Monthly Archives: June 2019

June 1, 2019

By David Snowball

Dear friends,

Oops … I did it again!

On May 19, 2019, I helped launch my 35th cohort of Augustana grads on an unsuspecting world. With modest pomp, stirring music, one thoughtful address (that no one will remember) and one clunky one (likewise, thank God), I participated in the college’s 159th commencement. Afterward, by long tradition, the graduates filtered through the throng of faculty, exchanging tears and laughter, thanks and hugs.

And then they were gone. It’s bittersweet to have a career forever predicated upon bidding farewell to amazing young folks just as they hit their stride. They were a challenge, and they’re your challenge now.

Don’t underestimate them. Be careful imposing easy stereotypes upon them. They are different. But they always are: one of Plato’s contemporaries fussed endlessly about the indolent and irresponsible college students on his day, Ralph Waldo Emerson (in Walden) groused about the high cost of tuition and students’ concern more for comfort than contemplation, and Teddy Roosevelt decried their tendency toward talking rather than acting (“The first great lesson which the college graduate should learn is the lesson of work rather than of criticism.”)

You should read Roosevelt’s 1894 essay on college and society. If you’re patient and have time for a quiet, thoughtful walk afterward, you’ll find yourself reprocessing it for a long time.

My students are more connected and more aware than I ever was. They’re more resilient, and more fragile. (I suspect they’re more responsible for the former, and we bear a lot of responsibility for the latter.) Their great strength – connection – is their great weakness. They are never far from the portal to the hive mind, never disconnected. Their attention is continuous, partial, divided and fleeting. They work hard, but under a different set of assumptions than those I brought to young adult life. I’m still trying to translate between their language and mine.

It’s hard and never-ending. But they’re worth it. And so are you.

Remaining engaged with the implications of an unstable climate

We highlight this month the launch of Zeo Sustainable Credit, which focuses on the debt offerings of firms that pursue sustainable business practices. Manager Venk Reddy’s argument is sustainable practices are important predictors of a firm’s creditworthiness, not just gestures toward social good.

Morningstar’s sustainability coverage is becoming broader and deeper. On June 6, 2019, they will host the Inaugural Edition of The Morningstar Sustainable Investing Quarterly Webinar. Each webinar promises “the latest news and trends in ESG investing, [to] bring you up to date on sustainable funds, and [will] feature a conversation with a sustainability leader. It’s pitched at financial advisors but it’s not clear why other thoughtful folks wouldn’t benefit.

Finally, my favorite podcast, Make Me Smart, offered a remarkably thoughtful and insightful program entitled “How to survive climate change” (5/14/2019). It’s very much worth listening to. It makes three points that struck me as worth thinking about: there is no credible challenge to the reality of the situation (though there are feverish challenges), the response to climate instability needs to be balanced between mitigation and adaptation (parts of Davenport’s downtown have been underwater for 80 consecutive days, and so I nod) and there’s more to life than coping with this one problem.

Kai and Molly, the hosts, really are remarkable folks. You might consider making it a habit to listen in.

Snowball elsewhere

I’ve had the privilege of sharing some reflections with other readers lately. the publishers of those pieces kindly gave us permission to share the links with you.

For the American Association of Individual Investors monthly AAII Journal, I reworked two essays that we published here into a single, compact, updated piece: “Investing in Response to Climate Change” (June, 2019). I’ve been invited to address a session at their October annual convention in Orlando, and gratefully accepted.

I appear, with some frequency, in the Bottom Line: Personal newsletter. Most of my articles there flow from a collaboration with Mark Gill. He asks, we talk, he drafts, I edit. There’s an art involved in making meaning in such short pieces, and Mark’s really good at it. Our most recent conversation led to These Attractive Funds Focus on Overlooked Midcap Stocks (May 1, 2019).

I hope you enjoy both and hope, too, that they help folks we might not otherwise have reached.

Go raibh maith agat!

Which, I dearly hope, is the Gaelic phrase for “Thanks! “ (I’m haunted by those possibly apocryphal stories of dimwits whose poetical Chinese tattoos actually translate as “serious mistake” or “abundant mound; it’s common enough that the Hanzi Smatter blog provides regular translations of its readers’ tattoos.) That celebrates both my current holiday and our gratitude for your support.

We mentioned last month, in the wake of the demise of Money magazine, that we are exclusively reader-supported and a fair number of folks stepped up and chipped in. A never-quite-complete list of thanks starts with Wilson from Lexington, Marc (we think you’re awesome, too!), John from Columbia, SC, an anonymous donor, Lee, Tom from Mizzou, David (not me-David, another David), Gregory, Vicki from CA (friends in Sacramento are trying to lure me back with the promise that “it’s a dry 106”), Curtis (thanks to you, too!), Donald from Seattle, Richard (to whom we note, we were tempted to party like it’s 2025!), Sherwin, William from Richland and Kirk from Richland Hills.

We celebrate, especially, Seshadri (thank you, sir!) who became the latest reader to set up a small monthly contribution through PayPal. In doing so he joins our corps of subscribers: Doug, Deborah, Greg, William, David (no, not the David above nor me-David) and Brian.

If you’d like to join them, you can either click on the PayPal link (no, you don’t need a PayPal account, they’re just a processing agent) over to the right side of this page or on the “Support Us” tab on the top navigation bar. Since we’re a 501(c)3 non-profit, contributions are, mostly and generally, tax-deductible.

Following up on Morningstar

Because it conflicted with my teaching schedule, I was only able to attend part of the first day of the Morningstar Investment Conference. Charles, who was there throughout, reports on his experiences in this month’s issue.

Despite the brevity of my stay, I had the opportunity to talk with a bunch of folks, some of whom are startlingly thoughtful. (I’m regularly amazed that they’re so generous with their time.) In the crush of work at the end of an academic year, I wasn’t able to do justice to their insights and strategies.

Partly by plan and partly by happenstance, most of the folks I met fish the turbulent seas beyond the US: the quietly erudite Amit Wadhwaney, founder of Moerus Capital; Inbok Song, who leads Seafarer’s growth investing team; Bryce Fegley, who co-manages Sextant Global High Income (SGHIX, which Morningstar assigns to its “cautious allocation” category for the purpose of sustainability ratings) and Beini Zhou, manager of Matthews Asia Value (MAVRX). In July, we’ll follow up with fuller discussions of our time together.

I missed the opportunity to meet with Josh Vail, president of 361 Capital and Abhi Patwardhan, co-manager of the new FPA Flexible Fixed Income Fund (FPFIX), but I’m working on it.

Russell Baker, a Pulitzer-prize winning journalist and humorist, passed away in January. At 93, he’d led a life full of years, honor and meaning. I’ll leave you, for now, with a reminder to gird yourself for the craziness ahead while still celebrating the days that life has given us.

“Ah, summer,” he wrote, “what power you have to make us suffer and like it.” –

Take care,

david's signature

What Color Are the Swans?

By Edward A. Studzinski

 “Bureaucracy is a giant mechanism operated by pygmies.”

     Honoré de Balzac, Epigrams (trans. Jacques Leclercq, 1959)

When last our heroes met at the end of April, the market had been on a tear pretty much since the beginning of the year. Many domestic funds were showing total returns in the high teens. International funds were likewise showing total returns in the vicinity of twenty percent at April 30th. Active fund managers, to the background music of “Happy Days are Here Again” were waxing poetic about how it was an active manager’s kind of market, when stock picking would once again come to the fore. And this was notwithstanding valuation metrics that as May advanced continued to increase to higher levels. From their point of view, regardless of market valuations, investors should return their moneys to the equity markets, preferably to the funds that had suffered both a tragic bout of under-performance as well as a loss of assets under management in 2018.

Look forward to almost the end of May. The total returns on those domestic and international funds have melted away by anywhere from five hundred to a thousand basis points. Those who were afraid that the train was leaving the station and piled back into the equity markets in the first week of May now find themselves sitting on some rather large paper losses. Coming on top of what was for many a disastrous 2018, the potential exists for another substantial drawdown in both assets and performance.

Nissim Taleb, of Black Swan fame, gave a rather interesting interview on Bloomberg in May 2019. One of the points he makes is that there is an assault on risk takers now as failures as they more often than not lose money. He moves on to talk about the assault on capitalism by those who make decisions that cause harm to the economy, partly because they don’t have skin in the game. He considers it to not be capitalism but rather crony capitalism, which is what we saw with Wall Street being bailed out by being close to the government. He is worried because we have very low unemployment with huge and growing deficits. He thinks we should still be worried about the possibility of hyper-inflation. What we have done according to him since the financial crisis is to shift debt from private hands to public. And that is because the public debt burden arises as a result of those without skin in the game, the politicians. Taleb strongly feels that one should not invest in the financial markets without tail risk insurance, that is, a hedge. He strongly argues that one should not have exposure to financial assets without the protection of hedging. But he feels that hedging is quite complicated if it is to be done successfully. And if one cannot hedge one’s financial assets, his argument is people should be in cash to avoid the possibility of catastrophic loss.

The part of this interview that gave me pause was the argument that one should not be investing in equities or long-term bonds without the appropriate degree of hedging. This goes along with my comments in months prior about needing to seek out uncorrelated investments. Which has of course become very hard, as (a) huge amounts of capital continues to pour into passive investments, indexing, and (b) so many of the purported active managers are closet indexers. One needs to pay attention now to not just performance, but also to the accuracy of the active share numbers being used in marketing.

There is a very real possibility of this being yet another variation on the marketing scams that come out of the mutual fund industry.

The question then becomes, borrowing from the title of Lenin’s 1901 book, What is to be Done?

I suspect that the most appropriate answer is nothing. Yes, one can sell everything, go to cash (and generate a lot of commissions and taxes), but the average person once out of the market will find it very hard to get back into it when panic (and thus opportunity) sets in. One can try and hedge your investments, but for the average person that is difficult if not impossible. There are, of course, long-short funds as well as market neutral funds, but finding the good ones with good long-term records is not easy. And they are not suitable for an entire investment portfolio. The average investor with the average consultant will most likely be driven, as they were in March and April, by FOMO, Fear of Missing Out. The best advice I can offer is think again about risk tolerance, time horizons, and what your goals are. For someone on the cusp of retirement the answers will be quite different than the answers from someone with thirty or forty working years in front of them. But beware of following the lemmings, as one sees the explosive growth in managed volatility products which have not yet been tested over time.

All Global, All the Time

Some ten years ago global funds (international and domestic equities in one fund) were the bastard children of the mutual fund world, generally shunned by consultants in their asset allocation models. The argument was that they wanted to pick international managers separately from domestic managers. There was some logic to the argument given that many global funds were the result of stapling together an international set of stocks from the international team and a set of domestic stocks from the domestic team and calling it a global product. This usually reflected more the internal politics of a firm, as well as the allocation of revenues and profits between the domestic segment and the international segment than a thought-out and consistently managed investment product.

Now things have reversed. The preference is for global mandates to be filled by integrated global investment teams. This usually results in a more cost-efficient product and a more dynamic investment process, since the politics (or personal economics) are stripped out and the best ideas (and country allocations) win out, whether on a top down macro or bottom up fundamental basis. I think that this makes a great deal of sense.

Indeed, it reflects how I am thinking about asset allocation personally these days. Unfortunately, I can’t take the credit for the idea. It comes from a well-respected West Coast investment consultant. That firm uses a value-oriented global fund as a core, with an overlay of a growth-driven global manager’s fund (which has a concentrated portfolio). For those with a ten year or longer time horizon, it is an approach that seems to make a great deal of sense.

Edward A. Studzinski

An MFO Quick List: Top Global Value Funds

The funds that Ed refers to in his final paragraph are managed by Dodge & Cox and Sands Capital. Interested readers might look into Dodge & Cox Global Stock (DODWX) and Harbor Global Leaders (HGGIX) as affordable, low-minimum ways of accessing those managers.

As a complement to Ed’s article, we screened for global value equity funds and ETFs with the highest Sharpe ratio over the complete market cycle, from October 2007 – now. They are sorted by risk-adjusted returns.

  Annual Return Sharpe Ratio
Tweedy Browne Value TWEBX 5.5% 0.41
Franklin Mutual Global Discovery MDISX 4.9 0.39
FPA Paramount FPRAX 6.8 0.36
Oakmark Global Select  OAKWX 7 0.35
John Hancock Global Shareholder Yield JGYIX 4.8 0.34
MainStay Epoch Global Equity Yield EPSYX 4.5 0.31
Wasatch Global Value FMIEX 4.8 0.3
Cambiar Global Ultra Focus CAMAX 6.7 0.25
Voya Global Equity NAWGX 4.7 0.24
Columbia Global Equity Value IEVAX 4.4 0.24
Polaris Global Value PGVFX 4.8 0.23

Top Concentrated Global Growth Funds

We screened for concentrated global growth equity funds and ETFs with the highest Sharpe ratio over the complete market cycle, from October 2007 – now. Sorted by risk-adjusted returns.

  Annual Return Sharpe Ratio
Morgan Stanley Global Franchise MSFAX 9 0.62
Guinness Atkinson Global Innovators IWIRX 8 0.4
Marsico Global MGLBX 7.1 0.36

Ed did not select and does not necessarily endorse any of the funds noted above.

Morningstar Investment Conference – 2019 #MICUS

By Charles Boccadoro

When people have no choice, life is almost unbearable …

But as the number of choices keeps growing, negative aspects of having a multitude of options begin to appear …

the negatives escalate until we become overloaded.

At this point, choice no longer liberates, but debilitates.

Barry Schwartz in Paradox of Choices

If last year’s Morningstar Investment Conference, which consolidated the once separate ETF venue, was one of the worst in memory, this year’s was one of the best.

Once again, it occurred in the beautiful and vibrant city of Chicago, where the 35-year old company Morningstar is headquartered, on May 8-10 at the sprawling but impressively run McCormick Place, which happens to be the largest convention center in North America. The conference’s 1350 registered attendees can look out onto Lake Michigan and the Field Museum as they hurry to dozens of break-out sessions focused along so-called “tracks,” like Passive Track or Practice Management Track.

As a sign of the times, the hall’s food court offers an impressive and even friendly Pho Bar, where David bought me lunch, and an Uber sign is now a permanent fixture outside the conference’s south entrance, where customers would rather wait for their rides hailed via iPhone than participate in the shorter traditional taxi line.

Morningstar showcases the most prominent of this year’s 49 speakers here, where you will find presentation summaries and interviews. This year’s speakers included AQR’s Cliff Asness, T. Rowe Price’s David Giroux, and Royce’s Charlie Dreifus. Mr. Giroux manages Capital Appreciation (PRWCX), which is an MFO Great Owl fund, and Mr. Dreifus manages Special Equity (RYSEX).

Kunal Kapoor, Morningstar’s CEO, opened the conference by stating: “The story of Morningstar is the story of the modern financial advisor.” In a play on his previous opening message, which received some pushback from folks like Josh Brown, this year Mr. Kapoor closed with … “there’s never been a better – or more important – time for great advice.”

On that and much more in his talk, I agree. Our latest Lipper Global Data Feed shows 12,500 funds (33,440 all share classes), including 550 CEFs, 2250 ETFs, and 2150 Insurance Funds. In the conference’s main hall, there were 168 exhibits and vendor booths, with displays, company brochures, colorful trinkets, and well-dressed spokespersons (numbering 701) … all vying for your business!

How does an investor funnel down from the vast universe of offerings to the handful or less to ultimately invest in? Even if the advice is as simple as: “Set all your 401K savings and contributions to the Vanguard Balanced (VBINX) and forget about it.” Most people I know need financial advice.

Mr. Kapoor stressed the firm’s commitment to remaining independent, transparent, and investing for the long term. I find him to be a very impressive, young CEO. His opening keynote is worth viewing here, as is reading the recent piece by Amy Merrick in his alma mater’s magazine, entitled “All In for Investors.”

Since Mr. Kapoor became CEO at the start of 2017, Morningstar’s stock (MORN) is up 93%.

Cliff Asness gave the opening keynote. He kiddingly started by stating that if he had known how “crappy” a year quants were going to suffer, he would never have agreed to do the talk. “Bad year for quant last year,” he quipped. But before I get into just how bad, a bit more on his good talk, which I think included sound advice.

He believes investors have an easier time recognizing and accepting when traditional discretionary investing strategies have bad years. They don’t expect them to always work. One reason is they have good stories, quoting Warren Buffett: “If a business does well, the stock eventually follows.”

Mr. Asness says that “the most certain long-term failure” is investing in a strategy you can’t stick with. It’s easier if the strategy is 1) intuitive, 2) delivers very high Sharpe, and 3) isn’t too “maverick.” He recognizes that a strategy like “market-neutral multi-factor quantitative” fails on all three counts.

To help fund architects (and ultimately their investors) handle periods of poor performance with such strategies, he suggests building a process (at least) that is intuitive, size bets reasonably, check whether something has changed (acknowledging human nature desperately wants to find something), and resign yourself to that fact that the strategy really is intuitively hard.

If “(if!)” you’ve done the above and haven’t found a smoking gun, “stick like grim death” to your beliefs.

How bad has it been?

Latest MFO Fund Family Scorecard gives AQR a “Lower” grade. Of AQR’s 39 funds, 26 trail their peers since launch through April 2019 based on absolute return.

Fortunately, most of AQR’s AUM is in just five funds: Managed Futures Strategy (AQMIX), Style Premia Alternative (QSPIX), Large Cap Defensive Style (AUEIX), Long-Short Equity (QLEIX) and Large Cap Multi-Style (QCELX), which have all bested their peers since launch.

But it’s been a tough past year for two of these: Style Premia Alternative (QSPIX) and Long-Short Equity (QLEIX), each down 13-14% through April, particularly since alternatives tend to target investors with more moderate risk tolerance.

AQR is in good company … Wes Gray’s AlphaArchtect, Meb Faber’s Cambria, and O’Shaughnessy Asset Management – all quant shops, all recognized leaders – have struggled this past year with 19 of their 20 funds between them under-performing. (Notable exception: Joel Greenblatt … 18 of 21 Gotham Funds outperformed this past year.)

But as much as I admire Mr. Asness and enjoyed his talk, he never directly addressed why he thought quant generally and funds like QLEIX have been ‘crappy’ lately. Perhaps as close as he may come can found in his paper, entitled “Looking for the Intuition Underlying Multi-Factor Stock Selection.”

My experience with AQR Funds is that when things start going wrong, they circle the wagons and stop communicating. Our colleague and friend Sam Lee of SVRN Asset Management, who championed QSPIX back in 2015, believed “something is broken in the strategy” when it retracted on numerous consecutive days for no apparent reason. He also started questioning AQR’s drawdown protection process. It was not apparent during this year’s drawdowns.

Being significantly negative while the rest of the market is positive is a tough place for alternative funds to be, making them especially hard to stick with, reinforcing Mr. Asness’s point.

David Giroux, a discretionary investor for-sure, suggests that maybe something has changed: “Secular risk is what has changed value.” In the face of sector giants like Apple, Amazon, Facebook, Google there is no more “just having a bad year” for competitors. Worse, too often, management of out-of-favor companies try for the “Hail Mary Pass” to return to glory (e.g., Yahoo), just hastening their demise with destruction of capital. Mr. Giroux’s assertion: “No more reversion to the mean.”

An exception? He’s very bullish on GE, since Larry Culp took the helm.

Interestingly, Adam Seessel published a piece (recently reprinted in the WSJ) that mimics Giroux’s view: “Why Value Investing Is Broken.”

Given the banter, Morningstar’s Ben Johnson chaired an excellent session entitled “The Value Premium is Dead, Long Live the Value Premium,” with BlackRock’s Holly Framsted, Wes Gray, and Patrick O’Shaughnessy.

In defense of value, Wes shared his healthy and candid perspective afterward, which also strikes me as good advice:

This skepticism is a recurring narrative throughout the history of value and arguably why value works in the first place. Value is a strategy of watching the market throw the ugly baby out with the bathwater and eventually realizing that even ugly babies should live in one form or the other (even though they will never be as cute as the pretty babies).

When this revaluation occurs, value earns the extra kick. There is always some monopolistic competitor or technology in the marketplace that “can’t lose.” For example, can you imagine what people thought when airplanes were invented? You can look at newspapers, cable, as recent examples of “once dominant, now losers.” They were dominant industries with huge moats, now they all stink.

Value strategies often died with them … a little bit. But value through these different cycles has historically won in the end. And remember, in order to be a generic value stock you need to have some fundamental (e.g., earnings). So systematic value, even in the most generic form, boots out total trash fairly early on. An example is GE. No value strategy will hold it because the net income is negative and has been for almost 2 years now.

So, QED on the importance of good financial advice … even the experts give conflicting views!

I’ve listened to perhaps a hundred of Meb Faber’s excellent podcasts (yes, it seems we’re being flooded with podcasts), and invariably, from one expert guest to the next, I will hear conflicting views, both equally compelling (e.g., Ken Fisher’s bullishness versus James Montier’s caution).

Certainly, the one reason investing can be so hard is that it involves predicting the future, which of course is not entirely knowable. So, we frame investment strategies based on past behavior and experience, which can be subject to individual biases resulting in differing expert opinions … many well intended!  

Ultimately, it’s about understanding your own risk tolerance and investment time horizon. Then, finding products to match that charge low fees, apply good processes, and are run by firms that really put investors first. Finally, and here’s the hard part, those products need to behave as you expect, or you will indeed exit, just like Mr. Asness says. Bruce Berkowitz’s Fairholme fund (FAIRX) is a classic example of a fund that set volatility expectations one decade, attracting huge AUM, only to see it evaporate when the fund experienced a completely different kind of volatility the next decade.

Break, break.

On David’s strong recommendation, I visited the Art Institute of Chicago after the conference ended. Filled with the works of extraordinary impressionists: Monet, Renoir, van Gogh, Degas. And, the Dutch master Rembrandt. Sheer delight.

Just as beautiful were the thoughtful words of Doris Kearns Goodwin, who gave the conference’s luncheon keynote, based on her latest book: “Leadership in Turbulent Times.” She was a White House Fellow during the Johnson administration, even after she had written against the Vietnam War. President Johnson is said to have responded: “Oh, bring her down here for a year and if I can’t win her over, no one can.” Ultimately, he asked her to write his biography.

Ok, let’s finish this off with lifetime and past-year risk and performance numbers on three fund families that continue to impress me … all represented well at this year’s conference: Mairs & Power (St. Paul MN), FMI (Milwaukee WI), and Frost (San Antonio TX).

MAPOX is probably the most under-appreciated balanced fund out there … it arguably outperforms Vanguard’s Wellington (VWELX). (And, their spokesmen at the conference handed-out cans of Spam … Hormel is based in the Great Lakes area, a region considered Mairs & Power’s expertise.)

The impressive FMI funds are again open to new investors. All three FMI funds are MFO Great Owls.

Frost’s bond funds are a must-consider for conservative investors, even if you don’t live in Texas.

Index Funds S&P 500® Equal Weight NoLoad (formerly Index Funds S&P 500® Equal Weight), (INDEX), June 2019

By David Snowball

At the time of publication, this fund was named Index Funds S&P 500® Equal Weight.

Objective and strategy

The fund equally weights all of the stocks in the S&P 500 index and rebalances its portfolio quarterly.


The Index Group, LLC, headquartered in Colorado Springs, Colorado. While they are legally permitted to provide other advisory services, managing their mutual fund is their only current activity.


Michael Willis. Mr. Willis has been president of Index Funds since 2006. His earlier stints included serving as a senior vice president of UBS Financial Services (2003 to 2004), senior vice president-investment of PaineWebber (1999-2003) and first vice president of Smith Barney (1994-1999). This is the only vehicle he’s managing.

Strategy capacity and closure

$200-300 billion. Capacity constraints are normally imposed by starting with (1) the desired size of the lowest market cap fund in the portfolio or (2) by the need to be able to unwind positions with limited liquidity quickly and quietly. Neither of those is a meaningful constraint here: their tiniest firm has a $2 billion market cap and it will never get more than 0.22% of the portfolio and positions would change only as the composition of the underlying index does.

Management’s stake in the fund

Neither the manager nor the trustees has a direct investment in the fund. That having been said, the manager and his partner (aka The Index Boys) are pouring all of their money into running the fund which is reflected in the fact that they only charge investors 0.25% for a fund that costs them nearly 2% to operate. The trustees accept only $79/year for their services.

Opening date

April 30, 2015.

Minimum investment


Expense ratio

0.25%, after waivers, on assets of $102.8 million, as of July 2023. 


This is an update to our fund profile of June, 2018. For a complete discussion of the fund’s rationale and structure, please check the original profile. This update provides a short synopsis of the full argument and will provide updated performance information.


Standard and Poor’s compiles several versions of their famous S&P 500 index. The most famous is designated SPX. It is the cap-weighted version of the index. That means that the percentage weight each stock has in the index is directly tied to their market cap; a stock that represents 4% of the cumulative value of all the S&P stocks gets a 4% weighting in the index. As of April 2019, the top ten firms in the index comprise almost 25% of its entire weight. Over $3.4 trillion is invested in SPX index funds.

Another version of the index, designated Equal Weight Index or EWI, takes the exact same stocks but weights them differently. It gives every stock an equal weight in the index, 0.2% for everybody. Microsoft, which occupies 4% of the SPX is only 0.2% of EWI. The same 10 names that are almost 25% of SPX are just 2% of EWI. Once a quarter, the index is rebalanced to sell the winners back down to 0.2% and buy more of the losers to restore them to 0.2%. About $22.5 billion is invested in EWI index funds.

That simple difference in weighting creates significant differences in the biases embedded in the indexes:

  1. SPX is a large cap index, EWI acts like a midcap one. The average market cap for SPX is $110 billion, while EWI clocks in at $23 billion. 90% of the money in SPX, but only 57% of the money in EWI, is in large and mega-cap stocks.
  2. SPX is momentum-driven, EWI is a bit contrarian. The mantra for a cap-weighted index is “buy more of your winners.” To a limited extent, the discipline of an equal-weighted index is to sell down your winners and buy into your losers.
  3. SPX tilts more to growth, EWI tilts more to value. The “story stocks” from growth darlings (often the FAANGs) become a larger slice of the index as more investors pile up, increasing their size and the index’s valuations.
  4. SPX tilts more toward tech and telecomm, EWI has more exposure to the real world. Some of the greatest EWI overweights are in industrials, materials, real estate, utilities and energy.

The argument for investing in the S&P 500 Equal Weight Index is simple: you’re troubled by the fundamental flaw in the original S&P 500, which is its cap-weighting. It rewards, and becomes dependent on, the market’s largest and most overvalued stocks. And the sheer popularity of S&P 500 indexing (over $9.9 trillion indexed or benchmarked to the index, with indexed assets comprising approximately $3.4 trillion of this total) means that more money is automatically poured into those stocks, driving them to even higher valuations.

Two points worth knowing.

Over time, EWI beats SPX.

This chart of the 10-year performance comes from Standard and Poor’s itself.

Over the past decade, the conventional SPX index has beaten 85% of all large cap core funds. The unconventional EWI index has beaten 95% of them. Over 15 years, SPX leads 92% and EWI leads 98%. But, more centrally, EWI leads SPX.

Over time, INDEX has been your single best option for accessing EWI.

There are three vehicles that track EWI: two funds and one ETF. INDEX has been the best of them over its four-year lifetime. The other two options are huge: Invesco Equally-Weighted S&P 500 Fund (VADDX) holds $7.3 billion and charges 28 bps while Invesco S&P 500® Equal Weight ETF (RSP) has $15.2 billion and charges 20 bps.

Despite the popularity of the two older products, INDEX has since inception outperformed both on pure return and risk-adjusted returns.

  Four year Three year Two year One year AUM
  Annual Returns Sharpe Annual Returns Sharpe Annual Returns Sharpe Annual Returns Sharpe Millions
INDEX 9.4% 0.68 12.68 0.98 10.8 0.68 10.42 0.47 42
RSP 9.1 0.66 12.57 0.97 10.8 0.68 10.44 0.47 16,100
VADDX 9.2 0.66 12.58 0.97 10.7 0.67 10.35 0.46 7,700

All data as of 4/30/2019, from the Lipper Global Data Feed and Morningstar. Thanks to my colleague Charles Boccadoro for adding the four-year performance metrics to the MFO Premium screener.

Those are very small performance differences, but they compound over time. A $10,000 investment in each of the three funds on the day INDEX launched would, four years later, have grown by 40.8 – 43.4%.

INDEX $14,340
Invesco ETF RSP 14,076
Invesco Fund  VADDX 14,083

Calculation from Morningstar for the period 04/30/2015-05/01/2019.

The INDEX manager attributes their long-term success to tiny daily gains they have from intelligent cash management. By way of example, since prices in the first few and last few minutes of the market each day are highly volatile, they choose not to execute trades then which gains them an advantage that’s small but that more than offsets the ETF’s small price advantage.

On whole, you’d be silly not to pocket the extra money given that all three vehicles do exactly the same thing.

If you would like to reap those higher rewards, INDEX has proven to be a worthy option. With expenses of just 0.25%, it’s very affordable especially when you combine it with a low $1000 minimum investment. Mr. Willis has been managing the fund for four years and he’s signaled his commitment to his investors by pouring substantial amounts of his own money into creating and maintaining an accessible, low-cost vehicle.

Bottom Line

In the long-term, biases toward value, smallness and diversification have paid off handsomely. One attempt to calculate the returns of the equal-weight and cap-weight versions of the S&P 500 back to 1926 estimate that the equal-weight version outperforms the cap weighted version by 281 basis points per year; another, calculating from 1958, can EWI a nearly 350 bps year advantage. Skeptics of this approach, including our colleague Sam Lee, note that “there’s no such thing as a free lunch.” The higher returns come at the price of higher volatility, higher taxes as a result of more frequent portfolio rebalancing and the prospect of lagging badly during periods where mega-caps soar. All of which is true, though modestly so. For investors looking to de-FAANG their portfolios while maintaining exposure to the S&P 500 companies, INDEX offers a sensible, affordable option.

Fund website

Index Funds

Launch Alert: Zeo Sustainable Credit Fund (ZSRIX)

By David Snowball

On May 31, 2019, Zeo Capital Advisors launched Zeo Sustainable Credit Fund (ZSRIX). The fund seeks to provide risk-adjusted total returns consisting of income and moderate capital appreciation. This marks the launch of Zeo’s second fund, after Zeo Short Duration Income (ZEOIX).

ZEOIX has performed exceedingly well over its eight years. The fund’s risk-adjusted returns have been best-in-class and its expenses have fallen. The limitation perceived by some of its major investors is that it is duration-constrained; that is, it doesn’t have the flexibility to pursue many attractive longer-duration opportunities. ZSRIX is designed to address those concerns.

“Sustainable Credit”

Sustainable: Investors view “sustainability” as offering one of two virtues. Some see sustainability as good, primarily, because it’s good for the planet. Others see sustainability as good because it’s good for the portfolio. Zeo falls in the latter camp. Firms pursuing sustainable practices (relatively sustainable practices, since some industries are more resource-intense by nature) are more credit-worthy. They’re giving evidence of making better long-term capital allocation decisions and they’re less subject to headline risk, policy risk or costly litigation.

Credit: Fixed income securities are subject to a combination of macro-level risks (the Federal Reserve or ECB acting to deal with an economic problem) or company-level risk (the management misallocating capital and being unable to pay their creditors).  On whole, Zeo prefers dealing with the latter since it’s within management’s ability to control. So “credit” means that the portfolio is relatively interest-rate insensitive; that is, performance is driven primarily by corporate actions rather than macro-level ones.

The Process

The manager, humbly enough, understands that he cannot directly control his portfolio’s returns, but he can control its risk exposures and so that’s where he starts.  He anticipates portfolio volatility, which some interpret as “risk,” at 150-250% of ZEOIX’s.  “The market will,” he notes, “pay more or less of a premium for that portfolio compared to Short Duration’s.”

The fund will:

  • Use the same investment discipline as ZEOIX.
  • Be managed by Venkatesh Reddy, Zeo’s founder and ZEOIX’s manager.
  • Invest primarily, and actively, in fixed income securities; they define that asset class pretty broadly.
  • Target companies who are leaders among their peers in key areas of sustainable business practices.
  • Typically be longer-dated than ZEOIX but shorter-dated than the total bond market.

The fund may:

  • Invest internationally, including securities from emerging markets issuers.
  • Invest a majority of its assets in high-yield bonds.
  • Manage interest-rate risks by varying the duration of the portfolio or hedging.

The Case for Considering the Fund

The firm’s flagship fund offers reason for some optimism about the prospects of Sustainable Credit. Here’s the performance of Zeo Short Duration, since inception, against its Lipper “multisector income” peer group.

 Comparison of Lifetime Performance (06/2011 – 04/2019)

  APR Max DD Std Dev Down Dev Bear market dev Sharpe ratio Sortino ratio Martin ratio Ulcer Index
Zeo Short Duration Income 3.1 -1.5 1.2 0.6 0.2 2.05 4.41 9.21 0.3
Multi-Sector Income Average 3.8 -5.7 3.8 2.3 1.2 0.91 1.57 2.40 1.7

How do you read that? Annual percentage returns (APR) measure the fund’s upside for the period mentioned, while the next four measure its downside: deepest decline during the period, normal volatility, downside or “bad” volatility and volatility in bear markets. The remaining four reflect the state of the balance between return and risk; Sharpe is the most widely-followed metric, Sortino is a bit more risk-averse and Martin is the most risk-averse of all. The Ulcer Index combines means of how far a fund falls and how long it takes to recover; funds that fall a lot and stay down tend to give their investors ulcers, hence the name.

ZEOIX has offered returns that are a bit lower than its peers with risks that are vastly lower; in consequence, its risk-return ratios are among the best in its peer group. Its Sharpe and Martin ratios are the second-best among its 53 peers, while its Ulcer index and Sortino ratio are the group’s best.

Morningstar places Zeo Short Duration in its high-yield peer group, which strikes us as misleading. Because Zeo is much more cautious than a high-yield fund – for example, its standard deviation is one-quarter of the average HY fund and its effective duration is one-fifth the average – its performance is wildly out-of-step with the group’s. In years when the group soars, Zeo has terrible relative performance and in years when the group tanks, Zeo has great relative performance. As a result, Zeo’s peer ranking and Morningstar rating tell you more about how the group has done lately than about whether Zeo continues to deliver on its promise: steady, positive absolute returns.

To get an idea of its steadiness, here’s a chart of ZEOIX against Morningstar’s equivalent to the Multi-Sector Income group:

In short, over time and with great consistency, Mr. Reddy has delivered what he promised. Mr. Reddy has a comparable goal for Short Duration: “best-in-class risk-adjusted returns measured by Sharpe ratio, among other ways.”

The fund carries a $5,000 minimum initial investment and expenses of 1.25% (after waivers for 2019). The Zeo Sustainable Credit Fund (ticker ZSRIX) should be open for investment Monday, June 3 on the following platforms: 

  • Direct through the transfer agent
  • Charles Schwab 
  • Fidelity
  • Pershing (within a week of launch)

Other custodial platforms added upon request. Given that ZEOIX is available for purchase on JPMorgan, Pershing, TD Ameritrade, and Vanguard, it’s likely this one will appear there, too.

Elevator Talk: Paul Privitera, Virtus Newfleet Dynamic Credit ETF (BLHY)

By David Snowball

Since the number of funds we can cover in-depth is smaller than the number of funds worthy of in-depth coverage, we’ve decided to offer one or two managers each month the opportunity to make a 300 word pitch to you. That’s about the number of words a slightly-manic elevator companion could share in a minute and a half. In each case, I’ve promised to offer a quick capsule of the fund and a link back to the fund’s site. Other than that, they’ve got a few hundred words and precisely as much of your time and attention as you’re willing to share. These aren’t endorsements; they’re opportunities to learn more. 

Virtus Newfleet Dynamic Credit ETF (BLHY) is an actively-managed ETF that focuses on two non-investment-grade asset classes, bank loans and high-yield bonds. The fund tries to generate high current income and capital appreciation; because the performance of non-IG assets is relatively interest rate insensitive, it may also provide a rising interest rate hedge.


Good question!

In normal times, income-oriented investors could count on substantial, predictable returns from very unambitious, core investment grade bond funds. To illustrate that contention we identified the five core bond funds that have been around for 40 years or more, then studied their rolling one, three, five, ten and twenty year annualized returns. Since each fund has up to 20 rolling periods each year (the 1, 3, 5, 10 and 20 year periods following January 1990, then the 3, 5 and 10 year periods following February 1990 and so on), there are a lot of data points (11,955 rolling periods) but only one answer: “about 7.3%.” Historically, it simply didn’t matter how long you held a core bond fund, it was going to return an average of 7.3%. Hold it for one year and, on average, you’d get 7.28%. Hold it for five years and, on average, you’d get 7.32%.

If Dr. John Watson was writing about it, he might recycle the title, The Seven-Per-Cent Solution.

Two caveats: (1) these returns are nominal, not real. If you made 7% and inflation is running at 8%, your real return is negative. Over the long term, inflation runs just above 2% so you might think of your real buying power as growing by about 5% per year. (2) Short-term returns are much more volatile than long-term averages. One of the five funds had one twelve month loss of 25% and one 12-month gain of 55% but that’s out of 700 observation periods. On average and over time, 7.3%.

Back to the question, why? The simplest answer is, future returns – and future risk-adjusted returns – are likely to be dramatically different from the past.  Recent analyses published by Morningstar and MFO point to far lower bond fund returns in the future, likely in the range of 0 – 3% real returns with heightened volatility. That’s not good. The picture is further complicated by the changing composition of issuers. Bond benchmarks offer the greatest weight to the most heavily indebted borrowers in a particular class. Federal policy-makers (abetted by economists touting Modern Monetary Theory which describes deficits as harmless) have surrendered any attempt at deficit control; the projected $1.0 – 1.4 trillion federal budget deficit for 2019 requires issuing $1.0 – 1.4 trillion in new Treasury bonds. The weight of traditionally low-yielding Treasuries has doubled in just a decade, and is rising steadily. The New York Times reports:

Over the last decade, as the United States government has issued more and more debt, Treasuries have grown from 22 percent of the index (and index funds) to 40 percent. The index’s Treasury stake is likely to increase in the coming years because the new tax law has reduced corporate tax revenue and a growing federal budget deficit will require more Treasury debt to pay the country’s bills. (Carla Fried, For a While, Bond Funds Were an Exception to the Indexing Rule, 1/11/2019)

That evolution means that investors face falling returns and exposure to fewer issuers, hence more issuer risk. Investors who find that situation intolerable look for income elsewhere: in bond-like equities, financial derivatives, international bonds and in non-investment-grade bonds.

And that’s where Newfleet comes in. Newfleet Asset Management, now part of Virtus, is a $10.5 billion fixed-income manager that specializes in a multi-sector approach. While they don’t quite believe “there’s always a bull market somewhere,” they do believe that there’s always better value somewhere. You might think of them as “disciplined agnostics.” They are not “always and only muni bonds” or “always and only” anything. Instead, they’ve constructed an active strategy that allocates resources between two distinct but convergent non-investment-grade universes.

High-yield bonds can offer equity-like returns with minimal correlation to interest rates. There’s now a $1.1 trillion dollar high-yield market.

Bank loans can offer a powerful hedge against rising interest rates, since the loan interest rates get reset periodically, with the security of knowing that Newfleet is purchasing senior secured loans. There’s now a $1.1 trillion dollar securitized loan market.

While the markets are large, liquid and similar in size, there are significant differences between the two asset classes. By way of example, some industries issue (tech, for example) very few high yield bonds but do participate in the loan market while other industries (energy, as an example) do the reverse. By Newfleet’s calculation, about 800 issuers participate in the bond loan market but not the high-yield market, about 600 do the reverse and only 300 participate in both. The ability to move between the two allows managers to tap into very different income streams, depending on where the best opportunities lie.

Newfleet, through a number of 40-act funds, has been pursuing this strategy since 2014. I had a chance in April 2019 to chat with Paul Privitera, one of Newfleet’s business development guys, and through him with Newfleet’s investment team.  Here are Mr. Privitera’s 238 words on why investors ought to consider both an active strategy and exposure to asset classes like high yield and bank loans:

The value proposition behind Dynamic Credit is simple. Over the past decade, high yield bonds are continuing to look more like bank loans and vice versa, so instead of splitting the allocation between both asset classes, we believe investors can more efficiently access the leveraged finance space through a single, flexible strategy. The benefit of this approach is that it enables a single investment manager with purview over a larger opportunity set to capitalize on technical dislocations and differential relative value opportunities within industries, credit quality tiers, and across the capital structure. Additionally, the fund has the ability to utilize Treasuries should conditions warrant, a feature that we feel is especially important to managing risk late cycle and a feature we are currently utilizing.

Given the number of issuers that have a significant presence in both the loan and high yield markets, a plan sponsor or other investor with dedicated strategies may have exposure to an issuer through both its loan and high yield portfolios. In contrast, a manager with a flexible mandate has broader oversight and control over aggregate exposures. Similarly, the use of dedicated strategies may lead to unintentional industry concentration risk or manager style risk that a single-manager, flexible mandate can avoid.

Combining high yield bonds and bank loans in an actively managed strategy takes advantage of the two asset classes’ common and complementary attributes, enhancing diversification and providing the potential for attractive risk-adjusted returns.

This is an actively-managed ETF. While equity investors are used to equating passive with “good and cheap,” that’s not such a sure thing in fixed-income investing. Passive products don’t have a performance advantage over active ones and aren’t all that cheap. The average high-yield ETF – almost all passive – returned 5.76% annually over the past three years. The average high-yield mutual fund – almost all active – made substantially more: 6.17%. Similarly, bank loan mutual funds returned 4.39% while bank loan ETFs clocked in at 3.72% (per Morningstar, as of 5/28/19).

Dynamic Credit was launched in December 2016, has assets of $15.7 million and a 0.68% expense ratio (per Morningstar, 5/28/19). That’s below-average for the bank loan ETF peer group, though above-average for the high yield bond ETF group. Compared to mutual funds, it is below average for both bank loan and high yield. As of March 31, 2019 Newfleet Asset Management had approximately $10.5 billion in assets under management.

The ETF is managed by a team led by David L. Albrycht, Newfleet’s CIO. Mr. Albrycht has crafted a team that’s frequently recognized as being in the industry’s top tier. In addition to this ETF, they manage fixed-income assets through two other ETFs, three closed-end funds, part of all of seven mutual funds and two offshore funds. The Virtus Newfleet Dynamic Credit homepage offers all the basic information, with the Newfleet Flexible Credit Strategy site offering a bit more depth. The difference is that the latter page focused on the performance of somewhat older SMAs and is written with greater detail for an institutional audience.

Launch Alert: Cannabis Growth Fund (CANNX/CANIX)

By David Snowball

On February 22, 2019, Foothill Capital Management launched the Cannabis Growth Fund (CANNX/CANIX). The fund seeks to provide long-term capital appreciation through investing globally in companies “engaged exclusively in legal cannabis activities under applicable national and local laws, including U.S. federal and state law.” This marks the launch of Foothill’s second fund, after All-Terrain Opportunity Fund (TERIX), a four-year-old fund of funds that’s done quite well since inception.

Morningstar rates TERIX as a four-star fund (as of 5/29/19).

MFO’s May issue incorrectly identified CANNX as a “fund in registration,” that is, a fund not yet available for sale.

Here’s a quick rundown of the newly-launched fund:

  • Its investable universe includes the 350 or so publicly-traded firms which derive 50% or more of their earnings from the cannabis industry.
  • Those firms are located in a variety of sectors, including agricultural and bio-technology, cultivation and retail, and industrial hemp.
  • Their universe is populated primarily by micro- to mid-cap growth companies, though they won’t invest in any stock with a market cap below $100 million and their largest single holding is a large cap Canadian firm, Canopy Growth (CGC) as of March 31, 2019.
  • The fund is non-diversified with about 32 stocks in the portfolio currently; it anticipates relatively high turnover.
  • The manager uses options in an attempt to (partially) manage volatility and increase performance.
  • The portfolio manager is Korey Bauer, who co-manages All-Terrain Opportunity Fund (TERIX) and previously managed Catalyst Macro Strategy Fund in 2014.

The upside, by the manager’s reckoning, is that you’re gaining early access to an exploding market. They write:

More than 22 countries covering a population of nearly 1 billion have laws that cover the legal use of medical cannabis as well as the decriminalization and use of hemp. With legalization helping to expand various health care and consumer uses, the global cannabis market is anticipated to grow 60% to over $30 billion by 2021.

Other estimates are rather more aggressive. One places the global cannabis market at $340 billion by 2025 with the legal industry capturing about 25% of the total. Canopy Growth published a 2019 analysis of the global market that suggested that cannabis products could disrupt a half trillion dollar market for products ranging from pain relief and animal health to sleep aids and … recreational alternatives to alcohol.

The downside, of course, is that the stuff is illegal in the U.S. The use, sale, and possession of cannabis with over 0.3% THC in the United States is illegal under the federal Controlled Substances Act of 1970. While states, eyeing a potential tax windfall, have been merrily legalizing medical and recreational marijuana, under the Supremacy Clause of the U.S. Constitution, federal law preempts conflicting state and local laws. On the upside, the 2018 Farm Bill made low-THC cannabis, sometimes called “industrial hemp,” legal though highly regulated. A second channel might be the incredibly popular cannabis-derived product cannabidiol (CBD), which has been faddishly added to everything. The New York Times announced that

cannabidiol is everywhere. We are bombarded by a dizzying variety of CBD-infused products: beers, gummies, chocolates and marshmallows; lotions to rub on aching joints; oils to swallow; vaginal suppositories for “soothing,” in one company’s words, “the area that needs it most.” (Can CBD really do all that? 5/14/19)

The fund’s retail shares (CANNX) carry a $2,500 minimum initial investment and expenses of 1.35% (after waivers in effect through 2020). The institutional shares (CANIX) require $100,000 and charge 1.10%. The fund is available through direct purchase or the online TD Ameritrade and InteractiveBrokers sites. The Cannabis Growth homepage offers a reasonable amount of information about the strategy and its investable universe.

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. In general, launching new funds in July and August is a dumb idea. Investment returns in summer are, in general, miserable and you lose the advantage of being able to report a full calendar quarter.

Happily, not many fall victim to that trap. Well, these guys did but not many others.

Aberdeen Standard AI Driven US Equity ETF

Aberdeen Standard AI Driven US Equity ETF, an actively-managed ETF, seeks long-term capital appreciation. The plan is to invest in US stocks. Who will be doing the investing, you ask? Our robot overlord … uh, overmanager? … I say. The portfolio will be constructed by “a proprietary, quantitative and artificial intelligence driven model [that] utilizes machine learning to analyze constantly evolving financial markets data and to identify and recall patterns in markets. Based on those patterns, the Model dynamically allocates to exposure combinations value, quality, momentum, small size and low volatility.”  According to the prospectus, the fund will be managed by “employee [   ] and [   ].” Its opening expense ratio has not been disclosed.

Aberdeen Standard AI Driven Emerging Markets Equity ETF

Aberdeen Standard AI Driven Emerging Markets Equity ETF, an actively-managed ETF, seeks long-term capital appreciation. The plan is to do the same thing to the emerging markets that its sibling will do to the US market: a constantly evolving computer program will select varying exposures to five different investing factors: value, quality, momentum, size and volatility. Neither the manager(s) nor the expense ratio has been disclosed.

First Trust EIP Carbon Impact ETF

First Trust EIP Carbon Impact ETF, an actively-managed ETF, seeks a competitive risk-adjusted total return balanced between dividends and capital appreciation. The plan is to invest in utility and/or energy companies who are seeking to reduce the carbon impact of the production, transportation, conversion or storage of energy. That includes companies trying to reduce emissions of carbon and other greenhouse gases or companies that aid the broader decarbonization of the economy through renewables or smart transmission technology. The fund will be managed by a team from Energy Income Partners, LLC. Its opening expense ratio has not been disclosed.

First Trust Multi-Manager Small Cap Core ETF

First Trust Multi-Manager Small Cap Core ETF, an actively-managed ETF, will seek long-term capital appreciation. The plan is to assign part of the portfolio to an as-yet unnamed growth manager and part of the portfolio to an as-yet unnamed value manager and let them have at it. Its opening expense ratio has not been disclosed.

IQ Ultra Short Duration ETF

IQ Ultra Short Duration ETF, an actively-managed ETF, seeks current income while maintaining limited price volatility. The plan is to maintain a BBB- or higher quality portfolio with a duration of a year or less; up to 20% of the portfolio can be invested in options and futures as an interest rate hedge. The fund will be managed by as as-yet unnamed party. Its opening expense ratio has not been disclosed.

John Hancock Diversified Macro Fund

John Hancock Diversified Macro Fund will seek long-term capital appreciation. The plan is to act like a global macro hedge fund. I wish them well. The fund will be managed by Kenneth Tropin and Pablo Calderini. Its opening expense ratio is between 1.34-2.45% depending on share class, and the minimum initial investment will be $1000 for retail shares and $250,000 – $1 million for institutional share classes.

Quantified Tactical Fixed Income Fund

Quantified Tactical Fixed Income Fund will seek total return. The plan is to do tactical stuff with fixed income: non-diversified, long and short, domestic and global, investment grade and not, government and corporate.  They’ve got three models to help them “balance high return, low correlation, and low volatility” while being aggressively tactical. The fund will be managed by Jerry C. Wagner and Jason Teed of Flexible Plan Investments. Its opening expense ratio is 1.77%, and the minimum initial investment will be $10,000.

Quantified Evolution Plus Fund

Quantified Evolution Plus Fund will seek capital appreciation. The plan is to do tactical stuff with equity, debt, gold and commodities. It’s going to be aggressive and it’s going to be non-diversified but, in bad times, it can reach to short-term fixed income. The fund will be managed by Jerry C. Wagner and Jason Teed of Flexible Plan Investments. Its opening expense ratio is 1.77%, and the minimum initial investment will be $10,000.

The Top Five Manager Changes

By David Snowball

Each month dozens of funds and ETFs undergo partial or complete turnover in their management teams. This month we found 85 funds and ETFs making a change. The vast majority of those changes are inconsequential to anyone other than the folks losing (or gaining) jobs: one manager on a five person team might be popped out and replaced by another, resulting in little net change.

In deference to our impending trip to Ireland, we’ve decided to report just five changes that caught our eye for now with the whole big list returning in July.

DWS ESG Global Bond Fund (SZGAX) dismissed its entire management team and brought two new guys on-board. The fund has been a long-time laggard. Seven other DWS funds had management tweaks.

Fidelity Emerging Markets Fund (FEMKX) loses star manager Sammy Simnegar, who’s taking over the reins on Fidelity Magellan, on September 30, 2019. He’s replaced by John Dance, who’s done a fine job at Fidelity Emerging Asia over the past couple years and who also ran Fidelity Pacific Basin. Fidelity Emerging Asia (FSEAX) then loses John Dance on December 31, 2019 who’s being succeeded by Xiaoting Zhao.

Harbor International Small Cap Fund (HIISX) terminated Baring International Investment Limited as its sub-adviser after three pretty uninspired years and is bringing in Cedar Street Asset Management LLC to run the fund. Since Cedar Street’s lead manager, Waldemar Mozes, did a fine job with ASTON/TAMRO International Small Cap Fund (AROWX/ATRWX), I’m pleased for the change.

Ben Franklin no longer serves as the portfolio manager of the Intrepid International Fund (ICMIX) or as part of the investment team of the Intrepid Capital Fund (ICBMX). On the one hand, ICMIX was distinctive and fascinating – international, absolute value, micro-cap – on the other hand, that discipline hasn’t worked over the past three years and the fund is about to be liquidated.

T. Rowe Price International Value Equity (TRIGX) is in the midst of an un-T. Rowe Price-like shuffle. On July 1, 2019, Sebastien Mallet steps down as manager – on very short notice, by TRP standards – after less than a year – a very short tenure by TRP standards – running this fund. Colin McQueen will take the helm of this fund. Mr. McQueen has had a long investing career, though mostly elsewhere.

Briefly Noted

By David Snowball


The Balter Invenomic Fund (BIVIX) is in the process of shedding Balter. As a practical matter, that will translate to a name change, Invenomic Fund, and little more. BIVIX is, as we noted in our May 2019 profile, an exceptionally strong performer with steady asset growth.  The manager is both talented and self-assured, so I’m not particularly concerned though I am curious. The proxy document offers this somewhat cryptic explanation for the change:

BLA (i.e., Balter Liquid Alts) informed the Board that it was making this request because it is currently exiting the investment advisory business due to uncertainty involving a “seed investor” which could potentially affect its ability to provide services to the Fund and other funds in the future. BLA believes that this transition is in the best interest of the Fund and its shareholders as it will provide continuity for the Fund and create a more direct relationship between shareholders and Invenomic. The seed investor currently holds a non-voting equity interest in BLA and initially contributed seed capital for the Fund. 

We’ve reached out to the Invenomic team for comment and will share what we’ve learned in our July issue.

Thanks, most especially, to Kirk Taylor for giving us a heads up about the impending change and the Invenomic folks for promising to talk through the change as soon as they’re able.

And thanks, as ever, to The Shadow – a long-time stalwart of MFO’s discussion board – for his indefatigable reading of SEC filings each month. He finds things before the SEC even knows they’ve been filed. It helps a lot to be able to scan his list of finds on the Board each month, just to be sure that I haven’t missed anything significant.

Which, usually, I have.

Briefly Noted . . .

A bunch of Direxion funds have announced reverse share splits. That normally occurs when a fund’s NAV has dropped to an inconvenient level. The Direxion funds are not investments; they are trading vehicles meant to be held for a day or less. A particularly stark illustration of that fact: a $10,000 investment made five years ago in Direxion Daily Natural Gas Related Bull 3X ETF (GASL) would today be worth $2.

  Reverse Split Ratio
Direxion Daily Mid Cap Bear 3X Shares 1 for 5
Direxion Daily Small Cap Bear 3X Shares 1 for 5
Direxion Daily Financial Bear 3X Shares 1 for 5
Direxion Daily MSCI Real Estate Bear 3X Shares 1 for 5
Direxion Daily Natural Gas Related Bull 3X Shares 1 for 5
Direxion Daily Junior Gold Miners Index Bull 3X Shares 1 for 5
Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares 1 for 5
Direxion Daily Semiconductor Bear 3X Shares 1 for 10

In a move that only Vanguard could get away with, Vanguard Long-Term Bond Index Fund (VBLAX) will impose a 0.50% on all purchases of its Investor and Admiral shares. “Purchase fees,” they note, “are paid directly to the Fund to offset the costs of buying securities. This fee is separate from, and in addition to, other expenses charged by the Fund.” So the (two star) fund will advertise a 0.07% expense ratio but, for new investors, the practical expense ratio will be 0.57% – eight times as high.

In related news, “Vanguard crushing the competition with largest fund inflows so far in 2019” (, 5/27/2019).

I miss Jack Bogle.


As usual, a bunch of funds have lowered their expense ratios this month. That strikes me as a strategy that weakens the advisor without materially increasing the competitiveness of their funds, but it’s sort of de rigueur for advisors to make the gesture.

Some of this month’s offerings …

AdvisorShares Newfleet Multi-Sector Income ETF (MINC) from 0.65% to 0.50%
Columbia EM Core ex-China ETF from 0.35% to 0.16%
Columbia Multi-Sector Municipal Income ETF from 0.28% to 0.23%
Federated Adjustable Rate Securities Fund (FEUGX, FASSX), their also shuffling around the names of their share classes from 0.60% to 0.30%
T. Rowe Price Institutional U.S. Structured Research Fund from 0.50% to 0.33%
T. Rowe Price Capital Opportunity Fund from 0.69% to 0.50%

In other news …

Effective June 1, 2019, the Diamond Hill Long-Short Fund will re-open to new investors.

DWS Total Return Bond Fund will drop their maximum front-end sales load to 2.75% on “A” shares.

Federated High Yield (FHYAX) will eliminate its 2.0% redemption fee on June 30, 2019.

Principal Contrarian Value Index ETF is, for now, off the deathwatch. They’d been threatened with delisting by Nasdaq for having fewer than 50 investors. Principal just announced that we’ve gotten the number of investors over 50.


AB Intermediate Bond Portfolio (ABQUX) Is being rechristened AB Total Return Bond Portfolio. Not surprisingly, it’s new mandate is to seek “total return” and it will no longer be required to hold only intermediate-term bonds.

Advisorshares Treesdale Rising Rates ETF has changed its ticker symbol to GTAA. Be still, my beating heart!

Effective as of June, 30, 2019, FAM Equity-Income Fund (FAMEX) will change its name to FAM Dividend Focus Fund. The fund is already dividend-focused so there won’t be any changes in goals, strategy or management.

Green Square Tax Exempt High Income Fund (GSTAX) has become Green Square High Income Municipal Fund

Invesco is acquiring a bunch of Oppenheimer ETFs. Absent last minute hang-ups, here are the unsurprising name translations:

 Predecessor Funds Successor Funds
Oppenheimer Emerging Markets Revenue ETF Invesco Emerging Markets Revenue ETF
Oppenheimer Emerging Markets Ultra Dividend Revenue ETF Invesco Emerging Markets Ultra Dividend Revenue ETF
Oppenheimer Global ESG Revenue ETF Invesco Global ESG Revenue ETF
Oppenheimer Global Revenue ETF Invesco Global Revenue ETF
Oppenheimer International Revenue ETF Invesco International Revenue ETF
Oppenheimer International Ultra Dividend Revenue ETF Invesco International Ultra Dividend Revenue ETF
Oppenheimer Russell 1000® Low Volatility Factor ETF Invesco Russell 1000® Low Volatility Factor ETF
Oppenheimer Russell 1000® Momentum Factor ETF Invesco Russell 1000® Momentum Factor ETF
Oppenheimer Russell 1000® Quality Factor ETF Invesco Russell 1000® Quality Factor ETF
Oppenheimer Russell 1000® Size Factor ETF Invesco Russell 1000® Size Factor ETF
Oppenheimer Russell 1000® Value Factor ETF Invesco Russell 1000® Value Factor ETF
Oppenheimer Russell 1000® Yield Factor ETF Invesco Russell 1000® Yield Factor ETF
Oppenheimer S&P 500 Revenue ETF Invesco S&P 500 Revenue ETF
Oppenheimer S&P Financials Revenue ETF Invesco S&P Financials Revenue ETF
Oppenheimer S&P MidCap 400 Revenue ETF Invesco S&P MidCap 400 Revenue ETF
Oppenheimer S&P SmallCap 600 Revenue ETF Invesco S&P SmallCap 600 Revenue ETF
Oppenheimer S&P Ultra Dividend Revenue ETF Invesco S&P Ultra Dividend Revenue ETF
Oppenheimer ESG Revenue ETF Invesco ESG Revenue ETF
Oppenheimer Russell 1000® Dynamic Multifactor ETF Invesco Russell 1000® Dynamic Multifactor ETF
Oppenheimer Russell 2000® Dynamic Multifactor ETF Invesco Russell 2000® Dynamic Multifactor ETF

Nuveen Symphony Credit Opportunities Fund is becoming Nuveen Symphony High Yield Income Fund. When the fund’s name changes, it will be permitted to invest up to 30% of its net assets in loans and will no longer invest in convertible securities as a principal investment strategy.

Effective July 31, 2019, the $400 million PIMCO Global Multi-Asset Fund (PGMAX) becomes PIMCO Global Core Asset Allocation Fund.

PNC is selling its asset manager biz to Federated.

Hmmmm … the first thing that strike me is that both operations are (largely) headquartered in Pittsburgh, my hometown. The larger part of PNC started life as Pittsburgh National Bank (PNB) before merging with Piedmont Bank. Federated launched in Pittsburgh in about 1957, got bought by Aetna, bought themselves back and are working to buy European exposure. One wonders if proximity allowed for ideas to germinate.

Federated admits that “For more than four decades, clients have turned to Federated for liquidity management solutions,” and money markets are still – even post Hermes – two-thirds of their assets. That’s an incredibly low margin business. Their corporate goals include seeking “additional options for international acquisitions and growth, particularly in the Latin America and Asia-Pacific regions, and are actively working to establish strategic relationships with select financial institutions to add regional distribution of Federated investment strategies.” So, clearly “international” and “getting beyond money markets” are on their mind.

Why might PNC sell? Perhaps because it’s a stagnant business segment with contracting margins? Their asset growth has been negative, the number of funds has been decreasing, most of the PNC-branded funds are niche-y which means their market potential is likely limited and there is no hint in the company’s annual report that they have any plans to commit to investment services.

In some instances Federated will merge PNC funds into their own existing offerings. In other cases, the PNC funds will become new Federated ones.

Therefore we get

PNC Funds becoming … Federated Funds
PNC Government Money Market Federated Government Obligations
PNC Treasury Money Market Federated U.S. Treasury Cash Reserves
PNC Treasury Plus Money Market Federated Treasury Obligations
PNC International Equity Federated International Equity  New
PNC Multi-Factor Small Cap Core Federated MDT Small Cap Core
PNC Ultra Short Bond Federated Ultrashort Bond
PNC Small Cap Federated MDT Small Cap Core
PNC Total Return Advantage Federated Total Return Bond
PNC Multi-Factor Small Cap Growth Federated MDT Small Cap Growth
PNC Multi-Factor Large Cap Value Federated MDT Large Cap Value
PNC Multi-Factor Large Cap Growth Federated MDT Large Cap Growth
PNC Tax Exempt Limited Maturity Bond Federated Short-Intermediate Duration Municipal Trust
PNC Intermediate Tax Exempt Bond Federated Intermediate Municipal Trust
PNC Multi-Factor Small Cap Value Federated MDT Small Cap Core
PNC Balanced Allocation Federated MDT Balanced
PNC Emerging Markets Equity Federated Emerging Markets Equity New
PNC Multi-Factor All Cap Federated MDT All Cap Core
PNC International Growth Federated International Growth New

Effective as of May 1, 2019, Summit Global Investments U.S. Low Volatility Equity Fund (LVOLX) becomes SGI U.S. Large Cap Equity Fund

Effective August 5, 2019, the Arbitrage Event-Driven Fund (AGEAX) will change its name to Water Island Diversified Event-Driven Fund.

In a slightly Orwellian announcement, there will be “a repurposing” of one of the Touchstone Funds on August 23, 2019. The small and sedentary Touchstone Premium Yield Equity Fund (TPYAX) will find new purpose in life as Touchstone International ESG Equity Fund. Rockefeller & Co. LLC will take over the fund from Miller/Howard Investments, Inc.

On or about July 29, 2019, Touchstone Sustainability and Impact Equity Fund (TEQAX) will be renamed Touchstone Global ESG Equity Fund. Nothing else will change..

Effective July 1, 2019, T. Rowe Price Capital Opportunity Fund (PRCOX) changes to T. Rowe Price U.S. Equity Research Fund. It’s a large and successful fund. Given the absence of any other change, I’m guessing that it’s just tired of being mistaken for the T. Rowe Price Capital Appreciation Fund.

Effective on or after July 9, 2019, VanEck Vectors Global Alternative Energy ETF (GEX) becomes VanEck Vectors Low Carbon Energy ETF. The fund’s history of producing negligible-to-negative returns might be a more pressing issue than its name.

Effective July 9, 2019, Virtus Newfleet Bond Fund will change to Virtus Newfleet Core Plus Bond Fund and Virtus Newfleet Low Duration Income Fund will change to Virtus Newfleet Low Duration Core Plus Bond Fund.

The former American Beacon SGA Global Growth fund is now available as the Virtus SGA Global Growth Fund (SGAAX). Small fund. Five-star rating. Top 2% returns since launch. Same management team since launch.

Effective July 22, 2019, Wells Fargo Traditional Small Cap Growth Fund (the “Fund”) becomes Wells Fargo Fundamental Small Cap Growth Fund. Zero Mostel mourns.


Let’s start with The Big List of Dying Funds.

  Liquidation Date
Alambic Mid Cap Value Plus Fund  (ALMVX)
Alambic Small Cap Value Plus Fund (ALAMX)
June 30, 2019
Balter L/S Small Cap Equity Fund (BEVRX) June 28, 2019
Bishop Street Dividend Value Fund (BSLIX) June 26, 2019
BNY Mellon Absolute Insight Multi-Strategy Fund (MAJAX) July 19, 2019
Brandes Value NextShares June 28, 2019
Brandes Global Opportunities Value Fund (BGOAX) June 28, 2019
Columbia Beyond BRICs ETF (BBRC)
Columbia EM Quality Dividend ETF (HILO)
Columbia India Infrastructure ETF (INXX)
Columbia India Small Cap ETF (SCIN)
June 14, 2019
ETF Industry Exposure & Financial Services ETF (TETF) June 20, 2019
Franklin India Growth Fund (FINGX) September 13, 2019
Franklin K2 Global Macro Opportunities Fund (FKMAX) June 24, 2019
Goldman Sachs Tactical Exposure Fund (GSMPX) June 28, 2019
Hartford Long/Short Global Equity Fund (HLOAX) July 11, 2019
Intrepid International Fund (ICMIX) September 27, 2019
JPMorgan International Equity Income Fund (JSEAX) July 8, 2019
Pax Mid Cap Fund (PWMDX) July 15, 2019
PSI Total Return Fund (FXBAX) June 27, 2019
Stadion Alternative Income Fund (TACFX) August 16, 2019
Templeton Emerging Markets Balanced Fund (TAEMX) June 24, 2019
Templeton Global Currency Fund October 10, 2019
WBI BullBear Global High Income ETF (WBIH)
WBI BullBear Global Rotation ETF (WBIR)
June 14, 2019

Three notes about that list:

  1. Investing outside the US is proving fatal. Of the 21 funds on this list, two-thirds invested globally or internationally.
  2. Bishop Street was an excellent fund, period.
  3. Templeton EM Balanced was a solid fund benchmarked inappropriately. Morningstar benchmarks EM balanced funds against EM equity funds, a decision excused by the “too few for a peer group” argument. EM balanced funds produce equity-like returns with far lower risk but get buried in the equity group.

A number of funds are getting merged into other funds.

Disappearing fund Surviving fund
Broadview Opportunity Fund Madison Small Cap Fund
FDP BlackRock Capital Appreciation Fund BlackRock Capital Appreciation Fund
FDP BlackRock Equity Dividend Fund BlackRock Equity Dividend Fund
FDP BlackRock International Fund BlackRock International Fund
Royce Micro-Cap Opportunity Fund Royce Opportunity Fund
Royce Small/Mid-Cap Premier Fund Royce Pennsylvania Mutual Fund
Royce Small-Cap Leaders Fund Royce Pennsylvania Mutual Fund
Touchstone Credit Opportunities Fund Touchstone Credit Opportunities II Fund
Wells Fargo Asia Pacific Fund Wells Fargo Emerging Markets Equity Income Fund
Wells Fargo Capital Growth Fund Wells Fargo Endeavor Select Fund
Wells Fargo Small Cap Value Fund Wells Fargo Small Company Value Fund

I’m struck mostly by the continued unwinding of the Royce Funds. Following their acquisition decades ago by Legg Mason, they rolled out a slew of virtually indistinguishable small-cap value funds. They’ve been unwinding that decision for about a decade now.