John Rekenthaler: Hi. This is John Rekenthaler of Morningstar here at the Morningstar Investment Conference with Steve Romick of FPA Crescent Fund. Steve has run the FPA Crescent Fund since its inception in 1993 very successfully, that's why we invited him here. And the fund has a 5 Star rating for every time period that Morningstar rates it. So it probably behooves us to pay a little bit of attention to what Steve is saying today.
So, Steve, let's start off with – you were here a year ago, and a year ago we were talking about a slug of high yield bonds that you had in your portfolio. I think at that time you were maybe already starting to wittle that position down a little bit. But anyway, it was a very successful position in 2009. Where are you with high yield bonds now and where is the market?
Steve Romick: High yield bonds in the portfolio kind of peaked through the mid 30s. And we had taken it up in a period of three, four months from 5% all the way up.
Rekenthaler: This was at the end of 2008?
Romick: 2008 and into the beginning of 2009.
Romick: So when we were here – ever since last year I was in – we actually – it was a month earlier a year ago, so we definitely were not trimming back at that point in time. We were in our full position. We were probably about our peak at that point in time. And since then it's snapped down to about 19, 19.5% of the portfolio. The yield at the end of March of '09 on the corporate debt was almost 23%. The yield at the end of March of 2010 was 8%.
Rekenthaler: Talk about the tale of two different worlds, huh? Do you like a better 23?
Romick: There is so much to do. We were so excited. I mean, the world was a difficult place, and it's a scary place and still is, but we were finding things to do. We were ecstatic about that. Now, it's – people were fearful of risk then. Now, they are not as fearful of risk. And the market rebounded 80% from its lows. And it's fallen off a bit since then. But there isn't the same kind of opportunity, and we are big fans of opportunity.
Rekenthaler: So talk about this 19% position you have or so in high yield bonds with an 8% yield…?
Romick: Hard to call them high yield bonds with and say 8% in the same sense, isn't it?
Rekenthaler: I get a sense they are in the portfolio because you've got to have your money somewhere and doing something but if you were to see other opportunities…?
Romick: I wouldn't have bottomed.
Rekenthaler: You wouldn't have bottomed. This is one of those stories where you wouldn't have bottomed but you would hold them?
Romick: Yeah, exactly. So we were holding some of these bonds. We were holding all of these bonds then. So most of them were – I mean, the average cost of these bonds somewhere in the low 70s, near about, they are close to par now, and some of the bonds we purchased, well we purchased in the 30s. They are also at par or close to par.
So it's a kind of thing where, if at 8%, I think that's going to be better than the stock market over the next few years. The duration on that book is relatively short. So we don't have a lot of interest rate risk to it. We have the credit risk but we think the credit risk is mostly – the bigger portion of the credit risk is mostly behind us. So it doesn't justify a 35% position.
We have sold some of the riskier names in that book, the ones we are more concerned with. And now, we are sitting with what we've got today. But I am not going to go and jump up and down for two reasons; one, because they are not a good yield and two, because I'll jump out of the camera range.