. . . from the archives at FundAlarm
New-Fund Page for August, 2010
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!