Monthly Archives: March 2017

March 1, 2017

By David Snowball

Dear friends,

 It’s spring! Could you tell the difference where you are? March 1 is the beginning of “meteorological spring” and I’m indisputably in the middle of Augustana’s Spring Break. (It always looked better on MTV.) Spring training has begun for major leaguers while Augie’s baseball team is currently 5-1 on their swing through Florida. I’ve just placed my order for a flat of native prairie plants (the “Happy Hummer” collection plus a few extra Jack in the Pulpit, Chip’s favorites) and have been paging through the Burpee’s catalog.

The announcement of spring does seem a bit tardy. Our February saw more 70 degree days than days with snow. Coming into this month, the Quad Cities had seen three 70 degree February days ever. We had five 70 degree days in the last 10 days of February, including the warmest February day in the city’s history. Also the second warmest, the third warmest and the fourth warmest. Nationwide, we set 3,146 new record highs in February, against only 27 record lows. The instability wrought by a warming planet seems regrettably hard to ignore.

On the upside, there’s fascinating research that suggests that soil bacteria act as anti-depressants and anti-anxiety agents. The evidence has been building there for about a decade, but recent studies are pointing to brain chemical changes and enduring effects on mood and sociability.

Grab some humus (or hummus) and read on!

Scam alarm: hidden subscription price changes

Professional journalism is (a) invaluable, both at the local and national levels, especially at a time when more and more people have concluded that “fact” are whatever pop out of their mouths, (b) in deep financial distress and (c) entirely deserving of your financial support. We need good fact-gathering and checking which means that we need to be willing to pay for it. In my case, that’s reflected in my decision to subscribe to four newspapers (the Quad Cities Times and Wall Street Journal in print, the Financial Times and New York Times online), public broadcasting (National Public Radio and Iowa Public TV) and two important magazines (The Economist and Consumer Reports). If you think you’re entitled to “free” news, you’ll discover that you get exactly what you paid for.

That’s all a prelude to a warning about a scam that a number of newspapers have resorted to. In order to extract extra money from people who have already paid for, say, a year’s subscription, the newspapers are cutting weeks off the end of your subscription.

In my case, the Quad City Times sent a subscription rate increase notice that contained the cryptic warning, “this increase may accelerate the end of your current subscription period.” That struck me as impossible, since I paid for 52 weeks in advance. When I called the Times they confirmed their plan to cut six weeks off the end of my subscription; rather than ending in late September, my subscription would end in early August. I inquired about whether the phrase “breach of contract” was new to them; they offered 52 weeks for a set amount, I paid the amount, they owe me 52 weeks. Period. The operator offered to extend my subscription by four weeks in early September, “so you’re subscription started in September and now it will end in September so that works, right?” No, it doesn’t. I reminded her that I paid for 52 weeks, not 46 nor 50. Next she offered a $25 gift card. And again, no. The contract said 52 weeks, I expect 52 weeks. She’s promised to have a supervisor call. None has. The QCT is published by Lee Enterprises, which publishes about 100 newspapers in the Midwest and West.

When I mentioned this to Chip, she reported a similar problem with her mom’s local paper, the Times Herald Record (Middletown, NY). The paper is now collecting its monthly charge every three weeks. Why? Because they’ve designated some of their issues as “premium editions” and those cost you extra, which they accommodate by shortening your subscription period. The THR is part of the Local Media Group, which publishes two dozen newspapers.

If you subscribe to a local paper, we suggest you check the text of any renewal or rate increase notices very carefully. It appears that in their desperation, some publications are acting dishonorably toward their subscribers. As much as it will pain me to do so, if the Times cannot act with honor, I’ll ask for a refund of my remaining subscription.

Thanks, as ever, to the folks who help support the Observer

We mentioned, in January, our need for the 2% solution. Not counting their support via Amazon, about 1% of our readers provide financial support (some generously and many yearly since we launched) for the Observer. Amazon has now announced a “simplification” of their program which will, almost certainly, reduce its contribution to us. So, we’d like to raise more-active support to 2%, which would translate to around 500 people, including new and renewing members of MFO Premium, all told.

It’s a simple, painless, satisfying process: contributions to MFO are mostly tax-deductible (our attorney says I must repeat the phrase, “consult your tax adviser”) because we’re incorporated as a 501(3)c charity. We’re also an efficient 501(c)3 since our fund-raising costs are, well, zero. If you contribute $100 or more, Charles gives you immediate access to MFO Premium with all the attendant data and support.

By Charles’s best estimate, we added 21 new subscribers in January (on target!) and seven in February (off-target but that’s my fault; I was so embarrassed by our need to publish several days late that I didn’t raise the topic). I promised folks monthly updates on our progress so here ‘tis: we’re hoping to add 20 supporters (out of 25,000 readers) a month, so 40 by the end of February would have been nice. We’re a bit under 30.

MFO Premium portal

Thanks to David Moran, the good folks at Gardey Financial for their years of support, Gary Habbersett, Frank Nobles and Richard Weeks.  As always, we thank our regular PayPal subscribers: Deb, Greg, Jonathan and Brian. We really appreciate you.

And special regards to Mary Kappagoda whose email address we temporarily misplaced. Sorry ‘bout that, ma’am!

What we’re up to this month

At the same of each year, I walk folks through the shape of, logic behind, and changes in my portfolio. That’s not because it’s a singularly brilliant piece of investing; it isn’t and, frankly, it doesn’t have to be. Instead, it’s a way of understanding what sorts of factors you might consider in planning and monitoring your own investments.

We’re hopeful of an April follow-up to that piece. Our colleague Ed Studzinski has long grumbled (actually, I could stop the sentence right there and it would be correct and complete) that I own too many funds for the modest size of my portfolio. He’s quite likely correct, so I’ve invited our data wizard Charles Boccadoro to disassemble and reassemble it for me. Charles has walked us through the strategies for focusing and rationalizing a couple other portfolios, and he kindly accepted the challenge. We’ll hear his “Plan B” for me next month.

Ed, meanwhile, shares his reflections after the annual Graham and Dodd conference at Columbia University. He starts with an unsurprising observation (the number of great investment opportunities is invisibly small) and offers two actionable suggestions. The first is to consider your own “pivot to Asia.” The other is to figure out who’s reading the balance sheet for your investment manager; if the answer is “some guy down in accounting,” if might be time to run away.

Bob C., who enjoys gardening rather more than running, continues his conversation of retirement planning from the perspective of someone for whom it’s now immediately relevant: himself.

And, as always, we’ve been talking with managers, screening data and reading shareholder letters on your behalf. That’s led us to five specific investments that rather deserve attention:

  • Pin Oak Equity (POGSX) is a remarkably successful all-cap fund that does what people claim they want, it beats the indexes, the ETFs and the pants off its peers. Oddly, Morningstar left the fund behind. We didn’t.
  • Homestead Growth (HNASX), like Reese’s Peanut Butter Cups, combines two great tastes that taste great together. The fund is advised by a mission-oriented organization whose purpose was to help the members of America’s rural electric coops (!) and sub-advised by T. Rowe Price, a fund family with an absolutely sterling reputation which just placed one of its best young managers on the fund.
  • Polen International Growth (POIRX/POIIX) launched in December as a sort of international extension of a very disciplined, very successful Polen Growth (POLRX) fund. In our Launch Alert, we talk through both the discipline and the success.
  • Paul Espinosa, lead manager of Seafarer Overseas Value (SFVLX/SIVILX) talks with us about value investing in emerging markets and what makes SFVLX “a Seafarer Fund.”
  • T. Rowe Price is about to adopt and rechristen a very promising young high-yield bond fund. They’ll bring T. Rowe Price U.S. High Yield Fund (née Henderson High Yield Opportunities Fund HYOAX/HYOIX) to market at the end of May. We profile the change in a PreLaunch Alert.

Off we go!

Ed recently attended the annual Graham and Dodd conference at Columbia University. His reflections on those talks appear in his essay, “Half a league, half a league, half a league onward” this month.

Charles will be representing MFO at the Litman Gregory Alternative Strategies Fund Due Diligence Forum, March 16, in San Francisco. He’ll get a chance to hear from and chat with some of the folks who sub-advise the exceptionally find Litman Gregory Masters Alternative Strategies Fund (MASNX). He’ll share his findings with you in our April issue.

And with any luck at all, we’ll all convene in Chicago during the Morningstar Investment Conference, April 26-28. The lineup of keynote speakers – the founder of Wikipedia, the author of Flash Boys and The Big Short, and Larry Fink – seems to signal a different approach to the gathering. We’ll incorporate what we can into our May issue, with some pieces likely held until June.

In the meanwhile, I’ll be speaking in Sacramento (“American nativist rhetoric at the centenary of the Asian Exclusion Act”) on March 13 and with the AAII chapter (“How not to be stupid in a world that makes it easy”) in Albuquerque (March 15).

Seriously, we’d be pleased by the opportunity to meet and chat with any of our readers. If you’re going to be around any of those gatherings, let us know.

Wishing you a great start to the season,

Snowball’s potato portfolio

By David Snowball

I like gardening rather more than I like investing. I garden because it’s joyful, healthy and engaging. Most recently, I planted my first potato patch with four artisanal varieties of tubers, one each of russet, gold, red and blue. That meant adding a considerable quantity of organics and a bit of sand to a 4×4 south-facing patch that had been mostly weeds. You’re also supposed to “hill up” potatoes as they grow but I couldn’t, for the life of me, figure out quite what that meant in the context of an open patch of earth. Instead, I collected grass clippings (a safe practice since I don’t chem my lawn) and kept everything but the leaves buried.  I’m stunned and delighted to report that it actually worked. I dug around in October and there was, like, food in the ground!

That led to a spate of roasted root veggie meals, since I’d also planted onions, carrots and herbs. The results were delicious and edible even by the standards of my 16-year-old son.

The upcoming challenge is to figure out whether and, if so, where to plant potatoes this year. Any particular plot of ground should be used for potatoes only one year in three, otherwise you risk crop failure from soil-borne pathogens. Complicating the problem is that fact that tomatoes are in the same family as potatoes (who knew?), which means they can’t be one of the fill-in crops. This will take some planning.

Which is where my portfolio comes in. I count on my portfolio to make potatoes possible. It has two roles to play in my potato patch. First, it needs to give me the confidence to focus on the things I care about: family, friends, gardens, books, students, my community, and you folks. That confidence comes from the fact that I know that I have the resources to deal with…. well, stuff. Because stuff happens. And, sadly, most of our fellow citizens can’t have the confidence that they can deal with it.   About two-thirds of Americans report that they would struggle to quickly come up with $1,000 to address some small but imminent crisis. That leads to an awful lot of anxiety and anxiety feeds bad decision-making.

In 2016, “stuff” came in the form of my son’s request for a car. Will turned 16, has a wonderful girlfriend and the ambition to get a job while taking community college classes through his high school. A car seemed like a perfectly reasonable request. I hate the idea of more debt or car payments so, after finding a clean ’09 Kia Spectra, I sold down portions of three mutual funds and simply wrote a check for it. Two weeks later the transmission failed and a second check followed (we split the cost 50/50 with the dealer.)

Thanks go to Steve Romick, David Sherman and the team at T. Rowe Price for helping to make that possible.

In the longer-term, my portfolio is also part of the plan which will allow me to step back one day from full-time teaching and to explore other passions.

Remember, I said that my portfolio contributed in two ways to my potato patch. Its second contribution is made by not distracting me. The last thing I need is a portfolio that requires – or demands – constant attention. I don’t like trading and don’t want the temptation to trade; I will never buy an ETF and will never again buy an individual stock. I don’t want to try to outguess the new administration’s effects or respond to the next crisis. I want a portfolio that will benefit from benign neglect. That’s reflected in the fact that I liquidate a fund position about once every seven years.

Those two imperatives led me, long ago, to four steps:

  • Make a good plan, which meant calculating how much I need to made each year, then finding the combination of asset allocation and monthly contributions that
  • Execute the plan, which meant finding the funds that best fit within the plan and then funding them monthly.
  • Live modestly, which strikes me as both a personal and financial good. Frankly, I don’t judge myself based on my ability to impress someone with my stuff. I’ve owned one new car in my lifetime, and most of my used cars have made it easily past the quarter-million mile mark. My mortgage and taxes are far under $1,000/month which reflects the fact that my house is comfortably full when there are three of us in it; I rather aspire to the Danish virtue of hygge (maybe “hue-guh,” the translation of which is “an immediate sense of coziness”) than to the American virtue of “wow!”.
  • Enjoy life: check!

Here’s the plan.

My retirement account targets 70% growth / 30% income. By my best calculation, making 6% annually – through a combination of capital appreciation, income and monthly contributions – will achieve my goal.  Those numbers are not simply made up. Several retirement providers have retirement planning calculators. In my case, I used tools offered by T. Rowe Price, Fidelity and TIAA-CREF. Of those, Price, which does a Monte Carlo simulation, struck me as the most useful and reliable but all of them had me in about the same range.

Within the broad category of growth, I’m about two-thirds domestic and one-third international. Within domestic, I tilt toward “small” and “value.” Within international, I’m about two-thirds developed markets and one-third emerging markets. Within the broad category of income, about half of my investments are investment-grade domestic debt and about half are real estate income, higher-yield debt or international (mostly EM) bonds.

My non-retirement account starts with a simple asset allocation:

  • 50% growth / 50% income
  • Within growth, 50% domestic equities, 50% foreign
  • Within domestic, 50% smaller companies, 50% larger
  • Within foreign, 50% developed, 50% emerging
  • Within income, 50% conservative, 50% venturesome.

One thing to remember is that I do not have a large savings balance and never have. My non-retirement portfolio, then, is positioned to function as both my savings and emergency account. With a low equity exposure and experienced managers, it offers the opportunity for capital growth, limited downside and far higher returns than the 0.1% inflicted on savers by central bank policies. No, it’s not guaranteed. I know that. But the maximum projected downside for this allocation is small enough that, even in crisis, I’ll have the resources to meet any plausible challenge.

Here’s the execution of it.

My retirement portfolio is largely hostage to Augustana College. I helped lead a dramatic program redesign several years ago, which greatly simplified the system, limited investment options and created an employer match rather than a simple employer contribution. It worked really well to boost savings college-wide but it cost me access to Fidelity and T. Rowe Price. Those two pots of retirement money are now sort of locked away, I can’t add to them and, as a practical matter, I can’t move money between them. Our “live” options are mostly TIAA-CREF annuities and funds.

Fair enough.

My TIAA-CREF holdings are about 60% CREF Stock, 20% TIAA Real Estate and 20% Lifecycle Index 2025. Morningstar rates Stock as a below-average domestic large-cap annuity, which isn’t surprising since Stock is 30% international. Real Estate is unique because it actually owns real estate and participates in real estate partnerships, rather than passively investing in REITs or REOCs. It tanked in 2008 when the real estate bubble burst, but has otherwise generated a steady 8% annually. My personal rate of return last year was 7.3%. I don’t anticipate any changes here.

My largest of my 10 Fidelity holdings are Low-Priced Stock (FLPSX), Growth Discovery (FDSVX) and Global Balanced (FGBLX). I’ve never made money betting against Mr. Tillinghast at Low-Priced, Mr. Wiener just finished his 10th year at Growth Discovery and has top quartile returns over the period, Global Balanced is a good idea that’s been struggling for several years. I may well shuffle that allocation toward Total Emerging Markets (FTEMX), in which I already have a smaller holding.

On the T. Rowe side, my largest (of nine) holdings are Blue Chip Growth (TRBCX), Spectrum Income (RPSIX) and Mid-Cap Growth (RPMGX). Blue Chip had a sucky year (under 1%), Spectrum Income had a great one (over 8%) and Mid-Cap Growth rolled along (6.5%). My best short-term performers here were value-oriented funds, the worst had high international stakes. No surprises. The biggest question here, which Charles might answer next month, is whether to simplify all of this into a target-date 2025 fund. The key is that I can no longer add to the account so perhaps auto-pilot now makes sense. I’ll ponder.

My non-retirement portfolio is comprised of actively-managed funds whose managers have earned my trust. Since I do not trade my funds, I try to find vehicles where the managers have some flexibility to bob-and-weave on my behalf.

Here’s the current roster, ranked from my largest position to my smallest.

  My reflections
FPA Crescent

I started 2016 skeptical of Crescent’s future in my portfolio; the fund was large and the firm (though not the fund) was undergoing considerable management turnover. After I expressed that skepticism in print, I had the opportunity to talk a bit with Mr. Romick who came across as direct and thoughtful. He pointed out that the fund was far below its peak size and still finding opportunities.

Our follow-up piece concluded: “can Crescent consistently and honorably deliver on its promise to its investors; that is, to provide equity-like returns with less risk over reasonable time periods? Given that the management team is deeper, the investment process is unimpaired and its size is has become more modest, I think the answer is ‘yes.’ Even if it can’t be ‘the old Crescent,’ we can have some fair confidence that it’s going to be ‘the very good new Crescent.’” That faith was validated by Morningstar’s decision to nominate Mr. Romick as manager-of-the-year recognition.

Intrepid Endurance Endurance is a domestic equity fund which was profiled in 2016; it is one of the tiny handful of absolute value funds left in existence. Those funds follow a simple discipline: if there’s nothing worth buying, buy nothing! That aligns entirely with my beliefs and, over time, it has produced an outstanding risk-return profile. I added the fund in 2016 after publishing its profile and I’m entirely amazed by its 8% returns on a portfolio that’s 70% cash and short-term bonds.
Seafarer Overseas Gr and Income (Institutional) Andrew Foster is a remarkably talented, thoughtful and risk-conscious guy. He’s seen a lot over 15 years and is determined to do right by his investors. One example of that commitment is his willingness to waive the institutional minimum for retail investors who invest directly through Seafarer and who have an automatic investment plan in place. It’s among the best EM options out there, though now closed to new investors.
T. Rowe Price Spectrum Income This fund-of-income-oriented-funds continues to do precisely what I want: it generates very steady returns in the range of 5-6% with low expenses.
Artisan International Value One of my first mutual funds was Artisan International, which I traded for Artisan International Value as soon as it became available. It remains unequalled.
RiverPark Strategic Income RSIVX is the riskier of David Sherman’s two funds. He had two or three mis-steps in security analysis in 2015 which cost the fund a lot. I remain confident in Mr. Sherman’s ability to find interesting high-yield opportunities, with the goal of hitting the high single-digits.
RiverPark Short Term High Yield RPHYX continues to sport a one-star rating (because it has nothing in common with its Morningstar high-yield peer group) and the highest Sharpe ratio of any fund in existence. It returns about 3% a year with virtually non-existent volatility and is almost closed to new investors.
Matthews Asian Growth & Income MACSX is a legacy holding from the days that Andrew Foster managed it.
Matthews Asia Strategic Income If you believe that Asia will drive the global economy this century, as it likely will, then it makes sense to participate in the Asia debt markets – which are almost entirely absent from most bond funds. Ms. Kong strikes me as brilliant, experienced, disciplined and talented. It’s curious that so few have been drawn to the fund.
Grandeur Peak Global Micro Cap (Institutional) The short version is that I think Grandeur Peak does global small- and micro-cap investing better than anyone. These strike me as very distinctive funds with very good, tested management and the potential for substantially higher-than-market returns.
Grandeur Peak Global Reach

My portfolio normally changes at a glacial pace. By historic standards, 2016 saw a blizzard of change. In particular:

I eliminated three funds from my portfolio.

Artisan Small Cap Value was liquidated by Artisan and I moved the procedures to Intrepid.

Northern Global Tactical Asset Allocation and ASTON/River Road Long Short are both exemplary funds, and we’ll soon refresh our Northern profile. That said, both of the accounts were too small to contribute much to my portfolio, so I sold them without prejudice and added the procedures to Intrepid. That made Intrepid my second-largest holding behind Crescent.

I sold shares in three funds.

Crescent, T. Rowe Price Spectrum Income and RiverPark Short-Term High Yield contributed about equally to the purchase of my son’s car. (Thanks!) And to the subsequent rebuilt transmission. (Nuts. It happens.)

I added one new fund: Intrepid Endurance, now my second-largest position.

And I continued funding most, but not all, of them.

What does the future hold? 

Stuff, mostly, but I have no firm idea of what sort of stuff.

On the investment front, we know that stocks are at the high end of their historic valuations and that they’ve been on a speculative tear since the election. It’s not clear whether the classic sign of investor frenzy is present, nor is it clear than investor frenzy is any longer needed prior to a collapse.

Commentators are torn about the degree to which we should worry. Most sensible (in my reading) people say that it’s not time to increase your risk profile, though the market is singing a siren song. Some commentators try to justify the market’s valuations with silly arguments (“if fossil fuel companies weren’t so depressed, valuations market wide would look pretty normal?) and others make intriguing ones (one analyst suggests that investors are now reconciled to permanently low returns, which are manageable even at current valuations).

I simply don’t know and don’t intend to twist my life in knots fretting about the question. After all, the garden beckons.

Half a league, half a league, half a league onward —–

By Edward A. Studzinski

“Frost on grass: a fleeting form, that is and is not!”


This is the time of the month when I am usually wrestling with what to say and trying to avoid repeating myself, which can be pretty difficult after several years of columns. This month, I have something of a surfeit of material, so I will apologize in advance for the rambling.

A few weeks ago, I attended the annual Graham and Dodd Conference at Columbia University’s Graduate School of Business in New York. As always, the speakers were outstanding. Since the conference follows Chatham House rules (anonymity to the speakers, as well as their respective comments), I will limit myself to two generalized observations. One, for the second year running, none of the speakers were from the mutual fund asset-gathering complexes. Rather, they were from relatively small hedge fund or private equity firms, generally running limited partnerships. Two, for a conference run by value investors for value investors, and attended by same, no one seemed to be having an easy time coming up with great investment ideas given the valuation levels now to be found in most markets.

I also not too long ago had lunch with a well-known balanced fund manager, whose fund and firm had enjoyed a strong fourth quarter as a result of what we may perhaps label the Trump bull-market effect. He attributed the strong performance to the analysts’ work on keeping their models fresh and the portfolio managers’ focus on the predicted expected returns of securities on their “Buy” list. Notwithstanding their marketing, the portfolio management style is for the most part a “regression to the mean” approach. In the nature of, “what do we do now” he also pointed out that they now had, after the market’s run, a smaller number of issues to invest in than they had ever had in his memory. This of course always presents a dilemma – do you stop taking in moneys from your clients? Or, do you average in to existing positions? Or do you have the analysts go over their models with a fine tooth comb? Will optimism with regard to what President Trump might do to improve the economy justify higher expected returns and “Sell” targets on existing holdings? Indeed, he indicated that many investment committee meetings now consisted of analysts and portfolio managers challenging presenting analyst’s models. “Gee Heathcliff, do you really think Doofus Corporation can improve their operating margins in that division by another fifteen basis points?”

My associate’s ongoing challenge: there are fewer attractive investment options that ever in his memory.

Which brings me to the investor’s fundamental concern, what is undervalued now? An interesting presentation made its way over the transom recently. I found several of the charts particularly provocative. If you look at the annualized total returns for U.S. large cap stocks for the period running from 1926 – 2015, you end up with a mean of 12.1%, a standard deviation of 20.1%, and a Sharpe ratio of 0.60 (if I accept the numbers). But if you look at the S&P 500 from the end of 12/2011 to the end of 12/2016, you find an annualized return of 14.7%, an annualized standard deviation of 10.3%, and a Sharpe ratio of 1.43.

Who really thinks that we can continue to extrapolate that set of trends? Or, have we all gone down the rabbit hole gleefully to the world of “greater fool” investing?

A lot of this comes back to what I again say will be a discussion of the appropriateness of indexing. Indexing, while low cost (or at least it should be), favors the stocks of yesteryear that outperformed. Which begs the question of how one should think about things now? If you are trying to macro forecast what effect a Trumpian economic plan (and taxation) will have, you need to be right about what is going to be done, and how the market will react. And it does present certain temptations, for who would not want to catch the wave they know is coming.

So where should one look to invest? Technology and distribution have been the great disruptors. Amazon has pretty much destroyed the retail space (as well as the retail real estate space), and that probably does not turn around unless one of the state Attorneys General or the Justice Department decides to start enforcing the antitrust laws again. Cyclicals aren’t compelling; growth is temporary and often illusory. What one should be looking for are franchises with moats. The number of those has been shrinking. Look at the branded consumer goods space, where companies such as Nestle have had to ratchet down organic growth expectations. Even better, do what I do and go into a grocery store and pick so many of the brands that you used to see your parents swear by and look carefully at the label. What you will very often note is a phrase “distributed by” and the name of what used to be the company that invented the products and then made them. Now it is all financial engineering with outsourced manufacturing. So where do you still see opportunities and a valuation opportunity? Healthcare of course is one area where U.S. companies are still innovators.

What else looks interesting and undervalued? Well, even with a recent run, emerging markets. Today I heard one of the Bloomberg talking heads mentioning China’s “One Belt, One Road” policy, a phrase I have started to hear with increasing regularity. China is the world’s major trading partner, and at this point, is building new “silk roads” to bind other regions and countries closer to it. The Belt and the Road as they were, link China, Russia, Central Asia, the Baltic States in Europe through Central Asia and West Asia, and South Asia, running through the Persian Gulf, Indian Ocean, the South China Sea, as well as the South Pacific. China has founded the Asian Infrastructure Investment Bank, and approved fifty-seven countries to become founding members. At the end of 2016, the relative p/e ratios were 22.4X for the MSCI World ex Japan and 14.2X for the MSCI Emerging Markets.

The point is that China (and its economy) will not go away. Whether this will finally be the Asian century remains to be seen, but assuming it will not be is foolish. Many of those fifty-seven countries will align their strategic and economic interests with China. And since political and military power derives from economic power, that should be remembered. Concurrently, change is also taking place in Japan, although few are paying attention to it. Those who are are not quite sure what if anything to do about it. My suggestion for what may be actionable – pay attention to Charles’ Great Owl Rankings when looking at your portfolio allocations. In particular, pay attention to investments that stress dividend paying companies in China, frontier emerging markets as well as emerging markets, and on the margin, Japanese opportunities.

Final thoughts I had a long conversation last week with a consultant friend of mine that I respect greatly. One of the questions I asked her was, given valuation levels, how does one protect against a general decline again like 2008? What are the advance warning signs? Consultants among other things spend their days interviewing investment managers and firms, making sure that there is a process or methodology in place which is more than someone looking at sheep entrails and making an investment decision for a portfolio. They also spend a lot of time making sure that the process as represented is being followed. There also needs to be a succession plan in place so that the process survives the departure of a star manager or analyst. And finally, given a relationship that builds up over time, they become experienced in reading “tells” to know when they are being lied to, for whatever reason.

We then drilled down into specific firms. I asked if she was convinced that one famous California firm had learned anything from its mistakes in 2007-2009. Her answer was that yes, they had learned that they needed to pay more attention to the fixed income side of the house. The problems that we saw in the great meltdown were telegraphed well ahead of time and increasingly apparent to fixed income analysts and portfolio managers. It was then that the light went off in my head and I understood something. Most of the equity analysts I knew (and know) paid little if any attention to the balance sheet of a corporation. They were almost totally focused on the income statement as well as the statement of cash flows.

Because leverage matters, the quality and role of the fixed income team matters. If they’re the red-headed stepchildren of the firm, you’re looking for trouble.

Surprise – leverage matters. And if you are a financial institution with a need for liquidity and funding, leverage matters. The balance sheet matters. So my other actionable suggestion for you if you are looking at balanced funds as well as equity funds, pay attention to what kind, if any, fixed income team they have in place, and what role they play in the investment decision making process. Too often, especially for equity-driven firms, spending money on fixed income research and personnel is not viewed as critical to the process. So when you are looking at making an investment in a particular firm and fund, pay attention to how serious they are or aren’t about the world of fixed income. And that applies even more if they do not have a fixed income product. They need to pay more than lip service to the corporate balance sheet.

Planning a Rewarding Retirement, Part 2: Can I Afford to Retire?

By Robert Cochran

This is the second in a series of articles. 

Over 36 years of providing a financial advice, I have heard a number of clients tell me, “You will know when it’s time to retire.” My original plan was to work until I turn 70, since I truly love what I do. Over the last couple of years, however, a number of friends, relatives, and colleagues have passed away rather suddenly, or they developed chronic health issues that will greatly limit their quality of life. This caused me to re-consider my retirement timeline, especially in light of what my wife and I would like to do over the next ten years. I will be 67 in September of this year. It’s time.

As an owner of a small business, it’s easy to think the company I helped create cannot function without me. The truth is that my younger colleagues are more than capable, certainly more tech savvy than I, and probably relate to newer, younger clients better than I. And, as the person responsible for regulatory compliance oversight of our company, I am finding this role to be more and more cumbersome. Multiple layers of federal and state regulations take a steadily increasing number of hours the last few years, despite retaining an outside law firm to assist us. It’s time. 

Now that I have flipped the mental switch for retirement, there are other areas to address. The first for most people, and this column’s focus, is cash flow. For me, the question was “Can I afford to retire?” Figuring what income you will have is the easy part. Calculating what you will spend is more difficult. I believe rules of thumb are flawed and should be tossed because there are so many variables that go into retirement cash flow. Here are a few items to consider:

  • What kind of part-time work will I do? After 30 years of retail banking, my wife loves her retirement:  two days a week at her “fun retirement job”, one-half day volunteering at a local food pantry, a leadership role in a women’s arts organization, and time to spend with her father who lives in a seniors’ community. It is clear that she and I will be staying active and involved. I have an interest in wine, so perhaps some kind of employment will come from that. We have a national display garden at our home, so that keeps me physically active and fulfilled much of the year. So…no clear decisions yet, but I am working on this. 
  • When should I start receiving Social Security benefits? Some people have no option and must begin receiving benefits as soon as they are able. Others have the option to delay. Remember that every year beyond full retirement age means an annual 8% increase in benefits to age 70.
  • When should I start withdrawals from my retirement plan account(s)? This item deserves a full discussion, and I will devote my next article to it. For some retirees, income from part-time jobs, Social Security, and other sources allows them to delay retirement account withdrawals until the mandatory age 70 ½ RMD (required minimum distribution). Others may not have this option. How is a retirement account converted to accommodate cash flow needs? Don’t forget taxes!
  • What will health care costs be in future years? It’s a given that this will continue to be a rising expense. A separate column in this series will focus on health insurance and expense considerations. My wife and I have long-term care policies, and we believe benefits from them will be enough to supplement our cash flow should one of us need that care level. 
  • If I have learned one thing over 30 years of helping clients, it’s that heading into retirement with no mortgage is a huge, positive impact on cash flow needs.
  • Some expenses will continue: utility bills, cable/satellite, phone, real estate taxes, insurance, and income taxes. Others are more flexible: food, charitable giving, and travel, just for starters. Be sure to make your own list. Quicken software is a great way to track expenses, since it can pull data from bank accounts and credit cards to give you a complete picture and may give you an Aha!
  • There may be reduced or even no spending on some things, such as clothing, eating out, retirement plan contributions, and daily commuting expenses.
  • How much spending is based on need as opposed to want? A rewarding retirement does not mean eliminating wants, but it might mean being more thoughtful about how we spend our money. 

Surely there are other important cash flow considerations, some of them perhaps unique to each of us. My experience with hundreds of clients is that being realistic with your expense projections is crucial. But at the same time, don’t think of your current earnings as cash flow. Use the final deposited to your bank account number that is net of all deductions. You may be surprised to find that you are living on less than you thought, unless you have large credit card balances that you carry forward from month to month, and that could be an OMG! moment.

Has your fund been left behind by Morningstar?

By David Snowball

If so, you’re not alone.

There are hundreds of funds which Morningstar once covered that they can no longer afford to follow.  Morningstar started as seven guys working out of Joe Mansueto’s apartment. They’re now a publicly-traded global corporation with 3900 employees and $130 billion in assets under management (or advisement). More importantly, they’re a corporation with $600 million in annual expenses.

If you’ve got $600 million in bills, you really need more than $600 million in income and you don’t get that by worrying about small funds that aren’t on most advisors’ radar, especially when the entire universe of active funds is contracting.  Morningstar explains the rules this way, “We’re committed to covering those investments that are most relevant to investors and that hold a significant portion of industry assets.” In this case, “relevant” is pretty much the same as “pretty large.”

As an empirical matter, if your fund has under a billion in assets, you have one chance in 30 of getting coverage. That is, excluding life-cycle or target-date funds, 195 of 5700 (3.4%) of funds under $1 billion have coverage.

In addition to the relatively few smaller funds with current coverage, there are hundreds of others which once received coverage but do not now. Sometimes that’s because they suck and deserve to wither in the shadows. But sometimes it’s a simple resource decision where very promising funds are consigned to the shadows. Morningstar again,  “Investments with suspended coverage or that have never been covered are often those that are both smaller in size and are less widely held.”

Out of curiosity, we constructed a reasonable surrogate for funds that Morningstar might find worth writing about: funds that have a rating of four or five stars for the past three, five and ten year periods, as well as an overall rating of four or five stars.

Excluding muni bond funds, which sometimes live in a category with only two competitors, there are 599 distinct funds that meet those criteria. Of those, fewer than 40% (237 of 599) have analyst coverage. As we searched the Morningstar database we found many more in that elite coverage that once had coverage but haven’t been covered in five or more years.

I wish I could be more precise, but sometime after we first mentioned this phenomenon last month, Morningstar tidied up their search results so that analyst reports older than 24 months no longer appear in the search list.  You might reasonably think that the funds with “–” might never have received coverage.

list of funds

In reality, on this list, Northern Stock Index and Pink Oak Equity were both the subject of multiple reports before being dropped in 2009.

Charles has posted a list of more than 70 excellent domestic and international equity funds that have lost coverage at our MFO Premium site. Premium members can find them by clicking on the pre-set screen, “Morningstar’s forgotten funds” in the multi-search screener. We’ll add allocation funds when time and workloads permit.

Each month we’ll profile one of the funds that once interested Morningstar and which, though small, still interests us. We started the effort last month with our profile of T. Rowe Price Global Multi-Sector Bond (originally named T. Rowe Price Strategic Income, PRSNX). The analyst in 2009 wondered if Mr. Huber could sustain his success. He could.

This month’s focus is Pin Oak Equity (POGSX), a $200 million fund that’s both highly disciplined and consistently excellent. The analyst in 2009 asked if he could manage risks well enough to maintain consistently high returns; the manager thinks so and the record is very strong.

In the months ahead we’ll try to bring one fund each issue back into the light. If you manage a fund that’s lost analyst coverage but think you since have a story to tell, let us know. We’ll do our best.

Homestead Growth (HNASX), March 2017

By David Snowball

Objective and strategy

The fund seeks long-term capital appreciation by investing, primarily, in domestic large cap growth stocks. The portfolio is diversified (typically 60-75 names) but not sprawling. Direct foreign investment is currently about 5.6%, which is modest but also above-average for its Morningstar peer group.

In general, the fund’s subadvisor T. Rowe Price targets:

  • companies with characteristics that support sustainable double-digit earnings growth and
  • high-quality earnings, strong free cash flow growth, shareholder-oriented management, and rational competitive environments

Their preference is for firms with a lucrative and defensible niche which allows them to sustain their earnings growth even when the economy slows. They’re valuation conscious, and look to buy stocks when there’s a disconnect between long-term prospects and short-term price.


RE Advisers of Arlington, Virginia. REA is an extension of the National Rural Electric Cooperative Association, a non-profit that serves America’s rural electric coops. REA was originally chartered to provide investment services for electric coop employees, though their funds are open to all US investors. REA launched in 1990, oversees the eight Homestead mutual funds and has, as of December 31, 2016, $3.4 billion in assets under management.

The Homestead Growth Fund has been sub-advised since 2008 by T. Rowe Price Associates, a famously risk-conscious bunch with over $800 billion in assets.


Taymour R. Tamaddon. Mr. Tamaddon began phasing-in as manager of the strategy during his predecessor’s last six months at the helm and became the manager in January 2017. Mr. Tamaddon joined T. Rowe Price in 2004 as an equity analyst and became a portfolio manager in 2013. He managed T. Rowe Price Health Sciences (PRHSX) from February 2013-July 2016 when he began to transition to managing this strategy. He succeeded Mr. Sharps at the $13 billion T Rowe Price Institutional Large Cap Growth Fund (TRLGX), which is part of their $30 billion large cap growth equity strategy. Mr. Tamaddon holds a B.S. in applied physics cum laude from Cornell University and an M.B.A. from the Tuck School of Business at Dartmouth University.

Strategy capacity and closure

Exceedingly large and quite unlikely, respectively. The T. Rowe Price large cap growth strategy, of which Homestead is one manifestation, has $30 billion in assets. Steve Kaszynski, president and CEO of the Homestead funds, argues that this strategy invests in “very large, very liquid companies.” Our estimate is that the U.S. large cap universe is valued around $16 trillion. As a result, there’s no immediate capacity constraint imposed by the investable universe.

Active share

  1. “Active share” measures the degree to which a fund’s portfolio differs from the holdings of its benchmark portfolio. High active share indicates management which is providing a portfolio that is substantially different from, and independent of, the index. An active share of zero indicates perfect overlap with the index, 100 indicates perfect independence. HNASX has an active share of 69 which reflects a modest degree of independence from its benchmark Russell 1000 Growth Index. Because HNASX replicates T. Rowe Price’s institutional large cap growth strategy, which has $30 billion in assets, we compared it to the active share of the eight large cap growth funds with at least $25 billion in assets. The average active share for those funds was 68, so HNASX has an active share that is typical of very large, successful large cap growth strategies.

Management’s stake in the fund

None yet reported. I do not anticipate that Mr. Tamaddon, as an employee of T. Rowe Price, will invest in this fund. His predecessor as manager here, Robert Sharps, also did not invest in it though both likely had investments in the corresponding Price product. Similarly only one of the fund’s eight directors has invested in the fund.

Opening date

1/22/2001. For its first seven years, HNASX was managed in-house. On 12/01/2008, the fund became solely managed by T. Rowe Price.

Minimum investment

$500, reduced to $200 for an IRA.

Expense ratio

0.84% on assets of $296.5 million (expenses and assets as of July 2023).


Do you remember “Two great tastes that taste great together”? It was Reese’s celebration of what happens when milk chocolate and peanut butter intersect. It’s also a slogan they haven’t used in more than a quarter century; the fact that we so easily remember it is a testament to the staying power of a good line.

RE Advisers is on a mission. To understand it, you need to understand a little bit of the history behind it.

Rural electric cooperatives originated in the 1930s when less than 10% of America’s farms had electricity. The result was brutal. If you wanted light, you lit an oil lamp. If you wanted water, you pumped it and hauled it. If you wanted a bit of hot water, you heated it in a bucket over a wood-burning stove. If you wanted clean clothes, you dumped them in a basin with some soap then dragged them back and forth, by hand, over a corrugated metal board, wrung the excess water out by hand and hung them on a line to dry. If you wanted ironed clean clothing, you sat a flatiron on your stove until it was hot (or tossed live coals inside a box iron). It was a miserable existence. While Karl Marx did not decry “the idiocy of rural life” (it’s a widely-quoted mistranslation, the closer translation would have been “the isolation of rural life”), you could certainly be sympathetic to the judgment.

All of that changed with the Rural Electrification Act of 1936 which made federal loans to farmers’ co-ops (rural electric coops) to help them finance the delivery of electric. Within 2 years it helped bring electricity to some 1.5 million farms through 350 rural cooperatives in 45 of the 48 states. Almost half of all farms were wired by the onset of World War Two and virtually all of them by the 1950s.

Much of this work was coordinated by the National Rural Electric Cooperative Association, which still represents 900 rural electric coops. RE Advisors was launched as a tool to help provide “a greater measure of confidence in their financial future” for the folks working at those co-ops. The Homestead Funds, which have unusually low fees for small funds, were one of the tools they used to pursue that mission.  REA manages the funds themselves whenever they have confidence in their in-house abilities; otherwise they negotiate sub-advisory contracts with “best of class” outsiders such as T. Rowe Price. And they offer some of the industry’s lowest purchase requirements: $500 for a regular account and $200 for a tax-advantaged one.

T. Rowe Price is the exact right partner for them. To state the obvious, Price is one of the industry’s most-respected firms. Morningstar’s Katie Reichart described them this way:

T. Rowe Price is an industry leader, with a strong lineup of funds across asset classes. The firm’s disciplined, risk-conscious investment process has consistently produced successful results across its fund lineup, often with less volatility than peers … the firm is in a strong financial position and remains amply resourced. T. Rowe Price has acted in fundholders’ interests by closing funds with surging asset bases and avoiding trendy fund launches. Reasonable fees and a manager compensation plan focused on long-term performance are other pluses. (11/24/2015).

Price’s equity managers average 19 years of experience. As of December, 2016, 86% of T. Rowe Price’s funds had beaten their Lipper peer group average for the past decade. Fortune magazine annually celebrates them as one of “the world’s most admired companies,” most recently ranking them third in their industry. In February 2017, Price’s CEO was invited to join the board overseeing Harvard’s endowment.

Even when Price gets it wrong, they get it right. In 2016, they inadvertently voted “yes” on a proxy vote involving Dell when they’d meant to vote “no.” The mistake cost fund investors $200 million; Price immediately reached out to the boards of the funds involved and promised to make the shareholders whole. Shortly thereafter they wrote the nine-figure check. Barron’s described it as “a booster shot to maintain the firm’s stellar reputation” (6/11/2016).

To recap: Homestead Growth is supported by two exceedingly solid, exceedingly reputable teams. The most important elements for a fund’s long-term success are the clear alignment of the interests of the advisers with the interests of their shareholders and the presence of a talented, disciplined management team. Homestead Growth sports both.

None of which would mean much if the fund didn’t perform well. Happily, it does. Largely under Mr. Sharps’ management, the fund has outperformed its Lipper large-growth peer group for the past one-, three-, five- and ten-year periods, as well as over the course of the current market cycle that begin in October 2007 and the current up-market cycle that began in March 2009. The fund’s annual return over the full market cycle is 170 basis points over its peers. It’s recognized as a Lipper Leader for Total Return and Consistent Returns while Morningstar rates it as a five-star fund overall, as well as a five-star fund for the past five- and ten-year periods. By the Observer’s calculation, the fund has been modestly more volatile than its peers over the past decade but also substantially more rewarding. As a result, its risk-return calculus (reflected in the Sharpe, Sortino and Martin ratios) are all above its Lipper peer group’s.

The question is what to make of the new management that took the helm in January 2017. Four thoughts on that front:

  1. Mr. Tamaddon did exceedingly well at his last charge, T. Rowe Price Health Sciences (PRHSX). Morningstar analyst Robert Goldsborough reports that Mr. Tamaddon “led the fund to a 21.1% annualized gain during the three years ending Feb. 29, 2016. That bested 98% of peers in the healthcare Morningstar Category over that timeframe” (03/24/2016).
  2. Price and Morningstar have both expressed confidence in him. Price just handed him a $13 billion fund within a $30 billion strategy. He’s been with Price for 13 years and performed brilliantly when star manager Kris Jenner resigned from PRHSX. They’ve had time to observe, train and assess him, and he seems to have earned their confidence. Likewise, Morningstar upgraded their analyst rating on T. Rowe Price Institutional Large Cap Growth (TRLGX) from “neutral” to “bronze” in February 2017.
  3. Price handles manager changes well. New managers typically join as part of a long-planned transition and typically work alongside the departing manager for half a year or more. Each manager works with a management committee that includes peer managers and analysts to make sure that they have appropriate support and guidance. On whole, it has worked very well.
  4. Mr. Tamaddon has been doing his due diligence. Homestead’s CEO reports that Mr. Tamaddon visited with the management team for every firm in the portfolio during his six-month transition. Price knows that most top management people have a set “script” they speak from. The key, Mr. Tamaddon says, is “to get the CEO or CFO off script—it gives you a better nuance as to what’s going on.”

The single red-flag is Mr. Tamaddon’s staunch defense of Valeant Pharmaceuticals. He was the stock’s first champion at Price, helped make Price the stock’s third-largest owner and then rigidly defended it as the whole sordid mess came crashing down. As recently as March 2016, just before he left Health Sciences, he wrote that “We have been long-term believers in the company’s business strategy.” By May 2016, Price had liquidated 90% of its Valeant position. By August 2016, Price had filed suit against Valeant, alleging “Defendants’ fraud was so vast in execution and so devastating to investors, patients, physicians and insurers, that media and commentators have dubbed it the ‘Pharmaceutical Enron’.” Mr. Tamaddon was far from the only sophisticated investor taken in by Valeant and Price is not the only major investment firm suing Valeant. Beyond that, he made a whole series of other investments that richly rewarded his investors and his fund’s losses as Valeant imploded were smaller than his average peer’s. It seems unlikely that Price would allow him to repeat the mistake with a huge core portfolio, but it bears keeping in mind.

Bottom Line

Homestead Growth has been, and is apt to remain, an entirely admirable fund, especially for smaller or younger investors who don’t want to tie their fortunes to a passive product. It’s got a very talented management team, a lot of analyst support and an adviser whose mission is shareholder-friendly. The T. Rowe Price version of the fund requires a million dollar initial purchase; here investors can get access to the same skills for just $500. It really should be on more due-diligence lists.

Fund website

Homestead Growth

Pin Oak Equity (POGSX), March 2017

By David Snowball

Objective and strategy

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


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


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

Strategy capacity and closure

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

Active share

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

Management’s stake in the fund

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

Opening date

August 3, 1992

Minimum investment


Expense ratio

0.95% on assets of $123.8 million, as of 6/18/23.


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Bottom Line

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

Fund website

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


Elevator Talk: Paul Espinosa, Seafarer Overseas Value (SFVLX/SIVLX)

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.

Paul Espinosa is the Lead Portfolio Manager of the Seafarer Overseas Value Fund and a co-manager of the Seafarer Overseas Growth and Income Fund (SFGIX/SIGIX). Paul joined Seafarer Capital Partners in 2014. Before that, he spent seven years in London as an equity analyst for Legg Mason and, before that, as a New York-based equity analyst for Citigroup and J.P. Morgan. Andrew Foster, Seafarer’s founder, co-manages the fund with Paul. Mr. Espinosa explains that Mr. Foster isn’t the “if Paul get hits by a bus” guy but, rather, someone with whom he explores both security and portfolio positioning ideas.

See the .pdf of the article reprint.

Value trumps growth. That is, over the long run, value investing yields far better returns than growth investing. Over a 90 year span from 1926-2016, value stocks returned 17% annually while growth stocks made 12.6% (Your best bet is…). Over a decade, that would be the difference between earning a 3:1 return (growth) versus a nearly 5:1 return (value). That same pattern has been documented across various decades, across various holding periods, across market capitalizations and across countries.

Why, exactly, is that? There seem to be two reasons: people hate buying value stocks and value investing is hard.

People hate buying value stocks. Value investing has never been as popular as growth investing. Growth investing pursues the “gee whiz” companies of tomorrow; value investors are often relegated to apparently-broken companies in boring niches. Odd as it seems, the simple fact that people love owning “story stocks” explains why value outperforms growth over the long-term; people find it ridiculously easy to talk themselves into overpaying for a company that makes “killer apps” but not one that dominates in bagged concrete. Sadly, paying too much at the outset always depresses your future returns. Value investors get away with paying too little because most investors aren’t interested in such stocks.

Nonetheless, the preference for growth investing has been particularly strong in the emerging markets. By Seafarer’s calculation, corroborated by Morningstar, only about 3-4% of EM stock funds are value-focused. In the U.S. market, it’s about 28%. No emerging markets ETF has “value” in its name; the only ETF ever to claim a value focus (iShares MSCI EM Value EVAL) liquidated in August 2015. A few dividend-oriented ETFs buy low-valuation stocks almost by accident, but mostly $1.4 trillion in EM value stocks get ignored.

Value investing is hard.  The simpleton’s approach to value investing is this: pick one or two or three quantitative measures (low p/e, low p/b, low p/ev), buy 10 stocks that share those characteristics and wait for the magic. As it turns out, that approach fails, which is why deep-value ETFs haven’t worked. Some firms that are priced as if they’re going out of business are actually going out of business. Some firms priced as if they have permanently brain-impaired leadership turn out to have, well … you get it. Tweedy, Browne’s classic review of the research (What has worked in investing, 2009 ed.) identifies at least six separate drivers at play, concluding that while no single factor is independently useful, “Each characteristic seems somewhat analogous to one piece of a mosaic. When several of the pieces are arranged together, the picture can be clearly seen: an undervalued stock.”

Value investing in emerging markets was especially hard. Value traps abounded, legal and regulatory protections were scant, and much of the value locked up in EM companies remained permanently locked away. Mr. Espinosa’s research and Mr. Foster’s experience suggest that emerging markets are evolving in ways that make it possible to now realize more of that traditionally inaccessible value. In On Value in the Emerging Markets, Paul identifies seven possible catalysts which might (or, in any isolated instance, might not) serve to unlock value. One factor, as an example, is that many EM companies are still owned by their founding families; as the founders pass the firm along to the next generation, more and more second-generation owners are hiring professional managers and are open to the possibility of selling, liquidating or divesting underperforming assets. Another is the maturation of local capital markets, which make it increasingly possible for local investors to borrow enough money to simply buy (and reform) an underachieving company.

We asked Mr. Espinosa to talk about what he’s up to, what makes this a Seafarer fund and what makes it not Andrew Foster’s Seafarer fund. Here are Mr. Espinosa’s 400 words on why you should add SFVLX to your due-diligence list:

I’m managing this fund for the reader you talked about, the guy who manages a diner in Montana and who’s thinking about his retirement and his family’s security. This is the core, my personal crusade, for why I want to lead this fund. Government and central bank policies penalize thrift; they’re trying to encourage price inflation through low interest rates but this means purchasing power is declining and many of us are having trouble retiring with dignity. What I’m truly truly trying to do here is to increase the purchasing power of a saver.

The vogue today is for relative return investing. It asks “how did you do relative to a benchmark,” not “has your manager been helping you meet your goals?” I think of myself as a sort of absolute return investor; we’re benchmark-agnostic, our aim is to produce a minimum rate of return that allows our investors to increase their purchasing power.

Andrew and I follow the same process in evaluating companies. What we do within that process is different. I have a much greater focus on capital appreciation driven by changes within my firms, and those are often separate drivers. A growth fund, such as Andrew’s, will mostly follow the trajectory of emerging markets economic growth, buoyed by income and dividends. The Value fund is more likely to grow in a step function; one of our stocks might do nothing for quite a while, then pop when a catalyst takes hold even though its home market isn’t particularly growing. That’s when we might sell and look to redeploy capital in another firm that hasn’t yet appreciated.

The need to find that places where change is just taking hold may lead us into markets where Growth & Income wouldn’t go, including frontier markets, and it might take risks that Growth & Income is not quite ready for, such as leverage risk.

Like Andrew, I’m a bottom-up investor. I’ve worked at large institutional firms where the organization is very structured, very rigid. At Seafarer, the portfolio managers do stock analysis, analysts involved in portfolio construction. I work with the growth investments and he works with the value investments, which helps mentally and allows us to avoid being one-trick ponies.  And we’re patient. Demand for the Value product might not take off for ten years, but that’s okay. We’ll do our work, hone our skills, build our record and be there when investors come looking.

A very Seafarer thing.

Seafarer Overseas Value has a $2500 minimum initial investment which is reduced to $1500 for accounts established with an automatic investing plan or $1000 for IRAs and other types of tax-advantaged accounts. Expenses are capped at 1.15% through August 2017. The institutional share class has a $25,000 minimum and expenses capped at 1.05%. The fund has assets of $6.7 million (1/30/17). Seafarer will waive the institutional share class minimum for investors who (1) establish an account with an automatic investing plan, (2) invest directly through Seafarer rather than through a platform, and (3) testify in good faith that they hope to continue investing until they reach the fund’s normal institutional minimum. Here’s the fund’s homepage. Mr. Espinosa has laid out the case for EM value investing in a 2016 white paper, “On Value in the Emerging Markets.” It’s a bit dense for non-technical readers but, with a bit of time, it’s also entirely manageable.

Launch Alert: Polen International Growth Fund (POIRX/POIIX)

By David Snowball

On December 30, 2016, Polen Capital Management launched Polen International Growth Fund (POIIX). The fund is an international extension of the high-conviction strategy behind Polen Growth (POLRX/POLIX) and Polen Global Growth (PGIRX/PGIIX). Polen has over $9 billion in assets under management and is located in Boca Raton, Florida, “far away from the short-term pressures of Wall Street.”

The fund will typically invest in 25 to 35 large cap international stocks, including those domiciled in both developed and developing markets. It might, from time to time, dabble in a few mid-cap names. The manager will focus on firms that have a sustainable competitive advantage which can deliver sustainable, above-average earnings growth in industries where there are high barriers to entry. Their research attempts to identity firms which:

  • consistent and sustainable high return on capital
  • strong earnings growth and free cash flow generation,
  • strong balance sheets and
  • competent and shareholder-oriented management teams.

They have a five-year investment horizon, which has translated to single-digit portfolio turnover rates at their other two funds.

There are a couple reasons that investors seeking international growth exposure might want to take this new fund seriously.

Polen Growth, whose discipline it follows, has been remarkably successful. Morningstar rates the fund as four-star overall and five-star over the past three years; Morningstar’s analysts have awarded it a Bronze designation and have named it a Morningstar Prospect.

Its performance numbers reflect a fund that knows how to lose at the right time. In 2012 it trailed 90% of its peers, but offered its investors double-digit (11%) returns. In 2013 it trailed 90% of them, and offered its investors double-digit (22%) returns. In 2014 it beat 97% of them, and offered its investors double-digit (16%) returns. In 2015 it beat 99% of them, and offered its investors double-digit (14%) returns. In 2016 it made less than a percent while its peers made 3%, which was “meh” for both. In general, it has offered strong, steady returns.

Polen Global Growth, which we hope to profile in the month’s ahead, is off to a similarly impressive start.

Polen thinks interesting thoughts. Their “10,000 portfolios” paper, which we link to below, is way cool. It started with an investor’s question, “how do you know you’ve put together the best portfolio you could?” Their CIO was intrigued and commissioned FactSet to run an experiment on their behalf. Polen has been running a growth portfolio since 1989; the outline is always the same: about 20 large cap US stocks, more or less equally weighted, held for about five years. They have FactSet construct 10,000 portfolios of randomly-selected US large cap stocks, each of which turned over once every five years.

Here’s a picture of the results:

chart of polen returns vs volatility

The further north-west (high returns, low vol) you go, the better. Very few potential portfolios were further north-west then Polen, while the S&P500 was distinctly south and east. That led to a nice discussion, under “What We Learned,” about the effects of concentration, quality and conviction. Their reflections then dovetailed nicely with the most recent research on active share, which concludes that concentration and conviction far trumps expenses as a predictor of investment success.

The investor shares of the fund carry 1.35% expense ratio, after minimal waivers, with a $3,000 minimum initial purchase. The initial minimum for IRAs is $2,000. The institutional shares are 1.10% and $100,000, respectively.

The fund’s website is Polen Capital. You might, in particular, spend a moment with their white paper “Could We Have Done Better? The 10,000 Portfolios Project” (2016), which struck me as both well-written and unusually thoughtful.

Prelaunch Alert: T. Rowe Price U.S. High Yield Fund

By David Snowball

On February 27, 2017, T. Rowe Price announced their plans to acquire and rebrand a very solid young high-yield bond fund. The rechristened offering will be available by the end of May, 2017.

The adopted fund is Henderson High Yield Opportunities Fund (HYOAX/HYOIX). The Henderson fund has just $61 million in assets and a four-year track record. It’s managed by Kevin Loome, who spent 11 years as a high-yield analyst at Price before leaving to become Head of High Yield Investment at Delaware Investments (which has $167 billion in assets under management) then Head of U.S. Credit at Henderson Global Investors NA, the U.S. subsidiary of Henderson Global (with $125 billion in AUM).

T. Rowe Price already has an exceptionally strong high-yield team headed by Mark Vaselkiv. Mr. Vasilkiv has been running the flagship Price High Yield Fund (PRHYX) since 1996. Over those 20 years, PRHYX has beaten its average peer by 90 basis points annually, which compounds to a huge advantage, and has done so with lower volatility. The $10 billion fund is part of the larger T. Rowe Price Global High Yield strategy, which had $29.4 billion in assets as of December 31, 2016. and led by industry veteran Mark Vaselkiv, has been closed to new investors since 2012.

The new fund will be “substantially similar” to the current Henderson fund and will “complement our strong, existing high yield strategy.” When I asked, the folks from T. Rowe agreed that, in this usage, “complementing” the T. Rowe fund might be translated as “offers potential investors unable to access Mark Vaselkiv’s fund a very fine, but mostly comparable option.” In order to maintain their independence, Mr. Loome and his team will remain in Philadelphia instead of joining the Price folks in Baltimore.

A side-by-side comparison of the two funds is reassuring. By our calculation, the three-year correlation between the two is exceedingly high: 97. In terms of performance, Mr. Loome’s fund has actually outperformed Mr. Vaselkiv’s.

  Annual return Maximum drawdown Standard deviation Sharpe ratio Beats peer group by…
T. Rowe Price High Yield Fund 4.4 -8.9 5.4 0.78 +0.8
Henderson High Yield Opportunities Fund, “A “ shares 5.7 -7.2 5.3 1.06 +2.1
Lipper high yield peer group 3.6 -9.1 5.5 0.67

I would certainly not concluded on the basis of three years that Mr. Loome’s fund is superior to Mr. Vaselkiv’s, but there seems abundant evidence that it’s going to be a very strong addition to the T. Rowe lineup.

Expenses for the fund’s Investor share class will be 0.79% which is substantially below their current level, far below the HY category average and nearly in-line with PRHYX. The minimum initial investment will be $2500 for regular accounts and $1000 for various tax-advantaged accounts.

Manager changes, February 2017

By Chip

It’s a quiet month on the manager change front. While nominally there’s a greater deal of management turnover in a given year, practically most of it is insignificant because the 27th member of a team leaves and is replaced by an equally adept newbie. This is one of those months. We’ve identified 35 manager changes this month, few involving the installation of an entire new team and only two or three affecting “household names.”

Because bond fund managers, traditionally, had made relatively modest impacts of their funds’ absolute returns, Manager Changes typically highlights changes in equity and hybrid funds.

Ticker Fund Out with the old In with the new Dt
ATHAX American Century  Heritage As of March 1, 2017, David Hollond will no longer be listed as a manager for the fund. Nalin Yogasundram will join Greg Walsh in managing the fund. 2/17
ACAQX American Century All Cap Growth As of March 1, 2017, David Hollond will no longer be listed as a manager for the fund. Michael Orndorff and Marcus Scott will continue to manage the fund. 2/17
BBHLX BBH International Equity Fund Nigel Bliss and Andrew Porter are no longer listed as portfolio managers for the fund. Jonathan Allen, Chad Clark, Loren Lewallen, Matthew Pickering and Brian Vollmer will now manage the fund. 2/17
BACAX BlackRock All-Cap Energy & Resources Portfolio Poppy Allonby is no longer listed as a portfolio manager for the fund. Alastair Bishop will continue to manage the fund. 2/17
SSGRX BlackRock Energy & Resources Portfolio Poppy Allonby is no longer listed as a portfolio manager for the fund. Alastair Bishop will continue to manage the fund. 2/17
CADVX Calamos Dividend Growth Fund David Kalis will no longer serve as a portfolio manager for the fund. John Calamos, John Hillenbrand and Jon Vacko will continue to manage the fund. 2/17
CAGEX Calamos Global Equity Fund David Kalis will no longer serve as a portfolio manager for the fund. John Calamos, John Hillenbrand, Nick Niziolek, Eli Pars, Jon Vacko and Dennis Cogan will continue to manage the fund. 2/17
CVLOX Calamos Global Growth and Income David Kalis will no longer serve as a portfolio manager for the fund. John Calamos, R. Matthew Freund, John Hillenbrand, Nick Niziolek, Eli Pars, Jon Vacko, Dennis Cogan and Joe Wysocki will continue to manage the fund. 2/17
CVTRX Calamos Growth and Income Fund David Kalis will no longer serve as a portfolio manager for the fund. John Calamos, R. Matthew Freund, John Hillenbrand, Eli Pars, Jon Vacko and Joe Wysocki will continue to manage the fund. 2/17
CVGRX Calamos Growth Fund Michael Roesler and David Kalis are no longer listed as portfolio managers for the fund. Michael Grant joins John Hillenbrand, Jon Vacko and John Calamos in managing the fund. 2/17
CMSFX Cavalier Multi Strategist Fund Parasol Investment Management will no longer subadvise the fund. Cavalier Investment LLC will directly manage the portfolio sleeve previously allocated to Parasol. The rest of the team remains. 2/17
FJACX Fidelity Series Small Cap Discovery Fund No one, yet, but Charles Myers will no longer serve as a portfolio manager, effective December 31, 2017 Derek Janssen will continue to manage the fund. 2/17
FCARX Fiera Capital Diversified Alternatives Fund Charles Korchinski is no longer listed as a portfolio manager for the fund. Geoffrey Doyle, Mark Jurish, Rasheed Sabar, Kazuhiro Shimbo, Rajiv Sobti and Alexandre Voitenok continue to manage the fund 2/17
FCIVX Frontier MFG Core Infrastructure Fund Dennis Eagar stepped down from his portfolio management responsibilities. Ben McVicar joins Gerald Stack as a portfolio manager of the fund. 2/17
HSCSX Homestead Small Company Stock Fund Gregory Halter is no longer listed as a portfolio manager for the fund. Mark Ashton and Prabha Carpenter will continue to manage the fund. 2/17
HOVLX Homestead Value Fund Gregory Halter is no longer listed as a portfolio manager for the fund. Mark Ashton and Prabha Carpenter will continue to manage the fund. 2/17
GTNDX Invesco Global Low Volatility Equity Yield Fund Andrew Waisburd will no longer serve as a portfolio manager for the fund. Donna Chapman Wilson, Michael Abata, Charles Ko,  Nils Huter, Jenz Langewand and Uwe Draeger continue to manage the fund. 2/17
JDEAX JPMorgan Disciplined Equity Fund Aryeh Glatter is no longer listed as a portfolio manager for the fund. Raffaele Zingone, Steven Lee and Tim Snyder will continue to manage the fund. 2/17
LCAOX Lazard Capital Allocator Opportunistic Strategies Portfolio David Cleary and Christopher Komosa are no longer listed as portfolio managers for the fund. Jai Jacob, Stephen Marra, Tom McManus and Kim Tilley will now manage the fund. 2/17
GOBAX Legg Mason BW Global Opportunities Bond Fund No one, but . . . Anujeet Sareen joins David Hoffman, Stephen Smith and John McIntyre on the management team. 2/17
MMYAX MassMutual Select Small Company Value Fund Andrew Waisburd will no longer serve as a portfolio manager for the fund. Donna Chapman Wilson and Michael Abata join Stephen Gutch, J. David Wagner, Charles Ko, Glen Murphy and Martin Jarzebowski on the management team. 2/17
MSIBX Morgan Stanley Institutional Fund (MSIF) Active International Allocation Portfolio No one yet, but effective June 30, 2017, Ann Thivierge will depart as a portfolio manager. Ben Rozin, Munib Madni and Jitania Kandhari join the management team. 2/17
NWHVX Nationwide Geneva Mid Cap Growth Fund Michelle Picard will no longer serve as a portfolio manager for the fund. Amy Croen, William A. Priebe and William Scott Priebe will continue to manage the fund. 2/17
NWHZX Nationwide Geneva Small Cap Growth Fund Michelle Picard will no longer serve as a portfolio manager for the fund. Amy Croen, William A. Priebe and William Scott Priebe will continue to manage the fund. 2/17
WAYEX Navian Waycross Long/Short Equity Fund No one, but . . . Benjamin Thomas is joined by John Ferreby in managing the fund. 2/17
NGDAX Neuberger Berman Guardian Fund No one, but . . . Marc Regenbaum joins Charles Kantor (“a regular commentator on CNBC” we’re assured) in managing the fund. 2/17
NTHFX Northeast Investors Growth Fund William Oates, Jr. is now deceased, and thus will no longer serve as a portfolio manager of the fund. John Francini and Nancy Milligan will continue to manage the fund. 2/17
OPPAX Oppenheimer Global Fund No one, but . . . Rajeev Bhaman is joined by John Delano in managing the fund. 2/17
OSTIX Osterweis Strategic Income Fund No one yet, but effective May 15, 2017, Simon Lee will be retiring from Osterweis. Craig Manchuck joins Bradley Kane and Carl Kaufman on the management team. 2/17
OSTVX Osterweis Strategic Investment Fund No one yet, but effective May 15, 2017, Simon Lee will be retiring from Osterweis. Craig Manchuck joins Bradley Kane and Carl Kaufman on the management team. 2/17
PDVAX PIMCO Diversified Income Fund No one, but . . . Sonali Pier joins Eve Tournier, Daniel Ivascyn and Alfred Murata on the management team. 2/17
REQAX Russell U.S. Defensive Equity Fund Richard Johnson and David Hintz are no longer listed as portfolio managers for the fund. James Barber and Megan Roach will now manage the fund. 2/17
SILCX State Street Institutional U.S. Large-Cap Core Equity Fund Paul Reinhardt and Stephen Gelhaus are no longer listed as portfolio managers for the fund. David Carlson and Chris Sierakowski are now running the fund. 2/17
VWINX Vanguard Wellesley Income Fund No one, but . . . Michael Stack and Loren Moran join John Keogh and W. Michael Reckmeyer in managing the fund. 2/17

Briefly Noted . . .

By David Snowball


Stay of execution: the Mirae Asset Asia Fund (MALAX) and Emerging Markets Fund (MALGX) were both scheduled for liquidation. “[A]fter further consideration,” the Board changed its mind. Both are very solid little funds, with an emphasis on the “little.” They have $25 million in assets between them after almost seven years of operation. At the same time, both are four-star funds with the same manager and both are distinguished by capturing a bit less of the downside and a bit more of the upside than their peers. The question remains whether, given the current infatuation with passive funds, that will ever be enough for the funds to reach economic viability.

Briefly Noted . . .


The Board of Directors has approved re-opening the Boston Partners Long/Short Research Fund (BPRRX) to all investors, effective as of March 1, 2017. That said, they may re-close the fund is assets grow by more than 5%. They’re currently at $6.5 billion. In rough terms, that’s $300 million in inflows. It’s a really good long/short fund though, to be clear, it is not their closed flagship fund, Boston Partners Long/Short Equity (BPLEX).

The Board of Directors of Leuthold Funds has reduced the investment advisory fee (i.e., Leuthold’s cut) for Leuthold Global (GLBLX) from 1.10% to 0.90%.

CLOSINGS (and related inconveniences)

None that we noticed. Rather to the contrary, closed funds are starting to re-open. Given that valuations aren’t getting any more attractive, the reopenings (Oakmark International, Oakmark Global, Artisan Mid Cap Value) mostly seem to signal asset outflows and rising financial distress on the advisors’ part.


On April 15, the American Century Disciplined Growth Plus Fund (ACDJX) will be renamed AC Alternatives Disciplined Long Short Fund (and will, well, begin shorting stocks). The manager will use the same quantitative model that he currently employs; he’ll just have the opportunity to short the least-attractive stocks that the system outputs as well as investing in the most-attractive ones.

Aspiriant Risk-Managed Global Equity Fund’s name has changed to Aspiriant Risk-Managed Equity Allocation Fund (RMEAX). They’re also dropping the requirement of investing globally. They’ve drawn a lot of assets ($750 million) for a fund with a pretty modest performance record; the argument, of course, is that they’re capturing more upside than downside which necessarily means trailing the market but being a lot less risky. That’s a hard sell and, to their credit, these folks are doing it.

Effective February 15, 2017, BlackRock Small Cap Growth Equity Portfolio became BlackRock Advantage Small Cap Growth Fund (CSQEX). Morningstar hasn’t quite caught up with the change.

Deutsche Global Equity Fund (DBISX) will be rechristened as with Deutsche Global Macro Fund on May 8, 2017. In the prospectus it gets a new name, objective, strategy and subadvisor. At base, it jettisons the whole “equity” focus in favor of multi-asset minuet. Given that they have no assets and a record that trails 97% of their peers over the past decade, the desire for change is understandable if late.

On May 1, 2017, The Dreyfus Third Century Fund (DTCAX) which has always been an ESG sort of fund, will be renamed The Dreyfus Sustainable U.S. Equity Fund, with some refinements to the ESG mandate.

In what might be the prelude to a merger, on April 10, the HSBC Emerging Markets Local Debt Fund (HBMAX) becomes the HSBC Emerging Markets Fixed Income Fund. The key difference is that now it invests in local currency debt; after the change it will invest in both local currency and dollar-denominated debt. At the same time, HSBC Emerging Markets Debt Fund (HCGAX) will change its mandate so that it, too, invests in both local currency and dollar-denominated debt. Both funds will then adopt the same benchmark: J.P. Morgan Emerging Markets Bond Index Global (50%) and the J.P. Morgan Government Bond Index – Emerging Markets Global Diversified (50%), though neither fund has enough assets to be financially viable.


There’s a sudden wave of share class liquidations, which we thought we’d mention separately. These are instances where funds sort of give up on the retail market and try to tie their fate to their ability to attract “sophisticated” institutional investors. The “sophisticated” is in quotation marks out of respect to the ridicule that advisors occasionally heap upon the heads of these guys.

Bogle Investment Management Small Cap Growth Fund (BOGLX/BOGIX) has closed its Investment class and converted the existing shareholders to the lower-cost institutional class.

Convergence Core Plus Fund (MARVX) is doing likewise.

Meritage Value Equity Fund (MPVEX) has discontinued the sale of its Investor Shares and it appears they’ll liquidate the Investor share class. They will continue to offer Institutional Shares. It’s not clear that the current Investors get to stay on-board.

Al Frank Dividend Value Fund (VALDX) is going to be merged into Al Frank Fund (VALUX). Nominally the shareholders vote on the move on April 20; given that the proposed liquidation would occur by the next day, I’m thinking this one is already in the books.

Breithorn Long/Short Fund (BRHAX) shorted out February 28, 2017.

Eaton Vance Hexavest Emerging Markets Equity Fund (EHEAX) will liquidate on March 31, 2017. If you’d invested on the fund’s opening day five years ago, you’d still be underwater today.

Gratry International Growth Fund (GGIGX) will be liquidated on or about March 30, 2017 

Newfound Total Return Fund (NFBAX) heads to the lost-and-found on March 7, 2017.

Nuveen Gresham Long/Short Commodity Strategy Fund (NGSAX) will be liquidated after the close of business on April 24, 2017.

PIMCO RAE Worldwide Fundamental Advantage PLUS Fund (PWWAX) will liquidate on April 28, 2017. Morningstar categorizes it as a market-neutral fund, though it’s not quite that. Regardless, this chart of its performance against its market-neutral peers may explain its current fate.

PWWAX chart

It will be preceded in death by two actively-managed ETFs, PIMCO Diversified Income Active ETF (DI) and PIMCO Global Advantage Inflation-Linked Bond Active ETF (ILB), both of which disappear on April 7, 2017.

Princeton Futures Strategy Fund (PFFAX) becomes the Princeton Past Strategy Fund on March 27, 2017.

Putnam is merging away a bunch of funds. The $5 billion Putnam Fund for Growth and Income (PGRWX), rated Bronze by Morningstar, will merge into the $6 billion Equity Income Fund (PEYAX) on or about May 15, 2017. The $1.2 billion Putnam High Yield Trust (PHIGX) will be absorbed by the $600 million High Yield Advantage (PHYIX) on May 8, 2017. The 3- and 5-year correlations between the funds’ performance is a perfect 1.0. The $22 million Putnam Global Dividend (PGDEX) will merge into the $8 million Global Sector (PPGAX) while Putnam Global Energy (PGEAX) will merge into Global Natural Resources (EBERX), but those mergers will be no earlier than mid-May and might well be later.

SCS Tactical Allocation Fund (SCSGX), which has lost a daunting 10% annually over the past three years while its peers have been climbing, will disappear on March 31, 2017.

TCW Small Cap Growth Fund (TGSNX) and the TCW Growth Equities Fund (TGDNX) will be liquidated on or about March 15, 2017.

Toews Hedged Core Frontier Fund (THEMX) has closed and will face The Final Frontier on March 15, 2017.

The closed-end Virtus Total Return Fund (DCA) will, pending shareholder approval, merge into The Zweig Fund (ZF) sometime toward the end of March, 2017.