Why Veteran Fund Manager Steve Romick Isn’t ‘Leaning in Hard’

The stock market’s wild fluctuations should provide plenty of opportunities for investors. However, Steve Romick, co-manager of the Bronze-rated FPA Crescent fund, says he isn’t “leaning in hard” yet.

“It’s not like they’re giving stuff away,” he observed of the market’s recent lows. During a conversation with Morningstar on April 8, just before President Donald Trump announced a 90-day pause on many tariffs, the Los Angeles-based Romick talked about investor complacency, why he’s worried about the long-term risks of the administration’s actions, and how investing, like life, is eminently unpredictable.

Romick has been managing FPA Crescent, which holds a mix of bonds, cash, and equities, since 1993. The $10.4 billion fund is a top performer, out-earning 95% of funds in the moderately aggressive allocation category for the last five years. It lands in the top 20% for the past ten years. Even over the last 12 months, Romick and his co-managers have led the fund to top-decile returns.

Keep reading to learn more about Romick’s views. This conversation has been edited and condensed for time and clarity.

Leslie Norton: It’s only April, but you’ve had an eventful year, with the Los Angeles fires and the seesawing market. But you’re a bear market veteran.

Steve Romick: A decade ago, I gave a speech to the CFA Society in Chicago and said the one thing you shouldn’t be surprised by is surprises. Nothing’s ever certain. At the end of the year, more than 40% of investors thought there was less than a 10% probability of a stock market crash. During the depths of covid in 2020, less than 15% of investors thought there was a less than a 10% probability of a stock market crash.

Investing, like life, is eminently unpredictable. I anticipated there would be fires here. There were videos of Richard Nixon in the 1950s hosing down his roof. I had firehoses on my property, a pump to take water out of the pool. But even the best-laid plans...

Trump’s tariff policy is a nasty surprise. I can’t divine the future. These trade tariffs seem to be more calculated on whimsy rather than sound reasoning. I don’t know if you saw Larry Summers on X saying “This is to economics what creationism is to biology.” Tangible goods are considered, but not intangible services. If Japan contributes $20 to the deficit, there’s no corresponding offset for when Japan pays Netflix $20. It’s problematic because a poor third-world country will never be able to import as much from us as they export.

Risks of Tariffs in the Long Term

Norton: What are some of the big risks?

Romick: The long-term ramifications of [the administration’s] actions: If I’m a foreign trade partner, I’ve lost faith in the US. I’m going to reset my expectations with the US and try to establish different sourcing and relationships with other trade partners. And then, what does that mean? Who are the winners and losers? If I recall correctly, Brazil’s agricultural complex was built back in the 1960s and 1970s, when trade restrictions were high and the population was growing. They needed food and didn’t want to be dependent on the US. Structural changes that occur because of these decisions might last.

What does this do to the US dollar? Does it push it away from being the world’s reserve currency? Maybe that’s a bad thing in light of the alternatives that exist today.

Norton: What lessons from previous declines are you remembering now?

Romick: This too shall pass, and if things get cheap enough where you can assume the worst, prepare for the worst and then hope for the best. Make investments with that in mind, and you’ll be fine. If you can get the bad news plugged into the valuations and kind of assume the worst, then you should be in a good position.

Cash is 25% of the FPA Crescent Fund

Norton: You had a quarter of your portfolio in cash going into this decline.

Romick: Our net exposure is really lower than that would suggest. We’ve been backing away from stocks for some time. So we’re the cleanest shirt in the dirty clothes hamper.

Norton: What have you been doing the past few days?

Romick: Some select buying, but I’m not gonna name names. We’re not leaning in hard. The market’s not down so much. You can see the valuations are down from where they were at the beginning of the year and a little bit further from their peak. It’s not like they’re giving stuff away.

What It Takes to Get Bullish

Norton: What would it take for you to lean in hard, as you put it?

Romick: Stock price in the context of what we think earnings are likely to be over the next five years for these companies. I’m agnostic in terms of domestic versus international. Internationally, some businesses are there. But with these trade policies, we’re trying to figure out how they will ultimately be impacted. What that means to earnings is a little bit challenging.

For example, I don’t own Tesla, but some people initially thought Elon Musk would be happy about tariffs because they advantage Tesla over foreign car manufacturers. That misses a couple of points. One, Tesla sells overseas. Two, they import a tremendous amount of their cost of goods sold from outside the US. I have to believe it’s not inconsequential.

Norton: Are you concerned about risks from some kind of financial failure?

Romick: You know the tide goes out, there’s somebody swimming naked. If the group is swimming naked, that creates systemic risk.

Norton: What are you thinking about bonds, corporate bonds, credit?

Romick: The yield spread is average-ish. The absolute yield you’re getting isn’t great. It doesn’t account for all the risks out there, like economic risk, or your ability to get control of the principal in the event of a bankruptcy, because the covenants are so light. So we tread very cautiously when it comes to corporate credit. We’re not on the cusp of getting engaged, either.

Norton: Has your cash position come down?

Romick: I don’t think we’ve bought enough yet to to offset the declines in the securities we do own. I’m waiting for a price level that can support a negative outcome, assuming the worst. There’s nothing fact-based, nothing established. We don’t really know what the trade policy will be.

Advice for US Investors

Norton: What’s your advice to US investors who are likely overexposed to US stocks?

Romick: There’s a lot of good companies outside the US trading at valuations, all else equal, that are on average somewhat less. European markets have more banks in their mix, and banks should by definition trade a lower multiple than a good growing business. I mean, they’re inherently leveraged. And not only that, but they also probably have more bad banks in their universe than we have, that never came through the financial crisis and paid the full price.

But comparing like-for-like businesses, there are some interesting opportunities. The world’s moving so quickly that it’s hard to determine. We’re trying to do a lot of work on a lot of different companies all at once, when the world is certainly drinking from a firehose [of information].

For individuals, some of us might be overexposed to stocks, period. People are preconditioned to buying on dips and bear markets are viewed in months, not years. We haven’t had a long bear market in many years. Look at the 1970s. That was a long period for stocks to be down. The Dow Jones industrial average was rangebound for years. My point is that memories are short. Between 1970 and 1982, the Dow traded up and down between 700 and 1,000. It broke out after 1982.

It’s not that I’m calling for that, but people look at the at the recent past and extrapolate. And when I say recent past, I don’t mean five years, I’m saying in their investing lifespan. Most people weren’t around then, investing. I was 13 years old in 1976, buying some stocks with my grandfather and not knowing what the heck I was doing.

Norton: Should US investors stay tilted toward the US market because it is their home market? During the long Japanese downturn, some of the most popular investments for Japanese investors were US equity funds.

Romick: People should be tilted toward good-quality growing companies wherever they might live. And so I tend to be agnostic as to country of domicile, except to the extent that I want to be mindful of how an authoritarian or totalitarian regime might take something away from me. This is how we operate. We look for opportunities globally. There could be a point in time when Adidas is better than Nike, or vice versa. I don’t own either of these stocks, I’m just picking name brands in two different countries. Nike has gotten torched.

Norton: How do you deal with mood during market declines?

Romick: This too shall pass. You have got to look down the road. If you can’t invest with a five-to-seven-year horizon, you should not be investing, period. Make sure you have enough. Make sure you don’t have so much invested where that it keeps you awake at night, and everybody’s different there. Understand your own psychology. Because if you don’t, you’re gonna be buying or selling at exactly the wrong times.