Monthly Archives: April 2019

April 1, 2019

By David Snowball

Dear friends,

It’s been an especially distressing month. Rapid and widespread flooding following a hard winter destroyed the lives and livelihoods of many thousands of good folks in eastern Nebraska and western Iowa. Levees failed, bridges and roads were swept away, homes and equipment left mangled. Many are in despair at the loss of thousands of newborn calves, with loss to private and public property exceeding a billion dollars. At the same time, Cyclone Idai, the second-worst in the region’s history, swept across eastern Africa, likely killing more than a thousand and leaving hundreds of thousands homeless and hungry. While it is only “weather,” persistent patterns in the weather define our climate and the pattern of the past five years has been increasing numbers of extreme weather events.  We really need to work together to figure out how best to manage these challenges.

Speaking of challenges, presidential wannabees are beginning to descend on Iowa. We’ve even got a website to keep track of the invasion. There are days when you can’t get your oil changed without tripping over one of them. Okay, so here’s our little state secret. You know all those pictures where would-be presidents have donned plaid shirts with rolled-up sleeves and are sitting down to some “real Iowa food”?

Yeah, actually we don’t eat any of that crap. It started as a sort of party game called “what do you think we can convince those rubes to stuff in their mouths?” which ended up with deep-fried, bacon-studded pork nuggets on a stick and four pound, two foot wide pork tenderloin sandwiches. (Had I mentioned our experiment with deep-fried butter? Took out two Republicans and a Democrat with that one.)


As ever, to the 30,000 or so of you who spend part of your month with us.

To the folks on the discussion board, who daily share Virtual Excedrin and chuckles.

To the journalists with whom we’ve had increasingly frequent conversations. I’m hopeful they help us all be smarter.

To Marty (We know what you’re looking for. Be patient, the profile is on the way), the good folks at Gardey Financial for their years of support, Richard, Himu from Florida, Peter from Medina, Paul K., James (extra strength Exedrin – Thanks!), and Jonathan.

Thanks, most especially, to the small but growing circle of folks who’ve chosen to make a (generally modest, universally appreciated) monthly contribution in support of MFO. We think of you – Doug, Deborah, Greg, William, Brian, David – as “our subscribers” and are hopeful of sharing a small thank-you later this week. Sadly, I have almost no snail mail addresses so look for a query in your inbox!

MFO upcoming

David, Charles and Ed will be in Chicago, at or near the Morningstar conference, in the second week of May. Please do drop us a note if you’d like to catch up while we’re there.

Chip and I will be in western Ireland during the first 10 days of June. She’s masterminded a day-by-day itinerary for our time around Dingle, Doolin and Galway. If you’ve got strong opinions about “can’t miss” meals or experiences, let her know and we’ll share pics!

Given our sense that the investment climate feels nearly as parlous as the physical one, we’re hopeful of highlighting more, and more interesting, safe harbor and ESG investment opportunities. If you’ve spotted something that you think we should know more about (that happens a lot), please do pass along your reflections and we’ll see what we can learn.

As the One Minute Manager guy, Kenneth Blanchard, notes and the Make Me Smart podcast guy, Kai Ryssdal, repeats: “none of us is as smart as all of us.”


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Death Cleaning my portfolio

By David Snowball

Or, since I teach at a historically Swedish-Lutheran college, I might use the original Swedish term: I was döstädning my portfolio.

By way of background, my income comes from teaching at the aforementioned Augustana College; it’s exceedingly secure but has not increased much, in real or inflation-adjusted terms, in quite a while. It has “bond-like” qualities. I invest about 13% pretax for retirement, the college has a match that adds about 10% and I squirrel away around 10% of my take-home pay each month. Our home in Davenport is small, snug and affordable. Our cars are used but clean and efficient. Our splurges often enough involve live music and local brews somewhere in town.

Annually I share a bit about how I’ve been thinking about my own portfolios and what I’ve done about them. The short version, most years, is that I think “gosh, markets are weird” and then continue making steady but modest automatic monthly contributions. If that studied calm left me with a portfolio that’s a bit smaller than it might have been, it also left me with the time and energy for a life that’s a bit richer.

Here’s the discipline:

  1. work out the strategic plan
  2. work out the tactical plan
  3. execute the plan
  4. don’t get all smart and twitchy and screw up the plan (again)

The strategic plan is the big picture and it mostly involves my asset allocation and funding levels. In my retirement portfolio, I invest about two-thirds in equity and one-third in income. My equity exposure tends to have abnormally large commitments to international equity (about half of the total) and emerging markets (nearly half of the international piece). While I prefer to tilt toward the value, size and quality factors, the fact that large, low-quality and growth have been outperforming keeps tilting it back. My income exposure tends, likewise, to have more international and non-investment-grade bond exposure, partly through the TIAA Real Estate portfolio.

Over the long term, I’ve been able to meet my goal of 5-6% real returns which is what it will take to give me a good chance of managing 25 years in retirement.

In my non-retirement portfolio, I invest about half in equity and half in income. I tend to have a strong tilt toward international, small, value and emerging markets. It is not a tax-efficient allocation. Here’s why: I don’t have a substantial savings account and haven’t for years. I loathe the idea of locking in losses, which is what happens when my credit union’s saving account pays 0.10% APR and my cost-of-living rises at 10-20 times that rate. So instead, I have a substantial commitment to several exceedingly low volatility income funds that return 2-4% annually complemented by a couple slightly riskier income-oriented funds that aren’t hostage to US interest rates.

In general, for non-retirement investors, stocks should be treated like cooks treat habañero peppers: cautiously and with a clear understanding that a little bit is good and a lot is disastrous. Asset allocation research from T. Rowe consistently illustrate the risk: stock-light portfolios make a bit above 5% annually, stock-heavy portfolios make a bit below 6% annually while nearly quadrupling your risk.

The tactical plan is the selection of individual investments needed to carry out the strategic plan. In general, my experience and my reading of the professional and research literature make me comfortable favoring actually active over passive; risk-aware investors over market-beating ones; small, driven firms over large, asset-loving ones; managerial records that are respectable over entire market cycles rather than great during short, arbitrary periods; and advisors whose hearts, souls and family fortunes are invested next to my pittance.

I execute the plan by setting up automatic monthly investments. My personal record of self-discipline is no better than yours; anything that I don’t do automatically, I don’t do.

I avoid getting too smart for my own good by ignoring my portfolio for months on end and refusing to change it for years on end. As long as the manager remains faithful, I do except when there’s a change to my strategic plan.

And that’s where the döstädning kicks in.

Vast changes in my retirement portfolio. For years, Augustana offered a 403(b) retirement plan that provided benefit access to all of TIAA-CREF, Fidelity, T. Rowe Price, American Century and Lutheran Brotherhood. Rather more than 800 funds. That system worked very poorly for most employees of the college and, about five years ago, I participated in a complete redesign of the system to offer just a couple dozen high quality choices, with auto-enrollment and auto-escalation provisions. That worked splendidly for 98% of the college’s employees; I was part of the 2%. The new system shut down access to T. Rowe and Fidelity, leaving me with a tri-part portfolio of TIAA-CREF (funded by the college’s contribution) and Fidelity and Price (funded by my personal withholding). Between the three, I owned just over 30 funds. Given that I can no longer add to either Price or Fidelity it was time to change.

Change #1: I moved all of my Fidelity money over to T. Rowe Price, which reduced the number of funds I was following from 22 to 10.

Change #2: I moved 90% of my Price money into T. Rowe Price Retirement 2025 (TRHHX) then recreated my traditional tilt toward the emerging markets by buying Emerging Markets Discovery (PRIJX) and Emerging Markets Bond (PREMX). All three funds are MFO Great Owl funds, meaning that they’ve landed in the top 20% of their peer groups for risk-adjusted returns in every measurement period longer than one year. Two of the three are also five-star funds under Morningstar’s system and tw0 (2o25 is Silver, EM Bond is Bronze) have received the endorsement of the Morningstar analysts. Morningstar’s machine-learning system projects a Silver assignment for EM Discovery.

Strategic changes in my non-retirement portfolio. I wrote, last month, about the sustained threat posed by climate destabilization. Climate destabilization triggers four different kinds of risks which impact our portfolios as well as our lives. Some of those risks (for example, regulatory and reputational) strike me as pretty immediate, and all seem to be growing in intensity. We made that assessment in our March issue. In our April issue, we’ve worked to identify the sustainable/ESG funds which marry the best long-term performance (measured by MFO and Morningstar ratings) with the most principled portfolios (measured by Morningstar sustainability ratings and Fossil Free Funds).

From that analysis, I concluded that the most compelling ESG equity fund is Brown Advisory Sustainable Growth (BAFWX). In response to that finding, I decided to (a) add BAFWX to my portfolio and (b) provide an updated but condensed version of Dennis Baran’s fine profile of the fund. For folks wanting richer detail, Dennis’s original profile is still the place to turn.

In the months ahead, I’ll look to make a comparable addition to the income-oriented part of the portfolio. No one stands out in the way a couple of the equity ESG funds do, so research is ongoing. Maybe Saturna Sustainable Bond (SEBFX)?  Maybe learn a bit more about Zeo Sustainable Credit Fund after its likely launch next month? I really don’t want returns below the rate of inflation (think 2% or more) or to be hostage to the US credit cycle (see above), which means look for “credit” funds or ones with a globally diversified portfolio. I’ll work on it, and share.

– Growth –

Artisan International Value (ARTKX): about the best of the international value funds, the fund got dinged for weak relative performance in 2017 (when it made 24%, for gosh sakes) and 2018 (when it trailed its peers by 1%). No worries there, though the evolution of the management team bears watching: founding managers Samra and O’Keefe have split the responsibilities, with O’Keefe taking custody of Artisan Global Value and Samra taking responsibility here. In each case, they added younger co-managers last year. Planning for change is good, so I cheer them. Now the question is, how will the changes play out? I’ll watch. Closed to new investors.

Brown Advisory Sustainable Growth (BAWFX): new for 2019! Check out the profile.

Grandeur Peak Global Reach (GPROX): the core fund in Grandeur Peak’s global micro- and small-cap lineup. Below average volatility, well above-average returns, four stars at Morningstar and the equivalent of four stars at MFO. Closed to new investors.

Grandeur Peak Global Microcap (GPMCX): Grandeur Peak’s smallest and most venturesome fund, the fund was subject to a prelaunch subscription, a quota on how much you could invest, and a hard closure on the day of launch. I find it fascinating, and it’s returned rather more than 8% a year so far.

Intrepid Endurance (ICMAX): I love the discipline (absolute value, small cap focused) and am increasingly worried about the execution. While ICMAX finished in the top 5% in 2018, its long-time manager Jayme Wiggins left on short notice in September, president Mark Travis filled in for four months, and now three young managers have ascended. The managers haven’t found a use for their 70% cash stake leaving them with a five-year record that trails, oh, my savings account at the credit union. Former managers Eric Cinnamond and Jayme Wiggins have filed to launch a new fund using the Endurance style with slightly lower fees; I’ll keep watch there to see whether I’ll move the money to the original Endurance managers.

– Growth & Income –

Seafarer Overseas Growth & Income (SIGIX): Seafarer is a long-time holding that underwent several evolutionary changes in 2018. Andrew Foster has been the lead manager and pursues a sort of growth-as-a-reasonable price discipline, which led to exceptional returns and muted volatility. With the evolution of the EMs themselves, Andrew instituted two changes at the fund: his two long-time associates are now recognized as co-managers and they are structuring distinctive value and growth components into portfolio. Where, for example, value stocks might have coincidentally been 10% of the total portfolio, now they might consciously be a quarter or more of it.

Matthews Asia Growth & Income (MACSX): one of the most conservative ways to invest in Asian stocks, MACSX tends to have solid absolute returns in rising markets and outstanding relative returns in falling ones. In 2018, its 10% loss bested 80% of its peers.

FPA Crescent (FPACX): managed by Steven Romick, Crescent has long been a “go anywhere we can find exceptional value” fund with a superb record. Mr. Romick, like most of the folks at FPA, pursues an “absolute value” orientation that I find compelling. At base, the absolute value investors say “we’ll only buy if we’re offering an attractive security priced with a compelling margin of safety, absent that, we’re going to wait.” The fund had a rare and substantial stumble in 2018. I’ll wait to hear Mr. Romick’s discussion of it, but I’m not making long-term decisions based on short-term performance.

– Income –

Matthews Asia Strategic Income (MAINX): Teresa Kong strikes me as frighteningly smart, and she’s done a fine job. Morningstar switched their peer group last year from “international” to “emerging,” which makes the relative data weird: Morningstar says they finished at the 50th percentile over the past five years but also that they’ve substantially outperformed their peers in each of those years. Uhhh …

RiverPark Short Term High Yield (RPHYX): my lowest volatility holding, RPHYX typically churns out 2-4% with its maximum-ever drawdown of 0.6%. That constancy has made it an MFO Great Owl. Closed to new investors.

RiverPark Strategic Income (RSIVX): nominally the next-step-out on the risk-return spectrum from the folks who managed RPHYX, which originally aspired to about double its sibling’s return. It hasn’t really managed that over time, though it did trounce RPHYX in two individual years. Much lower Sharpe, much higher maximum drawdown.

T. Rowe Price Strategic Income (RPSIX): a globally diversified T. Rowe Price fund-of-income-funds, with a slice of dividend-paying stocks. It lost 2.6% in 2018 which isn’t surprising given its exposure, however conservative, to stocks and EM bonds.

Bottom line: down about 9% in 2018, with everything touching international equities seeing double-digit declines. It happens. Five goals for 2019:

  1. sort through the raft of retirement plan changes announced by Augustana (few of which thrilled me) to reassert control over my 403(b);
  2. rebalance back to my target asset allocation, which means moving some international money into the Brown Advisory fund;
  3. monitor two funds closely;
  4. search for a suitable ESG income fund; and
  5. attend to the new management configurations at Artisan and Seafarer

Learning from the fall fall

By David Snowball

The last substantial decline in the US stock market occurred between 2007-09. Vanguard Total Stock Market Index Fund (VTSMX) declined by 50.9% and remained under water for 52 months. Vanguard International Stock Market Index (VGTSX) fell 58.5% and did not recover for 114 months. Investors in Vanguard Emerging Market Index (VEIEX) would be at least a little envious of the fact that VGTSX investors were in the red for almost ten years, since they were at a loss for more than 10 years after their portfolio hit bottom. Investors who hewed to the “stocks for the long-term” mantra and faithfully held their VEIEX shares ended the decade with an average annual loss of 0.1%.

The good news is that it’s over: almost all diversified funds have managed to recover all of the losses they suffered and then some.

The bad news is that it could have been much worse. In major bear markets, stock valuations often drop from “way too high” at the outset, rocket past “entirely reasonable” and crash around “horrifyingly low,” which sets up a rebound and a new bull market. That didn’t exactly happen in 2007-09, valuations were so historically high before the crash that a 50% decline didn’t return them to “horrifyingly low.” At the worst of the decline, stock valuations were no lower than “about reasonable.”

Here’s the Shiller p/e ratio for the US stock market from the late 19th century to the early 21st century. Shiller’s p/e tries to eliminate some of the distortions caused by short-lived profit spikes, since those spikes create the temporary illusion that market valuations are fabulously low.

The median Shiller p/e for that 140-year period is 16.9; the depth of the sharpest percentage decline since the Great Depression brought the market’s p/e down to just 15 in March 2009. If the market bottomed at the levels typical of major bear markets, it would have been in the single digits.

It may be that we will never see single-digit valuations ever again because, you know, technology and algorithms and the Fed. Those of us depending on relatively modest retirement portfolios to keep us from spending our Golden Years in a repurposed dumpster out behind the Walmart, might want to approach such optimism with caution.

The worse news is that another crash is coming. That’s not a market-timing call, it’s simply a report on 2000 years of investment history. Markets climb, often irrationally. Markets fall, often irrationally. The past 10 years have seen a nearly unbroken rise in domestic equity markets, punctuated by a series of minor hiccups:

Year Duration of the decline Extent of the decline
2010 5 months 16%
2011 3 months 19
2015 2 months 15
2015-16 3 months 13
2018-19 6+ months* 20

* as of 29 March 2019, the domestic Total Market and S&P 500 indexes are within about 2% of their all-time highs from September 2018. Having posted its best quarter in decade, the correction feels mostly “done.”

The folks at Yardeni Research have published a series of graphs that illustrate the extent, timing and severity of market declines over the past century. Their work gives you a sense of how inconsequential all the Sturm und Drang over the past decade has been:

The simple question is, are you ready for the next round? The problem is that many of the most popular investment options available today didn’t exist in mid-2007. Almost half of all existing mutual funds (3340 of 7348) launched after October 1, 2007, which means we don’t have a record of how they handled the last really extended bear market.

We can help

We can, however, get a snapshot of how they did during the second-worst stretch in recent market history, the 2018-19 correction. I used the fund screener at MFO Premium to show the risk-adjusted performance of all funds and ETFs over the past six months, which captures both the autumn decline and the winter rebound. Our guess is that the performance of funds during a short, sharp cycle will give you an insight into how they might perform in a long, grinding cycle later.

The statistics below measure fund performance from September 1, 2018 – February 28, 2019 so they capture the few weeks before the market peak and exclude March, 2019. Here are the ten funds (well, nine funds and an ETF) that had the best risk-adjusted performance during that mini-cycle.

  Maximum drawdown Sharpe ratio Ulcer Index
Benchmark: Vanguard Total Stock Market (VTSMX) -14.3% -0.39 7.6
Spectrum Low Volatility (SVARX) -2.1 0.78 1.2
SEI Multi-Asset Income (SIOAX) -2.8 0.57 1.5
Fidelity Advisor Series Growth Opportunities (FAOFX) -10.4 0.46 6.5
FAM Equity-Income (FAMEX) -8.1 0.43 4.1
Invesco S&P 500 Low Volatility ETF (SPLV) -6.9 0.42 3.1
AMG Yacktman Focused (YAFFX) -4.7 0.41 2
Marshfield Concentrated Opportunity (MRFOX) -8 0.41 4.1
Calvert Equity (CSIEX) -8.4 0.38 4
AMG Yacktman (YACKX) -4.9 0.35 2.1
Akre Focus (AKREX) -8.5 0.29 4.4

MFO Premium search string: Mutual Funds + ETFs, U.S. Equity + Mixed Asset, Only  Great Owl Funds, display 09/2018-02/2019. N = 203 funds/ETFs

To test the hypothesis that performance during the autumn-to-winter cycle might help us identify funds and ETFs that will serve us well during an extended bear, we then looked at the relative performance of each of these funds, upside, downside and risk-return balance, from the time of its inception (periods ranging from 3 – 32 years) to now. The table below documents our findings.

Performance since inception

  Age APR Max DD Recov Std Dev DS Dev Ulcer Bear Sharpe MFO
Spectrum Low Volatility 5 5 1 2 1 1 1 1 5 5
SEI Multi-Asset Income 7 4 1 2 1 1 1 1 5 5
Marshfield Concentrated Opportunity 3 5 1 2 2 1 1 1 5 5
Akre Focus 10 5 1 3 1 1 1 1 5 5
AMG Yacktman 27 5 1 1 2 2 1 2 5 5
Calvert Equity 32 2 1 1 1 1 1 1 4 5
AMG Yacktman Focused 22 5 1 1 3 2 1 2 5 5
Invesco S&P 500 Low Volatility ETF 8 5 1 1 1 1 1 1 5 5
FAM Equity-Income 23 5 3 3 2 2 2 3 5 4
Fidelity Advisor Series Growth Opportunities 5 5 1 5 4 2 2 3 5 5

In each case, the values represent the performance of the fund since its inception. Since being splendid for a long time is even harder than being splendid for a while, we highlight each fund’s age. In all cases, blue represents the best possible rating, green is second best and so on down to red.

What do the columns mean? APR is “annual percentage return,” so blue is the top 20% of its peer group since inception. Max DD is “maximum drawdown,” so blue is in the 20% of peer funds with the smallest worst-case performance. Recov is “time to recover from your max DD,” standard deviation is a measure of “normal” volatility, DownSide deviation is a measure of a fund’s tendency to move downward, the Ulcer Index combines measures of how far a fund falls and how long it stays down, bear is a fund’s normal performance in bear market months, Sharpe is a very common measure of a fund’s risk-return performance and MFO is a variation of Sharpe that strongly rewards funds that hold up well in volatile markets.

These are just the comparative rank data (top 20%, top 40% and so on). If you’re geeky enough to want to work with the raw data as well, that’s all in the screener at MFO Premium. For our immediate purpose, the relative performance was the relevant part.

Here’s the takeaway: the funds’ short-term resilience seems to reflect their long-term prospects. The funds that excelled in the fall and winter have also excelled, with some consistency and across a variety of measures, since their inception.

Where do we go from here?

If you’re intrigued and have access, “to MFO Premium,” go there and recreate the search string so you can see the full details rather than my quick summary. If you’re intrigued but haven’t sought access to Premium, here are the highlights of resilient funds and ETFs in a variety of categories.

Zero is not my hero! All equity funds and ETFs with a Sharpe ratio above zero

State Street SPDR SSGA US Large Cap Low Volatility Index ETF LGLV Multi-Cap Core
T Rowe Price Capital Appreciation PRWCX Growth allocation
Legg Mason Low Volatility High Dividend ETF LVHD Multi-Cap Value
Madison Dividend Income BHBFX Equity Income
Invesco DJIA Dividend ETF DJD Equity Income
Fidelity Advisor Multi-Asset Income FAYZX Flexible Portfolio
BMO Low Volatility Equity MLVEX Multi-Cap Value
BlackRock iShares Edge MSCI Min Vol USA ETF USMV Multi-Cap Core
Nuance Mid Cap Value NMVLX Mid-Cap Core
MFS Low Volatility Equity MLVAX Multi-Cap Core
Fidelity SAI US Low Volatility Index FSUVX Multi-Cap Core
Vanguard Wellesley Income VWINX Conservative allocation
TCW New America Premier Equities TGUSX Multi-Cap Growth
First Trust Value Line Dividend Index FVD Multi-Cap Value
Invesco S&P MidCap Low Volatility ETF XMLV Mid-Cap Core
Champlain Mid Cap CIPMX Mid-Cap Growth
Virtus KAR Small-Cap Growth PXSGX Small-Cap Growth
Jackson Square SMID-Cap Growth DCGTX Small-Cap Growth
T Rowe Price Dividend Growth PRDGX Large-Cap Core
Jensen Quality Growth JENSX Large-Cap Core
YCG Enhanced YCGEX Large-Cap Core
State Street SPDR Portfolio S&P 500 High Dividend ETF SPYD Equity Income
AMG River Road Focused Absolute Value AFAVX Multi-Cap Value
ProShares Russell 2000 Dividend Growers ETF SMDV Small-Cap Core

The small standing tall: the top five small cap funds

Citizens of the World: The Top Five Global Funds

Beyond these shares: the top five international funds

… or maybe a few more.

Striking a healthy balance: the top five balanced funds

… yes, I know. Think of it as an Easter Egg.

On the other hand: the top ten alternatives funds

The rewards of virtue: the top ten ESG funds

A socially responsible money market. Who knew?

Passively active: the top ten active ETFs

Brand or Generic?

By Edward A. Studzinski

The Romans had a maxim, “Shorten your weapons and lengthen your frontiers.” But our maxim seems to be, “Diminish your weapons and increase your obligations.” Aye, and diminish the weapons of your friends.

Winston S. Churchill, speech to the House of Commons, 14 March 1934

There has been a lot of discussion in recent months about the Kraft Heinz debacle. Much of it is around the assumptions by Warren Buffett that consumers would return to their habits of forty or fifty years ago and purchase Heinz ketchup, mustard, or relish to slather on their hot dogs and hamburgers. As demographics, consumer tastes, and spending habits have changed, we are as likely to see condiments such as chutney, fish sauce or sriracha sauce used as often as not. And if there are brands involved, they are as often as not transnational rather than American. Often as well, they are private label.

Recently I was in New York, having dinner with a fund manager. The discussion was around his efforts to come up with new product and build-out his brand. He indicated that people like him have a choice. They could either have a product (fund) built around a star manager, who in effect becomes the brand. Alternatively, rather than being built around a star manager, the various funds (products) are built around a process. On the one hand you are building a business, the foundation of which is built on a guru. Alternatively, you are building the business and products on a process, where no one individual is essential to the investment selection, execution, and returns.

Fidelity built its reputation on star managers – a Peter Lynch, a George Noble, a Beth Terrana – all of whom were superb managers. The problem came when they elected to retire or move on to other things. Now, with a few exceptions, Fidelity builds its products around process and a very talented group of managers and analysts. Marketing campaigns are not built around individuals. Vanguard had a similar problem when its reputation as an active manager was tied to John Neff at Windsor Fund (1964-1995). Then Neff’s performance went cold and he ultimately retired. Which resulted in problems, problems, and problems. Vanguard has solved the problem with a slew of low cost index funds. Their active funds generally divide portfolio management among two or more firms. It is impossible from the outside to come up with performance attribution for the different managers. You have no way of knowing whether the group of managers are additive, offset one another, or all have negative performance.

As is generally true with branded consumer products, branded index funds such as Fidelity’s or Vanguard’s, although generic products, are not going to have the firm names on them if they are crap. There are standards that will be met, as to back office, trading, and reporting. You will get something that in terms of process you can rely on, especially given that there will be no skimping that would cause reputational risk.

The issue these days comes with actively managed funds. What does it really cost to manage a fund? What does the research cost to perform, especially if you hold yourself out as only doing your own research? Does it cost more to research and invest for an international or emerging markets fund? Do the reporting, currency, compliance, and tax questions cost more? And here is where the 3G – Kraft Heinz analogy comes into play. Where do you take out costs as an active manager to remain competitive in fees and expense ratios? How do you deal with personnel costs? Do you take a Money Ball approach a la Michael Lewis’ book about the Oakland Athletics and turn over personnel regularly to bring costs down? Or is there a chemistry among people that makes a difference?

It is hard to figure that out from the outside. Years ago, after they had been acquired by Franklin, a former analyst at Mutual Shares explained to me that the firm kept tweaking analyst personnel to see if (a) it made a difference in performance and (b) the outside world would notice. You may draw your own conclusions at this point, but I would also suggest that generational shifts would have ultimately made a difference regardless.

I really don’t have an answer to these questions, but I think they are worth thinking about, both for individuals and for institutional investors. For individuals, unless there is some thrill of the chase that you live for (and do not put a money value on your time), researching active managers may prove both cathartic and possibly rewarding. For those not so inclined, especially for 401(k) or other retirement moneys where you should make the investment and leave it alone to compound, given a ten year or more time horizon, a product such as the Vanguard Balanced Index Fund, with its automatic rebalancing and quarterly income distributions may make the most sense from a cost and efficiency point of view. Alternatively, especially since life expectancy in this country keeps lengthening, eschew the target date funds and find a relatively low cost, actively managed balanced fund such as Dodge and Cox Balanced, where you have a real (as opposed to make believe) equity research team and managers, and a real (also as opposed to make believe) fixed income research team and managers. And avoid fund groups that are subsidiaries of large asset gathering organizations.

And understand something that is too often not emphasized enough. Or it is glossed over. Your mutual fund manager and his firm are in business to make money, first for themselves. The fund is a product. You are the consumers. As consumers, you should feel free to pull your money and go elsewhere if the product changes in ways you don’t understand, is cheapened, or does not meet your goals, objectives, and expectations. Loyalty is not a two-way street in the investment world. It is strictly buyer beware.

ETFs and the fine art of propaganda

By David Snowball

I teach about propaganda and persuasion for a living. “Propaganda” in the Hitler, Goebbels, rise of the Nazis sense of the term. It’s an important and fascinating study, though it seems reasonably tangential to contemporary investing.

Then I started reading about ETF marketing.

The Institute for Propaganda Analysis, 1937-1942, was an honest attempt to help American citizens detect and dissect trickery and deceptive messages. They were, then as now, rife. The Institute’s most famous publication was The Fine Art of Propaganda (1939) which offered a “candid and impartial study of the devices and apparent objectives of specialists in the distortion of public opinions.” They devoted a chapter to each of seven tricks:

  • Name-calling
  • Glittering generalities
  • Transfer
  • Testimonial
  • Plain folks
  • Card stacking
  • Bandwagon

That last one, the bandwagon, “is a means for making us follow the crowd and accept a propagandist’s program as a whole and without examining the evidence for and against it. His theme is: ‘Everybody’s doing it. Why not you?’ His techniques range from the street-corner medicine show to those of the vast pageant” (105).

So here’s the propagandist’s tale: “passively-managed ETFs are taking over the world. The only fools who invest in futile attempts by active managers to beat the market are old men in frock coats and gardenia-scented spinsters!” Those are buttressed by analyses showing the passive strategies will control over half the markets assets by mid-2019.

But why?

Excellent question! My skepticism about passive cap-weighted or debt-weighted index investing, especially through ETFs, has had three sources:

  1. it incorrectly focuses on “market beating returns,” which is misleading since my investment goal isn’t to beat the market. It’s to fund a comfortable existence, which market-beating returns might or might not achieve.
  2. cap-weighted strategies tend to thrive in rising markets, and virtually the entire period of ETF ascent has been during a 10+ year bull market.
  3. it might ultimately undermine the ability of the market to manage major downturns by draining liquidity; that is, ETFs hold no cash reserves to deploy during downturns which risks fostering algorithm-fed downward spirals.

Many, including many who market ETFs, disagree.

A series of recent reports suggest that marketers might be consciously gaming the system to generate a self-sustaining bandwagon effect. Take the case of one of the most explosive ETF launches ever … a JPMorgan Japan fund?

The Invesco QQQ Trust (QQQ) was the ETF to capture the largest inflows this week―$1.2 billion―but the week belonged to another fund, the JPMorgan BetaBuilders Japan ETF (BBJP). Inflows for BBJP totaled more than $1 billion during the period, which is remarkable considering the fund had less than $10 million in assets a little over a week ago. (‘BBJP’ 2nd-Fastest ETF To $1B Assets, 28 July 2018)

How can you explain a billion dollars swooping in over the course of a week? A carefully constructed bandwagon and, it seems, just one of many. Asjylyn Loder of The Wall Street Journal reports:

JPMorgan Chase & Co. launched an exchange-traded fund last June that invests in Japanese stocks. The fund raised $1.7 billion in six weeks, making it one of the fastest ETFs ever to surpass $1 billion in assets.

The biggest buyers: JPMorgan’s clients.

By buying JPMorgan’s ETFs on behalf of customers, JPMorgan’s private bank and wealth management divisions helped the JPMorgan BetaBuilders Japan reach $3.3 billion in assets by the end of the year.

It wasn’t an isolated case. JPMorgan’s ETFs raised $15.6 billion last year, most of it from JPMorgan affiliates … The tide of client money helped boost the New York bank from an ETF also-ran to the 10th largest ETF issuer. By the end of 2018, JPMorgan affiliates owned 53% of the firm’s ETF assets, and the bank was the top shareholder of 23 of its 31 ETFs.

JPMorgan isn’t the only ETF issuer that steers clients into in-house funds. Almost every issuer has repackaged some of their ETFs into other investment products … The practice has even earned its own nickname: BYOA, for “Bring Your Own Assets.” (JPMorgan ETFs Are a Hit, but With Its Own Clients, 11 March 2019 – with thanks to Ms. Loder for her excellent reporting and Ted, the MFO discussion board’s senior member, for urging us to highlight it)

That essentially corroborates the investigative work done by Elizabeth Kashner at In “Tough Times for New ETFs” (2/21/2019), she makes two interesting points: ETF liquidations are rising steadily and almost no new ETF launches lead to sustainable asset levels. In general, the only ETFs make serious money are the ETFs that are used in the portfolios of other funds. Beyond that, for all the hype and pageantry, it looks like the market has peaked.

Major investors have reached the same conclusion, even if most small investors are still in thrall to the call of “the winning team.” Ira Artman, longtime friend of MFO, shared the conclusions of “Fidelity’s annual global institutional investor survey … over the next six years institutional investors expect to shift their portfolios toward more active strategies and smart beta products — all at the expense of traditional passive. The survey includes responses from 905 institutional investors in 25 countries” (“The Traditional Passive Fund is a Dying Species,” 18 March 2019).

Bottom line: the argument “but everyone’s doing it!” is the hallmark of the reasoning of a petulant, hormonally-imbalanced teen. That’s not really a good reason to use the same logic to drive your investment decisions, is it? And yet, it works. It worked for demagogues in the 1930s. It works for convincing people to read, usually the first chapter of, mediocre nonsense (a New York Times bestseller!) And it drives marketing money on the web, where popular seven-year-olds can claim a $20 million payday because everybody who’s anybody is watching them.

“ETFs are winning” is not a reason to buy ETFs, especially when “winning” is just a synonym for “attracting money.” The hallmarks of good investments are that they meet your needs, make sense in your world and will serve you in good times and bad. Very few active funds bear those hallmarks, and very few ETFs do.

Caution is especially warranted when the bandwagon rolls into town with hype and hoopla and cheering crowds. That’s often a good signal to put your hand securely over your wallet and move quietly toward an exit.

Next month MFO will, by the way, highlight actively-managed ETFs that have the greatest record of strong, consistent achievement. Do drop by.

Introducing MFO Premium’s Compare Funds Tool

By Charles Boccadoro

The Compare Funds tool displays all the data from MultiSearch Results table, our main search tool on the MFO Premium site, for up to 10 funds in an easy-to-compare and export/pdf format. Basically, it transposes the table from horizontal to vertical orientation. Thanks to our friends at Gaia Capital Management for requesting this display feature.

We use the Oakmark fund family to illustrate. Here’s summary only risk and return metrics across the current full market cycle through February.

Pressing the Compare button delivers the transposed table, as illustrated below:

Here’s a link to a pdf of the full Compare table, summarizing 200 parameters currently output in the MultiSearch tool.

Finding ESG Fund One

By David Snowball

By Morningstar’s calculation, there are 486 “socially-conscious” funds.  While bond and mixed-asset funds can be “socially-conscious,” Morningstar does not rate the sustainability of their portfolios. If you subtract the 183 funds in those categories, you’re left with 303 “socially-conscious” equity funds. Only 93 (or 31%) have portfolios that score “high” on Morningstar’s sustainability ratings while 101 more are “above average,” so about two-thirds of ESG funds earn good-to-great sustainability scores.

At the other end of the spectrum, 18 (about 6%, including one with “environmental” in the name) have the lowest-possible sustainability rating.

MFO, which draws its data from Refinitiv (formerly Thomsen-Reuters, formerly Lipper), can identify 339 “socially-conscious” funds and ETFs, combined. In either case, ESG-conscious investors have a wealth – and possibly a welter – of choices to contend with.

To help create a more manageable short list of ESG funds that might be worth consideration, we combined three datasets and two sets of measurements to identify 27 first-tier options for you.

Screen one: we looked for “socially conscious” funds in both the Morningstar and MFO datasets.

Screen two: we selected funds with strong risk-adjusted returns. Those were defined as funds that have an MFO rating of 5 for risk-adjusted performance (and noted the Great Owl funds, GO on the table, which have been incredibly persistent outperformers) or a Morningstar rating of four- or five-stars (and noted the presence of a positive analyst rating).

Screen three: we selected funds with the most promising records of environmentally sustainable investments by looking at their Morningstar sustainability ratings and the Fossil Free Funds badges.

Then we added three bits of important information: age (since excellence over long periods is especially notable), expenses and fund size. To make it easy to scan, we color-coded each cell with blue for the highest score, green for second and so on. Finally, we sorted the table by score. Brown Advisory ranks first with 20 of a possible 20 points, Calvert is second with 19 of 20 and so on.

Remember: these are all really solid performers, whether at the top of the table or at the bottom of it. Our basic starting point for inclusion was outstanding risk-adjusted returns. 

Three important notes to help you interpret the table:

  1. The ranking is most sensitive to the “E” in “ESG.” That might not align with your interests if, for example, you’re intensely motivated to find firms that treat their employees with respect.
  2. Environmentally sensitive funds without an explicit ESG mandate are missing. If we keyed off the fund’s Morningstar sustainability rating, which is based on a portfolio analysis rather than on the prospectus language, interesting opportunities are added. The funds below don’t invoke “the trigger words” but act responsibly and perform splendidly.
    MFO M* stars M* sust Age ER AUM -$M
Champlain Mid Cap (CIPMX) Mid growth 5 + GO 5 + Gold 5 11 1.05 3.1 billion
Buffalo International (BUFIX) Int’l multi growth 5 + GO 5 5 11 1.05 325
Monongahela All Cap Value (MCMVX) Multi value 5 5 5 6 0.87 12
FAM Equity-income (FAMEX) Mid growth 5 + GO 5 4 23 1.26 283
Harding Loevner EM (HLMEX) EM 5 4 + Silver 5 20 1.40 3.8 billion
Crawford Dividend Opp (CDOFX) Small core, dividend focused 4 5 5 6 1.05 214
Seafarer Overseas Gr & Income (SIGIX) EM 5 3 + Silver 5 7 0.87 1.5 billion
Dreyfus Total EM (DTEIX) EM balanced 4 5 4 8 1.30 28

Dreyfus just announced plans to liquidate DTEIX on May 20, 2019, because producing twice your peers’ returns with 80% of their volatility just isn’t sexy enough for investors.

  1. Many fine socially-conscious funds fall just outside of our performance metrics. Remember, we targeted funds with a “5” from MFO (top 20% risk-adjusted returns since inception) and a “4” or “5” from Morningstar. Of necessity, some entirely credible ESG funds live just outside that fence. Here are two examples.
    MFO M* stars M* sust Age ER AUM -$M
Trillium P21 Global Equity (PORTX) Global large 4 4 5 20 1.29 511
Northern Global Sustainability Index (NSRIX) Int’l large 4 3 4 11 0.30 640

Bottom line: there’s a good chance that ESG investors will stumble when they first encounter the number and diversity of ESG funds and ETFs. That problem is deepened by the short track record for many of these funds (51 have launched in just the past two years) and the apparent differences in their goals and methods (do you even know whether you’d want a fund with the word “impact” in the name?). That leads to a decision phenomenon (perhaps an indecision phenomenon) known as choice overload. Having too many approximately equally good options is mentally draining, especially when the choices feel significant and time is limited. In such cases, we tend to freeze or make impulsive “let’s pick any one and get it over” choices.

It doesn’t have to be hard. Remember that, first and foremost, you want an investment that produces reasonable returns while creating risks you can live with. After that, you want funds that either broadly address ESG issues or that (as with the Workplace Equality or Eco Leaders fund) specialize in an set of issues which are particularly important to you. After that, it’s just a matter of starting small, investing regularly and keeping, so to speak, the faith.

Brown Advisory Sustainable Growth Fund (BAFWX/BIAWX/BAWAX), April 2019

By David Snowball

Objective and strategy

The managers seek long-term capital appreciation by investing in a concentrated portfolio of 30-40 mid and large capitalization companies that use sustainable business strategies (SBA) to drive future earnings growth.

They focus on finding companies whose sustainability strategies are generating tangible business results such as revenue growth, cost improvement, or enhanced franchise value. Such companies may enjoy competitive advantages from environmentally efficient design or manufacturing or offer products or services that address sustainability challenges.

Sustainable business advantage analysis complements thorough fundamental research and a strict valuation discipline. Only companies with strong fundamental, sustainable, and valuation characteristics are considered for investment.


Brown Advisory, a private independent investment management firm founded in 1993 in Baltimore within Alex Brown & Sons. The firm employs 600 people in eight offices, manages 15 mutual funds, is a sub-adviser on four others, and runs 29 additional investment strategies. Total firm AUM as of September 30, 2018: $68.4B with $8.7 billion of that in their mutual funds.


Karina Funk and David Powell. Ms. Funk, CFA, joined Brown Advisory in 2009 from Winslow Management Company where she was a Portfolio Manager and Equity Research Analyst running an ESG- focused equity mutual fund. Brown acquired Winslow in 2012. Her academic credentials are in chemical and environmental engineering from first-tier universities in the US and France. Mr. Powell joined Brown Advisory in 1999 as an equity research analyst. Prior to joining the firm, David held a position in investor relations at T. Rowe Price. They are supported by three equity analysts.

Strategy capacity and closure

In the neighborhood of $15 billion, which is not excessive for a global, large cap strategy. Total AUM in the strategy (mutual funds, a UCITS European mutual fund, and separate accounts) was approximately $1.8B as of September 30, 2018.

Management’s stake in the fund

As of June 30, 2018, Ms. Funk owns between $100,000-500,000 of the fund and Mr. Powell over $1,000,000. As of December 31, 2017, only one of the four independent trustees had a personal investment in the fund.

Opening date

June 29, 2012 and an SMA from December 31, 2009. The PMs manage these products exclusively.

Minimum investment

Institutional Shares $1,000,000; Investor and Advisor Shares $100.

BAWFX is available for purchase through 34 brokerages, including major platforms such as JPMorgan, TD Ameritrade, Vanguard, Fidelity, and Schwab.

BIAWX is available for purchase through 33 brokerages, including major platforms such as JPMorgan, Merrill, TD Ameritrade, Vanguard, Fidelity, and Schwab.

BAWAX available for purchase through 37 brokerages, including major platforms such as JPMorgan, TD Ameritrade, Vanguard, Fidelity, and Schwab

Expense ratio

Institutional 0.63%; Investor 0.78%; Advisor 1.03%. Assets under management is $7.2 Billion. 


The environmental and business cases for incorporating ESG factors into your portfolio are unassailable. It is very clear that the behavior of corporations contributes directly, for good or ill, to the habitability of the planet. It’s equally clear that investing in sustainable enterprises does not harm your returns, and might well bolster them. Larry Fink, president of BlackRock, the world’s largest investment firm, argues that within five years “all investors will be using ESG (environmental, social, governance) metrics to determine the value of a company.” That’s perfectly rational. An October 2018 review of the research by the Boston Consulting Group concludes that “ESG-driven decisions implemented well go far beyond good marketing, and actually boost the bottom line because they are more sustainable than decisions made to boost stock price in the short term” (Business Insider,  11/1/2018). That aligns well with both the research done by the Brown Advisory managers and with their performance.

The way to make money on companies with great ESG characteristics is to invest first in fundamentally strong companies that will outperform over time. So they look at their return on equity, earnings variability, historical earnings per share growth plus other factors.

Once they identify these companies, they can begin looking more deeply into whether a company’s management team understands its long-term sustainability risks and opportunities and is investing in them materially.

They use the term “sustainable business advantage,” or SBA, to describe the characteristics in a company’s business strategy that can add shareholder value through sustainability. Companies with great fundamentals and the potential to propel those outcomes through SBA are the companies they want to own.

It’s this intersection of company performance and ESG focus that defines sustainable investing for these managers.

On whole, the managers worry rather more about producing alpha, i.e., market-independent returns, than they do about managing beta, also known as market risk. Even so, the fund tends to generate below average volatility across time and across a variety of measures.

The fund does exceptionally well, against any plausible benchmark, over time. We first screened Lipper’s Socially Conscious (SC) category for U.S., global, and international multicap growth.

One year 13.4%, 2nd
Two year 19.4%, 1st
Three year 20.3%, 1st
Five year 13.9%, 1st

Our second screen broadened the search to include all multicap growth funds, domestic, global or international, socially conscious or not. The results remain impressive.

Second, we looked at the fund’s performance relative to the S&P 500 and its benchmark index, the Russell 1000 Growth. The S&P is a flawed comparison because the investment styles are substantially different, but a relevant one because so many investors use the S&P as their implicit benchmark for any equity investment. The Russell 1000 Growth is pretty spot-on.

  BAWFX beat the S&P 500 by … BAWFX beat its benchmark Russell 1000 Growth by
One year 8.7% 6.1%
Three year 5.0% 1.1%
Five year 3.2% 0.8%
Since inception 3.2% 0.9%

The managers admit that they will underperform the market at times. The Russell 1000 Growth Index has been red hot for the past decade, averaging an annual return of 18.2%. The PMs looks for steady, not rapid growth. Now in the tenth year of a bull market, they are careful to avoid chasing momentum-led stories. That’s produced a nice asymmetry in which they capture most of their benchmark’s upside but much less of its downside.

Bottom Line

  1. The mangers make money. With an 18.0% lifetime APR, BAFWX is an MFO Great Owl in the multicap growth category. That means it has consistently received a return rank of 5 (Best) for all periods three years and longer. It joins only nine other GO funds in that category. Investors have not sacrificed returns or experienced a tradeoff from using ESG characteristics in the portfolio.
  2. The managers are smart, careful, and even cynical. Just because a company issues a sustainability report, doesn’t mean that it’s added value. They’re only interested in companies that make an ESG impact. Their legacy and reputation is based on repeatedly finding companies that hinge on sustainable growth drivers well before the rest of the market catches up.
  3. The managers’ strategy is different. They don’t use ESG to find companies that they believe are less harmful than others. They don’t invest passively though a best-in-class approach aiming to find the best “scorers” in each industry trying to match the risks and returns of the broad market and therefore unlikely to outperform their benchmark.

They can earn a profit and help the planet — as has the fund — while ESG continues to move consistently to the center of corporate thinking on strategy, risk, reputation, operations, efficiency, and long-term performance.

Fund Website

Sustainable Growth Fund

Karina Funk Sustainability TED Talk

Funds in registration

By David Snowball

Before funds and ETFs 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 year’s end because that allows them to have clean “year to date” and calendar year results to share. These launches will likely occur in late May or June so that they’ll at least have full-quarter results for 2019 Q3.

The team behind Harbor Focused International has been recognized as one of the best asset managers in Europe, while the advisers behind DoubleLine Emerging Markets Local Currency Bond Fund and Vanguard Global ESG Select Stock Fund are among the best in US fixed income and equity investing, respectively. And yet, the Kensington Managed Income Fund might have the best underlying performance of them all. That makes it a good month.

Aegon Short Duration High Yield Fund

Aegon Short Duration High Yield Fund will seek a high level of current income. The plan is to invest in high yield securities, including those in default, with an average weighted portfolio duration of 36 months or less. The portfolio will be invested primarily in corporate bonds but might also hold foreign sovereign debt, bank loans and convertible securities. They also apply an ESG screen. The fund will be managed by a team from Aegon USA Investment Management, LLC. Aegon is a global investment manager with $330 billion in assets and offices in … Cedar Rapids, Iowa? Potential investors will want to review a substantial discussion, contained in the prospectus of SEC actions against the advisor. Its opening expense ratio is 0.95% after waivers, and the minimum initial investment will be $2,000.

Aegon Emerging Markets Debt Fund

Aegon Emerging Markets Debt Fund will seek to maximize total return, consisting of income and capital appreciation. The plan is to invest in “all varieties” of EM fixed income securities, including derivatives and exchange-traded funds. “All varieties” is both “all types” and “all maturity, duration and credit qualities.” They may hedge various portfolio risks and also apply an ESG screen. The fund will be managed by a team from Aegon USA Investment Management, LLC. Aegon is a global investment manager with $330 billion in assets and offices in Cedar Rapids, Iowa. Potential investors will want to review a substantial discussion, contained in the prospectus of SEC actions against the advisor. Its opening expense ratio is 1.00% after waivers, and the minimum initial investment will be $2,000.

AGFiQ Dynamic Hedged U.S. Equity ETF

AGFiQ Dynamic Hedged U.S. Equity ETF, an actively-managed ETF, seeks long-term capital appreciation with lower than market volatility. The plan is to use a multi-factor quantitative model to make sector bets within the S&P 500. They’ll hedge market risk by investing, to a greater or less extent, in the AGFiQ U.S. Market Neutral Anti-Beta Fund (BTAL) and cash equivalents. BTAL is a surprisingly volatile fund (it has lost money in four of the seven years of its existence, but made 15% in 2018) so one rather hopes its use will be exceedingly judicious.The fund will be managed by a team from FFCM LLC, Boston-based smart-beta / factor-based investors that AGF bought last year. Its opening expense ratio has not been disclosed.

AGFiQ Global Infrastructure ETF

AGFiQ Global Infrastructure ETF, an actively-managed ETF, seeks long-term capital appreciation. The plan is to use a multi-factor quantitative model to screen for growth, value, quality and risk characteristics. As a risk management measure, the portfolio will have constraints on country, industry, group, sector and individual security concentrations. The fund will be managed by a team from FFCM LLC, Boston-based smart-beta / factor-based investors that AGF bought last year. Its opening expense ratio has not been disclosed.

CIBC Atlas International Growth Fund

CIBC Atlas International Growth Fund will seek long-term capital appreciation. The plan is to invest in 40-70 stocks that have superior quality and growth characteristics. As part of the risk management strategy, stocks are placed into one of three baskets (Quality Compounders, Emerging Growth, Risk Mitigators), with the implication that the portfolio might systematically favor one basket over another at various points. The fund will be managed by Daniel Delany and Matthew Scherer of CIBC Private Wealth Advisors. The current prospectus includes the record of the underlying strategy since 2008. The cumulative data and 2018 performance are missing but the general pattern suggests this is a fairly high volatility approach. Its opening expense ratio is 1.56%, and the minimum initial investment will be $3,000.

DoubleLine Emerging Markets Local Currency Bond Fund

DoubleLine Emerging Markets Local Currency Bond Fund will seek high total return from income and capital appreciation. The plan is to invest in pretty much in any attractively valued IOUs (here’s their text: “The Adviser interprets the term ‘bond’ broadly as an instrument or security evidencing what is commonly referred to as an IOU”) in any EM country, with due cautiousness. The fund will be managed by a large team from DoubleLine. Its opening expense ratio has not been disclosed, and the minimum initial investment for “N” shares will be $2,000.

Harbor Focused International Fund

Harbor Focused International Fund will seek long-term growth of capital. The plan is to use pretty rigorous, pretty traditional fundamental analysis to select 25-40 blue chips which they anticipate holding for 3-5 years on average. The fund will be managed by a team from the French firm Comgest Asset Management International. Comgest has over $30 billion in assets and a bunch of “best asset manager in Europe” awards. It appears that this will be its first product for US investors. Its opening expense ratio is 1.22%, and the minimum initial investment will be $2,500.

Homestead Intermediate Bond Fund

Homestead Intermediate Bond Fund will seek high level of current income consistent with preservation. The plan is to create a sort of go-anywhere, do-anything portfolio that looks for opportunities globally, in a wide array of fixed-income securities, while maintaining due caution about risk. The fund will be managed by Mauricio Agudelo and Ivan Naranjo, both of RE Advisers which is Homestead’s parent. They’re an awfully trustworthy bunch. Its opening expense ratio has not yet been disclosed, and the minimum initial investment will be $500.

HSBC Ultra Short Bond Fund

HSBC Ultra Short Bond Fund will seek current income consistent with the preservation of capital. The plan is to build a global (including EM) portfolio of investment grade fixed income securities. It will normally maintain a dollar-weighted average maturity of up to 1.5 years and a dollar-weighted average effective duration of up to 0.50 years. The fund will be managed by Jason Moshos of HSBC Global. Its opening expense ratio is 0.20%, and the minimum initial investment for “A” shares will be $1,000. Despite the “A” designation, the shares are no-load and carry the same expense ratio as the “I” shares. Curious.

Kensington Managed Income Fund

Kensington Managed Income Fund will seek “income.” The plan is to construct a fund of income funds with a portfolio that might be tweaked daily. The fund will be managed by Bruce P. DeLaurentis of Advisors Preferred, LLC. Mr. DeLaurentis entered the asset management business in 1984 after serving for 20 years in the US armed forces. Over the past decade, Mr. DeLaurentis’s strategy, manifested in separately managed accounts, has returned an average of 10.1% annually while the Barclays bond aggregate returned 3.5%. Its opening expense ratio is 2.97% and “A” shares nominally carry at 4.75% fee, which seems like a near-fatal combination. The minimum initial investment  will be $1,000.

MainStay MacKay Intermediate Tax Free Bond Fund

MainStay MacKay Intermediate Tax Free Bond Fund will seek current income exempt from regular federal income tax. The plan is to invest in muni bonds (duh); the portfolio’s weighted average duration will range from 3-10 years. Some of the portfolio might be non-investment-grade debt. The fund will be managed by a quite large team from MacKay Shields. Its opening expense ratio has not been disclosed, and the minimum initial investment will be $1,000.

Vanguard Global ESG Select Stock Fund

Vanguard Global ESG Select Stock Fund will seek to maximize returns while having greater exposure to companies with attractive environmental, social, and governance characteristics. The plan is to start by looking for firms with a proven track record of effective capital allocation, leading ESG practices and a wide and sustainable gap between return on capital and cost of capital. They’ll then look at a series of secondary screens (employee engagement, corporate culture, adaptability) before constructing the portfolio. The fund will be managed by Mark Mandel and Yolanda Courtines of Wellington Management. Its opening expense ratio is 0.55% and the minimum initial investment will be $3000.

Wells Fargo Special International Small Cap Fund

Wells Fargo Special International Small Cap Fund will seek long-term capital appreciation. The plan is to build a diversified portfolio of firms which are “well managed, have flexible balance sheets and sustainable cash flows, and that are undervalued companies relative to an assessment of their intrinsic value.” They don’t generally hedge currency exposure. The fund will be managed by a team from Wells Capital Management. The team has been running this strategy in separately managed accounts for about five years. Since inception, the SMA composite has outperformed its benchmark by about 160 bps/year, with a really substantial advantage in 2018 when the composite fell 12% and its benchmark declined by 18%. Its opening expense ratio is 0.95%, and the minimum initial investment will be $1 million but there is broad waiver language for brokerages, 529 plans, retirement plans and so on.

Manager changes, March 2019

By Chip

It’s been a quiet but consequential month on the manager change front. While Chip tracked down changes at just 28 funds, barely one-third of what we see in many months, a couple of the changes strike me as worth following.

The unexplained departures of Messrs Cipolloni and Saylor from Berywn Income (BERIX) is a game-changer, and a fund changer. The pair had been managing the fund together for a dozen years with a distinctive go-anywhere approach. They departed rather abruptly in February, causing Morningstar’s analysts to downgrade the fund and Morningstar to declare it to be “a new fund.” The new guys might well be grand, but it’s an entirely new approach.

There’s some sense that Nuveen is running out of patience, perhaps triggered by a huge drop in assets in December, 2018. In any case, managers at eight Nuveen funds – often long-time managers with modest accomplishments – were excused over the course of a couple weeks.

Ticker Fund Out with the old In with the new Dt
JETIX Aberdeen Global Equity Impact Fund Martin Connaghan, Jamie Cumming, Stephen Docherty, and Samantha Fitzpatrick are no longer listed as portfolio managers for the fund. Dominic Byrne and Sarah Norris will now manage the fund. 3/19
BERIX Berwyn Income Fund Mark Saylor and George Cipolloni are no longer listed as portfolio managers for the fund. Andrew Toburen, T. Ryan Harkins, David Dalrymple, Thomas Coughlin, and Jeffrey Bilsky will now run the fund. 3/19
CGGAX Catalyst Growth of Income Fund Robert Dainesi and Robert Groesbeck will no longer serve as portfolio managers for the fund. Charles Ashley and David Miller now manage the fund. 3/19
DABIX Delaware Global Value Fund Edward Gray is no longer listed as a portfolio manager for the fund. Åsa Annerstedt, Jens Hansen, Claus Juul, and Klaus Petersen will now manage the fund. 3/19
DEGIX Delaware International Value Equity Fund Edward Gray is no longer listed as a portfolio manager for the fund. Åsa Annerstedt, Jens Hansen, Claus Juul, and Klaus Petersen will now manage the fund. 3/19
DMSFX Destinations Multi Strategy Alternatives Fund No one, but . . . LMCG Investments has been added as a subadviser and Andreas Eckner, Guillaume Horel, Ajit Kumar, Edwin Tsui, and David Weeks will join the other nine managers on the management team. 3/19
DRFMX Dreyfus Emerging Markets Fund Warren Skillman will no longer serve as a portfolio manager for the fund. Sean Fizgibbon and Julianne McHugh now manage the fund. 3/19
FSLBX Fidelity Select Brokerage and Investment Management Daniel Dittler left the fund on December 31, 2018. Charlie Ackerman continues to manage the fund. 3/19
FSVLX Fidelity Select Consumer Finance Shilpa Mehra no longer serves as portfolio manager of the fund. Chuck Culp will continue to manage the fund. 3/19
GCBLX Green Century Balanced Fund Effective June 30, 2019, Stephanie Leighton will no longer serve as a portfolio manager of the fund. The fund’s resurgence roughly corresponds to her arrival 10 years ago. Cheryl Smith, Matthew Patsky, and Paul Hilton will continue to serve as portfolio managers of the fund. 3/19
HEMAX Janus Henderson Emerging Markets Fund Glen Finegan is no longer listed as a portfolio manager for the fund. Michael Cahoon will continue to manage the fund. 3/19
HFEAX Janus Henderson European Focus Fund Lars Dollmann and Stephen Peak are no longer listed as portfolio managers for the fund. Robert Schramm-Fuchs is now managing the fund. 3/19
HFOAX Janus Henderson International Opportunities Fund Stephen Peak is no longer listed as a portfolio manager for the fund. Dean Cheeseman and Marc Shartz join James Ross, Gordon MacKay, Junichi Inoue, Paul O’Connor, Glen Finegan, Andrew Gillan, Nicholas Cowley, and Ian Warmerdam on the management team. 3/19
JSFBX John Hancock Seaport Long/Short Fund Effective June 30, 2019, Nicholas Adams and Mark Lynch will no longer serve on the fund’s management team. Steven Angeli, John Averill, Jennifer Berg, Robert Deresiewicz, Ann Gallo, Bruce Glazer, Andrew Heiskell, Jean Hynes, and Keith White will continue to serve on the fund’s management team 3/19
FAIIX Nuveen Core Bond Fund Jeffrey Ebert and Wan-Chong Kung will no longer serve as portfolio managers for the fund. Jason O’Brien will continue to manage the fund. 3/19
FAFIX Nuveen Core Plus Bond Fund Jeffrey Ebert and Wan-Chong Kung will no longer serve as portfolio managers for the fund. Timothy Palmer will leave the fund on July 31, 2019. Douglas Baker and Timothy Palmer will continue to manage the fund until July 31, 2019, and Douglas Baker will carry on after that. 3/19
NGVAX Nuveen Gresham Diversified Commodity Strategy Fund Wan-Chong Kung is no longer a portfolio manager for the fund. Randy Migdal, Susan Wager, John Clarke and Chad Kemper will continue to serve as portfolio managers for the fund. 3/19
FAIPX Nuveen Inflation Protected Securities Fund Wan-Chong Kung is no longer a portfolio manager for the fund. Chad Kemper will continue to serve as the portfolio manager for the fund. 3/19
FISGX Nuveen Mid Cap Growth Opportunities Fund James Diedrich and Harold Goldstein are no longer listed as portfolio managers for the fund. Gregory Ryan is managing the fund, now. 3/19
FCDDX Nuveen Strategic Income Fund Jeffrey Ebert and Marie Newcome are no longer portfolio managers for the fund. Kevin Lorenz, William Martin, Katherine Renfrew and Nick Travaglino are added as portfolio managers of the fund. Timothy Palmer will continue to serve as a portfolio manager for the fund until July 31, 2019. Douglas Baker will continue to serve as a portfolio manager for the fund. 3/19
USBOX Pear Tree Quality Fund Mark Iong will no longer serve as a portfolio manager for the fund. Mark Tindall will continue to manage the fund. The fund, which often had three or more managers, is now down to one. 3/19
RGIYX Russell Investments Global Infrastructure Fund Adam Babson is no longer listed as a portfolio manager for the fund. Patrick Nikodem is now managing the fund. 3/19
SVSCX State Street Dynamic Small Cap Fund Anna Mitelman Lester is no longer listed as a portfolio manager for the fund. Xiaojin Tang joins John O’Connell in managing the fund. 3/19
VSSGX VALIC Company I Small-Mid Growth Fund Daniel Zimmerman and Michael DeSantis are no longer listed as portfolio managers for the fund. Jessica Katz and Steven Barry are now managing the fund. 3/19
VGSRX Vert Global Sustainable Real Estate Fund Joseph Chi no longer serves as a portfolio manager of the fund. William Collins-Dean joins Jed Fogdall and Allen Pu in managing the fund. 3/19
WWIAX Westwood Income Opportunity Fund Daniel Barnes, Mark Freeman, and Todd Williams are no longer listed as portfolio managers for the fund. David Clott and P. Adrian Helfert will now manage the fund. 3/19
WLVIX Westwood Low Volatility Equity Fund Daniel Barnes is no longer listed as a portfolio manager for the fund. P. Adrian Helfert joins Matthew Lockridge, David Clott and Shawn Mato on the management team. 3/19
WWIOX Westwood Worldwide Income Opportunity Fund Daniel Barnes, Mark Freeman, and Todd Williams are no longer listed as portfolio managers for the fund. P. Adrian Helfert will now manage the fund. 3/19


Briefly Noted . . .

By David Snowball

Each month we share developments in the industry that are, individually, to minor to warrant their own story. Since about three-quarters of it are stories of failure and the subsequent thrashing about, it mostly gets downplayed. This month saw, in particular, the liquidation of a lot of funds that were trying to deal with a low-interest rate, high stock valuation world: their names invoke global allocations and global bonds, alternative and unconstrained income, flexible opportunities and the occasional quantamental bent.


A handful of funds reduced their advisory fees and/or expense ratio caps this month, often enough from “extortionate” down to “exorbitant.” They shall go nameless but they do bring to mind an interesting rule of thumb: if your portfolio’s expense ratio is greater than your weight, panic.

AMG SouthernSun U.S. Equity Fund (SSEFX) and AMG GW&K Enhanced Core Bond Fund (MFDAX) will convert their “C” shares to “N” shares on May 31, 2019. How much difference does that make? Well, shareholders in SouthernSun’s “C” class will see their e.r. drop from 1.96% to 1.21%. “C” shares have, from the get-go, been one of the industry’s worst ideas; they were advertised as a no-load way to access load-bearing funds, which was great as long as you could rationalize their universally exorbitant fees. I celebrate their death.

AMG Managers Montag & Caldwell Growth Fund (MCGFX) will convert their “R” shares to “N” shares on the same date. That’s a price reduction of about 30 bps for investors.

Effective immediately, the AQR Diversified Arbitrage Fund, AQR Equity Market Neutral Fund, AQR Long-Short Equity Fund and AQR Multi-Strategy Alternative Fund are no longer closed to new investors. The folks on the MFO Discussion Board were … uhh, not leaping for their checkbooks.

Boston Partners Long/Short Equity Fund (BPLEX) has reopened to new investors, though the adviser “has discretion to close the Fund in the future should the assets of the Fund increase by more than 5% from the date of the reopening of the Fund.” BPLEX saw hundreds of millions in outflows over the past 12 months as performance continued to flounder, while the Boston Partners complex saw outflows of $2.3 billion. After crushing the competition for years, BPLEX now has a five year record that trails 75% of its peers, with high volatility and high expenses (3.26%). I’d want to be very comfortable about my understanding of the firm’s recent travails before committing funds to it.

Fans of the fund might look a bit at Balter Invenomic (BIVIX), a long/short fund run by Ali Motamed, a former BPLEX manager. The difference in performance is pretty stark and charges a bit less than does BPLEX.

CLOSINGS (and related inconveniences)

On or about April 29, 2019, the Investor share class of Litman Gregory Masters Equity Fund (MSENX) and the Litman Gregory Masters International Fund (MNILX) will be terminated. Folks holding Investor Shares will be rolled into Institutional Class shares and, going forward, the investment minimum for institutional shares will drop to $10,000, with the minimum in for retirement accounts dropping to $1,000.


On June 9, 2019, the Dreyfus name will disappear from the investing world. On that date, the phrase “BNY Mellon” will substitute for the word “Dreyfus” in the name of each fund. Dreyfus has seen five consecutive years of near-continuous outflows and the name holds little brand value anymore.

Frontier Timpani Small Cap Growth Fund (FTSCX) will soon become a Calamos fund, following Calamos’ decision to buy the fund’s adviser.

On May 7, 2019, Highland Premier Growth Equity Fund (HPEAX) becomes Highland Socially Responsible Equity Fund with the predictable revisions of the investment strategy. Morningstar currently rates the fund as having a “below average” sustainability rating, despite qualifying as an ESG fund.


Advisorshares Madrona International ETF, AdvisorShares Madrona Domestic ETF, AdvisorShares Madrona Global Bond ETF and AdvisorShares Madrona International ETF were all liquidated on March 29, 2019.

Altrius Enhanced Income Fund (KEUAX), RAISE™ Core Tactical Fund (KRCAX) and MarketGrader 100 Enhanced Fund (KHMAX) all vanished simultaneously on March 30, 2019.

Barrow Value Opportunity Fund (BALIX) will discontinue its operations effective April 3, 2019. It’s an entirely respectable fund that gained absolutely no market traction.

CLS International Equity Fund (INTFX) has closed and will liquidate on Tax Day, April 15, 2019.

CRM Large Cap Opportunity Fund will merge with and into CRM All Cap Value Fund (CRMEX) sometime in the second quarter of 2019.

Diamond Hill Financial Long-Short Fund (BANCX) will merge into Diamond Research Opportunities Fund (DHROX) on or about June 7, 2019. Over the past 3, 5, and 10 years, BANCX has substantially outperformed its surviving sibling, though at least investors will receive a modest cost reduction after the change.

Dreyfus Unconstrained Bond Fund (DSTAX, formerly Opportunistic Income) will be liquidated on or about April 29, 2019.

Driehaus Frontier Emerging Markets Fund (DRFRX) has closed and will liquidate as soon as that can be practicably arranged; the advisor currently expects that to be April 29, 2019. The fund is modestly underwater since inception; $10,000 on Day One will have become $9,800 now.

Dunham Alternative Dividend Fund (DNDHX), likewise underwater since inception, will be liquidated on or about April 30, 2019

GALF eats FARF: Federated Global Allocation Fund (FGALF to use Federated’s abbreviation) is slated to consume Federated Absolute Return Fund (FARF) assuming shareholder approval at a special meeting currently scheduled for April 25, 2019. 

Franklin California Ultra-Short Tax-Free Fund (FKTFX) will disappear on July 12, 2019.

Hartford Schroders Global Strategic Bond Fund (SGBVX), which returned $15 on a $10,000 investment of the past five years, will be liquidated on or before April 30, 2019.

The Iron Equity Premium Income Fund was liquidated on March 26, 2019. 

Janus Henderson All Asset Fund (HGAAX) was supposed to be liquidated on December 31, 2018 but received a stay of execution until March 22, 2019. For reasons unstated, the Board issued another stay until June 25, 2019. Not to be blunt, but the fund has seen five months of inflows in five years and trailed between 70-90% of its peers, depending on which trailing period you examine. It’s not entirely clear whose interest is served by delaying its departure.

Neiman Balanced Allocation Fund (NBAFX) was liquidated on March 29, 2019. 

Nile Africa, Frontier and Emerging Fund (NAFAX) was liquidated on March 28, 2019, after quite short notice.

Putman Global Sector Fund (PPGAX) will merge into Putnam Global Equity Fund (PEQUX) following shareholder approval. The vote is in early April, the merger shortly thereafter.

RQSI Small/Mid Cap Hedged Equity Fund (RQSAX) will cease operations and liquidate on or about April 5, 2019.

Steben Select Multi-Strategy Fund liquidated on March 30, 2019 though it will reportedly take a month or more for investors to receive their checks.

Stringer Moderate Growth Fund (SRQAX) become moderately unstrung on March 29, 2019.

The one-star record of Transamerica Multi-Cap Growth (ITSAX) will disappear as it merges into Transamerica US Growth (TADAX) on May 31, 2019. 

USA Mutuals/WaveFront Hedged Quantamental Opportunities Fund (QUANX) was liquidated on March 29, 2019. If only its departure would also strike the word “quantamental” from our collective consciousness, but that regrettable term has too many fans now.

On or about April 26, 2019, Virtus Newfleet CA Tax-Exempt Bond Fund (CTESX) will be liquidated.

Voya CBRE Long/Short Fund (VCRLX) will be liquidated on or about June 7, 2019.