At the recent Morningstar Investment Conference in Chicago, FPA Crescent manager Steve Romick discussed his 30 years managing the fund and his evolution as a value investor, telling his audience that he’s “come to appreciate the competitive advantage of a business,” favoring “moats” over “cigar butts,” reports an article in CityWire. Shifting away from the practice of labelling the cheapest stocks as “value” and higher-quality stocks as “growth,” Romick told the crowd that he’s realized “there is no bright line between growth and value.”
Many of the stocks that were labeled as cheap were low-quality companies that eventually disappeared, while stocks that were more expensive and considered growth by some were actually a greater value because of their future potential. Early on in his career, Romick said he “wouldn’t have been comfortable buying Microsoft and Google,” though he’s now come to recognize that a successful investing strategy is to buy a very profitable company that has an edge over its competitors for a reasonable price and hold onto it for the long haul. Indeed, that evolution has caused some Crescent investors to question whether the managers were still considered value investors, to which Romick responds that “being a value investor is insisting on a margin of safety, not just buying stocks with low multiples,” according to the article. Currently, 5% of Crescent’s holdings are a combination of Alphabet’s A-shares and C-shares, which they bought in 2012 and 2015, respectively.
Crescent also bought interest rate derivatives for the first time last year, where a fixed interest rate is exchanged for a variable rate on a set principal amount—something that certainly paid off in 2022—as well as Yen swaps as the dollar was surging. But though Romick has waded into some new waters, one thing he’s always on the lookout for is distressed debt, which he’s reserved the non-stock portion of Crescent for rather than allocating more to bonds. As of the end of March, 65% of Crescent’s $8.9 billion fund was in stocks, roughly 29% was in cash, and only 2.6% was in bonds. That allocation will stay put, Romick says, given the “lack of opportunity in high yield and higher quality businesses,” the article quotes.