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By John Rekenthaler | 06-23-2010 04:09 PM

Romick: 3 Themes Driving the Portfolio Today

The FPA Crescent manager discusses three themes at work in the fund today: energy, health care, and subprime whole loans. Plus, Romick describes how the go-anywhere fund fits in a portfolio.

Securities mentioned in this video
FPACX FPA Crescent

John Rekenthaler: Let me switch from at a national and international level to a much more local level, which is your fund. Your fund we have classified as moderate allocation because we had to put it somewhere. I actually noticed that when we run a regression, it shows up as being the closest match, although not a particularly close match to a target-date fund category. It's clearly not a target-day fund either, right, but I mean it's some kind of mix of assets as in the target-date. How do you describe your fund to people? How should people view your fund and how it would be used in the portfolio?

Steve Romick: It's a great question because I think that there aren't any other public funds that really operate the way we do. We have a very broad charter. We do lots of different things with long stocks or long corporate bonds. We're buying whole loans now. We do some selective shorting. We will sit on creditors' committee and do some workouts. So, we're asset allocators. So people give us their money, and say, look – those people say, look, we don't know whether we should be here or there. I'll let you, Steve Romick and team, be the asset allocators for us.

And so, to that degree, we actually end up being a fairly good hub in a hub-and-spoke investment strategy, such that maybe you'll go and do specialty things around it, but what we find is Morningstar has done a great study about investor return versus fund return. The greater the volatility, the greater the variance between fund return and investor return. So, if we can operate a fund that has lower volatility and provide equity return with less risk than stock market, which we've been able to accomplish for the last seven years, we'll be beating the market by a pretty good margin with far less risk, with two-thirds of the volatility of the market.

We think we can give our clients a pretty good service, and that's what we are trying to do. Our goal is not to beat the market, by the way, our goal is to do at least as well with less risk. And that's what we hope to continue to do. So, I think to the extent that people are less comfortable with volatility, are more concerned about downside, and temporary impairments of a portfolio can turn to permanent impairments if people don't have the staying power. Then, you know, we're a good place for those kinds of people.

Rekenthaler: And the yield on your portfolio, that's going to vary. You're not really targeting a yield, right? That just depends on where the opportunities are. So, when you have the huge slug of 23% bonds, you have big yield.

Romick: Yes.

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