Steven Romick's FPA Crescent Fund Year-End Shareholder Commentary

Dear Shareholders:

Global stock markets ended 2019 on a high note, with the global MSCI ACWI Index returning 8.95% and 26.60% for the fourth quarter and full year, respectively, and the domestic S&P 500 Index returning 9.06% and 31.49% for the same periods. It was a “risk on” year with even U.S. investment grade bonds delivering 14.23% for the year, approximately in line with the high yield bond market’s 14.41% performance.1 The FPA Crescent Fund, or the Fund, increased 5.69% and 20.02% for 2019’s fourth quarter and full year, underperforming the average of its two comparative equity indices at 9.01% and 29.04% for the fourth quarter and full year, respectively.

Long equities held by the Fund returned 9.76% and 31.53% in the fourth quarter and for the full year, respectively, outperforming the MSCI ACWI and S&P 500 indices.2 Including a small amount of other risk assets and cash it held, the Fund beat its own risk exposure by generating 68.9% of the market’s return in 2019 (“market” is average of the 2019 returns for MSCI ACWI and S&P 500 indices) with 68.4% of its capital at risk, on average, during the year.3

Portfolio

The Fund has unusual breadth, having the ability to invest in more diverse regions, sectors and asset classes than almost any other mutual fund. Yet we will only commit capital when we have determined that upside opportunity exceeds downside risk. If we believe prices are attractive, we buy. If not, we hold or sell. Importantly, we don’t (because we can’t) try and pick market tops or bottoms.

Santa left coal in our stockings at Christmas 2018 as global markets swooned. Like good little children, we did the right thing and took advantage of lower prices, increasing the Fund’s risk exposure by approximately ten percentage points in the second half of 2018. Then Christmas came early last year as markets rebounded, ultimately reaching new highs. We similarly took advantage of rising prices in 2019 and reduced or sold positions that we could no longer justify holding at given valuations, and therefore ended the year with 9.2% less risk exposure.

The U.S. continued to outperform international markets, which has made foreign domiciled companies marginally less expensive, all else being equal. At the end of the year, the S&P 500 trailing price-to-earnings ratio, or P/E, was 21.6x, higher than the 19.8x of the MSCI ACWI. The international component of the MSCI ACWI traded at a P/E of 17.4x at year end. This almost 20% discount to U.S. stocks helps to explain why the Fund’s exposure to international companies has increased. At year-end, the Fund had 35.4% of net equity invested outside the U.S., six percentage points higher than at the end of 2018.

The Fund’s shareholders have entrusted us to decide when upside opportunity surpasses downside risk. The Fund’s investment exposure will therefore swing between more and less invested. While the Fund was less invested in 2019, we have no doubt that in the future we will deploy more of its capital.

We continue to focus on companies that have at least a small breeze at their backs and avoid those businesses with wind in their faces. Over time, we generally expect the companies we own to sell an increasing number of units as well as have at least enough pricing power to offset cost inflation.

Contributors to and detractors from the Fund’s trailing 12-month returns are listed in the following table.

Our investment in the cable industry via Charter Communications (CHTR, Financial) (up approximately 70%) along with Comcast (CMCSA, Financial) (up approximately 34%) were two notable contributors in 2019.5 We made these investments in mid-2018, when many investors were concerned that subscribers would cut the cord in favor of streaming and when wireless 5G threatened to damage these companies’ dominant broadband franchise. Our belief remains that while video will continue to shrink, video is less profitable on a cash basis than many believe it to be. Thus, we think broadband should remain vibrant, as it is likely to take many years and many billions of dollars before the potential impact of the competitive threats is known. The market has sidled over to our thinking on this, at least for the time being.

American International Group’s (AIG, Financial) stock lost 32% in 2018, including dividends, negatively impacting the Fund’s performance in that year. In 2019, however, it delivered a total return of 34%.5 The company’s multi-year turnaround efforts are finally bearing fruit, and the market has begun to take notice. The Fund further benefited by increasing its stake to take advantage of price weakness in late 2018. If AIG’s return on capital continues to improve, as we expect, the company should trade at a similar price-to-tangible book value multiple as its peers. Were that to be the case, we can see its stock trading at $70 to $80 in the next couple of years, a healthy premium to its closing price of $51.33 at the end of 2019. As value investors, AIG is emblematic of so many of our investments that underperform on their way to outperforming.

Glencore (LSE:GLEN, Financial) shares were under pressure on the back of commodity weakness and regulatory concerns. We continue to think the shares at a single-digit free cash multiple represent compelling value.

The other four detractors have all been discussed previously. Please refer to previous commentaries for additional information.

Investing

Value investing means investing with a margin of safety so if all doesn’t go according to plan, whether ours or a company’s, then investors may nonetheless come out close to whole. This may mean having the protection of business and/or balance sheet, but without that protection, the emperor wakes up one day to realize he’s not wearing clothes.

Being a value investor in 2019 was like wearing a crew cut in Haight Ashbury in 1969 – not only do you stand-out, you invite a bit of ridicule. We value investors must not acquiesce to the fear of missing out, however, and instead make our peace with a different kind of FOMO, the fate of missing out. To do well over long periods of time means accepting that we won’t do well for lengths of time in between. We realize that has made us appear both smart and dumb at different moments in time, but our goal is to deliver over the long run rather than at any one point in time.

When all appears easy, it generally isn’t. What we won’t do is redefine value. We believe we can help ourselves and you by staying the course and continuing to invest bottoms up.

Taking a look from the top down, though, helps explain why we find it more challenging to unearth suitable investments today. We end up struggling to find great risk/rewards against the following backdrop.

Low interest rates and a lack of investment alternatives have lifted the price of risk assets globally. Global stock markets trade at or near their highs as a percent of their respective economies, as shown in Exhibit B.

Looking at the stock market from a price-to-earnings basis, it becomes clear that when earnings are smoothed, valuations have only been this high once before. This is shown in Exhibit C, using the Shiller P/E methodology that divides current price by ten-year average earnings, adjusted for inflation.

However, current P/E ratios are not so outlandish in the context of low interest rates and a reasonably good economy. Should rates remain low and economies avoid weakening measurably, markets could reasonably remain at today’s elevated levels.

The long outperformance of growth stocks compared to value stocks has left value much less expensive, trading at a relative P/E that’s about as low as we have ever seen it in our careers. This does not make value stocks cheap, just less pricey than growth stocks.

In fact, value stocks have performed reasonably well over the last decade. The S&P 500 Value Index has compounded at a rate of 12.14%. Value investments just haven’t done as well as growth stocks, which have annualized at 14.76%.9 However, growth stocks have outperformed their fundamentals, which has led to P/E multiple expansion, while value stocks have not. (Side note: The S&P 500 Value index had better 10-year earnings growth than the S&P 500 Growth index, but that is because it started at a point that was at its earnings nadir.)

Judging what a company is worth and where its stock should trade requires a great deal of interpretation. Analyzing a bond’s performance is generally easier, as the most you can get as a return is the contracted amount, though an appreciation for the underlying company’s solvency will cause one to accept a higher or lower yield. ‘Credit investors’ current acceptance of historically low yields reflects their greater concern for return than for risk, whether it be in investment grade, high yield or levered loans.

The investment grade, or IG, bond market today has the lowest yield and lowest credit quality in its history. For instance, lowly BBB credits have more than quadrupled in value. Low yield and low credit quality don’t generally go hand in hand. In addition, at 7.9 years, the IG market has the longest duration in its history.11 Any increase in interest rates or spread will therefore have a larger impact than has been the case previously.

The levered loan market has trebled from $527 billion to $1.5 trillion over the last ten years and yields just 6.2%. Cracks are beginning to show. About 4% of the leveraged loan universe was trading below 80 cents on the dollar at the end of the year, versus just 2% in May 2019.13 We suspect that busted levered loans will be a future opportunity under the Fund’s broad mandate.

The high yield segment of the credit market has been important to the Fund since its inception. Today, however, we are not getting paid anywhere near enough to invest broadly in high yield. We said the same thing a year ago – and the high yield market soared. But more than half of its 14% return came from tighter spreads and lower yields due to a decline in interest rates.14 We were under no illusion that just because we didn’t think the risk/reward then in high yield was attractive, the market would collapse, and we don’t mean to suggest it will collapse now. We do want to make sure that a prospective return justifies the risk assumed. As much as that wasn’t the case a year ago, we believe it is even less so now. We offer five good reasons why we believe that high yield should be avoided.

1. Low yields: Trading at 5.4%, near its lowest all-time yield. (Exhibit G)
2. Narrow spreads: Current spread over Treasuries is 3.7%, well below average. (Exhibit G)
3. Lower credit quality: Leverage and interest coverage metrics of corporate America, using Bloomberg Barclays US Corporate High Yield Index as a proxy, are at a low which is particularly unusual because the economy is relatively robust. (Exhibit H)
4. Weak covenants: About as weak as they’ve ever been. Weaker covenants give the advantage to the borrower. (Exhibit I)
5. Larger credit market: The corporate bond market has grown from $4.3 trillion to $9.4 trillion in the last decade. The high yield and levered loan components of it have almost doubled from $1.5 trillion to $2.8 trillion. (Exhibit J)

It has recently been a tale of two high yield markets, in which the good credits have gotten better and the bad haven’t seen much price movement. Spreads of better high-yield bonds have tightened, and at year-end almost one third of the stocks tracked in the ICE BofA U.S. High Yield Index trade at yields less than 4.0%. On the other hand, spreads of CCC-rated and riskier bonds have remained flattish over the last 12 months.19 When interest rates increase and/or the economy weakens, there will be lots of opportunity. Reaching for yield will have the usual consequence. This time, the fallout might be magnified further because of the five reasons for caution listed above. If there is a run on the bank, we wonder at what clearing price a buyer will step in.

Also, the rise of passive funds adds another concern: At the end of 2019, there was $253 billion in corporate bond exchange traded funds, or ETFs, including $56 billion in high yield and $10 billion in levered loans.

Passive funds that invest in less liquid securities, such as small-cap stocks, high yield bonds, and levered loans, only offer the illusion of liquidity. They give their shareholders the ability to buy and sell daily, but the underlying securities these funds own can be quite illiquid. Any significant selling of high yield ETFs could cause lower-rated corporate bonds to hit a pricing air pocket with bids dropping precipitously. In this world of immediate gratification, investors are foregoing future yield for current yield and unwittingly accepting de facto illiquidity in the process.

We have knowingly accepted some illiquidity for a very small portion of the Fund’s portfolio, investing in private credits, including non-publicly traded loans to private companies.21 We expect a higher yield for the lower liquidity, and that has been the case since 2009, when such investments have delivered approximately 14% weighted average return to the portfolio. Importantly, all of these loans have had first liens, with collateral coverage well in excess of the loan amount. We believe the higher yields and better asset coverage have made these private loans far less risky than the broader high yield bond market. With 30 loans and more than $650 million invested since 2009, the Fund has yet to experience a loss on any. We will continue to make such loans, but given that we manage a public fund with daily liquidity, we seek to mitigate the potential for forced selling by keeping these less liquid positions small. 22

Economy and Macro

We offer limited value when speaking of the larger global macro environment, so here we provide only a skeletal view to help explain the challenge in finding good investments today.

As David Rosenberg of Gluskin Sheff pointed out, “In a normal cycle, the stock market has a correlation of roughly 60% with the economy. The other 40% is explained by factors like valuations, sentiment, technicals and momentum. This cycle was literally off the charts in that respect—because only 7% of this entire bull market was due to the economy. And that’s a good thing if you are long the stock market because this did go down as the weakest economic expansion on record and yet one of the most powerful bull markets ever.” Mr. Gluskin concluded, “The fundamentals do win out in the end, but it could take time.”23

We don’t think the stock market’s link to the economy has been severed, but it has at least been largely suspended. When and how deep a future recession might be and how the market might react remain open questions. Risk does seem skewed to the downside today.

The show goes on as long as the government puppet masters allow, or when the audience leaves. The U.S. deficit climbed just over $1 trillion in 2019, despite a growing economy and the tightest labor market on record. Central banks have successfully inflated asset prices but failed to ignite real economic activity. Most Americans are not better off today than they were a decade ago.

Extremely low interest rates continue to pervert capital allocation decisions. Whether or not to buy a piece of equipment, repurchase shares, or make an acquisition, a lower cost of capital can improve an otherwise impractical or marginal decision. This doesn’t seem likely to change anytime soon. The global monetization experiment took a pause but has since restarted, and a more expansive fiscal policy is under discussion.

Indebted governments, companies and individuals have recalibrated to this low level of rates. When or if rates eventually rise, many of these same parties may find their finances dangerously askew.

One only need to look east for a recent example of the failure of low interest rates to keep markets elevated. Japan cut interest rates throughout the 1990s and has kept them low ever since. Despite that, Japan’s Nikkei stock index declined more than 40% four times between 1990 and 2009. Low interest rates are not a panacea and can present or mask other problems.

Debt accumulation at the sovereign, corporate, consumer and state and local levels has bought economic growth, but at an as-yet-to-be-determined cost. Debt has grown far faster than the gross domestic product (“GDP”) in the U.S., a situation that can’t mathematically endure unabated. Since 2009, U.S. federal debt has increased by $10.8 trillion, helping to buy $6.9 trillion in GDP growth. The EU and Japan have similarly been borrowing to buy GDP, as depicted below (Exhibit L).

At the end of 2019, the U.S. national debt stood at over $23 trillion, exceeding the country’s estimated $21.4 trillion GDP. The chart below shows that, using GDP as a proxy for income, the return on investment for U.S. spending has declined for decades and is now as low as it has ever been. As a nation, we are getting less while paying more.

Corporate debt growth has been another contributor to U.S. GDP growth, almost trebling since 2008 without a commensurate increase in GDP. Relative to the size of our economy, we now have more debt on corporate books than at any point in time in history (Exhibits J and N). In good times, leverage enhances corporate earnings, but the opposite is true in an economic downturn.

Not wanting to be left out, households have joined the debt accumulation party. Consumer debt is now at an all-time high in dollars and as a percent of GDP. Superficially, household debt growth doesn’t appear so terrible, but that perception is biased by the fact that non-housing debt has grown much faster than mortgage debt and only 64% of households own a home.

Increasing auto, student and credit card loans continue to propel the economy as they reach new heights. Non-housing debt balances have been increasing faster than income and now sit at $32,035 per household. Unlike governments, individuals must one day repay their debts.27

Simply, the average American’s finances are getting strained. Take auto loans as an example. Car buyers have stretched their auto loans over longer periods so that they can buy the car they want, or just to buy a car at all.

Experian reported in the first quarter of 2019 that the average term for a new car loan is 68.9 months, with the term of more than one third of new vehicle loans longer than 73 months and with a few as long as 96 months.29 The credit rating agency also stated that the average initial term for a used car loan is 64.7 months -- and that’s for a car that’s already a few years old. Some 20% of used car loans are for longer than 73 months. Thus, the average used car buyer will still be paying off a loan for a car that’s more than eight years old – and Consumer Reports sets the average life of a new car at only about eight years.30

Debt accumulation in the form of unfunded liabilities also will likely pose a problem in the future, but that problem might lie well beyond a typical investment horizon. Nevertheless, it’s good to understand the current state of affairs.

Almost three quarters of state and local pensions in the U.S. are underfunded, despite optimistic assumptions about the expected return on plan assets.31 The state pension funding gap alone is arguably understated by $1.3 trillion or so.

The U.S. also has an estimated $122 trillion of unfunded federal liabilities, including Social Security and Medicare.33 Unfunded federal, state and local liabilities could be mitigated by higher taxes and changes to benefits. These politically painful options, if implemented, would likely prove an economic obstacle. We will inevitably come upon a time when we will be forced to live within our means, and the consequences, at least for a time, will not benefit the stock market.

Conclusion

We will continue to seek to capitalize when equities (both domestic and foreign) and credit (mostly public but some private) are ripe. If not, we shall maintain our more conservative posture. There are those who take liquidity and those who provide it. We prefer to be the latter, a function of temperament and having cash on hand for investment.

We look for shareholder partners of a like mind, those who also prefer an equity-like rate of return over time while trying to avoid a permanent impairment of capital.

We try to field a balanced team, playing both offense and defense. Since we believe that the stock market will generally rise over time, we do tilt more towards offense but not indiscriminately. If we are given lemons we will make lemonade, but we can’t even do that if there’s a drought.

It is generally psychologically easier to invest when a rising market validates an investor’s purchases. We take greater comfort when choppier markets challenge an investor’s conviction, even more so when a lower price follows each new purchase. For now anyway, it seems to be buy high and sell higher.

Respectfully submitted,

Steven Romick (Trades, Portfolio)

Co-Portfolio Manager

February 5, 2020

1. US investment grade bonds is represented by the ICE BofA US Corporate Index (2019 return: 14.23%); High Yield bond market is represented by the ICE BofA US HY Index (2019 return: 14.41%).
2. For illustrative purposes only. The performance of the long equity segment of the Fund is presented gross of investment management fees, transactions costs, and Fund operating expenses, which if included, would reduce the returns presented. Long equity holdings exclude paired trades, short-sales, limited partnerships, derivatives/futures, corporate bonds, mortgage backed securities, and cash and cash equivalents. Please refer to the first page for overall net performance of the Fund since inception. The long equity performance information shown is for illustrative purposes only and may not reflect the impact of material economic or market factors. No representation is being made that any account, product or strategy will or is likely to achieve profits, losses, or results similar to those shown.
3. Risk assets are any assets that are not risk free and generally refers to any financial security or instrument, such as equities, commodities, high-yield bonds, and other financial products that are likely to fluctuate in price. Risk exposure refers to the Fund’s exposure to risk assets as a percent of total assets. Average risk exposure for the Fund for year is the average of the quarter-end risk exposures.
4. Reflects the top five contributors and detractors to the Fund’s performance based on contribution to return for the trailing twelve months (“TTM”). Contribution is presented gross of investment management fees, transactions costs, and Fund operating expenses, which if included, would reduce the returns presented. The information provided does not reflect all positions purchased, sold or recommended by FPA during the quarter. A copy of the methodology used and a list of every holding’s contribution to the overall Fund’s performance during the TTM is available by contacting FPA Client Service at [email protected]. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities listed.
5. Percentage change reflects total return including the reinvestment of dividends and interest. The total return of the security may not equate with the performance of the holding in the Fund.
6. Source: The World Bank, IMF, MSCI, as of December 31, 2019. Q4 2019 market cap data based on 2018 market cap data provided by The World Bank adjusted by 2019 Index (MSCI US for US and MSCI World for World) performance. 2019 GDP assumes 2019 IMF real GDP growth projections plus year over year inflation change provided by IMF. Data shown represents total value of all listed shares in the stock market as a percentage of GDP in each respective region/country, as defined by The World Bank. The World Bank releases this data annually. Stock market is the market capitalization of stocks. Market capitalization (also known as market value) is the share price times the number of shares outstanding (including their several classes) for listed domestic companies. Investment funds, unit trusts, and companies whose only business goal is to hold shares of other listed companies are excluded. Annual data, end of year values.
7. Source: Robert Shiller, http://www.econ.yale.edu/~shiller/data.htm, as of December 31, 2019. CAPE = Cyclically adjusted price-to-earnings ratio, and is also commonly known as the Shiller P/E ratio or P/E 10 ratio.
8. Source: Bloomberg, as of December 31, 2019. SVX=S&P 500 Value; SPX=S&P 500.

9. Source: Bloomberg. Growth stocks represented by the S&P 500 Growth Index.

10. Source: Bloomberg, as of December 31, 2019.

11. Source: Bloomberg. The IG bond market is represented by the Bloomberg Barclays US Corporate Bond Index. Index data as of December 31, 2019.

12. Source: Bloomberg, as of December 31, 2019. BBB market size represented by total market value of the ICE BofA BBB US Corporate Index. BBB as a percent of Investment Grade is ICE BofA BBB US Corporate Index divided by ICE BofA US Corporate Index.
13. Source: The leverage loan market is represented by the S&P/LSTA Leveraged Loan Index.
14. iShares iBoxx High Yield Corporate Bond ETF delivered a 14.23% total return in 2019 with 8.37% due to capital appreciation and the balance from income/dividends.
15. Source: Bloomberg, as of December 31, 2019.

16. As of December, 2019. Source: Factset. High Yield Issuers represented by data for bond issuers within the Bloomberg Barclays US High Yield Index. EBITDA = Earnings before interest, taxes, depreciation, and amortization.

17. As of December 31, 2019. Source: Moody’s High-Yield Covenant Database Note: Moody’s Covenant Quality Index (CQI) inception date was January 2011, and includes all high-yield bonds, including high-yield lite. High-yield lite bonds lack a debt incurrence and/or a restricted payments covenant and automatically receive the weakest possible covenant quality score of 5.0.

18. As of December 31, 2019. Source: Bloomberg, JPMorgan. High yield bonds market data represented by ICE BofA US HY Index; Leveraged loans market data from J.P. Morgan January 3, 2020 Leveraged Loan Weekly Snapshot. December 31, 2018; BBB market data represented by ICE BofA BBB US Corporate Index. High grade bonds defined as AAA, AA or A rated corporate bonds. High grade bonds data represented by the AAA, AA, and A component of the ICE BofA US Corporate Index.

19. Source: Bloomberg, as of December 31, 2019.
20. Source: Morningstar, as of December 31, 2019.

21. Private credits: Debt extended to private companies.

22. As of December 31, 2019. For illustrative purposes only. The information provided about the Fund’s private credit investments is not intended to imply any future performance of the Fund. The weighted average return is the weighted average Internal Rate of Return (“IRR”). The weighted average IRR is based on the size of all investment level IRRs plus net income from private loans that were committed but not invested. Weighted average allocations are based on firm level allocations. Of the 30 investments the Fund has made since 2009, 26 have been exited and 4 are still open. IRR is calculated from the ‘Initiated’ date through the ‘Exited’ date for exited investments, and through December 31, 2019 for open investments. IRR is presented net of all underlying manager or sourcing fees, but gross of FPA management fees and expenses, which would reduce these returns. The IRR noted herein should not be construed as, and is not indicative of, the performance of the Fund. References to individual investments are for informational purposes only and should not be construed as recommendations by the Fund, the portfolio managers, FPA or the distributor. Any information provided is not a sufficient basis upon which to make an investment decision. It should not be assumed that future investments will be profitable or will equal the performance of any investment examples discussed. Past performance is no guarantee, nor is it indicative, of future results. Please refer to the important disclosures at the back of the presentation.

23. Gluskin Sheff. Breakfast with Dave. December 19, 2019.
24. Source: Bloomberg, as of September 30, 2019.

25. Source: US. Bureau of Economic Analysis, as of December 31, 2019.

26. As of December 31, 2019. Source: Federal Reserve. GDP=Gross Domestic Product; Corporate Debt Market (ex. Financials) is represented by nonfinancial corporate business; debt securities and loans.

27. Source: New York Fed Consumer Credit Panel/Equifax; Statista.com, as of September 30, 2019.

28. Source: New York Fed Consumer Credit Panel/Equifax, as of September 30, 2019.
29. https://www.experian.com/blogs/ask-experian/research/auto-loan-debt-study/; https://www.creditkarma.com/auto/i/car-loan-term/

30. Sources: Experian.com, Research, Auto Loan Debt Sets Record Highs, July 18, 2019. Data is from Q1 2019; https://www.experian.com/blogs/ask-experian/research/auto-loan-debt-study/; and FRED (Federal Reserve Economic Data); https://fred.stlouisfed.org/series/DTCTLVEUMNQ; and Archival FRED, https://alfred.stlouisfed.org/series?seid=DTCTLVEUMNQ&utm_source=series_page&utm_medium=related_content&utm_term=rela ted_resources&utm_campaign=alfred

31. Take our local CalPers (California Public Employee Retirement System) as an example. It reported its funded status as of its fiscal year end 6/30/2019 at about 70%, but that’s with optimistic assumptions (6.7% expected net return; ~7% discount rate; expected life span, etc.). With plan assets at about $370bn at the end of their fiscal year, at 70% fundingà $529bn Pension Benefit Obligations (PBO), which means $159bn underfunding. If its portfolio averages just 1% less in return, then its underfunding would grow to 38-39%, or ~$30bn.

32. Source: Bloomberg, Comprehensive Annual Financial Reports as of fiscal year 2017.

33. Source: RealClear Politics, Unfunded Govt. Liabilities -- Our Ticking Time Bomb, January 10, 2019; https://www.realclearpolitics.com/articles/2019/01/10/unfunded_govt_liabilities_--_our_ticking_time_bomb.html

Important Disclosures

This Commentary is for informational and discussion purposes only and does not constitute, and should not be construed as, an offer or solicitation for the purchase or sale with respect to any securities, products or services discussed, and neither does it provide investment advice. Any such offer or solicitation shall only be made pursuant to the Fund’s Prospectus, which supersedes the information contained herein in its entirety. This presentation does not constitute an investment management agreement or offering circular.

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.

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 Fund, the portfolio managers, the Adviser, or the distributor. It should not be assumed that future investments will be profitable or will equal the performance of the security examples discussed. The portfolio holdings as of the most recent quarter-end may be obtained at www.fpa.com.

Investments, including investments in mutual funds, carry risks and investors may lose principal value. Capital 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; these risks may be heightened when investing in emerging markets. Foreign investments, especially those of companies in emerging markets, can be riskier, less liquid, harder to value, and more volatile than investments in the United States. Adverse political and economic developments or changes in the value of foreign currency can make it more difficult for the Fund to value the securities. Differences in tax and accounting standards, difficulties in obtaining information about foreign companies, restrictions on receiving investment proceeds from a foreign country, confiscatory foreign tax laws, and potential difficulties in enforcing contractual obligations, can all add to the risk and volatility of foreign investments.

Small and mid-cap stocks involve greater risks and may 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. Interest rate risk is the risk that when interest rates go up, the value of fixed income securities, such as bonds, typically go down and investors may lose principal value. Credit risk is the risk of loss of principal due to the issuer’s failure to repay a loan. Generally, the lower the quality rating of a security, the greater the risk that the issuer will fail to pay interest fully and return principal in a timely manner. If an issuer defaults the security may lose some or all of its value. Lower rated bonds, callable bonds and other types of debt obligations involve greater risks. Mortgage-backed 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.

Value securities, including those selected by the Fund’s portfolio managers, are subject to the risk that their intrinsic value may never be realized by the market because the market fails to recognize what the portfolio managers consider to be their true business value or because the portfolio managers have misjudged those values. In addition, value style investing may fall out of favor and underperform growth or other styles of investing during given periods.

Important Performance Disclosures

The weighted average IRR shown for the Fund’s private credit investments do not represent the total Fund returns. These private credit investments were invested alongside the Fund’s other assets and cash and cash equivalents. The Fund’s performance will likely materially differ from the private credit investments’ weighted average IRR shown herein due to numerous factors. The weighted average IRR for the Fund’s private credit investments do not reflect the impact of FPA management fees and expenses, which would lower these returns.