Morningstar (MORN) is out with its 2013 Fund Manager of the Year awards and the recipient in the Asset Allocation category is no stranger to YCharts readers. We’ve been following the portfolio moves of the $15.9 billion deep value FPA Crescent Fund run by long-time lead manager Steven Romick and his newer co-managers Mark Landecker and Brian Selmo.
The Morningstar awards are actually less about one-year wonders and more about terrific long-term funds that happened to have a worthy enough calendar year to merit the award. FPA Crescent fits that bill. (Full disclosure: Morningstar is an investor in YCharts.)
In 2013 the fund gained 22%. Yes, that’s 10 percentage points shy of the S&P 500. But this is an asset allocation fund that also traffics in bonds and isn’t shy about holding cash when it can’t find enough compelling value propositions. That 22% gain becomes quite impressive when you factor in that at year-end the managers were lugging around 44% in cash earning bupkes.
And longer-term the fund is the rare actively managed one that delivers index-beating returns. The folks at Morningstar called out FPA Crescent’s outperformance relative to other asset allocation funds: “Romick has led the fund since inception more than 20 years ago. Since 1993, the fund has turned a $10,000 investment into more than $89,000, and the fund’s 11.0 percent annualized gain from inception through December 2013 beats the category by more than 4 percentage points.”
It’s also no slouch when stacked up against the all-stock S&P 500: over that same 20 year stretch $10,000 invested in the S&P 500 would have grown to $61,000 compared to the $89,000 plus Romick pulled off.
Okay, so with the fund’s investing chops established, this is one portfolio worth looking to for investing leads worth further investment research.
In its recent portfolio filing for the fourth quarter the top five holdings—all at least 5% of fund assets-were Microsoft (MSFT), Oracle (ORCL), CVS Caremark (CVS) Aon Corp. (AON) and Thermo Fisher Scientific (TMO). Only Oracle was added to in the fourth quarter. The only other action in the top five was a small 8% profit-taking trim in Aon, which was first purchased way back in the fourth quarter of 2009 and was last added to in the third quarter of 2012. Sure, not every stock plays out as well, but this is a fine example of investing when the storm clouds are still present and waiting for some clearing:
Though Microsoft is the largest position at nearly 7%, it’s Oracle that has been getting the most fresh money lately. Since the position was established in the second quarter of 2012, more Oracle shares have been bought every subsequent quarter. And we’re not talking nibbles; the fourth quarter addition boosted the fund’s Oracle stake by 25%. The stock now accounts for about 6% of fund assets.
A few quarters ago the managers laid out their interest in a triumvirate of old-tech laggards including Oracle as well as Cisco Systems (CSCO) and Microsoft. “These three companies all face real challenges, including poor management and/or competition from new technologies. But we feel, in each case, the prices adequately discount those fear . . . we believe that the negative sentiment created an opportunity for us to arbitrage the difference between perception and reality.”
Indeed, it’s not as if you’re paying up for Oracle:
The fund also added three more new tech stocks to the portfolio in the fourth quarter. (No, it’s not a tech fund; it’s a value fund that happens to be finding a margin of safety in tech stocks.) The largest move was investing 2% of fund assets in Checkpoint Software Technologies (CHKP). Intel (INTC) and Qualcomm (QCOM) were added as 1.8% positions. Using the same EV/EBIT measure the managers called out in their earlier shareholder letter you can begin to see the allure.
Return on equity is another metric the FPA Crescent team pays attention to. While only Checkpoint Software’s Return on Equity has been on the rise lately, all three companies are well ahead of the 12% ROE for the S&P 500. You can unleash financial advisor tools in countless ways on these stocks.
All three have at least doubled per-share earnings growth over the past five years. (Qualcomm has nearly tripled) yet their valuations remain in check, using PE ratio less cash: