Monthly Archives: November 2021

November 1, 2021

By David Snowball

Dear friends.

Welcome to November, a quieting time in nature and one which gives us the opportunity to take a deep breath, rejoice that we’ve pretty much made it through another year, and give thanks for the people and events that have enriched our lives.

November was the ninth month in the old Roman calendar (hence its name, from “novem” for “nine”) and the residence of the American Thanksgiving holiday, which was celebrated intermittently until the presidency of Abraham Lincoln and annually thereafter.

In the midst of a civil war of unequaled magnitude and severity, which has sometimes seemed to foreign States to invite and to provoke their aggression, peace has been preserved with all nations, the order has been maintained, the laws have been respected and obeyed, and harmony has prevailed everywhere except in the theatre of military conflict …

No human counsel hath devised nor hath any mortal hand worked out these great things. They are the gracious gifts of the Highest God. . . It has seemed to me fit and proper that they should be solemnly, reverently and gratefully acknowledged as with one heart and voice by the whole American people.

Abraham Lincoln, Proclamation of October 3, 1863

In 2021, anyway, it’s also the start of the Jewish Festival of Lights, of which it is said, “Hanukkah is not merely a cause for celebrations. It is a trial of perseverance.”

And, not least, the date of the American elections, which are – for all of their madness – free and peaceful, honest and fair. While this month’s elections – for school boards and city halls, primarily – don’t have the riveting drama of national contests, they are the lifeblood of our society. We need to care about our schools and our children; we need to care about our neighbors and our neighborhoods. We build large things at last by building small things first. That’s the essence of these thousand small votes. You should do your part in them.

Insider trading comes out

We mentioned, last month, the bipartisan and multi-branched celebration of insider trading, as both members of the Federal Reserve’s board of governors and a bipartisan collection of Congress members were flagged for trading on inside information.

This month adds to the roster. Another 43 members of Congress have failed to properly report their financial trades as mandated by the Stop Trading on Congressional Knowledge Act of 2012, also known as the STOCK Act. Senator Richard Burr of North Carolina is under investigation by the SEC for trades he and his brother made in February 2020; reportedly, the senator called his brother, who, within minutes, placed sell orders ahead of news of the effects of Covid. Burr had been privately briefed on the pandemic’s likely toll, though the Justice Department announced in January that they were not pursuing criminal charges. Fed chair Jay Powell did about the same: selling $5 million in Vanguard fund shares just ahead of the Covid bear.

All of which is sadly resonant with recent research findings, showing that rich people really are self-absorbed, entitled clods. “Emotional intelligence” is the ability to recognize and control our own emotions, but also the ability to recognize and influence other people’s feelings. It’s an incredibly important skill for managing stress, de-escalating conflict, building partnerships, and making the world a better place.

Ken and Karen have no emotional intelligence. Neither, as it turns out, do most people who are rich and recognize their superiority to others.

A series of studies published in Social Psychological and Personality Science found that people of higher socioeconomic status (SES) score consistently lower on tests of emotional intelligence, especially when they perceive high levels of inequality in their community. The researchers suggest that high SES and high subjective inequality promote increased self-focus and less motivation to attend to others’ emotions.

This might explain why it never even occurs to some of our elected and appointed officials that, perhaps, rules apply to them, too.

Time to think broadly

The Bank of America has now joined the “dead for the long term” party. They now project that the S&P 500 will return somewhere between zero and a bit below zero annually for the next ten years. That’s perfectly in line with Research Affiliates’ projection of a negative 0.5% annual return for the broad US stock market and wildly more optimistic than GMO’s regression-driven estimate of negative 7% annual returns for the next seven years.

There’s an argument for thinking a bit broadly. We’ve profiled Standpoint Multi-Asset Fund this month, one of the entrants in the “permanent portfolio” derby. Standpoint argues that traditional asset class returns are positioned for long-term stagnation, and they strive to add non-traditional asset classes as a buffer. Similarly, it might be wise to give greater weight to dividends as part of your portfolio strategy. High dividend yield corporations are often in mature, slower growth industries, whose dearth of growth opportunities explains why they have the cash to hand back to shareholders.

Funds whose mandates give equal importance to income and growth are classified as Equity Income funds. I did a quick screen for the Equity Income funds with the best risk-adjusted returns. These are all MFO Great Owls. Since the strategy is a bit old-fashioned, you shouldn’t be surprised that most of these funds have a record spanning decades. And you should be pleased that, by the nature of the Great Owl metric, these are funds that have been consistently in the top tier of their class. For the sake of comparison, we’ve also included Vanguard Total World Stock Index as a quick benchmark.

Equity Income / International Equity Income Great Owl Funds, five-year returns

Sorted by Sharpe ratio

Thanks, in a season of thanksgiving …

To our loyal supports, Paul, John, Wilson, the folks at S&F Investments (hey guys, I owe you a fund profile), Brian, William, and the other William, David, Doug, and Greg. As we work through the knotty questions (ahem, not “naughty”) of MFO’s future, your continued faith and support means more than you could know.

Likewise, for Shadow and Ira and all of the good folks on the MFO Discussion Board… Ya give us reason to get up each morning!

See you when the snow flies,

david's signature

Value Versus Culture

By Edward A. Studzinski

“In order to become the master, the politician poses as the servant.”   

– Charles De Gaulle

One of the more interesting additions to portfolios, looking at various reports for the third quarter just ended, is that of Alibaba, the largest e-commerce company in China. Over the last year, the company has been in the news any number of times. There have been huge fines imposed on it by the Chinese government. The founder, Jack Ma, after giving a rather provoking speech in 2020, dropped out of view for a time, although he has now resurfaced. Over the last twelve months, the share price has declined by more than 47%.

Given the large price decline, many well-known value investors have purchased the stock, and in many instances now, doubled down on their original investment. This includes such notables as Charlie Munger, Dodge and Cox, First Pacific Advisors, and Tweedy Browne, among others. The expressed rationale for investing often seems to focus on the discount to business value being too great, resulting in a large, embedded margin of safety. The implied rationale seems to be, “I missed investing in Amazon, which never got cheap again. I misunderstood what Jeff Bezos was doing. This is the next Amazon with a much larger market to exploit. I am not going to miss this one.”

Churchill once said of Russia that it was “a riddle wrapped within an enigma.” I don’t know what descriptive one would apply to China other than that it is a civilization and culture of more than a thousand years. There are considerable differences between that culture and its values and those of the West. In that regard, Jack Ma’s speech of last November caused China’s internet to go from under-regulated to the most strictly regulated in the world. The reaction in the West has been to view this all through the window of a conspiracy, one that would hinder the technology leaders and investors.

A different conclusion would require a study of the policy papers and discussions underlying such regulatory moves. Since they are not in English, one would have to read them in Chinese to appreciate the thoughts behind the content. The analogy, I think, is, yes, Virginia, you really do have to read the entire annual report cover to cover, especially the footnotes as well as the entire 10K.

This brings us to the key question of whether China is or is not investable. The rather astute commentators at Oceanlink Management Ltd. that I have the greatest respect for pointed out that the Chinese government was trying to avoid the problems that have occurred here in the United States. We have four internet monopolies in this country that dominate our lives and control much of the political debate and process to such an extent that there is little hope of any way to rein them in.

To understand the actions concerning Jack Ma and his opinions on financial regulation that he expressed in his speech, you must ask when should it be acceptable for a CEO to criticize a nation’s economists and regulators in real-time out of his frustration that his company was not being exempted from regulatory oversight? Can you see that happening in a Congressional hearing? After all, that is why we have platoons of lobbyists on K Street in Washington, DC.

One can understand this better by looking at it from this perspective. In the West, the individual’s sway over economic and political decisions is paramount. Individual freedom leads to the greater good as defined by societal advancement. Alternatively, China culturally harbors an inbred mistrust of human nature, and the state’s role is to protect individuals from their own weaknesses and failings.

Which brings us to the question of timing. You will have noticed in recent years that in the United States, recessions have been repressed. Rather than allow the regular purging of the economy that used to occur, the election cycle and its potential winners and losers dictate Western (and U.S.) policy. Policy success is measured in, at most, years. China’s politicians (if that is the right phrase) think in terms of decades. China is prepared to let its investments pay off over the long term. And to borrow from Keynes, as facts and circumstances change, so do the appropriate policies.

What determines whether China is investable or not? It comes down to a willingness and desire to understand their system on their terms. And that will require a willingness to put boots on the ground. Cultural and linguistic understanding cannot be picked up from afar. And one needs to get to the source materials in their original form. And there is, of course, the all-important matter of personal relationships.

For those who are looking for suitable investment managers, I would point out that Dodge and Cox, among others, has opened an office in China (Shanghai) and brought into its firm native Chinese speakers. Consultants I respect in this country have also in the last year or so tilted their recommendations toward managers who likewise have people on the ground in China. Flying in for a two-week visit (today Beijing, the next day Shanghai, etc.) is no longer going to cut it.

For those interested in learning more about the question of risk versus return in China, I would refer you to an article published in the October 24, 2021 issue of “The Wire China” entitled The China Bull – Ray Dalio, authored by Brent Crane.

Standpoint Multi-Asset Fund: Forcing Me to Reconsider

By David Snowball

I have a deep distrust of managed futures funds. The logic is simple: isolate asset classes that are uncorrelated, invest only in the uptrending assets, ignore (or short) the losing classes, and you get a long, smooth ride to prosperity.

The research behind them is so beautiful and compelling. Various backtests suggest that a managed futures strategy would have returned 13.5% annually for the period 1972-2010.  During that same period, the equity market would have returned 9.8% annually. On top of it, the managed futures strategy would have been less volatile.

Their performance, on whole, is so wretched and bewildering. Over the past five years, the average (surviving) managed futures fund returned 0.7% a year with a maximum drawdown of 17.7% and a negative Sharpe ratio. A well-run lemonade stand would have made you more money with less heartache. There is no group that was more frequently featured in the “Dustbin of History” column than managed futures, a trend that was diminished only when we started running out of managed futures funds to liquidate.

Standpoint Multi-Asset (REMIX / BLNDX) might force me to reconsider my biases.

The fund is managed by Eric Crittenden, who co-founded Longboard Asset Management in 2010 and launched the Longboard Managed Futures Fund (now Longboard Alternative Growth LONGX) in 2012, eventually building the firm’s assets to $500 million.  He was Co-CIO and Co-Portfolio Manager for Longboard from August 2011 to August 2018, launching Standpoint Asset Management in August 2019.

Mr. Crittenden and I chatted over the summer, and we’ve been following the fund since then. It was an interesting conversation and, really, he had me at

I hate managed futures. I sold them for years at a 3% fee, driven by the argument that all portfolio optimizers agree that you should have 30-50% managed futures all the time. It’s like the advice, take your vitamins. That’s great if you can get them in the form of Gummi Bears but it can be horrible otherwise.

You’ve got to drill down to individual models, especially commodity-heavy ones. Commodities should be able to add valuable diversification to a portfolio but long-only commodities as a whole are money losers over time, in part because they’ve got a 12-30% cost to carry (for storage, insurance, etc.).

The strategy seems sensible and straightforward. The fund provides exposure to equities (which help in times of economic growth or inflation), fixed income (which buffers deflationary periods and stock market declines), and commodities (which are uncorrelated with the first two, making it possible to minimize the effects of both sustained price changes and of an equity market decline). Half of the portfolio is invested in low-cost ETFs to give exposure to the global equity market. The argument is simple: over time, equities make serious money, especially if you don’t overpay for them. The fund holds eight equity ETFs charging between 3 and 7 basis points.

The other half of the portfolio is managed futures positions. The positions can be in stocks and fixed income, as well as currencies and commodities. “Once a year we pull down the information on all the future contracts in the world, arrayed from most liquid to least liquid. We exclude the untradeable, then select the 75 most liquid in six sectors which includes equity index futures, bond futures, currencies, metals, energy, and agricultural commodities.” Using a market following strategy, the futures contracts allow the portfolio’s exposure to equity markets to be increased beyond its 50% base (it was at 65% in mid-summer) or decreased to near zero.

We compared Standpoint against its two plausible peer groups for the longest standard period available, 18 months. In each metric, the best value is signaled by green highlighting.

Performance from April 2020 – October 2021

Source: Lipper Global Data Feed, 4/20 – 10/21, from MFO Premium

The performance of the strategy, since inception, against a global equity portfolio, is pretty striking. The same color scheme applies.

Source: Morningstar Direct, 12/30/19 – 9/30/21, from Standpoint

Much of that advantage comes from the one thing you most want in an all-weather portfolio: protecting you from the storm.

Ultimately, the fund should provide three sources of gain. The equity risk premium, the risk-free gains from T-bills and TIPS, and a risk-transfer premium that comes from providing liquidity to hedgers. That’s allowed them to generate a negative beta in bear markets.

The argument for Standpoint is much like the old argument for managed futures: it can provide absolute positive returns with muted volatility even when the equity markets correct or the fixed-income markets are priced to return less than zero in the immediate future.

“Our edge,” he says, “is that we know how to build a good macro program without the traditional 2 & 20.” It is designed to be a permanent piece of your portfolio: simple, durable, and resilient.

It’s worth investigating. The fund’s website is pretty low flash but has a fair amount of information and several video interviews. The fund charges 1.53% (after waivers) for Investor shares whose minimum purchase is $2,500.

Building a Multi-Strategy Portfolio – Vanguard Traditional IRA

By Charles Lynn Bolin

I divide my investing strategy into the low cost, buy and hold philosophy following that of Vanguard, and its founder, John Bogle, along with Charles Ellis, and the more active business cycle approach of Fidelity, Benjamin Graham, Howard Marks, and Ed Easterling, with a touch of trend following from Gregory L. Morris using a risk-managed approach of Mutual Fund Observer, the bucket approach of Morningstar, and the tax strategy that I learned late in life. Whew! This article describes how I try to make sense of it all planning for retirement, and still focus on keeping it simple. I set a different strategy for different accounts to take advantage of the strengths of the financial institution, funds, and account type. Keep It Simple but Significant!

The amount of conflicting financial advice each of us is bombarded with never ceases to give me pause…

“How can you not invest in the future of America?” one guest will ask whole heartedly. While the next will state “US markets are all over-priced by every historical measure.” And, each provides passionate and convincing arguments.

Others argue for buy-and-hold strategies, while just as many others argue for trend following. Both camps devoted to their positions.

My colleague David Snowball offers one way of dealing with the conflict. Basically, nobody wants their funds (or the advice they follow) to suck…

So, David is constantly asking himself: Do the recommendations given, implicitly or not, by us or others, suck?

How Well Do MFO Great Owls Perform?, MFO August 2019, Charles Boccadoro

I have been simplifying my accounts with one Vanguard traditional IRA described in this article that uses five buy and hold core funds, but with a tactical sleeve for 15% of the assets. It has a global focus with a tilt toward large-cap value. Next month’s article will describe a traditional IRA at Fidelity that follows the business cycle approach and is my attempt to “row instead of sail” using multi-asset, real return, and more tactical funds. These two accounts are conservative, with a stock and “other” ratio of about 45% to bonds, because taxes will have to be paid on them. I have set up a Roth IRA as a Fidelity Managed Account which is more aggressive, with about 75% stocks, because taxes have already been paid. Overall, including employer stock plans and a bucket for three years of living expenses, my portfolio is 55 percent stocks and “other” resembling a “balanced” portfolio with a large tilt away from technology toward core funds and a small tilt toward small and mid-cap funds.

Each investor’s situation is different and my intermediate objective is to keep income low until I begin drawing social security and required minimum distributions in order to convert traditional IRAs to Roth IRAs while income is low. This strategy works well for those with pensions and the cash to pay for the taxes on the conversions. One of my next quests is to work with a financial planner specializing in taxes to implement this strategy.

1.  Vanguard Traditional IRA Strategy

Starting valuations matter. Global stocks this year have continued to rally from pandemic lows, and that will make further gains harder to come by. In fact, our 10-year annualized return forecasts for some developed markets are nearly 2 percentage points lower than they were at the end of 2020…

U.S. stocks: 2.4% to 4.4%; ex-U.S. stocks: 5.2% to 7.2%.

– Vanguard

I wanted to build a simple strategy for a traditional IRA using the Vanguard strategy and funds as much as possible. Taxes will have to be paid on this portfolio as required minimum distributions take effect so I want to be more conservative in this portfolio, and more aggressive in a Roth IRA. This portfolio is a candidate for at least a partial conversion to a Roth. Bear markets may be an ideal time to convert to a Roth and I will be watching for this opportunity.

What some people may not realize is that Vanguard manages $1.6 trillion in actively managed funds. They claim that over the past 10 years, 86% of their actively managed funds outperformed their peer groups. Another misconception about the Vanguard philosophy may be that you should blindly set an allocation and hold it or adjust it for the remaining years until retirement. In 1999, the founder of Vanguard, John Bogle, was “concerned about the (obviously) speculative level of stock prices.” Mr. Bogle reduced his equity exposure to about 35 percent of assets, which he held through the time of writing Enough: True Measures of Money, Business, and Life in 2010:

Clearly, investors would have been wise to set their expectation for future returns on the basis of the current sources of returns rather than fall into the trap of looking to past returns to set course. That dividend yield as 2000 began was at an all-time low of just 1 percent and the P/E at a near record high of 32 times earnings together explain why the average return on stocks in the current decade is at present running at an annual rate of less than 1 percent.

By comparison, the price-to-earnings ratio is currently estimated to be 29. One difference is that we are now in the mid-cycle stage of the business cycle where earning may have room to grow as opposed to the late stage of the business cycle in 2000. I also want to apply some form of Benjamin Graham’s (Warren Buffett’s mentor) guideline of investing no less than 25% in stocks and no more than 75% depending upon valuations:

As an alternative policy he [an investor] might choose to reduce his common-stock component to 25% ‘if he felt the market was dangerously high,’…

The Intelligent Investor (1973), page 5, Benjamin Graham

Vanguard offers eleven sector ETFs from a total of 76, which can be used to tilt a portfolio according to one’s view of the investment environment.

I have finalized the strategy of this traditional IRA to own four Vanguard mixed funds and Columbia Thermostat (COTZX) to have five core funds with allocations that range between 10% and 25% that will make up 85% of the portfolio. The other 15% is a tactical sleeve of mostly Vanguard sector ETFs and trending funds to adjust according to the business cycle. The neutral stock to bond allocation for this portfolio is 45% where it is now, but at extremes in the business cycle, this may be as low as 30% or as high as 65% depending upon what I own in the tactical sleeve and Columbia Thermostat. This range is a gradual change over the business cycle and not an attempt for short-term timing of the market.

2.  Best Funds Over Twenty Five Years

More than anything, we believe investors should be using all of the tools in their toolbox to meet goals and objectives. This means deploying an active investment approach with the ability to generate beyond passive benchmarks.

There is no such thing as ‘easy money,’ and lower returns should be expected. We know it may not be what investors want to hear, but this type of clear-eyed, realistic approach to risk management is the only way we know how.

Cruising Through The Economic Cycle, Manning & Napier

For the Vanguard Portfolio, I want a portfolio with low turnover, and I look to the very short list of existing funds that consistently outperformed over the past twenty-five years. The funds below are the ones that I find most attractive, and Vanguard’s low-cost philosophy is a winning philosophy. For the next ten or more years, with high valuations in the US, stimulus wearing off, large debts and deficits, and the speculative nature of current markets with high margin leverage, we are likely to see lower domestic returns relative to international along with more volatility and with at least some “less than transitionary” inflation. The Wellington Management Fund has managed the Vanguard Wellington and Wellesley funds since inception and now manages two global versions of these funds.

What the table points out is that the funds are conservative (MFO Risk =2) to moderate (MFO Risk =3) while the Lipper Category classifies them as conservative, moderate, and growth. The names in blue indicate the funds that have the MFO Great Owl Classification for high-risk adjusted performance. Martin Ratio is the risk-adjusted performance. I added the column for percent equity as another measure of risk (and returns), and percent domestic allocation to show that while many of these funds have done well, they have invested largely in the US which now has much higher valuations than many other markets. Vanguard Wellesley Income (VWIAX) is a great conservative fund that invests mostly domestically.

Table #1: Best Funds Over Twenty Five Years

Source: Created by the Author Using MFO Premium screener and data

For the more aggressive funds in the traditional IRA at Vanguard, I select the Wellington and STAR funds. For the more conservative fund, I like the Wellesley fund.

3.  Vanguard Core Funds

Vanguard Global Wellington Admiral (VGWAX): The equity portfolio holds about 90 stocks and tilts to mega-caps. Key holdings since its November 2017 inception include Bank of America BAC, Microsoft MSFT, and Novartis NVS. Industrials have been overweight, anchored by defense companies such as Lockheed Martin LMT, which has a strong record of increasing dividends. A notable underweighting is technology, but the team likes semiconductor names, as they feel that after a period of consolidation, the top firms are now more effectively using technology as a source of competitive advantage. Non-U.S. names account for about half of the equity sleeve and include holdings like Taiwan Semiconductor TSM and AstraZeneca AZN.

Morningstar, Patricia Oey

Table #2 shows my favorite Vanguard mixed-asset funds with metrics for the past two years. My expectation is that global funds, which have performed relatively poorly for the past few years, are likely set to outperform over the next five to ten years due to lower international valuations. The Global Wellesley and Global Wellington Funds have higher allocations (close to 45%) to international stocks with a strong tilt toward value.  If you are interested in information about the Vanguard Funds in this article, I refer you to Vanguard Global 60/40 Funds.

The Vanguard Global Wellington has a price-to-earnings ratio of 18.6 compared to 25.5 for the Vanguard Wellington Fund. Investors are paying 37% more per dollar of earnings to own the Wellington instead of the Global Wellington fund. The global funds have been more volatile compared to domestic versions because of additional currency and country risks.

Table #2: Best Vanguard Core Fund Metrics – Two Years

Source: Created by the Author Using MFO Premium screener and data

The one-year trends in Figure #1 show the funds in the Mixed-Asset Growth Category have performed similarly as we shift from the Recovery to the Middle Stage of the business cycle. Likewise, the Global Wellesley is performing about as well as the Wellesley Income Fund. This may represent an inflection point for performance from growth to value and domestic to international.

Figure #1: Best Vanguard Core Fund Metrics – One Year

Source: Created by the Author Using Vanguard

I selected the Global Wellington and STAR Funds for the more aggressive side of the portfolio partly because they are more global, and the Wellesley Fund as the more conservative, domestic side of the portfolio. The Global Wellesley Fund is more of an unknown to me, and I selected it as a conservative global fund, but have a lower allocation to it.

4.  Vanguard Sector Funds

Although we do not believe the pillars are yet in place to support a 1970s-style stagflation scenario, we are clearly in a weakening growth/high inflation era that appears less “transitory” every day

Interdependencies, coupled with low inventories across global supply chains, have ushered in a brittle system that’s become more vulnerable to shocks and their ripple effects.

The Beast of Burden of Inflation, Liz Ann Sonders from Charles Schwab

The tea leaves are difficult to read for sector funds because August to October has been volatile with a small dip. While valuations are high, we are in the middle stage of the business cycle which is typically the longest-running stage of the business cycle. The price-to-earnings ratio of the S&P 500 appears to be declining as earnings increase. With ample stimulus, there is probably more room to run before the next recession. Other risks include inflation, tapering on bond purchases by the Federal Reserve, volatility, and of course the “unknowns”. The past couple of months has been a good time to adjust allocations and pick up new funds.

Table # 3 shows most of the Vanguard Sector Funds. Those in the top two sections (eight funds) typically do well in the late stage of the business cycle. Those in the top section (five funds) are trending higher and may be more favorable for the next year or two. Those in the bottom section are what I want to underweight as they do well in the Recovery stage, but may now be more over-valued. The Vanguard Commodity Strategy Fund has had strong trends but has seen some withdrawals recently. I am holding, but watching as I read some consumer staples such as food and natural gas for home heating continue the trend of higher prices.

Trend Exponential Moving Average (EMA) measures the price of the fund compared to its moving average which weight more recent months heavier. A positive value shows the fund is increasing in value compared to its trend. Price to Cash Flow (P/C) is the price relative to the cash the fund generates.

Table #3: Vanguard Sector Funds

Source: Created by the Author Using Mutual Fund Observer

Investors should always have a Plan B for other funds. Figure #2 contains some Plan A tactical funds such as Commodity and Consumer Staples, along with Plan B funds such as real estate funds, mid-cap value funds, and emerging markets. When the Plan B funds are accelerating faster than the Plan A funds then it may be time to see if there is a storyline for making a change. I recently added the American Funds New World Fund Class (NWFFX) in another account because it underweights China and is more diversified including companies from developed countries that do business in emerging markets. Another interesting ETF that has performed well is the BlackRock iShares MSCI Emerging Markets ex-China (EMXC) which invests in emerging markets excluding China.

Figure #2: Trending Funds

Source: Created by the Author Using Vanguard

I include the Vanguard Commodity Strategy Fund and the Consumer Staples ETF in the Tactical Sleeve but have added Health Care in the traditional IRA at Fidelity. These categories tend to do relatively well in the late stage of the business cycle. I have also added an emerging market and mid-cap value fund in the traditional IRA at Fidelity. For those wishing to hedge against inflation without buying commodities, I suggest that you look at Horizon Kinetics Inflation Beneficiaries ETF (INFL) which invests in companies that will benefit from inflation, but with a caution that like commodities it will likely be volatile.

5.  Setting a Target Allocation (aka Cycle Inflection Points)

In my view, the greatest way to optimize the positioning of a portfolio at a given point in time is through deciding what balance it should strike between aggressiveness/defensiveness. And I believe the aggressiveness/ defensiveness should be adjusted over time in response to changes in the state of the investment environment and where a number of elements stand in their cycles.

Mastering the Market Cycle: Getting the Odds on your Side, Howard Marks, co-founder of Oaktree Capital Management

You are driving along at 50 miles an hour and step on the accelerator. Your car speeds up. You let off the accelerator and the car slows down, but you are still moving. The same concept applies to the economy. Fidelity estimates that the economy has moved from the recovery stage to the middle cycle which means the economy is still growing, but at a slower rate (deceleration). Mutual Fund Observer Multi-Screen has a new tool called the Trend EMA for the exponential moving average for three- and ten-month periods. This can be applied to funds as I show in this article. The fund price may be growing at a faster rate (acceleration) or slower rate (deceleration). The point at which acceleration turns positive or negative is an inflection point where the fund may still be growing, but at a slower or faster rate than previously.

I believe that we are in secular and business cycle inflection points. Inflection points with high valuations, slower growth rates, and inflation are usually followed by secular bear markets where returns are lower than historical averages. Stocks may rise, but valuations often fall. Valuations are the best long-term determinant of returns, but not a short-term timing metric. For the business cycle, the middle stage is usually the longest. The economy is growing strongly but will grow slower than it did during the recovery stage.  

As an example of secular markets and business cycles, Figure #3 shows the conservative Vanguard Wellesley (VWINX) compared to the more aggressive Vanguard Wellington (VWELX) and S&P 500 since 1995. The Wellington and S&P500 did not consistently outperform the conservative Wellesley for the 20 year period containing the bursting of the Technology Bubble and Great Financial Crisis. For the past twenty-six years, the S&P500 has not significantly outperformed the Wellington fund. Entering retirement, my time horizon is likely less than 25 years. I expect lower than historical returns with high volatility. In this environment, I like an active approach rather than a passive one.

Figure #3: Secular Trends

Source: Created by the Author Using Portfolio Visualizer

We, as individual investors, can’t time the markets on a consistent basis but we can adjust the risk of our portfolios to match the investment environment. Because I believe that some underperforming funds such as international and small caps may be set to outperform, I did not choose funds to include in the portfolio based on historical performance. Instead, I chose funds that have performed relatively well in categories that I expect to outperform in the future. I want to have a target allocation but tilt toward growth in the recovery stage and defense in the later stages. Coincidently, my overall allocation is 55 percent. I would be comfortable with a 30 percent allocation to stocks in the late stage of a business cycle and 65 percent during the recovery stage.  

Implementation is more difficult. This is one reason for building a multi-strategy portfolio. The goal is that each portfolio does well, but they and some of their funds will outperform at different times. Both the Vanguard and Fidelity Portfolios contain Columbia Thermostat (COTZX/CTFAX) which will allocate between 10 and 90 percent to stocks based on valuations using the philosophy of “buying low and selling high”. It is mostly in bonds now and will underperform many mixed-asset funds until the next correction. For more information about Columbia Thermostat, please read Tactical Sleeve for the Conservative Minded. There is always a bear market on the horizon, and I expect the next one in two to five years from now. This is not a forecast, just a historical reality…

“History doesn’t repeat itself, but it often rhymes.” – Mark Twain

6.   Vanguard Traditional IRA Portfolio

The simplest form of adjusting portfolios to the business cycle is to own four to six funds and adjust allocations during regular quarterly or annual rebalancing. For those who want to be more active, you may add a few sector funds or rotate between growth and value funds. Portfolios should remain diversified in each stage of the business cycle.

Business Cycle Portfolio Strategy, MFO December 2019, Charles Lynn Bolin

The above concept that I described in 2019 is what I am implementing with the traditional IRA at Vanguard. I am more heavily invested in Vanguard Global Wellington because it has a higher allocation to stocks, has a value orientation, is more global, and has the experience of the Wellington Management Team. I have a high allocation Vanguard Wellesley as a more conservative domestic fund. In other words, I set allocations based on gut feel where I believe we are in the business and secular cycles and will adjust the tilt based on trends.

The four Vanguard Funds that I am invested in are Vanguard Global Wellington (VGWAX), Global Wellesley (VGYAX), and Wellesley Fund (VWIAX). The Vanguard STAR Fund (VGSTX) is an excellent fund that I want to own more of during the recovery stage of the business cycle. It is a fund of funds including the venerable Windsor and PRIMECAP Funds, and overall has a tilt toward growth. I include the Columbia Thermostat Fund (COTZX) because it adjusts allocations according to cyclically adjusted price to earnings. Thermostat did not perform well following the Great Financial Crisis but has since changed its strategy to gradually change allocations instead of consisting of all stocks or bonds. It performed extremely well during the 2020 bear market.

I allocate 15% to a tactical sleeve based upon funds that do well in the coming stages of the business cycle, as well as momentum and valuations. In the tactical sleeve, I own the Vanguard Commodity Strategy Fund (VCMDX) which has exhibited lower risk than most commodity funds. I also recently bought the Vanguard Consumer Staples ETF (VDC). The tactical sleeve often consists of higher risk funds (MFO Risk = 4).  The portfolio is moderate (MFO Risk = 3). The maximum drawdown of this portfolio would have been around 11 percent during the 2020 bear market, and the return would have been around 12 percent.

The allocation to stocks and commodities of this portfolio is 43%, of which just under a third is international. As per the strategy described in Section #1, I will be bringing the allocation to the STAR fund up to the minimum of 10% as I rebalance. I will also be looking to reduce the allocation of the Commodity Strategy Fund over time down to 5% as per the strategy of this portfolio.

Table #4:  Vanguard Traditional IRA Portfolio (Two Years)

Source: Created by the Author Using MFO Premium screener and data

7.  Closing

My wife and I built a relationship with a Fidelity Advisor which includes having a managed Roth IRA account. It is a comfort for my wife to know the financial plan and situation, and I want to know that she has someone to go to for advice in case something happens to me. He is a personal advisor, familiar with my situation and preferences. What I liked is that he asked my opinion and went along to rationalize decisions together. We will make adjustments as required going forward. I also like Vanguard for its great funds and like to diversify to some extent across financial institutions.

Just trying to keep it simple…

“Everything should be made as simple as possible, but no simpler.”

– Albert Einstein.

Best Wishes and Stay Safe!


Red flags over China

By David Snowball

There is an ongoing debate about whether Chinese President Xi’s economic reforms fundamentally threaten the investment case for China (and, by extension, for the emerging markets universe which China dominates). The Economist warns that “China’s new reality is rife with danger” (10/2/2021):

His campaign is remarkable for its scope and ambition. It started to rumble in 2020, when officials blocked the initial public offering of Ant Group, an affiliate of Alibaba, a tech giant. It is thundering onward, having so far destroyed perhaps $2trn of wealth. Didi, a ride-hailing outfit, has been punished for listing its shares in America. Evergrande, an indebted property developer, is being driven towards default. Trading on cryptocurrency exchanges has been banned as, more or less, has for-profit tutoring. Gaming is bad for children, so it must be strictly rationed. China needs larger families, so abortion must become rarer. Male role models should be manly and celebrities patriotic. Underpinning it all is Xi Jinping Thought, which is being drummed into the craniums of six-year-olds.

The question is whether Xi’s campaign will merely suppress excesses (which are innumerable) or, by intent or error, overshoot and fundamentally damage the global economy. The good folks at Matthews Asia, surely among the most experienced China investors in the public sphere, are cautiously in the former camp. Andy Rothman’s recent video blog, “What is Xi Jinping Thinking?” (10/2021) argues that the Chinese elite know that private wealth has been the goose that laid the golden egg, and they’re surely not going to kill it. They might make tactical errors in dealing with the excesses but they’re likely to steady the system after a quarter or two. “How worried should we be?” They are “prone to overdoing it” but are “swift to course correct.”

Others are more cautious. Andrew Foster, the founder of Seafarer of reflected in 2021:

In my view, China has always held the greatest promise – possibly more than all other emerging markets combined … For the past three decades, my academic studies and professional career have been heavily influenced by an abiding interest in China’s practical and largely successful effort to escape mass poverty. Over time, my understanding of the country’s economic progress had manifested in a formative idea of China’s emergent potential. However, that year I was forced to recognize that my hopes for China’s future were naïve. From 2013 onward, President Xi and his administration have explicitly imagined a very different “Chinese Dream.” 

Mr. Foster speculates that China might need to become its own asset class if EM investing is to remain viable. Goldman Sachs just raised the same prospect.

The October 2021 letter from Grandeur Peak’s Robert Gardiner reflects are similar caution:

Our view for now (emphasis added) is that China is still a place we want to be investing, though we aren’t blindly moving ahead. We’re staying cautious.

Recent Chinese moves against aggressive capitalism have not been subtle. This has crushed certain industries in the Chinese stock market. We’ve been hurt by this, but not too badly. Some of the move against capitalism may be healthy. China has had a tremendous amount of fraud, which we believe might be reined in, and many companies in China are overly aggressive and perhaps this will add some caution, which could also be healthy. Understanding China is so important to understanding the global landscape, including the United States. We’re sticking with our investments in China for the time being (again, emphasis added).

A fair number of funds have issued updated statements concerning the risk of investing in China. The largest China fund, iShares MSCI China ETF, issued an expanded warning in September. The revised warning runs to 5,000 words and includes a clear statement on the risk of investing in dictatorships:

The Chinese government is authoritarian and has periodically used force to suppress civil dissent. Disparities of wealth and the pace of economic liberalization may lead to social turmoil, violence and labor unrest. In addition, China continues to experience disagreements related to integration with Hong Kong and religious and nationalist disputes in Tibet and Xinjiang. There is also a greater risk in China than in many other countries of currency fluctuations, currency non-convertibility, interest rate fluctuations and higher rates of inflation as a result of internal social unrest or conflicts with other countries. Unanticipated political or social developments may result in sudden and significant investment losses. China’s growing income inequality, rapidly aging population and significant environmental issues also are factors that may affect the Chinese economy.

BlackRock’s version of the alarm, in their own updated risk statements, includes the note:

Investments in securities of companies domiciled in the People’s Republic of China involve a high degree of risk and special considerations not typically associated with investing in the U.S. securities markets. Such heightened risks include, among others,

      • an authoritarian government,
      • popular unrest associated with demands for improved political, economic and social conditions,
      • the impact of regional conflict on the economy
      • hostile relations with neighboring countries
      • Military conflicts, either in response to internal social unrest or conflicts with other countries …
      • The Chinese economy is vulnerable to long-running disagreements and religious and nationalist disputes with Tibet and the Xinjiang region.
      • Since 1997, there have been tensions between the Chinese government and many people in Hong Kong … Recent protests and unrest have increased tensions even further.
      • China has a complex territorial dispute regarding the sovereignty of Taiwan and has made threats of invasion
      • China is alleged to have participated in state-sponsored cyberattacks against foreign companies and foreign governments.
      • China could be affected by military events on the Korean peninsula or internal instability within North Korea.
      • there can be no assurance that [Chinese economic and market} reforms will continue or that they will be effective.
      • The Chinese government may intervene in the Chinese financial markets, such as by the imposition of trading restrictions, a ban on “naked” short selling or the suspension of short selling for certain stocks.
      • there is less regulation and monitoring of the securities markets and the activities of investors, brokers and other participants in China than in the United States.

A side-by-side comparison with earlier notes highlights three substantial additions:

Chinese companies are also subject to the risk that Chinese authorities can intervene in their operations and structure.

Additionally, China is alleged to have participated in state-sponsored cyberattacks against foreign companies and foreign governments. Actual and threatened responses to such activity and strained international relations, including purchasing restrictions, sanctions, tariffs or cyberattacks on the Chinese government or Chinese companies, may impact China’s economy and Chinese issuers of securities in which the Fund invests.

Chinese companies, including Chinese companies that are listed on U.S. exchanges, are not subject to the same degree of regulatory requirements, accounting standards or auditor oversight as companies in more developed countries. As a result, information about the Chinese securities in which the Fund invests may be less reliable or complete. Chinese companies with securities listed on U.S. exchanges may be delisted if they do not meet U.S. accounting standards and auditor oversight requirements, which would significantly decrease the liquidity and value of the securities. There may be significant obstacles to obtaining information necessary for investigations into or litigation against Chinese companies, and shareholders may have limited legal remedies.

China is a problem for your portfolio. As one of the world’s two largest economies and one of the world’s two largest stock markets, you can’t really avoid it. A US-only portfolio is still full of gaming and tech companies (Intel, Broadcom, Micron, Texas Instruments, AMD) who derive 20 – 70% of their earnings from China.

While reporting on China exposure is spotty – companies don’t have to break out earnings by country or region – lots of consumer names, from Yum Brands (Taco Bell, Pizza Hut, KFC) to UnderArmour and Nike, are dependent on China for billions in revenues.

Likewise, your international holdings have surprising exposure to Chinese stocks. Seven of the 10 largest holdings of the troubled Evergrande Property Services Group are Vanguard index funds, not overly Asian. And Evergrande is not alone in its financial woes: Sinic Holdings likely won’t repay $250 million worth of bonds and China Properties Group has defaulted on $226 million worth of notes.

To get a measure of the implied exposure to China (and its woes), we used the screener at MFO Premium to calculate the correlation between the largest China fund (iShares MSCI China ETF) and various sets of international investments.

Emerging markets: The 10-year correlation of the Vanguard Emerging Markets Index, a surrogate for EMs generally, and iShares MSCI China, the largest China ETF, is 0.84. Artisan Developing World, an MFO Great Owl, is just a touch behind at 0.81. The 10-year correlation for the largest EM funds is 0.74 – 0.84.

Emerging markets small-cap: 0.57 – 0.66

Frontier markets: 0.43 – 0.64

– – – – –

International large-cap growth: 0.61 – 0.78 (Vanguard International Growth is highest)

International small-mid growth: 0.63 – 0.69

International small-mid value: 0.60 – 0.64 

International large cap value: .048 – 0.55

The bottom line: the strongest China exposure, not surprisingly, is in mainstream EM equity funds. If you’re looking for EM exposure, prefer small caps to large caps, and frontier markets to more mature emerging markets.

If you’re looking for broad international exposure, international large growth – the default category for the largest international funds these days – has the highest correlation, international large value has the lowest with international small caps in-between.

One place to start your portfolio exploration is with the international Great Owl funds that favor smaller markets, smaller market caps, and smaller valuations. The Great Owl designation means that the fund in question has landed in the top 20% of its peer group, based on conservatively risk-adjusted returns, for the past 3, 5, 10, and 20 years, as applicable based on the age of the fund. The funds listed below all have track records of five years or more and have earned the Great Owl designation.

The complete list of all 700 Great Owl funds and ETFs is available at MFO Premium.

Small Cap emerging markets and frontier markets

Virtus KAR Emerging Markets Small Cap (VIESX)

Oberweis Emerging Markets (OBEMX)

International Small / Mid-Cap Growth

Wasatch International Opportunities (WAIOX)

Virtus KAR International Small-Mid Cap (VIISX)

WCM International Small Cap Growth (WCMSX)

Brown Capital Management International Small Company (BCSFX)

Grandeur Peak International Stalwarts (GISYX)

International Large-Cap Value

AMG River Road International Value Equity (ARLSX)


Super Bull Markets and Latest Upgrades To MFO Premium

By Charles Boccadoro

Last month, in “A Leap of Faith – MICUS Chicago 2021,” we noted that Morningstar’s CEO Kunal Kapoor recently described US equities as “one of the greatest bull markets.” The statement looks past March 2020, of course. Similarly, many who discuss the great bull markets of the 1980s and 1990s, don’t acknowledge the sudden decline of October 1987, so-called “Black Monday.”

Basically, both retractions were so short, each just three months, they just get lumped in with the long-term gains of the adjacent bull markets, ex post, of course. 

We last discussed the six market cycles US equities have experienced since 1968 (or nine since 1926) in “A Thirty Year Proposition,” published September 2020. Here’s an update of its key cycle table through September 2021:

You can see the shortness of the bear markets of 1987 and 2020. In response, we’ve added two new evaluation periods to MultiSearch, our main search tool on MFO Premium. The new periods are nicknamed “Super Bull 1 & 2.” 

The first Super Bull, which began in late 1974, returned 17.2% annualized for the S&P 500 across 26 years. 26 years! The second, which began early 2009, has returned about the same at 17.4% annualized across these past 13 years. It’s still going.

The Tech Bubble finally took down the first Super Bull in 2000. Survivors of that bubble (Amazon, Apple, Microsoft) have helped propel the current Super Bull. One reason the current bull market may be “one of the greatest” … its excess return (over risk-free) is 17.0% annualized versus “just” 10.3% for the previous one.

In addition to these two new periods, we recently added several new features that derived from an enjoyable Zoom session with premium subscriber Devesh Shah. The former Goldman Sachs partner resides in New York and publishes the YouTube Channel Understanding Personal Finance. He also happens to be a co-inventor of the stock market’s barometer of fear, the Cboe’s Volatility Index (VIX). His most recent interview (“Video 81”) is outstanding.

Thanks to his suggestions, the MultiSearch now includes:

  • Decadal Returns, Ratings, and Display Periods. Both absolute (calendar decade) and relative (10-year periods, stepping back from today). Most screeners available today provide risk and performance metrics on past 10 years. But how did the funds you’re considering perform in the previous decade? Now, it’s easy to find out.
  • After Tax Returns and Ratings. With help from Tom Roseen, Refinitiv’s Head of Research Services, we’ve derived these after-tax metrics for 1, 3, 5, and 10-year periods, both pre-liquidation and post-liquidation, from the Tax Cost Ratio (TCR), which we introduced last July. You will find these new screenable metrics in the Purchase & Taxes group, along with TCRs and TCR Ratings. Devesh believes taxes can “erode out almost any long term competitive outperformance of actively mutual funds.”
  • Adjustable Columns. Thanks to a recent development by Allan Jardine of SpryMedia and associate Daniel Hobi, users can now adjust the width of any column in the results table. Just place the cursor between column headers and pull left or right. (To incorporate this cool addition, we had to alter the table appearance a bit.)

The table below illustrates the new calendar decade period metrics for three indexes (SP500, LGovBnd, and TBill), along with the equity/long bond allocation indices from the Allocation Pre-set Screen. All date back to 1926. The table reveals that rarely in the past 100 years have excess returns been as high as those since 2009, the start of the current Super Bull.

Hope you will enjoy the new features!

Refinitiv will drop the month-ending October data Saturday, 6 November. Ratings should post the next day.

PS. We just went live (Thursday, 4 November) with month ending October ratings. Going forward, we should now be able to post month ending ratings within 2-3 days of month close, thanks to Refinitiv including latest month ending data in their daily drop.

Elevator Talk: Amy Greer and Jennifer Klass, Baker McKenzie

By David Snowball

MFO’s Elevator Talks serve as a way of introducing you to smart people who (a) we’ve only recently met and (b) we’ve become convinced that you should hear from. In the usual course of events, that translates to a fund manager whose approach seems promising and intriguing but whom we’re still learning about (and from). Elevator Talks aren’t recommendations. They’re invitations: to hear from impressive folks, deepen your understanding of important issues and strategies.

In the normal course of things, we interview fund managers.

Meh, “normal” is overrated.

We are confronting three essentially indisputable truths.

  1. The global climate is in a rapidly escalating crisis. As we began working on this piece, a “once in a millennium” heat dome encompassed the Pacific Northwest, and temperatures of 118º F (48º C) had reached the Arctic Circle. At the same time, the American Southwest recorded over 300 record high-temperature readings in a single week.

    (Right. If it only lasts for a week, it’s “weather.” The patterns underlying it – hotter, drier, with more frequent occurrence of extreme weather events – is “climate.”)

    For understandable psychological reasons, some people continue to insist that humans are not the drivers of the change. They are incorrect. NASA maintains a useful page that highlights the state of the scientific and medical community’s research on climate change.

    Here’s the short version: we’ve made a mess, and we need to find a way to clean up after ourselves.

  1. The investor community is counting on private markets to help reduce or mitigate the crisis. Rich Powers, the ETF at Vanguard, reports that “In our conversations, clients continuously bring up the topic.” In a mutual frenzy, the investment industry is rolling out new funds weekly, and investors are committing tens of billions – by some estimates, trillions – of dollars to them. The US Sustainable Investing Forum now estimates that one out of every three investment dollars is committed to sustainable investments; that’s $17 trillion worldwide by their calculation. KMPG claims it’s actually $30 trillion. Bloomberg estimates it will reach $54 trillion by 2025.

Those are big numbers. So big that KPMG has labeled them

And those are paired with investment vehicles that make all the difference:

Sadly, that brings us to our third indisputable truth:

  1. Those numbers are unreliable, the metrics are rigged, the claims are unverified, and the marketers are adding a green sheen to everything they can reach. With honorable exceptions, of course. In general, though, it’s a jungle out there.

    Ask yourself a simple question: how can one reputable source tell us that there were $17 trillion in sustainable investments in 2019 while another, similarly reputable one, declares that it was $30 trillion? Even in today’s world, $13 trillion is not just a rounding error.

    Apple Inc. is the largest holding in Vanguard ESG US Stock ETF (ESGV), and the company is worth $2.2 trillion. Does that mean that all $2.2 trillion of Apple’s market cap should be counted as “green” investment, despite the fact that the huge bulk of the money did not come from folks looking for that kind of green? Or do we only count the portion of the funds contributed by ESG-screened funds? But what about funds that invest responsibly without a formal ESG screen? And how can we assess the motivations of private investors? That answers to those questions determine, literally, trillions of dollars worth of nominal ESG investments.

    And when it comes to Apple’s “green” credentials, what counts and who counts it? Does a plan to be carbon neutral at some point in the future make an investment green today? If a company says they’re already carbon neutral, do we take their word for it? How would we treat a firm that invests in solar and coal?

To date, the answer has mostly been “close your eyes and pray.”

Or, worse yet, “close your eyes and trust the marketing department.”

That’s changing, in fits and starts. European regulators are trying to actively shape the behavior of corporations; that is, to make them act responsibly. The American strategy is rather more market-sensitive: regulators are trying to find ways to force companies to consistently and reliably disclose … hmmm, well, they don’t yet know what they want them to disclose. Commissioners of the Securities and Exchange Commission agree that the important stuff has to be disclosed; they just can’t agree on what qualifies as “the important stuff.” In technical terms, they can’t agree on what’s “material” to disclose.

Amy Greer and Jennifer Klass can help. Their job is to help their clients – including asset managers – navigate the quickly evolving rules concerning green disclosure.

Ms. Greer serves as the co-chair of Baker McKenzie’s North America Financial Regulation & Enforcement Practice, which provides clients with regulatory advice and enforcement counseling. Before joining Baker McKenzie, she served as chief trial counsel at the US Securities and Exchange Commission’s (SEC) Philadelphia regional office and managed a team of lawyers overseeing a wide variety of enforcement matters…

Jennifer L. Klass serves as the other co-chair of Baker McKenzie’s Financial Regulation and Enforcement Practice in North America. She is an experienced investment management lawyer with a particular focus on investment adviser regulation and regularly represents clients before the SEC. She provides practical advice that is informed by her experience as Vice President and Associate Counsel at Goldman, Sachs & Co., where she represented the asset management and private wealth management businesses. She’s also worked with SEI, which manages, administers, or advises on about $1.2 trillion in assets.

She’s also a lot better at Twitter than I am.

We spoke at length in June about the world of greenwashed products, regulatory slumber and modernization, and how to navigate it all. They kindly offered to think a bit about a simple but daunting challenge: what do investors interested in a sustainable portfolio actually need to know just now in order to have the best chance of aligning their portfolios with their intentions? Here’s their advice for both individuals and asset managers.

The attraction of so-called ESG investments is understandable: make money and save the world, all in one fell swoop. But recent statements from the regulators suggest there is more to it, and indeed there is.

Feeling the pressure of competition, both domestically and from foreign multinationals, the latter of which actually may be subject to existing ESG disclosure regimes, many publicly traded companies in the United States are issuing statements and reports describing their efforts to meet their own self-imposed environmental, social and governance goals, but without the benefit of any mandatory regulatory guidance. These U.S. corporate ESG reports sometimes use voluntary third-party standards which attempt to offer some meaningful and objective measures. However, this is not always the case. Often companies merely describe their recent efforts to be better corporate citizens, together with aspirational statements and targets for future goals.

Moreover, investors of all kinds, whether they are institutions deciding on portfolio investments or retail investors, currently have no meaningful way to compare U.S. corporations to one another or to non-U.S. firms. Consistency and comparability of ESG reporting is the stated goal of SEC Chair Gary Gensler in promoting the agency’s adoption of mandatory disclosures on climate risk and human capital, including board diversity. However, the SEC is not going to stop there as the agency’s agenda also includes the creation of new rules for investment companies and investment advisers on ESG factors, including claims, disclosures and marketing.

The lack of standards and the unrelenting pressure of investor interest has placed U.S. public companies and all regulated entities, into a place of real jeopardy, to the extent that any public statements do not match actual events or practices. This mismatch is fertile ground for SEC Enforcement investigations and enforcement actions. We anticipate that the previously announced Enforcement Division Climate and ESG Task Force is zeroing in at precisely these types of issues, using existing tools, like the antifraud provisions and reporting requirements.

ESG competitive pressures also impact a wide variety of regulated entities like asset managers and investment advisers. As a result, these firms also face potential regulatory risk on ESG-related issues – as investors, product manufacturers, and marketers.

The SEC’s Division of Examinations has promised to review whether firms accurately disclose their ESG investing approaches and have adopted and implemented policies, procedures, and practices consistent with their ESG-related disclosures. Regulated entities can expect consideration of portfolio management practices, including their diligence on ESG investments and whether proxy voting decisions are consistent with disclosures on ESG integration. This includes a review of their public and client-facing advertising and marketing and evaluation of compliance programs to ensure that the firms are not ‘greenwashing’ their investment products.

Depending on the nature of our client’s business, we work to evaluate how they can best compete in the ESG space while simultaneously adopting the internal controls necessary to manage regulatory examination and enforcement risk. Whether U.S. public companies or regulated entities, focusing on actual metrics and practices that can be objectively measured and substantiated, rather than generalities, will be a much safer course from a regulatory standpoint. And, for regulated entities, don’t forget the policies and procedures necessary to test your claims and practices. 

The Baker McKenzie site is sprawling in a way that puts the Mall of America to shame. Folks interested in learning more might start with the homepages for Amy Greer or Jennifer Klass. Beyond that, they’ve shared their most recent analysis of the SEC’s ESG agenda with you and commend a couple of essays on sustainability in financial institutions from the Baker McKenzie site for your consideration.

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 we survey actively managed funds and ETFs in the pipeline. This month brings 39 new products in the pipeline, most of which will launch by the end of December. Only Smead International Value overtly flags a 2022 launch.

The four most important words to keep in mind when you’re reviewing this month’s filings:

Show Me The Money.

More correctly, “show me that you have any audited record of making any money for clients with your Magic Wand Strategy.” Technically you’re asking for evidence of a GIPS-compliant separately managed account composite, which should appear in a prospectus under “Performance of related accounts.” But, this month, it mostly doesn’t. One fundamental tenet at MFO is “never trust your money to someone who still has training wheels on.” One place to get that training is on separately managed accounts using the same strategy. Some managers can bring a 10-year record with tens of millions of investor money to the table when they launch a new fund.

That is less important when an established advisor with a clear discipline and documented record adds a fund to their stable, as might be the case with Polen Global SMID Company Growth this month. There’s a Polan discipline that has been applied consistently across Polen’s slowly growing stable of funds. The record of those funds gives you some sense of what you’re getting in this one.

But if you’ve got nothing more than the manager’s boundless confidence that they’ve found The Secret of All Secrets when it comes to investing, perhaps you should give them a year or two to prove it … with someone else’s money.

Admirable Acts of Charity: the Simplify Health ETF and RN Volition America Patriot ETF are promising to contribute “all” and “the majority” of their management fees to worthy charities. The former supports the Susan G Komen Foundation and the latter, the Folds of Honor charity which provides scholarships for the children of soldiers wounded or killed in service.

Amazing how fast the bitcoin filings read like late-arriving wannabees.  I could write the prospectus for them: “Hi, we’re going to invest in bitcoin futures and short-term fixed-income just like the last 12 guys!” I skipped a few filings for the sheer redundancy of them.

The two non-redundant filings: one to short bitcoin futures and the other the leverage them. The SEC has formally requested the withdrawal of that latter filing, but (at press time) the adviser has not

Think of it as “the trans moment for funds.” Five of this month’s filings are for conversions, including one hedge fund becoming a mutual fund and four mutual funds becoming ETFs.

ARK 21shares Bitcoin Futures Strategy ETF

Ark 21shares Bitcoin Futures Strategy ETF, an actively managed ETF, seeks long-term capital appreciation. The plan is to buy bitcoin futures while the rest of the portfolio is low-risk fixed-income stuff. The fund will be managed by an unnamed employee of 21Shares US who will provide recommendations to Brandon Koepke, who is “jointly and primarily responsive” for the fund. 21Shares is a Swiss firm with European crypto-ETPs. The ARK derives from the fact that ARK Investment Management provides “marketing support,” but not investment services, to the fund.

Avantis U.S. Small Cap Equity ETF

Avantis U.S. Small Cap Equity ETF, an actively managed ETF, seeks long-term capital appreciation. The plan is to build a diversified portfolio of “higher profitability or value companies.” The fund will be managed by an American Century team headed by Eduardo Repetto. Dr. Repetto is the Avantis CIO, a DFA alumnus and aeronautical engineer with his Ph.D. from CalTech. Its opening expense ratio has not been disclosed.

AXS Astoria Inflation Sensitive ETF

AXS Astoria Inflation Sensitive ETF, an actively managed ETF, seeks long-term capital appreciation in inflation-adjusted terms. The plan is to invest in firms in industries that benefit from sustained inflation in commodities and TIPs. (Jason Zweig expressed skepticism about the actual, as opposed to purported, performance of such assets. See “Deflating Your Inflation Fears,” Wall Street Journal, 10/29/2021.) The fund will be managed by John Davi of Astoria Portfolio Advisors. Its opening expense ratio has not been disclosed.

Baron Technology Fund

Baron Technology Fund will seek capital appreciation. The plan is to invest in tech companies Baron believes have significant opportunities for growth, sustainable competitive advantages, exceptional management, and an attractive valuation. The fund will be managed by Michael Lippert and Ashim Mehra. Its opening expense ratio has not been disclosed, and the minimum initial investment will be $2,000, reduced to $500 for accounts with an automatic investing plan.

Barrow Hanley Emerging Markets Value Fund

Barrow Hanley Emerging Markets Value Fund will seek long-term capital appreciation and consistent income from dividends. The plan is to use quantitative valuation and business strength screens to reduce a 5,500-stock universe down to a 100-150 name guidance list. The team then does fundamental research to select the portfolio names. The fund will be managed by Randolph Wrighton, Sherry Zhang, and David Feygenson. Its opening expense ratio for “Y” shares is 1.14%, and the minimum initial investment will be $2,500.

Barrow Hanley International Value Fund

Barrow Hanley International Value Fund will seek to outperform the MSCI EAFE Index with lower risk. The plan is to invest in companies that are temporarily undervalued for reasons Barrow Hanley can identify, understand, and believe will improve over time. Quantitative screens winnow a 3,800-stock universe to 150-200 potential holdings, and analysts do fundamental research to identify the portfolio holdings. The fund will be managed by Randolph Wrighton and TJ Carter. Its opening expense ratio for “Y” shares is 1.01%, and the minimum initial investment will be $2,500.

BlackRock Global Equity Absolute Return Fund

BlackRock Global Equity Absolute Return Fund will seek total return over the long term. It’s going to be a global equity fund with a bunch of hedging opportunities, including shorts. The fund will be managed by James Bristow and Gareth Williams. Its opening expense ratio has not been disclosed, and the minimum initial investment will be $1,000.

BlockFi Bitcoin Strategy ETF

BlockFi Bitcoin Strategy ETF, an actively managed ETF, seeks capital appreciation. The plan is to buy bitcoin futures and short-duration fixed income securities. The fund will be managed by Andrew Serowik, Todd Alberico, and Gabriel Tan. Its opening expense ratio has not been disclosed.

Clockwise Capital Innovation ETF

Clockwise Capital Innovation ETF, an actively managed ETF, seeks long-term growth of capital. The plan is to embrace “5G enabled opportunistic investing,” which “focuses on the meaning of time.” Nominally all-cap, 10-20 unevenly weighted names in the portfolio. The fund will be managed by Ryan J. Guttridge and Cengiz Mehmet Cakmak of Clockwise Capital LLC. Its opening expense ratio is 1.25%, but that number is reported in brackets which implies a degree of tentativeness.

Conductor Global Equity Value ETF

Conductor Global Equity Value ETF, an actively managed ETF, seeks to provide long-term risk-adjusted total return. The plan is to use one set of models to identify attractively valued stocks, a second set to find ones with momentum, and a third set dictates the extent to which the whole portfolio is hedged, with a final portfolio that’s 50-100% net long. This is the conversion to an ETF of the Conductor Global Value Equity Fund, whose five-year Sharpe ratio is about half that of its Lipper Global Small/Mid Cap peers. The fund will be managed by Charles Albert Cunningham, III, Chief Investment Officer of IronHorse Capital. Its opening expense ratio is 1.35% after waivers.

Convergence Long/Short Equity ETF

Convergence Long/Short Equity ETF, an actively managed ETF, seeks long-term capital growth. The plan is to invest 90-150% of the portfolio in “fundamentally sound companies” while having short positions equal to 20-70% against “fundamentally inferior” companies, with a net long position of 50-100%. This represents the fund-to-ETF conversion of the four-star Convergence Long/Short Fund. In the conversion, the minimum expense ratio goes away, and the expense ratio drops by 0.55%. The fund will be managed by David J. Abitz and. Justin Neuberg of Convergence Investment Partners. Its opening expense ratio is 1.84%.

Copeland International Small Cap Fund

Copeland International Small Cap Fund will seek long-term capital appreciation and income generation. The plan is to purchase small-cap equities (max cap of $11 billion) of international companies with a proven track record of consistent dividend growth. The fund will be managed by Erik B. Granade and Kenneth T. Lee. Its opening expense ratio for “A” shares is 1.22%, “I” shares is 0.97%, and the minimum initial investment for either class will be $5,000. They might be using the share class decision as a sort of IQ test for shareholders.

Cultivar ETF

Cultivar ETF, an actively managed ETF, seeks long-term capital appreciation. The plan is to invest in 50-100 undervalued (or under-appreciated, as so many of us are) securities. The fund will be managed by Thomas Muir and Keith Henderson of Cultivar Capital. Its opening expense ratio has not been disclosed.

Dimensional US Marketwide Value ETF

Dimensional US Marketwide Value ETF, an actively managed ETF, seeks long-term capital appreciation. The plan is to buy large-cap value stocks. This is the largest in DFA’s series of conversions of mutual funds into ETFs. The fund being converted is DFA Tax-Managed US Marketwide Value II which has above-average to high returns relative to its Morningstar large value peer group. The fund will be managed by Jed Fogdall and Joel Schneider. Its opening expense ratio is 0.23%.

Direxion Bitcoin Strategy Bear ETF

Direxion Bitcoin Strategy Bear ETF, an actively managed ETF, seeks capital appreciation. The plan is to short Bitcoin futures. The fund will be managed by Paul Brigandi and Tony Ng of Rafferty Asset Management. Its opening expense ratio has not been disclosed.

DoubleLine Shiller CAPE U.S. Equities ETF

DoubleLine Shiller CAPE U.S. Equities ETF, an actively managed non-transparent ETF, seeks to outperform the S&P 500. The plan is to invest primarily in four of the five most undervalued industry sectors in the S&P as measured by their CAPE Index values. The security selection within each sector is an active decision. The fund will be managed by two as-yet-unnamed DoubleLiners. Its opening expense ratio has not been disclosed.

Grandeur Peak Global Explorer Fund

Grandeur Peak Global Explorer Fund will seek long-term growth of capital. The plan is to build a typical Grandeur Peak portfolio. They can’t yet talk about the fund’s particular niche, and about the best I can discern is that the economic prospects of the region in which a company is located may play a greater-than-usual role in portfolio construction. Other than that, micro- to mid-cap, best-in-class companies, growth orientation. The fund will be managed by Juliette Douglas. Its opening expense ratio has not been disclosed, and the minimum initial investment will be $1,000.

Green Alpha Growth & Income Fund

Green Alpha Growth & Income Fund will seek current income and long-term capital appreciation. The plan is to invest in “Next Economy” companies, those which “are creating or enabling solutions to major systemic risks including, but not limited to climate change, resource degradation and scarcity, and widening inequality and the resulting erosion of social cohesion.” (Social cohesion firms? Hmmm.) The fund will be managed by Jeremy Deems and Garvin Jabusch. Its opening expense ratio has not been disclosed, and the minimum initial investment will be $2,500.

InfraCap Equity Income Fund ETF

InfraCap Equity Income Fund ETF, an actively managed ETF, seeks to maximize income and pursue total return opportunities. The plan is to invest in dividend-paying stocks, overlaid with put and call options and junk bonds, with the additional prospect of 33% leverage. The fund will be managed by Jay D. Hatfield of Infrastructure Capital Advisors. Its opening expense ratio is 0.80%.

LHA Market State Tactical Q ETF

LHA Market State Tactical Q ETF, an actively managed ETF, seeks long-term outperformance relative to the large-capitalization U.S. equity market. The plan is to use a bunch of derivatives, but only for good. The portfolio starts as the NASDAQ 100. If analysis of VIX trends shows rising volatility, they dial back exposure to the NASDAQ and add exposure to VIX futures and call options as hedges. The fund will be managed by Michael Thompson and D. Matthew Thompson of Little Harbor Advisors. Its opening expense ratio is 1.15%.

Madison Sustainable Equity Fund

Madison Sustainable Equity Fund will seek long-term capital appreciation. The plan is to buy 35-50 high-quality, large-cap companies that incorporate sustainability into their overall strategy. The fund will be managed by Maya Bittar and Dave Geisler. Its opening expense ratio for “Y” class shares is 0.90%, and the minimum initial investment will be $1,000.

Polen China Growth Fund

Polen China Growth Fund will seek long-term growth of capital. The plan is to invest in corporations from Hong Kong, the People’s Republic of China, and Taiwan. They’re looking for firms with (i) consistent and sustainable high return on capital; (ii) strong earnings growth and free cash flow generation; (iii) strong balance sheets, and (iv) competent and shareholder-oriented management teams. The fund will be managed by as-yet unnamed parties affiliated with Polen Capital Management. Its opening expense ratio will be 1.50%, and the minimum initial investment will be $3,000, reduced to $2,000 for IRAs and accounts with automatic investing provisions.

Polen Global SMID Company Growth Fund

Polen Global SMID Company Growth Fund will seek long-term growth of capital. The plan is to find companies with (i) consistent and sustainable high return on capital, (ii) strong earnings growth and free cash flow generation, (iii) strong balance sheets typically with low or no net debt to total capital, and (iv) competent and shareholder-oriented management teams. (I rather like the decision to target “competent teams,” presumably because they are few enough of them that it is a significant constraint.) The fund will be managed by Rob Forker, who has been on Polen’s Small Company Growth team since 2018. Its opening expense ratio will be 1.50%, and the minimum initial investment will be $3,000.

Rareview Inflation/Deflation ETF

Rareview Inflation/Deflation ETF, an actively managed ETF, will seek returns that exceed the rate of inflation over a business cycle. The plan is to invest in TIPs and derivatives linked to U.S. Treasury and interest-rate futures. The fund will be managed by Neil Azous of Rareview Capital. Its opening expense ratio will be 0.92%.

Rayliant Quantamental Emerging Market Equity ETF

Rayliant Quantamental Emerging Market Equity ETF, an actively managed ETF, seeks long-term capital appreciation. The plan is to put together a mid- to large-cap portfolio using the same “minds and machines” approach as the other Rayliant funds, also taking some account of ESG factors. The fund will be managed by a team led by Jason Hsu, the firm’s CIO. Its opening expense ratio will be 0.80%.

Rayliant Quantitative Developed Market Equity ETF

Rayliant Quantitative Developed Market Equity ETF, an actively managed ETF, seeks long-term capital appreciation. The plan is to use “a quantitative investment approach with human discretion” to find stocks with “the potential for higher future returns.” (Duh.) They also “take into account certain ESG criteria.” The fund will be managed by a team led by Mark Schlarbaum. Its opening expense ratio will be 0.80%.

RBC Global Equity Leaders Fund

RBC Global Equity Leaders Fund will seek long-term capital growth. The plan is to buy 20-40 companies that are, or have the potential to become, leaders in their industries. This assessment is based on the sustainability of a company’s competitive advantage, quality of management, and environmental, social, and governance stewardship. The fund will be managed by Habib Subjally. Its opening expense ratio has not been disclosed, and the minimum initial investment will be $1,000.

RN Volition America Patriot ETF

RN Volition America Patriot ETF, an actively managed ETF, seeks capital growth. The plan is to invest in mid- to large-cap domestic stocks, with the sub-adviser donating “a majority of its sub-advisory fee” to Folds of Honor, a charity focused on providing scholarships to families of veterans who were disabled or killed in action. The fund will be managed by a team led by Patrick W. Galley of RiverNorth Capital. To unpack the name: RN is RiverNorth, Volition America is a charity that supports the Folds of Honor program and Patriot … well, sort of works with all the rest. Its opening expense ratio has not been disclosed.

RPAR Ultra Risk Parity ETF

RPAR Ultra Risk Parity ETF, an actively managed ETF, seeks to generate positive returns during periods of economic growth, preserve capital during periods of economic contraction, and preserve real rates of return during periods of heightened inflation. The plan is to provide “leveraged, risk balanced exposure across four major asset classes – Global Equities, Commodities (through commodity producer equities and gold), U.S. Treasury Inflation Protected Securities, and U.S. Treasuries.” They target leverage at 160-180% of the fund’s net assets. The fund will be managed by Michael Venuto and Charles A. Ragauss of Toroso Investments. Its opening expense ratio has not been disclosed.

SilverPepper Long/Short Emerging Markets Currency Fund

SilverPepper Long/Short Emerging Markets Currency Fund will seek positive absolute returns from sources uncorrelated with the stock and bond markets. The plan is to take long and short positions in a select number of emerging market currencies. The fund will be managed by John Dean and Ian Ross Taylor of Absolute Returns Strategies. Its opening expense ratio is 1.85%, and the minimum initial investment will be $5,000.

Smead International Value Fund

Smead International Value Fund will seek long-term capital appreciation. The plan is to invest in 25-30 large-cap value stocks in developed and emerging markets. Their standard for “large-cap” is above $5 billion, which other funds place in the lower end of the mid-cap spectrum. The screening criteria for holdings seems to match their domestic funds’. This represents the conversion of their hedge fund, Smead International Value Fund LP. The fund will be managed by Cole Smead, backed up by his dad, Bill. Its opening expense ratio on its six share shares has not been disclosed, and the minimum initial investment will be $3,000 for Investor shares.

State Street Diversified Income Fund

State Street Diversified Income Fund will seek a high level of income. The plan is to invest across higher income-generating sectors while adjusting the portfolio to manage risk through different credit cycles. The fund will invest up to 10% convertibles, 10% preferreds, up to 75% in emerging markets but no more than 50% in non-US dollar-denominated securities. The fund will be managed by Matthew Nest and Orhan Imer. Its opening expense ratio has not been disclosed, and there is no minimum initial investment requirement.

Subversive Cannabis ETF

Subversive Cannabis ETF, an actively managed ETF, seeks long-term capital appreciation. The plan is to invest in legal THC-related businesses in the United States, including REITs, biotechs, financial services and such. The “subversive” part appears to be marketing, given that the strategy is about as subversive as my Aunt Jean’s decision to sneak a little parsley into her green bean casserole. The fund will be managed by a team from Subversive Capital. Its opening expense ratio is 0.75%.

Subversive Metaverse ETF

Subversive Metaerse ETF, an actively managed ETF, seeks long-term capital appreciation. The plan is to invest in tech companies. I suppose there is some tech company that wouldn’t qualify as having any involvement in The Next Big Thing, but not many. The fund will be managed by a team from Subversive Capital. Its opening expense ratio is 0.75%.

The Acquirers Fund  

The Acquirers Fund, an actively managed ETF, seeks capital appreciation. The plan is to invest in 30 stocks considered to be undervalued but fundamentally strong. Nothing about the portfolio discipline involves firms that are about to be acquired or any stuff. It’s just the name of the adviser. This represents a conversion of the adviser’s passive ETF (which has a pretty horrible record – negative 5% since inception in 2019, against a 21% S&P 500 gain) into an active fund. The fund will be managed by Charles A. Ragauss and Qiao Duan of Toroso Investments. Its opening expense ratio is 0.89%.

The Character Based Investing ETF

The Character Based Investing ETF, an actively managed ETF, seeks capital appreciation. The plan is to invest in the 75-100 corporations whose CEOs have the highest Composite Character. At base, they want to invest in corporations led by Great Leaders, people of exceptional integrity who, by nature, tend to stay with their company for long periods. The fund will be managed by Daniel Cooper of Character Based Investing LLC. Its opening expense ratio will be 0.49%.

The Future Fund Long/Short ETF  

The Future Fund Long/Short ETF, an actively managed ETF, seeks to provide capital appreciation. The plan is to have a thematic long portfolio: companies that benefit from “emerging technological or social trends or developments” and will short “thematic losers.” In general, the portfolio will be 50-80% net long. The fund will be managed by Gary Black and David Kalis. Mr. Black is in equal measure famous and infamous: ex-CIO for Goldman Sachs Global Equities, ex-CEO of Janus, ex-CIO of Calamos. Its opening expense ratio has not been disclosed.

Valkyrie XBTO Levered BTC Futures ETF

Valkyrie XBTO Levered BTC Futures ETF, a leveraged ETF, seeks to generate 1.25 times the daily movement of the price of Bitcoin. So October 26, 2019: 40% jump in 24 hours = 50% rise in your holdings. February 23, 2021, 20% drop in 19 hours = 25% loss for you, bubba. The prospectus helpfully warns that if you hold the fund for more than a day, returns “will very likely differ in amount and possibly even direction” from the fund’s target. Translation: if you hold the fund for a week and bitcoin rises three days, falls two days, and ends the week flat, you could be a major loser. The fund will be managed by a team from Valkyrie, which had the first bitcoin ETF. Its opening expense ratio has not been disclosed.

WisdomTree Managed Futures Strategy Fund  

WisdomTree Managed Futures Strategy Fund, an actively managed ETF, seeks to provide investors with positive total returns in rising or falling markets. The plan is to invest in some combination of 21 commodities futures (unrefined sugar?) and bitcoin futures (up to 5%). Hmmm … maybe currency futures. This seems to be the relaunch of a Wisdom Tree fund that might be on its third strategy refinement? The fund will be managed by a team from Newton Investment Management North America. Its opening expense ratio is 0.65%.

Manager Changes, October 2021

By Chip

Each month we track changes to the management teams of actively managed, equity-oriented funds and ETFs. That excludes index funds and most fixed income funds. The index fund exclusion is pretty straightforward: in a passive fund, the managers are interchangeable cogs whose presence or absence is almost always inconsequential to the fund’s performance.

Similarly, most bond fund managers have a very limited ability to add value. For instance, over the past ten years, the top-performing Core Bond fund in the Lipper universe outperformed its peers by just 1% per year with a virtually identical Sharpe ratio (0.98 for the top returning fund, 0.97 for the top returning the average fund). The best global income and flexible income managers outperformed by 3.5 and 2.4%, respectively, which is comparable to the margin between the best large-core equity fund managers and the pack.

This month, we noted 55 funds with changes in their management teams. The 700-pound gorilla is the decision by Grandeur Peaks Global founder Robert Gardiner to embark on a three-year sabbatical. Given the consistent and distinctive excellence of the Grandeur Peak family, along with its combination of shareholder sensitivity and consistent growth, Mr. Gardiner’s absence is necessarily news. He directly and intelligently addresses the decision, and his reason for confidence in it, in his annual chairman’s letter:

I will be taking a three-year sabbatical from Grandeur Peak to serve as a mission president with my wife, Susie, for the Church of Jesus Christ of Latter-day Saints. I will continue to work full time at Grandeur Peak until that date, and then will remain Chairman of the Board and attend quarterly board meetings during my three-year sabbatical. I expect to return full-time to Grandeur Peak in July of 2025, and hope to return to the roles of analyst, mentor, and Guardian Portfolio Manager on several of our global funds. I started in the money management business at the age of 16. After nearly forty years of trying to help people improve their financial future, Susie and I decided, when presented with this request from our church leaders, that serving as a mission president would be a wonderful adventure and provide another great opportunity to give back, as I personally have been given so much. As you may remember, I served as a missionary in France for two years as a 19-year-old young man, and found it to be a challenging and wonderfully rewarding experience. My church/religion has been a central and important part of my entire life. Susie and I believe we can spread a message of hope and peace, tolerance and love. The chance to oversee, nurture and love a hundred or more missionaries is a great responsibility and something we are excited to undertake. Working with young people is a real passion of ours. I have been blessed by so many mentors in my life and I love playing this role for future generations. During my three-year sabbatical, I will remain engaged in the strategic direction of the firm through quarterly board meetings, but I will be doing no meaningful research to help our investment team. I also intend to remain one of the largest individual shareholders in the Funds.

Careful readers might note Mr. Gardiner’s confidence in returning in 2025, but also the new roles he delineates: “analyst, mentor, and Guardian Portfolio Manager.” That is, no longer the day-to-day guy. There’s more to life than making or managing money. We wish Mr. Gardiner well on his upcoming adventure, even as we turn a slightly anxious eye to our Grandeur Peak holdings.

The letter, by the way, is well worth reading for its reflections on the markets – our and China’s – as well as discussions of the firm’s commitment to growth and diversity.

Quite separately, Larry Puglia’s impending retirement continues to send out ripples, away from the T. Rowe Price funds that he’s so skillfully managed and out into the universe of funds for which he (and Price) serve as the sub-advisor.

Ticker Fund Out with the old In with the new Dt
LTAFX Alternative Strategies Ladenburg Thalmann Asset Management, Inc. no longer serves as an advisor to the fund. SCG Asset Management, LLC will now serve as an advisor to the fund. 10/21
AABPX American Beacon Balanced Rahul Bapna is no longer serving as a portfolio manager of the fund. Justin Martin and Matthew Routh have joined the management team. 10/21
BBLRX BBH Select Series – Large Cap No one, but… Nicholas Haffenreffer joins Michael Keller as a portfolio manager of the fund. 10/21
CNRGX City National Rochdale Short Term Emerging Markets Debt Garrett D’Alessandro no longer serves as a portfolio manager of the fund. Thomas Ehrlein and Charles Luke remain as portfolio managers of the fund. 10/21
YLDE ClearBridge Dividend Strategy ESG Effective December 31, 2021, Mary McQuillen will no longer serve as a portfolio manager of the fund. John Baldi, Peter Vanderlee, and Michael Clarfeld will continue to manage the fund. 10/21
LGGAX Clearbridge International Growth Thor Olsson is no longer a portfolio manager for the fund. Elisa Mazen, Michael Testorf, and Pawel Wroblewski continue to manage the fund. 10/21
LRGE ClearBridge Large Cap Growth ESG Effective December 31, 2021, Mary McQuillen will no longer serve as a portfolio manager of the fund. Margaret Vitrano and Peter Bourbeau will continue to serve as portfolio managers to the fund. 10/21
RPFCX Davis Appreciation & Income No one, but… Darin Prozes joins Chris Davis and Preston King as a portfolio manager of the fund. 10/21
DHQAX Day Hagan Logix Smart Value DH Logix, LLC no longer serves as the sub-advisor of the fund. Robert Herman and Jeffrey Palmer are no longer serving as portfolio managers of the fund. Regan Teague joins Donald Hagan as a portfolio manager of the fund. 10/21
FHJUX Fidelity Europe No one, but… Allyson Ke and Faris Rahman join Andrew Sergeant as portfolio managers of the fund. 10/21
FGBFX Fidelity Global Credit No one, but… Lisa Easterbrook joins Andrew Lewis, Matthew Bartlett, and Michael Foggin as a portfolio manager of the fund. 10/21
GPGCX Grandeur Peak Global Contrarian Effective July 1, 2022, Robert Gardiner will take a three-year sabbatical from his duties as a portfolio manager of the fund. Mark Madsen will continue to manage the fund. 10/21
GPMCX Grandeur Peak Global Micro Cap Effective July 1, 2022, Robert Gardiner will take a three-year sabbatical from his duties as a portfolio manager of the fund. Spencer Hackett and Amy Sunderland will continue as portfolio managers of the fund. 10/21
GPGOX Grandeur Peak Global Opportunities Effective July 1, 2022, Robert Gardiner will take a three-year sabbatical from his duties as a portfolio manager of the fund. Ben Gardiner, Amy Sunderland, and Blake Walker will continue to manage for the fund. 10/21
GGSOX Grandeur Peak Global Stalwarts Effective July 1, 2022, Robert Gardiner will take a three-year sabbatical from his duties as a portfolio manager of the fund. Brad Barth and Randy Pearce will continue to manage the fund. 10/21
HIIDX Harbor Diversified International All Cap Michael Nickson no longer serves as a portfolio manager to the fund. Alex Duffy, Justin Hill, Simon Somerville, Neil Ostrer, Nick Longhurst, Charles Carter, William Arah, and Robert Anstey continue to serve as portfolio managers of the fund. 10/21
HIINX Harbor International Michael Nickson no longer serves as a portfolio manager to the fund. Alex Duffy, Justin Hill, Simon Somerville, Neil Ostrer, Nick Longhurst, Charles Carter, and William Arah continue to serve as portfolio managers of the fund. 10/21
HQIAX Hartford Equity Income Effective June 30, 2022, Michael Reckmeyer will retire and no longer serve as a portfolio manager to Matthew Hand and Adam Illfelder will continue as portfolio managers of the fund. 10/21
HRRLX Homestead Rural America Growth & Income Effective January 7, 2022, Peter Blackstone will no longer serve as a portfolio manager of the fund. Mauricio Agudelo, Prabha Carpenter, Mark Long, Ivan Naranjov, and James Polk will manage the fund. 10/21
JAQAX Janus Henderson Asia Equity Mervyn Koh is no longer listed as a portfolio manager of the fund. Andrew Gillan is now the sole portfolio manager of the fund. 10/21
JBGCX John Hancock Blue Chip Growth Larry Puglia is no longer serving as a portfolio manager of the fund. Paul Greene is now the sole portfolio manager of the fund. 10/21
JSCCX John Hancock Small Cap Value Effective December 31, 2022, Timothy McCormack will no longer serve as a portfolio manager of the fund. Effective January 4, 2022, Danielle Williams will join Timothy McCormack, Shaun Pedersen, and Edmond Griffin as a portfolio manager of the fund. 10/21
LVHD Legg Mason Low Volatility High Dividend Michael Ripper is no longer serving as a portfolio manager of the fund. Vaneet Chadha, Christopher Floyd, and Jose Maldonado join Michael LaBella and Russell Shtern as portfolio managers of the fund. 10/21
LCORX Leuthold Core Investment Jun Zhu is no longer listed as a portfolio manager of the fund. Scott Opsal joins Douglas Ramsey, Chun Wang, and Greg Swenson in managing the fund. 10/21
LIFAX Lord Abbett Inflation Focused Hyun Lee is no longer a portfolio manager of the fund. Leah Traub, Steven Rocco, Kewjin Yuoh, Andrew O’Brien, and Robert Lee continue to manage the fund. 10/21
MAPIX Matthews Asia Dividend No one, but… Joyce Li joins Yu Zhang, Robert Horrocks, and Sherwood Zhang as a portfolio manager of the fund. 10/21
NSFBX Natixis Sustainable Future 2015 – 2060 Serena Stone of Natixis Advisors will no longer serve as a portfolio manager of the funds. Daphne Du and Benjamin Kerelian of Natixis Advisors will join the portfolio management team of the funds. 10/21
NABAX Neuberger Berman Absolute Return Multi-Manager Cramer Rosenthal McGlynn, LLC will no longer act as a subadviser to the fund. Fred Ingham, Jeffrey Majit, and David Kupperman continue to manage for the fund. 10/21
FGIAX Nuveen Global Infrastructure No one, but… Noah Hauser joins Jay Rosenberg, Tryg Sarsland, and Jagdeep Ghuman in managing the fund. 10/21
NRIAX Nuveen Real Asset Income No one, but… Benjamin Kerl joins Jay Rosenberg, Brenda Langenfeld, Tryg Sarsland, and Jean Lin in managing the fund. 10/21
OAYLX Oakmark Select Thomas Murray has announced his retirement in the second quarter of 2022. William Nygren and Anthony Coniaris will continue as portfolio managers of the Fund. 10/21
PMEFX Penn Mutual AM 1847 Income Mark Saylor no longer serves as a portfolio manager of the fund. George Cipolloni, Scott Ellis, and Greg Zappin remain. 10/21
PTCRX Performance Trust Credit Jason Appleson is no longer listed as a portfolio manager of the fund. Anthony Harris, G. Michael Plaiss, and Lars Anderson will continue to serve as the fund’s portfolio managers. 10/21
LSEIX Persimmon Long/Short No one, but… Dakota Welath, LLC is now an advisor to the fund. 10/21
TPLGX T. Rowe Price Institutional Large-Cap Core Growth Larry Puglia will no longer serve as a portfolio manager of the fund. Paul Green is now the sole portfolio manager of the fund. 10/21
TQGEX T. Rowe Price QM Global Equity Sudhir Nanda is no longer serving as a portfolio manager of the fund. David Corris and Jordan Pryor continue to serve as portfolio managers of the fund. 10/21
TQSMX T. Rowe Price QM U.S. Small & Mid-Cap Core Equity Sudhir Nanda is no longer serving as a portfolio manager of the fund. David Corris joins Prashant Jeyaganesh, Vidya Kadiyam, and Navneesh Malhan as a portfolio manager of the fund. 10/21
TQMVX T. Rowe Price QM U.S. Value Equity  Effective January 1, 2022, Farris G. Shuggi will no longer serve as a portfolio manager of the fund. David Corris, Prashant Jeyaganesh, and Vidya Kadiyam will remain as portfolio managers of the fund. 10/21
USVT US Value Andrew Wellington is no longer listed as a portfolio manager of the fund. Daniel DeSerio is now the sole portfolio manager of the fund. 10/21
UCAGX USAA Cornerstone Aggressive No one, but… Lela Dunlap joins Lance Humphrey, Mannik Dhillon, Neal Graves, and James Jackson as a portfolio manager to the fund. 10/21
USCCX USAA Cornerstone Conservative No one, but… Lela Dunlap joins Lance Humphrey and Mannik Dhillon as a portfolio manager to the fund. 10/21
UCEQX USAA Cornerstone Equity No one, but… Lela Dunlap joins Lance Humphrey and Mannik Dhillon as a portfolio manager to the fund. 10/21
USBSX USAA Cornerstone Moderate No one, but… Lela Dunlap joins Lance Humphrey, Mannik Dhillon, Neal Graves, and James Jackson as a portfolio manager to the fund. 10/21
USCRX USAA Cornerstone Moderately Aggressive No one, but… Lela Dunlap joins Lance Humphrey, Mannik Dhillon, Neal Graves, and James Jackson as a portfolio manager to the fund. 10/21
UCMCX USAA Cornerstone Moderately Conservative No one, but… Lela Dunlap joins Lance Humphrey, Mannik Dhillon, Neal Graves, and James Jackson as a portfolio manager to the fund. 10/21
VEIPX Vanguard Equity Income Effective June 30, 2022, W. Michael Reckmeyer will retire and no longer serve as a portfolio manager of the fund. Matthew Hand joins W. Michael Reckmeyer and Sharon Hill as a portfolio manager of the fund. 10/21
VEXPX Vanguard Explorer Binbin Guo has retired and is no longer listed as a portfolio manager of the fund. Cesar Orosco remains the sole portfolio manager of the fund. 10/21
VQNPX Vanguard Growth and Income Binbin Guo has retired and is no longer listed as a portfolio manager of the fund. Cesar Orosco remains the sole portfolio manager of the fund. 10/21
VMNIX Vanguard Market Neutral Binbin Guo has retired and is no longer listed as a portfolio manager of the fund. Cesar Orosco remains the sole portfolio manager of the fund. 10/21
VSEQX Vanguard Strategic Equity Binbin Guo has retired and is no longer listed as a portfolio manager of the fund. Cesar Orosco remains the sole portfolio manager of the fund. 10/21
VSTCX Vanguard Strategic Small-Cap Equity Binbin Guo has retired and is no longer listed as a portfolio manager of the fund. Cesar Orosco remains the sole portfolio manager of the fund. 10/21
VWUSX Vanguard U.S. Growth Binbin Guo has retired and is no longer listed as a portfolio manager of the fund. Cesar Orosco remains the sole portfolio manager of the fund. 10/21
VWINX Vanguard Wellesley Income Effective June 30, 2022, W. Michael Reckmeyer will retire and no longer serve as a portfolio manager of the fund. Matthew Hand joins W. Michael Reckmeyer and Loren Moran as a portfolio manager of the fund. 10/21
ASHR Xtrackers Harvest CSI 300 China A-Shares Tom Chan no longer serves as a portfolio manager of the fund Hubert Shek and Kevin Sung continue to manage the fund. 10/21
ASHS Xtrackers Harvest CSI 500 China A-Shares Small Cap Tom Chan no longer serves as a portfolio manager of the fund Hubert Shek and Kevin Sung continue to manage the fund. 10/21


Briefly Noted

By David Snowball


The Ivy Fund liquidations announced in September 2021 and October 2021 have been temporarily suspended. No word on why or when the executions will proceed.

Briefly Noted . . .

The Cook & Bynum Fund modified their prospectus to flag a new risk factor, one that’s likely unprecedented in the industry: Risk of Current Focus on Breweries and Soft Drink Bottling and Distribution. The adviser allows that they hold “from time to time, a relatively high percentage of the assets … in the Breweries and Soft Drink Bottling and Distribution industries.” The fund owns eight stocks: Berkshire Hathaway, two issues from Liberty Latin America (a telecom), three companies that bottle and distribute Coca-Cola in Latin America, and two Latin breweries. So, yes, by most standards having 57% invested in Coke bottlers and Latin breweries is “a relatively high percentage.”

Fidelity has introduced “Loyalty Class 1” and “Loyalty Class 2 shares” for their Disruptive (Automation, Communications, Finance, Medicine, Technology and omnibus Disruptors) Funds.

More fund-to-ETF conversions. In addition to the four conversions flagged in “Funds in Registration,” Convergence Long/Short Equity Fund will soon be Convergence Long/Short Equity ETF. And two Motley Fool funds are about to become Motley Fool ETFs.  

Fund ETF
MFAM Global Opportunities Fund MFAM Global Opportunities ETF
MFAM Mid-Cap Growth Fund MFAM Mid-Cap Growth ETF

Something new under the sun. The Sweater Cashmere Fund. No, not Cashmere Sweater. It’s billed as “The Venture Fund for Everyone.” For just $500, you too can be a party to a venture capital fund. The adviser has already filed for 30 pages of online or social media ads. Here’s the theme: VC has been just another tool to allow the rich to get richer. Screw that! We’re coming to play, too!

Uh-huh. Two thoughts in passing. First, successful venture capital investing is really hard. Depending on how you count it, only one-third of VC investments pay off. So if this fund’s managers are good at what they do, they’re already really rich. So why, exactly, do they want your $500? Oh, right … get richer. Second, it’s an “Unlisted Closed-End Fund” with unpublished fees and a 545-day lock-up period.

The ads are cute and engaging, but that doesn’t absolve you from asking hard questions about why, exactly, this is the best use of your money.

The Simplify Health Care ETF (PINK) has chosen to donate its annual management fee to The Susan G. Komen Breast Cancer Foundation, Inc., a 501(c)(3) charitable foundation. Small fund, grand gesture.


Effective December 1, 2021, the T. Rowe Price Mid-Cap Growth Fund (and its clones, T. Rowe Price Mid-Cap Growth Portfolio and T. Rowe Price Institutional Mid-Cap Equity Growth Fund), which was closed to new investors on May 28, 2010, will reopen to new investors.

CLOSINGS (and related inconveniences)

Effective November 30, 2021, the WCM Focused International Growth Fund will be soft-closed.


Effective October 22, 2021, the Fund’s name is ASYMsharesTM ASYMmetric S&P® 500 ETF (f/k/a ASYMshares ASYMmetric 500 ETF).

Out, out damned Swedes! As of November 1, 2021, the Global X FTSE Nordic Region ETF became the Global X Norway ETF. How? First, Norway merged into Nordic Region. Then Nordic Region was promptly renamed Norway with the promise to keep at least 80% of the portfolio in The Kingdom of Norway. On behalf of Augustana’s Swedish founders, we offer the following.

Q: How do you say “genius” in Norway?
A: Tourist.

Q: Why did the Norwegian crawl on the floor through the supermarket?
A: Because they’re looking for the low prices.

Q: Why did the Norwegian bring a rolled-up piece of sandpaper to the desert?
A: Thought it was a map.

Effective October 22, 2021, the name of the LifeGoal Homeowner Investment ETF has been changed to the LifeGoal Home Down Payment Investment ETF.

In January 2022, Marketfield Fund becomes the Cromwell Marketfield Long/Short Fund. Expenses remain somewhere between “high” (2.36% for “I” shares) and “extortionate” (3.36% for “C” shares).

Effective immediately, Mesirow Financial is simplifying the names of its funds:

Current Name New Name
Mesirow Financial Small Cap Value Sustainability Fund Mesirow Small Company Sustainability Fund
Mesirow Financial High Yield Fund Mesirow High Yield Fund
Mesirow Financial Enhanced Core Plus Fund Mesirow Enhanced Core Plus Fund


The advisor to the Aasgard Small & Mid-Cap Fund has decided to exit the fund business and offer this strategy solely through separate accounts, which will reduce expenses for investors continuing in the strategy. The three-star fund will be liquidated on November 12, 2021.

Aberdeen Total Return Bond Fund disappeared into Aberdeen Global Absolute Return Strategies Fund on October 8, 2021.

Brandywineglobal International Opportunities Bond Fund is expected to cease operations on or about December 3, 2021.

Cushing SMID Growth Focused Fund was liquidated on November 1, 2021. Promising 2020, disastrous 2021, $3 million left, and so …

Defiant no more. The Defiance Nasdaq Junior Biotechnology ETF will be closed and liquidated on December 3, 2021.

Protective no more. The Emles Protective Allocation ETF goes off-duty on or about November 8, 2021.

January 2022 will see the reorganization of the Goldman Sachs High Quality Floating Rate Fund with and into the Goldman Sachs Enhanced Income Fund.

Effective on October 15, 2022, Highland Healthcare Opportunities Fund loses all interest in healthcare and becomes the NexPoint Event Driven Fund. It will use “various arbitrage and short-selling investment strategies” to capture gains from corporate mergers, asset sales, restructurings, and so on. Eric Fritz has been added as a portfolio manager of the Fund.

Disintegration commences in … Neuberger Berman Integrated Large Cap Fund will cease its investment operations, liquidate its assets and make a liquidating distribution on or about December 16, 2021. The fund trailed 94% of its peers over the decade and brought in a new management team in 2019; performance strengthened, but assets were nowhere to be found.

Nuveen Large Cap Core Fund merges into Nuveen Santa Barbara Dividend Growth Fund, an MFO Great Owl, on November 12, 2021. Santa Barbara lost its long-time manager, James Boothe, in 2019. He launched Semper Brentview Dividend Growth Equity in June 2021. His successors have continued to beat their Lipper peer-group by about 1.8% annually.

RiverFront Asset Allocation Aggressive and RiverFront Asset Allocation Moderate, are each merging into RiverFront Asset Allocation Growth & Income on or about January 24, 2022.

The $6 million Scharf Alpha Opportunity Fund will reorganize and merge into the $50 million Scharf Multi-Asset Opportunity Fund on or about the close of business on December 10, 2021.

Shelton BDC Income Fund has closed and will be liquidated on or about November 30, 2021.

Symons Value Institutional Fund has closed to new investors and will be liquidated on November 29, 2021.

The Trend Aggregation Growth ETF was liquidated on October 28, 2021.

TorrayResolute Small/Mid Cap Growth Fund will be liquidated on or around November 23, 2021.

TS&W Equity Portfolio will, following shareholder approval, merge into TSW Large Cap Value Fund. Oddly, I can’t find any evidence of the existence of that latter fund.TSW was purchased by JOHCM’s parent firm in May 2021. No idea why the names don’t align.

The odd maneuverings with the Virtus KAR Internal Small Cap Fund came to a conclusion on October 22, 2021, when Virtus KAR International Small-Mid Cap Fund II (formerly Virtus KAR International Small-Mid Cap Fund) was merged with and into Virtus KAR International Small-Mid Cap Fund.