Steven Romick’s letter to FPA Crescent Fund shareholders for the first quarter ended March 31, 2015.
The FPA Crescent Fund increased a flattish 0.15% in the first quarter while the S&P 500 returned 0.95%.
Our top five winners in the quarter added 1.10% while our top five losers cost us 1.44%. Nothing newsworthy happened to any of these companies so the limited share price movement was just a result of the typical prattle that occurs every day the market is open.
Globally, low interest rates continue to be the principal driver behind investment decisions for individuals, corporations, foundations, endowments and other capital allocators. Bloomberg lists nineteen countries’ 10-year bonds on their World Bond Markets home page with an average yield of just 2.2%.1 If you consider Greece an outlier, then the yield on the remaining eighteen sovereigns drops to 1.6%. Investors continue to opt for a riskier path since they want or need a return that’s anything better than that.
The definition of what makes an attractive investment these days is now broader than it has perhaps ever been thanks to a 1.6% hurdle rate2. Long-term decisions are being made based on what we at FPA believe are impermanent conditions. Of course, everything in an altered state looks better. We’ll spare you the inevitable comparison to the bad choices people make when they are a bit sloshed but, suffice to say, many wake up later with regrets and well, we’ll pass.
FPA Crescent Fund: The stock market ad nauseam
We have talked about the impact of this low-yielding environment on the stock market ad nauseam but the repercussions can be felt and seen in all risk assets around the world. For the first time in history, a country was even able to sell 10-year government bonds with a negative yield.3 Switzerland issued a 10-year note at -0.055%. Mexico, meanwhile, was able to issue a 4.2%, 100-year bond denominated in Euros. There has never been 10-year sovereign debt that a buyer had to pay for the privilege of owning and the Euro has never been validated with a 100-year bond. Put another way, investors are paying a fee for the security of the Swiss Franc or making a century-long bet on the Euro, a currency that’s only existed for 13% of the bond’s duration (and we haven’t even mentioned the additional credit and interest rate risk that comes along with it).4,5 We haven’t spoken to anyone who has admitted to buying either but we never met anyone who fessed up to buying Michael Jackson’s Thriller album and it sold more than 50 million copies.
We understand lenders are taking advantage of an unprecedented seller’s market. Who can blame them? It’s the buyers who stymie us. Call us old-fashioned but we continue to want to receive more in return than what we offer. That’s something we’re finding rather challenging in the market today with P/Es marking time in the 95th percentile.
So the stock market continues to make monkeys out of us as we await the next occasion to commit more of our collective capital. This hasn’t been the first time nor will it be the last, but we do wish for a shorter duration between opportunities. This is already the longest bull market of the last 70 years.
We appreciate that ours is not an annuity business. We must therefore continually earn our stakeholders trust – investors, partners and employees – but for us, that takes time as it always has.
Our longer market commentary will be written per usual at the end of the first half.
April 20, 2015
See full PDF below.