The portfolio manager and research director shares his thoughts on volatility, AI, the Magnificent Seven, and private equity.
Our guest this week is Brian Selmo. Brian is a portfolio manager and research director at First Pacific Advisors. Since 2013, he has comanaged the FPA Crescent Fund with Steve Romick and Mark Landecker, and in 2021, he became comanager of the FPA Global Equity ETF. Both strategies are highly regarded by Morningstar’s Manager Research Team. Before joining FPA in 2008, Brian worked as an analyst at Third Avenue Management and at Rothschild, and was founder and portfolio manager of Eagle Lake Capital. Brian holds a degree from Johns Hopkins.
Steve Romick: ‘We Think Defensively’, The Long View podcast, Aug. 25, 2020.
Morningstar Awards for Investing Excellence
In an Uncertain World: Tough Choices From Wall Street to Washington, by Robert E. Rubin and Jacob Weisberg
(Please stay tuned for important disclosure information at the conclusion of this episode.)
Dan Lefkovitz: Hi and welcome to The Long View. I’m Dan Lefkovitz, strategist for Morningstar Indexes. Our guest this week is Brian Selmo. Brian is a portfolio manager and research director at First Pacific Advisors. Since 2013, he has comanaged the FPA Crescent Fund with Steve Romick and Mark Landecker, and in 2021, he became comanager of the FPA Global Equity ETF. Both strategies are highly regarded by Morningstar’s Manager Research Team. Before joining FPA in 2008, Brian worked as an analyst at Third Avenue Management and at Rothschild, and was founder and portfolio manager of Eagle Lake Capital. Brian holds a degree from Johns Hopkins.
Brian, thanks so much for joining us on The Long View.
Brian Selmo: Thanks, Dan. It’s a pleasure to be here. Thanks for having me today.
Lefkovitz: Yeah, we really appreciate you making some time for the podcast and sharing your perspective. We are recording this in late June 2025, and markets have settled down, but we did see some very sharp drawdowns earlier this year in stocks and tremors in the Treasury market, and a couple terms that have trended this year, “volatility” and “uncertainty.” I’m curious what your messages for investors who’ve been unsettled by volatility and uncertainty.
Selmo: Yeah, sure, Dan. This is a question that would have come up a lot during our first-quarter conference call, which was held shortly after “Liberation Day.” And, our feeling is that uncertainty is sort of a constant and intrinsic part of the human experience. And it just reflects the fact that there are a lot more things that could happen than will happen. And that uncertainty is sort of kind of a definition of risk from our perspective. And I think there’s actually, people kind of, as you said, it trends, and people say, how can you deal with all this uncertainty that exists today? And, there’s so much uncertainty, what are you going to do? And our thought would be: There’s always been uncertainty. And there was actually a long time ago, I read a book by Bob Rubin called In An Uncertain World, and the premise of it—and he had had, I think, something like a 40-year career at that point in government and having previously run Goldman Sachs before being Treasury Secretary—his premise was basically that you can’t really know anything for certain before you make a decision. You sort of have to deal with the facts you have and reasonable probabilities around likely outcomes and then make the best decision you can, given that you live in an uncertain world.
And so that’s, I think, an idea that’s sort of always been a pretty robust way to approach, financial markets and probably geopolitical issues as well. So what we want to do is instead of predicting any particular outcome, which, I think we would say is basically impossible, we want to prepare for any manner of eventualities. And so, if you think about our Crescent Fund, we are endeavoring for equitylike returns with less risk over rolling market cycles and over rolling five-year periods. And we do that by having a number of different types of investments, some that will do well in a given scenario and maybe others that will do well in other scenarios. And so, we want to take advantage of the volatility that, as part of capital markets, equity markets, and be able to buy stocks and bonds when we think they offer good value. And then sort of buy businesses and bonds that we would expect to do well in any number of circumstances. So things that can kind of ride well no matter what the tide happens to look like. We don’t tend to do a lot of changing of our mind or changing of the portfolio in response to some item that’s in the news at a given point in time.
Lefkovitz: Yeah. There was a great line in your first-quarter commentary that I highlighted. “You have not entrusted us with your hard-earned capital to opine on public policy, but to do the best with the hand that we are dealt.” I thought that was good.
Selmo: I think that’s right.
Lefkovitz: So you’re very much fundamental bottom-up investors, but you do describe yourselves as macro-aware. So I wanted to ask if you’ve made any sort of adjustments to the portfolio based on expectations around economic growth or inflation or geopolitical risk?
Selmo: Yeah. Specifically with regard to growth and geopolitical risk, the short answer is no. And the reason is that we’re seeking to find easy problems to solve and try to avoid hard or impossible problems. And I tend to think that coming up with a useful, differentiated expectation for growth or inflation expectations is basically impossible. And when I say useful, I mean, both different from consensus and also a view in which you have enough kind of conviction or certainty that you’d be willing to risk capital behind it. So that’s not something that we can do. What we do, just sort of on a day-to-day basis is we’re building and maintaining a universe of high-quality franchise businesses. And we’re looking for a chance to buy them. Think of these as compounders. My partner, Mark, says that we’re looking for compounders that are clouded in controversy. And so we’re going to get a chance to buy those kind of businesses when there’s some kind of doubt about them. And you want to have done the work and have thought about what your anchors to windward are or what are the durable characteristics of the investment before the news events start trying to throw things into a volatile twist.
It’s very hard to get one’s conviction if you are sort of just learning or coming up the learning curve in a very volatile environment. So instead, we try to prepare ahead of time and then respond to the opportunities that come on offer when some macro issue comes to the fore. In terms of being macro-aware, what we’re really doing is looking to understand where there are areas of clear excess, and it could be a lot of enthusiasm or high-priced or overpriced securities. And then we’re also—or maybe excessive credit risk—and then we’re also looking for areas that we think are deeply depressed compared to sort of long-term sustainable levels. And so we want to avoid the first, right, where we think there’s too much froth. A lot of what we’re doing in Crescent is winning by not losing. So we want to avoid areas of the market, whether it’s equities, whether it’s geographies, whether it’s industries, that the risk/reward or the price/value doesn’t make any sense. And given our flexibility, we’re able to be completely out of various sectors, industries, or businesses. And then on the other hand, when a business or an industry is out of favor or operating well below trend or faces sort of some challenges, that’s a place we want to sift around for opportunity or for investments.
Lefkovitz: Yeah. So, as you said, the Crescent team has used market selloffs historically as buying opportunities. And the tariff-driven selloff that we saw earlier this year didn’t last that long. It wasn’t a huge drawdown. But curious if you were net buyers of risk assets during the period.
Selmo: Yeah, we were net buyers. I think, we bought a couple hundred basis points in equities, and it was primarily adding to businesses that we had been buying over the previous 12 months. So it was a handful of Japanese businesses, and then probably seven or eight businesses that are domiciled around the world, primarily in Europe and the US. And those businesses range from electronics businesses, consumer staples, energy services, leisure companies, building materials, and, maybe one commodity producer. And so there’s not really any unifying industry or geography around the businesses that we’ve been buying. But the thing that does kind of unite them all is they’re all sort of small- to mid-cap companies. None of them have market caps above $30 billion. And I think they would be considered classically good businesses, right? Strong returns on invested capital, strong margins, large shares, and in niches where we think the prospects for growth over the next, call it, five or 10 years are pretty sound. And so all the businesses have strong balance sheets.
I think on the management team side, they’re somewhere between acceptable to great management teams. And then I think the thing that really makes them attractive to us is, given the high-quality nature of the companies, they’re all selling for between 8 and 14 times earnings when we bought them.
On the credit side, we did not do anything directly in response to “Liberation Day” or the tariffs. Subsequently, we’ve done one credit that I think is, was attractive in as a result of sort of some uncertainty or change in government policy with regard to wireless spectrum. But just broadly in the public credit side, spreads were about as tight as they’d ever been at the end of February or end of March. They widened maybe to slightly tighter than normal for maybe a week or two during the little bit of volatility we had in April. And then they’ve come right back, and the credit market is wide-open. And so we’ve kind of been very limited in the amount of credit we’ve been investing in the last sort of 12 months. And so I was encouraged to hear Jamie Dimon say, I think a week ago or something, that if he was a portfolio manager, he would kind of avoid credit in his portfolio. So that hopefully adds some credibility to the position we’ve had for a while.
Lefkovitz: You mentioned finding opportunity in the mid-cap or small- to mid-cap space. Generally, large caps have outperformed smaller caps over the past 10, 15 years or so. Do you find more attractive valuations down the cap spectrum?
Selmo: We do. If we look over the last year, we have been very much net sellers of large- and mega-cap companies and buyers of mid-cap companies. And I think there’s probably, there’s always idiosyncratic reasons, but it feels like there are maybe some larger drivers of that. I think that’s sort of the natural buyers of mid-cap companies, whether it is active mutual fund managers or long-short hedge fund managers. I think that those managers have seen tremendous outflows from their strategies over the last 10 or 15 years to a point where the industry is almost dead. And where you’ve seen a lot of inflows is one, as a competitor to sort of buying these businesses would be private equity. But private equity has probably been a little bit out of the market the last year or two because of the increase in interest rate. And then, also sort of failure to recycle capital and maybe a little bit of limited appetite.
But the other issues have been the huge flow into passives. And that tends to disproportionately go toward large- and mega-cap companies. And then I think the other bit is the kind of dominance of pod shops in terms of trading flows and just assets under management over the last decade. And those are, at least as I understand it, on the equity side, they’re not really natural holders of companies with lower levels of liquidity because in order to run the kind of perfectly hedged neutral model, you really need to be able to get in and out of positions pretty quickly. And so when you have a lot of the market move away from being, call it, bottom-up fundamental long-term holders, I think that’s creating an opportunity. And it’s an opportunity that we’re very, I think, well situated to take advantage of. And it’s something that we’re pretty optimistic about over the next, call it, three or four years or until something else changes.
Lefkovitz: Yeah. I wanted to ask about geography. As you mentioned, you’re very much a global investor. You own businesses in Europe and Japan and Korea. US has obviously outperformed, again, going back 10, 15 years. Do you find more compelling valuations outside of the US than within, generally? Do you have a perspective on kind of the long run of outperformance of US?
Selmo: Yeah, I mean, I would say that it’s a little bit hard to say because we don’t invest from a macro basis, from top-down basis. We follow businesses by their industry or competitive set, and we follow them across geography. So the people who cover a particular business niche would certainly not stop their analysis at a geographic border. They would cover that entire value chain. And then we would invest really open-mindedly across wherever the companies might be domiciled, considering the valuation, considering the competitive position, and considering the management quality and maybe shareholder-friendliness.
And so I think that we have over the last couple years been buying more things that are domiciled internationally, but it’s not necessarily a comment that, generally, market A is cheaper than market B. In terms of understanding some of the outperformance of the US over the last, call it, 10, 15 years, I mean, I think the punchline is a lot of it’s earned. And I think there’s a couple of things that went into it. I think one is that the starting point after the financial crisis was a time of certainly reasonable valuations in US market, and the currency wasn’t particularly expensive. And a lot of emerging markets at the time and even international markets in general, their economies, they benefited proportionately a lot more from the commodity supercycle. And you might remember, but, there was a—I guess there weren’t memes at the time—but there was a theme at the time that there was going to be a decoupling and that the BRICS were going to pull the world ahead and decouple from the US and maybe from Europe. And so I think that’s all largely reversed. And that’s probably a bit of a cyclical experience, where you see different markets outperform for a decade and underperform. And that’s kind of ebbed and flowed, I think, off and on for the last 100 years. The issue that’s maybe a little bit different in the last 10 or 15 years from my perspective is, I’d call it, Silicon Valley-funded tech platforms.
And so putting what amounts to a supercomputer into 5, 6 billion people’s hands has created business opportunities on a scale and a profit profile, the likes of which just didn’t exist prior to, let’s say, the opportunity didn’t exist prior to 2010. And if we think about ex-China, almost all of the important firms that have succeeded on building those platforms are US-domiciled, and so they’re going to be in US indexes. And then when you have sort of the power law of success accruing to the few, you have a result of where real economic activity in terms of business performance—a lot of their activity is actually happening globally—but in terms of where the companies are domiciled that are experiencing all of this very real business value growth, that’s just been in the US market. So I think it’s only natural if you have that, that market would outperform.
We started talking uncertainty, just because that’s been what happened the last 10 or 15 years, it certainly doesn’t mean that’s what will happen in the next 10 or 15 years. And, AI is, I think, very likely to be a new tech platform, right, a new compute platform. And historically when you’ve had new platforms, such as the mobile platform, that’s created a change in the landscape and an opportunity for new businesses to create very, very big profit pools and a new type of economic dominance in some way. And so I don’t know where the dominant AI companies will be developed, and they very well could be developed outside of the US. It’s maybe not the betting odds because Silicon Valley is still very well-funded and probably, at least now, in pole position to win with AI. But it creates another shot at things for other geographies in terms of where these businesses might get built.
Lefkovitz: Yeah. I wanted to ask you about AI, how FPA is thinking about it, and whether it’s core to your investment thesis for any of your holdings. Looks like you’ve got Meta and Alphabet, Amazon, some semiconductor manufacturers.
Selmo: Yeah. I mean, I think there are a couple things. One, a lot of humility in terms of thinking about what you don’t know. But, two, I think, as a firm, we want to embrace it as much as possible. So, we want to be listening to podcasts by people who are leaders in the industry. We want to be reading about people’s perspective and insight into what might be possible with this technology. We want to certainly use it and incorporate it into our work when we have tools that are useful. And that’s both on the investment research side but also on the operating the business side. And so we use various AI tools as an organization already. And I only expect that to increase. And then I think, personally, you want to experiment with them as much as you can.
On the investing side, I think what’s really important for any investment, but particularly kind of, like I said, a likely paradigm shift or platform shift in the technology is you want to be as creative and broad in how you think about what might happen, right? You want to entertain what maybe seems implausible because it’s sort of usually the failure of imagination that gets you into trouble, right? It’s imagining you’re making an assumption that something implicit often that something won’t or can’t happen. And then it sneaks up and surprises you later.
So we want to be as imaginative as possible in terms of thinking about what business is and what activities might be challenged. And then, we would like to certainly have various exposures to things that we think would benefit from AI, but particularly, we want to focus on those things that we think are going to be durable and not change in light of AI because it’s the things that you can get a competence in not changing that you can really build a position or build a business around.
In terms of the companies that we own in the Mag Seven, you mentioned Amazon, Meta, and Alphabet, I think, to date, Amazon and Meta are generally viewed as beneficiaries from AI. And I think that Alphabet faces a very obvious risk. And I think just so everyone’s level-set, I mean, Alphabet is a number of different businesses. There’s Cloud, there’s YouTube, there’s Search, as you think about it, and then there’s some of the other bets, and Waymo’s maybe starting to come into its own in terms of the other bets. And the best part of the Google business, the 10 blue links, is probably not going to be as good a business the next 10 years as it was the last 10 years. And so that creates uncertainty and risk. I would say that, to some degree, that’s, I think, well identified and probably incorporated in the stock price to some degree. I think there was a presentation a week ago by a very prominent hedge fund manager who’s also involved in big way in growth equities and venture. And I think Alphabet and Apple were kind of his picks to no longer be top 30 businesses over the next decade or maybe even in the next five years. And so I don’t think it’s lost on anyone. I think that it’s also worth remembering that a lot of these companies have reinvented themselves over time. I would say that no one really uses original blue Facebook anymore, but that hasn’t prevented what is now Meta from remaining a very relevant and valuable business. And so I think from our perspective, the big question mark at Alphabet is how is management going to handle this? And I think to date, they have probably not covered themselves in glory, but certainly it should be front-page now for them. And then hopefully they will execute well.
Lefkovitz: Yeah. And then your positions in semiconductor manufacturers, is that sort of a picks and shovels play on AI?
Selmo: Yeah, we’ve owned some, so we’ll call it, power and analog semiconductor businesses for a number of years, really going back, I think, probably 10, 12 years in the case of ADI. And so those are largely picks and shovels, or you can think about them almost as a toll on the digitization of the world. And we think that that’s a very durable long-term trend. AI is, I think, going to benefit and accelerate that trend. But we got into all of those well before AI was sort of front and center and had valuations that made a lot of sense.
Lefkovitz: And then how are you thinking about regulatory risk in the context of some of these Mag Seven holdings? There’s been some antitrust actions.
Selmo: It’s another uncertainty. I think that we will see what the impact is. I think there, for some companies, there’s a thesis to be had that if you broke them up into their component pieces, that maybe they would be worth more than where they trade in the markets. But we don’t take a particular view on how the regulatory environment will play out. We think that the asset bases that the companies have and the financial wherewithal they have in the various business, discrete businesses within the companies are all probably strong enough to be certainly Fortune 500 companies on their own. And so we suspect that it might not be the end of the world if they were to get rearranged a little bit organizationally. It might even create some energy and focus from the management teams. I don’t think many people believe that Alphabet is the best managed, most lean financially, or commercially aggressive organization in the world. And so having a little bit of the wolf at the door might be helpful for them.
Lefkovitz: Going back to the opportunities you’ve been finding in the small- and mid-cap space, the compounders that you’ve been adding to recently, wondering if you would be willing to share a couple names and walk us through the thesis.
Selmo: Yeah, sure. I’ll start with the one that’s the most fun, being a user of the product. So, over the last, call it, six months, we had an opportunity to buy what we think of as a unique trophy asset in Vail Resorts at what are very undemanding prices. And the very simple thesis is that there have not really been new ski resorts developed over the last 50 years. We think that people’s propensity to ski is a pretty durable human desire. And over time, we would suspect that the company can manage the revenue base and price their product in a way that it slightly exceeds inflation and that that ought to allow for a bit of a margin benefit and you have a business trading at, as we said, somewhere between 8 and 14 times earnings and redistributing just about all of that cash to shareholders in the form of dividends and buybacks. So I think that the math works, and we think it’s an asset that, no matter what happens with AI, is likely to remain relevant. So, that’s one that we’ve been doing.
Lefkovitz: Can I ask with that one, do you think climate change concerns have kind of weighed on the share price at all?
Selmo: I think they do weigh on it from time to time. I mean, I think the interesting thing to point out there is there is, I’d say a few things. There is always a scenario where an investment won’t work out, right? So there’s no perfect investment in my mind. And if for some reason the world does not produce enough cold days for skiing, that will make their business irrelevant, nonviable. I would though say that when people talk about this as a near-term issue, this is a little bit of a headline divorced from fact. And so the reality is that the number of skiing days generally in North America has gone up over the last decade and over the last two decades, so meaning the number of days that the resorts are open. And then secondly the Vail Resort mountains have actually increased their skier days by more than the industry over the last 10 or 20 years. So the actual amount of, call it, skiing days produced has gone up, not down, despite the kind of concerns around climate. And the reason for that is largely because of the snowmaking capabilities and capacities at a lot of these resorts. And being the best capitalized and best invested in, Vail has actually, on a relative basis, even benefited vis-à-vis the rest of the industry. And so it’s certainly something that would cause the investment to not work over a very long period of time. But I think in the more near-term, it certainly hasn’t been an impact, I think, on the business in terms of days that the mountain is open.
Another business that we bought over the last six or 12 months is a company in Europe called Eurofins. And this is a business that does testing for, call it, life, what they would call. And so this is, whether it’s environmental testing, whether it’s around drugs that are being developed, or whether it’s around various materials or in the food chain, they kind of ensure that the environment, the food, or the medicines people are taking are safe and then also allow people to innovate in those fields and get quick results. And it’s an owner-operator who we think has built a terrific network and franchise and over time is going to accrue the benefits of the long-term trend of a greater interest in a clean environment and a robust food chain and biologic and health innovation. So those are long-term trends that we think ought to underpin the growth of the business. And the organization is well set up to be a cost leader because they’ve developed their own IT system in-house. And we think that that’s going to give them a little bit of a benefit, and over a fixed cost base, if they can manage those costs a little bit better, that’ll be some margin benefit. And then again, we got into it on a nondemanding multiple with the management team that is actively buying back stock and paying dividends. So we think the math will work there, too.
Lefkovitz: Very interesting. That healthcare sector overall seems like it’s kind of derated. Have you been finding opportunity?
Selmo: We have. We’ve gone from about zero in healthcare during—not “about”--we’ve gone from zero in healthcare during kind of the covid mania to now a few, let’s say, a little over 3%. And what’s interesting about that is that, back in 2012, that’s kind of like the peak fear of Obamacare, healthcare was our largest exposure. And then as valuations got to points that we thought were kind of untenable, we just exited it outright. And that’s consistent with how we invest in sort of across the board. If we think the opportunities are good, we’re happy to invest. If we think that the risk/reward doesn’t make sense or everything’s overpriced, we don’t have any preconceived notion that we have to be somewhere. So we’ll go to zero exposure. Currently, I would say we’re most interested in the picks and shovels in the healthcare business. And these are really companies that help develop pharmaceuticals or biologics or produce them. And I think that they’re probably pretty well established as high-quality franchise businesses. There’s a bit of a maybe cyclical slowdown and some uncertainty given the changing posture at Department of Health and Human Services. But long term, I think we’re very bullish on healthcare spending because, if you go back to what’s durable for a given level of efficiency, you’re assuming that incremental spend can be done productively. It’s incredibly societally positive to invest more and more money into improved health and longevity or health span. And so we think that it’s pretty healthy for an economy to ultimately spend more of discretionary capital in that field. And we think that that trend is kind of going to continue kind of forever as long as there are good prospects for that spend.
And coming back to AI, one of the big promises of AI is going to be an increase in the number of opportunities or development pipelines or development ideas in various, call it cutting-edge biologic cell and gene therapy. And so I think, if anything, the future is very bright there. If you go out T plus five or T plus 10 instead of maybe the next 12 months where you got to think a little bit more about the budget cuts and maybe some loss of patent at the pharma companies where there may be some little bit of an air pocket in terms of what demand looks like shorter term.
Lefkovitz: Going back to the global conversation we were having, the number of holdings in Europe and Japan, Korea as well, but not much in emerging markets. I do see Grupo Mexico in a portfolio, but it doesn’t seem like you have much in India or China or Brazil, some of the big emerging markets. Is that by policy? What has kept you out?
Selmo: Yeah. In general, we’re looking to invest in scaled, high-quality businesses, and there are just fewer of those domiciled in emerging markets. We have in the past. There’s no policy, I should say. We have in the past exposures in China and even in Russia. And we still actually have a little bit in China, in India today, but in general, we’re happy to get the exposure to those economies through multinational companies. And the more mundane businesses in those geographies tend to have a lot of state influence. They tend to maybe subject to regulatory environments that we’re not comfortable with and probably are not of the business quality or shareholder alignment that we’re typically looking for. And so, as we mentioned earlier, we’re happy to not do things as well if we don’t think they line up.
Lefkovitz: You mentioned a view on the dollar earlier. Curious how currency considerations factor into your investment decision-making and portfolio positioning?
Selmo: I think there’s two thoughts on currency. One is on the individual firm, how are they matched, revenue cost and balance sheet? And do they have some risks in terms of mismatch there? And so, that would be on a company-specific basis. The other would be just on a portfolio level, and would we be interested in holding the exposure to the currency? That comes back to the macro question from earlier, which is we’re macro-aware in the sense that if we don’t have a strong view that a currency is particularly unattractive, so if we just kind of think it’s within the range of reasonable, we’re prone to allow, keep the exposure to the currency and get some diversification benefit. If we thought that a currency was particularly unattractive, and we had some investments a decade or so ago after Fukushima in Japan, and we thought the currency was particularly unattractive, and there we would have hedged the currency because we had just a sense again from the macro awareness that it wasn’t a risk that we wanted to run.
Lefkovitz: I want to shift gears and talk a little bit about private markets, which is a very hot topic these days in the investment world. There’s a lot of efforts to broaden access to smaller investors. You’ve owned private companies and private debt for many years now. I wonder if you could share your approach to private assets?
Selmo: Yeah, for sure. From an analytic perspective, it’s really the same. You have a different level of liquidity. I think the big positives are, if we’re talking about companies, and if you are able to be in a control position, you have control ultimately over the management, the use of discretionary cash, and strategy. You can meaningfully reduce the principal agent challenges that you often have in public markets. That’s not to say there aren’t many, many public companies where I probably think the governance and behavior of management is better than it is in private companies. There’s also a lot of challenge if the nature of the people running the public companies aren’t shareholder-oriented. It’s very hard to change them. That’s the big benefit, I think, of being private. As a manager the real issue is around matching the liquidity of the investment to the liquidity of the assets of a fund that are holding it. In Crescent, which is an open-ended fund, we have very, very little appetite for privates because it’s a daily dealing fund. Now, we also manage a closed-end fund called Source. Source has a large appetite relative to its size for privates. It’s actually significantly invested in private credit as well as some private equity these days. I think that will continue because Source is essentially a locked-up vehicle. It’s an appropriate profile to own illiquid assets. In Crescent, we have invested in privates over time, but these are private or illiquid. I would put quotation marks around really from an SEC definition perspective rather than what I think of as in practice, genuinely illiquid or private. The reason for that is the two big exposures we’ve had there is one—we bought pools of defaulted mortgages after the financial crisis. These were pools where we were the 100% owner of the assets, so we could choose to dispose of it when and how we would like. They were self-liquidating, so they were pretty liquid even though they didn’t have a CUSIP and trade. Then over the last 12 years or so, we’ve been investing opportunistically in ships in a number of different sectors within shipping. We’ve got some partners who manage the buying and selling and operating of the vessels, but we’re over 95% of the capital, and we can determine when and if we buy or when we sell. Ships are actually fairly liquid as an asset. They trade pretty regularly, and so we can exit our ships, I think, over no more than 60 days if we’ve needed to sell. That although it shows up as private or illiquid, it’s actually probably more liquid than, call it, a huge stake in a small- or mid-cap company.
Lefkovitz: I’m curious with all of the institutions increasing their allocations to private equity and private credit, have you seen signs of froth in either asset class?
Selmo: It’s a good question, and people have been talking about it for a while. I don’t know that I am deeply enough involved in those markets to really comment. I think we don’t see that … You know, AI-backed venture firms are getting money, it seems like left, right, and center at very, very high apparent valuations given neither the number of people involved or how long the business has been around, but that’s the nature of a big gold rush around an interesting opportunity set. Whether that all proves to be a smart idea or a bad idea, I think it’s way too early to tell. On terms of the private equity, call it, traditional buying of mid-cap businesses, I think that’s a market that’s cooled a lot in the last three years or so. During covid, when rates were at zero, I think people were buying, it seemed to be, that people were buying any decent business that would trade. Now, I think that that private equity bid is much subdued. I’m not sure that I have a blanket statement on it.
Lefkovitz: The common story with private credit is that increased regulation on banks after the financial crisis curtailed bank lending and gave rise to private credit. It’d be interesting to get your perspective on that, especially because you own some big US banks.
Selmo: Yeah, look, I think that’s dead right. I think that we were not quick enough to identify and understand it. I think the other thing that pushed a lot of private lending was just the low level of absolute rates and people’s need to meet their obligations. There’s a ton of businesses that are upscale. I think I saw the other day, 80%-plus of $100 million revenue firms are private. It’s actually terrific that the US capital markets are deep enough that they can all get funded outside the banking system. That has, I think, been what’s gone on the last 10, 15 years. I think we should all keep in mind that the banks back leverage a lot of those assets. The banks are still exposed. They’re just exposed at a lower attachment point and so actually in a much safer position than they would have been 15 or 20 years ago.
Lefkovitz: I’ve heard you talk in the past about how the expansion of private market investing and private equity funds have impacted public markets, especially in the small-cap space. Curious how you think about the impact of private capital on public markets generally?
Selmo: Yeah, I think that, like I said, a couple years ago, they were a very competitive buyer for interesting mid-cap companies. I think that they’re a little bit less so now. I think the other impact has been part of the sucking capital out of the, call it, mid-cap fund specialists in the long-short equity funds. I think that the performance of private equity has been strong enough that it’s really sucked up a lot of the capital that would have previously gone to those managers. Now, what I suppose is going to be interesting is that as you’ve had very low returns OF capital, not necessarily ON capital. We don’t know how that will play out yet, but in terms of paying back of LPs, LPs seem to be getting to a point, traditional LPs, seem to be getting to a point of being tapped out on private equity and maybe for institutional specific reasons, but there’s a couple of famous leaders in the space that are apparently shopping chunks of their private equity portfolio. If private equity isn’t able to tap retail capital in a meaningful way, we may be at a point where the growth in private equity starts to slow down a little bit, but we’ll have to see how it plays out.
Lefkovitz: Well, my colleagues at Morningstar’s Manager Research Team pointed out to me that FPA has an investigative journalist on staff. I’m curious how that research is integrated into your investment process.
Selmo: Yeah, we do. We have had a person with a journalist background for over 15 years on the team. Now, the current person in the role, Scott Cendrowski, has done a terrific job. He’s by far our best journalist. I think I should give some perspective in that our funds’--and funds go back over 30 years—average holding period in the fund has been five years, and the average holding period at the top 10 names is, I think, about nine years. If you are a genuinely long-term owner of businesses, and I think that very few managers are, the decision-making of the top people at the organization, the culture, their capabilities, how they’re addressing challenges, how they compensate people, become incredibly important as you go further out into the future. And so, having someone like Scott or a journalist on board, it allows us to essentially do background checks or personal profiles on executives that maybe we aren’t sure about given their public profile. And it doesn’t mean necessarily that they’ve done anything wrong. It’s just they could be new to the role. They might just not have an extensive public profile that you can make a judgment on.
The thing I would say to this is it’s hard to overstate how important the people are running a business. The kind of thing we—I don’t want to joke about—but the thing I try to point out to people is the question of: Apart from 5x, the shareholder return, what’s the difference between, if you go back to 2005, what’s the difference between JPMorgan and Citigroup? Citigroup was probably a better positioned bank at the time. And so, what happened? I think that the answer is simple. It’s as simple as Jamie Dimon. One of them fired Jamie Dimon five years earlier and the other one figured out a way to buy Bank One to get Jamie Dimon. And so, that has made all the difference. And there are a number of businesses that operate that way. And we want to come at it from the people-first perspective sometimes, not just kind of the financial side. And that’s really where the journalist comes into play.
Lefkovitz: That’s really interesting. Have there been examples where the research has kept you out of a position?
Selmo: Yes, there are examples. And I probably won’t name them, because some of them are recent. And I think there’s people who I’ve got a lot of respect for, I think, are in some of these stocks. But there are just a fair amount, like anything, there’s a fair amount of below-average, your professional or uninspiring managers. And you see all the time as kind of someone coming from the financial side of: Company X is well positioned. They have share. They have every reason to succeed. Why hasn’t it worked? And we’ve been in some of those. So, I mean, if you want a couple of other examples of how important people are, I’d say take a look at the experience of a company called Esterline and the performance of those assets after it was bought by TransDigm. It’s absolutely tremendous what can be done with the exact same asset under a different kind of environment. And then the one that we had a tremendous amount of benefit from is a company called Howmet, which had been a subsidiary of Alcoa a long, long time ago. And when John Plant became CEO, it was, again, no acquisitions, no change in business mix. But you can track the performance of that business starting on the day of his appointment. And it looks like nothing compared to its past. Or it’s a tremendous change just on the basis of really one individual being changed out there. And so we want to be, it’s imperfect, and it’s hard, it’s very subjective. We want to be open to those kind of ideas.
The other one that I think was pretty important for us is that we had a pretty meaningful position in a company called Broadcom, became Avago. And at the time that we got into it, if you rewind, these were like the days of Valiant, if you remember Valiant, and the roll-up kind of idea, you just sort of roll things up and cut all your costs. And there was a fair amount of controversy about the CEO at Broadcom at the time. I won’t bore you with the story, but we did a tremendous amount of work on the person, interviewing the original private equity sponsor who backed him a decade earlier, talking to a number of people who had sold businesses to him, had worked with him and had left, and kind of came to the conclusion that even though Wall Street maybe had a narrative that he was a Valiant 2.0, that there was really something else going on there. And that was all qualitative. That wasn’t in a spreadsheet, and that certainly was important for us.
Lefkovitz: Yeah, very interesting. Well, we only have time for one more, Brian, but I wanted to ask about working with Steve Romick, who’s had such a long and distinguished investing career at FPA. Maybe you could share how Steve has impacted you as an investor.
Selmo: Yeah, Steve’s great. I’ve been working with Steve for 17 years and then my other partner, Mark, for the last 16 years. And I’m grateful for both of them as partners and also people I have learned a lot from. In terms of Steve, I think the big thing on the analytical side when I first joined or started working with Steve is Steve had a background in shorting. And so he did a fair amount of individual name shorts and that, I think, caused him to have a focus on the bear side—there’s always a bear case to an investment—that was probably much greater than I did. And I think that was very helpful. So Steve is very, very big on the look down, always your first kind of idea. And I think that it’s helpful to think through how might investment X, Y, or Z not work.
I mean, you talked about Vail earlier, right? There is a bear case. You want to identify the bear case. You want to understand what it would mean to the individual security, and you want to understand how it would impact the rest of your portfolio. And so I think that Steve really put that in my head in a way that probably wasn’t before. And then the other thing I think that Steve should get a lot of credit for is that he has had, I think, the entire time since he started Crescent, a focus on what the clients or LPs experience is, right? And I’m sure many of your listeners will be familiar with the stories of managers who have kind of tremendous long-term track records, but the actual result for their clients was sort of maybe even negative, I think in some cases, but certainly paled in comparison to the performance of the fund. Steve has always wanted and impressed upon all of us the importance of the LPs having actually a good experience in it and getting the returns of the fund, not just the fund putting up an impressive number or something. And so those are two things that very much Steve talks a lot about.
Lefkovitz: Does he do that through, is it mostly through communication? He just kind of urges them to stick with the fund through downturns and not buy low?
Selmo: I think we try to be thoughtful in the letters we write, certainly. We try to be thoughtful in the quarterly calls. And then it’s also just the mandate, right? It’s coming up with a mandate, which is equitylike returns over time with less risk and pursuing it in a way so that we kind of never set the fund up to be in a position where we think you might be taking off the cliff, right? And so many funds because of their narrow mandate are kind of forced to stay in an investment, whether it’s a geography, a style, whatever else it might be, even when it gets to a point where it doesn’t make any sense, because that’s sort of the business proposition they’ve had. And so if instead you just sort of structure it from the beginning with a business proposition that is flexible to avoid difficult decisions that we talked about and kind of to keep the portfolio disciplined, I think it just results in a more sustainable result for people.
Lefkovitz: Well, Brian, thanks so much for joining us on The Long View. This has been great.
Selmo: Yeah, thanks for having me.
Lefkovitz: Thank you for joining us on The Long View. If you could, please take a moment to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts. You can follow us on socials at Dan Lefkovitz on LinkedIn.
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