FPA Crescent Fund Sheds Microsoft Stake, Citing AI Valuation Concerns and Shifting Portfolio Strategy
In a notable portfolio shift detailed in its recently released fourth-quarter 2025 investor letter, the FPA Crescent Fund, managed by First Pacific Advisors (FPA), has exited its position in Microsoft Corporation (NASDAQ: MSFT). The fund, known for its disciplined, value-aware approach and aversion to market speculation, reported a solid quarterly return of 3.09%, bringing its annual gain to 17.65%.
The letter outlined the rationale behind selling shares of the software behemoth, which closed at $430.29 on January 30, 2026. While Microsoft posted impressive fiscal Q1 2026 revenue of $77.7 billion—an 18% year-over-year increase—the fund's managers expressed a calculated shift in perspective. "We continue to recognize Microsoft's dominant position and robust financial health," the letter stated. "However, our analysis suggests that the current valuation already reflects much of its near-term AI-driven growth. We see more compelling risk-reward profiles in select, under-the-radar AI equities that we believe carry greater upside potential with less downside risk."
This move occurs as Microsoft remains a top holding among hedge funds, with 312 funds reported owning it at the end of Q3 2025. The fund's performance notably exceeded its benchmark, with returns reaching 79% of the MSCI All Country World Index against an average net risk exposure of 64.9%.
The decision highlights a growing debate among value investors about how to price the AI revolution. While giants like Microsoft integrate AI across their vast ecosystems, some funds are now hunting for what they see as "next-wave" opportunities, potentially in smaller companies or specific niches of the semiconductor and infrastructure space.
Investor Reactions
Michael R., Portfolio Manager at a rival fund: "FPA is sticking to its knitting. They've always been contrarian. While selling MSFT seems bold, it's a classic value move—taking profits on a winner to reinvest where they see a wider margin of safety and growth. It's a high-conviction call that will be interesting to watch."
Sarah Chen, Tech Sector Analyst: "This isn't necessarily a bearish signal on Microsoft's core business. It's more a commentary on market saturation and valuation. The fund is essentially saying the easy money in MSFT's AI story has been made, and future alpha might lie elsewhere. It's a tactical reallocation."
David K. (Online Investor Forum Handle: "ValueHawk"): "This is pure insanity. You don't sell one of the most resilient cash-flow generators on the planet, with arguably the best AI stack in the business, to chase 'undervalued' speculations. This reeks of performance chasing disguised as value investing. FPA might regret this in 5 years."
Linda Garcia, Independent Financial Advisor: "For my clients, this underscores the importance of knowing your fund's strategy. FPA Crescent is actively managed and makes big swings. It's a reminder that even 'blue-chip' stocks can be sold by active managers when valuations or opportunities shift. Investors should align with strategies they understand and believe in for the long term."
Disclosure: This analysis is based on public investor letters and is for informational purposes only. It is not investment advice.