FPA New Income Fund’s conference call and webcast for the third quarter 2014.
Also see Steven Romick: FPA Crescent Fund 3Q14 Webcast And Transcript, FPA Paramount Fund Q314 Conference Call Transcript And Slides and FPA International Value Fund On Taking Advantage Of Market Volatility
FPA New Income Fund’s Ryan Leggio: First, we are absolute return investors, and each investment must meet our strict fundamental research and macroeconomic criteria—not just offer opportunity relative to other alternatives.
Second, we have strict risk/reward parameters. We like to invest when there is a target-rich environment. Risk of loss is a critical element in our thinking, and thus each investment must compensate for its unique risk, combined with a margin of safety.
And last, we have a flexible mandate. We do not bind ourselves to any one benchmark or index. We believe this flexibility provides a competitive advantage over those who do not have this capability, and this has been a critical element I achieving our goals historically.
Turning to core tenants, we seek not to lose money over the short term and seek to grow shareholder wealth over the long term above the rate of inflation. As mentioned previously, we are value investors and as such actively managed the duration or interest rate risk profile of the Strategy. We constantly stress test our holdings in the portfolio as a whole to ensure we are positioned to accomplish our objectives.
In terms of the current portfolio’s profile, one of the most impactful ways we can maximize the portfolio’s risk-adjusted returns is to attempt to provide the highest returning portfolio possible that is consistent with our risk and return objectives. A simple way to measure this is by comparing how much return—in this case yield-to-worst on the screen—to how much interest rate risk or duration we are assuming.
There are a couple key takeaways from the table at the bottom of the screen. First, we are achieving a yield-to-worst that is close to the Barclays Aggregate Index, while assuming only about 25% of the interest rate risk, as measured by effective duration. And second, we have a yield more than twice that of the 1–3 Year Barclays Aggregate Index, which we include here on the screen because it has a similar duration profile as FPA New Income Fund, while assuming about 70% of the interest rate risk of the 1–3 Year Aggregate Index.
Now there are two main reasons why we can have such a compelling risk/reward profile. First, that I mentioned previously, is that we are not tied to benchmark weights either in terms of sectors or credit quality or duration. The portfolio’s constructed on an entirely bottom-up basis. And the other is that we intentionally are not running a $20 or $50 billion-plus fixed income strategy. We often purchase off-the-run, less liquid, or unrated securities in the $10 to $50 million size range that simply don’t make sense for larger strategies. If we were running such large amounts of capital, the risk/reward profile and potential of the Strategy would be far less differentiated and compelling.
We will now touch on two more recent developments with FPA New Income Fund, and the first is the most recent quarterly dividend. Some of you may have noticed that the distribution this quarter was less than the rate of previous quarters, and this was for a few reasons. First, at the end of each fiscal year, FPA reevaluates the amortization of the notional amount of all our interest-only securities and makes the appropriate adjustment. Given a reduction in our exposure to this sector, the resultant income for the quarter was reduced. And second, over the past three months, the amount of prepayment penalties received from our Ginnie Mae Project Loans, a topic we’ve discussed on webcasts prior, declined. Now I will note that the yield-to-worst of FPA New Income Fund has not changed significantly over the quarter—that is, from the second quarter of this year to the third quarter.
See full FPA New Income Fund transcript here.
FPA New Income Fund Webcast
Absolute return with preservation of capital
- Seek positive absolute return over rolling 12-month periods
– Achieved 30 consecutive years
- Seek positive real returns in excess of CPI + 100 Index over five-year periods
– Achieved 23 out of 24 rolling five-year periods
- Benchmark indifferent
- Rigorous security and portfolio analysis seeks to mitigate risk:
– Value-driven investing
– Duration actively managed
– Security and portfolio stress test
– Allocation constraints for credit sensitive exposures
The FPA New Income’s distribution was $0.05 this quarter which was less than $0.07-$0.08 range in prior quarters for two primary reasons:
- At the end of each fiscal year FPA reevaluates the amortization of the notional amount of all our interest only securities and makes adjustments. Given a reduction in our exposure to this sector, the resultant income for the quarter was reduced
- Over the past three months, the amount of prepayment penalties received from our GNMA Project Loan Interest Only Securities declined
- The profile of the Fund has not changed significantly over the past quarter
See full FPA New Income Fund Webcast here.