March 20, 2012
Bob Rodriguez, CFA, is the managing partner and chief executive officer of First Pacific Advisors. Based in Los Angeles, FPA manages $19 billion across five equity strategies and one fixed-income strategy. Bob joined the firm in 1983. He currently serves in a supporting role to the research and portfolio management teams for the Small/Mid-Cap Absolute Value (including FPA Capital) and Absolute Fixed Income (including FPA New Income) strategies, both of which he established in 1984.
I spoke with Bob on February 14.
You’ve handed off the management of the FPA Capital Fund and the FPA New Income Fund to others. What are your new responsibilities, and do you miss running a fund?
My responsibilities are as CEO and managing director, as well as an advisor to the funds and product groups I formerly managed. The firm has grown rapidly over the last several years. We expanded the management committee by the addition of Steven Romick in early 2009, who manages the Contrarian Value Strategy (including the FPA Crescent Fund). That was in preparation for my sabbatical in 2010.
I think more about larger issues. I pester my successors with comments and suggestions, but I am not in what I would call the security-specific selection arena, other than if I see them doing something in an area where I have some knowledge, I will provide free advice – which is worth about as much as I charge.
Do I miss managing money? Not particularly. I look at the time that I was off on my sabbatical and came back, and nothing has really changed. There was a major financial collapse with a desperate need for liquidity.
I have said to pension funds that you never know the value of liquidity until you need it or don't have access to it. They tended to get a sense of that in the credit collapse. Here in 2011 and 2012, memories are exceedingly short, and the bad behaviors that I saw before are alive and well today. It is a very difficult time to be managing money, particularly with the high-volatility, risk-on/risk-off environment that we are in.
I am going to come to some of the macro issues in a bit, but first, in the beginning of December last year you launched your first new fund in 25 years, the FPA International Value Fund. Why at that time?
We had been looking internationally at company-specific data. What portion of corporate revenues is international? How can that benefit our investments? Since many of us at the firm believed that the recovery growth rates in the US would be very much substandard, could we gain something more in this area?
The opportunity came via Steven Romick when Pierre O. Py and Eric Bakota became available. We went through a long vetting process that lasted for eight months. In all things, at FPA we wanted to create an environment that would enable long-term success for the strategy. We have committed to building it over time and very pleased with their progress thus far. Their style fits very much with many of the styles and philosophies at FPA. The cultural and investment fit is right and we are excited about the prospects for the strategy.
Let’s talk about investing style. You were forecasting a global financial meltdown starting as early as 2007, and you moved to a large cash position. And for this prudence you received shareholder criticism and redemptions. From a business – but not necessarily an investing point of view – does it make sense to take an extreme position away from the consensus?
That is always a hard question to answer. When I speak to graduate students at the University of Southern California, I say, “Each of you is going to have to answer that question yourself.” For me, investing comes first and what happens to the business comes second. If I didn't pay attention and do what was right investment-wise, I wouldn't have a business longer-term.
I got an early test of that in the 1980s, when a client terminated me and the account was one of the best at our firm. It represented a 50% to 60% loss of business in one day. It was because I was not willing to pay kickbacks to keep the account. I said, “What more can happen to me than that?”
In one way it was very negative, but in another way it was very freeing. I have never looked back.
In 2007, we went to our separate account clients and said, “We're taking the cash up. Your choice is either to stay or leave.” Fortunately, they all stayed. That doesn't mean they didn't redeem some portion of their capital.
The volatility was highest in my equity mutual fund. It makes managing a fund more difficult, when you have sizeable shareholder redemptions. In 2007-2009, if I did not have a large cash position, I would have been selling into a very negative market environment, thereby hurting our own investments and harming our existing shareholders. I have no regrets about holding cash, and I don't think there were a lot of fund managers who did this.
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