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FPA Changes Tune on Banks

Putnam makes new bid to improve international research, and more.

Morningstar Analysts, 08/29/2011

After years of avoiding large financials and banks, FPA manager Steven Romick recently changed his tune. Romick noted in a July letter to shareholders that his FPA Crescent FPACX fund established a small position in three large banks. Based strictly on fundamental, bottom-up analysis, Romick found the valuations of these banks too compelling to pass up. Still, macroeconomic and regulatory concerns limited FPA Crescent's position to just 1.3% in the three banks.

This is a very recent development for FPA and Romick's funds. While the Crescent fund's second-quarter holdings report does not list any banks, a recent 13-F filing with the SEC shows that during the second quarter the funds' advisor, First Pacific Advisors, bought shares of Bank of America BAC, Citigroup C, Bank of New York Mellon BK, as well as insurer American International Group AIG. These names are most likely owned by Romick's hedge fund, FPA Hawkeye, and could also reveal which banks he's buying for Crescent.

Romick hesitated to join other value players investing in financials during much of the past decade. In 2006 he warned investors about the inherent risk in investment banks due to unusually high leverage, price/book value and return on equity. In 2008, when deep-value funds like Hotchkis and Wiley Large Cap Value HWLIX were increasing their positions in Bank of America, Romick steered clear. When Fairholme FAIRX placed big bets on Citigroup in late 2009 and Bank of America in early 2010, Romick again maintained skepticism.

However, at today's prices, Romick finally sees value in large, domestic banks. He estimates that Crescent's basket of financials trades at 85% of tangible book value and roughly 7 times normalized earnings. From a strictly bottom-up perspective, these stocks deserve a much heavier weighting in the portfolio, Romick said. But unlike the aforementioned value funds, FPA Crescent's ongoing top-down concerns prevent it from placing such a heavy bet (Hotchkis and Wiley Large Cap Value has 28% in financials, excluding REITs, and Fairholme has more than 65%).

Putnam Hires Fidelity Vets to Help Lead International Expansion
Putnam has spent three years trying to improve its domestic funds, and while the results are mixed, it's now turning its sights abroad. As part of the plan, the firm has hired Aaron Cooper and Shep Perkins from Fidelity, which continues a trend of Putnam's poaching talent from its cross-town rival.

Cooper and Perkins will help manage an expansion of Putnam's international research staff. Former Fidelity Mid-Cap Stock FMCSX manager Shep Perkins has become Putnam's co-head of international equities and lead manager of Putnam Global Equity PEQUX. Meanwhile, Cooper, formerly a managing director of research at Fidelity, has become Putnam's director of global equity research. Besides helping to bolster Putnam's international research, Cooper will oversee Putnam Research Fund PNRAX, which is supposed to hold the "best picks" of Putnam's analysts. This offering showed promise in 2009 and 2010 amid a broad stock market rally but has stumbled this year.

Putnam has 41 equity analysts roughly spread equally across its domestic and international operations. But expect to see more hiring in its Singapore office as the firm tries to boost research of the Pacific Rim's emerging markets. Putnam has 80 analysts across all its research operations.

Putnam's international lineup has a history of poor performance relative to peers. While recent moves are a positive sign, Putnam's international build-out will take time.

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