Among the many traits of marketbeating investors, First Pacific Advisors’ CEO Bob Rodriguez ranks having a thick skin among the most important. “We have to have far more patience and discipline than our clients do,” he says. Such resolve has served even the impatient clients of $24 billion (assets) FPA exceedingly well. Just one example: the small/ mid-cap FPA Capital Fund that Rodriguez ran for 25 years prior to ceding day-to-day responsibility to Dennis Bryan in 2010 has earned a net annualized 14.6% since 1984, vs. 9.9% for the Russell 2000 index.
While they’re finding bargains to be rather few and far between, Bryan and Rodriguez do see value today in such areas as for-profit education, contract drilling, disk drives and specialty retail.
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FPA Capital’s Robert Rodriguez and Dennis Bryan describe how the market’s “gaming mentality” can create opportunity, what inexpensive sectors have not piqued their interest, how they play technology without having to pick product winners and losers, and why the see unrecognized value in DeVry, Rowan, Foot Locker and Western Digital.
FPA has “absolute value” and “quality” smaller-cap strategies. How you define your absolute-value opportunity set?
Bob Rodriguez: Notice that he says “reasonable.” Some managers focus only on companies with very high returns on equity or on assets, and are willing to pay a price for that. We’re looking at a universe of companies with reasonable returns on capital and assets and very depressed prices. The highest-quality companies with all the attributes Dennis mentioned rarely trade at extremely depressed prices.
What situations are companies in that make their stocks cheap enough to buy?
Bob Rodriguez: The advantage we have is time frame. When I came into the business the average holding period for a mutual fund was seven years. Today it’s less than nine months. If turnover ratios are that high, that means
managers have more of a gaming mentality and are looking for the more instantaneous payback. With a longer time frame and patience, we can look at opportunities such as struggling tank-car companies that aren’t at the forefront of other managers’ selection processes.