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.
Rekenthaler: Otherwise, but don't buy your fund for yield, buy your fund first for we won't say absolute return, that's an overused phrase, but a consistent – we hope a consistent return and consistent gains and with more stability than…
Romick: Our goal is to, when we think about absolute return, it doesn't mean that the market is going to allow you to make money every year, but that's the way we think. We're not the people – we're not closet indexers. We don't think about you know what the benchmark has. We actually didn't own any financial stocks going into 2008, zero, sold them out number of years before that. Or actually we're net short slightly, you know, in this space. But going into the mess, we bought a ton of corporate bonds of financial companies, CIT Group, American General Finance, they were buying equipment trust certificates, equipment leasing or aircraft leasing in International Lease Finance division of AIG, buying lots of things like that.
So we will flex up the portfolio to certain sectors. And because of that we can easily be early, and when you are early, you can underperform for a period of time, we have no problem underperforming for a period of time. So, when you say consistent performance, consistent to us we think in seven-year cycles. So, consistent does not mean we're going to do well every year or every two years, because God knows in '98, '99, we looked absolutely moronic. You know market was up…
Rekenthaler: Right. You were a bit short on Internet – or not enough, I know you weren't short in them entirely, but...
Romick: We weren't short really, but we didn't have any Internet stocks.
Rekenthaler: -- you didn't have any Internet stocks.
Romick: We had very little technology, I mean practically nothing. This is not to our great strength. But we looked little bit smarter in 2000, 2001, 2002. We made money in each of those years where the market lost.
Rekenthaler: Is there anything else you'd like to add in conclusion that – or maybe an investment theme for today, where you're at today, and where an opportunity might be or a concern?
Romick: Three themes that we really continue to operate with us, one is to continue to focus on energy. We view energy as black gold. It will help in – it will be good. We think the supply to many countries of energy are very – continue to be very attractive over time. It will protect against the weak U.S. dollar should that occur, protect against inflation should that occur. So, we do continue to like energy. We've been spending more time in the healthcare space and then increasing some positions. There, obviously, has been so much concern surrounding heath care reform. So, in that field we've been able to make certain investments.
And then we've been – the third thing, which I had just mentioned a few moments ago was the purchase of subprime bonds – of not bonds of whole loans. These things are – this is hairy stuff. I mean, 90% of these loans that we were buying in some of the pools are 30 days or more past due, and these are not current. So, we're looking at the asset value and we got a good margin of safety. And so we're looking to either modify or short sale or do a new foreclosure or something on those, and get that money back relatively quickly.
So those are the themes that we're operating under. Concerns continue to be, you know, what's going on at the federal and state level debt both on and off balance sheet, whether it'd be on balance sheet debt or underfunded pensions or underfunded or unfunded, say, unemployment trust reserves, et cetera.
Rekenthaler: Thank you, Steve.
Romick: Thank you.
Rekenthaler: That was Steve Romick of FPA Crescent Fund. I'm John Rekenthaler of Morningstar. Thanks for joining us.