It has been gratifying that a piece I wrote on cash for the CFA Institute has gotten a fair bit of attention. It is called, “Cash as Trash, Cash as King, and Cash as a Weapon.” As you can see from today’s title, we’re going to revisit the theme.
One reader had worked with Bob Rodriguez when he was at the helm of the FPA Capital Fund (FPPTX). Rodriguez was not afraid to have cash build up in the portfolio when it didn’t make sense to be buying — a note from the reader said cash reached 45% in 2006. Rodriguez is now an advisor to the fund rather than the lead manager, but the fund currently has 31% cash, according to its website.
It’s instructive to read the policy statement for the strategy. Regarding cash: “When there is a lack of investments that satisfy our criteria for absolute valuation and return possibility, cash will build as we await better opportunities. Cash, or liquidity, is just the residual of investment opportunity. We do not set out on our investment journey with a particular cash level in mind.”
Thus, it fits squarely into one of the categories that I mentioned in my CFA Institute article, wherein cash levels are a residual of a disciplined investment process. The record illustrated above speaks for itself as to how the strategy has worked over time.
To be clear, I haven’t done due diligence on this fund and I would have plenty of questions if I did. But I wouldn’t make the mistake that most gatekeepers do today, envisioning an “investment journey with a particular cash level in mind.” That is, very little of it under any circumstances, thinking that managers can’t be trusted to use it wisely and well.
While it’s a byproduct of another part of the process, the cash in FPA Capital appears to have been effectively used as a weapon. Why would you want to take it away? (Chart: Bloomberg terminal.)