June 2020 IssueLong scroll reading

June 1, 2020

By David Snowball

Dear friends,

Welcome to summer.

All of us hope that it’s not going to be a long, hot one.

Some months it’s easy to write a welcome note, some months not. This is one of those latter times. Over the night just passed there were ongoing instances of “civil unrest” (the police chief’s term) with a caravan of 100 cars proceeding from one shopping plaza to the next. Four people – including a police officer simply driving his car – were shot; two, not including the officer, died. Many of the caravanning cars bore Minnesota plates. That followed a day in which there was a huge, peaceful, multi-ethnic protest which was shepherded safely through the city by Davenport police. We’ll live with a curfew in the days ahead.

Meanwhile, life is constrained by a pandemic.

Many – environmentalists and activists, journalists and doctors, local law enforcement and elected leaders – will work, often enough at substantial personal risk and for sometimes pitiful compensation, to make life safer and saner for all of us. We don’t agree with everything they write, say or do. The key is whether we attribute those differences of opinion to some malign impulse on their part, and so think ill of them.

On whole, I’ll probably assume that the people who were good and wise when we agreed with them, remain so even in disagreement. I’ll talk, I’ll listen, and I’ll trust they’ll do the same.

What’s crazy?

Let’s put aside for now all of the people who have too much time on their hands and use it to create faux Oreos:

I’ll focus instead on the market.

We’ll be experiencing a little turbulence.

Once upon a time, gaining or losing 1% in a day seemed like a lot.

No more. The Leuthold Group has been tracking days on which the market gains or loses 3% or more in a single session. That’s roughly a 750 point swing in the Dow. Since the February 19th peak there have been 13 days when the S&P 500 fell by more than 3% and 12 days when it gained more than 3% (data from Research.Leuthold). Measured intra-day, rather than at the close, March saw 14 thousand-point moves on the Dow.

Which reasonably leads to the question …

You made how much?

Quick quiz: the market’s been completely crazy for 12 months. At the end of it all, how much has the market returned over the past 12 months?

  1. 5%
  2. nada / zilch / zippo
  3. -5%

The answer is, “none of the above.” Over the past 12 months, Vanguard Total Stock Market Index (VTSMX) is up precisely 10% which is to say, it’s been a perfectly normal year in the markets?

Did we just have a bear market?

Are we over it yet?

The downturn we experienced was the fastest and, if over, shortest bear market in history.  Driven by computer programs that initiate 70-80% of all trades, an average of 15.6 billion shares traded daily, the greatest total in 11 years. The stock market fell 20%, the bear market threshold, in just 16 days. That’s faster, by seven days than the collapse that heralded the Great Depression. By the end of Day 19, the market was down 30%. The bear market then lasted only 37 days (Feb. 19 – Mar. 23) before beginning a rebound that never retested the market low.

The Leuthold Group concludes, “The current rally is either the first up-leg of a new bull market or the second-largest bear market rally in the last 125 years” (5/29/2020). The key question is whether the S&P 500 closes above 3,386, its February 19 peak. We begin June at 3044 on the S&P 500, so Leuthold thinks the signal for a new bull is about 11% up from here.

Mid-year changes to Snowball’s portfolio

I made two changes to my retirement portfolio in May. It’s rare that I make mid-year changes (heck, it’s rare that I make any changes) but I try to report them when I do. Other than a small Roth IRA, my workplace retirement portfolio is split between TIAA-CREF and T. Rowe Price.

In the TIAA-CREF portfolio, I sold all shares of my CREF Stock and Dodge & Cox International, plus TIAA-CREF Lifecycle Retirement Income, and replaced them with CREF Social Choice Account (QCSCIX). Social Choice is balanced, with assets divided between foreign and domestic stocks (about 60%) and bonds and other fixed-income securities, including money market instruments (about 40%). Currently, about half its equity exposure and one-third of its fixed-income portfolio is international. In asset allocation terms, it constituted a minor reduction in my equity exposure. I am, however, more comfortable with a portfolio that takes ESG factors into account and Social Choice accomplishes that goal. The expense ratio is 0.24% and it has a four-star rating from Morningstar.

In the T. Rowe Price portfolio, I sold most of my individual equity funds and replaced them with T. Rowe Price Multi-Strategy Total Return (TMSRX). It’s Price’s version of a hedge fund and incorporates a bunch of non-correlated strategies.

Risk Allocation, as of 4/30/2020

Component Strategy Contribution to Risk
Macro and Absolute Return 74.54%
Style Premia 14.91%
Equity Research Long/Short 11.60%
Global Focused Growth 8.45%
Dynamic Credit 6.54%
Volatility Relative Value 5.30%
Fixed Income Absolute Return 4.15%
Diversified Foreign Currency N/A
Quantitative Equity Long/Short N/A
Other -25.50%

I trust Price rather more than I trust the current state of the market. The fund held up well during the turbulence, with a net gain of 0.6% through April 30 and 3.2% through May 30. Its annualized lifetime return is 4.1% while its average multi-alternative peer lost 3.7% annualized.

I’m working on a profile of the fund, but haven’t heard back from T. Rowe Price yet about a couple of statistical questions. Expect it in July!

What’s working?

Martin Ryan, an MFO reader, dropped a note that said it might be helpful if I … oh, you know, tried to identify what was working. Good suggestion, sir!

One thought: be very wary about latching on to what’s working right now. That’s a lot like learning to depend on the reactions you learned while visiting a circus funhouse. My own inclination is to make any bets very carefully.

A second thought: talking about the performance of broad categories of investment masks more than it reveals. By way of illustration, here are the category returns for a half dozen ways of hedging your exposure to the stock market. I’m using the S&P 500 as a surrogate for that.

  YTD return, through 4/30/20 Average MAXDD Five-year returns
Equity Market Neutral -3.7% -7.3% -1.8
Absolute Return -5.2 -9.9 0.8
Moderate 60/40 Allocation -7.5 -13.1 3.6
Multi-Strategy Alts -7.6 -11.5 0.1
S&P 500 -9.4 -19.6 8.8
Flexible Portfolio -9.6 -15.2 2.2
Long/Short Equity -9.8 -15.8 1.5

So what do we see? Two-thirds of the categories outperformed the S&P 500 during the four exciting months that began the year … but the best of them returned less than half as much as the S&P over the longer term.

But that masks a lot. The vanilla 60/40 category beats the flexible portfolio category, where managers are trusted to decide how much to allocate and where, by a lot. But when we ask the screener at MFO Premium to give us a list of the YTD returns of all 60/40 and all flexible funds, we discover that all of the top 10 funds and 17 of the top 20 on the list are from the lower-performing category:

Name Symbol Lipper Category YTD
Advisors Preferred Quantified STF QSTFX Flexible Portfolio 11.9
Columbia Thermostat COTZX Flexible Portfolio 10.5
GuidePath Managed Futures Strategy GPMFX Flexible Portfolio 7.6
KL Allocation GAVIX Flexible Portfolio 6.7
AXS Aspect Core Diversified Strategy EQAIX Flexible Portfolio 5.2
Cargile CFNDX Flexible Portfolio 5.2
Issachar LIONX Flexible Portfolio 4.6
Absolute Capital Opportunities CAPOX Flexible Portfolio 4.5
Advisors Preferred OnTrack Core OTRFX Flexible Portfolio 4
Advisors Preferred Spectrum Low Volatility SVARX Flexible Portfolio 3.2
Victory Market Neutral Income CBHIX Flexible Portfolio 2.0
Hussman Strategic Allocation HSAFX Flexible Portfolio 2.0
Arrow DWA Balanced DWAFX Moderate Allocation 1.9
Dynamic International Opportunity ICCIX Flexible Portfolio 1.8
RPAR Risk Parity ETF RPAR Flexible Portfolio 1.4
Goldman Sachs Tactical Tilt Overlay GSLPX Flexible Portfolio 0.8
MFS Prudent Investor FPPVX Moderate Allocation 0.4
SMI Dynamic Allocation SMIDX Flexible Portfolio 0.3
Toews Tactical Growth Allocation THGWX Flexible Portfolio 0.2
Manning & Napier Pro-Blend Moderate EXBAX Moderate Allocation -0.1

We profile KL Allocation elsewhere in this issue.

The takeaway is that you need to get beyond the labels and try to find a strategy that makes sense to you, whose risks you understand and which you’re willing to live with for the next five or ten years.

Here are the top YTD performers in each category, and their five-year record.

    Lipper Category 2020, through 4/30 Five year
ATACX ATAC Rotation Absolute Return 35.4 10.6
TAIL Cambria Tail Risk ETF Absolute Return 17.7 n/a
GLGUX American Beacon GLG Total Return Ultra Absolute Return 9.5 n/a
MOM AGFiQ US Market Neutral Momentum Equity Market Neutral 21.8 3.5
BTAL AGFiQ US Market Neutral Anti-Beta Equity Market Neutral 11.9 5.3
JPMNX JPMorgan Research Market Neutral Equity Market Neutral 8.5 2.9
CLIX ProShares Long Online/Short Stores ETF Long/Short Equity 33.4 n/a
AVOLX Arin Large Cap Theta Long/Short Equity 27.2 6.0
RLSIX RiverPark Long/Short Opportunity Long/Short Equity 18.6 10.2
IQDNX Infinity Q Diversified Alpha Multi-Strategy 8.9 7.6
RYMSX Rydex Guggenheim Multi-Hedge Strategies Multi-Strategy 6.5 2.0
CSQIX Credit Suisse Multialternative Strategy Multi-Strategy 5.7 1.8
QSTFX Advisors Preferred Quantified STF Flexible Portfolio 11.9 n/a
COTZX Columbia Thermostat Flexible Portfolio 10.5 6.8
GPMFX GuidePath Managed Futures Strategy Flexible Portfolio 7.6 n/a
GAVIX KL Allocation Flexible Portfolio 6.7 4.8
DWAFX Arrow DWA Balanced Moderate Allocation 1.9 1.7
FPPVX MFS Prudent Investor Moderate Allocation 0.4 n/a
EXBAX Manning & Napier Pro-Blend Moderate Moderate Allocation -0.1 3.9

“Absolute return” funds are Lipper’s ultimate “do anything it takes to finish in the black” flexible category.

ATAC Rotation (ATACX), Arin Large Cap Theta (AVOLX), RiverPark Long/Short Opportunity (RLSIX), and Infinity Q Diversified Alpha (IQDNX) have all earned MFO’s “Great Owl” designation. That signals the fact that they’re posted top 20% risk-adjusted returns in every trailing period beyond one year.

What’s not working?

“Famous old guys” have had a rough start to the year. Here are three notables, with the YTD through 4/30 returns.

Bill Miller, a guy with a 15-year streak, Miller Income (LMCJX), -31%

Bruce Berkowitz, Morningstar manager of the decade for 2000-10, Fairholme Allocation (FAAFX), –15%

Whoever’s running Sequoia (SEQUX), -10.9%

Sadly, value funds have had it even worse. If you rank-order all large-cap value, core and growth funds by their YTD returns, there is not one large-cap value fund in the top 200.

The Top Values

    Lipper Category 2020, through 4/30 Five year
HDOGX Hennessy Total Return Large cap value -11.0 4.5
BIGRX American Century Income & Growth Large cap value -11.7 5.7
QRVLX Queens Road Value Large cap value -13.2 6.3
EDOW First Trust Dow 30 Equal Weight ETF Large cap value -13.4 n/a
YAFFX Yacktman Focused Large cap value -13.7 6.5

The researchers at the Leuthold Group offered a fascinating observation of why this might be true. The market, they argue, bifurcated around 1990, around the launch of the worldwide web, into two separate markets. “New era” companies have seen a steady, nearly 50% rise in return-on-equity (sometimes called “operating profitability”), and they’ve seen their average p/e ratios sit above 35 for 25 years. The other 75% of corporations are at the same p/e as in the 1950s and 60s as their profitability has steadily slumped (James Paulsen, “Two Conundrums? A single answer,” 6/1/2020). The trapped 75% largely defines the universe for most value investors.

 One glimmer of hope is Rupal Bhansali’s Ariel Global Fund (AGLYX) which was down just 5.7% through April 30. That makes it pretty much the top value fund this year. Lipper classifies it as a global large-cap value fund. We recognize it as a “Great Owl” for sustained excellence over its eight-year existence. Our profile of it is here.


For being here. For reading and, at least occasionally, writing back to me. For your good humor and your good leads on funds and stories.

Several folks poked gently at the implication that my celebration of “grown-ups” last month pointed to folks with just one set of political beliefs. Nope. Far from it. When I think of grown-ups, I think of the final line of J.M. Barrie’s Peter Pan:

When Margaret grows up she will have a daughter, who is to be Peter’s mother in turn; and thus it will go on, so long as children are gay and innocent and heartless.

“Gay and innocent and heartless.” Curious and unexpected line with an unexpected juxtaposition: “innocent and heartless.” It reflects an old judgment that compassion grows only through travail. We take a few hits and suddenly feel for others. Catherynne Valente, in her novel The Girl Who Circumnavigated Fairyland in a Ship of Her Own Making (2011) makes the point more plainly:

One ought not to judge her: all children are Heartless. They have not grown a heart yet, which is why they can climb high trees and say shocking things and leap so very high grown-up hearts flutter in terror. Hearts weigh quite a lot. That is why it takes so long to grow one.

My guess is that grown-ups are people who care, a lot, about others; they care about getting it right, they often start with the facts rather than the fears or the comfortable conclusions, they listen and are willing to grow from what they hear. Some grown-ups are McCain-shaped (John rather more than Meghan) and some look like Mike Tomlin (sorry, Pittsburgh native here). Some grown-ups are shaped like Tim Walz, the governor of Minnesota, and others like Mike DeWine, the governor of Ohio. Good guys, with very different political inclinations, trying really, really hard to deal as best they can with really, really hard challenges.

And so, thanks for your notes. I appreciate good-spirited disagreement and the opportunity to reflect and perhaps grow.

Thanks to Wilson, Martin, and Sunil, and to the good folks at S&F Investments. Thanks, as ever, to the good folks who’ve expressed their confidence by being “subscribers” to MFO; that is, who’ve set up modest monthly contributions through our PayPal link. They are Gregory, William, Matthew, the other William, Brian, David, and Doug

Support good journalism

I would, at this point, often enough encourage you to support MFO. But really, for now, I’d much rather you support those struggling to support us all. Light is, after all, a great disinfectant. The power of independent journalism came sharply to mind as I read a front-page story in The Wall Street Journal. Entitled “Facebook Executives Shut Down Efforts to Make the Site Less Divisive” (paywall, 5/26/2020), journalists Jeff Horwitz and Deepa Seetharaman drew on internal Facebook documents to show that the company knows its tearing at the fabric of society … and consciously rejected its own team’s efforts to make the site less malignant.

A Facebook team had a blunt message for senior executives. The company’s algorithms weren’t bringing people together. They were driving people apart.

“Our algorithms exploit the human brain’s attraction to divisiveness,” read a slide from a 2018 presentation. “If left unchecked,” it warned, Facebook would feed users “more and more divisive content in an effort to gain user attention & increase time on the platform.” …

But in the end, Facebook’s interest was fleeting. Mr. Zuckerberg and other senior executives largely shelved the basic research, according to previously unreported internal documents and people familiar with the effort, and weakened or blocked efforts to apply its conclusions to Facebook products.

The reporters conclude,

In essence, Facebook is under fire for making the world more divided. Many of its own experts appeared to agree—and to believe Facebook could mitigate many of the problems. The company chose not to.

It is a long, powerful, painful piece that looks equally at Facebook’s culpable knowledge and at its leadership’s self-serving excuses (couldn’t afford to be “paternalistic”) to preserve their profits (and vast paychecks) against the needs of the broader society. You might like or dislike Facebook, use or not use it, welcome or reject “social considerations” that impede profitability, but you surely benefit from a clearer understanding of the situation.

So, subscribe to your local paper. If you’re a professional, certainly support one of the more-expensive elite outlets: The Wall Street Journal, Financial Times, New York Times, and others. Electronic subscriptions are cheap and keep their lights on. Contribute to Marketplace, home of some of the clearest, least polemical explanations of the economy and finance that you’ll ever find. (I listen to both Marketplace and their Make Me Smart podcast pretty much daily). Consider ProPublica, a non-profit that supports public interest journalism. (Dear lord, there’s an entire underground mask economy! “The Secret, Absurd World of Coronavirus Mask Traders and Middlemen Trying To Get Rich Off Government Money,” 6/1/2020)

When in doubt, contribute to your food bank. Shop local. Cut a housebound neighbor’s lawn. That all creates the “together” in the phrase, “we’ll get through this together.”

Be careful out there!

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About David Snowball

David Snowball, PhD (Massachusetts). Cofounder, lead writer. David is a Professor of Communication Studies at Augustana College, Rock Island, Illinois, a nationally-recognized college of the liberal arts and sciences, founded in 1860. For a quarter century, David competed in academic debate and coached college debate teams to over 1500 individual victories and 50 tournament championships. When he retired from that research-intensive endeavor, his interest turned to researching fund investing and fund communication strategies. He served as the closing moderator of Brill’s Mutual Funds Interactive (a Forbes “Best of the Web” site), was the Senior Fund Analyst at FundAlarm and author of over 120 fund profiles. David lives in Davenport, Iowa, and spends an amazing amount of time ferrying his son, Will, to baseball tryouts, baseball lessons, baseball practices, baseball games … and social gatherings with young ladies who seem unnervingly interested in him.