Yearly Archives: 2012

Northern Global Tactical Asset Allocation Fund (BBALX) – September 2011, Updated September 2012

By Editor

This profile has been updated since it was originally published. The updated profile can be found at http://www.mutualfundobserver.com/2012/09/northern-global-tactical-asset-allocation-fund-bbalx-september-2011-updated-september-2012/

Objective

The fund seeks a combination of growth and income. Northern’s Investment Policy Committee develops tactical asset allocation recommendations based on economic factors such as GDP and inflation; fixed-income market factors such as sovereign yields, credit spreads and currency trends; and stock market factors such as domestic and foreign earnings growth and valuations. The managers execute that allocation by investing in other Northern funds and outside ETFs. As of 6/30/2011, the fund holds 10 Northern funds and 3 ETFs.

Adviser

Northern Trust Investments. Northern’s parent was founded in 1889 and provides investment management, asset and fund administration, fiduciary and banking solutions for corporations, institutions and affluent individuals worldwide. As of June 30, 2011, Northern Trust Corporation had $97 billion in banking assets, $4.4 trillion in assets under custody and $680 billion in assets under management. The Northern funds account for about $37 billion in assets. When these folks say, “affluent individuals,” they really mean it. Access to Northern Institutional Funds is limited to retirement plans with at least $30 million in assets, corporations and similar institutions, and “personal financial services clients having at least $500 million in total assets at Northern Trust.” Yikes. There are 51 Northern funds, seven sub-advised by multiple institutional managers.

Managers

Peter Flood and Daniel Phillips. Mr. Flood has been managing the fund since April, 2008. He is the head of Northern’s Fixed Income Risk Management and Fixed Income Strategy teams and has been with Northern since 1979. Mr. Phillips joined Northern in 2005 and became co-manager in April, 2011. He’s one of Northern’s lead asset-allocation specialists.

Management’s Stake in the Fund

None, zero, zip. The research is pretty clear, that substantial manager ownership of a fund is associated with more prudent risk taking and modestly higher returns. I checked 15 Northern managers listed in the 2010 Statement of Additional Information. Not a single manager had a single dollar invested. For both practical and symbolic reasons, that strikes me as regrettable.

Opening date

Northern Institutional Balanced, this fund’s initial incarnation, launched on July 1, 1993. On April 1, 2008, this became an institutional fund of funds with a new name, manager and mission and offered four share classes. On August 1, 2011, all four share classes were combined into a single no-load retail fund but is otherwise identical to its institutional predecessor.

Minimum investment

$2500, reduced to $500 for IRAs and $250 for accounts with an automatic investing plan.

Expense ratio

0.68%, after waivers, on assets of $18 million. While there’s no guarantee that the waiver will be renewed next year, Peter Jacob, a vice president for Northern Trust Global Investments, says that the board has never failed to renew a requested waiver. Since the new fund inherited the original fund’s shareholders, Northern and the board concluded that they could not in good conscience impose a fee increase on those folks. That decision that benefits all investors in the fund. Update – 0.68%, after waivers, on assets of nearly $28 million (as of 12/31/2012.)

UpdateOur original analysis, posted September, 2011, appears just below this update. Depending on your familiarity with the research on behavioral finance, you might choose to read or review that analysis first.

September, 2012

2011 returns: -0.01%. Depending on which peer group you choose, that’s either a bit better (in the case of “moderate allocation” funds) or vastly better (in the case of “world allocation” funds). 2012 returns, through 8/29: 8.9%, top half of moderate allocation fund group and much better than world allocation funds.

Asset growth: about $25 million in twelve months, from $18 – $45 million.

This is a rare instance in which a close reading of a fund’s numbers are as likely to deceive as to inform. As our original commentary notes:The fund’s mandate changed in April 2008, from a traditional stock/bond hybrid to a far more eclectic, flexible portfolio. As a result, performance numbers prior to early 2008 are misleading.The fund’s Morningstar peer arguably should have changed as well (possibly to world allocation) but did not. As a result, relative performance numbers are suspect.The fund’s strategic allocation includes US and international stocks (including international small caps and emerging markets), US bonds (including high yield and TIPs), gold, natural resources stocks, global real estate and cash. Tactical allocation moves so far in 2012 include shifting 2% from investment grade to global real estate and 2% from investment grade to high-yield.Since its conversion, BBALX has had lower volatility by a variety of measures than either the world allocation or moderate allocation peer groups or than its closest counterpart, Vanguard’s $14 billion STAR (VGSTX) fund-of-funds. It has, at the same time, produced strong absolute returns. Here’s the comparison between $10,000 invested in BBALX at conversion versus the same amount on the same day in a number of benchmarks and first-rate balanced funds:

Northern GTAA	$12,050
PIMCO All-Asset “D” (PASDX)	12,950
Vanguard Balanced Index (VBINX)	12,400
Vanguard STAR (VGSTX)	12,050
T. Rowe Price Balanced (RPBAX)	11,950
Fidelity Global Balanced (FGBLX)	11,450
Dodge & Cox Balanced (DODBX)	11,300
Moderate Allocation peer group	11,300
World Allocation peer group	10,300
Leuthold Core (LCORX)	9,750

BBALX holds a lot more international exposure, both developed and developing, than its peers. Its record of strong returns and muted volatility in the face of instability in many non-U.S. markets is very impressive.

BBALX has developed in a very strong alternative to Vanguard STAR (VGSTX). If its greater exposure to hard assets and emerging markets pays off, it has the potential to be stronger still.

Comments

The case for this fund can be summarized easily. It was a perfectly respectable institutional balanced fund which has become dramatically better as a result of two sets of recent changes.

Northern Institutional Balanced invested conservatively and conventionally. It held about two-thirds in stocks (mostly mid- to large-sized US companies plus a few large foreign firms) and one-third in bonds (mostly investment grade domestic bonds). Northern’s ethos is very risk sensitive which makes a world of sense given their traditional client base: the exceedingly affluent. Those folks didn’t need Northern to make a ton of money for them (they already had that), they needed Northern to steward it carefully and not take silly risks. Even today, Northern trumpets “active risk management and well-defined buy-sell criteria” and celebrates their ability to provide clients with “peace of mind.” Northern continues to highlight “A conservative investment approach . . . strength and stability . . . disciplined, risk-managed investment . . . “

As a reflection of that, Balanced tended to capture only 65-85% of its benchmark’s gains in years when the market was rising but much less of the loss when the market was falling. In the long-term, the fund returned about 85% of its 65% stock – 35% bond benchmark’s gains but did so with low volatility.

That was perfectly respectable.

Since then, two sets of changes have made it dramatically better. In April 2008, the fund morphed from conservative balanced to a global tactical fund of funds. At a swoop, the fund underwent a series of useful changes.

The asset allocation became fluid, with an investment committee able to substantially shift asset class exposure as opportunities changed.

The basic asset allocation became more aggressive, with the addition of a high-yield bond fund and emerging markets equities.

The fund added exposure to alternative investments, including gold, commodities, global real estate and currencies.

Those changes resulted in a markedly stronger performer. In the three years since the change, the fund has handily outperformed both its Morningstar benchmark and its peer group. Its returns place it in the top 7% of balanced funds in the past three years (through 8/25/11). Morningstar has awarded it five stars for the past three years, even as the fund maintained its “low risk” rating. Over the same period, it’s been designated a Lipper Leader (5 out of 5 score) for Total Returns and Expenses, and 4 out of 5 for Consistency and Capital Preservation.

In the same period (04/01/2008 – 08/26/2011), it has outperformed its peer group and a host of first-rate balanced funds including Vanguard STAR (VGSTX), Vanguard Balanced Index (VBINX), Fidelity Global Balanced (FGBLX), Leuthold Core (LCORX), T. Rowe Price Balanced (RPBAX) and Dodge & Cox Balanced (DODBX).

In August 2011, the fund morphed again from an institutional fund to a retail one. The investment minimum dropped from $5,000,000 to as low as $250. The expense ratio, however, remained extremely low, thanks to an ongoing expense waiver from Northern. The average for other retail funds advertising themselves as “tactical asset” or “tactical allocation” funds is about 1.80%.

Bottom Line

Northern GTA offers an intriguing opportunity for conservative investors. This remains a cautious fund, but one which offers exposure to a diverse array of asset classes and a price unavailable in other retail offerings. It has used its newfound flexibility and low expenses to outperform some very distinguished competition. Folks looking for an interesting and affordable core fund owe it to themselves to add this one to their short-list.

Fund website

Northern Global Tactical Asset Allocation

Update – 3Q2011 Fact Sheet

Fund Profile, 2nd quarter, 2012

Wedgewood (formerly RiverPark/Wedgewood), (RWGFX), September 2011

By Editor

At the time of publication, this fund was named RiverPark/Wedgewood.

Objective

Wedgewood pursues long-term capital growth, but does so with an intelligent concern for short-term loss. The manager invests in 20-25 predominately large-cap market leaders. In general, that means recognizable blue chip names (the top four, as of 08/11, are Google, Apple, Visa, and Berkshire Hathaway) with a market value of more than $5 billion. They describe themselves as “contrarian growth investors.” That translates to two principles: (1) target great businesses with sustainable, long-term advantages and (2) buy them when normal growth investors – often momentum-oriented managers – are panicking and running away. They then tend to hold stocks for substantially longer than do most growth managers. The combination of a wide economic moat and a purchase at a reasonable price gives the fund an unusual amount of downside protection, considering that it remains almost always fully-invested.

Adviser

RiverPark Advisors, LLC. Executives from Baron Asset Management, including president Morty Schaja, formed RiverPark in July 2009. RiverPark oversees the five RiverPark funds, though other firms manage three of the five. Until recently, they also advised two actively-managed ETFs under the Grail RP banner. A legally separate entity, RiverPark Capital Management, runs separate accounts and partnerships. Collectively, they have $100 million in assets under management, as of August 2011. Wedgewood Partners, Inc. manages $1.1 billion in separate accounts managed similarly to the fund and subadvises the fund and provides the management team and strategy.

Manager

David Rolfe. Mr. Rolfe has managed the fund since its inception, and has managed separate accounts using the same strategy since 1993. He joined Wedgewood that year and was charged with creating the firm’s focused growth strategy. He holds a BA in Finance from the University of Missouri at St. Louis, a durn fine school.

Management’s Stake in the Fund

Mr. Rolfe and his associates clearly believe in eating their own cooking. According to Matt Kelly of RiverPark, “not only has David had an SMA invested in this strategy for years, but he invested in the Fund on day 1”. As of August 1, David and his immediate family’s stake in the Fund was approximately $400,000. In addition, 50% of Wedgewood’s 401(k) money is invested in the fund. Finally, Mr. Rolfe owns 45% of Wedgewood Partners. “Of course, RiverPark executives are also big believers in the Fund, and currently have about $2 million in the Fund.”

Opening date

September 30, 2010

Minimum investment

$1,000 across the board.

Expense ratio

1.25% on assets, in the retail version of the fund, of $29 million (as of August 2023). The institutional shares are 1.00%. Both share classes have a waiver on the expense ratio.

Comments

Americans are a fidgety bunch, and always have been. Alexis de Tocqueville observed, in 1835 no less, that our relentless desire to move around and do new things ended only at our deaths.

A native of the United States clings to this world’s goods as if he were certain never to die; and he is so hasty in grasping at all within his reach that one would suppose he was constantly afraid of not living long enough to enjoy them. He clutches everything, he holds nothing fast, but soon loosens his grasp to pursue fresh gratifications.

Our national mantra seems to be “don’t just sit there, do something!”

That impulse affects individual and professional investors alike. It manifests itself in the desire to buy into every neat story they hear, which leads to sprawling portfolios of stocks and funds each of which earns the title, “it seemed like a good idea at the time.” And it leads investors to buy and sell incessantly. We become stock collectors and traders, rather than business owners.

Large-cap funds, and especially large large-cap funds, suffer similarly. On average, actively-manage large growth funds hold 70 stocks and turn over 100% per year. The ten largest such funds hold 311 stocks on average and turn over 38% per year

The well-read folks at Wedgewood see it differently. Manager David Rolfe endorses Charles Ellis’s classic essay, “The Losers Game” (Financial Analysts Journal, July 1975). Reasoning from war and sports to investing, Ellis argues that losers games are those where, as in amateur tennis,

The amateur duffer seldom beats his opponent, but he beats himself all the time. The victor in this game of tennis gets a higher score than the opponent, but he gets that higher score because his opponent is losing even more points.

Ellis argues that professional investors, in the main, play a losers game by becoming distracted, unfocused and undistinguished. Mr. Rolfe and his associates are determined not to play that game. They position themselves as “contrarian growth investors.” In practical terms, that means:

They force themselves to own fewer stocks than they really want to. After filtering a universe of 500-600 large growth companies, Wedgewood holds only “the top 20 of the 40 stocks we really want to own.” Currently, 63% of the fund’s assets are in its top ten picks.

They buy when other growth managers are selling. Most growth managers are momentum investors, they buy when a stock’s price is rising. If the company behind the stock meets the firm’s quantitative (“return on equity > 25%”) and qualitative (“a dominant product or service that is practically irreplaceable or lacks substitutes”) screens, Wedgewood would rather buy during panic than during euphoria.

They hold far longer once they buy. The historical average for Wedgewood’s separate accounts which use this exact discipline is 15-20% turnover where, as I note, their peers sit around 100%.

And then they spend a lot of time watching those stocks. “Thinking and acting like business owners reduces our interest to those few businesses which are superior,” Rolfe writes, and he maintains a thoughtful vigil over those businesses. For folks interested in looking over their managers’ shoulders, Wedgewood has posted a series of thoughtful analyses of Apple. Mr. Rolfe had a new analysis out to his investors within a few hours of the announcement of Steve Jobs’ resignation:

Mr. Jobs is irreplaceable. That said. . . [i]n the history of Apple, the company has never before had the depth, breadth, scale and scope of management, technological innovation and design, financial resources and market share strength as it possesses today. Apple’s stock will take its inevitable lumps over the near-term. If the Street’s reaction is too extreme we will buy more. (With our expectation of earnings power of +$40 per share in F2012, plus $100 billion in balance sheet liquidity by year-end 2011, the stock is an extreme bargain – even before today’s news.)

Beyond individual stock selection, Mr. Rolfe understood that you can’t beat an index with a portfolio that mirrors an index and so, “we believe that our portfolios must be constructed as different from an index as possible.” And they are strikingly different. Of 11 industry sectors that Morningstar benchmarks, Wedgewood has zero exposure to six. In four sectors, they are “overweight” or “underweight” by margins of 2:1 up to 7:1. Technology is the only near normal weighting in the current portfolio. The fund’s market cap is 40% larger than its benchmark and its average stock is far faster growing.

None of which would matter if the results weren’t great. Fortunately, they are.

Returns are high. From inception (9/92) to the end of the most recent quarter (6/11), Wedgewood’s large growth accounts returned 11.5% annually while the Russell 1000 Growth index returned 7.4%. Wedgewood substantially leads the index in every trailing period (3, 5, 7, 10 and 15 years). It also has the highest alpha (a measure of risk-adjusted performance) over the past 15 years of any of the large-cap growth managers in its peer group.

Risk is moderate and well-rewarded. Over the past 15 years, Wedgewood has captured about 85% of the large-cap universe’s downside and 140% of its upside. That is, they make 40% more in a rising market and lose 15% less in a falling market than their peers do. The comparison with large cap mutual funds is striking. Large growth funds as a whole capture 110% of the downside and 106% of the upside. That is, Wedgewood falls far less in falling markets and rises much more in rising ones, than did the average large-growth fund over the past 15 years.

Statisticians attempt to standardize those returns by calculating various ratios. The famous Sharpe ratio (for which William Sharpe won a Nobel Prize) tries to determine whether a portfolio’s returns are due to smart investment decisions or a result of excess risk. Wedgewood has the 10^th highest Sharpe ratio among the 112 managers in its peer group. The “information ratio” attempts to measure the consistency with which a manager’s returns exceeds the risks s/he takes. The higher the IR, the more consistent a manager is and Wedgewood has the highest information ratio of any of the 112 managers in its universe.

The portfolio is well-positioned. According to a Morningstar analysis provided by the manager, the companies in Wedgewood Growth’s portfolio are growing earnings 50% faster than those in the S&P500, while selling at an 11% discount to it. That disconnect serves as part of the “margin of safety” that Mr. Rolfe attempts to build into the fund.

Is there reason for caution? Sure. Two come to mind. The first concern is that these results were generated by the firm’s focused large-growth separate accounts, not by a mutual fund. The dynamics of those accounts are different (different fee structure and you might have only a dozen investors to reason with, as opposed to thousands of shareholders) and some managers have been challenged to translate their success from one realm to the other. I brought the question to Mr. Rolfe, who makes two points. First, the investment disciplines are identical, which is what persuaded the SEC to allow Wedgewood to include the separate account track record in the fund’s prospectus. For the purpose of that track record, the fund is now figured-in as one of the firm’s separate accounts. Second, internal data shows good tracking consistency between the fund and the separate account composite. That is, the fund is acting pretty much the way the separate accounts act.

The other concern is Mr. Rolfe’s individual importance to the fund. He’s the sole manager in a relatively small operation. While he’s a young man (not yet 50) and passionate about his work, a lot of the fund’s success will ride on his shoulders. That said, Mr. Rolfe is significantly supported by a small but cohesive and experienced investment management team. The three other investment professionals are Tony Guerrerio (since 1992), Dana Webb (since 2002) and Michael Quigley (since 2005).

Bottom Line

RiverPark Wedgewood is off to an excellent start. It has one of the best records so far in 2011 (top 6%, as of 8/25/11) as well as one of the best records during the summer market turmoil (top 3% in the preceding three months). Mr. Rolfe writes, “We are different. We are unique in that we think and act unlike the vast majority of active managers. Our results speak to our process.” Because those results, earned through 18 years of separate account management, are not well known, advisors may be slow to notice the fund’s strength. RWGFX is a worthy addition to the RiverPark family and to any stock-fund investors’ due-diligence list.

Fund website

Wedgewood Fund

Ellis’s “Losers Game” offers good advice for folks determined to try to beat a passive scheme, much of which is embodied here. I don’t know how long the article will remain posted there, but it’s well-worth reading.

Sextant Growth (SSGFX), January 2007

By Editor

. . . from the archives at FundAlarm

These profiles have not been updated. The information is only accurate as of the original date of publication.

January 1, 2007

FundAlarm Annex – Fund Report

Objective

The fund seeks long-term growth by investing in common stocks, as well as convertible and preferred shares. While Morningstar classifies it as a mid-cap growth fund, the firm claims to follow a “value approach to investing” in looking at stocks with favorable potential over the next one to four years. They list a variety of predictable factors (revenue growth, p/e and p/b ratios, industry position and so on) in their selection criteria. No more than 5% of the fund may be invested in foreign companies.

Adviser

Saturna Capital. Saturna oversees four Sextant funds, the Idaho Tax-Free fund and two Amana funds. The Amana funds invest in accord with Islamic investing principles and were recognized as the best Islamic fund manager for 2005.

Manager

Nicholas Kaiser. Mr. Kaiser is president and founder of Saturna Capital. He has degrees from Chicago and Yale. In the mid 1970s and 1980s, he ran a mid-sized investment management firm (Unified Management Company) in Indianapolis. In 1989 he sold Unified and subsequently bought control of Saturna. As an officer of the Investment Company Institute, the CFA Institute, the Financial Planning Association and the No-Load Mutual Fund Association, he has been a significant force in the money management world. He’s also a philanthropist and is deeply involved in his community. By all accounts, a good guy all around. Morningstar must think so, too, because he’s a finalist for its 2006 Domestic Manager of the Year award.

Inception

December 30, 1990, though its name was then Northwest Growth Fund. Morningstar insists that the Growth Fund was launched in 1987. Saturna claims 1990, either October or December, for its predecessor fund and 1995 for the fund under its current configuration.

Minimum investment

$1,000 for regular accounts, $100 for IRAs.

Expense ratio

1.01% for Investor class shares and 0.77% for Institutional class shares on an asset base of about $62 million, as of July 2023. There’s a considerable performance adjustment built into the fee: management fee will change by as much as 0.20% based on performance in the trailing year. There is no redemption fee.

Comments

This seems like a wonderfully admirable little fund. It should, in principle, do well. Expenses are quite low for such a tiny fund and management has linked its compensation to a solid performance fee. Its base management fee is 0.60% and the performance fee of up to 0.30% can cut the manager’s profits by half if he screws up. The fund holds stocks across all market capitalizations and ranges from deep value to growth holdings. The portfolio is pretty compact at 55 names, the manager is tax-sensitive and turnover is virtually non-existent. Morningstar reports 4% turnover, Saturna reports 0% for the year ending in May 2006. The fund reports virtually no frictional loss to taxes; that is, the annual tax cost on unsold shares trims less than 0.20% from the fund’s pre-tax returns. Finally, the manager, his employees and their families own nearly 40% of all outstanding shares. Which is good, since Mr. Kaiser’s pay is remarkably modest: $81,360 in total compensation for calendar 2005.

Happily, principle is aligned with practice. Sextant Growth has compiled a remarkable record for consistent excellence. It is one of just a tiny handful of equity funds that seems always above average, at least as measured by Morningstar’s metrics. Sextant Growth currently qualifies as four-star fund, but has also earned four stars for the preceding three-year, five-year and ten-year periods. For every trailing period, Morningstar gives it “above average” returns and “below average” risk.

Sextant Growth ranks in the top 15% of mid-cap growth funds over the long term, but the comparison is not terribly meaningful since the fund does not particularly target mid-caps (or, for that matter, growth stocks). It has returned 11.6% annually over the past decade and has substantially led the S&P 500 for the preceding three, five and ten years. It does tend to lag, but perform well, in growth markets: for example, it had a bottom decile rank in 2003 but still racked up gains of 26% and a bottom third rank in ’99 with returns of 41%.

Bottom line

The “Growth” name and “value” claim notwithstanding, this strikes me as a really solid core holding. The manager is experienced, the fund has prospered in a wide variety of market conditions, and the management firm seems highly principled. Kind of like a tiny little version of T. Rowe Price. It’s well deserving of substantially greater attention.

Company link

Sextant Growth Fund

Fact Sheet

Manning and Napier Disciplined Value (formerly Dividend Focus), (MNDFX), November 2011

By Editor

Objective

The fund seeks returns which are competitive with the broad market, while at the same time providing some capital protection during “sustained” bear markets. Stocks are selected from a broad universe of mid- to large-cap stocks — including international and emerging markets — based on high free cash flow, high dividend yields, and low likelihood of, well, bankruptcy. This is a quant fund which rebalances only once each year, although the managers reserve the right to add or drop individual holdings at any time. Their target audience is investors “[s]eeking a fundamentals-based alternative to indexing.”

Adviser

Manning & Napier Advisors, LLC. Manning & Napier was founded in 1970, and they manage about $43 billion in assets for a wide spectrum of clients from endowments and state pension plans to individual investors. About $17 billion of that amount is in their mutual funds. The firm is entirely employee-owned and their 22 funds are entirely team-managed. The firm’s investment team currently consists of more than 50 analysts and economists. The senior analysts have an average tenure of nearly 22 years. The firm reorganized on October 1, 2011. That reorganization reflected succession planning, as the firm’s owner – William Manning – entered his mid-70s. Under the reorganization, the other employees own more of the fund and outside investors own a bit of it.

Manager

Managed by a team of ten. They actually mean “the team does it.” Manning & Napier is so committed to the concept that they don’t even have a CEO; that’s handled by another team, the Executive Group. In any case, the Gang of Many is the same crew that manages all their other funds.

Management’s Stake in the Fund

Only one team member has an investment in this fund, as of 3/31/11. All of the managers have over $100,000 invested in Manning & Napier funds, and three of the eight have over $500,000.

Opening date

November 7, 2008

Minimum investment

$2,000, which is waived for accounts established with an automatic investment plan (AIP).

Expense ratio

0.52% on assets of $363.5 million, as of July 2023.

Comments

Dividend Focus invests in a diversified portfolio of large- and mega-cap stocks. The managers select stocks based on three criteria:

“High free cash flow (i.e., cash generated by a company that is available to equity holders). Minimum free cash flow yield must exceed the yield of high quality corporate bonds.
Dividend yield equal to or exceeding the dividend yield of the broad equity market.
Not having a high probability of experiencing financial distress. This estimate is based on a credit scoring model that incorporates measures of corporate health such as liquidity, profitability, leverage, and solvency to assess the likelihood of a bankruptcy in the next one to two years.”

The portfolio currently (9/31/11) holds 130 stocks, about a quarter international including a 3% emerging markets stake.

Why consider it? There are three really good reasons.

First, it’s managed by the best team you’ve never heard of.

Manning & Napier launched at the outset of “the lost decade” of the 1970s when the stock market failed to beat either inflation or the returns on cash. The “strategies and disciplines” they designed to survive that tough market allowed them to flourish in the lost decade of the 2000s: every M&N fund with a ten-year record has significant, sustained positive returns across the decade. Results like that led Morningstar, not a group enamored with small fund firms, to name Manning & Napier as a finalist for the title, Fund Manager of the Decade. In announcing the designation, Karen Dolan of Morningstar wrote:

The Manning & Napier team is the real hidden gem on this list. The team brings a unique and attractive focus on absolute returns to research companies of all sizes around the globe. The results speak for themselves, not only in World Opportunities, but across Manning & Napier’s entire lineup. (The Fund Manager of the Decade Finalists, 11/19/09)

More recently, Morningstar profiled the tiny handful of funds that have beaten their category averages every single year for the past decade (“Here Come the Category Killers,” 10/23/11). One of only three domestic stock funds to make the list was Manning & Napier Pro-Blend Maximum (EXHAX), which they praised for its “team of extremely long-tenured portfolio managers oversee the fund, employing a strategy that overlays bottom-up security selection with macroeconomic research.” MNDFX is run by the same team.

Second, it’s the cheapest possible way of accessing that team’s skill.

Manning & Napier charges 0.60% for the fund, about half of what their other (larger, more famous) funds charge. It’s even lower than what they typically charge for institutional shares. It’s competitive with the 0.40 – 0.50% charged by most of the dividend-focused ETFs.

Third, the fund is doing well and achieving its goals.

Manning was attempting to generate a compelling alternative to index investing. So far, they’ve done so. The fund returned 9% through the first ten months of 2011, placing it in the top 2% of comparable funds. The fund has outperformed the most popular dividend-focused index funds and exchange-traded funds since its launch.

	Since inception	Q3, 2011
Vanguard Total Stock Market (VTSMX)	15,200	-15.3%
M&N Dividend Focus (MNDFX)	14,700	-8.9
Vanguard Dividend Appreciation Index (VDAIX)	14,600	-12.5
SPDR S&P Dividend ETF (SDY)	14,500	-9.4
First Trust Morningstar Div Leaders Index (FDL)	14,200	-3.7
iShares Dow Jones Select Dividend Index (DVY)	13,400	-8.1
PowerShares HighYield Dividend Achievers (PEY)	12,000	-5.9

The fund’s focus on blue-chip companies have held it back during frothy markets when smaller and less stable firms flourish, but it also holds up better in rough periods such as the third quarter of 2011.

The fund has also earned a mention in the company of some of the most distinguished actively-managed, five-star high dividend/high quality funds.

	Since inception	Q3, 2011
M&N Dividend Focus (MNDFX)	14,700	-8.9
Tweedy, Browne Worldwide High Dividend Yield Value (TBHDX)	14,600	-10.1
GMO Quality III (GQETX)	14,100	-5.4

In the long run, the evidence is unequivocal: a focus on high-quality, dividend-paying stocks are the closest thing the market offers to a free lunch. That is, you earn slightly higher-than-market returns with slightly lower-than-market risk. Dividends help in three ways:

They’ve always been an important contributor to a fund’s total returns (Eaton Vance and Standard & Poor’s separately calculated dividend’s long-term contribution at 33-50% of total returns);
The dividends provide an ongoing source of cash for reinvestment, especially during downturns when investors might otherwise be reluctant to add to their positions; and,
Dividends are often a useful signal of the underlying health of the company, and that helps investors decrease the prospect of having a position blow up.

Some cynics also observe that dividends, by taking money out of the hands of corporate executives and placing in investors’ hands, decreases the executives’ ability to engage in destructive empire-building acquisitions.

Bottom Line

After a virtually unprecedented period of junk outperforming quality, many commentators – from Jeremy Grantham to the Motley Fools – predict that high quality stocks will resume their historic role as the most attractive investments in the U.S. market, and quite possibly in the world. MNDFX offers investors their lowest-cost access to what is unquestionably one of the fund industry’s most disciplined and consistently successful management teams. Especially for taxable accounts, investors should seriously consider both Manning & Napier Tax-Managed (EXTAX) and Dividend Focus for core domestic exposure.

Fund website

Disciplined Value Fund

Fact Sheet

RiverPark Short Term High Yield Fund (RPHYX) – July 2011

By Editor

This profile has been updated since it was originally published. The updated profile can be found at http://www.mutualfundobserver.com/2012/09/riverpark-short-term-high-yield-fund-rphyx-july-2011-updated-october-2012/

Objective

The fund seeks high current income and capital appreciation consistent with the preservation of capital, and is looking for yields that are better than those available via traditional money market and short term bond funds. They invest primarily in high yield bonds with an effective maturity of less than three years but can also have money in short term debt, preferred stock, convertible bonds, and fixed- or floating-rate bank loans.

Adviser

RiverPark Advisers. Executives from Baron Asset Management, including president Morty Schaja, formed RiverPark in July 2009. RiverPark oversees the five RiverPark funds, though other firms manage three of the five. Until recently, they also advised two actively-managed ETFs under the Grail RP banner. A legally separate entity, RiverPark Capital Management, runs separate accounts and partnerships. Collectively, they have $90 million in assets under management, as of May 2011.

Manager

David Sherman, founder and owner of Cohanzick Management of Pleasantville (think Reader’s Digest), NY. Cohanzick manages separate accounts and partnerships. The firm has more than $320 million in assets under management. Since 1997, Cohanzick has managed accounts for a variety of clients using substantially the same process that they’ll use with this fund. He currently invests about $100 million in this style, between the fund and his separate accounts. Before founding Cohanzick, Mr. Sherman worked for Leucadia National Corporation and its subsidiaries. From 1992 – 1996, he oversaw Leucadia’s insurance companies’ investment portfolios. All told, he has over 23 years of experience investing in high yield and distressed securities. He’s assisted by three other investment professionals.

Management’s Stake in the Fund

30% of the fund’s investments come from RiverPark or Cohanzick. However, if you include friends and family in the equation, the percentage climbs to about 50%.

Opening date

September 30, 2010.

Minimum investment

$1,000.

Expense ratio

1.25% after waivers on $20.5 million in assets. The prospectus reports that the actual cost of operation is 2.65% with RiverPark underwriting everything above 1.25%. Mr. Schaja, RiverPark’s president, says that the fund is very near the break-even point. Update – 1.25%, after waivers, on $53.7 million in assets (as of 12/31/2011.)

Comments

The good folks at Cohanzick are looking to construct a profitable alternative to traditional money management funds. The case for seeking an alternative is compelling. Money market funds have negative real returns, and will continue to have them for years ahead. As of June 28 2011, Vanguard Prime Money Market Fund (VMMXX) has an annualized yield of 0.04%. Fidelity Money Market Fund (SPRXX) yields 0.01%. TIAA-CREF Money Market (TIRXX) yields 0.00%. If you had put $1 million in Vanguard a year ago, you’d have made $400 before taxes. You might be tempted to say “that’s better than nothing,” but it isn’t. The most recent estimate of year over year inflation (released by the Bureau of Labor Statistics, June 15 2011) is 3.6%, which means that your ultra-safe million dollar account lost $35,600 in purchasing power. The “rush to safety” has kept the yield on short term T-bills at (or, egads, below) zero. Unless the U.S. economy strengths enough to embolden the Fed to raise interest rates (likely by a quarter point at a time), those negative returns may last through the next presidential election.

That’s compounded by rising, largely undisclosed risks that those money market funds are taking. The problem for money market managers is that their expense ratios often exceed the available yield from their portfolios; that is, they’re charging more in fees than they can make for investors – at least when they rely on safe, predictable, boring investments. In consequence, money market managers are reaching (some say “groping”) for yield by buying unconventional debt. In 2007 they were buying weird asset-backed derivatives, which turned poisonous very quickly. In 2011 they’re buying the debt of European banks, banks which are often exposed to the risk of sovereign defaults from nations such as Portugal, Greece, Ireland and Spain. On whole, European banks outside of those four countries have over $2 trillion of exposure to their debt. James Grant observed in the June 3 2011 edition of Grant’s Interest Rate Observer, that the nation’s five largest money market funds (three Fidelity funds, Vanguard and BlackRock) hold an average of 41% of their assets in European debt securities.

Enter Cohanzick and the RiverPark Short Term High Yield fund. Cohanzick generally does not buy conventional short term, high yield bonds. They do something far more interesting. They buy several different types of orphaned securities; exceedingly short-term (think 30-90 day maturity) securities for which there are few other buyers.

One type of investment is redeemed debt, or called bonds. A firm or government might have issued a high yielding ten-year bond. Now, after seven years, they’d like to buy those bonds back in order to escape the high interest payments they’ve had to make. That’s “calling” the bond, but the issuer must wait 30 days between announcing the call and actually buying back the bonds. Let’s say you’re a mutual fund manager holding a million dollars worth of a called bond that’s been yielding 5%. You’ve got a decision to make: hold on to the bond for the next 30 days – during which time it will earn you a whoppin’ $4166 – or try to sell the bond fast so you have the $1 million to redeploy. The $4166 feels like chump change, so you’d like to sell but to whom?

In general, bond fund managers won’t buy such short-lived remnants and money market managers can’t buy them: these are still nominally “junk” and forbidden to them. According to RiverPark’s president, Morty Schaja, these are “orphaned credit opportunities with no logical or active buyers.” The buyers are a handful of hedge funds and this fund. If Cohanzick’s research convinces them that the entity making the call will be able to survive for another 30 days, they can afford to negotiate purchase of the bond, hold it for a month, redeem it, and buy another. The effect is that the fund has junk bond like yields (better than 4% currently) with negligible share price volatility.

Redeemed debt (which represents 33% of the June 2011 portfolio) is one of five sorts of investments typical of the fund. The others include

Corporate event driven (18% of the portfolio) purchases, the vast majority of which mature in under 60 days. This might be where an already-public corporate event will trigger an imminent call, but hasn’t yet. If, for example, one company is purchased by another, the acquired company’s bonds will all be called at the moment of the merger.
Strategic recapitalization (10% of the portfolio), which describes a situation in which there’s the announced intention to call, but the firm has not yet undertaken the legal formalities. By way of example, Virgin Media has repeatedly announced its intention to call certain bonds in August 2011. The public announcements gave the manager enough comfort to purchase the bonds, which were subsequently called less than 2 weeks later. Buying before call means that the fund has to post the original maturities (five years) despite knowing the bond will cash out in (say) 90 days. This means that the portfolio will show some intermediate duration bonds.
Cushion bonds (14%), refers to a bond whose yield to maturity is greater than its current yield to call. So as more time goes by (and the bond isn’t called), the yield grows. Because I have enormous trouble in understanding exactly what that means, Michael Dekler of Cohanzick offered this example:

A good example is the recent purchase of the Qwest (Centurylink) 7.5% bonds due 2014. If the bonds had been called on the day we bought them (which would have resulted in them being redeemed 30 days from that day), our yield would only have been just over 1%. But since no immediate refinancing event seemed to be in the works, we suspected the bonds would remain outstanding for longer. If the bonds were called today (6/30) for a 7/30 redemption date, our yield on the original purchase would be 5.25%. And because we are very comfortable with the near-term credit quality, we’re happy to hold them until the future redemption or maturity.

Short term maturities (25%), fixed and floating rate debt that the manager believes are “money good.”

What are the arguments in favor of RPHYX?

It’s currently yielding 100-400 times more than a money market. While the disparity won’t always be that great, the manager believes that these sorts of assets might typically generate returns of 3.5 – 4.5% per year, which is exceedingly good.
It features low share price volatility. The NAV is $10.01 (as of 6/29/11). It’s never been higher than $10.03 or lower than $9.97. Almost all of the share price fluctuation is due to their monthly dividend distributions. A $0.04 cent distribution at the end of June will cause the NAV will go back down to about $9.97. Their five separately managed accounts have almost never shown a monthly decline in value. The key risk in high-yield investing is the ability of the issuer to make payments for, say, the next decade. Do you really want to bet on Eastman Kodak’s ability to survive to 2021? With these securities, Mr. Sherman just needs to be sure that they’ll survive to next month. If he’s not sure, he doesn’t bite. And the odds are in his favor. In the case of redeemed debt, for instance, there’s been only one bankruptcy among such firms since 1985.
It offers protection against rising interest rates. Because most of the fund’s securities mature within 30-60 days, a rise in the Fed funds rate will have a negligible effect on the value of the portfolio.
It offers experienced, shareholder-friendly management. The Cohanzick folks are deeply invested in the fund. They run $100 million in this style currently and estimate that they could run up to $1 billion. Because they’re one of the few large purchasers, they’re “a logical first call for sellers. We … know how to negotiate purchase terms.” They’ve committed to closing both their separate accounts and the fund to new investors before they reach their capacity limit.

Bottom Line

This strikes me as a fascinating fund. It is, in the mutual fund world, utterly unique. It has competitive advantages (including “first mover” status) that later entrants won’t easily match. And it makes sense. That’s a rare and wonderful combination. Conservative investors – folks saving up for a house or girding for upcoming tuition payments – need to put this on their short list of best cash management options.

Financial disclosure: I intend to shift $1000 from the TIAA-CREF money market to RPHYX about one week after this profile is posted (July 1 2011) and establish an automatic investment in the fund. That commitment, made after I read an awful lot and interviewed the manager, might well color my assessment. Caveat emptor.

Note to financial advisers: Messrs Sherman and Schaja seem committed to being singularly accessible and transparent. They update the portfolio monthly, are willing to speak individually with major investors and plan – assuming the number of investors grows substantially – to offer monthly conference calls to allow folks to hear from, and interact with, management.

Fund website

RiverPark Short Term High Yield

Update: 3Q2011 Fact Sheet

Artisan Global Value Fund (ARTGX) – May 2011

By Editor

Objective

The fund pursues long-term growth by investing in 30-50 undervalued global stocks. Generally it avoids small cap caps, but can invest up to 30% in emerging and less developed markets. The managers look for four characteristics in their investments:

A high quality business
With a strong balance sheet
Shareholder-focused management
Selling for less than it’s worth.

The managers can hedge their currency exposure, though they did not do so until they confronted twin challenges to the Japanese yen: unattractive long-term fiscal position plus the tragedies of March 2011. The team then took the unusual step of hedging part of their exposure to the Japanese yen.

Adviser

Artisan Partners of Milwaukee, Wisconsin. Artisan has five autonomous investment teams that oversee twelve distinct U.S., non-U.S. and global investment strategies. Artisan has been around since 1994. As of 3/31/2011 Artisan Partners had approximately $63 billion in assets under management (March 2011). That’s up from $10 billion in 2000. They advise the 12 Artisan funds, but only 6% of their assets come from retail investors. Update – Artisan Partners had approximately $57.1 billion in assets under management, as of 12/31/2011.

Manager

Daniel J. O’Keefe and David Samra, who have worked together since the late 1990s. Mr. O’Keefe co-manages this fund, Artisan International Value (ARTKX) and Artisan’s global value separate account portfolios. Before joining Artisan, he served as a research analyst for the Oakmark international funds and, earlier still, was a Morningstar analyst. Mr. Samra has the same responsibilities as Mr. O’Keefe and also came from Oakmark. Before Oakmark, he was a portfolio manager with Montgomery Asset Management, Global Equities Division (1993 – 1997). Messrs O’Keefe, Samra and their five analysts are headquartered in San Francisco. ARTKX earns Morningstar’s highest accolade: it’s an “analyst pick” (as of 04/11).

Management’s Stake in the Fund

Each of the managers has over $1 million here and over $1 million in Artisan International Value.

Opening date

December 10, 2007.

Minimum investment

$1000 for regular accounts, reduced to $50 for accounts with automatic investing plans. Artisan is one of the few firms who trust their investors enough to keep their investment minimums low and to waive them for folks willing to commit to the discipline of regular monthly or quarterly investments.

Expense ratio

1.5%, after waivers, on assets of $57 million (as of March 2011). Update – 1.5%, after waivers, on assets of $91 million (as of December 2011).

Comments

Artisan Global Value is the first “new” fund to earn the “star in the shadows” designation. My original new fund profile of it, written in February 2008, concluded: “Global is apt to be a fast starter, strong, disciplined but – as a result – streaky.” I have, so far, been wrong only about the predicted streakiness. The fund’s fast, strong and disciplined approach has translated into consistently superior returns from inception, both in absolute and risk-adjusted terms. Its shareholders have clearly gotten their money’s worth, and more.

What are they doing right?

Two things strike me. First, they are as interested in the quality of the business as in the cost of the stock. O’Keefe and Samra work to escape the typical value trap (“buy it! It’s incredibly cheap!”) by looking at the future of the business – which also implies understanding the firm’s exposure to various currencies and national politics – and at the strength of its management team. One of the factors limiting the fund’s direct exposure to emerging markets stocks is the difficulty of finding sufficiently high quality firms and consistently shareholder-focused management teams. If they have faith in the firm and its management, they’ll buy and patiently wait for other investors to catch up.

Second, the fund is sector agnostic. Some funds, often closet indexes, formally attempt to maintain sector weights that mirror their benchmarks. Others achieve the same effect by organizing their research and research teams by industry; that is, there’s a “tech analyst” or “an automotive analyst.” Mr. O’Keefe argues that once you hire a financial industries analyst, you’ll always have someone advocating for inclusion of their particular sector despite the fact that even the best company in a bad sector might well be a bad investment. ARTGX is staffed by “research generalists,” able to look at options across a range of sectors (often within a particular geographic region) and come up with the best ideas regardless of industry. That independence is reflected in the fact that, in eight of ten industry sectors, ARTGX’s position is vastly different than its benchmark’s. Too, it explains part of the fund’s excellent performance during the 2008 debacle. During the third quarter of 2008, the fund’s peers dropped 18% and the international benchmark plummeted 20%. Artisan, in contrast, lost 3.5% because the fund avoided highly-leveraged companies, almost all banks among them.

Why, then, are there so few shareholders?

Manager Dan O’Keefe offered two answers. First, advisors (and presumably many retail investors) seem uncomfortable with “global” funds. Because they cannot control the fund’s asset allocation, such funds mess up their carefully constructed plans. As a result, many prefer picking their international and domestic exposure separately. O’Keefe argues that this concern is misplaced, since the meaningful question is neither “where is the firm’s headquarters” or “on which stock exchange does this stock trade” (the typical dividers for domestic/international stocks) but, instead, “where is this company making its money?” Colgate-Palmolive (CL) is headquartered in the U.S. but generates less than a fifth of its sales here. Over half of its sales come from its emerging markets operations, and those are growing at four times the rate of its domestic or developed international market shares. (ARTGX does not hold CL as of 3/31/11.) His hope is that opinion-leaders like Morningstar will eventually shift their classifications to reflect an earnings or revenue focus rather than a domicile one.

Second, the small size is misleading. The vast majority of the assets invested in Artisan’s Global Value Strategy, roughly $3.5 billion, are institutional money in private accounts. Those investors are more comfortable with giving the managers broad discretion and their presence is important to retail investors as well: the management team is configured for investing billions and even a tripling of the mutual fund’s assets will not particularly challenge their strategy’s capacity.

What are the reasons to be cautious?

There are three aspects of the fund worth pondering. First, the expense ratio (1.50%) is above average even after expense waivers. Even fully-grown, the fund’s expenses are likely to be in the 1.4% range (average for Artisan). Second, the fund offers limited direct exposure to emerging markets. While it could invest up to 30%, it has never invested more than 9% and, since late-2009, has had zero. Many of the multinationals in its portfolio do give it exposure to those economies and consumers. Third, the fund offers no exposure to small cap stocks. Its minimum threshold for a stock purchase is a $2 billion market cap. That said, the fund does have an unusually high number of mid-cap stocks.

Bottom Line

On whole, Artisan Global Value offers a management team that is as deep, disciplined and consistent as any around. They bring an enormous amount of experience and an admirable track record stretching back to 1997. Like all of the Artisan funds, it is risk-conscious and embedded in a shareholder-friendly culture. There are few better offerings in the global fund realm.

Fund website

Artisan Global Value fund

Update – December 31, 2011 (4Q) – Fact Sheet (pdf)

Wasatch Global Opportunities (WAGOX), May 2010

By Editor

. . . from the archives at FundAlarm

These profiles have not been updated. The information is only accurate as of the original date of publication.

FundAlarm Annex – Fund Report
May 1, 2010

Objective

The Fund invests in small and micro cap foreign and domestic companies, though it reserves the right to put up to 35% in larger companies. Up to 90% of the portfolio may be in micro caps and up to 50% in emerging markets. Currently the US is about 40% of the portfolio which, if I’ve read the prospectus rightly, is at the high end of the anticipated range. The fund is technically non-diversified, but currently holds 330 stocks. They use quantitative screens to focus their attention, then “bottom up” analysis – including extensive, expensive company visits – to make the final selections.

Adviser

Wasatch Advisors of Salt Lake City, Utah. Wasatch has been around since 1975. It both advises the 18 Wasatch funds – including the recently acquired 1st Source 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 of January 2010, the firm had $7 billion
in assets under management, about $5 billion of which were in their funds.

Managers

Robert Gardiner and Blake Walker. Mr. Gardiner had previously been Wasatch’s research director and managed three exceedingly strong Wasatch funds, Micro Cap, Micro Cap Value and Small Cap Value. With the launch of this fund, he gave up his other charges to focus here. Mr. Walker co-managed Wasatch International Opportunities. They both speak French. Mais oui!

Management’s Stake in the Fund

Mr. Gardiner has over a million dollars in the fund. Mr. Walker is in the $10,000 – $50,000 range, with a larger investment in his other fund.

Opening date

November 17, 2008.

Minimum investment

$2,000 for regular accounts, $1,000 for IRAs and Coverdells.

Expense ratio

1.19% for Investor class shares and 1.05% for Institutional class shares, after a waiver, on assets of $195 million, as of August 2023. There’s also a 2% redemption fee for shares held fewer than 60 days.

Comments

There’s a lot to be said for investing with specialist firms. Firms that know what they’re after and foster a culture that focuses on their core competency, tend to succeed. It’s clear that Matthews is the place to go for Asia funds. Royce is your single best bet for small cap value investing. Bridgeway is better at quant work than pretty much anyone else. And Wasatch is as close as we have to a small growth specialist. They define themselves by their expertise in the area, though they’ve purchased funds with other mandates. They promise incredibly thorough research, cross-team collaboration, and discipline in pursuit of “the World’s Best Growth Companies.”

They started with a couple very fine funds whose success drove them to quick closings. While they’ve added more flavors of funds lately – Emerging Markets Small Cap, Microcap Value, and Global Tech – their focus on great, smaller companies has remained.

Mr. Gardiner is likely one of their best managers. He ran, most famously, Wasatch Microcap from its inception through 2007. His success there was stunning. If you had invested $10,000 with Mr. Gardiner on the day he opened Micro Cap and sold on the day he retired as manager, you would have made $129,000. Put another way, your $10,000 investment would have grown by an additional $10,000 a year
for 12 years. That is almost four times more than his peers managed in the same period. Microcap Value – in which both Roy and I have personal investments – did almost as well, both during the years in which he served as mentor to the fund’s managers and afterward. His new charge is off to a similar performance: WAGOX has turned $10,000 into $20,000 from its launch at the end of 2008 to April 29, 2010. Its world-stock peers have returned about half as much.

The managers recognize that such returns are unsustainable, and seem to expect turbulence ahead. In their April 20th note to investors, Messrs. Gardiner and Walker sound a note of caution:

Given our view of the world, our main focus continues to be on quality. In each and every market, including emerging markets, we are trying to invest in what we consider to be the highest-quality
names. If the global economy ends up growing faster than we expect, stocks of high-quality companies may not lead the market, but they should do just fine. And if we see the type of subdued growth we envision, we believe high-quality stocks will do better than average.

Investing is never a sure thing. Several of Wasatch’s star funds have faded. Wasatch, here and in its
other funds, are purposefully targeting higher risk, higher return asset classes. That tends to make for “lumpy” returns: a string of great years followed by a few intensely painful ones. And Wasatch charges a lot – over 2% on average for their international and global offerings – for its services.

That said, Wasatch tends to find and keep strong employees. They’ve got a track record for “tight” closings to protect their funds. Their communications are timely and informative and, in the long run, they reward
their investors confidence.

Bottom Line

This is a choice, not an echo. Most “global” funds invest in huge, global corporations. While that dampens risk, it also tends to dampen rewards and produces rather less diversification value for a portfolio. This bold newer fund goes where virtually no one else does: tiny companies across the globe. Only Templeton Global Smaller Companies (TEMGX) – with a value bent and a hefty sales load – comes close. Folks looking for a way to add considerable diversity to the typical large/domestic/balanced portfolio really owe it to themselves to spend some time here.

Fund website

Wasatch Global Opportunities

Fact Sheet

February, 2010

By Editor

. . . from the archives at FundAlarm

These profiles have not been updated. The information is only accurate as of the original date of publication.

FundAlarm – Highlights & Commentary – (Updated 1st of Each Month)

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

Dear friends,

You can’t imagine the sinking feeling I had at the beginning of January, when I read the headline “Stocks have best first week since 1987.” Great, start with parallels to a year that had one of the market’s greatest-ever traumas. I was somehow less disturbed to read three headlines in quick succession at the end of that same month: “January barometer forecasts a down 2010” and “Three crummy weeks for stocks” on the same day as “Growth hits 6-year high” and “Energy prices dip in January.” There’s such a sense of disconnect between Wall Street’s daily gyrations (and clueless excesses) and the real-world that there’s not much to do, other than settle back and work toward a sensible long-term plan.

Portfolio Peeking Season

As is our tradition, Roy and I take a few minutes each February to share our portfolios and the thinking that shapes them. Our hope is that our discussions might give you the courage to go look at the bigger picture of your own investments and might, too, give you some guidance on how to make sense out of what you see.

My portfolio lives in two chunks: retirement (which used to be 15 years away but now, who knows?) and not. My retirement portfolio is overseen by three entities: TIAA-CREF, T. Rowe Price, and Fidelity. Within each retirement portfolio, I have three allocation targets:

80% equity / 20% income (which includes real estate)
50% domestic / 50% international in the equity sleeve
75% developed / 25% developing in the international sleeve

Inevitably things vary a bit from those weightings (TIAA-CREF is closer to 75% domestic / 25% international, for example), but I get pretty close. Over the past decade, that allocation and good managers have allowed me to pretty consistently outperform the Vanguard Total Stock Market (VTSMX) by 1 to 2% per year. In 2008, I lost about 36% — a percent better than Vanguard’s Total Stock Market but a percent worse than my benchmark composite. In 2009, I gained about 37% — eight percent better than Vanguard’s Total Stock Market, almost five percent better than either Vanguard’s Total World Stock Market ETF (VT) or my benchmark.

The same factors that drove the portfolio down in 2008 (a lot of international exposure and a lot of emerging markets exposure) drove it back up in 2009. Early in 2009 I rebalanced my account, which meant adding equity exposure and, in particular, emerging market equity exposure. None of my funds earned less than 20% and four of them – T. Rowe Price International Discovery (PRIDX), T. Rowe Price Emerging Market Stock (PRMSX), Fidelity Emerging Middle East and Africa (FEMEX) and Wasatch Microcap Value (WAMVX, in a Roth IRA) – returned more than 50%.

My non-retirement portfolio is considerably more conservative: it’s supposed to be about 25% US stocks, 25% foreign stocks, 25% bonds and 25% cash. It lost about 20% in 2008 and made about 30% in 2009.

Right now that’s accomplished with six funds:

TIAA-CREF Money Market, which generates income of $2.66 for every $1000 in my account. Sigh.
T. Rowe Price Spectrum Income (RPSIX): a fund of Price’s income-oriented funds. Technically a multi-sector bond fund, its relative performance is often controlled by what happens with the one stock fund that’s included in its portfolio. In general, it serves as a low-volatility way for me to keep ahead of inflation without losing much sleep. It’s pretty consistently churned out 5-6% returns and has lost money only during the 2008 meltdown. I could imagine being talked into a swap for Hussman Strategy Total Return (HSTRX), which didn’t lose money in 2008 and which also offers a low-volatility way to keep ahead of inflation. It has pretty consistently outperformed Price by 2-3% annually, but HSTRX’s fate lies in the performance of one guy – John Hussman, PhD – while Price is spread across eight or nine managers.
Artisan International Value (ARTKX): a very solid fund run by two Oakmark alumni. Made 33% in 2009, while lagging the vast majority of its peers. I’m fine with that, since leading in a frothy market is often a sign of an undisciplined portfolio. My only question is whether I’d be better in Artisan Global Value (ARTGX), which is smaller, more flexible and run by the same team.
Leuthold Global (GLBLX) is one manifestation of my uncertainty about the global economy and markets. It’s a go-anywhere (really: think “pallets of palladium in a London warehouse”) fund driven by a strict quantitative discipline. I bought it because of my admiration for the long-term success of Leuthold Core (LCORX), of which this is the “global” version. It made about 32% in 2009, well beyond its peers. I’d be substantially happier if it didn’t cost 1.82% but I’m willing to give Leuthold the chance to prove that they can add enough value to overcome the higher cost.
Finally, my portfolio by enlivened by the appearance of two new players: FPA Crescent (FPACX) and Matthews Asian Growth & Income (MACSX). I started 2009 with a pile of cash generated by my sale of Utopia Core (which was closed and liquidated, at a painful loss) and Baron Partners (which talked big about having the ability to take short positions – which I hoped would provide a hedge in turbulent markets – but then never got around to actually doing it). After much debate, I split the money between FPA and Matthews. FPA Crescent is a no-load fund from a mostly “loaded” family. Its manager, Steven Romick, has the flexibility to invest either in a company’s stock or its bonds, to short either, or to hold cash. This has long been a fixture of Roy’s portfolio and I finally succumbed to his peer pressure (or good common sense). The Matthews fund is about the coolest Asian fund I know of: strong absolute returns and the lowest risk of any fund in the region. Once it reopened to new investors, I began piling up my pennies. In 2009, it did what it always does in soaring markets: it made a lot of money in absolute terms (about 40%) but trailed almost all of its peers (97% of them). Which is just fine by me.

A more rational person might be drawn to MACSX’s sibling fund, Matthews Asia Dividend (MAPIX). Over its first three years, it has actually outperformed MACSX (by almost 2:1) with no greater risk. “Bob C.,” on the FundAlarm discussion board, mentioned that he’d been moving some of his clients’ assets into the fund. In retrospect, that looks like a great move but I’m reluctant to sell a fund that’s doing what I bought it to do, so I’ll probably watch and learn a bit longer.

What does the next year bring? Not much. Most of my investment success has been driven by two simple impulses: don’t take silly risks (which is different from “don’t take risks”) and save like mad. I continue to gravitate toward conservative managers who have a fair amount of portfolio flexibility and a great record for managing downside risks. And I continue saving as much as I can: about 13.5% of my annual income goes to retirement, my employer – Augustana College – contributes the equivalent of 10%, and about 10% of my take-home pay goes into the funds I’ve just mentioned. While college professors don’t make a huge amount of money, the fact that all of my investments are set on auto-pilot helps me keep with the program. Although I’ve profiled several incredibly intriguing funds over the past year, I’ll probably not add any new funds right now – I don’t have any really obvious holes and I’m not great at keeping control of large numbers of funds.

Roy writes:

Alas, I am quite a bit less systematic than David in designing my portfolio, not that there is anything wrong with David’s approach (in fact, it is quite good). Basically, I try to keep my portfolio roughly divided into broad capitalization “thirds” — one-third each large cap, mid-cap and small-cap funds — and within each third roughly divided into value, blend, and growth orientation. In other words, I try to fill each square of the venerable, nine-square Morningstar style box with a roughly equal percentage of my portfolio, with a further goal to have about 15% of my portfolio in foreign stocks, and an overweight in the health care, technology and fiancial services sectors (I’ll get back to you in about 10 years on that last one). To get an overview of my portfolio for this purpose, I use the Morningstar portfolio X-ray tool (which, by the way, is available free on the T. Rowe Price WSeb site).

Roy’s Mutual Fund Portfolio (as of December 31, 2009, in alphabetical order within each percentage category)

More than 15% by dollar value

Buffalo Small Cap (BUFSX)
iShares Russell 3000 Index ETF (IWV)

Less than 15% by dollar value

Allianz RCM Global Technology D (DGTNX)
Bridgeway Ultra-Small Company Market (BRSIX)
Cohen & Steers Realty Shares (CSRSX)
Fidelity Select Brokerage & Investment (FSLBX)
FPA Crescent (FPACX)
Vanguard 500 Index (VFINX)
Vanguard European Stock Index (VEURX)
Vanguard Health Care (VGHCX)
Vanguard Total Stock Market ETF (VTI)
Wasatch Global Technology (WAGTX)
Weitz Partners Value (WPVLX)

In early 2010, shortly after the snapshot above, I sold Bridgeway Ultra-Small Company Market, due to poor performance, and invested the proceeds in Wasatch Mid Cap Value (WAMVX). I also have arranged to invest this year’s retirement plan contributions in WAMVX.

To simplify things a bit, I probably should sell my shares of Vanguard 500 Index (VFINX) and invest the proceeds in iShares Russell 3000 Index ETF. But I hold the VFINX in a taxable acccount, and my desire not to pay capital gains tax outweighs my need to tidy up. Likewise, to reduce the number of my holdings, I should sell my shares of Vanguard Total Stock Market ETF (VTI) and invest the proceeds in iShares Russell 3000 Index ETF (IWV), which plays a very similar role in my portfolio (the shares of VTI are held in a retirement account so, in this case, such a sale would have no tax consequences). Here, I just don’t want to pay the transaction fees which, while minor, ultimately strike me as unnecessary.

[Back to David] Forward Long/Short Credit Analysis: a clarification and correction

In January, I profiled

Forward Long/Short Credit Analysis (FLSRX), a unique fund which takes long and short positions in the bond market. The fund’s appeal is due to (a) its prospects for extracting value in an area that most other mutual funds miss and (b) its pedigree as a hedge fund. Forward’s president was particularly proud of this latter point, and took some pains to dismiss the efforts of competitors who could come up with nothing more than hedge fund wannabes:

Unlike the “hedge fund light” mutual funds, this one is designed just like a hedge fund, but with daily pricing, daily liquidity, and mutual fund-like transparency.

Forward’s commitment to the fund’s hedge roots was so strong that it was initially available only to qualified investors: folks with a net worth over $1.5 million or at least $750,000 invested in the fund.

Since Forward says that FSLRX models a Cedar Ridge hedge fund, but doesn’t specify which hedge fund they mean, I guessed that it was Cedar Ridge Master Fund and highlighted Cedar Ridge’s performance as an illustration of FSRLX’s potential.

I was wrong on two counts. First, I had the wrong hedge fund. “Evan,” one of our readers, wrote to inform me that the correct fund was Cedar Ridge Investors Fund I, LP. Second, the Investors’ fund record raises serious questions about FSLRX. The Cedar Ridge Master Fund lost 6% in 2008, a respectable performance. Cedar Ridge Investors, however, lost 31% — which is far less reassuring. Worse, there was a cosmic gap between the 2009 performance of Cedar Ridge Investors (up 98%) and its doppelganger, FSLRX (up 47%). When I asked about the gap in performance, the folks at Forward passed along this explanation:

The Forward Long/Short Credit Analysis Fund is based on the Cedar Ridge Investors I. The performance difference in 2009 between the two is easily explained. Compared to the Cedar Ridge fund, FLSRX fund is more diversified and uses less leverage to be able to provide daily liquidity and operate as a fund for retail investors.

Somehow that 2:1 return difference is making the Forward fund look pretty durned “hedge fund light” about now. (Many thanks to Evan for pointing me, finally, in the right direction.)

Akre Focus: Maybe it is worth all the fuss and bother

In the January issue, I took exception to the uncritical celebration by financial journalists of the new Akre Focus (AKREX) fund. Manager Chuck Akre intends to manage AKREX using the same strategy he employed with the successful FBR Focus (FBRVX) fund, and Akre is the only only manager FBRVX has ever known. AKREX – for all intents and purposes – is FBRVX: same manager, same expenses, same investment requirement, same strategy. I was, however, still suspicious: FBRVX has a very streaky record, Mr. Akre’s entire analyst team resigned in order to stay with the FBR Fund and, in doing so, they were reported as making comments that suggested that Mr. Akre might have been something less than the be-all and end-all of the fund. I e-mailed Akre Capital Management in December, asking for a chance to talk but never heard back.

Victoria Odinotska, president of a public relations firm that represents Akre Focus, read the story and wrote to offer a chance to chat with Mr. Akre about his fund and his decision to start Akre Focus. I accepted her offer and gave our Discussion Board members a chance to suggest questions for Mr. Akre. I got a bunch, and spent an hour in January chatting with him.

Our conversation centered on three questions.

Question One: Why did you leave? Answer: Because, according to Mr. Akre, FBR decided to squeeze, if not kill, the goose that laid its golden eggs. As Mr. Akre, explained, FBR is deeply dependent on the revenue that he generated for them. He described his fund as contributing “80% of FBR’s assets and 100% of net income.” While I cannot confirm his exact numbers, there’s strong evidence that Focus is, indeed, the lynchpin of FBR’s economic model. At year’s end, FBR funds held $1.2 billion in assets. A somewhat shrunken Focus fund accounted for $750 million, which works out to about 63% of assets. By Mr. Akre’s calculation, he managed $1 billion for FBR, which represents about 80%. More importantly, most of FBR’s funds are run at a substantial loss, based on official expense ratios:

Expense ratio before waivers

Expense ratio after waivers

Loss on the fund

FBR Pegasus Small Cap Growth

3.9%

1.5%

2.4%

FBR Pegasus Mid-Cap

3.0%

1.4%

1.6%

FBR Pegasus Small Cap

2.8%

1.5%

1.3%

FBR Technology

3.0%

1.9%

1.1%

FBR Pegasus

2.2%

1.3%

0.9%

FBR Focus

1.4%

–

FBR Large Cap Financial

1.8%

–

FBR Small Cap Financial

1.5%

–

FBR Gas Utilities Index

0.8%

–

Source: FBR Annual Report, “Financial Highlights, Year Ending 10/31/09”

Based on these numbers, virtually all of FBR’s net income was generated by two guys (Mr. Akre, whose Focus fund generated $10.8 million, and David Ellison whose two Financial funds chipped in another $3.5 million), as well as one modestly over-priced index fund (which grossed $1.5 million)

FBR underwent a “change of control” in early 2009 and, as Mr. Akre describes it, they decided they needed to squeeze the goose that was laying their golden eggs. After a series of meetings, FBR announced their new terms to Akre, which he says consisted of the following:

He needed to take a 20% cut in compensation (from about 55 basis points on his fund to 45 basis points), a potential cash savings to management that he did not believe would be passed on to fund shareholders.
He would need to take on additional marketing responsibilities, presumably to plump the goose.
And he had eight days to make up his mind.

Mr. Akre said “no” and, after consulting with his team of three analysts who agreed to join him, decided to launch Akre Focus. The fund was approved by the SEC in short order and, while his analysts worked on research back at the home office, Mr. Akre took a road trip. Something like three days into that trip, he got a call. It was his senior analyst who announced that all three analysts had resigned from his new fund. The next day, FBR announced the hiring of the three analysts to run FBR Focus.

FBR has been taking a reasonably assertive tack in introducing their new portfolio managers. They don’t quite claim that they’ve been running the fund all this time, but they come pretty close. FBR Focus’s Annual Report, January 2010, says this: “Finally, we are pleased to be writing this letter to you in our expanded role as the Fund’s co-Portfolio Managers. We assumed this position on August 22, 2009, after working a cumulative 23 years as the analysts responsible for day to day research and management of the Fund’s investments (emphasis added).” Mr. Akre takes exception to these claims. He says that his analysts were just that — analysts — and not shadow managers, or co-managers, or anything similar. Mr. Akre notes, “My analysts haven’t run the fund. They have no day-to-day investment management experience. They were assigned to research companies and write very focused reports on them. As a professional development opportunity, they did have a chance to offer a recommendation on individual names. But the decision was always mine.”

Mr. Akre’s recollection is certainly consistent with the text of FBR’s annual and semi-annual reports, which make no mention of a role for the analysts, and don’t even hint at any sort of team or collegial decision-making.

Question Two: How serious is the loss of your entire staff ? Answer: not very. After a national search, he hired two analysts who he feels are more experienced than the folks they replaced:

Tom Saberhagen: Since 2002, a Senior Analyst with the Aegis Value Fund (AVALX), which I’ve profiled as a “star in the shadows”.
John Neff, who has been in the financial services industry for 15 years. He was a sell-side equity analyst for William Blair & Company and previously was in the First Scholar program at what was then First Chicago Corporation (now JP Morgan).

Question Three: What can investors expect from the new fund? Mr. Akre has some issues with how the size of FBR Focus was managed at the corporate level. It’s reasonable to assume that he will devote significant attention to properly managing the size of his own fund.

In general, Mr. Akre is very concerned about the state of the market and determined to invest cautiously, “gingerly” in his terms. He plans to invest using precisely the discipline that he’s always followed, and seems exceptionally motivated to make a success of the fund bearing his name. In recognition of that, I’ve profiled Akre Focus this month as a “star in the shadows.”

Thanks again to Mr. Akre for taking the time to talk with me, and for giving us some rare behind-the-scenes views of fund management. Of course, if there are credible viewpoints that differ from Mr. Akre’s, we’d like to hear them, and we’ll carefully consider printing them as well.

Noted briefly:

RiverNorth Core Opportunity(RNCOX), was recognized by Morningstar as the top-performing moderate allocation/hybrid fund over the past three years. My profile of RNCOX was also the subject of vigorous discussion on the FundAlarm Discussion Board, where some folks were concerned that the closed-end market was not currently ripe for investment. (Source: Marketwire.com, 1/12/10)

Manning & Napier, Matthews Asia and Van Eck were recognized by Strategic Insight (a research firm) as the fastest-growing active fund managers in 2009. I know little about Van Eck, but have profiled several funds from the other two firms and they do deserve a lot more attention than they’ve received. (Source: MutualFundWire.com, 1/14/10)

T. Rowe Pricewas the only pure no-load manager to make Lipper/Barron’s list of “best fund families, 2009.” The top three families overall were Putnam (#1 – who would have guessed?), Price and Aberdeen Asset Management. Top in U.S. equity was Morgan Stanley, Price topped the world equity category, and Franklin Templeton led in mixed stock/bond funds. Fidelity ranked 26/61 while Vanguard finished 40^th. (Source: “The New Champs,” Barron’s, 2/01/10).

Raising the prospect that Forward Long/Short Credit Analysis (FSLRX, discussed above and profiled last month) might be onto something, Michael Singer, head of alternative investments for Third Avenue Management, claims that the best opportunities in 2010 will come distressed debt (a specialty for the new Third Avenue Focused Credit (TFCVX) fund), long-short credit (à la Forward) and emerging markets. Regarding long-short credit, he says, “Last year, making money in long-short credit was like shooting fish in a barrel. This year talented traders can make money on both the long and short side, but you better be in the right credits.” (Source: “Tricky Sailing for Hedge Funds,” Barron’s, 2/01/10).

In closing . . .

I’ve written often about the lively and informative debates that occur on FundAlarm’s discussion board. For folks wondering whether supporting FundAlarm is worth their time, you might consider some of the gems scattered up and down the Board as I write:

“MJG” linked to the latest revision of well-regarded Callan Periodic Table of Investment Returns, which provides – in a single, quilt-like visual – 20 years’ worth of investment returns for eight different asset classes. “Bob C” had reservations about the chart’s utility since it excludes many au currant asset classes, such as commodities. After just a bit of search, Ron (a distinct from rono) tracked down a link to the Modern Markets Scorecard which provides a decades’ worth of data on classes as standard as the S&P500 and as edgy as managed futures. You can find the Scorecard here: Link to Scorecard (once you get to this page, on the Rydex Web site, click on the appropriate PDF link).
After a January 28 market drop, “Fundmentals” offered up a nice piece of reporting and interpretation on the performance of variously “hedged” mutual funds.

Posted by Fundmentals
on January 28, 2010 at 20:02:18:

The long/short category in M* includes many different strategies which may not be correlated with each other but days like this expose the different strategies and how they behave.

I have divided the funds into several behavioral categories

Long huggers: These are the category equivalent of closet indexers in active long-only funds. Their short/hedging positions don’t prevent them from being close to the market movements (say upto -1% on a day like this). These should be avoided if they do this consistently. Examples include:

Astor Long/Short ETF I ASTIX -0.71% (try shorting for a change bud)
Old Mutual Analytic Z ANDEX -1.01% (need more analytics it seems)
Schwab Hedged Equity Select SWHEX -0.85% (hedged? try again)
Sound Mind Investing Managed Volatility SMIVX -0.90% (no one with sound mind will think this is managing volatility)
The Collar COLLX -0.67% (cute name but is the manager a dog?)
Threadneedle Global Extended Alpha R4 REYRX -0.94% (What alpha? Missing the needle)
Virtus AlphaSector Allocation I VAAIX -0.71% (Pick whether you want to be an alpha fund or a sector fund)
Wasatch-1st Source Long/Short FMLSX -0.95% (Perhaps time to try the 2nd Source for ideas?)
Wegener Adaptive Growth WAGFX -1.12% (Sorry bud, you ain’t adapting nor growing)

Long-biased: These hedge/short sufficiently to reduce downside but still manage to lose with some correlation to the market (say around -0.5% on a day like this. Examples include

AQR Managed Strategy Futures N AQMNX -0.51% (future ain’t looking bright with this)
Beta Hedged Strategies BETAX -0.41% (need more cowbells.. er.. hedging)
Glenmede Long/Short GTAPX -0.37% (a bit more short perhaps?)
Highland Long/Short Equity Z HEOZX -0.56% (High on long?)
ICON Long/Short Z IOLZX -0.58% (Not too long if you please?)
Janus Long/Short T JLSTX -0.51% (More like long T-shirt, try a short size)
Nakoma Absolute Return NARFX -0.55% (absolute loss?)

Market neutral: These funds are hedged/short sufficiently to provide a return largely unrelated to the market movement (say between -0.3% to 0.3% on a day like this). Most of them fall here and are what you need in this category

Alpha Hedged Strategies ALPHX -0.30%
Alternative Strategies I AASFX -0.16%
American Century Lg-Shrt Mkt Netrl Inv ALHIX +0.20
Arbitrage R ARBFX -0.08%
DWS Disciplined Market Neutral S DDMSX +0.22
First American Tactical Market Oppt Y FGTYX -0.1%
GMO Alpha Only III GGHEX 0.00%
Goldman Sachs Absolute Return Tracker IR GSRTX -0.11%
ING Alternative Beta W IABWX -0.18%
Merger MERFX +0.06%
MFS Diversified Target Return I DVRIX -0.22%
Robeco Long/Short Eq Inv BPLEX +0.12%
TFS Market Neutral TFSMX -0.33%
Turner Spectrum Inv TSPCX +0.18%
Vantagepoint Diversifying Strategies VPDAX -0.20%

Short biased: These are hedged/short sufficiently that they are mostly inverse correlated with the market but do have some upside in up markets (say around +0.5% on a day like this)

None I can find

Short huggers: This is the opposite of the long huggers who are so hedged/short that they are more correlated with inverse funds than being short biased and are likely to do poorly in up markets. Avoid if they do this consistently. Examples

Hussman Strategic Growth HSGFX +0.95% (The strategy is to grow only when everyone is shrinking?)
In addition to well-earned words of thanks, many of the 20 replies offered up other hedged and risk-diversifying funds worthy of consideration and suggestions for ways to interpret the inconsistent ability of managers to live up to the “market neutral” moniker.

Of the 20 funds with “absolute” in their names, precisely half have managed to break even so far in 2010. Only two “absolute return” funds actually managed to achieve their goal by staying above zero in both 2008 and 2009 — Eaton Vance Global Macro Absolute Return (EAGMX) and RiverSource Absolute Return Currency & Income (RARAX). Both also made money in January.

In common with many nervous investors, “Gandalf” was curious about how much investable cash other folks were holding in the face of the market’s (so far) minor correction. You might be interested to read why several respondents were at 75% cash – and what they intended to do next.

The joys of the board are varied, but fleeting – after a week to 10 days, each post passes into The Great Internet Beyond so that we can make room for the next generation. As we pass the 280,000 post mark, the members of the discussion community have offered up a lot of good sense and sharp observations. Roy and I invite you to join in the discussion, and to help provide the support that makes it all possible.

Please do let us know, via the board or e-mail, what you like, what makes you crazy and how we can make it better. We love reading this stuff!

With respect,

David

American Century One Choice funds: Income (ARTOX), 2025 (ARWIX), 2035 (ARYIX), and 2045 (AROIX) (formerly American Century LIVESTRONG funds), June 2006

By Editor

At the time of publication, this fund was named American Century LIVESTRONG funds.

. . . from the archives at FundAlarm

These profiles have not been updated. The information is only accurate as of the original date of publication.

June 1, 2006

FundAlarm Annex – Fund Report

Objective

These are “funds of funds” which grow increasingly conservative as the
retirement target date approaches.

Adviser

American Century Investment Management. American Century is located in Kansas City and manages about $80 billion through 70 funds. That slightly overstates the case since 10 of their offerings – the LIVESTRONG and One Choice groups – are “funds of funds.”

Manager

Richard Weiss, Vidya Rajappa, Radu Gabudean, Scott Wilson and Brian Garbe.

Mr. Weiss is the chief investment officer for multi-asset strategies and oversees the team that manages all of the firm’s multi-asset strategies, including the OneChoice, Strategic Allocation and college savings portfolios. Ms. Rajappa, formerly director of quantitative research at AllianceBernstein, is head of portfolio management. Mr. Gabudean is a portfolio manager who previously was the vice president for quantitative strategies at Barclays Capital. Mr. Wilson has been an American Century portfolio manager since 2011; prior to that he was an equity analyst for 20 years. Mr. Garbe is a senior portfolio manager. Prior to joining American Century in 2010, he was a portfolio manager for the investment wings at several banks and hedge funds.

Opening date

August 31, 2004. Formerly called the “My Retirement” funds (another marketing gem), they were rebranded as LIVESTRONG funds on May 15, 2006.

Minimum investment

$2500 for both regular and tax-sheltered accounts, and $2000 for a Coverdell Education Savings Account. The IRA minimum is $500 if you establish a monthly automatic investing plan.

Expense ratio

0.75% for Investor class shares, as of June 2023. In general, Morningstar classifies this fund, and the other funds in the One Choice series, as having high expense ratios. The One Choice series of funds collectively hold $1.8 billion, as of June 2023.

Comments

The LIVESTRONG funds, like the MY RETIREMENT ones before them, invest in 14 other American Century funds. The funds had very modest performance in their first year or so of operation and drew little interest from retail investors. In rebranding the funds as LIVESTRONG, American Century did four things:

It acquired Lance Armstrong as a spokesmodel.
It agreed to contribute at least $1 million of corporate – not investor – money to the Lance Armstrong Foundation in each of the next several years.
It eliminated tobacco companies from the investment mix.
And it latched on to a sort of goofy marketing slogan (“Get your Lance face on!”), accompanied by a very odd website.

All of which is unobjectionable, despite some snickering from the pundit gallery (“Tour de Funds”). The Armstrong Foundation is
generally well-respected and highly-rated by the charity watchdog groups. There’s a logical tie for the American Century funds, whose founder and founder’s wife are both cancer survivors. The founder already supports a cancer research center. Fidelity has already led the way on celebrity spokesmodels (Sir Paul McCartney) and a number of other fund companies (Ariel and Bridgeway among them) have charitable missions.

But none of that offers a reason to invest in the funds. They seem a tiny bit more costly and noticeably less aggressive than the offerings from the Big Three. Here, for example, is a comparison of American Century’s target-date 2025 fund to those of the Big Three:

	American Cent.	Fidelity	Price	Vanguard*
US stocks	50	58	60	71
Int’l stocks	15	15	19	11
Bonds	30	20	15	18
Cash	5	7	5	0
Expenses	.88	.75	.82	.20

*The Vanguard portfolio reflects changes that will occur early in June, 2006. We reported on those earlier.

The LIVESTRONG funds are distinguished by their annual asset mix adjustment, while the others wait for five years. The LIVESTRONG funds also hold a few international bonds (something like a half percent for 2025), a little real estate (2%), some emerging markets equity exposure (3%), and the manager is meditating upon commodities.

Bottom line

It’s not clear that there’s any particular reason to choose these funds over their competitors. Retirement investors seeking a more-aggressive portfolio might consider T. Rowe Price and then make their own contribution (and receive their own tax deduction) to a worthy charity such as the Armstrong Foundation. (While you’re at it, send a little to FundAlarm as well.)

Company website

https://www.americancentury.com/invest/funds/one-choice-in-retirement-portfolio/artox/

One Choice portfolio strategy outline:

https://www.americancentury.com/invest/accounts/one-choice-portfolios/

Al Frank Fund (VALUX), April 2008

By Editor

. . . from the archives at FundAlarm

These profiles have not been updated. The information is only accurate as of the original date of publication.

April 1, 2008

FundAlarm Annex – Fund Report

Objective

The objective of the Al Frank Fund is long-term capital appreciation. The manager selects equity securities that he believes are out of favor and undervalued, then purchases and holds them until it believes that the securities have reached a fair value. That tends to take a while, so portfolio turnover is quite low and the portfolio is quite diverse: just under 300 holdings, across all valuations and size ranges. Currently the portfolio is comprised mostly of U.S. names.

Adviser

Al Frank Asset Management. The adviser, named for its late founder, manages two mutual funds (Al Frank and Al Frank Dividend Value) and about 800 separate accounts. Altogether, it manages about $750 million in assets.

Managers

John Buckingham and Jessica Chiaverini. Mr. Buckingham is the Chief Investment Officer for Al Frank, which he joined in 1987. He’s responsible for the fund’s day-to-day management. He’s also the Director of Research and editor of both The Prudent Speculator and the TechValue Report newsletters. Ms. Chiaverini works mostly with the firm’s separate accounts and the analysts.

Management’s Stake in the Fund

Mr. Buckingham has between $100,000 and $500,000 in each of the funds and owns about 20% of the adviser. Ms. Chiaverini has a marginal investment in the fund, but does buy many of the individual stocks recommended by The Prudent Speculator and held in the fund. Because Al Frank is part of the Advisers Series Trust, which provides the fund’s administrative and legal services, their board is actually a group designated to oversee all of the Advisers Series funds. As a result, they generally have no investment in either of the Al Frank funds.

Opening date

January 2, 1998.

Minimum investment

$1,000 for regular and IRA/UGMA accounts.

Expense ratio

1.24% after a waiver on assets of $67 million, as of August 2023. There’s a 2.0% redemption fee on shares held fewer than sixty days.

Comments

Since I’m working on next week’s quizzes for my Advertising and Social Influence class at Augustana, I thought I’d toss in a short quiz for you folks, too. Here’s the set-up to the question:

Fund-tracker Morningstar provides an analysis in visual form of each mutual fund’s “ownership zone.” They define the “ownership zone” this way:

Ownership zones are the shaded areas of the style box intended to be a visual measure of a fund’s style scope–that is, the primary area of a fund’s ownership within the style box. Some key points to remember about the ownership zone are that it encompasses 75% of the stock holdings in the fund’s portfolio, and that it is centered around a centroid that is determined using an asset-weighted calculation.

Please match each fund with its corresponding ownership zone:

a. Al Frank Fund

b. Fidelity Low-Priced Stock

c. Vanguard Total Stock Market

If you thought Fidelity’s Low-Priced is represented by image #1, you get a point. If you thought Vanguard’s Total Stock Market index is represented by index #3, you’re wrong. Terribly wrong. Image #3 represents a picture of the Al Frank Fund’s holdings.

For a fund whose ticker is VALUX, you might imagine . . . well, you know, “value” stocks in the portfolio. And while Mr. Buckingham thinks of himself as a value investor, he is wary of letting his portfolio get anchored merely to traditional value sectors like financials and utilities (the latter of which, by the way, he does not own). He argues that non-traditional realms, like tech, can offer good – and occasionally spectacular – values which are missed when you stick strictly to traditional valuation metrics. He argues that tech firms (the subject of his TechValue Report) might have no earnings but nonetheless represent legitimate “value” investments if the business shows evidence of substantial growth potential and the available valuations are at the low end of their historic ranges. He write:

In short, we seek bargains wherever they reside. If Blue-Chips seem cheap, we buy them. If technology stocks appear undervalued, we snap them up. We believe that limiting our investment universe by market-cap or value-versus-growth distinctions likely will serve only to limit our potential returns.

As new money comes (slowly, he grumps) into the fund, Mr. Buckingham rebalances the portfolio by investing in the new names with the most compelling valuations rather than adding to his existing positions. He argues that having a sprawling portfolio offers the best prospect for long-term success, in part because much of a portfolio’s gain is driven by a relative handful of wildly successful investments. Since it’s hard to predict which invest will be spectacular as opposed to merely “good” and since something like a third of any good investor’s choices “simply don’t work out,” he holds “200 or more stocks in our Funds, to improve our chances of owning those rare few stocks that everyone wishes they’d noticed earlier. This disciplined approach makes it possible for us to put patience – perhaps the most elusive of investment qualities – to work.” Skeptics might recall that Joel Tillinghast, on the short list of the best investment managers ever to work for Fidelity, consistently holds 700 or more stocks in his Fidelity Low-Priced Stock (FLPSX) portfolio. That’s complemented by the fact that Mr. Buckingham’s newsletter, “The Prudent Speculator has evolved to become the #1 newsletter as ranked by The Hulbert Financial Digest in its fifteen-, twenty- and twenty-five-year categories for total return performance through May 31, 2007.”

Over the decade of Al Frank fund’s existence, it’s landed in the top 2% of its peer group clocking in with annual returns of 12.7%, which tops the S&P500 and its mid-cap blend peer group by about 5% a year. Its absolute returns over the past five years – 19% annually – are stronger while its relative returns and about the same as for the longer period. The headache for investors comes in the pattern of year-to-year performance that leads to those strong, long-term numbers.

Year

Peer Group Ranking

2001

Top 10%

2002

Bottom 10%

2003

Top 10%

2004

Bottom 10%

2005

Top 10%

2006

Bottom 10%

2007

Just below average

On whole, that pattern doesn’t bother him. Citing Warren Buffett’s famous dictum, “At Berkshire, we would rather earn a lumpy 15% over time than a smooth 12%,” Mr. Buckingham takes lumpiness as an inevitable consequence of independent thinking.

Bottom Line

Al Frank definitely offers lumpy returns. The manager neither aspires to nor achieves smoothly mediocre results. He tends to make a lot of money for his investors, but punctuates periods of stout returns with periods where a good glass of stout might be called for. For folks willing to take the bad with the good, they’ve got access to a strong track record and devoutly original thinking.

Fund website

http://www.alfrankfunds.com/

FundAlarm © 2008

Akre Focus (AKREX), February 2010

By Editor

. . . from the archives at FundAlarm

These profiles have not been updated. The information is only accurate as of the original date of publication.

February 1, 2010

FundAlarm Annex – Fund Report

Objective

The fund seeks long-term capital appreciation by investing, mostly, in US stocks of various sizes, though it is likely to hold small and mid-cap stocks more frequently than large cap ones. The fund may also invest in “other equity-like instruments.” The manager looks for companies with good management teams (those with “a history of treating public shareholders like partners”), little reliance on debt markets and above-average returns on equity. Once they find such companies, they wait until the stock sells at a discount to “a conservative estimate of the company’s intrinsic value.” The Fund is non-diversified, with both a compact portfolio (25 or so names) and a willingness to put a lot of money (often three or four times more than a “neutral weighting” would suggest) in a few sectors.

Adviser

Akre Capital Management, LLC, an independent Registered Investment Advisor located in Middleburg, VA. Mr. Akre, the founder of the firm, has been managing portfolios since 1986, and has worked in the industry for over 40 years. At 12/30/09, the firm had over $500 million in assets under management split between Akre Capital Management, which handles the firm’s separately managed accounts ($1 million minimum), a couple hedge funds, and Akre Focus Fund. Mr. Akre founded ACM in 1989, while his business partners went on to form FBR. As a business development move, it operated it as part of Friedman, Billings, Ramsey & Co. from 1993 – 1999 then, in 2000, ACM again became independent.

Manager

Charles Akre, who is also CEO of Akre Capital Management. Mr. Akre has been in the securities business since 1968 and was the sole manager of FBR Focus (FBRVX) from its inception in 1996 to mid-2009. He holds a BA in English Literature from American University, which I mention as part of my ongoing plug for a liberal arts education.

Managements Stake in the Fund

Mr. Akre and his family have “a seven figure investment in Akre Focus, larger than my investment in the FBR fund had been.”

Opening date

August 31, 2009 though the FBR Focus fund, which Mr. Akre managed in the same style, launched on December 31, 1996.

Minimum investment

$2,000 for regular accounts, $1000 for IRAs and accounts set up with automatic investing plans.

Expense ratio

1.46% on assets of about $150 million. There’s also a 1.00% redemption fee on shares held less than 30 days.

Comments

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). Across the years and despite many names, he applied the same investment strategy that now drives Akre Focus.

Here’s his description of the process:

The process we employ for evaluating and identifying potential investments (compounding machines) consists of three key steps:

We look for companies with a history of above average return on owner’s capital and, in our assessment, the ability to continue delivering above average returns going forward. Investors who want returns that are better than average need to invest in businesses that are better than average. This is the pond we seek to fish in.

We insist on investing only with firms whose management has demonstrated an acute focus on acting in the best interest of all shareholders. Managers must demonstrate expertise in managing the business through various economic conditions, and we evaluate what they do, say and write for demonstrations of integrity and acting in the interest of shareholders.

We strive to find businesses that, through the nature of the business or skill of the manager, present clear opportunities for reinvestment in the business that will deliver above average returns on those investments.

Whether looking at competitors, suppliers, industry specialists or management, we assess the future prospects for business growth and seek out firms that have clear paths to continued success.

Mr. Akre’s discipline leads to four distinguishing characteristics of his fund’s portfolio:

It tends to be concentrated in (though not technically limited to) small- to mid-cap stocks. His explanation of that bias is straightforward: “that’s where the growth is.”
It tends to make concentrated bets. He’s had as much as a third of the portfolio in just two industries (gaming and entertainment) and his sector weightings are dramatically different from those of his peers or the S&P500.
It tends to stick with its investments. Having chosen carefully, Mr. Akre tends to wait patiently for an investment to pay off. In the past ten years, FBRVX never had a turnover ratio above 26% and often enough it was in the single digits.
It tends to have huge cash reserves when the market is making Mr. Akre queasy. From 2001 – 04, FBRVX’s portfolio averaged 33.5% cash – and crushed the competition. It was in the top 2% of its peer group in three of those four years and well above average in the fourth year.

Those same patterns seem to be playing out in Akre Focus. At year’s end, he was 65% in cash. Prompted by a reader’s question, I asked whether he had a goal for deploying the cash; that is, did he plan to be “fully invested” at some point? His answer was,no. He declared himself to be “very cautious about the market” because of the precarious state of the American consumer (overextended, uncertain, underemployed). He allowed that he’d been moving “gingerly” into the market and had been making purchases weekly. He’s trying to find investments that exploit sustained economic weakness. While he has not released his complete year-end portfolio, three of his top ten holdings at year-end were added during the fourth quarter:

WMS Industries, a slot machine manufacturer. He’s been traditionally impressed by the economics of the gaming industry but with the number of casino visits and spending per visit both down dramatically, his attention has switched from domestic casino operators to game equipment manufacturers who serve a worldwide clientele. By contrast, long-time FBRVX holding Penn National Gaming – which operates racetracks and casinos – is a “dramatically smaller” slice of AKREX’s portfolio.
optionsXpress, an online broker that allows retail investors to leverage or hedge their market exposure.
White River Capital, which securitizes and services retail car loans and which benefits from growth in the low-end, used car market

Potential investors need to be aware of two issues.

First, despite Morningstar’s “below average” to “low” risk grades, the fund is not likely to be mild-mannered. FBRVX has trailed its peer group – often substantially – in four of the past ten years. If benchmarked against Vanguard’s Midcap Index fund (VIMSX), the same thing would be true of Mr. Akre’s private account composite. Over longer periods, though, his returns have been very solid. Over the past decade returns for FBRVX (11% annually, as of 12/31/09) more than doubled its average peer’s return while his separate accounts (8%) earned about a third more than VIMSX (6%) and trounced the S&P500 (-1.0%).

Second, Mr. Akre, at age 67, is probably . . . uhhh, in the second half of his investing career. Marty Whitman, Third Avenue Value’s peerless 83-year-old star manager, spits in my general direction for mentioning it. Ralph Wanger, who managed Acorn (ACRNX) to age 70 and won Morningstar’s first “fund manager lifetime achievement award” in the year of his retirement from the fund, might do the same – but less vehemently. Mr. Akre was certainly full of piss and vinegar during our chat and the new challenge of building AKREX as an independent fund is sure to be invigorating.

Bottom Line:

Partnership is important to Mr. Akre. He looks for it in his business relationships, in his personal life, and in his investments. Folks who accept the challenge of being Mr. Akre’s partner – that is, investors who are going to stay with him – are apt to find themselves well-rewarded.

Fund website

Akre Focus Fund

Driehaus International Small Cap Growth (DRIOX), November 2007

By Editor

. . . from the archives at FundAlarm

These profiles have not been updated. The information is only accurate as of the original date of publication.

November 1, 2007

FundAlarm Annex – Fund Report

Objective

The Driehaus International Small Cap Growth Fund seeks to maximize capital appreciation. The Fund invests primarily in equity securities of smaller capitalization non-U.S. companies exhibiting strong growth characteristics. The fund invests at least 80% of its net assets in the equity securities of non-U.S. small capitalization companies, currently that is companies whose market capitalization is less than $2.5 billion at the time of investment.

Adviser

Driehaus Capital Management LLC, which was organized in 1982 to provide investment advice to high net worth individuals and institutions. As of July 31, 2007, it managed approximately $4.4 billion in assets. Driehaus runs three other mutual funds: Emerging Markets Growth (closed to new investors), International Discovery, and International Yield Opportunities (new in 2007).

Managers

Howard Schwab and David Mouser. Schwab is the lead manager here and was the lead manager for the Driehaus International Opportunities Fund, L.P., the predecessor limited partnership from its inception in August, 2002 until it transformed into this mutual fund. Schwab is also a co-manager of the Driehaus Emerging Markets Growth Fund and, for several months, helped manage the Driehaus International Equity Yield Fund. Mr. Mouser has “certain responsibilities” for investment decision-making on fund, “subject to Mr. Schwab’s approval,” just as he did with the limited partnership.

Management’s Stake in the Fund

Technically none, since the fund began operation after the date of the last SAI.

Opening date

September 17, 2007. If you don’t like that date, you could choose July 1, 2001 (the date on which Schwab began managing separate accounts using this strategy) or August 1, 2002 (the date that they launched the International Opportunities Fund, L.P., whose assets and strategies the mutual fund inherits). Technically you might also choose February 26, 2007, the date that the fund was “established as a series of Driehaus Mutual Funds” but apparently had no assets or investors. It’s a little confusing, but it does offer a certain richness of data.

Minimum investment

$10,000 for regular accounts, $2,000 for IRAs. The minimum subsequent investment for regular accounts is high, at $2,000, but it’s only $100 with an automatic investment plan. In any case, it’s a lot more affordable for most of us than the $20 million minimum required for a separate account that uses this same strategy.

Expense ratio

1.16% on assets of $205.8 million, as of July 2023.

Comments

DRIOX represents an interesting case for investors. It’s a new fund but it’s directly derived from two predecessor entities. There are separately managed accounts with combined assets of $210 million and there was a Limited Partnership with assets of $100 million, both managed by the same guys with the same strategies. But they were also managed under very different legal structures (for example, the L.P.s don’t have to pay out distributions the way that funds are required to do) for very different sorts of clients (that is, folks with $20 million or more to invest). In addition, Driehaus runs two other mutual funds with different management teams but with the same investment discipline.

In general, all Driehaus managers are growth guys who look for companies which have:

Dominant products or market niches
Improved sales outlook or opportunities
Demonstrated sales and earnings growth
Cost restructuring programs which are expected to positively affect company earnings
Increased order backlogs, new product introductions, or industry developments which are expected to positively affect company earnings

They also consider macroeconomic and technical information in evaluating stocks and countries for investment.

What might we learn from all of that data? Driehaus makes gobs of money for its investors.

The International Small Cap Growth separate accounts have returned 36.9% annually since inception. Their benchmark has returned 13.5% over the same period.
The International Opportunities LP returned 36.75% annually since inception. Its benchmark returned 27.3% over the same period.
Emerging Markets Growth fund (DREGX) has returned 22.3% annually since inception. Its benchmark returned 13.6%. Over the past five years it has returned 44.2% annually, while its Morningstar peer group returned 36.7%.
International Discovery fund (DRIDX) has returned 22.2% annually since inception. Its benchmark returned 7.2%. Over the past five years it has returned 34.4% annually, while its Morningstar peer group returned 24.0%.

While I’m generally not impressed by big numbers, those are really big performance advantages, delivered through a variety of investment vehicles over a considerable set of time frames.

There are two risks which are especially relevant here. The first is that Driehaus is a very aggressive investor. Morningstar classifies Emerging Markets Growth and International Discovery as having Above Average risk. Both of the funds have turnover rates around 200%. That aggressiveness is reflected in considerable swings in performance. International Discovery, for example, has the following peer ranks:

Year	Morningstar Peer Rank, Percentile
2003	22
2004	97
2005	1
2006	90
2007	1

Emerging Markets shows the same saw-tooth pattern, though in a tighter range:

Year	Morningstar Peer Rank, Percentile
2002	66
2003	14
2004	48
2005	14
2006	4
2007	31

The performance data for the International Small Growth separate accounts makes the strategy’s strengths and limits pretty clear. They calculate “capture ratios,” which are essentially volatility estimates which measure performance in rising and falling markets separately. A score of 100 means you rise (or fall) in synch with the market. A score of 110 up and 130 down means that you rise 10% more than the market when it’s going up and fall 30% more when it’s going down. Here are the most recent capture ratios, as of 9/30/07:

3 Years

5 Years

Upside

179.28

179.66

Downside

139.51

110.01

Which is to say, it rises 80% more in good times and drops 40% more in bad than does the market. You don’t want to be here when the rain is falling.

The second risk is Driehaus’s penchant for closing and/or liquidating funds. Driehaus had a bunch of other funds that they seem to have liquidated: Driehaus International Growth (DRIGX), Driehaus European Opportunity (DREOX) and Driehaus Asia Pacific Growth (DRAGX), all of which died in 2003. The very successful Emerging Markets Growth fund just closed to new investors.

Bottom Line

For investors with $10,000 to spare and a high tolerance for risk, this might be as good as bet for sheer, pulse-pounding, gut-wrenching, adrenaline-pumping performance as you’re going to find.

Fund website

http://www.driehaus.com/DRIOX.php

Guinness Atkinson Alternative Energy (GAAEX), September 2007

By Editor

. . . from the archives at FundAlarm

These profiles have not been updated. The information is only accurate as of the original date of publication.

September 1, 2007

FundAlarm Annex – Fund Report

Objective

The fund seeks long-term capital appreciation by investing in US and overseas of companies involved in the alternative energy or energy technology sectors, which includes companies that increase energy efficiency but excludes nuclear.

Adviser

Guinness Atkinson Asset Management, headquartered in Woodland Hills CA but also has offices in London. The company was founded by a number of then and former managers for Investec, a multinational investment firm. The firm manages mutual funds whose net assets are about $340 million.

Manager

Tim Guinness, Ed Guinness and Matthew Page. Tim Guinness is the lead manager, the firm’s Chief Investment Officer and manager of the Global Energy and Global Innovators funds. Immediately prior to founding GA, he was joint chairman of Investec. Ed Guinness, Tim’s son, has engineering and management degrees from Cambridge. Before joining Guinness Atkinson, he worked on tech investing at HSBC and risk arbitrage for Tiedemann Investment Group in New York. Matthew Page has a Master’s degree in Physics from Oxford and worked briefly at Goldman Sachs before joining GA.

Opening date

March 31, 2006.

Minimum investment

$5000 for regular accounts, $2500 for regular accounts for individuals who own shares in other GA funds, $1000 for IRAs and $100 for accounts opened with an automatic investing plan.

Expense ratio

1.1% after waivers on $33.7 million in assets as of July 2023.

Comments

More than is usually the case, I feel like I’m on a precipice over a gaping dark chasm of ignorance. There are two questions – is there a strong case now for alternative energy investing? and if so, is there a strong case for making that investment through an open-end mutual fund? Those are good questions for which good answers would take pages. Multiple, many, numerous pages. Little of which I’m competent to write. As a result, I’ll try to offer the second-grader’s version of the story and will ask the indulgence of folks who have profound professional knowledge of the subject.

Is there a case now for alternative energy investing? Well, there’s certainly a case for alternative energy so there’s likely a parallel case for investing in the field. What’s the case?

The world is running out of affordable oil and gas –

While there’s no question of imminent physical exhaustion, a number of economists project the future price of oil based on the notion of “peak oil.” At base, the peak oil theory says that once half of the oil in a particular reservoir is withdrawn, the price for removing the other half escalates sharply. There’s no single, definitive estimate for when a peak has been passed, since every oil field has its own life cycle. In general, though, experts seem to agree that the US peaked in the early 1970s and the North Sea peaked in the early 2000s. The most pessimistic estimates claim that global production is has already passed its peak (this is a subject, by the way, that causes Saudi oil ministers to sputter mightily), with 54 of the world’s 65 major producing nations in decline. A more cautious study commissioned by the US Department of Energy (Hirsch, et al, Peaking Of World Oil Production: Impacts, Mitigation, & Risk Management, 2005) predicted the peak would be “soon,” by which they meant within 20 years. Natural gas is not substantially better off.

That study made two other important claims: (1) “As peaking is approached, liquid fuel prices and price volatility will increase dramatically, and, without timely mitigation, the economic, social, and political costs will be unprecedented.” And (2) “Viable mitigation options exist on both the supply and demand sides, but to have substantial impact, they must be initiated more than a decade in advance of peaking.”

A point rarely recognized is that much of the oil that remains is not light sweet crude; it’s generally a heavy, sour oil that’s hard to refine and a relatively poor source of higher distillates such as gasoline.

Fossil fuel consumption is irreparably affecting the global climate

You don’t actually need to believe this argument, you mostly need to agree that it is moving into the area of “commonly accepted wisdom,” since that’s what motivates governments and other organizations to act.

I’ll note, in passing, that I’m not a climatologist and so I’m not competent to judge the technical merit of what appears to be an enormous and growing body of peer-reviewed research which substantiates this claim. I am, as it turns out, trained to assess arguments. From that perspective, I’m note that those arguing against the theory of human-induced climate change generally support their case through deceptive and misleading arguments – they mischaracterize their sources, suppress inconvenient conclusions found in the research they cite, over-claim their own qualifications, and shift argument grounds midway through. The vast majority of the skeptics’ discourse appears in blogs rather than in peer-reviewed journals and little of it is research per se but rather they focus on often-narrow methodological critiques (one recent controversial was over a quarter-degree difference in a calculation). With the possibility that the future of human civilization hangs in the balance, we deserve much more honest debate.

In anticipation of the two preceding arguments, governments are going to push hard for alternatives to fossil fuels

Whether through taxation, carbon emission caps, subsidies or legal protections (e.g., relaxed siting requirements), governments around the world are moving to support the production of alternative energy.

The tricky question is the “now” part – is it currently prudent to invest in this field? The Guinness Atkinson folks are refreshingly blunt, both in print and on the phone, about the undeniable risks in the field:

. . . a large percentage of alternative energy companies are thinly traded small cap stocks . . . many of these companies are loss making or just beginning to produce profits [and] many alternative energy stocks have appreciated significantly recently as a result of increased energy prices (Guinness Atkinson, The Alternative Energy Revolution, March 2006).

In a phone conversation, Jim Atkinson (GA’s president) stressed that these were voluntary caveats that GA included because they wanted well-informed investors who were willing to hold on through inevitable, short-term dislocations. The company does, indeed, support the goal of informed investors. Their monthly Alternative Energy Briefs provides a richness of information that I’ve rarely seen from a fund company.

Three factors specific to Guinness Atkinson cut against these concerns: (1) the elder Mr. Guinness has a lot of experience in the field of energy investing. The Alternative Energy fund is the offspring of a successful, offshore global energy fund of his. Both of the younger fund managers have graduate training in technical fields (engineering and physics) which bears on their ability to read and assess information about firms and their technologies. And (2) they’re reasonable conservative in their choice of companies. By Mr. Guinness’ calculation, about 82% of the portfolio companies have “positive earnings forecasts for 2007.” That number climbs to 90% by 2008. Finally (3) they build risk management into portfolio construction. They expect to have 30 or so stocks in the portfolio and, in a perfect world, they’d assign 1/30^th of their assets to each stock. Lacking perfect confidence in all of their companies, they assign a full share only to companies in which they have the greatest confidence, a half share to those in which they have fair confidence and a “research share” – that is, a very small amount – to those whose prospects are most speculative but which they’d like to track. The managers note that their poorest performers are generally held in the “research” pool, which both vindicates their stock assessment and limits the damage.

Is there a strong case for making that investment through an open-end mutual fund? I’m rather more confident that the answer here is, yes. The alternative channel for alternative energy investing is one of about three exchange traded funds:

PowerShares WilderHill Clean Energy

(PBW) which invests in clean energy and conservation technologies. Its top holding is Echelon Corporation which provides “control networking technology for automation systems.” Echelon’s website highlights their work in improving McDonald’s kitchens. Net assets are $1.1 billion with expenses of 0.70%.

Market Vectors Global Alternatives

(GEX) which tracks the Ardour Global Index (Extra Liquid) of companies “engaged in the business of alternative energy.” Net assets are $61 million, expense ratio is not available.

First Trust NASDAQ Clean Edge US Liquid

(QCLN) tracks the NASDAQ Clean Edge U.S. Index of “clean energy” companies, which includes lots of semiconductor makers. The fund has $23 million in assets.

There are several “clean technology” ETFs, which invest in pollution control, networking, and efficiency-supporting companies. There are, in addition, a number of specialized “green” mutual funds (Spectra Green) and ETFs (Claymore/LGA Green) which don’t particularly focus on the energy sector. They like, for example, Starbuck’s because of its commitment to recycling and environmental causes.

So why not an ETF? At base, the only argument for them is low-cost: their expense ratios are about 0.7% and Guinness’ is about 1.7%. That cost advantage is overstated by three factors: (1) Guinness e.r. is declining, their’s isn’t. (2) Brokerage fees aren’t included – each purchase of an ETF goes through a broker for whose services you pay. And (3) ETFs don’t trade at their net asset value. When ETFs trade at a premium, you actually pay for less than you get. Premiums on the alternative energy ETFs have run lately from 33 to 260 basis points. By way of translation, a fund with a 70 basis point expense ratio and a 260 basis point premium to NAV is costing an investor 3.3% to buy.

The arguments against the ETFs are (1) that they’re limited to liquid investments. That’s why you’ll notice the “liquid” in the names of several. That generally excludes them from investing in private placements or very small companies. (2) You have to have a lot of confidence in the quality of the underlying index. A number of commentators don’t. Of PowerShares WilderHill Clean Energy, which has more assets than all of the other investment options combined, Morningstar recently opined:

. . . this fund lacks a well-reasoned strategy as well as a sensible, diversified benchmark. Instead, its index holds lots of companies with unproven business models and speculative stock prices. For example, the index’s average return on equity is actually negative, despite its rich average price/earnings multiple of 25 (Analyst Report, 3/5/07).

They concluded that investors “would be better off with an active manager,” though that was not a particular endorsement of Guinness Atkinson. In addition, (3) ETFs can be sold short and otherwise made part of the arbitrage games of hedge fund managers. Which isn’t a recipe for stable returns.

Perhaps as a result, Guinness Atkinson has consistently outperformed the ETFs. It benchmarks its performance against the WilderHill Clean Energy index. Here are the performance comparisons, as of 7/30/07:

	Guinness	WilderHill
YTD	30.60%	25.01%
Trailing twelve months	34.35	22.39
Since fund inception	14.53	0.64

Bottom Line

If I were to invest in alternative energy, I think there’s a strong case to be made for investing with an active manager who has broad discretion and considerable experience. The ETF’s cost advantages are simply not sufficient to overcome their design limitations. Even if Guinness did not have a corner on the market for no-load alternative energy funds, their excellent work in a range of other funds, thoughtful portfolio construction and broad expertise makes them a strong candidate for the role.

(By way of full disclosure, my wife – who has degrees in environmental planning and law – reviewed a bunch of the literature I’ve been working through and chose to invest several thousand dollars of her retirement account in the Guinness Atkinson fund.)

Fund website

Alternative Energy Fund

Northern Active M International Equity (formerly Active M International Equity), (NMIEX), November 2006, July 2010

By Editor

At the time of publication, this fund was named Northern Multi-Manager International Equity (NIEWX) Fund.
This fund was formerly named Active M International Equity.

. . . from the archives at FundAlarm

These profiles have not been updated. The information is only accurate as of the original date of publication.

November 1, 2006
Update (posted July 1, 2010)

FundAlarm Annex – Fund Report

Objective

The fund seeks long-term capital appreciation through a diversified portfolio of non-U.S. securities. Income is “incidental.” It’s willing to invest in companies of any size, though primarily in the developed markets. The portfolio is allocated among four independent, outside managers.

Adviser

Northern Trust. The parent company was founded in 1889 and has about $650 billion in assets under management. Northern Trust Global Advisors (NGTA) has been managing money for institutional investors for about a quarter century.

Manager

Andrew Smith, Senior Vice President and Chief Investment Officer for NTGA since 2000. Before that, he managed about a billion dollars in asset allocation funds for Spectrum Investments. Smith’s task here is primarily to select and monitor the fund’s sub-advisers. The four current sub-advisers are:

Altrinsic Global Advisors – A Connecticut-based firm with about $3 billion under management. They focus on large, high quality companies. Northern describes them as having a “relative value style: expected to protect capital in negative markets.”
Nicholas-Applegate Capital Management – A California-based adviser with about $15 billion under management. These folks provide an aggressive-growth element to the portfolio.
Oechsle International Advisors – A Boston firm which oversees about $18 billion. This is a fairly GARP-y, conservative growth group. Oechsle was subject to a disciplinary action by the SEC in 1998 for failing to adequately supervise one of its private portfolio managers, who has since left the firm. Oechsle subsequently reimbursed its clients for the monetary losses they suffered.
Tradewinds NWQ Global Investors – This is a wholly-owned subsidiary of Nuveen Investments with about $23 billion under management. These folks pursue an “absolute value” style which is “distinguished by deep specialization, fundamental analysis and transparency.” In theory they’ll provide the best down-side protection for the portfolio.

Inception

June 22, 2006.

Minimum investment

$2,500 for regular accounts, $500 for IRAs and $250 with an automatic investment plan.

Expense ratio

0.84%, after waivers from a 0.90% gross expense ratio, on assets of $475.1 million, as of July 2023. There’s also a 30-day, 2% redemption fee to discourage active traders.

Comments

The argument for Northern’s various multi-manager funds is pretty straightforward. Northern has been selecting investment managers for really rich people for 125 years. They’ve done it well enough that Northern has been entrusted with assets that are starting to creep up on the trillion dollar mark. They sorted through a set of 500 managers before selecting these four.

And, in general, they seem to be getting it right. Collectively Morningstar awards four-stars to Northern’s international fund line-up and praises their “very low” expense ratios. Nicholas-Applegate runs a bunch of pretty solid international funds, but their investment minimums are typically around a quarter million dollars. Tradewinds has only a few funds, but they’re solid, disciplined performers. Altrinsic and Oechsle’s public records are mostly with funds for sale to Canadian investors. In the US, they seem to serve mostly high net-worth individuals.

Northern positions this as a fairly aggressive choice. On their risk-reward spectrum, it occupies the fourth spot from the top behind the emerging markets, international real estate and international growth funds and next to their international index fund.

Bottom line

This fund is a calculated risk, in some ways more than most. You’re basically betting on Northern’s ability to assemble a group of superior investors whose services are not generally available. Mr. Smith has been doing this for better than 20 years and seems to be rising steadily within his profession. And Northern has been doing it, to the apparent satisfaction of “a well-heeled client” for better than a century. This seems to create a fair presumption in their favor, especially at a time when compelling choices in international funds are few.

Company link

http://www.northernfunds.com

November 1, 2006

Update (posted July 1, 2010)

Assets: $2.7 billion	Expenses: 1.4%
YTD return (through 6/17/10): (4.0%)

Our original thesis

This fund is a calculated risk, in some ways more than most. You’re basically betting on Northern’s ability to assemble a group of superior investors whose services are not generally available.

Our revised thesis

So far, so good.

Since inception, NMIEX has performed modestly better than its peers or its index. The fund is down about 6% since inception, its international core peer group is down about 7% and its primary benchmark is down about 9%. It has earned those modestly above-average returns with modestly below-average volatility. It substantially outperformed its peers and benchmark during the 2007-09 crash, slightly outperformed them in the May 2010 mini-crash and substantially trailed (47% for NMIEX versus 61% for its benchmark index) through during the 12 month surge following the market low. Both the better performance in the down market and the poorer performance, especially in the early phases of the rebound, are attributable to the same factor: the fund had only about half of the exposure to European financial stocks as did its peers.

In general, the seven Northern Multi-Manager funds have been entirely respectable performers over the short life spans. Like Price funds, they generally seem to do a bit better than the peers over time and rarely end a year in the basement. Northern has been pretty vigilant about monitoring the performance of its sub-advisors and has not been reluctant to replace teams that are drifting (mostly notably in the underperforming Small Cap NMMSX fund, where they’ve made three switches in about 12 months).

It’s regrettable that the fund’s expense ratio has remained virtually unchanged, despite the tripling of assets under management from 2007 through 2010. The 1.4% fee here compares to 1.1% for the average international fund, and rather less than that for the average large cap, developed market international fund.

This is a solid choice whose low minimum investment (down to $250 for folks setting up an automatic investment plan) and broad diversification might recommend it to a wide audience.

Aegis Value (AVALX) – May 2009

By Editor

. . . from the archives at FundAlarm

These profiles have not been updated. The information is only accurate as of the original date of publication.

May 1, 2009

FundAlarm Annex – Fund Report

Fund name:

Aegis Value (AVALX)

Objective

The fund seeks long-term capital appreciation by investing (mostly) in domestic companies whose market caps are ridiculously small. On whole, these are stocks smaller than those held in either of Bridgeway’s two “ultra-small” portfolios.

Adviser:

Aegis Financial Corporation of Arlington, VA. AFC, which has operated as a registered investment advisor since 1994, manages private account portfolios, and has served as the Fund’s investment advisor since the fund’s inception. They also advise Aegis High Yield.

Manager

Scott L. Barbee, CFA, is portfolio manager of the fund and a Managing Director of AFC. He was a founding director and officer of the fund and has been its manager since inception. He’s also a portfolio manager for approximately 110 equity account portfolios of other AFC clients managed in an investment strategy similar to the Fund with a total value of approximately $80 million. Mr. Barbee received an MBA degree from the Wharton School at the University of Pennsylvania.

Management’s Stake in the Fund:

As of August 31, 2008, Mr. Barbee owned more than $1 million of fund shares. He will also be the sole owner of the adviser upon retirement of the firm’s co-founder this year.

Opening date

May 15, 1998

Minimum investment

$10,000 for regular accounts and $5,000 for retirement accounts, though at this point they might be willing to negotiate.

Expense ratio

1.43% on assets of $66 million

Comments:

Let’s get the ugly facts of the matter out of the way first. Aegis Value is consistently a one- to two-star small value fund in Morningstar’s rating system. It has low returns and high risk. The fund’s assets are one-tenth of what they were five years ago.

‘Nuff said, right?

Maybe. Maybe not. I’ll make four arguments for why Aegis deserves a second, third, or perhaps fourth look.

First, if we’d been having this discussion one year ago (end of April 2008 rather than end of April 2009), the picture would have been dramatically different. For the decade from its founding through last May, Aegis turned a $10,000 initial investment into $36,000. Its supposed “small value” peer group would have lagged almost $10,000 behind, while the S&P500 would have been barely visible in the dust. Over that period, Aegis would have pretty much matched the performance of Bridgeway’s fine ultra-small index fund (BRSIX) with rather less volatility.

Second, ultra-small companies are different: benchmarking them against either small- or micro-cap companies leads to spurious conclusions. By way of simple example, Aegis completely ignored the bear market for value stocks in the late 1990s and the bear market for everybody else at the beginning of this century. While it’s reasonable to have a benchmark against which to measure a fund’s performance, a small cap index might not be much more useful than a total market index for this particular fund.

Third, ultra-small companies are explosive: Between March 9 and April 29, 2009, AVALX returned 66.57%. That sort of return is entirely predictable for tiny, deep-value companies following a recession. After merely “normal” recessions, Morningstar found that small caps posted three-year returns that nearly doubled the market’s return. But the case for tiny stocks after deep declines is startling. Mr. Barbee explained in his January 22 shareholder letter:

. . . in the 5 years following 1931, the Fama/French Small Value Benchmark returned a cumulative 538 percent without a down year, or over 44 percent per year. Even including the damaging “double-dip” recession of 1937, the benchmark returned over 21 percent annually for the 7 years through 1938. After market declines in 1973 and 1974, over the next 7 years (1975 through 1981), the Fama/French Small Value Benchmark returned a cumulative 653 percent without a down year, or greater than 33 percent per year.

Fourth, the case for investing in ultra-small companies is especially attractive right now. They are deeply discounted. Despite the huge run-up after March 9, “the companies held by the … Fund now trade at a weighted average price-to-book of 29.4%, among the very lowest in the Fund’s nearly 11-year history.” The universe of stocks which the manager finds most attractive – tiny companies selling for less than their book value – has soared to 683 firms or about five times the number available two years ago. After the huge losses of 2008 and early 2009, the fund now packs a tax-loss carryforward which will make any future gains essentially tax-free.

Bottom Line

Mr. Barbee, his family and his employees continue to buy shares of Aegis Value. He’s remained committed to “buying deeply-discounted small-cap value stocks,” many of which have substantial cash hoards. Investors wondering “how will I ever make up for last year’s losses?” might find the answer in following his lead.

Fund website

Aegis Value fund

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 21^st. 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	1955-03	1949-2009	1949-2009
Average annual return (before inflation)	7.4	9.2	11.0
Number of down years	3	12	14
Average loss in a down year	-0.5	-6.4	-12.5
Standard deviation	5.2	10.6	17.0
Loss in 2008	-0.2*	-22.2	-37.0
* 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.

Fund	Category	Results
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.

Fund	Category	Results
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

Funds	Strategy	Results
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 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,

David

January 2012 Funds in Registration

By Editor

Driehaus International Credit Opportunities Fund

Driehaus International Credit Opportunities Fund seeks to provide positive returns under a variety of market conditions. It will hold long and short positions in a variety of developed and developing market fixed-income instruments. It may use derivatives to hedge its exposure. The fund will be non-diversified in terms of both the number of securities held and the number of nations or regions represented in the portfolio. Its annual portfolio turnover is estimated to be 100 – 300%. The fund will be managed by Adam Weiner who has managed emerging markets fixed income and currency strategies for Oppenheimer and Frontpoint Partners/Morgan Stanley. In 2011, he joined Driehaus as a portfolio manager for international credit-oriented strategies. He is not a member of the team which runs Driehaus’s other two “nontraditional bond” funds. $10,000 minimum initial investment. Expenses not yet set.

Manager changes, December 2011

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.

Fund	Out with the old	In with the new	Dt
Columbia Select Small Cap (ESCAX)	The whole dang management team	Wayne Collette, George Myers, Lawrence Lin, and Brian Neigut	12/11
Fidelity Select Wireless (FWRLX)	Gavin Baker leaves here, remains at Fido OTC	Matthew Drukker will join comanager Kyle Weaver	12/11
Goldman Sachs Balanced (GSBFX)	James Clark, the latest high-level departure from GSAM’s funds.	The three other managers will remain.	12/11
Goldman Sachs Large Cap Value (GSLIX)	Dolores Bamford	The other managers will remain.	12/11
Goldman Sachs Mid Cap Value (GSMCX)	John Arege	The other managers will remain.	12/11
Hartford Total Return Bond (ITBAX).	An undistinguished in-house staff headed by Nasri Toutoungi	As of Q1/2012, Wellington Management	12/11
ING Global Natural Resources (LEXMX) and ING Global Resources (IGRSX)	David Powers	Joseph Bassett and John Bailey will remain	12/11
JHancock Large Cap Equity (TAGRX)	Roger Hamilton and Timothy Malloy	Walter McCormick and Sandy Sanders	12/11
Neuberger Berman Partners (NPRTX)	Basu Mullick, who’d been around since 1998 and who was disturbingly comfortable with volatiility	Eli Salzmann	12/11
Neuberger Berman Regency (NBRVX)	Basu Mullick, who’d been high beta / low alpha since 2005	Michael Greene and his mid-cap intrinsic-value team	12/11
Oppenheimer Quest International Value (QIVAX)	Dominic Freund	Randall Dishmon	12/11
Osterweis Fund (OSTFX)	Steve Moore	The other five managers including leader, John Osterweis, will remain.	12/11
USAA Precious Metals and Minerals (UIPMX)	Mark Johnson will retire in March 2012.	Comanager, Dan Denbrow, will forge on.	12/11