Yearly Archives: 2017

December 1, 2017

By David Snowball

Dear friends,

Welcome to Winter. It’s my favorite time of the year. My students, with their hummingbird-like metabolisms, are loath to surrender their shorts and sandals even now.

The midwinter holidays ahead – not just Christmas but a dozen other celebrations rooted in other cultures and other traditions – are, at base, expressions of gratitude. They occur in the darkest, coldest, most threatening time of year. They occur at the moment when we most need others, and they most need us. No one thrives when they’re alone and each day brings 14 to 18 hours of darkness. And so we’ve chosen, from time immemorial, to open our hearts and our homes, our arms and our pantries, to friends and strangers alike.

Don’t talk yourself out of that impulse. Don’t worry about whether your gift is glittery (if people actually care about that, you’re sharing gifts with the wrong people) or your meal is perfect (Martha Stewart’s were and she ended up in the Big House). People most appreciate gifts that make them think of you; give a part of yourself. Follow the Grinch. Take advice from Scrooged. Tell someone they make you smile, hug them if you dare, smile and go.

In the midst of Hurricane Harvey’s assault on the Houston area in early September, we reminded you that you could make a difference by reaching out – then and there, while the need was great and the impulse was at the top of your mind – to help folks. I made two personal notes then. The first was that I’d chosen to contribute to the Houston Food Bank and the Animal Defense League of Texas, which handled pet rescue and rehabilitation. The second was that I’d remind you – and myself – to give again by year’s end. “The pattern is painful: disaster strikes, money and attention pour in, the immediate crisis abates, we move on … and a region is left with few resources as they begin the long slog to rebuild homes, re-open schools and find meaningful employment for folks who always lived with limited financial resources.”

I did check in and, happily, I did give again. The Houston Food Bank has a particularly compelling opportunity: first time gifts are matched 3:1.

The Riverbend Food Bank serving my home community, the Iowa/Illinois Quad Cities, couldn’t offer any such incentive but they, too, made a compelling point: my neighbors need help and, for $20, I could feed a hundred.

And so I did. To both. You could, too. Donor’s Choose helps teachers in need. (Non-profit.) Marketplace provides some of the sharpest, more accessible financial journalism on the air. (Non-profit.) Wikipedia is now the universal encyclopedia, free, volunteer and run on a shoestring. (Non-profit.) Heck, Charity Navigator, the service that tells you which non-profits use your money most responsibly and effectively, is itself a donor-supported non-profit. Pick one of them. Pick your own cause. But don’t walk away from the opportunity to make a difference for the folks who make a difference to our lives and our neighbors.

Oh, by the way, you make me smile. I’m endlessly humbled (and pleased) at the realization that you’re dropping by to see what we’ve been thinking. Thanks for that!

“Rembrandt of Red Ink”

Ted, the senior member of our discussion board, came across a remembrance this month of the worst fund manager who ever lived. Charles Steadman managed the singularly improbable feat of taking $1,000, investing it in the stock market for 38 years, and ending up with $500. Over those same years, the market rose 1500%.

The funds were derided as “the Deadman funds,” both in sardonic tribute to Steadman’s name and skills, and in recognition of the fact that many of the accounts in his funds were held by those who actually were dead.

Here, courtesy of Ted the Linkster, is the link to Jack El-Hai’s homage to The Dead Man Fund.

Farewell to Amazon

With considerable sadness and trepidation, we announce the end of our associates relationship with Amazon. Amazon has concluded that the open portal approach that we’ve been using – that is, the simple system where you enter Amazon through our link and we receive financial support from Amazon – violates their rules. The system was set up long ago with the help of an Amazon representative, but things have changed. Under the new dispensation, we have two options: (1) have Amazon ads scrolling on the side of each page and (2) ask you to support us through the Amazon Smiles program for non-profits. Neither is attractive. We really don’t want to clutter the site with more of the constant commercials that plague the web, and the Amazon Smiles program pays only 0.5%. Our original Amazon associates program paid nearly 8%, which Amazon has throttled back to about 5%, which is still ten-times what Smiles offers.

The only two sources of support for MFO were Amazon and reader contributions. If it’s in your budget and in your best interest, we’d encourage you to make a tax-deductible year-end contribution to MFO. Contributions of $100 or more get you a year’s access to MFO Premium, home of the unique fund screener that we’ve built for folks who want information – sophisticated risk measures, rolling returns, correlations between funds – that are normally unavailable to regular folks. Whether you choose to give $1 or $10,000, we’re grateful and we’ll keep digging on your behalf.

Some folks have chosen to use our PayPal link to create regular monthly contributions, which we find almost freakishly cool. Thanks, as ever, to Deb, Greg, and Brian, whose continued monthly support make us smile.

Wishing you great joy and delight in the company of friends, until we meet again in the New Year,

Rearranging the Deck Chairs

By Edward A. Studzinski

“In wars then let our great objective be victory, not lengthy campaigns.”

                  Sun Tzu, The Art of War

Another year-end is in sight. Those of us who have been conservative in our asset allocations and predicting the end of the world have once again it seems, been proven wrong. Or perhaps not, for as the market keeps rising, the breadth keeps getting narrower. Or least it had been. It begs the question of whether we are setting up for a blow-off, heading straight up through year-end, or something else.

Attached is a picture of a group of active value managers in Chicago, which I think is indicative of the issues all value investors face at this point in time. Put simply, the valuation metrics make no sense.

A research analyst at one local firm, speaking with his peers at a coffee break at the recent Baird Industrial Conference, was asked how he could justify the issues in which investor money was being placed. His answer was that the lowest risk category of equity issues now had a discount rate of 6% being used in the dividend discount model. And as the person who related that narrative to me said, “Perhaps even 6% is too high at this point.”

What I know is that increasingly, institutional investors are more worried at this time of year about job security and missing or having missed the train as it has left the station, resulting in under investment.

That of course leads to performance which lags the benchmarks. So once again the index funds will look smarter (and certainly cheaper). But again the focus is not on how much can be lost. For those pondering this in their real life portfolios, I suggest you pay attention to the recovery period it takes for a fund to earn back from its point of maximum drawdown. All of that information is available to those making use of our premium site.

Swensen’s Thoughts

We have often spoken with admiration about David Swensen who runs the Yale Endowment. Two weeks ago he was a speaker at an annual Council of Foreign Relations program, the Stephen C. Freidheim Symposium on Global Economics, where he was interviewed by Robert Rubin, the former Treasury Secretary. I commend the whole event to you as it is available on YouTube. One of the points that resonated with me is that he has been engaged in a conversation with Yale’s Provost about the wisdom of reducing the assumed rate of nominal returns on the endowment portfolio from 8.25% down to 5%. We have heard a similar debate in other quarters about the need to reduce the assumed rate of return on pension funds, given where interest rates are (or are not). But if we reduce them to what makes both actuarial and financial sense, those pension plans are even more under-funded than they appear to be at present.

Swensen of course, is not a fan of the public markets, feeling that most active managers have become subject to too much short-termism in investing, focusing on quarterly earnings numbers. One of the points he makes is that finance classes in business schools spend too much time talking about normal distributions for stock returns. His point is that we know that those distributions are not normal, for if they were the Crash of 1987 representing a 25X standard deviation event could not have happened. His bias in the endowment is clearly for what he describes as “uncorrelated investments.” That is why the amount of the endowment that is in private equity is in excess of 30%. But the private equity investment firms he favors are those that invest in companies and make them better. This is not the private equity that takes a company private with cheap money, piles on leverage, strips the balance sheet, and then sells it to the greater fool, either another private equity flipper or by going public when there is an appetite for garbage.

He also does not like activist investors, His concern is that the activists take a position in a business, and then ask for cash back. And the cash can come in the form of a dividend, or the cash can come in the form of a share buyback. But he thinks there is a certain naivety that impacts the quality of a business, and as a result the quality of the markets.

Swensen prefers the hands-on operators in buy-out funds who want to improve the quality of the companies they own, and there is no pressure for quarter to quarter performance. But, and there is always a but, if they are successful you have to pay them 20%, which is a very high hurdle rate. But he feels that if there were truly a fair deal structure, you would never want to invest in the public equity markets.

I am not going to regurgitate the entire conversation, because I do think it is a worthwhile listen. But I am going to close with the question of how Swensen finds people with whom he is willing to invest . He indicated that he used to have a rather long list of the characteristics he wanted in an investment firm. But over time he found that the most important thing is the character and quality of the people running the investment firm. It is also the second, third, and fourth most important thing. He is not looking for people who are going to gather lots of assets at high fees, driven by making a lot of money. He looks for people who define winning as producing great investment returns. In today’s world however, that is a very difficult thing for an outsider to assess.

You will often hear the comment, “we eat our own cooking.” That can be a relative thing. Some would say if a manager has a million dollar commitment in one of his funds, that is quite a statement. Yet if his total compensation (all–in compensation, not just what is told to the fund trustees) has been thirty million dollars a year for the last seven years, and the manager’s fund investment is still the same one million, that is not a very big statement. As an example, Polaris Global Value Fund was recently soliciting shareholder approval for some changes. A proxy document was sent out, which disclosed that fund manager Bernie Horn and his wife owned 15% of the fund, which is roughly a 75 million dollar investment. Now that’s a statement.

Finally, Swensen says you can make money investing in the public markets, but you have to do it with managers who take a long-term point of view. Specifically, they are truly investing with a three to five year time horizon. The other thing that he suggested is that you try and find managers who take a private market approach to the public markets. They invest in large concentrated positions, and try and become partners with the management, working to improve the company. The key is looking for intelligent intermediate and long-term strategies that are attuned to improving the company. He says few do it, but the ones that do achieve powerful returns.

This reminds me of a mistake we as managers made some years ago, that my friend and former colleague Clyde McGregor used to point out in client meetings. And that was that as managers, we had allowed ourselves to be hoodwinked, to drink the Kool Aid as to the options packages which we used to have to vote on proposed by managements. At the time, we thought it was a good thing to align management interests with the shareholders. And what we found was that the management’s interests always took priority, and that ownership of the business would be incrementally but consistently transferred to management over time, regardless of how well the business was doing, and the shareholder investment diluted accordingly. The short-term focus was hitting the targets to trigger the option packages. In retrospect, what should have been done and should be done is to let no retiring or departing executive sell any stock owned as a result of options awarded, for a period of five years after leaving the company.

Tidbits

A couple of points raised by the Financial Times at month end in their global fund management section.

  • Black Rock is shifting people and resources to San Francisco as part of a plan to increase its focus on technology and innovation. Their argument is that the cutting edge of innovation in this country is on the West Coast. I suspect the cutting edge for innovation may be that part of the country west of the Mississippi. While California has many strengths, it also has a cost of living that makes it hard to attract and keep a younger generation of employee there. That said, it is obvious that Black Rock is looking to be a leader in the uses of Artificial Intelligence in portfolio management, and is positioning itself accordingly.
  • Will soft dollars ever go away? Or rather, will managers have to fund investment research with hard dollars out of their own P&l statement, rather than using commissions generated by the investment of client funds to widen the investment manager’s profit margins. Europe, where governance and transparency have taken root to a far greater extent than in the U.S., has adopted strict rules on the ability of asset managers to pay for investment research as part of a “bundle” of services. At what point will similar rules come into being in the U.S., and actually be enforced. Probably Wall Street will delay as long as they can, or at least until the current generation of owner/managers have cashed out.
  • Will the Fiduciary Rule be delayed even further from implementation. Look for this to be resolved in 2018 as there is increasing push back against investment professionals acting in their own best interests rather than those of the client.

Happy Holidays!

The Terrific Twos

By David Snowball

We thought we’d start catching up with the 130 U.S. equity funds which have passed their second anniversary but have not yet reached their third, which is when conventional trackers such as Morningstar and Lipper pick them up. As Charles has repeatedly demonstrated, the screener at MFO Premium allows you to answer odd and interesting questions. As I, and other users of the site, have asked him, “would it be possible to …?” Charles has almost always responded with a cheerful “let me see what I can do. I’ll get back to you.”

Two days later, the screener has an entirely new and useful capability. I’m vaguely awestruck by that sort of energy, passion and genius. So, like to find two year old open-end no-load funds with the highest Sharpe ratios that are open to retail investors? No problem!

Herewith are some of the highlights from a screen of youngsters who will reach their third anniversary in 2018.

Funds at the greatest risk of being miscategorized by tracking firms

We start with the question, “which of these funds might be badly miscategorized?”

That’s an important question, since investors tend to buy the funds with the highest ratings from firms such as Morningstar and Lipper. In general, that’s an okay decision: five star funds rarely become stinkers, one star funds rarely become gems. The exception is when a fund has gotten dropped in an inappropriate peer group, so that Morningstar is looking at a banana and trying to judge it as an apple. Our two favorite examples are RiverPark Short Term High Yield (RPHYX) and Zeo Strategic Income (ZEOIX). Both are outstanding at what they do: generate low single-digit returns (say, 2-4%) with negligible volatility. And both get one star from Morningstar because they’re being benchmarked against funds with very different characteristics. (Jeff Ptak, one of the Morningstar folks and an occasional respondent to our essays, puts out that these are really exceptional circumstances; Morningstar categorizes thousands of funds and finds sensible homes for the vast majority. We agree.)

How did we check for miscategorized funds? Simple, using the screener at MFO Premium, we identified all of the two-year-old US equity funds, then sorted them based on their correlation to their peers. We found that over half of the funds were indexes or closet indexes (correlations over 95, with some “active” funds at 98). Just six funds, three active and three index, had correlations under 75.

Cambria Value and Momentum ETF (VAMO, as in Vamoose?) has the lowest correlation (0.43) with its Lipper large cap value peers. Why should you care? Because a low correlation with the peer group raises the prospect that a fund has been miscategorized and it makes it very likely that any rating it receives – positive or negative – will be unreliable. One illustration of that possibility: 5 of 6 six low correlation funds trail their peer group with VAMO lagging by 14% annually. Does that mean they’re bad funds? No, it means that its strengths and weakness can’t be predicted from its peer group.

The other two-year-olds with peer group correlations under 0.75 so far:

HTDIX Hanlon Tactical Dividend and Momentum Fund Equity Income
PTMC Pacer Trendpilot 450 ETF Mid-Cap Core
BMVIX Baird Small/Mid Cap Value Fund Small-Cap Core
PTLC Pacer Trendpilot 750 ETF Large-Cap Core
FSUVX Fidelity SAI US Minimum Volatility Index Fund Multi-Cap Core

The most independent fund: VAMO

The bane of active management is timidity, which often translates into anxiously adhering to a benchmark’s or peer group’s weighting. From a manager’s perspective, the (cowardly) logic is compelling: “if I only sink when everyone else is sinking too, they’re not going to have any reason to single me out and fire me.” 

Cambria Value and Momentum ETF (VAMO, as in Vamoose?) has the lowest peer correlation of any of the two-year-old equity funds. Its correlation is 0.43 with its Lipper large cap value peers. Researchers view momentum + value as a sort of chocolate + peanut butter pairing. Both are sources of mispricing in the market; based on a reading of 20 years’ worth of research, Larry Swedroe (2016) concludes they are “two of the most powerful explanatory factors in finance.” Momentum is a price anomaly that seems stable and exploitable; that is, it’s been consistent and predictable across market cycles. It’s flawed by a tendency to overpay: stocks with momentum are often moving quickly from “reasonably valued” to “noticeably overvalued.” Valuation is an equally powerful anomaly that suffers from the opposite problem: undervalued stocks can remain undervalued … well, almost forever. Understandably then, momentum and value are negatively correlated; when one’s lagging, the other tends to be leading.

That said, the combination of value and momentum has a long but very mixed history. American Beacon Bridgeway Large Cap Value (BWLIX) is a five-star fund with a near 15-year record of above average returns with below average volatility. (Most of that record is attributable to the institutional share class BRLVX, but performance for the newer retail class has been adjusted to account for differences in e.r.) The profile at MFO Premium shows the institutional version outperforming its peers by 1.7% annually since inception, with lower volatility. Beyond that, though, the strategy has been … umm, incompletely successful. In ye olden dayes at FundAlarm, we wrote about American Century’s value + momentum fund, Income & Growth (BIGRX) which strikes me as nearly unpredictable: modestly above average in one full market cycle, noticeably below in the preceding one, winner in some down markets, loser in others, likewise for up markets. Numeric Investors, which practiced it, liquidated in 2007. The 20 year old IMS Capital Value Fund (IMSCX) was solid until 2009, but has been a consistently laggard since. BIGRX has been a tepid performer of late.

Predictably, a number of ETF sponsors have also tried to join the party.

Alpha Architect Value Momentum Trend ETF (VMOT) is an ETF of Alpha Architect ETFs, US value, US momentum, international value, international moment. Tao Wang manages the fund (his co-manager Yang Xu left in mid-October) and it charges 0.79%.

Cambria Value and Momentum ETF (VAMO) is a purely US vehicle, which uses the Schiller CAPE to assess the value component. It’s actively managed by Mebane “Meb” Faber and Eric Richardson with expenses of 0.59%.

PowerShares DWA Momentum & Low Volatility Rotation Portfolio ETF (DWLV) is an ETF of low-vol and momentum ETFs. The fund is run by a team of guys from Invesco and charges 0.52%.

None have a three-year record and none have performance that cries out “Buy me! Buy me!” If the combination interests you, we’d recommend starting with the Bridgeway fund.

The funds that are making serious money

When markets are rising, everybody’s question is the same: who’s making the most?

There are two ways to answer that. One way is to look at total returns. As of Halloween (our data is current as of the end of last month), the clear winner is the $8 million Zevenbergen Genea (ZVGIX) fund, a focused fund with an emphasis on tech. (What’s a “genea”? Old Greek word related to “genealogy,” it sometimes signals “a generation,” which aligns with the fund’s emphasis on having a long-term view.)

Zevenbergen Genea Fund ZVGIX
Multi-Cap Growth
23.6% annualized return since inception through October 2017

ProShares S&P 500 Ex-Health Care ETF SPXV
Large-Cap Core
18.1%

Leland Thomson Reuters Private Equity Index Fund LDPIX
Specialty Diversified Equity
17.9%

ProShares S&P 500 Ex-Energy ETF SPXE
Large-Cap Core
17.8%

Alambic Small Cap Value Plus Fund ALAMX
Small-Cap Value
17.8%

Sometimes a fund is good not because the fund is good, but because its investment style or focus is hot. For example, a hot energy market makes even bad energy fund managers look like geniuses. You’ll notice that two of the six top performers are distinguished for what they did not invest in: “ex Health Care” and “ex Energy” tells you that these funds are winning just because the excluded sectors are, for now, losing.

To control for that, we can look for funds that are distinctively better than their peers. Seven funds are beating their peers by more than 5% per year so far, with 50% of those being passive.

Leland Thomson Reuters Private Equity Index Fund LDPIX
Specialty Diversified Equity
17.9% APR since inception
13% annual lead over their (in this case, irrelevant) peer group

Zevenbergen Genea Fund ZVGIX
Multi-Cap Growth
23.6% APR
10.7% annual lead of their peers

ProShares Russell 2000 Dividend Growers ETF SMDV
Small-Cap Core
15.5% APR
7.2% lead

HCM Dividend Sector Plus Fund HCMZX
Equity Income
14.9% APR
7% lead

ProShares S&P MidCap 400 Dividend Aristocrats ETF REGL
Mid-Cap Core
13% APR
6.1% lead

VictoryShares US Small Cap High Div Volatility Wtd Index ETF CSB
Small-Cap Growth
13.8% APR
5.8% lead

Invesco PowerShares S&P 500 ex-Rate Sensitive Low Volatility Portfolio XRLV
Multi-Cap Core
13.4% APR
5.2% lead

Only two of the six funds with the highest total returns are also substantially leading their peers. Half of the peer beaters consciously factor dividends, which sometimes signals the quality of a firm’s management, into their strategies.

What happens when you mix in the rest of the world?

Fair question. So far we’ve only looked at US equity funds. Here are the five international funds that combine the best absolute and relative annual returns; that is, these are funds that make a lot and make a lot more than their peers.

Top performer: MFS Blended Research Emerging Markets Equity (BRKVX), with an annual return of 23.5% and a 5.8% lead over its EM peers.

Grandeur Peak International Stalwarts (GISYX) has returned 20.9% a year and leads its international small-to-mid peers by 5.2% annually. The two Stalwarts funds, Global is the other, represent the “alumni” of Grandeur Peak’s (closed) small- and micro-cap funds. They’re firms that the fund continues to find attractive, even though they’ve appreciated too much to remain eligible for the other funds. Grandeur Peak’s discipline is so clean and their success so consistent that our colleague, Sam Lee, has referred to them as “the Platonic ideal of a fund advisor.”

T. Rowe Price Emerging Markets Value (PRIJX) has earned 20.7% per year, 3% ahead of its EM peers. Our November 2015 Launch Alert contained a thoughtful explanation from Nick Beecroft, based in Price’s Hong Kong office, about why the manager’s focus on re-ratings catalysts would allow him to succeed in the unpopular craft of EM value investing.

Grandeur Peak Global Stalwarts (GGSYX), which has made 19.9% annually, 2.2% better than its global small- to mid-cap peers.

Brown Capital Management International Small Cap (BCSFX), up 18.8% and 3.2% ahead of its peers.

Bottom line: it’s not important to know that a fund is winning. It’s important to know why a fund is winning. That’s hard to suss out, but relative performance and some idea of portfolio biases gives you a place to start. We’ll keep track of these folks for you as they mature.

Launch Alert: The Touchstone adoptees

By David Snowball

On October 30, 2017, Touchstone Investments finalized the adoption of a suite of Sentinel funds. The Sentinel funds were somewhere between “solid” and “outstanding,” depending on the fund in question, but they were not at all well known. Given the maturity of the mutual fund marketplace, Sentinel saw little prospect for growth and little reason to continue serving as adviser to the funds. Like a number of other firms, including UMB which recently sold the Scout Funds, Sentinel looked to sell the funds after (80) years in the business. Touchstone Investments stepped up.

Nine Sentinel funds were involved in the transition. Five were absorbed into existing Touchstone funds, while four continued life under a new name. Two of the four surviving funds also received new management teams.

We’ll start with the five funds merged away.

Sentinel Government Securities Fund and Sentinel Total Return Bond both merged into Touchstone Active Bond Fund (TOBAX). TOBAX has been managed by Fort Washington Investment Advisors since 2001. Over the last decade, TOBAX has been perfectly respectable, but nothing to get excited about. Morningstar and Lipper categorize it differently (Intermediate Bond and Core Bond Plus, respectively) but both paint a picture of risks and returns that vary modestly from its peer group’s. Sentinel investors aren’t being hurt by the transition and with a fixed-income fund, that might be about the most you could reasonably ask.

Sentinel Low Duration Bond merged in Touchstone Ultra Short Duration Fixed Income (TSDAX), which Morningstar likes other than for its fees. The fund has made between 0.5% and 1.5% a year since becoming an ultra-short fund in 2010. In most years, they eke out a lead over their peers but it still returns just under 1% on average. It makes me sympathetic to Morningstar’s observation that, at those rates of return, every basis point counts. Brent Miller and Scott Weston have been managing the fund for Fort Washington since 2008 and have been running an ultra-short strategy for longer. They are, by all reckoning, solid.

Sentinel Multi-Asset Income merged into Touchstone Flexible Income (FFSAX). Seems like a solid but unspectacular option, managed by ClearArc Capital since 2002.

Sentinel Sustainable Core Opportunities merged in Touchstone Sustainability and Impact Equity (TEQAX). The Touchstone fund has only had a sustainability focus since 2015 when the current managers came on-board, though Rockefeller Asset Management has been responsible for it since 2012. That means that all of the public data on the fund’s performance needs to be read with care. The basic universe and process is unchanged, but the ESG screens skew the longer-term comparisons. That said, Rockefeller has been running an ESG strategy, Rockefeller Global Sustainability & Impact Equity, since the 1990s. Morningstar notes that the “separate account has done pretty well over the past decade, beating the separate-account world-stock Morningstar Category in seven of the 11 calendar years from 2005 through 2015 and ranking in that category’s 19th and 30th percentiles over the past five and 10 years through the end of 2016.”

Frankly we’re more interested in the newly created funds since they’re more likely to be unfamiliar and misunderstood.

Sentinel Common Stock has become Touchstone Large Cap Focused (SENCX). Manager Hilary Roper has been replaced by James Wilhelm, the Ft. Washington manager responsible for Touchstone Focused (TFOAX) since 2012.  Ms. Roper was a very talented manager, and she served her investors well. They’re in good hands with Mr. Wilhelm as her successor. He began investing in 1993 and began running accounts based on the Focused Strategy in 2007. Morningstar reports that he’s posted one of the five best records over his time managing the separate account, adding value on both the upside and downside. That’s consistent with our data on the past five years when the Focused Fund returned about a half percent more, annually, than its peers while having a standard deviation that’s about a half percent lower.

Sentinel Balanced has become Touchstone Balanced (SEBLX). We’re ambivalent about this fund since a very successful, long-tenured Sentinel team was replaced upon the retirement of its lead member by the three Ft. Washington managers; two of whom co-manage Touchstone Active Bond while the third, Mr. Wilhelm, handles Focused and Large Cap Focused (above).  Based on the experience of those funds, the fixed-income sleeve is okay, the equity sleeve is strong and we have no track record on allocation decisions between the two.

Sentinel International Equity is now Touchstone International Equity (SWRLX). Andrew Boczek, who has managed the fund since 2012, remains on-board. That’s a good thing. Boczek looks for quality companies selling at reasonable prices. The fund has an all-cap portfolio, with a very hefty exposure to small caps (about 12% of the portfolio compared to its peers 0.5%), a market cap that’s one-quarter of its peers (about $10 billion) and an active share of 95 against the MSCI EAFE Index. Despite its remarkably strong, consistent performance, the fund has attracted a modest $200 million in assets.

Sentinel Small Company is now Touchstone Small Company (SAGWX). Jason V. Ronovech, who has been onboard since 2013, was retained. The fund has modestly outperformed its small-growth peers during his tenure but with modestly lower volatility; that’s translated to a consistent four-star rating across the fund’s history. At $1.2 billion, the fund is large but still manageable; that’s evidenced by a microcap stake ten times greater than its peers.

The funds’ minimum initial investment for “A” and “Y” shares is $2500. The “A” shares carry a sales load, though some platforms make load-waived shares available, and a 25 bps 12(b)1 fee. The “Y” shares are no-load, don’t have a 12(b)1  but are just available through supermarkets (Fido, Schwab, Scottrade, TD Ameritrade and so on).

Bottom line: Touchstone has been a consistently good steward of its investors’ money. They tend to hire good institutional sub-advisers and stick with them for long periods. By MFO’s rating system, they’re an above-average group across the range of their products. The Ft. Washington crew has been solid, at worst, and well above average in some of their equity products. The firm values have active share, as part of its “Distinctively Active” branding.

We think that folks looking for active equity managers who’ve consistently earned their keep should add Large Cap Focused, International Equity and Small Company to their due diligence list. We’ll watch Balanced and Sustainability to see how they develop, while we’ve fairly sure that the income-oriented funds will continue down the “safe and sane” path.

The Touchstone Investments  homepage highlights a bunch of stories about the Sentinel acquisition, as well as profiles of the individual funds.

There’s no idea so dumb that it won’t attract a dozen ETFs

By David Snowball

I’m not sure that Bitcoins actually exist. I’ve never seen one, and I’ve never interacted with one. I can’t quite explain what they are, beyond invoking the term “cryptocurrency” (which leads me to wonder if its ghoulish story will eventually be popularized under the title, “Tales from the Crypto …”?). Our colleague Sam Lee is intrigued by the potential for the underlying software, though skeptical of Bitcoin per se.

Not quite as skeptical as Hamilton Nolan seems to be. Mr. Nolan, whose writing style occasionally makes Jim Cramer read like a Tibetan monk, howls about finance and injustice for the Kinja family of websites. He’s clear and often enough thoughtful.

His thoughts on Bitcoin are summarized in an article entitled, “Hey Idiots–You’re Gonna Lose All Your Money on Bitcoin, Idiots” (11/28/2017).  Before you click on the link, I need to remind you that his language is inappropriate in civilized discourse; I suspect that even Gordon Ramsay would object. He makes two points: (1) people have no earthly idea of what they’re buying – or investing in – when they buy Bitcoins and (2) it’s okay for you to own something that goes up like a rocket as long as you remember what the next phase of each rocket’s life is like.

And, too, it uses horrendous amounts of energy.

In October 2017, LedgerX began trading bitcoin options. Both the Chicago Merc and CBOE are going to launch bitcoin futures. NASDAQ is being coy on the subject, with its president Adene Friedman admitting only to “active dialogue with a lot of clients and with partners about what might be possible.” The Financial Times reports that bitcoin derivatives will begin trading by Christmas:

Trading in bitcoin-related derivatives will begin before Christmas after CME Group, the world’s largest futures exchange, and two other venues said they had self-certified their planned products with US markets regulators. The Chicago group and rival CBOE Global Markets said on Friday they had self-certified the contracts they plan to offer investors with the Commodity Futures Trading Commission. Cantor Exchange, run by Cantor Fizgerald, has opted to self-certify bitcoin binary options. (FastFT, “Bitcoin futures trading to start in time for Christmas,” 12/1/2017)

ProShares has already filed to launch an ETF that would trade such derivatives once they become available. A couple exchange-traded products trafficking in bitcoin have been proposed, by VanEck and BATS. Both were snagged by the SEC because it’s concerned about a fundamental element of bitcoin’s design: they were designed to be unregulated and beyond any government’s control. That’s great if you want to smuggle funds out of a kleptocratic dictatorship; it’s bad if you’re the agency responsible for protecting investors from fraud.

In the meanwhile, the larger question is, how might a Bitcoin collapse affect the rest of us? It’s wildly volatile, seeing short-term losses of 20-40% since September, with one former hedge fund manager allowing that it could quadruple in price in 2018 and that it also represents “the biggest bubble of our lifetimes.”

So who gets it when the … uhh, bit hits the fan? This year, likely fewer people than you might fear. The currency is largely useful for speculation, rather than for financial transactions, which insulates those not speculating in it. Bitcoin mining requires specialized mini-computers, the demand for which is so high that it’s sent prices for graphics cards made by Nvidia and Advanced Micro Devices to record highs; TDAmeritrade thinks such stocks will take a substantial hit if demand collapses and miners dump thousands of used components on the market. While many tech and financial firms are exploring the underlying technology, few have reported direct exposure to cryptocurrencies.

The risk becomes critical when bitcoin moves from pure speculation and integrates into the financial system. The arrival of bitcoin ETFs will allow investors to move portions of their retirement savings from traditional assets into something with more growth potential. (I wouldn’t be surprised if the State of Illinois, faced with a deficit in their retirement system, toyed with the magic wand, too.) The Wall Street Journal quotes Joe Saluzzi of Themis Trading, who offers a nice capsule description of what we’ll be doing: “You’re going to put a derivative on a derivative of an unregulated asset? That, to me, is a recipe for disaster.”  The Fed seems to agree. On November 30, 2017, Randal Quarles, a vice chair of the Fed, argued:

The “currency” or asset at the centre of some of these systems is not backed by other secure assets, has no intrinsic value, is not the liability of a regulated banking institution, and in leading cases, is not the liability of any institution at all. While these digital currencies may not pose major concerns at their current levels of use, more serious financial stability issues may result if they achieve wide-scale usage.

Once there’s a working options and futures market, actual bitcoin ETFs will likely come to market. The WSJ sources estimate they’ll be widely available within 18 months. In the interim, anxious ETF providers have turned to “blockchain,” the logic behind bitcoin and other cryptocurrencies, as the next-best thing. In the past month, four blockchain ETFs filed for registration with the SEC.

InnovationShares Blockchain Innovators ETF will be for those of you who want to track the Innovation Labs Blockchain Innovators Index. Reality Shares Nasdaq Blockchain Economy ETF seeks to tracking the Reality Shares Nasdaq Blockchain Economy Index. The First Trust Indxx Blockchain ETF tracks the Indxx Global Blockchain Index. Amplify Blockchain Leaders ETF is an actively managed blockchain ETF which will target total return.

None of which have a track record and none of which have a meaningful investable universe. That is, there are no publicly traded companies that specialize in blockchain; there are mostly companies with a dozen other lines of business that have some sort of efforts going into blockchain. The “blockchain universe” is a small, motley collection of firms that recently changed their names to blockchainify them (360 Capital Financial suddenly became 360 Blockchain), over-the-counter stocks, foreign small caps and recent IPOs. The number is small enough that if you want to build a diversified portfolio of 15-20 blockchain stocks, you need to buy all of the blockchain stocks. Like 3D Printer and Robotics funds, it’s not clear that there’s any meaningful place for an investor to go.

Funds in Registration

By David Snowball

Relatively few funds enter registration in November or December. Advisers really want to go live by December 30th, so that they will be able to show full-year results for 2018. As a result, lots of funds go into registration in October so that they can emerge from the SEC’s “quiet period” by the end of December. As a result, this month’s filings are limited to a handful of institutional funds that might offer retail shares, and a pack of high-visibility active ETFs from Vanguard.

Horizons Cadence Hedged US Dividend Yield ETF

Horizons Cadence Hedged US Dividend Yield ETF, an actively-managed ETF, seeks income and long-term growth of capital. The plan is to invest in 250-300 high quality companies with strong balance sheets, predictable earnings and cash flow growth, and a history of dividend growth. (That statement alone implies that the managers are cock-eyed optimists.) The managers have the ability to employ an options overlay as a risk management tool; that’s the “hedged” part. The fund will be managed by a team from Cadence Capital Management led by Michael J. Skillman, their Chief Executive Officer. The expense ratio has not been announced.

Marmont Redwood International Equity Fund

Marmont Redwood International Equity Fund will pursue will pursue long-term capital gains. The plan is to find good companies (stable operating histories, strong financials, competitive advantages, and proven management teams) whose stocks reflect “strong positive momentum, recent positive earnings revisions, and attractive valuations.” The fund will be managed by a team from Redwood Investments, led by CIO Michael Mufson. They intent to launch the institutional share class immediately, with the prospect of opening a retail class afterward. The expense ratio will be 1.25% on the retail shares and 1.0% on the institutional shares. The minimum initial investments are $3,000 and $100,000, respectively.

Marmont Redwood Emerging Markets Fund

Marmont Redwood Emerging Markets Fund will pursue will pursue long-term capital gains. The plan is to find good frontier and emerging market companies (stable operating histories, strong financials, competitive advantages, and proven management teams) whose stocks reflect “strong positive momentum, recent positive earnings revisions, and attractive valuations.” The fund will be managed by a team from Redwood Investments, led by CIO Michael Mufson. They intent to launch the institutional share class immediately, with the prospect of opening a retail class afterward. The expense ratio will be 1.50% on the retail shares and 1.25% on the institutional shares. The minimum initial investments for retail and institutional are $3,000 and $100,000, respectively.

Motley Fool 100 Index ETF

Motley Fool 100 Index ETF will try to match the Motley Fool 100 Index. The aforementioned index, launched just this year, is comprised to “the 100 largest, most liquid U.S. companies that have been recommended by The Motley Fool’s analysts and newsletters.” Woo-hoo! The fund will be managed by Bryan Hinmon and Anthony Arsta. The expense ratio has not yet been announced.

Vanguard U.S. Multifactor Fund 

Vanguard U.S. Multifactor Fund will pursue long-term capital appreciation by investing in stocks with relatively strong recent performance, strong fundamentals, and low prices relative to fundamentals. It will be driven by quant models. The fund will be managed by Antonio Picca and Liqian Ren. The expense ratio will be 0.18%, and the minimum initial investment is for Admiral shares is $50,000.

Vanguard Active Quant ETFs

Vanguard is launching a much-ballyhooed suite of active ETFs. All of them are run by the same two guys, Antonio Picca and Liqian Ren, all of them are computer-driven and all but one (noted below) have the same low 0.13% expense ratio. Both managers have earned an M.B.A. and a Ph.D. from the University of Chicago. Mr. Picca joined Vanguard in 2017, Ms. Ren in 2007.

Vanguard U.S. Liquidity Factor ETF will pursue long-term capital appreciation by investing in an all-cap portfolio stocks with lower measures of trading liquidity.

Vanguard U.S. Minimum Volatility ETF will pursue long-term capital appreciation with relatively low volatility

Vanguard U.S. Momentum Factor ETF aims for long-term capital appreciation by investing in stocks with strong recent performance.

Vanguard U.S. Multifactor ETF is after long-term capital appreciation by investing in stocks with relatively strong recent performance, strong fundamentals, and low prices relative to fundamentals. The more-complex mission means the e.r. jumps to 0.18%.

Vanguard U.S. Quality Factor ETF will try to provide long-term capital appreciation by investing in stocks with strong fundamentals.

Vanguard U.S. Value Factor ETF will seek long-term capital appreciation by investing in stocks with relatively lower share prices relative to fundamental values.

Manager changes, November 2017

By Chip

It’s never a good sign when the guy whose name is on the door is also the guy handed the pink slip. And yet such was the fate this month of the founder of Caldwell & Orkin Market Opportunity. Happily that wasn’t the fate of any of the other 45 funds seeing partial or total manager changes this month.

Ticker Fund Out with the old In with the new Dt
NMUSX Active M U.S. Equity The London Company of Virginia, LLC will no longer subadvise the fund. Lazard Asset Management and Thompson, Siegel & Walmsley will each subadvise a portion of the fund. 11/17
GSVAX American Beacon Grosvenor Long/Short Fund Pine River Capital Management L.P. will no longer serve as a sub-advisor of the fund. The rest of the management team remains. 11/17
AMFAX ASG Managed Futures Strategy Fund Effective January 1, 2018, Dr. Andrew Lo will no longer serve as a co-portfolio manager of the fund. Robert S. Rickard, Robert Sinnott, Alexander Healy, Philippe Lüdi, and John Perry remain. 11/17
ABNDX Bond Fund of America Andrew Barth will no longer serve as a portfolio manager for the fund. David Betanzos, Pramod Atluri, David Lee, Fergus MacDonald, Robert Neithart, David Hoag, and John Smet will continue to manage the fund. 11/17
BUFDX Buffalo Dividend Focus Fund Scott Moore will no longer serve as a portfolio manager for the fund. Paul Dlugosch will continue to manage the fund. 11/17
BUFGX Buffalo Growth Fund Chris Carter will no longer serve as a portfolio manager for the fund. Clay Brethour and Dave Carlsen will continue to manage the fund. 11/17
BUFMX Buffalo Mid Cap Fund Scott Moore will no longer serve as a portfolio manager for the fund. Chris Carter, recently of Buffalo Growth, and Josh West will now manage the fund. 11/17
COAGX Caldwell & Orkin Market Opportunity Michael Orkin, who launched the fund in 1992, David Bockel and J. Patrick Fleming will no longer serve as portfolio managers for the fund. Derek Pilecki will now manage the fund. he fund leads its peers more frequently than it trails them; the fatal difference is that when it leads, it leads by a few points but when it trails, it generally trails by double digits. 11/17
CHNAX Clough China Fund No one, but . . . Charles Clough, Jr. and Anupam Bose have joined Brian Chen on the management team. 11/17
CAGAX Columbia Acorn Emerging Markets Fund Effective December 29, 2017, Stephen Kusmierczak and Louis Mendes will no longer serve as portfolio managers for the fund. Former manager Fritz Kaegi is now in a heated race to become Cook County (which is to say, Chicago) assessor. We wish him well. Charles Young will join Satoshi Matsunaga in managing the fund. 11/17
EAVSX Eaton Vance Global Small-Cap Fund No one, but . . . Michael McLean and J. Griffith Noble join Aidan Farrell in managing the fund. 11/17
MDDDX FDP BlackRock Capital Appreciation Fund Carmel Wellso is no longer listed as a portfolio manager for the fund. Lawrence Kemp will now manage the fund. 11/17
MDVVX FDP BlackRock Equity Dividend Fund Charles DyReyes, Devin Armstrong, James Warwick, and Kevin Holt are no longer listed as portfolio managers for the fund. Tony DeSpirito, Franco Tapia, and David Zhao will manage the fund. 11/17
MDIQX FDP BlackRock International Fund Victoria Higley, José Luis García, and Thomas Melendez are no longer listed as portfolio managers for the fund. Gareth Williams and James Bristow will now manage the fund. 11/17
FBALX Fidelity Balanced Fund Tobias Welo no longer serves as co-manager of the fund. Richard Malnight joins the rest of the team. 11/17
FDFAX Fidelity Select Consumer Staples Robert Lee will no longer serve as a portfolio manager for the fund. James McElligott will manage the fund. 11/17
FSDPX Fidelity Select Materials Tobias Welo no longer serves as a manager of the fund. Richard Malnight will manage the fund. 11/17
FDSSX Fidelity Stock Selector All Cap Fund Robert Lee, Tobias Welo, and Christopher Sharpe no longer serves as portfolio managers of the fund. Richard Malnight and Samuel Wald join the rest of the team. 11/17
VEEEX Global Strategic Income Fund Stuart Shikiar, Albert Sipzener, and Lockwook Sloan are no longer listed as portfolio managers for the fund. Kenneth Doerr, Joseph Hosler, and Robert Kuftinec will now manage the fund. 11/17
GMAMX Goldman Sachs Multi-Manager Alternatives Fund Effective December 15, 2017, Ryan Roderick will no longer serve as a portfolio manager for the fund. Robert Mullane will join Kent Clark and Betsy Gorton in managing the fund. 11/17
HVOAX Hartford Quality Value Fund David Palmer and James Mordy will no longer serve as portfolio managers for the fund. Matthew Baker will now manage the fund. 11/17
GASFX Hennessy Gas Utility Fund In connection with his planned retirement, Winsor (Skip) H. Aylesworth will no longer be a portfolio manager of the fund. Ryan Kelley and Brian Peery will continue to manage the fund. 11/17
ICIAX ICON Industrials Fund Zach Jonson is no longer listed as a portfolio manager for the fund. Rob Young will now manage the fund. 11/17
ICBAX ICON Natural Resources Fund Zach Jonson is no longer listed as a portfolio manager for the fund. Rob Young will now manage the fund. 11/17
IOCAX ICON Risk-Managed Balanced Fund Zach Jonson is no longer listed as a portfolio manager for the fund. Craig Callahan and Scott Callahan jointed Donovan (Jerry) Paul in managing the fund. 11/17
SWOIX  Laudus International MarketMasters Fund Stephanie Braming no longer serves as portfolio manager for the fund. The rest of the team remains. 11/17
LMAPX Legg Mason BW Alternative Credit Fund Regina Borromeo is no longer listed as a portfolio manager for the fund. Gary Herbert, Brian Kloss and Tracy Chen will continue to manage the fund. 11/17
LFLAX Legg Mason BW Global Flexible Income Fund Regina Borromeo is no longer listed as a portfolio manager for the fund. John McIntyre and Anujeet Sareen join Gary Herbert, Brian Kloss and Tracy Chen on the management team. 11/17
LBHAX Legg Mason BW Global High Yield Fund Regina Borromeo is no longer listed as a portfolio manager for the fund. Gary Herbert, Brian Kloss and Tracy Chen will continue to manage the fund. 11/17
MRPAX Measured Risk Strategy Fund Steven Aniston and Peter Kihara will no longer serve as portfolio managers for the fund. Larry Kriesmer and Bernard Surovsky will continue to manage the fund. 11/17
NWGKX Nationwide Diamond Hill Large Cap Equity Fund Yanping Li and Derek Izuel are no longer listed as portfolio managers for the fund. Charles Bath, Austin Hawley, and Christopher Welch will now manage the fund. 11/17
MUIFX Nationwide Fund Yanping Li and Derek Izuel are no longer listed as portfolio managers for the fund. Cheryl Duckworth, Mark Mandel, and Jonathan White have taken over management of the fund. 11/17
NCBIX New Covenant Balanced Income Fund Steven Treftz will no longer serve as a portfolio manager for the fund. Richard Bamford and Erin Garrett will now manage the fund. 11/17
PAAAX PNC Bond Fund Mark Lozina will no longer serve as a portfolio manager of the fund. Jason Weber joins Sean Rhoderick and John Graziani on the management team. 11/17
POMAX PNC Government Mortgage Fund No one, but . . . Jason Weber joins Mark Lozina and Sean Rhoderick on the management team. 11/17
PBFAX PNC Intermediate Bond Fund Mark Lozina will no longer serve as a portfolio manager of the fund. Sean Rhoderick and Jeffrey Bryan will continue to manage the fund. 11/17
PTVAX PNC Total Return Advantage Fund Mark Lozina will no longer serve as a portfolio manager of the fund. Jason Weber joins Sean Rhoderick and John Graziani on the management team. 11/17
PGIRX Polen Global Growth Fund Julian Pick is no longer a member of the portfolio management team. Damon Ficklin joins Jeff Mueller in managing the fund. 11/17
SGCFX Shelton Greater China Fund William Mock is no longer listed as a portfolio manager for the fund. Matthias Knerr and Andrew Manton will now manage the fund. 11/17
FMELX Strategic Advisers Growth Multi-Manager Fund Stephen Balter and Christopher Galizio are no longer listed as portfolio managers for the fund. Julian Albornoz joins John Stone, Matthew Krummell, C. Frank Feng, David Pavan, Edward Wagner, Stacey Nutt, Aziz Hamzaogullari, James  Fallon, Jonathan Sage, John Stocks, and Niall Devitt on the management team. 11/17
OMOAX Vivaldi Multi-Strategy Fund No one, but . . . Sam Dunlap, Brad Friedlander, Berkin Kologlu, Kin Lee, Colin McBurnette, and Sreeniwas Prabhu join Stephen O’Neill, Patrick Galley, Brian Murphy, Kyle Mowery, Jeff O’Brien, Michael Peck, Scott Hergott and Kevin Smith on the management team. 11/17
WSCAX Wanger International No one, but . . . Tae Han Kim will join P. Zachary Egan and Louis Mendes on the management team. 11/17
WUSAX Wanger USA William J. Doyle is no longer listed as a portfolio manager for the fund. Richard Watson joins Matthew Litfin on the management team. 11/17
FMLSX Wasatch Long/Short Terry Lally was dropped on November 13, the same day that the adviser announced their intention to merge the fund into Wasatch Global Value. David Powers joined the team on October 5 and will presumably oversee the transition. 11/17
YOVAX Yorktown Small-Cap Fund Mendel Fygenson will no longer serve as a portfolio manager for the fund. Michael Borgen is now managing the fund. 11/17

Briefly Noted

By David Snowball

Updates

It’s been a good first year for Laura Geritz, the folks at the Rondure funds and her partners at Grandeur Peak. Rondure New World (RNWOX) has drawn $90 million in assets since its May 1, 2017 launch. Rondure Overseas (ROSOX) has drawn just $15 million so far, despite having stronger absolute and relative returns than its sibling. New World is an unconstrained all-cap fund investing in firms that are either in or are substantially tied to, the emerging markets. Overseas has a much lower market cap reflecting, in part, New World’s investments in huge multinational corporations that have substantial interests in the emerging world. Both funds have about 8% cash and portfolios that are reassuringly out-of-step with their peers; that is, both portfolios have sector and size weightings that differ vastly from the norm. In the case of New World, for example, consumer cyclical and consumer defensive sectors constitute 63% of the portfolio when their peers invest 24% there. Performance has been okay, and risk-adjusted performance for Overseas, measured by Sharpe ratio, has been exceptional.

For the funds we might say, “short record, good start.” Of the manager, it’s closer to “long record, consistent strength.”

Mr. Larkin comes fully equipped

Two interesting developments this month. First, Zach Larkin will move from Grandeur Peak to Rondure on January 1, 2018. Zach currently holds the role of Guardian Portfolio Manager with Grandeur Peak Emerging Markets Opportunities (GPEOX, in which I have a personal investment but which is now closed). He also is responsible for research on industrials and has also covered technology and healthcare. Second, Mr. Larkin’s move signals an acceleration of the firm’s plan to launch a third strategy; one which would focus on frontier and smaller emerging markets. Ms. Geritz ran a fund with a comparable focus, Wasatch Frontier Emerging Small Countries Fund, for four and a half years during her tenure with Wasatch Advisors. During her tenure, that fund returned a cumulative 37% while its peer group lost about 5%. Mr. Larkin is also an alumnus of Wasatch Advisors.

Good value managers all look like idiots at first. It’s an occupational hazard. Good value managers are not satisfied with simply buying “the best of a bad lot.” They go out of their way to identify broken, forgotten and misunderstood firms, then to separate the few who are on the mend from the majority which are terminally and justifiably residents of the trash heap. Making money at this game has three steps: first the firms that will rebound then wait – certainly months and likely years – for them to actually rebound, and then wait again – certainly months and sometimes years – for other investors to notice and to pile in. The experience of David Marcus and the folks at Evermore Global Value (EVGBX) certainly illustrates the pattern; they trailed 90-97% of their peers for three years while steps one and two played out, before taking off in year four as others suddenly clamored to buy their portfolio. It’s one of the very few funds that I haven’t bought but that still sorely tempts me.

Seafarer Overseas Value Fund (SFVLX) might well be doing the same thing. Their relative performance has been really weak (they’re trailed 95% of their Morningstar peers over the past 12 months) but their absolute performance has been really strong (they’ve made 20% for the investors in the past 12 months, so quit whining, ya big babies!). Two factors are important in understanding those patterns:

  1. They think differently than do their peers. Of the 229 diversified emerging markets funds, only 52 have a value-oriented portfolio. Of the 52 EM value funds, only eight land in Morningstar’s mid-cap or small-cap box; Seafarer is one of those eight. In making that quick generalization, though, we making a possibly serious mistake: we’re describing these funds based on simple portfolio metrics (relative p/e or p/b ratios) rather than judging on their investment discipline.

    The Seafarer folks argue that almost all “value” managers make the same error; they mistake “cheap” for “unjustifiably cheap” by simply looking at the valuation numbers. They argue that the more productive strategy is to look at what signals unjustifiably low valuations. They organize their analysis around a set of factors that might reasonably drive valuations substantially higher.

    And, when they talk about their stocks, they talk about them in terms of the status of deleveraging or of the evolution of management.

  2. They act differently than do their peers. Beyond the obvious fact of being a value fund in a growth-oriented arena:

    • Cash in the portfolio is six times greater than average
    • Market cap is about one-fifteenth of the average
    • Small- and micro-cap exposure is 15 times the average.
    • Sector exposure varies by at least 2:1 from their peers in nine of 11 major sectors
    • Exposure via developed market companies is over 50% of the portfolio, compared to 30% for its peers. In Asia especially, there’s a very noticeable tilt toward developed Asian markets whose firms serve developing Asian ones; it’s the exact opposite pattern with its peers.

The impact of those differences is reflected in Seafarer’s negligible correlation to “normal” emerging markets offerings. For example, its lifetime correlation with the Vanguard Emerging Markets Index (VEIEX) is just 0.25.

Which raises the very real possibility that their “peers” aren’t really their peers and that your simple peer comparison might be seriously misinforming you.

Briefly Noted . . .

SMALL WINS FOR INVESTORS

A whole series of funds in the ALPS Trust have decided to drop their sales loads, Effective December 1, 2017, Class A shares of the

  • ALPS/Alerian MLP Infrastructure Index Fund (ALERX)
  • ALPS/CoreCommodity Management CompleteCommodities Strategy Fund (JCRAX)
  • ALPS/Kotak India Growth Fund (INDAX)
  • ALPS/Metis Global Micro Cap Value Fund (METAX)
  • ALPS/Red Rocks Listed Private Equity Fund (LPEFX)
  • ALPS/WMC Research Value Fund (AMWYX)
  • Clough China Fund (CHNAX)
  • RiverFront Conservative Income Builder Fund (RCABX)
  • RiverFront Dynamic Equity Income Fund (RLGAX)
  • RiverFront Global Allocation Fund (RMGAX)
  • RiverFront Global Growth Fund (RLTAX), and
  • RiverFront Moderate Growth & Income Fund (RMIAX)

will be renamed Investor Class shares and such shares will be offered without an initial sales charge or a contingent deferred sales charge.

Of them, RiverFront Dynamic Equity Income Fund (RLGAX) might be worth investigating, if only because of the wildly divergent ratings the fund generates. Morningstar, with classifies it as a World Allocation fund, rates it as a five-star fund with annualized five-year returns about 2.7% ahead of its peers. Lipper, whose data we currently rely on, classifies it as an Equity Income fund, whose annualized five-year returns trail its peers by 2.9%. Given the fund’s 45% international stake, I’ve got some sympathy with the Morningstar classification. Given that it’s a fund-of-ETFs with high turnover and “dynamic” in the name, some caution is justified.

On November 17, 2017, the Board of Trustees of Loomis Sayles Funds approved the re-opening of the Loomis Sayles Small Cap Value Fund (LSCRX) to new investors. Good fund, though still a bit bulky at $1.1 billion. It tends to post somewhat better return with substantial lower risk than its peers; in consequence, it has a higher Sharpe ratio than its peers in every trailing period except for the past year.

CLOSINGS (and related inconveniences)

On November 15, 2017, the Board of Trustees decied to liquidate the “A” share version of Matisse Discounted Closed-End Fund Strategy (MDCAX), leaving the low-minimum Institutional version still up and running. Matisse, RiverNorth and the RiverNorth Core Opportunity Fund (RNCOX) both pursue the strategy of buying closed-end funds when they’re selling at historically unjustified discounts to their NAVs, an ongoing problem for CEFs. The two funds have a high correlation (.96) and high expenses (around 2.8%, because they’re investing in high-expense funds); they offer the prospect of market-independent arbitrage gains when the discounts on their holdings revert to normal. If you’re invested, you might look at our profile of RNCOX.

Effective December 29, 2017, Goldman Sachs Small Cap Value Fund (GSSMX) will close to new investors. It has a T. Rowe Price-like pattern: it wins by being consistently solid, controlling risk and providing somewhat better than average returns year after year. In its rare trailing year, it doesn’t trail by much. That’s the upside. The downside is that it has $7.0 billion in assets, an egregious amount for somewhat investing in small- and micro-cap stocks.

OLD WINE, NEW BOTTLES

AB International Growth Fund (AWPAX) will become AB Sustainable International Thematic Fund on January 8, 2018. The fund will develop affection for “the securities of companies that are positively exposed to sustainable investment themes.” Not to suggest that’s a marketing ploy, but the fund has a miserable long-term record (it trails 96% of its Morningstar peers over the past decade) and has had no particular commitment to sustainable firms in the past.

Effective November 15, 2017, the Aberdeen Equity Long-Short Fund changed its name to the Aberdeen Focused U.S. Equity Fund (MLSAX). In short, it no longer shorts.

Effective January 30, 2018, the Boston Common International Fund (BCAIX) will change its name to the Boston Common ESG Impact International Fund and the Boston Common U.S. Equity Fund (BCAMX) will change its name to the Boston Common ESG Impact U.S. Equity Fund. The advisor avers that the name change brings them in alignment with their current investment strategies.

City National Rochdale Emerging Markets Fund (RIMIX) has been reorganized into the Fiera Capital Emerging Markets Fund. Fiera Capital is a large Canadian adviser was $123 billion in AUM and operations in the US and Europe. The fund has been splendid under manager Anindya Chatterjee (top 1% over 5 years) with no more than average volatility, but they certainly don’t make it cheap (the retail e.r. is 1.63%) or easy to invest in. The shares are offered only through intermediaries, not many of them and not NTF. That is, it’s really good.

Effective November 27, 2017, Destra Wolverine Alternative Opportunities Fund (DWAAX) became Destra Wolverine Dynamic Asset Fund. Nothing in the filings suggests any substantive change.

Also on November 27, 2017, Day Hagan Tactical Dividend Fund (DHQAX) became Day Hagan Logix Tactical Dividend Fund.

The Guggenheim ETFs, which used to be the Claymore ETFs, are about to become Invesco PowerShares ETFs. The ETFs’ board finalized plan for the sale and rebranding on November 15, 2017.

Kaizen Hedged Premium Spreads Fund (KRCAX) has been renamed RAISE Core Tactical Fund.

Legg Mason has worked harder than most to distance its funds from its own name. ClearBridge, EnTrust Permal (hedged products), Martin Currie (international), QS (quantitative portfolios), Royce (small caps) and Western Asset (fixed income) are the other Legg Mason brands. The last remaining Legg Mason funds will submerge when the latest round kicks off on December 29, 2017. All of the funds subadvised by Brandywine lose their Legg Mason tag. The affected funds are:

Legg Mason BW International Opportunities Bond (LWOAX) BrandywineGLOBAL – International Opportunities Bond
Legg Mason BW Global Flexible Income BrandywineGLOBAL – Global Flexible Income
Legg Mason BW Dynamic Large Cap Value BrandywineGLOBAL – Dynamic US Large Cap Value
Legg Mason BW Global High Yield BrandywineGLOBAL – Global High Yield
Legg Mason BW Global Opportunities Bond BrandywineGLOBAL – Global Opportunities Bond
Legg Mason BW Alternative Credit BrandywineGLOBAL – Alternative Credit
Legg Mason BW Diversified Large Cap Value BrandywineGLOBAL – Diversified US Large Cap Value

Bill Miller, of course, took Legg Mason Opportunity (LMOPX) for his own as the Miller Opportunity Trust while the renowned Legg Mason Value (LMVTX), the fund that beat the S&P 500 15 years running, became the really disappointing ClearBridge Value fund:

Loomis Sayles Global Equity and Income Fund (LGMAX) has become Loomis Sayles Global Allocation Fund. I’m not sure why. It’s a five-star fund with nearly $2 billion in assets and they aver that the fund’s goal and strategies will not change.

Effective January 16, 2018, PIMCO Capital Securities and Financials Fund (PFANX) will be renamed PIMCO Preferred and Capital Securities Fund. Morningstar already designates it as a Preferred Stock fund. For those interested, “capital securities” are “include securities issued by U.S. and non-U.S. financial institutions (including, but not limited to, banks and insurance companies) that can be used to satisfy their regulatory capital requirements.”

On December 2, 2017, the $3 million Rational Real Strategies Fund (HRSAX) will be rechristened the Rational Hedged Return Fund. At that point, its investment objective will go from seeking total return based, in part, on capital appreciation to seeking total return based, in part, on long-term capital appreciation.

Royce International Micro-Cap Fund (ROIMX) will be renamed Royce International Discovery Fund effective February 1, 2018.

OFF TO THE DUSTBIN OF HISTORY

Advantus Strategic Credit Income Fund (ABSNX) will be liquidated on December 28, 2017.

Ashmore Emerging Markets Hard Currency Debt Fund (ESDAX) in theory liquidated on November 17; in practice, it was still trading on November 29th.

Baird LargeCap Fund (BHGSX) will be liquidated no later than December 22, 2017.

The $30 million Brandes Credit Focus Yield Fund (BCFAX) will, for entirely predictable reasons, liquidate on December 29, 2017.

After a long, honorable run and a long decline, the Croft Funds Corporation has decided it’s time to close up shop on their two funds, Croft Value (CLVFX) and Croft Income Fund (CLINX). Kent G. Croft has been managing both funds since 1995, with Russell Croft joining him 11 years later. Both funds were quite competitive until 2010 or so, when they were left behind by the market’s relentless climb. The funds departed on December 1, 2017.

Della Parola Risk Optimized Equity Fund (ROERX) is slated to liquidate. Oddly, Morningstar seems to have already deleted the fund (we get a glimpse at the fund’s page which immediately switches to a “ticker not found” page), though MarketWatch shows it still trading on November 29, 2017.

A scheduled shareholder meeting to approve the merger of the Deutsche Small Cap Value Fund (KDSAX) into Deutsche Small Cap Core Fund (SZCAX) has been adjourned without action.

Also pending shareholder baa-ing, Franklin Global Real Estate Fund (FGRRX) will be absorbed into Franklin Real Estate Securities Fund (FREEX) in the spring of 2018.

Frost Conservative Allocation (FDSFX), Frost Moderate Allocation Fund (FASTX), and Frost Aggressive Allocation (FCAAX) will all liquidate on December 22, 2017. None of the funds was very good, and they ranged in size from $200,000 – $2.9 million.

Guggenheim Large Cap Optimized Diversification ETF (OPD) will be liquidated on or about December 18, 2017.

GuideStone Inflation Protected Bond Fund (GIPZX) plans to close to new investments on February 7, 2018 and liquidate on February 9, 2018. Uhhh … why does it make any sense for a fund that’s liquidating its holdings to accept new cash? Between now and February, they’ll be selling TIPs and moving to cash.

Harbor Funds’ Board of Trustees has determined to liquidate and dissolve the Harbor Commodity Real Return Strategy Fund (HACMX). The liquidation of the Fund is expected to occur on January 26, 2018. 

iShares Edge MSCI Minimum Volatility Global Currency Hedged ETF (HACV) is under review for delisting by the CBOE BZX Exchange because it has too few fundholders.

The one-star, $1 billion Ivy Dividend Opportunities Fund (IVDAX) will merge into the two-star, $300 million Ivy Global Equity Income Fund (IBIAX) in the first quarter of 2018.

Pending shareholder approval, JPMorgan Tax Aware Income Opportunities Fund (JTAAX) will merge to JPMorgan Tax Free Bond Fund (PMBAX) in the spring of 2018.

Nuveen Intermediate Government Bond Fund (FIGAX) will be liquidated after the close of business on January 22, 2018.

Nuveen NWQ Global All-Cap Fund (NGEAX) will be liquidated after the close of business on January 22, 2018.

O’Shares FTSE Europe Quality Dividend Hedged ETF (OEUH) and O’Shares FTSE Asia Pacific Quality Dividend Hedged ETF (OAPH) will liquidate on December 8, 2017.

The PNC S&P 500 Index Fund (PIAAX) will liquidate on December 27, 2017. As Shadow put it when he announced the liquidation on our discussion board: (?????).

RVX Emerging Markets Equity Opportunity Fund (RVEDX) was liquidated and dissolved on or about November 30, 2017.

The Board of Trustees of Sterling Capital Funds has approved the liquidation of the Sterling Capital Long/Short Equity Fund (SLSAX). The liquidation is expected to occur on or about January 26, 2018.

Wasatch Long/Short Fund (FMLSX) is slated to merge into Wasatch Global Value Fund (FMIEX). The change requires shareholder approval, which is generally a foregone conclusion. Wasatch Global Value started out in 1996 as 1st Source Monogram Income Equity Fund, was adopted by Wasatch in 2008 and renamed Wasatch Large Cap Value. It gained its current name in October 2017. The departing long/short fund followed the same path: it launched in 2003 as 1st Source Monogram Long/Short Fund, then was adopted and renamed in 2008. After a long, solid run, the fund faltered badly in 2015, rebounded in 2016, faltered in 2017, lost its original management team, then lost the guy hired to replace them and now faces dissolution.

November 1, 2017

By David Snowball

Dear friends,

Augustana, my longtime academic home for those of you who don’t know, seems to grow some odd things.

But, too, some awfully joyful moments (at, in this case, Diwali, the Festival of Lights).

and

There are times when their enthusiasm, ill-informed, ill-directed and immature though it sometimes might be, makes much good possible.

Meanwhile, the grown-ups audition for Men Behaving Badly

October saw a remarkable run of news implicating some of the industry’s oldest and most visible players.

Morningstar and The Wall Street Journal launch a ferocious slap fight.

Those brutes!

“When elephants fight, it is the grass that gets trampled.”  Yeah, so the nation’s largest newspaper and the nation’s largest … well, whatever Morningstar is now, are in another of the inevitable, periodic tussles. Short version, WSJ: Morningstar is a virtual monopoly and a bully whose marketers are peddling the equivalent of patent medicine to the hicks. Short version, Morningstar: The Wall Street Journal is staffed by a bunch of disgruntled former English majors who never took stats.

If you’re interested in the tedious exchange, MFWire offers a bearable take on them. Our colleague Sam Lee, formerly a Morningstar editor and now president of SVRN Asset Management, tries to get to the bigger problem: not the stars, but how they’re used.

MFO’s argument hasn’t been changed by the recent exchange. The analyst ratings focus on large funds and virtually ignore small, interesting ones. (“Three things we do not know, but which might be true,” April 2017). The star ratings are directionally useful at the extremes; that is, five star funds mostly remain reasonable choices over the succeeding five to ten years. That is, they’re apt to remain in business and maintain star ratings of three or above. One-star funds mostly remain bad choices over the succeeding five to ten years. That is, they’re apt to liquidate or post continued low ratings. For funds in the middle, they’re barely worth noticing.

TIAA gets a substantial slap

TIAA – recently TIAA-CREF and long ago Teachers Insurance Annuity Association, a non-profit underwritten by Andrew Carnegie – is facing serious charges of financial impropriety. Stories in Inside Higher Ed, Investment News, Barron’s, and the New York Times all report on charges by whistle-blowers that TIAA has resorted to the same sorts of sales sleaze that has undone other firms. According to the whistleblowers and legal filings, TIAA has been pressuring employees to move affluent investors into more complicated, higher cost products than they need. The success of that strategy would depend, in part, on the remnants of TIAA’s halo from the days in which it was seen as the ultra-frugal protector of the interests of folks in the non-profit sector.

TIAA’s responses ranged from the irrelevant (“we’ve paid out $394 billion in benefits over the years”) and superficial (“we’re highly transparent and ethical”) to the downright dodgy (“our advisers don’t receive sales commissions,” a point unrelated to the actual allegations).

Nir Kaissar, writing for Bloomberg, goes beyond the legal questions to pose a more fundamental question: is TIAA systematically overcharging and underperforming? (“TIAA’s devotion to investors can start with fees,” 11/1/2017). TIAA has, in the past, explained that a portion of their fund fees underwrites the work of the firm’s many consultants, who provide investment advice at no charge to plan participants. That’s a service not typically offered by mutual fund companies, though it’s certainly a claim made problematic if the charges leveled by the Times and others prove true.

Bogle continues to grouch at Vanguard

The headlines from an interview Bogle gave to Christine Benz of Morningstar tend to read “Vanguard almost too big.” The substance of the interview seems to be that Vanguard can’t reap additional economies of scale, and so can’t reduce expenses much further. (Yawn.) The other half of Bogle’s fear is that Vanguard and two or three of its brethren will be declared an oligopoly, and a threat to the competitive marketplace. That might, he fears, invite government regulation. Perhaps it’s time to “take the foot off the accelerator and ease it gently over to the brake.”

At about the same time, a more interesting criticism of Vanguard and its business model arose in a Barron’s article entitled “Vanguard’s genocide problem” (10/28/2017).  A group of Vanguard’s shareholders, led by a team from Harvard Law, are introducing a resolution asking the firm not to underwrite genocide. As a practical matter, they ask Vanguard not to invest in firms that “substantially contribute to genocide or crimes against humanity.” Vanguard’s response is, “not our problem, we need to leave it to Trump and the Congress.”

Uhhhh …

Vanguard’s two specific claims are “Vanguard cannot manage the funds in an effective manner” if it has to accommodate the social and political beliefs of its investors and “an index fund is required to track an index, and if we don’t track that index, it introduces tracking error and harms our investor returns.”

Uhhhh …

There are indexes that they could choose to track; indeed, Vanguard does offer one ESG index fund (Vanguard FTSE Social Index Fund VFTSX) out of the 180 funds in its lineup. Why only one fund, and no active funds? Why make an argument like “tracking error reduces investor returns” when it doesn’t, though it does create other problems? The likeliest answer is, “not our problem,” which is less troubling in a firm controlling $44 million rather than one controlling $4.4 trillion.

Meanwhile, the dumb article of the month competition goes to …

A bunch of articles debating the trenchant question, “could a crash like 1987 happen again?” The one word article that follows that headline would be, “Yes.”

And, Thanks!

Our special thanks, in this season of thanks giving, to our stalwart subscribers, Deb, Greg, Brian. A big thank you, too, to Roger for your generous donation. And, to Marvin, we really appreciate your kind contribution. We couldn’t keep going without your support.

As ever,

The Real Problem with Morningstar’s Star Rating

By Samuel Lee

Last week the Wall Street Journal published a story slamming Morningstar (“The Morningstar Mirage”), arguing the firm’s star ratings were virtually useless as predictors of performance. The Journal showed that both five-star funds and one-star funds regressed toward the mean over time. But it overstated its case because the funds didn’t regress all the way: five-star funds ended up doing much better than one star funds three, five and even ten years on. The pattern is striking: higher stars predicted higher future star ratings over all the horizons the Journal examined.

Morningstar, my former employer, has seized on this fact to argue that the star rating is “moderately predictive.” But weakly predicting performance within a peer group of actively managed funds is not a feat. You could do the same by simply sorting on expense ratio. Indeed, that’s what Morningstar found in a 2010 study: expense ratios slightly outdid star ratings on “success ratio,” the percentage of funds that both survived and outperformed their peers. It’s unclear to me whether the star ratings have added any information beyond what’s captured by low expenses.

The Journal would have been more persuasive if it had demonstrated that even five-star funds ended up underperforming index funds (which I believe is the case). After all, the practical choice facing investors is not between an active fund and its average or median peer, but between an active fund and an appropriately matched investible index fund. The distinction is of practical importance because it’s much harder to beat an index fund than it is to beat a median peer. For example, the Vanguard Total Stock Market ETF VTI is in the top 18%, 13%, and 10% of its category over the trailing 5, 10 and 15 years as of September end. A fund that beats its peer group but not its logical index fund competitor is still a loser as far as the investor is concerned. Peer group comparisons make more sense when you’re dealing with an asset class that lacks cheap, efficient index trackers.

I think most knowledgeable investors would agree that picking funds solely on historical performance is a dumb thing to do. The Journal demonstrated through anecdotes and fund flow data that many investors and advisors act like financial astrologers, switching funds with the ebb and flow of the star ratings. This touches the bigger story: A huge chunk of the nation’s savings is managed by useless or even harmful “helpers”, either because they lack the requisite knowledge or because their incentives are skewed.

If you walk into a bank or brokerage and ask for financial advice, a salesperson (who will call himself an advisor or wealth manager) will steer you into pricey, mediocre proprietary products. This salesperson will have some rudimentary investment knowledge, but he will mostly be regurgitating whatever sales scripts were given to him to push the firm’s model portfolios. (These models, by the way, are designed to hit that sweet spot of looking complicated enough for clients to feel as if they’re getting value for their money, but not so unconventional as to lag the benchmark by much.)

Most people calling themselves financial advisors are salespeople, not technical experts. This wouldn’t be a problem if not for the fact that many misrepresent their expertise. There’s even a lucrative sub-industry of phony qualifications and awards for financial advisors, such the “Five Star Professional” designation that mostly signals the advisor is enough of a huckster to pay for a phony award.

If 80% of the least competent and honest advisors disappeared and were replaced by index funds or robo advisors, the world would be better in almost every way. I’ve seen how billion-dollar registered investment advisors, the wealth-management units of major banks, and small-time brokers manage money. The better ones offer overpriced closet index strategies; the worst ones cheat their clients.

The problem has a simple cause. If someone needs an advisor, they’re poorly equipped to assess the competence of one, so they often resort to shortcuts like picking the person who is the most likeable, successful, or confident. Competition does not drive out technically inept financial advisors (but it does drive out socially inept ones) because the typical prospect assumes a successful advisor must have been successful on behalf of his clients, and many don’t know how to gauge whether their advisor did a good job or whether they got value for the fees they paid. As a result, there’s little correlation between an advisor’s investing or financial planning chops and his ability to make tons of money as a purveyor of “advice.”

Even if the star rating disappeared, the underlying problem would still exist: bad investors and bad advisors would still control hundreds of billions of dollars. They won’t behave more rationally when deprived of one piece of performance information. In fact, they would simply chase raw performance, a far worse outcome than chasing risk-adjusted return, which the star rating measures.

In an ideal world, Morningstar would include fees as an explicit component of the star rating calculation. Doing this would nudge the least sophisticated investors into lower-cost funds and encourage fund companies to lower expense ratios, particularly for funds on the cusp of a higher star rating. Fees need not be so large a component that companies could turn awful-performing funds into four- or five-star funds by slashing expense ratios; that would delegitimize the rating in the eyes of performance chasers and fund company marketers, defeating the purpose of including fees in the first place. The fact that Morningstar hasn’t done so, despite study after study showing that fees are among the best predictors of relative performance is puzzling, if you take Morningstar at face value that the star rating exists solely to help individual investors make better decisions.

The Journal raised a good point about how Morningstar makes money off the star ratings. Incentives are powerful. The human brain is a marvelous machine for rationalizing one’s self interest as society’s interest. The 4% of revenue that the star ratings and related intellectual property licenses account for sounds small, but the marginal dollar earned from licensing is pure profit. If that IP-licensing revenue disappeared, Morningstar’s stock price would take a bat to the head.

However, the Journal went too far when it insinuated that Morningstar’s fund analysts were somehow influenced by BlackRock to upgrade the company’s “parent rating” to positive. I worked as a fund analyst for years. My former colleagues were sincere. No one brought up advertising or licensing revenue from such and such client when discussing a fund and I felt no implicit pressure to be nice to our biggest clients. We had an idealism that was only possible due to our isolation from the marketing and sales side of the business. The dirty work done by the sales and marketing folks paid our salaries, but we could act in ways that hurt them without suffering financial consequences. I’m sure some of them resented us for that, me especially, because I was unsparing in my criticism. I’m grateful that I could speak my mind, something that wouldn’t have been possible if Morningstar simply paid lip service to its stated values.

Fall Frolics

By Edward A. Studzinski

“Maybe this world is another planet’s hell.”

                                 Aldous Huxley

Investment Committees and Performance

We are at that point in time when investment returns trickle in from the endowments of schools and other not-for-profit organizations for their fiscal years ending June 30, 2017. In terms of preliminary numbers, the top ten college/university endowments had total returns ranging from a high of 18.8% (Grinnell) to 14.6% (Dartmouth College). Grinnell of course has had two advantages over time – one, Warren Buffett was originally involved in helping to manage the fund and two, it is relatively small, at only $1.9B in assets. Dartmouth is somewhat larger at $4.96B in assets.

One of the endowment bellwethers, Yale with the second largest university endowment at $27.2B in assets, generated an 11.3% total return. Yale’s endowment of course is managed by David Swensen, who has been a leader in the multi-asset class diversification approach, investing substantial sums in private equity and other hedge-fund investments. While FY2017 looks sub-par, in FY2016 Yale achieved a 3.4% total return when most other school endowments had negative numbers for the same period. Harvard, the largest university endowment, with some $37.1B in assets at the end of FY2017, achieved a total return of 8.1% after struggling in FY2016 with a -2.0% return.

Why do some endowments struggle at producing competitive returns? After all, the motivation should be on earning long-term compounded returns on investment, not on gathering assets. That niggled at me, as a not-for-profit endowment I am familiar with produced a total return for FY2017 in the low single digits. The question is one of identifying the variables that produce such sub-optimal results.

I approached a West Coast-based consultant I know, and asked her about the range of educational institution endowment returns and what they were like. That resulted in the numbers I have related above. I then asked her what she would think of an institution with an endowment roughly the size of Trinity College ($520M) that produced a low single digit return. She was incredulous, not understanding how the return could have been that, given the returns on most global asset classes over the comparable period. That led to my next question, which was, “How large are the investment committees for your best performing endowment clients?” Her answer was that they often were as small as five people, but that the consistently best-performing ones seemed to have eight members, which allowed for one person with experience and knowledge in each asset class in which they were investing. My final question was, “What would you think of a committee with more than twenty-five members on it?” Again her answer was straightforward – too large and unwieldy. The best ideas would be compromised away given the inter-personal dynamics of a committee structure that large.

Deciding to enlarge my sample size, I contacted a friend who runs one of the most successful college endowments in the country, trained by David Swensen at Yale. I asked her, “How large is your investment committee?” Her answer was that it was twenty people when she first took the job as investment officer, but she had been able over time to get it down to eight. I then asked what she would think of a committee composed of twenty-five to thirty members. Her answer was that that has to be solely for entertainment purposes, as it is unworkable for a functioning investment committee.

Neither of those answers surprises me. I have served on four not-for-profit investment committees over the years. The larger the committee, the worse the results were. The other problem was the issue of consultants who always wanted to give money to outperforming managers, and take money away from underperforming managers. This panders to the fears of most non-investment professionals who may be on an investment committee, as well as to those investment professionals who believe that momentum is a one-way street. What you need, if using a consultant, is a consultant bereft of conflicts of interest with an overriding ability to place the interests of the client first over their own job security. I leave you with this thought. Most people instinctively run away from a fire in a burning house. Warren Buffett is the investor (and I can name others) who runs towards the fire and into the burning house.

There are two other potential problems with large investment committees. One is that the larger the committee, the greater the chance that there is someone on there with a real or apparent conflict of interest. Raising the issue of conflicts of interest in the not-profit-setting is equivalent to bringing in your dog to pee on someone’s expensive Oriental rug. People tend to get this pained look on their faces wondering how you could have the temerity to bring up the subject. The assumption of course is always that no one would ever contact the Public Charities Division of the appropriate State Attorney General to file a complaint and ask for an inquiry and audit. The other potential problem is the current development paradigm of using a position on the investment committee (although there are a number of other possible alternatives) as a reward for making suitably large donations to the institution. The failure tends to result from the practice of having people on governing boards with more money than brains, the current fallacy being the assumption that because they have money they must have brains.

Reality Comes to the Buy-Side

Attention has recently turned to Fidelity, based on a recent Wall Street Journal story alleging a hostile work environment, especially for women. Curious, I spoke to a New England-based journalist I know to see what she had heard about the story. She indicated that after the story had broken in the WSJ, one of her sources there had talked to her about the problem, maintaining that the vaunted Fidelity culture was at this point broken. A question that remains to be addressed is how this could happen in a business being run by one of the most senior and powerful woman executives in this country.

What perhaps has been ignored in all of the focus upon what may be the allegedly more racy details, is how much intimidation and subjectivity in personnel evaluation and advancement had become accepted practices in what may best be defined as “nerdy” cultures. Perhaps the best context I can put it in for you is to suggest that one watch about ten or fifteen rerun episodes of a popular television show called “The Big Bang Theory,” which my wife refers to as “The Geeky Boys.” The four male characters, all with genius intellectual abilities, suffer from varying degrees of arrested development. They display a regular inability to have normal social interaction with the rest of the human species. You may think this only happens on television. Well dear readers, it happens in Silicon Valley, it happens in Hollywood, and unlike banking and brokerage firms where many of those practices were rooted out and dealt with, it still happens in today’s investment management firms. It will be interesting to watch the ongoing fallout. My journalist friend indicated that there would be an increasing number of people coming forward to relate how they had been impacted. Look for this to put paid to the culture of the “star” portfolio manager, whose shenanigans had been ignored as long as the assets under management were growing.

Launch Alert: Northern Funds U.S. Quality ESG Fund (NUESX)

By David Snowball

On October 02, 2017, Northern Trust Asset Management launched Northern U.S. Quality ESG Fund.  It strikes me as a particularly interesting fund which combines two separately valuable commitments in a single low-cost platform.

The case for investing in high quality companies is almost definitional. No sensible person buys low quality anything when, for about the same price, they can get a high quality alternative. The key is having a viable definition of “quality” and a clear sense of how much of a premium a quality company might charge. Northern has done a good job of navigating those waters. The quality metrics here are comparable to those at Northern Income Equity Fund (NOIEX). NOIEX shares one of NUESX’s managers, Jeff Sampson. Income Equity has earned four stars from Morningstar (as of 10/30/17) and it has managed to combine consistently low volatility with consistently above average returns. Northern incorporates the “quality” screen in a number of other funds, as well: Northern Small Cap Core Fund (NSRGX), Northern Small Cap Value Fund (NOSGX), Northern Large Cap Core Fund (NOLCX), Northern Large Cap Value Fund (NOLVX) and Northern International Equity Fund (NOINX).

Northern Trust Asset Management has made a major commitment to responsible investing. This fund will be the latest in a series of launches by Northern, which offers a global ESG index fund, Global Sustainability Index Fund (NSRIX) and, as of July 14, 2016, two ETFs: FlexShares STOXX US ESG Impact Index Fund (ESG) and FlexShares STOXX Global ESG Impact Index Fund (ESGG). More important, Northern uses the strategy behind their U.S. Quality ESG fund in accounts offered to high net-worth individuals. Northern Trust reports:

We manage an investment strategy, Quality US ESG, for institutional and HNW clients, that has a similar investment process with the same portfolio management team.  From its 09/10/15 inception through 9/30/17, this strategy has outperformed its benchmark–the Russell 1000 Index. Also as of 9/30/17, it has outperformed YTD and for one year. AUM is $141 million as of 9/30/17. 

Northern’s research, graphed below, shows that good corporate citizens tend to inch out average citizens most years. That’s shown in the third column, ESG Excess, which shows the difference in performance between ESG and non-ESG securities in the same index. In the preceding three years, ESG-qualified securities performed quite well (14.24% annualized returns) but marginally worse than non-ESG securities. That said, in most years and in most markets, good citizens that are also exceptionally well-managed corporations tend to lead the pack, sometimes substantially (column five).

The new fund will invest in 150-200 mid- to large-cap US stocks. The portfolio screening process will be largely quantitative. The screens look for a good ESG record, including the ability to avoid high-profile controversies, and for measures of strong corporate performance, including strength of the management team and of cash flows.  Finally there’s a risk-management overlay that operates at the security, sector and portfolio level.  It will be managed by Jeff Sampson and Peter Zymali. Mr. Sampson joined Northern in 1999, and Mr. Zymali joined in 2001. Mr. Sampson joined the team managing Northern Income Equity Fund in July 2017. For the past decade he’s been a senior manager on the Global Equity Team, responsible for $5 billion in ESG investments for Northern’s core high net worth clientele. For about the same period, Mr. Zymali has been a manager in the quantitative investing group, specializing in tax-advantaged investing.

In truth, the fate of the world hangs in the balance. Where doubt about the human role in climate change was once the province of thoughtful skeptics (I was, 20 years ago, among them), it’s increasingly the demesne of a coterie of ideologues who have surrendered any passing concern for the truth. Their conscious, reckless distortion of the evidence appalls me.

We can neither precisely predict, nor reverse, over the next century anyway, the damage we are doing to our planet’s life-support system. We can only seek now to minimize, anticipate and mitigate it. MFO’s commitment to using a “green” server won’t save the world nor will your decision to invest in an ESG-sensitive fund. But we each make dozens of decisions each day about what we value and what we will bequeath to our children’s children. This might represent one of them. Northern’s commitments, to low cost investing, rigorous research, risk sensitivity and, quite broadly, to “conscience driven investing” makes this is good place to look for investors worried both about their portfolios and their planet.

The fund’s minimum initial investment is $2500, lowered to $500 for tax-advantaged accounts and $250 for an account established with an automatic investing plan. The opening expense ratio, after waivers, is 0.43%.

The fund’s homepage: Northern Funds U.S. Quality ESG.

Against The Herd

By Charles Boccadoro

“Two roads diverged in a wood, and I—

I took the one less traveled by,

And that has made all the difference.”

        Robert Frost

Like many metrics in the MFO screener, and indeed the screener itself, the latest come in response to requests from David to help uncover funds, usually younger, that don’t follow the crowd.

This time the need called for the correlation of a particular fund with its peers. A correlation coefficient, often denoted “R”, attempts to measure the tendency of two funds (their monthly total returns) to move together. Values of R can range from -1.00 to 1.00. The closer to 1.00, the more two funds have behaved similarly. The closer to -1.00, the more two funds have behaved opposite to each other.

While the screener already features a correlation matrix tool (see The Diversified Portfolio of Less Correlated Asset Classes), it’s limited to 12 funds. Peer count for categories like Large Cap Growth or Emerging Markets can be in the hundreds.

We decided to establish new reference funds, which represent the Average of Monthly Returns, for each of the 155 Categories. The respective reference fund(s) will now be included automatically in any Category searches. They will also serve as basis for the Correlation R versus Peer metric, which will be specific to the Display or evaluation Period selected.  

In addition to R versus Peer, you will find three other correlations against key indices: S&P 500 Monthly Reinvested Index (denoted SP500), Barclays US Aggregate Total Return Index (USBond), and MSCI All Country World minus US Gross Dividends Reinvested Index (ACIxUS).

Finally, a related metric, beta, or beta coefficient, which, adopting from the Financial Times, is defined as follows: “A measure of a fund’s risk of volatility compared to the overall market. The market’s beta coefficient is 1.00. Any fund with a beta higher than 1.00 is considered more volatile than the market, and therefore riskier to hold, whereas a fund with a beta lower than 1.00 is expected to rise or fall more slowly than the market.” The market in this case is the S&P500.

All these newly added metrics help investors better understand their portfolio concentration and diversification (or lack of) and exposure to overall market risk. And, for David, to help seek-out unique funds, with thoughtful managers that don’t hug an index, worthy of your attention.

Here are a couple sample outputs illustrating funds with low Correlation R versus Peer, first for International Small/Mid-Cap Value funds this past year, which includes AlphaArchitect’s International Quantitative Value ETF QVAL (click image to enlarge):

And for High Yield Bond funds this past 3 years, which includes RiverPark’s Short Term High Yield Fund RPHIX, an MFO Great Owl  (click image to enlarge):

Launch Alert: American Beacon Shapiro Equity Opportunities Fund (SHXPX) and American Beacon Shapiro SMID Cap Equity Fund (SHDPX) Investor Class

By Dennis Baran

On September 12, 2017, American Beacon launched two funds using Shapiro Capital Management, an institutional, value-oriented firm, as its sub-advisor. This alert focuses on the Equity Opportunities Fund, its all-cap value product. The SMID fund applies the same strategy in the mid cap space.

Established in 1990, Shapiro is known for deep fundamental research and concentrated portfolios. As of 2017, its managers — Samuel Shapiro, Michael McCarthy, Louis Shapiro, and Harry Shapiro — have 141 years of collective investment experience and head a team without turnover for 27 years, a continuity that confirms their ability to outperform their peers and passive indices.

Shapiro provides investment management services to individuals, investment companies, foundations, endowments, pension and profit sharing plans, trusts, corporations, and estates. As of 3Q 2017, the firm managed approximately $4.5B in assets.

The Core: A vigorous contrarian strategy

Shapiro seeks capital appreciation and long-term outperformance following an absolute return mindset. They choose contrarian, misunderstood companies, those going through restructuring, spin-offs, reverse LBOs, having some presence of a catalyst, complex accounting, and material insider purchases — in other words– “complicated situations” in the most inefficient segments of the market while looking for stocks having a greater than 50% upside to intrinsic value based on an absolute target price.

The managers ask, “Where’s the pain in the market?” as they try to stay ahead of market sentiment.

Historically, four segments comprise the fund portfolios:

Contrarian 35-50%; Spin-Offs 25-35%; Reorganizations 15-20%; and Residual Assets 3-8%

They want companies with established operations having

  • High returns on invested assets >= 20% pretax
  • A product/service with minimal chances of obsolescence
  • Franchise-like characteristics with significant barriers to entry
  • Substantial operations – market leadership and
  • Sound management with an equity interest

That means they will avoid high-risk businesses, e.g., computer hardware companies, airlines, biotechnology, fads, and start-ups. The funds will typically hold 25-30 securities with a relatively low turnover of their core positions between 30-40 percent.

During a holding period, they continue to concentrate on operations of their investments, not on their price fluctuations, i.e., a relatively long investment horizon because of their belief that the intrinsic value will be reflected in the stock.

Based on EBITDA, the highest percentage of these companies are underleveraged or normally leveraged –not fully leveraged — and often 1 or 2 in their industries.

Performance

The Opportunities fund is an outgrowth of the All-Cap Composite beginning March 1, 2001.

Examining the detailed quarterly commentaries for the All-Cap Composite Strategy for 10.75 years (March 2007 through September 2017) shows the consistent application of the managers’ approach in finding value beyond traditional factors, e.g., value relative to the market, P/B, P/E., industry, or sector.

Their in-house, intensive research has produced historically robust returns independent of which value style is in favor and created a stronger investment experience across full market cycles.

The adviser’s compliance team asks us to mention: “The net of fee numbers reflects a 0.95% advisory fee representing the highest annual advisory fee Shapiro charged to accounts in the All Cap Opportunity Composite.” So we did.

  • The Composite has been in the top decile in each measurement period since inception.
  • On a rolling 3-year basis since inception through 3Q2017, the All-Cap Opportunity Strategy has outperformed the Russell 3000 Index approximately 88% of the time. (Source: Morningstar Direct)
  • The Active Share for the All-Cap Composite vs. its benchmark calculated at quarter end from October 2007 to September 2017 is 93%. (Source: FactSet)

Back to their compliance folks for this reminder: “The performance of the Composite does not represent the historical performance of its corresponding Fund and should not be considered indicative of future performance of that Fund and is not subject to the same types of expenses as the Funds or other restrictions imposed by the 1940 Investment Company Act.”

Notably significant is that the managers have historically welcomed the increased shift to passive strategies because they improve their long-term potential by further reducing the active judgment necessary for market efficiency. From their 2Q2017 commentary:

Our recent experience supports this view as deal activity (the best barometer of inefficiency) is rising in step with increased passive adoption. Absent the possibility of greater short-term volatility, we see far more opportunity than risk for our economically justified value approach in an increasingly passive investment environment.

Conclusion

The firm’s consistent, time-tested strategy and collective management experience has produced superior returns.

Being different from active and passive strategies has made the difference and is emblematic of the Composite’s success.

Investors may wish to consider what this new prodigy can offer.

Administrative details for American Beacon Shapiro All-Cap Fund.

Symbol Expense Ratio  Minimum Purchase
SHXIX (I Class) .80 $250,000
SHXYX (Y Class) .90 $100,000
SHXPX (N Class) 1.18 $2500

The fund is available through TD, Schwab, Raymond James, and Pershing. They expect to add Fidelity to that list but don’t plan to go beyond that.

Shapiro and its principals have invested significantly in its strategies and hold the same securities that the company purchases or recommends for its clients. The initial SAI was dated before the fund’s first day of operation, so it necessarily reflects no insider ownership.

There’s relatively little information about the funds yet available. Both the American Beacon Shapiro Equity Opportunities and Shapiro Capital websites are essentially blank. In general the American Beacon pages are reasonably rich, so we just might need to be patient for a bit.  

Predicting 2017’s Capital Gain Distributions

By Mark Wilson

Warren Buffet once quipped: “Forecasts usually tell us more of the forecaster than of the forecast.”  This is one reason I hesitate to forecast what we might see this year for capital gains distributions from mutual funds.  Nonetheless, I’ll reveal a little about myself and will make an educated guess.

Looking Back

I don’t track absolute dollars of fund distributions, but for the last four years I have counted the number of funds that have “large” (more than 10%) capital gains distributions.  As you can see from the chart below, the trend has been favorable to taxpayers.  2014 had over 500 funds that distributed more than 10% in gains.  Last year, barely 100 funds were in that category.

Initial Thoughts

Larger than average fund distributions are generally driven by two factors:

  • Gains – We’ve seen nine nice years of market gains, so it’s no surprise that funds (especially US equity funds) have gains on their books. As funds make trades to rebalance and take profits, they realize taxable gains that must be distributed to fund owners. 
  • Fund Liquidations – The last several years has seen a large move away from actively managed mutual funds and into index mutual funds and ETFs. Last year, active managers running US equity funds saw over $260 million in fund outflows and we are seeing similar numbers this year too.  Managers in these funds have to raise cash, and that means selling holdings and realizing taxable gains.  There is very little a fund manager can do to be tax efficient in this situation.

Given these two factors, I’d expect we will see a solid number of large fund distributions in 2017.  My early thoughts were that we’d see numbers somewhere between what we saw in 2015 and 2016.

Where are we now?

As I write this, about one third of the fund firms in my extended database have released their capital gains estimates and the results are interesting.  We have already surpassed last year’s totals and we are on pace towards 2014’s numbers. (You can find a running tally of Capital Gain Distribution Stats at http://www.capgainsvalet.com/cap-gains-stats-2017/.)  We could end up this year with around 500 funds making 10%+ distributions. 

 

Mark Wilson, APA, CFP® is President and Founder of MILE Wealth Management, a fee-only financial planning and investment management firm located in Irvine, CA.  He’s been running CapGainsValet for the last four years to help mutual fund investors reduce the hassles of mutual fund capital gain distributions.

Elevator Talk: Sean Stannard-Stockton, Ensemble Fund (ENSBX)

By David Snowball

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

The conventional wisdom is that passive investing, particularly market cap weighted indexes, work best in highly-liquid, highly visible markets. Many new funds have tried to dodge the steamroller by tracking down market niches (emerging markets small cap value) or with complex bob-and-weave strategies (multi asset class, VIX hedged, sector rotating ploys). The Ensemble folks think those competitors are overthinking, over complicating and over diversifying. Their strategy is distinctly old school: buy a limited number of high quality firms when their stocks sell at a substantial discount to fair value. If you can’t find such a stock, buy nothing. If one of your current holdings has appreciated beyond a reasonable target, start selling. Their 21 holdings range from tiny Prestige Brands (maker of Chloraseptic lozenges and Nix, a treatment for head lice) to Apple. About 9% of their fund is in cash, and they report that good values are becoming scarcer.

One under-recognized threat to successful active management, especially for value-sensitive managers who tend to lag in frothy markets, is the tendency of investors to grow skittish and impatient, and to withdraw funds at critical junctures. Those outflows, which might occur just ahead of market tops or as markets tumble and worthwhile opportunities reappear, can force long-term managers into making disruptive changes to meet cash demands. An interesting advantage for Ensemble Capital, the advisor to the Ensemble Fund, comes from the assets of its core high net worth and philanthropic clients; that tends to be long-term money, a sort of “permanent capital,” which might allow the adviser to hold fast to his discipline even in markets where his newer investors grow skittish.

The Ensemble folks describe their approach this way:

We look for companies that have superior competitive positioning and create real cash earnings on behalf of shareholders at a higher than average rate. These companies achieve above-average returns on the capital they invest into their businesses while growing at sustainable and attractive levels. We look first for durable companies that we believe have bright prospects and limit our investments to those that pass our rigorous tests. Only after this assessment positively identifies an investment opportunity do we work to establish what we believe is a reasonable estimate of the company’s intrinsic value. We then require the stocks we add to our portfolio to be trading at a substantial discount to our estimate of that intrinsic value.

Our portfolio managers believe that risk management is every bit as important as stock selection. In addition to our thorough scrutiny of individual securities, we attempt to reduce risk by diversifying equity portfolios among up to 25 stocks, taking care to limit concentration in any one company or industry. We also construct portfolios in accordance with each client’s tolerance for both business risk and market risk.

Performance is a treacherous metric when it comes to assessing a fund’s prospects and its potential role in a portfolio. That’s especially true for strategies that have short public records and have been observed only under one set of market conditions. For those reasons, we’ll stick with: “the fund’s performance so far has been respectable rather than outstanding, and it tends to be a bit more volatile than its peers.”

Ensemble is managed by Sean Stannard-Stockton, and much of his career has been in service to high net worth individuals and philanthropic families. From 2007-11, he developed a considerable public following for this Tactical Philanthropy blog. Before joining Ensemble, he worked with high net worth private clients for Scudder Investments.

Ensemble Capital is the successor to Curtis Brown & Company, which was founded in 1997. Mr. Stannard- Stockton became a partner at Curtis Brown in 2004, at which point it was renamed Ensemble Capital. It’s a surprisingly large firm given its low profile. Ensemble Capital has $675 million in assets under management, primarily for high net worth folks. About a quarter of their assets come from private foundations, nonprofit endowments, charitable trusts and other philanthropic accounts. Sean remains personally active in the philanthropic community.

Herewith are Sean’s 320 words on what led him to conclude that the world needed a 393rd “large growth” (Morningstar) fund or the 175th “multi-cap growth” fund (Lipper), or that a successful private manager needed to offer a mutual fund, just now:

At Ensemble, we think that the “death of active management” has largely been a self-inflicted violence. Over the last thirty years mutual fund managers have dramatically changed their behavior to focus primarily on not straying too far from their benchmark, rather than focusing on generating strong long-term returns for their investors.

The Ensemble Fund currently has an Active Share of 91%, showing that there is less than 10% overlap between the composition of the S&P 500 and our portfolio of 15-30 companies. Our portfolio is fundamentally different from the market as a whole. Our investment strategy, owning competitively advantaged companies whose stocks sell at a discount to their intrinsic value, is simple to understand but difficult to execute. Everyone wants to outperform, but by definition outperforming means being different from your benchmark. Unfortunately most fund managers are unwilling or unable to tolerate a portfolio that acts differently from its benchmark for very long.

With 15-30 stocks in our portfolio, it is not uncommon for the Ensemble Fund to exhibit high tracking error and generate returns that are significantly different relative to the market. But since Ensemble Capital is 100% employee owned and as CIO and portfolio manager of the Ensemble Fund I’m the majority owner, we have the institutional permission to allow the portfolio to deviate from the market.

We understand that not everyone is willing to hold a portfolio that is different from the market. For these investors we wholeheartedly endorse passive index funds. But we think it is a serious mistake to invest in the mushy middle of active funds that hold hundreds of stocks in an effort to hug the benchmark while still hoping to generate outperformance.

 As a portfolio manager who has 100% of my own public equity assets invested in the strategy I run, I’m willing to accept that my goal of outperformance is paid for by my willingness to act different than the crowd.

Ensemble Fund has a $5,000 minimum initial investment. Expenses are capped at 1%; with the fund now at $18 million.

Here’s the fund’s homepage. It’s an entirely-respectable site with reasonable depth of information; you might find even greater depth (e.g., client call transcripts) on the advisor’s homepage.

Fuller & Thaler Behavioral Small-Cap Equity (FTHNX), November 2017

By David Snowball

Objective and strategy

FTHNX pursues long-term capital appreciation. The managers invest in a diversified US small cap equity portfolio. The managers seek out stocks where other investors are likely to make behavioral mistakes. If they conclude that an investor mistake is likely and the company has solid fundamentals, the portfolio managers generally buy the stock. They sell when the misbehavior has run its course, which tends to lead to a high turnover portfolio. That said, they do not automatically buy or sell based on a single security’s characteristics; they impose a risk management overlay that helps control exposures to sectors, size, and other characteristics. The fund currently holds about 80 stocks.

Adviser

Fuller & Thaler Asset Management, Inc., which is headquartered in San Mateo, California. The adviser was formed in 1993 and provides advisory services to mutual funds in the US and separately managed accounts for individuals, pension plans, charities and foundations, corporations and other pooled interests. Their small cap separate account strategies focus individually on the small value, small core, small growth and microcap classes. They have filed with the SEC to launch two new mutual funds, Mid Cap Value and Small Cap Growth, near the end of 2017. The firm employs 20 people, including 11 investment professionals. As of September 30, 2017, they had over $9.0 billion in assets under management and advisement.

Managers

Dr. Raife Giovinazzo, CFA, the lead Portfolio Manager and Dr. Russell Fuller, CFA. Dr. Fuller is Fuller & Thaler’s co-founder, president and chief investment officer. He has 46 years of investment industry experience. Dr. Fuller earned all of his degrees from the University of Nebraska and has chaired the finance department at Washington State University. He’s managed the fund since inception. Dr. Giovinazzo is Fuller & Thaler’s Lead Portfolio Manager for the Fund. Before joining Fuller & Thaler in 2013, he served stints with Blackrock and Wellington Management. He has a B.A. from Princeton (studying under the 2002 Nobel Laureate, Dr. Daniel Kahneman) and both an MBA and a Ph.D. from the University of Chicago.  Dr. Richard Thaler, the 2017 Nobel Prize winner in economics was his advisor for his PhD at the University of Chicago.

Strategy capacity and closure

Folks at Fuller & Thaler, having been burned before, are understandably reluctant to name a figure. For small cap strategies, the best most managers can say is “our capacity depends on about a dozen things we can’t control and can’t predict.” Those typically include the size and speed of fund flows since the small cap market is less liquid than the large cap one, changes in the size of their investable universe influenced by changes in equity valuations and corporate growth rates and so on. One of the Fuller & Thaler partners avers that they know what their capacity is given current conditions and they know they “absolutely have to be cognizant” of it. They’ll close before they hit their capacity constraint.

Management’s stake in the fund

Both Dr. Fuller and Dr. Giovinazzo have more than-$1million of their own money in the fund. None of the trustees had invested, as of December 31, 2016. In addition, 96 million R6 shares are held in trust for Fuller & Thaler.

Opening date

September 8, 2011. The fund began life as a fund that was sub-advised by Fuller & Thaler for Allianz Global Investors, and then Fuller & Thaler became the advisor for the fund on October 23, 2015.

Minimum investment

$1,000 for Investor shares. The lower-expense share classes have minimums of $100,000 (Institutional) and $1,000,000 (R6).

Expense ratio

1.06% for Investor class shares on assets of around $6.8 Billion, as of July 2023. 

Comments

Fuller & Thaler received a well-deserved spurt of attention in October 2017, following Richard Thaler’s receipt of the 2017 Nobel Prize in Economics for his ground-breaking work on investor misbehavior. Dr. Thaler is one of the owners of the adviser, sits on their board of directors and contributes his insights; he does not actively participate in managing the fund, nor has he ever.

Investors, misbehaving and otherwise, discovered the fund’s attractiveness rather ahead of the media. The fund’s assets under management have grown from about $11 million in 2015 to $66 million in 2016 and $268 million by late 2017.

Anyone who has watched another couple out on a date, or who has raised a teenager, or who has tried to reason with a committee immediately recognizes a painful truth: people can be remarkably, stubbornly, painfully, endlessly thick-skulled. We do the damned dumbest things, often to our own disadvantage … and we do them over and over again.

For years, the only people on the planet who believed we weren’t that dense were economists. They insisted that we were “rational actors,” forever living neatly at the intersection of the supply and demand curves. And they invented the efficient market hypothesis which, in its strongest form, said “the price of every stock is exactly right since it continuously represents all of the information held by all of the rational actors in the market.”

Most of us just sort of stared at them in wonderment, then studiously avoided them at lunch.

That began to change several decades ago when researchers, Dr. Thaler included, began to rigorously document and explain the patterns of investor irrationality. Since those patterns of misbehavior were predictable and consistent over time, they were also exploitable. Smart people would find ways to make money based on their ability to predict when, and how, the rest of us were going to be dumb.

Thus, the field of behavioral finance was born. Many of the academics responsible for that foundational research became active participants in the market, turning insight into financial gain. Thus, Fuller and Thaler was born.

This is one of the rare funds where the advisor’s explanation of what they do is clear, conversational and sensible. I’ll let them speak for themselves.

Our investment process is based on decades of research into behavioral finance. Behavioral finance is the study of how investors actually behave, as opposed to how they should behave, when making investment decisions. Professional investors are human, and like all humans, they make mistakes. Investors make mistakes because they have emotions, use imperfect rules-of-thumb, and have priorities beyond risk and return. We look for those mistakes. We attempt to predict when other investors – the “market” – have likely made a behavioral mistake, and in turn, have created a buying opportunity.

There are two kinds of mistakes that produce buying opportunities: over-reaction and under-reaction. Other investors may over-react to bad news and losses (e.g., panic). Or they may underreact to good news (e.g., not pay attention). At the individual stock level, we search for events that suggest this type of investor misbehavior. If these behaviors are present, we then check fundamentals. In summary, if an investor mistake is likely and the company has solid fundamentals – we buy the stock.

While investors make mistakes in assets classes of all types and sizes, we believe they make even more mistakes in small-cap stocks. Why? Small-cap stocks receive less attention, making mistakes even more likely. Furthermore, there are four times more small-cap stocks than large-cap stocks – providing four times the opportunity set. Our fund invests in a portfolio of U.S. small-cap stocks and delivers similar risk characteristics to the Russell 2000. It is our behavioral edge that provides an opportunity to outperform.

The Observer’s analysis of the fund’s performance –both in raw returns and in various measures of risk-adjusted returns – reveals a reassuring pattern. The fund has substantially outperformed its peers since inception; more importantly, it is both less volatile and less volatile on the downside than its peers.

Here’s the snapshot of performance from inception through 9/30/2017.

(Performance reflects the R6 share class, which has a lower expense ratio than its siblings.)
  Annual return Maximum drawdown Recovery time Std dev Downside dev Ulcer Index Bear market dev Bear Rating Sharpe Ratio Sortino Ratio Martin Ratio
Fuller & Thaler 19.8 -13.0% 11 months 12.4 5.8 2.8 4.4 2 1.58 3.37 7.12
Lipper Small-Cap Core Peers 15.6 -16.2 18 14.1 7.5 4.6 5.2 5 1.10 2.11 3.67

Here’s how to read the table. Since launch in 2010, the fund’s total returns have averaged 19.8% a year, against 15.6% for its peers. That’s really good but better still is the fact that the fund has not subjected its investors to nearly the same amount of short-term risk as its peers. The fund’s worst lost was 13%, less than its peers 16.2% and it recovered from that lost within 11 months. Volatility measured by the fund’s standard deviation is lower than its peers, but the more important measure of downside deviation (that is, the tendency to post short, sharp losses) is much smaller. The Ulcer Index, a measure that combines the depth and duration of a fund’s drawdowns, is lower as are its losses during bear market months. The final three columns then measure the risk-return balance, which varying degrees of conservativeness. In each case, higher is better and, in each case, Fuller & Thaler is higher.

One way of looking at the consistency of returns is a fund’s three-year rolling averages. The screener at MFO Premium allows us to answer the question, “if you were willing to hold a fund for three (or one or five) years, what’s about the worst you might experience and what’s about the best you might hope for?” So we calculate returns from, say, November 2011 to November 2014, then December 2011 to December 2014, January 2012 to January 2015 and so on. Over the last five years, there have been 25 overlapping three year periods.

There are 270 funds in Fuller & Thaler’s small cap core Lipper peer group.  Fuller & Thaler ranks #1 when you look at the worst-case period; in their worst three-year period, the fund returned 8.5% annually. The second-best fund, a mid-cap index, trailed them by 170 basis points annually. They rank #7 out of 39 when you look at best three-year periods, with a return of 16.5%.

The fund has earned the Observer’s Great Owl designation, which signifies outstanding risk-adjusted performance in every trailing time period. It has earned a five-star rating from Morningstar, from the past three- and five-year periods and overall. And it has earned a Lipper Leader designation for outstanding total return, consistency of return and expenses. (All those ratings are current as of 9/30/17).

The fund is growing briskly, having quadrupled in size with a year. “Hot money” rushing in sometimes portends the risk of hot money eventually rushing back out. The inflows help the fund’s tax efficiency and are still too small to affect strategy execution, but the outflows – probably at the worst possible time, since people tend to be predictably dunderheaded (see above) – will complicate things.

Bottom Line

Fuller and Thaler is not the only firm using behavioral finance principles to build their portfolio, but they’re one of the best because behavioral finance is not just “one of many factors” influencing the portfolio and it’s not window-dressing for the sake of marketing. It’s what they do, and they do it very well. They communicate clearly, they manage risk well, they outperform their peers and they outperform the indexes. For investors looking for a distinct take on small cap investing, Fuller & Thaler Behavioral Small-Cap Equity should surely be on the due-diligence short list.

Fund website

Fuller and Thaler Behavioral Small Cap Equity

Dr. Thaler has warned repeatedly, in a series of well-received books, about what we were screwing up and how to guard against it. For the benefit of readers interested in popular versions of the research, we’ve linked to a series of his books and to books he’s recommended in my November 2017 “publisher’s letter.”

Funds in Registration

By David Snowball

A great month, especially if you’re rich. AQR has two new bonds funds tagged for $1,000,000 and $5,000,000 minimums. DFA has registered to launch Emerging Markets Sustainability Core 1 Portfolio and Global Core Plus Fixed Income Portfolio, kept so far from the hoi polloi that they don’t even list investment minimums. Rather, we suppose, like the restaurants that don’t list prices on the menu. Likewise, the Martin Currie Emerging Markets SMA Shares Fund will only be available to Legg Mason’s SMA customers. Joel Greenblatt has filed his latest fund, Gotham 500 Plus Fund, with a quarter million dollar minimum. It’ll invest long in large caps and long/short in small- to mid-caps. 17 of his 19 other funds have peer-beating returns since inception. RMB International Small Cap Fund has a $100,000 minimum for now, though an Investor class might come along one day. The advisor has no other international funds; remember, these used to be the Burnham Funds. The RQSI GAA Systematic Global Macro Fund will set you back 2.48% and $5,000,000.

AlphaOne VIMCO Small Cap Value Fund

AlphaOne VIMCO Small Cap Value Fund will pursue long-term capital appreciation. The plan is for the manager (Villanova Investment Management Company) to “employing its distinctive private market value approach to public equities, while focusing on downside protection and a margin of safety.” Those seem like good things to focus on. The fund will be managed by Rastislav Berlansky and Edward A. Trumpbour. The initial e.r. is 1.66% and the minimum initial investment will be $2,500.

AlphaOne Select Technology Fund

AlphaOne Select Technology Fund will pursue long-term capital appreciation. The plan is to invest in technology companies. What, you might ask, is a “technology company”? It’s one which “produces, designs, markets, uses or might benefit significantly from” technology. (sigh) (Had I mentioned that the Westfield Whip Manufacturing Company, America’s last buggy whip manufacturer, uses and benefits from technology?) It will be non-diversified. The fund will be managed by Dan Niles. The initial e.r. is 1.66% and the minimum initial investment will be $2500.

Baron Real Estate Income Fund

Baron Real Estate Income Fund will pursue a combination of capital appreciation and current income. The plan is to buy the securities of businesses with “sustainable competitive advantages, exceptional management, opportunities for growth, and an attractive valuation.” And also are income-producing, and in real estate. Mostly REITs. The fund will be managed by Jeffrey A. Kolitch who has been with Baron since 2005. The initial e.r. has not been released and the minimum initial investment will be $2,000, reduced to $500 for accounts established with an automatic investing plan.

Baron WealthBuilder Fund

Baron WealthBuilder Fund will pursue capital appreciation. The plan is to invest in a mix of the other Baron funds. The only hint we get about what mix is that the fund will be global and the max portfolio weight for the individual holdings ranges from 15-30%. The fund will be managed by Ron Baron. The initial e.r. has not been released and the minimum initial investment will be $2,000, reduced to $500 for accounts established with an automatic investing plan.

Baron Durable Advantage Fund

Baron Durable Advantage Fund will pursue capital appreciation.. The plan is to buy mostly domestic large cap stocks from firms that are “unique, well-managed, competitively advantaged” and which “generate significant excess free cash flow that is consistently returned to shareholders in the form of stock buybacks and/or dividends.” The fund will be managed by Alex Umansky. The initial e.r. has not been released and the minimum initial investment will be $2,000, reduced to $500 for accounts established with an automatic investing plan.

Brandes Value NextShares

Brandes Value NextShares, an active ETF, will pursue long term capital appreciation. The plan is to … well, do nothing special so far as I can tell. The four sentence description of the discipline says they’ll buy “securities that are selling at a discount.” Brandes doesn’t have any US-focused funds; their international and global funds are, on whole, strong and reasonably priced. The fund will be managed by a four person team from Brandes Investment Partners. The initial e.r. will be 0.40%.

Cambria Covered Call Strategy ETF

Cambria Covered Call Strategy, an actively-managed ETF, will pursue . The plan is to buy other exchanged-traded products (ETFs, ETNs and, generically, ETPs) and write quarterly exchange-traded covered call options on each. The fund will be managed by David Pursell, Mebane T. Faber and Eric W. Richardson. Mr. Faber is, our colleague Charles attests, very, very smart. Still, lots of managers have died on this particular hill. The initial e.r. has not yet been disclosed.

Deutsche Short Duration High Income Fund, “S” shares

Deutsche Short Duration High Income Fund will pursue high level of income, with a secondary emphasis on total return. The plan is to invest at least 65% in foreign and domestic high-yield securities, including those from emerging markets, and potentially adjustable rate notes, ETFs and cash. The fund will be managed by Gary Russell, Thomas R. Bouchard, and Mark L. Rigazio. The initial e.r. has not been disclosed and the minimum initial investment will be $2,500, reduced to $1,000 for accounts set up with automatic investing plans.

Footprints Discover Value Fund

Footprints Discover Value Fund will pursue total return from capital appreciation and income. The plan is to use fundamental analysis to determine a stock’s “absolute value” and technical analysis to determine the optimal purchase price; the manager can buy securities from anywhere within the firm’s capital structure. The fund will be managed by Stephen Lococo of Footprints Asset Management. The initial e.r. is 2.00% and the minimum initial investment will be $10,000.

Fuller & Thaler Behavioral Small-Cap Growth Fund

Fuller & Thaler Behavioral Small-Cap Growth Fund will pursue long-term capital appreciation. The plan is to buy small growth company stocks based, in part, on the adviser’s “educated predictions of when other investors – the ‘market’ – have likely made a behavioral mistake, and in turn, have created a buying opportunity.” The fund will be managed by Frederick Stanske, Back-Up Portfolio Manager (really) to their flagship fund, and Raymond Lin, Back-Up Manager to this fund. The initial e.r. is 1.24% and the minimum initial investment will be $1,000.

Fuller & Thaler Behavioral Mid-Cap Value Fund

Fuller & Thaler Behavioral Mid-Cap Value Fund will pursue long-term capital appreciation. The plan is to buy midcap value stocks based, in part, on the adviser’s “educated predictions of when other investors – the ‘market’ – have likely made a behavioral mistake, and in turn, have created a buying opportunity.” The fund will be managed by David Potter, who has managed Fuller & Thaler’s Small-Cap Value strategy since 2005 , Frederick Stanske, Back-up Portfolio Manager, and Ryam Lee. The initial e.r. is 1.14% and the minimum initial investment will be $1,000.

Mirae Asset Discovery Emerging Markets Corporate Debt Fund

Mirae Asset Discovery Emerging Markets Corporate Debt Fund will seek to achieve total return. The plan is to buy fixed and floating rate debt securities and debt obligations of E.M. governments and corporations. The fund will be managed by Joon Hyuk Heo and Ethan Yoon. The initial e.r. is 0.80% for “A” shares and the minimum initial investment will be $2,000, reduced to $500 for tax-advantaged accounts and those set up with an automatic investing plan. The “A” shares, at least nominally, carry a sales load.

MProved Systematic Long-Short Fund

MProved Systematic Long-Short Fund will pursue capital growth by engaging in rules-based long-short strategies. The plan is to invest in stocks of firms that they expect to be impacted by “a significant corporate or market event, including corporate actions, abnormal price movements, investor sentiment, and shifts or disruptions in the company’s balance sheet, cash flow, or earnings fundamentals or other industry and market dynamics.” The “and other stuff” always worries me a bit. In any case, they’ll go long if the security, in light of the impending event, is undervalued and short if it’s overvalued. The fund will be managed by Devin Dallaire of Magnetar Asset Management LLC. The initial e.r. has not been revealed and the minimum initial investment will be $10,000.

Natixis Loomis Sayles Short Duration Income ETF

Natixis Loomis Sayles Short Duration Income ETF, an actively-managed ETF, will pursue current income consistent with preservation of capital. The plan is to invest in investment-grade fixed-income securities with a focus on relative value investing on a risk-adjusted basis. The fund will be managed by Christopher T. Harms, Clifton V. Rowe, and Kurt L. Wagner. The initial e.r. has not been disclosed.

Nuveen Winslow International Small Cap Fund

Nuveen Winslow International Small Cap Fund (NWSTX) will pursue long-term capital appreciation. The plan is to invest in companies with improving fundamental profiles as well as sustainable, above-average earnings growth, high or rising returns on invested capital and reasonable relative valuations. This is a conversion of a Winslow fund which itself seems to have been an adoption of a successful ISC portfolio. The fund will be managed by Steven M. Larson and Adam Kuhlmann of Winslow Capital Management. Mr. Larson has an unusually rich Linked In profile with rather a lot of information about his career and accolades. The initial e.r. will be 1.24% and the minimum initial investment will be $3,000.

PowerShares Ultra Short Duration Portfolio

PowerShares Ultra Short Duration Portfolio, an actively-managed ETF, will pursue maximum current income, consistent with preservation of capital and daily liquidity. The plan is to buy diversified portfolio of fixed income instruments of varying maturities, but that have an average duration of less than one year. The fund will be managed by Peter Hubbard of Invesco. The initial e.r. is 0.27%.

PowerShares Total Return Bond Portfolio

PowerShares Total Return Bond Portfolio, an actively-managed ETF, will pursue maximum total return, comprised of income and capital appreciation. The plan is to buy pretty much whatever the heck they want, but to do so based on “intensive credit research and extensive due diligence on each issuer, region and sector.” The fund will be managed by Peter Hubbard of Invesco. The initial e.r. is 0.50%.

Reinhart Intermediate Bond NextShares

Reinhart Intermediate Bond NextShares, an actively-managed ETF, will try to outperform the Barclays Capital Intermediate Government/Credit Index, measured over an entire market cycle without excess interest rate, credit, structure or liquidity risk. They’ll take into account issuers quality, visibility, liquidity and availability. Most of those are attempted to limit risks attendant to negative surprises.The fund will be managed by Michael Wachter. The initial e.r. is 0.30%.

Spyglass Growth Fund

Spyglass Growth Fund will pursue long-term capital appreciation. The plan is to build a non-diversified, all-cap, domestic growth portfolio. They work “through thoughtful, disciplined, bottom-up fundamental research and comprehensive due diligence.” This is a converted hedge fund, Spyglass Partners, which lost 15.3% in 2016 while its benchmark rose 7.3%. The fund will be managed by James A. Robillard of Spyglass Capital Management LLC. The initial e.r. is 1.25% and the minimum initial investment will be $3,000.

Toews Agility Dynamic Tactical Income ETF

Toews Agility Dynamic Tactical Income, an actively-managed ETF, will pursue income. (If they’d included “synergistic” in the fund’s name, they would have won this month’s buzzword bingo.) The plan is to invest in foreign and domestic high-yield ETF. The fund will be managed by Phillip Toews, Randall Schroeder, Jason Graffius and Charles Collins. The initial e.r. is 1.26%.

Toews Agility Specified Risk ETF

Toews Agility Specified Risk ETF will pursue income and long-term growth of capital. The plan is to buy (read carefully, there will be a quiz) (1) equity index futures, (2) equity index options, (3) options on equity index futures, (4) options on ETFs, 5)  equity ETFs, (6) equities, (7) fixed income ETFs, (8) fixed income securities and (9) cash equivalents. The fund will be managed by Phillip Toews, Randall Schroeder, Jason Graffius and Charles Collins. The initial e.r. is 1.05%.

Manager changes, October 2017

By Chip

It’s a strange month. At one level, several exceedingly capable managers have been shown the door but at another level, almost no managers have been shown the door. We recorded fewer than 40 partial or complete manager changes this month, about 40% below what’s “normal.” At the same time, fund liquidations are at a multi-year low. Only 23 traditional mutual funds left us, one third of which came from a single firm. The quiet is curious. It might signal a bottoming-out in the industry, or might simply be an anomalous stay of execution for dozens of funds and managers. We’ll keep an eye out.

Ticker

 Fund Out with the old In with the new Dt
AISCX Acuitas International Small Cap Fund Regina Chi and Drew Edwards will no longer serve as portfolio managers for the fund. David Savignac, Qing Ji, and Robert Beauregard join Bram Zeigler, Christorper Tessin, and Dennis Jensen in managing the fund. 10/17
LHGFX American Beacon Bridgeway Large Cap Growth II Fund Harry Segalas will no longer serve as a portfolio manager for the fund since the sub adviser contract has been awarded to Bridgeway. Elena Khoziaeva, John Montgomery, and Michael Whipple will now manage the fund. 10/17
ANHAX Angel Oak High Yield Opportunities Fund No one, but . . . Nichole Hammand had joined Matthew Kennedy, Sreeniwas Prabhu, and Berkin Kologlu in managing the fund. 10/17
ARTQX Artisan Mid Cap Value Fund George O. Sertl, Jr., is out, which is fairly epochal. James Kieffer and Daniel Kane are joined by Thomas Reynolds IV. 10/17
ARTLX Artisan Value Fund George O. Sertl, Jr., is out. James Kieffer and Daniel Kane are joined by Thomas Reynolds IV. 10/17
ESSAX Ashmore Emerging Markets Small-Cap Equity Fund Felicia Morrow will no longer serve as a portfolio manager for the fund. Patrick Cadell and Dhiren Shah will now manage the fund. 10/17
EMEAX Ashmore Emerging Markets Value Fund Felicia Morrow will no longer serve as a portfolio manager for the fund. Dhiren Shah will now manage the fund. 10/17
MDGCX BlackRock Advantage Global Fund Murali Balaraman and John Coyle are no longer listed as portfolio managers for the fund. Kevin Franklin, Richard Mathieson, and Raffaele Savi will now manage the fund. 10/17
CDRTX Campbell Dynamic Trend Fund Xiaohua Hu has retired from the advisor and will no longer serve as a portfolio manager for the fund. Kevin Cole will join G. William Andrews in managing the fund. 10/17
CDYGX Cavalier Dynamic Growth Fund Mark Scalzo will no longer serve as a portfolio manager for the fund, and Validus Growth Investors will no longer sub-advise the fund. Odd since the fund’s been roaring right along. Justin Lent will continue to manage the fund and StratiFi, LLC will now be the sole subadvisor to the fund. 10/17
CCLAX Collins Long/Short Credit Fund Effective immediately, Mr. Richard M. de Garis no longer serves as a portfolio manager Oren Cohen will continue to manage the fund. 10/17
SZEAX Deutsche Emerging Markets Fixed Income Fund No one, but . . . Nicolas Schlotthauer joins Rahmila Nadi in managing the fund. 10/17
EPVNX Epiphany Faith and Family Values Fund No one, but . . . Daniel Mulvey joins Samuel Saladino in managing the fund. 10/17
FGRTX Fidelity Mega Cap Stock Fund No one, but . . . Ashley Fernandes joins Matthew Fruhan in managing the fund. 10/17
FSNGX Fidelity Select Natural Gas Portfolio No one, but . . . Ted Davis is joined by Ben Shuleva in managing the fund. 10/17
FSAEX Fidelity Series All-Sector Equity Fund Peter Dixon is no longer listed as a portfolio manager for the fund. Chip Perrone joined the other eight managers on the team. 10/17
FFIOX FormulaFolios US Equity Fund Keith Springer will no longer serve as a portfolio manager for the fund. Derek Prusa and Jason Wenk will continue to manage the fund. 10/17
TEMIX Franklin Mutual European Fund No one, but . . . On January 1, 2018, Mandana Hormozi will join Philippe Brugère-Trélat and Katrina Dudley on the management team. 10/17
TEDIX Franklin Mutual Global Discovery Fund No one, but . . . On January 1, 2018, Christian Correa will join Philippe Brugère-Trélat, Peter Langerman, and Timothy Rankin on the management team. 10/17
FMIAX Franklin Mutual International Fund No one, but . . . On January 1, 2018, Timothy Rankin will join Philippe Brugère-Trélat and Andrew Sleeman on the management team. 10/17
FNHSX Frontier Silk Invest New Horizons Fund Mohamed Bahaa Abdeen will no longer serve as a portfolio manager for the fund, and Silk Invest Limited will no longer sub-advise the fund. Olufunmilayo Akinluyi and Zin El Abidin Bekkali will continue to manage the fund, though we don’t know what it will be called. 10/17
GDIFX Goldman Sachs Dynamic Allocation Fund Momoko Ono is no longer listed as a portfolio manager for the fund. Federico Gilly, Stephan Kessler, and Matthew Schwab will now manage the fund. 10/17
GMAMX Goldman Sachs Multi-Manager Alternatives Fund YG Partners, LLC will no longer be an investment subadvisor for the fund. The rest of the management team remains. 10/17
JSIVX Janus Henderson Small Cap Value Fund Tom Reynolds is no longer listed as a portfolio manager for the fund. Craig Kempler joins Justin Tugman and Robert Perkins in managing the fund. 10/17
GLIFX Lazard Global Listed Infrastructure Portfolio No one, but . . . Bertrand Cliquet joins Matthew Landy, John Mulquiney, and Warryn Robertson in managing the fund. 10/17
MFUAX MassMutual Select Fundamental Value Fund No one, but . . . Karen Grimes is joined by Ray Nixon, Brian Quinn, and R. Lewis Ropp. 10/17
DBBEX Miller/Howard Drill Bit to Burner Tip Fund Roger Young will no longer serve as a portfolio manager for the fund. Gregory Powell joins Bryan Spratt, John Leslie, Michael Roomberg, John Cusick, and Lowell Miller on the management team. 10/17
MHIEX Miller/Howard Income-Equity Fund Roger Young will no longer serve as a portfolio manager for the fund. Gregory Powell joins Bryan Spratt, John Leslie, Michael Roomberg, John Cusick, and Lowell Miller on the management team. 10/17
LSEIX Persimmon Long/Short Fund Matthew Shefler is no longer listed as a portfolio manager for the fund. Timothy Melly, Ken Cavazzi, Arthur Holly, Gregory Horn, H. George Dai, Daniel Brazeau, and Joshua Bennett will continue to manage the fund. 10/17
HSUAX Rational Dynamic Brands Fund David Miller and Michael Schoonover are no longer listed as portfolio managers for the fund. James Calhoun, Eric Clark, and David Garff are now managing the fund. 10/17
TEMFX Templeton Foreign Fund No one, but . . . Herbert Arnett and Christopher Peel join Heather Arnold, Norman Boersma, James Harper, and Tucker Scott in managing the fund. 10/17
SEBLX Touchstone Balanced Fund, formerly Sentinel Balanced Fund Jason Doiron is no longer listed as a portfolio manager for the fund. We regret the change since Doiron had been doing a first-rate job despite the fund being “left behind by Morningstar.” Daniel Carter, Timothy Policinski, and James Wilhelm will now manage the fund. 10/17
SENCX Touchstone Large Cap Focused Fund Hilary Roper is no longer listed as a portfolio manager for the fund. James Wilhelm will now manage the fund. 10/17
Various USAA Target Retirement Funds John Toohey is no longer listed as a portfolio manager for the fund. Wasif Latif and Brian Herscovici will continue to manage the funds. 10/17
FMLSX Wasatch Long/Short Fund No one, but . . . Terry Lally is joined by David Powers on the management team. 10/17
WBIIX William Blair Institutional International Growth Fund Stephanie Braming is no longer listed as a portfolio manager for the fund. Kenneth McAtamney joins Simon Fennell and Jeffrey Urbina in managing the fund. 10/17
WBIGX William Blair International Growth Fund Stephanie Braming is no longer listed as a portfolio manager for the fund. Kenneth McAtamney joins Simon Fennell and Jeffrey Urbina in managing the fund. 10/17
WISNX William Blair International Small Cap Growth Fund Stephanie Braming is no longer listed as a portfolio manager for the fund. Simon Fennell joins Andrew Flynn in managing the fund. 10/17
YOVIX Yorktown Small-Cap Fund Mendel Fygenson will no longer serve as a portfolio manager for the fund. Michael Borgen in now managing the fund. 10/17

Briefly Noted …

By David Snowball

 

The $12 million Global Strategic Income Fund (VEEEX) has a couple upgrades planned for the next month. “These changes included the appointment of a new adviser and sub-adviser to the Fund; revisions to the Fund’s investment objective; revisions to the Fund’s investment strategy; a change to the name of the Fund; changes to certain service provider agreements; and the addition of new share classes as well as the conversion of Class C Shares into Class A Shares.” Nominally the current version of the fund had a global, all-asset strategy; practically, it was a global equity fund with a 30-day SEC yield of 0.00%. The new fund will be named Mission – Auour Risk-Managed Global Equity Fund.

Similarly, the board of the tiny KKM Enhanced U.S. Equity Fund (KKMAX) approved a few tweaks to the fund in September, 2017. In particular they are:

  • Changing the name of the Fund to Essential 40 Stock Fund.
  • Changing the Fund’s investment objective;
  • Changing the Fund’s principal investment strategies;
  • Changing the Fund’s classification from “non-diversified” to “diversified”
  • Changing the supplemental benchmark for the Fund;
  • Suspending the sale of Class A shares of the Fund and converting existing Class A shares to Class I shares.

And, so far as I can tell, becoming an index fund. The objective is “track[ing], before fees and expenses, the performance of the Essential 40 Stock Index.” There’s no suggestion that it will adopt index fund-like expenses, rather than its current 1.18% ratio.

SMALL WINS FOR INVESTORS

Effective November 1, 2017, the redemption fee for the Cedar Ridge Unconstrained Credit Fund (CRUPX) will be removed.

Gotham has filed to launch retail shares for two of its funds, which is a first and generally quite welcome. The funds are Gotham Index Plus and Gotham Total Return. Neither has yet been assigned a ticker symbol. Both will have $2,500 share classes. Expenses in Index Plus are capped at 1.40%. The Total Return fund invests in other Gotham funds and caps expenses at 25 bps in addition to the fees and expenses of the underlying funds. Neither fund yet has a three-year record; both have beaten their peers since inception.

Roumell Opportunistic Value Fund (RAMVX) is simplifying its share structure by collapsing “A” and “C” shares into the “Institutional” share class, with a new Institutional minimum of $2,500. That gives shareholders a break in their expenses of between 25 bps (“A” shareholders) and 100 bps (“C” shareholders). Now they just need to hope that the 2016-17 performance turnaround endures.

CLOSINGS (and related inconveniences)

Highland Floating Rate Opportunities Fund (HFRAX) closed to new investors on October 13, 2017. Bank loan funds don’t particularly float my boat, so I haven’t paid much attention but it certainly does have a provocative performance record. In the last 11 calendar years, including 2017 YTD, the fund

Finished in the bottom 20% of its peer group: five times.

Finished in the top 20% of its peer group: five times.

Finished exactly at the 50th percentile for performance: one time.

Effective on October 30, 2017, the Nationwide Geneva Small Cap Growth Fund (NWHZX) was closed to new investors. Good call, by the way. It’s a $700 million microcap growth fund with a good record; it’s hard to imagine how you’d maintain the record with a much larger asset base.

Neuberger Berman Greater China Equity (NCEAX) soft-closed in September. “Since the total assets of the investment strategy have continued to increase and the capacity limit is likely to be reached in the near term,” the fund moved to a hard-close on October 17, 2017.

OLD WINE, NEW BOTTLES

Effective January 1, 2018, the American Funds Balanced Portfolio (BLPAX) will change its name to American Funds Moderate Growth and Income Portfolio.

Effective November 1, 2017, the $8 million Ashmore Emerging Markets Value Fund was renamed Ashmore Emerging Markets Equity Fund (EMEAX).

Accordingly, effective on or about December 30, 2017, the following changes are made to the Fund’s Summary Prospectuses, Prospectuses and SAI, as applicable:

Change in the Fund’s Name

On December 31, 2017, BlackRock Science & Technology Opportunities Portfolio will be renamed BlackRock Technology Opportunities Fund. Just as stunning, its benchmark will change from the MSCI World Information Technology Index to the MSCI All-Country World Information Technology Index.

The Center Coast MLP Focus Fund (CCCAX) is likely to be adopted by Brookfield Investment Funds by February 2018. The current management team will become Brookfield employees; no word about possible changes to the name or expenses. It’s got about $3 billion in assets and offers slightly above-average returns for substantially below-average volatility.

On November 1, Dreyfus GNMA Fund became Dreyfus U.S. Mortgage Fund.

Effective October 30, 2017, QuantShares becomes AGFiQ.

Fund (Old Name) Fund (New Name)
QuantShares U.S. Market Neutral Momentum Fund AGFiQ U.S. Market Neutral Momentum Fund
QuantShares U.S. Market Neutral Value Fund AGFiQ U.S. Market Neutral Value Fund
QuantShares U.S. Market Neutral Size Fund AGFiQ U.S. Market Neutral Size Fund
QuantShares U.S. Market Neutral Anti-Beta Fund AGFiQ U.S. Market Neutral Anti-Beta Fund
QuantShares Hedged Dividend Income Fund AGFiQ Hedged Dividend Income Fund
QuantShares Equal Weighted Value Factor Fund AGFiQ Equal Weighted Value Factor Fund
QuantShares Equal Weighted Low Beta Factor Fund AGFiQ Equal Weighted Low Beta Factor Fund
QuantShares Equal Weighted High Momentum Factor Fund AGFiQ Equal Weighted High Momentum Factor Fund

“Anti-Beta.” Uh-huh.

Effective November 1, 2017, Sierra Core Retirement Fund (SIRAX) was renamed Sierra Tactical All Asset Fund.

Tierra XP Latin America Real Estate ETF (LARE) is morphing into the Alternative Agroscience ETF on December 26, 2017. I’m always struck by the brazenness of some of these transformations.

OFF TO THE DUSTBIN OF HISTORY

AdvisorShares Gartman Gold/Euro ETF (GEUR) and AdvisorShares Gartman Gold/Yen ETF (GYEN) both liquidated in mid-October.

Bishop Street Short-Duration Bond Fund (BSSDX) will liquidate on November 15, 2017. The fund produced index-like returns but charged nearly 1.9% of their services which likely made it a hard sell. The fund’s $11 million in assets included none of its managers’ own money, per the most recent SAI. I’ve always been taken by the question directed to managers and directors, “if you’re not willing to put your money into the fund, why should anyone else?”

CM Advisors Fund (CMAFX) will be merged into the CM Advisors Small Cap Value Fund (CMOVX) on February 28, 2018. There’s trouble in River City when the fund you choose to keep is the $47 million, one-star one that’s trailed 98% of its peers over the past five years.

“The previously scheduled shareholder meeting to approve the merger of the Deutsche Gold & Precious Metals Fund (SGDAX) into Deutsche Real Assets Fund (AAAAX) has been adjourned to a later date. If approved by shareholders … the merger is expected to occur on or about December 11, 2017. If the merger is not approved by shareholders … the Board will take such action, if any, that it deems to be in the best interest of the Fund.” Ummm … when the black hooded guy with the AAAAX says “or else I’ll take ‘such action’ as I think fit,” you might as well jot down the names of the heirs and next of kin.

Dreyfus Emerging Markets Debt U.S. Dollar Fund (DMEAX) will liquidate on or about November 29, 2017.

Frontier Silk Invest New Horizons Fund (FNHSX) has dumped Silk Invest Limited as a subadvisor and allows that the Board may soon consider a merger or liquidation of the fund.

Goldman Sachs Long Short Fund (GSEAX) will be liquidated on or about December 12, 2017.

On October 27, 2017, JPMorgan Dynamic Growth Fund was absorbed by JPMorgan Large Cap Growth Fund 

JPMorgan SmartAllocation Income Fund (SAEAX) becomes a Former Fund on (or about) November 30, 2017.

Mirae Asset Asia Great Consumer Fund (MGCEX) will merge into Mirae Asset Asia Fund (MALAX) by December 1, 2017. By Morningstar’s reckoning, both are four-star funds. Both are small, MALAX is one-quarter the size of MGCEX and both launched in 2010. Presumably the broader mandate for MALAX is what convinced the advisor to keep the smaller one.

As of October 16, 2017, the reorganizations of Nuveen Large Cap Growth Opportunities Fund into Nuveen Large Cap Growth Fund (NLAGX) and Nuveen Large Cap Core Plus Fund into Nuveen Large Cap Core Fund (NLAGX) are complete.

Parametric Emerging Markets Core Fund (EAPEX) will be liquidated on or about December 15, 2017. This was one of those rare cases where the trustees of the fund had substantially more invested in it than did its managers who, collectively, placed $0.00 of their own money into the fund.

Satuit West Shore Real Return Fund (NWSFX) liquidated and dissolved on Halloween, 2017. We warned it not to take a flickering flashlight to check out that “thump” in the basement.

Stone Ridge Emerging Markets Variance Risk Premium Fund (VRMIX) and Stone Ridge International Variance Risk Premium Master Fund (VRIIX), both institutional funds, will liquidate on or about December 21, 2017 and December 22, 2017, respectively.

The Symons Concentrated Small Cap Value Institutional Fund (SCSVX) is set to be liquidated “due to the adviser’s business decision that it does not want to continue to manage the Fund.” The fund is less than a year old, has a $1 million minimum initial investment and $300,000 AUM. That almost implies the possibility that they did not attract a single outside investor.

Having a name like “Victory” surely is a double-edged sword when it comes to media notices. If times are good, you gloat over “Victory prevails” or “Victory assured!” But then come the fund liquidations and the temptation to headline “Victory vanquished” or “Victory No More.” In any case, Victory Funds is liquidating several of its troupe on December 15: Victory CEMP Commodity Volatility Weighted Strategy, Victory CEMP Global High Dividend Defensive, Victory CEMP Long/Short Strategy, Victory Sopus China, and two muni-bond funds (Ohio and National).

We’d mistakenly included Victory Strategic Income Fund in the list of Victory funds being liquidated. We apologize for our error. The Victory Strategic Income Fund is NOT liquidating.