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Holly LaFon
Holly LaFon
Articles (7842) 

Steven Romick's Q4 Commentary for FPA Crescent Fund

January 24, 2014 | About:

Dear Shareholders:

Forgive us if we bring you up to date this year, in part, through the lens of the distant past.

We can't help but think that the creators of Greek tragedies – those of the ancient variety, not the ongoing, modern ones – would have relished watching the Fed and the stock market the past couple of years and envisioned all kinds of morals to the story.

For instance, it was another year of single-digit earnings growth but double-digit gains in multiples. What's more, o ur oracles – we call them economists now – failed at the beginning of 2013 to accurately predict what would occur for that year: The U.S. economy grew more slowly than expected and S&P 500 earnings were lower than anticipated and yet the stock market rocketed to its best showing since 1997.

Overseas, things weren't that different . Our increasingly global view includes the performance of foreign stock markets, which generally didn't fare quite as well as the U.S., with the exception of Japan. The U.S. stock market 's relatively strong showing speaks to the Federal Reserve 's continued aggressively dovish policy stance and that our economy missed estimates by less than most other developed economies. 

The FPA Crescent Fund itself returned 21.95% for the year, with just 54.1% average exposure to equities. The winners and losers for the fourth quarter are as follows: 

Valuation multiples trumping earnings growth cannot continue ad infinitum. In most markets, 2013, like 2012 before it, benefited from the willingness of investors to pay a higher price per dollar of earnings. Earnings growth eventually must carry the day. 

Winners added 2.53% to fourth quarter return, while shorts detracted just 0.16%. The nice, but unusual, winner/loser ratio of 16 x won't oft en be repeated. The winners and losers in the fourth quarter don't tell a consistent story. Microsoft is a case in point – a top five winner in Q2, but before we could get too excited, it found itself in the top loser column in Q3 yet ended Q4 a winner. Our role is to have a view of a business 's worth and then consider that in context of its public market value. Its upside potential should be far greater than its downside. We can assure you that the underlying value of the Microsoft enterprise did not move as much as its $100 billion intra-year movement in market prices. We can say the same for the respective valuation fluctuations for the other nine companies on the list.


Chronicling the economy is always a challenge. We are, first and foremost, investors and we analyze businesses better than we understand the economy. That said, the economy can clearly have a huge impact on a business' s fortunes. So in the absence of delivering anything definitive about the economy, we continue instead to offer semi-annually just some of our bigger-picture observations that help us frame a n investment's potential outcome.

Surveying the economic landscape this year , we're inclined to consider the power of myth to explain the inexplicable. The American author Joseph Campbell considered myths to be public dreams, and we see both public officials and private investors engaged in some serious flights of fancy. Perhaps believing in myths is the only means to cope with the actions of the few being taken for the many. 

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