Monthly Archives: May 2014

June 2014, Funds in Registration

By David Snowball

American Beacon AHL Managed Futures Strategy Fund

American Beacon AHL Managed Futures Strategy Fund will pursue capital growth. The strategy will be to be use futures, options and forward contracts linked to stock indices, currencies, bonds, interest rates, energy, metals and agricultural products. They’ll invest in areas with positive price momentum and short ones with negative momentum; the prospectus doesn’t give much detail, though, on the use of shorting and hedges. The prospectus does offer an admirable amount of detail concerning the sorts of risk that this strategy entails. The enumerated risks include:

Asset Selection

Commodities

Counterparty

Credit

Currency

Derivatives

Emerging Markets

Foreign Investing

High Portfolio Turnover

Interest Rate

Investment

Issuer

Leveraging

Liquidity

Market Direction

Market Events

Market

Model and Data

Obsolescence

Crowding/Convergence

Non-Diversification

Other Investment Companies

Management

Sector

Short Position

Subsidiary

Tax

U.S. Government Securities and Government Sponsored Enterprises

Valuation

Volatility

The fund will be managed by Matthew Sargaison and Russell Korgaonkar of AHL Partners LLP. The opening expense ratio is 1.93% after waivers. The minimum initial investment is $ 2500.

American Beacon Bahl & Gaynor Small Cap Growth Fund

American Beacon Bahl & Gaynor Small Cap Growth Fund will pursue long-term capital appreciation. The strategy will be to invest in high-quality dividend-paying small cap stocks. The managers pursue a fundamental approach to security selection and a bottom-up approach to portfolio construction. The fund will be managed by Edward Woods, Scott Rodes and Stephanie Thomas of Bahl & Gaynor. The opening expense ratio is 1.37% after waivers. The minimum initial investment is $2500.

American Century Emerging Markets Debt Fund

American Century Emerging Markets Debt Fund will pursue capital growth. The strategy will be to invest in dollar-denominated debt instruments issued by E.M. governments and corporations. The managers may invest in both investment grade and high-yield debt. They’ll attempt to hedge other sorts of risk, including currencies, interest rates and individual country risk. The fund will be managed by a team led byMargé Karner, who just joined American Century after serving as a senior portfolio managers for E.M. debt at HSBC Global Asset Management. The opening expense ratio is 0.97%. The minimum initial investment is $2500, reduced to $2000 for Coverdell education savings accounts.

Coho Relative Value Equity Fund

Coho Relative Value Equity Fund will pursue total return. The strategy will be to invest in mid- to large-cap dividend-paying stocks. The portfolio will generally be comprised of 20 to 35 equity securities that demonstrate “stability, dividend- and cash-flow growth.” The fund will be managed by Brian Kramp and Peter Thompson of Coho Investment Partners. The opening expense ratio is 1.30% plus a 2% redemption fee on shares held fewer than 60 days. The minimum initial investment is $2,000, reduced to $500 for retirement accounts.

Emerald Insights Fund

Emerald Insights Fund will seek long-term growth through capital appreciation. Their preference is for “[c]ompanies with perceived leadership positions and competitive advantages in niche markets that do not receive significant coverage from other institutional investors.” The fund will be managed by David Volpe, a managing director at Emerald. The opening expense ratio is 1.40% after waivers. The minimum initial investment is $2000.

Horizon Active Risk Assist Fund

Horizon Active Risk Assist Fund “seeks to capture the majority of the returns associated with equity market investments, while exposing investors to less risk than other equity investments.” The plan is to invest in up to 30 ETFs representing about a dozen asset classes, then to hedge that exposure with their “risk assist” strategy. “Risk Assist is an active de-risking strategy intended to guard against catastrophic market events and maximum drawdowns.” Translation: they’ll hold cash and Treasuries. The fund will be managed by a team headed by Horizon’s president, Robbie Cannon. Normal operating expenses are capped at 1.42%. The minimum initial investment is $2500.

Lyrical Liquid Hedged Fund

Lyrical Liquid Hedged Fund will pursue long-term capital growth. The strategy will be to invest under normal circumstances in liquid long and short equity positions in an attempt to benefit from rising markets and hedge against falling markets. They expect to be at last 40% net long usually. The “liquid” part means “easily traded securities,” which translates mostly to mid- and large-cap US stocks. The fund will be managed by Andrew Wellington, CIO of Lyrical Asset Management, LP. The opening expense ratio is 2.20% after waivers. The minimum initial investment is $2,500.

Scharf Global Opportunity Fund

Scharf Global Opportunity Fund will pursue long-term capital appreciation. The strategy will be to invest in a global collection of “growth stocks at value prices” (their wording), though they could invest up to 30% in fixed income. The fund will be managed by Brian A. Krawez, president of the advisor. The opening expense ratio is 0.51% after a waiver of about 250 bps, plus a 2.0% redemption fees on shares held fewer than 15 days. (15 days? Really?) The minimum initial investment is $10,000, reduced to $5,000 for tax-advantaged accounts or those set up with automatic investing plans.

Sirius S&P Strategic Large-Cap Allocation Fund

Sirius S&P Strategic Large-Cap Allocation Fund seeks long term growth and preservation of capital through investment in large cap equity and market index funds. At base, they’ll invest – long and short – in the S&P 500 index, companies or sectors. The fund will be managed by Sirius Fund Advisor’s founder, Constance D. Russello. The expense ratio is not yet set. The minimum initial investment is $2500.

V2 Hedged Equity Fund

V2 Hedged Equity will seek to provide long-term capital appreciation with reduced volatility. The fund may invest up to 100% in 30-50 stocks in the S&P500 and (2) up to 100% in CBOE FLexible EXchange index call options. The prospectus makes two claims that I can’t immediately reconcile: “the Adviser seeks to achieve the Fund’s investment objective by investing at least 90% of its net assets in U.S. common stocks” and “The net long exposure of the Fund (gross long exposures minus gross short exposures) is usually expected to be between 20% and 80%.” In 2010, the adviser had four separate accounts which used this strategy for private investors. In 2012, those four accounts morphed into the core of a hedge fund using the strategy. In July, the hedge fund will become the mutual fund’s institutional class. From August 2010 to December 2013, the strategy returned 14.16% annually which compares favorably to the 5.74% earned by the average long/short fund over that same period. Victor Viner and Brett Novosel of V2 will manage the account. The minimum initial investment will be $5,000.

Weitz Core Plus Income Fund

Weitz Core Plus Income Fund will pursue current income, capital preservation and long-term capital appreciation. They’ll invest in “debt securities” which includes preferred stock, foreign bonds, and taxable munis as well as more-traditional fare. Up to 25% of the portfolio might be invested in non-investment grade debt. They can also use various derivatives “for investment purposes consistent with the Fund’s investment objective and [to] mitigate or hedge risks.” They anticipate an average portfolio maturity of about 10 years. Thomas D. Carney, a portfolio manager since 1996, and Nolan P. Anderson of Weitz Investment Management will run the fund. The initial expense ratio will be 0.85% for the Investor class shares. The minimum initial investment is $2500.

William Blair Bond Fund

William Blair Bond Fund will try to “outperfrorm the Lehman Brothers U.S. Aggregate Index by maximizing total return through a combination of income and capital appreciation.” They’ll invest in dollar-denominated, investment grade securities, issued both here and overseas. They might also sneak in a few bond-like equity securities. The fund will be managed by James Kaplan, Christopher Vincent, and Benjamin Armstrong, whose “core fixed income composite” seems not to have performed noticeably better than the index over the past decade. The initial expense ratio will be 0.65%. The minimum initial investment is $5000, reduced to $3000 for IRAs.

It Costs How Much?

By Edward A. Studzinski

A democracy is a government in the hands of men of low birth, no property, and vulgar entitlements.

Aristotle

One of the responses I received to last month’s diatribe about mutual fund fees was that the average mutual fund investor did not object to them because they were unseen. They painlessly and invisibly disappeared every quarter. The person who pointed this out noted that lawyers charged a bill for services rendered, as did accountants. Why then, should not a quarterly mutual fund statement show the gross amount invested at the beginning of the period, the investment appreciation or depreciation, and then the deduction of fees to arrive at a net amount invested at the end of the period ? Not a bad idea. But one that has been resisted (or gutted) at every turn by the industry and one that the regulators have never felt strongly enough to move forward on.

But do clients truly understand what they are giving up or what they are actually paying? Charlie Ellis, in an article in the current issue of the Financial Analysts Journal would argue that they do not. He goes on to make the case that the enormity of the fees as a percentage makes the 2% and 20 that many hedge funds charge seem reasonable in comparison. His rationale is thus. Assume an S&P 500 Index Fund achieves in a year a total return of 36% and charges investment management fees of 5 basis points (0.05%). Assume your other investment is Mick the Bookie’s Select Investment Fund which had a total return of 41% over the same period and charges 85 basis points (0.85%). Your incremental return is 500 basis points (5%) for which you paid an extra 80 basis points (0.80%). Ellis would argue, and I believe correctly so, that your incremental fee for achieving that excess return was SIXTEEN PER CENT. And don’t forget that the money that went into the account to begin with was already your money that you had earned.

So, one question that I hear coming is – the outside trustees or directors have to approve fees annually and they wouldn’t do it if it was not fair and reasonable, especially given the returns. Answer #1 – eighty per cent of the time the active manager does not beat the benchmark and achieve an excess return. Answer #2 – the 20% of the time when the active manager beats the return, it is not on a sustainable basis, but rather almost random. Answer #3 – rarely does the investor actually get a benchmark beating return because he or she moves their investments too frequently to even achieve the performance numbers advertised by the investment management firm. Answer #4 – all too rarely do the outside trustees or directors have an aligned vested interest in the fee question (a) because in most instances they have at best a de minimis investment in the fund or funds that they are overseeing and (b) oddly enough the outside trustees or directors often have more of a vested interest in the success of the investment management company. Growth and profitability there will lead to increases in their fees.

So you say, I must be getting something of value for the incremental fees at those times when the investment returns don’t justify the added expense? Well, sadly, if recent history is any guide, the kinds of things you have gotten for such excess incremental fees include things like vicarious interests in yachts and sports cars; race horses in Lexington, Kentucky; and multiple homes and pent houses on the lake front in the greater Chicago area. I could go on and on in a similar vein. Rather than outperforming benchmarks or making money for investors, the primary goal has morphed to the creation and accumulation of substantial personal wealth, often to the tune of hundreds of millions of dollars.

To paraphrase Don Corleone in that scene in New York City where he says to the heads of the Five Families, “How did we let things go so far?” I don’t have a good answer for that. I suspect that the painlessness of fee extraction explains part of it. Having had the present administration in Washington serving in the role of defender of Middle Class America, one has to wonder why they have allowed the savings and investments of the Middle Class to effectively be clipped by dollars and cents every month. What has happened is one of the great hidden wealth transfers in our society, similar to what happens when hackers get into a bank computer and start skimming fractions of cents from millions of transactions. It is not solely the administration’s fault however, as neither the regulators nor the courts have wanted to clean up the fee mess. Everyone really wants to believe that there is a Santa Claus, or more appropriately, a Horatio Alger ending to the story.

One might hope that financial publications such as Morningstar, would through their media outlets as well as their conferences, address the subject of fees and their excessive nature. Certainly when they first started with their primary conference at the Grand Hyatt at Illinois Center in Chicago, there was a decided tilt to the content and substance that favored and indeed championed the small investor. However, since then in terms of content the current big Morningstar conference here has taken on more of an industry tilt or bias.

Why do I keep harping on this subject? For this reason – mutual fund investors cannot negotiate their own fees. Institutional investors can, and corporate and endowment investors do just that, every day. And often, their fee agreements with the investment manager will have a “most favored nation” clause, which means if someone else in the institutional world with a similar amount of assets negotiates a lower fee agreement with that investment firm the existing clients get the benefit of it. If you sit in enough presentations from fund managers, it becomes obvious that, public industry statements notwithstanding, in many instances the mutual fund business (and the small investor) is being used as the cash cow that subsidizes the institutional business.

Remember, expenses matter as they lessen the compounding ability of your investment. That in turn keeps the investment from growing as much as it should have over a period of time. With interest rates and tax rates where they are, it is hard enough to compound at a required rate to meet future accumulation targets without having even further degradation occur from the impact of high fees. Rule Number One of investing is “Don’t lose money” and Rule Number Two is “Don’t forget Rule Number One.” However, Rule Number Three is “Keep the expenses low to maximize the compounding effect.”

May 1, 2014

By David Snowball

Dear friends,

swirly_eyed It’s been that kind of month. Oh so very much that kind of month. In addition to teaching four classes and cheering Will on through 11 baseball games, I’ve spent much of the past six weeks buying a new (smaller, older but immaculate) house and beginning to set up a new household. It was a surprisingly draining experience, physically, psychologically and mentally. Happily I had the guidance and support of family and friends throughout, and I celebrated the end of April with 26 signatures, eight sets of initials, two attorneys, one large and one moderately-large check, and the arrival of a new set of keys and a new garage door clicker. All of which slightly derailed my focus on the world of funds. Fortunately the indefatigable Charles came to the rescue with …

The Existential Pleasures of Engineering Beta

Mebane Faber is a quant.

He is a student of financial markets, investor behavior, trend-following, and market bubbles. He pursues absolute return, value, and momentum strategies. And, he likes companies that deliver cash to shareholders.

He recognizes alpha is elusive, so instead focuses on engineering beta, which promises a more pragmatic and enduring reward.

In a field full of business majors and MBAs, he holds degrees in engineering and biology.

He distills a wealth of financial literature, research, and conditions into concise and actionable investing advice, shared through books, his blog, and lectures.

Given low-cost ETFs and mutual funds available today, he thinks people generally should no longer need to hire advisors, or “brokers back in the day,” at 1-2% fees to tell them how to allocate buy-and-hold portfolios. “It kind of borderlines on criminal,” he tells Michael Covel in a recent interview, since such advisors “do not do enough to justify their fees.”

He is a portfolio manager and CIO of Cambria Investment Management, L.P., which he co-founded along with Eric Richardson in 2006. It is located in El Segundo, CA.

His down-to-earth demeanor is at once confident and refreshingly approachable. He cites philosopher Henry David Thoreau: “There is no more fatal blunderer than he who consumes the greater part of his life getting his living.”

The Paper. Mebane (pronounced “meb-inn”) started his career as biotech equity analyst during the genome revolution and internet bubble. While at University of Virginia, he attended an advanced seminar in security analysis taught by the renowned hedge fund manager John Griffin of Blue Ridge Capital. In fulfillment of the Chartered Market Technician program, Mebane drafted a paper that became the basis for “A Quantitative Approach To Tactical Asset Allocation,” published in the Journal of Wealth Management in 2007.

The paper originally included the words “market timing,” but he soon discovered that to a lot of people, the phrase comes with “enormous emotional baggage” and “can immediately shut-down all synapses in their brains.” Similar to Ed Thorp’s experience with his first academic paper on winning at blackjack, Mebane had to change the title to get it published. (It continues to stimulate synapses, as discussed in David’s July 2013 commentary, “Timing Method Performance Over Ten Decades” and periodically on the MFO discussion board.)

He attributes the paper’s ultimate popularity to 1) its simple presentation and explanation of the compelling results, and 2) the fortuitous timing of the publication itself – just before the financial meltdown of 2008/9. Practitioners of the method during that period were rewarded with a maximum drawdown of only -2% through versus -51% for the S&P 500.

The Books. There are three. All insightful, concise, and well-received:

The first published by Wiley in 2009, entitled “The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets.”
The second, self-published in 2013, entitled “Shareholder Yield: A Better Approach to Dividend Investing.”
The third, also self-published and just released, “Global Value: How to Spot Bubbles, Avoid Market Crashes, and Earn Big Returns in the Stock Market.”

As summarized above, each contains straight-forward strategies that investors can follow on their own using publically available information. That said, each also forms the basis of ETFs launched by Cambria Investment Management.

The First Fund. Last December, Mebane tweeted “Diversification was deworseification in 2013.” To understand what he meant, just compare US stock return against just about all other asset classes – it trounced them. Several all-asset strategies have underperformed during the current bull market, as seen in the comparison below, including AdvisorShares Cambria Global Tactical ETF Fund (GTAA). GTAA was Cambria’s first ETF, launched in November 2010, as a sub-advisor through ETF house AdvisorShares, and based on the strategy outlined in “The Ivy Portfolio.”

If it helps, Mebane is in good company. Rob Arnott’s all asset and John Hussman’s total return strategies have not received much love lately either. In fact, since GTAA’s inception, the “generic” all-asset allocation of US stocks, foreign stocks, bonds, REITs, and broad commodities has underperformed US equity index by 40% and traditional 60/40 balanced index by 15%.

GTAA’s actual portfolio currently shows more than 50 holdings, virtually all ETFs. Looking back, the fund has held substantial cash at times, approaching 40% in mid-2013…”assuming a defensive posture and utilizing cash as an alternative to its long positions.”

Market volatility has likely hurt GTAA as well. Its timing strategy, shown to thrive in trending markets, can struggle with short-term gyrations, which have been present in commodity, foreign equity, and real estate markets during this time. Finally, AdvisorShares’ high expense ratio, even after waivers, only adds to the headwind. At the 3.5-year mark, GTAA remains at $36M assets under management (AUM).

The New Funds. Cambria has since launched three other ETFs, based on the strategies outlined in Mebane’s two new books, but this time the funds were kept in-house to have “control over the process and charge reasonable fees.” Each fund invests in some 100 companies with capitalizations over $200M. And, each has quickly attracted AUM, rather remarkably given the proliferation of ETFs today. They are:

GVAL is the newest and actually tracks to a Cambria-developed index, maintained daily. It focuses on companies that trade 1) below their assessed intrinsic value, and 2) in countries with the most undervalued markets determined by parameters like CAPE, as depicted in earlier figure. These days, Mebane believes that means outside the US. “We certainly don’t think the [US] market is in a bubble, rather, valuations will be a headwind. There are much better opportunities abroad.”

SYLD is actively managed and focuses primarily on US companies that exhibit strong characteristics of returning free cash flow to their shareholders; specifically, “shareholder yield,” which comprises dividend payments, share buybacks, and debt pay-down. FYLD seeks the same types of companies, but in developed foreign countries and it passively tracks to Cambria’s FYLD index.

Mebane believes that these are the first ETFs to incorporate the shareholder yield strategy. And, based on their reception in the crowded ETF market, he seems pretty pleased: “I certainly think alpha is possible…lots of jargon across smart beta, alpha, etc., but beating a market cap index is a great first step.” Morningstar’s Samuel Lee noted them among best new ETFs of 2013. Approaching its first year, SYLD is certainly off to a strong start:

Interestingly, none of these three ETFs employ explicit draw-down control or trend-following, like GTAA, although GVAL does “start moving to cash if markets don’t pass an absolute valuation filter … no sense in buying what is cheapest when everything is expensive,” Mebane explains. SYLD too has the discretion to take the entire portfolio to “Temporary Defensive Positions.”

When asked if his approach to risk management is changing, given the incorporation of more traditional strategies, he asserts that he’s “still a firm believer in trend-following and future funds will have trend components.” (Other funds in pipeline at Cambria include Global Momentum ETF and Value and Momentum ETF).

Mebane remains one of the largest shareholders on record among the portfolio managers at AdvisorShares. His overall skin-in-the-game? “100% of my investable net worth is in our funds and strategies.”

The Blog. mebfaber.com (aka “World Beta”) started in November 2006. It is a pleasant blend of perspective, opinion, results from his and other’s research – quantitative and factual, images, and references. He shares generously on both personal and professional levels, like in the recent posts “My Investing Mentor” and “How to Start an ETF.”

There is a great reading list and blogroll. There are sources for data, references, and research papers. It’s free, with occasional plugs, but no annoying pop-ups. For the more serious investors, fund managers, and institutions, he offers a premium subscription to “The Idea Farm.”

He once wrote actively for SeekingAlpha, but stopped in 2010, explaining: “I find the quality control of the site is poor, and the respect for authors to be low. Also, [it] becomes a compliance risk and headache.”

He strikes me as having the enviable ability to absorb enormous about of information, from past lessons to today’s water-hose of publications, blogs, tweets, and op-eds, then distill it all down to chart a way forward. Asked whether this comes naturally or does he use a process, he laughs: “I would say it comes unnaturally and painfully!”

29Apr14/Charles

It Costs How Much?

by Edward Studzinski

A democracy is a government in the hands of men of low birth, no property, and vulgar entitlements.

Aristotle

But do clients truly understand what they are giving up or what they are actually paying? Charlie Ellis, in an article in the current issue of the Financial Analysts Journal would argue that they do not. He goes on to make the case that the enormity of the fees as a percentage makes the 2% and 20% that many hedge funds charge seem reasonable in comparison. His rationale is thus. Assume an S&P 500 Index Fund achieves in a year a total return of 36% and charges investment management fees of 5 basis points (0.05%). Assume your other investment is Mick the Bookie’s Select Investment Fund which had a total return of 41% over the same period and charges 85 basis points (0.85%). Your incremental return is 500 basis points (5%) for which you paid an extra 80 basis points (0.80%). Ellis would argue, and I believe correctly so, that your incremental fee for achieving that excess return was SIXTEEN PER CENT. And don’t forget that the money that went into the account to begin with was already your money that you had earned.

From Russia, with Love

While journalist Brett Arends bravely offered to explain “Why I’m going to invest in the Russian stock market” – roughly, Russian stocks are cheap and Putin couldn’t be that crazy, right? – a whole series of Russia-oriented funds have amended their statements of principal risks to include potential financial warfare:

SSgA Emerging Markets (SSEMX)

In response to recent political and military actions undertaken by Russia, the United States and European Union have instituted numerous sanctions against certain Russian officials and Bank Rossiya. These sanctions, and other intergovernmental actions that may be undertaken against Russia in the future, may result in the devaluation of Russian currency, a downgrade in the country’s credit rating, and a decline in the value and liquidity of Russian stocks. These sanctions could result in the immediate freeze of Russian securities, impairing the ability of the Fund to buy, sell, receive or deliver those securities. Retaliatory action by the Russian government could involve the seizure of U.S. and/or European residents’ assets and any such actions are likely to impair the value and liquidity of such assets. Any or all of these potential results could push Russia’s economy into a recession. These sanctions, and the continued disruption of the Russian economy, could have a negative effect on the performance of funds that have significant exposure to Russia, including the Fund.

SPDR BofA Merrill Lynch Emerging Markets Corporate Bond ETF (EMCD) uses the same language, apparently someone was sharing drafts.

iShares MSCI Russia Capped ETF (ERUS) posits similar concerns:

The United States and the European Union have imposed economic sanctions on certain Russian individuals and a financial institution. The United States or the European Union could also institute broader sanctions on Russia. These sanctions, or even the threat of further sanctions, may result in the decline of the value and liquidity of Russian securities, a weakening of the ruble or other adverse consequences to the Russian economy. These sanctions could also result in the immediate freeze of Russian securities, impairing the ability of the Fund to buy, sell, receive or deliver those securities. Sanctions could also result in Russia taking counter measures or retaliatory actions which may further impair the value and liquidity of Russian securities.

ING Russia Fund (LETRX) adds the prospect that they might not be able to honor redemption requests:

… the sanctions may require the Fund to freeze its existing investments in Russian companies, prohibiting the Fund from selling or otherwise transacting in these investments. This could impact the Fund’s ability to sell securities or other financial instruments as needed to meet shareholder redemptions. The Fund could seek to suspend redemptions in the event that an emergency exists in which it is not reasonably practicable for the Fund to dispose of its securities or to determine the value of its net assets.

I’ve continued my regular investments in two diversified emerging markets funds whose managers have earned my trust: Andrew Foster at Seafarer Overseas Growth & Income (SFGIX) and Robert Gardiner at Grandeur Peak Emerging Markets Opportunities (GPEOX). I don’t think I have nearly the expertise needed to run toward that particular fire, nor to know when it’s gotten too hot. I wish Mr. Arends well, but would advise others to consider finding a manager whose experience and judgment is tested and true.

Here’s my rule of thumb: Avoid rules of thumb at all costs

The folks on our discussion board have posted links to two “rule of thumb” articles about investing. Just a quick word on why they’re horrifying.

Rule One: You need to invest $82.28 a day!

The story comes from USA Today, by way of Lifehacker. “Want to live well in old age? You’d better get cracking: $82.28 a day to be exact.”

That’s $29,000 a year. Cool! That’s just $1000 more than the average per capita income in the US! In fairness, though, it’s just 54% of the median family income: $53,046. So here’s the advice: if you’re living paycheck-to-paycheck, remember to set aside 54% of your income. BankRate.com, by the way, advises you to invest 10%. Why 10%? Presumably because it’s a nice round number.

Rule Two: Your age should be your bond allocation!

More of the same: where to put it? Your bond allocation should be equal to your age, which Lifehacker shares from Bankrate.com. But why is this a good rule of thumb? Like “remember to drink eight glasses of water each day,” it’s catchy and memorable but I’ve seen no research that validates it.

Forbes magazine places it #1 on its list of “10 Terrible Pieces of Investment Advice.” Fund companies flatly reject it in their own retirement planning products. The target-date 2030 funds are designed for folks about 50; that is, people who might retire in 15 years or so. If this advice were sound, some or all of those funds would have 50% in bonds. They don’t. T. Rowe Price Retirement 2030 is 16% bonds, American Funds is 10%, Fidelity is 12%, TIAA-CREF is 21% and Vanguard 20%. JPMorgan (23%) and BlackRock (30-33%) seem to represent the high end.

Especially at the end of a three decade bull market in bonds, we owe it to ourselves and our readers to be particularly thoughtful about quick ‘n’ easy advice.

I’m sorry, they paid Gabelli what?

Gabelli The folks are MFWire did a nice, nearly snarky story on The Mario’s most recent payday. (I’m Sorry, They Paid Gabelli What?). I’ll share the intro and suggest that you read one of the two linked stories:

Mario Gabelli made $85 million in salary in 2013.

That’s one eighth the global domestic product of Somoa.

According to USA Today, the GAMCO founder, chief executive and investment officer was paid not only $85 million last year, but his three-year total compensation came to over $215 million.

No wonder he looks like that.

Morningstar Goes on Autopilot

On April 23^rd, Morningstar’s Five-Star Investor feature trumpeted “9 Core Funds That Beat the Market,” which they might reasonably have subtitled “Small funds need not apply.”

Morningstar highlights nine funds in the article, with assets up to $101 billion. Those are drawn from a list of 28 that made the cut. Of those 28, one has under a billion in assets.

The key to making the cut: Morningstar must designate it a “core” fund, a category for which there are no hard-and-fast rules. They’re generally large cap and generally diversified, but also fairly large. There’s only one free-standing fund with under $250 million in assets that they think of as “core.”

There are a lot of “core” funds under $250 million but that occurs only when they’re part of a target-date suite: Fidelity Retirement 2090 might have only $12 in it but it becomes “core” because the whole Fido series is core.

Morningstar’s implied judgments (“we don’t trust anyone over 30 or with under a billion in assets”) might be fair, but would be fairer if more explicit.

They followed that up with a list of 4 Medalist Ideas for Long-Short Strategies.”Some of the funds we like in this area are Robeco Boston Partners Long/Short Equity, Robeco Boston Partners Research Fund, MainStay Marketfield, and Wasatch Long/Short.”

I’d describe those as Long-Closed, Recently-Closed, Bloated (they had $1 billion three years ago and $21 billion today; trailing 12 month performance is exactly mediocre which might be a blip or might be the effects of the $11 billion they picked up last year) and Very Solid, respectively.

Russel Kinnel finished the month by asking “How Bloated is your Fund?” He calculates a “bloat ratio” which “tries to find out how much a fund trades and how liquid its holdings are. It multiplies turnover by the average day’s trading volume of a fund’s holdings (asset-weighted).” At base, Russel’s assumption is that the only cost of bloat is a loss of the ability to trade quickly in and out of stocks.

With due respect, that seems silly. As assets grow, fund managers necessarily target the sorts of stocks that they can trade and begin avoiding the ones that they can’t. If your fund’s size constrains you to invest mostly in stocks worth $10 billion or more (the upper end of the mid-cap range), your investable universe is just 420 stocks. You may trade those 420 effectively, but you’re not longer capable of benefiting from the 6360 stocks at below $10 billion.

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

Martin Focused Value (MFVRX): it’s easy for us to get stodgy as we age; to become sure that whatever we did back then is quite exactly what we should be doing today. Frank Martin, who has been doing this stuff for 40 years, could certainly be excused if he did stick with the tried and true. But he hasn’t. There’s clear evidence that this absolute value equity investor has been grappling with new ideas and new evidence, and they’ve led him to construct his portfolio around the notion of “an antifragile dumbbell” (with insights credited to Nassim Talib). His argument, as much as his fund, are worth your attention.

Conference Call Upcoming

We’re toying with the possibility of talking with Dr. Ian Mortimer (Oxford, no less) and Matt Page of Guinness Atkinson Global Innovators (IWIRX), which targets investments in firms that are demonstrably engaged in creative thinking and are demonstrably beginning from it. They appear to be the single best performer in Lipper’s global growth category and we know from our work on Guinness Atkinson Inflation-Managed Dividend (GAINX) that they’re awfully bright and articulate. Both of their funds have small asset bases, distinctive and rigorous disciplines and splendid performance. The hang-up is the time difference between here and London; our normal nighttime slot (7:00 Eastern) would be midnight for them. Hmmm … we’ll work on it.

Launch Alert

It says something regrettable about the industry that Morningstar reports 156 new funds since mid-March, of which 153 are new share classes of older funds, one is Artisan Global High Income (ARTFX) and two aren’t terribly interesting. We’ll keep looking… Found another worth noting, just launched 4/28: Whitebox Tactical Income (WBIVX/WBINX).

Funds in Registration

Funds currently in registration with the SEC will generally be available for purchase around the end of June, 2014. Our dauntless research associate David Welsch tracked down 17 new no-load funds in registration this month. There are several intriguing possibilities:

Catalyst added substantially to their collection of quirky funds (uhhh … Small Cap Insider Buying (CTVAX) might be a decent example) with the registration of five more funds, of which three (Catalyst Absolute Total Return, Catalyst/Stone Beach Income Opportunity and Catalyst/Groesbeck Aggressive Growth Funds) will be sub-advised by folks with strong documented performance records.

LSV GLOBAL Managed Volatility Fund will follow the recent vogue for investing in low-volatility stocks. The fund gains credibility from the pedigree of its managers (“L” is a particularly renowned academic who was one of the path-breaking researchers in behavioral finance) and by the strength of the other four LSV funds (all three of the rated funds have earned four stars, though tend toward high volatility).

North Star Bond Fund will invest primarily in the bonds, convertible securities and (potentially) equities issued by small cap companies. I’m not sure that I know of any other fund with that specialization. The management team includes North Star’s microcap and opportunistic equity managers. Their equity funds have had very solid performance in not-quite three years of operation (though I’m a bit puzzled by Morningstar’s assignment of the North Star Opportunity fund to the “aggressive allocation” category given its high stock exposure). In any case, this strikes me as an interesting idea and we’re apt to follow up in the months after launch.

All of the new registrants are available on the May Funds in Registration page.

Manager Changes

On a related note, we also tracked down 52 sets of fund manager changes. The most intriguing of those include the exit of Stephen and Samuel Lieber, Alpine Woods founders and Alpine Small Cap’s founding managers, from Alpine Small Cap (ADIAX) and Chuck McQuaid’s long-anticipated departure from Columbia Acorn (ACRNX).

Active share updates

“Active share” is a measure of the degree to which a fund’s portfolio differs from what’s in its benchmark index. Researchers have found that active share is an important predictor of a fund’s future performance. Highly active fund are more like to outperform their benchmarks than are index funds (which should never outperform the index itself) or “closet index” funds which charge for active management but really only play around the edges of an indexed portfolio.

In March, we began publishing a list of active share data for as many funds as we could. And the same time, we asked folks to share data for any funds that we’d missed. We’re maintaining a master list of all funds, which you can get to by clicking on our Resources tab:

resources_menu

Each month we try to update our list with new funds submitted by our readers. This month folks shared seven more data reports:

Fund	Ticker	Active share	Benchmark	Stocks
LG Masters International	MSILX	89.9	MSCI EAFE	90
LG Masters Smaller Companies	MSSFX	98.2	Russell 2000	52
LG Masters Equity	MSEFX	84.2%	Russell 3000	85
Third Avenue Value	TAVFX	98.1	MSCI World	37
Third Avenue International Value	TAVIX	97.0	MSCI World ex US	34
Third Avenue Small Cap Value	TASCX	94.3	Russell 2000 Value	37
Third Avenue Real Estate	TAREX	91.1	FTSE EPRA/NAREIT Developed	31

Thanks to jlev, one of the members of the Observer’s discussion community and Mike P from Litman Gregory for sharing these leads with us. Couldn’t do it without you!

The return of Jonathan Clements

Jonathan Clements had an interesting valedictory column when he left The Wall Street Journal. He said he had about three messages for his readers and he’d repackaged them into 1008 columns: “Forget spending more money at the mall — and instead spend more time with friends. Your bank account may still be skimpy, but your life will be far, far richer.”

Apparently he’s found either a fourth message to share, or renewed passion for the first three, because he returned to the Journal in April. Oddly, his work appears only on Sundays and only online; he doesn’t even use a Dow Jones email address. When I asked him about the plan, he noted:

I didn’t want a fulltime position with the WSJ again, at least not at this juncture. The column gives a little variety to my week. But most of my time is currently devoted to a new personal-finance book. The book is a huge undertaking, and it wouldn’t be possible if I was fulltime at the WSJ.

He’s written several really solid columns (on the importance of saving even in a zero-interest environment and on the role of dividend funds in a retirement portfolio) and has a useful website that shares personal finance resources and works to dispel the rumor that he’s an accomplished writer of erotica. (Really.)

On whole, I’m glad he’s back.

MFO in the news!

in_the_news

Indeed

The English-language version of the article by Javier Espinosa, “Travel Guide: Do Acronyms Aid ‘Emerging’ Investing?” ran on April 7^th but lacked the panache of the Malay version.

MFO on the road

For those of you interested in dropping by and saying “hi,” we’ll be present at a couple conferences this summer.

cohen I’ve been asked to provide the keynote address at the Cohen Client Conference, August 20 – 21, 2014. The conference, in Milwaukee, is run by Cohen Fund Audit Services. This will be Cohen’s third annual client conference. Last year’s version, in Cleveland OH, drew about 100 clients from 23 states.

goat Cohen offers the conference as a way of helping fund professionals – directors, compliance officers, tax and accounting guys, operating officers and the occasional curious hedge fund manager –develop both professional competence and connections within the fund community. Which is to say, the Cohen folks promised that there would be both serious engagement – staff presentations, panels by industry experts, audience interaction – and opportunities for fellowshipping. (My first, unworthy impulse is to drive a bunch of compliance officers over to Horny Goat Brewing, buy a round or two, then get them to admit that they’re making stuff up as they go.)

The good and serious folks at Cohen want to offer fund professionals help with fund operations, accounting, governance, tax, legal and compliance updates, and sales, marketing and distribution best practices.

And they want me to say something interesting and useful for 45 minutes or so. Hmmm … so here’s a request for assistance. Many of you folks work in the industry (I don’t) and all of you know the sorts of stuff I talk about. What do you think I could say that would most help someone trying to be a good fund trustee or operations professional? Drop me a line through this link, please!

For more information about the conference itself, you can contact

Chris Bellamy, 216-649-1701 or [email protected] or

Megan Howell, 216-774-1145 or [email protected].

They’d love to hear from you. So would I.

We’ll also spend three full days in and around the Morningstar Investment Conference, June 18 – 20, in Chicago. We try to divide our time there into thirds: interviewing fund managers and talking to fund reps, listening to presentations by famous guys, and building our network of connections by spending time with readers, friends and colleagues. If you’d like to connect with us somewhere in the bowels of McCormick Place, just let me know.

Briefly Noted . . .

Interesting developments in the neighborhood of Gator Focus Fund and Gator Opportunities Fund. At the end of February, Brad W. Olecki and Michael Parks resigned from their positions as Trustees of the Trust. No new Trustees have been appointed. On the same date Andres Sandate resigned from his position as President, Secretary and Treasurer of the Trust.

Do recall that, for reasons that continue to elude me, ING Funds have been rebranded as Voya Funds.

LS Opportunity Fund (LSOFX) just reclassified itself from “diversified” to “non-diversified.” It’s not clear why or what effect that will have on its 100 stock portfolio.

SMALL WINS FOR INVESTORS

IMS Capital Management is reorganizing three of its funds (IMS Capital Value,Strategic Income Fund, and Dividend Growth funds) into a new series of the 360 funds. I’m guessing they’ll be rebranded and the advisor is guessing that the reorganization will result in lower administration, fund accounting and transfer agency costs.” With luck, those savings will be passed along to investors.

Effective immediately, the Leader Total Return Fund (LCTRX) has discontinued the redemption fee.

Vanguard has decreased, generally by one basis point, the expense ratios on seven of its ETFs include Vanguard Total Bond Market ETF (BND), Vanguard FTSE Developed Markets ETF (VEA), Vanguard Value ETF (VTV), Vanguard Growth ETF (VUG), Vanguard Small-Cap ETF (VB) and a couple others

CLOSINGS (and related inconveniences)

First Eagle Overseas Fund (SGOVX) will close to new investors on May 9, 2014. Good fund but with $15 billion in AUM, its best days might be in the past.

Grandeur Peak Global Reach (GPROX) closed on April 30^th. That closure was the subject of our first mid-month alert to readers, which we sent to 4800 of you about 10 days before the closure was effective. We heard back from four readers who said that the information was useful to them. My hope is that we didn’t overly annoy the other 99.9% of recipients.

On May 9, 2014, the Wasatch Frontier Emerging Small Countries Fund (WAFMX) will close to new investors. Wasatch avers that it “takes fund capacity very seriously. We monitor assets in each of our funds carefully and commit to shareholders to close funds before asset levels rise to a point that would alter our intended investment strategy.” At $1.2 billion with investments in Nigeria, Kuwait and Kenya, it seems like a prudent move for a fund with top decile returns. (Thanks to JimJ on the Observer’s discussion board for timely notice of the closing.)

OLD WINE, NEW BOTTLES

Bridgehampton Value Strategies Fund (BVSFX) is being rebranded as the Tocqueville Alternative Strategies Fund. Same management and a “substantially similar” strategy but lower expenses for investors. The change becomes effective on June 27, 2014. Looks like a pretty decent fund.

The Board of John Hancock Rainier Growth Fund decided to axe Rainier and hire Baillie Gifford to manage it. As of mid-April, it was rechristened as JHancock Select Growth Fund (RGROX).

Neuberger Berman Dynamic Real Return Fund (NDRAX) becomes Neuberger Berman Inflation Navigator Fund on June 2.

Hansberger International Growth Fund is being reorganized into the Madison Fund.

On June 2, 2014, Neuberger Berman International Select Fund changed its name from Neuberger Berman International Large Cap Fund. Two year record, slightly below-average returns and absolutely no investor interest.

Neuberger Berman Emerging Markets Income Fund’s name has changed to Neuberger Berman Emerging Markets Debt Fund.

Effective on May 1, 2014, Parnassus Equity Income Fund (PRBLX) became Parnassus Core Equity Fund while Parnassus Workplace Fund (PARWX) became Parnassus Endeavor. There were no changes to management, strategy or fees.

Effective December 29, 2014, the T. Rowe Price Retirement Income Fund (TRRIX) will change its name to the T. Rowe Price Retirement Balanced Fund. It’s a really solid fund but with 40% of its portfolio in equities, it’s probably not what most folks think of as a “retirement income” fund.

OFF TO THE DUSTBIN OF HISTORY

Ever wonder why it’s “The Dustbin of History”? It’s Leon Trotsky’s dismissal of the Menshevik revolutionaries, who he saw as failed agents: “You are pitiful, isolated individuals. You are bankrupts; your role is played out. Go where you belong from now on – in the dustbin of history!” It was in Russian, of course, so translations vary (occasional “the trash heap of history”) but the spirit is there.

CMG SR Tactical Bond Fund (CMGTX/CMGOX) liquidated on April 29, 2014. Nope, I’d never heard of it either.

The Board of Directors of Nomura Partners Funds approved the merger of The Japan Fund (NPJAX) into Matthews Japan (MJFOX), effective in late July, 2014. Japan Fund has sort of bounced from adviser to adviser over the years and is more the victim of Nomura’s decision to get out of the U.S. fund business than of crippling incompetence. The investors are getting a stronger fund with lower expenses, with the merger boosting MJFOX’s size by about 30%.

Morgan Stanley Institutional Total Emerging Markets Portfolio (MTEPX) will liquidate on May 30, 2014.

Principal intends to merge Principal Large Cap Value Fund I (PVUAX) into the Large Cap Value Fund III (PESAX). Shareholders are scheduled to rubbersta vote on the proposal at the end of May. Neither fund is particularly attractive, but the dying fund actually has the stronger record of the two.

On April 17, 2014, Turner’s Board of Trustees decided ed to close and liquidate the Turner Market Neutral Fund (TMNFX) on or about June 1, 2014. Three stars but also $3 million in assets. Sadly the performance was decent and steadily improving.

Vanguard continues with its surprising shakeup. It has decided to merge Vanguard Tax-Managed Growth and Income Fund (VTMIX) into Vanguard 500 Index Fund (VFISX) on about May 16, 2014. Why surprising? VTMIX has over $3 billion in assets, 0.08% expenses, a “Gold” analyst rating and four stars, which are not usually characteristics associated with descendent funds. Vanguard is looking to lower investor expenses (by about three basis points in this case) and simplify their line-up. On an after-tax basis, it looks like investors will gain two basis points in returns.

World Commodity Fund (WCOMX) has closed and will liquidate on May 26, 2014. It’s got rather less than a million in the portfolio and has, over the course of its seven-and-a-half year life, managed to turn a $10,000 initial investment into $10,120 which averages out to rather less than 0.10% per year. That saddest part? That’s not nearly the worst record, at least over the past five years, in either the “natural resources equity” or “broad commodities” groups.

In Closing . . .

Thanks to folks who’ve been supporting MFO financially, with a special tip of the cap to Capt. Neel (thank you, sir) and the Right Reverend Rick (I’m guided here by Luke: “In every way and everywhere we accept this with all gratitude”).

amazon Especially for the benefit of the 6000 first-time readers we see each month, if you’re inclined to support the Observer, the easiest way is to use the Observer’s Amazon link. The system is simple, automatic, and painless. We receive an amount equivalent to about 7% of the value of almost anything you purchase through our Amazon link (used books, Kindle downloads, groceries, sunscreen, power tools, pool toys …). You might choose to set it as a bookmark or, in my case, you might choose to have one of your tabs open in Amazon whenever you launch your browser. Some purchases generate a dime, some generate $10-12 and all help keep the lights on!

June: the month for income. With the return of summer turbulence and Janet Yellen’s insistent dovishness about rates, we thought we’d take some time to look at four new funds that promise high income and managed volatility:

Artisan High Income (ARTFX) run by former Ivy High Income manager Bryan Krug. The fund has drawn $76 million in its first six weeks.

Dodge & Cox Global Bond, which went live on May 1.

RiverNorth Oaktree High Income (RNOTX), which combines RiverNorth’s distinctive CEF strategy with Oaktree’s first-rate institutional income one.

(maybe) West Shore Real Asset Income (AWSFX) which combines an equity-oriented income strategy with substantial exposure to alternative investments. We’ve had a couple readers ask, and we’ve been trying to learn enough to earn an opinion but it’s a bit challenging.

We’ve also scheduled a conversation with the folks at Arrowpoint, adviser to the new Meridian Small Cap Growth Fund (MSGAX) which is run by former Janus Triton managers Brian Schaub and Chad Meade.

As ever.

David

Martin Focused Value (MFVRX)

By David Snowball

Update: This fund has been liquidated.

Objective and strategy

The Fund seeks to achieve long-term capital growth of capital by investing in an all-cap portfolio of undervalued stocks. The managers look for three qualities in their portfolio companies:

High quality business, those companies that have a competitive advantage, high profit margins and returns on capital, sustainable results and/or low-cost operations,
High quality management, an assessment grounded in the management’s record for ethical action, inside ownership and responsible allocation of capital
Undervalued stock, which factors in future cash flow as well as conventional measures such as price/earnings and price/sales.

Mr. Martin summarizes his discipline this way: “When companies we favor reach what our analysis concludes are economically compelling prices, we will buy them. Period.” If there are no compelling bargains in the securities markets, the Fund may have a substantial portion of its assets in cash or cash equivalents such as short-term Treasuries. The fund is non-diversified and has not yet had more than 9% in equities, although that would certainly rise if stock prices fell dramatically.

Adviser

Martin Capital Management (MCM), headquartered in Elkhart, IN. Established in 1987, MCM has stated an ongoing commitment to a “rational, disciplined, concentrated, value-oriented investment philosophy.” Their first priority is preservation of capital, but seek opportunities for growth when they find underpriced, but well-run companies. They manage about $160 million, roughly 10% of which is in their mutual fund.

Manager

Frank Martin is portfolio manager, as well as the founder and CIO of the adviser. A 1964 graduate of Northwestern University’s investment management program, Mr. Martin went on to obtain an MBA from Indiana University. He does a lot of charitable work, including his role as founder and chairman of the board of DreamsWork, a mentoring and scholarship program for inner-city children. Mr. Martin has published two books on investing, Speculative Contagion and A Decade of Delusions. He’s assisted by a four person research team.

Strategy capacity and closure

Mr. Martin allows that the theoretical capacity is “pretty darn large,” but that having a fund that was big is “too distracting” from the work on investing so he’d look for a manageable portfolio size.

Active share

Not formally calculated but undoubtedly near 100, given a portfolio with just four stocks.

Management’s stake in the fund

Mr. Martin has invested over $1 million in the fund and, as of the early 2014, is the fund’s largest shareholder. No member of the board of directors has invested in the fund but then four of the six directors haven’t invested in any of the 18 funds they oversee. The firm’s employees invest in this strategy largely through separately managed accounts, which reflects the fact that the fund did not exist when his folks began investing. The portfolio is small enough that Mr. Martin knows many of his shareholders, five of whom own 35% of the retail shares between them.

Opening date

May 03, 2012

Minimum investment

$2,500 for an initial investment for retail shares. $100 minimum for subsequent investments.

Expense ratio

1.39%, after waivers, on about $15 million in assets (as of April 2014). There’s also an institutional share class (MFVIX) with an e.r. of 0.99% and a $100,000 minimum.

Comments

Absolute value investors are different. These are guys who don’t want to live at the edge. They take the phrase “margin of safety” very seriously. For them, “risk” is about “permanent losses,” not “foregone gains.” They don’t BASE jump. They don’t order fugu. They don’t answer the question “I wonder if this will hold my weight?” by hopping on it. They do drive, often in Volvos and generally within five MPH of the posted speed limit, to Omaha every May to hear The Word from Warren and fellowship with like-minded investors.

Unlike relative value and growth guys, they don’t believe that you hired them to pick the best stocks available. They do believe you hired them to compose the best equity portfolio available. The difference is that “the best equity portfolio” might well be one that, potentially for long periods, holds few stocks and huge amounts of cash. Why? Because markets are neither efficient nor rational; they are the aggregated decisions of millions of humans who often move as herds and sometimes as stampeding herds. Those stampedes – sometimes called manias or bubbles, sometimes simply frothy markets or periods of irrational exuberance – are a lot of fun while they last and catastrophic when they end. We don’t know when they will end, but we do know that every market that overshoots on the upside is followed by one that overshoots on the downside.

In general, absolute value investors try to protect you from those entirely predictable risks. Rather than relying on you to judge the state of the market and its level of riskiness, they act on your behalf by leaving early, sacrificing part of the gain in order to spare you as much of the pain as possible.

In general, that translates to stockpiling cash (or implementing some sort of hedging position) when stocks with absolutely attractive valuations are unavailable, in anticipation of being able to strike quickly on the day when attractively-priced stocks are again available.

Mr. Martin takes that caution one step further. In addition to protecting you from predictable risks (“known unknowns,” in Mr. Rumsfeld’s parlance), he has attempted to create a portfolio that offers some protection against risks that are impossible to anticipate (“unknown unknowns” for Mr. Rumsfeld, “black swans” if you prefer Mr. Taleb’s term). His strategy, also drawing from Mr. Taleb’s research, is to create an “antifragile” portfolio; that is, one which grows stronger as the stress on it rises.

Mr. Martin, a value investor with 40 years of experience, has won praise from the likes of Jack Bogle, Jim Grant and Edward Studzinski. Earlier in his career, he ran fully-invested portfolios. In the past 20 years, he’s become less willing to buy marginally-priced stocks and has rarely been more than 70% invested in the market. With the launch of Martin Focused Value Fund in 2011, he moved more decisively into pursuing a barbell strategy in his portfolio, which he believes to be decidedly anti-fragile. The bulk of the portfolio is now invested in short-term Treasuries while under 10% is in undervalued, high-quality equities. In normal markets, the equities will provide much of the fund’s upside while the bonds contribute modest returns. The portfolio’s advantage is that in market crises, panicked investors are prone to bid up the price of the ultra-safe bonds in his portfolio, giving him both downside protection and “dry powder” to deploy when stocks tank.

The result is a low volatility portfolio which has produced consistent results. While his mutual fund is new, he’s been using the same discipline in private accounts and those investments have decisively outperformed the S&P this century. The following chart reflects the performance of those private accounts:

Those returns include the effects of some outstanding stock picking. The equity portion of Mr. Martin’s portfolio returned 13.1% annually from 2000 – 2014Q1, while the S&P banked just 3.7% for the same period. He and his analysts are, in short, really talented at picking stocks. Over this same period, the composite had a standard deviation (a measure of volatility) of 3.4% while the S&P 500 bounced 12.3%, a difference of 350%.

Why might you want to consider a low-equity, antifragile portfolio? Like many absolute value investors, Mr. Martin believes that we’re now seeing “a market that seems increasingly detached from its fundamental moorings.” That’s a “known unknown.” He goes further than most and posits the worrisome presence of an unknown unknown. Here’s the argument: corporations can do one of four things with their income (technically, their free cash flow):

They can invest in the business through new capital expenditures or by hiring new workers.
They can give money back to their investors in the form of dividends.
They can buy back shares of the corporation’s stock on the open market.
They can acquire someone else’s company to add to the corporate empire.

Of these four activities, one and only one – re-investment – is consistently beneficial to a corporation’s long-term prospects. It is also the one that least interests corporate leaders who are being pushed to maximize immediate stock returns; focusing on the long-term now poses a palpable risk of being dismissed if it causes short-term performance to lag.

Amazon’s chief and founder, Jeff Bezos, and Amazon’s stock are both being pounded in mid-2014 because Bezos stubbornly insists on pouring money into research and development and capital projects. Amazon’s stock has fallen 25% YTD through May 1, an event that Bezos can survive when most other CEOs would fall.

“Since 2008, the proportion of cash flow invested in capital assets is the lowest on record” while both the debt to GDP ratio and the amount of margin debt (that is, money borrowed to speculate in the market) are at their highest levels ever. At the same time, the 100 largest companies in the U.S. have spent a trillion dollars buying back stock since 2008 while dividend payments in 2013 were 40% above their 10-year average; by Mr. Martin’s calculation, “90% of cash flow is being expended for purposes that don’t increase the value of most companies over the longer-term.” In short, stock prices are rising steadily for firms whose futures are increasingly at risk.

His aim, then, is to build a portfolio which will, first, preserve investors’ wealth and then grow it over the course of a life.

Potential investors should note two cautions:

They need to understand that double-digit returns will be relatively rare; his separate account composition had returns above 10% in four of 14 years from 2000-13.
Succession planning at the firm has not yet born fruit. At 71, Mr. Martin is actively, but so far unsuccessfully, engaged in a search for a successor. He wants someone who shares his passion for long-term success and his willingness to sacrifice short-term gains when need be. One simple test that he’s subjected candidates to is to look at whether their portfolios outperformed the S&P during the 2007-09 meltdown. So far, the answer has mostly been “no.”

Bottom Line

There are some investors for whom this strategy is a very good fit, though few have yet found their way to the fund. Folks who share Mr. Martin’s concern about the effects of perverse financial incentives (or even the growing risks of global technology that’s outracing our ability to comprehend, much less control, its consequences) should consider the fund. Likewise investors who are trying to preserve wealth against the effects of inflation over decades would find a comfortable home here. Folks who are convinced that they can outsmart the market, who are banking on double-digit rights and expect to out-time its gyrations are apt to be disappointed.

Fund website

www.martinfocusedvaluefund.com. He’s got a remarkable body of writings at the fund website, but rather more at the main Martin Capital Management site. His essays are well-written, both substantial and wide-ranging, sort of the antithesis of the usual marketing stuff that passes for mutual fund white papers.

The Existential Pleasures of Engineering Beta

By Charles Boccadoro

Originally published in May 1, 2014 Commentary

Mebane Faber is a quant.

He recognizes alpha is elusive, so instead focuses on engineering beta, which promises a more pragmatic and enduring reward.

In a field full of business majors and MBAs, he holds degrees in engineering and biology.

He distills a wealth of financial literature, research, and conditions into concise and actionable investing advice, shared through books, his blog, and lectures.

He is a portfolio manager and CIO of Cambria Investment Management, L.P., which he co-founded along with Eric Richardson in 2006. It is located in El Segundo, CA.

The Books. There are three. All insightful, concise, and well-received:

The first published by Wiley in 2009, entitled “The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets.”
The second, self-published in 2013, entitled “Shareholder Yield: A Better Approach to Dividend Investing.”
The third, also self-published and just released, “Global Value: How to Spot Bubbles, Avoid Market Crashes, and Earn Big Returns in the Stock Market.”

29Apr14/Charles

Manager changes, April 2014

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
SHKIX	Aftershock Strategies Fund	Michael Lebowitz is out.	Daniel Cohen, David Wiedemer, and Robert Wiedemer remain.	4/14
RMDAX	AllianzGI Mid-Cap Fund	Louise Laufersweiler is out.	Steven Klopukh and Timothy McCarthy remain.	4/14
RAGHX	AllianzGI Wellness Fund	Paul Wagner is gone.	John Schroer and Michael Dauchot will carry on.	4/14
ADIAX	Alpine Small Cap Fund	In a major shakeup, founder and founding managers Stephen Lieber and Samuel Lieber are out, as the fund changes strategy in an attempt to reach economic viability after more than eight years.	Michael Smith and Peter Belton will take over	4/14
ATBAX	Ascendant Balanced Fund	Todd Smurl	James Lee	4/14
AEQAX	Ascendant Deep Value Convertibles Fund	Todd Smurl	James Lee	4/14
NRGAX	Ascendant Natural Resources	Todd Smurl	James Lee	4/14
BELAX	Belvedere Alternative Income Fund	Belvedere Asset Management will be stepping down as advisor to the fund	The board has approved an interim advisory agreement with ES Capital	4/14
CVTRX	Calamos Growth and Income Fund	John Scudieri will leave on April 30th.	The rest of the team remains on the fund.	4/14
LACAX	Columbia Acorn Fund	Charles McQuaid stepped down from his roles as the President and Chief Investment Officer of CWAM and the lead portfolio manager of the fund. He will remain in his role as lead manager on the Columbia Thermostat Fund (CTFAX)	Robert Mohn and David Frank remain, with Mr. Mohn taking on the lead manager role.	4/14
CHDEX	Cullen High Dividend Equity Fund	John Gould died, unexpectedly.	Jennifer Chang joins James Cullen as a portfolio manager	4/14
CVLVX	Cullen Value Fund	John Gould died, unexpectedly.	Jennifer Chang joins James Cullen and Brooks Cullen as a portfolio manager	4/14
KDHAX	DWS Equity Dividend	Juergen Foerster and Johannes Prix are out	Di Kumble takes over	4/14
EINFX	Elfun Income Fund	Vita Marie Pike is out.	William Healey and Mark Johnson remain.	4/14
CAPAX	Federated Capital Income	Christopher Smith	Jerome Conner joins the rest of the team.	4/14
FSTBX	Federated Global Allocation Fund	Christopher Smith	Chengjun Wu joins Timothy Goodger, Philip Orlando, Ihab Salib, and Audrey Kaplan	4/14
FDRAX	Federated Managed Risk Fund	Christopher Smith	Chengjun Wu joins James Gordon Jr., Stephen Gutch, Marc Halperin, John Nichol, and Philip Orlando	4/14
FAGAX	Fidelity Advisor Growth Opportunities Fund	No one, but . . .	Gopal Reddy will become the lead manager and Steve Wymer will remain as a comanager. This change will be effective on January 1, 2015.	4/14
FNCMX	Fidelity Nasdaq Composite Index Fund	James Francis	Patrick Waddell, Louis Bottari, and Peter Matthew remain, with Mr. Waddell stepping up to the lead role.	4/14
FAOFX	Fidelity Series Advisor Growth Opportunities Fund	No one, but . . .	Gopal Reddy will become the lead manager and Steve Wymer will remain as a comanager. This change will be effective on January 1, 2015.	4/14
FPEMX	Fidelity Spartan Emerging Markets Index Fund	James Francis	Patrick Waddell, Louis Bottari, and Peter Matthew remain, with Mr. Waddell stepping up to the lead role.	4/14
FKGRX	Franklin Growth Fund	Jerry Palmieri, manager for nearly half a century, died at 85. His investors missed a lot of the growth in the bull market of the 80s and 90s, but his caution served them well over the turbulent last decade of his tenure.	Serena Vinton and Conrad Hermann will carry on, as planned.	4/14
FANTX	Frost International Equity Fund	William Fries and Lei Wang	Wendy Trevisani, Tim Cunningham, and Greg Dunn remain.	4/14
GSCAX	Goldman Sachs Commodity Strategy Fund	Stephen Lucas is out	Michael Johnson and Samuel Finkelstein remain	4/14
HFBAX	Highland Fixed Income Fund	Vita Marie Pike is out.	William Healey and Mark Johnson remain.	4/14
HBAFX	Huntington Balanced Allocation Fund	No one, but . . .	Robert “Chip” Hendon joins Randy Batemen as a comanager of the fund	4/14
HCAFX	Huntington Conservative Allocation Fund	No one, but . . .	Robert “Chip” Hendon joins Randy Batemen as a comanager of the fund	4/14
HDEAX	Huntington Disciplined Equity Fund	No one, but . . .	Robert “Chip” Hendon joins Peter Sorrentino as a comanager of the fund	4/14
HDCAX	Huntington Dividend Capture Fund	No one, but . . .	Peter Sorrentino joins Kirk Mentzer as a comanager of the fund	4/14
HGSAX	Huntington Global Select Markets	No one, but . . .	Martina Cheung joins Paul Attwood as a comanager of the fund	4/14
HGRFX	Huntington Growth Allocation Fund	No one, but . . .	Robert “Chip” Hendon joins Randy Batemen as a comanager of the fund	4/14
HIEAX	Huntington International Equity Fund	No one, but . . .	Martina Cheung joins Paul Attwood as a comanager of the fund	4/14
HRSAX	Huntington Real Strategies Fund	No one, but . . .	Robert “Chip” Hendon joins Peter Sorrentino as a comanager of the fund	4/14
HSUAX	Huntington Situs Fund	No one, but . . .	Kirk Mentzer joins Randy Batemen as a comanager of the fund	4/14
RGROX	John Hancock Select Growth Fund (formerly known as John Hancock Rainier Growth Fund)	Ranier Investment Management is out, along with James Margard, Mark Dawson and Michail Emery	Baillie Gifford Overseas Limited is in, with Ian Tabberer at the helm	4/14
MSSFX	Litman Gregory Masters Smaller Companies Fund	Turner Investments is out (that seems to happen a lot) as a subadviser and Frank Sustersic is out as a manager	Dennis Bryan, Kenneth Gregory, Richard Weiss, Jeremy DeGroot, and Jeffrey Bronchick remain	4/14
LEQAX	LoCorr Long/Short Equity Fund	No one, but . . .	Billings Capital Management is added as a subadvisor, with Eric F. Billings, Eric P. Billings, Scott Billings, and Thomas Billings, joining the management team.	4/14
MAEQX	Mutual of America Equity Index	Benjamin Heben	Jamie Zendel	4/14
MAMQX	Mutual of America Mid Cap Equity Index	Benjamin Heben	Jamie Zendel	4/14
NCGFX	New Covenant Growth Fund	Robert Pharr is out	The other sixteen managers remain on the fund.	4/14
PAEMX	PIMCO Emerging Market Bond Fund	Ramin Toloui has stepped down to serve as Deputy Under Secretary for International Finance in the U.S. Dept. of Treasury.	Michael Gomez will remain	4/14
PGSAX	PIMCO Global Advantage Strategy Bond Fund	Ramin Toloui has stepped down to serve as Deputy Under Secretary for International Finance in the U.S. Dept. of Treasury.	Michael Gomez will remain	4/14
EMSAX	RPg Emerging Markets Sector Rotation Fund	F-Squared Institutional Advisors no longer advise the fund, and Howard Present is no longer a fund manager.	David Gatti and Jason McGinty remain.	4/14
SBMBX	Saratoga Energy and Basic Materials Fund	Greg McCullough is out	David Cohen and Salil Sharma are in	4/14
SARNX	Schroder Absolute Return EMD and Currency Fund	No one, but . . .	Abdallah Guezour takes over the lead manager role. Current lead manager, Geoff Blanning, remains on the fund, as do Guillermo Besaccia and Nick Brown, the other managers.	4/14
SIIEX	Sentinel International Equity Fund	Katherine Schapiro is gone	Andrew Boczek will carry on.	4/14
TCOEX	Tactical Offensive Equity Fund	William Fries and Lei Wang	The rest of the extensive team remains.	4/14
TPSAX	Thrivent Partner Small Cap Growth Fund	Peter Sustersic of Turner Investment Partners is out but	Peter Niedland and Jason Schrotberger of Turner Investment Partners move in	4/14
TMCGX	Turner Emerging Growth Fund	Peter Sustersic	Peter Niedland	4/14
TCGFX	Turner Large Growth Fund	No one, but . . .	Christopher Baggini joins Robert Turner and becomes lead portfolio manager	4/14
VASVX	Vanguard Selected Value Fund	No one, but . . .	Pzena Investment Management has been added as an advisor, with Richard Pzena, Eli Rabinowich, and Manoj Tandon, overseeing that portion of the portfolio	4/14
WRAAX	Wilmington Multi-Manager Alternatives	No one, but . . .	Carl Loeb Advisory Partners becomes the 6^th subadvisor to join the team.	4/14