FPA Crescent Fund Second Quarter 2022 Commentary

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Summary

  • First Pacific Advisors (FPA) is a Los Angeles-based institutional money management firm practicing a disciplined approach to value investing, prudently seeking superior long-term returns while maintaining a focus on capital preservation.
  • The FPA Crescent Fund – Institutional Class (“Fund” or “Crescent”) declined 9.32% in 2022’s second quarter and declined 10.69% for the trailing twelve months.
  • Market declines can be psychologically difficult, but are to be expected, and can be used to allocate capital towards re-priced and newly attractive opportunities.
  • We believethat some of the ups and downs might prove ephemeral, but we address where our thesis is beingvalidated or where it mightbe broken.

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Average Annual Total Returns (%)

Trailing Performance (%)

Market Cycle Performance

As of Date: 6/30/2022 Inception* 20Years 15Years 10Years 5Years 3Years 1 Year YTD QTD 3/25/00-10/9/07 10/10/07-6/30/22
FPA Crescent Fund (MUTF:FPACX) 9.58 7.95 6.33 7.61 5.74 5.96 -10.69 -12.11 -9.32 14.70 6.42
S&P 500 9.68 9.08 8.54 12.96 11.31 10.60 -10.62 -19.96 -16.10 2.00 8.37
MSCI ACWI** 60% S&P 500 / 8.76 7.00 6.21 -15.75 -20.18 -15.66 - 4.48
40% Bloomberg US Agg -7.92 -7.14 -6.72 8.50 7.37 6.23 -10.24 -16.11 -11.63 3.97 6.57
CPI 2.50 2.52 2.39 2.60 3.88 4.97 9.00 5.43 2.65 2.75 2.39

You should consider the Fund's investment objectives, risks, and charges and expenses carefully before you invest. The Prospectus details the Fund's objective and policies and other matters of interest to the prospective investor. Please read the Prospectus carefully before investing. The Prospectus may be obtained by visiting the website at www.fpa.com, by calling toll-free, 1-800-982-4372, or by contacting the Fund in writing.

Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown. This data represents past performance and investors should understand that investment returns and principal values fluctuate, so that when you redeem your investment it may be worth more or less than its original cost. Current month-end performance data, which may be lower or higher than the performance data quoted, may be obtained at www.fpa.com or by calling toll-free, 1-800-982-4372. The FPA Crescent Fund – Institutional Class (“Fund” or “FPACX”) total expense ratio as of its most recent prospectus is 1.17%, and net expense ratio is 1.14% (both including dividend and interest expense on short sales).

Periods greater than one year are annualized. Fund performance is shown net of all fees and expenses. Fund performance is calculated on a total return basis which includes reinvestment of all distributions. Fund returns do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares, which would lower these figures. Comparison to any index is for illustrative purposes only. An investor cannot invest directly in an index. The Fund does not include outperformance of any index or benchmark in its investment objectives.

* The Fund commenced operations on June 2, 1993. The performance shown for periods prior to March 1, 1996 reflects the historical performance of a predecessor fund. FPA assumed control of the predecessor fund on March 1, 1996. The Fund’s objectives, policies, guidelines, and restrictions are, in all material respects, equivalent to those of the predecessor fund.

** The MSCI ACWI NR USD Index (“MSCI ACWI”) was not considered a relevant illustrative index prior to 2011 because the Fund was not classified as a global mandate until this point in time. Market Cycle performance for MSCI ACWI is being shown for illustrative purposes only to illustrate how global equities have performed in the current market cycle.

Market Cycle Performance reflects the two most recent market cycles (peak to peak) defined as a period that contains a decline of at least 20% from the previous market peak over at least a two-month period and a rebound to establish a new peak above the prior market peak. The current cycle is ongoing and thus presented through the most recent quarter-end. Once the cycle closes, the results presented may differ materially.

First Pacific Advisors, LP (the “Adviser” or “FPA”), the Fund’s investment adviser, has contractually agreed to reimburse the Fund for operating expenses in excess of 0.05% of the average net assets of the Fund, excluding management fees, administrative service fees, short sale dividend expenses and interest expenses on cash deposits relating to short sales, brokerage fees and commissions, redemption liquidity service expenses, interest, taxes, fees and expenses of other funds in which the Fund invests, and extraordinary expenses, including litigation expenses not incurred in the Fund’s ordinary course of business, through April 30, 2023. The Adviser has also contractually agreed to reimburse the Fund for redemption liquidity service expenses in excess of 0.0044% of the average net assets of the Fund through April 30, 2023. These agreements may only be terminated earlier by the Fund’s Board of Trustees (the “Board”) or upon termination of the Advisory Agreement. Effective September 4, 2020, the Fund’s management fee of 1% includes both an advisory fee of 0.93% and a class-specific administrative fee of 0.07%.

Effective September 4, 2020, the current single class of shares of the Fund was renamed the Institutional Class shares. All data herein is representative of the Institutional Share Class. Please see important disclosures at the end of the commentary.


Dear Shareholder

Performance Overview

The FPA Crescent Fund – Institutional Class (“Fund” or “Crescent”) declined 9.32% in 2022’s second quarter and declined 10.69% for the trailing twelve months.1 The Fund generated 81.1% of the average of the S&P 500 and MSCI ACWI NR USD’s (“MSCI ACWI”) return in the trailing twelve months, underperforming its 75.0% average net risk exposure.2 However, over the current market cycle, the Fund has performed favorably compared to the equity market on a risk-adjusted basis - capturing 99.9% of the average of the S&P 500 and MSCI ACWI’s return while taking on 64.4% net risk exposure, on average.3

Below you can see the Fund’s performance along with various relevant indexes.

Exhibit A: Performance versus Illustrative Indices4

Q2 2022

Trailing

12-month

Crescent

-9.32%

-10.69%

Crescent – Long Equity

-13.63%

-14.48%

MSCI ACWI NR USD

-15.66%

-15.75%

S&P 500

-16.10%

-10.62%

60% MSCI ACWI NR USD/ 40% BBg US Agg

-11.36%

-13.43%

60% S&P 500 / 40% BBg US Agg

-11.63%

-10.24%

During the first half of 2022, from peak to trough, the MSCI ACWI declined more than 20% for the third time since the great financial crisis.5 As discussed in prior commentaries, we had been concerned about inflation and were running the Fund more invested than the recent past in an effort to protect purchasing power.6 With an average net risk exposure of 75% during the first half of the year, the Fund was not immune to the market selloff, capturing 64% of the average market decline (based on the average return of the S&P 500 and MSCI ACWI indices).

The decline in global equity indexes was broad-based, leaving little unscathed, with energy as one of the few exceptions, as rising interest rates, high inflation, fears of a weakening economy, and greater caution around funding risky, money-losing companies. Market declines can be psychologically difficult, but are to be expected, and can be used to allocate capital towards re-priced and newly attractive opportunities. We are predisposed to lean into price weakness by adding to what we believe are quality businesses at increasingly attractive prices, acquiring debt at equity-like returns, building positions in long-admired franchises, and occasionally seeking out opportunities in distressed and deeply out-of-favor situations.

Portfolio discussion

Exhibit B: Trailing Twelve-Month Contributors and Detractors as of June 30, 20227

Contributors

Perf. Cont.

Avg. % of Port.

Detractors

Perf. Cont.

Avg. % of Port.

Sound Holding

1.03%

0.5%

Meta Platforms (META)

-1.55%

2.5%

FPS LLC

0.70%

1.1%

Comcast (CMCSA)

-1.04%

3.3%

Glencore (OTCPK:GLCNF)

0.63%

2.2%

Charter Communications (CHTR)

-0.86%

2.4%

Meggitt (OTCPK:MEGGF)

0.55%

0.2%

Naspers (OTCPK:NPSNY) & Prosus (OTCPK:PROSY)

-0.83%

2.2%

Interest Rate Caps (multiple)

0.49%

0.4%

Citigroup (C)

-0.75%

2.2%

3.40%

4.5%

-5.02%

12.7%

In the last twelve months, Crescent’s top five performers contributed 3.4% to its return, while its bottom five detracted 5.0%. We believe that some of these ups and downs might prove ephemeral, but we address where our thesis is being validated or where it might be broken.

Sound Holding & FPS LLC – The global shipping market is subject to extreme cyclical swings. Due to institutional imperatives, public market constraints and misalignment of interest, we have not believed that investing in this sector’s public equities is the best way to take advantage of these cycles. We prefer the contrarian approach of buying vessels at below replacement cost, operating with minimal leverage, and exiting when values incent new vessel construction as we believe that can lead to attractive, less-correlated long-term equity-like returns, with modest risk of permanent impairment. In response to depressed container ship values, in 2013, we began to make direct ship investments in partnership with industry operators. Over the years, the Fund has also bought and participated in loans to container, dry bulk, chemical and oil service vessels. Because Sound Holding and FPS LLC invest directly in shipping and service vessels, and we control the equity of Sound Holding and FPS, we make the purchase/sale and capital distribution decisions, positioning us to buy at attractive prices, finance conservatively, and exit opportunistically. With the rebound in the global economy combined with boats being scrapped, supply and demand tipped in favor of container vessel owners, allowing the Fund to exit its spot container positions at premiums to acquisition cost, resulting in recognized gains. We expect distribution of sale proceeds in the third quarter to reduce the Sound Holdings position. FPS’ increase in price caused it to become a top ten fund holding. FPS is primarily comprised of oil service vessels. Given supply and demand dynamics for oil service vessels, we are cautiously optimistic.

Glencore is one of the largest globally diversified commodity businesses operating both industrial and marketing businesses. Importantly, we believe Glencore operates in a genuinely shareholder-oriented manner. Crescent purchased Glencore off-and-on from 2018 through 2020 at what we believe is a single digit multiple of normal earnings power. The opportunity presented itself when investors were less willing to own commodity sensitive businesses due to a period of low inflation and general disregard for valuation. Net of distributions of above average cyclical profits likely to be earned in 2022, we believe the company still trades at an attractive valuation relative to its long-term earnings power, justifying its continued presence in the Fund.

Our investment thesis on the names that have detracted from performance have not materially changed but highlight the following three.

Prosus’ stock price has declined along with the values of their investment portfolio. Our thesis has somewhat improved as management recently announced a share repurchase program that will be funded, in part, by periodic and partial sales of its Tencent holding. Given that its stock price trades at a greater than 35% discount to its estimated net asset value (NAV), share repurchases should be accretive. The Company’s stock price has appreciated 26% since the announcement.8

Charter and Comcast, the Fund’s investment in the US cable industry, is an example of us leaning into fear. These investments have underperformed in the last year but still trade above the Fund’s cost basis. The industry has been plagued by fears of video cord cutting, and competition from 5G and Fiber to the Home. This allowed us to buy and to continue to hold both Comcast and Charter Communications. These businesses trade at what we believe are reasonable valuations and we think should have attractive growth in free cash flow over the next decade. We expect that they will allocate that free cash flow in the best interest of shareholders, given that they are controlled by owner-operators.

Exhibit C: Portfolio Composition9

Risk Asset

Q2 2022

Q1 2022

Q2 2021

5yr Average

Common Stock, Long

70.0%

71.5%

77.1%

70.7%

Common Stock, Short

0.0%

-0.5%

-3.0%

-5.3%

Credit, Long

1.5%

0.6%

1.2%

3.8%

Credit, Short

0.0%

0.0%

-0.2%

-0.3%

Other

4.0%

2.8%

1.7%

2.0%

Exposure, Net

75.5%

74.5%

76.9%

71.0%

Crescent had net exposure at the end of the second quarter of 75.5%, marginally higher (just 1%) than its exposure at the end of the first quarter. With the stocks having declined as much as they have, the 1% increase in exposure belies the greater activity when you scratch below the surface. We added seven new positions to the Fund and exited three in the quarter. Some of the new positions the Fund has taken include CarMax (KMX) and as noted earlier, investments in convertible bonds.

CarMax has three operating segments: used retail, used wholesale, and used auto lending. The general market decline and recession concerns have caused its stock price to decline by almost half since it peaked in Q4 2021. CarMax is the largest U.S. company in the used car retail space. We think CarMax has the opportunity to gain share in the market due to its strong wholesale business, historically good returns on capital, and an excellent management team that invests for the future and allocates capital with an owner- oriented mindset.10 Recessionary concerns are valid as their lending business, in particular, will likely be hurt. We would not be surprised to see its stock price decline as a result and would consider the opportunity to increase the Fund’s stake at that time.

Convertible Bonds – High-yield exposure in Crescent reached an all-time low of just 0.2% in Q4 of last year, below the Fund’s five-year average of 4% and long-term average since inception of 9%. We explained in Q4 2021 this low exposure was because of historically low yields and spreads to Treasuries. Since Q4, the high-yield bond index has declined 10% as both Treasury yields have increased, and credit spreads have widened. We have begun to see some compelling risk-adjusted opportunities in convertible bonds specifically for the first time since 2000. Many stocks have seen a tremendous decline in price, particularly those companies that are still in their earlier stages with business models that have yet to be optimized.

Some of these companies had raised money to fund their growth via convertible bonds initially with yields of 1% and lower. With the conversion price now well out of the money due the decline in their stock prices, the bonds have traded down and now offer what we believe are attractive yields to intermediate term maturities that leave some optionality should these businesses succeed. If this is the case, we would expect the market to reward them with a higher stock price that should translate to a higher bond price; and an outside chance that the convertible feature pays off prior to maturity. The average yield-to-maturity of these bonds is currently 11.5%, 310 basis points better than the 8.4% yield currently offered in the high-yield market.11 The allocation to these bonds is small for now, but we are hopeful a combination of a further increase in interest rates and continued stock market volatility may allow us to increase the allocation to this space.

Outlook (observations on current environment)

We are often asked about our “outlook.” Which is kind of funny because we have never made a market forecast and, like everyone else, are regularly surprised by world events. While there is always plenty to worry about (insert list of worries), we agree with Jamie Dimon, who on JP Morgan’s second quarter 2022 call, in response to a question about pending economic hurricanes, observed “going through a storm, -- that gives us opportunities, too. I always remind myself the economy will be a lot bigger in 10 years, we’re here to serve clients through thick or thin.” There will always be a place in the portfolio for good businesses at good prices, and you should expect to see the Fund’s risk exposure increase should those prices become attractive. As always, we will be conservative in our underwriting, and let price be our guide.

Despite our no-market prediction philosophy, we do think it is useful to observe current conditions and pricing for financial assets, in order to avoid potholes, focus research attention and calibrate risk appetite.

In bonds, we mentioned the initial fruits of our labor in convertible bonds. Stepping back, we would observe that the high-yield market is approaching 2016 and 2020 yield levels, but credit spreads are still below the 800+ basis point spreads seen in both of those periods, despite there being no official recession in 2016.

Exhibit D: US High-Yield Effective Yield and Option-Adjusted Spread12

Exhibit D: US High-Yield Effective Yield and Option-Adjusted Spread12

In equities, more traditional value stocks are no longer as inexpensive, unlike March 2020 when value spreads (the cheapest 20% of the market versus the market average) got to 2008 levels of cheapness. We have therefore spent more time considering (and adding to) faster growing, better quality businesses, many of which are both less expensive than the market today and where they have historically been valued, as supported in the following Exhibits E and F.

Exhibit E: Valuation Spreads – The Cheapest Quintile Compared to the Market Average (1926 – June 30, 2022)13

Exhibit E: Valuation Spreads – The Cheapest Quintile Compared to the Market Average (1926 – June 30, 2022)

Exhibit F: The Big Growers – Relative Price to Sales Ratio14

Exhibit F: The Big Growers – Relative Price to Sales Ratio14

We will remain flexible, and seek to take advantage of opportunities that present a margin of safety, whether they are perceived as “value” or “growth.” 15

Relatively speaking, international markets continue to trade at lower valuations than that of the US, as shown in Exhibit G below. That explains, in part, the Fund’s increase in international exposure from 20.3% to 37.5% of the Fund’s net equities over the last three and a half years. We continue to find attractive opportunities outside of the US.

Exhibit G: Twelve-Month Forward Price to Earnings Ratio Discount MSCI AC World Index ex-US vs S&P 500 Index16

Exhibit G: Twelve-Month Forward Price to Earnings Ratio Discount MSCI AC World Index ex-US vs S&P 500 Index

Closing

We are living through what is not our first volatile period. While we cannot tame volatility, we have learned to make friends with it. A decline in price can afford us the opportunity to buy as much as an increase can offer the chance to sell. We believe our hyper focus on price and business quality should allow us to successfully navigate this current turbulent moment in time.

Respectfully submitted,

FPA Crescent Portfolio Managers


table: FPA Cresent Fund portfolio holdings

table: FPA Cresent Fund portfolio holdings

table: FPA Cresent Fund portfolio holdings

table: FPA Cresent Fund portfolio holdings

table: FPA Cresent Fund portfolio holdings


Footnotes

1 Effective September 4, 2020, the current single class of shares of the Fund was renamed the Institutional Class shares. Unless otherwise noted, all data herein is representative of the Institutional Share Class.

2 Risk assets are any assets that are not risk free and generally refers to any financial security or instrument, such as equities, commodities, high-yield bonds, and other financial products that are likely to fluctuate in price. Risk exposure refers to the Fund’s exposure to risk assets as a percent of total assets. The Fund’s net risk exposure as of June 30, 2022 was 75.5%.

3 The current market cycle began October 10, 2007 and continued through June 30, 2022. The current market cycle is ongoing. Market cycles (peak to peak) are generally defined as a period that contains a decline of at least 20% from the previous market peak over at least a two-month period and a rebound to establish a new peak above the prior market peak. The current cycle is ongoing and thus presented through the most recent quarter-end. Once the cycle closes, the results presented may differ materially.

4 Comparison to the indices is for illustrative purposes only. The Fund does not include outperformance of any index or benchmark in its investment objectives. An investor cannot invest directly in an index. The long equity segment of the Fund is presented gross of investment management fees, transactions costs, and Fund operating expenses, which if included, would reduce the returns presented. Long equity holdings only includes equity securities excluding paired trades, short-sales, and preferred securities. The long equity performance information shown herein is for illustrative purposes only and may not reflect the impact of material economic or market factors. No representation is being made that any account, product, or strategy will or is likely to achieve profits, losses, or results similar to those shown. Long equity performance does not represent the return an investor in the Fund can or should expect to receive. Fund shareholders may only invest or redeem their shares at net asset value.

5 The current market decline for the MSCI ACWI index began January 5, 2022 and is ongoing. During the period Jan 5, 2022 through June 30, 2022, the S&P 500 and the MSCI ACWI NR USD declined 20.42% and 20.57%, respectively; while the Fund declined 13.03% during the same period. The two other periods with 20%+ market declines as measured by the MSCI ACWI were 4/29/2011 to 10/3/2011 and 2/19/2020 to 3/23/2020. During these periods the MSCI ACWI, S&P 500 and the Fund declined 22.63%, 18.64%, and 13.06%; 33.64%, 33.79% and 29.07%, respectively. The Global Financial Crisis was from 2007 to 2009. Even with this recent drawdown, equity markets are not technically in a bear market yet (defined by Vanguard as being down by at least 20% for more than two months), though many companies have suffered far deeper declines.

6 Prior Crescent Fund commentaries can be found at: FPA Crescent Fund Quarterly Commentary Archive

7The current market decline for the MSCI ACWI index began January 5, 2022 and is ongoing. During the period Jan 5, 2022 through June 30, 2022, the S&P 500 and the MSCI ACWI NR USD declined 20.42% and 20.57%, respectively; while the Fund declined 13.03% during the same period. The two other periods with 20%+ market declines as measured by the MSCI ACWI were 4/29/2011 to 10/3/2011 and 2/19/2020 to 3/23/2020. During these periods the MSCI ACWI, S&P 500 and the Fund declined 22.63%, 18.64%, and 13.06%; 33.64%, 33.79% and 29.07%, respectively. The Global Financial Crisis was from 2007 to 2009. Even with this recent drawdown, equity markets are not technically in a bear market yet (defined by Vanguard as being down by at least 20% for more than two months), though many companies have suffered far deeper declines.

Prior Crescent Fund commentaries can be found at:https://fpa.com/funds/fpa-crescent-fund-quarterly-commentary-archive

8Source: Prosus announcement, June 27, 2022. Appreciation is in Euros, the local currency. https://www.prosus.com/news/the-groupannounces-the-beginning-of-an-open-ended-share-repurchase-programme-of-prosus-and-naspers-shares/

9The “Common Stock, Long” and the “Exposure, Net” categories include a 3.8% allocation to a SPAC basket consisting of 76 SPAC investments as of June 30, 2022.

10Source: FPA, recent Company filings, Automotive News. As of June 30, 2022.

11Source: FPA, Bloomberg. As of June 30, 2022.

12Source: Federal Reserve Economic Data (FRED). As of June 30, 2022.

13Source: Empirical Research Analysis, National Bureau of Economic Research. As of June 30, 2022. Cheapest quintile refers to the most undervalued 20% of stocks in an analysis of large-capitalization US stocks. Standard Deviation is a measure of dispersion of a data set from its mean. Prior to 1952, the spread is measured using the price-to-book data of the largest 1,500 stocks. Current Level refers to the valuation spread as of June 30, 2022 which is 0.4 standard deviations above the mean.

14Source: Empirical Research Partners (“ERP”) Analysis, National Bureau of Economic Research, as of June 5, 2022. Equallyweighted data. ERP categorized a group of 75 US large-capitalization stocks that they have faster and stronger growth credentials than the rest of the US large-cap universe as ‘Big Growers’. The analysis covers the period January 1960 through June 5, 2022.

15Margin of Safety - Buying with a “margin of safety” is when a security is purchased at a discount to the portfolio manager’s estimate of its intrinsic value. Buying a security with a margin of safety is designed to protect against permanent capital loss in the case of an unexpected event or analytical mistake. A purchase made with a margin of safety does not guarantee the security will not decline in price.

16 As of June 30, 2022. Source: Factset, MSCI, Standard & Poor's, J.P. Morgan Asset Management Guide to the Markets. Forward Price to Earnings is a version of the ratio of price-to-earnings (P/E) that uses forecasted earnings for the P/E calculation.


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Additional disclosure: This Commentary is for informational and discussion purposes only and does not constitute, and should not be construed as, an offer or solicitation for the purchase or sale with respect to any securities, products or services discussed, and neither does it provide investment advice. Any such offer or solicitation shall only be made pursuant to the Fund’s Prospectus, which supersedes the information contained herein in its entirety. This presentation does not constitute an investment management agreement or offering circular.

The views expressed herein and any forward-looking statements are as of the date of the publication and are those of the portfolio management team and are subject to change without notice. Future events or results may vary significantly from those expressed and are subject to change at any time in response to changing circumstances and industry developments. This information and data have been prepared from sources believed reliable, but the accuracy and completeness of the information cannot be guaranteed and is not a complete summary or statement of all available data.

Portfolio composition will change due to ongoing management of the Fund. References to individual securities or sectors are for informational purposes only and should not be construed as recommendations by the Fund, the portfolio managers, the Adviser, or the distributor. It should not be assumed that future investments will be profitable or will equal the performance of the security or sector examples discussed. The portfolio holdings as of the most recent quarter-end may be obtained at www.fpa.com.

Investments, including investments in mutual funds, carry risks and investors may lose principal value. Capital markets are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. The Fund may purchase foreign securities, including American Depository Receipts (ADRs) and other depository receipts, which are subject to interest rate, currency exchange rate, economic and political risks; these risks may be heightened when investing in emerging markets. Foreign investments, especially those of companies in emerging markets, can be riskier, less liquid, harder to value, and more volatile than investments in the United States. Adverse political and economic developments or changes in the value of foreign currency can make it more difficult for the Fund to value the securities. Differences in tax and accounting standards, difficulties in obtaining information about foreign companies, restrictions on receiving investment proceeds from a foreign country, confiscatory foreign tax laws, and potential difficulties in enforcing contractual obligations, can all add to the risk and volatility of foreign investments.

Small and mid-cap stocks involve greater risks and may fluctuate in price more than larger company stocks. Short-selling involves increased risks and transaction costs. You risk paying more for a security than you received from its sale.

The return of principal in a bond investment is not guaranteed. Bonds have issuer, interest rate, inflation and credit risks. Interest rate risk is the risk that when interest rates go up, the value of fixed income securities, such as bonds, typically go down and investors may lose principal value. Credit risk is the risk of loss of principal due to the issuer’s failure to repay a loan. Generally, the lower the quality rating of a security, the greater the risk that the issuer will fail to pay interest fully and return principal in a timely manner. If an issuer defaults the security may lose some or all of its value. Lower rated bonds, callable bonds and other types of debt obligations involve greater risks. Mortgage-backed securities and asset-backed securities are subject to prepayment risk and the risk of default on the underlying mortgages or other assets. High yield securities can be volatile and subject to much higher instances of default. Derivatives may increase volatility.

The ratings agencies that provide ratings are Standard and Poor’s, Moody’s, and Fitch. Credit ratings range from AAA (highest) to D (lowest). Bonds rated BBB or above are considered investment grade. Credit ratings BB and below are lower-rated securities (junk bonds). High-yielding, non-investment grade bonds (junk bonds) involve higher risks than investment grade bonds. Bonds with credit ratings of CCC or below have high default risk.

Value securities, including those selected by the Fund’s portfolio managers, are subject to the risk that their intrinsic value may never be realized by the market because the market fails to recognize what the portfolio managers consider to be their true business value or because the portfolio managers have misjudged those values. In addition, value style investing may fall out of favor and underperform growth or other styles of investing during given periods.

Investing in Special Purpose Acquisition Companies (“SPACS”) involves risks. Because SPACs and similar entities have no operating history or ongoing business other than seeking acquisitions, the value of their securities is particularly dependent on the ability of the entity’s management to identify and complete a profitable acquisition. SPACs are not required to provide the depth of disclosures or undergo the rigorous due diligence of a traditional initial public offering (IPO). Investors in SPACs may become exposed to speculative investments, foreign or domestic, in higher risk sectors/industries. SPAC investors generally pay certain fees and give the sponsor certain incentives (e.g., discounted ownership stakes) not found in traditional IPOs. Due to this, an investment in a SPAC may include potential conflicts and the potential for misalignment of incentives in the structure of the SPAC. For more information relating to the risks of investing in SPACs please refer to the Fund’s Prospectus.

While transactions in derivatives may reduce certain risks, they entail certain other risks. Derivatives may magnify the Fund’s gains or losses, causing it to make or lose substantially more than it invested. Derivatives have a risk of default by the counterparty to a contract. When used for hedging purposes, increases in the value of the securities the Fund holds or intends to acquire should offset any losses incurred with a derivative.

Investments in private securities and limited partnerships present risks. These investments are not registered under the federal securities laws, and are generally eligible for sale only to certain eligible investors. They may be illiquid, and thus more difficult to sell, because there may be relatively few potential purchasers for such investments, and the sale of such investments may also be restricted under securities laws.

Please refer to the Fund's Prospectus for a complete overview of the primary risks associated with the Fund.

In making any investment decision, you must rely on your own examination of the Fund, including the risks involved in an investment. Investments mentioned herein may not be suitable for all recipients and in each case, potential investors are advised not to make any investment decision unless they have taken independent advice from an appropriately authorized advisor. An investment in any security mentioned herein does not guarantee a positive return as securities are subject to market risks, including the potential loss of principal. You should not construe the contents of this document as legal, tax, investment or other advice or recommendations.

Index Definitions

Comparison to any index is for illustrative purposes only and should not be relied upon as a fully accurate measure of comparison. The Fund may be less diversified than the indices noted herein, and may hold non-index securities or securities that are not comparable to those contained in an index. Indices will hold positions that are not within the Fund’s investment strategy. Indices are unmanaged and do not reflect any commissions, transaction costs, or fees and expenses which would be incurred by an investor purchasing the underlying securities and which would reduce the performance in an actual account. You cannot invest directly in an index. The Fund does not include outperformance of any index in its investment objectives.

S&P 500 Index includes a representative sample of 500 hundred companies in leading industries of the U.S. economy. The Index focuses on the large-cap segment of the market, with over 80% coverage of U.S. equities, but is also considered a proxy for the total market.

MSCI ACWI NR USD Index is a free float-adjusted market capitalization weighted index that is designed to represent performance of the full opportunity set of large- and mid-cap stocks across 23 developed and 26 emerging markets.

Consumer Price Index (CPI) is an unmanaged index representing the rate of the inflation of U.S. consumer prices as determined by the U.S. Department of Labor Statistics. The CPI is presented to illustrate the Fund’s purchasing power against changes in the prices of goods as opposed to a benchmark, which is used to compare the Fund’s performance. There can be no guarantee that the CPI will reflect the exact level of inflation at any given time.
ICE BofA US High Yield Index tracks the performance of US dollar denominated below investment grade rated corporate debt publicly issued in the US domestic market. To qualify for inclusion in the index, securities must have a below investment grade rating (based on an average of Moody's, S&P, and Fitch) and an investment grade rated country of risk (based on an average of Moody's, S&P, and Fitch foreign currency long term sovereign debt ratings).

Bloomberg (BBg) US Aggregate Bond Index provides a measure of the performance of the US investment grade bonds market, which includes investment grade US Government bonds, investment grade corporate bonds, mortgage pass-through securities and asset-backed securities that are publicly offered for sale in the United States. The securities in the Index must have at least 1-year remaining in maturity. In addition, the securities must be denominated in US dollars and must be fixed rate, nonconvertible, and taxable.

60% S&P500/ 40% Bloomberg US Aggregate Bond Index is a hypothetical combination of unmanaged indices and comprises 60% S&P 500 Index and 40% Bloomberg US Aggregate Bond Index.
60% MSCI ACWI NR USD/ 40% Bloomberg US Aggregate Bond Index is a hypothetical combination of unmanaged indices and comprises 60% MSCI ACWI Index and 40% Bloomberg US Aggregate Bond Index.

Other Definitions

Commodity is a basic good used in commerce that is interchangeable with other goods of the same type. Commodities are most often used as inputs in the production of other goods or services.
Drawdown refers to how much an investment or trading account is down from the peak before it recovers back to the peak.

Earnings power is a figure that telegraphs a business's ability to generate profits over the long haul, assuming all current operational conditions generally remain constant. Earnings power factors in several elements, including a company’s total assets, plus recent growth or loss trends.

Effective yield is the return on a bond that has its interest payments (or coupons) reinvested at the same rate by the bondholder. Effective yield is the total yield an investor receives, in contrast to the nominal yield—which is the stated interest rate of the bond's coupon.

Growth stock is any share in a company that is anticipated to grow at a rate significantly above the average growth for the market. These stocks generally do not pay dividends.

Inflation is the decline of purchasing power of a given currency over time. A quantitative estimate of the rate at which the decline in purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods and services in an economy over some period of time.

Long Equity Performance represents the performance of stocks that the Fund owned over the given time periods and excludes the long equity portion of a pair trade, short-sales, limited partnerships, derivatives/futures, corporate bonds, mortgage backed securities, and cash and cash equivalents.

Market Cycles, also known as stock market cycles, is a wide term referring to trends or patterns that emerge during different markets or business environments.

Net Equity Exposure includes long equity securities minus short-sales and preferred securities.
Net Risk Exposure is a measure of the extent to which a fund’s trading book is exposed to market fluctuations. In regards to the Fund, it is the percent of the portfolio exposed to Risk Assets.

Option-adjusted spread (OAS) is the measurement of the spread of a fixed-income security rate and the risk-free rate of return, which is then adjusted to take into account an embedded option. Typically, an analyst uses Treasury yields for the risk- free rate.

Return on capital (ROC) is a calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ROC gives a sense of how well a company is using its capital to generate profits.

Risk Assets is any asset that carries a degree of risk. Risk asset generally refers to assets that have a significant degree of price volatility, such as equities, commodities, high-yield bonds, real estate and currencies, but does not include cash and cash equivalents.

Value stock refers to shares of a company that appears to trade at a lower price relative to its fundamentals, such as dividends, earnings, or sales, making it appealing to value investors.

Volatility is a statistical measure of the dispersion of returns for a given security or market index. In most cases, the higher the volatility, the riskier the security. Volatility is often measured as either the standard deviation or variance between returns from that same security or market index.

©2022 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted by Morningstar to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

The FPA Funds are distributed by UMB Distribution Services, LLC, 235 W. Galena Street, Milwaukee, WI, 53212.

©© 2022 First Pacific Advisors, LP

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