FPA Crescent Fund Moves into Emerging Markets

The managers at FPA Crescent (FPACX) make no apologies for lagging the stock market over the past five years. The trio—Steve Romick, Mark Landecker and Brian Selmo—expect the go-anywhere fund's contrarian strategy to lag the broad market when stocks are hot, as they have been since the end of the financial crisis. But they also expect the fund to outperform by a large margin when times are tough.

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Over the long run, that's proved to be a winning combination. From Crescent's inception in 1993 through June 11, the fund, a member of the Kiplinger 25, has topped Vanguard 500 Index fund (VFINX) by an average of two percentage points per year. Over that period, Crescent turned a $10,000 investment into $93,191, compared with just $63,403 for the Vanguard fund, which tracks Standard & Poor's 500-stock index.

Crescent can invest almost anywhere in the world and in nearly any kind of asset, from stocks, bonds and cash to currencies and home loans. But the managers—Romick has been with the fund since its inception, and Landecker and Selmo became co-managers in 2013—tilt toward deeply out-of-favor sectors and try to buy stocks that they believe are trading at steep discounts to the value of the underlying companies. Because stock and bond prices have risen so much over the past year (most of the run-up in bonds has occurred in 2014), the trio have made few purchases. These days, 46% of the fund's assets sit in cash, Romick told clients on June 2, at FPA's annual investor day in Santa Monica, Calif.

But the managers have found a few pockets of opportunity. One surprising purchase recently: Lukoil (LUKOY), the Russian energy giant. (Symbols for Lukoil and other foreign stocks mentioned in this article are for the company's American depositary receipts.) Although many investors have abandoned the Russian market in the wake of the turmoil on the Ukraine-Russia border, Landecker says the crisis left the shares of Russia's biggest oil producer too cheap to ignore. Lukoil posed a safer bet than other Russian stocks, he says, because it has a long history of paying generous and rising dividends; the company's leaders are increasing their personal stakes in the company. Lukoil, he notes, is buying back its own stock. Moreover, Lukoil's products are exported throughout Europe, providing a revenue stream that is divorced from the ruble. So Lukoil's performance is less susceptible to a decline in the value of the currency than the typical Russian company.

Lukoil isn't Cresent's only foray into emerging markets. The managers also invested recently in two sister companies headquartered in Hong Kong, Jardine Matheson Holdings (JMHLY) and one of its businesses, Jardine Strategic Holdings (JSHLY). The pair are akin to a Chinese Berkshire Hathaway, in that they own businesses in everything from commercial real estate to insurance, manufacturing and retail. The two firms have a long history of delivering double-digit-percentage earnings growth.

The fund's biggest recent purchase, Alcoa (AA), is another good example of its contrarian style at play. Stock in the century-old, New York City-based aluminum company traded as high as $42 in 2007 but dropped below $8 last year as declining aluminum prices put pressure on profits. The share price got so low, in fact, that in 2013, the overseers of the Dow Jones industrial average ousted Alcoa from the index after a 54-year presence. But Landecker, Romick and Selmo considered multiple possible outcomes, from aluminum prices remaining depressed to prices rising with increased demand. In a worst-case scenario, the fund could lose 10% to 50% on the holding. But in a best-case scenario, the investment could triple, Landecker says. This attractive risk-reward trade-off made Alcoa worth buying in quantity. The stock is now a top ten holding and accounts for 1.4% of Crescent's assets.