Monthly Archives: January 2019

January 1, 2019

By David Snowball

Dear friends,

January 1, 2019. Welcome to a New Year!

Or not.

January 1.

The whole question of why we designate January 1 as the start of a new year is a bit unsettled. As you think about it, January 1 aligns with nothing. No major historical event. No astronomical occurrence. No grand moment in any of the world religions.

Much of the world goes its own way on the matter. The Iranian New Year, called Nowruz, sensibly enough begins at the moment of the spring equinox, March 20 or 21. Al-Hijra, the Islamic New Year, begins August 30. The Jewish New Year will be celebrated during Rosh Hashanah, beginning September 29. The Chinese (Korean and Vietnamese) New Year, preceded by a week of celebration, rolls in on February 5 with the inauguration of The Year of the Pig. In Chinese culture, pigs are the symbol of wealth. (I’ll admit that’s a thin hope, but I’m willing to go with it!)

The ancient Romans were sensibly political about the matter. The New Year started on Inauguration Day, whatever day the new consul took office which was usually in late spring, and the year was named for the leader. (January 20, 2017, if you want to play with that notion in your head.) The exact date was set by Rome’s chief priest, the pontifex, who often had strong opinions about the incoming administration. As a result, years could start sooner when the pontifex liked you and substantially later when he didn’t.

Upon ascending to power, Julius Caesar put a stop to the practice and set January 1 as the first day of the New Year, 45 BCE. The idea quickly caught on.

Okay, it didn’t unless you meant “about 1500 years later.” Here are the dates for when various states first recognized the civil year as beginning on January 1:

Holy Roman Empire (a/k/a Germany) 1544
Spain, Portugal, Poland 1556
Prussia, Denmark and Sweden 1559
France (Edict of Roussillon) 1564
Scotland 1600
Russia 1725
Great Britain (except Scotland, above), Ireland and British Empire (including the American colonies) 1752
Japan 1873
China 1912

And still, we need a New Year. It represents a symbolic and psychological break from the messiness of the preceding twelve months, and it offers us the opportunity to gather, celebrate, plan and commemorate. Those are all very good things.

2019

The designation of “centuries” as somehow important strikes me as equally silly. We can’t even keep straight whether a new century begins with the year numbered -00 or the one number -01; the latter makes more sense, though it’s less visually satisfying. Why, exactly, “the 21st century” is a meaningful phrase is unclear, since this epoch did not begin with any defining event.

The challenge to that easy orthodoxy was posed long ago by William Klingaman, in his 1987 book, 1919, The Year Our World Began. 1919 marks, he argues, the end of “the long 19th century” which was defined by a set of political structures (dynastic and imperial) and social structures (rigid and stratified) that were ripped apart by The Great War and the global plague that sickened one-third of the world’s population and killed 50,000,000. As the world spun out of control, its leaders were locked in vindictive, self-aggrandizing bickering.

We wish you better on this centennial of our world. We look forward to the year, fully cognizant of the wildness we face and of our own ignorance (I’ve got not the slightest clue about what the market will do nor how it’ll do it) but also cheered by your wisdom, your companionship and our children’s unbounded potential. We’ll make a good year of it, because we have no other option worth pursuing.

Thanks!

We were blessed both by challenge grants from two anonymous friends of MFO, and by your willingness to step up and help us meet them. You contributed enough in December for us to cover rather more than half of our (modest) fixed costs for the year ahead. Thank you for that.

Thank you to the dozens of you who renewed your MFO Premium accounts. In addition to Charles’s regular enrichments of the site’s function, we’re moving toward several grander changes including the creation of an investor advisory council to help us fine tune the system’s capabilities and a professional “user experience designer” to help us make it even friendlier and easier to use.

Speaking of MFO Premium, be sure to read Charles’s short announcement entitled “MFO Premium webinar.” Charles is co-hosting the webinar with Brad Ferguson of Halter Ferguson Financial, one of the financial planners who uses the site regularly in his practice and whose custom metrics are now incorporated in it.

Quite beyond those, special thanks to December’s contributors, including Sharon A., the K. Family, Greg (one of our stalwarts), Marvin from Montana, Brett A., Sunil (howdy, sir!) of sunny California, William M., Robert M., Lee of San Antonio, Irv H., Carl from Cambridge, Francis of Minnesota, Van S., Brian T., Deb (the ever awesome), Kevin P., Altaf of Illinois, Richard from Raleigh, Ben from Virginia, Ed G., Joseph S., Richard of Phoenix, Ronald from Rhode Island, David C., Victoria O., Leah from Massachusetts, Mike H. (your note meant a lot), Paul of Cincinnati, Charles R., Francis from Rogue River, Doug E., Paul from Virginia, Joseph A., and several anonymous friends.

A special shout-out to Richard from Orchard Beach and other fans of Money Life with Chuck Jaffe. I was Chuck’s guest on about December 20th and offered quick takes on a half dozen funds:

Provident Trust Strategy (PROVX) for Rich in Orchard Beach, MD. and Dale in London, OH. PROVX was profiled in our December issue, but also in our first issue ever. They’ve done a better job than just about anyone in managing the risks posed by a focused portfolio. It’s an exceptional little fund.

RiverPark Strategic Income (RSIVX) also for Rich. I like it a lot. David Sherman manages a flexible portfolio that aspires to returns in the 7-8% range but he will not “reach for returns.” I own it in my personal portfolio and we hold it as part of MFO’s tiny endowment. That said, two other RiverPark funds are modestly more compelling RiverPark Short Term High Income (RPHIX/RPHYX, which Chip and I also own in our portfolios) and RiverPark Floating Rate CMBS Fund (RCRIX/RCRFX).

Bruce Fund (BRUFX) for Dave in Beaver Dams, NY. Run by Robert & Jeffrey Bruce since 1983. The senior Mr. Bruce is 87 and was the mastermind behind one of the great funds of the 1960s and early 1970s, the Mathers Fund. They won’t permit themselves to be photographed and won’t talk with journalists or analysts. It’s a go-anywhere fund, with rock star / rock steady performance. It lost only 1% during September and October. #2 ranked flexible portfolio by Sharpe ratio. Industry’s worst website apparently designed by an accountant who resented the whole idea of the web. Morningstar disdains the fund and ended coverage in 2010; since then it’s been a top 5% performer.

Ariel International (AINTX) for Richard in Chula Vista, Calif. Rupal Bhansali has managed the fund since 2011. We’ve spoken at length, and she’s really impressive. I like the fact that her portfolio construction starts with a phase she called “throwing out the trash.” The general pattern is that performance sucks in boisterous markets, thrives in sucky ones. General rule: if the international markets are in the red, this fund will be a top 10% performer, if the international markets are making north of 20%, this fund will be in the bottom 10% with solid absolute returns. My impulse is to look at her Global Fund (AGLOX), with about twice the returns and slightly lower volatility.

Vanguard Dividend Appreciation (VIG) for Richard in Chula Vista, CA. Dividend worship has gotten entirely out of hand, as zero –and occasionally negative –interest rates triggered a desperate search for income-at-any-price. That’s had two effects on dividend paying stocks. First, they’re often no-growth companies whose stocks are now priced as if they’re high growth companies. Second, corporate management has engaged in some desperate financial engineering so they can continue to pay those dividends. Some companies have turned to issuing high yield bonds to fund dividends (and stock buybacks, which were averaging $75 billion a month over the first three quarters of 2018) and nearly 500 firms have dividend payouts that exceed their earnings. These are not your father’s blue chip Steady Eddie stocks, Richard. That said, Vanguard is sensible, disciplined (they look for 10 consecutive years of rising dividends) and cheap.

We were delighted to receive a boatload of books over the holiday season. These arrived throughout the month of December, and we smiled as we opened each one:

These Truths: A History of the United States, by Jill Lepore, an award-winning historian and writer for the New Yorker. Heralded as, “the most ambitious one-volume American history in decades,” These Truths explores our history through the lens of Jefferson’s “three truths” – political equity, natural rights, and the sovereignty of people.

Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts, by Annie Duke. The author, “poker champion turned decision strategist,” tells us how to become comfortable with uncertainty, avoid knee-jerk reactions, and make good decisions – mostly without math!

Washington Black, a novel by award-winning author Esi Edugyan. This is the story of George Washington Black, or “Wash”, as life takes him from Barbados field slave, to manservant, to fugitive; from the Caribbean, to the Arctic, London, and Morocco. It’s a story of “love and redemption.”

Beginnings: How the Party Started, by Marc Weber. A truly beautiful cookbook presenting “purposefully unadulterated, commercial kitchen recipes” designed to inspire “bringing out your inner pro chef.” Chip promptly turned to page 202, the Jack and Ginger Julep.

Factfulness: Ten Reasons We’re Wrong About the World – and Why Things Are Better Than You Think, by Hans Rosling. A book designed to “change the way you see the world and empower you to respond to the crises and opportunities of the future.” If you liked Optimism is not always the answer, you might want to check out this book.

Thanks to the folks at Cohanzick, Cook & Bynum, Long/Short Advisors and others – optimists one and all – for their generous attempts to deepen my clue supply and help me while away the long winter evenings!

Cheers!

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MFO Premium Webinar

By Charles Boccadoro

On Tuesday January 15th, we will host a webinar discussing latest features of the MFO Premium search tool site. This time we are fortunate to be joined by Brad Ferguson of Halter Ferguson Financial, a fee-only independent financial advisor based in Indianapolis. Brad will highlight the Ferguson analysis tool, one of the site’s newest features, which helps investors identify funds with equity-like returns but tempered volatility.

Other topics covered on the call will be the newly introduced rolling average ratings, Lipper benchmarks, interval funds, trend analysis, and the much expanded evaluation periods. Finally, we will discuss the new default evaluation period and the much faster responsiveness of the site’s main MultiSearch tool … this very latest feature will be go live in next day or so, in time for the year-end performance metrics.

There will be two sessions, one at 11 am Pacific time (2pm Eastern) and one at 2pm Pacific time (5pm Eastern). The webinar will be enabled by Zoom. Please use the following links to register for the morning session or afternoon session. Each will last nominally 1 hour, including questions.

Here are links to previous webinar charts and video recording.

Hope to you can join us again on the call. If you have any questions, happy to answer promptly via email ([email protected]) or scheduled call.

Optimism is not always the answer

By David Snowball

But, it is, in general, the best place to begin the search for the answer. Optimists, who assume things will work out, tend to see more paths forward, more options worth considering, than pessimists (often dubbing themselves “realists”) who know that it’s eternally time to duck-and-cover.

The word “optimism” entered the English language (1759, in French 1737) several generations before pessimism (1794) did. 

The psychological research on the effects of optimism is stunning. The champion of such research is Dr. Martin E.P. Seligman, a Professor of Psychology at the University of Pennsylvania and Director of their Positive Psychology Center. His focuses on notions like “learned helplessness” and has racked up rather more than 325 journal articles and books. His most widely-cited work, Learned Optimism: How to Change Your Mind and Your Life (Vintage Books, 2006) has been cited by other scholars on 7,998 occasions. In it he argues:

The defining characteristic of pessimists is that they tend to believe bad events will last a long time, will undermine everything they do, and are their own fault. The optimists, who are confronted with the same hard knocks of this world, think about misfortune in the opposite way. They tend to believe that defeat is just a temporary setback, that its causes are confined to this one case. Optimists believe that defeat is not their own fault: Circumstances, bad luck, or other people brought it about. Such people are unfazed by defeat. Confronted by a bad situation, they perceive it as a challenge and try harder.

These two habits of thinking about causes have consequences. Literally hundreds of studies show that pessimists give up more easily and get depressed more often. These experiments also show that optimists do much better in school and college, at work and on the playing field. They regularly exceed the predictions of aptitude tests. When optimists run for office, they are more apt to be elected than pessimists are. Their health is unusually good. They age well, much freer than most of us from the usual physical ills of middle age. Evidence suggests they may even live longer.

There are important parallels here to “the placebo effect.” For a long time, medical researchers considered the placebo effect to be a nuisance and a sign of failure; that is, if taking “a sugar pill” was about as useful as taking an experimental drug, they concluded that the drug was a failure. Newer research, embodied at Harvard’s Program in Placebo Studies, reaches the opposite – and more optimistic – interpretation: it’s not that the drug failed, it’s that the placebo worked. Our minds are able to have powerful effects on our bodies which aren’t limited to the rainbows-and-unicorns fluff associated with Pollyanna. We can will physiological changes into existence if we believe that those changes are due.

Vox published a nice summary of the placebo research, Brian Resnick’s “The Weird Power of the Placebo Effect, Explained,” in 2017. There’s a conspiracy afoot to trick you into getting smarter; it involves a number of smart people making learning seem fascinating and whimsical. They came together on the Christmas Eve edition of the Make Me Smart podcast in which Kai and Molly reprise an interview with Adam Conover, of the Adam Ruins Everything TruTV show. Conover is both a comedian and a really smart guy who tries to bring serious research comically to bear on various cultural myths and misunderstandings. Kai and Molly’s piece ends with a nice reflection by Adam on the power of placebos.

Why does it matter?

Good question! It matters because the world feeds your impulse toward pessimism and starves the prospects for optimism. Still, in ways small and large, there’s an objective case for optimism.

Many of us know the tragic story of the death of Mollie Tibbetts, an Iowa college student murdered in July 2018 by a young man who’d worked quietly in town for years, but who also was in the US illegally. His arrest in August led to threats against other migrant workers in Iowa, many of whom left in fear. Fewer of us know that Ms. Tibbetts’ mother took in the child of a migrant family that had fled; Ulises Felix had grown up in town, was a high school senior intent on graduating and faced the prospect of spending a year alone in the one still-furnished room of a trailer home. At her son’s behest, she invited Ulises to live in their spare bedroom. It was a quiet gesture without great political significance, but also an important and good one.

Many of us know that greenhouse gas levels in the atmosphere continue to rise, which raises the prospect of catastrophe. Fewer have reason to note the dozen or so global trends, social and environmental, that reflect the fact that many people are working passionately to make the world a better place. Elijah Wolfson, writing for Quartz, detailed How the world got better in 2018, in 15 charts.

The Gates Foundation’s 2018 “Year in Review” report similarly detailed the many things that are going right in the world. Some are huge (a billion people were vaccinated in tropical countries), many were small (toilet tech improved) and all were threatened by pessimism. Sue Desmond-Hellmann, the president of the Gates Foundation warned, “the biggest threat is a sense of despair and pessimism … youth who feel like they don’t have an opportunity to have a better life … to have a happy, productive, fulfilled life and to achieve something. That’s the biggest threat.”

Traditional media has always followed the maxim, “if it bleeds, it leads.” Editors and publishers know that we’re transfixed by horror (Stephen King has sold over 350,000,000 copies of his horrifying stories), so they feed it to us. Social media, an addictive vortex of horrifying fiction posing as secret truths, makes fear and loathing into virtues.

The markets likewise: the five FAANG stocks lost a trillion dollars this fall, the US markets evaporated a trillion in value in a single week, the Chinese market misplaced nearly $3 trillion this year, global markets vaporized $3 trillion in just two days … and worse, worse, worse! is yet to come.

Or not.

Stock market valuations, the key driver of future investment returns, are historically high but becoming more reasonable daily. Interest rates, the key driver of corporate capital decisions and income-investor returns, are low but becoming more nearly normal. Volatility, a key tool for restraining irrational exuberance and investment bubbles, has become a top-of-mind phenomenon.

To be clear: those are all good things as long as we’re willing to make them into good things.

For investors in their 20s-40s: you’ve been blessed with a series of incomparable gifts. You’re young. (We forgive you.) The current repricing of the markets is utterly inconsequential to your long-term gains. Here’s the Dow Jones average over the past 100 years on a “log scale” so that a 1% gain in 1920 (a rise of less than one point in the DJIA) is the same as a 1% gain in 2010 (which would require a rise of over 100 points). The 18 gray bars are economic downturns.

In general, pick any point in the past century, move 25 years forward and look up – generally way up – at the new value of your portfolio. Unless you have reason to anticipate a return to the Dark Ages, the current thrashing about is precisely as important to your long-term prospects as the frenzied yapping of a small dog.

You’ve got access to more investing tools, more affordably priced, than any generation in history. Asset valuations are slowly returning toward rational levels (umm, not there yet but …) and rising interest rates should impose some discipline on the stock market (it’s harder to borrow more to do silly things when the money’s a bit expensive). There are, in particular, a number of really well-designed multi-asset funds – from target-date funds to “income builder” strategies – that come awfully close to fire-and-forget investments.

For investors in the latter stages of their careers: the current noise is precisely as consequential as you allow it to be. Your returns and volatility are driven more by the asset allocation you’ve chosen than by the individual investments – active or passive, ETF or fund, boutique or behemoth – you’ve selected to implement that allocation.

The mantra “stocks for the long-term” is double-edged. First, stocks are your portfolio’s best friend over the next quarter century and its worst enemy over any “next decade.” Stocks are highly volatile, seductive during their long, relentless “it really is different this time” bull runs and destructive in the inevitable aftermath if you haven’t planned for profiting from the price collapse.

Here’s the magnitude of the losses you might face. I searched MFO Premium’s database for the five largest equity funds, balanced funds and bond funds then pulled up their maximum drawdowns (i.e., largest-ever declines) and how long it took them to get back to break even. It turns out that all of the largest equity funds are passive, four Vanguard index funds and a State Street ETF that hold two trillion in assets, so I added a separate line for the largest actively-managed equity funds (four American and one Fidelity).

Class Drawdown, in percent Recovery, in months
Equity, passive 52 Five years, six months
Equity, active 47 Five years, one month
Balanced 34 Three years
Bond 11 One year, nine months

With both the pure equity and pure bond lines, one of the top five funds was a significant outlier which a much longer drawdown and much slower recovery than the others, so your results might be a little better.

Here’s the translation: if you own an equity fund, you might reasonably anticipate losing half of your investment at some point. If you don’t sell in a panic, but also don’t deploy your “dry powder” during the worst of the bear, you will not break even for five long years; a bit more for index funds, a bit less for active ones. Those aren’t worst-case numbers, those are the performances of the largest funds which got to be large by being abnormally steady. The worst case numbers, among funds with $10 billion or more in assets:

Class Drawdown, in percent Recovery, in months
Equity, passive Invesco QQQ Trust, 81.1% State Street Technology Select Sector SPDR, 17 years, 10 months
Equity, active Janus Henderson Enterprise, 77% Janus Henderson Enterprise, 14 years, nine months
Balanced Fidelity Freedom 2050, -52.7% First Eagle Global, six years, three months.
Bond Nuveen High Yield Muni Bond, 44.2% Vanguard Long-Term Tax-Exempt, five years, two months.

(Still not the worst-case; remember this screen only examines the performance of very large funds. For complete details, folks who are members of MFO Premium can screen the records of 17,000 funds, ETFs, CEFs and insurance products to see how they compare over any of dozens of different time periods.)

We have argued, and will continue to argue, that the Cult of Equity is overblown. For most folks over 40, a smaller stock allocation than you might imagine will serve you best, especially in your non-retirement portfolio. 

For the managers of active mutual funds: the day you’ve been praying for has come! It’s no longer the up-and-away market that favors whoever offers the purest equity exposure all the time at the lowest cost. The arguments for active management are that (1) managers have the flexibility – through holding cash or dodging the priciest issues – to moderate the effects of a downturn and position investors for a rebound and (2) managers can communicate clearly and frequently, allowing their investors to avoid the worst of their impulses. It’s time to put up or shut up.

For the advocates of liquid-alt strategies: likewise. The average 60/40 balanced fund, for which liquid alts often claim themselves a successor, dropped 9.3% during the last three months of 2018. Every single liquid alts category outperformed that, with market neutral funds clocking in a -0.6%. The rub is that no category of alts earned as much as 3% annually over the past three years. The excuse has been “hostile market conditions,” with zero interest rates and a massive tax cut underwriting all sorts of excess. That’s past now. It’s time to step up, or step aside.

Bottom line. Here’s what I know about 2019: it will be 365 days long. Pretty much everything beyond that is conjecture.

Here’s what I conjecture: it will be a year of great adventures, in the markets and otherwise. It is likely to be marked by great volatility, in the markets and otherwise. Folks who want to sleep well at night they might reasonably act on the recommendations of Vanguard founder Jack Bogle:

Trees don’t grow to the sky, and I see clouds on the horizon. I don’t know if and when they’ll arrive. A little extra caution should be the watchword. If you were comfortable at a 70 percent to 30 percent [allocation of stocks to bonds], under these circumstances you’d like to go back to 60 percent to 40 percent, or something like that.

The Observer’s special passion is for investors with exceptional risk management disciplines and records. We will continue to highlight for you the folks with the wherewithal to keep you safe and to invest responsibly beside you. Seek them out.

Having done that, you might reasonably turn to Warren Buffett’s recent recommendation:

The one easy way to become worth 50 percent more than you are now — at least — is to hone your communication skills — both written and verbal. If you can’t communicate, it’s like winking at a girl in the dark — nothing happens. You can have all the brainpower in the world, but you have to be able to transmit it.

The Year That Wasn’t!

By Edward A. Studzinski

“Human life is punishment.” Seneca

“Vīta hūmāna est supplicium,” Lucius Annaeus Seneca

Looking at the detritus of the year just passed and its effect on investment portfolios, the question that will be asked ad nauseam over the next four or five weeks will be some variant on “How did this happen?” The answer is rather short and simple. You, your mutual fund portfolio manager, and the asset management firm that the fund is part of, all were too greedy.

How so?

It has been pretty clear, certainly in regard to domestic equities, that valuations have been extended for some time. We have heard many explanations as to why that has not been the case, which are variations on “New Math.”

If you take out this and add back that, it’s cheap.

If you extrapolate normalized (whatever that is in this environment) earnings out two to three years and discount them back (but at what interest rate in a rising rate environment), it’s cheap.

These software and media companies are asset-light, and therefore should be valued differently than the traditional industrial companies we have invested in (just look at the private market transaction values – the new greater fool approach). They’re cheap.

So what if certain foreign media and internet companies don’t allow us to actually own common stock, but only sort of a stock-like certificate? They’re …

Here’s the math that matters. If your fund family hit a high-water mark of assets under management of $150B early on in the calendar year, that would have produced, assuming an all-in blended 1% fee and a constant run rate, $1.5B in revenue, half of which goes to the parent organization. By the end of November your assets are down to $120B, which means revenues are running at a $1.2B rate, and only $600M for you in-house.

This poses two questions? What happens if assets under management have dipped under $100B by year-end? And how do you stop the bleeding? Depending on absolute and relative performance, some heads should roll (and spare us the “bad year for everyone” and “who could have predicted” nonsense). The heads should be the accountable heads, not some poor schmucks who have not been the investment decision makers. Just because you call someone a co-portfolio manager, doesn’t mean the person did anything but sit for a photo shoot. In that vein, I hold up Tweedy, Browne as an example, where I am told all five members of the investment committee, all senior partners, have to agree before an equity is bought or sold. You understand the accountability at that firm.

Active investment managers are bleeding badly, and it’s not going to stop until they hold themselves to a dramatically higher standard.

Stopping the bleeding is a more difficult question. Have your investors lost faith in you? As a fund manager or fund organization, disclosing an investment given the SEC ranges (more than X$) probably doesn’t go far enough any longer. And saying that at these prices, you have added to your fund investments also doesn’t go far enough. I think the example of Longleaf Asset Management should apply. With very rare exceptions, no equity investments by firm employees should be permitted in vehicles other than the funds managed by the firm. No clone investment limited partnerships, no real estate partnerships, no outside investment partnerships, no individual common stocks, nada. If you are going to talk about skin in the game, let’s have real skin in the game.

Some of you may think this is especially harsh and unrealistic, given that investment talent can easily go down the elevator and out the door. Let them. I want to share with you a comment that a retired investment banker made to me recently. And the comment was that most of the sovereign asset funds as well as the private offices for those European families with billions of dollars of personal wealth, have been forty to fifty per cent in cash since June. Why, he asked, do American institutional and retail investors, after more than five years of above-average returns, think they have to try and time the top of the market? After all, the focus should be on investing for generations, for the long-term, not milking out the last hundred basis points of return in hopes of a bigger bonus. If your talent is unwilling to commit to the same products you are asking the investors to invest in, lose them. Don’t pretend you are taking on the same risks as the investors, especially if fund personnel are fleeing the organization’s products. As an exercise, look at the 9/30/2018 financials and then 12/31/2018 financials for your funds. See what level of cash they were carrying. That will give you an indication as to whether the fund company was investing OPM (other people’s money) or catering to the financial consultants.

We Love Shareholder Friendly Managements

One of the phrases I have come to hate is “we invest in companies that have shareholder friendly managements.” This is then expanded to define them as companies where the management’s focus on the appropriate capital allocation, usually defined as repurchasing stock or paying dividends when appropriate. I can’t think of when I heard those capital allocation discussions include “investing in the growth of the firm’s business.” Which makes me wonder how many companies have become hollowed-out over the years. Yes, there are some businesses that are just commodity businesses, like banking, where adding branches or making an acquisition used to be the limit of what could be done. But now that branch banking networks are superfluous in a world of electronic banking, investing in technology (as well as cyber-security) may be a better use of capital than just shrinking the share count or paying out a dividend. A few years ago, I asked a friend who was on the board of a multinational Chicago-based financial institution what kind of money they were spending on cyber-security. His answer was that they were spending a fortune and they knew it was not enough.

In 2018, management spent more to buy back its stock, $1.1 trillion dollars, often at inflated valuations, than it committed to investing in its actual operations and almost 20x more than it spent on cybersecurity.

Does share repurchase make sense? Sometimes. But it is not a panacea for a declining business, especially if we are talking about a slow death. Often share repurchase is just being used to eliminate the dilution caused by stock options issued to executives. And that is a mistake I and other investment managers recognized too late. We should never have gone along with the managements on that. We thought we were aligning interests. Instead we gave them a way to own a company for free.

The Year Ahead

I have been reminded recently that I have not come back to the issue I raised some years ago that most investors owned too many funds, and perhaps fewer than ten was appropriate. I also remain committed to my idea that equity funds should only be owned in tax-exempt accounts. I will come back to those issues in some detail. Perhaps that will be in tandem with a piece about funds that should no longer exist. I would suggest that if a Morningstar-rating puts a fund for all periods observed in the 90th decile or higher, either the fund should not exist or you should no longer be an investor, if indeed you are. Things for you to look forward to in the New Year.

Terrific twos: Intriguing funds not yet on your radar

By David Snowball

Most funds don’t show up on investors’ radar until they have at least a three year record, which is also the point at which they receive their inaugural Morningstar rating. That’s a generally sensible, sometimes silly constraint since many funds that have been operating for fewer than three years are actually long-tested strategies managed by highly experienced professionals which are just coming to market in a new form. Relatively recent examples of such funds include Andrew Foster’s Seafarer Overseas Growth & Income (SFGIX), Rajiv Jain’s GQG Partners Emerging Markets Equity (GQGPX), Abhay Deshpande’s Centerstone Investors (CETAX), and Amit Wadhwaney’s Moerus Worldwide (MOWNX). Collectively, those four managers had overseen more than $100 billion using strategies later embodied in their “too new to be on the radar” funds.

As a result, MFO Premium has a preset screen to allow us to identify funds which will receive their three-year recognition within the next 12 months. While many of those are undistinguished and we’ve looking closely at just a handful, our performance and risk screens highlighted a handful of funds that are intriguing.

The big picture is that there were 568 funds, CEFs and ETFs, as of 11/30/2018, which have passed their second birthdays but haven’t yet reached their third. About 200 ETFs and 330 mutual funds. Because we prefer investing to speculating, we filtered out the trading funds. Likewise, because we prefer investing to saving, we filtered out the money market funds. Finally, because we prefer things you can actually buy, we filtered out insurance products. That still left us with 490 newer funds, CEFs and ETFs. We then sorted everyone by Lipper category and by Sharpe ratio.

Some highlights:

Out-of-favor areas were hot. Our list includes 51 diversified international equity funds and 51 liquid alts funds of various hues and denominations. Five categories logged in with 20-some funds each: 29 global equity (29), US large cap (28), flexible portfolios (24),US small cap (23) and emerging markets (21).

BlackRock and State Street have the greatest number of funds in the pipeline, each with 22 entrants likely to receive their three-year rating in 2019. Fidelity has 18, First Trust has 17, Invesco and WisdomTree each clock in with 14.

Most of the newer funds are being launched by smaller, independent advisers. Fidelity accounts for only 10 of the 330 newer mutual funds, and they’re the most active large firm. Vanguard launched just a couple, T. Rowe Price had five, BlackRock has eight and American Funds has a single entrant.

Only one-third of the funds have enough assets to be financially sustainable. The cutoff number we use, based on conversations with several independent fund managers, is $75 million in AUM. You can certainly run a fund with a smaller asset base, run it well and run it for a long time, but you’re not likely to generate enough in fees to pay yourself. (Apply a management fee of 0.75% to a $50 million base and you’ve got $375,000 to cover all the expenses of the management firm.)

Best advice for crossing the $1 billion in assets mark: have “Fidelity” as the first word in your fund’s name. Of the 26 fund with $1 billion or more in assets, eight are Fidelity funds (an 80% success rate for Fido, in the sense of having eight of 10 funds cross the threshold).

The biggest laggard among the ultra-large cohort is the Global X Robotics & Artificial Intelligence ETF (BOTZ) which trails its science & tech peer group by 4.9% annually; it also has the greatest maximum drawdown and highest volatility in the group. The biggest leader is UBS AG FI Enhanced Global High Yield ETN due March 3 2026 (FIHD), an exchange-traded note that’s outpacing the average high-yield fund by 12.5% annually.

The highest Sharpe ratio, which roughly translates to the best risk-adjusted returns, were posted by the RiverPark CMBS Floating Rate Fund (RCRIX) at 5.26. The fund averaged 4.3% a year without a single losing month. We wrote about the fund at its latest launch, since it’s been offered as a private fund, a sort of closed-end interval fund and now an open-end mutual fund. The second-highest Sharpe ratio was earned by another closed-end fund, PREDEX (PRDEX), which invests “up to 95% of its net assets … in privately offered securities of non-traded institutional real estate funds.” The third-best Sharpe ratio was another former hedge fund with a focus on mortgage-linked securities, Braddock Multi-Strategy Income (BDKAX).

In the area of long-short equity, the right answer was almost always “Gotham.” In the top tier of long-short funds, six were from Joel Greenblatt’s Gotham operation.

  Sharpe ratio Returns vs peers Annual returns
Gotham Defensive Long 500 1.74 11 16.8
Gotham Absolute 500 Core 1.61 5.3 11.1
Gotham Enhanced 500 Core 1.59 10.6 16.4
Gotham Hedged Core 1.56 5.2 11
WisdomTree CBOE S&P 500 PutWrite Strategy 1.34 1.4 8
CBOE Vest S&P 500 Buffer Strategy 1.32 2 7.4
WisdomTree Dynamic Long/Short US Equity 1.17 6.2 11.4
Gotham Hedged Plus 1.16 5.1 10.7
Catalyst/Millburn Hedge Strategy 1.13 6 11.1
Neuberger Berman US Equity Index PutWrite Strategy 0.95 0.6 6.4
Gotham Defensive Long 0.79 2.6 8.4

Two notes: that means (1) Gotham has launched six new funds in under three years and, at least in the last stages of a bull market, (2) they work.

Three of the funds are options-based, rather than conventionally investing long in some equities and short in others. The two more-traditional long/short funds in the top tier are:

WisdomTree Dynamic Long/Short US Equity (DYLS), a passive fund that tracks an active index which rather muddies the whole active-passive debate. They invest long in 100 large cap stocks then short the S&P 500 index. The fund can range from 100% long to 100% short. The expense ratio is 0.48%.

Catalyst/Millburn Hedge Strategy (MBXIX) is a converted hedge fund with a strong track record. The hedge fund was reorganized into a mutual fund on December 28, 2015. The portfolio is 30-70% equities; this long portfolio is a passive, buy-and-hold operation to generate market exposure. The remainder of the portfolio is in long and short contracts on equity, fixed income, commodities and currency futures. The combined funds’ returns seem consistent and creditable.

The minimum initial invest is $2500 minimum and the expense ratio is 2.0%.

Other funds that caught our eye

Ladder Select Bond (LSBIX), which has a Sharpe ratio that’s laughably higher than any other core bond fund, 2.27 against runner-up Invesco Total Return ETF at 1.03. Ladder is an institutional real estate investor with $6 billion in AUM and this is an institutional fund with a $100,000 minimum. Like the three funds with the highest Sharpe ratios, this invests in the world of real estate securities. Ladder describes themselves as “inherently conservative … favoring strong downside protected positions with attractive credit metrics.”

BlackRock Emerging Markets Equity Strategies Fund (BEFAX), which had the highest Sharpe ratio of any emerging markets fund (1.33), well ahead of runner-up Ashmore EM Active Equity (0.88) and the rest of the EM pack (0.50).  It had a top 1% performance among all EM funds in 2018. It’s a long/short EM equity fund with an experienced manager. Sam Vecht, CFA, and portfolio manager, is head of BlackRock’s Emerging Europe equity team. Mr. Vecht’s service with the firm dates back to 2000, including his years with Merrill Lynch Investment Managers (MLIM), which merged with BlackRock in 2006. Mr. Vecht began his career with MLIM in 2000 as a member of the Global Emerging Markets team. I’m not surprised, given his background, that the fund is substantially overweight in Europe (28% of assets) and in developed markets generally (34% of assets). It’s available no-load at TDAmeritrade, with an e.r. of 1.56%.  on $16M in assets.

Holbrook Income (HOBEX/HOBIX) is either a short-term bond fund (Morningstar) or a flexible portfolio fund (Lipper/MFO). Its mandate allows it great flexibility within the fixed-income arena, including investments in closed-end funds and ETFs, with the proviso that it positions itself to deal with a rising-rate environment. As a practical matter, that means that it’s currently acting a lot like a short-term bond fund. If it’s a flexible portfolio, it’s way at the top of the risk-adjusted returns pack and had the group’s smallest drawdown. As a short-term bond fund, it has top 10% returns. The manager is the former president of Leader Capital where he helped manage the Leader Total Return and Leader Short Duration Bond funds. The expense ratio on the Investor shares is high (1.80%) but the initial minimum is low at $2,500.

Guggenheim Diversified Income Fund (GUDPX) elicits more agreement from Morningstar (30-50% equity allocation fund, though it currently holds 22% in global equities) and Lipper (flexible portfolio). It’s a fund-of-funds that’s seeking “high current income with consideration for capital appreciation.” The “diversified” in the name means that it looks for exposure to “different geographic regions, different positions in issuers’ capital structures and different investment styles.” In general, it targets equities and high yield bonds. Performance has been competitive and volatility management has been exceptional. It has a Sharpe ratio of 1.62, while the average for the other 21 flexible funds was 0.48. The “P” shares are available through online brokerages without a load or a transaction fee and without a minimum investment. I’m a bit fretful of the gross expense ratio (5.0%) as well as the capped expense ratio that you actually pay (1.62%). Still the underlying idea seems sensible and the early performance is promising.

State Street Disciplined Global Equity (SSGMX) and SEI Global Managed Volatility (SGMAX) are the two best-performing global funds, but their institutional minimums seem pretty inflexible. No other young global fund has performance that’s immediately crying out for attention. State Street Disciplined US Equity (SSJIX) is similarly top-rated and mostly inaccessible. Pity all around.

Columbia Sustainable International Equity Income ETF (ESGN) takes “sustainability” in two directions; it’s looking for income that’s sustainable in the sense of consistency and for corporations that are sustainable in the sense of ESG practices. The ETF earns Morningstar’s highest sustainability rating, five. It tracks a custom-built index. The fund’s attractiveness depends, in part, on its peer group. Lipper tracks “international equity income” as a separate peer group, Morningstar does not and places it in the “foreign large value” box. Taken as an equity income fund, it’s at the top of the pack with a Sharpe of 0.79 and peer-beating returns. Within the foreign large value group, it’s just slightly above-average. The key attraction would be its low cost (0.45%) and commitment to sustainability.

Cognios Large Cap Growth (COGEX) and Cognios Large Cap Value (COGVX) sit atop the domestic large-cap heap, both handily outperforming their peers with below-market risk. They’re the younger siblings to Cognios Large Cap Market Neutral (COGMX), about the best market-neutral fund out there.

Bottom line

We’ll keep watch for you. Several of these funds are promising in both conception and execution, and we always try to focus on managers who intensely dislike losing your money.  In the months ahead, as we become more knowledgeable about them, we’ll begin building out our coverage of them. If there are any that particularly intrigue you, drop me a note!

Launch Alert: Artisan International Small-Mid Fund (ARTJX)

By David Snowball

Effective 4 December 2018, the Artisan Partners officially rechristened Artisan International Small Cap as Artisan International Small-Mid Fund. Four other consequential changes were attendant to it:

On 15 October 2018, the fund reopened to new investors

On that same date, a new manager, Rezo Kanovich, took control of the fund. Mr. Kanovich and his analyst team, all of whom resigned on rather short notice, have guided Oppenheimer International Small-Mid Company (OSMAX) since early 2012.

On 4 December 2018, the fund’s investment guidelines formally changed to broaden the investable universe, though the change had been announced on 4 October 2018.

Finally, on 1 December 2018, the adviser reduced fees on the fund’s Investor share class from 1.57% down to 1.37%.

Artisan describes the changes as “evolutionary.”

Mr. Kanovich will be able to invest in stocks with market caps as high as $30 billion which, they note, means that might be investing in the largest firms in some smaller markets. The fund will normally hold at least 65% of its assets in non-US equities, which allows for a substantial investment in US equities as well. His investment discipline has three components:

A thematic component, in which he attempts to identify both long-term, secular growth drivers and the firm’s most likely to benefit from them

A sustainable growth component, in which he targets “wide moat” firms with strong management teams, and

A valuation component, in which he seeks temporary mispricings of  good firms.

He has done an exceptional job at his earlier charge, whose performance Morningstar describes as “terrific.” Oppenheimer International Small-Mid Company (OSMAX) is a closed, five-star fund. Shareholders should expect substantial portfolio turnover, with a potentially large tax hit. The OSMAX portfolio is substantially more Asia-focused than Artisan’s current one, it has a substantially higher stake in large cap stocks and higher overall market cap, and it typically holds about three times as many names in its portfolio.

There was a spirited discussion about the change on our discussion board. Some expressed the opinion that the Artisan brand is not so sterling as it once was, while others noted the steadily rising charge for Mr. Kanovich’s services. “msf,” for example, pondered a question that Ed Studzinski raises frequently.

The minimum initial investment in the fund’s Investor share class is $1,000, the Advisor shares (APDJX) require $250,0000 and the Institutional share class (APHJX) minimum is $1 million. The expense ratios, after waivers, are 1.37%, 1.27% and 1.16%, respectively. Morningstar describes all of those as “high.” While Artisan’s website is generally rich with resources, information specific to the fund’s new direction remains modest.

Launch Alert: Centaur Total Return (TILDX)

By David Snowball

On November 1, 2018, the Board of Trustees of the Centaur Total Return Fund announced an epochal change: Zeke Ashton, Centaur Fund’s longest-tenured manager and one of its four founding managers, had notified the Board that he intended to resign after a run of 13.5 years. The Board announced an interim management agreement, effective November 15, 2018, under which DCM Advisors, LLC, would assume responsibility for the fund.

While the fund will, under the interim agreement, pursue Centaur’s “current investment objective and strategies,” the presence of a new management team and the imminence of a new strategy makes this, for all practical purposes, a new fund.  It may grow into a splendid option, but it should not be judged based on its performance prior to November 15, 2018.

Here’s what we know.

      1. Unchanged objectives: the fund “seeks maximum total return through a combination of capital appreciation and current income.” The new managers aver that that will not change, and they anticipate maintaining a risk profile that is roughly comparable to the fund’s historic norm.

      2. New management team: Vijay Chopra will be primarily responsible for the fund’s equity investments, while Greg Serbe will have primary responsibility for the fund’s fixed-income positions.

        Dr. Chopra has had an incredibly rich career. He’s been an equity manager for Lebenthal Asset Management, Roosevelt Investments, Mesirow Financial, Bear Stearns Asset Management, VKC Investments (his own firm), Jacobs Levy Equity Management, Deutsche Asset Management, State Street Global Advisors, Bankers Trust. He has, on several occasions, managed or co-managed multi-billion dollar portfolios: $4.5 bill at Deutsche and $13.0 billion at Jacobs Levy.

        Mr. Serbe was chief investment officer with Lebenthal Asset Management, was the tax-exempt and money-market investments CIO for Mitchell Hutchins Asset Management, and had stints with First National Bank of Chicago and Provident Management. Mr. Serbe managed mutual funds while employed at Mitchell Hutchins and Lebenthal.

      3. New strategy: Mr. Ashton was an equity investor with an absolute value discipline; that is, he would prefer to be 100% invested in equities but would not buy stocks that were, by his lights, overpriced. As a result, the Centaur portfolio often had huge cash holdings – 40-60% of assets – as he waited to find attractively valued investments. The new strategy is an overtly “balanced” one, with a typical allocation of 60% stocks to 40% bonds and cash.

        Dr. Chopra allows that the portfolio will likely range between 50-70% equities, depending on market conditions. His discipline encourages him to watch Fed policies as a signal for whether to pursue a risk-on or risk-off allocation. He anticipates changes that might occur monthly or quarterly. The fund might typically hold 30-50 equity positions, close to equally-weighted. They’ll use risk-optimization software to help control risk concentrations; that is, the software will help monitor sector, industry, market caps, and other sorts of risk-related exposures that might inadvertently build in the portfolio.

        Mr. Serbe’s investment universe is investment grade fixed-income, including corporates, Treasuries, agency debt (for example, bonds issued by Ginnie Mae, Fannie Mae and Freddie Mac), and taxable munis. He starts with an analysis of the yield curve, that is, the difference in yield between short-term and longer-date debt, to find where they’re receiving the best compensation for the additional risks that longer-dated issues carry.  Mr. Serbe notes, “to me, it’s very exciting”

    While the managers have a wealth of experience and they manage global equity SMAs, they have not managed a “balanced” SMA portfolio. They anticipate that it will not be their last, as they look for opportunities to both grow Centaur’s assets (now under $20 million) organically and acquire other small funds.

    We wish them well.

    Centaur’s minimum initial investment is $1,500. A proxy statement being sent to shareholders to approve the new investment advisory agreement also caps the fund’s normal expenses at 1.50% of assets, down from 1.95% currently. The proxy closes at the end of February 2019. The fund’s website remains a work in progress.

Funds in registration

By David Snowball

Before funds can be offered to the public, they’ve got to be submitted to the SEC which has 70 days to review the application. In general, advisers try to launch just before years end because that allows them to have clean “year to date” and calendar year results to share. These launches will likely occur in late February or March.

Many prospectuses were still incomplete but a couple stand out for offering services from well-respected advisors: Diamond Hill, which has a bunch of strong domestic equity funds, offers its first all-international portfolio; Acadian Asset Management, which has a good record in managed volatility investing, will manage Harbor Overseas; Navellier & Associates, a storied quant investment house, brings a five-star separate account strategy to the ’40 Act world under the Method brand; and Rimrock Capital, a hedge fund house, offers up a global unconstrained bond fund. They’re worth watching.

When I opened a filing from Gabelli, I was suddenly transported back to 1999 with Auld Lang Syne playing like a dirge in the background. The Gabelli Innovations Trust wanted to share word with you of the Gabelli Media Mogul, Pet Parents’TM, Food of All Nations and RBI (roads, bridges, and infrastructure) funds. Gimmicky niche funds that seem more at home in the world of the Westcott Nothing But Net fund, the Golf Fund, the Chicken Little Growth fund, the StockCar Stocks Index fund or even … Gabelli Global Interactive Couch Potato Fund (GICPX, 1994-2000).

BlackRock U.S. Equity Factor Rotation ETF

BlackRock U.S. Equity Factor Rotation ETF, an actively-managed ETF, will seek to outperform the U.S. stock market by providing diversified and tactical exposure to style factors via a factor rotation model. The plan is to categorize US mid- and large-cap stocks by the investing factors (momentum, quality, value, size and minimum volatility) that they embody, then to invest the portfolio in the constellation of factors that’s most attractive in any given market. Each stock might exhibit more than one of the five factors. The fund will be managed by Ked Hogan, Phil Hodges and Michael Gates of BlackRock. Its opening expense ratio has not been disclosed.

Castle Tandem Fund

Castle Tandem Fund will seek long-term capital appreciation. The plan is to invest primarily in a focused domestic, large cap portfolio using a quant discipline. The fund will be managed by John Carew, Billy Little, and Ben Carew of Tandem Investment Advisers. Its opening expense ratio is 1.18%, and the minimum initial investment will be $10,000.

Diamond Hill International Fund

Diamond Hill International Fund will seek long-term capital appreciation. The plan is to invest in a portfolio of undervalued international equities, with up to 30% of those coming from the emerging markets. The fund will be managed by an as-yet unnamed representative of Diamond Hill. The initial expense ratio has not been disclosed and the minimum initial purchase will be $2,500.

Harbor Overseas Fund

Harbor Overseas Fund will seek long-term growth of capital. The plan is to use a quant strategy to invest, primarily, in developed overseas markets. The fund will be managed by Brendan O. Bradley, Ryan D. Taliaferro, and Harry Gakidis, all of Acadian Asset Management LLC. The guys have a fair amount of experience, and a decent track record, in global and EM managed volatility investing, which may inform their approach here. The opening expense ratio will be 1.22%, and the minimum initial investment is $2,500.

Hartford Schroders Securitized Income Fund

Hartford Schroders Securitized Income Fund will seek current income and long-term total return consistent with preservation of capital. The plan is to invest in U.S and foreign fixed and floating rate securitized credit instruments, mostly of the mortgage-backed variety. The fund will be managed by Michelle Russell-Dowe and Anthony Breaks, both of Hartford Funds. Its opening expense ratio has not been disclosed, and the minimum initial investment for “A” shares will be $2,000.

iShares Commodity Multi-Strategy ETF

iShares Commodity Multi-Strategy ETF, an actively-managed ETF, seeks “to provide exposure, on a total return basis, to a group of commodities with characteristics of carry, momentum, and value.” That’s a curious investment objective; such statements typically focus on the investment outcome (“high current income”) rather than the contents of the portfolio. The plan is to invest “in a broad range of derivative instruments, including total return swaps that provide exposure to commodities futures contracts referenced by the _____________ (the ‘___________ Benchmark’). The Fund intends to follow a multifactor strategy reflected by the ___________ Benchmark, which equally weights three sub-indices designed to provide exposure to carry, momentum, and value factors. The ‘carry’ sub-index emphasizes commodities and contract months with the greatest degree of backwardation or lowest degree of contango.” Couldn’t have said it better myself. My general recommendation: if you have no idea of what they just said, stay away. The fund will be managed by Alan Mason and Richard Mejzak of BlackRock Fund Advisors. Its opening expense ratio has not been released.

Method Smart Beta Global Allocation Plus Fund

Method Smart Beta Global Allocation Plus Fund seeks long-term capital appreciation and preservation. The Fund’s sub-advisor, Navellier & Associates, has a market timing system that measures “pivot points in the market.” When the system flashes “risk on,” the adviser buys ETFs representing 2-6 S&P sectors. “Risk-off” triggers a move to investment grade fixed-income, by default Treasuries. Normally, 40% of the portfolio will be in non-US securities.The fund will be managed by Michael Garaventa and Peter Koelewyn of Navellier & Associates. Navellier appears to run the same strategy in a separate account format, for which it received five-stars from Morningstar in 2018. The opening expense ratio hasn’t been released, and the minimum initial investment will be $1,000.

North Capital Emerging Technology Fund

North Capital Emerging Technology Fund will seek long-term capital appreciation. The plan is to invest in companies involved in developing or deploying blockchain technology, artificial intelligence, machine learning, virtual computing and intelligent devices. The fund will be managed by James P. Dowd and Michael T. Weaver of North Capital. Neither its opening expense ratio nor the minimum initial investment has been disclosed.

OTG Latin America Fund 

OTG Latin America Fund will seek long-term capital appreciation. The plan is to invest in Latin American stocks plus inverse or leveraged ETFs “short-term market timing or hedging.” The fund will be managed by Mauricio Alvarez of Strategic Asset Management, Ltd., a Cayman Islands corporation. Its opening expense ratio is 1.95%, and the minimum initial investment will be $1,000. The “OTG” in the name is short for “on the ground.”

Rimrock Bond Fund

Rimrock Bond Fund seeks to maximize long-term total return. The plan is to … uh, buy bonds. Undervalued bonds, to be sure. Mostly investment grade, mostly dollar-denominated with the option of investing 25% in short positions. The fund will be managed by Jesse Brettingen, Julian Maldanado, Ryan Rattet, and Erik Wayda, all of Rimrock Capital Management, a fixed-income hedge adviser with $4 billion under management. Its opening expense ratio is 0.65%, and the minimum initial investment will be $5,000.

RYZZ Managed Futures Strategy Plus ETF

RYZZ Managed Futures Strategy Plus ETF, an actively-managed ETF, seeks positive absolute returns. The plan is to use a momentum-based futures trading strategy across a global array of asset classes. I wish them well, but this strategy has seen more fund liquidations than virtually any other. The fund will be managed by Christopher A. Stanton. Its opening expense ratio has not been released.

Selective Premium Income Fund

Selective Premium Income Fund (SLCPX) will seek to generate income while protecting capital. The plan is to invest in fixed income securities, preferred stock, convertible securities and dividend-paying stock, as well as using in covered call options. The adviser, Selective Wealth Management, uses “the Selective Process” to identify “Selective Companies” in which to invest. The fund will be managed by Christopher J. Devlin. Its opening expense ratio has not been disclosed, and the minimum initial investment will be $10,000 for taxable accounts, reduced to $5,500 for tax-advantaged ones.

Thornburg Summit Fund

Thornburg Summit Fund “seeks to grow real wealth over time.” Somehow I’m surprised that the SEC even allowed that language, but they’ve been getting … uh, more permissive in recent years. The plan is to invest, mostly long but also significantly short, in a variety of asset classes. The fund will be managed by Ben Kirby and Jeff Klingelhofer. Its opening expense ratio is 1.37%, and the minimum initial investment will be $5,000.

WisdomTree Mortgage Plus Bond Fund

WisdomTree Mortgage Plus Bond Fund, an actively-managed ETF, seeks income and capital appreciation. The plan is to combine both macro and fundamental research to select mortgage-related debt and other securitized debt. The fund will be managed by a sub-adviser which has not yet been named. Similarly, its opening expense ratio has not been released.

Manager changes, December 2018

By Chip

In the course of a normal month we’ll highlight 60-70 manager changes in equity and allocation funds. We mostly skip bond funds because, frankly, it’s a danged rare fixed income team that’s materially affected by the departure of a single individual. In a fairly quiet month, 46 funds and ETFs saw partial or complete team changes.

Chip, who manages our manager changes database, notes that this is one of the first months she’s tracked where more women seemed to be joining management teams than departing them. The academic research is pretty unequivocal: having women manage, or represent a strong fraction of the management team, tends toward better risk-adjusted returns than investors would otherwise experience.

Ticker Fund Out with the old In with the new Dt
TNBAX 1290 SmartBeta Equity Fund Will Jump will no longer serve as a portfolio manager to the fund. Alwi Chan, Kenneth Kozlowski, Gideon Smith, Cameron Gray, Harry Prabandham, and Anubhuti Gupta will continue to manage the fund. 12/18
BJBIX Aberdeen Select International Equity Fund  (née Julius Baer International Equity) Effective February 28, 2019, Stephen Docherty, Bruce Stout, Jamie Cumming, Samantha Fitzpatrick, and Martin Connaghan will no longer serve as a portfolio managers for the fund. The fund’s strategy will change (again) at the same time. Tony Hood, Joanna McIntyre, Dominic Byrne, Donal Reynolds and Euan Sanderson will be primarily responsible for the day-to-day management of the fund. 12/18
AABPX American Beacon Balanced Fund Effective December 31, 2018, Sheldon Lieberman of Hotchkis and Wiley Capital Management, LLC will retire from his position as a portfolio manager for the fund. Effective January 31, 2019, David Hardin of Barrow, Hanley, Mewhinney & Strauss, LLC will retire from his position as a portfolio manager for the fund. The other couple dozen managers will remain. 12/18
AAGPX American Beacon Large Cap Value Fund Effective December 31, 2018, Sheldon Lieberman of Hotchkis and Wiley Capital Management, LLC will retire from his position as a portfolio manager for the fund. The other dozen managers will remain. 12/18
BISIX BlackRock International Dividend Fund As a result of Stuart Reeve’s upcoming retirement from BlackRock, he will no longer serve as a portfolio manager of the fund effective on or about April 30, 2019. Andrew Wheatley-Hubbard will continue to manage the fund. 12/18
MDLTX BlackRock Latin America Fund William Landers is no longer listed as a portfolio manager for the fund. Edward Kuczma continues to manage the fund. 12/18
BOYAX Boyar Value Fund No one, but … Jonathan Boyar joins Mark Boyar in running the fund. 12/18
CSCEX Columbia Multi-Manager Small Cap Equity Strategies Fund Effective on or about February 12, 2019, Dalton, Greiner, Hartman, Maher & Co., LLC will no longer serve as a subadviser to the fund. Effective on or about February 22, 2019, EAM Investors, LLC will no longer serve as a subadviser to the fund.  Effective on or about December 19, 2018, J.P. Morgan Investment Management Inc. assumes day-to-day management of a portion of the fund’s portfolio. Eytan Shapiro, Felise Agranoff, Matthew Cohen, and Greg Tuorto join the management team. Effective on or about February 13, 2019, Hotchkis and Wiley Capital Management, LLC assumes day-to-day management of a portion of the fund’s portfolio. 12/18
CAREX Cornerstone Advisors Real Assets Fund BlackRock Financial Management, LLC and BlackRock International Limited longer serve as sub-advisers to the fund. Akiva Dickstein and Christopher Allen will no longer serve as portfolio managers for the fund. Metropolitan West Asset Management, LLC now serves as an investment sub-adviser to the fund. Bret Barker and Lawrence Rhee join Evan Wirkkala, Katie Robinette, David Freudenberg, Paul Pedalino, and John Frey on the management team. 12/18
ESGAX Dana Epiphany ESG Equity Fund Samuel Saladino and Daniel Mulvey are no longer listed as portfolio managers for the fund. David Weinstein, Duane Roberts, Ann Roberts, and Sean McLeod will now manage the fund. 12/18
RPFGX Davis Financial Fund No one, but … Pierce Crosbie joins Christopher Davis in managing the fund. 12/18
DSEFX Domini Impact Equity Fund Donald Tunnell is no longer listed as a portfolio manager for the fund. Amy Domini Thornton, Kathleen Morgan, and Carole Laible will now manage the fund. 12/18
FCLIX Fidelity Advisor Industrials Fund Tobias Welo will no longer serve as a portfolio manager for the fund, as planned. Janet Glazer will continue to manage the fund. 12/18
FCRDX Fidelity Conservative Income Municipal Bond Fund No one , but . . . Robert Mandeville joins Douglas McGinley and Elizah McLaughlin on the management team. 12/18
FGHNX Fidelity Global High Income Fund Ian Spreadbury will no longer serve as a portfolio manager for the fund. James Durance joins Harley Lank, Bryan Collins, and John Carlson on the management team. 12/18
FBMPX Fidelity Select Communication Services Portfolio Nidhi Gupta is no longer listed as a portfolio manager for the fund. Matthew Drukker will now manage the fund. 12/18
FCARX Fiera Capital Diversified Alternatives Fund Alexandre Voitenok is no longer listed as a portfolio manager for the fund. Acadian Asset Management LLC and Karya Capital Management LP will no longer serve as sub-advisers to the fund. Kazuhiro Shimbo, Mark Jurish, and Geoffrey Doyle continue to manage the fund. Fiera Capital Inc. and Mizuho Alternative Investments, LLC now advise and subadvise the fund. 12/18
FKBAX Franklin Total Return Fund Christopher Molumphy is no longer listed as a portfolio manager for the fund. Sonal Desai joins Michael Materasso, David Yuen, Kent Burns, and Roger Bayston on the management team. 12/18
GHYMX Glenmede High Yield Municipal Portfolio Neil Langberg has retired. Chad Rach, Karl Zeile, and Jerome Solomon will continue to manage the fund. 12/18
Various Goldman Sachs Target Date Funds David Hottman and Patrick Ryan will no longer serve as portfolio managers for the fund. Raymond Chan and Christopher Lvoff will now manage the funds. 12/18
GAAEX Guinness Atkinson Alternative Energy Fund No one , but . . . Jonathan Waghorn and Will Riley join Edward Guinness in managing the fund. 12/18
HEOAX Highland Long/Short Equity Fund Jonathan Lamensdorf will no longer serve as a portfolio manager for the fund. Michael McLochlin and James Dondero join Bradford Heiss in managing the fund. 12/18
HMEAX Highland Merger Arbitrage Fund Jonathan Lamensdorf will no longer serve as a portfolio manager for the fund. Michael McLochlin, Bradford Heiss, and Eric Fritz join James Dondero on the management team. 12/18
IATAX Ivy Accumulative Fund Barry Ogden will no longer serve as a portfolio manager for the fund, after 14 years at the helm. Gustaf C. Zinn, Senior Vice President of IICO, and John Bichelmeyer, Vice President of IICO will now manage the fund. 12/18
WCEAX Ivy Core Equity Gustaf Zinn will no longer serve as a portfolio manager for the fund after 12 years. Erik Becker will continue to manage the fund. 12/18
LEQAX LoCorr Dynamic Equity Fund No one, but . . . First Quadrant LP was added as a subadvisor, with Dori Levanoni and Jia Le joining Sean Katof, Andrew Kurita, Thomas Billings, Scott Billings, Eric P. Billings, Eric F. Billings, and Jon Essen on the management team. 12/18
MBEQX M International Equity Fund Northern Cross, LLC will no longer subadvise the fund. Dimensional Fund Advisors will now subadvise the fund. 12/18
MOPIX MainStay Epoch U.S. Small Cap Fund Michael Welhoelter, David Pearl, Michael Caputo, and Justin Howell are no longer listed as portfolio managers for the fund. Migene Kim and Mona Patni will now manage the fund. 12/18
MOTAX MassMutual Select Fundamental Growth Fund No one, at the moment. But, Paul Marrkand is expected to retire at the end of December 2019. Joel Thomson joins Paul Marrkand on the management team. 12/18
MWFRX Metropolitan West Floating Rate Income Fund James Farnham has retired as a portfolio manager of the fund. Stephen Kane, Jerry Cudzil, and Laird Landmann remain on the management team. 12/18
MWHIX Metropolitan West High Yield Bond Fund James Farnham has retired as a portfolio manager of the fund. Tad Rivelle and Bryan Whalen join Stephen Kane and Laird Landmann remain on the management team. 12/18
MSTMX Morningstar Multisector Bond Fund Sonal Desai is no longer listed as a portfolio manager for the fund. Calvin Ho joins Michael Hasentab and the rest of the team in managing the fund. 12/18
QFFOX Pear Tree Axiom Emerging Markets World Equity Fund Edward Qian and Nicholas Alonso are no longer listed as portfolio managers for the fund. José Morales, Christopher Lively, Andrew Jacobson, Donald Elefson, and Bradley Amoils will now run the fund. 12/18
RBTRX RBC BlueBay Diversified Credit Fund Michael Reed and Nick Shearn will no longer serve as portfolio managers for the fund. Mark Dowding, Polina Kurdyavko, Justin Jewell, Thomas Kreuzer, and Marc Stacey will continue to manage the fund. 12/18
WTMIX Segall Bryant & Hamill Micro Cap Fund Paul Kuppinger is no longer listed as a portfolio manager for the fund. Scott Decatur and Nicholas Fedako now manage the fund. 12/18
SRSCX Spouting Rock Small Cap Growth Fund Saumen Chattopadhyay and Sonu Varghese are no longer listed as portfolio managers for the fund. James Gowen will now manage the fund. 12/18
TQSMX T. Rowe Price QM U.S. Small & Mid-Cap Core Equity Fund Vinit Agrawal has stepped down from managing the fund. Prashant Jeyaganesh and Sudhir Nanda will continue to manage the fund. 12/18
TRREX T. Rowe Price Real Estate David Lee has retired. Nina Jones will now run the fund. 12/18
FEMGX Templeton Emerging Markets Bond Fund Sonal Desai is no longer listed as a portfolio manager for the fund. Calvin Ho joins Michael Hasentab and Laura Burakreis in managing the fund. 12/18
TPINX Templeton Global Bond Fund Sonal Desai is no longer listed as a portfolio manager for the fund. Calvin Ho joins Michael Hasentab in managing the fund. 12/18
TGTRX Templeton Global Total Return Sonal Desai is no longer listed as a portfolio manager for the fund. Calvin Ho joins Michael Hasentab in managing the fund. 12/18
TBOAX Templeton International Bond Fund Sonal Desai is no longer listed as a portfolio manager for the fund. Calvin Ho joins Michael Hasentab in managing the fund. 12/18
MCGAX Transamerica Mid Cap Growth Howard Aschwald and Timothy Chatard are no longer listed as portfolio managers for the fund. Timothy Manning now runs the fund. 12/18
VHGEX Vanguard Global Equity Fund Acadian Asset Management no longer subadvises the fund. Brendan Bradley and John Chisholm will no longer serve as portfolio managers for the fund. Charles Plowden, Malcolm MacColl, Spencer Adair, Neil Ostrer, and William Arah will continue to manage the fund. 12/18
VMGRX Vanguard Mid-Cap Growth Fund William Blair Investment Management, LLC will no longer serve as an advisor for the fund. Daniel Crowe, Robert Lanphier, and David Ricci are no longer listed as portfolio managers for the fund. Frontier Capital Management Co., LLC and Wellington Management Company LLP have been added as new investment advisors for the fund. Christopher Scarpa, Timothy Manning, Paul Leaung, and Stephen Knightly join D. Scott Tracy, Christopher Clark, Melissa Chadwick-Dunn, and Stephen Bishop on the management team. 12/18
WWLAX Westwood LargeCap Value Fund Mark Freeman will no longer serve as a portfolio manager for the fund. Scott Lawson, Matthew Lockridge, and Varun Singh will continue to manage the fund. 12/18

 

Briefly noted

By David Snowball

Both the stock market’s recent volatility and the financial service industry’s ongoing revolution (there’s blood in the streets!) create and foreclose opportunities. Each month we note, briefly, the recent developments that might change the number and nature of opportunities available to you.

And, in the ongoing spirit of our predecessor FundAlarm, we do occasionally point and snicker at the industry’s boneheadedness.

Updates

Fidelity triggered a shockwave in late summer with its decision to launch zero expense ratio funds and to eliminate the minimum initial expense requirements from their funds. We’ve seen vigorous responses from mega-firms such as Vanguard, which reduced purchase minimums on its ultra-low cost Admiral shares to $3,000, and Schwab, which just eliminated them. Just about everyone continues trimming expenses, in many cases charging just 1-5 basis points for their services.

Fidelity’s ZERO funds have seen brisk inflows. Fidelity ZERO Total Market Index Fund (FZROX) has pulled in $1.6 billion while Fidelity ZERO International Index (FZILX) has gathered just under $500 million. Zero expenses notwithstanding, FZROX trails both the average large cap core fund since launch and its closest competitor, Vanguard Total Stock Market Index (VTSMX), since inception. FZILX leads both its peers and its Vanguard counterpart, though modestly.

Briefly Noted . . .

SMALL WINS FOR INVESTORS

This month’s theme is, you can profit from the foolishness of others. A bunch of closed, first-rate funds have reopened following short periods of underperformance and investor flight.

Effective December 31, 2018, Class A shares and Class C shares of the AAM/HIMCO Global Enhanced Dividend Fund (HGDAX) will become available for purchase.

Columbia Small Cap Value Fund II (COVAX) will reopen to new investors on January 14, 2019. Morningstar’s analysts assign it a Bronze rating, though its performance over the past five years has been no better than “okay.”

Effective as of January 1, 2019, Fiduciary Management, the investment adviser to FMI Funds, reduced the investment advisory fee for the FMI Large Cap Fund (FMIHX) and the FMI Common Stock Fund (FMIMX). Both were already quite good.

Invesco Small Cap Value Fund (VSCAX) will open to all investors effective as of the open of business on January 11, 2019. Morningstar’s analysts assign it a Bronze rating. Its performance looks weak but that’s partly a matter of discipline: it’s a more-nearly deep value investor than its peers, and value has been out of favor for a record stretch.

Effective December 17, 2018, Oakmark International Fund (OAKIX) re-opened to all investors. I’d approach thoughtfully, if at all. The reopening was occasioned by massive outflows in 2018 which, themselves, were occasioned by a short stretch of miserable performance. The fund posted top 10% returns in 2016 and 2017 but bottom 1% relative returns in 2018; around June, investors began fleeing. They are fools. That said, this is really a very large fund.

And, arguably, Mr. Herro has a very large ego. His brief profile in the Wikipedia contains the following warning flag from its editors: “This article is an autobiography or has been extensively edited by the subject or by someone connected to the subject.” His support of gay marriage is noted in the piece, his ongoing support of climate denial groups is not.

The Oberweis International Opportunities Fund (OBIOX) has resumed sales of its shares and is fully open for investment to both existing shareholders and new investors. That’s another case of rotten performance in 2018 trumping the fund’s long-term strength and distinction.

Effective January 16, 2019, the minimum initial investment required to invest for 30 Schwab and Laudus funds will be eliminated.

T. Rowe Price has reduced the expense cap on its Target Date funds to 0.15% through at least 2020.

At a meeting held on December 10, 2018, the Board of Directors of TCW Funds approved the reduction of the management fees and/or the contractual expense limitations for nine of their funds. The most marked price cuts are coming for TCW Global Bond (from a capped 1.04% to 0.70%) and TCW International Small Cap Fund (from 1.40% to 1.20%).

Effective January 25, 2019, Virtus Ceredex Small-Cap Value Equity Fund (SASVX) will be available for purchase by new investors. It’s a four-star fund with a Bronze rating assigned by Morningstar’s machine-learning model.

CLOSINGS (and related inconveniences)

Hmmm … no, none of those. It’s all good!

OLD WINE, NEW BOTTLES

Beginning February 28, 2019, Aberdeen Select International Equity (BJBIX) will expand its hedging options, switch management teams and add a new focus to the fund’s investment strategy: “the Fund’s investment team will focus on securing and analyzing information about the fast changing corporate prospects of companies, concentrating on the most important factors that drive the market price of the investment, which is based on first-hand research and disciplined company evaluation.” This is the latest attempt to resuscitate the once-legendary Julius Baer International Equity fund.

Effective December 14, 2018, Alphacore Statistical Arbitrage Fund (STTKX) became AC Market Neutral Fund. It will also stop using a statistical arbitrage strategy (don’t know) and will transition to a market neutral one relying on total return swaps (don’t know). In just over a year of operation, the managers turned $10,000 into $8,100, so it does seems like a change was in order.

Effective on or about March 1, 2019, the one-star Franklin Balance Sheet Investment Fund (FRBSX) will be renamed Franklin Mutual U.S. Value Fund. It will also formally promise to commit 80% of its assets, rather than “most of its assets,” to equities. As a practical matter, the phrase “most of its assets” has consistently translated to 85-90% in equities already.

Effective on or about March 1, 2019, Franklin International Small Cap Growth Fund (FINAX) will be renamed Franklin International Small Cap Fund. Presumably some amendment in its principal strategies might follow.

On or around February 1, 2019 iShares U.S. Preferred Stock ETF (PFF) becomes iShares Preferred and Income Securities ETF. It picks up a new index to track, one which is U.S. dollar-denominated preferred and hybrid securities.

Effective immediately, the name of the LS Theta Fund (LQTVX) is changed to Theta Income Fund, though nothing else changes.

Effective on or about February 28, 2019, MainStay MacKay Government Fund (MASAX) will become the MainStay MacKay Infrastructure Bond Fund.

Effective as of December 31, 2018, Motley Fool Small-Cap Growth ETF became MFAM Small-Cap Growth ETF. (“Foolish mortals, you will soon learn to fear the power of M-Fam!”)

At some time in the second quarter of 2019, Palmer Square SSI Alternative Income Fund (PSCAX) will become the American Beacon SSI Alternative Income Fund.

Effective January 4, 2019, Rational Hedged Return Fund (HRSAX) will become the Rational Tactical Return Fund. The fund got a new management team at the start of 2018 and they promptly crushed their peers and the S&P 500. Folks looking for an options-based strategy might want to peer in here.

On January 1, 2019, Salient Tactical Growth Fund (FFTGX) changed its benchmark from the S&P 500 – with which it was not designed to compete – to the HFRX Equity Hedge Index, with which it can compete.

Effective on or about January 22, 2019, State Street Disciplined Emerging Markets Equity Fund (SSEMX) becomes State Street Defensive Emerging Markets Equity Fund. No change in the substance of the fund, from what I can tell. It’s a one-star fund whose 2018 performance was top-tier, so maybe better days are ahead.

Pending shareholder approval, the Vontobel funds will become Virtus Vontobel funds in the spring of 2019.

Current fund “Surviving Funds”
Vontobel Global Emerging Markets Equity Institutional Fund Virtus Vontobel Emerging Markets Opportunities Fund
Vontobel Global Equity Institutional Fund Virtus Vontobel Global Opportunities Fund
Vontobel International Equity Institutional Fund Virtus Vontobel Foreign Opportunities Fund

OFF TO THE DUSTBIN OF HISTORY

The Board of Trustees of American Beacon Funds has approved a plan to liquidate and terminate the American Beacon Grosvenor Long/Short Fund (GSVAX) on or about January 29, 2019. It’s a pretty solid fund that never gained market traction.

On March 22, 2019, American Century International Discovery Fund (TWEGX) will merge into American Century International Opportunities Fund (AIOIX). TWEGX is much larger and older but its record is weaker. AC has aligned the two management teams so the absorption should be relatively smooth, but it’s still a case of burying a bad record.

AMG SouthernSun Global Opportunities Fund (SSOVX), a half million dollar fund, and AMG Renaissance International Equity Fund (RIEIX), a fund with a scant quarter million dollars in the portfolio, were liquidated on December 28, 2018.

AMG Managers Lake Partners LASSO Alternatives Fund (ALSNX) and AMG Managers Guardian Capital Global Dividend Fund (AGCNX) will follow them into the darkness on or about January 25, 2019.

BlackRock Emerging Markets Dividend Fund (BACHX), will be liquidated on or about February 13, 2019.

Invesco Multi-Factor Large Cap ETF (GMFL), Invesco U.S. Large Cap Optimized Volatility ETF (OVLC), Invesco DWA Momentum & Low Volatility Rotation ETF (DWLV), Invesco S&P 500 Value with Momentum ETF (SPVM) and Invesco Wilshire US REIT ETF (WREI) will undergo “termination and winding down” on or about February 27, 2019.

On June 22, 2018, Janus Henderson All Asset Fund (HGAAX) was scheduled for execution on December 31, 2018 “or at such other time as may be authorized by the Trustees.” For reasons undisclosed (perhaps the fund’s resurgence in late 2018?), there is new liquidation date of March 22, 2019 for the Fund.

The Board of Trustees of Janus Aspen Series has approved a plan to liquidate and terminate Janus Henderson Global Unconstrained Bond Portfolio on or about March 1, 2019. Two notes here: (1) this is a portfolio run by Bill Gross but (2) it is not the mutual fund run by Mr. Gross. The portfolio is a tiny flyspeck on an insurance product. The $1 billion fund (JUCAX), about which we’ve offered several strong cautions, is performing about the way we’d expect:

Over four-and-a-half years, Mr. Gross has managed to grow an initial $10,000 to … $10,026. That only modestly trails the gains posted by the change jar on my bedroom dresser.

On December 28, 2019, the Board of Directors of The Lazard Funds had Lazard Emerging Markets Multi-Asset Portfolio (EMMOX) liquidated. It was a tiny EM balanced fund that somehow managed not only to consistently post negative returns, but also to post greater losses than its all-equity peer group.

Laudus Small-Cap MarketMasters Fund (SWOSX) will liquidate on or about February 26, 2019. Hmmm … 10 managers, high expenses, limited assets and a 10-year record that has to look up at 93% of its peers. Apparently mastering the market is trickier than it looked.

Following shareholder approval in February 2019, Lord Abbett Calibrated Large Cap Value Fund (LCVIX) will merge into Lord Abbett Fundamental Equity Fund (LDFVX) and Lord Abbett Calibrated Mid Cap Value Fund (LVMIX) will be absorbed by Lord Abbett Mid Cap Stock Fund (LAVLX).

O’Shares FTSE Asia Pacific Quality Dividend ETF (OASI) and O’Shares FTSE Russell International Quality Dividend ETF (ONTL) both liquidated in late December.

Recurrent Natural Resources Fund (RNRGX) will be liquidated and dissolved on or about January 31, 2019.

The unwinding of the Royce Funds continues. Pending shareholder approval, during the second quarter of 2019:

Royce Small-Cap Leaders and Small/Mid-Cap Premier Funds will be merged into Royce Pennsylvania Mutual Fund.

Royce Micro-Cap Opportunity Fund will be merged into Royce Opportunity Fund.

Royce Low-Priced Stock Fund will be merged into Royce Micro-Cap Fund.

Shelton Greater China Fund (SGCFX) was liquidated, on quite short notice, December 21, 2018.

Steinberg Select Fund (STMAX) “anticipates that it will complete the liquidation on or around the close of business on or about January 31, 2019.” Do you suppose that a mutual fund contemplating its own mortality grows queasy at the thought? 

On or about April 5, 2019, Vanguard Morgan Growth Fund (VMRGX) will be “reorganized with and into” Vanguard U.S. Growth Fund (VWUSX).

Effective December 21, 2018, Virtus DFA 2025 Target Date Retirement Income Fund and Virtus DFA 2055 Target Date Retirement Income Fund were liquidated.