MONEY

Why is the best fund manager of all time jumping ship?

So you’ve just nailed the Morningstar Fixed-Income Manager of the Year award for the third time. You’ve led both a stock fund and a bond fund to great long-term returns, which prompted Money to name you Best Fund Manager of Our Time in 2008. And you’ve been proven correct in your forecasts about the dire impact of subprime mortgage debt. With economy collapsing just as you predicted, what do you do now?
For Robert Rodriguez of First Pacific Advisors the answer is a bit counterintuitive: you announce that you are leaving for a one-year sabbatical starting next January.

A star fund manager taking a sabbatical in the midst of the worst financial crisis since the Great Depression? It’s all part of a long-term plan, according to Rodriguez. “When is a good time to pass the baton?” he says. “I’ve seen a lot of fund managers overstay. And that can be bad for the firm and its clients.” With a successful transition, he says, FPA’s future can be secured for another 10 to 20 years.

And there’s good reason to be optimistic. Rodriguez has recruited a deep bench of portfolio managers, who share his value investing philosophy, and they have established their own impressive records. Tom Atteberry, co-manager of FPA New Income (FPINX)—who shares a Morningstar Manager of Year award for fixed-income investing—will continue to head that fund. And at stock fund FPA Capital (FPPTX), co-managers Dennis Bryan and Rikard Ekstrand will take full charge.

“Who in their right mind would consider a major transition at this time unless they had high confidence in their associates?” Rodriguez says. “I’m leaving all my money in the firm.” When he returns to FPA in 2011, it will be as an advisor and analyst, as well as managing partner—but he will not be a lead portfolio manager.

Rodriguez acknowledges that FPA’s managers are likely to face a tough investing climate in 2010. “I think the worst of the financial collapse is behind us,” he says. “But we have a long, drawn-out fight ahead of us. I think people will be disappointed by the magnitude of the financial recovery—the stimulus will have virtually no traction.” That’s because the impact of the stimulus money will be offset by Americans’ increased saving, as well as a decline in international trade, Rodriguez says.

And even bigger issue, as he sees it, is the ballooning debt being racked up at the federal, state and local levels. It’s an issue he has frequently written about and discussed. So along with his plans to travel next year—“to South America, maybe around the world”—and read books, Rodriguez hopes to get involved with organizations that are focused on issue of the U.S. debt.

What about working with the U.S. government itself? Rodriquez dismisses the notion. “Whether it’s the Republicans or Democrats,” he says, “the government just recycles the same people.”

Meanwhile, both FPA Income and FPA Capital are investing cautiously. FPA Income holds only short-term high quality debt, including a stake in Treasury Inflation-Protected Securities; it’s up 3.73% over the past 12 months, which beats 90% of its peers. And FPA Capital has stashed more than third of its portfolio in cash, with the rest invested mainly in energy stocks. It’s down 42%, which places it in the top 28% of mid-cap value funds.

– Penelope Wang

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