Monthly Archives: July 2018

July 1, 2018

By David Snowball

Dear friends,

Welcome to July! You shouldn’t be here.

Welcome to the Observer’s annual “summer light” issue in which you point out the obvious: you need some time away from the headlines, the daily howling, the apocalypse, the partisan glee, the certainty of boom, doom or gloom (to borrow from the name of Marc Faber’s thoughtful reports).

Setting aside the overtly political headlines, here’s a snapshot of the top stories in my news feed for June 30, 2018.

a collection of financial headlines

And on and on. Dear lord.

Add in political dysfunction, steadily worsening climate instability, caustic mistrust of one another … it’s all vitally important, but utterly exhausting.

comic showing couple watching political news

Exhausted people don’t think clearly and they don’t plan thoughtfully; they merely react, often poorly, relying on mental shortcuts and defense mechanisms. Researchers at Indiana University found that a sense of being overwhelmed often leads us to share the lowest-quality content: simplistic drivel that doesn’t challenge our capacities or prejudices.

The brain can deal with only a finite amount of information, and too many incoming stimuli can cause information overload. That in itself has serious implications for the quality of information on social media. We have found that steep competition for users’ limited attention means that some ideas go viral despite their low quality—even when people prefer to share high-quality content. (6/21/2018)

For those willing to risk mid-summer depression, here’s my note from the history of propaganda.

That feeling of exhaustion is widely shared. Based on surveys of over 5000 adults, the Pew Research Center concluded that 70% of us feel overwhelmed by it all.

If you feel like there is too much news and you can’t keep up, you are not alone. A sizable portion of Americans are feeling overwhelmed by the amount of news there is, though the sentiment is more common on the right side of the political spectrum … (6/5/2018)

That’s part of a larger phenomenom in which our devices feed us more information – the humidity in our homes, the number of steps we’ve taken today, the temperature inside our fridge, the value of a stock index at this very second – than we’ve ever needed to process. In reporting on research by neuroscientist Daniel Levitin, the Canadian website Folio notes:

Estimates suggest that today we take in about five times as much information as we did 25 years ago, and that we process as much data in a day … as our 15th-century ancestors would have in their lifetimes. (How to manage information overload, 6/16/2018)

The new term-of-art is “news fatigue,” a feeling of mental and moral numbness that sets in when you can’t escape the obligation to walk in the miasma. The effects can be surprising: as our brains begin to gush out our ears, we lose our keys, forget appointments, struggle to complete our sentences and stare off into space because we can’t recall what we were in the midst of doing.

red gumby-like creature holding head in worry

For the sake of all you care about – your family, your good humor, your sanity, your country, your planet, your portfolio – you need to step back once in a while, to shut out the din and to renew your ability to discriminate and process. Otherwise you feed the problem rather than build the solution.

Here’s our annual three-step plan:

  1. Throttle back on incoming information. Really, you do not need a browser open 24/7. You don’t need to glance at social media every time you’ve got 10 seconds without stimulus. You don’t need to have the TV on. It’s hard at first to quiet the din because we (most of us, anyway) had chosen to make it environmental, and have justified that decision by imagining that it’s essential.

    It isn’t, even for those fully engaged In their careers. Here’s an alternative: listen to Up First, NPR’s daily 10-minute podcast which highlights the stuff you need to know for the day ahead. They post it at 6:00 a.m. Eastern. It’s thoughtful, informative, calm and well-done, offering six to eight stories that highlight events in the news and why they might matter.

  2. Read a book. Or, blessedly, get lost in a book. My preference is to pick something that lets you stretch your mind while stepping back from the noise o’ the day. Some folks prefer historical fiction (the Washington Post recommends Gregory Smith’s The Maze at Windermere, “Five subtly related stories spread over three centuries in the little seaside town of Newport, R.I.”), some like thrillers (Chris Bohjalian’s The Flight Attendant: “ After a passionate one-night stand, a flight attendant wakes up next to a dead man. Did she kill him? She can’t remember.” And haven’t we all been there?) and many enjoy smut (just avoid any work with the number “50” in the title).

    I’m mostly working through creative non-fiction:

    Cassia St. Clair’s The Secret Lives of Color (2017). Literally, you want to know the history of scarlet or chrome yellow? She’s got you covered in a series of very short chapters that both display the colors in question and give you their back stories. You might learn, for example, that many of the colors you see in famous paintings are vastly different from what the artist intended (some pigments were so expensive that artists could only use a particular red in tiny amounts) or what they applied (the different paints react chemically with one another, so their color today is substantially different from their color a century ago). The foreknowledge of those reactions led artists to compose scenes where two badly incompatible colors were never adjacent. Personally, I was intrigued to learn that color perception changes as civilizations mature; many colors simply weren’t recognized because knowledge of them wasn’t essential to navigating life. Blues and purples, for instance, were not consistently distinguished from black. In English, the “important” half of our color words are native while the less important are later borrowings from other languages. “White” is not derived from “blanc,” for example, while “blue” is clearly from “bleu.” So, colors don’t “exist” but are just mental constructs? Huh.

    Lynn Murphy’s The Prodigal Tongue: The Love-Hate Relationship Between American and British English (2018). Murphy is an American linguist teaching Brits, at a British university, about the history and development of their language. She spends rather more time being lectured to than lecturing. You get some sense of the state of things from the quotation that opens the book:

    If there is a more hideous language on the face of the earth than the American form of English, I should like to know what it is! Baron Somers, speech in the House of Lords, 1979.

    It’s not just Lord Somers. Murphy did a fun experiment with The Google: she used a thesaurus to create a list of synonyms for the words good, bad, useful and useless, then searched each variant of the phrase “a(n)  ___ Americanism”  (for example, “a lovely Americanism”). The three most common judgments she found about the way I (we?) talk:

    • 7,780: An ugly Americanism
    • 4,780: A horrible Americanism
    • 3,610: A vile Americanism


    The most positive? “A lovely Americanism” appeared in just 227 searches.

    Well, poop on them.

    Professor Murphy “an arsenal of facts and an armful of interpretations that, I hope, might heighten our enjoyment of our common language and our pride in it.” She generously allows that if you’ll humor her for the length of the book, “then, if you must, you can go back to complaining.” I took her up on the offer.

    I might eventually add Daniel Levitin’s The Organized Mind (2015) which is sitting on my shelf. Levitin is the neuroscientist mentioned above and his word is lauded for helping to explain everything from the kitchen junk drawer (we all have them and they’re actually marvels) to office org charts, but I’m wary of approaching anything that looks too “relevant” with my summers.

  3. Engage your passions. Hug your child. Walk along the river, far from the sound of traffic. Cheer for the Little League. Try cooking something you’ve been talking yourself out of; I’ll share a really good recipe for peppery chicken piccata if you’d like. Plant a tree, and celebrate the fact that you’re doing it solely to help a child born in 2048, your selfless gift to the child who will delight in its shade. Plant peas; they’ll reward you yet this year. Me? I’ll weed the front yard.

    a profusion of colorful flowers in david snowball's front yard

You’ll come back better for it: more able to make a difference in the world, more centered, more likely to smile for no reason.

So, in honor of all that, we’ve lightened the Observer for you this month. We’re limiting ourselves to our favorite monthly features (manager changes, new funds in registration and the cool developments in the industry that I routinely sneak into “briefly noted”), ten quick takeaways from Morningstar and profiles of three funds which won’t raise your stress and which certainly deserve more recognition than they’ve received:

Long Short Opportunity (LSOFX): with a team from Prospector Partners just finishing their third year, this might well be the best “pure” long-short equity fund on the market. The same team has done a remarkable job with the long-only Prospector Opportunity Fund (POPFX).

Holbrook Income (HOBIX): this intriguing new fund, skippered by the former manager of Leader Short Term Bond Fund (LCCMX/LCCIX) and Leader Total Return Fund (LCTRX/LCTIX), has garnered lots of positive buzz on the Observer’s discussion board this summer. Dennis Baran brings it to you.

Zeo Short Duration Income (ZEOIX): formerly Zeo Strategic Income, the adviser changed the fund’s name to forestall questions from folks who insistently confused “strategic” with “tactical” investing. With steady 2-4% returns, minimal volatility, substantially reduced fees and increased insider ownership, our colleague Charles Boccadoro concludes “there’s never been a better time” to consider Zeo. His argument was so compelling that he himself opened a position with the fund.

And thanks to the folks who’ve reached out to us this month: Hjalmar, John, Donald, and William. Thanks, too, to our stalwart subscribers: Deb, Greg, and Brian. We couldn’t do it without folks like you.

In August we’ll introduce you to 361 Global Long-Short Equity (AGAQX)  and reintroduce you to RiverPark Long-Short Opportunities (RLSFX), update you after the fifth anniverary of T. Rowe Price Global Allocation (RPGAX) and share a bit more about strategies for reducing heartburn.

Until then, keep cool, be joyful and perhaps a little mischievious. It’s summer, after all.

david's signature

The Morningstar Minute

By David Snowball

Ten quick takeaways from our time in Chicago.

        1. Value investing works. Value investors, routinely, don’t.

          Charles, Chip and I had a long conversation with Mike Hunstad, head of quantitative strategies; Jim McDonald, chief investment strategist and co-PM for Northern Global Tactical Asset Allocation Fund (BBALX). They weren’t in attendance at the conference, so we met at a restaurant nearby.

          Mr. Hunstad’s argument, for which he provided substantial evidence, is that the vast majority of alpha is provided by a handful of “factors,” variables that show very consistent and persistent outperformance. One of the most well-known factors is value: value outperforms growth across time, across asset classes and across markets. Makes sense: if you buy something with the intent of reselling it (as you do with stocks), you’ll make more money if you bought it at a low price than at a high one. And yet, value investors have not established a consistent record of outperforming growth investors even over very long periods. By way of illustration, we used the MFO Premium screener to examine the record of the past quarter century, during which time Vanguard’s value index fund (VIVAX) has underperformed its growth index fund (VIGRX). The raw return difference is small (9.5% annually versus 9.6%) but shouldn’t exist at all. The picture is a tiny bit better if you look at 10-year rolling averages (if you look at all 187 rolling 10-year periods since the funds’ inception, Value leads6.5% to 6.3), but not nearly so much as the theory says. If you look just at the past 10 years, value lags substantially.

          Here’s Hunstad’s argument: there are six factors that drive investing performance, but value investors act as if there’s only one. As a result, they contaminate their value portfolios by including stocks that have positive value characteristics but negative attributes on some or all of the other five controlling factors. An admirably deep-value portfolio might well inadvertently contain low quality, high volatility, low dividend, oversized stocks, all of which dilute or perhaps eliminate the value premium.

          He argues that this is especially problematic for investors in “multi-factor” ETFs, where the adviser promises “quality value” but actually constructs a “quality sleeve” (which might be overvalued) and a “value sleeve” (which might contain low quality stocks), neither of which controlled for, say, volatility factor. He notes that once you eliminate those contaminants, value has decisively outperformed growth even in the current environment.

          Northern attempts to control for such contamination in their FlexShare ETFs, their very fine Global Tactical Asset Allocation Fund (BBALX) which invests through those ETFs and in their actively-managed funds, such as Northern Income Equity (NOIEX) and LC Core Fund (NOLCX). We’ll look more closely at the performance the latter two funds in the next couple months.

        2. Value investing might, finally, work in Asia.

          The traditional concern about value investing in Asia is that the system is rigged against the interests of outside investors. Corporations and inter-corporate ties were controlled by relationships and the sense of personal or societal obligation. Corporations made and sustained objectively horrible investments in one another because of the relationships between their control parties, often the founding family rather than the ostensible shareholder-owners. Corporations might have vast potential value which would never be unlocked because the control parties placed their interests ahead of their corporations.

          That’s changing, at least if Beini Zhou is right. Mr. Zhou manages Matthews Asia Value Fund (MAVRX/MAVAX) and he believes corporate Asia is undergoing slow but irreversible changes that force economic efficiency and corporate responsibility. Many of those changes are generated by stakeholders, such as the home country’s government, who are too important to be disregarded. Sovereign wealth funds and retirement funds need their investments in corporate stocks to post steady, substantial returns if they’re to meet their own obligations. They are willing to undertake activist campaigns to pressure corporations into unlocking value and becoming more attractive to outside investors. As a younger generation of leaders – perhaps the grandchildren of the founders – ascend to leadership, they bring attitudes more aligned with modern corporate finance.

          Mr. Zhou’s approach to investment research involves huge amounts of reading (his colleagues post pictures of his four-foot stacks of 10Ks) and a distinctive approach to management: he asks them to tell him the stories of their corporations, rather than to share the numbers (which he already knows). Those narratives, he believes, gives him vital clues to the corporation’s culture and its path forward.

          Mr. Zhou came across as incredibly bright (Matthews has a knack for hiring such folks), curious and independent. I enjoyed our talk and was impressed by his intellect. (That’s regrettably rare.) It’s hard to question his fund’s success: he’s outperformed his Asia-Pacific peers by 330 bps a year with 20% less volatility and far smaller drawdowns. We’ll assay a profile of Matthews Asia Value in either September or October.

        3. We’re in the race of our lives.

          Jeremy Grantham, co-founder of the institutional investor GMO, was utterly bleak in one of the four Morningstar keynote addresses (the link provides the transcript and video, divided into five parts). Grantham has been, in general, pessimistic about the shape of the markets and its implication for the next decade (GMO projects negative real returns for most asset classes over the next seven years) and over our stewardship of the planet, but it’s usually framed in terms such as “we need serious, immediate action to mitigate the worst effects of global warming.” This time, he abandoned almost all attempts to provide an optimistic gloss to the situation.

          Here’s the short version: we are making absolutely phenomenal gains in zero-carbon energy sources, electricity storage and carbon withdrawal technologies. That still won’t be enough to save us from vast damage on a global scale, with catastrophic damage likely to occur in Africa. But, wait, it gets worse: environmental toxins compound the damage, with the number of pollinators down by 75% already and human sperm counts down by 50%. Increased heat robs food crops of their nutrients, increased storms increase erosion, both decrease our food security. These combined pressures are probably manageable in the richest countries, but are certainly not for the poorest. North African refugees, arriving by just the tens of thousands, caused the virtual collapse of Europe’s relatively open, relatively liberal post-war. We need to anticipate a world in which they are forced by the tens of millions from vast uninhabitable swathes of their continent.

          He delivered the presentation with his signature wealth of data, but without his equally signature self-deprecating humor.  It was a cri de Coeur from a man whose has committed 98% of his net wealth to two charitable foundations or to fighting climate change.

          Grantham offers a variety of suggestions for actions investors might take, including divesting from fossil fuels (a move with essentially no loss to your portfolio), invest in green companies and technologies (a potential positive to the portfolio) and urge the companies you’re already invested in to be more environmentally responsible. While all are sensible and positive, it felt very much like an obligatory addendum peripheral to his core message: our children will not survive if we choose denial, equivocation and inaction. Acting now will require huge effort. Acting in a generation will require ten times greater effort. Not acting signs death warrants for hundreds of millions of human beings.

        4. Cryptocurrencies are not investments. Period.

          Sam Lee, who is incredibly smart, and three other guys were panelists for “Crypto, Blockchain, and Lamborghinis, Oh My!” The program title was a reference to newly-minted crypto-tycoons buying Lambos.

          If I understand Sam’s argument correctly, it is that cryptocurrencies are ripe for profitable speculation: there’s a clear boom-bust cycle at work where you simply learn to play the peaks and valleys. So far, each peak and each subsequent valley have been higher than the one before. The fact that each bitcoin crash bottoms out at a somewhat higher level than during the preceding crash is a modestly hopeful sign.

          That said, first, cryptocurrencies are intrinsically valuable only if you cannot trust the other side. If you think that the counter-party in your transaction is going to try to skip off with your money or if you believe that the government issuing the money is going to manipulate (or freeze or seize) the currency, cryptocurrencies are potentially valuable. In the absence of those conditions, they’re very expensive diversions.

          Second, most cryptocurrencies are going to zero and taking their speculators with them. The value of a cryptocurrency is directly related to the number of people who use it, its network. Morningstar could certainly decide to issue a currency of their own and pay their staff in (wait for it!) StarBucks, but with only 4,500 people in the network if would be nearly valueless. That is, if someone walks into a Starbucks and offered to pay with a StarBuck, they’d be turned away, de-caffeinated. As of June 30, 2018, there are 1,597 cryptocurrencies in circulation. There might be enough demand for cryptocurrency to create viable networks for, oh, 10 of them. Holders of the other 1587 might find themselves better off with a stash of Venezuelan bolivars.

          The other panelists seemed rather less willing, or able, to step back and consider fundamental questions; they focused instead on trivia questions like whether it’s possible to make more energy-efficient cryptocurrency miners, the answer to which is “yes, of course, but why bother?”

        5. As markets begin to fracture, RiverPark Long/Short Opportunity (RLSFX) is resurgent. RiverPark holds comfortable performance leads over its Lipper peer group over the past one-, three- and five-year periods, generally with more volatility but smaller drawdowns. Much of RiverPark’s success is driven by a macro-level overlay which identifies dying industries and sectors then shorts stocks in those areas. Document Storage, companies which warehouse millions of tons of old corporate records, is dying, and even the best companies in that sector are going down with the ship. Data Centers, companies which run the computers that make “the cloud” possible, are thriving and the best companies there are poised to make a mint. For a while, zero interest rates and central bank interventions made it possible for dying companies to mask their plight; lately that has ceased to be the cause and RiverPark is profiting.

          We’ll update our profile of the fund in August.

        6. 361 Global Long/Short Equity (AGAQX) is worth attention. At $700 million and a five-star rating it’s getting attention, it just might warrant your attention, too. Tom Florence, 361’s president and CEO, spent some time with us, talking through the strategy’s distinctions. The core discipline resonated strongly with our discussion of factor investing with Northern’s Mike Hunstad. At base, volatility is one of the persistent drivers of performance whereby low vol stocks routinely and consistently outperform high vol ones. Nonetheless, high vol “story stocks” are continuously and irrationally popular.

          Management of the 361 long/short portfolios is handled by a team for a famous sub-adviser, Analytic Advisers (now a subsidiary of Wells Fargo Asset Management). The team, led by president Harindra (“Harin”) de Silva, are quants whose discipline exploits the volatility anomaly. Controlling for other factors as a risk-management strategy, they target low vol stocks for their long book and high vol stocks for their short book.

          The fund’s performance has been exemplary; it qualifies as a Great Owl for having top 20% risk-adjusted returns in the three application time periods available to us (1-year, 3-year and since inception) but it actually had a longer, strong record as a hedge fund before that. We’ll assay a profile of the fund in August.

        7. Cognios Large Cap Market Neutral (COGMX) remains one of the very few sensible market-neutral funds in existence. Most market neutral funds offer irrelevant returns in exchange for market-free movement. The question is “why bother with a complicated, expensive market neutral strategy when I can get comparable returns in a virtually risk-free ultra-short bond fund?” Most long-short managers don’t have an answer; over the past five years, the average market neutral equity fund has returned 1.3% annually while ultra-short bond funds clocked in a 0.8%. Cognios clocked in with a five-year return of 4.6% annually, three-and-a-half times its average peer. That’s tied for the second highest total return with the $5.4 billion Gateway (GATEX) fund. Cognios is distinctive among the performance leaders because it’s really market neutral (R-squared of 5 against the S&P 500) while its top-performing peers were actually tracking the market upward (R-squared of 84 for GATEX and 82 for Eaton Vance Hedged EROIX).

        8. The quality of tchotchkes was way down. The FlexShares folks had cool USB lights with flexible necks, so that you could plug one into a USB port on your laptap and have a reasonable light with which to read or write. Queens Road, whose Value Fund (QRVLX) is way smaller than its record and discipline warrant, offered up jars of delicious peanuts made by their church. Other than that, there was some weird and anachronistic fetish for fidget spinners (hello, 2016!) and a continuing attachment to “invest mints.” Here’s the marketing note: tchotchkes should align with some value the company espouses (Southern firm/peanuts, got it) and should be around long enough to buy mindshare. A bag of M&Ms that get trashed before you leave the exhibit hall don’t do it.

        9. It is a distinct pleasure to meet Dick Gillons. Dick works with RHG Advisors in Tucson. He’s been in the business a long time, though he’s paring back a bit now. He reads MFO and we met with no greater agenda than to meet and chat. It’s always a delight to meet with you folks, and was most especially with Dick. Thank you, sir!

        10. The next Morningstar Investment Conference will be May 8–10, 2019, again at McCormick Place, Chicago.

          Morningstar’s Sarah Wirth reports that “total attendees registered was over 2,260. Total exhibitor booths were 171. We had more than 40 speakers, 80 registered media, and more than 740 employees attend the conference.” That compares with the April 2017 conference at 1,313 registered attendees (mostly advisors), 756 exhibitors, 175 exhibitor booths, and 45 speakers. The bump in paying customers was likely driven by the decision to move back to June and to merge the Investment Conference and the ETF Conference into a single event.

          And, again presumably, attendance did not warrant prime-time space in McCormick Place so the conference is heading back to May.

Not in Kansas Anymore!

By Edward A. Studzinski

“Twenty years from now you will be more disappointed by the things that you didn’t do than by the things you did do, so throw off the bowlines, sail away from safe harbor, catch the trade winds in your sails. Explore, Dream, Discover.”    Mark Twain

With June, we have had the coming of another Morningstar Conference. Repeatedly I studied the agenda. I could not see anything I thought worth hearing. Rather than presenting many of the leading investment professionals of the mutual fund world, this year the key seemed to be showcasing of the Morningstar internal talent that was going to allow investment intermediaries to no longer worry about selecting investments. Morningstar would do that for them, letting them focus on marketing, client retention, and overall business strategy. This was a break from the past, at least the past that I remember from when the conference was being held at the Hyatt Regency on East Wacker Drive.

One of the things that I noticed was those mutual fund managers who used to make a point of attending the conference were not attending this year. Now granted, most of them fell into the category of being with smaller boutique operations. And most of them did not attend for any of the wisdom that was being disseminated at the conference. They would come to see people outside of the conference. This year the answer I received almost uniformly when I asked why they had decided not to attend? Few if any of their clients were attending. One concludes that subjects like “How to Hire – and Fire – Funds in a Portfolio” or “Big Data, Machine Learning, and AI in Portfolio Management” were not sufficient motivators in and of themselves to bring people to Chicago at the beginning of June.

Next year the conference will be a month earlier, at the beginning of May 2019. We can stay tuned for the next iteration then of Morningstar’s relatively new CEO, Kunal Kapoor, and his Flying Monkeys.

the wrigley building at nightRoughly contemporaneous with the ending of the Morningstar Conference this year was an announcement in the Chicago media that “billionaire” Joe Mansueto, through his newly formed real estate group Mansueto Properties, was purchasing the Wrigley Building in Chicago for a reported $255M. In 2011 you could have bought the building and an adjacent parking garage for $33M. The parking garage was subsequently sold separately for $42M in 2014. This proves two things: (a) in real estate investing, timing and location are everything and (b) better financially to have been the founder and principal original shareholder of Morningstar as a public company, all other things being equal, than a Morningstar subscriber.

Can Your Fund Manager Be Fired?

Some years ago, I had an acquaintance who was an analyst and then a fund manager with T. Rowe Price. About a year and a half into her tenure, I ran into her at an investment conference. I asked her how she liked being a fund manager. It was clear the pressure was an issue, other than the self-imposed pressure that most of us feel when dealing with client money. She indicated that managers at Price had a limited time horizon for sub-par (sub-benchmark) performance, after which they would be replaced as a fund manager. That period was somewhere between three and five years. It has struck me since then that an interesting governance question is whether your fund manager can be removed for performance reasons. Obviously, in situations involving moral turpitude or securities law violations, changes can and are made. But what about removal solely for reasons of lagging performance?

At one extreme you have Vanguard. There, much like the KGB, it is not unusual for a poorly performing fund to see a manager or management removed, often very much almost in the middle of the night when no one is looking. At the other extreme are situations where the lead fund manager is the primary owner of the investment firm, e.g., a Cook & Bynum Fund, a Davis New York Ventures Fund, a Sequoia Fund and you are unlikely to see fund manager changes as quickly, if ever, as you would at a Vanguard or T. Rowe Price for performance reasons. Elsewhere, you must look at both firm and fund structure. At Oakmark you are never going to see Bill Nygren or David Herro removed from managing a fund solely for performance-related issues. And then there are firms like Dodge and Cox which make the issue moot given a committee rather than star-based system of portfolio management. This leads to both consistency of culture and philosophy as well as a sustainability of the investment methodology.

Where do the trustees of the funds fall in these matters? Well, again it depends on structure and the specific nature of the organization. Years ago, we saw the removal of Donald Yacktman from the Selected American Shares Fund that he was managing (by the trustees), which ended up being a disaster. Likewise, the removal by the trustees of Jim Gipson and his firm from managing the Clipper Fund and their replacement by Chris Davis and his firm, also initially could have been labeled an unmitigated disaster. And while it has worked out over time, the Clipper Fund is now a very different fund than it was originally.

The point of this discussion. Think carefully about why you are investing in a fund. If it is short-term and you are following a manager’s hot hand, that is one thing. But if it is long-term retirement or family-office type endowment money, think carefully about the structure and organization that you are partnering with. Because in taxable accounts, you may find moving an investment with an unplanned for or unacceptable manager change may be a double whammy in terms of the tax consequences, on top of a change in investment philosophy and methodology.

Zeo Short Duration Income (ZEOIX), July 2018

By Charles Boccadoro


*Zeo Capital Advisors, LLC ceased operations on 5/1/2022*

This fund is now Osterweis Short Duration Credit Fund. 

“Perhaps time’s definition of coal is the diamond.”

Kahlil Gibran

Objective and Strategy

The Zeo Short Duration Income Fund (ZEOIX), previously known as the Zeo Strategic Income Fund, is a non-diversified, actively managed, total return, fixed-income fund that seeks …

  • “ … to deliver low volatility, risk-managed solutions for the prudent investor.”
  • “ … low volatility and absolute returns consisting of income and moderate capital appreciation.”
  • “ … long-term capital preservation, income and moderate capital appreciation across market environments.”
  • “ … low volatility, absolute returns in a long-only fixed income portfolio.”
  • “ … to deliver a consistent, low-volatility risk profile suitable for both short and long time horizons.”
  • “ … to deliver low volatility.”

Clearly, ZEOIX’s focus is low volatility. To achieve its objective, the fund targets what its adviser assesses to be low-risk investments. Specifically, it focuses on under-valued short duration US corporate debt of defensive (boring but essential) companies with healthy underlying businesses resistant to cyclical trends.

While there is no target return goal, the strategy has delivered 2-4% annualized above risk-free return. Indeed, since the fund’s launch, ZEOIX has delivered 3% annualized return, mostly under an extended period of zero interest rate monetary policy. Dividend yield has been 2.5% this past year, comparable to AGG and todays’ newly resuscitated 1-year CD rate.

With risk being the paramount constraint, the fund seeks a steadily upward return, regardless of market cycle. In this regard, the fund seeks what many hedge fund strategies promise: absolute return.


Zeo Capital Advisors, LLC located in San Francisco’s financial district. The firm was founded in February 2009, the nadir of the financial crisis, by Venk Reddy. The seed investor remains with Zeo and today, approaching the ten-year mark, the firm manages just over $300M. The preponderance is in ZEOIX. About 60% of the AUM comes from RIAs, while 15% is from family offices.

Zeo is a boutique adviser with a singular and niche fixed-income investment strategy. Its leadership team comprises just three individuals: Venk Reddy, Founder and CIO; Brad Cook, Portfolio Manager and Director of Credit Research; and Paige Uher, Director Investor Relations.

Together they articulate the Zeo mission statement: “We are committed, philosophically and structurally, to building a long-term business, aligning our mandate with specific and overlooked investment needs, and serving fiduciaries consistent with our existing investor base.”

In David Snowball’s July 2014 profile of ZEOIX, he noted the firm’s insistence on finding the right types of clients, consistent with the fund’s objective and strategy. That same principle applies today, only the firm has smartly expanded its website to better communicate its story, as well as initiated investor conference calls.

After meeting with the Zeo team twice in San Francisco and again at this month’s Morningstar Investment Conference in Chicago, here’s my impression of the team: Paige is the driving force behind getting the word out, the greatly improved website, and knowing each of Zeo’s clients. Brad is the inside, deep-dive corporate debt analyst, and experienced trader … slave to his Bloomberg trading terminal. Venk is the visionary who created the strategy that fills a void in the fixed income 40 Act world, establishing the firm to make it possible … and he knows a lot about the business of investing. So, one leader for each of the firm’s guiding principles focused on clients, portfolio, and business. They appear all together on the firm’s mission and all-in on their commitment to making Zeo successful.

The office itself is quite modest, even minimal, though the view of the Golden Gate is spectacular. The city’s financial district commands some of the highest rents on earth, but to date, Zeo shares the floor with another firm, also launched by the same seed investor and together they pay a very modest rent. Venk warns this could change going forward because of growth, but he believes staying in the heart of the city’s financial district benefits the firm, its employees, and ultimately its shareholders. For the record, rent is covered under the management fee portion of er.

I counted three Bloomberg terminals … and Brad’s terminal, whose was kind enough to walk me through some of his trading process, was lit-up like a Christmas tree. Black-and-white pictures showcasing products of the firms Brad likes to invest in hung throughout the office, like engine nacelles from Spirit Aerosystems.


Prior to Zeo, Venk was a co-founder of Laurel Ridge Asset Management LP, a $400m multi-strategy hedge fund, where he managed the credit, distressed and event-driven portfolios. In that role, Venk specialized in asset valuation and identifying opportunities at the intersection of quantitative and fundamental analysis. In addition to his portfolio and investment committee responsibilities, he managed both the credit and technology teams and built the infrastructure underlying the fund’s scalable risk and analysis systems. His previous positions include portfolio manager within Bank of America’s Equity Financial Products group (EFP), investments manager at Pine River Capital Management LP and HBK Investments LP, where he started his career. Venk earned a BA in Computer Science with Honors from Harvard University. He currently serves as a trustee for the Katherine Delmar Burke School with roles on the finance, audit and technology committees. He was recently featured in an efc article, entitled “Why this former bank trader and hedge fund manager feels he’s best off in long-only asset management.”

Brad joined Zeo in 2012. He began his career with PricewaterhouseCoopers in Vancouver where he qualified as a Canadian Chartered Accountant with a focus on audit and bankruptcy before joining their London-based corporate finance group. He then served as a vice president and high yield credit analyst at Oaktree Capital Management Ltd, a top-tier European high yield bond fund in London. He also served as a Director and senior credit analyst at Descartes Capital LLC, a $300m hedge fund focused on high yield and convertible debt based in San Francisco. Immediately prior to joining Zeo, he was head of convertible strategies at Sterne Agee Group, Inc. and head of credit research in the convertible bond group at Thomas Weisel Partners LLC. In both roles, Brad focused on fundamental investments in corporate debt with an emphasis on company value and capital structure. Brad earned a BComm from the University of Calgary.

Strategy Capacity and Closure

In 2014, David’s assessment was that the fund pursues “capacity constrained” strategies; that is, by its nature the fund’s strategy will never accommodate multiple billions of dollars. The advisor doesn’t have a predefined bright line because the capacity changes with market conditions. In general, the strategy might accommodate $500M – $1B.

As of May 2018, ZEOIX has $290M in AUM.

Management’s Stake in the Fund

Per last August’s SAI filing, Venk maintains $100 – 500K in the fund, and Brad maintains between $50 – 100K. These levels are much improved from those published in 2014. My initial inclination was that they remain low for managers of their tenure, experience, and leadership positions. That said the nature of the fund is very conservative. Since Venk and Brad do not appear close to retirement, the inclination to overallocate to ZEOIX may be misplaced.

They are partners and in addition to salary, may be eligible for a performance-based bonus and a share of the profits, if any. So, they each have a vested interest in the success of the firm and the fund. Venk adds “a substantial portion of our net worth for each of us as owners comes from a combination of our ownership in Zeo and our holdings in ZEOIX. In addition, all members of our management team are invested in the fund, as well as members of our families.”

The fund is one of a series of many funds registered with the SEC under the Northern Lights Trust. Gemini Fund Services, LLC  is the trust’s administrator, transfer agent and fund accountant. All the trustees of the fund appear to be affiliated with Gemini and the SAI shows that none hold any stake in ZEOIX, which in the case of this trust is more the norm.

Opening Date

May 31, 2011. ZEOIX is the firm’s singular fund and for all intents and purposes the firm’s singular strategy. Commendably, ZOEIX is a single share-class fund.

Minimum Investment

The minimum initial investment (verified at Fidelity and Schwab) is $5,000 for all accounts except IRAs, which have a $1,500 minimum. Subsequent purchases for all accounts can be as low as $1,000.

Expense Ratio

August 2023 update:

0.85% on assets of $95 million. No redemption fee. 

The fund recently reduced its management fee to from 1.00 to 0.75% per year. And, in the newly filed prospectus, its “Other Expenses” are reduced 2 bps. These reductions brings its net expense ratio to 1.04, slightly above the 1.00 er average for high yield funds (all share classes), where Morningstar categorizes ZEOIX, and in-line with the 1.03 er for multi-sector income funds, where Lipper categorizes the fund.

The reduction in er is a very positive step for this small firm and it speaks well of its commitment to shareholders.

The fund charges no loads and no 12b-1 fee. There is a 1% redemption fee if sold before holding for 30 days, which the adviser believes is consistent with the stable nature of the strategy and discourages trading.

It is available at brokerage houses, like Fidelity and Schwab, but not on their no transaction fee (NTF) platforms. The former charges a $49.95 transaction fee to buy, while the latter charges $76 (ouch!). There is no fee to sell.

Venk argues NTF hurts investors, because it typically costs 0.25% annually. I agree with him and applaud Zeo’s single share class.

On the topic of “soft dollars,” which is a hidden fee that allows advisers to pay higher commissions to broker-dealers to execute trades in exchange for things like research databases: It is the Firm’s policy to not enter into “soft dollar” relationships with any brokerage firms.

Besides, Venk explains, “we don’t really use third party research anyway. We are a fundamental manager that does our own credit research to determine what we want to buy. We don’t outsource that to anyone, so third party research is of limited value to us and is never the reason we make an investment decision.”

Interestingly, Zeo’s annual report shows no commissions paid, which is because dealers get paid by the spread.


When Zeo originally named the fund “Strategic Income,” it did not realize that by “Strategic” the industry really means “Tactical.” But the strategy is not tactical at all. Zeo uses short duration and fundamental analysis to create a portfolio of say 50 positions it believes will be resistant to interest rate change and are undervalued. Once established, it is happy to hold to duration. “We’re a lender to these companies and are not trading for profit,” Venk insists. Nor does Zeo move in and out of bonds in tactical fashion in response to some destabilizing market event, like their name came to imply. So, the name changed.

Below is an example of the resiliency of the fund’s performance given various potentially destabilizing market events. The data presented is through March 2018.

The average effective duration of its current portfolio is about 1 year, which is six times shorter than AGG. A year ago, it was half that. Its high yield relative to its short duration (the so-called “Sherman Ratio”), enables Zeo to mitigate interest rate risk while redeploying maturing bonds to those with higher yield.

The turnover metric appears high (152% as of April 2018) because of short duration. Venk argues that “for a portfolio where bonds are being called by issuers or maturing, or where a bond is within two weeks of such an event, the reinvestment of the proceeds artificially inflates the turnover calculation … ” Furthermore, the distributions ZEOIX makes are almost entirely driven by dividend income, not capital gains.

Brad spends considerable time understanding the companies Zeo holds in its portfolio. Companies that have a “reason to exist” and often have a high barrier to entry. Here’s background he provided on three typical holdings:

Arctic Glacier, LLC
Arctic Glacier (AGUCAN) produces and distributes packaged ice. What makes Arctic Glacier interesting to us is the monopolistic market structure when analyzed by region. The company has the #1 market share in its local markets and is often 10x the size of the next largest competitor. Our analysis gives us confidence that its scale and cost advantage of ice distribution leads to stable cash flows to service debt payments even through market cycles.

FTI Consulting Inc
FTI Consulting (FCN) is a professional consulting services company. FTI’s largest focus area is debt restructuring advisory services, which are typically most in demand in times of economic downturn. When the economy is growing, they provide technology and other financial consulting. This can result in an earnings profile that is somewhat countercyclical. We first invested in FTI in early 2014 when the debt was rated BB-.  The company was rationalizing underperforming areas and focusing on debt reduction. Since then, the credit rating has been upgraded to BB+ (one level short of investment grade).

Cott Corporation
Cott (BCBCN) produces carbonated drinks and juices traditionally focusing on private label products to be sold at grocers. The carbonated drinks market has been in slow decline, which is typically not an attractive situation for equity investors. However, as a debt investor, we believe Cott gets overlooked as a strong credit investment supported by their strict focus on cash flows and debt reduction. Additionally, Cott purchased DS Services (DSWATE) to expand into direct-to-consumer bottled water and coffee distribution to spur growth and diversity.

Zeo is one of the firms whose depictions of fund performance and volatility regularly align with metrics we endorse on the MFO Premium site. Metrics like max drawdown, up versus down capture, and rolling averages.

Here’s an example:

The chart depicts 1-year rolling returns since ZEOIX launch through March 2018. It demonstrates consistently positive rolling returns with tight deviation, compared to the Bloomberg Barclays US Aggregate Index and even more so when compared to the BAML High Yield Master II Index.

I find the fund’s 3- and 5-year rolling returns even more impressive. In the 49 3-year rolling returns since launch through May 2018, ZEOIX has never delivered less than 2.4% per year versus 1.1% for the Aggregate Index and in the 25 5-year rolling returns, it has never delivered less than 2.9% versus 1.5%.

ZEOIX has been a perennial MFO Great Owl because the MFO ratings system is based on Martin Ratio, which rewards funds with high excess return and low drawdown. The table below highlights the fund’s performance the past five years versus the Aggregate Index and versus the high yield and short duration categories. The fund is a top quintile performer among the 67 peers Lipper has in the Multi-Sector Income category, but ZEOIX would be top quintile in any of these categories.

It also consistently receives the “Very Conservative” MFO Risk score of 1, which means its volatility is less the 20% of the S&P 500. Through May, there are 707 funds (mutual funds, ETFs, CEFs, and insurance funds) at least 5-years old with a MFO Risk of score 1, regardless of category. Nearly half of those are money market funds. ZEOIX is ranked number 13 out of 707 in the “Very Conservative” MFO Risk group, based on absolute return. It returned 15.5% cumulatively over the past 5 years versus 3.3% for the average Very Conservative fund (and 1.6% for the median).

Interestingly, ZEOIX has captured nearly 50% of the upside Aggregate Index, which is return across the months when the index was positive, while avoiding all of its downside. It delivered positive return across the months when the Aggregate Index was negative (there were 25 such months in the past 5 years), producing negative downside capture.

ZEOIX actually correlates more with high yield and short duration than it does with the Aggregate Index, as seen in the table below.

Bottom Line

Since our 2014 profile, the folks at Zeo have continued to do many of the right things David first praised and more. They’ve successfully executed their strategy of low volatility with modest return through several potentially destabilizing catalysts. They’ve reduced their er from 1.50% to 1.04%. They’re increased their personal stake in the fund. They’ve communicated well their message, as evidenced by an informative website and initiating investor teleconferences. AUM has tripled from $100M to nearly $300M and I expect it will continue to grow steadily, especially as interest rates increase.

ZEOIX does indeed fill a void in the fixed-income investment space. Venk identified it and founded the firm to fill it. The firm is approaching its tenth year and together with Brad and Paige, this leadership trio is prosecuting their strategy like a well-oiled machine.

Given the current interest rate environment and the continued maturity of this fund, there has never been a better time for very conservative investors to consider owning ZEOIX or for ZEOIX to occupy at least a portion of the low volatility allocation in more diversified portfolios.

Fund Website

Osterweis Short Duration Credit Fund (Formerly Zero Short Duration Income Fund).


I decided to invest in ZEOIX recently while researching this profile and after the firm reduced its er … for the more conservative and buy-and-forget portion of my retirement portfolio. The more I looked, the more I liked.

LS Opportunity Fund (LSOFX), July 2018

By David Snowball

Objective and strategy

LS Opportunity Fund pursues three goals: preserving capital, delivering above-market returns and managing volatility. “The secret,” says manager John Gillespie, “is to avoid large losses.” They invest, both long and short, in individual stocks; they do not short “the market,” they don’t use esoteric options and they don’t typically use ETFs. They normally will have 20-40 short positions and 50-70 long ones. The long portfolio is both all-cap and value-oriented, both of which are fairly rare. The short portfolio targets firms with weak or deteriorating fundamentals and unattractive valuations. 


Long Short Advisors of Philadelphia (LSA) launched the fund in 2010 and, after a solid five-year run with a different sub-adviser, brought in Prospector Partners in May 2015 to manage the portfolio. Prospector Partners, which is headquartered in Guilford, CT, was founded in 1997 by John D. Gillespie. Prospector defines itself as a value investor with a distinctive emphasis on investing from a credit perspective. They also manage institutional private funds and separate accounts, along with their two Prospector funds. Prospector manages about $740 million.


Steven R. Labbe, Kevin O’Brien, and Jason Kish. Mr. O’Brien has been a portfolio manager at Prospector since 2003. Before joining Prospector he spent seven years with Neuberger Berman, rising from analyst to managing director, and several years with White Mountains Advisors. He earned the Chartered Financial Analyst designation in 1995. Mr. Kish has been with the firm for 20 years. He’s a graduate of Providence College, received his Certified Public Accountant designation in 2000 and his Chartered Financial Analyst designation in 2004. The CFA designation is a significant predictor of manager performance. The team is supported by four analysts.

Strategy capacity and closure

$2 billion. The strategy currently holds nearly $420 million, the majority in a long-established LP.

Management’s stake in the fund

Management has over $2 million invested in the fund and collectively they have “significant personal investments” in the strategy, beyond those in the mutual fund.

Opening date

The fund launched in September 2010, but with a different sub-adviser and strategy. Prospector Partners took over on May 28, 2015; as a practical matter, this became a new fund on that date. Prospector has been managing the underlying strategy since 1997.

Minimum investment



2.89% on assets of $151.3 million, as of July 2023. 


We last profiled LS Opportunity in March 2016. At that point, the team from Prospector Partners had been in place for under a year; their performance was promising but too brief to allow for anything more than tentative support.

The team has now completed their third year running the fund and their 20th year running the hedge fund which it emulates. The record is now clear and unequivocal: this is a first-rate fund, and it deserves your attention.

The argument for a long-short fund is simple. Most investors who want to reduce their portfolio’s volatility add bonds, in hopes that they’re lightly correlated to stocks and less volatile than them. The simplest manifestation of that strategy is a 60/40 balanced funds; 60% large cap stocks, 40% investment grade bonds. Such strategies are simple, cheap and have paid off historically.

Sadly, we can’t live in the past and virtually every credible long-term investor anticipates vastly lower returns and substantially higher volatility.

Over the past five years, the US market has returned 13% annually with 10% volatility. That’s measured by the performance of Vanguard Total Stock Market Index Fund (VTSMX). Vanguard estimates that over the next 10 years, stocks will return around 4% with 17% volatility. Roughly speaking, expect 70% less gain but 70% more pain. Their bond market projections are 2.5% gain and 5.0% volatility. Over the past five years, Vanguard Total Bond Market Fund (VBMFX) returned 2% with 2.8% volatility so you might expect a small rise in returns and a near doubling of volatility. (Vanguard economic and market outlook for 2018: Rising risks to the status quo, 12/2017). That implies a balanced portfolio will return 3.4% annually, before accounting for the effects of inflation, fees and taxes.

BlackRock reaches a similar conclusion: 4% returns with 10% volatility.

Sadly, Vanguard and BlackRock represent the optimists. Institutional investor Grantham, Mayo, van Otterloo (GMO) uses a simple reversion-to-the-mean method to project negative 4.4% real (that is, after-inflation) returns from US stocks and negative 0.3% real returns from US bonds over the next seven years. In that case, a 60/40 portfolio would lose 2.75% annually (7 Year Asset Class Returns, 5/30/2018). The British institutional investor Schroders, with rather more than a half trillion dollars in global assets, estimates 1.6% returns on US stocks over the next seven years and 0.3% returns on US bonds (Seven year asset class forecast returns, 2017 update). That comes out to 0.75% annually, before fees and taxes. Research Affiliates estimates 0.7% annually for a 60/40 portfolio over the next decade.

So returns for a core 60/40 portfolio in the range of negative 3% to positive 3% per year are plausible, though unpalatable.

Even assuming “normal” markets, long-short strategies are a better option than 60/40 ones. As the folks at 361 Capital note, between 1994 and 2017, “long/short equity strategies have come close to matching the performance of equities with essentially the same level of volatility as a 60/40 bond portfolio, and with smaller drawdown … returns have been comparable to those of long-only equity strategies with half of the risk.”

In short, a skilled long-short manager can offer more upside and less downside than either a pure stock portfolio or a stock/bond hybrid one. That’s reflected in the fact that the Sharpe ratio for the Credit Suisse Long/Short Equity Index is higher than either stocks or 60/40 hybrids, at a time when economic conditions purely favored both.

The argument for LS Opportunity is simpler. For long-short strategies to be incorporated as part of a core portfolio, supplementing or succeeding a 60/40 fund, they need to be simple, reliable and consistently successful. LSOFX is, the vast majority of its competitors are not.

From our perspective, the ideal candidate for a core long/short fund would invest long in great stocks, short the worst stocks, maintain a relatively stable relationship between the size of the long book and short book (the equivalent of the 60/40 balance) and have managers with a record of success across changing markets. Over the 138 funds in Lipper’s long/short peer group, fewer than 20 meet those criteria. For the remainder, some short entire markets via ETFs, some can dramatically change the extent of their shorting, some don’t short at all but simply use options to hedge their long book.

We chose to benchmark LSOFX against only funds that meet our three criteria: a focus on individual stocks, a stable allocation and a team with experience. Using the screening tools at MFO Premium, we compared the performance of those funds over the three years that Prospector has been responsible for LSOFX. We found:

LSOFX had the highest annualized percentage returns 7.2% of any of the funds.

LSOFX had the second-smallest maximum drawdown and the quickest recovery from its maximum drawdown.

LSOFX had the third-lowest volatility, measured by standard deviation, and the second lowest “bad” volatility, measured by downside deviation.

LSOFX had the lowest Ulcer Index, which combines measures of the depth and duration of a fund’s drawdowns; low Ulcer Indexes signal funds with relatively small drawdowns from which they recover relatively quickly.

LSOFX had the highest risk-adjusted returns, whether measured by the Sharpe, Sortino or Martin ratios which are all common measures with Sortino more risk-sensitive than Sharpe and Martin more risk-sensitive than Sortino.

Prospector Partners, in contrast to many competitors who operate with training wheels, has a long record of long-short investing, having been an actual long short hedge fund for now over 20 years. The firm was founded in 1997 by professionals who had first-rate experience as mutual fund managers. They have a clearly-articulated investment discipline, differing from most in that they work from the bottom up, starting with the balance sheet. Prospector comes at each company from a credit perspective, asking first how much could I lose in this investment. Then they move on to valuing the company through either Private Market Value or  free cash flow (FCF). FCF is like earnings, in that it measures a firm’s economic health. It is unlike earnings in that it’s hard to rig; that is, the “earnings” that go into a stock’s P/E ratio are subject to an awful lot of gaming by management while the simpler free cash flow remains much cleaner. So, start with healthy firms, assess the health of their industries, look for evidence of management that uses capital wisely, then create a relatively concentrated portfolio of 50-70 stocks with the majority of the assets typically in the top 20 names. The fact that they’ve been developing deeper understanding of specific industries for 20 years while many competitors sort of fly-by using quant screens and quick trades, allows Prospector “to capitalize on informational vacuums in Insurance, Consumer, Utilities, and Banks.” They seem to have particular strength in property and casualty insurance, an arena “that’s consistently seen disruption and opportunity over time.”

The short portfolio is a smaller number of weak companies in crumbling industries. The fact that the management team is stable, risk-conscious and deeply invested in the strategy, helps strengthen the argument for their ability to potentially repeat their accomplishments.

The LSOFX portfolio is built to parallel Prospector Partners’ twenty-year-old hedge fund in both the long and short securities.

Bottom Line

Even the best long-short funds aren’t magic. They don’t pretend to be market-neutral, so they’ll often decline as the stock market does. And they’re not designed to keep up with a rampaging bull, so they’ll lag when long-only investors are pocketing 20 or 30% a year. And that’s okay. At their best, these are funds designed to mute the market’s gyrations, making them bearable for you. That, in turn, allows you to become a better, more committed long-term investor. The evidence available to us suggests that LSA has found a good partner for you: value-oriented and time-tested. As you imagine a post-60/40 world, this is a group you should learn more about. Investors willing to forego the protection offered by a robust short portfolio in exchange for an expense ratio about 60 bps lower might consider Prospector Partner’s long-only Prospector Opportunity Fund (POPFX).

Fund website

LS Opportunity Fund. The site remains pretty Spartan, offering the basic information paired with sort of grainy graphics and very little of Prospector’s own “voice.” That said, the Long Short Advisors have been really open and willing to talk; they will, I think, find you the information you need if you just talk with them.


Holbrook Income Fund (HOBIX), July 2018

By Dennis Baran

Objective and strategy

The fund seeks to provide current income with a secondary objective of capital preservation in a rising interest rate and inflationary environment.

The manager’s goal is to achieve a 2% return above inflation, generate income, and protect principal. By managing credit and interest rate risk, limiting duration, and minimizing drawdown to less than 2%, it’s designed to fend against frontal attacks that may ravage the bond market which reduce investor returns and suffocate market enthusiasm.

It’s a bold, flexible strategy using a diverse, tactical portfolio targeting allocation to multiple sectors in fixed income securities including investment grade bonds, TIPS, BDC senior notes (Baby Bonds), high yield bonds, CLOs, convertibles, and fixed and floating instruments. Additionally, the manager may invest in preferred stocks, emerging market bonds, and in underlying funds such as ETFs and discounted CEFs. Typically the fund will hold 70% in investment grade securities.

Additionally, the manager has other resources to reach his objectives. These include a top down allocation model, macro-economic projections, fundamental company/industry analysis, and technical analysis of individual issuers to strategically position his holdings. He can hold cash in any amount and use derivatives in underlying investments to reduce certain exposure or hedge volatility.

Holbrook Income is not just a market positioning play, which can change, but rather a distinct placeholder as an income diversifier within the bond asset class.

It’s not expected to outperform if rates move lower. That’s not its objective or its job.

The fund’s benchmark is the Barclay’s U.S. Aggregate Bond Total Return Index.


Holbrook Holdings Inc., which is located in Portland, OR. Holbrook’s goal is “to provide high risk-adjusted returns for its clients while maintaining impeccable transparency, open communication, the highest ethical standards, and an empirical approach that provides clients with proprietary research and in-depth market commentary.” Holbrook Income Fund is the firm’s only investment product.

Why Holbrook? The firm was founded in founder Scott Carmack’s home, which had been once owned by Stewart Holbrook (1893-1964). Mr. Holbrook was a sort of colorful figure in Oregon, a one-time logger and provocateur whose three dozen books included Age of the Moguls (1954) and The Golden of Quackery (1959). Mr. Carmack’s wife suggested the name, he liked it, and so the firm was born.


Scott Carmack.

Mr. Carmack graduated from Harvard University with honors with a degree in economics. He has been involved in the financial markets for 17 years now. The first two were wealth management at J.P. Morgan Private Bank, the next eight proprietary equity trading, and the last seven in fixed income. He has almost six years of portfolio management experience.

He’s always loved the capital markets. Before graduating from Harvard, his competitive energy was focused on sports, baseball and basketball specifically. After graduation, he wanted to find a field that would accommodate his competitive nature. What was his best option?


Reason for Launching the Fund

Mr. Carmack worked at Leader Capital from 2011 to 2015, a mutual fund specializing in fixed income, serving first as an analyst, then as a portfolio manager of a short term and intermediate term bond fund, and as President. Morningstar ranked his funds in the 1st percentile for return performance during his tenure.

Leader Capital performance during Scott Carmack's tenure

At Leader, he saw a need for a product that could perform well in a rising interest rate environment and perform as a “fixed income diversifier.” Remember, enormous amounts of money have funneled into fixed income strategies over the last decade, yet many of those strategies are dependent on a low-rate environment. As rates move lower, duration is extended on many benchmarks and funds – a perfect storm for investors. They are more exposed to interest rate risk than ever and at a time where the secular winds are changing. He wanted to launch a fund that didn’t just position for rising rates but one that was designed to outperform in such an environment as its main objective.

Management’s stake in the fund

Mr. Carmack has invested between $100,001 – $500,000 in his fund. He describes that as all of his retirement savings and the majority of his family’s savings. None of the four trustees own shares.

Strategy capacity

The fund currently has 15M AUM, the majority from independent RIAs, but he expects to be above 20M by the end of June. The strategy is scalable until at least $1.5 billion and probably much higher. 

As we’ve noted, Mr. Carmack was able to manage a top -performing fund at those levels and says that he will reassess at that level. But even then, he would be quite small relative to his behemoth competitors and has no intentions to limit assets now. If size compromises performance, he would limit assets immediately.

Opening date

The fund launched July 6, 2016. At slightly under two years, MFO classifies it as an intriguing new fund.

Minimum investment

$100,000 for Institutional Class shares (HOBIX) and $2,500 for Investor Class shares (HOBEX)

The fund is available through some online platforms. The firm has waived some minimums in the short term at certain brokerages. Please consult your brokerage for details.

If investors find that it is not available but have interest, they can call or email Mr. Burns directly to find a solution.

Michael Burns: 503-915-3210; email: [email protected]

Expense ratio

The institutional class is 1.10%(because there is no distribution fee) and the investor class is 1.60% on assets of $1.1B. 


Portfolio turnover

While the fund won’t receive this number until later in June 2018, Mr. Carmack expects it to be between 100-120%. Short duration funds tend to have a higher turnover because many securities mature or are called in any given year. Derivatives for many of the fund’s larger competitors tend to increase the turnover drastically. HOBIX doesn’t use derivatives in its strategies and as a result has less turnover.

The Fund’s Style Box

Lipper classifies HOBIX as a flexible income fund, but Morningstar as a short-term bond fund. Is this an issue?


First, Morningstar does not have a Flexible Income classification.

Mr. Carmack replies that Morningstar puts him in the Short-Term category because of the fund’s duration and investment grade average rating. Typically, the fund’s maturities are 5 years and in. He does expect to have a bit more volatility than other short-term bond funds, but the truth is that the fund probably fits somewhere in between the two styles.

Risk Management

Mr. Carmack uses position limits, sell discipline, and value realization when price targets are achieved. Some example of how macro factors are a part of his portfolio positioning are given later in the discussion under “Key Components In a Flexible Strategy.”

Trade tariffs and political/geopolitical risks are used to the extent that he can get good pricing on credits that he likes. Fundamental changes in these areas are considered after they are enacted and as they affect the fundamental thesis behind an investment. But rarely do such changes affect the binary outcome on a short duration bond and can often lead to great opportunities.

The Manager’s Bond Market View

A one-liner: “Quantitative tightening (QT) will be as harmful to the economy as quantitative easing (QE) was helpful.”

Some bond fund managers agree with his assessment. Like DoubleLine’s Jeffrey Gundlach on June 12th during his own conference call. When we brought up the issue, Gundlach said, “Perfectly logical.”


Because we are entering a secular bear market for treasuries and that inflation will be a persistent problem for the U.S. For that reason his fund is designed to outperform over a longer period of time.

All of the fundamental requirements are in place.

When he launched in 2016, the excessive bullishness in treasuries and the global negative rate environment were the last requirement for the end of the multi-decade bull market. Demographics were important for his thesis. Many economists contend that an aging society is ultimately deflationary.

He disagrees.

Disinflation and falling rates are the result of a persistent supply glut of labor. In the United States, it started with the Baby Boomers entering the work force and was augmented with the spike in female participation. But as these forces waned in the 1990’s, a far more powerful force emerged – globalization. Suddenly, U.S. companies had access to an enormous supply of foreign labor through off shoring and outsourcing. All of these secular forces are now reversing, he says, and the labor glut will continue to transition to a labor shortage driving wages and prices higher. 

Everything we have come to know over the last fifty years will reverse. 

Companies will experience margin deterioration, and income inequality will begin to reverse. Firms that have spent the last few decades investing in labor (because it is relatively cheap to capital) will start shifting their inputs and capex will spike, spurring investment and productivity. The cheap labor well is running dry, and with it the secular forces that economists have come to depend on in their models, are changing. 

Furthermore, the deflation argument will be debased. 

On the surface it might seem that older cohorts consume less; however, from a money flow perspective, this is not the case, especially in what he forecasts to be the political environment moving forward. Older cohorts have a higher marginal propensity to consume: They spend a higher percentage of their income. And while a growing percentage of their income will be sourced from transfer payments (Social Security, Medicare, etc.) all of that is spent and recycled into the economy. Whether it’s financed by savers (the working-age cohort) or through more sovereign debt doesn’t matter. Both are inflationary.

Other Bond Market Views

Fed interest rates

Mr. Carmack believes that there is a risk of a 5th Fed rate hike because the Fed moved 25 bps June 13, 2018 and upped the dot-plot from 3 to 4 hikes this year, in-line with what he expects.

Core inflation is already overshooting their target, and unemployment is well below what the Fed deems full employment at 4.5%. As long as this continues, it will continue to hike. 

So, if rates continue higher, he will continue to add exposure to floating rate notes that have maturities in 2020 and 2021 because he thinks that rate hikes will likely be done by then. He likes industrial names for diversification purposes because he’s heavily weighted to financials through his BDC Baby Bond exposure.

Buying at the short end

Mr. Carmack expects the shorter end of the yield curve to offer better yield or income per unit of duration and agrees that as long as the fund’s duration is shorter than his investment horizon, which it generally is, that the fund will benefit from rising rates. It’s even more so when floating-rate, short maturity paper can be sourced. 

As stated above, he believes that the Fed will be forced to raise rates even faster than the market and the Fed are forecasting, and so rising rates will definitely benefit him, especially relative to other funds and benchmarks. One of the reasons he doesn’t mind call risk is that re-investment risk favors active managers who can find value in the market at any given time.

He also agrees that many investors have been chasing higher yields from bonds because of declining interest rates throughout QE, including yields in the short-term space; that with the start of QT investors have seen bond yields in the 10-year rise but sporadically; and that there’s the danger that investors seeking to avoid bond market risk (preserving NAV, shortening duration, avoiding inflation) will continue buying at the short end — factors that can affect his credit selection.

He anticipates even more interest in the short-end because of the flat yield curve. His credit selection is very much driven by his macro thesis.  For example, he’s overweight financials (specifically BDC), MLP’s, and REITS. The first two are late cycle outperformers, and in the case of MLP’s, are still recovering from the 2014-15 oil route. He sees value there. The latter is a belief that equity REIT’s (malls and otherwise) will still be relevant in an Amazon-dominated world. Typically, these underperform late cycle because of rates, but because they have been so beaten up, he finds value. 

Last, the common theme is that after a sector/industry experiences a 2008- like event, it’s typically a good time to invest. These investments are not popular, but they provide good risk/reward criteria for his investors. 

Buying IG bonds

We also pointed out that there’s been a lot of issuance in investment grade bonds since 2009, especially in BBB credits – about 30% since ’09 and one level above junk; and that if the economy hits headwinds because of rising rates, increased debt levels, late cycle stimulus, etc. – that these factors could lead to illiquidity and bankruptcy for some of these credits.

His response: Absolutely — and recovery rates will be lower with all of the covenant-lite issuance. This is mainly a problem for high yield. But IG credits will be faced with price volatility, and he will use that to his advantage in the names that he likes. Again, much of his BBB-credit exposure and high yield exposure are in industries that he expects to outperform in the late stages of an economic expansion.

What has the manager avoided?


For MBS and RMBS, it’s just not his expertise, and much of the sector is vulnerable to rising rates, so it just doesn’t fit in for the fund. Dollar denominated EM bonds are starting to look attractive, but because he finds similar returns domestically, he’s chosen not to take on the added geopolitical risk. COCOs will only have a place in his portfolio if they drop to pennies on the dollar.

Views about the next recession

In his outlook for 2018, Mr. Carmack said that he didn’t believe a recession would occur this year but more likely in 2020 because of the Fed’s continued tightening and other factors. He also outlined how he would then modify his portfolio.

It remains his thesis that a recession is more likely in 2020. Investors can’t believe how long this expansion has lasted, but if one plots real GDP growth overtime, a person starts to realize that the cycles continue to be longer and longer. Much of this has to do with the Federal Reserve and that larger economies are typically less volatile.

He can’t modify a portfolio in recession – it’s too late.

By the time the U.S. is in recession, he’ll be adding risk. But in preparation for recession, he’ll minimize high yield, pare back lower-rated IG, and move from floating to fixed coupons — in that order. In fact, he’s already started by paring back high yield. 

What else? Increasing his TIPS position and probably extending duration in those securities as break-even rates fall. 

It’s also his view that the next recession and the Fed response to it will be much different than what the market expects. Investors think that the Fed will automatically cut rates to zero and embark on massive QE. However, he believes that inflation will make their easing cycle much different and is one of the reasons why TIPS will be the risk-off security, not nominal treasuries. 

Key Components in a Flexible Strategy

The fund has found relative value among diverse income producing assets by being strategic and tactical.

Here’s what the allocation looks like as of June 15, 2018.

hobix fund structure showing strategic allocation vs current allocation as of 6/15/18

Let’s zero in.


TIPS are an important part of the portfolio construction and strategically have a 25% allocation over the long term. TIPS provide inflation protection, AAA rating, liquidity, and non-correlation with the corporate exposure in the portfolio.

Since inception, TIPS exposure has ranged between 10% and 25% of the portfolio and is currently at 11% with all maturities within 5 years. While not being super-bullish on TIPS, he says that they still provide value in the portfolio and serve to meet his second prospectus objective of preserving capital in a rising interest rate environment.

While breakeven rates dictate the attractiveness of TIPS relative to nominal treasuries, they don’t indicate their relative value to other corporate securities. But, because Mr. Carmack chooses to remain fully invested, he carries a small cash position so that he can take advantage of opportunities in the corporate market quickly. The liquidity in TIPS enables him to sell quickly if he needs cash and meet unexpected redemptions without having to sell securities that represent good value.

In terms of relative value, TIPS have outperformed treasuries handily over the last year. For example, the breakeven inflation rate on a 5-year treasury has gone from 1.55% to 2.07%, but real rates continue to move higher, and so the asset class in general has been down over the last year.

For example, the real 5-year rate has moved from 20 bps to 70 bps over the last year, which equates to an approximate 2% loss in the 5-year TIP. He expects breakeven rates to continue higher, potentially eclipsing 3% in the next 12 months; however, with the Federal Reserve continuing its hawkish stance, he also believes that real rates will continue to move higher in the near term, a considerable headwind to the asset class. 

Ultimately, he thinks that the Federal Reserve will have to decide which mandate is more important — unemployment or inflation. If the Fed errs on the side of employment, which he suspects, TIPS will become an even more attractive asset class as inflation targets will become less rigid. When this begins to play out, he will likely be at a 25% strategic allocation in TIPS. While he doesn’t expect great returns from TIPS in the near future, he certainly believes that they will outperform treasuries.

His TIPS exposure at the short-end of the curve below 5 years is simple to explain. The pick-up in real yield gained from investing in a 2-year TIP versus a 10-year TIP is only 4 bps.

Investors are not being compensated for the additional real yield duration.  

Baby Bonds (BDCs)

One key component for Mr. Carmack is his allocation to Business Developing Companies (BDCs) Senior Unsecured Baby Bonds, now at 25% of his portfolio — investment grade — and traded on an exchange.

They’re attractive because of their IG rating and because the regulatory restrictions for these companies mandate that they maintain an asset coverage ratio by 150%. (A bill passed called the “Small Business Credit Availability Act” changed the asset coverage ratio from 200% to 150%.). If their asset coverage ratio dips below this level, they are mandated to stop equity distributions to shareholders or buy back their Baby Bonds until they comply with the 1.5x coverage mandate.

The rest of the covenants remain largely the same, and it doesn’t change his outlook on them. 

These regulations are extremely bondholder friendly and offer him a margin of safety.

What about their yield?

It’s considerably more than bank bonds of similar duration. Currently, the fund is getting between 4% and 7% yields for 3-6 year maturities.

Plus they have less financial leverage than their commercial bank counterparts, and because the Baby Bond market is considerably smaller than the bank bond market, it’s difficult to access for larger funds, adding to the fund’s opportunity set as a small fund.

Here’s a helpful chart.

Baby bond yield pick-up over bank bonds

Notice at the lower right corner where the fund lives vs. larger companies along the yield curve.

He expects his AUM to increase over the next 6 months, and if it does, he plans to substitute some of this exposure with investment grade collateralized loan obligations that have floating rate coupons which support his mandate of outperforming in a rising rate environment.

Flexibility at work.

High Yield Corporates

High yield corporates have been reduced because spreads are at multi-decade lows, and the asset class is abundant with credit and rate risk.

His positioning in high yield is determined by reversion to the mean of spreads over treasuries. He will lower his exposure from his 30% strategic positioning when these spreads are historically tight and increases it – up to 50% — when they are wide. Currently he has minimum high yield exposure.  

Preferred Stock

The fund has had minimal exposure to preferred stock since inception. What preferreds it has owned are all fix-to-float with short call dates but have never been a large part of the portfolio.


Generally, HOBIX is fully invested. High cash balances at the end of a month are due to inflows before month-end and are usually quickly deployed in the issues where he finds values at the time.

Recent Portfolio Allocation

hobix current portfolio and key portfolio metrics

The portfolio is over 88% investment grade and at least 70%, per prospectus. Its current effective duration is 1.90 years and has ranged between 1-3 years since inception.

Investors using Morningstar to view the portfolio need to know that the allocations shown are dated January 31, 2018 and show a major discrepancy from the chart above. Please refer to the information under “Preferreds” given earlier. The correct information appears on the fund’s website, and Morningstar is in the process of updating what their website currently shows.


Here’s the performance through June 15, 2018, since inception, and as of quarter end March 31, 2018.

holbrook income fund performance chart vs. barclays

Since inception the fund has returned 4.68%. The Barclay’s Aggregate Bond Index Total Return has returned -0.84 percent.

As of June 15, 2018, the fund has returned 2.78%. Its yield is 3.60%.

Its launch was propitious: It opened July 6, 2016 on the day that the 10-year treasury yield hit a low at 1.37%.

Let’s look.

10-year treasury constant maturity rate

The interest rate at the bottom of the 2016-07 period is the 10-year low at 1.37% on July 6, 2016, an increase of 158 BPS to an interim high of 2.95% shown at the upper right on June 15, 2018.

While it was not Mr. Carmack’s intent to launch the fund that very day, the spike in rates for nearly two years after launch illustrates how the strategic composition of the fund can generate income and protect net asset value in an environment that challenges many bond strategies.

And remember, during this time the fund returned 4.68%.

According to Morningstar, the fund has been in the 1st percent YTD in the short-term bond category and for one year ending June 15, 2018. The fund will be two years old on July 6, 2018 and may earn that rank then too.

As of May 31, 2018, MFO shows the fund doing extremely well against its peers and its Barclay’s bogy.

MFO premium screener - hobix lifetime performance

How has it done vs. Flexible Income and Short Investment Grade Debt?

Here’s the fund’s 1-yr. performance.

MFO Premium screener - hobix one year performance

Its 1-year MFO Risk performance now has a Risk Rating of 1.

Examining the fund’s Upside and Downside Capture Ratios for one year vs. the Flexible Income Category, the Short Term Investment Grade Debt category, and the Barclay’s Aggregate TR Index is quite relevant.

chart of hobix upside and downside capture ratios

The downside capture indicates that when the Barclays Aggregate was down, the fund was positive 84.5% of the benchmark’s negative return. So if the Barclay’s Aggregate was down 2%, which it was, the fund was up 1.69%. 

Because the fund’s objective is to preserve NAV in a rising interest rate environment, it expects to have a negative downside capture ratio. Also, if it has a negative upside capture ratio, that demonstrates that it’s serving as an income diversifier. Capturing the Barclay’s positive returns adds additional value.

MFO Premium data also shows that the fund’s lifetime correlation is 0.39 compared to its peers and 0.09 compared to the Barclay’s US Aggregate Total Return Index.

To keep his performance above average to avoid mean reversion, Mr. Carmack would shorten his maturity profile when he believes there is a significant risk to corporate credit, improve credit quality by increasing his TIPs exposure, and continue to decrease high yield.

Although the fund is young at 1.9 years, its early returns demonstrate that the manager’s anchored flexible strategy has fulfilled what he’s set out to do and earned his keep.

Bottom Line

HOBIX attempts to be fully armored for complete protection against interest rate and inflationary increases, two components of bond warfare that bludgeon forays into the asset class. It has been bullish on risk since inception.

Mr. Carmack believes that traditional core bond strategies and indices are not irrelevant because they can do a good job when exogenous events roil the market. But investors need diversification and a product that will perform well when the rest of their fixed-income portfolio is facing headwinds, and now is the time to have exposure to income producing products that perform better in a rising interest rate environment.

If he underperforms when every other bond fund outperforms because rates move drastically lower, he can live with that.

With the beginning stages of a multi-year uptick in bond yields, he does not favor fixed coupon bonds, treasury, or otherwise.

Most importantly, his attention to outperformance combined with a competitive nature doesn’t mean that he’s trying to shoot the lights out.

Remember, if he can return 2% above the rate of inflation on a long-term basis and keep his drawdowns under 2%, he’s doing his job.

HOBIX is not a go-anywhere fund.

His strategic core as shown earlier is intrinsic: It’s not traded around. He’ll add on weakness, pare on strength but maintain those basic positions. It has a solid fundamental thesis both macro and micro and is not based on intraday, intra-quarter, or even intra-year moves.

Also, Mr. Carmack openly tells investors that the environment that he expects is actually the hardest in which to make money – even for his fund – because of increased interest rates to all fixed income. His galvanized strategy is an attempt to create a fortified defense against bond market shocks that would destroy investor returns.

The bond market can behave like one of the most intelligent of creatures — and as one of the most perverse. Investors have become complacent about their exposure to bonds over the last decade and embraced strategies dependent on a low-rate environment.

The bottom line is clear: Mr. Carmack has made money for investors since inception.

While he may not know what price investors have to pay from market disruption nor what fortunes may be told, he has constructed a number of financial building blocks that are a solid bulwark against market turbulence. His itinerary is no random journey through an asset class but a direct flight path with his grass roots aboard.

For investors wishing to reach his destination, he has given them a map to get there.


Holbrook Advisors  

Holbrook Income

Both include Mr. Carmack’s Newsletter and Perspective, each given once per quarter and sent to others. They’re worthwhile – lucid, in-depth, provocative, bold. Also, his views @HolbrookHldgs usually show daily responses to current events happening in the market as shown here from June 15, 2018.

tweet by @holdbrookhldfs with graph of inverted yield curve

Funds in Registration

By David Snowball

VanEck has registered a launch a video-gaming and e-sports ETF, which strikes me as silly in the extreme but at least doesn’t include cryptocurrencies. “Silly in the extreme” means we’re not saying anything more about it. Happily, a bunch of really solid offerings – a new Litman Gregory, a bond fund run by ex-PIMCO guys, an emerging markets offering from LSV and the ETF version of several four-star funds – were filed at the same time. All of these funds and active ETFs are likely available by the end of September.

American Century Diversified Municipal Bond ETF

American Century Diversified Municipal Bond (TAXF), an actively-managed ETF, seeks current income that is exempt from federal income tax. The plan is to invest in a combination of investment-grade and high-yield muni bonds. They will primarily seek income but might achieve a bit of capital appreciation by anticipating interest rate moves or credit upgrades. The fund will be managed by Steven M. Permut, Joseph Gotelli, and Alan Kruss. Mr. Permut manages four other AC muni funds, including high yield. Its opening expense ratio has not been disclosed.

American Century Growth ETF

American Century Growth, an actively-managed ETF, seeks long-term capital growth. The plan is “to look for stocks of companies they believe will increase in value over time.” (sigh) This distinguishes the fund from all of those wingnuts looking to invest in stocks they believe will decrease in value over time. The fund will be managed by somebody, but no names have yet been shared. Its opening expense ratio has not been released. There is a three-star American Century Growth (TWCGX) mutual fund, which Morningstar disparages for its “lack of a competitive advantage.” This might be the same game in a different wrapper.

Anfield Universal Fixed Income ETF

Anfield Universal Fixed Income, an actively-managed ETF, seeks current income. It’s another global, unconstrained fixed income fund whose investment universe includes MLPs, private debt and a variety of derivatives. The fund will be managed by three former PIMCO guys: Cyrille Conseil, Peter van de Zilver, and David Young. Its opening expense ratio is 0.95%.

BrandywineGLOBAL—Global Total Return ETF

BrandywineGLOBAL—Global Total Return, an actively-managed ETF, seeks maximize total return, consisting of income and capital appreciation. The plan is to invest, both long and short, in domestic and foreign fixed income securities, debt instruments, currencies and related investments. That includes high yield and EM securities, as well as some privately-issued debt. The fund will be managed by Stephen S. Smith, David F. Hoffman, John P. McIntyre and Anujeet Sareen. Its opening expense ratio is 0.60%.

Calamos Short-Term Bond Fund

Calamos Short-Term Bond Fund will seek a high level of current income consistent with preservation of principal. The plan is to invest in, well, investment-grade short term bonds. Up to 20% of the bonds might be non-investment grade or foreign. The fund will be managed by John P. Calamos, Sr. and three other guys. Its opening expense ratio has not been disclosed, and the minimum initial investment will be $2,500.

Center Coast Brookfield Energy Infrastructure Fund

Center Coast Brookfield Energy Infrastructure Fund will seek total return through growth of capital and current income. The plan is to invest in master limited partnerships (MLPs) and MLP-like securities. The fund will be managed by Dan C. Tutcher, Robert T. Chisholm, and Jeff Jorgensen. Its opening expense ratio is 1.50%, and the minimum initial investment for “A” and “Y” shares will be $1,000.

First Trust Long Duration Opportunities ETF

First Trust Long Duration Opportunities, an actively-managed ETF, seeks to generate current income with a focus on preservation of capital. The plan is to invest in publicly-issued U.S. Treasury securities and bonds, debentures and mortgage-backed securities. There’s also a bunch of talk about “dollar rolls” and an average effective duration of eight years or more. The fund will be managed by Jim Snyder and Jeremiah Charles. Its opening expense ratio has not been disclosed.

Gabelli Financial Services Fund

Gabelli Financial Services Fund will seek capital appreciation. The plan, give or take some unnecessary noise about Rule 12d3-1, is to buy the stocks of financial services companies. No word about what they’re up to beyond that, or how they might be different from the other 61 financial services funds. The fund will be managed by Macrae Sykes, who joined Gabelli in 2008 as a financial services analyst. Its opening expense ratio for AAA shares is 1.25%, and the minimum initial investment will be $1,000. Technically, the name of this fund is “The Gabelli Financial Services Fund.” Given Mr. Gabelli’s reputation, it strikes me as possible that the name refers to “The Gabelli” rather than “The Fund.” In any case, we shortened it just as we do when talking about Ohio State University.

Gadsden Dynamic Growth ETF

Gadsden Dynamic Growth ETF, an actively-managed ETF, seeks total return. The plan is to have a “strategic allocation sleeve” that comprises about 80% of the portfolio and an opportunistic “tactical allocation sleeve” that might comprise 20%. That strategic sleeve tries to generate exposure to “certain indexes composed of equity securities of certain countries, sectors, industries, or market capitalizations, including indices that may be factor-based.” Uh-huh. The fund will be managed by Kevin R. Harper and James W. Judge. Its opening expense ratio has not been disclosed.

Janus Henderson Mortgage-Backed Securities

Janus Henderson Mortgage-Backed Securities (JMBS), an actively-managed ETF, seeks a high level of total return consisting of income and capital appreciation. The plan is to invest in mortgage-related fixed income instruments of varying maturities that can provide “a net return of 0.50% over the Bloomberg Barclays US MBS Index Total Return Value Unhedged USD (“Bloomberg Barclays US MBS Index”), while generally maintaining an investment return with substantial correlation to the Index.” The fund will be managed by John Kerschner and Nick Childs. Mr. Kerschner also manages the four-star JH Multi-Sector Income Fund (JMUDX). Its opening expense ratio has not been disclosed.

Litman Gregory Masters High Income Alternatives Fund

Litman Gregory Masters High Income Alternatives Fund will seek a high level of current income from diverse sources, consistent with the goal of capital preservation over time. The plan is to hire four teams of star managers, one each offering (1) an equity income strategy, (2) a credit value strategy, (3) a multi credit strategy, and (4) an option income strategy. The fund will be managed by teams from Ares, Guggenheim, Neuberger Berman and an unnamed fourth sub-adviser. Its opening expense ratio is 1.23%, and the minimum initial investment will be $1,000 unless you sign up for an automatic investment plan, in which case they raise the minimum and the minimum subsequent purchase requirements. That’s weird.

LSV Emerging Markets Equity Fund

LSV Emerging Markets Equity Fund will seek long-term growth of capital. The plan is to use quant models to identify and buy undervalued stocks where the underlying performance of the company is improving but that improvement is not yet recognized by “the market.” The fund will be managed by the regular LSV team headed by Josef Lakonishok, their CIO/CEO. Two of the firm’s three domestic quant / behavioral / value funds have four star ratings from Morningstar, the third is a three-star fund while their global value fund carries a two-star rating. The short version: LSV is way cool but they haven’t yet proven their chops in international markets. Its opening expense ratio is 1.45%, and the minimum initial investment will be $1,000.

Morgan Stanley Global Permanence Portfolio

Global Permanence Portfolio will seek long-term capital appreciation. The plan is to craft a global equity portfolio of firms with sustainable competitive advantages and, in particular, those with rising returns on invested capital, above-average business visibility, strong free cash flow generation and an attractive risk/reward.  The fund will be managed by as-yet unnamed “members of the Growth team.” Given that the fund is pursuing the same strategy as hundreds of other competitors, it would be important to find some competitive advantage that the team possesses. Its opening expense ratio for “A” shares is 1.32%, and the minimum initial investment will be $1,000.

PGIM Active High Yield Bond ETF

PGIM Active High Yield Bond, an actively-managed ETF, seeks total return, through a combination of current income and capital appreciation. The plan is to invest in high yield bonds, with up to 25% invested in derivatives and up to 20% allocated to foreign bonds. The managers combine a top-down macro analysis with a bottom up view (ick) of the issuer’s ability to service the debt. The fund will be managed by a five-person team headed by Robert Cignarella, CFA. Mr. Cignarella & Co. also manage the four-star PGIM High Yield fund, among others. Its opening expense ratio has not been disclosed.

VanEck Vectors Municipal Allocation ETF

VanEck Vectors Municipal Allocation, an actively-managed ETF, seeks maximum long-term after-tax return, consisting of capital appreciation and income generally exempt from federal income tax. The plan is to start with a tactical allocation model attuned to credit and interest rate risk, then execute the resulting plan by investing in other VanEck exchange-traded products. There’s a helpful reminder that “investors in the Fund should be willing to accept a high degree of volatility in the price of the Fund’s Shares and the possibility of significant losses.” The fund will be managed by David Schassler and Barak Laks. Its opening expense ratio has not been disclosed.

Manager changes, June 2018

By Chip

The revolving door slowed dramatically this month, perhaps because it’s summer and the HR people are away on vacation. In any case, we found manager changes at just 40 funds where 60-80 would be typical. That said, several of the changes are consequential. Ben Inker, head of GMO’s asset allocation team, will no longer manage Wells Fargo Asset Allocation, as they shift subadvisement from GMO to Wells Capital Management. Boniface “Buzz” Zaino, one of the senior managers at Royce, is transitioning out of active management.  Rusty Johnson is, for health reasons, stepping back from leadership of Harding, Loevner EM. We wish them all the best.

Ticker Fund Out with the old In with the new Dt
CUGAX Aberdeen Global Unconstrained Fixed Income Fund Emma Jack is no longer listed as a portfolio manager for the fund. Craig MacDonald and Christopher Heckscher join Richard Smith, James Athey, and Maximilien Macmillan on the management team. 6/18
AGMAX AllianzGI Emerging Markets Debt Fund Greg Saichin will no longer serve as a portfolio manager for the fund. Richard House joins Daniel Ha and David Pinto in managing the fund. 6/18
APINX AMG Managers Pictet International Fund Swee-Kheng Lee will no longer serve as a portfolio manager for the fund. Fabio Paolini and Benjamin Beneche will continue to manage the fund. 6/18
CLTAX Catalyst/Lyons Tactical Allocation Fund Brandon Burns is no longer a portfolio manager of the fund. Alexander Read and Matthew Ferratusco will continue to manage the fund. 6/18
CDGAX Cavalier Dynamic Growth Fund Justin Lent will no longer serve as a portfolio manager for the fund. Clint Pekrul and Brian Lockhart join Scott Wetherington in managing the fund. 6/18
CTFAX Columbia Thermostat Fund Jeffrey Knight is no longer listed as a portfolio manager for the fund. Anwiti Bahuguna and Joshua Kutin will now manage the fund. 6/18
DMPAX Deutsche MLP and Energy Infrastructure Fund No one, but . . . Avraham Feinberg joins John Vojticek, Francis Greywitt, and Manoj Patel on the management team. 6/18
FSTBX Federated Global Allocation Fund Randy O’Toole will no longer serve as a portfolio manager for the fund. Qun Liu will join John Sherman, Steven Chiavarone, Chengjun Wu, Ihab Salib, and Timothy Goodger in managing the fund. 6/18
FHKCX Fidelity China Region Fund Bobby Bao is leaving the fund. Stephen Lieu and Ivan Xie will now manage the fund. 6/18
FSOPX Fidelity Series Small Cap Opportunities Fund Patrick Venanzi is on a leave of absence until August 30, 2018. Jennifer Fo has been named interim co-manager, joining Richard Thompson, Shadman Riaz, Morgen Peck, and Eirene Kontopoulos, until Mssr. Venanzi’s return. 6/18
FDSCX Fidelity Stock Selector Small Cap Fund Patrick Venanzi is on a leave of absence until August 30, 2018. Jennifer Fo has been named interim co-manager, joining Richard Thompson, Shadman Riaz, Morgen Peck, and Eirene Kontopoulos, until Mssr. Venanzi’s return. 6/18
GGEFX Golub Group Equity Fund John Dowling no longer serves as part of the portfolio management team of the fund. Colin Higgins, Kurt Hoefer, Michael Kon, and Matthew Gordon remain. 6/18
HLEMX Harding, Loevner Emerging Markets Rusty Johnson will move from co-lead manager to comanager, effective July 2nd. Scott Crawshaw will step up to co-lead manager alongside Craig Shaw. The rest of the management team remains. 6/18
HLMNX Harding, Loevner International Equity Portfolio No one, but . . . Effective January 2, 2019, Ferrill Roll and Andrew West will serve as co-lead managers. The rest of the management team remains. 6/18
HBFBX Hennessy Balanced Fund Brian Peery will no longer serve as a portfolio manager for the fund. Ryan Kelley will join Neil Hennessy in managing the fund. 6/18
HFCGX Hennessy Cornerstone Growth Fund Brian Peery will no longer serve as a portfolio manager for the fund. Neil Hennessy and Ryan Kelley will continue to manage the fund. 6/18
HFLGX Hennessy Cornerstone Large Growth Fund Brian Peery will no longer serve as a portfolio manager for the fund. Neil Hennessy and Ryan Kelley will continue to manage the fund. 6/18
HFMDX Hennessy Cornerstone Mid Cap 30 Fund Brian Peery will no longer serve as a portfolio manager for the fund. Neil Hennessy and Ryan Kelley will continue to manage the fund. 6/18
HFCVX Hennessy Cornerstone Value Fund Brian Peery will no longer serve as a portfolio manager for the fund. Neil Hennessy and Ryan Kelley will continue to manage the fund. 6/18
GASFX Hennessy Gas Utility Fund Brian Peery will no longer serve as a portfolio manager for the fund. Ryan Kelley will continue to manage the fund. 6/18
HTECX Hennessy Technology Fund Brian Peery will no longer serve as a portfolio manager for the fund. Daniel Hennessy and Ryan Kelley will continue to manage the fund. 6/18
HDOGX Hennessy Total Return Fund Brian Peery will no longer serve as a portfolio manager for the fund. Ryan Kelley will join Neil Hennessy in managing the fund. 6/18
USDY Horizons Cadence Hedged US Dividend Yield ETF Troy Cates and Garrett Paolella will no longer serve as a portfolio manager for the fund. Jonathan Molchan will continue to manage the fund. 6/18
VSQAX Invesco Global Responsibility Equity Fund Uwe Draeger and Donna Wilson are no longer listed as portfolio managers for the fund. Nils Huter joins Michael Abata, Robert Nakouzi, and Manuela von Ditfurth on the management team. 6/18
IWGAX Ivy Wilshire Global Allocation Fund Elizabeth Yakes is no longer listed as a portfolio manager for the fund. W. Jeffery Surles, Anthony Wicklund, Nathan Palmer, and F. Chace Brudige will continue to manage the fund. 6/18
JAAMX James Alpha Multi Strategy Alternative Income Portfolio Darren Schuringa, James Hug, Leonard Edelstein, and William Hershey are no longer listed as portfolio managers for the fund. Kevin Greene, James Vitalie, Michael Montague, and Akos Beleznay will manage the fund. 6/18
HFEAX Janus Henderson European Focus Fund No one, but . . . Lars Dollmann joins Stephen Peak in managing the fund. 6/18
JEIAX JPMorgan International Equity Income Fund Georgina Maxwell has announced her intent to retire, effective July 31, 2018. Jeroen Huysinga and Helge Skibeli have joined the fund in March 2018 and Rajesh Tanna will join the fund upon Ms. Maxwell’s departure. 6/18
JNUSX JPMorgan International Value Fund Georgina Maxwell and Demetris Georghiou no longer serve as portfolio managers for the fund. Michael Barakos, Thomas Buckingham, Ian Butler, Kyle Williams now manage the fund. 6/18
FAAGX Nuveen Strategy Aggressive Growth Allocation Fund Effective August 31, 2018, Keith Hembre will no longer be a portfolio manager for the fund. Derek Bloom will continue to serve as portfolio manager for the fund. 6/18
FSGNX Nuveen Strategy Balanced Allocation Fund Effective August 31, 2018, Keith Hembre will no longer be a portfolio manager for the fund. Derek Bloom will continue to serve as portfolio manager for the fund. 6/18
FSFIX Nuveen Strategy Conservative Allocation Fund Effective August 31, 2018, Keith Hembre will no longer be a portfolio manager for the fund. Derek Bloom will continue to serve as portfolio manager for the fund. 6/18
FSNAX Nuveen Strategy Growth Allocation Fund Effective August 31, 2018, Keith Hembre will no longer be a portfolio manager for the fund. Derek Bloom will continue to serve as portfolio manager for the fund. 6/18
ROSFX Royce Micro-Cap Opportunity Fund Boniface “Buzz” Zaino will be retiring from the fund, effective October 1, 2018. He will stay on as a Royce senior advisor. William Hench will continue to manage the fund. This has been a long planned succession. 6/18
RYPNX Royce Opportunity Fund Boniface “Buzz” Zaino will be retiring from the fund, effective October 1, 2018. He will stay on as a Royce senior advisor. William Hench will continue to manage the fund. This has been a long planned succession. 6/18
SBTAX Salient Tactical Plus Fund William Hunt will no longer serve as a portfolio manager for the fund. Christopher Guptill will continue to manage the fund. 6/18
Various USAA Target Retirement Income Fund, USAA Target Retirement 2020 Fund, USAA Target Retirement 2030 Fund, USAA Target Retirement 2040 Fund, USAA Target Retirement 2050 Fund, and USAA Target Retirement 2060 Fund Effective June 1, 2018, Brian Herscovici is no longer a portfolio manager of the funds. Lance Humphrey joins Wasif Latif in managing the funds. 6/18
VMSAX Virtus Aviva Multi-Strategy Target Return Fund Daniel James and Brendan Walsh, formerly of Aviva Investors Global Services Limited, are no longer portfolio managers of the fund. James McAlevey joins Peter Fitzgerald and Ian Pizer on the management team. 6/18
EAAFX Wells Fargo Asset Allocation Fund Ben Inker is no longer listed as a portfolio manager for the fund, as subadvisement shifts from GMO to Wells Capital Management. Kandarp Acharya, Petros Bocray, and Christian Chan will manage the fund. 6/18
NVSOX Wells Fargo Disciplined Small Cap Fund (formerly the Small Cap Opportunities Fund) Schroder Investment Management, Robert Kaynor, and Jenny Jones are all out. Justin Carr, Greg Golden, and Robert Wicentowski will now manage the fund. 6/18

Briefly Noted

By David Snowball

All the developments that are worth knowing but aren’t worth separate stories, including 50 funds that just earned headstones rather than headlines. An absolute disaster? 10% of vanishing funds promising “absolute returns.” Wells Fargo promises that you can trust them, just before announcing millions of additional fines. Tadas moves up, a favorite fund closes quick and hard, Monrad celebrates his 58th and the Mathers Fund leaves this veil of tears after 53 eventful years.

Briefly Noted . . .

iShares has announced 2-for-1 share splits for three of its ETFs. The affected funds are 

  • iShares 1-3 Year Credit Bond ETF (CSJ)
  • iShares Intermediate Credit Bond ETF (CIU)
  • iShares U.S. Credit Bond ETF (CRED)

The record date for the stock splits will be August 3, 2018, and the stock splits will be effectuated after the close of trading on August 7, 2018.

octopus captures the earthThe Ritholtz Empire grows.  On June 26, 2018, Josh Brown (a/k/a The Reformed Broker) announced the hiring of Tadas Viskanta as the new director of investor education at Ritholtz Wealth Management. Tadas is the indefatigable proprietor of Abnormal Returns who, since 2005, has daily curated dozens of links on finance and on life. His proclaimed focus is being a “forecast-free investment blog,” which is to say AR is blessedly free of the endless din of self-serving, click-whoring speculation about whether a new Golden Age or a new Dark Age has been spawn by some act of corporate cupidity, fintech folly, robotic ascendance or druncle tweet. His curation strikes me as discerning but not dogmatic; he finds thoughtful content in unconventional places, and is as willing to offer an audience to a thoughtful blogger as to a Morningstar vice president. Tadas will continue to publish Abnormal Returns and profess finance at Butler University in Indianapolis.

Butler was, for a bit, the academic home of my predecessor as Director of Debate at Augustana. My teams and I spent a fair amount of time on Butler’s campus, primarily in Jordan Hall which seemed to be eternally under renovation.

The longest tenured fund manager. On June 1, 2018, Bruce Monrad of Northeast Investors Trust (NTHEX) celebrated his 58th year at the fund’s helm. His next-closest peer is Rupert H. Johnson of Franklin DynaTech (FKDNX) who is his 50th year with his fund. Their funds have one and five stars, respectively.

“Any publicity is good publicity”? Wells Fargo begins to wonder. In April 2018, federal regulators proposed $1 billion in fines against Wells Fargo for mortgage-lending and auto-insurance abuses.

In May 2018, scandal-ridden Wells Fargo trotted out a new ad campaign to reassure the public that “It’s a new day at Wells Fargo.”

wells fargo ad

In June 2018, the SEC fined Wells another $5.1 million because it “improperly pushed retail customers to actively trade complex investments in order to generate higher fees” (Reuters, 6/25/2018). It’s poor optics at the very least when the best you can say is, “well, the fines are getting much smaller!”

CBS News offered a nice summary of Wells’ travails.


Brown Advisory Strategic Bond Fund (BATBX/BIABX) is trying an interesting game. The fund has three share classes, the most expensive of which is the Advisor class. Rather than reducing expenses on all three share classes, on July 1, 2018, Brown is going to (a) close the Advisor class and (b) move Advisor shareholders to the less expensive Investor share class and Investor shareholders to the still-less expensive Institutional share class. For reasons less clear, the Investor share class will adopt the ticker symbol from the closed Advisor shares (BATBX) and the Institutional share class will adopt the old Investor class ticker (BIABX).

CLOSINGS (and related inconveniences)

Columbia Diversified Real Return Fund (CDRAX) will close to new investors on July 27, 2018. No word about why or the fund’s future. That said, it has $1.7 million in assets, across all share classes, after four years of operation. (Cue funeral dirge.)

A typo notwithstanding, Oberweis International Opportunity Fund (OBIOX) and its Institutional clone were hard closed on June 7, 2018 (the typo in the filing stipulates 2017 for the closure date). There are only two small exceptions to the closure.

“Effective as of the date hereof” (a laughably inelegant phrase in place of which they might have said “as of June 27, 2018”), the Institutional Class shares of Royce Low-Priced Stock Fund (RYLPX) and Royce Small-Cap Value Fund (RYVFX) are closed to all purchases and exchanges.


Effective August 6, 2018, The Arbitrage Credit Opportunities Fund (AGCAX) will change its name to the Water Island Credit Opportunities Fund. The Fund’s portfolio managers, investment objective and investment strategies will not change. Our guess is that the adviser felt that the fund’s current name as a bit too generic to attract investor attention; despite top-quartile returns over the past five years, the fund has drawn only $45 million in assets and has seen money trickling out the door.

Effective June 25, 2018, AT All Cap Growth Fund became CIBC Atlas All Cap Growth Fund (AWGIX) and AT Equity Income Fund was rechristened as CIBC Atlas Equity Income Fund (AWYIX). No changes in structure, fees or management were announced.

This all follows from the fact that AT Investment Advisers, Inc., the funds’ investment adviser, has changed its name to CIBC Private Wealth Advisors. For fans of initialisms, AT started as Atlantic Trust, adviser to the Atlantic Whitehall funds. CIBC signals Canadian Imperial Bank of Commerce, one of Canada’s Big Five banks.

CBOE Vest Defined Distribution Strategy Fund (VDDIX) is on its way to being the CBOE Vest Alternative Income Fund, at which point it will become an index fund tracking the CBOE S&P 500 Market-Neutral Volatility Risk Premia Optimized Index.

Effective June 4, 2018, the City National Rochdale Emerging Markets Fund (RIMIX) reorganized into the Fiera Capital Emerging Markets Fund.

Effective December 1, 2018, Fidelity MSCI Telecommunication Services Index ETF (FCOM) will be renamed Fidelity MSCI Communication Services Index ETF and its new benchmark will be the MSCI USA IMI Communication Services 25/50 Index.

A little less Laudus: The Board of Trustees of Laudus Trust has determined that it is in the best interests of each of the Laudus Mondrian International Equity Fund (LIEIX), Laudus Mondrian Emerging Markets Fund (LEMNX) and Laudus Mondrian International Government Fixed Income Fund (LIFNX) and their shareholders to ditch the “Laudus” moniker. The funds will become Mondrian International Equity Fund, Mondrian Emerging Markets Equity Fund, and Mondrian International Government Fixed Income Fund.

Effective September 30, 2018, Lord Abbett International Dividend Income Fund (LIDAX) becomes Lord Abbett International Value Fund and its benchmark changes from the MSCI All Country World Ex-U.S. High Dividend Yield Index to the MSCI EAFE Value Index.

Salient International Real Estate Fund (KIRYX) becomes Salient Global Real Estate Fund, with the predictable and necessary changes to its investment mandate, on August 14, 2018.

Many ETFs have recently chosen to highlight the identity of their sub-advisers in the fund’s name, so The Reasonable ETF might be renamed The Reasonable OMG It’s Peter Lynch! ETF. Effective as of June 29, 2018, Wisdom moved in the opposite direction by stripping out the names of their index providers from some ETFs.

Prior to June 29, 2018 Effective on June 29, 2018
WisdomTree Barclays Yield Enhanced U.S. Aggregate Bond Fund WisdomTree Yield Enhanced U.S. Aggregate Bond Fund
WisdomTree Barclays Yield Enhanced U.S. Short-Term Aggregate Bond Fund WisdomTree Yield Enhanced U.S. Short-Term Aggregate Bond Fund
WisdomTree Barclays Interest Rate Hedged U.S. Aggregate Bond Fund WisdomTree Interest Rate Hedged U.S. Aggregate Bond Fund
WisdomTree Barclays Negative Duration U.S. Aggregate Bond Fund WisdomTree Negative Duration U.S. Aggregate Bond Fund
WisdomTree Bloomberg Floating Rate Treasury Fund WisdomTree Floating Rate Treasury Fund


AlphaClone International ETF (ALFI) liquidated on June 29, 2018. Hmmm … “alpha clone” sounds rather like a type of storm trooper (“the Sith are advancing, send a squad of the alpha clones”) from Star Wars.

AlphaCore Absolute Fund (GDABX) disappears on July 27, 2018. (Absolute minus one)

Avondale Core Investment Fund was promoted to glory on June 15, 2018 (hint: they refer to it as, the “Liquidation Date”).

Columbia Diversified Absolute Return Fund (CDUAX) will close to new investors on July 27, 2018 and liquidate on September 7, 2018. The fund launched partway through 2015 and managed an absolute (negative) return in 2015, 2016 and so far in 2018. That presumably investors in the fund (who weren’t managers of it) and the managers of the fund (who weren’t investors in it), since the prospectus goal was to provide “absolute (positive) return.”

chart showing managers not invested in cduax

(Absolute minus two)

Despite posting returns in the top 1% of the multi-currency Morningstar peer group over the past decade, $41 million Columbia Absolute Return Currency and Income Fund (RARAX) will follow the same path: closed in July and really closed in September. (Absolute minus three)

Eaton Vance Multi-Strategy Absolute Return Fund (EADDX) is slated to merge into Eaton Vance Short Duration Strategic Income Fund (ETSIX) by October, 2018. Effective August 1, 2018, EADDX is closed to new investors. (Absolute minus four!)

The GAMCO Mathers Fund (MATRX) will be liquidated on or about August 31, 2018. Wow. It’s got that sort of “the last mastodon is dying” feel to it. Henry G. Van der Eb has been running this fund since the year I graduated from Wilkinsburg High School; that school was abandoned in 2016 after 106 years, victim of shrinking numbers, parlous finances and abysmal performance (the state department of education ranked it as Pennsylvania’s second-worst high school). Not that I’m suggesting parallels. The Mathers Fund launched in 1965 (no, no one named Mathers ever managed it) and become Gabelli Mathers in 1999. The fund’s goal was to make money in the long run “without excessive risk of capital loss.”

giant mastodon

Hmmm … MATRX has posted “capital losses” over the past year, and three years, five years, ten years, twenty years and (wait for it) thirty years. For instance, over the past 10 years, MATRX would have transformed $10,000 to $4,600. Over 20 years, $10,000 would have shrunk to $4,800. A 30 year holding period would have transformed $10,000 to $6,900. Here’s the good news: if you’d bought the fund at inception in 1965 and sold June of 1981, you’d have been dancing in the street; $10,000 grew to $112,000 because of, rather than despite, the financial mess of the 1970s and early 1980s. At its peak, the fund held over a half billion in assets. Today, the remnant is $7.5 million.

The fund’s fortunes turned in 1981 because of two epochal moves: the highest interest rates and largest tax cuts in American history collided. The country spun into recession, inflation fell dramatically, and the economy rebounded quickly. Returns quickly flattened then turned negative. The titan that always and everywhere saw signs of financial ruin was undone by decades of relative prosperity.

In the fund’s defense, you could note that it’s the top performer in Morningstar’s bear market category which would be more compelling if it was a bear market fund, in the sense of being a tactical, trading vehicle for shorting the market. It, so far as I can tell, wasn’t.

You sensed Mr. Van der Eb’s exhaustion in the fund’s final annual report (12/30/2017), which eschewed talking about the fund’s present or future and focused instead on its single bright spot this century:

The Fund completed 52 years of operation during 2017 and since inception through December 31, 2017 its average annual total return was 5.84% versus 10.01% for its benchmark S&P 500 Index. During the 2008-09 credit crisis, the Fund’s risk averse position preserved capital and outperformed the S&P 500 for the two, three, five, and ten year periods ended December 31, 2009. The Fund had positive returns for the one, two, three, five, and ten year periods ended December 31, 2008 versus the S&P 500, which had negative returns for each of those periods.

IQ Hedge Multi-Strategy Plus Fund (IQHOX) will be liquidated on or about August 7, 2018. As part of the larger “falling out of love with liquid alts,” IQHOX had a solidly above average record since inception but it’s expensive, high minimum, and assets have been dribbling away for years.

iShares has resolved to cull the hedged and multifactor herd. The following ETFs are set to be liquidated on August 22, 2018:

  • iShares Currency Hedged MSCI Europe Small-Cap ETF (HEUS),
  • iShares Edge MSCI Min Vol EAFE Currency Hedged ETF (HEFV),
  • iShares Edge MSCI Min Vol EM Currency Hedged ETF (HEMV),
  • iShares Edge MSCI Min Vol Europe Currency Hedged ETF (HEUV),
  • iShares Edge MSCI Min Vol Global Currency Hedged ETF (HACV),
  • iShares Edge MSCI Multifactor Consumer Discretionary ETF (CNDF),
  • iShares Edge MSCI Multifactor Consumer Staples ETF (CNSF),
  • iShares Edge MSCI Multifactor Energy ETF (ERGF),
  • iShares Edge MSCI Multifactor Financials ETF (FNCF),
  • iShares Edge MSCI Multifactor Healthcare ETF (HCRF),
  • iShares Edge MSCI Multifactor Industrials ETF (INDF),
  • iShares Edge MSCI Multifactor Materials ETF (MATF),
  • iShares Edge MSCI Multifactor Technology ETF (TCHF) and
  • iShares Edge MSCI Multifactor Utilities ETF (UTLF).

Janus Henderson All Asset Fund (HGAAX) will liquidate and, just to be sure, terminate on or about December 31, 2018.

The Board of Trustees for John Hancock Natural Resources Fund (JINRX) has announced that “as of the close of business on or about October 19, 2018, there are not expected to be any shareholders in the fund, and the fund will be liquidated.” Unbidden, Carew388, one of the discussion board members, volunteers that “this fund won’t be missed.” That might be driven by the observation that over the past decade, JINRX turned $10,000 into $5,200, rather worse than 90% of its peers.

The shareholders of Lord Abbett Multi-Asset Focused Growth Fund (LDSFX) voted to merge their fund into Lord Abbett Multi-Asset Growth Fund LWSAX) which should be completed as of the close of business on July 13, 2018. 

Loomis Sayles Dividend Income Fund (LSCAX) and Loomis Sayles Value Fund (LSVRX, which Morningstar designates as a “bronze medalist”) will liquidate on or about August 30, 2018. While Morningstar believes that “a consistent, low-turnover strategy, reasonable fees, and an experienced management team outweigh concerns about Loomis Sayles Value’s recent underperformance and outflows,” Loomis seems to have reached the opposite conclusion.

MainStay Absolute Return Multi-Strategy Fund (MSANX) celebrated its third anniversary by announcing its impending liquidation, on November 16, 2018. (Yikes, absolute minus five!)

Following “a strategic review of the management and operations of the Fund,” The Momentum Bond Fund (MOMBX) – yes, “The” was part of the formal name – liquidated on June 29, 2018. The “strategic review” might well have ended with (a) we’re expensive, (b) we have only $5 million in assets and (c) our performance looks like this:

MOMBX performance chart

Morgan Stanley’s Active Assets Government Trust (AISXX) will become noticeably less active after August 13, 2018.

On June 13, 2018, Nationwide Mutual Funds board of trustees voted to liquidate the Nationwide National Intermediate Tax Free Bond Fund (NWJOX) and the Nationwide Ziegler Wisconsin Tax Exempt Fund (NWJWX) two weeks hence. Just in case you were wondering, the board then offered up a bit of investing insight: “Because of the pending liquidations, neither Fund now represents a long-term investment solution.”

Oppenheimer Global Real Estate Fund (OGRAX), a perfectly respectable performer with about $50 million in assets, will be liquidated on or about August 24, 2018.

Rex Gold Hedged S&P 500 ETF ceased operations and liquidated on June 22, 2018.

Salient Adaptive Balanced Fund (AOGAX), Adaptive Income Fund (AILAX), Adaptive US Equity Fund (ACSIX), Adaptive Growth Fund (SRPAX), Trend Fund (SPTAX), EM Infrastructure Fund (KGIAX), International Dividend Signal Fund (FFDAX), Real Estate Fund (KREAX), Select Opportunity Fund (FSONX), and US Dividend Signal Fund (FDYAX) all become rather less salient on or around August 13, 2018.

On the next day, Salient International Real Estate gets a new name and mission. And on the day after that, Salient Tactical Real Estate Fund (KSRAX) will merge into Salient International Real Estate Fund (KIRAX). 

Spirited Funds/ETFMG Whiskey & Spirits ETF (WSKY) took its final sip from the bottle on June 15, 2018.

VanEck Vectors EM Investment Grade + BB Rated USD Sovereign Bond ETF (IGEM) will close at the end of July and liquidate on August 7, 2018. One wonders if part of the problem was baked in at the fund’s inception. Its benchmark index (“the EM Investment Grade Index”) seems like it would invest in, oh, investment grade securities but in reality “includes both investment grade and below investment grade rated securities.” The fund also invested in unregistered (Regulation S) and illiquid private (rule 144A) securities which were hard enough to trade that the fund had to rely on a sampling strategy to approximate the performance of the index.

USAA Flexible Income Fund (USFIX), USAA Real Return Fund (USRRX), and USAA Total Return Strategy Fund (USTRX) are each slated for liquidation on August 17, 2018.

… a snippet from a propaganda lecture

By David Snowball

The phenomenon of carefully, continuously engineered noise and distraction is neither new nor benign. Each year for the past quarter century, I’ve ended the last lecture of my Propaganda in the 20th Century course with a reading from Milton Mayer, They Thought They Were Free: The Germans, 1933-45 (University of Chicago Press, 1955).

Mayer, an American political scientist, traveled to Germany in the early 1950s to speak with German Nazis. He was dissatisfied by the existing analyses of how Nazism came to be, and hoped that intimate interviews with ten Germans who became Nazis might help him come to understand.

This excerpt comes from Chapter 13, a discussion by a university professor.

“What happened here was the gradual habituation of the people, little by little, to being governed by surprise; to receiving decisions deliberated in secret; to believing that the situation was so complicated that the government had to act on information which the people could not understand, or so dangerous that, even if the people could understand it, it could not be released because of national security. And their sense of identification with Hitler, their trust in him, made it easier to widen this gap and reassured those who would otherwise have worried about it.

“This separation of government from people, this widening of the gap, took place so gradually and so insensibly, each step disguised (perhaps not even intentionally) as a temporary emergency measure or associated with true patriotic allegiance or with real social purposes. And all the crises and reforms (real reforms, too) so occupied the people that they did not see the slow motion underneath, of the whole process of government growing remoter and remoter. . .

“The dictatorship, and the whole process of its coming into being was, above all diverting. It provided an excuse not to think for people who did not want to think anyway. I do not speak of your ‘little men,’ your baker and so on; I speak of my colleagues and myself, learned men, mind you. Most of us did not want to think about fundamental things and never had. There was no need to. Nazism gave us some dreadful, fundamental things to think about — we were decent people – and kept us so busy with continuous changes and ‘crises’ and so fascinated, yes, fascinated, by the machinations of ‘national enemies,’ without and within, that we had no time to think about these dreadful things that were growing, little by little, all around us. Unconsciously, I suppose, we were grateful. Who wants to think?

“To live in the process is absolutely not to be able to notice it – please try to believe me – unless one has a much greater degree of political awareness, acuity, than most of us had ever had occasion to develop. Each step was so small, so inconsequential, so well explained or, on occasion, ‘regretted,’ that, unless one were detached from the whole process from the beginning, unless one understood what the whole thing was in principle, what all these ‘little measures’ that no ‘patriotic German’ could resent must some day lead to, one no more saw it developing from day to day than a farmer sees the corn growing. One day it is over his head. . .”

My students and I talk about the prospect that “bad stuff” – policies and the propaganda or media strategies that enable them – don’t just appear. They grow; they grow within us, fed by our uncertainty, tolerance and exhaustion. The essential tool, I argue, for confronting great injustice is to recognize and reject daily injustice: don’t tolerate demeaning comments, even when – perhaps especially when – they’re made by your friends. Don’t ignore the stranger in need. Don’t go for the cheap laugh. Don’t shake your heads and just walk away. Do today the things that will make you, fifty years hence, look back on with pride. Do today the things that will give you a decent answer to your child’s someday question, “oh, no! Well, what did you do about it, dad?”