Category Archives: Funds

Intrepid International Fund (ICMIX)

By Dennis Baran

Objective and strategy

The fund seeks long-term capital appreciation by investing in an international, all-cap portfolio. The fund is non-diversified and its primary focus is on developed markets. Its strategy is benchmark-agnostic, so its country, industry and sector weightings may differ substantially from those in its benchmark index or peer group. Its process capitalizes on market disruptions, fear, and volatility to generate bargains. The fund plans to hold between 15-50 different companies, may hold substantial cash and is typically hedges its currency exposure when cost effective.

The fund is intended for Continue reading →

Funds in registration

By David Snowball

The SEC requires managers to submit plans for their new funds 75 days before they’re offered for sale to the public. This month finds 16 new funds in the pipeline. The most intriguing are the two Rondure funds, launched by a partnership between former Wasatch star manager Laura Geritz and the folks at Grandeur Peak. We wrote in December about the partnership. One of pure EM, the other global and both are positioned to hold stocks that are somewhat larger and more seasoned than we associate with Grandeur Peak. Artisan, which rarely launches a bad fund, has registered plans for its niche-est fund, Artisan Thematic, led by an experienced hedge fund guy. Continue reading →

Tributary Small Company (FOSCX)

By David Snowball

Objective and strategy

The fund pursues long-term capital appreciation. They invest in a portfolio of 60-70 small-cap stocks, mostly domiciled in the U.S. Their fundamental approach is value-oriented and broadly diversified across economic sectors. In general, each position in the portfolio starts out about equally weighted; 50 of the 65 current holdings are each between 1-2% of the portfolio. They hold minimal cash, currently about 4%. Portfolio turnover is in the range of 25-35%, far below the small cap average.   Continue reading →

Funds in registration

By David Snowball

You know it’s a bad month for fund registrations when the most interesting thing out there is a bad idea: The ETF Market ETF (TETF). If you’ve ever thought to yourself, “there’s nothing I want more than to be trapped investing in a very limited universe of companies, almost none of whom have enduring competitive advantages,” you can now not only invest there, you can day trade if you want. (sigh) Otherwise, year-end is a slow time in the fund launch world. Continue reading →

Funds in Registration

By David Snowball

Twenty new no-load retail funds are slated to go live by year’s end; most will first trade on December 30 so they’ll first able to report full-year results for 2017. The most immediately intriguing are Rajiv Jain’s new GQG Partners Emerging Markets Equity Fund and Osterweis Total Return., though Polen International Growth Fund has some pretty solid lineage, too. Read on!

ACR International Quality Return Fund

ACR International Quality Return Fund will seek is “to protect capital from permanent impairment while providing an absolute return above the Fund’s cost of capital and a relative return above the Fund’s benchmark over a full market cycle.” After such a build-up, it’s a letdown to report that it appears just to be a global stock fund. It will hold about 20 names, expects to keep less than a third in emerging markets and might hold some cash. Not much stands out there. The fund will be managed by Continue reading →

Fund Profile: City National Rochdale Emerging Markets Fund, (RIMIX, CNRYX)

By Dennis Baran

Objective and strategy

The fund seeks to provide long-term capital appreciation primarily by investing in locally listed large, medium, and small quality companies broadly accessible to U.S. investors within Asian Emerging Markets. The Adviser conducts on-the-ground research to provide direct insight into these companies using its domain expertise in the region, and while it may invest in companies from any emerging market country, it expects to focus its investments in Asia.

The fund is intended for long-term investors who have a time horizon of at least 5 years but preferably 7-10. It was first mentioned in the April 2015 edition of MFO as Continue reading →

Funds in Registration

By David Snowball

Ten new funds are in the queue, ready to launch somewhere between Thanksgiving and New Years. Several high-profile firms are launching new funds, including DoubleLine, Northern, Osterweis and TIAA-CREF. (We also snuck in a small handful of institutional launches from AMG and AQR.)

U.S. Quality ESG strikes me as particularly interesting. Northern Trust has made a major commitment to responsible investing.  This fund will be the latest in a series of launches by Northern Trust, which has offered a global ESG index fund, Global Sustainability Index Fund (NSRIX) and added FlexShares STOXX US ESG Impact Index Fund (ESG) and FlexShares STOXX Global ESG Impact Index Fund (ESGG) on July 14, 2016. Northern’s passive products are consistently Continue reading →

Fund Profile: Mairs and Power Small Cap Fund (MSCFX)

By David Snowball

Objective and strategy

The fund seeks “above-average” long-term capital appreciation by investing in 40-45 small cap stocks. For their purposes, “small caps” have a market capitalization under $3.4 billion at the time of purchase. The manager is authorized to invest up to 25% of the portfolio in foreign stocks and to invest, without limit, in convertible securities (but he plans to do neither). Across all their portfolios, Mairs & Power invests in “carefully selected, quality growth stocks” purchased “at reasonable valuation levels.” Continue reading →

Funds in Registration, September 2016

By David Snowball

It’s been a quiet month for new registrants. There’s the usual collection of trendy ETFs (e.g., Pacer US Cash Cows 100 ETF) and Mr. Greenblatt is launching more Gorham-branded institutional funds (Gotham Neutral 500 at 1.4%, Defensive Long at 2.15%, and Defensive Long 500 at 1.65%). Other than that, we found just four new no-load, retail funds. Folks interested in social impact investing might want to put Gerstein Fisher Municipal CRA Qualified Investment Fund on their radar. Low minimum, relatively low expense, it provides individual investors a tool to support affordable housing and community development. Otherwise, the new options peaked out at “meh.” Continue reading →

Fund Profile: Ariel Global (AGLOX)

By David Snowball

Objective and strategy

Ariel Global Fund’s fundamental objective is long-term capital appreciation. The manager pursues an all-cap global portfolio. The fund is, in general, currency hedged so that the returns you see are driven by stock selection rather than currency fluctuation. The manager pursues a “bottom up” discipline which starts by weeding out as much trash as humanly possible before proceeding to a meticulous investment in both the fundamentals of the remaining businesses and their intrinsic value. The fund is diversified and will generally hold 50-150 positions. As of July 2016, there are 84. Continue reading →

Fund Profile: Catalyst/MAP Global Total Return Income (TRXAX, TRXIX)

By David Snowball

Objective and strategy

The manager attempts to preserve capital while generating a combination of current income and moderate long-term capital gains. The portfolio has four sleeves:

  • 40-65 global equity positions constituting 30-70% of the portfolio depending on market conditions. Over the past five years, the range has been 54-62%.
  • Income-generating covered calls which might be sold on 0-30% of the portfolio. Of late option premiums have not justified writing.
  • Short/intermediate-term bonds, generally rated B+ or better and generally with an average maturity of approximately a year.
  • Cash, which has traditionally been 5-15% of the portfolio.

The portfolio is unconstrained by geography, credit quality or market cap. The manager is risk conscious, looking for securities that combine undervaluation with a definable catalyst which will lead the market to recognize its intrinsic value. Continue reading →

Funds in registration, August 2016

By David Snowball

Newly-proposed funds need to sit quietly for 75 days. During that time the Securities and Exchange Commission staff reviews their prospectuses and has the right to demand changes. If the SEC doesn’t object, the advisor earns the right – but not the obligation, oddly enough – to release the fund to the public. Funds currently in registration are apt to launch at the end of September so that they will be able to report complete results for the fourth quarter of 2016.

Setting aside whacko ideas (The Wearable Technology ETF? Did we learn nothing from the adventures of the 3D Printing ETF? Or the Obesity ETF?), there were 13 new no-load retail funds or active ETFs in registration this month. Continue reading →

Funds in Registration, July 2016

By David Snowball

Anchor Alternative Equity Fund

Anchor Alternative Equity Fund will pursue total with a secondary objective of limiting risk. It will be a long/short fund-of-funds investing in ETFs and mutual funds.  Here’s the key phrase: “The Fund primarily takes long and short positions in securities that are highly correlated to major US equity indices based on long, intermediate, and short term trends.” The fund will be managed by Garrett Waters of Anchor Capital Management. The initial expense ratio is 2.77%. The minimum initial investment is $2,500.

Anchor Tactical Real Estate Fund

Anchor Tactical Real Estate Fund will pursue above average total returns over a full market cycle with lower correlation and reduced risk when compared to traditional real estate indexes. It will be a long/short fund-of-funds investing in ETFs and mutual funds.  They’ll invest in real estate funds based on their analysis of trends, with the prospect of hedging against broad market declines with short ETFs. The fund will be managed by Garrett Waters of Anchor Capital Management. The initial expense ratio is 3.10%. The minimum initial investment is $2,500.

Cornerstone Core Plus Bond

Cornerstone Core Plus Bond will pursue total return, consisting of current income and capital appreciation.  The plan is to farm the work out to 12 people representings several different famous firms. The initial expense ratio is 0.49%. The minimum initial investment is $2,000 but it’s available only “to certain advisory clients of the Adviser.”

Low Beta Tactical 500 Fund

Low Beta Tactical 500 Fund will seek to outperform the S&P 500 with lower volatility than the Index.  The plan is to invest either in S&P 500 ETFs or cash based on “tactical research, analysis and evaluation regarding market trends.” The fund will be managed by Thomas Moring of LGM Capital Management. The initial expense ratio is 1.95%. The minimum initial investment hasn’t been disclosed.

Schwab Target 2060 Fund

Schwab Target 2060 Fund will pursue capital appreciation and income by investing in other Schwab and Laudus Funds.  Zifan Tang, Ph.D., CFA, a Managing Director and Head of Schwab’s Asset Allocation Strategies, is responsible for all the funds in the series. The expense ratios have not yet been released. Ironically, the funds do not carry 12b-1 fees, which are usually the price for getting carried on the Schwab platform. The funds are only open to institutional investors but for those investors the minimum investment is $100.

Schwab Target Date Index Funds

Schwab Target Date Index Fund will pursue “capital appreciation and income consistent with its current asset allocation.” These will be funds-of-ETFs which equity exposure ranging from 95% (2060) to about 40% (2010).  Zifan Tang, Ph.D., CFA, a Managing Director and Head of Schwab’s Asset Allocation Strategies, is responsible for all the funds in the series. The expense ratios have not yet been released. Ironically, the funds do not carry 12b-1 fees, which are usually the price for getting carried on the Schwab platform. The funds are only open to institutional investors but for those investors the minimum investment is $100.

Aston/River Road Independent Value (ARIVX)

By David Snowball

Update: This fund has been liquidated.

This fund was previously profiled in September 2012. You can find that profile here.


The fund seeks to provide long-term total return by investing in common and preferred stocks, convertibles and REITs. The manager attempts to invest in high quality, small- to mid-cap firms (those with market caps between $100 million and $5 billion). He thinks of himself as having an “absolute return” mandate, which means an exceptional degree of risk-consciousness. He’ll pursue the same style of investing as in his previous charges, but has more flexibility than before because this fund does not include the “small cap” name.


Aston Asset Management, LP. It’s an interesting setup. Aston oversees 24 funds with $9.3 billion in assets, and is a subsidiary of the Affiliated Managers Group. River Road Asset Management LLC subadvises six Aston funds; i.e., provides the management teams. River Road, founded in 2005, oversees $6.1 billion and was acquired by AMG in 2014. River Road also manages seven separate account strategies, including the Independent Value strategy used here.


Eric Cinnamond. Mr. Cinnamond is a Vice President and Portfolio Manager of River Road’s independent value investment strategy. Mr. Cinnamond has 23 years of investment industry experience. Mr. Cinnamond managed the Intrepid Small Cap (ICMAX) fund from 2005-2010 and Intrepid’s small cap separate accounts from 1998-2010. He co-managed, with Nola Falcone, Evergreen Small Cap Equity Income from 1996-1998.

Management’s Stake in the Fund

Mr. Cinnamond has invested between $500,000 – $1,000,000 in the fund.

Strategy capacity

Mr. Cinnamond anticipates a soft close at about a billion. The strategy has $450 million in assets, which hot money drove close to a billion during the last market crisis.

Opening date

December 30, 2010.

Minimum investment

$2,000 for regular accounts, $1000 for various sorts of tax-advantaged products (IRAs, Coverdells, UTMAs).

Expense ratio

1.42%, after waivers, on $410 million in assets.


If James Brown is the godfather of soul, then Eric Cinnamond might be thought the godfather of small cap, absolute value investing. He’s been at it since 1996 and he suspects that folks who own lots of small cap stocks today are going to want to sell them to him, for a lot less than they paid, sooner rather than later.

This fund’s first incarnation appeared in 1996, as the Evergreen Small Cap Equity Income fund. Mr. Cinnamond had been hired by First Union, Evergreen’s advisor, as an analyst and soon co-manager of their small cap separate account strategy and fund. The fund grew quickly, from $5 million in ’96 to $350 million in ’98. It earned a five-star designation from Morningstar and was twice recognized by Barron’s as a Top 100 mutual fund.

In 1998, Mr. Cinnamond became engaged to a Floridian, moved south and was hired by Intrepid (located in Jacksonville Beach, Florida) to replicate the Evergreen fund. For the next several years, he built and managed a successful separate accounts portfolio for Intrepid, which eventually aspired to a publicly available fund.

The fund’s second incarnation appeared in 2005, with the launch of Intrepid Small Cap (now called Intrepid Endurance, ICMAX). In his five years with the fund, Mr. Cinnamond built a remarkable record which attracted $700 million in assets and earned a five-star rating from Morningstar and a Lipper Leader for total returns and capital preservation. If you had invested $10,000 at inception, your account would have grown to $17,300 by the time he left. Over that same period, the average small cap value fund lost money.

The fund’s third incarnation appeared on the last day of 2010, with the launch of Aston / River Road Independent Value (ARIVX). While ARIVX is run using the same discipline as its predecessors, Mr. Cinnamond intentionally avoided the “small cap” name. While the new fund will maintain its historic small cap value focus, he wanted to avoid the SEC stricture which would have mandated him to keep 80% of assets in small caps.

Over an extended period, Mr. Cinnamond’s small cap composite (that is, the weighted average of the separately managed accounts under his charge over the past 20 years) has returned 10% per year to his investors. That figure understates his stock picking skills, since it includes the low returns he earned on his often-substantial cash holdings.

The key to Mr. Cinnamond’s performance (which, Morningstar observed, “trounced nearly all equity funds”) is achieved, in his words, “by not making mistakes.” He articulates a strong focus on absolute returns; that is, he’d rather position his portfolio to make some money, steadily, in all markets, rather than having it alternately soar and swoon. There seem to be three elements involved in investing without mistakes:

  • Buy the right firms.
  • At the right price.
  • Move decisively when circumstances demand.

All things being equal, his “right” firms are “steady-Eddy companies.” They’re firms with look for companies with strong cash flows and solid operating histories. Many of the firms in his portfolio are 50 or more years old, often market leaders, more mature firms with lower growth and little debt.

His judgment, as of early 2016, is that virtually any new investments in his universe – which requires both high business quality and low stock prices – would be a mistake. He writes:

As a result of extremely expensive small cap valuations, especially in higher quality small cap stocks, the Independent Value Portfolio maintains its very contrarian positioning. Cash is near record levels, while expensive, high quality small cap holdings have been sold. We expect our unique, but disciplined, positioning to cause the Portfolio to continue to look and perform very differently than the market and its peers.

… we do not believe the current market cycle will continue indefinitely. We feel we are positioned well for the end of the current cycle and the inevitable return to more rational and justifiable equity valuations. As disciplined value investors, we have not strayed from our valuation practices and investment discipline. We continue to require an adequate return for risk assumed on each stock we consider for purchase, and will not invest your (and our) capital simply for the sake of being invested.

He’s at 85% cash currently (late April 2016), but that does not mean he’s some sort of ultra-cautious perma-bear. He has moved decisively to pursue bargains when they arise. “I’m willing to be aggressive in undervalued markets,” he says. For example, his fund went from 0% energy and 20% cash in 2008 to 20% energy and no cash at the market trough in March, 2009. Similarly, his small cap composite moved from 40% cash to 5% in the same period. That quick move let the fund follow an excellent 2008 (when defense was the key) with an excellent 2009 (where he was paid for taking risks). The fund’s 40% return in 2009 beat his index by 20 percentage points for a second consecutive year. As the market began frothy in 2010 (“names you just can’t value are leading the market,” he noted), he began to let cash build. While he found a few pockets of value in 2015 (he surprised himself by buying gold miners, something he’d never done), prices rose so quickly that he needed to sell.

The argument against owning is captured in Cinnamond’s cheery declaration, “I like volatility.” Because he’s unwilling to overpay for a stock, or to expose his shareholders to risk in an overextended market, he sidelines more and more cash which means the fund lags in extended rallies. But when stocks begin cratering, he moves quickly in which means he increases his exposure as the market falls. Buying before the final bottom is, in the short term, painful and might be taken, by some, as a sign that the manager has lost his marbles. Again.

Bottom Line

Mr. Cinnamond’s view, informed by a quarter century of investing and a careful review of history, is that small cap stocks are in a bubble. More particularly, they might be in a historic bubble that exceeds those in 2000 and 2007. Each of those peaks was followed by 40% declines. The fragility of the small cap space is illustrated by the sudden decline in those stocks in the stock half of 2015. In eight months, from their peak in June 2015 to their bottom in February 2016, small cap indexes dropped 22%. Then, in 10 weeks, they shrugged it off, rose 19% and returned to historically high valuations. Investing in small cap stocks can be rational and rewarding. Reaping those rewards requires a manager who is willing to protect you from the market’s worst excesses and your own all-to-human impulses. You might check here if you’re in search of such a manager.

Fund website

Aston/River Road Independent Value

© Mutual Fund Observer, 2016. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.

Centaur Total Return Fund (TILDX)

By David Snowball


The fund seeks “maximum total return” through a combination of capital appreciation and income. The fund invests in undervalued securities, mostly mid- to large-cap dividend paying stocks. The manager has the option of investing in REITs, master limited partnerships, royalty trusts, preferred shares, convertibles, bonds and cash. The manager invests in companies “that it understands well.” The managers also generate income by selling covered calls on some of their stocks. The portfolio currently consists of about 30 holdings, 16 of which are stocks.


Centaur Capital Partners, L.P., headquartered in Southlake, TX, has been the investment advisor for the fund since September 3, 2013. Before that, T2 Partners Management, LP advised the fund with Centaur serving as the sub-advisor. The first “T” of T2 was Whitney Tilson and this fund was named Tilson Dividend Fund. Centaur is a three person shop with about $90 million in AUM. It also advises the Centaur Value Fund LP, a hedge fund.


Zeke Ashton, founder, managing partner, and a portfolio manager of Centaur Capital Partners L.P., has managed the fund since inception. Before founding Centaur in 2002, he spent three years working for The Motley Fool where he developed and produced investing seminars, subscription investing newsletters and stock research reports in addition to writing online investing articles. He graduated from Austin College, a good liberal arts college, in 1995 with degrees in Economics and German.

Management’s Stake in the Fund

Mr. Ashton has somewhere between $500,000 and $1,000,000 invested in the fund. One of the fund’s two trustees has a modest investment in it.

Strategy capacity

That’s dependent on market conditions. Mr. Ashton speculates that he could have quickly and profitably deployed $25 billion in March, 2009. In early 2016, he saw more reason to hold cash in anticipation of a significant market reset. He’s managed a couple hundred million before but has no aspiration to take it to a billion.

Opening date

March 16, 2005

Minimum investment

$1,500 for regular and tax-advantaged accounts, reduced to $1000 for accounts with an automatic investing plan.

Expense ratio

1.95% after waivers on an asset base of $27 million.


You’d think that a fund that had squashed the S&P 500 over the course of the current market cycle, and had done so with vastly less risk, would be swamped with potential investors. Indeed, you’d even hope so. And you’d be disappointed.


Here’s how to read that chart: over the course of the full market cycle that began in October 2007, Centaur has outperformed its peers and the S&P 500 by 2.6 and 1.7 percent annually, respectively. In normal times, it’s about 20% less volatile while in bear market months it’s about 25% less volatile. In the worst-case – the 2007-09 meltdown – it lost 17% less than the S&P and recovered 30 months sooner.

$10,000 invested in October 2007 would have grown to $18,700 in Centaur against $16,300 in Vanguard’s 500 Index Fund.


Centaur Total Return presents itself as an income-oriented fund. The argument for that orientation is simple: income stabilizes returns in bad times and adds to them in good. The manager imagines two sources of income: (1) dividends paid by the companies whose stock they own and (2) fees generated by selling covered calls on portfolio investments. The latter, of late, have been pretty minimal.

The core of the portfolio is a limited number (currently about 16) of high quality stocks. In bad markets, such stocks benefit from the dividend income – which helps support their share price – and from a sort of “flight to quality” effect, where investors prefer (and, to an extent, bid up) steady firms in preference to volatile ones. Almost all of those are domestic firms, though he’s had significant direct foreign exposure when market conditions permit. Mr. Ashton reports becoming “a bit less dogmatic” on valuations over time, but he remains one of the industry’s most disciplined managers.

The manager also sells covered calls on a portion of the portfolio. At base, he’s offering to sell a stock to another investor at a guaranteed price. “If GM hits $40 a share within the next six months, we’ll sell it to you at that price.” Investors buying those options pay a small upfront price, which generates income for the fund. As long as the agreed-to price is approximately the manager’s estimate of fair value, the fund doesn’t lose much upside (since they’d sell anyway) and gains a bit of income. The profitability of that strategy depends on market conditions; in a calm market, the manager might place only 0.5% of his assets in covered calls but, in volatile markets, it might be ten times as much.

Mr. Ashton brings a hedge fund manager’s ethos to this fund. That’s natural since he also runs a hedge fund in parallel to this. Long before he launched Centaur, he became convinced that a good hedge fund manager needs to have “an absolute value mentality,” in part because a fund’s decline hits the manager’s finances personally. The goal is to “avoid significant drawdowns which bring the prospect of catastrophic or permanent capital loss. That made so much sense. I asked myself, what if somebody tried to help the average investor out – took away the moments of deep fear and wild exuberance? They could engineer a relatively easy ride. And so I designed a fund for folks like my parents. Dad’s in his 70s, he can’t live on no-risk bonds but he’d be badly tempted to pull out of his stock investments at the bottom. And so I decided to try to create a home for those people.”

And he’s done precisely that: a big part of his assets are from family and friends, people who know him and whose fates are visible to him almost daily. He’s served them well.

Bottom Line

You’re certain to least want funds like Centaur just when you most need them. As the US market reaches historic highs that might be today. For folks looking to maintain their stock exposure cautiously, and be ready when richer opportunities present themselves, this is an awfully compelling little fund.

Fund website

Centaur Total Return Fund

© Mutual Fund Observer, 2016. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.

Funds in Registration, May 2016

By David Snowball

AMG Multi-Asset Income Fund

AMG Multi-Asset Income Fund will seek a high level of current income. They intend to invest in many sorts of income-producing securities, using five sub-advisers with five different approaches, in order to generate “incrementally more yield” than a portfolio of government securities. That’s nice, except that their risk target is “lower than the S&P 500 Index over the long term.” On face, that’s not a compelling balance. The management teams haven’t been named. The initial expense ratio has not been set, nor has the expense cap that apparently will be in place. The minimum initial investment is $2,000, reduced to $1,000 for various tax-advantaged products.

AMG SouthernSun Global Opportunities Fund

AMG SouthernSun Global Opportunities Fund will seek long-term capital appreciation. The plan is to invest globally in 15-40 small to mid-cap companies. As with their US small cap fund, they’re looking for firms with financial flexibility, good management and niche dominance. The domestic small cap fund has suffered from “the girl with the curl” problem. The fund will be managed by Michael Cook, who also manages the other two SouthernSun funds. The initial expense ratio will be 1.70% and the minimum initial investment is $2,000, reduced to $1,000 for various tax-advantaged products.

Concorde Wealth Management Trust

Concorde Wealth Management Trust will seek total return and preservation of capital. The plan is to invest in all kinds of stuff – stocks, bonds, private placements – that is attractively valued, though the prospectus doesn’t mention how the managers will allocate between asset classes nor whether there are any limits on their discretion. For reasons unclear, they insist on shouting the world FUND over and over in the prospectus. The fund will be managed by Dr. Gary B. Wood, John Stetter, and Gregory B. Wood. The initial expense ratio will be 1.37% and the minimum initial investment is $500.

DoubleLine Ultra Short Bond Fund

DoubleLine Ultra Short Bond Fund will seek current income consistent with limited price volatility. They’ll target securities with a duration under one year and an average credit quality of AA- or higher. The fund will be managed by Bonnie Baha, who famously referred to her boss as “a freakin’ jerk” and still manages four funds for him, and Jeffrey Lee. The initial expense ratio has not been set, nor has the expense cap that apparently will be in place. The minimum initial investment is $2,000, reduced to $500 for various tax-advantaged products.

Toreador Select Fund

Toreador Select Fund will seek long-term capital appreciation. The plan is to deploy “a proprietary stock selection model” (aren’t they all proprietary?) to select 35-60 large cap stocks. The fund will be managed by Paul Blinn and Rafael Resendes of Toreador Research & Trading. The team also managed Toreador Core, a global all-cap fund with a modestly regrettable record since: total returns trail its peers while volatility is modestly higher. The initial expense ratio will be 1.21% and the minimum initial investment is $1,000.

Otter Creek Long Short Opportunity (OTCRX), April 2016

By David Snowball

Objective and strategy

The Otter Creek Long/Short Opportunity Fund seeks long-term capital appreciation. They take long positions in securities they believe to be undervalued and short positions in the overvalued. Their net market exposure will range between (-35%) and 80%. They can place up to 20% in MLPs, 30% in REITs, and 30% in fixed income securities, including junk bonds. They use a limited amount of leverage. The fund is unusually concentrated with about 30 long and 30 short positions.


Otter Creek Advisors. Otter Creek Advisors was formed for the special purpose of managing this mutual fund and giving Messrs. Walling and Winter, the two primary managers, a substantial equity stake in the operation. That arrangement is part of a “succession plan to provide equity ownership to the next generation of portfolio managers: Mike Winter and Tyler Walling.” Otter Creek Advisers has about $280 million in assets under management.


R. Keith Long, Tyler Walling and Michael Winter. Mr. Long has a long and distinguished career in the financial services industry, dating back to 1973. Mr. Walling joins Otter Creek in 2011 after a five-year stint as an equity analyst for Goldman Sachs. Mr. Winter joined Otter Creek in 2007. Prior to Otter Creek, he worked for a long/short equity hedge fund and, before that, for Putnam Investment Management.

Strategy capacity and closure

Somewhere “north of a billion” the team would consider a soft close. They were pretty emphatic that they didn’t want to become an asset sponge and that they were putting an enormous amount of care into attracting compatible investors.

Management’s stake in the fund

Mr. Long has invested more than $1,000,000 in the fund, Mr. Winter and Mr. Walling each have $500,000-$1,000,000. Those are substantial commitments for 30-something managers to make. Sadly, as of December 30, 2015, no member of the fund’s board of trustees had chosen to invest in it.

Opening date

December 30, 2013.

Minimum investment

$2,500, reduced to $1,000 for accounts established with an automatic investment plan.

Expense ratio

2.57% for the Investor class, on assets of $270 million (as of March 2016). The fund caps its fees at 1.95% but has to account for acquired fund fees and other expenses related to shorting. Those amount to 0.92%.


In its first two-plus years of operation, Otter Creek Opportunity has been a very, very good long/short fund. Three observations lie behind that judgment.

First, it has made much more money than its generally sad sack peer group. From inception from the end of February, 2016, OTCRX posted annual returns of 10.2%. Its average peer lost 1% annually in the same period. During that stretch, it bested the S&P 500 in 15 of 25 calendar months and beat its peers in 17 of 25 months.

Second, it has provided exceptional downside protection. It outperformed the S&P 500 in 10 of the 11 months in which the index declined and consistently stayed in the range of tiny losses to modest gains in periods when the S&P 500 was down 3% or more.


It also outperformed its long/short peers in nine of the 11 months in which the S&P 500 dropped. Since launch, the fund’s downside deviation has been only 40% of its peers and its maximum drawdown has been barely one-fourth as great as theirs.

Third, it has negligible correlation to the market. To date, its correlation to the S&P 500 is 0.05. In practical terms, that means that there’s no evidence that a decline in the stock market will be consistently associated with a decline in Otter Creek.

What accounts for their very distinctive performance?

At base, the managers believe it’s because they focus. They focus, for example, on picking exceptional stocks. They are Graham and Dodd sorts of investors, looking for sustainably high return-on-equity, growing dividends, limited financial leverage and dominant market positions.  They use a “forensic accounting approach to financial statement analysis” to help identify not only attractive firms but also the places within the firm’s capital structure that holds the best opportunities. They tend to construct a focused portfolio around 30 or so long and short positions. On the flip side, they short firms that use aggressive accounting, weak balance sheets, wretched leadership and low quality earnings.

Which is to say, yes, they were shorting Valeant in 2015.

Their top ten long and short positions, taken together, account for about 70% of the portfolio. They’re both more concentrated and more patient, measured by turnover, than their peers.

They also focus on the portfolio, rather than just on individual names for the portfolio. They’ve created a series of rules, drawing on their prior work with their firm’s hedge fund, to limit mishaps in their short portfolio. If, for example, a short position begins to get “crowded,” that is, if other investors start shorting the same names they do, they’ll reduce their position size to avoid the risk of a short squeeze. Likewise they substantially reduce or eliminate any short that moves against the portfolio by 25% or more over the course of six months.

Bottom Line

Messrs. Walling and Winter bear watching. They’ve got a healthy attitude and have done a lot right in a short period. As of mid-February, they had a vast performance advantage over the S&P 500 and their peers. Even after the S&P’s furious six-week rally, they are still ahead – and vastly ahead if you take the effects of volatility into account. It’s clear that they see this fund as a long-term project, they’re excited by it and they’re looking for the right kind of investors to join in with them. If you’re looking to partner with investors who don’t like volatility and detest losing their shareholders money, you might reasonably add OTCRX to your short-list of funds to investigate.

Fund website

Otter Creek Long/Short

© Mutual Fund Observer, 2016. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.

AQR Equity Market Neutral (QMNIX), AQR Long-Short Equity (QLEIX), April 2016

By Samuel Lee

Objective and strategy

AQR offers its absolute return equity strategy in two mutual fund flavors: AQR Equity Market Neutral and AQR Long-Short Equity. Equity Market Neutral, or EMN, goes long global stocks that score well on proprietary composite measures and shorts global stocks that score poorly. AQR groups these measures into six broad “themes”:

  • Value is the strategy of buying stocks that are cheap on fundamental measures such as book value, earnings, dividends and cash flow.
  • Momentum is the strategy of buying stocks with strong recent relative performance according to measures such as price returns, abnormal returns after earnings announcements (earnings surprises), abnormal risk-adjusted returns (residual momentum), and returns of economically linked firms (indirect momentum).
  • Earnings quality is the strategy of buying stocks with reported earnings that are more reliable indicators of future earnings, according to measures such as accruals.
  • Stability is the strategy of buying stocks with defensive characteristics, such as low volatility, low beta, and low leverage.
  • Investor sentiment is the strategy of buying stocks with wide agreement by “smart money”, according to measures such as low short interest as a percentage of market capitalization and high commonality of holdings by elite hedge funds.
  • Management signaling is the strategy of buying stocks where management engages in actions that indicate financial strength or cheapness, such as debt retirement and share repurchases.

Stocks are ranked by these measures within each industry. The stocks with the highest composite scores are bought and the stocks with the lowest composite scores are shorted. Industry neutrality improves risk-adjusted returns on a wide variety of stock selection signals, perhaps because it removes persistent industry bets.

In addition, the strategy engages in country-industry pairs selection using the same six sets of signals and industry selection using only value and momentum. Because AQR dislikes concentrated bets, the country-industry pairs and industry selection strategies are allotted a smaller portion of the strategy’s overall risk than the stock-selection strategy.

The balance of the long and short sleeves is managed to produce returns uncorrelated with the MSCI World Index, a market-weighted benchmark of developed market stocks. This does not mean each sleeve has the same notional size. The long sleeve tends to exhibit lower volatility for each unit of notional exposure than the short sleeve. In order to balance them, the strategy must own more dollars of the long sleeve, creating the impression that it has net long equity exposure. The gross exposure for each sleeve has a floor of 100% NAV and a cap of 250% NAV, meaning the strategy’s gross exposure can range from 2x to 5x the net asset value of the fund. As of February end, AQR Equity Market Neutral had 190% notional long exposure and 173% notional short exposure, for a total gross notional exposure of 363%.

AQR takes steps to mitigate the risks of leverage. First, the strategy is well diversified, with over 1700 stock positions, most of them under 0.5% notional exposure and the biggest at a little under 1.7%. Single-stock concentration goes against every bone in AQR. Like most quant investors, AQR goes for seconds and thirds when it comes to the “free lunch” of diversification.

Second, AQR has a 6% annualized volatility target for the strategy, which means AQR will likely reduce gross leverage if its positions behave erratically. This is a trend-following strategy as periods of high volatility usually coincide with bad returns. For reference, the volatility target is about a third of the historical volatility of the U.S. stock market and roughly the same as the historical volatility of the Barclays Aggregate Bond Index (though in recent years the bond index’s volatility has dropped to about 3%).

Finally, the strategy applies what AQR calls a “drawdown control system”, a methodology for cutting risk when the strategy loses money and adding it back as it recoups its losses (or enough time lapses since a drawdown). The drawdown control system can cut the fund’s target volatility by up to half in the worst circumstances. AQR’s use of volatility targeting and drawdown control are common practices among quantitative investors. As a group these investors tend to cut and add risks at the same time. It is unclear whether they are influential enough to alter the nature of markets and perhaps render these methods obsolete or even harmful (think of portfolio insurance and its contribution to Black Monday in 1987, when the Dow Jones Industrial Average fell 22.6%). My guess is quantitative investors aren’t yet big enough because many more investors are counter-cyclical rebalancers over the short-run, particularly institutions. This is speculation, of course. The market is a big and wild herd that will sometimes stampede in a direction it had never gone before—a lesson AQR itself learned at least twice: during the madness of the dot-com bubble and during the great quant meltdown of 2007.

Long-Short Equity, or LSE, takes the EMN strategy (though they’re not exact clones if we’re to judge by their holdings and position sizes) and overlays a tactical equity strategy that targets an average 50% exposure to the MSCI World Index, with the ability to adjust its exposure by +/- 20% based largely on valuation and momentum. The equity exposure is obtained through futures.

In a back-test of a simplified version of the strategy, the market-timing component did not add much to the strategy’s performance while it worsened the drawdown during the financial crisis.


AQR Capital Management, LLC, was founded in 1998 by a team of ex-Goldman Sachs quant investors led by Clifford S. Asness, David G. Kabiller, Robert J. Krail, and John M. Liew. (Krail is no longer with the firm.) AQR stands for Applied Quantitative Research. Asness, Krail and Liew met each other at the University of Chicago’s finance PhD program. The firm’s bread and butter has long been trading value and momentum together, an idea Asness studied in his dissertation under Eugene Fama, father of modern finance and one of the co-formulators of the efficient market hypothesis.

AQR is mostly owned by AQR Group LP, which in turn is owned by employees of the firm. AMG, a publicly traded asset manager, has owned a stake in AQR since 2004 and in 2014 it increased it, but remains a minority shareholder (terms of both transactions have not been disclosed). AMG largely leaves its investees to run themselves, so I am not concerned about the firm pushing AQR to do stupid things to meet or beat a quarterly target. Though the implosion of Third Avenue, an investee, may spur AMG to more actively monitor its portfolio companies, I doubt Asness and his partners gave AMG much power to meddle in AQR’s affairs.

AQR’s mutual fund business has grown rapidly in size and sophistication since 2009, when it launched arbitrage and equity momentum funds. It competes with DFA for the mantle of academic “thought leadership” among advisors, its main clients. This has put Asness in the awkward position of competing with his former mentor Fama, who is a significant shareholder in DFA and the chief intellectual architect of its approach. Like DFA, AQR emphasizes the primacy of factors in managing portfolios.

When AQR started up, it was hot. It had one of the biggest launches of any hedge-fund up to that point. Then the dot-com bubble inflated. The widening gap in valuations between value and growth stocks almost sunk AQR. According to Asness, had the bubble lasted six more months, he would have been out of business. When the bubble burst, the firm’s returns soared and so did its assets. The good times rolled on and the firm was on the verge of an IPO by late 2007. According to the New York Post, AQR had to shelve it as the subprime crisis began roiling the markets. The financial crisis shredded its returns, with its flagship Absolute Return fund falling more than 50 percent from the start of 2007 to the end of 2008. Firm-wide assets from peak-to-trough went from $39.1 billion to $17.2 billion. The good times are back: As of December-end, AQR had $142.2 billion in net assets under management.

The two near-death experiences have instilled in AQR a fear of concentrated business risks. In 2009, AQR began to diversify away from its flighty institutional clientele by launching mutual funds to entice stickier retail investors. The firm has also launched new strategies at a steady clip, including managed futures, risk parity, and global macro.

AQR has a strong academic bent. Its leadership is sprinkled with economics and finance PhDs from top universities, particularly the University of Chicago. The firm has poached academics with strong publishing records, including Andrea Frazzini, Lasse Pedersen, and Tobias Moskowitz. Its researchers and leaders are still active in publishing papers.

The firm’s principals are critical of hedge funds that charge high fees on strategies that are largely replicable. AQR’s business model is to offer up simplified quant versions of these strategies and charge relatively low fees.


Both the Equity Market Neutral and Long-Short Equity strategies are run by Jacques A. Friedman, Andrea Frazzini, and Michele L. Aghassi. Ronen Israel helps manage EMN. Hoon Kim helps manage LSE. All five are principals, or partners, in the firm.

Friedman heads AQR’s Global Stock Selection team. Prior to joining AQR at its inception in 1998, he developed quantitative stock selection strategies at Goldman Sachs. He is the principal portfolio manager and supervises Frazzini, Aghassi and Kim.

Israel heads AQR’s Global Alternative Premia Group. Prior to joining AQR in 1999, he was a senior analyst at Quantitative Financial Strategies, Inc.

Frazzini researches global stock-selection strategies. Prior to joining AQR in 2008 he was a star finance professor at the University of Chicago.

Aghassi is co-head of research of AQR’s Global Stock Selection team. Prior to joining AQR in 2005, she obtained her PhD in operations research at MIT.

Kim is the head of equity portfolio management in AQR’s Global Stock Selection team. Prior to joining AQR in 2005, he was head of quantitative equity research at Mellon Capital Management.

Israel and Friedman have master’s degrees in mathematics. Frazzini, Aghassi and Kim have PhDs.

Strategy capacity and closure

The EMN and LSE funds together have over $1.6 billion in assets. However, AQR runs hedge funds, institutional separate accounts, and foreign funds, and re-uses the same signals in different formats, such as long-only funds. The effective dollars dedicated to the signals use by the funds are almost certainly much higher than reported by the aggregate net asset values of the mutual funds.

Fortunately, AQR has a history of closing funds and ensuring its assets don’t overwhelm the capacity of its strategies. When the firm launched in 1998, it could have started with $2 billion but chose to manage only half that, according to founding partner David Kabiller. Of its mutual funds, AQR has already closed its Multi-Strategy Alternative, Diversified Arbitrage and Risk Parity mutual funds. Soon after I wrote about AQR Style Premia Alternative QSPIX and AQR Style Premia LV QSLIX in the September 2015 edition of MFO, AQR announced a soft close of the funds. It went into effect on March 31, 2016. AQR will meet additional demand by launching funds that are tweaked to have more capacity. 

Management’s stake in the funds

As of December 31, 2014, the funds’ managers had relatively low investments in the mutual funds.

  • Friedman had $50,001 to $100,000 in the EMN fund and $100,001 to $500,000 in the LSE fund.
  • Israel had no investment in the EMN fund.
  • Frazzini had $10,001 to $50,000 in both funds.
  • Aghassi had no investments in either fund.
  • Kim had no investment in the LSE fund.

The low levels of investment should not be held against the managers. It is cheaper and more tax efficient for them to invest in the strategies through AQR’s hedge funds. They also have a direct interest in the success of the firm. Unlike many other hedge funds, AQR does not compensate partners and employees largely based on the profits attributable to them. The team-based nature of AQR’s quantitative process means profits cannot be cleanly attributable to a given employee. Moreover, there is a huge element of luck in the performance of a given strategy and AQR rightly does not want to overwhelmingly tie compensation to it. All the portfolio managers of the funds are partners and so earn a payout based on the firm’s earnings and their relative ownership stakes. AQR grants ownership stakes based on “cumulative research, leadership and other contributions.”

I expect that over time the managers’ stakes will rise as a matter of window-dressing for consultants who take a check-the-box approach to due diligence (most of them). There is evidence that window-dressing has occurred: Some of AQR’s principals own both the low- and high-volatility versions of the same strategy, which is strange because it is costlier to own the low-volatility version per unit of exposure.

Opening date

AQR Long-Short Equity started on July 16, 2013. AQR Equity Market Neutral started on October 7, 2014. AQR has been running long-short stock-selection strategies since its 1998 founding.

Minimum investment

$1 million for the N shares, $5 million for the I shares. The minimums are waived at certain brokerages. Fidelity, for example, allows investments as small as $2500 in IRAs. Fee-only financial advisors have no investment minimums.

Expense ratio

1.55% for the N shares, 1.3% for the I shares. The fees are high compared to long-only funds, but low for long-short mutual funds. Note that EMN and LSE both charge the same fee, but the LSE fund throws on equity market exposure and tactical timing for free.


Since its October 2014 inception, AQR Equity Market Neutral Fund I QMNIX has returned 18.6% annualized with a standard deviation of 7.0%, for a Sharpe ratio of 2.66. Since its July 2013 inception, AQR Long-Short Equity Fund I QLEIX has returned 14.4% above its benchmark (a 50-50 blend of the MSCI World Index and cash) with a standard deviation of 5.8%, for a Sharpe ratio of 2.46. Almost all of the abnormal returns were driven by the market-neutral equity stock selection sleeve; AQR’s tactical market timing in the LSE strategy contributed zilch to the fund’s returns from inception to the end of 2015.

These are not sustainable numbers. A more reasonable, conservative long-run Sharpe ratio is 0.5. Translated to a raw return, that’s 3% above cash for a market-neutral strategy that runs at a 6% volatility.

While AQR’s absolute return global stock selection strategy has done well, its long-only funds have not. Since the LSE fund launched in 2013, its active returns (that is, returns above its benchmark) have far outstripped the active returns of the AQR Multi-Style funds. In the chart below I plotted the cumulative active returns of AQR Long-Short Equity (which has a longer live track record than AQR Equity Market Neutral) against a sum of the active returns of AQR Large Cap Multi-Style I QCELX and AQR International Multi-Style I QICLX. The long-only funds have stagnated, while the long-short fund has consistently made lots of money. While I doubt this divergence will remain big and persistent, I’m confident that it’s well worth paying up for AQR’s long-short strategy. 


Bottom line

AQR’s long-short global stock-selection strategy is well worth the money and a better deal than its long-only stock funds.

Fund Website

AQR Equity Market Neutral

AQR Long-Short Equity

SamLeeSam Lee and Severian Asset Management

Sam is the founder of Severian Asset Management, Chicago. He is also former Morningstar analyst and editor of their ETF Investor newsletter. Sam has been celebrated as one of the country’s best financial writers (Morgan Housel: “Really smart takes on ETFs, with an occasional killer piece about general investment wisdom”) and as Morningstar’s best analyst and one of their best writers (John Coumarianos: “ Lee has written two excellent pieces [in the span of a month], and his showing himself to be Morningstar’s finest analyst”). He has been quoted by The Wall Street Journal, Financial Times, Financial Advisor, MarketWatch, Barron’s, and other financial publications.  

Severian works with high net-worth partners, but very selectively. “We are organized to minimize conflicts of interest; our only business is providing investment advice and our only source of income is our client fees. We deal with a select clientele we like and admire. Because of our unusual mode of operation, we work hard to figure out whether a potential client, like you, is a mutual fit. The adviser-client relationship we want demands a high level of mutual admiration and trust. We would never want to go into business with someone just for his money, just as we would never marry someone for money—the heartache isn’t worth it.” Sam works from an understanding of his partners’ needs to craft a series of recommendations that might range from the need for better cybersecurity or lower-rate credit cards to portfolio reconstruction. 

© Mutual Fund Observer, 2016. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.

Intrepid Endurance (ICMAX), April 2016

By David Snowball

Objective and strategy

The fund pursues long-term capital appreciation by investing in high quality small cap equities, which they’ll only buy and hold when they’re undervalued. “Small stocks” are stocks comparable in size to those in common indexes like the Russell 2000; currently, that means a maximum cap of $6.5 billion. The fund can hold domestic and international common stocks, preferred stocks, convertible preferred stocks, warrants, and options. They typically hold 15-50 securities. High quality businesses, typically, are “internally financed companies generating cash in excess of their business needs, with predictable revenue streams, and in industries with high barriers to entry.” The managers calculate the intrinsic value of a lot of small companies, though very few are currently selling at an acceptable discount to those values. As a result, the fund has about two-thirds of its portfolio in cash (as of March 2016). When opportunities present themselves, though, the managers deploy their cash quickly; in 2011, the fund moved from 40% cash down to 20% in the space of two weeks.  


Intrepid Capital Management. Intrepid was founded in 1994 by the father and son team of Forrest and Mark Travis. It’s headquartered in Jacksonville, Florida; the location is part of a conscious strategy to distance themselves from Wall Street’s groupthink. Rather distinctively, their self-description stresses the importance of the fact that their managers have rich, active lives (“some of us surf … others spend weekends at kids’ football games”) outside of work. That focus “makes us a better company and better managers.” They are responsible for “approximately $800 million for individuals and institutional investors through a combination of separately managed accounts, no-load mutual funds, and a long/short hedge fund.” They advise six mutual funds.


Jayme Wiggins, Mark Travis and Greg Estes. Mr. Wiggins, whose first name is pronounced “Jay Mee,” is the lead manager and the guy responsible for the fund’s day-to-day operations. His career is just a bit complex: right after college, he joined Intrepid in 2002 where he worked as an analyst on the strategy before it even became a fund. In 2005 Jayme took over the high-yield bond strategy which, in 2007, was embodied in the new Intrepid Income Fund (ICMUX). In 2008, he left to pursue his MBA at Columbia. While he was away, Endurance’s lead manager Eric Cinnamond left to join River Road Asset Management. Upon his return in September 2010, Jayme became lead manager here. Mr. Travis is one of Intrepid’s founders and the lead manager on Intrepid Capital (ICMBX). Mr. Estes, who joined the firm in 2000, is lead manager of Intrepid Disciplined Value (ICMCX). Each member of the team contributes to each of the firm’s other funds.

Strategy capacity and closure

The managers would likely begin discussions about the fund’s assets when it approaches the $1 billion level, but there’s no firm trigger level. What they learned from the past was that too great a fraction of the fund’s assets represented “hot money,” people who got excited about the fund’s returns without ever becoming educated about the fund’s distinctive strategy. When the short-term returns didn’t thrill them, they fled. The managers are engaged now in discussions about how to attract more people who “get it.” Their assessment of the type of fund flows, as much as their amount, will influence their judgment of how and when to act.

Management’s stake in the fund

All of the fund’s managers have personal investments in it. Messrs. Travis and Wiggins have between $100,000 and $500,000 while Mr. Estes has between $10,000 and $50,000. The fund’s three independent directors also all have investments in the fund; it’s the only Intrepid fund where every director has a personal stake.

Opening date

The underlying small cap strategy launched in October, 1998; the mutual fund was opened on October 3, 2005.

Minimum investment

$2,500 for Investor shares, $250,000 for Institutional (ICMZX) shares.

Expense ratio

1.40% on assets of approximately $250 million (as of 3/30/16).


Start with two investing premises that seem uncontroversial:

  1. You should not buy businesses that you’ll regret owning. At base, you wouldn’t want to own a mismanaged, debt-ridden firm in a dying industry.
  2. You should not pay prices that you’ll regret paying. If a company is making a million dollars a year, no matter how attractive it is, it would be unwise to pay $100 million for it.

If those strike you as sensible premises, then two conclusions flow from them:

  1. You should not buy funds that invest in businesses regardless of their quality or price. Don’t buy trash, don’t pay ridiculous amounts even for quality goods.
  2. You should buy funds that act responsibly in allocating money based on the availability of quality businesses at low prices. Identify high quality goods that you’d like to own, but keep your money in your wallet until they’re on a reasonable sale.

The average investor, individual and professional, consistently disregards those two principles. Cap-weighted index funds, by their very nature, are designed to throw your money at whatever’s been working recently, regardless of price or quality. If Stock A has doubled in value, its weighting in the index doubles and the amount of money subsequently devoted to it by index investors doubles. Conversely, if Stock B halves in value, its weighting is cut in half and so is the money devoted to it by index funds.

Most professional investors, scared to death of losing their jobs because they underperformed an index, position their “actively managed” funds as close to their index as they think they can get away with. Both the indexes and the closet indexers are playing a dangerous game.

How dangerous? The folks at Intrepid offer this breakdown of some of the hot stocks in the S&P 500:

Four S&P tech stocks—Facebook, Amazon, Netflix, and Google (the “FANGs”)—accounted for $450 billion of growth in market cap in 2015, while the 496 other stocks in the S&P collectively lost $938 billion in capitalization. Amazon’s market capitalization is $317 billion, which is bigger than the combined market values of Walmart, Target, and Costco. These three old economy retailers reported trailing twelve month GAAP net income of nearly $17 billion, while Amazon’s net income was $328 million.

As of late March, 2016, Amazon trades at 474 times earnings. The other FANG stocks sell for multiples of 77, 330 and 32. Why are people buying such crazy expensive stocks? Because everyone else is buying them.

That’s not going to end well.

The situation among small cap stocks is worse. As of April 1, 2016, the aggregate price/earnings ratio for stocks in the small cap Russell 2000 index is “nil.” It means, taken as a whole, those 2000 stocks had no earnings over the past 12 months. A year ago, the p/e was 68.4. In late 2015, the p/e ratios for the pharma, biotech, software, internet and energy sectors of the Russell 2000 were incalculable because those sectors – four of five are very popular sectors – have negative earnings.

“Small cap valuations,” Mr. Wiggins notes, “are pretty obscene. In historical terms, valuations are in the upper tier of lunacy. When that corrects, it’s going to get really bad for everybody and small caps are going to be ground zero.”

At the moment, just 50 of 2050 active U.S. equity mutual funds are holding significant cash (that is, 20% or more of total assets). Only nine small cap funds are holding out. That includes Intrepid Endurance whose portfolio is 67% cash.

Endurance looks for 30-40 high-quality companies, typically small cap names, whose prices are low enough to create a reasonable margin of safety. Mr. Wiggins is not willing to lower his standards – for example, he doesn’t want to buy debt-ridden companies just because they’re dirt cheap – just for the sake of buying something. You’ll see the challenge he faces as you consider the Observer’s diagram of the market’s current state and Endurance’s place in it.


It wasn’t always that way. By his standards, “that small cap market was really cheap in ‘09 to fairly-priced in 2011 but since then it’s just become ridiculously expensive.”

For now, Mr. Wiggins is doing what he needs to do to protect his investors in the short term and enrich them in the longer term. He’s got 12 securities in the portfolio, in addition to the large cash reserve. He’s been looking further afield than usual because he’d prefer being invested to the alternative. Among his recent purchases are the common stock of Corus Entertainment, a small Canadian firm that’s Canada’s largest owner of women’s and children’s television networks, and convertible shares in EZcorp, an oddly-structured (hence mispriced) pawn shop operator in the US and Mexico.

While you might be skeptical of a fund that’s holding so much cash, it’s indisputable that Intrepid Endurance has been the single best steward of its shareholders’ money over the full market cycle that began in the fall of 2007. We track three sophisticated measures of a fund’s risk-return tradeoff: its Sharpe ratio, Sortino ratio and Martin ratio.

Endurance has the highest score on all three risk-return ratios among all small cap funds – domestic, global, and international, value, core and growth.  

We track short-term pain by looking at a fund’s maximum drawdown, its Ulcer index which measures the depth and duration of a drawdown, its standard deviation and downside deviation.

Endurance has the best or second best record, among all small cap funds, on all of those risk measures. It also has the best performance during bear market months.

And it has substantially outperformed its peers. Over the full cycle, Endurance has returned 3.6% more annually than the average small-value fund. Morningstar’s Katie Reichart, writing in December 2010, reported that “the fund’s annualized 12% gain during [the past five years] trounced nearly all equity funds, thanks to the fund’s stellar relative performance during the market downturn.”

Bottom Line

Endurance is not a fund for the impatient or impetuous. It’s not a fund for folks who love the thrill of a rushing, roaring bull market. It is a fund for people who know their limits, control their greed and ask questions like “if I wanted to find a fund that I could trust to handle the next seven to ten years while I’m trying to enjoy my life, which would it be?” Indeed, if your preferred holding period for a fund is measured in weeks or months, the Intrepid folks would suggest you go find some nice ETF to speculate with. If you’re looking for a way to get ahead of the inevitable crash and profit from the following rebound, you owe it to yourself to spend some time reading Mr. Wiggins’ essays and doing your due diligence on his fund.

Fund website

Intrepid Endurance Fund

© Mutual Fund Observer, 2016. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.

Funds in Registration, April 2016

By David Snowball

Boyd Watterson Short Duration Enhanced Income Fund

Boyd Watterson Short Duration Enhanced Income Fund will seek income, capital preservation and total return, in that order. The plan is to invest tactically in a wide variety of security types including junk bonds, bank loans, convertibles, preferred shares, CDOs and so on. They’ve got a bunch of proprietary strategies for sector, industry and tactical allocations. The fund will be managed by a team from Boyd Watterson Asset Management. The opening expense ratio has not been disclosed and the minimum initial investment is $5,000, reduced to $2,500 for various tax-advantaged accounts.

Moerus Worldwide Value Fund

Moerus Worldwide Value Fund will seek capital appreciation. The plan is to invest in a global portfolio of 25-40 undervalued stocks. Candidate companies would have solid balance sheets, high quality business models and shareholder-friendly management teams. In addition, they should have the capacity to thrive in “difficult periods” and “market downturns.” The fund will be managed by Amit Wadhwaney, formerly lead manager of Third Avenue International Value. He and two other former Third Avenue employees launched Moerus Capital in December 2015. And no, I have no idea of what a “moerus” is. The opening expense ratio is 1.65% and the minimum initial investment is $2,500.

Northern Active M U.S. Equity Fund

Northern Active M U.S. Equity Fund  will seek long-term capital appreciation through a diversified portfolio of primarily U.S. equity securities. Any income generation is purely incidental. It will be a multi-manager fund, so I’m guessing that explains the mysterious “M” in the name. The fund will be managed by Delaware Investments, Granite Investment Partners, The London Company of Virginia, and Polen Capital Management. The opening expense ratio is 0.67% and the minimum initial investment is $2,500, reduced to $500 for various tax-advantaged accounts and $250 for funds set up with an AIP.

Sit ESG Growth Fund

Sit ESG Growth Fund will seek long-term capital appreciation. The plan is to invest in fundamentally attractive businesses which also have “strong environmental, social and corporate governance (ESG) practices at the time of purchase.” The fund will be managed by Roger Sit and a team from SIT Associates. The opening expense ratio is 1.50% and the minimum initial investment is $5,000.

SPDR® SSGA U.S. Sector Rotation ETF

SPDR SSGA U.S. Sector Rotation ETF will seek a provide capital appreciation. The plan is to invest, using a tactical sector allocation strategy, in sector ETFs. They determine the attractiveness of sectors monthly, so you might reasonably expect a high-turnover strategy. The fund will be managed by John Gulino, Lorne Johnson and Michael Narkiewicz of the Investment Solutions Group. The opening expense ratio has not been disclosed and, being an ETF, there’s no regular investment minimum.  

Vest Armor S&P 500® Fund

Vest Armor S&P 500® Fund will track, before expenses, the performance of the CBOE S&P 500 Buffer Protect Index. These folks are actually launching about 14 related funds simultaneously. The underlying idea is that they can use options to tightly control the range of a fund’s gains or losses.  In a rising market, they’ll profit up to a preset cap. In a modestly declining market, they’ll keep returns at zero. In a sharply declining market, they’ll lose 10% less – that is, 1000 basis points less – that the S&P 500. Twelve of the funds are denominated by month: the January fund sets its 12-month return parameters at one level, the February fund at another, the March fund at a third and so on. The fund will be managed by Karan Sood and Johnathan Hale of Vest Financial. The opening expense ratio is 1.50% and the minimum initial investment is $1,000.