A quiet announcement earlier this week from Los Angeles-based First Pacific Advisors (FPA) concerned the retirement of Robert Rodriguez, a legendary stock-fund manager you’ve probably never heard of.
Rodriguez himself was often anything but quiet about one issue or another when it came to his responsibility to manage other people’s money. Among his targets: government policies, particularly, and frequently, the Federal Reserve.
Rodriguez is that rare duck whose very existence academic finance doubts — a live, flesh-and-blood active investment manager who ran circles around relevant benchmarks over the long term.
According to data from investment researcher Morningstar, Rodriguez’s stock fund, FPA Capital Fund FPPTX, -0.91% , produced a 15.02% annualized return from July 12, 1984 through 2009, after which Rodriguez went on an extended sabbatical that lasted until his official retirement. Meanwhile, over that 25-year-plus stretch, the S&P 500 SPX, +0.06% delivered 10.81% on an annualized basis and the Russell 2000 RUT, -1.27% posted a 9.24% annualized return.
Rodriguez’s approach was deceptively simple. Pick cheap stocks, and hold liberal amounts of cash when nothing meets your criteria. This cash stake is one of the things that separated Rodriguez from his peers and led to his success. He worried about losing money and paying too much for securities.
Seeing risk as the permanent loss of capital.
So if prices were high by Rodriguez’s gauge, which proved to be accurate over time, then cash it was. The mindset leading to this approach is seeing risk as the permanent loss of capital, rather than simply “volatility” or “beta.”
Nobody, of course, can move to cash exactly at market peaks. So this strategy didn’t always endear Rodriguez to his own clients, even if it worked out in the long run. As Steven Romick, the co-manager of the highly regarded FPA Crescent Fund, said FPACX, -0.38% in the firm’s announcement, Rodriguez “taught us all what it’s like to put investors first, whether they liked it or not.”
Rodriguez treated investors well not only by protecting their assets, but by writing investor letters that became the gold standard for manager communication to clients. His letters contrasted sharply with the pallid communiques from large fund companies that have come to dominate the industry — letters which are managed so completely by the firms’ legal departments that they say nothing of interest to clients.
Rodriguez explained clearly what he was doing with clients’ money — and what he wasn’t doing, including which securities he was boycotting. When you got a shareholder letter from Rodriguez, you were in for an interesting read.
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If managing a successful stock fund weren’t enough, Rodriguez also ran a top-flight bond fund, FPA New Income Fund FPNIX, -0.10% , that beat the Bloomberg Barclays U.S. Aggregate Index for his tenure and never experienced a down year. From June 7, 1984 through the end of 2009, the fund produced an 8.67% annualized return, while the Bloomberg Barclays U.S. Aggregate Bond Index returned 8.57%. In a world that has become increasingly specialized, it would be unthinkable for someone to manage both a stock fund and bond fund. But Rodriguez received both the equity and fixed-income versions of Morningstar’s manager of the year award during his career.
Today, as index funds gather trillions of dollars, it’s easy to forget Rodriguez’s accomplishments. Indeed there are legitimate reasons for assets moving to index funds. Many active managers haven’t been able to overcome their fees and beat their benchmarks. FPA Capital itself has been lackluster since Rodriguez stepped down, though a lengthy bull market, after which prices are arguably stretched, has never been this fund’s time to shine.
But it’s also easy to forget active management in a bull market, which, by definition, is good for indexing. Professional investors and fund managers who have qualms about the current securities prices necessarily seem out of step.
A devoted indexer might say it would have been hard to recognize Rodriguez’s excellence before the fact. And now that he’s retired, it’s impossible to hire him. But Rodriguez didn’t toil in obscurity while he was compiling a record that beat the index by four percentage-points annually. Everyone will have to come to their own decision about whether it’s impossible to appraise value-stock investors like Rodriguez during their careers, or whether people’s emotions cause them to dismiss those independent-minded investors who lag in bull markets because they won’t pay up for securities.