Great Investor, Steve Romick, Morningstar’s 2013 Asset Allocation Fund Manager of the Year has built up one of the largest cash hordes of his career in his FPA Crescent Fund. This noted contrarian says even with his broad investment mandate of investing in any asset class, in any market the bargains are few and far between. In an interview with WealthTrack’s Consuelo Mack, he discusses the opportunities he is finding in farmland, real estate loans, Russian equities and some selective stocks.
Steve Romick is a great investor who rarely gives interviews. Additionally, he is very bearish on US equities, but very bullish on Russian equities which I is sorta like myself; since I found this interview very interesting I decided to take some VERY informal notes on the talk which can be found below.
Steve Romick is not optimist but he is not pessimist, he is careful to make the distinction. He notes there is little opportunity and is skeptical about the Fed managing its exist. He notes that he looks opportunistically as his structure allows him to invest in prefs and across the world, for example. Steve Romick notes that you can have a bad outlook but as long as it is priced in its okay. Cash is building as a byproduct of what Romick does not as a top down macro bet.
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Romick thinks volatility will increase and has only been low due to Fed actions. No one even heard of QE 10 years ago, and now we are addicts to it. Romick says in the past FPA was more in treasuries and asset backed securities but they got pricey around 2008 and FPA started to sell. Commercial paper has come back into the portfolio lately, and Romick has been buying sovereign debt. He specifically notes Singapore as one place where he is buying sovereigns. Romick thinks that treasuries are not a great investment now as investments can be found elsewhere.
Steve Romick on alternatives to cash
He notes that he is finding opportunities elsewhere but since there are not enough cash has built. However, in the past ‘6-9 months’ Romick has been buying in the aluminum industry, noting that the metal is trading at a historic low (inflation adjusted). Alcoa is one position he likes, Romick notes that everyone who covers Alcoa is a metals and engineering analyst, despite the fact that most of the value comes from the engineers product solution business, where they are part of a duopoloy, in which Alcoa supplies specialty materials. Romick says using a comp for engineers product solution business to precision cash parts, Alcoa is trading at a massive discount.
As supply contracts and demand increases ie Airplanes at 8 year backlog, the aluminum division should make more money. He notes that cars like Ford’s F150s come with 300-400 pounds of aluminum, which saves 1000 pounds of steal and makes it easier to pass EPA tests.
Romick believes he brings to the table – time arbitrage – but looking out a number of years Alcoa Inc (NYSE:AA) should make a good IRR.
At the end of the day its understanding conviction of price.
Steve Romick on EM
Very few places they are running from. Romick says emerging markets in general the multiple declines has been result of decline of cyclical based companies, so these businesses are not always high quality enough to pass the screen.
Romick on Russia vs Venezuela
He says they have a small stake in Russia. When looking at Russia, there are many companies which are both domestically important and globally. This is not the case with a country like Venezuela where many companies are only important regionally, but not globally.
Romick notes that Russia has the largest oil reserves and both Rosneft’ NK OAO (MCX:ROSN) (OTCMKTS:RNFTF) and Gazprom OAO (OTCMKTS:OGZPY) are strategic importance and to their neighbors. He understands there are risks but they trade at very large discounts to companies like Exxon. People there seem less concerned. Lukoil has seen $1 billion of insider buying in the last 12 months, and there is lots of insider buying at other Russian companies. Both companies are very cheap.
Romick believes that in terms of the whole portfolio he is defensive, but you need to be willing to lose money. If you ever want to make any money you need to accept some risk. But because of the obvious concerns over Russian companies, Romick would never make them a very large component of the portfolio. However, he notes that Russia needs these companies as they cannot pay off their debt if the country is insolvent. 25% of Russian GDP, 50% of revenue comes from oil.
Romick on compounders
Romick likes MEGGITT PLC (OTCMKTS:MEGGF), which is in a sector he likes, Aerospace. Airline traffic will increase over the next 10-20 years and this will be a big plus for Meggit which is dominant in the wheel and space business. They are the single source in certain markets; they are in a huge margin business, and you can get a good vision of earnings. This is a company which generates a lot of FCF, and has historically made good acquisitions with some of this capital. 5-10 years from now as long as the multiple stays the same, FPA should make money.
Romick one investment
Romick likes the private sector. First lien real estate loans partnering with a AAA real estate investor, is where a lot off money could be made.
Romick on farmland
Romick likes farmland, which he bought many years ago. He likes how the investment would behave in an inflationary enviroment. Romick likes it both due to lack of opportunity elsewhere AND because they are good investments with low teens IRRs, ditto with the real estate loans.
Romick on using his cash
What would get him investing more cash? Romick says its bottom up approach and NOT macro; it could be a theme where things fall out of favor or if companies stumble along the way.
Steve Rommick video and more below
Action point keep cash
Adds financial ballast:
- Stability and Protection
- Adds liquidity and opportunity
- Adds a psychological advantage
- “Financial Valium”
Steve Romick one investment
First lien real estate loans with a AAA real estate investor
No False Promises
Steven Romick, Morningstar’s 2013 Asset Allocation Fund Manager of the Year, is known for his outspoken and contrarian views. In a recent quarterly letter to shareholders he told them if they believe the market is going to continue to go up, they would be better served having their capital with a manager who is more fully invested.