Monthly Archives: June 2020

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!

david's signature

Not So Welcome Back ZIRP

By Charles Boccadoro

June begins the fourth month with yield on the 10-year US Treasury Note below 1%. Dating back to 1926, the yield has never been below 1%.

Since the Federal Reserve implemented its Zero Interest Rate Policy (ZIRP) in December 2008 to help combat the Great Financial Crisis (GFC), the yield has remained below 3% 113 of 138 months … or more than 80% of the time. The goal of 3% level seems to have become something of a new normal. It used to be more like 5%, the long-time average.

The last time the 10-year yielded below 3% for an extended period started in 1934 during the Great Depression. It lasted more than 20 years, through mid-late 1950s.

ZIRP lasted 7 years, through December 2015 … which represented much of President Obama’s tenure.

Under Chairman Janet Yellen and continued by Jerome Powell, the Fed tried to “normalize” rates by gradually increasing the so-called Discount Rate from near zero to 2.4% over a three-year period from January 2016 through December 2018. The 10-year rose above 3%. It did not last long.

The average US Treasury fund drew down about 11% during this period with longer duration being hardest hit, as one would expect. Vanguard Extended Duration Treasury Index (VEDTX) was off 20.4% during this period.  BlackRock iShares 20+ Year Treasury Bond ETF (TLT) off 15.2%. Its 7-10 year cousin (IEF) off 7.1%.

After the December 2018 sell-off, which wiped-out the S&P 500’s entire year gain, attempts to normalize rates stopped. And when the CV-19 crisis hit in March, we were back to ZIRP.

Bond funds in general have enjoyed a nearly 40-year bond bull market with rates generally declining. How many surviving bond funds are more than 40-years old … when rates actually rose? Well, just 40. They include Lord Abbett Income (LAGVX) and Putnam Income (PINCX).

Today there are 1250. Which means most bond funds (and perhaps more importantly most investors in bond funds) have never experienced periods of increasing rates.

Not that rising rates appears to be a risk anytime soon, but unless they drop below zero (please not), they have only one direction to go. With that in mind, and in the spirit of getting back to basics as described in last month’s commentary, the MFO Premium site has expanded its evaluation periods. They include the most recent “normalization” period and other periods since GFC of even modest yield increases, like Quantitative Easing 3 (QE3), which included the so-called Taper Tantrum in mid-2013.

The nine new periods are:

  • Quantitative Easing (QE) 1 – 200812 To 201003
  • Quantitative Easing (QE) 3 – 201206 To 201312
  • Normalization – 201601 To 201812
  • Zero Interest Rate Policy (ZIPR) – 200812 To 201512
  • Obama Bull – 200903 To 201612
  • Trump Bump – 201701 To 201912
  • Dec ’18 Selloff – 201812 To 201812
  • CV-19 Bear – 202001 To 202003
  • QE Infinity – 202004 To 202004

A brief description of each can be found here.

The period called Trump Bump offers opportunity to examine how younger funds behaved on the backside of the 11-year bull market that began in March 2009. The December 2018 Selloff requires no explanation, as does the (presumptive) CV-19 Bear period. QE Infinity will continue as necessary.

The MultiSearch tool now offers 57 evaluation periods to screen funds with some 80 different criteria covering fund risk and return performance and portfolio characteristics.

Rules Based Investing – Rule #6 Develop a Simple Investment Process Based on Rules and Guidelines

By Charles Lynn Bolin

Wow! What a year it has been so far! Coronavirus is at the top of the list. For me personally, there was a diagnosis, uncertainty, denial, surgery, and then recovery. After recovery, I took an assignment involving significant travel with less time to spend researching and investing for a couple of months followed by lots of free time. These two life events did not impact how I invest as much as the last rule, to “Develop a Simple Investment Process Based on Rules and Guidelines”. First, I wanted portfolios that were stable enough that I would be comfortable holding them unattended for months at a time during a bear market. For this reason, I created three relatively simple model portfolios that I follow with different accounts. Second, I began researching managed portfolios and accounts at Charles Schwab, Fidelity, and Vanguard, in case my wife needs to manage our investments. I put a small account into a Charles Schwab Intelligent Portfolio (Robo-Adviser) to see how well it does.

I first got the idea of writing the rules of investing last November, but most of the rules that I found were about trading and market timing. I wanted rules that were more applicable to the average individual investor. Here are a few of my favorite rules of investing,some of which are provided by Lance Roberts in Market & Investing Wisdoms For 2020.

    • “In my view, the greatest way to optimize the positioning of a portfolio at a given point in time is through deciding what balance it should strike between aggressiveness and defensiveness. And I believe the aggressiveness/defensiveness balance should be adjusted over time in response to changes in the state of the investment environment and where a number of elements stand in their cycles.” – Howard Marks
    • …the investor should never have less than 25% or more than 75% of his funds in common stocks. – Benjamin Graham
    • Always insist on a margin of safety – James Montier
    • Be fearful when others are greedy and greedy when others are fearful. – Warren Buffet
    • Don’t trust your own opinion and back your judgment until the action of the market itself confirms your opinion. – Jesse Livermore
    • The money lost by speculation alone is small compared with the gigantic sums lost by so-called investors who have let their investments ride. – Jesse Livermore
    • Always keep a good part of your capital in a cash reserve. Never invest all your funds. – Bernard Baruch

My Simple Process

I use an investment model to estimate how much I should have invested in stocks and bonds that are consistent with the rules of the famous investors above. The point is to determine whether one should be aggressive or defensive. With the uncertainties surrounding COVID-19 and a global slowdown, I choose to be more defensive. To select the funds, I create a single value to rank all funds based on Return (Martin Ratio, Sortino Ratio, Period Return, MFO Rank), Risk (Ulcer Index, MFO Risk, average down cycle performance), Yield, Quality (Family Rating, Expenses, Age, Composite MFO, % Junk Bonds, Bond Rating), Valuation (Discount, Price to Cash, Sales, and Earnings) and Momentum (3- and 10-month trends, 3-month performance, and Fund Flows). 

I use a nine bucket approach based on diversification and safety. I hold at least one fund in at least seven buckets. These are Buckets #1 – #4 for increasing Risk, Inflation, Global bonds, Global Investments, and Defensive.

I am going to use the Fidelity Moderate Model Portfolio as an example. The system is automated and takes about an hour per month.

Fidelity Moderate Portfolio

There are 13 funds in the Fidelity Moderate Portfolio and the overall rank and its components are shown in Chart #1. The best rank is 100 and the worst is 0. The funds shaded green are doing well. The yellow funds are okay. The funds shaded red are candidates to be replaced.

Chart # 1:  Fidelity Moderate Portfolio Factor Rank

Chart #2 is created from the Mutual Fund Observer Portfolio Tool showing the same funds from for the past two years. The portfolio has an average annual return of 7.1% with a maximum drawdown of 8.9%. It is classified by MFO as Conservative (MFO Risk = 2). Weight is the percent of the portfolio allocated to a fund. Most of the red funds had a maximum drawdown of 18 to 27 percent over the past two years with real estate and emerging markets performing the worst. These are candidates for replacement. I hold many of these for purposes of diversification so temporary short term performance is not a reason alone to make a trade.

Chart # 2:  Fidelity Moderate Portfolio Metrics – 2 years

Chart #3 shows the top-ranked Fidelity Mutual Funds by selecting one fund for each of the nine Buckets. I am overweight in bonds and not interested in exchanging one bond fund for another. The Fidelity Select Telecommunication Portfolio (FSTCX) is interesting, but I already own a Telecomm fund. I also already own the Baron Global Advantage Retail Portfolio Fund (BGAFX).

Chart # 3:  Top Ranked Fidelity Funds Per Bucket Classification

I may also include Closed End Funds in the Fidelity Moderate Portfolio. Chart #4 is interesting. Each of the funds has a low Ulcer Index (risk) and a respectable Martin Ratio (risk-adjusted return). These warrant more research when I am not traveling.

Chart # 4:  Top Ranked Closed End Funds Per Bucket Classification

Of the Top Ranked Exchange Rated Funds, the Blackrock Aaa – A Rated Corporate Bond Fund (QLTA) is the only one of interest to me. I maintain a small amount of gold in each of my portfolios which has reduced volatility and increased returns.

Chart # 5:  Top Ranked Exchange Traded Funds Per Bucket Classification

Fidelity Conservative Portfolio

The Fidelity Conservative Portfolio that I also follow is likewise classified as Conservative (MFO Risk = 2) but has a slightly lower Ulcer Index than the Fidelity Moderate Portfolio. The portfolio has an average annual return of 6.0% with a maximum drawdown of 7.1%. 

Chart # 6:  Fidelity Conservative Portfolio Metrics – 2 Years

 Vanguard Conservative Portfolio

The Vanguard Conservative Portfolio had a lower return of 4.8% for the past two years, a maximum drawdown of 7.7%.  Its yield is 3.1%. 

Chart # 7:  Vanguard Conservative Portfolio Metrics

 The Top Ranked Vanguard Funds with one fund per bucket classification are shown in Chart #8. The Vanguard Health Care (VGHAX), LifeStrategy Conservative Growth (VSCGX), and US Growth (VWUAX) are potential replacements for the T. Rowe Price Global Multi-Sector Bond Fund (PRSNX).  The rest, I want to keep for diversification.

 Chart # 8:  Top Ranked Vanguard Funds Per Bucket Classification

Top Charles Schwab Funds

Chart #9 contains the Top Ranked Funds available at Charles Schwab. The T. Rowe Price New America Growth (PRWAX) and T. Rowe Price Global Stock Fund (PRGSX) are interesting stock funds and deserve additional research.

Chart # 9:  Top Ranked Charles Schwab Funds Per Bucket Classification


I appreciate the services that the good people at Mutual Fund Observer provide. They have reduced the amount of time that I spent doing research and provided a quantitative method for investing. I have spent too many hours during my life looking at charts and tables trying to determine trends. The method that I use now quantifies those trends.


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.

The Mice that Roared: How Two Small Funds Threaten to Disrupt Two Large Industries

By David Snowball

On May 15, 2020, an unassuming filing with revolutionary potential appeared in the Securities and Exchange Commission’s EDGAR database. It was an N-1A, initial prospectus, filing for two ETFs: SmartETFs Dividend Builder ETF and SmartETFs Asia Pacific Dividend Builder ETF. Both unremarkably offered “to provide investors with dividend income and long-term capital growth.”

The real news appeared on page 9 of the document:

The SmartETFs Asia Pacific Dividend Builder ETF will adopt the performance history of its predecessor fund, the Guinness Atkinson Asia Pacific Dividend Builder Fund.

And on page 18:

At that time, SmartETFs Dividend Builder ETF will adopt the performance history of its predecessor Fund, the Guinness Atkinson Dividend Builder Fund.

And though they didn’t know it yet, two trillion-dollar industries – mutual funds and ETFs – were shaken.

Assuming final SEC approval, this will be the first instance in which a current mutual fund seamlessly transforms into an ETF, bringing along its asset base, long-term record, Morningstar (and MFO) ratings, and analyst coverage. Conversions of hedge funds into mutual funds are common, and conversions to or from the world of closed-end funds are rare but not unprecedented.

Allowing a mutual fund to become an ETF is unprecedented. And, potentially, very good, very disruptive news.

The packaging of professional money management services for the common investor has a series of milestones:

1893: closed-end funds, which trade on secondary exchanges like stocks, launch

1928: the first open-end mutual funds, including the first no-load Scudder fund, launch. Those first launches included the Massachusetts Investors Trust and Wellington Fund. By 1929, there were 19 open-end funds and 700 CEFs.

1940: the Investment Company Act of 1940 sets in place the regulations that still form the basis of the industry’s rules. For that reason, cognoscenti sometimes refer to “’40 Act funds.”

1993: launch of the first exchange-traded fund, State Street’s S&P 500 Trust ETF. Originally all ETFs shared three characteristics: they were passive, they could be bought and sold minute-by-minute with “fresh” prices, and their portfolios were fully transparent. That transparency was critical since you want to be sure that the amount you paid for a share of an ETF was exactly the same as the value of the securities in the portfolio.

2008: launch of the first actively-managed ETF, Bear Stearns Current Yield ETF (YYY). A very philosophical ticker symbol. The fund sought “as high a level of current income as is consistent with the preservation of capital and liquidity,” which is to say that it was a sort of high-yield money market fund. Still fully transparent, but actively managed.

2020, April: the first non-transparent, actively-managed ETFs launch, the American Century Focused Dynamic Growth ETF (FDG) and American Century Focused Large Cap Value ETF (FLV). While both of the ETFs were brand new, FDG was a near-clone of an existing fund that continues to operate: the five-star $400 million American Century Focused Dynamic Growth Fund (ACFOX).

2020, July: the first direct conversion of mutual funds into transparent, actively-managed ETFs occurs.

For whom is that good news?

The shareholders of Guinness Atkinson Dividend Builder Fund (GAINX) and Guinness Atkinson Asia Pacific Dividend Builders Fund (GAADX) are the first and surest winners. ETFs have four advantages, three of which are structural, over mutual funds:

  1. They have structurally lower costs. Mutual funds are subject to several sets of expenses, such as state registrations and “stocking fees” at brokerages such as Schwab, that ETFs don’t have to bear. That allows an adviser to offer the exact same services for less in an ETF wrapper than in a fund wrapper.
  2. They allow investors to control the timing of capital gains taxation. Most mutual funds generate tax bills annually because accrued capital gains from portfolio trading have to be distributed in the year in which they’re accrued. As a result, investors pay capital gains even in years where they fund lost money and they did not sell any fund shares. With ETFs, the capital gains bill comes due when the shares are sold.
  3. They might be marginally more tax efficient. One source of portfolio churn, hence taxes, is forced selling to meet redemptions. There are a couple of structural features of ETFs that allow them to avoid generating taxable events.
  4. They have not been repeatedly defamed by self-interested marketers and lazy financial journalists looking for cheap stories. “80% of mutual funds failed to beat the market last year” is utterly fatuous – beating the market isn’t the goal, one year is an irrelevant time period, risk matters as much as returns, very nearly all passive products also trail the market – but has made it hard to approach investors, young, professional or otherwise. The term “skunked” comes to mind. The repackage offers a clean slate.

The owners of mutual fund boutiques are potentially the second set of winners if they choose to be. The excess structural costs of operating a mutual fund are largely fixed expenses; that is, a $20,000 fee is assessed whether you manage a million or a billion. As a result, reducing the structural costs that are unique to the mutual fund wrapper has the greatest impact on small funds. A $20,000 savings will have a far greater effect on the expense ratio of the $14 million Guinness Atkinson Dividend Builder than on the $814 million Eaton Vance Dividend Builder. In discussions last year, the president of Guinness Atkinson was estimating 60-80 bps savings. That’s roughly in line with the American Century experience, where the ETF version of Focused Dynamic Growth charges half what the mutual fund version does, 45 bps versus 85 bps (subsidized).

Similarly, the challenge of broad availability disproportionately impacts small funds. Platforms such as Schwab reportedly have a $100 million minimum for considering the inclusion of a fund on their platform, and then only for a substantial price. As a practical matter, the only way for a fund to reach $100 million is if they’re on the platform but, Catch-22 ho! they can’t get on the platform until …

That said, many of the owners of boutique firms are remarkably resistant to innovation. I’ve heard the phrase “well, that’s the way we do things here” rather more than “we need to look at things with fresh eyes and embrace change or this thing’s going to become a death spiral!”

To whom is the disruption coming?

Disruptee #1: The ETF industry, many of whose players are doomed anyway.

There’s an awful lot of unwarranted strutting about by “players” in that industry. Their general demeanor is “we’re ETFs and we’re the Kings of Creation.”

Nice story. Delusional, but still nice.

Two things to consider:

  1. the ETF industry is dominated by a handful of mutual fund companies.

    If we look at the 50 most successful ETF launches of the past three years, you notice some familiar names:

    American Century, BlackRock, Columbia, Invesco, Janus, JPMorgan, PIMCO, Schwab, State Street, Vanguard, USAA …

    When you take out offerings from traditional fund companies, you have eliminated 40 of the top 50 new ETFs.

    Those same firms offer all of the 100 largest ETFs. The first pure-play ETF issuer on the list might be … Morningstar? FlexShares Morningstar Global Upstream Natural Resources Index appears around #190 with $3.1 billion in assets. (USCF appears higher on the list with the USCF Oil ETF (USO) that suffered a 75% price collapse this year, has apparently been cut off by its broker from buying futures contracts, and is apparently under federal investigation for improper risk disclosure so I’m not quite sure of its status.)

  2. many independent ETFs linger at death’s door.

    About a thousand ETFs had been liquidated by the start of 2020, while others had been “creatively repurposed” so that one day’s Cloud Computing ETF is the next day’s Industrial Hemp Fund. The long-running ETF Deathwatch had 399 names on its list in March; 54 names had been removed in the month, nearly half of those through … well, death. Deathwatch tracks funds with under $25 million in assets and low trading volume. Academic studies put the … uh, deadline, at about $30 million in assets.

    Take a quick snapshot of the 655 ETFs launched in the last three years. Three hundred and sixty – 55% – are at or below the $30 million deadline with many other ETFs launched in the period already liquidated.

We reported last year on a series of news analyses that suggest that ETF marketers might be consciously gaming the system to generate a self-sustaining bandwagon effect. Take the case of one of the most explosive ETF launches ever … a JPMorgan Japan fund?

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

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

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

The biggest buyers: JPMorgan’s clients.

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

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

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

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

Deep, cleansing breath. Deep, cleansing breath. I am not picking on the ETF industry. I’m merely suggesting that things are not nearly as secure as the headlines portray.

500 mutual funds have under $100 million in assets but have earned four- and five-star ratings from Morningstar. If even a fraction of those funds transitioned to ETFs, bringing long, exceptional records, and suddenly low expenses, and improved tax efficiency, it would upset the ETF equation in a major way.

Disruptee #2: the mutual fund industry, many of whose players are doomed anyway.

Which is pretty obvious.

Bottom line: Nothing’s guaranteed. It might be that the SmartETF path is seen as too burdensome, or the simple pigheadedness prevails. There are surely marketing questions to be answered since many traditional firms still offer loaded funds or have comfortable existing relationships with advisors that they don’t want to disrupt.

That said, the SmartETF launch opens a pathway to relevance for hundreds of small, strong mutual funds … and a new challenge for many of their ETF peers.

Guinness Atkinson Dividend Builder embodies an entirely sensible strategy, well-executed and popular with European investors. We’ve profiled the fund in the past, and we’ll offer a Launch Alert with updated information as soon as the ETF goes live.

What We Do Not Know!

By Edward A. Studzinski

“Pessimist: one who, when he has the choice of two evils, chooses both.”

                    Oscar Wilde

One wonders what fifty years down the road, people will say about this period and how we as a nation dealt with the challenges with which we were presented.

In this country, we have had the conflict between states that never really closed but recommended social distancing and states that fully locked down and shut-in their residents and shut down their economies. In the latter case, the initial goal was to “bend the curve” until the healthcare system could prepare for the onslaught of expected cases by building up supplies and resources. That goal morphed into “staying home to save lives.” That wisdom became suspect when Governor Cuomo of New York was forced to admit that the later batches of hospital admissions in New York City consisted of people who had not been anywhere but in their apartments. It had become apparent that fresh air (opening windows) tended to dissipate the virus whereas modern high rises with sealed HVAC systems and windows that did not open did not dissipate the virus.

Which leads me to say that we now know more about what we do not know. As analysts, it is increasingly apparent that we are dealing with a high-frequency low severity event (in terms of the ultimate mortality rate from the pandemic). Will there be a second surge of the virus later this year? It is not an unreasonable assumption. What I do know is that we have now better prepared the healthcare system for such a surge, in terms of the necessary spaces, equipment and testing capability. And, we have learned from research and practice more about how to mitigate the effects of the virus, except in those whose health is already compromised. The greater issue, unfortunately, is that the other diseases and illnesses that cause death in the U.S. have continued to march forward, now unimpeded. Seven hundred and fifty thousand people a year in the U.S. are diagnosed with cancer in one form or another. Since the beginning of the year, with the issues raised about the dangers of COVID, half of those seven hundred fifty thousand have been missing their appointments for chemotherapy, radiation, or follow-up testing. We will most likely need another category of death related to COVID. That is, deaths caused by not getting proper treatment for diagnosed illnesses due to fear of catching COVID. 


I am going to repeat myself by saying that bonds are not a great place to invest now. With interest rates as low as they are (1% or less on risk-free governments), it would take little movement in those rates upwards to wipe out, on a mark to market basis, a considerable amount of hard-earned permanent capital. Given the number of bankruptcy filings and corporate restructurings (layoffs) that we are starting to see, it is difficult to make an argument that this is an asset class that will serve its traditional role as an anchor to windward in a balanced portfolio. And besides corporate issues, I should note that the same concerns apply to municipal bonds. There will also be a group of corporate restructurings that will occur that had been waiting for the right moment to execute. The virus has provided the justification for moving forward.

I continue to believe that the role traditionally played by the fixed income component should be taken over by cash. And while the cash will earn less than a fixed income bond portfolio, it should hold its value as a preserver of capital (if you stick to Treasury money market funds and insured bank certificates of deposit). The cash provides the opportunity to selectively go forward into equities that become irrationally undervalued at times. Those equities will take the place of providing income, assuming that they are in good, dividend-paying securities. That is, those that have a consistent history of paying dividends that have increased over time. In that sense, you are looking for businesses that generate cash, do not have a lot of debt, and do not require a lot of continued capital investment in plant and equipment to sustain the business.

An example of a business not to invest in would be an aircraft manufacturer. That business has a continued capital investment requirement in plant and equipment, is levered with debt, and is a situation where it takes twenty years to figure out if they actually made a profit on the production of a particular aircraft. A reasonable dividend hurdle to look for is an equity issue priced to provide at least a 3% dividend yield. One should avoid the high dividend yielders (paying above 6% in yields or distributions), as in this environment, those companies are as likely to reduce or eliminate their dividends to preserve corporate working capital. A perfect example of that is the real estate investment trust Weyerhaeuser, which a few weeks ago was attracting attention as an issue yielding close to seven percent, apparently a safe dividend. Shortly thereafter, the board, looking into the future as to the demand for forest products for building materials and paper, along with the debt load of the corporation, decided to eliminate the dividend. That has not been an unusual situation. 

Many companies are going to have no earnings … retail is a disaster area … even cloud-based services have most likely been overbuilt. Which leads me to …

What needs to be thought about in terms of equity investments (and those funds that invest in equities), is that for the second and third quarters of this calendar year, there is a better than average chance that many companies are going to have no earnings. What looked to be equity valuations that were only slightly overvalued in terms of the overall market are going to look extremely overvalued.

This leads us to the asset class of real estate. Retail is a disaster area, and many of both the stores and restaurants in that category will not be able to ever reopen. Even if they were, the amount of traffic they will receive would be questionable. The same is true of hotels. Many of those too will not be able to reopen, let alone pay rent. Those that do will see depressed occupancy for a long period of time.

Apartments will be a question of geography, as there will be locations that will see a faster economic recovery than others. Office buildings, especially in downtown urban locations, will see increased vacancy rates as working from home (and workforce restructurings) becomes more common. Industrial property, especially warehouses, should fare better than other classes, but again the issues of occupancy and rent payment will be determinative. Finally, what people thought would be winners, data processing hubs for servers, may not prove out. A consultant friend in the cybersecurity business explained to me that much of the capacity built in that category had been for smaller companies not good at forecasting their future needs, so they had overestimated. Companies such as Walmart, Amazon, Costco and the like were quite good at forecasting their space and server needs. The small business component of demand will be under pressure. The space has most likely been overbuilt.

Which leads me to the following. Warren Buffett was criticized as a result of his annual meeting comments that he had not repurchased any Berkshire Hathaway stock during the days of market downdrafts. He indicated he intended to hold onto the cash hoard the company had built up, as the range of potential outcomes that he saw was too extreme. We had gone beyond the two standard deviations of normal distribution returns and into the world of outliers (think not just a hundred-year storm but ongoing back-to-back hundred-year storms).

Mr. Buffett intends to hold onto the cash hoard the company has built up … I take that as a fiduciary decision to protect his shareholders.

He is in a better position to see what is going on in the domestic economy than most company chief executives as well as most mutual fund portfolio managers. Think about the group of businesses that Berkshire has in its portfolio, including Burlington Northern, Dairy Queen, Nebraska Furniture Mart, Benjamin Moore, NetJets, Berkshire Hathaway Real Estate and on and on. He will be looking at revenues and cash flows from the customers of that diverse portfolio of companies on a relatively real-time basis – a snapshot of information that we cannot similarly access. I take his decision to hunker down and preserve cash as a fiduciary decision to protect his shareholders. That is very distinct from the mutual fund manager hoping to regain a sufficient dollar amount of assets under management to preserve his firm’s unfunded deferred compensation plan for the highly compensated. 

For those who are interested in a better appreciation of COVID, and some of the numbers involved, I recommend “A fiasco in the making? As the coronavirus pandemic takes hold, we are making decisions without reliable data” Stanford Medical School epidemiologist Dr. John P. A. Ioannidis. It was published in Stat, the health care and medical on-line paper out of Boston, in March of this year.

Launch Alert: ClearBridge Focus Value ETF (CFCV)

By David Snowball

On May 27, 2020, ClearBridge Investments launched ClearBridge Focus Value ETF (CFCV), one of the first active, non-transparent ETFs launched under the so-called Precidian protocol.

Precidian Investments, like ClearBridge, is an affiliate of Legg Mason. Legg paid $25 million in January 2020 to acquire the majority ownership of Precidian. It had been a minority owner since 2016. Precidian received approval from the SEC for a process that allows fund managers to evade the traditional ETF rule requiring constant, real-time portfolio transparency. Precidian now licenses its “technologies” to other advisers, allowing them to offer active funds with limited portfolio visibility.

ClearBridge Investments, a 50-year-old firm, manages $120 billion in assets. It merged in 2013 with Legg Mason Capital Management. Each of Legg’s nine affiliates managers – including Royce and Brandywine – maintains its investment autonomy while Legg handles marketing and distribution.

Sometime in the third quarter of 2020, Franklin Resources will complete the $4.5 billion purchase of the whole lot of them.

ClearBridge Focus Value ETF is managed by Robert Feitler and Dmitry Khaykin. Feitler and Khaykin also manage ClearBridge Large Cap Value Fund (SINAX). The Focus Value ETF uses the same discipline as the Large Cap Value Fund but plans to hold fewer stocks, 30-40 versus the 50+ typically in the fund. Otherwise, they are using the same investment strategy:

The investable universe is companies, primarily domestic, with a market cap above $5 billion.

They filter for characteristics such as sustainable competitive advantages, sustainable characteristics and attractive valuations.

They combine stock-by-stock fundamental analysis with a broader macro analysis that focuses on broad economic and industry trends.

Finally, they apply a series of ongoing risk management strategies including a sell discipline, and risk controls to help mitigate concentration risk and enhance diversification.

Why buy the strategy?

Morningstar rates the low IS share class (LMLSX) as a four-star fund with a Silver medalist rating.

Mr. Feitler has been managing the fund since August 2004, just over 15 years. Mr. Khaykin joined in 2007. Morningstar credits the team with a 15-year record that’s about 0.54% greater than its peers and 0.17% above its benchmark index.

The fund is in the top tier of US large-cap value offering over the 15 years since Mr. Feitler joined. Its returns are in the top 20 of its category and its Sharpe ratio is in the top 15. We sorted LCV funds by their 15-year returns, then captured ClearBridge and its immediate neighbors.

Name APR MAXDD STDEV Ulcer Index Sharpe Ratio Martin Ratio MFO Rating ER
Vanguard Value Index VIVAX 6.9 -54.9 15.1 15.8 0.37 0.36 3 0.17
ClearBridge Large Cap Value SAIFX 6.8 -49.3 14.3 13.4 0.39 0.42 4 0.6
Dodge & Cox Stock DODGX 6.6 -59.2 17.5 17.8 0.31 0.3 2 0.52
Vanguard Windsor II VWNFX 6.6 -53.3 15.4 15 0.35 0.35 3 0.34
Average of Metrics for Large-Cap Value 6.1 -52.6 15.6 15.1 0.32 0.34 3 0.78

ClearBridge outperformed Dodge & Cox Stock and Vanguard Windsor II in raw returns while trailing the Vanguard Value Index by 0.1%. When we shift our attention to risks and risk-return metrics, ClearBridge outperforms all three, and its peer averages, by a substantial margin. Its maximum drawdown, in February 2009, was 10 points small that Dodge & Cox’s and four points better than either of the Vanguard funds.  It has lower volatility and higher risk-return measures than any of its neighbors.

It is, in short, a sensible, well-executed strategy that has a record of handing downturns well, including a substantial outperformance in 2020.

Why buy the strategic in a new-fangled wrapper instead of the mutual fund?

It is cheaper than the fund.

The ETF charges 50 bps, while the retail “A” shares go for 88 bps, an upcharge of 57%. Even the institutional IS shares, the cheapest current route, charge 55 bps (or 0.55% of assets annually). At 50 bps, the ETF will be cheaper than the $60 billion DODGX.

It is more tax-efficient than the fund.

If you own shares of an open-end mutual fund, you’re liable to receive a tax bill even in years when you don’t sell any of your shares; that’s because the fund structure forces them to pass along the capital gains taxes generated by the manager’s ongoing buying and selling. Sometimes the manager is choosing to sell, sometimes they’re forced to sell in order to meet redemptions. That generates ongoing and somewhat annoying tax bills.

An arcane element of the structure of ETFs – the creation unit – allows them to dodge the need to make taxable sales in order to meet redemptions. Morningstar’s rough estimation is that an active ETF is about 3% more tax-efficient than a comparable fund.

In addition, with an ETF, you only pay capital gains taxes in the year that you choose to sell your shares. That gives you greater control and a smaller set of accounting headaches.

In either structure, you pay taxes on any dividends you received each year.

It is less annoying than Legg Mason’s usual foolishness.

ClearBridge Large Cap Value Fund is marketed in seven different share classes, with sales loads ranging from 0% – 5.75%, expense ratios ranging from 0.55% to 1.58% and minimum investment requirements of $1,000 or $1 million.

ClearBridge might be the tip of the spear, the third active, non-transparent ETF to market but 14 other fund families – including Fidelity and T. Rowe Price – have pursued the option to launch such ETFs.

On its own, it’s an attractive option for conservative equity investors and, especially, those with a preference for incorporating sustainability principles in their portfolio. The clean format – no investment minimum, no 12b1 fees, no sales charges, low expense ratio – make it an especially intriguing option.

Investors might read the ETF’s homepage, which is a bit thin yet, or the fund’s homepage at Legg Mason, but ClearBridge’s own site offers a much more substantial discussion of the underlying ethos and strategy.

Launch Alert: Jensen Global Quality Growth

By David Snowball

On April 15, 2020, Jensen Investment Management launched the Jensen Global Quality Growth Fund (JGQSX).  This new fund is a global version of Jensen Quality Growth: the same discipline, same managers. Jensen Quality Growth Fund (JENSX) is, at least from the perspective of those who look at long-term accomplishments, one of the best domestic large-cap core funds in existence.

What do they do?

Their discipline is remarkably simple: they buy and hold high-quality growth companies. The underlying argument is “quality companies possess sustainable competitive advantages, creating value as profitable businesses that can, over time, provide attractive returns with less risk than the overall market.”  They typically own around 25-30 stocks and typically hold a stock for about five years. It is not unusual for the fund to hold a stock for 15 or 20 years, as in the case of Pepsi, 3M, or Omnicon Group.

There’s a four-step process at work:

    1. limit your universe to firms with a return-on-equity (ROE) greater than 15% for each of the past 10 years and to stocks with a market cap over $1 billion
    2. screen that shortlist for quality and growth characteristics
    3. assess the sustainability of their advantages
    4. build a portfolio around 25-30 of them.

The new Global Quality Growth fund follows the same discipline with a couple of notes:

at least 40% of the portfolio will be non-US, rather than the 3% on Quality Growth

the fund might invest in emerging markets

the fund will hold 25 to 40 names, rather than 25 to 30

the fund will likely remain fully invested at all times

The strategy has worked quite well over time

Using the fund screener at MFO Premium, we screened for the top five domestic large-cap core funds over the entire market cycle, from October 2007 to February 2020. That captures performance in both one of the century’s most traumatic market falls, as well as the longest bull market in US history.

Here are the top five funds, based on their full-market cycle Sharpe ratios.

Name APR vs peer STDEV Sharpe APR MAXDD Recovery STDEV DSDEV Bear Down
GMO Quality III GQETX 9.9 2.1 12.2 0.76 5 1 1 1 1 1 1
Jensen Quality Growth JENSX 9.7 2.0 13.6 0.67 5 1 1 1 1 1 1
Vanguard PRIMECAP VPMCX 10.6 2.9 15.6 0.64 5 1 1 4 3 3 2
Alger Growth & Income ALBAX 8.3 0.6 11.9 0.64 4 1 1 1 1 1 1
Vanguard PrimeCap Core VPCCX 10.3 2.6 15.3 0.63 5 1 1 3 2 2 2

How do you read that? Lipper tracks 137 large-cap core funds with records that cover the full market cycle. Jensen’s annualized 9.7% return beat its average peer by 2.0% a year. Its Sharpe ratio, a measure of risk-adjusted returns, is the second-highest of any fund; it trails only GMO Quality III, which has a $5 million minimum initial investment.

In the last seven columns, any blue-shaded box represents performance in the best 20% of the peer group. That’s important because the last six columns are all about risk.

Maximum drawdown looks at a fund’s worst fall.

Recovery looks at how long it takes to recover from a bad fall.

Standard deviation looks at “normal” day-to-day volatility.

Downside deviation looks only at “bad” volatility; that is, volatility to the downside.

Bear looks at a fund’s performance in bear market months, those where the market has fallen sharply.

Down looks at a fund’s performance in any month when the market has fallen, by a little or a lot.

Across all those metrics, Jensen sits in the top tier which should be very reassuring to investors contemplating seriously unsettled markets. Recent markets, such as 2019’s fiesta, were driven by financial engineering (from zero real interest rates and record tax cuts which underwrote $700 billion in corporate stock buybacks in 2019, the single largest source of demand for US stocks), did not reward high-quality businesses. Jensen’s 23% returns in 2017 and 29% in 2019 badly trailed their average peer’s. The attractiveness of the new fund really hinges on your answer to two questions:

    1. do you think the rest of the world will remain permanently in our shadow? Research Affiliates puts the probability that European stocks will average at least 5% real returns over the decade at 80%; they project only a 5% chance that US large caps will cross that threshold. And,
    2. do you think, given the recent evolution of the market, that you’re better off owning the best companies in the world, or the flashiest?

The no-load, retail “J” shares of Global Quality Growth have an expense ratio of 1.25%, which is below average for its Morningstar category, and a $2,500 minimum initial investment.

I know, with some amusement, that there’s barely a hint on the Jensen Investment website that the new fund even exists. That being said, interested investors might check the process and risk management discussions for the domestic version of the fund, Jensen Quality Growth Fund.

KL Allocation Fund (GAVAX/GAVIX), June 2020

By David Snowball

Objective and strategy

The fund is trying to grow capital, with the particular goal of beating the MSCI All Country World Index over the long term while maintaining an emphasis on capital preservation. The fund allocates assets between stocks (10-90%), fixed-income securities (10-90%), and cash depending on market conditions. The equity portion of the portfolio is invested in stocks of firms that they designate as “knowledge leaders.” Knowledge Leaders are a group of the world’s leading innovators with deep reservoirs of intangible capital. These companies often possess competitive advantages such as strong brand, proprietary knowledge, or a unique distribution mechanism. Knowledge Leaders are largely service-based and advanced manufacturing businesses, often operating globally. Their investable universe is mid- and large-cap stocks in 24 developed markets. They buy those stocks directly, in local currencies, and do not hedge their currency exposure.


Knowledge Leaders Capital, LLC, of Denver, Colorado. KL started as a US money management affiliate of GaveKal Research Ltd., a Hong Kong-based independent research boutique. Founder Steven Vannelli had partnered with GaveKal for about a decade (2006-17) but had a long-term plan to become an independent shop. They manage over $300 million in the Knowledge Leaders Allocation Fund, an ETF that embodies the equity-only portion of the strategy and a series of separately managed accounts that replicate both the allocation and equity-only strategies.


Steven Vannelli and Bruce Coward. Mr. Vannelli is managing director of Knowledge Leaders Capital, manager of the fund, and lead author of the firm’s strategy for how to account for intangible capital. Before joining GaveKal, he served for 10 years at Denver-based money management firm Alexander Capital, most recently as Head of Equities.

Bryce Coward, the Deputy CIO, joined Knowledge Leaders in 2009 after a two-year stint as an analyst at Level 3 Communications.  He shares responsibility for the selection of developed world equities, fixed income, cash and commodities.

Strategy capacity and closure

With a large-cap, global focus, they believe they might easily manage something like $3 billion across tactical allocation manifestations of the strategy, this fund, and some separate accounts. The equity-only version, the Knowledge Leaders Developed World ETF (KLDW), has probably three times that capacity.

Active share

97. “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 for the Knowledge Leaders Fund is 97, which reflects a very high level of independence from its benchmark MSCI All Country World Index.

Management’s stake in the fund

Mr. Vannelli seeded the fund with $250,000 of his own money. His current stake is in the range of $100,000 – 500,000.  There is no corporate policy encouraging or requiring employee investment in the fund and none of the fund’s directors have invested in it.

Opening date

September 30, 2010. Two caveats. First, Mr. Vannelli began managing a version for European investors in 2006. Second, the fund’s strategy changed on March 31, 2015, when it went from an all-equity portfolio to one relying on a tactical allocation strategy.

Minimum investment

$2500 for Advisor shares, $500,000 for Institutional ones.

Expense ratio

1.53% on the Advisor share class and 1.28% on Institutional share class, on assets of $40.9 million, as of July 2023. 


The stock investors have three nemeses:

  • Low long-term returns
  • High short-term volatility
  • A tendency to overpay for equities

Many managers specialize in addressing one or two of these three faults. Knowledge Leaders think they’ve got a formula for addressing three of three.

Low long-term returns: Knowledge Leaders believes that large stocks of “intangible capital” are key drivers of long-term returns and has developed a database of historic intangible-adjusted financial data, which it believes gives it a unique perspective. Intangible capital represents investments in a firm’s future profitability. It includes research and development investments but also expenditures to upgrade the abilities of their employees. There’s unequivocal evidence that such investments drive a firm’s long-term success. Sadly, current accounting practices punish firms that make these investments by characterizing them as “expenses,” the presence of which makes the firm look less attractive to short-term investors. Mr. Vannelli’s specialty has been in tracking down and accurately characterizing such investments in order to assess a firm’s longer-term prospects.

High short-term volatility: there’s unequivocal empirical and academic research that shows that investors are far more cowardly than they know. While we might pretend to be gunslingers, we’re actually likely to duck under the table at the first sign of trouble. Knowing that, the manager works to minimize both security and market risk for his investors. His first tool is the structure of the equity portfolio. In addition to the inherent resilience of Knowledge Leaders, they also limit the size of any individual position to 5% of the portfolio. They entirely screen out a number of high leverage sectors, especially those where a firm’s fate might be controlled by government policies or other macro factors. The excluded sectors include financials, commodities, utilities, and energy. Conversely, many of the sectors with high concentrations of knowledge leaders, health care, for example, are defensive.

The second tool is the fixed-income and cash buffer. The extent of equity exposure is controlled by their view of the macro environment. Finally, they have the option to reduce market exposure when some combination of four correlation and volatility triggers are pulled. They monitor the correlation between stocks and bonds, the correlation between stocks within a broad equity index, the correlation between their benchmark index and the VIX and the absolute level of the VIX. In high-risk markets, they increase the buffer. Equities, as a percentage of the portfolio, have ranged over the past five years from 45 – 70% with a substantial fraction invested overseas.

That cautious flexibility has paid remarkable dividends: the fund has outperformed its benchmark in every one of the 17 drawdowns of 5% or more since its launch and even made money during two of the three major drawdowns between May 2019 and May 2020.

A tendency to overpay: “expensive” is always relative to the quality of goods that you’re buying. Knowledge Leaders assigns two grades to every stock, a valuation grade based on factors such as price to free cash flow relative both to a firm’s own history and to its industry’s and a quality grade based on an analysis of the firm’s balance sheet, cash flow, and income statement. Importantly, Knowledge Leaders use their proprietary intangible-adjusted metrics in the analysis of value and quality.

In the end, you get a very solid, mildly-mannered portfolio. Here are the standard measures of the fund against its benchmark. Since the fund added its allocation strategy about five years ago, we’ll look at the five-year metrics.

  GAVAX MSCI All Country World Index
Beta .34 1.0
Standard deviation 7.6 14.4
Alpha 2.43 0.0
Maximum drawdown (15.6) (21.4)
Capture 1.71 1.0
Sharpe ratio 0.51 0.29
Annualized return 4.8 4.4

Compared against its Lipper Flexible Portfolio peer group, which is home to funds such as FPA Crescent, Bruce, First Eagle Global and IVA Worldwide, GAVAX places in the top 10% of all funds in every meaningful measure: total returns, Sharpe ratio, downside deviation, bear market deviation, down market deviation, capture ratio for the S&P 500, capture ratio for 60/40 hybrid benchmark and so on.

And, by each of those same measures, KL Allocation has outperformed all of those famous titans over the past five years.

Bottom Line

This is not a fund for investors seeking unwaveringly high exposure to the global equities market. The fund has quietly made a strong case for consideration by investors anxious that the markets of the next five years will be rockier and less rewarding than the five years just past. It has earned serious consideration for investors and advisors crafting a sustainable, long-term conservative equity portfolio.

Fund website

KL Allocation Fund. As befits folks who take knowledge seriously, the site is ridiculously rich in content, some appropriate to all of us and some sensible mostly to trained professionals. 

The Fund wrote a popular white paper on their Moneyball Investing strategy.

© Mutual Fund Observer, 2020. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.

Funds in Registration

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 are in a scramble to launch by June 30th with the hope that having a “standard reporting period” to share with investors sooner. In a remarkable surge, we found 31 active funds and ETFs in registration, some quite notable. Expect them to launch by the end of July 2020.

The number of ESG-themed funds in the pipeline continues to grow. This month’s crop includes a couple of passive ETFs, SPDR [S&P 500 ESG] ETF and JPMorgan Carbon Transition U.S. Equity ETF, as well as active funds and ETFs from Aperture, BlackRock, Changebridge, Ecofin, Eventide and PIMCO.

Individual funds that warrant additional inquiry:

Aperture International Equity, the latest entry from a successful young boutique founded by a former AllianceBernstein CEO. They sport the industry’s most radical performance-based fulcrum fee.

Penn Mutual AM 1847 Income Fund, which seems to be a reincarnation of Berwyn Income (later Chartwell Income, which saw the departure of the entire Berwyn crew in 2019 and then entirely changed strategy in 2020).

Rayliant Quantamental China Equity Fund, whose name leaves me cold, but whose three quant managers include a co-founder of Research Affiliates and a former vice president there.

SmartETFs Dividend Builder ETF, a potentially revolutionary launch since it represents the first time that an extant mutual fund transitioned to become an active ETF. While it’s not uncommon for hedge funds or closed-end funds to become mutual funds, the SEC has never previously authorized a mutual fund to become an ETF, carrying its long-term track record with it.

Ziegler Piermont Small Cap Value Fund, a small-value fund using the same investment strategy which led the managers’ SMA composite to beat the Russell 2000 Value Index over the past 3, 5, 10, and 15 year periods.

Every month the ETF industry breathlessly trots out a few ideas designed to seize the moment. Last month, it was the Work from Home ETF, the Esports and Digital Entertainment ETF, and the BioThreat ETF. This month’s bright, shiny object of the month is Global X Digital Health & Telemedicine ETF which tracks a new index about which no information is available, except that if your annual report includes both the words “digital” and “health,” you’re in!

ABR 75/25 Volatility Fund

ABR 75/25 Volatility Fund will seek long-term capital appreciation. The plan is to “provide long and short exposure to CBOE Volatility Index futures and exchange-traded products, long exposure to S&P 500 Index futures and ETPs, long exposure to long-term U.S. Treasury securities, and cash.” (I nod.) The fund will be managed by Taylor Lukof and David Skordal. Its opening expense ratio is 2.0%, and the minimum initial investment will be $2,500.

Aperture International Equity Fund

Aperture International Equity Fund will seek returns in excess of the MSCI ACWI ex-US Index. The plan is to invest in quality growth companies located outside the US while shorting sucky companies (unattractive valuations, deteriorating fundamentals, inflexible structure, entrenched management, competitive threats and/or weak pricing power). The manager will notice, but not be controlled by, ESG factors. The fund will be managed by an unnamed employee of Aperture Investors. Its opening expense ratio is 2.20%, and the minimum initial investment will be $500. Aperture is a new boutique whose three funds were all launched within the past year and are all doing well. The fund was founded by former AllianceBernstein chairman/CEO Peter Kraus who promises, “Aperture charges minimum fees equivalent to those of typical passive ETFs in the same categories. This basically covers our base salaries and non-compensation expenses. When we exceed our benchmarks – and only when we exceed our benchmarks – we charge an additional performance-linked fee.” This fund’s published 1.90% management fee is the amount charged if the fund exceeds its benchmark’s performance by 5.0% in a calendar year; the actual fee might vary from 0.40% (insane underperformance) to 3.40% (insane outperformance).

BlackRock LifePath ESG Index [Target Date] Funds

BlackRock LifePath ESG Index [Target Date] Funds will seek to “provide for retirement outcomes based on quantitatively measured risk and to improve the environmental, social and governance investment profile as measured by MSCI Inc. In pursuit of this objective, the LifePath ESG Index Retirement Fund will be broadly diversified across global asset classes, including investing in underlying funds that seek to maximize exposure to companies with higher ESG ratings.” The fund will be managed by a six-person BlackRock team. Its opening expense ratio has not been disclosed, and the minimum initial investment will be $1,000. BlackRock has launched ten funds in this series, from a retirement income fund through a target-date 2065 fund.

Changebridge Capital Long/Short Equity ETF  

Changebridge Capital Long/Short Equity ETF, an actively-managed ETF, seeks long-term capital appreciation while minimizing volatility. The plan is to build a domestic, all-cap, ESG-sensitive long-short portfolio. The long portfolio feels like it will focus on “special situations” stocks: “companies that are facing temporary uncertainties and potential problems that are specific to those individual companies or sectors.” The short book uses typical language. The fund will be managed by Ross Klein of OBP Capital, LLC. Mr. Klein was “long/short generalist for a $1B long/short equity portfolio at Boston Partners from April 2010 to March 2020.” Its opening expense ratio is 1.75%.

Changebridge Capital Sustainable Equity ETF

Changebridge Capital Sustainable Equity ETF, an actively-managed ETF, seeks capital appreciation while preserving capital. The plan is to buy “companies with above-average financial characteristics and growth potential that excel at managing ESG risks and opportunities.” The fund will be managed by Ross Klein of OBP Capital, LLC. Its opening expense ratio is 0.85%.

Corbett Road Tactical Opportunity ETF

Corbett Road Tactical Opportunity ETF, an actively-managed ETF, seeks to provide long-term total return. The plan is to allocate between stocks and fixed-income or cash based on “its proprietary MACROCAST scoring system.” The equity portion of the portfolio will be a combination of core large-cap holdings and “opportunistic” stocks, whose nature is not defined. The fund will be managed by C. Scott Airey and Rush Zarrabian of Corbett Road Management. Prior to founding Corbett Road, Mr. Airey was a Branch Manager at Charles Schwab in Alexandria, VA. Its opening expense ratio has not been disclosed.

Ecofin Global Renewables Infrastructure Fund

Ecofin Global Renewables Infrastructure Fund will seek to generate long-term total returns. The plan is to invest in the stocks of companies who are developers, owners, and operators, in full or in part, of renewable electricity technology plants and systems, and related infrastructure investments. The portfolio will be global and might include up to 15% in fixed-income. This is the conversion of a hedge fund that launched in 2015. The fund will be managed by Matthew Breidert and Michel Sznajer of Tortoise Advisers UK Limited. Its opening expense ratio has not been disclosed, and the minimum initial investment will be $2,500.

Eventide Core Bond Fund

Eventide Core Bond Fund will seek total return. The plan is to buy “income producing securities issued by entities [who] have a positive impact on the world.” Mostly investment grade, mostly intermediate-term with social screens that might mostly appeal to folks with socially-conservative views. The fund will be managed by Dolores S. Bamford and David M. Dirk of Boyd Watterson Asset Management. Its opening expense ratio is 0.78% for “N” shares whose minimum initial investment will be $1,000.

JOHCM Credit Income Fund

JOHCM Credit Income Fund will seek to preserve capital and deliver returns through a combination of income and modest capital appreciation. It’s positioned as a sort of go-anywhere, market opportunities fund. The fund will be managed by Lale Topcuoglu and Giorgio Caputo of JOHCM. Its opening expense ratio on Class II shares, which are available through financial platforms, is 0.94% and there is no minimum initial investment.

Modern Capital Tactical Opportunities Fund

Modern Capital Tactical Opportunities Fund will seek to provide income and capital gains. The plan is to invest long or short primarily in domestic or foreign common stocks and debt instruments directly or through closed-end funds, ETFs, and American depositary receipts.  They will seek income from interest payments and dividends and capital gains through short-term trading strategies. The fund will be managed by Peter Montalbano. Its opening expense ratio is 1.45%, and the minimum initial investment will be between $1,000 – 10,000.

Mortgage-Backed Securities ETF

Mortgage-Backed Securities ETF, an actively-managed ETF, seeks a high level of total return. The plan is to buy mortgage-backed securities, with no distinctive strategy laid out in the prospectus. The fund will be managed by Andrew Serowik and Travis Trampe. Previously, the managers were quants at Goldman Sachs and Invesco, respectively. Its opening expense ratio has not been disclosed.

Penn Mutual AM 1847 Income Fund  

Penn Mutual AM 1847 Income Fund will seek current income and total return consistent with the preservation of capital. The plan is to buy some combination of income-producing securities ranging from T Bills to common, preferred, and convertible shares. The fund will be managed by a team from Penn Mutual Asset Management. The team includes a bunch of experienced managers, including folks formerly associated with Chartwell / Berwyn Income. Its opening expense ratio is 1.0%, and the minimum initial investment will be $3,000.

PIMCO ESG Income Fund

PIMCO ESG Income Fund will seek to maximize current income. The plan is to build a multi-sector portfolio of Fixed Income Instruments of varying maturities. They will avoid issuers whose business practices related to ESG issues “are not to PIMCO’s satisfaction.” At base, this is the ESG-screened version of PIMCO’s $115 billion PIMCO Income Fund (PONAX). The fund will be managed by as-yet-unnamed parties. Its opening expense ratio has not been released for any of its five share classes, and the minimum initial investment will be $1 million.

Rayliant Quantamental China Equity Fund

Rayliant Quantamental China Equity Fund will seek long-term capital appreciation. The plan is to invest in Chinese stocks using “large amounts of data and computer models are paired with human insights about economic and financial features to make investment decisions.”  The fund will be managed by Jason Hsu, Vivek Viswanathan, and Phillip Wool, all PhDs and all employees of Rayliant. Mr. Hsu was a co-founder, with Rob Arnott, of Research Affiliates where Mr. Viswanathan served as a vice president. Its opening expense ratio is 0.98%, and the minimum initial investment will be $1,000.

Simplify US Equity PLUS Convexity ETF

Simplify US Equity PLUS Convexity ETF (SPYC), an actively-managed ETF, seeks to provide capital appreciation. The plan is to maintain equity exposure through index ETFs along with an options overlay. “The option overlay is intended to add convexity to the Fund,” which means outperforming in up and down markets. The fund will be managed by Paul Kim and David Berns of Simplify Asset Management. Prior to this, Mr. Kim was a portfolio manager and managing director at Principal Global Investors (2015 -20).  Mr. Berns, according to the prospectus, “was [insert 5-year business history].” Its opening expense ratio has not been disclosed. There are two other funds, Upside Convexity (SPUC) and Downside Convexity (SPD) in the same portfolio.

SmartETFs Asia Pacific Dividend Builder ETF

SmartETFs Asia Pacific Dividend Builder ETF, an actively-managed ETF, seeks to provide investors with dividend income and long-term capital growth. The plan is to invest in publicly-traded dividend-producing equity securities of Asia Pacific companies. In general, it would equally weight the portfolio holdings and, in general, will hold around 35 positions. The fund will be managed by Edmund Harriss and Mark Hammonds. This ETF formerly operated as Guinness Atkinson Asia Pacific Dividend Builder Fund (GAADX), and it is the first instance of a mutual fund being converted directly to an active ETF. Its opening expense ratio has not been disclosed.

SmartETFs Dividend Builder ETF

SmartETFs Dividend Builder ETF, an actively-managed ETF, seeks a moderate level of current income and consistent dividend growth at a rate that exceeds inflation. The plan is to buy the stocks of dividend-paying companies that have the ability to consistently increase their dividend payments over the medium term. “One key measure of a company’s ability to achieve consistent, real dividend growth is its consistency in generating high returns on capital. The Adviser seeks to invest in companies that have returned a real cash flow return on investment of at least 10% for each of the last 10 years and … are likely to grow their dividend over time.” The fund will be managed by Dr. Ian Mortimer and Matthew Page. This ETF formerly operated as Guinness Atkinson Dividend Builder Fund (GAINX) and, with its Asia-Pacific sibling, is the first instance of a mutual fund being converted directly to an active ETF. Its opening expense ratio has not been disclosed.

T. Rowe Price Retirement 2065 Fund

T. Rowe Price Retirement 2065 Fund will seek the highest total return over time consistent with an emphasis on both capital growth and income. This is just the newest, longest-dated entry. It’s a fund-of-funds in Price’s more-aggressive target-date series. The fund will be managed by the same four-person team responsible for all of the funds. Its opening expense ratio is 0.71%, and the minimum initial investment will be $2,500.

William Blair Emerging Markets Debt Fund

William Blair Emerging Markets Debt Fund will seek attractive risk-adjusted returns. The plan is to buy EM fixed income securities that are denominated in developed-world or “hard” currencies. The fund will be managed by Marcelo Assalin and Marco Ruijer. Its opening expense ratio has not been disclosed, and the minimum initial investment will be $1 million but that’s most relevant at the retirement-plan level; that is, the retirement plan would need to invest at least a million but individual investors within the plan would contribute a sort of retail amount.

Ziegler Piermont Small Cap Value Fund

Ziegler Piermont Small Cap Value Fund will seek to maximize total return from capital appreciation and income. The plan is to use “a proprietary multi-factor, quantitative ranking system combined with a qualitative risk review” to build a domestic, small-value portfolio. The fund will be managed by John S. Albert, Kevin A. Finn, and John Russon. Their small cap value composite has handily outperformed the Russell 2000 Value index over the last 3, 5, 10, and 15 year periods. The composite’s annualized 15-year returns are 10.3%. Its opening expense ratio for Investor shares will be 1.15%, and the minimum initial investment will be $1,000.

Manager Changes, May 2020

By Chip

Fund managers matter, sometimes more than others. As more teams adopt the mantra “we’re a team,” if only as window-dressing, more and more manager changes are reduced to “one cog out, one cog in.” Nonetheless, we know that losing funds with new managers tend to outperform losing funds that hold onto their teams, while the opposite is true for winning funds. Strong funds with stable teams and stable assets outperform strong funds facing instability (Bessler, et al, 2010). Because of the great volatility of their asset class, equity managers matter rather more than fixed-income investors. (Sorry guys.)

And so each month we track the changes in teams, primarily at active, equity-oriented funds and ETFs. With the kind assistance of the folks from Morningstar who share a record of changes they’ve recorded, we’ve tracked down 44 manager changes recorded in the past month or two, down dramatically from the 101 we reported last month.

The most consequential of the changes is at AMG GW&K Global Allocation Fund, formerly Chicago Equity Partners Balanced, where the change of team represents an entirely new regime and investment strategy that moves the fund toward global allocation. Greg Carlson, the Morningstar analyst covering the fund, warns that “a complete makeover doesn’t render this fund attractive.” We offered the same wait-and-see advice in May, as Chip moved to liquidate her position in the fund.

Ticker Fund Out with the old In with the new Dt
MBESX AMG GW&K Global Allocation Fund Michael Budd, Curt Mitchell, Michael Lawrence, Keith Gustafson are no longer listed as portfolio managers for the fund. Aaron Clark, Mary Kane, Thomas Masi, Daniel Miller, Bill Sterling will now manage the fund. 5/20
AAIIX Ancora Income Richard Barone will no longer serve as a portfolio manager for the fund. James Bernard and Kevin Gale will now manage the fund. 5/20
ANSCX Ancora Special Opportunity Fund Richard Barone will no longer serve as a portfolio manager for the fund. James Bernard and Kevin Gale will now manage the fund. 5/20
BGASX Baillie Gifford Global Alpha Equities Fund No one, at the moment, but … Charles Plowden is expected to retire and cease to serve as portfolio manager for the fund effective on or about April 30, 2021. 5/20
BGLTX Baillie Gifford Long Term Global Growth Fund James Anderson will no longer serve as a portfolio manager for the fund. Tom Slater and Mark Urquhart will continue to manage the fund. 5/20
BGGSX Baillie Gifford U.S. Equity Growth Fund Helen Xiong will no longer serve as a portfolio manager for the fund. Dave Bujnowski will join Kirsty Gibson, Gary Robinson, and Tom Slater in managing the fund. 5/20
BUFTX Buffalo Discovery Fund Clay Brethour will no longer serve as a portfolio manager for the fund. Ken Laudan and Jamie Cuellar join Dave Carlsen in managing the fund. 5/20
BUFGX Buffalo Growth Fund Clay Brethour will no longer serve as a portfolio manager for the fund. Josh West joins Dave Carlsen in managing the fund. 5/20
AACOX Cavanal Hill Opportunistic Thomas Mitchell is no longer listed as a portfolio manager for the fund. Brandon Barnes joins Matt Stephani in managing the fund. 5/20
ECPAX Eaton Vance PA Municipal Income Adam Weigold is no longer listed as a portfolio manager for the fund. Christopher Eustance will now manage the fund. 5/20
FADMX Fidelity Advisor Strategic Income Fund Rosie McMellin is no longer listed as a portfolio manager for the fund. Rick Patel joins the other nine managers on the team. 5/20
GTCMX Glenmede Municipal Intermediate Michael Crow will no longer serve as a portfolio manager for the fund. J. Douglas Wilson and Robert Daly will now manage the fund. 5/20
GTAWX Glenmede Short Term Tax Aware Fixed Inc Michael Crow will no longer serve as a portfolio manager for the fund. J. Douglas Wilson and Robert Daly will now manage the fund. 5/20
NITEX Idaho Tax-Exempt Patrick Drum and Phelps McIlvaine are no longer listed as portfolio managers for the fund. Elizabeth Alm and Christopher Lang will now manage the fund. 5/20
GNDCX Invesco Global Low Volatility Equity Yield Michael Abata is no longer listed as a portfolio manager for the fund. Tarun Gupta, Glen Murphy, and Sergey Protchenko join Robert Nakouzi and Nils Huter on the management team. 5/20
MKNCX Invesco Global Market Neutral Michael Abata is no longer listed as a portfolio manager for the fund. Tarun Gupta, Glen Murphy, and Jerry Sun join Robert Nakouzi and Nils Huter on the management team. 5/20
VSQCX Invesco Global Responsibility Equity Michael Abata is no longer listed as a portfolio manager for the fund. Tarun Gupta and Glen Murphy join Robert Nakouzi, Manuela von Ditfurth, and Nils Huter on the management team. 5/20
LTNYX Invesco Oppenheimer Rochester Limited Term New York Municipal Fund No one, but . . . Troy Willis, Julius Williams, Tim O’Reilly, Scott Cottier, and Michael Camarella join Mark DeMitry and Mark Paris in managing the fund. 5/20
OCCIX Invesco Select Risk: Conservative Investor Fund No one, but . . . Jacob Borbidge and Duy Nguyen join Jeffrey Bennett in managing the fund. 5/20
OCAIX Invesco Select Risk: High Growth Investor Fund No one, but . . . Jacob Borbidge and Duy Nguyen join Jeffrey Bennett in managing the fund. 5/20
OCMIX Invesco Select Risk: Moderate Investor Fund No one, but . . . Jacob Borbidge and Duy Nguyen join Jeffrey Bennett in managing the fund. 5/20
OAACX Inveso Active Allocation No one, but . . . Jacob Borbidge and Duy Nguyen join Jeffrey Bennett in managing the fund. 5/20
JAWGX Janus Henderson VIT Global Research Portfolio Carmel Wellso will no longer serve as a portfolio manager for the fund. Matthew Peron will now manage the fund. 5/20
JAGRX Janus Henderson VIT Research Portfolio Carmel Wellso will no longer serve as a portfolio manager for the fund. Matthew Peron will now manage the fund. 5/20
JIAGX John Hancock II Multi-Asset High Income No one, but . . . Caryn Rothman, Geoffrey Kelley, and John Addeo join Christopher Walsh and Nathan Thooft on the management team. 5/20
JIGDX John Hancock II Opportunistic Fixed Income Fund Andrew Balls, Sachin Gupta, and Lorenzo Pagani are no longer listed as portfolio managers for the fund. Brian Garvey and Brij Khuran will now manage the fund. 5/20
UGLSX John Hancock U.S. Global Leaders Growth Fund George Fraise is no longer listed as a portfolio manager for the fund. Kishore Rao joins Gordon Marchand and Robert Rohn on the management team. 5/20
OMICX JPMorgan Municipal Income Fund Jennifer Tabak is no longer listed as a portfolio manager for the fund. Wayne Godlin and Kevin Ellis join David Sivinski in managing the fund. 5/20
LBCCX Lord Abbett Corporate Bond No one, but . . . Yoana Koleva and Eric Kang join Andrew O’Brien and Kewjin Yuoh in managing the fund. 5/20
MMLRX MassMutual Select T. Rowe Price Large Cap Blend Fund No one, but . . . Jeffrey Rottinghaus joins Mark Finn and Joseph Fath on the management team. 5/20
MIPIX Matthews Asia Dividend Fund Vivek Tanneeru will no longer serve as a portfolio manager for the fund. S. Joyce Li joins Sherwood Zhang, Robert Horrocks, and Yu Zhang on the management team. 5/20
OARBX Oakmark Equity and Income Fund Edward Wojciechowski is no longer listed as a portfolio manager for the fund. Adam Abbas joins Clyde McGregor and M. Colin Hudson on the management team. 5/20
OWCAX Old Westbury California Municipal Bond Fund Bruce Whiteford will no longer serve as a portfolio manager for the fund. Kevin Akinskas joins David Rossmiller in managing the fund. 5/20
OWMBX Old Westbury Municipal Bond Bruce Whiteford will no longer serve as a portfolio manager for the fund. Kevin Akinskas joins David Rossmiller in managing the fund. 5/20
OWNYX Old Westbury New York Municipal Bond Bruce Whiteford will no longer serve as a portfolio manager for the fund. Kevin Akinskas joins David Rossmiller in managing the fund. 5/20
PBMPX Principal Core Plus Bond Fund Timothy Warrick and Tina Paris are no longer listed as portfolio managers for the fund. Randy Woodbury joins William Armstrong in managing the fund. 5/20
RGHYX RBC BlueBay High Yield Bond Fund Thomas Kreuzer is no longer listed as a portfolio manager for the fund. Andrzej Skiba joins Tim Leary and Justin Jewell on the management team. 5/20
TGIGX TCW Relative Value Dividend Appreciation Fund No one, but . . . Bo Fifer joins Diane Jaffee in managing the fund. 5/20
TGVNX TCW Relative Value Mid Cap Fund No one, but . . . Mona Eraiba joins Diane Jaffee in managing the fund. 5/20
VCGAX VALIC Company I Systematic Core Fund Tim Snyder and Raffaele Zingone are no longer listed as portfolio managers for the fund. Stephen Platt, Ronan Heaney, and Khalid Ghayur will now manage the fund. 5/20
VMMSX Vanguard Emerging Markets Select Stock Fund Richard Sneller has retired from Baillie Gifford and will no longer serve as a co-portfolio manager for the portion of the fund managed by Baillie Gifford. Ewan Markson-Brown is added as a co-portfolio manager for the portion of the fund managed by Baillie Gifford, joining the existing management team. 5/20
VMATX Vanguard Massachusetts Tax-Exempt Fund Mathew Kiselak will no longer serve as a portfolio manager for the fund. Stephen McFee will now manage the fund. 5/20
VOHIX Vanguard Ohio Long-Term Tax-Exempt Fund James D’Arcy will no longer serve as a portfolio manager for the fund. Stephen McFee will now manage the fund. 5/20
RSHCX Victory High Income Municipal Bond Fund Douglas Gaylor will no longer serve as a portfolio manager for the fund. Regina Conklin, John Bonnell, and Andrew Hattman will now manage the fund. 5/20


Briefly Noted

By David Snowball


Index Funds S&P 500 Equal Weight NoLoad Fund (INDEX, cool ticker) passed its fifth anniversary on April 30, 2020. It’s no secret that traditional US stock indexes are becoming more and more concentrated in just a few mega-cap names. Ten percent of the S&P 500 is invested in just two stocks (Microsoft and Apple) and 20% of the entire index is held in five stocks (adding Amazon, Facebook, and Alphabet). That’s great if you want concentrated exposure, in particular to mega-cap tech.

There’s an alternative: place an equal amount in each of the S&P 500 stocks. In INDEX, for example, Apple is 0.21% of the portfolio rather than 5.09%. The resulting portfolio is more diversified by sector (tech & telecom drop from 33% to 17% of the portfolio), the portfolio’s p/e ratio drops (from 21 to 17), its sustainability rating rises (from 46 to 64, per Morningstar) and its average market cap drops like a rock (from $127 billion to $29 billion). Those embedded biases – toward diversification, size, value – have, over time, allowed the equal-weight index (EWL) to modestly outperform the cap-weighted index.

And, at the five-year mark, INDEX remains the most effective way to access the equal-weight index. Here are their five-year returns against their two giant competitors.

Our 2019 profile of INDEX recognizes that there are no magic wands in investing, but that it’s a durn fine, slightly-contrarian option.

Briefly Noted . . .

Sean Healey, the co-founder of AMG, died on May 27, 2020, from the effects of ALS. Begun as Affiliated Managers Group in 1995, AMG invested in – and helped market – boutique fund managers. Those include AQR, Winton Group, Harding Loevner, River Road, SouthernSun, Tweedy Browne, and Yacktman. The firm now has $600 billion in assets.


On May 20, 2020, the Board of Trustees booted the current management team at Delaware Select Growth (DVEAX) and voted to reopen the fund to new investors on July 31, 2020. They warn of considerable, taxable portfolio churn as the new team realigns the portfolio to match their style.

Effective May 8, 2020, the Dividend Performers (INDPX) and Preferred-Plus (INPPX) closed the “A” share class of the fund. On May 29, 2020, Class A shares were converted into Class I shares, whose minimum investment is $5,000.

Effective May 15, 2020, Goldman Sachs Small Cap Value Fund (GSSMX) reopened to new investors. The decision follows six years of outflows from the fund, which originally closed a decade ago.

Longleaf Partners Small Cap Fund (LLSCX) appears to have reopened to new investors. The adviser doesn’t highlight any change, but the proviso “closed to new investors” has been removed.

Effective June 1, 2020, Madison Dividend Income Fund (BHBFX) and Madison Investors Fund (MINVX) permanently reduced their management fee from 0.75% to 0.70%.

Effective July 14, 2020, the TIAA-CREF Quant Small-Cap Equity Fund (TCSEX) will resume offering its shares to new investors after four years, including 2020, of trailing its peers.

Effective June 5, 2020, the T. Rowe Price Mid-Cap Value Fund (TRMCX) will resume accepting new accounts and purchases from most investors who invest directly with T. Rowe Price. It’s a Gold-rated by Morningstar with consistently top-tier ratings from MFO. The fund has been closed for a decade but the recent market rout has created a lot of new opportunities for manager David Wallack.

CLOSINGS (and related inconveniences)

American Beacon has announced that effective May 29, 2020, they will no longer sell American Beacon funds directly to you. If you want to buy them, you’ll need to go to a supermarket just like everybody else.

Effective as of the close of business on June 10, 2020, Grandeur Peak International Stalwarts Fund (GISOX/GISYX) will close to new investors who try to purchase the fund through third-party intermediaries; i.e., Schwab.

Harbor Money Market Fund closed to new investors on May 15, 2020. The money market industry is under increasing distress as portfolio returns drop below portfolio expenses. The options are either to “break the buck,” underwrite the fund’s operating losses or hold on and pray. Closing the fund, which reduces the need to buy new zero-return paper, is an example of the latter.


Effective 27 May 2020, the Artisan Thematic Fund as renamed Artisan Focus Fund (ARTTX). Here’s the somewhat silly explanation for the new name: “The new name highlights the team’s dedicated focus on its process.” Notwithstanding its five star rating and success in attracting $1.1 billion in assets, my first and ongoing reaction to “Thematic” was to cringe since it was redolent of “Trend du Jour.” I suspect Focus is simply easier to talk about and appropriate to a portfolio that now holds just 28 names.

Two splendid FPA funds continue to move toward their new homes. FPA Paramount will become Phaeacian Global Value Fund and FPA International Value (FPIVX) will be Phaeacian Accent International Value Fund, both pending shareholder approval. This is just the unfolding of a story we wrote about in April, Taking the Polar Plunge.


Forty-one funds and ETFs are leaving us soon, including an entire series from AllianzGI and Franklin. Seven of those are mergers, while the remainder are liquidations. Only four of those funds had earned a one-star rating from Morningstar, while three carried four- or five-star ratings.

The Condemned Date of execution
361 US Small Cap Equity Fund (ASFQX) May 29, 2020
AllianzGI Retirement Date series, eight funds September 15, 2020
American Beacon Crescent Short Duration High Income Fund (ACHIX) June 30, 2020
American Beacon GLG Total Return Fund (GLGYX), a four-star fund June 30, 2020
Ancora Special Opportunity Fund (ANSIX), a five-star fund May 29, 2020
BNY Mellon Large Cap Growth Fund (DLCGX), merged into BNY Mellon Large Cap Equity Fund July 31, 2020
Brandes Global Equity Income Fund (BGIAX) June 30, 2020
Cutler Fixed Income Fund (CALFX) and Cutler Emerging Markets Fund (CUTDX) May 28, 2020
Franklin NextStep Conservative Fund, Franklin NextStep Moderate Fund, and Franklin NextStep Growth Fund August 14, 2020
Frontier Phocas Small Cap Value Fund (FPVSX) June 26, 2020
Frost Global Bond Fund (FRVGX) June 30, 2020
Heartland Select Value Fund (HRSVX), merged into Heartland Mid Cap Value Fund “the fourth quarter of 2020”
Hodges Small-Mid Cap Fund (HDSMX) June 30, 2020
Hotchkis & Wiley Capital Income Fund (HWIAX), merged into Hotchkis & Wiley High Yield Fund June 26, 2020
Ladder Select Bond Fund (LSBKX) June 22, 2020
Madison High Income Fund (MHNYX) merged into Madison Core Bond Fund September 14, 202
Madison Large Cap Value Fund (MGWAX), merged into Madison Dividend Income September 14, 2020
Mirae Asset Asia (MALAX) July 17, 2020
Monteagle Fixed Income Fund (MFHRX) June 26, 2020
Monteagle Quality Growth Fund (MFGIX) June 26, 2020
Navigator Duration Neutral Bond Fund (NDNAX) June 30, 2020
Nicholas High Income Fund (NNHIX) July 24, 2020
Northern Prime Obligations Portfolio, which reflects the struggles of a number of advisers who can’t afford to have money market funds that pay less than zero July 10, 2020
Nuveen Gresham Diversified Commodity Strategy Fund (NGVIX) July 24, 2020
Oberweis Small-Cap Value Fund (OBIVX) June 30, 2020
Pacer Benchmark Retail Real Estate SCTR ETF (RTL) May 22, 2020
Schneider Small Cap Value Fund (SCMVX) July 15, 2020
Smith Group Large Cap Core Growth Fund (BSLNX) July 6, 2020
Touchstone Sands Capital Institutional Growth Fund (CISGX), a four-star fund, merged into Touchstone Sands Select Growth Fund (PTSGX) December 11, 2020
Touchstone Anti-Benchmark US Core Equity Fund (TABYX), merged into Touchstone Dynamic Equity Fund (TDEYX, to be renamed the Touchstone Anti-Benchmark US Core Equity Fund) September 11, 2020
USCF SummerHaven SPHEN Index Fund (BUYN) May 6, 2020