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FPA Mutual Funds Not Afraid to Hold Cash

Seeking to protect shareholders, FPA funds often take positions that other managers might consider outlandish.

NEW YORK (TheStreet) -- Eric Ende, portfolio manager of FPA Perennial (FPPFX) - Get FPA U.S. Core Equity Report, would be considered an odd duck at most fund companies. While his typical competitors stick primarily with stocks, Ende sometimes has double-digit positions in cash. Most managers stay broadly diversified, holding stocks from a range of sectors in the S&P 500. But Ende has no interest in matching the benchmark's allocations. Recently FPA Perennial had no assets at all in financials, software, telecom and utilities.

As a result of the eccentric approach, Ende does not track the benchmark closely. Some years, the fund soars past competitors and other times it lags badly. That record can unnerve shareholders who prefer more conventional approaches. But long-term investors have been richly rewarded. During the past ten years, the fund has returned 9.7% annually, outdoing 99% of mid growth competitors, according to

Morningstar

.

Though he might appear unconventional, Ende is right at home at FPA. The managers of the company's six funds are a contrarian lot. Seeking to protect shareholders, the funds often hold big cash stakes and take positions that other managers might consider outlandish.

Among bond funds,

FPA New Income

(FPNIX) - Get FPA New Income Fund Report

may be unique in its willingness to go against the crowd. After junk bonds crashed in 2002, the fund loaded up on discounted securities and scored big gains when markets recovered. More recently, portfolio manager Tom Atteberry has plowed his assets into high-quality short-term securities, which should prove resilient if inflation and interest rates rise.

FPA Crescent

(FPACX) - Get FPA Crescent Institutional Report

resembles few of its competitors in the moderate allocation category. Portfolio manager Steven Romick roams widely, buying junk bonds one year and high-quality blue-chip stocks the next. When he couldn't find bargains, Romick has held more than 40% of assets in cash.

All the FPA managers can be crochety. In speeches and shareholder letters, they have railed against Washington for mismanaging the economy. To protect shareholders from hazardous markets, the funds have all been defensive lately, keeping plenty of cash and sticking with holdings that appear to have limited downside.

Like his fellow FPA managers, Eric Ende has long taken a cautious approach. He has an extreme aversion to companies with heavy debt, and most of the 30 stocks in his portfolio have no debt at all. That is very different from typical managers who argue that effective use of debt can boost earnings. "Some investors prefer businesses that keep the pedal to the metal," he says. "We feel more comfortable with companies that have very conservative management teams. If you have lots of cash, you are not at the mercy of banks or the capital markets."

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Ende looks for companies that have long track records for producing superior returns on capital. Some of his holdings deliver double-digit earnings growth. But others chug along in unglamorous industries where only top managements can produce steady single-digit gains. Ende likes to shop when stocks have fallen a bit out of favor. Once he buys, the portfolio manager holds on for years. In 2009, the fund only turned over 3% of its portfolio. In contrast, the average mid growth fund trades rapidly, turning over its entire portfolio every year.

Two of his favorite holdings are trucking companies,

Knight Transportation

(KNX) - Get Knight-Swift Transportation Holdings Inc. Class A Report

and

Heartland Express

(HTLD) - Get Heartland Express, Inc. Report

. Ende says that trucking is generally a difficult business. Most companies report weak revenue growth and skimpy profit margins. But Knight and Heartland are standouts. Operating efficiently, the companies consistently report fat margins. During the recession, many truckers cut costs sharply, refusing to replace aging rigs. But Ende's two holdings continued investing in new trucks. Now their fleets have a big edge because it costs less to maintain a new truck than an old one. "The top companies can take market share away from competitors that have higher costs," he says.

Ende likes companies that dominate niches. A steady holding is

Varian Medical Systems

(VAR) - Get Varian Medical Systems, Inc. Report

, which makes equipment that is used to treat cancer. The company has few competitors, says Ende. "The machines sell for millions of dollars, and it is very expensive for competitors to enter the business," he says.

Ende says that Varian's sales should continue climbing for years. The new health care legislation should result in more patients being treated for cancer. In addition, Varian is reaching new customers by expanding into the emerging markets.

Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.