@David_SnowballHi David.
Thank you for sharing as always.
Your list of top managers largely and understandably looks like the cream of the crop from the funds in your portfolio
as per most recent post. (I am less of a bond fund investor: Mr. Sherman is ‘David K. Sherman’ managing
RPHYX, right?). And since I actually prefer low-profile managers, are the Leuthold and T Rowe Price people: Scott Opsal (+ m.b. Chun Wang) and Charles Shriver (+ m.b. Stefan Hubrich / Richard De Los Reyes)? Are there others at those co's I have missed?
Overall, your manager selections make perfect sense to me in all instances, but one. And I either trust these same managers with my investments (Seafarer, Grandeur, Artesian and now, Palm Valley) or would certainly consider doing so under the right circumstances, again – except for one. Oddly enough, this ‘one’ is your top fund holding: FPA Crescent (FPACX).
I used to have a position in FPACX long ago, but sold out for alternatives, because – to my eyes – this is a good example of where a
fund and a
manager ranking might diverge: i.e., a good fund with an average manager. Clearly, I am missing something, since you both value Mr. Romick highly and also have a better understanding of mutual fund dynamics.
You have previously mentioned that FPACX has ~
matched S&P 500 with about half the downside. That is a significant achievement and a strong relative metric when comparing funds – though not necessarily managers – as S&P 500 is unmanaged (sans relatively rare changes to the index). Also, S&P 500 is Large Cap while FPACX is MA/AL per MStar, so it does not seem to make for an entirely apples-to-apples comparison.
So, the questions I asked myself were:
1. How much value did Mr. Romick create for shareholders within the strategy where he operates: MA/AL (unless you believe FPACX is misclassified)? And
2. Are there managers within that strategy who have created significantly better long-term value so they might be called ‘great’ and, by extension, other manager – whose performance was meaningfully lesser – would be ‘average’ or below? (This also avoids the active manager vs passive index issues.)
Re 1, I looked at FPACX 10-year record on MStar – not as long as 30 years but might be sufficient to test across market conditions. There, FPACX has 10 y Alpha of 1.14, Beta of 1.14 coincidentally, max DD of -20.51%, and Sharpe ratio of 0.52 vs MStar MA/AL index w max DD -22.30% and Sharpe ratio of 0.61. This, and I could be very wrong, would seem to imply that active management of FPACX resulted in the fund fairly closely tracking the index and was able to generate a modest 1.14% excess return vs index at the cost of lower Sharpe ratio. To me, these numbers imply that active management of FPACX delivered average value for a good fund (i.e., a fund that managed to do marginally better than a well-performing index, which returns a poor manager / placeholder might implicitly or explicitly emulate).
Re 2, There are several options here, but I will use the one that has already been brought up: PRWCX. I think the comparison is fair since FPACX has spent most of the last 10 years in the same MA category as PRWCX. And it is a well-known fund not on your portfolio list, so you have – so to speak – chosen Mr. Romick’s fund management over Mr. Giroux’s. I do not believe, perhaps wrongly, that it is due to fund size as FPACX is not "small" and PRWCX has grown this "big" only in the last few years. As for active management metrics: per MStar PRWCX has 10 y Alpha of 4.55, Beta of 1.01, Sharpe ratio of 0.88, and max DD of -16.53%. That is, using a roughly similar pool of strategies and within the same timeframe, Giroux produces ~ 4x higher excess return, with better risk-return profile, lower downside if you happen to need the assets at just the wrong moment, and – depending on how you interpret data – does so in an arguably more predictable way. That sounds ‘great’ to me. So, why Mr. Romick and not Mr. Giroux?
To be honest, I was so baffled that I’d signed up for MFO Premium – one good thing to come out of this – and looked for clues there. The only thing I could find when running a comparison on MFO Premium was maxDD of -36.63% for PRWCX vs -28.83% for FPACX in 200902. Btw, things looked even grimmer @ MStar w max DD of at least -40.11% vs -30.80%, respectively, in the same timeframe. (Does MFO calculate max DD differently?) However, the time to convergence within 5% was quite short ~ 1 mo. So, does 5% extra DD over one month deprecate all other evidence that Mr. Giroux is a significantly better manager? Seemed doubtful to me. Finally, this comparison might not even be relevant as, in the words of Mr. Giroux,
this was a BFS era, before Farris Shuggi […] it changed the way I managed CAF which happened in late 2009. In that sense, Mr. Giroux capabilities have undergone a (positive) qualitative change and, when comparing Mr. Giroux to Mr. Romick management skills since 2010, the superiority of the former appears to leave no doubt. So, I am still puzzled...
Of course, none of this is meant as a critique in any way – except, perhaps, of my own decision to sell out of FPACX – but I remember using similar logic to drive my own choice then and am, more than anything, trying to see what I might have missed. (Especially, since the rest of your fund manager appraisals resonate so well with my own.)
