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FPA Capital 2012 q4 Commentary

FPA Capital 2012 q4 Commentary

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Published by Devon Shire
FPA Capital 2012 Q4 Commentary
FPA Capital 2012 Q4 Commentary

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Published by: Devon Shire on Apr 04, 2013
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 We hope that investors will find FPA commentaries helpful to understand application of the same investmentdiscipline in various markets, and can refer to particular items that interest them.
 You should consider the Fund’s investment objectives, risks, and charges and expenses carefully
before you invest. The Prospectus details the Fund's objective and policies, sales charges, and othermatters of interest to the prospective investor. Please read this Prospectus carefully before investing. The Prospectus may be obtained by visiting the website at  www.fpafunds.com,by email at crm@fpafunds.com,toll-free by calling 1-800-982-4372 or by contacting the Fund in writing.
Sales charges vary depending on levels of investment.
 Average Annual Total Returns
 As of December 31, 2012
Fund/Index QTR YTD 1 Year3Years**5Years**10Years**15Years**20Years**SinceInception**
FPA Capital (NAV) 3.32% 9.69% 9.69% 11.20% 6.64% 10.17% 9.41% 12.81% 14.63%FPA Capital (withload ^)-2.11% 3.94% 3.94% 9.22% 5.49% 9.57% 9.02% 12.51% 14.41%Russell 2000 1.85% 16.35% 16.35% 12.25% 3.56% 9.72% 5.89% 8.43% 9.48%Russell 2500 3.10% 17.88% 17.88% 13.34% 4.34% 10.49% 7.43% 9.89% 11.30%
** Annualized. Inception of FPA Capital is July 1, 1984.^Maximum sales charge is 5.25%. A redemption fee of 2.00% will be imposed on redemptions of certain shares within 90 days. Adeferred sales charge of 1.00% may apply. Expense ratio calculated as of the date of the most recent prospectus is 0.84%.
Past performance is no guarantee of future results and current performance may be higher or lowerthan the performance shown. This data represents past performance and investors shouldunderstand that investment returns and principal values fluctuate, so that when you redeem yourinvestment it may be worth more or less than its original cost. Current month-end performance datamay be obtained by calling toll-free, 1-800-982-4372.
 To view portfolio holdings from the most recent quarter end, please refer to the end of this document or at www.fpafunds.com.Portfolio composition will change due to ongoing management of the fund. References to individualsecurities are for informational purposes only and should not be construed as recommendations by theFunds, Advisor or Distributor. The discussions of Fund investments represent the views of the Fund's managers at the time of each reportand are subject to change without notice. These views may not be relied upon as investment advice or as anindication of trading intent on behalf of any First Pacific Advisors portfolio. Security examples featured aresamples for presentation purposes and are intended to illustrate our investment philosophy and itsapplication. It should not be assumed that most recommendations made in the future will be profitable or will equal the performance of the securities.  The Russell 2000 Index consists of the 2,000 smallest companies in the Russell 3000 total capitalizationuniverse. This index is considered a measure of small capitalization stock performance. The Russell 2500Index consist of the 2,500 smallest companies in the Russell 3000 total capitalization
universe offers investors access to the small to mid-cap segment of the U.S. equity universe, commonly referred to as "smid" cap. These indices do not reflect any commissions or fees which would be incurred by an investor purchasing the stocks they represent. The performance of the Fund and of the Averages iscomputed on a total return basis which includes reinvestment of all distributions.
Fund Risks
Investments in mutual funds carry risks and investors may lose principal value. Stock markets are volatile andcan decline significantly in response to adverse issuer, political, regulatory, market, or economicdevelopments. The Fund may purchase foreign securities which are subject to interest rate, currency exchangerate, economic and political risks; this may be enhanced when investing in emerging markets. Small and mid-cap stocks involve greater risks and they can fluctuate in price more than larger company stocks. Groups of stocks, such as value and growth, go in and out of favor which may cause certain funds to underperformother equity funds. The return of principal in a bond fund is not guaranteed. Bond funds have the same issuer, interest rate,inflation and credit risks that are associated with underlying bonds owned by the fund. Lower rated bonds,convertible securities and other types of debt obligations involve greater risks than higher rated bonds. The FPA Funds are distributed by UMB Distribution Services, LLC, 803 W. Michigan Street, Milwaukee, WI,53233.
FPA Capital Fund, Inc.
Quarterly Commentary 
4th Quarter
December 31, 2012
Portfolio Commentary
 The FPA Capital Fund outperformed its benchmark the Russell 2000 for the 4
quarter of 2012 yetunderperformed for the year. The combination of our large cash position and our large exposure to energy go
a long way to explain this short term differential. Our energy stocks outperformed the benchmark’s energy 
exposure by roughly 7-8% for the year. However, our large weighting in energy at 30% vs. 6% for the
benchmark was a hindrance to overall performance, with the benchmark’s energy stocks lagging the market
 by 20% for the year.Energy, which is broken down into oil service and exploration and production, continues to be the largest
area of the portfolio despite us reducing several positions during the year. We have sold the lion’s share of the
significant investments made back in late 2008 and early 2009. Since the second quarter of 2009, FPA CapitalFund has taken approximately $400 million in profit on an original $359 million invested. In other words, wehave taken around 111% of the original amount invested off the table. Despite this selling, we still retain mostof our initial investment in the energy sector. We continue to have conviction in our energy holdings, whichare now primarily oil focused. Oil is a global commodity that has a heavy exposure to global-demand growthand in particular that of the developing economies. We believe growth in the developing economies willexceed that of developed ones and oil will be one of the beneficiaries of this. Oil production also has a sharpdecline curve, roughly 9% according to the International Energy Agency, which makes it difficult to grow supply. Importantly, this high decline rate not only enhances the upside, but also potentially helps protect theinvestments in a recessionary environment, since supply and demand get back into equilibrium much faster.Lastly and most imperative, oil in the ground and assets used to produce it, should provide a store of valueagainst potential future monetary inflation.
Industrials and technology companies drove most of our outperformance in the quarter. Our industrials wereup approximately 15% and our technology companies 10% versus 10% and 2% for the respective sectorconstituents in the benchmark. The top five contributors in the quarter were Trinity Industries, Arrow Electronics, Western Digital, ENSCO, and Interdigital.
The bottom 5 performers, of which four were energy companies as discussed above, were Rowan Companies, Newfield Exploration, Rosetta Resources, FootLocker and Baker Hughes.During the year we continued to trim positions as they got close to or exceeded our fair value estimates. Wetrimmed about half of the portfolio stocks during the year including five energy investments, threetechnology investments and both our retailers. We also added to five existing positions during the year,Devry, Interdigital, Newfield Exploration, Patterson-UTI Energy and Veeco Instruments. Patterson-UTI, which we had sold at higher prices, came down to 75% of book value
, around 3x trailing cash flow 
andclose to half its replacement value of primarily new equipment, at which time we began repurchasing thestock. We also initiated a new position in the defense industry.During 2012, the following investments went up by more than 15% in value: Amerigroup, VeecoInstruments, Oshkosh, ARRIS Group, Western Digital, Foot Locker, Federated Investors, Cabot Oil & Gas,Reliance Steel & Aluminum, ENSCO, Signet Jewelers, Trinity Industries and Atwood Oceanics. As you cansee, our winners included companies from 7 industries. Some of these investments have been a part of theFund for many years and some were brand new positions initiated in the past two years. Of the above, Veeco
 As measured by the S&P 500.
For a complete list of the portfolio’s holdings refer to pg. 8
or fpafunds.com.
Book value is the value at which an asset is carried on a balance sheet. To calculate, take the cost of an asset minus the accumulateddepreciation.
 A company's free cash flow for the previous 12 months.

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