Can the FPA Way Survive Generational Change?

FPA is an interesting case study of how to handle a closely held firm's transition from a charismatic leader to a succeeding generation. The report, so far, has been positive, but it's a work in progress and worth monitoring.

The firm's history goes back to the early 1950s, but for much of the last three decades, it has been personified by current CEO Bob Rodriguez. A vehement and voluble value investor, Rodriguez is known as much for his censorious opinions on fiscal and monetary policy as for his strong record as manager of  FPA Capital and  FPA New Income (FPNIX). Indeed, at an investor day earlier this summer, Rodriguez, a three-time Morningstar Manager of the Year award winner, adamantly asserted that government finances, and stock and bond valuations, were living on borrowed time and exhorted investors to shun markets primed for excess by indulgent Fed policy. "Unless you're willing to withhold capital the excesses will continue," he said.

It was vintage Rodriguez. But is the present FPA, which now has $30 billion under management, of the same vintage as it was in its uncompromising leader's heyday? It's a fair question since the firm has seen a number of changes since Rodriguez took a one-year sabbatical and a step back from day-to-day fund management in 2010. Assets under management have more than doubled. Veterans have departed, including one of Rodriguez's successors at FPA Capital, Rikard Ekstrand, who left in 2013, and longtime  FPA Perennial comanager, Steven Geist, who decided to retire this year. There also are many new faces. More than half of the firm's nearly 30 investment personnel have joined in the last four years, many of them to help out Steven Romick at  FPA Crescent (FPACX), where assets have nearly quadrupled to $18 billion since Rodriguez took his timeout. The family even ventured into international and global investing by launching an international-value fund and turning the formerly domestic  FPA Paramount into a world-stock fund in 2011.

Cultural Constants
There are bound to be changes as a firm grows and leadership lays the groundwork for succession. And even an ardently contrarian shop like this one can adapt somewhat to its investors' needs and preferences by, for instance, fostering international-stock expertise. The challenge for a partnership like FPA is to evolve gracefully without gradually eroding or forsaking the fundamental values on which the business was built. There are plenty of signs that FPA is passing this test.

Despite a couple of notable manager departures, the firm's one- and five-year manager retention rates of 92% and 96%, respectively, are better than most fund firms'. That shows FPA is still able to attract and retain good people. Dennis Bryan  and Tom Atteberry, who've been with the firm for two decades each--give or take a couple of years--still hold down the forts at FPA Capital and FPA New Income, respectively. Thirty-year veteran Eric Ende is gradually passing FPA Perennial's torch to Greg Herr, who has been with the firm for seven years himself. Relative newcomer Pierre Py, manager of the promising FPA International Value , came to the firm with impressive credentials, having worked at Harris Associates'  Oakmark International (OAKIX). Rodriguez, of course, still has a lot of influence, providing macroeconomic context for the investment teams' research and keeping an eye on risks. There are seasoned hands around to carry the firm's culture into the future.

There are other cultural constants. There is no doubt that an investor, Rodriguez, manages the firm. He and his colleagues also eat their own cooking--more than 96% percent of the firm's assets are in funds in which one or more of the managers invest more than $1 million. Portfolio managers' bonuses are based on long-term performance--typically five and 10 years--and other factors, including succession planning, which ensures that the investment personnel's definition of long term extends beyond their own tenures. Fees are reasonable, the fund board is more than 80% independent, and the firm's regulatory record is blemish-free. FPA clients get regular detailed and forthright communications, and the family of six funds is no trend chaser. Though there is no one way to invest at FPA, the firm remains committed to achieving decent absolute long-term returns via high-conviction, bottom-up, focused strategies.

Surviving Success
This approach has produced admirable long-term results, but as is often the case, success can also raise concerns. FPA Crescent, which accounts for more than half of the firm's assets under management, remains a rare, truly eclectic, and contrarian fund. It gets a Gold Morningstar Analyst Rating because of the experience and talent of Romick, who has demonstrated time and again his aptitude for lying in wait until opportunities present themselves, whether in out-of-favor small-cap stocks during the late 1990s and early 2000s or high-yield bonds and distressed debt during the financial crisis.

Asset growth, however, has raised the degree of difficulty for what has become FPA's flagship. The firm has invested heavily in Romick's team, increasing it to 10 from two in 2005, when the fund closed for about two years. The additions have been salutary thus far; recently appointed comanagers Mark Landecker and Brian Selmo share Romick's focus on value and absolute returns, as well as his long-term orientation and willingness to search off the beaten path for equitylike returns. The fund's path from here, however, will be different because it can't be as big of an investor as it has in the past in small caps and other less liquid securities. That doesn't mean it will be worse. Closing the fund again would assuage asset-bloat concerns, but the managers' contrarian discipline and patience give it a good shot at being just as successful as it has been at generating stocklike results with less volatility.

Likewise, while some gradual generational changes at FPA bear watching, the firm still checks out as a fine steward.