FUND MANAGER PROFILE
Betting on a Meltdown
Worried about the poor fiscal health of the U.S., FPA Capital
doubles down on quality names. By Ilana Polyak
It’s hard to know if the United States will actually fall off the much-discussed fiscal cliff. Will relatively low tax rates expire at he end of 2012? Will there be sharp spending cuts to the military and domestic programs?
Will gross domestic product shrink by 4% as the
Congressional Budget Office has predicted?
No matter what kind of deal Beltway politicians hammer out, however, the managers at
FPA — the Los Angeles firm formerly known as
First Pacific Advisors — believe that this year’s
uncertainty just underscores what a dire fiscal
situation the U.S. finds itself in.
“It’s pretty clear that no country can run a
budget deficit of 8% to 10% of GDP year after
year,” says Dennis Bryan, co-manager of $1.2 billion FPA Capital Fund (FPPTX).
But fixing U.S. financial woes will require a
shakeout of government excess, Bryan argues
— and that will bring a lot of pain to the populace,
at least in the short term. “We need to bring down
the deficits, restructure the entitlements, change
tax policy to be more transparent,” he adds,
echoing the firm’s chief executive officer, Robert
Rodriguez, who ran FPA Capital until 2010 with
Bryan and co-manager Rikard Ekstrand. “In the
short run that could be disruptive,” he concedes.
FPA’s grim view of the country’s fiscal health
affects the way they see risk — and has led them
to demand more of the companies that they
include in their portfolios. For now, that means
FPA Capital runs a concentrated portfolio of just
20-odd names and a 30% cash hoard. Compa-
nies need lower valuations and higher net cash
on balance sheets in an effort to gird against the
coming fiscal storm, Bryan argues.
Sometimes potentially being right long-term isn’t
a winning strategy, and FPA Capital has struggled
recently, while the market has soared. For the
12 months ended Nov. 1, the fund is up 6%, but
trails the S&P 500 by more than eight percentage
points. It’s in the bottom 3% of its mid-cap value
competitors, according to Morningstar.
Why? Bryan wanted to know as well, so he
and his colleagues did a little digging. Looking
at the stocks in the Russell 2000, the fund’s
benchmark, they noticed that 219 of them
(about 10%) had appreciated by more than
50%. But of that group, half had negative earn-
ings growth in 2011. And the companies that
were profitable had price-to-earnings ratios of
36, price-to-book of 5. 5 and leverage of 42%.
Basically, Bryan says, what’s been driving the
index are companies with declining profits and
others that are “richly priced.”
Longer term, things look better for FPA.
Over the last three years ended Nov. 1, the fund
is up an annualized 12.8% a year, in the 43rd
FPA Capital Fund
Credentials: B.S. in
Finance, Cal Poly;
manager, FPA Capital
folio manager for small/
mid-cap absolute value
Inception of fund:
Style: Mid-cap value
Assets: $1.3 billion
performance as of
Nov. 1: 12.83%
performance as of
Nov. 1: 4. 65
Expense ratio: 0.84%
Front load: 5.25%
Alpha: - 1. 38
vs. S&P 500