FPA Capital Fund FPPTX. Second Quarter 2016 Webcast Presentation. Presented by: Arik Ahitov, Portfolio Manager Dennis Bryan, CFA, Portfolio Manager

Transcription

1 Presented by: Arik Ahitov, Portfolio Manager Dennis Bryan, CFA, Portfolio Manager FPA Capital Fund FPPTX Second Quarter 2016 Webcast Presentation

2 FPA Capital highlights Absolute value Seek genuine bargains among smaller companies and hold cash when opportunities are scarce Benchmark agnostic Go wherever the opportunities are Bottom-up Select and value companies based on fundamentals. Buy market leading companies with a history of profitability and strong balance sheets Downside focused Seek to avoid low quality and high leverage. Buy only when we see a compelling risk/reward Research-based We perform deep due diligence and we do that not only prior to purchase but throughout the life of the investment Concentrated Focus on best ideas - typically holdings. Average holding period of 7+ years Shareholder aligned approach Fund has been closed for 17 of past 32 years. Portfolio managers invest alongside clients in their strategies 2

3 We are benchmark agnostic 35% 30% 25% 20% 15% 10% 5% 0% 16% 13% Consumer Discretionary 0% 4% 23% 4% Sector Weightings as of 6/30/16 26% 0% 0% 11% 7% Source: Capital IQ. GICS sector classifications. Portfolio composition and weightings will change due to ongoing management of the Fund. Please refer to the end of the presentation for important disclosures. 25% 15% 15% Consumer Staples Energy Financials Healthcare Industrials Information Technology FPA Capital Russell % 0% 0% 1% 0% Materials Telecommuication Services 5% Utilities 30% Cash 0% 3

4 Deep expertise Investment Team Dennis Bryan, CFA Arik Ahitov Partner Portfolio Manager Partner Portfolio Manager 29 years experience Joined FPA in years experience Joined FPA in 2010 Chris Moreno, CFA Research Analyst 12 years experience Joined FPA in 2014 Sean R. Pompa, CFA Research Analyst 6 years experience Joined FPA in

5 Performance (%) as of June 30, 2016 As of Date: 6/30/2016 QTD YTD 1 Year 3 Years 5 Years 10 Years 15 Years 20 Years Since 8/1/84* FPA Capital Russell Periods greater than one year are annualized. See disclosures at the bottom of the page. $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 FPA Capital** $510,303 Russell 2500 $325,441 * Inception of FPA management: July 11, Performance is presented using August 1, 1984 as the benchmark comparison is not available based on Fund Inception. Periods greater than one-year are annualized. Expense ratio as of most recent prospectus. is 0.77%. A redemption fee of 2% will be imposed on redemptions within 90 days. 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 may be obtained at or by calling toll-free, **Total return calculations are based on a $10,000 investment Please refer to the end of the presentation for important disclosures. Source: Morningstar Direct. 5

6 Outlook The volatility we have been expecting is finally here The Fund was down 11.77% in the first half of the first quarter (02/12/16) and is up 15.48% since then (as of 06/30/2016) WTI crude oil fell 46% in 2014 and 30% in 2015 to close at ~$37. Its 2016 low was at ~$26 only to close at ~$38 at the end of first quarter and ~$48 at the end of second quarter (source: Bloomberg) We are optimistic prospectively: We have ample liquidity Our portfolio is defensively positioned Most portfolio companies are doing well operationally Our holdings are cheap and carry strong balance sheets Our process remains the same as has been deployed over the past three decades Our stocks have already taken substantial hits Source: Bloomberg. Past performance is no guarantee of future results. Please refer to the end of the presentation for important disclosures. 6

7 Our process has not changed The Fund continues to invest in: Market leading companies History of profitability Strong balance sheets Good management teams Cheap As of June 30, FPA Capital Number of holdings 25 Weighted average market cap $5.2B Russell 2500 Index $3.9B Median market cap $2.2B $1.0B Price to earnings 17.7x 28.3x (12 months trailing) Price to book 1.6x 2.3x Return on Equity 8.2% 9.7% Dividend Yield 1.25% 1.66% Cash 26.9% 0.0% List of FPA Capital companies with public debt Earliest maturity YTM (6/30/2016) Avnet (AVT) % Rowan Companies (RDC) % Western Digital (WDC) % Arrow Electronics (ARW) % Noble Energy (NBL) % Interdigital (IDCC)* % AGCO Corporation (AGCO) % Dana Holdings (DAN) % SM Energy (SM) % Foot Locker (FL) % Oshkosh (OSK) % Cimarex Energy (XEC) % Helmerich & Payne (HP) % *Convertible Source: Bloomberg. Source: Cap IQ and Mellon. Portfolio composition will change due to ongoing management of the Fund. Please refer to the end of the presentation for important disclosures. 7

8 Taking advantage of opportunities Change in Fund s allocation to energy vs. change in price of oil 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% Q3'14 Q4'14 Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Q2'16 Fund Allocation Source: Bloomberg price data. Portfolio composition/exposure will change as the result of the ongoing management of the Fund. Please refer to the end of the presentation for important disclosures. Oil 8

9 1 st quarter opportunities West Texas Intermediate $41 $37 $33 $29 $25 SM Energy Company $22 $18 $14 $10 $6 SM Energy Company Q1 16 Transaction Activity 1,000, , , , ,000 - (200,000) (400,000) (600,000) 12/31/2015 Purchased Sold 03/31/16 Source: Yahoo Finance. Past performance is no guarantee of future results. Please refer to the end of the presentation for important disclosures. 9

10 2 nd quarter opportunities We started utilizing covered calls. Potential benefits to shareholders: May generate additional income May provide downside protection May reduce tax burden Example: SM s stock price ranged from $6.99 to $34.69 in The stock s implied volatility is sky high (i.e. the call premiums are very rich). The stock could be worth much more at higher commodity prices, but we also know it will not travel to its ultimate destination in a straight line. Rather than sell the stock, we can write covered calls that generate income in the short term and have strike prices well above the current stock price. If the stock remains flat or even falls before expiration, the Fund collects income it otherwise would not have received. If the stock continues rising so much that it gets called away then the Fund will get a higher price than if we had simply sold the stock. We executed three covered calls in the quarter: Sold PTEN July 2016 $20 calls for $0.79 each 1,000 contracts representing 100,000 shares or ~5% of the position. The stock closed at $20.20 on the day of the trade Sold SM August 2016 $35 calls for $3.11 each 500 contracts representing 50,000 shares or ~10% of the position. The stock closed at $31.97 on the day of the trade Sold XEC September $120 calls for $8.07 each 250 contracts representing 25,000 shares or ~9% of the position. The stock closed at $ on the day of the trade Market value of these calls was 0.01% as of 06/30/16. Portfolio composition will change due to ongoing management of the Fund. Past performance is no guarantee of future results. Please refer to the end of the presentation for important disclosures. 10

11 Western Digital an example on how we scale our position size up and down $115 $105 $95 $85 $75 $65 $55 $45 $35 $25 $15 $5 Initial buy Increased Trimmed Increased Trimmed Increased $15, at 7x P/E. Q3 08 to Q4 08: concerns of a price More than tripled war between HDD the positon (hard disk drive) producers Q3 09: Trimmed Q2 10 to Q3 11: Q1 13 to Q2 15: position by ~30% Almost tripled the Trimmed position positon by ~75% Q3 15 to Q2 16: Increased positon by ~60% Percentages are based on the absolute number of shares and do not take into account the impact of contributions and/or redemptions. Please refer to the end of presentation for important disclosures. 11

12 Top & bottom performers (2Q16) Top Contributor FPA Analysis: Number two land drilling company in the U.S.; also owns one of the leading frac companies in the Permian Basin and Eagle Ford shale Upside leverage to shale producers taking global market share over the long-term Solid balance sheet - should easily survive; weaker competitors on the brink Generating significant free cash flow at the bottom of the cycle Dividend yield of >2% is sustainable Performance Contribution Percent of Portfolio Bottom Contributor FPA Analysis: Performance Contribution Percent of Portfolio Patterson-UTI 0.97% 5.13% Dana Holdings -0.89% 2.97% Market leading globally diversified auto parts supplier specializing in driveline components #1 or #2 market share in all products Structurally improved business running w/ lower leverage, less customer concentration & now focused on returns & profitability Downside case assumes all segments return to trough production levels w/ owners earnings bottoming around $1.30/shr Upside case assumes 5-10% volume growth for light & commercial vehicles in core regions generating owners earnings of $3.00/shr Based on weighted contribution to the Fund s quarterly performance as of June 30, Contribution is presented gross of investment management fees, transactions costs, and Fund operating expenses, which if included, would reduce the returns presented. Percentage of portfolio as of June 30, Past performance is no guarantee of future results. Please refer to the end of the presentation for important disclosures. 12

13 FPA Capital holdings as of June 30, 2016 INFORMATION TECHNOLOGY 24.89% INDUSTRIALS 7.31% Western Digital 6.39% AGCO Corporation 2.29% InterDigital 5.27% Babcock & Wilcox 2.15% Arris Group 4.92% Cubic 1.53% Avnet 3.68% Oshkosh 1.34% Arrow Electronics 2.51% Veeco Instruments 2.12% OTHER 0.60% Undisclosed 0.60% ENERGY 22.79% Patterson-UTI Energy 5.13% BONDS 2.27% Cimarex Energy 4.50% Atwood Oceanics Inc. 6.50% 02/01/ % Noble Energy 4.38% SM Energy Co 6.50% 11/15/ % Helmerich & Payne 4.06% Rowan Companies 2.85% CALL OPTIONS 0.01% SM Energy 1.87% Cimarex Energy 0.00% Patterson-UTI Energy -0.01% CONSUMER DISCRETIONARY 15.27% SM Energy 0.02% Aaron's 3.44% Apollo Group 2.95% CASH 26.87% Dana Holdings 2.97% DeVry 2.95% Houghton Mifflin Harcourt 2.40% Foot Locker 0.56% Please refer to the end of the presentation for important disclosures. 13

14 Security changes in portfolio (net) YTD From December 31, 2015 to June 30, 2016 New Securities Added to Exisiting Securities Reduced Securities Eliminated Securities SM Energy Co 6.50% 11/15/21 Aarons, Inc. AGCO Corporation Reliance Steel & Aluminum Undisclosed Arris Group Apollo Group, Inc. Sanders Farms Inc Babcock & Wilcox, Enterprises Arrow Electronics, Inc. Barnes and Noble, Inc. Dana Holdings Corporation Avnet, Inc. Houghton Mifflin Harcourt Co Cimarex Energy Co. Veeco Instruments, Inc. DeVry Inc. Western Digital Corporation Foot Locker, Inc. Helmerich & Payne, Inc. Interdigital, Inc. Noble Energy, Inc. Oshkosh Corporation Patterson - UTI Energy, Inc. Rowan Companies plc SM Energy Company Please refer to the end of the presentation for important disclosures. 14

15 Relative performance of growth vs. value 10-year returns for growth have been higher than value only three times in the past 90 years Source: Kenneth French s Data Library. 15

16 Federal Reserve rate cut expectations Source: Evercore-ISI: June 27,

17 Declining corporate profits Source: MacroMavens June,

18 Inventory excess Source: MacroMavens June,

19 No obvious interbank strains Source: Bank Credit Analyst July,

20 Rising wages Source: Deutsche Bank July,

21 Global oil demand forecast 94.1 Source: IEA July 13,

22 U.S. total crude production has rolled over U.S. total crude production is down 1.2mm barrels since its early June 2015 peak. Down 12.2% year-over-year and 8.6% year-to-date. Source: EIA June 17, ,700 9,500 9,300 9,100 8,900 8,700 8,500 U.S. Crude Oil Production 8,300 01/02/15 04/02/15 07/02/15 10/02/15 01/02/16 04/02/16 22

23 Monthly OPEC Crude Production is at Peak Capacity Source: Cornerstone Analytics March 21,

24 If demand stays robust and supply is declining, inventories should come down Source: Cornerstone Analytics July 19,

25 Question & Answer

26 FPA s Views on Western Digital Corporation (WDC) Hypothetical Western Digital Earning Power Source: FPA Analysis based on data from company reports. HGST - Hitachi Global Storage Technologies. Please refer to the end of the presentation for important disclosures. FPA Analysis: Leading data storage company competing in both Hard Disk Drives (HDDs) and Solid State Drives (SSDs). Completed the acquisition of SanDisk (SNDK) and, in our view, positioned the firm as the first truly media agnostic data storage company. We believe the company has the potential to nearly double owner s earnings over the next 4 years and substantially de-lever the balance sheet. 26

27 Recent additions (past three years: 6/30/13 6/30/16) Market Cap (MM) TEV TEV/ EBITDA P/E P/BV P/S ROE Net Debt/ Capital 1 Aaron's $2,097 $1, x 14.9x 1.7x 0.9x 12% 0% AGCO Corporation $5,086 $5, x 8.7x 1.3x 0.5x 16% 4% Barnes & Noble 2 $1,607 $1, x NM 1.3x 0.2x 3% 0% Babcock & Wilcox 3 $3,213 $3, x 11.2x 2.9x 1.1x 26% 6% Cubic Corporation $1,230 $1, x 21.0x 1.6x 0.9x 1% 1% Dana Holdings $3,475 $3, x 13.7x 2.9x 0.5x 20% 11% Undisclosed 1 $737 $ x 11.0x 2.4x 0.8x 21% 0% Houghton Mifflin Harcourt $2,650 $2, x NM 1.8x 2.0x -7% 12% Helmerich & Payne $6,604 $6, x 9.4x 1.3x 1.8x 16% 0% Undisclosed 2 4 $1,661 $1, x 22.1x 1.5x 0.4x 6% 0% Patterson UTI $2,008 $2, x 31.8x 0.7x 0.7x 2% 21% Sanderson Farms 5 $1,457 $1, x 5.3x 1.4x 0.5x 31% 0% TWI 6 $859 $1, x 18.9x 1.2x 0.4x 9% 20% Average $2,514 $2, x 15.3x 1.7x 0.8x 12% 6% Median $2,008 $1, x 13.7x 1.5x 0.7x 12% 1% Represents all new equity positions added to portfolio during last 3 years (June 30, 2013 June 30, 2016) as of initial purchase; current data may vary materially. 1 If company is in a net cash position, we reflect 0%. 2 Sold in Q Split in Q Sold in Q Sold in Q Sold in Q Please refer to the end of the presentation for important disclosures. 27

28 Security changes in portfolio (net) QTD From to March 31, 2016 to June 30, 2016 New Securities Added to Exisiting Securities Reduced Securities Eliminated Securities Undisclosed Aarons, Inc. AGCO Corporation Barnes and Noble, Inc. Arris Group Apollo Group, Inc. Avnet, Inc. Arrow Electronics, Inc. Babcock & Wilcox, Enterprises Cimarex Energy Co. Dana Holdings Corporation DeVry Inc. Houghton Mifflin Harcourt Co Helmerich & Payne, Inc. Veeco Instruments, Inc. Noble Energy, Inc. Western Digital Corporation Oshkosh Corporation Patterson - UTI Energy, Inc. Rowan Companies plc SM Energy Company Please refer to the end of the presentation for important disclosures. 28

29 Important Disclosures These slides are intended as supplemental material to the 2 nd Quarter 2016 FPA Capital Fund audio presentation that is posted on our website fpafunds.com. It is important to understand that the views expressed on these slides and in the accompanying audio presentation are as of today, August 2, 2016 and are subject to change based on market and other conditions. These views may differ from other portfolio managers and analysts of the firm as a whole, and are not intended to be a forecast of future events, a guarantee of future results or investment advice. Any mention of individual securities or sectors should not be construed as a recommendation to purchase or sell such securities, and any information provided is not a sufficient basis upon which to make an investment decision. The information provided does not constitute, and should not be construed as, an offer or solicitation with respect to any securities, products or services discussed. 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 the prospective investor. Please read this Prospectus carefully before investing. The Prospectus may be obtained by visiting the website at by calling toll-free, , 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. The Fund s expense ratio as of its most recent prospectus is 0.77%. A redemption fee of 2% will be imposed on redemptions within 90 days. Current month-end performance data may be obtained at or by calling toll-free, Dennis Bryan and Arik Ahitov have been co-portfolio managers since November 2007 and February 2014, respectively, and manage the Fund in a manner that is substantially similar to the prior portfolio manager, Robert Rodriguez. Mr. Rodriguez ceased serving as the Fund s portfolio manager effective December The views expressed herein and any forward-looking statements are as of the date of the publication and are those of the Portfolio Management Team. Future events or results may vary significantly from those expressed and are subject to change at any time in response to changing circumstances and industry developments. This information and data has been prepared from sources believed reliable, but the accuracy and completeness of the information cannot be guaranteed and is not a complete summary or statement of all available data. Portfolio composition will change due to ongoing management of the Fund. References to individual securities are for informational purposes only and should not be construed as recommendations by the Fund, the Portfolio Managers, or the Distributor. It should not be assumed that future investments will be profitable or will equal the performance of the security examples discussed. The portfolio holdings as of the most recent quarter-end may be obtained at 29

30 Important Disclosures cont d Investments in mutual funds carry risks and investors may lose principal value. Stock markets are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. The Fund may purchase foreign securities, including American Depository Receipts (ADRs) and other depository receipts, which are subject to interest rate, currency exchange rate, economic and political risks; this may be enhanced when investing in emerging markets. Small and mid-cap stocks involve greater risks and they can fluctuate in price more than larger company stocks. Value securities, including those selected by the Fund s portfolio managers, are subject to the risks that their intrinsic value may never be realized by the market and that their prices may go down. In addition, value style investing may fall out of favor and underperform growth or other styles of investing during given periods. Securities selected by the portfolio managers using a value strategy may never reach their intrinsic value because the market fails to recognize what the portfolio managers consider to be the true business value or because the portfolio managers have misjudged those values. Index Definitions The Russell 2500 Index consists of the 2,500 stocks that cover the small and mid cap market capitalizations. The Russell 2500 is a market cap weighted index that includes the smallest 2,500 companies covered in the Russell 3000 universe of United States-based listed equities. The S&P 500 Index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. The index focuses on the large-cap segment of the market, with over 80% coverage of U.S. equities, but is also considered a proxy for the total market. Indices do not reflect any commissions or fees which would be incurred by an investor purchasing the underlying securities. You cannot invest directly in an Index. Other Definitions Not meaningful (NM) is a standard way to show a P/E for companies with negative GAAP eps. Price/Earnings ratio (P/E) is the price of a stock divided by its earnings per share. Percentages are based on the absolute number of shares. Price-to-Book (P/BV) is a ratio used to compare a stock's market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share. Price-to-Sales (P/S) is a ratio valuing a stock relative to its own past performance. Price to sales is calculated by dividing a stock's current price by its revenue per share in most recent year. Total Enterprise Value (TEV) is a valuation measurement used to compare companies with varying levels of debt. The FPA Funds are distributed by UMB Distribution Services, LLC, 235 W. Galena Street, Milwaukee, WI,