Monthly Archives: October 2014

October 1, 2014

By David Snowball

Dear friends,

If it weren’t for everything else I’ve read in the news this week (a “blood feud” between DoubleLine and Morningstar? Blood feud? Really? “Pa! Grab your shotgun. Ah dun seen one a them filthy Mansuetos down by the crik!”), the silliest story of the week would be the transformation of candidate’s mutual fund portfolios into attack fodder. And not even attacks for the right reasons!

Republican U.S. Senate candidate Terri Lynn Land attacked her opponent for owning shares of the French firm Total SA. Three weeks later Democrat Gary Peters struck back after discovering that Land (the wretch!) owned “C” shares of Well Fargo Absolute Return (WARCX)and WARCX in turn owns GMO Benchmark-Free Allocation which owns five other GMO funds, one of which has 3% of its portfolio invested in Total SA stock. “She got her hand caught in the cookie jar,” quoth the Democrat.

Land’s total profit from WARCX was between $200-1000. Total SA represented 4% of a fund that was itself 14% of another fund. Hmmm … maybe 0.5% of her perhaps $200 windfall was Total SA so, yup, the issue came down to $1 worth of cookie.

Of course, it wasn’t about the money. It was about the principle. As politics so often are.

Also in Michigan Democrat Mark Schauer attacked the Republican governor’s tax break which benefited companies “even if they send jobs overseas.” The Republican struck back after discovering that Schauer owned shares of Growth Fund of America (AGTHX) which “has a portfolio of companies that make goods overseas, such as Apple.” Here in the Quad Cities, the Democrat candidate for Congress has been attacked for her investment in Janus Overseas (JAOSX), whose 7% holding in Li and Fung Enterprises raised Republican hackles. Congressional candidate Martha Robertson was attacked for owning stock in the treacherous, border-jumping, tax-inverting Burger King – which turns out to be held in the portfolio of a mutual fund she bought 36 years ago. Minnesota senator Al Franken was found to own Lazard, the parent company of a somehow objectionable company, via shares in a socially responsible mutual fund.

Yup. That sure would have been the craziest story of the month except for …

Notes on The Greatest (ill-timed mutual fund manager transition) Story Ever Told

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Bill Gross arriving at Janus

Making sense of Mr. Gross’s departure from PIMCO is the very epitome of an “above my pay grade and outside my circle of competence” story. I don’t know why he left. I don’t know whether PIMCO has a toxic environment or, if so, whether he was the source or the firewall. And I certainly don’t know who, among the many partisans furiously spinning their stories, is even vaguely close to speaking the truth.

Here are, however, seven things that I do believe to be true.

If your adviser has recommended moving out of PIMCO funds, you should fire him. If your endowment consultant has advised moving out of PIMCO funds, fire them. If your newsletter editor has hamsterrushed out a special bulletin urging you to run, cancel your subscription, demand a refund and send the money to us. (We’ll buy chocolate.) If your spouse is planning on selling PIMCO shares, fir … distract him with pie and that adorable story about a firefighter giving oxygen to baby hamsters. (Also switch him to decaf and consider changing the password on your brokerage account.)

At base, Mr. Gross made some contribution to his core fund’s long-term outperformance, which is in the range of 100-200 basis points/year. In the long term, say over the course of decades, that’s huge. For the immediate future, it’s utterly trivial and irrelevant.

Note to PIMCO (from academe): Thank you! Thank you! Thank you! On behalf of all of us who teach Crisis Communications, Strategic Comm, Media Relations or Public Relations, thanks. Your handling of the story has been manna and will be the source of case studies for years.

For those of you without the time to take a crisis communications course, let me share the five word version of it: Get ahead of the story. Play it, don’t let it play you. Mr. Gross’s departure was absolutely predictable, even if the precise timing wasn’t. The probability of his unhappy departure was exceedingly high, even if the precise trigger was unknown. The firm’s strategists have either known it, or had a responsibility to know it, for the past six months. You could have been planning positive takes. You could have been helping journalists, long in advance, imagine positive frames for the story.

As is, you appeared to be somewhere between scrambling and flailing. About the most positive coverage you could generate was a whiny headline, “Bill Gross relied on us,” and a former employee’s human interest assessment, “El-Erian: PIMCO’s new CIO is one of the most considerate and decent people I know.”

We’d been living off BP’s mishandling of the Gulf oil disaster for years, but it was endless and getting stale. Roger Goodell has certainly offered himself up (latest: he’s got bodyguards and they assault photographers) but it’s great to have a Menu of Misses and Messes to work with.

Note (1) to Janus: You don’t have a Global Unconstrained Bond Fund. Or didn’t at the point that you announced that Mr. Gross was running it:

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You might blame the “Global” slip-up on your IT team. It turns out that it’s not just the low-level gnomes. Janus president Richard Weil also invoked the non-existent Global Unconstrained Fund:

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Morningstar echoed the confusion:

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I called a Janus phone rep, who affirmed that of course they had a Global Unconstrained Fund, followed by a bunch of tapping, a “that’s odd,” an “uh-oh” and a “I’ll have to refer this up the line.” Two hours later Janus filed the name change announcement with the SEC.

Dudes: you were at the top of the news cycle. Everyone was looking. This was just chance to prove to everyone that you were relevant. Why deflect the story with careless goofs? You could have filed a two sentence SEC notice, with no mention of Mr. Gross, the week before. You didn’t. Why, too, does the fund have an eight page summary prospectus with five pages of text, two pages labeled “Intentionally Blank” and another page also blank (even blanker than the two preceding pages with writing on them), but apparently unintentionally so?

Note (2) to Janus: That’s the best picture of Mr. Gross that you could find? Really? Uhhh … that’s not a fund manager. That’s the Grinch.

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Note to the ETF zealots, dancing around a bonfire and attempting to howl like wolves: Stop it, you’re embarrassing.

fire_danceIf you actually believed the credo that you so piously pronounce, there’d be about three ETFs in existence, each with a trillion in assets. They’d be overseen by a nonprofit corporation (hi, Jack!) which would charge one basis point. All the rest of you would be off somewhere, hawking nutraceuticals and testosterone supplements for a living. We’ll get to you later.

Note to pundits tossing around 12 figure guesstimates about PIMCO outflows: Stop it, you’re not helping anyone. I know you want to get headlines and build your personal brand. That’s fine, go date a Kardashian. There are a bunch of them available and apparently their standards are pretty … uhhh, flexible. Making up scary pronouncements with blue sky numbers (“we anticipate as much as $400 billion in outflows…”) does nothing more than encourage people to act poorly.

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Note to our readers and other PIMCO investors: this is likely the best news you’ve had in a year. PIMCO has been twisting itself in knots over this issue. It’s been a daily distraction and a source of incredible tension and anxiety for dozens upon dozens of management and investment professionals. The situation had been steadily worsening. And now it’s done.

We don’t much cover PIMCO funds. Like the American Funds, they’re way too big to be healthy or interesting. That said, PIMCO has launched innovative and successful new funds over the past five years. Their collective Morningstar performance ratings (4.4 stars for the average domestic equity fund, 3.8 stars for taxable bond funds, 3.6 for international stocks and 1.9 for muni bonds) are well above average.

There is, I suspect, a real prospect of very healthy outcomes for PIMCO and their investors from all this. I suspect that a lot of people may start to look forward to coming to work again. That it will be a lot easier to attract and retain talent. And that a lot of folks will hear the call to step up and take up the slack. You might want to give them to chance to do just that.

Ever wonder what Mr. Gross did when he wasn’t prognosticating?

When I explained to Chip, overseer of our manager changes data, that Mr. Gross was moving on and that his departure affected a six page, single-spaced list of funds (accounting for all of the share classes and versions), she threatened to go all Air France on us and institute a work stoppage. Shuddering, I promised to share the master list of Gross changes with you in the cover essay.  The manager changes page will reflect just some of the higher-profile funds in his portfolio.

Here’s a partial list, courtesy of Morningstar, of the funds he was responsible for:

    • PIMCO Total Return, the quarter trillion dollar beast he was famous for

And the other 34:

    • MassMutual Select PIMCO Total Return
    • PIMCO Emerging Markets Fundamental IndexPLUS Absolute Return Strategy
    • JHFunds2 Total Return
    • Target Total Return Bond
    • AMG Managers Total Return Bond
    • PIMCO GIS Total Return Bond
    • PIMCO Worldwide Fundamental Advantage Absolute Return Strategy, the fund with the highest buzzwords-to-content ratio of any.
    • Transamerica Total Return
    • 37 iterations of PIMCO GIS Unconstrained Bond
    • Consulting Group Core Fixed-Income
    • Harbor Unconstrained Bond
    • PIMCO Unconstrained Bond
    • PIMCO Total Return IV
    • Principal Core Plus Bond
    • PL Managed Bond
    • PIMCO Fundamental Advantage Absolute Return Strategy
    • VY PIMCO Bond
    • PIMCO International StocksPLUS® Absolute Return Strategy
    • PIMCO Small Cap StocksPLUS® Absolute Return Strategy
    • PIMCO Fundamental IndexPLUS Absolute Return
    • PIMCO StocksPLUS Absolute RETURN Short Strategy
    • PIMCO GIS Low Average Duration
    • PIMCO StocksPLUS Absolute Return
    • Old Mutual Total Return
    • PIMCO GIS StocksPlus
    • PIMCO Moderate Duration
    • PIMCO StocksPLUS
    • PIMCO Low Duration III
    • PIMCO Total Return II
    • PIMCO Low Duration II
    • PIMCO Total Return III
    • Harbor Bond
    • PIMCO Low Duration
    • Prudential Income Builder

As we note with PIMCO GIS Unconstrained (the GIS standing for “global investor series”), there can be literally dozens of manifestations of the same portfolio, denominated in different currencies and hedged and unhedged forms, offers to investors in a dozen different nations.

charles balconyMorningstar ETF Conference Notes

By Charles Boccadoro

The pre-autumnal weather was perfect. Blue skies. Warm days. Cool nights. Vibrant city scene. New construction. Breath-taking architecture. Diverse eateries, like Lou Malnati’s deep dish pizza. Stylist bars and coffee shops. Colorful flower boxes on The River Walk. Shopping galore. An enlightened public metro system that enables you to arrival at O’Hare and 45 minutes later be at Clark/Lake in the heart of downtown. If you have not visited The Windy City since say when the Sears Tower was renamed the Willis Tower, you owe yourself a walk down The Magnificent Mile.

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At the opening keynote, Ben Johnson, Morningstar’s director responsible for coverage of exchange traded funds (ETFs) and conference host, noted that ETFs today hold $1.9T in assets versus just $700M only five years ago, during the first such conference. He explained that 72% is new money, not just appreciation.

The conference had a total of 671 attendees, including 470 registered attendees (mostly financial advisors, but this number also includes PR people and individual attendees), 123 sponsor attendees, 43 speakers, and 35 journalists, but not counting a very helpful M* staff and walk-ins. Five years ago? Just shy of 300 attendees.

The Dirty Words of Finance

AQR’s Ronen Israel spoke of Style Premia, which refers to source of compelling returns generated by certain investment vehicle styles, specifically Value, Momentum, Carry (the tendency for higher-yielding assets to provide higher returns than lower-yielding assets), and Defensive (the tendency for lower-risk and higher-quality assets to generate higher risk-adjusted returns). He argues that these excess returns are backed by both theory, be it efficient market or behavioral science, and “decades of data across geographies and asset groups.”

He presented further data that indicate these four styles have historically had low correlation. He believes that by constructing a portfolio using these styles across multiple asset classes investors will yield more consistent returns versus say the tradition 60/40 stocks/bond balanced portfolio. Add in LSD, which stands for leverage, shorting and derivatives, or what Mr. Israel jokingly calls “the dirty word of finance,” and you have the basic recipe for one of AQR’s newest fund offerings: Style Premia Alternative (QSPNX). The fund seeks long-term absolute (positive) returns.

Shorting is used to neutralize market risk, while exposing the Style Premia. Leverage is used to amplify absolute returns at defined portfolio volatility. Derivatives provide most efficient vehicles for exposure to alternative classes, like interest rates, currencies, and commodities.

When asked if using LSD flirted with disaster, Mr. Israel answered it could be managed, alluding to drawdown controls, liquidity, and transparency.

(My own experience with a somewhat similar strategy at AQR, known as Risk Parity, proved to be highly correlated and anything but transparent. When bonds, commodities, and EM equities sank rapidly from May through June 2013, AQR’s strategy sank with them. Its risk parity flagship AQRNX drew down 18.1% in 31 trading days…and the fund house stopped publishing its monthly commentary.)

When asked about the size style, he explained that their research showed size not to be that robust, unless you factored in liquidity and quality, alluding to a future paper called “Size Matters If You Control Your Junk.”

When asked if his presentation was available on-line or in-print, he answered no. His good paper “Understanding Style Premia” was available in the media room and is available at Institutional Investor Journals, registration required.

Launched in October 2013, the young fund has generated nearly $300M in AUM while slightly underperforming Vanguard’s Balanced Index Fund VBINX, but outperforming the rather diverse multi-alternative category.

QSPNX er is 2.36% after waivers and 1.75% after cap (through April 2015). Like all AQR funds, it carries high minimums and caters to the exclusivity of institutional investors and advisors, which strikes me as being shareholder unfriendly. Today, AQR offers 27 funds, 17 launched in the past three years. They offer no ETFs.

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In The Shadow of Giants

PIMCO’s Jerome Schneider took over the short-term and funding desk from legendary Paul McCulley in 2010. Two years before, he was at Bear Stearns. Today, think popular active ETF MINT. Think PAIUX.

During his briefing, he touched on 2% being real expected growth rate. Of new liquidly requirements for money market funds, which could bring potential for redemption gates and fees, providing more motivation to look at low duration bonds as an alternative to cash. He spoke of 14 year old cars that needed to be replaced and expected US housing recovery.

He anticipates capital expenditure will continue to improve, people will get wealthier, and for US to provide a better investment outlook than rest of world, which was a somewhat contrarian view at the conference. He mentioned global debt overhang, mostly in the public sector. Of working age population declining. And, of geopolitical instability. He believes bonds still play a role in one’s portfolio, because historically they have drawn down much less than equities.

It was all rather disjointed.

Mostly, he talked about the extraordinary culture of active management at PIMCO. With time tested investment practices. Liquidity sensitivity. Risk management. Credit research capability, including 45 analysts across the globe that he begins calling at 03:45…the start of his work day. He touted PIMCO’s understanding of tools of the trade and trading acumen. “Even Bill Gross still trades.” He displayed a picture of himself that folks often mistook for a young Paul McCulley.

Cannot help but think what an awkward time it must be for the good folks at PIMCO. And be reminded of another giant’s quote: “Only when the tide goes out do you discover who’s been swimming naked.”


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Youthful Hosts

Surely, it is my own graying hair, wrinkled bags, muddled thought processes, and inarticulate mannerisms that makes me notice something extraordinary about the people hosting and leading the conference’s many panels, workshops, luncheons, keynotes, receptions, and sidebars. They all look very young! In addition to being clear thinkers, articulate public speakers, helpful and gracious hosts.

It would not be too much of a stretch to say that the combined ages of M*’s Ben Johnson, Ling-Wei Hew, and Samuel Lee together add up to one Eugene Fama. Indeed, when Mr. Johnson sat across from Nobel laureate Professor Fama, during a charming lunch time keynote/interview, he could have easily been an undergraduate from University of Chicago.

Is it because the ETF industry itself is young? Or, is it as a colleague explains: “Morningstar has hard time holding on to good talent because it is a stepping stone to higher paying jobs at places like BlackRock.”

Whatever the reason, if we were all as knowledgeable about investing as Mr. Lee and the rest of the youthful staff, the world of investing would be a much better place.

Damp & Disappointing

That’s how JP Morgan’s Dr. David Kelly, Chief Global Strategist, describes our current recovery. While I did not agree with everything, it was hands-down the best talk of the conference. At one point he said that he wished he could speak for another hour. I wished he could have too.

“Damp and disappointing, like an Irish summer,” he explained.

Short term US prospects are good, but long term not good. “In the short run, it’s all about demand. But in the long run, it’s all about supply, which will be adversely impacted by labor and productivity.” The labor force is not growing. Baby boomers are retiring en masse. He also showed data that productivity was likely not growing, blaming lack of capital expenditure. (Hard to believe since we seem to work 24/7 these days thanks to amazing improvements communications, computing, information access, manufacturing technology, etc. All the while, living longer.)

Dr. Kelly offered up fixes: 1) corporate tax reform, including 10% flat rate, and 2) immigration reform, that allows the world’s best, brightest, and hardest working continued entry to the US. But since congress only acts in crisis, he concedes his forecast prepares for slowing US growth longer term.

Greater opportunity for long term growth is overseas. Manufacturing momentum is gaining around world. Cyclical growth will be higher than US while valuations remain lower and work force is younger. Simply put, they have more room to grow. Unfortunately, US media bias “always gives impression that the rest of the world is in flames…it shows only bad news.”

JP Morgan remains underweight fixed income, since monetary policy remains abnormal, and cautiously over weight US equities. The thing about Irish summers is…everything is green. Low interest rates. Higher corporate margins. Normal valuation. Although he takes issue with the phrase “All the easy money has been made in equities.” He asks “When was it ever easy?”

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Alpha Architect

Dr. Wesley Gray is a former US Marine Captain, a former assistant and now adjunct professor at Drexel University, co-author of Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors, and founder of AlphaArchitect, LLC.

He earned his MBA and Finance PhD from University of Chicago, where Professor Fama was on his doctoral committee. He offers a fresh perspective in the investment community. Straight talking and no holds barred. My first impression – a kind of amped-up, in-your-face Mebane Faber. (They are friends.)

In fact, he starts his presentation with an overview of Mr. Faber’s book “The Ivy Portfolio,” which at its simplest form represents an equal allocation strategy across multiple and somewhat uncorrelated investment vehicles, like US stocks, world stocks, bonds, REITS, and commodities.

Dr. Gray argues that simple, equal allocation remains tough to beat. No model works all the time; in fact, the simple equal allocation strategy has under-performed the past four years, but precisely because forces driving markets are unstable, the strategy will reward investors with satisfactory returns over the long run. “Complexity does not add value.”

He seems equally comfortable talking efficient market theory and how to maximize a portfolio’s Sharpe ratio as he does explaining why the phycology of dynamic loss aversion creates opportunities in the market.

When Professor Fama earlier in the day dismissed a question about trend-following, answering “No evidence that this works,” Dr. Gray wished he would have asked about the so-called “Prime anomaly…momentum. Momentum is pervasive.”

When Dr. Gray was asked, “Will your presentation would be made available on-line?” He answered “Absolutely.” Here is link to Beware of Geeks Bearing Formulas.

His firm’s web site is interesting, including a new tools page, free with an easy registration. They launch their first ETF aptly called Alpha Architect’s Quantitative Value (QVAL) on 20 October, which will follow the strategy outlined in the book. Basically, buy cheap high-quality stocks that Wall Street hates using systematic decision making in a transparent fashion. Definitively a candidate MFO fund profile.

Trends Shaping The ETF Market

Ben Johnson hosted an excellent overview ETF trends. The overall briefings included Strategic Beta, Active ETFs (like BOND and MINT), and ETF Managed Portfolios.

Points made by Mr. Johnson:

1. Active vs passive is a false premise. Today’s ETFs represent a cross-section of both approaches.

2. “More assets are flowing into passive investment vehicles that are increasingly active in their nature and implementation.”

3. Smart beta is a loaded term. “They will not look smart all the time” and investors need to set expectations accordingly.

4. M* assigns the term “Strategic Beta” to a growing category of indexes and exchange traded products (ETPs) that track them. “These indexes seek to enhance returns or minimize risk relative to traditional market cap weighted benchmarks.” They often have tilts, like low volatility value, and are consistently rules-based, transparent, and relatively low-cost.

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5. Strategic Beta subset of ETPs has been explosive in recent years with 374 listed in US as of 2Q14 or 1/4 of all ETPs, while amassing $360M, or 1/5th of ETP AUM. Perhaps more telling is that 31% of new cash flows for ETPs in 2013 went into Strategic Beta products.

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6. Reduction or fees and a general disillusionment with active managers are two of several reasons behind the growth in these ETFs.  These quasi active funds charge a fraction of traditional fees. A disillusionment with active managers is evidenced in recent surveys made by Northern Trust and PowerShares.

M* is attempting to bring more neutral attention to these ETFs, which up to now has been driven by product providers. In doing so, M* hopes to help set expectation management, or ground rules if you will, to better compare these investment alternatives. With ground rules set, they seek to highlight winners and call out losers. And, at the end of the day, help investors “navigate this increasingly complex landscape.”

They’ve started to develop the following taxonomy that is complementary to (but not in place of) existing M* categories.

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Honestly, I think their coverage of this area is M* at its best.

Welcomed Moderation

Mr. Koesterich gave the conference opening keynote. He is chief investment strategist for BlackRock. The briefing room was packed. Several hundred people. Many standing along wall. The reception afterward was just madness. His briefing was entitled “2014 Mid-Year Update – What to Know / What to Do.”

He threaded a somewhat cautiously reassuring middle ground. Things aren’t great. But, they aren’t terrible either. They are just different. Different, perhaps, because the fed experiment is untested. No one really knows how QE will turn out. But in mean time, it’s keeping things together.

Different, perhaps, because this is first time in 30-some years where investors are facing a rising interest rate environment. Not expected to be rapid. But rather certain. So bonds no longer seem as safe and certainly not as high yield as in recent decades.

To get to the punch-line, his advice is: 1) rethink bonds – seek adaptive strategies, look to EM, switch to terms less interest rate sensitive, like HY, avoiding 2-5 year maturities, look into muni’s on taxable accounts, 2) generate income, but don’t overreach – look for flexible approaches, proxies to HY, like dividend equities, and 3) seek growth, but manage volatility – diversify to unconstrained strategies

More generally, he thinks we are in a cyclical upswing, but slower than normal. Does not expect US to achieve 3.5% annual GDP growth (post WWII normal) for next decade. Reasons: high debt, aging demographics, and wage stagnation (similar to Rob Arnott’s 3D cautions).

He cited stats that non-financial debt has actually increased 20-30%, not decreased, since financial crisis. US population growth last year was zero. Overall wages, adjusted for inflation, same as late ’90s. But for men, same as mid ‘70s. (The latter wage impact has been masked by more credit availability, more women working, and lower savings.) All indicative of slower growth in US for foreseeable future, despite increases in productivity.

Lack of volatility is due to fed, keeping interest rates low, and high liquidity. Expects volatility to increase next year as rates start to rise. He believes that lower interest rates so far is one of year’s biggest surprises. Explains it due to pension funds shifting out of equities and into bonds and that US 10 year is pretty good relative to Japan and Europe.

On inflation, he believes tech and aging demographics tend to keep inflation in check.

BlackRock continues to like large cap over small cap. Latter will be more sensitive to interest rate increases.

Anything cheap? Stocks remain cheaper than bonds, because of extensive fed purchases during QE. Nothing cheap on absolute basis, only on relative basis. “All asset classes above long term averages, except a couple niche areas.”

“Should we all move to cash?” Mr. Koesterich answers no. Just moderate our expectations going forward. Equities are perhaps 10-15% above long term averages. But not expensive compared to prices before previous drops.

One reason is company margins remain high. For couple of same reasons: low credit interest and low wages. Plus higher productivity, which later appeared contrary to JP Morgan’s perspective.

He advises investors be selective in equities. Look for value. Like large over small. More cyclical companies. He likes tech, energy, manufacturing, financials going forward. This past year, folks have driven up valuations of “safe” equities like utilities, staples, REITS. But those investments tend to work well in recessions…not so much in rising interest rate environment. EM relatively inexpensive, but fears they are cheap for reason. Lots of divided arguments here at BlackRock. Japan likely good trade for next couple years due to Japanese pension funds shifting to organic assets.

He closed by stating that only New Zealand is offering a 10 year sovereign return above 4%. Which means, bond holders must take on higher risk. He suggests three places to look: HY, EM, muni’s.

Again, a moderate presentation and perhaps not much new here. While I personally remain more cautiously optimistic about US economy, compared to mounting predictions of another big pull-back, it was a welcomed perspective.

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Beta Central

I’m hard-pressed to think of someone who has done more to enlighten investors about the benefits of ETF vehicles and opportunities beyond buy-and-hold US market cap than Mebane Faber. At this conference especially, he represents a central figure helping shape investment opportunities and strategies today.

He was kind enough to spend a few minutes before his panel on dividend investing and ETFs, which he held with Morningstar’s Josh Peters and Samuel Lee.

He shared that Cambria recently completed a funding campaign to expand its internal operations using the increasingly popular “Crowd Funding” approach. They did not use one of the established shops, like EquityNet, simply because of cost.  A couple hundred “accredited investors” quickly responded to Cambria’s request to raise $1-2M. The investors now have a private stake in the company. Mebane says they plan to use the funds to increase staff, both research and marketing. Indeed, he’s hiring: “If you are an A+ candidate, incredibly sharp, gritty, and super hungry, come join us!”

The new ETF Global Momentum (GMOM), which we mentioned in the July commentary, is due out soon, he thinks this month. Several others are in pipeline: Global Income and Currency Strategies ETF (FXFX), Emerging Shareholder Yield ETF (EYLD), Sovereign High Yield Bond ETF (SOVB), and Value and Momentum ETF (VAMO), which will make for a total of eight Cambria ETFs. The initial three ETFs (SYLD, FYLD, and GVAL) have attracted $365M in their young lives.

He admitted being surprised that Mark Yusko of Morgan Creek Funds agreed to take over AdvisorShares Global Tactical ETF GTAA, which now has just $20M AUM.

He was also surprised and disappointed to read about the SEC’s probe in F2 Investments, which alleges overstated performance results. F2 specializes in strategies “designed to protect investors from severe losses in down markets while providing quality participation in rising markets” and they sub-advise several Virtus ETFs. When WSJ reported that F2 received a so-called Wells notice, which portends a civil case against the company, Mebane posted “first requirement for anyone allocating to separate account investment advisor – GIPS audit. None? Move on.” I asked, “What’s GIPS?” He explains it stands for Global Investment Performance Standards and was created by the CFA Institute.

Mebane continues to write, has three books in work, including one on top hedge funds. Speaking of insight into hedge funds, subscribers joining his The Idea Farm after 31 December will pay a much elevated $499 annually.

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.

This month’s funds call into two broad categories: The Fallen Titans Funds and Stealthy Funds from “A” Tier Teams.

Le roi est mort, vive le roi’s new fund

Janus Unconstrained Bond (JUCAX) On October 6, Bill Gross, The Bond King, completes the transition from running 34 funds and $1.8 trillion in assets to managing a single $13 million portfolio. Like a Walmart at dawn on Black Friday, the fund is sure is see a huge crush of anxious, half-unhinged shoppers jammed against the doors.

Miller Income Opportunity (LMCJX) On February 26, Bill Miller, The Guy Who Bested the S&P 15 Years in a Row, partnered with his son to manage a new fund with a slightly misleading name (the portfolio produces little income) and hedge fund like freedom (and fees).

Quiet funds from “A” tier teams

Meridian Small Cap Growth (MSAGX) Small growth stocks have been described as “a failed asset class” because of the inability of most professional investors to control the sector’s downside well enough to benefit from its upside. Fortunately Chad Meade and Brian Schaub didn’t know that it was impossible to profit handsomely by limiting a small growth portfolio’s downside and so, for the past seven years, they’ve been doing exactly that. After moving from Janus to Meridian, they get to do it with a small, nimble fund.

Sarofim Equity (SRFMX) Have you ever looked at a large fund with a sensible strategy, solid management team and fine long-term record and thought to yourself “sure wish they were running a small, new fund doing the exact same thing for noticeably less money”? If so, the management team behind Dreyfus Appreciation has an opportunity for you to consider.

Elevator Talk: Justin Frankel, RiverPark Structural Alpha (RSAFX/RSAIX)

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

Justin Frankel (presumably not the JF described as “the world’s most dangerous geek”) co-manages Structural Alpha with his colleague Jeremy Berman. RiverPark launched the fund in June 2013, but the strategy’s public record is considerably longer. It began life in September 2008 as Wavecrest Partners Fund, LP which the guys ran alongside separate accounts for rich folks. Justin and I spent some time discussing the fund over warm drinks in lovely Milwaukee this August.

Structural Alpha embodies an options-based strategy. Every time I write that, my head begins to hurt because I struggle to explain them even to myself. Investors use options as a sort of portfolio insurance. The managers here sell options because those options are structurally overpriced; that is, there’s a predictable excess profit for the sellers built into the market just as you pay more for your insurance policies than you’ll ever get out of them.

The portfolio has four components – long-dated options which tend to move in the direction of the stock market, short-dated options which tend to be market independent, a permanent hedge which buffers the long options’ downside risk and a huge amount of cash which serves as collateral on the options they’ve sold. The guys invest that cash in short-term securities which produce income for the fund. As market conditions change, the managers adjust the size of the options components to keep the fund’s risk exposure within predetermined limits. That is, there are times when their market indicators show that the long-dated portion is carrying the potential for too much downside and so they’ll dial back that component.

Here’s what that performance looks like, including the strategy’s time as a hedge fund. RiverPark is the blue line, its painfully inept peer group is on the orange line and the S&P 500 is green.

riverpark

Over the better part of a full market cycle, the Structural Alpha strategy captured the 80% of the stock index’s returns – the strategy gained about 70% while the S&P rose 87% – while largely sidestepping any sustained losses. On average, it captures about 20% of the market’s down market performance and 40% of its up market. The magic of compounding then works in their favor – by minimizing their losses in falling markets, they have little ground to make up when markets rally and so, little by little, they catch up with a pure equity portfolio.

Justin Frankel

Justin Frankel

It’s clear that they might substantially lag in sustained, low volatility rallies but it’s also clear that they’ll make money for their investors even then.

Here are Justin’s 200 words on how you might buy some insurance:

The RiverPark Structural Alpha Fund is a market-neutral, hedged equity strategy. Our goal is to generate equity-like returns with fixed-income like volatility. We use a consistent and systematic investment process that focuses first on the management of risk, and then on the management of return.

The core of our investment philosophy is that excessive returns are rarely realized, and therefore should be traded for the opportunity to generate more stable returns, protect against some market declines, and reduce overall portfolio volatility. Secondarily, we believe that index options are overpriced, and by systematically selling these options we can generate positive returns without market exposure. This is why we use the term Structural Alpha in the fund’s name.

comanager

Jeremy Berman

Importantly, we have no view of the market and do not change our holdings or market exposure based on market conditions. Specifically, we use options to set zones of protection and to allow the fund to perform in up markets while maintaining a constant hedge to help protect the fund in down markets. The non-linear profile of options makes them ideally suited to implement our philosophy. Our portfolio naturally gets more exposed to the market as it declines (which means that we are constantly buying lower), and gets less exposed to the market when it rises (which means we are constantly selling higher).

Over the long run, the fund is slightly long-biased. Therefore, we believe it should perform better in rising markets. In our opinion, small and consistent gains over time, when compounded, will yield above average risk-adjusted returns for our shareholders. We believe our structural approach to investing gives the strategy a high probability for success across a range of different market environments.

RiverPark Structural Alpha has a $1000 minimum initial investment. Expenses are capped at 2.0% on the investor shares and the fund has about gathered about $7 million in assets since its June 2013 launch. Here’s the fund’s homepage, which has a funny video of the guys talking through the strategy. It’s a sort of homemade ten minute video and has much of the unprepossessing charm of Sheldon Cooper’s “Fun with flags” videos on The Big Bang Theory. Spoiler alert: the first two minutes are the managers sharing their biographies and the last seven minutes are soundless images of slides and disclaimers (I feel the compliance group’s hand here). If you’d like to listen to a précis of the strategy, start listening at about the 4:00 minute mark through to about 6:50. They make a complex strategy about as clear as anyone I’ve yet heard.

Launch Alert: T. Rowe Price International Concentrated Equity (PRCNX)

trowe_logoIt’s rare that a newly launched fund receives both a “Great Owl” (top quintile risk-adjusted returns in all trailing periods longer than a year) and Morningstar five star rating, but Price’s International Concentrated Equity Fund (PRCNX) managed the trick. On August 22, 2014, T. Rowe released a retail version of its outstanding Institutional International Concentrated Equity Fund (RPICX). That fund launched in July 2010. Federico Santilli, who has managed the RPICX since inception, will manage the new fund. He claims to be style, sector and region-agnostic, willing to go wherever the values are best. He targets “companies that have solid positions in attractive industries, have an ability to generate visible and durable free cash flow, and can create shareholder value over time.”

The portfolio holds 60 large cap names, weighting them equally but turning them over with alarming speed, about 150% per year. The portfolio offers little direct exposure to the emerging markets but the multinationals that dominate the portfolio (Royal Bank of Scotland, Sony, drug maker Glaxo, Honda) derive much of their earnings from consumers in those newer markets.

The fund has performed well. It has been in or near the top 10% of foreign large blend funds each year. $10,000 invested there at inception would have grown to $15,700 (as of late September, 2014) while its average peer would have generated $13,700 with noticeably higher volatility. It has been the second-strongest performer among all the T. Rowe Price international funds, trailing only International Discovery (PRIDX), whose lead is tiny.

PRCNX is not merely a share class of RPICX. It is a separate fund, managed by the same guy using the same discipline. Nonetheless, the portfolios may show significant differences depending on what names are attractive when money flows into each fund.

The expense ratio is capped at 0.90%, barely higher than the Institutional fund’s 0.75%, under February 2017. The minimum initial investment is $2500, reduced to $1000 for IRAs. The fund’s homepage is here but the institutional fund’s homepage has a far greater array of information and strategy detail. Price would urge me to remind you that the information about the institutional fund is designed to inform qualified investors and analysts and it’s not aimed to persuading you to buy the retail fund.

Funds in Registration

Our colleague David Welsch tracked down 12 new no-load, retail funds in registration this month. In general, these funds will be available for purchase by late November. A number of the prospectuses are incredibly incomplete (not listing, for example, a fund manager) which suggests that they’re just gearing up for the traditional year-end rush to launch new funds. Highlights among the registrants:

  • 361 Global Long/Short Equity Fund, which will feature a global long/short portfolio. Its most notable for its cast of managers, including Blaine Rollins from 361 Capitals and Harindra de Silva from Analytic Investors. Mr. Rollins ran Janus Fund at the height of its popularity (sadly, that would be around the year 2000), left investing in 2006 but has since returned to cofound 361, a liquid alts firm that’s dedicated to trying to prevent the sorts of losses the Janus funds suffered. Mr. Silva has roots going back to the PBHG Funds in the 1990s. The fund is no-load with a $2500 minimum, but we don’t yet know the expenses.
  • American Century Multi-Asset Income Fund, which will primarily seek income with a conservative balanced portfolio. You might anticipate 40% dividend-paying stocks and 60% bonds. It will be team-managed with a reasonable 0.91% e.r. and $2,000 minimum.
  • DoubleLine Long Duration Total Return Bond Fund, which will sport an effective average duration of 10 years or more. That’s a fascinating launch since long duration funds are highly interest rate sensitive and most observers anticipate rising rates (eventually). The Other Bond King and Vitaliy Liberman will manage the fund. The expenses aren’t yet set. The minimum initial investment will be $2,000 for “N” shares.

Manager Changes

Yikes.  This month saw 93 manager changes without accounting for the full extent of the turmoil caused by Mr. Gross’s change of employment. 

Top Developments in Fund Industry Litigation – September 2014

Fundfox LogoFundfox is the only intelligence service to focus exclusively on litigation involving U.S.-registered investment companies, their directors and advisers. Each month editor David Smith shares word of the month’s litigation-related highlights. Folks whose livelihood ride on such matters need to visit FundFox and chat a bit with David about the service.

New Lawsuit

  • Harbor was hit with new excessive-fee litigation, alleging that it charges advisory fees to its International and High-Yield Bond Funds that include a mark-up of more than 80% over the fees paid by Harbor to unaffiliated subadvisers who do most of the work. (Tumpowsky v. Harbor Capital Advisors, Inc.)

Orders

  • The court consolidated a pair of fee lawsuits regarding the Davis N.Y. Venture Fund. (In re Davis N.Y. Venture Fund Fee Litig.)
  • In a pair of ERISA lawsuits regarding a J.P. Morgan pooled stable value investment fund, the court transferred venue to the S.D.N.Y. (Adams v. J.P. Morgan Ret. Plan Servs., LLC; Ashurst v. J.P. Morgan Ret. Plan Servs. LLC.)
  • The court denied defendants’ motion to dismiss excessive-fee litigation regarding six Principal LifeTime funds: “[W]hile Plaintiff has included some generalized statements regarding the mutual fund industry in its complaint, Plaintiff is not relying solely on speculation and has included some specific factual allegations regarding Defendants and their practices.” (Am. Chems. & Equip., Inc. 401(k) Ret. Plan v. Principal Mgmt. Corp.)
  • The court gave its final approval to a $19.5 million settlement of an ERISA class action regarding TIAA-CREF‘s procedures for closing retirement plan accounts. (Bauer-Ramazani v. TIAA-CREF.)

Brief

  • The plaintiff filed her opening brief in an appeal concerning American Century‘s liability for the Ultra Fund’s investments in off-shore Internet gambling businesses. Defendants include independent directors. (Seidl v. Am. Century Cos.)

Amended Complaint

  • After surviving a motion to dismiss, a plaintiff filed an amended complaint alleging Securities Act violations in connection with four closed-end Morgan Keegan bond funds (n/k/a Helios funds). (Small v. RMK High Income Fund, Inc.)

For a complete list of developments last month, and for information and court documents in any case, log in at www.fundfox.com and navigate to Fundfox Insider.

 

Liquid Alternative Observations

dailyaltsBrian Haskin publishes and edits the DailyAlts site, which is devoted to the fastest-growing segment of the fund universe, liquid alternative investments. Here’s his quick take on the DailyAlts mission:

Our aim is to provide our readers (investment advisors, family offices, institutional investors, investment consultants and other industry professionals) with a centralized source for high quality news, research and other information on one of the most dynamic and fastest growing segments of the investment industry: liquid alternative investments.

I like the site for a couple reasons. The writing is clean, the stories are fresh and the content seems thoughtful. Beyond that, one of the ways that the Observer tries to help folks is by linking them to the resources they need. There are really important areas that are outside our circle of competence and beyond our resources, and we’re deeply grateful for folks like David Smith at FundFox and Brian for their generous willingness to share leads and insights.

Brian offers this as his take on the month just past.

A Key Turning Point

September 2014 may be a month to remember – jot it down in the depths of your memory as it may be a useful data point some time down the road. Why? Because it was the point at which the largest pension fund in the United States, the California Public Employee Retirement System (CalPERS), decided not to push forward with a larger allocation to hedge funds, and instead reversed course and cut their allocation to zero.

Citing costs and complexity, it is easy to see why the prior would be a problem for the taxpayer funded pension system. As James B. Stewart stated in his article for The New York Times, “the fees CalPERS paid [to hedge funds] would have soared to $1.35 billion” if they increased their hedge fund program to a meaningful allocation of their portfolio (~10-15%).

That’s clearly not a number that would make any investment committee member comfortable. The “CalPERS Decision” may be the real turning point for liquid alternatives, which are essentially hedge funds without performance fees wrapped in mutual fund or exchange traded fund wrappers.

By eliminating the performance fee, which generally is equal to 20% of annual returns, investors will reap the short- and long-term benefit of substantially lower costs. This lower cost will be attractive not only to individual investors and their advisors, but also to a much broader universe of investors that includes family offices, endowments, foundations and pension funds. Hedge funds are a key source of diversification for many of these investors already, and as more high quality mutual fund and ETF choices become available, investors will shift assets from higher cost hedge funds to lower cost liquid alternative vehicles.

It should be noted that most, but not all, alternative mutual funds do not incur a performance fee similar to a hedge fund performance fee. However, certain structures within mutual funds do allow for the mutual fund to indirectly purchase limited partnerships (i.e. hedge funds) that charge traditional hedge fund fees, including a performance fee.

New Fund Launches

As of this writing, September saw only six new alternative fund launches, with five of those being mutual funds. Additional launches often occur on the last day of the month, so others may be near, including a long/short equity fund from Goldman Sachs and a multi-alternative fund from Lazard. Two notable new funds that have launched are as follows:

  • AQR Style Premia Alternative LV Fund (QSLIX) – this is a low volatility version of an existing AQR fund, but is interesting because it takes a leveraged market neutral approach to investing across multiple asset classes using a factor based investment approach. With a targeted volatility level similar to intermediate term bonds, this fund could be a good substitute for long-only fixed income if rates start to rise.
  • Eaton Vance Richard Bernstein Market Opportunities Fund (ERMIX) – this new global macro fund is managed by the former Chief Investment Strategist at Merrill Lynch and the fund’s namesake, Richard Bernstein. The market environment is getting better for global macro funds as the Fed eases up on QE and more natural market trends re-emerge. Keep an eye on this one.

A full list of new funds can be found on the DailyAlts’ New Fund Listing.

New Fund Registrations

We tracked ten new alternative mutual fund filings in September, which means that the end of the year will be flush with new funds. Four of the filings are for long/short equity, which has been a recipient of significant inflows over the past year. Two of the notable filings outside of long/short equity include the following:

o  State Street Global Macro Absolute Return Fund – another go-anywhere global macro fund that will invest across global markets and asset classes. As with the new Eaton Vance fund above, the timing could be good and the universe for global macro funds is relatively small.

o   Palmer Square Long Short Credit Fund – just in time for rising interest rates, this new fund comes from a boutique asset management firm with a highly experienced fixed income team. The fund has a wide range of credit oriented securities that it can use on both a long and short basis to generate absolute (positive) returns over full market cycles.

Other Items of Interest

  • On the ETF front, First Trust launched an actively managed long/short equity ETF. We’ll keep an eye on this low cost vehicle to see how well a long/short strategy can do in an ETF wrapper.
  • HedgeCo launched HedgeCoVest, a managed accounts platform available to individual investors for as little as $30,000. Investors can get a hedge fund managed in their own brokerage account with full liquidity and transparency. This could be a real market disruptor.
  • TFS marked the 10-year anniversary of their TFS Market Neutral Fund (TFSMX). Quite an accomplishment, especially when (in hindsight) being “market neutral” over the past five years has not been a desirable bet. But as we know, the next five years won’t be like the past five years. Congrats to TFS.

We look forward to bringing readers of the Mutual Fund Observer monthly insights on the evolving market for alternative mutual funds.

Meh. Just meh.

meh_logoFrom time to time, I come across what strikes me as an extraordinarily cool website or online retailer. In the past those have included the DailyAlts site and the Duluth Trading Company. When that happens, I’m predisposed to share word about the site with you, for your sake and for theirs.

I still remember a sign in the hot dog shop’s window from when I was in grad school: “eat here or we’ll both go hungry.” It’s sort of like that.

I have lately been delighted with the little online shop, meh. If we were Vikings, that would be “meh son of woot” or “meh wootson.” Woot was an online shop launched in 2004. The founders worked as wholesalers and looked at the challenge of selling what I think of as “orphan goods.” That is, stuff where the quantity available is substantial but too small to be profitably distributed through a mainline retailer. Woot was distinguished by two characteristics: (1) a one-deal-one-day business model in which shoppers were offered one deeply discounted item each day and at the day’s end, the item vanished. And (2) a snarky dismissiveness of their own offerings.

It was sufficiently cool that Amazon.com bought it in 2010 and messed it up by, oh, 2011. Instead of advertising one great deal, Amazon thought they should offer one deal in each of ten categories, plus Side Deals and Woot!Plus deals and miscellaneous sale items from Amazon’s own site and goodness knows what else.

Woot’s founders decided to try again (presumably after the expiration of non-compete agreements) and, with the help of Kickstarter funding, launched meh. Like the original Woot!, meh offers precisely one deal for no more than 24 hours. The site is tantalizing for two reasons: (1) the stuff is always cheap and sometimes outstanding and (2) checking each day takes me about 30 seconds since there’s, well, just one thing.

What sort of “one thing”? 40 AA Panasonic batteries for $5. Two refurbished 39” Emerson LCD TVs for $300 (not $300 each, $300 for the pair). A Phillips Blu-ray player for $15. Down alternative comforters for $18-20. (I bought two for my son’s bed, under the assumption that 14-year-olds will eventually spot, stain or shred pretty much anything within reach.) A padded laptop, a refurbished Dyson DC41 vacuum, Bluetooth keyboards for your tablet. Stuff.

It’s a small operation. Shipping tends to be slow. They charge $5 per item to ship unless you join their Very Mediocre Person service where you get unlimited free shipping for $5/month. A lot, but not all, of the stuff is refurbished. Neither bells nor whistles are in evidence. On whole they are, I guess, sort of “meh.”

That said, they’re also worth visiting. (And no, we have no relationship of any sort with them. You’re so suspicious.) meh.

Briefly Noted . . .

Effective November 1, 2014, Catalyst/Lyons Hedged Premium Return Fund (CLPAX/ CLPFX) will pursue “long-term capital appreciation and income with less downside volatility than the equity market.” That’s a bold departure from the current promise to seek “long-term capital appreciation and income with low volatility and low correlation to the equity market.”

On October 1st, FTSE and Research Affiliates rolled out a new set of low-volatility indexes. As with many RAFI products, the stocks in the index are weighted using fundamental factors, as opposed to market capitalization. Jason Hsu, one of the RA co-founders, describes it as “a next generation approach that produces a low volatility core universe which is valuation-aware, without uncomfortable country or sector active bets.” Given that there’s $60 billion in funds, ETFs and separate accounts benchmarked against the existing FTSE RAFI indexes, you might reasonably expect the product launches to commence in the near future.

Matthews raised the expense ratio on Matthews China Fund (MCHFX) by one basis point at the end of September, netting them a cool $110,000 on a $1.1 billion fund. MCHFX and Matthews Asia Dividend have both qualified for access to Chinese “A” shares, expenses relating to which apparently triggered the one bp bump.

In another odd development, the Board of Trustees of the Value Line Core Bond Fund (VAGIX) approved a 3:1 reverse stock split on or about October 17, 2014. It’s incredibly rare for a fund to execute a split or a reverse split because the fund’s NAV has absolutely no relevance to its operation. With stocks, share prices that are too low might trigger a delisting alert and shares prices that are too high (think Berkshire Hathaway Cl A shares) might impede trading. Funds have no such excuse. When I spoke with a fund rep, she dutifully read Value Line’s one-sentence rationale to me: “It will realign our fund’s NAV with their peers’ and daily performance would be more appropriately reported.” Neither she nor I nor why the former was important or how the latter occurred, so I rack it up to “it’s Value Line. They do that sort of thing.”

Seafarer adds capacity

As Seafarer Overseas Growth & Income (SFGIX) grows steadily in size, it’s now over $117 million, and approaches its third anniversary, Andrew Foster has taken the opportunity to add to his analyst corps.  The estimable Kate Jacquet (Morningstar keeps misspelling her name as “Jacque”) is joined by Paul Espinosa and Sameer Agarwal.   Paul was a London-based analyst who has worked for Legg Mason, JP Morgan, Citigroup and Salomon Brothers.  He’s got some interesting experience in small cap and market neutral strategies.  Sameer grew up in India and worked for an India-based mutual fund before joining Royal Bank of Scotland and later Cartica Management, LLC.  Cartica is a sort of liquid alts manager focusing on the emerging markets.  I’ll ask Andrew in the month ahead how the guys’ work with what appear to be hedged products might contribute to Seafarer’s famously risk-conscious approach.

Seafarer reduced its expenses again, to 1.25% for Investor shares, though Morningstar continues to report a higher cost. 

SMALL WINS FOR INVESTORS

appleseed_logoAppleseed (APPLX/APPIX) is lowering their expenses for both investor and institutional classes. Manager Joshua Strauss writes: “As we begin a new fiscal year Oct. 1, we will be trimming four basis points off Appleseed Fund Investor shares, resulting in a 1.20% net expense ratio. At the same time, we will be lowering the net expense ratio on Institutional shares by four basis points, to 0.95%.” It’s a risk-conscious, go-anywhere sort of fund that Morningstar has recognized as one of the few smaller funds that’s impressed them.

CLOSINGS (and related inconveniences)

Grandeur Peak Global Reach (GPROX), which was already soft closed to new investors, imposed a hard close on virtually all investors on September 30th.

“Effective immediately, and until further notice” Guggenheim Alpha Opportunity Fund (SAOAX) has closed to all investors. That’s odd. It’s an exceedingly solid long/short fund with negligible assets. There’s been some administrative reshuffling going on but no clear indication of the fund’s future.

OLD WINE, NEW BOTTLES

The Absolute Opportunities Fund has been renamed the Absolute Credit Opportunities Fund (AOFOX). Its prospectus is being revised to reflect a focus on credit-related strategies. At the same time, the fund’s expense ratio is dropping from a usurious 2.75% down to a high 1.60%.

Chilton Realty Income & Growth Fund (REIAX) has become West Loop Realty Fund.

Effective on September 2, 2014, Dreyfus Select Managers Long/Short Equity Fund (DBNAX) became Dreyfus Select Managers Long/Short Fund (DBNAX). Dropping the word “equity” from the name allows the managers to invest more than 20% of the portfolio in non-equity securities but it’s not clear that any great change is in the works. The new prospectus still relegates non-equity securities to one line at the end of paragraph four: “The fund may invest, to a limited extent, in bonds and other fixed-income securities.”

Effective October 1, 2014, Mellon Capital Management Corporation replaced PVG Asset Management Corporation as sub-adviser to the Dunham Loss Averse Equity Income Fund (DAAVX),which was then re-named the Dunham Dynamic Macro Fund.

John Hancock China Emerging Leaders Fund (JCHLX) is rethinking the whole “China” thing and has become just the John Hancock Emerging Leaders Fund. The change allows them to invest across the emerging markets. DFA will still manage the fund.

Effective at the close of business on October 15, 2014, Loomis Sayles Capital Income Fund (LSCAX) becomes Loomis Sayles Dividend Income Fund. The investment strategies change to stipulate the fact that they’ll be investing, mostly, in equities.

Effective September 16, 2014, Market Vectors Wide Moat ETF (MOAT) became Market Vectors Morningstar Wide Moat ETF.

Pioneer is planning to find Solutions for you. Effective mid November, all of the Pioneer Ibbotson Allocation funds will jettison Ibbotson and gain Solutions. So, for example, Pioneer Ibbotson Growth Allocation Fund (GRAAX) will be Pioneer Solutions: Growth Fund. Moderate Allocation (PIALX) will become Solutions: Balanced and Conservative Allocation (PIAVX) will become Solutions: Conservative. Some as-yet undisclosed strategy and manager changes will accompany the name changes.

In that same “let’s add the name of someone well-known to our fund’s name” vein, what was Ramius Trading Strategies Managed Futures Fund (RTSRX) is now State Street/Ramius Managed Futures Strategy Fund. SSgA replaced Horizon Cash Management LLC as manager.

OFF TO THE DUSTBIN OF HISTORY

Dreyfus Emerging Asia Fund (DEAAX) becomes Dreyfus Submerging Asia Fund on or about October 30, 2014. The decision to liquidate caps a sorry seven year run for the tiny, volatile fund which made a ton of money for investors in 2009 (130%) but was unrelievedly bad the rest of the time.

Driehaus Global Growth Fund (DRGGX)is slated to liquidate on October 20, 2014. Cycling through a half dozen managers in a half dozen years certainly didn’t solve the fund’s performance problems and might well have deepened them.

Forward Managed Futures Strategy Fund (FUTRX) no longer has a future, a fact which will be formalized with the fund’s liquidation on October 31, 2014. The fund has lost about 12% since launch in 2012. The whole managed futures universe has performed so abysmally that you have to wonder if regression to the mean is about to rescue some of the surviving funds.

Huntington International Equity Fund (HIEAX) is merging into Huntington Global Select Markets Fund (HGSAX). Effectively both funds are being liquidated. HEIAX disappears entirely and HGSAX transforms from an underperforming equity markets stock fund to a global balanced fund with no particular tilt toward the Ems. The same management team that struggled with these as international equity funds will be entrusted with the new incarnation of Global Select. The best news is a new expense cap of 1.21% on Select. The worst news is that much of the combined portfolio might have to be liquidated to complete the transition.

Morgan Stanley Global Infrastructure Fund (UTLAX)will be absorbed by its institutional sibling, MSIF Select Global Infrastructure (MTIPX). They’re essentially the same fund, except for the fact that the surviving fund is much smaller and charges more. And, too, they’re both really good funds.

Nationwide International Value Fund (NWVAX)will be liquidated on December 19th for all the usual reasons.

Effective November 14, 2014, Northern Large Cap Growth Fund (NOEQX) will merge into Northern Large Cap Core Fund (NOLCX). The Growth Fund shareholders get a major win out of the deal, since they’re joining a far stronger, larger, cheaper fund. The reorganization does not require a shareholder vote.

Perimeter Small Cap Growth Fund (PSCGX/PSIGX) has closed to new investors in anticipation of being liquidated on Halloween. The fund’s redemption fee has been waived, just in case you want to get out early.

On or about November 14, 2014, Pioneer Ibbotson Aggressive Allocation Fund (PIAAX) merges into Pioneer Ibbotson Growth Allocation Fund (GRAAX) At the same time, Growth Allocation changes its name to Pioneer Solutions – Growth Fund.

This is kind of boring, but here’s word that PNC Pennsylvania Tax Exempt Money Market Fund and PNC Ohio Municipal Money Market Fund both liquidate in early October.

QuantShares U.S. Market Neutral Momentum Fund (MOM) and QuantShares U.S. Market Neutral Size Fund (SIZ) are under threat of delisting. “The staff of NYSE Regulation, Inc. recently advised the Trust that the Funds’ shares currently are not in compliance with NYSE Arca, Inc.’s continued listing standards with respect to the number of record or beneficial holders. Therefore, commencing on or about September 16, 2014, NYSE Arca will attach a “below compliance” (.BC) indicator to each Fund’s ticker symbol … Should the Staff determine to delist a Fund, or should the Adviser conclude that a Fund cannot be brought into compliance with NYSE Arca’s continued listing standards, the Adviser will recommend the Fund’s liquidation to the Fund’s Board of Trustees and attempt to provide shareholders with advance notice of the liquidation.”

Pending shareholder approval, Sentinel Capital Growth Fund (BRGRX – it’d read as “Boogers” if it were a license plate) and Sentinel Growth Leaders Fund (BRFOX) will merge into Sentinel Common Stock Fund (SENCX). The shareholder meeting will nominally occur in lovely Montpelier, Vermont, on November 14th. It wouldn’t be unusual for the merger to then occur by year’s end.

TCW Growth Fund (TGGYX) will liquidate around Halloween, 2014.

Turner Large Growth Fund (TCGFX) will soon merge into Turner Midcap Growth Fund (TMGFX), pending shareholder approval. I’ve never really gotten the Turner Funds. They always feel like holdovers from the run and gun ‘90s to me. The fact that Midcap Growth suffered a 56% drawdown during the financial crisis and is routinely a third more volatile than its peers fits with that impression.

Wade Tactical L/S Fund (WADEX) plans to cease and desist around the middle of October.

The Board of Directors for Western Asset Global Multi-Sector Fund (WALAX)has determined that “it is in the best interests of the fund and its shareholders to terminate the fund.” It seemed they long ago also determined it was in shareholders’ best interest not to invest in the fund:

walax

The fund is expected to cease operations on or about November 14, 2014.

On January 30, 2015, Wilmington Short Duration Government Bond Fund (ASTTX) will be merged into the Wilmington Short-Term Corporate Bond Fund (MVSAX). Likewise the Wilmington Maryland Municipal Bond Fund (ARMRX) will be merged into the Wilmington Municipal Bond Fund (WTABX). The latter, muni into muni, makes more sense on face than the former.

The WY Core Fund (SGBFX/SGBYX) disappeared on September 30th, just in case you were wondering why there’s an empty seat at the table.

In Closing . . .

As I sat in my study, 11:30 p.m. CDT on the last day of September, finishing this essay, my internet connection disappeared.  Then the lights flickered, flashed then failed.  Nuts.  The MidAmerican Energy outage map shows that I was one of precisely two customers to lose power.  This is the second time since moving to my new home in May that the power disappeared just as we were trying to finishing an update.  The first time it happened we were in a world of hurt, both having lost a bunch of writing and having the rest of the new issue trapped inside an inert machine.

This time we were irked and modestly inconvenienced. The difference is that after the first major outage, Chip identified and I bought a really good uninterruptible power supply (UPS) for us. While it’s not an industrial grade unit, it allowed me to save everything, move it for safekeeping to an external solid-state drive and finish the story I was working on before shutting the system down. We resumed work a bit before dawn and finished everything roughly on time.

All of which is to say thank you! to all the folks who’ve supported the Observer.  I was deeply grateful that we had the resources at hand to react, quickly and frugally, to resolve the problems caused by the first outage.  Thanks to all the folks who use our Amazon link (feel free to share it!), to Joe and Bladen (cool old English name, linked to a village in Oxfordshire) who contributed to our resources this month but most especially to Deb who, in an odd sense, is the Observer’s only subscriber.  Deb arranged a monthly auto-transfer from her PayPal account which provides us with a modest, very welcome stipend at the beginning of each month.

The other project that you helped support this month was the first ever face-to-face meeting of the folks who write for you each month.  Charles, Chip, Ed and I gathered in Chicago in the immediate aftermath of the Morningstar ETF Conference to discuss (some would say “plot”) the Observer’s future.  Among our first priorities coming out of the meeting is to formalize the Observer as a legal enterprise: incorporation, pursue of 501(c)3 tax-exempt organization status, better liability and intellectual property protection and so on.  None of that will immediately change the Observer but it all lays the foundation for a more sustainable future.  So thanks for your help in covering the expenses there, too.

Take care and enjoy October.  It tends to be a rough and tumble month in the markets, but a fine time for visiting orchards with your family and starting the holiday fruitcakes.

As ever,

David

 

Sarofim Equity (SRFMX), October 2014

By David Snowball

Objective and strategy

The fund seeks long-term capital appreciation consistent with the preservation of capital. In general it invests in a fairly compact portfolio of multinational, megacap names. The portfolio’s smallest firm is valued at $10 billion and it won’t even consider anything below $5 billion. The managers start by identifying the most structurally attractive sectors, those with the most consistent long term growth prospects. They then look for the leaders in those sectors, which tend to be large, mature and financially stable. They then buy those stocks and hold them, sometimes for decades; annual turnover is frequently 1%.

Adviser

Fayez Sarofim & Co. Fayez Sarofim was founded in 1958 by, well, Fayez Sarofim. It’s a Houston-based, employee-owned firm that manages about $28 billion in assets. It serves as the subadviser to several mutual funds, including Dreyfus Appreciation (DGAGX), Core (DLTSX), Tax-Managed Growth (DTMGX) and Worldwide Growth (PGROX).

Managers

Fayez Sarofim, Gentry Lee, Jeffrey Jacobe, Reynaldo Reza and Alan Christensen. Mr. Sarofim is the firm’s Chairman, Chief Executive Officer and Chief Investment Officer while the others are, respectively, his president, CIO, vice president and COO.

Strategy capacity and closure

Undisclosed. Dreyfus Appreciation owns 61 stocks, the smallest of which has a $10 billion market cap. That implies a $30 billion strategy capacity, assuming that the firm wants to own no more than 5% of the outstanding shares of any corporation. Institutional constraints might dictate a lower capacity, but there’s been no commentary on those.

Active share

Undisclosed. We presume that the portfolio statistics for Sarofim will parallel those for Dreyfus Appreciation but Dreyfus hasn’t disclosed the active share for the fund. They published “The Case for Active Share Analysis” (2014), part of their “Sales Ideas” series for advisers, but chose to provide the active share for only five of its 88 funds. Given the fund’s high R-squared (91) and focus on huge multinational stocks, it is unlikely to have a high active share.

Management’s stake in the fund

None yet recorded. Mr. Sarofim has over $1 million in both of the Dreyfus funds that he co-manages. Mr. Lee has between $50,000 – $100,000 in both. Mr. Jacobe has between $1 – $50,000 in both.

Opening date

January 17, 2014.

Minimum investment

$2,500

Expense ratio

0.70%, after waivers, on assets of $105 million (as of July 2023). There’s also a 2% redemption fee on shares held 90 days or less.

Comments

Fayez Sarofim & Co. mostly manages the personal wealth of very, very rich people. Like many such firms, it’s faced with “the grandchild problem.” What do you do when one of your investors, who might have entrusted a hundred million to you, asks you to work with her grandkids who might have just a paltry few tens of thousands to invest? The most common answer is, very quietly, to open a mutual fund or two to serve those younger family members. Such funds are normally available to the general public but are rarely advertised.

Because those funds are offered as a service to their clients, the advisor has no incentive to attract bunches of assets or to pad their fees (gramps would not like that). They are, on whole, a quiet bunch.

For years, Fayez Sarofim & Co. has had a productive, amicable relationship with Dreyfus, four of whose funds they subadvise. The most notable of those is Dreyfus Appreciation (DGAGX). DGAGX is the most visible manifestation of Mr. Sarofim’s mantra, “buy the best companies and hold them forever.” The fund has a sort of ultra-blue chip portfolio topped with Apple, Exxon, Philip Morris, Coca-Cola, Chevron and Johnson & Johnson. Heck, you even know the smallest and most obscure names they hold: News Corp, 21st Century-Fox, and Whole Foods.

It is not a flashy portfolio. It is, however, one finely attuned to the needs of really long-term investors. By Morningstar’s calculation, “While the fund’s 10-year returns don’t look great right now, on a rolling basis its 10-year returns have beaten the large-blend category 87% of the time under the current team. It has done this with significantly less volatility than its average peer, so its returns look pretty good on a risk-adjusted basis.”

Sarofim Equity was very, very quietly launched in January 2014 to serve the needs of Sarofim’s lower-paid staff and its investors’ friends and family. How quietly? The fund not only doesn’t have a webpage, its existence isn’t even acknowledged on the Sarofim & Co. site. Morningstar’s link to the fund still points to another company, weeks after we mentioned the glitch to them. There’s no factsheet, no news release, no posted letters. A Sarofim executive stressed to me last year that they have no interest in competing with Dreyfus, their long-time partners, or drawing attention from the Dreyfus funds they subadvise. They just want a tool for in-house use.

This, however, an attractive fund. Sarofim Equity is likely to differ from Dreyfus Appreciation in only two material ways. First, it’s likely to hold the same stocks but not necessarily in exactly the same weightings. It’s a question of what’s most attractively priced when money flows in, and some of the Dreyfus holdings were established decades ago. At last check, both the top five and top ten holdings were the same names in slightly jumbled order. Second, Sarofim Equity is cheaper. Sarofim charges 71 basis points, Dreyfus charges 94.

Bottom Line

Dreyfus Appreciation has been a consistently solid choice for conservative investors looking for exposure to the world’s best companies. Given the firm’s investment strategy, “small and nimble” isn’t a particular advantage for the new fund. Less costly is.

Fund website

There isn’t one. You can, however, call the fund’s representatives at 855-727-6346. Barron’s wrote a nice profile of the 85-year-old Mr. Sarofim, “A Lion in Winter,” in 2013 (Google the title to find access). In one of those developments that make me smile and look out the window, Mr. S. married his son’s mother-in-law in the summer of 2014. 

Prospectus

© Mutual Fund Observer, 2014. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.

Meridian Small Cap Growth (MSGAX/MISGX), October 2014

By David Snowball

Objective and strategy

The fund pursues long-term capital growth by investing, primarily, in domestic small cap stocks. Their discipline stresses the importance of managing risk first and foremost. They seek to avoid the subset of sometimes alluring names which seem set up for terminal decline, then identifying high quality small firms with the sorts of sustainable competitive advantages and competent leadership that might lead them one day to become high quality large firms. As of 2013, the stocks in their target universe had market caps between $50 million and $4.8 billion. The portfolio holds about 100 stocks.

Adviser

Arrowpoint Asset Management, LLC. Headquartered in Denver, Arrowpoint was founded in 2007 by three former Janus Funds managers: David Corkins, Karen Reidy and Minyoung Sohn. Arrowpoint provides investment management services to high net worth individuals, banks and corporations and also advises the four Meridian funds. The firm has grown from 10 employees and $1 billion AUM in 2007 to 37 employees and $6.2 billion in 2014. Part of that growth came from the acquisition of Aster Investment Management and the Meridian Funds in 2013 following founder Rick Aster’s death.

Managers

Chad Meade and Brian Schaub. Before joining Arrowpoint, Mr. Meade worked at Janus as an analyst (2001-2011) and portfolio manager for Triton (2006-2013) and Venture (2010-13). His analytic focus was on small cap health care and industrial stocks. Mr. Schaub’s career paralleled Mr. Meade’s. He joined Janus as an analyst in 2000 and co-managed both Triton and Venture with Mr. Meade. Mr. Meade is a Virginia Tech grad while Williams College is Mr. Schaub’s alma mater. They are supported by six dedicated analysts who report directly to them.

Strategy capacity and closure

Between $1.5 – 2.0 billion.  The managers were responsible for handling up to $9 billion at Janus and think they have a pretty good handle on the amount of money that they and the strategy can profitably accommodate.

Active share

Not yet available.

Management’s stake in the fund

Both managers have over $1 million in each of the funds (Growth and Small Cap Growth) that they oversee. Everyone at Arrowpoint is encouraged to have some amount invested in the funds but since each employee’s needs and resources differ, there’s no mandated dollar amount. Two of Meridian’s independent trustees have over $100,000 invested with the firm and two have no investment.

Opening date

December 16, 2013.

Minimum investment

$99,999 for Investor Class shares, $2,500 for Advisor Class which is widely available through brokerages.

Expense ratio

1.49% for Advisor Class, 1.22% for Investor Class, and 1.09% for Institutional class on assets of about $764.8 million (as of July 2023).

Comments

So far, so (predictably) good. Meridian Small Cap Growth draws on its managers’ simple, logical, repeatable discipline. It is, like its forebears, quietly thriving. Janus Triton (JGMAX), the fund’s most immediate predecessor, outperformed its peers in seven of seven years that Messrs. Schaub and Meade managed the fund. Over their time as a whole, it crushed its benchmark by over 400 bps a year, beat 95% of its peers and exposed its investors to just 80% of its average peer’s risk (per Morningstar, 5/22/13).

Here’s the visual representation of that performance, with Triton represented by the blue line and Morningstar’s proprietary small-growth index in red.  A $10,000 investment in Triton grew to $21,100 over their tenure, a similar investment in the average small growth fund grew to $15,900.

triton

That’s a remarkable accomplishment. Only 9% of all small-growth managers have managed to exceed their benchmark over the past five years, much less over seven years. And much, much less over seven years with substantially reduced volatility. The questions, reasonably enough, are two: (1) how did they do it and (2) what are the prospects that they can do it again?

One hallmark of really first-rate minds is the ability to make complex notions or processes seem comprehensible, almost self-evidently simple. As I spoke with the managers about Question One, their answer made it seem almost laughably simple: they buy good companies and avoid bad ones.

One possibility is that it really is simple. The other is that they’re really good.

I’m opting for the latter.

Chad and Brian attribute their success to two, equally significant disciplines. First, they identify and avoid losers. They illustrated the importance of that by dividing the five-year returns of the stocks in their benchmark, the Russell 2000 Growth, into quintiles; the top quintile represented the one-fifth of stocks with the highest returns while the bottom quintile represented the one-fifth with lowest returns. The lowest quintile stocks in the index lost an average of 80% in value over five years. That’s over 200 stocks which would need to return over 500% of their lows just to break even. Chad argues that it’s the dark side of the power of compounding; that those losses are simply too great to ever overcome. “We could never afford to invest in that quintile, regardless of the exciting stories they can tell,” he noted. “Avoiding them has probably contributed half or better of our outperformance.”

There is no reliable, mechanical way to screen out losers, which explains their continued presence in the indexes.  “There are many failures,” Brian argues.  Many firms have products that won’t be relevant in three to five years.  Many can’t raise prices.  Some are completely dependent on a single large customer; others suffer disruption and disintermediation (that is, customers find ways to live without them).  Many are reliant on the capital markets to survive, rather than being able to fund their operations through internally-generated free cash flow.

Each stock they consider starts with the same question: “how much could we lose?” They create worst case, base case and best case models for each firm’s future and eliminate all of the stocks with terrible worst case outcomes, regardless of how positive the base and best cases might be. 

They trace that staunch loss aversion to personal history: they both entered the profession in mid-2000 when it seemed like every stock and every screen was flashing red all the time.  “I don’t think we’ll ever forget that experience.  It has permanently shaped our investing discipline.”

The other half of the process is identifying firms with sustainable competitive advantages.  “All large caps have them,” they note, “while few small caps do.”  The small cap universe remains under covered by Wall Street firms; there are just a handful of sell-side analysts attempting to sort through several thousand stocks.  “Overall, they’re less picked over and less efficiently priced,” according to Mr. Schaub.  Among the characteristics they’re looking for is a growing industry, evidence of pricing power (are their goods or services sufficiently valuable that they can afford to charge more for them?), of strengthening margins (is the firm making money more efficiently as it matures?) and low market penetration (are there lots of new opportunities for growth and diversification?).

Bottom Line

Schaub and Meade’s goal is clear, sensible and attainable: “we try to run an all-weather portfolio that would be an investor’s core small growth position; not something that you trade into and out of but something that’s a permanent part of the portfolio.  We’re not trying to shoot the lights out, but we think our discipline and experience will allow us to capture 100% or a little bit more of the market’s total return while shooting downside capture of  80%. We think that should give us good relative results over a full market cycle.” While the track record of the fund is short, the record of its managers is long and impressive. Investors looking for intelligent, risk-managed exposure to this important slice of the market owe it to themselves to look closely here.

Fund website

Meridian Small Cap Growth

© Mutual Fund Observer, 2014. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.

Miller Income (LMCJX), October 2014

By David Snowball

At the time of publication, this fund was named Miller Income Opportunity Fund.

Objective and strategy

The fund hopes to provide a high level of income while maintaining the potential for growth. They hope to “generate a high level of income from a wide array of sources” by prowling up and down firms’ capital structures and across asset classes. The range of available investments is nigh unto limitless: common stocks, business development corporations, REITs, MLPs, preferred stock, convertibles, public partnerships, royalty trusts, bonds, currency-linked derivatives, CEFs, ETFs and both offensive and defensive derivatives. The managers may choose to short markets or individual securities, “a speculative strategy that involves special risks.” The fund is non-diversified, though it holds a reasonably large number of positions.  

Adviser

Legg Mason. Founded in 1899, the firm is headquartered in Baltimore but has offices around the world (New York, London, Tokyo, Dubai, and Hong Kong). It is a publicly traded company with $711 billion in assets under management, as of August, 2014. Legg Mason advises 86 mutual funds. Its brands and subsidiaries include Clearbridge (the core brand, launched after the value of the “Legg Mason” name became impaired), Permal (hedge funds), Royce Funds (small cap funds), Brandywine Global (institutional clients), QS Investors (a quant firm managing the QS Batterymarch funds) and Western Asset (primarily their fixed-income arm).

Manager

Bill Miller III and Bill Miller IV. The elder Mr. Miller (William Herbert Miller III) managed the Legg Mason Value Trust from 1982 – 2012 and still co-manages Legg Mason Opportunity (LMOPX). Mr. Miller received many accolades for his work in the 1990s, including Morningstar’s manager of the year (1998) and of the decade. Of the younger Mr. Miller we know only that “he has been employed by one or more subsidiaries of Legg Mason since 2009.”

Strategy capacity and closure

Not available.

Active share

Not available. Mr. Miller’s other Opportunity Fund (LMOPX) has a low r-squared and high tracking error, which implies a high active share but does not guarantee it.

Management’s stake in the fund

None yet recorded. Mr. Miller owns more than $1 million in LMOPX shares.

Opening date

February 26, 2014.

Minimum investment

$1,000 for “A” shares, reduced to $250 for IRAs and $50 for accounts established with an automatic investment plan.

Expense ratio

1.21% on assets of $141.2 million (as of July 2023). “A” shares also carry a 5.75% sales load. Expenses for the other share classes range from 0.90 – 1.95%.

Comments

If you believe that Mr. Miller’s range of investment competence knows no limits, this is the fund for you.

Mr. Miller’s fame derives from a 15 year streak of outperforming the S&P 500. That streak ran from 1991-2005. It was followed by trailing the S&P500 in five of the next six years. During this latter period, a $10,000 investment in the Legg Mason Value Trust (LMVTX, now ClearBridge Value Trust) declined to $6,700 while an investment in the S&P500 grew to $12,000. At the height of its popularity, LMVTX held $12 billion in assets. By the time of Mr. Miller’s departure in April 2012, it has shrunk by 85%. Morningstar counseled patience (“we think this is a good time to buy this fund” 2007; “keep the faith” 2008; “we still like the fund” late 2008; “we appreciate the bounce” 2009; “over the past 15 years, however, the fund still sits in the group’s best quartile” 2010) before succumbing to confusion and doubt (“The case for Legg Mason Capital Management Value Trust is hard, but not impossible, to make” 2012).

The significance of Mr. Miller’s earlier accomplishment has long been the subject of dispute. Mr. Miller described the streak as “an accident of the calendar … maybe 95% luck,” since many of his annual victories reflected short-lived bursts of outperformance at year’s end. Defenders such as Legg Mason’s Michael Mauboussin calculated the probability that his streak was actually luck at one in 2.3 million. Skeptics, arguing that Mauboussin used careless if convenient assumptions, claim that the chance his streak was due to luck ranged from 3 – 75%.

Mr. Miller’s approach is contrarian and concentrated: he’s sure that many securities are substantially mispriced much of the time and that the path to riches is to invest robustly in the maligned, misunderstood securities. Those bets produced dramatic results: his Opportunity Trust (LMOPX) captured nearly 200% of the market’s downside over the past five- and ten-year periods, as well as 150% of its upside. The fund’s beta averages between 1.6 – 1.7 over the same periods. Its alpha is substantially negative (-5 to -8), which suggests that shareholders are not being fairly compensated for the fund’s volatility. Here’s the fund’s history (in blue) against the S&P MidCap 400 (yellow). Investors seem to have had trouble sticking with the fund, whose 5- and 10-year investor returns (a Morningstar measure that attempts to capture the experience of the average investor in the fund) trail 95% of its peers. Assets have declined by about 80% since their 2007 peak.

lmopx

Against this historic backdrop, Mr. Miller has been staging a comeback. “Unchastened” and pursuing “blindingly obvious trends” (“Mutual-fund king Bill Miller makes a comeback,” Wall Street Journal, 6/29/14), LMOPX has returned 35% annually over the past three years (through September 2014) which places him in the top 2% of his peer group. In February he and his son were entrusted with this new fund.

Four characteristics of the fund stand out.

  1. Its portfolio is quite distinctive. The fund can invest, long or short, in almost any publicly traded security. The asset class breakdown, as of August 2014, was:

    Common Stock

    39%

    REITs

    20

    Publicly-traded partnerships

    20

    Business development companies and registered investment companies

    9

    Bonds

    7

    Preferred shares

    3

    Cash

    2

    Mr. Miller’s stake in his top holdings is often two or three times greater than the next most concentrated fund holding.

  2. Its performance is typical. There are two senses of “typical” here. First, it has produced about the same returns as its competitors. Second, it has done so with substantially greater volatility, which is typical of Mr. Miller’s funds.
    miller

  3. It is remarkably expensive. That’s also typical for a Legg Mason fund. At 1.91%, this is the single most expensive fund in its peer group: world allocation funds, either “A” or no-load, with at least $100 million in assets. The fund charges about 50 basis points more than its next most expensive competitor. According to the prospectus, an A-share account that started at $10,000 and grew by 5% per year would incur $1212 in annual fees over the next three years.

  4. Its income production is minimal. While the fund aspires to “a high level of income,” Morningstar reports that its 30-day SEC yield is 0.00% (as of September 2014). The fund’s website reports a midyear income payout of $0.104 per share, roughly 1%. “Yield” is not reported as one of the “portfolio characteristics” on the webpage.

Bottom Line

It is hard to make a case for Miller Income Opportunity. It’s impossible to project the fund’s returns even if we were to assume the wildly improbable “average” stock market performance of 10% per year. We can, with some confidence, say that the returns will be idiosyncratic and exceedingly volatile. We can say, with equal confidence, that the fund will be enduringly expensive. Individual interested in exposure to a macro hedge fund, but lacking the required high net worth, might find this hedge fund like offering and its mercurial manager appealing. Most investors will find greater profit in small, flexible funds (from Oakseed Opportunity SEEDX to T. Rowe Price Global Allocation RPGAX) with experienced teams, lower expenses and greater sensitivity to loss control. 

Fund website

Miller Income Fund

© Mutual Fund Observer, 2014. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.

Janus Henderson Absolute Return Income Opportunities Fund (formerly Janus Global Unconstrained Bond), (JUCAX), October 2014

By David Snowball

At the time of publication, this fund was named Janus Global Unconstrained Bond Fund.

Objective and strategy

The fund is seeking maximum total return, consistent with preservation of capital. Consistent with its name, the manager is free to invest in virtually any income-producing security; the prospectus lists corporate and government bonds, both international and domestic, convertibles, preferred stocks, common stocks “which have the potential for paying dividends” and a wide variety of derivatives. Up to 50% of the portfolio may be invested in emerging markets. The manager can lend, presumably to short-sellers, up to one-third of the portfolio. The duration might range from negative three years, a position in which the portfolio would rise if interest rates rose, to eight years.

Adviser

Janus Capital Management, LLC. Janus is a Denver-based investment advisor that manages $178 billion in assets. $103 billion of those assets are in mutual funds. Janus was made famous by the success of its gun-slinging equity funds in the 1990s and infamous by the failure of its gun-slinging equity funds in the decade that followed. It made headlines for management turmoil, involvement in a market-timing scandal, manager departures and lawsuits. Janus advises 54 Janus, Janus Aspen, INTECH and Perkins mutual funds; of those, 28 have managers with three years or less on the job.

Manager

William Gross. Mr. Gross founded PIMCO, as well as serving as a managing director, portfolio manager and chief investment officer for them. Morningstar recognized him as its fixed income manager of the decade for 2000-09 and has named him as fixed-income manager of the year on three occasions. His media handle was “The Bond King,” a term which Google finds associated with his name on 100,000 occasions. He was generally recognized as one of the industry’s three most accomplished fixed-income investors, along with Jeffrey Gundlach of DoubleLine and Dan Fuss of Loomis Sayles. At the time of his departure from PIMCO, he was responsible for $1.8 trillion in assets and managed or co-managed 34 mutual funds.

Strategy capacity and closure

Not yet reported. PIMCO allowed its Unconstrained Bond fund, which Mr. Gross managed in 2014, to remain open after assets reached $20 billion. That fund has trailed two-thirds or more its “non-traditional bond” peers for the past one- , three- and five-year periods.

Active share

Not available.

Management’s stake in the fund

Not yet recorded. Mr. Gross reputedly had $240 million invested in various PIMCO funds and might be expected to shift a noticeable fraction of those investments here but there’s been no public statement on the matter.

Opening date

May 27, 2014.

Minimum investment

$2,500 for “A” shares and no-load “T” shares. There are, in whole, seven share classes. Brokerage availability is limited, a condition which seems likely to change.

Expense ratio

The fund has 8 different share class with expense ratios ranging from 0.63% to 1.71% and assets under management of $58.7 million, as of July 2023. 

Comments

The question isn’t whether this fund will draw billions of dollars. It will. Mr. Gross, a billionaire, has a personal investment in the PIMCO funds reportedly worth $250 million. I expect much will migrate here. He’s been worshipped by institutional investors and sovereign wealth fund managers. Thousands of financial advisors will see the immediate opportunity to “add value” by “moving ahead of the crowd.”  The Wall Street Journal reported that PIMCO saw $10 billion in asset outflows at the announcement of Mr. Gross’s departure (“Pimco’s New CIOs: ‘Bill Gross Relied on Us,’” 9/29/14) and speculated that outflows could reach $100 billion.

No, the question isn’t whether this fund attracts money. It’s whether the fund should attract your money.

Three factors would predispose me against such an investment.

  1. Mr. Gross’s reported behavior does not inspire confidence. Mr. Gross’s departure from PIMCO was not occasioned by poor performance; it was occasioned by poor behavior. The evidence available suggests that he has become increasingly autocratic, irascible, disrespectful and inconsistent. The record of PIMCO’s loss of talented staff – both those who left because they could not tolerate Mr. Gross’s behavior and those who apparently threatened to resign en masse over it – speaks to a sustained, substantial problem. Josh Brown of Ritzholz Wealth Management suspects that Gross’s dramatically wrong market bets led him “to hunker down. To throw people out of one’s office when they voice dissension. To view the movement of the market as an affront to one’s intelligence … for a highly-visible professional investor [such a mindset] becomes utterly debilitating.” We’ve wondered, especially after the Morningstar presentation, whether there might be a health issue somewhere in the background. Regardless of its source, the behavior is an unresolved problem.

  2. Mr. Gross’s recent performance does not inspire confidence. Not to put too fine a point on it, but Mr. Gross already served as manager of an unconstrained bond portfolio, PIMCO Unconstrained Bond and its near-clone Harbor Unconstrained Bond, and his performance was distinctly mediocre. He assumed control of the fund in December 2013 when Chris Dialynis took a sudden sabbatical which some now attribute to fallout from an internal power struggle. Regardless of the motive, Mr. Gross assumed control and trailed his peers (the green line) through the year.
    janus

    While the record is too short to sustain much of a judgment, it does highlight the fact that Mr. Gross does not arrive bearing a magic wand.

  3. Mr. Gross is apt to feel that he’s got something to prove. It is hard to imagine that he does not approach this new assignment with a considerable chip on his shoulder. He has always had a penchant for bold moves, some of which have substantially damaged his shareholders. Outsized bets in favor of TIPs and emerging markets bonds (2013) and against Treasuries (2011) are typical of the “Macro bets [that] have come to dominate the fund’s high-level decision-making in recent years” (Morningstar analyst Eric Jacobson, July 16 2013). The combination of a tendency to make bold bets and the unavoidable pressure to show the world they were wrong is fundamentally troubling.

Bottom Line

Based on Mr. Gross’s long track record with PIMCO Total Return, you might be hoping for returns that exceed their benchmark by 1-2% per year. Over the course of decades, those gains would compound mightily but Mr. Gross, 70, will not be managing this fund for decades. The question is, what risk are you assuming in pursuit of those very modest gains over the relatively modest period in which he’s likely to run the fund? Shorn of his vast analyst corps and his place on the world stage, the answer is not clear. As a general rule, in the most conservative part of your portfolio, clarity on such matters would be deeply desirable. We’d counsel watchful waiting, the fund is likely to still be available in six months and the picture will be far clearer then.

Fund website

Janus Henderson Absolute Return Income Opportunities Fund

© Mutual Fund Observer, 2014. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.

October 2014, Funds in Registration

By David Snowball

361 Global Long/Short Equity Fund

361 Global Long/Short Equity Fund seeks to achieve long-term capital appreciation by participating in rising markets and preserving capital in falling ones. The plan is to invest, long and short, in a global, all-cap portfolio. The fund will be managed by the “A” team from 361 plus Harindra de Silva, Dennis Bein, and David Krider from Analytic Investors. The opening expense ratio is not yet set. The minimum initial investment will be $2500.

American Century Multi-Asset Income Fund

American Century Multi-Asset Income Fund seeks income, but is willing to accept a bit of capital appreciation, too. The plan is to invest in income-producing equity securities (20-60% of the portfolio) as well as fixed-income ones (40-80%). The fund will be managed by a team led by American Century’s CIO, Scott Wittman. The opening expense ratio is 0.91%, after waivers, on Investor shares. The minimum initial investment will be $2,000.

DoubleLine Long Duration Total Return Bond Fund

DoubleLine Long Duration Total Return Bond Fund seeks long-term total return. The plan is to create a fixed-income portfolio whose duration is at least 10 years. The firm’s specialty, of course, are mortgage-backed securities of various sorts but the fund can invest anywhere. Up to a third of the portfolio might be in bonds denominated in foreign currencies. The fund will be managed by The Jeffrey and Vitaliy Liberman. The opening expense ratio is not yet set. The minimum initial investment will be $2,000 for “N” shares, reduced to $500 for IRAs.

Exceed Structured Enhanced Index Strategy Fund

Exceed Structured Enhanced Index Strategy Fund seeks to track the NASDAQ Exceed Structured Enhanced Index (EXENHA). The word “enhanced” always makes me worried. The fund will provide no downside protection but offers 2:1 upside leverage on the S&P500, capped at gains of around 20-25%. The fund will be managed by Joseph Halpern. The opening expense ratio is 1.45%. The minimum initial investment will be $2,500.

Exceed Structured Hedged Index Strategy Fund

Exceed Structured Hedged Index Strategy Fund seeks to track the NASDAQ Exceed Structured Hedged Index (EXHEDG). They hope to protect you against relatively minor losses in the S&P500 and to offer you 150% leverage on minor gains, capped at around 10-15% per year. The rough translation is that this fund is designed to improve your returns in modestly rising or sideways markets. The fund will be managed by Joseph Halpern. The opening expense ratio is 1.45%. The minimum initial investment will be $2,500.

Exceed Structured Shield Index Strategy Fund

Exceed Structured Shield Index Strategy Fund seeks to track the NASDAQ Exceed Structured Protection Index (EXPROT). This is an options-based strategy which allows you to track the “normal” movements of the S&P500 but which eliminates extreme returns. The options are designed to limit your downside risk to 12.5% annually but also cap the upside at 15%. The fund will be managed by Joseph Halpern. The opening expense ratio is 1.45%. The minimum initial investment will be $2,500.

Geneva Advisors Emerging Markets Fund

Geneva Advisors Emerging Markets Fund will to pursue long-term capital growth by investing in emerging markets firms with “sustainable competitive advantages and highly visible future growth potential, including internal revenue growth, large market opportunities and simple business models, and shows strong cash flow generation and high return on invested capital.” The fund will be managed by Reiner Triltsch and Eswar Menon of Geneva Advisors. The opening expense ratio is 1.60% for “R” shares. The minimum initial investment will be $1,000.

Longboard Long/Short Equity Fund

Longboard Long/Short Equity Fund seeks to long term capital appreciation by investing, long and short, in US equities. The fund will be managed by Eric Crittenden, Cole Wilcox and Jason Klatt of Longboard. The team has been running a hedge fund using this strategy since 2005; it’s returned 10.8% a year since inception while the S&P500 made 6.3%. The hedge fund dropped 24% in 2008, about half of the market’s loss, and a fraction of a percent in 2011. The opening expense ratio is not yet set but the sum of the component pieces would exceed 3.0%. The minimum initial investment will be $2500.

PIMCO International Dividend Fund

PIMCO International Dividend Fund seeks to provide current income that exceeds the average yield on international stocks while providing long-term capital appreciation. The plan is to invest in an international-focused diversified portfolio of dividend-paying stocks that have an attractive yield, a growing dividend, and long-term capital appreciation. They can also include fixed-income securities and derivatives, but those don’t seem core. The fund will be managed by … someone, they’re just not saying who. The opening expense ratio is not yet set. The minimum initial investment for “D” shares will be $1000.

PIMCO U.S. Dividend Fund

PIMCO U.S. Dividend Fund seeks to provide current income that exceeds the average yield on U.S. stocks while providing long-term capital appreciation. The plan is to invest in a diversified portfolio of domestic dividend-paying stocks that have an attractive yield, a growing dividend, and long-term capital appreciation. They can also include fixed-income securities and derivatives, but those don’t seem core. The fund will be managed by … someone, they’re just not saying who. The opening expense ratio is not yet set. The minimum initial investment for “D” shares will be $1000.

TCW High Dividend Equities Fund

TCW High Dividend Equities Fund seeks high total return from current income and capital appreciation. The plan is to invest in US equities including those in the odd corners: publicly-traded partnerships, business development corporations, REITs, MLPs, and ETFs. The fund will be managed by Iman Brivanlou. The opening expense ratio is not yet set. The minimum initial investment will be $2,000, reduced to $500 for IRAs.

TCW Global Real Estate Fund

TCW Global Real Estate Fund seeks to maximize total return from current income and long-term capital growth. The plan is to invest in 25-50 global REITs. The fund will be managed by Iman Brivanlou. The opening expense ratio is not yet set. The minimum initial investment will be $2,000, reduced to $500 for IRAs.

Manager changes, September 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

ASFIX

Absolute Strategies Fund

No one, but . . .

Harvest Capital Strategies and Pine Cobble Capital will become subadvisers to the fund.

9/14

MBDFX

AMG Managers Total Return Bond Fund

William Gross.  This would be, alphabetically, the first of nearly 40 manager changes attributable to Mr. Gross’s change of employment.

Scott Mather, Mark Kiesel, and Mihir  Worah have been designated as his successors here.

9/14

AHFAX

Aurora Horizons

Chicago Fundamental Investment Partners is out as a subadvisor to the fund

The other nine subadvisors remain.

9/14

BXMMX

Blackstone Alternative Multi-Manager Fund

No one, but . . .

Rail-Splitter Capital Management has joined as a new subadviser.

9/14

DHGRX

Centre Global Select Equity Fund

Jing Sun is out

Xavier Smith take over.

9/14

KDCAX

Deutsche Large Cap Value

Peter Steffen

Deepak Khanna

9/14

DRGGX

Driehaus Global Growth Fund, which itself is slated for liquidation.

Dan Rea is out, along with assistant portfolio manager, Sebastian Pigeon

Joshua Rubin moves up to lead portfolio manager. 

9/14

DRIDX

Driehaus International Discovery Fund

Dan Rea is out, along with assistant portfolio manager, Sebastian Pigeon

Joshua Rubin moves up to lead portfolio manager

9/14

DAAIX

Dunham Appreciation & Income Fund

Calamos Advisors is out as a subadvisor

Penn Capital Management takes over as subadvisor

9/14

DAAVX

Dunham Loss Averse Equity Income Fund

PVG Asset Management is no longer a subadvisor

Mellon Capital Management is the new subadvisor

9/14

EIIPX

E.I.I. International Property

Suang Eng Tsan

Andrew Cox and Michael Wong join Alfred Otero

9/14

ENRAX

Eaton Vance Global Natural Resources

Robert Lyon

Stephen Bonnyman

9/14

FGSAX

Federated MDT Mid Cap Growth Fund

No one, but . . .

John Lewicke joins Brian Greenberg, Frederick Konopka, and Daniel Mahr.

9/14

FSTRX

Federated MDT Stock Trust Fund

No one, but . . .

John Lewicke joins Brian Greenberg, Frederick Konopka, and Daniel Mahr.

9/14

FSGLX

Frontegra RobecoSAM Global Equity Fund

Diego D’Argenio is no longer a portfolio manager of the fund.

Rainer Baumann assumed the position of senior portfolio manager. Kai Fachinger remains on the fund.

9/14

FACEX

Frost Growth Equity Fund

Stephen Coker and TJ Qatato (yep, we checked the spelling) no longer serve as portfolio managers to the Fund.

John Lutz, Tom Stringfellow, and Brad Thompson carry on

9/14

GTCIX

Glenmede International Fund

Frederick Herman is no longer listed as a portfolio manager.

Wei Huang joins Andrew B. Williams, Robert Benthem de Grave, and Stephen Dolce to manage the fund.

9/14

MXREX

Great-West Real Estate Index Fund

No one, but . . .

Deanne Gyllenhaal joins Louis Bottari, Peter Matthew, and Patrick Waddell

9/14

MXGBX

Great-West Templeton Global Bond Fund

Canyon Chan (sounds like he should be a fighter pilot) is no longer a portfolio manager of the fund.

Michael Hasentab and Christine Zhu carry on.

9/14

GLDZX

GuideStone Funds Low-Duration Bond Fund

Chris Dialynas no longer serves as a portfolio manager.

Mary Syal, Thomas Musmanno, Scott MacLellan, Brian Matthews and Jerome Schneider remain on the fund.

9/14

GMDZX

GuideStone Funds Medium-Duration Bond Fund

Chris Dialynas no longer serves as a portfolio manager.

Jonathan Beinner, Carl Eichstaedt, Mark Lindbloom, Michael Swell, Julien Scholnick, Sudi Mariappa, Michael Buchanan, Keith Gardner, and S. Kenneth Leech remain.

9/14

HCGAX

HSBC Emerging Markets Debt Fund

No one, but . . .

Vinayak Potti joins Guillermo Ossés, Lisa Chua, Binqi Liu, and Phil Yuhn.

9/14

HBMAX

HSBC Emerging Markets Local Debt Fund

No one, but . . .

Abdelak Adjriou joins Guillermo Ossés, Lisa Chua, Binqi Liu, and Phil Yuhn.

9/14

HRSAX

Huntington Real Strategies Fund

Robert “Chip” Henderson II, who served as portfolio manager for only five months.

Paul Attwood joins Peter Sorrentino.

9/14

ALAAX

Invesco Income Allocation

Gary Wendler is no longer listed as a portfolio manager

Duy Nguyen is in

9/14

AINAX

Invesco International Allocation

Gary Wendler is no longer listed as a portfolio manager

Duy Nguyen is in

9/14

IECAX

Ivy Emerging Markets Local Currency Debt Fund

Orlena Yee is out

The rest of the team, Simon Lue-Fong, , Mary-Therese Barton, Wee-Ming Ting, Philippe Petit, and Guido Chamorro, remains

9/14

JAREX

James Alpha Global Real Estate Investments Portfolio

Amanda Black no longer serves as a portfolio manager.

Andrew Duffy continues on.

9/14

JUCAX

Janus Unconstrained Bond Fund (soon to be Janus Global Unconstrained Bond Fund)

Gibson Smith and Darrell Watters

William Gross

9/14

JITRX

JHancock Funds II Total Return

William Gross

Mark Kiesel, Scott Mather, and Mihir Worah are in

9/14

JFIAX

John Hancock Floating Rate Income Fund

Stephen A. Walsh no longer serves as a portfolio manager of the fund.

S. Kenneth Leech has been named as portfolio manager the fund. Michael C. Buchanan and Timothy J. Settel will continue as portfolio managers of the fund.

9/14

JISOX

John Hancock Small Cap Opportunities Fund

No one, but . . .

Brandywine Global Investment Management and Gannett, Welsh & Kotler have been added as subadvisors

9/14

JASAX

JPMorgan Alternative Strategies Fund

Bala Iyer will retire at the end of the month

The rest of the team remains

9/14

JDEAX

JPMorgan Disciplined Equity Fund

Terance Chen is no longer listed as a portfolio manager

Steven Lee, Raffaele Zingone, and Aryeh Glatter remain.

9/14

JUEAX

JPMorgan Equity Index Fund

No one, but . . .

Nicholas D’Eramo will join the team at the beginning of November.

9/14

JEITX

JPMorgan Global Research

Beltrán de la Lastra is out

James Cook, Ido Eisenberg, and Demetris Georghiou are in.

9/14

OIEAX

JPMorgan International Research Enhanced Equity

Beltrán de la Lastra is out

James Cook and Ido Eisenberg are in.

9/14

OGIAX

JPMorgan Investor Balanced

Bala Iyer will retire at the end of the month

The rest of the team remains

9/14

OICAX

JPMorgan Investor Conservative Growth

Bala Iyer will retire at the end of the month

The rest of the team remains

9/14

ONGIX

JPMorgan Investor Growth & Income

Bala Iyer will retire at the end of the month

The rest of the team remains

9/14

ONGAX

JPMorgan Investor Growth

Bala Iyer will retire at the end of the month

The rest of the team remains

9/14

HSKAX

JPMorgan Market Neutral

Terance Chen is no longer listed as a portfolio manager

Steven Lee and Raffaele Zingone remain.

9/14

JLSAX

JPMorgan Research Equity Long/Short

Terance Chen is no longer listed as a portfolio manager

Steven Lee and Raffaele Zingone remain.

9/14

JMNAX

JPMorgan Research Market Neutral

Terance Chen is no longer listed as a portfolio manager

Steven Lee and Raffaele Zingone remain.

9/14

JEPAX

JPMorgan U.S. Research Equity Plus

Terance Chen is no longer listed as a portfolio manager

Aryeh Glatter and Raffaele Zingone return to manage the fund after a two month absence

9/14

KPFIX

KP Fixed Income

Kelly Cliff ceased serving as co-portfolio manager

Ivan “Butch” Cliff joined the rest of the team.

9/14

KPIEX

KP International Equity Fund

Kelly Cliff ceased serving as co-portfolio manager

Ivan “Butch” Cliff joined the rest of the team.

9/14

KPLCX

KP Large Cap Equity Fund

Kelly Cliff ceased serving as co-portfolio manager

Ivan “Butch” Cliff joined the rest of the team.

9/14

KPSCX

KP Small Cap Equity Fund

Kelly Cliff ceased serving as co-portfolio manager

Ivan “Butch” Cliff joined the rest of the team.

9/14

SWMSX

Laudus Small-Cap MarketMasters Fund

TAMRO Capital Partners LLC will no longer serve as an investment manager

The rest of the team remains

9/14

LSVRX

Loomis Sayles Value Fund

No one, but . . .

Adam Liebhoff joins Arthur Barry who’s been running the fund on his own since Warren Koontz’s departure last month.

9/14

MOPAX

MainStay US Small Cap Fund

Janet Navon will be leaving at the end of the year

David Pearl and Michael Welhoelter will continue to serve as portfolio managers of the fund.

9/14

MDDAX

MassMutual Select Diversified Value Fund

Warren Koontz is no longer listed as a portfolio manager

Joseph Kirby, Henry Otto, Steven Tonkovich, and Arthur Barry remain on the fund.

9/14

NMMGX

Northern Multi-Manager Global Real Estate Fund

Subadvisor, EII Real Securities is out, along with managers Peter Nieuwland, Alfred Otero, James Rehlander, and Suang Eng Tsan.

Subadvisor, Delaware Investments Fund Advisers, is in. The remainder of the managers stay on the fund.

9/14

MIBFX

Orion/Monetta Intermediate Bond Fund

George Palmer, Jr., no longer serves as a portfolio manager.

Stephen Cummings, Jr., continues on.

9/14

PARNX

Parnassus Fund

Romahlo Wilson ceased acting as a co-portfolio manager

Jerome Dodson continues to serve as lead portfolio manager, and Ian Sexsmith continues to serve as co-portfolio manager.  Sexsmith?  Smith, as in “one who makes…”?

9/14

LSEAX

Persimmon Long/Short Fund

Todd Dawes no longer serves as a portfolio manager of the fund.

Arthur Holley has been added as a portfolio manager, joining Greg Horn and the rest of the extensive team.

9/14

PEQAX

PIMCO EqS Emerging Markets Fund

Masha Gordon

Virginie Maisonneuve

9/14

PFATX

PIMCO Fundamental Advantage Absolute Return Strategy

William Gross

Robert Arnott, Mohsen Fahmi and Saumil Parikh

9/14

PIXAX

PIMCO Fundamental IndexPLUS AR

William Gross

Robert Arnott, Mohsen Fahmi and Saumil Parikh

9/14

PSCSX

PIMCO Small Cap StocksPLUS AR Strategy

William Gross

Mohsen Fahmi and Saumil Parikh

9/14

PSTKX

PIMCO StocksPLUS

William Gross

Sudi Mariappa

9/14

PSPTX

PIMCO StocksPLUS Absolute Return

William Gross

Mohsen Fahmi and Saumil Parikh

9/14

PSTIX

PIMCO StocksPLUS AR Short Strategy

William Gross

Mohsen Fahmi and Saumil Parikh

9/14

PTXAX

PIMCO Tax Managed Real Return Fund

Mihir Worah is out

Rahul Seksaria joins Joseph Dean in managing the fund.

9/14

PTTRX

PIMCO Total Return

William Gross

Mark Kiesel, Scott Mather, and Mihir Worah are in

9/14

PUBAX

PIMCO Unconstrained Bond Fund

William Gross

Daniel Ivascyn, Mohsen Fahmi, and Saumil Parikh

9/14

PIAAX

Pioneer Ibbotson Aggressive Allocation Fund

Pioneer Investment Management, Inc. will assume direct responsibility for the day-to-day management of each of the Pioneer Ibbotson Allocation funds in mid-November. This will involve a name and strategy change, as well.

There’s no word yet on portfolio managers

9/14

GRAAX

Pioneer Ibbotson Growth Allocation Fund

Pioneer Investment Management, Inc. will assume direct responsibility for the day-to-day management of each of the Pioneer Ibbotson Allocation funds in mid-November. This will involve a name and strategy change, as well.

There’s no word yet on portfolio managers

9/14

PIALX

Pioneer Ibbotson Moderate Allocation Fund

Pioneer Investment Management, Inc. will assume direct responsibility for the day-to-day management of each of the Pioneer Ibbotson Allocation funds in mid-November. This will involve a name and strategy change, as well.

There’s no word yet on portfolio managers

9/14

PMDEX

PMC Diversified Equity

Warren Koontz is no longer listed as a portfolio manager

Arthur Barry remains on the fund, along with the rest of the extensive team

9/14

PMCAX

PNC Mid Cap Fund

Gordon Johnson has announced his intention to retire effective June 30, 2015

Effective October 31, 2014, James Mineman and Peter Roy will become co-lead portfolio managers

9/14

PPCAX

PNC Small Cap Fund

Gordon Johnson has announced his intention to retire effective June 30, 2015

Effective October 31, 2014, James Mineman and Peter Roy will become co-lead portfolio managers

9/14

PCGAX

Prudential Income Builder

William Gross, Matthew Sabel, and Dennis Alff are no longer listed as portfolio managers

QMA, Jennison, Prudential Fixed Income and Prudential Real Estate Investors became the subadvisers to the Fund.

9/14

PEEAX

Prudential Jennison Mid-Cap Growth Fund

No one, but . . .

Jeffrey Rabinowitz will join John Mullman as a portfolio manager for the fund.

9/14

PBQIX

Prudential Jennison Value Fund

David Kiefer and Avi Berg are out

Warren Koontz will be managing the fund

9/14

RSFLX

RS Floating Rate Fund

Marc Gross is no longer co-portfolio manager

Kevin Booth, Paul Gillin, and John Blaney carry on

9/14

GUHYX

RS High Yield Fund

Marc Gross is no longer co-portfolio manager

Kevin Booth and Paul Gillin carry on

9/14

RSIAX

RS Strategic Income Fund

Marc Gross is no longer co-portfolio manager

Kevin Booth, Paul Gillin, and John Blaney carry on

9/14

FMGCX

Rx Dynamic Growth Fund

Chase Weaver is no longer a member of the portfolio management team

Steven Wruble, Greg Rutherford, and D. Jerry Murphey remain

9/14

SVFAX

Smead Value Fund

No one, but . . .

Cole Smead joins William Smead and Tony Scherrer.

RTSRX

State Street/Ramius Managed Futures Strategy Fund (note the new name)

Jill King and Horizon Cash Management are out.

Thomas Connelley, of State Street Global Advisors, joins William Marr and Alexander Rudin on the management team.

9/14

FMJDX

Strategic Advisers International Fund

No one, but . . .

Thompson, Siegel & Walmsley has been added as a fourth subadviser to the fund

9/14

FNAPX

Strategic Advisers Small-Mid Cap Multi-Manager Fund

No one, but . . .

Fisher Investments has been added as the ninth subadviser to the fund

9/14

PRCOX

T. Rowe Price Capital Opportunity Fund

Anna Dopkin, whose done a bang-up job in her seven years with the fund, leaves at New Year’s.

Ann Holcomb, Jason Polun, and Eric Veiel become the new portfolio management team

9/14

TILCX

T. Rowe Price Institutional Large-Cap Value Fund

No one, at the moment, but . . .

Heather McPherson joins Mark Finn, John Linehan, and Brian Rogers on the fund. They’ve also announced that Brian Rogers will step down a bit over a year from now.

9/14

TRISX

T. Rowe Price Institutional U.S. Structured Research

Anna Dopkin, see above.

Ann Holcomb, Jason Polun, and Eric Veiel become the new portfolio management team

9/14

TGMAX

TCW Emerging Markets Multi-Asset Opportunity Fund

No one, but . . .

Ray Prasad joins Penelope Foley and David Robbins.

9/14

TVSVX

Third Avenue Small Cap Value Fund

Curtis Jensen and Charles Page are no longer listed as portfolio managers.  The debate centers on whether to use “purge,” “cleansing” or “rolling coup” to describe the continuing departure of almost all the old guard Third Avenue managers.

Robert Rewey and Tim Bui remain on the fund

9/14

IMNAX

Transamerica Global Equity Fund

Dario Castagna and Dan McNeela are no longer listed as portfolio managers

Jimmy Chang and David Harris are now managing the fund.

9/14

MCGAX

Transamerica Mid Cap Growth Fund

Stephen Bradley, Jr. is no longer listed as a portfolio manager

Howard Aschwald and Timothy Chatard carry on

9/14

WMMRX

Wilmington Multi-Manager Real Asset Fund

No one, but . . .

Parametric Portfolio Associates become a fourth subadviser to the fund with Thomas Seto and David Stein joining the team

9/14

DTLVX

Wilshire Large Company Value Portfolio

Antonio DeSpirito, III no longer serves as portfolio manager

The rest of the team remains.

9/14

 

Morningstar ETF Conference Notes

By Charles Boccadoro

Originally published in October 1, 2014 Commentary

MStar_Conf_1

The pre-autumnal weather was perfect. Blue skies. Warm days. Cool nights. Vibrant city scene. New construction. Breath-taking architecture. Diverse eateries, like Lou Malnati’s deep dish pizza. Stylist bars and coffee shops. Colorful flower boxes on The River Walk. Shopping galore. An enlightened public metro system that enables you to arrival at O’Hare and 45 minutes later be at Clark/Lake in the heart of downtown. If you have not visited The Windy City since say when the Sears Tower was renamed the Willis Tower, you owe yourself a walk down The Magnificent Mile.

MStar_Conf_2

At the opening keynote, Ben Johnson, Morningstar’s director responsible for coverage of exchange traded funds (ETFs) and conference host, noted that ETFs today hold $1.9T in assets versus just $700M only five years ago, during the first such conference. He explained that 72% is new money, not just appreciation.

The conference had a total of 671 attendees, including 470 registered attendees (mostly financial advisors, but this number also includes PR people and individual attendees), 123 sponsor attendees, 43 speakers, and 35 journalists, but not counting a very helpful M* staff and walk-ins. Five years ago? Just shy of 300 attendees.


The Dirty Words of Finance

AQR’s Ronen Israel spoke of Style Premia, which refers to source of compelling returns generated by certain investment vehicle styles, specifically Value, Momentum, Carry (the tendency for higher-yielding assets to provide higher returns than lower-yielding assets), and Defensive (the tendency for lower-risk and higher-quality assets to generate higher risk-adjusted returns). He argues that these excess returns are backed by both theory, be it efficient market or behavioral science, and “decades of data across geographies and asset groups.”

He presented further data that indicate these four styles have historically had low correlation. He believes that by constructing a portfolio using these styles across multiple asset classes investors will yield more consistent returns versus say the tradition 60/40 stocks/bond balanced portfolio. Add in LSD, which stands for leverage, shorting and derivatives, or what Mr. Israel jokingly calls “the dirty word of finance,” and you have the basic recipe for one of AQR’s newest fund offerings: Style Premia Alternative (QSPNX). The fund seeks long-term absolute (positive) returns.

Shorting is used to neutralize market risk, while exposing the Style Premia. Leverage is used to amplify absolute returns at defined portfolio volatility. Derivatives provide most efficient vehicles for exposure to alternative classes, like interest rates, currencies, and commodities.

When asked if using LSD flirted with disaster, Mr. Israel answered it could be managed, alluding to drawdown controls, liquidity, and transparency.

(My own experience with a somewhat similar strategy at AQR, known as Risk Parity, proved to be highly correlated and anything but transparent. When bonds, commodities, and EM equities sank rapidly from May through June 2013, AQR’s strategy sank with them. Its risk parity flagship AQRNX drew down 18.1% in 31 trading days…and the fund house stopped publishing its monthly commentary.)

When asked about the size style, he explained that their research showed size not to be that robust, unless you factored in liquidity and quality, alluding to a future paper called “Size Matters If You Control Your Junk.”

When asked if his presentation was available on-line or in-print, he answered no. His good paper “Understanding Style Premia” was available in the media room and is available at Institutional Investor Journals, registration required.

Launched in October 2013, the young fund has generated nearly $300M in AUM while slightly underperforming Vanguard’s Balanced Index Fund VBINX, but outperforming the rather diverse multi-alternative category.

QSPNX er is 2.36% after waivers and 1.75% after cap (through April 2015). Like all AQR funds, it carries high minimums and caters to the exclusivity of institutional investors and advisors, which strikes me as being shareholder unfriendly. Today, AQR offers 27 funds, 17 launched in the past three years. They offer no ETFs.

MStar_Conf_3


In The Shadow of Giants

PIMCO’s Jerome Schneider took over the short-term and funding desk from legendary Paul McCulley in 2010. Two years before, he was at Bear Stearns. Today, think popular active ETF MINT. Think PAIUX.

During his briefing, he touched on 2% being real expected growth rate. Of new liquidly requirements for money market funds, which could bring potential for redemption gates and fees, providing more motivation to look at low duration bonds as an alternative to cash. He spoke of 14 year old cars that needed to be replaced and expected US housing recovery.

He anticipates capital expenditure will continue to improve, people will get wealthier, and for US to provide a better investment outlook than rest of world, which was a somewhat contrarian view at the conference. He mentioned global debt overhang, mostly in the public sector. Of working age population declining. And, of geopolitical instability. He believes bonds still play a role in one’s portfolio, because historically they have drawn down much less than equities.

It was all rather disjointed.

Mostly, he talked about the extraordinary culture of active management at PIMCO. With time tested investment practices. Liquidity sensitivity. Risk management. Credit research capability, including 45 analysts across the globe that he begins calling at 03:45…the start of his work day. He touted PIMCO’s understanding of tools of the trade and trading acumen. “Even Bill Gross still trades.” He displayed a picture of himself that folks often mistook for a young Paul McCulley.

Cannot help but think what an awkward time it must be for the good folks at PIMCO. And be reminded of another giant’s quote: “Only when the tide goes out do you discover who’s been swimming naked.”


MStar_Conf_4
Youthful Hosts

Surely, it is my own graying hair, wrinkled bags, muddled thought processes, and inarticulate mannerisms that makes me notice something extraordinary about the people hosting and leading the conference’s many panels, workshops, luncheons, keynotes, receptions, and sidebars. They all look very young! In addition to being clear thinkers, articulate public speakers, helpful and gracious hosts.

It would not be too much of a stretch to say that the combined ages of M*’s Ben Johnson, Ling-Wei Hew, and Samuel Lee together add up to one Eugene Fama.  Indeed, when Mr. Johnson sat across from Nobel laureate Professor Fama, during a charming lunch time keynote/interview, he could have easily been an undergraduate from University of Chicago.

Is it because the ETF industry itself is young? Or, is it as a colleague explains: “Morningstar has hard time holding on to good talent because it is a stepping stone to higher paying jobs at places like BlackRock.”

Whatever the reason, if we were all as knowledgeable about investing as Mr. Lee and the rest of the youthful staff, the world of investing would be a much better place.


Damp & Disappointing

That’s how JP Morgan’s Dr. David Kelly, Chief Global Strategist, describes our current recovery. While I did not agree with everything, it was hands-down the best talk of the conference. At one point he said that he wished he could speak for another hour. I wished he could have too.

“Damp and disappointing, like an Irish summer,” he explained.

Short term US prospects are good, but long term not good. “In the short run, it’s all about demand. But in the long run, it’s all about supply, which will be adversely impacted by labor and productivity.” The labor force is not growing. Baby boomers are retiring en masse. He also showed data that productivity was likely not growing, blaming lack of capital expenditure. (Hard to believe since we seem to work 24/7 these days thanks to amazing improvements communications, computing, information access, manufacturing technology, etc. All the while, living longer.)

Dr. Kelly offered up fixes: 1) corporate tax reform, including 10% flat rate, and 2) immigration reform, that allows the world’s best, brightest, and hardest working continued entry to the US. But since congress only acts in crisis, he concedes his forecast prepares for slowing US growth longer term.

Greater opportunity for long term growth is overseas. Manufacturing momentum is gaining around world. Cyclical growth will be higher than US while valuations remain lower and work force is younger. Simply put, they have more room to grow. Unfortunately, US media bias “always gives impression that the rest of the world is in flames…it shows only bad news.”

JP Morgan remains underweight fixed income, since monetary policy remains abnormal, and cautiously over weight US equities. The thing about Irish summers is…everything is green. Low interest rates. Higher corporate margins. Normal valuation. Although he takes issue with the phrase “All the easy money has been made in equities.” He asks “When was it ever easy?”

MStar_Conf_5


Alpha Architect

Dr. Wesley Gray is a former US Marine Captain, a former assistant and now adjunct professor at Drexel University, co-author of Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors, and founder of AlphaArchitect, LLC.

He earned his MBA and Finance PhD from University of Chicago, where Professor Fama was on his doctoral committee. He offers a fresh perspective in the investment community. Straight talking and no holds barred. My first impression – a kind of amped-up, in-your-face Mebane Faber. (They are friends.)

In fact, he starts his presentation with an overview of Mr. Faber’s book “The Ivy Portfolio,” which at its simplest form represents an equal allocation strategy across multiple and somewhat uncorrelated investment vehicles, like US stocks, world stocks, bonds, REITS, and commodities.

Dr. Gray argues that simple, equal allocation remains tough to beat. No model works all the time; in fact, the simple equal allocation strategy has under-performed the past four years, but precisely because forces driving markets are unstable, the strategy will reward investors with satisfactory returns over the long run. “Complexity does not add value.”

He seems equally comfortable talking efficient market theory and how to maximize a portfolio’s Sharpe ratio as he does explaining why the phycology of dynamic loss aversion creates opportunities in the market.

When Professor Fama earlier in the day dismissed a question about trend-following, answering “No evidence that this works,” Dr. Gray wished he would have asked about the so-called “Prime anomaly…momentum. Momentum is pervasive.”

When Dr. Gray was asked, “Will your presentation would be made available on-line?” He answered “Absolutely.” Here is link to Beware of Geeks Bearing Formulas.

His firm’s web site is interesting, including a new tools page, free with an easy registration. They launch their first ETF aptly called Alpha Architect’s Quantitative Value (QVAL) on 20 October, which will follow the strategy outlined in the book. Basically, buy cheap high-quality stocks that Wall Street hates using systematic decision making in a transparent fashion. Definitively a candidate MFO fund profile.


Trends Shaping The ETF Market

Ben Johnson hosted an excellent overview ETF trends. The overall briefings included Strategic Beta, Active ETFs (like BOND and MINT), and ETF Managed Portfolios.

Points made by Mr. Johnson:

1. Active vs passive is a false premise. Today’s ETFs represent a cross-section of both approaches.

2. “More assets are flowing into passive investment vehicles that are increasingly active in their nature and implementation.”

3. Smart beta is a loaded term. “They will not look smart all the time” and investors need to set expectations accordingly.

4. M* assigns the term “Strategic Beta” to a growing category of indexes and exchange traded products (ETPs) that track them. “These indexes seek to enhance returns or minimize risk relative to traditional market cap weighted benchmarks.” They often have tilts, like low volatility value, and are consistently rules-based, transparent, and relatively low-cost.

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5. Strategic Beta subset of ETPs has been explosive in recent years with 374 listed in US as of 2Q14 or 1/4 of all ETPs, while amassing $360M, or 1/5th of ETP AUM. Perhaps more telling is that 31% of new cash flows for ETPs in 2013 went into Strategic Beta products.

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6. Reduction or fees and a general disillusionment with active managers are two of several reasons behind the growth in these ETFs.  These quasi active funds charge a fraction of traditional fees. A disillusionment with active managers is evidenced in recent surveys made by Northern Trust and PowerShares.

M* is attempting to bring more neutral attention to these ETFs, which up to now has been driven by product providers. In doing so, M* hopes to help set expectation management, or ground rules if you will, to better compare these investment alternatives. With ground rules set, they seek to highlight winners and call out losers. And, at the end of the day, help investors “navigate this increasingly complex landscape.”

They’ve started to develop the following taxonomy that is complementary to (but not in place of) existing M* categories.

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Honestly, I think their coverage of this area is M* at its best.


Welcomed Moderation

Mr. Koesterich gave the conference opening keynote. He is chief investment strategist for BlackRock. The briefing room was packed. Several hundred people. Many standing along wall. The reception afterward was just madness. His briefing was entitled “2014 Mid-Year Update – What to Know / What to Do.”

He threaded a somewhat cautiously reassuring middle ground. Things aren’t great. But, they aren’t terrible either. They are just different. Different, perhaps, because the fed experiment is untested. No one really knows how QE will turn out. But in mean time, it’s keeping things together.

Different, perhaps, because this is first time in 30-some years where investors are facing a rising interest rate environment. Not expected to be rapid. But rather certain. So bonds no longer seem as safe and certainly not as high yield as in recent decades.

To get to the punch-line, his advice is: 1) rethink bonds – seek adaptive strategies, look to EM, switch to terms less interest rate sensitive, like HY, avoiding 2-5 year maturities, look into muni’s on taxable accounts, 2) generate income, but don’t overreach – look for flexible approaches, proxies to HY, like dividend equities, and 3) seek growth, but manage volatility – diversify to unconstrained strategies

More generally, he thinks we are in a cyclical upswing, but slower than normal. Does not expect US to achieve 3.5% annual GDP growth (post WWII normal) for next decade. Reasons: high debt, aging demographics, and wage stagnation (similar to Rob Arnott’s 3D cautions).

He cited stats that non-financial debt has actually increased 20-30%, not decreased, since financial crisis. US population growth last year was zero. Overall wages, adjusted for inflation, same as late ’90s. But for men, same as mid ‘70s. (The latter wage impact has been masked by more credit availability, more women working, and lower savings.) All indicative of slower growth in US for foreseeable future, despite increases in productivity.

Lack of volatility is due to fed, keeping interest rates low, and high liquidity. Expects volatility to increase next year as rates start to rise. He believes that lower interest rates so far is one of year’s biggest surprises. Explains it due to pension funds shifting out of equities and into bonds and that US 10 year is pretty good relative to Japan and Europe.

On inflation, he believes tech and aging demographics tend to keep inflation in check.

BlackRock continues to like large cap over small cap. Latter will be more sensitive to interest rate increases.

Anything cheap? Stocks remain cheaper than bonds, because of extensive fed purchases during QE. Nothing cheap on absolute basis, only on relative basis. “All asset classes above long term averages, except a couple niche areas.”

“Should we all move to cash?” Mr. Koesterich answers no. Just moderate our expectations going forward. Equities are perhaps 10-15% above long term averages. But not expensive compared to prices before previous drops.

One reason is company margins remain high. For couple of same reasons: low credit interest and low wages. Plus higher productivity, which later appeared contrary to JP Morgan’s perspective.

He advises investors be selective in equities. Look for value. Like large over small. More cyclical companies. He likes tech, energy, manufacturing, financials going forward. This past year, folks have driven up valuations of “safe” equities like utilities, staples, REITS. But those investments tend to work well in recessions…not so much in rising interest rate environment. EM relatively inexpensive, but fears they are cheap for reason. Lots of divided arguments here at BlackRock. Japan likely good trade for next couple years due to Japanese pension funds shifting to organic assets.

He closed by stating that only New Zealand is offering a 10 year sovereign return above 4%. Which means, bond holders must take on higher risk. He suggests three places to look: HY, EM, muni’s.

Again, a moderate presentation and perhaps not much new here. While I personally remain more cautiously optimistic about US economy, compared to mounting predictions of another big pull-back, it was a welcomed perspective.

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Beta Central

I’m hard-pressed to think of someone who has done more to enlighten investors about the benefits of ETF vehicles and opportunities beyond buy-and-hold US market cap than Mebane Faber. At this conference especially, he represents a central figure helping shape investment opportunities and strategies today.

He was kind enough to spend a few minutes before his panel on dividend investing and ETFs, which he held with Morningstar’s Josh Peters and Samuel Lee.

He shared that Cambria recently completed a funding campaign to expand its internal operations using the increasingly popular “Crowd Funding” approach. They did not use one of the established shops, like EquityNet, simply because of cost.  A couple hundred “accredited investors” quickly responded to Cambria’s request to raise $1-2M. The investors now have a private stake in the company. Mebane says they plan to use the funds to increase staff, both research and marketing. Indeed, he’s hiring: “If you are an A+ candidate, incredibly sharp, gritty, and super hungry, come join us!”

The new ETF Global Momentum (GMOM), which we mentioned in the July commentary, is due out soon, he thinks this month. Several others are in pipeline: Global Income and Currency Strategies ETF (FXFX), Emerging Shareholder Yield ETF (EYLD), Sovereign High Yield Bond ETF (SOVB), and Value and Momentum ETF (VAMO), which will make for a total of eight Cambria ETFs. The initial three ETFs (SYLD, FYLD, and GVAL) have attracted $365M in their young lives.

He admitted being surprised that Mark Yusko of Morgan Creek Funds agreed to take over AdvisorShares Global Tactical ETF GTAA, which now has just $20M AUM.

He was also surprised and disappointed to read about the SEC’s probe in F2 Investments, which alleges overstated performance results. F2 specializes in strategies “designed to protect investors from severe losses in down markets while providing quality participation in rising markets” and they sub-advise several Virtus ETFs. When WSJ reported that F2 received a so-called Wells notice, which portends a civil case against the company, Mebane posted “first requirement for anyone allocating to separate account investment advisor – GIPS audit. None? Move on.” I asked, “What’s GIPS?” He explains it stands for Global Investment Performance Standards and was created by the CFA Institute.

Mebane continues to write, has three books in work, including one on top hedge funds. Speaking of insight into hedge funds, subscribers joining his The Idea Farm after 31 December will pay a much elevated $499 annually.