Portfolio Commentary: The FPA Capital Fund outperformed its benchmark the Russell 2000 for the 4th quarter of 2012 yet underperformed for the year. The combination of our large cash position and our large exposure to energy go a long way to explain this short term differential. Our energy stocks outperformed the benchmark’s energy exposure by roughly 7-8% for the year. However, our large weighting in energy at 30% vs. 6% for the benchmark was a hindrance to overall performance, with the benchmark’s energy stocks lagging the market1 by 20% for the year.
Energy, which is broken down into oil service and exploration and production, continues to be the largest area of the portfolio despite us reducing several positions during the year. We have sold the lion’s share of the significant investments made back in late 2008 and early 2009. Since the second quarter of 2009, FPA Capital Fund has taken approximately $400 million in profit on an original $359 million invested. In other words, we have taken around 111% of the original amount invested off the table. Despite this selling, we still retain most of our initial investment in the energy sector. We continue to have conviction in our energy holdings, which are now primarily oil focused. Oil is a global commodity that has a heavy exposure to global-demand growth and in particular that of the developing economies. We believe growth in the developing economies will exceed that of developed ones and oil will be one of the beneficiaries of this. Oil production also has a sharp decline curve, roughly 9% according to the International Energy Agency, which makes it difficult to grow supply. Importantly, this high decline rate not only enhances the upside, but also potentially helps protect the investments in a recessionary environment, since supply and demand get back into equilibrium much faster. Lastly and most imperative, oil in the ground and assets used to produce it, should provide a store of value against potential future monetary inflation. Continue Reading »