FPA Queens Road Small Cap Value Fund Institutional Class · NASDAQ:QRSIX
FPA Queens Road Small Cap Value Fund Institutional Class — FPA Crescent Fund — Investor Day (2018)
123 slides from FPA Queens Road Small Cap Value Fund Institutional Class's investor day presentation, 2018
Slide 1: FPA Crescent Fund (FPACX)
L L C r s , i s FPA Crescent Fund (FPACX)o dv i c A c if P a i r s t Steven Romick, Mark Landecker, Brian Selmo F
Slide 2: Section I: Intro
L L C r s, i s o dv A Section I Intro c if ic P a Ryan Leggio, Partner s t Head of National Accounts and Senior Product Specialist F i r Not for Redistribution 2
Slide 3: Differentiated performance across multiple market cycles
Differentiated performance across multiple market cycles L L C ■ 155 peers run by same manager since 2000 r s, o 155 i s ■ 55 funds had >90% of return and <60% of drawdown during v 2000-2007 cycle ■ 3 funds have been able to accomplish it this market cycle A d ic (October 10, 2007 to March 31, 2018)
Slide 4: Section II: Philosophy and strategy
L L C r s, i so dv A Section II ific Philosophy and strategy c P a i rs t F Not for Redistribution 4
Slide 5: P t s
L L C r s, i so dv ic A c if Pa i rs t F Not for Redistribution 5
Slide 6: FPA Crescent investment objective and philosophy
FPA Crescent investment objective and philosophy Investment objective ■ The FPA Crescent Fund seeks to generate equity-like returns over the long-term, take less risk than the market and avoid permanent L L C s, impairment of capital. r Philosophy o ■ Flexible approach i s ‒ We utilize a go-anywhere
Slide 7: FPA Crescent investment objective and philosophy
FPA Crescent investment objective and philosophy Investment objective ■ The FPA Crescent Fund seeks to generate equity-like returns over the long-term, take less risk than the market and avoid permanent L L C s, impairment of capital. r Philosophy o ■ Flexible approach i s ‒ We utilize a go-anywhere
Slide 8: Opportunity set
Opportunity set L Morningstar Fund Category L C s, Typical asset classes used to accomplish FPA Crescent Allocation – 50% World Allocation World Stock Long-Short r goal to 70% Equity Equity s o U.S. Equities (All Cap) v i Developed Equities (All Cap) d Emerging Market Equities (All C
Slide 9: FPA Crescent investment objective and philosophy
FPA Crescent investment objective and philosophy Investment objective ■ The FPA Crescent Fund seeks to generate equity-like returns over the long-term, take less risk than the market and avoid permanent L L C s, impairment of capital. r Philosophy o ■ Flexible approach i s ‒ We utilize a go-anywhere
Slide 10: P t s
L L C r s, i so dv ic A c if Pa i rs t F Not for Redistribution 10
Slide 11: FPA Crescent investment objective and philosophy
FPA Crescent investment objective and philosophy Investment objective ■ The FPA Crescent Fund seeks to generate equity-like returns over the long-term, take less risk than the market and avoid permanent L L C s, impairment of capital. r Philosophy o ■ Flexible approach i s ‒ We utilize a go-anywhere
Slide 12: P t s
L L C r s, i so dv ic A c if Pa i rs t F Not for Redistribution 12
Slide 13: FPA Crescent investment objective and philosophy
FPA Crescent investment objective and philosophy Investment objective ■ The FPA Crescent Fund seeks to generate equity-like returns over the long-term, take less risk than the market and avoid permanent L L C s, impairment of capital. r Philosophy o ■ Flexible approach i s ‒ We utilize a go-anywhere
Slide 14: Investment types – equity
Investment types – equity Compounders ■ The world’s great businesses. We think of compounders as infinite duration bonds with rising coupons. L L C s, ■ We think of long-term returns on compounders equal to: r ‒ Long-term return to owner before capital allocation = Owner earnings + Long-term organic
Slide 15: Investment types – equity
Investment types – equity Compounders ■ The world’s great businesses. We think of compounders as infinite duration bonds with rising coupons. L L C s, ■ We think of long-term returns on compounders equal to: r ‒ Long-term return to owner before capital allocation = Owner earnings + Long-term organic
Slide 16: Investment types – equity
Investment types – equity Compounders ■ The world’s great businesses. We think of compounders as infinite duration bonds with rising coupons. L L C s, ■ We think of long-term returns on compounders equal to: r ‒ Long-term return to owner before capital allocation = Owner earnings + Long-term organic
Slide 17: Investment types – high yield/distressed
Investment types – high yield/distressed Performing Credits ■ Credit instruments expected to remain performing. Interest and principal recovered under all reasonable worst-case scenarios L L C s, ■ Generally purchased at >10% yield-to-maturity, or Libor +700 s o r i Stressed Credits v ■ Credits with
Slide 18: Investment types – high yield/distressed
Investment types – high yield/distressed Performing Credits ■ Credit instruments expected to remain performing. Interest and principal recovered under all reasonable worst-case scenarios L L C s, ■ Generally purchased at >10% yield-to-maturity, or Libor +700 s o r i Stressed Credits v ■ Credits with
Slide 19: Investment types – high yield/distressed
Investment types – high yield/distressed Performing Credits ■ Credit instruments expected to remain performing. Interest and principal recovered under all reasonable worst-case scenarios L L C s, ■ Generally purchased at >10% yield-to-maturity, or Libor +700 s o r i Stressed Credits v ■ Credits with
Slide 20: Investment process
Investment process Portfolio Management L L C r s, s o Source Ideas Quick Analysis Full Analysis Review and Decision i Attractive v Quality Business Universe Qualitative Description Fundamental, Bottom Up Portfolio Construction d Value Oriented Valuation - Business - Equity A Publication
Slide 21: Investment Team
Investment Team Portfolio Managers L L C s, Steven Romick Mark Landecker Brian A. Selmo o r Managing Partner Partner Partner Portfolio Manager/ Research Analyst Portfolio Manager/ Research Analyst Portfolio Manager/ Director of Research v i s A d ic Andrew August Scott Cendrowski Sean M.
Slide 22: P t s
L L C r s, i so dv ic A c if Pa i rs t Source: McLaud F Not for Redistribution 22
Slide 23: Section III: Performance
L L C r s, i so dv A Section III Performance c ific P a i rs t F Not for Redistribution 23
Slide 24: Performance
Performance Trailing Performance (%) L L C Market Cycle Performance , Inception* 20 15 10 Years 5 3 1 YTD QTD 3/25/00- 10/10/07- s As of Date: 3/31/18 r Years Years Years Years Year 10/9/07 3/31/18 FPA Crescent 10.23 8.23 9.26 7.27 7.44 5.63 5.74 -0.98 -0.98 14.70 6.66 o S&P 500 9.49 6.46 10.10 9.49
Slide 25: The Fund has delivered on its objective for years
The Fund has delivered on its objective for 24 years Investment objective: The FPA Crescent Fund seeks to generate equity-like returns over the long-term, take less risk than L L C , the market and avoid permanent impairment of capital. Market-Like Returns Upside Downside Participation o r s Lower V
Slide 26: Fund objective met thus far in current market cycle
Fund objective met thus far in current market cycle Investment objective: The FPA Crescent Fund seeks to generate equity-like returns over the long-term, take less risk than L L C , the market and avoid permanent impairment of capital. Market-Like Returns Upside Downside Participation o r s Lower Vo
Slide 27: 5-year rolling returns by market type since inception
5-year rolling returns by market type since inception 30% Down Market Normal Market Robust Market L L C s, FPA Crescent 20% o r 10% v i s 0% d -10% A -10% 0% 10% 20% 30% ic S&P 500 c if Down market Normal market Robust market a 5yr average return 5yr average return 5yr average return P below 0% 0-10
Slide 28: Active stock selection drives differentiated returns
Active stock selection drives differentiated returns L L C 2007 - Q1 2018 2017 2016 2015 2014 2013 2012 r s, 2011 2010 2009 2008 2007 o 2018 Q1 i s CAGR dv FPACX long equity 10.61% -0.96% 21.07% 15.57% -0.64% 13.64% 38.12% 17.77% 4.58% 22.48% 38.66% -38.27% 11.47% A S&P 500 7.96% -0.76% 21.83% 11.96
Slide 29: Maximizing the investor experience
Maximizing the investor experience FPA Crescent vs. Index Funds Trailing Ten Years L L C r s, o Strategy Fund Investor Standard Max i s Return Return Deviation Drawdown v FPA Crescent d 7.27% 7.14% 9.86% -28.84% A Average S&P 500 Index Fund1 9.34% 6.38% 15.04% -46.40% ic MSCI World Index Fund2 3.66%
Slide 30: Section IV: Process
L L C r s, i so dv A Section IV Process c ific P a i rs t F Not for Redistribution 30
Slide 31: Leaning into the wind – dynamic sector exposure
Leaning into the wind – dynamic sector exposure L L C , Corporate Credit Energy o r s Mortgages v i s Healthcare Ad ific Old Tech Consumer Brands a c Financials s t P Municipal Bonds F i r Not for Redistribution 31
Slide 32: Corporate credit – bad headlines
Corporate credit – bad headlines L L C r s, i so dv ic A c if Pa i rs t F Not for Redistribution 32
Slide 33: Credit – some FPACX current and past investments
Credit – some FPACX current and past investments L L C r s, i s o dv ic A c if Pa i rs t F Not for Redistribution 33
Slide 34: Opportunistic exposure – corporate credit
Opportunistic exposure – corporate credit BofA Merrill Lynch US High Yield Master II Option-Adjusted Spread vs. L L C , FPA Crescent High Yield/Distressed Exposure r s 20% 35% o Effective Yield and Option-Adjusted s 18% i 30% v 16% % of Assets in High Yield d 14% 25% A 12% 20% Spread ic 10% f 15% i
Slide 35: Corporate credit – good headlines
Corporate credit – good headlines L L C r s, i so dv ic A c if Pa i rs t F Not for Redistribution 35
Slide 36: Energy’s late 1990 negative headlines
Energy’s late 1990 negative headlines L L C r s, i so dv ic A c if Pa i rs t F Not for Redistribution 36
Slide 37: Opportunistic exposure – energy
Opportunistic exposure – energy S&P 500 Energy Sector Earnings Yield vs. L L C , FPA Crescent Energy Equity Exposure r s S&P 500 Energy Sector Earnings Yield (LHS) o 16% 18% s FPA Crescent Energy Equity Exposure (RHS) i 14% 16% v FPA Crescent Energy Equity d S&P 500 Energy Sector 12% 14% A 12% Earni
Slide 38: Energy – FPACX current and past investments
Energy – FPACX current and past investments L L C r s, i so dv ic A c if Pa i rs t F Not for Redistribution 38
Slide 39: Crescent’s energy holdings less expensive than sector
Crescent’s energy holdings less expensive than sector FPA Crescent Energy Holdings Weighted Earnings Yield vs. L L C , S&P 500 Energy Sector Earnings Yield r s FPA Crescent Energy Holdings Weighted Earnings Yield o 35% i s S&P 500 Energy Sector Earnings Yield v 30% d 25% A Earnings Yield ic 20% c if
Slide 40: Not everything we read proves useful
Not everything we read proves useful L L C r s, i so dv ic A c if Pa i rs t F Published 2005 Not for Redistribution 40
Slide 41: US oil production projection (circa 2011)
US oil production projection (circa 2011) L L C , US Oil Production: A Second Wind o r s v i s A d c if ic P a i r s t F As of December 31, 2011 Source: US Energy Information Administration (EIA) Not for Redistribution 41
Slide 42: Energy exposure increased along with expectation of weak production
Energy exposure increased along with expectation of weak production L L C , FPA Crescent Energy Equity Exposure vs. Global Daily Oil Production r s 18% 103,000 o Thousands of Barrels Per Day s FPA Crescent Energy Equity 16% i 98,000 v 14% 93,000 d 12% A Exposure 10% 88,000 ic 8% 83,000 if 6% c 78,00
Slide 43: Historical oil prices
Historical oil prices L L C , Crude Oil Prices: West Texas Intermediate (WTI) - Cushing, Oklahoma r s $160 i s o $140 v Dollars per Barrel d $120 A $100 f ic $80 c i $60 P a $40 s t $20 i r $0 F '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 As of March 31, 2018. Source: Federal
Slide 44: Mortgages – bad headlines
Mortgages – bad headlines L L C r s, i so dv ic A c if Pa i rs t F Not for Redistribution 44
Slide 45: Opportunistic exposure – whole mortgage loans
Opportunistic exposure – whole mortgage loans L L C , FPA Crescent Exposure to Residential Mortgages (Whole Loans) r s 2.5% FPA Crescent Residential Mortgage Exposure (LHS) 110 o FPA Crescent residential mortgage Markit ABX.AAA 2006-2 Index (RHS) i s Subprime Mortgage Price Index 100 v 2.0% d 90 A e
Slide 46: Mortgages – good headlines
Mortgages – good headlines L L C r s, i so dv ic A c if Pa i rs t F Not for Redistribution 46
Slide 47: Healthcare – bad headlines
Healthcare – bad headlines L L C r s, i so dv ic A c if Pa i rs t F Not for Redistribution 47
Slide 48: Opportunistic exposure – healthcare
Opportunistic exposure – healthcare S&P 500 Healthcare Sector Earnings Yield vs. L L C , FPA Crescent Healthcare Equity Exposure r s S&P 500 Healthcare Sector Earnings Yield (LHS) o 9% 14% s FPA Crescent Healthcare Equity Exposure (RHS) S&P 500 Healthcare Sector i FPA Crescent Healthcare Equity 8% 1
Slide 49: Healthcare – FPACX current & past investments
Healthcare – FPACX current & past investments L L C r s, i s o dv ic A c if Pa i rs t F Not for Redistribution 49
Slide 50: Crescent’s healthcare investments cheaper than sector
Crescent’s healthcare investments cheaper than sector FPA Crescent Healthcare Holdings Weighted Earnings Yield vs. L L C , S&P 500 Healthcare Sector Earnings Yield 12% FPA Crescent Healthcare Holdings Weighted Earnings Yield o r s s S&P 500 Healthcare Sector Earnings Yield v i 10% A d Earnings Yield
Slide 51: Healthcare – good headlines
Healthcare – good headlines L L C r s, i so dv ic A c if Pa i rs t F Not for Redistribution 51
Slide 52: Old tech– bad headlines
Old tech– bad headlines L L C r s, i so dv ic A c if Pa i rs t F Not for Redistribution 52
Slide 53: Opportunistic exposure – old, large-cap tech
Opportunistic exposure – old, large-cap tech S&P 500 Information Tech Sector Earnings Yield vs. L L C , FPA Crescent Net Information Tech Equity Exposure r s S&P 500 Information Tech Sector Earnings Yield o 8% FPA Crescent Information Tech Equity Exposure (RHS) 16% s S&P 500 Information Tech Sector
Slide 54: Old technology – FPACX current and past investments
Old technology – FPACX current and past investments L L C r s, i s o dv ic A c if Pa i rs t F Not for Redistribution 54
Slide 55: Crescent’s large cap tech holdings less expensive than sector
Crescent’s large cap tech holdings less expensive than sector FPA Crescent Information Tech Holdings Weighted Earnings Yield vs. L L C , S&P 500 Information Tech Sector Earnings Yield o r s FPA Crescent Information Tech Holdings Weighted Earnings Yield 30% s S&P 500 Information Tech Sector Earnings
Slide 56: Old tech– good headlines
Old tech– good headlines L L C r s, i so dv ic A c if Pa i rs t F Not for Redistribution 56
Slide 57: Consumer staples – bad headlines
Consumer staples – bad headlines L L C r s, i so dv ic A c if Pa i rs t F Not for Redistribution 57
Slide 58: Opportunistic exposure – consumer staples
Opportunistic exposure – consumer staples S&P 500 Consumer Staples Sector Earnings Yield vs. L L C , FPA Crescent Consumer Staples Equity Exposure r s S&P 500 Consumer Staples Sector Earnings Yield (LHS) o 8% 18% s FPA Crescent Consumer Staples Equity Exposure (RHS) i S&P 500 Consumer Staples Sector
Slide 59: Consumer Staples – Crescent’s current and past investments
Consumer Staples – Crescent’s current and past investments L L C r s, i s o dv ic A c if Pa i rs t F Not for Redistribution 59
Slide 60: Crescent’s consumer staples holdings less expensive than sector
Crescent’s consumer staples holdings less expensive than sector FPA Crescent Consumer Staples Holdings Weighted Earnings Yield vs. L L C , S&P 500 Consumer Staples Sector Earnings Yield r s FPA Crescent Consumer Staples Holdings Weighted Earnings Yield o 16% s S&P 500 Consumer Staples Sector Earning
Slide 61: Consumer brands – good headlines
Consumer brands – good headlines L L C r s, i so dv ic A c if Pa i rs t F Not for Redistribution 61
Slide 62: Financials – bad headlines
Financials – bad headlines L L C r s, i so dv ic A c if Pa i rs t F Not for Redistribution 62
Slide 63: Opportunistic exposure - financials
Opportunistic exposure - financials S&P 500 Bank Industry Price/Book vs. L L C , FPA Crescent Financials Equity Exposure r s 3.5 Price/Book Value (LHS) Net Financial Equity Exposure (RHS) 25% i s o Financials Price/Book Value 3.0 FPA Crescent Net Financials Equity v 20% d 2.5 A 2.0 15% f ic Allocati
Slide 64: Financials – some FPACX current and past investments
Financials – some FPACX current and past investments L L C r s, i s o dv ic A c if Pa i rs t F Not for Redistribution 64
Slide 65: Bank of America: evidence of an efficient market?
Bank of America: evidence of an efficient market? L L C , Share Price vs Tangible Book Value Performance r s $35 o Share price performance (LHS) s 118% i Tangible book value/share (RHS) v $30 d Share Price Performance Tangible Book Value / Share A 113% $25 if ic 108% c $20 P a 103% t $15 F i r s $10
Slide 66: Financials – good headlines
Financials – good headlines L L C r s, i so dv ic A c if Pa i rs t F Not for Redistribution 66
Slide 67: Section V: Market view
L L C r s, i so dv A Section V Market view c ific P a i rs t F Not for Redistribution 67
Slide 68: US economic expansion currently 3rd longest on record
US economic expansion currently 3rd longest on record L L C , Months of Economic Expansion r s 140 i s o 120 Duration (months) v 100 d 80 A 60 f ic 40 c i 20 a 0 s t P F i r Source: National Bureau of Economic Research. As of March 31, 2018. Not for Redistribution 68
Slide 69: Weak economic expansion
Weak economic expansion Cumulative Real GDP Growth Since Prior Peak L L C r s, i s o dv ic A c if Pa i r s t As of March 31, 2018F Source: JP Morgan Guide to the Markets Not for Redistribution 69
Slide 70: Lower rates = market fuel
Lower rates = market fuel L L C , 10-Year US Treasury vs. CAPE Earnings Yield r s 18 10-Year US Treasury Earnings Yield i s o 16 v 14 A d 12 ic 10 if 8 a c 6 P 4 s t 2 i r 0 F '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 As of March 31, 2018 Source: Shiller Not for
Slide 71: Higher rates = headwind
Higher rates = headwind L L C , 10-Year US Treasury vs. CAPE Earnings Yield o r s v i s A d c if ic Pa i rs t As of March 31, 2018 Source: Shiller, FPA F Not for Redistribution 71
Slide 72: What happens when the fuel runs out?
What happens when the fuel runs out? L L C , Components of S&P 500 return since 1982 What’s next? r s 12% 12% o 2.13% 11.10% i s 10% 2.45% 10% dv ? 8% 8% 6.45% A 6% 6% f ic 4% 4% c i 2% 2% P a 0% 0% i r s t F As of March 31, 2018. Source: Bloomberg. Not for Redistribution 72
Slide 73: Second longest equity bull market in history
Second longest equity bull market in history L L C , Longest US Bull Markets Since 1926 r s 120 100 i s o dv Duration (months) 80 ic A Average 60 f 54 i Months c 40 a 113 108 73 60 49 P 20 i r s 0 t Oct '90 - Mar '09 - Oct '62 - Aug '82 - Apr '42 - F Mar '00 present Nov '68 Aug '87 May '46 As of Mar
Slide 74: It has been a long, unprecedented rally
It has been a long, unprecedented rally S&P 500 Streaks (1975 – Present) L L C , A Once in 52 Years Event o r s 80 76 i s 70 dv 60 A 50 ic 41 Count f 40 i 34 c 30 24 a 20 17 t P 8 9 10 5 4 5 4 s 0 0 0 0 0 0 0 0 0 0 2 2 r 1 1 0 0 0 0 1 i 0 F -15 -14 -13 -12 -11 -10 0 1 2 3 4 5 6 7 8 9 -9 -8 -7 -6 -5
Slide 75: Global stock market highs
Global stock market highs L L C , S&P 500, MSCI EAFE, MSCI Emerging Markets Indexes o r s 3000 v i s 2500 A d 2000 ic 1500 1000 c if 500 P a i r 0 s t '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 ‘18 F S&P 500 Index MSCI EAFE Index MSCI Emerging Markets Index As of March 31, 2018 Source: Bloomberg No
Slide 76: Global bond yields have been declining
Global bond yields have been declining L L C , Bond Yields: US, Emerging Market, and Global ex-US r s 20 s o 18 v i 16 d 14 Yield to Worst A 12 ic 10 if 8 c 6 P a 4 t 2 r s 0 i '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '17 '18 F BBG Barclays US Agg BBG B
Slide 77: US CAPE Ratio has only been higher 3% of the time
US CAPE Ratio has only been higher 3% of the time L L C , Historic US P/E Using 10-year Average Earnings r s 50 18% o March 31 '18 P/E 10-Year s 45 Current 32.8 2.89% i 16% Since 1881 16.8 4.56% v 40 Since 1930 17.9 5.02% 14% d Since 1950 19.3 5.70% 10-Year US Treasury Notes 35 A Since 1970 20.0 6.4
Slide 78: US P/E based on forward earnings
US P/E based on forward earnings L L C , S&P 500 Forward Price/Earnings r s 28 s o 26 v i 24 d 22 A 20 Average = 16.9x f ic 18 c i 16 a 14 P 12 s t 10 i r 8 F '90 '91 '92 '93 '94 '95 '97 '98 '99 '00 '01 '02 '04 '05 '06 '07 '08 '09 '11 '12 '13 '14 '15 '16 '18 Source: Bloomberg. As of March 31, 2018.
Slide 79: US equity market valuations at new high relative to economy
US equity market valuations at new high relative to economy L L C , US Stock Market as a % of GDP r s 250% i s o v 200% Stock Market as % of GDP 150% A d if ic 100% a c P 50% i r s t 0% '47 '54 '61 '68 '75 '82 '89 '96 '03 '10 '17 F As of December 31, 2017 Source: Federal Reserve Bank of St Louis, Bo
Slide 80: Global stock valuations are historically high
Global stock valuations are historically high L L C , Valuations at Most Recent Market Peaks vs. March 31, 2018 r s US (S&P 500) Global (MSCI ACWI) s o Price/ Price/ Price/ CAPE Price/ Price/ Price/ CAPE v i Earnings Sales Book Earnings Sales Book d TTM TTM TTM TTM A Mar 31, 2000 18.9 1.4 2.9 43.2 1
Slide 81: International stocks are cheaper?
International stocks are cheaper? L L C , Large, Quality US Company Valuation vs International Peers r s Industry US Company P/E International P/E International o TTM Company TTM Premium / i s Discount v Consumer Durables & Apparel Nike 28.9 Adidas 29.6 2% d Distillers & Vintners Brown Forman 34.6 D
Slide 82: Bears facing extinction
Bears facing extinction L L C , US Investor Optimism (1996 – 2018) s Wells Fargo/Gallup Investor and Retirement Optimism Index s o r dv i ic A c if P a i r s t F Source: Wells Fargo/Gallup Not for Redistribution 82
Slide 83: Household investments – an indicator of market returns?
Household investments – an indicator of market returns? S&P 500 Trailing 10-Year Return vs Household Equity as a L L C , Percent of Household Financial Assets (shifted forward 10 years and flipped) r s 20% S&P 500 Trailing 10-yr Return Household Equity as a % of Household Financial Assets 0% o House
Slide 84: Investors accepting low yields in junk bonds
Investors accepting low yields in junk bonds L L C , High? Yield r s US EU i s o Gross yield 6.3% 3.1% dv Default rate, historical -3.6% -4.6% A Recovery rate, historical 41.0% 38.4% Net default -2.1% -2.8% if ic Net yield 4.2% 0.3% a c s t P F i r US gross yield as of March 31, 2018: BofA Merrill L
Slide 85: Weak US high yield covenants
Weak US high yield covenants L L C , Moody’s Covenant Quality Index o r s s August 2015 v i Low 4.52 A d ic 1.00 3.37 4.32 5.00 f April 2011 March 2018 i High a c P Strongest Weakest t Investor Protection F i r s Source: Moody’s April 10, 2018. The rating agency’s Covenant Quality Index is a three-m
Slide 86: Most leverage for US companies in almost decades
Most leverage for US companies in almost 4 decades Net Leverage of S&P 500 Companies L L C , (Ratio of Net Debt to EBITDA1) o r s v i s A d c if ic P a i r s t As of April 2017 F Source: World Economic and Financial Surveys “Global Financial Stability Report: Getting the Policy Mix Right”, Bloomberg
Slide 87: US interest coverage lowest ex-recession
US interest coverage lowest ex-recession Average of Interest Coverage Ratio L L C , (Ratio of EBIT to Interest Payments) o r s v i s A d c if ic P a i r s t As of April 2017 F Source: World Economic and Financial Surveys “Global Financial Stability Report: Getting the Policy Mix Right”, Bloomberg No
Slide 88: Greater existential corporate risk
Greater existential corporate risk Percentage of “Challenged” Firms L L C , (Percent of Total Assets) o r s 1 v i s A d c if ic P a i r s t As of April 2017 F Source: World Economic and Financial Surveys “Global Financial Stability Report: Getting the Policy Mix Right” 1 The interest coverage ratio
Slide 89: Growth of high yield and leveraged loan market
Growth of high yield and leveraged loan market L L C , U.S. High Yield and Leveraged Loan Market Size r s $2,500 i s o v $2,000 $1,500 A d ic $ billion $1,000 c if P a t $500 F i r s $- '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17 Source: JPMorgan. 2017 High Yield Annual Review and 2016 L
Slide 90: Value investing is out of favor
Value investing is out of favor L L C r s, i so dv ic A c if Pa i rs t F Not for Redistribution 90
Slide 91: Value out of favor – for now
Value out of favor – for now Russell 1000 Value vs Russell 1000 Growth L L C , (Rolling 10-Years) r s 10% s o 8% i Value outperforms v 6% d 4% A 2% if ic 0% c -2% P a -4% t -6% r s Growth outperforms i -8% F Jan ‘78 – Oct ‘94 Nov ‘94 – Jan ‘01 Feb ‘01 – Mar ‘12 Mar ‘12 – Mar ‘18 Source: Morningstar.
Slide 92: Growth dominated value in 2017
Growth dominated value in 2017 L L C , 2017 Index Performance r s 35 30 i s o dv 25 A Percent 20 if ic 15 a c 10 P 5 i r s 0 t MSCI ACWI S&P 500 MSCI ACWI S&P 500 FPACX Long MSCI ACWI S&P 500 F Growth Growth Equity Value Value As of December 31, 2017 Source: Morningstar. Past performance is no guara
Slide 93: Growth continues to beat value in 2018
Growth continues to beat value in 2018 L L C , 2018 Index Performance YTD r s 3 2 i s o dv 1 A 0 ic Percent if -1 a c -2 P -3 i r -4 s t S&P 500 MSCI ACWI S&P 500 MSCI ACWI FPACX Long MSCI ACWI S&P 500 F Growth Growth Equity Value Value As of March 31, 2018 Source: Morningstar. Comparison to the S&P
Slide 94: Growth is expensive relative to value
Growth is expensive relative to value L L C , Relative Valuation of US Value vs. US Growth Stocks 0.65 o r s Value to Growth P/B Ratio i s 0.60 Price/Book: Russell Value Index vs dv 0.55 A Russell Growth Index 0.50 if ic 0.45 Average = 0.43 a c 0.40 P 0.35 s t 0.30 Source: Bloomberg F i r 0.25 '95 '
Slide 95: This is not the first time that value has been out of favor
This is not the first time that value has been out of favor Barron’s December 1999 - “What’s wrong, Warren?” L L C , “Berkshire Hathaway may experience its first annual decline since 1990. Is Warren Buffet’s distaste for tech stocks leaving s him in the dust?” o r Berkshire Hathaway vs S&P 500 120%
Slide 96: This is not the first time that value has been out of favor
This is not the first time that value has been out of favor Morningstar July 2000 L L C , “FPA Crescent has owned the wrong stocks in the wrong asset classes” FPA Crescent vs S&P 500 o r s v i s FPA Crescent S&P 500 120% A d 100% ic 80% c if 60% a 40% 20% s t P i r 0% F -20% 1998 1999 2000 2001 2002
Slide 97: Volatility hit an all-time low in Q4 2017
Volatility hit an all-time low in Q4 2017 L L C , S&P 500 Volatility Index (VIX) 90 o r s i s 80 dv 70 A 60 ic 50 if 40 a c 30 P 20 s t 10 i r 0 F '90 '92 '93 '95 '97 '99 '01 '03 '05 '06 '08 '10 '12 '14 '16 '18 Source: Bloomberg. As of March 31, 2018 Not for Redistribution 97
Slide 98: Indiscriminate buying floats all boats
Indiscriminate buying floats all boats Valuation Spreads – The Cheapest Quintile Compared to the Market Average (1952 – February 2018) L L C r s, i s o dv A Standard Deviation c if ic P a i r s t F Source: Empirical Research Analysis, National Bureau of Economic Research. As of February 28, 2018. Ch
Slide 99: “The waiting is the hardest part.”
L L C r s, i s o dv ic A c if Pa i rs t F “The waiting is the hardest part.” Tom Petty Not for Redistribution 99
Slide 100: John Kenneth Galbraith quote
L L C r s, i s o v “We quickly forget financial disasters and the circumstances that brought them d about, and as a consequence, when the same or closely similar circumstances A arise again, sometimes in just a few years, they are hailed by a new, often ic youthful, and always extremely self-confide
Slide 101: Section VI: Investment examples
L L C r s, i so dv A Section VI if Investment examples c ic P a i rs t F Not for Redistribution 101
Slide 102: Investment types – high yield / distressed
Investment types – high yield / distressed L L C s, Performing Credits o r ■ Credit instruments expected to remain performing, interest and principal under all reasonable worst-case scenarios s ■ Purchased at 10% + YTM or Libor + 700 Stressed Credits dv i A ■ Credits with a high likelihood (50/50) o
Slide 103: Opportunistic exposure – corporate credit
Opportunistic exposure – corporate credit BofA Merrill Lynch US High Yield Master II Option-Adjusted Spread vs. L L C , FPA Crescent High Yield/Distressed Exposure r s 20% 35% o Effective Yield and Option-Adjusted s 18% i 30% v 16% % of Assets in High Yield d 14% 25% A 12% 20% Spread ic 10% f 15% i
Slide 104: Puerto Rico
Puerto Rico L L C , 1970s Barron’s advertisement for Puerto Rico muni bonds ■ “Puerto Rico…land of the legally balanced budget.” o r s ■ “There has never been a default….” v i s A ■ “…many evidences of the fiscal responsibility so characteristic of the d ic Commonwealth of Puerto Rico.” c if P a i r
Slide 105: Puerto Rico – bad news
Puerto Rico – bad news L L C r s, i so dv ic A c if Pa i rs t F Not for Redistribution 105
Slide 106: Puerto Rico
Puerto Rico Summary of Debt Outstanding as of February 2017 ($MM) L L C r s, i s o dv ic A c if P a i r Government of Puerto Rico s t 1) Unpaid principal and interest includes debt service that has been paid by insurers and is owed by the government F 2) HTA includes Teodoro Moscoso bonds 3) GDB pri
Slide 107: Puerto Rico
Puerto Rico FPACX Purchased FPACX Purchased L L C , Commonwealth of Puerto Rico GO 85 Puerto Rico Commonwealth Aqueduct & Sewer s Authority Rev r 80 o 75 s 60 i ($) ($) v 65 d 40 A 20 55 ic '15 '15 '16 '16 '17 '17 '18 '15 '15 '16 '16 '17 '17 '18 c if FPACX Purchased a 70 Puerto Rico Pubs Bldgs Auth
Slide 108: FPA Crescent – Financials
FPA Crescent – Financials L L C , Recap from 2016 Investor Day r s 2007 2007 Q1 2016 Q1 2016 2015 o Tangible Equity/ Price/Tangible Tangible Equity/ Price/Tangible ROTE s Tangible Assets Book Tangible Assets Book Citigroup Bank of America 2.7% 3.4% 2.1-3.9x 3.2-4.2x dv i 11.0% 8.1% 0.67x 0.84x 9.0%
Slide 109: Returns since last Investor Day
Returns since last Investor Day L L C Cumulative Performance r s, o (Since June 6, 2016) v i s Bank of America 112.3% d Ally 54.4% A CIT Group 53.3% f ic Citigroup 51.4% c i Leucadia 31.2% a AIG -0.9% P S&P 500 29.9% i r s t F Source: Bloomberg. As of March 31, 2018. Represents the percentage of the
Slide 110: FPA Crescent - Financials positions
FPA Crescent - Financials positions ■ ROE Improved L L C , ■ Valuation Improved o r s s Q1 2016 2015 Q4 2017 2017 i Price/ ROTE Price/ ROTE dv Tangible Book Tangible Book A Citigroup 0.67x 7.6% 1.24x 9.6% ic 0.84x 9.8% 1.75x 11.0% f Bank of America i 0.64x 7.0% 0.99x 8.2% c CIT Group a AIG 0.84x 6.0
Slide 111: Financials - opportunity
Financials - opportunity Financials: 3-Year Cumulative Return Potential L L C Return on Tangible Equity r s, i s o Current v 6% 7% 8% 9% 10% 11% 12% 13% d 1.57 60% 64% 69% 74% 79% 84% 89% 94% A Multiple of tangible book 1.47 50% 54% 58% 63% 67% 72% 77% 81% ic 1.37 39% 43% 48% 52% 56% 60% 65% 69% if
Slide 112: Financials valuation vs FPA Crescent exposure
Financials valuation vs FPA Crescent exposure L L C 3.5 Price/Book Value (LHS) r s, Net Financial Equity Exposure (RHS) 25% i s o Financials Price/Book Value 3.0 FPA Crescent Net Financials Equity v 20% d 2.5 A 2.0 15% f ic Allocation i 1.5 c 10% a 1.0 P 5% t 0.5 i r s 0.0 0% F '96 '97 '98 '99 '00 '
Slide 113: AIG – what happened?
AIG – what happened? 2016 2017 L L C , Losses Per Share $0.78 -$7.33 r s TBV Per Share $73 $66 i s AIG Stock Price Since June 6, 2016 o $67 dv ic A f $62 a c i Price $57 s t P r $52 F i Source: Bloomberg. As of March 31, 2018 $47 Jun '16 Sep '16 Dec '16 Mar '17 Jun '17 Sep '17 Dec '17 Mar '18 Not fo
Slide 114: AIG – what’s new?
AIG – what’s new? L L C , New Management s ■ CEO - Brian Duperreault r ■ COO - Peter Zaffino i so dv ic A c if a “In 2017, our reserve and underwriting action set a P baseline for General Insurance. As I said before, 2018 t is the year of the underwriter at AIG, and I'm r s committed to empowering u
Slide 115: AIG – reserves
AIG – reserves L L C r s, i s o dv ic A c if P a t “Well, yes. I mean, we look at all the reserves, I mean, really. I mean, it's not -- I mean, we have a detailed review of -- in a scheduled way. If r s we see a problem, we pull it forward. We will look at everything. So I wouldn't characterize this
Slide 116: AIG – why we like it?
AIG – why we like it? Underperforming Market Leader L L C s, Discount Valuation o r ■ 0.83x TBV Normal Earnings Power of 6-7 per share s ■ Excess Capital PV of approximately $10 Proven Capable Management dv i ic A c if P a i r s t F Source: Dowling & Partners AIG Property & Casualty Research, Februa
Slide 117: Q&A
L L C r s, i so dv ic A if Q&A a c s t P F i r Not for Redistribution 117
Slide 118: Appendix
L L C r s, i so dv ic A if Appendix a c s t P F i r Not for Redistribution 118
Slide 119: Holdings as of March 31, 2018
Holdings as of March 31, 2018 Consumer Discretionary 7.9% Industrials 9.3% Preferred Stocks L 0.1% L C , Naspers - N Shares 4.2% United Technologies 2.8% Ditech Holdings 0.1% Porsche Auto Holding 1.5% Arconic 2.1% s WPP 1.4% Meggitt 1.4% Limited Partnerships 0.4% r Expedia 0.8% Nexeo Solutions 1.2%
Slide 120: Important Disclosures
Important Disclosures L C This investor presentation is confidential to the recipient and may not be disclosed or distributed to any other person without the prior consent of First Pacific Advisers LLC (the “investment manager”). This presentation is for information purposes L only and does not cons
Slide 121: Important Disclosures (continued)
Important Disclosures (continued) L C You should consider the Fund's investment objectives, risks, and charges and expenses carefully before you invest. The Prospectus details the Fund's objective and policies and other matters of interest to the prospective L investor. Please read this Prospectus c
Slide 122: Important Disclosures (continued)
Important Disclosures (continued) L C Index / Benchmark / Category Definitions , L The Standard & Poor's 500 Stock Index (S&P 500) is a capitalization-weighted index which covers industrial, utility, transportation and financial service companies, and represents approximately 75% of the New York Sto
Slide 123: Important Disclosures (continued)
Important Disclosures (continued) L C Price-to-Sales (P/S) is a ratio valuing a stock relative to its own past performance. Price to sales is calculated by dividing a stock's current price by its revenue per share in most recent year. , L Return on Equity is the amount of profit computed by dividing