Our Insights

About personal finance, investments and markets.
May 26, 2014

Learn from the Best

It is no secret that most active fund managers underperform their benchmark over a longer time horizon. We therefore use low-cost index ETF as the core building blocks in many of our portfolios and only in some exceptional cases do we pick active fund managers. However, there is sometimes a golden nugget in a pile of rubble and we always like to hear what the best fund managers are currently thinking. Steven Romick, who manages the FPA Crescent Fund,  is one of the few shining stars in the often mediocre fund management industry.

Steven has a long list of accolades including Morningstar’s 2013 Asset Allocation Fund Manager of the Year and Morningstar’s 2009 Domestic-Stock Fund Manager of the Decade Nominee. But more importantly, the FPA Crescent Fund has beaten the S&P500 over more than 20 years while also exhibiting a much lower volatility! Less than 5% of all mutual funds beat the market over a period of 20 years. $10,000 invested in the FPA Crescent Fund 20 years ago would have grown now to around $90,000, while an equal investment in the S&P500 would have grown to around $60,000.

In a recent interview, Steven Romick has laid out his current thoughts on the market and his portfolio:

The key take-aways from the interview:

  • Steven has built up one of the largest cash hordes of his career in his FPA Crescent Fund (46% at the end of Q1 2014)
  • Even with his broad investment mandate of investing in any asset class, in any market, the bargains are few and far between.
  • QE is an experiment and he doesn’t know how it will end. We find the honesty and modesty refreshing and investors should equally at this point shy away from giving their portfolio a strong tilt towards an inflationary or deflationary scenario, simply because it is too early to tell how the ultra-loose monetary policy of the FED will affect the economy.
  • Emerging markets are only superficially cheap. They appear attractively valued at the index level, but that is mainly because the index is heavily distorted by low-quality sectors (commodities, financials, etc).
  • He started to build some small positions in Russia in Q1. Difficult fundamentals are one thing but valuation is another. If you are not willing to lose a little bit of money, you are unlikely to make any money.
  • Steven expects volatility to pick up from the current very low levels.

There is certainly a confirmation bias when we present Steven Romick’s views since we have written this year about exactly the same subjects: raising your cash level here, unattractive valuations here and here, Emerging Market Index problems here,  Russia here and currently unusually low volatility here.

Unfortunately we now have to pour cold water on the idea that you can go out and buy shares in the FPA Crescent Fund. The fund is closed to new money and was never registered in Europe anyway. Still, we think the success of the FPA Crescent Fund reveals a few universal truths about investing that we hold dear:

  • No investment restrictions. It is simply impossible to know today where attractive buying opportunities will be found tomorrow hence a flexible approach is necessary. Ideally a fund can invest across the entire capital structure, across all sectors and in all market caps. If a deep-dive analysis tells me a company is attractive, why should I have to buy the common shares if the bonds offers even more value?
  • All intelligent investing is value investing – acquiring more than you are paying for,
  • Cash is an underestimated asset class. Don’t be afraid to run a large cash position. If you can’t find attractive investment opportunities, holding cash is the right thing to do. Cash doesn’t earn much today, but it gives you options in the future.
  • Avoid strict benchmark focus. If a fund manager wants to beat the market, he has to build a portfolio that is different from the market. However, investors need to realize that this also means that the fund will have periods of underperformance. The FPA Crescent Fund is an excellent example: allthough it did beat the index over more than 20 years with much lower volatility, it has actually underperformed the index in 11 out of 20 years! The investment process and the long-term performance is key, not some random 1, 2 or 3 year performance data when it comes to picking fund managers.
  • Micro analysis (stock-picking) is key but fund managers also need to take the macro environment into account. The lesson that many have all too painfully learned in 2008 is that it isn’t reasonable to be agnostic about the big picture.

For further questions, please contact us at info@ipanema-capital.com

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