FPA Crescent: A Great Fund for Uncertain Times

Even in the best of times, Steven Romick worries a lot. Unfortunately, notwithstanding the stock market's rollicking first-quarter performance, these are not the best of times. "Investing is especially challenging today," says Romick, the veteran manager of FPA Crescent (symbol FPACX).

Unsettling Romick is the halting economic recovery and the huge amount of government debt sloshing around in the economy, thanks to an ineffectual Congress and the loose money policies of the Federal Reserve. Just as consumers paying down debts remains a continuing drag on the economy, Romick believes we'll encounter new problems when the government seeks to cut back on its debt burden. "We expect continued economic struggles," he says

At the end of the day, though, Romick is still doing what he has done since he launched Crescent in 1993: buying good businesses at reasonable prices and hanging on for the long term. At least that's his strategy for the stock portion of the portfolio.

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Nowadays, that's leading him to the shares of high-quality, large businesses that trade at reasonable valuations and boast low debt and, often, attractive dividend yields. He finds stocks of most small companies too pricey. He's also steering away from cyclical companies because of his concerns about the economy. That means that Crescent, a member of the Kiplinger 25, will continue to underperform if the economy keeps strengthening, he says.

The fund has been a laggard lately. Over the past three years through April 2, Crescent returned an annualized 16.8%. That's an average of 5.1 percentage points per year less than the return of Standard & Poor's 500-stock index.

But longer-term returns paint a different picture. Over the past ten years, the fund gained an annualized 8.6%, double the return of the S&P 500. Crescent has lagged in bull markets but more than made up the difference in bear markets. To me, how a fund holds up in lousy markets is the acid test. In the 2007-09 bear market, Crescent lost 27.9% while the S&P plunged 55.3% (both figures include dividends).

Crescent is hardly a pure stock fund. On average, Romick invests roughly half of its assets in stocks. Because of that, not surprisingly, Crescent has been about 40% less volatile than the S&P.

In spite of his bleak big-picture outlook, Romick is investing more in stocks than he usually does. Romick tells me the fund is now 64% in stocks. But that's only because he owns few high-yield bonds -- in which he usually invests a sizable chunk of assets. Yields on junk bonds are unattractive, he says. Romick thinks of both junk bonds and stocks as "risk assets."

Indeed, Romick is shying away from bonds altogether. Bond yields, which move inversely to prices, have gone about as low as they're likely to go. Instead, he has about 30% of the fund in cash.

One of Romick's many strengths is that he often finds unusual places to invest a little of Crescent's capital. He owns some whole mortgages; he actually hired a loan servicer to collect the payments. And he's invested in farmland through a non-publicly traded real estate investment trust.

Among his favorite stocks is Wal-Mart Stores (WMT). Wal-Mart's price-earnings ratio, based on the giant retailer's earnings over the past 12 months, is 14 -- lower than it has been in at least a decade. Even so, Romick is worried. Now that Wal-Mart is so big, it obviously can't grow as fast as it did in the past. Plus, corporate profit margins, in general, are far above their long-term averages. As companies hire more people, margins have to come down. Wal-Mart also has a lot of competition nowadays, from Dollar Tree (DLTR) and the like.

Another favorite, which Romick admits he bought too early, is Hewlett-Packard Co. (HPQ). "The company has made stupid investments," Romick says. New leadership, he believes, will bring better decisions. The stock is cheap, trading at just 8 times trailing earnings. Still, Romick concedes that it will be a while before the changes lead to improved financial results.

FPA Crescent is one of my favorite funds. Romick, 49, strikes me as smart and careful. The fund has $8.4 billion in assets and seven full-time analysts. The expense ratio is 1.18%.

Crescent won't keep up in a buoyant market. But it will keep you relatively safe in poor markets. If that doesn't appeal to you, your memory may be too short.

Steven T. Goldberg is an investment adviser in the Washington, D.C. area. One or two of his clients own both Hewlett Packard and Wal-Mart.