Monthly Archives: October 2017

October 1, 2017

By David Snowball

Dear friends,

It’s finally fall, my favorite season of the year. The heat abates, the garden quiets, the apples ripen.  Chip and I will soon venture north to Wisconsin for leaf peeking and visits to orchards. You’d be amazed at the variety of flavors found in apples; there are about 200 varieties grown in the US, with the average grocery store stocking just a half dozen (including that flavorless favorite, Red Delicious). You’ve still got time to do better. In the Midwest, anyway, October is the month for Haralson and King David, Golden Russet and Creston, Enterprise and Voyager. Heck, you might find a few Lura Red or Wolf Rivers left, if you’re lucky.

And Augustana is beginning to look like Augustana in Autumn.

It feels like a time to breathe again.

Once more into the breach!

When last we wrote, the Gulf Coast had been swept by a huge hurricane and we talked about strategies for reaching out. It feels slightly freakish to note two more major hurricanes hitting the US in the weeks that followed, Irma and Maria. While many areas of the mainland US were devastated, reports coming out of the Caribbean talk about an apocalypse where entire islands had their homes and infrastructure disappear. Even now, only one Puerto Rican in 20 has electricity, fewer than half have access to safe drinking water and … horror of modern horrors … only 14% of the cell phone network is functioning.

For those wishing to reach out, the best resource I’ve found is Charity Navigator, a non-profit that rates charities by the efficiency of their efforts. Charity Navigator has a page devoted to agencies providing support to hurricane victims. We can’t fix it all, but that seems a poor argument for choosing to do nothing. And so, we try.

Driving the porcelain … uhh, portfolio

Many of us have reached the same miserable moment. It’s 2:00 a.m. We’ve got a stomach virus. We’re miserable and we know what’s coming. But, perhaps after a false alarm or two, it hasn’t come … yet.

And so you sit. And you think, “oh, god. Let’s just get this over with and get on with life.”

That’s about where I am now. The stock market is historically overpriced, and becoming more so by the day.

Index averages generally reflect the performance of a few huge, hot stocks (the FANGs). To eliminate that bias, investors sometimes look at the performance and pricing of the median stock in an index; that is, the S&P 500 stock ranked 250th in costliness. By such measures, GMO notes: “the average US stock has never been more expensive than it is currently, even at the height of the insanity that was the TMT bubble of the late 1990s. We have never seen such broad-based overvaluation of US equities.”

With a special tip of the hat to Eric Cinnamond and the folks at the Towle Deep Value Fund (TDVFX, closed to new investors), GMO ran a valuation screen suggested by Benjamin Graham, designed to identify “deep value” stocks. The screen looks at earnings yield relative to bonds, dividend yield relative to bonds, total corporate debt and 10-year price/earnings ratio. Using that test, “in the US not a single stock passes the screen. Not one single solitary stock can be called deep value.”

Jason Zweig, more perma-brain than perma-bear, is writing a series of stories this month to commemorate the October 16, 1987 crash in which the Dow lost nearly a quarter of its value in eight hours. It had been a banner year in the market, it was up 30% by October, despite rising interest rates, international bickering, skirmishes with Iran and concern over tax policy. It was a banner year … right up to the moment it wasn’t.

History does offer a few clear lessons.

Stocks have been overvalued, by long-term standards, for most of the past three decades. So, on average, you were more likely to have missed consistent gains than to have dodged a crash if you got out of the market entirely.

Investors today who hold large positions in the hottest stocks … should consider trimming their positions, however. In 1987, as in 1929, the stocks that had previously gone up the most tended to fall the farthest.

Above all, says Staley Cates, vice chairman of Southeastern Asset Management in Memphis, Tenn., “don’t be afraid to hold cash.” On Oct. 19, 1987, he and his young colleagues clustered around a Quotron machine putting in buy orders as they watched the market crash, “and the ultimate comfort we had that day was holding 25% to 30% of our portfolios in cash.”

Without it, “we couldn’t have bought stocks,” he says. Having the cash to buy when others are selling is the surest source of courage in a crash.

Mr. Graham’s advice for such moments was about the same: “When such opportunities have virtually disappeared, past experience indicates that investors should have taken themselves out of the stock market and plunged up to their necks in US Treasury bills.” Matt Kadnar and James Montier of GMO might secretly agree, but their public position is “anywhere but here.”

The cruel reality of today’s investment opportunity set is that we believe there are no good choices from an absolute viewpoint … you are reduced to trying to pick the least potent poison… For a relative investor (following the edicts of value investing), we believe the choice is clear: Own as much international and emerging market equity as you can, and as little US equity as you can. If you must own US equities, we believe Quality is very attractive relative to the market.

None of which means that a crash impends. Both the Leuthold Group and Birinyi Associates report that we’re not seeing the usual pattern of behavior that signals a “final top” to the market. The market strategists at Bank of America Merrill Lynch argue for a final “melt up” preceding a crash, which they’ve dubbed “the Icarus trade.”

Bearish commentators concede that the market has been overpriced by historical measures for nearly 30 years, so maybe it’s time to toss history out as being old-fashioned and out-of-date. On the other hand, on the last 20 years we’ve also experienced two of the three worst crashes in modern history bracketed by “the lost decade” in which the S&P 500, including dividends, ended the decade 9.1% lower than where it began.

Which leaves us where, exactly? In general, our advice is the same:

  1. Don’t put more money at risk than you can afford to lose. If your portfolio’s allocation is already attuned to your willingness to lose money, you’re golden! As we’ve noted before, my non-retirement portfolio is about 50% equities and 50% income. The equities are split between “here” and “there,” the income is split between foreign and domestic bonds and cash-like securities. When Icarus tumbles, I’d likely lose 18% or 20%. I can live with that. You might want to have the same sense.
  2. Prefer active over passive. At the very least, market cap-weighted funds have a momentum bias on the upside (as Amazon soars, so does its p/e ratio – 240x – and its weight in the S&P 500) and no way of protecting on the downside.
  3. Prefer independence over the herd. There are managers out there who aren’t blindly following the path of least resistance. David Marcus at Evermore Global Value (EVGBX), John Deysher at Pinnacle Value (PVFIX), Jaymie Wiggins at Intrepid Endurance (ICMAX), Steve Romick at FPA Crescent (FPACX), Zeke Ashton at Centaur Total Return (TILDX) and many of the folks in the Dry Powder Gang are doing the hard and painful work now to be sure their investors are intact come what may.
  4. Prefer experience over inexperience. Mike Tyson famously observed, “everyone has a plan until they get punched in the mouth.” It would be awfully reassuring to trust your fortune to someone who’s already survived a few bouts. While investors like Ryan Caldwell at Chiron Capital Allocation (CCAPX), Amit Wadhwaney at Moerus Worldwide Value (MOWVX) or Abhay Desphande at Centerstone Investors (CENTX) have a lot of experience, though the fact that their current funds are young masks that fact.

And then, we wait.

All of which leaves me feeling like a guy with a stomach virus.

Shukran, gràcies, dank u, mahalo, grazie, arigatô, tack … and thanks!

Thanks to Deb, Greg, and Brian. And, also, to Gregory (not to be confused with Greg). Your continued support keeps us going each month.

Thanks, most especially, to an anonymous donor for her kind gift. Charles happily reports that it “buys us time to implement continued enhancements that folks have asked for, like rolling averages and portfolio analysis, as well as purchasing expert support with our DataTables interface and our Encodable front-end user management/login/re-subscription software.” I’m a little fuzzy on what that means; Chip assures me that it translates to a more powerful, more responsive suite of tools for folks using MFO Premium.

A more secure MFO

Late in September, Chip added a new security certification for MFO. Now when you come to MFO, your browser bar should have a little green lock icon and an “https” designation that indicates it’s a secure site.

Since we don’t collect personal information, or even track our readers, that’s mostly a matter of symbolic affirmation and keeping up with the best practices recommended by internet security professionals. Just thought you’d like to know.

The Story without a title

By David Snowball

In journalism, the headlines you read are generally an afterthought, crafted by a headline writer – not the story’s author – to fit the available space and grab attention. For us, story titles function differently: they’re “framing devices,” which we write early and which help us figure out how to explain the entire story.

This is “the story without a title,” because I’ve got no clue about what’s going on.

On September 19th, Third Avenue announced a series of dramatic changes which mostly undo the dramatic changes they’d made in the prior four years. In particular:

  • Chip Rewey is out. Robert “Chip” Rewey, who was brought in on June 14, 2014 to help the firm get past “the cult of Marty,” is out. That’s a reference to the firm’s founder and most powerful investment manager, Marty Whitman. At the time, it struck us as somewhere between “odd” and “bad.” We wrote:

    The most prominent change was the arrival, in 2014, of Robert Rewey, the new head of the “value equity team” and formerly a portfolio manager at Cramer Rosenthal McGlynn, LLC, where his funds’ performance trailed their benchmark (CRM Mid Cap Value CRMMX, CRM All Cap Value CRMEX and CRM Large Cap Opportunity CRMGX) or exceeded it modestly (CRM Small/Mid Cap Value CRMAX). Industry professionals we talked with spoke of “a rolling coup,” the intentional marginalization of Mr. Whitman within the firm he created and the influx of outsiders.


    Shortly thereafter, the managers of Third Avenue Small-Cap Value departed. We noted, in Manager Changes, that:

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


  • Tim Bui and Yang Lie are out. Both served as Mr. Rewey’s co-managers, with Mr. Bui brought in from the outside for the task.
  • Victor Cunningham is in. Mr. Cunningham had co-managed Third Avenue Small Cap from 2013-2016, left and has now returned.
  • Michael Fineman is in. Mr. Fineman managed a hedge fund for eight years, before leaving the firm in 2014. He’s now a co-manager of Third Avenue Value.
  • Third Avenue International Value is out. The fund has struggled since the serial departures of Amit Wahdwaney and his analysts in 2014. Now saddled with a bad track record and sorely diminished assets, the fund is merging into Third Avenue Value.
  • The cult of Marty is in, Marty is not. The 93-year-old remains as the firm’s chairman emeritus and is presumably the architect here, but is not going to be driving the firm’s investments.
  • Third Avenue Real Estate Value (TVRVX/TAREX) remains, distant from the mess and highly functional.

Almost all of the firm’s dramatis personae are now off the stage: founder Whitman, the polarizing president David Barse, Whitman’s lead managers Amit Wadhwaney and Ian Lapey, and some (but apparently not all) of Mr. Barse’s hires. At this point, the firm seems to be banking on the viability of Mr. Whitman’s “safe and cheap” perspective and the ability of several second-tier professionals to step up.

Can they? Don’t know. Was the “cult of Marty” extinguished in the Barse years? Don’t know. Has the “cult of Barse” been extinguished now? Don’t know. Do two sets of purges, in 2014 and 2017, likely linked to two periods of miserable days at work, leave behind the foundations on which to build a healthy culture? Don’t know.  Is it possible to revive a “cult brand” in the absence of any cult leader? Don’t know.

Friends of Third Avenue seem stunned but modestly optimistic. Time will tell if they’re right. For now, I’d limit my attention to the distinctive, stable and excellent Real Estate Value team.

Morningstar ETF Conference – Chicago 2017

By Charles Boccadoro

“If someone invented levitation tomorrow, it would still take five years to catch on.”

             Alan H. Epstein

The last panel, entitled “Meet the Pundits,” enjoyed a winner’s circle atmosphere this year. It included Barron’s Crystal Kim, Morningstar’s Ben Johnson, Matt Hougan of Inside ETFs , Tom Lydon of ETF Trends , and Dave Nadig of As reported in our July Commentary, ETFs recorded another banner year of inflows, twice those of last year, and seem poised to overtake assets of traditional open-ended mutual funds in the not-to-distant future.

Fundamentally better tech,” argued Mr. Hougan. The panel re-iterated benefits of ETFs: reduced costs, eliminated loads and 12b-1 fees, winnowed share classes, more transparency, access to hedge-fund like investments and strategies, higher liquidity, better tax benefits thanks to in-kind redemption, and externalized costs of ownership providing “huge economies of scale.” (A solid reference is CFA’s “A Comprehensive Guide to Exchange-Traded Funds.”)

As anticipated, Morningstar announced that this would be the last stand-alone ETF conference. Next years’ Investment Conference will include an “ETF Track.” Except for the fact that it will be in muggy June versus glorious September, combining the conferences is welcomed news. There were 714 attendees at this year’s event held September 6-8 at the Hyatt Regency Chicago.

Barry Ritholtz gave a thoughtful presentation, entitled “Crashes & Terrorists & Sharks, Oh, My! Why investors FEAR the wrong things, and what you can do about it.” He was kind enough to share a clear pdf version, here.

Barry reminded us of our fear of sharks after Steven Spielberg’s Jaws and our fear of flying after 9/11. I personally remember walking through an empty airport at LAX on 9/11/2002 in route to a conference in Toronto. Besides the crew and air marshal, I was the only person onboard. Barry cited a statistic that estimates 15,000 more people died in car crashes as a result of their fear and avoidance of flying after 9/11. Similarly, there are more deaths around the world each year from selfies than sharks … and humans continue to obliterate the shark population. As you can guess, he sees many of the same fears and ironies with investing.

Morningstar’s Daniel Sotiroff, AlphaArchitect’s Wesley Gray, Vanguard’s John Ameriks, and Research Affiliates’ John West conducted an excellent panel discussion, entitled “Shades of Value.” I’ve never seen Wes more comfortable discussing and articulate with his subject matter. AlphaArchitect now manages $238M in its five quant ETFs, all less than 3 years old.

The elephant in the room, however, was John Ameriks, or more accurately the group he represents. He heads Vanguard’s Quantitative Equity Group (QEG), which we profiled last November. QEG currently does not manage any ETFs, but on last day of conference, Bloomberg’s Eric Balchunas tweeted a Barron’s news report that the SEC plans to approve Vanguard’s application to offer actively managed ETFs, which many suspect would be led by QEG.

Ben Johnson, Alex Bryan, and Adam McCullough presented a series of briefings on Morningstar’s latest research, ETF due diligence, and assessing stewardship practices. Here is link to their briefings and below is one of my favorite charts. Ben, who still prefers the term “Strategic Beta” over “Smart Beta,” says the colors were inspired by one of his children’s books!

All three briefings are worth reviewing. You will learn why Alex prefers Vanguard’s Small Cap ETF (VB) over iShares Russell 2000 ETF (IWM), that “a handful of the largest fund companies have controlled passive U.S. fund assets for at least the past 15 years,” and why Adam thinks “fund closures are not a victimless crime.”

Vanguard’s Joe Davis gave the opening keynote, captivatingly entitled “The Trend That Will Define Our Lifetime.” He believes the changing nature of work driven by technological advances is the seminal issue of our time, and that traditional measures, like GDP, are missing forces driving the economy, especially productivity and prosperity. This situation has created three paradoxes: 1) low inflation, but full employment, 2) low growth, but high valuations, and 3) low volatility, but high uncertainty.

He explains that historically, work has shifted from “Basic” to “Repetitive” and in the future it will shift from “Repetitive” to “Advanced,” as depicted below:

He argues that automation threatens tasks, not jobs: “Tasks of any job change over time.” But he acknowledges that if a task is repetitive, “get out of the way!” “Advanced” work, like jobs involving creative thinking and “emotional IQ,” is more immune to automation. In fact, he predicts automation will bring new paradoxes, including labor shortages.

BlackRock’s Andrew Ang provided another keynote address, entitled “Frontier of Factor Investing.” It was my first exposure to Andrew, but he attracted a large crowd at the conference with many champions about his former teachings at Columbia and his book, Asset Management: A Systematic Approach to Factor Investing. Nathan Vardi of Forbes recently profiled him in “The New Face of Active Investing” and Morningstar’s Adam McCullough interviewed him at the conference in “BlackRock: Factors With Economic Rationale Should Endure.”

Andrew started his talk with this statement: “Investing is harder than ever.” But as he presented, I could not help but think, especially given the other presentations from Wes and Joe, that traditional forms of active management … no, more precisely, any form of active management that can be distilled into a formula based on publicly available information is being commoditized. Those tasks are now automated by quants developing and implementing systematic strategies more pragmatically, more consistently, and more efficiently than ever before.

Quickly noted:

  • USAA will be entering ETF space with six core offerings, four equity and two fixed income, expected to launch this quarter.
  • With the traditional market index ETFs dominated by Vanguard, BlackRock, and State Street, players like First Trust offer more niche ETFs, like First Trust Dow Jones Internet Index Fund (FDN) or First Trust North American Energy Infrastructure Fund (EMLP).
  • Pacer offers simple trend-following strategies, like Pacer Trendpilot 750 ETF (PTLC).
  • The 10 ETFs offered by Columbia Threadneedle 10 ETFs came from its 2016 acquisition of Emerging Global Advisors. They do indeed focus on emerging markets, global consumer, and sustainability.
  • Then there is the nonprofit startup called Impact Shares, which plans to offer ETFs endorsed by and in support of other non-profits, like NAACP, PBS, The Salvation Army, Red Cross and UNICEF. (Ha! That’s brilliant!)
  • Less novel, but seemingly well intended, the fledgling SerenityShares Impact ETF (ICAN): “…your investments should target solving the world’s problems and making it a better place to live…”


“One for the Gipper”

By Edward A. Studzinski

“There is much to be said in favor of modern journalism. By giving us the opinions of the uneducated, it keeps us in touch with the ignorance of the community.” Oscar Wilde

A recurring theme in investment letters, usually when one suspects that performance or personnel issues (often directly related) need to be glossed over, is a discussion about the need to have “team players” in the investment management and research process. Now there were hedge funds, such as Tiger Management in its heyday and Maverick Capital which used to make a virtue of recruiting former athletes in high school or college who had played team sports such as football or basketball (no fencers or gymnasts need apply).

I must confess to being befuddled by all of this. I am not an athlete, having lacked the requisite physical skills, and never participated in team sports, other than on a pickup level. Probably the closest I came to that kind of activity was to play in a seventeen piece jazz band, which required a different kind of cohesion. But by the luck of the draw in my freshman college year I ended up living on a floor of scholarship football and basketball players. And I generally found them to be among the most thoughtful, low key individuals I have spent time with, not usually feeling the need as my former roommate put it, to “throw their jocks on the floor whenever they entered a room.”

I had a similar experience in all of my years in the military. The real heroes, the ones who had won the Air Medal or Navy Cross, never seemed to need to thump their chests. So it is always entertaining to me when people who were not the “star quarterback” but rather were the “star equipment manager” begin pontificating about team players. As my friend David Marcus puts it, we are placing our bet on the jockey, not the horse. The best investment managers – the Warren Buffetts, the Charlie Mungers, the Joel Tillinghasts, the Tom Russos, the Bill Millers – achieved their greatest success either without a team or despite what was foisted upon them as a supporting cast.

As is so often the case, Dilbert by Scott Adams says it all. Scott Adams started drawing Dilbert when he was working at what was then Pacific Bell. Much of what he drew was based on what he saw in that corporate culture. Many of you look at that cartoon strip or calendar today and find it cute but not especially believable. To which I say, having seen many of the same things over and over again in the last forty years in the environments I have been in, “you can’t make this stuff up.” So in that vein, let me close out this section with a Dilbert comic strip. In the first box, the boss says, “I dislike the words Boss and Employee. From now on, we are all Team Members.” The second panel the boss goes on to say “I’ll be the team member that makes the decisions and gets paid the most. You’ll be the team members I punish when things go wrong.” Finally in the third panel, Dilbert says “But otherwise we are all equal?” And the boss says, “Whoa! Calm down Spartacus.”

Expenses and Retirement Income

There is a timely and well-written article in the September 2017 issue of the AAII Journal entitled “The Impact of Expense Ratios on Retirement Income.” Somewhat differently than the issues we have been raising about expenses and their impact on investment returns, the author, Craig L. Israelsen, Ph.D., is concerned about the extent to which increased costs eat into the potential annual withdrawals in retirement. The article has a number of interesting tables. The point of it is that “For each additional 25 basis points of cost, the average ending balance of the retirement portfolio declines by roughly 5.9% and the average annual withdrawal from the portfolio declines by 3.7%.”

I would suggest this is an exercise that many of us should consider going through in terms of whether we need to ratchet down to lower cost vehicles as retirement appears on the horizon. Even at age 60 or 65, life expectancies are easily another fifteen plus years, based on the IRS longevity tables. Now you do need to make sure that the asset allocation mixes you are comparing are equal, that is, that the mix of mutual funds and ETF’s takes in the same asset classes, with the mandated Required Minimum Distribution being equal. The only difference should occur with one group of funds having lower expense ratios – namely the retiree controls the cost.

So why am I exercised about this? If you look at the examples and apply them, you see that a retirement portfolio that started with a $1 million balance, allocated over the same asset classes over a 25 year period, and without adjusting for inflation, an account with a 25 basis point expense ratio ends up with a roughly $2.9M account balance and a 100 basis point expense ratio ends up with an account balance of roughly $2.4M. The 25 basis point expense ratio account ends up with an average annual withdrawal of $164,500 over a 25 year period while the 100 basis point account ends up with an average annual withdrawal of $146,800 over the same 25 year period. That’s $18,000 less a year, or $1,500 less a month in retirement income. Expenses on retirement accounts matter! Whether you want active management or passive management, pay attention to the expenses! Because over periods longer than 10 years, the returns smooth out, and it is the expenses that you can control, that put the most money in your pocket in retirement.

Indexation – the New Nifty Fifty?

Is indexation investment management’s Frankenstein monster, a new Nifty Fifty equivalent? I don’t know the answer to that. I do know a tendency of investors, both sophisticated and unsophisticated, is to buy at the top of a market and sell at the bottom. Maximum draw-down numbers are helpful, but should be used more by investors in assessing what degree of market risk they are prepared to tolerate in their investments, not whether an investment with a greater maximum draw-down rate is necessarily a bad investment. One of the things Charles and I have been kicking around is the usefulness of rolling return numbers in making investment and allocation decisions. The problem with looking at return numbers tied to a specific time period is they are just that, tied to a specific time period. It is the problem I used to have with managements who would fixate on their quarterly and annual earnings (although the honest ones would admit that they really couldn’t see out often more than twelve months, if that). I used to remind them that they were not going to wind up the business and liquidate the company based on a 12/31 earnings number, as it was just a snapshot in time of what should be a going concern. Investment portfolios should be reviewed and looked at the same way.

Things to Watch

As a follow-up to my recommendation of Joel Tillinghast’s book, I saw a half-hour interview with him on Bloomberg, which reinforced my opinion of him as an extremely gifted manager of a fund that more people should be looking at it if they like active managers. As I said, look at the jockey, not the horse.

You can find the interview on YouTube.

Rolling Averages, Finally!

By Charles Boccadoro

“Maybe the mind’s best trick of all was to lead its owner to a feeling of certainty about inherently uncertain things.”

        Michael Lewis’ The Undoing Project

Took a while, but we’ve finally added rolling average analysis to the MFO Premium site.

The new Rolling Averages tool provides insight into how returns vary for selected rolling periods of interest. Each period overlaps the next, separated by one month, across the life of the fund. This insight is especially important when establishing expectations based on an investor’s risk tolerance and time-line, as it reveals best and worst performance history. 

For example, the venerable Dodge & Cox Stock Fund (DODGX) has an outstanding long-term annualized return of more than 11%/yr from its inception more than 50 years ago through August 2017. But it’s incurred stretches of 3-year periods where the annualized return was a gut-wrenching -20%/yr (that’s per year!) and even 5-year periods where the annualized return was a discouraging -8%/yr. That said, the fund has never returned less than 1.2%/yr in any 10-year period. (For more insight on DODGX and rolling average analysis in general, see A Look Back at Dodge & Cox Stock Fund).

The rolling periods are 1, 3, 5, 10 and 20 years, as applicable, based on age of fund and selected display period.

For each rolling period, the table provides:

  • cnt – short for “Count”, which is number of rolling periods evaluated for display period selected.
  • min – short for “Minimum”, which is lowest annualized percent return (APR, %/yr) of all rolling periods evaluated.
  • max – short for “Maximum”, which is highest APR of all rolling periods evaluated.
  • avg – short for “Average”, which is average APR of all rolling periods evaluated.
  • std – short for “Standard Deviation”, which is the typical variation in rolling average APR.

Display period defaults to Life (ie., performance since fund inception, or at least back to January 1960 … the limit of our Lipper database), but can also be selected for the past 20, 10, 5, or 3 years. The latter options are helpful when making direct fund-to-fund comparisons. 

Using MultiSearch to screen for equity funds that are older than 10 years and never incurred a negative return over any 3 year period, only five of nearly 5,400 funds in our database pop-up: First Trust NYSE Arca Biotechnology Index Fund (FBT), First Trust Health Care AlphaDEX Fund (FXH), Matthews Asia Dividend Fund Inv (MAPIX), Monetta Young Investor Fund (MYIFX) and Guggenheim S&P 500 Equal Weight Consumer Staples ETF (RHS).

Here are their 10-year risk and return metrics (click table to enlarge):

Then, performing rolling analysis results in the following (click table to enlarge):

What does that tell us? Using RHS as the focus of our discussion:

  • 1-Year APR Metrics: RHS has lost as much as 25.6% in a single year, and has also gained as much as 48%. It has averaged about 13.5% annually.
  • 3-Year APR Metrics: If you look at all the three-year periods in RHS’s history (there are 85 such periods since we start 12 measurement periods annually, Jan 2014 – Jan 2017, Feb 2014 – Feb 2017 and so on), the worst three-year period in the fund’s history saw an annualized gain of 2.5% while the best saw 24.5%. Since ups and downs tend to cancel out over time, its standard deviation for three-year periods, at 4.9%, is much lower than its one-year deviation.
  • 5-Year APR Metrics: Finally, it you were to have a five-year holding period, your worst experience would have been an annual gain of 7.5% while the best could have hoped for is 23.2%.

Do these calculations say that one of these funds is better for you than another? Definitely not, since they invest in very different universes and they all represent “best of class” offerings by this measure. If these were all, say, small-cap value funds of a similar vintage, you would get a far better sense of the consistency of a fund’s performance and of how to understand the experience you might have had with it in the last three years by comparing those three to all three year periods and even to the longer term.

Ideally, all fund performance should be presented in rolling analysis format, along with maximum drawdown, since that is only way can investors get a realistic assessment of how volatile a fund has returned historically.

The wise reader’s two most important words. “Uh, no.”

By David Snowball

Having concluded that we’re not willing to pay for the services of professional journalists and editors, we’re increasingly getting what we paid for: stories written by robots, amateurs, dilettantes and self-interested parties posing as journalists. Here’s my monthly roundup of stories that made my head hurt, plus one opening note on the future of funds.

Namaste, fund advisors

I use the news aggregator Flipboard to track cover of issues that interest me, from the Pittsburgh Steeler and gardening to statistics and mutual funds. Which mutual funds, you might ask, are in the news? Vanguard, Fidelity, DoubleLine? Active, passive, hedged?

Uh, no. The answer is “Indian mutual funds.” Here’s the breakdown of the top 10 stories on the mutual fund (9/29/2017, 10:oo a.m., anyway):

  • Stories about mutual funds in India: 5
  • Stories about mutual funds in Sweden: 1
  • Stories about mutual funds in Canada: 1
  • Stories about mutual funds in the US: 3

Thesis: “Robert ‘Chip’ Rewey was hired to turn around the Third Avenue Value Fund in 2014 after years of underperformance …The mutual fund rebounded last year after posting a loss in 2015.”

MFO’s take: uh, no. At the flagship Third Avenue Value Fund (TAVFX), Mr. Rewey had bad performance in 2015, his first year with the fund (down by 8%, trailed 90% of his peers), good performance in the second (up by 13%, top 6% among his peers), bad performance in the third (up 7.6% through the beginning of September, trailing 97% of his peers), another billion in assets left (from $2.1 billion AUM on 10/31/14 to $1.1 billion on 10/31/16) … and now he’s “pursuing other opportunities.” It’s not clear how one year’s good performance matched with steady outflows qualifies as a turnaround.

Thesis: oh, for the good old days when sales charges and wise brokers discouraged investors from frequent trading and other self-destructive behaviors.

MFO’s take: uh, no. The essay is strangely devoid of, well, evidence to support the nostalgic speculations. Against that, the research on broker-sold funds is fairly consistent. Brokers added expenses without improving a portfolio’s risk-return profile, in part because the brokers themselves had incentives to trade even when their clients did not.

One of the most widely cited studies (it’s been cited nearly 400 times by other scholars) is Daniel Bergstresser , John M. R. Chalmers  and Peter Tufano, “Assessing the Costs and Benefits of Brokers in the Mutual Fund Industry,” The Review of Financial Studies, Volume 22, Issue 10, 1 October 2009, pages 4129–4156. Here’s their bottom line:

Many investors purchase mutual funds through intermediated channels, paying brokers or financial advisors for fund selection and advice. This article attempts to quantify the benefits that investors enjoy in exchange for the costs of these services. We study broker-sold and direct-sold funds from 1996 to 2004, and fail to find that brokers deliver substantial tangible benefits. Relative to direct-sold funds, broker-sold funds deliver lower risk-adjusted returns, even before subtracting distribution costs. These results hold across fund objectives, with the exception of foreign equity funds. Further, broker-sold funds exhibit no more skill at aggregate-level asset allocation than do funds sold through the direct channel. Our results are consistent with two hypotheses: that brokers deliver substantial intangible benefits that we do not observe and that there are material conflicts of interest between brokers and their clients.

The “substantial intangible benefit” is sometimes labeled “hand-holding,” and it really does contribute to an investor’s quality-of-life.

Bottom line: defending high sales charges (and high expenses) because they enforced good investor behavior is like defending obesity because it keeps us from going outside and breathing polluted air; weird on face and unsupported by any serious evidence.

Thesis: “there are plenty [of mutual funds] out there that have earned their fees, crushing these index funds for years—and they’re still far outperforming the market.” Gloating about Columbia Global Technology Growth R4 (CMTFX), ProFunds UltraSector Health Care Fund (HCPIX) and JPMorgan Growth Advantage Fund (VHIAX) follows.

MFO’s take: uh, no. First, that’s not a “portfolio,” that’s just a pile. A portfolio is an interactive structure, where each addition it made in order to complement the remainder. Second, they appear to have been selected solely because they beat the S&P 500 in the past, not because there’s any reason to believe that they’ll beat it in the future. Heck, if you’re going to play that game, at least play it well and announce THE ONE FUND portfolio: ProFunds UltraSector Biotech (BIPIX), which has booked over 20% annually for the past decade. Third, they appear to have been selected without consideration of the risks involved. ProFunds, for example, is a leveraged fund that produces 150% of the daily movement of its index. The prospectus warns:

The Health Care UltraSector ProFund seeks investment results for a single day only, not for longer periods. The return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from one and one-half times (1.5x) the return of the Dow Jones U.S. Health Care SM Index (the “Index”) for that period. For periods longer than a single day, the Fund will lose money when the level of the Index is flat, and it is possible that the Fund will lose money even if the level of the Index rises. (emphasis in the original).

The fund’s prospectus calculates the risk of buying and holding this beast. In a market where the underlying index returns 0% for 12 months, a buy-and-hold index will lose between 0.4% and 31.3%, depending on how volatile the market is. Heck, the index could rise 10% and this fund could lose 20% if the market’s volatile and you foolishly buy and hold it. Fourth, there’s no reason to believe that they’ll continue to outperform, especially when the market reverses. How bad could they get? The maximum lifetime drawdowns for these funds (that is, the largest losses they’ve inflicted on their investors) is between 62-82%.

I wonder which one is supposed to be Fed chair Janet Yellen? The one yellin’, perhaps?

Elevator Talk: Ryan Caldwell, Chiron Capital Allocation Fund (CCAPX)

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 good news is that, as a concept, “world allocation funds” makes sense. The term describes funds that generally have some sort of “total return” mandate (that is, they consciously seek gains from both growth and income), authorization to pursue a variety of asset classes and a global purview.

Chiron Capital Allocation’s prospectus gives a snapshot of that flexibility:

The Fund seeks ….total return [from] capital growth and income.

The Fund … allocat[es] its assets among equity, debt and cash investments in markets around the globe … the combination of the Fund’s investments will vary from time to time both with respect to the types of securities and markets, in response to changing market and economic trends.

Under normal market conditions, the Fund intends to allocate

  • Equity: 25-70% of net exposure
  • Fixed Income: 20-50% of net exposure
  • Cash and Cash Equivalents: 0-50% of net exposure

The Fund has no geographic limits on where its investments may be located.

Equity securities … include common stock issued by companies of any market capitalization, ADRs, ETFs [and] preferred stocks.

The Fund may invest in any type of debt security, REITs, and derivatives.

The bad news is that the category quickly became dominated by a handful of behemoths. Here are the category’s top five funds by AUM:

$107 billion American Funds Capital Income Builder (17 share classes)

$56 billion First Eagle Global (4 share classes)

$39 billion Black Rock Global Allocation (6 share classes)

$16 billion Thornburg Income Builder (7 share classes)

$14 billion American Funds Global Balanced (17 share classes)

There are 110 funds in the Morningstar world allocation category. The single largest fund has assets roughly equal to the combined assets of the 100 smallest funds in group. We’ve indicated the number of share classes per fund because each share class as an asset gathering ploy; funds cut special deals with special sub-sets of investors (e.g., retirement plans with over $1 billion in assets might get lower cost shares than retirement plans with assets under $1 billion) in order to attract and retain their business.

Good for the advisor. Not as good for their investors. As assets grow, opportunity sets contract and internal pressure grows to avoid doing anything that might “spook” the investment committees. As a result, none of the largest funds are (a) closed to new investors or (2) top tier performers anymore. None of these funds places in the category’s top-tier over the past three years, only one finishes in the top 25 while the rest fall in the comfortable middle of the pack.

Several very talented managers have reacted in frustration to the constraints imposed by huge asset bases, choosing to leave their secure perch for the interesting and risky world of investor-driven boutique startup funds. At about the same time, Abhay Deshpande walked away from an $80 billion charge to launch Centerstone Investors (CENTX) and Mr. Caldwell walked away from $40 billion charge to found Chiron.

From 2000 – mid-2014,Mr. Caldwell managed several funds for Waddell &Reed, including Ivy Asset Strategy, W&R Asset Strategy, and Ivy Funds/VIP. Morningstar made him a manager of the Year finalist in 2007 and Institutional Investor tagged him as one of the “Rising Stars of Mutual Funds” in 2009. He’s made the best of the opportunity since Chiron attracting $1.3 billion in assets in its first couple years. CCAPX’s one year return through September 2017 placed it as 2nd of 137 “growth allocation” funds (Lipper), behind only CGM Mutual Fund (LOMMX), or 1st of 105 “world allocation” funds (Morningstar).

Herewith are Mr. Caldwell’s 200 words on what led him to conclude that the world needed a 140th “growth allocation” (Lipper) fund or a hundredth “world allocation” fund (Morningstar) just now:

I think there are a couple of seminal moments for me.

There are always decision points in your career where you think “this doesn’t feel right anymore.” One of mine came when I looked at fund size. Global allocation funds didn’t exist 15 years ago, then the category grew like a weed with four (or four-and-a-half) funds sopping up almost all of the assets for about a decade. I was on one of those funds.  The problem with that if you really are flexible, looking for upside participation and downside capture, size is not a benefit. Your asset base gets unwieldy and you’re set up for your worst risk-adjusted returns. I didn’t want that.

The other thing that was seminal for us was the buzz wordy “quantamental” thing that gets thrown around. A lot of corporate cultures are either fully quant or fully fundamental; that makes things precarious for investors who believe that quant screens and human analysis are both essential parts of the same process. There’s just so much information now; it’s not the business I entered into in the late 90s and early 2000s.

I concluded that we needed a stand-alone entity where we could embrace a capacity-constrained strategy and a quantamental discipline. We love the “global allocation” focus because it signals high degrees of freedom. We’ve got no style dogma to plague us. We’ve got a return set that’s still interesting, at least if you think in terms of market cycles rather than months. We’ve managed to attract world-class people, guys like Grant and Brian, each with a quarter century of success in the industry. We think we can add value by being small and staying (relatively) small. Big funds and public firms have goals that are misaligned with their investors, and we won’t go down that path. Chiron is, and always will be, niche-y, size constrained, a boutique. It’s a good place to be, for us and for our investors.

Chiron Capital Allocation Fund nominally has a $100,000 minimum initial investment, but as a practical matter it’s available at Schwab for $2,500. Expenses are capped at 1.15%; with the fund now at $1.3 billion, it’s turned profitable and  it becomes possible for the managers to talk about fee reductions.

Here’s the fund’s homepage. It’s basically a pick-up spot for fund documents, and so it’s a bit thin on content. Happily, clicking on almost any of the tabs at the top of the page will take you to Chiron’s homepage which has a reasonable explanation of their process and some videos (under the “news” tab) that gives you a decent sense of what they’re up to.

Launch Alert: Artisan Global Discovery Fund (APFDX)

By David Snowball

On August 21, 2017, Artisan Partners launched a near-clone of their very successful Artisan Global Opportunities Fund (ARTRX). Artisan organizes their managers into eight autonomous teams, with each team supported by an analyst corps and responsible for one or more funds. Global Discovery will be managed by the Growth team, which is also responsible for Global Opportunities, Mid Cap (ARTMX) and Small Cap (ARTSX).

Jason White, James Hamel, Craigh Cepukenas, Matthew Kamm

A different member of the team is designated the Lead Manager for each fund. The lead manager for Global Discovery is Jason White, who joined Artisan in 2000 after working as a fire control officer on the USS Lake Erie. He has a history degree from the U.S. Naval Academy, a credential I entirely approve of. The team is supported by seven analysts.

The principal investment strategy for each fund is identical, word for word:

The Fund’s investment team employs a fundamental investment process to construct a diversified portfolio of U.S. and non-U.S. growth companies across a broad capitalization range. The team seeks to invest in companies that it believes possess franchise characteristics, are benefiting from an accelerating profit cycle and are trading at a discount to its estimate of private market value. The Fund’s investment process focuses on two distinct elements –security selection and capital allocation. The team overlays its investment process with broad knowledge of the global economy.

The distinction between the funds appears in the past paragraph of the strategy section.

Global Opportunities Global Discovery
The U.S. companies in which the Fund invests generally have market capitalizations of at least $3 billion at the time of initial purchase, although the Fund may invest in a U.S. company with a lower market capitalization if it already holds a position in that company. There is no restriction on the size of the non-U.S. companies in which the Fund may invest. The Fund also may invest to a limited extent in equity-linked securities that provide economic exposure to a security of one or more non-U.S. companies without direct investment in the underlying securities (called “participation certificates “in the Fund’s prospectus, but may be called different names by issuers). The U.S. companies in which the Fund invests generally have market capitalizations of at least $1 billion at the time of initial purchase, although the Fund may invest in a U.S. company with a lower market capitalization if it already holds a position in that company. There is no restriction on the size of the non-U.S. companies in which the Fund may invest. The Fund expects to participate in the initial public offering (“IPO”) market. The Fund also may invest to a limited extent in equity-linked securities that provide economic exposure to a security of one or more non-U.S. companies without direct investment in the underlying securities (called “participation certificates” in the Fund’s prospectus, but may be called different names by issuers).

Discovery has the ability to invest in somewhat smaller firms and expects to invest in IPOs. Artisan allows that the IPOs are likely to make an effect when a fund is small. “When a Fund is small, IPOs may be a significant contributor to the Fund’s total return. As a Fund grows larger, however, the effect of investments in IPOs on a Fund’s performance will generally decrease.” Because all of the Artisan funds, except High Income, have the ability to participate in IPOs and the firm will be allocated a limited number of IPO shares, it’s not immediately clear how much impact to expect here.

The launch of this fund is consistent with Artisan’s broader strategy: hire a good team, let them prove themselves on one fund, then let them launch a second fund that’s a variation on the first. Artisan Partners CEO Eric Colson said, “Since the founding of our firm … we have steadily expanded the investment flexibility of existing strategies and launched new strategies with greater degrees of freedom. This increases our investment teams’ ability to generate alpha and manage risk within the constraints required by clients. The launch of Artisan Global Discovery Fund is consistent with this evolutionary process.”

Since Global Opportunities is still open and still relatively small at $2.3 billion, should you care? At least in their first version of the portfolio, the team has installed a distinct small-cap tilt compared to their larger charge’s.

Portfolio data, 8/31/2017 Global Discovery Global Opportunities
Median Market Cap (Billions) $9.3 $25.7
Weighted Avg. Market Cap (Billions) $17.4 96.2
Weighted Harmonic Avg. P/E (FY1) 27.1X 25.6x
Weighted Harmonic Avg. P/E (FY2) 23.3X 22.0x
Weighted Avg. LT EPS Growth Rate (3-5 Yr) 16.1% 17.4
Weighted Avg. LT Debt/Capital 33.5% 31.4
Active Share 98.8% 93.5
Number of Securities 46 47
Number of Countries 12 15
U.S. stocks 60.8 54.0
Emerging markets stocks 10.5 6.9
Largest sector (technology) weight 29.0 29.6
Cash (% of total portfolio) 7.0% 4.6%

Beyond that, it’s a game of inches: the stocks in Discovery are a little pricier, US exposure is a little higher which is offset by e.m. exposure also being a little higher, active share is a little higher but is “high” in both cases. Understandably Discovery’s e.r. is higher; 1.5% on $21 million in assets, compared to 1.18% on $2.6 billion.

To be clear: Global Opportunities has been a splendid fund. It has a very stable management team, top tier performance, a five-star/Silver rating from Morningstar, and a “Great Owl” designation from MFO which signals the fact that it has decisively better risk-return performance than its peers over every trailing time period. Discovery is positioned to be a slightly racier version of a GARP-y, risk-aware discipline. Folks already in Global Opportunities probably don’t need to change. Folks intrigued by the Global Opps record and tolerant of a bit more risk might consider Global Discovery.

The fund’s homepage: Artisan Global Discovery.

Manager changes, September 2017

By Chip

Thirty funds saw complete or partial manager changes, which is a very modest talent. Most months see between 50-70 changes. The most consequential are the changes coming to the Third Avenue funds. The best description we have is that a bunch of the guys hired by founder Marty Whitman were purged during the Barse years. With Mr. Barse’s unceremonious departure, a number of his acolytes have now been shown the door, including “Chip” Rewey, the amiable soul hired to right the ship three years ago. In place of the recent departees, some of the previously purged folks have returned. No word from Mr. Whitman, now 93 and described by Forbes as “an obstinate and cantankerous cuss,” on any of it.

Ticker Fund Out with the old In with the new Dt
AZDAX AllianzGI Global Fundamental Strategy Fund Armin Kayser is no longer listed as a portfolio manager for the fund. Georgios Costa Georgiou has joined Neil Dwane, Eric Boess, Karl Happe, and Steven Berexa in managing the fund. 9/17
LHGFX American Beacon Holland Large Cap Growth Fund, renamed as American Beacon Bridgeway Large Cap Growth II Fund‌ Holland Capital Management is no longer a subadvisor. Accordingly, the managers of that portion of the portfolio are out. Bridgeway Capital will remain as the subadvisor with John Montgomery, Elena Khoziaeva, and Michael Whipple managing the fund. 9/17
QWVOX Clearwater Small Companies Keeley-Teton Advisors is out as a subadvisor. Kevin Chin and Brian Keeley are no longer listed as portfolio managers for the fund. Cooke & Bieler and Pzena Investment Management are new subadvisors, joining KCM. Donald Cobin and Timothy Hasara are joined on the management team by Andrew Armstrong, Steve Lyons, Michael Meyer, Edward O’Connor, R. James O’Neil, Mehul Trivedi, William Weber, John Flynn, Evan Fox, and Benjamin Silver. 9/17
CPATX Counterpoint Tactical Income Fund John Koudsi will no longer serve as a portfolio manager for the fund. Michael Krause is joined by Joseph Engelberg in managing the fund. 9/17
DURAX Deutsche European Equity Fund Dirk Aufderheide is no longer listed as a portfolio manager for the fund. Britta Weidenbach, Mark Schumann, Gerd Kirsten, and Christian Reuter will continue to manage the fund. 9/17
FADAX Fidelity Advisor Dividend Growth Fund No one, but . . . Gordon Scott joins Ramona Persaud as a co-manager to the fund. 9/17
FWATX Fidelity Advisor Multi-Asset Income Fund Matthew Fruhan is no longer listed as a portfolio manager for the fund. Ramona Persaud joins Adam Kramer and James Morrow to manage the fund. 9/17
FLPSX Fidelity Low-Priced Stock Fund James Harmon no longer serves as a co-manager of the fund. Sam Chamovitz and Salim Hart  have joined Joel Tillinghast, Justin Bennett, Katherine Buck, John Mirshekari, Shadman Riaz, and Morgan Peck on the management team. 9/17
FOCPX Fidelity OTC Portfolio Gavin Baker is no longer listed as a portfolio manager for the fund. Sonu Kalra and Christopher Lin now manage the fund. 9/17
FSDIX Fidelity Strategic Dividend & Income Fund Joanna Bewick is leaving Fido and so will no longer serve as a portfolio manager for the fund. Brian Chang has joined Andrew Kramer, Ford O’Neil, Samuel Wald, Scott Offen (who plans to retire at the end of the year), and Ramona Persaud on the management team. 9/17
FSICX Fidelity Strategic Income Fund Joanna Bewick will no longer serve as a portfolio manager for the fund. Adam Kramer joins Ford O’Neil, Franco Castagliuolo, William Irving, Johnathan Kelly, Mark Notkin, and David Simner on the management team. 9/17
INCAX James Alpha Hedged High Income Portfolio No one, but . . . Coherence Capital Partners was added as a subadvisor. Sal Naro, Vincent Mistretta, and Michael Cannon join Kevin Greene, James Vitalie, Michael Montague, Akos Beleznay, Glenn Koach, Tom Krasner, and Jon Duensing. 9/17
LMGAX Lord Abbett Growth Opportunities Fund Paul Volovich and Anthony Hipple are no longer listed as portfolio managers for the fund. Jeffrey Rabinowitz will now manage the fund. 9/17
MFGIX Monteagle Quality Growth Fund  Curt Rohrman will no longer serve as a portfolio manager for the fund. Robert Prorok, Thomas Sauer, Stefan Astheimer, Brett Winnefeld, and Craig Cairns will now manage the fund. 9/17
OWSMX Old Westbury Small & Mid Cap Strategies Fund No one, but . . . Douglas Brodie and Douglas Polunin join the management team, representing new subadvisors of Baillie Gifford Overseas Limited and Polunin Capital Partners Limited. 9/17
OALGX Optimum Large Cap Growth Fund Fred Alger Management is no longer a subadvisor to the fund. Therefore, Ankur Crawford and Patrick Kelly will no longer serve as portfolio managers for the fund. ClearBridge Investments joined the subadvisory team, with Peter Bourbeau and Margaret Vitrano added as portfolio managers. They join Joseph Fath, who’s been managing the fund since 2014. 9/17
PAXWX Pax Balanced Fund Not immediately, but Christopher Brown has stated his intention to retire at the end of the year. Mssr. Brown, Anthony Trzcinka, and Nathan Moser are joined by Andrew Braun and Peter Schwab on the management team. 9/17
PAXLX Pax Large Cap Fund Not immediately, but Christopher Brown has stated his intention to retire at the end of the year. Andrew Braun and Barbara Browning joins Mssr. Brown in managing the fund. 9/17
PXNIX Pax MSCI EAFE ESG Leaders Index Fund Not immediately, but Christopher Brown has stated his intention to retire at the end of the year. Mssr. Brown, Scott LaBreche, and Greg Hasevlat are joined by Steve Falci on the management team. 9/17
SLSAX Sterling Capital Long/Short Equity Fund Ward Davis and Brian Agnew are no longer listed as portfolio managers for the fund. L. Joshua Wein, James Willis, Ashton Lee, Charles Frumberg, Michael Gregory, and Derek Pilecki will continue to manage the fund. 9/17
TEMFX Templeton Foreign Fund No one, but . . . Christopher Peel and Herbert Arnett Jr join Tucker Scott, Norman Boersma, James Harper and Heather Arnold 9/17
WEAIX Teton Westwood Intermediate Bond Fund  Mark Freeman has resigned as portfolio manager and Westwood Management will no longer sub-advise the fund. Teton, the advisor to the fund, will assume portfolio management duties, with Wayne Plewniak becoming the new portfolio manager. 9/17
  Third Avenue Small-Cap Value Fund Robert “Chip” Rewey and Tim Bui are out. Victor Cunningham will again manage the fund 9/17
TVFVX Third Avenue Value Fund Robert Rewey and Yang Lie are out. Matthew Fine and Michael Fineman, who was sort of purged in 2014, will now manage the fund. 9/17
TPYAX Touchstone Premium Yield Equity Fund Roger Yound will no longer serve as a portfolio manager for the fund. Lowell Miller, Bryan Spratt, John Leslie, and Deepak Ahuja will continue to serve as portfolio managers of the fund. 9/17
VICAX USA Mutuals Vice Fund Gerald Sullivan no longer serves as portfolio manager of the fund. Gerry was never really a natural fit for anything associated with vice. Jordan Waldrep will now manage the fund. 9/17
WAIGX Wasatch International Growth Fund Effective October 10, 2017, Kabir Goyal will no longer be a manager for the fund. Roger Edgley, Ken Applegate, and Linda Lasater will continue to manage the fund. 9/17
WAAEX Wasatch Small Cap Growth Fund Effective December 31, 2017, Jeff Cardon will no longer be a manager for the fund. That makes sense, he’s been with the fund since 1986 and was once the Wasatch CEO. “Pulling back” is about right. JB Taylor, Ken Korngeibel, and Ryan Snow will continue to manage the fund. 9/17
WVCAX Wells Fargo Alternative Strategies Fund Effective September 13, 2017, William Tuebo will no longer serve as a portfolio manager of the fund. Kyle Mowery will continue to serve as portfolio manager of the fund. 9/17
WDISX Wells Fargo Strategic Income Fund David Germany has announced his intention to retire. Niklas Nordenfelt, Anthony Norris, Thomas Price, Scott Smith, Alex Perrin, and Noah Wise will continue to manage the fund. 9/17


Funds in registration

By David Snowball

It’s been a quiet month in the land of new fund registrations. There are ten new (mostly) no-load retail funds in the pipeline, as well as a half dozen loaded funds (which I’m mostly ignoring) and a slew of ETFs. The most intriguing development is the question, who’s offering the most pointless ETF? Candidates are the ProShares Decline of Bricks and Mortar Retail ETF which will surely compete with the ProShares Long Clicks/Short Bricks Retail ETF while the USCF Contango-Killer Natural Gas Fund (No K-1) takes on USCF Contango-Killer Oil Fund (No K-1).

AAM/HIMCO Global Enhanced Dividend Fund

AAM/HIMCO Global Enhanced Dividend Fund will seek a high level of current income and, just maybe, some capital appreciation. The plan is to invest long and short positions in domestic and foreign equity securities. They’ll be long dividend-payers and short stocks “with below average dividends and less attractive returns.” They’ll also leverage up the portfolio so that they’re 140% long and 40% short. The fund will be managed by a small team from Hartford Investment Management Company. The initial expense ratio has not been released, and the minimum initial investment is $2,500. “A” shares have a 5.5% sales load. The no-load “I” shares have a $25,000 minimum initial investment.

AT Equity Income Fund

AT Equity Income Fund will seek current income, and, secondarily, modest capital appreciation. The plan is to invest mostly in US income-producing equities, common and preferred stocks, REITs, MLPs and convertible securities, with up to 30% international and up to 25% emerging markets. They advertise a bottom-up, fundamental approach to finding quality growth companies. This represents the conversion of an earlier fund, apparently institutional, into a retail platform. The fund will be managed by Robert C. Bridges and John Huber, who’ve co-managed the predecessor fund since its launch in 2010, and Gordon C. Scott who joined more recently. The initial expense ratio will be 1.45%, and the minimum initial investment is $3000.

AT All Cap Growth

AT All Cap Growth will seek long-term capital appreciation. The plan is to invest mostly in US stocks, with up to 30% international and up to 25% emerging markets. They advertise a bottom-up, fundamental approach to finding quality growth companies. This represents the conversion of an earlier fund, apparently institutional, into a retail platform. The fund will be managed by Robert C. Bridges and John Huber, who’ve co-managed the predecessor fund since its launch in 2007. The initial expense ratio will be 1.45%, and the minimum initial investment is $3000.

Brandes Small Cap Value Fund

Brandes Small Cap Value Fund will seek long term capital appreciation. The plan is to invest, mostly, in US small cap stocks. Up to 10% of the portfolio might be invested in fixed income securities and 10% in foreign stocks. This fund represents the conversion of a “private investment fund” which has a (mixed) 15 year record. The fund will be managed by the same team that ran its predecessor, Ralph Birchmeier, Luiz Sauerbronn, Yingbin Chen, and Mark Costa. The initial expense ratio is 1.15% and the minimum investment is $2,500. There’s a 5.75% sales charge on “A” shares.

Elevation U.S. Small Cap Value Fund

Elevation U.S. Small Cap Value Fund will seek long-term capital appreciation. The plan is to “employ a multi-factor investment strategy to invest in a broad and well diversified basket” of US small cap value stocks. The fund will be managed by Dr. Vito Sciaraffia. The manager has a PhD from Cal-Berkeley and has had three short faculty stints, which sort of explains his claim to employ “a set of academically-driven factors.” We’ll set aside, for the nonce, the fact that “academically-driven” is a nonsense phrase. The initial expense ratio will be 0.92%, and the minimum initial investment is $10,000.

Elevation U.S. Large Cap Value Fund

Elevation U.S. Large Cap Value Fund will seek long-term capital appreciation. The plan is to “employ a multi-factor investment strategy to invest in a broad and well diversified basket” of US large cap value stocks. The fund will be managed by Dr. Vito Sciaraffia. The manager has a PhD from Cal-Berkeley and has had three short faculty stints, which sort of explains his claim to employ “a set of academically-driven factors.” We’ll set aside, for the nonce, the fact that “academically-driven” is a nonsense phrase. The initial expense ratio will be 0.75%, and the minimum initial investment is $10,000.

Elevation U.S. Large Cap Growth Fund

Elevation U.S. Large Cap Growth Fund will seek long-term capital appreciation. The plan is to “employ a multi-factor investment strategy to invest in a broad and well diversified basket” of US large cap growth stocks. The fund will be managed by Dr. Vito Sciaraffia. The manager has a PhD from Cal-Berkeley and has had three short faculty stints, which sort of explains his claim to employ “a set of academically-driven factors.” We’ll set aside, for the nonce, the fact that “academically-driven” is a nonsense phrase. The initial expense ratio will be 0.75%, and the minimum initial investment is $10,000.

Orange Structured Credit Value Fund

Orange Structured Credit Value Fund will seek a high level of risk-adjusted current income and capital appreciation while preserving capital. The plan is to invest in structured credit securities including non-agency residential mortgage-backed securities (RMBS), agency mortgage-backed securities (MBS), commercial mortgage-backed securities (CMBS), asset-backed securities (ABS), collateralized mortgage obligation securities (CMO) and collateralized loan obligations (CLO). They may occasionally short such securities. The fund will be managed by Jay Menozzi and Boris Peresechensky of Orange Investment Advisers. Neither the initial expense ratio nor the minimum initial investment has been disclosed yet.

Powell Alternative Income Strategies Fund

Powell Alternative Income Strategies Fund will seek to generate income and capital appreciation with lower volatility as compared to the S&P 500 Index.. The plan is to combine esoteric strategies (dividends plus puts, long/short pair trades, hedged global dividends and “additional and new strategies from time to time”). The fund will be managed by David D. Wrench of Powell Capital LLC. He spent five years at Russell Investments, including a stint as Global Director of Asset Allocation and Model Strategies. The initial expense ratio will be 2.25%, and the minimum initial investment is not yet disclosed.

VanEck Vectors Real Asset Allocation ETF

VanEck Vectors Real Asset Allocation ETF will seek long-term total return. In pursuing long-term total return, the Fund seeks to maximize “real returns” in inflationary environments while seeking to reduce downside risk during sustained market declines. The plan is to invest in real asset ETFs and cash. The fund will be managed by David Schassler and Barak Laks of VanEck Absolute Return Advisers. The initial expense ratio has not been disclosed.

Briefly noted

By David Snowball

I’ve lost track of many of the funds that we profiled back in the FundAlarm days. This month one surfaced, Capital Advisors Growth Fund (CIAOX), and it was awfully nice to see that (a) they’re still providing exactly what they promised long ago – cautious equity exposure with no glitz – and (b) we were right, nine years ago, in assessing it as an exceptionally solid citizen for equity investors interested in sleeping well at night.

Briefly the number of mutual funds liquidating matched the number of ETFs liquidating, then September 29th came around and a bunch of fund advisers officially admitted that they’d reached the end of the road. About 40 funds became historical footnotes by month’s end.


Frontier Netols Small Cap Value Fund (FNSVX) was set to merge into Frontier Phocas Small Cap Value Fund, then the board decided they should check with the Frontier Phocas shareholders first. As a result, the execution – scheduled for October 27, 2017 – has been indefinitely postponed.

Briefly Noted . . .

American Beacon ARK Transformational Innovation Fund (ADNPX), which launched in January 2017, has formally added Bitcoins to its investable universe. Apparently it already invested in the Bitcoin Investment Trust which, conceivably, fell in a grey area for permissible investments. In any case “The Fund has contributed its holdings in the Bitcoin Investment Trust (accounting for less than 10% of the value of its total assets) to a wholly owned subsidiary organized under Delaware law (the “Delaware Subsidiary”).  In the future, the Fund will seek to gain additional exposure to the Bitcoin Investment Trust by investing up to 25% of the value of its total assets (less the percentage of that value invested in the Delaware Subsidiary) in a wholly owned subsidiary organized under the laws of the Cayman Islands.” No idea of why it’s only Bitcoin (our colleague, Sam Lee, finds Ethereum to be a more interesting vehicle and there are lots of other blockchain-based crypocurrencies on the loose).

The three AMG SouthernSun Funds have added REITs to the list of securities in which they might invest.


Capital Advisors Growth Fund (CIAOX) has eliminated its 12(b)1 fee and has lowered its expense cap from 1.25% to 1.00%. I like both the fund and its ticker symbol (our eldest cat is Ciao, when she was feral we tamed her with plates of Kitty Chow and she heard the call “Kitty Chow! Chow!” so much that she took it to be her name). Back in Ye Olde FundAlarme days, in mid-2008, we profiled CIAOX as an excellent choice for stunned equity investors. The fund finished 2008 in the top 2% of its peer group and we noted:

Despite its excellence and prudence, it has a minute asset base. Why so? CIAOX remains true to its origins…  the fund was launched as a service offering; it was a way for friends, employees or relatives of Capital Advisor’s affluent investors to access Capital’s expertise even though they couldn’t meet the separate account minimum. As a result, the firm has no marketing for the fund. Perhaps as a result, assets and expenses before waivers have been extremely stable over the past five years.

[For investors shaken by the market collapse] the alternative to running and hiding is to seek out folks who are intensely risk-aware but also committed to balancing that risk with the prospect of returns. And it makes sense, too, to seek out folks who have actually managed to accomplish those goals rather than just talking about them as the marketing ploy du jour. Capital Advisors Growth has managed to accomplish just that. Investors looking to creep back into the market might reasonably seek them out.

Over the course of the entire market cycle, from its start 10 years ago, through the collapse and subsequent bull market, CIAOX has done exactly what we would have expected: entirely reasonable returns, very modest risk and very stable assets.

  Annual Return MAX Drawdown Std Deviation Downside Dev Ulcer Index Bear market deviation Bear Rating
CIAOX 6.0 -40.0% 13.5 9.2 13.4 8.7 1
Large-Cap Core Average 6.4 -49.4 15.5 10.9 16.0 10.6 5

The $50 million fund’s new expense ratio is 1.03% with an odd redemption fee applicable only to shares held for one week or less. Such idiosyncratic restrictions are usually a sign that someone tried misusing the fund (akin to the local “escape room” that now requires visitors to sign a promise to remain clothed) and the adviser imposed a gate.

Goldman Sachs Small Cap Value Fund (GSSMX) has reopened to new investors, but “for approximately three months” according to their SEC filing.

Hmmm … Snow Capital Opportunity Fund (SNOAX) and Snow Capital Small Cap Value Fund (SNWAX) each reduced their management fee by 20 bps, effective October 1, 2017.

CLOSINGS (and related inconveniences)

Effective October 1, 2017, Champlain Mid Cap (CIPMX) will be closed to new investors.

Driehaus Micro Cap Growth Fund (DMCRX) soft-closed on September 29, 2017.

In what’s an increasingly common move for asset-challenged funds, KKM Enhanced U.S. Equity Fund has closed its “A” share class (KKMAX), kept over the institutional shares (KKMIX) and dropped its management fee from 0.85% to 0.50%.

Neuberger Berman Greater China Equity Fund (NCEAX) closed to new investors on September 20, 2017.

Effective on October 13, 2017, the Adviser Share Class of all of the Payden funds will be closed.


On November 15, 2017, Aberdeen Equity Long-Short Fund will become Aberdeen Focused U.S. Equity. The plan is for it to transition from a long/short fund to an all-cap US equity fund with 20-30 names in the portfolio. As always, these sorts of transitions trigger lots of short-term portfolio turnover and higher than average tax bills.

Alpha Risk Hedged Dividend Equity Fund (CANTX) has become Alpha Risk Tactical Rotation Fund.

“Effective as of the Effective Date” (I love lawyers), American Beacon Holland Large Cap Growth Fund becomes American Beacon Bridgeway Large Cap Growth II Fund.  The effective date in question was September 27, 2017. That’s all pursuant to the decision by the folks at Holland Capital Management to get out of asset management and shutter their business.

Effective October 1, 2017, AMG Managers Fairpointe Focused Equity Fund (AFPTX, formerly ASTON/Fairpointe Focused Equity Fund) became AMG Managers Fairpointe ESG Equity Fund.  Mary L. Pierson and Brian M. Washkowiak will serve as portfolio managers of the Fund though, oddly enough, “Ms. Pierson, Mr. Washkowiak and Thyra E. Zerhusen will be jointly and primarily responsible for the day-to-day management of the Fund.”

Kaizen Hedged Premium Spreads Fund (KZSIX) becomes Raise Core Tactical Fund on November 17, 2017. “Kaizen” is the Japanese term for “continuous improvement.”

I’m still processing this one. Lebenthal Lisanti Small Cap Growth Fund has become Dinosaur Lisanti Small Cap Growth Fund (ASCGX) for no reason I can discern. There’s been some turmoil at Lebenthal Lisanti, the adviser, with “change of control” announcements coming and going. Pursuant to the latest, the fund has changed its name. Why Dinosaur? No clue (yet). There’s no “Dinosaur” elsewhere in the documents, so I can only guess that it’s a bit of bitter sarcasm from manager Mary Lisanti who’s been managing mutual funds since 1996.


Around Thanksgiving, Kempner Multi-Cap Deep Value Equity Fund (FAKDX) becomes Kempner Multi-Cap Deep Value Fund, thereby eliminating the need to keep 80% of the portfolio in equities.

Effective November 1, 2017, RBC BlueBay Emerging Market Select Bond Fund (RESAX) will be renamed RBC BlueBay Emerging Market Debt Fund and RBC BlueBay Global High Yield Bond Fund (RHYAX) will become RBC BlueBay High Yield Bond Fund.

Plans to have the Sentinel funds be adopted by Touchstone are proceeding apace. Absent last minute surprises, the change is expected to be completed October 27, 2017. A couple of the Sentinel funds have been consistently solid (and left behind by Morningstar); in recognition of that, we’ll offer a profile of at least one in our November issue. 

On October 31, 2017, Wasatch Large Cap Value Fund (FMIEX) becomes Wasatch Global Value Fund. The new name signals two changes: from domestic to global and from large cap to all-cap. Normally 40% of the portfolio will be international but in the extreme, up to 50% might be in the emerging markets. Morningstar has decided to jump the gun; their site has changed to Global while Wasatch legally remains Large Cap.


AI International Fund (IMSSX) and AI Large Cap Growth Fund (LGNIX) will both liquidate on October 19, 2017. Their board urges them to be prompt in their unwinding.

Alger Mid Cap Focus Fund (SPEAX) will liquidate on or about October 25, 2017. Sad summary: 10 years, $10 million, bottom tenth.

AMG Systematic Large Cap Value Fund (MSYAX) is expected to liquidate on or about October 31, 2017.

Baird LargeCap Fund (BHGSX) seems to be on the path to extinction, but we’re not sure of that yet. For now, Baird terminated the fund’s sub-adviser and closed it to new purchases. The board will decide in November whether to liquidate the fund, merge the fund or do something else. The fund’s been sort of a study in mediocrity, with a 17 year history and $42 million in assets, which doesn’t really cry out “save me!”

Catalyst/Princeton Unconstrained Hedged Income Fund (HIFAX) has closed, and will dissolve and liquidate on October 27, 2017. One sign of its distress:

The other:

Destra Focused Equity Fund has closed and will liquidate by October 31, 2017.

Direxion Indexed Managed Futures Strategy Fund (DMXAX) will pursue “an orderly liquidation,” set for October 27, 2017.

Shareholders of Dreyfus Small Cap Equity Fund (DSEAX) are being asked to agree on merging their fund into Dreyfus/The Boston Company Small Cap Value Fund (RUDAX). Meanwhile, Dreyfus MLP Fund (DMFAX) is being liquidated on or about November 15, 2017. DMFAX is small and has produced index-like returns over its 30 months of existence, which is to say it’s lost a lot of money for its shareholders.

The Fidelity Multi-Manager Target Date Funds are expected (expected by who?) to liquidate on or about December 8, 2017.

Hatteras Disciplined Opportunity Fund (HDOIX) will “return the Fund’s investor capital … to the Fund’s shareholders,” a particularly delicate phrase most commonly associated with hedge fund closures, on October 30, 2017. HDOIX is actually one of the top performing option-strategy funds whose three-year average return is more than double its average peer’s. Presumably the adviser found the $54 million asset base to be financially unsustainable.

On or about October 13, 2017, Global X Junior MLP ETF (MLPJ), Global X Permanent ETF (PERM), Global X Guru International Index ETF (GURI), Global X Guru Activist Index ETF (ACTX), Global X FTSE Andean 40 ETF (AND), Global X Brazil Mid Cap ETF (BRAZ) and Global X Brazil Consumer ETF (BRAQ) will liquidate.

JPMorgan Diversified Real Return Fund (JRNAX) will become an unreal fund around December 8, 2017.

JPMorgan International Opportunities Fund will liquidate and dissolve (may I watch?) on October 2, 2017.

Manning & Napier Emerging Markets Series (MNEMX) has closed and will soon liquidate.

MassMutual Premier Value Fund (MCEAX) will be dissolved on March 23, 2018.

MassMutual Select Large Cap Value Fund (MMLAX) will merge into the MassMutual Select Diversified Value Fund (MDVYX) sometime in January 2018. 

Mirae Asset Asia Great Consumer Fund (MCGEX) will merge into Mirae Asset Asia Fund (MALAX), “later this year.”

ProShares liquidated a slew of ETFs in September. Those were ProShares Short S&P Regional Banking, Ultra S&P Regional Banking, Ultra Oil & Gas Exploration & Production, UltraShort Oil & Gas Exploration & Production,Ultra MSCI Mexico Capped IMI, UltraShort MSCI Mexico Capped IMI, Ultra Junior Miners, UltraShort TIPS, UltraShort 3-7 Year Treasury, German Sovereign/Sub-Sovereign, USD Covered Bond, Hedged FTSE Europe and Hedged FTSE Japan ETFs.

Roosevelt Multi-Cap Fund (BULLX, originally the Bull Moose Growth Fund and briefly the Abacus Bull Moose Growth Fund) is no longer accepting purchase orders for its shares and it will close effective November 15, 2017. 

SSGA Enhanced Small Cap Fund (SSESX) will be liquidated and terminated on or about November 20, 2017

Tactical Asset Allocation Fund (GVTAX) ceased to allocate anything on or about September 28, 2017.

TFS Market Neutral Fund (TFSMX), TFS Small Cap Fund (TFSSX) and TFS Hedged Futures Fund have terminated the public offering of their shares and will discontinue each Fund’s operations on or about October 27, 2017.

Third Avenue International Value (TVIVX), a shell of its former self, has closed to new investors and will merge into Third Avenue Value Fund (TAVFX) as soon as the board permits. Those who remember it fondly should check Moerus Worldwide Value (MOWNX) run by Amit Wadhwaney, the former manager.

 “As a result of lack of demand in the marketplace for the Funds and difficulty in attracting and retaining assets,” which actually strike me as the exact same thing, TD Short-Term Bond Fund (TDSHX), TD Core Bond Fund (TDBFX), TD High Yield Bond Fund (TDHBX), Epoch U.S. Equity Shareholder Yield Fund (TDUEX), Epoch Global Equity Shareholder Yield Fund (TDGIX) and TD Target Return Fund (TDTFX) will be liquidated on or about January 17, 2018. The “TD” here is Toronto Dominion bank, whose funds seem to have limited availability in the US, which is sad because several of their funds are quite good. (TDAM Global Low Volatility Equity TDLVX, which is not being liquidated, earned MFO’s “Great Owl” designation for outperforming its peers on a risk-adjusted basis in every applicable trailing time period.) TD helpfully recommends that shareholders redeem quickly since “shareholders remaining in a Fund just prior to the Liquidation Date may bear increased transaction fees incurred in connection with the disposition of the Fund’s portfolio holdings.” Less helpfully, they note that this isn’t a taxable event for the fund, but it is a taxable event for the fund’s shareholders.

Turner liquidations: on, off, on. Turner Midcap Growth Fund, Turner Small Cap Growth Fund and Turner Titan Long/Short funds had been slated to liquidate, then received a reprieve from the governor (or the Board) but the reprieve has now been eliminated. The new Liquidation Date will be on or about September 25, 2017. That will officially take the count of Turner Funds down to zero, for now.

VanEck Long/Short Equity Index Fund (LSNAX) will liquidate on November 20, 2017. Rather earlier, four other VanEck ETFs (AMT-Free 6-8 Year Muni Index, Solar Energy, Treasury-Hedged High Yield Bond and AMT-Free 12-17 Year Muni Index) will undergo “termination and winding down” on or about October 6, 2017.

Another two silly ETFs are biting the dust. USCF Restaurant Leaders Fund (MENU) and Stock Split Index Fund (TOFR … get it? Two-fer) will liquidate on October 20, 2017. Fortunately USCF will provide us with two worthy replacements: USCF SummerHaven Private Equity Strategy Index Fund (BUY) and USCF SummerHaven Private Equity Natural Resources Strategy Index Fund (BUYN) are both now in registration with the SEC.