From the November 2009 issue of Research Magazine • Subscribe!

November 1, 2009

Bob Rodriguez’ Farewell Address

The First Pacific Advisors' investing giant offers his ever-candid thoughts on financial markets and the economy ahead of his 2010 sabbatical.

Robert Rodriguez doesn't run with the pack. Indeed, having the courage of his convictions has made this independent thinker one of the most successful money managers for almost three decades.

Honored with a trio of Morningstar Manager awards (2008, 2001, 1994), Rodriguez is CEO of First Pacific Advisors, which manages about $11.5 billion in institutional and mutual fund assets.

A long-term value manager, Rodriguez, 60, is president and CIO of FPA Capital Fund and FPA New Income. The latter hasn't had a down year in more than 32. Rodriguez favors out-of-favor industries and, in fixed-income, invests in high-quality bonds with the focus on capital preservation and total return.

Well known for forecasting the global financial meltdown, Rodriguez, starting as early as 2007, moved to a cash level nearly 12 times that of the industry's. For his prudence, he would ultimately withstand strong shareholder criticism and redemptions.

In 1971 the Culver City, Calif., native -- whose BS in business administration (magna cum laude) and MBA are both from the University of Southern California -- started out at Transamerica Investment Services. He then went to Kaufman & Broad as senior portfolio manager in the chairman's department. By 1983 he had joined FPA, the following year leading the acquisition of two Transamerica funds that turned into the high performing FPA Capital and
FPA New Income.

Appointed CEO in 2000, Rodriguez led the 2006 buy-back of the firm from its large insurance-company parent, Old Mutual. FPA is based in Lake Tahoe, Nevada -- where Rodriguez now makes his office -- and Los Angeles.

In January 2010, the money manager begins a one-year sabbatical; he plans to return to FPA in a supporting role.

In an illuminating, wide-ranging chat with Research this past September, Rodriguez talked about going on leave, the Obama administration and his cautious outlook for the economy and markets for next year.

How did you first become interested in finance?

I was a coin collector starting at about 6 years old. I'd go through the cash boxes of local stores and gas stations. When I was 12, I saw a movie on the New York Stock Exchange. I thought it looked like one of the biggest casinos in the world. That caught my attention.

How would you describe the status of the financial markets today?

Nothing has been learned from this last crisis. The aspect of destroying other people's money seems to have dissipated. There's a false sense of security. What I see isn't the risk of loss but the risk of missing the rally.

The stock market is highly speculative; it's discounting robust earnings growth for 2010. People will be disappointed. We've crossed over into a new financial era.

What do you think of President Obama's plan to overhaul the financial system?

I don't' agree with it. He's trying to put more centralized power into the Federal Reserve. None of our regulatory agencies exercised the authority they had to preclude the financial crisis. They blew it. The Fed and Treasury did not have a clue about its magnitude and breadth when it began.

People look for hides to hang in the corporate area. But I've seen no hides hung at the regulatory agencies for what they missed.

What about the President's proposal to revamp health care?

It's a very, very high-risk maneuver. Every single forecast of what the cost would be for every entitlement program that has been initiated since FDR has been off by magnitudes. So should I trust the forecasts of today regarding health care? Absolutely not. I look at the ballooning debt and potential policies that could come, and I believe they're playing with nitroglycerin.

Do you approve of Ben S. Bernanke's second-term appointment as Federal Reserve chair?

At least 70 percent of the economists were in favor of his reinstallment. Probably at least 70 percent of economists didn't have a clue about the financial crisis occurring either. The Fed has stabilized the economy to a degree by flooding the system with money...But at what price longer term?

How is your attitude reflected in the investments you've made over the last year?

The buy program we had in the equity area last year, from October 7 to December 26, and which started again in late February, was the largest in dollars in FPA's history.

The last purchases we made were in early March. Starting in about [late July], we have been gradually reducing positions.

That means you're cautious.

Very. One has to be highly circumspect of what is transpiring in our economic system. I do not trust Congress or the executive branch -- and the regulatory agencies are not enhancing my confidence.

What are your expectations for the stock market in 2010?

The question is: What will top-line revenue growth be? With what the federal government has thrown at the economy, there was bound to be a bounce. But has this led to a sustainable economic recovery? I don't believe so.

Growth has come as a function of cost reductions, not top-line growth.

FPA Capital had a loss last year. How is it doing now?

If you're measuring the short term, we did take a hit. But if you're measuring the long term, we made the right decisions. Today I'm within about 8 percent of where we were at the beginning of 2008, and the markets are still 22 percent to 29 percent away. So we went down less than the market, and we've come back stronger than the market.

What's your outlook for bonds?

We're highly aggressive in our bond management: high quality bonds with a duration of barely over one year. The growth in Treasury debt is at an unsustainably high level. If present trends continue, we will have a fiscal crisis at the federal level within five to seven years. If the health care plan is passed, I would move up that time-frame.

Do you think the recession is really at an end?

I call this economy the "caterpillar economy." It goes very rapidly, then it decelerates, then it re-accelerates. So you don't move forward very fast. The $64,000 question is: What will the U.S. consumer do?


It will probably take eight to 10 years for consumers to rebuild their balance sheets. Baby boomers, especially, are screwed. They didn't save enough, they got hammered on equities and their biggest asset, real estate, has evaporated.

Is President Obama's proposal for automatic retirement savings plans a good thing?

If you encourage the consumer to save, that pulls back consumption as a percentage of GDP.

What are you going to replace it with? The present administration believes that only government can get us out of this mess...I haven't been encouraged by the Bush administration or the Obama administration. Clinton did get our debt down -- but at the cost of impairing our military preparedness. That is happening again.

What will it take for the economy to grow?

The only way is to expand our export position. Exports as a percentage of GDP need to rise from about 12.9 percent to upwards of 18 percent over the next 10 years. If we don't do that, we'll be relegated to a very slow economy.

What's the biggest threat to the market next year?

Lack of economic growth. No. 2 is the likelihood of a second stimulus plan, which will again work to hurt the dollar.

What sectors do you like?

The two largest sectors the FPA Capital fund is invested in are energy and technology. We believe we'll be in another energy crisis or higher energy prices within three to five years.

Talk about your personal experience entering the financial services field.

It was very difficult to get in it initially. To help raise some money so I could stay in college, before my last year I interviewed at a large number of firms. But I wasn't hired. They were firing people. You could set off a cannon in the business district of Los Angeles, and nobody was there to hear it. So I ended up selling encyclopedias door to door.

You're a first-generation American. When did your father emigrate from Mexico?

My family lost everything in the Mexican Revolution. My grandfather helped support [General] Pancho Villa. But when the war took a turn, he didn't make it out alive. There was no fence at the border, and the dominant language in south Arizona was Spanish; so we could have just walked across and melded in. But my grandmother said, "We're going to the United States. This will be our new country. Our first act will not be one of breaking the law." It took about seven years for our family to come across.

What has been a big hurdle that you've overcome?

I had surgery at 12, when a tooth that was growing the wrong way caused a benign tumor. The surgery eliminated about half my upper palate, bone structure and teeth. For nearly two-and-a-half years I was totally unintelligible. People laughed at me. Then at school I gave a talk on the finer aspects of elocution -- but I couldn't say "elocution." I was making fun of myself. As a result, instead of laughing at me, they began to laugh with me.

Has being Latino helped or hampered your career?

I grew up when having a Spanish surname was not a competitive advantage. Wall Street was still White Shoe in 1960. For a number of years I was the only Latino mutual fund manager in the industry. In 1986, California passed affirmative action on the deployment of contracts: 15 percent had to be left to minority-owned firms. We discussed my setting up a separate firm at FPA, of which I would own 51 percent. But then I thought, if I got business because of affirmative action, I'd never know whether I'd gotten it on merit or just because I fit into a certain box. So I decided to just duke it out.

What's the biggest investment regret of your career?

My worst failure was Conseco in 2002. When I made a fatal mistake in Conseco [not recognizing their breakdown in underwriting standards], it really was an eye-opener as to what I had missed...But [in general] if you don't make mistakes, then you're not pressing the appropriate risk boundaries. There's a time to take risk; there's another time to be cautious. And that is what I call judgment.

Why are you going on sabbatical?

It's been in the works for more than six years that between 2009 and 2011, I would take a one-year sabbatical. It's part of my succession plan. And I want to just relax, have one year before I die where I don't have a schedule -- I've been working since I was 8! I hope to bring back a different perspective and be a positive contributor to the firm and to our clients.

Will you keep in touch?

No, and only one person will know where I am. I'll get monthly updates, but probably won't look at them until next fall. I might have to start practicing going without my BlackBerry so I don't get BlackBerry withdrawal!

Who will take over the portfolios for you?

My partners: Dennis Bryan, Rikard Ekstrand and Tom Atteberry. I'll convey my proxy to one of them.

But if something major happens in the market, won't you be tempted to step in?

This is going to be a time for my associates to grow too. I want to make sure that the firm has a very smooth transition. That's why I'm going on sabbatical so early, to get people used to the idea. Many years in the distant future, I'll transition from CEO to, probably, CEO Emeritus. We already have the person in the firm to take over.

What do you plan to do while on leave?

Read things I never have a chance to, like an early book about liberty by Alexis de Tocqueville. I'll travel with my wife Suzanne to South America, Japan, China, the Middle East, Germany. I'm still planning.

You're a passionate car racer and own nine Porsches. Will you be at the wheel next year?

I told my race mechanic to have the cars prepared, the engines warm and to wait for a phone call!

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