Monthly Archives: June 2017

June 1, 2017

By David Snowball

Dear friends,

And they’re off!” signals both the start of a horse race and the end of a class’s years at college.

Augustana just launched 485 more grads in your direction. It’s our 157th assault on adult life, and one of our largest. I’m pleased that Mike Daniels was the student selected to speak at commencement but he’s so durn Augie. Mike’s a defensive lineman, but also a jazz musician. He’s an accountant, but also a first team NCAA Academic All-American. He’s been to Italy (with the football team), but also managed to sneak in three internships on his way to working for Deloitte & Touche. He’s a good man who overtly rejects “good enough” as a goal; that is not, he said, “the Augie way.”

They’re good kids. Be patient with them. They really do want to do right. They’re awfully bright. They learn fast. They work and play well together. They’re a lot more aware of the world around them than I was at their age. They’ll keep you young if you let them.

I’m not sure that they’re as relentlessly curious as we once were, but that’s mostly because they don’t have to wonder about the answers; they simply Google them. I’d grumble about their sense of entitlement, but every time I glance in the mirror I blush at the source of it. Their attention span is pretty short, I guess, and they seem incapable of focusing on one thing at a time. But I think that’s because they’re smart and they’ve learned the lesson we have chosen to teach them: do more and do it now! I’m not sure when it became common for 10th graders to have resumes – and concerns about building resumes – but we’re there now. And if we wonder why Facebook and Instagram creep into their daytime hours, we might think about the number of work emails and texts that creep into their nighttime hours.

Celebrating commencement: from peril to Pollyanna, and back

Such events are normally festooned by modestly gaseous speeches from distinguished adults. For better and worse, no one is listening; words may flow into their ears, but they’re not lodging in their brains. Given the day, how could they?

Bill Gates, perhaps sensing the problem, decided to try a different approach to a valedictory address. He tweeted it. Here is Gate’s May 15th address to The Classes of 2017:

  1. New college grads often ask me for career advice. At the risk of sounding like this guy… … [Snowball: it’s the “just one word: plastics” clip from The Graduate]
  2. [Artificial intelligence], energy, and biosciences are promising fields where you can make a huge impact. It’s what I would do if starting out today.
  3. Looking back on when I left college, there are some things I wish I had known.
  4. For example, intelligence takes many different forms. It is not one-dimensional. And not as important as I used to think.
  5. I also have one big regret: When I left school, I knew little about the world’s worst inequities. Took me decades to learn.
  6. You know more than I did when I was your age. You can start fighting inequity, whether down the street or around the world, sooner.
  7. Meanwhile, surround yourself with people who challenge you, teach you, and push you to be your best self. As @MelindaGates does for me.
  8. Like @WarrenBuffett I measure my happiness by whether people close to me are happy and love me, & by the difference I make for others.
  9. If I could give each of you a graduation present, it would be this–the most inspiring book I’ve ever read.
  10. @SAPinker shows how the world is getting better. Sounds crazy, but it’s true. This is the most peaceful time in human history.
  11. That matters because if you think the world is getting better, you want to spread the progress to more people and places.
  12. It doesn’t mean you ignore the serious problems we face. It just means you believe they can be solved.
  13. This is the core of my worldview. It sustains me in tough times and is the reason I love my work. I think it can do same for you.
  14. This is an amazing time to be alive. I hope you make the most of it.

“It’s an amazing time … with serious problems … they can be solved.” It’s a call to action that Bernie Sanders echoed two weeks later: “In response to these very serious problems it seems to me that we have two choices. First we can throw up our hands in despair. We can moan and groan. We can withdraw from the public reality that we face. We can loudly proclaim that we can’t beat the system. That is one response. It is an understandable response but it is not an acceptable response” because the costs of despair are too high.

Gates’s endorsement of The Better Angels of our Nature drove sales of the book on Amazon through the roof, from about #12,000 to #2 in just a few days.  For those of us reluctant to slog through an 832-page tome (inside every fat book there’s a thin book struggling to get out), here’s the short version:

  • Almost all of human history has been a bloody horror, often in a literal “ankle-deep in blood” sense.
  • But, century by century, it’s gotten better because we’re able to use our brains to make the world more secure and humane.
  • Nonetheless, we insist on romanticizing the past and demonizing the present, mostly because the present is a pain in our butts and the past can’t hurt us anymore.

Pinker’s bottom line: there is no time machine to let us return there and, if there was, no one but a fool would step into it.

Setting aside the furor that the book engendered (and it was furious), there is a powerful warning embedded in Pinker’s Pollyanna prose: an attempt to return America to some rose-hued Golden Age is not only doomed from the start (it didn’t exist and we can’t get there), but it’s also powerfully destructive. Rather than celebrate the world we have and grapple with its problems, we’d sink into delusion and denial, letting manageable problems swell into horrific ones. Which, of course, just encourages more denial and nostalgia.

The administration’s obsession with the coal industry has that flavor. The coal industry as a whole employs, from miners to secretaries, just over 50,000 Americans. Those are hard, often dangerous (my grandfather’s work in the mines almost kept him from, well, becoming my grandfather), often high-paid (the industry average is $28/hour) jobs in towns that need them; still, it is a tiny pool, being dried up by private competition rather than government fiat. Even if we were to magically increase employment in coal by 50%, it would still employ far fewer people than my local Hy-Vee grocery chain.

And so, to our new graduates, welcome to the world! It’s a wonderful place. It’s a horrible place. It’s yours, and ours. Time to get working!

Had I mentioned that my Ph.D. is in a non-quantitative field?

I’m trained as a debate coach and a historian of rhetoric. I have a visceral attachment to words, stories and ideas and a modestly anxious acquaintance with number. I mention all this as part of an apology and a mea culpa.

In our June issue, we urged people to take a realistic look at the risks embedded in their portfolios. In particular, we suggested that you should quickly calculate the likely downside you face in the sort of powerful corrections we’ve recently seen, 2000-02 and 2007-09. One way to do that is to multiply the maximum drawdown for each fund in your portfolio by its weight in your portfolio, then add the products together. The sum you see is an approximation of the amount by which your portfolio might decline in a bear market.

All of which would have worked better if I’d been paying more attention to Mrs. Zimmermann in fifth-grade math, when she introduced percentages. I ended up miscalculating the drawdown impact of two funds, which overstated my portfolio’s likely loss. Our colleague and data demon Charles later went in and refined the drawdown calculation from funds that are too new to have experienced the 2007-09 downturn.

Bottom lines:

  1. My portfolio, which I think of as a conservative growth model, might well lose 30% in a sharp downturn, rather than the 33% I originally estimated. I might expect to take 3-5 years to recover those losses.
  2. I’m pleased with my manager’s risk sensitivity. I looked for the closest match ETFs for my core holdings, to compare the impact that my managers have on downside protection. For some funds (FPA Crescent), there are simply no substitutes. For others, the comparison of losses in 2007-09 is instructive:


    As a substitute for

    My MaxDD

    ETF’s MaxDD

    iShares Emerging Markets ETF




    PowerShares Emerging Markets Sovereign Debt Portfolio

    Matthews Asian Strategic Income



    iShares MSCI EAFE ETF

    Artisan International Value



    iShares Morningstar Small-Cap Value ETF

    Intrepid Endurance



    BLDRS Asia 50 ADR Index Fund

    Matthews Asian Growth & Income



  3. I’m deeply grateful for all the folks who took the argument seriously to detect the error and share it with us. Those include Thom Pickett, a senior vice president at Wells Fargo Advisors, as well as bee, willmatt72 and Vintage Freak on MFO’s always lively discussion board. Thanks guys!

PARMX: no longer “left behind by Morningstar”

As Morningstar’s priorities have shifted, they’re dropped coverage of hundreds of exceptionally strong funds. Our standard for “exceptionally strong” is funds that have maintained a four- or five-star rating over every trailing time period.

On the flipside, we occasionally discover a fund that has been re-discovered by Morningstar. So, kudos to Parnassus Mid-Cap (PARMX). PARMX is a $2.4 billion, five-star mid-cap fund with a set of strong ESG screens. The fund was last covered six years ago (5/19/2011) when Kathryn Young concluded that you should “keep this fund on your radar, but give it time to mature.”

Apparently “time” translated to “about six years,” including five in which the fund handily beat its peers. On March 30, 2017, Wiley Green offered these highlights: “Parnassus Mid Cap has it all for environmental, social, and governance investors seeking mid-cap exposure … The team has executed well [and] the fund’s risk-adjusted performance shines, with lower volatility and better downside protection than the category and index during the same time frames.”

Morningstar prospects:  Hope for the little guy

Morningstar publishes a quarterly list of “up-and-coming or under-the-radar investment strategies that Morningstar Manager Research thinks might be worthy of full coverage someday.”

The list is available only by subscription but we received permission to share highlights.

Two funds went from prospect to full coverage: ClearBridge Large Cap Growth (SBLGX), a 20 year old, $7.4 billion fund, was recognized as a Bronze medalist while Vanguard Tax-Exempt Bond Index (VTEBX), which is not yet two years old, has been awarded a Silver medal.

Columbia Acorn Emerging Markets (CEFZX) was dropped entirely from the Prospects list because of the departure of manager Fritz Kaegi and turmoil at Columbia Acorn funds.

New prospects include

  • Tributary Small Company (FOSCX). Our December 2016 profile described it as “one of the best small cap funds available to you.”
  • Westwood SmallCap (WHGSX), a 10-year old small- to micro-cap blend fund. Nominally institutional, it has a $5,000 minimum.
  • Morgan Stanley Global Opportunities, led by a protégé of star manager Dennis Lynch.
  • GQG Partners Emerging Markets Equities (GQGPX). It’s a new fund by a star manager Rajiv Jain. You can get some sense of Mr. Jain’s thinking from our February 2017 Elevator Talk with him.
  • LJM Preservation & Growth (LJMAX), an options trading fund. I’ve sort of given up on options funds and managed futures funds, so I’ll mostly nod here.
  • Oppenheimer Fundamental Alternatives (QVOPX), a 28-year-old multi-alternatives fund with a team that’s now been in place for five years.

Congratulations to the prospects, and thanks to Morningstar for sharing them.

Thanks, too, to you!

William, Patrick, and Jason – thanks so much for your contribution. It means a lot to us. And, as always, our trusty regulars Jonathan, Deb, Brian, and Greg. We couldn’t do it without you. For those who’d like to make a contribution, you can see your options on the “Support Us” page. We always appreciate your help.

As ever,


The Dry Powder Gang, updated

By David Snowball

“Put your trust in God but keep your powder dry.”

Oliver Cromwell, 1650, to the soldiers of the New Model Army as they prepared to forge an Irish river and head into battle.

Cromwell was a dour, humorless (or “humourless”) religious fanatic charged with squashing every Catholic and every independent thought in the British Isles because, well, that’s what God demanded. Famine, plague, deportations, mass death and deportations followed.

But even Cromwell knew that the key to victory was prudent preparation; faith did not win battles in the absence of the carefully stocked dry gunpowder that powered the army. There were time to charge ahead and there were times to gather powder.

With investing likewise: there are times to be charge ahead and times to withdraw. Most investors struggle with that decision. Why?

  1. Most investment products feed our worst impulses. The investment industry has come to be dominated by passive, fully-invested products over the past five years; not coincidentally, that period has seen just one break in the upward rush. In cap-based funds, more money goes to the best performing stocks in the index so markets get driven by the momentum of fewer and fewer stocks. In 2015, for instance, just four stocks accounted for the S&P 500’s entire gain.
  2. Most professional investors worry more about accumulating assets than about serving investors. By most measures, the U.S. stock market is substantially overpriced but the cash reserves at mutual funds are low; Morningstar gives the average domestic funds cash at 4.2%. Why? Because, as Jason Zweig writes, “cash is now a sin.” Cash is a drag on short-term returns and investors fixated on 1/3/5 year returns have poured their money into funds that are fully invested all the time, both index products and the cowardly “active” managers who merely shadow them. The technical term for “skilled investors who do not attract assets to the firm” is “unemployed.”
  3. Most of us are too optimistic. Most guys think of themselves as “good investors” or “above average” investors, mostly because “good” is such a vague term and almost none of us actually know how or what we’ve done. Quick quiz: what’s your personal rate of return over the last five years? How much of your portfolio was invested cautiously as the market approached its top in October 2007 and how much was invested aggressively at its bottom in March 2009? The honest answers for most of us are “dunno, dunno, dunno.”
    It’s not just about investing. 95% of us think we’re above average drivers. One 1965 study of drivers responsible for car accidents that put people in the hospital found the same: the majority of those drivers rated themselves as “really good.” Stan Clark, a Canadian adviser, wrote a thoughtful little piece on the phenomenon.

The result is that we’re tempted to take on too much risk, sublimely confident that it will all work out.

But it won’t. It never does. You need a manager who’s got your back, and you need him now. Here are three arguments in three pictures.

Argument one: stock prices are too danged high.

This chart shows valuation of the US stock market back to 1880; numbers get really sketchy before that. Valuation, on the left axis, is the CAPE P/E ratio which tries to adjust for the fact that earnings tend to be “lumpy” so it averages them over time. The “mean” or average value over 140 years is 16.8; as of late May 2017, we’re at 177% of the market’s long-term average valuation.

The U.S. market went over a CAPE P/E of 24 just three times in the 20th century; it’s lived there in the 21st. The market’s P/E at its February 2016 bottom was still higher than the P/E at its October 2007 top.

Argument two: Price matters.

Thanks for Ryan Leggio of FPA for sharing this chart and John Hussman for creating it.

If you overpay for something, whether it’s $72 million for a “franchise quarterback” who’s only started seven NFL games ever or 211 years’ worth of earnings for a share of Netflix stock, you’re going to be disappointed.

The chart above reflects the stock market’s valuation (measured by the value of the stock market as a percentage of the value of the “real economy,” so when the blue line is high, stocks are relatively inexpensive) overlaid with its returns over the following 12 years. With considerable consistency, price predicts future returns. By this measure, U.S. stocks are priced to return 2% a year. The only ways for that number to go up is for the U.S. economy to grow at an eye-watering rate or for prices to come down. A lot. Based on the market’s performance over the past 60 years, the folks at the Leuthold Group find that a return to the valuations seen in the average bear market would require a fall of 27-35% from where we were at the end of April.

Vigorous economic growth, even if possible, would be a double-edged sword. It might serve to justify current prices but considerable disruption of Corporate America would be required to achieve it. Three researchers at Research Affiliates, Rob Arnott’s firm, wrote in late May 2017:

[T]he ‘Trump bump’ reveals market expectations of continuing public policies prioritizing stability, inhibiting creative destruction, depressing yields and wage growth, and inflating a profits bubble. If instead the Administration delivers reforms that allow creative destruction, invigorate growth, and raise returns to capital and wages, then the lofty profits of corporate incumbents will be at risk.

Argument three: Market collapses are scary

I think of this as “the icicle chart.” Ben Carlson, one of the Ritholtz managers, wrote a really thoughtful essay, rich in visuals, in April. He posted it on his Wealth of Commonsense blog under the name “180 years of market drawdowns.” He provided this graph as an antidote to those relentlessly cheerful logarithmic “mountain charts.” Those are the ones that show the stock market’s relentless climb with just niggling little “oopsies” from time to time. Losing half your portfolio is, viewed from the perspective of a few decades or a century, just a minor annoyance. Losing half your portfolio is, viewed from the perspective of a guy who needs to meet a mortgage, fund a college education and plan for the end of a teaching career, rather a bigger deal. Mr. Carlson concludes:

…stocks are constantly playing mind games with us. They generally go up but not every day, week, month or year. No one can predict what the future returns will be in the market … But predicting future risk is fairly easy — markets will continue to fluctuate and experience losses on a regular basis.

Market losses are the one constant that don’t change over time — get used to it.

The ideal approach is a strong contrarian discipline; famously, being fearful when others are greedy and greedy when others are fearful. As Mr. Zweig wrote in May 2017:

Having the cash and courage to buy from [panicking sellers] at bargain prices is a good way to raise your future returns. Not joining them as blind-faith buyers is an excellent way to reduce your risk, now and in the future.

Managers who’ve got your back

There are only a handful of managers left who take all of that seriously. The rest have been driven to unemployment or retirement by the relentless demand: fully invested, price be damned. They typically follow a simple model: stock by stock, determine a reason price for everyone in our investable universe. Recognized that stocks are risky, so buy them only when they’re selling at a healthy discount to that price. Hold them until they’re around full value, then move on regardless of whether their prices are still rising. Get out while the getting is good. If you can’t find anything worth buying today, hold cash, keep your powder dry and know that the next battle awaits.

They bear a terrible price for hewing to the discipline. Large firms won’t employ them since large firms, necessarily, value “sticky assets” above all else. 99.7% of the investment community views them as relics and their investors steadily drift away in favor of “hot hands.”

They are, in a real sense, the individual investor’s best friends. They’re the people who are willing to obsess over stocks when you’d rather obsess over the NFL draft or the Cubs’ resurgence. And they’re willing, on your behalf, to walk away from the party, to turn away from the cliff, to say “no” and go. They are the professionals who might reasonably claim …

This chart reflects every equity-oriented mutual fund that currently has somewhere between “a lot” and “the vast majority” of their portfolio in cash, awaiting the return of good values. Here’s how to read it. The first two columns are self-explanatory. The third represents how their portfolios have been repositioned between 2011 (when there are still reasonable valuations) and now. Endurance, for example, had two-thirds of its money in stocks in 2011 but only a seventh invested now. The fourth column is fund’s annual return for the period noted (full market cycle or since inception). The fifth shows the fund’s Sharpe ratio, a measure of risk-adjusted returns, against its peers. The sixth column shows you how it’s performed, again relative to its peer group, in bear market months. The last column is the comparison time frame. I’ve marked decisive superiority in blue, comparable performance in amber and underperformance in red. All date is month end, April 2017.

  Style Change in equity exposure from 2011 – 2017 Annual return Sharpe ratio, compared to peers Bear market rating, compared to peers Comparison period
Intrepid Endurance ICMAX Small-cap value 64%->16% 7.7% 0.65 vs 0.31 1 vs 6 FMC
FPA Crescent FPACX Flexible 57 -> 54 6.9 0.65 vs 0.33 4 vs 6 FMC
Bruce BRUFX Flexible 41 -> 50 7.0 0.57 vs 0.33 4 vs 6 FMC
Centaur Total Return TILDX Equity-income 89 -> 32 7.7 0.56 vs 0.39 1 vs 5 FMC
FMI Common Stock FMIMX Small-cap core 88 -> 81 9.1 0.51 vs 0.34 1 vs 6 FMC
Weitz Partners III Opportunity WPOIX Multi-cap growth 67 -> 57 7.9 0.50 vs 0.34 1 vs 6 FMC
Pinnacle Value PVFIX Small-cap core 51 -> 55 4.7 0.49 vs 0.34 1 vs 6 FMC
Intrepid Disciplined Value ICMCX Mid-cap value 81 -> 48 5.9 0.43 vs 0.35 1 vs 6 FMC
Shelton Core Value EQTIX Equity income 100 -> 74 6.8 0.42 vs 0.39 6 vs 5 FMC
Hennessy Total Return HDOGX Large-cap value, Dogs of the Dow 73 -> 48 4.0 0.30 vs 0.30 1 vs 5 FMC
Frank Value FRNKX Mid-cap core 83 -> 36 4.9 0.25 vs 0.37 1 vs 6 FMC
Bread & Butter BABFX Multi-cap value 69 -> 68 3.2 0.22 vs 0.31 1 vs 5 FMC
Funds with records >5 years but less than the full market cycle
Cook & Bynum COBYX Global large-cap core 67% -> 64% 9.1% 1.18 vs 0.74 1 vs 6 08/2009
Castle Focus MOATX Global multi-cap core 67 -> 70 8.1 1.14 vs 0.74 1 vs 5 08/2010
Chou Opportunity CHOEX Flexible 74 -> 60 3.6 0.18 vs 0.79 10 vs 6 08/2010
Two plausible benchmarks
Vanguard Total Stock Market VTSMX Multi-cap core 100 -> 100 7.1% 0.42 4 FMC
Vanguard Balanced Index VBINX Hybrid 60 -> 60 6.2% 0.61 1 FMC

No single measure is perfect and no strategy, however sensible, thrives in the absence of a sufficiently talented, disciplined manager. This is not a “best funds” list, much less a “you must buy it now, now, now!” list.

Bottom Line: being full invested in stocks all the time is a bad idea. Allowing greed and fear, alternately, to set your market exposure is a worse idea.  Believing that you, personally, are magically immune from those first two observations is the worst idea of all.

You should invest in stocks only when you’ll be richly repaid for the astronomical volatility you might be exposed to.  Timing in and out of “the market” is, for most of us, far less reliable and far less rewarding than finding a manager who is disciplined and who is willing to sacrifice assets rather than sacrifice you. The dozen teams listed above have demonstrated that they deserve your attention, especially now.

Time to put on your big-boy pants and check your investments

By David Snowball

As I noted in my publishers letter this month, this article, originally published in May, contained a substantial and utterly boneheaded mathematical error. After we published it, two things happened: first, readers took the article seriously enough to find the error and report it; second, our colleague Charles, substantially revised the method for calculating the maximum drawdown for funds in my portfolio which haven’t been around for a full market cycle. Because those changes were material, we decided to re-present this article as a public service.

Sorry, I don’t have a really gender-neutral alternatives to “big-boy pants.”

In all likelihood, you might expect to experience considerable ugliness in financial markets in the months ahead. That’s not a timing call, it’s a statement of the obvious.

What’s behind it?

The bull market in stocks is now the longest in U.S. history. The second- and third-longest bull markets ended (1929, 2000) in horrendous routs.

Market valuations, by any reasonable measure, are very extended. There are a million ways to calculate valuations and estimates of “fair value.” None of them say “cheap!” Almost all point to a market that’s at the top of its normal valuation range; by some measures, at the 99th percentile for its valuations.

The economy has not generated substantial earnings growth and the Congress does not seem poised to act constructively (or at all) to encourage it. At the same time, inflation (the PCE index) rose at its fastest rate since 2011.

The generally-pessimistic institutional investor Grantham, Mayo, van Otterloo (GMO) publishes monthly estimations of likely market returns over the next 5-7 years. It doesn’t involve a crystal ball, it simply assumes that the market returns to historically normal values; it’s a measure of what would happen to your portfolio if, by the end of 5-7 years,  profits, price-to-earnings ratios and inflation returned to rates that are normal by historical standards.

So, in inflation-adjusted terms, they estimate that high-quality U.S. stocks will earn zero and emerging markets stocks will earn a bit. Former Vanguard CEO Jack Bogle is more generous, by far, and estimates that you might be able to make 4%.  As we noted last month, there are two ways to get there: with a bang, or with a whimper.

Jason Zweig, one of the sharpest of all the folks writing about finance, wrote an entirely fascinating and horrifying column in late April, “Whatever You Do, Don’t Read This Column” (4/30/2017). His most startling finding is that rich investors now expect to make more than ever before. Jason attributes it to faith in “an investing tooth fairy.”

Here’s our suggestion: check now to see if you’re ready for either possibility. GMO’s Ben Inker stated the obvious in the firm’s most recent quarterly letter (1Q2017): “It is impossible to determine if you are taking an appropriate amount of risk without understanding what the downside is for your portfolio, which means you simply have to do the exercise of understanding what can go wrong.”

One quick-and easy way to answer the “how bad could it get?” question is to look at your funds’ maximum drawdown; that is, the biggest loss they’ve suffered during the current market cycle.

Multiply the size of the loss by the weight of that fund in your portfolio. As an illustration, I’ve done the calculation for my non-retirement portfolio for you. I used the MFO Premium fund screener to isolate the maximum drawdown for each fund during the current market cycle which began in October, 2007.

Here are the funds that were actually around for the entire cycle:

Fund MaxDD Portfolio Weight Portfolio Impact
FPA Crescent 29% 17% 4.9
T Rowe Price Spectrum Income 14 10 1.4
Artisan International Value 47 10 4.7
Mathews Asian Growth & Income 38 6 2.3
Intrepid Endurance 19 12 2.3

Those funds represent 55% of my entire portfolio. If they repeat their maximum drawdown, they’ll cost my portfolio about 16% of its total value.

What about newer funds? That’s a little tougher. None of them have been around long enough to experience a major drawdown event, so I had to estimate. Once again, I used the screener. First, I found average maximum drawdown by fund category since October, 2007. Second, I adjusted this average by the ratio of each fund’s volatility to average volatility since fund inception. (For this exercise, I used standard deviation as the volatility metric.) You’ll notice in the table below that I tend to invest in funds that experience lower volatility than their category peers.

Fund Category Average MaxDD Volatility Ratio Estimated
Portfolio Weight Portfolio Impact
Seafarer Overseas Growth & Income Emerging Markets 63 0.84 53 12 6.4
RiverPark Strategic Income Flexible Portfolio 36 0.35 13 8 1.0
RiverPark Short-Term High Yield High Yield 30 0.10 3 8 0.2
Matthews Asia Strategic Income Emerging Mrkts Hard Currency Debt 27 0.73 20 6 1.2
Grandeur Peak Global Microcap Global Small-/Mid-Cap 56 0.85 47 6 2.8
Grandeur Peak Global Reach Global Small-/Mid-Cap 56 0.87 49 5 2.5
          45 14

If you do that, you end up with a loss of about 30% in my portfolio, despite its cautious allocation. Currently, my allocation is just about 50/50% equity/fixed income, placing my overall portfolio in Lipper’s “Mixed Asset Moderate Allocation” category:

… a mix of between 40%-60% equity securities, with the remainder invested in bonds, cash, and cash equivalents.

The average maximum drawdown for funds in this category during the last bear market was -35%. If we look at the recovery times for my funds (that is, how long it took them to regain their previous peaks), there’s a good chance that I’d be in the red for three years or more.

Is that really a “loss”? Dan Wiener of Independent Adviser for Vanguard Investors and I had a short chat about it. Dan thinks you would merely have a smaller long term gain, rather than a loss.

Hi, David. You write that “there’s a good chance that I’d be in the red for three years or more.” That’s absolutely false unless you assume you bought all your funds on the day before the market starting going down. And that’s the kind of thinking that scares the bejeesus out of investors.  If I invest $100 and it goes to $150 and then it drops 33% and I’m back to $100 I’m actually NOT in the red. I’m flat.

Dan’s argument centers on how you think about the cost-basis of your investments. If over the years I’d invested $20,000, it grew to $50,000 then a tantrum in the market reduced it to $33,000, how should I think about my position? Have I made 65% or lost 33%?

Dan’s sensible observation is that investors should think about all they’ve gained (from their initial value) over the years. My sense is that they would think about all they’ve lost (from their peak value). If you’ve got “dry powder” at hand and Dan’s steely nerve, you’d be better off. Sadly, few do.

So here’s the question: if I lost about one-third of my lifetime savings, what would I do? Could I ignore the loss, or would I react unwisely to it? Remember, at the point that I’d lost 30% of my total nest egg, I’d have no assurance that the losses would ever end (the early 1930s crash dropped the market by 90%).

If you don’t know how bad the loss in your portfolio could be, find out now! That’s the cheapest and best advice you’ll get in a year. You can’t plan without knowing, and you can’t react intelligently without planning.

We have faith in you, and we’ll help as much as we can. But you really need to start checking now, before the market scares you into doing something spectacularly unwise.

How Bad Can It Get?

By Charles Boccadoro

In last month’s commentary, David challenged readers to review their portfolios and be sure they understand how bad it could get when markets head south. “There’s a break in the rain. Get up on the roof!” he’ll often advise. He shared his own portfolio, which maintains a modest 50/50 stock/bond allocation. He estimated his drawdown to be 30% for perhaps three to five years, using the bear market of 2008 as guide. A look back at US market volatility since 1926 helps provide further insight into the question of just “How Bad Can It Get?”

The results presented below use the monthly database maintained by Amit Goyal, the same database referenced in Timing Method Performance Over Ten Decades, but updated as appropriate from January 1960 through April 2017 with our Lipper Data Feed Service. The three principal indicies modeled are S&P 500 Monthly Reinvested Index, Bloomberg Barclays US Treasury Long Total Return Index, and US 3-Month Treasury Bill Total Return Index.

By far the largest and most devastating bear market over the past 10 decades occurred during The Great Depression, as depicted below:

Only a heavy dose of bonds insulated investors from the gut-wrenching drawdown. In its aftermath, numerous safeguards were established to help prevent such economic catastrophes, beginning with Roosevelt and America’s New Age. But then you never know … Though the scale was narrower, fortunately, the NASDAQ meltdown reflects scarily similar numbers, beginning less than 20 years ago:

Cambria’s Meb Faber writes often of market bubbles, old and new, broad and narrow (eg., Japan in ‘90s, cryptocurrency). Nonetheless, let’s have a little faith and focus on broader US market beginning in January 1932. Using month ending stock data, we find 11 bear markets, each defined when the market retracts from its previous peak by 20% or more. The table below summarizes the drawdown for each of the bear periods, along with beneficial impact of allocating a portion of one’s portfolio to bonds. (Since -20% represents a common pain threshold, those periods are highlight in red in all tables.)

Five times since 1932, about half of all bears, the broad equity market has retracted 40-50% and remained underwater up to 76 months, or more than six years! Three other times, equities were down 30%. Bottom-line: if you are heavily invested in equities, brace for a drawdown of 30-50% during the next bear market. That means chances are very likely the Fidelity monthly statement on your retirement savings, which now reads say $150,000, will be below $100,000, or even just $75,000.

Thoughtful MFO Discussion Board contributor bee writes of the beneficial allocation to bonds, like TLT or EDV as “portfolio insurance” … “flight to safety” when stock markets head south. For most of the equity bear markets since 1932, it certainly appears to be the case. A review shows only once have bonds retracted more than 20% … and just that. It occurred when rates spiked in the late 1970’s:

Finally, we take a closer look at worst-case drawdown scenarios, not by bear periods, but by stock/bond portfolio allocation, again since 1932. In addition to maximum drawdown, the table also provides other attendant risk and return metrics:

Extraordinary that highest Sharpe, which measures excess return (over cash) versus volatility, a kind of “gain for pain” metric, is highest for portfolios with stock/bond allocations of between 70/30 and 30/70, which is precisely the range legendary investor Jack Bogle likes to target, as shared at the recent Morningstar conference.

Similarly for Martin, which measures same return but versus drawdown (or the so-called Ulcer Index), results are highest for portfolios with stock/bond allocations of between 60/40 and 20/80. Our Discussion Board colleague teapot believes that the higher the Martin, the less chance of investors bailing when things get tough.

Ben Graham touted the 50/50 portfolio in the Intelligent Investor. Over the 85 year evaluation period examined in this piece, longer than the average lifespan, a simple 50/50 stock/bond (eg., SPY/TLT) portfolio delivered nearly 9% per year while breaking the -20% pain threshold for less than a year. Something to think about, even as we anticipate increasing rates.

The Boys of Summer

By Edward A. Studzinski

Everything is on such a clear financial basis in France. It is the simplest country to live in. No one makes things complicated by becoming your friend for any obscure reason. If you want people to like you, you have only to spend a little money.


In recent weeks, a number of articles and books have made their way into print, and they are things worth taking a gander at as one ponders where we are in the economic cycle One of my favorite blogs to read is “The Brooklyn Investor,” which can be found at which is updated intermittently. A recent piece was titled “High Fees” and posted May 19, 2017. The author discusses a friend who has a million dollars invested in Fidelity’s Magellan Fund and makes the point that, long past the days of star manager Peter Lynch, and in a far different world, does the friend really think the fund will going forward outperform the S&P 500? The friend does not of course think that that outperformance will occur, which begs the question, why given a 1% expense fee, are you willing to write a check for $10,000 a year or $100,000 over ten years? That is a lot of money, especially for a retired person or someone living on a fixed income. Of course, it is a painless payment, since it is just deducted from the account at the fund level, which is why most people tend not to think about it. But if we are in a world going forward where equities may at best as an asset class return 6% a year, a 1% fee looks very different in terms of order of magnitude.

The author argues that most mutual fund investors tend to be indifferent to the fees, given the stickiness of investing – once committed they leave things alone. The advice given is that for most of us, it would be worth the exercise to figure out what we are really paying in hidden fees on an annual basis. The best real life example for us of course would come if Professor Snowball, having shared the components of his portfolio with us last month, would give us a rough number as to how much in fees is being sucked out of his assets each year.

[Professor Snowball’s obliging report on the magnitude of sucking: in my non-retirement portfolio, which is the one to which Ed is referring, fund expenses consume roughly $591.42 each year.]

One of the hardest questions to answer of course is when the culture changes at a fund organization. Put differently, when did the fund organization you invested in shift from being an investment firm to an asset gathering firm. One clue – if the firm is not employee-owned or, is a subsidiary of a larger organization such as a bank, brokerage firm, or investment bank, odds are you are in the hands of asset gatherers (a variation on being stuck in a “Night of the Living Dead” movie).


I have been critical for a while of the generational shift going on at First Pacific Advisors, where the older partners have been retiring en masse while the mutual fund family has been remade. In recent years, the flagship fund has been FPA Crescent, which ballooned up to $20B in assets while its performance declined, not surprisingly, reflecting the surge in assets and style-drift upward into large and mega cap securities. At the same time, the firm has repositioned and changed the investment objectives for the closed-end fund Source Capital. Indeed, Source Capital (SOR) has become a balanced product, managed by the same team of equity and fixed income managers that run Crescent. There is some degree of overlap between the portfolios, although they are not identical. Morningstar indicates Source Capital has a 91 basis point expense ratio while Crescent has a 107 basis point expense ratio. However, as a closed-end fund with a fixed capital structure, Source is currently trading at an 11% discount to net asset value. So with that discount, assuming a buy and hold investor, you are covering in effect 11 years of expenses. The other advantage Source has of course, which was noted in their first quarter report for this year, was that they repurchased a small number of shares taking advantage of that discount to NAV, which is accretive. Finally, FPA Crescent at this point has $17.3B in assets while Source has $330M in assets under management. I was a fan of the old Source Capital, as it was a superb investment vehicle over the long-term, especially given the original involvement of Charlie Munger with it. I think the new Source could prove an interesting alternative to FPA Crescent and bears watching to see what the new managers do with it. Given overall market valuations as well as concerns with volatility, the fact that the portfolio managers of Source will be freed from concerns about having to raise liquidity by selling into a down market makes it an interesting choice for those worried about having to deal with portfolio drawdowns at the wrong time.


Over the last several weeks, the Wall Street Journal has been running a number of articles about quantitative investing. I recommend them to you. As a value investor who used to both use quantitative models for screening purposes and visit with quants at their conferences, I always found their thinking and inputs both useful and intriguingly divergent from fundamental analysis. (And as an aside, anytime you have an opportunity to hear Andrew Lo of MIT speak, do it). I was not so much taken by the inefficiencies they would find in each new factor model they came up with, complete with back-testing. Rather, to paraphrase Stonewall Jackson, I was more interested in where they were not going. After all, the periods of time when the inefficiencies in valuations that they had found, became increasingly compressed into smaller horizons. And when the elephants begin to dance, it is better to be far, far away. So I would look for uncorrelated pockets of outliers. The area remains a fascinating one to observe, and even more interesting to try and turn those observations into useable rule sets that can be exploited.


Planning a Rewarding Retirement, Part 5: Wealthy Living in Retirement

By Robert Cochran

The fifth in a series of articles

For me there has always been a disconnect between the concept of wealthy living and the size of a person’s bank account, retirement account, or other traditional measure of wealth. Enjoying a wealthy life should not be determined by how much money one makes or has amassed. Wealthy living is doing those things that make life inspiring, rewarding and worth living – helping young people improve reading skills, assisting at a food pantry, sorting clothing at a resource center, collecting gifts for underserved children at holiday times, volunteering at a hospital or hospice, having a part-time, fun retirement job that is totally different from a career, using expertise to help serve on the board or help raise money for an arts organization, doing the physical activity that was always put off because of career demands – the list can be endless.

One bit of advice I have received from a number of retired clients is to not make any quick decisions when it comes to time commitments. As one client recently suggested, “Treat retirement as the sabbatical you never had.” As the door to my career closes, I fully expect several others to open for consideration. For those who do not know, my undergraduate and graduate degrees are in music, so I suspect I will be spending more time performing classical music, something I deliberately limited the last 30 years.

Planning for a wealthy life can help it become a reality. A number of the truisms I discussed in the first article in this series, if followed, can make a large difference. Unfortunately, our society today is one of instant gratification, and we are bombarded with ads telling us how we need to have this gadget, that thing, or those items now.

In more than 30 years of helping clients plan for retirement, seldom was it just about money. Occasionally the planning involved helping people visualize what it was that retirement meant to them. We all know individuals who are so obsessed with their career that they have no life outside work. For these people, even discussing retirement is difficult. What will they do with all those hours? Even avid golfers soon realize at retirement they need more than a tee time to make them happy.

Another aspect of retirement I have seen more often than not is the difficulty savers have in spending money in retirement. The many years of putting money away for the future is over, there is no regular pay check, and there is concern they will somehow run out of money. Folks should know that it is relatively easy to set up a monthly, quasi-paycheck from a retirement nest egg, and it doesn’t require buying an expensive annuity product that only benefits the salesperson.

A recent study found many U.S. retirees keep saving even after they retire. The average American over 60 cuts spending 2.5% per year, or about 20% over a 10-year period, according to a University of Michigan survey. I well remember a widow client who remained in the small but well-maintained home in which she and her husband raised a family. She had a portfolio worth a million dollars, and her retirement income was more than she could spend, but she called me, asking for permission to buy a new microwave oven. Perhaps you see yourself in this description.

Even conservative lifetime-income-projections (low assumed return on investments, higher-than-average inflation, and more-than-actual spending) that show no chance of running out of money can have little impact on the savers among us. Of course there are also those who have always lived way beyond their means, and retirement for them can be disastrous. Saying they can live comfortably on 30% of what they now earn is unrealistic at best. For savers and spenders alike, it is often difficult to flip a mental switch when it comes to spending habits.

My advice to those nearing retirement is to not delay doing things on your bucket list if your finances allow it. We all know people who planned to do things someday, but the onset of health issues meant never being able to live their dreams. My older brother, who appeared to be as healthy as anyone, passed suddenly as a result of an aortic aneurysm. Several friends have passed at a relatively young age following bouts with cancer. These things speak not only to bucket lists, but also to making sure important documents are current – wills, powers of attorney, any advance directives, trusts.

Retirement today is much different than it was in my father’s day and his father’s day. For one, life expectancy when my father was born in 1906 was just above 50 years. Second, Social Security retirement benefits were less. Third, many companies offered pension plans. For his father, there really was no retirement. Having lived through the Great Depression, he worked right up until his death. As a bona fide baby-boomer, I recognize my fortune in being able to retire at a time of my choosing, of actually having a list of things I probably will be able to do, in having choices as to how I spend my days, and in being able to do those things that make life inspiring, rewarding, and worth living. I hope others will have an opportunity for their own version of wealthy living.

Funds in Registration

By David Snowball

Before fund companies are allowed to offer mutual funds to the public, they need to submit them to SEC review. The SEC has 75 days to ponder the fate of the newly-registered funds before allowing them to proceed. The registration period is also called “the quiet period” because fund companies are not allowed to talk about their funds in registration. Happily, we are! The once-steady flow of 20-30 new funds a month has dwindled to a half dozen, many of which are simply converted versions of hedge funds or separately managed accounts. The former are more common this month, with five hedge funds morphing into two new mutual funds, including an unprecedented four-for-one merger and conversion offered up by Driehaus.

CBOE Vest S&P 500® Dividend Aristocrats Target Income Fund

CBOE Vest S&P 500 Dividend Aristocrats Target Income Fund will seek generate price returns that are approximately equal to the price returns of the S&P 500 and income that is approximately 4% over the annual dividend yield of the S&P 500 . The plan is to buy 30 Dividend Aristocrat stocks and write covered calls on each of them to generate income. The fund will be managed by Karan Sood and Jonathan Hale. The initial expense ratio for “A” shares will be 1.20%, which a 5.75% sales load. The minimum initial investment will be $1,000.

Counterpoint Long-Short Equity Fund

Counterpoint Long-Short Equity Fund will seek capital appreciation and preservation. The plan is to invest, long and short, in an all-cap portfolio which might include international stocks. The portfolio is constructed using computer models and such; the adviser assures us that the “models are based on proprietary research related to economic indicators found in peer-reviewed academic journals.” No idea what that means or why it’s reassuring; the single most common complain about anomalies found in peer-reviewed publications is that they disappear before you can profit from them. The fund will be managed by Joseph Engelberg, Ph.D., Chief Research Officer of for Counterpoint, and Michael Krause. The initial expense ratio has not been disclosed. The minimum initial investment will be $5,000.

Driehaus Small Cap Growth Fund

Driehaus Small Cap Growth Fund will seek to maximize capital appreciation. The plan is to build a domestic small cap growth portfolio and to “frequently and actively trade” it. The discipline is a mash of fundamental, macro and behavioral factors. In an unprecedented development, the new fund is also the mash-up for four (4!) Dreihaus hedge funds: Driehaus Institutional Small Cap, L.P., Driehaus Small Cap Investors, L.P., Driehaus Institutional Small Cap Recovery Fund, L.P. and Driehaus Small Cap Recovery Fund, L.P. All, we’re reassured, had identical portfolios. At same point the prospectus will disclose their performance; for now, that space is blank.The fund will be managed by Jeffrey James, assisted by Michael Buck. Together they also managed the four hedge funds. The initial expense ratio has not been disclosed, though we know there will be a 2% redemption fee. The minimum initial investment will be $10,000.

Gotham Short Strategies Fund

Gotham Short Strategies Fund will seek long-term capital appreciation and to provide positive returns in down markets. The plan is to construct an all-cap US equity portfolio that typically is 100% long and 150% short.  The fund represents the conversion of a Gotham hedge fund, Gotham Short Strategies (Master), LP., though the performance data on that partnership is not yet available. The fund will be managed by Messrs. Greenblatt and Goldstein, who’ve run the L.P. since 2008. The initial expense ratio will be 1.50%. The minimum initial investment will be the usual $25,000.

T. Rowe Price International Bond Fund (USD Hedged)

T. Rowe Price International Bond Fund (USD Hedged) will seek current income and capital appreciation. The plan is to purchases bonds issued in foreign currencies, which may include bonds issued in emerging markets currencies. Forward currency exchange contracts are used to hedge the fund’s foreign currency exposure back to the U.S. dollar.  The goal is to make sure returns are driven by security selection, rather than by the vagaries of the currency market. The fund will be managed by Arif Husain and Kenneth Orchard . The guys also manage T. Rowe Price International Bond which has, to be blunt, sucked since they took over. The initial expense ratio is “TBD.” The minimum initial investment will be $2,500.

Manager changes, May 2016

By Chip

Each month, many funds undertake partial or complete changes in their management teams. Most are inconsequential, because they involve marginal changes in teams or the substitution of one inoffensive MBA-holder for another. That pretty much describes this month’s changes; 41 funds saw partial or complete changes in their management teams, none earth-shattering. 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
ADIAX Alpine Small Cap Fund Michael Smith is no longer listed as a portfolio manager for the fund. Sarah Hunt will now run the fund. 5/17
MFTAX Altegris Managed Futures Strategy Fund Robert Murphy is no longer listed as a portfolio manager for the fund. Lara Magnusen has joined Eric Bundonis, John Tobin, and Matthew Osborne on the management team. 5/17
BGRWX Barrett Growth Fund No one, but . . . Owen Gilmore has been added as a portfolio manager of the fund. He joins Robert  Milnamow and  E. Wells Beck 5/17
BATCX BMO TCH Core Plus Bond Fund Effective June 30, 2017, William Canida intends to relinquish all portfolio management duties in preparation for his retirement from Taplin, Canida & Habacht, LLC in the third quarter of 2017. Scott Kimball, Daniela Mardarovici, Frank Reda, and Janelle Woodward are continuing to manage the fund 5/17
BATIX BMO TCH Corporate Income Fund Effective June 30, 2017, William Canida intends to relinquish all portfolio management duties in preparation for his retirement from Taplin, Canida & Habacht, LLC in the third quarter of 2017. Scott Kimball, Daniela Mardarovici, Frank Reda, and Janelle Woodward are continuing to manage the fund 5/17
BAMEX BMO TCH Emerging Markets Bond Fund Effective June 30, 2017, William Canida intends to relinquish all portfolio management duties in preparation for his retirement from Taplin, Canida & Habacht, LLC in the third quarter of 2017. Scott Kimball, Daniela Mardarovici, Frank Reda, and Janelle Woodward are continuing to manage the fund 5/17
BAIIX BMO TCH Intermediate Income Fund Effective June 30, 2017, William Canida intends to relinquish all portfolio management duties in preparation for his retirement from Taplin, Canida & Habacht, LLC in the third quarter of 2017. Scott Kimball, Daniela Mardarovici, Frank Reda, and Janelle Woodward are continuing to manage the fund 5/17
BBIEX Bridge Builder International Equity Fund Ajay Sadarangani, of Manning & Napier will no longer serve as a portfolio manager to the fund. The other two dozen managers remain. 5/17
CAVAX Catholic Values Equity Fund Waddell & Reed Investment Management Co. will no longer subadvise the fund, therefore Erik Becker and Gustaf Zinn are no longer on the management team. The other thirteen managers remain. 5/17
REBAX Columbia Emerging Markets Bond Fund Henry Stipp is no longer listed as a portfolio manager for the fund. Jim Carlen is joined by Christopher Cooke on the management team. 5/17
DBISX Deutsche Global Macro Fund Mark Schumann and Sebastian Werner are no longer listed as portfolio managers for the fund. Stefan Flasdick, Henning Potstada, and Christoph-Arend Schmidt will manage the fund. 5/17
SMCAX Deutsche Mid Cap Growth Fund Rafaelina Lee is no longer listed as a portfolio manager for the fund. Joseph Axtell will be joined by Michael Sesser and Peter Barsa in managing the fund. 5/17
SZCAX Deutsche Small Cap Core Fund Rafaelina Lee is no longer listed as a portfolio manager for the fund. Joseph Axtell and Michael Sesser will continue to manage the fund. 5/17
SSDAX Deutsche Small Cap Growth Fund Rafaelina Lee is no longer listed as a portfolio manager for the fund. Joseph Axtell will be joined by Michael Sesser and Peter Barsa in managing the fund. 5/17
DTCAX Dreyfus Third Century Fund Ronald Gala, C. Wesley Boggs, and William Cazalet are no longer listed as portfolio managers for the fund. Terry Coles, John Gilmore, and Jeff Munroe are the new management team. 5/17
ETGIX Eaton Vance Greater India Fund Kevin Ohn will no longer serve as a portfolio manager for the fund. Hiren Dasani will now manage the fund. 5/17
FSAVX Fidelity Select Automotive Portfolio Annie Rosen is no longer listed as a portfolio manager for the fund. Elliot Mattingly will manage the fund. 5/17
FSHCX Fidelity Select Health Care Services Edward Yoon no longer serves as co-manager of the fund. Justin Segalini will continue to manage the fund. 5/17
FFIOX FormulaFolios US Equity Portfolio Ryan Wheless will no longer serve as a portfolio manager for the fund. Jason Wenk, Derek Prusa and Keith Springer remain managing the fund. 5/17
GSGAX Goldman Sachs Investment Grade Credit Fund Carolyn Sabat has announced that she will be retiring. Effective immediately, Ms. Sabat no longer serves as a portfolio manager for the Fund. Ben Johnson will continue to manage the fund. 5/17
CPNAX Invesco All Cap Market Neutral Fund Charles Ko will no longer serve as portfolio manager. Michael Abata, Anthony Munchak, Glen Murphy, Francis Orlando and Donna Chapman Wilson will continue to manage the fund. 5/17
GTNDX Invesco Global Low Volatility Equity Yield Fund Charles Ko will no longer serve as portfolio manager. Uwe Draeger, Jens Langewand, Michael Abata, Nils Huter, and Donna Chapman Wilson will continue to manage the fund. 5/17
JAGRZ Janus Aspen Research Portfolio Jean Barnard and Burton Wilson are no longer listed as portfolio managers for the fund. Carmel Wellso will now manage the fund. 5/17
LIMAX Lateef Fund James Tarkenton has resigned as part of what looks like a bigger shake-up. Quoc Tran continues to manage the fund. 5/17
NCGFX New Covenant Growth Fund Waddell & Reed Investment Management Co. will no longer subadvise the fund, therefore Erik Becke is no longer on the management team. The other nine managers remain. 5/17
OMSOX Oppenheimer Main Street Select Fund Effective Immediately, Benjamin Ram is no longer a portfolio manager on the fund. Joy Budzinski and Magnus Krantz will continue to manage the fund. 5/17
PMDEX PMC Diversified Equity Fund Effective May 1, 2017, Thomas White International, Ltd. has been terminated. All references to Thomas White, Jr., Wei Li, Jinwen Zhang, Douglas M. Jackman, and John Wu are removed. Epoch Investment Partners, Inc.  has been added as a sub-adviser to the fund with Lilian Quah, William Priest, Glen Petraglia, and William Booth join the other dozen managers. 5/17
PUGIX Putnam Global Utilities Fund Sheba Alexander will no longer serve as a portfolio manager for the fund. William Rives is now managing the fund. 5/17
PENNX Royce Pennsylvania Mutual Fund No one, but . . . James Stoeffel and Chris Flynn join Lauren Romeo, Jay Kaplan, and Chuck Royce. 5/17
RCSAX Russell Investments Commodity Strategies Fund Lee Kayser will no longer serve as a portfolio manager for the fund. Vic Leverett and Mark Raskopf will now manage the fund. 5/17
SEBLX Sentinel Balanced Fund Daniel Manion has retired. Jason Doiron will continue to manage the fund 5/17
SENCX Sentinel Common Stock Fund Daniel Manion has retired. Hilary Roper will continue to manage the fund 5/17
ATTRX Transamerica Dynamic Allocation Fund No one, but . . . Jim Huynh joins Thomas Picciochi, Ellen Tesler, Adam Petryk, S. Kenneth Leech, Prashant Chandran on the management team. 5/17
UGEIX USAA Global Equity Income Fund Stephan Klaffke will no longer serve as a portfolio manager for the fund. Dan Denbow and John Toohey will continue to manage the fund. 5/17
USIFX  USAA International Fund Marcus Smith has retired. Filipe Benzinho, Susanne Willumsen, James Shakin, Craig Scholl, Paul Moghtader, Ciprian Marin, Taras Ivanenko, Andrew Corry, and Daniel Ling will continue to manage the fund. 5/17
SSVSX Victory Special Value Fund The entire team of Thomas Uutala, Martin Shagrin, Carolyn Rains, Paul Danes, and Lawrence Babin will no longer serve as a portfolio manager for the fund. Michael Gura will now manage the fund. 5/17
STYAX Wells Fargo Core Plus Bond Fund Ashok Bhatia will no longer serve as a portfolio manager for the fund. Michael Schueller joins Thomas Price, Janet Rilling, Noah Wise and Christopher Kauffman in managing the fund. 5/17
SGVDX Wells Fargo Government Securities Fund Ashok Bhatia will no longer serve as a portfolio manager for the fund. Michal Stanczyk joins Christopher Kauffman and Jay Mueller in managing the fund. 5/17
WSIAX Wells Fargo Strategic Income Fund Ashok Bhatia will no longer serve as a portfolio manager for the fund. David Germany, Niklas Nordenfelt, Anthony Norris, Thomas Price, Scott Smikth, Alex Perrin, and Noah Wise will continue to manage the fund. 5/17
WBSIX William Blair Small Cap Growth Karl Brewer is no longer listed as a portfolio manager for the fund. Michael Balkin and Ward Sexton will continue to manage the fund. 5/17
WSMDX William Blair Small-Mid Cap Growth Karl Brewer is no longer listed as a portfolio manager for the fund. Robert Lanphier and Daniel Crowe will continue to manage the fund. 5/17

Briefly noted

By David Snowball

It’s been an unusually busy month in the industry, with nearly three dozen funds liquidated or slated for liquidation, as well as a surprising number of open funds closing to new investors and closed funds opening to them. And, as ever, the “smoke and marketing” crowd has re-branded a bunch of funds; most, not surprisingly, aren’t very good.


Fritz Kaegi, formerly co-CIO at Columbia Acorn and manager of Columbia Acorn Emerging Markets (CEFXZ) and, more briefly, Columbia Acorn (ACRNX), has left Columbia. In a gesture of civic responsibility, the Chicago native is “exploring” a run for the post of Cook County assessor. We’re hoping to chat with Fritz (whose exploratory committee, Friends of Fritz, might be tapping into the pool of hard-core Fritz Mondale fans, an octogenarian dragon waiting to be awakened) in the month ahead.

Nadine Youssef, formerly a director of media relations (and continuingly a very good person to work with) has left Morningstar. At last check, she’s still searching for new opportunities.

Lebenthal Lisanti Capital Growth, LLC, advisor to Lebenthal Lisanti Small Cap Growth Fund (ASCGX), is undergoing a change of ownership. It looks like Lebenthal became a 51% owner instead of a 49% owner. It’s worth noting primarily because the “Lisanti” of “Lebenthal Lisanti,” is Mary Lisanti, a particularly distinguished SCG manager.

It’s been a year since the housecleaning at Sequoia (SEQUX). Mr. Goldfarb left in late March 2016 and four co-managers were added in mid-May. David Poppe, a prime architect of the disastrous decision to place a third of the fund’s assets in Valeant Pharmaceuticals, remains in charge. So far, the changes haven’t borne fruit: the fund has a healthy absolute return of 13.6% over the past 12 months but trails 88% of its peers. It also trails the returns of their single largest holding, Berkshire Hathaway. That’s partly attributable to an above-average cash stake of 9% and to one large, underperforming position (O’Reilly Auto Parts). Morningstar, which maintained the fund’s Gold rating through much of the disaster and eventually re-rated it as Bronze, continues to be supportive: better risk controls are in place and “the team, led by David Poppe, remains exceptional … As dark as things were over the past 18 months, this fund looks well-positioned for the future.”

Briefly Noted . . .


Around June 28, 2017, Class A Shares of the 1789 Growth and Income Fund (PSEAX) will be converted into Class P Shares; in consequence, the expense ratio will fall from 1.33% to 1.08%.  

Effective on or about June 1, 2017, the management fee for AMG Managers Cadence Emerging Companies Fund (MECAX) was reduced from 1.25% to 0.69% and the contractual expense limitation amount was reduced from 1.42% to 0.89%. It’s a really solid microcap growth fund with just $68 million in assets. I’m hopeful that the lower expense ratio earns it a bit more attention.

Effective as of May 9, 2017, Causeway Capital has agreed to revise its expense limit agreement on the Causeway Global Absolute Return Fund (CGAVX) to reduce the fund’s expense ratio by 0.40 percentage points. It’s a high volatility market neutral strategy that has handily beaten its woebegone peer group in the long run, but has been subject to sharp swings. It’s down more than 10% year-to-date.

Effective May 24, 2017, the JPMorgan U.S. Large Cap Core Plus Fund (JLCAX) “will no longer be subject to a limited offering.” That’s their coy way of saying it’s open to new investors. High risk, high return, large asset base. Meh.

Effective May 6, 2017, the minimum initial investment amount for the Institutional Class of Nuance Concentrated Value Long-Short Fund (NCLSX) was reduced from $1,000,000 to $10,000.

Palmer Square Ultra-Short Duration Investment Grade Fund (PSDSX) reduced its investment minimum, though more modestly, from $1,000,000 to $250,000. Palmer Square Opportunistic Income Fund (PSOIX) dropped at the same time, from $5,000,000 to $250,000.

Wasatch Emerging Small Countries Fund (WAMFX) has reopened after three years. In the year since Laura Geritz’s departure as lead manager, the fund has trailed 99% of its peers, which likely explains both the re-opening and our suggestion that you consider Ms. Geritz’s new Rondure New World Fund (RNWOX) instead.

CLOSINGS (and related inconveniences)

AQR is closing two more funds at month’s end. Here’s their complete roster of closed funds and the dates of their closing.  

Closed Fund Closing Date
AQR Diversified Arbitrage Fund June 29, 2012
AQR Multi-Strategy Alternative Fund September 30, 2013
AQR Style Premia Alternative Fund March 31, 2016
AQR Style Premia Alternative LV Fund March 31, 2016
AQR Long-Short Equity Fund June 30, 2017
AQR Equity Market Neutral Fund June 30, 2017

Invesco Developing Markets Fund (GTDDX) will close to new investors on June 8, 2017. Interesting fund: about 20% cash, $3.1 billion in AUM, and a Morningstar analyst rating of Silver. Given that it’s primarily a large-cap fund, capacity shouldn’t be greatly strained right now. Given the vagaries of standard reporting periods (the 1-, 3-, 5-year windows which are arbitrary and often misleading), the fund looks unimpressive. Viewed from the more meaningful perspective of the entire market cycle, it’s clearly on the A-list.

Longleaf Partners Fund (LLPFX) will close to new investors on June 9, 2017, the fourth such closure in the fund’s history. The other three were in 1995, 1999 and 2004. Morningstar’s Russ Kinnel notes that while this is “kind of” a sign of an over-valued market, Longleaf’s past closures have not consistently occurred near market tops. Mostly Longleaf, already at 24% cash, can’t find new investment opportunities that would warrant keeping the fund open. They expect that “patience and discipline” now will “pay off handsomely” in the future. In the interim, they’re finding lots of international investment opportunities so their International and Global funds remain open.

Effective as of the close of business on June 15, 2017, the Meridian Growth Fund (MRAGX) “will no longer accept offers to purchase” Investor Class, Class A and Class C shares of the Fund, though the Institutional share class will remain open for now.

Vanguard Dividend Growth Fund (VDIGX) has closed to all new investors “with the exception of investors who are added and invest in the Fund only through technology-driven model portfolios” and some retirement plans.

Effective July 31, 2017, Wells Fargo Small Company Growth Fund (WFSAX) will be closed to most new investors.


Effective on May 24, 2017, CG Core Balanced Fund became CG Core Total Return Fund (CGBNX), the greatest significance of which is that it used to hold at least 25% bonds. The new fund can hold as little as 10% in fixed income.

Effective May 8, 2017, Deutsche Global Equity Fund changed its investment strategy, management team and name; it’s now Deutsche Global Macro Fund (DBISX). While the fund hasn’t been horrible in the past five years, it’s certainly been no better than mediocre so the changes should be welcomed.

Gavekal KL Allocation Fund (GAVAX/GAVIX) has changed its name to KL Allocation Fund. The “KL” stands for “Knowledge Leaders.”

In a move with limited (little, no apparent) significance for investors Horizon Spin-off and Corporate Restructuring Fund (LSHAX) is being restructured so that its sub-adviser becomes its adviser. In the 10 years of the management team’s tenure, the fund has trailed 98% of its peers. For reasons unknown, neither manager nor any trustee has invested in the fund.

In July, shareholders will vote on a plan to reorganize Nomura High Yield Fund (NPHIX) into a new American Century fund, American Century High Income Fund. Under this arrangement, Nomura will go from advising to sub-advising (i.e., managing) the new fund. If shareholders approve the reorganization “and other closing conditions are met,” the reorganization will close around October 2, 2017.

On June 30, 2017, the name and principal investment strategies of the Oak Ridge Large Cap Growth Fund (ORILX) will be changed. The name will be Oak Ridge Multi Strategy Fund and the game will be investing in the four other Oak Ridge funds. 

Effective July 18, 2017, Oppenheimer Main Street Select Fund (OMSOX) becomes Oppenheimer Main Street All Cap Fund.

Royce Heritage Fund has been renamed Royce Small/Mid-Cap Premier Fund (RGFAX) which means it is now required to have 80% of its net assets invested in small- and mid-cap stocks. Hmmm … the fund already has 95% in small- and mid-cap stocks, and has trailed 92% of its Morningstar mid-cap blend peers over the past five years, so the benefit of the change isn’t immediately clear. Steven McBoyle remains as the Fund’s portfolio manager.

On or around July 31, 2017, Westwood Strategic Global Convertibles Fund (WSGCX) will become Westwood Strategic Convertibles Fund; the Fund’s principal investment strategies will be revised to eliminate the “at least 40% outside the U.S.” proviso, in anticipation of which the managers will be selling some of their non-U.S. holdings.


AMG Managers Cadence Capital Appreciation Fund (MPAFX) will be merged into AMG Renaissance Large Cap Growth Fund (MRTLX) on July 30, 2017. In justifying the change, AMG reassures investors that the funds … uhhh, both have AMG in their names and have the same trustees. The funds have a correlation of about 0.94 with Renaissance having a lower market cap and a less pronounced growth tilt.

BlackRock Advantage International Fund (formerly BDIIX) liquidated, on four days’ notice, on May 5, 2017.

Bradesco Latin American Equity Fund (BDERX) and Bradesco Latin American Hard Currency Bond Fund (BHCRX) will both liquidate on or about June 14, 2017.

Destra Dividend Total Return Fund (DHDAX) closed on May 9, 2017 and liquidated on May 31, 2017.

Deutsche Global Inflation Fund (TIPAX) will liquidate on November 3, 2017.

Deutsche Select Alternative Allocation Fund (SELAX) and Deutsche Gold & Precious Metals Fund (SGDAX) will merge into Deutsche Real Assets Fund (AAAAX) on or about October 30, 2017.

Dreyfus Opportunistic U.S. Stock Fund (DOSAX) will liquidate on July 26, 2017 but remains open to new accounts through June 16, 2017. On face, that strikes me as stupid (“let’s have you open an account in a stock fund that’s transitioning to cash and will liquidate in five weeks!”) but I’m sure there must be some sensible “relationship with advisors” sort of logic behind it.

E.I.I. Realty Securities Fund (EIIIX), E.I.I. International Property Fund (EIIPX) and E.I.I. Global Property Fund (EIIGX) will be liquidated on or about June 9, 2017.

Federated Emerging Markets Equity Fund (FGLEX) will be liquidated on or about July 7, 2017. Not at all a bad fund, in an index-hugging kind of way.

Federated InterContinental Fund (RIMAX) will merge into Federated International Leaders Fund (FGFAX) on or about August 25, 2017.

Federated Managed Volatility Fund (FVOAX) will be liquidated on or about June 23, 2017.

The investment adviser for the GKE Asian Opportunities Fund (GKEAX) has determined to close and liquidate the fund on June 26, 2017.

Goldman Sachs Focused Growth Fund (GFGAX) will merge into the Goldman Sachs Concentrated Growth Fund (GCGAX) on July 28, 2017. As it turns out, Focused is noticeably more focused than Concentrated is concentrated, by about two to one.

The Hartford Unconstrained Bond Fund (HTIAX) will merge into Hartford Strategic Income Fund (HSNAX) around September 25, 2017.

Monte Chesapeake Macro Strategies Fund (MHBAX) has terminated the public offering of its shares and will discontinue its operations effective June 26, 2017.

Northern Large Cap Equity Fund (NOGEX) melts into Northern Large Cap Core Fund (NOLCX) around July 21, 2017

Northern Technology Fund (NTCHX), on the other hand, simply melts. The fund will be liquidated one week later, July 28, 2017.

Nuveen NWQ Japan Fund (NTJAX) will be liquidated after the close of business on July 24, 2017.

Oakseed Opportunity Fund (SEEDX/SEDEX) has closed and will liquidate on June 30, 2017.

RiverPark Structural Alpha Fund (RSAFX) will be liquidated on or about June 30, 2017.

Upon the recommendation of Scout Investments, Inc., the Scout Funds Board of Trustees authorized liquidation of the Scout Emerging Markets Fund (SEMFX), Scout Global Equity Fund (SCGLX) and Scout Equity Opportunity Fund (SEOFX) on or about June 29, 2017. The first two funds are perfectly respectable and the last, SEOFX, is outstanding. Between them, they have under $50 million in assets. The manager, Brant Olson, had a similarly strong record during his three year run as manager of Aquila Three Peaks Opportunity Growth (ATGAX). If I were in the mutual fund acquisition (or talent acquisition) business, I’d be intrigued.

State Street Institutional U.S. Large-Cap Core Equity Fund (SILCX) will liquidate on June 30, 2017.

In a not-quite death, T. Rowe Price decided to pull the plug on a fund they’re never launched. Effective May, 19, 2017, the T. Rowe Price Tax-Free Ultra Short-Term Bond Fund (Fund) will be terminated.

Effective May 10, 2017, the Virtus Strategic Income Fund and the Virtus Emerging Markets Debt Fund were liquidated.

Weitz Research Fund (WRESX) will cease operations and be liquidated on or about June 30, 2017.