FPA Crescent Fund

FPA Crescent Fund – Strategy And Portfolio Companies [Slides]

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

FPA Crescent Fund

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

FPA Crescent Fund

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.

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