FPA: Two Decades of Winning by Not Losing

A recent talk by FPA's Steven Romick.

On active investing:

For as long as I’ve been investing, it has generally been the case that just a few stocks drive these indices; and that these few stocks pull the lesser performing stocks along with them. The investing community has come to define this law of financial physics as “positive skew.” “Positive skew” now joins “active share” in that lexicon. 

FPA's active, go-anywhere strategy:

There’s risk to operating in our unconstrained idiosyncratic fashion. We won’t be fully invested at all times regardless of valuation. And, although we may be avoiding losers, there will be times when our winners aren’t keeping up with the market. This will periodically lead to relatively poor performance; and, we will invariably lose clients as a result. We will avoid whole sectors of the market for years, if not decades. We benefited by not owning technology stocks when they declined 78% from 2000 to 2003.5 It also helped that we didn’t own much by way of financials in the 2007 to 2009 time frame, as they collectively declined 76%.6 Since we aren’t closet indexers, our returns will therefore usually look vastly different than our benchmarks – for better and worse.

And on today's market environment - in which the fund is taking a cautious stance.

This brings us to today, with an impending third test due to come before too long – or, maybe too long, but one day. The S&P 500 is in its 99th month of a bull market – the second longest since 1926. The US market hasn’t had at least a 20% correction since 2009; while, the US economy is in its ninth year of economic expansion – the third longest since 1900.8 US stocks currently trade at historically high valuations, supported more by low interest rates than by earnings growth.

Winning by not losing - FPA's perspective on avoiding companies that are going to lose value.

Innovative technology is driving business transformation faster than ever before. As a result, the expected tenure of a company in the S&P 500 is expected to drop from 25 years to 14 years.26 We want to avoid those companies whose businesses are existentially challenged. Many of these will end up being the worst stock performers in the coming years. Since 1995, the worst performing 10% of stocks in the S&P 500 have detracted -3.3% on average annually from the S&P’s annual return, or 35% of that index’s annual average return. Sidestepping them would have been good for one’s financial health. 

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