FPA Paramount - new focus, revised management team

David_Snowball

Dear friends,

The nice folks at FPA just announced a significant evolution in their five-star F P A Paramount (FPRAX). Effective September 1, it will become a global value fund. Currently it holds 75% domestic stock (mostly midcaps) and 10% cash. Longtime co-managers Eric Ende and Steven Geist will be removed from the management team. Greg Herr and Pierre Py, who became Paramount co-managers in 2011, become the two new lead managers.

Why? FP A's press release doesn't say, but two possibilities stand out.

First. F P A Paramount and F P A Perennial (FPPFX) are functionally indistinguishable. Same lead managers, for about the same amount of time. Comparable expenses, negligible turnover, domestic mid-cap focus. If you chart their performance over the past ten years, the lines are identical. And neither has drawn substantial assets: about $300 million each after 30+ years.

The apparent difference in the funds comes from Morningstar's decision to category Paramount as "world stock," despite the fact that its international exposure is minimal. The different benchmark gives Paramount an apparent edge and a higher star rating.

Second, F P A doesn't have a dedicated global fund but does have the in-house talent to produce one. By creating a clear distinction between its funds and creating a fund whose mission is easier to explain to investors, That nicely complements F P A's recent decision to remove all of their sales loads, which made their funds accessible to more investors.

Here's the red flag, with F P A itself raises: they're going to have to substantially refashion Paramount's portfolio. First, F P A's other funds currently have far higher cash levels (40-60% at last report, as opposed to 10% in Paramount). Second, even if the managers liked current prices, a substantial fraction of the 74% held in domestic stocks would be sold to create a global profile. As a result, investors are almost certain to see high realized capital gains (generally long-term, some quite possibly substantial) during the transition.

For what interest it holds,

David

VintageFreak

Very important. I guess most should hold off buying till end of year and after capital gains distributions.

David_Snowball

Reply to @VintageFreak: Hmmm ... Morningstar lists the potential cap gains exposure as 29.72, but doesn't say 29.72 what. The NAV is about $25, so I'm hoping that the potential tax bill doesn't actually exceed the value of the shares, but with a 2% turnover and a profitable strategy, it's going to have some substantial embedded capital gains.

David

Investor

Reply to @David_Snowball: I believe it is 29.72% of NAV. If really depends on what they sell. If I were them I would sell those shares with highest cost first and then try to balance out with the embedded losses if any.

VintageFreak

Actually the only person who can buy right now is me Because I give two
hoots about capital gains distributions since I will have losses to offset it.