Dear Shareholder:
Overview
The FPA Crescent Fund – Institutional Class ("Fund" or "Crescent") gained 9.74% in 2021's first quarter and 54.80% for the trailing twelve months.1
The Fund's positive performance in late 2020 has endured thus far into 2021. The stock prices of many underappreciated, good businesses that had been left behind in the market's rally since the pandemic lows of last year continued to capture investor interest. The Fund generated 98.8% of the average of the S&P 500 and MSCI ACWI return in the trailing twelve months, outperforming its own 77.2% average net risk exposure.2 Crescent's performance and that of its underlying equity exposure are captured in the following table:
Exhibit A: Performance versus Illustrative Indices3
| Q1 2021 | Trailing 12-month | |
| Crescent | 9.76% | 54.80% |
| Crescent – Long Equity | 12.92% | 74.92% |
| S&P 500 | 6.17% | 56.35% |
| MSCI ACWI | 4.57% | 54.60% |
| 60% S&P 500 / 40% BBgBarc U.S. Agg | 2.31% | 31.71% |
| 60% MSCI ACWI / 40% BBgBarc U.S. Agg | 1.35% | 30.75% |
Portfolio discussion
Reflecting on the past year, we submit that we are probably not as dumb as we appeared to be last March; however, we also don't believe we are as smart as we may now appear. The truth lies somewhere in between. This is one of the reasons we continue to encourage our shareholders to think in terms of market cycles and rolling five-year periods and to block out the inevitable noise, however unsettling, in between.
Although Crescent's showing in the first quarter was not unexpected, we had no idea that the strong performance of its underlying securities would occur when it did. After having increased our allocation to risk securities during the Q1 2020 selloff, by the time Fall rolled around we found ourselves holding a collection of companies that we considered to be some combination of relatively and absolutely cheap. Although the broader market seems to have recognized in recent months that a segment of the market was mispriced, these shares could have remained unappreciated for longer.
The top contributors to and detractors from the Fund's trailing 12-month returns are listed below.
Exhibit B: Trailing Twelve-Month Contributors and Detractors as of March 31, 20214
| Contributors | Perf. | Avg. % | Detractors | Perf. | Avg. % |
| Cont. | of Port. | Cont. | of Port. | ||
| Alphabet | 4.15% | 5.4% | FPS LLC | -0.37% | 0.6% |
| Jefferies Financial Group | 2.73% | 2.5% | Financial Select Sector SPDR | -0.30% | -0.6% |
| Broadcom | 2.67% | 2.9% | Jardine Strategic Holdings | -0.06% | 0.2% |
| AIG | 2.60% | 2.9% | GACP II, LLC | -0.05% | 0.4% |
| TE Connectivity | 2.52% | 2.6% | O-I Glass Inc. | -0.05% | 0.0% |
| 14.66% | 16.3% | -0.84% | 0.7% |
There were no substantive changes in the business prospects in any of the major contributors and detractors. AIG (AIG, Financial) and Jeffries (JEF, Financial), two of the better contributors for the trailing twelve months, were amongst the largest detractors for the year ago Q1 2020 trailing twelve-month period. The subsequent rebound in their share prices speaks to what we have previously maintained: that the businesses of these two companies have not changed enough to warrant their stock price declines. This has been demonstrated true for much of the portfolio.
We are pleased with the improvement in the overall quality of businesses that we hold, but we cannot ignore the rally in both the market and in many of our companies. As seen in the charts below, the rising tide has lifted most stocks – both growth and value, but a significant valuation gap remains. Despite a strong recent run for many out of favor companies, some of the "growthier" names have risen even more.
While we don't "own the market", many of our companies aren't as cheap as they were. This leaves less "gas in the tank" over the near-term. However, we have sought to avoid owning names in the more speculative pockets of the market, not necessarily because we don't think the business models are interesting, but rather because in the majority of instances it strikes us that valuations already incorporate optimistic expectations. While these names may not look attractively valued today, we are nonetheless actively studying and researching tomorrow's leaders so that we will be able to act opportunistically whenever the next market swoon arrives.
This brings us full circle to our actions over the last twelve months, where we strategically used market weakness to upgrade the portfolio, and to own what we believe are those better-quality global businesses where investors are not willing to look past temporary challenges, as well as those companies that we think are reasonably priced but should "grow and throw" (earnings and cash flow) for years to come. As such we now find ourselves with a portfolio whose underlying quality is higher than at any point we can recall, and for this reason, we feel comfortable being more invested than has been our average over the past three to five years.
Markets will do what they'll do over the short-term, but our focus will continue to be on the long-term, for which we believe we are well-positioned, with a focus on quality, growing businesses at fair to good prices.
As laid out in the table below, the Fund's long equity positions are cheaper than the market, albeit more expensive than and not quite as discounted as they were six short months ago; and, if consensus estimates are correct, our companies are expected to grow faster in the next three years.
Closing
We don't know.
That is generally our answer to the regular questions that are posed to us about our macroeconomic view or the future performance of stocks. The only confident response we can offer is that we will continue to seek those reasonably priced businesses in the hopes that they will provide a reasonable real rate of return over time and offer some respite from the spendthrift policies of the U.S. and other sovereign nations.
Respectfully submitted,
Steven Romick (Trades, Portfolio)
Co-Portfolio Manager
April 26, 2021
- Effective September 4, 2020, the current single class of shares of the Fund was renamed the Institutional Class shares. Unless otherwise noted, all data herein is representative of the Institutional Share Class.
- 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. The Fund's net risk exposure as of March 31, 2021 was 74.8%.
- Comparison to the indices is for illustrative purposes only. The Fund does not include outperformance of any index or benchmark in its investment objectives. An investor cannot invest directly in an index. 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 only includes equity securities excluding paired trades, short-sales, and preferred securities. The long equity performance information shown herein 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. Long equity performance does not represent the return an investor in the Fund can or should expect to receive. Fund shareholders may only invest or redeem their shares at net asset value.
- 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.
Source: Bloomberg. As of March 31, 2021.
- Source: Empirical Research Analysis, National Bureau of Economic Research. As of March 31, 2021. Cheapest quintile refers to the most undervalued 20% of stocks in an analysis of large-capitalization US stocks. Standard Deviation is a measure of dispersion of a data set from its mean. Current Level refers to the valuation spread as of March 31, 2021 which is 0.6 standard deviations above the mean. Large-capitalization U.S. stocks are those companies with market capitalization of $10 billion or more.
- Source: CapIQ, Factset, Bloomberg, FPA calculations. 3-Year Forward Estimated EPS Growth is based on FPA calculations using consensus data from CapIQ, Factset and Bloomberg. Forward looking statistics are estimates and subject to change. Comparison to the S&P 500 and MSCI ACWI Indices is being used as a representation of the "market" and is for illustrative purposes only. The Fund does not include outperformance of any index or benchmark in its investment objectives. Please refer to Footnote 3 for the definition of the long equity holdings and other important information, and refer to Page 1 for net returns of the Fund. The long equity holdings average weight in the Fund was 74.7% and 72.7% for Q1 2021 and TTM through 3/31/21, respectively. The long equity holdings average weight in the Fund was 75.2% and 71.6% for Q4 2020 and TTM through 12/31/20, respectively. The long equity holdings average weight in the Fund was 73.3% and 69.9% for Q3 2020 and TTM through 9/30/20, respectively. The long equity statistics shown herein are 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 results similar to those shown. Long equity statistics noted herein do not represent the results that the Fund or an investor can or should expect to receive. Fund shareholders can only purchase and redeem shares at net asset value.
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 and are subject to change without notice. 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 have 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 failur e 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. High yield securities can be volatile and subject to much higher instances of default. Derivatives may increase volatility.
Value securities, including those selected by the Fund's portfolio managers, are subject to the risk that their intrinsic val ue 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.
Please refer to the Fund's Prospectus for a complete overview of the primary risks associated with the Fund.
In making any investment decision, you must rely on your own examination of the Fund, including the risks involved in an investment. Investments mentioned herein may not be suitable for all recipients and in each case, potential investors are advised not to make any investment decision unless they have taken independent advice from an appropriately authorized advisor. An investment in any security mentioned herein does not guarantee a positive return as securities are subject to market risks, including the potential loss of principal. You should not construe the contents of this document as legal, tax, investment or other advice or recommendations.
