Steven Romick's FPA Crescent Fund 1Q15 Webcast [Slides, Transcript, Audio]

Steven Romick’s FPA Crescent Fund webcast slides, transcript, audio for the first quarter ended March 31, 2015.

Steven Romick’s FPA Crescent Fund 1Q15 webcast audio

Steven Romick’s FPA Crescent Fund 1Q15 webcast transcript

Steven Romick: Thank you very much, Mark. And thank you all for taking the time to join Brian, Mark, and myself today. I’ll begin with our usual reminder of our Contrarian Value Strategy’s philosophy, which is to seek long-term equity-like returns with less risk than the stock market while avoiding permanent impairment of capital. There’s three key categories that we focus on. We have an absolute return focus, a flexible approach, and deep research.

So in an absolute return focus, we are more concerned with trying to end up in the black than we are with trying to hug one kind of benchmark or another. In terms of flexible approach, we are able to invest across the capital structure, varied asset classes, and in different geographies. And as far as deep research is concerned, we spent most of our time trying to gain a strong understanding of individual businesses and the industries in which they operate.

We’ve delivered, if you look at the performance slide, on our stated goals since our inception. And if you look at the slide following that, in addition to the year-to-date annual and trailing performance numbers, we also now report a market cycle performance. A hat tip to Ryan Leggio, who’s in the room with us, for his effective arguments for their consideration. So please take a look at the new commentary, which Mark I believe has posted today—a new commentary entitled “The Importance of Market Cycle Returns” that you’ll find on our website.

(2:05) And so let me turn, if you would, to page 4, and you will see how Crescent has performed in the two most recent market cycles—the one we’re in currently and the one prior. We define a market cycle as the period from one market peak to the next that includes a market correction along the way—that is, a market high followed by at least a 15% correction, followed in turn by a new market peak. We don’t think it’s helpful to examine a period of only rising stock prices or only falling prices. A market cycle by our definition therefore begins with the ending of one bull market followed by a bear market and ending with another bull market.

For example, look at the chart on the left side. It depicts the prior completed full market cycle from the market peak and dot-com bubble in 2000 through a 45% correction, then a housing market and subprime-fueled new peak in 2007. From March 2000 to October 2007, we delivered in Crescent 15% return—better than both the S&P 500 and an S&P/Barclays Agg blend. And this occurred with much less downside along the way. In the current cycle that’s still ongoing—it began in October 2007—we have returned 7%, also better than these indices and also with less downside.

I’d like to call your attention to the max drawdown of the S&P 500 in each of the market cycles depicted—45% in the one on the left, the first one, the prior one; and the current one on the right, 51%. Now we recognize it’s been some time since we’ve seen that kind of market weakness. But we believe, as long as there is fear and greed, economic cycles, wars, and government intervention, that we’ll continue to have market cycles. If not, we’d all be better in an ETF.

A market cycle analysis is more consistent with our longer term approach to investing rather than the Snapchat crowd that’s more concerned with what’s happening over shorter timeframes. We believe there’s more to be gained with the former.

We are happy to report we’ve been able to generate equity-like returns with less risk since inception and over market cycles. (4:00) And by less risk, we don’t necessarily mean less volatility, although that has certainly been a byproduct. On average since inception, we’ve had about 70% of our capital at risk in stocks, bonds, and other risk assets and have still achieved equity-like returns. This is because we’ve been disciplined in our research and patient in waiting for opportunities but committing capital when opportunities arise.

So thank you, Ryan, for really pushing us as a firm in this direction. I think it’s a very important consideration and one that we’ll be reporting heretofore.

If you turn to the next slide if consider the winners and losers for the quarter, this is another quarter where winners and losers didn’t have any real significant news surrounding them that might have driven their stock price one direction or another. Now note that the number one winner and the number one loser are really the same trade. We were long Naspers, which owns a stake in Tencent. So by shorting a proportional amount of Tencent, we created a Naspers stub. We talked about this in our Q3 2014 shareholder letter, so you can certainly reference that for additional information.

In looking at our portfolio characteristics on page 6, not much has changed this quarter versus last quarter versus the prior year. We still have a focus on larger-cap, high-quality global businesses. The equities are, on average like the rest of the market, not particularly cheap and as you can see from the portfolio’s PEs and price to book. However, our book is still slightly cheaper than the market. And more important than that we feel at this point in time is that the balance sheets are a lot better. We run on average… our companies on average are running with net cash.

The exposures—looking at page 7 at portfolio allocation—haven’t changed much in the last year either. We are still below average. And the biggest win in that average continues to be our corporate debt book, which is ten points below our historic average. With yields as low as they are, that can’t be any kind of great surprise.

(6:06) We put in front of you here on page 8 a chart that depicts the life of various bull markets of the S&P 500. And right now as you can see looking at this chart in the far right a number of months, the S&P 500 has had the longest running bull market since World War II. We’re now in Year 7.

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