Steve Romick's FPA Crescent Fund Still Conservatively Positioned: Q4 Letter

Steve Romick's FPA Crescent Fund is out with its fourth quarter and 2012 year-end letter and commentary.  In it, he highlights how they've maintained conservative positioning due to concern over risk.

FPA Still Conservatively Positioned

Romick writes that,

"Artificial and unsustainably low cost of capital perverts capital allocation decisions. Fear of not having enoughincome pushes the elderly to own more equities or riskier bonds. Companies will find that they can invest capital that wouldn’t otherwise meet their return -on-capital hurdles (ROC). In general, investors are moreable/willing to assume greater risk, and they sometimes forsake liquidity in the process, even though they might have near- term needs for that capital. It’s easier to spend capital  when it’s sitting on your balance sheet, earning essentially nothing. And companies that should die are kept alive by an endless supply of cheap money  . We feel like we’ve fallen down the rabbit hole. Traditional investment decision -making processes have been hijacked by zero-interest-rate-policy (ZIRP)."

The scenario they illustrate of lack of return on cash positions driving investors to invest more fully has certainly come to fruition.  Earlier today, we highlighted how Grey Owl Capital has moved more cash into equities due to the negative real return on cash.  FPA, on the other hand, has stood steadfast and will invest only when they see opportunity by their definition.


Investment in Groupe Bruxelles Lambert

FPA notes they've taken a stake in Groupe Bruxelles Lambert (GBL), a Belgian holding company which many liken to Berkshire Hathaway as it's run by the 'Warren Buffett of Europe,' Albert Frere.  FPA liked shares due to the 25-30% discount to NAV and they term it a 'infinite duration bond.'  They also like the 4.5% dividend yield but note that they don't see a catalyst for the NAV gap to close.

They also include a write-up on their stake in Orkla, a stock they originally purchased in November 2011 but they continue to hold.


Embedded below is FPA Crescent Fund's Q4 letter to investors:




To see what FPA's invested in, we've covered Romick's pitch on Renault as well as some of Romick's investment picks.

Steve Romick's Latest Investment Picks (Interview)

FPA Crescent Fund's Steve Romick recently appeared on CNBC's Squawk Box to talk about his approach and his top two stock picks.  FPA has returned 19.7% over the past year and has seen 9% annual returns over the past decade.

Romick's Picks

The fund manager likes Renault (RNO), since it's out of favor in Europe at the time.  He cites the company's stakes in Nissan, Volvo, and Daimler as being worth more than the value of Renault.  They're long RNO and short Volvo & Nissan, saying that "the market is paying us to own Renault."

OmniCare (OCR) was his other pick as he argued the business will benefit from the aging of America and new management.  Sticking with the healthcare space, we've also posted up on potentially why Romick owns WellPoint (WLP) as well.

He also likes farmland is his thesis there is that it will benefit in an inflationary environment (and decline in the US dollar).  He likens it to gold, but unlike the metal, he says it has a positive return and no cost of carry.  They couldn't own as much of it as they want due to liquidity. 

We've detailed in the past how Michael Burry has advocated owning farmland in the past.  Burry, if you're not familiar, was one of the investors that profited from the subprime bubble.


FPA's Investment Approach

He mentioned that his goal is to "provide equity rates of return with less risk than the market."  They invest across asset classes.  While equities are the largest portion of their portfolio, they also do high yield bonds, mortgage home loans, farmland, etc.  They currently hold around 30% in cash as well.

Romick argues against owning bonds at the moment, save for some corporate bonds.  Past posts on this site have highlighted how Omega Advisors' Leon Cooperman has been outspoken against bonds.

Embedded below is the video of Romick's interview with CNBC:



Romick will be presenting new investment ideas at the Value Investing Congress in Las Vegas next May and our readers receive a discount to the event here.

Why Steve Romick Owns WellPoint (WLP): Stock of the Week

The stock of the week this time around is WellPoint (WLP) and the analysis below takes a look at some potential reasons as to why Steve Romick of FPA Crescent might like the company. Last week we featured: why David Einhorn owns Dell.


The following is written by Tsachy Mishal, portfolio manager of TAM Capital Management.

Hedge funds as a group have struggled performance-wise in recent years. However, there is one sector which has treated them very well: the HMO's. In 2010, at the height of uncertainty surrounding Obamacare, many hedge funds took positions in HMOs such as UnitedHealth (UNH), Cigna (CI) and WellPoint (WLP).

Since then, most of the stocks in the group are up by 50%, with some nearly doubling. Even after this large rise, many stocks in the the group are still cheap. Currently, Farallon Capital Management and Steve Romick of FPA Crescent hold positions in WellPoint.

WellPoint currently trades at $69.25 a share. They are expected to earn $7.70 in the current year and $8.50 next year. WellPoint is planning on repurchasing $2.5 billion worth of their own shares this year, which amounts to nearly 11% of the shares outstanding at the current price.

The most often cited reason for this bargain basement price is the continued uncertainty surrounding Obamacare. While Obamacare will lead to more customers, there is uncertainty regarding many of the new laws (specifically the mandate that requires them to accept customers at their quoted price, even if they are already sick).

The stock has underperformed its peers in the HMO sector recently as earnings disappointed last quarter. Wellpoint mispriced a large policy in California, which they have since terminated. As a result, Wellpoint trades at a discount to the group, even though it is the second largest HMO in a business where scale matters.


What I Like:

- The valuation of 8.15 times 2013 earnings estimates is extremely attractive assuming estimates are anywhere near accurate.

- Management has an excellent track record of returning cash to shareholders and have said they will return $2.5 billion this year via share repurchases. The share repurchase should put a floor under the stock as there will constantly be a large buyer in the market.

- There is little to no European risk in the business and economic sensitivity is minimal.

- Management recently reiterated their intent to repurchase $2.5 billion worth of shares this year, which likely means that this year is less than a disaster.


What I Don't Like:

- Low health care utilization has helped the earnings of HMOs in recent years. This trend is likely to end at some point.

- Obamacare is a wildcard as it can help or hurt earnings. While there will be more customers there will also be new regulations. This large change is a big uncertainty, which investors don't like.

- A decade ago, HMO industry profits plunged as companies fought for market share. Since then, the industry has consolidated and become more rational. However, there is still the risk that the industry is more cyclical than most believe.


There are numerous risks in WellPoint, such as Obamacare and the risk that margins for the industry contract. However, at a little over 8 times next year's earnings there is a large margin of safety in WLP's stock price. Even if estimates are off by 20% the stock is still cheap. The nice part of the business is that it is insulated from Europe and has little economic sensitivity. As a result, I am long WellPoint.


Be sure to scroll through all of our stock of the week posts for further equity analysis.