Monthly Archives: October 2022

October 1, 2022

By David Snowball

Dear friends,

Our hearts go out to people around the world whose lives are being wracked by forces beyond their control, whether that’s the madness of dictators or the ravages spawned by the world’s increasingly unstable climate. Those folks represent needs far beyond the annoyance caused by our collective loss of $9 trillion in the stock market’s ongoing revaluation.

Those of us only indirectly affected by such tragedies have three imperatives:

  1. Help those in need now. No, you can’t fix everything but you can do some good. Charity Navigator offers credible guidance whether you’re concerned about the brave souls in Ukraine or the stunned survivors of Hurricane Ian.
  2. Turn our energy, resolve, and creativity to preventing their reoccurrence.
  3. Celebrate the daily beauty and joy of life. Really. Notice the good, not just the bad. That will leave you both more resilient and more able to manage adversity when it presents itself.

Augustana College pond, September 2022

Much of this issue will focus on the dual challenges of holding things together now and actively preparing to gain in the better times (inevitably) to come.

Survive now, thrive later

The question we most often hear from friends is, “this market is crazy, and the stress is killing me. What on earth should I be doing? Run away? Charge forward? Pretend none of this ever happened?”

There is very little reason to anticipate healthy returns from stocks or bonds in the near term. The Federal Reserve is on a mission (to crush inflation), and they’re very aware of financial history (the Fed’s premature tightening in 1936 and 1937 led to a catastrophic crash, and their repeated giveaways in the decade following the 2007-08 global financial crisis triggered the behaviors that triggered the 2021-202? global inflation crisis). Chair Powell has repeatedly invoked the same warning: “The historical record cautions strongly against prematurely loosening policy.”

The Feds are going to inflict pain on us in order to change our expectations and behaviors. The longer it takes for those things to change – the Fed promises that policy is driven by “the data,” and the data in question are measures of softening employment, slowing growth, tighter job markets, weaker housing demand, and slowing prices.

Kai Ryssdal: I need you to roll with me on this last one. We’ve got a little game we play on the show. It’s called “What is Jay Powell thinking in five words or less?”

Jay Powell: Five words or less. I’m gonna go with what I really am thinking is “get inflation back under control.” (Marketplace, 5/12/2022)

Doing that will, in all likelihood, mean triggering a more-or-less severe recession in the US in the next year or so, which spreads to other economies. We’re not there yet, certainly, but investor Stanley Druckenmiller would be “stunned” if we didn’t have “a hard landing” by the end of next year. (The happy fiction of a “soft landing” is not supported by the history of Fed interventions, which contain only one instance of a tightening cycle which did not tank the economy.) Ned Davis Research puts the odds at 98%, Bloomberg’s survey puts the Eurozone at an 80% risk Vanguard’s economists are around 65% over the next two years. Mohammed el-Erian merely describes the risk as “uncomfortably high.”

Which might, or might not, be the occasion for a further 20-40% decline in the stock market. No one knows.

Uncertainty, dislocation, crashes, and stagnation are entirely normal. In the current phrase, “they’re featured, not flaws.”

So what’s to be done? Our answer is simple.

Step One: Survive now.

There are a bunch of small, sensible moves that can help you make some modest gains without corresponding risks. In this issue, Devesh Shah points you to the risk-free I Bonds that are now yielding over 9% and to the virtues of tax-loss harvesting and portfolio rebalancing as giving you some relief and some breathing room. Series I Bonds: A Ray of Hope

In mid-September, we tweeted out a warning and an investment recommendation:

Just two short-term funds have generated positive Sharpe ratios YTD: RiverPark Short-Term High Yield and its sibling CrossingBridge Ultra-Short. Both are managed by Cohanzick Management. CrossingBridge has a $50,000 minimum, RiverPark is $1000 for retail shares and $50,000 for institutional.

Cohanzick avers, “Return of Capital Is more important than return on capital,” which is reflected in the top tier performance of all of their funds (through 9/30) in a tumultuous market:

  YTD return Performance within its peer group
RiverPark Short-Term High Yield 1.19% Top 1%
CrossingBridge Ultra-Short Duration 0.68% Top 7%
CrossingBridge Pre-Merger SPAC ETF 0.48% Top 1%
CrossingBridge Responsible Credit -0.80% Top 1%
CrossingBridge Low Dur Hi Yld -0.94% Top 1%
RiverPark Strategic Income -3.60% Top 3%

So one recommendation for the immediate future is to generate a strategic cash cushion.

The other might feel odd. Do not be afraid. It’s advice we offer not because we think things are fine. It’s advice we offer precisely because things are profoundly unbalanced.

Step Two: Thrive later.

If there is a recession, small-cap stocks and emerging markets stocks, and emerging markets value stocks will get creamed. This is to say, assets that are among the cheapest anywhere will get noticeably cheaper.

And then, they’ll rocket. That’s the pattern of post-recession performance. Wise investors will begin planning now to profit then. Since we’re spectacularly bad at timing markets, don’t. Long-term investors should:

  1. Double-check their long-term strategic plan. The two key questions that your plan must answer are, “in order to have a good chance of reaching the goals I’ve set, (1) how much must I invest monthly (2) in which asset classes?” If the plan makes sense, even if 2022 sucks, do not undercut yourself by getting all twitchy.
  2. To the extent that your plan allows you to invest in high-risk assets, start identifying compelling strategies now and establishing small positions in the funds (which includes ETFs) which you’ll be gloating over in 2025 and beyond. That likely involves increased emerging markets, international, small-cap, and value exposure.

The flight of investors who misunderstood their own risk tolerance has created opportunities for the rest of us. After the decision in September to reopen their six closed funds, all 20 of the Wasatch funds are now open to new investors. Likewise, William Blair EM Small Cap is accepting new money for the first time in years.

Our colleague Lynn Bolin explores the possibility that our robot overlords, maestros of black box funds, might likewise offer advantages in the next market. Shining the Light into Black Box Funds

Celebrate Seafarer

Devesh Shah spent dozens of hours in August speaking with emerging markets managers, an effort that culminated in his exceptional September essay “Emerging Markets (EM) Investing in the Next Decade: The Game.” With its companion piece on “The Players,” it was the most-read article in the issue.

Devesh shared two important conclusions:

  1. EM Value Stocks are probably the cheapest of the stocks in the world, especially considering the unrecognizing strength and success of many EM managers.
  2. Cheap securities with good businesses, high ROE, and high FCF provide a risk floor today and a chance at strong returns tomorrow. Even if it’s not immediate, even if the markets are scary, the opportunity is knocking. Let’s not twiddle thumbs and do nothing.

All of the August interviews – with leaders at Rondure, Causeway, William Blair, Pzena, and others – were catalyzed by a series of conversations with Andrew Foster, founder of Seafarer Capital and one of the most thoughtful guys in the industry.

In a hard environment, those managers posted some of the industry’s best returns. Here are the top ten diversified EM funds based on total returns through 9/30/2022.

  1. Seafarer Overseas Value, a five-star (Morningstar) Great Owl (MFO) fund
  2. Ashmore Emerging Markets Frontier
  3. Barrow Hanley Emerging Markets
  4. Pzena Emerging Markets Value
  5. Silk Invest New Horizons Frontier
  6. BlackRock Defensive Advantage
  7. Calvert Emerging Markets
  8. Vaughan Nelson Emerging Markets Opportunity
  9. Rondure New World, a five-star fund (Morningstar)
  10. Seafarer Overseas Growth & Income, a five-star fund (Morningstar)

If we look at the diversified EM funds (including ETFs) with the highest YTD Sharpe ratios, Ashmore S&P Emerging Markets Low Volatility is #1, Seafarer Overseas Value is #2, Pzena EM Value is #7, and Seafarer Overseas Growth & Income is 10.

That consistent success, in both absolute and risk-adjusted terms, led CityWire to profile Seafarer Capital as their “boutique of the month” (registration required).

Dodge ARK

We warned folks about the inordinate risk of entrusting money to Cathie Wood even as investors chucked tens of billions in her direction. “This is certainly not to criticize the folks who chucked $37 billion at Ms. Wood and her bevy of high vol ETFs in 2020. Really, 1,100% asset growth in 12 months (including $700 million in the Space Exploration ETF) for a family of funds whose success is almost entirely dependent on the continued flawlessness of a single person … what could possibly go wrong?” (5/2021)

Okay, a lot.

  2020 2021 2022 3-year APR
ARK Fintech Innovation ETF 108 -18 -62 -10%
ARK Israel Innovative Technology ETF 34 -4 -40 -5
ARK Innovation 153% -23 -60 -3
ARK Next Generation Internet 158 -17 -62 -1
ARK Genomic Revolution 181 -34 -46 5%
ARK Autonomous Technology & Robotics ETF 107 3 -41 13.4
ARK Space Exploration & Innovation ETF n/a n/a -34 n/a

Morningstar’s analysis is purely caustic (“the strategy has been one of the worst-performing U.S.-sold funds …Manager Cathie Wood has since doubled down on her perilous approach … her go-with-your-gut approach [compounded by the fact that there are no discernible risk management controls] has hurt many investors of late. It could hurt more in the future”(Robby Greengold, 9/9/2022, paid membership required).

We were right, but we were rarely funny.

Ms. Woods’ most recent move has been the launch of a (ridiculously expensive) fund that allows you to blindly trust in her ability to pick non-public stocks, with the additional proviso that you can’t have your money back.

Alex Rosenberg and Alex Steger rose to the challenge of eviscerating the fund while simultaneously being funny and keeping their legal department happy-ish. Their goal: saying only nice things about ARK Venture. (9/30/2022).

“ARK Venture Fund,” they observe, “is a very pleasant name,” so only a cynic would suggest “that she’s taking her sizable fan base and ushering them into the retail investing structure that pays her the highest possible fees for the longest possible period of time.”

Things we’ve seen before and things we haven’t

Wells Fargo is in trouble again. Allegedly “Wells Fargo hiring managers interview minorities even after a position has been filled in order to suggest that it is working towards a more diverse workforce, as well as to boost its own diversity statistics” (, 9/26/22). After hitting their stride with a scandal a month, seemingly for years, I sort of missed the reassuring rhythm of perfidy.

And then, something entirely new! A team of criminals posing as legitimate fund advisors invented an entirely non-existent mutual fund, Archer Growth Fund. According to the SEC, the crooks created a website and then claimed

that the Archer Fund had an annual rate of return of 47%, that it had beaten the Russell Growth Index for five straight years, and that it was “one of the only High-Watermark Funds available on the market.” The SEC also alleges these claims were false. Indeed, the SEC alleges there was no Archer Growth Fund.

Please note, too, that “Archer” is a common name, so this does not refer to the Archer family of funds nor to a Canadian fund operating under that name.

Thanks, as ever …

Many, many thanks to those who help us keep the lights on. Wilson, S&F Advisors, William, Greg, Doug, William, David, and Brian – we appreciate your steady support. James, Leah, and Radley – it was so good to hear from you. 

Wishing you great joy,

david's signature

Do not be afraid: Advice to investors and other friends

By David Snowball

An impending civil war in the US. A planet on fire. The worst drought in 1500 years. The prospect of Putin using nuclear wars in Europe. A market decline that might be accelerating rather than slowing. Inflation at 40-year highs. Crazy people storming the Capitol. Voter restrictions. Politicians increasingly willing to assert control over women’s lives. We are afraid.

Fear is many things, depending on the circumstances. It can be appropriate, rational, essential, energizing, and productive. Fear, as an evolutionary response, works really well to help us address threats that are (1) immediate and (2) physical. Snarling dog running in your direction? Be afraid! Be very afraid … and vault effortlessly over that 10’ fence.

But fear can also be the opposite: inappropriate, irrational, unneeded, exhausting, paralyzing. Fear, as a social response, works really poorly to help us address threats that are (1) ongoing and (2) psychological.

Here are three things you need to know.

1. Your fears are invented for the profit of others

You’ve acquired your fears as the result of a three-step process. (1) Things happened. (2) Someone decided that they could profit if you experienced the thing as a terrifying threat. (3) Those terrifying visions were pushed to you, and you couldn’t look away.

Things are forever happening, the question is how we frame them. That is, what’s the story you learn to tell yourself about the event? Are tens of thousands of people – mostly parents hauling small children – attempting to cross the southern US border a cause for hysteria (“an invasion” or “a crisis at the border”), a cause of compassion (what would it take for you to decide to walk two toddlers for a hundred miles?) or a call to reassess US international and economic policy in the Americas? That’s one event that can be framed three different ways, and those different frames can arouse anxiety, paralyze thought, encourage rage … or the opposite.

Sadly, fear-mongering is highly profitable. Tens of thousands of websites or dozens of “news” outlets need you to show up, preferably dozens of times a day. The best way to do that is to energize your obsessive fears. Eric Deggans, media critic for National Public Relations:

Instead of informing audiences, many of the fastest-growing news programs and media platforms are playing on old prejudices and deep rooted fears to compete for increasingly narrow audiences. Using the same tactics once employed to mobilize political parties, they send fans coded messages and demonize opposing groups as their audience share soars and website traffic ticks up. (Race Baiter: How the Media Wields Dangerous Words to Divide a Nation, 2012)

Jeffrey McCall, professor of communication at DePauw University:

Americans are fearful in large part because too many establishment media provide a constant drumbeat of frightful shadows that send news consumers looking for places to hide their heads. Stories of woe permeate today’s media messaging, seldom with nuanced reporting that puts threats in proper context.

The news agenda on a micro level covers a variety of dreadful events and stories, but the macro message boils down to one headline: “Be Afraid.”

Propagandists work under the assumption that people eventually believe what they hear most often. The constant hyping of a culture of fear has rhetorically scared otherwise reasonable Americans into irrational emotions and behaviors.  (Media spread fear, Americans listen, 5/30/21)

Fear is an adaptive evolutionary response designed to keep us safe. The problem is that it’s possible for those seeking to lead us to manufacture fear; that is, to create the crises in which propaganda flourishes. Arash Javanbakht, Assistant Professor of Psychiatry, Wayne State University argues that

Fear is a very strong tool that can blur humans’ logic and change their behavior.

Politicians and the media very often use fear to circumvent our logic. I always say the U.S. media are disaster pornographers – they work too much on triggering their audiences’ emotions. They are kind of political reality shows, surprising to many from outside the U.S.

When one person kills a few others in a city of millions, which is of course a tragedy, major networks’ coverage could lead one to perceive the whole city is under siege and unsafe. If one undocumented illegal immigrant murders a U.S. citizen, some politicians use fear with the hope that few will ask: “This is terrible, but how many people were murdered in this country by U.S. citizens just today?” Or: “I know several murders happen every week in this town, but why am I so scared now that this one is being showcased by the media?”

We do not ask these questions, because fear bypasses logic. (“The politics of fear: How it manipulates us to tribalism,”7/17/19)

2. Chronic fear is a disaster for your health

When we are afraid, our brains take dramatic actions to ensure our survival. Much of our decision-making is usurped by the amygdala, two almond-shaped organs located deep in our brains. The amygdala is responsible for fast, emotion-driven reactions designed to keep us alive. It triggers massive releases of adrenaline, cortisol, and stored sugars; our breathing speeds up, and our blood begins carrying more oxygen; our muscles tense, body temperature spikes, and blood flow is redirected away from non-essential organs (your stomach and salivary glands, as examples, which leads to the “rock in my stomach” feeling and a dry mouth).

The “fight” part of the fight, flight, or freeze reaction means we’re not only frightened but we’re also mad. Jacob Hess, in a singularly well-written article, warns that “media glorifies outrage in headlines like ‘If you’re not angry, you’re not paying attention.’ But what we should be reporting on and talking about more is what all this chronic anger is doing to all of us” (What chronic anger is doing to us, 9/16/2022).

The problem is that this fight, flight, or freeze reaction is only supposed to be triggered rarely, briefly, and in the face of imminent threats to survival. According to Harvard Health (2020), chronic activation of this survival mechanism is commonplace and damaging to our physical and mental wellness.

When there is a repeated and prolonged sense of danger, we place ourselves at risk of developing chronic anxiety, depression, immune system failures, and wretched sleep.

Also, weight gain. (Nuts.)

In short, your favorite politicians, favorite talking heads – no, I’m not going to name them because that would only feed your anger – and favorite feeds … are killing you.

3. Chronic fear stops you from solving the problem you fear.

Here’s the good news: the world is always teetering on the brink of destruction!

No one captured that insight quite like Tommie Lee Jones in Men in Black (1997)

We nearly had a nuclear war about 39 years ago because of a computer glitch, didya know? At a moment of intense international tension in the wake of the Soviet destruction of Korean Air Lines flight 007, their missile defense radars reported an incoming US first strike. The rules were clear: the watch officer had to immediately sound an alarm and escalate word of the attack to senior leadership. (He didn’t. Thank you, friend Petrov.)

The American democracy has nearly collapsed into anarchy about once a generation since its founding; it went far enough that, against a background of armed militias and political hysteria, in the summer of 1933, there was actually a coup attempt organized by America’s wealthiest investors against President Roosevelt. One of the most influential books I’ve ever read was a textbook from my undergrad political science sciences, The Irony of Democracy (17th ed., 2015).

If the survival of the US system depended on an active, informed and enlightened citizenry, then democracy in the US would have disappeared long ago, for the masses normally are apathetic and ill-informed about politics and public policy, and they exhibit a surprisingly weak commitment to … individual dignity, equality of opportunity, the right to dissent, freedom of speech and press, religious toleration and due process of law.

Democratic values thrive best when the masses are absorbed in the problems of everyday life and involved in … work, family, neighborhood, trade union, hobby, religion, group recreation, and other activity.

To be clear: that’s not their description of 21st-century America. That’s the reading of nearly 250 years of American history. “The irony of democracy” is that it survives only when most people leave it alone.

And yet, despite all of that, we’re still here. More importantly: we’re here, and things are, generation by generation, getting better. Politicians hype crime in the cities without acknowledging that violent crime has fallen to its lowest levels in a century. Childhood poverty has dropped dramatically in 25 years. Poverty and hunger have fallen on every continent. There’s an increasingly credible case for climate optimism, even in the face of still-mounting threats. More people in more countries live under at least nominal democracies than ever, and more women in more countries are receiving the benefits of more education than ever.

The poster child for the possibility of meaningful progress is the storied ozone hole.

Did you know that the earth is healing itself, and we’re helping? In September 2022, NASA scientists reported a major milestone: the ozone-destroying gases in our upper atmosphere have declined by more than half since the problem was first discovered. It is now on track to be completely healed over most of the planet by the 2030s and over the poles by the 2050s.

The ozone shield protects all life on the planet – you, me, Elon Musk – from lethal radiation. If there were no ozone in the atmosphere, according to NASA, “the Sun’s intense UV rays would sterilize the Earth’s surface.” The hole we punched in it through the release of a class of chemicals called CFCs, mostly used as propellants in spray cans and in refrigerators and air conditioners, was large, growing, and linked to both cancer and blindness.

And then a strange thing happened: people decided to recognize and fix the problem. Politicians talked with scientists, diplomats talked with one another, countries wrote laws and signed treaties, reporters explained to people what was happening… and we fixed it. (Mostly, so far.)

We noted, three looooooong years ago, that optimists, who assume things will work out, tend to see more paths forward, more options worth considering, than pessimists (often dubbing themselves “realists”) who know that it’s eternally time to duck-and-cover.

The word “optimism” entered the English language (1759, in French 1737) several generations before pessimism (1794) did. 

The psychological research on the effects of optimism is stunning. The champion of such research is Dr. Martin E.P. Seligman, a Professor of Psychology at the University of Pennsylvania and Director of their Positive Psychology Center. He focuses on notions like “learned helplessness” and has racked up rather more than 325 journal articles and books. His most widely-cited work, Learned Optimism: How to Change Your Mind and Your Life (Vintage Books, 2006), has been cited by other scholars on 11,540 occasions. In it, he argues:

The defining characteristic of pessimists is that they tend to believe bad events will last a long time, will undermine everything they do, and are their own fault. The optimists, who are confronted with the same hard knocks of this world, think about misfortune in the opposite way. They tend to believe that defeat is just a temporary setback, that its causes are confined to this one case. Optimists believe that defeat is not their own fault: Circumstances, bad luck, or other people brought it about. Such people are unfazed by defeat. Confronted by a bad situation, they perceive it as a challenge and try harder.

These two habits of thinking about causes have consequences. Literally hundreds of studies show that pessimists give up more easily and get depressed more often. These experiments also show that optimists do much better in school and college, at work and on the playing field. They regularly exceed the predictions of aptitude tests. When optimists run for office, they are more apt to be elected than pessimists are. Their health is unusually good. They age well, much freer than most of us from the usual physical ills of middle age. Evidence suggests they may even live longer.

We are fixing a freakin’ 10 million square mile hole in the ozone layer! What else could we do if we shifted from making enemies to finding partners?

For readers worried about the climate (which should be every single one of you):

We could, in relatively short order, reverse the melting of the polar ice caps. As in, stop the melting then reverse it within a matter of years for $11 billion a year, the same amount we spend on litter clean-up in the US. The plan would be to inject aerosols high above the poles, which would increase the ice crystals in the atmosphere and would reflect more heat back into space. It would be a Band-Aid, surely, but one which might buy us time to make more systematic change.

Individually, get involved locally. Don’t try to fix the world. Try to get your city government to change the building code to encourage green roofs, support pocket parks, and plant city trees. Heck, for $1, you can get a tree planted yourself.

For readers worried about political dysfunction:

Get involved locally. I know you don’t want to encourage strangers to vote, plant yard signs, make calls, volunteer hours, and suffer similar indignities. And yet, that’s where change happens. In 2020, the race for a seat in the US House of Representatives for my district in eastern Iowa was decided by seven (7!) votes.

About half of the local elections here are uncontested: two candidates for the two open seats on a county board, as an example. So here’s a scary thought: become one of those two. You’re sensible, insightful, and temperate. You could make a difference in your city … which could make a difference in your state … which might, just maybe, change America.

For readers worried about the direction of the Supreme Court:

Encourage moderation in Congress. The Court mostly steps into vacuums, creating rules where Congress hasn’t. And Congress hasn’t acted because its members are increasingly rewarded for immoderation and intransigence. Perhaps talking with your member of Congress when they hold their district office hours? Perhaps voting for the most sensible person, rather than the one with the right color affiliation. Perhaps voting??? The record level of participation was set in the 2018 mid-term elections: 50.1%. The typical level would be 40%.

So, vote, don’t just plan to vote. Take a friend. Do good for yourself.

For readers worried about another lost decade in the stock market:

It is entirely possible that US large cap stocks will hover, in 2032, right about where they are now. We can identify at least four lost decades since 1870 … at least measured by that standard. But there have been no decades since the 1950s where at least one major asset class didn’t post double-digit returns.

That excludes asset classes such as EM equities which weren’t investable over the entire period.

If your strategy is to stick blindly to the Church of What Worked Recently, you’re likely in trouble. If you recognize that undervalued assets produce oversized returns in the long run and you’re prudent in the short run, you’ll be fine.

The next decade will be the worst of times and the best of times. You get to choose which by deciding how you think about (or frame) events, where you look, and how effectively you act.

In reality, it doesn’t get any better than that.

Rebalancing, Portfolio Restructuring, Tax Loss Harvesting

By Devesh Shah

Down years in the financial markets are a heavy burden on asset holders. (We presume you’re noticed.) Holding assets through down years is the price we pay for earning long-term risk premia embedded in assets. Years like this are particularly challenging because the current downswing feels so very abnormal: it’s a correction in the financial markets (normal but painful) in which both investment grade bonds and speculative tech stocks are falling sharply and simultaneously (utterly abnormal and still painful), and the trajectory of the decline is warped by war in Europe, the threat of a “twin-demic,” and central banks simultaneously –  but inconsistently – withdrawing liquidity from the markets.

On the whole, it’s hard to imagine compelling investment opportunities in the short term. That said, for 2022, there are two bright sides to the poor market returns:

  1. Rebalancing & Portfolio Restructuring
  2. Tax Loss Harvesting

Both are sensible strategies that can allow a prudent investor to eke out some gains even in uncertain times.

Rebalancing & Portfolio Restructuring

Rebalancing is helpful when one asset is up, and the other is down. You sell the winner to add to the losing asset. This year, Rebalancing does not work in a traditional sense. All assets have lost money. However, a pause and look actually reveals that a very interesting landscape has now opened up.

I was recently able to buy some New York triple-tax exempt AA municipal bonds, with a 10-year to call at a yield of 4.15% to worst. This purchase allows me to lock in a certain level of interest income which is fully free of taxes from all jurisdictions. Investing in such bonds requires the help of a seasoned fixed-income professional. This bond purchase may not work for everyone. If one is in a low tax bracket or lives in a low/zero tax state, such a purchase might not make sense.

For the first time since 2008, 10-year bonds – US Government bonds and tax-exempt municipal bonds – are available at interest rates close to 4% and higher. Savers finally have a solid option. If that means restructuring the overall portfolio and taking off some risky positions to earn tax-free income, one ought to give it serious thought. Good sleep matters.

Tax Loss Harvesting

When the stock market is in the doldrums, people are frightened to do anything. That this behavior pattern is not conducive to future wealth creation is well known. How can we change it? We need the motivation to shake off our inertia.

Tax Loss Harvesting (TLH) is the reward provided by the IRS to break the logjam of being stubborn with one’s investments. Investors with a taxable investment portfolio would benefit well by understanding how TLH works.

A brokerage statement provides the cost basis, line item by line item, of each investment holding. Furthermore, by digging deeper on the website, one can usually find the individual trades which contributed to the position.

Take, for example, an investor who bought 250 shares of SPY every year for the last three years on the last day of the year in a taxable account. That investor would be sitting at a total loss of $21,750 on the purchase of those 750 shares of SPY. A deeper look shows that the purchase from 12/31/21 is responsible for more than 100% of those losses.

What can this investor do? The following is educational, not tax advice, but instructive, nevertheless. One idea:

  1. Sell the 250 shares bought on 12/31/21 at $475 per share today and take a loss of $28,500. The broker must be instructed to sell these specific shares. Usually, one can choose the shares on the website or by letting the broker know.
  2. Use the proceeds of $90,250 to buy another US domestic stock ETF. For example, VTI (Vanguard Total Stock Market ETF) or IVV (iShares Core S&P 500 ETF).
  3. Although SPY, VTI, and IVV are all similar to each other, the IRS treats them as non-similar because of the subtle differences in their makeup.

With this action, the investor has maintained the exposure to US domestic stocks in a passive ETF format. However, the investor has now taken a Capital Loss of $28,500 in 2022.

What’s the use of this Capital Loss?

Capital Losses can offset Capital Gains.

Short-term capital losses offset short-term gains, and long-term capital losses offset long-term gains. Net short-term losses can also offset net long-term gains and vice versa.

$3,000 of Net Capital loss can be offset against Ordinary income in 2022 if married filing jointly.

Finally, residual net capital losses in excess of $3,000 can be carried over to future years. When, in a future year, any asset is sold for a Capital gain, this residual Capital loss built up in 2022 can be used to offset those gains. Thus, by acting today and building up a Capital Loss, investors can shield some future Capital Gains from taxes. Tax Loss Harvesting works at the Federal level of taxation.

When does Tax Loss Harvesting not work?

Three common reasons are:

  1. Investments in Deferred Tax accounts do not benefit from this exercise.
  2. When an investor holds stock in a specific company, say, Microsoft, they may not want to sell it for a loss and replace Microsoft with Meta. There is no exact Microsoft replacement like there is for Index ETFs.
  3. Some states do not allow for a carry forward of Capital Losses, so one needs to consult a tax accountant.

Bottom line: Tax Loss Harvesting is thus a way to build a “hidden asset” while maintaining market exposure. You cannot get paid for it or sell it to someone else, but you can use it to shield your future Capital Gains taxes. One can also use this opportunity to get rid of bad investments, to restructure the portfolio wholesale, and to set up a portfolio for future success.

Shining the Light into Black Box Funds

By Charles Lynn Bolin


A reader on the Mutual Fund Observer Discussion Board asked “how do you feel about putting monies into funds that have a somewhat ‘black box’ dynamic to them…yes, they explain their positions but sometimes I wonder, how safe of an investment are some of these funds?”

For those not familiar with black box investing, Investopedia explains: “a black box is a device, system, or object which produces useful information without revealing any information about its internal workings. The explanations for its conclusions remain opaque or ‘black.’ Financial analysts, hedge fund managers, and investors may use software that is based on a black-box model in order to transform data into a useful investment strategy.”

Useful but not magical

By nature, then, these tend to be computer-driven quant funds that might move between asset classes, or between long and short positions within asset classes, based on triggers in the model but unknown to mere mortals. The first well-known Black Box Models was the Black-Scholes-Merton Model, it was developed by Fischer Black, Myron Scholes, and Robert C. Merton in the late 1960s. Good news: the trio shared a Nobel Prize in 1997 for the work that underlies the model. Fans will recognize the BSM model for European options pricing:

Bad news: The early application of this model incurred financial losses due to a lack of risk management. These models can make money or reduce risk in certain environments, but may fail miserably in other environments. 

In his Weekly Commentary on Seeking Alpha, Doug Noland describes a current example of Black Box risk which occurred this past week. Some pension funds in the U.K. have employed a strategy using liability-driven investing that attempts to reduce volatility without lowering returns. However, as interest rates rose, these pension funds experienced losses and margin calls, and were forced to sell assets to raise cash.  Volatility was high during the week. The Bank of England stepped into to support the bond market.

I have invested in several “Black Box” funds which currently make up approximately 10% of my financial assets. The reason that I chose to place money in black boxes is because in this environment of high inflation and valuations, rising rates, and falling bond prices, some Black Box funds have demonstrated that they can reduce risk and have outperformed stocks and bonds. Diversification across funds and categories is essential to keeping risks low.

This article is divided into the following sections so readers can skip to the sections of interest:

Base Case for 2023

Black Box Fund Lipper Category Definitions

Black Box Fund Performance – 5 Years

Black Box Fund Current Performance – Top 30 Funds

Portfolio Visualizer Backtest

Alternative funds have become more popular recently, and are more available to individual investors. The five-year time period includes most alternative funds in the Lipper Database. The Current Performance is based on thirty of the best performing alternative funds that are available to individual investors.

Base Case for 2023

My base case is that the U.S. economy will enter a recession during 2023. Opinions about the severity of a possible recession vary. As an explanation, let’s start with the deep inversion of the yield curve as shown in Figure #1. Bond investors believe that a recession is likely in the next year or two. Banks make money in large part by borrowing short term funds at a lower rate and lending them out longer term at higher rates. Since the beginning of the year, rates have risen dramatically raising the cost of borrowing to consumers and businesses. Yun Li reported in a CNBC article, “The Fed Forecasts Hiking Rates As High As 4.6% Before Ending Inflation Fight” that the median forecast for the Fed Funds rate is 4.4% by the end of 2022 which will require two more 75-basis-point rate hikes.

Figure #1: Yield Curve

Source: Created by the Author Using the St. Louis Federal Reserve FRED Database

Lance Roberts of Real Investment Advice had an article published on Seeking Alpha titled “Debt and Why the Fed Is Trapped” where he points out that “massive” debt levels pose a significant risk and challenge to the Federal Reserve. He quotes Federal Reserve Chairman Jerome Powell below and highlights the importance on future growth:

It is very important that inflation expectations remain anchored. What we hope to achieve is a period of growth below trend. (Lance Roberts, “Debt And Why The Fed Is Trapped”, Seeking Alpha, September 23, 2022)

Growth below trend may imply a “soft” landing, but also implies below trend stock returns. A timely article by Charles Rotblut at the American Association of Individual Investors entitled, “It’s Been Difficult for the Fed to Pull Off Economic Soft Landings”, reminds us of how difficult it is to manage a soft landing after raising rates:

Most prior rate-hike cycles have been followed by recessions, so-called hard landings…  Only one of the 11 previous rate-tightening cycles has resulted in what [former Federal Reserve vice chairman Alan] Blinder described as a “perfect soft landing.” (Charles Rotblut, “It’s Been Difficult for the Fed to Pull Off Economic Soft Landings”, American Association of Individual Investors, September 2022)

Liz Ann Sonders and Kevin Gordon at Charles Schwab wrote “Earnings: Trampled Under Foot?” where they express concerns about earnings growth:

We believe the weakness in expected earnings growth is early in its trip to an ultimate negative (year-over-year decline) destination. Last week’s FedEx news of an expected earnings implosion and the company’s removal of all forward-looking guidance is a likely canary. (Liz Ann Sonders and Kevin Gordon, “Earnings: Trampled Under Foot?”, Charles Schwab, September 19, 2022)

Are we headed for a recession next year? Azhar Igbar and Nicole Cervi with Wells Fargo answer that question in “Gonna Change My Way of Thinking: Is Recession Coming?”. They believe that a recession is likely to start in the first quarter of next year:

Using 50% as a threshold, our preferred Probit approach has never produced a false signal and has predicted all recessions since 1980. The 50% line was breached in Q2-2022, jumping to a 57% probability from 28% the prior quarter. Through August, the Q3 probability is 48%…

Given the historical accuracy of this Probit approach, a recession in the next year is more likely than not, in our view.

Our forecast calls for a recession starting in Q1-2023 with three consecutive quarters of negative real GDP growth and output growth turning positive in Q4-2023. (Azhar Igbar and Nicole Cervi, “Gonna Change My Way of Thinking: Is Recession Coming?”, Wells Fargo, September 23, 2022)

The S&P 500 fell 9.9% for the past month at the time that I wrote this article. During this time, the Alternative Managed Futures funds covered in this article averaged a positive return of 4.9%. Multi-Strategy, Event Driven, and Global Macro Trading funds lost about one percent, or one-tenth of the loss of the S&P 500. Of the funds that I track, Intermediate Government Bonds lost 3.8%, Utilities lost 3.5%, Health funds lost 5.0%, and Consumer Defensive funds lost 9.0%.

How does one prepare for a recession when interest rates are rising and bond prices falling? Here is the approach that I have taken over the past year and as I approached retirement:

  • Consulted with a financial advisor.
  • Set up pensions to cover living expenses.
  • Reduced expenses.
  • Maintained a Safety Bucket of several years of expenses in ultra-safe funds.
  • Set up Buckets based on tax characteristics and timing of withdrawals.
  • Reduced allocations to stocks to just under 40%.
  • Built ladders of short-term treasury bonds and certificates of deposits.
  • Allocated approximately 10% to alternative funds in Conservative, Tax-Advantaged Buckets.
  • Added modest amounts of Utility, Infrastructure, Health Care, and Consumer staple funds.

Black Box Fund Lipper Category Definitions

We’re going to look at funds that fall into six distinct Lipper categories. They are Event-Driven, Global Macro, Long/Short Equity, Multi-Strategy, Managed Futures, and Mixed Assets / Flexible. Folks interested in a bit more precision about what characteristics each box represents should check the Lipper Global Classifications Category Definitions (2019) document. When you click on that link, you’ll be prompted to download a .pdf file. These categories are mostly on pages 25 – 27.

For Flexible Portfolio funds, I selected funds with “Multi-Asset” in the name.

Black Box Fund Performance – 5 Years

Over the past five years, there has been an increase in the number of alternative funds and assets under management. One might infer from Figure #2, that over the past five-years, Alternative Managed Futures, Long / Short Equity, and Multi-Strategy Funds have been riskier than the S&P 500.

Figure #2: Return vs Risk (Ulcer Index) – Five Years

Source: Created by the Author Using the MFO Premium fund screener

Table #1 shows that by several measures, Alternative Even Driven, Equity Market Neutral, Multi-Strategy, and Global Macro along with Conservative Mixed-Asset have been the least risky in terms of drawdown. Blue shading indicates lower risk and higher returns and red shading indicates higher risk and lower returns. The best funds to own in a bear market continue to be Conservative Mixed Asset Funds, and Alternative Event Driven, Multi-Strategy, and Market Neutral funds.

Table #1: Risk and Reward – Five Years

Source: Created by the Author Using the MFO Premium fund screener

Note: Blue shading indicates lower risk and higher returns and red shading indicates higher risk and lower returns.

Black Box Fund Current Performance

I began the research for this article by looking at Alternative Funds available at Fidelity with no transaction fees, expense ratios less than 2%, assets under management of at least $100 million, and required minimum investments of less than $25,000.

As shown in Figure #3, over the past two and half years, Alternative Managed Futures have had high returns and lower risk as measured by the Ulcer Index. Equity Income includes only one fund, the Core Alternative Fund (CCOR).

Figure #3: Return vs Risk (Ulcer Index) – 2.5 Years

Source: Created by the Author Using the MFO Premium fund screener

One can see in Table #2 that the alternative funds have lower risk than the S&P 500 over the past two and a half years. Alternative Managed Futures and Flexible Portfolio funds have had high returns.

Table #2: Risk and Reward – 2.5 Years

Source: Created by the Author Using the MFO Premium fund screener

Note: Blue shading indicates lower risk and higher returns and red shading indicates higher risk and lower returns.

Table #3 contains the thirty funds used in the analysis for the past two and a half years, sorted by the Martin Ratio which is the risk adjusted return. It is calculated as the average annual return divided by the Ulcer Index. The top section represents the funds with the highest risk adjusted returns (Martin Ratio) and consists mostly of Alternative Managed Futures Funds. The bottom section represents the funds with the lowest risk adjusted returns and consists mostly of Alternative Global Macro Funds. This may be related to the Russian invasion of Ukraine. The middle section consists of a wide variety of categories of funds due to the effectiveness of strategies.

Table #3: Top Black Box Funds 2.5 Years Sorted by Martin Ratio (Risk Adjusted Return)

Source: Created by the Author Using the MFO Premium fund screener

The week ending September 16th covered a large down turn when markets reacted to higher-than-expected inflation reports. Table #4 shows performance during that week, along with year-to-date performance and percent below the 52-week high. The bold lines are the funds that I am invested in. Each helped to reduce the volatility in my portfolios. I don’t own any Alternative Global Macro Funds or Event Driven Funds. One of my criteria for buying a new fund is whether I expect them to outperform no risk, short-term treasuries over the next few months. Short-term treasuries and certificates of deposit are currently yielding around 4% or more.

Table #4: Black Box Funds – Week Ending September 16th, 2022 Sorted by One Week Performance

Ticker Name Stock Industry/
Fund Category
% Total Return
1 Week
% Total Return
3 Month
% Return
% Below
AMFAX AlphaSimplex Mgd Futs Strgy Systematic Trend 1.9 -2.6 39.0 4.6
GMSAX Goldman Sachs Mngd Futs Strgy Systematic Trend 1.6 -2.9 20.5 4.2
AHLPX American Beacon Mgd Futs Strat Systematic Trend 1.5 1.5 16.8 0.0
AQMNX AQR Mngd Futures Strgy Systematic Trend 1.2 0.5 36.1 0.7
CSAAX Credit Suisse Mngd Futs Strgy Systematic Trend 1.2 -0.2 22.7 1.4
PQTAX PIMCO TRENDS Mngd Fut Strgy Systematic Trend 1.0 -6.0 15.8 8.9
GDMA Alpha Architect Gdsdn Dynmc Mlt-Asst Alloc-50% to 70% Eq 1.0 -3.9 -0.9 8.6
CCOR Core Alternative Options Trading 0.7 6.9 2.8 5.2
DBMF iMGP DBi Mngd Futures Strategy Systematic Trend 0.4 0.9 27.6 1.9
FMF First Trust Mngd Future Strategy Systematic Trend 0.2 -6.7 10.5 15.8
TMSRX T. Rowe Price Multi-Strat Ttl Ret Multistrategy 0.1 -0.3 -5.0 11.4
CSQAX Credit Suisse Multialt Strgy Multistrategy -0.2 4.6 3.0 6.7
GPANX Grant Park Multi Alternative Strats Macro Trading -0.3 -1.2 -0.5 12.3
PCBAX BlackRock Tactical Opportunities Macro Trading -0.3 1.7 0.1 1.3
MERFX The Merger Fund A Event Driven -0.4 3.5 0.2 0.6
BALPX BlackRock Event Driven Equity Event Driven -0.8 3.3 -0.7 1.3
MAFIX Abbey Capital Multi Asset I Multistrategy -0.9 3.7 8.5 5.2
TALTX Morgan Stanley Pathway Alt Strats Multistrategy -0.9 -0.4 -2.5 4.3
JAAAX JHancock Alternative Asset Allc Multistrategy -1.3 0.8 -3.4 5.6
BAMBX BlackRock Systematic Multi-Strat Multistrategy -1.3 -1.3 -4.7 7.9
CRAAX Columbia Adaptive Risk Allocation Tactical Allocation -1.4 -0.2 -13.3 27.6
REMIX Standpoint Multi-Asset Investor Macro Trading -1.5 -3.7 4.0 5.8
FMSDX Fidelity® Multi-Asset Income Alloc-50% to 70% Eq -1.5 4.2 -12.6 16.4
DVRAX MFS Global Alternative Strategy Macro Trading -1.9 1.7 -6.9 7.6
ABRZX Invesco Balanced-Risk Allocation Tactical Allocation -2.0 -3.5 -13.4 32.4
NLSAX Neuberger Berman Long Short Long-Short Equity -2.5 2.4 -7.1 8.7
FTLS First Trust Long/Short Equity Long-Short Equity -2.6 1.2 -7.2 7.8
PAAIX PIMCO All Asset Tactical Allocation -2.6 -0.9 -12.6 18.3
PRPFX Permanent Portfolio Alloc-50% to 70% Eq -2.7 -1.7 -10.3 13.4
ETNMX Eventide Multi-Asset Income Alloc-50% to 70% Eq -3.1 3.6 -14.9 19.9
SPY SPDR® S&P 500 Trust Large Blend -4.8 6.1 -17.9 19.5

Source: Created by the Author Using Morningstar

Figure #4 shows the short-term performance of selected funds. My hesitance to add more alternative funds is that even though they have out performed the S&P 500 year to date, most have been trending down.

Figure #4: Performance of Selected Funds

Source: Created by the Author Using the MFO Premium fund screener

Portfolio Visualizer Backtest

I ran Portfolio Visualizer Backtest to maximize return with seven percent volatility for a portfolio of twenty-five of the funds in this article including the S&P 500. I limited allocations to ten percent per fund and twenty five percent per Lipper Category. I would not invest this way; however, I learn which funds Portfolio Visualizer selects. The link to Portfolio Visualizer is provided here.

The Provided Portfolio was equally weighted. What I like about the “optimized” portfolio is the low draw down during the COVID-induced recession and this year. Keep in mind that interest rates will probably not be rising as rapidly over the next two years and the risk of a recession is rising for 2023.

Figure #5: Portfolio of Alternative Funds Performance

Source: Created by the Author Using Portfolio Visualizer

Table #5 contains the funds and allocation from Portfolio Visualizer.

Table #5: Allocations for Portfolio of Alternative Funds with 7% Volatility

Source: Created by the Author Using Portfolio Visualizer

The results are that the above portfolio had similar returns to the S&P 500 with a drawdown of only 4% compared to 20% for the S&P 500.

Table #6: Portfolio Performance

Source: Created by the Author Using Portfolio Visualizer

Figure #6 is the Efficient Frontier of the funds showing the return over nearly three years compared to volatility as measured by the standard deviation. Note that all are significantly less volatile than the S&P 500. AMFAX had higher returns than the scale of the Expected Return and is not shown in the figure.

Figure #6: Efficient Frontier of Alternative Funds

Source: Created by the Author Using Portfolio Visualizer

Table #7 shows the average correlation of the funds by Category. The dark outlines show the correlation of the funds against other funds in the same category. For example, the two Alternative Event Driven funds have a high correlation of 0.87 to each other while Alternative multi-strategy funds are less correlated (0.32) to each other.  If investors are going to invest in Alternative Funds, they should diversify across funds and categories to reduce risk, and limit the total exposure according to their risk tolerance.

Table #7: Correlations – January 2020 to August 2022

Source: Created by the Author Using Portfolio Visualizer


For investors who dedicate a moderate amount of time to studying the markets, modest allocations to Black Box funds can reduce volatility and increase returns. One needs to have eyes wide open when buying some of these funds. Standpoint Multi-Asset Investor (REMIX) lost 5% in one day not too long ago, but has had good performance over the past year.

In the event of a recession, I expect a further decline of around 20%. As Liz Ann Sonders and Kevin Gordon pointed out earlier in this article, earnings may become negative. The Price to Earnings ratio is based on cyclical measures of earnings. Longer term valuations are still historically high.

I see short-term bond yields as being attractive compared to stocks. I continue to build ladders of short-term treasuries and rolling them over at higher rates. Rising rates are a headwind to stocks. Another possible headwind to some stocks is the new 1% tax introduced in the Inflation Reduction Act. Investors should also consider the tax efficiency of alternative funds. Multi-Strategy, Event-Driven, and Global Macro tend to be the least tax efficient. Flexible Portfolio and Equity Income tend to be more tax-efficient.

Recessions occur frequently and are to be expected, but not feared. Impacts can be reduced by preparing for them. Best wishes in these volatile times!

William Blair Emerging Markets Small Cap Growth: the star fund you might or might not be able to get

By David Snowball

William Blair Emerging Markets Small Cap Growth (WESNX) is a purely outstanding offering. You might or might not be able to buy it.

You might: Morningstar and Lipper both report that the fund is open to new investors.

The fund’s AUM has fallen but by a relatively small amount. The latest William Blair report on four- and five-star funds says that closed funds are flagged with an asterisk (*). WESNX is not flagged.

You might not: Both TD Ameritrade and Schwab have the fund available “for current investors only.” Re-opening the fund would be a “material change” and would have to be posted to the SEC; it has not been.

William Blair representatives, unhelpfully, have not responded to my request for clarification. The fund’s homepage is mute on the subject.

If you can, you should.

The EM team, led by Todd McClone, who spoke at length with Devesh Shah for his “Emerging Markets Investing for the Next Decade” (9/2022) essay, focuses exclusively on high-quality growth companies. They aim for “well-managed companies with superior business fundamentals,” which might include both IPOs and private placements. Their 25-person team covers a 1000-company universe, with EM companies comprising almost 50% of William Blair’s global high-quality growth universe. As Devesh noted, US investors might have systematically under judged the emerging strength of management teams in emerging market firms. Blair’s assessment – that 50% of all high-quality growth teams globally are in the EMs – supports that suspicion.

The discipline has performed brilliantly over the long term and well in the short term. The fund has earned a five-star rating for the past three- and ten-year overalls, as well as an overall five-star rating. (Its five-year rating is four stars.) Morningstar places its returns in the top 1% over the past decade.

(The peer ranks are shown as 1, 3, 5, and 10-year periods, as of 6/30/2022.)

Since its inception, it has outperformed the average EM fund by a margin of 5:1 with higher returns, lower standard deviation, and better risk-adjusted returns.

The fund underperformed in the second quarter of 2022, which the managers attribute to the broad flight from risk.

Underperformance during the quarter versus MSCI Emerging Markets Small Cap (net) was largely due to style headwinds amid strong outperformance of low-valuation stocks. The underperformance is highly correlated to the inflationary pressures and increase in interest rates, which has led to significant multiple contractions for growth companies in particular. Quality companies, which typically offer downside protection, didn’t help offset the underperformance amid the largely indiscriminate sell-off of high-growth, high-P/E stocks.

They argue that even if the move to value investing in the emerging markets persists, their portfolio might benefit because the valuations on their portfolio of high-quality names got compressed just as much as low-quality stocks did, which gives them the potential for a significant rebound when markets normalize.

Bottom line: we don’t know yet whether Blair has reopened, or will reopen, the fund. It’s not a pure small cap fund by Morningstar’s standards, but its average holding is dramatically smaller and dramatically higher quality than its average peer. For long-term investors interested in a growth style, there would be few better prospects.

We will follow up on your behalf.

William Blair Emerging Markets Small Cap Growth. Blair also shared a really useful process overview.

Series I Bonds: A Ray of Hope

By Devesh Shah

There are not many winners this year, but simplicity has taken the cake.

Series I Savings Bonds is one such winner. The current interest rate accrued on these bonds is 9.62% – in line with the CPI.

Like TIPS:

  • Series I Bonds are backed by the full faith and credit of the US Government.

Unlike TIPS:

  • Series I Bonds carry no risk, nor benefit, from movement of real rates and duration. In essence, they don’t have price risk.
  • Series I Bonds also do not have risk to future deflationary CPI – not that anyone is thinking about deflation right now.

A known irritant about Series I Bonds:

  • US savers are allowed to purchase up to a maximum of $10,000 per year. For many people, it was too little.
  • My colleague, David Snowball, would add that the Treasury Direct website, registration process, and customer support are all (his words) “profoundly regrettable.” Nonetheless, you’ve got to work through that site to make purchases.

Senators Deb Fischer (R-Neb) and Mark Warner (D-VA) have introduced a new bill titled “The Saving Security Act of 2022”.  The senators’ announced goal is “to protect [Americans’] savings from changes in inflation by increasing the public’s ability to utilize I Bonds.” The pertinent highlights of the proposed bill are:

Currently, the Treasury Department caps annual purchases of I Bonds …. The Savings Security Act would require the Treasury Secretary to raise the annual cap to $30,000 per person when the average six-month annual Consumer Price Index for all Urban Consumers (CPI-U) is above 3.5%. The new purchase limit only applies to families and individuals. Businesses and trusts would not be eligible for the increased cap.

Thoughts: This is a step in the right direction and must be celebrated. It would be even better if the CPI-linked condition was eliminated altogether.

American savers have fantastic retirement savings accounts in the form of 401(K) or IRAs. It is easy to invest in the stock market through these accounts and compound capital through tax-free gains over decades. The best way to build long-term stock portfolios is to have stability in the portfolio. This stability can come from the $30,000 of Series I-Bonds contribution. Together, stock investment in 401k and Series I Bonds can be a dynamic combination.

Stocks will work from economic growth and profits. Series I bond will protect against inflation.

By carrying a diversified portfolio, a thoughtful investor would stop frivolous trading and other activities and concentrate on stashing away $50,000 a year in these fairly straightforward and simple products. Two cheers for simplicity!

Closed-End Private Real Estate Interval Funds: A Job Well Done! Thank You and Bye-bye.

By Devesh Shah

You cannot praise them enough. Don’t take my word. Look at the MFO Premium search engine:

Results sorted by AUM with Year-to-date Returns and other metrics:

Among these are Great Owls, Fund Alarm Ratings Honor Rolls, MFO 5 Rating, MFO 1-2 Risk, Sharpe Ratios that touch the sky, Max drawdowns of no more than a 2-3%, Year to Date Returns ALL POSITIVE!

The biggest fund, Bluerock Total Income (TIPRX), is up 16% on the year!! We are talking about 2022, my friends, not 2021. While the rest of planet earth’s financial markets burn, these funds have been having a moment in the sun. Their phenomenal performance begets questions:

  1. What do these funds do?
  2. How are they structured?
  3. Why are they doing so well?
  4. Will their good performance continue?

What do these funds do?

They are funds of funds. These funds are investors in institutional Private Real Estate funds. They may also invest in public REITs, public REIT ETFs, and the debt of REITs. They belong in the US Domestic Real Estate investment bucket. By picking best-in-class real estate managers and their funds in their portfolio, these closed-end funds hope to earn income and gain capital appreciation.

Bluerock’s online description of the fund’s strategy provides an intuitive understanding of their investment portfolio:

How are these funds structured?

Closed-end funds can be bought anytime but cannot be sold daily.

As these are also interval funds, they offer the unit holders an opportunity to redeem once a quarter, although this can differ from fund to fund.

No more than 5% of the fund can be redeemed in a quarter. These funds need liquidity gates because they are holding illiquid private real estate funds, which cannot be sold. Usually, the funds carry 5-10% in cash to facilitate redemptions.

They do not take leverage, but that says nothing about the leverage held by the underlying fund investments or the actual properties.

In the recent past, about 45-50% of shares submitted for redemption at Bluerock (as an example) have been accepted for redemption.

They charge about 2% fees on average. There are multiple share classes.

If the fund is held for less than 12 months, it may incur a 1% penalty to exit. A detailed reading of the prospectus is required to determine the loads for each share class.

Why are they doing so well?

This is a legitimate question in 2022. Compare these funds to the total return of broader asset classes to Sep 26th of this year:

  1. the S&P 500 Index ETF SPY: down 22.4%,
  2. iShares Core US Aggregate Bond ETF (AGG): down 14.7%
  3. the Vanguard Real Estate ETF (VNQ): down 28.5%
  4. the iShares US Real Estate ETF (IYR): down 27.5%

Contrary to the massive volatility seen in publicly marketable securities, these closed-end interval private real estate funds have performed beautifully over the past few years. Here are the numbers for two of the funds:

As a result, there has been little reason for investors to want to sell these funds. In fact, quite the opposite has been happening – these funds have been receiving substantial inflows this year. Take the above two funds as an example:

Source: Ycharts data plus MFO calculation

My back-of-the-envelope calculations show that Bluerock has gone from managing $3.8 billion in assets at the end of the year to $7.2 billion now. Of this change, almost $3 billion comes from new money. Combined, these funds of funds have received over $5.28 Billion in the last 1 year.

Source: Data from Ycharts

It thus appears that investors have tried to seek protection from rising interest rates, falling equities, rising real yields, and rising risk premiums by hiding in these funds standing tall.

Meanwhile, the big passive public REIT ETFs, Vanguard ETF (VNQ) and Ishares (IYR) have lost over $31 billion in Assets from Outflows, besides losing $30 Billions in market returns.

This still doesn’t explain why these fund of funds are doing well. I suspect it has to do with two features of these closed-end funds:

  1. Their private holdings have not yet been marked down.
  2. Their investors are gated and can sell very little of the fund each quarter in aggregate.

Intuitively, this makes sense, even though it is hard to get asset-level confirmation on private fund holdings. Nobody denies these have been great investments. I am not even questioning their institutional high-quality portfolio. The only question is if they have done their job a little too well and if it’s time for the savvy investor to say thank you and move on.

Will their good performance continue?

Lesson from Private Equity Secondary Market: Institutional Investor magazine’s Hannah Zhang penned an article in the August 2022 magazine, “Prices Are Dropping as Investors Sell Private Equity Stakes at a Record Pace”. She writes …According to Jefferies, the average winning bid of secondary private equity stakes was 86 percent of net asset value in the first half of 2022…

If Private equity assets are selling at a 14% discount, will private real estate assets meet a different outcome? I don’t think so. Real rates are much higher, and risk premiums much wider than even the first half of 2022. The private real estate portfolio, even if it is invested in the best of all assets, will go through a markdown.

Green Street Advisors Public to Private REIT NAV Comparison:
Green Street Advisor is the preeminent independent research and advisory firm concentrating on the commercial real estate industry in North America and Europe. The firm maintains a measure of Public REITs Share Prices to Green Street calculated NAVs going back to 1990.

The chart reads that share prices trade at a 2.3% average premium to their NAVs in the 1990 to 2022 period. However, REIT shares prices are currently trading at a 9.1% discount to the NAV. One can see earlier periods of discounts and premiums. The chart will not too data friendly is intuitive to a market follower.

It’s unclear when, in 2022, the chart was updated, but things have only worsened in the last few months and weeks.

In addition, Green Street writes on the chart: “Observed premiums/discounts in the public market have historically been reliable predictors of future changes in private-market prices.”

In short, Private REIT prices are primed to head down. It is a matter of time.

In 2020, private REITs did not mark down because the share prices rebounded quickly enough. I am not sure if we will have that luxury this time.


Closed-end interval private real estate funds have done very well for their early and loyal investors. This is a tough year. There are many assets available at far cheaper prices than just 9- months ago. Some of them even deserve our attention. To buy cheap assets, sometimes we have to sell other assets that have done their job for now. We must say thank you and (try) to move on from these funds. It won’t be easy because of the redemption gates. The early bird will catch the worm. There will be a time in the future to come back to these funds, but for now, it’s time to say bye.

Briefly Noted

By TheShadow

Not a major surprise, but there are a load of active ETFs in the pipeline.  Fidelity has launched Fidelity Tactical Bond ETF. John Hancock will have John Hancock International High Dividend, and Hartford is launched Hartford Sustainable Income, managed by a team from Wellington. iShares is launched an active U.S. Consumer Focused ETF, but such funds have always felt a bit gimmicky to us. Finally, Neuberger Berman Commodity Strategy Fund is becoming an ETF on or about October 21, 2022.

Akre ups international flexibility. Effective November 28, 2022, the percentage of the Akre Focus Fund portfolio that can be devoted to international equities pops up from 15% to 25%.

ClearBridge Focus Value ESG ETF is transitioning from non-transparent to transparent though the advisor offered no reason for the change. I’d guess it has to do with minimizing administrative hassle, but that’s only a guess.

Sextant gives up its fulcrum.  In September 2022, the board of the Sextant funds approved a plan to scrap the funds’ longstanding fulcrum fee. The advisor charges 0.50% for their services, and that will continue. The old system rewarded the advisor with a higher fee if they outperformed their peers and penalized them with a lower fee if they underperformed.

The Soundwatch Hedged Equity Fund, which is primarily involved with options trading, will be converted into an ETF on or about October 21. Morningstar rates this fund overall with four stars.

Small Wins for Investors

Alger Small Cap Focus Fund was re-opened to all investors on or about October 17, 2022. The fund was soft-closed to new investors on July 31, 2019.

Effective October 28, 2022, the Altegris/AACA Opportunistic Real Estate Fund will discontinue its short-term redemption fee. Redemption fees make a world of sense –they “tax” people who trade into and out of the fund in rapid succession – but investors seem to loathe them.

iMGP Dolan McEniry Corporate Bond Fund will have a share class conversion of its investor class shares into its institutional share class on or about September 30, 2022. As a result of the conversion, the minimum initial investment amount for retirement accounts will be changed from $5,000 to $1,000.

Effective October 3, 2022, the Lord Abbett Developing Growth Fund will be reopened to new investors

Morgan Stanley Global Opportunity Portfolio is re-opening to new investors on January 23, 2023. The fund was closed to new investors effective December 31, 2020. Several consecutive months of outflows during 2022, coupled with buying opportunities available, have resulted in management re-opening the fund.

Polar Capital Emerging Market Stars Fund will convert its sole institutional class into the fund’s sole share class. The conversion will result in the fund’s initial minimum being lowered from $100,000 to $5,000. These changes were effective September 1,

Wasatch Global Investors has re-opened six of its mutual funds immediately through financial intermediaries: Wasatch Core Growth, Wasatch Small Cap Growth, Wasatch Ultra Growth, Wasatch Small Cap Value, Wasatch Micro Cap, and Wasatch International Opportunities. The funds have been closed over the past several years due to the influx of cash inflows and performance. For the first time in a long while, all 20 of the Wasatch funds are open to new investors.

Old Wine, New Bottles

Invesco Funds is reorganizing its American Value Fund into its Value Opportunities Fund. Invesco is also reorganizing its Global Growth Fund into its Global Fund. The reorganizations are expected to occur on or about February 10, 2023.

The former Highland Funds have become the NexPoint funds.

On October 21, 2022, Q3 All-Weather Sector Rotation Fund will change its name to Q3 All-Season Sector Rotation Fund, and the Q3 All-Weather Tactical Fund will change its name to Q3 All-Season Tactical Fund. Because, presumably, a lot of investors were backing away from the fund, crying, “All-Weather? Heck no, I’m lookin’ for an All-Season fund!”

VanEck Morningstar Durable Dividend ETF has been rechristened VanEck Durable High Dividend ETF.

Liquidations (and Related Inconveniences)

Emles Trust is liquidating several ETFs on or about October 26:

  • Emles @Home ETF
  • Emles Federal Contractors ETF
  • Emles Made in America ETF
  • Emles Alpha Opportunities ETF
  • Emles Luxury Goods ETF
  • Emles Real Estate Credit ETF

First Trust TCW ESG Premier Equity ETF disappears on November 1, 2022.

FRC Founders Index Fund will be liquidated and terminated on October 31, 2022. The fund had an interesting idea – invest in a basket of companies still run by their founders – and did everything right – low fees, broad diversification, and high insider ownership, only to discover that “interesting” and “successful” were very different things. The fund has drawn just $25 million, and the turmoil of the past year has hit its small cap-dominated portfolio hard.

No need to worry about what to get the Goldman Sachs Target Date Funds for Christmas. Goldman Sachs Target Date Retirement and Target Date 2025 through 2060 all get shut down on December 20, 2022.

Harbor Emerging Markets Equity and Harbor Money Market Funds will liquidate on or about December 9.

On or about February 10, 2023, Invesco American Values will merge into Value Opportunities, and Invesco Global Growth gets swallowed by Invesco Global. Somehow the class R shares of Invesco Global are not part of the deal, but I’m not sure what that translates to.

LHA Tactical Beta Variable Series Fund will liquidate on or about October 7.

The $344 million Lord Abbett Durable Growth Fund will redefine “Durable” to mean “disappeared” as of October 25, 2022.

Lord Abbett Mid Cap Innovation Growth Fund  will be liquidated and dissolved around October 28, 2022

Macquarie Labor Select International Equity Portfolio will liquidate and dissolve on or about December 16, 2022. The fund’s ticker is DELPX, but different sites report several variations on its name.

Nationwide American Century Small Cap Income Fund will be liquidated on or about January 23, 2023.

Stone Ridge Bitcoin Strategy Fund will liquidate on or about October 21.

USAA Global Equity Income Fund Institutional Shares will liquidate on or about November 29, 2022.

On September 22, 2022, the board of trustees for Vanguard U.S. Liquidity Factor ETF agreed to liquidate and dissolve the ETF on or about November 28, 2022.

WBI BullBear Global Income ETF and WBI BullBear Trend Switch US 3000 Total Return ETF will not be around to see the end of the current BullBear cycle since they will be liquidated on October 14, 2022.

Manager changes

Which fund? What changes, when?
American Century Focused Dynamic Growth ETF and Focused Dynamic Growth Fund   Prabha Ram, Vice President and Portfolio Manager has announced her plans to leave American Century Investments on September 30, 2022. Messrs. He, Li, and Le, all appointed in 2016 with Ms Ram, remain.
Axonic Strategic Income Jamshed Engineer is out; Clayton DeGiacinto and Matthew Weinstein remain.
BlackRock Future Tech ETF Caroline Tall has joined portfolio managers. Tony Kim and Reid Menge.
BlackRock Mid-Cap Growth Equity, BlackRock Capital Appreciation, BlackRock Large Cap Focus Growth, BlackRock Exchange BlackRock, BlackRock Sustainable US Growth Equity Effective April 1, 2023, Lawrence G. Kemp. Phil Ruvinsky and the recently added William Broadbent will remain. Kemp, who brought Mr. Ruvinsky with him from UBS, is wrapping up a 40-year career.
BNY Mellon International Bond Fund and  BNY Mellon Global Fixed Income Fund Nathaniel Hyde, CFA, was just added to the three-person team, presumably to succeed the just-departed David Leduc, Mellon’s CIO.
Boston Partners Small Cap Value Fund II On September 16, 2022, David Dabora retired from Boston Partners and management of this fund. His former co-manager, George Gumpert, is going commando!
Braddock Multi-Strategy Income Fund Braddock is replacing itself as manager of the fund, bringing in Bramshill Investments, LLC instead. That’s a good move for the shareholders, given the record of Bramshill’s four-star Income Performance fund.
C WorldWide International Equities Fund Effective September 1, 2022, Lars Wincentsen is out, and Peter O’Reilly is in. He’ll serve with Bo Almar Knudsen, Bengt Seger and Matthias Kolm .
Clearbridge Appreciation Fund Stephen Rigo, CFA, is joining Scott Glasser (who has managed the fund since 2001) and Michael Kagan. The fund’s defining characteristic is its consistently below-average volatility rather than its excellent returns.
Fidelity Strategic Advisers Large Cap Fund Fidelity has added DESIM, the marketer’s version of D.E. Shaw Investment Management, to the caste of thousands already assigned to the fund. Okay, 15 different sub-advisor firms.
Marsico Midcap Growth Focus Fund Peter Marsico and James Marsico have joined Tom Marsico as the fund’s management team. (Sings along to “It’s a family affair,” the Sly and the Family Stone one, not Mary J. Blige’s)
Meeder Funds Amisha Kaus had been removed from the management teams of six Meeder allocation and income funds. The funds cycled through a vast number of managers over the past decade without noticeable hiccups. That said, two of the three longest-tenured managers departed this year, leaving founder Robert Meeder as the source of management continuity.
Newday Ocean Health ETF and Newday Diversity, Equity & Inclusion ETF Gabriel Mass has replaced Gordon Telfer as a portfolio manager of each fund, whose playful ticker symbols are AHOY and FAIR
Old Westbury Large Cap Strategies Fund After about a year’s service, John Coviello is out. Messrs. John Hall, Edward N. Aw, Jeffrey A. Rutledge, and Ms. Nancy Sheft will continue to serve as portfolio managers
Old Westbury Small & Mid Cap Strategies Fund After about a year’s service, John Coviello is out. Messrs. Michael Morrisroe, Edward N. Aw, Konstantin Tcherepachenets, and Mses. Nancy Sheft and Andrea Tulcin will continue to serve. (I copied Old Westbury’s text here because I hadn’t encountered the plural “Mses.” before and was rather struck by it.
Schwab Select Large Cap Growth Fund Effective April 1, 2023, Lawrence G. Kemp will retire from BlackRock Investment, the fund’s subadviser. Phil Ruvinsky and the recently added Caroline Bottinelli will remain.
The 3D Printing ETF and ARK Israel Innovative Technology ETF William Scherer replaces founder Cathy Wood, perhaps to free up her time to manage her new VC-focused mutual fund.