Steven Romick must feel like a kid with his pockets full of money in a prohibitively expensive candy store. Romick, manager of FPA Crescent Fund, is free to invest in stocks, convertible and straight bonds, or cash equivalent securities in this hybrid asset allocation offering. He has $458 million in assets to work with, much of it in readily available cash. Yet even with a large investment universe and a solid war chest, he says he is hard-pressed to come up with new investment ideas because almost everything out there has just gotten too expensive.

"In my 18 years of investing, this is the most difficult time I have had finding securities I like," says the 40-year-old Romick, a deep-value contrarian who has ferreted out bargains for the fund since its inception in 1993. "There is no dramatically out-of-favor industry or asset class that looks appealing."

To appeal to Romick, a company's securities must trade at a substantial discount to private market value, rather than appear inexpensive based on a discount to its peer group or market average. Although valuations may reflect temporary conditions such as a weak economy or a management misstep, a company must meet quality standards that will allow it to survive tough times, and eventually thrive.

High-yield bonds, which provided Romick with some of his favorite investment ideas last year, no longer attract him because their risk far outweighs their potential for reward. Today, they account for just 7% of assets, a historic low for the fund. "Two years ago, high-yield bonds yielded ten percentage points more than Treasury issues," he says. "Now, the spread has narrowed to as little as two percentage points in some cases." Bonds and notes account for 14.4% of fund assets, down from 26.5% at the beginning of last year.

He believes that stocks, for the most part, similarly are overvalued after last year's surprisingly strong showing. After rallying for several years, even many of the small company value stocks that remain a staple of the portfolio are no longer the compelling values they once were. Romick's expectations for the market are modest, and he expects stocks to deliver "mid-single digit rates of return over the next three to five years."

Despite his tepid market outlook, Romick views the energy area as relatively attractive. At 16% of assets it is the fund's largest sector allocation, and a major contributor to performance this year. He believes that natural gas company fund holdings should benefit from growing demand for natural gas. "We are in the early stages of a long-term upward cycle in natural gas prices," he says. "And unlike oil, natural gas cannot be imported very easily."

A few scattered stocks are catching his eye as well. Recently, he added to the fund's stake in Big Lots, a national chain of 1,450 discount stores that sells closeout merchandise. He believes that the stores are not as economically sensitive as higher-priced retailers, and that its new chairman will help improve the company's profit picture.

For the most part, however, Romick remains unenthusiastic. With a dearth of new investment candidates he has 44% of the fund parked in cash, a figure that includes collateral for short positions. Romick says that he "may do more short selling" in the future, although would not comment on specific plans.

Romick is not the only fund manager at Los Angeles-based First Pacific Advisors rejecting what he considers overpriced stocks and bonds in favor of short-term securities. Robert Rodriguez, the firm's CEO and manager of the FPA Capital Fund, outlined his similar investment rationale and its possible consequences in a letter to shareholders earlier this year, appropriately titled "Slim Pickings." In it, he noted that "we prefer to let others use their liquidity at these elevated risk levels. In the short run, our strategy of letting liquidity build may lead to underperforming the market. As we have written so many times in the past, to achieve superior long-term performance, one must be willing to accept periods of short-term underperformance."

Romick rejects the notion held by many fund companies and financial advisors that a fund should keep its cash stake in the single digits, regardless of what the market is doing. "People who want me to be fully invested at all times should not give me their money," says Romick. Given the comparative rates of return for other investments and their risks going forward, he believes that "it is appropriate to look at cash as an investment."

In the past, Romick has used cash successfully to help provide downside protection and relative stability for the fund. Since its inception, Crescent has captured, on average, 75% of the upside monthly performance of the overall stock market, while participating in only 50% of the downside. It has lost money in only one calendar year. That was in 1999, when the fund's 6.3% decline was significantly less punishing that the double-digit losses seen in comparative equity indices.

At the same time, long-term performance has been highly competitive. As of mid-March, its three, five, and ten-year total returns put it in the top 1% of Morningstar's moderate asset allocation category. "The fund has easily overcome a hefty cash stake," notes Morningstar analyst William Samuel Rocco. "Its small-value bias has been a big plus, as has its focus on beaten-up corporates and convertibles on the fixed-income side." The fund's willingness to deviate from traditional asset allocation fund portfolios, such as blue-chip stocks and plain vanilla bonds, gives it a low correlation to the overall market as well as its peers, he adds. Rocco also notes that while the fund "got punished for its atypical style in 1998 and 1999's growth surges, it thrived in the mixed conditions of the mid-1990s."