Dear Shareholders:
The stock market had a strong third quarter. The domestic S&P 500 increased 7.71% while the MSCI ACWI increased a lesser but still admirable 4.28%. Growth continues to lead the way with the S&P 500 and MSCI ACWI Growth indexes increasing 9.28% and 4.56%, respectively for the third quarter. Their value counterparts underperformed (again), with the S&P 500 and MSCI ACWI Value indexes each increasing just 5.86% and 3.98%, respectively. The FPA Crescent Fund (“Fund”) returned 4.15% in the quarter, about in line with the value indexes.
Crescent’s long equity book has performed more or less with the value indexes in the third quarter and the year-to-date periods.
Portfolio Commentary
The performance contribution from the top five holdings versus the bottom five was a net benefit in the third quarter and year-to-date.
We report performance by top and bottom securities in the portfolio over short time frames as a matter of convention and client preference. This data frequently reveals nothing more than a chart of recent weather would, as shares of public companies move around a lot more than the value of their underlying businesses.
We have little idea where sentiment might cause any security to trade in the near term. Business value and stock price should converge over time. We therefore prefer the more sapient pursuit of understanding and valuing businesses, and that is what we hope our commentaries will convey.
The table above holds some good examples of why one should not focus too much on near-term price action. Year-to-date, Arconic (ARNC, Financial)’s stock price performance has landed it among the bottom five securities in the Fund’s portfolio. It was in a similar position in the first quarter, and was joined there by Nexeo (NXEO, Financial) in the second quarter as well. Yet, here we are one and two quarters later, and each of these companies was a top five contributor to the Fund’s performance, collectively adding 1.04%.
We will be sure to address any significant permanent impairment of capital – the more significant the impairment, the more robust the discussion – as has been the case in the past. Over the last quarter century, however, our errors have really been more of omission than commission. For example, we failed by not owning Amazon (AMZN, Financial) but did avoid the melt-down in retailers whose businesses were harmed by the disruptive distribution model perfected by Amazon, as we have discussed previously.
We write longer letters discussing markets and economy at mid-year and year-end. Our more global views, which can be accessed here, have not changed since last quarter.
Respectfully submitted,
Steven Romick (Trades, Portfolio)
Portfolio Manager
October 25, 2018
1Source: FPA, Morningstar. The table above shows the performance of the long equity segment of the Fund only and is presented gross of investment management fees, transactions costs, and Fund operating expenses, which if included, would reduce the returns presented. Please refer to page 1 for overall net performance of the Fund since inception. 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.
2. Reflects the top contributors and top detractors to the Fund’s performance based on contribution to return for the quarter and year-to-date. 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 or year-to-date. A copy of the methodology used and a list of every holding’s contribution to the overall Fund’s performance during the quarter and year-to-date 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. Past performance is no guarantee of future results.
Important Disclosures
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.
