FPA Crescent Fund 2Q 2017 Investor Letter

FPA Crescent just published its second quarter 2017 investor letter.

The letter briefly comments on the economy and markets. The high yield market in particularly only offers "return-free risk".

Part of our historical bread and butter has been finding opportunities in the high yield sector, but today we find the bread burned. The yield-to-worst of the US high yield market is a paltry 5.7%, while the EU high yield sector offers a pathetic 2.7%. Importantly, those yields are gross of some future default and recovery rates. If one were to look at the US as a proxy over the past thirty-five years, with an average default rate of 3.7% and recovery of 40.9%, the US gross yield would be reduced to a net yield of 3.5%. In Europe, the return would be negative.

The letter takes an in-depth look at FPA's long-running Naspers/Tencent pair trade. To date the trade has been going against the fund as the discount has widened significantly (with Tencent rallying far more than Naspers stock).

The letter also discusses loans to Sears Canada and FPA's portfolio of financial stocks. The basket of financial stocks has appreciated significantly and in FPA's view is no longer "dirt cheap".