Вы находитесь на странице: 1из 52

FPA International Value Strategy FPIVX

Ryan:

(1:03) Good afternoon, and thank you for joining us today. We would like
to welcome you to the third quarter 2014 webcast for the FPA International
Value Strategy, including the FPA International Value Fund. My name is
Ryan Leggio, and Im a Senior Vice President and Product Specialist here
at FPA.
The audio, transcript, and visual replay of todays webcast will be
made available on our website, fpafunds.com.
In just a moment, you will hear from Pierre Py, the Portfolio
Manager of the Strategy, as well as Jason Dempsey and Victor Liu, both
Senior Vice Presidents and Analysts on the Strategy
Initially we would like to highlight the key Fund attributes for those
who may be listening in for the first time, and well quickly mention a few of
these attributes. First, the Strategy is run with an absolute value
philosophy. The teams starting position is cash, and they seek genuine
bargains in the equity markets rather than relatively attractive ones.
Second, the Fund has a broad benchmark-agnostic mandate. The team
can invest in both developed and emerging markets, and can own stocks
across market caps and sectors. Finally, the Fund is relatively
concentrated, as the team focuses on only high-quality companies that
trade at significant discount to the teams estimate of their intrinsic value.

-1-

FPA International Value Strategy FPIVX

For more detailed information regarding the Strategy, we encourage you


to read the Strategys policy statement available at fpafunds.com.
At this time, it is my pleasure to introduce Pierre Py. Over to you,
Pierre.
Pierre:

Thank you, Ryan, for the introduction, and thank you all for taking the time
to be on the call today. During the third quarter of this year, the Fund
declined 8.70% compared to the MSCI All Country World Index decline of
5.27%. Year-to-date that translates into a total return of negative 5.98%
versus n Index thats essentially been flat. More importantly, since
inception on December 1st, 2011, the Fund has appreciated 12.36%
annualized versus 10.29% for the Index. (3:08) Its worth pointing out that,
while our cash holding has fluctuated along with the opportunity set over
the past almost three years now, it has averaged in excess of 35% since
the inception of the Strategy.
This was another bad quarter for the Fund from a short-term
performance standpoint. That said, the underlying situation this period was
quite difference than from the previous quarter. In the past, we complained
about the lack of investment opportunities, the disconnect between
valuations and pending business development, and the market distortions
largely created by government actions around the world.

-2-

FPA International Value Strategy FPIVX

At the end of the last quarter, at June 30, 2014, our cash exposure
had hit an all-time high of about 40%. We were struggling to keep up
with the continued run-up in market prices overall and more importantly to
even maintain the average discount to intrinsic value of our holdings in the
mid-20% range, which was also one of the lowest levels since the
inception of the Strategy for the discount to intrinsic value.
In the past three months, however, the market presented us with
opportunities to invest in a number of companies. Some were companies
we had followed for a long time that were either on our focus list and
experienced some element of positive change, or on our best-of-breed list
and experienced price correction. Some were companies we had newly
researched as well.
As a result, our cash balance came down significantly throughout
the period. At the end of the quarter, it had reached about 30%, again
down from about 40% only three months ago. As weve mentioned several
times in the past, our cash exposure is not a function of our top-down view
of the state of the world economy or that of capital markets. (5:01) Rather
it is a residual output of our bottom-up investment approach. Because of
the relatively concentrated nature of the Strategy, as well as its smaller
size, it is possible for our cash exposure to come down materially in a

-3-

FPA International Value Strategy FPIVX

short period of time, all else being equal. A few good investment ideas
suffice to bring it down.
Combined with opportunities to reduce exposure to names that
performed well intra-period and in that respectfor instance SAP was
actually up close to 10% in local currency in July aloneas well as
opportunities to redeploy capital towards names offering higher
prospective returns, that meant we deployed about a quarter of the Funds
assets towards newly built positions during the quarter. That included the
three names that we started buying towards the very end of the previous
quarternamely Adidas, TNT, and Fenner, which we didnt disclose back
in Juneas well as the six new names that we added to the portfolio this
quarter, which include ALS, Christian Dior, Hypermarcas, KSB, and
Prada, with one name that we keep undisclosed at the time for a variety of
reasons similar to what we did with Fenner last quarter. We also revealed
a meaningful position in LSL, company that weve had in the portfolio ever
since the inception of the Strategy, albeit at very different weighting levels,
as the share price reversed back to what we consider to be highly
attractive levels.
The reason why weve typically been purchasing these names
obviously is because theyve become attractively priced. While the market

-4-

FPA International Value Strategy FPIVX

as a whole is only down 5%, these companies have seen their share price
correct by 1545% in the past three months. And these declines often
came on the back of previous bad performance as well, so that some of
these stocks have effectively declined by 3050% in the past few months.
If you take ALS for instance, the stock was down about 45% since June at
the end of the quarter and close to 60% since the high in the first quarter
of 2012. TNT was down about 50% since its spinoff from PostNl and 30%
since March. Adidas, Fenner, and Prada were all down about 35% since
last December. Christian Dior was down only about 15%, but it was
enough to push the stock into buy-range nonetheless. And LSL was down
more than 25% over the past six months.
Now with these declines against what we consider to be relatively
stable business values, we believe that market prices no longer
adequately reflected the underlying fundamentals of the individual
businesses, and thus weve become active buyers of these companies.
Now our investment discipline dictates that we purchase stocks that
trade at at least more than a 30% discount to intrinsic value and that we
weight them in the portfolio based on the discount to intrinsic value they
each offer relative to the existing holdings. Unfortunately, or fortunately
maybe depending on how you look at it, stocks which come to offer such

-5-

FPA International Value Strategy FPIVX

discounts are oftenand in particular when we find ourselves many years


into a run-up in market priceson downward trends. This is the reason
why in the past weve characterized our approach as often contrarian. The
mere fact that we are purchasing these stocks doesnt mean that they
cant or wont continue to fall and thus offer even greater discounts to
intrinsic value after we started purchasing them.
In many instances we observed that negative sentiment is a selffeeding spiral that takes time to reverse, which is also why we take a longterm view of investing. So the stocks we buy, they tend to go down further
in pricenot always, but its very often the case.
(9:02) As we take a high conviction approach where we invest
primarily in our best ideas, new portfolio additions can be large position at
the onset. Because individual portfolio weightings are also based on
relative discounts to intrinsic value, this is particularly true again when
market prices have run up and were presented with multiple opportunities
within a short window of time. And this explains the large exposure to the
newly added name. This also means that new holdings, which continue to
experience declines in share prices can have a meaningful negative
impact on the Funds short-term performance. In short, its not surprising

-6-

FPA International Value Strategy FPIVX

for short-term performance to suffer at times of more aggressive capital


deployment irrespective of our cash exposure.
With that being said, there were a couple of other things which
impacted performance negatively this quarter, which we should highlight
on the call. First is currency, as both the euro and the British pound
depreciated significantly against the dollar in the quarter. With the portfolio
still primarily geared towards companies that are domiciled in Europe, this
had a material negative impact on performance. And for reference in euro
currency, the Fund would be down only 1% during the third quarters.
In terms of free cash flow however, only about a quarter of what our
holdings generate is indeed denominated in euros, with closed to 60% of
that defensively hedged and only a little over 10% is denominated in
British pounds, which is also partly hedged.
Last but more importantly in our view, as bottom-up investors, we
also experienced our first instance of an investment delivering
unexpectedly bad market performance during the period. Our worst
performing holding in the quarter was Fugro. This is a name that weve
owned for over year now, and it was down by more than 40% in U.S.
currency in the quarter, (11:02) following the result of a posted warning in
July that indicated a significant contraction in gold margin for the year.

-7-

FPA International Value Strategy FPIVX

This is clearly a disappointment, and the company was one of our large
holdings. And thus its been a meaning detractor for quarterly
performance. But we will provide some additional thoughts on the
company specifically in our key performers section.
In terms of key investment takeaways, a few things I want to
highlight. The first one is, however painful it may seem to see the Fund
down 9% even for the long-term-minded investors, theres some
interesting lessons to be learned or taken away from this past quarter.
The first lesson is that we, or I, havent sold a single share of the
Fund since the inception of the Strategy and have still essentially all of my
net investable wealth committed to the Fund.
The second thing, to the point about currency, is that our cash file
which is denominated in dollars has regained some of its value, and were
taking advantage of this restored purchasing power. Were buying more
companies that happen to be based in Europe with stock often
denominated in euros or in British pounds.
The third thing is that prices are finally coming down. As mentioned
earlier, there are specific sections of the markets where prices are coming
down significantly. Now a function of our bottom-up, unconstrained, and
concentrated approach is that we dont need the whole market to correct

-8-

FPA International Value Strategy FPIVX

30% to be able to deploy capital with a high margin of safety. Being small
and nimble is also a key in being able to take advantage of market
volatility, as we only need to find a handful of new names to come down to
act.
What we have seen is that businesses with underlying exposure to
sectors like mining, oil and gas, or luxury goods in markets like Australia,
Europe broadly speaking, or Brazil have experienced some meaningful
correction. (13:12) While we recognize some of the short-term challenges
many of these businesses are facing, we think market values now do not
adequately reflect their long-term profit-generating power. In contrast,
intrinsic values are a function of long-term free cash flow and based on the
normalized through cycle of economics that the business can generate.
With that, we are doing precisely what were wired to do, which is to
buy as things get cheap and to buy more as things get cheaper. Thats
why weve added so many new names, further building recent positions,
and why weve been adding back to some of our existing holdings like
LSL. Weve also constructed a meaningful pipeline of next-best
opportunities that we think are within ten percentage points of a buy
range. And assuming share price continues to come down, were likely to

-9-

FPA International Value Strategy FPIVX

deploy incremental capital and add more names to the portfolio going
forward.
The fourth thing to understand is that were not market timers. What
this means is that we have no ability to predict when a stock is going to hit
bottom. So we do not try and guess. Once a name trades at a discount to
intrinsic value in excess of 30%, we invest. If it gets cheaper, which it often
does, thereby negatively impacting performance, we buy more. Similarly
we do not put our toes in the water and start slow, so to speak. The
weighting is set based on relative discount to intrinsic value at the onset
and achieved as soon as liquidity permits. We do not play a game and try
simply because we cant to maximize our discount. And the same thing is
true on the sell side. We do not try and maximize return by holding on to a
rising stock. We consider it a fools game either way that could only lead
us to miss out on opportunity or worse to permanent losses.
(15:06) Last but not least, we typically invest over several years,
and we do not consider a quarter as particularly meaningful. We say it
now like weve said it repeatedly when short-term performance was much
stronger than it is now. We recommend shareholders to evaluate the
Funds returns over the medium to long term. As mentioned in past
commentaries, we expect the Fund to experience short-term volatility at

-10-

FPA International Value Strategy FPIVX

times. But volatility does not equate to permanent capital destruction.


Rather it often translates into opportunities for us to deploy capital at
prospectively high rates of return. And typically we lean into market
volatility to invest in high-quality businesses with a high margin of safety.
As a result of that, we make experience periods of poor short-term
performance. Longer term however, we should be able to reap the
rewards of this investment discipline.
Taking advantage of market volatility is precisely what weve been
doing this past quarter. It is consistent with our philosophy and in fact
much different from what we experienced in the first quarter of 2012 when
European equities were already punished in the market. The Fund then
was down by more than 5%. And by June 30, 2012, the weighted average
discount of our holdings was 36%. Today it stands at a similar level of
34% that means that weve been able to redeploy capital towards ideas
with greater prospective returns while retaining a large portion of the
performance the Fund has generated since inception both on an absolute
basis and against the Index.
So now these are our thoughts from more of an investors
standpoint, but I think Ryan also wanted to highlight a few points from
more of a historical perspective. So Ill pass it back over to Ryan for that.

-11-

FPA International Value Strategy FPIVX

Ryan:

Thanks, Pierre. As many shareholders know, since the inception of the


Strategy, the International Value Team has published the Funds
estimated discount to intrinsic value in their quarterly letters. (17:04) And
the graph you see on your screen right now displays the estimated
discount over the history of the Fund. This is consistent with our continued
efforts across the board to provide meaningful transparency into the
profiles of our Fund with the hopes of enhancing the overall shareholder
experience.
As you can see, the estimated discount of the Fund has varied
between a high of about 36% in June 2012 to a low of about 24% in
December 2013. To Pierres previous comments, you can see just how
challenging the environment has been over the last year by the Funds
estimated discount to intrinsic value, which was consistently in the mid20%. This helps explain why the Funds average cash exposure over the
last year was close to 40%, as new ideas were hard to come by.
Importantly, the Funds profile would have been even more challenged if
we did not have the ability to concentrate assets in our best ideas or were
restricted from investing in smaller or emerging market companies.
We hope shareholders take away at least three things from this
slide. First, for the first time in about two years, the Fund is once again

-12-

FPA International Value Strategy FPIVX

attractive from a risk/reward standpoint. Now that being said, its quite
possible that the Fund will trade at a discount of more than 40% before the
completion of the current market cycle.
Second, we hope shareholders will use the estimated discount that
we publish to maintain reasonable expectations. When discounts are
narrow and there is complacency in the market, declines are quite
possible over the short run, as weve seen recently.
Third, weve delivered strong performance over the last 2.5+ years,
whether measure in an absolute or relative or risk-adjusted basis. (19:10)
Despite having approximately 65% of the Funds capital at risk on average
over the period, we have been able to deliver a low double-digit
annualized return that exceeded the Index by close to 20%.
No Ill hand it back to Pierre, who will discuss some of the portfolio
metrics.
Pierre:

Thank you, Ryan. Beyond some of these comments that are encouraging
or more back-looking in nature, another thing that we find encouraging are
the portfolio metrics at the end of the quarter, which are reflective of what
we own and how we expect to build returns going forward.
So first in terms of valuation, even though we do not think price-toearning ratios are very meaning metrics, we note that the portfolio traded

-13-

FPA International Value Strategy FPIVX

at a price-to-earning ratio of 14.8 times at the end of the period, which was
down significantly from 16.7 time as at the end of the second quarter. That
means the Fund remained somewhat more richly valued than the Index.
But as we pointed out in the past, however, the Index includes
businesses that typically trade at lower multiples and to which we continue
add little exposure, such as financials. On an equal footing, we think our
companies are materially cheaper than the market and that our portfolio of
holdings is now more attractive than it was three months ago or at any
point in fact over the past couple of years. Specifically, as I previously
mentioned, we have estimate that our holdings trade at a weighted
average of 34%, up from the 26% at the end of the last quarter.
More importantly we think our businesses generally have greater
staying power, stronger earning-generation power per dollar invested, and
superior management teams relative to the market. In fact, our portfolio
holdings generate a weighted average return on equity of over 18%
versus about 15% for the Index. While this is down from over 21% at the
end of the second quarter, (21:03) this remains an elevated level, in
particular considering that many of the newly added names are cyclically
challenged businesses at the moment and/or are businesses that are
going through material operational adjustments.

-14-

FPA International Value Strategy FPIVX

In addition, our businesses are able to generate these returns


without much financial leverage, as you can see, and thus without taking
on the associate risk. So the portfolio weighted average debt-to-equity
ratio stood unchanged this quarter at 0.3 time versus twice as much for
the Index.
As we said before, were not strong supporters of these selected
portfolio metrics, but they continue nonetheless to show our focus on highquality, well run, financially robust companies that we can buy and own at
significant discount to intrinsic value.
Moving on to key performers, as I mentioned earlier, we had our
first disappointing investment development this quarter. Our worst
performing holding in the period was Fugro, which is a name that weve
had in the portfolio now for over a year. Fugros share price was down by
over 40% in U.S. currency following the release of a posted warning in
July that indicated a significant contraction in margin for the year. The
company was one of our large holdings and thus was a meaningful
detractor for quarterly performance. Based in Holland, Fugro is a worldleading provider of geo-technical and geophysical analysis for resource
projects, with large exposure to oil and gas.

-15-

FPA International Value Strategy FPIVX

Now we had initiated our investment in the company in the second


quarter of 2013 following a series of negative news, including the abrupt
resignation of the Chairman of the Audit Committee, allegations of
accounting fraud, and some significant management changes, including
the CEO and the announced retirement of the CFO. The company had
also divested its more capital-intensive seismic survey activities, which up
to then accounted for a large portion of the business.
(23:03) Behind these negative circumstances and important
transformation, though, we thought Fugro was left with an interesting
collection of small businesses which had a history of good organic growth,
solid returns, and high free cash flow generation. The group had a healthy
balance sheet and some potential for operational improvements. As
management was working through some of the issues, however, they
failed to recognize some of the cyclical shifts that were taking place in the
underlying markets and ran into a number of operational challenges that
compounded with softening business conditions.
The slowdown in oil and gas, and in particular in offshore
exploration and production to a degree, where Fugro has historically
generated a significant portion of its profits, will likely continue to put
negative pressure on the companys results in the short term. Longer term

-16-

FPA International Value Strategy FPIVX

however, we expect market conditions to improve as depleting fields


ultimately need to be replaced with new offshore resources. We also
expect management to take actions to adjust both operating expenses
and capital expenditure to the new underlying market reality.
Lower interim free cash flows translate into some reduction in
enterprise value, but we believe nonetheless materially smaller than the
share price correction that the companys experienced, which implies a
greater discount to intrinsic value. And as a result, weve added to our
position, and we maintain a large investment in the company.
Our best performing holding this quarter was again G.U.D. Holdings
Limited. It was our best performing holding last quarter as well, so this is
somewhat repetitive. But G.U.D. is a small conglomerate of several
independent domestic businesses. Four of these businesses benefit from
strong brands and leading market positions, in particular in aftermarket
auto parts where the group generates a large portion of its profit and
returns.
The other two are more challenged, and they need management
actions, both operationally and strategically. A new team of high-caliber
global executives recently took over. Several of these managers actually
come from much larger, high-quality companies, some of which weve

-17-

FPA International Value Strategy FPIVX

owned in the past. (25:06) Both short-term and long-term solution exist for
the struggling businesses, and they are being actively pursued. The
groups balance sheet is solid and provides flexibility to run successful
turnarounds.
While things have changed several times in various ways for
G.U.D. over the past decade, the group has consistently deliver low-tomid-teen margins, returns on capital employed in excess of 35%, and
pitch-perfect cash conversion rates. In addition, G.U.D. was a small,
somewhat remote company. At the time of purchase, the stock was not
well researched with little institutional shareholders involved. The
companys specifics are somewhat difficult to analyze, with several
businesses jammed under one umbrella and the challenged parts typically
retaining most of the attention.
Lastly we identified an agent of change in the high-quality new
management team. And with that, we found the opportunity to be quite
compelling, and we originally took a large investment in the company
effectively making the Fund one of G.U.D.s larger shareholders at the
time. However, the share had rallied in the months that followed our
original purchase, which caused us to significantly reduce the positions
weighting down to its current levels. G.U.D. still displays many

-18-

FPA International Value Strategy FPIVX

characteristic of a good investment for our Strategy, and we remain


interested in being shareholders so long at the stock continues to offer an
appropriate discount to intrinsic value.
Moving on to portfolio activity, as mentioned above, we added six
names to the Fund this quarter including ALS, Christian Dior,
Hypermarcas, KSB, Prada, and one other company that we are not
disclosing at this point.
We also built a position in Fenner, which we had initiated last
quarter actually, although we did not disclose the position at the time.
Based in the U.K., Fenner is the world-leading manufacturer of conveyer
belts with significant mining exposure, as well as meaningful presence in
Australia as a result.
(27:01) ALS is based in Australian and a dominant provider of
geochemistry services. The group is also a leading player in
environmental analysis and growing market participant in a number of
other testing, inspection, and certification markets. Similar to Fenner, the
company has material exposure to both the mining industry and to
Australia.

-19-

FPA International Value Strategy FPIVX

Christian Dior is based in France. It is a world-renown fashion


house, and more importantly 40% shareholders in global luxury group
Louis Vuitton Moet Hennessy.
Hypermarcas is Brazils second largest package good company
and the third largest pharma company in the country.
KSB is based in Germany and one of the worlds leading
manufacturer of pumps, with strong market presence in the energy sector.
Prada is another global luxury fashion franchise, with strong
position in the attractive leather category. While based in Italy, the group
has significant exposure to the Chinese market and is actually listed in the
Hong Kong Exchange.
We can only speculate as to why these companies have
experienced significant decline in market value. We can see, however,
how the sharp decline in exploration spending, the slowdown in Chinese
growth coupled with strong anti-corruption and anti-gift policies, not to
mention political tensions in Hong Kong and fears around the Ebola virus,
macro and political uncertainties in Brazil, and an anemic growth prospect
in Europe may have contributed to negative sentiments towards these
names. Our focus, however, is on the underlying business fundamentals,

-20-

FPA International Value Strategy FPIVX

the quality of the managers in charge, and the free cash flows that these
companies should be able to generate over the long run.
While we do not wish to share further details of our investment
thesis on all of these names, we would like to highlight a few points on the
Hypermarcas, as it is our first investment to date in Brazil, a market where
we actually have been finding more intriguing opportunities following
repeated visits over the last couple of years. And for this, I will now pass it
over to Victor.
Victor:

(29:04) Thank you, Pierre. Hypermarcas is one Brazils top consumer


branded goods and pharmaceutical companies. The consumer division
sells condoms, diapers, nail polish, and moisturizers. The pharma division
sells over-the-counter drugs, prescription drugs, and generic drugs.
Hypermarcass brands across both categories have long heritages that
span decades and thus command strong market positions. The company
spends heavily on advertising, and this is one of the largest media
spenders in Brazil. Hypermarcas benefits from a large, well diversified
portfolio of activities and products, and thus is not overly dependent on a
specific segment of the Brazilian market.
The group went through a prolonged period of acquisitions with
various successes, but recently shifted to integrated the acquired

-21-

FPA International Value Strategy FPIVX

businesses and improving the efficiencies of their operations. The


company has now built up a strong portfolio, in particular on the
pharmaceutical side. Management is focused on extracting value from
past acquisitions, optimizing the portfolio, and managing operating
expenses.
Hypermarcas is an owner-oriented company. The main shareholder
owns 20% of the shares, and one long-term partner owns another 15%.
The founder, CEO, and CFO have been running the company together for
over a decade, and they are ambitious entrepreneurs. While they have
made some disappointing investments, we think they now have a
compelling asset portfolio and are focused on execution.
The balance sheet has financial leverage following a multiyear
period of acquisitions. It remains manageable at 2.5 times net debt to
EBITDA, and we expect leverage to come down rapidly in the next few
years. Hypermarcas currently trades at less than nine times normalized
enterprise value to EBIT 2016 and high single-digit free cash flow yield.
We believe that current valuations do not adequately reflect the quality of
the asset, the change in management focus, and the potential for
operating improvement. In the long run, we think Hypermarcas is a
business that should compound capital at healthy rates.

-22-

FPA International Value Strategy FPIVX

Pierre:

(31:04) Now just to finish up on portfolio activityand thank you, Victor,


for the comments on Hypermarcason the sell side of things, we exited
two positions, GEA and Legrand, as we believe the stocks simply no
longer offered appropriated discounts to intrinsic value.
GEA had been in the portfolio since inception in December 2011.
The group is based in Germany, and it is a world-leading industrial player
with strong market positions in heat transfer, mechanical separation, and
farm technologies. Theyre also well positioned in process engineering and
food technology.
Legrand had been in the portfolio since the first quarter of 2012 and
was one of our first quarterly case studies. The companys based in
France and a world-leading player in design and manufacturing of low
voltage electrical products, such as switches and sockets.
Both GEA and Legrand are well run, financially strong, high-quality
companies that we would be happy to own again if we can invest in them
with a significant margin of safety.
Lastly, as we added new names to the portfolio, we also
opportunistically reduced the weighting of a number of our existing
holdings based on relative discounts to intrinsic value.

-23-

FPA International Value Strategy FPIVX

Despite the increased activity during the period, the overall profile
of the portfolio now really didnt change dramatically from quarter to
quarter. The Funds main geographic features are broadly similar to what
they were at June 30, although we have some Latin American exposure
now with our investment in Hypermarcas. The addition of ALS also didnt
suffice to upset the reduction in weightings of our other Asia-Pacific-based
companies. So our exposure to the region came down as a result. And
with that, we are still primarily geared towards companies that are based
in Europe.
Larger cap companies also continue to account for a sizable portion
of the Funds assets. However, the Strategy is currently more balance
towards smaller cap companies with lower weighted average market
capitalization, (33:02) as well as a lower median and more sizable
exposure overall to smaller companies. ALS, KSB, Fenner, LSL, TNT,
which together represent more than 15% of the portfolio now, all have
market capitalization within a 500 million to 3 billion range. And this is
simply a reflection of where we found compelling opportunities, as our
approach is agnostic to size, as it is to geography for that matter.
We still have no exposure to companies based in Japan where we
find that management teams typically lack the financial discipline we look

-24-

FPA International Value Strategy FPIVX

for and where valuations remain unattractive. We also continue to have


limited exposure to companies based in emerging markets,
notwithstanding the addition again of Hypermarcas. In general we find that
valuations of high-quality companies remain elevated in many developing
countries. That said, we have identified a number of opportunities in Brazil
specifically and would expect to see further investments in this market
going forward as a result.
More importantly, as we mentioned in the past, we do not consider
domicile to be particularly relevant. What matters more is where business
value is created. And while many of our holdings are indeed domiciled in
Europe, together they generate close to 60% of their free cash flow
outside of the region.
At a sector level, we have no exposure to banks. Again we find that
these businesses often dont lend themselves well to research and
appraisal, and tend to generate mediocre returns despite high levels of
financial leverage. And so with that, thats typically a poor fit for our
investment strategy.
Beyond that, the Fund is relatively diversified from a sector
standpoint while naturally geared towards businesses that are highly cashgenerative and less capital-intensive. These include service-type

-25-

FPA International Value Strategy FPIVX

bushiness and robust industrial companies. And with the additions of


Adidas, Christian Dior, Prada, and Hypermarcas, our exposure to
consumer discretionary actually sensibly increased given our quality bias
this is another type of businesses toward which we naturally tend to
gravitate.
(35:03) Our exposure to technology has come down somewhat on
lower relative discount to intrinsic value, but it remains sizable. In general,
we find that technology-driven companies are difficult to value, as we
typically struggle to assess the long-term sustainability of their business
models. However, our investments in the sector purely reflect the
strengths of the underlying fundamentals, rather than any calls on
potential technological developments, or market cycles.
And with that, I will pass it over to Jason for our quarterly case
study before closing with our prepared remarks.
Jason:

Thank you, Pierre. Our case study for the quarter is Accenture. Domiciled
in Ireland, Accenture is a leading consulting and outsourcing business
specializing in IT services. It generates over $4 billion in operating profit
on 30 billion in sales, with a 14% margin and a very high return on
investment since its invested capital base is less than 5 billion.

-26-

FPA International Value Strategy FPIVX

The company is organized into two broad service linesconsulting,


which is a bit more than half of the revenues, and outsourcing, which
makes up the rest and grows at a faster rate with higher margins.
Accenture employs over 300,000 employees. Over two-thirds of these
belong to what the company calls its global delivery network.
This is one of the few large offshore sourcing and production
networks in the industry, and Accenture was able to build it organically
over the last decade. It allows the company to have a highly competitive
cost-per-labor unit, as it offers a variety of high value-added services to
multinational corporate clients. Its service portfolio ranges from onshore
strategic consulting projects to multiyear recurring business process
outsourcing contracts involving thousands of employees.
Our research on the company late last year pointed to many
competitive advantages that Accenture enjoys. (37:04) In consulting for
example, Accenture possesses a valuable brand that allows it access to
CEOs and CFOs at the worlds largest companies. This brand offers
competitively priced consulting talent that will assist management teams in
achieving the improved financial results that they are hired to deliver. To
support and continuously improve the brand value of its consulting
services, Accenture invests significantly in sales and marketing, R&D, and

-27-

FPA International Value Strategy FPIVX

training at levels far beyond other competitors. Published data indicates


that levels from 10 to 20 times higher than at direct competitors.
In outsourcing, Accenture is one of the few global firms in the
industry that has a large network of high skilled, but low-cost labor pools at
its disposal. The company made the bold strategic decision to build this
network starting in the early 2000s. The tradeoff was higher growth in
margins in the future, but added short-term cost of cannibalizing its
existing legacy onshore business. The payoff now though is that
Accenture benefits from a clear cost advantage insofar as they can
source, train, and manage engineering talent in low-cost countries and
then resell this output at very competitive prices in developed countries.
Market demand for IT services is very large. Our research indicated
that the revenue of 40 leading IT service companies tops $250 billion
worldwide. Growth is above global GDP levels, with the outsourcing firms
taking share at a rapid pace. In fact, they grow at the rate by which they
can source and add trained employees. With this constraint, the industry
has thus proved to be rational, with the leading companies generating high
margins, high returns, and double-digit growth rates.
We like the profile of Accentures management team. Almost all of
the 15 executives have spent their careers at the firm. (39:04) We believe

-28-

FPA International Value Strategy FPIVX

this is one of the reasons why strategy, execution, and communication are
all transparent and sensible. Managements track record in allocating
capital has been admirable, with a majority of excess capital returned to
shareholders, and there has been no attempt to artificially boost growth
rates by dilutive and questionable acquisitions.
Lastly, we like their policy on the balance sheet, which they keep at
a moderate net cash level. At the time of purchase, we invested in
Accenture at a high single-digit free cash flow yield and multiple of
normalized EBITDA. Our assumptions for the normalized margins of the
company are backed by our own research on dozens of industry
competitors.
Pierre?
Pierre:

Thank you very much, Jason. Very quickly conclude, and then well jump
into Q&A after a quick pause. Wed like to wed like to reiterate, as we do
each quarter, the key tenets of our investment philosophy. Were absolute,
not relative, long-term value investors with a strong bias towards quality.
We look for well run, financially strong, high-quality businesses with stock
we can purchase at a significant discount to our estimates of their intrinsic
values. And we only invest when presented with such opportunities and
will hold cash in the absence of such opportunities.

-29-

FPA International Value Strategy FPIVX

And with that, with no further prepared remarks for today, wed like
to open it up for questions.
Ryan:

Thanks, Pierre. For those who are listening in, please feel free to submit
your questions on line. Were going to pause for just a moment as we
compile those questions. Please stand by.
Okay, were going to go through the questions that were submitted
ahead of time first. (41:01) So for those of you who submitted questions
during the call, please stand by. Were going to try to get to most, if not all,
the questions that were submitted during the call.
So the first question that was submitted beforehand was: Pierre,
would you estimate what the current discount to intrinsic value is? And
what do you think may be the effect of QE in Europe on earnings and
valuation multiples, if you care to speculate?

Pierre:

All right, and well start going through these questions in order. And
depending on time, I may just take it over and just answer them all at once
without necessarily going through individual or reading each individual
question.
With respect to that first question, first, as I mentioned earlier in our
prepared remarks, we estimate that an average discount to intrinsic value

-30-

FPA International Value Strategy FPIVX

of our holding is 34%. So in PV terms, this means a little under 0.7 time or
66%.
With respect to the question on QE, I think theres been and
continues to be a significant impact on market prices, and I think its
affected markets globally rather than within the limits of a specific
geography. The same QE policies have the same effect everywhere
theyre implemented, and obviously they have implications far beyond
their specific place of origin.
Im not sure about earnings though, or maybe it is a good thing for
premium car manufacturers maybe, for real estate businesses, for luxury
good companies, and auction houses. Maybe its also allowed some
companies ironically to invest in hard asset as a substitute for labor or to
rejuvenate equipment, thereby helping margins and possibly returns. But
generally speaking, CapEx spending hasnt been quite elevated, so I
cannot say for sure in general terms like this.
Arguably its actually been a negative for many businesses because
of lower rates and what they mean for many savers, as well as the weak
recovery weve generally seen since the global financial crisis. In some
cases, its increasingly highly inflationary. Think about the ballooning

-31-

FPA International Value Strategy FPIVX

student loans and the rapid increase in tuition rates. And some instances
its deflationary, as the middle class is getting squeezed.
(43:01) So net-net in general terms, I guess I just dont know. Im
not an economist, and I dont want to be one. From an investment
standpoint though, at the end of the day we have to look at the specifics of
individual businesses.
On the valuation front, given the markets that weve experienced
over the past almost three years here within the International Value Team,
I think that what we can say is that theres supporting evidence QE has
fueled significant inflation in multiples, and earning expectation possibly for
that matter, as investors who were typically relative in their approach
adjusted their cost of equity to artificially low, if not zero, interest rates, and
as many fear now that the economy just couldnt operate without free
money, which incidentally may be true in the case of consumer spending
without real income growth like the U.S.
But generally speaking I think this impact has been actually quite
and maybe more dramatic in the U.S. It could be a function of scale, the
fact that European is that Europe is not as integrated as the U.S. and
maybe not as directive as China, and arguably because in Europe

-32-

FPA International Value Strategy FPIVX

inflationary pressure has been offset by the lack of compelling, if at all,


economic improvements.
Look at whats happening to European stocks today, with now
reports the SEB is considering buying corporate bonds. Theyre kind of
taking that on from the U.S. authorities at this stage. And Japan of course
has gone into buying equity now. So its everywhere, and its certainly a
negative from our standpoint because it makes for a difficult
environmentmake it more difficult to find genuine bargains for us.
More importantly from our standpoint as investors who need to
entrust management teams with capital allocation decision, I think its also
having a negative effect on management behavior. Weve seen it in quite
dramatic fashion in many emerging market, which is something that we
actually commented on in past reports. But we have also seen it in
developed markets. (45:00) Sometimes within management team which
we consider to be financially disciplined, theyre letting working capital
build up or adding capacity simply because they can finance at low rates.
Sometimes they even investwe did hear thatin inventory because
cash doesnt earn them anything. Sometimes they feel pressured and/or
attempted to revise down their return threshold for investment because
they feel it could be causing them to miss out on opportunities. And of

-33-

FPA International Value Strategy FPIVX

course theyre far more eager to do acquisitions and buybacks, which they
can show as accretive to earnings pretty much at any price given the
very low rates on some of the cash sometimes sitting idle on their balance
sheet.
The last thing that we can say is, while we can speculate on all of
this, we cannot let ourselves be held captive to this from an investment
perspective. It could go on for a long time. And I dont think it can go on
forever, but it could go on for a long time. And we cannot play this. We
cannot time the markets that way, or at least we dont think we can, so we
dont try. The only thing we can do is stay the course and follow through
with our bottom-up absolute value discipline no matter what it means in
the short term. In the long term, we think thats the only way to build value
for ourselves and for our shareholders.
Ryan:

Thanks, Pierre. Im going to combine two questions we got on cash. The


first, which was submitted beforehand: are we using cash to buy equities
that are caught in the recent downturn? Combined with a very similar
question we just received, which is: have we continued to deploy cash
over the last few weeks during the downturn?

Pierre:

Okay, the answer to that question is: to what extent to the full extent, but
so long as we can invest in high-quality, well run, financially robust

-34-

FPA International Value Strategy FPIVX

companies that we can buy at significant discount to intrinsic value. And


this is not specific to the current downturn, if there is one. Its always the
case. Were always willing to be fully invested. Were always willing to
deploy cash irrespective of what the world economy is doing or whether
capital markets are going up or down. Our cash exposure is not a topdown call; its a residual output of our process. And were seeing the case
come down now, but we could see it come down the same way if markets
were coming up.
(47:04) Whats true though is with markets coming down in the past
few months and some specific sectors, geographies being hit particularly
hard, we see more opportunities of late, and weve been using our cash to
take advantage of these opportunities. I mean, if you look, weve deployed
10% of our assets, a quarter of our liquidity, and weve put 25% of our
assets into newly built position, many of which are now within our top
holding, as youd expect, over the quarter. So its been a meaningful
period for the portfolio these past few months of downturn or correction or
whatever else we want to call it.
Ryan:

Thanks, Pierre. We received a question beforehand on Fugro and a few


questions during the call on Fugro. So, Pierre, do you want to take those?

-35-

FPA International Value Strategy FPIVX

Pierre:

Yeah. And Ill maybe revert back to some of these questions later because
many coming through, and I want to try and address as many as I can.
The question was with respect to the largest oil and gas majors like
Shell and Total having been clear about their intent to use exploration
spending, and the question is why were investing capital in Fugro in this
environment, which doesnt appear to be a great business, with returns on
capital have been historically in low double digit and with a surveying
business being a notoriously cyclical business.
So to begin with, many of these comments are true, but some need
to be nuanced. So Fugro was historically in the seismic survey business. It
was the bigger part of their portfolio in the past, and it is a low return
business by nature, at least for the companies who actually participate
with the assets on the balance sheet, as most do. Even though Fugro still
has some actual surveying activity, however, they sold out of the seismic
business prior to our investment in the company.
It remains true nonetheless that Fugro has exposure to oil and gas,
in particular offshore and high exposure to exploration spending. As you
know, commodity prices in oil in particular have been coming down, which
means exploration spending has also been coming down as well. This is
not new; this is not an intention thats being stated. (49:02) Its a reality

-36-

FPA International Value Strategy FPIVX

now for these businesses. Its been a reality now for these businesses for
some time. And that doesnt mean they can no longer grow or generate
good profit, but it does mean lower growth and more challenges to
preserve margins and returns in the short term.
Its also true that Fugro is not a great business. The companys
returns have indeed been as low as in the low double digit. That said,
theyve also been well in excess of 13%. In fact theyve average north of
20% in the past 1015 years, including the current downturn in oil and
gas, as we just talked about. That may not be the sign of a great business,
but it is a business that creates value even relative to a normalized cost of
capital, which is how we think about it.
Lastly, its true that not only surveying but most commoditized
businesses including oil gas service businesses like Fugro are cyclical
businesses in nature. However, whats important to understand is we dont
invest in businesses only when they are, only when they are not cyclical,
and only when the environment is good. That means that to me seems
like a challenging formula to buy cheap stock and generate excess returns
doing that. None of the abovewhether thats softening market condition,
just okay business fundamentals, and cyclicalitymakes a business noninvestable. Its a question of what we believe is factored into the share

-37-

FPA International Value Strategy FPIVX

price relative to the long-term free cash flow that the business can
generate because it can exist in perpetuity or at least for a very long
period of time.
So first, we dont invest only in great businesses. We invest in all
quality businessesthat is it say, businesses that are sustainable in the
long run and can durably generate average returns in excess of their
normalized cost of capital because of their fundamentals. Within that,
there are some great businesses and theyre work 15 time normalized
operating profit, which mean we want to buy them at 10 time at the most.
And there are some businesses that are just okay, and they can be worth
as little as eight time and still be own-able. But we need to buy them at the
most at five or six time profit.
(51:05) Second, we dont invest based on how good the
environment currently is for a business. Now is arguable not a good time
to invest in luxury goods or businesses with exposure to mining, China,
Brazil, or Europe. 2009 wasnt a good time to invest in many businesses,
But I have never seen a better one in my lifetime as an investor, with all
the limitations that that implies. While short-term environment may dictate
sentiment and share prices, they do not command long-term free cash

-38-

FPA International Value Strategy FPIVX

flow generation. Thats often why were able to buy these businesses at
discounts to intrinsic value.
When oil prices were north of the $100 a barrel and all related
businesses were over-earning and they were all trading at huge multiple,
we had no interest in buying them. Same with emerging markets today, by
the way for the most part, if you could go back to some of my earlier
comments. Or try and buy luxury car manufacturers now as demand is
booming on cheap financing. Were sellers of this business nowin fact
recently sold out of our position in Daimler. But we were buyers in 2009,
and we were buyers in the first quarter of 2012 for that matter. Businesses
that are faced with short-term challenges are often hated. It doesnt mean
theyre bad businesses, it doesnt mean we dont need them, it doesnt
mean they wont be around in 50 years, and it doesnt mean they cannot
deliver good profits and return over the cycle. But very often it does mean
that their stocks are cheap because the short-term view I think is more
prevalent in capital markets than what the long-term nature of business
value would dictate.
With all that being said, its clear that, in hindsight with Fugro stock
being down by more than 40%, we would have much preferred not to be
invested in the company or not investing in the company when we did.

-39-

FPA International Value Strategy FPIVX

But thats the past. But then our question now is what do we do now? Now
its a decent portfolio of niche-y businesses that should do well longer term
as business condition improves. And the companys trading at one time
book and 8% dividend yield, 7.5% earning, and one time revenue on last
disclosure numbers. Thats probably a price at which we should be
buyers, not sellers, and thats exactly what were doing.
Ryan:

Thanks, Pierre.

Pierre:

(53:10) Yeah, okay, so Ill start just going through questions, and Ill try to
take down as many as I can. Do you feel that the current portfolio is
overexposed to highly cyclical business, which I think a very valid
question? So as you know, we do not build or manage portfolio like that
based on exposed to one thing or another it ends up looking. Were also
not entirely clear on what overexposed actually means. I think were of
the view that if you think you have a massively asymmetric situation and a
large outlier in terms of prospective return, youd want to be as
overexposed to that opportunity as you possibly can. And for reference, to
us that means 10% of our assets at purchase. And historically weve
actually had more than 10% of our assets in one name, and that was LSL
when the shares were trading in the 200 P/Es.

-40-

FPA International Value Strategy FPIVX

That said, its true that we have effectively added exposure to some
businesses that are more cyclical in nature. And while we are bottom-up
investors, we also try and remain mindful of what our exposure ultimately
is if you think back to how we approach currently exposure for instance.
Thats the case of ALS for example. Its clearly a cyclical business and it
was the case of LSL originally, as U.K. real estate transactions were down
by more than 50% even from their long-term average. But ALS samples,
volumes were down 35% last year, and they were down 27% in the first
half of their fiscal year 2015.
Like I said for LSL at the time, I dont know for sure that things
wont get worse from here, but they seem dire and sustainable longer term
at this stage. In the meantime similar to LSL, margins have been holding
up, as management is aggressively adjusting staff levels, with labor being
the higher cost item in the lab. Even with that, the returns are now half
what theyve been historically, and yet theyre still north of 20%. (55:03)
The network of labs that ALS has built is a superb asset, extremely difficult
to recreate. The balance sheet is relatively healthy at 2.2 time net debt to
EBITDA, and the free cash flow generation remain strong. But because it
is cyclical or at least in part because of this, the share prices have come
down from $12 a share to $5 a share, which means were able to buy this

-41-

FPA International Value Strategy FPIVX

business at 1.3 times book value and we think a material discount to what
it would cost to even recreate this network, not to mention the multiyear
ramp-up period that would be needed to even get it to break even.
Fenner, too, has similar underlying exposure to mining, and it is by
definition a cyclical exposure. And I dont want to roll out the entire
investment thesis here, but a vast majority of the business is aftermarket,
so its more recurring in nature than cyclical. And the market for conveyor
belts is essentially a duopoly following the recent acquisition of Valiant
So the point here is whats important out of specifics of individual
businesses more than just the underlying exposure and what is again
factored into the price. Its based on normalized through-cycle economics.
And using a multiple within 815 time that we think adequately reflect the
cyclical nature of the business, if we can derive an intrinsic value that
implies the stock is trading at a significant discount, then were interested
in becoming shareholders in the business whether or not its cyclical.
Weve done it before. Think about LSL, Wolseley, Travis, Adecco, BBA,
Daimler, Taiwan Semi more recently.
The other ones we added in the past three months or so, I dont
know how cyclical one would consider them to bewhether thats Adidas,
Christian Dior, Prada, or Hypermarcas. So far as existing holdings are

-42-

FPA International Value Strategy FPIVX

concerned, I think Aggreko is definitely cyclical, Incitec as well, LSL, but


how about Atea, Brambles, Danone, Diageo I guess to some degree
they all are somewhat cyclical. (57:02) Most businesses have some
element of cyclicality to them, and theyre all potentially subject to shortterm disruptions. Back to Britvic for instance for a case of product recall
and how disruptive that temporarily was to the business.
But that in and of itself doesnt mean that theyre businesses we
shouldnt own. In fact sometimes its positive thingnot only because
cyclicality can drive share price volatility, as I mentioned, but also because
some businesses benefit tremendously throughout cycle. Again think
aback to Taiwan Semi and semiconductor manufacturing in general. Its
hugely cyclical, but every cycle kills the weaker players, making the
business stronger. Thats the type of business we actually love.
The key again is to make sure that were pricing these more cyclical
businesses based on through-cycle normalized economics. So for
instance, we would not assume Daimler loses 0.5 billion per annum in
perpetuity like they did in 05, and we wouldnt assume that they can get
double margins in perpetuity either even though they earned that and
more at high points in the cycle and in particular markets.

-43-

FPA International Value Strategy FPIVX

Theres another question on price to cash flow change over the


past two quarters. I think the comments on discount to intrinsic value
address that. Its normally increased significantly, the weighted average
discount to intrinsic value over the past two quarters. But ever since the
first quarter of 2012 its never been that high.
Just taking the sort of five minutes left or so to just run through
some of these questions, current security selection year-to-date, some are
coming down. That goes back to my earlier comments. As names are
coming downAdidas, TNT, Fennerwe really started initiated the
position at the very end of the second quarter. And then over the last three
months weve been aggressively buying in them, as well as we were
adding the other six names, as all of these names were significantly falling
down.
Proper margin of safety for buying price of Fugro, whether thats
Fugro or any other one, when we invest, we invest with the conviction that
there is as least a 33% discount to intrinsic value. It goes without saying
that, with a share price having now come down by more than 40%, the
massively higher than that. (59:06) Now why do we think its a good
business? I think weve highlighted a few things, and its kind of
redundantthe same question as weve addressed before.

-44-

FPA International Value Strategy FPIVX

Again another question on Fugro, same thinga comment on


cyclicality and return, which Ive addressed earlier.
The thoughts on recent pull back in German related collapse in
vehicle production, again we dont really focus on macroeconomic trends.
What matters to us is the long-term free cash flow generation of the
business and what that means in terms of enterprise value versus whats
discounted in the share price. If as a result of that macro theme or trend
we see a significant correction in the share price of say I dont want to
say too much here because we have some names on sort of the high
priority list that have exposure to that that are being affected by a
correction related to that market trend we may be interested in looking
further into it and potentially investing.
LSL, how do you normalize U.K. real estate market in terms of
volume? So theres an element of magnitude there, and theres an
element of timing. Obviously its very challenging. What we did at the time
is we looked at years and years of data going back 2030 years for what
was kind of the long-term average level. We looked peak-to-trough. We
also looked at a bunch of microeconomic data to see what was
reasonable from an affordability standpoint. Its not just about volume; its
also about price and what that means for potential buyers. We looked at

-45-

FPA International Value Strategy FPIVX

things like population growth, household information, immigration, and just


kind of what a sustainable level was.
But more importantly the way we looked at itand we often use
that as the typical example of an asymmetric investment at the timeis
we said, if the market was never to normalize in any way we didnt think
it was very realistic, but if the market was never to normalize in any way,
would we at least be still buying into this at a discount to intrinsic value.
(61:06) And we were getting a 20% discount to intrinsic value for LSL at
the time when the stock Thats when the stock was in the 200 PEs.
Expected cap gains for 2014
Ryan:

Yeah, so were going to have our estimates on our website in the next few
weeks. So stay tuned for that. Well have the estimated capital gains for
the Fund.

Pierre:

Okay. Management tradition at Aggreko, I mean clearly with Angus and


Rupert gone, weve lost two senior managers that we really likedone
kind of bigger-than-life charismatic character, which is really important for
businesses that have high customer exposure like this and pretty broad
scope and a big work force. And then Angus, the CFO, was a very strong
protector of financial discipline and very transparent of our interest as
shareholders. We think the new CFO, who was the former Head

-46-

FPA International Value Strategy FPIVX

Controller, is very much of that same vein. The new CEO, we havent
seen anything negative about him thus far. And as a result of that havent
made any adjustment to the intrinsic value according to this. But I think its
fair to say that, with respect to the CEO specifically, were still kind of
waiting to see what he can achieve and deliver.
Wed also highlight that we are very close to the Chairman of the
Board at Aggreko, who used to be the CEO of Cadbury, which is a
company we were invested in at the time. And we have direct rapport with
him as well, and we think that he is fully understands where we come
from. Weve had very clear exchanges with him with respect to our
expectation, how we think about capital allocation, how we think about
some of the technologiesnot to go into the specifics of this business
that are appropriate for this business. And I believe were very much on
the same page. So we see no reason to change the assessment of the
intrinsic value.
The 2.2 billion offer for Reebok, (63:01) I think its still a bit early for
me to be talking about this, and I certainly would not disclose what the
intrinsic value is that we have on Reebok. I think the bottom line is Reebok
was a mistake. The management team acknowledged that theyve
destroyed significant amount of value doing this deal back in 2006.

-47-

FPA International Value Strategy FPIVX

Theyve struggled to find a formula that works. They may be on the verge
of doing that with a focus on fitness, and so I certainly wouldnt want them
to sell at a discount to intrinsic value for that asset. But if we can get a
good price for it, I dont I would want management to consider it. And
how they think about it is going to be an important factor to how we assess
their quality level.
Discount to intrinsic value for Adidas and SAP, in light of the recent
results, no dramatic change in enterprise value. As you know enterprise
value is the perpetual stream of free cash flow discounted back to present
time so whatever is happening in a given quarter doesnt have a massive
impact. And the discount to intrinsic value has to be north of 33% for us to
buy. So that answer on the question on Adidas and SAP, I think I can
disclose on this call. As we stand today, even though its been a long
existing holding, its north of 33% as well.
Why do we think Accenture is genuine bargain? Accenture is still in
the portfolio. Its come down as a weighting. I think we can say that its at
the bottom of the pile in terms of discount to intrinsic value. When we do
case studies, we try not give away our hottest investment thesis. So
maybe that gives you some perspective. Its clearly not at the top of the
docket.

-48-

FPA International Value Strategy FPIVX

How of the Funds decline was based on discounts widening? Most


of it, as we highlighted and weve done some math on that topic
specifically, so were happy to share some of it after the call with people
who are interested in it, subject to clients approval. But our assessment is
that the bigger part of the decline is buying into these declining names
aggressively, as we mentioned in the prepared remarks.
Would you refresh my memory as to whether your hedge
underlying portfolio company cash flow are based on domicile? Okay, so I
think that has to do with currency hedges. So again very quickly on this,
the way we think about it is we measure the exposure not based on where
individual stocks are where individual companies are domiciled and
what currency individual sticks are denominated in. The way we measure
our exposure is we look at the free cash flow of each of our holdings. We
look at what percentage of that free cash flow is denominated in what
currency. We consolidate all of that, and then we look if we have any one
currency that is a big outlier. And where we ended up and still end up to a
degree today is the two big outliers, the most important one is the euro,
followed by the British pound. And if theyre in excess of 10% of the
consolidated free cash flow of the portfolio, then we hedge that back

-49-

FPA International Value Strategy FPIVX

defensively to below 10%. In the case of the euro, I can say as of today,
were a little over-hedged, but weve got more than 60% that hedged.
Ryan:

Thanks, Pierre and team. I think that was all the questions that were
submitted both beforehand and during the call. If for some reason we
missed your question, please feel free to email us at crm@fpafunds.com.
and well get back to you later today.
Thank you, team. And to our listeners, we would like to thank you
for your participation in todays FPA International Values third quarter
2014 webcast. We invite you, your colleagues, and clients to listen to the
playback and view the slides from todays webcast, which will be available
on our website, fpafunds.com, over the next week or so. (67:02) We urge
you to visit the website for additional information on the Fund, such as
complete portfolio holdings, historical returns, and after-tax returns.
Importantly we expect the portfolio manager commentary for this quarter
to be available in the coming days. So please go to our website for that.
Following todays webcast, you will have the opportunity to provide
your feedback. We highly encourage you to complete this portion of the
webcast, and we do appreciate and review all of your comments.
Please visit fpafunds.com in the future for webcast information,
including replays. We will post the date and time of the prospective

-50-

FPA International Value Strategy FPIVX

webcasts during the latter part of each quarter, and expect the calls will
generally be held three to four weeks following each quarters end. We
hope that our shareholder letters, commentaries, and these conference
calls will help keep you, our investors, appropriately informed about the
Fund.
We do want to make sure you understand that the views expressed
on this call are as of today, October 21st, 2014, 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.
Past performance is not a guarantee of future results, and it should
not be assumed that recommendations made in the future will be
profitable or will equal the performance of the security examples

-51-

FPA International Value Strategy FPIVX

discussed. Any statistics have been obtained from sources believed to be


reliable, but the accuracy and completeness cannot be guaranteed.
You may request a prospectus directly from the Funds distributor,
UMB Distribution Services LLC, or from our website, fpafunds.com.
Please read the prospectus and the policy statement carefully before
investing. The FPA International Fund is offered by UMB Distribution
Services LLC.
Thank you again for your participation, and this concludes todays
webcast.

[END CALL]

-52-