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August 27, 2011

The manager of the $6.7 billion FPA Crescent Fund (ticker: FPACX) is such a quick thinker that his speech can scarcely keep pace. That’s apparently good for his investors, beneficiaries of Steven Romick’s long and happy track record at the fund, which has returned 9.3% annually during the past decade as of July, versus 2.6% for the Standard & Poor’s 500 Index.

It wasn’t always thus. The Contrarian Value maven at First Pacific Advisors in Los Angeles confesses to stretches of underperformance, some of them lengthy. From early ’98 to 2000, shareholders redeemed nearly 90% of its assets. They missed the subsequent ascent. We are a three-quarters step forward, half-a-step back kind of manager. To do well over the long term, you have got to be okay underperforming for periods, Romick says.

Unlike other mutual-fund managers, Romick holds big slugs of cash. He can also range across the capital structure. Lately, he’s been buying high-quality big-cap stocks. Barron’s reached him by phone last week.

Barron’s . What were you up to the past couple of weeks?

When we look at a business, we look for companies to make good decisions for the long term, even if it negatively impacts the short term. — Steven Romick Manuello Paganelli

Romick: We’ve been buyers of stocks in the last couple of weeks. Back in 2008, we had a ton of cash we drew down, flexing up our portfolio with distressed debt and high yield, taking it from roughly 5% to 34% four to five months later. Our strength isn’t in being a macro investor and trading currencies or foreign bonds. But we think it’s important to have a macro backdrop to invest against. Just as importantly, it will drive us away from things we should avoid, which can be as important as the things you own. At times, it limits catastrophic risk. From 2005 to 2007, when we worried about unsustainable home prices and the overlevered consumer and overlevered financial institutions, we didn’t own banks, even if they looked cheap at 11 times earnings. Earnings were overstated.

What’s worrying you these days?

The thing that Standard & Poor’s got right in downgrading our country’s debt is that they recognized that fiscal policy is inextricably linked to political process. Nothing about this political process really invites confidence. We think economic growth at best will be slow. Growth expectations for the U.S. were overstated, because if you look at the stimulus, there was no way to know what the permanent benefits would be. My partner Bob Rodriguez calls it Red Bull economics. When we look at a business, we look for companies to make good decisions for the long term, even if it negatively impacts the short term.

The U.S. government doesn’t do that. They end up putting parks in that make constituents happy, but don’t replace the pipes underneath the roads, because you don’t see that. Our political process has been hijacked so that elected representatives and appointed officials are tempted to rewrite economic law based on political need rather than common sense.