FPA Queens Road Small Cap Value Fund Institutional Class · NASDAQ:QRSIX
FPA Queens Road Small Cap Value Fund Institutional Class — First Pacific Advisors — CFA Institute presentation (October 2013)
43 slides from FPA Queens Road Small Cap Value Fund Institutional Class's conference presentation, Oct 17, 2013
Slide 1: Fixed Income Portfolios in the New Frontier
October 17, 2013 Photo: Bianco Research L.L.C. Fixed Income Portfolios in the New Frontier Presented by Thomas H. Atteberry, CFA, Partner First Pacific Advisors, LLC. 11400 W Olympic Blvd., Ste 1200, Los Angeles, CA 90064
Slide 2: Investment Philosophy
Investment Philosophy We believe investors can achieve consistent absolute and real returns through uncompromising risk management, disciplined portfolio construction, and resourceful security selection. We will invest only when we believe returns adequately compensate investors for risk. 1
Slide 3: Core Tenets
Core Tenets Strategy highlights: ■ Seeks positive absolute returns every calendar year ■ Seeks positive real returns over five-year period Holdings must provide: ■ Sufficient absolute return to compensate for interest rate and credit risk ■ Conservative downside protection Downside protection Effect
Slide 4: Assessing Interest Rate Risk
Assessing Interest Rate Risk Scenario analysis Understanding how an interest rate increase would affect investments allows the team to focus on preservation of capital US Treasury yields and downside risk 3.50% Yield to Maturity – Forecast 1.94% 2.49% 1.40% bond income with no change in 0.36% 0.65%
Slide 5: Assessing Interest Rate Risk
Assessing Interest Rate Risk 10 4.0 2 year Treasury 10 year Treasury 4.6 9 30 year Treasury Portfolio Effective Duration 8 4.5 7 6 1.7 (%) Yield 5 4 3 2.4 2.1 2 2.0 1 1.5 0.5 0 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-
Slide 6: Assessing Interest Rate Risk
Assessing Interest Rate Risk Spread between 1 Year and 10 Year Constant Maturity Treasury Source: Bloomberg, Federal Reserve Bank 5
Slide 7: "Real" Long Term Interest Rates Back to 1801
“Real” Long Term Interest Rates Back to 1801 Highlights ■ Several times in history real rates have been “very negative.” These periods have always occurred during or soon after major wars. Some Statistics About Real Interest Rates (through May 2013) Correlation: LT Rates and Largest Largest Period M
Slide 8: Long Term Interest Rates Back to 1801
Long Term Interest Rates Back to 1801 Source: The Foundation for the Study of Cycles; Bianco Research, L.L.C. 7
Slide 9: Long Term Interest Rates Back to 1790
Long Term Interest Rates Back to 1790 Highlights ■ The Yields noted on the chart depict some of the cyclical extremes reached since 1790. ■ Long term interest rates, more than any other investment, display a cyclical pattern. That is, their trends often last decades. The shortest trend was a 20-year
Slide 10: Long Term Interest Rates Back to 1790
Long Term Interest Rates Back to 1790 Source: The Foundation for the Study of Cycles; Bianco Research, L.L.C. 9
Slide 11: Why Long Term Interest Rates Reach the Levels Experienced in 1940-1951
Why Long Term Interest Rates Reach the Levels Experienced in 1940-1951 In April 1942 after US entry into World War II Fed publically commits to maintain a .375% rate for Treasury Bills and a 2.50% rate for Long Term Treasury Bonds After World War II Federal Reserve Board wanted to change its interes
Slide 12: Treasury Fed Accord of 1951
Treasury Fed Accord of 1951 The view of the ruling politicians President Harry Truman and Treasury Secretary John Snyder believed that banks and not market forces of supply and demand set interest rates “ The Federal Reserve Board should make it perfectly plain… to the New York Bankers that the peg
Slide 13: Fed Accord (continued)
Fed Accord (continued) The Federal Reserve Bank governors view was that the Fed needed to be independent of the Treasury Department and its primary objective was to control inflation Exchange between Representative John Wright Patman of Texas and Fed Governor Marriner Eccles ■ “Patman: Don’t you thi
Slide 14: Fed Accord (continued)
Fed Accord (continued) The Federal Reserve System Statement regarding the Accord between them and the Treasury Department in 1951 “The Treasury and the Federal Reserve System have reached full accord with respect to debt-management and monetary policies to be pursued in furthering their common purpo
Slide 15: Inflation Post World War II
Inflation Post World War II US CPI Urban Consumers YoY NSA Source: Bloomberg, Bureau of Labor Statistics 14
Slide 16: Median Yield on a 1 Year Treasury
Median Yield on a 1 Year Treasury Source: Bloomberg, Board of Governors of the Federal Reserve System 15
Slide 17: Median Yield on a 3 Year Treasury
Median Yield on a 3 Year Treasury Source: Bloomberg, Board of Governors of the Federal Reserve System 16
Slide 18: Median Yield on a 5 Year Treasury
Median Yield on a 5 Year Treasury Source: Bloomberg, Board of Governors of the Federal Reserve System 17
Slide 19: Median Yield on a 10 Year Treasury
Median Yield on a 10 Year Treasury Source: Bloomberg, Board of Governors of the Federal Reserve System 18
Slide 20: Moody's Long Term Baa Corporate Credit Spread
Moody’s Long Term Baa Corporate Credit Spread 8.00 7.00 6.00 5.00 4.00 3.00 2.00 Median = 1.81 1.00 0.00 Source: Moody’s Investor Services, Board of Governors of the Federal Reserve System 19
Slide 21: 30 Year Agency Mortgage Pool Spread
30 Year Agency Mortgage Pool Spread 6.00 5.00 4.00 3.00 2.00 Median = 1.59 1.00 0.00 Source: FHLMC, Board of Governors of the Federal Reserve System 20
Slide 22: What Could Happen to Bond Returns if Rates Return to Median Levels
What Could Potentially Happen to Bond Market Returns if Interest Rates Return to Long Term Median Levels Annualized Total Return If Return to Median Yield 8/31/13 Long Term Interest Rate 3 Years 5 Years Yield to Worst Median Yield 1 Year Treasury 0.11% 4.99% NA NA 3 Year Treasury 0.87% 5.39% 0.87% N
Slide 23: Impact of the Change in Interest Rates over Different Time Horizons
Impact of the Change in Interest Rates over Different Time Horizons 3 Year Time Horizon 5 Year Time Horizon 8/31/13 Interest Rate 3% 4% 5% 3% 4% 5% Yield to Worst 1 Year Treasury 0.11% NA NA NA NA NA NA 3 Year Treasury 0.87% NA NA NA NA NA NA 5 Year Treasury 1.69% -0.41% -1.96% -3.48% NA NA NA 7 Yea
Slide 24: Post 2008 Security Selection Criteria
Post 2008 Security Selection Criteria Find bond opportunities that meet the following criteria: ■ Secured by an asset that is critical to the business or individual ■ There is an ability to place a value on the collateral asset ■ The bond has a first lien on the asset ■ Issuer/borrower has capital a
Slide 25: Single Family Mortgage Investment Opportunity
Single Family Mortgage Investment Opportunity that Represents about 6% of the Portfolio Loan characteristics: ■ Significantly delinquent and defaulted first lien mortgages ■ Weighted average outstanding loan size $388,908 ■ Weighted average current appraisal value of the home $252,537 ■ Current Loan
Slide 26: Single Family Mortgage Investment Opportunity
Single Family Mortgage Investment Opportunity that Represents about 6% of the Portfolio Resolution process is dual path: ■ Modify the mortgage through reduction of principal so Loan-to-Value on home is 80% the resulting new loan is greater in value than price paid for unpaid balance ■ $252,537 times
Slide 27: High Quality Investment that Represents about 10% of the Portfolio
High Quality Investment that Represents about 10% of the Portfolio Basic Characteristics of GNMA REMIC Project-Loan IO ■ Project-Loan IO is an interest-only class whose weighted-average coupon is stripped off the entire transaction ■ Priced using 15% CPJ, so cash-flows are default adjusted from day
Slide 28: High Quality: Seeking Value
High Quality: Seeking Value Security specific opportunity Seeking value and capital preservation in high quality bonds ■ Differentiated sector opportunities Compare/contrast each high quality sector for optimum opportunities ■ Security-level analysis Price movement among high quality bonds tend to b
Slide 29: Historical Non-Agency CMBS Case Study
Historical Non-Agency CMBS Case Study MSC 2007-XLF9 ■ Securitized floating rate commercial real estate loans originated in 2007 ■ Loans outstanding as of October 2012: Loan Description Property Type Property Location Loan Maturity MSREF Resort Portfolio Oct-2014 JW Marriott Desert Ridge Resort Phoen
Slide 30: Historical Non-Agency CMBS Case Study
Historical Non-Agency CMBS Case Study JW Marriott Desert Ridge, Phoenix, AZ Source: JW Marriot 29
Slide 31: Historical Non-Agency CMBS Case Study
Historical Non-Agency CMBS Case Study JW Marriott, Orlando, FL Source: JW Marriot 30
Slide 32: Historical Non-Agency CMBS Case Study
Historical Non-Agency CMBS Case Study Ritz-Carlton, Orlando, FL Source: Ritz-Carlton 31
Slide 33: Historical Non-Agency CMBS Case Study: Principal Payments
Historical Non-Agency CMBS Case Study Even under the downside case, the ‘D’ Tranche has a capital buffer Weighted Average Loan-to-Value MSREF-only Loan-to-Value FPA FPA FPA FPA Tranche Balance 2007 2007 Tranche Base Downside Base Downside as of October 2012 Appraisal Appraisal Case Case Case Case Fi
Slide 34: Historical Non-Agency CMBS Case Study
Historical Non-Agency CMBS Case Study MSC 2007-XLF9 D purchased in October 2012 at a dollar price of 93.50 ■ Coupon = 1 month LIBOR + 0.85% ■ Maturity uncertain due to expiration of loan extension options Weighted Maturity Annualized Return Summary Three Possible Scenarios Avg. Life Date Return (yea
Slide 35: Secured Airplane Investment
Secured Airplane Investment ■ In July 2012, FPA structured and funded a $23.5 million note secured by a 1st lien on one 1999 Boeing 747-400 leased to Delta Air Lines ■ At issuance, the Secured Note had an expected yield of 7.61% and an expected weighted average life of 4.2 years ■ The 747-400 is an
Slide 36: Secured Airplane Investment: Loan-to-Value
Secured Airplane Investment ■ As of July 2012, Delta’s gross leverage1 was 5.9x and Delta was on pace for an additional $1.7 billion of debt reduction, which would imply gross leverage of 5.6x and give Delta one of the strongest balance sheets among the network carriers. Delta designed its capital s
Slide 37: Example of Opportunity During Market Decline
Example of Opportunity During Market Decline Nielsen Finance 7.75% Senior Notes due 10/15/18 Nielsen is a market-leading provider of media audience measurement and consumer purchasing analytics ■ The company enjoys a monopoly in providing data critical for $76 billion television advertising market i
Slide 38: Example of Opportunity During Market Decline
Example of Opportunity During Market Decline ■ The company is publicly listed and trades at an enterprise value of 11.5x pro forma LTM EBITDA1,2; pro forma net leverage through senior bonds of 3.9x implies loan-to-value of 34% for senior unsecured bonds ■ FPA New Income Fund also owns the Nielsen Se
Slide 39: Example of Opportunity During Market Decline
Example of Opportunity During Market Decline Nielsen Finance 7.75% Senior Notes due 10/15/18 ■ Purchased $24 million of 7.75% Senior Notes due 10/15/18 in market sell-off at average price of 109.11 and yield-to-worst of 3.5% to expected October 2014 call − Over 2.5 points cheaper than 05/10/13 price
Slide 40: Example of Opportunity During Market Decline
Example of Opportunity During Market Decline ■ 4.5% Senior Notes due 10/01/20 were trading at a 4.9% yield-to-maturity − Down 6.875 points and 132 bps wider on yield-to-worst basis from 05/10/13 peak price of 104.625 ■ Bonds could have absorbed another 94 bps of upward pressure in yield and company
Slide 41: Disclosure
Disclosure These slides are intended as supplemental material to the CFA Institute audio presentation that is posted on our website fpafunds.com. We do want to make sure you understand that the views expressed on these slides and in the accompanying audio presentation are as of today, October 17th,
Slide 42: Glossary of Terms
Glossary of Terms Absolute Return: The return that an asset achieves over a certain period of time. This measure looks at the appreciation or depreciation (expressed as a percentage) that an asset - usually a stock or a mutual fund - achieves over a given period of time. Absolute return differs from
Slide 43: Glossary of Terms (continued)
Glossary of Terms (continued) GNMA: Government National Mortgage Association, or Ginnie Mae was established in the United States in 1968 to promote home ownership. As a wholly owned government corporation within the Department of Housing and Urban Development (HUD), Ginnie Mae’s mission is to expand
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