Monthly Archives: September 2011

September 1, 2011

By David Snowball

Dear friends,

Almost all of the poems about the end of summer and beginning of fall are sad, wistful things.  They’re full of regrets about the end of the season of growth and crammed with metaphors for decline, decay, death and despair.

It’s clear that poets don’t have investment portfolios.

The fact that benchmarks such as the Dow Jones Industrial average and Vanguard Total Bond Market are both showing gains for the year masks the trauma that has led investors to pull money out of long-term funds for six consecutive weeks.  Whether having the greatest outflows since the market bottom in March 2009 is a good thing remains to be seen.

Roller coasters are funny things.  They’re designed to scare the daylights out of you, and then deposit you back exactly where you started.  It might be a sign of age (or, less likely, wisdom) that I’d really prefer a winding garden path or moving walkway to the thrills now on offer.

The Latest Endangered Species: Funds for Small Investors

Beginning in the mid-1990s, I maintained “The List of Funds for Small Investors” at the old Brill/Mutual Funds Interactive website.  I screened for no-load funds with minimums of $500 or less and for no-load funds that waived their investment minimums for investors who were willing to start small but invest regularly.  That commitment was made through an Automatic Investing Plan, or AIP.

At the time, the greatest challenge was dealing with the sheer mass of such funds (600 in all) and trying to identify the couple dozen that were best suited to new investors trying to build a solid foundation.

Over the years, almost all of those funds ceased to be “funds for small investors.”  Some closed and a fair number added sales loads but the great majority simply raised their investment minimums.  In the end, only one major firm, T. Rowe Price, persevered in maintaining that option.

And now they’re done with it.

Effective on August 1, Price eliminated several policies which were particularly friendly to small investors.  The waiver of the minimum investment for accounts with an Automatic Asset Builder (their name for the AIP) has been eliminated. Rather than requiring a $50 minimum and $50/month thereafter, AAB accounts now require $2500 minimum and $100/thereafter.

The minimum subsequent investment on retail accounts was raised from $50 to $100.

The small account fee has been raised to $20 per account under $10,000. The fee will be assessed in September. You can dodge the fee by signing up for electronic document delivery.

Price changed the policies in response to poor behavior on the part of investors. Too many investors started with $50, built the account to $300 and then turned off the asset builder. Price then had custody of a bunch of orphaned accounts which were generating $3/year to cover management and administrative expenses.  It’s not clear how many such accounts exist. Bill Benintende, one of Price’s public relations specialists, explains “that’s considered proprietary information so it isn’t something we’d discuss publicly.”  This is the same problem that long-ago forced a bunch of firms to raise their investment minimums from $250- 500 to $2500.

Two groups escaped the requirement for larger subsequent investments.  Mr. Benintende says that 529 college savings plans remain at $50 and individuals who already have operating AAB accounts with $50 investments are grandfathered-in unless they make a change (for example, switching funds or even the day of the month on which an investment occurs).

That’s a real loss, even if a self-inflicted one, for small investors.  Nonetheless, there remain about 130 funds accessible to folks with modest budgets and the willingness to make a serious commitment to improving their finances.  By my best reading, there are thirteen smaller fund families and a half dozen individual funds still taking the risk of getting stiffed by undisciplined investors.  The families willing to waive their normal investment minimums are:

Family AIP minimum Notes
Ariel $50 Four value-oriented, low turnover funds with the prospect of a fifth (international) fund in the future.
Artisan $50 Eleven uniformly great, risk-conscious equity funds.  Artisan tends to close their funds early and a number are currently shuttered.
Aston  funds $50 A relatively new family, Aston has 26 funds covering both portfolio cores and a bunch of interesting niches.  They adopted some venerable older funds and hired institutional managers to sub-advise the others.
Azzad $50 Two socially-responsible funds, one midcap and one (newer) small cap
Berwyn $0 Three funds, most famously Berwyn Income (BERIX), all above average, run by the small team.
Gabelli/GAMCO $0 On AAA shares, anyway.  Gabelli’s famous, he knows it and he overcharges.  That said, these are really solid funds.
Heartland $0 Four value-oriented small to mid-cap funds, from a scandal-touched firm.  Solid to really good.
Homestead $0 Seven funds (stock, bond, international), solid to really good performance, very fair expenses.
Icon $100 17 funds whose “I” or “S” class shares are no-load.  These are sector or sector-rotation funds.
James $50 Four very solid funds, the most notable of which is James Balanced: Golden Rainbow (GLRBX), a quant-driven fund that keeps a smallish slice in stocks
Manning & Napier $25 The best fund company that you’ve never heard of.  Fourteen diverse funds, all managed by the same team.
Parnassus $50 Six socially-responsible funds, all but the flagship Parnassus Fund (PARNX) currently earn four or five stars from Morningstar. I’m particularly intrigued by Parnassus Workplace (PARWX) which likes to invest in firms that treat their staff decently.
USAA $50 USAA primarily provides financial services for members of the U.S. military and their families.  Their funds are available to anyone but you need to join USAA (it’s free) in order to learn anything about them.  That said, 26 funds, so quite good.

There are, in addition, a number of individual funds with minimums reduced or waived for folks willing to commit to an automatic investment.  Those include Barrett  Opportunity (SAOPX), Cullen High Dividend Equity (CHDEX), Giordano (GIORX), Primary Trend (PTFDX), Sector Rotation (NAVFX), and Stonebridge Small Cap Growth (SBAGX).

On a related note: Fidelity would like a little extra next year

Fidelity will begin charging an “annual index fund fee” of $10.00 per fund position to offset shareholder service costs if your fund balance falls below $10,000, effective December 2011.  They’re using the same logic: small accounts don’t generate enough revenue to cover their maintenance costs.

The Quiet Comeback of Artisan Small Cap (ARTSX)

The second fund in which I ever invested (AIM Constellation was the first) was Artisan Small Cap (ARTSX). Carlene Murphy Ziegler had been a star manager at Stein, Roe and at Strong.  With the support of her husband, Andrew, she left to start her own fund company and to launch her own fund.  Artisan Small Cap was a solid, mild-manned growth-at-a-reasonable price creature that drew a lot of media attention, attracted a lot of money, helped launch a stellar investment boutique, and quickly closed to new investors.

But, somewhere in there, the fund got out of step with the market.  Rather than being stellar, it slipped to okay and then “not too bad.”  It had some good years and was never terrible, but it also never managed to have two really good years back-to-back.  The firm added co-managers including Marina Carlson, who had worked so successful with Ziegler at the Strong Funds.  Ziegler stepped aside in 2008 and Carlson in 2009.

At that point, manager responsibilities were given to Andrew Stephens and the team that runs Artisan Mid Cap Fund (ARTMX).  ARTMX has posted remarkably strong, consistent results for over a decade.  It’s been in the top 10-15% of midcap growth funds for the past 1, 3, 5 and 10 year periods.  It has earned four or five star ratings from Morningstar for the past 3, 5, and 10 year periods.

Since taking over in October 2009, ARTSX has outperformed its peers.  $10,000 invested on the day the new team arrived would have gain to $13,900, compared to $13,100 at its peers.   Both year to date and for the three, turbulent summer months, it’s in the top 2% of small growth funds.  It has a top 5% record over the past year and top 15% over the past three.

Artisan has a very good record of allowing successful teams to expand their horizons. Scott Satterwhite’s team from Artisan Small Cap Value (ARTVX) inherited Artisan Mid Cap Value (ARTQX) and the large cap Artisan Value (ARTLX) funds, and has reproduced their success in each.  The same occurred with the Artisan International Value team running Artisan Global Value and Artisan International running Artisan International Small Cap.

Given that track record and the fund’s resurgence under the Stephen’s team, it might be time to put Artisan Small Cap back on the radar.

Fund Update: RiverPark Short-Term High Yield

We profiled RPHYX in July as one of the year’s most intriguing new funds. It’s core strategy – buying, for example, called high yield bonds – struck me “as a fascinating fund.  It is, in the mutual fund world, utterly unique . . .  And it makes sense.  That’s a rare and wonderful combination.”

The manager, David Sherman of Cohanzick Management, has been in remarkably good spirits, if not quite giddy, because market volatility plays into the fund’s strengths.  There are two developments of note.

The manager purchased a huge number of additional shares of RPHYX after the market rout on Monday, August 8.  (An earlier version of this note, on the Observer’s discussion board, specified an amount and he seemed a bit embarrassed by the public disclosure so I’ve shifted to the demure but accurate ‘huge number’ construction.)

The fund’s down about 0.4% since making its monthly distribution (which accounts for most of its NAV changes). For those keeping score, since August 1, Fidelity Floating Rate High Income (FFHRX, a floating-rate loan fund that some funds here guessed would parallel RiverPark) is down 4%, their new Global High-Income fund (FGHNX) is down 5% and Fidelity High Income (SPHIX) is down 4.5%.

Fortunately, the fund generates huge amounts of cash internally. Because durations are so short, he’s always got cash from the bonds which are being redeemed. When we spoke on August 10th, he calculated that if he did nothing at all with the portfolio, he’d get a 6% cash infusion on August 16, a 10% infusion on August 26th, and cash overall would reach 41% of the portfolio in the next 30 days. While he’s holding more cash than usual as a matter of prudent caution, he’s also got a lot to buy with.

And the market has been offering a number of exceptional bargains. He pointed to called HCA bonds which he first bought on July 27 at a 3.75% annualized yield. This week he was able to buy more at a 17% yield. Since the bonds would be redeemed at the end of August by a solidly-profitable company, he saw very little risk in the position. Several other positions (Las Vegas Sands public preferred and Chart Industries convertibles) have gone from yielding 3-3.5% to 5-6% available yields in the last two weeks.

He was also shortening up the portfolio to take advantage of emerging opportunities. He’s selling some longer-dated bonds which likely won’t be called in order to have more cash to act on irrational bargains as they present themselves. Despite an ultra-short duration, the fund is now yielding over 5%. The Fed, meanwhile, promises “near zero” interest rates for the next two years.

Mr. Sherman was at pains to stress that he’s not shilling for the fund. He doesn’t want to over-promise (this is not the equivalent of a savings account paying 5%) and he doesn’t want to encourage investors to join based on unrealistic hopes of a “magic” fund, but he does seem quite comfortable with the fund and the opportunity set available to him.

Note to the Securities and Exchange Commission: Hire a programmer!

Every day, the SEC posts all of its just-received filings online and every day I read them.  (Yep.  Really gotta get a life.) Here is a list of all of today’s prospectus filings.  In theory, if you visit on September 1st and click on “most recent,” you’ll get a screen full of filings dated September 1st.

Except when you don’t.  Here, for example, is a screen cap of the SEC new filings for August 22, 2011:

Notice how very far down this list you have to go before finding even one filing from August 22nd (it’s the ING Mutual Funds listing).  On July 25th, 43 of 89 entries were wrong (including one originally filed in 2004).

Two-thirds of all Wall Street trades emanate from high-frequency traders, whose computers execute trades in 250 microseconds (“Not So Fast,” The Economist, 08/06/11).  Those trades increase market volatility and asset correlations, to the detriment of most investors.  The SEC’s difficulty in merely getting the date right on their form postings doesn’t give me much confidence in their ability to take on the problems posed by technology.

Four Funds, and why they’re worth your time

Really worth it.  Every month the Observer profiles two to four funds that we think you really need to know more about.  They fall into two categories:

Most intriguing new funds: good ideas, great managers. These are funds that do not yet have a long track record, but which have other virtues which warrant your attention.  They might come from a great boutique or be offered by a top-tier manager who has struck out on his own.  The “most intriguing new funds” aren’t all worthy of your “gotta buy” list, but all of them are going to be fundamentally intriguing possibilities that warrant some thought.  This month’s two new funds:

RiverPark/Wedgewood (RWGFX): David Rolfe makes it seem so simple.  Identify great companies, buy only the best of them, buy only when they’ve on sale, and hold on.  For almost 19 years he’s been doing to same, simple thing – and doing it with unparalleled consistency and success.  His strategy is now available to retail investors.

Walthausen Select Value (WSVRX): the case for this focused small- to mid-cap fund is simple.  Manager John Walthausen has performed brilliantly with the last three funds he’s run and his latest fund seeks to build on one of those earlier models.

Stars in the shadows: Small funds of exceptional merit. There are thousands of tiny funds (2200 funds under $100 million in assets and many only one-tenth that size) that operate under the radar.  Some intentionally avoid notice because they’re offered by institutional managers as a favor to their customers (Prospector Capital Appreciation and all the FMC funds are examples).  Many simply can’t get their story told: they’re headquartered outside of the financial centers, they’re offered as part of a boutique or as a single stand-alone fund, they don’t have marketing budgets or they’re simply not flashy enough to draw journalists’ attention.  There are, by Morningstar’s count, 75 five-star funds with under $100 million in assets; Morningstar’s analysts cover only eight of them.

The stars are all time-tested funds, many of which have everything except shareholders.

Northern Global Tactical Asset Allocation (BBALX): up until August 1st, you could access to the best ideas of Northern Investment Policy Committee only if you had $5 million to meet this fund’s minimum or $500 million in assets at Northern.  And then it became a retail fund ($2500) with an institutional pedigree and expenses (0.68%).  Folks looking for a conservative core fund just stumbled onto a really solid option.

Walthausen Small Cap Value (WSCVX): we profiled this fund shortly after launch as one of the year’s best new funds.  Three years on, it’s running rings around its competition and starting to ask about when it will be necessary to close to new investors.  A somewhat volatile choice, it has produced remarkable results.

Briefly noted . . .

 

Berwyn Income (BERIX) will reopen to new investors on Sept. 19. The $1.3 billion fund closed in November 2010, but says the board, “recent volatility in the market has led to new investment opportunities for the Fund.”  BERIX makes a lot of sense in turbulent markets: modest stake in dividend-paying stocks and REITs, plus corporate bonds, preferred shares, convertibles and a slug of cash.  Lots of income with some prospect for capital growth.  The fund more than doubled in size between 2008 and 2009, then doubled in size again between 2009 and 2010.  At the end of 2008, it was under $240 million.  Today it carries a billion more in heft.  Relative performance has drifted down a bit as the fund has grown, but it remains really solid.

Fidelity is bringing out two emerging market funds in mid-October. The less interesting, Emerging Markets Discovery, will be their small- to mid-cap fund. Total Emerging Markets will be a 60/40 balanced fund. The most promising aspect of the balanced fund is the presence of John Carlson, who runs New Markets Income (FNMIX) at the head of the management team.  FNMIX has a splendid long-term record (Carlson’s been there for 16 years) but it’s currently lagging because it focuses on dollar-denominated debt rather than the raging local currency variety.  Carlson argues that local currencies aren’t quite the safe haven that newbies believe and that, in any case, they’re getting way overvalued.  He’ll have a team of co-managers who, I believe, run some of Fidelity’s non-U.S. funds.  Fido’s emerging markets equity products have not been consistently great, so investors here might hope for index-like returns and a much more tolerable ride than a pure equity exposure would offer. The opening expense ratio will be 1.4% and the minimum investment will be $2500.

Northern Funds are reducing the operating expenses on all of their index funds, effective January 1, 2012.  The seven funds involved are:

Reduction and resulting expense ratio
Emerging Market Equity Reduced by 42 basis points, to 0.30%
Global Real Estate 15 basis points, to 0.50%
Global Sustainability 35 basis points, to 0.30%
International Equity 20 basis points, to 0.25%
Mid Cap 15 basis points, to 0.15%
Small Cap 20 basis points, to 0.15%
Stock 15 basis points, to 0.10%

Nicely done!

Forward Management introduced a new no-load “investor” share class for Forward International Real Estate Fund (FFIRX), the Forward Real Estate Long/Short Fund (FFSRX), and the Forward Global Infrastructure Fund (FGLRX). Forward Real Estate (FFREX) already had a no-load share class.  The funds are, on whole, respectable but not demonstrably great. The minimum investment is $4,000.

DWS Strategic Income (KSTAX) becomes DWS Unconstrained Income on Sept. 22, 2011. At that point, Philip Condon will join the management team of the fund.  “Unconstrained” is the current vogue term for income funds, with PIMCO leading the pack by offering unconstrained Bond (also packaged as Harbor Unconstrained Bond), Tax-Managed Bond and Fixed Income funds.  All of them have been underperformers in their short lives, suggesting that the ability to go anywhere doesn’t immediately translate into the wisdom to go somewhere sensible.

Litman Gregory Asset Management has renamed its entire line of Masters’ Select funds as Litman Gregory Masters Funds name.

PIMCO Developing Local Markets (PLMIX) has changed its name to PIMCO Emerging Markets Local Currency, presumably to gain from the “local currency debt” craze.

Dreyfus S&P Stars Opportunities (BSOBX) will change its name to Dreyfus MidCap Core on Nov. 1, 2011.

DWS RREEF Real Estate Securities (RRRRX) will close Sept. 30, 2011.

JPMorgan U.S. Large Cap Core Plus (JLCAX) closed to new investors on Sept. 2, 2011.

Scout TrendStar Small Cap (TRESX) is merging into Scout Small Cap (UMBHX).

MFS Core Growth (MFCAX) merged into MFS Growth (MFEGX) in August.

Effective Sept. 15, 2011, GMO Global Balanced Asset Allocation Fund (GMWAX) will be renamed GMO Global Asset Allocation Fund and it will no longer be bound to keep at least 25% each in stocks and bonds.

Forward Funds is changing Forward Large Cap Equity (FFLAX), a mild-mannered fund with a slight value bias, into Forward Large Cap Dividend Fund.  After November 1, at least 80% of the portfolio will be in . . . well, large cap, dividend-paying stocks.   Not to rain on anybody’s parade, but all of its top 25 holdings are already dividend-paying stocks which implies marketing rather than management drove the change.

Likewise, Satuit Capital Micro Cap has been changed to the Satuit Capital U.S. Emerging Companies Fund (SATMX).   The Board hastened to assure shareholders that the change was purely cosmetic: “there are no other changes to the Fund being contemplated as a result of this name change.”  Regardless, it’s been a splendid performer (top 1% over the past decade) with an elevated price tag (1.75%)

DWS Climate Change (WRMAX) becomes DWS Clean Technology on October 1, 2011.

A few closing notes . . .

We’re very pleased to announce the launch of The Falcon’s Eye.  Originally written by a FundAlarm board member, Falcon, the Eye provides a quick and convenient link to each of the major profiles for any particular fund.  Simply click on “The Falcon’s Eye” link on the main menu bar atop this page and enter one or more ticker symbols.  A new windows pops up, giving the fund name and direct links to ten major source of information:

Yahoo Morningstar Google
Smart Money U.S. News Barron’s
Bloomberg USA Today MSN

And, of course, the Observer itself.

Mark whichever sources interest you, click, and the Eye will generate direct links to that site’s profile of or reporting on your fund.  Thanks to Accipiter for his tireless work on the project, and to Chip, Investor, Catch22 and others for their support and beta testing of it.  It is, we think, a really useful tool for folks who are serious about understanding their investments.

Thanks to all of you for using or sharing the Observer’s link to Amazon.com, which is providing a modest but very steady revenue stream.  Special thanks for the folks who’ve chosen to contribute to the Observer this month and, especially, to the good folks at Milestones Financial Planning in Kentucky for their ongoing support.  We’re hoping for a major upgrade in the site’s appearance, in addition to the functionality upgrades that Chip and Accipiter have worked so faithfully on.

Looking for the archive? There is an archive of all Observer and later FundAlarm commentaries, links to which usually appear at the top of this page. This month we encountered a software glitch that was scrambling the list, so we’ve temporarily hidden it. Once out tech folks have a chance to play with the code, it’ll be back where it belongs. Thanks for your patience!

Keep those cards and letters, electronic or otherwise, coming.  I love reading your thoughts.

See you in October!

David

Walthausen Small Cap Value Fund (WSCVX), September 2011

By Editor

*This fund is now called North Star Small Cap Value Fund*

Objective

The Fund pursues capital appreciation by investing in small cap stocks.  For their purposes, “small cap” is under $2 billion at the time of purchase.  The manager reserves the right to go to cash as a temporary move.

Adviser

Walthausen & Co., LLC.  Walthausen & Co., LLC. is an employee-owned  investment adviser located in Clifton Park, NY.  Mr. Walthausen founded the firm in 2007.  It specializes in small- and mid-cap value investing through separate and institutional accounts, and its one mutual fund. Being employee owned, Mr. Walthausen and team control the decision making process on important management issues such as limiting assets under management in order to maximize their client’s returns. In September 2007, he was joined by the entire investment team that had worked previously with him at Paradigm Capital Management, including an assistant portfolio manager, two analysts and head trader. Subsequently this group was joined by Mark Hodge, as Chief Compliance Officer, bringing the total number of partners to six.

Manager

John B. Walthausen. Mr. Walthausen is the president of the Advisor and has managed the fund since its inception. Mr. Walthausen joined Paradigm Capital Management on its founding in 1994 as a Portfolio Manager. Mr. Walthausen was the lead manager of the Paradigm Value Fund from January 2003 until July 2007 and oversaw approximately $1.3 billion in assets.  He’s got about 30 years of experience and is, as I noted above, supported by the team from his former employer.

Inception

February 1, 2008.

Management’s Stake in the Fund

Mr. Walthausen has over $1 million invested in the fund and also owns the fund’s adviser.

Minimum investment

$2,500 for all accounts.

Expense ratio

1.21% on an asset base of about $40 million, as of August 2023.  When I first profiled the fund in April 2010, expenses were 1.48% on just $25 million in assets, so it seems unlikely that the fund will ever become inexpensive.

Comments

Walthausen Value started as Mr. Walthausen’s attempt to reproduce the success of his Paradigm Value (PVFAX) fund by using the same investment objectives, strategies and policies with his new fund.  It’s not entirely clear what those strategies are.  Mr. Walthausen maintains a pretty low profile and the prospectus refers only to “a proprietary valuation model to identify companies that are trading at a discount to intrinsic value.”  If a stock passes that valuation screen, Walthausen and his team construct detailed earnings and cash flow projections.  Those projections are driven, in part, by evidence of “internal drivers” of growth, such as new managers or new products.  They’ll frequently talk with company managers, and then decide whether or not to buy.

His strategy appears to be fairly adaptable.  In explaining the fund’s strong relative performance in 2008, he notes that it “was achieved by populating the portfolio with companies which, by and large, had strong balance sheets, conservative, bottom-line oriented managements, and products that were in reasonable demand from their customers” (Annual Report, 1/09).  His letter, written while the market was still falling, concludes with his belief that excess negativity and a tumbling valuation meant “that outsized returns become a real possibility.”  Six months later, as he began harvesting those outsized returns, the portfolio had been moved to overweight cyclical sectors (e.g., information tech and consumer discretionary) and underweight defensive ones.

Mr. Waltausen’s public record dates to the founding of Paradigm Value.  His ability to replicate PVFAX’s record here would be an entirely excellent outcome, since his record there was outstanding.  The SEC believes the funds are close enough to allow Paradigm’s record into Walthausen’s prospectus.

  Last year at PVFAX 

7/31/06- 7/31/07

 Last 3 years at PVFAX 

7/31/04 – 7/31/07

 From inception to departure 

1/1/03 – 7/31/07
Paradigm Value 21.45 21.55 28.82
S&P 600 14.11 14.63 18.48
Russell 2000 Value 7.67 13.42 18.86

The fund has quickly earned itself a spot among the industry’s elite.  It returned over 40% in each of its first two full years of operation.  Its 2011 performance (through 08/25/2011) is -12.6%, about average for a small-value fund.

Since the fund has an elite pedigree, it makes sense to compare it to the industry’s elite.  I turned to Morningstar’s list of small core “analyst pick” funds.   Morningstar’s analyst picks are their “best ideas” funds, selected category-by-category, on the basis of a mix of quantitative and qualitative factors: thoughtful strategies, experienced management, low expenses, high stewardship grades and so on.  I tested Walthausen against those funds for two time periods.  The first is 2/1/08 – 7/30/2011 (that is, inception to the present).  A skeptic might argue that that comparison is biased in Walthausen’s favor, since it was likely still holding a lot of start-up cash as the market imploded.  For that reason, I also included the period 3/2/09 – 3/2/10 (that is, the year of the ferocious rally off the March market bottom).

$10,000 would have become . . . Since inception Year after the market bottom
Walthausen Small Cap Value $16,120 $24,000
Royce Special (RYSEX) 13,000 16,700
Paradigm Value (PVFAX) 12,200 18,300
Vanguard Tax-Managed Small Cap (VTMSX) 11,800 18,800
Bogle Small Cap Growth (BOGLX) 11,400 20,400
Third Avenue Small-Cap Value (TASCX) 10,000 17,100
Bridgeway Small-Cap Value  (BRSVX) 9400 18,400

When I last ran this comparison (April 2010), the funds ended up in exactly the same order as they do today (August 2011).

The majority of Walthausen’s investors come by way of Registered Investment Advisers, a fairly sophisticated group who don’t tend to be market timers.  As a result, the fund saw very little by way of outflows during the summer turbulence.  While closure is not imminent, investors do need to plan for that possibility.  Mr. Walthausen manages both his fund and separate accounts.  Between them, they have $530 million in assets.  He anticipates closing the strategy, both accounts and the fund, was that total reaches $750 million.  That’s well below the $1.3 billion he managed at Paradigm and could come in the foreseeable future.

Bottom line

There are, of course, reasons for caution.  Mr. Walthausen, born in 1945, is likely in the later stages of his investing career.  The fund’s expenses are above average, though its returns are higher still.  Mr. Walthausen has invested through a series of very different market conditions and has produced consistently top decile returns throughout.   This fund keeps rising to the top of my various screens and seems to be making a compelling case to rise on yours as well.

Company link

North Star Small Cap Value Fund, which is a pretty durn Spartan spot but there’s a fair amount of information if you click on the tiny text links across the top.

© 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].

Walthausen Select Value (WSVRX), September 2011

By Editor

Objective

The Fund pursues long-term capital appreciation by investing primarily in common stocks of small and mid capitalization companies. Small and mid capitalization companies are those with market capitalizations of $4 billion or less at the time of purchase.  The Fund typically invests in 40 to 50 companies. The manager reserves the right to go to cash as a temporary move.

Adviser

Walthausen & Co., LLC, which is an employee-owned investment adviser located in Clifton Park, NY.  Mr. Walthausen founded the firm in 2007.  In September 2007, he was joined by the entire investment team that had worked previously with him at Paradigm Capital Management, including an assistant portfolio manager, two analysts and head trader. Subsequently this group was joined by Mark Hodge, as Chief Compliance Officer, bringing the total number of partners to six.  It specializes in small- and mid-cap value investing through separate and institutional accounts, and its two mutual funds.   They have about $540 million in assets under management.

Manager

John B. Walthausen. Mr. Walthausen is the president of the Advisor and has managed the fund since its inception. Mr. Walthausen joined Paradigm Capital Management on its founding in 1994 and was the lead manager of the Paradigm Value Fund (PVFAX) from January 2003 until July 2007.  He oversaw approximately $1.3 billion in assets.  He’s currently responsible for about half that amount.  He’s got about 30 years of experience and is, as I noted above, supported by the team from his former employer.  He’s a graduate of Kenyon College (a very fine liberal arts college in Ohio), the City College of New York (where he earned an architecture degree) and New York University (M.B.A. in finance).

Inception

December 27 2010.

Management’s Stake in the Fund

Mr. Walthausen has between $100,000 and $500,000 in this fund, over $1 million invested in his flagship fund and also owns the fund’s adviser.

Minimum investment

$2,500 for all accounts.  There’s also an “investor” share class with a $10,000 minimum and 1.46% expense ratio.

Expense ratio

1.70% on an asset base of about $1.2 million (as of 01/31/2011).

Comments

The case for Walthausen Select Value is Paradigm Value (PVFAX), Paradigm Select (PFSLX) and Walthausen Small Cap Value (WSCVX).   Mr. Walthausen is a seasoned small- and mid-cap investor, with 35 years of experience in the field.   From 1994 to 2007 he was a senior portfolio manager at Paradigm Capital.  He managed Paradigm Value from its inception until his departure, Paradigm Select Value from inception until his departure and Walthausen Small Cap Value from its inception until now.

Mr. Walthausen’s three funds have two things in common:  each holds a mix of small and mid-cap stocks and each has substantially outperformed its peers.

Walthausen Select parallels Paradigm Select.  Each has a substantial exposure to mid-cap stocks but remains overweight in small caps.  In his two years at Paradigm Select, Morningstar classified the portfolio as “small blend.”  Paradigm currently holds about one third of its assets in mid-caps while Walthausen Select is a bit higher, at 45% (as of 04/30/2011).  In each case, the stocks were almost-entirely domestic.  Walthausen Small Cap Value has about 85% small cap and 15% mid-cap, while Paradigm Value splits about 80/20.  In short, Mr. Walthausen is a small cap investor with substantial experience in mid-cap investing as well.

Each of Mr. Walthausen’s funds has substantially outperformed its peers under his watch.

Paradigm Select turned $10,000 invested at inception into $16,000 at his departure.  His average mid-blend peer would have returned $13,800.

Paradigm Value turned $10,000 invested at inception to $32,000 at his departure.  His average small-blend peer would have returned $21,400.  From inception until his departure, PVFAX earned 28.8% annually while its benchmark index (Russell 2000 Value) returned 18.9%.

Walthausen Small Cap Value turned $10,000 invested at inception to $14,000 (as of 08/2/2011).  His average small-value peer would have returned $10,400. Since inception, WSCVX has out-performed every Morningstar “analyst pick” in his peer group.  That includes Royce Special (RYSEX), Paradigm Value (PVFAX), Vanguard Tax-Managed Small Cap (VTMSX), Bogle Small Cap Growth (BOGLX), Third Avenue Small-Cap Value (TASCX) and Bridgeway Small-Cap Value (BRSVX).  WSCVX earned more than 40% in each of its first two full years.

Investors in Walthausen Select are betting that Mr. Walthausen’s success is not due to chance and that he’ll be able to parlay a more-flexible, more-focused portfolio in a top tier performer.   A number of other small cap managers (at Artisan, Fidelity, Royce and elsewhere) have handled the transition to “SMID-cap” investing without noticeable difficulty.  Mr. Walthausen reports that there’s a 40% overlap between the holdings of his two funds. There are only a few managers handling both focused and diversified portfolios (Nygren at Oakmark and Oakmark Select, most famously) so it’s hard to generalize about the effects of that change.

There are, of course, reasons for caution.  First, Mr. Walthausen’s other funds have been a bit volatile.  Investors here need to be looking for alpha (that is, high risk-adjusted returns), not downside protection.  Because it will remain fully-invested, there’s no prospect of sidestepping a serious market correction.  Second, this fund is more concentrated than any of his other charges.  It currently holds 42 stocks, against 80 in Small Cap Value and 65 in his last year at Paradigm Select.  Of necessity, a mistake with any one stock will have a greater effect on the fund’s returns.  At the same time, Mr. Walthausen believes that 75% of the stocks will represent “good, unexciting companies” and that it will hold fewer “special situation” or “deeply troubled” firms than does the small cap fund. And these stocks are more liquid than are small or micro-caps. All that should help moderate the risk.  Third, Mr. Walthausen, born in 1945, is likely in the later stages of his investing career.  Finally, the fund’s expenses are high which will be a major hassle in a market that’s not surging.

Bottom line

There’s considerable reason to give Walthausen Select careful consideration despite its slow start.   From inception through late August 2011, the fund has slightly underperformed a 60/40 blend of Morningstar’s small-core and midcap-core peer groups.   Mr. Walthausen’s track record is solid and he’s confident that this fund “will be better in a muddled market” than most.  While it’s more concentrated than his other portfolios, it’s concentrated in larger, more stable names.  Folks willing to deal with a bit of volatility in order to access Mr. Walthausen’s considerable skill at adding alpha should carefully track the evolution of this little fund.

Company link

Walthausen Funds homepage, which is a pretty durn Spartan spot but there’s a fair amount of information if you click on the tiny text links across the top.

© 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].

July, 2010

By Editor

. . . from the archives at FundAlarm

David Snowball’s
New-Fund Page for July, 2010

Dear friends,

In celebration of the hazy, lazy, crazy days of summer, we’ve decided to slow down, take a deep breath, and enjoy the long days. At least to the extent that you can enjoy days when a twitchy computer program can appreciably change your fortunes in a fraction of a second. So we’re taking time to catch up with the funds we’re already presented, starting with . . .

The Billionaire’s Club

Attracting a billion dollars’ in assets is hard. There are about 5200 funds below that threshold and only 1200 over it. 260 of those smaller funds have earned five stars from Morningstar and some of those smaller five-star funds (CGM Mutual, Mair & Powers Balanced, Valley Forge, FMI Common, Greenspring . . . ) have been in operation for decades. As a result, it’s noteworthy when a new fund is able to draw more than a billion in just a few years. This month’s New Fund page focuses on the nine funds that we’ve previously profiled which have crossed that threshold. Here’s the snapshot and link to each.

Dodge & Cox Global (DODWX), launched 05/01/2008 and now at $1.1 billion. Dodge & Cox is one of the most respected names in investing. They do just about everything right, and have been doing it right for 80 years. Global, which had a wretched 2008, combines the strengths of Dodge & Cox Stock (DODGX) and Dodge & Cox International (DODFX).

Leuthold Asset Allocation (LAALX), launched 05/25/2006 and now at $1.3 billion. Before the Leuthold funds, there was The Leuthold Group which did quantitative historical research to develop sophisticated models for institutional investors. Steve Leuthold was prevailed upon to launch a fund, Leuthold Core (LCORX), to give folks with less than a million to invest access to his models. LCORX’s closing led to the launch of look-alike LAALX. Steven Goldberg, writing for Kiplinger’s, was unambiguous about the virtues of these eclectic offerings: “In uncertain times, I think Leuthold Asset Allocation will prove its worth. Put 20% of your money here.” Yes, sir! (See “The 7 Best Mutual Funds for This Market,” 06/22/2010)

Northern Multi-Manager International Equity (NMIEX), launched 06/22/2006 and now at $2.6 billion. Northern’s multi-manager funds proceed from a simple premise: different people do different things well. Pick out what needs done well, then go find the best managers for the job. Northern concluded, for example, that “absolute value” stocks should be represented as should “aggressive growth” ones, so they hired high value institutional managers who specialize in each of those niches. With the large size of the resulting management teams, some worry that too many cooks might spoil the broth. Northern, though, hires only one broth chef (to complement the pastry chef and the soup guy). The results have been consistently solid.

PIMCO Global Advantage Strategy Bond, “D” shares (PGSDX) launched 02/05/2009 and now at $1.8 billion. PIMCO’s chief, the legendary Bill Gross, is unambiguous: “Bonds have seen their best days.” The question is, what’s a bond specialist like PIMCO to do about it? They’ve offered two answers, in Global Advantage and Global Multi-Asset, below. Global Advantage addresses the risk of a bond market bubble and long, slow decline by changing the rules for bond investing. Instead of focusing on the biggest borrowers (the “market cap” approach used by virtually all bond indexes and benchmarks), shift to the credit-worthy borrowers (those whose Gross Domestic Products are large enough, and growing vigorously enough, to support their bond obligations). Global Multi-Asset goes a step further.

PIMCO Global Multi-Asset, “D” shares (PGMDX), launched 10/29/2008 and now at $2.2 billion. PIMCO tried diversifying away from bonds before, in the 1980s, but Mr. Gross’s heart simply wasn’t in the move. When their handful of stock investors tried to get PIMCO invested at the start of the greatest bull market in the 20th century, they got shut down. Mr. Gross admits, “Those sessions basically said, ‘Hey, we’re a bond shop. This is what we’re going to do. It’s the party line.’” With the help of CEO Mohamed El-Erian, a distinguished emerging markets investor and former head of Harvard Management Company, PIMCO is beginning to market opportunistic strategies that encompass a far wider array of asset classes and economic possibilities than ever before.

Rydex/SGI Managed Futures Strategy (RYMFX), launched 03/02/2007 and now at $2.3 billion. Sometimes it seems that intriguing new asset classes remain excellent options only until you invest in them. That must be the way that RYMFX investors feel. The fund, which holds long and short positions solely in financial instruments (e.g., currency futures and bonds) and commodities, amazed everyone by completing ignoring the 2008 market crisis and turning a handsome profit. But as the investors rushed in, the underlying market conditions changed and the fund has spent 18 months drifting lower. Fans argue that the long-term record of its underlying index (the Diversified Trends Index) gives reason for cheer: once financial markets start being “normal” again, this fund will take off again.

T. Rowe Price Overseas (TROSX), launched 12/29/2006 and now at $2.2 billion. Back in 2006, T. Rowe Price had a problem: their flagship international fund Price International (PRITX) utterly mediocre and had been so for years. In apparent response, they delegated the very successful manager of one of their smaller international funds (International Growth and Income TRIGX) to manage both this fund and his old charge. That turns out poorly, as TRIGX sagged to mediocrity while TROSX never rose above it. But the other response, fix the original problem by getting a more-focused manager for PRITX, has done a world of good for that fund.

Vanguard Dividend Appreciation Index (VDAIX), launched 04/21/2006 and now at $3.9 billion. In 2006, a lot of new investments were aimed at exploiting the virtues of dividends: high dividends, high dividend growth, high relative dividends or whatever. Most of them have fallen flat, but VDAIX (and its ETF clone, VIG), have gotten it right: high alpha, low beta large cap domestic investing. With low expenses and a focus on companies, that advantage seems likely to prove durable.

Wintergreen (WGRNX), launched 10/17/2005 and now at $1 billion. This is what mutual funds were supposed to be. Not “wimpy, cover my butt, don’t get too far out of line and do keep CNBC blaring in the background” investing, but “I’m smarter and I’m getting their first” investing. If DC Comics ever wanted to create a new super-hero, The Superman-ager, they’d surely model him off Mr. Winters who presents the perfect alter ego (funny, thoughtful, self-effacing, the unremarkable guy in the next cubicle over). But when night falls, off comes the green (wintergreen?) tie and out The Superman-ager flies.

The oddest thing about the Billionaire’s Club? No Fidelity funds. The titan of asset accumulation is still rolling out new funds – something like 65 in three years – but the vast majority are either retirement products (their target-date funds of funds), funds open only to other Fidelity funds or cloned share classes of long-standing funds (for example, the all-important “F” and “K” classes of Diversified International). Their most-successful new retail funds – at least as measured by their ability to attract assets – areDynamic Strategies (FDYSX, at $250 million) and Emerging Middle East and Africa (FEMEX, at $120 million). There are profiles of both in the archives, below. Beyond that, their most successful launches are index funds and “enhanced” index funds.

Fidelity. Small. Index funds. Eeeek.

Quick Updates from SteelPath

SteelPath offers the only open-end mutual funds which invest exclusively in master limited partnerships. In my June 2010 profile of SteelPath Alpha (MLPAX), I argued that “This seems to be an asset class with sustained, compelling advantages. SteelPath is, currently, the only game in town for mutual fund investors. Fortunately they seem to be a pretty good game: experienced players, rational arguments about their portfolio, and reasonable expenses especially for folks who can access the no-load shares.” Some of the posters on FundAlarm’s discussion board had follow-up questions, in particular about the peculiar tax status of MLPs. I put those questions to SteelPath and Gabriel Hammond, SteelPath’s founder and the fund’s manager, was kind enough to respond. Here are the highlights:

Q. Since your fund is structured as a corporation, are payments to shareholders taxed as income?

A. “No, the Funds’ distributions are taxed as qualified dividends. The Funds’ distributions may also be classified as return of capital in some cases, and not subject to taxation.”

Q. Since MLPs represent a relatively small portion of the investment universe, will you be constrained to close your funds while they’re still relatively small?

A. “We believe that a manager would have difficulty delivering the type of outperformance we envision if he held more than 1%-1.5% of the float of the securities in the space. As such we would consider a soft close at $1.25bb.” Given their different mandates, SteelPath’s Alpha 40 fund doesn’t face a meaningful upper limit and the Income fund might see “a soft close at $1.75bb.”

Q. While MLPs have been great portfolio diversifiers so far – their long-term correlation to the S&P500 is 0.24, rather lower than emerging market equities’ – do you anticipate an increasing correlation to the stock market as MLPs become increasingly securitized, or mainstream?

A. Over time, as the MLP asset class becomes more institutionalized, there may be a marginal increase in correlation with other market sectors, but fundamentally, because the underlying cash flows are uncorrelated (that’s the key difference: REITS are correlated not because they’re institutionalized, but because their distributions go up and down with the vicissitudes of the broader economy, as do the cash flows of the average widget maker in the S&P 500) so we expect MLPs to remain largely uncorrelated.

The fund also offered great news for interesting individual investors. While the fund has a 5.75% front load, “the fund is available with no load if purchased through Schwab, TD, among others and directly from the Fund, through its website, telephone, or mail.”

Quick Updates from Wasatch

Several months ago, Kenster, a contributor to FundAlarm’s Discussion Board, recommended Wasatch Global Opportunities(WAGOX) to me as a fund worthy of much more attention. I did the research and concluded, not surprisingly, that Kenster was right again. In my May 2010 profile of WAGOX, I concluded: “This is a choice, not an echo. Most global funds invest in huge, global corporations. While that dampens risk, it also tends to dampen rewards and produces rather less diversification value for a portfolio. This bold newer fund goes where virtually no one else does: tiny companies across the globe. Only Templeton Global Smaller Companies (TEMGX) with a value bent and a hefty sales load comes close. Folks looking for a way to add considerable diversity to the typical . . . portfolio really owe it to themselves to spend some time here.” I reported that the fund held 330 stocks, more than triple the average global fund’s average. Some of the folks on the Discussion Board were concerned that this might represent a watering-down of performance. Eric Huefner, a Wasatch Vice President and Director of Mutual Funds & Brand Management, wrote in early June:

Robert Gardiner [the manager] always ran a longer list than most others at Wasatch in his domestic funds. He feels like he is able to get to know the most promising companies better if they are actually in the portfolio, and as his confidence grows in a company so does his position size. As Robert & [co-manager] Blake [Walker] traverse the globe they are finding a handful or more of promising companies in each country they visit. In Robert’s classic style, they have initially purchased small positions in each of these companies of greatest interest. Over time you are likely to see the concentrations and number of holdings fluctuate. Even with a list of 350 holdings, Robert describes the list as we he thinks are the best 2-3% of the companies in his consideration universe.

I’ll also note that the estimable Fidelity Low-Priced Stock Fund (FLPSX) has long favored holding many hundreds of small companies – nearly 900 at the moment – without a noticeable detriment in performance.

More great small funds are disappearing!

Oak Value (OAKVX), which has recently become small enough – about $80 million, but once four times that large – to interest me and appall the managers, has agreed to become the RS Capital Appreciation fund by September. OAKVX has a very tight, large cap portfolio (27 stocks), and a long record of producing above-average returns at the cost of above-average volatility. In moving to RS, which used to be the fine no-load firm Robertson Stephens, OAKVX will gain a 4.75% sales load though the expense ratio will initially drop about 25 bps. Those who buy before the formal acquisition get “grandfathered-in” to the no-load share class.

FBR Pegasus Small Cap Growth (FBRCX) is merging into FBR Pegasus Small Cap (FBRYX) at the end of summer. In my January 2010 profile of FBRCX, I argued that the fund was “fundamentally sensible: they offer most of the upside without much of the gut-wrenching volatility. It’s hard to find managers who can consistently pull it off. Mr. Barringer seems to be one of those people, and he deserves a serious look by folks looking for core small cap exposure.” In the short term, it’s “no harm, no foul.” Mr. Barringer runs the acquiring fund and the expenses are identical. Neither fund is economically viable – the $24 million growth fund is being rolled into the $9 million core fund and FBR had to waive $90,000 in fees on each fund in 2009 – which seems to be a problem for a number of FBR funds.

Why isn’t there an Emerging Markets Hybrid fund?

There are a couple dozen funds, mostly of the “global allocation” variety, which have at least 25% of their portfolios in bonds and at least 25% in non-U.S. stocks. None of them has even 10% of their money in the emerging markets. Why would anyone want such a crazy creature? Let’s see:

Over the past ten years, the EM bond group has returned about 11% per year while the EM stock group turned in 10% annually.

GMO predicts that the highest-returning equity class over the next 5-7 years will be emerging markets equities and the highest-returning debt class will be emerging markets bonds (GMO 7-Year Asset Class Return Forecasts, 5/31/2010).

EM bonds are weakly correlated to EM stocks in the long run (around 30), though all correlations spike during crises. EM bonds also have a weak-to-negative correlation with all domestic bonds, except for high yield bonds (all of that derived from the site www.assetcorrelation.com).

The EM market is investable and broadly diversified. According to the Emerging Markets Traders Association, by 2007, secondary market trading volumes for emerging market debt (Brady bonds, sovereign and corporate Eurobonds, local markets instruments, debt options and sovereign loans) was about U.S.$6.5 trillion, with local bonds (as opposed to Brady bonds) comprising nearly 66%. Trading in such bonds was down by a third in 2008 and 2009 figures don’t seem yet available.

There are eight emerging markets bond funds and 32 emerging markets equity funds with over $1 billion in assets. A half dozen of the bond funds and 26 of the stock funds have records longer than 15 years.

But there are no funds, with a total of no assets, which systematically invest in both.

Admittedly EM bonds cratered in September and October 2008, with Fidelity New Markets (FNMIX) losing a third of their value in six weeks. That said, it has also rebounded to a new high by the following June.

Curious.

Briefly noted:

Fidelity had picked up on the alternative energy bandwagon. The former Fidelity Select Environmental Portfolio (FSLEX) has become the Select Environment and Alternative Energy Portfolio and adopted the FTSE Environmental Opportunities & Alternative Energy Index as its benchmark. The fund’s target will be “companies engaged in business activities related to alternative and renewable energy, energy efficiency, pollution control, water infrastructure, waste and recycling technologies, or other environmental support services.” Alternative and renewable energy and water infrastructures are all new, energy efficiency is more prominent now than in the old portfolio. FSLEX has been around for 20 years but has accumulated only about $50 million in assets. Morningstar classifies itself as a midcap growth fund, a group which it has solidly trounced over the past decade.

The $1.4 billion Arbitrage Fund (ARBFX) is slated to close to new investors on July 19th. The advisor announced the closing about a month ahead of time, which is almost never in the best interest of existing shareholders since it constitutes an open invitation for “hot money” investors to get in while they still can. The managers had previously planned on closing at $1 billion, so this might be a bit late. Their closest peer, Merger Fund (MERFX), is even-larger at $3.2 billion.

The Forward Frontier Markets fund (FRONX) has been recommissioned as the Forward Frontier MarketStrat fund. The difference in focus is not entirely clear from the revised prospectus. Given that Forward trails virtually all frontier market, regional frontier market and emerging markets funds since inception, the desire to make some sort of change is understandable. I just wish I understood what they were doing.

Let’s not be hasty about this whole execution thing! On May 6, 2010, the Board of Directors voted to close, liquidate and terminate (not just “liquidate,” mind you – “liquidate and terminate”) the SAM Sustainable Climate Fund, Sustainable Water Fund andSustainable Global Active Fund. On June 14, 2010, the Board issued an unexplained “hold on there!” and voted to reopen (hence, “and neither liquidate nor terminate”) the SAM Sustainable Global Active Fund (SGAQX). The funds were launched between late 2007 and late 2009, presumably to capture the then-trendy green investing passion.

The Intrepid All Cap and Income funds have added institutional share classes. Both of the funds are small, newish and have performed very solidly. These shares will be 25 basis points cheaper than the retail shares but will have a $250,000 investment minimum. Tickers not yet assigned.

For reasons unexplained, Global X has announced that the following ETFS are “not operational and unavailable for purchase:Global X Brazil Consumer ETF, Global X Brazil Financials ETF, Global X Brazil Industrials ETF, Global X Brazil Materials ETF, Global X Brazil Utilities ETF [and] Global X China Mid Cap ETF.” Geez, this really derails my plan to make a play on the booming Brazilian snack foods market.

In closing . . .

Well, that’s it for now. The time spent with your families is far more precious than money. Enjoy it while you can. Our new fund and stars profiles will return as soon as the weather cools.

As ever,

David

August, 2010

By Editor

. . . from the archives at FundAlarm

David Snowball’s
New-Fund Page for August, 2010

Dear friends,

In celebration of the Dog Days of Summer (which have turned out to be less “lazy, hazy” and more “crazy” than I’d liked), we continue with one last potpourri of fund news before returning to the serious business of autumn.

If you didn’t know that “potpourri” originally meant “meat stew” and, in particular “slightly-rotten meat stew,” you might want to check my “Closing” note for a lead to a book purchase which will leave you enlightened and amused (and, as always, will support FundAlarm’s continued financial health).

The fund industry’s awareness of how quickly the sands are shifting is illustrated by a series of recent repackagings, renamings, and rechristenings. Since this stuff sometimes drives me to drink (in the summer heat: iced lambrusco festooned with raspberries, maybe sangria), I tend to think of them in terms of wines and bottles.

Old Wine in New Bottles

The Bridgeway Balanced Fund (BRBPX) is now the Bridgeway Managed Volatility Fund (still BRBPX). Most Bridgeway funds have names descriptive of their composition (Ultra-Small Company, Large Cap Value), rather than their outcomes. The new name is meant to reflect, rather than change, the fund’s long-time goals. Dick Cancelmo, the fund’s manager since inception, writes:

We seek to provide a high current return with short-term risk less than or equal to 40% of the stock market – new name has more alignment with the objective. Balanced Funds are typically a fairly generic mix of equity and fixed income. Our fund also uses options and futures to dampen risk and we wanted to highlight that distinction.

Mr. Cancelmo felt compelled to highlight that distinction, since “I can’t tell you how many times I have told an advisor that I manage a balanced fund and I am told they won’t look at it.” They hope that the new name “will at least get us a better look.”

The fund certainly warrants a long, hard look. Since inception in June 2001, it has managed to earn 2.46% per year against the S&P’s 0.01% with a beta of just 44 (pretty close to his target of 40). The fund’s recent record has been damaged by the 15% or so of the portfolio dedicated to investments mirroring those in Bridgeway Aggressive Growth I (BRAGX). BRAGX’s computer programs performed brilliantly for more than a decade, but cratered in the past three years. That collapse has reportedly led to a substantial rewriting of the programs.

In another set of changes, the IQ funds have shaken the fund world by renaming IQ CPI Inflation Hedged ETF (and the similarly-named underlying index) to IQ Real Return ETF (and similarly-named index). They compounded the tremor by dropped “ARB” from the names of IQ ARB Merger Arbitrage and IQ ARB Global Resources.

New Wine in Old Bottles

Effective at the end of June, PowerShares Value Line Industry Rotation Portfolio became the PowerShares Morningstar StockInvestor Core Portfolio (PYH) and Value Line TimelinessTM Select Portfolio became the PowerShares S&P 500 High Quality Portfolio (PIV).

Since inception, both of the Value Line versions of the fund had laughably bad performance (losing more in 2008, earning less in 2009, trailing enormously since their respective inceptions) compared to any of their benchmarks. The decision was announced on April 29. But since these are not new funds, they don’t require vetting by that sleepy ol’ SEC. The mere fact that nothing about the new funds’ strategy or portfolio will have any resemblance to the old funds’ apparently doesn’t rise to the level of material change. PowerShares is a relatively new player on the fund scene, but it’s already learning the lessons of cynicism and customer-be-damned quite well. We’re guessing that there’s more like this in the PowerShares future.

The other changes: PowerShares Autonomic Growth NFA Global Asset Portfolio became PowerShares Ibbotson Alternative Completion Portfolio, and PowerShares Autonomic Balanced Growth NFA Global Asset Portfolio became PowerShares RiverFront Tactical Balanced Growth Portfolio.

A Nice Table Wine: Tweaked Blend, New Label

T. Rowe Price has changed its internal Short-Term Income fund into its internal Inflation-Focused Fund. Inflation-Focused is only available to the managers of Price’s funds-of-funds, but I was curious about what the rest of us might learn from the rationale for the change. Wyatt Lee, a member of Price’s asset allocation team, explained the fund’s evolution this way: originally, Price’s funds-of-funds invested separately in a short-term bond fund and cash, as part of the most conservative sleeve of their portfolios. That struck Price as clunky, so they shaped the portfolio of the Short-Term Income fund to balance cash and short-term bonds. The new version of the fund will invest in a “diversified portfolio of short- and intermediate-term investment-grade inflation-linked securities . . . as well as corporate, government, mortgage-backed and asset-backed securities. The fund may also invest in money market securities, bank obligations, collateralized mortgage obligations, foreign securities, and hybrids.”

Why now? Mr. Lee stressed the fact that Price is not acting in anticipation of higher short-term inflation. They’re projected 1% or so this year and around 2% in 2011. Instead, their research suggested that they can decrease the fund’s volatility without decreasing returns, and still be positioned for the inevitable uptick in inflation when the global economy recovers. Mr. Lee says that Price isn’t discussing a comparable change to its retail Short-Term Bond fund, but he left open the possibility.

Price has a second, more aggressive internal fund in registration, the Real Asset Fund. Real Asset will invest both in “real assets” and in the securities of companies that derive their revenue from real assets. Such assets include energy and natural resources, real estate, basic materials, equipment, utilities and infrastructure, and commodities. It’s typical of Price’s approach to pursue such a fund when everyone else is turning away from the sector and it might be prudent for the rest of us to ask whether investing in, say, T. Rowe Price New Era (PRNEX) when it’s down (by about 6% YTD through July 27) is better than waiting to rush in after it’s gone up.

Broken Bottles, Spilt Wine

AARP is liquidating all four of their funds. Damn, damn, damn. Four funds, all rated five-star by Morningstar, and all rated somewhere between “solid” and “outstanding” by Lipper. The three stock-oriented funds (Aggressive, Moderate, Conservative) are all way above average for 2010 after posting unspectacular results in the 2009 surge. Low expenses (0.5%). Ultra-low minimum ($100). Straightforward, low turnover strategy (invest in varying combinations of four indexes). All of which generated quite modest investor interest: between $20 and $50 million in assets after almost five years of operation.

These would be great funds to test Chuck Jaffe’s suggestion that retail giants might be logical marketers for lines of mutual funds (“Aisle 1: Frozen Foods, Aisle 2: Mutual Funds,” Wall Street Journal, July 13 2010). Here’s the oversimplified version of Mr. Jaffe’s argument: funds have been increasingly like commodities over the past two decades, and they’d be a good complement to firms (Wal-Mart, Microsoft) which have brand recognition and a knack for selling mass consumption items. While I like the branding possibilities of the very fine GRT Value (GRTVX) fund – it’s already Wal-Mart’s brand – the simplicity, ease of expansion, and sensibility of AARP’s approach makes it a natural fit.

AARP’s Board is not alone in the painful decision they had to make. Investors remain deeply skittish about stock investing and fund flows generally are negative, especially to “vanilla” products that don’t tout downside protection. That’s annoying to Fidelity but catastrophic to boutique firms or mom-and-pop funds

Of the 401 funds which hold Morningstar’s five-star designation (as of late July, 2010), 46 live at the edge of financial extinction, with assets under $50 million. While I would not propose a No-Load Death Watch list, investors might have reasonable concern about and, in several cases, interest in:

Aegis High Yield AHYFX A great value-stock manager’s bond fund, which makes sense because the small value companies that Mr. Barbee and his team were researching were also issuers of high yield bonds. 2010 has been tough, but it’s a top 1% performer since inception with annual returns of better than 8%.
Akros Absolute ReturnAARFX A well-qualified manager with a complex long-short strategy that I don’t actually understand. Morningstar’s analysts are impressed, which is a good thing. The fund charges over 2%, which is less good, but not surprising for a long-short fund. It lost only 2% in 2008 and has a string of solid years relative to its peer group.
Bread & Butter BABFX It sounded like a goofy fund when it was launched in 2005 and the strategy still sounds stilted and odd: the Contrarian/Value Investment Strategy driven by analyses of things like “overall management strategy” and “financial integrity.” Except for a relatively outstanding 2008 (admittedly, a big exception), the fund has been a lackluster performer.
CAN SLIM Select GrowthCANGX The newspaper Investor’s Business Daily has a list of can’t miss aggressive growth stocks. The point is to identify solid firms whose stocks are about to pop and to exercise a rigid sell discipline (if a stock drops 7% below the purchase price, it’s history – no exceptions). Unlike the funds attempting to profit from Value Line’s rating system, this one actually works, though not quite as well as the theory predicts.
FBR Pegasus InvestorFBRPX, Midcap FBRMX and Small Cap FBRYX The Pegasus line of funds is FBR’s most distinguished and all are managed by David Ellison, a long-time colleague of the now-departed Chuck Akre.
Kinetics Water Infrastructure KINWX Kinetics just fired the fund’s sub-adviser, Brennan Investment Partners LLC, presumably because the fund managers left Brennan. Unconcerned by … oh, qualifications, Kinetics then put their regular team of (non-water) managers in place.
LKCM Balanced LKBAX A mix of mostly dividend-paying stocks plus investment grade bonds, reasonable expenses, low risk, same team since inception. A thoroughly T. Rowe Price sort of offering.
Marathon Value MVPFX Small, low turnover, low risk, domestic large cap fund with pretty consistently top 10% returns and the same manager for a decade.
Midas Perpetual PortfolioMPERX “Perpetual Portfolio.” “Permanent Portfolio.” What’s the diff? These two funds invest in the same sorts of precious metals, solid currencies, commodities and growth stocks.Permanent Portfolio (PRPFX) just does it a lot better. Perpetual shows a remarkablysmooth, slow, upward trending return line over the past decade. It has essentially ignored the stock market’s gyrations and made about 40% over the decade, about 3.5% per year. Permanent Portfolio made about 160%, 10% a year.Perpetual Portfolio’s managers have shown no interest in investing in their fund. Three of the four managers have invested zero and one has a token investment.
Monetta Young InvestorMYIFX “Young investor” funds typically buy Apple and Disney, with the illusory hope that “young investors” will be drawn to their favorite brands. Here, the fund’s top 10 holdings are all broad ETFs. Fairly short history with market-like risk but above-market returns.
Needham AggressiveNEAGX and Small Cap Growth NESGX Needham’s funds suffer from relatively high cost and high manager turnover but both of these have produced strong returns with limited volatility.
Neiman Large Cap ValueNIEMX Purely domestic, same managers since inception (2003), low volatility, solid returns, rather more impressive in down markets than in rallies.
Royce Global SelectRSFTX The fund invests in a combination of larger stocks, preferred shares and debt. With a $50,000 minimum, it seems unlikely that Royce cares about the fund’s asset level.
Sextant Core SCORX andGrowth SSGFX Part of Nicholas Kaiser’s fleet of outstanding funds, both here and through the Amana group. Core is a balanced fund,Growth is a low-risk, large cap domestic growth fund.
Tilson Dividend TILDX The larger and stronger of value guru Whitney Tilson’s two funds.
Valley Forge VAFGX Bernand Klawans, now 89, has run the fund since the first Nixon administration. His co-manager, added in 2008, owns 75% of the fund’s advisor, but has only $1000 invested and does not contribute (according to the latest SAI) to the fund’s day-to-day operation. The fund’s fate after Mr. Klawans eventual departure is unclear.

The Brazos drama continues. Brazos was a line of fine, small no-load funds launched in the late 1990s. It became a loaded family in 1999 when the advisor was bought by AIG (booo! Hissss!). Its original no-load shares were redesignated as institutional shares and a new share class was launched. Their flagship Micro-cap fund closed in 2001 with $300 million in assets. In 2002, they dropped the funds’ sales loads (hooray!). In 2003, they settled an SEC case involving improper, but not fraudulent, actions. Fast forward to 2008, when the funds suffered losses of 48 to 54% which, shall we say, dented investor enthusiasm for them. In January 2010, PineBridge bought and renamed the four Brazos funds. Shareholders quickly rubber-stamped the Board’s proposal that the funds’ investment objectives were “not fundamental,” though for the life of me I can’t imagine anything more fundamental to a fund than its reason for existence. And, after all that, they’ve concluded that their US Mid Cap Growth Fund (PBDRX) is unsalvageable, so it’s being liquidated.

Aston Funds closed Aston/Optimum Large Cap Opportunity Fund [AOLCX] in mid-July. The fund will be liquidated by mid-August.

Speaking of Deathwatches, the ETF Deathwatch List has grown to 133 funds, up 54% in the past year. The Deathwatch List targets funds which trade under $100,000 daily. The most moribund of the lot is FaithShares Lutheran Values (FKL), which trades an average of 41 shares a day and which doesn’t trade at all on most days. (That’s a trading volume usually associated with stocks on the smallest African frontier market exchanges.) It’s especially annoying to be trailing the durn Baptists, whose Baptist Values ETF (FZB) is equally tiny, but modestly more successful YTD.

The most interesting note is Ron Rowland’s speculation that many of these funds serve as mere “placeholders,” that is, once launched they become tools for the advisors who can – as with the PowerShares funds mentioned above – keep flipping the fund’s mission and composition until they find something that draws money. And when it stops drawing, they cut it loose again. (“ETF Deathwatch List Is Longest In A Year,” Investors.com, July 19 2010)

What am I, chopped livah?

Another in a long line of “best investments you’ve never heard of . . . unless you read FundAlarm” articles, Kiplinger’s senior editor Jeffrey Kosnett offers up master limited partnerships for your consideration.

We lionize a mutual fund that returns 20% during a bear market. Or we assume that anything earning such fabulous returns must be a fraud or caught in a bubble. Now consider a whole class of investments, many of which have returned double digits annualized during the stock-market quagmire of the past decade. More remarkable: Few of us are aware of this phenomenon called pipeline master limited partnerships. (“The Best Investment You’ve Never Heard Of,” July 15 2010)

Kosnett’s short article reviews the asset class and options for owning MLPs, including direct ownership, ETFs and the SteelPath funds. We part company on his endorsement of direct ownership; I suspect that might be best for folks looking for a meaningful, long-term relationship with their tax accountants. Folks interested in more depth on MLPs, links to the research and a profile of the (no-load) SteelPath funds might check either FundAlarm’s June 2010 profile of SteelPath Alpha or the July 2010 update on the fund’s no-load availability, investment capacity and tax status.

SteelPath’s Investor Commentary for June 30, 2010, made two interesting points:

MLPs as a group registered gains on 63% of the trading days in June. The Alpha fund was in the black for the month as well.

The sector might be experiencing a new type of fund inflows. Traditionally MLPs have been dominated by leveraged hedge fund trading but much of the new money seems to originate with institutional investors, who are less likely to fall prey to “hot money” impulses. As a result, demand for MLP shares might see a steady, sustainable rise.

In Closing . . .

As we move into fall, we’ll also move back to the normal rhythm of things: new fund profiles and stars in the shadows, snarky comments and interviews. But before getting all serious again, you should indulge in a last few moments of diversion. Of late, I’ve been reading Martha Barnette’s amusing Ladyfingers & Nun’s Tummies (2005). Barnette tracks the origins of our food names and food related words, including a remarkable array of foods named for the body parts or … uh, bodily functions of revered religious figures. The number of foods dedicated to nuns’ … uh, toots (occasionally cleaned up for children by calling them “nun’s kisses”) is striking. If you enjoy food and diversion, and would like to painlessly help support FundAlarm, please use our link to Amazon.com to pick up a copy. While you’re there, you might pick up a can or two of delicious Spotted Dick, which you’ll probably enjoy more before you read Barnette’s history of the name.

Take care and we’ll talk again as the weather cools!

David