The World's Greatest Investors: Rodriguez

Editor’s note: Even as stocks come crawling back from the abyss, big name money managers are still going to have a hard time regaining investors’ trust – even if they deserve it. In this special report, SmartMoney spoke with four of the world’s greatest investors to see how they managed to minimize investors’ losses during the worst of the downturn and how they’re making money now.

CEO, First Pacific Advisors

Irrepressible on a spring morning in his Los Angeles office, Rodriguez takes a luxurious sip from his favorite green coffee cup. Then he mimics an uptight pension fund client who fired him in 2008 for moving his portfolio into cash: “We will not compromise our investment guidelines!”

Had his client “compromised,” he most likely would have spared himself a lot of pain. Rodriguez foresaw not only the real estate bubble but also the credit crisis and its aftermath. He says his insistence on moving into cash cost him $1.2 billion in client withdrawals—a significant hit for First Pacific Advisors, a $10 billion firm. But today Rodriguez might as well be wearing a neon sign that reads vindication. In 2008 his FPA New Income bond fund returned 4.3 percent, while his average competitor lost almost 5 percent, according to Morningstar; in a quarter-century that fund has never had a losing year. Rodriguez’s equity fund, FPA Capital, was hurt by its energy-laden portfolio last year but has trounced the market with a 19 percent return so far this year. Its annualized returns from 1987 through today are a stunning 13.8 percent.

Rodriguez, now 60, grew up in poverty two miles from First Pacific’s office tower. “I remember signs that said no dogs, Jews or Mexicans,” he says. A high school adviser tried to steer him to trade school. But after magna cum laude honors, an MBA and three decades of investment success, Rodriguez is getting the last laugh. His vindication will be followed by vacation: In 2010 he’s taking a one-year sabbatical, after which he’ll be playing a supporting role at the firm.

Rodriguez’s confidence doesn’t extend to the economy. Today’s rally is a mere head fake, he says, and the regulatory reforms proposed by the Obama administration will only “paper over” larger problems, like the nation’s soaring levels of spending and debt. He sees the U.S. entering a “repression”—more severe than a recession, but a step short of a depression—with a prolonged period of slow growth and high interest rates. To weather those trends, he’s buying high-quality bonds with one- to two-year durations. Most of his new purchases are in energy: He sees oil reaching $100 to $150 a barrel in three to five years, another ill omen for an early recovery. It’s partially because of the crisis ahead that Rodriguez is shrinking his management role. “This will be a long battle,” he says, and “I won’t be the optimum age to be the general of the army.”

Ensco International (ESV)
A “contract driller” that digs wells for big oil firms. 

BJ Services (BJS)
This company’s horizontal drilling technology reaches hard-to-find oil; Rodriguez thinks it could double.

Rowan Companies (RDC)
A deep-water driller, another variation on Rodriguez’s favorite theme.