FPA Crescent Fund 4Q18 Commentary – Financials, Communication services, and information technology 43% of the portfolioJacob Wolinsky
FPA Crescent Fund commentary for the fourth quarter ended December 31, 2018.
- Added new long equity positions in General Electric (GE) perpetual preferred stock, Glencore (GLEN) and Signature Bank (SBNY). In fixed income, we increased our Puerto Rico municipal bond exposure by purchasing sales tax revenue bonds. We also disclosed2 our long-equity positon in Naver (NHNCF).
- Increased our long equity exposure in Mohawk (MHK), Nexon (NEXOF), Royal Bank of Scotland (RBS), and Nexeo (NXEO).
- Decreased our long equity exposure in Aon (AON), Expedia (EXPE), and Oracle (ORCL). Also decreased short positions in Volkswagen (VOW3) and Utilities Select Sector SPDR Fund ETF (XLU) related to pair trades with Porsche (POAHY) and PG&E (PCG), respectively. We also decreased the size of the Naspers/Tencent pair trade.
- Closed our long equity positions in American Express (AXP), Esterline Technologies (ESL), Mondelez International (MDLZ), Thermo Fisher Scientific (TMO). Closed short positions in Alibaba (BABA) and Line (LN) related to pair trades with Altaba (AABA) and Naver (NHNCF), respectively. Our Navistar bond matured and we exited our fixed income position in Bombardier above par. We also exited our remaining commercial real estate loans as the bonds matured.
Contributors and Detractors:
Positioning and Outlook:
- We were able to increase our net risk exposure by approximately 1000 bps during 2018 because of increased volatility in our portfolio holdings and global equity markets. Many of our holdings are now trading at multi-year valuation lows based on various measures.
- The Fund’s top three sectors are financials, communication services, and information technology, which comprise 43% of the portfolio.
- With volatility returning to the market, we continue to search for what we believe to be high quality, value opportunities for inclusion in the portfolio, while remaining mindful of our long-term focus of limiting the permanent impairment of capital.
- We still view high-yield bonds as unattractive given sub-par yields and spreads to treasuries as well as weak covenants.