Monthly Archives: September 2018

September 15, 2018

By David Snowball

Dear friends,

Welcome to the mid-September issue of Mutual Fund Observer. And thanks for your patience in waiting for it. It has been a rare summer.

In some ways, this summer ended much as last summer did. Our September 2017 issue started with news of the “storm of the century” that had crashed into Houston. We highlighted some of the opportunities to help, and made personal pledges to do so. The highlight of the response to the storm was surely the work of Houston Texas football player J.J. Watt. Mr. Watt, anxious to help, took to Twitter, pledged $100,000 and appealed to his followers to contribute in support of storm relief. He hoped he might be able to raise $200,000. Instead, he raised more than that in the first hour and more than $800,000 in the first day. By the end of 10 days, it was $27 million. After a year, he’d raised $41.6 million … and promptly spent it all to help the people of Houston. After three billion dollar storms in three years, modest attempts to impose floodplain regulations in the aftermath of the storm were still challenged as “undermining the market-friendly logic key to our historic success.”

This issue might easily enough start with news of “the storm of a lifetime,” now swamping the Carolinas or the far greater storm, super-typhoon, Mangkut, slamming the Philippines. Like Harvey, their destructiveness is fed by human decisions and we can only hope that, like Harvey, they’re answered with generosity and heroism.

We’ve done our best to keep folks apprised of the medical adventures that have engulfed our happy family, from multiple surgeries for Chip’s mom and my son’s trips to Mayo in July, followed by Chip’s own, rather unexpected, brain surgery in the last week of August.

Chip is recovering. The procedure ran about eight hours, but the lead surgeons came out of it feeling good about how it went. She spent a week hooked to an array of wires and tubes, including the one that keep her brain fluids drained. She had a headache that was continuous and intense, managed mostly by narcotics and other IV pain meds. She was declared to be coming along well enough to come home late last week, though with stitches at the base of her spine, a continuous headache and a supply of narcotic pain meds. She’s been pretty adamant about reducing those as far and as fast as the pain permits.

She’s mostly functional now, but still plagued by the headache and very, very easily exhausted. If the weekend goes well, she’ll return to work on Monday with clear and emphatic restrictions on the degree of exertion she’s permitted (uhh … none).

We’re deeply grateful for the letters of support and prayers that Chip received in the weeks following our email announcement that the September Observer would be delayed. We were also heartened by several notes from medical professionals praising the excellence of the University of Iowa Hospitals, both generally and with regard to the neurosurgeons. They were, indeed, awesome.

The summer project to make me smarter

At the beginning of summer, I strongly suggested that it would be in your best interest to rethink your connect to social media. For far too many people, our phones serve as portals for a cacophony of discordant headlines, pleas and claims. We increasingly fixated on the immediate, often to the exclusion of the important. I suggested that I was shutting it down, and returning my attention – or what’s left of it – to more measured discourse.

I managed to finish The Secret Lives of Color (2017), which I commended to folks back in June. Part of it was just mildly diverting (arsenic was used to create vivid green fabric dyes and wallpapers, to which homeowners developed a – literally – fatal attraction) and part was maddeningly provocative. Scientist have now created a black so black that you literally can’t see it. If I painted my face with the stuff, you couldn’t see my face even in intensely bright light. The front of my head would seem to be a purely featureless plane. (Wow.) It’s possible that some colors couldn’t be seen because they hadn’t been conceived; some classical cultures had no need to notice the difference between blue, purple and black and so those (to us) three colors all functioned (to them) as a single color.(I wonder what I’m missing even now.) That then led to a discussion of color distinction: men actually don’t see colors the way women do; on whole, we’re challenged to recognize distinctions between related shades and hues. (“would you say this is ‘navy’ or ‘midnight’ blue?”). It might have something to do with testosterone goofing with our adolescent brains.

All of which was well worth the time. I made it part way through The Prodigal Tongue (cool stuff, but the writing style didn’t appeal) while The Organized Mind remains on the shelf.

I did encounter a podcast well worth your acquaintance: Make Me Smart, hosted by Kai Ryssdal and Molly Woods. The core of each show is a segment on one interesting, challenging subject: how the sheer scale of Amazon, Apple and Alphabet might rewrite the rules of economics, how Google search results are rigged (though not in the way the president believes) and how tariffs resonate in the world of Wisconsin’s ginseng growers. On either side of that core, there’s what seems like amiable, informed banter between two really smart people who really like each other.

Fans of news-as-origami should check out Axios.com.  They offer a hundred word precis of the day’s top stories then provide a “go deeper” button that expands the story to add 100-500 additional words. They explain themselves this way:

All of us left cool, safe jobs to start a new company with this shared belief: Media is broken — and too often a scam.

Stories are too long. Or too boring. Web sites are a maddening mess. Readers and advertisers alike are too often afterthoughts. They get duped by headlines that don’t deliver and distracted by pop-up nonsense or unworthy clicks. Many now make money selling fake headlines, fake controversies and even fake news.

Can you imagine Ford being obsessed mainly with whether the engineers love the howl and design of the F-150 engine, instead of simply delivering an awesome truck people want to drive? Never. But that’s what digital media companies too often do. They produce journalism the way journalists want to produce it. And they design their products to maximize short-term buzz or revenue — not deliver the best experience possible.

We are engineering Axios around a simple proposition: Deliver the cleanest, smartest, most efficient and trust-worthy experience for readers and advertisers alike.

I’m in.

For those still looking for the news equivalent of a shot of morning espresso, there’s Up First, NPR’s effort to provide “the biggest stories and ideas — from politics to pop culture — in 10 minutes,” all by 7:00 in the morning.

My word of the day: Trillion.

A million million. 1,000,000,000,000. 1012. 

British English used to use “trillion” to signify a million million million, but now they’re willing to tolerate the American diminutive.

A trillion. As in …

A trillion: the market value of Apple stock.

Which makes it “fairly valued,” saith Morningstar. Also Amazon’s, which ticked just below $1 trillion. Soon enough Microsoft’s (“undervalued” at $870 billion) and Alphabet’s (“fairly valued” at $820 billion).

Ryssdal and Wood devoted a Make Me Smart episode to the consequences of their sheer scale, the so-called “Amazon effect.” The short version is that Amazon’s scope is so great that it overwhelms many of the accepted tenets of economics (for example, that labor shortages in a growing economy ought to fuel wage gains). Our colleague Ed Studzinski touches on some of those same issues in his essay this month, “Anti-trust Law, what anti-trust law?”

A trillion: the magnitude of US corporate stock buybacks in 2018

In what has been characterized as the largest stock price manipulation scheme in history, US corporations repurchased $1 trillion worth of their own stock in 2018. That exceeds the previous record by $200 billion. “In a way it’s catnip for management teams,” said RBC Wealth Management’s Alan Robinson in an interview with Epoch Times. “They see the direct relationship. It’s a quick way of supporting the share price by reducing the float.” Both conservative and progressive commentators have called for a return to the historic ban on buybacks, arguing that management uses them to manipulate their company’s stock value. In the immediate case, it reflects the decision of leadership to use the gains from lower federal taxes to boost portfolios rather than boosting salaries or investment.

A trillion: the size of the federal deficit.

The Republicans’ enthusiasm for cutting taxes and raising spending (I scarcely recognize the Grand Old Party which is already preparing a second wave of cuts) has handed us a trillion dollar deficit for FY 2019. Those of us raised with the mantra “live within your means” tend to find that degree of irresponsibility mind-numbing. The Congressional Budget Office projects that, unless we quickly elect and support sober adults, our national debt will reach $100 trillion by 2048.

Hedge fund titan Ray Dalio made rather a lot of news for projecting a collapse more destructive than the 2008 crisis, likely around the time of the next presidential election. By then, the cheap buzz provided by historic tax cuts will have run their course, deficits will be at records, debt service burdens will be climbing and government will have few resources to stanch the bleeding. He’s actually written a book on the subject and is giving an electronic version away free.

A trillion: Social Security’s annual net payments

Somewhere between 2018 and 2019, Social Security will pass the $1 trillion/year threshold as Baby Boomers leave the workforce at the rate of about 4,000,000/year. Absent a change in demographics, taxation or benefits, Social Security is now projected to begin paying out more than it takes in somewhere between 2025-2027. That’s something that ought to concern anyone who, well, plans on living past 2025 since many of our retirement and investment plans are premised on receiving a predictable base of support from Social Security.

A trillion:  value of the homes in the path of Hurricane Florence

With, data geeks estimate, is likely to drop ten trillion gallons of rain on the region.

Think about signing up for email notification

About 7,000 of MFO’s 27,000 monthly readers have signed-up for a free notification when our new issue posts. It’s that little box, over there, on the right side of the home page … lower … lower. Sort of looks like

We’ve published 52 issues and have issued just 55 emails: 52 of them have announced the new issue, one announced a surprising and imminent closure of a first-tier fund, and a couple have allowed us to let readers know that something’s afoot and our issue would be delayed.

If you’re not signed-up and were a bit confused by not seeing September when you expected it, please consider adding your name to the mailing list.

Our thanks, as ever, to you

I’m only slightly panicked to note that beyond our ever-faithful subscribers Deb and Greg and a handful of MFO Premium renewals, we’ve received no contributions over the past six weeks. Hmmm … it was summer and we were spotty. We’ll keep a good thought for autumn, and an especially good thought for Greg and Deb!

We aspire to launch our October issue when we’re supposed to launch a monthly issue: on the first of the month. If you think you hear thunder, it’s likely just God laughing at me.

Cheers!

david's signature

Launch Alert – Litman Gregory Masters High Income Alternatives Fund (MAHIX, MAHNX)

By Charles Boccadoro

The folks at Litman Gregory Fund Advisors, LLC, of Walnut Creek, California are excited to launch their High Income Alternatives Fund, which “seeks to generate a high level of current income from diverse sources, consistent with the goal of capital preservation over time.”

After months of advisor selection and due diligence, the fund will launch September 28, 2018. Here are links to recently published fund commentary/fact sheet and webinar registration. The webinar will occur Monday, September 24, 2018 1:00 – 2:00 PM Pacific Time.

As with all its Masters funds, Litman Gregory allocates assets among multiple investment managers with strong track-records employing “different but complementary strategies.” The firm believes this approach can “further enhance the risk-adjusted return potential of an overall fund portfolio over a full market cycle.” The starting lineup for High Income Alternatives:

  • Ares Management will manage the “Alternative Equity Income” strategy, with a launch allocation of 15%,
  • Brown Brothers Harriman (BBH) will manage the “Credit Value” strategy, with a 32.5% allocation,
  • Guggenheim Partners will manage the “Multi-Credit” strategy, with a 32.5% allocation, and
  • Neuberger Berman will manage the “Option Income” strategy, with a 20% allocation.

BBH’s managers include Andrew P. Hofer and Neil Hohmann, who also manage BBH Limited Duration (BBBMX), an MFO Great Owl, and BBH Income (BBNIX). All three BBH bond funds are top performers.

Guggenheim’s B. Scott Minerd and Anne Walsh manage Guggenheim Taxable Municipal Managed Duration (GBAB) CEF, Guggenheim Strategic Opportunities (GOF) CEF, Guggenheim Limited Duration (GILHX), all three are MFO Great Owls, and Guggenheim Investment Grade Bond (SIUSX), an MFO Honor Roll fund.

Neuberger Berman’s Derek Devens manages Neuberger Berman US Equity Index PutWrite Strategy (NUPIX), a two-year fund with top quintile risk adjusted returns based on Sharpe.

Litman Gregory’s Chief Investment Officer Jeremy DeGroot will oversee the subadvisors as he does with the firm’s largest fund Masters Alternative Strategies (MASFX/MASNX), which we profiled last year.

The fund will be seeded with $60M from Litman’s managed accounts. It will target 5% income to investors distributed monthly, tempered risk, and low correlation to equities and traditional fixed income.

Given its depth of analysis, experienced staff, and industry knowledge, alternatives makes an ideal space for Litman Gregory to add value.

When the facts change, I change my mind. What do you do, sir?

By David Snowball

Investors are forever willing to panic themselves at the prospect that their managers have taken Stupid Pillstm. The presumed signs of ingestion: any period of relative underperformance, pretty much without regard to absolute performance, the brevity of the period, its cause or the appropriateness of the peer group.

The automatic urge: running away, either to cash or to an investment with eye-catching recent returns.

Which is, by the way, stupid.

There is no question that some managers take their eye off the ball. Ed Studzinski, who knows an awful lot about what’s going on inside firms, notes that a fair number of managers have become as rich as Croesus. Many of them succumb to the impulse to spend more time thinking about their personal tens of millions than about their investors’ tens of thousands. Others, under pressure from “the business side” of their operations, worry more about attracting and holding assets than about providing the best performance for their investors. And some just lose the passion that once drove them.

It happens, but it’s not an investor’s biggest problem.

A bigger problem, we’d argue, is that managers take Stubbon Pillstm. They’re easily available and, if you can track down a toddler, the symptoms are easily observable. Users become adamant that they’re going to have it their way, and no amount of patience, evidence or argument makes a nickel’s worth of difference. Indeed, in a reaction predicted by Social Judgment Theory, all evidence offered to suggest their wrong makes them furious and even more intractable.

We can be thankful that most toddlers outgrow the impulse (save, perhaps, for those who pursue high elected office instead).

A discouraging number of managers show the same pattern. They decide that there is one right way, immutable and eternal. They’ve discovered it, they’ve made a fortune with it and, though the heavens themselves might fall, they are never going to doubt The Way and they are never going to change.

That might describe Ron Muhlenkamp of Muhlenkamp Fund (MUHLX), with whom I invested happily in the late 1990s and early 2000s but who I left when I noticed that, in the face of declining performance, he took to quoting his own newsletter from 1o or 15 years earlier to prove there was no need to change. His fund (per Morningstar, 9/15/2018) now trails 100% of its peers for the past 1, 3, 5, 10 and 15 year periods. It certainly described the reported behavior of Legendary Investors in their final days at Third Avenue Value (TAVFX) and Sequoia (SEQUX). It would certainly be consistent with the self-confidence that Bruce Berkowitz exuded in a long past interview with us, and it would be equally consistent with his dogged embrace of St. Joe (JOE, over 25% of the portfolio) and his Fairholme Fund’s (FAIRX) record; it trails 100% of its peers for the past 1, 3, 5 and 10 year periods.

Consistency and Self-Assurance, key components of Stubborn Pills, are powerful drugs.

There are, however, honorable exceptions. There are people who refuse to do something tomorrow simply because it’s what they’re used to, or they’re comfortable with, or it’s what they’ve always done.

Bernie Horn is an exception. Mr. Horn manages, among other funds, Polaris Global Value (PGVFX), a four star fund to which Morningstar’s machine-learning algorithms assign an analyst rating of Gold. It’s an exceptional fund that had an exceptionally poor performance in 2007-09. In a long interview with us, Mr. Horn described “the soul-searching” that went on after the meltdown and the increased rigor he built into the screening process. We recount that interview in our profile of Polaris Global Value  which beat 87% of its peers in the decade following.

“A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines. With consistency a great soul has simply nothing to do. He may as well concern himself with his shadow on the wall. Speak what you think now in hard words, and to-morrow speak what to-morrow thinks in hard words again, though it contradict every thing you said to-day. — ‘Ah, so you shall be sure to be misunderstood.’ — Is it so bad, then, to be misunderstood? Pythagoras was misunderstood, and Socrates, and Jesus, and Luther, and Copernicus, and Galileo, and Newton, and every pure and wise spirit that ever took flesh. To be great is to be misunderstood.” ― Ralph Waldo Emerson, Self-Reliance

Ralf A. Scherschmidt is an exception. Mr. Scherschmidt manages Oberweis International Opportunities (OBIOX), a now-closed three star fund that earns a Bronze rating from Morningstar analysts. The manager uses an understanding of other investors psychological quirks to profit from a series of arbitrage opportunities on top of what’s accomplished by its stock selection screens. It’s an exceptional fund that had an exceptionally poor performance in 2007-09. Mr. Scherschmidt was surprised and upset by those losses, studied his processes carefully and added a risk-optimizer that better let him see that hidden sources of risk in the portfolio. The prospect that his Malaysian fabric manufacturer, his German paint company, his Japanese software firm and his Brazilian lighting manufacturer all had European car companies as major clients illustrates the idea. Those changes, discussed in our profile of Oberweis International Opportunities, allowed him to substantially reduce his downside risk.

And Andrew Foster is an exception, in oh so many ways. Mr. Foster managed, and now co-manages, Seafarer Overseas Growth and Income (SFGIX). Seafarer is in my personal portfolio and has been the subject of several Observer profiles. The fund is closed to new investors. Since inception, the fund has returned 5.6% annually, against 2.1% for its emerging markets peer group. By every measure we track – maximum drawdown, standard deviation, downside deviation, bear market deviation – it has subjected its investors to noticeably less volatility than its peers.

Seafarer posted comparatively tepid returns in 2017. It earned 26% for investors (me: yay!), but trailed 87% of its peers. All told, the fund had sluggish performance from about mid-2016 through May 2018 with a total return of 17% while its peers returned 33.6%. Two things followed:

  1. Investors got stupid. The Investor share class saw substantial redemptions, though most Institutional share class investors stayed up.
  2. Andrew Foster got thoughtful. This represented the longest period of sluggishness he’d suffered over the course of a long career managing with Matthews Asia and Seafarer. He promised, and delivered, a careful deconstruction of both his portfolio and his investing process.

 In the end, he reached two conclusions:

  1. Fundamental changes in the emerging markets had eroded, to a degree, the attractiveness of the “steady Eddy” stocks that traditionally comprised the core of the Seafarer portfolio. The core of Foster’s argument is that the traditional mantra of EM investors was “invest for growth! All growth! Only growth! Moooore growth!” As a result, steady, dividend-paying EM stocks were often undervalued and mispriced, though investors might move toward them when markets eroded. They were, as a result, a very good spot for patient investors. As EM capital markets have matured, China has matured, and more passive investors have entered the EM space, the traditional advantages of those stocks have become less pronounced. At the same time, comparable changes are making value investing in EMs more compelling.
  2. Two of his colleagues, Paul Espinosa and Inbok Song, have earned a greater degree of authority and responsibility than he’d previously assigned them. Mr. Espinosa leads the firm’s exploration of value investing and is lead manager for Seafarer Overseas Value (SFVLX). Ms. Song is the firm’s Chief Data Scientist, leads the firm’s growth investing strategy, and brings experience as a manager for both Thornburg and Matthews Asia.

That led Seafarer to announce two important changes at the end of August:

  1. Distinctly “value” and “growth” stocks would become a more visible and permanent part of the portfolio.
  2. Espinosa and Ms. Song would join Mr. Foster as co-lead managers. Each of the three managers would have final authority over one component of the portfolio, though each would continue to submit their ideas to the group for discussion and critique before making their decision. Mr. Foster would remain the firm’s Chief Investment Officer.

Traditionally, distinctly “value” and “growth” stocks might each comprise 10-20% of the fund’s portfolio. Going forward, 20% would typically be the “floor” for each with a normal range of 25-35% each in value, core, and growth. The fund often holds some fixed-income exposure, which Mr. Foster expects might decline with time. The provision of keeping at least 80% of the portfolio in dividend-paying stocks remains.

“When the facts change, I change my mind. What do you do, Sir?” Authorship contested, once attributed to John Maynard Keynes by Paul Samuelson

The fund is not adopting a team-managed approach, though the recognition of Paul and Inbok certainly answers the “what if Andrew gets hit by a bus?” question, at least with regard to the fund. Each manager will have individual responsibility for the decisions concerning their own component of the portfolio and they’ll be held accountable for their decisions. Andrew believes that individual responsibility leads people to recognize goofs faster and correct them earlier, which is the signature strength of an individually-managed fund.

Bottom line: Seafarer always has been an exceptional fund, both in its treatment of its shareholders and in the execution of its strategy. I anticipate that these changes will help the fund continue that tradition. Great organizations are led by people who recognize changing circumstances, embrace rather than deny the changes and respond intelligently to them. As with great sports teams, they add remarkable people, celebrating rather than fearing the fact that those people will foster growth, adaptation and difference.

In post-script: Seafarer’s performance over the past quarter is yet again in the top 10% of all EM funds. It’s year-to-date, one year and five year returns again top its peers, while three year numbers still lag. Mr. Foster notes that the turnaround is not an artifact of the recent changes (they’re too recent to account for it), but rather a reflection that the fund’s holdings were badly oversold in early 2018. He continues to suspect that conditions in the emerging markets are troubled, just not quite so troubled as the headline writers desperately want you to believe. 

Antitrust Law, What Antitrust Law?

By Edward A. Studzinski

“A smooth sea never made a skilled sailor.”

English proverb sometimes attributed to FDR

There is a tendency among investors, especially younger ones, to extrapolate their assumptions about investments far off into the future, beyond just a normal year or two. Once something has started working – growth rates, earnings increases, share price growth – expectations become unrealistic AND unsustainable. We have seen that in the last few years about the so-called FAANG stocks – Facebook, Amazon, Apple, Netflix, and Google. The Nifty Fifty of old have been replaced by the Fantastic Five.

One of the things that has been ignored in all of the rosy prognostications for the future are the antitrust laws currently sitting on the books in the United States. And part of the reason they are ignored is that in recent years they have not been enforced here (and it should be pointed out that a different situation has been happening in the European Union, where enforcement of their anti-competition laws has continued a pace, and huge multi-million dollar fines have routinely been assessed against a number of U.S. high tech firms).

As investors who need to be aware of things that could come some morning to bite them in the rear end, I commend to your attention an article in the Sunday, September 9, 2018 Business Section of the Sunday New York Times entitled “Be Afraid, Jeff Bezos, Be Very Afraid.” The point of the article is that in the 1970’s a consensus developed on antitrust enforcement that said that consumer well-being, that is, low prices, could obviate the need for antitrust enforcement, notwithstanding anticompetitive behavior and predatory pricing that had the effect of destroying competition.

Along came a law student, now lawyer, named Lina Khan, who wrote a note for the Yale Law Journal titled “Amazon’s Antitrust Paradox.” The point of the paper – Amazon was willing to forgo accounting profits as it built up a shipping and warehouse infrastructure that forced many independent businesses and retailers to do business with it and use its services. Otherwise those companies are shut out of the marketplace unless they are willing to do business with their biggest competitor, on term’s set by their biggest competitor. The influence of Amazon on the domestic economy, indeed its control over many parts of that economy, has allowed it an influence over the economy well in excess of its market share.

Ms. Khan, who was going to a clerkship on the Federal Ninth Circuit Court of Appeals, now finds herself as a consultant to a new commissioner on the Federal Trade Commission. The FTC has been moving forward with hearings and discussions as to whether a new economy requires different attitudes and approaches to the enforcement of antitrust law.

So, why do I think this important? Sometimes we forget that things that swing one way in terms of regulation and enforcement often reach a point where the trends reverse and they swing the other way. Spectrum, the airwaves, banking franchises – all of these are things that in the final analysis belong to the public. And in that context, one should not forget that valuation is not an abstract concept, but in the end, it matters, both for the return of capital as well as the return on capital.

In the Company of Heroes

The television miniseries war drama “Band of Brothers” at its end had a series of interviews with men who had been part of Easy Company. One of them related how he had been asked by his grandson whether he was a hero. His response was telling. He told his grandson that he was not a hero, but rather, that he had served in the company of heroes.

I did not know nor ever meet John McCain. Although we were both naval officers, his period of service was winding down as mine was beginning. By accident of the calendar, I was considered a Vietnam-era veteran, but was never anywhere near Southeast Asia, so our paths did not cross there. Later, after McCain’s retirement and entry into politics, I met those who had known him on active duty or were in contact with him during his political career. Like Hull and Preble, Spruance and Turner before him, McCain’s leadership skills remained a dominant part of who he was, his personality. He was a warrior who men and women would follow anywhere. And, he was an American hero. In the week after his death, it was said repeatedly that we would not see his like again, which if true, is sad for us as a country.

In that vein, I would offer only the words of the Greek poet Simonides of Ceos, who, writing about the fallen of Sparta said,

“These were men, and though they crown their
Homeland with an imperishable crown,
They entered the dark cloud of death,
Though dead, they are not dead;
From on high their virtues raise
Them from the dead, from out of the depth.”

Conestoga SMID Cap Fund (CCSMX & CCSGX)

By Dennis Baran

Objective and strategy

The managers seek long-term growth of capital favorable to its benchmarks with lower risk – specifically companies with 12-15% earnings growth potential for at least three years. They typically hold 40-60 SMid stocks whose valuations are attractive relative to their growth prospects. SMid caps have market capitalizations between $250 million and $12 billion, and are generally within the range of those in the Russell 2500 Growth Index.

Adviser

Conestoga Capital Advisors. The firm, founded in 2001 by Robert Mitchell and William Martindale, is located in Wayne, PA. It’s a boutique, independent investment firm specializing in managing small cap and mid cap growth stocks. Conestoga advises the two Conestoga mutual funds and approximate 190 separately managed accounts. As of July 31, 2018, total AUM at the firm was $3.87B, $2.46B in mutual funds, $1.35B in separate accounts, and $60M in a pooled retirement vehicle known as a collective investment fund.

Managers

Bob Mitchell, Managing Partner, CIO; Derek Johnston, CFA; and Joe Monahan, CFA.

At Martindale Andres, Mr. Mitchell was a portfolio manager/analyst and Director of Equity Research where he focused his expertise on small capitalization companies. He has 23 years of investing experience.

Mr. Johnston has 22 years of investing experience, 16 years in the small and mid cap space.  He also co-manages the firm’s SMid Cap Growth strategy with Mr. Mitchell.

Mr. Monahan is the co-PM on the Small Cap strategy and an analyst on the SMid Cap Growth strategy. He has 36 years of investing experience.

They are supported with research from David Neiderer, CFA, CPA, and Larry Carlin, CFA.

Strategy capacity 

Based on market conditions as of July 31, 2018, the capacity for the SMid Cap strategy is approximately $2 billion+ for total strategy assets, which include the fund and separate accounts. As of July 31, 2018, total strategy assets were $131.5 million with $64.4 million in the mutual fund and $67.1 million in separate accounts. The managers would expect $2 billion+ for the foreseeable future unless there was a major disruption in the market. 

Active share

95, per FactSet Research, 7/31/18. “Active share” measures the degree to which a fund’s portfolio differs from the holdings of its benchmark portfolio. High active share indicates management which is providing a portfolio that is substantially different from, and independent of, the index. An active share of zero indicates perfect overlap with the index, 100 indicates perfect independence. CCSMX has an active share of 95 which reflects an exceptionally high degree of independence from its benchmark Russell 2500 Growth Index.

Management’s stake in the fund

As of September 30, 2017, Mr. Mitchell owned from $100,001 to $500,000 of the SMid Cap Fund’s shares. Mr. Monahan owned from $50,001 to $100,000 of the SMid Cap Fund’s shares and Mr. Johnston $500,001 to $1,000,000. As of September 5, 2018, four of the fund’s six independent trustees have invested in it, with one newly appointed trustee who would not have had the opportunity to invest yet. One trustee has invested $50,000 – 100,000 while the others are in the $10,000 – 50,000 bracket. The trustees and the officers together hold between 18.8% of the Investor class SMID cap fund and 4.2% of the Institutional class.

Opening date

The Investor Class (CCSMX) launched on January 21, 2014, the Institutional Class (CCSGX) followed on December 15, 2014.

Minimum investment

CCSMX $2,500 CCSGX $250,000

Brokerage Options

  • Vanguard
    • CCSMX NTF Basic $3,000; IRA $2,500
    • CCSGX TF $20 Basic, IRA $250,000
  • TD Ameritrade
    • CCSMX NTF Basic, IRA $2,500
    • CCSGX Institutional Shareholders Only, TF $49.99, $250,000 Basic, IRA
  • Fidelity
    • CCSMX NTF Basic, IRA $2,500
    • CCSGX TF $49.95 $2,500
  • Schwab
    • CCSMX NTF Basic, IRA $100
    • CCSGX TF $76 $2,500

Expense ratio

0.85% for Institutional shares, 1.10% for Investor shares

Reason for launching the fund

CCSMX is an extension of the firm’s capabilities in the small cap (CCALX/CCASX) space where it can leverage its knowledge. As the market capitalizations of smaller companies continued to drift higher and graduate into the mid cap space, the managers knew many of the names after covering them for so long as small caps. On July 1, 2018, Conestoga partially closed the small cap fund.

The current overlap between the two funds is between 50-55%. The managers expect the overlap to remain in the 50-60% range going forward.

Comments

As a small/mid cap manager, Conestoga has shown that it’s well qualified to find companies early in their history, under-followed by analysts, and then hold them until they reach their full potential. These companies, and their management teams, benefit from secular growth, often exploiting under-served or niche markets.

Because of their high quality focus, the managers have historically favored technology, producer durables, and health care companies — but not biotech — due to lack of profitability.

To mitigate the portfolio against market declines during the current market cycle when valuations are high, they stay true to their focus by only owning high quality, durable businesses and manage position sizes by taking profits in holdings that are expensive in both an absolute sense and relative to their benchmarks. Specifically, these companies are profitable, with high ROE and earnings growth, low debt to capitalization and significant levels of insider ownership, characteristics that they believe lead to better downside protection.

So what happens when their performance suffered, as it did in 2014 for CCSMX (-8.10% vs. +5.65% R2500 Growth Index from inception 1/22/14 to 12/31/14) and CCASX (-8.05% vs. +5.60% R2000 Growth Index) and tested their patience?

They stayed true to their discipline, identified issues in companies that underperformed, didn’t change their stripes or what’s working, and held on to the lion’s share of those companies that disappointed wherein there were no structural problems with the business.

No companies are purchased without a thorough research review prior to investment. Company visits and/or conference calls with a company’s management are a requirement before investing in a company and subsequent visits and calls are made on a periodic basis after initial investment. Their five-person investment team conducts their own internal research examining financial statements and speaking with various customers, suppliers and competitors. They attend industry conferences and trade shows and utilize a network of regional research contacts to supplement their internal research and discussions with company management.

Bottom Line

The managers believe that the SMid Cap Fund offers similar long-term capital appreciation potential as their small cap fund but across a wider capitalization range that incorporates both small and mid-capitalization stocks. What actually supports this view?

CCSMX succeeds from owning high quality conservative companies with stable and sustainable earnings growth, strong balance sheets, and significant management ownership. The team likes to see management ownership of 10% or more of a company in the small cap fund. For CCSMX, however, the hurdle is somewhat lower because it’s more difficult to have that level in larger companies.

Investors often hear about the so-called small cap size effect or premia, i.e., that small stocks outperform large caps over time. But small cap portfolios are not created equally. So what creates this size premia?

Research shows that the quality of companies in a small cap portfolio, their profitability, sustainability of earnings, liquidity, avoiding high beta companies, those with low leverage – in other words – avoiding low quality companies or junk – are responsible for this effect.

Regarding high-quality small/mid cap stocks, Conestoga has hired Standard & Poor’s (S&P) to conduct an annual study of the performance and volatility of high vs. low quality stocks for the time period of 1986 – 2017 for the Russell 2000 Growth and Russell 2500 Growth Indices. These studies confirm that higher quality names have outperformed lower quality names and have done so with much lower levels of volatility. 

Below are the results of these studies from S&P for the Russell 2500 Growth Index:

Also, embedded in the firm’s philosophy is that smaller companies tend to be “underfollowed” by sell-side analysts, which the managers use as an advantage in this inefficient discovery process. For example, fewer than five sell-side analysts cover some of the companies they own in the fund. 

Currently about 18% of companies in the Russell 2500 and 23% in the Russell 2500 Growth are unprofitable. The high levels of unprofitable companies in the index work to their advantage because these companies have typically underperformed over long periods of time, thus giving them a higher probability of generating excess returns above the index over a full market cycle — the fund’s main objective.

The managers emphasize a patient, long-term approach to achieving superior returns with low turnover in a small and SMID cap asset class generally characterized as volatile. Forty-nine percent of the names currently in the portfolio have been there since inception of the fund over 4.5 years ago. The annual portfolio turnover is 20-30% annually, 4.4% in the last 12 months as of July 31. This long-term approach to high quality investing is one of the differentiating characteristics of their style relative to other managers in the space.

Investing with high conviction is another hallmark of the Conestoga Funds, which own between 40-60 stocks diversified across economic sectors.

Their last notable characteristics are consistent returns with low volatility and downside protection. Here are capture numbers as of July 31, 2018.

CCSMX 3 Yr Since Inception (1/21/14)
Upside Capture Ratio: 118.4 94.7
Downside Capture Ratio:  83.8 94.0
CCSGX     3 Yr Since Inception (12/15/14)
Upside Capture Ratio: 119.3 95.4
Downside Capture Ratio:  83.6 90.4

Both funds have a high-quality conservative growth approach which can protect capital during periods of market uncertainty and higher volatility.

CCSMX/CCSGX is not Conestoga’s first venture into mid-cap investing. They had a short-lived mid-cap fund and separate accounts, but limited demand and market conditions convinced them to close the mutual fund. However, the managers still run a few separate accounts in the Mid Cap Strategy. The team believes the new fund is more flexible than its predecessor and allows them to draw more seamlessly on their small cap expertise.

Because Conestoga executes a quality strategy, it has created excess returns relative to its benchmark index.

Furthermore, the culture of the firm is strong: It is 100% employee-owned, not interested in growing for growth’s sake, but focused on shareholder returns, deliberate about how they grow the business and control their future.

Need an example? They’ve closed the cash window of CCASX to maintain investor returns.

Conestoga has no debt, and as of 2Q18, continues to expand ownership of the firm with one PM and one analyst becoming new members and others increasing their stake.

The five-member team consists of generalists, not five specialists siloed in Wayne, PA to cover separate market sectors.

Its pedigree is CCASX, an Honor Roll Fund since inception in 2002, and has an overall Morningstar 5-star rating.

With CCASX having limited availability, CCSMX gives investors the opportunity to own the approximately 50-60% of what used to be small caps names that the team has owned for seven years. Now, because of their growth and profit runway, they’re too big for the small cap space but remain excellent as mid caps.

Conestoga focuses on long term performance, high quality companies, keeping up with the market when it’s rising, outperforming during periods of volatility, and ultimately beating the Russell 2500 Growth Index by 200 bps over an entire market cycle. For investors, that’s an excellent choice to have.

Fund website

https://www.conestogacapital.com/mutual-funds/

Trend

By Charles Boccadoro

We’ve added Trend Metrics to the MultiSearch tool on MFO’s Premium site.

Trend Metrics signal when funds are performing above or below their 3- and 10-month simple moving averages (SMAs). If the Trend Metric is positive, the strategy suggests staying invested. If negative, exiting the position. The strategy has proved effective at mitigating severe drawdown, especially during periods of longer term trends, like experienced during the financial crisis of 2008.

The seminal paper on trend following is Mebane Faber’s “A Quantitative Approach To Tactical Asset Allocation,” which is the most downloaded paper by far on the Social Science Research Network (SSRN) as of August 2018.

You might also see “Method Performance Over Ten Decades” and “10 mo SMA Method In Down Markets.”

As of month ending August, nearly all of the 3270 US Equity funds are trending positive, 3121 in fact had 3- and 10-month returns above their respective averages. Similarly, 132 of Lipper’s 168 fund categories are trending positive, exceptions are some commodities and international funds. Most International Equity funds have been underwater the past 7 months, but trend indicates a few, like FMI International (FMIJX), are be trending up.

Below please find past year metrics for a sampling of international funds in some notable families. The values of SMA are based absolute month ending total returns, which include dividends, and are in units of percentage, %. The values of Trend represent 3- and 10-month fund performance relative to their respective SMAs, and are also in units of percentage, %. They are highlighted in blue if positive and red if negative.

Manager changes, July and August 2018

By Chip

We monthly report on manager changes, which most commonly is simply swapping out one member of a management team for another. Those changes are sometimes deeply consequential, and we try to highlight those, but mostly they’re marginal to the funds. This month, though, several of the changes are especially important to the folks involved. Montag & Caldwell Growth has announced the departure of Ron Canakaris after a quarter century at the helm. The BP Capital Twinline funds announced the tragic death of manager Anthony Riley. Columbia High Yield Bond manager Jennifer Ponce de Leon is on indefinite medical leave. Our thoughts are with them all.

Ticker Fund Out with the old In with the new Dt
AGFQX 361 Global Managed Futures Strategy Fund Jeremy Frank will no longer serve as a portfolio manager to the fund. Blaine Rollins, Clifford Stanton, Aditya Bhave, Jason Leupold, and John Riddle will continue to serve as portfolio managers of the fund. 7/18
AGMQX 361 Macro Opportunity Fund Jeremy Frank will no longer serve as a portfolio manager to the fund. Blaine Rollins, Clifford Stanton, Aditya Bhave, and Jason Leupold will continue to serve as portfolio managers of the fund. 7/18
AMFQX 361 Managed Futures Strategy Fund Jeremy Frank will no longer serve as a portfolio manager to the fund. Blaine Rollins, Clifford Stanton, Aditya Bhave, Jason Leupold, John Riddle and Randall Bauer will continue to serve as portfolio managers of the fund. 7/18
MCGFX AMG Managers Montag & Caldwell Growth Fund Ronald Canakaris will no longer serve as lead portfolio manager but will continue to serve as a portfolio manager of the fund. Mr. Canakaris has been managing the fund since 1994 – 24 years now – and one imagines that he’s thinking a bit more about the next chapter in his life. Andrew Jung will step up to the lead portfolio manager position. In addition, M. Scott Thompson will join the team. 7/18
MGSEX AMG Managers Special Equity Fund Brian Greenberg will no longer serve as a portfolio manager for the fund. Damien Zhang joins the other ten managers on the team. 8/18
TLEVX AMG Trilogy Emerging Markets Equity Fund Robert Beckwitt will no longer serve as a portfolio manager of the fund. Pablo Salas and William Sterling will continue to serve as the portfolio managers of the fund. 7/18
BBGRX BBH Global Core Select Timothy Hartch is no longer listed as a portfolio manager for the fund. Regina Lombardi will continue to manage the fund. 7/18
BXMIX Blackstone Alternative Multi-Strategy Fund Gracian Capital will no longer serve as a sub-advisor to the fund. The fund’s assets formerly allocated to the Gracian strategy have been re-allocated to the fund’s other subadvisors or the Blackstone Alternative Investment Advisors (BAIA), the advisor to the fund. Min Htoo, of BAIA, has joined the management team. 7/18
BPMAX BP Capital TwinLine MLP Fund The BP Capital TwinLine Funds regret to inform its shareholders that Anthony Riley, CFA, unexpectedly and tragically passed away on Saturday, July 21, 2018. The BP Capital TwinLine team is extremely saddened by the news, but is grateful for Anthony’s hard work and contributions, and he will be greatly missed. Toby Loftin and Benton Cook will continue to serve as co-portfolio managers to the MLP Fund. 7/18
BAFJX Brown Advisory – WMC Japan Alpha Opportunities Fund Kent Stahl has announced his plan to retire effective December 31,2018. Gregg Thomas and Edward Baldini will continue to manage the fund. 8/18
CFRAX Catalyst Floating Rate Income Fund Tom Wojczak is no longer listed as a portfolio manager for the fund and Princeton Advisory Group is no longer a subadvisor of the fund. Stan Sokolowski will now manage the fund. 8/18
INEAX Columbia High Yield Bond Fund Jennifer Ponce de Leon, co-portfolio manager, is on a medical leave of absence. A timetable for her return is not set. Brian Lavin, co-portfolio manager, will run the fund until Ms. Ponce de Leon’s return. 7/18
QAACX Federated MDT All Cap Core Fund Brian Greenberg will no longer serve as a portfolio manager for the fund. Damien Zhang joins the other  managers on the team. 8/18
QABGX Federated MDT Balanced Fund Brian Greenberg will no longer serve as a portfolio manager for the fund. Damien Zhang joins the other  managers on the team. 8/18
QALCX Federated MDT Large Cap Growth Fund Brian Greenberg will no longer serve as a portfolio manager for the fund. Damien Zhang joins the other  managers on the team. 8/18
QASCX Federated MDT Small Cap Core Fund Brian Greenberg will no longer serve as a portfolio manager for the fund. Damien Zhang joins the other  managers on the team. 8/18
QASGX Federated MDT Small Cap Growth Fund Brian Greenberg will no longer serve as a portfolio manager for the fund. Damien Zhang joins the other  managers on the team. 8/18
FEDDX Fidelity Emerging Markets Discovery Fund Tim Gannon no longer serves as a co-manager of the fund. Jane Wu joins Xiaoting Zhao, Sam Polyak, Greg Lee, and Jim Hayes on the management team. 7/18
FSRPX Fidelity Select Retailing Portfolio Nicola Stafford is expected to transition off the fund in November 2018. Boris Shepov serves as co-manager and will continue to run the fund after Ms. Stafford’s departure. 7/18
GAGVX Goldman Sachs Blue Chip Fund Effective September 30, 2018, Sean Gallagher will be retiring from Goldman Sachs and will no longer serve as a portfolio manager for the fund. Steven Barry and Steven Becker will continue to serve as portfolio managers for the fund. 7/18
GSCGX Goldman Sachs Capital Growth Fund Effective September 30, 2018, Sean Gallagher will be retiring from Goldman Sachs and will no longer serve as a portfolio manager for the fund. Steven Barry and Steven Becker will continue to serve as portfolio managers for the fund. 7/18
GSGRX Goldman Sachs Equity Income Fund Effective September 30, 2018, Sean Gallagher will be retiring from Goldman Sachs and will no longer serve as a portfolio manager for the fund. Dan Lochner and Charles “Brook” Dane will continue to serve as portfolio managers for the fund. 7/18
GFVAX Goldman Sachs Focused Value Fund Effective September 30, 2018, Sean Gallagher will be retiring from Goldman Sachs and will no longer serve as a portfolio manager for the fund. Charles “Brook” Dane will serve as a portfolio manager for the fund. 7/18
GSIFX Goldman Sachs International Equity ESG Fund Effective August 15, 2018, Suneil Mahindru no longer serves as a portfolio manager for the fund. Abhishek Periwal will join Alexis Deladerrière on the management team. 7/18
GSAKX Goldman Sachs International Equity Income Fund Effective August 15, 2018, Suneil Mahindru no longer serves as a portfolio manager for the fund. Abhishek Periwal will join Alexis Deladerrière on the management team. 7/18
GSLAX Goldman Sachs Large Cap Value Fund Effective September 30, 2018, Sean Gallagher will be retiring from Goldman Sachs and will no longer serve as a portfolio manager for the fund. Charles “Brook” Dane will serve as a portfolio manager for the fund. 7/18
GCMAX Goldman Sachs Mid Cap Value Fund Effective September 30, 2018, Sean Gallagher will be retiring from Goldman Sachs and will no longer serve as a portfolio manager for the fund. Sung Cho and Adam Agress will continue to serve as portfolio managers for the fund. 7/18
GSMAX Goldman Sachs Small/Mid Cap Growth Fund Effective immediately, Steven Barry will no longer serve as a portfolio manager for the fund. Daniel Zimmerman and Michael DeSantis will continue to serve as portfolio managers for the fund. 7/18
HISIX Homestead International Equity Fund No one, but . . . Effective January 2, 2019, Ferrill Roll and Andrew West will serve as co-lead portfolio managers. Scott Crawshaw, Bryan Lloyd, Patrick Todd, and Alexander Walsh will continue to serve as portfolio managers. 7/18
IAEMX Invesco Emerging Markets Flexible Bond Fund Avi Hooper is no longer listed as a portfolio manager for the fund. Rashique Rahman, Michael Hyman, and Robert Turner will continue to manage the fund. 7/18
LGCYX Lord Abbett Global Equity Research Fund Yarek Aranowicz will no longer serve as a portfolio manager for the fund. David Linsen, Jeffrey Arricale, and Sue Kim now manage the fund. 7/18
MAAGX MFS Aggressive Growth Allocation Fund No one, but . . . Natalie Shapiro joins Joseph Flaherty, Jr. in managing the fund. 8/18
MACFX MFS Conservative Allocation Fund No one, but . . . Natalie Shapiro joins Joseph Flaherty, Jr. in managing the fund. 8/18
various MFS Lifetime Series Funds No one, but . . . Natalie Shapiro joins Joseph Flaherty, Jr. in managing the fund. 8/18
MAGWX MFS Growth Allocation Fund No one, but . . . Natalie Shapiro joins Joseph Flaherty, Jr. in managing the fund. 8/18
MAMAX MFS Moderate Allocation Fund No one, but . . . Natalie Shapiro joins Joseph Flaherty, Jr. in managing the fund. 8/18
FAAGX Nuveen Strategy Aggressive Growth Allocation Fund Keith Hembre is no longer listed as a portfolio manager for the fund. Nathan Shetty joins Derek Bloom in managing the fund. 8/18
FSGNX Nuveen Strategy Balanced Allocation Fund Keith Hembre is no longer listed as a portfolio manager for the fund. Nathan Shetty joins Derek Bloom in managing the fund. 8/18
FSFIX Nuveen Strategy Conservative Allocation Fund Keith Hembre is no longer listed as a portfolio manager for the fund. Nathan Shetty joins Derek Bloom in managing the fund. 8/18
FSNAX Nuveen Strategy Growth Allocation Fund Keith Hembre is no longer listed as a portfolio manager for the fund. Nathan Shetty joins Derek Bloom in managing the fund. 8/18
OPEIX OFI Pictet Global Environmental Solutions I Effective immediately, all references to Simon Gottelier in each of the Summary Prospectus, Statutory Prospectus and Statement of Additional Information are deleted. Luciano Diana and Gabriel Micheli will continue to manage the fund. 7/18
OWLSX Old Westbury Large Cap Strategies Fund Rusty Johnson is no longer listed as a portfolio manager for the fund. The other dozen managers remain. 7/18
OWSMX Old Westbury Small & Mid Cap Strategies Fund Ormala Krishnan is no longer listed as a portfolio manager for the fund. Brendan Bradley and John Chisholm join the other 17 managers on the team. 7/18
PMDRX  PIMCO Moderate Duration Fund Sudi Mariappa will no longer serve as a portfolio manager for the fund. Michael Cudzil joins Scott Mather in managing the fund. 7/18
PTFAX PIMCO RAE Fundamental Advantage PLUS Fund Sudi Mariappa will no longer serve as a portfolio manager for the fund. Jing Yang and Bryan Tsu have joined Christopher Brightman, Mohsen Fahmi, and Robert Arnott on the management team. 7/18
PEFFX PIMCO RAE Fundamental PLUS EMG Fund Sudi Mariappa will no longer serve as a portfolio manager for the fund. Jing Yang and Bryan Tsu have joined Christopher Brightman, Mohsen Fahmi, and Robert Arnott on the management team. 7/18
PIXAX PIMCO RAE Fundamental PLUS Fund Sudi Mariappa will no longer serve as a portfolio manager for the fund. Jing Yang and Bryan Tsu have joined Christopher Brightman, Mohsen Fahmi, and Robert Arnott on the management team. 7/18
PTSOX PIMCO RAE Fundamental PLUS International Fund Sudi Mariappa will no longer serve as a portfolio manager for the fund. Jing Yang and Bryan Tsu have joined Christopher Brightman, Mohsen Fahmi, and Robert Arnott on the management team. 7/18
PCFAX PIMCO RAE Fundamental PLUS Small Fund Sudi Mariappa will no longer serve as a portfolio manager for the fund. Jing Yang and Bryan Tsu have joined Christopher Brightman, Mohsen Fahmi, and Robert Arnott on the management team. 7/18
PLVVX PIMCO RAE Low Volatility PLUS EMG Fund Sudi Mariappa will no longer serve as a portfolio manager for the fund. Jing Yang and Bryan Tsu have joined Christopher Brightman, Mohsen Fahmi, and Robert Arnott on the management team. 7/18
PXLVX PIMCO RAE Low Volatility PLUS Fund Sudi Mariappa will no longer serve as a portfolio manager for the fund. Jing Yang and Bryan Tsu have joined Christopher Brightman, Mohsen Fahmi, and Robert Arnott on the management team. 7/18
PLVBX PIMCO RAE Low Volatility PLUS International Fund Sudi Mariappa will no longer serve as a portfolio manager for the fund. Jing Yang and Bryan Tsu have joined Christopher Brightman, Mohsen Fahmi, and Robert Arnott on the management team. 7/18
PWLAX PIMCO RAE Worldwide Long/Short PLUS Fund Sudi Mariappa will no longer serve as a portfolio manager for the fund. Jing Yang and Bryan Tsu have joined Christopher Brightman, Mohsen Fahmi, Josh Davis, and Robert Arnott on the management team. 7/18
PSPTX PIMCO StocksPLUS Absolute Return Fund Sudi Mariappa will no longer serve as a portfolio manager for the fund. Jing Yang and Bryan Tsu have joined Christopher Brightman, Mohsen Fahmi on the management team. 7/18
PSPAX PIMCO StocksPLUS Fund Sudi Mariappa will no longer serve as a portfolio manager for the fund. Jing Yang and Bryan Tsu have joined Christopher Brightman, Mohsen Fahmi on the management team. 7/18
PIPAX PIMCO StocksPLUS International Fund (U.S. Dollar-Hedged) Sudi Mariappa will no longer serve as a portfolio manager for the fund. Jing Yang and Bryan Tsu have joined Christopher Brightman, Mohsen Fahmi on the management team. 7/18
PPUAX PIMCO StocksPLUS International Fund (Unhedged) Sudi Mariappa will no longer serve as a portfolio manager for the fund. Jing Yang and Bryan Tsu have joined Christopher Brightman, Mohsen Fahmi on the management team. 7/18
PSSAX PIMCO StocksPLUS Short Fund Sudi Mariappa will no longer serve as a portfolio manager for the fund. Jing Yang and Bryan Tsu have joined Christopher Brightman, Mohsen Fahmi on the management team. 7/18
PCKAX PIMCO StocksPLUS Small Fund Sudi Mariappa will no longer serve as a portfolio manager for the fund. Jing Yang and Bryan Tsu have joined Christopher Brightman, Mohsen Fahmi on the management team. 7/18
RMPLX RiverNorth Marketplace Lending Corporation No one, but . . . Adrew Kerai joins Philip Bartow and Patrick Galley on the management team. 7/18
TRIGX T. Rowe Price International Value Equity Fund Jonathan Matthews will no longer serve as a portfolio manager for the fund. Sebastian Mallet will now manage the fund. 7/18
WFEMX WCM Focused Emerging Markets Fund Effective June 30, 2018, Paul Black and Kurt Winrich will no longer serve as portfolio managers of the fund. Gregory Ise and Mike Tian will join Sanjay Ayer, Peter Hunkel, and Michal Trigg as portfolio managers for the fund. 7/18
WWHYX Westwood Opportunistic High Yield Fund Ryan Carrington will no longer serve as a portfolio manager for the fund. Trevor Kaufman joins Hannah Strasser in managing the fund. 7/18

 

Briefly Noted

By David Snowball

The imminence of Halloween reveals itself in the deadened thud as the walking dead move toward the graveyard. Summer saw a curious lull in fund liquidations and manager changes both, but the end of summer is ending that reprieve. We’ve tracked 33 obituaries for this issue. A few were high-performing funds that couldn’t attract attention. There seems to be a pattern in the remainder: lots of funds designed to hedge against market volatility, lots of funds designed to hedge against rising prices and a few more funds with exposure to emerging markets. A fusty old curmudgeon might note that liquidations in a category peak at the moment of maximum pessimism which is to say, just before we really wish we had exposure to …

Briefly Noted . . .

We join the folks at First Eagle Funds in celebrating the life of Henry Arnhold (1921-2018), even as we note his passing. He was 96.

Mr. Arnhold, along with George Soros, founded First Eagle in 1967, guided its growth to past the $100 billion mark and continued serving the firm until 2015. He would be notable if he’d done no more than that. His life story reads like a gripping novel, full of moments of great darkness and brilliant rebound. The lede to the Times’ obituary begins to scratch the surface: Mr. Arnhold was “the last member of a generation of prominent German Jewish bankers who escaped Nazi persecution, re-established their family business in the New World and later helped rebuild Dresden after the fall of the Iron Curtain.” He also grew up in a household visited by the likes of Albert Einstein, saw the Nazis seize his family’s 120 year old firm, was taken to a concentration camp, emigrated after the war, built a life in America and helped rebuild lives back in Germany, demonstrated lifelong generosity and a passion for the goodness of life. He enriched the world with his presence. His final gift would be if, inspired by the possibility for Good that he embodied, we did likewise.

The planned merger of Dreyfus Core Equity Fund (DLTSX) into Dreyfus Worldwide Growth Fund (PGROX) has been delayed until October 31, 2018.

SMALL WINS FOR INVESTORS

IVA Worldwide (IVWAX) and IVA International (IVIOX) have reopened. Both of them closed to new investors in 2011 as a way of managing inflows. Both of them are now reopening as a way of managing outflows. The managers are holding a lot of cash, but they would prefer not to use that cash to pay departing shareholders since that would increase their equity exposure at a time they feel its unwarranted. Allowing in some new investors to offset departing ones maintains both the fund’s strategy and its tax efficiency. The funds’ independence does translate to a pattern of dramatically outperforming for a year or two then dramatically underperforming for a year or two; investors, insensitive to their own best interest, are departing after a year of soft performance in 2017. Morningstar rates both as Silver. Based on MFO’s metrics, both are top tier (i.e., top 20%) performers on a risk-adjusted basis since launch, though neither qualifies as a Great Owl.

CLOSINGS (and related inconveniences)

Goldman Sachs International Small Cap Insights Fund (GICAX) will close to new investors effective as of the close of business on November 16, 2018.

OLD WINE, NEW BOTTLES

Effective immediately, ATAC Inflation Rotation Fund (ATACX) has been rechristened ATAC Rotation Fund. Word up: the new plan is to “target various segments of the investable landscape by allocating primarily between equities and bonds depending on the potential for near-term stock market volatility as signaled through inter-market trends and relative prices. When indicators suggest equity volatility is likely to fall, stocks tend to outperform bonds, and when indicators suggest equity volatility is likely to rise, bonds tend to outperform stocks. The Adviser’s approach allocates into equities, or bonds based on these historical observations.” Which is pretty much what they do now, absent any reference to inflation. Turnover north of 2000%, expenses near 2%, 7.8% annual returns since inception.

On October 1, 2018, Crow Point Defined Risk Global Equity Fund (CGHAX) becomes Crow Point Global Tactical Allocation. The key is the disappearance of the word “equity” in the moniker, which signals a shift to a multi-asset strategy.

Effective September 15, 2018, Eaton Vance Multi-Strategy All Market Fund (EAAMX) will change its name to Eaton Vance Multi-Asset Credit Fund. It will, thereafter, primarily limit itself to “fixed income, variable rate, and floating-rate debt investments.”

Effective November 1, 2018, Hartford Small Cap Core Fund (HSMAX) will change into the Hartford Small Cap Value Fund, with the inevitable adjustment of benchmarks and such.

Effective on or about August 21, 2018, Salient International Real Estate Fund became Salient Global Real Estate Fund (KIRAX). The expense ratio dropped a bit at the same time.

TIAA goes active: Effective August 1, 2018, TIAA-CREF Enhanced Large-Cap Growth Index Fund became TIAA-CREF Quant Large-Cap Growth Fund (TLIIX). The managers will trawl the same universe of stocks as before, now using quant models to do the selection.

OFF TO THE DUSTBIN OF HISTORY

Advisory Research Global Dividend Fund (ADVWX) and Advisory Research Small Company Opportunities Fund (ADVSX) will meet a ghoulish end on Halloween, 2018.

ClearBridge Real Estate Opportunities Fund (CREOX) will terminate and liquidate and cease operations on or about October 19, 2018. Not a bad fund but the asymmetry between returns (above average) and volatility (way above average) led investors to look elsewhere.

Columbia Diversified Real Return Fund (CDRAX) closed on July 27, 2018 and will be liquidated on or about October 17, 2018.

TCW/Gargoyle Systematic Value Fund (TFSNX), TCW/Gargoyle Hedged Value Fund (TFHVX) and TCW/Gargoyle Dynamic 500 Fund (TFDNX) will all be liquidated on or about September 27, 2018. TCW Gargoyle Dynamic 500 Collar Fund (TFCNX) and TCW Gargoyle Dynamic 500 Market-Neutral Fund (TFMNX) were liquidated on August 30, 2018.

Likewise TCW Long/Short Fundamental Value Fund (TFFNX) met its end on August 30, 2018.

Hartford Corporate Bond ETF (HCOR) and Hartford Quality Bond ETF (HQBD) will be liquidated on or about September 21, 2018.

Hartford Global Capital Appreciation Fund (HCTAX) is scheduled to merge into Hartford International Equity Fund (HDVAX) on or about October 29, 2018. Optics, mostly. HDVAX has the same managers and a better track record, but is about one-quarter the size of HCTAX. Cynics would mumble about “burying the record.” I, of course, would not.

Hartford Real Total Return Fund (HABMX) will simply be liquidated on or about October 12, 2018. I’m guessing that that possibility started to get bandied about somewhere around, oh, 2015.

“Due to a change in business strategy,” Horizons Cadence Hedged US Dividend Yield ETF (USDY) liquidated on August 28, 2018.

iSectors Post-MPT Growth ETF (PMPT) will be liquidated on September 28, 2018.

The 20 year old Johnson Realty Fund (JRLTX), faced with a “small asset size and resulting inefficiencies, such as the high operating costs” will be liquidated on November 1, 2018. The aforementioned “small asset size” might, though we’re not sure, be a reflection of the fact that the fund has trailed its peers in every time period we track.

JPMorgan Commodities Strategy Fund met its maker on August 30, 2018.

Lazard Fundamental Long/Short Portfolio (LLSIX) meets The Big Short on September 28, 2018. The fund roared in its first three quarters of existence and hasn’t been able to get out of its own way since. Investors noticed.

Nuveen Multi-Asset Income Tax-Aware Fund (NMXAX) will be liquidated after the close of business on September 25, 2018.

“Considering the small size of the fund,” Oaktree High Yield Bond Fund (OHYDX) will be liquidated no later than September 10, 2018. It will be liquidated earlier if all of the investors have cashed-out. The fund was a big “meh,” which might explain the absence of investors. Over its 46 month life, a $10,000 investment would have earned about $100 more here than in a high-yield index product. The performance of its joint venture with RiverNorth, RiverNorth/Oaktree High Income Fund (RNOTX) has produced slightly lower returns with high expenses.

PIMCO is liquidating just the Administrative and C share classes of PIMCO Emerging Local Bond Fund (PEBLX/PELCX) and PIMCO Emerging Markets Bond Fund (PEBAX/PEBCX) on October 31, 2018.

PNC Bond Fund, PNC Government Mortgage Fund and PNC Limited Maturity Bond Fund are to be dissolved on October 19, 2018.

Putnam Emerging Markets Income Fund (PEMWX) will liquidate “the Fund upon recommendation of the Fund’s investment adviser” on November 16, 2018. It’s a tiny fund with a curious track record: Year 1, well above average; Year 2, somewhat above average; Year 3, somewhat less above average; Year 4, a little below average; Year 5, collapse and death. Same team, same strategy, continuous slippage. Odd.

Legg Mason Partners is terminating and liquidating QS International Dividend Fund (LDIVX) on about September 28, 2018. Very solid fund, no assets.

Regal Total Return Fund (RTRTX) is being absorbed by North Star Opportunity Fund (NSOPX),

RiverPark becomes less focused … or, at the very least, liquidates their Focused Value Fund (RFVFX) on September 28, 2018.

Who now remembers Julius Baer International (BJBIX)? From 1995 to the start of the financial crisis in 2007, BJBIX outran its peers by a margin of more than 2:1. Then it lost 65% in the crash, which was still better than its peers. The problem was that its rebound off the market bottom was not as vigorous as its peers, and its performance sort of stalled. (Somewhere in there, some marketing genius rebranded Julius Baer as Artio because, he argued, Julius Baer was confusing. FundAlarm ridiculed the move, noting that naming your funds after the Celtic bear goddess wasn’t like introducing a household name into the equation. Artio floundered.) Managers Rudolph-Riad Younes and Richard Pell were shown the door in 2013 and shortly thereafter launched RSQ International Equity (RSQVX).

From the get-go, RSQ suffered from a lack of predictability: it sometimes offered downside protection, then would manage to lose money when the market was making money, but not make money when the market was losing. Since inception, the fund has averaged a loss of 0.1% annually while its peers made 4.0%. Mr. Younes left in 2016, and now Mr. Pell is left to turn off the lights, sweep out the shop and head home after the fund’s liquidation on October 26, 2018.

Salient Tactical Muni & Credit Fund (FLSLX) closed on August 13, 2018 and will liquidate on October 15, 2018.

Westwood Global Equity Fund (WWGEX) will close on October 12, 2018, after an undistinguished six-year run.