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By Jason Stipp | 10-14-2013 05:00 PM

Romick: Where Investors Are (and Aren't) Paid to Play

The FPA Crescent manager takes a pass on long-dated bonds and high yield, but found value in old-school tech firms.

Jason Stipp: I'm Jason Stipp for Morningstar.

Minding the downside and focusing on the long term are two important factors for successful investing, and few managers do it better than those at FPA Crescent, a Gold-rated, 5-star fund. Joining us today is lead manager Steve Romick to talk a bit about how the portfolio is positioned today.

Thanks for being here, Steve.

Steve Romick: Thank you.

Stipp: Let's start by talking about what you're not investing in, which seems to be a lot of things these days. In your last letter you wrote, "We avoid those investments that appear overly exposed to obvious macro excess."

A notable attribute of your fund recently has been its cash stake, which has been upwards or higher than 30%. What is it that you're not finding attractive when you look at the marketplace?

Romick: Long-dated bonds; we don't think you're getting paid to play. We don't really know what direction rates will go; we expect over time that they will increase, and they could just have a stair-step function up, and we just don't think, given where the 10-year is, you're getting paid to play.

High-yield bonds, which aren't so high-yielding--there's not a lot of distress in those--and spreads to Treasuries are relatively low, and the starting yield given the already-low level of interest rates makes it even lower still.

So, you just can't look at spread. A lot of people look at spread--well, spread to kind of a risk-free rate of return is normal, but we find that it doesn't really take into account the lower level of rates.

Then there are other areas that we just … put up there as too complicated. Health care is some place that … with all the changes that are taking place, it's hard to see what the outcome is going to be for various companies. So where we do invest in health care, which is in a very small way, we tend to tread very, very cautiously.

Stipp: What about equities as a whole? They look perhaps relatively more attractive than bonds, but does that make them attractive?

Romick: I think you answered the question with your question. They are relatively more attractive than bonds, and I think that if you are going to have to look out 10 years and where you'd like to be, I think being 100% in cash is too big a bet for people to make.

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