Friday, December 11, 2009

FPA’s Rodriguez Flouts ‘Small Mind’ Investor Rules to Top Funds

Robert Rodriguez ignores most rules of the mutual-fund industry, an approach that’s helped him beat all rival managers over the past 25 years.

Rodriguez, who runs the $1.1 billion FPA Capital Fund, puts most of his money into two or three industries at a time, has stopped taking new investors for 12 of the past 14 years and has held as much as 46 percent of assets in cash. His 15 percent average annual return since 1984 is best among diversified U.S. equity funds, according to Morningstar Inc.

“His approach is at odds with how the mutual-fund industry runs its money,” Christopher Davis, an analyst with Chicago- based Morningstar, said in a telephone interview.

The 60-year-old says he looks for companies with a market value of $1 billion to $4 billion that sell at what he considers bargain prices, and holds cash if he can’t find enough stocks that meet his criteria. That strategy helped Rodriguez limit losses from the technology stock bubble in 2000 and the credit crisis that started in 2007.

Since 1998, the fund has had an average cash position of about 30 percent. Stock mutual funds hold an average of 4.3 percent.

“People told me, ‘You are not paid to manage cash,’ ” he said in a telephone interview from his home in Zephyr Cove, Nevada, where he moved three years ago from California. “I am paid to exercise my best judgment. If you don’t like it, you can leave.”

As a student at the University of Southern California, where he earned a bachelor’s degree and a master’s of business administration, Rodriguez said he heard Charles Munger, now vice chairman of Omaha, Nebraska-based Berkshire Hathaway Inc., belittle the importance of holding a diversified portfolio.

“He called diversification the hobgoblin of small minds with little confidence,” Rodriguez said.

Rodriguez has criticized rival fund managers for selling products based on marketing considerations instead of investment opportunities. Rather than attract more money than he’s comfortable investing, Rodriguez said he keeps the fund closed to new investors. Morningstar data show that 6.5 percent of stock mutual funds are currently closed.

Rodriguez says he hasn’t bought a single stock since March, anticipating that equity markets may take as long as a decade to reach the previous highs.

Rodriguez will begin a one-year sabbatical in January that had been planned since 2003. FPA Capital will be run by Dennis Bryan and Rikard Ekstrand during that period, both of whom are portfolio managers on the fund. Rodriguez said he will keep his money in FPA’s funds.

In his year off, Rodriguez plans to travel and read books, including “Democracy in America” by Alexis de Tocqueville and “Roughing It” by Mark Twain. He also will devote more time to his hobby: driving Porsches at 155 miles per hour.


Related previous post: FPA Capital Fund Letter to Shareholders which includes the Final Fund Commentary from Robert Rodriguez