March 2017 IssueLong scroll reading

Pin Oak Equity (POGSX)

By David Snowball

Objective and strategy

Pin Oak is a concentrated, all-cap fund. The portfolio currently holds 35 securities with much more exposure to small- and mid-cap stocks than its peers Portfolio construction begins with macro-level assessments of the economy, proceeds to analyses of industries and sectors, and then ends by buying and holding the most attractive stocks in the most attractive sectors. Oak Associates has a long and adamant tradition in favor of buying-and-holding just a few best-of-class stocks, so turnover is generally below 20%. Half of the portfolio’s 35 current stocks have been there for between five and 15 years.

Adviser

Oak Associates, ltd. Founded in 1985 and headquartered in Akron, Ohio, Oak Associates has managed quality portfolios for individual investors, endowments, public pension plans and private clients. The firm has 14 employees and manages seven no-load funds and around a hundred separate accounts. Total assets under management are about $1.4 billion. Employees, friends and family of Oak Associates are among the largest shareholders in the Funds.

Manager

Mark Oelschlager. Mr. Oelschlager has managed this fund since 2005, initially as a co-manager with James Oelschlager. Since June 2006, he’s had sole responsibility for the fund. Mr. Oelschlager also manages or co-manages five other funds (three Oak Associates and two as a sub-advisor to Saratoga Capital Management) and is part of the team responsible for about $400 million dollars in separately-managed accounts.

Strategy capacity and closure

Given the size and liquidity of the firms in his investable universe, the manager foresees no practical constraints for many years.

Active share

89.6, calculated by K.J. Martijn Cremers of the University of Notre Dame, at activeshare.info. “Active share” measures the degree to which a fund’s portfolio differs from the holdings of its benchmark portfolio. High active share indicates management which is providing a portfolio that is substantially different from, and independent of, the index. An active share of zero indicates perfect overlap with the index, 100 indicates perfect independence. POGSX has an active share of 90 which reflects a very high degree of independence from its benchmark Russell 3000 Index.

Management’s stake in the fund

Insider ownership of the fund is exceedingly high. Mr. Oelschlager has over $1 million invested in the fund, and six of the fund’s seven trustees are invested in it. As of January 31, 2016, officers and trustees, in the aggregate, owned 9.4% of Pin Oak shares. The research is pretty clear that substantial manager and trustee ownership of a fund is associated with more prudent risk taking and modestly higher returns and is a visible symbol of the alignment of the managers’ interests with their investors’.

Opening date

August 3, 1992

Minimum investment

$2,000

Expense ratio

1.08% on assets of $210 million, as of 02/2017.

Comments

Pin Oak has been left behind by Morningstar. It’s not clear that you should make the same decision.

Pin Oak is a fully-invested, reasonably-concentrated domestic equity fund. Many years ago, it would be fairly described as a very aggressive fund; in its decade under manager Mark Oelschlager, it’s better described as a reasonably aggressive fund. At a macro-level, Mr. Oelschlager assesses the state of the economy but, more importantly, the state of other investors’ minds. His goal is to position the fund defensively when he believes others are complacent and to reposition it aggressively when others panic. At the level of individual stocks, they seem to be pursuing a pretty conventional mix of strong businesses at reasonable prices. The less conventional part is their willingness to hold stocks for eight, 10 or 15 years; their conviction is that as other investors shorten their time horizons, the premium on a buy-and-hold portfolio rises.

Morningstar covered this fund extensively since 1999. In 2000, it was “very compelling.” Eighteen months later, its appeal was “limited” and, by 2006 it was “a bad idea.” Morningstar’s last comment on the fund came in late 2009. Courtney Goethals Dobrow wrote:

The fund has posted outsized losses in several periods, but has so far offset that on the upside. Its return is more than double the category average and index’s in a handful of periods. Long-term investors have been stung by the fund’s dreadful 10-year record, but most of the damage was done before Oelschlager’s watch.

This fund is still not for the faint of heart. It has been on a good run lately but needs to extend its winning streak to prove that it has permanently tempered some of its risks. (10/27/2009)

If the question is simply “can the fund continue to dominate its category,” the answer is “yes.” Here’s Morningstar’s annualized total return calculations against their large-blend benchmark group.

Total Return 1-Year 3-Year 5-Year 10-Year 15-Year
Pin Oak Equity 35.19 12.37 15.68 10.94 8.38
+/- Category (LB) 11.30 3.66 3.32 4.61 1.43
Rank in Category 2 1 1 1 7
POGSX and LB return as of 02/24/2017

That second row measures Pin Oak’s margin of victory over its peers; over the past decade, they’ve outperformed the average large-blend fund by 461 basis points annually.

The Observer relies on Lipper peer groups and data from Thomson Reuters for our analyses. Since Mr. Oelschlager has been the sole manager for between ten and eleven years (6/2006 – 3/2017) we’ll present the 10-year data on his work. Here the fund is compared to its Lipper peer group, the S&P 500 against which Morningstar benchmarks it and the broader Vanguard Total Stock Market Index Fund (VTSMX) which Lipper places in the same peer group as Pin Oak.

  Cumulative 10-year Return% Annual return POGSX ahead by
Pin Oak Equity 192.0% 11.3%
Multi-cap core average 84.4 6.2 +5.1
Vanguard Total Stock Market Index 98.8 7.1 +4.2
S&P 500 Monthly Reinvested Index 96.4 7.0 +4.3
Data from February 2007 – January 30, 2017. All data and peer group calculations are from Thomson Reuters and reflect the fund’s Lipper Peer Group, multi-cap core.

Just for the fun of it, here are Lipper’s own ratings of the fund, where “5” is the highest possible rating.

  Total Return Consistent Return Preservation Tax Efficiency
3 Year 5 5 4 4
5 Year 5 5 4 4
10 Year 5 5 3 5
Overall 4 4 4 5
Data and ratings effective as of 1/31/2017

To answer Morningstar’s question: yes, he appears to have kept the winning streak alive over the seven-plus years since you asked.

The other half of the question is, has the manager learned to keep the fund’s risks bearable? There is no undebatable answer to that question because the answer depends on the degree to which each investor understands the strategy and is comfortable with the possibility of sharp, short-term reversals in the pursuit of long-term gain.

The fund’s 10-year risk-return data offers a partial answer. The maximum drawdown measures a fund’s greatest losses in a particular period while downside deviation represents the severity of “bad” (or downside) volatility. Bear market deviation looks at volatility in months where the stock market declines sharply.

Measures such as the Ulcer Index plus Sharpe, Sortino and Martin ratios were designed to calculate whether investors were being adequately rewarded for an investment’s risks. The Ulcer Index factors together the depth and duration of an investment’s worst declines; smaller Indexes are better. The three ratios measure whether excess risk is greater, or lesser, than excess reward. In these cases, higher values are better. Here is Pin Oak’s performance against the benchmarks we discussed above.

  Max Draw DS Dev BM Dev Recovery Ulcer Index Sharpe Ratio Sortino Ratio Martin Ratio
Pin Oak Equity -54.7 13.8 13.4 38 15.2 0.51 0.78 0.70
Multi-cap core average -51.4 11.9 11.3 55 17.2 0.34 0.48 0.36
Vanguard Total Stock Market Index -50.9 11.1 10.8 53 15.6 0.41 0.59 0.42
S&P 500 Monthly Reinvested Index -50.9 10.7 10.4 53 16.1 0.42 0.59 0.40

How might you read that? In volatile markets, Pin Oak does indeed drop more than its peers but it also rebounds faster and more vigorously. The “recovery” stat measures how long, in months, it took an index or fund to recover from its worst drawdown. For the decade shown above, Pin Oak recovered all of its losses in 38 months; its various benchmarks remained in the red for 15 -17 months longer. That explains why all of its risk-return ratios are strongly positive.

Likewise, manager Mark Oelschlager offers a partial answer. He suggests that, in the ‘90s, the fund was a more consistently aggressive, more pedal-to-the-metal vehicle. In a rational response to an evolving market, that’s now changed.

We manage the fund differently than we did a long time ago and with each cycle, we get a little bit better at limiting downside risk. I’m constantly thinking about how other people are behaving.   I get more nervous when things are going well and I’m more nervous now than I was a year ago… My instinct right now is to move incrementally in the direction of stability and defensiveness.

We recognize that we’re not infallible; we have to protect ourselves and protect our shareholders from the possibility that we might be wrong.

The Oak managers are contrarians of a sort. When they see evidence of rising market complacency, which is currently signaled, among other things, by a narrow dispersion of stock valuations (that is, the market is valuing companies similarly), they become defensive. “Moving in the direction of stability and defensiveness” translates to shifting some of the portfolio’s assets toward more defensive names. He allows that such repositioning is exceptionally tricky now because traditional defensive sectors remain richly valued. Contrarily, when they see evidence of rising panic and despair, they begin allocating toward their more aggressive names.

Bottom Line

“Beating the benchmark,” Mr. Oelschlager notes, “is not an easy endeavor, but there are managers who do so.” He and his colleagues at Oak Associates are among that small crowd. The question for investors is, are you actually prepared for a fund that beats the market? In a world bereft of wizards, wands and unicorns, higher long term gains will be accompanied by higher short-term volatility. If you’re the twitchy sort, who checks his portfolio daily and stays awake at night if the Dow drops 300 points, you shouldn’t be here. If you check your portfolio rarely and see today’s market declines as an excellent source of tomorrow’s market gains, you owe it to yourself to take Pin Oak seriously.

Fund website

Pin Oak Equity. They’re working with a design firm to refresh their site, so you’ll need to consider a bit of a work in progress.

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About David Snowball

David Snowball, PhD (Massachusetts). Cofounder, lead writer. David is a Professor of Communication Studies at Augustana College, Rock Island, Illinois, a nationally-recognized college of the liberal arts and sciences, founded in 1860. For a quarter century, David competed in academic debate and coached college debate teams to over 1500 individual victories and 50 tournament championships. When he retired from that research-intensive endeavor, his interest turned to researching fund investing and fund communication strategies. He served as the closing moderator of Brill’s Mutual Funds Interactive (a Forbes “Best of the Web” site), was the Senior Fund Analyst at FundAlarm and author of over 120 fund profiles. David lives in Davenport, Iowa, and spends an amazing amount of time ferrying his son, Will, to baseball tryouts, baseball lessons, baseball practices, baseball games … and social gatherings with young ladies who seem unnervingly interested in him.