Steve Romick: Trade Into The Gold You Can Eat, Farmland

PAGE 5 OF 5

Forbes: Forgive my lack of French or Flemish — Groupe Bruxelles Lambert.

Romick: Right, Groupe Bruxelles Lambert. As we look for ways to have allocations to various companies into that exposure and environment, it could be prove to be inflationary before you know it, but it may take longer. In a world where things aren’t terrifically cheap, you look through to the assets of some various holding companies, trying to figure out if the underlying companies are good businesses, is this on a sum of parts basis, priced to discount? And it’s not a large position for us, but that’s a company that makes that cut.

Forbes: You seem to like pieces of health care.

Romick: Pieces. Health care is something we’re not —

Forbes: CVS Caremark.

Romick: Yes, CVS Caremark’s interesting, because we actually purchased CVS Caremark at a point in time when people are very fearful. Stock has done very well, but CVS as the pharmacy also owns Caremark. And the revenues are pretty close to 50-50 give or take. And Caremark business, the pharmacy benefit management business is a more complicated business. One that I truly don’t understand as well, do not know how they will be impacted by government reimbursements and how they could get impacted upstream.

But I felt that they were better positioned with a new management team in that division vis-à-vis their competition. So I felt at least versus Express Scripts or Medco, they actually could succeed relatively speaking. So what we did was we went long CVS Caremark and we shorted Express Scripts and Medco to kind of neutralize a good chunk of that P.B.M. exposure. And those are the kinds of things that we do periodically. Recently, able to put on a couple of other positions like that, where we were able to create a stub.

Forbes: Renault-Nissan.

Romick: Yes, Renault. Renault, the largest French car manufacturer, owns 44% of Nissan, used to own 7% of Volvo truck, as well as owning a couple percent of Daimler, as well as another percent or two in a Russian automotive company. And if you add up the value of these other things that they own, it exceeded the value of where the stock was trading.

And we looked and said, “Wow, they’re gonna pay us five billion euros, pay us five billion euros to own Renault? Okay.” For a business that’s cash flow positive marginally, but where European SARs, auto sales are at relatively low ebb because of the weak economy in the E.U. And a business in the finance side that’s been very strong, better than our auto finance companies. We’ll take that.

Well, now since then, that stub has narrowed up from $5 billion to more or less flat. We also did it recently with Vodafone Verizon. Vodafone owns 45% of Verizon Wireless. Verizon owns 55%. So we were able to just a couple of weeks ago, we were able to buy Vodafone while selling Verizon Wireless short and create a stub of just the Vodafone assets at 2.9 times EBITDA. So sometimes the market hands you these things. And we’ll take advantage of that.

Forbes: What other things have you drooling now in this otherwise unappetizing environment?

Romick: Not a lot have us drooling. We see where opportunity could come. I don’t want to go and mention a couple things we were spending a lot of time focusing on, because we’ve invested a lot of time in one particular industry, where we’re just beginning to allocate some capital. We’ve done so in the debt side. And we would hope to create some opportunity there for ourselves on the equity side.

Then we also kind of hope that sequestration hits hard and allows us to investment in a number of different defense companies that we have done work and we’ve put it into our library. And we hope to pull it off and take it off the shelf and dust it off and put those companies in our portfolio.

Forbes: Most investors wouldn’t they be better off in index funds?

Romick: Probably. Particularly if you’re looking at large cap companies. They’re very tax efficient. They’re lower fee. But for us, we actually don’t expect that everybody should have their money with us, in our fund, the FPA Crescent Fund. We manage the portfolios if they do. It’s a portfolio that invests in lots of different things. It’s not just stocks. It’s not just large cap stocks. It’s a lot of mid-cap stocks. It’s got, as we talked about, high-yield bonds at points in time. And subprime whole loans and farmlands and other types of things and other types of special situation trades which we can put in there, like the Renault a mentioned, Vodafone, Verizon, et cetera. So we look at things a little but differently. But I don’t think there’s anything wrong with index funds.

Forbes: ETFs, are they going to continue to grow explosively? And why would somebody go with a fund versus an ETF version?

Romick: I don’t know. It is a lot of argument to be made for ETFs. I think that if you want to get exposure to a certain sector of the market or a certain region in the world, it may make sense for somebody to do that. But most people I think want to find somebody they can trust to manage their capital. We aspire to be those type of people that those investors can trust. We’re not the only ones. There are a lot of very good portfolio managers out there. But in fact, it’s not incorrect for you to talk about the importance of index funds and ETF in the context of most managers don’t do as well as the index over time.

Forbes: And you can continue to best it?

Romick: We have bested it for the last couple decades. Whether or not we will in the future is anybody’s guess. We’re certainly gonna try to do so. But our goal is not even to best it, although we have. We’ve actually bested it with only half of our portfolio and stocks and averaging 25% in cash. But our goal, actually, is just to do as well, do as well with less risk. Because if you can have less risk, we think that your clients, your shareholders can actually end up sticking with you a little bit longer.

Forbes: It sounds like a good way to go. Your benchmark, you went from the Russell 2500 to the S&P 500.

Romick: Well, we did that a while ago. The best benchmark really I think for most investors, for us what think of as understanding what the rate of inflation’s going to be and adding some equity risk premium, and is the manager with whom you’re investing, are they justifying the risk they’re taking with the returns they’re generating for you. Benchmarking stuff. We certainly don’t look at what we’re doing any given day, quarter, even year. It just becomes a lot of noise. What’s this investment going to do over the next five years? And we just don’t worry about the stuff in between.

Forbes: Steve, thank you very much.

Romick: Thank you very much.

source

please give me comments thanks