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Mark H.:
2014 third quarter webcast. It is our goal during these calls to give you,
our stakeholders, a clear understanding of our current views as the team
discusses the portfolio, the market, and the economy.
It is our expectation that, with the appropriate consents, the audio,
transcript, and visual aspects of todays call will be posted on our website,
fpafunds.com, over the coming few days.
Momentarily you will hear from Steven Romick, Brian Selmo, and
Mark Landecker, the portfolio managers of our Contrarian Value Strategy,
which includes the FPA Crescent Fund. Steven has managed the FPA
Crescent Fund since its inception in 1993, with Brian and Mark joining
Steven as portfolio managers in 2013. Its my pleasure to hand it over to
Steven Romick.
Steven:
Thank you, Mark. As always, we just start the slide of our philosophy just
to highlight. And not to read every word on the page, but our goal is to
provide equity rates of return over time and to do so by avoiding
permanent impairments to capital.
If you look how weve accomplished that going back to our
inception, youll note that we actually have outperformed the market by a
reasonable margin. So weve actually exceeded our goal, and weve done
so, you can note here as well, with about a third less volatility.
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If you look at the performance through the end of the most recent
quarter, it shouldnt be any great surprise that we are consistent with what
we always say that were going to do. And we will generally lag in bull
markets and generally outperform in bear markets, and its exactly what
you see here, although again over time our goal is to do as well as
equities and do so while avoiding that permanent impairment in capital.
If you look whats actually happened in the most recent quarter,
youll note that there were top five winners and losers youll see on this
chart. And for the first time ever theyve exactly offset each other. We
didnt plan that98 basis points up and 98 basis points down. There
wasnt much news in any of these securities. Some of the winners were
out or ahead of Wall Street expectations, while some of the losers were
behind. (2:01) Nevertheless thee was really nothing of note that caused
us to deviate from our longer-term view in any of these companies, and
this quarterly price movement is nothing more than noise.
Within our broad charter, we have an ability to go long and short.
And sometimes a public company owns part of another, and we have the
ability to short these businesses out. So Ill give you an example from the
past. We were long Renault and short Nissan. Renault owned 44% of
Nissan and some other companies as well. In this case, we see a long
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a winner and a loser on opposite sides of the metrics that you see here,
and Naspers and Tencent Holdings. Thats one of these sub-investments
trades that we habitually make. The fact that it shows on both sides of the
tables misleading however because the Tencent gain, which was a short,
was entirely offset by the Naspers loss, which was a long. One really
needs to look at the net, which has detrimental impact of just five basis
points.
Just a couple words on Naspersits a South African Holding
company with a global portfolio of media and tech investments. Naspers
has a 34% stake in Tencent, which is a Chinese internet company. The
market values Nasperss stake in Tencent at $48 billion, but then only
value the entire parent company at $45 billion. So by going long Naspers
and shorting a proportionate number of Tencent shares, it effectively
allows us to create a stub at a negative $3 billion valuation. Now that
means that the market is effectively paying us to own Naspers exTencent, and we feel that Nasperss media assets are worth substantially
more than negative $3 billion.
If you look at our portfolio characteristics at the end of the third
quarter, nothing stands out as particularly different from the second
quarter, and we continue to have a portfolio that is somewhat larger cap
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than our historic average probably due to where the relative value is in the
marketplace, and you also note that our balance sheets are on average
far better. (4:02) Thats the most significant difference of this versus the
Index of the S&P 500 is that the debt-to-capitals a negative number.
The negative number basically means our portfolio of companies on
average have net cash. It doesnt mean every company; thats looking
across the portfolio.
Our allocations havent changed much. Exposure is running about
54% net. And within the portfolio, there have been some changes
however. Weve eliminated six long positions in the last year, and this
year to date weve added seven new long positions, which averaged
about 7% capital commitment.
What we see out there in the world today is nothing much different
than what we talked about in the prior few quarters. Were beginning to
sound repetitive we realize, but there isnt a lot new that we have. And
stocks dont look particularly cheap, and things were going our way for a
few moments. But that was, as it turns out, nothing more than ephemeral,
at least for the moment.
Im going to turn it over to Mark Landecker, whos going to talk
about an industry that we have some exposure to, and we felt that these
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Carlsberg, two of which we obviously own. Now before I get into more
details about the industry, Id like to set the stage to illustrate the
dominance of the Big 4, which in aggregate, as you can see form the top
of this pyramid, account for a whopping 50% of global volume.
Now if that wasnt impressive enough, you can see from this pie
chart that these same Big 4 companies account for a staggering 80% plus
of the global profit pool. So across all the world, these four companies
account for one out of very two beers that are drunk at weddings,
corporate functions, sporting events, who knows whereat home
watching the football game on the weekend. But given that they account
for more than three-quarters of the global profit pool, we think its not a
bad collection of companies to keep your eye on.
Now I mentioned earlier that the Big 4 benefit from tremendous
economies of scale, and the easiest way to observe this dynamic is by
looking at how the trend on return on tangible invested capitalthose are
the bars in blackhave increased from 17% in 2000 all the way up to
49% on average for the Big 4 in 2013.
Now the disparity between return on tangible invested capital in
black and total invested capital in green relates to goodwill that was
attributed to M&A. Now this goodwill was largely generated over the last
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overnight success but rather over-decade success, or actually multidecade success to be exact.
Those strong brand positions are nicely complemented by modest
private label penetration compared to other FMCG categories. And just to
be clear, FMCG stands for fast-moving consumer goods. Now I cant tell
you scientifically why private label beer share is low, but generally
speaking beer is drunk in a social setting, and its an emotional purchase.
And many people often identify themselves with the beer they drink.
So within the audience listening to this call today, Im going to
suggest that the wannabe Harley Davidson rider amongst us drinks Bud,
the young professional that wants to show that hes a man of the world
might drink Heineken, the actual man of the world who wants to show
everyone else he has money to burn drinks Stella, and the wannabe
surfers like myself and Steven drink Corona. (10:03) Now even if we didnt
personally manage to offend you with our stereotyping, our point is:
nobody wants to be the guy caught drinking cheap no-name beer
amongst friends.
Lastly, it also doesnt hurt that, unlike the typical FMCG product like
say toothpaste or mustard, beer actually changes the way you feel when
you consumer it.
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Now thinking back to that 50% average tangible return on invested capital for the Big 4,
its not just the income statement and high operating margins that drive
this result, but also the ability to sweat the assets on the balance sheet.
In fact, the beer industrys rather remarkable in that the majority of
market participants have negative working capital or on their way there.
Its actually pretty simple if you think about it: turn the inventory quickly,
get paid in 30 days or less by a fragmented group of customers, and
squeeze your suppliers, most of whom are selling you commodity inputs
of bottles, barley, and labels.
Now as for fixed assets, the industry has relatively modest CapEx
requirements at about 8% of sales on average, though this figures
demonstrably less for cash cow mature markets about 5% versus 1011%
for faster emerging markets.
Lastly, while volume growth is modest to nonexistent in mature
markets, much like other FMCG categories, its still positive on a global
basis due to the contribution from emerging markets. In fact, even mature
markets offer opportunities for favorable price mix movement. Looking at
Western Europe as a poster child for mature market, you can from the
chart on the left the volumes of the past decade or so have been
negative. However in looking at the chart on the right, you can see that the
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retail value of beer has still increased over the same period. Furthermore,
looking out over the past decade or so starting in 2005, you can see that,
for those members of the big four who separately report their Western
European EBIT margins, theyve actually risen in all instances, and some
cases quite materially.
(12:03) Now moving to specific names, weve owned AB InBev at
FPA since 2010, and we obviously continue to own the stock. We think
the company has a lot of attractive characteristics with a great CEO, great
cap allocation, and the largest market share and the worlds largest profit
pool. Now we bought the name at a very reasonable multiple, but its rerated with the market over the past few years. So when we looked for
additional exposure to the sector, we recently bought Carlsberg, which
well admit is not as qualitatively attractive as AB InBev, but it trades at a
demonstrably lower multiple and has its own attractions.
Ill now turn it back to Mark Hancock or Steven for Q&A.
Steven:
So as always, the program for Q&A is to take the calls that were
submitted in advance, and Ill pass it around between Mark, Brian, and
myself, and then take the calls that come over the transom that you can
send in via email real-time.
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impact AIG because AIG has indemnified the government for the terms of
the investment that the government made back in 2008.
In terms of how concerned are we, we are not terribly concerned,
but thats not to say that we dont think the arguments promulgated by
Greenbergs attorneys are without economic merit. But I would observe
that litigations difficult. I think AIG, when they decided not to participate in
the litigation, got an opinion from counsel that the case had a 20%
probability of success. You can assume that they hired counsel who
would give them a low estimate. So probably the probability of success is
slightly higher than that. But importantly there is an out for AIG in terms of
the indemnification theyve given to the government, and its an out that
relates to willful negligence or misconduct. And it would seem logical,
although certainly not a slam-dunk that, if Greenberg were to prevail, the
government would be found to be something in the way of either negligent
or willfully committing conduct.
So I think that theres two steps to the litigation, and its not
something thats overly concerning to us at this time.
Steven:
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apologies in advance. But our view of the economies of Russia and China
are admittedly less clear than our view of the U.S. economy. But thats
only a relative statement. We understand economics well enough well
enough not to make predictions. (16:00) We built our earnings models of
all the companies were looking at mindful that bad things can happen.
And when we invest, we generally believe that, should the worst occur, we
believe that we still wouldnt lose money over time. And Marks going to
come back to, a little bit later on the call, some of the specific Russia
investments that we have.
Im going to combine a couple of question here that relate to cash.
What is the range cash the Fund held through 2014? Whats the highest
level of cash the Fund has held since inception? When was the last time
you held this much cash and why?
So Crescent hit a peak liquidity at quarter-end in March 2006. That
was at almost 46%. And long-time shareholders will recall that we were
quite concerned at the time about the leverage in the financial system, the
aberrant use of derivatives, and irresponsibly lax lending standards. We
maintained at that time higher-than-average amounts of liquidity until the
2008/9 downturn when we were able to successfully recycle that cash into
new investments.
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Mark L.:
Steven:
If you knew Mark Landecker at all, the fact that hes quoting a very
expensive female clothing brand, you would find that incredibly amusing,
as we do. Nevertheless its incredibly accurate. We do what we do year-in,
year-out.
Again Im going to combine a couple of questions. To what extent
will you be using cash to buy equity that are Im not sure what its saying
here, but that were in the current downturn, its going to shorten it.
Given the significant cash position, are there any plans to deploy those
funds in the foreseeable future?
Now we look for good businesses trading at attractive valuations,
and attractive valuation takes into account the downside case. The
prospective investment always looks better if one avoids consideration of
the downside. As reasonably conservative and skeptical people, we just
cant do that. When we purchased our aluminum companies, for example,
we didnt count on aluminum returning to 2,700 bucks a ton. Instead we
asked ourselves what happens to the cash flow of the business if
aluminum remained mired at 1,700 dollars. So when the market was
going down, I think theres still wasnt consideration of the downside that
exists. We certainly were out there maintaining our exposures to the
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market. Our exposures did increase somewhat at that point in time, but it
isnt any kind of dramatic increase. And the market, as you know did not
stay down very long.
There is a question Im going to turn over to
Brian
Five days a downturn can make, right, but just not at 5%. Its
not terribly 1887. So, Mark, just talking about the U.S. dollar Im sorry,
Im going to skip this question because I actually dont understand the
question. My apologies.
Could you discuss your investment in Farmland? How do you do it?
Do you think Farmland is currently fairly valued allocation percentage?
Farmlands a really small investment. We parted with the group back in
2010 to buy a geographically diverse portfolio. At less than 30 basis
points, its hardly worth discussion, and Farmlands gone up a lot since
then. And its certainly more expensive than it was, although I would point
out one does need to look the values originally. And I think thats really all
were going to talk about Farmland given its negligible exposure in the
Fund.
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Steven:
More things we dont know. How have your Russian investments held up
over the past weeks in light of market declines? Since I wasnt able to
attend your Investment Day and I havent looked at transcripts or slides,
could you discuss your thesis and the balance of stocks purchased? Have
you actually done any company visits there?
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Say no again.
Steven:
Okay. When you make a decision to purchase something, what are the
steps involved in determining the amount of that purchase? What are the
factors that lead you to choose between a small, medium, or large
purchase? Well, theres a number of factors obviously that go into sizing a
position, and its so far from being an exact science. Business, quality,
valuation, downside risk, conviction, and upside all contribution to position
sizing. The better each of those is, the larger the position.
Heres another question asking about Crescents performance and
asking or stating that Crescents performance has declined why has
Crescents performance declined so drastically this year, drastically
underlinedthird quartile, well below its category average per
Morningstar? Morningstar has us in the moderate allocation group where
our peers generally have several bond portfolios. And, yes, were slightly
below average year-to-date with rates hitting new lows and bonds are
higher. We dont have this kind of bond portfolio and therefore we
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wouldnt benefit. But I should make clear that that made that prior
statement without having analyzed any of the portfolios of our peers.
More importantly, we never consider performance over such a
short timeframe. Thatll be a complete mismatch with our own investment
horizon for the investments we make. A partial year is totally irrelevant in
our view. If you think this year-to-date performance delta is drastic, I
suggest you just go back and look to see how we did in 98 and 99 when
we were more than 50 points behind the S&P 500 and mining the
cellarrelative to our peers for two consecutive years.
But if you have the confidenceIm not suggesting it was easy to
have maintained that confidence at that point in time but if you had that
confidence and stuck with us, you wouldve looked back three years later
and seen that we were more than 40 heads of the Index, (24:08) ahead of
the pack over the prior five years even including those two hideous
underperformance years of 98 and 99.
And Id like to direct you to our investment policy statement on our
website to ensure that you understand what we do and how we execute it.
We spent a lot of time writing this a number of years back so that
investors can understand exactly what theyre getting into when they
partner with us.
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Okay, if mid-cap stocks become bargain price down the road, will
FPA Crescent be too large to buy them? I can inequivocally [sic] state that
we absolutely retain the ability to buy mid-cap stocks. Its just something
we are able to do.
Mark L.:
And Id loop it into the previous question, which is around what weve
been doing recently. Most of the stocks weve bought an added to this
year are mid-cap stocks, and that certainly has been true in the last 30 or
60 days. And I think its
Brian:
It was just a question about some of the questions that came in. Were not
going to read it out loud, but were
Mark L.:
Steven:
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Mark L.:
So we dont own Tesco. (26:00) It was sold back in the second quarter,
and were generally not in the business of commenting on names we dont
own. But as for why we sold it, weve shared with the audience in the past,
we do low-base high cases. It was clear Tesco was trending to our low
case and actually probably more even below that to be honest. And so
when that became apparent, we sold it. The catalyst for that was probably
a meeting that Brian and I attended with the CEO, Phil Clarke where we
talked about what the economics of the business were going to be going
forward. And while we thought he was doing the right things, we generally
came to the conclusion amongst the group of us: your guess is as good
as mine. We thought that made us
Mark L.:
Yeah. And Phil included in that, I should say, the former CEO. So
between that, it just made it tough. We said we needed a larger margin of
safety to be able to stick around. It wasnt there.
Brian:
Id also point out to people that Tesco was not a successful investment for
us. At a very similar point in time we decided to exit the remaining stake
we had in Walmart. So you can thank that we tried to take some learnings
from one name and applied them across the portfolio.
Steven:
And despite being unsuccessful, I would point out that one should expect
unsuccessful investments in our portfolio. I mean, its part of investing. If it
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was easy, everything went up, then a lot of people would be able to do it.
We have things that dont work out, and well have our mea culpas along
the way. But as Mark stated, we build low cases, base cases, and high
cases, and we try and handicap them and hope and expect that theyll get
to that high case. We hope theyre at least be attractive in the base case,
but sometimes that low case does end up taking place. So its not entirely
outside the realm of expectations.
Mark, did you want to add something? Okay. There was a question
just in general about Alcoa and Im going to broaden the question out and
pass it off to you, Brian, and maybe just talk about the give an update
about the aluminum investment.
Brian:
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Steven:
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peak oil, and Mr. Munger may very well be correct. Far be it from me to
correct anything that hes saying. Hes obviously had terrific investment
success over many, many decades. However we prefer to develop an
investment thesis agnostic to the price of the underlying commodity. In
other words, the underlying security should be inexpensive even at current
commodity prices. So we prefer an increase in that price of the commodity
to be a free or at the very least inexpensive option.
A few other questions here as it relates to Russian commodities
basket continued to decline in the quarter. For how many months or years
are you willing to hold this basket of stock and endure the pain of a
decline? I think that statement, that question be made over any basket or
any company that is declining. But Im going to turn it over to Mark.
Mark L.:
So if you look at Crescent, its been around 20-plus years, our average
holding period circa 45 years. You shouldnt expect our patience or
holding period to be any different on the Russian names. We didnt buy
them because we thought we were going to make a quick trade next
quarter. I dont think weve actually ever bought anything thinking that
were going to make a quick trade. Its definitely better to be lucky than
smart. If we get lucky, thats fantastic, but thats not how we go about
managing the capital.
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Steven:
Microsoft represents 3.4% of the funds portfolio. What are your thoughts
on the new CEOs first steps in strategy? And theres a yeah, so Ill turn
it back over to you, Mark, as well.
Mark L.:
So we talked a little bit about this at the Investor Day and I think on some
other call. We view Satya favorably. Theres a lot of things we like. We
like the fact that hes on the public conference calls, which Ballmer maybe
hadnt been on for a decade from what I can recall. We like the fact
theyre talking about return on invested capital internally. We like the fact
that theyre embracing having a Microsoft ecosystem that enables
productivity for their users regardless of whether theyre working off of the
iOS Apple platform (32:08) Windows, etc., what type of device theyre on.
So we think hes doing a lot of good things. Were probably not unique in
that thought. Thats why you see the stock is doing a little better than a
few years ago when we were told we were idiots on these calls for owning
it. So now its a little well see how he delivers over the next few years,
but hes definitely enjoying a honeymoon period. And Id say were fans of
his from what weve read from afar at the moment.
Steven:
Brian, what are the catalysts in Owens Illinois? Are you in touch with their
board of directors? Would we go into more activist role?
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Brian:
Steven:
Thanks, Brian. Question this is really to you, Mark Hancock to get back
to people can call you on this, but do you expect large capital gain
distribution this year and in the future? Well, we certainly hope that well
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have large capital gain distributions in the future, so I can say that with
great expectation anyway.
All right, whats going to happen this year I think is I dont know
I cant I dont know the answer today. Its an answer that well be able to
get sometime over the course of November, early December third week
of November. So if you check back in with Client Service at that point in
time, theyll be able to give you some idea of that.
Can you discuss the investment in Meggitt and risk of the
aerospace cycle?
Mark L:
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margins when the cycle turns down because theyre giving away less
spare parts for free.
But that aside, if we look at something in the aerospace cycle or
any industry with a bit of cyclicality you should assume were not getting
involved because were more bullish than the bulls. Its probably because
were a little less bearish than the bears.
Steven:
Brian:
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Ill speak for Ill speak for all of us. We dont talk to Bob about these things
at all.
Mark L.:
The other thing to say is we generally if you think about the derivative of
why were holding cash, its not because weve got a view of the world and
what the markets going to do. It really always comes to the ability to find
bottom-up fundamental investments that also have some margin of safety
of purchase. So if we can find those, were going to get invested
regardless of what the pundits are saying about the global economy and
the macro. And if we cant find them and everyone says the worlds great
with rose-tinted glasses, the valuations are really expensive, youre going
to see cash just be higher as the nature of the fact cant buy things with a
margin of safety.
Steven:
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challenging to actually make that happen but would that have an effect
on asset prices? Yeah, probably. I mean, I dont mean to be terribly
equivocal. But if you go look at the short that we just put on this slide here,
you can see going back to from the markets downturn, you see the
S&P 500 plotted against what the Fed has put on its balance sheet.
(40:00) And you can see that asset prices have been lifted alongside
anyway in this examplealongside with the Feds balance sheet
ballooning. And this is just the S&P 500, but you can draw the same chart
and replace the S&P 500 with commercial real estate prices and a host of
other things in there as wellall kinds of asset prices. So, look, a higher
interest rate in and of them it depends on how you get there and why
youre getting there. But higher interest rates in and of themselves may
not be bad, but it could be.
Whats next, guys? Want to take two and three up there, Mark?
Mark L.:
Sure. Let me say these are questions about Russia. Were doing more
things have traded off, so on and so forth. So the Russian investments
account for about 1.5% of the portfolio, and our cost we are down high
single digit. I think the maximum weve spoken internally, and maybe
weve share thisI cant recallon conference calls probably dont see
Russia really being more than probably 3% of the portfolio in a similar
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simply because you said, oh, based on the WACC these things look
cheap.
Steven:
Hey, Brian, there are a couple questions in front of us on Citi Group and
Bank of America. One is #11. I dont know where the Bank of American
question went. It was
Brian:
I think maybe Ill just talk in generalities about the general financial thesis,
which is sort of the question is at. But the companies balance sheet that
we own, the balance sheets are very strong relative I think on an
absolute basis and certainly relative to any of those companies history, I
think they are all working through some challenges from the financial
crisis. As those challenges start to dissipate, we would see the earnings
power and return on tangible capital of those businesses shine through.
And as that happens, we would expect to receive some of the rewards as
shareholders, whether in the form of dividends or buybacks. And thats
our thesis on them.
Steven:
Theres a question: given the drop in oil prices, have you looked at any
companies in the energy sector, and do any appear attractive? And we
had at one point, as many of you know, much greater exposure to the
energy sector. And we dont have much exposure today relatively
speaking to energy companies, although a little bit.
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With the oil prices going down, I mean, obviously the stocks have
come down. (44:01) But theyre not to the levels where they reflect to
the statement that I had made earlier as to we want to be agnostic as to
the commodity price, there are a couple of companies that we have on the
list that were looking at. Theres one company thats active that is part of
another business and is going to be spun off. But there isnt a lot that that
were doing at these prices.
That actually leads to a larger question about the spinoff that was
asked. I mean, if you can scroll down please. Theres q question about
spinoffs and do spinoffs there is a trend towards company spinoff.
Madison Square Garden, Ferrari, do you believe that spinoff unleashes
companys value. I mean, look, companies have bigger companies
have spun off smaller companies for many, many decades, and at points
in time they can be somewhat orphaned. But theres a lot of smart people
looking at a lot of businesses, and theres people that run screen just on
spinoffs. Yes, value can be unleashed without question. But just like every
company we look at, we look at the opportunities discretely and make it a
determination. I wouldnt look at spinoffs and just say this is a category
that needs considered above all others.
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Mark L.:
I was just going to go back to the energy. Some of you may not have
heard us talk about E&Ps or the drillers on prior calls, but Ill say were
probably of the viewpoint these arent better-than-average businesses. If
anything, theyre maybe lower-than-average businesses over a cycle. And
because of that, we pay attention to them. We get involved, but its more
driven by price. Of the three of us, none of us has some strong affinity that
we feel we love them, need them, have to have them.
E&Ps generally dont earn their cost of capital over a cycle. Driller
generally earn about an average return on capital over a cycle. So if you
want to make a better-than-average return, you probably have to buy at a
lower-than-average price. And thats really where we might get interested,
but its really because theres a distress in the price. We dont have any
real need. Its not like a go head, Brian.
Brian:
Steven:
I mean, but to Marks point, I just want to highlight just to put a finer point
on that as well. I mean, if you have a business that has lower-thanaverage returns on capital and youre only getting ajust to keep the
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math simple and youre getting a 6% return at 50% of book, you get a
12% return. A 12% returns more attractive than a 6% return.
Do you guys have any thoughts on the craft beer industry? I guess
that dovetails with your questions on the your presentation on beer.
Brian:
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Steven:
You mentioned in your letter that due to correction FPA analysts were
excited to come to work again. Can you elaborate on the opportunity you
lacked till currently? (48:02) This is
Brian:
Im depressed again.
Steven:
Yeah. Were excited to come in there were five days that we were
excited at coming in. And theyve come back up, and nobodys excited
anymore, sadly. But that said, and then not to be too flip, we come in
everyday. Theres always something to work on. We need to be educated
on companies and industries and regions, and we spend our time reading.
If you were to walk through our office on any given day, youd see a lot of
people just sitting on their desks, in their chairs, on the floor, standing up
now as it turns out, and theres were like a library. We just like to read;
we like to learn. And I hope we at some point in time, when opportunities
present themselves as a function of price, were able to capitalize on that,
as we have been able to do in the past.
Mark L.:
Steven:
Oh, and by the way, Mark is not inviting you and Tuesday and Thursday.
Brian:
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Ill do the ADR. Theres a question: do you invest foreign securities in the
local market or ADR? Some of it just depends. There is a slight charge to
hold ADRs. Its not demonstrable, but youd maybe like to avoid it if you
can. However, if you think about some securities, it might just be when
you want to start buying it the local market opened, the ADR isnt, vice
versa. We dont have any hard and fast rules. So thats the extent of it.
Steven:
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I dont know if Brian and Mark have any books that were of
particular interest in the prior quarter.
Mark L.:
Brian:
Mark L.:
So well skip that. Question about Microsoft and Oracle, two of your
largest holdings. Theres a question about divergent performance.
Microsoft and Oracle, they do compete a little bit directly on databases,
but its not a large portion of Microsoft business. Brian and I were actually
chatting to the CFO of Oracle yesterday. And I mean, she even said they
actually view Or its actually sorry, shes now the Co-CEO, yeah. They
view themselves as much as sort of partners than anything else. And if
you go back and for example you listen to Larry Ellison at OracleWorld,
one of the few peers he had positive things to say about was Microsoft
where he said Satyas doing the right things and making progress.
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Mark L.:
maybe the largest what we can disclose. So, look, we like Oracle. And
if youd like to see an in-depth discussion, I believe we went through it
several quarters ago, and you could find the quarterly transcript that takes
one through the investment thesis, which largely hasnt changed.
Steven:
What didnt come clear in the discussion of the question was the premise
was that Microsoft was taking share from Oracle. And thats why Mark
was saying its not relevant.
Mark L.:
Brian:
I mean, I think a point worth noting is that were aware and our research
reflects the fact that smaller companies and mid-cap companies have
been underperforming on a mark-to-market basis. And I think that,
different from two or three years ago, a much greater focus of the
research efforts are on small- and mid-cap companies. It has not yet been
reflected in the portfolio, but it is in the work process.
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Mark L.:
We actually have some names that have been added would be smallcap companiesnot within the U.S., so these would be international. But
theres been additions year-to-date in that category, and even adding
most recently yeah, and mid as well.
Steven:
Brian:
Steve:
(54:07) Yeah, we shorted (XLE and XLP), when you comment on what
makes our cap allocation strategy superior, first off in the (XLE the XLP?),
we shorted out awhile back the Oxy in particular is in the midst of a
major restructuring. Youve seen they have a lot of different kinds of
assets around the world, and youve seen them sell off the domestic
assets. Theyre spinning off their California nonconventional assets. You
have them they owned a general partnership interest GP interest in
Plains All American Pipeline, and they sold a chunk of that. They have
more to sell there that they said that they would sell. Theyre going to sell
off a portion in the Middle East. Theres a bunch of capital theres a
bunch of M&A thats coming there. And so when that happens, we felt
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with the view that there should be some capital value creation as a result
of that versus these indices.
And CNQ weve owned for quite some time, and its also not a
terribly large position. It actually has worked out, and its about incredible
depths of reserves. And (what admittedly needs @ 55:28) for CNQ, one
needs higher oil prices out there for that to continue to work.
Mark L.:
So theres a question here about the research library of high quality stock.
How many companies do you have on the shelf today? Ill say generally
theres several hundred companies that we follow, if not more than that.
Theres different degrees of research thats been done on each. Some
have been fully worked up over time. Some we might meet with on a
regular basis once a year, were reading the transcripts four times a year,
were reading the transcripts of competitors on a regular basis, annual
reports, initiation (56:06). So there is some disparity between ones Ill say
that were about a week away on and some where we might need a little
bit longer to make sure we dot the Is and cross the Ts. But in the total
universe, Ill call it, of high quality stocks that we think wed be ready to go
in a fairly short order, it would be in the hundreds.
And then theres a question: was there high-quality stock that
dropped in price, then you updated your research in response to the price
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change, and you didnt buy as the fundamentals changed? I think Tesco
is probably Im not going to say we thought it was a compounded sort
of straddle as higher-quality. We (inaudible @ 56:42) sort of definitely
higher-quality than it was. We thought there was maybe value in the
(excess?) real estate, so on and so forth. And without a doubt our
assessment of the situation changed, and we actually didnt really buy
Tesco down even when it first started dropping Christmas ago or sorry,
January two years two, three years ago two years ago?
Brian:
Mark L.:
Brian:
Mark L.:
Brian:
10, yeah.
Steven:
(inaudible @ 57:45).
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Brian:
Mark L.:
Brian:
And I think its important to give the idea, or get at the concept, most ideas
are not generated spontaneously or something. We dont walk down the
stairs and all of a sudden, hey, Ive never heard of this company or this
industry. What happened? Its a new idea. I think theyre almost all at this
point things that weve thought about in one form or anotherwhether the
specific business, the industry, or the commodity. And so from seeing
something that is cheap to pulling the trigger can be very, very quick, but
its not kind of a de novo idea.
Steven:
I think, Mark, weve reached the hour mark. So any other questions that
theres just a few left If there are any other questions that havent been
answered that you want to get a response, then give Mark Hancock a call.
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Hell certainly get those answers to you, get you in touch with the right
person. So, Mark?
Brian:
Ill say just the one thing. So there is a question here, probably the person
who asked who made a comment about a question. Someone asked:
can you give an example of a good question? What insightful question
would like to see or suggest listeners should ask? I probably will just say
we do see a lot of questions about the economy. Generally speaking, we
dont have a house view on these issues. We dont spend more than five
minutes a quarter discussing these issues, and unfortunately we dont
have much we can do to help you when you do have these questions. We
can offer our thoughts, but theyre not worth the air that sort of comes out
of our mouth. Were really bottom-up investors at heart.
So I think another way to say it is: anything that helps you that is
not about the economy or an inherently unknown an unknowable is a
good question.
Steven:
(60:00) We try and answer all of these questions. We try and bring
everything back to philosophy and process. And so any question that
allows us to do that, that would be advantageous, we believe, to educate
our shareholders. Since we dont since analyzing the economy, for
example, is not part of our process, we just dont have a lot to say.
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Mark L.:
And the other thing we Brian and I were in New York this past week,
and we saw one of our peers at a very well known shop we hold in high
regard. Ill say Mr. Buffet holds in high regard and has in the past as well.
Thats a hint. And we both were commiserating that theres these public
conference calls, and people want you to open your kimono and talk
about why you love a company. And were all here hoping we get to add
to these companies on weakness, so the last thing we want to do is shine
a spotlight as to why we like a company because it may make it more
difficult for us to average down in the future.
That said, what were always trying to do in an intelligent manner
and to help you do your jobs to understand how your capital is being
managed is explain to you why we own what we do. Now were much
more comfortable doing that when we have full positions in a name. And
at that point, weve bought so much that all we really want to do is pray it
goes up not more than down. I think thats when were most amenable to
sharing. Its not that were trying to be evasive or dodge your questions.
Its just that really we wake up each day hoping these companies go down
rather than up. And I think because were a larger fund, maybe there are
some people who read these calls or listen to them (inaudible @ 61:29).
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Mark H.:
And with that, we will conclude todays conference call because the rest
could be dangerous. (62:00) Thank you all for listening today and
participating in our third quarter Crescent 2014 webcast. We invite you,
your colleagues, and clients to listen to the playback and review the slides
from todays webcast, which will be available on our website. I will
reiterate weve had a number of people ask us if slides will be available.
The audio and the visual aspects of day will be available on our website in
a few days. So you dont need to ask the question. They will be on
fpafunds.com in the days to come.
Following todays webcast, youll have the opportunity to provide
your feedback. We highly encourage you to complete this portion of
webcast, as we take into consideration your constructive criticism. Its
important to us to know what our clients think.
Please visit fpafunds.com in the future for webcast information
including our replays. We will post the date and time of the prospective
webcast during the latter part of each quarter and expect the calls, as is
the case today, to be held three to four weeks following each quarter end.
We hope that our shareholder letters, commentaries, and these
conference calls will help you keep you, our investors and advisors to our
underlying investors, appropriately updated about the Fund.
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