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 or 300 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.
Adam Strauss is, along with his brother Joshua, one of the three managers of Appleseed Fund. Both joined the firm in 2004 after careers outside the financial services sector. The third manager, Bill Pekin, has been with Pekin Singer Strauss since 2001; before that he had stints at Credit Suisse in Chicago and at Donaldson, Lufkin & Jenrette in New York. In 2015, the SEC concluded that the firm had under-resourced its compliance efforts between 2009 and 2011; in consequence, the firm and two of its principals were fined and censured, and the firm was directed to clean up its compliance program. Long before the SEC finding, the firm worked to substantially upgrade its compliance efforts. In total, the firm manages about $830 million in assets.
The idea of a go-anywhere value fund is exceedingly attractive. Over any given period, the most attractive opportunities might be here or there, large or small, low-div or high-div, developed or emerging. And, over long periods, buying low is always more profitable than buying high. The problem is that most go-anywhere value managers won’t and aren’t. That is, they won’t go anywhere and they aren’t value investors. Most remain attached to large stocks in the US with a bit in Europe, and most insist on remaining fully invested no matter how few really compelling opportunities (sometimes called “fat pitches”) the market offered. Indeed, with the stock market hovering near record valuations in the latter days of history’s longest bull market, fewer than two dozen managers appear to be holding significant amounts of dry powder.
Appleseed is one of them. The fund holds a substantial amount of gold (“a hedge in the event of a currency crisis” but also an inflation hedge and a diversifier) and cash, five times more small cap exposure than its peers, and a third more emerging markets exposure (data as of 3/31/17). With 21 positions overall, it’s far more concentrated than its peers and it imposes an ESG screen that eliminates, among other things, banks that are “too big to fail.” It has a low-beta portfolio which has substantially outperformed its Lipper peer group over the full market cycle, but has lagged them over the past 3- and 5-year periods as market valuations continue to climb (and most managers continue to play along with a market in which they have no confidence). Morningstar’s judgment is about right, “Appleseed is tough to classify, but it has plenty to offer the right kind of investor.”
Here are Mr. Strauss’s 200 (well, okay, 252) words on why Appleseed warrants your consideration.
I know it sounds odd, but, when we launched Appleseed Fund in 2006, we rarely used mutual funds. We believed at the time that there was no good reason for most mutual funds to exist over the long-term given the fees charged and the closet indexing strategies they pursued. We expected the market for funds to eventually be dominated by low-cost index funds along with a few active managers who were unafraid to express a strong set of investment opinions.
We resolved for Appleseed Fund to be one of those few and, in particular, one of those few who also took value investing seriously.
Our goal is to provide our shareholders with an attractive risk-adjusted rate of return. We seek to invest in quality companies which are significantly undervalued, wherever we can find them. We don’t pay attention to our benchmark index, and we don’t focus on relative return, although we expect our investment process to lead to outperformance over a full market cycle. Because of our high-conviction, index-ignorant approach, Appleseed’s tracking error and active share are both high.
As a result, we manage, in my opinion, a distinctive and truly active go-anywhere value fund. While we were 100% invested in equities at the bottom of the market in 2009 and benefited greatly coming out of the crisis, we’ve been around 60% invested in equities during the past five years. Today, most of our exposure is outside the US, because that’s where we are finding investments with a sufficient margin of safety.
The minimum initial purchase for Investor shares is $2,500, and those shares carry a 1.14% expense ratio. Entry to the Institutional shares requires $100,000, though waivers are a possibility, and those shares carry an expense ratio of 0.95%. To their ongoing credit, the managers have reduced those fees several times.