Monthly Archives: May 2013

May 1, 2013

By David Snowball

Dear friends,

I know that for lots of you, this is the season of Big Questions:

  • Is the Fed’s insistence on destroying the incentive to save (my credit union savings account is paying 0.05%) creating a disastrous incentive to move “safe” resources into risky asset classes?
  • Has the recent passion for high quality, dividend-paying stocks already consumed most of their likely gains for the next decade?
  • Should you Sell in May and Go Away?
  • Perhaps, Stay for June and Endure the Swoon?

My set of questions is a bit different:

  • Why haven’t those danged green beans sprouted yet?  It’s been a week.
  • How should we handle the pitching rotation on my son’s Little League team?  We’ve got four games in the span of five days (two had been rained out and one was hailed out) and just three boys – Will included! – who can find the plate.
  • If I put off returning my Propaganda students’ papers one more day, what’s the prospect that I’ll end up strung up like Mussolini?

Which is to say, summer is creeping upon us.  Enjoy the season and life while you can!

Of Acorns and Oaks

It’s human nature to make sense out of things.  Whether it’s imposing patterns on the stars in the sky (Hey look!  It’s a crab!) or generating rules of thumb for predicting stock market performances (It’s all about the first five days of the day), we’re relentless in insisting that there’s pattern and predictability to our world.

One of the patterns that I’ve either discerning or invented is this: the alumni of Oakmark International seem to have startlingly consistent success as portfolio managers.  The Oakmark International team is led by David Herro, Oakmark’s CIO for international equities and manager of Oakmark International (OAKIX) since 1992.  Among the folks whose Oakmark ties are most visible:

 

Current assignment

Since

Snapshot

David Herro

Oakmark International (OAKIX), Oakmark International Small Cap (OAKEX)

09/1992

Five stars for 3, 5, 10 and overall for OAKIX; International Fund Manager of the Decade

Dan O’Keefe and David Samra

Artisan International Value (ARTKX), Artisan Global Value (ARTGX)

09/2002 and 12/2007

International Fund Manager of the Year nominees, two five star funds

Abhay Deshpande

First Eagle Overseas A

(SGOVX)

Joined First Eagle in 2000, became co-manager in 09/2007

Longest-serving members of the management team on this five-star fund

Chad Clark

Select Equity Group, a private investment firm in New York City

06/2009

“extraordinarily successful” at “quality value” investing for the rich

Pierre Py (and, originally, Eric Bokota)

FPA International Value (FPIVX)

12/2011

Top 2% in their first full year, despite a 30% cash stake

Greg Jackson

Oakseed Opportunity (SEEDX)

12/2012

A really solid start entirely masked by the events of a single day

Robert Sanborn

 

 

 

Ralph Wanger

Acorn Fund

 

 

Joe Mansueto

Morningstar

 

Wonderfully creative in identifying stock themes

The Oakmark alumni certainly extend far beyond this list and far back in time.  Ralph Wanger, the brilliant and eccentric Imperial Squirrel who launched the Acorn Fund (ACRNX) and Wanger Asset Management started at Harris Associates.  So, too, did Morningstar founder Joe Mansueto.  Wanger frequently joked that if he’d only hired Mansueto when he had the chance, he would not have been haunted by questions for “stylebox purity” over the rest of his career.  The original manager of Oakmark Fund (OAKMX) was Robert Sanborn, who got seriously out of step with the market for a bit and left to help found Sanborn Kilcollin Partners.  He spent some fair amount of time thereafter comparing how Oakmark would have done if Bill Nygren had simply held Sanborn’s final portfolio, rather than replacing it.

In recent times, the attention centers on alumni of the international side of Oakmark’s operation, which is almost entirely divorced from its domestic investment operation.  It’s “not just on a different floor, but almost on a different world,” one alumnus suggested.  And so I set out to answer the questions: are they really that consistently excellent? And, if so, why?

The answers are satisfyingly unclear.  Are they really consistently excellent?  Maybe.  Pierre Py made a couple interesting notes.  One is that there’s a fair amount of turnover in Herro’s analyst team and we only notice the alumni who go on to bigger and better things.  The other note is that when you’ve been recognized as the International Fund Manager of the Decade and you can offer your analysts essentially unlimited resources and access, it’s remarkably easy to attract some of the brightest and most ambitious young minds in the business.

What, other than native brilliance, might explain their subsequent success?  Dan O’Keefe argues that Herro has been successful in creating a powerful culture that teaches people to think like investors and not just like analysts.  Analysts worry about finding the best opportunities within their assigned industry; investors need to examine the universe of all of the opportunities available, then decide how much money – if any – to commit to any of them.  “If you’re an auto industry analyst, there’s always a car company that you think deserves attention,” one said.  Herro’s team is comprised of generalists rather than industry specialists, so that they’re forced to look more broadly.  Mr. Py compared it to the mindset of a consultant: they learn to ask the big, broad questions about industry-wide practices and challenges, rising and declining competitors, and alternatives.  But Herro’s special genius, Pierre suggested, was in teaching young colleagues how to interview a management team; that is, how to get inside their heads, understand the quality of their thinking and anticipate their strengths and mistakes.   “There’s an art to it that can make your investment process much better.”  (As a guy with a doctorate in communication studies and a quarter century in competitive debate, I concur.)

The question for me is, if it works, why is it rare?  Why is it that other teams don’t replicate Herro’s method?  Or, for that matter, why don’t they replicate Artisan Partner’s structure – which is designed to be (and has been) attractive to the brightest managers and to guard (as it has) against creeping corporatism and groupthink?  It’s a question that goes far beyond the organization of mutual funds and might even creep toward the question, why are so many of us so anxious to be safely mediocre?

Three Messages from Rob Arnott

Courtesy of Charles Boccadoro, Associate Editor, 27 April 2013.
 

Robert D. Arnott manages PIMCO’s All Asset (PAAIX) and leveraged All Asset All Authority (PAUIX) funds. Morningstar gives each fund five stars for performance relative to moderate and world allocation peers, in addition to gold and silver analyst ratings, respectively, for process, performance, people, parent and price. On PAAIX’s performance during the 2008 financial crises, Mr. Arnott explains: “I was horrified when we ended the year down 15%.” Then, he learned his funds were among the very top performers for the calendar year, where average allocation funds lost nearly twice that amount. PAUIX, which uses modest leverage and short strategies making it a bit more market neutral, lost only 6%.

Of 30 or so lead portfolio managers responsible for 110 open-end funds and ETFs at PIMCO, only William H. Gross has a longer current tenure than Mr. Arnott. The All Asset Fund was launched in 2002, the same year Mr. Arnott founded Research Affiliates, LLC (RA), a firm that specializes in innovative indexing and asset allocation strategies. Today, RA estimates $142B is managed worldwide using its strategies, and RA is the only sub-advisor that PIMCO, which manages over $2T, credits on its website.

On April 15th, CFA Society of Los Angeles hosted Mr. Arnott at the Montecito Country Club for a lunch-time talk, entitled “Real Return Investing.” About 40 people attended comprising advisors, academics, and PIMCO staff. The setting was elegant but casual, inside a California mission-style building with dark wooden floors, white stucco walls, and panoramic views of Santa Barbara’s coast. The speaker wore one of his signature purple-print ties. After his very frank and open talk, which he prefaced by stating that the research he would be presenting is “just facts…so don’t shoot the messenger,” he graciously answered every question asked.

Three takeaways: 1) fundamental indexing beats cap-weighed indexing, 2) investors should include vehicles other than core equities and bonds to help achieve attractive returns, and 3) US economy is headed for a 3-D hurricane of deficit, debt, and demographics. Here’s a closer look at each message:

Fundamental Indexation is the title of Mr. Arnott’s 2005 paper with Jason Hsu and Philip Moore. It argues that capital allocated to stocks based on weights of price-insensitive fundamentals, such as book value, dividends, cash flow, and sales, outperforms cap-weighted SP500 by an average of 2% a year with similar volatilities. The following chart compares Power Shares FTSE RAFI US 1000 ETF (symbol: PRF), which is based on RA Fundamental Index (RAFI) of the Russell 1000 companies, with ETFs IWB and IVE:

chart

And here are the attendant risk-adjusted numbers, all over same time period:

table

RAFI wins, delivering higher absolute and risk-adjusted returns. Are the higher returns a consequence of holding higher risk? That debate continues. “We remain agnostic as to the true driver of the Fundamental indexes’ excess return over the cap-weighted indexes; we simply recognize that they outperformed significantly and with some consistency across diverse market and economic environments.” A series of RAFIs exist today for many markets and they consistently beat their cap-weighed analogs.

All Assets include commodity futures, emerging market local currency bonds, bank loans, TIPS, high yield bonds, and REITs, which typically enjoy minimal representation in conventional portfolios. “A cult of equities,” Mr. Arnott challenges, “no matter what the price?” He then presents research showing that while the last decade may have been lost on core equities and bonds, an equally weighted, more broadly diversified, 16-asset class portfolio yielded 7.3% annualized for the 12 years ending December 2012 versus 3.8% per year for the traditional 60/40 strategy. The non-traditional classes, which RA coins “the third pillar,” help investors “diversify away some of the mainstream stock and bond concentration risk, introduce a source of real returns in event of prospective inflation from monetizing debt, and seek higher yields and/or rates of growth in other markets.”

Mr. Arnott believes that “chasing past returns is likely the biggest mistake investors make.” He illustrates with periodic returns such as those depicted below, where best performing asset classes (blue) often flip in the next period, becoming worst performers (red)…and rarely if ever repeat.

returns

Better instead to be allocated across all assets, but tactically adjust weightings based on a contrarian value-oriented process, assessing current valuation against opportunity for future growth…seeking assets out of favor, priced for better returns. PAAIX and PAUIX (each a fund of funds utilizing the PIMCO family) employ this approach. Here are their performance numbers, along with comparison against some competitors, all over same period:

comparison

The All Asset funds have performed very well against many notable allocation funds, like OAKBX and VWENX, protecting against drawdowns while delivering healthy returns, as evidenced by high Martin ratios. But static asset allocator PRPFX has actually delivered higher absolute and risk-adjusted returns. This outperformance is likely attributed its gold holding, which has detracted very recently. On gold, Mr. Arnott states: “When you need gold, you need gold…not GLD.” Newer competitors also employing all-asset strategies are ABRYX and AQRIX. Both have returned handsomely, but neither has yet weathered a 2008-like drawdown environment.

The 3-D Hurricane Force Headwind is caused by waves of deficit spending, which artificially props-up GDP, higher than published debt, and aging demographics. RA has published data showing debt-to-GDP is closer to 500% or even higher rather than 100% value oft-cited, after including state and local debt, Government Sponsored Enterprises (e.g., Fannie Mae, Freddie Mac), and unfunded entitlements. It warns that deficit spending may feel good now, but payback time will be difficult.

“Last year, the retired population grew faster than the population of working age adults, yet there was no mention in the press.” Mr. Arnott predicts this transition will manifest in a smaller labor force and lower productivity. It’s inevitable that Americans will need to “save more, spend less, and retire later.” By 2020, the baby boomers will be outnumbered 2:1 by votes, implying any “solemn vows” regarding future entitlements will be at risk. Many developed countries have similar challenges.

Expectations going forward? Instead of 7.6% return for the 60/40 portfolio, expect 4.5%, as evidenced by low bond and dividend yields. To do better, Mr. Arnott advises investing away from the 3-D hurricane toward emerging economies that have stable political systems, younger populations, and lower debt…where fastest GDP growth occurs. Plus, add in RAFI and all asset exposure.

Are they at least greasy high-yield bonds?

One of the things I most dislike about ETFs – in addition to the fact that 95% of them are wildly inappropriate for the portfolio of any investor who has a time horizon beyond this afternoon – is the callous willingness of their boards to transmute the funds.  The story is this: some marketing visionary decides that the time is right for a fund targeting, oh, corporations involved in private space flight ventures and launches an ETF on the (invented) sector.  Eight months later they notice that no one’s interested so, rather than being patient, tweaking, liquidating or merging the fund, they simply hijack the existing vehicle and create a new, entirely-unrelated fund.

Here’s news for the five or six people who actually invested in the Sustainable North American Oil Sands ETF (SNDS): you’re about to become shareholders in the YieldShares High Income ETF.  The deal goes through on June 21.  Do you have any say in the matter?  Nope.  Why not?  Because for the Sustainable North American Oil Sands fund, investing in oil sands companies was legally a non-fundamental policy so there was no need to check with shareholders before changing it. 

The change is a cost-saving shortcut for the fund sponsors.  An even better shortcut would be to avoid launching the sort of micro-focused funds (did you really think there was going to be huge investor interest in livestock or sugar – both the object of two separate exchange-traded products?) that end up festooning Ron Rowland’s ETF Deathwatch list.

Introducing the Owl

Over the past month chip and I have been working with a remarkably talented graphic designer and friend, Barb Bradac, to upgrade our visual identity.  Barb’s first task was to create our first-ever logo, and it debuts this month.

MFO Owl, final

Cool, eh?

Great-Horned-Owl-flat-best-We started by thinking about the Observer’s mission and ethos, and how best to capture that visually.  The apparent dignity, quiet watchfulness and unexpected ferocity of the Great Horned Owl – they’re sometimes called “tigers with wings” and are quite willing to strike prey three times their own size – was immediately appealing.  Barb’s genius is in identifying the essence of an image, and stripping away everything else.  She admits, “I don’t know what to say about the wise old owl, except he lends himself soooo well to minimalist geometric treatment just naturally, doesn’t he? I wanted to trim off everything not essential, and he still looks like an owl.”

At first, we’ll use our owl in our print materials (business cards, thank-you notes, that sort of thing) and in the article reprints that funds occasionally commission.  For those interested, the folks at Cook and Bynum asked for a reprint of Charles’s excellent “Inoculated by Value”  essay and our new graphic identity debuted there.  With time we’ll work with Barb and Anya to incorporate the owl – who really needs a name – into our online presence as well.

The Observer resources that you’ve likely missed!

Each time we add a new resource, we try to highlight it for folks.  Since our readership has grown so dramatically in the past year – about 11,000 folks drop by each month – a lot of folks weren’t here for those announcements.  As a public service, I’d like to highlight three resources worth your time.

The Navigator is a custom-built mutual fund research tool, accessible under the Resources tab.  If you know the name of a fund, or part of the name or its ticker, enter it into The Navigator.  It will auto-complete the fund’s name, identify its ticker symbols and  immediately links you to reports or stories on that fund or ETF on 20 other sites (Yahoo Finance, MaxFunds, Morningstar).  If you’re sensibly using the Observer’s resources as a starting point for your own due diligence research, The Navigator gives you quick access to a host of free, public resources to allow you to pursue that goal.

Featured Funds is an outgrowth of our series of monthly conference calls.  We set up calls – free and accessible to all – with managers who strike us as being really interesting and successful.  This is not a “buy list” or anything like it.  It’s a collection of funds whose managers have convinced me that they’re a lot more interesting and thoughtful than their peers.  Our plan with these calls is to give every interested reader to chance to hear what I hear and to ask their own questions.  After we talk with a manager, the inestimably talented Chip creates a Featured Fund page that draws together all of the resources we can offer you on the fund.  That includes an mp3 of the conference call and my take on the call’s highlights, an updated profile of the fund and also a thousand word audio profile of the fund (presented by a very talented British friend, Emma Presley), direct links to the fund’s own resources and a shortcut to The Navigator’s output on the funds.

There are, so far, seven Featured Funds:

    • ASTON/RiverRoad Long/Short (ARLSX)
    • Cook and Bynum (COBYX)
    • Matthews Asia Strategic Income (MAINX)
    • RiverPark Long/Short Opportunity (RLSFX)
    • RiverPark Short-Term High Yield (RPHYX)
    • RiverPark/Wedgewood (RWGFX)
    • Seafarer Overseas Growth and Income (SFGIX)

Manager Change Search Engine is a feature created by Accipiter, our lead programmer, primarily for use by our discussion board members.  Each month Chip and I scan hundreds of Form 497 filings at the SEC and other online reports to track down as many manager changes as we can.  Those are posted each month (they’re under the “Funds” tab) and arranged alphabetically by fund name.  Accipiter’s search engine allows you to enter the name of a fund company (Fidelity) and see all of the manager changes we have on record for them.  To access the search engine, you need to go to the discussion board and click on the MGR tab at top.  (I know it’s a little inconvenient, but the program was written as a plug-in for the Vanilla software that underlies the discussion board.  It will be a while before Accipiter is available to rewrite the program for us, so you’ll just have to be brave for a bit.)

Valley Forge Fund staggers about

For most folks, Valley Forge Fund (VAFGX) is understandably invisible.  It was iconic mostly because it so adamantly rejected the trappings of a normal fund.  It was run since the Nixon Administration by Bernard Klawans, a retired aerospace engineer.  He tended to own just a handful of stocks and cash.  For about 20 years he beat the market then for the next 20 he trailed it.  In the aftermath of the late 90s mania, he went back to modestly beating the market.  He didn’t waste money on marketing or even an 800-number and when someone talked him into having a website, it remained pretty much one page long.

Mr. Klawans passed away on December 22, 2011, at the age of 90.  Craig T. Aronhalt who had co-managed the fund since the beginning of 2009 died on November 3, 2012 of cancer.  Morningstar seems not to have noticed his death: six months after passing away, they continue listing him as manager. It’s not at all clear who is actually running the thing though, frankly, for a fund that’s 25% in cash it’s having an entirely respectable year with a gain of nearly 10% through the end of April.

The more-curious development is the Board’s notice, entitled “Important information about the Fund’s Lack of Investment Adviser”

For the period beginning April 1, 2013 through the date the Fund’s shareholders approve a new investment advisory agreement (estimated to be achieved by May 17, 2013), the Fund will not be managed by an investment adviser or a portfolio manager (the “Interim Period”).  During the Interim Period, the Fund’s portfolio is expected to remain largely unchanged, subject to the ability of the Board of Directors of the Fund to, as it deems appropriate under the circumstances, make such portfolio changes as are consistent with the Fund’s prospectus.  During the Interim Period, the Fund will not be subject to any advisory fees.

Because none of the members of Fund’s Board of Directors has any experience as portfolio managers, management risk will be heightened during the Interim Period, and you may lose money.

How does that work?  The manager died at the beginning of November but the board doesn’t notice until April 1?  If someone was running the portfolio since November, the law requires disclosure of that fact.  I know that Mr. Buffett has threatened to run Berkshire Hathaway for six months after his death, so perhaps … ? 

If that is the explanation, it could be a real cost-savings strategy since health care and retirement benefits for the deceased should be pretty minimal.

Observer Fund Profiles:

Each month the Observer provides in-depth profiles of between two and four funds.  Our “Most Intriguing New Funds” are funds launched within the past couple years that most frequently feature experienced managers leading innovative newer funds. 

FPA International Value (FPIVX): It’s not surprising that manager Pierre Py is an absolute return investor.  That is, after all, the bedrock of FPA’s investment culture.  What is surprising is that it has also be an excellent relative return vehicle: despite a substantial cash reserve and aversion to the market’s high valuations, it has also substantially outperformed its fully-invested peers since inception.

Oakseed Opportunity Fund (SEEDX): Finally!  Good news for all those investors disheartened by the fact that the asset-gatherers have taken over the fund industry.  Jackson Park has your back.

“Stars in the Shadows” are older funds that have attracted far less attention than they deserve. 

Artisan Global Value Fund (ARTGX): I keep looking for sensible caveats to share with you about this fund.  Messrs. Samra and O’Keefe keep making my concerns look silly, so I think I might give up and admit that they’re remarkable.

Payden Global Low Duration Fund (PYGSX): Short-term bond funds make a lot of sense as a conservative slice of your portfolio, most especially during the long bull market in US bonds.  The question is: what happens when the bull market here stalls out?  One good answer is: look for a fund that’s equally adept at investing “there” as well as “here.”  Over 17 years of operation, PYGSX has made a good case that they are that fund.

Elevator Talk #4: Jim Hillary, LS Opportunity Fund (LSOFX)

elevator

Since the number of funds we can cover in-depth is smaller than the number of funds worthy of in-depth coverage, we’ve decided to offer one or two managers each month the opportunity to make a 200 word pitch to you. That’s about the number of words a slightly-manic elevator companion could share in a minute and a half. In each case, I’ve promised to offer a quick capsule of the fund and a link back to the fund’s site. Other than that, they’ve got 200 words and precisely as much of your time and attention as you’re willing to share. These aren’t endorsements; they’re opportunities to learn more.

MJim Hillaryr. Hillary manages Independence Capital Asset Partners (ICAP), a long/short equity hedge fund he launched on November 1, 2004 that serves as the sub-advisor to the LS Opportunity Fund (LSOFX), which in turn launched on September 29, 2010. Prior to embarking on a hedge fund career, Mr. Hillary was a co-founder and director of research for Marsico Capital Management where he managed the Marsico 21st Century Fund (MXXIX) until February 2003 and co-managed all large cap products with Tom Marsico. In addition to his US hedge fund and LSOFX in the mutual fund space, ICAP runs a UCITS for European investors. Jim offers these 200 words on why his mutual fund could be right for you:

In 2004, I believed that after 20 years of above average equity returns we would experience a period of below average returns. Since 2004, the equity market has been characterized by lower returns and heightened volatility, and given the structural imbalances in the world and the generationally low interest rates I expect this to continue.  Within such an environment, a long/short strategy provides exposure to the equity market with a degree of protection not provided by “long-only” funds.

In 2010, we agreed to offer investors the ICAP investment process in a mutual fund format through LSOFX. Our process aims to identify investment opportunities not limited to style or market capitalization. The quality of research on Wall Street continues to decline and investors are becoming increasingly concerned about short-term performance. Our in-depth research and long-term orientation in our high conviction ideas provide us with a considerable advantage. It is often during times of stress that ICAP uncovers unusual investment opportunities. A contrarian approach with a longer-term view is our method of generating value-added returns. If an investor is searching for a vehicle to diversify away from long-only, balanced or fixed income products, a hedge fund strategy like ours might be helpful.

The fund has a single share class with no load and no 12b-1 fees. The minimum initial investment is $5,000 and net expenses are capped at 1.95%. More information about the Advisor and Sub-Advisor can be found on the fund’s website, www.longshortadvisors.com. Jim’s most recent commentary can be found in the fund’s November 2012 Semi-Annual Report.

RiverPark/Wedgewood Fund: Conference Call Highlights

David RolfeI had a chance to speak with David Rolfe of Wedgewood Partners and Morty Schaja, president of RiverPark Funds. A couple dozen listeners joined us, though most remained shy and quiet. Morty opened the call by noting the distinctiveness of RWGFX’s performance profile: even given a couple quarters of low relative returns, it substantially leads its peers since inception. Most folks would expect a very concentrated fund to lead in up markets. It does, beating peers by about 10%. Few would expect it to lead in down markets, but it does: it’s about 15% better in down markets than are its peers. Mr. Schaja is invested in the fund and planned on adding to his holdings in the week following the call.

The strategy: Rolfe invests in 20 or so high-quality, high-growth firms. He has another 15-20 on his watchlist, a combination of great mid-caps that are a bit too small to invest in and great large caps a bit too pricey to invest in. It’s a fairly low turnover strategy and his predilection is to let his winners run. He’s deeply skeptical of the condition of the market as a whole – he sees badly stretched valuations and a sort of mania for high-dividend stocks – but he neither invests in the market as a whole nor are his investment decisions driven by the state of the market. He’s sensitive to the state of individual stocks in the portfolio; he’s sold down four or five holdings in the last several months nut has only added four or five in the past two years. Rather than putting the proceeds of the sales into cash, he’s sort of rebalancing the portfolio by adding to the best-valued stocks he already owns.

His argument for Apple: For what interest it holds, that’s Apple. He argues that analysts are assigning irrationally low values to Apple, somewhere between those appropriate to a firm that will never see real topline growth again and one that which see a permanent decline in its sales. He argues that Apple has been able to construct a customer ecosystem that makes it likely that the purchase of one iProduct to lead to the purchase of others. Once you’ve got an iPod, you get an iTunes account and an iTunes library which makes it unlikely that you’ll switch to another brand of mp3 player and which increases the chance that you’ll pick up an iPhone or iPad which seamlessly integrates the experiences you’ve already built up. As of the call, Apple was selling at $400. Their sum-of-the-parts valuation is somewhere in the $600-650 range.

On the question of expenses: Finally, the strategy capacity is north of $10 billion and he’s currently managing about $4 billion in this strategy (between the fund and private accounts). With a 20 stock portfolio, that implies a $500 million in each stock when he’s at full capacity. The expense ratio is 1.25% and is not likely to decrease much, according to Mr. Schaja. He says that the fund’s operations were subsidized until about six months ago and are just in the black now. He suggested that there might be, at most, 20 or so basis points of flexibility in the expenses. I’m not sure where to come down on the expense issue. No other managed, concentrated retail fund is substantially cheaper – Baron Partners and Edgewood Growth are 15-20 basis points more, Oakmark Select and CGM Focus are 15-20 basis points less while a bunch of BlackRock funds charge almost the same.

Bottom Line: On whole, it strikes me as a remarkable strategy: simple, high return, low excitement, repeatable and sustained for near a quarter century.

For folks interested but unable to join us, here’s the complete audio of the hour-long conversation.

The RWGFX Conference Call

When you click on the link, the file will load in your browser and will begin playing after it’s partially loaded. If the file downloads, instead, you may have to double-click to play it.

Conference Call Upcoming: Bretton Fund (BRTNX), May 28, 7:00 – 8:00 Eastern

Stephen DodsonManager Steve Dodson, former president of the Parnassus Funds, is an experienced investment professional, pursuing a simple discipline.  He wants to buy deeply discounted stocks, but not a lot of them.  Where some funds tout a “best ideas” focus and then own dozens of the same large cap stocks, Mr. Dodson seems to mean it when he says “just my best.”

As of 12/30/12, the fund held just 16 stocks.  Nearly as much is invested in microcaps as in megacaps. In addition to being agnostic about size, the fund is also unconstrained by style or sector.  Half of the fund’s holdings are characterized as “growth” stocks, half are not.   The fund offers no exposure at all in seven of Morningstar’s 11 industry sectors, but is over weighted by 4:1 in financials. 

In another of those “don’t judge it against the performance of groups to which it doesn’t belong” admonitions, it has been assigned to Morningstar’s midcap blend peer group though it owns only one midcap stock.

Our conference call will be Tuesday, May 28, from 7:00 – 8:00 Eastern.

How can you join in?  Just click

register

Members of our standing Conference Call Notification List will receive a reminder, notes from the manager and a registration link around the 20th of May.  If you’d like to join about 150 of your peers in receiving a monthly notice (registration and the call are both free), feel free to drop me a note.

Launch Alert: ASTON/LMCG Emerging Markets (ALEMX)

astonThis is Aston’s latest attempt to give the public – or at least “the mass affluent” – access to managers who normally employ distinctive strategies on behalf of high net worth individuals and institutions.  LMCG is the Lee Munder Capital Group (no, not the Munder of Munder NetNet and Munder Nothing-but-Net fame – that’s Munder Capital Management, a different group).  Over the five years ended December 30, 2012, the composite performance of LMCG’s emerging markets separate accounts was 2.8% while their average peer lost 0.9%.  In 2012, a good year for emerging markets overall, LMCG made 24% – about 50% better than their average peer.  The fund’s three managers, Gordon Johnson, Shannon Ericson and Vikram Srimurthy, all joined LMCG in 2006 after a stint at Evergreen Asset Management.  The minimum initial investment in the retail share class is $2500, reduced to $500 for IRAs.  The opening expense ratio will be 1.65% (with Aston absorbing an additional 4.7% of expenses).  The fund’s homepage is cleanly organized and contains links to a few supporting documents.

Launch Alert II: Matthews Asia Focus and Matthews Emerging Asia

On May 1, Matthews Asia launched two new funds. Matthews Asia Focus Fund (MAFSX and MIFSX) will invest in 25 to 35 mid- to large-cap stocks. By way of contrast, their Asian Growth and Income fund has 50 stocks and Asia Growth has 55. The manager wants to invest in high-quality companies and believes that they are emerging in Asia. “Asia now [offers] a growing pool of established companies with good corporate governance, strong management teams, medium to long operating histories and that are recognized as global or regional leaders in their industry.” The fund is managed by Kenneth Lowe, who has been co-managing Matthews Asian Growth and Income (MACSX) since 2011. The opening expense ratio, after waivers, is 1.91%. The minimum initial investment is $2500, reduced to $500 for an IRA.

Matthews Emerging Asia Fund (MEASX and MIASX) invests primarily in companies located in the emerging and frontier Asia equity markets, such as Bangladesh, Cambodia, Indonesia, Malaysia, Myanmar, Pakistan, Philippines, Sri Lanka, Thailand and Vietnam. It will be an all-cap portfolio with 60 to 100 names. The fund will be managed by Taizo Ishida, who also manages managing the Asia Growth (MPACX) and Japan (MJFOX) funds. The opening expense ratio, after waivers, is 2.16%. The minimum initial investment is $2500, reduced to $500 for an IRA.

Funds in Registration

New mutual funds must be registered with the Securities and Exchange Commission before they can be offered for sale to the public. The SEC has a 75-day window during which to call for revisions of a prospectus; fund companies sometimes use that same time to tweak a fund’s fee structure or operating details. Every day we scour new SEC filings to see what opportunities might be about to present themselves. Many of the proposed funds offer nothing new, distinctive or interesting. Some are downright horrors of Dilbertesque babble (see “Synthetic Reverse Convertibles,” below).

Funds in registration this month won’t be available for sale until, typically, the beginning of July 2013. We found fifteen no-load, retail funds (and Gary Black) in the pipeline, notably:

AQR Long-Short Equity Fund will seek capital appreciation through a global long/short portfolio, focusing on the developed world.  “The Fund seeks to provide investors with three different sources of return: 1) the potential gains from its long-short equity positions, 2) overall exposure to equity markets, and 3) the tactical variation of its net exposure to equity markets.”  They’re targeting a beta of 0.5.  The fund will be managed by Jacques A. Friedman, Lars Nielsen and Andrea Frazzini (Ph.D!), who all co-manage other AQR funds.  Expenses are not yet set.  The minimum initial investment for “N” Class shares is $1,000,000 but several AQR funds have been available through fund supermarkets for a $2500 investment.  AQR deserves thoughtful attention, but their record across all of their funds is more mixed than you might realize.  Risk Parity has been a fine fund while others range from pretty average to surprisingly weak.

RiverPark Structural Alpha Fund will seek long-term capital appreciation while exposing investors to less risk than broad stock market indices.  Because they believe that “options on market indices are generally overpriced,” their strategy will center on “selling index equity options [which] will structurally generate superior returns . . . [with] less volatility, more stable returns, and reduce[d] downside risk.”  This portfolio was a hedge fund run by Wavecrest Asset Management.  That fund launched on September 29, 2008 and will continue to operate under it transforms into the mutual fund, on June 30, 2013.  The fund made a profit in 2008 and returned an average of 10.7% annually through the end of 2012.  Over that same period, the S&P500 returned 6.2% with substantially greater volatility.  The Wavecrest management team, Justin Frankel and Jeremy Berman, has now joined RiverPark – which has done a really nice job of finding talent – and will continue to manage the fund.   The opening expense ratio with be 2.0% after waivers and the minimum initial investment is $1000.

Curiously, over half of the funds filed for registration on the same day.  Details on these funds and the list of all of the funds in registration are available at the Observer’s Funds in Registration page or by clicking “Funds” on the menu atop each page.

Manager Changes

On a related note, we also tracked down 37 fund manager changes. Those include Oakmark’s belated realization that they needed at least three guys to replace the inimitable Ed Studzinski on Oakmark Equity and Income (OAKBX), and a cascade of changes triggered by the departure of one of the many guys named Perkins at Perkins Investment Management.

Briefly Noted . . .

Seafarer visits Paris: Seafarer has been selected to manage a SICAV, Essor Asie (ESSRASI).  A SICAV (“sea cav” for the monolingual among us, Société d’Investissement À Capital Variable for the polyglot) is the European equivalent of an open-end mutual fund. Michele Foster reports that “It is sponsored by Martin Maurel Gestion, the fund advisory division of a French bank, Banque Martin Maurel.  Essor translates to roughly arising or emerging, and Asie is Asia.”  The fund, which launched in 1997, invests in Asia ex-Japan and can invest in both debt and equity.  Given both Mr. Foster’s skill and his schooling at INSEAD, it seems like a natural fit.

Out of exuberance over our new graphic design, we’ve poured our Seafarer Overseas Growth and Income (SFGIX) profile into our new reprint design template.  Please do let us know how we could tweak it to make it more visually effective and functional.

Nile spans the globe: Effective May 1, 2013, Nile Africa Fixed Income Fund became Nile Africa and Frontier Bond Fund.  The change allows the fund to add bonds from any frontier-market on the planet to its portfolio.

Nationwide is absorbing 17 HighMark Mutual Funds: The changeover will take place some time in the third quarter of 2013.  This includes most of the Highmark family and the plan is for the current sub-advisers to be retained.  Two HighMark funds, Tactical Growth & Income Allocation and Tactical Capital Growth, didn’t make the cut and are scheduled for liquidation.

USAA is planning to launch active ETFs: USAA has submitted paperwork with the SEC seeking permission to create 14 actively managed exchange-traded funds, mostly mimicking already-existing USAA mutual funds. 

Small Wins for Investors

On or before June 30, 2013, Artio International Equity, International Equity II and Select Opportunities funds will be given over to Aberdeen’s Global Equity team, which is based in Edinburgh, Scotland.  The decline of the Artio operation has been absolutely stunning and it was more than time for a change.  Artio Total Return Bond Fund and Artio Global High Income Fund will continue to be managed by their current portfolio teams.

ATAC Inflation Rotation Fund (ATACX) has reduced the minimum initial investment for its Investor Class Shares from $25,000 to $2,500 for regular accounts and from $10,000 to $2,500 for IRA accounts.

Longleaf Partners Global Fund (LLGLX) reopened to new investment on April 16, 2013.  I was baffled by its closing – it discovered, three weeks after launch, that there was nothing worth buying – and am a bit baffled by its opening, which occurred after the unattractive market had risen by another 3%.

Vanguard announced on April 3 that it is reopening the $9 billion Vanguard Capital Opportunity Fund (VHCOX) to individual investors and removing the $25,000 annual limit on additional purchases.  The fund has seen substantial outflows over the past three years.  In response, the board decided to make it available to individual investors while leaving it closed to all financial advisory and institutional clients, other than those who invest through a Vanguard brokerage account.  This is a pretty striking opportunity.  The fund is run by PRIMECAP Management, which has done a remarkable job over time.

Closings

DuPont Capital Emerging Markets Fund (DCMEX) initiated a “soft close” on April 30, 2013.

Effective June 30, 2013, the FMI Large Cap (FMIHX) Fund will be closed to new investors.

Eighteen months after launching the Grandeur Peak Funds, Grandeur Peak Global Advisors announced that it will soft close both the Grandeur Peak Global Opportunities Fund (GPGOX) and the Grandeur Peak International Opportunities (GPIOX) Fund on May 1, 2013.

After May 17, 2013 the SouthernSun Small Cap Fund (SSSFX) will be closed to new investors.  The fund has pretty consistently generated returns 50% greater than those of its peers.  The same manager, Michael Cook, also runs the smaller, newer, midcap-focused SouthernSun US Equity Fund (SSEFX).  The latter fund’s average market cap is low enough to suggest that it holds recent alumni of the small cap fund.  I’ll note that we profiled all four of those soon-to-be-closed funds when they were small, excellent and unknown.

Touchstone Merger Arbitrage Fund (TMGAX) closed to new accounts on April 8, 2013.   The fund raised a half billion in under two years and substantially outperformed its peers, so the closing is somewhere between “no surprise” and “reassuring.”

Old Wine, New Bottles

In one of those “what the huh?” announcements, the Board of Trustees of the Catalyst Large Cap Value Fund (LVXAX) voted “to change in the name of the Fund to the Catalyst Insider Buying Fund.” Uhh … there already is a Catalyst Insider Buying Fund (INSAX). 

Lazard U.S. High Yield Portfolio (LZHOX) is on its way to becoming Lazard U.S. Corporate Income Portfolio, effective June 28, 2013.  It will invest in bonds issued by corporations “and non-governmental issuers similar to corporations.”  They hope to focus on “better quality” (their term) junk bonds. 

Off to the Dustbin of History

Dreyfus Small Cap Equity Fund (DSEAX) will transfer all of its assets in a tax-free reorganization to Dreyfus/The Boston Company Small Cap Value Fund (STSVX).

Around June 21, 2013, Fidelity Large Cap Growth Fund (FSLGX) will disappear into Fidelity Stock Selector All Cap Fund (FDSSX). This is an enormously annoying move and an illustration of why one might avoid Fidelity.  FSLGX’s great flaw is that it has attracted only $170 million; FDSSX’s great virtue is that it has attracted over $3 billion.  FDSSX is an analyst-run fund with over 1100 stocks, 11 named managers and a track record inferior to FSLGX (which has one manager and 134 stocks).

Legg Mason Capital Management All Cap Fund (SPAAX) will be absorbed by ClearBridge Large Cap Value Fund (SINAX).  The Clearbridge fund is cheaper and better, so that’s a win of sorts.

In Closing …

If you haven’t already done so, please do consider bookmarking our Amazon link.  It generates a pretty consistent $500/month for us but I have to admit to a certain degree of trepidation over the imminent (and entirely sensible) change in law which will require online retailers with over a $1 million in sales to collect state sales tax.  I don’t know if the change will decrease Amazon’s attractiveness or if it might cause Amazon to limit compensation to the Associates program, but it could.

As always, the Amazon and PayPal links are just … uhh, over there —>

That’s all for now, folks!

David

FPA International Value (FPIVX), May 2013 update

By David Snowball

This is an update of the fund profile originally published in August 2012. You can find that profile here.

Objective and Strategy

FPA International Value tries to provide above average capital appreciation over the long term while minimizing the risk of capital losses.  Their strategy is to identify high-quality companies, invest in a quite limited number of them (say 25-30) and only when they’re selling at a substantial discount to FPA’s estimation of fair value, and then to hold on to them for the long-term.  In the absence of stocks selling at compelling discounts, FPA is willing to hold a lot of cash for an extended period.  They’re able to invest in both developed and developing markets, but recognize that the bulk of their exposure to the latter might be achieved indirectly through developed market firms with substantial emerging markets footprints.

Adviser

FPA, formerly First Pacific Advisors, which is located in Los Angeles.  The firm is entirely owned by its management which, in a singularly cool move, bought FPA from its parent company in 2006 and became independent for the first time in its 50 year history.  The firm has 27 investment professionals and 71 employees in total.  Currently, FPA manages about $23 billion across four equity strategies and one fixed income strategy.  Each strategy is manifested in a mutual fund and in separately managed accounts; for example, the Contrarian Value strategy is manifested in FPA Crescent (FPACX), in nine separate accounts and a half dozen hedge funds.  On April 1, 2013, all of FPA’s fund became no-loads.

Managers

Pierre O. Py.  Mr. Py joined FPA in September 2011. Prior to that, he was an International Research Analyst for Harris Associates, adviser to the Oakmark funds, from 2004 to 2010. In early 2013, FPA added two analysts to support Mr. Py.  One, Victor Liu, was a Vice President and Research Analyst at Causeway Capital Management from 2005 until 2013.  The other, Jason Dempsey, was a Research Analyst at Artisan Partners and Deccan Value Advisers.  He’s also a California native who’s a specialist in French rhetorical theory and has taught on the subject in France.  (Suddenly my own doctorate in rhetoric and public address feels trendy.)

Management’s Stake in the Fund

Mr. Py and FPA’s partners are some of the fund’s largest investors.  Mr. Py has committed “all of my investible net worth” to the fund.  That reflects FPA’s corporate commitment to “co-investment” in which “Partners invest alongside our clients and have a majority of their investable net worth committed to the firm’s products and investments. We encourage all other members of the firm to invest similarly.”

Opening date

December 1, 2011.

Minimum investment

$1,500, reduced to $100 for IRAs or accounts with automatic investing plans.

Expense ratio

1.32%, after waivers, on assets of $80 million.  The waiver is in effect through 2015, and might be extended.

Comments

Few fund companies get it consistently right.  By “right” I don’t mean “in step with current market passions” or “at the top of the charts every years.”  By “right” I mean two things: they have an excellent investment discipline and they treat their shareholders with profound respect.

FPA gets it consistently right.

That alone is enough to warrant a place for FPA International Value on any reasonable investor’s due diligence list.

Like the other FPA funds, FPA International Value is looking to buy world-class companies at substantial discounts.

They demand that their investments meet four, non-negotiable criteria:

  1. High quality businesses with long-term staying power.
  2. Overall financial strength and ability to weather market dislocations.
  3. Management teams that allocate capital in a value creative manner.
  4. Significant discount to the intrinsic value of the business.

The managers will follow a good company for years if necessary, waiting for an opportunity to purchase its stock at a price they’re willing to pay.  Mr. Py recounted the story of a long (and presumably frustrating) recent research trip to the Nordic countries.   After weeks in northern Europe in January, Mr. Py came home with the conclusion that there was essential nothing that met their quality and valuation criteria.  “The curse of absolute investors,” he called it.  As the market continues to rally, “it [becomes] increasingly difficult for us to find new compelling investment opportunities.”  And so he’s doing now what he knows he must: “We take the time to get to know the business, build our understanding . . . and wait patiently, sometimes multiple years” for all the stars to align.

The fund’s early performance (top 2% of its peer group in 2012 and returns since inception well better than their peer group’s, with muted volatility) is entirely encouraging.  The manager’s decision to avoid the hot Japanese market (“weak financial discipline … insufficient discounts”) and cash reserves means that its performance so far in 2013 (decent absolute returns but weak relative returns) is predictable and largely unavoidable, given their discipline.

Bottom Line

This is not a fund that’s suited to everybody.  Unless you share their passion for absolute value investing, hence their willingness to hold 30 or 40% of the portfolio in cash while a market roars ahead, you’re not well-matched with the FPA funds.  FPA lends a fine pedigree to this fund, their first new offering in almost 20 years (they acquired Crescent in the early 1990s) and their first new fund launch in almost 30.  While the FPIVX team has considerable autonomy, it’s clear that they also believe passionately in FPA’s absolute value orientation and are well-supported by their new colleagues.  While FPIVX certainly will not spend every year in the top tier and will likely spend some years in the bottom one, there are few funds with brighter long-term prospects.

Fund website

FPAInternationalValue

2013 Q3 Report and Commentary

Fact Sheet

© Mutual Fund Observer, 2013. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.

Artisan Global Value (ARTGX), May 2013 update

By David Snowball

 
This is an update of the fund profile originally published in 2008, and updated in May 2012. You can find that profile here.

Objective

The fund pursues long-term growth by investing in 30-50 undervalued global stocks.  The managers look for four characteristics in their investments:

  1. A high quality business
  2. A strong balance sheet
  3. Shareholder-focused management and
  4. The stock selling for less than it’s worth.

Generally it avoids small cap caps.  It can invest in emerging markets, but rarely does so though many of its multinational holdings derived significant earnings from emerging market operations.   The managers can hedge their currency exposure, though they did not do so until the nuclear disaster in, and fiscal stance of, Japan forced them to hedge yen exposure in 2011.

Adviser

Artisan Partners, L.P. Artisan is a remarkable operation. They advise the twelve Artisan funds (the eleven retail funds plus an institutional emerging markets fund), as well as a number of separate accounts. The firm has managed to amass over $83 billion in assets under management, of which approximately $45 billion are in their mutual funds. Despite that, they have a very good track record for closing their funds and, less visibly, their separate account strategies while they’re still nimble. Five of the firm’s funds are closed to new investors, as of April 2013.  Their management teams are stable and invest heavily in their own funds.

Managers

David Samra and Daniel O’Keefe. Both joined Artisan in 2002 after serving as analysts for the very successful Oakmark International, International Small Cap and Global funds. They co-manage the closed Artisan International Value (ARTKX) fund and oversee about $23.2 billion in total. Mr. O’Keefe was, for several years in the 90s, a Morningstar analyst.  Morningstar designates Global Value as a five-star “Silver” fund and International Value as a five-star “Gold” fund, both as of March, 2013.

Management’s Stake in the Fund

Samra and O’Keefe each have more than $1 million invested in both funds, as is typical of the Artisan partners generally.

Opening date

December 10, 2007.

Minimum investment

$1,000 for regular and IRA accounts but the minimum is reduced to $50 for investors setting up an automatic investing plan. Artisan is one of a very few firms still willing to be so generous with small investors.

Expense ratio

1.50% after waivers, on assets of $500 million. There is a 2% redemption fee on shares held less than 90 days. 

Comments

I’m running out of reasons to worry about Artisan Global Value.

I have long been a fan of this fund.  It was the first “new” fund to earn the “star in the shadows” designation.  Its management team won Morningstar’s International-Stock Manager of the Year honors in 2008 and was a finalist for the award in 2011 and 2012. In announcing the 2011 nomination, Morningstar’s senior international fund analyst, William Samuel Rocco, observed:

Artisan Global Value has . . .  outpaced more than 95% of its rivals since opening in December 2007.  There’s a distinctive strategy behind these distinguished results. Samra and O’Keefe favor companies that are selling well below their estimates of intrinsic value, consider companies of all sizes, and let country and sector weightings fall where they may. They typically own just 40 to 50 names. Thus, both funds consistently stand out from their category peers and have what it takes to continue to outperform. And the fact that both managers have more than $1 million invested in each fund is another plus.

Since then, the story has just gotten better. Since inception, they’ve managed to capture virtually all of the market’s upside but only about two-thirds of its downside. It has a lower standard deviation over the past three and five years than does its peers.  ARTGX has outperformed its peers in 75% of the months in which the global stock group lost money.  Lipper designates it as a “Lipper Leader” in Total Return, Consistency and Preservation of Capital for every period they track.  International Value and Global Value won three Lipper “best of” awards in 2013.

You might read all of their success in managing risk as an emblem of a fund willing to settle for second-tier returns.  To the contrary, Global Value has crushed its competition: from inception through the end of April 2013, Global Value would have turned a $10,000 investment into $14,200.  The average global stock fund would have turned $10,000 into … well, $10,000.  They’ve posted above-average returns, sometimes dramatically above average, in every calendar year since launch and are doing it again in 2013 (at least through April).

We attribute that success to a handful of factors:

First, the managers 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 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.

Second, the fund is sector agnostic. . .  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.  In designated ARTGX a “Star in the Shadows,” we concluded:

Third, they are consistently committed to their shareholder’s best interests.  They chose to close the International Value fund before its assets base grew unmanageable.  And they closed the Global Value strategy in early 2013 for the same reason.  They have over $8 billion in separate accounts that rely on the same strategy as the mutual fund and those accounts are subject to what Mr. O’Keefe called “chunky inflows” (translation: the occasional check for $50, $100 or $200 million arrives).  In order to preserve both the strategy’s strength and the ability of small investors to access it, they closed off the big money tap and left the fund open.

You might consider that a limited time offer and a durned fine one.

Bottom Line

We reiterate our conclusion from 2008, 2011 and 2012: “there are few better offerings in the global fund realm.”

Fund website

Artisan Global Value

2013 Q3 Report

© Mutual Fund Observer, 2013. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.

Payden Global Low Duration Fund (PYGSX), May 2013

By David Snowball

Objective and Strategy

Payden Global Low Duration Fund seeks a high level of total return, consistent with preservation of capital, by investing in a wide variety of debt instruments and income-producing securities. Those include domestic and international sovereign and corporate debt, municipal bonds, mortgage- and asset-backed debt securities, convertible bonds and preferred stock. The maximum average maturity they envision is four years. Up to 35% of the portfolio might be investing in non-investment grade bonds (though the portfolio as a whole will remain investment grade) and up to 20% can be in equities. At least 40% will be non-US securities. The Fund generally hedges most of its foreign currency exposure to the U.S. dollar and is non-diversified.

Adviser

Payden & Rygel is a Los Angeles-based investment management firm which was established in 1983.  The firm is owned by 20 senior executives.  It has $85 billion in assets under management with $26 billion in “enhanced cash” products and $32 billion in low-duration ones as of March 31, 2013.  In 2012, Institutional Investor magazine recognized them as a nation’s top cash-management and short-term fixed income investor.  They advise 14 funds for non-U.S. investors (13 focused on cash or fixed income) and 18 U.S. funds (15 focused on cash or fixed income).

Managers

Mary Beth Syal, David Ballantine and Eric Hovey.  As with the Manning & Napier or Northern Trust funds, the fund relies on the judgments of an institution-wide team with the named managers serving as the sort of “point people” for the fund.    Ms. Syal is a managing principal, senior portfolio manager, and a member of the firm’s Investment Policy Committee. She directs the firm’s low duration strategies. Mr. Ballantine is a principal, a portfolio manager and develops investment strategies for short and intermediate-term fixed income portfolios.  Both have been with the fund since inception.  Mr. Hovey is a senior vice president and portfolio manager who specialty is in analyzing market opportunities and portfolio positioning.

Management’s Stake in the Fund

None.  Two of the three managers said that their own asset allocation plans were heavily weighted toward equities.

Opening date

September 18, 1996.

Minimum investment

$5000, reduced to $2000 for tax-sheltered accounts and those set up with an AIP.

Expense ratio

0.55% after an annually-reviewed, apparently-permanent fee waiver on assets of $80 million.

Comments

Two things conspire against the widespread recognition of this fund’s long excellent record, and they’re both its name.

“Global” and “low duration” seems to create a tension in many investors’ minds.   Traditionally, global has been a risk-on strategy and short-term bonds have represented a risk-off strategy.  That mixed signal – is this a strategy to pursue when risk-taking is being rewarded or one to pursue when risk-aversion is called for – helps explain why so few investors have found their way here.

The larger problem caused by its name is Morningstar’s decision to assign the fund to the “world bond” group rather than the “short-term bond” group.  The “world bond” group is dominated by intermediate-term bonds, which have a fundamentally different risk-return profile than does Payden.  As a result of a demonstrably inappropriate peer group assignment, a very strong fund is made to look like a very mediocre one. 

How mediocre?  The fund’s overall star rating is two-stars and its rating has mostly ranged from one- to three-stars.  That is, would be a very poor intermediate-term bond fund.  How bad is the mismatch?  The fact is that nothing about its portfolio’s sector composition, credit-quality profile or maturities is even close to the world bond group’s.  More telling is the message from Morningstar’s calculation of the fund’s upside and downside capture ratios.  They measure how the fund and its presumed act when their slice of the investing universe, in this case measured by the Barclays US Bond Aggregate Index, rises or falls.  Here, by way of illustration, is the three-year number (as of 03/31/13):

 

Upside capture

Downside capture

Payden Global Low

44

(28)

World bond group

100

134

When the U.S. bond market falls by 1%, the world bond group falls by 1.34% while Payden rises by 0.28%. At base, the Payden fund doesn’t belong in the world bond group – it is a fundamentally different creature, operating with a very different mission and profile.

What happens if you consider the fund as a short-term bond fund instead?  It becomes one of the five best-performing funds in existence.  Based solely on its five- and ten-year record, it’s one of the top ten no-load, retail funds in its class.  If you extend the comparison from its inception to now, it’s one of the top five.  The only funds with a record comparable or superior to Payden are:

Homestead Short-Term Bond (HOSBX)

Janus Short-Term Bond (JNSTX)

Vanguard Short Term Bond Index (VBISX)

Vanguard Short Term Investment-Grade (VFSTX)

There are a couple other intermediate-term bond funds that have recently shortened their interest rate exposures enough to be considered short-term, but since that’s a purely tactical move, we excluded them.

How might Payden be distinguished from other funds at the top of its class? 

  • Its international stake is far higher.  The fund invests at least 40% of its portfolio internationally, while it’s more distinguished competitors are in the 10-15% range.  That becomes important if you assume, as many professionals do, that the long US bull market for bonds has reached its end.  At that point, Payden’s ability to gain exposure to markets at different points in the interest rate cycle may give it a substantial advantage.
  • Its portfolio flexibility is more substantial.  Payden has the freedom to invest in domestic, developed and emerging-markets debt, both corporate and sovereign, but also in high-yield bonds, asset- and mortgage-backed securities.   Most of its peers are committed to the investment-grade portion of the market.
  • Its parent company specializes, and has specialized for decades, in low duration and international fixed-income investing.  At $80 million, this fund represents 0.1% of the firm’s assets and barely 0.25% of its low-duration assets under management.  Payden has a vast amount of experience in managing money in such strategies for institutions and other high net worth investors.  Mary Beth Syal, the lead manager who has been with Payden since 1991, describes this as their “all-weather, global macro front-end (that is, short duration) portfolio.”

Are there reasons for caution?  Because this is an assertive take on an inherently conservative strategy, there are a limited number of concerns worth flagging:

  • No one much at Payden and Rygel has been interested in investing in the fund. None of the managers have placed their money in the strategy nor has the firm’s founder, and only one trustee has a substantial investment in the fund.  The research is pretty clear that funds with substantial manager and trustee investment are, on whole, better investments than those without.   It’s both symbolically and practically a good thing to see managers tying their personal success directly to their investors’.  That said, the fund has amassed an entirely admirable record.
  • The fund shifted focus somewhat in 2008.  The managers describe the pre-2008 fund as much more “credit-focused” and the revised version as more global, perhaps more opportunistic and certainly more able to draw on a “full toolkit” of options and strategies.
  • The lack of a legitimate peer group will obligate investors to assess performance beyond the stars.  With only a small handful of relatively global, relatively low duration competitors in existence and no closely-aligned Lipper or Morningstar peer group, the relative performance numbers and ratings in the media will continue to mislead.  Investors will need to get comfortable with ignoring ill-fit ratings.

Bottom line

For a long time, fixed-income investing has been easy because every corner of the bond world has, with admirable consistency, gone up.  Those days are past.  In the years ahead, flexibility and opportunism coupled with experienced, disciplined management teams will be invaluable.  Payden offers those advantages.  The fund has a strong record, 4.5% annual returns over the past 17 years and a maximum drawdown of just 4.25% (during the 2008 market melt), a broad and stable management team and the resources of large analyst corps to draw upon.  This surely belongs on the due-diligence list for any investor looking to take a step or two beyond the microscopic returns of cash-management funds.

Company website

Payden Global Low Duration

Quarterly Report

Commentary

Fact Sheet

© Mutual Fund Observer, 2013. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.

Oakseed Opportunity Fund (SEEDX), May 2013

By David Snowball

This fund has been liquidated.

Objective and Strategy

The fund will seek long term capital appreciation.  While the prospectus notes that “the Fund will invest primarily in U.S. equity securities,” the managers view it as more of a go-anywhere operation, akin to the Oakmark Global and Acorn funds.  They can invest in common and preferred stocks, warrants, ETFs and ADRs.  The managers are looking for investments with three characteristics:

  • High quality businesses in healthy industries
  • Compelling valuations
  • Evidence that management’s interests are aligned with shareholders

They are hopeful of holding their investments for three to five years on average, and are intent on exploiting short-term market turbulence.  The managers do have the option to using derivatives, primarily put options, to reduce volatility and strengthen returns.

Adviser

Jackson Park Capital, LLC was founded in late 2012 by Greg Jackson and John Park. The firm is based in Park City, Utah.  The founders claim over 40 years of combined investment experience in managing mutual funds, hedge funds, and private equity funds.

Managers

Gregory L. Jackson and John H. Park.  Mr. Jackson was a Partner at Harris Associates and co-manager of Oakmark Global (OAKGX) from 1999 – 2003.  Prior to that, he works at Yacktman Asset Management and afterward he and Mr. Park were co-heads of the investment committee at the private equity firm Blum Capital.  Mr. Park was Director of Research at Columbia Wanger Asset Management, portfolio manager of the Columbia Acorn Select Fund (LTFAX) from inception until 2004 and co-manager of the Columbia Acorn Fund (LACAX) from 2003 to 2004.  Like Mr. Jackson, he subsequently joined Blum Capital.  The Oakmark/Acorn nexus gave rise to the Oakseed moniker.

Management’s Stake in the Fund

Mr. Park estimates that the managers have $8-9 million in the fund, with plans to add more when they’re able to redeem their stake in Blum Capital.  Much of the rest of the money comes from their friends, family, and long-time investors.  In addition, Messrs. Jackson and Park own 100% of Jackson Park. 

Opening date

December 31, 2012.

Minimum investment

$2500 for regular accounts, $1000 for various tax-deferred accounts and $100 for accounts set up with an AIP.

Expense ratio

1.41% after waivers on assets of $40 million (as of March, 2013).  Morningstar inexplicably assigns the fund an expense ratio of 0.00%, which they correctly describe as “low.”

Comments

If you’re fairly sure that creeping corporatism – that is, the increasing power of marketers and folks more concerned with asset-gathering than with excellence – is a really bad thing, then you’re going to discover that Oakseed is a really good one.

Oakseed is designed to be an opportunistic equity fund.  Its managers are expected to be able to look broadly and go boldly, wherever the greatest opportunities present themselves.  It’s limited by neither geography, market cap nor stylebox.   John Park laid out its mission succinctly: “we pursue the maximum returns in the safest way possible.”

It’s entirely plausible that Messrs. Park and Jackson will be able to accomplish that goal. 

Why does that seem likely?  Two reasons.  First, they’ve done it before.  Mr. Park managed Columbia Acorn Select from its inception through 2004. Morningstar analyst Emily Hall’s 2003 profile of the fund was effusive about the fund’s ability to thrive in hard times:

This fund proved its mettle in the bear market. On a relative basis (and often on an absolute basis), it was a stellar performer. Over the trailing three years through July 22 [2003], its 7.6% annualized gain ranks at the top of the mid-growth category.

Like all managers and analysts at Liberty Acorn, this fund’s skipper, John Park, is a stickler for reasonably priced stocks. As a result, Park eschews expensive, speculative fare in favor of steadier growth names. That practical strategy was a huge boon in the rough, turn-of-the-century environment, when investors abandoned racier technology and health-care stocks. 

They were openly mournful of the fund’s prospects after his departure.  Their 2004 analysis began, “Camel, meet straw.”  Greg Jackson’s work with Oakmark Global was equally distinguished, but there Morningstar saw enough depth in the management ranks for the fund to continue to prosper.  (In both cases they were right.)  The strength of their performance led to an extended recruiting campaign, which took them from the mutual fund work and into the world of private equity funds, where they (and their investors) also prospered.

Second, they’re not all that concerned about attracting more money.  They started this fund because they didn’t want to do marketing, which was an integral and time consuming element of working with a private equity fund.  Private equity funds are cyclical: you raise money from investors, you put it to work for a set period, you liquidate the fund and return all the money, then begin again.  The “then begin again” part held no attraction to them.  “We love investing and we could be perfectly happy just managing the resources we have now for ourselves, our families and our friends – including folks like THOR Investment who have been investing with us for a really long time.”  And so, they’ve structured their lives and their firm to allow them to do what they love and excel at.  Mr. Park described it as “a virtual firm” where they’ve outsourced everything except the actual work of investing.  And while they like the idea of engaging with prospective investors (perhaps through a summer conference call with the Observer’s readers), they won’t be making road trips to the East Coast to rub elbows and make pitches.  They’ll allow for organic growth of the portfolio – a combination of capital appreciation and word-of-mouth marketing – until the fund reaches capacity, then they’ll close it to new investors and continue serving the old.

A quirk of timing makes the fund’s 2013 returns look tepid: my Morningstar’s calculation (as of April 30), they trail 95% of their peers.  Look closer, friends.  The entire performance deficit occurred on the first day of the year and the fund’s first day of existence.  The market melted up that day but because the fund’s very first NAV was determined after the close of business, they didn’t benefit from the run-up.  If you look at returns from Day Two – present, they’re very solid and exceptional if you account for the fund’s high cash stake and the managers’ slow, deliberate pace in deploying that cash.

Bottom Line

This is going to be good.  Quite possibly really good.  And, in all cases, focused on the needs of its investors and strengths of its managers.  That’s a rare combination and one which surely warrants your attention.

Fund website

Oakseed Funds.  Mr. Park mentioned that neither of them much liked marketing.  Uhhh … it shows.  I know the guys are just starting out and pinching pennies, but really these folks need to talk with Anya and Nina about a site that supports their operations and informs their (prospective) investors.   

Update: In our original article, we noted that the Oakseed website was distressingly Spartan. After a round of good-natured sparring, the guys launched a highly functional, visually striking new site. Nicely done

Fact Sheet

© Mutual Fund Observer, 2013. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.

Riverpark/Wedgewood Fund

By Chip

The fund:

RiverPark/Wedgewood (RWGFX)riverparkwedgewood

Manager:

David Rolfe, manager since inception.

The call:

I had a chance to speak with David Rolfe of Wedgewood Partners and Morty Schaja, president of RiverPark Funds. A couple dozen listeners joined us, though most remained shy and quiet. Morty opened the call by noting the distinctiveness of RWGFX’s performance profile: even given a couple quarters of low relative returns, it substantially leads its peers since inception. Most folks would expect a very concentrated fund to lead in up markets. It does, beating peers by about 10%. Few would expect it to lead in down markets, but it does: it’s about 15% better in down markets than are its peers. Mr. Schaja is invested in the fund and planned on adding to his holdings in the week following the call.

The strategy: Rolfe invests in 20 or so high-quality, high-growth firms. He has another 15-20 on his watchlist, a combination of great mid-caps that are a bit too small to invest in and great large caps a bit too pricey to invest in. It’s a fairly low turnover strategy and his predilection is to let his winners run. He’s deeply skeptical of the condition of the market as a whole – he sees badly stretched valuations and a sort of mania for high-dividend stocks – but he neither invests in the market as a whole nor are his investment decisions driven by the state of the market. He’s sensitive to the state of individual stocks in the portfolio; he’s sold down four or five holdings in the last several months nut has only added four or five in the past two years. Rather than putting the proceeds of the sales into cash, he’s sort of rebalancing the portfolio by adding to the best-valued stocks he already owns.”

His argument for Apple: For what interest it holds, that’s Apple. He argues that analysts are assigning irrationally low values to Apple, somewhere between those appropriate to a firm that will never see real topline growth again and one that which see a permanent decline in its sales. He argues that Apple has been able to construct a customer ecosystem that makes it likely that the purchase of one iProduct to lead to the purchase of others. Once you’ve got an iPod, you get an iTunes account and an iTunes library which makes it unlikely that you’ll switch to another brand of mp3 player and which increases the chance that you’ll pick up an iPhone or iPad which seamlessly integrates the experiences you’ve already built up. As of the call, Apple was selling at $400. Their sum-of-the-parts valuation is somewhere in the $600-650 range.

On the question of expenses: Finally, the strategy capacity is north of $10 billion and he’s currently managing about $4 billion in this strategy (between the fund and private accounts). With a 20 stock portfolio, that implies a $500 million in each stock when he’s at full capacity. The expense ratio is 1.25% and is not likely to decrease much, according to Mr. Schaja. He says that the fund’s operations were subsidized until about six months ago and are just in the black now. He suggested that there might be 20 or so basis points of flexible room in the expenses. I’m not sure where to come down on the expense issue. No other managed, concentrated retail fund is substantially cheaper – Baron Partners and Edgewood Growth are 15-20 basis points more, Oakmark Select and CGM Focus are 15-20 basis points less while a bunch of BlackRock funds charge almost the same.

Bottom Line: On whole, it strikes me as a remarkable strategy: simple, high return, low excitement, repeatable and sustained for near a quarter century.

podcastThe conference call (When you click on the link, the file will load in your browser and will begin playing after it’s partially loaded.)

The profile:

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.”

The Mutual Fund Observer profile of RWGFX, September 2011.

Web:

The Riverpark/Wedgewood Fund website

Fund Focus: Resources from other trusted sources

May 2013, Funds in Registration

By David Snowball

AQR Long-Short Equity Fund

AQR Long-Short Equity Fund will seek capital appreciation through a global long/short portfolio, focusing on the developed world.  “The Fund seeks to provide investors with three different sources of return: 1) the potential gains from its long-short equity positions, 2) overall exposure to equity markets, and 3) the tactical variation of its net exposure to equity markets.”  They’re targeting a beta of 0.5.  The fund will be managed by Jacques A. Friedman, Lars Nielsen and Andrea Frazzini (Ph.D!), who all co-manage other AQR funds.  Expenses are not yet set.  The minimum initial investment for “N” Class shares is $1,000,000 but several AQR funds have been available through fund supermarkets for a $2500 investment.  AQR deserves thoughtful attention, but their record across all of their funds is more mixed than you might realize.  Risk Parity has been a fine fund while others range from pretty average to surprisingly weak.

AQR Managed Futures Strategy HV Fund

AQR Managed Futures Strategy HV Fund will pursue positive absolute returns.   They intend to execute a momentum-driven, long/short strategy that allows them to invest in “developed and emerging market equity index futures, swaps on equity index futures and equity swaps, global developed and emerging market currency forwards, commodity futures, swaps on commodity futures, global developed fixed income futures, bond futures and swaps on bond futures.”  They thoughtfully note that the “HV” in the fund name stands for “higher volatility.” The fund will be managed by John M. Liew (Ph.D!), Brian K. Hurst and Yao Hua Ooi (what a cool name), who all co-manage other AQR funds.  Expenses are not yet set.  The minimum initial investment for “N” Class shares is $1,000,000 but several AQR funds have been available through fund supermarkets for a $2500 investment. 

Barrow SQV Hedged All Cap Fund

Barrow SQV Hedged All Cap Fund will seek to generate above-average returns through capital appreciation, while reducing volatility and preserving capital during market downturns. The plan is to use their Systematic Quality Value discipline to identify 150-250 long and the same number of short positions. The fund will be managed by Nicholas Chermayeff and Robert F. Greenhill, who have been managing separate accounts using this strategy since 2009.  The prospectus provides no evidence of their success with the strategy. Neither expenses nor the minimum initial investment are yet set. 

Barrow SQV Long All Cap Fund

Barrow SQV Long All Cap Fund will seek long-term capital appreciation. The plan is to use their Systematic Quality Value discipline to identify 150-250 spiffy stocks. The fund will be managed by Nicholas Chermayeff and Robert F. Greenhill, who have been managing separate accounts using this strategy since 2009.  The prospectus provides no evidence of their success with the strategy. Neither expenses nor the minimum initial investment are yet set. 

Calamos Long /Short Fund

Calamos Long /Short Fund will pursue long term capital appreciation.  Here’s the secret plan: the fund will take “long positions in companies that are expected to outperform the equity markets, while taking short positions in companies that are expected to underperform the equity markets.”  They’ll focus on US what they describe as mid- to large-cap US stocks, though their definition of midcap encompasses most of the small cap space.  And they might put up to 40% in international issues.  The fund will be managed by John P. Calamos, Sr., Gary D. Black and Brendan Maher.  While one can’t say for sure that this is Mr. Black’s fund, he did file for – but not launch – just such a fund in the period between being excused from Janus and being hired by Calamos.  Expenses ranged from 2.90 – 3.65%, depending on share class.  The minimum initial investment is $2500. 

Gratry International Growth Fund

Gratry International Growth Fund will seek long-term capital appreciation by investing in an international, large cap stock portfolio.  Nothing special about their discipline is apparent except that they seem intent on building the portfolio around ADRs and ETFs. The fund will be managed by a team headed by Jerome Gratry.  Expenses are not yet set.  The minimum initial investment is $2500. 

M.D. Sass Equity Income Plus Fund

M.D. Sass Equity Income Plus Fund seeks to generate income as well as capital appreciation, while emphasizing downside protection.  The plan is to buy 25-50 large cap, dividend-paying stocks and and then sell covered calls to generate income.  The managers have the option of buying puts for downside protection and they claim an “absolute return” focus.  Martin D. Sass, CIO and CEO of M.D. Sass, will manage the fund.  The expense ratio for the Retail class is 1.25% and the minimum initial investment is $2500.

RiverPark Structural Alpha Fund

RiverPark Structural Alpha Fund will seek long-term capital appreciation while exposing investors to less risk than broad stock market indices.  Because they believe that “options on market indices are generally overpriced,” their strategy will center on “selling index equity options [which] will structurally generate superior returns . . . [with] less volatility, more stable returns, and reduce[d] downside risk.  This portfolio was a hedge fund run by Wavecrest Asset Management.  That fund launched in September, 2008 and will continue to operate under it transforms into the mutual fund, on June 30, 2013.  The fund made a profit in 2008 and returned an average of 10.7% annually through the end of 2012.  Over that same period, the S&P500 returned 6.2% with substantially greater volatility.  The Wavecrest management team, Justin Frankel and Jeremy Berman, have now joined RiverPark and will continue to manage the fund.   The opening expense ratio with be 2.0% after waivers and the minimum initial investment is $1000.

Schroder Emerging Markets Multi-Cap Equity Fund

Schroder Emerging Markets Multi-Cap Equity Fund seeks long-term capital growth by investing primarily in equity securities of companies in emerging market countries.  They’re looking for companies which are high quality, cheap, or both.  The fund will be managed by a team headed by Justin Abercrombie, Head of Quantitative Equity Products.  Expenses are not yet set.  The minimum initial investment for Advisor Class shares is $2500. 

Schroder Emerging Markets Multi-Sector Bond Fund

Schroder Emerging Markets Multi-Sector Bond Fund seeks to provide “a return of capital growth and income.”  After a half dozen readings that phrase still doesn’t make any sense: “a return of capital growth”?? They have the freedom to invent in a daunting array of securities: corporate and government bonds, asset- or mortgage-backed securities, zero-coupon securities, convertible securities, inflation-indexed bonds, structured notes, event-linked bonds, and loan participations, delayed funding loans and revolving credit facilities, and short-term investments.  The fund will be managed by Jim Barrineau, Fernando Grisales, Alexander Moseley and Christopher Tackney.  Expenses are not yet set.  The minimum initial investment for Advisor Class shares is $2500. 

Segall Bryant & Hamill All Cap Fund

Segall Bryant & Hamill All Cap Fund will seek long-term capital appreciation by investing in a small-cap stock portfolio.  Nothing special about their discipline is apparent. The fund will be managed by Mark T. Dickherber.  Expenses are not yet set.  The minimum initial investment is $2500. 

Segall Bryant & Hamill Small Cap Value Fund

Segall Bryant & Hamill Small Cap Value Fund will seek long-term capital appreciation by investing in an all-cap stock portfolio.  Nothing special about their discipline is apparent. The fund will be managed by Mark T. Dickherber.  Expenses are not yet set.  The minimum initial investment is $2500.

SilverPepper Commodities-Based Global Macro Fund

SilverPepper Commodities-Based Global Macro Fund will seek “returns that are largely uncorrelated with the returns of the general stock, bond, currency and commodities markets.”  The plan is to maintain a global, long-short, all-asset portfolio constructed around the sub-advisers determination of likely commodity prices. The fund will be managed by Renee Haugerud, Chief Investment Officer at Galtere Ltd, which specializes in managing commodities-based investment strategies, and Geoff Fila, an Associate Portfolio Manager.  The expenses are not yet set (though they do stipulate a bunch of niggling little fees) and the minimum investment for the Advisor share class is $5,000.

SilverPepper Merger Arbitrage Fund

SilverPepper Merger Arbitrage Fund  wants to “create returns that are largely uncorrelated with the returns of the general stock market” through a fairly conventional merger arbitrage strategy.  The fund will be managed by Jeff O’Brien, Managing Member of Glenfinnen Capital, LLC, and Daniel Lancz, its Director of Research.  Glenfinnen specializes in merger-arbitrage investing and their merger arbitrage hedge fund, managed by the same folks, seems to have been ridiculously successful. The expenses are not yet set and the minimum investment for the Advisor share class is $5,000.

TCW Emerging Markets Multi-Asset Opportunities Fund

TCW Emerging Markets Multi-Asset Opportunities Fund will pursue current income and long-term capital appreciation.  The plan is to invest in emerging markets stocks and bonds, including up to 15% illiquid securities and possible defaulted securities.  The fund will be managed by Penelope D. Foley and David I. Robbins, Group Managing Directors of TCW.  Expenses are not yet set.  The minimum initial investment is $2000, reduced to $500 for IRAs.

Toews Unconstrained Fixed Income Fund

Toews Unconstrained Fixed Income Fund will look for long-term growth of capital and, if possible, limiting risk during unfavorable market conditions. It’s another “trust me” fund: they’ll be exposed to somewhere between -100% and 125% of the global fixed-income and alternative fixed-income market.  As a kicker, it will be non-diversified. The fund will be managed by Phillip Toews and Randall Schroeder.  There’s no record available to me that suggests these folks have successfully executed this strategy, even in their private accounts.  There only other public fixed-income offering (hedged high yield) is undistinguished. Expenses are not yet set.  The minimum initial investment is $10,000, though the prospectus places [10,000] in square brackets as if they’re not quite sure of the matter yet.  “Unconstrained” is an increasingly popular designation.  This is the 13th (lucky them!) unconstrained income fund to launch.

Visium Catalyst Event Driven Fund

Visium Catalyst Event Driven Fund will pursue capital growth while maintaining a low correlation to the U.S. equity markets.  The plan is to pursue a sort of arbitrage strategy involved both long and short positions, in both equities and debt, both foreign and domestic, of companies that they believe will be impacted by pending or anticipated corporate events.  “Corporate events” are things like mergers, acquisitions, spin-offs, bankruptcy restructurings, stock buybacks, industry consolidations, large capital expenditure programs, significant management changes, and self-liquidations (great, corporate suicides).  The mutual fund is another converted hedge fund.  The hedge fund, with the same managers, has been around since January 2001.  Its annual return since inception is 3.48% while the S&P returned 2.6%.  That’s a substantial advantage for a low correlation/low volatility strategy. The fund will be managed by Francis X. Gallagher and Peter A. Drippé.  Expenses, after waivers, will be 2.04%. The minimum initial investment is $2500.

Manager changes, April 2013

By Chip

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

Ticker

Fund

Out with the old

In with the new

Dt

BACAX

BlackRock All-Cap Energy & Resources

Daniel Neumann

Robin Batchelor and Poppy Allonby

4/13

MDIVX

BMO Dividend Income

Daniel Brown 

Casey Sambs and Kenneth Conrad join existing comanager, Ernesto Ramos

4/13

IGLGX

Columbia Global Equity 

No one, but . . .

Neil Robson joined comanager Esther Perkins

4/13

DQIAX

Dreyfus Equity Income 

Jocelin Reed

C. Wesley Boggs, Warren Chiang, and Ronald Gala remain

4/13

DPOAX

Dreyfus MidCap Core

Jocelin Reed

C. Wesley Boggs, Warren Chiang, and Ronald Gala remain

4/13

DTCAX

Dreyfus Third Century 

Jocelin Reed

C. Wesley Boggs, Warren Chiang, and Ronald Gala remain

4/13

DWGVX

Dynamic Contrarian Advantage

Izet Elmazi

David Fingold and Don Simpson remain

4/13

EQCRX

Equinox Crabel Strategy Fund

Brian Bell

Afroz Qadeer and Sue Osborne are joining the existing team

4/13

FMPAX

Fidelity Advisor Mid Cap Value 

Bruce Dirks

Court Dignan

4/13

FSMVX

Fidelity Mid Cap Value

Bruce Dirks, who seems to have left Fido and who did a really solid job over eight years

Court Dignan, who’s been solid on Fido Select Insurance

4/13

FPHAX

Fidelity Select Pharmaceuticals

Andrew Oh 

Asher Anolic

4/13

GSCGX

Goldman Sachs Capital Growth

Joe Hudepohl and Scott Kolar

Steve Becker joins Tim Leahy

4/13

GGOAX

Goldman Sachs Growth Opportunities

Joe Hudepohl and Scott Kolar

Steve Barry and Jeffrey Rabinowitz remain

4/13

SECEX

Guggenheim StylePlus – Large Core 

Mark Bronzo and Mark Mitchell

B. Scott Minerd, Farhan Sharaff, Jayson B. Flowers and Scott Hammond

4/13

SECUX 

Guggenheim StylePlus – Mid Growth Fund

Joseph O’Connor 

B. Scott Minerd, Farhan Sharaff, Jayson B. Flowers and Scott Hammond

4/13

HLDAX

Hartford Emerging Markets Local Debt

Ricardo Adrogué 

James Valone and Tieu-Bich Nguyen continue on

4/13

HCOAX 

Highland Global Allocation

Stephen Gelhaus and Paul Reinhardt

James Dondero 

4/13

IADEX

ING Diversified Emerging Markets Debt 

Jennifer Gorgoll

Marcelo Assalin and Michael Mata continue on

4/13

IMCDX

ING Emerging Markets Corporate Debt

Jennifer Gorgoll

Michael Hyman is joined by new manager Kurt Kringelis

4/13

AWEIX

Invesco Disciplined Equity

No one, but . . .

W. Brant Houston joins existing managers Patricia Bannan and Paul McPheeters

4/13

JHIAX

John Hancock Small Cap Intrinsic Value Fund

Roger Hamilton

Joseph Nowinski and Bill Talbot

4/13

JMGIX

JPMorgan Managed Income 

No one, but . . .

Kyongsoo Noh joins comanager David Martucci

4/13

LGILX

Laudus Growth Investors US Large Cap Growth

Sam Console

Peter Bye and Paul Graham remain

4/13

LGMAX

Loomis Sayles Global Equity and Income

Warren Koontz

Eileen Riley and Lee Rosenbaum join remaining managers, Dan Fuss and David Rolley

4/13

MCAAX

Madison Large Cap Growth

Bruce Ebel 

David Halford, Jay Sekelsky, Ray DiBernardo, and Walter E. Dewey

4/13

MHFAX

MutualHedge Frontier Legends Fund

Brian Bell

Afroz Qadeer and Sue Osborne have been added as portfolio managers, joining together with Richard Bornhoft, Ajay Dravid and Rufus Rankin

4/13

NNGAX

Nuveen Multi-Manager Large-Cap Value

Subadvisors, Institutional Capital and Symphony Asset Management

Bob Doll

4/13

OAKBX

Oakmark Equity & Income

No one (they’re still trying to fill the retired Ed Studzinski’s shoes), but . . .

Clyde McGregor is joined by Edward Wojciechowski, Colin Hudson, and Matthew Logan

4/13

QRAAX

Oppenheimer Commodity Strategy Total Return

Robert Baker has left the firm

George Zivic

4/13

QVGIX

Oppenheimer Global Allocation

Arthur Steinmetz, Krishna Memani, and George Evans

Mark Hamilton now comanages with Benjamin Rockmuller

4/13

JMCVX

Perkins Mid Cap Value

No one, but . . .

Kevin Preloger will join Jeff Kautz and Tom Perkins

4/13

JSVTX

Perkins Select Value 

Kevin Preloger

Alec Perkins

4/13

JSCVX

Perkins Small Cap Value

Todd Perkins

Tom Reynolds

4/13

TAVIX

Third Avenue International Value

Jakub Rehor who just joined in January

Matthew Fine and Amit Wadhwaney remain

4/13

VGIAX

Vanguard Growth and Income 

No one, but . . .

Anne Dinning joins as a comanager

4/13

EIVAX

Wells Fargo Advantage Intrinsic Value 

Gary Lisenbee

The rest of the team remains

4/13

EWEAX

Wells Fargo Advantage Intrinsic World Equity

Gary Lisenbee

The rest of the team remains

4/13

WWLAX

Westwood Large Cap Value

Jay Singhania and Todd Williams

Varun V. Singh gets taped onto the existing team at this sputtering fund

 

Three Messages from Rob Arnott

By Charles Boccadoro

Originally published in May 1, 2013 Commentary

Robert D. Arnott manages PIMCO’s All Asset (PAAIX) and leveraged All Asset All Authority (PAUIX) funds. Morningstar gives each fund five stars for performance relative to moderate and world allocation peers, in addition to gold and silver analyst ratings, respectively, for process, performance, people, parent and price. On PAAIX’s performance during the 2008 financial crises, Mr. Arnott explains: “I was horrified when we ended the year down 15%.” Then, he learned his funds were among the very top performers for the calendar year, where average allocation funds lost nearly twice that amount. PAUIX, which uses modest leverage and short strategies making it a bit more market neutral, lost only 6%.

Of 30 or so lead portfolio managers responsible for 110 open-end funds and ETFs at PIMCO, only William H. Gross has a longer current tenure than Mr. Arnott. The All Asset Fund was launched in 2002, the same year Mr. Arnott founded Research Affiliates, LLC (RA), a firm that specializes in innovative indexing and asset allocation strategies. Today, RA estimates $142B is managed worldwide using its strategies, and RA is the only sub-advisor that PIMCO, which manages over $2T, credits on its website.

On April 15th, CFA Society of Los Angeles hosted Mr. Arnott at the Montecito Country Club for a lunch-time talk, entitled “Real Return Investing.” About 40 people attended comprising advisors, academics, and PIMCO staff. The setting was elegant but casual, inside a California mission-style building with dark wooden floors, white stucco walls, and panoramic views of Santa Barbara’s coast. The speaker wore one of his signature purple-print ties. After his very frank and open talk, which he prefaced by stating that the research he would be presenting is “just facts…so don’t shoot the messenger,” he graciously answered every question asked.

Three takeaways: 1) fundamental indexing beats cap-weighed indexing, 2) investors should include vehicles other than core equities and bonds to help achieve attractive returns, and 3) US economy is headed for a 3-D hurricane of deficit, debt, and demographics. Here’s a closer look at each message:

Fundamental Indexation is the title of Mr. Arnott’s 2005 paper with Jason Hsu and Philip Moore. It argues that capital allocated to stocks based on weights of price-insensitive fundamentals, such as book value, dividends, cash flow, and sales, outperforms cap-weighted SP500 by an average of 2% a year with similar volatilities. The following chart compares Power Shares FTSE RAFI US 1000 ETF (symbol: PRF), which is based on RA Fundamental Index (RAFI) of the Russell 1000 companies, with ETFs IWB and IVE:

May 1, 2013

And here are the attendant risk-adjusted numbers, all over same time period:

May 1, 2013

RAFI wins, delivering higher absolute and risk-adjusted returns. Are the higher returns a consequence of holding higher risk? That debate continues. “We remain agnostic as to the true driver of the Fundamental indexes’ excess return over the cap-weighted indexes; we simply recognize that they outperformed significantly and with some consistency across diverse market and economic environments.” A series of RAFIs exist today for many markets and they consistently beat their cap-weighed analogs.

All Assets include commodity futures, emerging market local currency bonds, bank loans, TIPS, high yield bonds, and REITs, which typically enjoy minimal representation in conventional portfolios. “A cult of equities,” Mr. Arnott challenges, “no matter what the price?” He then presents research showing that while the last decade may have been lost on core equities and bonds, an equally weighted, more broadly diversified, 16-asset class portfolio yielded 7.3% annualized for the 12 years ending December 2012 versus 3.8% per year for the traditional 60/40 strategy. The non-traditional classes, which RA coins “the third pillar,” help investors “diversify away some of the mainstream stock and bond concentration risk, introduce a source of real returns in event of prospective inflation from monetizing debt, and seek higher yields and/or rates of growth in other markets.”

Mr. Arnott believes that “chasing past returns is likely the biggest mistake investors make.” He illustrates with periodic returns such as those depicted below, where best performing asset classes (blue) often flip in the next period, becoming worst performers (red)…and rarely if ever repeat.

May 1, 2013

Better instead to be allocated across all assets, but tactically adjust weightings based on a contrarian value-oriented process, assessing current valuation against opportunity for future growth…seeking assets out of favor, priced for better returns. PAAIX and PAUIX (each a fund of funds utilizing the PIMCO family) employ this approach. Here are their performance numbers, along with comparison against some competitors, all over same period:

May 1, 2013

The All Asset funds have performed very well against many notable allocation funds, like OAKBX and VWENX, protecting against drawdowns while delivering healthy returns, as evidenced by high Martin ratios. But static asset allocator PRPFX has actually delivered higher absolute and risk-adjusted returns. This outperformance is likely attributed its gold holding, which has detracted very recently. On gold, Mr. Arnott states: “When you need gold, you need gold…not GLD.” Newer competitors also employing all-asset strategies are ABRYX and AQRIX. Both have returned handsomely, but neither has yet weathered a 2008-like drawdown environment.

The 3-D Hurricane Force Headwind is caused by waves of deficit spending, which artificially props-up GDP, higher than published debt, and aging demographics. RA has published data showing debt-to-GDP is closer to 500% or even higher rather than 100% value oft-cited, after including state and local debt, Government Sponsored Enterprises (e.g., Fannie Mae, Freddie Mac), and unfunded entitlements. It warns that deficit spending may feel good now, but payback time will be difficult.

“Last year, the retired population grew faster than the population of working age adults, yet there was no mention in the press.” Mr. Arnott predicts this transition will manifest in a smaller labor force and lower productivity. It’s inevitable that Americans will need to “save more, spend less, and retire later.” By 2020, the baby boomers will be outnumbered 2:1 by votes, implying any “solemn vows” regarding future entitlements will be at risk. Many developed countries have similar challenges.

Expectations going forward? Instead of 7.6% return for the 60/40 portfolio, expect 4.5%, as evidenced by low bond and dividend yields. To do better, Mr. Arnott advises investing away from the 3-D hurricane toward emerging economies that have stable political systems, younger populations, and lower debt…where fastest GDP growth occurs. Plus, add in RAFI and all asset exposure.