Objective and Strategy
FPA International Value tries to provide above average capital appreciation over the long term while minimizing the risk of capital losses. Their strategy is to identify high-quality companies, invest in a quite limited number of them and only when they’re selling at a substantial discount to FPA’s estimation of fair value, and then to hold on to them for the long-term. In the absence of stocks selling at compelling discounts, FPA is willing to hold a lot of cash for an extended period. They’re able to invest in both developed and developing markets, but recognize that the bulk of their exposure to the latter might be achieved indirectly through developed market firms with substantial emerging markets footprints.
FPA, formerly First Pacific Advisors, which is located in Los Angeles. The firm is entirely owned by its management which, in a singularly cool move, bought FPA from its parent company in 2006 and became independent for the first time in its 50 year history. The firm has 25 investment professionals and 66 employees in total. Currently, FPA manages about $20 billion across four equity strategies and one fixed income strategy. Each strategy is manifested in a mutual fund and in separately managed accounts; for example, the Contrarian Value strategy is manifested in FPA Crescent (FPACX), in nine separate accounts and a half dozen hedge funds.
Pierre O. Py. Mr. Py joined FPA in September 2011. Prior to that, he was an International Research Analyst for Harris Associates, adviser to the Oakmark funds, from 2005 to 2010. At this writing (July 30 2012), Mr. Py was looking for a couple of analysts to assist in running the fund.
Management’s Stake in the Fund
Mr. Py, his former co-manager Eric Bokota and FPA’s partners are the fund’s largest investors. Mr. Bokota estimated that he and Mr. Py had invested about two to three times their annual salary in the fund. That reflects FPA’s corporate commitment to “co-investment” in which “Partners invest alongside our clients and have a majority of their investable net worth committed to the firm’s products and investments. We encourage all other members of the firm to invest similarly.”
December 1, 2011.
$1,500, reduced to $100 for IRAs or accounts with automatic investing plans
1.35% on assets of $8 million
Few fund companies get it consistently right. By “right” I don’t mean “in step with current market passions” or “at the top of the charts every years.” By “right” I mean two things: they have an excellent investment discipline and they treat their shareholders with profound respect.
FPA gets it consistently right.
That alone is enough to warrant a place for FPA International Value on any reasonable investor’s due diligence list.
What are the markers of getting it right? FPA describes itself as a “absolute value investors.” They simply refuse to buy overpriced assets, preferring instead to hold cash – even at negligible yields – rather than lowering their standards. It’s not unusual for an FPA fund to hold 20 – 40% in cash, sometimes for several years. That means the funds will sometimes post disastrous relative returns – for example, flagship FPA Capital (FPTTX) has trailed 98-100% of its peers three times in the past ten years – but their refusal to buy anything at frothy prices pays off handsomely for long-term investors (FPPTX has posted top-tier results for the decade as a whole). That divergence between occasional short-term dislocations and long-term discipline leads to an interesting pattern in Morningstar ratings: while three of FPA’s four established stock funds earn just three stars (as of late July 2012), all three also earn Silver ratings which reflects the judgment of Morningstar’s analysts that these really are top-tier funds.
The fourth fund, Steve Romick’s FPA Crescent (FPACX), earns both five stars and a Gold analyst rating.
Like the other FPA funds, FPA International Value is looking to buy world-class companies at substantial discounts.
We always demand that our investments meet the following criteria:
- High quality businesses with long-term staying power.
- Overall financial strength and ability to weather market dislocations.
- Management teams that allocate capital in a value creative manner.
- Significant discount to the intrinsic value of the business.
The managers will follow a good company for years if necessary, waiting for an opportunity to purchase its stock at a price they’re willing to pay. Founding co-manager Eric Bokota said that they’d purchase if the discount to fair value was at least 33% but would begin “lightening up” on the position while the discount narrowed to 17%; that is, they buy deeply discounted stocks and begin to sell modestly discounted ones.
Mr. Bokota argues that the long-term success of the strategy rises as market volatility rises. First, the managers have been assessing possible purchase targets for years, in many cases. Part of that assessment is how corporate management handles “market dislocations.” Bokota’s argument is that short-term dislocations strengthen the best companies by giving them the opportunity to acquire less-seasoned competitors or to acquire market share from them. Second, their willingness to hold cash (around 22% of the portfolio, as of the end of July 2012) means that they have the resources to act when the time is right and an automatic cushion when the time isn’t.
Bokota holds that the fund has four competitive distinctions:
- It holds stocks of all sizes, from $400 million to multinational mega-caps
- It holds cash rather than lower quality or higher cost stocks
- It maintains its absolute value orientation in all markets
- It is unusually concentrated, with a target of 25-35 names in the portfolio. As of late July, the portfolio is just below 25 names. That’s consistent in line with Mr. Bokota’s observation that “anything north of 15 to 20 names” offers about as much diversification benefit as you’re going to get.
The fund’s early performance (top 1% of its peer group for the first seven months of 2012 with muted volatility) is entirely encouraging. That said, there are three reasons for caution:
First, the management team is still evolving. The fund launched in December 2011 with two co-managers, Eric Bokota and Pierre Py. Both were analysts at Harris/Oakmark and they shared responsibility for the portfolio. They were not supported by any research analysts, which Bokota described as a manageable arrangement because their universe of investable stocks is quite small and both he and Py loved research. In July 2012, Mr. Bokota suddenly resigned for pressing personal reasons. Py and FPA immediately began a search for two analysts, one of whom spokesman Ryan Leggio described as “a senior analyst.” Their hope was to have the matter settled by the end of the summer, but the question was open at the time of this writing.
Second, this is the manager’s first fund. While Mr. Py doubtless excelled as a member of Oakmark’s well-respected analyst corps, he has not previously been the lead guy and hasn’t had to deal with the demands of marketing and of fickle investors.
Third, FPA’s discipline lends itself to periods of dismal relative performance especially during sharply rising markets. Sadly, rising markets are when investors are most willing to check portfolios daily and most likely to dump what they perceive to be “laggards.” Investors with relatively high turnover fund portfolio (folks who “actively manage” their portfolios by trading funds in search of what’s hot) are likely to be poorly served by FPA’s steady discipline.
FPA lends a fine pedigree to this fund, their first new offering in almost 20 years (they acquired Crescent in the early 1990s) and their first new fund launch in almost 30. While the FPIVX team has considerable autonomy, it’s clear that they also believe passionately in FPA’s absolute value orientation and are well-supported by their new colleagues. While FPIVX certainly will not spend every year in the top tier and will likely spend some years in the bottom one, there are few with better long-term prospects.