Monthly Archives: December 2017

December 1, 2017

By David Snowball

Dear friends,

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

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

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

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

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

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

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

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

“Rembrandt of Red Ink”

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

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

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

Farewell to Amazon

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

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

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

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

Rearranging the Deck Chairs

By Edward A. Studzinski

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

                  Sun Tzu, The Art of War

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

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

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

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

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

Swensen’s Thoughts

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

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

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

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

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

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

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

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


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

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

Happy Holidays!

The Terrific Twos

By David Snowball

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

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

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

Funds at the greatest risk of being miscategorized by tracking firms

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

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

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

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

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

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

The most independent fund: VAMO

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

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

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

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

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

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

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

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

The funds that are making serious money

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

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

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

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

Leland Thomson Reuters Private Equity Index Fund LDPIX
Specialty Diversified Equity

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

Alambic Small Cap Value Plus Fund ALAMX
Small-Cap Value

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Launch Alert: The Touchstone adoptees

By David Snowball

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

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

We’ll start with the five funds merged away.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

By David Snowball

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

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

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

And, too, it uses horrendous amounts of energy.

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

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

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

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

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

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

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

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

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

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

Funds in Registration

By David Snowball

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

Horizons Cadence Hedged US Dividend Yield ETF

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

Marmont Redwood International Equity Fund

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

Marmont Redwood Emerging Markets Fund

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

Motley Fool 100 Index ETF

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

Vanguard U.S. Multifactor Fund 

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

Vanguard Active Quant ETFs

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

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

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

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

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

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

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

Manager changes, November 2017

By Chip

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

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

Briefly Noted

By David Snowball


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

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

Mr. Larkin comes fully equipped

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

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

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

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

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

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

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

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

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

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

Briefly Noted . . .


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

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

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

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

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

CLOSINGS (and related inconveniences)

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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