FPACX (FPACX) 2020-11-01 Earnings Call Transcript

Hello, and welcome to today's webcast. My name is Heidi and I will be your event specialist today. All lines have been placed on mute to prevent any background noise. And please note that today's webcast is being recorded. During the presentation, we will have a question-and-answer session, you can ask to text questions at any time. Click the green Q&A icon on the lower left hand corner of your screen, type your question in the open area and click Ask to Submit. If you would like to view the presentation in the full screen view, click the full screen button on the lower right hand corner of your screen. Press the Escape key on your keyboard to return to your original view. For optimal viewing and participation, please disable your pop-up blockers. And finally, should you need technical assistance, as the best practice we first suggest that you refresh your browser. As that does not resolve the issue, please click on the support option in the upper right hand corner of your screen for online troubleshooting. It is now my pleasure to turn today's program over to Ryan Leggio. Ryan, the floor is yours.

Thank you so much. Good afternoon and thank you for joining us today everyone. We'd like to welcome you to FPA Crescent's third quarter 2020 webcast. My name is Ryan Leggio. I'm a partner here at FPA. The audio transcript visual replay and presentation of today's webcast will be made available on our website fpa.com in the coming days. Momentarily, you will hear from Steven Romick, Brian Selmo and Mark Landecker, the portfolio managers of our contrarian value strategy, which includes the FPA Crescent Fund. Steven has managed the FPA Crescent Fund since its inception in 1993 as Brian and Mark joining Steven as portfolio managers in June of 2013. Before I hand it over to Steven, I wanted to mention that Steven was recently interviewed on Morningstar's The Long View Podcast. Please go to our homepage, if you'd like to listen to the podcast. At this time, it's my pleasure to turn the call over to Steven. Steven, over to you.

Thank you, Ryan, and thank you everybody for joining the call today. If we sound a little bit muffled for sitting in here, Brian Selmo is joining me in the room today and so we're both wearing mask; and Mark Landecker decide to play it safe and take this call from home. To accomplish our goal of achieving equity rates of return with less risk of our full market cycles, we can invest broadly, more broadly than any public fund that we're aware of not just in the stocks, but in distressed debt and high yield bonds overseas as well as in the U.S. as well as a host of other tools. However, the pricing - asset pricing in recent years has not allowed us to take advantage of all our resources, which has caused the Fund to look a lot more ordinary in recent years than it has historically. The FPA Crescent Fund gained 3.8% for the third quarter, but declined 5% for the first nine months of 2020. The global ACWI advanced 8% in the quarter, while the domestic S&P increased 9%. Year-to-date the ACWI and the S&P are both positive 1% and 5% change respectively. We have largely avoided the secularly challenged industries over the last decade; including brick and mortar retail, mall, real estate, oil and gas and broadcasting to name a few. We do own, however, a number of what we believe to be very good businesses in sectors that are cyclically challenged rather than secularly challenged and those have performed quite well of late including aerospace, property and casualty insurance and cement. These companies have overshadowed the very good performance of many of the other less cyclical and less COVID impacted companies we own in our portfolio. But as COVID recedes into our rearview mirrors along with the fear of owning a company challenged by the pandemic, these businesses should once again grow and attract investor interest. Though we wish it might be sooner business performance will eventually be recognized in stock prices. Growth continues to outperform value on a global basis. I am not telling you something that you don't know. For the nine months, the global ACWI and the domestic S&P growth indices returned 18% and 20% respectively. By comparison, their value counterparts declined 11% and 14%. Crescent's long equity book delivered returns better than these value indexes, but below our own five year standards. If our portfolio of companies grow at the same rate as the stock market, and they've actually been growing faster, while trading at these lower valuations, and it stands to reason that our portfolio should perform well in the future. Guided by the incredible performance of a few large growth companies, the stock market recovery were being deeply in the red following the global onset of COVID-19, the stock market breath is as narrow as we've ever seen it and we prepared this table to help illustrate that. The largest ten companies delivered all of the performance and then some. The largest ten companies in the ACWI contributed 415% of the index return. While the largest ten companies in the S&P contributed 169% of that indexes return. For the nine months around 61% of the companies in the ACWI had around 57% in the S&P delivered a negative return. The performance of larger companies with their larger index rates has overshadowed the losers allowing the indices to post a positive return and the median stock return tells a similar story. For the nine months, the median total return of a stock in the ACWI was a loss of 7.9% while the S&P posted a slightly lower loss of 3.6%. That leaves value as in expenses as it has ever been when compared to growth and at some point we imagine that will change. Long equity net portion of our portfolio, there has been a drag on performance. The gap between value and growth performance this year since underperforming for a period of years, but this year is wider than any other point in time since 1975. To some degree, the stock market has come uncoupled from underlying profit growth. The S&P 500 has increased 63% since the beginning of 2015 through quarter end, even while corporate profits have declined. In that time, the S&P's trailing 12 month price earnings ratio increased from 18 to 26 times. The decline in interest rates and the expectation that they will remain low has trumped earnings and helped to propel the stock market, but such a disconnect cannot continue ad infinitum, profitability and valuation were once again be relevant. As value investors, we aim to understand the value of a business and purchase it at a price that offers both a margin of safety and the opportunity for a good longer term rate of return. Sometimes, a company captures the imagination of investors right away, and that return comes quickly, but more often the exact opposite occurs. For the contributors in the Fund over the trailing 12 months are technology companies, and the fifth is a cable company that offers the broadband delivery system for efficient internet access, including good quality video streaming. The contributors have either been beneficiaries of COVID-19, for example, more streaming, and thus more demand for broadband, or haven't experienced much of a negative impact on their businesses due to the pandemic. The detractors are no surprise aerospace or financial companies, whose businesses have been harmed to various degrees and their stock prices reflect these changes. However, in most cases, when COVID-19 recedes, we believe these businesses rebound and incite investor interest that could lead to higher stock prices. I'm going to turn it over to Brian and Mark for a moment to add some additional color to this page and the portfolio.

Sure, in this page - and Mark please feel free to jump in as we're not sitting next to each other. So this page has a fair representation of what we have in the portfolio. We have a number of high quality good to great businesses that we think trade at reasonable multiples for their quality and growth prospects, many of those have performed well year-to-date and you can see a smattering them - smattering of them on the left side of this page. We think that these companies remain either competitive while they all remain competitively entrenched and remain trading at reasonable valuations to their future prospects. We have also, in some cases, begun to reduce positions or exit positions all together in the face of stretching or stretched valuation metrics. On the right side of the page, you can see the company that Steven eluded to that in some cases are directly impacted by the pandemic, when we think about Howmet and Meggitt being aerospace suppliers, or the financial businesses that are impacted both by credit concerns as well as incredibly low interest rates. The companies on the right trade at highly discounted valuations. In the case of AIG and Wells Fargo, they trade at between 60% and 50% of tangible book value at earnings yields to the average earnings over the last four or five years of between 15% and 20% meaning if we took the average of what those businesses earned over the last five years and compared it to the current stock price and meaningful dividend yields. We would expect that as the economy normalizes and these businesses earnings are manifest, the excess capital that they generate would go towards buying back shares at a highly discounted basis, which should drive earnings performance and hopefully stock market performance. In regard to the aerospace companies that you see, they have in no way lost their competitive position or relevance. Their industry has been hit by somewhat unexpected and historically unprecedented disruption. When aerospace returns or when flying returns, we expect Howmet and Meggitt to continue to gather their same share and ship set value on new planes and on maintenance activities. Both of these companies trade at single digit multiples to their earnings prior to the pandemic, we would expect that in the fullness of time, their earnings power will be reinstated fulsomely or in some cases higher than what they were doing in 2019. And as such, we think that over a multi-year call it three or five year holding period, they represent incredibly good value. Mark, I'm not sure if you'd like to add, if not, I'll turn it back to Steven.

We'll toss it back to Steve.

2020 has been our worst relative year in a couple of decades for stocks held in Crescent for reasons we've discussed both in the aggregate as well as the detail that Brian just offered with some examples on the page for the prior slide. Despite the decade long headwind of value underperforming growth, the Fund's long equity book has marginally outperformed the broad market averages. Since we started keeping track in 2007, best in the S&P albeit by just 0.12% per year, but beating the MSCI ACWI by more significant 3.5% beginning in 2011. We alluded in the second quarter two central bank policies widening the societal gap between the haves and have nots. Within the equity market a similar valuation gap between the haves and have nots is about as wide as we've ever seen it. While the stock markets continue to rally, many companies have been left behind. You can see that in this chart shows that the cheapest stocks traded at about as much of a discount to the market average as they ever have. We have been able to populate the Fund with many recently priced companies that should go well over the intermediate and longer term as things normalize. Although we truly have no idea what might happen in the near-term. Nevertheless, this has generally been a good setup for future performance in the Fund. Each of the times you're seeing these peaks in this chart where the valuation spreads have gapped open. We therefore continue to maintain the Fund's net risk exposure to around 78% with less than average exposure to low yielding sub-investment grade corporate debt; the Fund's equity exposure is crept up to 70%. We believe that the more value oriented names in our portfolio continue to offer good value both on absolute and relative terms. So these companies continue to execute well believe there's only a matter of time before the valuation gap between them and the stock market average and certainly the expensive, large-cap stocks. No one has ever lived through the grand monetary experiment that central bankers and government treasuries are cooking up. These are unproven and untested theories where the outcome is not yet clear. However, if one has a long-term time horizon, choosing between investments in cash no return cash, low return fixed income and likely higher return in equities, equities would be the logical choice although they do come with a bit more volatility. In last quarter's letter, we pointed out the Fund’s long equity portfolio, for trailing 12 month and forward periods, was cheaper on a price-to-earnings and price-to-book basis than the S&P and the ACWI, and had higher three-year historic and forecasted earnings per share growth than the indices, although you wouldn't know it from its price performance. On average, it appears investors are placing much greater weight on what earnings might look like somewhere down the road, rather than where they are in the here and now. Joel Greenblatt, in a recent Bloomberg podcast highlights this, when he pointed out that, if you bought every company that lost money in 2019 that had a market cap over $1 billion, you’d be up 65% so far this year. I think it's safe to conclude our shareholders realized that those are not the types of companies in our portfolio. And the last slide before we turn to Q&A, we continue to find good, growing and reasonably priced companies domiciled outside the United States, which explains why our international exposure is now 38.5% of our net equity exposure. That is the conclusion of our prepared remarks. Now, we're going to turn to Q&A, and address the pre-submitted webcast questions as questions continue to come over the transom.

This question speaks to another question that was submitted, which was, what is your outlook for cash? So I'm going to take them together. We live in unusual times. We're the first people in history to witness medium and longer-term interest rates this low and in some cases negative. Continued pressure on rates is likely given so many governments say they desire to keep rates low, so they can not only add continued fuel to their economies, but also keep the borrowing costs, their national debt as low as possible. And concert was printing money with abandon, it's hard to know what the future holds. Where will inflation be, how the different fiat currencies fare, it's hard to not see the longer term benefits of owning the interest in a productive asset assuming or productive assets portal, assuming their purchase at reasonable prices. We, therefore, believe that equities will likely be a higher returning in cash and fixed income overall a longer term time horizon. And as our long-term partners now, cash has always been a byproduct of our investment process, but the penalty for owning cash is higher than it has been historically. Do you see future outperformance in emerging markets, particularly if the U.S. dollar weakens? As we pointed out at our prepared remarks, we think that international stocks on average less expensive than U.S. companies. In making this statement, we are careful to compare like for like and appreciate that more of the better global technology companies are based in the U.S. than are domiciled elsewhere, like Europe, for example. We are looking for good growing businesses at a reasonable price. If it so happens that of late, there have been more overseas, some of those are emerging markets. Foreign stock underperformance has led to opportunity, but as to when the stocks we own might outperform and what might the drivers be; only time will tell. And these companies do continue to grow as expected then we should be happy with the return they deliver at some point in the future.

Of course, it's more tilted to what most would deem value stocks than it was a year ago, this should be expected given the increasingly desperate price movement of growth in value in that time. However, the institutional view of what is a growth stock and what is a value stock places a bright line where there really isn't one. We want to own growing businesses and growing industries and avoid those that are secularly declining. Some will get defined by others as value or growth. We have done a good job of avoiding those businesses that are being disrupted by new technology, better products or improved business models where we have not excelled, is owning many of the rapidly growing businesses regardless of price. As I mentioned in our prepared remarks, many of those companies with no earnings have been huge market winners. Too low interest rates allow growth assets to continue to outperform value assets to the point people give up on value managers. Well, I think, it's fair to say that people have been given up on value managers. But to answer the question, I think the declining interest rate is what has been the biggest driver of stock returns in recent years. Disproportionately benefiting growth stocks is out your cash flows are worth more at a lower discount rate. Now, the rates are already zero to negative bound, it's hard to see how that same benefit will be there in the future. If the companies we own, grow, as we have surmised, then their stock prices should appreciate over time, and quite likely outperform many of them were in probably priced businesses, even those and even more of those with the suspect business models. However, fund flows impacting our ability to manage the portfolio. We've managed Crescent for more than a quarter century to significant inflows and outflows, both. The vast majority of our positions are very, very liquid and all this diverse scale up and scale down without impacting the market. Very, very few less liquid positions have always been sized - very small so that we might allow them to scale up in the event of redemptions. From the outset, we would have preferred those less liquid positions to be larger, so when increase in size is generally welcome.

I think you bring up an important point many value companies is in our businesses disrupted as a result of technologically different competitive landscapes. But those seemed companies weren't necessarily valued based on book value. Investors weren't buying Sears or Kodak or blockbuster video for their respective book values. It was for their earnings until their earnings weren't there anymore. Other than the financials, we generally looking at the value of a business predicted on its gap equity. We think about what a company should earn over time, but might be a reasonable multiple investor may pay on their future cash earnings, and as the current price of Fortis a reasonable IRR based on those assumptions.

We are seeing a similar premium being paid for tech stocks, and less volatile a cyclical company selling staples today. Some of those businesses might warrant the prices being paid for them and a lot of them in our opinion, don't. We also think the Ohio market offers more than its share of return free risk. The Ohio market, as I pointed out earlier is a place where we've historically found lots of opportunity, but given how weak covenants are today, it makes it pretty darn challenging. It's kind of shocking that I guess to my knowledge, I just don't have even seen a travel company go bankrupt in 2020. So we hope for opportunity to future, but we're not operating as if it's coming around the corner anytime soon.

I want to note that we've always cared about long-term after tax returns. As long-term investors and as taxable co-investors in our funds with clients. We have always strived for any gains to be long-term in nature is possible and proven. Our capital gain estimate and other details will be posted on our website this week. Long-term capital gains will likely fall in the range of 2% to 4% of NAV, while short-term gains are estimated 1% to 2% is based on a September 30 closing price.

And Northwestern Lakers, the Dodgers has been quite a month, now it's up to the round. So thank you for the shout out. I'm going to turn it over to Mark and Brian to address some of the additional questions that were pre-submitted.

What are the companies, the companies that fund own and is considering saying - let me paraphrase it. What are the companies that we own and other businesses that we're analyzing, commenting on or saying regarding their outlook for revenues and cash flow over the next year or so?

Sure. So I think the answer is across the portfolio quite varied. We had an opportunity to join a group conference call with the CEO of our Japanese video gaming company next and recently, and he called out well, it's obvious that there's a humanitarian crisis playing out worldwide, as it relates to their actual business, it's never been better and the effectively are experiencing no crisis. Then we have other companies like our Aerospace Holdings, for example, that are operating in a much more dynamic environment. And many of them have often offered up low to high cases with respect to how the next 12 months might look. So it's really hard to generalize in terms of what the majority of companies see, given it varies so significantly. That said, we would say that overall, the majority of companies have chosen to take a mulligan as it relates to offering up what the world looks like over the next 12 months. Suffice to say, they believe there will continue to be uncertainty.

So I think there are two bits to this. One, I would say that the risk free rate is certainly the benchmark rate, or the starting off point by which every risk asset or competitive asset, economic asset prices in a country or in the world lot matter. And certainly, the lower perceived risk to the cash flows, the tire bound to the risk free rate that you would expect those cash flows to trade. And so I think that's the second part that you get at is the subjective and objective criteria, which is there should be some type of risk premium applied above that risk free rate, but for a assumed or given level of risk or risk premium that one is assuming a lower discount rate or a lower risk free rate would mathematically drive a higher valuation, all other things equal, and that is sort of no different for us or anything else. And, and what this really comes down to at the end of the day is people have - savers have capital, and they have an opportunity set. And one needs to consider the current opportunity set against other risk assets, investable assets and the risk free rate as well as against a potential future opportunity set. And it's the tension of those opportunities that leads to portfolio decisions and pricing.

Sure. So Steven touched on this earlier in his comments, but I'll add a little bit more meat to the bone. We've always believed that both growth and value are tied at the hip. So if you go back over roughly almost a decade I believe now, we originally purchased Microsoft during, which time it was often described by the investment community as a value stock or even a deep value stock at the time. And then in the later years most recently, it's now taken on the narrative of being a growth stock. On the flip side, when we originally purchased Baidu, it was largely viewed as a growth company, and now has largely transitioned to a value story. Ultimately, however, we seek to purchase and subsequently own securities that we believe traded a discount to what we believe to be the intrinsic value. Now, at times we may creatively try and combine value and growth such as our ownership of Altaba and SoftBank that effectively allowed us and discounted method or value oriented entry into the Alibaba story. The same could be said for Naspers and Tencent as an example. Regardless, in all cases, we try and do a robust analysis to consider a range of scenarios from low-to-high and allocate capital when we believe the risk reward is tilted in our favor. And I'm going to hop to a question that I saw coming over the transom. Now on the screen, it says, what's your view on the value of Microsoft to double from current levels, the company would fetch, I suppose it would need to fetch a 3 trillion market cap.

And Brian said something in the lines of - we pinch your nose until we can't take it anymore. It might be safe to say, and if you look at some of the trims in the portfolio over the past quarter, and perhaps what you will see over the coming quarter is that we're having trouble pinching our nose anymore on certain names. And so suffice to say, it's realistic that you will see us lighten up on some of the “compounders” in the portfolio. When we believe we may struggle to return equity type rates of return going forward back to you Brian.

The quick answer is we have not. And if you think about how we analyze businesses and think about our holding period over time, we're generally looking out past any one election and that implies that there's a fair amount of political uncertainty in any investment. If you go out over multiple election periods, I would say that we do think about changing political climate and what it might do both in terms of loss rates for insurance companies, monetary policy as well as regulatory policy for various industries. And we think that there are some industries that may likely face a more challenging future over a different administration and we've been spending some time getting up to speed and identifying those that we would be interested in owning over a long-term outlook.

Well, I think this is a very astute question. I think that certainly there, as Steven has talked about, there is really no return opportunity in fixed income today. And whether you're looking at high yield or you're looking at treasuries, the return is very, very small for the risk taken. So this is a question that we grapple with when building the portfolio. And I think as Steven has talked about, and as you've seen in our letters, we believe that a diversified equity portfolio of high quality well-financed companies is the right answer to this question. And that is going to be made up of some companies that pay very attractive dividend yield. And I would call out with Farge Broadcom, AIG, and others as well as other businesses that are growing rapidly, buying back their shares and effectively creating a yield in the form of share shrink for their shareholders. And so when you look at our equity portfolio, it yields more than two times the ten-year bond. And I mean that just the dividend yield. And in addition to that, we get the earnings yield of those businesses working for us, which I think if we look at the presentation on page 12, you'll see is about 17 times the expected earnings for next year. So that's approaching a 6% free cash flow yield, which is a significant spread to treasuries or even high yield bonds. And so I think that the equity portfolio over a rolling three or five-year period is a much superior option and will provide yield compared to alternatives.

Let me interject just fold the question into that's coming in. There's a question that it refers back to. I think it was in our shareholder letter where we just, where we show what are trolling to ES and then comparing that to the kind of the projected PE that Brian is addressing and it shows the PE that this ramp to a hundred times. Well, the calculation of that PE is we're just falling, trying to follow the index rules and they can get skewed in a smaller portfolio President an index of 500 stocks for example, but negative earnings have a play, have a role in that calculation. So excluding the negative ratings, it's just not as dramatic as that, but the negative earnings were close. The negative earnings do have an impact, which create that noise that happens. It shouldn't be any great surprise in COVID-19 environment where some companies are losing money at least temporarily. And I think that's one of the reasons why we think it's important to focus on what a normalized level of earnings are. Now, the forward earnings that we show on the chart that the table that Brent was referencing are not our projections. Those are consensus. We just - we want to take ourselves out of the equation and be honest brokers in the manner in which we communicate the value in the portfolio as it's compared to the indices today. Brian, do you want?

Yes. Thank you. We've gotten a couple of questions on AIG, specifically the management and the recent spinoff or discussion around splitting the business into two. I think broadly what we'd say is that we continue to be impressed with AIG's turnaround in their general insurance operations. I think you can see that in the accident, your underwriting year-to-date, you can see it in the cat experience that they disclosed that they're going to have in the third quarter net of reinsurance. And I think probably most importantly, you can see it in this eventual split up of the business. So this split has been something that a lot of people have been enthused about for a number of years. I think that each of the businesses are likely to trade better on their own. Certainly if you look at any of the peers, they would appear to trade better on their own than what AIG trades out together. And I think that the decision now to separate the two is a statement of confidence from the management and the board in the capital strength of the overall enterprise. And so I think that I would take it as a very positive sign, both in terms of how the company has restructured and improved performance as well as hopefully creating a market opportunity for people to get any more clean look at the two different divisions.

Okay, being able to own a company that trades at 40% of book value. I think it's a good book value, it is not an attractive to us.

We don't have any particular comment on GE common. We owned a position in GE preferred and as a sort of relative pricing versus other opportunities and kind of where the yield was on that we decided to sell it, but it really wasn't a position in GE common at that point.

I think that this speaks to some of the points that Brian was addressing with respect to the question about smart financials and Wells Fargo example of the gaming. Today, going into 2008, you had this is all the accounting, you know, adage that says the left side of the balance sheet wasn't right, and the right side didn't have much left. So you had that assets and not a lot of equity there to support the balance sheet. Since then, we think the assets are much better than they were back at that point. There was certainly a lot more capital in the system today than there was then. So we don't think that is same issue in the financial system that existed that, they'll be different issues.

Oh, to pick up on that, Brian walked through an example that one of our investor days, maybe two years ago. I can't quite recall Brian you'll jump in where we looked at the financial position of the call, large money center banks. And if they were to take write offs of a magnitude equal to that realized in the GFC, they would come out of the say - they would emerge from whatever downturn came around this time with balance sheets that were actually superior to that of going into the GFC. Brian, if you want to elaborate on that.

No, that's right Mark. And I think the other thing that we would point out is that certainly there is a lot of credit loss that will come as a result of Coronavirus. A lot of that has been reserved for at this point. And you've seen broadly companies are going to report net earnings over the course of the year in which they take the lion's share of those losses through the income statement. So I think that from that perspective, the financial system seems much stronger than it was a decade or so ago.

We just never have any idea. I mean, rates - and it isn't just the rates are low. The bigger factor I would argue that's been the driver has been since 2015 anyway. Where rates weren't even high at that point in time is that rates went it's gone down since then. And in 2015, there was a perception out there in certain parts of the world that rates was good chance of going up. I think there is - today we sit in a place where rates are already much lower than they were then. Then can't go much lower without going negative in the United States, which is, I don't want to suggest is an impossibility. But we have that same benefit with that second derivative rate of change. It'd be very hard to come by. And then the question that it bags is, what is likely to happen in the future. And, and again, we don't, we, we just, we don't know what happens in the near future or the distributor. Instead, we want to focus and try and find some of these businesses that we're articulating today to you and explain why we hold them in our portfolios. And we're not going to engage in discussion. And in a lot of companies that we think have silly prices to them, but we do think there is a universe of companies like that out there. So we don't know what will be the catalyst to cause our portfolio to move in a favorable direction anytime soon. And it could start tomorrow, could start next week. Why did the stock market peak in March of 2000? We know we did - it could have peaked a year earlier. You would have lost, you still would have lost 90% of your money. So we don't know any of those things. We just really want to focus and trying to find me in owning these good businesses and we do own a lot of good businesses in our portfolio. And some of them just are cyclical, but some of them aren't, and Google reported reporting earnings after, you know, after the close while we're on this call and the stocks trading up nicely overnight, and I'll know that's sustainable. I don't know what will happen tomorrow. But the point being is we own different types of companies in our portfolio, as we try to create a portfolio for ourselves and for our shareholder partners, that is robust and multiple outcomes. Yes, I think it's fair to say that we are trying to avoid exposures or risks that benefit from very low rates, right? I mean, I think we perceive the risk being in the other direction. So we're not actively positioning to benefit from rates staying at zero. I think what you are though, hearing us talk about is describe the choice between zero and a diversified equity portfolio that has both attractive growth prospects, reasonable valuation, and a decent starting yield. And I think that we find that portfolio much more attractive. And so that's what I would say is how it's impacting us.

I think all of these indices are flawed in different, in different ways. And I think it is a signpost of a vivid that doesn't direct you much of anywhere. It's just something you can look at where it's been in the past and to where it is now, but it doesn't suggest anything about the future.

I think that all the companies we own have reasonable exposures, meaning they're not overly exposed to commercial real estate with the possible exception of one New York lender that has a real differentiated book that's probably still well covered even in a very depressed New York real estate environment, but the rest of them are quite diversified by type and geography. And I think that they also are high quality lenders meaning that they're going to primarily have core portfolios that are well-supported by the owners and sponsors. And so I think that, there have been significant reserves taken to date probably appropriately. So I think that they have the earnings power and the capital to handle, continued deterioration in commercial real estate.

When we model, we try and determine when a company might earn over time and we look out a number of years and we never know if a recession is coming around the corner, we never know if a recession hits how deep it might be. We don't know how long a good economy might last. So we just try and do is this is be intellectually honest and build our models in such a way that we say look what a base case over the next few years, this should be a very attractive opportunity for us to get a good IRR in a good business. And then - and that's some optionality on a high case scenario that might occur that can get us even better returns and supercharge it a bit. But very importantly in the low case, try and analyze it in a way that we can appreciate and accept that we wouldn't lose much money if anything over a multi-year period.

Yes. I'd say if anything, if this year doesn't create some humility in terms of one's ability to project, maybe nothing will, right. I think there are data points I could give you such as performance of the NASDAQ and then ask you to guess if the NASDAQ is that all time record, what would happen to rents in San Francisco, and I think you've got that question wrong. And this year I know I would have. And so there is a lot of cases where even if you give us half the puzzle, we might still get it wrong. And this year has shown that in spades. So I think that it's possible that earnings will be higher next year. The virus could also be much worse than what people are assuming, and earnings could be very difficult. We just don't know.

The only thing I'll throw in is when we do talk to corporates, and we say, if revenue turns out to be similar in 2021 to 2020, how do you think profitability would look? And by and large given the steps companies have taken to restructure their cost pace, right size their organizations make changes in the supply chain?

And in respect to the energy industry in general, there is - look we - used a lot of the energy industry within the energy industry 15 years ago. And as we saw the idea of peak oil be hijacked by type shale formation and we saw inappropriate capital spending under parts of many of the companies that we were - who had sworn it - had sworn off of making a stupid capital allocation decisions. We limited to those positions believing that they would be more secularly challenged at least by that at that point in time. And now, you've got real - real renewable challenges effecting a lot of - that will affect fossil fuels in the next 50 years combined with the regulatory such these are likely to come their way if the - both the White House and the Senate were to - well the Senate were to flow. So I think there's a lot of questions that come out of that, but that we don't really find that we're able to answer, but there are enough headwinds in the future and make the question too difficult to answer such that we believe is easier things to do, where we believe that that airplanes will fly again more frequently in the future and people will be trumping them and they'll need new brakes. Those are all the questions that come across. We hope that we're able to answer them robustly. If there is some - are there follow-up questions that somebody would like to answer, please reach out to our team and we will do our best to get you the answer as quickly as possible. Ryan, I'm turning it back to you.

Thanks Steven, Mark and Brian. And again please email us at [email protected] if we missed your question or if you need anything else. Thank you for listening to FPA Crescent's third quarter 2020 webcasts. And we'd now like to turn it over to the system moderator for closing comments and disclosures. System moderator?

Thank you for your participation in today's webcast. We invite you your colleagues and shareholders to listen to the playback of this recording and view the presentation slides that will be available on our website within a few days at fpa.com. We urge you to visit the website for additional information about the Funds, such as complete portfolio holdings, historical returns, and after tax returns. Following today’s webcast, you will have the opportunity to provide your feedback and to submit any comments or suggestions. We encourage you to complete this portion of the webcast. We know that your time is valuable and we do appreciate and review all of your comments. Please visit fpa.com for future webcast information, including replays. We post the date and time of upcoming webcasts toward the end of each quarter. And webcasts are typically held three to four weeks following each quarter end. If you did not receive an invitation via email for today's webcast, and you would like to receive them, please email us at [email protected]. We hope that our quarterly commentaries, webcasts and special commentaries will continue to keep you appropriately informed on the strategies discussed today. We do want to make sure that you understand that the views expressed on this call are as of today and subject to change without notice based on market and other conditions. These views may differ from other portfolio managers and analysts at the firm as a whole, and are not intended to be forecast of future events, a guarantee of future results or investment advice. Past performance is no guarantee, nor is it indicative of future results. Any mention of individual securities or sectors should not be construed as a recommendation to purchase or sell securities or invest in such sectors. And any information provided is not sufficient basis upon, which to make an investment decision. It should not be assumed that future investments will be profitable or will equal the performance of the security or sector examples discussed. Any statistics or market data mentioned during this webcast have been obtained from sources believed to be reliable, but the accuracy and completeness cannot be guaranteed. You should consider each Fund's investment objectives, risks and charges and expenses carefully before you invest. The Prospectus details the Fund's investments, objectives, and policies, risks, charges, and any other matters of interest to a prospective investor. Please read the Prospectus carefully before investing. The Prospectus may be obtained by visiting the website at fpa.com by email at [email protected], toll free by calling 1-800-982-4372, or by contacting the Fund in writing. FPA Funds are offered by UMB Distribution Services, LLC. This concludes today's call. Thank you and enjoy the rest of your day.

How will the Fund navigate through a future of accelerated money printing, rising inflation and the currency debasement?

Please discuss your view, growth versus value, how is the Fund positioned today versus last year of this time?

How do you account for intangible assets which were poorly reflected with modern gap standards? Is the global value universe fundamentally weaker to a greater degree, compared to the growth universe and has been in years past?

What is the biggest risk in the market currently? Steven Romick:

What are your estimates for distributions?

What do you think of Northwestern victory over Maryland, I think was a question posed directly to me?

Great. Thank you, Steven. Mark, do you want to grab the first question?

Sure. Brian, why don't you read the questions and then I'll answer, you can keep the master list just to stay in control.

Perfect.

Thanks. Next question. I've recently read this since interest rates are low. So is the discount rate for future earnings, those resulting in high earnings multiples. This does not seem logical to me. I would think that the present value of company's future earnings should be based on other more relevant subjective and objective criteria. Please comment on how the concept might apply or not to the way you value companies?

Okay, next question. Can you address the continued divergence on growth versus value and what if any alterations in policy you foresee deploying as a result. Mark?

Is there much return to be head over the next five years at this level? So for long-term investors in the fund, I remember at our very first Investor Day, somebody said, how long do you hold these compounders? When do you sell?

Thanks Mark. Next question. Have you made any significant changes in advance of the election?

Next question. How is it going to be possible to get any yield in a market where the government has price controls on the bond market without taking greater risks? It seems like your strategy which has been executed very well, could be harder to implement in a market with any safe returns being squeezed out of it?

There is a question on GE and other value managers speaking high, low GE and us exiting a position in the third quarter?

There is a question about how is our financial system really recovered from 2008, if not, what effect will this continue to have on our stock and bond markets?

There is a question. What will be the impact on the portfolio of near zero interest rates for the foreseeable future?

There is somebody who is asking about is the Russell 1000 value of proxy for value in that?

Yes, there is a question about concerns regarding the debt and the assets related to commercial real estate held by in the various banks or insurance companies we own?

The question about consensus expectations for 2021 or higher. And it's probably a typo here higher than 2021 far as higher than 2020. Do you find that likely?

We feel that they would say ceteris paribus they would be more profitable than they were in 2020. And you can imagine due to all the remedial actions taken, that doesn't seem outlandish on our part, but we're not telling you to assume ceteris paribus.

There is another question about interest rates and the impact on stocks, and the person who is asking this question is really a longer involved discussion, which would require a little bit of back and forth that we're not able to do on this call?

So I would ask that the question or reach out to Ryan Alessio, and he can schedule a time for a conversation offline.

There is a question on the energy industry in general in Kinder Morgan's specific, it seems as though pipelines are being valued at level, assuming there will be a permanent decline in volumes in the U.S. I think that question is certainly true. And I think the broader question is about what the decline is going to be in which pipelines and at what speed. And so, I think that we have felt that natural gas is going to be one of the longer life slower decline uses of fossil fuels. And that's still probably our perspective on it, but certainly the big questions that you're interestingly thinking about something like tender of the other pipeline companies.