An article in Barron’s offers market insights from Steve Romick, one of the managers of FPA Crescent Fund—which, over the past three, five, 10 and 15 years has reportedly “beaten the average moderate asset-allocation fund in Morningstar’s database”.

Here are some highlights from Romick’s comments:

  • The issues leading up to the financial crisis of 2008 arose from an over levered financial system and consumer. Today, however, Romick says that consumers are in better shape and have more equity than they did a decade ago. Further, mortgage debt is lower and home prices are higher in most parts of the country.
  • The problem today is in the corporate sector, with increasing leverage, as well as sovereign debt. “Sovereign debt levels are as high as they’ve ever been relative to gross domestic product around the globe,” says Romick, adding, “That’s true of the U.S. Treasury and of the state and local levels in the U.S. This rapid debt expansion can’t continue forever.”
  • Romick characterizes sovereign, state and local governments as “accidents waiting to happen,” and believes that whatever happens in sovereign debt could create future problems and a higher-rate environment. “With yields as low as they are,” he says, “people don’t recognize the risk.”
  • Going forward, Romick says, equities will suffer due to increased corporate bankruptcies. “But it will create future opportunity for us to put even more capital to work. We invest with five- to seven-year mindset, and I think we’re going to have some very attractive IRRs. We’d rather have our money out there and accept some volatility, rather than just keep it in cash.”
  • Passive investing, says Romick, “is a terrific tool, but if you’re a hammer, everything can be a nail.” It’s important for investors to recognize the limitations.

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