Monthly Archives: April 2018

April 1, 2018

By David Snowball

Dear friends,

It’s spring.

It’s snowing.

Happy Easter.

Or Happy Eostre, if you prefer. The timing of Easter appears to be another instance of religious plagiarism, as early Christians borrowed a pagan spring festival as the (endlessly variable) date on which to celebrate the Resurrection. We don’t know that Eostre actually was a pagan goddess, since only the Venerable Bede testifies to her existence. Still, it makes sense and would be a great time to be hopeful.

So, Felices Pascuas and/or chag sameach, y’all!

One good reason to celebrate. Congratulations go to Fritz Kaegi for his electoral victory in Chicago. Fritz, who I first met when he was a high school debater for Kenwood Academy and I was Augustana’s director of debate, went on to manage Columbia Acorn Emerging Markets and, eventually, to serve as co-CIO for Columbia. He left Columbia two years ago after a coup of some sort, began to look for ways to use his powers for good and not for evil, and settled onto the prospect of running for Cook County Assessor.  It’s a powerful position affecting all of the city of Chicago, and Fritz just won a hard-fought campaign against the incumbent Joe Berrios. Neither Mr. Berrios’ Wikipedia bio nor the testimony of Chicago-area friends paints Mr. Berrios in a positive light. One giddy commentator suggested that Fritz’s win “could signal end to machine-style Chicago politics.”

Thanks to the various folks who are trying to share useful resources for you, through us.

Kirk Taylor, a long-time reader of MFO who’s lately been keeping us up to date on the last remnants of Third Avenue Focused Credit, has launched a blog, Fire Checklist, that’s begun posting interesting, thoughtful pieces on investing. On the Third Avenue matter, the advisor expects to complete liquidation by the end of June with investors receiving about 84% of their pre-liquidation capital back.

Thanks, too, to Rick Bachmann and the folks at AAII / Baltimore for sharing a Saturday morning with me. I hope it was interesting and productive!

Thanks, as ever, to the folks who support MFO.

Our special thanks, this month, to Marty for your generous donation and to John V., now joyfully retired after a long, productive career helping others manage toward retirement. Larry, Robert, Vincent, Toney, Bob Dorsey and the good folks at Ultimus, we couldn’t do it without you. To Larry P., for the support and Jonathan B. for the recommendation to investigate ACM Dynamic Opportunity (ADOIX), we thank you.

And always thanks to our trio to faithful subscribers, folks who’ve set up a steady monthly contribution to MFO. To the indefatigable Deb who might yet get me to understand how to achieve financial stability, to Brian and most especially to Greg Estey for the kind and thoughtful note that I shared with the other folks here.

In hopes that our friends in the investment management industry might have a happy week, Ed Studzinski and I agreed not to mention the recent Bloomberg Gadfly column by Mark Gilbert (“What your fund management job will look like in a decade,”3/20/2018). The essay is informed by a report by Oliver Wyman and Morgan Stanley which concludes that the firm model for the industry is unraveling, with smaller advisers driven to the wall by the commitment of larger firms to data mining and high-margin alternative investments. The key to survival is using customer relationship data and better artificial intelligence algorithms to find a way to create enduring relationships. I’ve spoken with a number of managers on this very subject. The reaction to advice to reconceive their relationship with shareholders is uniform: “don’t wanna, not gonna. I pick stocks.”

Which means it would be gratuitous to point them toward Mike Cherney’s article, “What fund managers can learn from vacuum cleaners” (WSJ, 3/29/2018). In it Andrew Formica, coCEO at Janus Henderson Group argues that the level of customer service in the investment industry is poor, but that you could learn (if you chose) from Dyson. He notes that Dyson seems manic about making sure that every customer loves every interaction with the company. When things go wrong, they go far out of their way to make it right. “No questions, no quibbles. That is client experience.” In contrast, investment managers care for their portfolios and let their clients fend for themselves.

And it would certainly be cruel to reach back to 2016, when the Financial Times interviewed Sudhir Nanda, a T. Rowe Price manager and one of their best quants (“Fund star Sudhir Nanda warns of threat to human role in finance,” 4/25/2016) for decades, the best hedge funds have used massive computing power and increasingly sophisticated programs to enact their strategies. Large fund firms “pouring money into new technology, ‘big data’ and more computer programmers to ensure they do not fall by the wayside in an increasingly ruthless investment world.” Independent firms, in contrast, often seem reluctant even to splurge on a Windows upgrade. Mr. Nanda most optimistic argument offers cold comfort, “Having a human is still important. Humans aren’t going to be completely replaced, but they will be mostly replaced.”

My colleague Charles Boccadoro unequivocally agrees. He’s been spending a lot of time in the past year with first-tier quant managers and just returned from a conference entitled “Democratizing Quant Investing.” His report appears later in this issue.

My doctorate is in communication (dude, I teach propaganda and persuasion for pay!) and my argument just doesn’t strike me as controversial: “any fund firm that stakes its existence on its ability to generate better raw performance than a well-constructed index or AI algorithm is dead, dead, dead.” Not now, not next year and not in the next decade. But, without considerable creativity and a willingness to put the same energy into understanding your clients that you put into understanding your portfolio, there will not be a “next generation” of independent managers. (Or of fund analysts.)

All of which is true, but none of which we’ll mention just now. It’s spring, a season of hope and fertility.

In May we’ll celebrate MFO’s seventh anniversary. Our first official issue was May 1, 2011. We’ll look back to that first essay, as well as look ahead to the prospect of meeting folks at the Morningstar conference in June.

Until then, stay sane!

Democratizing Quant: An Update on Alpha Architect

By Charles Boccadoro

“In investing, what is comfortable is rarely profitable.”

        Robert Arnott

“An investment in knowledge pays the best interest.”

        Benjamin Franklin

MFO profiled Alpha Architect’s US Quantitative Value ETF  (QVAL) in December 2014, shortly after the fund’s launch and after our colleague, Sam Lee, praised QVAL’s strategy in a Morningstar piece, entitled “A Deep Value Quantitative Hedge Fund Strategy.” The firm’s CEO Wes Gray first impressed us during his presentation “Beware of Geeks Bearing Formula” at Morningstar’s ETF Conference in Chicago earlier that same year.

I had a chance to visit Wes, his partner and CIO/CFO Jack Vogel, and the rest of his team recently at the Alpha Architect office in Broomall, Pennsylvania. The picturesque town is nearby Bryn Mawr, Haverford, and Swarthmore Colleges; Villanova and Drexel Universities; and The Wharton School of University of Pennsylvania. Wes earned his PhD from University of Chicago, with Nobel Prize Winner Eugene Fama serving as his adviser, and he taught at Drexel. Jack earned his PhD from Drexel and he taught at Villanova.

The office is literally a converted basement in Wes’ home. Approaching the address, I observe six cars parked tightly at top of driveway, as if not wanting to call attention to the neighborhood business managing nearly $1B in assets. The headquarters of behemoth Vanguard, the industry’s largest fund provider at $5T in assets, is just 15 miles away in Valley Forge.  

Inside, I find an open arrangement of seven single desks and attendant Bloomberg terminals. There are no private offices. Its “conference room” contains not much more than a well-worn whiteboard and folding chairs; it doubles as the office coffee room. Wes’ garage is the staff gym and weight room. He is an ex-Marine and last year hiked 28 miles near a Pennsylvania army base lugging a 40-pound pack, as described nicely by Landon Thomas Jr in the NY Times article “Hiking Mountains, Gladly, With a Marine Turned Fund Manager.”

Changes since our 2014 profile? Plenty …

I’m not inside the door a minute, backpack still in tow, before bringing up their newest fund. VMOT is a fund of funds that uses the four other funds as building blocks: focused value and momentum factor-based building blocks … the two factors that historically have demonstrated the highest return premium. VMOT employs a trend-following system to trigger hedging and dampen volatility, specifically extreme drawdown or “tail-risk.” There are two levels of hedging: 50% and 100%, the latter being market neutral. The trend period is based on a 12-month window, which nicely mitigates extended drawdowns like those experienced in 2000 and 2008. (See “10 mo SMA Method In Down Markets.”)

I mention that it has performed extremely well out of the gate and seems to be the culminating and definitive product that the other funds were developed for. Jack concurs. He also confirms that no other ETFs are planned currently. “We are happy to focus on these five.”

All five funds maintain a 0.79% expense ratio, including VMOT, which (after waivers) does not charge a management fee. Like QVAL, all five strategies and their employment are systematic, transparent, and based on academically vetted evidence. There is no ad-hoc decision making or active override, which is “fraught with behavioral biases.” Wes says the QVAL model has not been changed or tweaked since launch. The basic four ETFs are all concentrated, long only equity, fully invested with some 40 holdings each.

In the conference room, Wes is pulling up the Visual Active Share of John Hancock Multi Factor ETF (JHML). “What does this fact sheet say?” he asks skeptically. It states the fund will “emphasize smaller companies, lower valuations, and higher profitability.” But, in fact, “it does none of these things! And these guys are DFA, known for managing money of Nobel Prize winning economists!” The image below reveals the fund’s holdings shadow the Russell 1000 index in both capitalization and valuation, the latter based on the metric EBIT/EV or earnings before interest and taxes divided by enterprise value.

Wes takes pride in the firm’s low overhead, not just in its office space, coach-class travel routine, and no-flash/no-pretense culture, but also in the refusal to pay distribution fees. “Our funds are bought, not sold,” he emphasizes. He references a recent article by Morningstar’s oracle John Rekenthaler, entitled “Revenue Share: The Fund Industry’s Dinosaur.” Here are John’s key passages:

  1. Most companies that distribute funds (through online platforms, their staff of financial advisors, or both), expect to be paid by fund companies. Effectively, the fund company overcharges its customers, the distributor undercharges, then the fund company cuts a check to the distributor to settle the difference.
  2. This subterfuge rests with investors. As a general rule, they shun overt charges–brokerage commissions, account fees, and so forth. In contrast, they are relatively insensitive to asset-based arrangements, where their payments are collected quietly, behind the scenes.
  3. The artifice is a poison. It abets dishonesty. There isn’t any way that a distributor can tell its customers, “We selected these funds, in part, based on the size of the payment that we receive from their underwriters.” That is no way to inculcate trust.
  4. Open hands is where the investment business is heading, albeit slowly. Eventually, funds will be sold as stocks currently are.
  5. Investors have rewarded firms for engaging in revenue share. But those days are changing. B shares are out, and (relatively) clean ETFs are in. Gradually, slowly, revenue share is on its way to extinction.

Wes also references a darker and deeper piece he and Jack posted, entitled “Distribution Economics: Understanding Wall Street’s Conflict of Interest Problem.” It discusses the shift from banks offering only their own financial products to now getting kickbacks to offer products from others. Under a revenue sharing arrangement, instead of directing trades to the bank, the fund agrees to share a portion of its management fees with the bank. The bank maintains profits by awarding scarce “shelf space,” and the fund gets distribution on the bank platform. Generate a lot of fees for the bank? Earn more shelf space! Even if better products get pushed off. It concludes with a reminder: “Fiduciary responsibility matters in financial services more than in any other product category outside of urgent medical care.”

The good news is investors, particularly younger investors, are becoming more aware. Ryan calls it “the feedback loop” phenomenon. Basically, financial information is available today like never before, facilitating performance comparisons of individual portfolios, with your financial adviser or 401K plan, and those offered elsewhere. Every month, it is getting harder for financial firms to bury hidden fees in fine print of fancy factsheets and brochures.

As for competition, Wes believes the business model pursued by Alpha Architect would be hard to replicate and he sees little motivation for anyone to try, certainly not larger players who would not be willing to risk up-front capital at this point. “We’re a low scale trade in an uber niche segment. It works for us because of our low overhead and it’s our passion, but to any of the substantial players out there, it’s a shitty business model … not to mention career risk.”

The firm spends a lot of time educating investors. While the desire to understand financial markets, be open and give-back is pervasive in the culture of Alpha Architect, they acknowledge the outreach is also an opportunity to tout its own products, and perhaps more importantly, it’s an essential provision for attracting the right kind of investors. Basically, investors need to fully understand the underperformance risk the firm’s strategies are likely to incur, at least across shorter investment horizons. (See “An Introduction To Alpha Architect.”)

This past year through February, for example, QVAL has been exceptional. Of the 131 funds Lipper identifies in the MultiCap Value category, QVAL ranked No. 2 and it enjoyed top quintile risk-adjusted performance across multiple metrics, including Sharpe, Sortino and Martin ratios. Below, from the MFO Premium site, are the top five funds based on absolute return, along with the largest fund by AUM, BlackRock iShares Russell 1000 Value ETF (IWD), and the worst performing fund, Fairholme (FAIRX), which is actively managed by deep value investor Bruce Berkowitz … FAIRX’s 13.2% annualized 10-year return through December 2009 earned him Morningstar’s Fund Manager of the Decade award for domestic equity (click table to enlarge).

In back tests before launch, as well as the implemented strategy in its SMAs, QVAL delivered similarly impressive results. But for the two years following QVAL’s launch, investors experienced the downside of a concentrated, factor-focused (“actively managed”) strategy. “Yeah,” Wes confirms. “We called the top at launch.” It dropped 25% versus 13% in category when the market swooned in early 2016 and remained underwater for 29 months, which is hard under normal market conditions but nearly impossible to reconcile during one of the longest bull markets in US history. VMOT, on the other hand, and to a lesser extent IVAL, have enjoyed strong performance since launch. (Morningstar gives IVAL 5 stars in the Foreign Large Value category.)

Here’s a quick performance summary of each of the five Alpha Architect ETFs since launch, which varies from 9 months for VMOT to 40 months for QVAL (click table to enlarge):

The correlation matrix of R values for the four underlining funds in VMOT shows rather uncorrelated behaviors, which I would expect and bodes well for the fund of funds diversification (click table to enlarge):

Finally, below is the 1-year rolling average performance of QVAL and IVAL over the past 3 years, along with IWD and BlackRock iShares Core MSCI Total International Stock ETF (IXUS) for comparison. There are 25 1-year rolling periods and the table shows the minimum, maximum, average, and standard deviation in absolute annualized return percentage. Despite some healthy drawdown, both funds have enjoyed even healthier upside, but you must be able to handle substantially higher year-to-year variation than the market (click table to enlarge).

What was supposed to be a 2-hour visit tops, turned into three days thanks in part due to Wes’ invitation to the Democratize Quant hosted by Alpha Architect and Villanova University, and in part due to a late nor’easter that dropped 13 inches of spring snow … it provided a good excuse to stay present. Many participants could not attend in person (eg., Jeremy Siegel Skyped-in from Toronto after his flight was cancelled … for a delightful “fireside chat” with his former student Jeremy Schwartz). But Bloomberg’s Eric Balchunas attended, giving his usual outstanding overview of “The ETF Landscape,” as did Barry Ritholtz, Corey Hoffstein of Newfound, Liqian Ren of Vanguard’s Quantitative Equity Group, Bridgeway’s CEO Tammira Philippe, and Chris Meredith of O’Shaughnessy Asset Management.

Alpha Architect has posted a nice summary of the event, including presentations, in “Democratize Quant Recap,” as did attendee Jack Forehand of Validea in “Lessons from a Quantitative Investing Conference.”

The conference represented a sort of touchstone to the practitioners and investors in quantitative financial analysis, particularly factor based, which has become the new active, supplanting traditional fundamental, boots-on-ground strategies practiced by the likes of Benjamin Graham, Warren Buffett, Peter Lynch and Bruce Berkowitz. Similar to when Buffett was feared to have lost his touch heading into the late ‘90s, or Dodge & Cox in 2008, or Sequoia Fund (SEQUX) in 2016 … once considered the greatest fund ever, my sense is that many of the attendees at this conference, at some level, needed to be reassured as to “Why Do These Strategies ‘Work’ In The First Place?” The team at Alpha Architect will never stop asking.

Snowball’s portfolio

By David Snowball

Roy Weitz, founder of FundAlarm and sort of godfather to MFO, annually shared his portfolio, and his reflections on it, with his readers. He owned up to his mistakes, talked through his logic and revealed his plans. When I began contributing to FundAlarm, he encouraged me to do likewise. This essay, then, is an annual “think aloud” exercise that might help you imagine how to make more informed, satisfying decisions for yourself. In constructing it, I drew on my reading and conversations with managers as well as the tools available at Morningstar and MFO Premium.

I’ve thought long and hard to create a portfolio that allows me to be dumb and lazy. My overarching goal is to have a portfolio that lets me get on with life, not one that consumes my life. I try to make good decisions, then not second-guess myself. The results of those impulses are below. I’ll work through my non-retirement and retirement portfolios, let you know what I’m planning and suggest a few things that you might consider doing in the months ahead.

Non-retirement portfolio

My asset allocation is driven by two insights: (1) I don’t like losing money and (2) the best way to make money in the long term is not losing in the short-term. As a result, I built my portfolio backward from the desire for enough decent returns without attention-grabbing volatility. Mostly, I’ve succeeded. From January 26 – February 8, 2018, the US stock market dropped about 10% and financial journalists dropped a couple extra shots of espresso into their morning coffee before taking up the “the end is nigh” screed. I have no idea of how my portfolio did during those couple weeks and, until I began writing this essay, I didn’t exactly know how it had performed in 2017. Nothing weird was happening with my funds, no one resigned, no one made headlines, no one liquidated … which was all I needed to know.

The process I rely on is simple.

  1. Start with an appropriate asset allocation. I’ve written, repeatedly, about the fact that a stock-light portfolio is a far better choice in a non-retirement portfolio (i.e., one where you might reasonably need to make withdrawals this year or sometime in the next three or five years) than a stock-rich portfolio. For the sake of simplicity, I generally target 50% growth and 50% income. Within the growth sleeve, I generally target 50% foreign and 50% domestic. Within the income sleeve, I generally target 50% cash substitutes and 50% other.

    Based on a review of 65 years of returns (1949-2013), this allocation would typically return a bit over 8% annually, would lose money about one year in six but its average loss would be in the 4-5% range.

  2. Find the funds that best suit my plan and me. In general, the research shows that value works, small works, cheap works, and diversified works. For me, in particular, I’m happiest when I become convinced that my managers are sensible people, with sensible approaches to risk, who are doing sensible things and have been through ugly markets before. That leads me toward value and absolute value managers who write well, have a willingness to close their funds early and have a long record. In general, I prefer funds where the manager is not locked into a single narrow asset class; multi-asset flexibility and a willingness to hold a lot of cash means they can be positioned to cope with the inevitable crash.

  3. Automatically invest. I don’t trust myself to write checks to investment companies, there’s always something more tempting to do with the money. So everything I do, I do with a monthly automatic investing plan.

  4. Enjoy life, seek challenges, make a difference, ignore my portfolio. The fact that two of my funds returned more than 30% last year is great, but it didn’t make the “top 10 in 2017” list in our Christmas letter: Chip’s decision to move to Iowa (and the moving adventures appertaining thereunto), my sister’s first visit in 20 years, Will’s show choir triumphs, our new rain garden and garden sculptures did. If, in 2018, two of my funds decline by 30%, it’s still not defining my year.

Here’s a quick snapshot of my team, listed from my largest position to my smallest.

Name   2017 return Worst-ever rolling 3-year ave. Morningstar risk MFO status Morningstar’s take
FPA Crescent Go anywhere, absolute value 10.39 -4.1 Average   Gold 4 star
Seafarer Overseas Growth and Income Asia-tilted emerging markets 26.20 -2.0 Below average   Silver 4 star
T Rowe Price Spectrum Income Broadly diversified fund of income funds 7.02 -0.5 Average   Bronze 4 star
Intrepid Endurance Small cap, absolute value 2.15 -0.3 Low   Q-Neutral 3 star
Artisan International Value Large cap internat’l 23.82 -11.4 Low Great Owl Gold 5 star
RiverPark Strategic Income Sort of like RPHYX, but twitchier 4.58 -0.1 Low   Q-Neutral 2 star
RiverPark Short Term High Yield Low vol cash alternative 2.15 +2.0 Low Great Owl Q-Neutral 1 star
Matthews Asian Growth & Income Dividend stocks & convertibles ex-Japan 21.85 -7.2 Low   Silver 3 star
Matthews Asia Strategic Income Go anywhere in Asian income markets 9.40 -0.1 Average Great Owl Q-Silver 5 star
Grandeur Peak Global Micro $300M ave. market cap 31.48 n/a Not rated   Q-Neutral
Grandeur Peak Global Reach GP’s master fund 30.50 5.0 Average   Q-Neutral 4 star

2017 return is just that.

Worst-ever rolling measures the greatest loss you would have ever suffered if you held a fund for three years. We’re showing the “since inception” record, which means some funds have vastly more datapoints than others. FPACX, MASCX and RPSIX all have over 250 rolling three-year periods, RSIVX and GPROX have under 25.

Morningstar risk is their proprietary, peer-based calculation.

MFO status notes whether a fund qualifies as a Great Owl, the designation reserved for funds in the top 20% of risk-adjusted returns for every trailing period we measure.

Morningstar’s take includes two reports, current as of 3/31/2018. The first is the analyst rating, their forward-looking estimation of a fund’s prospects made either by their analysts (“Silver”) or by their new artificial intelligence engine (“Q-Silver”). The other is their backward-looking (but famous) star rating.

Snapshots of the individual funds

FPA Crescent (FPACX): manager Steve Romick has jokingly described himself as the free-range chicken of the investing world. Romick combines the absolute value discipline that infuses the FPA operation with the willingness to invest in any part of an attractive firm’s capital structure: common or hybrid equity, debt, loans or whatever.

Seafarer Growth & Income (SIGIX, closed): manager Andrew Foster just strikes me as one of the best folks I’ve met. There are lots of smart people I’ve met in the industry, but few truly thoughtful ones. In founding Seafarer, Mr. Foster announced the goal of creating a new kind of fund advisor, one smarter and more shareholder centered. He’s achieved it, through really good writing, steadily falling expenses, and an institutional share class (he’d prefer the term “universal share class”) open to small investors like me. His discipline focuses on avoiding the errors made by index creators and focusing on well-run businesses that don’t have to rely on dysfunctional local capital markets to sustain themselves. For well more than a decade, he’s practiced the art of losing at exactly the right time: his funds tend to have weak relative returns in frothy markets but excellent absolute returns. 2017 is an illustration: he trailed 86% of his peers, but made 26% for his shareholders. In a down year like 2015, he finished in the top 3% of all emerging markets funds. That’s pretty common for him.

T. Rowe Price Spectrum Income (RPSIX): this is a fund of T Rowe Price funds, including one equity fund. It returns about 6-7% annually and its losing years are rare (three in 27 years) and manageable (it dropped 9% during the 2008 meltdown). The fund has been around for 298 rolling three-year periods; its worst ever three year performance was an annualized loss of 0.5% while its average gain is 7%. Income-oriented strategies are, by nature, not tax-efficient. That simply doesn’t bother me here. I’m more than happy to pay my taxes in trade for strong, reliable returns in a portfolio I can easily access.

Intrepid Endurance (ICMAX): this fund pursues the industry’s rarest, hardest discipline. It’s a stock fund that refuses to buy irrationally-priced stocks. When its entire investable universe (small cap value, mostly) becomes irrationally-priced, it simply accumulates cash in anticipation of an eventual fire sale. That makes a world of sense to me: step one, don’t be stupid. Unfortunately, investors become hypnotized by the magic of stock markets that are going to go up forever, this time, and flee from their best hope of profiting from an eventual crash. (Mostly investors fantasize that, as soon as the market begins crashing, they’re going to invest every spare penny in it and make a killing; in reality, they do the opposite.) ICMAX sits at about 60% cash and trails nearly all of its peers over the past five years, with an annual return of 2%. Since I know that markets don’t go up forever and I believe this is one of the most grievously overvalued in history, I’m perfectly comfortable letting an experienced, talented manager hedge my portfolio by holding cash and waiting.

Artisan International Value (ARTKX, closed): I bought this fund as soon as it launched in late 2002. The managers are interested in building a compact, 50 stock portfolio of high quality, undervalued firms, frequently with much lower than average market caps. The fund’s performance has clubbed its peers and pretty much every plausible benchmark over the past 15 years. As undervalued stocks become rare, the managers have moved into larger firms and are holding a lot (15%) of cash. The fund closed to new investors to minimize the risk of bloat and my only concern is that Messrs. Samra and O’Keefe might choose to cash in their chips and retire to a nice chateau, as some other early Artisan managers have already chosen to do. As long as they stay, so do I.

RiverPark Strategic Income (RSIVX) and RiverPark Short Term High Yield (RPHYX): both RiverPark funds are run by David Sherman of Cohanzick Asset Management. The older fund, RPHYX, has been freakishly successful as a cash alternative fund for me: it has averaged 3.2% annually since inception with a negative downside capture rate. Right, markets fall and it makes money. The fund has been around for 78 rolling 12-month periods; so far, its worst-ever loss in a 12 month period was a gain of 0.6%. In consequence, it has the highest five-year Sharpe ratio of any fund in existence. Strategic Income was positioned as one step further out on the risk-return ladder. Over the past three years it has returned about 50% more than its sibling, but with substantially greater volatility. At base, a couple individual issues blew up in 2014; with a concentrated portfolio, that was enough to put a noticeable dent in the fund.

I’m strongly committed to RPHYX, but likely to remain vigilant about Mr. Sherman’s ability to avoid repeating errors of the magnitude we saw in RSIVX’s portfolio in 2014.

Matthews Asian Growth and Income (MACSX): I began investing in this fund, which was for a long time the lowest-risk fund in one of the world’s highest-risk niches, back when Andrew Foster managed it. When he launched Seafarer, I moved half of my stake from MACSX to open my new account. Frankly, I think the fund has gone from “great” to “quite good” and I’m not sure how much longer that will warrant a place in my portfolio. Over the past 10 years, for example, it had the lowest Ulcer Index of any fund that invests in the Pacific. The Ulcer Index combines the size and duration of a fund’s worst drawdowns to estimate how much of an ulcer it will cause. Over the past decade, it’s #1. Over the past five years, it’s dropped to #8.  Over the past three years, to #12. That’s still quite good but …

Matthews Asia Strategic Income (MAINX): the argument is that the center of the financial world is ineluctably shifting from places like New York and London to places like Shanghai, and that wise income investors need to accommodate their portfolios to that shift. The fund can go anywhere within the Asian income market, including corporate (currently 50%) and government bonds, convertibles and dividend-paying stocks. The fund, led by Teresa Kong, has been growing slowly and is miscategorized by Morningstar as a “world bond” fund. The decision is entirely understandable, but it also means that star ratings and comparisons to “peer” performance as quite unreliable.

Grandeur Peak Global Reach (GPROX, closed) and Global Micro Cap (GPMCX, closed): the folks at Grandeur Peak are better at small- and micro-cap global investing than anyone else. Full stop. The founders left Wasatch after a strong run there and formed a new firm obsessive about getting investing right. They knew from the outset that they’d eventually launch seven core funds, they knew what their firm-wide capacity was and they resolved to close each fund promptly and tightly. And they have: all seven Grandeur Peak funds are now closed to new investors, including the $42 million micro cap fund that was closed on the day it opened, though their two “alumni” funds, Global Stalwarts and International Stalwarts, were opened to give loyal advisors access to the Grandeur Peak discipline in slightly larger firms. Over the years, there’s need a steady stream of folks looking to align with the firm.

The funds as a team

My final question is whether each of my funds brings something distinct to my portfolio. It wouldn’t make sense to have two funds each trying to do the same thing; I’d want to simply get rid of the weaker of the two and keep the stronger. We assess that by generating a correlation matrix, using the tools at MFO Premium. In general, I’d worry about correlations in the 90s, notice correlations in the 80s and be pleased with correlations in the 70s and below.

RiverPark Short Term Hi Yld RPHYX 1.00 0.66 0.63 0.60 0.56 0.55 0.55 0.54 0.54 0.54
RiverPark Strategic Inc RSIVX   1.00 0.63 0.64 0.57 0.53 0.55 0.55 0.52 0.51
T R Price Spectrum Inc RPSIX     1.00 0.72 0.73 0.61 0.83 0.72 0.88 0.81
Intrepid Endurance ICMAX       1.00 0.70 0.59 0.61 0.57 0.58 0.57
Grandeur Peak Global Reach GPROX         1.00 0.83 0.76 0.86 0.68 0.78
FPA Crescent FPACX           1.00 0.56 0.84 0.60 0.59
Seafarer Overseas Gr & Inc SIGIX             1.00 0.68 0.85 0.92
Artisan Int’l Value ARTKX               1.00 0.67 0.70
Matthews Asia Strategic Inc MAINX                 1.00 0.83
Matthews Asian Gr & Inc MACSX                   1.00

Grandeur Peak Global Micro Cap is too young to appear in any of the following analyses.

So now what do I do?

It’s rare that I hold a fund for less than 7-10 years, mostly because I know that change is rarely warranted if you’ve done the homework and the manager has kept the faith. Three things weigh on my mind as I think about my portfolio following this review.

      1. I’m out of balance. The stock/bond balance is just fine at 51% – 49%. Within stocks, though, the domestic/international balance is badly off-course. It should be 50% domestic, 50% international. It’s closer to 28% domestic, 72% international. That’s the biggest imbalance ever in my portfolio. It reflects two sets of decisions: my decision not to have a “pure” domestic equity fund and my managers’ decision, wherever possible, to underweight domestic equity because valuations are so badly stretched. Two options: let it ride for another year or add a fund with strong exposure to domestic equity.

        Here is GMO’s February 2018 forecast for equity class returns over the next seven years. It’s created by simply modeling what would happen if valuations and profits regressed to roughly their historic means.

        From a valuation perspective, (a) things look bleak but (b) my preference for emerging markets exposure and cash-like investments – a sort of barbell – is looking more justified than forcing exposure to US equities.

      2. I need to reconsider MACSX. The correlation with Seafarer, which has Mr. Foster and more global flexibility, is high enough to warrant eliminating it. I could add a fund with greater domestic equity, I suppose, or shift the money to Matthews Strategic Income. Ms. Kong’s fund has, since inception, had a fair correlation (low 80s) with MACSX, offered higher returns (4% versus 3% over 5 years) and far lower volatility (5.2% SD versus 10.3%).
      3. I need to step up my monthly investment. My broker has been Scottrade, recently absorbed by TD Ameritrade. There was an administrative screw-up (uhhh … miscommunication, I’m told) that discontinued my monthly transfer from my bank account a year or so ago. While I’m adding steadily to my non-retirement portfolio through auto-investing in Seafarer, T Rowe Price and Grandeur Peak, the amount should probably rise at least a bit from my current level of several hundred a month.

My retirement portfolio

My retirement portfolio consists of a 403(b) plan administered by my employer, Augustana College, and a small Roth IRA. The 403(b) part is split between TIAA-CREF (the college’s contribution went there), T. Rowe Price and Fidelity. As part of a retirement plan reform that I helped manage, we’ve effectively shut down my ability to add to the Fidelity or T Rowe portfolios. Our new state-of-the-art system offers fewer choices (CREF funds and accounts, lifecycle funds as a default, and exactly one actively managed outside fund in each asset class) but has vastly higher employee participation. I really wanted to keep my old setup, but knew that it wasn’t in the best interest of the vast majority of college employees.

Each of the three providers has a stand-alone portfolio that’s about 70% equities. The relentless rise of the US stock market and the inconvenience of managing the old accounts through the new system, has allowed my domestic equity exposure to get far too high at about 50% more than international equity.

That said, the returns were just fine last year – 23% or so – driven by all things growth. Expenses across the portfolio come to 0.55%.

So now what do I do?

Three changes are coming in the near future.

      1. I am liquidating my Fidelity portfolio and transferring the proceeds to T. Rowe Price. I’m worried that Fidelity is becoming a bit frayed, with reports of sexual harassment, changes in the roles of managers, fund mergers and no clear evidence of a healthy, innovative culture. For the sake of sanity and simplicity, I’d rather one “locked” portfolio than two and I am substantially more confident in Price than in Fido.
      2. I will simplify things at Price. My plan is to maintain my overweights (small / value / emerging) but I’ll do it with fewer funds. I’m apt to move the bulk of my assets into T Rowe Price Retirement 2025 (TRRHX) then use smaller positions in a few funds to tilt it. Price also has a Target 2025 Fund (TRRVX) with the same manager but a more cautious asset allocation. I’ll ponder it, but lean toward the other.
      3. I will review my asset allocation. I’m not sure that I want to ratchet back.

So what should you do?

As little as possible, but as much as necessary.

    1. Consider contributing, then using the ever-evolving tools at MFO Premium. The contribution part is $100 a year, tax-deductible (mostly). The tools are easy to use and Charles, our colleague and maestro of the Premium site, is an infinitely kind and engaging teacher for those who have questions.
    2. Consider whether you’re comfortable with the risks you’ve built into your portfolio. You might glance at our 2014 and 2017 articles (here, here, and here) on the implications of asset allocation for risk and return, to see whether you’re aware of the broad risks you face. You might try the lifeboat drill we offered: multiply your funds’ maximum drawdown during the 2007-09 financial crisis by their percentage weight in your portfolio. The result will give you a decent guesstimate of how much your portfolio might fall in a similar meltdown. In my case, the non-retirement loss would likely be in the low 20s. If you look and think, “good gravy, I wouldn’t be able to sleep or eat if I lost that much,” you could act to change your risk profile now by shifting to a lower risk allocation or to more risk-sensitive managers.
    3. Reduce the clutter, in your life and portfolio both. We don’t have an infinite ability to pay attention to things, much less to enjoy them. If you discover six nearly-identical funds in your portfolio, simplify. If you’re glancing at Facebook and Twitter more than at the faces of your family, simplify. If you’ve structured your day so that you have time neither to learn nor wonder, simplify. (I’m struck by the fact that we’re so sure that even though Gates and Buffett and Musk have lifelong commitments to learning and thinking, such activities don’t warrant our own time.)

Popping the Balloon

By Edward A. Studzinski

“We live in an age of great events and little men.”

       Winston S. Churchill

We have made it through another month, and another quarter. It was not quite so painless for either investors or money managers, as year to date the S&P 500 has now dropped into negative territory. Volatility is clearly back. And while active managers made a valiant effort during the last week of the quarter to move the averages back up into positive territory, it was not to be.

What comes next? Stocks are still overvalued by most measures. And bonds, given an upward trend in interest rates, with the Federal Reserve committed to more hikes, don’t offer a place to hide.

According to my friend Larry Jeddeloh at The Institutional Strategist, tech valuations look to be close to where they were in 2000 before the implosion, which was triggered by an absence of liquidity in the U.S. banking system. So once again we may get to see whether valuations and liquidity have an impact on technology businesses.

The question now arises as to how we pay the increased rates on our debt if the Fed keeps raising rates. (Per the Committee for a Responsible Federal Budget, “if interest rates were 1 percentage point higher than expected, debt would rise by $1.7 trillion over ten years.”) The answer seems to be that we will look to inflate our way out of the increased interest payments.

Friend Jeddeloh has also opined that home prices are now back to about where they were, if not below where they were, just before the beginning of the Great Recession in 2008. Since many steps have been taken to keep the banking system from getting into trouble again, this time it looks like the onus has been put on the homeowner. Namely, as rates go up (which we have seen in mortgages), the prices of homes will have to come down for there to be a clearing of the excess inventory. Alternatively, people are going to be staying in their houses a lot longer, rather than being able to sell to afford the entry deposit to the retirement community.

Home price increases and home sales have come to a halt, not just in Chicago but also in New York and Boston.

In that vein, I have to say that I had more reaction to my column last month about condominium prices in Chicago over the last three years than I have had in response to almost any other column I have written. It turns out that price increases and sales have come not just to a halt in Chicago, but also in New York City and Boston. That lack of sales activity has been masked to some extent because the building trades and the manufacturers and suppliers of building materials have remained quite busy.

Why? One reason is the unusually large number of catastrophic storm, fire, and other losses homeowners have suffered across the country since last summer. We have had hurricanes and flooding in Texas, Florida, and Puerto Rico, along with storm damage all up the East Coast running from Florida up to Maine, and fires in California. The winter storms this year have added to the toll. So what? Well, the big homeowner’s insurance companies are first movers in that regard, as they endeavor to limit or mitigate further damage. What might have been normal building materials inventories for where we are in the real estate cycle, before the catastrophe losses, have been drawn down to effect repairs. And contractors and sub-contractors in the various trades are filling their order books with more work commitments than they can fulfill in the usual time. A person at one insurance agency that has clients at the high end of the business in those geographic areas told me, within the last two weeks, that no contractor she has been trying to hire for repair work will guarantee materials pricing out more than thirty days. And the head of personal lines at a major property and casualty company has confirmed for me that this year has started off as last year ended in terms of weather events.

And this is before we understand the full effect of tariffs.

And these issues are before we understand the full effect of tariffs. Last summer, the Trump Administration put a tariff on Canadian timber, which has impacted the pricing and availability of some categories of lumber. Given that we have had a long, cold winter in the northern tier of the country, it will probably also take longer for domestic loggers to get into the forests, cut new timber, and get it out and into the kilns to prepare for delivery. And that was before we have had the new wrinkle of tariffs on steel and aluminum. And to that add the uncertainty as to which countries and products those tariffs will ultimately apply (a Chicago architect mentioned to me last week that they were seeing a ripple through of pricing increases on steel in commercial projects on the order of 20%).

The Great Unintended (or Maybe Not) Consequence

The above provides fair warning that we are going to see conditions of extreme volatility in both new construction and repair work. There is one area that I don’t think people have considered. That is the changes in consumer thinking that will be driven by the new personal income tax changes.

There are some parts of the country which in effect have two-tier residential home markets. One tier is for those who live and work in that marketplace year-round, for whom it is home. The other tier in that market is the second home owner, who comes to the area on weekends and holidays as well as for extended periods of time during the year, either in the summer to enjoy the weather and access to water sports and boating among things, or in the winter for winter sports. Some of the obvious locations are Santa Fe, New Mexico; parts of Colorado and Montana, and much of the coastal areas of the East Coast. Two areas that I am familiar with that fall into that category are Litchfield County in northwest Connecticut and southern Berkshire County in western Massachusetts. For those locations, the second tier of homes are those whose market values/selling prices are usually greater than $750,000 and rising on up to the $2 or $3M range. Most people in that category of homeowner in those two counties come up from New York City, which is generally a two to three hour drive or drive plus train trip, to spend at least three weekends of every month in that second home.

What has changed? Well, the amount of subsidy by the Federal tax act has changed. State and local deductibility of taxes is now capped at $10,000 so deducting all your New York City property taxes and all your Massachusetts property taxes is gone. In fact, you will most likely be unable to deduct most of your New York State and City income taxes, and your property taxes in New York. The deductibility of first or second home mortgages above $750,000 is also gone. My sense is that when this year’s tax return is received and the estimates for the coming year are also received, there is going to be a very rude awakening. And to me that translates to the incremental demand coming from people looking for that kind of weekend property drying up, UNTIL the clearing prices of the existing inventory of those homes for sale above $750,000 comes down to where people think they are getting a real bargain.

There will be another tangential effect, detrimental to those second home communities. And that is that the boost to revenues they have gotten from increased property taxes in a rising price property market will be on hold, putting pressure on municipal budgets. They will have to cut services, raise the rate of property taxes, and add new fees on other services, or some combination of all three. On that cheerful note, I am going to end, as far as the meat of this letter is concerned.

Every now and then, I read something, either fiction or non-fiction, that I feel is worth recommending. This time, my recommendation is Munich by Robert Harris, a work of fiction set around the meetings between Chamberlain and Hitler in 1938. Harris, who tends to write works of historic fiction that do a good job of catching the personalities and atmosphere of a place and time, here has managed to catch the feel of Great Britain, still reeling from the casualties in the Great War and Germany, seeking payback for the humiliation of Versailles. I think the following paragraph, an apocryphal conversation between two British diplomats on Chamberlain’s plane flying to Munich for the historic meeting captures things:

“I was with the PM in Bad Godesberg. We thought we had an agreement then, until Hitler suddenly came up with a new set of demands. It’s not like dealing with a normal head of government. He’s more like some barbarian chieftain out of a Germanic legend – Ermanaric, Theodoric – with his housecarls gathered around him. They leap up when he comes in and he freezes them with a look, asserts his authority, and then he settles down at a long table to feast with them, and to laugh and boast. Who’d want to be in the PM’s shoes, trying to negotiate with such a creature?”

The Morningstar Minute

By David Snowball

Morningstar’s analysts can cover a limited number of funds, “those investments that are most relevant to investors and that hold a significant portion of industry assets.” When analysts cover a fund, they issue a forward-looking rating based on five research-driven “pillars.” Those ratings are described by medal assignments: Gold, Silver, Bronze, Neutral and Negative. The analyst ratings are distinct from the iconic star ratings; the star ratings are backward looking (they tell you how a fund did based on risk and return measures) while the analyst ratings are forward-looking (they aspire to tell you how a fund will do based on a broader set of factors).

As a practical matter, few smaller, newer, independent funds qualify. In response to concerns from clients who believe that Morningstar’s assessment is an important part of their compliance and due-diligence efforts for every fund they consider, Morningstar has unveiled a second tier of ratings. These ratings are driven by a machine-learning algorithm that has been studying two sets of data: the last five years’ worth of analyst ratings and the ocean of data Morningstar has on the components and metrics of fund performance. The goal was to produce ratings for all “analogous to” those produced by Morningstar analysts. Like the analyst ratings, they would could in Gold/Silver/Bronze and so on. Unlike the analyst ratings, they would be based purely on quantitative inputs (so the observation “he’s an utter sleazeball and a lying sack of poop” might influence the analyst’s judgment but would be unavailable to the machine). Here are the methodological details.

On March 28, 2018, I had to chance to speak with Jeff Ptak and Tim Strauts about the system and its implications. Jeff is Morningstar’s global director of manager research, Tim is their director of quantitative research and one of the brains behind the new system. We played around with three topics.

Is the machine good?

Performance in the back tests, they aver, “is pretty good.” The rough translation is that the machine has roughly the same level of predictive ability as do the human analysts.

Does the machine get to replace the humans?

Of course not.  (If I had a nickel for …) The machine and the humans do not always agree, in part because they’re focused on slightly different sets of inputs. The humans factor conversations into their judgment of the “People” pillar, for instance, while the machine factors in Sharpe ratio as part of “People.” For now the machine and the humans agree on the exact rating about 80% of the time; it could be higher, but Tim argues that he didn’t want to “overfit” the model. The more important point, in their minds, is that they’re largely avoided “the very bad problem” that would result if the machine issued a “negative” rating on the same fund where the analysts assigned a positive one. That occurs in “much less” than 1% of the ratings.

Beyond that, the machine learns from the analysts’ rating decisions. They need to keep making new decisions in order for it to become more sophisticated.

Is there a way to see the machine’s outputs? That is, can we quickly find where the machine found bits of gold or silver that the analysts missed?

Nope. Jeff and Tim are going to check with the Product team and the Prospects team, but they neither knew of any particular cool finds made by the machine nor of any way for outsiders to search the ratings just now.

The ratings are available, fund by fund, on Morningstar’s new (low profile) fund pages. When you pull up a fund’s profile, you see a simple link to the alternate profile page.

If you click on the link in the colored bar, you see

Out of curiosity, I ran a screen for all five-star domestic equity funds with under $1 billion in assets, then clicked through each profile. About half of the funds have a neutral rating and just two have negative ratings. Excluding a few funds available just through insurance products, here’s the list of “non-neutral” funds with the links to their MFO profiles when available. Many of these are purely institutional funds or the institutional share classes of funds, which reflects the effect of expenses on a fund’s ratings.

Update: Jeffrey Ptak updates us via Twitter


Glenmede Total Market Portfolio GTTMX


Fuller & Thaler Behavioral Small-Cap Equity FTHFX – an MFO “Great Owl” fund. Great Owls, a term derived from the Great Horned Owl which inspired MFO’s logo, are fund’s that are in the top 20% of their peer group, based on risk-adjusted returns, for every trailing measurement period.

Hartford Schroders US Small/Mid-Cap Opportunities Fund Class I SMDIX – “Great Owl”

Jackson Square SMID-Cap Growth Fund IS Class DCGTX – “Great Owl”

Johnson Enhanced Return Fund JENHX – “Great Owl”

Lord Abbett Micro Cap Growth Fund Class I LMIYX

Nationwide Small Company Growth Fund Institutional Service Class NWSIX – “Great Owl”

Nationwide Ziegler NYSE Arca Tech 100 Index Fund Class A NWJCX

Shelton Capital Management Nasdaq-100 Index Fund Direct Shares NASDX

Tributary Small Company Fund Institutional Class FOSCX – “Great Owl”

Victory RS Small Cap Equity Fund Class A GPSCX

William Blair Small Cap Growth Fund Class I WBSIX


AT Disciplined Equity Fund Institutional Class AWEIX 

Conestoga SMip Cap CCSMX

Glenmede Strategic Equity GTCEX

Government Street Mid-Cap Fund GVMCX – “Great Owl”

Manning & Napier Disciplined Value Series Class I MNDFX

Morgan Stanley Institutional Fund, Inc. Advantage Portfolio Class I MPAIX

Morgan Stanley Institutional Fund, Inc. Insight Portfolio Class I

Pin Oak Equity Fund POGSX

T. Rowe Price Capital Opportunity Fund PRCOX

T. Rowe Price Institutional U.S. Structured Research Fund TRISX


Catalyst Buyback Strategy Fund BUYIX – negative on parent, price, and people

Salient US Dividend Signal Fund Institutional Class FDYTX – negative on price, process and people



The 15 / 15 Funds

By David Snowball

It was ridiculously easy to make 15% total returns in 2017. 3,406 funds managed the feat.

And it was not particularly hard to hold 15% cash in 2017, though it was certainly unpopular with investors. 970 funds held that level of cash, either as collateral on derivative purchases, as a defensive move, or from the inability to find suitable investments.

Making 15% is good. It’s about 50% above the stock market’s historic rate of return and is a bit better than most balanced funds.

Holding 15% cash is good. The stock market is teetering. Its valuations are at or near all-time highs by a variety of measures. Washington is somewhat unhinged. People, and machines, are primed for a panic. And the best way to survive a panic is to have a clear plan and cash on hand to move in when others are giving away their shares.

Holding 15% cash and still finding a way to make 15% last year – that is, having both dry powder to profit in a crash while not sitting out the market’s rise – is rare, difficult and desirable.

Finding such funds is tricky because “cash” has many forms and functions. For our purposes, we’re looking at “cash” as a source of liquidity: money guaranteed to be there in the midst of a crash, so that a manager might move aggressively. So we started with all funds that nominally held 15% or more in cash, then stripped out those who used cash as collateral, or those whose cash included highly volatile cryptocurrencies. As a further safeguard, we tried to strip away highly volatile funds. We also screened for trailing three year returns of at least 5% to minimize the number of one hit wonders.

Finally, we tried to identify funds that were still open and accessible to the average retail investor. That left us with just over 15 15/15 funds.

    2017 return Cash
AMG Yacktman Focused Large Core 20.0% 23%
Dreyfus Total Emerging Markets Emerging Mkts Balanced 42.7 46
FPA International Value Int’l Small/Mid Blend 27.1 29
Hillman No Load Large Value 16.4 15
Leuthold Core Investment Tactical Allocation 15.8 18
Longleaf Partners International Int’l Large Core 24.2 22
Meeder Dynamic Allocation Aggressive Allocation 21.2 20
Meeder Muirfield Tactical Allocation 20.3 30
Monongahela All Cap Value Mid-Cap Value 20.8 20
Port Street Quality Growth Large Blend 15.0 44
Quantified Market Leaders Mid-Cap Growth 16.9 20
T. Rowe Price Intl Concentrated Equity Int’l Large Core 21.1 21
The Cook & Bynum Large Core 15.1 39
Tweedy, Browne Value Global Large Cap 16.5 33
US Global Investors Emerging Europe Emerging Europe 22.7 21
Wasatch World Innovators (soon to be Seven Canyons World Innovators) Global Small/Mid Cap 33.0 24
Westcore International Small-Cap Int’l Small/Mid Growth 33.6 31

Investors looking for a portfolio hedge, but who aren’t immediately drawn to complicated and costly hedging strategies, might want to start here.

A different approach was inspired by a recent article by Jeff Ptak at Morningstar (Slow and Steady Wins the Race–in the Land of Make-Believe, 3/20/2018). For reasons unclear, he decided to direct his disdain toward a suggestion that Oaktree’s Howard Marks made in a memo 28 years ago. Marks quotes the manager as saying:

We have never had a year below the 47th percentile over that period or, until 1990, above the 27th percentile. As a result, we are in the fourth percentile for the 14-year period as a whole.

In the following two paragraphs, we learn that slow and steady is “a mirage,” that the manager cited was “a unicorn or a mermaid,” the search for slow and steady is “largely misguided” and that we’d be looking for “Puff the Magic Portfolio Manager.” Mr. Ptak constructs several tests that everyone fails. He concludes that most investors should buy an index fund or, alternately, pick “managers who know the true meaning of slow but steady, as evidenced by a strong commitment to the investment process, a supportive, shareholder-friendly parent, and competitive fees that give the strategy a fighting chance of succeeding over the long haul.”

Sadly, he offers no suggestions for how to find such managers. Here’s one place to start: we searched for equity managers who had not fallen in their category’s bottom third in any of the past ten years. I focused only on funds that Morningstar flags as “core” holdings, which eliminates pretty much all of the smaller, newer funds which comprise MFO’s coverage universe. All of the funds turn out to have received four- or five-star ratings from Morningstar and are medalists of various shades.

Fidelity Asset Manager 30% Allocation–15% to 30% Equity
MFS Conservative Allocation Allocation–30% to 50% Equity
Vanguard Tax-Managed Balanced Allocation–30% to 50% Equity
Columbia Capital Allocation, Moderately Aggressive Allocation–50% to 70% Equity
T. Rowe Price Capital Appreciation Allocation–50% to 70% Equity
Vanguard STAR Allocation–50% to 70% Equity
Deutsche Core Equity Large Blend
Fidelity Blue Chip Growth Large Growth
Fidelity Growth Company Large Growth
PRIMECAP Odyssey Growth Large Growth
T. Rowe Price Growth Stock Large Growth
Vanguard Morgan Growth Large Growth
USAA World Growth World Large Stock

This list excluded target-date funds and those not easily accessible to small investors.

If these results were merely random, we’d expect to see one-third of the list drop out each year; that is, one third of a random group of funds would end up the bottom third of their peer group. That’s not the pattern here, funds drop out at about 40% of the predicted rate.

Bottom Line: It is possible to change your portfolio’s risk-return profile. It doesn’t require blowing things up, but it doesn’t benefit from blind deference to the magic of market cap-weighted index funds either. Investors who ask reasonable questions, proceed from an understanding of what risks their portfolio faces and do a little poking around while the weather’s still relatively calm, can make things better for themselves and their families.

Guinness Atkinson Global Innovators (IWIRX), April 2018

By David Snowball

Objective and strategy

The fund seeks long term capital growth through investing in what they deem to be 30 highly innovative, reasonably valued, companies from around the globe. They take an eclectic approach to identifying global innovators. They read widely (for example Fast Company and MIT’s Technology Review, as well as reports from the Boston Consulting Group and Thomson Reuters) and maintain ongoing conversations with folks in a variety of industries. That leads them to identify a manageable set of themes (from artificial intelligence to clean energy) which seem to be driving global innovation. They then identify companies substantially exposed to those themes (about 1000), then weed out the financially challenged (taking the list down to 500). Having identified a potential addition to the portfolio, they also have to convince themselves that it has more upside than anyone currently in the portfolio (since there’s a one-in-one-out discipline) and that it’s selling at a substantial discount to fair value (typically about one standard deviation below its 10 year average). They rebalance about quarterly to maintain roughly equally weighted positions in all thirty, but the rebalance is not purely mechanical. They try to keep the weights “reasonably in line” but are aware of the importance of minimizing trading costs and tax burdens. The fund stays fully invested.


Guinness Atkinson Asset Management. The firm started in 1993 as the US arm of Guinness Flight Global Asset Management and their first American funds were Guinness Flight China and Hong Kong (1994) and Asia Focus (1996). Guinness Flight was acquired by Investec, then Tim Guinness and Jim Atkinson’s acquired Investec’s US funds business to form Guinness Atkinson. Their London-based sister company is Guinness Asset Management which runs European funds that parallel the U.S. ones. They have $1.6 billion in assets under management and advises funds in both the US and Europe.


Matthew Page and Ian Mortimer. Mr. Page joined GA in 2005 and working for Goldman Sachs. He earned an M.A. from Oxford in 2004. Dr. Mortimer joined GA in 2006. Prior to joining GA, he completed a doctorate in experimental physics at the University of Oxford. They are assisted by two analysts. The team manages $930 million in total, including Dividend Builder Fund (GAINX) and the Dublin-based versions of both funds.

Strategy capacity and closure

Approximately $5 billion. The current estimate of strategy capacity was generated by a simple calculation: 30 times the amount they might legally and prudently own of the smallest stock in their universe. The strategy, including its Dublin-based version, holds about $390 million.

Active share

93. “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 Global Innovators is 93, which reflects a very high level of independence from its benchmark MSCI World Index.

Management’s stake in the fund

The managers are not invested in the fund because it’s only open to U.S. residents. They report being heavily invested in the European version of the strategy.

Opening date

Good question! The fund launched as the Wired 40 Index on December 15, 1998. It performed splendidly. It became the actively managed Global Innovators Fund on April 1, 2003 under the direction of Edmund Harriss and Tim Guinness. It performed splendidly. The current team came onboard in May 2010 (Page) and May 2011 (Mortimer) and tweaked the process, after which it again performed splendidly.

Minimum investment

$5,000, reduced to $1,000 for IRAs and just $250 for accounts established with an automatic investment plan. The minimum for the Institutional share class (GINNX) is $100,000.

Expense ratio

1.24% on assets of about $230 million, as of March 30, 2018. Expenses on the institutional shae class is 0.99%. The fund continues to see steady inflows.


Let’s start with the obvious and work backward from there.

The obvious: Global Innovators has outstanding (consistently outstanding, enduringly outstanding) returns. Here’s the fund’s rank for total and risk-adjusted (measured by Sharpe ratio) returns against its Lipper Global Large Cap Growth group:

  Total returns Risk-adjusted returns
One year rank #4 of 34 funds, as of 02/2018 #1
Three year rank #3 of 29 #6
Five year rank #1 of 23 #1
Ten year rank #1 of 15 #2

Morningstar, using a different peer group, places it in the top 1 – 5% of US Large Blend funds for the past 1, 3, 5 and 10 year periods (as of 03/29/2018). That’s particularly impressive given the fact that IWIRX is succeeding against a domestic peer group (the average peer has 3% foreign) with a portfolio is that heavily invested overseas (40%) at a time when domestic stocks (8.6% annually over the past ten years) have a strong performance advantage over their international peers (5.8% annually in the same period). They should not be thriving given those disadvantages, and yet they are.

Growth of a $10,000 investment, 3/31/2008 to 3/30/2018

Guinness Atkinson Global Innovators $28,209
Morningstar Large Blend peer group 21,587
Morningstar World Stock peer group 17,328

per, returns before taxes, accessed 3/31/2018

But why?

Good academic research, stretching back decades (for example, Paul A. Geroski, Innovation and Competitive Advantage, 1995), shows that firms with a strong commitment to ongoing innovation outperform the market. Firms with a minimal commitment to innovation trail the market, at least over longer periods. Joseph Schumpeter (1942) offered a clear and memorable explanation:

The essential point to grasp is that in dealing with capitalism we are dealing with an evolutionary process. … Capitalism, then, is by its nature a form or method of economic change and not only never is but never can be stationary.

The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates. …

[t]he … process of industrial mutation … incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in.

Every firm and every strategy, he argues, “must be seen in its role in the perennial gale of creative destruction.”

The challenge is finding such firms and resisting the temptation to overpay for them. The fund initially (1998-2003) tracked an index of 40 stocks chosen by the editors of Wired magazine “to mirror the arc of the new economy as it emerges from the heart of the late industrial age.” In 2003, Guinness concluded that a more focused portfolio and more active selection process would do better, and they were right. In 2010, the new team inherited the fund. They maintained its historic philosophy and construction but broadened its investable universe. Fifteen years ago there were only about 80 stocks that qualified for consideration; today it’s closer to 500 than their “slightly more robust identification process” has them track.

This is not a collection of “story stocks.” They look for firms that are continually reinventing themselves and looking for better ways to address the opportunities and challenges in their industry and in the global economy. While that might describe Google / Alphabet, it might also describe a major manufacturer of tires (Continental AG) or an innovative conglomerate whoses businesses find new ways “diagnose, treat and prevent disease” dental diseases and finds new ways to provide clean drinking water for tens of millions of people (Danaher Corporation). The key is to find firms which will produce disproportionately high returns on invested capital in the decade ahead and which are not themselves capital intensive or deeply in debt, not stocks that everyone is talking about.

Then they need to avoid overpaying for them. The managers note that many of the firms on their watchlist, their potential acquisitions, sell at “extortionate valuations.” Their strategy is to wait the required 12 – 36 months until they finally disappoint the crowd’s manic expectations. There’s a stampede for the door, the stocks overshoot – sometimes dramatically – on the downside and the guys move in.

Their purchases are conditioned by two criteria. First, they look for valuations at least one standard deviation below a firm’s ten year average (which is to say, they wait for a margin of safety). Second, they maintain a one-in-one-out discipline. For any firm to enter the portfolio, they have to be willing to entirely eliminate their position in another stock. They turn the portfolio over about once every three years. They continue tracking the stocks they sell since they remain potential re-entrants to the portfolio. They note that “The switches to the portfolio over the past 3.5 – 4 years have, on average, done well. The additions have outperformed the dropped stocks, on a sales basis, by about 25% per stock.”

An analysis of the fund’s 2017 year-end portfolio shows the way this discipline plays out.

Their firms spent a lot more on R&D than their peers (7.8% versus 6.0% of sales revenue) but a lot less (7.5% versus 9.0%) on capital goods.

Their firms have a lot higher return-on-investment than peers (16% versus 12% CFROI).

Their firms are growing a lot faster (12.6% versus 4.4% sales growth, 12% versus 9.6% earnings growth) than their peers, but cost only a little bit more (17.5 p/e versus 17.2 p/e).

The fund tends to be a bit more volatile but a lot more profitable than its peers. Several structural aspects of the portfolio contribute to the asymmetry: they rebalance frequently to trim winners; they have a one-in-one-out discipline which means they’re constantly pressured to eliminate their weakest names; they limit position size, avoid debt-ridden firms and invest in areas that are strongly buoyant. That is, the firms are involved in areas where there is a huge long-term impetus which allows them to recover quickly from short-term setbacks.

Bottom Line

While we need to mechanically and truthfully repeat the “past performance is not indicative of future results” mantra, Global Innovator’s premise and record might give us some pause. Its strategy is grounded in a serious and sustained line of academic research. Its discipline is pursued by few others. Its results have been consistent across 20 years and three sets of managers. This is not a low volatility strategy, but it has proven to be a highly resilient one. Over the past decade, its maximum drawdown was slightly higher than its peers (50.1% versus 47.6%) but its rebound was far faster and stronger. Investors willing to tolerate the slightly-elevated volatility of a fully invested, modestly pricey equity portfolio, Global Innovators really does command careful attention.

Fund website

GA Global Innovators Fund. While you’re there, please do read the Innovation Matters (2018) whitepaper. Written by president Jim Atkinson and analyst Joshua Cole, it’s short, clear and does a nice job of walking you through both the academic research and the firms’ approach.

Launch Alert: T. Rowe Price Multi-Strategy Total Return Fund

By David Snowball

On February 23, 2018, T. Rowe Price launched Multi-Strategy Total Return (TMSRX / TMSSX) which combines six liquid-alt strategies in a single package. These multi-strategy or multi-alternative funds function in the way that hedged funds were originally envisioned to: they combine strategies whose returns are not dependent on the movements of the broad equity and bond markets and, ideally, are not correlated with each other. The goal is to produce the potential for reasonable returns in a wide variety of hostile market conditions.

The fund is managed by Richard de los Reyes and Stefan Hubrich.  Mr. de los Reyes joined T. Rowe Price in 2006. Dr. Hubrich joined them in 2005 and is an associate portfolio manager for the five-star T. Rowe Price Global Allocation Fund (RPGAX). He is also one of TRP’s Directors of Research in the Multi Asset Division. This fund is Mr. de los Reyes’ sole focus and Mr. Hubrich’s primary one.

The fund has six component strategies, with Messrs de los Reyes and Hubrich managing some of them and coordinating all of them. The strategies and their primary managers are:

Macro and absolute return: this is the go anywhere, invest in any asset, “best ideas” part of the strategy. It’s overseen byRick de los Reyes and three analysts.

Fixed income absolute return: this is a go anywhere in the fixed-income universe in search of positive returns, which means it will give up some of the upside to eliminate the downside. Arif Husain, who manages T. Rowe Price Dynamic Global Bond Fund (RPIEX) oversees investments here.

Equity research long/short: a global, large cap long/short portfolio overseen by Stefan Hubrich.

Style premia: I have yet to find a short, coherent explanation of a style premia strategy, despite the fact that it clearly and consistently works a market-neutral source of alpha. (If any of our readers can volunteer a sentence or two that would make sense to the average non-technical reader, we’d happily edit this Alert to include it). In any case, Stefan Hubrich will handle it.


I originally admitted that I didn’t have a clear explanation for style premia and solicited reader assistance with the explanation. Greg Stalsberg, CIO for the Ryan Financial Group shared this gloss on the strategy: “Style premia strategies attempt to profit from certain exposures or ‘styles’ that tend to be successful over time (e.g. value, momentum, low volatility). Many style premia strategies tend to be market neutral (for every dollar of long exposure, they also have a dollar of short exposure).  As such, a simplistic strategy incorporating the three styles above would consist of three separate ‘trade bundles’: long $1 of cheap stocks, short $1 of expensive stocks; long $1 of high momentum stocks and short $1 of low momentum stocks; long $1 of low volatility/defensive stocks and short $1 of high volatility stocks. Since each style ‘bundle’ is market neutral, the bundles don’t tend to move in lockstep, which has historically led to attractive diversification benefits.” Greg later allows that it might take $1.20 long to match a $1.00 short because the shorts tend to be more volatile. We don’t claim this is exactly what T Rowe is doing, just that this is the sort of behavior that falls under “style premia.” Thanks to Mr. Stalsberg!

Quantitative equity long/short: Sudhir Nanda, described by the Financial Times as “a rising fund manager star,” is the head of the Quantitative Equity Group for T. Rowe Price. He manages five funds for them, all carrying the “QM” designation including the five-star, “silver” rated T. Rowe Price QM US Small-Cap Growth Equity (PRDSX).

Volatility relative value: an equity index call / put options strategy, which typically operate with negligible correlation to the market and robust returns when volatility is highest, managed Robert Harlow. Mr. Harlow is not responsible for any of the Price strategies per se but is responsible for options strategies within several asset allocation portfolios.

It is impossible to predict the fund’s prospects by looking at the performance of its peer group because the group is particularly random. We pulled the top 10 funds of the past five years based on their Sharpe ratios and looked for performance commonalities. There are none. When we looked at the correlations between those funds, they were mostly in the 60s and 70s with one true outlier (AQR Multi-Strategy whose correlation to the group was somewhere between negligible and negative). Oddly, their correlation with the S&P 500, in the 70s and 80s, was higher (AQR again excepted) than their correlation with one another, as was their correlation to their entire peer group. That implies that any eventual rating, whether Morningstar stars or Lipper Leaders, will be statistically unreliable; you’ll need to look beyond the headline to assess the fit of the strategy in your portfolio.

The folks at Price report that “MSTR targets a return of cash+5% with similar annualized volatility over a market cycle which translates to a Sharpe Ratio of 0.8 to 1.0.” Cash roughly translates to “the rate of inflation,” so you could conclude that the fund targets an annualized real return of 5%, give or take about 5% volatility. A Sharpe ratio of 1.0 would have it tied as the second-best multi-alternative fund over the past five years.

The fund gathered $53 million in its first month of operation. The investor share class has a $2500 minimum and 1.37% expenses, while the institutional shares require $1,000,000 and charge 1.07%. Morningstar describes both expense ratios as “high,” but Price has been exceptionally responsible in driving down fund expenses as asset growth permits.

Understandably, the fund’s homepage contains just the basic information for now.

Manager changes, April 2018

By Chip

There were more than 57 funds that modified their management teams this month; the “more than” reflects the fact that one manager was pulled off literally uncounted Global X funds. While few of the changes are immediately consequential, several signal an impending changing of the guard. John B Walthausen, now in his 70s, has added a co-manager to the two Walthausen funds. Billy Hwan is joining Jerome L Dodson, also in his 70s, as co-manager of Parnassus Endeavor. Moving in the opposite direction, Thomas Marsico is moving to pick up responsibility for another fund, Marsico Flexible Capital, after several rocky years.

Ticker Fund Out with the old In with the new Dt
ADAVX Aberdeen Dynamic Dividend Fund, formerly Alpine Dynamic Dividend Fund Brian Hennessey and Sarah Hunt are no longer listed as portfolio managers for the fund. Stephen Docherty, Bruce Stout, Jamie Cumming, Martin Connaghan, Stewart Methven, and Joshua Duitz will manage the fund. 4/18
AIAFX Aberdeen Global Infrastructure Fund, formerly Alpine Global Infrastructure Fund. Gavin Tam is no longer listed as a portfolio manager for the fund. Stephen Docherty, Bruce Stout, Jamie Cumming, Martin Connaghan, Stewart Methven, and Joshua Duitz will manage the fund. 4/18
CHUSX Alger Global Growth Fund Daniel Chung, Deborah Medenica, and Pedro Marcal are no longer listed as portfolio managers for the fund. Gregory Jones and Pragna Shere will now manage the fund. 4/18
AFGPX Alger International Growth Fund Pedro Marcal is no longer listed as a portfolio manager for the fund. Gregory Jones and Pragna Shere will now manage the fund. 4/18
RAGHX AllianzGI Health Sciences Fund Michael Dauchot will no longer serve as a portfolio manager for the fund. Peter Pirsch joins John Schroer in managing the fund. 4/18
AFXAX American Beacon Flexible Bond Fund No one, but . . . Colin Hamer joins the management team. 4/18
AGCAX Arbitrage Credit Opportunities Fund Robert Ryon will no longer serve as a portfolio manager for the fund. John Orrico and Gregory Loprete will now manage the fund. 4/18
AGEAX Arbitrage Event-Driven Fund Robert Ryon will no longer serve as a portfolio manager for the fund. John Orrico joins Edward Chen, Todd Munn, Gregory Loprete, and Roger Foltynowicz on the management team. 4/18
BACAX BlackRock All-Cap Energy & Resources Portfolio No one, but . . . Mark Hume joins Alastair Bishop in managing the fund. 4/18
SSGRX BlackRock Energy & Resources Portfolio No one, but . . . Ruth Brooker joins Alastair Bishop in managing the fund. 4/18
HMCAX Carillon Eagle Mid Cap Stock Fund Charles Schwartz, Betsy Pecor, and Matthew McGeary will no longer serve as portfolio managers for the fund. Bert Boksen and Eric Mintz will now manage the fund. 4/18
LAIAX Columbia Acorn International P. Zachary Egan has announced that he will step down as portfolio manager effective, July 1, 2018. Louis Mendes and Tae Han Kim will continue to manage the fund. 4/18
FHIAX Fidelity Advisor High Income Fund No one, immediately. Matthew Conit is expected to retire from his portfolio manager role effective, December 31, 2018. Michael Weaver is joining Mssr. Conti in managing the fund, with the expectation that he will assume sole portfolio management duties next year. 4/18
FMCDX Fidelity Advisor Stock Selector Mid Cap Fund Christopher Lin will no longer serve as a portfolio manager for the fund. Ali Khan joins Robert Stansky, John Mirshekari, Edward Yoon, Samuel Wald, Pierre Sorel, Douglas Simmons, Gordon Scott, and Shadman Riaz on the management team. 4/18
FDLSX Fidelity Select Leisure Portfolio Katherine Shaw will no longer serve as a portfolio manager for the fund. Becky Painter will continue to manage the fund. 4/18
FTBFX Fidelity Total Bond Fund No one, immediately. Matthew Conti is expected to retire from his portfolio manager role effective, December 31, 2018. Michael Weaver is joining the team with the expectation that he will assume sole responsibility for Mr. Conti’s portion of the fund, next year. 4/18
SCAFX Fiera Capital STRONG Nations Currency Fund “Effective as of March 3, 2018, Mr. Jonathan E. Lewis has taken an interim leave of absence from his role as Chief Investment Officer of Fiera Capital Inc., the Fund’s investment adviser, to make a run for the United States Congress.  During this leave period, Mr. Lewis will not serve as a Portfolio Manager of the Fund. …  If Mr. Lewis’ run for Congress is successful, he will leave his role as Chief Investment Officer of the Adviser and Portfolio Manager of the Fund to fulfill his duties as a U.S. Congressman.” Iraj Kani will continue to manage the fund. 4/18
FNGAX Franklin International Growth Fund Mohammad Par Rostom is no longer listed as a portfolio manager for the fund. John Remmert joins Donald Huber and Coleen Barbeau in managing the fund. 4/18
Various GlobalX Funds Hailey Harris will cease to be a portfolio manager of the series. Nam To will now manage the funds. 4/18
QGLDX Gold Bullion Strategy Fund Z. George Yang will no longer serve as a portfolio manager for the fund. Jason Teed joins Jerry Wagner in managing the fund. 4/18
GMAMX Goldman Sachs Multi-Manager Alternatives Fund New Mountain Vantage Advisers will no longer subadvise the fund. River Canyon Fund Management is now a subadvisor to the fund. 4/18
HLMSX Harding, Loevner International Small Companies Portfolio No one, but . . . Anix Vyas joins Jafar Rizvi in managing the fund. 4/18
SGBVX Hartford Schroders Global Strategic Bond Fund James Lindsay-Fynn will no longer serve as a portfolio manager for the fund. Robert Jolly, Paul Grainger, and Thomas Sartain will continue to manage the fund. 4/18
HEOAX Highland Long/Short Equity Fund Effective immediately, Michael McLochlin will no longer serve as a portfolio manager for the fund. Bradford Heiss joins Jonathan Lamensdorf in managing the fund. 4/18
HHCAX Highland Long/Short Healthcare Fund Effective immediately, Michael Gregory will no longer serve as a portfolio manager for the fund. Andrew Hilgenbrink and James Dondero will manage the fund. 4/18
HPEAX Highland Premier Growth Equity Fund Effective immediately, Michael Gregory will no longer serve as a portfolio manager for the fund. Michael McLochlin joins James Dondero in managing the fund. 4/18
HSZAX Highland Small-Cap Equity Fund Effective immediately, Michael Gregory will no longer serve as a portfolio manager for the fund. James Dondero will continue to manage the fund. 4/18
HSCSX Homestead Small-Company Stock Fund Effective March 30, 2018, Mark Ashton will retire as co-manager of the fund. Prabha Carpenter will continue to manage the fund. 4/18
HOVLX Homestead Value Fund Effective March 30, 2018, Mark Ashton will retire as co-manager of the fund. Prabha Carpenter will continue to manage the fund. 4/18
JMCVX Janus Henderson Mid Cap Value Thomas Perkins intends to retire from Perkins Investment Management LLC prior to the end of 2018. He intends to step down from fund management after June 30, 2018. Kevin Preloger and Justin Tugman will continue to manage the fund. 4/18
JVSAX Janus Henderson Select Value Fund Robert Perkins is no longer listed as a portfolio manager for the fund. Alec Perkins will continue to manage the fund. 4/18
JDSNX Janus Henderson Small Cap Value Fund Robert Perkins is no longer listed as a portfolio manager for the fund. Craig Kempler and Justin Tugman will continue to manage the fund. 4/18
JBOAX John Hancock ESG Core Bond Fund David Madigan will no longer serve as a portfolio manager for the fund, effective at the close of business on September 28, 2018. Following the effective date, Matthew Buscone, Sara Chanda, Khurram Gillani and Jeffrey Glenn will continue to serve as portfolio managers of the fund. 4/18
MDFSX Manning & Napier Disciplined Value Series Jeffrey Tyburski has resigned as a member of the management team. Alex Gurevich has been added to the management team, joining Christopher Petrosino and Richard Schermeyer. 4/18
MFCFX Marsico Flexible Capital Fund Jordon Laycob will no longer serve as a portfolio manager for the fund. Thomas Marsico is now managing the fund. 4/18
NAIGX Nuveen NWQ International Value Fund No one, but . . . James Stephenson will join Peter Boardman in managing the fund. 4/18
OYCIX Oppenheimer Portfolio Series Conservative Investor Fund Mark Hamilton and Dokyoung Lee will no longer serve as a portfolio managers for the fund. Jeffrey Bennett will now run the fund. 4/18
OYAIX Oppenheimer Portfolio Series Equity Investor Fund Mark Hamilton and Dokyoung Lee will no longer serve as a portfolio managers for the fund. Jeffrey Bennett will now run the fund. 4/18
OYMIX Oppenheimer Portfolio Series Moderate Investor Fund Mark Hamilton and Dokyoung Lee will no longer serve as a portfolio managers for the fund. Jeffrey Bennett will now run the fund. 4/18
PARWX Parnassus Endeavor Fund No one, but . . . On May 1, Billy Hwan will join Jerome Dodson on the management team. 4/18
QFFOX Pear Tree Panagora Emerging Markets Fund Mark Barnes no longer is a portfolio manager. Nicholas Alonso and Edward Qian continue to manage the fund. 4/18
RPEMX Pear Tree Panagora Risk Parity Emerging Markets Fund Mark Barnes no longer is a portfolio manager. Nicholas Alonso and Edward Qian continue to manage the fund. 4/18
PSR PowerShares Active U.S. Real Estate Fund No one, but . . . Grant Jackson joins Mark Blackburn, Paul Curbo, Joe Rodriguez, Jr., Darin Turner, and Ping Ying Wang on the management team. 4/18
PCACX Principal Largecap Value Fund Joel Fortney is no longer listed as a portfolio manager for the fund. Jeffrey Schwarte joins Christopher Iback in managing the fund. 4/18
PMVAX Putnam Sustainable Future Fund James Polk is no longer listed as a portfolio manager for the fund. Katherine Collins and Stephanie Henderson now manage the fund. 4/18
PNOPX Putnam Sustainable Leaders Fund Richard Bodzy and Robert Brookby are no longer listed as portfolio managers for the fund. Katherine Collins, R. Shepherd Perkins, and Stephanie Henderson will now manage the fund. 4/18
RDMIX Rational/ReSolve Adaptive Asset Allocation Fund Michael Ivie and R. Jerry Parker will no longer serve as portfolio managers for the fund. Adam Butler, Rodrigo Gordillo, and Michael Philbrick will now manage the fund. 4/18
SITAX STAAR Investment Trust – Alternative Categories Fund J. Andre Weisbrod is no longer listed as a portfolio manager for the fund. Brett Boshco now manages the fund. 4/18
TBWAX Thornburg Better World International Fund Rolf Kelly is no longer listed as a portfolio manager for the fund. James Gassman and Di Zhou will now manage the fund. 4/18
USCAX USAA Small Cap Stock Fund Cambiar Investors, LLC will no longer subadvise the fund. The other subadvisers remain. 4/18
VCINX VALIC Company I International Growth Fund Clas Olsson, Matthew Dennis, Rajesh Gandhi, Daniel Ling, Mark Jason, Richard Nield, Brently Bates, James Gendelman, and Filipe Benzinho are no longer listed as portfolio managers for the fund. Kristian Heugh will now manage the fund. 4/18
IMCVX Voya Multi-Manager Mid Cap Value Fund James Mordy has announced his plan to retire from the fund, effective December 31, 2018. Gregory Garabedian will join the rest of the team and assume lead management responsibilities upon Mssr. Mordy’s retirement. 4/18
WSVRX Walthausen Select Value Fund No one, but . . . Gerard Heffernan joins John Walthausen on the management team. 4/18
WSCVX Walthausen Small Cap Value Fund No one, but . . . Gerard Heffernan joins John Walthausen on the management team. 4/18
WSCAX Wanger International No one, immediately. P. Zachary Egan has announced that he will step down as portfolio manager effective, July 1, 2018. Louis Mendes and Tae Han Kim will continue to manage the fund. 4/18
EAAFX Wells Fargo Asset Allocation Fund Grantham, May, Van Otterloo & Co. will no longer subadvise the fund. Wells Capital Management is now subadvising the fund. Kandarp Acharya, Petros N. Bocray, and Christian Chan will be portfolio managers for the fund. 4/18
EGWAX Wells Fargo Traditional Small Cap Growth Fund Alexi Makkas will no longer serve as a portfolio manager for the fund. Michael Smith and Christopher Warner are now managing the fund. 4/18


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.” This month there are 17 no-load retail funds and actively managed ETFs in the pipeline. I’m most intrigued by two funds that aren’t actually new: Seven Canyons Strategic Income and Seven Canyons World Innovators are the rechristened versions of two Wasatch funds, both managed by Wasatch founder Samuel Stewart. Mr. Stewart, now 75, appears to be distancing himself from the firm, though we don’t know the circumstances behind it. The Wasatch website, including Mr. Stewart’s most recent shareholder letter, offers no hints concerning the change. Wasatch has seen steady outflows every quarter since Q2 2014, with a net outflow of around $5.5 billion. One could imagine the departure of these funds, and the merger of Wasatch Long/Short into Wasatch Global Value (see this month’s “Briefly Noted” for details), as attempts to adjust to that reality.

AdvisorShares Dorsey Wright Micro-Cap ETF

AdvisorShares Dorsey Wright Micro-Cap ETF (DWMC), an actively-managed ETF, will seek long term capital appreciation. The portfolio strategy is “entirely based on market movement of the securities and there is no company fundamental data involved in the analysis.” The fund will be managed by John G. Lewis of Dorsey, Wright & Associates.The initial expense ratio is not yet disclosed and, being an ETF, there is no minimum initial investment.

Agility Shares Managed Risk Equity ETF

Agility Shares Managed Risk Equity ETF (TRCE) seeks income and long-term growth with a secondary goal of limiting risk during unfavorable market conditions. . The plan is to invest in some combination of S&P 500 Index futures contracts, S&P 500 ETFs and S&P 500 stocks. “The Fund buys and sells put options against these positions to offset the risk of adverse price movements, and buys and writes call options against the same positions to reduce volatility and to receive income from written call options.” The fund will be managed by Phillip Toews, Randall Schroeder, Jason Graffius, and Charles Collins, all of Toews Corporation. The team manages five other funds, four of which have two star ratings from Morningstar. The initial expense ratio is 1.05% after waivers, and there is no minimum initial investment.

AI Powered International Equity ETF

AI Powered International Equity ETF, an actively though robotically managed fund, will seek capital appreciation. The manager relies on an artificial intelligence program, EquBot, running on IBM’s famous Watson platform. The program identifies both the international equity securities and their target weights, based on a 12-month risk/return horizon. Anticipate an all-cap portfolio of 80-250 names with the prospect for relatively active trading. Two mere humans, Denise M. Krisko and Rafael Zayas of Vident Investment Advisory, make the actual buy/sell decisions. For now! (Insert a mechanical “mwah-hah-ha” about here.) The initial expense ratio is not yet disclosed and, being an ETF, there is no minimum initial investment.

Altegris/AACA Real Estate Income Fund

Altegris/AACA Real Estate Income Fund seeks to maximize current income with potential for capital appreciation. The plan is to invest in the equity and debt of U.S., foreign and emerging market real estate and real estate related companies. The fund will be managed by Burland B. East III of American Assets Capital Advisers, LLC. Mr. East also manages the five-star Altegris/AACA Opportunistic Real Estate Fund (RAANX). The initial expense ratio has not been disclosed, and the minimum initial investment for the no-load “N” shares will be $2,500.

AlphaCentric Small Cap Alpha Fund

AlphaCentric Small Cap Alpha Fund seeks long-term growth of capital. The plan is to invest in the stock of small capitalization companies with “underappreciated earnings potential and reasonable valuations.” The fund will be managed by Mike Ashton of Pacific View Asset Management, LLC. The initial expense ratio for the no-load “I” shares is 1.40%, and the minimum initial investment will be $2,500.

AMG TimesSquare Global Small Cap Fund

AMG TimesSquare Global Small Cap Fund will seek to long-term capital appreciation. The plan is to construct a global small cap portfolio, with a minimum of 30-35% in the US, using fundamental analysis and applying “a macro overlay to monitor and mitigate country risks.” The fund will be managed by Magnus Larsson, Grant R. Babyak and Ian Anthony Rosenthal, all of TimesSquare Capital Management. Mr. Larsson co-manages the five-star AMG TimesSquare International SmallCap Fund (TQTIX). The initial expense ratio will be 1.40%, and the minimum initial investment for “N” shares will be$2,000.

Direxion Tactical Large Cap Equity Strategy Fund

Direxion Tactical Large Cap Equity Strategy Fund will seek capital appreciation. The plan starts with a directional trading model created by ProfitScore Capital Management. The model determines, each day, whether the likely direction of the market is up, down or sideways. The managers then (primarily) use index futures to position the fund long, short or neutral (i.e., in cash). The fund will be managed by Paul Brigandi and Tony Ng of Rafferty Asset Management. The initial expense ratio will be 1.45%, and the minimum initial investment will be$25,000.

Fidelity High Yield Factor ETF

Fidelity High Yield Factor ETF, an actively-managed ETF, will seek a high level of income. The fund may also seek capital appreciation. The fund will rely on “a proprietary multifactor quantitative model to systematically screen over 1,000 bonds and select those with strong return potential and low probability of default using a value and quality factor-based methodology.” It is “guided by” the ICE BofAML BB-B US High Yield Constrained Index (wow) but might invest in non-US bonds, in higher or lower quality bonds and in the bonds of “troubled” companies. It will be managed by Michael Cheng, Matthew Conti and Michael Weaver. The initial expense ratio is not yet disclosed and, being an ETF, there is no minimum initial investment.

First Trust TCW Unconstrained Plus Bond ETF

First Trust TCW Unconstrained Plus Bond ETF will seek to maximize long-term total return. The plan is to invest in fixed income securities of any type or credit quality, including up to 70% in high yield (or “junk”) securities, up to 60% in emerging market securities and up to 50% in securities denominated in foreign currencies.. The fund will be managed by Tad Rivelle, Chief Investment Officer of the Fixed Income Group at TCW, Stephen M. Kane, Laird Landmann, and Brian T. Whalen. Mr. Rivelle is reasonably famous, as least so far as fixed-income fund guys get to be famous. The initial expense ratio is not yet disclosed and, being an ETF, there is no minimum initial investment.

Franklin Liberty High Yield Corporate ETF

Franklin Liberty High Yield Corporate ETF seeks high level of current income, with some capital appreciation as long as it doesn’t conflict with the “current income” goal. The plan is to invest in high yield securities, with the portfolio constructed security by security from the bottom up. The fund will be managed by Glenn I. Voyles and Patricia O’Connor, both of Franklin Advisers. The duo co-manages Templeton Global High Yield, an undistinguished UCITS, with Michael Hasenstab. The initial expense ratio is not yet disclosed and, being an ETF, there is no minimum initial investment.

Gadsden Dynamic Equity ETF

Gadsden Dynamic Equity ETF seeks total return with both reduced downside risk and sensitivity to inflation. The plan is to construct a portfolio with two embedded components. The strategic component, typically about 80% of the portfolio, is a global equities portfolio. The tactical component takes “a shorter-term view of market opportunities and downside threats,” the allocation to which is “designed to adjust overall portfolio risk either higher or lower, depending on market conditions and opportunities.” The fund will be managed by Kevin R. Harper and James W. Judge, both of Gadsden, LLC. The initial expense ratio is not yet disclosed and, being an ETF, there is no minimum initial investment.

Gadsden Dynamic Income ETF

Gadsden Dynamic Income ETF seeks current income while providing a positive long-term real return. The plan is to construct a portfolio with two embedded components. The strategic component, typically about 80% of the portfolio, is a mix of fixed income securities and high dividend yielding global equities. The tactical component may “invest globally in any asset class” and takes “a shorter-term view of market opportunities and downside threats,” the allocation to which is “designed to adjust overall portfolio risk either higher or lower, depending on market conditions and opportunities.” The fund will be managed by Kevin R. Harper and James W. Judge, both of Gadsden, LLC. The initial expense ratio is not yet disclosed and, being an ETF, there is no minimum initial investment.

Gadsden Dynamic Multi-Asset ETF

Gadsden Dynamic Multi-Asset ETF seeks to preserve and grow capital with a positive long-term real return. The plan is to construct a portfolio with two embedded components. The strategic component, typically about 80% of the portfolio, will balance lower-risk asset classes (such as inflation-linked bonds or fixed income securities) and higher-risk asset classes (such as equities or REIT investments). The tactical component takes “a shorter-term view of market opportunities and downside threats,” the allocation to which is “designed to adjust overall portfolio risk either higher or lower, depending on market conditions and opportunities.” The fund will be managed by Kevin R. Harper and James W. Judge, both of Gadsden, LLC. The initial expense ratio is not yet disclosed and, being an ETF, there is no minimum initial investment.

Harbor Core Bond Fund

Harbor Core Bond Fund seeks total return. The plan is to invest in domestic, investment-grade fixed-income securities. The fund will be managed by William A. O’Malley, James E. Gubitosi and Sarah Kilpatrick, all employees of Income Research + Management. In 2017, Pensions & Investments named them the second best place to work among all smaller (100-500 employee) investment management firms. Messrs. O’Malley and Gubitosi are about CFA charterholders. The initial expense ratio for Institutional shares is 0.45%, and the minimum initial investment will be$1,000.

Seven Canyons Strategic Income Fund

Seven Canyons Strategic Income Fund will seek current income, with a willingness to accept some long-term growth of capital. The plan is to invest in a global equity and fixed income portfolio, though the allocation between asset classes is fluid. This is the rechristened incarnation of Wasatch Strategic Income Fund (WASIX). Technically, “The Fund commenced upon the reorganization of the Wasatch Strategic Income Fund.” The manager is Samuel Stewart, the 75-year-old founder of the Wasatch Funds. The initial expense ratio has not been disclosed and the minimum initial investment will be $1,000, unless you’re silly enough to fund an IRA. In that case, the minimum increases to $2,000. That’s a provision I’ve never before encountered and I’ve chronicled thousands of funds in registration.

Seven Canyons World InnovatorsFund

Seven Canyons World Innovators Fund will seek seeks to deliver capital preservation and capital appreciation. The plan is to invest in domestic and foreign growth companies that the Adviser believes are innovators in their respective sectors or industries. This is the rechristened incarnation of the five-star, $200 million Wasatch World Innovators Fund (WAGTX). The managers are Samuel Stewart, the 75-year-old founder of the Wasatch Funds and Josh Stewart, who have also been managing the Wasatch fund. The initial expense ratio has not been disclosed and the minimum initial investment will be $1,000, unless you’re silly enough to fund an IRA. In that case, the minimum increases to $2,000.

Templeton International Climate Change Fund

Templeton International Climate Change Fund will seek total return over the longer term. The plan is to invest predominantly in companies that are superior in identifying, adapting and providing solutions to the consequences of climate change (i.e., companies able to successfully transition to a lower carbon economy). The discipline is bottom-up and valued-oriented. The fund will be managed by Maarten Bloemen. The initial expense ratio for no-load “R” shares is 1.47% and the minimum initial investment is $1,000.

Briefly Noted

By David Snowball


In March, we highlighted some notable funds that had received Lipper Fund Awards for their excellence over the past three years. A couple people wrote to note, correctly, that they’d received five-year awards and those were even cooler, despite the fact that I hadn’t mentioned them.

Mea culpa. Mea maxima culpa.

KCM Macro Trends Fund (KCMTX) received recognition of the best five-year performance among all alternative global macro funds.

AQR Multi-Strategy Alternatives (ASANX) led the alternative multi-strategy group. I mention that in recognition of the fact that AQR seems remarkably successful across a range of such funds, none of which particularly welcome smaller investors.

City National Rochdale Emerging Markets (RIMIX) led among EM funds.

Polaris Global Value Fund (PGVFX) received the award for global multi-cap value fund.

Edgewood Growth topped the five year large-cap growth rankings while LSV Value Equity (LSVEX) was tops in large-cap value. Our profiles of them are too old to be worth linking for you, but we’ll check during April to see if we might offer updated profiles.

Broadly speaking, T. Rowe Price dominated the target-date retirement categories, in some cases winning the three-, five- and ten-year awards. TIAA-CREF made a strong showing, with Fidelity and Vanguard pretty much shut out.

For multi-cap core funds, Parnassus Endeavor ran the table, winning the three-, five- and ten-year awards. Love the fund, worry about manager Dodson’s age.

And Oberweis International Opportunities (OBOIX) was the top international small- to mid-cap growth fund over the past 10 years.

Morningstar has initiated analyst coverage on David Sherman’s RiverPark Short Term High Yield Fund (RPHIX/RPHYX)

Briefly Noted . . .

Aberdeen seems to have taken a dislike to the Okies: “Class T shares are not currently available for purchase and not currently sold in any State or to residents of any State, including Oklahoma or to residents of Oklahoma.” Hmmm … perhaps they were afraid that the Oklahomans wouldn’t have figured it out otherwise?

On March 26, 2018, the $140 million Cambria Shareholder Yield ETF (SYLD) gave up its identity as an actively managed quant ETF and became a passively managed index fund tracking the Shareholder Yield index. No decrease in fees accompanied the change.

On April 6, 2018, Direxion Monthly S&P 500® Bull 2x Fund (DXSLX) and Direxion Monthly Nasdaq-100® Bull 2x Fund (DXQLX) will each undergo 5:1 share splits; for every share you own on April 5, you’ll have five on April 7. Since the NAV per share will be precisely one-fifth as high, investors will neither gain nor lose value from the split.

I originally thought that PIMCO had updated the “glide path,” that is, the changes in their retirement funds’ asset allocation strategy, effective at the end of March, 2018.

It actually appears that they’re just updated the picture of the glide path, to the one above from the one below.

Hmmm … well, let’s look at the differences. (1) The new asset allocation glide path has the legend on the left, rather than underneath. And (2) the new glide path is higher res than the old one.

I tingle.

Especially in the face of increasingly unstable markets, many folks have been asking how much equity exposure they should have. PIMCO’s answer is, “it depends.” In particular it depends on how close you are to actually needing some of the money and how the markets are priced. Here’s the short version of their asset allocation guide.

Years to goal Stocks Real assets Fixed income
40 74 ±15 10 ±10 16 ±15
30 73 ±15 10 ±10 17 ±15
20 65 ±15 10 ±10 25 ±15
10 50 +10 to – 20 6    ±6 44 +20 to -10
0 36 + 10 to -20 4    ±4 60 +20 to -10

What might you take away from these ranges?

  1. A 10-year time frame is when you need to move decisively from the “stocks for the long term” mantra. At the 10 year threshold, the weighting on stocks and the potential overweighting of them drop dramatically. PIMCO’s maximum conceivable stock exposure at the 20 year window is 80%; at the 10 year window, it’s 60%.

    Why? Because it can take more than 10 years to recover from a bear market. Possibly much more. At this moment, there are 44 funds still in the red 10 years after the 2007-09 crash. An additional 47 funds took 10 years or more (that is, 120 – 122 months) to reach the break-even point. At person who is 58 years old today – that is, a person 10 years from full Social Security benefits – whose retirement is almost entirely equities, is at risk of having a portfolio in 2028 that’s no bigger than it is today. Few of us can afford a lost decade.

    Want to check yourself? Easy if you have MFO Premium access (and you should, it’s ridiculously affordable at $100 and you’d be helping keep the lights on here). On the multi-screener, go to the “asset sub type” tab and click “US equity, global equity, international equity and mixed asset.” On the “display period” tab, pick “full cycle 5 – 200711-201802”) and on “period metrics” choose “longest recovery time.” You can sort the resulting tab by “recovery months” (or anything else, for that matter) or you can download it as a spreadsheet.

  2. Real assets are a hedge against inflation, but are famously volatile. Shorter-term portfolios should contain little or none of them, presumably since the potential losses from rising prices are smaller than the potential losses in a volatile asset class.
  3. Fixed income should never be less than 50% of an income-oriented portfolio. Granted that most of us spend 15 years or so “in retirement,” but that’s still not a long enough window to warrant the volatility of stocks. That’s not an argument for a bond index fund, whose construction is far more problematic than an equity index’s. Nor is it an argument for loading up on interest-rate sensitive fare. It is a reminder that a bond bear market is far less horrendous than an equity bear, even though it might drag on for decades. Ben Carlson of Ritzholz Wealth (and a “Bloomberg Prophet,” god help us all) wrote a really thoughtful essay at about the nature of a bond market bear. The short version: your greatest risk isn’t loss of principal, it’s loss of purchasing power to inflation when your bond yield (which might be positive) is smaller than your cost-of-living rise. Check the cool and scary chart labeled “inflation-adjusted government bond drawdowns, 1926-2017.”

For additional details on the whole “get your asset allocation right or else” thing, you might review the data from T. Rowe Price that we’ve periodically provided in our essays on a stock-light portfolio.


FMI International Fund (FMIJX / FMIYX) will reopen to new investors on April 2, 2018.

On March 30, 2018, Gator Focus Fund (GFFAX / GFFIX) redesignated its Investor shares as Institutional shares, and then dropped the minimum initial investment from $100,000 down to $5,000. The new institutional shares serve as a sort of universal share class for the fund, and do not impose 12b-1 fees. Nice people. $3 million fund. Disastrous performance.

Vanguard Convertible Securities Fund (VCVSX) is now open “to new accounts for institutional clients who invest directly with Vanguard.”

CLOSINGS (and related inconveniences)

Vanguard Wellington Fund (VWELX) has closed to all prospective financial advisory, institutional, and intermediary clients (other than clients who invest through a Vanguard brokerage account).


Effective April 6, 2018, AllianzGI Small-Cap Blend Fund (AZBAX) will change its name from AllianzGI Small-Cap Fund.

American Century Adaptive All Cap Fund (ACMNX) will be renamed the Adaptive Small Cap Fund, effective May 7, 2018.

Effective immediately, the name of the BlueStar TA-BIGITech Israel Technology ETF (ITEQ) is changed to the BlueStar Israel Technology ETF.

The former Collins Long/Short Credit Fund is now CrossingBridge Long/Short Credit Fund (CLCAX). The fund just received its first Morningstar rating, which placed it as a four-star fund in the long-short credit group. Notwithstanding, Morningstar’s new quantitative rating system (see this month’s “Morningstar Minute” article for details) places a negative rating on the fund for perceived weaknesses in its People, Parent and Price pillars. On the fund’s profile page, Morningstar shows 53 funds in its peer group, up from 50 at the end of 2017, but you get that number only by counting each share class (A, C, advisor, retirement, institutional and so on) of each fund as a separate fund. In reality, there are only 16 “distinct” funds in the group.

Fidelity Strategic Income (FSICX) is reorganizing into Fidelity Advisor Strategic Income (FSRIX), effective April 27, 2018. The Advisor version is several hundred million dollars larger and several basis points costlier, but it’s otherwise the same fund. The 10 year correlation between the two is 100.

The Board of Trustees at GMO approved a change in the name of GMO U.S. Equity Allocation Series Fund (GMUEX) to GMO U.S. Equity Series Fund, but didn’t stipulate a date for the change. The fund’s investment minimums range from $10 million to $750 million, so relatively few of us will be waiting anxiously to learn the date.

After the close of the markets on April 6, 2018, the Guggenheim ETFs all become PowerShares ETFs.

Fund Acquiring Fund
Guggenheim S&P 100® Equal Weight ETF PowerShares S&P 100® Equal Weight Portfolio
Guggenheim S&P 500® Equal Weight ETF PowerShares S&P 500® Equal Weight Portfolio
Guggenheim S&P 500® Equal Weight Consumer Discretionary ETF PowerShares S&P 500® Equal Weight Consumer Discretionary Portfolio
Guggenheim S&P 500® Equal Weight Consumer Staples ETF PowerShares S&P 500® Equal Weight Consumer Staples Portfolio
Guggenheim S&P 500® Equal Weight Energy ETF PowerShares S&P 500® Equal Weight Energy Portfolio
Guggenheim S&P 500® Equal Weight Financials ETF PowerShares S&P 500® Equal Weight Financials Portfolio
Guggenheim S&P 500® Equal Weight Health Care ETF PowerShares S&P 500® Equal Weight Health Care Portfolio
Guggenheim S&P 500® Equal Weight Industrials ETF PowerShares S&P 500® Equal Weight Industrials Portfolio
Guggenheim S&P 500® Equal Weight Materials ETF PowerShares S&P 500® Equal Weight Materials Portfolio
Guggenheim S&P 500® Equal Weight Real Estate ETF PowerShares S&P 500® Equal Weight Real Estate Portfolio
Guggenheim S&P 500® Equal Weight Technology ETF PowerShares S&P 500® Equal Weight Technology Portfolio
Guggenheim S&P 500® Equal Weight Utilities ETF PowerShares S&P 500® Equal Weight Utilities Portfolio
Guggenheim S&P MidCap 400® Equal Weight ETF PowerShares S&P MidCap 400® Equal Weight Portfolio
Guggenheim S&P SmallCap 600® Equal Weight ETF PowerShares S&P SmallCap 600® Equal Weight Portfolio
Guggenheim MSCI Emerging Markets Equal Country Weight ETF PowerShares MSCI Emerging Markets Equal Country Weight Portfolio
Guggenheim S&P 500® Top 50 ETF PowerShares S&P 500® Top 50 Portfolio
Guggenheim S&P 500® Pure Growth ETF PowerShares S&P 500® Pure Growth Portfolio
Guggenheim S&P 500® Pure Value ETF PowerShares S&P 500® Pure Value Portfolio
Guggenheim S&P MidCap 400® Pure Growth ETF PowerShares S&P MidCap 400® Pure Growth Portfolio
Guggenheim S&P MidCap 400® Pure Value ETF PowerShares S&P MidCap 400® Pure Value Portfolio
Guggenheim S&P SmallCap 600® Pure Growth ETF PowerShares S&P SmallCap 600® Pure Growth Portfolio
Guggenheim S&P SmallCap 600® Pure Value ETF PowerShares S&P SmallCap 600® Pure Value Portfolio
Guggenheim Multi-Factor Large Cap ETF PowerShares Multi-Factor Large Cap Portfolio

On May 22, 2018, MainStay MacKay Tax Advantaged Short Term Bond Fund (MYTBX) becomes MainStay MacKay Short Term Municipal Fund. At that point, the management fee drops substantially (from 45 bps to 35 bps) and the investment strategy targets an “actively managed, diversified portfolio of tax-exempt municipal debt securities.”

On or about April 30, 2018, MarketGrader 100 Enhanced Index Fund (KHMIX) becomes MarketGrader 100 Enhanced Fund. The fund appears to have suffered an “oops,” and is down 17% YTD as of late March.

The advisor’s website is curiously silent on the collapse illustrated above. That, all by itself, seems a valid reason to avoid the fund.

Effective May 1, 2018, Neuberger Berman Socially Responsive Fund (NBSRX) will change to Neuberger Berman Sustainable Equity Fund. The investment strategy will reorient to focus on mid- and large-cap stocks which survive ESG and valuation screens. 

As of March 22, 2018, USCA Shield Fund (SHLDX) was renamed USCA Premium Buy-Write Fund.

Effective April 16, 2018, the name of the Sierra Strategic Income Fund (SSIZX) will be changed to Sierra Tactical Core Income Fund. Since “the investment objective, principal investment strategies and principal investment risks for the Fund have not changed,” we’re left to conclude that Sierra believes “strategic” is the same as “tactical” or, alternately, “strategic” is the same as “tactical core.”

As of April 28, 2018, Strategic Advisers International II Fund (FUSIX) will be renamed Strategic Advisers Fidelity®International Fund.

On May 1, 2018, Voya Global High Dividend Low Volatility Fund (VGLAX) becomes Voya International High Dividend Low Volatility Fund. At that same point, it loses US exposure and allows itself 5 bps of higher expenses:

Footnote 3 to the table entitled “Annual Fund Operating Expenses” of the Fund’s Prospectuses is deleted and replaced with the following:

The adviser is contractually obligated to limit expenses to 0.85%, 0.60%, and 0.85% for Class A, Class I, and Class T, respectively, through March 1, 2019. Effective March 1, 2019, the adviser is contractually obligated to limit expenses to 0.90%, 065% and 0.90% for Class A, Class I, and Class T shares, respectively through March 1, 2020.


AdvisorShares Meidell Tactical Advantage ETF(MATH) is expected “to cease operations, liquidate its assets, and distribute the liquidation proceeds” on April 6, 2018. I love the thoroughness of some of these “we’re killing it” announcements. A few include the “all references to the fund will be deleted from the prospectus and related documents,” but I am still waiting for “the managers’ images will be obscured, their belongings sold, salt poured deeply upon the places they trod and their names shall ne’er be spoken again.”

ALPS/Alerian MLP Infrastructure Index Fund (ALERX) will be closed and liquidated … with an effective date as determined by a committee of the Board of the Trust.”

American Independence U.S. Inflation-Protected Fund (FFIHX, FNIHX, FCIHX, and/or AIIPX) is merging into BNP Paribas AM U.S. Inflation-Linked Bond Fund (“BNP TIPS Fund”). Both funds are run by the same management team.

The $3 million AMG Chicago Equity Partners Small Cap Value Fund (CESVX) has closed to new investment and will liquidate on May 18, 2018.

Amplify YieldShares Oil-Hedged MLP Income ETF (AMLX) will liquidate after the close of business on April 19, 2018.The fund has been around nine months and has lost about 25%.

Cavanal Hill Intermediate Tax-Free Bond Fund (the “Fund”) goes to a far, far better place on May 30, 2018.

The Trustees of Context Capital Funds have voted to liquidate and terminate Context Strategic Global Equity Fund (CGPGX) effective on or about March 29, 2018 which is to say, it’s gone already.

CRM International Opportunity Fund (CRMIX) will liquidate on April 30, 2018.

The Direxion iBillionaire Index ETF (IBLN) will close on April 6, 2018 and be liquidated within a week. At base, the ETF tried to invest in the same stocks that the 10 most successful billionaire investors or institutional investment managers invested in. Nice idea but the fund only outperformed the average large cap domestic equity fund by 100 bps over the course of three years, an amount insufficient to draw the attention of any billionaire investors, or millionaire investors or, judging from the AUM, even more thousandaire investors.

Fidelity is giving up the ghost on Fidelity Inflation-Protected Bond Fund (FINPX). The fund will be merged in Fidelity Inflation-Protected Bond Index Fund (FSIQX) on or about August 24, 2018. Neither fund is spectacular, but the index fund has nearly twice the assets at about half the cost which accounts for most of its slight performance advantage over FINPX. William Irving no longer serves as lead portfolio manager of the fund.

Hartford Global Equity Income Fund (HLEAX) is slated to merge into Hartford International Equity Fund (HDVAX) on or about June 25, 2018. The Global fund owns about $65 million in US stocks and is merging into a fund with just $70 million in assets; that implies a lot of liquidations and, potentially, a large tax bill for someone.

Janus Henderson Global Allocation Portfolio – Moderate (JMAPX) merges into Janus Henderson Balanced Portfolio (JABLX), hence out of existence, on or about the close of business on April 27, 2018 

Janus liquidated and terminated Janus Velocity Volatility Hedged Large Cap ETF (SPXH) and Janus Velocity Tail Risk Hedged Large Cap ETF (TRSK) on March 26, 2018.

Johnson Growth Fund (JGRWX) is merging into the Johnson Equity Income Fund (JEQIX) on or about April 20, 2018.

What’s the rush? JPMorgan Multi-Cap Market Neutral Fund (OGNAX) liquidated on March 23, 2018. That date was moved up twice, from April 6 to March 29, then to March 23. 

Lazard US Realty Income Portfolio (LRIOX) will, pending shareholder approval, merge into Lazard US Realty Equity Portfolio (LREOX) on or about June 29, 2018. The funds, between them, have $70 million in assets. Over the past two years, LREOX has had much stronger performance than LRIOX, but they did spend their first seven years neck-and-neck. They’re run by the same two managers, which raises the question of whether LREOX’s recent excellence represents brilliant management or just (temporarily) favorable market conditions.

Lord Abbett Emerging Markets Local Bond Fund (LEMAX) will liquidate and dissolve on or around April 19, 2018. (Fans of EM bond investing really owe it to themselves to look at Teresa Kong’s two funds, Matthews Asia Strategic Income and Matthews Asia Credit Opportunities. She, and they, are absolutely first-rate.)

Lord Abbett Multi-Asset Focused Growth Fund (LDSAX) will merge, at a not-yet-specified moment, into Lord Abbett Multi-Asset Growth Fund (LWSAX). Those affected by the move should note that LWSAX has a substantial bond component (17%) and about a third fewer international stocks than does the disappearing fund. That has translated to higher returns with higher volatility.

MFG Low Carbon Global Fund (MGKGX) and MFG Infrastructure Fund (MGKSX) will liquidate on or about April 27, 2018.

A proposal to merge Nuveen Concentrated Core Fund (NCADX) into Nuveen Large Cap Core Fund (NLACX) will be submitted to shareholders in May. The funds have the same managers, are the same age and have comparable expenses. Concentrated holds 20 stocks, Core holds 100. Core has higher returns and lower volatility but neither is particularly a star.

Nuveen Symphony High Yield Bond Fund (NSYAX) will be liquidated after the close of business on May 11, 2018. Solid fund, victim of the whims of the market, I suspect.

Putnam Investors Fund (PINVX) will close on May 18, 2018 and merge into Putnam Multi-Cap Core Fund (PMYAX), likely on June 25, 2018.

Huh? Putnam Investors launched in 1925 and has over $2 billion in assets, about three times the size of Multi-Cap Core. Statistically, the funds have nearly identical performance over the past five years though that seems like an awfully thin slice of data when you’re dealing with one fund that has a 93 year record. The correlation between the two is 99 and the statistical differences between the two are typically a tenth of a percent. Both have a four-star rating from Morningstar and have the same managers. The only consequential difference is that Investor tends to hold more large-cap names.

While they’re at it, Putnam is merging Putnam Capital Opportunities Fund (PCOAX) into Putnam Small Cap Growth Fund (PNSAX) and liquidating entirely Putnam Low Volatility Equity Fund on or about May 18, 2018.

Shelton European Growth & Income Fund (EUGIX) and Shelton Greater China Fund (SGCFX) are both fated to be eaten by Shelton International Select Equity Fund (SISLX). The two regional funds each has fewer than $10 million in assets.

TCW Focused Equities Fund (TGFVX) will liquidate on or about May 31, 2018. 2008 served as a turning point in the fund’s history; it performed excellently before the crash and miserably thereafter.

Templeton Global Opportunities Trust (TEGOX) is merging into Templeton Growth Fund (TEPLX) or about August 24, 2018. At about the same time, Templeton Foreign Smaller Companies Fund (FINEX) will merge into Templeton Global Smaller Companies Fund (TEMGX).

The merger of the Third Avenue International Value Fund (TAVIX/TVIVX) into the Third Avenue Value Fund (TAVFX/TVFVX) was completed on March 19, 2018.

Pending shareholder approval, Thrivent Growth and Income Plus Fund (TEIAX) will merge into Thrivent Moderately Aggressive Allocation Fund (TMAAX) sometime this year, the filing was not particularly informative on the subject. The move is a good one for shareholders.

On or about April 27, 2018, Virtus Duff & Phelps International Equity Fund (VIEAX), Virtus Horizon International Wealth Masters Fund (VIWAX), Virtus Rampart Global Equity Trend Fund (VGPAX) and Virtus Rampart Low Volatility Equity Fund (VLVAX) will be liquidated.

Subject to various sets of shareholder approvals, Voya Multi-Manager Large Cap Core Portfolio (IPFAX) will merge into Voya Index Plus LargeCap Portfolio (IPLSX) in September.

The Board of the Wasatch Funds Trust has decided to put Wasatch Long/Short Fund (FMLSX – who now remembers the 1st Source Monogram funds whose legacy lived in this ticker symbol?) out of its misery by merging it into Wasatch Global Value Fund (FMIEX – notice the odd coincidence in the ticker, this used to be 1st Source Monogram Income Equity Fund). Wasatch adopted both funds in 2008, assets in long/short popped from $100 million to $1.6 billion in three years, Wasatch replaced its 1st Source managers in 2013 and the fund promptly lost money in three of the next four calendar years. It’s now smaller than when Wasatch purchased it.