The cautious approach of FPA Crescent's manager has generated great returns for this no-load fund, which recently reopened to new investors. By Andrew Tanzer, Senior Associate Editor June 9, 2008 For years, Steve Romick and Bob Rodriguez, his partner at First Pacific Advisors, have warned anyone who would care to listen about some ugly risks that were building in the U.S. financial system. A couple of years ago they were fretting about dreadful mortgage lending practices and rapidly escalating derivatives exposure outside the traditional banking system.Alas, too few people listened -- certainly not enough people of authority in Washington or on Wall Street. But how do prescience and insight into systemic failures help a portfolio manager to make money? First, they allow a manager to avoid permanent loss of capital. That's how an authentic value investor such as Romick, manager of FPA Crescent (symbol FPACX), defines risk, not the more conventional definition that sees volatility as a proxy for risk. Romick says his fund's returns are a product as much of what he hasn't owned -- namely, financial stocks -- rather than what he has owned. Avoidance of risk and a focus on absolute rather than relative return have been hallmarks of Romick's impressive 15-tenure at Crescent, a no-load fund that reopened to new investors this year. Over the past 15 years through May 31, Crescent gained an annualized 13%, an average of three percentage points per year better than Standard & Poors 500-index. Over the past decade, Crescent, a balanced fund, returned an annualized 10%, three points per year ahead of the Dow Jones U.S. Moderate Portfolio, according to Morningstar, which puts the fund in the top 3% of its category. Advertisement Romick notes that he's enjoyed 75% of the upside in months with a positive return while suffering only 50% of the market's loss in down months. If you protect capital like this, sharing most of the gains in bull markets but minimizing downside in bear markets, your wealth will compound nicely over the long run. So what does this accomplished -- and wary -- value investor like now? He's not certain the financial system is out of the woods. "The business system is being stress-tested," he says. "Time will tell how much the system needs to be bailed out." Romick is still selling short some financial stocks (a bet that their prices will fall) and keeping at least 30% of the fund's assets in cash. He won't discuss stocks he's bet against, but as of March 31, Crescent was short Capital One Financial (COF), Lehman Brothers (LEH) and Wachovia (WB), among others. But he says he likes certain junk bonds that yield 9% to 11%. "There's a disconnect between high-yield bonds and stocks," he says. "Either high yield is cheap or stocks are expensive." And he's happy to hold onto the stocks in his portfolio (Romick holds his stocks for five years on average). His two largest holdings are oil stocks, ConocoPhillips (COP) and Ensco International (ESV), a drilling company. A third of Crescent's holdings are in energy stocks. Advertisement Another favorite is Covidien (COV), a medical equipment company that was spun out of the scandal-ridden Tyco International. Romick says the newly independent company is now investing properly in research and development and expanding its sales force. He's also had a nice gain in Wal-Mart (WMT), which he sees, thanks to the retailer's enormous financial strength and steadily rising dividend payouts, as equivalent to a long-term bond with a steadily rising interest coupon. No investment is safe, but FPA Crescent is about as low-risk as they come. Romick describes his goal as providing stock rates of return with less risk than the stock market. In this he has succeeded. Crescent charges annual expenses of 1.34%. It is available to new shareholders only by direct purchase through FPA. The initial minimum investment required is $1,500.