A Mixed Bag That Works

A talk with a fund manager whose eclectic approach has delivered a 21% gain this year

In most balanced funds, blue-chip stocks and high-quality bonds are the staples. Not so at Steven Romick's FPA Crescent Fund. The 40-year-old portfolio manager blends small- and mid-cap stocks with junk bonds and convertible debt. This eclectic approach works. The $350 million fund is up 21% so far this year -- and has lost money in just one of the past 10 years. Personal Business Editor Lauren Young spoke with Los Angeles-based Romick on a visit to New York.

Why is 30% of the fund in cash?

Right now, we are just not finding many bargains. Holding cash is the same thing as saying: "I expect better opportunities down the road."

What sectors do you like?

Oil field services is one of the more attractive sectors today because we need to do more drilling for natural gas. There were 5,000 rigs 20 years ago; today there are fewer than 1,000 in operation. Greater demand will drive higher day rates for the rigs, driving earnings.

That's why we have increased our holdings in a number of companies, including Patterson-UTI Energy, National-Oilwell, GlobalSantaFe, and ENSCO International.

You're still holding high-yield bonds, despite the big runup. Why?

We own fewer high-yield bonds than we did in the past. We're down from 20% in summer 2002 to 11% now. But whatever might upset the high-yield market will have much more of a negative impact on the stock market -- so on a relative basis, high-yield bonds are more attractive than stocks.

What kinds of investments or sectors are you shying away from?

I'm very cautious on consumer finance. Household debt as a percentage of gross domestic product is 80%. The consumers are stretched thin, and most of the companies are highly leveraged.

Having said that, the fund owns WFS Financial Inc., the No. 2 independent auto lender. Unlike its competitors, WFS has a clean balance sheet, insiders own a huge amount of stock, and it has very conservative accounting policies.

What's another company that you are excited about?

Trinity Industries. It's the largest railcar manufacturer in the U.S. About 1.1 million cars are on the rails today, and the scrappage rate is around 50,000 per year. But in 2002, only 15,000 new cars were sold, so if the fleet is maintained at current levels, more cars will be needed. It's another supply-vs.-demand story.

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