Objective and Strategy
The FPA Global Value Strategy will seek to provide above-average capital appreciation over the long term while attempting to minimize the risk of capital losses by investing in well-run, financially robust, high-quality businesses around the world, in both developed and emerging markets. The portfolio holds between 25-50 stocks, 33 at present. As of October 2014, the fund’s cash stake was 16.7%.
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 28 investment professionals and 72 employees in total. Currently, FPA manages about $33 billion across five 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 FPA funds became no-loads.
Pierre O. Py and Greg Herr. 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. Mr. Py has managed FPA International Value (FPIVX) since launch. Mr. Herr joined the firm in 2007, after stints at Vontobel Asset Management, Sanford Bernstein and Bankers Trust. He received a BA in Art History at Colgate University. Mr. Herr co-manages FPA Perennial (FPPFX) and the closed-end Source Capital (SOR) funds with the team that used to co-manage FPA Paramount. Py and Herr will be supported by the two research analysts, Jason Dempsey and Victor Liu, who also contribute to FPIVX.
Strategy capacity and closure
99.6. “Active share” measures the degree to which a fund’s portfolio differs from the holdings of its benchmark portfolio. High active share indicates management which is providing a portfolio that is substantially different from, and independent of, the index. An active share of zero indicates perfect overlap with the index, 100 indicates perfect independence. The active share for Paramount is 99.6 measured against an MSCI all-world index, which reflects extreme independence.
Management’s Stake in the Fund
At December 31, 2013, by Mr. Herr was between $100,001 and $250,000, and by Mr. Py was still $0 after two years as manager. Mr. Py did have a very large investment in his other charge, FPA International Value. Three of the five independent trustees had between $10,000 and $50,000 invested in the fund, a fourth trustee had over $100,000 and the final trustee was relatively new to the organization and had no investment in the fund.
September 8, 1958.
$1,500, reduced to $100 for IRAs or accounts with automatic investing plans.
1.26% on $304 million in assets, as of October, 2014. That is 32 basis points higher than it was a year earlier. Mr. Herr explained that the fund’s board of trustees and shareholders approved a higher management fee; global funds typically charge more than domestic ones in recognition of the fact that such portfolios are costlier to assemble and maintain. The fund remains less expensive than its peers.
Until September 2013, FPA Paramount and FPA Perennial (FPPFX) were essentially clones of one another. High quality clones, but clones nonetheless. FPA has decided to change that. Beginning in 2011, they began to transition-in a new management team by adding Messrs Herr and Py to the long-tenured team of Stephen Geist and Eric Ende. In September 2013, Messrs Geist and Ende focused all of their efforts on Perennial while Herr and Py have sole charge of Paramount.
That same month, the fund shifted its principal investment strategies to more closely mirror the approach taken in FPA International Value (FPIVX). Ende and Geist stayed fully invested in high-quality domestic small and mid-cap stocks. Herr and Py pursued a global, absolute value strategy. That shift shows up in three ways:
- The market cap has climbed. Paramount’s market cap is about four times higher than it was a year ago.
- The global exposure has climbed. They’ve shifted from about 10% non-US to about 50%.
- The cash stash has climbed. Ende and Geist generally held frictional cash, 3-4% or so. Herr and Py have nearly 17%. At base, an absolute value discipline holds that you should not put money into risky assets unless you’re being more than compensated for those risks. If valuations are high, future returns are iffy and the party’s roaring on, absolute value investors hold cash and wait.
Sadly, the performance has not climbed. Between the date of the strategy transition and October 30, 2014, a $10,000 investment in Paramount would have grown to $10,035. The average global stock fund would have provided $11,670. The fund had been modestly trailing its peers until the 3rd quarter of 2014, when it dropped 9% compared to a modest 3.3% loss for its peers.
Manager Greg Herr and I talked about the fund’s performance in late October, 2014. He attributed the fund’s modest lag through the beginning of July to three factors:
- A small drag from unhedged foreign currency exposure, primarily the euro and pound.
- A more substantial drag from the fund’s largest cash stake.
- The inevitable lag of a value-oriented portfolio in a growth-oriented period.
The more substantial lag from July to the present seems largely driven by the fund’s hidden emerging markets exposure, and particularly exposure to the EM consumer. The fund added five new positions in the second quarter of 2014 (Adidas, ALS Limited, Hypermarcas SA, Prada TNT Express) which have significant EM exposure. Adidas, for example, is the world’s largest provider of golf equipment and supplies; it has consciously expanded into the emerging markets, including adding 850 outlets in Russia. Oops. Prada is the brand of choice for Chinese consumers looking to express their appreciation to local elected officials, a category that’s been dampened by an anti-corruption initiative. Hypermarcas is a Brazilian retailer selling global brands (Johnson & Johnson products, for example) into a market destabilized by economic and political uncertainty ahead of recent presidential elections.
The largest hit came from their stake in Fugro, a Dutch oil services company that does a lot of the geoscience stuff for exploration and production companies. The stock dropped 40% in July on profit warnings, driven by a combination of a deterioration in the oil & gas exploration business and in some “company-specific issues.” David Herro, who managers Oakmark International and who also owns a lot of Fugro, remains “a firm shareholder” because he thinks Fugro has great potential.
Herr and Py agree. They continue to monitor their holdings, but believe that the portfolio is now deeply undervalued which means it’s also positioned to produce abnormally high returns. They’ve continued adding to some of these positions as the value deepened. In addition, the market instability in the third quarter is beginning to drive the price of some strong businesses – perhaps five or six are “near the door” – low enough to provide potential near-term uses for the fund’s large cash reserve.
It’s hard being independent and this is a very independent fund. When a member of the investment herd is out-of-step with the rest of the herd, it’s likely to be only marginally and almost invisible so. It remains safely masked by mediocrity. When a highly independent fund is out-of-step, it’s really visible and can cause considerable shareholder anxiety. That said, the question is whether you’re better served by understanding and reacting to the distinctive tactics of an absolute value portfolio or by reacting to a single striking quarter. The latter is certainly the common response, which almost surely means it’s the wrong one. That said, FPA’s recent and substantial fee increase has raised the bar for Paramount’s managers and have disadvantaged its shareholders. The fund is intriguing but the business decision is regrettable.