January 1, 2012

By David Snowball

Dear friends,

Welcome to a new year.  Take a moment, peer back at 2011 and allow yourself a stunned “what the hell was that about?”  After one of the four most volatile years the stock market’s seen in decades, after defaults, denunciations, downgrades, histrionics and the wild seesaw of commodity prices, stocks are back where they began.  After all that, Vanguard’s Total Stock Market Index (VTSMX) had, as of 12/29/11, risen by one-quarter of one percent for the year.

I have no idea what the year ahead brings (except taxes).  I’m dubious that the world will follow the Mayans into extinction on December 21st.    My plan for the new year, and my recommendation for it: continue to live sensibly, invest cautiously and regularly, enjoy good wine and better cheese, celebrate what I have and rejoice at the fact that we don’t need to allow the stock market to run our lives.

All of which introduces a slightly-heretic thought.

Consider Taking a Chill Pill: Implications of a Stock-Light Portfolio

T. Rowe Price is one of my favorite fund companies, in part because they treat their investors with unusual respect.  Price’s publications depart from the normal marketing fluff and generally provide useful, occasionally fascinating, information.  I found two Price studies, in 2004 and again in 2010, particularly provocative.  Price constructed a series of portfolios representing different levels of stock exposure and looked at how the various portfolios would have played out over the past 50-60 years.

The original study looked at portfolios with 20, 40, 60, 80 and 100% stocks.  The update dropped the 20% portfolio and looked at 0, 40, 60, 80, and 100%.

As you think about your portfolio’s shape for the year ahead, you might find the Price data useful.  Below I’ve reproduced partial results for three portfolios.  The original 2004 and 2010 studies are available at the T. Rowe Price website.

20% stocks

60% stocks

100% stocks

Conservative mix, 50% bonds, 30% cash

The typical “hybrid”

S&P 500 index

Years studied




Average annual return (before inflation)




Number of down years




Average loss in a down year




Standard deviation




Loss in 2008




* based on 20% S&P500, 30% one-year CDs, 50% total bond index


What does that mean for you?  Statisticians would run a Monte Carlo Analysis to guide the answer.  They’d simulate 10,000 various decades, with different patterns and sizes of losses and gains (you could lose money in 6 of 10 years which, though very unlikely, has to be accounted for), to estimate the probabilities of various outcomes.

Lacking that sophistication, we can still do a quick calculation to give a rough idea of how things might play out.  Here’s how the simple math plays out.

Assuming no losing years, $10,000 invested conservatively for 10 years might grow to $20,900.  You might or might not have experienced a loss (historically, the portfolio lost money one year in 16). If your loss occurred in Year 10, your $10,000 would still have grown to $20,000.

Assuming no losing years, $10,000 invested moderately for 10 years might grow to $25,000.  You’ll likely have lost money twice, about 6.5% each year.  If you suffered an average loss in Year Five and again at Year Ten, your $10,000 would still have grown to $17,600.

Assuming no losing years, $10,000 invested aggressively for 10 years might grow to $29,900.  You’ll likely have lost money twice, about 12.5% each year.  If you suffered an average loss in Year Five and again at Year Ten, your $10,000 would still have grown to $18,385.

Measured against a conservative portfolio, a pure stock portfolio increases the probability of losing money by 400% (from a 6% chance to 23%), increases the size of your average loss by 2500% (from 0.5% to 12.5%) and triples your volatility.  With extraordinary luck, it doubles the conservative portfolio’s gain.  With average luck, it trails it. This is not a prediction of how stocks will do, in the short term, or the long term, but  is simply a reminder of the consequence of investing in them.

We can’t blithely assume that future returns will be comparable to past ones.  As Bob Cochran and others point out, bonds enjoyed a 30 year bull market which has now ended.  GMO foresees negative “real” returns for bonds and cash over the next seven years and substandard ones for US stocks as a whole.   That said, the Price studies show how even fairly modest shifts in asset allocation can have major shifts in your risk/reward balance.  As with Tabasco sauce, dribbles and not dollops offer the greatest gain.  Adding only very modest amounts of stock exposure to otherwise very conservative portfolios might provide all the heat you need (and all the heat you can stand).

Launch Alert: TIAA-CREF Lifestyle Income

On December 9, 2011, TIAA-CREF launched a new series of Lifestyle funds-of-funds.  In light of the T. Rowe Price research, Lifestyle Income (TSILX) might be worth your attention.  TSILX invests 20% of its assets in stocks, 40% in Short-Term Bond Fund (TCTRX) and 40% in their Bond (TIORX) and Bond Plus (TCBPX) funds.  The bond funds are all low cost offerings with index-like returns.  The equities sleeve is needlessly complicated with 11 funds, the smallest allocation being 0.2% to Mid-Cap Value.  That said, TSILX has a bearable expense ratio for a new fund (0.85%).  It’s run by the same team that has achieved consistent mediocrity with TIAA-CREF Managed Allocation (TIMIX), another fund of too many TIAA-CREF funds.   In this case, “mediocrity” isn’t bad and “consistent” is good.   The minimum initial investment is $2500.

TSILX might, then, approximate T. Rowe Price’s conservative portfolio allocation.  They are, of course, not the only option.  Several of the “retirement income” funds offered by the major no-load families have the same general nature.  Here’s a rundown of them:

  • Vanguard LifeStrategy Income (VASIX) has about the same stock and short-term bond exposure, with a higher minimum and lower expenses
  • Fidelity Freedom Income (FFFAX) with the same minimum as TSILX and lower expenses.  It’s been a weaker performer than the Vanguard fund.  Both lost around 11% in 2008, more than the Price model likely because they held less cash and riskier stocks.
  • T. Rowe Price’s income funds are attractive in their own right, but don’t come particularly close to the conservative allocation we’ve been discussing.  Retirement Income and Personal Strategy Income both hold far more stock exposure while Spectrum Income (RPSIX) holds fewer stocks but some riskier bonds.

The Great Unanswered Question: “What Are Our Recommendations Worth?”

This is the time of year when every financial publication and most finance websites (not including the Observer), trumpet their “can’t miss” picks for the year ahead.  A search of the phrase “Where to Invest in 2012” produced 99,200 hits in Google (12/26/2011), which likely exceeds the number of sensible suggestions by about 99,100.

Before browsing, even briefly, such advice, you should ask “what are those recommendations worth?”  A partial answer lies in looking at how top publications did with their 2011 picks.  Here are The Big Four.

Morningstar, Where to Invest in 2011 was a report of about 30 pages, covering both general guidance and funds representing a variety of interests.  It no longer seems available on the various Morningstar websites, but copies have been posted on a variety of other sites.




Sequoia( SEQUX) Long-time favorites Up 14%, top 1%
Oakmark (OAKMX) Long-time favorites Up 2%, top quarter
Oakmark Select (OAKLX) Long-time favorites Up 3%, top quarter
Fairholme (FAIRX) Long-time favorites Down 29%, dead last
T Rowe Price Equity Income( PRFDX) Long-time favorites 0%, middle of the pack
Dodge & Cox International (DODFX) Long-time favorites Down 16%, bottom quarter
Scout International (UMBWX) Long-time favorites Down 12%, bottom half
Harbor International (HAINX) Long-time favorites Down 11%, top quarter
PIMCO Total Return (PTTRX) Long-time favorites Up 3%, bottom 10th
Harbor Bond (HABDX) Long-time favorites Up 3%, bottom 10th
Dodge & Cox Income (DODIX) Long-time favorites Up 4%, bottom quarter
MetWest Total Return (MWTRX) Long-time favorites Up 5%, bottom quarter
Vanguard Tax-Managed  Capital Appreciation (VMCAX) Tax-managed portfolio Up 2%, top third
Vanguard Tax-Managed International (VTMGX) Tax-managed portfolio Down 14%, top third
Amana Trust Income (AMANX) Steady-Eddie stock funds Up 2%, top quarter, its ninth above average return in 10 years
Aston/Montag & Caldwell Growth (MCGFX) Steady-Eddie stock funds Up 3%, top decile
T. Rowe Price Dividend Growth (PRDGX) Steady-Eddie stock funds Up 4.2%, top decile
T. Rowe Price Short-Term Bond (PRWBX) Short-term income investing, as a complement to “true cash” Up 1%, top half of its peer group
American Century Value (TWVLX) Top-notch bargaining hunting funds Up 1%, top half of its peer group
Oakmark International (OAKIX) Top-notch bargaining hunting funds Down 14%, bottom third
Tweedy Browne Global Value (TBGVX) Top-notch bargaining hunting funds Down 5%, still in the top 5% of its peers


Kiplinger, Where to Invest in 2011 began with the guess that “Despite tepid economic growth, U.S. stocks should produce respectable gains in the coming year.”  As long as you can respect 1.6% (Vanguard’s Total Stock Market Index through Christmas), they’re right. In a sidebar story, Steven Goldberg assured that “This Bull Market Has Room to Run.”  Again, if “into walls” and “off cliffs” count, they’re right.

The story focused on 11 stocks and, as a sort of afterthought, three funds.  In a particularly cruel move, the article quotes a half dozen fund managers in defense of its stock picks – then recommends none of their funds.




Fidelity Contrafund (FCNTX) Large US companies with a global reach A 1% gain through Christmas, good enough to land in the top third of its peer group, one of Fidelity’s last great funds
Vanguard Dividend Growth (VDIGX) Large US companies with a global reach 7.5% gain and top 1% of its peer group
PIMCO Commodity RealReturn (PCRDX) Diversification, some protection from a falling dollar and from inflation Down 5% as of Christmas, in the middle of its peer group, its worst showing in years


SmartMoney, Where to Invest in 2011, cheated a bit by not offering its recommendations until February.  Even then, it focused solely on a dozen individual stocks.  The worst of their picks, Oracle ORCL, was down 16% between the start of the year and the Christmas break.  The best, TJX Companies TJX, was up 49%. Six stocks lost money, six gained.  The portfolio gained 4.8%.  A rough conversion into fund terms would have you subtract 1.4% for operating expenses, leaving a return of 3.4%.  That would have it ranked in the top 14% of large cap core funds, through Christmas.  If you missed both the best and worst stock, your expense-adjusted returns would drop to 1.4%.

Money, Make Money in 2011: Your Investments discussed investing as a small part of their 2011 recommendations issue.  The offered a series of recommendations, generally a paragraph or two, followed by a fund or two from their Money 70 list.

Money’s strategic recommendations were: Favor stocks over bonds, favor large caps over small cap, good overseas carefully and don’t rush into emerging markets,  shorten up bond durations to hedge interest rate risks and add a few riskier bonds to boost yields




Jensen (JENSX) For domestic blue chip exposure Slightly underwater for 2011, middle of the pack finish
Oakmark International (OAKIX) Cautious, value-oriented international Down 15%, bottom half of international funds
T. Rowe Price Blue Chip Growth (TRBCX) International via the global earnings of US multinational corporations Up about 2%, top quarter of its peer group
FPA New Income (FPNIX) They recommend “a small weighting” here because of its short-duration bonds Up about 2%, top quarter of its peer group
Vanguard High-Yield Corporate (VWEHX) A bond diversifier Up 7%, one of the top high-yield funds
T. Rowe Price International Bond (RPIBX) A bond diversifier Up 2%, bottom quarter of its peer group


The Bottom Line: give or take the Fairholme implosion, Morningstar was mostly right on equities and mostly wrong on bonds and commodities, at least as measured by a single year’s return.  SmartMoney’s stock picks weren’t disastrous, but missing just one stock in the mix dramatically alters your results. Kiplinger’s got most of the forecasts wrong but chose funds with predictable, long term records.

Amateur Hour in Ratings Land, Part 1: TheStreet.com

How would you react to an article entitled “The Greatest Baseball Players You’ve Never Heard Of,” then lists guys named DiMaggio, Clemente and Kaline?  Unknown novelists: Herman Melville, Stephen King . . . ?

TheStreet.com, founded by frenetic Jim Cramer, is offering up mutual fund analysis.  In December, mutual fund analyst Frank Byrt offered up “10 Best Mutual Funds of 2011 You’ve Never Heard Of.”  The list made me wonder what funds the folks at TheStreet.com have heard of.  They start by limiting themselves to funds over $1 billion in assets, a threshold that suggests somebody has heard of them.  They then list, based on no clear criteria (they’ve been “leaders in their category”), some of  the industry’s better known funds:

Franklin Utilities (FKUTX) – $3.6 billion in assets under management

Fidelity Select Biotechnology (FBIOX) – $1.2 billion

Sequoia Fund (SEQUX) – $4.7 billion, the most storied, famously and consistently successful fund of the past four decades.

Federated Strategic Value Dividend Fund (SVAAX) – $4.9 billion

Delaware Smid Cap Growth (DFDIX) – $1 billion

GMO Quality (GQETX) – technically it’s GMO Quality III, and that number is important.  Investors wanting Quality III need only shell out $10 million to start while Quality IV requires $125 million, Quality V requires $250 million and Quality VI is $300 million.   In any case, $18 billion in assets has trickled in to this unknown fund.

Wells Fargo Advantage Growth (SGRNX) – the fund, blessed by a doubling of assets in 2011 and impending bloat, is closing to new investors. Mr. Byrt complains that “Ognar has wandered from the fund’s mandate,” which is proven solely by the fact that he owns more small and midcaps than his peers.  The prospectus notes, “We select equity securities of companies of all market capitalizations.”  As of 10/30/2011, he had 45% in large caps, 40% in mid caps and 15% in small names which sounds a lot like what they said they were going to do.  Mr Byrt’s ticker symbol, by the way, points investors to the $5 million minimum institutional share class of the $7.2 billion fund.  Po’ folks will need to pay a sales load.

Vanguard Health Care Admiral Fund (VGHAX) – a $20 billion “unknown,” with a modest $50,000 minimum and a splendid record.

SunAmerica Focused Dividend (FDSAX) – $1 billion

Cullen High Dividend Equity (CHDVX) – $1.3 billion.

Of the 10 funds on Mr. Byrt’s list, three have investment minimums of $50,000 or more, four carry sales loads, and none are even arguably “undiscovered.”  Even if we blame the mistake on an anonymous headline writer, we’re left with an unfocused collection of funds selected on unexplained criteria.

Suggestion from the peanut gallery: earn your opinion first (say, with serious study), express your opinion later.

Amateur Hour in Ratings Land, Part 2: Zacks Weighs In

Zacks Investment Research rates stocks.  It’s not clear to me how good they are at it.  Zacks’ self-description mixes an almost mystical air with the promise of hard numbers:

The guiding principle behind our work is that there must be a good reason for brokerage firms to spend billions of dollars a year on stock research. Obviously, these investment experts know something special that may be indicative of the future direction of stock prices. From day one, we were determined to unlock that secret knowledge and make it available to our clients to help them improve their investment results.

So they track earnings revisions.

Zacks Rank is completely mathematical. It”s cold. It”s objective.

(It’s poorly proofread.)

The Zacks Rank does not care what the hype on the street says. Or how many times the CEO appeared on TV. Or how this company could some day, maybe, if everything works perfectly, and the stars are aligned become the next Microsoft. The Zack Rank only cares about the math and whether the math predicts that the price will rise.

Momentum investing.  That’s nice.  The CXO Advisory service, in an old posting, is distinctly unimpressed with their performance.  Mark Hulbert discussed Zacks in a 2006 article devoted to “performance claims that bear little or no relationship with the truth.”

In a (poorly proofread) attempt to diversify their income stream, Zacks added a mutual fund rating service which draws upon the stock rating expertise to rank “nearly 19,000 mutual funds.”

There are three immediately evident problems with the Zacks approach.

There are only 8000 US stock funds, which is surely a problem for the 10,000 funds investing elsewhere.  Zacks expertise, remember, is focused on US equities.

The ratings for those other 10,000 funds are based “a number of key factors that will help find funds that will outperform.”  They offer no hint as to what those “key factors” might be.

The ratings are based on out-of-date information.  The SEC requires funds to disclose their holdings quarterly, but they don’t have to make that disclosure for 60 days after the end of the quarter.  If Zacks produces, in January, a forecast of the six-month performance of a fund based on a portfolio released in November of the fund’s holdings in September, you’ve got a problem.

Finally, the system doesn’t attend to trivial matters such as strategy, turnover, expenses, volatility . . .

All of which would be less important if there were reliable evidence that their system works.  But there isn’t.

Which brings us to Zack’s latest: a 12/20/11 projection of which aggressive growth funds will thrive in the first half of 2012 (“Top 5 Aggressive Growth Mutual Funds”).  Zacks has discovered that aggressive growth funds invest in “a larger number of” “undervalued stocks” to provide “a less risky route to investing in these instruments.”

Investors aiming to harness maximum gains from a surging market often select aggressive growth funds. This category of funds invests heavily in undervalued stocks, IPOs and relatively volatile securities in order to profit from them in a congenial economic climate. Securities are selected on the basis of their issuing company’s potential for growth and profitability. By holding a larger number of securities and adjusting portfolios keeping in mind market conditions, aggressive growth funds offer a less risky route to investing in these instruments.

Larger than what?  Less risky than what?  Have they ever met Ken Heebner?

Their five highest rated “strong buy” funds are:

Legg Mason ClearBridge Aggressive Growth A (SHRAX): ClearBridge is Legg Mason’s largest equity-focused fundamental investing unit.  SHRAX traditionally sports high expenses, below average returns (better lately), above average risk (ditto), a 5.75% sales load and a penchant for losing a lot in down markets.

Delaware Select Growth A (DVEAX): give or take high expenses and a 5.75% sales load, they’ve done well since the March 2009 market bottom (though were distinctly average before them).

Needham Aggressive Growth (NEAGX) which, they sharply note, is “a fund focused on capital appreciation.”  Note to ZIR: all aggressive growth funds focus on capital appreciation.  In any case, it’s a solid, very small no-load fund with egregious expenses (2.05%) and egregious YTD losses (down almost 15% through Christmas, in the bottom 2% of its peer group)

Sentinel Sustainable Growth Opportunities A (WAEGX): 5% sales load, above average expenses, consistently below average returns

American Century Ultra (TWCUX): a perfectly fine large-growth fund.  Though American Century has moved away from offering no-load funds, the no-load shares remain available through many brokerages.

So, if you like expensive, volatile and inconsistent . . . .  (Thanks to MFWire.com for reproducing, without so much as a raised eyebrow, Zacks list.  “Are These Funds Worth a Second Look?” 12/21/2011)

Two 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 new fund:

HNP Growth and Preservation (HNPKX): one of the strengths and joys of small funds is that they offer the opportunity to try new approaches, rather than offering the next bloated version of an old one.  The HNP managers, learning from the experience of managed futures funds, offer a rigorous, quantitative approach to investing actively and cautiously across several asset classes.

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.

Tocqueville Select (TSELX): Delafield Fund is good.  Top 5% of the past three years.  And five years.  And ten and fifteen years, for that matter.  Could Tocqueville Select be better?  It offers the same talented team that runs Delafield, but allows them to construct a concentrated portfolio that needs to invest only one-twentieth of Delafield’s assets.

Launch Alert:

Matthews Asia Strategic Income Fund (MAINX) launched on November 30, 2011.  The fund will invest in a wide variety of bonds and other debt securities of Asian corporate and sovereign issuers in both local and hard currencies. The fund will draw on both Matthews’ expertise in Asian fixed-income investing, which dates to the firm’s founding, and on the expertise of its new lead manager, Teresa Kong. Ms. Kong was Head of Emerging Market Investments at Barclays Global Investors / BlackRock, where she founded and led the Fixed Income Emerging Markets team. She was a Senior Portfolio Manager for them, a Senior Securities Analyst at Oppenheimer Funds, and an analyst for JP Morgan Securities.  Matthews argues that the Asian fixed income market is large, diverse, transparent and weakly-correlated to Western markets. Because Asian firms and governments have less debt than their Western counterparts, they are only a small portion of global bond indexes which makes them attractive for active managers. The Matthews fund will have the ability to invest across the capital structure, which means going beyond bonds into convertibles and other types of securities. The minimum initial investment is $2500 for regular accounts, $500 for IRAs.  Expenses are capped at 1.40%.

Prelaunch Alert: RiverNorth Tactical Opportunities

RiverNorth Core Opportunities (RNCOX) exemplifies what “active management” should be.  The central argument in favor of RNCOX is that it has a reason to exist, a claim that lamentably few mutual funds can seriously make.  RNCOX offers investors access to a strategy which makes sense and which is not available through – so far as I can tell – any other publicly accessible investment vehicle. The manager, Patrick Galley, starts with a strategic asset allocation model (in the neighborhood of 60/40), modifies it with a tactical asset allocation which tilts the fund in the direction of exceptional opportunities, and then implements the strategy either by investing in low-cost ETFs or higher-cost closed-end funds.  He chooses the latter path only when the CEFs are selling at irrational discounts to their net asset value.  He has, at times, purchased a dollar’s worth of assets for sixty cents.

Closed-end funds are investment vehicles very much like mutual funds.  One important difference is that they can make greater use of leverage to boost returns.  The other is that, like stocks and exchanged-traded funds, they trade throughout the day in secondary markets.  When you buy shares, it’s from another investor in the fund rather than from the fund company itself.  That insulates CEFs from many of the cash-flow issues that plague the managers of open-ended funds.

RNCOX, since inception, has outperformed its average peer by about two-to-one, though the manager consistently warns that his strategy will be volatile.  After reaching about a half billion in assets, the fund closed in the summer of 2011.

In the fall of 2011, RiverNorth filed to launch a closed-end fund of its own, RiverNorth Tactical Opportunities.  The fund will invest in other closed-end funds, just as its open-ended sibling does.  The closed-end fund will have the ability to use leverage, which will magnify its movements.  The theory says that they’ll deploy leverage to magnify the upside but it would be hard to avoid catching downdrafts as well.

Morningstar’s Mike Taggart agrees that the strategy is “compelling.”  Mr. Galley, legally constrained from discussing a fund in registration, says only that the timing of launch is still unknown but that he’d be happy to talk with us as soon as he’s able.  Folks anxious for a sneak peek can read the fund’s IPO filing at the Securities and Exchange Commission.

Pre- Pre-Launch Alert:

Andrew Foster announced on Seafarer’s website that he’s “exploring” a strategy named Seafarer Overseas Growth and Income.  At this point there is no vehicle for the strategy, that is, nothing in registration with the SEC, but tracking Mr. Foster’s thinking is likely to be a very wise move.

Mr. Foster managed Matthews Asian Growth and Income (MACSX), a FundAlarm “star in the shadows” fund, from 2005-2011.   As its manager, he first worked with and then succeeded Paul Matthews, the firm’s founder.  Saying that he did an excellent job substantially understates his success.  MACSX was one of the most consistent, least volatile and most rewarding Asia-focused funds during his tenure. Andrew also served as Matthews’ director of research and chief investment officer.

Andrew left to found his own firm in 2011, with the announced intention of one day launching a thoroughly modern mutual fund that drew on his experience.  While this is not yet that fund, it does illustrate the direction of his planning.   Andrew writes:

This strategy attempts to offer a stable means of participating in a portion of developing countries’ growth prospects, while providing some downside protection relative to a strategy that invests only in the common stocks of emerging markets. The strategy’s objective is to provide long-term capital appreciation along with some current income. In order to pursue that objective, the strategy incorporates dividend-paying equities, convertible bonds and fixed income securities. It may also invest in companies of any size or capitalization, including smaller companies.

We’ll do our best to monitor the strategy’s development.

Mining for Hidden Gems among Funds

Journalist Javier Espinoza’s pursuit of “hidden gems” – great funds with under $100 million in assets – led him to the Observer.  His article Mining for Hidden Gems Among Funds ran in the Wall Street Journal’s “Investing in Funds” report (12/05/2011).  The Journal highlighted five funds:

Pinnacle Value (recommended David Snowball and profiled as a “star in the shadows”)

Marathon Value (another “star in the shadows,” recommended by Johanna Turner of Milestones Financial Planning and a supporter of both FundAlarm and the Observer)

Artio US Smallcap (recommended by Bob Cochran of PDS Planning, one of the most thoughtful and articulate members of the community here and at FundAlarm)

Bogle Small Cap Growth (recommended by Russel Kinnel, Morningstar’s venerable director of fund research)

Government Street Equity (recommended by Todd Rosenblut, mutual fund analysis for S&P Capital IQ)

Fund Update

RiverPark Wedgewood (RWGFX), which the Observer profiled in September as one of the most intriguing new funds, has an experienced manager and a focused portfolio of exceptionally high-quality firms.  Manager Dave Rolfe aims to beat index funds at their own game, by providing a low turnover, tightly-focused portfolio that could never survive in a big fund firm.

The fund is approached the end of 2011 with returns in the top 2% of its large growth peer group.  Manager Dave Rolfe has earned two distinctions from Morningstar.  His fund has been recognized with the new Bronze designation, which means that Morningstar’s analysts weigh it as an above-average prospect going forward.  In addition, he was featured in a special Morningstar Advisor report, Wedgewood’s Lessons Pay Off.  After lamenting the pile of cookie-cutter sales pitches for firms promising to invest in high-quality, reasonably-priced firms, Dan Culloton happily observes, “self-awareness, humility and patience set Wedgewood apart.”  I agree.

Briefly Noted . . .

Matthews International Capita Management reopened Matthews Asian Growth and Income Fund (MACSX) and the Matthews Asia Small Companies Fund (MSMLX) on January 4, 2012. The funds have been closed for about a year, but both saw substantial asset outflows as Asian markets got pummeled in 2011.  MACSX was identified as an Observer “Star in the Shadows” fund.  As usual, it’s one of the best Asian funds during market turbulence (top 15% in 2011) though it seems to be a little less splendid than under former manager Andrew Foster.  The young Small Companies fund posted blistering returns in 2009 and 2010.  Its 2011 returns have modestly trailed its Asian peers.  That’s a really reassuring performance, given the fund’s unique focus on smaller companies.

The Wall Street Journal reports on a fascinating initiative by the SEC.  They’ve been using quantitative screens to identify hedge funds with “aberrational performance,” which might include spectacularly high returns or inexplicably low volatility. They then target such funds for closer inspection.  The system is been so productive that they’re now adding mutual funds to the scan (“SEC Ups its Game to Identify Rogue Firms,” 12/29/11).

Artisan Partners has withdrawn their planned IPO, citing unfavorable market conditions.  The cash raised in the IPO would have allowed the firm to restructure a bit so that it would be easier for young managers to hold a significant equity stake in the firm.

Ed Studzinski, long-time comanager of Oakmark Equity & Income (OAKBX) retired on January 1, 2012, at age 62.  Clyde McGregor will now manage the fund alone.

ETrade daily publishes the list of “most searched” mutual funds, as an aid to folks wondering where investors’ attention is wandering.  If you can find any pattern in the post-Christmas list, I’d be delighted to hear of it:

  • Rydex Russell 2000 2x Strategy (RYRSX)
  • Managers PIMCO Bond (MBDFX)
  • T. Rowe Price Emerging Markets Stock (PRMSX)
  • Vanguard Energy (VGENX)
  • T. Rowe Price New Horizons (PRNHX)

Highland Funds Asset Management will spin-off from Highland Capital Management next month and switch its name to Pyxis Capital.  Highland’s 19 mutual funds will be rebranded with the Pyxis name effective January 9.  Pyxis is a constellation in the southern sky and Latin for a mariner’s compass.  Pixies?  Pick Six?  Pick sis?  What do you suppose was going on at the meeting where someone first suggested, “hey, let’s change our name to something that no one has ever heard of, which is hard to say and whose sole virtue is an obscure reference that will be grasped by three Latin astronomers?”

Anya Z. and the Observer’s New Look

In December we unveiled the Observer’s new visual design, which is easier to navigate, easier to maintain and infinitely more polished.  I’d like to take a moment to recognize, and thank, the designer.  Anya Zolotusky is a Seattle area web designer who specializes in elegant and highly useable websites for small businesses.  Anya’s resume has entries so cool that they make me laugh.  Uhhh . . . she pioneered “cybercasts from uncomfortable places.”   One presumably uncomfortable place was a Mt Everest Basecamp, 18,000’ up from which she handled all communications, including live audio and video interviews with CNN and their ilk).

We talked a while about what I imagined the Observer should look like and Anya took it from there.  She describes her goal:

Primarily I wanted a more polished look that would better suit the spirit of the MFO and make using the site a more pleasant experience for visitors. I liked incorporating the energy of the exchange floor, but faded way back, because the MFO is a source of calm and reason in the midst of investment world chaos. The colors, the clean layout and clear navigation are all intended to create a calm backdrop for a topic that is anything but. And the iconic Wall Street bull is just a natural totem for the MFO. I’m happy to have contributed a little to what I hope is a long, bullish future for the MFO and all the Snowball Groupies (especially my mom)!

Anya’s mom is a Soviet émigré and long-time fan of FundAlarm.  Her encouragement, in a note entitled “Come on, Snowball.  Do it for mom!” helped convince me to launch the Observer in the first place.

And so, thanks to Anya and all the remarkably talented folks whose skill and dedication allows me to focus on listening and writing.  Anyone interested in seeing the rest of Anya’s work should check out her Darn Good Web Design.

Two New Observer Resources

The Observer continues to add new features which reflect the talents and passions of the folks who make up our corps of volunteer professionals.  I’m deeply grateful for their support, and pleased to announce two site additions.

The Navigator

Accipiter, our chief programmer and creator of the Falcon’s Eye, has been hard at work again. This time he’s turned his programming expertise to The Navigator, a valuable new tool for looking up fund and ETF information. Similar to the Falcon’s Eye, you can enter a ticker and receive links to major sources of information, 27 at last count. In added functionality, you can also enter a partial ticker symbol and see a dropdown list of all funds that begin with those characters. Additionally, you can search for funds by entering only part of a fund name and again seeing a dropdown list of all funds containing the string you entered. Choosing a fund from the dropdown then returns links to all 27 information sources. This all strikes me as borderline magical.  Please join me in thanking Accipiter for all he does.

Miscommunication in the Workplace

This ten-page guide, which I wrote as a Thanksgiving gift for the Observer’s readers, has been downloaded hundreds of times.  It has now found a permanent home in the Observer’s Resources section.  If you’ve got questions or comments about the guide, feel free to pass them along.  If we can make the guide more useful, we’ll incorporate your ideas and release a revised edition.

In Closing . . .

Augustana bell tower panorama

Augustana College bell tower panorama, photo by Drew Barnes, class of 2014.

Winter will eventually settle in to the Midwest.  The days are short and there are lots of reasons to stay inside, making it a perfect time to catch up on some reading and research.  I’ve begun a conversation with Steve Dodson, former president of Parnassus Investments and now manager of Bretton Fund (BRTNX) and I’m trying to track down James Wang, manager of the curious Oceanstone Fund (OSFDX).  Five years, five finishes at the top of the fund world, cash heavy, few assets and virtually no website.  Hmmm. Our plan is to review two interesting new funds, one primarily domestic and one primarily international, in each of the next several months. We’ll profile the new Grandeur Peak Global Opportunities (GPGOX) and Matthews Asia Strategic Income (MAINX) funds in February and March, respectively.

Observer readers have asked for consideration of a half dozen funds, including Conestoga Small Cap (CCASX) and Aston/Cornerstone Large Cap Value (RVALX).  I don’t know what I’ll find, but I’m delighted by the opportunity to learn a bit and to help assuage folk’s curiosity.

In addition, Junior Yearwood, who helped in editing the Miscommunication in the Workplace guide, has agreed to take on the task of bringing a long-stalled project to life.  Chuck Jaffe long ago suggested that it would be useful to have a launch pad from which to reach the highest-quality information sources on the web; a sort of one-stop shop for fund and investing insights.  While the Observer’s readers had a wealth of suggestions (and I’ll be soliciting more), I’ve never had the time to do them justice.  With luck, Junior’s assistance will make it happen.

We’re healthy, in good spirits, the discussion board is populated by a bunch of good and wise people, and I’m teaching two of my favorite classes, Propaganda and Advertising and Social Influence.  Life doesn’t get much better.

I’ll see you soon,


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About David Snowball

David Snowball, PhD (Massachusetts). Cofounder, lead writer. David is a Professor of Communication Studies at Augustana College, Rock Island, Illinois, a nationally-recognized college of the liberal arts and sciences, founded in 1860. For a quarter century, David competed in academic debate and coached college debate teams to over 1500 individual victories and 50 tournament championships. When he retired from that research-intensive endeavor, his interest turned to researching fund investing and fund communication strategies. He served as the closing moderator of Brill’s Mutual Funds Interactive (a Forbes “Best of the Web” site), was the Senior Fund Analyst at FundAlarm and author of over 120 fund profiles. David lives in Davenport, Iowa, and spends an amazing amount of time ferrying his son, Will, to baseball tryouts, baseball lessons, baseball practices, baseball games … and social gatherings with young ladies who seem unnervingly interested in him.