December 2017 IssueLong scroll reading

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.

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About David Snowball

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