Yearly Archives: 2019

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.

SMALL WINS FOR INVESTORS

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.

OLD WINE IN NEW BOTTLES

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.

OFF TO THE DUSTBIN OF HISTORY

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.

March 1, 2019

By David Snowball

Dear friends,

It’s spring and it’s about 10 degrees above zero here which means it’s Spring Break at Augustana College! Winter term on Augie’s singularly bizarre academic calendar runs from roughly Halloween to Valentine’s Day, gulping down Thanksgiving, Christmas, and New Year’s along the way. We offer, I suppose, the antithesis of the old MTV spring break beach parties with raucous guys dancing with girlfriends clad only in whipped cream. Nope, Swedish-Lutherans we, we hand the kids their parkas and urge them to go off and have a good time, but just be back before too late!

The break gives me occasion to read, some of which (a friend’s novel) was deeply engaging and some of which (virtually every online “news” story) was deeply disturbing. Not that the news was disturbing so much as the lunacy of the folks they allow near keyboards. It appeared at times as if the financial analyses were being offered up by the folks from Monty Python’s Flying Circus.

I mourned the passing of Jack Bogle, who was sometimes wrong but never anybody’s fool. I pondered the disclosure that Bill Gross has Asperger’s Syndrome, an autism spectrum condition, and that he attributed part of his long string of successful investments to it. And I thought a bit about the different sets of tales coming from Fidelity: the parent company spinning gold out of straw while even their best managers can’t hold investors.

Three Tales of the Faithful

Fidelity first appears in English in the 15th century, from Middle French fidélité, from Latin fidēlitās, from fidēlis (“faithful”).

Tale the First: Shearing the sheep

I had the opportunity to read the 2018 annual report of FMR, Fidelity Investment’s parent company. The company has much to celebrate. First, they’re giving away money like holiday candy. Their funds have zero minimums. Expense ratios are down. New index funds that charge nothing, nothing, nothing! are drawing billions. And Fidelity has launched no-commission, low expense ETFs including sector ETFs charging just 0.084%. That is $0.84 for every $1,000 invested. It’s like Mother Teresa is running the place.

And yet, somehow Fidelity is miraculously raking in record piles of cash. Revenue was up 11.5% and income was up 18.6%. Expenses were up 8.6%. And yet, the number of customers was up just 6-7%. Assets under management were down as were assets under advisement.

If the amount of money Fidelity takes in grows faster than the number of accounts, and it grows even when the value of those accounts fall, one begins to suspect that somehow Fidelity – despite record largesse – has arranged things so as to extract greater amounts of money from their investors than ever before.

Which, by the way, is the fundamental imperative of the financial services industry.

Tale the Second: The Losing Bet

I have never made money betting against Joel Tillinghast.

Mr. T. manages Fidelity Low-Priced Stock Fund. He is, by all accounts, a genius. Peter Lynch, famed manager of Fidelity Magellan, explains in the Foreword to Mr. T’s book Big Money Thinks Small, how he came to be at Fidelity. Lynch writes that his secretary eventually put Tillinghast through, saying there was a “sweet guy” from the Midwest who kept calling. She thought he might be a farmer. Lynch said he’d give him five minutes. An hour later, he said, “We’ve got to hire this guy.”

Good call. In the 1980s, Mr. Tillinghast discovered a stock market anomaly – low-priced stocks, those priced at $5.00 a share or less – were substantially mis-priced, perhaps because managers were squeamish about something that felt so … flimsy. He convinced Fidelity that he could make a lot of money investing in these low-priced stocks if only they’d give him a fund to do it with. And they did: Peter Lynch and Fidelity chairman Ned Johnson seeded the 31-year-old’s new Low-Priced Stock Fund with their own money.

A quick scan of the fund’s performance in the MFO Premium database shows:

Inception – 2019: Low Priced Stock beats its peers by 3.2% annually. $10,000 invested alongside Lynch and Johnson in 1989 would have grown to $379,000 today. The same money in one of its peers? $158,000-167,000, depending on the group. That’s a … ummm, $220,000 premium.

Over the past 20 years: Low-Priced wins by 1.9% annually.

Over the full market cycle: Low-Priced wins by 0.8% annually. Likewise it won over the entire preceding market cycle.

During the 2007-09 crash: Low-Priced wins by 2.7% annually.

It also wins during the subsequent up-cycle, and over the past year and the past five years and in three of the past four years and in every year when the peer group has lost money, it beats indexes, benchmarks, peer groups and ETFs …and …and …and ….

And the management is stable and deeply invested in the fund. The expenses (0.62%) are low and falling. Turnover is low and the fund is tax-efficient. Morningstar celebrates it. MFO celebrates it.

All of which, understandably enough, convinced investors to flee in droves.

This is a pretty powerful picture. It depicts monthly outflows from Low Priced Stock in 59 of the past 60 months, despite offering everything that an equity investor might reasonably (or unreasonably) hope for: discipline, low-cost and winning performance.

As investors, we need to ask “is it me, Lord?” Am I the one dumb enough to ignore all of the available evidence and invest based on fad rather than fact? As fund advisors, we need to ask, “if cheap and successful doesn’t work for Mr. T., what does it say about how we should approach our investors and our approach to creating a sustainable business?” Many fund companies continue to pursue the same doomed approach: “Let’s cut our expense ratio by a few basis points, let go an analyst or two, and talk about our market-beating performance.” Dear friends, you can’t nibble your way out of this problem and you can’t win by trumpeting fleeting returns. You need to listen much more seriously to your investors and ask the hard question, what purpose do we serve?

Tale the Third: Passing in Silence

Fidelity announced this month the impending retirement of the long-time manager of Fidelity Magellan (FMAGX), once more of a starship than a flagship in the galaxy of funds. The announcement of the departure of The Great Man – whether Johnson, Smith, Lynch or Vinik – would have been front page news and fodder for a breaking story on CNBC.

Today? Listen to the sound of the crickets. Morningstar just ran Russ Kinnel’s story, “7 Funds with Big Manager Changes” (2/25/2019). Westwood Income Opportunity (WHGIX) made the list, Fidelity Magellan did not.

Perhaps that’s not surprising. Magellan, once the largest actively-managed equity fund in existence, is not even one of Fidelity’s 20 largest funds anyone. At $16 billion, it sits 25th on the list … and you couldn’t name even a handful of the 24 ahead of it. Nor, I suspect, could you name the manager who, after eight years at the helm, is about to go.

Jeff Feingold. He’s been replaced by Sammy Simnegar, Fidelity’s very successful emerging markets manager.  It might worry Fidelity that we’re able to identify at a glance a manager who’s been gone for 29 years far more easily and naturally than the guy who’s actually been running the show this century.

Before you point, in celebration or condemnation, to ETFs

You really should read a singularly thoughtful, well-written and well-researched piece by Elizabeth Kashner at ETF.com. It’s entitled “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 that 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. It’s worth both reading and thinking about.

Thanks!

To your all, and welcome to Roberto Plaja, our first international (much less first Swiss) subscriber! Thanks, as ever, to our subscribers – the folks who’ve set up modest recurring monthly contributions through PayPal — Greg, William, Brian, David, Doug, and Deb. Wow! We can’t thank you enough for your help. Finally, thanks and welcome to Trev, Martin and John. We really do appreciate the help!

We’re beginning to plan for the warmer months to come. MFO will be at the Morningstar Investment Conference in Chicago again this year, but we’ll be less present than usual. The conference runs from Wednesday, May 8 to Friday, May 10. Chip and I are both still in session at our colleges then, so she won’t be able to attend at all and I will be around only on Wednesday, May 8. We expect that our colleague Charles Boccadoro, master of MFO Premium, will be around throughout the conference. If you’d like a chance to chat with me, check your Wednesday schedule and drop me a note. Likewise, reach out to Charles if you’d like to talk MFO Premium, data, analytics, AI for funds or a hundred other topics.

And, if you’re trying to find us in June, you’ll have to look for the happy Americans walking the beaches of the Dingle Peninsula, County Kerry, Ireland.

Take great care!

david's signature

The Investor’s Guide to the End of the World

By David Snowball

Human actions are causing our planet’s climate to become increasingly unstable. We are beyond the point where that fact is open to debate. Most Americans, Republicans and Democrats both, now accept the reality of climate change. That’s based on fascinating data visualizations provided by the Yale Program on Climate Change Communication. Republicans, far more than Democrats and others, are unsure that there’s a human role or that scientists have reached agreement on what is happening.

The short version is that every serious inquiry reaches the same conclusion: the climate is becoming unstable, human activity is driving the change, the instability is immediate and the effects are potentially catastrophic. For folks who would like to learn more about the subject from a source that’s expert, unbiased, and accessible, NASA’s Global Climate Change is quite informative and easy to follow.

Why NASA? Because NASA and  National Oceanic and Atmospheric Administration (NOAA) are  the federal government’s lead climate and weather agencies, often working in partnership to gather, test and analyze data. (Thanks, Leah!)

The rising levels of heat-trapping gases in the atmosphere – not just CO2, but also methane, nitrous oxide and others – have both physical and biological effects. There is very good evidence of the physical risks – temperature rise, sea level rise, greater intensity of storms, greater frequency of extreme weather events – and somewhat more question on the biological risks. There’s some evidence, for example, that plants like rice will carry one-third less nutrients and that some plant species (coffee!!!! cacao!) might be pushed toward extinction, but that stuff strikes me as muddier than the physical effects.

At this point, we’ll offer two different paths. The section which immediately follows, The Climate Consensus, is a quick guide to some of the latest reports on climate destabilization, for those interested in learning a bit more. Folks with no such interest might skip to the following section, Climate Conscious Investing Options.

The Climate Consensus

By “consensus,” we mean “a general agreement” and, in particular, “a general agreement among those whose qualifications have earned them the right to a professional judgment.” Yes, I know that sounds vague. At base, there have been seven studies of the beliefs of scientists who actively research the world’s climate; depending on the particular study, you find between 91-100% of climate scientists in agreement. Against that, there are several online petitions you can sign where you simply type your name and your academic background and hit “submit.” The largest such petition claims 31,000 signees, of whom 39 (0.01%) claim to be climate scientists.  It appears as if some of the signatures might date to the late 1990s, when the evidence available was much more limited, and it appears that a number of the signatories are … well, long dead. (I searched 10 random names from among the PhDs whose last names started with “A.” Two were dead, in 2007 and 2009, respectively; two exist nowhere on the internet except on this survey; and six were non-climate folks with specialties from pulmonology to mathematics.)

The breadth of the consensus is illustrated by important, authoritative reports released in the last few months.

Lawrence Livermore National Laboratory (2019): less than one chance in a million

Researchers from the Lawrence Livermore National Laboratory have concluded that there’s less than one chance in a million that the changes we’re seeing are natural. Technically, the “five sigma” level of statistical significance. The lead author says, “The narrative out there that scientists don’t know the cause of climate change is wrong. We do.”

U.S. Department of Defense (2019): almost all military installations threatened

The U.S. Department of Defense issued their Report on the Effects of a Changing Climate (2019) which tracks “the significant vulnerabilities from climate-related events in order to identify high risks to mission effectiveness on installations and to operations.” This report focused only on the vulnerability of individual military bases to climate-related threats such as fires and floods, but it follows in a long-line of DOD studies which highlight the broad national security implications of rising sea levels and changing weather patterns. One of the earlier reports was National Security Implications of Climate-Related Risks and a Changing Climate (2015). It begins, “DoD recognizes the reality of climate change and the significant risk it poses to U.S. interests globally.”

U.S. Director of National Intelligence (2019): hazards are intensifying

The Worldwide Threat Assessment of the US Intelligence Community (2019), released by the Director of National Intelligence, identified climate change as a “global threat.”

Global environmental and ecological degradation, as well as climate change, are likely to fuel competition for resources, economic distress, and social discontent through 2019 and beyond. Climate hazards such as extreme weather, higher temperatures, droughts, floods, wildfires, storms, sea level rise, soil degradation, and acidifying oceans are intensifying, threatening infrastructure, health, and water and food security.

U.S. National Climate Assessment (2017, 2018): no convincing alternative explanation

The federal government’s National Climate Assessment includes separate reports on the science of climate change (2017) and the effects of climate change (2018). The science report is pretty definitive:

This assessment concludes, based on extensive evidence, that it is extremely likely that human activities, especially emissions of greenhouse gases, are the dominant cause of the observed warming since the mid-20th century. For the warming over the last century, there is no convincing alternative explanation supported by the extent of the observational evidence.

In addition to warming, many other aspects of global climate are changing, primarily in response to human activities. Thousands of studies conducted by researchers around the world have documented changes in surface, atmospheric, and oceanic temperatures; melting glaciers; diminishing snow cover; shrinking sea ice; rising sea levels; ocean acidification; and increasing atmospheric water vapor.

Intergovernmental Panel on Climate Change (2018):  as much as possible, as fast as possible

The most broad-ranging assessments come from the Intergovernmental Panel on Climate Change (IPCC), a UN agency whose “scientists volunteer their time to assess the thousands of scientific papers published each year to provide a comprehensive summary of what is known about the drivers of climate change, its impacts and future risks, and how adaptation and mitigation can reduce those risks.” After a review of over 6000 published scientific reports on climate, the IPCC concluded in October 2018 that “we need to cut carbon pollution as much as possible, as fast as possible.” The Guardian’s ongoing climate change coverage occurs in a feature called Climate Consensus – the 97%, which refers to the finding that 97% of all peer-reviewed climate papers and publications point toward a human role in climate change.

On the impulse to obscure the information

To date, the executive branch’s response to report after report produced by folks charged with protecting our national security has not be exemplary. The Department of Defense report, quoted above, has been removed from the DoD website which is a typical response; the Columbia University Center for Climate Change Law has documented 194 (and climbing) cases of the political wing of the executive branch censoring its own scientists’ or suspending their work, with a fair amount of that work being misquoted by members of Congress. The interface is a tiny bit clunky, you’ll have to select “agency” then scroll down to the letter “D” where you’ll see actions involving the Department of Defense, Department of the Interior and so on. The administration’s most-recent initiative is to create a Presidential Committee on Climate Security led by a guy who (a) is not a climate scientist but nonetheless (b) has dismissed the thousands of climate researchers as “a cult movement” and who (c) endorses what’s sometimes called “the greening of Planet Earth,” a vision of a sort of New Eden propounded by the National Coal Association in the 1992 video of the same name.

Fossil fuels will either run out, destroy the planet, or both. The only possible way to avoid this outcome is rapid and complete decarbonization of our economy. Needless to say, this is an extremely difficult thing to pull off. It needs the best of our talents and innovation, which almost miraculously, it may be getting. It also needs much better than normal long-term planning and leadership, which it most decidedly is not getting yet. Homo sapiens can easily handle this problem, in practice; it will be a closely run race, the race of our lives.

Jeremy Grantham, investor and founder of Grantham, Mayo, van Otterloo (GMO), “The Race of Our Lives,” keynote address at the Morningstar Investment Conference (2018)

Climate Conscious Investing Options

Our individual actions, whether it’s buying LED bulbs or not buying fossil fuel stocks, will neither save nor doom the planet. Too much of our energy consumption is determined by factors beyond our control: if it’s a two-hour commute to work (welcome to Chicago!) and there’s no plausible alternative to driving, then we drive and our choice of a Corolla versus a Sequoia makes a marginal difference to the planet. At base, collective action, that is, public policy, determines whether the $30 trillion in needed infrastructure gets built or not.

Worldwide, though, recognition of climate destabilization is not a partisan issue. With relatively minor differences, conservatives and liberals elsewhere both look at the evidence, gulp and nod. Below are those results from a survey of citizens in 18 developed nations outside the US.

Folks on the left and right often disagree on how to address the problem, but they tend to agree that there is a real problem. As a result, there’s broad support (outside the US) for vigorous regulatory action.

One popular proposal is setting a price on, and charge for, carbon emissions. Homeowners pay now to have their waste, whether trash or sewage, disposed of. The city’s charge reflects of cost of neutralizing with a pollutant in which raw sewage full of pathogens leaves homes and businesses, it’s collected through several processes, resulting in water that can be safely discharged and, here in Iowa anyway, in bio-solids that can be turned into finished compost that’s sold at a profit. At base, it’s possible to treat waste released into the air in about the same way we treat solid waste or sewage.

The popularity of those ideas is important, because they introduce regulatory risk into the mix of factors for investors to consider. If BP is suddenly paying (pick a number) $50 billion a year for the carbon pollution their product creates, the value of their stock might require dramatic adjustment.

Finally, the popularity of ESG-screened investments is soaring. Morningstar recently reported that the number of ESG funds and ETFs rose 50% (from 235 to 351) in just one year while flows are 30 times greater than they were just a few years ago. Jon Hale, their director of sustainable investing, reports that

…the average inflow per year for [ESG] funds was about $135 million [each year from 2009-2012] –very, very small, tiny. Now, for the past six years the average flow has been about $4.5 billion and $5.5 billion just in the last year.

This reflects the fact that investors, institutional and retail alike, are expressing steadily rising levels of concern about investing in unsustainable or seemingly irresponsible businesses. As Millennials enter their peak earning (and investing) years, the movement of capital away from “irresponsible” businesses and toward “responsible” ones, will increasingly burden corporations. That’s sometimes referred to as reputational risk.

To recap: four sorts of risks, physical, biological, regulatory and reputational. While the big picture narratives about the state of the planet in 2050 or 2100 seem reassuringly distant and abstract, these risks can impact your portfolio in the short term. That’s evidenced by the recent bankruptcy of Pacific Gas & Electric (PG&E) triggered by two years of raging wildfires in California; PCG stock made up 3% of the portfolios of bunches of mutual funds.

Your options as an investor: (1) divest yourself of the stocks most exposed to carbon and related risks; (2) invest in stocks – and, though this is harder, bonds – of firms that might benefit from new regulatory regimes and public demands, (3) invest in stocks of resilient firms; those that are adept at adapting and re-allocating capital and (4) speaking up.

Divest: the good news is that indexes which exclude carbon polluters slightly outperform indexes with include them. For example, the S&P 500 has about the same returns whether energy companies are included or excluded, so a low-carbon strategy costs little. The bad news is that some of the firms central to fossil fuel extraction and refinement are also central to renewable energy development and battery tech.

The website fossilfreefunds.org tracks the carbon footprints of hundreds of funds by analyzing the exposures in their portfolios. They list a number of funds, often growth-oriented, with zero exposure to the extraction, processing or combustion of fossil fuels. Attractive options include Brown Advisory Sustainable Growth Fund (BIAWX) and Green Century Balanced (GCBLX). Brown is an MFO Great Owl fund, meaning that it has posted risk-adjusted returns in the top 20% of its peer group for every tracked period greater than one year. My colleague Dennis Baran recently profiled BIAWX.

Green Century got a new management team 11 years ago, and that team has modestly but consistently outperformed its peers.

  Annual returns Max drawdown Standard dev. Downside dev. Ulcer Index Bear market dev. Bear rating Sharpe ratio
Green Century Balanced 5.1% -34.2 10.6 7.5 9.3 7.0 2 0.43
Lipper peer group 4.7 -40.7 12.0 8.6 11.5 8.1 5 0.36

Green cells highlight places where the fund has outperformed its peer group over the 11+ years of the current market cycle.

ETF investors have choices like SPDR MSCI ACWI Low Carbon Target ETF (LOWC) and SPDR S&P 500 Fossil Fuel Reserves Free ETF (SPYX).

Invest: there is compelling evidence at a broad ESG-screened fund can form the core of a long-term portfolio, with no loss of returns or escalation of risk. As a broad generalization, any of the Parnassus Funds. Parnassus Core (PRBLX) and Parnassus Mid-Cap (PARMX) both earned Great Owl designations, while Parnassus Endeavor (PARWX) has somewhat above-average volatility but vastly above-average returns for pretty much every meaningful trailing period. Fans of smart-beta ESG investing might look to the work of Northern Trust Asset Management who, we noted in writing about Northern US Quality ESG (NUESX), “has made a major commitment to responsible investing.” That includes active funds, indexes and smart beta ETFs.

Finally, with most future growth in greenhouse gas emissions coming from Asia, it makes a lot of sense to consider investing in innovators in that half of the world. The cleanest option is Matthews Asia ESG (MASGX), which has substantially outperformed its Pacific stock peers since inception and which benefits from Matthews’ unparalleled depth in the Asia arena. More broadly, a handful of exceedingly solid EM equity funds – Morningstar medalists – also receive Morningstar’s highest sustainability rating: Harding Loevner Emerging Markets (HLEMX), Seafarer Overseas Growth & Income (SFGIX) and Virtus Vontobel Emerging Markets Opportunities (HEMZX, still highly regarded despite the loss of star manager Rajiv Jain two years ago).

Innovate: some managers look for funds that are, in a way, resilient. They have a structural and cultural commitment to innovation. Two outstanding funds with such a focus are Guinness Atkinson Global Innovators (IWIRX) and Seven Canyons World Innovators (WAGTX, formerly Wasatch World Innovators).

  Annual returns Max drawdown Standard dev. Downside dev. Ulcer Index Bear market dev. Bear rating Sharpe ratio
Guinness Atkinson Global 6.9 -56.1 18.8 12.8 17.5 12.2 8 .034
Seven Canyons World 6.4 -59.2 17/9 13.0 18.7 12.5 4 .033

Green cells indicate places where the funds have outperformed their respective peer groups over the 11+ years of the current market cycle.

The two funds have earned four- and five-star ratings, respectively, from Morningstar. Both are flexible, global funds run by small, stable management teams. Both have outperformed their peers over the 11+ years of the current market cycle. Guinness Atkinson has a purely large cap portfolio while Seven Canyons invests the vast majority of its portfolio in micro- to mid-cap stocks.

Speak up:  in my day job, I’m a communication studies professor. My doctorate is in rhetorical theory and practice. For a quarter century I was a debater, then a debate coach. You had to see this coming, right?

If you invest directly in equities, contact the management of corporations in which you invest and express your views to them. You can find out how your managers think about, and respond to, the environmental risks around their activities by reading their annual Form 10-K, which is available from both the corporation and the SEC. The 10-K will list all of the risks that the corporation faces and how it’s responding to them. By way of illustration, General Motors (2018) writes:

To mitigate the effects of our worldwide operations on the environment, we are converting as many of our worldwide operations as possible to landfill-free operations which reduces greenhouse gas emissions associated with waste disposal. … approximately 50% of our manufacturing operations were landfill-free.

We continue to search for ways to increase our use of renewable energy and improve our energy efficiency … We have committed to meeting the electricity needs of our operations worldwide with renewable energy by 2050 … We continue to seek opportunities for a diversified renewable energy portfolio including wind, solar, and landfill gas.

And so on, in some detail. Like what you read? Congratulate them. Don’t like it? Chastise them.

If you invest indirectly through funds or ETFs, contact the adviser of the fund. Really. I do this all the time. They’re people. They answer the phone. Morningstar publishes a sustainability grade for every domestic equity fund and FossilFreeFunds.org does a similar five-star sort of rating.

and

Check your holdings’ rating. Like what you see? Congratulate the advisors. Don’t like it? Chastise them.

If you live in a democracy, contact the people you elected to represent you. The League of Conservation Voters publishes an environmental voting record for every member of the US Congress. Check out your representative. If you like what you see … well, you know the rest.

Bottom Line: Individual responsibility can’t save the planet. And yet, it’s still the right thing to do. My home is over-insulated and all of the lights are LEDs. My car gets 40 MPG highway, and still I walk rather than drive whenever I can. I eat no red meat and only sustainably-harvested seafood. None of which will save the planet, and yet all of which saves me. Collectively, such actions are good for my health, physical, mental and spiritual. And, for all of us, should be quite enough reason to do them.

Vanguard – Going, Going, Gone!

By Ira Artman

January 2019 will be remembered by mutual fund and Vanguard investors for a few things.  Besides the stock market recovery that largely reversed the year-end 2018 selloff, the following two things occurred:

  • On January 16th, John Bogle, age 89, died in his home in Pennsylvania. Mr. Bogle’s efforts on behalf of indexing and individual investors were widely honored and remembered.
  • On January 22nd, Vanguard created the PDF for the Wellington Fund Annual Report, dated November 30, 2018.  The US Postal Service distributed paper copies of this report during the first week of February.

Compare, for example, the Fund Profile for Wellington Fund that was included with the May 31 2018 Semi-Annual Report, with the information included in the November 30 2018 Annual Report. 

FIGURE 1: Fund Profile Wellington Fund Semi-Annual Report – 05-31-2018

FIGURE 2: Fund Info Wellington Fund Annual Report – 11-30-2018

You will notice something peculiar – Vanguard  has eliminated virtually all of the Fund Profile information from the Annual Report.

Gone, for example, are the Wellington Fund’s stock market symbols (VWELX or VWENX, for Investor and Admiral share classes, respectively),  numerous stock portfolio metrics, including: number of stocks held, market cap, P/E and P/B ratios, return-on-equity, dividend yield, foreign holdings percentage, ten largest stocks, fund R2 and beta.

Gone as well are fixed income metrics including the number of bonds held, yield-to-maturity, average coupon, duration, and average effective maturity.  Also missing are summary statistics on the bonds’ credit quality.

Long-time Vanguard experts and observers have remarked upon other recent changes in Vanguard’s disclosures and statements.

Daniel P. Wiener, editor of The Independent Adviser for Vanguard Investors and co-founder of Adviser Investments in Newton, MA, believes the changes may be related to Vanguard’s efforts to push folks to the web, in Vanguard’s continuing effort to cut costs. He notes that the second page of the new Wellington Fund annual report includes the following message:

Important information about access to shareholder reports

Beginning on January 1, 2021, as permitted by regulations adopted by the Securities and Exchange Commission, paper copies of your fund’s annual and semiannual shareholder reports will no longer be sent to you by mail, unless you specifically request them. Instead, you will be notified by mail each time a report is posted on the website and will be provided with a link to access the report.

You may elect to receive paper copies of all future shareholder reports free of charge. If you invest through a financial intermediary, you can contact the intermediary to request that you continue to receive paper copies. If you invest directly with the fund, you can call Vanguard at one of the phone numbers on the back cover of this report or log on to vanguard.com. Your election to receive paper copies will apply to all the funds you hold through an intermediary or directly with Vanguard.

Wiener states that  “the idea, of course, is that if folks don’t receive dead-tree [paper] reports, or they find them inadequate, they’ll go to the web… Vanguard, having shaved costs to the bone, and with service issues continuing to plague them, needs to find ways to continue to cut costs and at the same time redirect spending to the web. They’re well behind the competition in that regard so now they’ve gotta catch up.”

David Snowball points to Joseph DiStefano’s February 7  2019 column on Philly.com –

Vanguard SEC filings drop ‘at-cost,’ ‘no profit’ claims that were dear to late founder John Bogle.

DiStefano writes that Vanguard’s most recent statements to the Security and Exchange Commision (SEC) and investors no longer claim, as they once did, that:

The Vanguard Group is truly a mutual mutual fund company. It is owned jointly by the funds it oversees and thus indirectly by the shareholders in those funds. Most other mutual funds are operated by management companies that may be owned by one person, by a private group of individuals, or by public investors.

Nor do Vanguard’s recent statements claim (as they once did) that:

 Vanguard operates “on an at-cost basis,” as if the funds charge the affiliated management company only what it costs for fund services, without the usual business overhead and profit margins.

As far as I can tell, Mr. Bogle never said “Know what you own, and know why you own it.”  Those wise words were written by former Magellan Fund manager Peter Lynch, in his 1989 book One Up On Wall Street.

But it is not 1989 anymore, it is 30 years later – it is 2019.  The year that John Bogle died. The year that Vanguard decided that you did not need to know what you own.

FIGURE 3: Going, Going, Gone!

Ketchup is Ketchup, Mustard is Mustard

By Edward A. Studzinski

The typical American of today has lost all the love of liberty that his forefathers had, and all their disgust of emotion, and pride in self-reliance. He is led no longer by Davy Crocketts; he is led by cheer leaders, press agents, word-mongers, uplifters.

         H.L. Mencken, “On Being an American” (1922)

As we move forward, now more than half-way through the first quarter of 2019, it has been interesting to watch the change in psychology among investors, both individual and institutional. We have gone from fear of a bear market with all that that might entail in terms of wiping out permanent capital to fear of missing the train perhaps leaving the station as we either start the next leg up of a bull market, or perhaps start a new bull market. Some of that is a mindset of trying to make back some of the losses that, in a panic mode, investors might have realized. Some of it is a recognition that, with the Federal Reserve is less willing to continue raising rates as originally laid out under a new chair in 2018, the only game in town may be a return to equities.

In that vein, one of the most interesting disclosures was the write-down of assets by both Berkshire Hathaway, as well as investor group 3G Capital from Brazil. This reflected their assessment of the current value of the Kraft-Heinz brands, as impaired by changes in tastes and habits of the food shopping public. That is the rationale as to why Mr. Buffett has had a rare toe stub.

The reality is somewhat more complex than that. The argument in favor of investing in consumer branded food companies has been that the brands had a cachet. They often related to the childhood memories of the consumer, which allowed for pricing power over alternatives in the marketplace such as private label. And under that umbrella, from a capital allocation view point such companies would be able to dedicate a large part of the cash flows to REINVESTMENT in the brands, providing for a constantly growing annuity from those investments.

What changed? Well, first, the nature of the competition. If you go back some twenty-odd years, private label was a matter of horrible packaging (black and white cheap cardboard), often placed in a separate aisle from the rest of the store, and often less clean than the rest of the store. And that was before one got to the ingredients used, and the resulting taste of the product. The intent was pretty much to provide a product that no consumer would want to purchase or consume. The consumer would hopefully run screaming to other parts of the store to purchase the traditional branded items.

Fast forward five to ten years, and one of the things that happened was Walmart. They pushed constantly on the branded manufacturers to cut their wholesale product prices to Walmart. The end result was that Walmart’s margins would be superior while providing a lower price point for the consumer. And to win and keep Walmart’s business and maintain their own margins, the branded companies found themselves searching for ways to take out costs. We started seeing product reformulations, changes in packaging, and outsourcing of product manufacturing to contract manufacturers to reduce labor costs. We saw the arrival of the investment bankers, with their ideas of synergies that could be obtained by merging companies with complementary product lines. Savings would come from the scale of raw materials purchasing for ingredients, packaging, and manufacturing costs. They would also look for savings in the marketing and advertising costs that were a large factor in the price the consumer saw in the supermarket.

Fast forward another five years. We see a world where pricing power has shifted from the manufacturers to the retailers – the Costco and Kroger companies of the world. First, private label products became brands in and of themselves. No need for advertising and marketing budgets required to support a brand. Kroger is the largest private label manufacturer in this country. Its own plants and sourcing, allow it to control quality while making a margin equal to or superior to the branded companies manufacturing similar products.

The same story applies with Costco – why purchase Hellman’s Mayonnaise when for substantially less you can purchase the Kirkland Costco brand, and it tastes better! And all of this is before we address the question of food inflation. That is a subject not talked about by either political party over the last ten years. As I have mentioned in previous months, it is obvious to anyone who does the food shopping, and sees the dollar purchasing power shrinkage resulting from the packaging shrinkage. And that is before you apply the taste test to the various reformulations.

These trends did not happen overnight. The millennials do shop and eat differently. But by the same token, prior generations also have been forced as a matter of survival to also shop and eat differently. Clearly the Great Recession forced many families to change their food and consumer item shopping habits. And once they switched to, for instance, the Kroger or Safeway private label products in such things as pasta or cereal, there would be no going back when happy days returned.

Now, we do not need to have a tag day for either Mr. Buffett or the people at 3G. They have profited handsomely over time. This should be a wake-up call to them to rethink where appropriate their allocation of capital. But one does wonder about the extent to which these pricing pressures will spread to other areas.

Automobile insurance is a regulated product and a commodity product at the end of the day. Cell phones likewise have the potential to morph into being viewed as a commodity product. What this really means is that we do face, in the investment world, the continuing potential of not just technological disruption, but also brand disintermediation in areas where we never thought we would see intense price and product competition arising.

The Ten-Year Bull

By Charles Boccadoro

“Happy days are here again! The skies above are clear again. Let us

sing a song of cheer again, Happy days are here again!”

Jack Yellen

February marked the tenth full year of the current bull market, which began in March of 2009. For those of you that held steady through the great recession or have just been lucky or wise enough be invested over this period, you’ve been well rewarded.

Through much of its first years, this bull market had little love, especially in late 2011 when it looked like we were headed back into bear territory. There have been a couple modest retractions since: the taper tantrum of 2013, January 2016, and this past December.

But for the most part, it’s been a fairly steady upward ride, including periods of extremely low volatility and many consecutive months of positive returns (eg., Historically Low Volatility).

Examining fund performance across full, down, and up market cycles, is one of the principal reasons we established the MFO Premium screening tools. There have been five market cycles since 1960, as described in Mediocrity and Frustration. Here is a sampling of outputs of risk and performance metrics since March of 2009.

The five basic indices … 90-day T-Bill, US aggregate bond, US 60/40 equity/bond, SP500, and all-country x-US:

That’s right! More than 16.5% annualized for the S&P. About 6.5% more than its long-term average. It translates to a 367% increase since inception. The rolling 3-year average never dropped below 8.8% annualized.

You suffered through the 16% “correction” in late 2011, being underwater for 10 (more) months, but traditional alternatives offered little: cash paid nothing, bonds only half what you’ve gotten used to since 1980 … on an absolute basis, and foreign equities have received little love in comparison. Fortunately, for those with a more tempered risk appetite, the US 60/40 balanced index rose nearly 200%.

Has it made up for the preceding bear?

Below find the same indices over the full cycle and a look back at the calendar-year returns:

The  answer is? Likely yes. The annualized return over the cycle is more than 7.5%, still below the long-term average, but excess return (APER), which is return above cash, is 7.1% annualized, about 2% above the long-term average. Excess returns for bonds is also about 50 basis points over its long-term average. Investors in all-country ex-US based funds lost another decade plus, unfortunately.

The top five sector equity funds, based on top-quintile absolute and risk-adjusted return versus peers, during the bull are presented below … tech and retail funds like T Rowe Price Global Technology PRGTX and Fidelity Select Retailing Portfolio FSRPX delivered eye-watering annualized returns of 25%, nominally, or a whopping 800% total. (Names highlighted in dark blue are MFO Great Owl funds.)

Here are the full-cycle (thank you VintageFreak) and calendar-year returns for those same five funds:

Similarly, below please find the top actively managed mutual funds … among them, T Rowe Price New Horizons PRNHX rewarded with 700% return … more than 6% per year above peers.

The top performing ETFs included funds by Invesco (3!), State Street, and WisdomTree, including two “value” ETFs (in name at least) … delivering upwards of 600%:

Finally, setting the MFO Risk metric to 3 (“moderate”), below are the best performers during this bull run. The venerable T Rowe Price Capital Appreciation PRWCX takes top honors, tripling its investors’ returns … it now exceeds $31B in assets under management (AUM). The list includes much smaller but just as seasoned Bruce BRUFX , which delivered more than 13% annualized.

While this bull is still modest compared with either of the two bull markets in the ’80s and ’90s, both of which racked-up 800% absolute return, it may no longer be “mediocre.” In any case, as David often reminds us, now seems like a good time to be sure you’ve allocated consistent with your risk tolerance and investment horizon … better now than when the market falls.

This article has been revised from original to reflect performance through February 2019 and to include more full-cycle comparisons.

Launch Alert – DoubleLine Colony Real Estate and Income Fund (DBRIX/DLREX)

By Dennis Baran

On December 17, 2018, DoubleLine launched the DoubleLine Colony Real Estate and Income Fund. It seeks capital appreciation and income with returns in excess of its benchmark, the Dow Jones U.S. Select REIT Index over a full market cycle. The managers will use derivatives to create investment returns that approximate the returns of the newly-launch Colony Capital Fundamental US Real Estate Index. To the extent that there’s additional capital available, they will also invest in an actively managed portfolio of short-to-intermediate term fixed income securities. It’s an open-ended, index overlay fund — not a balanced fund, structured product, or a K-1 offering.

There are three arguments for considering an investment in the fund.

First, real estate adds substantial value to a traditional stock-bond portfolio. So what are some benefits of REIT ownership?

According to Jeffrey Sherman, president of DoubleLine Alternatives LP, the DJ U.S. Select REIT Index outperformed the S&P 500 by > 4% per year over the last 20 years, has a correlation to stocks of .57 and .18 to bonds, have tended to perform positively during rising rates over the long term, and tended to outperform stocks during periods of declining rates over the long term.

That’s evidence of a differentiation benefit.

Second, Colony’s “fundamental index” approach addresses serious problems that traditional fixed-income indexes embody. While investors and commentators are generally worshipful of equity indexes, many professionals are deeply worried about intrinsic flaws in fixed-income investing. Most fixed-income indexes, REIT indexes included, are issuer-weighted; that is, they automatically give the greatest weight to the larger debt issuers who are, by definition, the most indebted companies.  Fundamental indexes seek to target the most attractive issues by analyzing underlying financial metrics.

The DoubleLine managers like the Colony Capital Index because it avoids the riskiest segments within any single market and takes a different approach than do traditional REIT strategies.

The Colony Capital REIT Index implements fundamental real estate investing principles from its 27 years of managing real estate assets for institutional investors across private and public markets.

It emphasizes a quality over value approach and seeks to deliver superior risk-adjusted returns, relative to other REIT indices, from publicly traded real estate equities.

That means it emphasizes exclusion by omitting

  • Financial mortgage REITS
  • The least-profitable and the highest-yielding REITs
  • The most leveraged REITs and
  • The most expensive REITs, measured by an enterprise value to operating profits ratio

The remaining REITs are then weighted by market capitalization, subject to concentration and diversification limits, to derive the Index’s composition.

If REITs and bonds go down, your portfolio will be down. The volatility of the fund will be similar to the REIT market and the standard deviation will come primarily from exposure to the Colony Index. On the flip side, however, higher volatility has been accompanied by a higher Sharpe ratio and a higher return profile over the long term.

For example, while it may sound strange to mention “Active Share” about an index fund, the fund’s active share is 40.41% as of January 31, 2019. (The top four to five REIT indices have a .99 correlation.) That independence is important because too many REIT indexes, and even supposedly smart-beta REIT indexes, are over-concentrated by sector, over-exposed to financial risk and prone to value old REITs merely because they’re old.

Third, DoubleLine is really, really good. 87% of DoubleLine funds are in the top half of their peer groups over the past year, 77% over the past three years and 100% over the past five years. Jeffrey Gundlach, CEO and CIO of DoubleLine Capital LP, and Jeffrey Sherman, deputy CIO of the firm and president of DoubleLine Alternatives LP, serve as portfolio managers of the Fund. With the contributions of DoubleLine’s fixed income investment teams (including mortgage-backed securities, Treasuries, corporate securities and international debt and the firm’s Fixed Income Asset Allocation Committee), Mr. Gundlach and Mr. Sherman actively manage the fixed income portfolio.

The CEO of Colony Capital is Tom Barrack. He and Jeffrey Gundlach know each other. Mr. Barrack’s offices are located 2 ½ blocks from those at DoubleLine. Mr. Barrack was looking for a partner and came to DoubleLine to discuss starting a fund together. Colony Capital is not a sub-advisor to the fund, and no money goes to it. Colony Capital is simply the index provider. DoubleLine didn’t pick Colony to create an index. Colony created its own index, and DoubleLine chose to have exposure to it.

Fund Facts

Class I (Institutional Class) DBRIX $1M, IRA $5.000; ER 0.66%. The fund is available for purchase through 14 brokerages, including major platforms such as JP Morgan, Fidelity, TD Ameritrade, and Vanguard.

Class N (Investor Class) DLREX $2,000, IRA $500; ER 0.91%. The fund is available for purchase through 12 brokerages, including major platforms such as Fidelity, Vanguard, TD Ameritrade, and Schwab.

Bottom Line

Given its emphasis on creating a quality over value portfolio based on its differentiated methodology discussed here, DBRIX/DLREX invites serious interest from investors. DoubleLine begins posting performance for newly launched funds three months after inception. Consult Morningstar if you need information before then.

 

15/15 funds, one year on

By David Snowball

Roller coaster? What roller coaster? After an anguished fall, the worst December market since the Great Depression, the Christmas Eve Massacre and a million howling headlines, we are pretty much back where we were in September with index values (and stock valuations) near historic highs.

As of the end of February, 2019, the Vanguard Total Stock Market Index Fund (VTSMX) was sitting just 3.66% below its September, 2019 level … and it was still rallying, picking up 0.69% on March 1, 2019.

In a singularly prescient moment, we reminded folks a year ago that “holding 15% cash is good. The stock market is teetering. Its valuations are at or near all-time highs by a variety of measures. Washington is somewhat unhinged. People, and machines, are primed for a panic. And the best way to survive a panic is to have a clear plan and cash on hand to move in when others are giving away their shares.”

Most of those same conditions exist today, though the Federal Reserve may well choose not to stir the pot nearly so much as many expected.

The 15/15 formula

We searched, a year ago, for equity funds that had two characteristics: in 2017, they held at least 15% cash and had a positive return of 15% or more.

It was ridiculously easy to make 15% total returns in 2017. 3406 funds managed the feat.

And it was not particularly hard to hold 15% cash in 2017, though it was certainly unpopular with investors. 970 funds held that level of cash, either as collateral on derivative purchases, as a defensive move or from the inability to find suitable investors.

Making 15% is good. It’s about 50% above the stock market’s historic rate of return and is a bit better than most balanced funds.

Holding 15% cash and still finding a way to make 15% in 2017 – that is, having both dry powder to profit in a crash while not sitting out the market’s rise – was rare, difficult and desirable. We celebrated the 15 funds that held cash in reserve, posted really solid absolute returns and were available to retail investors.

How did the 15/15 funds do subsequently? Relatively well, really. 75% of them outperformed their peer group during 2018’s turbulent market. Many enter 2019 with considerable dry powder still available for when the next shoe drops.

Here’s the two-year snapshot.

15/15 fund   2017 return 2017 Cash 2018 return 2018 cash
AMG Yacktman Focused Large Core 20.0% 23% 2.9% 20%
Port Street Quality Growth Large Blend 15.0 44 (0.7) 42
Hillman Large Value 16.4 15 (2.8) 5
Meeder Muirfield Tactical Allocation 20.3 30 (3.7) 72
Leuthold Core Investment Tactical Allocation 15.8 18 (6.2) 42
Tweedy, Browne Value Global Large Cap 16.5 33 (6.4) 40
Longleaf Partners International Int’l Large Core 24.2 22 (7.8) 5
Monongahela All Cap Value Mid-Cap Value 20.8 20 (8.1) 4
Meeder Dynamic Allocation Aggressive Allocation 21.2 20 (8.7) 24
Seven Canyons World Innovators (formerly Wasatch World Innovators) Global Small/Mid Cap 33.0 24 (10.4) 8
T. Rowe Price Intl Concentrated Equity Int’l Large Core 21.1 21 (10.7) 11
FPA International Value Int’l Small/Mid Blend 27.1 29 (10.8) 22
The Cook & Bynum Large Core 15.1 39 (13.4) 22
Quantified Market Leaders Mid-Cap Growth 16.9 20 (13.5) 17
US Global Investors Emerging Europe Emerging Europe 22.7 21 (17.0) 4
Segall Bryant & Hamill Fundamental Int’l Small Cap (formerly Westcore International Small-Cap) Int’l Small/Mid Growth 33.6 31 (23.0) 2

Green cells indicate performance in the top half of their respective peer groups.

We re-ran our screen in February 2019, looking for funds which came out of 2018 with both strong performance and a considerable commitment to cash. Only seven retail funds posted winning records last year (green cells under 2018 return), but we’re also including 16 other funds with exceptionally strong relative performances in 2018 paired, in almost all cases, with exceptional three-year records as well.

    Cash 2018 return 2018 %ile 3 year return 3 year %ile Risk
Artisan Thematic Investor Lg Gr 30 11.23 1 — — —
Biondo Focus Lg Gr 23 6.34 4 23.35 4 High
Federated Kaufmann Mid Gr 20 3.63 5 23.14 5 Average
AMG Yacktman Focused Lg core 24 2.88 1 14.72 35 Below Average
Marshfield Concentrated Opportunity Lg Gr 15 1.92 15 20.77 9 Low
Rational Dynamic Brands Lg Gr 30 0.63 22 12.65 — Above Average
Kinetics Small Cap Opportunity Small Core 31 0.29 1 25.49 1 Average
Frontier MFG Global Plus Lg Gr 23 -0.12 28 13.04 88 Low
Meridian Enhanced Equity Large Gr 25 -0.64 34 21.98 5 High
Port Street Quality Growth Lg Core 42 -0.68 5 8.69 96 Low
Provident Trust Strategy Lg Gr 17 -1.22 39 14.71 73 Low
Sims Total Return Lg Value 21 -1.31 3 6.65 98 Low
Chesapeake Growth Lg Gr 15 -1.74 47 15.77 60 Above Average
Convergence Core Plus Lg Core 26 -1.92 9 13.35 62 Average
Yorktown Capital Income Global 24 -2.74 6 9.95 77 Below Average
Aspiriant Risk-Managed Equity Global 16 -3.52 10 10.98 62 Low
JHancock Technical Opportunities Lg Gr 22 -4.65 75 12.69 89 Above Average
Nuance Concentrated Value Lg Value 22 -4.72 14 12.15 54 Below Average
Catalyst/Lyons Tactical Allocation Lg Core 15 -4.96 39 7.89 97 Average
Kopernik International Intl Lg Val 35 -6.25 1 8.89 41 Above average
Tweedy Browne Global Value Intl Lg Val 42 -6.67 1 8.76 43 Low
FMI International Intl Lg Core 59 -9.46 8 8.05 67 Low
FPA International Value Intl SMID 22 -10.81 5 11.99 13 Low

The green cells represent particularly noteworthy values:

  • 2018 returns greater than zero
  • 2018 returns in the top half of their peer group
  • 3-year returns of 10% or more
  • 3-year returns in the top half of their peer group
  • Morningstar risk scores that were below average or low

Bottom line: Cash works. Portfolio hedges can be complex, expensive and iffy. Or they can be simple, cheap and reliable. Of all of the ways to guard your wealth, investing with professionals who are willing to hold cash in frothy markets and invest it in bloody ones has worked for a long while. Investors looking for a portfolio hedge, but who aren’t immediately drawn to complicated and costly hedging strategies, might want to start here.

Funds in Registration

By David Snowball

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

Palm Valley Capital Fund is sort of a stand-out here, despite the name that vaguely calls a retirement community (with golf!) to mind. It will be a small cap stock fund managed by two experienced absolute value managers: Eric Cinnamond (formerly of Intrepid Endurance and ASTON/RiverRoad Independent Value) and Jayme Wiggins (Mr. Cinnamond’s successor at Intrepid Endurance). Both of the guys have excellent stock-picking records, but also a steely resolve to hold cash when there are no compelling values available. Mr. Cinnamond stepped away from management several years ago, liquidating his fund, because the market’s valuations remained so irrational for so long that he felt he was not serving his shareholders well by sitting on a vast cash stash. He resolved to return when he thought markets had the prospect of offering low-priced options. Mr. Wiggins maintained a similar resolve at Endurance until his (rather sudden) departure in September. Their reunion and return might signal their conclusion that a substantial reset in small cap valuations is now imaginable.

Alpha Architect Freedom 100 Emerging Markets ETF

Alpha Architect Freedom 100 Emerging Markets ETF, an passively-managed ETF, seeks to track the (custom, could you tell?) Life + Liberty Freedom 100 Emerging Markets Index. The plan is to build a portfolio that is weighted toward stocks in EM nations which protect life (e.g., control human trafficking), liberty (e.g., follow due process of law) and property (e.g., have transparent business regulations). The fund will be managed by Tao Wang of Empowered Funds and Alpha Architect. Its opening expense ratio has not been disclosed.

CLS Strategic Global Equity Fund

CLS Strategic Global Equity Fund (SGEFX) will seek long-term growth of capital. The plan is to create a global equity portfolio using other funds and ETFs. Typically 40% of the investments will be non-US. They’re going to try to maintain a risk exposure comparable to that of their benchmark, which is 60% Russell 3000 and 40% MSCI All-World ex US; it will also try to keep other portfolio characteristics (size, sector, style, region) comparable to that benchmark. The fund will be managed by a team from CLS Investments. Its opening expense ratio is 1.82%, and the minimum initial investment will be $2,500.

Conductor International Equity Value Fund

Conductor International Equity Value Fund will seek long-term risk-adjusted total return. The plan is to invest in the equity securities of international companies that are believed to exhibit strong fundamental attributes. The manager “prioritizes managing risk exposures,” so the manager might use cash, stocks on index ETFs or index options to hedge the portfolio when market risk seems excessive. The portfolio will normally range between 50-100% net long. The fund will be managed by Charles Albert Cunningham, III. Its opening expense ratio has not been disclosed, and the minimum initial investment will be $2,500 for “A” shares with nominally carry a 5.75% sales load.

Fidelity Women’s Leadership Fund

Fidelity Women’s Leadership Fund will seek long-term growth of capital. The plan is to “invest primarily in equity securities of companies that prioritize and advance women’s leadership and development.” One woman on the senior management team qualifies a stock for inclusion, as does having one-third of the board be women or, more generally, having policies designed to attract, retain and promote women. It might be a global, all-cap portfolio. The fund will be managed by Nicole Connolly. Its opening expense ratio has not been disclosed, and there is no minimum initial investment requirement.

Global Tactical Fund

Global Tactical Fund will seek long-term capital appreciation. The plan is to buy both stocks and equity ETFs, with 40% of the portfolio typically invested in international stocks. The manager has the ability to short, otherwise there’s no particular explanation of what’s “tactical” about it. The fund will be managed by Chetan Jindal of Greenwich Ivy Capital LLC. He was “formerly partner at a global asset management firm.” A quick Google suggests Altrinsic Global Advisors, for what interest that holds. Its opening expense ratio has not been disclosed, and the minimum initial investment will be $1,000.

iShares Edge MSCI Multifactor USA Mid-Cap ETF

iShares Edge MSCI Multifactor USA Mid-Cap ETF, an passively-managed ETF, seeks to track an index composed of U.S. mid-capitalization stocks that have “favorable exposure to target style factors subject to constraints.” We don’t normally cover passive ETFs but a passive fund tracking an active index seemed close enough. The plan is to invest in (the currently 88) mid-cap stocks which (a) are components of the MSCI USA Mid Cap Index and (b) have high exposure to value, quality, momentum and low size. The fund will be managed by a team from BlackRock Fund Advisors. Its opening expense ratio has not been disclosed.

iShares ESG MSCI USA Leaders ETF

iShares ESG MSCI USA Leaders ETF, an index ETF, seeks to track the investment results of an index composed of U.S. large- and mid-cap stocks of companies with high environmental, social, and governance performance relative to their sector peers. The fund will be managed by a team from BlackRock Fund Advisors. Its opening expense ratio has not been disclosed.

LKCM International Equity Fund

LKCM International Equity Fund will seek to maximize long-term capital appreciation. The plan is to invest in an all-cap international portfolio of companies that show high profitability levels, strong balance sheet quality, competitive advantages, ability to generate excess cash flows, meaningful management ownership stakes, attractive reinvestment opportunities, strong market share positions, and/or attractive relative valuation. The fund will be managed by Mason and J. Luther King of Luther King Capital Management. Its opening expense ratio is 1.0%, and the minimum initial investment will be $2,000.

Palm Valley Capital Fund

Palm Valley Capital Fund will seek long-term total return. The plan is to invest in high‑quality small companies that the managers believe can be valued accurately using its valuation methodology, are more likely to grow consistently, and are less likely to experience a permanent loss in value. Up to 30% of the fund might be invested internationally. The fund’s cash position, which might be very substantial, is determined by the availability of securities which meet the managers’ criteria. In the absence of suitable opportunities, the fund will hold cash. The fund will be managed by Eric Cinnamond and Jayme Wiggins, both former managers of Intrepid Endurance. Its opening expense ratio is 1.25%, and the minimum initial investment will be $2,500.

Manager changes, February 2019

By Chip

In most months, most manager changes are pretty much inconsequential (except to the managers themselves, I guess). This month, there are a collection of fairly epochal changes.

A star manager, Henry Ellenbogen, is leaving T. Rowe Price and T. Rowe Price New Horizons. It’s really rare for folks to leave Price and rarer still for one of their few high-profile folks to do so. No word on his next stop.

The Bond King, Bill Gross, is giving up. After helping to run hundreds of billions at PIMCO, Mr. Gross had a sudden, stormy departure and was promptly picked up by Janus which gave him the keys to a go-anywhere, do-anything, trust-me-I’m-Bill-Gross fund. Over a 4.5 year stint, Mr. Gross managed to turn an initial $10,000 investment to $10,080 while subjecting investors to lurching performance. His former fund is now being renamed and repurposed.

Jeffrey Feingold, the manager of Fidelity Magellan, has announced his decision to retire at year’s end. Fidelity is moving their star emerging markets manager (wow) into position to take over their former starship. Sammy Simnegar’s departure from the EM side then triggered a series of changes in other funds.

On the smaller fund front, Brad Cook is leaving Zeo and Zeo Short Duration Income; our colleague Charles Boccadoro has substantial admiration for the quality of Brad’s work. Similarly, Mark Travis, president of Intrepid Capital, is stepping away from Intrepid Endurance where he was a sort of bridge manager between Jayme Wiggins (who left in September) and a young team (that takes over now).

Ticker Fund Out with the old In with the new Dt
BGIOX Baillie Gifford International Stock Portfolio On or about April 30, 2019, Jonathan Bates is expected to retire and will no longer serve as a portfolio manager for the fund. Jenny Tabberer and Tom Walsh will join current manager, Angus Franklin. 2/19
BIAQX Brown Advisory Emerging Markets Select Fund, formerly Brown Advisory Somerset Emerging Markets Fund Edward Lam and Edward Robertson will no longer serve as a portfolio manager for the fund and Somerset Capital Management LLP will be terminated as the subadvisor to the fund. Niraj Bhagwat, Rakesh Bordia, Caroline Cai, Allison Fisch, and John Goetz will now manage the fund. Wellington Management Company LLP and Pzena Investment Management will serve as subadvisors to the fund. 2/19
SOPAX Clearbridge Dividend Strategy Fund No one, but … John Baldi joins Scott Glasser, Michael Clarfeld, and Peter Vanderlee on the management team. 2/19
DHSCX Diamond Hill Small Cap Fund Thomas Schindler will no longer serve as a portfolio manager for the fund. Christopher Welch and Aaron Monroe will continue to manage the fund. 2/19
DHMAX Diamond Hill Small-Mid Cap Fund Thomas Schindler will no longer serve as a portfolio manager for the fund. Christopher Welch and Jeannette “Jenny” Hubbard will continue to run the show. 2/19
SZGAX DWS High Conviction Global Bond Fund, which will become DWS ESG Global Bond Fund on or about May 1, 2019. Ramhila Nadi and Bernhard Falk will no longer manage the renamed and refocused fund. Thomas Farina will manage the fund. 2/19
MIDVX DWS Mid Cap Value Fund Richard Hanlon is no longer listed as a portfolio manager for the fund. Pankaj Bhatnagar and Arno Puskar will now manage the fund. 2/19
FAMKX Fidelity Advisor Emerging Markets Fund No one, right now, but Sammy Simnegar is expected to transition off the fund at the end of September, 2019. Sam Polyak has joined Sammy Simnegar in managing the fund, and will continue after Mssr. Simnegar’s departure. 2/19
FDEQX Fidelity Disciplined Equity Fund No one, right now, but Alex Devereaux is expected to transition off the fund at the end of September, 2019. Kwasi Dadzie-Yeboah has joined Alex Devereaux in managing the fund, and will continue after Mssr. Devereaux’s departure. 2/19
FEMKX Fidelity Emerging Markets Fund No one, right now, but Sammy Simnegar is expected to transition off the fund at the end of September, 2019. John Dance has joined Sammy Simnegar in managing the fund, and will continue after Mssr. Simnegar’s departure. 2/19
FDFFX Fidelity Independence Fund No one, right now, but Jeffrey Feingold is expected to retire from the fund at the end of December, 2019. Sammy Simnegar has joined Jeffrey Feingold in managing the fund, and will continue after Mssr. Feingold’s departure. 2/19
FMAGX Fidelity Magellan Fund No one, right now, but Jeffrey Feingold is expected to retire from the fund at the end of December, 2019. Sammy Simnegar has joined Jeffrey Feingold in managing the fund, and will continue after Mssr. Feingold’s departure. 2/19
FRIFX Fidelity Real Estate Income Fund No one, but … Bill Maclay joins Mark Snyderman in managing the fund. 2/19
FTIEX Fidelity Total International Equity Fund No one, right now, but Sammy Simnegar is expected to transition off the fund at the end of September, 2019. Sam Polyak has joined Sammy Simnegar, Jed Weiss, and Alexander Zavratsky in managing the fund, and will continue after Mssr. Simnegar’s departure. 2/19
FTCIX Franklin Conservative Allocation Fund T. Anthony Coffey is no longer listed as a portfolio manager for the fund. May Tong joins Thomas Nelson in managing the fund. 2/19
FCAZX Franklin Corefolio Allocation Fund T. Anthony Coffey is no longer listed as a portfolio manager for the fund. May Tong and Thomas Nelson will now manage the fund. 2/19
FFAAX Franklin Founding Funds Allocation Fund T. Anthony Coffey is no longer listed as a portfolio manager for the fund. May Tong and Thomas Nelson will now manage the fund. 2/19
FRRAX Franklin Real Return Fund T. Anthony Coffey is no longer listed as a portfolio manager for the fund. David Yuen joins Kent Burns in managing the fund. 2/19
FAKSX Frost Mid Cap Equity Fund Bob Bambace will no longer serve as a portfolio manager for the fund. Alan Adelman and Tom Stringfellow will now manage the fund. 2/19
SRIGX Gabelli ESG No one, but … Ian Lapey and Melody Bryant have been added as managers. They join Christopher Desmarais, Kevin Dreyer and Christopher Marangi at the helm of a badly underperforming fund. 2/19
PGEOX George Putnam Balanced Fund Aaron Cooper will no longer serve as a portfolio manager for the fund. Emily Shanks and Kathryn Lakin join Paul Scanlon in managing the fund. 2/19
GSMAX Goldman Sachs Small/Mid Cap Growth Fund Michael DeSantis will no longer serve as a portfolio manager for the fund. Jessica Katz joins Steven Barry in managing the fund. 2/19
GTKIX Goldman Sachs Tactical Exposure Fund Joshua Sheldon will no longer serve as a portfolio manager for the fund. Neill Nuttall, Raymond Chan and Robert Surgent will continue to serve as portfolio managers for the fund. 2/19
Various Goldman Sachs Target Date Funds Raymond Chan will no longer serve as a portfolio manager for the fund. Scott de Haai joins Christopher Lvoff in managing the funds. 2/19
GITAX Goldman Sachs Technology Opportunities Fund Michael DeSantis will no longer serve as a portfolio manager for the fund. Steven Barry, Sung Cho and Charles “Brook” Dane will continue to serve as portfolio managers for the fund. 2/19
HIIDX Harbor Diversified International All Cap Fund Simon Todd will no longer serve as a portfolio manager for the fund. Neil Ostrer, Charles Carter, Nick Longhurst, William Arah, Simon Somerville, Michael Nickson, Michael Godfrey, David Cull, and Robert Antsey,continue to serve as co-portfolio managers for the fund. 2/19
HIINX Harbor International Fund Simon Todd will no longer serve as a portfolio manager for the fund. Neil Ostrer, Charles Carter, Nick Longhurst, William Arah, Simon Somerville, Michael Nickson,  Michael Godfrey, and David Cull, continue to serve as co-portfolio managers for the fund. 2/19
ICMAX Intrepid Endurance Fund Mark Travis is no longer listed as a portfolio manager for the fund. Hunter Hays, Matt Parker, and Joe Van Cavage will now manage the fund. 2/19
JUCAX Janus Henderson Global Unconstrained Bond Fund, which is now the Janus Henderson Absolute Return Income Opportunities Fund Bill Gross has retired. Nick Maroutsos will become the new manager. 2/19
JHKAX John Hancock ESG All Cap Core Fund Effective June 30, 2019, Stephanie Leighton will no longer serve as portfolio manager of the fund. Elizabeth Levy and Cheryl Smith will continue to serve as lead portfolio manager and portfolio manager of the fund. 2/19
JEIAX JPMorgan International Equity Income Fund Jeroen Huysinga has decided to retire from the asset management industry. Sam Witherow will be joining Rajesh Tanna and Helge Skibeli on the management team. 2/19
MFOCX Marsico Focus Fund No one, but … Brandon Geisler joins Thomas Marsico in managing the fund. 2/19
MGRIX Marsico Growth Fund No one, but … Brandon Geisler joins Thomas Marsico in managing the fund. 2/19
PEVAX PACE Small/Medium Co Value Equity Investments Systematic Financial Management will no longer subadvise the fund. Aman Patel, D. Kevin McCreesh, and Ronald Mushock are no longer listed as portfolio managers for the fund. Mabel Lung, Fred Lee, Julie Kutasov, Craig Stone, Vincent Russo, Mayoor Joshi, Samir Sikka, and Joseph Huber will continue to manage the fund. 2/19
POLRX Polen Growth Fund No one, but … Brandon Ladoff joins Daniel Davidowitz and Damon Ficklin on the management team. 2/19
POIRX Polen International Growth Fund No one, but … Daniel Fields joins Todd Morris in managing the fund. 2/19
PPGAX Putnam Global Sector Fund Aaron Cooper will no longer serve as a portfolio manager for the fund. Kathryn Lakin will continue to manage the fund. 2/19
PSLAX Putnam Small Cap Value Fund David Diamond is no longer listed as a portfolio manager for the fund. Michael Petro will now manage the fund. 2/19
SHPAX Saratoga Health & Biotechnology Portfolio Fund Mark Oelschlager is no longer listed as a portfolio manager for the fund. Robert Stimpson will now manage the fund. 2/19
WTIFX Segall Bryant & Hamill Fundamental International Small Cap Fund Jeremy Duhon is no longer listed as a portfolio manager for the fund. John Fenley will continue to manage the fund. 2/19
GAL SPDR SSGA Global Allocation ETF Timothy Furbush will no longer serve as a portfolio manager for the fund. Jeremiah Holly and Michael Martel will manage the fund. 2/19
INKM SPDR SSGA Income Allocation ETF Timothy Furbush will no longer serve as a portfolio manager for the fund. Jeremiah Holly and Michael Martel will manage the fund. 2/19
SIESX State Street Institutional International Equity Fund Makoto Sumino will no longer serve as a portfolio manager for the fund. Michael Solecki will continue to manage the fund. 2/19
PRGTX T. Rowe Price Global Technology Fund Effective March 31, 2019, Joshua Spencer will no longer manage the fund. Alan Tu will take over the management of the fund. 2/19
PRNHX T. Rowe Price New Horizons Fund Effective March 31, 2019, Henry Ellenbogen will no longer manage the fund. Joshua Spencer will take over the management of the fund. 2/19
TAAAX Thrivent Aggressive Allocation Fund David Francis will no longer be a portfolio manager for the fund. David Spangler will join Mark Simestad, Darren Bagwell, Stephen Lowe, and David Royal on the management team. 2/19
THMAX Thrivent Moderate Allocation Fund David Francis will no longer be a portfolio manager for the fund. David Spangler will join Mark Simestad, Darren Bagwell, Stephen Lowe, and David Royal on the management team. 2/19
TMAAX Thrivent Moderately Aggressive Allocation Fund David Francis will no longer be a portfolio manager for the fund. David Spangler will join Mark Simestad, Darren Bagwell, Stephen Lowe, and David Royal on the management team. 2/19
TCAAX Thrivent Moderately Conservative Allocation Fund David Francis will no longer be a portfolio manager for the fund. David Spangler will join Mark Simestad, Darren Bagwell, Stephen Lowe, and David Royal on the management team. 2/19
TWAAX Thrivent Partner Worldwide Allocation Fund, which will become Thrivent International Allocation Fund, effective April 30, 2019. Aberdeen Asset Managers Limited will no longer serve as subadvisers to the fund. Goldman Sachs Asset Management, L.P. will continue to subadvise the fund. 2/19
INGBX Voya Global Bond Fund No one at the moment, but Mustafa Chowdhury will retire effective August 31, 2019. Sean Banai joins the management team, now. He and Brian Timerlake will remain after Mr. Chowdhury’s departure. 2/19
ZEOIX Zeo Short Duration Income Fund Brandford Cook will no longer serve as a portfolio manager for the fund. Venkatesh Reddy will continue to manage the fund. 2/19

 

Briefly Noted

By David Snowball

Updates

The Ghost Ship sails every onward. Voya Corporate Leaders (LEXCX, once Lexington Corporate Leaders) continues its skipperless voyage. The fund was launched in 1935 with a simple strategy (buy an equal number of shares of what were then America’s best companies, and never sell) and no manager. Right: no manager changes in more than 83 years ‘cause it’s had no manager in more than 83 years. How’s that working for you?

It’s turned an initial investment of $10,000 (admittedly, a nearly inconceivable amount in 1935 when a new car might be had for $600 and a new home for $6000, a lot less if you’d bought the high-end Vallonia from the Sears catalog) into $43.4 million while the average large cap value portfolio would have generated $23.9 million. The fund has outpaced 99% of its peers over the past 15 years and 97% in the tumultuous past 12 months.

Briefly Noted . . .

SMALL WINS FOR INVESTORS

Effective immediately, the minimum initial investment amount for iM Dolan McEniry Corporate Bond Fund (IDMIX) Institutional Shares has been lowered to $10,000. The fund launched in September 2018 and is performing well; it just hasn’t drawn investors.

The minimum initial investment for the institutional share class of Leader Total Return Fund (LCTIX) has dropped from $2 million to $100,000.

Effective March 29, 2019, the RMB Mendon Financial Services Fund (RMBKX) is open to investment by new investors.

The folks at Symons Value (SAVIX) want to reduce their fund’s expense ratio. Rather than, I don’t know, just reducing their fund’s expense ratio, they are creating a new share class (Class II) and moving all current investors into it. The net effect will be a drop of 0.25% in the expense ratio.

Vanguard FTSE All-World ex-US Small-Cap Index Fund, Vanguard FTSE Social Index Fund, Vanguard High Dividend Yield Index Fund, Vanguard Long-Term Bond Index Fund and Vanguard Total World Stock Index Fund now all offer low-cost Admiral Shares with an investment minimum of $3,000. Those trim a couple basis points off the comparable Investor shares. Vanguard has closed all of the Investor class shares to new investors and will begin moving their current investors automatically into the Admiral shares in April.

CLOSINGS (and related inconveniences)

Had you folks noticed anything? Other than funds liquidating, I hadn’t.

OLD WINE, NEW BOTTLES

Brown Advisory – Somerset Emerging Markets Fund (BIAQX) became Brown Advisory Emerging Markets Select Fund on February 22, 2019. The absence of “Somerset” in the name is consequent to the removal of “Somerset” (Capital Management) as the sub-adviser. Wellington and Pzena have replaced it. The Somerset managers were offering a fair trade: below average returns for much below-average risk.

Effective on or about May 1, 2019, DWS High Conviction Global Bond Fund (SZGAX) will be renamed DWS ESG Global Bond Fund. Thomas M. Farina will take over as manager for Ramhila Nadi and Bernhard Falk. SZGAX is amiably mediocre while Mr. Farina’s main charge is also amiably mediocre, so it’s hard to view the manager change as significant. The shift to an ESG focus feels like it’s marketing driven.

Effective as of February 15, 2019, EntrepreneurShares Global FundTM became ERShares Global FundTM (ENTRX). The same renaming occurred with the US Small Cap (IMPAX) and US Large Cap (IMPLX) funds.

Effective March 1, 2019, William H. Gross, the Portfolio Manager for Janus Henderson Global Unconstrained Bond Fund (JUCAX) intends to retire. Here’s the tail of the tape on Mr. Gross’s adventure, from the date of his ascension to the fund:

  Annual return Maximum drawdown Volatility Sharpe ratio
JUCAX 0.1% -7.7% 3.4% -0.19
Lipper peer group 1.9 -5.9 3.2 0.47
3 month T-bills, aka “cash” 0.7 0.0 0.2 0.00

Which is to say, you could have had seven times Mr. Gross’s returns, with none of his fund’s volatility, by sticking your money in a credit union’s savings account.

In connection with Mr. Gross’ retirement, effective on or about February 15, 2019, Nick Maroutsos will become the new Portfolio Manager of the Fund, and the Fund will change its name to Janus Henderson Absolute Return Income Opportunities Fund.

Effective April 30, 2019, Thrivent Large Cap Stock Fund will change its name to Thrivent Global Stock Fund (AALGX).

Effective April 1, 2019, Wells Fargo Intrinsic Value Fund (EIVAX) becomes Wells Fargo Classic Value Fund.

Effective February 22, 2019, Xtrackers MSCI Asia Pacific ex Japan Hedged Equity ETF has changed its investment strategy and its name to Xtrackers International Real Estate ETF (HAUZ).

OFF TO THE DUSTBIN OF HISTORY

The Board of Trustees of the Trust approved a plan to liquidate and terminate the AMG Managers Value Partners Asia Dividend Fund (AVADX) which is expected to occur on or about April 12, 2019.

Summary execution: On February 7, 2019, the Aspen board of trustees announced their decision to immediately close to Aspen funds and to have them liquidated within three days. Aspen Managed Futures Strategy Fund and Aspen Portfolio Strategy Fund were thus dispatched on February 10, 2019.

Baron Energy and Resources Fund (BENFX) will liquidate on or before April 29, 2019. $10,000 invested at inception, December 2011, is now $6,200 which is substantially worse than its peers, who would have burned only 20% of your money.

BlackRock Emerging Markets Local Currency Bond Fund (BECIX) should have remembered the old warning: beware the Ides of March. Instead they, like Caesar, perish that day.

On February 6, 2019, the Board of Directors of BMO Funds approved a Plan of Liquidation for each of the ten funds in their BMO Target Retirement (Date) series. If the Plan is approved by shareholders, the Funds will be liquidated on June 28, 2019.

On February 4, 2019, the Board of Trustees of the ALPS ETF Trust authorized an orderly liquidation of the BUZZ US Sentiment Leaders ETF (BUZ). See what they did there … “investor sentiment” “buzz”. Except, ironically, after three years they were able to create no buzz of their own: $8 million in assets with comparable volatility but 30% lower returns than its Lipper science & tech peer group.

Cortina Small Cap Growth Fund (CRSGX) and the Cortina Small Cap Value Fund (CISVX) closed to new investments effective at the close of business on February 5, 2019 and will be liquidated effective as of the close of business on March 22, 2019.

Eaton Vance Focused International Opportunities Fund (EFIIX) will be liquidated around March 11, 2019. One star, no assets, trailed 75% of its peers …

“The Board of Trustees of the Funds has approved a Plan of Liquidation for [Gabelli Food of All Nations NextShares and Gabelli RBI Nextshares], pursuant to which each Fund will be liquidated on or about March 28, 2019.” We described these funds as “Gimmicky niche funds that seem more at home in the world of the Westcott Nothing But Net fund, the Golf Fund, the Chicken Little Growth fund, the StockCar Stocks Index fund or even … Gabelli Global Interactive Couch Potato Fund (GICPX, 1994-2000).” Two more remain.

Highmore Sustainable All-Cap Equity Fund (HMSQX) was liquidated on February 27, 2019. That was one day short of the fund’s first birthday.

Sometimes these filings speak for themselves: “The Board of Trustees has determined that it is in the best interest of shareholders to liquidate the Iron Equity Premium Income Fund (CALIX) as a result of receiving notice from the Fund’s adviser that it does not want to continue to manage the Fund. As of the date of this supplement, the Fund is no longer accepting purchase orders for its shares and it will close effective March 26, 2019.” It’s a four-star options-based fund with just $11 million in assets. The adviser had dropped its management fee from 1.0% to 0.65%, which looks great for investors until you realize that $71,500 isn’t nearly enough income to justify running the fund.

Legg Mason Developed ex-US Diversified Core ETF (DDBI), Legg Mason Emerging Markets Diversified Core ETF (EDBI) and Legg Mason US Diversified Core ETF (UDBI) will all be liquidated on March 22, 2019.

Miscalibrated? Lord Abbett Calibrated Mid Cap Value Fund merged into Lord Abbett Mid Cap Stock Fund (LAVLX) and Lord Abbett Calibrated Large Cap Value Fund was absorbed by Lord Abbett Fundamental Equity Fund (LDFVX), both on February 22, 2019. Each of the “surviving funds” carries a two-star rating from Morningstar and each has trailed 80% of its peers over the past decade.

Matthews Asia Focus Fund (MIFSX) will be liquidated on or about March 29, 2019. Tiny fund, mediocre record, no compelling focus.

Patriot Balanced Fund (ATBAX) will be liquidated on March 29, 2019. “Patriotism” meant not investing in companies that did business with Iran, Sudan and Syria. The fund lagged about 80% of its peers, though it’s hard to imagine that the difference is driven by the non-patriotic companies that everyone else chose to buy.

Principal Contrarian Value Index ETF and Principal International Multi-Factor Index ETF are at risk of extinction, following a NASDAQ compliance finding that they had too few shareholders (under 50) to remain as listed securities. Principal’s been given time to track down some additional shareholders but, really, why would they?

Spouting Rock Small Cap Growth Fund (SRSCX) has closed to new investments and will liquidate on March 20, 2019. Hmmm … if you got shares as a Christmas present this year, you’d be alternately delighted (by outperforming your peers by 3:1) and saddened (that you now own a liquidating investment).

State Funds Enhanced Ultra Short Duration Mutual Fund (STATX) will liquidate on March 6, 2019. Uh-huh. That’s freakish. The fund has $90 million in assets, a 0.40% expense ratio, $100 minimum and a record so strong that it defied explanation. It outperformed its peers and its three best competitors, and did so with zero volatility.

A lively discussion of the fund alternated between excitement and deep suspicion of anything that smacked of “too good to be true.” And now it’s liquidating? Uh-huh. The Shadow, who is a senior member of our discussion board and remarkable observer of the developments in the industry, offers this passage as the only reason given: “Based on the recommendation of the adviser and given the Fund’s anticipated future expense, the Board has determined that liquidating the Fund would be in the best interests of the Fund and its shareholders.”

“Due to the Fund’s low asset levels, the high expense levels,” Stringer Moderate Growth Fund (SRQAX) is expected to liquidate at the close of business on March 31, 2019. That’s much more delicate than saying, “Due to the Fund’s high expenses, high sales load, bottom 5% returns, and tax inefficiency, investors have rationally chosen to avoid it and we have rationally chosen to terminate it.”

TETON Westwood Mid-Cap Equity Fund (WMCEX) will be liquidated on or about April 26, 2019.

Touchstone International Value Fund (FSIEX) is expected to be closed and liquidated on or about March 28, 2019.

Touchstone Merger Arbitrage Fund (TMGAX) is merging into Touchstone Arbitrage Fund (TMARX) around May 10, 2019. The funds have a correlation of 0.96 and identical (minimal) returns of 1.1% annually, so investors aren’t apt to notice the change.

Touchstone Controlled Growth with Income Fund (TSAAX) merges into the Touchstone Dynamic Diversified Income Fund (TBAAX) on about April 26, 2019. Similarly high five-year correlation, but the returns have been noticeably stronger for the surviving fund, so that’s good.

USCF Commodity Strategy Fund (USCFX) will liquidate on or around March 21, 2019.

USCF SummerHaven SHPEN Index Fund (BUYN) is in trouble ‘cause investors aren’t buyin’. NYSE’s compliance group has informed them that they’re at risk of de-listing because they don’t have at least 50 shareholders.

Western Asset Short Term Yield Fund (LGSTX), a $50,000 fund, all of whose shares are owned by a single person, will “terminate and wind up” on or about March 29, 2019.

On March 15, 2019, Wisdom will liquidate WisdomTree Australia Dividend Fund (AUSE), WisdomTree Japan Hedged Financials Fund (DXJF), WisdomTree Japan Hedged Quality Dividend Growth Fund (JHDG). WisdomTree Global SmallCap Dividend Fund (GSD), WisdomTree Global Hedged SmallCap Dividend Fund (HGSD), WisdomTree Europe Domestic Economy Fund (EDOM), WisdomTree Asia Local Debt Fund (ALD), and WisdomTree Brazilian Real Strategy Fund (BZF).

February 1, 2019

By David Snowball

Dear friends,

Please join me in bidding a fond adieu to January. It was a month in which our increasingly unstable global climate manifested itself in record-breaking cold and snow. Davenport, Iowa, my adopted hometown, saw the lowest temperature (-33, six degrees colder than the old record) and coldest wind chill readings (-54) in its recorded history. Despite having no precipitation in the first eleven days of January, it still managed 30.2” of snow by month’s end, the most since record-keeping began in 1884. Local drivers responded predictably.

picture of car upside down in the snow

That was all enriched by an electrical fire in Old Main, my campus home, a flu outbreak and five days of school (mall, bank, postal service … ) closures.

I suppose I could make a joke about the market heating up …

  January 2019
Russell 2000 11.3%
S&P MidCap 400 10.5
NASDAQ 9.7
NYSE 8.1
S&P 500 8.0
DJIA 7.3

but won’t.

The collective suspicion of the folks behind MFO is that, January notwithstanding, we face the prospect of serious and repeated challenges in the next couple years. While it would be nice to believe that the Christmas Eve sell-out represented the end of a rough stretch, there’s little reason to believe that’s true. Valuations remain stretched, the sugar buzz from the tax cuts have worn off while the prospects of trillion dollar annual deficits (and half trillion dollar annual interest charges) are beginning to sink in and investors are beginning to suspect that there are better games in town than ours.

The collective philosophy of the folks behind MFO is that it’s better to plan than panic. And so we’re using this happy pause in the action to begin offering resources that might help your planning. Those include thoughtful big picture advice from both Ed Studzinski and Bob Cochran, Charles’s primer on how to better use the MFO Premium screener to identify bear-resistant investments, my close look at which long-short funds seem positioned to best weather turbulent conditions, Dennis Baran’s profile of Marshfield Concentrated Opportunity, a long-only fund that’s weathered the storm, plus my introductions of Ladder Select Bond and FPA Flexible Income. It’s all designed to remind you that there are meaningful options available beyond the realm of domestic large-cap indexes and bond aggregates.

So, with just the briefest of thanks to you, to Greg, Deb, William and George, to Thomas Killian and the folks in the Bay Area, to the managers who reason with us, to the spouses who sustain us, and the 31,000 folks who read us, we’ll let you get to it.

Wishing you the warmth of good friends and good drink,

david's signature

Problems, What Problems?

By Edward A. Studzinski

“Life is a predicament which precedes death.”

  Henry James

After a year in which most investors saw unrealized losses in their fund investments due to a very volatile December, probably half of those unrealized losses have been made up through the end of January 2019. This reinforces again the value of being a long-term investor, when you are comfortable with the investment philosophy, strategy, and personnel implementing same at a fund.

But do you really know what is being done to execute investment strategy at your chosen fund or firm on a daily basis? I still remember hearing the story, which I hope was apocryphal, of the co-manager who was allegedly having a contretemps with one of his co-managers. Rather than endure the stress caused by meetings with the other co-manager to review investments and make portfolio decisions, he allegedly gave a list of equities he either wanted to buy or add to in his portion of the fund’s assets to his administrative assistant. He then told that person to just pick something on the list to buy for the fund when there was cash available to do it.

David Snowball had mentioned to me earlier in the month that there had been a perception amongst some of our readers that the fund managers of the world spent every waking moment sitting at their desks, staring at the portfolio and their Bloomberg terminals to try and come up with an enhancement to the investments that would improve performance. Nothing could be further from the truth, which is probably a good thing.

My experience has been that pretty much once you have created the portfolio and gotten it fully invested, less is more. Tinkering around the edges, at least for me, has generally resulted in a decrement to performance rather than an improvement. Which is not to say that in a period like December, when the market is effectively collapsing, you should not use the opportunity presented, as it was on December 24th to add to positions you really like. When the price declines are substantial, you have to be prepared and willing to act to add to positions. On occasion, you may even act to upgrade the portfolio when a security you have wanted to own finally becomes available at the bargain price you have wanted to pay for it, representing a real margin of safety. I recognize that it takes discipline and a strong stomach to do that, which is an argument in favor of active management.

Quo Vadis, Interest Rates

Fiscal Year Projected interest payments, billions
2013 $221
2018 $310
2023 $619
2028 $761

The Federal Reserve did an about face this week on interest rates, electing to keep them steady rather than continue to raise them. The three or four rate increases we were anticipating this year will apparently not happen. We may, at best, see two. Neither Washington nor Wall Street had particularly liked interest rate increases. They have tended to exacerbate increased volatility in the markets. The increases in rates also made it clear, if they continued, that we would not be able to fund repayment of our debt as it matured. The increased interest rates would become a big drag on the Federal budget, while crowding out the availability of capital to other parts of the economy.

Was it a political decision to not raise rates this week? Of course. Likewise it was a political decision to keep them artificially depressed during the eight years of the Obama Presidency. As we watched the impact of the governmental shut-down this January on government workers, the question I kept asking myself was, what happened to the middle class in this country? Federal government jobs used to be considered good, stable, and relatively above-average paying jobs, the bedrock of the middle class. And yet we saw people who apparently live from paycheck to paycheck, and are barely able to stay even, let alone get ahead. The last month should have made it apparent to all but those living on Mars that there has been a hollowing out in our society.

Those who have access to an on-demand feature on their cable network who did not see it should pull up the January 26, 2019 edition of Saturday Night Live, and watch Kate McKinnon’s satire of Commerce Secretary Wilbur Ross (Secretary Ross arrives at the 2:28 mark) and his “let them get loans” speech. The sad part about it was that it probably should not be considered a satire, as it pretty much represented a point of view had by Mr. Ross.

One rationale expressed by the Fed for keeping rates stable was that there are few if any signs of inflation in this country. My own application of the potato chip test would lead me to disagree. You used to be able to buy a one pound bag of potato chips for less than a dollar. Now, you are getting a ten ounce bag for somewhere between three and four dollars a bag. Those of you who do the grocery shopping will see similar examples of package shrinkage with price increases all throughout the exercise of a weekly shopping trip. My final comment in this regard will be that the only way for us to deal with the mountain of government debt at this point will be to inflate our way out of it. Think about your investments from that perspective.

Investing 2019

So, what to do, what to do for this year going forward. First, equities over bonds. If you need fixed income, think stability. You can get 3% certificates of deposit for periods under two years currently. And if you want bonds, stay with maturities under three years. For those wanting income, dividend paying stocks are probably the way to go, especially since the dividends can increase. Given a choice between an equivalent yielding bond fund, and an equivalent yielding dividend paying stock, the stock should usually win all other things being equal (especially considering the risk of default or bankruptcy). Look at some of the variations in real estate available. I am not a fan of real estate investment trusts usually, as the managements tend to raise capital by issuing shares to buy more properties at peak real estate prices, thus diluting their investors. But there are exceptions to every generalization. And finally, when you are giving your moneys to managers, if you are using active managers, make sure they really are active rather than buy and hold closet indexers. Above all, put together a strategy and stick to it. And don’t panic, especially when you see everyone else panicking.

The long and short of a defensive fund

By David Snowball

People bandy about the phrase “long/short fund” as if it had meaning. It does not. It is, instead, a catch-all term  that includes funds with very different objectives and very different strategies, including some funds that do no shorting at all. Some short individual stocks, some short groups of stocks through ETFs and others short entire markets. Some are market-neutral, some are permanently defensive, some switch between defense and offense, others are always playing offense.

A 2013 analysis of all funds listed as “long/short”  in Morningstar’s database by Long Short Advisors found “just 25 funds that are ‘real’ long/short equity funds that invest in individual stocks on both the long and short side of the portfolios and 12 strategies that only short using ETFs rather than individual stocks … The remaining funds are mix of totally miscategorized funds (multi-alternative, balanced, arbitrage, market neutral, global macro, etc.), quant funds and long/short sector funds that cannot be compared to broad market long/short funds.”

You can measure the jumble by looking at the correlations between the funds. If all long/short funds were doing roughly comparable things, you’d see consistently high correlations between members of the group. Instead, if you look at all long-short funds with at least a billion in assets, correlations range from negative 14 to positive 89. Twenty-three of 28 correlations are below 80, 14 of 28 are below 50. Similarly, if we look at the 10 funds with the highest annual returns over the past five years, the range is 42-87. Heck, a bunch of these funds have near-perfect correlations with the S&P 500 while others capture more than 100% of the S&P 500’s downside.

That’s not bad.  It does, however, mean that the phrase “maybe I should consider a long/short fund” is incoherent.

That said, it is possible for individual long-short funds to make sense and to make a difference.

In particular, long/short strategies have the potential to buffer your portfolio in volatile markets where sharp downside movements are as likely as anything else. To help identify funds worth closer consideration, we started with a simple hurdle:

The fund had to outperform a simple 60/40 index in the Q4 downturn. Since “adding bonds” is a cheap, effective and time-tested strategy for dampening volatility, any alternative should be at least as effective. VBINX dropped 8.1% in the quarter, so we start with funds that did better.

There are 148 long-short equity funds in Lipper’s database. Sixty-two funds, 42.5% of the universe, met that requirement. Only one fund designated a Great Owl failed the test: Gotham Enhanced 500 (GENFX). All other Great Owls in the long/short group passed: Gotham Absolute 500 (GFIVX), JP Morgan Hedged Equity (JEHQX), PIMCO RAE Worldwide Long/Short Plus (PWLIX), Catalyst/Millburn Hedge Strategy (MBXIX), Hundredfold Select Alternative (SFHYX), MFS Managed Wealth (MNWIX), and Nuance Concentrated Value Long-Short (NCLSX).

The second hurdle is also simple: the funds had to have positive returns in the long-term. Why, after all, buy a fund that shines in one bad stretch but, otherwise, fails you year and year? That eliminated a dozen funds, including several of the top performers in the turbulent final quarter of 2018.

Below are all of the long-short funds that made it over our two hurdles: better than 60/40 in the short-run and better than zero in the long run. We’ve broken them into four groups for you:

Tier one: funds that made money in the short-term and in the long-term. Three. Huzzah!

Tier two: funds that were much better than 60/40 in the short-term (though that still meant losing some in Q4) and positive in the long-term. Seven.

Tier three: funds that were somewhat better than 60/40 in the short term and positive in the long-term. Twenty-three.

Promising newcomers: funds that are one-to-three years old which were better than 60/40 in the short term and positive since inception.

Only five of the 148 long/short funds tracked by Lipper were positive in both the short- and longer-term, three older funds and two newbies. Those funds are highlighted in green. We’ll provide a capsule of each after the data tables.

Some of these funds have very high investment minimums (Glenmede and Gotham, for example). Some of them are not “true” long-short funds but pursue other hedging strategies (FundX Tactical and Bridgeway Managed Volatility are examples).  They share just three characteristics (in the Lipper peer group, Q4 performance, three-year performance) so you’d need to consider each separately on its merits.

Tier One: Positive in both Q4 and 2016-18
Symbol Name Q4 2018 3 year returns ER%/yr AUM$M
NCLSX Nuance Concentrated Value Long-Short 8 6.6 2.59 26.8
TACTX FundX Tactical Upgrader 4.1 7.8 1.73 58.1
BDMIX BlackRock Global Long/Short Equity 1.3 2.4 1.64 633
 
Tier Two: Lost less than half of a balanced portfolio in Q4 and positive for 2016-18
Symbol Name Q4 2018 3 year returns ER%/yr AUM$M
DIVA AGFiQ Hedged Dividend Income -1.2 6.3 0.75 3.5
JOEQX JPMorgan Opportunistic Equity Long/Short -3.4 4.5 2.2 272
PMHIX PIMCO EqS Long/Short -3.3 4.0 2.05 458
JDIEX Saratoga James Alpha Managed Risk Domestic Equity -3.3 3.5 2.22 20.7
DAMDX Dunham Monthly Distribution -1.9 2.7 2.94 254
MNWIX MFS Managed Wealth -1.5 2.6 1.18 31.5
ATQIX Arbitrage Tactical Equity -2.9 1.8 2.17 2.4
 
Tier Three: Lost less than a balanced portfolio in Q4 and positive for 2016-18
Symbol Name Q4 2018 3 year returns ER%/yr AUM$M
MEQFX AMG FQ Long-Short Equity -6.6 11.1 0.76 95.2
MBXIX Catalyst/Millburn Hedge Strategy -4.7 9.6 2 4,113
GTRFX Gotham Total Return -7.4 9.2 3.51 29.2
PWLIX PIMCO RAE Worldwide Long/Short PLUS -5.4 8.4 1.23 1,559
GFIVX Gotham Absolute 500 -5.8 7.7 3.2 14
JHEQX JPMorgan Hedged Equity -5.4 7.0 0.6 3,434
LSOFX LS Opportunity -7.7 6.0 2.97 59.4
SFHYX Hundredfold Select Alternative -4.5 4.9 2.84 50.6
ACDJX American Century Alternatives Disciplined Long Short -6.5 4.8 2.39 46.6
BGIQX BMO Global Long/Short Equity -8 4.4 1.41 7.2
QLS IQ Hedge Long/Short Tracker ETF -7.7 3.6 1.04 3.9
PLHZX PGIM QMA Long-Short Equity -7 3.6 2.01 482
MAIPX MAI Managed Volatility -8 3.5 1.03 127
ARLSX AMG River Road Long-Short -4.4 2.6 3.65 25.3
SAOAX Guggenheim Alpha Opportunity -4.5 2.5 1.97 131
CPIEX Counterpoint Tactical Equity -7 2.2 3.11 30.8
BRBPX Bridgeway Managed Volatility -7.4 2.1 0.95 30
GTAPX Glenmede Quantitative US Long/Short Equity Portfolio -7.9 1.9 2.42 311
JSFDX John Hancock Seaport Long/Short -7.4 1.9 1.69 667
SNAAX SEI Long/Short Alternative -7.3 1.9 1.44 31.4
FVALX Forester Value -2.9 1.9 1.27 20.5
HDG ProShares Hedge Replication ETF -5 1.1 0.95 37.8
BGLSX Boston Partners Global Long/Short -7.7 0.0 2.64 873
 
Promising possibilities: Good (better than balanced in Q4 and positive lifetime-to-date) young (more than one year, less than three) long/short funds 
Symbol Name Q4 2019 Since inception ER%/yr AUM$M
GDLFX Gotham Defensive Long 500 -7.9 11.5 3.8 11.1
GHPLX Gotham Hedged Plus -7 8.1 3.1 2.8
BIVIX Balter Invenomic 1.7 7.8 2.63 93.2
GACFX Gotham Absolute 500 Core -6.2 7.8 2.15 2.4
GCHDX Gotham Hedged Core -7.5 7.8 1.4 2.4
ATESX Anchor Tactical Equity Strategies -5.2 5.9 2.32 158
CPLIX Calamos Phineus Long/Short -4 5.3 2.54 1,139
BUIGX CBOE Vest S&P 500 Buffer Strategy -7.8 4.9 0.95 41.4
GDLIX Gotham Defensive Long -7.6 4.8 3.62 2.2
DFND Reality Shares DIVCON Dividend Defender ETF -6 4.5 1.38 4.7
EIVPX Parametric Volatility Risk Premium – Defensive -7.9 2.7 0.55 376
SHLDX USCA Premium Buy-Write -5.6 2.0 1.18 20.5
GARD Reality Shares DIVCON Dividend Guard ETF -7.6 1.6 1.41 12.6
VCRSX Voya CBRE Long/Short -4.6 1.1 2.35 44.8
GSSFX Gotham Short Strategies 11.5 0.5 1.35 2.2
HMXIX AlphaCentric Hedged Market Opportunity 1.9 0.2 2.47 8.3

Quick profiles of the five funds that were positive in both the short- and long-term

Nuance Concentrated Value Long-Short (NCLIX/NCLSX) invests in the stock of 15-35 companies that it deems to be industry leaders with strong and stable competitive positions. It then shorts the stock of up to 50 large companies with “more commoditized or structurally challenged competitive positions.” Up to 25% of the portfolio might be invested overseas.

Its managers remain pretty skeptical of the US market’s valuations. They write, “as of 12/31/18, the median company in the proprietary Nuance long universe, which consists of approximately 250 companies we view as industry leaders, was trading at around a 15% premium to what the Investment Team would consider to be fair value. Said another way, the universe appeared to be 15% over-valued on average, per our internal estimates. In addition, according to our company-by-company valuation work, this same universe had roughly 60% downside potential.” In response, the fund is just 6% net long; over the past couple years it has ranged from 23% net short to just 7% net long.

It has an R2 of just 13 against its peer group.

Morningstar rates this as a four-star fund. MFO has designated it as a Great Owl fund, which means that its risk-adjusted returns have been in the top 20% of its peer group. By any reasonable risk-sensitive measure, Nuance is a top-ten performer in its fund Lipper peer group.

Performance: 12th of 102 funds
Drawdown: 7th
Ulcer Index: 14th
Sharpe ratio: 11th
Martin ratio: 9th
Downside deviation: 11th
Bear-month deviation: 9th

The fund launched in December 2015.It’s drawn $26 million since then. Expenses are 2.84% and the minimum initial investment is $2,500. It made 5% in 2018.

FundX Tactical Upgrader (TACTX) is not a true long-short fund. Like all of the FundX offerings, it is a fund-of-funds that attempts to hold funds which are “in sync with current market leadership.”  Then separately, the manager may deploy a number of options to  buffer its stock market exposure: “raising cash, selling covered call or put options and/or buying put options or put spreads or call options or call spreads.”

Over the past three years, TACTX has performed reasonably well. Compared to all of the funds in its peer group, its three-year record:

Performance: 8th of 102 funds
Drawdown: 14th
Ulcer Index: 10th
Sharpe ratio: 4th
Martin ratio: 3rd
Downside deviation: 16th
Bear-month deviation: 19th

The fund had the misfortune of launching (and crashing) in the midst of the 2007-09 market crisis, which badly skews the “since inception” numbers. If we look at the 10-year picture, which mostly erases the effects of the financial crisis, you get a picture of a fund with slightly lower than average returns but noticeably lower than average risk. In particular, it has made money every year since launch and was up 7.5% in 2018

  Annual return MAX drawdown Recvry months Std dev Downside dev Sharpe ratio
FundX Tactical Upgrader 5.2 -9.3 12 7.8 4.9 0.61
Long/Short Equity Average 5.8 -18.9 25 10.1 6.4 0.52
S&P 500 Index 13.1 -18.1 4 13.6 8.5 0.94

The fund launched in February, 2008. It’s drawn $72 million since then. Expenses are 1.73% and the minimum initial investment is $1,000.

BlackRock Global Long/Short Equity (BDMAX) is best considered a market-neutral fund; that is, it tries to hedge out all market effects all of the time. That necessarily limits both upside and downside, since the decision to dodge headwinds also means that you can’t benefit from (more frequent) tailwinds.  The fund’s distinctive strategy is its reliance on Big Data. Perhaps BIG DATA!!

Their description is “The team’s powerful data capabilities help seek non-obvious opportunities others may miss.” Morningstar, which gives it a Bronze rating but only three-stars, explains it this way:

Management systematically ranks a universe of approximately 2,500 developed-markets stocks using a combination of traditional and nontraditional metrics …nontraditional metrics, which are often based on advanced computer techniques [include looking] at third-party data on online sales to get a sense of consumer sentiment in various markets.

The team tracks 50 different metrics and has invested a lot to continually deepen their data analytic capabilities. One measure of their success is its nearly complete independence from the stock market: since inception, the R-squared (that is, measured correlation) with the stock market is just 0.04. They show almost identical independence from their peer group, with an R-squared of just 0.05.

Over the past three years, BDMAX has performed reasonably well. The fund makes about 2.5 – 4% per year. Because it has no correlation to its nominal peer group, it’s not much worth reporting its rankings within the group. In broad terms, it has had double-digit returns in two years but also negative returns in two years. Over the past five years it has returned about 1.5% annually, better than cash not trailing ultra-short bonds. In 2018, it was up 1.8%. The numbers since inception, which includes its great performance in 2013, are stronger (4.2% annually) but nothing to make my heart go pitter-pat. If the fund had evidence of consistent 4% returns and rare years in the red, it would be noticeably more compelling. Morningstar praises the team for continually revising and strengthening their data analytic regime, which might suggest a brighter future. We just haven’t seen it proven consistently.

The fund launched in December, 2012 .It’s drawn $640 million since then. Expenses are 1.89% and the minimum initial investment is $1,000. “A” shares carry a 5.25% sales load, though its available no-load and NTF through some brokerages.

Balter Invenomic (BIVIX) is a strictly quantitative fund. The managers stay as far as humanly possible from the polished, sweet-tongued executives of the firms they might invest in. Instead, they generate a four page statistical profile of every stock in which they might invest. Currently, they have about 150 long and 150 short positions, which means that no one position has much potential to damage them.

Invenomic’s key differentiator, from the lead manager’s perspective, is a successful short book. Manager Ali Motamed argues that most long/short managers fail on the short side. They maintain too few shorts, they put too much money into each, they maintain a large short book when market conditions don’t warrant it and they view themselves as on a crusade against the management teams. Each of those mistakes limits the power of the short portfolio to generate alpha rather than just limiting beta; that is, Mr. Motamed thinks a good short portfolio should make money rather than just hedge volatility. They target “story stocks,” firms with deteriorating fundamentals and firms artificially buoyed by one-time windfalls that investors are treating as structural advantages. Depending on market conditions, as little as 10% of the portfolio or as much as 75% of it might be in the short book.

It is a fund about which Morningstar is uniformly negative.

I guess I mostly disagree. While the expenses are high, they’ve gotten a lot right. Since inception their beta (0.15)  is far lower than the stock market’s, their Sharpe ratio (a measure of risk-adjusted returns) is far higher, they made solid money is 2018 (up 3.5%, 780 bps better than the market and 970 better than their peers) and a lot in January 2019 (up 6.8% in 30 days). BIVIX has higher Sharpe and Sortino ratios than any fund in the Morningstar Long-Short Equity category since inception (06/19/17) through 12/31/18. It’s an intriguing fund run by a manager with first-rate experience as one of the Boston Partners.

The fund launched in June, 2017. It’s drawn $117 million since then. Expenses are 2.93% and the minimum initial investment is $5,000.  

Gotham Short Strategies (GSSFX) made a big pile of money (11.5%) in the fourth quarter of gotham funds logo2018 which pushed its lifetime annual rate of return to 0.5%.  Morningstar categorizes it as a bear market fund, which is much more accurate than Lipper’s assignment to the long-short equity group. I’ve included it here just as a gesture of transparency: it technically passed the screens, so you deserve to know about it. The other thing to know is that it, like all of its black-box siblings at Gotham, requires a minimum initial investment of $250,000.

Bottom line: both Nuance Concentrated Value Long-Short and Balter Invenomics warrant serious attention from investors looking to buffer part of their portfolio from the storm. They’re very different funds and both expensive by traditional standards, but both offer the prospect of dealing both with volatile markets and those which are hostile to traditional 60/40 balanced funds.

Nota bene: three of the four long-short funds we’ve profiled over the years – LS Opportunity, AMG RiverRoad Long-Short and Bridgeway Managed Volatility – passed our short-term / long-term screen and each ended up in Tier Three. All of them warrant close attention and we’ve linked, in the tables above, to our profiles of them. LS Opportunity, which has returned about 5.5% annually since launch might command the most attention.  The only fund not passing the screen – RiverPark Long/Short Opportunity (RLSFX) – is a more aggressive fund that uses its short book as an offensive weapon rather than a defensive shield. As such, it’s not terribly surprising that it faltered in Q4 (down 12.5%). That said, it has top tier returns over the past quarter, year, three years and five years.

Using MFO’s Bear Market Rating To Help Contain Portfolio Drawdown

By Charles Boccadoro

“Never risk what you have and need

for what we don’t have and don’t need.”

Warren Buffett

December reminded us of how quickly the music can stop. The SP500 fell 9% turning a modest annual gain into a loss. Those hugging the S&P were the lucky ones.

Touchstone Small Company (SAGWX) was off 13.4%. Invesco S&P SmallCap Health Care ETF (PSCH) was off 16.1%. Both are dual MFO Great Owl and Honor Roll funds, which means they have a track record of top quintile risk adjusted and absolute return versus peers.

Other notables: Parnassus Endeavor (PARWX) off 13.8%, Hotchkis & Wiley Mid-Cap Value (HWMIX) off 15.2%, and Miller Opportunity (LMOPX) off 18.7%.

We first introduced Bear Market Rating in the April 2015 commentary with “Identifying Bear Market Resistant Funds During Good Times.” The Bear Rating represents decile ranking (1 to 10 where 1 is most bear market resistant fund) of funds in a given category, based on bear market deviation (BMDEV). The deviation indicates typical percentage decline based only on a fund’s performance during bear market months, which Morningstar defines as a 3% drop for equity funds.

A look at the funds listed above on the MFO Premium site shows all but SAGWX have elevated Bear Market Ratings based on the last five years of the current bull market, which started in March of 2009 or 118 months ago … even if we shift the evaluation period to November before December’s decline. So, none really, except perhaps SAGWX, would have given past indications that they can resist drawdown when the overall market drops. Most in fact are experiencing their worst drawdowns in 5 years, through December anyway.

Going forward, we thought it be interesting to pull-up which funds appear to be the most resistant to future market pull-backs, based strictly on past performance during bear market months, again over the last five years of the current bull market.

Screening for Large-Cap, Mid-Cap, Small-Cap and Multi-Cap US Equity Lipper categories within the Mutual Fund and ETF universe, the table below lists the top ten by annualized return. Most are MFO Great Owls and Honor Roll funds. Invesco S&P MidCap Low Vol ETF, Akre Focus (AKREX) and AQR Large Cap Defensive Style (AUEIX) have among the lowest bear market deviations BMDEVs while still sporting strong absolute returns.

If December’s drawdown caused you more discomfort than you like or expected, as it did for me in January 2016 and all of us in 2008, than MFO’s Bear Market Rating and its attendant deviation BMDEV would seem like good metrics to help select funds that mitigate drawdown of your portfolio.

Living a Rewarding Retirement: The Importance of Time

By Robert Cochran

It’s minus 3 degrees this morning, with a thick blanket of snow on the ground, and winds are making it feel like 20 below.  There is little compelling reason for this retired guy to hustle around and get outdoors, so it’s as good a time as any to think about the so-called market meltdown of 2018 and offer some perspective on what is really important for individual investors to consider.

A quick look at my Schwab accounts tells me that since January 1, 2018, through January 18 of this year (12 ½ months), my total portfolio value is down 1.31%.  As I have mentioned before, I rarely look at these values, so I was actually surprised the return has been that good.  One would think last year was a disaster, given the massively negative press over the last many months. Yes, the year-end numbers were down more than today’s, but a loss of less than 6% over 12 months doesn’t get me excited at all.  In fact, that is the same return as the average 50%-70% Allocation Fund, and my allocation is more aggressive.

During my 30-plus years as an investment advisor, I was witness to numerous bull and bear markets, market crashes, market meltdowns, interest rate swings, recessions, wild one-day roller coaster rides, domestic and international political disasters, and more economic forecasts of doom and gloom than I can possibly recount. When we also consider the current state of affairs in Washington (and that’s really hard to avoid), it’s no wonder folks, especially retirees, are a bit nervous about their investments. This morning’s paper says that a majority of economists believe we will have a recession in 2020.  Am I going to make changes based on that? Of course not.  I seem to remember a quote from a while back, saying “Economists have predicted 12 of the last three recessions.”

Broadcast business media have discovered a gold mine of advertising resulting from scaring people on a daily basis.  I suggest a simple solution: don’t watch or listen to this drivel.  Few are real journalists, and even fewer have financial education and experience.  Those that offer alternative viewpoints may be ridiculed or even blackballed from future appearances.  Remember, the goal of these programs is to sell advertising, not to provide unbiased commentary.  Fortunately some investors rely on a competent, fee-only advisor to keep them from self-immolation!

Through all of the above, the most important factors in the overall success or failure of investment goals have been time and timing.  It’s important to remember that folks who are investors, and not traders, are not concerned about time and timing.  While working, they continue to add to their retirement accounts through good times and bad.  Investors look at the big picture and do not try to pick a time to exit or enter the stock markets like traders.  Investors set an overall portfolio allocation that allows them to sleep at night. Traders do not. Traders are constantly tweaking this or that holding. Investors are not. Investors understand there will be some tough times as well as some great times.  (Since 1980, the average intra-year decline of the S&P 500 has been nearly 14%, yet annual returns have been positive in 29 of those 39 years.) Traders will attempt to time these declines.

Some retirees are fortunate to not need income from their investment portfolios.  This allows them to be more aggressive with allocations, if they are comfortable with that.  Those that need portfolio income should set aside about 5 years of that income in cash, CDs, or short-term bonds.  This may avoid having to sell stocks during a down market.  Numerous studies suggest that a sensible annual withdrawal rate is 4-5% of the portfolio’s value.  Some investors are able and willing to reduce income needs following a down-market year.  Some might consider delaying retirement to avoid starting regular portfolio withdrawals during a down market.

Perhaps the reason some retirees fixate on portfolio valuation is because of time…they have too much time on their hands.  For those who fall into this situation, I would suggest reading my prior commentary: Living a Rewarding Retirement – Make a Difference. 

Investors who enter retirement with no mortgage or credit card debt are in a much better situation than those whose monthly cash flow necessitates these big payments.  That is why I have been a strong advocate of paying off debt prior to retirement.  It makes a huge difference and reduces potential pressure for portfolio income.  I can speak to this personally.  It really works.

There is yet to be anyone who can accurately predict what the markets will do on a regular basis.  Predicting what will happen each day is nearly impossible, but economists and other self-anointed experts want us to buy into their yearly predictions.  Understand this, and you will come a long ways toward shutting out some noise.  Volatility appears to be with us for now.  This is something many investors had forgotten during the past five years, and it adds to heightened anxiety.  But consider this: despite all the wild swings in the markets, there was no meltdown in the last 12 months.  It’s another year, the economy remains fairly strong, employment numbers are still very good, and inflation remains very low.

If all the noise is keeping you awake at night, if you are afraid to open your monthly account statements, or if you spend more than five minutes each day fussing over your investments, the solution is clear: reset your portfolio allocation to achieve a lower risk profile. Perhaps you should have zero dollars in stocks. Yes, your potential returns may be lower, but your potential drawdown should be correspondingly lower.  If you don’t know how to accomplish this, find a good fee-only advisor who can assist.  As the saying goes, “Set it and forget it.”  And also consider the impact mutual fund fees can have on your portfolio, especially if we continue to see single-digit returns.  As investors, we can’t control the markets, but we can make decisions on portfolio risk and portfolio expenses.

So, tune out the broadcast-business programming, get an allocation you can live with, and spend your free time making a difference for others.  This last, by itself, can help to reduce retiree angst.

 

Grandeur Peak reopening: the limited time offer

By David Snowball

On January 14, 2019, Grandeur Peak announced the partial reopening of four of their funds: Global Opportunities, International Opportunities, Global Reach and Emerging Markets Opportunities funds. The first three had been hard closed, while the last had been soft-closed. Under the terms of the reopening, the funds are open to additional purchases by existing shareholders but also to new shareholders willing to purchase the funds directly from Grandeur Peak Funds at www.grandeurpeakglobal.com.  Financial advisors and retirement plans with clients in one of these funds will be able to continue investing in the fund for both existing as well as new clients.

Long-term investors should take this opportunity seriously.

“The soft re‐opening is likely to be for a limited time … we remain committed to keeping assets tightly limited … but the time frame will depend on where the market goes and the level of additional investments received.”

For those unfamiliar with the firm, Grandeur Peak was started by a small group of Wasatch Funds professionals who left to launch a boutique dedicated to global small- and micro-cap investing. It is a challenging universe which few managers enter, which large investment firms avoid because the strategies are so tightly capacity constrained, and which ETF sponsors avoid because of technical issues (for example, trading volume) in some foreign markets make it impossible to construct a scalable index.

Grandeur Peak quickly distinguished itself for its discipline, exceptional performance and remarkably healthy culture. Part of that discipline was to know, even before they were launched, how many funds the firm would have and at what level of assets each fund would close. Each of the first four funds closed fairly quickly and Global Micro-cap closed on the day it launched. Only the two Stalwarts funds, originally offered out of respect for financial advisors who needed continued access and populated with “alumni” stocks from the other funds, remained open to new investors. It was unclear that any of the funds would ever become available to the general public again.

All of that changed with the brutal international sell-off that began in 2018. International stocks fell harder and faster than US stocks, emerging markets fell harder and faster than developed markets, small caps fell harder and faster than large, and emerging markets micro-caps … well, don’t ask.

In almost all instances, the Grandeur Peak funds fell farther, sometimes substantially farther than their peers. Below we report the relative performance of each Grandeur Peak fund against its Lipper peer group. In each case, the performance is annualized; for example, over the past five years, Emerging Markets Opportunities – the first fund in the table – has averaged 1.8% more per year than its peers over the past five years but 4.9% less per year over the past two.

  Q4 1 year 2 year 3 year 5 year Since inception
Open to existing fund shareholders and new direct shareholders:            
Emerging Markets Opportunities (GPEIX/GPEOX) -0.8 -4.7 -4.9 -4.0 1.8 1.8
Global Opportunities (GPGIX/GPGOX) 0.0 -4.3 1.0 -0.5 1.7 2.9
Global Reach (GPRIX/GPROX) 0.5 -1.9 1.7 0.3 2.6 2.4
International Opportunities (GPIIX/GPIOX) 0.0 -3.2 -0.1 1.0 1.5 3.1
Remains open to new and existing shareholders (no change in status):            
International Stalwarts (GISYX/GISOX) 0.1 0.9 1.8 3.0 n/a 3.7
Global Stalwarts (GGSYX/GGSOX) 0.2 -1.2 2.4 0.9 n/a 1.9
Remains hard closed (no change in status)            
Global Micro Cap (GPMCX) 2.1 -4.0 0.6 0.2 n/a 1.4

Why the sudden decline?  Grandeur Peak founder Robert Gardiner wrote a remarkably long, thoughtful Letter to Investors about the firm’s recent performance travails as well as a series of remarkably satisfying developments at the concern. Concerning the former issue, he wrote:

Beyond being in an out-of-favor segment of the market, we have faced two additional major headwinds. First, a weighting headwind with our significant overweight to Emerging Markets across all portfolios and our underweight to the US market in our global portfolios – this has been a seven-year headwind for us, but particularly strong in 2018. Second, a style headwind, as momentum investing has significantly outpaced value investing this year.

Over coffee once, our friend and colleague Sam Lee, president of SVRN Asset Management, suggested that Grandeur Peak embodies “the Platonic ideal” of a fund company. That is, anything that they could do right, they did. In January 2019, he reflected a bit on the causes of the recent slippage and a potential response.

My main thought: One of the biggest and most persistent detractors of Grandeur Peaks’ performance has been an overweight to EM/foreign relative to U.S. for their global funds. This is arguably an unforced error as the relative performance of US v foreign stock has historically exhibited a lot of trendiness. GP managed to overcome that drag with heroic stock-selection skills. If you dislike GP’s persistent foreign bias, you can neutralize it yourself by overweighting US stocks in your portfolio.

The question is, what should an investor do? Mr. Gardiner answered that from the perspective of the insiders who have personally invested millions in the Grandeur Peak funds: there’s blood in the streets, buy!

Investors are clearly fearful of Emerging Markets right now, and our current opinion of value-oriented, international small-cap companies is that they are highly attractive.

We view selloffs like this as not only an opportunity to buy our favorite companies at better valuations in the portfolios, but also a chance to invest more of our firm’s balance sheet, and our personal assets, in the Grandeur Peak Funds. The firm has recently added to its position, and we will likely continue to increase our investment if the market goes farther south. Individually, and as a firm, we are heavily invested in our own funds because we are confident in our potential to succeed over the long run.

The Grandeur Peak strategy is founded on the observation that the most compelling values, if not the most stable returns, are found in the tiniest niches: small and microcap value stocks, often in frontier and emerging markets. The fact of volatility goes with the territory.

Bottom line: The Grandeur Peak folks are not committing to keeping the funds open long and they have a tradition of closing on quite short notice. We view this as a limited time opportunity to explore the possibility of working with the most successful investors in a hard-to-access niche. It would be prudent for folks interested in moving parts of their portfolios away from developed market, large cap stocks which might be entering a multi-year swoon, to reach out to Grandeur Peak and take time to better understand the opportunity while it is still available.

MFO has profiled five Grandeur Peak funds. Links to each of those are available on our fund index page.

By way of full disclosure, I hold three Grandeur Peak funds in my personal portfolio. Those are Emerging Market Opportunities, Global Reach and Global Micro-cap. My style is to set my investments on auto-pilot, so I have been making small, consistent investments in the funds whenever possible and will continue to do so. David

As the world turns, Rondure Global gains

By David Snowball

 We’ve reported on the serious performance challenges faced by Grandeur Peak through much of 2018 and their subsequent decision to reopen four funds, three of which had been hard-closed; that is, unavailable even to existing shareholders.

But what about Rondure?

Rondure Global Advisors is newer investment adviser which is Grandeur Peak’s partner. Rondure, like Grandeur Peak, was launched by an alumna of the Wasatch Funds, Laura Geritz. As a practical matter, Ms. Geritz and the Grandeur Peak folks agreed that there was much to be gained through a partnership which provided for some sharing of resources and ideas.

Rondure launched two funds in May, 2017. Rondure New World Fund (RNWOX/RNWIX) invests primarily in emerging markets. Ms. Geritz has invested a far higher percentage of her portfolio in smaller stocks (47% in small- to mid-caps) than has her average peer (17%).  Rondure Overseas Fund (ROSOX/ROSIX) invests in developed international markets, with a substantial current overweight in Japan. As with New World, Overseas has a far higher percentage of its portion invested in smaller stocks (53% in mid- to micro-caps) than has her average peer (19%).  In both funds, Ms. Geritz looks for “Quality Compounders,” those with “the best metrics and best brands.”

MFO detailed Ms. Geritz performance and her funds’ discipline in a May 2017 Launch Alert, which might be worth reading if you’re unfamiliar with the family.

In a recent letter to her investors, Ms. Geritz describes both Rondure’s corporate culture and its investing mantra. As to the firm,

Our philosophy is simple. If you hire bright, driven, creative people, you embrace a time tested, patient process of investing in Quality Compounders with a balance sheet margin of safety at the right price, we believe you can do well over the long term.

As to investing, and her current suspicion that significant imbalances remain,

This changes nothing in our investment process. We screen, we travel, we invest when we see great compounders that we think will deliver an absolute return in the long run, and we don’t invest when we don’t see opportunity. Risk to us, like all the great investors mentioned above, is permanent loss of capital.

Her funds have a modest cash stake (4-5% at last report) and a diversified portfolio (80-100 stocks, with the majority weighted at around 1.3-1.5% of assets).  Overseas has drawn $24 million in assets while New World holds $114 million, driven in part by her outstanding performance in a similar product at Wasatch and in part by her outstanding performance with these funds.

Below we report the relative performance of each Rondure fund against its Lipper peer group. In each case, the performance is annualized; for example, since inception, New World has averaged 2.4% more per year and its Q4 2018 performance had been extended over an entire year, it would have outpaced its peers by 12.0%.

  Q4 2018 Since inception
Rondure New World (RNWOX/RNWIX) 12.0 4.9 2.4
Rondure Overseas (ROSOX/ROSIX) 3.8 4.4 4.1

Which is to say, both Rondure funds are solidly outperforming their peers with, so far as we can discern, no excess risk.

Bottom line: Rondure is off to a solid start, which should surprise no one and please many. Both funds are in the black (through 1/30/2019) since launch, they’ve seen modest inflows and the Rondure team is maturing nicely. They very much warrant your attention.

Launch Alert: FPA Flexible Income Fund (FPFIX)

By David Snowball

On December 31, 2018, FPA launched FPA Flexible Income Fund (FPFIX). The fund seeks to provide long-term total return, which includes income and capital appreciation, while considering capital preservation. This marks FPA’s first new bond fund since becoming adviser to FPA New Income (FPNIX) in 1984. Morningstar celebrates New Income for “a strong management, process, and risk/reward profile and has been a safe haven from losses and bond-market excess.” FPA hopes to leverage those virtues by applying them to a fund that has permission, but not the obligation, to follow a modestly more aggressive path.

FPA tends to be the home of absolute value investors. They are people who invest in securities that offer compelling risk-adjusted profiles; the mere fact that some security is “the best of a bad lot” does not, for them, warrant interest. That means that they’re often out-of-step with their nominal peers, that they have a tradition of holding cash when cash is the most prudent option, and that they dislike losing (your) money a lot more than they like making it. FPA New Income is the most conservative expression of that philosophy. Its goal is to provide a positive return in any given 12 month period. The data at MFO Premium shows that, over the past 20 years, the worst 12-month stretch for New Income saw a drawdown of just 0.3% and an average of +3.9%.

Ryan Leggio, one of FPA’s Partners and “a senior product specialist,” notes the problem with that goal: “If you believe that we do a good job at New Income, then we don’t have a 

photo of Thomas Atteberry

Thomas Atteberry

solution for a long-term fixed-income investor who isn’t concerned about losing money over a 12 month period.” There’s something like $6 billion in New Income, at least a chunk of which would be more-appropriately invested in a strategy with a longer horizon. Indeed, the flexible income strategy was seeded by a long-time investor in New Income for whom FPA subsequently created a separate account.

FPA partners Thomas Atteberry and Abhijeet (Abhi) Patwardhan manage both funds with the same investment philosophy, process and team. Morningstar describes Mr. Atteberry as “among the industry’s best” and Mr. Patwardhan as his successor. The managers, and other FPA professionals, are heavily invested in the strategy.

photo of Abhijeet (Abhi) Patwardhan

Abhijeet (Abhi) Patwardhan

Including analysts, there are seven people in the team supporting the two funds.

The managers will have the freedom to invest a greater portion of the portfolio in high-yield securities (75%, rather than the 25% cap for New Income) and will target generating positive returns over a 36-month period (rather than the 12-month target for New Income). That having been said, they will not compromise their absolute value orientation or engage in the fruitless game of chasing yield. Mr. Leggio notes that the fund “may look very much like New Income for three to five years in a row if there are no compelling opportunities; this will not always be a riskier portfolio, we only take risk when we’re paid for it.”

Over the long-term, FPA hopes this strategy will beat inflation by 200 bps. The volatility would normally be higher than New Income’s but lower than a short-term high yield bond index. By way of illustration, Mr. Leggio notes that “in 2015-16, the short-term high yield index (1-5 year) saw a drawdown of 10%, New Income drew down 1%, and the credit-sensitive bonds in New Income – which would be more prominent in Flexible Income – were down a little over 3% before fees.”

This is a capacity-constrained strategy. FPA estimates that they can manage, given current conditions and constraints, about $12 billion between the two iterations of their strategy. Currently they have about $7 billion invested.

The fund carries a $100,000 minimum initial investment and expenses of 0.39% (after waivers for 2019). The fund is available for purchase through 10 brokerages, including major platforms such as Fidelity and TD Ameritrade. There is no guarantee that a lower investment minimum option will be available, but it wouldn’t be surprising either.

Bottom Line: Fixed income investors need to take this opportunity seriously. Headwinds are rising in the bond markets, and pursuing respectable returns with muted risks will require discipline, flexibility and experience in weathering the storm. Mr. Atteberry brings that to the table; he and his co-managers have produced some of the industry’s highest Sharpe ratios over the years. While FPA doesn’t seek to maximize short-term returns, they do have an exceptional record of getting it consistently right for their investors.