Robert Rodriguez of First Pacific Advisors
Robert Rodriguez, Chief Executive Officer of First Pacific Advisors got almost everything right in 2008: earlier on in the year he hoarded cash in anticipation of a melting down of the stock market, and he by and large avoided Financials, yet in the end his flagship fund FPA Capital performance was only marginally better than S&P500 index, losing 34.8% vs. index’s 37% drop for 2008.
If one is willing to look at a longer track record (one cannot take the willingness for granted anymore as so many reputable money managers have their reputation tarnished during the past year), Robert Rodriquez has an impressive track record: for the past 1, 5, 10, 15, and 20 years, FPA Capital Fund returned -39.05, -4.43, 5.8, 10, 12.09% per year, whereas S&P returned -38.09, -4.76, -3, 5.91, 7.43%. Robert Rodriguez outperformed the market handily in periods longer than 5 years.
How Does Robert Rodriguez Select Stocks
Robert Rodriguez has announced that he would step down and take one sabbatical year after 2009. FPA Capital Fund will be managed by his hand-picked lieutenant Dennis Bryan and Rikard Ekstrand.
The March 2009 Letter to Shareholders include comments by these two future fund managers on Robert Rodriquez’s sabbatical leave and their investment style (Page 2):
Briefly, the investment stratey we employ and will continue to utilize a bottom-up” approach to selecting securities once at a time. We will continue to focus on companies that are market leaders with a strong niche, have solid balance sheets, have a management team with a proven track record, and are trading at a substantial discount to intrinsic value
Sounds familiar? It does to us as we at this website hear so much about Warren Buffett and how he manages money.
Adhering to the investment discipline is very important to Robert Rodriguez. As he stated in the recent Morningstar conference on May 29, 2009:
I believe I have found success because I have been deeply aware of the need to balance the human emotions of greed and fear. In a word, DISCIPLINE. As a board member on the University of Southern California’s Student Investment Fund program, I tell our students that discipline is a key of fundamental rules and a core philosophy, they will be sailing a course through the treacherous investment seas without a compass or rudder. I also emphasize the importance of integrity and tell them that they can spend a lifetime building their reputation and, if they are not vigilant, they can lose it in a day.
OK, I carried away a little. He was not just talking about selecting stocks. Still, I am sure he adheres to principles when he select stocks.
Disadvantage of Rodriguez over Buffett
Warren Buffett, operating a holding company actually has an advantage over mutual fund manager Robert Rodriquez. Shareholders of Warren Buffett may not like what he does, the only damage the can do to him is to sell the Berkshire Hathaway stocks. For Robert Rodriquez, if shareholders became unhappy with his performance for whatever reason, they demand to redeem their money.
This time around, when Robert Rodriguez called the storm coming and decided to keep as much as 45% of his fund’s asset in cash in 2007, redemption orders came in. In the end, $770 million on a base of $2.1 billion capital were redeemed by shareholders. One client withdrew $300 million because the high cash policy does not fit the client’s “asset allocation model”.
We wish the client did not plunge the money into some other funds which lost 40-50%.
What is Robert Rodriguez thinking now?
This comes so timely. Recently, Robert Rodriguez spoke on a Money Manager Conference organized by Morningstar, and he posted his speech in his companies website for our benefit. Here are two excerpt I found most relevant:
1. 67% of new capital is deployed into energy stocks
“We are again running contrary to the consensus, shifting course in our equity investment strategy in a way many would consider to be high risk. We deployed more capital than at any other period in the last 25 years, late last year and early this year, with 67% directed into energy stocks. This added to FPA Capital Fund’s hefty energy exposure that existed prior to the market collapse. Over 50% of the Fund’s equity investments are currently in energy. You may read more about our rationale in the March shareholder letter. We have skewed our research toward companies that will benefit from what I believe to be the beginning of a “ New World Order.” In my opinion, the old economic order began at the end of WW2 and ended in 2007. Mercantilist nations in Europe, Asia and other parts of the world operated with the strategy of having a cheap currency that made their exported goods attractively priced for a financially sound and unleveraged American consumer. With the recent collapse of the American consumer’s over-leveraged balance sheet, a new era has begun. Foreign countries will have to restructure their economies to emphasize domestic growth so as to offset the structural reduction of U.S. demand for their exports. China has already begun this process. If my outlook is correct, many sectors of the U.S. economy will be negatively affected. Active managers will have to make some hard choices as to how they deploy capital going forward.”
Recent Market Rally is a Bear Market Rally
“My financial market outlook is rather cautious. I believe the recent stock market rally is nothing more than a bear market rally. It is being driven by some highly optimistic expectations. A narrowing in credit spreads is encouraging some “experts” to express the view that the worst of the credit crisis is over, especially with the economic stimulus plan benefits yet to come. Many economists are forecasting an end to the recession by year end, and I have even seen one anticipating a “V” shaped recovery. If my previous comments about the stimulus plan prove to be correct, these forecasts will be wrong. With a continuing weak economy, particularly among consumers, corporate earnings growth will disappoint. Over the last four years at FPA, we have argued that both reported corporate profits and profit margins were unsustainably high. This assessment has proven to be correct for financial-service companies and now we believe this process is extending to non-financial corporations. We estimate that at their peak, corporate profit margins were approximately 30% higher than previous peaks. With a return to more normal profit margins and substandard economic growth, I expect the stock market to be price constrained for the next ten years. This analysis tends to support my estimate that it may also take ten years for U.S. consumers to rebuild their balance sheets.”
In summary, for now he is bearish of the stock market over all. Since he is a mutual fund manager and has to invest, so he might as well invest in Energy stocks whose value are compelling, and who can also act as a hedge against future commodity inflation.
1Q09 Top Holdings
As of March 31, 2009, these are the Robert Rodriguez’s top holdings: ENSCO International Inc. (ESV), Avnet Inc. (AVT), Arrow Electronics Inc. (ARW), PattersonUTI Energy Inc. (PTEN), Rowan Companies Inc. (RDC), Newfield Exploration Company (NFX). Four of the six are oil & gas companies.
No. 1: ENSCO International Inc. (ESV), Weightings: 10.74% - 2,150,000 Shares
ENSCO International Inc. is an international offshore contract drilling company that also provides marine transportation services in the Gulf of Mexico. The Company's complement of offshore drilling rigs includes jackup rigs, nine barge rigs, platform rigs, and one semisubmersible rig currently under construction. ENSCO International Inc. has a market cap of $5.86 billion; its shares were traded at around $41.29 with a P/E ratio of 5.2 and P/S ratio of 2.4. The dividend yield of ENSCO International Inc. stocks is 0.2%. ENSCO International Inc. had an annual average earning growth of 12.8% over the past 10 years.
No. 2: Avnet Inc. (AVT), Weightings: 10.45% - 3,152,600 Shares
Avnet Inc. is one of the world's largest industrial distributors of electronic components and computer products. The company is a vital link in the chain that connects suppliers of semiconductors interconnect products passive and electromechanical devices to original equipment manufacturers and contract manufacturers that design and build the electronic equipment for end-market use and to other industrial customers. Avnet Inc. has a market cap of $3.47 billion; its shares were traded at around $22.96 with a P/E ratio of 9.4 and P/S ratio of 0.2. Avnet Inc. had an annual average earning growth of 25% over the past 5 years.
No. 3: Arrow Electronics Inc. (ARW), Weightings: 9.68% - 2,684,700 Shares
Arrow Electronics Inc. is the world's largest distributor of electronic components and computer products to industrial and commercial customers. The company is a major global provider of products services and solutions to industrial and commercial users of electronic components and computer products. Arrow Electronics Inc. has a market cap of $3.02 billion; its shares were traded at around $24.97 with a P/E ratio of 10 and P/S ratio of 0.2. Arrow Electronics Inc. had an annual average earning growth of 0.7% over the past 10 years.
No. 4: PattersonUTI Energy Inc. (PTEN), Weightings: 7.14% - 4,208,000 Shares
Patterson is a provider of domestic land drilling services to major & independent oil & natural gas companies. The Company focuses its operations in Texas & southeast New Mexico. PattersonUTI Energy Inc. has a market cap of $2.33 billion; its shares were traded at around $15.23 with a P/E ratio of 7.7 and P/S ratio of 1.1. The dividend yield of PattersonUTI Energy Inc. stocks is 1.3%. PattersonUTI Energy Inc. had an annual average earning growth of 26% over the past 10 years. GuruFocus rated PattersonUTI Energy Inc. the business predictability rank of 2-star.
No. 5: Rowan Companies Inc. (RDC), Weightings: 6.16% - 2,721,000 Shares
Rowan Companies Inc. is a major provider of international and domestic offshore contract drilling services. The Company also owns and operates a manufacturing division that produces equipment for the drilling mining and timber industries. Rowan Companies Inc. has a market cap of $2.47 billion; its shares were traded at around $21.83 with a P/E ratio of 5 and P/S ratio of 1.1. Rowan Companies Inc. had an annual average earning growth of 10.9% over the past 10 years.
No. 6: Newfield Exploration Company (NFX), Weightings: 5.46% - 1,269,900 Shares
Newfield Exploration Company explores, develops, and acquires oil and natural gas properties primarily in the Gulf of Mexico. Newfield Exploration Company has a market cap of $4.99 billion; its shares were traded at around $37.66 with a P/E ratio of 12 and P/S ratio of 2.2. Newfield Exploration Company had an annual average earning growth of 19.1% over the past 10 years. GuruFocus rated Newfield Exploration Company the business predictability rank of 4-star.