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By Dan Culloton | 01-15-2014 11:00 AM

Romick: No Pay for Play in the Market

Seeing few opportunities that meet their risk-reward criteria, the team at FPA Crescent--winner of Morningstar's 2013 Allocation Fund Manager of the Year award--is sticking to its discipline and letting cash build, says manager Steve Romick.

Dan Culloton: The winners of Morningstar's 2013 Manager of the Year award in the Allocation category are Steve Romick, Mark Landecker and Brian Selmo of FPA Crescent.

My name is Dan Culloton with Morningstar. I am here with Steve Romick of FPA Crescent to talk about the award, and the year of 2013 for them.

Steve, thank you for being here.

Steve Romick: Thank you. Thank you for the honor of the award.

Culloton: The fund named Brian and Mark as co-managers part way through the year, yet they have been a part of the team for quite some time. Why don't you talk about their contributions to the fund in the past and this past year?

Romick: We only have a short 10-minute interview, so it's difficult to talk about their contributions in such a short timeframe. But they are terrific. Brian and Mark joined us in late 2008 and early 2009 and have been adding a lot of value ever since then. Although they were named portfolio managers in 2013, they had functioned effectively in that capacity for the year and a half preceding that or so.

Prior to joining FPA they were both respected portfolio managers in their own right, so they came to the firm as more than just analysts, and they've taken the ball and run with it for every task they've either been asked to do early on or tasks that they've initiated for themselves. They are a tremendous value-add to our team.

Culloton: One of the unique things about the fund and the past year was the performance you were able to put up with such a large and increasing cash stake throughout the year. What was interesting to me is that, sitting on all that cash did not mean sitting on your hands, and even within the cash stake, you were able to do some interesting things such as diversifying to Singapore debt. Why don't you talk about the cash stake and what you've done there?

Romick: First it's important to understand that the cash is merely a byproduct of our investment process. Cash is not a conscious top-down allocation decision. If we don't find companies that meet our risk-reward [criteria]…because our goal first and foremost is to generate equity rates of return while protecting capital… so if we feel we can't do that in any given name, then we end up in cash.

As cash was building during the course of the year, it increased 10% or so during the course of 2013, we realized that, with all the dysfunction that existed in Washington, not that we were worried about U.S. Treasuries ultimately having an impairment, but accessibility, availability of cash at any given point in time is paramount. That cash is an option on future opportunity, to be able to put that cash to work.

We felt it was incumbent upon us to diversify some of that cash away from U.S. Treasuries. So, we exited a number of different cash substitutes back in '08, and we re-entered commercial paper, for example, in 2013. We used short-term corporate bonds, and we also bought, as you mentioned, some sovereign paper, including the Singapore sovereign paper.

They are all cash substitutes, and we want that cash available at any given point in time.

Culloton: Another interesting thing about the allocation category and the other allocation funds that were considered is that they all had significant bond stakes, even funds that had been leaning away from bonds for similar reasons that you've leaned away from bonds. But you have almost no bonds in your portfolio. Why don't you talk about that?

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