“Patience, a long-term focus and avoiding the fads are key for successful investing. Some of the most successful stock investors of the last few decades in the U.S. aren’t known for finding the latest and greatest.” –Â Steven Romick
One of the successful investors Steven Romick (Trades, Portfolio) is referring to is the legendary Warren Buffett (Trades, Portfolio). And, clearly, Romick aims to remain among that group.
While he takes a contrarian stance, that strategy is underpinned with a strong value orientation and an aversion to unnecessary risk.
He has been prepared to sacrifice short-term results in order to post gains over the full market cycle, even if that takes 10 years. As Romick says of Buffett and others, including himself, “They won by not striking out rather than by hitting grand slams. In other words, they won by not losing – emblematic of our approach.”
Who is Romick?
Romick earned a B.S. in education at Northwestern University, then started his financial career in 1985 as a consulting security analyst for Kaplan, Nathan & Co.
In 1990, he went out on his own by founding Crescent Management. His contrarian mandate was to find low risk/high return investments that were out of favor with various areas of capital markets.
Romick started with his Contrarian Value Strategy in 1990 and followed up with the mutual fund Crescent in 1993. He joined First Pacific Advisors (Trades, Portfolio) in 1996, and at that time his Crescent Fund became the FPA Crescent Fund.
FPA reports the fund has been named by Morningstar as having the best risk-adjusted returns of all domestic mutual funds with more than $1 billion of assets and managed by the same party since inception. Romick received the Morningstar 2013 U.S. Allocation Manager of the Year award and was nominated for the Domestic Manager of the Decade Award in 2009. The fund currently enjoys a Morningstar 5-Star rating.
(Biographical information from the InsidersForum and his May 31 commentary, titled "Two Decades of Winning by Not Losing.")
Romick now has more than 30 years of investing in his own style, and his flagship fund, FPA Crescent, has been operating more than 20 years and winning numerous honors.
What is First Pacific Advisors?
FPA, as it is known, is an institutional money management firm based in Los Angeles. At the end of the first quarter, it managed approximately $30 billion worth of assets. It had a staff of 83, including 31 investment professionals.
According to the firm’s Web site, it was founded in 1954 as Shareholders Management Company but was renamed First Pacific Advisors in 1976. In 2006, the firm's professionals bought the firm from its corporate parent, Old Mutual U.S. In 2011, the firm adopted FPA as its official firm name.
The Web site reports the firm manages seven FPA funds across three categories:
Equity funds
- FPA Capital (FPPTX): Small/Mid-Cap (U.S.).
- FPA International Value (FPIVX): All-Cap (ex. U.S.).
- FPA Paramount (FPRA): Multi-Cap (Global).
- FPA US Value (FPPFX): Multi-Cap (U.S.).
Fixed income
- FPA New Income Inc.: Investment Grade and Noninvestment Grade Debt (U.S.).
Multiasset
- FPA Crescent: All-Cap Equities and Noninvestment Grade Debt (Global).
- Source Capital: Multi-Cap Equities (Global) + Investment Grade and Noninvestment Grade Debt (U.S.).
Romick is portfolio manager for the FPA Crescent Fund, Source Capital Inc. and the FPA Multi-Advisor Strategy. He is also a partner in the firm, which continues to be owned by its management and staff.
As an institutional manager, FPA serves major investment pools, including mutual funds and pension funds. To do that, it offers a range of funds, each designed to fit within an institutional portfolio.
Romick’s investment philosophy and strategy
The firm’s philosophy starts with a simple, one-sentence paragraph: “We are absolute value investors.”
Beyond that, the Form ADV Part 2A description of the philosophy goes on to say that Contrarian Value is a unique and advantaged strategy. That’s because “we have an unfettered mandate, we invest on an absolute basis, we consider the macroeconomic environment, and we have a long-term orientation.”
They go on to describe this philosophy in more detail:
- Absolute value investing: This means genuine bargains, a compelling relationship between risk and reward, on an absolute basis. They reject the idea of buying on the cheap; instead, they insist that the stock be available at a substantial discount to the intrinsic value.
- An unfettered mandate: The fund manager can use any security; common stocks are just the beginning. As they say, unlike most money managers, they can invest almost anywhere, using almost any instrument. In other words, there are no geographic or asset allocation boundaries.
- A long-term focus: Romick and his colleagues think in terms of market cycles lasting five to seven years. Within that context, they are prepared to accept underperformance in the short term (quarters or less). Further, they believe that what happens in less than market cycle periods is outside their capability and concern.
From a strategic perspective, Romick has three goals:
- Generate "equitylike" returns over the long term. Equitylike refers to the returns provided by broad equity benchmarks such as the Standard & Poor's 500 and Russell 3000.
- Take less risk than the market: “We cannot eliminate risk, but we seek to identify it, understand it, minimize it and be adequately compensated for it.”
- Avoiding the permanent loss of capital is a third key imperative and is considered on a portfoliowide basis.
To illustrate the validity of his philosophy and strategy, Romick suggests investors consider the five-year period that began on Jan. 1, 1998, in the period leading up to the bursting of the dot-com bubble. He says they tilted to smaller companies and stayed away from the booming internet stocks. As a result, they underperformed the S&P 500 by nearly 60% over the two years before Jan. 1, 2000, shareholders deserted them, and Crescent lost 90% of its assets. Romick wryly notes of the shareholders, “Maybe more would have left, but we figured some of them might have forgotten they had invested with us.”
Over the next three years, of course, those that fled must have rued their decisions. At the end of 2002 (after five years), the results looked like this for shareholders who invested $1,000 at the beginning of 1998:
- Those that stayed with Crescent would have a balance of $1,409 (a gain).
- Those who invested in the S&P 500 instead would have a balance of $972 (a loss).
- Those who capitulated at the end of 1999 and invested in the S&P 500 at the beginning of 2000 would have a balance of $625 (a loss).
Turning to process, they start by establishing five categories: Long Equity, Short Equity, Credit, Liquidity and a smaller “Other” category. That’s followed by a lot of reading and analysis as they look for bad news and other out-of-favor circumstances, all within the realm of business and situations they understand. With the field narrowed, they do more research to confirm the theses that led them to their original shortlist picks. In addition, they consider the macro environment.
The guru elaborates further with comments in the first-quarter Commentary: "Two Decades of Winning by Not Losing."
- The idea of "not losing" has two sides: the things you do (commission) and the things you do not do (omission).
- As an example of a successful omission, he references a 2015 speech. In it, he talked about avoiding W. W. Grainger Inc. (GWW, Financial), an American industrial distributor with a gross margin of 43% or more. Romick said it was “an unusual margin for a company that exists to move a widget from one warehouse to another. With such a large pricing umbrella, it’s no wonder that Amazon (AMZN, Financial) has targeted industrial distribution as a sector ripe for the picking.” Two years later, he sees Grainger missing its earnings in three of eight quarters, revenues below forecasts, margins tightening by 3% and earnings down some 15%.
- As an example of an unsuccessful omission, he says he regrets not buying Amazon a few years ago.
- Further, he notes innovative technology is disrupting businesses fast than ever. Because of that, a company is expected to last just 14 years on the S&P 500, compared to 25 years in the past. Romick says he wants to avoid companies whose businesses face such disruption challenges because they will become the worst performers in coming years.
- Investment discussions, he says, should be framed in terms of the long term, which makes daily decisions easier, and “Sometimes, it means that we do nothing. For some, that’s hard to do and for others it’s impossible.”
- Romick says bull markets can lead to complacency, taking on more risk in their portfolios in an attempt to maximize returns.
Shades of Buffett, who summed up his investing wisdom in two rules: Rule No. 1: Never lose money; Rule No. 2: Never forget Rule No. 1. Romick has developed his own approach to avoiding losses, an approach that emphasizes a long-term approach and an understanding of risk and how it can be managed.
Current holdings
Financials held the biggest proportion of the FPA Crescent Fund at the end of the first quarter of this year, according to GuruFocus. It also reports that these were the top 10 funds at the end of the first quarter:
- Oracle Corp. (ORCL, Financial) 7.47%.
- Nuveen Pennsylvania Municipal Value Fund (NPN, Financial) 5.95%.
- United Technologies Corp. (UTX, Financial) 5.5%.
- Citigroup Inc. (C, Financial) 5.22%.
- American International Group Inc. (AIG, Financial) 5.14%.
- Aon PLC (AON, Financial) 4.99%.
- CIT Group Inc. (CIT, Financial) 4.98%.
- Bank of America Corp. (BAC, Financial) 4.66%.
- Leucadia National Corp. (LUK, Financial) 4.4%.
- Arconic Inc. (ARNC, Financial) 4.21%.
Should the Fed allow significant increases in interest rates, and should the current political promises transpire, Romick is well positioned. Otherwise, his positions in technology may provide long-term potential.
Performance
GuruFocus reports that over the five-year cumulative, Romick earned an average of 9.2% per year, which trailed the S&P 500 by an average of 5.5% per year.
Over longer cumulative periods, Romick’s record was stronger against the benchmark (excess over the S&P 500 is shown in brackets):
- 15 years: 8.7% per year (2.0%).
- 20 years: 9.2% per year (1.5%).
In "Two Decades of Winning by Not Losing," Romick offered these perspectives on his performance:
- When the S&P 500 has a trailing five-year return above 10%, the FPA Crescent Fund has underperformed 87% of the time.
- When the S&P 500 trailing five-year returns were between 0% and 10%, his fund beat the benchmark 98% of the time.
- When the market declined, delivering negative returns in five-year periods, the FPA Crescent Fund beat the benchmark 100% of the time.
Romick notes that the FPA Crescent has had a positive record in every rolling five-year period, unlike the S&P 500.
Romick’s comments on his performance highlight how differently active managers fare in bull and bear markets. They also highlight the difference between looking at individual years versus looking at the longer term.
Conclusion
Success, for Romick, is never something that happens overnight, or even over a couple of years. It is the result only over the course of a market cycle, which often means seven to 10 years.
The strategy has worked. He has posted S&P 500-beating results for longer cumulative terms and is well positioned should the market end the long bull run that began more than eight years ago.
Romick demonstrated the strength of his convictions by staying the course during the dot-com bubble and burst. And those few investors who stuck with him were rewarded by the time the cycle had played itself out.
Disclosure: I do not own shares in any of the companies listed in this article, nor do I expect to buy any in the next 72 hours.
