Morningstar category during the past 15 years , particularly during the past five years . More important , Romick says , the FPA Crescent Fund ’ s value-oriented approach has made money over every rolling five-year period during the past 30 years .
Base Case
Value investing is a core element at Los Angeles-based institutional money manager First Pacific Advisors LP — the “ FPA ” on the fund ’ s nameplate .
In a report from earlier this year , Morningstar analyst Chris Tate described the FPA Crescent Fund ’ s crew as absolute value investors who view risk as the possibility of suffering permanent loss , not underperforming a benchmark or peer group . He further stated that they favor securities trading at discounts to their estimated worth , names that can deliver high-single-digit or double-digit returns . The team is not afraid to load up on cash if it doesn ’ t find suitable opportunities .
“ A lot of value managers forget about the upside and focus on the downside ,” Romick says . “ We think about upside in the context of the downside . We ’ re here to make money for people over time , but we don ’ t want to blow them up .”
That ’ s reflected in the fund ’ s risk / reward profile . According to Morningstar , the fund has a higher upside capture ratio and a lower downside capture ratio than its category .
Stocks typically represent the fund ’ s largest asset class allocation , and Morningstar notes that the valuations of the
“ The thought process [ on valuation ] is to always seek a margin of safety in the investments we make . Look before you leap .”
— Steve Romick
fund ’ s equities — in terms of price-toearnings / book / sales / cash flow — are lower than the category ’ s average . Romick says that ’ s simply a byproduct of what the fund does and not a targeted goal .
“ The thought process [ on valuation ] is to always seek a margin of safety in the investments we make . Look before you leap .”
Romick and his team use equity valuations mainly as a way to seek protection , so they ’ ll pay a reasonable price for growing , sustainable businesses with good management teams that use capital wisely and produce substantial cash flow .
They make projections on a company ’ s earnings expectations over the next five to 10 years , and build their models on a base case , low case and high-case framework .
“ In a base case we want to make some money ; on a high case we want to make a lot of money ,” Romick says . “ We figure the base case is more likely than the low case , but if the low case occurs it won ’ t blow us up .”
Episodic Opportunism
There ’ s an obvious question for managers of a go-anywhere fund : How do they zero in on portfolio ideas when their investment universe is whatever ’ s available ?
Romick uses the term “ episodic ” to explain the investing approach . The team listens for bad news in any sector that creates dislocations and mispriced assets .
“ To use the wind metaphor , we ’ re looking for the wind in our face , because that ’ s what ’ s creating the opportunity that one day could turn around and be wind at our backs .”
He believes that one such wind-inthe-face sector is commercial real estate , where the rise of remote work has hurt occupancy rates and rents . He says his fund is building positions in a couple of firms with top-notch real estate portfolios and solid management teams with significant inside ownership . The FPA Crescent managers also have their eyes on certain asset-backed mortgage securities they hope to buy if prices reach an attractive level .
Manager Steve Romick Age 60
Professional Background He joined FPA in 1996 , where he serves as a portfolio manager . Before that he was chairman of Crescent Management ( where the FPA Crescent Fund originated in 1993 ) and a consulting security analyst for Kaplan , Nathan & Co .
Outside Interests Mountain biking , surfing and pickleball . He enjoys cooking for family , reading and playing guitar .
Portfolio Statistics
# Of Long Equity Positions 55 # Of Long Fixed Income Credit Issuers 12 Weighted Average Mkt . Cap
258.6 billion P / E Ratio 13.4x Std . Dev Fund / Benchmark 14.18 / 14.31 Turnover Ratio 8 % Net Expense Ratio 1.05 %
Portfolio stats as of 9 / 30 / 23 . Standard deviation ( three-year period ) versus the Morningstar Moderately Aggressive Target Risk Index as of 10 / 31 / 23 . Sources : First Pacific Advisors LP and Morningstar .
52 | FINANCIAL ADVISOR MAGAZINE | DECEMBER 2023 WWW . FA-MAG . COM