Dear fellow shareholders,
For the fourth quarter, FPA Perennial Fund was up 7.43%. The S&P and the Russell 2500 had strong gains as well of 10.51% and 8.66%, respectively. We are proud of our returns over longer periods with strong absolute and relative performance for 5, 10, and 15 years, as shown on the table below.
A redemption fee of 2.00% will be imposed on redemptions within 90 days. Expense ratio calculated as of most recent prospectus is 1.02%. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown. This data represents past performance and investors should understand that investment returns and principal values fluctuate, so that when you redeem your investment it may be worth more or less than its original cost.
Current month-end performance data may be obtained by calling toll-free, 1-800-982-4372. Standout performers this year include Heartland Express, Inc. (NASDAQ:HTLD) (+50%) and Knight Transportation (NYSE:KNX) (+25%) both truckload carriers working to complete attractive acquisitions. Other winners in 2013 fit the description of light industrial or business services, with gains of +35-60% — suppliers of pumps, motors, valves, bar code printers, and industrial distributors.
We focus on owning high-quality businesses, firms with histories of earning high returns on capital with modest debt levels. These companies have leading market shares and top-tier management. They have demonstrable track records of wise allocation of the businesses’ cash flow. In other words, they walk the talk.
Our approach to investing sometimes generates unusual looking portfolios. We make no attempt to manage portfolios which mimic the benchmark. We have no fear of tracking error. Our portfolios are always much more concentrated than the benchmark, with much of the weightings the result of owning only a dozen or so names. Five- to ten-year holding periods for individual securities are not unusual as annual portfolio turnover has been very low, averaging about 15% over the past five years.
We believe the most important contributor to the long-term investment performance of the companies we own is growth in earnings, not changes in valuation (price/earnings ratio). Because growth is driven by earning high returns on capital and successful reinvestment of cash flow, it is necessary to own most of our portfolio securities for an extended period in order for this process to come to fruition.
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