Monthly Archives: March 2020

March 1, 2020

By David Snowball

Dear friends,

Welcome to spring. Meteorological spring, anyway, that brief interval when the Quad Cities are wedged between end of snow and the beginning of flood, between the end of hockey and the start of minor league baseball, between the days when you can’t imagine the end of winter and the ones where you can nearly taste the arrival of spring.

Celebrate it all, since it’s the only year we’re getting this year!

Modern Woodmen Park and the rink at The River’s Edge, Davenport, Iowa

March Madness.

It used to refer to a basketball tournament. Who knew?

What color is your swan?

The investing world’s most famous swan is black. The Black Swan: The Impact of the Highly Improbable is a 2007 book by Nassim Taleb who places the black swan – a rare, unpredictable event with potentially dire consequences – in the context of financial markets. Mr. Taleb explores the ways in which we talk about, think about and react to unforeseen calamities.

Nouriel Roubini, professor of economics and former head of the President’s Council of Economic Advisers, does not discount the importance of black swan events, but he does argue that there’s a far more common threat. He calls these white swan events. These are the disasters that we can see coming from a mile away, and yet are surprised by their arrival.

In my 2010 book, Crisis Economics, I defined financial crises … as “white swans”. According to Taleb, black swans are events that emerge unpredictably, like a tornado, from a fat-tailed statistical distribution. But I argued that financial crises are more like hurricanes: they are the predictable result of built-up economic and financial vulnerabilities and policy mistakes. (“The white swan harbingers of global economic crisis are already here,” 2/19/2020).

Mr. Roubini points out the obvious: the US has picked fights with four foreign opponents.

For starters, the US is locked in an escalating strategic rivalry with at least four implicitly aligned revisionist powers: China, Russia, Iran and North Korea. These countries all have an interest in challenging the US-led global order and 2020 could be a critical year for them.

He argues that all four favor asymmetric warfare: not challenging the US military directly, but working to damage cybersystems, political and trade alliances, and global financial institutions. Disruptions to the global oil supply, manipulations of China’s vast holdings of US Treasuries, an economy reliant on trillion dollar annual deficits and real interest rates at zero, ill-contained epidemics which become pandemics …

Beyond the usual economic and policy risks that most financial analysts worry about, a number of potentially seismic white swans are visible on the horizon this year. Any of them could trigger severe economic, financial, political and geopolitical disturbances unlike anything since the 2008 crisis.

In an interview this week with Germany’s Der Spiegel, Dr. Roubini argued “I expect global equities to tank by 30% to 40% this year. My advice is: Put your money into cash and safe government bonds.”

I wonder how he earned the moniker, Dr. Doom? (He’s not to be confused with Marc Faber, author of the Gloom, Doom and Boom Report although the latter does rather agree with the former: “In recent reports I have explained that I was reducing my equity exposure to around 20% of assets and increasing my cash holdings. I want to warn my readers not to be complacent. If the Coronavirus is going to be as bad as I believe it will be, I would not be surprised if all asset prices declined.” Nonetheless, he still holds US Treasuries as the last, best safe haven.)

I’m neither endorsing nor discounting the “30-40%” risk. I’m not competent to do so. The fact that serious people are raising the prospect does, however, warrant a bit of reflection on our part. That is, we need to array and assess our options. Generically, there are three:

  1. pretend nothing’s happening; alternately, run around like chickens with our heads cut off. Following the financial media too closely will surely lead you to one or the other. My suggestion: extend your financial media hiatus by a few more months, power down and read a book.
  2. reassess our asset allocation. We know that bear markets in stocks have greater drawdowns than bear markets in bonds, though the latter can also last for a decade. If your financial plan is, say, 50-70% equities, consider whether 50% equities will give you a bit of peace.
  3. ignore your portfolio until 2030. Ed Studzinski’s reflections this month on the stock market are unusually concise and, as ever, thoughtful. Ed reminds us of the old advice, to buy stocks as if the stock market might close for the next 5-10 years. That is, you’d still own your stocks but couldn’t sell them. That possibility would lead you to invest no more than you could afford to lose for the next decade, and would probably encourage you to target the best companies you could find. Those might well be boring companies that dominate stable niches, who will likely grow slowly and steadily, year after year.

If the latter appeals to you, so might this month’s profile of YCG Enhanced Fund (YCGEX). We’ll continue to try to highlight investors who are really good partners in really turbulent markets. If you’re feeling antsy, MFO’s list of Great Owl Funds – funds ranked in the top 20% in their categories, for conservatively risk-adjusted returns, for all evaluation periods 3 years and older – is a good place to start. The list is free and sortable by a bunch of criteria.

Thanks!

Mutual Fund Observer is, of course, 100% reader-supported.  Each month brings about 25,000 readers and, except at year’s end, about a dozen contributions. Thanks to folks, often gloriously repeat offenders, who make contributions to MFO in February: Nancy, Hjalmer, Wilson, Jon and the folks at Gardey Financial Advisors and the good people at S&F Investment Advisers in L.A.

Thanks, most especially, to the folks who’ve committed to making a monthly contribution that PayPal: Brian, Matthew, Gregory, James, William, and the other William.

We tried to mail a thank-you note and tax receipt to Tom Kilian, but the mail bounced. We hope you’re well, sir!

We also received a freakishly small check – $11.63 – from the AmazonSmile Foundation which covers October – December, 2019. We’re grateful for the goodwill that lies behind the check.

If you’d like to support the Observer, please do so. It’s not hard and doesn’t have to be much. Folks interested in accessing the fund screeners and other tools at MFO Premium should go there rather than using the regular PayPal/check option.

Looking forward to seeing you on April Fool’s Day!

 

 

Snowball’s Indolent Portfolio

By David Snowball

A tradition dating back to the days of FundAlarm was to annually share our portfolios, and reflections on them, with you.

Four rules have governed my portfolio for the past 15 years or so.

  1. I maintain a stock-light asset allocation.

For any goal that’s closer than 10-15 years away, stock investing is speculation. Stocks rise and fall far more dramatically than other investments and, once they’ve fallen, it sometimes feels like they can’t get up. Equity income funds are typically very conservative vehicles, and yet they took four years to regain their October 2007 peaks. International large cap core funds took seven years to reach break-even while domestic large-cap core funds were underwater for five-and-a-half years. The worst-hit categories languished for nine years.

Research conducted by T. Rowe Price and shared here, on several occasions, led me to conclude that I wouldn’t gain much from a portfolio that exceeds 50% stocks. My target allocation is 50% income (half in cash-like investments, half in somewhat riskier ones) and 50% growth (half in firms domiciled in the US and half elsewhere). Based on a review of 70 years of returns (1949-2018), this allocation would typically return a bit over 8% annually, would lose money about one year in six but its average loss would be in the 4-5% range.

  1. I value thoughtful, experienced investors who are risk-aware.

Passive strategies are efficient ways to capture a market’s total returns. That’s true in both rising and falling markets. I’m not particularly comfortable with blindly riding the markets down, so I’m not particularly comfortable with passive (especially cap-weighted or, worse, debt-weighted) investing.

While the returns of a portfolio seem highly variable, even great investors (Mr. Buffett, for example) have long periods of “not beating the market,” risk characteristics of a strategy seem pretty consistent. Funds with lots of day-to-day downside deviation in normal markets have to have dramatic downside in abnormal ones.

The key is finding folks who have managed well in turbulent markets before, who have thought clearly about the role of risk (or volatility) in their portfolios, and who communicate clearly enough that I know what they’re thinking. That gives me the confidence I need to ignore rough patches.

  1. I do not care about “beating” the market or anyone else.

There is no stupider or more destructive obsession in the investing world than this: so how often does your guy beat the market? This is the fantasy football version of investing: we win not by winning but by adding together a bunch of random, unconnected data points and declaring the person with the biggest piles o’ points won.

Earth to Investors: Fantasy Football is Fantasy. It’s not a model for managing your money. In personal finance, you win if and only if the sum of your resources is equal to or greater than the sum of your needs.

If you beat the market 10 years in a row and the sum of your resources is less than the sum of your needs, you lose.

If you trail the market 10 years in a row and the sum of your resources is greater than the sum of your needs, you win.

My guess is that winning requires investments that you understand and can stick with in the long term, ideally calibrated to a calculation of your long term needs. In my case, for example, I win if my retirement portfolio returns 6% per year. If my 6% returns “trail the market,” I still win. If I “beat the market” but make less than 6%, I lose.

  1. I need funds I can afford to buy.

My salary in my first year as a professor was about $14,000. I will retire without ever reaching $100,000. That’s not a complaint, that’s a constraint. For most of my life, I’ve invested in funds with low minimums or those willing to waive their minimums for investors using automatic investment plans.

So, here’s the non-retirement portfolio, ranked in order of their weight in the portfolio.

FPA Crescent (FPACX), a free-range chicken and quite possibly the fund that’s appeared in more of our data-driven articles than any other.

Seafarer Overseas Growth and Income (SFGIX), Andrew Foster’s excellent emerging markets fund.

    1. Rowe Price Spectrum Income (RPSIX), a fund of TRP income-producing funds.

Grandeur Peak Global Micro Cap (GPMCX), the smallest stocks selected by one of the world’s best global small cap stock firms.

Artisan International Value (ARTKX), which I bought at inception 17 years ago. Its management team was split in two in late 2018, so I’m watching a bit more closely.

RiverPark Short Term High Yield (RPHYX), my substitute for a saving account. Ridiculously high Sharpe ratio, often the highest of any fund in existence.

Matthews Asian Growth & Income (MACSX), traditionally one of the two or three most conservative ways to invest in Asian equities.

Brown Advisory Sustainable Growth (BIAWX), my newest fund and the first that’s dedicated to sustainable investing.

Matthews Asia Total Return Bond (MAINX, formerly Strategic Income), about the only fund giving dedicated access to Asian credit markets, which tends to be nicely out of sync with domestic ones.

Grandeur Peak Global Reach (GPROX), the flagship fund for one of the world’s best global small cap stock firms.

Currently, my portfolio is overweight in international stocks, 40% rather than my targeted 25% and underweight in US stocks, at 18%. That’s driven by two forces: (1) managers who have the freedom to invest in the US or elsewhere have, with some frequency, been chosing “elsewhere.” (2) My automatic investing plan isn’t yet active for my only pure US fund.

2019 moves:

  1. cut RiverPark Strategic Income, consolidating that account with RiverPark Short Term High Yield. Strategic Income is a fine fund, but it wasn’t providing enough differentiation with RPHYX. That reflects the fact that David Sherman manages both and that he’s moving Strategic Income to its most defensive stance which increases the overlap with RPHYX.
  2. cut Intrepid Endurance. I love the absolute value orientation and the discipline of holding cash when the stock market is not offering any discounted stocks worth owning. Don’t love the considerable turnover in the management team and the very poor communication about the matter. In part I moved the proceeds to FPA Crescent (FPACX) which espouses the same absolute value discipline (rather more successfully) and in part I …
  3. bought Brown Advisory Sustainable Growth (BIAWX). The managers have an entirely remarkable track record, both in managing risks and in generating top tier returns. As the magnitude of the world’s climate challenge has become clearer, I felt ethically obligated to transition assets into investments that aren’t endangering us all.

2020 moves:

  1. continue monitoring the role of Matthews Asia Growth & Income. It’s a very good fund and I’ve owned it for a very long time. That said, I have more exposure to Asia than to North America.The money might be better used …
  2. continue building my BIAWX position. Since I only added Brown in 2019 and tend to build over time, I probably need to be a bit more vigorous here. That will also help rebalance my foreign:domestic equity split.
  3. continue ignoring financial pornography, screaming heads, click-bait and other appeals to my worst instincts. Between rising market volatility, rising political frenzy and international challenges occasioned by dictators and viruses, that’s going to take some discipline.

And my retirement portfolio?

It’s mostly housed with T Rowe Price and TIAA. Like most of you, my choices very constrained by my employer’s choices. In both cases, there’s a target-date 2025 fund at the account’s core. In my T Rowe Price account, I added funds offering exposure to emerging market value stocks (T Rowe Price Emerging Markets Discovery) and international small caps (T Rowe Price International Discovery). In my TIAA account, I have rather 20% in the TIAA Real Estate Account. It invests, mostly, in commercial real estate and has been returning 6-9% a year with minimal volatility since the mid-90s. Other than for a pounding it took in 2008.

Bottom line

I don’t aspire to getting rich through investing. I would like to be sure that the sum of my resources is greater than the sum of my needs. My definition of winning, above.

I also don’t want to spend my life fretting about my portfolio, or fruitlessly chasing after The Next Hot Thing. My average holding period for a fund is creeping up toward 20 years, which reflects both my strategy (research carefully, choose well, walk away) and my priority (my family, my community, my friends, reading, learning, reflecting …and gardening, now that it’s spring).

I don’t pretend that my needs are your needs, or that my strategy need to be yours. The most we can do is to remind folks that investing is important, that understanding your investments is important, and that discipline is important. Which investments, which discipline … that’s your call.

YCG Enhanced Fund (YCGEX)

By David Snowball

Objective and strategy

The YCG Enhanced Fund seeks to maximize long-term capital appreciation consistent with reasonable investment risk. The portfolio consists of an equity component and an options component. The equity component attempts to identify and invest in the world’s best companies, which they designated “global champions.” The central characteristic of such firms is that they’re among the very few with long-term pricing power; that is, the nature of their industry and business is that they can consistently dictate prices to their users in exchange for irreplaceable services. The equity component ranges from 15-50 names, mostly large cap, mostly domiciled in the US. The median market cap of $80 billion because “global champions” aren’t small. The managers may also write put options and covered call options on a substantial portion of the equity portfolio to generate additional income and heighten tax efficiency. They do not use options to generate leverage.

Adviser

YCG, LLC, which was founded in 2007 and is located in Austin, Texas. They describe themselves as “a high-touch boutique investment firm” with approximately $920 million in mutual fund and separately managed account assets. The firm was founded by Brian Yacktman and is privately owned by its three partners: Brian Yacktman, William Kruger, and Elliott Savage.

Manager

Brian Yacktman and Elliott Savage. Mr. Yacktman founded YCG in 2007. He is their president and CIO, as well as a portfolio manager.  Prior to founding YCG, he was an Associate at Yacktman Asset Management, the adviser to The Yacktman Funds. Mr. Savage joined YCG in 2012. Prior to that, he was an analyst for a long/short equity hedge fund domiciled in Dallas.

Strategy capacity and closure

Considerable but variable. The equity capacity is massive, since it’s focused on global, mostly-large-cap stocks. The option component imposes the limit on size, but the extent of that limit is constantly changing. Given the massive extent of insider ownership, Mr. Yacktman is credible when he describes himself as “highly motivated to close when it’s in the best interest of the fund’s shareholders.” In the event that they’re forced to close the fund because of limits in the options universe, there remains the prospect of opening a strategy with the equity component but without the options overlay.

Active share

84.78. “Active share” measures the degree to which a fund’s portfolio differs from the holdings of its benchmark portfolio. High active share indicates management which is providing a portfolio that is substantially different from, and independent of, the index. An active share of zero indicates perfect overlap with the index, 100 indicates perfect independence. The “active share” research done by Martijn Cremers and Antti Petajisto finds that only 30% of U.S. fund assets are in funds that are reasonably independent of their benchmarks (80 or above) and only a tenth of assets go to highly active managers (90 or above).

FAMEX has an active share of 84.8, which reflects a reasonable degree of independence from the benchmark assigned by Morningstar, the Russell 1000.

Management’s stake in the fund

Each manager has invested more than a million in the fund. The officers and trustees of the fund owned 9.36% of outstanding shares, as of the last SAI. The fund’s trustees are very modestly compensated, $4,000/year; one of the two independent trustees has an investment in the $50,000-100,000 range while the other has not chosen to invest in the fund.

The Yacktman family’s collective commitment to the fund is reflected in the fact that the fund’s six largest shareholders are Yacktman; by my rough calculation their collective stake approaches $100 million. I’ve only ever seen a comparable level of insider ownership in one other fund.

Opening date

December 28, 2012

Minimum investment

$2500

Expense ratio

1.19% on assets of $351 million.

Comments

The Observer’s passion is for small funds that provide competitive returns with a high level of risk awareness. One of the worst periods in recent market history was the downturn at the end of 2018-19. When we looked at funds that held up best during that series of scary drops, YCG Enhanced was there (“Learning from the fall fall,” April 2019). When we recognize funds for consistently top tier risk adjusted performance, our Great Owl designation which was earned by only five of 135 multi-cap growth funds, YCG Enhanced was there.

Across its seven year life, the fund has posted consistently competitive returns with nearly unmatched risk management.

  Absolute value Rank Peer group average
Annual return 13.8% 74th 13.8
Sharpe ratio 1.27 8th 1.02
Martin ratio 5.16 6th 3.16
Ulcer Index 2.5 3rd 4.6
Maximum drawdown -11.9% 4th -16.9
Downside deviation 5.9% 3rd 7.9
Down month deviation 5.7% 3rd 7.9
Bear market deviation 5.4% 4th 6.8
Capture ratio/SP 500 1.1 13th 1.0
Downside capture 81 4th 103

Source: MFO Premium, using Lipper Global Data Feed, current as of 1/30/2020

How do you read that table?

Annual returns over the seven year period are perfectly respectable. Optimists would point out that the fund’s lifetime performance figures are hampered by a rough first year, 2013, when the fund’s 27.5% returns trailed most of its peers. Morningstar’s report of its one, three and five year record place it in the top 1-2% of their domestic large growth peer group (as of 2/28/2020).

Downside risk, measured by maximum drawdown, downside (day-to-day) deviation, down market and bear market deviation are all in the top 5 of 135 peers, as is its downside capture.

The risk-return balance, measured by the Sharpe and Martin ratios, the Ulcer Index (a measure of how far a fund falls and for how long its underwater) and capture ratio is consistently top tier.

That’s reflected in the fund’s performance during the turbulence in early 2020: Morningstar places it in the top 13% during the crash at the end of February, top 11% for the month of February and top 13% over the first two months of 2020. The moment you extend your time horizon beyond that, the fund pops into the top 1-2%.

What does the manager do?

The managers share, with many value investors, the realization that the average investor is irrational: they’re hopeful of getting rich quick, beguiled by stories of the hottest tech and hottest firms, and are prone to overpaying for high visibility, high volatility stocks.

Mr. Yacktman is pretty sure that that’s a bad idea. He’s concluded, as did his famous father before him, that the highest quality stocks seem “perpetually under-priced relative to their dominance and predictability” because they’re not … well, sexy. He describes his strategy this way:

We believe the best way to achieve excess returns without excessive risk is to: (1) Invest in Global Champions with enduring pricing power and long-term volume growth opportunities (2) Minimize other long-term business risk factors by partnering with ownership-minded management teams and avoiding companies with aggressive capital structures. (3) Avoid overpaying by focusing on the high-quality business mispricing, by remaining vigilant to market-timing mispricings, and by comparing the forward risk-adjusted rates of returns of our businesses with other investment alternatives. (4) Diversify as much as possible (without going overboard, 50 securities or less) among the attractively-priced, great businesses we’ve identified, and (5) Wait. This approach has served us well over the years, and we believe it will continue to do so in the future.

The manager has a realistic perspective on the state of the market, somewhat richly valued and likely overextended. That said, the fund is in general fully invested. Mr. Yacktman notes:

We’re fully invested because nobody is good at timing the market; we don’t want to be overconfident and believe we have an edge against everybody else. We take the humble approach and recognize we don’t have that skill. The best thing we can do is find the highest risk-adjusted returns and build the portfolio for the long-term. If you’re invested in great businesses and you have a very long horizon, the time to invest is always now and the high of the fund is far in the future.

The fund will hold cash if the projected return on cash exceeds the projected return on the other assets available to them, but that’s rare.

In lieu of cash as high-stability / long-return ballast in the portfolio, Mr. Yacktman has the ability to add options to the portfolio. As it turns out, investors bring the same silly biases to the options market as to the stock market: they want to get rich quick, are entranced by bright, shiny objects and systematically overpay for their purchases. By accommodating the impulses of others in his options strategy, he accomplishes two ends:

    1. he buffers volatility since he can sell options at a premium, almost like getting paid to put in a limit order, which then acts like an additional margin of safety.” He likens this to be “the house” in a casino; you might win or lose, but the house always gets its cut.
    2. he enhances the fund’s tax efficiency, because the vagaries of the Tax Code allow an option’s short term income to be treated as long term capital gains.

Bottom Line

For conservative (i.e. “rational”) growth investors, this has clearly been a top 10 fund. Competitive returns and exceptional downside resilience are complemented by exceedingly high sustainability scores, especially with regard to carbon exposure. It should clearly be on their short list of “funds for turbulent times.”

Fund website

YCG Funds. The “News” page linked to a Barron’s article, “The Best Mutual Fund You’ve Never Heard of” (7/5/19) but the link runs straight into the paywall.  Presumably it wasn’t worth the adviser’s money to provide access to the article. Their 2019 annual letter is one of the best-written I’ve encountered: informative about their intellectual underpinnings, strategy, risk management and its implications. That’s wildly more useful than the rote recitation of “top three contributors” that many managers provide.

Black Swans and Locusts

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)

On balance, it is somewhat hard to believe that in a few short weeks, we have gone from the domestic markets hitting new record highs, albeit with a continuing narrowing of breadth, to what is a full blown correction, with the markets now off by more than ten percent. And as we look to Monday, the first trading day in March, the question is have we reached a floor, or is this going to continue on for some time, wiping out performance gains for all of this year and go on to erase all or a substantial part of 2019’s profits.

What triggered the sell off this past Monday, which was a global event? More than likely, it was fear of the unknown. The current known unknown is the corona virus and what its potential impact will be on  . . . everything? The simple answer, or at least my simple answer is, that we don’t know. Nor is there any good way to handicap things. For years, we have been moving towards a much more interconnected world and effectively, an integrated global economy. We can now see the downside of that when, globally, countries and their health care systems are at different levels of quality. There is effectively no ability for there to be a consistent and timely global response across borders to a health care crisis.

Jason Zweig of the Wall Street Journal had an interesting column the other day, “The Pros Have to Sell Stocks Now. You Don’t” (February 20, 2020). He made the point, in his usual elegant fashion, that retail investors had the luxury of sitting back and not being panicked or forced into liquidating investments. He felt that much of the carnage taking place could be attributed to the actions of professional investors, who were focused on preserving their jobs rather than doing what was best for their investor clients. After all, the consultants will be searching for someone to blame for the losses suffered by their clients. Without that pressure, the individual should be able to assess whether his strategy is still appropriate and if not, how it should be modified.

What should you do as an individual investor? My efforts are going in to assessing, as suggested many years ago by Mr. Buffett, that one should look at the investments in one’s portfolio one by one. Would you be comfortable owning them if the market were to close for one or more years, so you would be owning them as a truly long-term investor? As with the prospect of hanging, that analysis does a good bit to clarify the mind. One can see what is real, and in many circumstances, apply a much more draconian assessment to things like leverage and cash flow. And especially important is the consideration of the exposure of your investments to unintended consequences.

For example, it is now apparent that having sole source supply of the fine chemicals needed to manufacture certain pharmaceuticals only in China, is perhaps not such a wonderful thing. We had some hint of this last summer when certain drugs for hypertension were in short supply due to an inability to source the raw materials to make them. In sum, you are going to have to examine, redo, and rethink many of what were your assumptions, which are now not so certain. And it won’t take much to see how certain industries like travel may be impacted.

Why not just sell everything and go to cash? Well, aside from triggering some permanent losses of capital, there are businesses that will continue to chug along and do quite well. Besides, if you sell everything and go to all cash, how will you know when to reinvest in equities? You won’t.

Rather than belabor the obvious, I am going to close with one quote from the Depression, when Franklin D. Roosevelt said in his 1933 inaugural address, “The only thing we have to fear is fear itself.”

 

Launch Alert: Artisan Select Equity

By David Snowball

On February 28, 2020, Artisan Partners launched Artisan Select Equity Fund (ARTNX / APDNX / APHNX). The fund is managed by Artisan’s Global Value team.

The Global Value team managers are Daniel O’Keefe, Justin Bandy and Michael McKinnon. The senior member of the team is Mr. O’Keefe who joined Artisan from Harris Associates (advisers to the Oakmark funds) in May, 2002. Up until October 2018, Mr. O’Keefe was paired with David Samra on running the International Value and Global Value strategies. They, to put it gently, were awesome. Artisan notes that O’Keefe and Samra “were nominated six times (in 2008, consecutively from 2011-2014 and again in 2016) for Morningstar’s International-Stock Fund Manager of the Year award in the US. Mr. O’Keefe and Mr. Samra won the award for their joint management efforts in 2008 and in 2013 for the management of international-stock funds.” In October 2018, the team was split, with Mr. Samra maintaining custody of Artisan International Value (ARTKX) and Mr. O’Keefe overseeing Artisan Global Value. The funds have outperformed their peers by 4.7% and 4.3%, respectively, since launch. The translation, in both cases, is that the funds have very nearly doubled the returns of their peers over the long-term.

Artisan’s précis of the team’s approach:

The investment team seeks to invest in high-quality, undervalued businesses that offer the potential for superior risk/reward outcomes.

Undervaluation

      • Determine the intrinsic value of the business
      • Invest at a significant discount to intrinsic value

Business Quality

      • Strong free cash flow
      • High/improving returns on capital
      • Strong competitive positions

Financial Strength

      • Strong balance sheets reduce potential for capital risk
      • Provides management ability to build value

Shareholder-Oriented Management

      • History of building shareholder value

One might express curiosity that the Global Value team has been charged with a non-global value strategy. The public answer is that Artisan is responding to investor demand:

We have seen growing demand in the marketplace for US equity-focused investment strategies, and we believe our Global Value team is well-positioned to meet that need. The Global Value team has a track record of delivering solid performance results, and we anticipate the team will continue to add value through the Select Equity Fund. (Artisan Partners CEO Eric Colson)

Currently, about half of the Global Value portfolio is invested in US stocks. With the liquidation of Artisan’s small cap value fund and the desultory performance of its Mid Cap Value Fund (ARTQX), which has led its peers in only one of the past five and three of the past 10 years, there’s room in the Artisan lineup for an all-cap value fund.

So, the most obvious difference between the funds is that Select is a domestic equity fund and Global is, well, Global, There are two additional differences between the prospectus language for the two funds:

    1. Select is selective. “The Fund is non-diversified, which means that it may invest a greater portion of its assets in a more limited number of issuers than a diversified fund. The Fund will typically hold 20-30 securities.” Global Value’s prospectus doesn’t have comparable language. Global Value currently reports 40 stocks and a handful of derivatives that provide currency hedges.
    2. Select has the freedom to invest in smaller firms. Global Value’s prospectus stipulates “the Fund generally invests in US and non-US companies with market capitalizations of at least $2 billion at the time of initial purchase.” Select’s prospectus notes, “There are no restrictions on the market capitalizations of the companies in which the Fund may invest.”

There’s much to like here. Across the board, Artisan emphasizes a risk-awareness that might hinder its funds in the final stages of a bull market. The lead manager is distinguished and all of the Artisan partners invest heavily in their own funds. Finally, Artisan has an exceptional record for its newly-launched funds: pretty much all of them are very competitive out of the gate and end up establishing long-term records for above-average risk-adjusted returns.

The fund’s Investor share class charges 1.25%, which is traditional for Artisan and which tends not to fall much. The sibling Global Value fund, with $3 billion in assets and a 12-year record, charges 1.28%. The minimum initial investment is $1,000.

The Global Value team’s investment philosophy and process, which governs both of the funds it manages, is posted on the Artisan website.

Funds in Reg

By David Snowball

The Securities and Exchange Commission, by law, gets between 60 and 75 days to review proposed new funds before they can be offered for sale to the public. Each month, Funds in Registration gives you a peek into the new product pipeline. Most funds currently in registration will not become available until late April.

We found 14 funds in the pipeline. Two stand-out opportunities: an active, non-transparent ETF version of the entirely excellent JPMorgan Large Growth Fund and the first non-Asia offering from Matthews Asia, the Matthews Asia Emerging Markets Fund. The list also includes one transformed hedge fund and one active ETF that started as a passive ETF that mimicked a strong mutual fund. Cool stuff!

6 Meridian Hedged Equity-Index Option Strategy ETF

6 Meridian Hedged Equity-Index Option Strategy ETF, an actively-managed ETF, seeks capital appreciation. They plan to use a strategy pairing a portfolio of equity securities with an index call option writing overlay designed to reduce the exposure of the Fund to broad equity market risk. The equity portion of the portfolio targets large cap, high quality stocks. The fund will be managed by a six person team from 6 Meridian LLC. Its opening expense ratio has not been disclosed.6 Meridian Low Beta Equity Strategy ETF

6 Meridian Low-Beta Equity Strategy ETF

6 Meridian Low Beta Equity Strategy ETF, an actively-managed ETF, seeks capital appreciation. The plan is to rank securities based on measures of quality, then invest in securities with the lowest measured beta among the high quality stocks. The fund will be managed by a six person team from 6 Meridian LLC. Its opening expense ratio has not been disclosed. The same prospectus contains filings for a mega-cap and small cap version of the same strategy.

Ave Maria Focused Fund (AVEAX)

Ave Maria Focused Fund (AVEAX) will seek long-term capital appreciation. The plan is to build an all-cap value portfolio, while “avoiding investments in companies believed to offer products or services or engage in practices that are contrary to core values and teachings of the Roman Catholic Church.” The prospectus offers a list. The fund will be managed by Chadd M. Garcia and Adam P. Gaglio. The team has been managing Ave Maria Growth since July 2019 and January 2020, respectively. Its opening expense ratio is 1.26% and the minimum initial investment will be $2,500.

BlackRock High Yield Muni Income Bond ETF

BlackRock High Yield Muni Income Bond ETF, an actively-managed ETF, seeks to maximize tax-free current income. The plan is to invest at least 80% of the Fund’s net assets in medium- to low-quality bonds. They may also invest up to 20% of its total assets in municipal bonds that are considered distressed securities. The fund will be managed by Kevin Maloney, Michael Perilli and Scott Radell of BlackRock. Its opening expense ratio has not been disclosed.

Driehaus Small/Mid Cap Growth Fund

Driehaus Small/Mid Cap Growth Fund will seek to maximize capital appreciation. The plan is to invest in growth stocks, “based on the belief that fundamentally strong companies are more likely to generate superior earnings growth on a sustained basis and are more likely to experience positive earnings revisions.” There’s also an ESG screen. The fund will be managed by Jeffrey James, Michael Buck,            and Prakash Vijayan. Its opening expense ratio has not been disclosed, and the minimum initial investment will be $10,000.

HSBC ESG Prime Money Market Fund

HSBC ESG Prime Money Market Fund will seek liquidity, a high level of current income consistent with the minimization of principal volatility, and consideration of ESG criteria. The plan is to build a portfolio of high quality debt obligations with maturities of 397 days or less. They intend to buy securities mostly from issuers who meet “the minimum ESG criteria” set by the adviser. The fund will be managed by HSBC Global but without named managers. Its opening expense ratio has not been disclosed, and the minimum initial investmen will be $1,000.

JPMorgan Equity Premium Income ETF

JPMorgan Equity Premium Income ETF, an actively-managed ETF, will seek current income while maintaining prospects for capital appreciation. The plan is to invest 80% into lower volatility stocks within the S&P 500 and 20% in exchange-linked notes. At base, ELNs combine stock and call option exposure. Their role is to generate a stream of income. The fund will pay a monthly dividend. The fund will be managed by Hamilton Reiner and Raffaele Zingone. Its opening expense ratio has not been disclosed.

JPMorgan International Growth ETF

JPMorgan International Growth ETF, an actively-managed ETF, seeks long-term capital appreciation. The plan is to invest in large and mid-capitalization foreign companies with a history of above-average growth or those that the adviser believes are expected to enter periods of above-average growth. The fund will be managed by Shane Duffy and Thomas Murray. Its opening expense ratio has not been disclosed.

JPMorgan Large Cap Growth ETF

JPMorgan Large Cap Growth ETF, a non-transparent, actively-managed ETF, will seek long-term capital appreciation. The plan is to use a bottom-up, growth discipline to select stocks of large, well-established companies. The fund will be managed by Giri Devulapally.Mr. Devulapally manages the five-star JPMorgan Large Cap Growth fund, which boasts $18 billion in assets, a five-star rating, high returns with above-average volatility. Its opening expense ratio has not been disclosed. If the ER is below the fund’s 0.94%, it would be a great, tax-efficient alternative to the fund.

Kayne Anderson Renewable Infrastructure Fund

Kayne Anderson Renewable Infrastructure Fund will seek total return through a combination of current income and capital appreciation. The plan is to invest in a global portfolio of renewable infrastructure company stocks. Those include businesses related to renewable energy production, storage and transmission. The prospectus offers a number of warnings, including the prospect of investing in IPOs, illiquid, thinly traded or resale-restricted stocks. The fund is a converted hedge fund; Kayne Renewable Infrastructure Fund, L.P. (formerly, the Kayne Renewable Energy Income Fund, L.P) have been in operation for about 18 months. The fund will be managed by “J.C.” Frey, Jody Meraz and Justin Campeau of Kayne Anderson. Its opening expense ratio has not been disclosed. Initially only institutional shares with a $250,000 minimum will be offered but the prospectus covers “A” and “C” shares as well.

Knowledge Leaders Developed World ETF

Knowledge Leaders Developed World ETF, an actively-managed ETF, seeks long-term capital appreciation. The plan is to build a global, diversified portfolio of “highly innovative companies,” their so-called “knowledge leaders.” The firm has been managing both active mutual funds and a passive ETF using these same screens; this ETF will absorb the assets of the current passive ETF, which will then be liquidated. The fund will be managed by Steven C. Vannelli and Bryce Coward. Its opening expense ratio is 0.75%.

Matthews Emerging Markets Equity Fund

Matthews Emerging Markets Equity Fund will seek long-term capital appreciation. For their purposes, an “emerging market” is everybody except the United States, Australia, Canada, Hong Kong, Israel, Japan, New Zealand, Singapore and most of the countries in Western Europe. The world is roughly 20 developed countries and 140 emerging markets. The plan is to build a diversified, all-cap portfolio invest in representing “companies capable of sustainable growth based on the fundamental characteristics of those companies.” The fund will be managed by John Paul Lech. Mr. Lech also comanages the Asian Growth and Income Strategy. It’s interesting that this is the fund that an earlier manager of the Asian Growth and Income Strategy, Andrew Foster, urged the firm to launch; when they did not, he left to found Seafarer Overseas Growth & Income. Its opening expense ratio is 1.15% and the minimum initial investment will be $2,500, reduced to $500 for various tax-advantaged products.

Rules Based Investing – Rule #3 Manage Risk First

By Charles Lynn Bolin

In this third of a six part series on the Six Rules of Investing, I look at risks and the ability of the investment environment to withstand shocks. This article is divided into four sections: 1) The Investment Environment, 2) Looking for the “Known Unknown” Risks, 3) Investment Strategy For Uncertain Times, and 4) Funds for Uncertain Times.

In February 2002, Donald Rumsfeld, the then US Secretary of State for Defense, stated at a Defense Department briefing: “There are known knowns. There are things we know that we know. There are known unknowns. That is to say, there are things that we now know we don’t know. But there are also unknown unknowns. There are things we do not know we don’t know.”

Donald Rumsfeld, US Secretary of State for Defense

It is easy to identify risks leading to recessions after they have occurred, but each recession is different.  Nassim Nicholas Taleb, author of The Black Swan (2007), criticized the risk management techniques of the financial industry in the book and warned about the coming financial crisis. According to Wikipedia, Dr. Taleb “advocates what he calls a ‘black swan robust’ society, meaning a society that can withstand difficult-to-predict events.”

Many of these risks are known by some people, who often point them out ahead of time. In this article, I look for the lesser known risks or risks with uncertain consequences that corporate executives, economic organizations, and investment managers are currently raising.

The Investment Environment

A mortgage loan officer told me in 2007 that a financial crisis was coming and it was going to be bigger than people had ever seen.  At the time, subprime loans were not mainstream in the financial media. I researched what he told me and shifted my 100% stock portfolio to 40% stocks.  The experience shifted my philosophy from “buy and hold” to managing risk according to the business cycle. I have since read dozens of books on economic and financial forecasting, statistics, investing history, and portfolio management.

Chart #1 is the Investment Model which is intended to maximize return of $100 invested in January 1995 by adjusting allocations based on the business cycle. I roughly follow Benjamin Graham’s guidelines of never having less than 25% invested in stocks and never more than 75%.  The dashed blue line is the index underlying the Allocation Index before a 20% and 75% cap are applied. It shows improvement in the Investment Environment since September 2019.  The Allocation Index (blue) is now at 25% stocks. The red line is the percent of indicators that are negative showing there is some improvement.  The Investment Model estimates that risks are high, but the investment environment is improving so continue being cautious.

Chart #1:  Investment Model

Source: Author

The Investment Model attempts to take into account the “known knowns” of risk such as financial stress, yield curve, high yield bond spreads, percentage of banks tightening lending standards, margin debt (leverage), inflation, recession probability, volatility, profit growth, economic policy uncertainty, and valuation.  What it does not do is take into account many of the “known unknowns” which occur less frequently and are harder to measure. 

Looking for the “Known Unknown” Risks

In this section, I list the major risks and concerns from a number of sources. As investors, we don’t need to run for the hills, but we need to recognize that this decade has many risks that were deferred from the global financial crisis or are exasperated by it.

1. Recession risk

The risk of recession has diminished but not been eliminated.  According to CEOs: Recession Biggest Business Risk in 2020, recession is now classified as the major risk by corporate executives both domestically and globally:

    • US: For US CEOs, a recession rose from being their 3rd biggest concern in 2019 to their top one in 2020… For two years in a row, US CEOs cite the issue [increased competition] as their 2nd top external worry… It [trade uncertainty] ranks as the 4th biggest worry of US CEOs, tied with its affiliate issue: global political instability.
    • Global: For the 2nd year in a row, CEOs and other C-Suite executives globally rank a recession as their top external worry in the year ahead… CEOs globally rank uncertainty about global trade as their 2nd biggest external worry in 2020… For CEOs globally, fiercer competition rose from being their 4th top external worry in 2019 to their 3rd in 2020.

CEOs: Recession Biggest Business Risk in 2020, Newsmax finance

One of the concerns over recessions is expressed well by Joachim Fels and Andrew Balls at PIMCO which is with interest rates already low there are fewer tools in the toolbox to fight the next recession:

Yet again, the Fed and other major central banks have helped to extend the global expansion by adding stimulus in response to rising recession risks. However, last year’s easing of monetary policy comes at a price: Whenever the next economic downturn or major risk market drawdown hits, policymakers will have even less policy capacity to maneuver, thus limiting their ability to fight future recessionary forces.

Seven Macro Themes for 2020

The Global Risks Report 2020 by the World Economic Forum is rich in data and charts.  Below is the chart of major Economic Risks.  The Global Shapers Community is the World Economic Forum’s network of young people (large circles) driving dialogue, action and change, while the Multi-Stake Holder (small diamonds) consists of leaders from the business, government and non-profit communities.  It is interesting that the Shapers find most topics of higher impact and likelihood than the Multi-Stake Holders. Most are well known, but “critical infrastructure failure” deserves highlighting as it shows up later in the Top Fund Objectives.

Chart #2:  Top Global Risks – Economic

2. Excessive corporate debt and low quality

Lance Roberts makes several good points in “MacroView: The Next ‘Minsky Moment’ Is Inevitable” including Chart #3 which shows that corporate debt is at its highest level in over 70 years. The benefit is that companies have lower costs from low interest rates. The risk is that interest payments have to be paid from cash flows. In recessions, this increases the risk of a company having to file for bankruptcy. 

Chart #3:  Corporate Debt to GDP

Another problem with corporate debt is that the quality is lower as described by Jeffrey Gundlach, co-founder of DoubleLine Capital:

The credit worthiness of corporate debt is the number one risk that should concern bond investors. Gundlach issued his strongest warnings ever over the leverage taken on by U.S. corporations and the unrealistically favorable ratings that debt has been given.

Foreigners have been buying U.S. assets, he said, but that is unstable. If the economy weakens, those investors will want to “get out.” A lot of “potential selling” could happen, Gundlach said.

Gundlach on the Biggest Risk Facing Bond Investors and the Likely Next President, Robert Huebscher, Advisor Perspectives

The Organisation for Economic Co-operation and Development (OECD) also acknowledges the risk of low corporate debt quality:

In every year since 2010, around 20% of the total amount of all bond issues has been non-investment grade and in 2019 the portion reached 25%. This is the longest period since 1980 that the portion of non-investment grade issuance has remained so high, indicating that default rates in a future downturn are likely to be higher than in previous credit cycles

In 2019, only 30% of the global outstanding stock of non-financial corporate bonds were rated A or above and issued by companies from advanced economies…

3. Excessive leverage

Lance Roberts highlights the high level of speculative leverage in Chart #4 from “MacroView: The Next ‘Minsky Moment’ Is Inevitable”.  This leverage supports the markets until investors decide to reduce it as they have been for the last year or two. This metric is included in the Investment Model, but worth highlighting here.

Chart #4:  Free Cash in Margin Accounts

4. Monetary policy and federal debt

Lance Roberts wrote MacroView: The Next ‘Minsky Moment’ Is Inevitable which shows that central banks have been increasing their balance sheets since the 2008 financial crisis to the point that global central balance sheets are now $21T which is roughly equal to the size of the U.S. economy.  Mr. Roberts also wrote, “MacroView: Japan, The Fed, And the Limits of QE”, comparing the U.S. to Japan as summarized below:

    • A decline in savings rates
    • An aging demographic
    • A heavily indebted economy
    • A decline in exports
    • Slowing domestic economic growth rates
    • An underemployed younger demographic
    • An inelastic supply-demand curve
    • Weak industrial production
    • Dependence on productivity increases

To support this view, in the chart below, the U.S., Japan, and Italy have the highest debt to GDP ratios of the countries with at least $1T in GDP.  Secondly, U.S., Japan, and Brazil have the highest budget deficits as a percentage of GDP.  In other words, the U.S. and Japan have the highest government debt loads and are getting into further into debt at a faster rate than other large economies.  Currently the debt is increasing at about $1T per year in the U.S. 

Chart #5:  Government Debt/GDP vs Deficits

Source: Created by the author based on Trading Economics

The velocity of money is how economists measure how fast money changes hands in an economy.  In Chart #6, we see that the velocity in the U.S. is 1.4 (dark red line) compared to 0.6 in Japan (light red line).  The suggestion is that incremental easy money is less effective when there is so much already in the economy.  The black line projects that at current rates, the velocity in the U.S. could reach that of Japan in another 10 or 15 years.  Note that the Japanese stock market, Nikkei, peaked in the early 1990’s and still has not returned to its former level.  The chart also shows that since 2009, asset prices have been inflated in Japan along with those in the U.S.

Chart #6:  U.S. and Japanese Velocity of Money

Source:  St. Louis Federal Reserve FRED database

5. Trade and geopolitical tensions

An excellent condensed view of geopolitical risk is provided by Blackrock, in Geopolitical Risk Dashboard, where they place global trade tensions as the most likely to occur with the highest consequences. Gulf tensions, U.S./China competition, cyberattacks, North Korea, Terror Attacks, and Latin American events are also likely to occur, but possibly have less impact on global investments. Geopolitical risks have been brought to the forefront by the conflict with Iran, China, and North Korea.

Chart #7:  Geopolitical and Trade Impact and Likelihood

From the Global Risks Report 2020 is a chart of major Geopolitical Risks. The Global Shapers Community is the World Economic Forum’s network of young people (large circles) driving dialogue, action and change, while the Multi-Stake Holder (small diamonds) consists of leaders from the business, government and non-profit communities.

Chart #8:  Top Global Risks – Geopolicitical

6. Inflation

This economic cycle — now entering a second decade — has been unusually long and shallow. The late-cycle, dovish pivot has also been unusual, and there are few signs of the traditional late-cycle limits of economic overheating. As a result, we don’t see a slide into recession as the primary risk — but a stubborn mix of slower growth and rising inflation. The potential for such a regime shift is one reason why we prefer short-maturity U.S. Treasuries, and see inflation-linked debt as attractive.

2020 Global Outlook, BlackRock Investment Institute

The biggest concern that I read about the risk of inflation is that it is under-estimated by investors. One measure of inflation, the Consumer Price Index, has been rising for the last five years and is now at 2.5%.  The Federal Reserve has expressed a willingness to let inflation run a little higher than its 2% target. Vanguard points out that an aging population is deflationary in the long term, but that trade conflict may drive prices higher.

In The Risks In 2020 Seem Evenly Balanced, Gerard Minack from Evergreen Virtual Advisor provides the following chart which shows that labor costs are rising, but at historically low rates compared to the unemployment rate. Labor intensive industries such as health care and utilities are more susceptible to inflation from higher labor costs.  Higher labor costs are great for workers and spending, but reduce profits.

Chart #9: Rising Wages

 

7. Weaker dollar

The dollar is heavily influenced by interest rates. If the global economy improves and the U.S. continues to slow then the dollar may weaken.  Currently, the dollar is a safe haven and retains its strength.  This may change at some point this decade which will benefit inflation protected bonds, U.S. multinational corporations, gold, commodities, foreign fixed income and emerging market equities.

8. Societal risks

From the Global Risks Report 2020 lists major Societal Risks including infectious diseases, food and water crises, involuntary migration, and social instability.

Paul Donovan from UBS, described the stock market drop on Monday, February 25th, as “fear of fear of the virus”.  John Hussman, president and principal shareholder of Hussman Econometrics Advisors, sums up coronavirus well in Make Good Choices:

Apart from counting the novel coronavirus as one of the many factors that could prompt an episode of risk-aversion, I prefer to avoid discussing the financial aspects of a public-health crisis. Suffice it to say that market valuations are extreme and risk premiums are more compressed than at any other point in U.S. history. It’s misguided to imagine that the extraordinary full-cycle market risk that is already baked in the cake would somehow go away if coronavirus was to abate (which is my hope).

The Schwab Center for Financial Research looked at past epidemics and how they have impacted the stock markets. They provided Chart #10 which shows the impact of past epidemics.  The stock market usually recovers within 3 to 6 months as the epidemic is contained.

Chart #10:  Impact of Past Epidemics

Investment Strategy for Uncertain Times

While global growth may be improving, the current investment environment is susceptible to many potential shocks.  When economies are growing slower, they are usually more susceptible to external shocks. This section reviews general topics on where to invest in the current environment. 

1. The coming decade

Given slow economic growth, high valuations, trade tensions, low interest rates, high debt and low quality debt, how should we invest starting the 2020’s? Cautiously, in my opinion.  The following view comes from Capital Management:

What should investors expect for the next ten years and how should we think about positioning for what could be a lower return environment? While we don’t know what the future may bring, the longer this liquidity fueled asset price bull market continues, the more extended valuations become. With low interest rates, modest economic growth and smaller benefits from globalization it is possible that we could be facing lower returns in both risk assets and interest-sensitive sovereign debt. We believe that a prudent, risk-aware approach focused on absolute returns with an eye towards preserving assets in down markets is preferred.  Are We There Yet?, Carl Kaufman, Bradley Kane, Craig Manchuck, Osterweis Capital Management

A common theme for assets over the next 5 to 10 years is shown by “GMO 7-Year Asset Class Forecasts: An Amazing Capstone to a Risk-On Year” in Chart #11.  U.S. large and small cap companies are expect to underperform due to high valuations. Bonds are also expected to underperform.  International stocks, especially emerging markets, are expected to be better performers.

Chart #11:  Expected Seven Year Returns

From JPMorgan’s “Guide to the Markets”, this chart shows that U.S. equities have risen so quickly relative to the rest of the world, the international valuations are now 22% lower than in the U.S.  The yield is significantly higher as well.

Chart #12:  Elevated U.S. Valuations Relative to International

Source:  JPMorgan’s Guide to the Markets

2. Investment risk

Financial Industry Regulatory Authority (FINRA) has this to say about risk:

Although stocks have historically provided a higher return than bonds and cash investments (albeit, at a higher level of risk), it is not always the case that stocks outperform bonds or that bonds are lower risk than stocks. Both stocks and bonds involve risk, and their returns and risk levels can vary depending on the prevailing market and economic conditions and the manner in which they are used.

I created Chart #11 to look at how Fidelity funds performed during the 2007 recession when the S&P 500 lost about 42% using Mutual Fund Observer’s down market statistics.  These are the funds that outperformed the S&P 500.  The chart represents the average return for the past 12 years compared to the Ulcer Index (Risk).

Chart #13:  Performance of Fidelity Funds Since the 2007 Bear Market

Source: Author Based on Mutual Fund Observer

3. Allocation

BlackRock Investment Institute’s 2020 Global Outlook is an interesting read as they have a wealth of information including risks and, of course, the shorter term 2020 outlook. BlackRock is positive on the following assets:

    • EM equities as beneficiaries from the global recovery.
    • Value due to its pro-cyclical nature and a steepening yield curve.
    • Quality as valuations have modestly cheapened including global firms that stand to benefit from improving trade activity.
    • Short term U.S. Treasuries
    • TIPS due to cheap valuations relative to current inflation levels – and potential for more price pressures due to wage pressures, an uptick in activity and longer-term deglobalization.
    • Global high yield, supported by stable monetary policy and the prospect of a growth inflection.
    • Hard-currency EM debt against a backdrop of dovish EM central banks, an improving growth outlook and a stable to somewhat weaker U.S. dollar.
    • Local-currency EM debt

2020 Global Outlook, BlackRock Investment Institute

 

4. Diversification

Jurrien Timmer, at Fidelity makes the case in 2020: Play the Middle, Protect The Tails for protecting against both deflation by owning longer duration bonds and inflation by owning gold and inflation protected bonds.

Daniel Loewy and Karen Watkin of AllianceBernstein wrote Five Multi-Asset Strategies for 2020’s ChallengesThey advocate two straight forward strategies of considering investing in Europe and emerging markets and holding on to longer duration fixed assets. Strategies that some investors may be less familiar with are investing in alternative strategies such as funds that benefit from volatility and merger arbitrage strategies. Examples of funds that that reduced volatility in my portfolio this past two weeks are The Merger Fund (MERFX), IQ Merger Arbitrage ETF (MNA), iShares Gold Trust (IAU), and AGFIQ US Market Neutral Antibeta Fund (BTAL).  They also advocate strategies that are based on fundamentals like valuations, balance sheets stimulation and inflation.

Funds for Uncertain Times

Each month, I extract data on about a thousand funds from the Lipper database using Mutual Fund Observer screens.  I rate funds and objectives based upon risk, risk-adjusted return, income, momentum, and quality factors including bond quality and stock price to earnings ratio. Table #1 contains the top Lipper Objective along with a representative component of the factors. The objective of this ranking system is to build a low-risk portfolio with high risk adjusted returns.  The way to read the table is that the S&P 500 had an Ulcer Index (Risk) of 4.4 and an average return (APR) of 21.7, a risk adjusted return (Martin Ratio) of 1.6% for the past two years.  I look for funds with lower risk and higher risk adjusted returns in each of the nine buckets. 

Table #1:  Top Performing Lipper Objectives – 24 Months Ending February 2020

Table #2 contains the top funds for each of the Top Lipper Categories for mutual funds at Vanguard, Fidelity and those available at Charles Schwab, along with closed end funds and exchange traded funds.  I use the ranking system to assess my own funds in comparison to top funds as identified in Table #2.  I make one or two small changes each month when appropriate.

Table #2:  Top Performing Funds by Top Performing Objectives

Closing

I have been positioning my portfolio optimistically and cautiously for a slow growth, high risk environment.  This month, while the S&P 500 was down 7%, my portfolio was down 1.5%.  The dip has been a good laboratory to see how my funds will perform in a down market. In March, I will use Mutual Fund Observer to identify potential funds to replace one or two of my riskier funds.  I find the new Mutual Fund Observer Portfolio Tool (MFO Premium access required) to be one of the best “keep it simple” tools for the individual investor. It gives me a quantitative method for pruning funds that no longer fit into my “sleep at night” lifestyle.

Disclaimer

I am not an economist nor an investment professional. I became interested in economic forecasting and modeling in 2007 when a mortgage loan officer told me that there was a huge financial crisis coming. There were signs of financial stress if you knew where to look. I have read dozens of books on business cycles since then. Discovering the rich database at the St. Louis Federal Reserve (FRED) provides most of the data to create an Investment Model. The tools at Mutual Fund Observer provide the means for implementing and validating the Investment Model.

Manager Changes, February 2020

By David Snowball

Every month we track changes to the management teams of equity, alternative and balanced funds, along with a handful of fixed-income ones. Why “a handful”? Because most fixed-income funds are such sedate creatures, with little performance difference between the top quartile funds and the bottom quartile, that the changes are not consequential. Even in the realms we normally cover, the rise of management committees dilutes the significance of any individual’s departure or arrival.

We tracked down 40 funds with manager changes this month. Special thanks to the folks at Morningstar for sharing their monthly spreadsheet of all major changes in the fund industry with it; it’s an invaluable double-check on the work that Chip, The Shadow and others do in tracking movements in the industry.

Most of the changes are low-key, though it is interesting that Akre Focus(AKREX) has added another co-mananger.

Akre Focus Fund (AKREX / AKRIX) was launched on August 31, 2009, and currently has net assets of approximately $12.8 billion (January 31, 2020). It was launched by Chuck Akre. In 1997, Mr. Akre became of founding manager of FBR Small Cap Growth – Value fund, which became FBR Small Cap Value, then FBR Small Cap, and finally FBR Focus (FBRVX) which is now Hennessy Focus (HFCSX). FBR, imprudently, I believe, put a financial squeeze on Mr. Akre and his firm, which decamped to launch their own fund employing Mr. Akre’s strategy. After originally agreeing to join him on the new fund, several of Mr. Akre’s former analysts were … uhh, incented to return to FBR and manage the fund in his stead.

To give you a sense of how that played, here’s the 10-year record for FBR/Hennessy Focus (blue) and Akre Focus (orange).

To be clear, both funds have been far above average performers.The fact that Akre Focus gained 390% to FBR/Hennessy’s 250% might explain why Hennessy has a respectable $1.5 billion in assets while Akre has accumulated a more than respectable $12 billion.

We can understand why one MFO reader was a bit concerned when he saw a new co-manager for the portfolio, and asked us to check into it. We did.

Chris Cerrone quietly joined the management team on January 1, 2020. He joined the firm in 2012, was made a partner in the firm in 2013 and has been an active member of the management team for years. He’s been responsible for something like a third of the names already in the portfolio; his elevation to “manager” simply allows him to legally execute trades on the firm’s behalf rather than channeling them through Mr. Akre or Mr. Neff, the other co-manager.

His promotion is the culmination of a long process of training and acculturation. Mr. Akre, now 77, continues to work 50 hour weeks. Our contract at Akre shared the revealing tidbit that when the firm reorganized their office space three years ago, part of the new plan was creating a bedroom suite for Mr. Akre on the floor above the office space. That accommodates his tendency to become immersed in his work and lose track of time.

The Akre team is 12 people, six of whom “work on ideas.” They have grown together and seem internally cohesive. John Neff’s observation was that he’s never been in a business with a better intelligence-to-ego ratio. That’s allowed a fairly smooth evolution of roles, with Mr. Akre increasingly looking at big picture issues, with Messrs. Neff and Cerrone doing a lot of the firm-by-firm analyses and briefing. By the firm’s count, they’re probably responsible for 90% of the names in the current portfolio.

It’s singularly reassuring that this evolution has largely slipped under the radar. The fund has posted nine consecutive years of above-average returns, even excelling in the chaos of early 2020. That implies that Mr. Akre has succeeded in training the next generation of stock-pickers and portfolio managers, and that the investors in Akre Focus should be reassured.

And now, the rest of the manager changes …

AC Alternatives Market Neutral Value (ACVVX) added David Bryns to the team.

AEW Global Focused Real Estate Fund (NRFAX) lost J Hall Jones, Jr., but the rest of the team remains.

AllianzGI Multi Asset Income Fund (AGRAX) designated Paul Pietranico as lead portfolio following the departure of Ryan Chin.

AlphaClone Alternative Alpha ETF (ALFA) dropped Denise Krisko and Austin Wen, who were succeeded by Travis E. Trampe and  Andrew Serowik.

Boston Trust Midcap Fund (BTMFX) and Walden Midcap Fund (WAMFX) removed Belinda Cavazos from the team and added Mark Zagata. The lead manager of both funds, Stephen Amyouny, remains in charge.

Walden SMID Cap Fund (WASMX), Walden Small Cap Fund (WASOX), Boston Trust SMID Cap Fund (BTSMX) and Boston Trust Walden Small Cap Fund (BOSOX) all removed Belinda Cavazos and added Leanne Moore, with the assurance that the rest of the team remains intact.

Catalyst Hedged Futures Strategy Fund (HFXAX) changed management teams, from Ed Walczak of Catalyst Capital to Warrington Asset Management. The fund has been rechristened Catalyst/Warrington Strategic Program (CWXAX).

Cavalier Tactical Rotation Fund (CAVTX) replaced Henry Ma and Julex Capital with Scott Wetherington of Cavalier Investments.

Cognios Large Cap Growth Fund (COGGX), Cognios Large Cap Value Fund (COGLX), and Cognios Market Neutral Large Cap (COGMX) seems in the midst of some administrative turmoil. It looks like the management team stays intact (except for Francisco Bido) but will now be employed by a different company than Cognios. Given that the management team includes the firm’s founder, it’s an odd development. We have inquiries out.

Columbia Emerging Markets Fund (UMUEX) added Derek Lin to the team.

Fidelity Balanced Fund (FBALX) had Jody Simes replace Richard Malnight, which must make the Material Portfolio management feel odd.

Fidelity Select Consumer Staples (FDFAX) loses James McElligott but gains Nicola Stafford.

Fidelity Select Materials Portfolio (FSDPX) added Richard Malnight as co-manager  with Jody Simes.

Fidelity Series Emerging Markets Fund (FHKFX) has switched John Chow in for Rahul Desai.

Goldman Sachs Multi-Manager Global Equity Fund (GSEQX) fully embraces the “multi” in “Multi-Manager.” Axiom International Investors becomes the 14th firm helping to co-manage the fund. It’s an odd development, since the fund does not appear to be operating yet.

Harbor Emerging Markets Equity Fund (HIEEX) is losing Timothy Jensen of Oaktree Capital to retirement. Janet Wang will be added in his stead and will serve with Frank Carroll.

JPMorgan Small Cap Value Fund (PSOAX) saw Dennis Ruhl retire at the end of 2019, with four new members joining the team to succeed him.

Litman Gregory Masters International (MNILX) removed Thornburg Investment Management as a sub-advisor.

Miles Capital Alternatives Advantage Fund (MILIX) asks us to “disregard any references to” Steve Stotts and focus instead on Michael Westphal, CFA.

Sprott Gold Equity (SGDLX) has lost Ryan McIntyre but still has Douglas Groh and John Hathaway.

  1. Rowe Price Global Allocation, T. Rowe Price Balanced, T. Rowe Price Spectrum Growth, T. Rowe Price Spectrum Income, T. Rowe Price Spectrum International, T. Rowe Price Spectrum Moderate Growth Allocation, T. Rowe Price Spectrum Conservative Allocation and T. Rowe Price Spectrum Moderate Allocation Funds all gain the services of Toby Thompson, serving as co-manager with Charles Shriver.
  2. Rowe Price Global Industrials Fund (RPGIX) is undergoing a management transition. On March 1, 2020, Jason R. Adams will join Peter J. Bates. On June 1, 2020, Mr. Bates will step down and Mr. Adams will become the fund’s sole portfolio manager.

Voya Floating Rate Fund (IFRAX) added Charles LeMieux to the team of Jeffrey Bakalar and Daniel Norman. In French, “le mieux” is “the best.” We’re hopeful.

 

Briefly Noted

By David Snowball

BlackRock gets bitten: Jason Zweig of The Wall Street Journal published a TMZ-worthy piece on a scandal involving BlackRock Income Trust (BIT). BIT is a closed-end fund with $750 million in assets and which, in Jason’s judgment, charges “an arm and a leg” for its services. The fund invested $75 million in “a small, privately held movie company, Aviron Capital LLC.” BlackRock underwrote six of Aviron’s seven films that latest of which, After (2019) cast one of the daughter of one of BlackRock fund’s managers in a lead role.

That does not appear to have been a decision triggered solely by the actor’s on-screen abilities. Mr. Zweig reports:

[Manager Randy] Robertson couldn’t be reached for comment. His daughter, actress Rebecca Lee Robertson, declined to comment.

BlackRock first invested in Aviron with a $12 million loan in 2015. Soon after, “we arranged for [Ms. Robertson] to meet with casting agents and managers,” says [Aviron’s owner William] Sadleir. “Anytime there was an opportunity to put her in a movie, we considered her.”

The entire $75 million investment was lost, Mr. Robertson was internally investigated and discharged and the fund finished 2019 behind 99% of its peers. Mr. Zweig’s rich article is “The Hollywood Drama That Cost a BlackRock Fund $75 Million” (accessible only to WSJ subscribers but well worth the time).

The staff of NASDAQ’s Listing Qualifications Department recently notified Invesco that Invesco RAFI Strategic Developed Ex-Us Small Company ETF (ISDS) does not appear to be in compliance with the continued listing standards of the Exchange, which requires, among other things, that a listed security maintain at least 50 shareholders

Trillium Asset Management (Trillium), a relatively young ESG firm, is being acquired by the Australian enterprise Perpetual Limited, which sounds a lot like a firm invented for an Addams Family movie. Trillium manages their own funds (Trillium ESG Small/Mid Cap TSMDX which is pretty weak and Trillium P21 Global Equity PORTX which is exceptionally solid) as well as John Hancock ESG All Cap Core Fund and John Hancock ESG Large Cap Core Fund. Given the change, Hancock has put the agreement with Trillium under review.

SMALL WINS FOR INVESTORS

Effective March 1, 2020, the management fees, operating expense limitation cap, and subadvisory fee for both the Investor Class Shares and Institutional Class Shares of the five-star Hilton Tactical Income Fund (HCYAX) will be reduced by about 11 bps. Interested readers might want to hear from the manager, Alex Oxenham, in our 2019 Elevator Talk.

Effective April 1, 2020, the T. Rowe Price Global Technology Fund (PRGTX) which was closed to new investors on September 29, 2017, will resume accepting new accounts and purchases from most investors who invest directly with T. Rowe Price. The fund lagged its peers in 2018, saw billions in outflows, got a new manager in 2019, had T Rowe Price-like performance (it booked 34% which was great, though it trailed its peers) and saw additional, though more modest, outflows.

CLOSINGS (and related inconveniences)

Vanguard PRIMECAP Fund (VPMCX), Vanguard PRIMECAP Core Fund (VPCCX) and Vanguard Capital Opportunity Fund (VHCOX) closed to new accounts for investors not enrolled in Vanguard Flagship Services or Vanguard Personal Advisor Services. Current shareholders of the Fund may invest up to $25,000 per Fund account per year in the Fund.

OLD WINE, NEW BOTTLES

Effective as of March 1, 2020, Berwyn Income (BERIX) will change its name to Chartwell Income Fund. In some ways, that’s a real service to shareholders who might otherwise think that by buying shares in the Berwyn Income fund they were … well, buying shares in the Berwyn Income fund. In reality, they were not: long-term Berwyn managers George Cipolloni and Mark Saylor unexpectedly resigned in February 2019 and the fund’s new adviser created an entirely new strategy by creating a 70/30 blend of Chartwell’s midcap value strategy and its core-plus bond strategy. While that might turn out to be a very fine fund, it has no similarity to the historic Berwyn Income fund and now that name, too, is gone. Over its short history the new strategy has noticeably trailed its Morningstar peer group, but 11 months is too short a time to say anything useful.

Effective May 1, 2020, BlackRock Credit Strategies Income Fund will change its name to BlackRock Income Fund

Effective February 11, 2020, GAMCO International Growth Fund changed its name to Gabelli International Growth Fund.

Lateef Focused Growth Fund, a fund whose portfolio wasn’t particularly marked by its commitment to sustainable investing, has become Lateef Focused Sustainable Growth Fund

Effective February 28, 2020, Duff & Phelps replaced Rampart Investment Management on the Virtus Rampart Alternatives Diversifier Fund (PDPAX). The name is now Virtus Duff & Phelps Real Asset Fund

I learn a new word today: “demerged.” As in, “The Investec Group’s asset management business is expected to be demerged from the Investec Group, and separately listed, on March 16, 2020.” Subsequent to which, their two funds get new handles:

Current Name New Name
Investec Global Franchise Fund Ninety One Global Franchise Fund
Investec Emerging Markets Equity Fund Ninety One Emerging Markets Equity Fund

VanEck Vectors ChinaAMC CSI 300 ETF will soon be receiving: (i) a new name; (ii) new benchmark index; (iii) new investment objective;(iv) new diversification status  and (v) some new principal investment strategies. After May 1, 2020 it becomes VanEck Vectors China Growth Leaders ETF (GLCN).Effective March 2, 2020, VanEck Vectors NDR CMG Long/Flat Allocation ETF (LFEQ) are hereby deleted and replaced with VanEck Vectors Long/Flat Trend ETF.

OFF TO THE DUSTBIN OF HISTORY

AMF Ultra Short Mortgage Fund (ASARX) will be liquidated on April 20, 2020.

Barings Global High Yield Fund (BXGIX) will be liquidated on March 19, 2020. It was a very fine fund – four star, Bronze-rated, substantially above average returns – for which there was no demand (not even from the six managers, none of whom invested a dollar in the fund).

The tiny five-star BlackRock Emerging Markets Equity Strategies Fund (BEFIX) will, with unusual precision, be liquidiated at 4:00 p.m. (Eastern time) on April 14, 2020. BlackRock investors will still have access to BlackRock Emerging Markets Investor (MDDCX) which has about a billion in assets, lower volatility and a better record.

Columbia, has seen a relatively $1.5 billion in outflows across its 100 funds over the past year, has decided to trim the fund list by merging away ten funds and liquidating three others. The target date for the mergers is sometime in the third quarter of 2020.

Target Fund Acquiring Fund
Columbia Contrarian Europe Fund Columbia Overseas Core Fund
Columbia Disciplined Small Core Fund Columbia Small Cap Value Fund I
Columbia Global Strategic Equity Fund Columbia Capital Allocation Aggressive Portfolio
Columbia Select Global Growth Fund Columbia Select Global Equity Fund
Columbia Small/Mid Cap Value Fund Columbia Select Mid Cap Value Fund
Columbia Global Energy and Natural Resources Fund Columbia Global Equity Value Fund
Columbia Global Infrastructure Fund Columbia Global Equity Value Fund
Columbia Select International Equity Fund Columbia Acorn International Select
Columbia Acorn Emerging Markets Fund Columbia Acorn International
Columbia Acorn Select Columbia Acorn Fund
Target Fund Acquiring Fund
Columbia Contrarian Europe Fund Columbia Overseas Core Fund
Columbia Disciplined Small Core Fund Columbia Small Cap Value Fund I
Columbia Global Strategic Equity Fund Columbia Capital Allocation Aggressive Portfolio

The Cutler Fixed Income Fund (CALFX) and the Cutler Emerging Markets Fund (CUTDX), assuming shareholder approval, will close and liquidate on or about May 28, 2020.The Columbia Sustainable Global Equity Income ETF (ESGW), on the other hand, is simply being liquidated on March 20, 2020. Columbia Inflation Protected Securities Fund will cease to protect us from … well, anything, on April 24, 2020. Columbia Contrarian Asia Pacific Fund will be sunk beneath the waves on July 20, 2020.

DFA U.S. Large Cap Value II (DFCVX) will be liquidated by March 5, 2020. Curious. Four-star fund with a Silver rating. $170 million in assets. Money has dribbled out the door, but there’s been no torrent. Fortunately, DFA offered a section labeled “Rationale for Liquidating the Portfolio.” Ready?

Based upon information provided by DFA, the Board determined that it is in the best interests of the Portfolio and its shareholders to liquidate and terminate the Portfolio … the Board considered factors that have adversely affected, and will continue to adversely affect, the ability of the Portfolio to conduct its business and operations in an economically viable manner.

At the end of that paragraph, we know precisely as much as we did at the beginning: zero.

Effective on or about April 7, 2020, the ETFMG Drone Economy Strategy ETF ceases to exist and the Wedbush ETFMG Global Cloud Technology ETF rises from its ashes. This is sort of a poster child for the practice of covert liquidation; there is roughly zero overlap between the two funds and zero reason to believe that “drone” investors were hopeful of “cloud” exposure.

 First Trust Value Line 100 Exchange-Traded Fund (FVL) is getting eaten by the First Trust Value Line Dividend Index Fund (FVD) and First Trust Exchange-Traded Mega Cap AlphaDEX® Fund is merging into First Trust Dow 30 Equal Weight ETF (EDOW).

The First Trust Australia AlphaDEX Fund (FAUS), the First Trust Canada AlphaDEX® Fund (FCAN), the First Trust Hong Kong AlphaDEX Fund (FHK), and the First Trust South Korea AlphaDEX Fund (FKO) are all disappearing into the First Trust Developed Markets ex-US AlphaDEX Fund (FDT).

The excellent-but-microscopic Franklin Liberty International Opportunities ETF (FLIO) will be liquidated and dissolve d occur on or about March 23, 2020.

 “After careful consideration,” Good Harbor Tactical Core U.S. Fund (GHUAX) will be merged into the Good Harbor Tactical Select Fund (GHSAX). More careful consideration might well have concluded that a more complete liquidation will warranted.

Harbor Funds’ Board of Trustees has approved the reorganization of the Harbor Small Cap Growth Opportunities Fund (HASOX) into the Harbor Small Cap Growth Fund (HASGX) on or about the close of business on April 24, 2020

The Hartford Quality Bond Fund (HQBAX) is being merged in The Hartford Total Return Bond Fund (ITBAX), managed by Wellington, on or about June 5, 2020.

Eight ICON funds will be merged out of existence in conjunction with the transfer of ICON’s fund business to the SCM Trust. The handoff will occur “in the second quarter” of 2020. 

Current ICON Fund Acquiring SCM Fund
ICON Fund ICON Equity Fund
ICON Long/Short Fund ICON Equity Fund
ICON Opportunities Fund ICON Equity Fund
ICON Equity Income Fund ICON Equity Income Fund
ICON Risk-Managed Balanced Fund ICON Equity Income Fund
ICON Consumer Discretionary Fund ICON Consumer Select Fund
ICON Consumer Staples Fund ICON Consumer Select Fund
ICON Financial Fund ICON Consumer Select Fund
ICON Energy Fund ICON Natural Resources Fund
ICON Industrials Fund ICON Natural Resources Fund
ICON Natural Resources Fund ICON Natural Resources Fund
ICON Information Technology Fund ICON Health and Information Technology Fund
ICON Healthcare Fund ICON Health and Information Technology Fund
ICON Utilities Fund ICON Utilities and Income Fund
ICON Flexible Bond Fund ICON Flexible Bond Fund
ICON Emerging Markets Fund Shelton Emerging Markets Fund

 

Invesco BLDRS Asia 50 ADR Index Fund (ADRA), Invesco BLDRS Developed Markets 100 ADR Index Fund (ADRD) and Invesco BLDRS Europe Select ADR Index Fund (ADRU) were terminated and wound down on February 26, 2020. ADRs are “American Depositary Rights,” a vehicle that allows foreign securities to be traded on US exchanges. Traditionally they’re used only by large, well-established corporations which implies that the dying ETFs were a form of international blue chip fund.

On February 3, 2020, the Loomis Sayles Multi-Asset Income Fund was liquidated. The firm’s announcement contained the helpful explanation, “The Fund no longer exists, and as a result, shares of the Fund are no longer available for purchase.” Well, yes, Packard Automotive likewise.

The Board of Trustees has determined that it is in the best interest of shareholders to liquidate the Miles Capital Alternatives Advantage Fund (the “Fund”) following the resignation of the Fund’s portfolio manager. As of the date of this supplement, the Fund is no longer accepting purchase orders for its shares and it will close effective March 27, 2020. 

Pacific Advisors Income and Equity Fund (PADIX), Balanced Fund (PAABX) , Large Cap Value Fund (PAGTX), Mid Cap Value Fund (PAMVX) and Small Cap Value Fund will be liquidated on March 30, 2020. The funds weren’t particularly good, but I always have liked the breaching whale logo – and videos – that are used by their parent company, Pacific Life.

Pinnacle Dynamic Growth Fund (PADGX) will plunge from the pinnacle, lose dynamism and cease growth, all on March 25, 2020.

Putnam International Growth Fund (PINOX) is being merged into Putnam Emerging Markets Equity Fund (PEMMX). The justification typically given for mergers is “really, we were just scammin’ you all along, these funds we’re merging are practically clones” is particularly strained here. PEMMX has under 3% exposure to the US, Japan and developed Europe; PINOX sits at 77%. The inverse is true of their EM exposure: PINOX has very little (under 20%) which makes it very unlikely that the PINOX investors signed up for an EM adventure. Nonetheless, they’re about to get one unless they bestir themselves to ditch their shares.

The microscopic Segall Bryant & Hamill Micro Cap Fund (WTMIX) will be liquidated on or about April 8, 2020; reflecting the limited liquidity of microcap names, the process of liquidating the portfolio will begin about five weeks prior to that date.

We ridiculed them when they launched, we ridiculed the few investors who signed up and now we bid the last of them of fund farewell. Janus’s Board of Trustees approved the liquidation of The Organics ETF (ORG) and The Obesity ETF (SLIM) on or about March 18, 2020. They were preceded in death by their sibling The Health and Fitness ETF (FITS).

  1. Rowe Price Institutional Frontier Markets Equity Fund (IEMFX) will be liquidated on April 17, 2020. I have not the slightest idea of why; it’s a four star, $1.8 billion fund.

Templeton Global Equity Series (TGESX) will be liquidated on or about April 24, 2020 with the dual provisos: “sooner if at any time before the liquidation date there are no shares outstanding in the Fund” and “the liquidation may also be delayed if unforeseen circumstances arise.”

At a meeting held on February 19-20, 2020, Wells Fargo Funds Trust considered whether to liquidate Wells Fargo Factor Enhanced Emerging Markets Fund, Wells Fargo Factor Enhanced International Fund, Wells Fargo Factor Enhanced Large Cap Fund and Wells Fargo Factor Enhanced Small Cap Fund. Six days later, they were gone.

The covert liquidation of ETFs continues. On May 12, 2020, Xtrackers Emerging Markets Bond – Interest Rate Hedged ETF (EMIH), Xtrackers High Yield Corporate Bond – Interest Rate Hedged ETF (HYIH) and Xtrackers Investment Grade Bond – Interest Rate Hedged ETF (IGIH) will gain (i) a new names and ticker symbols; (ii) a new investment objectives; (iii) a new underlying indexes; (iv) principal strategies; and (v) a reduction in the fund’s unitary advisory fee. While such changes are not tracked as “liquidations” in the Morningstar database, it’s hard to view the painfully common practice of “repurposing” ETFs in any other way.