Value Investing

FPA International Value Fund 1Q15 Webcast [Audio, Transcript, Slides]

FPA International Value Fund webcast slides, transcript, audio for the first quarter ended March 31, 2015.

FPA International Value Fund webcast audio

FPA International Value Fund webcast transcript

Pierre: During the first quarter of 2015, the FPA International Value Fund returned a positive 3.7% (in US currency), compared to 3.5% for the MSCI All Country World Index (that’s ex-US and on a net basis). Most importantly, since inception on December 1st, 2011, the Fund has appreciated by an annualized 10.5% vs. 8.5% for the Index.

As many of you know, we employ an absolute strategy whereby we have flexibility to hold cash if we cannot find opportunities that meet all of both our qualitative and our quantitative criteria. Because of this, we think it is important to put whatever returns the Fund may generate in the context of our cash holding as well.

As some of you may remember, our cash had reached an historical peak towards the end of the second quarter of 2014. In the following months, we took advantage of a general pull back in global equities, with some isolated severe price dislocation events, and a broad aversion in the market for European-based companies, in order to redeploy some of that cash. With that, our cash exposure had come down from over 40% towards the end of the second quarter of 2014 to around 26% at the end of 2014. As share prices ran up again, in particular in Europe, we’ve started to see cash rise, and ended the quarter with a little over 30% in cash.

Most importantly, and while cash has fluctuated along with the opportunity set from the low teens in the first quarter of 2012, to in excess of 40% towards the end of the second quarter of 2014, it has averaged in excess of 35% since the inception of the Strategy.

Lastly, we should point out that currency has continued to be a significant performance headwind this quarter for the Fund, as the Euro was down another 11% against the US Dollar in the period.

These are some of the performance highlights for the quarter. Before we move on to provide some key takeaways and perspectives on what transpired in the market since the beginning of the year, we want to remind shareholders that we do not consider a three month period as particularly relevant, and encourage investors to look at the Fund’s returns over a multi-year period, and preferably over a cycle. We also point out that one needs to contrast the absolute performance generated, rather than relative, with the amount of risk that was taken to achieve that performance.

[BEGIN KEYSTROKES TRANSCRIPTION]

By notion of risk, we do not mean volatility, but rather risk of permanent capital destruction. This is in Nassim Taleb’s terms the alternative history of returns, meaning what could have been the outcome of the investment had things turned out differently. Lastly we would suggest thinking about whether returns either correspond to true value creation or can at least be monetized. From our standpoint there is something a little schizophrenic about judging performance, let alone a short-term basis, on prices that we think can be so disconnected from the actual values of the underlying businesses that we seek to build our entire personal wealth by taking advantage of these disconnects.

In terms of takeaways from this first quarter, we would simply highlight a couple of things. The first is that, despite continued high exposure to cash, the Fund to date has actually performed slightly ahead of the Index, which highlights the importance of the reinvestment opportunity that we took advantage of later last year, as I mentioned earlier. Specifically half of the Fund’s top ten biggest return contributors in the quarter were positioned built during this last reinvestment opportunity, and together these holdings accounted for over 60% of the total equity holding contribution to the Fund’s return in the last three months. With that being said, several of our more recent new investments, I should say, such as ALS, Fenner, KSB, or TNT had yet to play out as of the end of the quarter on March 31st. Although I should point out that FedEx recently announced the acquisition of TNT, which effectively caused the share price to surge.

It is also worth noting that the best portfolio performer this quarter—and we will comment further on that later on the call—was Fugro. (2:00) It seems the company is on a positive trajectory, with management having made significant improvement both on the operational side and on the financial front. It also has an anchor shareholder now with both Boskalis and still a strong base of fundamental value investors that are shareholders of the company. We think that Fugro may have finally turned the corner at this point even though its underlying markets, which are oil prices driven, continue to be challenging.

Now for some market perspective, I would start by pointing out that, while positive, the returns mentioned earlier do not provide a full picture of what we experienced in the markets in the first quarter and what we have continued to see since the end of the period. In fact, when measured in euro terms, the Index returned a positive 17% in the first three months of the year alone while European currencies, and in particular the euro, depreciated significantly against the dollar, as I mentioned earlier.

See full FPA International Value Fund webcast transcript below.

FPA International Value Fund webcast slides

FPA International Value Fund

Highlights:

  • In 1Q15, cash exposure started to rise again (and did throughout the quarter) from ca. 26% at 12/31/14 to ca. 30% at 03/31/15.
  • Since inception, average cash exposure has been >35%. It’s fluctuated along with opportunity set from low teens to >40%.
  • Currency remains significant headwind to absolute performance. In euro currency, Fund and Index returned ~17% in period.

Takeaways:

  • Past reinvestment efforts have helped performance in face of renewed rally across multiple international markets.

–Some more recent additions however continued with negative momentum, including TNT, KSB, Fenner, and ALS.

  • Fugro may have turned corner. Improvements on many fronts, operationally and financially. Boskalis as new anchor shareholder.

Perspectives:

  • Fund may underperform in short-term. Always encourage shareholders to evaluate returns over multi-year period.
  • Renewed rally not a positive outcome. Signs of speculation driven by quantitative easing. Finding opportunities challenging again.

FPA International Value Fund

See full FPA International Value Fund webcast slides below.