- First Pacific Advisors (FPA) is a Los Angeles-based institutional money management firm practicing a disciplined approach to value investing, prudently seeking superior long-term returns while maintaining a focus on capital preservation.
- FPA Queens Road Value Fund (“Fund”) returned -13.01% in the second quarter of 2022 and -16.80% for the first six months of 2022.
- We expect the lower current valuations to bode well for future returns.
- The CEOs at our portfolio companies are saying they feel good regarding their inventory positions, but we are paying close attention because inventories will be a key indicator over the next couple of quarters.
Average Annual Total Returns (%)* | ||||||||
Trailing Performance (%) | Current Market Cycle Performance | |||||||
As of Date: 6/30/2022 | Inception | 15 Years | 10 Years | 5 Years | 3 Years | 1 Year | YTD | 10/9/07- 6/30/2022 |
FPA Queens Road Value | 7.95 | 6.26 | 10.35 | 8.12 | 6.48 | -8.89 | -16.80 | 6.28 |
S&P 500 Value Index | 7.79 | 6.22 | 10.97 | 8.19 | 8.23 | -4.86 | -11.41 | 6.16 |
You should consider the Fund's investment objectives, risks, and charges and expenses carefully before you invest. The Prospectus details the Fund's objective and policies and other matters of interest to a prospective investor. Please read the Prospectus carefully before investing. The Prospectus may be obtained by visiting the website at www.fpa.com , by calling toll-free, 1-800-982-4372, or by contacting the Fund in writing. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown. This data represents past performance and investors should understand that investment returns and principal values fluctuate, so that when you redeem your investment it may be worth more or less than its original cost. Current month-end performance data, which may be lower or higher than the performance data quoted, may be obtained at www.fpa.com or by calling toll-free, 1-800-982-4372. The FPA Queens Road Value Fund (“Fund”) commenced operations on June 13, 2002. Periods greater than one year are annualized. Fund performance is shown net of all fees and expenses and includes reinvestment of all distributions. Fund performance does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares, which would lower these figures. An investor cannot invest directly in an index. * Prior to November 1, 2020, the performance shown reflects the historical performance of the Fund when Bragg Financial Advisors, Inc. ("BFA") served as investment adviser of the Fund. Effective November 1, 2020, FPA became the investment adviser of the Fund and BFA transitioned to serving as the sub-adviser. BFA continues to be responsible for the day-to- day management of the Fund, subject to FPA's oversight. No changes to the Fund's principal investment strategies were made in connection with these changes in management of the Fund, and Steve Scruggs, CFA, Director of Research and Senior Portfolio Manager for BFA, continues to serve as the portfolio manager for the Fund. From inception of the Fund to December 31, 2004, BFA and its affiliates voluntarily absorbed certain expenses of the Fund and voluntarily waived its management fee. Had BFA not done this, returns would have been lower during that period. Effective January 1, 2005 through October 31, 2020, BFA charged a single unitary management fee and contractually agreed to pay all operating expenses of the Fund except for brokerage, taxes, interest, litigation expenses, and other extraordinary expenses. The Fund's Total Annual Operating Expenses (as of the most recent prospectus) before reimbursement is 1.69%. The adviser has contractually agreed to reimburse the Fund for operating expenses in excess of 0.65% of average net assets of the Fund, excluding interest, taxes, brokerage fees and commissions payable by the Fund in connection with the purchase or sale of portfolio securities, fees and expenses of other funds in which the Fund invests, and extraordinary expenses, including litigation expenses not incurred in the Fund’s ordinary course of business, until October 31, 2023. These expense reimbursements are subject to possible recoupment by the adviser from the Fund in future years (within the three years from the date when the amount is waived or reimbursed) if such recoupment can be achieved within the lesser of the foregoing expense limits or the then current expense limits. This agreement may be terminated only by the Fund’s Board of Trustees, upon written notice to the adviser. Prior to November 1, 2020, the Fund had a unitized fee structure that limited annual operating expenses to 0.95%. Market Cycle reflects the most recent market cycle (peak to peak) defined as a period that contains a decline of at least 20% from the previous market peak over at least a two-month period and a rebound to establish a new peak above the previous one by Russell 2000 Value Index. The current cycle is ongoing and thus is presented through the most recent quarter-end. Once the cycle closes, the results presented may differ materially. Please see important disclosures at the end of the commentary. |
Dear Fellow Shareholders,
FPA Queens Road Value Fund (“Fund”) returned -13.01% in the second quarter of 2022 and -16.80% for the first six months of 2022. This compares to the S&P 500 Value Index (“Index”) return of -11.27% during the 2nd quarter and -11.41% for the first six months of the year.
The Fund’s first quarter performance versus the S&P 500 Value Index was negatively impacted by the Fund’s lack of exposure to the energy sector, which was up 32% during the first half of the year. [1] In addition, the Fund’s industrial securities fared poorly as Trane Technologies, Eaton Corp., and Ingersoll Rand fell sharply.
Over the last 12 months, the S&P 500 Value Index has held up considerably better than the S&P 500 Growth Index, outperforming by over 15%. Despite the recent outperformance of value companies, we believe large cap value stocks remain considerably more attractive than their growth counterparts.
Value vs. Growth in 2022
Source: Factset. Data is as of June 30, 2022.
Persistently high inflation, rising interest rates, and the ongoing Russia/Ukraine war weighed heavily across the markets during the first half of 2022. The S&P 500 is technically in a bear market after falling over 20% from its peak in January and posting the index’s worst first-half performance since 1970. [2] Historically, bear markets are not that rare. We’ve experienced 22 bear markets since 1929, or one every 4.3 years, on average. 3 Excluding the one-month bear market in February of 2020 due to COVID, this is the first bear market in over a decade.
The market over that period has been fueled with easy monetary and stimulative fiscal policy. With the recent surge in inflation, the Federal Reserve has stated its primary concern is to get inflation down to 2%. [4] The resulting quantitative tightening has weighed heavily on markets with price/earnings multiples contracting significantly throughout the first half of the year. While bear markets are never fun, we believe they provide buying opportunities for disciplined and patient long-term investors. We expect these lower current valuations to bode well for future returns.
Despite rising inflation, which is at a 40-year high, 5 and higher interest rates, the labor market remains remarkable tight. Unemployment sits at 3.6%, and there are 1.9 job openings for every unemployed person. 6 While a sharp decrease in the labor participation rate has impacted this, with the labor participation rate falling more than 1% from pre-COVID levels, 7 we think the continued tightness in the labor markets remains a positive for the economic outlook. If we experience a recession later this year as many are predicting, this could temper the severity of it.
During 2021, we heard from several management teams that promotional activity, discounting, and coupon usage dipped during the COVID stimulus period. Interestingly, during that time the long-term trend toward private brands reversed and pricier branded goods gained market share. 8 It appears when people are spending ‘free’ money, they are less price sensitive. It will be interesting to see how this plays out now that federal government stimulus payments are waning and inflation is spiking.
By and large, the CEOs at our portfolio companies are saying they feel good regarding their inventory positions, but we are paying close attention because inventories will be a key indicator over the next couple of quarters.
Trailing 12-Month Contributors and Detractors 5
TTM Contributors | Performance Contribution | Average Percent of Portfolio | Detractors | Performance Contribution | Average p ercent of Portfolio |
Elevance Health, Inc. ( ELV ) | 1.5% | 6.0% | T. Rowe Price Group ( TROW ) | -1.8% | 3.5% |
Pfizer Inc. ( PFE ) | 1.1% | 4.0% | Trane Technologies plc ( TT ) | -1.5% | 4.5% |
General Dynamics Corporation ( GD ) | 0.8% | 4.5% | Intel Corporation ( INTC ) | -1.2% | 3.3% |
Merck & Co., Inc. ( MRK ) | 0.6% | 2.9% | Walt Disney Company ( DIS ) | -1.2% | 2.0% |
Raytheon Technologies Corporation ( RTX ) | 0.2% | 1.6% | JPMorgan Chase & Co. ( JPM ) | -1.0% | 3.5% |
4.4% | 18.9% | -6.7% | 16.8% |
There were no significant portfolio changes during the period.
Despite the market selloff during the first half of the year, we are excited about the opportunities the recent volatility is providing us. As always, we continue to diligently seek attractively priced larger-cap companies that are in sound financial condition, led by strong management teams, and operating in growing industries, while remaining mindful of our long-term focus on limiting the permanent impairment of capital.
Sincerely,
Steve Scruggs, CFA Portfolio Manager
Footnotes
[1] Source: FactSet. [2] Source: NASDAQ, US STOCKS-S&P 500 wobbles to the end of its worst first-half since 1970 [3] Source: Yardeni Research. [4] Source: Jerome Powell testimony to the House Financial Services Committee on June 22, 2022. [5] Source: US Bureau of Labor Statistics. [6] Source: US Labor Department, June 1, 2022. [7] Source: Bureau of Labor Statistics, Civilian labor force participation rate [8] Source: IRI Point of Sale data through April 17, 2022, Total Edible, Total US Multi-Outlet. |
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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FPA Queens Road Value Fund Second Quarter 2022 Commentary