FPA Capital Fund slides from the presentation of strategy and portfolio companies.
H/T Dataroma
Q1 hedge fund letters, conference, scoops etc, Also read Lear Capital: Financial Products You Should Avoid?
Fund highlights
- Absolute value – Seek genuine bargains among smaller companies and hold cash when opportunities are scarce
- Benchmark indifferent – True active management, do not follow a benchmark to construct the portfolio
- Bottom-up – Select and value companies based on fundamentals. Buy market leading companies with a history of profitability and strong balance sheets
- Downside focused – Seek to avoid low quality and high Buy only when we see a compelling risk/reward – we will not let low quality businesses age in the portfolio
- Research-based – We perform deep due diligence and we do that not only prior to purchase but throughout the life of the investment
- Concentrated – Focus on best ideas but be nimble around sizing
- Shareholder aligned approach – All team members invest alongside clients
The few true peers
What went wrong & how do we remedy?
What Went Wrong?
- Position Inertia
- Had a positive bias towards ideas we knew well
- Did not act as quickly as we should have to adjust position sizing as prices and facts changed
- Energy positions cost the fund dearly
- Lower Quality Companies Became Long-Term Portfolio Residents
- Occasionally, we take positions in lower quality businesses when valuations are at extreme levels
- We did not treat these holdings differently than our other holdings and held them longer than we should have
- Insufficient Idea Generation
- Spent too much time completing a full analysis (20-page+ investment memos) on ideas that should have already triggered a stopping point
- Not Nimble Enough
- Should have converted more of our ideas into new investments
- Should have taken larger positions in new ideas
What Will / Has Already Changed
- Be More Vigilant of Position Inertia Going Forward
- Will act more quickly to change position sizing as our analysis of the facts and the risk/reward changes
- Will guard against the natural tendency to become attached to positions we like when information and prices change
- Collectively, new positions did well, but weren’t sufficiently sized
- Differentiate Between Long-Term and Opportunistic Investments
- Low quality investments cannot become long-term holdings
- Long-term holdings need to be higher quality businesses
- Will Be Quicker to Pass on Ideas
- Speed up the idea evaluation phase
- Moved to a “quick look” model prior to committing to full memo
- Expect the Portfolio to Have More Holdings
- Alter position sizing more rapidly as facts and pricing changes
- One Portfolio Manager making final decision
See the full PDF below.
