Dear Shareholder:
Performance Overview
The FPA Crescent Fund – Institutional Class (“Fund” or “Crescent”) declined 4.71% in the third quarter and declined 14.68% for the trailing twelve months.1 The Fund captured 81.3% of the average of the S&P 500 and MSCI ACWI NR USD’s (“MSCI ACWI”) decline in the trailing twelve months, underperforming its 74.6% average net risk exposure.2 However, over the current market cycle, the Fund has performed favorably compared to the equity market on a risk-adjusted basis - generating 101.4% of the average of the S&P 500 and MSCI ACWI’s positive annualized return while taking on 64.6% net risk exposure, on average.3
Below you can see the Fund’s performance along with various relevant indexes.
Exhibit A: Performance versus Illustrative Indices4
Q3 2022 | Trailing | ||
| 12-month | |||
| Crescent | -4.71% | -14.68% | |
| Crescent – Long Equity | -7.27% | -21.07% | |
| MSCI ACWI NR USD | -6.82% | -20.66% | |
| S&P 500 | -4.88% | -15.47% | |
| 60% MSCI ACWI NR USD/ 40% BBg US Agg | -5.94% | -18.08% | |
| 60% S&P 500 / 40% BBg US Agg | -4.75% | -14.85% |
Portfolio discussion
Exhibit B: Trailing Twelve-Month Contributors and Detractors as of September 30, 20225
| Contributors | Perf. | Avg. % | Detractors | Perf. | Avg. % |
| Cont. | of Port. | Cont. | of Port. | ||
| Interest Rate Caps (multiple) | 0.66% | 0.5% | Comcast | -1.69% | 3.2% |
| FPS LLC (shipping investment) | 0.64% | 1.5% | Meta Platforms | -1.68% | 2.2% |
| Sound Holdings (shipping investment) | 0.64% | 0.7% | Alphabet | -1.56% | 5.6% |
| Glencore | 0.37% | 2.1% | Charter Communications | -1.55% | 2.2% |
| LPL Financial | 0.32% | 1.0% | Citigroup | -0.87% | 2.1% |
| 2.63% | 5.9% | -7.34% | 15.3% |
In the last twelve months, Crescent’s top five performers contributed 2.63% to its return, while its bottom five detracted 7.34%.
We addressed the performance of the Sound Holding & FPS LLC shipping investments, Glencore (LSE:GLEN, Financial), and the Comcast (CMCSA, Financial) and Charter (CHTR, Financial) cable investments in the Q2 2022 commentary which can be accessed in our archive.
We highlight the following:
We purchased Interest Rate Caps in 2018, when there was a broadly held belief that interest rates would remain lower for longer. The value of these caps has increased along with interest rates in 2022.
LPL Financial (LPLA, Financial) has similarly benefited from a rise in interest rates, specifically short-term rates, as well asa continued strong client asset flows.
The share prices of both Meta (META, Financial) and Alphabet (GOOG, Financial) have declined significantly over the past twelve months. We believe this is due to a combination of a weakening ad market, depreciation of foreign currencies, and increased competitive intensity. On the positive side, we anticipate each company to continue to generate significant amounts of free cashflow even during these challenging times, which we expect to be redeployed into a combination of growth projects and share buybacks.
Exhibit C: Portfolio Composition6
| Risk Asset | Q3 2022 | Q2 2022 | Q3 2021 | 5yr Average |
| Common stock, long | 68.3% | 70.0% | 73.6% | 71.0% |
| Common stock, short | 0.0% | 0.0% | -2.9% | -4.9% |
| Credit, long | 2.2% | 1.5% | 0.7% | 3.7% |
| Credit, short | 0.0% | 0.0% | -0.2% | -0.3% |
| Other | 4.4% | 4.0% | 1.9% | 2.2% |
| Exposure, net | 75.0% | 75.5% | 73.1% | 71.7% |
Crescent had net exposure at the end of the third quarter of 75.0%, relatively unchanged compared to its exposure at the end of the second quarter. With the stocks having declined as much as they have, the nominal decrease in exposure belies the greater activity when you scratch below the surface. We added five new positions to the Fund and exited three in the quarter.
Closing
Individual stock price movement continues to generally be far greater than changes in underlying business fundamentals. We maintain focus on the latter, while seeking to take advantage of the former.
Respectfully submitted,
FPA Crescent Portfolio Managers
October 26, 2022
- Effective September 4, 2020, the current single class of shares of the Fund was renamed the Institutional Class shares. Unless otherwise noted, all data herein is representative of the Institutional Share Class.
- Risk assets are any assets that are not risk free and generally refers to any financial security or instrument, such as equities, commodities, high-yield bonds, and other financial products that are likely to fluctuate in price. Risk exposure refers to the Fund’s exposure to risk assets as a percent of total assets. The Fund’s net risk exposure as of September 30, 2022 was 75.0%.
- The current market cycle began October 10, 2007 and continued through September 30, 2022. Market cycles (peak to peak) are generally defined as a period that contains a decline of at least 20% from the previous market peak over at least a two -month period and a rebound to establish a new peak above the prior market peak. The current cycle is ongoing and thus presented through the most recent quarter-end. Once the cycle closes, the results presented may differ materially.
- Comparison to the indices is for illustrative purposes only. The Fund does not include outperformance of any index or benchma rk in its investment objectives. An investor cannot invest directly in an index. The long equity segment of the Fund is presented gross of investment management fees, transactions costs, and Fund operating expenses, which if included, would reduce the returns presented. Long equity holdings only includes equity securities excluding paired trades, short-sales, and preferred securities. The long equity performance information shown herein is for illustrative purposes only and may not reflect the impact of material economic or market factors. No representation is being made that any account, product, or strategy will or is likely to achieve profits, losses, or results similar to those shown. Long equity performance does not represent the return an investor in the Fund can or should expect to receive. Fund shareholders may only invest or redeem their shares at net asset value.
- Reflects the top five contributors and detractors to the Fund’s performance based on contribution to return for the trailing twelve months (“TTM”). Contribution is presented gross of investment management fees, transactions costs, and Fund operating expenses, which if included, would reduce the returns presented. The information provided does not reflect all positions purchased, sold or recommended by FPA during the quarter. A copy of the methodology used and a list of every holding’s contribution to the overall Fund’s performance during the TTM is available by contacting FPA Client Service at [email protected]. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities listed.
- The “Common Stock, Long” and the “Exposure, Net” categories include a 4.0% allocation to a SPAC basket consisting of 79 SPAC investments as of September 30, 2022.
Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown. This data represents past performance and investors should understand that investment returns and principal values fluctuate, so that when you redeem your investment it may be worth more or less than its original cost. Current month-end performance data, which may be lower or higher than the performance data quoted, may be obtained at www.fpa.com or by calling toll-free, 1-800-982-4372. The FPA Crescent Fund – Institutional Class (“Fund” or “FPACX”) total expense ratio as of its most recent prospectus is 1.17%, and net expense ratio is 1.14% (both including dividend and interest expense on short sales).
