This is an update of the fund profile originally published in August 2012. You can find that profile here.
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 (say 25-30) 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 27 investment professionals and 71 employees in total. Currently, FPA manages about $23 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. On April 1, 2013, all of FPA’s fund became no-loads.
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 2004 to 2010. In early 2013, FPA added two analysts to support Mr. Py. One, Victor Liu, was a Vice President and Research Analyst at Causeway Capital Management from 2005 until 2013. The other, Jason Dempsey, was a Research Analyst at Artisan Partners and Deccan Value Advisers. He’s also a California native who’s a specialist in French rhetorical theory and has taught on the subject in France. (Suddenly my own doctorate in rhetoric and public address feels trendy.)
Management’s Stake in the Fund
Mr. Py and FPA’s partners are some of the fund’s largest investors. Mr. Py has committed “all of my investible net worth” to 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.
1.32%, after waivers, on assets of $80 million. The waiver is in effect through 2015, and might be extended.
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.
Like the other FPA funds, FPA International Value is looking to buy world-class companies at substantial discounts.
They demand that their investments meet four, non-negotiable 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. Mr. Py recounted the story of a long (and presumably frustrating) recent research trip to the Nordic countries. After weeks in northern Europe in January, Mr. Py came home with the conclusion that there was essential nothing that met their quality and valuation criteria. “The curse of absolute investors,” he called it. As the market continues to rally, “it [becomes] increasingly difficult for us to find new compelling investment opportunities.” And so he’s doing now what he knows he must: “We take the time to get to know the business, build our understanding . . . and wait patiently, sometimes multiple years” for all the stars to align.
The fund’s early performance (top 2% of its peer group in 2012 and returns since inception well better than their peer group’s, with muted volatility) is entirely encouraging. The manager’s decision to avoid the hot Japanese market (“weak financial discipline … insufficient discounts”) and cash reserves means that its performance so far in 2013 (decent absolute returns but weak relative returns) is predictable and largely unavoidable, given their discipline.
This is not a fund that’s suited to everybody. Unless you share their passion for absolute value investing, hence their willingness to hold 30 or 40% of the portfolio in cash while a market roars ahead, you’re not well-matched with the FPA funds. 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 funds with brighter long-term prospects.