FPA Capital fund -- one of the best in the business -- will close to new investors July 9, the 20th anniversary of Los Angeles-based First Pacific Advisors managing the fund.
The explanation? A lack of appealing investment opportunities because of a generally overpriced stock market and ballooning assets, the same grounds cited in May 1995 when the fund closed and stayed shut until Jan. 1, 2001. At the 1995 closing, FPA Capital had $288 million in assets; today the fund tips the scales at a portly (for a smaller cap-oriented fund) $1.5 billion.
Closing the fund in 1995 meant missing the gravy years of fund asset gathering and therefore leaving potential management fees on the table. Management fees grow with fund assets.
When the fund reopened at the beginning of 2001 it drew little investor interest. The track record at the time was somewhat unexciting compared to the larger-cap growth and tech funds that ruled the late nineties.
Robert L. Rodriguez, who manages the fund and is also its president and chief investment officer, may be using fund investor enthusiasm as much as market valuations to gauge when to go to cash and when to open and close his fund. When fund investors are most excited about a style of investing, good investing opportunities are near extinct. When investors throw money at you it is best to hibernate until sanity returns to the market.
Few fund companies pass on the easy money following a hot streak and are more than willing to lead lambs to slaughter, charging fees along the way. Fund families are more likely to give investors what they want, not what they need. Most fund sponsors launched Internet funds just before the crash, not because they believed in the future of the medium so much as its salability. Many of the new funds were closed or merged when Internet investing became synonymous with the tulip market bubble of centuries ago and became an almost impossible sell.
Rodriguez is one of the few managers left who allows cash positions to climb when he feels the market is overpriced. Large mega-fund complexes have long since abandoned the practice, favoring the consistency of mediocrity. Let investors decide how much cash they want to hold. Rodriguez knows fund investors sometimes need protection from themselves. Currently short-term investments in FPA Capital are over 35%, a level that would cost a fund manager his job at Fidelity.
Its top five stock holdings, which range between about 4% and 5% of the fund's assets, are:
, which distributes electronics instruments and controls;
, an oil well services and equipment company.
First Pacific Advisors should make an investor nostalgic for the good 'ole days of mutual funds when managers ran entrepreneurial independent shops of stock-pickers.
A sometimes large cash stake hasn't stifled performance. According to
, FPA Capital is up 32.65% over the past 12 months through June 25,placing the fund in the top quarter or so of similar funds. Over the last10 years the annualized total return was 18.41%. The returns do not include loads.
Today, computer program-driven, closet-indexers managed portfolios and fund families are more concerned with distribution, breadth of product offerings, asset gathering and growth through mergers. This decade-long shift to a giant mutual fund industrial complex is one reason the business slipped into questionable practices in recent years -- people's life savings became merely account numbers and it's easy to skim an account number.
No-load investors should pass on FPA Capital, although with the low fees the fund actually costs less than many no-load, small-cap funds if held for several years. Those who deal with brokers, buy funds with loads, access load funds for no load through a company retirement plan, or can avoid loads by hitting fund breakpoints should consider the fund before it shuts the door.
Be aware that the fund's size will be a drag on future performance. The fund will likely do better when it reopens with little fanfare some years from now after enthusiasm for smaller-cap value wanes.
FPA Capital is an old-school load fund with only one share class: A. Investors pay 5.25% up front -- the straight-up and honest way to charge a sales load. Unlike the vast majority of load funds, FPA didn't create a variety of share classes to give brokers tools to confuse investors and conceal the sales load.
After paying the load the fund has just a 0.83% annual expense ratio -- very low for a smaller cap-oriented fund. These fees do not leave much room for the ongoing "trailing" commission load funds often paid to brokers after they park a customer in a fund. FPA doesn't believe in using the questionable but legal practices of enticing brokers to choose one fund over another.
There is nothing wrong with having brokers distribute your fund and nothing unseemly about passing a load to a broker who has customers needing and willing to pay for advice. There is something wrong with trying to hide this fact from the customer through artfully crafted back-end and level load share classes.
Disguising sales loads is a modern strategy the
Securities and Exchange Commission
accepts so long as the nuances of the complex structure are disclosed in a 60-page (and growing fast) legal document nobody reads, namely the fund prospectus.
FPA is a stand-up outfit in an increasingly seedy business.
Although there is no perfect formula for choosing funds, fund investors can learn from FPA Capital what ingredients often go into a successful long-term track record for an actively managed fund: low fees, a smaller asset base, a concentrated portfolio run by a good stock-picker, low portfolio turnover and a willingness to ease up on the gas when stocks are historically expensive -- even if it means occasionally underperforming benchmarks. Contrast this to giant funds that own hundreds of stocks and sport high fees and it's no wonder most funds trail benchmark indexes.
Thanks to new SEC regulations requiring more fund board independence, FPA Capital will soon need an independent board chairman (currently there isn't one). Presently, Rodriguez is a "dependant" director, meaning he works for the fund adviser and can't look out for the best interest of shareholders -- or so the current thinking goes.
A resume that includes delivering good performance, keeping out fund-timers, maintaining low fees and restricting asset growth to help shareholders at the expense of fund company profits will not be enough to warrant the chairman title for Rodriguez in the new environment.
Jonas Max Ferris is co-founder of
MAXfunds.com, a fund research and analysis company, and partner in an investment advisor offering managed accounts in mutual funds. He welcomes column critiques, comments or baseless accusations at