SOR — Source Capital, Inc.

Summary of SOR Q4 2022 Earnings Call

1. Key Financial Results and Metrics

• As of December 31, 2022, the Assets Under Management (AUM) for the FPA Queens Road Small Cap Value Fund was approximately $500 million.
• In 2022, the Russell 2000 fell over 20%, while the Russell 2000 Value declined about 15%. In contrast, the Fund experienced a smaller decline of 9%, showcasing its downside protection.

2. Strategic Updates and Business Highlights

• The Fund aims to outperform the Russell 2000 Value over full market cycles with a disciplined value investing approach focused on small-cap companies with strong fundamentals and management.
• The Fund is now available on major platforms including Fidelity, Schwab, and Vanguard, enhancing accessibility for investors.
• Portfolio positioning remained stable, with no fundamental changes during the year. The Fund initiated six new positions and had four holdings acquired.

3. Forward Guidance and Outlook

• The management anticipates that small-cap stocks, particularly those with better valuations, will outperform large-cap stocks, especially coming out of a recession.
• The Fund's long-term view remains focused on three to five years, allowing it to navigate short-term market noise effectively.
• The investment team believes that the current setup for small-cap value is attractive, though not presenting "screaming bargains."

4. Bad News, Challenges, or Points of Concern

• The Fund's relative performance was negatively impacted by its lack of exposure to energy stocks, which saw significant gains in 2022.
• Specific holdings, such as Synaptics, experienced substantial declines, with a noted 67% drop, although management remains optimistic about the company's fundamentals.
• There are concerns regarding the potential for a recession, which could impact market performance, though the Fund is positioned to manage through such challenges.

5. Notable Q&A Insights

• Management emphasized the importance of maintaining a long-term investment perspective, avoiding the pitfalls of reacting to short-term market fluctuations.
• The Fund's technology holdings (23% of the portfolio) significantly exceed the sector weights in the Russell 2000 Value, reflecting a strategic divergence from typical small-cap value investments.
• The management expressed confidence in the ability of small-cap stocks to lead the recovery post-recession, citing historical trends that favor small-cap performance in such scenarios.

Overall, the call highlighted a disciplined investment approach with a focus on quality and long-term growth, while acknowledging challenges and market dynamics that could impact future performance.