FPA Crescent Fund Q3 2012 Letter

The just released letter from Steve Romick, portfolio manager of FPA Crescent Fund, discusses the disinvestment in Walmart after his thesis played out. His frame was based on buying a “infinite duration bond with a rising coupon – a bond-like equity”, in which could have a potential return between 9% to 14% per year based on three pillars: operating income growth, share repurchases and dividends paid.

Also, he mentioned why he has sold his position in Ensco, an international offshore contract drilling company. For an average business, returns should not be outstanding. Moreover, it`s a cyclical company. So basically they bought it below replacement value of its assets and sold it during high cycle earnings, where investors were paying for the “E”. In his words:

“Our goal when investing in commodity businesses is to buy assets and sell earnings. Capital intensive, cyclical businesses often trade at discounts to the value of the underlying assets when their respective industry is in distress (companies are either losing money or earning less than what`s expected in a more normal environment). When  earnings rebound, the market seems to forget that the businesses are cyclical. Investors begin to value them on earnings as if another downturn isn`t in the cards.” 

He also began shorting yen via OTC derivatives as Japan`s prospects continue to worsen. His goal is to get paid off for the “if” part of the thesis instead of the “when”.

The full letter can be found here.

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