feels like a trailblazer in a challenging new economic world where he is forced to bet on policy, he said in his investor letter
. The manager of the $7.48 billion FPA Crescent Fund has traditionally invested in good but out-of-favor companies that have low P/E ratios and trade at discounts to intrinsic value. With that strategy he has returned an average of 11% per year over the last 10 years.
At the end of the fourth quarter what he sees as a dim economic environment and hazy business prospects compelled him to have cautious positioning with net exposure to risk assets at 70.5%, which includes 5% of mainly lower-risk corporate bonds. Romick is conflicted about the economic landscape of 2012. He believes the market won’t likely crash as it did in 2008-09 mainly because people are more fearful. Yet despite deep analysis, he could not decide whether inflation or deflation is more likely to occur. Therefore, he did not tilt his portfolio one way or the other. Nevertheless, he said in his investor letter, “In the inflation outcome, our stocks should do well (at least nominally), but not as well as a portfolio committed to commodities. Should deflation come to pass, stocks will likely perform badly, but in that event, our substantial cash stake will allow for deployment at lower asset prices.” Continue Reading »