FPA Crescent Fund slide 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?
Differentiated performance across multiple market cycles
- 155 peers run by same manager since 2000
- 55 funds had >90% of return and <60% of drawdown during 2000-2007 cycle
- 3 funds have been able to accomplish it this market cycle (October 10, 2007 to March 31, 2018)
- FPA Crescent is one of only 2 funds able to accomplish it in both market cycles
Section II - Philosophy and strategy
FPA Crescent investment objective and philosophy
Investment objective
- The FPA Crescent Fund seeks to generate equity-like returns over the long-term, take less risk than the market and avoid permanent
Philosophy
- Flexible approach
- We utilize a go-anywhere approach with a broad mandate allowing us to invest across asset classes and the capital structure and in a variety of market caps, geographies and sectors without regard to benchmark weights.
- We can make illiquid investments and may sell short securities.
- Absolute return focus
- We invest when we believe there is a compelling economic risk/reward proposition on an absolute basis.
- We are willing to hold meaningful amounts of cash for prolonged periods if opportunities do not present themselves.
- Deep research
- We strive to understand our companies better than most. Through independent, bottom-up, fundamental research we try to minimize risk by reading the footnotes and fine print. The first question we always ask is, “What can go wrong?”
- We incorporate an understanding (though it may be uncertain at times) of the macroeconomic environment.
- Patience
- While we complete our research
- While we wait for an appropriate price
- While we hold an investment impairment of capital.
Opportunity Set
Investment types - equity
Compounders
- The world’s great businesses. We think of compounders as infinite duration bonds with rising coupons.
- We think of long-term returns on compounders equal to:
- Long-term return to owner before capital allocation = Owner earnings + Long-term organic growth in owner earnings
- Owner earnings = Free cash flow after investment required to sustain competitive position and pursue organic growth
3:1s
- Business is possibly of a lesser quality than that of a compounder but is still a good business and likely to have greater upside potential. We invest in these businesses when our assessment of what we can make vs. what we can lose has a ratio of 3:1 or better.
- Current portfolio examples include Owens-Illinois, American International Group, CIT Group.*
Special Situations
- Current portfolio examples include Pacific Gas & Electric, Yahoo, Altaba/Alibaba, Naspers/Tencent.*
See the full slides below.
