The nomination was backed by solid performance: For the past decade, during which the general market declined slightly, Crescent Fund grew an average of 10.69% per year. For 4Q09, Crescent Fund increased 5.3% for the fourth quarter, and 28.4% for 2009 and, in doing so, successfully earned back its 2008 losses. In the most recent two-year period of tremendous volatility, Crescent increased 2.0%, while the S&P 500 declined 20%, both returns on a cumulative basis.
Steven Romick just published his 4th Quarter 2009 letter to shareholders. Here is an excerpt on the investment outlook and his recommendation of one particular stock:
Full valuations, higher expected interest rates, and the aforementioned trends will prove a significant headwind for the markets. We do not expect to be in Pamplona running with the bulls any time soon. We expect earnings growth in 2010, but maybe not as much as what the equity and corporate debt market appears to have priced in, and we worry that 2011 and beyond will show the side effects of the drastic action taken by our government to avoid what certainly could have been a worse financial calamity.
We just don’t think it’s going to be easy to eke out a return from current market levels, particularly when the backdrop for the above is against an equity market that, at 19.9x, is far from inexpensive and that’s before we take into account our expected increase in interest rates.13 Nevertheless, there have been some pockets of bad news that have allowed us to make certain investments at prices that we deemed inexpensive.
Comments on HealthCare Sector
The arguments for health-care reform were loud and varied in 2009, filling minutes on television and the pages of your preferred newspaper. The fear of the unknown drove the share prices of many health-care companies down to a level we just couldn’t pass up. We purchased a number of them and we presently hold positions in Covidien, WellPoint, Health Net, Omnicare, Abbott Labs, and Pfizer. We believed, however, that the political window of opportunity did not exist for the tougher measures proposed, not when the expected cost was going to expand an already bloated Federal budget and, at a time when government-run entities are not viewed as efficiently managed. As a result, health-care represented 11.1% of the Fund at year-end 2009, up from 4.3% at the end of 2007.
Comments on Aon Corp. (AON)
We are looking for competitively advantaged businesses that produce a relevant, necessary, cost-competitive product, and are managed for the benefit of passive outside owners. This helps to explain why we like Aon Corp. Aon is the world’s largest commercial insurance broker with operations in over 40 countries. When operated at sufficient scale, commercial brokerage is a wonderful business. Adequate insurance coverage is a prerequisite for economic activity in a modern, developed economy. Both insurers and insured rely on the broker. Because insurance coverage is a necessary good and brokers occupy a relatively unassailable position as middle man, commercial brokerage operated on sufficient scale and market share, amounts to a tax on economic activity. In addition, the brokerage business does not require any capital and revenues/profits naturally rise in line with increasing insurance premiums. Broker’s natural pricing mechanism (% of premium) and lack of capital requirement leave brokers relatively well positioned in the event of inflation.
We believe Aon is among the world’s best positioned and operated insurance brokerage firms. Over the past four years, management has made steady progress integrating the company’s divisions and systems and improving the company’s margins. Under current management, Aon has shown a commitment to returning capital to shareholders through share repurchase. We purchased Aon at less than 10x our view of normalized earnings.
Click here to read the entire Fourth-Quarter 2009 Letter to Shareholders from FPA Crescent Fund.