Monthly Archives: July 2013

LS Opportunity Fund (LSOFX), August 2013

By David Snowball

Objective and Strategy

The Fund aims to preserve capital while delivering above-market returns and managing volatility. They invest, long and short, in a domestic equity portfolio. The portfolio is driven by intensive company research and risk management protocols. The long portfolio is typically 30-50 names, though as of mid-2013 it was closer to 70. The short portfolio is also 30-50 names. The average long position persists for 12-24 months while the average short position is closed after 3-6. The fund averages about 50% net long, though at any given point it might be 20-70% long. The fund’s target standard deviation is eight.

Adviser

Long Short Advisors, LLC. LSA launched the LS Opportunity Fund to offer access to Independence Capital Asset Partners’ long/short equity strategy. ICAP is a Denver-based long/short equity manager with approximately $500 million in assets under management.

Manager

James A. Hillary, Chief Executive Officer, Chief Investment Officer, and Portfolio Manager at ICAP. Mr. Hillary founded Independence Capital Asset Partners (ICAP) in 2004. From 1997-2004, Mr. Hillary was a founding partner and portfolio manager at Marsico Capital Management. While there he managed the 21^st Century Fund (MXXIX) and co-managed several other products. Morningstar noted that during Mr. Hillary’s tenure “the fund [MXXIX] has sailed past the peer-group norm by a huge margin.” Bank of America bought Marsico in 2000, at which time Mr. Hillary received a substantial payout. Before Marsico, he managed a long/short equity fund for W.H. Reaves. Effective June 1, 2013, Mr. Chris Hillary was added as a co-portfolio manager of the Fund. Messrs Hillary are supported by seven other investment professionals.

Strategy capacity and closure

The strategy, which is manifested in the mutual fund, a hedge fund (ICAP QP Absolute Return Fund), a European investment vehicle (Prosper Stars and Stripes, no less) and separate accounts, might accommodate as much as $2 billion in assets but the advisor will begin at about $1 billion to look at the prospect of soft closing the strategy.

Management’s Stake in the Fund

The senior Mr. Hillary has between $100,000 and 500,000 in the fund. Most of his investable net wealth is invested here and in other vehicles using this strategy. The firm’s principals and employees account for about 14% of ICAP’s AUM, though the fund’s trustees have no investment in the fund.

Opening date

September 9, 2010, though the hedge fund which runs side-by-side with it was launched in 2004.

Minimum investment

$5,000

Expense ratio

1.95% on fund assets of $40 million. The limit was reduced in early 2013 from 2.50%.

Comments

In 2004, Jim Hillary had a serious though delightful problem. As one of the co-founders of MCM, he had received a rich payout from the Bank of America when they purchased the firm. The problem was what to do with that payout.

He had, of course, several options. He might have allowed someone else to manage the money, though I suspect he would have found that option to be laughable. In managing it himself, he might reasonably have chosen a long-only equity portfolio, a long-short equity portfolio or a long equity portfolio supplemented by some sort of fixed-income position. He had success in managing both of the first two approaches and might easily have pursued the third.

The decision that Mr. Hillary made was to pursue a long-short equity strategy as the most prudent and sustainable way to manage his own and his family’s wealth. That strategy achieved substantial success, measured both by its ability to achieve sustainable long-term returns (about 9% annually from 2004) and to manage volatility (a standard deviation of about 12, both better than the Total Stock Market’s performance).

Mr. Hillary’s success became better known and he chose, bit by bit, to make the strategy available to others. One manifestation of the strategy is that ICAP QP Absolute Return L.P. hedge fund, a second is the European SICAV Prosper Star & Stripes, and a third are separately managed accounts. The fourth and newest manifestation, and the only one available to retail investors, is LS Opportunity Fund. Regardless of which vehicle you invest in, you are relying on the same strategy and the portfolio in which Mr. Hillary’s own fortune resides.

Mr. Hillary’s approach combines intensive fundamental research in individual equities, both long and short.

There are two questions for potential investors:

Does a long-short position make sense for me?
Does this particular long-short vehicle make the most sense for me?

The argument for long-short investing is complicated by the fact that there are multiple types of long-short funds which, despite having similar names or the same peer group assigned by a rating agency, have strikingly different portfolios and risk/return profiles. A fund which combines an ETF-based long portfolio and covered calls might, for example, offer far more income but far fewer opportunities for gain than a “pure” long/short strategy such as this one.

The argument for pure long/short is straightforward: investors cannot stomach the volatility generated by unhedged exposure to the stock market. That volatility has traditionally been high (the standard deviation for large cap stocks this century has been over 16 while the mean return has been 4; the translation is that you’ve been averaging a measly 4% per year while routinely encountering returns in the range of minus-12 to plus-20 with the occasional quarterly loss of 17% and annual loss of 40% thrown in) and there’s no reason to expect it to decline. The traditional hedge has been to hold a large bond position, which worked well during the 30-year bond bull market just ended. Going forward, asset allocation specialists expect the bond market to post negative real returns for years. Cash, which is also posting negative real returns, is hardly an attractive option.

The alternative is a portfolio which offsets exposure to the market’s most attractive stocks with bets against its least attractive ones. Research provided by Long Short Advisors makes two important points:

since 1998, an index of long/short equity hedge funds has outperformed a simple 60/40 allocation with no material change in risk and
when the market moves out of its panic mode, which are periods in which all stocks move in abnormal unison, both the upside and downside advantages of a hedged strategy rises in comparison to a long-only portfolio.

In short, a skilled long-short manager can offer more upside and less downside than either a pure stock portfolio or a stock/bond hybrid one.

The argument for LS Opportunity is simpler. Most long/short managers have limited experience either with shorting stocks or with mutual funds as an investment vehicle. More and more long/short funds are entering the market with managers whose ability is undocumented and whose prospects are speculative. Given the complexity and cost of the strategy, I’d avoid managers-with-training-wheels.

Mr. Hillary, in contrast, has a record worth noticing. He’s managed separate accounts and hedge funds, but also has a fine record as a mutual fund manager. He’s been working with long/short portfolios since his days at W.H. Reaves in the early 1990s. The hedge fund on which LS Opportunity is based has survived two jarring periods, including the most traumatic market since the Great Depression. The mutual fund itself has outperformed its peers since launch and has functioned with about half of the market’s volatility.

Bottom Line

This is not a risk-free strategy. The fund has posted losses in 15 of its first 34 months of operation. Eight of those losses have come in months when the S&P500 rose. The fund’s annualized return from inception through the end of June 2013 is 6.32% while the S&P moved relentlessly and, many fear, irrationally higher. In the longer term, the strategy has worked to both boost returns and mute volatility. And, with his personal fortune and professional reputation invested in the strategy, you’d be working with an experienced team which has committed “our lives, our fortunes, and our sacred honor” to making it work. It’s worth further investigation.

Fund website

LS Opportunity Fund

3Q 2013 Fact Sheet

Sextant Global High Income (SGHIX), August 2013

By David Snowball

Objective and Strategy

The fund seeks high income, with a secondary objective of capital preservation. They invest in a global, diversified portfolio of income-producing debt and equity securities. They manage risk at the level of individual security selection, but also through their ability to allocate between stocks and bonds, sectors, countries and currencies. Their portfolio may invest in up to 50% in equities, 50% in the U.S., 50% in investment grade bonds, and 33% in emerging markets. They won’t engage in hedging, leverage or credit default swaps.

Adviser

Saturna Capital Corporation, which was founded in 1989. Saturna has about $3.9 billion in assets under management and advises the Sextant, Idaho and Amana funds. Their funds are universally and continually solid, sensible and risk-conscious.

Manager

Bryce Fegley and John Scott. Mr. Fegley joined Saturna 2001, served as an analyst and then as director of research at their Malaysian subsidiary, Saturna Sdn Bhd. Mr. Scott joined Saturna 2009. He has worked with Morgan Stanley Smith Barney in California and Hyundai Securities in Seoul, S. Korea.

Strategy capacity and closure

They haven’t really discussed the matter formally. Mr. Fegley’s general sense is that the fund’s stake in preferred shares (currently 8% of the portfolio) would represent the largest constraint because the preferred market is small ($200 billion) compared to the common stock market ($14 trillion) and might well shrink by half over the next few years as new banking regulations kick in.

Management’s Stake in the Fund

As of November 30, 2012, Mr. Fegley had invested between $100,000 and 500,000 in the fund while Mr. Scott had between $50,000 and 100,000. As of the most recent SAI, their boss, Nick Kaiser, owned 30% of all of the fund’s shares which would be rather more than a million in the fund.

Opening date

March 30, 2012.

Minimum investment

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

Expense ratio

0.75% on assets of $9.4 million.

Comments

SGHIX, positioned as “a retirees’ fund,” responds to two undeniable realities: (1) investors need income and (2) the old stand-by – toss money into an aggregate bond index full of Treasuries – will, for a generation or more, no longer work. Grantham, Mayo, van Otterloo (a/k/a GMO) forecast “The Purgatory of Low Returns” (July 2013) for investors over the next seven years with a tradition 60/40 hybrid earning a real return under 1% per year and most classes of U.S. bonds posting negative real returns. Their recommendations for possible paths forward: concentrate on the highest return asset classes and rebalance frequently, seek alternatives, use leverage, and be patient.

With the exception of “use leverage,” Sextant does. SGHIX explicitly targets “high current income” and has broad flexibility to seek income almost anywhere, though they do so with a prudent concern for risk. John Scott describes himself as “the offensive manager,” the guy charged with finding the broadest possible array of reasonably-priced, income-producing securities. Bryce Fegley is “the defensive manager,” a self-described “asset allocation nerd” who aims to balance the effects of many sources of risk – country, valuation, interest rate, currency – while still pursuing a high-income mandate. Their strategy is to buy and hold for as long as possible: they hope to hold bonds to redemption and stocks as long as their dividends seem secure. With hard work, luck and skill, their ability to move between dividend-paying common stock, preferred shares (currently 8% of the portfolio) and relatively high-quality high yield bonds might allow them to achieve their goal of high income.

How high? The managers estimate that they might earn 300-400 bps more than a 10-year Treasury. In a “normal” world, a 10-year might earn 4.5%; this fund might earn 7.5 – 8.5%. In addition, the managers believe they might be able to add 2% per year in capital appreciation.

What concerns should prospective investors have? Three come immediately to mind:

To date, execution of the strategy has been imperfect. From inception through mid-July 2013, a period of about 15 months, the fund posted a total return of 5.2%. Much of their portfolio was, for about six months, in cash which certainly depressed returns. The managers are very aware of the fact that many investments are not paying investors for the risk they’re taking and have, as a result, positioned the portfolio conservatively. In addition, it’s almost impossible to construct a true peer group for this fund since its combination of a high income mandate, equities and tactical asset allocation changes is unique. There are four other funds with “global high income” in their names (Aberdeen, DWS, Fidelity, and MainStay plus one closed-end fund), but all are essentially high-yield bond funds with 0-3% in equities.

That having been said, a 4% annual return – roughly equivalent to the fund’s yield – is pretty modest. Investors interested in high income derived from a globally diversified portfolio might consider Sextant in the company with any of a number of funds or ETFs that advertise themselves as providing “multi-asset income.” An incomplete roster of such options and their total return from the date of Sextant’s launch through 7/29/13 includes:

	10K at SGHIX inception became	30-day SEC yield	Stock/bond allocation
Guggenheim Multi-Asset Income (CVY)	11,800	5.9	91 / 6
Arrow Dow Jones Global Yield ETF (GYLD)	11,300	5.8	60 / 40
BlackRock Multi-Asset Income (BAICX)	11,200	4.5	23 / 53
iShares Morningstar Multi-Asset Income (IYLD)	10,700	6.1	35 / 58
T. Rowe Price Spectrum Income (RPSIX)	10,700	2.9	13 / 77
SPDR SSgA Income Allocation (INKM)	10,600	4.2	50 / 40
Sextant	10,500	4.0	45 / 34

The portfolio composition stats illustrate the fact that none of these funds are pure peers. They are, however, plausible competitors: that is, they represent alternatives that potential SGHIX investors might consider. The other consideration, though, is that many of these funds are substantially more volatile than Sextant is. Below are the funds with launch dates near Sextant’s, along with their maximum draw down (that is, it measures the magnitude of a fund’s worst decline) and Ulcer Index (which factors-in both magnitude and duration of a decline). In both cases, “smaller” is “better.”

	Maximum drawdown	Date	Ulcer Index
iShares Morningstar Multi-Asset Income (IYLD)	7.9	06/13	2.7
SPDR SSgA Income Allocation (INKM)	6.9	06/13	2.3
Arrow Dow Jones Global Yield ETF (GYLD)	6.8	06/13	2.3
Sextant	4.7	06/13	1.6

The decision to provide a payout only once a year may not meet retirees’ needs for steady income. For investors who choose to receive their income in a check, rather than reinvesting it in fund shares, Sextant’s policy of paying out dividends and interest only once each year may be sub-optimal. The likeliest work-around would be to establish a systematic withdrawal plan, whereby an investor automatically redeems shares of the fund at regular intervals.
The fund’s risk calculus is not clearly articulated. This is a relative, rather than absolute, value portfolio. The managers feel compelled to remain fully invested in something. They’re currently moving around, looking to find income-producing assets where the income is relatively high and steady and the risk of loss of principal is manageable. That’s led them to a relatively low-yielding portfolio. When we talked about what level of risk they targeted or were willing to accept, the answer was pretty close to “it depends on what’s available.” While some funds have target volatility levels or drawdowns, the Sextant team seems mostly to be feeling their way along, taking the best deals they can find. That strategy would be a bit more palatable if the managers had a longer record, here or elsewhere, of navigating markets with the strategy.

Bottom Line

Sextant Global High Income has a lot to recommend it. The fund’s price (0.90%) is low, especially for such a tiny fund, as is its minimum investment. Saturna has an excellent reputation for patient, profitable, risk-conscious investing. The ability to travel globally and to tap into multiple asset classes is distinctive and exceedingly attractive. The question is whether the two young managers will pull it off. They’re both bright and dedicated guys, we’re pulling for them and we’ll watch the fund closely to see how it matures.

Fund website

Sextant Global High Income

Grandeur Peak Global Reach (GPROX), August 2013

By David Snowball

Objective and Strategy

Global Reach pursues long-term capital growth primarily by investing globally in a small and micro-cap portfolio. Up to 90% of the fund might normally be invested in microcaps (stocks with market cap under $1 billion at the time of purchase), but they’re also allowed to invest up to 35% in stocks over $5 billion. The managers seek high quality companies that they place in one of three classifications:

Best-In-Class Growth Companies: fast earnings growth, good management, strong financials. The strategy is to “find them small and undiscovered; buy and hold” until the market catches on. In the interim, capture the compounded earnings growth.

Fallen Angels: good growth companies that hit “a bump in the road” and are priced as value stocks. The strategy is to buy them low and hold through the recovery.

Stalwarts: basically, blue chip mid-cap stocks. Decent but not great growth, great financials, and the prospect of dividends or stock buy-backs. The strategy is to buy them at a fair price, but be careful of overpaying since their growth may be decelerating.

Grandeur Peak considers this “our flagship … strategy.” It is their most broadly diversified and team-based strategy. Global Reach will typically own 300-500 stocks, somewhere around 1-2% of their investible universe.

Adviser

Grandeur Peak Global Advisors is a small- and micro-cap focused global equities investment firm, founded in mid-2011, and comprised of a very experienced and collaborative investment team that worked together for years managing some of the Wasatch funds. They advise three Grandeur Peak funds and one “pooled investment vehicle.” The adviser passed $1 billion in assets under management in July, 2013.

Managers

Robert Gardiner and Blake Walker, assisted by three associate managers. Robert Gardiner is co-founder, CEO and Director of Research for Grandeur Peak Global. Prior to founding Grandeur Peak, he managed or co-managed Wasatch Microcap (WMICX), Small Cap Value (WMCVX) and Microcap Value (WAMVX, in which I own shares). In 2007, he took a sort of sabbatical from active management, but continued as Director of Research. During that sabbatical, he reached a couple conclusions: (1) global small/micro-cap investing was the world’s most interesting sector, and (2) he wanted to get back to managing a fund. He returned to active management with the launch of Wasatch Global Opportunities (WAGOX), a global small/micro-cap fund. From inception in late 2008 to July 2011 (the point of his departure), WAGOX turned a $10,000 investment into $23,500, while an investment in its average peer would have led to a $17,000 portfolio. Put another way, WAGOX earned $13,500 or 92% more than its average peer managed.

Blake Walker is co-founder of and Chief Investment Officer for Grandeur Peak. Mr. Walker was a portfolio manager for two funds at Wasatch Advisors. Mr. Walker joined the research team at Wasatch Advisors in 2001 and launched his first fund, the Wasatch International Opportunities Fund (WAIOX) in 2005. He teamed up with Mr. Gardiner in 2008 to launch the Wasatch Global Opportunities (WAGOX).

The associate managers, all Wasatch alumni, are Amy Hu Sunderland, Randy Pearce, and Spencer Stewart.

Strategy capacity and closure

$400-500 million. Grandeur Peak specializes in global small and micro-cap investing. Their estimate, given current conditions, is that they could effectively manage about $3 billion in assets. They could imagine running seven distinct small- to micro-cap funds and tend to close all of them (likely a soft close) when the firm’s assets under management reach about $2 billion. The adviser has target closure levels for each current and planned fund.

Management’s stake in the fund

None yet disclosed, but the Grandeur Peak folks tend to invest heavily in their funds.

Opening date

June 19, 2013.

Minimum investment

$2,000, reduced to $1,000 for an account established with an automatic investment plan.

Expense ratio

1.25% on assets of $252.3 (as of July 2023).

Comments

When Grandeur Peak opened shop in 2011, passion declared that this should be their first fund. Prudence dictated otherwise.

Prudence prevailed.

I approached this prevail with some combination of curiosity bordering on skepticism. The fact that Grandeur Peak closed two funds – presumably a signal that they had reached the limit of their ability to productively invest in this style – and then immediately launched a third, near-identical fund, raised questions about whether this was some variety of a marketing ploy. Some reflection and a long conversation with Eric Huefner, Grandeur Peak’s president, convinced me otherwise.

To understand my revised conclusion, and the conflict between passion and prudence, it’s important to understand the universe within which Grandeur Peak operates.

Their investable universe is about 30,000 publicly-traded stocks, most particularly small and microcap, from around the globe, many with little external analyst coverage. At the moment of launch, Grandeur Peak had six full-time investment professionals on staff. Fully covering all 30,000 would have been a Herculean task. Quite beyond that, Grandeur Peak faced the question: “How do we make our business model work?” Unlike many fund companies, Grandeur Peak chose to focus solely on its mutual funds and not on separately-managed accounts or private partnerships. Making that model work, especially with a fair amount of overhead, required that they be able to gather attention and assets. The conclusion that the Grandeur Peak executives reached was that it was more prudent to launch two more-focused, potentially more newsworthy funds as their opening gambit. Those two funds, Global Opportunities and International Opportunities, performed spectacularly in their two years of operations, having gathered a billion in assets and considerable press attention.

The success of Grandeur Peak’s first two funds allowed them to substantially increase their investment staff to fourteen, including seven senior investment professionals and seven junior ones. With the greater staff available, they felt now that prudence called them to launch the fund that Mr. Gardiner hoped would be the firm’s flagship and crown jewel.

The structure of the Grandeur Peak funds is intriguing and distinctive. The plan is for Global Reach to function as a sort of master portfolio, holding all of the stocks that the firm finds, at any given point, to be compelling. They estimate that that will be somewhere between 300 and 500 names. Those stocks will be selected based on the same criteria that drove portfolio construction at GPGOX and GPIOX and at the Wasatch funds before them. Those selection criteria drive Grandeur Peak to seek out high quality small companies with a strong bias toward microcap stocks. This has traditionally been a distinctive niche and a highly rewarding one. Of all of the global stock funds in existence, Grandeur Peak has the smallest market cap by far and, in its two years of existence, it has posted some of its category’s strongest returns.

The plan is to offer Global Reach as the flagship portfolio and, for many investors, the most logical place for them to invest with Grandeur Peak. It will offer the broadest and most diversified take on Gardiner and Walker’s investing skills. It will be part of an eventual constellation of seven funds. Global Reach will offer the most complete portfolio. Each of the remaining funds will offer a way for investors to “tilt” their portfolios. An investor who has a particular desire for exposure to frontier and emerging markets might choose to invest in Global Reach (which currently has 16% in emerging markets), but then to supplement it with a position in the eventual Emerging Markets Opportunities fund. But for the vast majority of investors who have no particular justification for tilting their portfolio toward any set of attributes (domestic, value, emerging), the logical core holding is Global Reach.

Are there reasons for concern? Two come to mind.

Managing seven funds could, eventually, stretch the managers’ resources. Cutting against this is the unique relationship of Global Reach to its sister portfolios. The great bulk of the research effort will manifest itself in the Global Reach portfolio; the remaining funds will remain subsidiary to it. That is, they will represent slices of the larger portfolio, not distinct burdens in addition to it.

The fund’s expense ratios are structurally, persistently high. The fund will charge 1.60%, below the 1.88% at GPGOX, but substantially above the 1.20% charged by the average no-load global fund. The management fee alone is 1.10%. Cutting against that, of course, is the fact that Mr. Gardiner has for nearly three decades now, more than earned the fees assessed to his investors. It appears that you’re getting more than what you are paying for; while the fee is substantial, it seems to be well-earned.

Bottom Line

This is a very young, but very promising fund. It is the fund that Grandeur Peak has wanted to launch from Day One, and it is understandably attracting considerable attention, drawing nearly $20 million in its first 30 days of operation. For investors interested in a portfolio of high-quality, growth-oriented stocks from around the globe, there are few more-attractive opportunities available to them.

Website

Grandeur Peak Global Reach

Grandeur Peak Global Opportunities (GPGOX), August 2013 update

By David Snowball

THIS IS AN UPDATE OF THE FUND PROFILE ORIGINALLY PUBLISHED IN February 2012. YOU CAN FIND THAT PROFILE HERE.

Objective and Strategy

Global Opportunities pursues long-term capital growth by investing in a portfolio of global equities with a strong bias towards small- and micro-cap companies. Investments may include companies based in the U.S., developed foreign countries, and emerging/frontier markets. The portfolio has flexibility to adjust its investment mix by market cap, country, and sector in order to invest where the best global opportunities exist. The managers expect to move towards 100-150 holdings (currently just over 200).

Adviser

Managers

Robert Gardiner and Blake Walker. Robert Gardiner is co-founder, CEO and Director of Research for Grandeur Peak Global. Prior to founding Grandeur Peak, he managed or co-managed Wasatch Microcap (WMICX), Small Cap Value (WMCVX) and Microcap Value (WAMVX, in which I own shares). In 2007, he took a sort of sabbatical from active management, but continued as Director of Research. During that sabbatical, he reached a couple conclusions: (1) global microcap investing was the world’s most interesting sector, and (2) he wanted to get back to managing a fund. He returned to active management with the launch of Wasatch Global Opportunities (WAGOX), a global small/micro-cap fund. From inception in late 2008 to July 2011 (the point of his departure), WAGOX turned a $10,000 investment into $23,500, while an investment in its average peer would have led to a $17,000 portfolio. Put another way, WAGOX earned $13,500 or 92% more than its average peer managed.

Strategy capacity and closure

Grandeur Peak specializes in global small and micro-cap investing. Their estimate, given current conditions, is that they could profitably manage about $3 billion in assets. They could imagine running seven distinct small- to micro-cap funds and tend to close all of them (likely a soft close) when the firm’s assets under management reach about $2 billion. The adviser has target closure levels for each current and planned fund.

Management’s stake in the fund

As of 4/30/2012, Mr. Gardiner had invested over $1 million in each of his funds, Mr. Walker had between $100,000 and 500,000 in each. President Eric Huefner makes an argument that I find persuasive: “We are all highly vested in the success of the funds and the firm. Every person took a significant pay cut (or passed up a significantly higher paying opportunity) to be here.” The fund’s trustees are shared with 24 other funds; none of those trustees are invested with the fund.

Opening date

October 17, 2011.

Minimum investment

The fund closed to new investors on May 1, 2013. It remains open for additional investments by existing shareholders.

Expense ratio

1.34% on $674.2 million in assets (as of July 2023).

Comments

As part of a long-established plan, Global Opportunities closed to new investors in May, 2013. That’s great news for the fund’s investors and, with the near-simultaneous launch of Grandeur Peak Global Reach (GPROX/GPRIX), not terrible news for the rest of us.

There are three matters of particular note:

This is a choice, not an echo. Grandeur Peak Global Opportunities goes where virtually no one else does: tiny companies across the globe. Most “global” funds invest in huge, global corporations. Of roughly 280 global stock funds, 90% have average market caps over $10 billion with the average being $27 billion. Only eight, or just 3%, are small cap funds. GPGOX has the lowest average market capitalization of any global fund (as of July, 2013). While their peers’ large cap emphasis dampens risk, it also tends to dampen rewards and produces rather less diversification value for a portfolio.
This has been a tremendously rewarding choice. While these are intrinsically risky investments, they also offer the potential for huge rewards. The managers invest exclusively in what they deem to be high-quality companies, measured by factors such as the strength of the management team, the firm’s return on capital and debt burden, and the presence of a sustainable competitive advantage. Together the managers have 35 years of experience in small cap investing and have done consistently excellent work. From inception through June 30, 2013, GPGOX returned 23.5% per year while its peers have returned about 14.5%. In dollar terms, a $10,000 investment at inception would have grown to $14,300 here, but only $12,500 in their average peer.
The portfolio is evolving. While Global Opportunities is described in the prospectus as being non-diversified, the managers have never chosen to construct such a portfolio. The fund typically holds more than 200 names spread over a couple dozen countries. With the launch of its sibling Global Reach, the managers will begin slimming down the Global Opportunities portfolio. They imagine holding closer to 100-150 names in the future here versus 300 or more in Global Reach.

Eric Huefner, Grandeur Peak’s president, isn’t exactly sure how the evolution will change Global Opportunities long-term risk/return profile. “There will be a higher bar” for getting into the portfolio going forward, which means fewer but larger individual positions, in the stocks where the managers have the greatest confidence. A hundred or so 10-25 bps positions will be eliminated; after the transition period, the absolute minimum position size will be 35 bps and the targeted minimum will be 50 bps. That will eliminate a number of intriguing but higher risk stocks, the fund’s so-called “long tail.” While more-concentrated portfolios are generally perceived to be more volatile, here the concentration is achieved by eliminating a bunch of the portfolio’s most-volatile stocks.

Bottom Line

If you’re a shareholder here, you have reason to be smug and to stay put. If you’re not a shareholder here and you regret that fact, consider Global Reach as a more diversified application of the same strategy.

Website

Grandeur Peak Global Opportunities.

Grandeur Peak Funds Investment Process

Grandeur Peak Funds Annual Report

3/31/2023 Quarterly Fact Sheet

August 2013, Funds in Registration

By David Snowball

AQR Style Premia Alternative Fund

AQR Style Premia Alternative Fund will seek to provide absolute returns by magically combining four investing styles (value, momentum, carry and defensive), five asset classes (equities, bonds, interest rates – how did interest rates get to be an asset class? – commodities and cash), both long and short, in an ever-changing mix which targets an as-yet unspecified volatility target and volatility band. AQR famously manages such complex strategies which work except when they don’t (their Risk Parity fund, for example, dropped nearly 10% in the second quarter of 2013 while its Morningstar benchmark dropped a half percent). It will be managed by Ronen Israel, Jacques A. Friedman, Lars Nielsen, and Andrea Frazzini, all of whom advertise their academic degrees after their names. Expenses not yet disclosed. The minimum initial purchase is $1 – 5 million, though places like Schwab tend to offer AQR funds at $2500.

AT Mid Cap Equity Fund

AT Mid Cap Equity Fund will pursue long-term growth by investing in midcap stocks (those in the $2 – 18 billion range). Up to 25% might be invested overseas. The managers will look for companies that can deliver consistently strong earnings growth, free cash flow growth and above average return on equity, and which has a history of growth. They aspire to buy and hold for the long-term. The fund will be managed by Frederick L. Weiss and Jay Pearlstein. The minimum initial investment is $3,000. The expense ratio will be 1.39%

AT Income Opportunities Fund

AT Income Opportunities Fund seeks current income and long-term capital appreciation through a portfolio of common and preferred stocks and bonds. Up to 25% might be investing in foreign securities and another 25% might be in the sale of call or put options. They’ll start by trying to find attractive, well-positioned companies and then they look across the capital structure to find the most attractive way to invest in it. The fund will be managed by Gary Pzegeo and Brant Houston. The minimum initial investment is $3,000. The expense ratio will be 1.25%.

Baron Discovery Fund

Baron Discovery Fund will seek capital appreciation through investments in small growth companies with market capitalizations of less than $1.5 billion whose stock could increase in value 100% within four to five years. This market cap is below the upper limit set for BMO Micro Cap, below. In a singular, and singularly-bizarre development two analysts, Laird Bieger and Randolph Gwirtzman, has been given the title of “co-managers” but Baron seems unsure that they’re ready for the responsibility so they’ve appointed a “Portfolio Manager Adviser.” Here’s the text: “Cliff Greenberg has been the portfolio manager adviser of Baron Discovery Fund since its inception on [ ], 2013. In this role, he advises the co-managers of the Fund on stock selection and buy and sell decisions and is responsible for ensuring the execution of the Fund’s investment strategy. Mr. Greenberg has been the portfolio manager of Baron Small Cap Fund since its inception on September 30, 1997.” $2000 minimum initial investment, reduced to $500 for accounts set up with an AIP. Expenses not yet announced.

BFS Equity Fund

BFS Equity Fund (BFSAX) will pursue long-term appreciation through growth of principal and income. The plan is to buy quality companies which have experienced an “opportunistic event” which might increase their value or temporarily decrease their price. The managers can invest directly in stocks or in ETFs, which is hard to square with the desire to exploit opportunities which, presumably, affect individual firms. The managers will be Keith G. LaRose, Timothy H. Foster, and Thomas D. Sargent, all of whom have some combination of substantial management experience with private and institutional accounts or hedge funds. The firm has been managing private accounts in this style since the mid-1990s. Their returns minutely trail the S&P500 throughout, though they did substantially outperform the market in 2008. $1000 investment minimum. Expenses not yet set.

BMO Micro-Cap Fund

BMO Micro-Cap Fund will seek long-term capital appreciation by investing in a diversified portfolio of micro-cap (under $2.3B) stocks. No detail on stock selection processes, other to invoke normal “good companies at good prices” sorts of language. Thomas Lettenberger and Ernesto Ramos, Ph.D. will co-manage the Fund. The minimum initial investment will be $1000. Expenses are not yet set.

BMO Global Low Volatility Equity Fund

BMO Global Low Volatility Equity Fund will pursue capital appreciation by investing in a globally diversified portfolio of “low volatility, undervalued stocks [selected] using a unique, quantitative approach based on the Adviser’s multi-factor risk/return models. This approach seeks to provide the Fund with lower downside risk and meaningful upside protection relative to the MSCI All Country World Index.” David Corris, Jason Hans, and Ernesto Ramos, Ph.D. will co-manage the Fund. They also manage separate accounts using this strategy but (1) their composite dates back only 15 months and (2) they haven’t yet disclosed the composite’s performance. They’ve also run a domestic low volatility fund (BMO Low Volatility Equity, MLVYX) for rather less than a year and it’s not immediately apparent that the fund is less volatile than the market. The minimum initial investment will be $1000. Expenses are not yet set.

DFA Short-Duration Inflation Protected Securities Portfolio

DFA Short-Duration Inflation Protected Securities Portfolio will seek to provide inflation protection and maximize total returns by investing directly or through other DFA funds in a combination of debt securities, including inflation-protected securities. “At inception, the Portfolio will invest a substantial portion of its assets in the DFA Short-Term Extended Quality Portfolio, DFA Intermediate-Term Extended Quality Portfolio and DFA One-Year Fixed Income Portfolio, but it is contemplated that the Portfolio will also purchase securities, including inflation-protected securities and derivative instruments directly.” David A. Plecha and Joseph F. Kolerich will manage the fund. No minimum is specified. The expense ratio is 0.24%. You can’t have the fund, but it’s always good to know what the “A”-level teams are thinking and doing.

FlexShares Global Infrastructure Index Fund

FlexShares Global Infrastructure Index Fund will try to match the returns of an as-yet unnamed Global Infrastructure Index. They’ll invest in both developed and emerging markets. Infrastructure assets, the fund’s target, includes “physical structures and networks upon which the operation, growth and development of a community depends, and include water, sewer, and energy utilities; transportation, data and communication networks or facilities; health care facilities, government accommodations, and other public-service facilities; and shipping.” Also unnamed is the expense ratio.

Horizon Tactical Income Fund

Horizon Tactical Income Fund will seek “income” (they modestly avoid adjectives like “maximum” or “high”) by investing in ETFs, sovereign and corporate debt, preferred and convertible securities, REITs, MLPs and mortgage-backed securities. They propose to make tactical shifts into whatever segment offers “the highest expected return for a given amount of risk” (though it’s not clear whether there’s a risk or volatility target for the fund). It will be managed by Robbie Cannon, President and CEO of Horizon, Ronald Saba, Director of Equity Research, Kevin Blocker and Scott Ladner, Director of Alternative Strategies. The minimum initial investment is $2500. The expense ratio will be 1.44%.

Innealta Risk Based Opportunity Moderate Fund

Innealta Risk Based Opportunity Moderate Fund, “N” shares, will seek long-term capital appreciation and income by investing in a wide variety of ETFs. Which ETFs? The process appears to start by confusing tactics with strategies: “In the first stage, the Adviser defines its Secular Tactical Asset Allocation (STAA), which is a longer-term-oriented strategic decision that is steeped in classic portfolio construction approaches to asset allocation.” From there they add a Cyclical Tactical Asset Allocation (stage two) and top it off with “a third stage of tactical management in which the Adviser augments the portfolio with those exposures it believes can further enhance risk-relative returns.” That third stage might add “long/inverse and leveraged long/inverse equity, fixed income, commodity, currency, real estate and volatility asset classes.” The fund will be managed by Gerald W. Buetow, JR., Ph.D., CFA, CIO of AFAM (formerly Al Frank Asset Management). $5000 investment minimum. Expenses not yet disclosed.

Wavelength Interest Rate Neutral Fund

Wavelength Interest Rate Neutral Fund will seek total return through a global, fixed-income portfolio including “developed-market nominal government bonds, developed-market inflation-linked government bonds, emerging market local-currency fixed-income securities, emerging market USD-denominated fixed-income securities, sovereign debt, corporate debt, and convertible bonds.” The manager plans to invest in “securities that are fundamentally related to growth and inflation, and in doing so, seeks to systematically balance investment exposures across potential interest rate changes.” Andrew Dassori, Wavelenght’s CIO, will be the portfolio manager. The minimum initial investment is $100,000. Expenses have not yet been announced.

Fairholme Fund (FAIRX) – What a Difference a Decade Makes

By Charles Boccadoro

From the Mutual Fund Observer discussion board, July 2013

FAIRX by the numbers…

First 3.5 years of 2000’s:

First 3.5 years of 2010’s:

What strikes me most is the difference in volatility. Superior excess returns with lack of downside volatility is what I suspect really drove Fairholme’s early attention and attendant AUM, once nearly $20B.

Here are the numbers from its inception through 1Q2007, just before financials popped (a kind of preview to my assignment for Mr. Moran):

Even through the great recession, FAIRX weathered the storm…fortunately, for many of us readers here on MFO. Here are the decade’s numbers that helped earn Mr. Berkowitz Morningstar’s top honor:

Pretty breathtaking. In addition to AUM, the success also resulted in Fairholme launching two new funds, FAAFX (profiled by David in April 2011) and FOCIX.

Here is table summarizing Fairholme family performance through June 2013:

Long term, FAIRX remains a clear winner. But investors have had to endure substantial volatility and drawdown this decade – something they did not experience last decade. It’s resulted in extraordinary redemptions, despite a strong 2012. AUM is now $8B.

The much younger FOCIX tops fixed income ranks in absolute returns, but not risk adjusted returns, again due to high volatility (granted, much of it upward..but not all). The fund bet heavy with MBIA and won big. Here’s current Morningstar performance plot:

And FAAFX? About all we shareholders can say is that it’s beaten its older brother since inception, which is not saying much. Below market returns at above market volatility. (I still believe it misplayed its once-heavy and long-term holding in MBIA.)

Here are latest MFO ratings for all three Fairholme funds:

None are Great Owls. Yet, if I had to bet on one fund manager to deliver superior absolute returns over the long run, it would be Bruce Berkowitz. But many of us have come to learn, it’s gonna be a bumpy ride. Like some other deep value money managers, he may simply look beyond risk definitions as defined by modern portfolio theory…something fans of Fairholme may need to do also.

Here is link to original thread.