Interview and Q&A with Eric Speron, portfolio manager on the Morningstar 5-star rated fund, First Foundation Total Return

*The Overall Morningstar Rating is based on the risk-adjusted returns out of 298 funds in the Morningstar US Fund Moderately Aggressive Allocation category as of 7/31/2023.

First of all many thanks Eric for accepting this interview! Let's get right into the interview! Can you tell us how you became interested in investing and can you present yourself and your fund?

Thanks Jeremy. As you know, I have a young family and my mother reminds my children all the time that their father used to sell candy on the bus to the other grade school kids. That drive came from my father who had a sandwich shop which meant we endlessly dissected the economics of anyone who sold food. He was my hero. That entrepreneurial spirit carried me into a decent secondary school where I was voted most likely to become a successful businessman. Although my grades were good and I was the school treasurer, because I was the son of a Greek immigrant, I also was well trained as an oddsmaker which was unique in a Benedictine learning environment.

Fast forward to First Foundation, the idea was that we could improve on the very smallest accounts at the firm. As General Electric split into a million pieces following the financial crisis, we won a bake-off to run one of their old mutual funds. Internally we began using the balanced fund for our smallest accounts with the stated intention that if we could just cut out the middleman, we had a leg up to do right by our clients. Over the past 9 years, the First Foundation Total Return fund’s(NASDAQ:FBBYX) use cases and assets have grown to $127m given the performance but we don’t forget our heritage that we are here to invest for the small time investor.

Q: what does your private twitter handle @off_the_run mean?

Off the run bond is a term to describe government bonds that are not recently issued; these older bonds have to offer extra yield in exchange for lower ubiquity. Like my father, I am also a runner but I thought it was a good metaphor for the type of trade-offs the market offers.

Q: how did you become interested in the Bolloré galaxy?

Per my last answer, I like the idea of getting a better price for a bit more obscurity. Bollore is really that idea to its extreme. I think there is an important distinction with Bollore(6.6% position 6/30/23) though that while the price is appealing relative to its value, there are a series of other holding company investment options in the stock markets. What I believe to be different about Bollore is the business quality. If you were to consider which businesses do you believe could be around for 100 years, Diageo’s Johnny Walker, Arnault’s Moet, or a railroad I could see all qualifying. I am not sure Universal Music would have any worse odds than those other nominees. I calculated as of August 12^th that each share of Bollore has €6.50/value in Universal Music. This means you don’t need to ascribe any value to the Transportation or Vivendi businesses which I have at €4 each. My point is that there is value but value is underpinned by a generational asset. Bollore’s history is that they will take advantage of the discount and create more value on a per share basis than the business’ organic growth rate. However, when that capital allocation opportunity is stacked on top of a business that is as robust and durable as UMG there is additional flexibility provided by the quality of the business which also lowers your risk.

Q: What attracts you to the media industry as I know that you really follow it closely?

One of my earliest investment successes was buying some of the American fiber operators after the crash of the Telecom Bubble of the early 2000s. In various internal strategies we owned Colt, Global Crossing, Level 3, TW Telecom, Zayo and XO communications. The idea was simple. Fiber was superior to cable broadband and there was an industry logic to bringing them all together. This is frankly the history of connectivity in many countries. We see media today in much the same light. We think there could be an industrial logic in media in the same way. We know who the survivors are, there balance sheets are no longer in distress. The idea that every competitor can be Netflix has receded. Local incumbents are finally holding audience share versus the large American video companies. The valuations are lower today than they have ever been just as the industry is coming together. Does there need to be independent public companies in Viaplay, iTV, Canal, Sky, Lionsgate, Televisa, Multichoice(1.6% position 6/30/23), Paramount, etc? Could content be shared across video providers? Is there value in negotiating globally with the creative community or Formula 1(2% position 6/30/23)? We think so. There are also capital and operating synergies and you can offer something Netflix doesn’t – cultural protection. By aligning a constellation of video providers in a manner that’s preferred by their respective cultural ministers you can offer protections that Netflix avoids in the name of scale. Sure, this may not be as good of a business as Netflix but arguably it could be more sustainable, capital efficient and an important ally of global creatives who do not mind a second in-country option.

Q: what is your current best idea?

On a dollar basis, the biggest buys in the first half of the year were two things actually outside our large cap equities. We found an alternative manager in Burford(4.5% position 6/30/23) in Q1. It was a real estate outfit, The Sphere(4.4% position 6/30/23), that led our Q2 portfolio change. We don’t have anything that juicy though that we just reported in our latest holdings August 15^th.

This may be a bit of a half-answer, but we also can’t have current best ideas. Everything we own, we love. I have 5 children; we know to never pick just one. I guess just to speak to something we have mentioned, media and something that your continental audience may be interested in – we are owners of Vivendi.

I think the assets and situation are fairly well known but one perspective on the optionality here. If an enterprising but small-time investor were to contact their custodian, spend €1,000 buying Vivendi(3.2% position 6/30/23) and shorted everything Vivendi has invested in that was publicly traded, that investor would receive a check from the broker for €1,000. This means the investor would be the owner of all of the non-traded assets, most importantly: Havas and Canal+. I would argue that Havas and Canal would be worth €1,000 to that aforementioned investor.

More formally, Vivendi has a bit over €9.5 billion of publicly traded investments, just under €1.5bn in debt measured against today’s €8.2bn market capitalization. To a private buyer, I think Vivendi would be able to generate an additional €6bn in proceeds for Canal and Havas north of €2bn. We love the risk profile of a situation like this but the math is well understood so it is the timing of that resolution that is unclear. We think the economics explained above could actually be the trigger to resolution.

In 2018, American investor Elliot Management won board control at Telecom Italia which had previously been in Vivendi’s grasp as the ~20% owner there. If Elliot were to remerge with that playbook at Vivendi, it could be done at much lower risk given that investment could be totally funded by the proceeds of shorting VIV’s public investments. If an interloper like Elliot were to acquire a meaningful enough stake, Vivendi would be forced to respond or watch its control narrow potentially to the point where it could be put at risk as had recently happened with Telecom Italia, Vivendi and Elliot.

Q: Is capital allocation decisive for you when you evaluate management? Why?

We have been on a number of corporate boards as we think alignment is critical. When we have questioned management's capital allocation sometimes, we were just wrong about the business. Those instances aside, when we do know the business, if capital is not being allocated in a way we understand – it does not make sense for us to maintain ownership in the equity. There is no price low enough or business quality high enough if the alignment is working against you. Sometimes we have gotten involved in the governance when we have disagreed while other times we needed to deepen our understanding of the business because it was our lens that was foggy. When there is a true divide, which happens even in the very largest companies, between principal and agent - we have preserved a lot of capital and brain cells by selling with alacrity.

Q: when do you decide to sell a holding?

The benefit we have in running a balanced or all-asset fund is there is always another idea. There is an arbitrage, a commodity, a large cap equity speedboat, a low beta equity battleship, something higher in the capital structure or a piece of real estate that provides a good use of risk-adjusted capital. Now, it isn't to say we are always right, often times far from it, but there is always something where the odds look favorable. Often times something left for dead will find a heartbeat or something with a faint heartbeat will become adored - that is to most often our sell discipline is dictated by the madness of the crowds.

Q: what are the most important elements of your checklist?

Warren Buffett has famously said, "Price is my diligence." Investors today refuse to acknowledge that Mr. Buffett could really have said that but price is the number 1 item on our checklist. Obvious signs of market neglect like a security’s ownership structure, the exchange a security is listed on, passive money mistakes, sleepy businesses that don't elicit greed - there were 60 items on our checklist the last time we used one. The truth is though that our opportunity set is so vast and the rationales for mistakes on price are so limitless, we probably haven't formally unearthed our checklist in a half decade.

Q: what was your biggest mistake and what did you learn from it?

Many of the mistakes that still haunt us are the ones that we count as mistakes related to our own ego. When we started the fund, we put up what we considered to be remarkably good performance. From our perspective we took little risk in doing it given the idiosyncratic profile of some of the contributors. My partner Jim Garrison nailed Time Warner who was purchased by AT&T, I hit on a few consumer discretionary investments and we did it with a very low amount of beta/market exposure. Inflows came and we were slow to invest the money. Trump was elected and the market went vertical. We lost an important client.

We love episodic investing, past, present and future but we also understand that back then we lacked market exposure. I made the decision to give Jim Garrison a dedicated portion of the portfolio(15-20%) to invest. To his credit, I believe he has excelled by any beta adjusted measure as he largely kept up or bettered the market return by investing where the market had fallen asleep so he has been able to do it with much lower risk.

Q: what are your red flags?

The market is a learning machine so you must always stay mentally fit. Many investors fall in love with an asset class, a market segment, a style of investing, some trading system but the market has always adapted. There is too much to be gained by adapting so the market is constantly evolving. if your approach does not adjust for the changing market backdrop, the market will find a way to take advantage of your capital. Maybe I should quote Charlie Munger to close this, “It's not supposed to be easy. Anyone who finds it easy is stupid.”

All Holdings are subject to change.

Please consider the investment objectives, risks, charges and expenses of First Foundation Funds. A full or summary prospectus with this and other information about the mutual funds can be obtained by calling 800-838-0191. Please read the prospectus carefully before investing.

Investing involves risk, including possible loss of principal. Some of those risks include, but are not limited to, Securities Market Risk, Growth Investing Risk, Value Investing Risk, Mid-Cap Company Risk, Foreign Investment Risk, Emerging Markets Risk, Credit Risk, Interest Rate Risk, and Derivatives Risk. These and other risks are further explained in the full and summary prospectus.

First Foundation Advisors (FFA) serves as the Sub-Advisor to the Funds and Brookmont Capital Management serves as the Advisor. First Foundation Funds’ mutual funds are distributed by SEI Investments Distribution Co., which is not affiliated with the Sub-Advisor, Advisor or any of its affiliates.

The Morningstar Rating TM for funds, or "star rating,” is calculated for managed products (including mutual funds, variable annuity, variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The Morningstar Rating does not include any adjustment for sales load. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.

7/31/23: The First Foundation Total Return Fund was rated against the following numbers of U.S.-domiciled Moderately Aggressive Allocation funds over the following time periods and received the following Morningstar Rating(s): For the three-year period, the fund was rated against 298 funds and received a Morningstar Rating of 5 stars. For the five-year period,: The was rated against the following numbers of U.S.-domiciled funds over the following time periods and received the following Morningstar Rating(s): For the three-year period, the fund was rated against funds and received a Morningstar Rating of stars. For the five-year period, the fund was rated against 280 funds, and received a Morningstar Rating of 5 stars. For the ten-year period, the fund was rated against 222 funds, and received a Morningstar Rating of 5 stars. Past performance is no guarantee of future results.

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Disclaimer: The above article constitutes the authors’ personal views and is for entertainment purposes only. It is not to be construed as financial advice in any shape or form. Please do your own research and seek your own advice from a qualified financial advisor. The authors may from time to time hold positions in the aforementioned stocks consistent with the views and opinions expressed in this article. Disclosure – I (Jeremy) hold a position in the Bolloré Galaxy entities but do not hold a position in Vivendi at the time of publishing this article (this is a disclosure and NOT A RECOMMENDATION).