Connie Mack interviewed First Pacific Advisors' CEO, Robert Rodriguez, co-portfolio manager of FPA Capital, a mid cap value fund, and FPA New Income, his bond fund, which just celebrated its 25th year in positive territory. Rodriguez is one of only two fund managers to have been honoured by Morningstar as best fund manager three times in his career. The other is Bill Gross.
Here are some excerpts from this in depth interview, which you should make a point of watching.
Rodriguez describes the economy as entering a "repression," not as bad as the Great Depression, but worse than a bad recession.
CONSUELO MACK: You've quoted in one of your speeches and one of your shareholder letters too that legendary economist John Maynard Keynes describing the long-term investor as eccentric, unconventional and rash in the eyes of the average opinion, which fits you to a tee, actually. So where does the eccentric and unconventional side of Bob Rodriguez come from? Where did you get this?
ROBERT RODRIGUEZ: I really don't like following the norm. If I follow the norm, I would never have been in this business. My last name is not a competitive advantage when I entered the field, and had to knock down a lot of doors, and you had to do things to separate yourself from the crowd, so that all started way back when I was very young. My first time I got anything to do with the investment field was writing a letter to the Federal Reserve chairman when I was ten. It was a school assignment.
CONSUELO MACK: And he wrote you back.
ROBERT RODRIGUEZ: And he wrote me back, and I said gee that's kind of neat, how many people would do that. What's the down side? So I started thinking differently about what the norm is, and then how can you turn that to your competitive advantage? So it's always been that way. I would say when I was in graduate school or just going into graduate school, I discovered Graham and Dodd during the summer before I was coming back to graduate school. And it really struck home, and I had the good fortune of meeting Charlie Munger in our investment course there.
CONSUELO MACK: Warren Buffett's kind of unknown partner.
ROBERT RODRIGUEZ: As Warren Buffett says, he's the smart one. And after the class I asked him, I said what can I do to make myself a better investor, beyond just what I'm doing here and researching, et cetera? And he said, read history. Read history. Read history. And if people had read history about the economic crises of before, not only the depression but even before then, they would have said this is an old friend, and so that helped. It's come from a number of different parts, but I think really not being afraid to fail and be different. That's what it took in order to differentiate in this business.
I had a friend of mine who was a growth stock manager who got just before the debacle of 2000, we were having lunch together in January of 2000 and he was buying all this dot com, and I said why are you buying this crap? And he says, because you have to, he says yes, if I don't buy it we won't be competitive. I said, but don't you realize, you are at the epicenter of a debacle that's going to occur? And when you get destroyed, you know, you could either have cash or you can buy these things. If you have cash, you get fired. If you buy the dot-com and it blows up, you get fired. So in both cases you're fired. What's the difference? Over here the one with the cash, where you held your investment discipline, you can rebuild your business. Over here, you've destroyed your credibility, you can never rebuild.
CONSUELO MACK: Let's talk about some of your unconventional current calls. You're describing the current economic state that we're in as a repression, which it's not as bad as the Great Depression, but it's also worse than a recession. Where is this repression taking us? What's it going to feel like?
ROBERT RODRIGUEZ: Here in the firm, we're using a new term for the economy. We're calling it the caterpillar economy. Where it goes up and goes down, goes up and goes down, but it doesn't move forward very fast, after this waterfall collapse that we had. And this is different from any other kind of economic environment that we've been in since the depression. You don't destroy the consumer's balance sheet, like what's gone on. You don't have the leverage in the system that we have and expect to come out of it the way we've come out of other periods. The president, I argue, that I think he's on the wrong road and when I compare him to let's say FDR. When he came into power, the debt to GDP was barely 17% when FDR came here, whereas now we're now at 65% going to 75, going to 90% this year.
Rodriguez says that the rebound in the market and economy is a "head fake." He suggests the way to go is to stay high quality and use a rifle, as opposed to shotgun, approach to investing, the next 5 to 10 years. He says highly diversified equity funds will be a competitive disadvantage - you may as well buy an index fund rather than pay an active fund manager who isn't necessarily going to deliver an edge in this market.
CONSUELO MACK: So how do you invest in an environment that is going to be substandard growth, that you don't know what the rules of the game are because you don't know what the government is going to do next, what do you do?
ROBERT RODRIGUEZ: It's going to be very hard. As a result, on the fixed income side, we're still maintaining our highest levels of quality. We haven't gone into the lower rungs of the high yield area, even though there's been big rungs there, because we think this is a head fake of what's going on in the economy and this rebound, the green shoots that people talk about. So we're going to stay high quality and let other people destroy themselves.
On the equity side, we think you have to be very focused in terms of the industries you go after. So we have a natural decline rate in, let's say energy, supplies of energy. So we think longer term- three, five, ten years. Energy prices are going to be considerably elevated from where they are today. So we have a heavy exposure there.
CONSUELO MACK: Heavy, like 55% of the FPA Capital Portfolio, is that right, is in energy?
ROBERT RODRIGUEZ: Well, about 41% of the total portfolio, about 55% of the equity. Okay. So we're looking for other areas to deploy capital that will both benefit from the international side but also from the commodities side.
So we see, you have to be rifle shooting over the course of the next five years or ten years, and that's why I gave a speech in Chicago at Morningstar that in my opinion, a highly diversified equity fund in this new order will be at a competitive disadvantage, especially if it carries management fees, et cetera, so you're going to have to do something different from the rest of the market in order to differentiate again, and that's what we're doing.
The whole transcript will be available for a limited time only (two weeks) as WealthTrack charges for archived transcripts. Read it here.
In case you didn't see the video 2 weeks ago, here it is again:
