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Steven Romick's First Quarter 2014 Crescent Fund Letter to Investors

April 28, 2014 | About:
Holly LaFon

Holly LaFon

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We hope that investors will find FPA commentaries helpful to understand application of the same investment discipline in various markets, and can refer to particular items that interest them.

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, sales charges, and other matters of interest to the prospective investor. Please read this Prospectus carefully before investing. The Prospectus may be obtained by visiting the website at www.fpafunds.com, by email at crm@fpafunds.com, toll-free by calling 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 may be obtained by calling toll-free, 1-800-982-4372.

The Fund commenced investment 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 FPA Crescent Fund's objectives, policies, guidelines and restrictions are, in all material respects, equivalent to those of the predecessor fund.

Dear Shareholders:

The FPA Crescent Fund returned 2.03% for the first quarter with an average exposure to equities of 50.8%. The S&P 500 returned 1.81%. Winners added 1.23% in the quarter and losers detract ed 0.41%. Not much can be gleaned from this other than maybe we shouldn't have invested in companies that begin with the letters c-i- t.



Economy

Despite some modest retrenchment in quantitative easing, the world remains awash in liquidity. We wish we could tell you how this all ends but it's beyond us. What we do know is that just because really smart people design something to happen doesn't mean it will. Central bankers say they have everything under control, but that isn't helping us sleep at night.

Investments

We feel a little out of whack in today's investment environment. We'd like to think it's due to central bank policies, but maybe not. We do know that: junk bond yields are close to an all-time low, as is the benchmark risk-free rate and covenant-lite loans are at a record high. The once-dicey sovereign debt of both Spain and Italy trades just 50 bps above comparable 10-year U.S. Treasuries and is apparently not so risky anymore. And, we can only wonder what buyers of Mexico's $1.66 billion, 100-year sterling bond at a lowly yield of 5.75% were thinking. Equally remarkable is how few companies are trading at low multiples and even fewer companies are trading at steep declines from their highs – as the following two charts depict.



Suffice to say we aren't seeing much in the way of fat pitches today, so we are comfortable just letting someone else swing at the junk that whizzes past us. We can, however, speak to what we think we do well – patiently wait for opportunity to invest in good assets at reasonable prices. This doesn't mean we're napping in the dugout. We have selectively entered the game, recently taking advantage of our broad mandate, as illustrated by the initiation of a handful of new positions, largely in emerging markets and commodity sensitive businesses. We will communicate more about these when we are no longer active in the market.

Conclusion

We sometimes hear portfolio managers grumble about the short-term thinking of their clients. Emotion all too frequently guides investors, whether they are individuals or professionals buying and selling stocks, bonds, mutual funds and the like. We give thanks every day that passion can overwhelm reason and drive securities (and the markets) to be either oversold or overbought, creating a transactional opportunity. The second derivative hope that all our clients will act dispassionately is therefore unrealistic.

We thank those of you who take the time to understand how we invest, realizing that neither our value- based philosophy nor our detailed and risk-adverse strategy will always be in vogue. We write comprehensive letters with the hope that they will inform you about our process so that you, like our Contrarian team, can make the best decision for your portfolio.

We endeavor to serve you well over the long term and are grateful for both your time and interest.

Respectfully submitted,

Steven Romick (Trades, Portfolio)

President

April 25, 2014


To view portfolio holdings from the most recent quarter end, please refer to the end of this document or at http://www.fpafunds.com/docs/funf-holdings/crescent-3- 14 .pdf?sfvrsn=8 Portfolio composition will change due to ongoing management of the fund. References to individual securities are for informational purposes only and should not be construed as recommendations by the Funds, Advisor or Distributor.

The discussions of Fund investments represent the views of the Fund's managers at the time of each report and are subject to change without notice. These views may not be relied upon as investment advice or as an indication of trading intent on behalf of any First Pacific Advisors (Trades, Portfolio) portfolio. Security examples featured are samples for presentation purposes and are intended to illustrate our investment philosophy and its application. It should not be assumed that most recommendations made in the future will be profitable or will equal the performance of the securities. This information and data has been prepared from sources believed reliable. The accuracy and completeness of the information cannot be guaranteed and is not a complete summary or statement of all av ailable data.

S&P 500 Index includes a representative sample of 500 leading 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. Russell 2500 Index is an unmanaged index comprised of 2,500 stocks of U.S. companies with small market capitalizations. Barclays Capital Government/Credit Index is an unmanaged index of investment grade bonds, including U.S. Government Treasury bonds, corporate bonds, and yankee bonds. Balanced Benchmark (60% R2500/40% BCGC) is a hypothetical combination of unmanaged indices comprised of 60% Russell 2500 Index and 40% Barclays Capital Government/ Credit Index, reflecting the Fund' s neutral mix of 60% stocks and 40% bonds. Barclays Aggregate Index provides a measure of the performance of the U.S. investment grade bonds market, which includes investment grade U.S. 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 U.S. dollars and must be fixed rate, nonconvertible, and taxable. The Consumer Price Index is an unmanaged index representing the rate of the inflation of the U.S. consumer prices as determined by the U.S. Department of Labor Statistics. There can be no guarantee that the CPI of other indexes will reflect the exact level of inflation at any given time.

The CPI shown here is used to illustrate the Fund's purchasing power against changes in the prices of goods as opposed to a benchmark which is used to compare Fund's performance. 60% S&P500/ 40% Barclays Aggregate Index is a hypothetical combination of unmanaged indices comprised of 60% S&P 500 Index and 40% Barclays Aggregate Index, the Fund's neutral mix of 60% stocks and 40% bonds. These indices do not reflect any commissions or fees which would be incurred by an investor purchasing the stocks they represent. The performance of the Fund and of the Indices is computed on a total return basis which includes reinvestment of all distributions. It is not possible to invest in an index.

Fund Risks

Investments in mutual funds carry risks and investors may lose principal value. Stock 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; this may be enhanced when investing in emerging markets. Small and mid-cap stocks involve greater risks and they can 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. Lower rated bonds, callable bonds and other types of debt obligations involve greater risks.

Mortgage securities and asset backed securities are subject to prepayment risk and the risk of default on the underlying mortgages or other assets; derivatives may increase volatility.

The FPA Funds are distributed by UMB Distribution Services, LLC, 803 W. Michigan Street, Milwaukee, WI, 53233.


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