December 2018 IssueLong scroll reading

Your 2019 funds watchlist: Draft #1

By David Snowball

It is exceedingly unlikely that your best options in the year and years ahead are going to look much like the winners of the past two years. That reflects, in part, the market’s unresolved turmoil and, in part, the fact that the market has been unmoored from reality of late. Commentators fear that “the sugar rush” provided by the Republicans’ indiscriminate tax cut will, at best, fade and, at worst, be followed by a “sugar crash” as the consequences of trillion dollar annual deficits, rising interest costs and global instability begin to hit home.

A quick snip from my most recent newsfeed:

Is Another Market Crash Coming?

The Latest Stock Market Crash Signal Is Blaring Out of Texas

A Market Crash Is Inevitable — Here’s What to Do

The stock market is flashing some terrifying parallels to the tech …

GOLDMAN SACHS: Hedge funds have plunged into a ‘vicious …

Is There A Possibility Of Another Stock Market Crash?

The stock market looks like it’s past the point of no return — and not …

Bitcoin Crash Escalates, Equity Crash Developing

Those are from halfway credible publications, not “head for the bunker” crazies!

And despite that, the market is still having 3.5% up days and has its share of “up 24% in 12 month” cheerleaders who might, for all I know, be right

We’ve been tracking funds whose strengths might serve you in markets that are greatly different from those we’ve lately seen. In advance of a series of 2019 profiles, we wanted to share the names of four funds that warrant a place on your year-end due diligence list.

The Fund for Uncertain Markets: Northern Global Tactical Asset Allocation (BBALX)

The ideal fund for uncertain times is not “conservative.” For uncertain times, you benefit from “a vigilant agnostic.” By that I mean a fund whose risk exposure can change as conditions evolve. Northern Global Tactic Asset Allocation qualifies.

Northern Trust Asset Management is institutionally averse to traders, speculators, flavors-of-the-month and trendy marketing. Northern Global Tactical Asset Allocation (BBALX) embodies the market assessment of Northern’s investment policy committee.

BBALX has an exceptionally solid core. It has a strategic asset allocation that’s more diversified than most, with structured exposure to global real estate, commodities and infrastructure as well as global equities and fixed income. It implements that allocation plan primarily through its FlexShare smart beta ETFs and iShares ETFs. The FlexShare ETFs are designed with strategic “tilts” in their asset class exposure: they “tilt” toward quality, dividends, value and size. Those tilts are all structural bets in the direction of factors which tend to outperform over the long term.

Northern can then apply a tactical overlay. If its calculation is that the market is favorable to a “risk-on” strategy, it can tactically increase its exposure to risk assets to gain a modest advantage over static portfolios.

I had a long talk in November with manager Jim McDonald, who is also the Chief Investment Strategist for Northern Trust. For the first time since the strategy’s inception, the tactical positioning is zero. That is, uncertainty in the market is so high that it’s prudent to neither embrace nor avoid risk. They’re a tiny bit heavy on corporates and a tiny bit light on TIPs. The most notable overweight in the portfolio is in high yield bonds: “our overweight is considerable, we view [HY] as a risk asset, and it is the least risky of our risk assets.” The net effect is being risk-neutral until they have a better view.

The most notable risk they see is that the fed will overshoot on interest rates, which is a “material risk” but not an element of their current base case. That is, they’re watching, they’ve wouldn’t be surprised, they’re ready to act … but haven’t yet.

On whole, the fund is performed admirablely across markets. The fund’s “tactical” mandate was first introduced ten years ago. Since that time, it’s delivered respectable returns with particular strength in managing failing markets.

Cum. return Annual return Max drawdown Recovery Std dev Downside dev Bear mkt dev Sharpe Ratio Sortino Ratio Martin Ratio
BBALX 101 7.2 -11.2 10 mos. 8.5 5.2 4.6 0.81 1.33 2.42
Lipper Flexible Portfolio 115 7.7 -14.7 15 10.1 6.2 5.5 0.76 1.27 2.05

Administrative details for Northern Global Tactical Asset Allocation

Symbol / Class Expense ratio, after waivers Minimum initial investment
BBALX 0.63% $2,500

The fund is managed by Robert P. Browne, James D. McDonald, and Daniel J. Phillips. As of July 31, 2018, Robert Browne had over $1 million invested in the fund, James McDonald between $500,001 and $1 million, and Mr. Phillips had no investment in the fund.

Northern Global Tactical Asset Allocation website.

The Fund for Nearly-Normal Markets: RiverPark Long/Short Opportunity (RLSFX / RLSIX)

RiverPark Long/Short Opportunity is designed to crush things in normal markets. RiverPark started with the recognition that some industries are in terminal decline because of enduring, secular changes in society. By identifying what the most important enduring changes were, the managers thought they might have a template for identifying industries likely to rise over the coming decades and those most likely to decline. The word “decade” here is important: the managers are not trying to identify relatively short-term “macro” events (e.g., the failure of the next G20 summit) that might boost or depress stocks over the next six to 18 months. Their hope is to identify factors which are going to lift up or grind down entire industries, year after year, for as far as the eye could see. They normally hold 40-60 long positions in stocks with “above-average growth prospects” and 40-75 short positions in stocks representing firms with challenged business models operating in declining industries. They would typically be 50-60% net long.

Unlike many long/short funds, the strategy here is to always play offense. Their short book doesn’t function as a “hedge” for their long book, it’s designed to make money all on its own. The strength of the fund has been masked by the fact that we have not been in a “normal” market for a long time. Relaxed lending standards and near-zero interest rates have allowed a lot of zombie firms to shuffle along far longer than you’d imagine; as credit tightens and interest rates rise, a lot of these firms will lose their lifelines and their (borrowed) leases on life. If that plays out, RiverPark is ready.

Over the past five years, the fund has performed as you might predict: it has generated both higher returns and higher volatility than its timid peers. As volatility has returned and the credit cycle began to turn, the fund has begun to shine. Here are the one-year metrics for the fund, reflecting a positive asymmetry between returns and risks in a normalizing market.

Annual return Max drawdown Recovery Std dev Downside dev Bear mkt dev Sharpe Ratio Sortino Ratio Martin Ratio
RLSFX 1.9% -7.7 2 mos. 12.9 9.3 8.8 0.01 0.02 0.05
Lipper Long Short 0.9 -7.0 6 mos 8.8 6.9 6.3 -0.13 -0.02 0.03

The fund’s performance has been particularly strong in 2018, where its 2.4% return (through 11/30) leads its average peer by an astounding 4.25%, placing it in the top quarter of all long-short funds.

Administrative details for RiverPark Long/Short Opportunity.

Symbol / Class Expense ratio, after waivers Minimum initial investment
RLSFX (Retail Class) 2.00% after waivers $1,000
RLSIX (Institutional Class) 1.79% after waivers $100,000

Mitch Rubin has over $1 million invested in the fund.

Long/Short Opportunity website.

The Fund for the Next Market: JOHCM Global Income Builder (JOFIX / JOBIX)

This is a multi-asset fund but it is largely unconstrained: it targets US and international income-producing securities including common stock, high-yield and investment grade debt, preferred shares and convertibles, and a variety of hedges including gold, precious metals, currency forward contracts, and inflation-linked vehicles. Income-oriented yet wary of today’s low yields, interested in capital growth yet skeptical of overpriced assets, determined to minimize the risk of permanent loss of capital but agnostic about which asset classes are best suited to do that. It intends to pursue a sort of absolute value discipline, whose core tenet is that the best way to make money long term is first and foremost not to lose it. As a result, the managers intend to only buy assets which provide a sufficient margin of safety.

The advantage they hold over other absolute value investors is that cash is not their only refuge; being a multi-asset fund, they can, as their Team Head observes, “still provide clients with the service of income even while risk assets are not particularly attractively priced.”

The fund is new but the team is experienced and, in particular, highly experienced at managing this strategy. Team Head Giorgio Caputo and Robert Hordon co-managed First Eagle Global Income Builder (FEBIX) from inception through July 19 and October 20, 2016, respectively. Both served as analysts on First Eagle’s Global Value Team which oversees First Eagle Global (SGENX) and both had the opportunity to work with renowned investor Jean-Marie Eveillard. Under their watch, FEBIX earned a four-star rating from Morningstar.

Morningstar reports that the fund has lost 2.75% in 2018, through November 30. That places them in the top 20% of all world allocation funds.

Administrative details for JOHCM Global Income Builder.

Symbol / Class Expense ratio, after waivers Minimum initial investment
JOFIX (I Class) 0.99 No minimum
JOBIX (Institutional Class) 0.89 $1,000,000

Access has been steadily broadening and the fund is now available through Schwab, Fidelity/NFS, Ameritrade, Stifel, Oppenheimer & Co., LPL Financial, JP Morgan and Morgan Stanley, as well through direct purchase via the JOHCM website.

Messrs. Caputo and Hordon have each invested $1,000,000 or more in the fund, Ms. Topcuoglu has invested between $100,000 – 500,000.

The fund’s website required a few extra clicks to reach and is, as yet, thin on content.

The Fund for a Bond Bear Market: RiverPark Floating Rate CMBS (RCRFX / RCRIX)

Many investors believe that we have reached the end of a three-decade bull market in bonds, and that a long, grinding bond bear market (yes, there are such things) might be underway. The fact that the market is unhappy does not materially change investors’ needs for income, especially in retirement. RiverPark Floating Rate offers a fascinating alternative to traditional fixed-income funds.

In general, the manager invests in high-quality commercial real estate debt which includes commercial mortgage backed securities (the “CMBS” in the fund’s name), commercial real estates secured bank loans, mezzanine loans and collateralized debt and loan obligations. The key is that the debt is all backed, directly or indirectly, by real estate assets. The primary attractiveness of the fund is its success in very steadily generating income. In its 24 months as a closed-end fund, the fund has never had a losing month while its benchmark Bloomberg Barclays U.S. Investment-Grade CMBS Index and the Bloomberg Barclays U.S. Aggregate Bond Index both lost money on 11 occasions. While the fund’s monthly returns are modest (6-75 basis points monthly since October 2016, the steady compounding and lack of negative months has given the fund is substantial performance edge: it has averaged 4.44% annually over the period while both the CMBS and Aggregate Bond indexes are in the red.

Three other factors make the fund particularly attractive for income-seeking investors:

It targets only high-quality investments. The manager targets securities back by high quality real estate and sponsored by blue-chip firms such as Vornado and Blackstone. From among those securities, they target ones with strong credit metrics and attractive yields.

It provides income independent of the traditional fixed-income market. Because the real estate market has different fundamental drivers than does the bond market and because most of the portfolio investments are floating rate with yields that reset monthly as interest rates rise, RiverPark believes the fund will allow investors to decrease their exposure to the risk of rising interest rates in their fixed income portfolios. MFO calculated the correlations between RiverPark and the aggregate bond market at only 0.30.

It has a highly experienced manager. The fund is managed by Edward L. Shugrue who has more than 30 years of commercial real estate investing experience, beginning with Bear Stearns & Co. in 1988 and including a stint as CFO for Sam Zell’s Capital Trust. He has, over the years, traded rather more than $30 billion in CMBS.

Morningstar reports that the fund has earned 3.2% in 2018, through November 30. That beats their Morningstar peer group by a full 5.0%.

Administrative details for RiverPark Floating Rate CMBS.

Symbol / Class Expense ratio, after waivers Minimum initial investment
RCRFX (Retail Class) 1.25% $1,000
RCRIX (Institutional Class) 1.00% $50,000

Edward L. Shugrue III has invested substantially more than $1,000,000 in his fund. The fund’s website is attractive, but content is growing at a modest rate.

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About David Snowball

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