Monthly Archives: February 2018

February 1, 2018

By David Snowball

Dear friends,

It’s a Tale of Two Parties, one rather healthier than the other. My students, slowed by a surprisingly cold month and end-of-term stress (Augustana is finishing a Winter trimester that began a bit after Halloween and ends near Valentine’s Day), have taken to launching spontaneous little parties in hopes of gathering that last burst of energy needed to make it through a last set of research presentations and reflective essays. Lionel Ritchie (whose name they barely recognize) captures the late winter moment: “Party, Karamu, Fiesta, Forever. Come on and sing along.” On whole, that strikes me as joyful, appropriate and, ultimately, productive.

The other party rather less so.

“Going so soon? I wouldn’t hear of it. Why my little party’s just beginning.”

                 Wicked Witch of the West, in L. Frank Baum, The Wonderful Wizard of Oz (1900)

I have never been much of a fan of any parties, but two draw my gravest reservations: (1) those in my honor and (2) those hosted by Wall Street. I’m safe from the former, at least until the end of May, but may be getting dragged into the latter. Two forces have been kept in balance in recent years: the stock market is increasingly overvalued but no one is very enthused about it, so it stumbles ahead without dramatic rises or falls. The first remains true, the second is in jeopardy.

The stock market is overvalued. Unless you believe that stocks are worth precisely whatever someone last paid for them (that is, that they’re never overpriced because someone just saw value in them), the stock market is overvalued. Way. Way, way, and for a long time. The folks at the Leuthold Group track about 30 different valuation measures, several of which focus on the valuations on the median stock in an index. Why median? Because the valuation of the “average” stock mostly reflects the valuations of an index’s largest stocks. By way of example, just five stocks (Apple, Microsoft, Facebook, Amazon and Alphabet) comprise 13% of the S&P 500. Looking at the median stock (the 250th cheapest or 250th most expensive, depending on the direction you’re looking from) avoids that bias.

So, where are we? Quoth Leuthold: “the broad U.S. stock market is more overvalued than at any time in history”(Perception for the Professional, January 2018).

That has, of course, been true for quite a while now. Low interest rates have suppressed interest in fixed-income investing and the move to “passive” investing has kept many portfolios fully exposed to the stock market, where once their managers might have begun reacting (or, admittedly, reacting foolishly) to the market’s moves.

Investors are (finally) starting to get excited. That’s never a good thing. Lisa Beilfuss, writing for the Wall Street Journal, notes, “after sitting out most of the nearly nine-year bull market, individual investors are finally pouring in” (“Retail investors jump into the market,” 1/27-28/2018). Discount brokerages saw surging activity at the end of 2017 and on into January 2018. One analyst warns that FOMO is setting in: Fear Of Missing Out. At Ameritrade, which saw a 72% rise in new accounts established by younger investors, cash flows are being driven by interest in cryptocurrencies and cannabis. E*Trade affirmed, “Crypto and cannabis … volumes have been up big.” Those investments are being financed, at least in part, by peoples’ decision to stop saving money: the US personal savings rate fell in December to its lowest level since the days of the housing bubble. All savings activities combined (college, retirement, savings accounts and so on) consume just 2.4% of disposable income. That’s down by 65% since the modest peak in the aftermath of the financial crisis. That’s helped pay for 14 record highs recorded in the S&P 500 just during January, the most in a single month since 1955. NASDAQ records, 13 of them, match what we saw in December 1999, at the climax of the tech and telecom bubble. When records fall in quick succession, we’re experiencing price acceleration which is, according to three Harvard economists, “the strongest indicator” of an impending peak (Greenwood, et al, “Bubbles for Fama,” 2017).

So where do we go from here? Quite possibly to a party. Stock markets tend to have climactic “melt-ups” in which crazed investors buy anything they can and whatever price it takes. It’s sort of akin to the feeding frenzy of tuna: toss a bit of chum in the water and the fish become so frenzied that they’ll even attack unbaited hooks. By how much might the market rise? In their January report for professional investors (Perception), Leuthold made a simple calculation: if the median stock matched the highest recorded valuation ever, on every measure, then the market would rise 5.1% further.

Oops. The broad U.S. market rose 5.4% in January, pushing through Leuthold’s “crazy but credible” ceiling. Jeremy Grantham, founder of the institutional investment firm GMO, is more optimistic in his pessimism; “we are currently showing signs of entering the blow-off or melt-up phase of this very long bull market” with an eventual S&P 500 top around 3400 – 3700. That is, if historical patterns repeat, the S&P 500 might reasonably (?) be expected to rise 20-25% further.

Woo hoo!

Followed, he fears, by a 50% decline. Leuthold suggests that just returning to our modern “normal” valuations – the median valuations seen since 1990 – would require a 24% decline from here. If the S&P 500 does indeed inflate to the 3400 -3700 range, the decline would be a bit over 40%. Of course, if we again saw the kinds of lows we’ve twice experienced since 1990, the decline would be 64% from here and … well, 73% from Grantham’s hypothetical peak.

Happily, the fact that other people are being stupid is not a reason for us to join them. A soaring market does not justify throwing Bitcoins at marijuana entrepreneurs, nor does the prospect of a falling market justify a panicked flight to cash and stocks of survival biscuits. MFO’s position is always the same: don’t put more money at risk than you can afford to lose, create an asset allocation plan that’s appropriate to your needs and risk tolerance, invest in vehicles that have earned investors’ faith over time … then move on to more important topics, like enjoying life and making a difference in the lives of others.

We’ll try to help. Our March issue will include my annual portfolio disclosure, recommendations for getting a little balance in your portfolio, cash-heavy funds (think of them as light hedge funds, since cash is the ultimate uncorrelated, defensive asset) that managed double-digit returns last year (we call them the “15/15 funds”) and profiles of two funds that consistently get it right. We hope you’ll stick around for the adventure.

Thanks go to . . .

Your generosity continues, and we appreciate it. Many, many thanks go to those who made contributions in January. Some of you subscribed to MFO Premium, some sent us a check, and many made contributions through our PayPal link. We’re grateful for every one. In particular, we’d like to thank Cecil, the Kaspar family, Raal, Gary, Sharon, Mark, Pete, Malcolm, Greg, Michael, Andrew, Dan, OJ (a mighty wave to you, from Chip!), Ted a.k.a. The Linkster, David, Harold, Haim, Tom, Bob C, Marva, Deb, Brian, William, Nate, and the folks at Gardey Financial. We recognize the names of many folks who have, out of a sense of right, supported us year after year; we sometimes sit around, talking about you and wondering how you’re doing. Really. We hope we’re able to make a difference.

Thanks, as ever,

 

What You See …

By Edward A. Studzinski

“If you can’t annoy somebody, there’s little point in writing.”

       Kingsley Amis

These days, given the continuing march of new highs in the market indices, coupled with the ongoing extremes of most valuation metrics on individual securities, there is not a lot for a conservative investor to say that hasn’t been said before. What is different this time is the continuing flight from higher fee investment vehicles by both retail and institutional investors. And that money is flowing either into exchange-traded funds or passive index products (the popularity of which provides additional juice to the rising markets). I have said before that we know how this movie ends. It will not have a happy ending. I don’t know when, and I don’t know by how much. I just know it will not end well. And yes, I am fully prepared to admit that I have been too conservative over the last five years. But that ultimately is the difference between investment and speculation. And in the fund world, it is the difference between asset gatherers and investment managers.

What I would like to cover briefly are some of Byron Wien’s Ten Surprises for 2018. This past year in December, shortly before the list was released, I had the pleasure of sitting next to Byron Wien at a small dinner party in New York. He would not and did not discuss his list with me. But, he was willing to discuss the methodology that went into researching and constructing it every year. Wien for many years was the Chief Investment Strategist at Morgan Stanley. Wien left Morgan Stanley in 2009 and joined Blackstone as a senior advisor in its Private Wealth Solutions Group. Interestingly, Wien’s successor at Morgan Stanley had no interest in continuing the Ten Surprises franchise, so Wien was able to secure the use of the name for effectively nothing (another example of children wanting to kill their parents).

What is a surprise? Wien believes a surprise happens when the average investor ascribes a one in three chance of an event taking place. Wien however believes the surprises have more than a 50% chance of happening. There are also the small group of Also-rans, which have either a lower probability in Wien’s mind of occurring or, are less germane to the investor. In total, we have the Ten Surprises and Six Also-rans. I am not going to discuss all sixteen items, but only those I find most intriguing.

The first one that strikes me as important is Wien’s Also-ran #15. The FANG stocks continue to make new highs, while many other companies stand still. There is a lot of discussion about creative destruction, especially with hundreds of companies spending billions of dollars on r & d. Remember, creative destruction used to be the two guys in the garage in Silicon Valley. Now it is corporate America. What I find of major interest (and concern) as an investor, is that the rapid growth of Amazon and Google to name a few, could come to a screeching halt if only the regulators decided to enforce the antirust and anti-competitive laws on the books. We see a lot of enforcement coming out of the European Union. We would see more if BREXIT were not a front and center issue there. And here, a change in the administration or control of Congress could also result in more targeted enforcement.

Wien’s Surprise #6 is the prospect of rising inflation. We have seen it for some time now, particularly in the shopping basket. The combination of shrinking packaging and shrinking contents has been obvious to anyone whose grocery budget has been static for the last couple of years. Rising inflation means higher interest rates. And higher interest rates mean that bonds and certificates of deposit become decent competition for the dividend yield available on the S&P 500. That produces disintermediation from stocks, slowing and then reversing the rise of the markets.

Wien’s Surprise #5 is that oil hits $80 a barrel, and stays there. At this point, we are increasingly capable of supplying our own needs with domestic production. Could that come to an end, especially with increased demand from developing economies (read “China”), as well as disruptions in the supply chain. Conflict in the Middle East or terrorist acts in various energy producing areas around the world could throw a monkey wrench into the prospects of global economic growth. Those who blocked the completion of pipelines running down from Canada for environmental concerns may find themselves in an unpopular and untenable position.

Wien’s Surprise #4 is a real barn burner. The markets, given increased speculation, suffer a 10% correction, with the S&P 500 falling to 2300 but rebounding strongly by year-end. This is one I like myself. Since the beginning of the year, we have been seeing a melt-up in securities prices, extending the extremes in valuation. And yet, there are now increasing signs that not all is right. Many companies are selling out to foreign bidders. Managements continue to cash out as huge sellers of stock – the fleeing of the insiders.

What I am going to leave you with is this. In New York, excepting hotel room rates which seem to have come down thirty per cent from the end of last year, everything else is up. A year ago my restaurant tab for dinner would have been about 60% of what it was this December. And yet, the restaurants I was in were not full. I also saw lots of shuttered locations, because the rentals for those locations had reached a point where the fundamentals of the businesses could no longer support them. If our markets are this rubber band which is stretching out further and further, at what point does the rubber band snap, as in the dot.com craze?

AlphaCentric Income Opportunities Fund (IOFIX), February 2018

By Charles Boccadoro

“Timing, perseverance, and ten years of trying

will eventually make you look like an overnight success.”

        Biz Stone

Objective and Strategy

The AlphaCentric Income Opportunities Fund seeks to provide current income. Presently, it invests in often overlooked (some call “pejorative”) segments of non‐agency (private label) residential mortgage-backed securities (RMBS), specifically in seasoned (2007 or earlier) subprime mortgages with floating rate coupons.

The irony is that 10 years after the housing collapse these bonds, once highly discounted if not feared worthless, represent one of the more sought after asset classes, as described nicely in Claire Boston’s Bloomberg article “Goldman and Pimco Are Loading Up on Mortgage Bonds.” Basically, this asset class has become desirable because of healthy yield in a low interest rate environment, uncorrelated behavior to traditional fixed income, and stable to improving credit worthiness, including lower home loan to values.

Consider the following:

    • Housing prices since 1948 have increased 4% per year, mirroring the consumer price index and avoiding recession, except for the tragedy of 2008 … they have been increasing sharply since 2011
    • Mortgage delinquencies, which went from under 3% in 2005 to nearly 12% in 2009, have been decreasing steadily since 2011, now nearly back to historical levels and decreasing faster than other household debt
    • Loan-to-values (LTVs) have gone from 110% as recently as 2011 to under 70% through September 2017 and with it the attendant increase in homeowner equity and decrease in mortgage debt to household assets
    • Voluntary prepayments (refinancings) have gone from just 3% in 2010 to 8% today
    • Lower priced homes have outperformed more expensive ones due to inventory shortage in nearly all of the largest metropolitan areas and inventories remain historically low
    • Mortgage rates also remain historically low, even at 4-4.5%, helping keep home ownership affordable.
    All this translates into a very opportunistic environment for this strategy to excel, or as its most senior principal adviser Tom Miner describes: “It’s been lightning in a bottle.”

While the fund’s prospectus allows for a broader mandate of asset-backed securities, IOFIX currently maintains a clearly defined RMBS niche, summarized here and depicted below: smaller, seasoned, subprime, mezzanine securities with improving underlying collateral, uncorrelated to broader market with less interest rate risk, producing a high income strategy yielding 5-8% annually. Its total return, however, since inception has been much higher.

Adviser

The adviser is AlphaCentric Advisors LLC. The sub-adviser is Garrison Point Capital, LLC (“Garrison Point or GPC”), an investment advisory firm founded in 2012 and located in Walnut Creek, California, about a half hour BART ride from San Francisco’s financial district. Fortunately, AlphaCentric leaves GPC independent to manage the fund’s day-to-day operations, including its thoughtful briefings and quarterly conference calls summarizing fund strategy and performance. (Here’s link to latest Quarterly Report.)

I visited its office twice and spoke directly to the principals at GPC without the need for AlphaCentric oversight or investment relations/media representative. In addition to acting as sub-adviser on IOFIX, GPC provides investment advice to individuals, high net worth individuals, trusts, businesses and charitable organizations.

It runs a very successful strategy similar to IOFIX called Garrison Point Enhanced Yield for separately managed accounts  (see historical performance on Pages 58-59 in the Prospectus), a smaller hedge fund called Garrison Point Opportunities I focused on a different asset class, and manages assets for an insurance company. The firm manages $1.8B all up, but most is in its Income Opportunities mutual fund.

GPC moved from 100 Pine Street to Walnut Creek in December 2016, a bit more that a year ago. A cheaper space and much easier commute for the two most senior partners whose homes are in nearby Danville. Their current office space is open and utilitarian and just a few minutes’ walk from the BART station.

Managers

Tom Miner, Garrett Smith, Brian Loo are jointly and primarily responsible for the day-to-day management of IOFIX’s portfolio. Jonathan Tran is chief analyst. Tom, Garrett, and Jonathan launched GPC in 2012. Tom and Garrett worked together briefly at Lehman Brothers in 2007 and again at Barclay’s from 2009 to 2012.

Tom, who enjoys this infectious enthusiasm for what he does (the kind my colleagues David and Ed describe when they champion fund managers), retired from Lehman after 20 years in structured fixed income products the year before its collapse. Garrett, who had just joined Lehman, was not so lucky. But it was Garrett who talked Tom out of retirement to join Barclays’ where together, along with Jonathan, they built one of the firm’s larger high net worth businesses and supervised nearly $2B in fixed income assets, employing much the same strategy they ultimately used to launch GPC.

Brian came to GPC from TCW after it had acquired MetWest, a fixed income firm he helped launch. Brian seems to be the first person folks talk to when they call the firm, like I did, asking about its strategy. He works from a remote office in LA.

Tom holds an MBA from the University of Utah where he is also an Adjunct Professor of Finance teaching Fixed Income Analysis and Venture Capital. Garrett is a United States Naval Academy graduate with MBA from Northwestern University. As a flight officer in the U.S. Navy, he logged over 400 carrier landings … over 200 at night! Brian holds a BS in Math/Applied Science from UCLA, an MS from the Carnegie Mellon’s Tepper School of Business, and is a CFA charterholder. Jonathan received a B.S. in Finance from The University of Virginia’s McIntire School of Business.

The four are partners in the firm, and together they represent more than 70 years’ experience in securitized products, with Tom’s experience making up nearly half. The team impresses me with their clarity, openness, and passion for what they do.

Strategy Capacity and Closure

The fund has achieved something few funds do … crossing the $1B threshold of assets under management (AUM) in less than two years. It attracted more capital in last quarter of 2017 than in the first six quarters of its existence. It ended the year with $1.6B, five times the level it started the year.

The GPC team seems intent on letting market opportunities decide the capacity and not an assets-gathered goal. Given the enormity of inflows, “closure is month-to-month at this point,” Tom explains. While the overall subprime market segment is nearly $400B, it is becoming harder to find bonds at a price GPC is willing to pay. But not yet impossible.

They remain in near continuous contact with 30-40 dealers and do substantial business with about half of them. Their current portfolio comprises nearly 300K mortgages with an average loan balance of $155K across more than 400 securities purchased at an average price of just $60.72 (par being $100). Fortunately, about $1B in non-agency RMBS are exchanged each day with 550 market trades made monthly. So, the typical trade of perhaps $2M is under the radar for institutional buyers with say $100B portfolios.

During their most recent conference call, they shared that the market’s fragmentation actually aids them in sourcing securities, as does patience. So far they are still able to buy securities that meet their price target and risk, the latter based on scenario assessment modelling. But if that changes, they will close.

Tom insists they will not be tempted to accept fast money only to disappoint investors. “We’d rather keep fewer investors longer term.” He also believes AlphaCentric will support GPC’s closure recommendation if and when it happens. My suspicion is that the fund will be capacity tested soon. Come May, IOFIX will reach the three-year mark, prompting rating coverage from Morningstar. Given its current performance level, it will debut with five stars, creating even greater demand.

Management’s Stake in the Fund

Per the latest SAI, as of March 2017, Tom Miner owned over $1M, Garrett Smith over $50K, and Brian Loo over $10K. Tom and Garrett stated that the team’s stake will be much higher, “like 10 times,” when the SAI is updated this year. Mr. Jerry Szilagyi, AlphaCentric’s controlling member and an interested trustee of the Income Opportunities Fund, which is one of several under the Mutual Fund Series Trust, holds over $100K.

Opening Date

May 28, 2015. All three share classes: IOFIX, IOFAX, and IOFCX. Lipper categorizes the fund as “Multi-Sector Income: Funds that seek current income by allocating assets among several different fixed income securities (with no more than 65% in any one sector except for defensive purposes), including U.S. government and foreign governments, with a significant portion of assets in securities rated below investment-grade.” Morningstar has it in same category.

That said: As of 31 December 2017, the fund maintains 94% of its portfolio in the subprime mortgage sector … and Garrison is bullish on it. Certainly more than the 65% referenced in Lipper’s category definition.

Lipper tracks 104 MultiSector Income funds. The elephant in the category is PIMCO’s Income Fund (PIMIX) with $108B in AUM. IOFIX ranks 25th in the category by AUM. Ten multisector funds have launched since IOFIX, including two GPC lists or have listed as competitors: Deer Park Total Return Credit (DPFNX) and Wilshire Income Opportunities (WIOPX). Others are Angel Oak Multi-Strategy Income (ANGLX), Performance Trust Strategic Bond (PTIAX) and Voya Securitized Credit (VCFIX). The last two are MFO five- and three-year Great Owls, respectfully, in the General Bond and US Mortgage categories.

Minimum Investment

The fund imposes only a $2500 minimum investment on all share classes, including the institutional IOFIX shares, which is good news. There is also a very low $100 minimum for automatic investments. I verified these minimums at Fidelity. At Schwab, however, it offers the normally 4.75% front-loaded share class IOFAX via No-Load/No Transaction Fee, but imposes a $100K minimum on the IOFIX institutional shares. So, caveat ēmptor.

Expense Ratio

IOFIX is 1.5%. IOFAX is 1.75% reflecting a 12b-1 distribution fee. A 4.75% front-load on this class is waived above $50K. IOFCX sports an egregious 2.5% expense ratio. That this latter class even exists reflects poorly on the advisor and the industry generally. All are net prospectus expenses after waivers. Fortunately, the preponderance of AUM is in IOFIX.

Given that the average expense ratio in the category is 0.85% (oldest share class only), these levels are undeniably high. But its performance has been so strong by any measure, nobody cares.

Focusing on IOFIX, the adviser pays 0.33% “other” (mostly administrative and servicing). The remaining 1.16% “management fee” (after a 0.01% acquired fund fee) is then split between AlphaCentric and Garrison Point, or 0.58% each. Since another Jerry Szilagyi company “MFund Services LLC,” also gets paid to manage the overall trust, Szilagyi’s firms appear to receive more fee from the fund than GPC does.

There are five AlphaCentric Funds, all less than four years old. “The Future of Investing … We seek to offer financial advisors and their clients access to best-in-class, style-forward managers in open-end mutual fund format, the types of products that were once only available to institutions and large endowments.” This last sentence is typically code for we charge high fees. Arguing that it’s still less than what hedge funds traditionally charge at 2% yearly plus a 20% performance fee. Only IOFIX has yet to attract significant assets, 96% in fact of the fund family. Average AlphaCentric fees: 1.84%, oldest share class only, or 2.10%, all share classes.

Interestingly, AlphaCentric is listed along with Eventide, Pinnacle and Advisory Research as a strategic partner in a firm called Multi-Funds, which describes itself as “A Premier Marketing, Consulting and Distribution Firm.” While this channel may indeed have helped bring attention to IOFIX, allowing the sub-adviser to focus on its strategy and portfolio management … what it loves to do, Multi-Funds hasn’t helped other funds in the AlphaCentric family achieve anywhere near the assets attracted by IOFIX.

Jerry Szilagyi also runs Catalyst Funds, a collection of “Intelligent Alternatives … We understood that the market did not need another traditional family of mutual funds … we endeavor to offer unique investment products to meet the needs of discerning financial advisers and their clients … specialized strategies seeking to produce income and equity-oriented returns while attempting to limit risk and volatility.” There are 28 Catalyst Funds comprising $6.2B in AUM. Average age just under 5 years. Most come in three classes, including those imposing 4.75% front-loads and 12b-1 fees. Average fees: 1.76% (oldest share class, 2.01% all share classes).

Here are the lifetime scorecard metrics from the MFO Premium site (click image to enlarge):

Are the high fees justified by overall fund family performance at AlphaCentric and Catalyst? Absolutely not.

Both AlphaCentric and Catalyst receive a “Lower” MFO Fund Family Score, which means most of their funds since inception underperform their categories on an absolute return basis. Risk adjusted performance is not any better. More than a third of their funds are bottom quintile performers based on Martin and 60% are in the bottom two quintiles. The four oldest surviving funds at Catalyst, which date back to 2006, sport absolutely abysmal performance.

Do they offer some winners? Yes, and one is IOFIX hands-down.

Comments

It’s been a perfectly behaved fund. It goes up or stays flat. It rarely goes down. It’s delivered what most alternative funds promise but rarely deliver: equity-like returns with bond-like volatility. It provides nearly 5% annualized dividend paid monthly. Last year its total return was 14%, after fees, to investors, beating its peers by 8.1% … about what the long outstanding PIMIX delivered in total. It delivered top quintile absolute return and risk adjusted returns based on Sortino and Martin ratios.

Here are last year’s risk and return metrics for the top 10 performers in Multi-Sector Income category, using our MultiSearch screener (click image to enlarge):

Since inception, the fund’s outperformance is even more impressive. It’s beaten AGG (iShares Core US Aggregate Bond ETF), HYG (iShares iBoxx $ High Yield Corporate Bond ETF), and PIMCO’s Income Fund (PIMIX) … all by substantial margins. It’s even beaten the S&P500, which few equity funds have done recently let alone fixed income funds.

“But more than its overall return, what we’re most proud of,” said Garrett during the latest conference call, “is the consistency of return.” The up-only behavior is similar to PIMIX’s only more so. Why? Because the underlining assets in the IOFIX portfolio are behaving that way; specifically, return on subprime mortgages generally has been 20.4% the past two years,  out-performing so-called “Alt-A” mortgages at 18.8% and prime mortgages at “only” 12.1%.

My colleague Sam Lee suggests another reason may contribute to the attractive behavior of funds like IOFIX and PIMIX. Matrix pricing of less liquid, harder to value assets may provide a steadier appearance than those in more highly traded markets. Similar to private equity or the value of your home, which is not marked-to-market daily, like holdings in your Schwab account.

IOFIX is priced daily by an independent but publicly traded company, called Intercontinental Exchange (ICE). Brian explains that the 3rd party pricing prevents any temptation to “meddle.”

Here’s summary of risk and return metrics in tabular form, from IOFIX launch through December 2017 (click image to enlarge):

The fund has demonstrated resilience during sell-offs in high yield and core bonds. The following correlation table for these same funds, plus SPY (S&P500 ETF), helps explain why. IOFIX is indeed negatively correlated with core bonds and uncorrelated with most others (click image to enlarge).

More fundamentally, IOFIX will be more resilient to factors affecting traditional core and high yield bonds, because of its variable coupon structure and its reliance on housing market versus corporate profits or balance sheets. That’s both the fund’s strength and potential weakness, but since launch it’s definitely been its strength.

Brian doesn’t expect conditions to change much in 2018. “Perhaps not as quite as much rate compression or improving credit [which enhanced the fund’s returns last year], but then we seem to say that every year.”

Tom emphasizes: “Even if housing prices stop increasing, amortization pays down the debt reducing loan to value every month!” Recent tax reform will benefit subprimes more because those loans are well below the deduction threshold, enabling its owners to have more money after taxes to further pay their mortgage. He also believes that since these mortgages are seasoned, originating 10-12 years ago, the owners are probably no longer “subprime” borrowers.

Greatest risk to the fund? Capacity. It is a shrinking market, at a rate of 15% per year, since “they don’t issue subprime mortgages anymore.” Because of daily trading volume and high demand, liquidity has not been an issue. But as a precaution, the firm secured a $200M line of credit recently to help mitigate any unexpected redemption pressure.

Other risks? If credit spreads rise because riskier assets like equities or high yield bonds are considered overpriced, or if home prices collapse perhaps because of a downturn in jobs. But given the appreciation in home prices, limited inventory, and decreases in LTVs, the asset class seems well positioned not lose money during another downturn.

If rates rise too much because of an overheated economy, the swath of underlining variable rate mortgages in these securities could make it harder for owners to make payments or even trigger caps, but then that’s balanced by the increase in home prices … the inflation of real assets.

Brian summarizes: “It’s really a mitigated credit story … the seasoned nature of these bonds provides a powerful stabilizing mechanism.”

Bottom Line

“The secret to riches, lab rats, is the same as the secret to comedy: timing,” Max Skinner tells his bond trading desk in the 2006 movie “A Good Year.”

The folks at Garrison Point have produced the perfect strategy at the perfect time. Their background, team work, risk/return models, and passion appear perfectly suited to exploit this current fixed income market niche.

So far, they have picked the right sectors and subsectors (tranches) and the right securities within those subsectors. Securities that have been called at par resulting in higher yield. Securities protected by subordination (tranches with lower rating absorbing any losses first) and benefiting from excess interest unique to this asset class. Securities enhanced by favorable legal settlements.

While IOFIX is fairly young, the team has prosecuted similar strategies very successfully at Barlcay’s for high net worth individuals and in their separately managed accounts since launching the firm. And, they continue to examine other “overlooked” asset-backed classes for opportunities to deliver “asymmetric yield.”

Were it not wrapped in an AlphaCentric logo, which means investors are paying perhaps 50 pps more than they should, it would be the perfect fund. But as long as IOFIX is producing at these levels, as long as it continues to handsomely outperform say PIMIX, the performance is worth the higher fees.

If you are looking to diversify your fixed income portfolio with uncorrelated assets, or looking to diversify your overall portfolio with real assets, consider IOFIX while you still can.

Fund Website

The website is a convenient place to get latest fund documents, including fact sheet, prospectus, etc. The best info though is the quarterly briefing. And, the opportunity to sign-up for the quarterly conference calls under the events tab. Beyond that, the Garrison Point team is very approachable and happy to field questions directly. Just give them a call at 415-887-1410.

Disclosure

I’ve been heavy IOFIX since early July 2017 in my retirement account.

Launch Alert: CrossingBridge Low Duration High Yield (CBLDX)

By David Snowball

CrossingBridge Low Duration High Yield launched on February 1, 2018. The fund seeks “high current income and capital appreciation consistent with the preservation of capital.” The plan is to invest in junk bonds and loans, mostly CCC or better. Their investable universe includes corporate bonds, zero-coupon bonds, commercial paper, ETNs, distressed debt securities, bank loan assignments and/or participations, private placements, mortgage- and asset-backed securities, U.S. Government obligations and bank loans to corporate borrowers. While most of the portfolio will be domestic, up to 25% might be foreign fixed-income securities. They’ll generally have a duration of three years or less. There’s also some (limited) ability to hedge the portfolio.

The adviser tends to invest around the notion of default risk: they invest in firms where the default risk appears minimal or where the issuer has already defaulted so they’re able to buy securities at huge discounts. They believe “that the combination of this fundamental analysis and the short duration characteristics of the securities result in a low volatility, absolute return risk profile.”

Why might you care?

CrossingBridge is an affiliate Cohanzick Management, sub-adviser to two exceptionally excellent and distinctive fixed-income funds. They are RiverPark Short Term High Yield (RPHYX/RPHIX) and RiverPark Strategic Income (RSIVX/RSIIX). RPHYX, in particular, has posted an exceptional risk-return profile: it has the highest Sharpe ratio of any mutual fund (as in: #1 out of 7000+) over the past five years and 14th over the past three. The Strategic Income fund is a couple steps out on the risk-return spectrum, offering the prospect of high single digit returns with an aversion to losing money.

  Return Best year Median year Worst year Sharpe Maximum drawdown Duration (years) Beta*
RPHIX 2.4% 4.4% 3.45% 1.2% 3.08 -0.6 0.2 -3 0.04
                 
RSIIX 3.6% 10.2 4.5% (3.8%) 1.08 -7.3 2-4 0.14

* relative to the BarCap Aggregate

CrossingBridge seems to be positioned in between the two older funds, offering the potential for more substantial returns than RPHIX with less downside than RSIIX.

Like the RiverPark funds, CrossingBridge is managed by David Sherman, Cohanzick’s founder, president and lead manager. In the case of CrossingBridge, Michael DeKler, a senior analyst at Cohanzick, serves as assistant portfolio manager.

For now, only the institutional share class is available to the public. It charges 0.99% with a $250,000 minimum. They are authorized to sell Investor shares with expenses of 1.27% and a $2500 minimum. No word yet on when that might occur. I’d share their website, but they don’t appear to have one.

We have profiled both Short Term High Yield and Strategic Income. By way of disclosure, I have personal investments in both though MFO has no financial ties to either RiverPark or Cohanzick.

Elevator Talk: Parker Binion, KCM Macro Trends Fund

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 about interesting funds.

KCM Macro Trends Fund (KCMTX/KCMIX) launched in 2008. It’s managed by two guys trained as attorneys: Marty Kerns, who has been managing the fund since inception, and Parker Binion, who joined in early 2016. 

The fund’s strategy is thoughtful and appealing. They want to give you exposure to stocks when markets are rising, and exposure to other assets when markets are falling. That implies two decisions:

  1. Macro: is this a Risk-On or Risk-Off environment?
  2. Micro: what are the best investments giving the environment?

In a Risk-On environment, the fund relies on quantitative screens to construct an equity portfolio. In a Risk-Off environment, the fund can reduce net equity exposure to zero so that it’s effectively market neutral. In such markets we will hedge using three approaches: (1) buying ETFs that act inverse to the stock market to create a market neutral or net short posture, (2) option trades that accomplish the same thing, and (3) investing in non-correlated asset classes such as bonds, precious metals or currencies through the use of ETFs.”

As we ran our statistical screens, the pattern was pretty striking:

KCM Macro Trends has returns in the top 1% of its Morningstar Multi alternative peer group over the past five years.

As of January 31, 2018, the fund has the highest five-year returns of any multi alternative fund in Morningstar’s database; they’ve earned 11.3% annually while the next highest fund (AlphaCore Absolute, GDAMX) booked 7.4%.

The fund’s returns are in the top two for the one- and three-year periods.

KCM Macro Trends has the highest returns of any alternative global macro fund in our database, which is built on Lipper data and categories; they’ve earned 11.8% annually while the next-highest fund (RiverNorth Core RNCOX) booked 8.8%.

KCM Macro Trends has the highest Sharpe ratio, the most widely used measure of the risk-return balance, of any alternative global macro fund: 1.15, with RNCOX an honorable second at 1.06.

The fund’s returns are in the top 5 for the 1- and 3-year periods as well.

While the fund was around only for the last eight months of the 2007-09 crisis (August 2008 – March 2009), it dramatically outperformed its peers and the broad market during that last spasm: KCMTX fell 14.5%, the average multi alternative fund fell 22% while the S&P 500 declined 41%. (In eight months! Yikes.)

All of which is reflected in the fund’s consistent five-star rating (over the past 3 and 5 year periods, and overall) by Morningstar.

We asked Mr. Binion to talk through the factors that might explain the fund’s distinctive risk-return profile. Here is his 292 word précis:

Marty Kerns and I have developed five core beliefs about investing. Here’s what we stand for:

  1. ORIGINAL RESEARCH

Consensus positions get benchmark results. We seek to beat our benchmark, thus we must be contrarian. We must have “active share.” So we rigorously test new ideas, trying always to identify what “works.” When we outperform, research is a big part of our edge.

  1. QUANTITATIVE INVESTING

We convert our research into quantitative models by developing buy/sell rules and ranking systems. These models produce buy/sell signals that we follow in a disciplined manner. We do this to remove as much emotion and behavioral bias as possible from the investment process. This is a big edge over most discretionary managers.

  1. LONG EQUITY BIAS

We favor equities over other asset classes under most circumstances due to their risk premium. We are biased long because good shorting opportunities are harder to find, and because shorts have limited upside potential with unlimited downside risk. However, we do use short positions in our fund as hedges seeking to reduce volatility and for profit.

  1. RISK CONTROL

For example, on a stock selection level, we cap sector exposure and individual name exposure. On a portfolio construction level, we make sure the models we use are relatively uncorrelated (i.e. diversified), and weighted in parity to the risk they pose.

  1. FLEXIBILITY

Finally, we believe in being flexible to adapt to changing market conditions. We have rules in place that guide us when markets get too risky, or extremely favorable, and will adjust our portfolios accordingly. Over the long term, we believe our flexibility is a big edge over funds trapped in an equity style box come rain or shine.

We run our fund with these core principles in mind.

KCMTX is a no-load fund (and no transaction fee on major retail platforms) with a $5,000 investment minimum and expenses of 1.65%. The Institutional class, KCMIX, has a $250,000 minimum and expenses of 1.40%. The fund’s website isn’t incredibly rich, but does provide a clean snapshot of the fund and a nice (and soon to be updated) investor presentation.

Funds in Registration

By David Snowball

The SEC requires advisers to give them 75 days to review and comment upon any proposed new fund offering. During those 75 days, the advisers aren’t permitted to say anything about the funds except “please refer to our public filing with the SEC.” At peak times of the year, there might be a couple dozen no-load retail funds and active ETFs in registration. Midwinter, not so much. Fidelity’s ESG bond index might be a useful option for investors looking to express their concerns about shaping a more humane world. Beyond that, mostly nice people who don’t yet have a public track record or striking competitive advantage. They might do very well, but we’ll have to watch for a bit.

Balter Merger Opportunity Fund (BMRGX/BMERX)

Balter Merger Opportunity will pursue capital appreciation. The plan is to establish a global merger arbitrage portfolio, with the prospect of shorting one of the partners in an announced merger. The strategy works, though there are already several dominant (if not excellent) players in the field. The fund will be managed by David J. Simon, Michael D. Horgan and Brett Patelsky of Twin Securities. The initial expense ratio has not been disclosed, and the minimum initial investment will be $5,000 for the Investor share class.

Belmont Theta Income Fund

Belmont Theta Income Fund will pursue positive returns independent of market cycles, consistent with income generation. The plan is to let loose The Iron Condor. An Iron Condor, of course, is “a directionally neutral, defined risk option strategy … to sell volatility in the S&P 500 index.” The fund will be managed by Stephen Solaka and Daniel Beckwith. The initial expense ratio will be 1.99% (yikes), and the minimum initial investment will be $5,000.

Fidelity U.S. Sustainability Bond Index Fund

Fidelity U.S. Sustainability Bond Index Fund will track the Bloomberg Barclays MSCI U.S. Aggregate ESG Choice Index. The plan is a bit unclear: it’s an investment grade US bond fund with ESG screens but I can’t tell if those are positive screens (they’re tilted toward “good” companies), negative ones (they simply screen out bad actors and track the “neutral to good” crowd) or something else. The fund will be managed by Brandon Bettencourt and Jay Small. The initial expense ratio will be 0.20% for Investor shares, and the minimum initial investment will be $2,500.

Rational Trend Aggregation Dividend and Income Fund

Rational Trend Aggregation Dividend and Income Fund will pursue current income while maintaining a secondary emphasis on long-term capital appreciation and low volatility. The plan is to trade bunches of income-producing securities based on trend following, mean reversion and intermarket analysis models. The fund will be managed by Matthew B. Tuttle, founder of the adviser. If I’m reading Linked In correctly, Mr. Tuttle is a private wealth adviser with Ameriprise. The initial expense ratio will be 1.62% for the no-load Institutional shares, and the minimum initial investment will be $1,000 for all share classes.

Rational Trend Aggregation Growth Fund

Rational Trend Aggregation Growth Fund will pursue long-term capital appreciation while maintaining a secondary emphasis on capital preservation. The plan is to trade U.S. equities using a momentum-based strategy. The prospectus, for reasons unclear, has the following phrase in a larger, bolded font: “tactical models implemented by the Advisor are,” followed by the same list (trend, mean reversion, intermarket analysis) evident in their other fund’s prospectus. The fund will be managed by Matthew B. Tuttle, founder of the adviser. The initial expense ratio will be 1.67% for the no-load Institutional shares, and the minimum initial investment will be $1,000 for all share classes.

REX BKCM ETF

REX BKCM ETF is an actively-managed ETF which will pursue total return. The plan is to invest in the cryptocurrency world: firms that accept payments, support miners, develop opps, use blockchain and/or are “Cryptocurrency Service Providers.” The fund will be managed by Brian Kelly, Founder and CEO of BKCM LLC, and Denise M. Krisko. Ms. Krisko has the distinction of having managed the fund “since its inception in 2016.” Ummmm … no? The initial expense ratio is not yet public and there is, of course, no minimum initial investment.

RVX Emerging Markets Equity Fund

RVX Emerging Markets Equity Fund will pursue long-term capital appreciation. The plan is to use “quantitative screening followed by ‘bottom-up’ fundamental analysis with the goal of owning the highest quality, undervalued companies” whose fates are tied to the emerging markets. Geographically, those firms might be headquartered in developed, emerging or frontier markets. The fund will be managed by Cindy New and Robin Kollannur of RVX Asset Management. RVX is an institutional EM specialist with, as best I can tell, $133 million in AUM. The initial expense ratio will be 1.35% after waivers for both the Institutional and Investor class shares, and the minimum initial investment has not been announced.

Six Thirteen Core Equity Fund (TZDKX)

Six Thirteen Core Equity Fund will pursue long-term growth of capital. The plan is to invest in the stock of high quality and attractively valued companies consistent with the Jewish values of tikkun olam (repairing the world) and of promoting the development of Israel. The fund will be managed by Evan F. Shorten and Justin L. Ross of JVIF, LLC (the Jewish Values Investment Funds). The initial expense ratio will be 1.36% after waivers, and the minimum initial investment will be $3,600. There’s a rich embedded set of cultural signals here. Nina Kallen, a friend and remarkably sharp attorney in Boston, helps with a bit of decoding: “There are,” she reports, “613 commandments in the Torah. Tsedakah is a Jewish concept that combines the English concepts of charity and justice. The Jewish word Chai means life. All Hebrew words have a numeric value taken from their letters. The numeric value of Chai is 18. So multiples of 18 are considered lucky –36, 360,3600, etc. Monetary gifts at bat mitzvahs often are in those amounts.”

I love being around people who are sharper than me, and especially those who are differently sharp. One of the joys of working with MFO is being surrounded by a cadre of folks – Chip, Charles, Ed and our readers – who are just those sort of people.

Manager changes, January 2018

By Chip

Ahh … it’s a quiet month on the manager change front. Forty-eight funds saw partial turnover in their management teams but no high profile manager stalked off or was shown the door, and no rising star was awarded a new charge. Despite the pressure for cost containment, 11 of the funds were simply adding to the size of the management team. The month’s sole highlight occurred when Chip encountered Harding Loevner manager Ferrill Roll, declared it “feral” and began wondering about whether he might be a candidate for managing a fund in Westeros. (Note in passing: don’t succumb to the temptation, the penalties for underperforming your benchmark there involve dragon fire.)

Ticker Fund Out with the old In with the new Dt
Various AB Multi-Manager Select Retirement Allocation target date funds Vadim Zlotnikov is no longer listed as a portfolio manager for the fund. Daniel Loewy and Christopher Nikolich will continue to manage the fund. 1/18
GOPAX Aberdeen China Opportunities Fund Kathy Xu will no longer serve on the fund. Hugh Young, Nicholas Yeo, Flavia Cheong, and Nicholas Chui will continue to manage the fund. 1/18
Various American Century One Choice Funds target date funds No one, but . . . Vidya Rajappa joins G. David MacEwen, Radu Gabudean, Richard Weiss, and Scott Wilson 1/18
AVEFX Ave Maria Bond Fund No one, but . . . Adam Gaglio is joining Brandon Scheitler and Richard Platte on the management team. 1/18
AVEMX Ave Maria Value Fund George Schwartz is no longer listed as a portfolio manager for the fund. Chadd Garcia is joining Timothy Schwartz and Joseph Skornicka on the management team. 1/18
BXMIX Blackstone Alternative Multi-Strategy Fund GS Investment Strategies, LLC will no longer subadvise the fund. The other subadvisers remain. 1/18
BBCPX Bridge Builder Core Plus Bond Fund No one, but . . . Stephen Bartolini joins the rest of the management team. 1/18
ACXAX Catalyst Multi-Strategy Fund Kevin Jamali will no longer serve as a portfolio manager for the fund. Darren Kottle will now manage the fund. 1/18
TAPRX Columbia Contrarian Asia Pacific Fund George Gosden and Vanessa Donegan are no longer listed as portfolio managers for the fund. Soo Nam Ng and Christine Seng will now manage the fund. 1/18
CRIHX CRM Long/Short Opportunities Fund No one, but . . . Mimi Morris and Jason Yellin join Jay Abramson in managing the fund. 1/18
FDESX Fidelity Advisor Diversified Stock Fund James Morrow no longer serves as lead portfolio manager of the fund. Ramona Persaud continues to manage the fund. 1/18
FLMLX Fidelity Advisor Series Equity-Income Fund James Morrow no longer serves as lead portfolio manager of the fund. Sean Gavin will continue to manage the fund. 1/18
FDGFX Fidelity Dividend Growth Fund Ramona Persaud no longer serves as lead portfolio manager of the fund. Gordon Scott will continue to manage the fund. 1/18
FJACX Fidelity Series Small Cap Discovery Fund Charles Myers no longer serves as co-manager of the fund. Derek Janssen will continue to manage the fund. 1/18
RFAP First Trust Riverfront Dynamic Asia Pacific ETF Effective January 2, 2018, Doug Sandler and Michael Jones are no longer portfolio managers for the fund. Adam Grossman, Chris Konstantinos, and Scott Hays will continue to serve as portfolio managers for the fund. 1/18
RFDI First Trust Riverfront Dynamic Developed International ETF Effective January 2, 2018, Doug Sandler and Michael Jones are no longer portfolio managers for the fund. Adam Grossman, Chris Konstantinos, and Scott Hays will continue to serve as portfolio managers for the fund. 1/18
RFEM First Trust Riverfront Dynamic Emerging Markets ETF Effective January 2, 2018, Doug Sandler and Michael Jones are no longer portfolio managers for the fund. Adam Grossman, Chris Konstantinos, and Scott Hays will continue to serve as portfolio managers for the fund. 1/18
RFEU First Trust Riverfront Dynamic Europe ETF Effective January 2, 2018, Doug Sandler and Michael Jones are no longer portfolio managers for the fund. Adam Grossman, Chris Konstantinos, and Scott Hays will continue to serve as portfolio managers for the fund. 1/18
GFRAX Goldman Sachs High Yield Floating Rate Fund Jean Joseph is no longer listed as a portfolio manager for the fund. Michael Goldstein is joined by Rachel Golder and Ken Yan on the management team. 1/18
HISOX Harbor Small Cap Growth Opportunities Fund Lance Marx will no longer serve as a portfolio manager for the fund. Cam Philpott, David Hand, Hiren Patel, and Sean McGinnis continue to serve as co-portfolio managers for the fund. 1/18
HLMVX Harding Loevner Global Equity Portfolio No one, but . . . Scott Crawshaw joins Richard Schmidt, Christopher Mack, Peter Baughan and Ferrill Roll on the management team. 1/18
HLMOX Harding, Loevner Frontier Emerging Markets Richard Schmidt is no longer listed as a portfolio manager for the fund. Pradipta Chakrabortty and Babatunde Ojo continue to serve as the portfolio managers of the fund. 1/18
HLMIX Harding, Loevner International Equity No one, but . . . Scott Crawshaw joins Ferrill Roll, Alexander Walsh, Bryan Lloyd, Patrick Todd and Andrew West on the management team. 1/18
SCUIX Hartford Schroders US Small Cap Opportunities Fund No one, but . . . Robert Kaynor joins Jenny Jones in managing the fund. 1/18
SMDIX Hartford Schroders US Small/Mid-Cap Opportunities Fund No one, but . . . Robert Kaynor joins Jenny Jones in managing the fund. 1/18
HSPX Horizons S&P 500 Covered Call ETF Wade Guenther will no longer serve as a portfolio manager for the fund. Garrett Paolella, Troy Cates, and Jonathan Molchan continue to run the fund. 1/18
ICHCX ICON Healthcare Fund Scott Snyder is no longer listed as a portfolio manager for the fund. Scott Callahan will now manage the fund. 1/18
MSAVX Invesco American Value Fund Effective on or about April 2, 2018, Thomas Copper will no longer serve as a portfolio manager to fund. Jeffry Vancavage and Sergio Marcheli will continue to manage the fund. 1/18
KPIEX KP International Equity Fund No one, but . . . William Blair joins in as the sixth subadvisor to the fund. 1/18
KPSCX KP Small Cap Equity Fund DeForest Hinman will no longer serve as a portfolio manager for the fund. The rest of the extensive team remains. 1/18
OAEIX Oppenheimer Equity Income Fund Michael Levine is no longer listed as a portfolio manager for the fund. Laton Spahr will now manage the fund. 1/18
PWREX Pioneer Real Estate Fund Gina Szymanski is no longer listed as a portfolio manager for the fund. Raymond Haddad now manages the fund. 1/18
PBAAX PNC Balanced Allocation Fund Mark McGlone will no longer serve as a portfolio manager for the fund. Aneet Deshpande, Martin Schulz, Jason Weber, and Michael Coleman will continue to manage the fund. 1/18
POGAX Putnam Growth Opportunities Fund Robert Brookby is no longer listed as a portfolio manager for the fund. Samuel Cox joins Richard Bodzy in managing the fund. 1/18
PNOPX Putnam Multi-Cap Growth Fund Richard Bodzy and Robert Brookby are no longer listed as portfolio managers for the fund. Katherine Collins and Shep Perkins will now manage the fund. 1/18
QEAAX Quaker Event Arbitrage Fund No one, but . . . Paul Hoffmeister will join Thomas Kirchner in managing the fund. 1/18
QTRAX Quaker Global Tactical Allocation Fund Thomas Kirchner is no longer listed as a portfolio manager for the fund. Todd Cohen, Elliot Gilfarb, Andrew Cowen, and Thomas Lott will now manage the fund. 1/18
QMCVX Quaker Mid-Cap Value Fund Frank Latuda and Gary Kauppila are no longer listed as portfolio managers for the fund. Todd Cohen, Elliot Gilfarb, Andrew Cowen, and Thomas Lott will now manage the fund. 1/18
QUSVX Quaker Small-Cap Value Fund Gregory Rogers and Christopher Whitehead are no longer listed as portfolio managers for the fund. Todd Cohen, Elliot Gilfarb, Andrew Cowen, and Thomas Lott will now manage the fund. 1/18
QUAGX Quaker Strategic Growth Fund Christopher Perras, Thomas Stevens, Daniel Allen, and Kristin Ceglar are no longer listed as portfolio managers for the fund. Todd Cohen, Elliot Gilfarb, Andrew Cowen, and Thomas Lott will now manage the fund. 1/18
RFCI Riverfront Dynamic Core Income ETF Michael Jones is no longer listed as a portfolio manager for the fund. Tim Anderson and Rob Glownia will continue to manage the fund. 1/18
RFUN Riverfront Dynamic Unconstrained Income ETF Michael Jones is no longer listed as a portfolio manager for the fund. Tim Anderson and Rob Glownia will continue to manage the fund. 1/18
USAAX USAA Growth Fund Paul Radomski no longer serves as a portfolio manager of the fund. Andy Eng will continue to manage the fund. 1/18
WALTX Wells Fargo Alternative Strategies Fund John Burbank is no longer listed as a portfolio manager for the fund. The other eleven managers remain. 1/18
WWIAX Westwood Income Opportunity Fund No one, but . . . Daniel Barnes joins Mark Freeman and Todd Williams on the management team. 1/18
WWLAX Westwood LargeCap Value Fund Lisa Dong no longer serves as a portfolio manager of the fund. Mark Freeman, Scott Lawson, Matthew Lockridge, and Varun Singh will continue to manage the fund. 1/18
WHGSX Westwood Smallcap Fund Lisa Dong no longer serves as a portfolio manager of the fund. William Costello, Matthew Lockridge, and Frederic Rowsey continue to manage the fund. 1/18

 

Briefly Noted

By David Snowball

Updates (and notes from careful readers)

Several MLP funds – including Center Coast MLP Focus Fund (CCCAX) and Global X MLP ETF (MLPA) – have announced that the recent tax law changes affects them. They’re treated as “a regular corporation” for the purpose of tax law, which means that the statutory tax rate that affects them has dropped from 35% to 21%. It is not yet clear that the rate change will have any appreciable effect on shareholders or the funds’ returns because of the complexity of calculating corporate taxes, then or now.

FPA U.S. Value Fund (FPPFX) has affirmed the proposition that “it is non-diversified” but simultaneously eliminated the provision that “[t]he portfolio may be moderately concentrated, typically 20-50 positions.”

One of our readers, Shawn McFarlane, was struck by evidence of a backlash against Vanguard within the financial services industry. “I thought I would share some interesting information. At least three large financial services firms are adding servicing fees to (or dropping) Vanguard funds” from their platforms. The story Shawn is referring to ran in the Wall Street Journal (which has a paywall) and was lightly excerpted at a site called Dealbreaker (which, understandably but regrettably, has a bunch of intrusive ads). The short version is that Fidelity, TDAmeritrade and Morgan Stanley are making access to Vanguard products either more difficult or more expensive. Vanguard took in $180 billion in new money in 2017, more than four times more than second place finisher Fidelity. The impositions aren’t going to stop the flows to Vanguard, but at least allow the others to make a bit of money off them.

Kirk Taylor shared a recent SEC filing in which the advisers to the four-star, $1.2 billion Semper MBS Total Return Fund (SEMPX) proposed “an increase in the Fund’s contractual advisory fee,” initially of 15 bps from 0.45% to 0.60%. (Remember, the advisory fee is just the adviser’s take, it’s not the complete set of expenses.) To compensate investors, they also propose adding “breakpoints” in which the fee declines as assets grow. Sadly, the lowest-possible level of the new fees is still higher than the current fee. The current fee is 45 basis points. The new fee starts at 60 basis points, drops to 55 bps for assets over the $1.5 billion threshold and 50 bps for assets over a $2.5 billion threshold. They’re also raising the cap for the overall expense limitation. By Semper’s estimate, retail shareholders will see their expenses rise from 1.00% now to 1.08%. The adviser is silent, at least in the filings, on what benefit investors receive in exchange for their higher expenses. Kirk’s note, “what a load of crap,” suggests that the benefits of the fee increase are not universally appreciated by shareholders.

Victory Capital Holdings has filed for an IPO. They’re a relatively acquisitive bunch, having purchased Munder, CEMP and RS Investments in the past few years. As of September 30, 2017, the firm “had $517.7 million aggregate principal amount of outstanding term loans under our existing senior credit agreement.” I think the translation is “had $517 million in debt.” Part of that debt, surely came from buying other fund firms but they also “incurred $125.0 million of this debt in February 2017 to pay a special dividend to our stockholders.” (That has the feeling of borrowing money to buy gifts for other people.) The purpose of the IPO is to allow them to repay a portion of that debt. Sadly, researchers suggest that Victory’s shareholders are not likely to see a benefit from the move. Michael Berkowitz’s 2003 study, “Ownership, risk and performance of mutual fund management companies,” concludes:

… publicly-traded management companies invest in riskier assets and charge higher management fees relative to the funds managed by private management companies. At the same time, however, the risk-adjusted returns of the mutual funds managed by publicly-traded management companies do not appear to outperform those of the mutual funds managed by private management companies.

Briefly Noted . . .

SMALL WINS FOR INVESTORS

The minimum initial investment for the Alambic funds – Alambic Mid Cap Growth Plus (ALMGX), Alambic Mid Cap Value Plus (ALMVX), Alambic Small Cap Growth Plus (ALGSX), Alambic Small Cap Value Plus (ALAMX) – has been reduced from $50,000 to $5,000. Should you care? Maybe. While the funds have just $7 million between them, Alambic manages nearly a billion overall. Their average account is around $100 million, which means this isn’t a small potatoes operation. All of the funds have beaten their peers since inception, while none of them have high volatility. The Mid Cap Growth Fund, in particular, has posted substantially higher-than-average returns with substantially lower-than-average volatility since inception. They hold a large number of positions, seeking small gains from “behavioral biases and informational asymmetries create small, predictable deviations in individual stock prices from fair value.” The founders are Citigroup / Salomon Brothers alumni and the organization, overall, is a collection of geeks. The 10 core staff includes:

A PhD in Chemical Engineering from MIT who also has an MBA and a CFA
Another PhD in Chemical Engineering from MIT who has a CAIA
An R&D engineer with a BS in Chemical Engineering from Iowa State (go Cyclones!)
An M.S. in Chemical Engineering from Illinois who also has an MBA and a CFA
An M.S. in Ocean Engineering from MIT (really, what else would you expect of their head marketer?)
And MS in Mechanical Science & Engineering from Illinois
An MS in Mechanical Engineering for Purdue plus
A J.D., an undefined B.A. from Johns Hopkins and a classical pianist

If you understand “thinking differently” to be a virtue, this has the prospect of being a saintly team. More to the point, founder Albert Richards was head of European equities for Citigroup for 12 years.

Sadly, none of that saves them from inept web maintenance. When you try to reach their homepage, you’re greeted with the warning:

Jacob Small Cap Growth Fund (JSIGX) and Jacob Micro Cap Growth Fund (JMIGX) have reduced their minimum subsequent investment from $1,000 to $100. Given that these are institutional funds with $1 million minimums, one wonders how many of their investors were strapped for the extra $900 to add to the fund?

CLOSINGS (and related inconveniences)

Convergence Core Plus (MARVX) and Convergence Opportunities (CIPVX) have both chosen to “permanently close” the Investment Class shares of their fund, effectively immediately. The funds are perfectly respectable, if a bit expensive, and their Institutional share class carries a relatively modest $15,000 minimum.

Oakmark International (OAKIX) has closed to new investors “and most third-party intermediaries” effective January 26, 2018.

OLD WINE, NEW BOTTLES

Collins Long/Short Credit Fund (CLCAX) has been adopted by CrossingBridge Advisors, LLC and rebranded as CrossingBridge Long/Short Credit Fund. The fund will operate, for the next 150 days, under an interim advisory agreement (largely impenetrable, though available for lawyers and other masochists). CrossingBridge is a $300 million affiliate of David Sherman’s $1.6 billion Cohanzick Management firm.

FPA U.S. Value Fund (FPPFX) has affirmed the proposition that “it is non-diversified” but simultaneously eliminated the provision that “[t]he portfolio may be moderately concentrated, typically 20-50 positions.”

In late January, the name “Columbia European Equity Fund” was replaced with “Columbia Contrarian Europe Fund.”

In October 2017, we ridiculed the decision to rebrand Lebenthal Lisanti Small Cap Growth Fund as Dinosaur Lisanti Small Cap Growth Fund (ASCGX). Morningstar’s Jeff Ptak wrote to let us know that Dinosaur Financial Group Holdings had taken a stake in Lebenthal Lisanti. The name still comes across as (a) stupid and (b) unexplained. That probably requires us to now celebrate the second name change in four months. The Dinosaur is extinct and the fund is now Lisanti Small Cap Growth Fund (ASCGX).The fund’s manager, Mary Lisanti, is a well-known and well-regarded figure renowned for her long-ago work at the Strong Funds. Sadly, her fund remains tiny, expensive and undistinguished.

As of February 1, 2018 Navian Waycross Long/Short Equity Fund became Waycross Long/Short Equity Fund (WAYEX). The Navian name was short-lived. The fund’s February 2017 annual report mentions “The Fund name was changed during the period to reflect Waycross Partners’ recent partnership with Navian Capital, LLC. Navian Capital is a broker/dealer based in Cincinnati, Ohio. The Navian partnership provides our firm with marketing, operational, and compliance support.”

The Board of Directors of the Prudential Funds approved replacing “Prudential” with “PGIM” in each Fund’s name with the exception of the Prudential Day One funds.  Beyond that Prudential Jennison Emerging Markets Equity Fund will change its name to PGIM Jennison Emerging Markets Equity Opportunities Fund and Prudential QMA Strategic Value Fund will become PGIM QMA Large-Cap Value Fund.

Putnam Multi-Cap Value Fund (PMVAX) is becoming Putnam Sustainable Future Fund with the addition of “sustainability criteria” to its investment strategies. The fund picked up a new manager at the very end of December and its portfolio already receives an above-average sustainability grade from Morningstar, so this isn’t a major change.

OFF TO THE DUSTBIN OF HISTORY

Berwyn Fund (BERWX) is being merged into Chartwell Small Cap Value Fund (CWSVX) in the second quarter of 2018. Over the past five years, Chartwell has modestly outperformed its peer group and has substantially outperformed Berwyn with lower volatility than either. It also offers lower expenses, by a bit, than Berwyn.

Capital Management Mid-Cap Fund (CMCIX) is seeking shareholder approval to merge into Wellington Shields All-Cap Fund (WSCMX), effective March 30, 2018. If the change occurs, the goal will switch from “long-term capital appreciation” to just “capital appreciation” and the strategies will include investing in stocks of all caps. Not to be critical of the move, but WSCMX is a one-star, $10 million fund that’s been around less than four years. It’s combined market-like volatility and far below market returns. CMCIX is twice the size, has a 23 year record and is a stronger performer. CMCIX is midcap, WSCMX is large growth. Hmmm … our recommendation to CMCIX investors would be to move to PowerShares S&P MidCap Low Volatility ETF (WMLV) or Hartford Schroeders Small/Mid Cap Opportunities (SMDIX), either of which is cheaper, better and offers the mid-cap focus folks were originally seeking.

The entire Castlemaine fund family (you did know there was a Castlemaine fund family, right?) – Castlemaine Emerging Markets Opportunities (CNEMX), Castlemaine Event Driven (CNEVX), Castlemaine Long/Short (CNLSX), Castlemaine Market Neutral (CNMNX) and Castlemaine Multi-Strategy (CNMSX) – has closed and liquidated on January 31, 2018 after very short notice. The funds launched in January 2016 and had barely $7 million between them. The market neutral fund was exceptional, the others … meh.

Castlemaine, by the way, is a town in Victoria, Australia, near the university where the funds’ manager earned a master’s degree in astronomy.

CM Advisors Fund (CMAFX) is slated to merge into CM Advisors Small Cap Value Fund (CMOVX ), pending shareholder approval. By Morningstar’s calculation, they’re both small cap value funds which have trailed 98-100% of their peers over the past 5-10 years.

FMC Strategic Value Fund (FMSVX) will liquidate on February 16, 2018.

Thank to Ted, our discussion board’s indefatigable Linkster, for the note that IndexIQ, a subsidiary of New York Life Investment Management, has announced it will be closing three of its 24 ETFs in March. They are IQ Canada Small Cap ETF (CNDA), IQ Global Oil Small Cap ETF (IOIL) and IQ Australia Small Cap ETF (KROO).

How Linkster-ish is Ted? As of 1/31/2018, he had initiated 19,497 discussion threads at MFO alone and surely tens of thousands more at our predecessor, FundAlarm.

Innovator McKinley Income Fund (IMIFX) will liquidate at the close of business on February 22, 2018. IMIFX is a sort of equity-income fund whose high expenses (2.7%) ate just about half of the income it generated (5.4%) leaving precious little for growth. The fund returned about 2.5% annually since inception.

iShares iBonds March 2018 Term Corporate ETF (IBDB) liquidates on April 2, 2018, which is not an entirely surprising development given the fund’s name and objective.

John Hancock continues to struggle to get enough shareholders today to merge John Hancock Small Company Fund (JCSAX) into John Hancock Small Cap Core Fund (JCCAX). They adjourned the January 26 meeting without resolution, will try again on February 16 and hope to merge the funds by March 9, 2018. The merger would be a win for JCSAX investors.

(Just a moment while I suppress the urge to roll my eyes.) (Okay, I’m better now.) In a surprising development, the LocalShares Board of Directors has voted to liquidate the Nashville Area ETF (NASH). Apparently the opportunity to invest in Cracker Barrel Old Country Store and private prison operator CoreCivic was not sufficient draw to compensate for earning 4.6% while your peers were making 9.8%.

The entire Pacific Financial family of funds – Pacific Financial Core Equity Fund (PFLQX), Tactical (PFTLX), Explorer (PFLPX), Faith & Values Based Moderate (FVMLX), International (PFLIX), Dynamic Allocation (PFLDX), Strategic Conservative (PFLSX), and Flexible Growth & Income (PFLFX) – liquidated on January 30, 2018. I feel badly for them, but the reality is that every one of their funds trailed their Lipper peer groups in every trailing period (1, 3, and 5 years and since inception) I checked.

Major kudos to The Shadow for this one: buried deep in an SEC filing for the Quaker Funds is a provocative note about Quaker Event Arbitrage Fund (QEAAX, QEACX, QEAIX).

Subject to further approvals, it is anticipated that shareholders of the Quaker Event Arbitrage Fund will be asked to approve the reorganization of the Fund into another fund family at a separate special meeting expected to be held in the second quarter of 2018. If the Reorganization is approved, Camelot and the named portfolio managers will continue to manage the Fund. The Fund’s investment objectives, principal investment strategies and investment policies remain unchanged…

I’m intrigued because Quaker Event Arbitrage started life as the no-load Pennsylvania Avenue EventDriven Fund (then PAEDX, a ticker subsequently seized by another fund), managed by Thomas Kirchner who remains co-manager on the Quaker fund. PAEDX was a solid, distinctive fund run by Mr. Kirchner out of his home (I think he was in the kitchen the long-ago afternoon I called him). Solid performance coupled with the utter inability to draw investor attention led to his partnership with Quaker. The fund still has only $22 million in assets, which might explain the implied plan to depart.

SMI Bond Fund (SMIUX) will liquidate on February 7, 2018. The “SMI” is “Sound Mind Investing.”

Effective January 19, 2018, Virtus Contrarian Value merged into Virtus Ceredex Mid-Cap Value Equity Fund (SAMVX). Morningstar’s system continues to think of the surviving fund as “Ridgeworth Ceredex Mid-Cap Value Equity,” which means trying to search “Virtus Ceredex” leads to

That’s right. Bad request! Bad, bad request!