Monthly Archives: September 2020

September 1, 2020

By David Snowball

Dear friends,

Another school year has begun, likely the most fascinating in my 35 years as a college professor. My students were in class this morning, cheerful and masked. When asked about their summers, they did not say what the rest of us might: “it sucked.” To the contrary, they were uniformly positive about the experience (“I had a good summer! We didn’t get to travel anywhere, but I put in a lot of hours on my job and spent a bunch of time with my family!”) and hopeful for the year ahead.

The number of students was, quite understandably, reduced: Augustana welcomed something like 550 first-years when we’d normally see 700, with a lot of the deficit coming from international students – well more than a tenth of the college – not able (or willing) to travel to the US this fall. Most have deferred admission until spring, and they’ll bring a lot of energy and perspective at a time of year when everything normally feels set and settled.

Day One began with two hours of introduction to propaganda, one of my academic specialties; I’ve been teaching “Propaganda in the Twentieth Century” for nearly 30 years now, though publishing only lightly in the area. The recurrent themes in the history of propaganda – fostering fear, playing on emotions, dividing people – have been on my mind as I’ve written this month’s missive. I hope you find it interesting.

The Eve of Destruction

Yeah, my blood’s so mad, feels like coagulatin’
I’m sittin’ here just contemplatin’
I can’t twist the truth, it knows no regulation
Handful of Senators don’t pass legislation

And marches alone can’t bring integration
When human respect is disintegratin’
This whole crazy world is just too frustratin’

And you tell me over and over and over again my friend
Ah, you don’t believe we’re on the eve of destruction

Think of all the hate there is in Red China
Then take a look around to Selma, Alabama
Ah, you may leave here for four days in space
But when you return it’s the same old place
The poundin’ of the drums, the pride and disgrace
You can bury your dead but don’t leave a trace
Hate your next door neighbor but don’t forget to say grace
And you tell me over and over and over and over again my friend
Ah, you don’t believe we’re on the eve of destruction

If you can get past the … hmmm, occasionally strained lyrics, the song feels curiously contemporary: a gridlocked Senate, protests over racism, rising conflict with China, married to a sense that we’d lost all tolerance of – much less respect for – one another.

Given that, you can hear the incredulity in the refrain: “you don’t believe we’re on the eve of destruction?” (You fool!)

The Byrds rejected the song but the Turtles (whose entire m.o. was to record songs that weren’t quite good enough for The Byrds to do) released it. The most famous version was, you might recall, Barry Maquire’s. July 1965. Raspy voice channeling fear and outrage. The song made it to #1 on the Billboard charts despite being banned by some radio stations (and all of Scotland), restricted by the BBC, and condemned by those who felt criticized. After he became a born-again Christian, Barry re-recorded the song for his album “Lighten Up” and has periodically rewritten and performed the song. Most recently, in 2008.

Sang it, but he didn’t write it. That credit goes to P. F. “Flip” Sloan, who also penned “Secret Agent Man.”

This whole crazy world is just too frustratin’.

We are, I suspect, always on the eve of destruction. And yet, somehow, we keep dodging the day of destruction.

Why is that? It might be that “destruction” is being oversold. Propagandists know that we’re easiest to control when we’re almost paralyzed with fear: when it feels like everything is spinning out of control, “all that is solid melts into air,” and that we are surrounded by threats, traitors, and enemies. And so they work hard to create precisely that sense: scenes are staged, hyped, ripped out of context, misinterpreted, tweeted, and relentlessly retweeted. Because keeping the details straight is, frankly, exhausting, most of us eventually just surrender to the propaganda and pseudo-events.

Too, it might be that we’re a bit more resilient than we think. A bit more able to step back, think it through, talk carefully, act well.

All of which we mention because the next eight weeks we’ll be deluged by hateful messages, most containing the barest grain of truth, that aim to make us rage. They’re hard to avoid, in part because they flood our environment, in part because they’re designed to be eye-catching, and, in part, because we’re drawn to them in the same way that we’re drawn to stare at the car wreck as we drive by.

Our world faces profound challenges, and the election of 2020 is going to be incredibly consequential. That’s pretty much a given. The question is, how do you navigate the months ahead so that you can make a positive difference in the world without losing your sanity and surrendering to the hate being offered up to you?

Voting would be one good move. Avoiding the propagandists would be another: ad spending – online and on TV – is apt to exceed $6 billion, and almost all of it will be negative (because negative works). You really might want to throttle back on your time spent staring at screens and the worst offenders will be your favorite sites and stations because propagandists know who you are and where you hang out. Unless you’re undecided about your vote in the upcoming election – a bit under 10% of us – more media is going to mean more anxiety. On whole, it is probably not good for you to rage-watch, rage-scroll, rage-tweet … or, well, rage.

We’ve taken to Netflix lately, watching some fascinating Asian shows, including “The Midnight Diner” (set in Toyk0) and “The Mystic Pop-Up Bar” (Seoul). They’re really interesting. Books are a good idea. Actually talking with people has its antique charms.

And if you are one of The Undecided Tenth? Perhaps talking with someone who doesn’t necessarily agree with you but who’s also trying to figure it out, would help you both.

Perhaps, given a bit less pressure and a bit more thought, we can again push the eve of destruction back to another day.

There is nothing either good or bad but thinking makes it so. (Hamlet, Act 2, Scene 2)

Extraordinary Popular Delusions and the Madness of Crowds

A fascinating book, written in 1841 Scotsman Charles Mackay. Never at a loss for words, Mackay wrote three volumes, the first of which was entitled “National Delusions.” The book opens with a series of case studies of economic manias (the South Sea Company bubble of 1711-20, the French land speculation frenzy known as the Mississippi Bubble, and the Dutch tulip mania.  “Money,” he notes in the Preface, “has often been a cause of the delusion of multitudes. Sober nations have all at once become desperate gamblers, and risked almost their existence upon the turn of a piece of paper.” (In reality, Mackay was very hesitant to let facts get in the way of a good story and historians have long known that he seriously overhyped the tulip mania because it suited his ends.)

John Waggoner has been writing – rather more gracefully and I, truth be told – about markets and investing for more than 30 years, most recently as a contributor to Kiplinger’s, Morningstar, USA Today and InvestmentNews. He suggests that MacKay also recognized the herd-like (lemming-like) behavior that’s behind much bad investing, and bad journalism:

“What a shocking bad hat!’ was the phrase that was next in vogue. No sooner had it become universal, than thousands of idle but sharp eyes were on the watch for the passenger whose hat shewed any signs, however slight, of ancient service. Immediately the cry arose, and, like the war-whoop of the Indians, was repeated by a hundred discordant throats. He was a wise man who, finding himself under these circumstances ‘the observed of all observers,’ bore his honours meekly.

Mackay came to mind again as I read two reports this month. Number One: amateur investors are yet again flocking to the markets. The most famous platform is Robinhood, with a reported 13,000,000 users but they’re not alone.

In China, regular people are packing into brokerage houses to buy shares. Americans are feverishly refreshing their Robinhood and TD Ameritrade brokerage apps, while newbie traders in India are enamored with penny stocks. A growing number of Brits, too, are taking a fancy to shares. Quartz, 8/31/2020

The Wall Street Journal (8/31/2020) reports that “individuals account for a greater chunk of market activity than at any time during the past 10 years” and that Asian exchanges, in particular, are dominated by individual traders (Alexander Osipovich, “Individual-Investor Boom Reshapes U.S. Stock Market”). One source “drew parallels with the dot-com boom in the 1990s.”

Number Two: new investors are embracing risky behaviors. In part, their behavior is being shaped by an intentional, designed, series of technologically-mediated “nudges” that encourages risk-taking.

But at least part of Robinhood’s success appears to have been built on a Silicon Valley playbook of behavioral nudges and push notifications, which has drawn inexperienced investors into the riskiest trading, according to an analysis of industry data and legal filings, as well as interviews with nine current and former Robinhood employees and more than a dozen customers. And the more that customers engaged in such behavior, the better it was for the company, the data shows.

More than at any other retail brokerage firm, Robinhood’s users trade the riskiest products and at the fastest pace, according to an analysis of new filings from nine brokerage firms by the research firm Alphacution for The New York Times.

In the first three months of 2020, Robinhood users traded nine times as many shares as E-Trade customers and 40 times as many shares as Charles Schwab customers, per dollar in the average customer account in the most recent quarter. They also bought and sold 88 times as many risky options contracts as Schwab customers, relative to the average account size, according to the analysis. (“Robinhood Has Lured Young Traders, Sometimes With Devastating ResultsNew York Times, 7/8/2020)

They are trading at eight to 40 times the rate of more experienced investors? An ETrade survey of hundreds of young (ages 18-34) investors found that they’re much more concerned about how much they can make rather than how much they can lose. ETrade reports that for younger investors:

  • Risk tolerance skyrockets since the pandemic. Over half (51%) of Gen Z and Millennial investors say their risk tolerance has increased since the coronavirus outbreak, 23 percentage points higher than the total population.
  • They are taking cash off the sidelines. Over one in three investors (34%) under the age of 34 said they are moving out of cash and into new positions, 15 percentage points higher than the total population.
  • And they are trading more frequently. Over half of investors (51%) under the age of 34 said they are trading equities and 46% said they’re trading derivatives more frequently since the pandemic, compared to 30% and 22% of the total population, respectively.
  • They’re optimistic about a quick recovery. While only 9% of young investors said their investment portfolios have recovered since the beginning of the pandemic, 50% think it will happen in the next six months, compared to 33% of the total population.
  • Health concerns come first, but portfolio concerns are a close second. Personal health (58%) and investment portfolio (53%) concerns remain the top worries for young investors in the wake of the pandemic.

“The effect [of the pandemic] on the US and global economies” was way down on their list.

Mohamed el-Erian, once PIMCO’s CIO, concludes,

It is hard to overstate the extent of today’s risk-taking in US financial markets. Yes, it would take a big shock for markets to move significantly lower — such as a renewed sharp economic downturn, a considerable monetary or fiscal policy mistake, or market defaults and liquidity accidents. But should such a move occur, the likelihood of further market turmoil would be high, especially given the current lack of a short base to buffer the downturn. This exposes small retail investors to big potential losses. (“Retail stock market investors should note professionals’ caution,” Financial Times, 8/31/2020)

Partly in response, a number of these numbers articles focus on absolute-value and long-short hedging options, ways to buffer your worst-case outcomes without abandoning the stock market.

The Strength of the Weak

The US dollar shows signs of weakening, in part because of the titanic budget deficit; $2.8 trillion so far in fiscal 2020, according to the Congressional Budget Office. The term “weak dollar” is misleading, in part because we immediately associate the words “weak” and “bad.” As in, “a weak dollar is bad.”

Not necessarily. A weak dollar is a description we use when other currencies rise in value with respect to ours. If we’re used to seeing  ₤1 being worth $1.34 and suddenly it’s worth $1.50, we decry “a weak dollar.” But if you make a $1 gizmo in the US, the weak dollar means it’s automatically more affordable – hence, more attractive – to British consumers. And if you have invested in a British company, every ₤1 earned by that company suddenly returns more to you in dollars than ever before.

Morningstar suggests (8/18/2020) that investors think about international funds that do not hedge their currency exposure. Fortune adds gold: “when the dollar is down, gold, foreign developed, and emerging-market stocks tend to perform admirably” (“A weakening U.S. dollar makes these 3 assets more attractive for your portfolio,” 8/5/2020). Evie Liu, writing at Barron’s, considers both the obvious candidates such as international equity funds and the investments that would rise in value if a weaker dollar were accompanied by rising prices (something the Fed would love to see). Her watch-list includes unhedged international equities in both developed and developing markets, gold, and community, maybe TIPs and foreign bond ETFs (“It’s Time to Prepare for a Weaker Dollar,” 8/21/2020).

Those preferences seem reflected in Research Affiliates’ latest 10-year asset class projections.

The Masked Ball

Face masks have become (blessedly, since they’re about the best protection we’ve got, see “Face Masks Really Do Matter. The Scientific Evidence Is Growing,” Wall Street Journal, 8/13/2020) the fashion accessory du jour. Because of our responsibilities as college administrators and faculty, Chip and I have had occasion to order masks from more than a dozen different manufacturers. For what perspective it offers, here’s a bit of quick reflection.

  1. Disposable masks are actually a decent option: they tend to be cooler than cloth masks, reasonably efficient at their primary job, reasonably cheap (we just bought 200 online for $40), and aesthetically inoffensive. They do create a regrettable amount of plastic waste.
  2. Size matters, especially if your headwear tends to be L to XL. Bunches of “one size fits most” masks are a misery, which includes many of the mass-produced masks from Hanes and Fruit of the Loom. Take the opportunity to look for sized masks.
  3. Function matters, which means you need to figure out what you’re going to be doing. We found that several masks that are great for wearing out for errands are incredibly hard to teach in. Proper Cloth masks, which are stylish and comfortable with behind-the-head straps, tend to adhere to your mouth when speaking.
  4. Don’t obsess about the exact fabric composition: cotton, silk, poly, modal, 3D printed … Stick with sensible, general rules of thumb. Hold it up to the light; if you can see, say, your fingers through it, it’s probably too thin. Put a drop of water on the outside of it; if the water soaks in immediately, it’s probably not so protective.
  5. Generally, more layers are more effective but can get awfully warm, awfully fast.
  6. Masks are probably best if hand-washed. The more you wash them, the thinner and less protective the fabric gets. And frequently the elastic ear loops get twisted beyond recognition. Regardless of hand- or machine-washing, don’t use fabric softener. It contains wax which makes the mask ineffective.
  7. Outdoor Research has a comfortable mask ($20) with an anti-viral coating designed to last for 30 washes. They can’t make the anti-viral claim in the US, though apparently its efficacy is recognized by European health authorities.
  8. Comfortable masks are available through Vista Print and Etsy. Vista Print, which I associate with business cards, makes comfortable masks in a huge variety of patterns. Through the summer, our go-to mask has been a comfortable two-layer cotton mask from DAVEGO at Etsy.
  9. For modestly-sized heads and modestly risked environments, Shon Simon – a contract clothing manufacturer – makes inexpensive masks in dozens of colors (including six iterations of “nude”) and in packages of one to 500.
  10. Personalized selfie masks are gross and disturbing, avoid them. Those are the ones with your face printed on them. Ick.

There will continue to be a scientific study a week on mask design. Feel free to ignore most of them and stick to first principles. At base, the best mask is the one that you will wear consistently and properly. (“Properly” means “if air goes it in, make sure it’s covered.”) They will, with time and practice, become no more intrusive than seatbelts – now used by 91% of us, though once loathed and rebelled against – are.


Most especially to the folks at Queens Road for the peanuts!

Love those things.

To the folks at S&F, Wilson, Quang, Michael from Dryden, and Leah for their generous – and, in some cases, generously repeated, support.

And, as ever, to the Faithful Few who contribute monthly: William and William, Matthew, Brian, David, Doug, and Gregory!

david's signature

The Long (and Short) of It: Top-Tier Long-Short Options

By David Snowball

Writing in The Wall Street Journal, Simon Cable declared “‘Long-Short’ Funds Missed Their Moment” (8/9/2020, paywall). His argument: “The stock-market volatility in the first half of 2020 should have been a near-perfect period for ‘long-short’ mutual funds and exchange-traded funds to make a killing. Unfortunately, less than one in three such funds made money for investors during this tumultuous period.” His analysis was that the market’s moves were too quick for most investors to capitalize on them (even if they recognized the opportunity).

He notes that Neuberger Berman Long-Short (NLSIX) raked in the most cash and that the ProShares Long Online/Short Stores ETF had the top YTD performance.

“Most funds are mediocre” is not a terribly useful insight. We decided to identify the 10 best performing long-short funds YTD (all posted double-digit returns) and look at their longer-term prospects. We did that by asking (a) do they qualify as MFO Great Owl funds and (b) have they also been top 10 funds over the past 3- and 5-year periods.

Our findings are reassuring and, we hope, useful. All seven MFO Great Owls posted positive YTD returns, all have been consistently excellent in risk-adjusted returns over time and all outperformed the S&P 500 this year with higher YTD returns and smaller losses (down an average of -3.5% versus -19.7% for the S&P) during the tumult in the first three months of the year.

The table below summarizes the performance of 2020’s top-ten long-short equity funds. Funds that have earned the Great Owl designation are shaded in blue.

  2020 returns, through 7/30 Top 10 fund 2020? Top 10 fund 3 year? Top 10 fund 5 year?
ProShares Long Online/Short Stores 74.8% Yes Too young Too young
RiverPark Long/Short Opportunity 36.7 Yes Yes Yes
Alger Dynamic Opportunity 27.4 Yes Yes Yes
Arin Large Cap Theta 25.0 Yes No Yes
Aperture Discovery Equity 22.7 Yes Too young Too young
Hundredfold Select Alternatives 19.2 Yes Yes Yes
Virtus KAR Long/Short Equity 17.9 Yes Too young Too young
Longboard Alternative 15.1 Yes Yes Yes
Hussman Strategic 13.6 Yes No No
RealityShares DIVCON Dividend Defender 12.2 Yes Yes Too young
Anchor Risk-Managed Equity 10.6 Yes Yes Too young


Snapshot for the top long/short funds

These are two funds from the list above (2020’s top performers) which are also MFO Great Owl funds or, at least, have landed in the top 10 of long/short funds for 2020 as well as the preceding 3- and 5-year periods. The difference between the two designations is that Great Owls must have top quintile risked-adjusted returns in every trailing period longer than one-year; some top-performing funds are simply more volatile than that metric rewards.

RiverPark Long/Short Opportunity (RLSFX): five-star fund, MFO Great Owl, $317 million in assets, 2.0% expense ratio, $1000 minimum initial investment.

Managed by Mitch Rubin, RiverPark combines thematic analysis with stock-by-stock decisions on who to invest in and who to short. Individual companies operate in a larger environment. If that environment turns hostile, even the best-run companies will struggle. As an example, if you’re in the “big box retail” business, firms with average management will be in a death spiral and even firms with great management teams will likely just end up in slow decline. If you’re in the “next-gen battery” business, firms with average management will thrive and firms with great management will soar. RiverPark invests in the best firms in rising industries and shorts the weaker firms in declining ones. RLSFX tends to have both dramatically higher returns (9.0% annually since inception, versus 4.0% ) and greater volatility (standard deviation of 10.5%, versus 9.4%) than its peers. We profiled RLSFX in 2012, shortly after its conversion from being a hedge fund, but it’s appeared in more than a dozen articles on strong alternative funds since then.

Folks interesting in a long-only fund might like at Mr. Rubin’s RiverPark Large Growth Fund (RPXFX) which is approaching its 10th anniversary.

Alger Dynamic Opportunities (SPEDX): five-star fund, $320 million in assets, 2.0% expense ratio, $1000 minimum initial investment.

A more-or-less old-style long/short fund: they have two teams of managers, one of which specializes in small caps. They invest long in attractive growth stocks and they short companies with deteriorating fundamentals. Their net long exposure is typically 60-70%.

Hundredfold Select (SFHYX): five-star fund, MFO Great Owl, $100 million in assets, 2.9% expense ratio, $5000 minimum initial investment.

Portfolio construction begins with a basket of high-yield fixed-income securities managed for steady returns and limited volatility. These securities are complemented with alternative strategies including a variety of short-term equity trading strategies, investments in long/short, absolute, or merger strategies, and the ability to move into cash depending on market conditions.

The management fees earned by Hundredfold Advisors are passed through to a nonprofit organization called Simply Distribute which supports medical, religious, scientific, and educational nonprofits throughout the world. Since 2004, Hundredfold Advisors has donated more than $5 million to designated charities

Longboard Alternative Growth (LONAX): four-star fund, not an MFO Great Owl, $17 million in assets, 2.24% expense ratio, $2,500 minimum initial investment.

The fund’s tactical investment process allocates to a portfolio of U.S. equities as well as alternative assets such as global bonds, currencies, TIPS, commodities, and gold.

As an aside, their website made my eyes hurt. Content is thin and I don’t even see direct links to an annual report, much less any sort of shareholder communication. Morningstar categorizes their portfolio as 94% cash and 6% other, which isn’t terribly informative. In short, they may do a fine job but you’re on your own in figuring it out.

RealityShares DIVCON Dividend Defenders ETF (DFND): five-star fund, MFO Great Owl, $39 million in assets, 1.44% expense ratio.

This passive fund tracks a custom index.  The index uses DIVCON, a forward-looking dividend rating system evaluating large-cap company health indicators based on seven key factors, with a 75% long investment in companies most likely to increase dividends and a 25% short in the firms most likely to cut their dividends.

The one immediate caution is that RealityShares other two dividend-focused ETFs are not particularly good which always raises the “luck or genius” question.

Anchor Risk-Managed Equity (ATEAX): five-star fund, MFO Great Owl, $225 million in assets, 2.05 % expense ratio, $1,000 minimum initial investment.

This is a top-down quant fund that invests in ETFs, stock mutual funds, and futures contracts. If their trend-analysis models turn negative on the stock market, they move some or all of the portfolio into Treasuries, short positions, or short ETFs. The reported portfolio turnover is 1100%.

Bottom line:

Any article that begins with the sentence, “Most funds in this category have simply not proven their worth,” is bound to be right. MFO’s founding premise is that the vast majority of funds and ETFs could vanish overnight and no one, except the managers, would be any poorer for it.

The key is remembering that “most disappoint” does not immediately signal “must disappoint.” Some managers have managed to navigate, honorably, and well, through a variety of market conditions. MFO’s Great Owl designation recognizes the funds with the most consistently excellent risk-adjusted-performance.

In 2020, all seven of the MFO Great Owls in the long-short equity category are in the black and all seven have outperformed the S&P 500’s 2.1% YTD gains. This article just highlights the four with double-digit YTD returns.

While there are some intriguing newcomers (the Virtus KAR folks seem talented and very successful across a range of funds), RiverPark Long/Short Opportunity remains the top choice based on long-term performance.

Feet of Clay

By Edward A. Studzinski

“Advertising is the rattling of a stick inside a swill bucket.”

                    George Orwell, ch. 3, Keep the Aspidistra Flying (1936)

I recently had occasion to speak with a long-term value manager who was lamenting how badly value was out of favor and how much it was hurting his and his firm’s performance and investor returns. The genesis of that sub-par performance, which one finds repeated across many value-oriented firms, is a departure from being attuned to the intrinsic business value of the firms invested in, replaced by a laser-like focus by his firm’s analysts and portfolio managers on what stocks are going up because the market favors them. But to some extent, the lament has been correct – most value investors are having a terrible time.

That said, let us look at some firms that have managed to deliver good performance in a period of financial distress in the markets and the economy. For example, Sequoia Fund has managed to recover from its huge misstep with Valeant. Year-to-date the fund has a total return in excess of 13%. During the first half of this year, they would attribute that success to thinking about investing in businesses rather than thinking about the business of running an investment firm. They recognized how easy it would be to make mistakes that would be justifiable – “no client will blame us for raising cash.” And they correctly view a mistake such as that as making a business decision, not an investment decision. They were able to avoid such mistakes because they knew their clients. They knew their clients wanted them to remain focused on investment decisions, not business decisions. (By way of disclosure, I have been an investor in Sequoia for more than thirty-five years).

A somewhat different focus, but still one worth looking at, is that of Troy Asset Management in London, which has a responsibility now for managing the portfolio of one of the most successful investment trusts (closed-end funds) in the UK – Personal Assets Trust.

In this environment, they believe one should be keyed to capital preservation first. A lot of thought should be dedicated to considering what could go wrong with an investment idea. Environmental, social, and governance issues will increasingly dominate the discussion. A company (and an investment manager) that is attuned to the maximization of shareholder value above all else stands a good chance of having an investment with no value whatsoever. Understanding a company’s philosophy and approach to the so-called ESG issues provides useful intelligence into the quality of management and the quality of management’s execution. Ignoring such issues could result in the loss of a company’s franchise or license to operate in the future. I find it interesting that so often managers and investment analysts are clueless about the fact that such things as franchises or licenses in banking or broadcasting can rather easily be taken away in the right regulatory climate.

Likewise, COVID has also provided Troy with some extraordinarily useful indicators as to the quality of both businesses and managements. One can observe low-debt, highly cash generative businesses that have shown the quality and resilience of their cultures with no COVID related layoffs this year, choosing to protect the jobs and incomes of their employees. One can contrast that with the behavior of those companies that have indicated a willingness to restructure (fire employees) either during COVID or after government support runs out. Those are clearly not businesses to own for the long-term. And at Troy, there is a list of things that they will not do as investment managers: they will not overpay for growth, they will not invest in challenged businesses, they will not launch new investment products (trying to catch a wave or alternatively, staunch the flow of departing assets), and they will not chase distressed turnarounds. They will not be distracted by FOMO – fear of missing out.

Pandemic Economics

Barron’s had an article this past Sunday on the credit ratings of states, giving a snapshot as to the damage that has been done to their balance sheets (Leslie P, Norton, “Is Your State in Financial Trouble? Here’s How All 50 Stack Up,” 8/31/2020; by their reckoning, Illinois is in the worst condition of any state, Idaho the best).

 It increasingly looks like many states (and by extension other subdivisions of local government) will have trouble meeting their financial obligations to bondholders, absent a miracle of some sort that comes to the rescue of empty coffers. The financial difficulties have been exacerbated beyond the pandemic due to the outbreaks of civil unrest in many large cities.

A friend in municipal finance told me that half of Chicago’s tax revenue base comes from the sales tax.

That revenue base was already under pressure by a shut-down that closed restaurants, bars, stores, hotels for several months. And then we had the unrest that targeted the downtown retail businesses, just as things were starting to reopen. Chicago has now taken on aspects of a boarded-up war zone, conventions, and other tourist business is gone, not to return until at the earliest 2021. The estimate is that fully 25% of the bars and restaurants in Illinois will never reopen again. Saddest of all, there is a population exodus from the city of those that it can least afford to lose. Chicago could become Detroit.

New York City is in a similar situation. Another friend made a trip into the city from her weekend house in Connecticut to keep a medical appointment and check on her townhouse. She found no one on the streets and seven large moving vans in the area where she lived on the Upper East Side. Granted, with the perspective of hindsight, one wonders how much that Amazon headquarters might have helped things economically had it not been chased away. Those jobs would have been the kind of jobs needed.

What does this mean for investing in municipal bonds? Well, it is an area now full of minefields.

Muni bond investing is an area now full of minefields. Few funds or firms have analysts who know how to do municipal credit analysis.

Unfortunately, few funds or firms have analysts who know how to do municipal credit analysis. I can point to a very few banks and investment firms still trying to do a good job in those areas, but the nature of the business changed when the amount flowing into those assets grew exponentially. Most municipal bond funds now rely on ratings from the agencies – Moody’s or S&P. I would suggest that you are in unchartered territory, as the ratings are historical. And do not expect that a rating given as a result of an underlying bond insurance guarantee will be adequate to protect you from defaults.

Test Sensitivity

There has been an ongoing stream of media criticism about the failure in this country to test enough people for COVID, and to do it rapidly. An article in the Sunday New York Times of August 30, 2020 on page 6 of the front section raised an interesting point. The article was titled “You’re Positive, but Are You Contagious? Tests May Be Too Sensitive, Experts Say.” The upshot of the article is that the standard tests are diagnosing too many people as positive who are carrying an insignificant virus load and not contagious. The problem is that the most common test used just provides a yes or no answer as to whether a person is infected. The PCR test commonly used amplifies genetic material from the COVID virus in cycles. The fewer cycles required, the greater the virus load is and the more likely the patient is contagious. The number of cycles used to find the virus is not sent to doctors, even though the information is available and could tell doctors how infectious a patient is and what the next treatment steps should be.

The most disturbing part of the article (which makes one wonder why it was buried on page 6)

Up to 90% of people testing positive barely carried any virus.

is in looking at three sets of cycle data from Massachusetts, Nevada, and New York, up to 90% of people testing positive barely carried any virus. Or put differently, if you applied that data and rate of contagiousness across the U.S., the 45,604 people who tested positive in the U.S. on Thursday, August 27th, only about 4500 may have actually needed to isolate and submit to contact tracing. And there is a simple fix to the problem. Just lower the cycle threshold from the number of cycles to find the virus (now usually set at 40) to a number suggested by many experts of 30 to 35.

Think about that as each night you listen to the Voices of Doom on the nightly news telling you that another X thousand people tested positive today. Makes you wonder when we moved beyond the science that so many politicians emphasized, and into the realm of something else. I commend the entire article to you, along with another recent piece in The Wall Street Journal, (Greg Ip, “New Thinking on Covid Lockdowns: They’re Overly Blunt and Costly,” 8/24/2020) about whether there had been a better way to protect the public health than shutting the economy down. The last point I would raise is, given the millions of dollars we have now spent on this disease, it is remarkable as to how little we really know about how it is transmitted.

A Thirty Year Proposition

By Charles Boccadoro

New Bull Emerges in a Market Riskier Than It Appears

The S&P 500 is once again at all-time highs.

Month ending July 2020 total return data indicated the S&P 500 index had recovered all of its March drawdown, officially marking the end of the CV-19 bear and declaring a new bull market, which began last April. Unlike bears, which are announced as soon as the market swoons 20% from previous peak, bulls are known only in retrospect … although granted definitions vary. Commonly, a bull needs to climb 20% off its last maximum drawndown and subsequently go on to achieve its next all-time high; basically, it needs to get back above water before becoming official. That happened in July.

The following table summarizes the US bear and bull markets dating back to the Great Depression, which updates the version found in “A Presumptive Bear Ends an 11-year Bull Run.” Like before, the results presented below use the monthly database maintained by Amit Goyal, but updated as appropriate from January 1960 through July 2020 with our Lipper Global Data Feed.

The identifiers Cycles 1-6 are maintained for consistency with previous studies and with evaluation period nomenclature used in MFO’s screening tools. Added are three earlier cycles (E1-3), which takes the table back to the beginning of the worst market drawdown in US history … The Great Depression. You’ll note new common names, which will generally contain the event, person, or entity most identified with the cycle period. As before, a full cycle comprises both a bear market and subsequent bull market.

You’ll note that even when including the Great Depression, the amount of time the S&P 500 spends in bear territory is a small fraction of the time it spends in bull territory, which is nearly 90%!

This rather dramatic statistic is often depicted graphically by sell-side market analysts and brokerages of equities. Here’s a link to an example published by Invesco, entitled “Bear and bull markets – historical trends and portfolio impact.” You’ll see a lot of green!

What the graphic or table above does not call attention to is the amount of time required to recover the drawdown caused by the previous bear market. The so-called recovery time or time your investment is “under water.”

Before revealing that detail, a couple more points about the table above:

Firstly, the average annualized return of the eight bull markets prior to the current on-going one is 18%. Per year! That’s hard to resist.

In late 1990’s I assumed responsibilities for my family’s trust and I remember asking my dad how much return he expected from his stock broker each year. The broker maintained a portfolio of around 30 mostly blue-chip stocks. My dad quickly responded: “If he doesn’t deliver 20%, fire him.”

Can you believe that?

And yet, in the 1990’s here are the annual S&P 500 returns: 1999 (21%), 1998 (28%), 1997 (33%), 1996 (23%), 1995 (37%). He was used to receiving 20% each year, at least!

Secondly, investors should brace for retractions of 30-40% during any bear market. But it’s been as bad as -83% and as mild as -20%. (Actually, month ending retraction for the CV-19 bear at its trough only reached -19.6%, but intra-month it certainly crossed below -20%, so we’ve conceded the bear. Similarly, it remained below -20% for just one month, but we’re declaring it a bear nonetheless. Same with the Cuban Missile Crisis bear of 1962.)

Thirdly, I used to believe that a retraction like that of the Great Depression were not realistic for the broad market given the creation of the SEC, market circuit breakers to curb panic selling, the proactive nature of the Fed with monetary policy, and willingness of Congress to act on fiscal policy. But after March, especially, I find that view naive and convenient.

While catastrophe was averted, yet again, there were moments when many were crying “Mayday” and punching the sell button, which led to illiquidity in investment grade assets and illiquidity hell in junk markets. Ditto during GFC, when financial markets teetered on the brink, as described in Timothy Geithner’s “Stress Test.” (Also see Michael Lewis’ review “The Hot Seat.”)

All of our processes and initiatives did not prevent an 80% drawdown in QQQ during the Dotcom bubble, as described in “How Bad Can It Get?” Or prevent companies like Telsa from trading at 250 times future earnings … and Tesla could become a major component of the S&P 500. Thomas Levenson’s recent article is a reminder to us all: “Investors Have Been Making the Same Mistake for 300 Years.”

Going forward, all articles on market cycles in Charles’ Balcony and evaluation tools on MFO Premium site will include performance of the Great Depression and evaluation periods back to 1926.

OK, below is a table depicting the same nine cycles shown above, but now revealing a riskier market than typically conveyed. It indicates months under water during each cycle, including months below -20% drawdown, which most investors consider real pain … the level when “Ulcer Index” gets your attention. The table reveals that buy-and-hold investors can expect to be under water relative to the preceding bull market peak 42% of the time. Furthermore, since new all-time highs occur 30% of the time, investors should brace for some level of drawdown 70% of the time.

The average annualized return across the full cycles is a compelling 9%, while excess return, that amount above risk-free 90-day T-Bill return, is just 5%. I suspect the latter number is not one that comes to mind when equity investors allocate large portions of their portfolios to SPY or VFINX. That number is more associated with the long-term return of risk-free investing, like you’d once get in a regular passbook savings account.

The table also indicates an average recovery time of 4-5 years, but as long as 7 in recent times during the Dotcom Bubble and 15 during the Great Depression. These long period help explain why companies like Morningstar mention “investment horizons longer than 10 years” for equity heavy portfolios.

During this year’s Berkshire Hathaway annual meeting, Warren Buffett stated the following:

And with that, I hope I’ve convinced you to bet on America. Not saying that this is the right time to buy stocks if you mean by “right,” that they’re going to go up instead of down. I don’t know where they’re going to go in the next day, or week, or month, or year. But I hope I know enough to know, well, I think I can buy a cross section and do fine over 20 or 30 years. And you may think that’s kind of, for a guy, 89, that that’s kind of an optimistic viewpoint. But I hope that really everybody would buy stocks with the idea that they’re buying partnerships in businesses and they wouldn’t look at them as chips to move around, up or down.

What struck me was the “… or 30 years” part.

Fact is buy-and-hold investors who have been investing for the past 20 years are currently suffering the lowest returns since those that had invested through the Great Depression. Basically, just about 6% annualized. And they only had to live through three bear markets to earn that! Robert Shiller’s prescient “Irrational Exuberance,” predicted as much in 2000.

For the past 30 years? Investors have earned closer to 10% annualized. In fact, they have never earned less than 8% nominally since 1926.

I suspect Mr. Buffett knew exactly what he was talking about.

Matthews Asia: High Profile Shuffle, Limited Downside

By David Snowball

On August 24, 2020, Matthews Asia announced a long set of manager changes and one fund liquidation. While they appear in a single document, there are at least two distinct triggering events behind them.

Event One: The departure of managers Tiffany Hsiao and YuanYuan Ji. Ms. Hsiao managed Matthews China Small Companies (MCSMX, since 2015) and, with long-time lead manager Michael Oh, Matthews Asia Innovators (MATFX, since 2018). Ms. Ji was the second manager of China Small Companies. Their departure was, so far as I can tell, a surprise to all. There is no word on their reason for leaving or their next steps.

Matthews’ formal response was emphasized the firm’s unquestioned strengths and continuity: “Our firm places significant emphasis and resources on retention of talent and while we are disappointed in her decision to leave the firm, we continue to have a very deep bench of investment team talent with over 40 investment professionals.”

Event Two: The announced liquidation of Matthews Asia Value (MAVRX), which has closed to new investors and will cease to exist on September 30, 2020. The liquidation is a sad event because the strategy was thoughtful, the fund fairly successful when judged in investment terms, and the manager is fiercely intelligent and innovative. Nonetheless, the liquidation was a surprise to (almost?) no one: the fund is approaching its fifth anniversary with $10 million AUM, and assets have been dribbling away for about 18 months.

Subsequently, lead manager Beini Zhou announced his departure. CityWire avers that “The fund’s liquidation is not connected to Zhou’s departure,” a somewhat curious observation.

The departure of Ms. Hsiao is a major loss. CityWire ranks her as a “AAA” manager and describes her as “a star.” By their rating system, she was the second-ranked female portfolio manager in the US. (No, sorry, I don’t know who #1 is or how meaningful their ratings are.). She’s piloted China Small Companies to a five-star record and considerable acclaim. She’s been described as “brilliant and driven.” Over the past five years, roughly the period in which she’s managed the fund, China Small Companies has the highest returns (21.5% annualized) and highest Sharpe ratio (0.99) of any China region fund in the Lipper database. Asia Innovators, which has always been a top tier fund, has had a particularly strong performance over the past couple of years, a period that corresponds with her time on the fund.

I don’t mean to downplay the significance of Ms. Ji’s role but her tenure at Matthews is shorter and her contributions less well-documented than Ms. Hsiao’s or Mr. Zhou’s. My apologies if I’m underestimating her contributions.

“Major loss,” though, is not the same thing as “irreparable loss.” Ms. Tsiao’s departure triggered several reassignments within the Matthews corps.

The Zhou changes

Matthews Asia Value (MAVRX)

Out: Beini Zhou

In: Robert Horrocks

Note: the fund liquidates as month’s end, so Mr. Horrocks is a sort of caretaker.

Matthews Emerging Markets Equity Fund (MEGMX)

Out: Beini Zhou

In: John Paul Lech remains as the sole manager; he’s been on board since inception.

Note: the fund launched in April 2020; it is tiny but has had a strong opening run. The key is that this is one of Matthews’ first moves outside of Asia. Fortunately, Mr. Lech has had a long career as a diversified EM analyst with Oppenheimer before joining Matthews.  It might be emblematic that his languages are Spanish, French, and Portuguese rather than, say, Mandarin (one of Mr. Zhou’s languages).

The Hsiao changes

Matthews China Small Companies (MCSMX)

Out: Tiffany Hsiao and YuanYuan Ji

In: Winnie Chwang and Andrew Mattock

Note: Ms. Chwang is co-manager of Matthews China and of Matthews Asia ESG, and had worked as an analyst on China Small Companies. Mr. Mattock is the lead manager of Matthews China (MCHNX) which has the third-highest returns of any China-centered fund over the past five years. The folks at Matthews report that “Both Winnie and Andrew have significant experience researching and investing in small companies in China and have a deep understanding of the China Small Companies Strategy’s current portfolio holdings.”

Matthews Asia Innovators Fund (MATFX)

Out: Tiffany Hsiao

In: Raymond Deng as co-manager, Michael Oh continues to lead the fund.

Note: Mr. Deng is a China specialist, as Ms. Hsiao was. Mr. Oh continues to lead the fund.

The Hsiao and Zhou change

Matthews Asia Small Companies Fund (MSMLX)

Out: Beini Zhou and Tiffany Hsiao

In: Vivek Tanneeru

Note: Mr. Tanneeru co-manages Matthews Asia ESG, where he remains. He’s a well-respected pan-Asia generalist rather than a country specialist, with experience on the Asia Dividend team.

The other changes

These were made “in order to add specific country and sector expertise to our core regional Asia portfolios,” so their inclusion with the others is mostly a matter of convenience.

Matthews Asia Growth & Income (MACSX)

Out: John Paul Lech, to focus only on Emerging Markets Equity

In: Satya Patel, as co-manager behind Robert Horrocks, Ph.D., and Kenneth Lowe

Note: the Big Dogs remain at the helm, so the changes likely have minimal effect. Mr. Patel is part of Teresa Kong’s income team and his role here is to provide additional income support expertise (convertibles, dividend stocks, credit opportunities) for the Income side of “Growth & Income.”

Matthews Asia Growth (MPACX)

Out: no one.

In: Taizo Ishida remains at the helm but Michael Oh, as co-manager

Note: Mr. Oh has been added to bring more specific sector expertise. This fund, like his Innovators fund, are pure growth Pan-Asia funds so the addition makes particular sense.

Bottom line

The departures strike us as substantial but manageable losses. Matthews has handled manager transitions well in the past, it has a lot of in-house talent and has made what appear to be sensible reassignments. If you’re currently invested in any of the funds affected, I’d surely spend a bit of extra time and attention tracking performance and reading the new manager’s discussions, but there is no cause for shifting away from the funds. If I were not invested but had been considering the possibility, I would stay the course. Learn a bit more about the new folks then build up from modest initial positions as your comfort grows.


Alternative and Global Funds during a Global Recession

By Charles Lynn Bolin

I am selective in the analysts that I receive market commentary from. They are overwhelmingly cautious. The buzz word “FOMO or Fear Of Missing Out” is used to describe retail investors piling into markets. The quote that sums up my feelings best comes from Liz Ann Sonders of Charles Schwab in “High Hopes: S&P 500 Hits All Time High Amid Pandemic/Recession”, published on Advisor Perspectives.

I worry about the signs of froth in the market and among some behavioral measures of investor sentiment: not to mention traditional valuation metrics that are historically stretched. This is not an environment in which greed should dominate investment decisions; but instead one for discipline around diversification and periodic rebalancing…

This article looks at a brief history of global and alternative funds, two Model Portfolios created from these funds, and a summary of some of the best alternative and global funds available to individual investors, in my opinion. Readers that are only interested in a Short List of Funds including fund strategies may want to skip to the Summary Section. Those interested in why I chose these funds should wade through the rest of the article.

The Figure below shows some recent data on consumer spending, business and retail sales, employment, interest rates, inflation, and the value of the dollar. The trends are that inflation remains modest, interest rates are historically low, sales and spending have recovered to within a few percent of what they were in 2017. Employment recovery has slowed. The dollar strengthened during the early part of the recession and has been weakening since. Meanwhile, the S&P 500 has increased by 15% during the past 12 months.

Figure #1 Snapshot of the U.S. Economy

Source: Created by the Author using the St. Louis Federal Reserve FRED database

Meanwhile, commercial chapter 11 filings for the last four months are up 42% compared to the same four months in 2019. According to Challenger Gray & Christmas, “Companies announced nearly 1.6 million permanent job cuts in the first half of 2020…” The Conference Board Leading Indicators have been growing at a slower rate for the past two months. Tom Roseen at Lipper Alpha Insight points out that for the seventeenth week in a row, investors redeemed equity mutual funds, withdrawing $5.1 billion while equity ETFs had net outflows of $1.5 billion. Corporate profits are reflecting the realities of the recession as shown in Figure #2.

Figure #2: Impact on Corporate Profits

Source: Created by the Author using the St. Louis Federal Reserve FRED database

A Brief History of Global and Alternative Funds

To look at the longer-term performance of global and alternative funds, I extracted 225 funds from the Mutual Fund Observer Premium screener that have been in existence for at least 15 years. What we can see in Table #1 is that Global and International Income Funds, Absolute Return Bonds, and Conservative Mixed Asset have done well in bull and bear markets and when interest rates are falling, but not well in a year (2005) when inflation was rising.

During bull markets and when interest rates are falling, Flexible Income and Portfolio, Global Macro, Long/short, and Multi-Strategy Funds have done well. All but Flexible Income did well in 2005 when inflation was rising. In a mild recession or bear market, these funds do well but are subject to larger losses during a financial crisis, but still lower than equity.

Table #1: Long Term Performance of Global and Alternative Funds

Source: Created by the Author using Lipper Global Datafeed and the MFO Premium screener

What the table above shows is that there are not many funds that have a long term history in these categories. They may be new to retail investors, suffer from survivor bias, or are new financial innovations. Descriptions of the Lipper Categories came from Refinitiv Lipper Classifications and Refinitiv Lipper U.S. Funds Classifications. A description of the categories follows:

    1. Global Income Funds: Funds that state in their prospectus that they invest primarily in U.S. dollar and non-U.S. dollar debt securities of issuers located in at least three countries, one of which may be the United States.
    2. International Income Funds: Funds that state in their prospectus that they invest primarily in U.S. dollar and non-U.S. dollar debt securities of issuers located in at least countries, excluding the United States, except in periods of market weakness.
    3. Absolute Return Bond Funds: Funds that aim for positive returns in all market conditions and invest primarily in debt securities. The funds are not benchmarked against a traditional long-only market index but rather have the aim of outperforming a cash or risk-free benchmark.
    4. Absolute Return Funds: Funds that aim for positive returns in all market conditions. The goal is not to benchmark against a traditional long-only market index, but rather to outperform a cash or risk-free benchmark.
    5. Flexible Portfolio Funds: Funds that allocate their investments to both domestic and foreign securities across traditional asset classes with a focus on total return. The traditional asset classes utilized are common stocks, bonds, and money market instruments.
    6. Alternative Multi-Strategy Funds: Funds that, by prospectus language, seek total returns through the management of several different hedge-like strategies. These funds are typically quantitatively driven to measure the existing relationship between instruments and in some cases to identify a position in which the risk adjusted spread between these instruments represents an opportunity for the investment manager.
    7. Alternative Global Macro Funds: Funds that, by prospectus language, invest around the world using economic theory to justify the decision-making process. The strategy is typically based on forecasts and analysis about interest rate trends, the general flow of funds, political changes, government policies, intergovernmental relations, and other broad systemic factors. These funds generally trade a wide range of markets and geographic regions, employing a broad range of trading ideas and instruments.
    8. Alternative Long/Short Equity Funds: Domestic or foreign funds that employ portfolio strategies combining long holdings of equities with short sales of equity, equity options, or equity index options. The funds may be either net long or net short, depending on the portfolio manager’s view of the market.

In this article, I screened over 50 funds, with several in each category, that have done well over the past five years but focusing on year to date performance. The following busy Figure below is the funds included in Model Portfolios and a few other interesting funds. In the Symbol column, the symbols highlighted in green are those included in the Model Portfolios in this article, and those in blue are ones that I found attractive. The table is sorted by those included in Model Portfolios, the MFO Risk Rank, and the Fund Flows. In the Name Column, the names highlighted in blue are Great Owl Funds. In the Lipper Category Column, the Large-Cap Core category for SWAN is misleading because it mostly invests in treasuries and uses options. The funds in the MAXDD column that are highlighted in blue have both low drawdowns and high fund flows. The funds that are highlighted in red in the YTD column raise the red flag that the fund has risen high quickly. The red cells in the years 2106 through 2019 highlight funds that have inconsistent returns. The last two columns highlight funds that do well with stimulus or in a low-interest-rate environment. What the table shows is that investors are currently seeking downside protection.

Table #2: Lower Risk, Higher Return Global and Alternative Funds

Source: Created by the Author using Lipper Global Datafeed and the MFO Premium screener

Overview of Model Portfolio Results

In this article, I build two portfolios selecting funds using Mutual Fund Observer Premium screens to the Lipper Global Database. These two portfolios are compared to the Vanguard Target Retirement 2020 Fund (VTWNX) in Figure #3 below. The link to Backtest Portfolio Asset Allocation is provided here. Interested readers can change funds and allocations. I like that the Combined Global and Defensive Portfolio had low drawdowns and decent returns.

Figure #3: Model Portfolios Compared to the Vanguard Target Retirement 2020 Fund

Source: Created by the Author using Portfolio Visualizer

Both portfolios have close to 20% allocation to equities, 50 to 60 percent bonds, and 20 to 25% in cash. Some of these funds hedge and use leverage to manage risk.

Figure #4: Model Portfolio Allocations

Source: Created by the Author using Portfolio Visualizer

One criterion that I used for selecting global funds was that each fund had to have at least 30% of its assets outside of the United States. Portfolio Visualizer was used to reduce the original fifty funds into a Conservative Global Portfolio that had a drawdown of 2.6% this year with an annualized return through July of 9.5%. My last several articles on Seeking Alpha have looked at defensive funds. The second portfolio in this article combines the funds from the Conservative Global Portfolio with a Defensive Portfolio. Portfolio Visualizer is used to create a portfolio that maximizes the Sharpe Ratio over the 12 months. The link to Portfolio Optimization is here.

Global Portfolio

Each fund in the Global Portfolio has an age of 5 to 25 years except for the Fidelity Multi-Asset Income younger share class Fund (FMSDX). The portfolio had a maximum drawdown of 2.6 on a monthly basis and has an annualized return of 9.5 percent year to date.

Table #3: Global Portfolio – Mutual Fund Observer Portfolio Tool

Source:  Created by the Author using Lipper Global Datafeed and the MFO Premium screener

All of the funds outperformed the BlackRock iShares Core Conservative Allocation ETF (AOK) during the first seven months of the year. Alger Dynamic Opportunities (SPEDX) and Horizon Issachar (LIONX) have done well, but raise the question about how much they might fall if conditions changes. Matthews Asia Dividend (MAPIX) raises concerns about the impact of trade tensions if conditions worsen.

Figure #5: Global Portfolio Funds Year to Date

Created by the Author using Yahoo Finance

The next table shows how well the funds have done since January 2018. The future is guaranteed to be different than the past, but past performance does give a perspective of how the funds might behave in stressed conditions.

Figure #6: Global Portfolio Funds From January 2018

Created by the Author using Yahoo Finance

Combined Global and Defensive Portfolio

I wanted to see how a Model Portfolio would perform if I combined the Global Portfolio above with Defensive Funds that I had written about on Seeking Alpha. I combined the funds and used Portfolio Visualizer to maximize the Sharpe Ratio. The results are shown using the Portfolio Visualizer Portfolio Tool. One thing to note is that the recent trend is downward on many of the more defensive funds.

Table #4: Global and Defensive Portfolio – Mutual Fund Observer Portfolio Tool

Source:  Created by the Author using Lipper Global Datafeed and the MFO Premium screener

Investors interested in Advisors Shares Spectrum Low Volatility (SVARX), but don’t like the high expense ratio also may want to evaluate Columbia Thermostat Flexible Portfolio (CTAFX and COTZX) which are available at Vanguard. The Prospectus highlights changes Columbia Thermostat implemented in May which increases the allocation to stocks.

Figure #7: Global and Defensive Portfolio Funds Year to Date

Created by the Author using Yahoo Finance

Figure #8: Global and Defensive Portfolio Funds from January 2018

Created by the Author using Yahoo Finance

Summary – The Short List

After screening all global and alternative funds that are available to retail investors, reviewing the MFO metrics for short term and intermediate-term performance, using Portfolio Visualizer to narrow the list, and reviewing chart trends, I selected the following funds from 14 different Lipper Categories to look into their strategies. I have arranged them loosely starting with defensive funds, followed by safer bonds, mixed assets, and alternative funds, and ending with funds that focus more on equity. Investors should have diversified, balanced portfolios appropriate for their risk tolerance. As someone nearing retirement and with the current high-risk environment, I choose to focus more on managing risk. As a traditional bond and stock fund investor (who adjusts allocations according to the business cycle), I limit exposure to alternatives to 15% of my portfolio. The strategies are paraphrased below and investors are advised to read the prospectus before investing.

    1. Flexible Income Funds:

Aptus Defined Risk (DRSK) invests 90% or more in investment-grade bonds with maturities spread over the next 7 or 8 years. The Fund invests in Call Options in individual companies and ETFs with expirations of 1 to 6 months to gain exposure to security appreciation and Put Options on ETFs to protect from market declines. DRSK has too short of a history for an accurate comparison to the S&P 500. For the past year and a half, it has returned 14.75 compared to 15.8% for the S&P 500. During the recent bear market, it returned 2.9% compared to losing 19.5% for the S&P 500 on a monthly basis. I like DRSK for the downside protection.

ALTERNATIVE FUND: Advisory Research Strategic Income (ADVNX) has an 8-year performance record and is classified as a Great Owl.

    1. Mixed Asset Target Today: Fidelity Freedom Index Income (FIKFX) has done well this year. It is a fund of funds with 11% in domestic equities, 8% in international equities, 46% in investment-grade bonds, 3% in long term treasuries, 11% in inflation-protected treasuries, and 23% in short-term funds. That is a safe allocation for many conservative investors during this uncertain time. Over the next year or two, FIKFX will be stable, but won’t have the tailwinds of falling interest rates.
    2. Absolute Return Funds attempt to have positive returns in all markets and to outperform a cash or risk-free benchmark. I list four funds here and have written that I prefer investing in a basket of alternatives rather than having larger allocations to a single fund. The following four funds were effective in reducing volatility this year. The three Absolute Return Funds (ATACX, PHDG, TAIL) and SWAN returned 14.9%, 5.45, 23.5%, and 0.1% respectively during the recent bear market. On an annualized basis year to date, ATACX, PHDG, TAIL, and SWAN returned 33.6%, 14.0%, 5.2%, and 19.9% respectively. ATACX and PHDG have been in existence for over seven years with ATACX being classified as a Great Owl Fund and both are listed as Honor Roll. SWAN and TAIL are relatively new funds.
      1. ATAC Rotation (ATACX) invests in equity and bond ETFs and may also use inverse and leveraged exchange-traded products. ATAC uses quantitative analysis to allocate “primarily between equities and bonds depending on the potential for near-term stock market volatility as signaled through inter-market trends and relative prices.”
      2. Invesco S&P Downside Hedged (PHDG) is an actively managed ETF that uses quantitative analysis to invest primarily in equity ETFs, but also volatility funds and cash. The Fund invests such that a “greater portion of the Benchmark’s weight will be allocated to equity securities during periods of low volatility, and a greater portion of its weight will be allocated to the VIX Futures Index during periods of increased volatility.”
      3. Amplify BlackSwan Growth & Treasury (SWAN) invests using a rules-based, quantitative approach with least 80% primarily in U.S. Treasuries, and long-dated call options on the SPDR SYP 500 ETF. The goal is to preserve capital during “Black Swan Events” while attempting to capture 70% of the upside of the S&P 500 over a full market cycle. The Prospectus cautions that SWAN is not a substitute for a money market fund, nor does it attempt to replicate the returns of the S&P 500.
      4. Cambria Tail Risk (TAIL) is more like an Absolute Return Fund so I include it here. It invests “in cash and U.S. government bonds, and utilizing a put option strategy to manage the risk of a significant negative movement in the value of domestic equities”. Cambria spends about one percent of the fund’s assets each month buying put options.

4. Alternative Multi-Strategy Funds: Rowe Price Multi-Strategy Total Return (TMSRX) is a two-year fund that had a maximum drawdown of 5% on a monthly basis and has returned 8.2% on an annualized basis year to date. Its goal is to have returns that are attractive to cash while maintaining low volatility. The fund primarily seeks exposure to the following strategies: Macro and Absolute Return; Fixed Income Absolute Return; Equity Research Long/Short; Quantitative Equity Long/Short; Volatility Relative Value; Style Premia; Dynamic Global FX; Dynamic Credit; and Global Stock. For those investors who want reasonable returns, this single fund may be the basket of alternatives that I mentioned earlier.

ALTERNATIVE FUND: Grant Park Multi Alternative Strategies (GPANX) is a six-year-old fund with $294 million in assets under management. It is on Mutual Fund Observer’s Honor Roll. Its expenses are 1.9% with a yield of 10.8%. It had no drawdown on a monthly basis year to date and has an annualized return of 6.4% for the past year. It is available through Fidelity.

The Fund allocates its assets among four independent, underlying strategies. Each strategy seeks to identify profitable opportunities across multiple, liquid foreign, and domestic markets. The Fund invests primarily in (1) derivatives, (2) US equities, (3) open- and closed-end funds and exchange-traded funds, (4) American Depository Receipts, (5) currencies and (6) domestic and foreign investment grade fixed income instruments.

    1. International Income Funds: Vanguard International Bond (VTABX) invests in government, government agency, corporate, and securitized non-U.S. investment-grade fixed-income investments, all issued in currencies other than the U.S. dollar and with maturities of more than one year. It hedges against currency risk. The fund has been a consistent performer with a yield of over 3%. It won’t have the benefit of falling interest rates over the next year or two but may benefit if the dollar continues to weaken.
    2. Mixed Asset Target Conservative: Vanguard LifeStrategy Income (VASIX) is a fund of funds that has a target allocation of 56% to Vanguard Total Bond Market II Index Fund, 24% to Vanguard Total International Bond Index Fund, 12% to Vanguard Total Stock Market Index Fund, and 8% to Vanguard Total International Stock Index Fund. It is a good conservative fund that will not have the tailwind of falling interest rates but will benefit if the dollar continues to weaken. Some investors may want to invest in the Admiral shares of the component funds and rebalance themselves.
    3. Alternative Global Macro Funds: Rowe Price Dynamic Global Bond (RPIEX) normally invests at least 80% of its net assets in bonds, and seeks to offer some protection against rising interest rates and provide a low correlation with the equity markets. The fund normally invests at least 40% of its net assets in foreign securities, including securities of emerging market issuers, which may be denominated in U.S. dollars or non-U.S. dollar currencies.
    4. Global Income Funds: Janus Global Henderson Global Bond (JHBTX) invests at least 80% of its net assets in corporate bonds, government notes and bonds, convertible bonds, commercial and residential mortgage-backed securities, and zero-coupon bonds. The Fund invests in corporate debt securities of issuers in a number of different countries including emerging markets, which may include the United States. The Fund will not have the tailwind of falling interest rates.
    5. Alternative Credit Focus: WSTCM Credit Select Risk-Managed (WAMBX) uses a quantitative model to invest in a combination of U.S. high-yield debt securities, U.S. investment-grade debt securities, and U.S. Treasury debt obligations mostly within the U.S.
    6. Multi-Sector Income: State Street Total Return Tactical (TOTL) invests at least 80% of the Fund’s net assets primarily in securities issued or guaranteed by the U.S. government or its agencies, instrumentalities or sponsored corporations; inflation-protected public obligations of the U.S. Treasury; agency and non-agency residential mortgage-backed securities; agency and non-agency commercial mortgage-backed securities; agency and non-agency asset-backed securities; domestic corporate bonds; fixed income securities issued by foreign corporations and foreign governments including emerging markets; bank loans; municipal bonds; and other securities of any maturity. The fund has been a consistent performer and has a yield of over 3%.
    7. Absolute Return Bond Funds: Carillon Reams Unconstrained Bond (SUBFX, formerly Scout Unconstrained Bond) will invest at least 80% of its net assets in bonds, debt securities, mortgage- and asset-backed securities and other similar instruments issued by various U.S. and non-U.S. public- or private-sector entities. The Fund may invest in high yield bonds, options, and futures contracts.
    8. Flexible Portfolio Funds:

a. Fidelity Multi-Asset Income (FMSDX) invests in domestic and foreign issuers of equity and debt securities, including common and preferred stock, investment-grade debt securities, lower-quality debt securities, floating-rate securities, and convertible securities. The Managers analyze a security’s structural features and current pricing, its issuer’s potential for success, and the credit, currency, and economic risks of the security and its issuer to select investments.

b. ALTERNATIVE FUND: Columbia Thermostat (CTFAX, COTZX) invests such that when “the S&P 500® Index goes up in relation to trading range bands that are predetermined by the Investment Manager, the Fund sells a portion of its stock Portfolio Funds and invests more in the bond Portfolio Funds, and when the S&P 500® Index goes down in relation to the predetermined bands, the Fund increases its investment in the stock Portfolio Funds. I like the approach of CTFAX, but include it as an alternative fund because in May it changed its allocations to hold a higher percentage in stocks. These are available through Vanguard.

13. International Multi-Cap Core: Vanguard Developed Markets (VTMGX) “employs an indexing investment approach designed to track the performance of the FTSE Developed All Cap ex US Index, a market-capitalization-weighted index that is made up of approximately 3873 common stocks of large-, mid-, and small-cap companies located in Canada and the major markets of Europe and the Pacific region. If the dollar continues to weaken then Europe may be the beneficiary. I own two European equity funds, but like VTMGX as being more diversified and less volatile.

14. Alternative Long/Short Equity Funds have a low correlation to the stock market and can be used to lower volatility. After reviewing the available funds in this category, I am not inclined to invest in them. For a slightly different take, see David Snowball’s “The Long and Short of It” elsewhere in this month’s issue.

Alger Dynamic Opportunities (SPEDX) invests long in companies with rapidly growing demand or market dominance that may be benefitting from new regulations, new product innovation, or new management. The Fund may short companies that it believes will lag the market. The Fund has had an annualized return of 27.4 percent year to date with growth doing so well and is attracting new funds. I took profits in my growth funds over the past couple of months and will pass on SPEDX.

ALTERNATIVE FUND: Hussman Strategic Growth (HSGFX)


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.

Portfolio update #1: added Palm Valley Capital

By David Snowball

On August 26, I added Palm Valley Capital Fund (PVCMX) to my non-retirement portfolio.

Why does this make sense?

My portfolio has a simple, static asset allocation: 50% stocks, 50% not. Within stocks, the default is 50% here, 50% there plus 50% larger, 50% smaller. When we calculated the likely downside of my portfolio in a 2008-like event, the loss was in the range of 25%. That’s not catastrophic.

Currently, my portfolio is overweight in international stocks, 50% rather than my targeted 25%, and underweight in US stocks, at 15%. That’s driven by two forces: (1) managers who have the freedom to invest in the US or elsewhere have, with some frequency, been choosing “elsewhere.” (2) The funds in my automatic investing plan (T Rowe Price Spectrum Income, Seafarer Overseas, Grandeur Peak Global Microcap) offer more fixed income and international equity exposure than US equity.

Palm Valley Capital, a fund that’s value-oriented, largely domestic and largely small cap, begins to redress that imbalance.

Why now?

On August 26, Palm Valley announced that the fund was now available through TD Ameritrade. I assume that it will be added to the Schwab list soon, given the acquisition of TD by Schwab. The advisor is still working on Fidelity.

The fund has already attracted $12.6 million, with modest but steady inflows. It appears, for example, that the fund drew an additional $1 million in the last week of August. The managers have invested between $100-500,000 in, each, in addition to their stake in the adviser.

What do they do?

Palm Valley Capital (PVCMX) is an absolute-value small cap equity fund managed by Eric Cinnamond and Jayme Wiggins. Very few equity managers hew to an absolute value orientation. At base, it recognizes that stocks are worth owning but they’re not always worth owning. They are risky and owning them requires some margin of safety built into the price to compensate you for that risk. The absolute value mantra is: “if it’s not cheap enough, I’m not buying.”

In general, that means that most absolute value managers are … well, unemployed. There’s an endless, painful cycle that such managers face: the market crashes, they deploy the often substantial cash reserves when everyone else is selling in a panic, the fund soars, investors (belatedly) rush in, and then the market returns to normal. “Normal” generally means a period of rational exuberance (in which absolute value managers make a bunch of money) then a period of irrational exuberance (in which they sell off holdings which have become overvalued and have lost their margin of safety, and often find few replacements). Cash builds as markets soar, investors grow restless then charge off in search of more exciting options … often right around the time the market crashes.

Mr. Cinnamond has been navigating these waters since 1996, first at Evergreen Small Cap (1996-98), then Intrepid Endurance (1998-2010), and finally Aston/River Road Independent Value (2010-2016). Mr. Wiggins started at Intrepid in 2002 and succeeded Mr. Cinnamond as manager of Intrepid Endurance in 2010 when he was also Intrepid’s chief investment officer.

In 2019, the duo launched Palm Valley Capital Fund which has performed brilliantly. It is a small-cap value fund with significant exposure to microcap stocks; Morningstar classifies it as a small-core fund. Here is Morningstar’s report for the top three small value and blend funds for 2020.

  YTD return Morningstar category
Aperture Discovery 30.7% Small core
North Star Microcap 17.65 Small-value
Palm Valley 15.19 Small-core
Small core average -8.9%  
Small value average -15.5  

Depending on whether you consider it small value or small core, it’s beating its peers by 25 – 30% YTD.

Small core is led by Aperture Discovery Equity (ADISX), a fund with a record of less than a year which is advised by the US branch of a fairly large UK adviser. It’s a long/short small-cap fund that reportedly it booked a 60% gain in Q2. Lipper considers it a long/short equity fund. Either assignment makes sense since the fund describes itself as “primarily” a long-based small-cap fund that “opportunistically …may also take short positions.” No idea of how much of 2020’s gains are attributable to long versus short positions. The fund sports a painfully high expense ratio (2.45%) with a very low investment minimum. The manager is from the private investment world; most recently, Diker Investments LLC, a small- and micro-cap specialist.

Small value is led by NorthStar Micro Cap (NSMVX), a hedge fund that converted about 10 years ago. We profiled their dividend fund last year. Neither Aperture nor North Star holds much cash.

Palm Valley falls in second place, regardless of which category you assign it to. Palm Valley is distinguished from its two competitors by having:

  • managers with far longer track records
  • substantially lower expense ratios
  • an absolute-value orientation.

That last point provides striking context for the fund’s 2020 performance: the portfolio generated 15% returns while averaging about 70% in cash. (The actual stake has ranged from 52% – 92% as opportunities for buying arose or holdings became overvalued and had to be trimmed, but the managers agree that 70% is “a good average to use.) The math requires that the average stock in the portfolio has returned about 50% YTD, which is a yawning chasm from the 15% average loss for small-value funds as a group.

Bottom line

We noted in our May 2020 Elevator Talk with Messrs. Cinnamond and Wiggins that the fund has excelled because of the presence of two very good stock pickers and a rigid investment discipline. There are few better stewards in the small-cap space. I had previously invested in both Intrepid Endurance and Aston / RiverRoad Independent Value. That is not a “buy” recommendation because we don’t make buy recommendations. It is a recommendation that investors who are leery of the increasingly toppy behavior of the large-cap growth stocks that have dominated the past decade, might want to move, sooner rather than later, to expand their due-diligence list to include Palm Valley and the handful of remaining absolute-value funds that we’ve profiled before.

Portfolio update #2: added T. Rowe Price Multi-Strategy Total Return

By David Snowball

On August 31, I added T. Rowe Price Multi-Strategy Total Return (TMSRX) to my non-retirement portfolio. I funded that position by transferring about half of my stake in T. Rowe Price Spectrum Income (RPSIX).

Why does this make sense?

I traditionally have minimal savings, in the sense of money in a savings account at the bank. That decision makes sense for me because my income is incredibly predictable (a perk of being a tenured senior member of the faculty at a strong college), though it grows minimally. Because savings accounts have for so long offered near-zero to negative real returns, I chose to keep the money otherwise destined for savings in exceedingly low volatility funds that offered the prospect of low- to mid-single-digit returns. RiverPark Short Term High Yield (RPHYX, 3% annual returns, 0.8% standard deviation, 1% maximum drawdown since inception) and Spectrum Income (RPSIX, 4.5% annual reports, 5.1% standard deviation, 9.7% maximum drawdown over the same 9-year period) earned spots in my portfolio as a low-volatility, steady returns sort of funds.

I’ve been tracking TMSRX since inception, about 2.5 years ago. It has offered slightly higher returns since inception than RPSIX has over the same period (about 5.5% annually versus 5.0%) with substantially lower volatility (5.8% standard deviation versus 7.9%, maximum drawdown of -4.7% versus -9.7%) and a lower correlation to the US stock market.

Why now?

This change has been on my mind since we profiled Multi-Strategic Total Return in July 2020 but, like you, I’d had a bunch of other stuff on my mind. The decision to add Palm Valley Capital (see Portfolio Update #1 in this issue) offered a convenient spur to make this second adjustment.

The fund has attracted $93 million, with very modest inflows. It appears, for example, that the fund drew an additional $1 million in the last week of August. Manager Richard de los Reyes has invested over $1 million in his fund and Stefan Hubrich has invested between $500,000 and $1 million.

What do they do?

This is a hedge fund-like operation that draws on T. Rowe Price’s vast, global network of analysts who cover a myriad of asset classes. The managers seek to invest in “non-market sources of return,” that is, returns that can be delivered whether the market rises or not. That’s possible by choosing investments that are intrinsically uncorrelated with the market or by using hedges to offset market exposure. If, for example, you have a stock investor who is capable of using good security selection to produce returns 4% higher than the market’s, you would then hedge your market exposure so that you could harvest the 4%. When the market rises or falls by 10%, you would still earn 4%.

The strategies currently available to the managers include Macro and Absolute Return; Fixed Income Absolute Return; Equity Research Long/Short; Quantitative Equity Long/Short; Volatility Relative Value; Style Premia; Dynamic Global FX; Dynamic Credit; and Global Stock.

That lineup might expand as Price discovers new sources of non-market returns.

Bottom line

This is a tweak rather than a spasm. I think I can modestly raise my portfolio’s likely returns while adding a bit more insulation against market volatility and decline.

Launch Alert: T. Rowe Price active ETFs

By David Snowball

On August 5, 2020, T. Rowe Price launched ETF versions of four of its largest actively-managed domestic equity funds.

Those are:

T. Rowe Price Blue Chip Growth ETF (TCHP)

  • The strategy targets mid- to large-cap, blue-chip companies that have the potential for above-average earnings growth and are well established. About 90% US stocks.
  • The strategy is managed by Larry Puglia, who has run it for 26 years.
  • The mutual fund version of the same name (TRBCX) is a five-star fund with a Silver analyst rating from Morningstar. It has $92 billion in assets.
  • The net expense ratio for the ETF is 0.57%, lower than the 0.69% charged by the fund.

T. Rowe Price Dividend Growth ETF (TDVG)

  • The strategy invests in dividend-paying companies expected to increase their dividends over time. About 90% US stocks, pretty much all large and mega-cap.
  • Managed by Thomas Huber, who has been portfolio manager of T. Rowe Price Dividend Growth Fund since 2000. 
  • The mutual fund version of the same name (PRDGX) is a five-star fund with a Silver analyst rating from Morningstar. It has $16 billion in assets.
  • The net expense ratio for the ETF is 0.50%, lower than the 0.62% charged by the fund.

T. Rowe Price Equity Income ETF (TEQI)

  • The strategy invests in undervalued, large cap stocks that have a record of paying reliable dividends. About 90% US stocks and 8% international stocks.
  • Managed by John Linehan, who has served as portfolio manager of the fund for four years but has managed the institutional Large Cap Value Fund for 20 years and has 21 years at T. Rowe Price.
  • The mutual fund version of the same name (PRFDX) is a three-star fund with a Silver analyst rating from Morningstar. It has $16 billion in assets.
  • The net expense ratio for the ETF is 0.54%, lower than the 0.64% charged by the fund.

T. Rowe Price Growth Stock ETF (TGRW)

  • The strategy is to invest in companies that have some combination of superior growth in earnings and cash flow, the ability to sustain earnings momentum even during economic slowdowns, occupation of a lucrative niche in the economy, and ability to expand even during times of slow economic growth. This is a sort of mega-cap fund with about 90% US stocks, 10% international stocks.
  • Managed by Joseph Fath, who has been portfolio manager of T. Rowe Price Growth Stock Fund for six years.
  • The mutual fund version of the same name (PRGFX) is a four-star fund with a Silver analyst rating from Morningstar. It has $69 billion in assets. I’m always amazed that guys that I’ve never heard of – even at firms where I’ve got substantial investments – are successfully managing such huge sums.
  • The net expense ratio for the ETF is 0.52%, lower than the 0.65% charged by the fund.

Bottom line

ETFs have a series of structural advantages that allow them to offer the same services at a lower cost, with potentially lower tax bills, than identically-managed mutual funds. In addition, there is no minimum initial investment required to open a new account which makes these funds particularly relevant to younger, smaller, and newer investors.

If you are already invested in the underlying funds, switching might incur an unpleasant short-term tax hit. Otherwise, these are marginally more attractive ways to tap into core holdings with a really solid, risk-conscious firm.

Launch Alert: Towpath Focus Fund

By David Snowball

On December 31, 2019, Oelschlager Investments launched the Towpath Focus Fund (TOWFX). The fund invests in 25-40 domestic stocks regardless of market capitalization. The fund is managed by Mark Oelschlager.

In general, we intend Launch Alerts to occur within six weeks of a fund’s launch. We entirely goofed up the Launch Alert for Towpath because we were looking for it under its preliminary name, Oelschlager Equity. As a result, we entirely missed the launch and the fund’s first eight months of existence. Regrets for the slip!

What do they do?

Towpath is a concentrated, all-cap equity fund. The portfolio currently holds 38 securities. About 11% of the portfolio is invested in non-US stocks. Portfolio construction begins with macro-level assessments of the economy, proceeds to analyses of industries and sectors, then ends by buying and holding the most attractive stocks in the most attractive sectors. Mr. Oelschlager has a long and adamant tradition in favor of buying-and-holding just a few best-of-class stocks, so one might anticipate turnover in the single digits.

Why might you care?

Mr. Oelschlager served as manager of Pin Oak Equity Fund (POGSX) from 2005-2019, initially as a co-manager with James Oelschlager and Donna Barton. Beginning in June 2006, he had sole responsibility for the fund. Mr. Oelschlager also managed or co-managed five other funds (three Oak Associates and two sub-advised funds for Saratoga Capital Management), served as the co-CIO for Oak Associates, and was responsible for about 700 million dollars in separately-managed accounts. In 2019, Mr. Oelschlager and his wife, Tina, who served as a Relationship Manager for Oak Associates, launched Oelschlager Investments together.

The Oelschlagers demonstrated to the SEC that the strategy he pursued at Pin Oak is identical to the Towpath Focus strategy; as a result, they are able to include Pin Oak’s performance record in their current prospectus.

Our 2017 profile of Pin Oak Equity pointed to the fact that in the years following Morningstar’s decision to eliminate analyst coverage of the fund, it continued to club its peer group. Our bottom line for that fund:

“Beating the benchmark,” Mr. Oelschlager notes, “is not an easy endeavor, but there are managers who do so.” He and his colleagues at Oak Associates are among that small crowd. The question for investors is, are you actually prepared for a fund that beats the market? In a world bereft of wizards, wands and unicorns, higher long term gains will be accompanied by higher short-term volatility. If you’re the twitchy sort, who checks his portfolio daily and stays awake at night if the Dow drops 300 points, you shouldn’t be here. If you check your portfolio rarely and see today’s market declines as an excellent source of tomorrow’s market gains, you owe it to yourself to take Pin Oak seriously.

While Mr. Oelschlager has owned various growth stocks, he’s not a blind devotee of the “growth at any price” style of investing that’s currently in vogue. He writes,

Growth stocks have continued to be the darlings of the market … all this outperformance has had an effect on growth stocks’ valuations, which have been pushed to high altitude. When you hear “growth stocks” you may think of the big ones, such as Google and Facebook, but the mega-cap growth companies are actually more reasonably priced than their smaller, lesser-known brethren. Empirical Research Partners tells us that the 75 companies with the best growth profiles (“big growers”), as an equally weighted group, currently trade at a relative (to the market) price/earnings ratio higher than anything seen over the last 68 years – higher even than in 1999, the peak of a growth-stock bubble.

As with all bubbles, this growth stock one has a compelling story behind it … But even a great story can be carried to an extreme, and we believe that is what is happening now.

We do own positions in a couple of the big growers that are trading at what we believe are reasonable valuations, but our current focus is on the other end of the growth-value spectrum, even more than usual. One reason that the growth stocks have such a high relative multiple right now is that much of the rest of the market is so cheaply priced … Given the extreme valuation discrepancies in the market, it’s “High Time” the market’s leadership changed. Our focus remains not on what is hot now, but what will pay off over the long run. (2nd Quarter Market Commentary, July 2020)

He described his portfolio positioning as “the most conservative positioning ever at the start of the year; the clear excess of enthusiasm and risk of recession made it appropriate to be more conservative than usual.” The market tanked then, of course, turned sharply higher. Mr. Oelschlager adjusted the portfolio but maintained a pretty skeptical attitude. Not “negative,” just skeptical. He notes, “Some people are frustrated by crazy markets, but I kind of like it. The market is pretty darn efficient at valuing things; high volatility gives you lots of deviation between a true value and current price, hence lots of opportunities for long-term gain.”

One of the nice things about smart, experienced managers is that they’ve got better impulse control than the rest of us. While the Robinhood investors are getting buzzed on Tesla stock, with its p/e ratio of 333, Mr. Oelschlager has been buying the Intels, eBays, and BNYs of the world, classic quality growth stocks that have been (temporarily) relegated to the dusty world of value investments. Patience and caution have worked for him in the past; we’ll watch to see how they play out now.

The administrative stuff

The institutional shares carry a $2,000 minimum. That’s reduced to $1,000 for accounts set up with an automatic investing plan. The expense ratio, after waivers, is capped at 1.10%.

The fund’s website is rich though idiosyncratic. It lacks the polish typical of many modern sites: stuff that slides in, flashes, morphs, and blinks. That said, the site is clean, easy to navigate, and uncluttered. The text comes across as candid and unfiltered; the “our principles” section is a list of 19 personal reflections about life and business. The Oelschlagers are anxious to do a good job with the site; drop by, read, reflect, and then drop them a note with your questions and reactions. You’ll make a difference when you do!

Osterweis Emerging Opportunity (OSTGX), September 2020

By David Snowball

Objective and strategy

OSTGX pursues long-term capital appreciation. Their target universe is high quality, small- to mid-cap companies with the ability to generate rapid, sustainable revenue growth. The markers of quality include: (1) a distinct proprietary advantage; (2) a leading position in the industry; (3) potential for margin expansion; and (4) the presence of a strong management team. “Rapid revenue growth” translates to organic growth that averages 30% annually. It invests primarily in domestic companies; as of June 30, 2020, 11% of the portfolio is invested internationally though the prospectus permits up to 30%. As of June 30, 2020, just over 50% of the Fund’s assets were invested in securities within the health care and information technology sectors, slightly lower exposure than the end of March 2020.


Osterweis Capital Management. Founded in 1983 by John Osterweis, the firm manages $5.8 billion in assets for individuals, families, endowments, and institutions. The shared investment philosophy is to pursue assets with “acceptable downside risk and underappreciated growth potential.” The firm is owned by its employees and two outside directors. The firm advises the five Osterweis funds, two of which (Emerging Opportunity and Total Return) are both Morningstar five-star and MFO Great Owl funds (as of July 30, 2020). The assets in the five funds represent the great bulk of the firm’s AUM.


Jim Callinan. Mr. Callinan served as a portfolio manager for the Putnam OTC Emerging Growth Fund from 1994 to 1996. He was the Co-Founder & Chief Investment Officer at Robertson Stephens Investments and managed Robertson Stephens Emerging Growth and its RS-branded successor funds from 1996 until 2010. In 1999 Mr. Callinan was named Morningstar’s Domestic Stock Manager of the Year. In 2006, he launched a more concentrated and valuation-conscious version of the original strategy and found that he “strongly preferred it over a more diversified strategy.” In reaction to corporation restructuring and redirection at the fund’s parent, Mr. Callinan took the concentrated strategy to his own firm, Callinan Asset Management. Recognizing the limits of a one-man shop, he stayed on the lookout for a corporate partner. In 2016, he found that partner in Osterweis and brought his concentrated small cap growth strategy, Emerging Growth Partners, LP, and team aboard.

Mr. Callinan earned both his B.A. and M.B.A. at Harvard and his M.S. in accounting at NYU.

In addition to this fund, he manages $65 million in a handful of separate accounts. He is supported by two analysts, Matthew Unger and Bryan Wong.

Management’s stake in the fund

Mr. Callinan is his fund’s single largest shareholder, owning 35% of its shares. Five of the firm’s other managers, including Mr. Osterweis, have chosen to invest in the fund. Only one of the fund’s six trustees has chosen to do so (per Statement of Additional Information, June 2020).

Strategy capacity and closure

Osterweis plans to close the fund to new investors when they feel that the fund has reached a point beyond which they could execute effectively and protect the integrity of the fund for their clients. Given the targeted universe of companies in which they invest, their research tells them they should be able to effectively execute this strategy up to $1.5-$2.0 billion in assets under management. If they need to close the strategy, they plan to institute a “soft” close that would allow existing clients to continue adding to their positions over time, but they would not take on new investors in the strategy.

Active share

97.06. “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. High active share is not a guarantee of investing success but high active share managers deliver, on average, stronger returns – even when accounting for risk  – than low active share managers. The “active share” research done by Martijn Cremers and Antti Petajisto finds that only 30% of U.S. fund assets are in funds that are reasonably independent of their benchmarks (80 or above) and only a tenth of assets go to highly active managers (90 or above).

OSTGX has an active share of 97, which reflects a very high degree of independence from the benchmark assigned by Morningstar, the Russell 2000 Growth index.

Opening date

November 30, 2016. Prior to that, the Fund operated as a partnership called the Emerging Growth Partners, L.P. from October 1, 2012, when Callinan Asset Management, LLC became the general partner.

Minimum investment

$5,000, reduced to $1,500 for tax-advantaged accounts. The fund is available through Schwab, JPMorgan, Fidelity, Raymond James, TD Ameritrade, among others.

Expense ratio

1.1% on assets of $210.7 million.


Bill Bernstein described small growth as “a miserable asset class,” and advised investors to avoid it. But they don’t. It’s the firecracker problem: in our analysis of 362 rolling 20 year periods, the best small growth fund has posted annual returns as high as 20.9%; that is, it averaged over 20% per year returns over a 20-year stretch. Nonetheless, average returns over the long-term are a little better than you find in larger, more stable stocks. Why? Because if you’re not exceptionally careful, skilled, seasoned, and disciplined, you can lose a lot by mishandling firecrackers; the average small growth fund has posted drawdowns of 55% over the past 20 years while returning 7.5% annually. A manager who made hundreds of millions by posting 290% returns in one year could lose billions by losing 93% in the succeeding three years.

And still the allure of “story stocks” and “ten baggers” is impossible to ignore.

Our advice: if you’re going to go there at all, you’d damn well better go with the best professional guide you can find.

Jim Callinan, with one of the longest and most distinguished records of any active small growth manager, might well be the guide you need. Mr. Callinan began his career as an equity analyst in the mid-80s and was a small-cap growth portfolio manager by the mid-90s. He’s managed through four market crashes and two of the longest bull markets in American history.  He’s managed both private partnerships and public funds and has handled as much as $6.8 billion in assets. Mr. Callinan describes himself as “still invigorated and still wanting to do well for shareholders” after having been through “a lot of wars.”

Four things you need to know in assessing the fund:

    1. it is concentrated: currently, the portfolio holds 39 stocks. Mr. Callinan targets 3o or so stocks from a universe of 100-150 companies that he’s constantly monitoring. Two sectors dominate the portfolio.
    2. it is quality-conscious: technically that’s described as firms with distinct proprietary advantages, industry-leading positions, good management, and so on. As a practical matter, it often translates to relatively young firms, often led by their founders who are passionate and sick to death of the “next quarter projection” questions. In the ideal, “Those will all be at different points in their growth cycles and will be moving at different speeds; 15-30% of them are names we may never to have sell, companies with five or more years of accelerating growth. We’re looking for the Googles of tomorrow.”
    3. it is valuation-conscious: The managers “look for opportunities with at least 100% potential upside using an industry-appropriate multiple that does not exceed 30x P/E” and, moreover, they want “to buy these stocks when they’ve corrected significantly off their highs.” The average p/e for his peer’s portfolios, 39.2, is higher than the high for his portfolio.
    4. it is risk-conscious: as a matter of firm-wide philosophy, Osterweis declares “Our clients don’t like to lose money and neither do we.” That’s a special challenge in this space. Mr. Callinan admits, “Let’s be honest: this is the market’s most volatile space.”

When you think of small-growth portfolios, you likely think of potentially-explosive weirdness: firms that fund cannabis cultivation, energy storage in the clouds, implantable microchips, or some such. Mr. Callinan thinks Etsy. Right, that Etsy. He describes Etsy as “our archetypal stock” and “the sort of firm that’s the bread-and-butter of our portfolio.” The firm sold $348 million in face masks in the second quarter of 2020. The customer base is growing, the frequency of repeat sales is rising, and the prospect is that margins (35% currently) will rise with them. He argues that the firm has a great management team, huge growth potential in both sales and margins, and it was available at a substantial discount to its fair value (he began buying in the teens, the stock is near $120 in late August 2020). His view is that the pandemic has “steepening the curve” in accelerating our transition to life online; it is not, he argues, a short-term change but an enduring one which will have “transformative effects” across a range of industries.

The performance of the Osterweis fund reflects the longer-term performance of Mr. Callinan’s concentrated strategy. Here are the metrics from the launch of the mutual fund on 11/30/2016 through 7/30/2020:

Here’s how to read that. Since its inception, the fund has returned an average of 25% per year while its average peer made 13.3%. Osterweis investors have experienced surprisingly low volatility in the same stretch. While the fund’s standard deviation (a measure of day-to-day volatility) is a bit higher than its peers, its maximum drawdown and downside deviation (which measures just “bad” volatility) are lower.  In line with that, though not shown in this table, the fund’s performance during the December 2018 sell-off was the seventh-strongest of all 194 small cap growth funds and it ranked fifth-best of 201 funds during the early 2020 collapse.

All three standard measures of risk-adjusted returns (the Sharpe, Sortino, and Martin Ratios) are far more positive for OSTGX than for its peers.

What about the passive / ETF option?

Small cap growth is not a place to count on passive funds. Over the past three years, only one ETF – which targets only IPOs – landed in the top 25 based on total returns and none made the top 25 based on risk-adjusted returns. The same thing is true over the past five years: none in the top 25 for total returns, one in the top 25 for risk-adjusted returns.

Bottom Line

In the long term, small stocks tend to outperform large ones. Over the past 3, 5, 10, and 15 year periods, though, small growth funds have lagged their large growth counterparts. Nonetheless, many small companies continue to outperform their stocks: growing, innovating, strengthening their finances, and deepening their leadership positions. Investors who suspect that the dominance of mega-cap growth stocks (the FAANGs and the indexes which are held hostage to them) is nearer its end than its beginning, should consider moving some of their assets to the sectors whose best days might be still ahead of them.

Such investments are risky, though potentially rewarding. Our first recommendation is to rely on a manager who’s succeeded through both the good times and the hard ones. Our second recommendation is to add Osterweis Emerging Opportunity to the due-diligence list for investors and advisers looking for sustained, risk-conscious excellence.

Fund website

Osterweis Emerging Opportunity. There’s a reprint of a decent Business Insider article there which gives you some insight into Mr. Callinan’s view of the market’s next phase; it should probably be read in conjunction with the portfolio repositioning discussion in his current shareholder letter.

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. We found 20-some active funds and ETFs in registration. (I hedge on the number because one of the entries covers an entire line of funds which is likely to grow over time.) Expect them to launch by the end of October 2020.

Every month the ETF industry breathlessly trots out a few ideas designed to seize the moment. Think: “Virtual Work and Life ETF.” This month’s leading candidate is the Bleu 75 Political Contributions ETF which will invest in corporations that direct at least 75% of their corporate political contributions (including the companies’ senior management) to the Democratic Party. A note in passing: the trail is littered with the dried-out husks of “red” and “blue” mutual funds. The Humankind US Stock ETF invests in companies based on how much value the company creates for humankind. (Facebook, anyone?) The nominee for the most cumbersome name is TrimTabs Donoghue Forlines Risk Managed Innovation ETF.

Adasina Social Justice All Cap Global ETF

Adasina Social Justice All Cap Global ETF, an actively-managed ETF, seeks capital appreciation and income. The plan is to create “a portfolio of global companies whose business practices are aligned with the social justice investment criteria of Robasciotti & Associates, Inc.,” the adviser. At least 40% of the portfolio will be invested in non-US stocks. The fund will be managed by Rachel J. Robasciotti, Founder and Chief Executive Officer of Adesina; Maya Philipson, co-founder; and Michael Venuto, founder Head of Investments for Global X. Ms. Robasciotti has been pursuing social justice investing for a long time, at least since the launch of Adesina in 2004. Its opening expense ratio has not been disclosed.

Alger 25 ETF

Alger 25 ETF, an actively-managed ETF, seeks long-term capital appreciation. The plan is to invest in about (you guessed it!) 25 companies, regardless of market cap, which meet Alger’s growth criteria. The fund will be managed by Ankur Crawford, Ph.D. Its opening expense ratio has not been disclosed.

Alger Mid Cap 40 ETF

Alger Mid Cap 40 ETF, an actively-managed ETF, seeks long-term capital appreciation. The plan is to invest in about (wait for it!) 40 mid-cap companies that meet Alger’s growth criteria. The fund will be managed by Amy Y. Zhang. Its opening expense ratio has not been disclosed.

Causeway Concentrated Equity Fund

Causeway Concentrated Equity Fund will seek long-term growth of capital. The plan is to create a global portfolio of 25-35 value stocks. Their analysis is both quantitative and fundamental with an emphasis on price-to-earnings ratios and yield. The fund will be managed by a team comprised of pretty much everybody at Causeway. Morningstar has rather a lot of faith in Causeway, despite the bumps that some of their funds have hit. Its opening expense ratio has not been disclosed, and the minimum initial investment will be $5,000.

Dodge & Cox Emerging Markets Stock Fund

Dodge & Cox Emerging Markets Stock Fund will seek long-term growth of principal and income. The plan is to find companies that are “temporarily undervalued by the stock market but have a favorable outlook for long-term growth.” On whole, D&C has been only “okay” at international and global investing, though Morningstar considers them the Gold standard as a firm. The fund will be managed by a team headed up by CIO Charles F. Pohl. Its opening expense ratio is 0.70%, and the minimum initial investment will be $2,500.

Domini International Opportunities Fund

Domini International Opportunities Fund will seek long-term total return. The plan is to create an all-cap international portfolio of “companies that demonstrate a commitment to sustainability solutions.” The fund will be managed by Kathleen Morgan, CFA, of SSGA. Its opening expense ratio is 1.40% and the minimum initial investment will be $2,500.

Gotham Enhanced 500 ETF

Gotham Enhanced 500 ETF, an actively-managed ETF, seeks long-term capital appreciation. The plan is to duplicate the methodology of the five-star mutual fund version of the strategy, which centers on excluding sketchy S&P 500 stocks from the portfolio. The fund will be managed by Joel Greenblatt, Robert Goldstein, and Michael Venuto. Its opening expense ratio has not been disclosed.

Hercules Fund

Hercules Fund will seek aggressive growth of capital. The plan is to use equity and index options, futures, options on futures, and exchange-traded funds to capture alpha from market volatility. The fund will be managed by James A. McDonald. Its opening expense ratio and the minimum initial investment have not been disclosed but the fund will be available only to qualified investors.

PartnerSelect Oldfield International Value Fund

PartnerSelect Oldfield International Value Fund will seek long-term growth of capital. The prospectus helpfully explains that that means to “increase in the value of your investment over the long term” which surely sets it apart from all of the rapscallions plotting to decrease the value of your investment over time. (Sadly, there appears to be a lot of them.) The plan here is to invest in 25-30 mid- to large-cap value stocks of companies located outside the US. EM exposure will be capped at 10%. The fund will be managed by Nigel Waller and Andrew Goodwin. Its opening expense ratio has not been disclosed, and the minimum initial investment will be $10,000, reduced to $2,500 for accounts established with an automatic investing plan.

QRAFT AI-Enhanced U.S. Next Value ETF

QRAFT AI-Enhanced U.S. Next Value ETF (NVQ), an actively-managed ETF, seeks capital appreciation. The plan is to use artificial intelligence, a system pioneered in South Korea, to select a portfolio of US value stocks. The fund will be managed by Andrew Serowik, Travis Trampe, and a robot with softly-glowing blue eyes and impeccable manners. (I’m guessing about that last team member.) Its opening expense ratio has not been disclosed.

Rareview Dynamic Fixed Income ETF

Rareview Dynamic Fixed Income ETF (RFDI), a non-transparent, actively-managed ETF, seeks total return with an emphasis on providing current income. The plan is to invest in fixed-income closed-end funds, seeking arbitrage gains from mispricings between the CEF’s market price and NAV. The fund will be managed by Neil Azous. Its opening expense ratio has not been disclosed.

Rareview Tax Advantaged Income ETF

Rareview Tax Advantaged Income ETF (RTAI), a non-transparent, actively-managed ETF, seeks current income, a substantial portion of which will be exempt from federal income taxes. The plan is to invest in closed-end muni funds, seeking arbitrage gains from mispricings between the CEF’s market price and NAV. The fund will be managed by Neil Azous. Its opening expense ratio has not been disclosed.

Real Asset Strategies Fund

Real Asset Strategies Fund (RAS), an actively-managed ETF, seeks to protect against inflation and provide diversification by investing primarily in liquid assets such as inflation-indexed securities, gold, commodities, and cash. The plan is to use quantitative models that include proprietary value and momentum factors to trade between various asset classes. The fund will be managed by William B. Peterson and Michael Ashton. Its opening expense ratio has not been disclosed.

SmartETFs Sustainable Energy ETF

SmartETFs Sustainable Energy ETF, an actively-managed ETF, seeks long-term capital appreciation. The plan is to invest in energy companies that provide or support alternative or renewable sources of energy. The fund will be managed by Edward Guinness, Jonathan Waghorn, and Will Riley. Its opening expense ratio is 0.XX%. At least the “0” is encouraging. This ETF is a conversion of the Guinness Atkinson Alternative Energy Fund (GAAEX).

SmartETFs Sustainable Energy II ETF

SmartETFs Sustainable Energy II ETF, an actively-managed ETF, seeks long-term capital appreciation. The plan is to use the same selection criteria as the original Sustainable Energy ETF but use it to build a focused, equal-weight portfolio. The fund will be managed by Edward Guinness, Jonathan Waghorn, and Will Riley. Its opening expense ratio is X.XX% as contrasted with its sibling’s 0.XX%.

Sterling Capital Focus Equity ETF

Sterling Capital Focus Equity ETF, an actively-managed ETF, seeks long-term capital appreciation. More specifically, the fund seeks to outperform the Russell 1000 Growth Index with a portfolio of 15 to 30 stocks. They will target mid- to large-cap stocks that demonstrate the potential for sustainable competitive advantages, visible reinvestment opportunities, and have experienced management teams. The fund will be managed by Colin R. Ducharme and Jeremy Lopez. Its opening expense ratio is 0.59%.

T. Rowe Price Retirement Blend Funds

T. Rowe Price Retirement Blend Funds are the third target-date series of funds from T. Rowe Price. The first two series were distinguished by one series being a bit more aggressive and the other a bit more cautious. I can’t, for the life of me, see what exactly the niche is for the Blend funds. We’ll follow-up upon launch because T. Rowe Price simply doesn’t do dumb things. We just need to talk with them to figure out why this is a smart one.

T. Rowe Price U.S. Limited Duration TIPS Index Fund

U.S. Limited Duration TIPS Index Fund, an actively-managed ETF, income by investing in inflation-linked securities. They’ll track the Bloomberg Barclays U.S. 1-5 Year Treasury TIPS Index. The fund will be managed by Michael Sewell. Its opening expense ratio is 0.21%.

Manager Changes, August 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 than 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.

Ticker Fund Out with the old In with the new Dt
CUGAX Aberdeen Global Absolute Return Strategies Fund Adam Rudd and David Sol are no longer listed as portfolio managers for the fund. Thomas Maxwell joins Katy Forbes, Neil Richardson, and Scott Smith on the management team. 8/20
NMIEX Active M International Equity Fund No one, but . . . Polen Capital Management will be added as the fifth subadvisor to the fund, effective September 8th. 8/20
HOLD Advisorshares Sage Core Reserves ETF Mark MacQueen no longer serves as a portfolio manager of the fund. Seth Henry will now manage the fund. 8/20
BATT Amplify Advanced Battery Metals and Materials ETF, which will become Amplify Lithium & Battery Technology ETF on or about October 12, 2020. Also on or about October 12th, Toroso Investments, LLC will cease serving as a sub-adviser to the fund. Amplify Investments LLC and CSAT Investment Advisory, L.P. will continue to subadvise the fund. 8/20
MDPCX Blackrock Asian Dragon Fund Alethea Leung will no longer serve as a portfolio manager for the fund. Stephen Andrews will now manage the fund. 8/20
MIMSX BNY Mellon Small Cap Multi-Strategy Fund Joseph Feeney, Thomas Murphy, Steven Pollack, Robert Zeuthen, William Scott Priebe, William Priebe, Todd Wakefield, Caroline Lee Tsao, John Porter, and José Muñoz are no longer listed as portfolio managers for the fund. James Boyd and Patrick Kent will continue to manage the fund. 8/20
MMCIX BNY Mellon Small/Mid Cap Multi-Strategy Fund Stephanie Brandaleone, Joseph Corrado, Todd Wakefield, Edward Walter, Robert Zeuthen, Caroline Lee Tsao, John Porter, and Nicholas Cohn are no longer listed as portfolio managers for the fund. James Boyd and Patrick Kent will continue to manage the fund. 8/20
LAIAX Columbia Acorn International Louis Mendes and Tae Han (Simon) Kim will no longer serve as portfolio managers for the fund. Hans Stege will now manage the fund. 8/20
LAFAX Columbia Acorn International Select Stephen Kusmierczak is out. Curious given that this is a four-star fund with half a billion in assets. No word from Columbia as to why. Hans Stege will continue to manage the fund. 8/20
CZMVX Columbia Multi-Manager Value Strategies Fund Effective immediately, Christopher Welch is removed as a portfolio manager to the fund. The other eight managers remain. 8/20
FDLSX Fidelity Select Leisure Portfolio No one, immediately, but Becky Baker will transition off of the fund effective on or about February 28, 2021. William Hilkert joins Becky Baker on the management team and will continue to manage the fund upon Ms. Baker’s departure. 8/20
FSTCX Fidelity Select Telecommunications Portfolio No one, immediately, but Matthew Drucker will transition off of the fund effective on or about February 28, 2021. Nicole Abernathy joins Matthew Drucker on the management team and will continue to manage the fund upon Mr. Durcker’s departure. 8/20
GALLX Goldman Sachs Flexible Cap Fund Silverio Foresi has announced his intention to retire from Goldman Sachs Asset Management, L.P. As such, effective September 30, 2020, Mr. Foresi will no longer serve as a portfolio manager for the fund. Steven M. Barry will continue to serve as the portfolio manager for the fund. 8/20
MMUSX Goldman Sachs Multi-Manager U.S. Dynamic Equity Fund No one, but . . . Artisan Partners Limited Partnership will now serve as an underlying manager of the fund, joining Lazard Asset Management LLC, Sirios Capital Management, L.P., Smead Capital Management, Inc., and Vaughan Nelson Investment Management, L.P. 8/20
HIEEX Harbor Emerging Markets Equity Fund Oaktree Capital Management, L.P. will no longer subadvise the fund. Oaktree is sort of iconic and their EM UCITS has a pretty solid record, for what that’s worth. Marathon Asset Management LLP will now subadvise the fund. 8/20
HAFAX Hartford AARP Balanced Retirement Fund No one, but . . . Lutz-Peter Wilke joins Christopher Goolgasian in managing the fund. Mr. Wilke previously served as a portfolio manager to the fund from August 2015 through July 2019 when they pursued a different investment objective and strategy. 8/20
HNCAX Hartford International Growth Fund The fund is moving to a single manager approach. Therefore, John Boselli and Tara Stillwell will no longer serve as portfolio managers to the fund. Matthew Hudson will remain as the sole portfolio manager. 8/20
OSMAX Invesco Oppenheimer International Small-Mid Company Fund Frank Jennings will no longer serve as a portfolio manager for the fund. David Nadel will continue to manage the fund. 8/20
MPACX Matthews Asia Growth No one, but . . . Michael Oh joins Taizo Ishida in managing the fund. 8/20
MACSX Matthews Asia Growth & Income John Paul Lech will no longer serve as a portfolio manager for the fund as he focuses on the Emerging Markets Equity Fund. Satya Patel joins Robert Horrocks and Kenneth Lowe in managing the fund. 8/20
MATFX Matthews Asia Innovators Fund Tiffany Hsiao is leaving Matthews Asia for parts unknown. It’s a fairly major loss. Raymond Deng joins Michael Oh in managing the fund. 8/20
MSMLX Matthews Asia Small Companies Beini Zhou and Tiffany Hsiao have announced their departure from Matthews Asia and will no longer serve as portfolio managers for the fund. Vivek Tanneeru will now manage the fund. 8/20
MAVRX Matthews Asia Value, which will liquidate at the end of the month Beini Zhou is leaving Matthews Asia, also for parts unknown. Robert Horrocks will manage the fund through the liquidation. 8/20
MCSMX Matthews China Small Companies Tiffany Hsiao and YuanYuan Ji have announced their departure from Matthews Asia and will no longer serve as portfolio managers for the fund. Winnie Chwang and Andrew Mattock will now manage the fund. 8/20
MEGMX Matthews Emerging Markets Equity Fund Beini Zhou is leaving Matthews Asia and will no longer serve as a portfolio manager for the fund. John Paul Lech will continue to manage the fund. 8/20
NMMGX Multi-Manager Global Real Estate Fund Brookfield Public Securities Group LLC will no longer subadvise the fund. Janus Capital Management, LLC will join Massachusetts Financial Services Company in subadvising the fund. 8/20
FJSIX Nuveen Credit Income Fund Kevin Lorenz is no longer listed as a portfolio manager for the fund and William Martin will leave the fund as of December 31, 2020. Brenda Langenfeld joins Anders Persson, Jean Lin, Karina Bubeck and Aashh Parekh, who will continue to serve as portfolio managers of the fund 8/20
Various ProFunds Europe 30 ProFund,UltraChina ProFund,UltraEmerging Markets ProFund,UltraInternational ProFunds,UltraJapan ProFund,UltraLatin America ProFund,UltraShort China ProFund,UltraShort Emerging Markets ProFund,UltraShort International ProFund,UltraShort Japan ProFund, and UltraShort Latin America ProFund plus 26 ProShares ETFs Ryan Dofflemeyer no longer serves as a portfolio manager of the funds. Alexander Ilyasov joins Scott Hanson in managing the funds. 8/20
PCAFX Prospector Capital Appreciation Fund No one, but . . . Steven Labbe joins John  Gillespie, Kevin O’Brien, and Jason Kish in managing the fund. 8/20
POPFX Prospector Opportunity Fund No one, but . . . Steven Labbe joins John  Gillespie, Kevin O’Brien, and Jason Kish in managing the fund. 8/20
PGIAX Putnam Focused Equity Fund No one, but . . . Jacquelyne Cavanaugh and Walter Scully join Daniel Schiff in managing the fund. 8/20
CBTAX Six Circles Tax Aware Bond Fund Wendy Casetta is removed as a portfolio manager to the fund. Nicholas Venditti joins the other 10 managers in managing the fund. 8/20
Various Thrivent Aggressive Allocation Fund, Thrivent Moderate Allocation Fund, Thrivent Moderately Aggressive Allocation Fund, Thrivent Moderately Conservative Allocation Fund, Thrivent Balanced Income Plus Fund, Thrivent Diversified Income Plus Fund, Thrivent Global Stock Fund, and
Thrivent International Allocation Fund
Thrivent and the funds are deeply saddened to share that Darren  Bagwell, a portfolio co-manager of the funds, recently passed away. The rest of the teams remain. 8/20
TDEAX Touchstone Dynamic Equity Fund, which will absorb Touchstone Anti-Benchmark US Core Equity and then will itself be renamed Touchstone Anti-Benchmark US Core Equity, effective October 3, 2020. Wells Capital Management will no longer subadvise the fund, also effective October 3, 2020. TOBAM S.A.S. will be the new subadvisor 8/20
TWQAX Transamerica Large Cap Value Effective on or about December 1, 2020, Levin Easterly Partners LLC will no longer subadvise the fund. Rothschild & Co Asset Management US Inc. will subadvise the fund and Paul Roukis and Jeff Agne will manage the fund. 8/20
USAWX USAA World Growth Fund No one, but, knowing that six managers were surely not enough to handle a $1.4 billion fund, USAA just added ten more. Peter Carpenter, Jason Dahl, Tyler Dann, Maria Freund, Robert Harris, Scott Kefer, Michael Koskuba, Joseph Mainelli, Erick Maronak, Michael Reynal, and Jeffrey Sullivan join the rest of the team in managing the fund. 8/20
VGENX Vanguard Energy Fund Vanguard’s Quantitative Equity Group will no longer serve as an investment advisor to the fund. Wellington Management Company LLP will serve as the fund’s sole advisor. 8/20
VAPAX Virtus Rampart Equity Trend Fund, which will be renamed Virtus FORT Trend Fund. Rampart Investment Management, LLC will no longer subadvise the fund. FORT Investment Management LP will now subadvise the fund. 8/20
VGEIX Virtus Vontobel Greater European Opportunities Fund No one, but . . . Markus Hansen joins Daniel Kranson in managing the fund. 8/20
VTUIX Vontobel U.S. Equity Institutional Fund No one, but . . . Chul Chang joins Edwin Walczak and Matthew Benkendorf on the management team. 8/20
WWLAX Westwood LargeCap Value Fund Casey Flanagan will no longer serve as a portfolio manager for the fund. Lauren Hill joins Scott Lawson, Matthew Lockridge, and William Sheehan on the management team. 8/20


Briefly Noted

By David Snowball


As of August 13, 2020, SouthernSun Asset Management bought Affiliated Managers Group’s interest in SouthernSun. As a result, SouthernSun is no longer affiliated with AMG; it’s now wholly owned by its employees.

Briefly Noted . . .

AdvisorShares Vice ETF (ACT) has amended its prospectus to allow that “companies that derive at least 50% of their net revenue from the food and beverage industry” are sinful while, at the same time, “the Fund will no longer invest in cannabis or cannabinoid-related investments.” Let’s see: brownies = vice, unless they contain pot. Got it!

TIAA-CREF and T Rowe Price both filed equivalent, curious notices: their broad index funds (for example, the S&P 500 fund) will continue to track its benchmark index even if the funds becomes nondiversified as a result of a change in relative market capitalization or index weighting of one or more constituents of the index.

There’s a heads-up: serious people are beginning to plan for the contingency that the world’s largest indexes become so dominated by a handful of companies that they’re no longer diversified investments.

Source: FEDweek, August 26, 2020

The folks at Thrivent were deeply saddened to share news of the death of Darren M. Bagwell (1967-2020). Mr. Bagwell was a portfolio co-manager for all of their funds, a vice president, and their Chief Equity Strategist. He passed away at Mayo Clinic in Rochester, Minnesota on July 16, 2020, after a long illness. Before joining Thrivent he worked at BOA and Robert Baird but was also the publisher of The Spin Off Report in New York. We join the folks at Thrivent in extended our profound sympathies to his wife Duyen, his son Macalister “Mac” (20) who is a senior at Stanford University, and his daughter Dakota “Kodi” (16), a Junior at Appleton North High School.


Eaton Vance Atlanta Capital SMID-Cap Fund (EISMX) reopened to new investors at the end of August 2020. The $11 billion fund saw some dramatic outflows in early 2020, likely hastening the reopening.

Cannabis Growth Fund (CANNX) has reduced the investment minimums for the Fund’s Class I Shares are lowered from $100,000 to $2,500 for initial purchases and from $5,000 to $100 for subsequent purchases. There are those who might suggest that “growth” is a misnomer.

Grandeur Peak made several shareholder-friendly changes, effective September 1, 2020.  The fee waivers on three funds were modified to lower the cost of ownership:

Grandeur Peak Global Opportunities Fund (GPGOX/GPGIX): management fee lowered to 1.00% on assets above $500 million

Grandeur Peak International Opportunities Fund (GPIOX/GPIIX): management fee lowered to 1.00% on assets above $500 million

Grandeur Peak Emerging Markets Opportunities Fund (GPEOX/GPEIX): management fee lowered to 1.00% on assets above $400 million

Their intent, they explain, “is to share the economic success of these funds with shareholders. It has been our stated intent from the founding of the firm to share economic success with our team, our clients, and our local and global community.”

Grandeur Peak also lowered the minimum initial investment on their funds to $1,000 for folks who invest directly through them. (I do.) The intent here is to make it easier for young investors to get started. My preferred solution has always been to waive the investment minimum for accounts with an automatic investing plan (AIP) since folks are much more likely to keep investing if a modest sum ($50-100 or whatever) is drawn monthly (or quarterly) than they are if they have to get up the nerve to actually write a check or initiate a transfer. Still, a good move.

Polen Growth Fund (POLRX) ditched its redemption fee, effective September 1, 2020. 

Effective immediately, Vanguard Treasury Money Market Fund is re-opened to all investors without limitations.

After a couple of years of steady outflows, the three-star Wells Fargo Small Company Growth Fund (WSCGX) reopened to new investors effective September 1, 2020.

CLOSINGS (and related inconveniences)

Meh, nothing that we noticed!


On or about October 12, 2020, Amplify Advanced Battery Metals and Materials ETF becomes the Amplify Lithium & Battery Technology ETF with a new sub-adviser.

Effective October 15, 2020, the Buffalo Emerging Opportunities Fund (BUFOX) name will be changed to Buffalo Early Stage Growth Fund.

Effective August 31, 2020, the CAN SLIM Select Growth Fund (CANGX) changed its name to the CAN SLIM Tactical Growth Fund.

Guinness Atkinson Alternative Energy Fund (GAAEX) has been repackaged as the SmartETFs Sustainable Energy ETF. We’ve noted before that Guinness Atkinson is the first company to receive permission to directly translate open-end mutual funds into ETFs; other firms are merely opening new ETFs that clone existing funds.

On or about November 1, 2020, JPMorgan Growth & Income (VGRIX), a perfectly fine fund, becomes JPMorgan U.S. Value Fund. At the same point, JPMorgan Intrepid Mid Cap Fund (PECAX) becomes JPMorgan SMID Cap Equity Fund with the predictable “and small caps, too” tweak to the prospectus.

Integrity Growth & Income Fund (IGIAX) has become Integrity ESG Growth & Income Fund. The argument is that it was an ESG fund all along, they just forgot to highlight the fact.

On August 24, 2020, RG Tactical Market Neutral Fund (RFTIX) became RG Gold+ Fund (GLDPX). The “Gold” is gold (and other precious minerals); the “+” is cryptocurrencies. There was also a plan afoot for a reversal share split to boost the share price to $20, but that doesn’t seem to have happened yet.

Effective October 27, 2020, Swan Defined Risk Foreign Developed Fund (SDJAX) becomes Swan Defined Risk Foreign Fund

Effective October 1, 2020, T. Rowe Price U.S. Treasury Long-Term Fund becomes T. Rowe Price U.S. Treasury Long-Term Index Fund.

Effective October 1, 2020, USAA World Growth Fund (USAWX) becomes USAA Sustainable World Fund.

Virtus Rampart Equity Trend Fund is becoming Virtus FORT Trend Fund because, well, Rampart has been shown the door and FORT Investment Management has been brought in. For those reluctant to invest with managers-with-training-wheels, the prospectus helpfully notes: “The Fund’s subadviser has not previously managed a mutual fund. Accordingly, the Fund bears the risk that the subadviser’s inexperience with the restrictions and limitations applicable to mutual funds will limit the subadviser’s effectiveness.”

Effective September 30, 2020, Water Island Diversified Event-Driven Fund will change its name to Water Island Event-Driven Fund. Big reveal: the fund will no longer be considered “diversified.”

On or about October 30, 2020, Wells Fargo WealthBuilder Conservative Allocation Fund (WCAFX) becomes Wells Fargo Spectrum Income Allocation Fund. The fund will invest no more than 20% in equities with a neutral weighting of 10% equities. The rest of the WealthBuilder lineup undergoes parallel name changes.

Current Fund Name New Fund Name Effective on or about October 30, 2020
Wells Fargo WealthBuilder Conservative Allocation Fund Wells Fargo Spectrum Income Allocation Fund
Wells Fargo WealthBuilder Equity Fund Wells Fargo Spectrum Aggressive Growth Fund
Wells Fargo WealthBuilder Growth Allocation Fund Wells Fargo Spectrum Growth Fund
Wells Fargo WealthBuilder Growth Balanced Fund Wells Fargo Spectrum Moderate Growth Fund
Wells Fargo WealthBuilder Moderate Balanced Fund Wells Fargo Spectrum Conservative Growth Fund


ETFs at the tipping point? Through the first eight months of 2020, for the first time, the number of ETFs liquidated exceeded the number of ETFs launched. Below we detail 29 ETF liquidations.

The $54 million, one-star AB Unconstrained Bond fund (AGSRX) has closed and will be liquidated around October 9, 2020.

Ascendant Tactical Yield Fund (ATYAX) is scheduled to be liquidated on September 29, 2020, but it seems already to have disappeared from Morningstar’s website. Cold.

AllianzGI is systematically shutting down a bunch of funds over the next four months.

Fund Name Effective Date
AllianzGI Core Bond Fund September 28, 2020
AllianzGI Emerging Markets Small Cap Fund October 16, 2020
AllianzGI Emerging Markets SRI Debt Fund September 28, 2020
AllianzGI Green Bond Fund December 17, 2020
AllianzGI Floating Rate Note Fund September 28, 2020
AllianzGI Best Styles Global Equity Fund December 17, 2020
AllianzGI Multi-Asset Income Fund December 17, 2020
AllianzGI PerformanceFee Managed Futures Strategy Fund December 17, 2020
AllianzGI Short Term Bond Fund December 17, 2020

Camelot Premium Return Fund (CPRFX) will be liquidated on September 28, 2020.

Columbia Select International Equity Fund merged into the four-star Columbia Acorn International Select (ACFFX) on August 7, 2020.

The $4 million Comstock Capital Value Fund (DRCVX) is doing … something? I think it’s liquidating but this SEC filing is a bit obscure:

… approval of the Agreement and Plan of Reorganization, between the Company, on its own behalf and on behalf of the Fund, and a newly formed Delaware corporation and the transactions contemplated thereby, including, among other things: (a)transfer by the Fund of all of its assets to New Comstock, Inc. (“New Comstock”) (which has been established solely for the purpose of acquiring those assets and continuing the Fund’s business) in exchange solely for shares in New Comstock and New Comstock’s assumption of all of the Fund’s liabilities, (b) distributing those shares pro rata to the Fund’s shareholders in exchange for their shares of common stock therein and in complete liquidation thereof, and (c) liquidating and dissolving the Fund.

It’s in the nature of a bear fund that the long-term numbers look horrifying: $10,000 invested with the fund when it launched in 1985 would have been reduced to $1,350 today.

Delaware Government Cash Management Fund (FICXX) will liquidate and dissolve on or about Dec. 4, 2020.

A special meeting of Shareholders of Diamond Hill Research Opportunities Fund will, following shareholder approval, merge into the $2 billion Diamond Hill Long-Short Fund (DIAMX); the Reorganization is expected to occur on or about October 23, 2020. It’s a curious combination. The mostly-long Research fund has no assets but a substantially stronger record than its more traditionally long-short sibling.

EventShares U.S. Legislative Opportunities ETF (PLCY), named “Thematic ETF of the Year” by, was liquidated on August 28, 2020.

Global X Scientific Beta Japan ETF (SJIC), Global X Scientific Beta U.S. ETF (SCIU), Global X Fertilizers/Potash ETF (SOIL), Global X Scientific Beta Europe ETF (SCID), and Global X Scientific Beta Asia ex-Japan ETF (SCIX) were plowed under on August 20, 2020.

ICON Risk-Managed Balanced Fund (IOCAX) lingers on in purgatory. The 17 ICON funds were slated to be merged in SCM funds, pending shareholder approval. So far, 16 funds have taken the plunge but the trustees have not been able to achieve a quorum from IOCAX shareholders. If they don’t achieve one by mid-September, they’re simply going to liquidate the fund. (A loss, really, to no one.)

iShares Edge MSCI Min Vol Europe ETF (EUMV), iShares Edge MSCI Min Vol Japan ETF (JPMV), iShares Europe Developed Real Estate ETF (IFEU) iShares Currency Hedged MSCI Australia ETF (HAUD), iShares Currency Hedged MSCI Italy ETF (HEWI), iShares Currency Hedged MSCI South Korea ETF (HEWY), iShares Currency Hedged MSCI Spain ETF (HEWP), and iShares Currency Hedged MSCI Switzerland ETF (HEWL) were liquidated effective August 20, 2020.

In a quick follow-up to the August liquidations, iShares then announced September’s executions: Direxion Daily 20+ Year Treasury Bear 1X Shares (TYBS),
Direxion Daily Small Cap Bull 2X Shares
(SMLL), PortfolioPlus S&P 500® ETF (PPLC), PortfolioPlus S&P® Small Cap ETF (PPSC), PortfolioPlus S&P® Mid Cap ETF (PPMC), PortfolioPlus Developed Markets ETF (PPDM), PortfolioPlus Emerging Markets (PPEM), Direxion Russell Large Over Small Cap ETF (RWLS), Direxion Russell Small Over Large Cap ETF (RWSL), Direxion MSCI USA Cyclicals Over Defensives ETF (RWCD), Direxion MSCI USA Defensives Over Cyclicals ETF (RWDC), Direxion MSCI Emerging Over Developed Markets ETF (RWED), Direxion MSCI Developed Over Emerging Markets ETF (RWDE), Direxion FTSE Russell US Over International ETF (RWUI), and Direxion FTSE Russell International Over US ETF (RWIU). The boilerplate for each was; “each Fund could not conduct its business and operations in an economically efficient manner over the long term due to each Fund’s inability to attract sufficient investment assets to maintain a competitive operating structure.” One wonders how often “bad idea, poorly executed” would have been more to the point?

On August 12, 2020, the Board of Trustees of Stone Ridge Trust approved plans of liquidation for the Elements U.S. Portfolio (ELUSX), the Elements U.S. Small Cap Portfolio (ELSMX), the Elements International Portfolio (ELINX), the Elements International Small Cap Portfolio (ELISX) and the Elements Emerging Markets Portfolio (ELMMX) on or about October 1, 2020

Leland Real Asset Opportunities Fund (GHTAX, f/k/a Good Harbor Tactical Equity Income Fund) was liquidated on August 31, 2020.

Harbor High-Yield Opportunities Fund (HHYVX) liquidated on August 31, 2020. Not a terribly fund, just an unpopular one.

Matthews Asia Value Fund (MAVRX), a fine little fund, will be liquidated on or about September 30, 2020.

PIMCO Emerging Markets Currency and Short-Term Investments Fund (PLMAX) will close on November 20 and liquidate in early January. Those curious for an explanation might look at the fund’s 2020 asset flows:

Right, over $600 million a month out the door.

The $25 million Segall Bryant & Hamill Mid Cap Value Dividend Fund (WIMCX) will be closed and liquidated on or about September 17, 2020. 

Stralem Equity Fund (STEFX) has closed to new investors and will be liquidated in the first few days of September 2020.

On or around November 30, 2020, the $430 million T. Rowe Price Institutional Core Plus Fund (TICPX) is expected to reorganize into the four-star T. Rowe Price Total Return Fund (PTKIX). They fall in the same Morningstar category but Total Return is smaller and stronger.

On October 2, 2020, Touchstone Anti-Benchmark US Core Equity Fund (TABOX) will be merged into Touchstone Dynamic Equity Fund (TDEAX), which will be immediately renamed … Touchstone Anti-Benchmark US Core Equity Fund. Why? Touchstone explains, “The Anti-Benchmark US Core Equity Fund will be the performance survivor as it has the record most reflective of the ongoing strategy of the combined fund.  The Dynamic Equity Fund is the legal and operational survivor as it has the broader share ownership and distribution partners … shareholders of the combined fund will have the Dynamic Equity fund’s tickers with the Anti-Benchmark fund’s performance history.”

Vanguard U.S. Value Fund (VUVLX) has closed to new investors ahead of its planned merger into Vanguard Value Index Fund (VIVAX). The merger is expected in early January. Dan Wiener, editor of The Independent Adviser for Vanguard Investors and the industry’s sharpest outside commentator on all things Vanguard, reminds us that it has always been a quant fund, initially managed by GMO. After a few years of great performance and a few more of lagging performance, Vanguard decided to staple on a second management team from AXA Rosenberg, then fired GMO, then fired Rosenberg “under a cloud of mistrust.” Thereafter, Vanguard’s own internal Quantitative Equity team. Oops. “Performance has cratered,” Dan notes. Perhaps for slow learners, he adds “performance has been horrible,” sharing his disdain on its “ignominious 20th birthday. Presumably, “horrible” sorts of looks like “still underwater after 20 years.”

We’d been a little more generous about the fund in our original version of this announcement. Thanks, as ever, to Dan for making it a lot clearer for us (and you)!

Effective August 18, 2020, Virtus Herzfeld Fund and Virtus Horizon Wealth Masters Fund were liquidated.

Wells Fargo Emerging Markets Bond Fund, Wells Fargo High Yield Corporate Bond Fund, Wells Fargo International Government Bond Fund, and Wells Fargo U.S. Core Bond Fund were all liquidated on or about August 27, 2020.