Update: This fund has been liquidated.
Objective
The fund seeks total return by investing, long and short, in the entire investable universe. It starts with a sensible neutral asset allocation and tries to “add alpha around the edges.” The fund parallels the firm’s Topaz hedge fund. It can short stocks, to a maximum of 30%. Unlike other hedge funds, Topaz avoids extensive leverage and highly concentrated bets. The fund will do likewise.
Adviser
GRT Capital Partners. GRT was founded in 2001 by Gregory Fraser, Rudolph Kluiber and Timothy Krochuk. GRT offers investment management services to institutional clients and investors in its limited partnerships. As of 2/1/11, they had over $300 million in assets under management and were experiencing healthy inflows. They also manage GRT Value (GRTVX) and ten separate account strategies.
Manager
The aforementioned Gregory Fraser, Rudolph Kluiber and Timothy Krochuk. Mr. Fraser is the lead manager. He managed Fidelity Diversified International (FDIVX) from 1991 to 2001. Before that he analyzed stuff (shoes, steel, casinos) for Fidelity. Mr. Kluiber, from 1995 to 2001, ran State Street Research Aurora (SSRAX), a small cap value fund. Before that, he was a high yield analyst and assistant manager on State Street Research High Yield. Mr. Krochuk managed Fidelity TechnoQuant Growth Fund from 1996 to 2001 and Fidelity Small Cap Selector fund in 2000 and 2001. Since 2001, they’ve worked together on limited partnerships and separate accounts for GRT Capital. All three managers earned BAs from Harvard, where Mr. Kluiber and Mr. Fraser were roommates. Messrs Kluiber and Fraser have both earned MBAs from UCLA and Pennsylvania, respectively.
Management’s Stake in the Fund
Not yet reported. That said, the managers own the advisory firm, and Mr. Krochuk attsts that “all of our managers own shares in their products” and “most of our net worth is in those products.”
Opening date
December 8, 2010.
Minimum investment
$2500, reduced to $500 for IRAs.
Expense ratio
2.39% on assets of $10 million.
Comments
Investors are often panicked by the simple fact that virtually no asset class is attractively priced any longer. Cash is at zero. Bonds have a near zero real return, with the spread between the riskiest bonds and Treasuries collapsing to 4.6%. U.S. stocks have nearly doubled in under two years while emerging markets and REITs have risen by even more. Gold, a classic inflation hedge, has risen from $272 in 2000 to $1363 in February 2011.
The argument that no asset class is undervalued does not mean that it’s impossible to make money; just that you’re less likely to make it with a static asset allocation and exposure to market indexes. That, at least, is the argument advanced by Tim Krochuk and the good folks at GRT Capital Partners in support of their new absolute return fund. “Active management is,” he argues, “oversold while ETFs are screaming skyward.”
Mr. Krochuk’s argument is that managers need the flexibility to make gains wherever an uncertain market offers them, a strategy which requires the ability to invest both long and short, in a wide variety of asset classes.
GRT Absolute Return (GRTHX), launched in December, offers three distinctive features.
First, it has a sensible neutral allocation. By shifting the classic 60/40 split between stocks and bonds to a 55/35/10 split between stocks, bonds and cash, GRT produced a benchmark with great stability that outperformed the traditional allocation in 100% of the rolling five year periods they studied. From 2005 – 10, GRT’s neutral allocation returned 31% while a 60/40 split returned 20% and the S&P500 was in the red.
Second, it doesn’t try to over-promise or over-extend itself. GRT has a remarkably vibrant quant culture, and their studies conclude that “a little shorting goes a long way.” As a result, the fund won’t short more than 30%, which provides “major downside protection” as well as contributing alpha in some markets. How much downside protection? A 2004 asset allocation study, published by T. Rowe Price, gives a hint. They studied the effects of various broad asset allocations (100% stock, 80% stock/20% bonds, and so on). In general, reducing your stock exposure by 20% reduces the average down year loss by 4%. For example, a portfolio 80% in stocks lost an average of 10% in its down years. Dropping that to 60% stocks cut the average loss to 6.5%. There was surprisingly little loss in returns occasioned by easing up on stocks: a static 60% stock portfolio earned 9.3% per year over 50 years while 80% stocks earned 10%.
We can, Krochuk concludes, “add alpha by investing around the edges of a good allocation benchmark.” They also avoid leverage, which dramatically boosts returns — but only if you’re very right and have impeccable timing. The underlying portfolio will be well diversified, rather than making a series of hedge fund-like bets on a small basket of securities. They’ve found that they can use U.S. blue chip stocks (liquid and dividend paying) in lieu of a large cash stake. And the managers invest major amounts in their funds. The prospect of losing much of your life savings, Mr. Krochuk notes, has a wonderfully sobering effect on investor behavior.
Finally, the fund has Greg Fraser (and company). Mr. Fraser, the lead manager, performed brilliantly at Fidelity Diversified International (FDIVX) for a decade, outperforming in both rising and falling markets. In the five years before FDIVX, he was one of Fidelity’s top stock analysts. In the decade since FDIVX, he’s run both a long/short hedge fund and a natural resources hedge fund for GRT. As I noted in my profile of GRT Value (GRTVX) and my March 2011 cover essay, G, R & T represent a major pool of time-tested talent.
GRT employs another half dozen managers on their private accounts, and several of those have outstanding records as mutual fund managers. While those managers do not directly contribute to this fund, their presence strengthens the fund in at least two ways. First, there’s an ongoing flow of information between the managers; informally on a daily basis and formally at monthly meetings. Second, the advisor monitors the performance of each of its 10 strategies every day. Those strategies are, in normal times, uncorrelated. A spike in correlations has been a reliable sign of an impending market fall. That information is available only to GRT and allows them to anticipate events and adjust their portfolio positions.
Bottom Line
The price of entering the fund ($2500) is low, though the price of staying in is rather high (2.39% at the outset). That said, highly active, alternative-investment funds are pricey are a group (the $1.4 billion Wintergreen fund charges 2%, for example) and expenses are likely to fall as assets rise. As importantly, the managers have a record of earning their money. Beyond GRTVX’s strong performance, there’s also decades of great absolute and risk-adjusted returns posted by all three members of the management team. Ensconced now in a partnership of their own creation, with a sensible corporate structure and a cadre of managers whose work they respect, there’s good reason to believe the GRT will achieve their goal of becoming “a mini-Wellington.” That is, an exceedingly stable firm dedicated to providing strong, sustainable long-term gains for their clients.
Fund website
GRT Capital Partners, then click on “mutual funds” in the lower right. The funds portion of the site has minimal information (links to the prospectus, SAI and required reports but not a profile, holdings, commentary or performance). The rest of the site, though, has a fair amount of relevant information to help folks understand the management team and their approach.
© Mutual Fund Observer, 2011. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact [email protected].
