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.


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 FundSustainable 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,