Monthly Archives: December 2022

December 1, 2022

By David Snowball

Dear friends,

Welcome to the darkest and brightest season of the year. Each year we share the reminder of a long and resolute human impulse: to stare into the gathering gloom, frozen fields, and biting winds and to declare, “we will not surrender to the darkness, within or without. Light the fires, summon the family, call our friends and set the table. Tonight, we rejoice together.”

The midwinter holidays ahead – not just Christmas but Saturnalia, Yul, St. Lucia’s Day, Dong Zhi, Yalda Night and a dozen other celebrations rooted in other cultures and other traditions – are, at the base, expressions of gratitude. They occur in the darkest, coldest, most threatening time of year. They occur at the moment when we most need others, and they most need us. No one thrives when they’re alone and each day brings 14 to 18 hours of darkness. And so we’ve chosen, from time immemorial, to open our hearts and our homes, our arms and our pantries, to friends and strangers alike.

Don’t talk yourself out of that impulse. Don’t worry about whether your gift is glittery (if people actually care about that, you’re sharing gifts with the wrong people) or your meal is perfect (I love Stouffer’s frozen mac and cheese, by the way). Take advice from Scrooged. Tell someone they make you smile, hug them if you dare, smile and go.

Oh, by the way, you make me smile. I’m endlessly humbled (and pleased) at the realization that you’re dropping by to see what we’ve been thinking. Thanks for that!

Managing this market, preparing for the next

In the month of November, Vanguard Total Stock Market Index (VTSMX) soared 8.3% and the guys whose livelihood depends on your willingness to invest ever larger amounts in the stock market have begun celebrating “a market bottom” and imaging a sharp rebound in 2023.

They might be right. We wouldn’t bet on it. Valuations remain historically high, and the recent bounce hasn’t helped matters. It is not clear – especially in light of November’s strong jobs report – that the Federal Reserve is ready to relent on its interest rate raising cycle. While there once was a “soft landing” at the end of a Fed tightening cycle, that happy outcome has occurred only once. Consumers are spending record amounts but mostly by drawing down savings and accumulating debt. Investors have lost a cumulative $22 trillion in 2022 (with the sole bright spot being that Elon Musk has personally lost over $100 billion).

Too, there is that issue of the party which assumes control of the House of Representatives in January. The St. Louis Post Dispatch (11/27/2022), likening them to toddlers, warns:

Anyone who might be offended by the comparison between unruly toddlers and a GOP House majority should consider the words of Rep. Jason Smith, R-Missouri, who is in line for a major budget post under the incoming GOP House majority: “The American people expect Congress to use every tool at its disposal” to press the Biden administration on issues like taxes, energy policy and the border, Smith said recently, “and the debt ceiling absolutely is one of those tools.”

Translation: Holding America’s full faith and credit hostage to an array of partisan issues — as Republicans did a decade ago, kneecapping the government’s credit rating for the first time ever — is something Smith and his cohorts are vowing to do again.

In 2011, the Republic-led refusal to raise the debt ceiling triggered the Black Monday sell-off where a trillion dollars in market value was lost in a single day.

In our 2022 year-end issue, we’ll develop four themes for you to consider. Our preview for them:

  1. Respect managers who have cash available to deploy: we’ve earlier described them as “the dry powder gang” and talk about them just below.
  2. Respect the ability of short and ultra-short fixed income investments to adapt quickly to rising interest rates.
  3. Favor high-quality over high momentum, stable growth over aggressive growth, and dividends over buybacks since all of those characteristics hold up better in markets where investors have grown fearful.
  4. Identify opportunities in small caps (especially small cap value) and emerging markets (especially emerging markets value) because those are widely regarded as the last pockets of reasonable risk-return balances on the planet.

We’ll share the receipts and name names. For now, the key is remembering that you can manage the current turmoil without hiding under a rock and missing out on the long-term gains still available to you.

In this month’s issue, Lynn Bolin lays out the prospects of a 2023 recession and the tools for managing through it, Devesh Shah reflects on what to do if you can’t find the magical Manager G and on what you have to celebrate, while the Shadow lays out a record of the industry’s most significant changes in the past month. I profile Towpath Focus, a fund that’s off your radar but – perhaps – should be at the center of it and another newbie that you can, well, probably do without.

Checking in on The Dry Powder Gang

In 2017, we urged you to consider The Dry Powder Gang. These are experienced equity managers who embrace an absolute return mindset. That is, they recognize that stocks make money in the long term but can inflict absolute misery in the short term. As a result, they are managers willing to dial back their equity exposure when equity valuations become irrational, and the risk-return calculus turns sharply negative.

We described them this way:

They are, in a real sense, the individual investor’s best friends. They’re the people who are willing to obsess over stocks when you’d rather obsess over the NFL draft or the Cubs’ resurgence. And they’re willing, on your behalf, to walk away from the party, to turn away from the cliff, to say “no” and go. They are the professionals who might reasonably claim, “we got your back!”

In a world where interest rates fell steadily to, then below, zero and stocks had only two settings – high and higher – they were loathed by individuals and institutions. Some liquidated, most saw substantial outflows and many barely held on. Most offered reasonable absolute returns during the “no one is as smart of Cathie Woods” phase of the market, though their relative returns were often atrocious as otherwise rational managers started sneaking Bitcoin into their portfolios just to remain competitive.

If you think that the future is apt to be less driven by across-the-board market gains and more marked by periodic dislocations, you should consider whether it’s time to look more closely at absolute return and absolute value investors.

The Dry Powder Roster

  Style Rating 2022 peer rank
Cook & Bynum COBYX Global large-cap core Five star  Top 1%
Hennessy Total Return HDOGX Large-cap value, Dogs of the Dow Three star 2
Pinnacle Value PVFIX Small-cap core Two star 3
Frank Value FRNKX Mid-cap core Three star 4
Palm Valley Capital, functionally an extension of Intrepid Endurance Small-cap value Five star, Great Owl 8
FMI Common Stock FMIMX Small-cap core Four star 10
Intrepid Small Cap, formerly Endurance ICMAX Small-cap value Two star 14
FPA Crescent FPACX Flexible Four star 16
Bruce BRUFX Flexible Five star 18
Castle Focus MOATX Global multi-cap core Two star 26
Shelton Equity Income, formerly Core Value EQTIX Equity income Four star 50
Weitz Partners III Opportunity WPOIX Multi-cap growth Three star 92
Centaur Total Return TILDX Equity-income Liquidated  
Intrepid Disciplined Value ICMCX Mid-cap value Liquidated  
Bread & Butter BABFX Multi-cap value Liquidated  

Full disclosure: Snowball owns shares of FPA Crescent and Palm Valley Capital; he had previously owned Intrepid Small Cap but moved that investment to Palm Valley when Intrepid’s managers launched the new firm.

Thanks, as ever …

New Year’s blessings to our indispensable regulars, from the good folks at S&F Investment Advisor in lovely Encino to Wilson, Gregory, William, the other William, Brian, David, and Doug.

Many thanks to Bruce & Silina (we’re so glad to hear that we’re making a difference for you, thanks!), Jonathan, Binod, Philip, Jeroen, John H, and Debbi Burnett in memory of our departed friend and the love of her life on the one-year anniversary of his passing. (Quick note: pick up the phone and call your friend. You know the one, the one you’ve been venting to and laughing with for years but never quite get around to calling much anymore. You won’t realize how much those calls mean until you can’t place them anyone.)

If you’re so disposed, please do consider contributing to MFO. Of our 18,000 readers, about 1% chip in. Making it 1% plus 1 would be a gain! It’s tax deductible, it lets us keep the lights on, and raises the prospect that we might be able to share a year-end gift with the folks who – without compensation – make this all possible.


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Towpath Focus: Adventures of a Growth Manager in Valueland

By David Snowball

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

Towpath is a concentrated, all-cap equity fund. The portfolio currently holds 41 securities. About 15% of the portfolio is invested in non-US stocks and 12% in cash. Compared to its Morningstar peers, the fund has more cash, more international, and more small-cap exposure. The portfolio stocks are higher growth companies (measured by sales, cash-flow, and book value growth) that sell for lower prices (measured by price-to-book, price-to-earnings, and price-to-sales) with higher returns than either their peers or their index.

Portfolio construction begins with macro-level assessments of the economy, proceeds to analyses of industries and sectors, then ends by buying and holding the most attractive stocks in the most attractive sectors. Mr. Oelschlager has a long and adamant tradition in favor of buying and holding just a few best-of-class stocks so that one might anticipate turnover in the single digits. While the reported turnover is higher than that, almost all of the portfolio’s largest holdings were first purchased in the fund’s opening months. In 2022, just a handful of new names appeared, including Novartis, Hillenbrand (a manufacturer most known for its funeral products subsidiary, Batesville), and online travel agency Booking Holdings.

The portfolio is not static but is responsive to long-term dynamics rather than short-term frenzies.

We manage our portfolios in a way that respects the potential for change.  In fact, we regularly try to find opportunities in stocks that would be positively impacted by the potential change.  Oftentimes, the market prices securities as if prevailing conditions will be in place for a long time, but history shows that change is normal.  Understanding this helps us not only find attractive investments but avoid potentially damaging ones as well. (2022 Q3 shareholder letter)

Sometimes, people matter

We first began tracking Mr. Oelschlager about 15 years ago during his time at Oak Associates. Mr. Oelschlager served as manager of Pin Oak Equity Fund (POGSX) from 2005-2019, initially as a co-manager, then beginning in June 2006, as sole manager. Mr. Oelschlager also managed or co-managed five other funds, served as the co-CIO for Oak Associates, and was responsible for about 700 million dollars in separately managed accounts.

His performance at Pin Oak Equity was consistently remarkable. Over a 10-year stretch in the heart of his time as manager, Pin Oak returned 11.3% annually and beat its peer group, and the S&P 500, by 400-500 bps. It was a bit more volatile than either, but its returns were so far superior that it beat its benchmark and peers by every risk-return metric we followed: Sharpe, Sortino, and Martin Ratio, as well as Ulcer Index. Our 2017 profile of Pin Oak Equity pointed to the fact that in the years following Morningstar’s decision to eliminate analyst coverage of the fund, it continued to club its peer group.

Then, in 2019, Mr. Oelschlager and his wife, Tina, who served as a Relationship Manager for Oak Associates, left Oak Associates and launched Oelschlager Investments together. The Oelschlagers demonstrated to the SEC that the strategy he pursued at Pin Oak is identical to the Towpath Focus strategy; as a result, they were able to include Pin Oak’s performance record in their initial prospectus.

The performance of the two funds since his departure highlights the point: sometimes people matter.

Same strategy, similar expenses, 5000 bps difference in returns.

In particular, it appears that Mr. Oelschlager matters. Towpath Focus has accumulated a remarkable record.  Earlier in his career, Mr. Oelschlager generated substantially higher returns at the price of modestly higher volatility. Since the launch of Towpath, he’s had the rare distinction of higher returns plus lower volatility, reflected in dramatically stronger risk-adjusted performance.

Towpath Focus, performance from inception through 11/2022

  APR APR vs peers Max DD Std Dev DS Dev Ulcer Index Sharpe ratio Sortino ratio Martin ratio MFO rating
Towpath 13.2 -18.7 19.4 11.0 5.5 0.65 1.15 2.31 5
Multi-cap value group 6.9 +6.3 -27.7 22.6 15.7 10.0 0.28 0.41 0.67 3
S&P 500 8.3 +4.9 -23.8 21.2 14.2 9.1 0.36 0.54 0.85 4
  Return Risk Risk-return metrics

The first two columns measure Towpath’s average annualized returns compared to both its peers and the S&P 500. The next three columns highlight volatility, sometimes abbreviated as “risk.” Those report the maximum drawdown (i.e., biggest fall), standard deviation (day-to-day volatility), and downside deviation (aka “bad volatility”). Finally, five measures that capture the balance between return and risk: the Ulcer Index (a measure that combines the depth and duration of an investment’s worst declines, whimsically anticipating how bad an ulcer you might from it), the three standard risk-return measures in order of increasing risk-aversion (if you really dislike losing money, focus on Martin rather than Sharpe) and finally MFO’s synthesis.

The fund shows the same pattern of outperformance against the Russell 3000, Lipper Multi-cap Core, and Morningstar Large Value benchmarks and peer groups.

Why are Towpath’s investors winning?

Our best guess: they’ve got a very good manager who has thrived through three bear markets, seven corrections, several periods of delusional investor exuberance, interest rates crashing to below zero, and Fed funds rates increasing 10-fold in a year. If we learn from adversity, Mr. Oelschlager seems to have taken the opportunity to learn rather a lot.

He argues that Towpath has three structural advantages: a longer-term perspective than most, more experience than most, and a more patient strategy than most. They encapsulate that claim in a nice graphic:

One of the nice things about smart, experienced managers is that they’ve got better impulse control than the rest of us. While the Robinhood investors are getting buzzed on Tesla stock, bored apes, and crypto exchanges (he notes that $2 trillion in crypto assets have evaporated in two years and “we largely avoided these traps”), Mr. Oelschlager was buying classic quality growth stocks that have been (temporarily) relegated to the dusty world of value investments.

Reflecting on what he’s learned in 28 years as a professional investor, a period that involved a variety of strategies and a variety of markets, he noted:

We manage portfolios differently than we did a long time ago, and with each cycle, we get a little bit better at limiting downside risk. I’m constantly thinking about how other people are behaving. I get more nervous when things are going well than when they’re not.

We recognize that we’re not infallible; we have to protect ourselves and protect our shareholders from the possibility that we might be wrong.

The year ahead promises to be challenging (“the near-term picture is bleak,” he admits), and the decade ahead might well be nothing to write home about: Vanguard is forecasting 10-year US equity returns of 4.7-6.7%, Research Affiliates projects it at 2.3%, Morningstar sees 5.5% – all before adjusting for inflation).

The key to thriving in uncertain times is, we’ve argued, having a steady and rational strategy executed by a proven manager. Towpath offers that. You should go learn more.

The administrative stuff

The institutional shares carry a $2,000 minimum. That’s reduced to $1,000 for accounts set up with an automatic investing plan. The expense ratio, after waivers, is capped at 1.10%.  The fund is available for direct purchase and through Schwab. If they can offer proof of sufficient investor interest, they’re willing to pursue the burdensome task of getting on other platforms as well.


What Really Matters…is that we are American investors

By Devesh Shah

We are approaching the end of an extraordinary year, one that has left many of us – citizens, investors, employers, workers, and parents – feeling whipsawed, anxious and confused. Much of that comes from the sense that we can’t figure out what’s behind this year, so we don’t have much hope about managing, much less thriving in, the year ahead.

I entirely agree with your feelings, but I’m here to suggest that you take a deep, cleansing breath. We’re doing better than you know, and if we keep our wits about us, we’re going to do okay.

In this two-topic article, I will first address the mythical Manager G brought up by Howard Marks.  The second part compares the diversified portfolio in America versus the rest of the world to show how thankful we have to be this season despite the carnage in the portfolios.

1. Howard Marks, What Really Matters, and the search for the Asymmetrical Manager

In his recent memo, What Really Matters, Howard Marks gave us yet another set of invaluable investment lessons. Avoid the event and economic noise, don’t pretend to know stuff when you don’t, avoid short-term trading and poor performance measures, and for the majority, the passive indices are just fine.

Howard Marks, co-founder of Oaktree Capital, author of The Most Important Thing: Uncommon Sense for the Thoughtful Investor (2011)

None of these are new to the readers at MFO, but it’s always good to get an erudite, timely, and thoughtful perspective on things that don’t work. When those lessons come from a market guru like Marks, we listen ever more carefully.

If you are inclined to beat Mr. Market, Marks offers some advice. As I wrote in my opening column for MFO in Feb 2022, each investor must ask themselves, What is Your Edge? Only if and when you find that elusive Edge, do you have yourself a ball game.

Presents that Howard Marks left under the tree for you

I like to say, “Experience is what you got when you didn’t get what you wanted.”

There are old investors, and there are bold investors, but there are no old bold investors.

Investment success doesn’t come from buying good things but rather from buying things well.

We have to practice defensive investing, since many of the outcomes are likely to go against us. It’s more important to ensure survival under negative outcomes than it is to guarantee maximum returns under favorable ones.

Being too far ahead of your time is indistinguishable from being wrong.

What the wise man does in the beginning, the fool does in the end.

There’s only one way to describe most investors: trend followers. Superior investors are the exact opposite. Superior investing requires second-level thinking—a way of thinking that’s different from that of others, more complex and more insightful.

As I’ve indicated earlier, the riskiest thing in the world is the belief that there’s no risk. By the same token, the safest (and most rewarding) time to buy usually comes when everyone is convinced there’s no hope.

Somebody comes into your office and says, ‘I’ve been managing money for 30 years, I’ve made 11% a year, and I’ve never had a down month. Your job is to say, ‘That’s too good to be true, Mr. Madoff.’

Marks’ memo referred to asymmetrical returns. He gave examples of theoretical managers, and at the pinnacle was Manager G. She possesses so much investment alpha that when the market is up 10%, she is up 20%. And when the market is down 10%, she surprises us all, and instead of being down with the market, she is actually up 5%!!

Does she exist? More specifically, does she exist in the mutual fund world? Members of the MFO Discussion Board reflected on this topic and concluded that Manager G might be a mythical character, much like Loch Ness or Big Foot.

Fund mandates, fund managers, and the market environment change with time. To search for Manager G is to invest significant time staying on top of all the changes. Maybe the right practical question is not if there is that magical manager, but what kind of market environment might allow for some talented managers to finally show their skill.

Will interest rates be more normalized going forward? Will the financial sorcery of the last twenty years be less prominent in the future? Will dividends and profit matter once again? Or will investors be sucked back into chasing phantom returns from completely wasteful schemes? A thoughtful manager cannot be expected to outperform the mania of the dotcom bubble or the 2020-2021 free-money era.

Readers of Mutual Fund Observer are uniquely empowered to have an informed opinion on this subject. The very versatile MFO Premium website is a gold mine for manager and fund metrics and profiles. Through the monthly commentaries, David Snowball and my fellow columnists have dived deep into funds that have the potential of outperformance. The active and buzzing Discussion Board leaves no stone unturned in discussing noteworthy (good and bad) fund managers.

My promise to the community was to be open-minded about active management. Research tells me that under the hood of 5900 funds, there are indeed a handful of funds, where the managers are thoughtful, battle-tested, outperform relative to their indices, and produce absolute returns. These managers are likely to be active investors in spots where passive indices are constructed poorly, sport heavy concentrations in sectors, and construct long stock and bond portfolios while avoiding the land mines.

Stay thirsty, my friends. And pray that common sense returns to our nation’s financial infrastructure and participants. That will help us all continue to reap the bounty of America The Beautiful.

2. America The Beautiful

Diversified portfolios invested in US stocks and bonds are down about 13-15% on the year so far. Inflation has reduced our purchasing power by another 7-8% this year alone.

Assuming we agree that we knew it was coming, there is still the problem of “What would you have done about it?”

Let’s ask the inverse question. Who made money this year, and would we have done what they did? By and large, four categories of investors won:

    1. Energy Equity investors
    2. Value funds & Berkshire Hathaway
    3. Investors who shorted bonds heavily
    4. A handful of esoteric and exceptionally talented stock and bond managers (at hedge funds and mutual funds)

Which of these cases apply to you? Would you have gone all in on energy stocks? Would you be like Stewart Horejsi and put all your money in Berkshire? Would you have known in advance which active fund managers would have zigged when the market zagged? And would you have had the gumption to invest enough with those fund managers, knowing full well that they underperformed their asset classes in the last few years? Or would you have taken to trading bond futures for a living?

The good part about knowing what it takes to win in a year like 2022 is that we can see that even if we had the blueprint, we might not have executed it well.

The reason people have stuck to the basic, diversified portfolio for a few decades now is that the damn thing works about as well, maybe better, than one can expect it to. We take the diversified portfolio for granted for one principal reason – it’s an American asset portfolio. We need to look at the rest of the world to appreciate what we have here. The kind of American capitalism, financial markets, and institutional strength that we have come to take as a given is not easily replicated everywhere.

This year alone, the US Dollar Index is up 11%, which means if you are lucky enough to travel abroad, your trip is discounted by 11%.

Compare the plight of the citizens of Argentina, where the Peso is down 62% this year versus the dollar. Or the Sri Lanka Rupee, down 81% on the year, and out of fuel supplies. In Turkey, the Lira is down 40% this year, and in Egypt, the Pound is down 56% against the US Dollar. Does it even matter what a diversified portfolio would look like in these countries? Investment returns are meaningless when the currency makes all of your assets worthless in purchasing power terms.

Across all of Europe, with the Euro down 10% versus the US Dollar, inflation of 8-10%, and diversified investment portfolios down 10%, the loss of purchasing power, locally and in US$ terms, is very real. We are talking about the developed world, not an emerging market country.

Whether one takes the 20% depreciation of the Japanese Yen, the 10% in Australia/New Zealand, or the 13% selloff in the Chinese Renminbi, the news is simple. If you don’t have US dollars, and you don’t have a US dollar portfolio, the year 2022 has been far cruel to the individual saver.

Even in the UK, America’s closest financial system equivalent, despite the commodity-heavy stock market is up 7% on the year, a theoretical 60/40 portfolio would be down 11% in GBP and down 22% in US$ terms.

There are a handful of countries that are OK – Mexico from reshoring and India because of its secular growth – but they are truly the (lucky) exceptions.

When we understand the performance of diversified American stock and bond portfolios through the lens of a worldwide meltdown in purchasing power and investment portfolios, we realize how beautiful the American system is.

What is not ok is to rely too much on that benevolence. The world is in a lot of pain, and this time around, there are no central banks to the rescue and no government money-printing machines being primed. The pain in the rest of the world will manifest itself in the USA in one form or another.

All too often, we disregard Howard Marks’ advice. We try to find that one stock or try to trade around too much.

Investors should remember that asset allocation decides the majority of returns. While we should think about how much we want in stocks versus bonds, we should also decide how much we want in the Capital Markets at all, rather than earning a cool 5% in the Bank CD.

Happy Holidays to all of the readers, and thank you for taking the time to share the investment journey together with the MFO columnists.

Worries About Inflation Giving Way to Recession

By Charles Lynn Bolin

I hope that Readers enjoyed their Thanksgiving as much as I did and wish everyone a safe and happy holiday season and a prosperous new year.

I expect this Santa Claus Rally will give way to a New Year’s hangover as investors start to anticipate a recession more than they fear inflation. On November 10th, the Consumer Price Index for all Urban Consumers was released to show the inflation rate increased by 7.76% from a year ago and 0.44% from the previous month which is still a high annual rate of 5.3%. The minutes of the November Federal Open Market Committee Meeting provide insights:

The staff, therefore, continued to judge that the risks to the baseline projection for real activity were skewed to the downside and viewed the possibility that the economy would enter a recession sometime over the next year as almost as likely as the baseline. (“Minutes of the Federal Open Market Committee November 1–2, 2022”, FOMC)

I consolidated the outlook from the Federal Reserve Bank of Philadelphia’s Fourth Quarter 2022 Survey of Professional Forecasters based on thirty-eight forecasters surveyed. The outlook is for slow growth during the first three quarters of next year with a high risk of a negative quarter. Unemployment is expected to rise modestly and inflation to fall to three percent by the end of the year. 

Source: Created by the Author Using Fourth Quarter 2022 Survey of Professional Forecasters

Signs of a recession are increasing. The Conference Board’s Leading Indicator has been falling for eight consecutive months as reported by Greg Robb at MarketWatch in “Economy May Be in a Recession Already, Conference Board Says, After Leading Index Drops for Eighth Straight Month.”


Consensus is building among economists, business leaders, and fund managers about the probability and severity of a recession next year. Mohamed El-Erian is the President of Queen’s College in Cambridge and chief economic adviser at Allianz. Dr. El-Erian wrote “Not Just Another Recession” in Foreign Affairs (11/22/2022, free registration required), describing his belief that we are headed for a severe recession and that shocks will become more frequent. The reasons are longer-term trends in global supplies, less liquidity from central banks, geopolitical risk, climate change, and instability in financial markets. Dr. El-Erian advises that households, companies, and governments need to learn to navigate this new economic and financial shift.

Theon Mohamed at Markets Insider summarized the views of a dozen business leaders in “Jeff Bezos, Elon Musk, and Ken Griffin Are Sounding the Alarm on a US Recession. Here Are 12 Dire Economic Warnings from Elite Commentators.” I relate most to the quote from Jeff Bezos, founder of Amazon and Executive Chairman, who said, “Take as much risk off the table as you can. Hope for the best, but prepare for the worst.”

Steve Goldstein at Market Watch describes that “Fund Managers Are Overwhelmingly Forecasting Stagflation Next Year With No One Anticipating Goldilocks Scenario.” Mr. Goldstein describes a survey of 309 people managing $854 billion in assets, where 92% expect below-trend growth and above-trend inflation next year. The fund managers are underweight stocks and overweight cash. Mr. Goldstein summarizes expected returns as:

Over five years, the fund managers anticipate 6.1% per year returns in the S&P 500 4.8% returns from U.S. corporate bonds and 4.2% returns from U.S. government bonds. (Steve Goldstein, “Fund Managers Are Overwhelmingly Forecasting Stagflation Next Year With No One Anticipating Goldilocks Scenario”, MarketWatch, November 15, 2022)

Recession is my base case, and I have already taken risk off the table. How does an investor prepare for this investment environment? Matthew Fox at Market Insider describes Michael Hartnett’s view from Bank of America that investors should consider buying bonds in the first half of 2023 and stocks in the second half. Short-term bonds are a good investment when rates are rising, and longer-duration bonds rise in value as interest rates fall.


For a great summary of likely rate hikes, I refer Readers to a Bloomberg article by Steve Matthews and Chris Anstey, “Wall Street at Odds.” Wall Street is looking for rate hikes to nearly 5% by June of next year and tapering to 4.4% by the end of the year. Suze Orman elaborates on building Treasury ladders courtesy of Dana George at the Motley Fool in “Why Suze Orman Thinks Treasury Ladders Are a Good Investing Option.” Ms. Orman makes the point that “it’s wise to make sure a slice of their portfolio is guaranteed.”

Having to take withdrawals at the bottom of a bear market can devastate retirement savings. One of my strategies to reduce this risk is to lock in treasury yields in order to match withdrawals for 2025 through 2030, with yields currently ranging from 3.8% to 4.4%. This will lock in about 30% in one conservative Traditional IRA and, to a lesser extent, in other portfolios. I prefer to invest in multi-asset funds for simplicity, but this change to strategy will result in shifting into a more active approach instead of multi-asset funds.

The chart below shows that the current yield curve, as of November 26th, has remained high for durations less than two years and fallen significantly for longer durations compared to November 1st. Short-term rates will rise, and longer-term rates are likely to invert further.


I track nearly three hundred funds in over one hundred Lipper Categories using MFO Premium’s MultiSearch. I rank these funds based on Momentum, Risk, Risk Adjusted long-term Return, short-term returns, and Money Flow. The top-rated Lipper Categories are shown below. Average metrics are shown based on three-year performance. Monthly returns and percent below the 52-week high are from Morningstar. At this point, I am not adding to equities, and I am seeking to extend bond durations.

The highest-rated funds per top Lipper Category are shown below. I have sold some funds to create Treasury ladders but still own PQTAX, FMIL, GPANX, VGENX, and FSRRX. I plan to reduce inflation hedges further next year.


I follow the Bucket Approach with a Safety Bucket containing very conservative short-term assets. My risk is concentrated in longer-term Buckets. Allocations are based on withdrawal strategies. The Treasury ladder approach described in this article is for a conservative Traditional IRA, where I intend to take accelerated withdrawals.

With the world population now at eight billion people, the demand for natural resources is rising. Natural resources such as oil, copper, and rare earths are finite resources. New discoveries will be made, technology can reduce costs, and higher prices will convert marginal resources into viable projects. Geopolitical conflict and COVID have disrupted supply chains in these boom-and-bust industries. I recently purchased a solar system to reduce the long-term risk of energy disruptions and inflation. The potential benefits include converting gas utilities to electric over time and the possible purchase of an electric vehicle in the future. It is a small contribution to managing climate change.

Launch Alert: Fidelity Hedged Equity (FEQHX)

By David Snowball

On September 1, 2022, Fidelity launched Fidelity Hedged Equity (FEQHX) which is also available in five Fidelity Advisor share classes.

The goal is Fidelity Hedged is to provide capital appreciation. Presumably, it’s also to provide capital appreciation with less volatility than the stock market, hence the “hedged” piece. The strategy is to invest in an S&P 500-like stock portfolio. That means some growth and small value but mostly large cap. The managers then apply “a disciplined options-based strategy designed to provide downside protection” mostly by buying put options, which appreciate when the relevant underlying asset depreciates. Generally, the hope is to gain most of the market’s long-term return with a fraction of its volatility. The downside is that, even if the strategy is executed well, you sacrifice some of the market’s upside.

To date, the fund has done just that: it dropped markedly less than the S&P 500 in its first six weeks of operation and rose markedly less over the rebound in the following six weeks.

The managers are Eric Granat, Mitch Livstone, and Zach Dewhirst. Of the three, only Mr. Dewhirst has previously managed mutual fund assets.

If you’re looking for a more experienced team pursuing an essentially similar strategy, you should look at Bridgeway Managed Volatility, which we’ve profiled twice in the past. The fund’s consistent record gives you a good sense of what the strategy offers:

And, while the comparison is short, Bridgeway (in red) has executed the strategy better so far than has Fidelity (in blue).

The Managed Volatility homepage has a fair amount of information about the strategy and its record.

The Fidelity Hedged has gathered $47 million in assets, with no investment minimum and an expense ratio (after waivers) of 0.55%. The fund’s homepage is light on content, understandably, since it’s both new and Fidelity (a famously content-light bunch), but it provides the essentials.

Briefly Noted . . .

By TheShadow

Bridgeway’s Omni Tax-Managed Small-Cap Value Fund will be converted into the Omni Small-Cap Value ETF. The conversion will require the approval of existing shareholders. If the conversion is approved, it is expected to take effect on or about during the first quarter of 2023.

Fidelity, likewise, is moving more funds into an ETF wrapper. Two and a half years ago, Fido launched a series of trendy funds which promises to find the disruptors, not just the innovators, and profit from them.

To date, the funds have gathered neither assets nor plaudits.

Fidelity’s new move is to pop the trendy strategies into the trendy active ETF wrapper. Those changes will occur next summer, with the promise of “lower net expenses, additional trading flexibility, increased portfolio holdings transparency, and the potential for enhanced tax efficiency.”

Shelling out some gold, man: Goldman Sachs has agreed to pay $4 million over how it managed mutual funds and other products that pick stocks based on environmental, social, and governance criteria.

The Securities and Exchange Commission (SEC) said Goldman marketed their ESG funds and a similar investment strategy without always following a consistent framework spelled out in its compliance plans International Equity ESG Fund, the ESG Emerging Markets Equity Fund, and the firm’s US Equity ESG SMA strategy.

The SEC found that Goldman’s Fundamental Equity group, which managed its strategies, was using ESG scores generated from questionnaires to guide position sizing and stock selection in the funds without actually utilizing them.

James Velissaris, the founder and former chief investment officer of Infinity Q Capital Management (Infinity Q), a New York-based investment adviser that ran a mutual fund and a hedge fund that purported to have approximately $3 billion in assets under management, pleaded guilty to securities fraud. He faces up to 20 years in prison and is scheduled to be sentenced on March 3rd. He had initially pleaded not guilty and rejected plea deals with a trial scheduled to begin next week on six counts total.

Infinity Q and Velissaris had run the Infinity Q Diversified Alpha Fund, which was valued at $1.7bn before its closure in February 2021 but was later revised down to about $1.2bn. The firm also ran a hedge fund, the Infinity Q Volatility Alpha fund, which federal officials alleged was similarly overvalued.

Kinetics Medical, Kinetics Alternative Income, and Kinetics Multi-Disciplinary Income Funds are being reorganized into Horizon Kinetics Medical ETF, Horizon Kinetics SPAC Active ETF and Horizon Kinetics AAA-AA Floating Rate Debt CLO-ETF. The reorganization of each of the funds will be on or about December 9.

Mesirow goes less green. Mesirow Small Company Sustainability Fund has been renamed Mesirow Small Company Fund, and its mandates to invest in firms with favorable Sustainable Equity scores have been eliminated. The decision is curious and unexplained. Mesirow is a tiny ($24 million AUM), high-performing (five-star) fund with outstanding performance and most of its inflows this year. One could imagine two explanations: (1) they don’t want to be anywhere near the Republican backlash against sustainable investing, or (2) “sustainable” wasn’t paying the bills, so they thought they’d try managing without it. Regardless, a good fund.

RiverPark Strategic Income is moving to a new home. The five-star fund is moving, perhaps invisibly, from RiverPark to CrossingBridge Advisors. CrossingBridge is part of Cohanzick, which has managed it since its inception. Manager David Sherman reassures investors that they’ll feel no fallout from the move:

From an investment side, the team and process remain the same … RSIIX will remain the same to shareholders in name and practice in all respects.

The move gives CrossingBridge control over things like the fund’s marketing; the fund approaches its 10th anniversary with a five-star rating but just $222 million in assets. Cohanzick and CrossingBridge manage $2.6+ billion under four strategies: 

 Ultra-Short Duration with a duration of 1 or below under RiverPark Short Term High Yield (RPHIX) and CrossingBridge Ultra Short Duration (CBUDX)

Low Duration High Yield with a duration focus between 1.0-2.0 in high yield under CrossingBridge Low Duration High Yield (CBLDX)

Conservative total return emphasizing high yield but with a flexible mandate through RiverPark Strategic Income (RSIIX) and 

CrossingBridge Responsible Credit (CBRDX).

Folks curious about the strategies might enjoy the quarter commentary and portfolio review, available through the RiverPark website.

Good news and bad news from T. Rowe Price. Good news: Price’s funds, income, and equity, domestic and international, have consistently outperformed their passive competitors. A study released by Price in late November 2022 notes a 75% success rate for their funds, based on an analysis of performance over rolling 1-, 3-, 5- and 10-year periods.

Here’s the data:

Translation: if you hold the average T Rowe Price equity fund for five years, you have about a 70% chance of beating the market: which is to say, outperforming a passive index fund or ETF in the same investment arena. A second table in the same report tracks “the percentage of funds that outperform more than half the time (those with a “positive” active success rate”).” That’s 80% of all T. Rowe Price funds, including 100% of its asset allocation (e.g., target-date) funds.

The “rolling” part is important since it dramatically increases the number of observations tracked by the 20-year study. A one-year rolling metric does not just measure 2004 performance, 2005 performance, and so on. That approach would give you 20 observation periods and a lot of noise in the results. Instead, a rolling period analysis would include January 2004 to December 2004, then February 2004 to January 2005, March 2004 to February 2005, and so on. That results in 229 one-year observation periods, with the same process applied to 3-, 5- and 10-year periods.

On whole, the equity funds consistently have higher returns than their passive competitors without higher volatility; the income funds have slightly higher returns with substantially lower volatility. A win all around and one of the reasons that T Rowe Price holds about half of Snowball’s retirement portfolio. The complete study can be found here.

Bad news: investors are still drifting away. CityWire reports that Price suffered third quarter outflows of $25 billion, one manifestation of an “exceedingly challenging year” which had led Price to reduce expenses. Those reductions translate, in part, to a 2% reduction in the workforce, or about 150 jobs (“T Rowe Price lays off 150 workers,” 11/17/2022).

Morningstar reports Price as having net outflows every year since 2016, for a cumulative move of over $150 billion. That’s remarkable and appalling given the indisputable fact that the vast majority of these investors are damaging their ability to achieve their financial goals by reallocating money from a consistent, if quiet, winner to the Bright Shiny Bauble du Jour.

It also helps explain Price’s decision to both launch active, non-transparent ETFs and to selectively convert their existing funds into ETFs. Both moves give fund-averse investors a way to avoid the psychological stigma of being “fund investors” (people who likely still have 8-track players in the Lincoln Town Cars) while accessing Price’s exemplary stewardship.

Small Wins for Investors

In general, any conversion of a successful fund to active is a win for both shareholders and advisors since it lowers barriers to investing in the fund by eliminating minimums and carries the potential for lower expenses and more modern taxes.

Old Wine, New Bottles

Effective November 4, 2022, iMGP Equity Fund has been rechristened as the iMGP Global Select Fund with a commensurately more global portfolio.

Virtus Stone Harbor Emerging Markets Debt Fund and Virtus Stone Harbor Emerging Markets Corporate Debt Fund will change their names to Virtus Stone Harbor Emerging Markets Debt Income Fund and Virtus Stone Harbor Emerging Markets Bond Fund, respectively. Effectively, the changes will occur on January 30, 2023.

The Dustbin of History

Calamos Global Sustainable Equities Fund will be liquidated during the first quarter of 2023.

AB All Market Income and AB Tax-Managed All Market Income Portfolios will be liquidated in February 2023.

Clearbridge International Small Cap Fund is closing to new investors and will be liquidated on or about January 18, 2023. It’s a $30 million fund that seems perpetually trapped in the basement, so I guess this is a welcome relief of sorts.

If you like the idea of international small cap investing as a way to tap into a mispriced, undervalued asset class, our recommendation is to put Harbor International Small Cap on your due-diligence list. It’s pretty much the best there is.

ETFMG 2X Daily Inverse Alternative Harvest ETF liquidated on November 23, 2022.  The fund was up 37% YTD with under $1M in assets, not quite twice the 50% loss of its sibling Alternative Harvest ETF. That latter fund is in the midst of its fifth consecutive year of double-digit losses – and still has $380M.

Mirae Asset Global Investments approved the reorganization of two funds on November 11. The Mirae Emerging Markets Fund is being merged with the Global X Emerging Markets ETF, and the Mirae Emerging Markets Great Consumer Fund is being acquired by the Global X Emerging Markets Great Consumer ETF.  Both funds will retain their investment objectives and management teams. The management fee of both funds will be reduced as well. Both reorganizations will occur during the first quarter of 2023.

Delaware Funds is reorganizing four funds. The Delaware Total Return and Delaware Strategic Allocation Funds will be merged into the Delaware Wealth Builder Fund. The Delaware Equity Income Fund will be merged into the Delaware Growth and Income Fund. The Delaware Mid Cap Value Fund will be merged into the Delaware Opportunity Fund. The reorganizations will occur in March 2023.

Thomas White International and Thomas White American Opportunities Funds will be liquidated on or about December 28.

The Tocqueville Opportunity and The Tocqueville Phoenix Fund were merged into The Tocqueville Fund on November 18, 2022. They’re one of the first few funds that seem obsessive about including the “The” in all references to their funds. Robert Kleinschmidt (right) has been managing Tocqueville since 1992, and seems to be handling it solo. Opportunity and Phoenix were decent funds, nearly 29 years old, and managed by three other guys who do not now appear to be working with the mutual fund.

VectorShares Min Vol ETF closed to new investors and liquidated, on rather short notice, by the third week of November 2022.

Manager changes

Which fund? What changes, when?
1919 Financial Services Fund John Helfst became a portfolio manager of the fund in October 2022, joining Charles King, who has been managing it since 2017. Three other co-managers left the fund earlier in 2022, so Mr. H. represents needed reinforcements.
ClearBridge International Value Fund   Sean Bogda and Grace Su will be joined, in January 2023, by Jean Yu. The implication is that managers Paul Ehrlichman and Safa Muhtaseb might then step aside.
Invesco US Large Cap Core ESG ETF Paul Larson no longer serves as Portfolio Manager of the Fund. Nominally it’s an active ETF, but with an active share of just 15, that’s open to discussion In any case, Belinda Cavazos, Mani Govil, and Raman Vardharaj remain on watch.
PineBridge Dynamic Asset Allocation Fund Jose R. Aragon no longer serves as a portfolio manager and has been replaced by Austin Strube. Four other managers remain, three of them having served since inception.
T. Rowe Price Global Technology Fund Dominic Rizzo has been added as co-portfolio manager. Mr. Rizzo joined T. Rowe Price in 2015. Effective April 1, 2023, Mr. Rizzo will become the sole portfolio manager as Alan Tu transitions away from his role with the fund after three undistinguished years.
T. Rowe Price Science & Technology Fund Effective October 1, 2023, Anthony Wang will join the fund as co-portfolio manager. Mr. Wang joined T. Rowe Price in 2017. Effective January 1, 2024, Mr. Wang will become the sole portfolio manager of the fund as Kennard Allen transitions away after managing the fund since 2009.
William Blair Global Leaders Fund Kenneth J. McAtamney and Hugo Scott-Gall co-manage the Fund. Andrew Flynn has departed.
William Blair International Small Cap Growth Fund Simon Fennell and D.J. Neiman co-manage the Fund. Andrew Flynn has departed.