market folly

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.