Steve Romick, Manager, FPA Crescent Fund (FPACX)
Go-anywhere value investor
"Of the federal debt outstanding, 48% of Treasuries mature within two years. So $6.5 trillion to $7 trillion of new debt needs to be sold over that period. Maybe not in the next two years, but at a point, that could really jack up interest rates -- even without inflation. We expect rising rates and inflation in three years or so. We're also shifting our stock mix toward larger, more global businesses with great balance sheets and high returns on capital. And we're seeking protection against inflation. For example, we like Aon, the insurance brokerage firm, whose commissions will benefit from the appreciation of the assets, such as buildings, that their coterie of underwriters are insuring. We also like Occidental Petroleum, a misunderstood company with cheap, on-shore oil reserves in California and elsewhere. We have also been buying whole mortgage loans from the likes of Citibank, Recap and others. These loans are mostly delinquent, but we are purchasing them at a 35% to 40% discount to their appraised value -- a solid margin of safety."
Charles de Vaulx, Co-Manager, IVA Worldwide Fund (IVWAX)
Global bargain hunter
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"There is no doubt that the contraction of the U.S. debt bubble is deflationary. [Paying down debt decreases the supply of money.] However, policymakers now must decide who is going to suffer: debtors, creditors or both. Because so much of the U.S. debt is held by foreigners, it will be tempting to inflate away the debt. [Inflation decreases the value of existing debt.] However, you don't go from a deflationary contraction to inflation in one year -- it might take three to ten years. But even with this bleak outlook, U.S.- and foreign-stock prices are compelling. We have recently been shopping among well-capitalized U.S. technology companies, such as Dell. We like Sodexo, a French catering company with significant U.S. sales, because it can pass on rising costs if food inflation picks up. We also hold 7% of assets in gold. Right now, the currency market is deciding which currency is the ugliest: the dollar, the euro or the yen. Gold is appealing by default. As for risks, we believe long-maturity Treasury bonds are vastly overpriced."
Jeffrey Gundlach, Co-Manager, DoubleLine Total Return Bond Fund (DLTNX)
Mortgage-bond maven
"The next several years will be one of the most difficult periods we'll face in our investing careers. This is a time for preservation of wealth. For now, deflation and the burden of the debt overhang are ruling the markets. People have been living on borrowed money to aspire to a lifestyle beyond their means. Now we have to pay the price. Right now, the economy is living on government stimulus. My base case is either austerity now or we hit the wall with a debt crisis of our own later. Be prepared for much lower investment returns. Stay in long-term Treasuries, which don't pay much but at least preserve capital. But if global attitudes toward Treasuries change, sell immediately. In other words, if Treasuries, which should rally on recessionary news, sell off on economic weakness, you must act decisively and sell. For investors who require a higher-yield alternative to government issues, I would recommend Ginnie Mae bonds. Ginnie Mae pass-throughs yield more than comparable-maturity Treasuries and, unlike corporate bonds, have no default risk."
