY) is one such trade. The fact that it shows up on both sides of the table below is misleading. In the most recent quarter, the Tencent gain (a short) was entirely offset by the Naspers loss (a long). One needs to look at the net, which had a detrimental impact of -5 bps (basis points). We explain the trade further in the investment section.

FPA Crescent Steve Romick

In the third quarter letter, we take time off from our semi-annual discussion of the economy and markets, but will have more to share at year-end.

Steve Romick’s FPA Crescent Fund: Investments

Naspers is a South African holding company with a global portfolio of media and technology investments. Naspers has a 34% equity stake in Tencent, a Chinese internet company most known for its QQ instant messaging platform with over 800 million active users. The market values Naspers’s stake in Tencent at ~$48 billion but the parent company at just ~$45 billion. Going long Naspers and shorting a proportionate number of Tencent shares effectively allows us to create a Naspers “stub” at a negative $3 billion valuation. We feel Naspers is worth substantively more, even after tax-affecting for a disposition of Tencent. Better yet, at today’s prices the market is paying us to own Naspers ex-Tencent.

The Naspers stub includes the leading South African Pay TV company MultiChoice, which has a more than 90% market share not to mention several Pay TV operations across Sub-Saharan Africa that have long-term subscriber growth potential resulting from increased Pay TV penetration. Naspers owns, as well, a major publisher of magazines and newspapers primarily sold in South Africa. The cash flow of these assets continues to support Naspers’s portfolio of Internet/e-commerce investments, including several companies focused on emerging markets that could prove valuable.

The market is paying us to own both Pay TV with positive cash flows and media assets with attractive market positions along with an internally-funded portfolio of emerging market e-commerce investments. When the price is right, even absolute value investors like us can feel like emerging market venture capitalists.

Conclusion

In the midst of writing this letter, volatility has picked up and stock markets have declined. Needless to say, given our cash position and ability to deploy capital, it has been a while since we have had so much fun coming into the office. Subject to prices continuing to come our way, we are hopeful that the next time we write, you will see that our amount of invested capital – as opposed to cash – has risen due to additions to existing names and/or the appearance of new ones.

Respectfully submitted,

Steve Romick

President

October 23, 2014

See full FPA Crescent 3Q14 letter here.