|
One investor talks caution
|
 |
June 13, 1997: 8:36 p.m. ET
Five-star mutual fund manager Robert Rodriguez is wary of today's market
|
NEW YORK (CNNfn) - When the stock market is soaring -- as it most certainly has this week -- it's often a good time to take the measure of a seasoned investor. Robert Rodriguez certainly fits the bill.
As chief investment officer of First Pacific Advisors, Rodriguez oversees two of the best mutual funds around: FPA Capital, a value-oriented stock fund, and FPA New Income, a diversified bond fund. Both boast five-star ratings from Morningstar, the mutual fund research firm.
Yet, this is one of the most difficult times to invest in 25 years, according to Rodriguez. He explained why to anchor Jan Hopkins of CNNfn's "Street Sweep."
Here are the excerpts from that interview.
HOPKINS: So why is it so difficult for you to do well in this kind of environment, when the market is reaching record after record?
RODRIGUEZ: The market's reaching record after record and it's really being led by the very large capitalization stocks, whereas I tend to have a small or medium-sized capitalization size [of stock] in [my fund's] portfolio. Secondly, I'm sitting on almost my largest liquidity position in the past 13 years since I've been managing the fund.
HOPKINS: You have a lot of cash, you're saying.
RODRIGUEZ: Yes.
HOPKINS: How much?
RODRIGUEZ: Right now, I'm sitting on just slightly north of 28 percent [of the fund's assets], and that's my highest level in approximately 22 years.
HOPKINS: And why is it that you have so much cash?
RODRIGUEZ: Because I'm a value manager in the classic sense, an absolute value manager, and find it extremely difficult to find companies to deploy our capital in today.
HOPKINS: What is your strategy?
RODRIGUEZ: Our strategy is one of basically investing in companies that are out of favor in industries that are out of favor. And hopefully buying those and putting them away for anywhere from three to five years.... So it's not unusual for us to have periods where we're, shall we say, a little bit out of step with the marketplace.
HOPKINS: And then when they start taking off, is that when you sell them?
RODRIGUEZ: We scale in and then we also scale out. It's what I refer to as diversifying one's stupidity. You can't ever make the one right decision. So for example, say one of our largest areas that we put [considerable amounts of] capital in a few years ago [was] California.
HOPKINS: And California was not doing well at that point.
RODRIGUEZ: That is correct. We had a severe recession going on then.
HOPKINS: And you've done well with the things that you've bought three years ago?
RODRIGUEZ: Most of the stocks have done extremely well. Our best performing stock would be Ross Stores, which is up probably just a little bit less than 600 percent in three years.
HOPKINS: But, you say that it's hard to find value now. Are you finding any?
RODRIGUEZ: We're finding small increments and what's frustrating about today is that ... the sectors are very few and far between. The valuations are high across the entire segment in the marketplace.
For example, in 1990 or 1987, you could have looked at a very high market in terms of the large capitalization stocks, such as in the S&P 500, but found major valuation discrepancies in the smaller cap areas.
Today, the valuation landscape is very flat between large and small, until you get down into the very, very small companies [with] less than $150 million in market capitalization.
HOPKINS: Aren't there some areas that investors hate now?
RODRIGUEZ: Well, there are some, I would say, among one of the areas that's really out of favor presently would be some of the cyclical areas, especially the steel companies. And we do have a couple of investments in that particular area, and one has been doing recently quite well.
HOPKINS: What's that?
RODRIGUEZ: That would be Oregon Steel, which is in several of our portfolios. Our other steel company would be Rouge Steel, which is within about 3/4 of a point of its low, down about 50 percent from its high, so we've built up a large position in that company.
And we've found some interest in still some out-of-favor retailers. The last retailer that we put into the portfolio would be Michaels Stores, which went from 46 to a low of 8, and we established about a 13 percent ownership position in the company at around 11-1/2. The stock's presently right around 21.
HOPKINS: What you're saying is that you're having a hard time finding value. So what does that say about the overall market?
RODRIGUEZ: I would say the overall market is very richly priced.
HOPKINS: Too richly priced?
RODRIGUEZ: Well, you can never, it's like, how high does a tree grow when you don't know what the attributes of the tree are or how high does a rocket fly? .... A number of the historical valuation benchmarks have been blown away. Thus, many people have been saying, this is a brave new era.
HOPKINS: And is it?
RODRIGUEZ: What a high valuation market says is that, yes, there are very positive things going on today but the markets have discounted many of them, and to sustain these above average rates of return that are going on requires the attainment of absolutely extraordinary assumptions on the growth in the economy and the profitability of companies.
HOPKINS: What would you tell investors to do at this point?
RODRIGUEZ: I would say they should probably have a little bit of a cash reserve. Secondly, they should scale down their investment return expectations .... It will take an extraordinary set of assumptions to continue this trend.
|
|
|
|
|
 |
|
