Business - Of Mutual Interest Fund manager still sees 'tremendous risk' in markets

By Mark Jewell AP Personal Finance Writer BOSTON (AP) -- Steven Romick admits to a potentially unhealthy habit: internalizing anxiety from Uncle Sam's surging budget deficits. "You're talking to someone who just doesn't sleep well at night," the manager of the $2.8 billion FPA Crescent Fund says. Romick fears that the nation's mounting debt will eventually become a major drag on the economy and corporate profits. In the short term he suspects the economy may prove to be in much worse shape than we thought, once the government's stimulus measures wear off. But if troubled sleep has left Romick drowsy, you wouldn't guess it from the impressive numbers FPA Crescent (FPACX) racked up last decade. The fund's average annual return was 10.7 percent, versus a 1 percent loss for the Standard & Poor's 500 index in what was mostly a lost decade for stocks. Here are excerpts from an interview with Romick on investment risks and opportunities: Q: In your letter to fund shareholders in January, you wrote that investors who became so afraid of risk after 2008 seem to have dropped their fears in the bull market that started last March -- you wrote about an "illicit love affair with risk assets." What did you mean? A: Risk has come back into the marketplace, and people are no longer scared. Their love affair with the stock market seems to have been renewed, their faith has been restored. And I think that faith is not entirely well-founded. The risk in the system is tremendous. It doesn't mean things are going to go to hell in a handbasket anytime soon. But we're still running a fairly leveraged system. The consumer is still overleveraged, banks still overleveraged. We haven't broken the logjam of risky assets at the banks. Commercial real estate is one large asset classes that has not really been dealt with yet. Q: So do you think the market is headed down? A: If the world is all fine, I think the stock market will do fine. That's because it's not expensive by historic measures -- particularly given the low interest rates today. However, we think there still is a lot of risk to corporate earnings, because we don't know how well the economy is really doing. Q: How might the economy fare once government stimulus measures wear off? A: It's as if your child has flu, and you've given them Motrin to bring their fever down. Once that wears off, then you will know whether they are feeling better, if there is still a fever. But while their fever is muted or has disappeared temporarily because of the medication, that doesn't mean they're well. We don't have any idea really what kind of shape the economy is in, because there's so much medication in the system. I feel like we're just guessing, it's all a game of guesswork right now. I tend to invest capital when there is not a lot of guesswork. A: How does the federal government's heavy borrowing affect your outlook? Q: Debt is going to inhibit our growth. We think overall economic output is going to be lower than people expect in the future. We're selling a little bit of our country to foreigners every year as we sell more and more Treasury debt. So we believe Treasury rates are going to go higher, with or without inflation, which is rare. Q: Three of your fund's top five holdings are in the oil business -- Ensco International, Chevron and Total S.A. Why so bullish on energy? A: We believe there's a real risk of inflation, so we want to own companies that can do well in an inflationary period. Commodities tend to do well. Also, if there is hyperinflation because the government is printing so much money or devaluing our currency, oil is denominated in dollars on global markets, and we're going to do well if that happens, too. And then there are supply-demand characteristics. We believe demand growth will continue, and supply will contract over time. Q: You've recently bought more health care stocks, including Abbott Labs and Pfizer. Why buy those stocks, given lingering uncertainty about health care reform? A: We bought health care stocks in the face of concerns regarding health care legislation. We like to buy on bad news, and there was a lot of it floating around late last summer and fall. That is when we were increasing our stake in drug companies, HMOs and medical equipment companies. Published: Mon, Mar 15, 2010

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