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Fund Times

Like a Hedge Fund, But Without Hedge-Fund Fees

For more than two decades, Gold-rated FPA Crescent's eclectic, contrarian style delivers equitylike returns with less risk than the stock market.

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The following is our latest Fund Analyst Report for FPA Crescent Fund (FPACX). Morningstar Premium Members have access to full analyst reports such as this for more than 1,000 of the largest and best mutual funds. Not a Premium Member? Gain full access to our analyst reports and advanced tools immediately when you try Morningstar Premium free for 14 days.

FPA Crescent can clear the hurdles between it and its goals and still deserves a Morningstar Analyst Rating of Gold.

Expenses are the biggest and most obvious hurdle. The fund has never been cheap and likely never will be; the managers argue they offer a hedge fund-like philosophy and approach for less than hedge fund fees. Precious few alternative or traditional strategies, however, have been able to overcome higher-than-average fees over the long term, but so far this fund has been the exception. It has delivered excellent results after fees for 24 years, and for most of that time fees were much higher than they are now. Expenses here have dropped 43% since 2009, and, while they're still above average, they are lower now than they have ever been.

Asset size is another potential hurdle. With more than $20 billion under management here and in similar strategies, its management team's ability to invest in the small- and mid-cap stocks that helped it years ago is limited. Flows into the fund, however, have turned negative in recent years, which actually alleviates some asset bloat concerns. There also are more people involved: Manager Steve Romick now has two comanagers and eight analysts contributing.

Romick and his team also apply the same eclectic, contrarian style that shoots for equitylike returns with less than equitylike risk by watching and waiting for the right price and place to deploy cash across the capital structure.

Patience and strict value standards remain the fund's edge. Romick remains pessimistic about valuations in general but hasn't gone on strike. The fund still had a lot of cash on hand at the end of 2017's first quarter--38% of assets--but he still thought financials stocks were relatively inexpensive after their post-U.S. election rally. The team also had been snooping around the healthcare sector after its weak 2016. The fund's helping of high-yield bonds remained small, less than 6% of assets, after taking profits on some energy and basic materials sector issues it had picked up earlier in 2016. This approach has helped the fund achieve its goals over time.

Dan Culloton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.