A Great Fund for a Nervous Market

In the midst of the housing crisis, Steven Romick wondered whether there was any value in the avalanche of bad mortgages. He ended up putting almost 4% of the assets of FPA Crescent (symbol FPACX), the fund he has managed since 1993, into a handful of heavily discounted home loans. A firm he partnered with services the mortgages.

That kind of outside-the-box thinking is what makes Romick, 47, so good -- and so different from more-conventional fund managers. “We go anywhere,” he says. “Our goal is to generate stock-market-like returns with less risk than the market by investing across the capital structure.”

That means investing in common stocks, preferred stocks, bonds, convertible securities -- essentially any kind of investment you can think of. And, as Romick’s purchase of individual mortgages showed, investing in types of assets you may have never thought of. Romick also shorts stocks -- that is, makes bets that they’ll decline in value. He has never invested more than about 70% of the fund in stocks (Morningstar, the provider of Kiplinger’s fund data, puts Crescent in its “moderate allocation” category).

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Romick’s approach has produced exceptional returns in a rotten decade. Over the past ten years through August 16, the fund, a member of the Kiplinger 25, returned an annualized 10.7%. By contrast, Standard & Poor’s 500-stock index lost an annualized 1.3% over the decade. Yet FPA Crescent is one-third less volatile than the S&P 500. That helped limit the bleeding in the 2007–09 bear market, during which Crescent sank 27.9% while the S&P 500 plunged 55.3%. The fund yields 2.1%, and annual expenses are a reasonable 1.17%

Don’t look for Romick’s approach to do well in a roaring bull market. From June 1993 through February 2000, Crescent returned an annualized 9.9% compared with 20.6% a year for the S&P 500 and 11.7% for the average balanced fund. Don’t count on that kind of rip-snorting bull market again anytime soon.

Currently, about half of Crescent’s assets are in stocks. In addition to the home loans, the fund has 17% in corporate bonds, mostly the high-yield variety. That’s down from 30% in bonds when he was bearish on stocks. About 25% is in cash. And 5% is in shorts. “I’m trying to not make big bets one way or the other,” Romick says of his current stance. “I’m trying to play it cautious.”

Romick sees the economy “on a deflationary path to inflation.” The Federal Reserve, he believes, will continue expanding its balance sheet to stop deflation from taking root. “We’re likely to have more quantitative easing and bailouts of states,” he says. “I’m fearful that what the federal government does will create ugly inflation down the road.”

Romick likes blue-chip stocks. In 1999, the market value (price times number of shares outstanding) of the average stock in Crescent was $335 million. Today it’s $42 billion. Stocks of small companies, Romick warns, are selling at record-high price-earnings ratios relative to stocks of large companies. That kind of disparity won’t last forever.

Romick is also bullish on emerging markets. Emerging markets, he says, account for 40% of global gross domestic product, but their total stock-market value is in the low teens as a percentage of global stock-market value. Meanwhile, U.S. GDP is 24% of the world’s economic output, yet the U.S. represents 42% of the globe’s stock-market value, Romick says.

Romick has few direct emerging-markets investments, but he owns plenty of multinational companies that do increasing amounts of business in emerging markets. He says he and his team of eight analysts don’t spend enough time in emerging markets to invest in them intelligently.

Top Crescent holdings include insurance broker Aon (AON); Anheuser-Busch InBev (BUD), the world’s largest beer maker, now based in Belgium and trading in the U.S. as an American depositary receipt; Ensco (ESV), a London-based energy-drilling firm that also trades as an ADR; Johnson & Johnson (JNJ); Occidental Petroleum (OXY); and Wal-Mart Stores (WMT).

Investors should consider putting up to 20% of their assets into Crescent. The fund lets you, in a sense, outsource to Romick and his team the decision of when to increase or trim exposure to stocks. His record shows that he executes that tricky maneuver better than most -- and that his ability to select individual securities isn’t too shabby, either.

Steven T. Goldberg (bio) is an investment adviser.