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Higher Investment Returns with Less Risk

Last update on: Feb 27 2020

One of the long-time top-performing funds in our “hedge fund” mutual fund portfolio is FPA Capital. For many years its met the goal of earning stock index-like returns with less risk and volatility. Manager Steve Romick made one of his rare public appearances this morning on CNBC. Romick explained how he does this by being different from other mutual funds. Instead of reaching for returns, he looks to reduce risk and invests across the entire capital structure of corporations, rather than buying only stocks and investment-grade bonds. He’s widely-diversified. In addition to stocks the fund owns high-yield bonds, cash, mortgages, and farmland, among other things. He also believes investors aren’t being paid adequately for the risks in most bonds today, including high-yield bonds. He’s looking for things that are out of favor, and that brings him to Europe these days. Here’s a rough transcript of part of the interview:

We’re looking for that which is out of favor and a lot is out of favor in the european automotive business. In the case of Renault they own stakes in ˜issan, a 44% stake there, and a 7% stake in Volvo and as well as a less than 2% stake in Daimler. You add up the stake of the companies, which are all public, andthey exceed the value of Renault. So you can actually own Renault as we are and we are short Volvo and Nissan not because we have a negative view as to Volvo and Nissan’s prospects but because Volvo’s and Nissan’s values exceeds Renault’s.

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