Monthly Archives: June 2012

June 1, 2012

By David Snowball

Dear friends,

I’m intrigued by the number of times that really experienced managers have made one of two rueful observations to me:

“I make all my money in bear markets, I just don’t know it at the time”

 “I add most of my value when the market’s in panic.”

With the market down 6.2% in May, Morningstar’s surrogate for high-quality domestic companies down by nearly 9% and only one equity sector posting a gain (utilities were up by 0.1%), presumably a lot of investment managers are gleefully earning much of the $10 billion in fees that the industry will collect this year.

Long-Short Funds and the Long, Hot Summer

The investment industry seems to think you need a long-short fund, given the number of long-short equity funds that they’ve rolled-out in recent years.  They are now 70 long-short funds (a category distinct from market neutral and bear market funds, and from funds that occasionally short as a hedging strategy).  With impeccable timing, 36 were launched after we passed the last bear market bottom in March 2009.

Long-short fund launches, by year

2011 – 12 13 funds
2010 16 funds
2009 7 funds
Pre-2009 34 funds

The idea of a long-short fund is unambiguously appealing and is actually modeled after the very first hedge fund, A. W. Jones’s 1949 hedged fund.  Much is made of the fact that hedge funds have lost both their final “d” and their original rationale.  Mr. Jones reasoned that we could not reliably predict short-term market movements, but we could position ourselves to take advantage of them (or at least to minimize their damage).  He called for investing in net-long in the stock market, since it was our most reliable engine of “real” returns, but of hedging that exposure by betting against the least rational slices of the market.  If the market rose, your fund rose because it was net-long and invested in unusually attractive firms.  If the market wandered sideways, your fund might drift upward as individual instances of irrational pricing (the folks you shorted) corrected.  And if the market fell, ideally the stocks you shorted would fall the most and would offer a disproportionately large cushion.  A 30% short exposure in really mispriced stocks might, hypothetically, buffer 50% of a market slide.

Unfortunately, most long-short funds aren’t able to clear even the simplest performance hurdle, the returns of a conservative short-term bond index fund.  Here are the numbers:

Number that outperformed a short-term bond index fund (up 3%) in 2011

11 of 59

Number that outperformed a short-term bond index fund from May 2011 – May 2012

6 of 62

Number that outperformed a short-term bond index over three years, May 2010 – May 2012

21 of 32

Number that outperformed a short-term bond index over five years, May 2008 – May 2012

1 of 22

Number in the red over the past five years

13 of 22

Number that outperformed a short-term bond index fund in 2008

0 of 25

In general, over the past five years, you’d have been much better off buying the Vanguard Short-Term Bond Index (VBISX), pocketing your 4.6% and going to bed rather than surrendering to the seductive logic and the industry’s most-sophisticated strategies.

Indeed, there is only one long-short fund that’s unambiguously worth owning: Robeco Long/Short Equity (BPLSX).  But it had a $100,000 investment minimum.  And it closed to new investors in July, 2010.

Nonetheless, the idea behind long/short investing makes sense.  In consequence of that, the Observer has begun a summer-long series of profiles of long-short funds that hold promise, some few that have substantial track records as mutual funds and rather more with short fund records but longer pedigrees as separate accounts or hedge funds.  Our hope is to identify one or two interesting options for you that might help you weather the turbulence that’s inevitably ahead for us all.

This month we begin by renewing the 2009 profile of a distinguished fund, Wasatch Long/ Short (FMLSX) and bringing a really promising newcomer, Aston / River Road Long- Short (ARLSX) onto your radar.

Our plans for the months ahead include profiles of Aston/MD Sass Enhanced Equity (AMBEX), RiverPark Long/Short Opportunity (RLSFX), RiverPark/Gargoyle Hedged Value (RGHVX), James Long-Short (JAZZX), and Paladin Long Short (PALFX).  If we’ve missed someone that you think of a crazy-great, drop me a line.  I’m open to new ideas.

FBR reaps what it sowed

FBR & Co. filed an interesting Regulation FD Disclosure with the SEC on May 30, 2012.  Here’s the text of the filing:

FBR & Co. (the “Company”) disclosed today that it has been working with outside advisors who are assisting the Company in its evaluation of strategic alternatives for its asset management business, including the sale of all or a portion of the business.

There can be no assurance that this process will result in any specific action or transaction. The Company does not intend to further publicly comment on this initiative unless the Company executes definitive deal documentation providing for a specific transaction approved by its Board of Directors.

FBR has been financially troubled for years, a fact highlighted by their decision in 2009 to squeeze out their most successful portfolio manager, Chuck Akre and his team.  In 1997, Mr. Akre became of founding manager of FBR Small Cap Growth – Value fund, which became FBR Small Cap Value, the FBR Small Cap, and finally FBR Focus (FBRVX). Merely saying that he was “brilliant” underestimates his stewardship of the fund.  Under his watch (December 1996 – August 2009), Mr. Akre turned $10,000 invested in the fund at inception to $44,000.  His average peer would have yielded $18,000.  Put another way: he added $34,000 to the value of your opening portfolio while the average midcap manager added $8,000.  Uhh: he added four times as much?

In recognition of which, FBR through the Board of Trustees whose sole responsibility is safeguarding the interests of the fund’s shareholders, offered to renew his management contract in 2009 – as long as he accepted a 50% pay cut. Mr. Akre predictably left with his analyst team and launched his own fund, Akre Focus (AKREX).  In a singularly classy move, FBR waited until Mr. Akre was out of town on a research trip and made his analysts an offer they couldn’t refuse.  Akre got a phone call from his analysts, letting him know that they’d resigned so that they could return to run FBR Focus.

Why?  At base, FBR was in financial trouble and almost all of their funds were running at a loss.  The question became how to maximize the revenue produced by their most viable asset, FBR Focus and the associated separate accounts which accounted for more than a billion of assets under management.  FBR seems to have made a calculated bet that by slashing the portion of fund fees going to Mr. Akre’s firm would increase their own revenues dramatically.  Even if a few hundred million followed Mr. Akre out the door, they’d still make money on the deal.

Why, exactly, the Board of Trustees found this in the best interests of the Focus shareholders (as opposed to FBR’s corporate interests) has never been explained.

How did FBR’s bet play out?  Here’s your clue: they’re trying to sell their mutual fund unit (see above).  FBR Focus’s assets have dropped by a hundred million or so, while Akre Focus has drawn nearly a billion in new assets.  FBR & Co’s first quarter revenues were $39 million in 2012, down from $50 million in 2011.  Ironically, FBR’s 10 funds – in particular, David Ellison’s duo – are uniformly solid performers which have simply not caught investors’ attention.  (Credit Bryan Switzky of the Washington Business Journal for first writing about the FD filing, “FBR & Co. exploring sale of its asset management business,” and MFWire for highlighting his story.)

Speaking of Fund Trustees

An entirely unremarkable little fund, Autopilot Managed Growth Fund (AUTOX), gave up the ghost in May.  Why?  Same as always:

The Board of Trustees of the Autopilot Managed Growth Fund (the “Fund”), a separate series of the Northern Lights Fund Trust, has concluded that it is in the best interests of the Fund and its shareholders that the Fund cease operations.  The Board has determined to close the Fund, and redeem all outstanding shares, on June 15, 2012.

Wow.  That’s a solemn responsibility, weighing the fate of an entire enterprise and acting selflessly to protect your fellow shareholders.

Sure would be nice if Trustees actually did all that stuff, but the evidence suggests that it’s damned unlikely.  Here’s the profile for Autopilot’s Board, from the fund’s most recent Statement of Additional Information.

Name of Trustee (names in the original, just initials here) Number of Portfolios in Fund Complex Overseen by Trustee Total Compensation Paid to Directors Aggregate Dollar Range of Equity Securities in All Registered Investment Companies Overseen by Trustee in Family of Investment Companies
LMB

95

$65,000

None

AJH

95

$77,500

None

GL

95

$65,000

None

MT

95

$65,000

None

MM

95

none

None

A footnote adds that each Trustee oversees between two and 14 other funds.

How is it that Autopilot became 1% of a Trustee’s responsibilities?  Simple: funds buy access to prepackaged Boards of Trustees as part of the same arrangement  that provides the rest of their “back office” services.  The ability of a fund to bundle all of those services can dramatically reduce the cost of operation and dramatically increase the feasibility of launching an interesting new product.

So, “LMB” is overseeing the interests of the shareholders in 109 mutual funds, for which he’s paid $65,000.  Frankly, for LMB and his brethren, as with the FBR Board of Trustees (see above), this is a well-paid, part-time job.  His commitment to the funds and their shareholders might be reflected by the fact that he’s willing to pretend to have time to understand 100 funds or by the fact that not one of those hundred has received a dollar of his own money.

It is, in either case, evidence of a broken system.

Trust But Verify . . .

Over and over again.

Large databases are tricky creatures, and few are larger or trickier than Morningstar’s.  I’ve been wondering, lately, whether there are better choices than Leuthold Global (GLBLX) for part of my non-retirement portfolio.  Leuthold’s fees tend to be high, Mr. Leuthold is stepping away from active management and the fund might be a bit stock-heavy for my purposes.  I set up a watchlist of plausible alternatives through Morningstar to see what I might find.

What I expected to find was the same data on each page, as was the case with Leuthold Global itself.

   

What I found was that Morningstar inconsistently reports the expense ratios for five of seven funds, with different parts of the site offering different expenses for the same fund.  Below is the comparison of the expense ratio reported on a fund’s profile page at Morningstar and at Morningstar’s Fund Spy page.

Profiled e.r.

Fund Spy e.r.

Leuthold Global

1.55%

1.55%

PIMCO All Asset, A

1.38

0.76

PIMCO All Asset, D

1.28

0.56

Northern Global Tact Alloc

0.68

0.25

Vanguard STAR

0.34

0.00

FPA Crescent

1.18

1.18

Price Spectrum Income

0.69

0.00

I called and asked about the discrepancy.  The best explanation that Morningstar’s rep had was that Fund Spy updated monthly and the profile daily.  When I asked how that might explain a 50% discrepancy in expenses, which don’t vary month-to-month, the answer was an honest: “I don’t know.”

The same problem appeared when I began looking at portfolio turnover data, occasioned by the question “does any SCV fund have a lower turnover than Huber Small Cap?”   Morningstar’s database reported 15 such funds, but when I clicked on the linked profile for each fund, I noticed errors in almost half of the reports.

Profiled turnover

Fund Screener turnover

Allianz NFJ Small Cap Value (PCVAX)

26

9

Consulting Group SCV (TSVUX)

38

9

Hotchkis and Wiley SCV (HWSIX)

54

11

JHFunds 2 SCV (JSCNX)

15

9

Northern Small Cap Value (NOSGX)

21

6

Queens Road Small Cal (QRSVX)

38

9

Robeco SCV I (BPSCX)

38

6

Bridgeway Omni SCV (BOSVX)

n/a

Registers as <12%

Just to be clear: these sorts of errors, while annoying, might well be entirely unavoidable.  Morningstar’s database is enormous – they track 375,000 investment products each day – and incredibly complex.  Even if they get 99.99% accuracy, they’re going to create thousands of errors.

One responsibility lies with Morningstar to clear up, as soon as is practical, the errors that they’ve learned of.  A greater responsibility lies with data users to double-check the accuracy of the data upon which they’re basing their decisions or forming their judgments.  It’s a hassle but until data providers become perfectly reliable, it’s an essential discipline.

A mid-month update:

The folks at Morningstar looked into these problems quite quickly. The short version is this: fund filings often contain multiple versions of what’s apparently the same data point. There are, for example, a couple different turnover ratios and up to four expense ratios. Different functions, developed by different folks at different times, might inadvertently choose to pull stats from different places. Both stats are correct but also inconsistent. If they aren’t flagged so that readers can understand the differences, they can also be misleading.

Morningstar is interested in providing consistent, system-wide data. Once they recognized the inconsistency, they moved quickly to reconcile it. As of June 19, the data had been reconciled. Thanks to the Wizards on West Wacker for their quick work. We’ll have a slightly more complete update in our July issue.

 

 

Proof that Time Travel is Possible: The SEC’s Current Filings

Each day, the Securities and Exchange Commission posts all of their current filings on their website.  For example, when a fund company files a new prospectus or a quarterly portfolio list, it appears at the SEC.  Each filing contains a date.  In theory, the page for May 22 will contain filings all of which are dated May 22.

How hard could that be?

Here’s a clue: of 187 entries for May 22, 25 were actually documents filed on May 22nd.  That’s 13.3%.  What are the other 86.7% of postings?  137 of them are filings originally made on other days or in other years.  25 of them are duplicate filings that are dated May 22.

I’ve regularly noted the agency’s whimsical programming.  This month I filed two written inquiries with them, asking why this happens.  The first query provoked no response for about 10 days, so I filed the second.  That provoked a voicemail message from an SEC attorney.  The essence of her answer:

  1. I don’t know
  2. Other parts of the agency aren’t returning our phone calls
  3. But maybe they’ll contact you?

Uhh … no, not so far.  Which leads me to the only possible conclusion: time vortex centered on the SEC headquarters.  To those of us outside the SEC, it was May 22, 2012.  To those inside the agency, all the dates in recent history had actually converged and so it was possible that all 15 dates recorded on the May 22 page were occurring simultaneously. 

And now a word from Chip, MFO’s technical director: “dear God, guys, hire a programmer.  It’s not that blinkin’ hard.”

Launch Alert 1: Rocky Peak Small Cap Value

On April 2, Rocky Peak Capital Management launched Rocky Peak Small Cap Value (RPCSX).  Rocky Peak was founded in 2011 by Tom Kerr, a Partner at Reed Conner Birdwell and long-time co-manager of CNI Charter RCB Small Cap Value fund.  He did well enough with that fund that Litman Gregory selected him as one of the managers of their Masters Smaller Companies fund (MSSFX).

While RPCSX doesn’t have enough of a track record to yet warrant a full profile, the manager’s experience and track record warrant adding it to a watch-list.  His plan is to hold 35-40 small cap stocks, many that pay dividends, and to keep risk-management in the forefront of his discipline.  Among the more interesting notes that came out of our hour-long conversation was (1) his interest in monitoring the quality of the boards of directors which should be reflected in both capital allocation and management compensation decisions and (2) his contention that there are three distinct sub-sets of the small cap universe which require different valuation strategies.  “Quality value” companies often have decades of profitable operating history and would be attractive at a modest discount to fair value.  “Contrarian value” companies, which he describes as “Third Avenue-type companies” are often great companies undergoing “corporate events” and might require a considerably greater discount.  “Smaller unknown value” stocks are microcap stocks with no more than one analyst covering them, but also really good companies (e.g. Federated Investors or Duff & Phelps).  I’ll follow it for a bit.

The fund has a $10,000 investment minimum and 1.50% expense ratio, after waivers.

Launch Alert 2: T. Rowe Price Emerging-Markets Corporate Bond Fund

On May 24, T. Rowe Price launched Emerging Markets Corporate Bond (TRECX), which will be managed by Michael Conelius, who also manages T. Rowe Price Emerging Markets Bond (PREMX).  PREMX has a substantial EM corporate bond stake, so it’s not a new area for him.  The argument is that, in a low-yield world, these bonds offer a relatively low-risk way to gain exposure to financially sound, quickly growing firms.  The manager will mostly invest in dollar-denominated bonds as a way to hedge currency risks and will pursue theme-based investing (“rise of the Brazilian middle class”) in the same way many e.m. stock funds do.  The fund has a $2500 investment minimum, reduced to $1000 for IRAs and will charge a 1.15% expense ratio, after waivers.  That’s just above the emerging-markets bond category average of 1.11%, which is a great deal on a fund with no assets yet.

Launch Alert 3: PIMCO Short Asset Investment Fund

On May 31, PIMCO launched this fund has an alternative to a money-market fund.  PIMCO presents the fund as “a choice for conservative investors” which will offer “higher income potential than traditional cash investments.”  Here’s their argument:

Yields remain compressed, making it difficult for investors to obtain high-quality income without taking on excess risk. PIMCO Short Asset Investment Fund offers higher income potential than traditional cash investments by drawing on multiple high-quality fixed income opportunity sets and PIMCO’s expertise.

The manager, Jerome Schneider, has access to a variety of higher-quality fixed-income products as well as limited access to derivatives.  He’s “head of [their] short-term funding desk and is responsible for supervising all of PIMCO’s short-term investment strategies.”  The “D” class shares trade under the symbol PAIUX, have a $1000 minimum, and expenses of 0.59% after waivers.  “D” shares are generally available no-load/NTF at a variety of brokerages.

Four Funds and Why They’re Really Worth Your While

Each month, the Observer profiles between two and four mutual funds that you likely have not heard about, but really should have.  Our “Most intriguing new funds: good ideas, great managers” 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. Two intriguing newer funds are:

Aston / River Road Long-Short (ARLSX). There are few successful, time-tested long-short funds available to retail investors.  Among the crop of newer offerings, few are more sensibly-constructed, less expensive or more carefully managed that ARLSX seems to be.  It deserves attention.

Osterweis Strategic Investment (OSTVX). For folks who remain anxious about the prospects of a static allocation in a dynamic world, OSTVX combines the virtues of two highly-flexible Osterweis funds in a single package.  The fund remains a very credible choice along with stalwarts such as PIMCO All-Asset (PASDX) and FPA Crescent (FPACX).  This is an update to our May 2011 profile.  We’ve changed styles in presenting our updates.  We’ve placed the new commentary in a text box but we’ve also preserved all of the original commentary, which often provides a fuller discussion of strategies and the fund’s competitive universe.  Feel free to weigh-in on whether this style works for you.

The “stars in the shadows” are all time-tested funds, many of which have everything except shareholders.

Huber Small Cap Value (HUSIX). Huber Small Cap is not only the best small-cap value fund of the past three years, it’s the extension of a long-practice, intensive and successful discipline with a documented public record.  For investors who understand that even great funds have scary stretches and are able to tolerate “being early” as a condition of long-term outperformance, HUSIX justifies as close a look as any fund launched in the past several years.

Wasatch Long Short (FMLSX).  For folks interested in access to a volatility-controlled equity fund, the case for FMLSX was – and is – remarkably compelling.  There’s only one demonstrably better fund in its class (BPLSX) and you can’t get into it.  FMLSX is near the top of the “A” list for those you can consider. This is an update to our 2009 profile.

The Best of the Web: Retirement Income Calculators

Our fourth “Best of the Web” feature focuses on retirement income calculators.  These are software programs, some quite primitive and a couple that are really smooth, that help answer two questions that most of us have been afraid to ask:

  1. How much income will a continuation of my current efforts generate?

and

  1. Will it be enough?

The ugly reality is that for most Americans, the answers are “not much” and “no.”  Tom Ashbrook, host of NPR’s On Point, describes most of us as “flying naked” toward retirement.  His May 29 program entitled “Is the 401(k) Working?” featured Teresa Ghilarducci, an economics professor at The New School of Social Research, nationally-recognized expert in retirement security and author of When I’m Sixty-Four: The Plot against Pensions and the Plan to Save Them (Princeton UP, 2008).  Based on her analysis of the most recent data, it “doesn’t look good at all” with “a lot of middle-class working Americans [becoming] ‘poor’ or ‘near-poor’ at retirement.”

Her data looks at the investments of folks from 50-64 and finds that most, 52%, have nothing (as in: zero, zip, zilch, nada, the piggy bank is empty).   In the top quarter of wage earners, folks with incomes above $75,000, one quarter of those in their 50s and 60s have no retirement savings.  Among the bottom quarter, 77% have nothing and the average account value for those who have been saving is $10,000.

The best strategy is neither playing the lottery nor pretending that it won’t happen.  The best strategy is a realistic assessment now, when you still have the opportunity to change your habits or your plans. The challenge is finding a guide that you can rely upon.  Certainly a good fee-only financial planner would be an excellent choice but many folks would prefer to turn to the web answers.  And so this month we trying to ferret out the best free, freely-available retirement income calculators on the web.

MFO at MIC

I’m pleased to report that I’ll be attending The Morningstar Investment Conference on behalf of the Observer.  This will be my first time in attendance.  I’ve got a couple meetings already scheduled and am looking forward to meeting some of the folks who I’ve only known through years of phone conversations and emails.

I’m hopeful of meeting Joan Rivers – I presume she’ll be doing commentary on the arrival of fashionistas Steve Romick, Will Danoff & Brian Rogers – and am very much looking forward to hearing from Jeremy Grantham in Friday’s keynote.  If folks have other suggestions for really good uses of my time, I’d like to hear from you.  Too, if you’d like to talk with me about the Observer and potential story leads, I’d be pleased to spend the time with you.

There’s a cheerful internal debate here about what I should wear.  Junior favors an old-school image for me: gray fedora with a press card in the hatband, flash camera and spiral notebook.   (Imagine a sort of balding Clark Kent.)  Chip, whose PhotoShop skills are so refined that she once made George W. look downright studious, just smiles and assures me that it doesn’t matter what I wear.  (Why does a smile and the phrase “Wear what you like and I’ll take care of everything” make me so apprehensive? Hmmm…)

Perhaps the better course is just to drop me a quick note if you’re going to be around and would like to chat.

Briefly noted . . .

Dreyfus has added Vulcan Value Partners as a sixth subadvisor for Dreyfus Select Managers Small Cap Value (DMVAX).  Good move!  Our profile described Vulcan Value Partners Small Cap fund as “a solid, sensible, profitable vehicle.”  Manager C.T. Fitzpatrick spent 17 years managing with Longleaf Partners before founding the Vulcan Value Partners.

First Eagle has launched First Eagle Global Income Builder (FEBAX) in hopes that it will provide “a meaningful but sustainable income stream across all market environments.”  Like me, they’re hopeful of avoiding “permanent impairment of capital.”  The management team overlaps their four-star High Yield Fund team.  The fund had $11 million on opening day and charges 1.3%, after waivers, for its “A” shares.

Vanguard Gets Busy

In the past four weeks, Vanguard:

Closed Vanguard High-Yield Corporate (VWEHX), closed to new investors.  The fund, subadvised by Wellington, sucked in $1.5 billion in new assets this year.  T. Rowe Price closed its High Yield (PRHYX) fund in April after a similar in-rush.

Eliminated the redemption fee on 33 mutual funds

Cut the expense ratios for 15 fixed-income, diversified-equity, and sector funds and ETFs.

Invented a calorie-free chocolate fudge brownie.

Osterweis, too

Osterweis Strategic Income (OSTIX) has added another fee breakpoint.  The fund will charge 0.65% on assets over $2.5 billion.  Given that the fund is a $2.3 billion, that’s worthwhile.  It’s a distinctly untraditional bond fund and well-managed.  Because its portfolio is so distinctive (lots of short-term, higher-yielding debt), its peer rankings are largely irrelevant.

At Least They’re Not in Jail

Former Seligman Communications and Information comanager Reema Shah pled guilty to securities fraud and is barred from the securities industry for life. She traded inside information with a Yahoo executive, which netted a few hundred thousand for her fund.

Authorities in Hong Kong have declined to pursue prosecution of George Stairs, former Fidelity International Value (FIVLX) manager.  Even Fido agrees that Mr. Stairs “did knowingly trade on non-public sensitive information.” Stairs ran the fund, largely into the ground, from 2006-11.

Farewells

Henry Berghoef, long-time co-manager of Oakmark Select (OAKLX), plans to retire at the end of July.

Andrew Engel, who helped manage Leuthold’s flagship Core Investment(LCORX) and Asset Allocation(LAALX) funds, died on May 9, at the age of 52.  He left behind a wife, four children and many friends.

David Williams, who managed Columbia Value & Restructuring (EVRAX, which started life as Excelsior Value & Restructuring), has retired after 20 years at the helm. The fund was one of the first to look beyond simple “value” and “growth” categories and into other structural elements in constructing its portfolio.

Closings

Delaware Select Growth (DVEAX) will close to new investors at the beginning of June, 2012.

Franklin Double Tax-Free Income (FPRTX) will soft-close in mid-June then hard-close at the beginning of August.

Goldman Sachs Mid Cap Value (GCMAX) will close to new investors at the end of July. Over the past five years the fund has been solidly . .. uh, “okay.”  You could do worse.  It doesn’t suck often. Not clear why, exactly, that justifies $8 billion in assets.

Old Wine, New Bottles

Artisan Growth Opportunities (ARTRX) is being renamed Artisan Global Opportunities.  The fund is also pretty global and the management team is talented and remaining, so it’s mostly a branding issue.

BlackRock Multi-Sector Bond Portfolio (BMSAX) becomes BlackRock Secured Credit Portfolio in June.  It also gets a new mandate (investing in “secured” instruments such as bank loans) and a new management team.  Presumably BlackRock is annoyed that the fund isn’t drawing enough assets (just $55 million after two years).  Its performance has been solid and it’s relatively new, so the problem mostly comes down to avarice.

Likewise BlackRock Mid-Cap Value Equity (BMCAX) will be revamped into BlackRock Flexible Equity at the end of July.  After its rebirth, the fund will become all-cap, able to invest across the valuation spectrum and able to invest large chunks into bonds, commodities and cash.  The current version of the fund has been consistently bad at everything except gathering assets, so it makes sense to change managers.  The eclectic new portfolio may reflect its new manager’s background in the hedge fund world.

Buffalo Science & Technology (BUFTX) will be renamed Buffalo Discovery, effective June 29, 2012.

Goldman Sachs Ultra-Short Duration Government (GSARX) is about to become Goldman Sachs High Quality Floating Rate and its mandate has been rewritten to focus on foreign and domestic floating-rate government debt.

Invesco Small Companies (ATIAX) will be renamed Invesco Select Companies at the beginning of August.

Nuveen is reorganizing Nuveen Large Cap Value (FASKX) into Dividend Value (FFEIX), pending shareholder approval of course, next autumn.  The recently-despatched management team managed to parlay high risk and low returns into a consistently dismal record so shareholders are apt to agree.

Perritt Emerging Opportunities (PREOX) has been renamed Perritt Ultra MicroCap.  The fund’s greatest distinction is that it invests in smaller stocks, on whole, than any other fund and their original name didn’t capture that reality.  The fund is a poster child for “erratic,” finishing either in the top 10% or the bottom 10% of small cap funds almost every year. Its performance roughly parallels that of Bridgeway’s two “ultra-small company” funds.

Nuveen Tradewinds Global All-Cap (NWGAX) and Nuveen Tradewinds Value Opportunities (NVOAX) have reopened to new investors after the fund’s manager and a third of assets left.

Off to the Dustbin of History

AllianceBernstein Greater China ’97 (GCHAX) will be liquidated in early June. It’s the old story: high expenses, low returns, no assets.

Leuthold Hedged Equity will liquidate in June 2012, just short of its third anniversary.  The fund drew $4.7 million between two share clases and the Board of Trustees determined it was in the best interests of shareholders to liquidate.  Given the fund’s consistent losses – it turned $10,000 into $7900 – and high expenses, they’re likely right.  The most interesting feature of the fund is that the Institutional share class investors were asked to pony up $1 million to get in, and were then charged higher fees than were retail class investors.

Lord Abbett Large Cap (LALAX) mergers into Lord Abbett Fundamental Equity (LDFVX) on June 15.

Oppenheimer plans to merge Oppenheimer Champion Income (OPCHX) and Oppenheimer Fixed Income Active Allocation (OAFAX) funds will merge into Oppenheimer Global Strategic Income (OPSIX) later this year.  That’s the final chapter in the saga of two funds that imploded (think: down 80%) in 2008, then saw their management teams canned in 2009. The decision still seems odd: OPCHX has a half-billion in assets and OAFAX is a small, entirely solid fund-of-funds.

In closing . . .

Thanks to all the folks who’ve provided financial support for the Observer this month.  In addition to a handful of friends who provided cash contributions, either via PayPal or by check, readers purchased almost 210 items through the Observer’s Amazon link.  Thanks!  If you have questions about how to use or share the link, or if you’re just not sure that you’re doing it right, drop me a line.

It’s been a tough month, but it could be worse.  You could have made a leveraged bet on the rise of Latin American markets (down 25% in May).  For folks looking for sanity and stability, though, we’ll continue in July our summer-long series of long-short funds, but we’ll also update the profiles of RiverPark Short-Term High Yield (RPHYX), a fund in which both Chip and I invest, and ING Corporate Leaders (LEXCX), the ghost ship of the fund world.  It’s a fund whose motto is “No manager? No problem!”  We’re hoping to have a first profile of Seafarer Overseas Growth & Income (SFGIX) and Conestoga Small Cap (CCASX).

Until then, take care and keep cool!

Manager changes, May 2012

By Chip

Because bond fund managers, traditionally, had made relatively modest impacts of their funds’ absolute returns, Manager Changes typically highlights changes in equity and hybrid funds.

Ticker Fund Out with the old In with the new Dt
ACSCX American Century Small Cap Value James Pitman Benjamin Giele and Jeff John 5/12
BMCAX BlackRock Mid-Cap Value Equity Anthony Forcione Timothy Keefe 5/12
IRFAX Cohen & Steers International Realty Portfolio manager Scott Crowe is leaving the firm Jon Cheigh 5/12
CSRSX Cohen & Steers Realty Shares No one, but … Tom Bohjalian will join Jon Cheigh as comanager. 5/12
CSVAX Columbia Strategic Investor Emil Gjester and Jonas Patrikson have stepped down Steven Schroll, Laton Spahr, and Paul Stocking will be the new managers. They’ve delivered solid performance on other Columbia funds. 5/12
EVRAX Columbia Value & Restructuring David Williams, manager since inception, retired. Comanagers Nick Smith and Guy Pope remain. 5/12
FDSSX Fidelity Stock Selector All Cap No one, but … Gordon Scott joined the team 5/12
FTEMX Fidelity Total Emerging Markets No one, but … Greg Lee, an e.m. stock manager, became the 7th comanager 5/12
FRVLX Franklin Small Cap Value Y. Dogan Sahin has stepped down. Four comanagers remain. 5/12
GIEIX GE Institutional International Equity Paul Nestro and Brian Hopkinson Lead manager Ralph Layman and two comanagers remain 5/12
GUSIX GE Institutional U.S. Equity Thomas Lincoln The other comanagers remain. 5/12
HRSVX Heartland Select Value Comanager Hugh Denison has stepped down in anticipation of retirement. The comanagers remain. 5/12
IEDAX ING Large Cap Value David Powers Comanagers Robert Kloss and Christopher Corapi remain 5/12
JCUAX John Hancock II Currency Strategies J No one, but … Jeppe Ladekarl will join current managers Ken Ferguson and Dori Levanoni 5/12
JPSAX JPMorgan US Dynamic Plus Christopher Blum was promoted. Alonzo, Dennis Ruhl, and Pavel Vaynshtok 5/12
SSIAX Legg Mason Investment Counsel Social Awareness David Kafes has left as comanager. Aimee Eudy will join Ronald Bates as comanager 5/12
LAALX Leuthold Asset Allocation Long time co-manager, Andrew Engel died. The other comanagers remain. 5/12
LCORX Leuthold Core Investment Long time co-manager, Andrew Engel died. The other comanagers and Leuthold’s quant screens remain. 5/12
MGVAX MainStay Government No one, but … Steven Rich was added as comanager. 5/12
MACSX Matthews Asian Growth & Income Jesper Madsen, who led the fund after Andrew Foster departed to found Seafarer Capital, stepped down CIO Robert Horrocks and relative newbie Ken Lowe remain as comanagers 5/12
NTGAX Nuveen Tradewinds Global Resources David Iben, Alberto Jimenez Crespo, and Gregory Padilla are left to join Vinik Asset Management Emily Alejos and Drew Thelen, the firms new co-CIOs 5/12
OAKLX Oakmark Select Henry Berghoef, long-time co-manager, will retire at the end of July. Lead manager Bill Nygren will run the fund 5/12
PRBLX Parnassus Equity Income No one, but … Benjamin Allen is promoted to comanager. 5/12
CVFCX Pioneer Cullen Value Subadvisor Cullen Capital Management, including team leader and firm founder, James Cullen Edward “Ned” Shadek and John Peckham 5/12
TGGWX TCW Enhanced Commodity Strategy Claude Erb Tad Rivelle joins current comanagers Steven Kane and Bret Barker 5/12
BNIEX UBS International Equity No one, but … Stephan Maikkula was added as a comanager 5/12

June 2012 Funds in Registration

By David Snowball

American Beacon The London Company Income Equity Fund

American Beacon The London Company Income Equity Fund (ABCVX) will pursue current income, with a secondary objective of capital appreciation. The plan is to invest in a wide variety of equity-linked securities (common and preferred stock, convertibles, REITs, ADRs), with the option of putting up to 20% in investment-grade fixed income securities. Their stock holdings focus on profitable, financially stable, core companies that focus on generating high dividend income, are run by shareholder-oriented management, and trade at reasonable valuations. The fund will be managed by a team headed by Stephen Goddard, The London Company’s chief investment officer. The minimum investment is $2500 and the expense ratio for Investor Class shares is 1.17% after waivers.

Pathway Advisors Conservative Fund

Pathway Advisors Conservative Fund will seek total return with a primary emphasis on income and a secondary emphasis on growth.  It will be a fund-of-funds (including mutual funds,  ETFs, CEFs, and ETNs) which will target 20-30% exposure to stocks and 70% to 80% to bonds and money market securities. The underlying funds might invest in foreign and domestic stocks of all sizes, REITs, high yield bonds, commodities, emerging market debate, floating rate securities and options.  They can also invest in funds which short the market and up to 15% of the portfolio may be in illiquid assets.. The fund will be managed by David Schauer of Hanson McClain Strategic Advisors.  The investment minimum is $2500 and the expenses have not yet been set.

Pathway Advisors Growth and Income Fund

Pathway Advisors Growth and Income Fund will seek total return through growth of capital and income.  It will be a fund-of-funds (including mutual funds,  ETFs, CEFs, and ETNs) which will target 60% exposure to stocks and 40% to bonds and money market securities. The underlying funds might invest in foreign and domestic stocks of all sizes, REITs, high yield bonds, commodities, emerging market debate, floating rate securities and options.  They can also invest in funds which short the market and up to 15% of the portfolio may be in illiquid assets.. The fund will be managed by David Schauer of Hanson McClain Strategic Advisors.  The investment minimum is $2500 and the expenses have not yet been set.

Pathway Advisors Aggressive Growth Fund

Pathway Advisors Aggressive Growth Fund will seek total return through a primary emphasis on growth with a secondary emphasis on income.  It will be a fund-of-funds (including mutual funds,  ETFs, CEFs, and ETNs) which will target 95% exposure to stocks and 5% to bonds and money market securities. The underlying funds might invest in foreign and domestic stocks of all sizes, REITs, high yield bonds, commodities, emerging market debate, floating rate securities and options.  They can also invest in funds which short the market and up to 15% of the portfolio may be in illiquid assets.. The fund will be managed by David Schauer of Hanson McClain Strategic Advisors.  The prospectus enumerates 24 principal and non-principal risks, no one of which “the fund manager has never run a mutual fund before and has no public performance record.”  But it should be.   The investment minimum is $2500 and the expenses have not yet been set.

TacticalShares Multi-Sector Index Fund

TacticalShares Multi-Sector Index Fund will seek to achieve long-term capital appreciation. It will be a tactical asset allocation fund which will invest in four global equity sectors: 1) U.S. equity market, 2) non-U.S. developed market, 3) emerging markets, and 4) the natural resources market.  The fund will invest in a collection of ETFs to gain market exposure.  Its neutral allocation places 25% in each sector, but they plan on actively managing their exposure.  The allocation is reset on a monthly basis depending on market conditions. The portfolio will be managed by a team headed by  Keith C. Goddard, CFA, President, CEO and Chief Investment Officer for Capital Advisors of Tulsa, OK. The minimum investment is $5000 for regular accounts, $500 for retirement plan accounts and $1000 for automatic investment plans. There is a redemption fee of 1% for funds held less than 30 days and the expense ratio after waivers is 1.9%.

William Blair International Leaders Fund

William Blair International Leaders Fund will seek long-term capital appreciation by investing in the stocks (and, possibly, convertible shares) of companies at different stages of development, although primarily in stocks with a market cap greater than $3 billion.The Fund’s investments will be divided among Continental Europe, the United Kingdom, Canada, Japan and the markets of the Pacific Basin.  It may invest up to 40% in emerging markets, which would be about twice the normal weighting of such stocks. George Greig, who also managed William Blair Global Growth and William Blair International Growth, and Kenneth J. McAtamney, co-managed of Global Growth, will co-manage the Fund.  The expense ratio will be 1.5% after waivers, and there will be a 2% redemption fee on shares held fewer than 60 days.

Huber Small Cap Value (formerly Huber Capital Small Cap Value), (HUSIX), June 2012

By David Snowball

At the time of publication, this fund was named Huber Small Cap Value.
This fund was formerly named Huber Capital Small Cap Value.

Objective and Strategy

The fund seeks long-term capital appreciation by investing in common stocks of U.S. small cap companies.  Small caps are those in the range found in the Russell 2000 Value index, roughly $36 million – $3.0 billion.  The manager looks for undervalued companies based, in part, on his assessment of the firm’s replacement cost; that is, if you wanted to build this company from the ground up, what would it cost?  The fund has a compact portfolio (typically around 40 names).  Nominally it “may make significant investments in securities of non-U.S. issuers” but the manager typically pursues U.S. small caps, some of which might be headquartered in Canada or Bermuda.  As a risk management tool, the fund limits individual positions to 5% of assets and individual industries to 15%.

Adviser

Huber Capital Management, LLC, of Los Angeles.  Huber has provided investment advisory services to individual and institutional accounts since 2007.  The firm has about $1.2 billion in assets under management, including $35 million in its two mutual funds.

Manager

Joseph Huber.  Mr. Huber was a portfolio manager in charge of security selection and Director of Research for Hotchkis and Wiley Capital Management from October 2001 through March 2007, where he helped oversee over $35 billion in U.S. value asset portfolios.  He managed, or assisted with, a variety of successful funds across a range of market caps.  He is assisted by four other investment professionals.

Management’s Stake in the Fund

Mr. Huber has over a million dollars in each of the Huber funds.  The most recent Statement of Additional Information shows him owning more than 20% of the fund shares (as of February 2012).  The firm itself is 100% employee-owned.

Opening date

June 29, 2007.  The former Institutional Class shares were re-designated as Investor Class shares on October 25, 2011, at which point a new institutional share class was launched.

Minimum investment

$5,000 for regular accounts and $2,500 for retirement accounts.

Expense ratio

1.75% on assets of $57.3 million, as of July 2023.  The expense ratio is equal to the gross expense ratio. 

Comments

Huber Small Cap Value is a remarkable fund, though not a particularly conservative one.

There are three elements that bring “remarkable” to mind.

The returns have been remarkable.  In 2012, HUSIX received the Lipper Award for the strongest risk adjusted return for a small cap value fund over the preceding three years.  (Its sibling was the top-performing large cap value one.)   From inception through late May, 2012, $10,000 invested in HUSIX would have grown to $11,650.  That return beats its average small-cap value ($9550) as well as the three funds designated as “Gold” by Morningstar analysts:  DFA US Small Value (DFSVX, $8900), Diamond Hill Small Cap (DHSCX, $10,050) and Perkins Small Cap Value (JDSAX, $8330).

The manager has been remarkable.  Mr. Huber was the Director of Research for Hotchkis-Wiley, where he also managed both funds and separate accounts. In six years there, his charges beat the Russell 2000 Value index five times, twice by more than 2000 basis points.  Since founding Huber Capital, he’s beaten the Russell 2000 Value in three of five years (including 2012 YTD), once by 6000 basis points.  In general, he accomplishes that with less volatility than his peers or his benchmark.

The investment discipline is remarkable.  Mr. Huber takes the business of establishing a firm’s value very seriously.  In his large cap fund, his team attempts to disaggregate firms; that is, to determine what each division or business line would be worth if it were a free-standing company.  Making that determination requires finding and assessing firms, often small ones that actually specialize in the work of a larger firm’s division.  That’s one of the disciplines that lead him to interesting small cap ideas.

They start by determining how much a firm can sustainably earn.  Mr. Huber writes:

 Of primary importance to our security selection process is the determination of ‘normal’ earnings. Normal earnings power is the sustainable cash earnings level of a company under equilibrium economic and competitive market conditions . . . Estimates of these sustainable earnings levels are based on mean reversion adjusted levels of return on equity and profit margins.

Like Jeremy Grantham of GMO, Mr. Huber believes in the irresistible force of mean reversion.

Over long time periods, value investment strategies have provided greater returns than growth strategies. Excess returns have historically been generated by value investing because the average investor tends to extrapolate current market trends into the future. This extrapolation leads investors to favor popular stocks and shun other companies, regardless of valuation. Mean reversion, however, suggests that companies generating above average returns on capital attract competition that ultimately leads to lower levels of profitability. Conversely, capital tends to leave depressed areas, allowing profitability to revert back to normal levels. This difference between a company’s price based on an extrapolation of current trends and a more likely reversion to mean levels creates the value investment opportunity.

The analysts write “Quick Reports” on both the company and its industry.  Those reports document competitive positions and make preliminary valuation estimates.  At this point they also do a “red flag” check, running each stock through an 80+ point checklist that reflects lessons learned from earlier blow-ups (research directors obsessively track such things).  Attractive firms are then subject to in-depth reviews on sustainability of their earnings.  Their analysts meet with company management “to better understand capital allocation policy, the return potential of current capital programs, as well as shareholder orientation and competence.”

All of that research takes time, and signals commitment.  The manager estimates that his team devotes an average of 260 hours per stock.  They invest in very few stocks, around 40, which they feel offers diversification without dilution.   And they hold those stocks for a long time.  Their 12% turnover ratio is one-quarter of their peers’.  We’ve been able to identify only six small-value funds, out of several hundred, that hold their stocks longer.

There are two reasons to approach the fund with some caution.  First, by the manager’s reckoning, the fund will underperform in extreme markets.  When the market is melting up, their conservatism and concern for strong balance sheets will keep them away from speculative names that often race ahead.  When the market is melting down, their commitment to remain fully invested and to buy more where their convictions are high will lead them to move into the teeth of a falling market.  That seems to explain the only major blemish on the fund’s performance record: they substantially trailed their peers in September, October and November of 2008 when HUSIX lost 46% in value.  In fairness, that discipline also set up a ferocious rebound in 2009 when the fund gained 86% and the stellar three-year run for which they earned the Lipper Award.

Second, the fund’s fees are high and likely to remain so.  Their management fee is 1.35% on the first $5 billion in assets, falling to 1% thereafter.  Management calculates that their strategy capacity is just $1 billion (that is, the amount that might be managed in both the fund and separate accounts).  As a result, they’re unlikely to reach that threshold in the fund ever.  The management fees charged by entrepreneurial managers vary substantially.  Chuck Akre of Akre Focus (AKREX) values his own at 0.9% of assets, John Walthausen of Walthausen Small Cap Value (WSCVX) charges 1.0% and John Deysher at Pinnacle Value (PVFIX) charges 1.25%, while David Winter of Wintergreen (WGRNX) charges 1.5%.  That said, this fund is toward the high end.

Bottom Line

Huber Small Cap has had a remarkable three-year run, and its success has continued into 2012.  The firm has in-depth analyses of that period, comparing their fund’s returns and volatility to an elite group of funds.  It’s clear that they’ve consistently posted stronger returns with less inconsistency than almost any of their peers; that is, Mr. Huber generates substantial alpha.  The autumn of 2008 offers a useful cautionary reminder that very good managers can (will and, perhaps, must) from time to time generate horrendous returns.  For investors who understand that reality and are able to tolerate “being early” as a condition of long-term outperformance, HUSIX justifies as close a look as any fund launched in the past several years.

Fund website

Huber Capital Small Cap Value Fund

April 30, 2023 Semi-Annual Report

Fact Sheet 3/31/2023

© Mutual Fund Observer, 2012. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.

ASTON / River Road Long-Short (ARLSX) – June 2012

By David Snowball

Objective and Strategy

ARLSX seeks to provide absolute returns (“equity-like returns,” they say) while minimizing volatility over a full market cycle.  The fund invests, long and short, mostly in US common stocks but can also take positions in foreign stock, preferred stock, convertible securities, REITs, ETFs, MLPs and various derivatives. The fund is not “market neutral” and will generally be “net long,” which is to say it will have more long exposure than short exposure.  The managers have a strict, quantitative risk-management discipline that will force them to reduce equity exposure under certain market conditions.

Adviser

Aston Asset Management, LP, which is based in Chicago.  Aston’s primary task is designing funds, then selecting and monitoring outside management teams for those funds.  As of March 31, 2012, Aston has partnered with 18 subadvisers to manage 26 mutual funds with total net assets of approximately $10.7 billion. Aston funds are available to retail investors, as well as through various professional channels.

Managers

Matt Moran and Daniel Johnson.  Both work for River Road Asset Management, which is based in Louisville.    They manage money for a variety of private clients (cities, unions, corporations and foundations) and sub-advise five funds for Aston, including the splendid (and closed) Aston/River Road Independent Value (ARIVX).  River Road employs 39 associates including 15 investment professionals.   Mr. Moran is the lead manager, joined River Road in 2007, has about a decade’s worth of experience and is a CFA.  Before joining River Road, he was an equity analyst for Morningstar (2005-06), an associate at Citigroup (2001-05), and an analyst at Goldman Sachs (2000-2001).  His MBA is from the University of Chicago.  Mr. Johnson is a CPA and a CFA.  Before joining River Road in 2006, he worked at PricewaterhouseCoopers.

Management’s Stake in the Fund

Mr. Moran and Mr. Johnson had between $100,000 and $500,000 as of April 30, 2012.  Those investments represent a significant portion of the managers’ liquid net worth.

Opening date

May 4, 2011.

Minimum investment

$2,500 for regular accounts and $500 for retirement accounts.

Expense ratio

2.75%, after waivers, on assets of $5.5 million.   The fund’s operating expenses are capped at 1.70%, but expenses related to shorting add another 1.05%.  Expenses of operating the fund, before waivers, are 8.7%.

Comments

Long/short investing makes great sense in theory but, far too often, it’s dreadful in practice.  After a year, ARLSX seems to be getting it right and its managers have a pretty cogent explanation for why that will continue to be the case.

Here’s the theory: in the long term, the stock market rises and so it’s wise to be invested in it.  In the short term, it can be horrifyingly irrational and so it’s wise to buffer your exposure.  That is, you want an investment that is hedged against market volatility but that still participates in market growth.

River Road pursues that ideal through three separate disciplines: long stock selection, short stock selection and level of net market exposure.

In long stock selection, their mantra is “excellent companies trading at compelling prices.” Between 50% and 100% of the portfolio is invested long in 15-30 stocks.

For training and other internal purposes, River Road’s analysts are responsible for creating and monitoring a “best ideas” pool, and Mr. Moran estimates that 60-90% of his long exposure overlaps that pool’s.  They start with conventional screens to identify a pool of attractive stocks.  Within their working universe of 200-300 such stocks, they look for fundamentally attractive companies (those with understandable businesses, good management, clean balance sheets and so on) priced at a discount that their absolute value.  They allow themselves to own the 15-30 most attractive names in that universe.

In short stock selection, they target “challenged business models with high valuations and low momentum.”  In this, they differ sharply from many of their competitors.  They are looking to bet against fundamentally bad companies, not against good companies whose stock is temporarily overpriced.  They can be short with 10-90% of the portfolio and typically have 20-40 short positions.

Their short universe is the mirror of the long universe: lousy businesses (unattractive business models, dunderheaded management, a history of poor capital allocation, and favorites of Wall Street analysts) priced at a premium to absolute value.

Finally, they control net market exposure, that is, the extent to which they are exposed to the stock market’s gyrations.  Normally the fund is 50-70% net long, though exposure could range from 10-90%.

The managers have a “drawdown plan” in place which forces them to become more conservative in the face of sharp market places.  While they are normally 50-70% long, if their portfolio has dropped by 4% they must reduce net market exposure to no more than 50%.  A 6% portfolio decline forces them down to 30% market exposure and an 8% portfolio decline forces them to 10% market exposure.  They achieve the reduced exposure by shorting the S&P500 via the SPY exchange-traded fund; they do not dump portfolio securities just to adjust exposure.  They cannot increase their exposure again until the Russell 3000’s 50 day moving average is positive.  Only after 10 consecutive positive days can they exit the drawdown plan altogether.

Mr. Moran embraces Benjamin Graham’s argument that “The essence of investment management is the management of risks, not the management of returns.”  As a result, they’ve built in a series of unambiguous risk-management measures.  These include:

  • A prohibition on averaging down or doubling-down on falling stocks
  • Stop loss orders on every long and short position
  • A requirement that they begin selling losing positions when losses develop
  • A prohibition on shorting stocks that show strong, positive momentum regardless of how ridiculous the stock might otherwise be
  • A requirement to systematically reduce any short position when the stock shows positive momentum for five days, and
  • The market-exposure controls embedded in the drawdown plan.

The fund’s early results are exceedingly promising.  Over its first full year of existence, the fund returned 3.7%; the S&P500 returned 3.8% while the average long-short fund lost 3.5%.  That placed the first in the top 10% of its category.  River Road’s Long-Short Strategy Composite, the combined returns of its separately-managed long-short products, has a slightly longer record (it launched in July 1, 2010) and similar results: it returned 16.3% through the end of the first quarter of 2012, which trailed the S&P500 (which returned 22.0%) but substantially outperformed the long-short group as a whole (4.2%).

The strategy’s risk-management measures are striking.  Through the end of Q1 2012, River Road’s Sharpe ratio (a measure of risk-adjusted returns) was 1.89 while its peers were at 0.49.  Its maximum drawdown (the drop from a previous high) was substantially smaller than its peers, it captured less of the market’s downside and more of its upside, in consequence of which its annualized return was nearly four times as great.

It also substantially eased the pain on the market’s worst days.  The Russell 3000, a total stock market index, lost an average of 3.6% on its fifteen worst days between the strategy’s launch and the end of March, 2012.  On those same 15 days, River Road lost 0.9% on average – which is to say, its investors dodged 75% of the pain on the market’s worst days.

This sort of portfolio strategy is expensive.  A long-short fund’s expenses come in the form of those it can control (fees paid to management) and those it cannot (expenses such as repayment of dividends generated by its short positions).  At 2.75%, the fund is not cheap but the controllable fee, 1.7% after waivers, is well below the charges set by its average peer.  With changing market conditions, it’s possible for the cost of shorting to drop well below 1% (and perhaps even become an income generator). With the adviser absorbing another 6% in expenses as a result of waivers, it’s probably unreasonable to ask for lower.

Bottom Line

Long-term investors need exposure to the stock market; no other asset class offers the same potential for long-term real returns.  But combatting our human impulse to flee at the worst possible moment requires buffering that exposure.  With the deteriorating attractiveness of the traditional buffer (bonds), investors need to consider non-traditional ones.  There are few successful, time-tested funds available to retail investors.  Among the crop of newer offerings, few are more sensibly-constructed or carefully managed that ARLSX seems to be.  It deserves attention.

Fund website

ASTON / River Road Long-Short Fund

2013 Q3 Report

2013 Q3 Commentary

© Mutual Fund Observer, 2012. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.

Wasatch Long/Short (FMLSX), June 2012 update (first published in 2009)

By David Snowball

This fund has been liquidated.

Objective

The fund’s investment objective is capital appreciation which it pursues by maintaining long and short equity positions.  It typically invests in domestic stocks (92% as of the last portfolio) and typically targets stocks with market caps of at least $100 million.  The managers look at both industry and individual stock prospects when determining whether to invest, long or short.  The managers may, at any point, position the fund as net long or net short.  It is not designed to be a market neutral offering.

Adviser

Wasatch Advisors of Salt Lake City, Utah.  Wasatch has been around since 1975. It both advises the 19 Wasatch funds and manages money for high net worth individuals and institutions. Across the board, the strength of the company lies in its ability to invest profitably in smaller (micro- to mid-cap) companies. As May 2012, the firm had $11.8 billion in assets under management.

Managers

Ralph Shive and Mike Shinnick. Mr. Shinnick is the lead manager for this fund and co-manages Wasatch Large Cap Value (formerly Equity Income) and 18 separate accounts with Mr. Shive.  Before joining Wasatch, he was a vice president and portfolio manager at 1st Source Investment Advisers, this fund’s original home. Mr. Shive was Vice President and Chief Investment Officer of 1st Source when this fund was acquired by Wasatch. He has been managing money since 1975 and joined 1st Source in 1989. Before that, he managed a private family portfolio inDallas,Texas.

Management’s Stake in the Fund

Mr. Shinnick has over $1 million in the fund, a substantial increase in the past three years.  Mr. Shive still has between $100,000 and $500,000 in the fund.

Opening date

August 1, 2003 as the 1st Source Monogram Long/Short Fund, which was acquired by Wasatch and rebranded on December 15, 2008.

Minimum investment

$2,000 for regular accounts, $1,000 for retirement accounts and for accounts which establish automatic investment plans.

Expense ratio

1.63% on assets of $1.2 billion.  There’s also a 2% redemption fee on shares held for fewer than 60 days.

Update

Our original analysis, posted 2009 and updated in 2011, appears just below this update.  Depending on your familiarity with the two flavors of long-short funds (market-neutral and net-long) and the other Wasatch funds, you might choose to read or review that analysis first.

June, 2012

2011 returns: 1.8%, top quarter of comparable funds2012 returns, through 5/30: (0.7%) bottom quarter of comparable fundsFive-year return: 2.4%, top 10% of comparable funds.
When we first profile FMLSX, it has just been acquired by Wasatch from 1stSource Bank.  At that time, it had under $100 million in assets with expenses of 1.67%.   Its asset base has burgeoned under Wasatch’s sponsorship and it approached $1.2 billion at the end of May, 2012.  The expense ratio (1.63%) is below average for the group and it’s particularly important that the 1.63% includes expenses related to the fund’s short positions.  Many long-short funds report such expenses, which can add more than 1% of the total, separately.  Lipper data furnished to Wasatch in November 2011 showed that FMLSX ranked as the third least-expensive fund out of 26 funds in its comparison group.On whole, this remains one of the long-short group’s most compelling choices.  Three observations  underlie that conclusion:

  1. The fund and its managers have a far longer public record than the vast majority of long-short products, so they’ve seen more and we have more data on which to assess them.
  2. The fund consistently outperforms its peers.  $10,000 invested at the fund’s inception would be worth $15,900 at the end of May 2012, compared with $11,600 for its average peer.  That’s a somewhat lower-return than a long-only total stock market index, but also a much less volatile one.  It has outperformed its long-short peer group in six of its seven years of existence.
  3. The fund maintains a healthy capture profile.  From inception to the end of March, 2012, it captured two-thirds of the stock market’s upside but only one-half of its downside.  That translates to a high five-year alpha, a measure of risk-adjusted returns, of 2.9 where the average long-short fund actually posted negative alpha.  Just two long-short funds had a higher five-year alpha (Caldwell & Orkin Market Opportunity COAGX and Robeco Long/Short Equity BPLSX).  The former has a $25,000 minimum investment and the latter is closed.

For folks interested in access to a volatility-controlled equity fund, the case for FMLSX was – and is – pretty compelling.

Our Original Comments

Long/short funds come in two varieties, and it’s important to know which you’re dealing with.  Some long/short funds attempt to be market neutral, sometimes advertised as “absolute returns” funds.  They want to make a little money every year, regardless of whether the market goes up or down.  They generally do this by building a portfolio around “paired trades.”  If they choose to invest in the tech sector, they’ll place a long bet on the sector’s most attractive stock and exactly match that it with a short bet on the sector’s least attractive stock.  Their expectation is that one of their two bets will lose money but, in a falling market, they’ll make more by the short on the bad stock than they’ll lose in the long position on the good stock.  Vice versa in a rising market: their long position will, they hope, make more than the short position loses.  In the end, investors pocket the difference: frequently something in the middle single digits.

The other form of long/short fund plays an entirely different game.  Their intention is to outperform the stock market as a whole, not to continually eke out small gains.  These funds can be almost entirely long, almost entirely short, or anywhere in between.  The fund uses its short positions to cushion losses in falling markets, but scales back those positions to avoid drag in rising ones.  These funds will lose money when the market tanks but, with luck and skill, they’ll lose a lot less than an unhedged fund will.

It’s reasonable to benchmark the first set of funds against a cash-equivalent, since they’re trying to do about the same thing that cash does.  It’s reasonable to benchmark the second set against a stock index, since they aspire to outperform such indexes over the long term.  It’s probably not prudent, however, to benchmark them against each other.

Wasatch Long/Short is an example of the second type of fund: it wants to beat the market with dampened downside risk.  Just as Oakmark’s splendid Oakmark Equity & Income (OAKBX) describes itself as “Oakmark with an airbag,” you might consider FMLSX to be “Wasatch Large Cap Value with an airbag.”  The managers write, “Our strategy is directional rather than market neutral; we are trying to make money with each of our positions, rather than using long and short positions to eliminate the impact of market fluctuations.”

Which would be a really, really good thing.  FMLSX is managed by the same guys who run Wasatch Large Cap Value, a fund in which you should probably be invested.  In profiling FMIEX last year, I noted:

Okay, okay, so you could argue that a $600-700 million dollar fund isn’t entirely “in the shadows.” . . . the fact that Fidelity has 20 funds in the $10 billion-plus range all of which trail FMIEX – yes, that includes Contrafund, Low-Priced Stock, Magellan, Growth Company and all – argues strongly for the fact that Mr. Shive’s charge deserves substantially more investor interest than it has received.

As a matter of fact, pretty much everyone trails this fund. When I screened for funds with equal or better 1-, 3-, 5- and 10-year records, the only large cap fund on the list was Ken Heebner’s CGM Focus (CGMFX).  In any case, a solid 6000 funds trail Mr. Shive’s mark and his top 1% returns for the past three-, five- and ten-year periods.

Since then, CGMFocus has tanked while two other funds – Amana Growth (AMAGX) and Yacktman Focused (YAFFX) – joined FMIEX in the top tier.  That’s an awfully powerful, awfully consistent record especially since it was achieved with average to below-average risk.

Which brings us back to the Long/Short fund.  Long/Short uses the same investment discipline as does Large Cap Value.  It just leverages that discipline to create bets against the most egregious stocks it finds, as well as its traditional bets in favor of its most attractive finds.  So far, that strategy has allowed it to match most of the market’s upside and dodge most of its downside.  Over the past three years, Long/Short gained 3.6% annually while Large Cap Value lost 3.9% and the Total Stock Market lost 8.2%.  The more impressive feat is that over the past three months – during one of the market’s most vigorous surges in a half century – Long/Short gained 21.2% while Income Equity gained 21.8%.  The upmarket drag of the short positions was 0.6% while the downside cushion was ten times greater.

That’s pretty consistently true for the fund’s quarterly returns over the past several years.  In rising markets, Long/Short makes money though trailing its sibling by 2-4 percent (i.e., 200-400 basis points).  In failing markets, Long/Short loses 300-900 basis points less.  While the net effect is not to “guarantee” gains in all markets, it does provide investors with ongoing market exposure and a security blanket at the same moment.

Bottom Line

Lots of seasoned investors (Leuthold and Grantham among them) believe that we’ve got years of a bear market ahead of us.  In their view, the price of the robustly rising market of the 80s and 90s will be the stumbling, tumbling markets of this decade and part of the next. Such markets are marked by powerful rallies whose gains subsequently evaporate.  Messrs. Shive and Shinnick share at least part of that perspective.  Their shareholder letters warn that we’re in “a global bear market,” that the spring surge does not represent “the beginning of an upward turn in the market’s cycle,” and that prudence dictates that they “not get too far from shore.”

An investor’s greatest enemy in such markets is panic: panic about being in a falling market, panic about being out of a rising market, panic about being panicked all the time.  While a fund such as FMLSX can’t eliminate all losses, it may allow you to panic less and stay the course just a bit more.  With seasoned management, lower-than-average expenses and a low investment minimum, FMLSX is one of the most compelling choices in this field.

Fund website

Wasatch Long-Short Fund

Fact Sheet

© Mutual Fund Observer, 2012. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.

Osterweis Strategic Investment (OSTVX), June 2012 update (first published in May 2011)

By David Snowball

Objective

The fund pursues the reassuring objective of long-term total returns and capital preservation.  The plan is to shift allocation between equity and debt based on management’s judgment of the asset class which offers the best risk-return balance.  Equity can range from 25 – 75% of the portfolio, likewise debt.  Both equity and debt are largely unconstrained, that is, the managers can buy pretty much anything, anywhere.  The two notable restrictions are minor: no more than 50% of the total portfolio can be invested outside the U.S. and no more than 15% may be invested in Master Limited Partnerships, which are generally energy and natural resources investments.

Adviser

Osterweis Capital Management.  Osterweis Capital Management was founded in 1983 by John Osterweis to manage money for high net worth individuals, foundations and endowments.   They’ve got $5.3 billion in assets under management (as of March 31 2012), and run both individually managed portfolios and three mutual funds.

Manager

John Osterweis, Matt Berler and Carl Kaufman lead a team that includes the folks (John Osterweis, Matthew Berler, Alexander (Sasha) Kovriga, Gregory Hermanski, and Zachary Perry) who manage Osterweis Fund (OSTFX) and those at the Osterweis Strategic Income Fund (Carl Kaufman and Simon Lee).  The team members have all held senior positions with distinguished firms (Robertson Stephens, Franklin Templeton, Morgan Stanley, Merrill Lynch). Osterweis Fund earned Morningstar’s highest commendation: it has been rated “Gold” in the mid-cap core category.

Management’s Stake in the Fund

Mr. Osterweis had over $1 million in the fund, three of the managers had between $500,000 and $1 million in the fund (as of the most recent SAI, March 30, 2011) while two others had between $100,000 and $500,000.

Opening date

August 31, 2010.

Minimum investment

$5000 for regular accounts, $1500 for IRAs

Expense ratio

1.50%, after waivers, on assets of $43 million (as of April 30 2012).  There’s also a 2% redemption fee on shares held under one month.

Update

Our original analysis, posted May, 2011, appears just below this update.  Depending on your familiarity with the two flavors of hybrid funds (those with static or dynamic asset allocations) and the other Osterweis funds, you might choose to read or review that analysis first.

June, 2012

2011 returns: 1.6%, top quarter of comparable funds2012 returns, through 5/30: 5.0%, top 10% of comparable funds  
Asset growth: about $11 million in 12 months, from $33 million  
Strategic Investment is a sort of “greatest hits” fund, combining securities from the other two Osterweis offerings and an asset allocation that changes with their top-down assessment of market conditions.   Its year was better than it looks.  Because the managers actively manage the fund’s asset allocation, it might be more-fairly compared to Morningstar’s “world allocation” group than to the more passive “moderate allocation” one.  The MA funds tend to hold 40% in bonds and tend to have higher exposure to Treasuries and investment-grade corporate bonds than do the allocation funds.  In 2011, with its frequent panics, Treasuries were the place to be.  The Vanguard Long-Term Government Bond Index fund(VLGIX), for example, returned 29%, outperforming the total bond market (7.5%) or the total stock market (1%).  The fundamentals supporting Treasuries (do you really want to lock your money up for 10 years with yields below the rate of inflation?) and longer-duration bonds, in general, are highly suspect, at best but as long as there are panics, Treasuries will benefit.Osterweis has a lot of exposure to shorter-term, lower-quality bonds (ten times the norm) on the income side and to smaller stocks (more than twice the norm) on the equities side.  Neither choice paid off in 2011.  Nevertheless, good security selection and timely allocation shifts helped OSTVX outperform the average moderate allocation fund by 1.75% and the average world allocation fund by 5.6% in 2011.  Through the first five months of 2012, its absolute returns and returns relative to both peer groups has been top-notch.The managers “have an aversion to losing money” and believe that “caution [remains] the better part of valor.”  They’re deeply skeptical the state of Europe, but do have fair exposure to several northern European markets (Germany, Switzerland, the Netherlands).  Their latest letter (April 20, 2012) projects slower economic growth and considerable interest-rate risk.  As a result, they’re looking for “cash-generative” equities and shorter term, higher-yield bonds, with the possibility of increasing their stake in equity-linked convertibles.For folks who remain anxious about the prospects of a static allocation in a dynamic world, OSTVX remains a very credible choice along with stalwarts such as PIMCO All-Asset (PASDX) and FPA Crescent (FPACX).

Comments

There are, broadly speaking, two sorts of funds which mix both stocks and bonds in their portfolios.  One sort, often simply called a “balanced” fund, sticks with a mix that changes very little over time: 60% stocks (give or take a little) plus 40% bonds (give or take a little), and we’re done.  I’ve written elsewhere, for example in my profile of LKCM Balanced, of the virtue of such funds.  They tend to be inexpensive, predictable and reassuringly dull.  An excellent anchor for a portfolio.

The second sort, sometimes called an “allocation” fund, allows its manager to shift assets between categories, often dramatically.  These funds are designed to allow the management team to back away from a badly overvalued asset class and redeploy into an undervalued one.  Such funds tend to be far more troubled than simple balanced funds for two reasons.  First, the manager has to be right twice rather than once.  A balanced manager has to be right in his or her security selection.  An allocation manager has to be right both on the weighting to give an asset class (and when to give it) and on the selection of stocks or bonds within that portion of the portfolio.  Second, these funds can carry large visible and invisible expenses.  The visible expenses are reflected in the sector’s high expense ratios, generally 1.5 – 2%.  The funds’ trading, within and between sectors, invisibly adds another couple percent in drag though trading expenses are not included in the expense ratio and are frequently not disclosed.

Why consider these funds at all?

If you believe that the market, like the global climate, seems to be increasingly unstable and inhospitable, it might make sense to pay for an insurance policy against an implosion in one asset class or one sector.  PIMCO, for example, has launched of series of unconstrained, all-asset, all-authority funds designed to dodge and weave through the hard times.  Another option would be to use the services of a good fee-only financial planner who specializes in asset allocation.  In either case, you’re going to pay for access to the additional “dynamic allocation” expertise.  If the manager is good (see, for example, Leuthold Core LCORX and FPA Crescent FPACX), you’ll receive your money’s worth and more.

Why consider Osterweis Strategic Investment?

There are two reasons.  First, Osterweis has already demonstrated sustained competence in both parts of the equation (asset allocation and security selection).  Osterweis Strategic Investment is essentially a version of the flagship Osterweis Fund (OSTFX).  OSTFX is primarily a stock fund, but the managers have the freedom to move decisively into bonds and cash if need be.  In the last eight years, the fund’s lowest stock allocation was 60% and highest was 93%, but it tends to have a neutral position in the mid-80s.  Management has used that flexibility to deliver solid long-term returns (nearly 12% over the past 15 years) with far less volatility than the stock market’s.  The second Osterweis Fund, Osterweis Strategic Income (OSTIX) plays the same game within the bond universe, moving between bonds, convertibles and loans, investment grade and junk, domestic and foreign.  Since inception in 2002, OSTIX has trounced the broad bond indexes (8.5% annually for nine years versus 5% for their benchmark) with less risk.  The team that manages those funds is large, talented, stable . . . and managing the new fund as well.

Second, Osterweis’s expenses, direct and indirect, are more reasonable than most.  The current 1.5% ratio is at the lower end for an active allocation fund, strikingly so for a tiny one.  And the other two Osterweis funds each started around 1.5% and then steadily lowered their expense ratios, year after year, as assets grew.  In addition, both funds tend to have lower-than-normal portfolio turnover, which decreases the drag created by trading costs.

Bottom Line

Many investors would benefit from using a balanced or allocation fund as a significant part of their portfolio.  Well done, such funds decrease a portfolio’s volatility, instill discipline in the allocation of assets between classes, and reduce the chance of self-destructive bipolar investing on our parts.  Given reasonable expenses, outstanding management and a long, solid track record, Osterweis Strategic Investment warrants a place on any investor’s due-diligence short list.

Fund website

Osterweis Strategic Investment

Quarterly Report

Fact Sheet

© Mutual Fund Observer, 2012. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.