Dear Shareholders:
This year’s strong performance by global markets continued through the third quarter. The S&P 500 Index returned 4.48% for the period and 14.24% year to date, while the MSCI ACWI returned 5.18% and 17.25%, respectively. The FPA Crescent Fund (“the Fund”) returned 1.90% in the third quarter and 7.27% year to date, thereby underperforming its risk exposure so far this year.
Low interest rates and a dearth of appealing investment alternatives continue to drive the stock market higher as many investors still find stocks relatively attractive and one of the few means of meeting their targeted return. This has allowed stocks, in general, to compound at a rate faster than their earnings – a transient state of affairs – and leaves global equities at relatively high valuation levels, higher than last quarter and higher than most points in history.
The “risk-on” trend persists early into the fourth quarter, with the S&P 500 Index posting eight days of consecutive positive performance – its longest string since 2013 – while simultaneously recording its lowest volatility ever.1
We will leave broader market musings to the Fund’s annual and semi-annual commentaries, as is our habit.
The Fund’s top five performing positions added 1.50% to our return while the bottom five detracted 1.29%, with Naspers/Tencent accounting for half of the latter amount.2
Our winners and losers are typically not much more than the noise that accompanies markets over shorter periods. Although that was largely the case in the third quarter, our Naspers/Tencent pair trade contributed more decibels than we would have preferred. As discussed in detail in last quarter’s commentary, this investment has been unprofitable to date. Its detraction from the Fund’s return persisted unrelentingly in the most recent quarter. While a long position that declines in price becomes a smaller weight in a portfolio, a short position that increases in price becomes larger. While we believe that the investment merit remains strong, in light of Tencent’s recent appreciation (the short side of the trade), the position has been trimmed, consistent with the desired risk characteristics of the Fund.
Something the late Tom Petty said in his last interview resonated with our team and summarizes how many of us feel in today’s markets. Speaking towards the end of September just before his death, Petty said songwriting is “kind of a lonely work, because you just have to keep your pole in the water. I always had a little routine of going into whatever room I was using at the time to write in, and just staying in there till I felt like I got a bite. I compare it to fishing: There’s either a fish in the boat or there’s not. Sometimes you come home and you didn’t catch anything and sometimes you caught a huge fish…I just remember being excited when I had a song done, and I knew I had a song in my pocket. I always felt really excited about it.”3
Each of us on our team has a pole in the water. Our daily individual routines vary but we are all trying to snag good assets at attractive prices. This takes patience. Like a popular song, an attractive investment has its own hook, commonly revealed at the intersection of price and quality.
We wish we could profess excitement and tell you that we recently completed a song and had another in our pocket. We have not had any “hit songs” in quite some time. We would be satisfied with a small commercial jingle at this point.
We typically only chase price when it is falling. Today though, a world awash in capital has found investors willing to pay ever higher prices. We, therefore, prefer to maintain Crescent’s conservative posture.
We believe the best course is to patiently read, speak to business managers, and just think. As Mr. Petty wrote and as we closed exactly a year ago, “The waiting is the hardest part.”4
Respectfully submitted,
Steven Romick (Trades, Portfolio)
Portfolio Manager
October 15, 2017
- The CBOE Volatility Index (VIX) recorded its lowest close in its 24 year history – 9.19 on October 5, 2017.
- Reflects the top contributors and top detractors to the Fund’s performance based on contribution to return for the quarter.
- The Last Interview. Los Angeles Times. Randy Lewis. October 4, 2017.
- The Waiting, Tom Petty & the Heartbreakers
Important Disclosures
The views expressed herein and any forward-looking statements are as of the date of the publication and are those of the portfolio management team. Future events or results may vary significantly from those expressed and are subject to change at any time in response to changing circumstances and industry developments. This information and data has been prepared from sources believed reliable, but the accuracy and completeness of the information cannot be guaranteed and is not a complete summary or statement of all available data.
