Steven Romick is a managing partner at First Pacific Advisors, a firm he joined in 1996. He manages several portfolios, including the $9 billion FPA Crescent Fund. Romick has delivered a 125.6% cumulative return over the last ten years, compared to 34.9% for the S&P 500, and is in the top 1% of money managers.
The Crescent Fund has a long-short allocation, which is currently about 66.2% long and 3.4% short. About 46% of the fund is allocated in the U.S., 21.3% in Europe and 1.8% elsewhere.
Because of his belief in conservative positioning and capital preservation, Romick was able to dodge the worst of the market dips of recent decades. Presently, he has a cautious market outlook and just 69% exposure to risk assets.
Romick is a bottom-up, absolute value investor with a long-term focus. Foremost, he lets price be his guide, “If a business or asset is good and cheap – absolutely, not relatively – we’ll buy it,” he says in his second-quarter letter.
However, Romick believes that investors ignore the macro picture at great peril. He has a tendency to be “appropriately fearful,” which has caused him to be early in evading disasters when he foresees them.
The Crescent Fund returned 3.5% for the first half of 2012, with its biggest winners being Walmart (WMT), Petsmart (PETM) and Anheuser-Busch INB (BUD). Its biggest losers were Cisco (CSCO), Canadian Natural Resources (CNQ) and Western Digital (WDC). Cisco is just below their cost, and Western Digital gave up most of its gains in the second quarter. Canadian Natural Resources had operating issues in the first quarter, but a more general weakness in energy stocks dragged it down in the second quarter.
Romick has “a lot of fear” about the economy longer term. Reasons for this view include slowing U.S. GDP growth, the EU financial crisis, a housing bubble and unsustainable infrastructure spending in China, increased government spending and rising health care costs.
He believes the EU has reached a Keynesian end point when the government can no longer rely on deficit spending alone to spur the economy, and the U.S. is just the EU at an earlier stage.
Romick also believes that the U.S. stock market is priced above average, and valuation depends on sustaining all-time high operating margins. The margins have been helped by declining corporate tax rates, labor costs and interest rates – variables that are unlikely to decline in the future. “Without some significant improvement in demand, the ‘E’ part of the Price/Earnings equation may be overstated,” he says.
Steve’s largest positions are CVS Caremark Corp. (CVS), Aon Plc (AON), Covidien Plc (COV), Microsoft (MSFT) and Walmart (WMT).
In the second quarter, he bought Oracle (ORCL), AIG (AIG), Bank of NY Mellon (BK), Aleghany Corp. (Y) and Xerox (XRX).
He is the only guru whose short positions GuruFocus tracks. See his stock portfolio here.
You can ask Steve your investing questions by typing them in the comments section below.