FPA Capital Fund

FPA Capital Fund Slide Presentation Of Strategy And Portfolio Companies

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

FPA Capital Fund

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

FPA Capital Fund

See the full PDF below.

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