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

Romick: There Could Be More Hell to Pay

The FPA Crescent manager says an overleveraged government and consumer could spell more trouble ahead, leading to the fund's conservative positioning today.

Securities mentioned in this video
FPACX FPA Crescent

John Rekenthaler: So where is your asset allocation right now?

Steve Romick: Asset allocation – our stocks have moved – I mean, a year ago – let's go back to high yield bonds for just a moment to lead into the answer to that question. A year ago – a little over a year ago the market had completely priced in a depression for corporate bonds – a depression. I mean investor grade bonds were in the toilet, you know low-grade corporate bonds and the high-yielding bonds were in the toilet and literally had priced in a depression. Stock market, on the other had, really had not. Stock market priced in a deep recession and we had that and it just wasn't – they weren't giving things away in the stock market the same way they were in the corporate debt market.

We felt there is no way we could lose in corporate bonds. Stocks, we felt there is that risk. Since then, now there's more certainly to be lost in the corporate bonds. There is not the same margin of safety that you have in those today. Stocks weren't as attractive relative to bonds. By the way, if the bonds weren't trading where they were, the corporate bonds, back then, we would have been a bit more aggressive on the equity side.

Rekenthaler: Right.

Romick: We just didn't feel the need to take that kind of risk. Today, even though the stock market has gone up high, a lot of stocks haven't gone up that much, particularly the larger cap, higher quality companies. And that's really where we see a little more of the opportunity today. The weighted average market cap in our companies, in our portfolios has actually gone up somewhat to – exceeds now $40 billion. And we look in our book today and our equities were about 47% long, about 5% short. We have a 19% in corporate bonds. We've got another few percent in – we are doing distressed mortgage-backed today or buying whole loans in our portfolio. So we actually are buying distressed pools of loans from ResCap and Citigroup and the likes.

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