2nd Quarter 2010


Dear Shareholders: Overview The market’s (S&P 500) momentum continued into late April, but then dramatically reversed, declining 11.4% for the second quarter. Crescent captured 52% of the market’s slide, declining 5.9% in the period. This is in line with the Fund’s historic 55% downside participation. Crescent declined 1.9% for the six-month period, versus the S&P 500’s 6.7% drop. More detailed returns of both the Fund and comparative indices can be found at the end of this commentary. With low interest rates offering anemic returns for the income-minded investor, the Fed presents us with little option but to embrace risk assets. We have been offered the choice of something uncertain (more so than normal) or practically nothing at all, neither of which strikes us as particularly appealing. We try to understand the potential loss of each investment and avoid reaching, preferring to “let it come to us.” Economy Though it hasn’t matched the Super Ball bounce experienced by the market, the economy has had a good rebound, stoked by the benefits of inventory restocking, tax credits and refunds, and other sundry and impermanent stimuli. Many people seem to be intaxicated by the euphoria of getting a tax refund, but the condition lasts only until they realize it was their money to start with. The economic recovery is fragile at best. Ephemeral actions have only put the future on hold. We picture a heavy box with a big red fragile sticker barely held aloft by Messrs. Bernanke and Geithner. As the initial effects of the stimulus fade, U.S. real GDP growth has slowed from 5.6% in Q4 2009 to 2.7% in Q1 2010. This should not be a surprise given the sharp Q4 recovery, but the economy has slowed more than consensus projections, begging the question: Is it real or fleeting? With the past as a guide, one would have expected better. We are not alone in this concern. Recent FOMC minutes reflect that central bank officials expect growth to be slower this year than had been expected, with deflationary pressures still one of their concerns (and ours as well).1 With much talk of inflation in the future, the near-term trend reflects price weakness rather than strength. According to David Rosenberg at Gluskin Sheff, the core rate of inflation (excluding food and energy) is 0.9% (just 20 bps greater than the all-time low of 0.7% seen in March 1961), with certain categories — such as housing and apparel — continuing to decline. We see a deflationary path to inflation, where the solution becomes the problem. We still see inflation as inevitable, especially since it appears the knee-jerk is the only skill required to operate the Mint’s printing press. In fact, we think the Fed is using today’s moderate inflation to continue to justify easy money. One of my colleagues, Mark Landecker, recently played Monopoly with his two young daughters (probably introducing them to the real world by zealously collecting their rent). The rules of this 1935 board game, he discovered, seemed eerily prescient given the actions of Mr. Bernanke and the other governors


Federal Open Market Committee (FOMC).


at the U.S. Federal Reserve. The Monopoly instructions state, “The Bank can never ‘go broke’. If the Bank runs out of money, the Banker may issue as much as needed by writing on ordinary paper.”

As Mark points out, we suspect “Helicopter” Ben Bernanke played a lot of Monopoly as a child. However, what young Ben failed to grasp was that the Monopoly approach to banking — while risk-free within the confines of the board game — has potentially damaging repercussions in the real world. In this case, the unprecedented monetary expansion and profligate federal spending reflected in the graphs below2 is bound to trigger higher inflation and then lead to higher interest rates. However, as we’ve discussed in the past, perennially large deficits and an already elephantine national debt should drive interest rates higher on their own.

We can see the fear of sovereign debt default when comparing the 10-year swap rate to the U.S. Treasury 10year note yield. The swap rate exceeded the government rate this spring, reflecting that some banks were viewed as a

CPI: Bureau of Labor Statistics (http://www.bls.gov/home.htm); Monetary Base: Federal Reserve (http://www.federalreserve.gov/default.htm); Federal Spending: National Income & Product Accounts from Bureau of Economic Analysis (http://www.bea.gov/).

better counterparty than the U.S. government; although positive today, the spread has settled near all-time lows. It is probable that one or more of the OECD countries will ultimately default on its debt, either directly or via inflation. There have been periods of rolling economic spasms, leaving bankruptcies of major countries in its wake. In the accompanying table from professors Reinhart and Rogoff’s recent book of financial folly, you can see that country defaults have been far more prevalent than most realize, since the world seemed a safe place to invest until a couple of years ago. PIIGS (Portugal, Italy, Ireland, Greece, and Spain) now dominate headlines, but sovereign default is not a new fear. Take Greece as an example. The country of Zeus has effectively been bankrupt 50.6% of the time since its 1829 independence.3 Our own country is ballooning with debt, but the public seems reluctant to look beyond the nation’s thin reflection in the fun-house mirror. We don’t realize we’re bloated and it will seemingly take a heart attack to get us on a diet. But if that’s what it takes, so be it. We cast our vote for a crisis that will hopefully yield positive change.


Carmen M. Reinhart and Kenneth Rogoff. This Time is Different: Eight Centuries of Financial Folly, (Princeton University Press, 2009).

As a result, your portfolio remains conservatively postured — more on that later — as we watch the economy try to clear a raft of hurdles, including: • The eventual end of stimulus funds. • As many people are no longer able to live rent-free in bank-owned homes and have to once again pay for shelter, we expect a trickle-down effect of reined-in consumer spending. • Higher taxes. • A housing recovery that remains in the distant future, leaving mortgage holders with negligible equity in their homes. • A difficult job market, characterized by persistent unemployment and underemployment and a growingbut-invisible segment of ‘disenfranchised’ workers who aren’t counted because they have given up job hunting. Meanwhile, job growth is decelerating. • The end of unemployment insurance benefits for many out-of-work Americans. Average weeks unemployed have now reached 35.2, exceeding the post WW II high of 21.2 weeks in 1983.4 • Continued consumer deleveraging. • Little to no lending from banks, coupled with anemic borrowing from customers (either due to lack of desire or lack of qualification). • High debt loads weighing down state and local governments. State and Local Government Challenges We feel we should expand on the last point of municipal challenges. In many cases, these high debt loads — when combined with continued deficits and off-balance-sheet liabilities (e.g., underfunded pensions, depleted unemployment trusts) — will force austerity measures. Citizens will see reduced services and, in some cases, government bankruptcy, negatively impacting quality of life. • Thirty-two states have borrowed a total of $37.8 billion from the U.S. Treasury to make unemployment payments (as of May).5 California sought $6.9 billion, or 18% of the total. • Declining tax revenues and unbridled spending have caused $300 billion in budget deficits for 2009 — 2012, according to figures from the National Association of State Budget Officers.6 “The Center on Budget Policy Priorities, a liberal think tank, estimates that this coming year alone, states will face an aggregate shortfall of $180 billion. In some states the budget gap is more than 30%.”7 • A recent Pew study of state pension plans found a $1 trillion hole. We believe that when a more appropriate (i.e., lower) discount rate is applied to plan liabilities the underfunding will grow to at least $2 trillion. This is partly due to market losses since June 2008. Accounting rules let the states off the hook. States can amortize pension liabilities over 30 years, while corporations are required to book pension expenses to bring them into compliance over 10 years. In addition, states can smooth their market losses by recognizing them over 5 years, but corporations must reflect their pension assets at market. Illinois wins the underfunding award, having just “40 percent of the funds needed to cover promised benefits.” 8,9
Bureau of Labor Statistics. Wenzel, Robert. www.economicpolicyjournal.com, May 21, 2010. 6 Garrahan, Matthew. “U.S. State Budget Deficit Crises Threaten Social Fabric,” Financial Times, June 27, 2010. 7 Zuckerman, Mortimer. “The Bankrupting of America.” Wall Street Journal, May 21, 2010. 8 McNichol, Dunstan. “States Shrink ‘Unaffordable’ Benefits to Bridge $1 Trillion Gap.” Bloomberg, June 4, 2010. 9 The Pew Center on the States, “The Trillion Dollar Gap: Underfunded State Retirement Systems and the Road to Reform,” February 2010.
4 5


This largely ignored issue needs to be addressed immediately, but doing so will likely compel the U.S. government to rescue the states. It would be hard to justify saving General Motors but not California. A sense of entitlement and unrealistic union expectations will make this a hard nut to crack. We wonder if the hard-working firemen of Chicago understand that their pension fund will likely run dry in the next 10 years. These are good, diligent people, promised benefits that seem unlikely to be delivered. We expect headlines about such crises. How can that not rip our nation’s social fabric? There will be no schadenfreude as certain municipal obligations ultimately go unmet. Investments We must admit that we find ourselves in the middle of a whole lot of “I don’t know” out there. In other words, we lack conviction. As a result of this disconnect between expectations and the prospective reality, we find ourselves continuing to seek to conserve capital, as we await the next opportunity to commit that capital to attractive investments. This does not mean we are disinvested. Our gross equity exposure has crept up to 49.4%, albeit at the expense of our corporate bond exposure, which has declined from the mid-30% range to just 18.2%.10 The limitations we see on GDP growth (mentioned above), make it less than likely that the optimistic topdown earnings estimates for the S&P 500 Index will be met. We don’t feel we are going out too far on a limb with that statement, given that earnings estimates generally decline during the course of the year. As the chart to the right depicts, in all but two of the last 24 years, actual earnings ended the year lower than analysts had forecasted. Since 1985, 5-year rolling average forecasted earnings growth for S&P 500 companies was 13%, but actual earnings growth was just 7% — a 6% differential. Said another way, analysts were, on average, overoptimistic and off on their expectations by 46%. There were only two brief periods (in the mid-90s and mid-00s) when actual results exceeded forecasts and that delta was negligible. Could they have something to sell? Investors need to understand their own individual risk tolerance, as much psychological as practical, and not that of a theoretical model prescribed by age bracket or wealth. Although we internally view risk as the potential permanent loss of capital, we recognize that our investors may feel differently, letting volatility drive the investment decision. Volatility creates extreme price movements, during which an investor can either buy or sell. Most investors, consultants, and advisors have greater apprehension with regard to the volatility associated with downward price movements. Upside “vol” is more appreciated — except by the short sellers. We believe our investors must have a self-awareness of how they will react to price volatility. We are not oblivious, however, to the institutional imperative, that is, that most individual and institutional investors find themselves in the awkward position of defending themselves to their clients, employers, spouses, or even themselves for holding a stock that keeps declining, or for owning any common stocks in a declining market.

Exposures as of July 26, 2010.

We believe that by having a mandate that allows us to move across asset classes, market caps, and sectors, and to hold cash when others cannot or will not, our investor base is better positioned to avoid the discomfort that might lead to an inopportune sell decision. Crescent has had more than one third less volatility and about half the downside of the stock market as a result of the Fund’s flexibility and execution of its mandate.11 That lower downside volatility is not the goal, but the natural byproduct of our strategy. More important, regardless of the environment, we consistently aim to distinguish ourselves by using volatility to our advantage, rather than detriment. Instead of composing a portfolio designed to mimic the performance of some benchmark or index, we utilize a deeply held contrarian philosophy oriented towards pushing back on a rising market by reducing exposure, thus allowing cash to increase, while conversely leaning into a falling market and spending that cash by opportunistically accumulating inexpensive securities. We do not make the top-down decision to increase or decrease cash. Cash builds by default when investments fail to meet our strict upside/downside parameters, that is, what we can make versus what we can lose. We deploy that cash when those hurdles are met. This is easier said than done. Looking back over the Fund’s existence, we have seen first-hand that rapidly increasing prices invite panicked buying, e.g., internet stocks of the late 1990s. We missed the internet upward move, but our contrary nature allowed us to manage to a profit through the subsequent market downturn. We also witnessed how price declines can sometimes incite panicked selling, e.g., most asset classes in 2008 and early 2009. We took that latter period as an opportunity to get more invested, particularly emphasizing distressed debt. From a business perspective, our willingness to stand separate from the herd has, at times, led allocators to sing our accolades in a declining market, but to also criticize our strong adherence to value investing in a rising one — a manic love/hate relationship that requires a thick skin. Quite simply, volatility is acceptable (to us), but not practicable for most, a fact we embrace in our quest to deliver long-term outperformance over a full business cycle. Letting volatility dictate investment decisions has proven the bane of many a mutual fund (and stock) investor. Morningstar points out that, “Even where the divergence between the investor return and the published total return isn’t huge…the gap can be as large as a fund expense ratio. And in some cases, the gaps are stunning. [Fund XYZ] is the starkest example of investors’ tendency to put a manager on a pedestal at the worst conceivable time. Assets flowing into the fund peaked in 2007, following an 80% commodity-fueled return that year, just in time for the fund to shed half its value in 2008.12 Not only have most investors not pocketed any of the fund’s 18% gain during the past decade, but the typical investor in the fund has lost nearly 14% per year — a stunning 32percentage-point investor return/total return gap.”13 This fund had LIFO investors, Last-In First-Out, and they came and went at precisely the wrong times. During the first half of the year, our team has spent more time than usual on what we would loosely define as large, well-known, high-quality companies. This is in contrast to much of the Fund’s history, during which we have typically trolled in more obscure waters to find value. So as odd as it sounds for people who like to call themselves contrarian, we are currently finding the best opportunities — on both a relative and absolute basis — amongst “Blue Chip” stocks.

Using Standard Deviation as measure of volatility. Since inception, FPACX Standard Deviation has been 36.9% less than the average of the Russell 2500 and S&P 500. Its downside participation has been 50.5% of the average of the Russell 2500 and S&P 500 since its inception. 12 Fund name omitted because it is not germane. 13 Benz, Christine. “The Error-Proof Portfolio: Beware the Star-Manager Trap: There may not be a Santa Claus, but don’t let that wreck your returns.” Morningstar.com, Feb. 22, 2010.


In addition to offering appealing valuations, these multi-national companies provide us with greater exposure to international markets that are growing faster than many more domestically oriented companies. We have moved into the bigger-is-better camp for reasons explained in this chart from the Leuthold Group. Note that small-cap stocks found their trough undervaluation (~40%) in 1998 and 1999, which explains why Crescent’s weighted average and median market capitalization were then at all-time lows. It similarly explains why the market capitalization metrics for the Fund have moved near its highs today.
1999 2010

FPACX Median Market Capitalization FPACX Weighted Average Market Capitalization

$335mm $1,136mm

$11,322mm $42,223mm

An excellent example of a large multi-national with better opportunities abroad would be Anheuser-Busch Inbev NV (BUD), the world’s largest beer company, in which we established a position early in the quarter. In addition to being the largest brewer in the United States, BUD also has a leading presence in many of the world’s most important beer markets, including Brazil, Canada, and the United Kingdom. The company has fantastic cash generative characteristics, world-class brands, a top management team, and the valuation at our purchase price is, at worst, reasonable — and if all goes well, perhaps exceptional. We believe the same can be said for the other “blue chip” stocks we currently hold, including Aon, Wal-Mart, and Johnson & Johnson, to name but a few. To gain a better perspective of the type of executives we prefer to act as stewards for our invested capital, we suggest you view BUD CEO Carlos Brito’s 2008 talk at Stanford University’s business school.14 Mr. Brito, who we had the pleasure of meeting recently, expounds for almost an hour on the characteristics of a great business leader and how to foster success among a company’s workforce. We assure you it’s worth the time. Aon Corp. As discussed in our year-end 2009 letter, we like Aon Corp. for its low valuation, world-class insurance brokerage operation, and shareholder-friendly management. We would be remiss if we did not mention it again today given their recently announced purchase (pending shareholder approval) of consulting firm Hewitt Associates. If asked, we would have recommended against the deal; we’d prefer an aggressive share buyback instead. A buyback would have further leveraged the company’s exposure to higher interest rates, greater inflation, economic recovery, overseas markets and, at some point, a better underwriting environment (i.e., a “harder market”). The Aon/Hewitt transaction has been commonly referred to as a purchase. But since Aon will be issuing 25% of its own shares in the transaction, it would be more accurate to describe the transaction as Aon selling 25% of its businesses to Hewitt shareholders. We believe the company sold its stock at an absurdly low price, and in

Carlos Brito’s Stanford University Graduate School of Business address, Feb. 14, 2008, http://www.youtube.com/user/ stanfordbusiness#p/search/0/dUoD6C31zJc.

return, received a business that, while attractive, we do not believe is as good a business as Aon’s core brokerage operations. We are therefore skeptical that the merger will prove to be the most optimal use of the company’s cash and balance sheet. However, we are not so arrogant as to believe our view infallible. Aon’s management has proven itself to be skilled operators and able capital managers over the past five years. We find management to be intelligent, thoughtful, and capable, and they know their businesses better than we do. Despite our preference for a buyback, the deal was completed on financially attractive terms (less than 5x EBIT pro-forma for synergies and immediately accretive to Aon’s cash earnings) — when ignoring the cost of issuing undervalued stock. After meeting with management, we are convinced the deal is at least financially reasonable and may, if properly executed, add value. It will not be easy, but Aon CEO Greg Case has historically under-promised and over-delivered, at least as far as restructuring, integration, and cost savings are concerned. And he understands that he starts in the hole on this deal (having issued undervalued stock). So for now, we continue to give management the benefit of the doubt, but we look forward to the day when shareholder-friendly rhetoric is matched by concrete actions (the repurchase of a substantial portion of the company’s outstanding shares). Distressed Mortgage Trade Over the past two quarters, we have substantially increased the Fund’s commitment to mortgage loans. The Fund’s roughly 4% exposure (pro-forma for a transaction that has yet to close) is in the form of five separate pools of mortgages, each purchased at a 40-60% to par and a 30-40% discount to a current independent third-party appraisal of the collateral supporting the loans. Though the pools are immature and we cannot be certain how they will ultimately perform, let us share the early performance on the first pool we purchased (November 2009) with you. Including interest, this pool has now returned more than 30% of our initial capital invested. Looking just at the properties unwound, they have generated a total return of more than 24%. In addition, we are earning a better than 8% current yield on our remaining basis in the portfolio. The early results are better than we would have expected, but it is too soon to declare victory. The difficult tail end of the portfolio (damaged properties, unwanted homes, and repair jobs) remains to be worked out. We will keep you apprised over the next two years as these investments season and mature. Energy Services We work hard to understand risks that might impact your Fund’s investments. Once understood, we try to handicap them — a task that’s more art than science. We sometimes do not handicap the risks correctly and, more rarely, miss the risk entirely. In the case of our investment in oil service companies, we understood that occasionally a rig would blow up and might have to be scrapped. Were that to occur, the earning power of the company would be reduced by the loss of that rig, but the rig would be insured and the company would receive those dollars to put toward either buying or building another rig. What we did not expect was that, while we could fly a man to the moon, British Petroleum couldn’t cap a well 5,000 feet under water (in any kind of reasonable time frame) and that oil would spew continuously into the Gulf of Mexico (GOM) after Transocean’s Deepwater Horizon rig exploded this past May. We also did not anticipate that the government would place a temporary ban on deepwater drilling in the Gulf. We found the ban to be a rash response to a discrete incident. Were an Airbus A320 to crash en route from Los Angeles to New York, we doubt that the entire fleet of airplanes (other Airbuses, Boeings, and private jets) on that route would be grounded. The government’s action, however, was to do just that. No distinction was made between shallow and deep water. There were no allowances for differences in the type of equipment, redundancies, and procedures on these rigs. It was illogically indiscriminate. All of these stocks declined in the quarter, including Ensco International, the Fund’s largest position. We believe that both shallow and deepwater drilling will resume in the GOM, since permanently removing this critical oil production capacity would cause a supply/demand

imbalance that would trigger a spike in oil prices. How quickly GOM drilling resumes will depend on capping the well, assessing the damage, the price of oil, politics and more. With conviction in the ultimate return of drilling in the GOM, however, we have increased our exposure to the drillers. These companies trade at deep discounts to their replacement value and single-digit P/Es on normalized earnings. We currently hold a 6.0% position in the drillers, up from 4.8% at the end of March 2010. Our economic interest in these companies has grown by even more, given the lower average stock prices. Not only has our position size been increased, but we now own far more of these companies given the share price decline. For a deeper discussion of the sector and Ensco in particular, please refer to our past letters. High? Yield Bonds The average price of a corporate bond we held on March 31, 2009 was $69, had a 9.6% cash yield, and a 22.8% yield-to-maturity. Given such attractive yield characteristics and what we believed to be excellent asset coverage metrics, the Fund had 28.6% in corporate bonds on its way to becoming an even larger position in the subsequent quarter. As corporate bond prices have risen and credit spreads have narrowed, our desire to own the debt of lower-credit-quality companies has commensurately declined, resulting in our corporate bond exposure having declined to 19.4% in the most recent quarter-end. The average price of a corporate bond in the Fund is now $99, and has a 7.0% cash yield and a mediocre 8.0% yield-to-maturity. As a result, we are seeking greener pastures elsewhere and the Fund’s exposure to higher-yielding corporate debt continues to decline (now 18.2%15 as of this writing). Closing We continue to expand our team and are currently in the final stages of interviewing for two analyst positions. One position is an addition and one is to replace Jason Bidwell, who returned to his hometown of Boston this past quarter. We thank him for his terrific efforts during his tenure at FPA and wish him well. We continue to build our team and tighten our research process, including the use of third parties to provide us with the information and insight we need to make sound long-term investments. We watched a number of World Cup soccer matches recently and, not having grown up with the game, became fascinated by the sparse scoring opportunities. The game requires patience and discipline to defensively keep the ball out of your box, while waiting for an opening to exploit on the offensive end of the pitch. The Spain/Netherlands final brought some of us together (some to watch and others to nap), and served to instruct us as we ruminated as to the similarities between the Spaniards and Crescent. Spain, during the tournament and along the way to becoming champions with the fewest cumulative goals, scored (8), kept their mistakes to a minimum and, similar to the way we aim to manage Crescent, focused on the quality of their shots rather than the quantity. Respectfully submitted,

Steven Romick President July 26, 2010

July 26, 2010.

The discussion of Fund investments represents the views of the Fund’s managers at the time of this report and are subject to change without notice. References to individual securities are for informational purposes only and should not be construed as recommendations to purchase or sell individual securities. While the Fund’s managers believe that the Fund’s holdings are value stocks, there can be no assurance that others will consider them as such. Further, investing in value stocks presents the risk that value stocks may fall out of favor with investors and underperform growth stocks during given periods. FORWARD LOOKING STATEMENT DISCLOSURE As mutual fund managers, one of our responsibilities is to communicate with shareholders in an open and direct manner. Insofar as some of our opinions and comments in our letters to shareholders are based on current management expectations, they are considered “forward-looking statements” which may or may not be accurate over the long term. While we believe we have a reasonable basis for our comments and we have confidence in our opinions, actual results may differ materially from those we anticipate. You can identify forward-looking statements by words such as “believe,” “expect,” “may,” “anticipate,” and other similar expressions when discussing prospects for particular portfolio holdings and/or the markets, generally. We cannot, however, assure future results and disclaim any obligation to update or alter any forward-looking statements, whether as a result of new information, future events, or otherwise. Further, information provided in this report should not be construed as a recommendation to purchase or sell any particular security.


June 30, 2010
Portfolio Characteristics as of June 30, 2010
FPA Crescent Stocks Price/Earnings TTM Price/Earnings 2010 est. Price/Book Dividend Yield Average Weighted Market Cap (billion) Median Market Cap (billion) Bonds Duration (years) Maturity (years) Yield-to-Worst Yield-to-Worst (corporate only) Russell 2500 S&P 500 Barclays Capital Gov’t/Credit

12.5x 11.4x 1.3x 2.1% $42.2 $11.3 1.4 1.7 4.0% 8.0%

24.6x 19.4x 1.7x 1.5% $2.0 $0.6

16.2x 14.3x 1.9x 2.2% $75.2 $8.9 5.4 7.6 2.6%

Portfolio Analysis as of June 30, 2010
10 Largest Holdings Ensco plc CIT Group Bonds* Covidien AON Occidental Petroleum Stanwich Mortgage Loan Trust* Wal-Mart Stores American General Finance Bonds* Vodafone Group plc PetSmart Total * Various issues Excludes U.S. Gov’t Securities 4.4% 3.4% 3.2% 3.0% 2.8% 2.5% 2.1% 2.1% 1.9% 1.9% 27.3% Portfolio Composition Asset Class Common Stocks, Long Other, Long Common Stocks, Short Corporate Fixed Income Mortgages Net Liquidity (Cash Ex-Short Rebate) Geographic U.S. Europe Other

45.3% 1.0% -4.9% 19.5% 2.6% 26.7% 48.5% 17.6% 1.8%

Performance Statistics as of June 30, 2010
FPA Crescent Statistics Gain in Up Months - Cumulative Upside Participation Loss in Down Months - Cumulative Downside Participation Up Month - Average Down Month - Average Delta between Up/Down months Worst Month Best Month Standard Deviation Sharpe Ratio (using 5% risk-free rate) Performance Quarter Calendar YTD 1 Year - Trailing 3 Years - Trailing 5 Years - Trailing 10 Years - Trailing 15 Years - Trailing From Inceptiona 60% R2500/ 40% BCGC 340.9% 100.7% -193.9% 82.5% 2.5% -2.7% 5.2% -13.9% 9.3% 11.22 0.29 -4.5% 1.5% 18.7% -1.3% 3.3% 5.6% 8.0% 8.3% Russell 2500 S&P 500

343.4% -160.0% 2.6% -2.3% 4.9% -13.9% 12.6% 10.71 0.53 -5.9% -1.9% 12.3% -0.3% 5.0% 11.0% 10.3% 10.6%

523.2% 65.6% -345.0% 46.4% 4.1% -4.5% 8.6% -21.5% 15.4% 18.57 0.20 -10.0% -1.7% 24.0% -8.0% 1.0% 4.2% 8.3% 8.8%

429.5% 80.0% -293.1% 54.6% 3.3% -3.9% 7.2% -16.8% 9.8% 15.37 0.13 -11.4% -6.7% 14.4% -9.8% -0.8% -1.6% 6.2% 7.0%


June 30, 2010
Calendar Year-End 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993a FPA Crescent 28.4% -20.6% 6.8% 12.4% 10.8% 10.2% 26.2% 3.7% 36.1% 3.6% -6.3% 2.8% 22.0% 22.9% 26.0% 4.3% 9.6% 60% R2500/ 40% BCGC 22.5% -21.4% 3.9% 11.2% 6.0% 12.7% 28.1% -6.6% 4.8% 7.9% 13.3% 4.9% 18.5% 12.6% 26.7% -2.0% 8.2% Russell 2500 34.4% -36.8% 1.4% 16.2% 8.1% 18.3% 45.5% -17.8% 1.2% 4.3% 24.2% 0.4% 24.4% 19.0% 31.7% -1.1% 10.1% S&P 500 26.5% -37.0% 5.5% 15.8% 4.9% 10.9% 28.7% -22.1% -11.9% -9.1% 21.0% 28.6% 33.4% 23.0% 37.6% 1.3% 5.3%

Objective, Strategy and Rankings
Objective The Fund’s investment objective is to provide a total return consistent with reasonable investment risk through a combination of income and capital appreciation. We employ a strategy of selectively investing across a company’s capital structure (i.e., a combination of equity and debt securities) that we believe have the potential to increase in market value, in order to achieve rates of return with less risk than the broad U.S. equity indices. Strategy To invest across a company’s capital structure to meet our objective. This includes investing in Common and Preferred Stocks, Convertible Bonds, High-Yield Bonds, and Bank Debt. There is an occasional use of Government Bonds. Downside Protection FPA Crescent’s ratio of positive to negative monthly performance is, on average from inception,a 11% better than the equity indexes. FPA Crescent has, on average from inception, captured 73% of the upside monthly performance but just 50% of the downside when compared to the equity indexes. Volatility FPA Crescent has exhibited much less volatility as measured by its Standard Deviation from inception.a On average, the Fund’s Standard Deviation is 37% lower than the equity indexes. FPA Crescent has a much lower delta in its average monthly performance, i.e., the difference between the average positive and negative month when compared to the equity indexes. FPA Crescent has had only two years of negative performance since inception,a the worst a loss of 21%. FPA Crescent’s maximum drawdown is 37% better than its benchmarks. Crescent 60% R2500/40% BCGC R2500 S&P 500 Number loss years since inceptiona 2 3 3 4 Maximum Drawdownb -29% -33% -53% -51% Performance FPA Crescent has beaten the stock indexes for the inception-to-date time period.a Conclusion FPA Crescent has met its objective since inception, having achieved higher absolute rates of return than the indexes and a dramatically higher Sharpe Ratio.a


Inception date is June 2, 1993. Returns from inception are annualized. The annualized performance of the Russell 2500 and Barclays Capital Government/Credit Indexes begins 6/1/93. b Maximum Drawdown is the largest percentage peak to trough decline in value that has occurred since inception. Past performance is not necessarily indicative of future results. All returns assume the reinvestment of dividends and distributions. There are no assurances that the Fund will meet its stated objectives. The Fund’s holdings and allocations are subject to change because it is actively managed and should not be considered recommendations to buy individual securities. Distributed by FPA Fund Distributors, Inc., a subsidiary of First Pacific Advisors, LLC. Balanced Benchmark is a hypothetical combination of unmanaged indices comprised of 60% Russell 2500 Index and 40% Barclays Capital Government/Credit Index, reflecting the Fund’s neutral mix of 60% stocks and 40% bonds. Russell 2500 Index is an unmanaged index comprised of 2,500 stocks of U.S. companies with small market capitalizations. Barclays Capital Government/Credit Index is an unmanaged index of investment grade bonds, including U.S. Government Treasury bonds, corporate bonds, and yankee bonds. S&P 500 Index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. The index focuses on the large-cap segment of the market, with over 80% coverage of U.S. equities, but is also considered a proxy for the total market.


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