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Spokane, Washington  Est. May 19, 1883
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A manager’s plays

Trevor Delaney Associated Press

NEW YORK – Steve Romick, manager of FPA Crescent fund, which has posted a return of more than 9 percent through May 20, and a five-year annualized return of 4.84 percent, recently sat down for an interview with the Associated Press. Here are excerpts from that interview.

Q: For investors who are thinking about their own asset allocation, what’s your portfolio looked like over the last year or so?

A: We saw a lot of this coming. We wrote about the “case for cash” in 2004, and started building cash at that time. We didn’t own financial stocks because we were concerned about a lot of these issues that have manifested themselves. So going into all of this we were relatively well positioned – with cash in the portfolio, last September, of almost 40 percent. Now that cash has come down to the low to mid-20s as we’ve put a lot of capital to work in debt.

So today we have about 37 percent long equities. And we also have a little over 30 percent in debt. And the debt in our portfolio had a yield-to-maturity, at the end of March, of 22 percent and change. It’s clearly not a low risk portfolio. We look at this debt as if it’s equity, we just think it offers greater relative value when compared to equity.

Q: Within the stock market, are there sectors that you like?

A: We like the supply demand characteristics of energy. I haven’t seen any dinosaur roaming the streets of New York, which probably means there’s not more supply coming – on the fossil fuel side anyway. And there’s this inexorable increase in demand over time, albeit, with certain dips along the way due to the weak economies we have today globally. So we think demand will increase over time and we do believe supply will continue to decrease, so we like those characteristics.

We also think there’s going to be future devaluation of the U.S. dollar against certain global currencies. Since oil is a commodity that is priced in dollars, as the U.S. dollar weakens, the commodity is more expensive in dollar terms, which is attractive for the investment that we have.

Q: Looking ahead, is there a key sign to look for in terms of a turnaround?

A: I think employment is a very good indicator. The employment measure is different today than it has been used in the past. We’re looking at unemployment which is now at around 9 percent. But there’s something that works in to the equation today that wasn’t as important in other periods, in the recent few decades when unemployment was higher – which is underemployment. So you have people who want to work a 40 hour a week who are only getting 28 hours. And that’s not showing up in the unemployment number. But it will show up in retail sales. People aren’t going to be able to afford as much.

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