Yearly Archives: 2017

August 1, 2017

By David Snowball

Dear friends,

For those of us who teach, August is a bittersweet month. Each year we approach summer like a gaggle of penitent drunks. This time, we promise, it’ll be different. We’ll do better. Trust us: we will revise all of our courses for fall. We will catch up on that mountain of books heaped beside the chair. We will finish that book manuscript (Miscommunication in the Workplace, 2d ed., in my case.). On top of which, we’ll see our children without the use of small electronic devices, we’ll be out there running at 6:00 each morning, we’ll get our roughage and drop 10 pounds.

Then it’s August, the resumption of school is just a couple weeks off and unfulfilled promises litter the floor.

And, it’s stinkin’ hot out. My best gesture toward weight loss this summer was a recent day in the garden, rooting out rose bushes that had gone feral then tilling up the soil. By the end of that adventure, I’d lost nearly three pounds and I was struggling to recall whether such 90/90 days (that is, 90 degrees and 90% relative humidity) were around when I was young.

The answer, as it turns out, is “no.” Summers are getting more oppressive, with a discouraging speed, as the planet heats. Nadja Popovich and Adam Pearce, reporters for the New York Times, wrote a sober piece entitled It’s Not Your Imagination. Summers Are Getting Hotter (07/27/2017). It contains a fascinating graphic showing the changing distribution of summer temperatures from the years of my childhood to now. While “extremely hot” days were once a rarity and “hot” ones were a minority, “hot” is now our normal state and “extremely hot” is uncomfortably common.

I’ve taken a couple steps in response, small though they are. The first was to join the Environmental Defense Fund, whose mission includes addressing climate change. Why EDF? Two reasons. It was well-rated by Charity Navigator, which assesses larger charities on the degree to which they use their resources efficiently and effectively. The fact that some rich donor was offering a 2:1 match for contributions through the end of August, helped. And EDF is reasonably compatible with my political philosophy. I’m a reasonably conservative guy who’d much rather encourage progress through conversation and cooperation with governments and corporations than engaging in histrionics and lawsuits. EDF works hard to create (but not get financial gain from) corporate partnerships, to tie their initiatives to good science and to engage groups with different political perspectives. So I’ve set up a monthly contribution for them in hopes that my son’s summers will be just a bit better for it.

The second was to make a carbon offset payment to the Carbon Fund, whose motto is “reduce what you can, offset the rest.” They’re small, but seem responsible, sensible and well-respected. My contribution, admittedly a form of wergild, will help support reforestation and methane capture projects, which at least helps offset some of the pollution that my small household produces.

And, as always, the Observer is hosted on energy-efficient servers which are (mostly) powered by renewable sources.

This is part of the same strategy that we’ve advocated all along: do not obsess about the theatrics in Washington and don’t hide in a comfortable bubble of like-minded conservatives or liberals. Take responsibility, actively support what you approve of, actively oppose what you disapprove of and respect other folks who are trying to do the same.

Everything you ever wanted to know about MFO Premium *

(*But were afraid to ask)

You’re curious.

You know you are.

And now you can find out. Live. On camera.

 

 

Mutual Fund Observer exists to help independent investors make better, more thoughtful and better informed decisions about their finances. While we believe that many of the finest opportunities lie in the realm of small, independent funds, we have no financial relationship with them and accept neither underwriting nor advertising.

MFO Premium is where all of our data and screeners lie. Originally it was just used internally as we vetted funds and screened for interesting outliers. It’s distinguished from most such operations in two important ways:

  1. It allows users to be highly risk-aware. While many sites use standard deviation, a measure of day-to-day volatility, to tell you all you need to know about risk. MFO Premium instead gives you four different risk-return metrics (Sharpe, Sortino, Martin and Ulcer) for both funds and benchmarks, calculated for up to 20 distinct time periods. It also provides measures of “normal” riskiness (the downside deviation) and measures for periods of extreme stress (maximum drawdowns, recovery periods, bear market month deviations). That’s complemented by custom correlation matrixes, which allow you to find out whether any particular fund is pulling its weight by adding diversification to offset the risks it carries.
  2. It’s highly responsive to individual needs. Charles Boccadoro, our colleague and major domo of MFO Premium, is in almost constant conversation with the site’s users. Those interactions lead us to almost monthly refinements in response to what folks most need.

MFO Premium has two missions. One is to help investors and advisors make much better informed decisions. The other is to provide an additional incentive for readers to provide (tax deductible!) financial support for Mutual Fund Observer. For a contribution of $100 or more, we’re happy to share a year’s access to MFO Premium with folks.

Webinars: August 16 and August 30

We will provide a live, interactive walk through over the MFO Premium screeners and analytics.

Our webinar will address:

  • Origin and motivation behind  MFO’s premium site search tools
  • Underlying database and top-level implementation methodology
  • Overview of various tools, including Dashboard of Profiled Funds, Fund Family Scorecard, Three Alarm Funds, Great Owls
  • On-line demos of Multi Search … the site’s main tool, including pre-set screens, multi-parameter searches, evaluation period selection
  • Quick review of definitions reference, limitations, and on-going improvements

Throughout our intention will be to highlight unique insights those tools provide individual investors and financial advisers … and the attendant benefits to themselves and their clients.

The webinars are free, though space is limited. At Chip’s recommendation, we’ll be using Zoom software which will allow us to be seen and to share our screen, as well as to see you (or not, at your discretion) and record the interaction. You will be provided instructions for accessing the webinar, which requires installation of a small plug-in.

Webinar #1 is Wednesday, August 16, at 3:00 p.m. Eastern Daylight Time (2:00 CDT, 1:00 MDT, noon PDT). Webinar #2 is Wednesday, August 30, at 11 a.m. Eastern Daylight Time (10:00 CDT, 9:00 MDT, 8:00 PDT).

If you would like to participate, contact us with your preferred date and we’ll arrange access.

Meet in person: September 6-8

Charles will be covering the Morningstar ETF Conference in Chicago for us. He’s hopeful of having coffee and conversation, about MFO and MFO Premium, with readers at a mutually agreeable time. If you can’t make the webinar (or just aren’t that into tech) but will be at Morningstar, please contact us with word of your interest and your plans.

The “Are You Smarter than a 5th Grader?” challenge

I am perfectly sanguine about admitting that our marketing skills are roughly equivalent to a 5th grader’s. (Okay, not those freakish 5th graders on YouTube. They’re scary. We mean the normal ones.)

If you’ve got a background in marketing and think you have a strategy or scheme, plan or ploy, trick or tactic, insight or initiative which might help the Observer reach more folks so that we can better fulfill our mission, we’d be delighted to hear from you, work with you and acknowledge you for it. We’re particularly hopeful of reaching the sorts of investors who are generally outsiders: younger folks, those with very limited resources, and others.

If you’re indeed smarter than a 5th grade marketer, contact David and we’ll talk!

Thanks.

Speaking of thanks …

As always, we’re thankful for your continued support and goodwill. Greg, Brian, Jonathan and Deb, we’re grateful for your ongoing subscriptions. And, many thanks this month to Sunil and Joseph for your generous contributions.

 

With wishes for a warm and relaxing end of summer,

Morningstar’s universe

By David Snowball

We regularly lament the fact that several hundred consistently four- and five-star funds have lost Morningstar analyst coverage over the years. Our almost-monthly feature “Left Behind by Morningstar” profiles a fund that once received analyst coverage but has now been ignored for five or more years. This month we profile Evermore Global Value (EVGBX / EVGIX), rated four-star for the past three years, past five years and overall. It’s a Euro-centric special situations fund run by David Marcus, whose roots are in the Mutual Series funds from the days of Michael Price’s reign. It’s both good and a good diversifier.

At the same time, we want to celebrate funds that have regained coverage. At the end of June, LSV Value Equity (LAEVX/LSVEX) received its first new analyst report since 2011. The LSV of LSV Value are the initials of three academics whose work on behavioral finance underlies the fund’s strategy: Josef Lakonishok of the University of Illinois, Andrei Schleifer of Harvard University, and Robert Vishny of the University of Chicago. Of those, only Dr. Lakonishok is actively engaged with the fund. At base, they discovered that most investors did predictably stupid things including getting excited about “story stocks” and shunning boring ones. It’s parlayed a combination of quantitative and fundamental screens into a series of consistently top-tier returns and a sizable lead over the S&P 500.

The Investor shares have a $1,000 minimum.

Morningstar also made some changes to their Prospects list, their roster of promising but not ready for prime time funds. They’ve added six funds to the list:

  • Deutsche X-trackers USD High Yield Corporate Bond ETF (HYLB)
  • Fidelity Growth Strategies (FDEGX), a $2.1 billion fund that’s been around since 1990. For the life of me I don’t see the attraction of the fund, but I presume that the Morningstar analysts see some movement under the surface that I’m missing.
  • GMO SGM Major Markets (GSMFX), a $1.5 billion fund with a $10 million minimum.
  • Oppenheimer Large Cap Revenue ETF (RWL), which weights the companies in the S&P 500 based on revenues rather than market caps.
  • T. Rowe Price QM U.S. Small & Mid-Cap Core Equity (PRDSX), a $4.4 billion quant fund that’s been around since 1997. The fund size, and the total assets that the management team has to manage across all their charges, has grown dramatically which worries us rather more than it worries Morningstar.
  • Western Asset Corporate Bond (SIGAX), a small, 35-year-old fund with markedly stronger performance over the past five years.

At the same time, the guys downgraded two funds; that is, they’re no longer Prospective: CRA Qualified Investment (CRATX) and Perkins International Value (JIFIX), now called Janus Henderson International Value. I suspect that the hit on International Value is that it’s not gathering enough assets ($52 million) to be worth following; the fund has earned four stars, which is rather more than most of the funds just added to the list can say. The CRA fund is a sort of socially-responsible bond fund, supporting projects qualified under the Community Redevelopment Act. It’s got about $2 billion and a three-star rating.

In an entirely admirable development, on July 24, 2017, Morningstar took a 40% equity stake in Sustainalytics, a firm that provides environmental, social, and governance (ESG) research and ratings. They’re the driver behind Morningstar’s sustainability grades for mutual funds, which you might notice on a fund’s profile page:

I’m not entirely sure what outcomes this will translate into, mostly because Morningstar CEO, Kunal Kapoor, talks like a CEO. After a short invocation of momentum and leverage and synergies, he concludes: “we look forward to continuing to meet the increasingly sophisticated ESG needs and requirements of our clients through integrated solutions and innovative research.”

For Whom Does the Bell Toll?

By Edward A. Studzinski

In the dawn, although I know

It will grow dark again,

How I hate the coming day.

                        Fujiwara No Michinobu

Buffett’s irreproducible edge

First, some addenda to last month’s comments, as there were a number of readers interested in private equity. One reader, whom I happened to agree with, identified Berkshire Hathaway as a private equity proxy, given that (a) Buffett is dealing with permanent capital with a true long-term time horizon, and (b) he has been clearly disciplined and dedicated to going where opportunities surface that others are inclined or required to ignore. It has actually been quite instructive to watch him complement his major holdings in Berkshire’s insurance businesses as well as the equity investments that he owned pieces of, such as American Express and Coca Cola, with the wholesale acquisition of an entire portfolio of what would have been smaller capitalization businesses, both public and private. His modus operandi was to acquire the entire company at a fair price of what he considered good businesses, leaving the managements in place. He was prepared to supply them with capital when appropriate. This was followed by his acquisition of entire large companies, such as Burlington Northern or Pacificorp when the opportunity was presented at a price that would meet a target hurdle rate on invested capital over time, and were in basically oligopoly situations.

I remember this well as a number of the smaller companies were ideas that had been put forward or owned as appropriate investments for some of the domestic funds we were running that were rejected or sold because they “did not move the needle.” This was the curse, even fifteen years ago, of sustained asset inflows, which made it difficult to purchase and own something like Dairy Queen, which was public at the time. This now plays out as style drift, as “small capitalization” now encompasses ideas up to $2B in market capitalization. “Mid-cap” arguably subsumes ideas all the way up to $12B in market capitalization. We note that few value funds other than Longleaf Partners own Scripps Network International but almost all large cap value funds have positions in Alphabet, Bank America, or Wells Fargo. In many instances there is a commonality of ownership, not just among them, but with some of the larger growth players as well (or GARP – Growth at a Reasonable Price players).

Now the larger fund managers cannot duplicate Buffett, as he has permanent capital to invest and they do not. And the counter-argument to investing in Berkshire at this point is that Buffett is in his eighties, so how much longer can things move as they have. There are however other private equity like businesses that are doing the same thing, albeit not quite yet with the history. They are all insurance holding companies such as Alleghany and Markel, who have the same luxury of permanent capital to invest, the float from their investment portfolios that they hold as a backstop to the claims-paying requirements of their businesses. And while they do not have Warren Buffett doing the investing, they have been managing to generate eight to ten per cent average compounded returns on tangible equity (book value) over time.

I will leave you in this section with these thoughts. Yes, there is only one Warren Buffett. And there are a number of mutual funds out there that have claimed to invest similarly (the Buffett clones) over the years. They use a method of deconstruction and reverse engineering, although it would appear they don’t invest the same way that he does. They are always a step or two behind in the evolution of the thought process. They also do not have a partner like Charlie Munger. Those who doubt his impact or acumen over the years should go dig out the annual reports and returns from The New America Fund, a closed-end fund run by Munger years ago. (Here’s a taste of what you’ll find.) Alternatively, they can read the annual reports from WESCO, before Berkshire bought it all in. A close friend who is a long-time observer of Mr. Buffett pointed out to me that it was a huge statement on his part when he spent the time at this year’s meeting that he did talking about Jeff Bezos and Amazon. That he would admit that he made a major mistake in not investing in Amazon is a major admission. So the evolution continues.

Drawdowns Ahoy?

Two cautionary pieces were published recently. The first was Advisor Perspectives an interview with Bob Rodriguez, in a piece entitled “We are witnessing the development of a perfect storm” (6/27/2017). Mr. Rodriguez retired from First Pacific Advisors at the end of 2016. He makes a compelling case that the actions of the Federal Reserve in keeping interest rates close to zero for so long have disrupted the normal functioning of the capital markets. Those markets have been distorted to the point that the only hope an active manager has of outperforming is by being invested in absolutely the right areas. If you were an absolute value manager, you would hold greater cash levels as the things you could or would invest in became fewer and fewer. Performance would lag and you would either be fired by your clients or retire.

Rodriguez further makes the point that active managers have not really added value to the process over the last twenty years. In the dot-com craze of 2000, active growth managers piled into the same names until they imploded, regardless of how speculative those investments were. Likewise, prior to the 2007-2009 financial crisis, many value-oriented managers held the same financial services investments such as large banks (Washington Mutual and their ilk) which would be destroyed as a result of the excesses in the credit markets. Both styles, putting short-term job security in front of their investors, did not cover themselves in glory. Major amounts of investor capital were destroyed. The unintended consequence was that lower-fee index funds and exchange-traded vehicles started to catch on, since the active managers did not identify the dangers while charging higher fees.

What is new says Rodriguez, is that those index funds and exchange-traded products will be destabilizing influences when the equity markets stop going up. Those products generally hold little in the way of cash reserves, and when the turn comes, they will have to sell to meet redemptions. The only question becomes, “Sell to whom?” I won’t give away the rest of the interview, which you can find on line. However Rodriguez says that he is carrying close to 65% liquidity in his personal investments, mostly in Treasury-like securities, with nothing beyond a three-year maturity.

The other piece in a similar vein but considerably longer, is from Howard Marks of Oaktree Capital, published on 7/26/2017 and entitled “There They Go Again …. Again.” Marks says that the reason not to invest now, the negative catalyst, is for most investors not clear. What could cause the markets to crater? Given low returns on cash, people are more worried about missing out low but highly risky returns than they are worried about the permanent loss of capital. There is a willingness to compromise disciplines and not ask questions – “Everyone is doing it, so it must be okay” that would not pass the sniff test if investors were prodding more.

Among the signals that Marks points to are an S&P 500 selling at 25 times trailing-twelve month earnings versus the long-term median of 15; the Shiller Cyclically Adjusted PE Ratio at 30 against a historic median of 16; earnings inflated by cost-cutting and share repurchase, among other things, making the already high valuations understated relative to norms; and the “Buffett Yardstick” of total stock market capitalization as a percentage of GDP at an all-time high in June of 145.

Marks then spends a lot of time anecdotally fleshing out his concerns, pointing out (as did Rodriguez) the importance of investors having a knowledge and awareness of history. He offers a checklist for knowing where we are in a market cycle. His premise here is that investors make the greatest and safest returns on their investment when they are prepared to do what others do not want to do. He posits a situation, analogous to what we see today, where too much money with too little fear is chasing risky investments since the alternative is unappealing (and will not sound good at the cocktail party).

Do As I Say, Not …..

One of my summer projects has been looking at the Statements of Additional Information filed by fund companies, which most have posted on their websites. Among other things, you get to see how much money fund managers have invested in the funds they are managing. Or as is more often the case than not, how much money they have not invested in the funds they are running. Given the profitability of the mutual fund business it should not be that difficult for a fund manager to have a seven figure investment in his or her fund. Unfortunately, that is the highest cutoff the SEC has allowed for, so you don’t get to see how much more than a million they have invested. Now I recognize that for most investors in funds, a million dollars starts to be real money. Unfortunately, over the last ten years that has proven in many instances to not be the case in the fund business.

Posit an international fund manager who is running some $40B of assets. Annual compensation has been in excess of $30M a year for more than ten years and that $30M number is typical of the shell game that is often played. Fund trustees will be told that the manager’s annual compensation is actually only $2M a year, and that the other moneys reflect payment for the manager’s ownership interest in the organization. But if the organization was sold to a publicly-traded asset gatherer, either domestic or international, how does that work? Are there really any checks and balances in place, or is it like the basketball team where one player is the franchise?

I noted that in the case of Vanguard, many of its international managers, from firms based in London, often had no moneys invested in the product they were managing. When I raised that question with a friend in Edinburgh, he said that in the UK, many of the managers would invest their own funds in the similar strategy product in the UK, recognizing that different tax regimes often made cross-border investing difficult in commingled products. So if you are wondering why the Baillie Gifford managers of Vanguard International Growth Fund (VWIGX, the fund has 30.8% total return year to date and charges 46 basis point expense ratio) no moneys invested in that product, take a look at the similar strategy product run by them in the UK, the Scottish Mortgage Investment Trust (a UK closed-end fund), where they have millions of pounds sterling invested. As an aside, a Morningstar review of Scottish Mortgage will allow you to pull up the annual and semi-annual reports for that investment trust. I commend them to you for a discussion of the strategy, its implementation, and the results obtained. Although I disagree with the investment style, I commend the efforts at communication with shareholders.

Which brings me to a final thought here – we need to modify the rules for reflecting manager ownership. Another band of investment ranges needs to be added to the SAI, either $1M-$5M or $1M- $10M. I say that because I am aware of a number of individuals who could easily meet that higher level of disclosure but instead choose to diversify away from their own organization. Alternatively, the Longleaf Partners rule of allowing no other investments outside of the group’s own funds would go quite far in aligning interests.

I recently asked a senior individual at an investment firm how much time he ascribed, being in his forties, to the longevity of the golden goose, namely his firm’s mutual fund business before fees collapsed and expenses were reined in wholesale. My guess was three years. His was on the order of perhaps ten. The truth is most likely in between. He then made two telling comments which I think fit in with both the Marks and Rodriguez cautionary tales. With his personal moneys beyond the required investments in firm products, he was deploying funds into uncorrelated, non-equity or fixed-income assets that would produce income and tax advantages. Namely, he was following what would have been the old immigrant strategy of buying a brownstone two or three flat in a changing neighborhood, fixing it up, renting out the units, and getting both capital appreciation and sheltered income. His other comment was more telling – he felt sorry for the young men and women in their thirties and early forties who had come into the business. They had been lured into the investment business out of business school expecting the path to fame and fortune, or at least fortune, to be a relatively certain one. Sadly, they are perhaps like that last group of fifty-odd thousand troops at Dunkirk, hoping the shrinking defense perimeter will hold and that another boat will come for them.

Elevator Talk: Matthias Knerr and Andrew Manton, Shelton International Select Equity (SISLX/SISEX)

By David Snowball

Since the number of funds we can cover in-depth is smaller than the number of funds worthy of in-depth coverage, we’ve decided to offer one or two managers each month the opportunity to make a 200 word pitch to you. That’s about the number of words a slightly-manic elevator companion could share in a minute and a half. In each case, I’ve promised to offer a quick capsule of the fund and a link back to the fund’s site. Other than that, they’ve got 200 words and precisely as much of your time and attention as you’re willing to share. These aren’t endorsements; they’re opportunities to learn more.

The first to do it was Harry Houdini, on January 7th, 1918. Criss Angel upped the ante with a herd in 2013. Penn & Teller gave it a comic twist in 2015 with their “Vanishing African Spotted Pygmy Elephant Act” (spoiler alert: “Elsie” was a cow with a taped-on trunk).

Matthias Knerr and Andrew Manton

Matthias Knerr and Andrew Manton

The old trick is making an elephant (mostly gray, occasionally spotted) disappear, but no one has managed the disappearance of a white elephant as quickly and as simply as Messrs. Knerr and Manton.

Knerr and Manton manage Shelton International Select Equity, a fund that began life as WHV International Equity WHVAX. From inception in 2008 – February 2016, the fund was managed by Richard K. Hirayama on behalf of WHV Investments. Founded in San Francisco in 1937, shortly after the launch of Dodge & Cox in the same city, WHV was one of the best known investment managers on the West Coast. In the present century, Mr. Hirayama was their best-known manager and his international equity strategy, which once held over $10 billion, 90% of all the firm’s assets. Mr. Hirayama made a substantial and ill-timed (some would say “principled”) bet on the proposition that buoyant global growth would cause the fund’s stake in energy, materials and industrials to soar.

It didn’t.

Investors, in particular large institutional ones, lost patience and fled in droves. Assets fell to $6 billion in mid-2015, $230 million by its October 2015 annual report and $52 million by April 2016.

At that point, things began to change. In February 2016, Mr. Hirayama retired and withdrew from investment management, to be succeeded by Knerr, Manton and a now-departed associate, operating as Rivington Investments. On July 18, 2016, Shelton Capital succeeded WHV as the investment adviser to the Fund and the Rivington team became a Shelton team. On August 12, 2016, the fund was renamed Shelton International Select Equity Fund but retained its original ticker symbols. On August 1, 2017, the fund acquired two new ticker symbols: SISLX and SISEX.

That change is surprisingly important, because those ticker symbols tied the fund to an abysmal 10-year record and to the one-star rating that stumbles in 2014-early 2016 earned. That represented an enormous drag on the fund’s future prospects since even if they could get past an advisor’s statistical screens to have a conversation, those conversations would always begin with a long talk about the fund’s past rather than about its future.

That would be regrettable, since the fund’s future appears distinctly bright. With a new set of tickers, the managers need only account for their own performance, which has been solid both with the fund and with their separate account strategy. The managers met a decade ago at Deutsche Asset Management, rose, grew a bit frustrated by a staid culture and, after a brief stint at Victory Capital, left to start their own firm. The team from Rivington Investments has been managing assets for nearly a decade, directly and as a sub-advisor, using the same strategy that’s now being employed at Shelton. One of the guys’ fundamental conclusions was that most strategies started by looking at the wrong factors (sector and industry, for examples) when assessing securities and constructing a portfolio. Their conclusion is that understanding where a firm is located in its corporate lifecycle – which runs in five phases from the young, volatile innovators to creaking distressed securities – is more important than knowing its sector, industry or the location of its headquarters.

That strategy has performed well – they’ve beaten their benchmark by 225 bps/year since inception, and have comfortable leads over it for the past one, three, five and seven-year periods (as of 6/30/2017).

We asked the team to share a couple hundred words in answer to the question, why you?

(Matthias:) Andy and I started together just about 10 years ago at Deutsche Asset Management (DeAM). Our experience at DeAM, a huge firm with seemingly endless resources, was that managers continued to underperform, and yet no one seemed willing to question the basic building blocks of their investment process.  (Andy:) We were frustrated with the common mentality of grouping or segmenting the investment universe based on a bunch of factors – industry, country, sector or region – which provided little meaningful information to an investor. We set out to create a process that put us at a better starting point and made us more efficient. (Matthias:)  We considered a number of approaches and became particularly interested in the concept of the corporate lifecycle. Firms at similar stages in their lifecycle show important similarities with regard to factors such as growth rates, capital requirements, cash flow returns and so on. Those commonalities provide fundamental signals or indicators about a firm’s prospects. (Andy:)  So we started to develop a set of tools to make us a lot more efficient; they help us strip down the basic equation of return on capital versus growth regardless of the accounting regime in place.  (Matthias:) The one thing we wanted to make sure was to have our alpha driven by stock selection; hence, we want to maximize the time we spend picking stocks and improve our effectiveness at it and not waste time on other areas.

(Matthias:)  Life-cycle explicitly recognizes adaptation and change over time. We’re incredibly vigilant about changes that might impact the portfolio. We have a weekly risk management meeting to assess the biggest contributors to risk and how we might adjust the portfolio based on risk outliers.

Shelton International Select Equity Investor shares have has a $1,000 minimum initial investment and $500 for funds established with an automatic investing plan. The minimum for institutional shares is $500,000. Expenses are capped at 1.24% on the Investor shares and 0.99% for institutional shares. The fund has about $45 million in assets.

Here’s the fund’s homepage. It’s currently a bit thin on content, but that is because of the ticker change.  The guys promise that updated Commentaries and Factsheets, along with a complete overhaul of the website, are coming very soon.

Evermore Global Value (EVGBX/EVGIX), August 2017

By David Snowball

Objective and Strategy

Evermore Global Value Fund seeks capital appreciation by investing in a global portfolio of 30-40 securities. The Fund’s special situations strategy is to identify companies trading at substantial discounts to their estimates of intrinsic value, and where catalysts exist to close these gaps.  Although they are opportunistic investors and can buy securities of any market capitalization, their sweet spot has been in micro to mid-cap opportunities.  They also have the ability to invest beyond the equity market in “less liquid” investments, such as distressed debt, can hold short positions in merger/arbitrage situations or to hedge market risk, and are willing to hold a up to 15% in cash.

Adviser

Evermore Global Advisors, LLC. Evermore was founded by Mutual Series alumni David Marcus and Eric LeGoff in June 2009. David manages the portfolios, Eric runs the business. They advise five substantial separately managed accounts as well as the Evermore Global Value Fund. All follow the same “special situations” strategy. As of June 30, 2017, they had $950 million of assets under management.

Manager

David Marcus. Mr. Marcus co-founded the adviser. He was hired in the late 1980s by Michael Price at the Mutual Series Funds, started there as an intern and describes himself as “a believer” in the discipline pursued by Max Heine and Michael Price. He managed Mutual European (MEURX) and co-managed Mutual Discovery (MDISX) and Mutual Shares (MUTHX), but left in 2000 to establish a Europe-domiciled hedge fund with a Swedish billionaire partner. Marcus liquidated this fund after his partner’s passing and spent several years helping manage his partner’s family fortune and restructure a number of the public and private companies they controlled. He then went back to investing and started another European-focused hedge fund. In that role he was an activist investor, ending up on corporate boards and gaining additional operational experience. That operational experience “added tools to my tool belt,” but did not change the underlying discipline.

Strategy capacity and closure

$2 – 3 billion, which is large for a fund with a strong focus on small firms. Mr. Marcus explains that he’s previously managed far larger sums in this style and that he’s willing to take “controlling” positions in small firms which raises the size of his potential position in his smallest holdings and raises the manageable cap. He currently manages about $400 million, including some separate accounts which rely on the same discipline. He’ll close if he’s ever forced into style drift.

Active share

99.4. “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. The active share for Evermore is generally near 100, which reflects extreme independence plus the effect of several hedged positions.

Management’s stake in the fund

Mr. Marcus has invested between $500,000-1,000,000 in the fund. The fund provides all of Mr. Marcus’s equity exposure except for long-held legacy positions that predate the launch of Evermore. In addition, he co-owns the firm to which he and his partner have committed millions of their personal wealth.

Opening date

December 31, 2009.

Minimum investment

$5000, reduced to $2000 for tax-advantaged accounts. The institutional share class (EVGIX) has a $1 million minimum and no load(as of July 2023). 

Expense ratio

For investor class shares it is 1.61% and for institutional shares it is 1.36% on assets under management of $106.9 million, as of July 2023. The fund eliminated the sales load on its retail shares in April 2015, an entirely admirable decision.

Comments

Morningstar’s last assessment of Evermore occurred in 2010, just eight months after the fund’s launch. As Evermore was taking short-term losses from the distressed firms in their portfolio, analyst Michael Breen opined:

There’s reason to believe. The managers are contrarians who focus on struggling firms where they see catalysts to unlock value, such as management changes or restructurings. Such transformations take time, so the managers are patient … They have strong track records elsewhere using the same approach … The fund’s recent buys look compelling. Patient investors will be well served here.

We concur. In 2011, we noted that managers in Mr. Marcus’s lineage “embody the best of active management: bold choices, high conviction portfolios, and a willingness to understand and exploit parts of the market that few others approach.” Three years later, with Evermore sporting a one-star rating from Morningstar, we argued that the discipline “David Marcus is teaching to his analysts, is highly-specialized, rarely practiced and – over long cycles – very profitable. Mr. Marcus, who has been described as the best and brightest of Price’s protégés, has attracted serious money from professional investors. That suggests that looking beyond the stars might well be in order here.” After a dozen interviews at this year’s Morningstar conference, we noted that Marcus is “consistently among the most engaging and thoughtful people we’ve met.”

And still much has changed since then:

  • In March 2017, Litman Gregory recognized Evermore’s strength and distinctiveness when they entrusted part of the Litman Gregory Master’s International Fund (MSILX) to Mr. Marcus and team.
  • In March 2017, Morningstar created a new fund category (World Small-Mid) into which they moved Evermore and 41 other funds. Those smaller cap funds have been a far more interesting and successful group than their former large cap brethren; the small-mid cap funds are 16% of the entire world stock group but have 35% of the top five-year performers.
  • The fund posted 13.9% annual returns for past five years (through 6/30/2017), placing it in the top 25% of its new Morningstar peer group.
  • In July 2017, the firm crossed the $1 billion in AUM threshold. The fund has seen inflows in 29 of the past 31 months.

Much more has not changed: Mr. Marcus’s favorite investments remain few in number, hard to find, difficult to value and prone to violent price movements. Those, oddly, are the things that Mr. Marcus finds most attractive about them.

In broad terms, the Evermore portfolio is divided between The Strange and The Steady. He prefers the former.  The Strange are “special situations” or “distressed” securities, often issued by smaller companies. Those are generally firms that have historically stunk through some combination of bad management, bad strategies, bad execution and bad luck. Many firms in this category deserve their impending oblivion, but some will stage dramatic turnarounds. Mr. Marcus’s challenge is to identify such firms early when their stock prices are dramatically discounted, but the pieces are falling in place. He refers to them as stocks that are “cheap with a catalyst.”

Investing in such stocks has four important characteristics:

  1. It is devilishly difficult. First, you have to be right in your judgment that the 120-year-old firm that’s been staggering around like a drunk for decades, always promising to reform, actually means it this time. Second, you have to have the fortitude to watch one of your holdings fall by 40% because other investors don’t yet get it, and to buy more along the way.
  2. It is not replicable with a passive strategy. That is, you can’t construct an index that tracks “firms for whom potential saviors (or life-saving clues) have just arrived.”
  3. It is not scalable. That is, there are relatively few firms poised for a turnaround at any particular time, and these are often small or very small companies. As a result, major investors like Vanguard and Fidelity cannot justify devoting resources for a strategy that might be capped at $2 billion. As a result, there are fewer analysts, less competition for the stock and greater initial mispricing.
  4. It is independent of the general movement of the market. That is, these firms don’t need to grow revenue in order to see sharp share-price gains. If you have a firm that’s struggling because its CEO is a dolt and its board is in revolt, you’re likely to see the firm’s stock rebound once the dolt is removed. If you have a firm that used to be a solidly profitable division of a conglomerate but has been spun-off, you should expect an abnormally low stock price relative to its value until it has a documented operating history. Investors like Mr. Marcus buy them cheap and early, then wait for what are essentially arbitrage gains.

As a result, Evermore does things for you that other funds simply can’t: it produces high returns that are independent of its benchmarks and its peers. By way of illustration, the five year correlation between Evermore and the Vanguard Total World Stock Index Fund (VTWSX) is not only low (0.76), it’s also lower than the correlation between VTWSX and Vanguard Emerging Markets Stock Index (VEIEX), 0.78. Evermore is simultaneously a strong diversifier for a broad world stock index and a better diversifier than adding emerging markets stocks would be.

Why? An active share of 100 means that it has essentially no overlap with its benchmark. The same applies to its peer group: Evermore has seven-times the exposure to micro-cap stocks as does its global small/mid-cap peer group. It has one-third of the US exposure and four times the developed European exposure of the average global fund.  And it sports a market cap only half as high as its peers.

Mr. Marcus believes that there are ample special situations opportunities outside the U.S. He writes, “We would agree that in the U.S. many stocks have lofty valuations. However, we are still finding special situations, mostly in Europe, that are trading at attractive valuations.”

When even he can’t find enough Strange stocks, he turns to the Steady. He refers to these as “Compounders,” which often translates to family owned or controlled firms that have activist internal management. Some of these folks are “ruthless value creators.”  The key is to get to know personally the patriarch or matriarch who’s behind it all; establish whether they’re “on the same side” as their investors, have a record of value creation and are good people.

Bottom Line

There are two real downsides to being independent: you’re sometimes disastrously out-of-step with the herd and it’s devilishly hard to find an appropriate benchmark for the fund’s risk-return profile. That means that both ratings and relative returns are often somewhere between irrelevant and disastrously misleading. Successful investors in the fund need to understand what the team is up to, and to ignore one-star and five-star ratings with equal aplomb. If you’re willing to learn why an experienced investor would commit eight times more assets than any other fund to a micro-cap bulk shipping company, then purchase another 400,000 shares when an investor panic drives the share price down by 25%, then you should meet David Marcus. He does remarkable work.

Fund website

Evermore Global Value Fund. In general, when a fund is presented as one manifestation of a strategy, it’s informative to wander around the site to learn what you can. I rather liked Mr. Marcus’s white paper describing developed Europe as “lonely and lumpy.” (I so know the feeling.)

July 2023: Evermore Global Value Fund

© Mutual Fund Observer, 2017. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.

Moerus Worldwide Value (MOWNX/MOWIX), August 2017

By David Snowball

Objective and strategy

Moerus Worldwide Value pursues long term capital appreciation, primarily by investing in foreign and domestic common stocks that it believes are deeply undervalued. The portfolio is constructed from the bottom-up through fundamental analysis; which is to say the manager cares about finding 15-50 great stocks with no particular interest in paralleling some indexes sector, size or country weightings. As of May 31, 2017, the fund is invested in 37 stocks.

Adviser

Moerus Capital Management, LLC. Moerus is a New York-based investment management company founded in 2015. The firm was founded by Amit Wadhwaney, John Mauro and Michael Campagna, all of whom worked together for nearly a decade at Third Avenue Management. They were joined by a fourth Third Avenue alumnus, Ian Lapey, in 2016.

Manager

Amit Wadhwaney. Mr. Wadhwaney is co-founder and Chief Investment Officer, as well as portfolio manager. Prior to Moerus, he was best known as a portfolio manager and partner at Third Avenue Management LLC where he managed Third Avenue International Value (TAVIX) from December 2001 to June 2014. Near the end of his tenure there, Morningstar described him as having “proved his mettle as a skilled and thoughtful investor, and his continued presence on the fund remains its main draw.” In addition to an M.B.A. in Finance from The University of Chicago, he holds degrees on economics, chemical engineering and mathematics.

Strategy capacity and closure

Moerus estimates that the strategy’s capacity is somewhere around $5 billion. Mr. Campagna notes that “This estimate is based on many factors, including liquidity requirements, the areas where we have traditionally found opportunity, our fee structure, as well as the economics of running the business and attracting the quality of employees that we seek.” The wild cards would be the rate of inflow (too much money too quickly might not be manageable) and the state of the market, which might dramatically expand or contract their opportunity set. Because the Moerus folks are committed to growing their personal wealth through their investments in the fund, rather than by attracting excess assets which might dilute performance, they judge that their $5 billion estimate is “conservative.”

Management’s stake in the fund

Mr. Wadhwaney has over $1 million invested in the fund. According to the most recent SAI, his personal investment represents 27.49% of the assets in the fund’s institutional share class, as of March 6, 2017. As of the end of July 28, 2017, Moerus employees as a group accounted for 11.1% of the total assets of the Moerus Worldwide Value Fund.

Opening date

May 31, 2016

Minimum investment

$2,500 for “N” class shares, $100,000 for “I” shares

Expense ratio

Effective on March 31, 2023, the adviser imposed expense caps at 1.25% for institutional and 1.50% for investor shares. Both represent significant reductions from their original 2017 levels. The assets under management is $55.5 million, as of July 2023. 

Comments

Harry Copland, who piloted his first plane in 1911 at the age of 15, is credited with the adage, “There are old pilots and there are bold pilots, but there are no old, bold pilots.” (He lived to be 80.) For pilots, deviating from proper procedures by even a little bit is not just a career risk, it’s a life risk.

For fund managers, the price of independence is not quite so high: independent managers tend to be unemployed, rather than expired. Running outside the herd frightens investors and absolutely terrifies fund company executives, who worship “sticky assets” above all else. And so most managers, no matter how promising, are eventually tamed into compliant mediocrity. That’s evidenced in two distinct ways. First, a July 2017 Morningstar study of the effects of manager changes on a fund’s performance finds, well, on average, none. That is, the average manager is an interchangeable cog who contributes no individual value. Second, the “active share” research done by Martijn Cremers and Antti Petajisto finds that only 30% of U.S. fund assets are in funds that are reasonably independent of their benchmarks (80 or above) and only a tenth of assets go to highly active managers (90 or above). Sadly, investors migrate toward, rather than away from, closet indexers when markets turn south.

Independence is hard on managers and investors alike.

Yet there are a few old, bold – that is, persistently independent managers — out there. Third Avenue founder Marty Whitman, who launched the Third Avenue Value Fund (TAVFX) at age 66 and managed it until he was 88, is one. His former protégé Amit Wadhwaney, a youngster at age 63, is another.

Twenty five years into his career as a professional investor, Mr. Wadhwaney, then 62, launched Moerus Worldwide Value as a new expression of Mr. Whitman’s “safe and cheap” investing mantra.

Moerus is a concentrated, deep value fund. The fund brings two distinctions to the table.

First, the investment strategy is distinctive and disciplined. All active investors need to determine what a potential investment is likely worth; it’s called “price discovery.” Almost all investors make their determinations by forecasting what the future holds for a firm: “TechnoZon’s Bluetooth division had $50 million in EBITDA, minus a goodwill write-off, last year; based on 2014-16 trends, we’re projecting EBITDA growth of 4% in 2017 and 5.2% in 2018 before it levels off to a sustainable 2.4% in the out years, which gives us a fair value of …”

Mr. Wadhwaney considers such projections as fantasies swathed in fictions: earnings numbers are often works of creative writing and the prospect of consistently foreseeing the future is nil.

Instead, his discipline starts with the question, “if we had to sell this entire firm today, based on what it’s already accomplished and built, and allowing for any highly-predictable income streams it has, what could we get for it?” He then asks, “and what could we get for it if things starting going bad in a big way?” That gives him a conservative estimate of what the firm’s worth; he’ll only buy the stock if (a) the firm’s attractive and (b) it’s selling as a substantial discount to his caustic assessment of the firm’s actual value.

He is, at base, looking for reasons not to buy each firm, rather than for reasons to buy them. If he can find a reason to say “no,” he immediately and resolutely does. He’s joking both about the moniker “Dr. No” and about a playful video made by his associates which shows one of them pretending to be Amit; they accomplished this by wearing a blonde wig (oddly) and tossing corporate reports aside while crying out “no, no … No!” (It was a fund manager’s version of Queen’s “Another One Bites the Dust.”)

There are three significant consequences of his price discipline. First, he’s willing to hold substantial amounts of cash when he can’t find safe and cheap stocks. Currently his cash reserve is 18%. Second, he may follow some firms for five to eight years before moving on them, which suggests that he knows them really well by the time an opportunity presents itself. Third, his discipline intrinsically favors some sorts of businesses – those with real assets and annuity-like cash streams – over others. As of 2/28/2017, he had zero combined exposure to three sectors (tech, healthcare and utilities) that represent 35% of his average peer’s portfolio.

Second, Mr. Wadhwaney does good work. He posted competitive returns with high degrees of independence and strong downside protection with his previous fund. Morningstar, which has followed him for years, quickly designated Moerus as a Morningstar Prospect and invited him to speak at their 2017 investment conference in Chicago. Moerus Worldwide returned 24.2% in the 12 months ending July 31, 2017, that outpaced its both benchmark and peer group by over 500 basis points, which placed it in the top 15% of its peer group. That’s despite the effects of relatively high start-up expenses and a substantial cash reserve. His median market cap, geographic distribution, asset allocation, and sector allocation are all substantially different from his peers.

Bottom Line

Independence is not easy, for manager or for fundholder. It’s hard to be out of step, especially when those around you are smugly basking in the illusory safety of passive investments. In the long term, though, success requires discipline and difference. For folks willing to take their obligations as investors seriously – that is, to invest alongside their managers, through thick and thin, based on a fundamental understanding of and agreement with their strategy – Moerus offers a rare and intriguing opportunity to invest alongside (in another of Mr. Whitman’s phrases) a distinguished “aggressive conservative investor.”

Fund website

The Moerus Funds site is perfectly respectable, but folks interested in a bit more detailed understanding of Mr. Wadhwaney’s style and strategy might benefit from browsing the “news” page on the Moerus Capital website, too. There are a couple nice interviews and his Investor Memos which might have been judged a bit too much for the casual passerby.

Funds in Registration

By David Snowball

It’s rare that I encounter the term “quantamental” twice in the same set of filings. Okay, it’s unheard of. I think they just made it up to irk me.

It’s also rare that Vanguard launches two new funds, much less the global version of two of their most legendary funds: Wellesley and Wellington. It’s hard to imagine why these won’t be $10 billion funds in, oh, about a year.

Calvert Ultra-Short Income NextShares

Calvert Ultra-Short Income NextShares will seek to maximize income, to the extent consistent with preservation of capital, through investment in short-term bonds and income-producing securities. The plan is to invest in a combination of floating rate securities and ultra-short bonds that pass Calvert’s financial, social and environmental screens. The fund is structured as an actively managed ETF. The fund will be managed by Vishal Khanduja and Brian S. Ellis. The initial expense ratio is 0.38% and you may buy as much or as little as you like.

Chiron SMid Opportunities Fund

Chiron SMid Opportunities Fund will seek long-term capital appreciation. The plan is to use a quantamental approach to construct a global small- to mid-cap equity portfolio. The managers use the strategy both to identify attractive regions or sectors, and to identify individual equities. The fund will be managed by Grant Sarris and Brian Cho of Chiron Investment Management. The initial expense ratio is 1.20%, while the minimum initial investment is $100,000.

Eventide Global Dividend Opportunities Fund

Eventide Global Dividend Opportunities Fund will seek dividend income and long-term capital appreciation. The plan is to build an all-cap global portfolio of dividend-paying companies, though the prospectus leaves open the door to calls and puts. The portfolio imposes a number of social and environmental screens. The fund will be managed by Martin A. Wildy. The initial expense ratio for the “N” shares will be 1.17%, while the minimum initial investment will be $1,000.

Fiera Capital International Equity Fund

Fiera Capital International Equity Fund will seek capital appreciation. The plan is to build a portfolio of stocks from 25 to 45 fundamentally attractive companies. . The fund will be managed by Nadim Rizk and Andrew Chan. The initial expense ratio has not been disclosed, while the minimum initial investment is $1,000.

Lazard Equity Franchise Portfolio

Lazard Equity Franchise Portfolio will seek total return consisting of appreciation and income. The plan is to a global equity fund around companies that have an “economic franchise” or, in Morningstar’s terms, “a moat.” They’ve got the ability to hedge their currency exposure, but might not. The fund will be managed by Matthew Landy, John Mulquiney, and Warryn Robertson . The initial expense ratio for Open shares will be 1.20%, while the minimum initial investment will be $2,500.

USA Mutuals/WaveFront Quantamental Long/Short Opportunities Fund

USA Mutuals/WaveFront Quantamental Long/Short Opportunities Fund will seek to produce positive absolute returns while reducing exposure to general equity market risk. The managers will employ (i) a “core long/short equity” strategy; (ii) a “macro overlay” strategy; and (iii) a risk management strategy. The fund represents the conversion of a limited partnership that’s been in operation since 2002.  That fund returned 6.57% from inception (compared to 2.8% for the average long/short fund), with a loss of only 3.45% in 2008. The fund will be managed by Roland Austrup, Ryan Butz and Mark Adam of WaveFront Global Asset Management. In addition, Mr. Butz managed the predecessor fund. The initial expense ratio is 1.30%, while the minimum initial investment $2,000.

Vanguard Global Wellesley Income Fund

Vanguard Global Wellesley Income Fund will seek long-term growth of income and a high and sustainable level of current income, along with moderate long-term capital appreciation. The plan is to invest 60% to 70% in U.S. and foreign investment-grade bonds and 30% to 40% in a global portfolio of dividend-paying, mid- to large-cap stocks. The fund will be managed by John C. Keogh, Loren L. Moran, Michael E. Stack, and Ian R. Link of Wellington Management Company. The initial expense ratio will be 0.42%, while the minimum initial investment is $3,000.

Vanguard Global Wellington Fund

Vanguard Global Wellington Fund will seek long-term capital appreciation and moderate current income. The plan is to invest 60% to 70% in a global portfolio of dividend-paying, mid- to large-cap stocks and 30% to 40% in U.S. and foreign investment-grade bonds. The fund will be managed by John C. Keogh, Loren L. Moran, Michael E. Stack, and Nataliya Kofman of Wellington Management Company. The initial expense ratio will be 0.45%, while the minimum initial investment is $3,000.

Manager changes, July 2017

By Chip

On July 27, 2017, Morningstar researchers confirmed what we’ve known for years: most manager changes are utterly inconsequential. Messrs. Hawkins and Cates have a combined 54 years at Longleaf Partners (LLPFX); the arrival of a young co-manager is unlikely to make a marked difference. Two interesting consequences that they did observe are that manager changes trigger fund outflows and that the outflows are greatest at large funds, perhaps because media coverage of those funds makes the changes more visible and portentous.

And yet there are times when we ought to note manager changes for entirely different reasons. This month Dowe Bynum, following the discovery of a brain tumor, stepped aside from management of The Cook & Bynum Fund (COBYX). Dowe is a good guy to talk with, funny and smart, a caring spouse and a dad with young children. We’re sanguine about the fund’s operation: there’s always been a contingency plan in place, they’ve recently added analytic support and they pursue a low turnover (9%) discipline. We know Dowe is receiving very good care and want to add our voice to the chorus of support and good wishes.

Ticker Fund Out with the old In with the new Dt
ATWAX AB Tax-Managed Wealth Appreciation Strategy Daniel Loewy and Vadim Zlotnikov are no longer listed as portfolio managers for the fund. Ding Liu and Nelson Yu will now manage the fund. 7/17
AWAAX AB Wealth Appreciation Strategy Daniel Loewy and Vadim Zlotnikov are no longer listed as portfolio managers for the fund. Ding Liu and Nelson Yu will now manage the fund. 7/17
ADVWX Advisory Research Global Value Fund Bruce Zessar, Drew Edwards, James Langer, Marco Priani, and Matthew Swaim are no longer listed as portfolio managers for the fund. Adam Steffanus and Michael Valentinas will now manage the fund. 7/17
ADVIX Advisory Research International Small Cap Value Fund Drew Edwards and Marco Priani are no longer listed as portfolio managers for the fund. Stephen Evans and Kevin Ross are now managing the fund. 7/17
ADIAX Alpine Small Cap Fund No one, but . . . Samuel Lieber and Stephen Lieber are joining Sarah Hunt on the management team, replacing Michael Smith who left in May. 7/17
AAIPX American Beacon International Equity Fund Cindy Sweeting has announced her intention to retire as of December 31, 2017. On January 1, 2018 Matthew Nagle will join the other 18, or so, managers. 7/17
MDRFX BlackRock Mid Cap Dividend Fund Murali Balaraman and John Coyle are no longer listed as portfolio managers for the fund. Tony DeSprito, Franco Tapia, and David Zhao will manage the fund. 7/17
BERCX Chartwell Mid Cap Value Fund Robert Killen will no longer serve as a portfolio manager for the fund. David Dalrymple will now manage the fund. 7/17
CAALX Cornerstone Advisors Public Alternatives Fund Arup Datta, Haijie Chen and Nicholas Tham no longer serve as portfolio managers of the fund. Theodore Aronson, Stefani Cranston, Gina Marie Moore, Gregory Rogers and Christopher Whitehead now serve as portfolio managers of the fund, joining the rest of the team. 7/17
CAREX Cornerstone Advisors Real Assets Fund No one, but . . . Christopher Allen joins the management team. 7/17
SFXAX Deutsche Core Fixed Income Fund No one, but . . . Kelly Beam joins Gregory Staples and Thomas Farina in managing the fund. 7/17
SEKAX Deutsche Emerging Markets Equity Fund No one, but . . . Sean Taylor and Andrew Beal are joined by Luiz Ribeiro and Marc Currat in managing the fund. 7/17
DEFAX Deutsche Emerging Markets Frontier Fund Andrew Beal in on temporary leave. Sean Taylor will continue to manage the fund. 7/17
SZEAX Deutsche Enhanced Emerging Markets Fixed Income Fund Darwei Kund, John Ryan and Steven Zhou are no longer listed as portfolio managers for the fund. Rahmila Nadi is joined by Nicolas Schlotthauer in managing the fund. 7/17
SZGAX Deutsche Enhanced Global Bond Darwei Kund, John Ryan and Gary Russell are no longer listed as portfolio managers for the fund. Rahmila Nadi is joined by Dirk Aufderheide in managing the fund. 7/17
SDUAX Deutsche Fixed Income Opportunities Fund Rahmila Nadi is no longer listed as a portfolio manager for the fund. John Ryan and Roger Douglas are joined by Kevin Bliss and Thomas Sweeney in managing the fund. 7/17
TIPIX Deutsche Global Inflation Fund No one, but . . . Rick Smith has been added as portfolio manager of the fund and, together with Darwei Kung, is responsible for the day-to-day management of the fund. 7/17
DDBAX Dreyfus Emerging Markets Debt Local Currency Fund Javier Murcio has left the building. Federico Garcia Zamora is the fund’s primary portfolio manager. 7/17
DIBAX Dreyfus International Bond Fund Raman Srivastava is on the road again. David Leduc and Brendan Murphy will continue to manage the fund. 7/17
DSTAX Dreyfus Opportunistic Fixed Income Fund Raman Srivastava and David M. Horsfall are … uhh, pursuing other opportunities. David Leduc and Brendan Murphy will continue to manage the fund. 7/17
DBNAX Dreyfus Select Managers Long/Short Fund Pine River Capital Management will no longer be a subadvisor to the fund and Joseph Bishop will no longer serve as a portfolio manager for the fund. John Brennan, Jeffrey Brozek, Christopher Crerend, Eugene Salamon, Jay Abramson, Ethan Johnson, Kristopher Kristynik, and James Rosenwalk will continue to manage the fund. 7/17
DHGAX Dreyfus/Standish Global Fixed Income Fund Raman Srivastava is no longer listed as a portfolio manager for the fund. David Leduc and Brendan Murphy will continue to manage the fund. 7/17
FSTBX Federated Global Allocation Fund Philip Orlando is no longer listed as a portfolio manager for the fund. John Sherman joins Timothy Goodger, Ihab Salib, Chengjun Wu, Steven Chiavarone, and Randy O’Toole will continue to manage the fund. 7/17
FFMVX Fidelity Flex Mid Cap Value Fund Court Dignan has left the fund after only three months. Justin Bennett, Katherine Buck, Matthew Friedman, John Mirshekari, Laurie Mundt, and Shadman Riaz now manage the fund. 7/17
FFIDX Fidelity Fund John Avery will no longer serve as a portfolio manager for the fund. Jean Park is now managing the fund. 7/17
FMCSX Fidelity Mid-Cap Stock Fund No one, but . . . John Roth is joined by Nicola Stafford in running the fund. 7/17
FMVAX Franklin Mid Cap Value Fund Donald Taylor, Samuel Kerner, and Jakov Stipanov are no longer listed as portfolio managers for the fund. Christopher Meeker and Steven Raineri will now manage the fund. 7/17
GMOFX GMO Foreign Fund Class III Drew Spangler is no longer listed as a portfolio manager for the fund. Neil Constable will now run the fund. 7/17
GMFSX GMO Foreign Small Companies Fund Class III Drew Spangler is no longer listed as a portfolio manager for the fund. Neil Constable will now run the fund. 7/17
GMISX GMO International Small Companies Fund Class III Drew Spangler is no longer listed as a portfolio manager for the fund. Neil Constable will now run the fund. 7/17
GSMYX Goldman Sachs Small/Mid Cap Growth Fund No one, but . . . Steven Barry and Daniel Zimmerman are joined by Micheal DeSantis in running the fund. 7/17
IBNAX Ivy Balanced No one, but . . . Rick Perry joins Matthew Hekman in managing the fund. 7/17
HGRAX Janus Henderson U.S. Growth Opportunities Fund No one, but . . . Kristi Guay joins Derek Pawlak and William Scott Priebe in managing the fund. 7/17
URTAX JPMorgan Realty Income Fund No one, but . . . Jason Ko is joined by Scott Blasdell on the management team. 7/17
JILSX JPMorgan U.S. Dynamic Plus Fund Shudong Huang is no longer listed as a portfolio manager for the fund. Dennis Ruhl is joined by Jason Alonzo and Pavel Vaynshtok in managing the fund. 7/17
LLPFX Longleaf Partners Fund No one, but . . . Ross Glotzbach joins O. Mason Hawkins and G. Staley Cates in managing the fund. Mssrs. Hawkins and Cates have a combined 54 years’ experience managing this fund. 7/17
LLINX Longleaf Partners International T. Scott Cobb will step down from his role as co-portfolio manager to focus on leading Southeastern’s European research efforts. Josh Shores will join Ken Siazon, G. Staley Cates, and O. Mason Hawkins on the management team. 7/17
LICAX Lord Abbett Global Core Equity Fund Didier Rosenfeld and Frederick Ruvkun will no longer manage the fund. Yarek Aranowicz will now manage the fund. 7/17
LMGAX Lord Abbett Growth Opportunities Fund Paul Volovich and Anthony Hipple are out. David Linsen will manage the fund until Jeffrey Rabinowitz takes on the job on August 7, 2017. 7/17
MIOFX Marsico International Opportunities Fund Munish Malhotra will no longer serve as a portfolio manager for the fund. Thomas Marsico and Robert Susman are now managing the fund. 7/17
SIEYX Saratoga Advantage International Equity Portfolio Regina Chi will no longer serve as a portfolio manager for the fund. Marc Miller is now managing the fund. 7/17
FLAUX Strategic Advisers Core Multi-Manager Fund Phillip Marriott will no longer serve as a portfolio manager for the fund. John Stone, Colin Morris, Kurt Feuerman, Matthew Fruhan, Anthony Nappo, George Ross, David Small, and Niall Devitt will continue to manage the fund. 7/17
COBYX The Cook & Bynum Fund J. Dowe Bynum is on medical leave and plans to return to his portfolio management role as soon as he is fully able. Richard Cook assumed sole responsibility for the day-to-day portfolio management of the fund. 7/17
IMUAX Transamerica Multi-Manager Alternative Strategies Portfolio Rishi Goel, James Schaeffer, and Timothy Galbraith are no longer listed as portfolio managers for the fund. Raymond Chan, Christopher Lvoff, and Lucy Xin will now manage the fund. 7/17
SCCTX Virtus Conservative Allocation Strategy Fund Alan Gayle is no longer listed as a portfolio manager for the fund. Peter Batchelar and Thomas Wagner are now running the fund. 7/17
SGIAX Virtus Growth Allocation Strategy Fund Alan Gayle is no longer listed as a portfolio manager for the fund. Peter Batchelar and Thomas Wagner are now running the fund. 7/17
WALTX Wells Fargo Alternative Strategies Fund Raj Iyer and George Jikovski are no longer listed as portfolio managers for the fund. Torrey Zaches, James Stavena, Joseph Bishop, Robert Kinderman, Ronald van der Wouden, Gregg Thomas, Kent Stahl, Kenneth LaPlace, Sudhir Krishnamurthi, Vassilis Dagioglu, Richard Chilton, John Burbank, and John Brennan will continue to manage the fund. 7/17
Various Wells Fargo Target Date Series Rodney Alldredge, James Lauder, and Paul Torregrosa are out. Kandarp Acharya, Petros Bocray, and Christian Chan are in. 7/17

 

Briefly noted

By David Snowball

The industry appears to be in full summer-beach mode, or its doing so splendidly that there’s no need to even think about changing anything. In any case, July saw the smallest number of announced changes in about five years.

Updates

Our July 2017 profile of Matthews Asia Credit Opportunities (MCRDX/MICPX) described it as investing in high-yield bonds. That’s correct but incomplete. Manager Satya Patel reminded us that the fund’s core investments can include “convertibles, hybrids and derivatives with fixed income characteristics.” Indeed, since inception convertible bonds have represented 20-25% of the portfolio. We’ve corrected the profile to reflect that. The fund has built a substantial performance advantage over its peers since inception, similar to the consistent success of its older sibling, Mathews Asia Strategic Income (MAINX).

Briefly Noted . . .

SMALL WINS FOR INVESTORS

Effective October 9, 2017, a bunch of American Century funds (including International Discovery, Adaptive Equity, Global Gold Fund, International Core Equity Fund, International Value Fund, International Opportunities Fund, Small Cap Growth Fund, Emerging Markets Fund, Global Growth Fund and International Growth Fund) are eliminating their redemption fees.

Effective August 1, 2017, Fidelity will reduce total expenses across 14 of its 20 stock and bond index mutual funds. The average e.r. will be reduced from 11 bps to 9.9 bps.

Effective September 1, 2017, the minimum initial investment amount for individual investors in Class I shares of the Marketfield Fund (MFLDX) is being lowered from $1,000,000 to $25,000. This has long felt like the Icarus Fund, which was too proud, soared too high, got too close to the sun and plummeted. Assets are down about 97% from their peak, but the firm is independent again and their 2017 performance has been quite solid.

PIMCO is liquidating the “C” class shares for many of their funds. That strikes me as an entirely positive move.

Touchstone Small Cap Fund (TSFAX) has reopened to new and existing investors.

Effective August 1, 2017, the Teton Westwood Mighty Mites Fund (WEMMX) initial minimum investment for Class AAA, Class A, Class C, and Class T shares is $1,000. It had been $10,000.

CLOSINGS (and related inconveniences)

Anchor Tactical Credit Strategies Fund (ATCSX) has permanently closed its Investor share class. Current Investor investors have been moved to Institutional shares.

Effective the close of business on August 4, 2017, Fidelity Global Balanced (FGBLX) will close to new investors. I’m not sure why. The fund is economically viable (roughly $500 million) but nowhere near reaching a capacity constraint. Its performance has been mostly mediocre, but never embarrassing. It’s a curious decision.

One week later, the four-star Fidelity Global Strategies Fund (FDYSX) closes as well.

Effective September 29, 2017, the T. Rowe Price Global Technology Fund (PRGTX) will be closed to new investors

Vanguard Wellington (VWELX) has closed to new investors, except for folks with a Vanguard brokerage account. That’s attendant to their impending launch of global versions of Wellesley Income and Wellington. (See this month’s “Funds in Registration” for details.)

OLD WINE, NEW BOTTLES

I’m tempted to title this entry “Baillie Gifford gives up Big Sex,” but I won’t. Baillie Gifford Emerging Markets Fund, Institutional Class, has changed its ticker symbol from BGSEX to BGEGX.

Effective October 2, 2017, Deutsche Enhanced Global Bond Fund (SZGAX) will be renamed Deutsche High Conviction Global Bond Fund, Deutsche Enhanced Emerging Markets Fixed Income Fund becomes Deutsche Emerging Markets Fixed Income Fund and Deutsche Enhanced Emerging Markets Fixed Income Fund (SZEAX) will be renamed Deutsche Emerging Markets Fixed Income Fund.

Finally, Deutsche Enhanced Emerging Markets Fixed Income Fund (SCEMX) will be renamed Deutsche Emerging Markets Fixed Income Fund.

On August 29, 2017, GMO Emerging Countries Series Fund is going to redeem its investment in GMO Emerging Countries Fund (“ECF”), after which it will be renamed GMO Emerging Markets Series Fund

OFF TO THE DUSTBIN OF HISTORY

AMG TimesSquare All Cap Growth Fund, AMG Trilogy International Small Cap Fund and AMG Trilogy Global Equity Fund will liquidate on August 31, 2017.

Deutsche Core Fixed Income Fund (SFXAX) will merge into Deutsche Core Plus Income Fund (SZIAX), on or about October 30, 2017. It’s scary when even the surviving fund, in this case one that’s trailed 98% of its peers over the past decade, looks like a candidate for closure.

Dreyfus Mid-Cap Growth Fund (FRSDX) will, pending shareholder approval, merge into Dreyfus/The Boston Company Small/Mid Cap Growth Fund (DBMAX) on January 19, 2018.

Dreyfus Strategic Beta Global Equity Fund (DBGAX) will liquidate on September 8, 2017.

Geneva Advisors Small Cap Opportunities Fund (GNORX) and Geneva Advisors International Growth Fund (GNFRX) will each wrap up their affairs on August 28, 2017.

Gingko Multi-Strategy Fund (GNKIX) goes extinct on August 21, 2017. The gingko tree, for which it’s named, has survived 270,000,000 years. The fund, whose “dynamic” static engendered a turnover ratio of 1800%, lasted six.

Guidestone Global Natural Resources Equity Fund (GNRZX) has closed and will liquidate on September 22, 2017.

Pioneer Emerging Markets Fund (PEMFX) will merge into Pioneer Global Equity Fund (GLOSX) “in the fourth quarter of 2017.” Approximately 3% of Global Equity’s portfolio is invested in the emerging markets, making it a pretty poor fit for investors who had been seeking direct EM exposure. Indeed, GLOSX has more money invested in Apple than in all the EMs combined. On the other hand, PEMFX is really bad at what it does while GLOSX is mostly mediocre.

Transamerica Global Long/Short Equity (TAEAX) vanished on July 24, 2017, after just over one week’s notice.

July 1, 2017

By David Snowball

Dear friends,

It’s summer time, an especially blessed and cursed interval for those of us who teach. On the one hand, we’re mostly freed from the day-to-day obligation to be in the classroom. Some of us write, some travel, some undertake “such other duties as may from time to time be assigned” by our colleges. On the other hand, we hear the clock ticking. All year long, as we try to face down a stack of 32 variably-literate essays at 11 p.m. Sunday night, we think “if I can just make it to summer, I’ll recharge and it’ll be great!” About the first thing we notice when summer does arrive, is that summer is almost spent.

Nuts.

To The Wall Street Journal: I get it now! I promise never to display another illicit barber pole.

Now will you stop?

Mayhap the editors of the WSJ.com have Calvin Coolidge (one of my predecessors as director of debate at the University of Massachusetts, by the way) tattooed upon their heinies?

Nothing in the world can take the place of persistence. Talent will not; nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts. Persistence and determination alone are omnipotent. The slogan Press On! has solved and always will solve the problems of the human race.

Calvin Coolidge. The quotation appears on the cover of his 1933 memorial service but archivists can’t find evidence of him actually saying it.

Admittedly that would be an awfully painful experience but there are few better explanations for their incredible persistence in sharing the same damned story with me, three times a week, every week for months. What story? Here’s a snip from my inbox:

Conversations

WSJ.com Editors Careers Update: Barber Poles Have Their Own Police Force, With Badges and Everything Jun 30
WSJ.com Editors Careers Update: Barber Poles Have Their Own Police Force, With Badges and Everything Jun 27
WSJ.com Editors Careers Update: Barber Poles Have Their Own Police Force, With Badges and Everything Jun 23
WSJ.com Editors Careers Update: Barber Poles Have Their Own Police Force, With Badges and Everything Jun 20
WSJ.com Editors Careers Update: Barber Poles Have Their Own Police Force, With Badges and Everything Jun 16
WSJ.com Editors Careers Update: Barber Poles Have Their Own Police Force, With Badges and Everything Jun 9
WSJ.com Editors Careers Update: Barber Poles Have Their Own Police Force, With Badges and Everything Jun 6
WSJ.com Editors Careers Update: Barber Poles Have Their Own Police Force, With Badges and Everything Jun 2
WSJ.com Editors Careers Update: Barber Poles Have Their Own Police Force, With Badges and Everything May 30
WSJ.com Editors Careers Update: Barber Poles Have Their Own Police Force, With Badges and Everything May 26

That story first ran at the beginning of May. The gist of it is, if you own a hair salon or similar establishment, you can’t simply plunk a red, white and blue striped pole in front of your establishment. Without a licensed barber on staff, you can’t even have a picture of a striped pole in your window. Barbers are ratting-out hairdressers at an incredible rate over these violations.

Got it. The illicit pole has been taken down from the Observer’s world headquarters. (Actually we have neither pole nor headquarters, but I’m getting desperate for some peace, so I’ll play along.) We promise not to reproduce its tri-color likeness in these pages again.

To the New York Post: No. He’s not saying stocks will go up 50%.

The headline is certainly eye-catching:

If only it were true.

The esteemed economist in question is Robert Shiller, creator of the Shiller CAPE index which tries to generate more-reliable estimates of stock market valuations by factoring the economic cycle into earnings estimates; that’s the Cyclically Adjusted part of the Cyclically Adjusted Price-to-Earnings (CAPE) index.

The quotation from Shiller is this: “I would say, have some stocks in your portfolio. It could go up 50 percent from here. That’s what it did around 2000 — after it reached this level, it went up another 50 percent.”

Have some stocks in your portfolio?  That is, don’t abandon the market completely. Does that sound like a guy saying the stock market will rise 50%?  Uhhh … no. That’s a guy saying “I’m not in the business of calling market tops. The market’s expensive but it could still go up before the final blow-off.” In a late June interview, he said, “People should be cautious now. We have a high market. That doesn’t mean I would avoid it altogether.”

You get a better sense of the esteemed economist’s current thought if you simply follow him on Twitter. His current passion is the role of narrative in economics; that is, the stories we tell ourselves – and the stories others suck us with – are far more powerful forces than rational calculus and data. He noted, for example,

Trump’s example and admonition to “think big and live large” (Trump and McIver, 2004) appears to provide inspiration to many of his admirers, and that might well be expected, along with his stimulative tax policy, to boost consumption demand as well as entrepreneurial zeal. Many people might take the Trump story as a script for themselves, and thus spend freely and raise their risk tolerance.

He lays it out in his newest book Phishing for Phools: The Economics of Manipulation and Deception (2016) and his 2017 presidential address to the American Economic Association.

To the Quad City Times: Really, a subscription is a contract.

In our March issue, I warned folks about an apparently widespread scam perpetrated by cash-strapped newspapers. In pursuit of a bit of additional revenue, the papers were turning 52 week subscriptions into 46 week subscriptions after the fact, then looking for an early renewal at a new, higher rate. Chip and I found several newspapers pursuing such “accelerated” terms, and urged you to check your own subscriptions to be safe.

I wrote the editor, publisher and circulation director of the Times, but received no reply. So, I filed a complaint with the Iowa Attorney General’s office.

Three days later, the publisher of the Times called me at home to apologize for the three month delay in responding and to promise that my original expiration date would be restored. She did allow that they’d received a call from the Attorney General’s office but wouldn’t commit to restoring the terms of other subscribers who were in the same position as me. Their reasoning is that a paid subscription isn’t a contract, hence they’re not bound by the dictates of contract law.

Since these agreements are often referred-to as “individual subscription contracts,” this seems like a novel legal position.

To the Wall Street Journal: Thanks!

In an era when much financial journalism is reduced to pandering for clicks and the sort of press release journalism that takes everything they hear at face value, the work of the folks at The Wall Street Journal really stands out. I’ve been endlessly impressed with the thorough, thoughtful and quiet way in which their financial reporters have kept the issues of risk, valuation and market stability at the forefront. They haven’t been screaming about it, but they have very faithfully found and explained news (whether about the occasional deceptiveness of the VIX or implications of tightening spreads in the face of loosening monetary policy) that strikes me as important for another not willing to assume we’ve reached some sort of “permanently high plateau” or a “new normal” where riskless 10% returns are baked in. To Jason, Justin, Chris & Co., sincere thanks. You’re good.

In particular, Jason Zweig continues to do really important, thoughtful work. His recent two-part report on the shrinking number of stocks (the small- and micro-cap universe is contracting sharply, which greatly increases the challenges that managers face) was surprising and interesting. And I was delighted by his column looking at our friend and too-occasional contributor Sam Lee’s take on being both a prudent investor and a bold speculator. I’m slightly stunned with Sam’s grasp of the implications of cryptocurrencies (Ethereum, in particular) and with Jason’s ability to walk us through the tale. It’s well worth reading.

Etherium prices

Now if only they could find an editorial staff that wasn’t so firmly stuck in the 16th century, I might even be willing to read those last four pages of the front section again.

And to you all: Thanks!

The Observer’s audience continues to be large, cheerful and growing. We’re up about 22% in readership over last June, for example, and the early months of the year saw about 34,000 readers a month drop by. Those numbers always drift down in summer as folks, sensibly enough, find better ways to spend their time.

We remain dedicated to helping folks, investors and managers alike, as best we can as often as we can. If you’d like to support that effort, we’d be grateful. You’d got three options: direct support through a tax-deductible cash gift (at $100 or more, we’d be happy to express our thanks by sharing access to MFO Premium with you), indirectly by using MFO’s link to Amazon (we receive a rebate of something like 5% of the value of anything you buy), or psychically by sharing your thoughts, kudos, questions, leads and suggestions with us. It’s always good to know that folks find something we’ve written useful enough to respond to.

Details about the first two options are laid out under the Support Us tab at the top of the page.

Thanks, especially, to the folks who’ve already committed and who, in several cases, have set up recurring monthly donations through PayPal; Brian, Greg, Deb, and Jonathan – You’re the best! Many thanks also, to those who sent donations this month, Hjalmar, Marc and John. We appreciate your help more than you know.

Enjoy the sum- sum- summertime, and we’ll see you again in August!

Autonomous vehicles, huge gaping sinkholes and your portfolio

By David Snowball

I wonder, occasionally, about a world dominated by self-driving cars, sometimes called “autonomous vehicles.” GM announced in June that they’ve piloted 180 autonomous vehicles and that they’ve got the capability to begin mass production of them. For now, they’re committing $600,000,000 a year to the development.

Last year, Goldman Sachs projected that, between driver-assistance technology and autonomous vehicles, the market will grow from about $3 billion in 2015 to $96 billion in 2025 and $290 billion in 2035. One key is convincing regulators to allow vehicles that are designed with no driver controls at all, basically it would just be a comfortable chair and a computer screen in a rolling box, and to convince people to get into them.

There are three likely advantages to such devices: they would simplify our lives, they would save money and they would save lives.

Nonetheless, for many of us, the loss of control would give real pause. Few are entirely comfortable with the prospect that a machine would make and execute potentially life-and-death decisions for us.  Experts foresee two particularly vexing, perhaps fatal, problems:

  1. The vehicles cannot react well to circumstances their programmers couldn’t foresee. Tests in Australia, for instance, show that autonomous vehicles are entirely flummoxed by kangaroos. In India drivers have so little regard for the rules of the road that the test vehicles are virtually paralyzed. I’m perversely curious, given the number of huge gaping sinkhole stories of late, of whether programmers will take “sudden conversion of the road into an abyss” into account.
  2. Vehicles from different manufacturers must have coordinated responses, otherwise one vehicle might “misunderstand” the likely response of the other (your Ford thinks “surely it will brake” while their Chevy thinks “oh God, accelerate!”), triggering an avoidable crash.

(A separate, fascinating question would be how autonomous vehicles will react in a no-win emergency; if you’re going to either hit and kill a single pedestrian or slam into a school bus, potentially injuring many children, which will your car choose?)

My shortest summary of the self-driving future is this: things will be smoother and more efficient so long as nothing unforeseeable happens; at that point, all bets may be off.

Which raises this question:

Are we already in a self-driving stock market?

Three quick thoughts.

  1. There’s reason for concern.

    Economic growth is sluggish. The stock market has been driven higher for a decade by ultra-low interest rates that discouraged investing in “risk-free” bonds and made it irresistible to borrow money to leverage a stock portfolio; that policy is now being reversed. As the Wall Street Journal recently noted, the Fed has a terrible record for managing such tightening cycles; overshoot and overreaction are far more common than a quiet drop in pressure. And stock valuations are high. If you squint just right you can claim that they’re only at 15 year highs, otherwise you describe it as one of the three highest levels in a century.

    Bill Gross, bright though eccentric, argues this is “the second most crisis-laden” period since 1971 as much because there’s no plausible upside story as because of the downside risk. (Okay, if you want to be skeptical about Gross’s judgment, go to the 1:25 mark of the embedded video interview. He makes his claim then appears to have an “absence seizure” where he freezes for four seconds with his eyes bulging out; his neck moves a tiny bit so I don’t think the video froze, I think Gross did. I’d see a doctor.) In the same week, the chair of the San Francisco Federal Reserve Bank described the stock market as “running on fumes.” BofA Merrill Lynch’s “multi-asset fragility indicator” has been flashing red for months; Joe Ciolli of Business Insider quotes a BAML note to investors: “Markets today are prone to ‘flash crashes’ and tantrums …Rising fragility shows cracks emerging.”

  2. There’s precious little evidence of concern.

    The markets set, then broke, three record highs in June and did so with record low levels of volatility. (“Volatility has disappeared from the stock market,” notes the WSJ’s Justin Lahart, “If you think stocks are dull, look at the economy,” 6/27/2017.). Record numbers of fund managers now describe stocks as overvalued and 80% of them recognize that the US market is the world’s most overvalued.

    And still it rises. Why?

  3. Perhaps because robots don’t feel concern.

    More money is entrusted to self-driving vehicles than ever before.

    Quant hedge funds are approaching a trillion in assets, which is multiplied by the funds’ ability to use leverage to multiply their bets. John Detrixhe, who has the painfully trendy “Future of Finance”, beat at Quartz.com reports:

    the buzz around quants is so intense that investment managers may feel pressured to adopt some sort of algorithmic strategy, or else risk raising less money, [Michael DePalma of Phase Capital] said. Computer-driven hedge funds have doubled their assets under management, to $932 billion, following eight straight years of inflows since 2009, according to data-tracking firm HFR. (“Even the most cutting-edge quant funds rely on old-school human intuition,” 6/28/2017)

    Passive ETFs contribute another $3 trillion, and rising. Since most are indiscriminate buyers, that is, they buy both the best and the worst components of their indexes with equal aplomb, they tend to provide an increasingly important prop to the market. The Wall Street Journal’s Chris Dietrich writes:

    Booming demand for passive investments is making ETFs an increasingly crucial driver of share prices, helping to extend the long US stock rally even as valuations become richer and other large buyers pare back. ETFs bought $98 billion in US stocks during the first three months of this year, on pace to surpass their total purchases for 2015 and 2016 combined…surging demand for ETFs this year had to an unprecedented extent helped fuel the latest leg higher for the eight-year stock-market rally. (“ETF buyers propel stock market’s surge,” 6/29/2017)

    “The risk,” according to Michael O’Rourke, chief market strategist at Jones Trading Institutional Services, is that when the wind changes direction, “the blind buyers [might] turn to blind sellers.” Cliff Asness, pointing to the market experience in 2007, allows that “a quant quake” could happen again.

As with self-driving cars, the question isn’t whether these things will help precipitate a crash, it’s what you should do about it.

  1. Remember that the bull could end with a whimper, not a bang. Optimists, such as Fed chair Janet Yellen believe we won’t see another financial crisis in our lifetime:

    Will I say there will never, ever be another financial crisis? No, probably that would be going too far. But I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will.

    The alternative to a sudden release of pressure might be a slow release: years, perhaps decades, where stocks produce formerly bond-like returns and bonds produce cash-like returns. Jim Masturzo, senior vice president for asset allocation at Rob Arnott’s Research Affiliates, a firm responsible for $200 billion in assets, says that the firm’s asset allocation research shows that a traditional 60/40 balance portfolio is likely to return about one-half of one percent a year, once inflation is accounted for, over the next decade. That estimate assume economic growth of about 2% and a dividend yield of about 2% but also a slow decline in stock market valuations.

    Jonathan Clements is both more optimistic and more pessimistic: a slow return to valuations common in the 20th century, coupled with those same growth and dividend assumptions, could yield a market return of 3-4% for a half century.

  2. Try to understand the magnitude of the risk your portfolio faces.

    In the last couple issues, we’ve walked folks through the mechanics of calculating your likely maximum portfolio drawdown, using your current portfolio and the maximum drawdown data based on funds’ performance during the 2007-09 crash. In the case of my own non-retirement portfolio, for example, I might anticipate a fall 30% and a recovery time in the range of 3-5 years.

  3. Adjust your portfolio if you don’t like what you see.

    If nothing else, rebalance your stock/bond/cash allocation if you haven’t done so in the past year or so. If you’re more ambitious and have access to MFO Premium or another database that allows you to construct a correlation matrix for your portfolio; that will tell you whether your attempt at diversification is more apparent than real. That is, if several of your funds have turned out to be highly correlated during downturns or across the entire market cycle, you might ask whether you’re better served by dropping a fund or two. That would give you a simpler portfolio that’s easier to track and assess. Your most ambitious move might be to adjust your asset allocation; our occasional essays on the charms of a stock-light portfolio show that going from 60/40 stocks-to-bonds down to 40/60 reduces your maximum drawdown by about 45% while costing you about a percent a year in returns. Slightly overweighting Europe and the emerging markets, both of which are better-valued today than the US, might offset that.

  4. Consider hiring an experienced chauffeur.

    Passive products excel in the sorts of steadily rising markets we’ve seen in this long bull market: with little discrimination between good and bad firms, everything rises and ETFs capture those rises efficiently. At best, they’ll capture any fall with equal efficiency. At worst, some oddity in their construction will cause them to become unhinged (as they did during the “flash crash”) or the purity of their decline will cause you to become unhinged. In either case, you’d be better served by an experienced manager who’s profited from crises before and who currently has the cash on hand to take advantage of any cracks in the system. We call those folks The Dry Powder Gang and we’ve written about them frequently.

There is, as many have noted, no such thing as passive investing. You make active decisions about what slice(s) of the market to pursue, index designers make active decisions about which companies qualify, fund issuers make active decisions about which indexes (there are now literally millions available) to track.

This might be a particularly opportune moment to assert control over your portfolio and to review the easy assumptions bred by a long bull market. If you think now about how you judge the market’s remaining upside prospects against its downside ones and how you can best preserve the gains you’ve already made, you’ll enter the fall with much better prospects.

Summer Musings

By Edward A. Studzinski

“Change is the law of life. And those who look only to the past or the present, are certain to miss the future.”

      John Fitzgerald Kennedy. Speech, Frankfurt, 25 June 1963.

The first six months of 2017 are gone, and most global markets have surged during that period. So those like me who thought valuations were starting to look extreme at the beginning of the year, once again cried “wolf” too soon. For those six months, Vanguard’s S&P 500 Admiral Fund achieved a total return of 9.3%, with an expense ratio of four basis points. Many actively managed funds, alas, did not perform quite as well for their investors, although their managers continued to do quite well, purchasing apartments in Paris or London, or jetting to their Georgia coastal estates.

Jason Zweig had an interesting column in The Wall Street Journal a week ago, pointing out that over the last twenty years, the number of publicly-traded stocks in the U.S. has been cut in half. This has happened as a result of takeovers, being taken private, etc., etc. My friend Michael Mauboussin, a strategist at Credit Suisse earlier this year highlighted the trend in a report titled “The Incredible Shrinking Universe of Stocks” that also pointed out that it made for a much more competitive environment for active managers. Mauboussin’s point was that active managers had a smaller number of issues to select from if they deviated from the index, notwithstanding that that was where the best opportunities, resulting from inefficiencies, might lie. Let us leave aside the issue that many so-called, or perhaps more aptly, so-marketed, active managers are really closet indexers.

This week, Mr. Zweig, in response to a number of letters from individuals at various asset-gatherers, backed off somewhat from the import of the shrinking number of stocks as pertains to small cap stocks. After all, that is a tiny part of the overall market. The action is all in the large caps and mega-cap securities. I think that raises a different issue. The increase in the shift from active managers to passive managers is resulting in a far larger part of the capitalization of issues being effectively “locked away” from the market unless the index funds start having negative flows. It also explains why valuations continue to rise. More money is chasing a smaller set of outstanding shares. Effectively, the universe of active managers has become the hamsters turning the wheel, having to run ever faster to mirror, let alone catch, the relevant benchmark index.

I had lunch this past week with my friend who is a very senior executive at a large, Chicago-based, financial services firm. Both of us see the demise of the mutual fund as preferred vehicle for investment somewhere out on the horizon (in fairness, one of us sees it on the horizon, and the other just over the horizon). Part of the issue is the impact of fees and fund flows on performance. Both factors in tandem destroy performance and serve to place funds at a competitive disadvantage to index products. One solution is the commingled equity trusts, which have come into vogue for 401(K) and other retirement accounts, slicing out a heavy layer of fees. Another solution is the return of separate account management, which will make use of individually-managed stock portfolios or ETF’s. The graveyard humor here is that many investment counseling firms were already ideally positioned for the new world. Unfortunately, their senior executives got greedy and focused on where the money and profit margins were, which was in the mutual fund business. They pushed out the portfolio managers and counselors with experience and brains, and replaced them with client-servicing personnel. Both of us see the demise of the “star” manager. Indeed, some firms face the problem of insurance firms with commission-driven sales forces in a world of internet purchasing and activity. They would love to go from point A to point C, but don’t know how to get there having sold the mystique of the star. Some cope of course by announcing teams of co-managers to present the image of a collegial decision-making process with sustainability and consistency as there are personnel changes. Sadly that assumes that the brand of yesteryear is the same as the brand today. If you buy a package of a Kraft product today, is it made by Kraft or distributed by Kraft, with the ingredients a function of a manufacturing contract to provide the greatest margins at lowest cost. In the investment world, I am thinking of an energy analyst in New England who retired some years ago, with a lifetime of contacts in the energy industry and a valuation methodology tied to valuing reserves in the ground in relation to the current futures strip. If the replacement does none of those things, merely trying to guestimate earnings based on an estimated production number, the brand is not the same.

Everybody Can’t Be David Swensen

As we have mentioned in the past, David Swensen of Yale University is justifiably famous for his multi-asset approach to running Yale’s endowment, which has allowed it to outperform most college endowments. Other endowments, egged on by their rather expensive consultants (there primarily to provide cover – the consultant made me do it), have tried to emulate that approach, slicing and dicing their investment portfolios into a multiple of asset classes, adding real estate, private equity, and venture capital to the traditional mix of global stocks and bonds.

Here I must point out that Mr. Swensen, having written a book on personal investing for the individual, basically said his approach could not be replicated easily, as he had access to a range of managers at prices others would not be able to obtain. And, although he was writing for individuals I think his advice was meant as well to apply to smaller endowments. He said that individuals (and the smaller endowments) would be better served by investing in a mix of passive, low-cost funds.

In recent years, from my own experience, I had noticed an uptick in the percentage of assets recommended and committed to private equity investments. The recommendations emanated from the consultants as well as the members of private equity and venture capital firms serving on endowment investment committees. They argued that the higher returns available from private equity (versus equities) justified a greater commitment of funds to that area. Let us ignore the multiple apparent conflicts of interest that exist in the scenario I have just presented. What’s the attraction to private equity?

Well, in the last two weeks I have twice had that question answered. Allegedly when private equity funds, which have limited-lives of usually five to seven years, are liquidating, some sixty per cent of the companies invested in are sold to new private equity funds being raised by competitors. Tulip mania? Let’s call this what it is – “greater fool investing.” But why still the attraction to illiquid investments? Answer – they don’t have to be marked to market, so the reported returns appear to be smoother. As we all know, today the enemy is “volatility.” Even though volatility is usually an opportunity for value investors, for rating agencies, donors, trustees – volatility is a curse.

Technology Strikes Again

The May/June 2017 issue of MIT Technology Review has a fascinating article on page 22 entitled, “Goldman Sachs Embraces Automation, Leaving Many Behind.” The article points out that in 2000, Goldman had six hundred equity traders at headquarters, buying and selling stocks for clients. Today there are just two equity traders left. Automated trading programs have taken over the work, with the support of some two hundred computer engineers.

This is another area where what you don’t see, may result in what you don’t get. Technology, especially in trading platforms, is an area that has been ripe for underspending by asset gathering firms. I still remember some ten years ago when the CEO of such a firm told me that automated trading and algorithms would never amount to more than ten per cent of trading volume. That mentality allowed the deferral of hundreds of thousands of dollars on equipment, software, and technically-literate personnel. Of course, having individual traders as opposed to programs allowed for some degree of control. Now, best execution may now actually turn out to be best execution. And compliance may now be subject to automated audit programs to confirm the elimination of “friction” on trading costs.

Requiescat

On a sadder note, we note the closing and liquidation of the Oakseed Opportunity Fund as of 30 June 2017. It points out the difficulty of a fund getting traction without a major start-up marketing effort to garner assets. It is also reflects the difficulty good managers have in overcoming sub-par performance. For in today’s world long-term really isn’t, even when you have what is a differentiated product in terms of security selection and portfolio composition. And most value investors have been forced to become value-oriented investors, whatever that term may mean. I wish my former colleague Greg Jackson, and his partner John Park, well in the future.

UK Governance

This week the financial regulator in the UK announced an effort to eliminate conflicts of interest while restoring investors trust in the UK’s approximately 7 trillion pounds sterling investment market. Fee structures are to be overhauled and made more transparent. Governance standards are to be toughened. Fund boards are to now have two independent directors (in response to those who say trustees here are independent, I say you are joking, when asset managers hand-pick trustees who are thought to be willing to be “flexible” in return for being allowed to set their own compensation). The Financial Competition Authority also turned its guns on the hedge funds and private equity funds for lack of transparency over fees and expenses. Fees received by the managers when investors buy and sell funds are to be curtailed. The FCA has also taken the position that the government should allow it to regulate the investment consultants who determine the allocation of pension and endowment funds in the UK.

It will be interesting to watch the fallout from the above. The rest of Europe is watching, given that similar issues exist in many EU jurisdictions. In this country of course, notwithstanding the effort to derail the implementation of the fiduciary requirement, it has gone into effect. While there will be a review of that rule, I expect, like the banning of restrictions on pre-existing conditions for health insurance as a result of the Affordable Care Act, the fiduciary standard is out of the box for good.

Inside Smart Beta Conference – New York 2017

By Charles Boccadoro

Matt Hougan of Inside ETFs and Dave Nadig of ETF.com hosted an Inside Smart Beta Conference this past month in New York City. Their career paths overlapped at ETF.com, which promotes itself, arguably so, as the “world’s leading authority on exchange-traded funds.” I find both Matt and Dave articulate thought leaders on ETFs and investing generally. They co-authored CFA’s A Comprehensive Guide to ETFs.

The venue in midtown Manhattan just off 6th Avenue drew some 330 attendees, including financial advisors and money managers. The event’s agenda comprised two dozen talks and panels, including Research Affiliates’ Rob Arnott and Shark Tank’s Kevin O’Leary. Vanguard was one of several key sponsors, along with JP Morgan and John Hancock.

If, like me, you’ve not been to NYC in a while, the former Pan Am Building is the Met Life Building, Trump Tower on 5th Avenue remains surrounded by police barricades playing havoc with nearby businesses and traffic, the marvelous One World Trade Center now dominates lower Manhattan skyline, construction is everywhere, Central Park is a jewel, and pizza-by-the-slice at places like Bleecker in Greenwich Village remains a whole other food group … amazing!

What is Smart Beta exactly?

Here’s one definition, by Nadig: “Going by many different names (strategic beta, fundamental indexing, factor investing and more), smart beta is a catchall term for rules-based strategies that aim to deliver better risk-adjusted returns than traditional market-cap-weighted indexes.”

Here’s another, by AQR’s Cliff Asness and John Liew: “Let’s be blunt. Smart Beta is mostly re-packaged, re-branded quantitative management… It takes well-established, quantitative investing styles, or factors, and implements them in a simple, transparent manner often, though not always, at lower fees than what we’ve seen in the past.”

Some of the better known “factors” are quality, value, momentum, size, and volatility. Smart beta ETFs target one or more such factors. In the opening keynote, Hougan and Nadig reported that 160 new smart beta ETFs have been introduced in the past three years. But while historically portfolios built on these factors outperform the market, they don’t work all the time, as depicted here:

The chart represents a cautionary tale for investor expectations. It occurred to me that like maximum drawdown, min and max rolling period returns should be including in all fund performance history, not just last 1, 3, 5, and 10 year look-back, as applicable.

The case for some ETFs over traditional mutual funds, but especially over actively managed ones, involves being cheaper, more transparent, rules-based, and more tax efficient. Perhaps no better example of a smart beta ETF strategy is defined in Wes Gray’s book Quantitative Value, A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors. We profiled QVAL in late 2014.

The case against some ETFs? See our David’s Certificate in ETF Punditry.

In a sense, factors are the new active. Factor-based indexes and trading rules can be automated. With automation, coupled with under-performance of traditional actively managed funds, follows elimination of money manager and trading roles, as evidenced by recent layoffs and skill reshuffling at firms like Goldman Sachs and Blackrock.

The following chart utilizes AlphaArchitect’s Visual Active Share Tool to illustrate factor tilts, specifically volatility with iShares Min Vol (USMV) versus All Country Index (ACWI), and value with ValueShares Quantitative Value (QVAL) and iShares Russell 1000 Value versus (IWD) versus Russell 1000 (IWB):

Here’s how iShares describes its Min Vol ETF (USMV) in the prospectus:

The Underlying Index is designed by selecting securities from the MSCI All Country World Index (the “Parent Index”), which is a capitalization weighted index, and then follows a rules-based methodology to optimize the Underlying Index and determine weights for securities in the index having the lowest total risk.

During one of several lively discussions, Bloomberg’s Eric Balchunas noted that closet-indexing is one of the industry’s dirty secrets: “Most smart beta ETFs are counterfeits with too much beta.” The visualizer above reveals that while IWD has a value tilt, it is not nearly as value oriented as QVAL. While touting the benefits of ETFs like QVAL, Eric argued: “Go big, or go Vanguard!”

A review of our Lipper Data Feed Service for month ending May 2017 reveals just over 2000 US ETFs versus about 7500 traditional open-ended funds. Assets under management (AUM) are $2.9 trillion for the former versus $17.4 trillion for the latter, excluding money market funds, or about 15%.

There are now 320 ETFs with AUM of $1 billion or more.

There are now 15 firms managing ETFs with AUM totaling $10 billion or more and 60 firms with ETFs totaling $100 million or more, including Meb Faber’s Cambria at $422 million.

Here is a summary of top fifteen US ETFs by AUM:

Hougan and Nadig both believe AUM in ETFs will surpass that of traditional mutual funds in 6 to 8 years. A trend supporting this belief is that ETFs are the vehicle of choice of increasingly popular robo-advisors, like Wealthfront and Betterment. Hougan, in fact, tracks his own portfolio called The World’s Cheapest ETF Portfolio. “It’s one of the greatest deals in financial history,” shown here:

During another session, entitled “Smart-Beta Hot Seat,” Hougan asked Vanguard’s Dan Reyes “Why are you even here?” Vanguard actually offers 70 ETFs with $722 billion in AUM (second only to Blackrock), but most are vanilla-index, long-only funds with no leverage or derivatives. The implication of its strong showing at this conference is that Vanguard likely plans to launch actively managed ETFs and with lower fees.

Another notable presence was Dimensional Fund Advisors (DFA), historically the investment choice of Nobel Laureates, often offering funds with very high minimums and then only through financial advisors trained in DFA’s quantitative philosophy. They have now teamed with John Hancock to offer 12 multifactor ETFs utilizing John Hancock Dimensional “indexes designed by DFA, a company regarded as one of the pioneers in strategic beta investing.”

In the session entitled “Best Factor ETFs,” four speakers debated the merits of …

JPMorgan Diversified Return Global Equity ETF (JPGE) won the contest with the audience as it offered a “smoother ride” for investors, making it a more likely candidate to stick with versus the other more volatile offerings.

Rob Arnott’s talk was entitled Pitfalls in Smart Beta: Data Mining, Selection Bias & Performance Chasing.

Some key messages: “Most investors are trend chasers! Most academics are trend chasers! Most product providers are trend chasers! Trend chasing is costly!”

But, contrarian investing adds value, as depicted here:

Kevin O’Leary shared how he tried all sorts of investments with proceeds from his sale of The Learning Company … hedge funds, hot managers, private equity. One thing he learned was that even the strongest managers “go flat or blow-up every 7-10 years.” The lesson led him to develop investment rules for stocks he owned: 1) no cashless sales, 2) no debt financed dividends, 3) no slowing of return on assets, and 4) no more than 80% of market volatility. These rules guided the creation of a series of indexes that support six O’Shares ETFs, which are the backbone of his family trust.

Matthews Asia Credit Opportunities (MCRDX/MICPX), July 2017

By David Snowball

*Matthews Asia liquidated their two fixed-income funds in March, 2023. Manager Teresa Kong subsequently left the firm. In consequence, the information for Marathon Value should be read for archival purposes only.*

Objective and strategy

The managers seek total return over the long term. They invest in debt issued by Asian corporations, governments and supranatural institutions. The managers invest, primarily, in high-yield, dollar-denominated debt though they define that term broadly enough to incorporate both high-yield bonds and debt-related instruments such as convertible bonds, hybrids and derivatives with fixed income characteristics.  Around 20-25% of the portfolio has been in convertible bonds since inception, and that percentage is been pretty stable from year to year. 

Adviser

Matthews International Capital Management, LLC, the Investment Advisor to the Matthews Asia Funds, was founded in 1991 by Paul Matthews. Since then they’ve been the only U.S. fund complex devoted to Asia. They have about $27.5 billion in fund assets and advise18 funds. Of those, two focus on Asian credit markets: Strategic Income (MAINX) and Credit Opportunities.

Managers

Teresa Kong and Satya Patel. Before joining Matthews in 2010, Ms. Kong was Head of Emerging Market Investments at Barclays Global Investors (now BlackRock) and responsible for managing the firm’s investment strategies in Emerging Asia, Eastern Europe, Africa and Latin America. In addition to founding the Fixed Income Emerging Markets Group at BlackRock, she was also Senior Portfolio Manager and Credit Strategist on the Fixed Income credit team. She’s also served as an analyst for Oppenheimer Funds and JP Morgan Securities, where she worked in the Structured Products Group and Latin America Capital Markets Group.

Mr. Patel joined Matthews in 2011. Before that, he was an Investment Analyst with Concerto Asset Management. He earned an M.B.A. from the University of Chicago Booth School of Business, an M.A. in Accounting and Finance from the London School of Economics and a B.A. in Business Administration and Public Health from Georgia.

Kong and Patel co-manage Matthews Asia Strategic Income (MAINX). Both are remarkably sharp, thoughtful and personable.

Strategy capacity and closure

These aren’t yet considerations, and aren’t likely to become concerns for years. That said, Matthews has frequently closed their funds when they’ve deemed it in their shareholders best interests to do so.

Management’s stake in the fund

As of December 30, 2016 (the latest Statement of Additional Information), neither of the managers has invested in the fund. Two of eight trustees have chosen to do so, though all of the trustees have investments in Matthews funds, with the two smallest stakes being held by the two newest trustees.

Opening date

April 29, 2016.

Minimum investment

$2,500 for Investor class shares, $100,000 for Institutional shares.

Expense ratio

1.10%, after waivers, for Investor shares and 0.90% for Institutional ones, on combined assets of $19.5 million (as of June, 2017). Matthews does not impose 12(b)1 fees.

Comments

Donald Trump isn’t the argument for investing in Asian fixed income, but he appears intent on accelerating the argument.

It is inevitably the case that most of the world’s financial market in the 21st century will be centered in, and driven by, Asia. Just as economic developments in the late 19th century led to the migration of the world’s markets from London to New York, so the economic developments in the early 21st century will engender a similar transition toward Asia. The rise of New York did not make London irrelevant, it merely meant that London was no longer running the show. Something similar is underway now as Asia credit markets quickly expand and deepen.

The policies pursued by Mr. Trump seem likely to accelerate that evolution. His nationalist agenda implicitly, and sometimes explicitly, withdraws the U.S. from international leadership leaving an opening for China to assume what they believe to be their rightful place on the world stage. That’s exemplified by his withdrawal from the Paris climate accord. European Commission President Jean-Claude Juncker “explained to Mr. Trump … that it would not be good for the world or the United States if America was to literally step off the world’s stage. Because the vacuum will be filled, and the Chinese are in prime position to take on a leadership role.”

President Xi’s “One Belt, One Road” project – a $1.7 trillion infrastructure program to tie all of Asia, most of Europe and parts of Africa to China – is another step in that assertion. The consulting firm McKinsey described it this way, “One Belt and One Road (OBOR) … aims to create the world’s largest platform for economic cooperation, including policy coordination, trade and financing collaboration, and social and cultural cooperation.” The Trump administration’s decision to send a senior representative to the May OBOR Summit was played in the Chinese press as evidence of America’s tacit support, “Washington’s participation … [will] help win Beijing and its infrastructure projects more international understanding and influence.”

Here’s the argument: Asia is not, and cannot be treated as, some backwater region in the global financial system or in investors’ portfolios. Its capital markets are already large, they’re maturing quickly and seem destined to play a major role in global finance.

Nonetheless, most American investors have minimal exposure to it. There are two reasons for that underweight. First, bond indexes tend to be issuance-weighted. That is, they place the greatest weight on the largest (i.e., most indebted) issuers, not on the most credit-worthy. Asia has, traditionally, been a modest user of such markets. Second, investors are stumped by “the jumbo shrimp conundrum.” As with “jumbo shrimp,” the phrase “Asian fixed income” seems to have a built-in contradiction: “Asian” means “emerging markets” and “scary” but “fixed income” means “safe and reliable.” Our antiquated view of the Asian markets leads us to look elsewhere, even in a yield-starved world.

Matthews is trying to change that by offering small investors access to the Asian fixed income markets. Four things you need to know:

The managers are really good. In our conversations, Ms. Kong and Mr. Patel have been consistently sharp, clear and thoughtful. They evidence profound understanding of their portfolio, which they can comfortably explain to non-specialists, and of the markets within which they operate. Their Strategic Income Fund has returned 5.0% annually since inception, trailing its EM Hard Currency Debt peer group by 0.4% annually but with a far lower standard deviation, maximum drawdown and downside deviation, and substantially higher Sharpe ratio.

The fund’s targets are reasonable and clearly expressed. “The objective of the strategy,” Ms. Kong reports, “is to deliver 6-9% return with 6-9% volatility over the long term.” In its first year, the fund returned 8.8% and a standard deviation of 3.4%.

Their opportunity set is substantial and attractive. The Asia credit market is over $600 billion and the sub-investment grade slice which they’ll target is $130 billion. For a variety of reasons, “about a quarter of Asian bonds are not rated by one of the Big Three US rating agencies anymore,” which limits competition for the bonds since many U.S. investors can only invest in rated bonds. That also increases the prospect for mispricing, which adds to the Matthews’ advantage. “Over the past 15 years,” they report, “Asia high yield has a cumulative return double that of European, LATAM and US high yield, with less risk than Europe and LATAM.” Here’s the picture of it all:

The best investments lie in the upper-left corner of that graph, representing the highest possible returns and the lowest possible volatility. You might draw a line between Asia Credit and Asia HY (the two gold points) then assume that the fund will fall on that line rather nearer to Asia HY.

The fund’s returns are independent of the Fed. U.S. investors are rightly concerned about the effect of the Fed’s next couple tightening moves. The correlation between the Asia HY market and the Barclays US Aggregate is only 0.39. Beyond that, the managers have the ability to use U.S. interest rate futures to hedge U.S. interest rate risk.

As Asian credit markets and economies mature, that independence grows. Teresa and Satya write:

More than ever, Asian economies are marching to the beat of their own drums rather than hinging on the US to drive business cycles. A decade ago, Asia needed to export to the U.S. and Europe to drive growth, and so Asian business cycles were closely linked to the U.S. Today, growth in Asia is driven by trade within Asia and domestic consumption of goods and services and has much less to do with exports to the U.S.

Asia and the U.S. will always be linked because of the global nature of companies and capital flows, but correlations between Asia and the U.S. – whether we look at interest rate cycles or asset class returns – are relatively low.

We’re in a rising rate environment in the U.S., and history has shown us that Asian bonds are relatively well insulated against rising U.S. rates. Whether you look at the local currency market, or even more so at the Asian high yield market, Asian bonds have a low beta to U.S. interest rates, and give you protection in a rising interest rate environment.

Bottom Line

If U.S. high yield bonds make sense for your portfolio, so might Matthews Asia Credit Opportunities. Asian high-yield and credit opportunity investments have a long track record and, in particular, a long record of offering higher returns with lower volatility than US high-yield. The same thing is true when compared to EM bonds; the Asian products simply and consistently outperform the global EM bond markets.

Even investors in Matthews Asia Strategic Income (MAINX) would get some diversification value from MCRDX. MAINX, they noted, “is an unconstrained bond fund with the full flexibility to pursue return opportunities in Asian credit, currencies or interest rates. MCRDX is more focused, deriving most of its returns from credit and most often in high yield.” MCRDX is also largely buffered from the effects of currency fluctuation which helped it substantially in the immediate aftermath of the US election.

If you want exposure to Asian markets, Matthews is the best, deepest and more experienced option available to most U.S. investors. Both of these funds are worth serious examination by investors who are interested in income but concerned about the parlous state of Western credit markets.

Disclosure: while the Observer has no financial or other ties to Matthews Asia or its funds, I do own shares of MAINX in my personal account and have recently added to them.

Fund website

Matthews Asia Credit Opportunities. Special plaudits to Matthews for two features of their website. First, they offer frequent analyses of developments affecting Asian finance. Second, they offer biographies of every member of their funds’ board of trustees. The board serves as investors’ agents; that is, they’re elected by the investors and are charged with pursuing your best interests in all dealings involving the fund. In reality, most firms barely acknowledge that they exist.

© Mutual Fund Observer, 2017. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.

Launch Alert: Artisan Thematic Fund (ARTTX)

By David Snowball

On April 24, 2017, Artisan Partners launched Artisan Thematic Fund (ARTTX). The managers seek to identify secular themes that will have an enduring impact on business, ideally identifying those themes sooner and more clearly than their competitors. There’s a point at which a development transitions from being geeky-cool to being a driver of corporate profits; Artisan refers to that as an inflection point.

Here’s their text: “Initial screen for large, inflecting total addressable market (TAM) through changes in secular, structural and cyclical trends driven by technology, adoption of new business models, changes in societal behavior, market conditions or regulation.”

Once they find The Next Big Thing and are convinced that it’s reached an inflection point, they use fundamental analysis to identify the firms most likely to profit from the thematic trend, then construct a risk-aware portfolio of 20 – 35 names across 4–7 themes. Up to 50% of the fund’s portfolio might be international, including investments in the emerging markets. The most heavily weighted sectors are likely to be consumer, tech/telecomm and industrials.

The Fund is managed by Christopher Smith. He joined Artisan Partners in October 2016. Prior to joining Artisan Partners in 2016, Mr. Smith was a senior analyst at Kingdon Capital from October 2014 to October 2016. From September 2013 to October 2014, he was the founder and portfolio manager at Centerline Investment Partners and prior thereto, he was a managing director with Karsch Capital Management. He’s supported by four analysts and other Artisan professionals. Together they form Artisan’s eighth autonomous management team.

I am deeply ambivalent about the fund. In the normal course of things, there are few safer bets than a new Artisan fund. A fund representative once noted that the senior partners might interview dozens of prospective management teams in a year, yet choose to launch a new fund every two or three years. The reason is that they’re not merely looking for really good managers; they’re looking for potential “category killers” (their words).

With very few exceptions, they’ve found them. Artisan’s three newest funds illustrate the point. Artisan Developing World (ARTYX) has substantially outpaced its peers in its first two years of operation, Artisan High Income (ARTFX) is in the top 1% of its Morningstar category over its first three years and Artisan Global Equity (ARTHX) bested its peers in each of its first five years of operation. Charles’s analysis of firm-wide performance places Artisan as one of the industry’s top tier firms.

And yet, caution is warranted. The key reservation is that we know who employed Mr. Smith but nothing about how he performed, how his discipline evolved, how robust his risk management skills were or why he tended to move from firm to firm. Mike Roos, one of the Managing Directors, allows “We don’t delve into his prior record.” That’s likely because the “investor protection” rules at FINRA would make disclosure of his hedge fund work so insanely complicated that it’s simply not worth the effort. Nonetheless, it leaves investors to act purely on the industry’s two most dangerous words: Trust us.

It doesn’t help that the name sounds a bit gimmicky and that the text surrounding the fund is not a model of clarity and precision. The fund will probably do well and, quite possibly, much better than “well.” That’s the indisputable track record. And still, I’d hesitate to act without clearer evidence.

For now, the fund has a single share class. The expense ratio is 1.50% and the minimum initial investment is $1,000.

The Artisan Thematic homepage is, as yet, a bit thin on content but it does offer the essential information and Artisan managers tend to be pretty good about keeping their investors updated.

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. This month’s good news is that most of the mutual funds in registration are sensible strategies from respected shops: Artisan, AQR, Brown Advisory, T. Rowe Price and others. The other part of the news is that the ETF industry continues to crank out a freakish mishmash. That includes the Quincy Jones Streaming Music, Media & Entertainment ETF, the Republican Policies Fund (GOP), the Democratic Policies Fund (DEMS) and the European Union Breakup Fund (EUXT).

Artisan Global Discovery Fund

Artisan Global Discovery Fund will seek maximum long-term capital growth. The plan is to build an all-cap global portfolio of “companies that it believes possess franchise characteristics, are benefiting from an accelerating profit cycle and are trading at a discount to its estimate of private market value.” The fund will be managed by Jason L. White, James D. Hamel, Matthew H. Kamm and Craigh A. Cepukenas. Various members of the team manage the five-star Global Opportunities, four-star Mid Cap and three-star Small Cap funds. The initial expense ratio has not yet been released. The minimum initial investment will be $1,000.

AQR Alternative Risk Premia Fund

AQR Alternative Risk Premia Fund will seek positive absolute returns. Here’s the official text describing the strategy: “The Fund pursues its investment objective by aiming to provide exposure to six separate investment styles: value, momentum, carry, defensive, trend and volatility using both long and short positions within the following asset groups: stocks, equity indices, bonds, interest rates and currencies.” The random italics are theirs.The fund will be managed by the usual AQR team. The initial expense ratio hasn’t been disclosed. The minimum initial investment will be $1,000,000 or $5,000,000, depending on share class.

Brown AdvisoryMid-Cap Growth Fund

Brown Advisory Mid-Cap Growth Fund will seek to achieve capital appreciation. The plan is to invest in US midcaps which exhibit “durable growth, sound governance, and scalable go-to-market strategies.” The fund will be managed by Christopher A. Berrier and George Sakellaris. Mr. Berrier leads Brown Advisory’s small cap growth team and co-manages their four-star Small Cap Growth Fund (BIASX). For now, only the Institutional share class is moving ahead though the prospectus clearly indicates that there will be Investor and Advisor shares as well. The initial expense ratio will be 0.71%. The minimum initial investment will be $1,000,000.

Epsilon Sector-Balanced Fund

Epsilon Sector-Balanced Fund will seek capital appreciation. The plan is to invest in large cap stocks which are favored by hedge fund managers; they’ll determine that by reading the funds’ 13F filings. They remind us that “The Fund is not a hedge fund and does not invest in hedge funds,” just in case you suspected that reading about a hedge fund made you a hedge fund. The fund will be managed by team from Epsilon Asset Management. The initial expense ratio will be 1.25%. The minimum initial investment will be $1,000.

Essex Environmental Opportunities Fund

Essex Environmental Opportunities Fund will seek long term capital appreciation. The plan is to construct a more-or-less all cap portfolio of 35-45 stocks. They’re targeting firms whose activities are positive for the global environment and which derive at least 25% of earnings from one of nine focuses: 1) Agricultural Productivity & Clean Fuels; 2) Clean Technology & Efficiency; 3) Efficient Transport; 4) Environmental Finance; 5) Power Technology; 6) Power Merchants & Generation; 7) Renewable Energy; 8) Low Carbon Commerce; and 9) Water. The fund will be managed by William H. Page and Robert J. Uek Senior Vice President and Portfolio Manager, has been a portfolio manager of the Fund since its inception in September 2017. The initial expense ratio has not yet been disclosed. The minimum initial investment will be $2,000 for Investor shares.

NWM Momentum Bond Fund

NWM Momentum Bond Fund will seek long-term capital appreciation, an exceedingly rare goal for a bond fund. The plan is to invest in fixed-income ETFs. When their model dictates a “risk-on” environment, they’ll invest in junk bonds, convertibles, EM bonds and so on. During “risk-off” environments, they’ll toggle to higher-quality fare. The fund will be managed by Timothy L. Ayles and George P. McCuen of NWM. The prospectus demurely notes, “The Adviser is a newly registered investment adviser and does not have assets under management.” The initial expense ratio will be 1.68% after waivers. The minimum initial investment will be $5,000, reduced to $1000 for tax sheltered accounts and those with automatic investing plans.

TCW Global Artificial Intelligence Equity Fund

TCW Global Artificial Intelligence Equity Fund will seek long-term capital appreciation. The plan is to invest in 25-60 funds that might “benefit from advances in the use of artificial intelligence … [typically in] information technology, consumer discretionary, industrial and health care sectors.” Frankly, I’m a bit fuzzy on what industries mightn’t claim a benefit from the evolution of our robot overlords. The minimum market cap will be $300 million. The fund will be managed by Jeffrey Linn and Thomas Lee. The initial expense ratio has not yet been disclosed. The minimum initial investment will be $2,000.

T. Rowe Price Multi-Strategy Total Return Fund

T.  Rowe Price Multi-Strategy Total Return Fund will seek strong long-term risk adjusted returns. The plan is to act like a multi-alternative hedge fund, seeking positive returns in all sorts of markets by rotating through nine different alternative strategies. The fund will be managed by Richard de los Reyes and Stefan Hubrich. Both guys work with their global allocation strategy team but not, so far as I can tell, with their very fine Global Allocation Fund (RPGAX). The initial expense ratio will be 1.48%. The minimum initial investment will be $2,500.

Manager changes, June 2017

By Chip

It’s been a relatively unexciting month on the manager change front, perhaps with folks regrouping over the quiet summer months. Five of the departures were triggered by announced retirements, which is a bit higher than usual. FPA got bounced off the team at Litman Gregory Masters Smaller Companies (MSSFX). On the one hand, that’s not terribly surprising: the managers’ main charge, FPA Capital (FPPTX), has trailed 94% of its Morningstar peers over the decade that lead manager Dennis Bryan has been in place. On the other hand, it is surprising that they lasted so long: FPA has been managing a portion of the portfolio for a decade, while the average tenure of managers at MSSFX is two to three years. It’s worth pondering the implications of that turnover: Litman Gregory’s specialty is manager selection and they have a lot of resources to deploy in finding the best managers and still, within a very few years, the majority of them are no longer contributing enough to remain. It does highlight the challenge that the rest of us face.

Ticker Fund Out with the old In with the new Dt
ACDJX AC Alternatives Disciplined Long Short Fund Scott Wittman will no longer serve as a portfolio manager for the fund. Yulin Long will continue to manage the fund. 6/17
ALEVX AC Alternatives Long Short Fund Effective June 22, 2017, Passport Capital, LLC will no longer serve as a subadvisor for the fund. Columbia Management Investment Advisers, Sirios Capital Management, Three Bridges Capital, and PWP remain. 6/17
AVMNX Advantus Dynamic Managed Volatility Fund No one, but . . . Jeremy Gogos has joined David Kuplic and Craig Stapleton on the management team 6/17
AMENX Advantus Managed Volatility Equity Fund No one, but . . . Jeremy Gogos has joined David Kuplic and Craig Stapleton on the management team 6/17
ACPVX American Century Core Equity Plus Fund Scott Wittman will no longer serve as a portfolio manager for the fund. Claudia Musat and Steven Rossi will continue to manage the fund. 6/17
AECHX American Century Emerging Markets Small Cap Fund Anthony Han has departed. The remaining managers are Patricia Ribeiro and Sherwin Soo, both of whom joined in 2016. 6/17
AGAEX American Century Global Allocation Fund Scott Wittman has announced his plans to leave American Century Investments. As a result, he will no longer manage the funds as of June 30, 2017. Richard Weiss, Scott Wilson, Radu Gabudean, and G. David MacEwen will continue to manage the fund. 6/17
AGBVX American Century Global Bond Fund Edward Boyle is leaving after 4 years on the funds. The remaining team members are John Lovito, Simon Chester, Robert Gahagan, and Abdelak Adjriou. 6/17
BEGBX American Century International Bond Fund Edward Boyle is leaving after 4 years on the funds. John Lovito, Brian Howell, Simon Chester and Abdelak Adjriou will continue to manage the fund. 6/17
ACNKX American Century NT Core Equity Plus Scott Wittman will no longer serve as a portfolio manager for the fund. Claudia Musat and Steven Rossi will continue to manage the fund. 6/17
Various American Century One Choice Funds Scott Wittman has announced his plans to leave American Century Investments. As a result, he will no longer manage the funds as of June 30, 2017. The rest of the team remains, though Richard Weiss has been promoted to Chief Investment Officer. Congrats to Mr. Weiss. 6/17
BROAX  BlackRock Advantage International Fund Simon McGeough, Ian Jamieson, and Thomas Callan are no longer listed as portfolio managers for the fund. Kevin Franklin, Richard Mathieson, and Raffaele Savi will now manage the fund. 6/17
MDLRX BlackRock Advantage Large Cap Core Fund Todd Burnside and Peter Stournaras are no longer listed as portfolio managers for the fund. Travis Cooke, Raffaele Savi and Richard Mathieson will manage the fund. 6/17
BMCAX BlackRock Advantage Large Cap Growth Fund Todd Burnside and Peter Stournaras are no longer listed as portfolio managers for the fund. Travis Cooke, Raffaele Savi and Richard Mathieson will manage the fund. 6/17
MDLVX BlackRock Advantage Large Cap Value Todd Burnside and Peter Stournaras are no longer listed as portfolio managers for the fund. Travis Cooke, Raffaele Savi and Richard Mathieson will manage the fund. 6/17
MDCPX BlackRock Balanced Capital Fund Todd Burnside, David Rogal, Bob Miller, Rick Rieder, Philip Green, and Peter Stournaras are no longer listed as portfolio managers for the fund. Travis Cooke, Raffaele Savi and Richard Mathieson will manage the fund. 6/17
MDEFX BlackRock EuroFund Zehrid Osmani is no longer listed as a portfolio manager for the fund. Brian Hall joins Nigel Bolton in managing the fund. 6/17
BMEAX BlackRock High Equity Income Fund Simon McGeough, Ian Jamieson, and Thomas Callan are no longer listed as portfolio managers for the fund. Tony DeSiprito, Kyle McClements, Franco Tapia, and David Zhao will manage the fund. 6/17
BREAX BlackRock International Dividend Fund Simon McGeough, Ian Jamieson, and Thomas Callan are no longer listed as portfolio managers for the fund. Stuart Reeve and Andrew Wheatley-Hubbard will now manage the fund. 6/17
BPMAX BP Capital TwinLine MLP Fund No one, but . . . Benton Cook joins Toby Loftin and Anthony Riley in managing the fund. 6/17
BBTBX Bridge Builder Core Bond Fund William Stevens has retired and will no longer serve as a portfolio manager for the fund. The other managers will remain on the fund. 6/17
DVFAX Cohen & Steers Dividend Value Fund Richard Helm intends to step down from portfolio management at the end of September and to retire at the end of the year. Anatoliy Cherevach, Jamelah Leddy, and Christopher Rhine will continue to manage the fund, with Mssr. Rhine assuming lead manager responsibilities. 6/17
INDZX Columbia Diversified Equity Income Russell Bloomfield is no longer listed as a portfolio manager for the fund. Hugh Mullin will continue to manage the fund. 6/17
EENAX Columbia Global Energy and Natural Resources Fund Jonathan Mogil is no longer listed as a portfolio manager for the fund. Josh Kapp continues to manage the fund. 6/17
DEVDX Driehaus Event Driven Fund Effective May 25, 2017, Matthew Schoenfeld no longer serves as an assistant portfolio manager of the fund. Thomas McCauley joins Michael Caldwell, K.C. Nelson, and Yoav Sharon in managing the fund. 6/17
FDSVX Fidelity Growth Discovery Fund No one, but . . . Asher Anolic joins Jason Weiner in managing the fund. 6/17
FSMVX Fidelity Mid Cap Value Fund Court Dignan has left the building after a four year stint. Keven Walenta will now manage the fund. 6/17
FPHAX Fidelity Select Pharmaceuticals Portfolio No one, but . . . Karim Suwwan de Felipe has joined Asher Anolic in managing the fund. 6/17
FSLCX Fidelity Small Cap Stock Fund No one immediately, but Lionel Harris intends to step away from portfolio management in June 2018. Kip Johann-Berkel joins Mr. Harris in managing the fund and will continue to manage the fund when Mr. Harris steps down. 6/17
FNSYX Frontier Netols Small Cap Value Fund Netols Asset Management will no longer subadvise the fund, due to the pending retirement of portfolio manager Jeffrey Netols. Michael Groblewski will also no longer manage the fund. Phocas Financial Corporation will manage the fund as an interim subadvisor while the Board evaluates alternatives, which include a likely reorganization into the Phocas Fund. In the meantime, William Schaff and Steve Block will manage the fund, using the Phocas strategy. This could have a significant tax consequence for investors. 6/17
FADVX Frost Value Equity Fund Craig Leighton is no longer listed as a portfolio manager for the fund. Tom Bergeron and Tom Stringfellow return to manage the fund. 6/17
GARTX Goldman Sachs Absolute Return Tracker Fund Alex Chung is no longer listed as a portfolio manager for the fund. Oliver Bunn will join Gary Chropuvka and Stephan Kessler in managing the fund. 6/17
GMAMX Goldman Sachs Multi-Manager Alternatives Corsair Capital Management, L.P. will no longer be an investment subadvisor for the fund. The other subadvisors remain. 6/17
RYSRX Guggenheim Long Short Equity Fund Ryan Harder and Michael Byrum are no longer listed as portfolio managers for the fund. Burak Harmeydan and Samir Sanghani will now manage the fund. 6/17
GGEZX Guidestone Growth Equity Fund Effective May 24, 2017, Jackson Square Partners was terminated as a sub-adviser. ClearBridge Investments joined the subadvisory team, with Peter Bourbeau and Margaret Vitrano added as portfolio managers. 6/17
HFRAX Highland Floating Rate Opportunities Fund Chris Mawn will no longer serve as a portfolio manager for the fund. Mark Okada and Jon Poglitsch will continue to manage the fund. 6/17
GTNDX Invesco Global Low Volatility Equity Yield Fund Jens Langewand will no longer serve as a portfolio manager for the fund. Michael Abata, Uwe Draeger, Nils Huter, and Donna Chapman Wilson will continue to manage the fund. 6/17
MKNAX Invesco Global Market Neutral Fund Jens Langewand will no longer serve as a portfolio manager for the fund. Michael Abata, Uwe Draeger, Nils Huter, and Donna Chapman Wilson will continue to manage the fund. 6/17
JAQAX Janus Henderson Asia Equity Fund Hiroshi Yoh is no longer listed as a portfolio manager for the fund. Andrew Gillan and Mervyn Koh will now manage the fund. 6/17
JSVAX Janus Henderson Contrarian Fund, formerly Janus Contrarian Fund. Daniel Kozlowski is no longer listed as a portfolio manager for the fund. Nick Schommer is now managing the fund. 6/17
JERAX Janus Henderson Global Real Estate Fund Patrick Brophy is no longer listed as a portfolio manager for the fund. Guy Barnard and Tim Gibson will now manage the fund. 6/17
MASNX Litman Gregory Masters Alternative Strategies Fund No one, but . . . DCI, LLC is added as a sub-advisor, and Stephen Kealhofer, Tim Kasta, Richard Donick, Paul Harrison, Bin Zeng and Adam Dwinells are added as portfolio managers. They join DoubleLine, First Pacific, Loomis Sayles, Passport Capital and Water Island Capital. 6/17
MSSFX Litman Gregory Masters Smaller Companies Fund First Pacific Advisors is being removed as a sub-advisor and Dennis Bryan and Arik Ahitov will be removed as the portfolio managers. Segall Bryant & Hamill, is added as a sub-advisor, and Mark Dickherber and Shaun Nicholson are added as portfolio managers. The management teams will then represent Cove Street Capital, Segall Bryant & Hamill, and Wells Capital Management. 6/17
LSABX Loomis Sayles Core Disciplined Alpha Bond Fund Effective immediately, William Stevens no longer serves as a portfolio manager of the fund. Lynne Royers, heretofore co-manager, takes over as planned. 6/17
MGCSX Managed Account Series (BlackRock) Advantage Global SmallCap Fund Murali Balaraman and John Coyle are no longer listed as portfolio managers for the fund. Kevin Franklin, Richard Mathieson, and Raffaele Savi will now manage the fund. 6/17
MMCVX Managed Account Series Mid Cap Dividend Fund Murali Balaraman and John Coyle are no longer listed as portfolio managers for the fund. Tony DeSprito, Franco Tapia, and David Zhao will manage the fund. 6/17
MEAPX Morgan Stanley Institutional Emerging Markets Fixed Income Opportunities Jens Nystedt no longer serves as a portfolio manager to the fund. Eric Baurmeister, Warren Mar and Sahil Tandon remain. 6/17
NABAX Neuberger Berman Absolute Return Multi-Manager Fund Effective immediately, GSA Capital Partners LLP will no longer act as a subadviser to the fund. A cast of thousands, representing Cramer Rosenthal McGlynn, Gamco Asset Management Levin Capital Strategies, Good Hill Partners, TPH Asset Management, Sound Point Capital Management, P/E Global LLC, Blue Jay Capital Management, and Portland Hill Asset Management remain to oversee this small, expensive underperformer. 6/17
FREAX Nuveen Real Estate Securities Fund No one, but . . . Sarah Wade is added as a portfolio manager, joining Jay Rosenberg and Scott Sedlak. 6/17
TQSMX T. Rowe Price QM U.S. Small & Mid-Cap Core Equity Fund Boyko Atanassov is no longer listed as a portfolio manager for the fund. The new management team is Vinit Agrawal, Prashant Jeyaganesh, and Sudhir Nanda. 6/17
TMPFX Tactical Multi-Purpose Fund No one, but . . . Michael Hanson has been added as the fifth manager, joining Kenneth L. Fisher, Jeffery Silk, William Glaser, and Aaron Anderson. Ummm … the fund has just under $25,000 in assets. 6/17
TAAAX Thrivent Aggressive Allocation Fund Russell Swansen has announced his retirement from Thrivent Financial, effective June 30, 2017. David Francis, Mark Simenstad, Darren Bagwell, and Stephen Lowe will continue to serve as portfolio managers of the fund. 6/17
THMAX Thrivent Moderate Allocation Fund Russell Swansen has announced his retirement from Thrivent Financial, effective June 30, 2017. David Francis, Mark Simenstad, Darren Bagwell, and Stephen Lowe will continue to serve as portfolio managers of the fund. 6/17
TMAAX Thrivent Moderately Aggressive Allocation Fund Russell Swansen has announced his retirement from Thrivent Financial, effective June 30, 2017. David Francis, Mark Simenstad, Darren Bagwell, and Stephen Lowe will continue to serve as portfolio managers of the fund. 6/17
TCAAX Thrivent Moderately Conservative Allocation Fund Russell Swansen has announced his retirement from Thrivent Financial, effective June 30, 2017. David Francis, Mark Simenstad, Darren Bagwell, and Stephen Lowe will continue to serve as portfolio managers of the fund. 6/17
VAMGX VALIC Company II Mid Cap Growth Fund Michael Smith and Christopher Warner are no longer listed as portfolio managers for the fund. Philip Ruedi and Mark Whitaker will manage the fund. 6/17
EIVAX Wells Fargo Intrinsic Value Fund Jeffery Peck has announced his intention to retire from Wells Capital Management Incorporated by July 31, 2017. Miguel Giaconi and Jean-Baptiste Nadal will continue as portfolio managers of the fund. 6/17
EWEAX Wells Fargo Intrinsic World Equity Fund Jeffery Peck has announced his intention to retire from Wells Capital Management Incorporated by July 31, 2017. Jen Robertson and Amit Kumar have been added as portfolio managers. Jean-Baptiste Nadal will continue to be a portfolio manager of the fund. 6/17

Briefly Noted

By David Snowball

Updates

Chuck Jaffe has been named editor-in-chief of RagingBull.com. Do I even make jokes about Chuck and a site that highlights “bull”? No. No, I do not. Chuck’s appointment is part of a process to increase the stock-touting site’s journalistic integrity and transparency.

Briefly Noted . . .

In advance of its merger into Century Shares Trust (CENSX), the Congress Large Cap Growth Fund (CAMLX) is changing its investment objective from “long term capital appreciation” to “long-term capital growth.” Given that, as the Investopedia rightly notes, “capital growth … is also known as capital appreciation,” it’s not immediately clear why the adviser had to rush to get the word out.

A note to the Chinese: Your Wall cannot save you!

Vanguard received a “wholly foreign-owned enterprise” license from the China Securities Regulatory Commission last November and has now opened a subsidiary in Shanghai. A company representative says, “We look forward to introducing investors in China to our low-cost philosophy [which] could result in the so-called Vanguard effect – the tendency for our entrance into a market to drive down investment costs by encouraging other companies to lower their fees to compete with Vanguard.”

SMALL WINS FOR INVESTORS

Laudus Mondrian International Equity Fund (LIEIX) and Laudus Mondrian Emerging Markets Fund (LEMNX) have each opted for radical simplification: their Investor and Select share classes have been eliminated and the investment minimum on the remaining, Institutional, share class has been eliminated as well. The International Equity fund is exceptionally solid, run by the same folks who run the five star, really institutional Mondrian International Equity Fund (PIEPX). It’s well worth a look.

Beyond that, the industry continues to make widespread but shallow efforts at self-improvement: lots of minor fee reductions and some other share class simplifications that give more investors access to lower-cost shares.

CLOSINGS (and related inconveniences)

Longleaf Partners Fund (LLPFX) has been closed to new investors.

Effective June 9, 2017, the Oberweis International Opportunities Fund (OBIOX) hard closed for essentially all investors.

OLD WINE, NEW BOTTLES

Effective August 15, 2017, AMG FQ U.S. Equity Fund (FQUAX) becomes AMG FQ Long-Short Equity Fund and, presumably, starts shorting stocks. Since they haven’t been particularly distinguished as long-only investors (they’ve trailed 75% of their peers over the past five years with a 175% annual turnover), the desire to try something new is understandable.

AMG River Road Select Value Fund, formerly ASTON/River Road Select Value Fund, is now also formerly AMG River Road Select Value Fund. On June 30, 2017, the fund was rechristened as AMG River Road Small-Mid Cap Value Fund.

Ascendant Deep Value Convertibles Fund (AEQAX) has transformed into Ascendant Deep Value Bond Fund, with a new mandate to invest in … well, bonds rather than convertibles.

The BlackRock Mid Cap Value Opportunities Fund (MDRFX) has changed its name to BlackRock Mid Cap Dividend Fund.

In one of those moves that just cries out “hey! The marketing team just weighed-in,” Calamos High Income Fund (CHYDX) has been renamed Calamos High Income Opportunities Fund. The management team and strategy are unchanged, there’s a new benchmark index and it looks like expenses are being reduced by 8 bps to a well above-average 1.25%.

On June 29, 2017, the name of the Entrepreneur U.S. All Cap Fund (IMPAX) changed to Entrepreneur U.S. Small Cap Fund, which means that the fund’s mid- and large-cap holdings are getting trimmed away. One month later, July 31, 2017, they’re liquidating the fund’s Investor share class. While many funds, faced with that decision, move their Investors into Institutional shares, the Entrepreneurs are simply popping checks in the mail and bidding their Investors adieu.

At the end of August 2017, Exceed Defined Shield Index Fund (SHIEX) becomes the Catalyst/Exceed Defined Shield Fund. There’s already a Catalyst Exceed Defined Risk Fund (CLPAX), so the transition shouldn’t be jarring.

1st Source Monogram Income Equity Fund (FMIEX) begat Wasatch Large Cap Value Fund and in the third generation Wasatch Large Cap Value begat Wasatch Global Value Fund. The fund has been pretty mediocre since David Powers took over from the original management team in August 2013 and it has no real tradition of global investing (international stocks are a tenth of the portfolio), so it’s hard to get excited.

The one-star Horizon Spin-off & Corporate Restructuring (LSHAX) is being relaunched as Kinetics Spin-off and Corporate Restructuring with the same management team and an additional share class or two.

RidgeWorth Capital Innovations Global Resources and Infrastructure Fund (INNAX) has become the Oak Ridge Global Resources & Infrastructure Fund.

The Rainier funds are reorganizing into Hennessy funds sometime in the third quarter of 2017. Here’s the translation:

Rainier Small/Mid Cap Equity Hennessy Cornerstone Mid Cap 30
Rainier Mid Cap Equity Hennessy Cornerstone Mid Cap 30
Rainier Large Cap Equity Hennessy Cornerstone Large Cap Growth

Similarly, the former Scout funds are all being rebranded as Carillon and Carillon Reams funds, the latter after the name of the long-time sub-adviser to the Scout bond funds. Ecce:

Scout International   Carillon Scout International  
Scout Mid Cap   Carillon Scout Mid Cap  
Scout Small Cap   Carillon Scout Small Cap  
Scout Low Duration Bond   Carillon Reams Low Duration Bond  
Scout Core Bond   Carillon Reams Core Bond  
Scout Core Plus Bond   Carillon Reams Core Plus Bond  
Scout Unconstrained Bond   Carillon Reams Unconstrained Bond  

Somewhere during the 4th quarter, the Sentinel funds will all become Touchstone Funds, some by adoption and others by absorption.

Sentinel Government Securities   Touchstone Active Bond *
Sentinel Low Duration Bond   Touchstone Ultra Short Duration Fixed Income *
Sentinel Multi-Asset Income   Touchstone Flexible Income *
Sentinel Sustainable Core Opportunities Touchstone Sustainability and Impact Equity *
Sentinel Total Return Bond   Touchstone Active Bond *
Sentinel Balanced   Touchstone Balanced  , new
Sentinel Common Stock   Touchstone Large Cap Focused, new
Sentinel International Equity Touchstone International Equity, new
Sentinel Small Company   Touchstone Small Company, new

*Existing Touchstone Fund.

Finally, WisdomTree has decided to add “U.S.” to the names of a bunch of its (presumably domestic) equity funds.

 WisdomTree Total Dividend   WisdomTree U.S. Total Dividend  
WisdomTree LargeCap Dividend   WisdomTree U.S. LargeCap Dividend  
WisdomTree MidCap Dividend   WisdomTree U.S. MidCap Dividend  
WisdomTree SmallCap Dividend   WisdomTree U.S. SmallCap Dividend  
WisdomTree High Dividend   WisdomTree U.S. High Dividend  
WisdomTree Dividend ex-Financials  WisdomTree U.S. Dividend ex-Financials 
WisdomTree Total Earnings   WisdomTree U.S. Total Earnings  
WisdomTree Earnings 500   WisdomTree U.S. Earnings 500  
WisdomTree MidCap Earnings   WisdomTree U.S. MidCap Earnings  
WisdomTree SmallCap Earnings   WisdomTree U.S. SmallCap Earnings  
WisdomTree LargeCap Value   WisdomTree U.S. LargeCap Value  

Effective June 19, 2017, the Tortoise North American Energy Independence Fund (TNPTX) was reorganized into the Tortoise Select Opportunity Fund.

OFF TO THE DUSTBIN OF HISTORY

ALPS/Sterling ETF Tactical Rotation Fund (ETRAX) disappeared at the close of business on June 26, 2017.

On June 22, 2017, the Board of Trustees “determined to terminate and wind up” the Alpine Emerging Markets Real Estate Fund (AEAMX). It’s about impossible to benchmark the fund’s performance since pretty much no one else operated in the space. No word on when that’s going to occur.

One of our weirder liquidations this month also comes from Alpine. I’ll quote without comment: “Effective June 22, 2017, the Board of Trustees of the Alpine Global Realty Growth & Income Fund approved the termination of the Fund. There were no shareholders on that date. As the Fund has ceased operations, shares of the Fund are no longer being offered.” Oooookay then.

AMG Managers High Yield Fund (MHHAX), a modestly above-average fund with a stable management team and manageable expenses (1.15%) will liquidate and terminate on or about August 31, 2017. The portfolio began transitioning to cash in June 12, 2017.

Arrow Commodity Strategy Fund (CSFFX) will liquidate on July 28, 2017.

Cozad Small Cap Value Fund (COZNX) is becoming Oberweis Small Cap Value, pending the (inevitable) approval of shareholders, which will be sought in July.

Credit Suisse Emerging Markets Equity Fund (CSNAX) – which managed to make about 1.2% over the course of 40 months – was liquidated on June 23, 2017.

Dhandho Junoon ETF (JUNE) – which specialized in investing in “Cannibals,” “Spin-off” and “Select Value Manager Holdings” — liquidated on June 30, 2017.

Driehaus Select Credit Fund (DRSLX) will liquidate on July 24, 2017. As you might expect of a Driehaus fund, DRSLX (the blue line) has been … uhhh, bold.

Franklin MidCap Value Fund (the “Fund”) is expected to merge into Franklin Small Cap Value Fund around the beginning of December, 2017.

Frontier Netols Small Cap Value Fund (FNVSX) essentially disappears on July 1, 2017. The principal at Netols is retiring and so Netols Asset Management is getting out of the business; the Board brought in Phocas Financial. The new manager “uses a different investment strategy than Netols … it is expected that most of the Fund’s existing holdings will be sold and replaced by new securities.” That likely signals a noticeable tax bill. On the upside, Phocas has done a nice job with Frontier Phocas Small Cap Value (FPVSX),

Glenmede U.S. Emerging Growth Portfolio (GTGSX) will close on August 31, 2017 and will liquidate on November 17, 2017.

The Grand Prix Investors Fund (no ticker symbol?) will close and liquidate on July 28, 2017. This offering, launched and managed by Autosport Fund Advisors, is bad but not nearly so bad as the other Grand Prix fund, a long-dead reminder of the foolishness of the 1990s and winner of a 2004 Booby Prize from Forbes.

GuideMark Opportunistic Equity Fund (GMOPX) liquidates on July 31, 2017.

JP Morgan is asking its shareholders to authorize the merger of JPMorgan Dynamic Growth Fund (DGAAX) into JPMorgan Large Cap Growth Fund (OLGAX).Both are four star funds with the same manager; OLGAX is about 30-times the size of its sibling. If approved, the merger would go through in the fourth quarter.

Mirae Asset Global Dynamic Bond Fund (MAGDX) will liquidate its assets “as soon as practicable” and will liquidate itself on August 4, 2017. It’s been a singularly strong fund since inception, despite rather higher fees than one might like.

Nationwide Portfolio Completion Fund (NWAAX) will liquidate on or about August 18, 2017, presumably leaving a lot of Nationwide portfolios incomplete.

All four of the New Century funds of funds – Alternative Strategies (NCHPX), Balanced (NCIPX), Capital (NCCPX) and International (NCFPX) – will liquidate, assuming shareholder approval, at the end of August, 2017.

PNC Target-Date Funds (2020-2050 and Retirement Income) will liquidate on or about August 7, 2017.

QS Dynamic Multi-Strategy Fund (LDFAX) “is expected to cease operations on or about August 25, 2017.”

State Street Global Advisors announced plans to liquidate nearly 20 ETFs, almost all of them international equity funds, by the end of July. They are:

  • SPDR Bloomberg Barclays 0-5 Year TIPS ETF (SIPE)
  • SPDR EURO STOXX 50® Currency Hedged ETF (HFEZ)
  • SPDR MSCI Australia StrategicFactorsSM ETF (QAUS)
  • SPDR MSCI Spain StrategicFactorsSM ETF (QESP)
  • SPDR S&P® Emerging Europe ETF (GUR)
  • SPDR S&P Emerging Latin America ETF (GML)
  • SPDR S&P Emerging Middle East & Africa ETF (GAF)
  • SPDR S&P International Consumer Discretionary Sector ETF (IPD)
  • SPDR S&P International Consumer Staples Sector ETF (IPS)
  • SPDR S&P International Dividend Currency Hedged ETF (HDWX)
  • SPDR S&P International Energy Sector ETF (IPW)
  • SPDR S&P International Financial Sector ETF (IPF)
  • SPDR S&P International Health Care Sector ETF (IRY)
  • SPDR S&P International Industrial Sector ETF (IPN)
  • SPDR S&P International Materials Sector ETF (IRV)
  • SPDR S&P International Technology Sector ETF (IPK)
  • SPDR S&P International Telecommunications Sector ETF (IST)
  • SPDR S&P International Utilities Sector ETF (IPU)
  • SPDR S&P Russia ETF (RBL)

TCW International Growth Fund (TGIDX) was liquidated on June 30, 2017.

Triad Small Cap Value Fund (TSCVX) liquidated on June 23, 2017. The adviser laments “its inability to market the Fund.”

WisdomTree Strategic Corporate Bond Fund (CRDT), WisdomTree Western Asset Unconstrained Bond Fund (UBND) and WisdomTree Global Real Return Fund (RRF) will all liquidate on August 16, 2017. The advisor cites “limited future prospects of investor demand for the Funds.”

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…https://www.com/watch?v=Dug-G9xVdVs … [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

    Seafarer

    53%

    60

    PowerShares Emerging Markets Sovereign Debt Portfolio

    Matthews Asian Strategic Income

    20

    26

    iShares MSCI EAFE ETF

    Artisan International Value

    47

    57

    iShares Morningstar Small-Cap Value ETF

    Intrepid Endurance

    19

    53

    BLDRS Asia 50 ADR Index Fund

    Matthews Asian Growth & Income

    38

    57
  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.