Monthly Archives: June 2022

June 1, 2022

By David Snowball

Dear friends,

Welcome to June and the unequivocal beginning of summer. I celebrated my 38th set of Augustana graduates.

Those of you who attend professional sports events think you’ve experienced “the roar of the crowd.” Pfah. Until you’ve been there on the moment when a young person becomes the first member of their family, ever, to earn a college degree, you’ve heard nothing.

I also bade farewell to nine of my faculty colleagues (some of whom I had a hand in hiring, which makes me wonder why they’re going so soon?) and my college’s president, Steve Bahls, who served us for 19 years. Steve is Augustana’s eighth president in 162 years.

It’s all good, and it’s all a touch bittersweet. I’ll miss them. I always do. And I’ll celebrate them. I always do.

My son celebrated, perhaps a bit more vigorously, the successful completion of his B.A. (and the impending beginning of his graduate work in counseling psychology) by charging through a 10’ geyser of water on a 50-degree day.

I nodded.

It’s all a matter of perspective

There is much to celebrate. And there is much to complain about. The question is, which will you choose to do?

The stock market has been the source of some anxiety.

The 14% in broad market indexes so far this year certainly is unpleasant. I should imagine that the declines experienced by yesterday’s Kings (and Queens) of the World are even more so: ARK Innovation is down 53%, the Meme Team stocks – tracked by the BUZZ ETF – are down 36%, a number of cryptocurrencies have been entirely wiped out with fan faves like Doge Coin and Shiba Inu dropping 50-70%, the average company brought public via a SPAC is down 43% YTD … you know bad stuff.

On the other hand, an investor holding the boring ol’ Vanguard Total Stock Market Index Fund (VTSMX) is down a whopping 4% in the past year, and still sitting on annual gains of 13.8% over the past decade. Dan Wiener, mastermind of the Independent Adviser for Vanguard Investors, shared a beautiful bit of perspective in a March 2022 note:

Dan wrote: “Your best defense, as a long-term investor, is to try and tune out the noise …The history of the stock market is littered with reasons to sell including wars, recessions, assassinations, invasions, and yes, even a recent pandemic. Those who sold out almost certainly weren’t able to time their re-entries. Me, I’ve done some buying. What about you?”

The market’s bottom is near … unless it’s not.

The bottom might be imminent. Morningstar (5/17/2022) has become convinced that “the market is undervalued.” Optimists rejoice that we’ve already reached “maximum bearishness” and corporate insiders are buying billions in their companies’ stock. Of course, “maximum bearishness” actually means “compared to recent years, using one measure of a fallible construct.” And insiders buy for many reasons, sometimes to convince the rest of us to follow.

Or the bottom might be cataclysmically far down. One measure of the market’s valuation, the Shiller PE ratio, sits at 32 even after the carnage, not quite twice the historic average. Jeremy Grantham, founder of GMO, estimates it as 40% further down. Not to be outdone, some random hedge fund manager claims it will be 78%. Economist David Rosenberg, the optimist in this group, calls for “a crash” but only by 17% more.

The price of gasoline is worrisome to many

Gas at over $4.00 a gallon? $5.00 a gallon? Who can put up with such madness‽‽

Virtually the rest of the developed world. For the past 25 years.

Price conversions are a bit tricky since petrol is priced in pounds or Euros per litre but the broad pattern is this: petrol topped a $4 / gallon mark in the last 1990s when Bill Clinton was in office and has never dropped below it. Here’s the British price in pence per litre. Any price about 105 pc is above $4 / gallon.

As of May 22, 2022, the per-gallon price in northern Europe was pretty striking.

During Mr. Trump’s last full month in office, the US produced 11M barrels of oil. Currently, we’re producing 11.7M.

Which is to say, it’s not us. It’s not Mr. Biden. It’s not a green cabal. And it’s not unusual … except for us.

And on and on. There are a lot of problems. We’ve created some of them through our own choices, voluntarily made. “We” thought day trading NFTs from our couches was a sure road to riches. “We” thought that driving the six-thousand-pound descendant of a military transport (the progenitor of the SUV) was a good idea. “We” thought that the best way to protect our children was to be sure that as many Americans had as many firearms as possible. (The Economist, 5/28/2022, laments that, in many states, it’s easier to acquire a gun than a puppy.) And many of us thought that shouting, rather than listening, was the way to solve our shared problems.

Perhaps we were wrong.

If you need to breathe, consider gardening (the psychological health effects of which can be pretty dramatic), supporting the slowly reopening business in Ukraine or perhaps picking up a copy of The Bright Ages: A New History of Medieval Europe (2021) at your local independent bookseller. It does a nice job of helping us rethink our tendency to see, and perhaps, celebrate the darkness (in this case, of “the dark ages”) while ignoring a wealth of evidence that the average person, on the average day, had a pretty good life.

Most importantly, consider stepping away from your newsfeed. To be clear: nothing you do today erases the losses your portfolio has already incurred. Staring and making yourself sick won’t help, and will likely lead to more imprudence. If you’ve got a long-term plan, stick with it and get on with your day. If you now reflect on your long-term plan, stick with it until you’ve had the opportunity to think clearly (about asset allocation, tax loss harvesting, and options for the next phase of the market).

Riddle me this, Batman. When is “the most active stock” not a stock?

Answer: Daily.

The Wall Street Journal publishes, daily among its market tables, a list of the ten most active stocks. Two oddnesses on this list:

  1. The most active stock is not a stock. On this fine day in May, it was the TQQQ ETF.

That’s a 2x leveraged bet on the NASDAQ; the fund rises 2% for every 1% the NASDAQ rises that day.

That’s not usual. Virtually every day in May, at least one ETF finished in the top three spots.

  1. There are signs of a mania, or perhaps madness or panic, here.

The “most active stock” is actually a leveraged bet in favor of the NASDAQ. The third most active stock is an equally leveraged bet against the NASDAQ, the fifth and 10th are straight bets on the S&P 500 and NASDAQ, respectively.

On several days in May, the #1 and #2 spots were occupied by the leveraged and reversed leverage NASDAQ with nearly 160 million leveraged bets being placed simultaneously in each direction.

The only way to win that game is not to play it. Either own a stock market yourself (the house always gets its cut) or invest with an eye of how a stock or asset class acts over the course of years or decades, not hours or days.

How much stock exposure should a long-term investor have?

It’s an interesting and vexing question, whose answer is always the same: “it depends.”

Several unconstrained, long-term funds at least give you a starting point for the discussion. FPA Crescent (FPACX), a ferociously independent fund that’s Gold rated at Morningstar (and my single largest personal holding) is 27% cash and 70% equity. Leuthold Core (LCORX), a rigorously quantitative allocation fund that’s also Gold rated, is 34% cash and 49% equities.  GMO Implementation (GIMFX), which used to be called GMO Benchmark-Free Allocation and will sport a $5 million minimum, is 28% cash and 58% equities.

My own portfolio remains about where I intend it to be: around half growth and half stability, half in the US and half international. In May, I made three purchases above and beyond my automatic monthly investments. In two cases, I gave $1,000 (a lot for me) to managers who have the freedom to buy stocks or to hold cash: Eric Cinnamond at Palm Valley Capital Fund (PVCFX) and Steve Romick at FPA Crescent (FPACX). I trust them to obsess so I don’t have to. The third purchase was moving money from “pure” cash to my cash surrogate, David Sherman’s RiverPark Short-Term High Yield Fund (RPHIX).

Stand, if you can, with the people of Ukraine

No one knows how the end of the Russian invasion of Europe will play out. It appears that Mr. Putin has been backed into a corner and, like any cornered creature, is lashing blindly out. The military strategy now appears centered on simple, brutal acts of annihilation: a “destroy everything, kill everyone” spasm. The US has shown remarkable leadership and most European countries have shown remarkable fortitude in opposing the invasion, supporting the Ukrainian military without escalating the war and welcoming refugees – some two million of them – into their countries.

Their need is great. Help if you can. Dan Wiener reports that a young friend has launched a line of shirts and caps to raise money for the Ukrainian people. She’s been getting some nice press in the Bay Area for her efforts. Chip launched herself at the website early; I think I might know what Father’s Day will bring.

One of the highlights of my short visit to the Morningstar Investment Conference was a quiet talk with Victoria Odinotska, a native of Ukraine and president of a really good media relations firm, Kanter Public Relations. Blessedly, Victoria’s family is now all of the country though many of her friends remain resolutely behind.

In Victoria’s judgment, two of the most compelling options for those looking to offer support is Razom for Ukraine (where “razom” translates as “together”) and United Help Ukraine, which has both humanitarian aid for civilians and a wounded warriors outreach.

Our June issue celebrates learning

In addition to my reflections above, there’s a theme of learning and growth this month.

Devesh Shah reflects on his recent journeys, both physical and mental, and on what they might offer the average investor in uncertain times

Mark Freeland writes about real estate investing and real estate funds, areas that he was not previously experienced with but which is essayed to master.

Charles Boccadoro shares his reflections on average personalization, multi-asset oysters and the pain, even now, of reliving Bill Gross’s unraveling.

And The Shadow does what The Shadow does: tracking down some of the industry’s many twists, twirls and disappearances.

I think you’ll enjoy, and hope you’ll learn.

Our July issue was seeded at Morningstar

I have a number of healthy conversations with really bright people. Those are the jumping off point for some mid-year content: an updated profile of Moerus Worldwide Value following a conversation with Michael Campagna, an updated profile of Harbor International Small Cap in light of some data Waldemar Mozes shared, and a long-overdue refresh for Matthews Asia Growth & Income which continues to do exactly what it’s supposed to do: provide really strong absolute returns in up markets (think 16-17% per year when its relative performance looks terrible) and top tier relative returns (think top 25% of the peer group) in falling ones. Met a new manager there, Siddharth Bhargava, and we’ll talk about what I might have learned!

Help out the folks at Conestoga Funds

This month we profile an interesting new fund, Conestoga Micro Cap Fund. It uses the same discipline as their very successful Small Cap Fund but applies it to smaller names in a less efficient corner of the market. The new fund is a converted hedge fund with a solid record.

If you’re an advisor, read the profile and think “huh … that’s interesting,” you would do them a favor? Call your brokerage – Fido, TD, Schwab, whoever – and ask them to add the fund to their platform? I had a nice chat with one of the Conestoga guys who I’ve known for a long while and he says the platforms tell him that they won’t act until they hear from advisors who say they want it.

And thanks!

Launch Alert: Artisan International Explorer Fund

By David Snowball

On 16 May 2022, Artisan Partners launched the Artisan International Explorer Fund (ARDBX / ARHBX). The fund is the public manifestation of their International Explorer strategy which launched in November 2020. Since inception, the IE strategy is up 41% annualized while its benchmark is up 31%. Currently, the fund is open only to advisors ($250,000 minimum) and institutions.

Artisan Partners is organized into autonomous management teams, each responsible for their own investment strategies and teams. This fund is overseen by the International Value team which is headed by David Samra and which advises the five-star Artisan International Value Fund. The IV team describes itself as “idiosyncratic investors who share a passion for investing in companies with unrecognized value. The team seeks to invest in high-quality, undervalued companies with strong balance sheets and shareholder-oriented management teams.”

The goal here is to build a concentrated portfolio of 25-30 high quality businesses in the least efficiently valued area of the public markets. They’re convinced that international small caps are the least efficient space because they’re hard to research, easy to misunderstand and lightly covered. And so they’re focusing here because it is where, they believe, they can most effectively “add alpha.”

The fund is managed by Beini Zhou and Anand Vasagiri, with David Samra sort of hovering protectively in the background. Mr. Zhou came to Artisan from Matthews Asia where he managed the Asia Value strategy and fund (since liquidated) but … Mr. Zhou came to Matthews Asia from Artisan, where he served as an analyst for seven years on the International Value team which he now rejoins. Mr. Zhou holds a BA in Applied Mathematics from Harvard and a MS in Computer Science from University of California-Berkeley.

I’ve spoken twice, at length, with Mr. Zhou at the Morningstar Investment Conference. I talk with lots of managers each year. He is among the most impressive I’ve met in terms of clarity and precision of thought and expression. He was, at our last conversation, in the midst of taking courses on artificial intelligence and teaching himself a new programming language with the intent of designing a program that could scrape qualitative data, not just statistical data, from conference calls and other corporate documents.

Mr. Zhou made two arguments: that Asian markets were evolving in a way that will benefit value investors and that most of the folks attempting value investing in Asia don’t “get it.” Doctrinaire thinking, or an over-dependence on quantitative measures, leads most investors into value traps. (He lays the argument out in “Value Investing in the Digital Age,” 2019)

He attempts to avoid those landmines using two, complementary strategies. First, he spends a lot of face-to-face time with management, deciding whether or not they’re the sort of people with whom he could invest. “The jockey,” he argues, “is often as important as the horse. When we meet with a founder in Asia, numbers are secondary and we use our initial first-hour meeting to inquire about the history, culture and DNA of the organization.” That’s the point at which individual intellect partners with deep linguistic and cultural knowledge to produce clues that others might miss.

Second, he tries to connect the dots in ways that others don’t. He sees great value in tech stocks despite the fact that “value orthodoxy avoids tech.” Ten of the hundred firms on his immediate watchlist, those that meet his quality criteria but don’t yet represent good value, are tech firms.

With luck, and skill, he identifies 30-40 “quality businesses where bad things have happened” that are actively changing their fate and that sell for $.70 on the dollar (“I want to buy a dollar for $.70 so long as it’s soon going to be worth more than a dollar”).

Mr. Vasagiri joined Artisan in 2019 as serving as portfolio manager for the Paradice Global Small Cap Strategy for nine years but …Mr. Vasagiri came to Paradice from Artisan where he served as an analyst for three years on the International Value team which he now rejoins. Mr. Vasagiri’s undergraduate degree is in mechanical engineering but he holds master’s degrees in business from both the Thunderbird School of Global Management (at Arizona State) and the Booth School of Business (at the University of Chicago).

The fund’s opening expense ratio is 1.42% after a modest fee waiver and the minimum investment for advisor shares is $250,000. The International Explorer Fund’s homepage is a bit sparse but there’s a solid “Insights” paper on The Artisan International Explorer process (2022) and a solid Year in Review (2022).

Easy Access Analysis

By Charles Boccadoro

Our MFO Premium search tool site now makes it quick and easy to run several analytics that previously required accessing through the main MultiSearch tool. Users can click on the Analyze link in the navigation bar atop any page, including Home, to run Chart, Compare, Correlate, Rolling Averages, Trend & Momentum, and Ferguson.

On first run, users will be prompted to enter up to 12 tickers. Once run, those same tickers can be used to run any other analysis tool or modify accordingly. This feature gets us one step closer to enhanced mobility, enabling focused fund analysis via your cell phone.

Here is screenshot of quick-access, pull-down analysis menu …

And below is an example MFO Chart run from the quick access Analyze link for some of the older Dodge & Cox funds.

Once the initial analytic is run, users can use either the Analyze link in the navigation bar or the Analyze button to run other analytics or new/modified tickers. The only limitation of the quick analysis feature is 12 tickers; whereas, running say Rolling Averages, Trend & Momentum, and Fergson with MultiSearch allows up to 1000 tickers obtained through various screening criteria.

Conestoga Micro Cap Fund (CMCMX / CMIRX), June 2022

By David Snowball

Objective and strategy

The Fund seeks to provide long-term growth of capital. The plan is to invest in 25-40 microcap stocks that are attractively priced relative to their growth prospects. Across the firm, the managers favor companies which have sustainable earnings growth rates, high returns on equity, low debt levels, and capable management teams. The strategy aims to produce consistent returns with low volatility and reduced downside capture.


Conestoga Capital Advisors, LLC. Headquartered outside of Philadelphia, Conestoga had its origins in the 1980s but the firm itself wasn’t incorporated as an independent advisor until 2001. Across all of its manifestations, the strategy focuses on creating high-conviction portfolios of high-quality conservative growth investments. Two of the firm’s four founders remain onboard. As of March 31, 2022, Conestoga managed approximately $7.7 billion in assets. The firm has grown steadily since its inception and has remained 100% employee-owned.


The lead portfolio managers are David Neiderer and Joseph Monahan, with founder Robert Mitchell sort of hovering in the background. That same team managed its predecessor limited partnership.

Mr. Neiderer joined Conestoga Capital Advisors in July 2013, became a Partner in 2018 and provides research support for the Small and SMid Cap strategies as well. Prior to joining Conestoga, David had similar responsibilities as a Research Analyst at both Penn Capital and Chartwell Investment Partners. He is a CPA, a CFA Charterholder, and a member of the CFA Society of Philadelphia.

Mr. Monahan is Conestoga’s Director of Research. He joined Conestoga in 2008 after serving as a portfolio manager and SVP at McHugh Associates. He is a CFA Charterholder
and a member of the CFA Society of Philadelphia.

Mr. Mitchell is one of the firm’s four co-founders and its Chief Investment Officer.

The team is supported with research from Larry Carlin, CFA, Derek Johnston, CFA, Ted Chang, CFA, and John Schipper.

Strategy capacity and closure

Approximately $500 million. While there is no formal policy on closing funds to new investors, their flagship Small Cap fund and strategy has already been closed to new investors.

Management’s stake in the fund

None yet reported. The managers’ ownership of the flagship Small Cap fund is modest but, Morningstar reports, the managers have committed much of their investable wealth to acquiring the shares of the advisor from retiring partners. Mr. Mitchell has invested between $500,00 and $1 million in Small Cap while Mr. Monahan has invested between $100,001 and $500,000 here.

Opening date

The Fund was launched on December 17, 2021. The strategy began life as a limited partnership, also called the Conestoga Micro Cap Fund, LP, on November 30, 2018 which means it’s coming up on its five-year anniversary.

Minimum investment

$2,500 for Investor shares, $250,000 for Institutional ones.

Expense ratio

1.50% for Investors shares and 1.25% for Institutional shares on assets of $2.3 million (as of July 2023). 


In general, there are two entirely rational approaches to growth investing.

Approach #1: Buy high quality companies which provide steady earnings growth and steady dividend growth. Resist the impulse to get twitchy and allow growth to compound over a period of years. “Great businesses at a fair price,” in Mr. Buffett’s parlance.

Approach #2: Buy high-quality companies which provide steady earnings growth but which are also selling at a discount to their prospects. Allow growth to compound over a period of years and harvest additional gains that come when other investors discover their original mistake and reprice the stock.

Conestoga does the second, does it very well and has been doing it consistently for a period of decades. That record is embodied in the $3.3 billion flagship Conestoga Small Cap Fund (CCASX / CCALX ) which Morningstar celebrates:

Conestoga Small Cap’s proficient investment team, principled approach, strong long-term track record, and competitive fees earn both share classes a Morningstar Analyst Rating of Silver.

The approach follows reasonable, clear guidelines. The managers target firms that can grow earnings at least 15% per year and generate 15% or more return on equity over the next three to five years. Low debt and decent insider ownership help. The team has long built its portfolio on mostly profitable, financially healthy companies relative to its small-growth Morningstar Category peers and the Russell 2000 Growth Index. Conestoga has also managed capacity pretty well, closing the fund to most new investors in 2018 amid a spike in assets. (Tony Thomas, Morningstar analysis, 9/16/2021)

Over the past 15 years, Conestoga Small Cap is one of the 10 best small cap growth funds or ETFs whether measured by total return, Sharpe ratio, maximum drawdown, bear market deviation, down market deviation or Ulcer Index (a measure of the combined depth and length of a fund’s worst fall).

It is also much of the reason to consider its microcap sibling.

The case for microcaps

Investing Approach #2 benefits from the managers’ ability to find mis-priced assets. Mispricing occurs when other investors conclude that an asset isn’t worth their time (Vanguard, for instance, can’t afford to be interested in microcap stocks because their total effect on a huge Vanguard fund would come down to a rounding error) or is too hard to assess or access (as in the case of international small caps). As a result, the median number of institutional analysts for microcap stocks is one (BMO, The Case for Microcap Investing, 2017).

There are nearly 5000 US companies with market caps of $1 billion or less, a common threshold for “microcap.” Many of those tiny firms are undoubtedly screwed up, which leads investors to discount the entire group. Conestoga argues that there are phenomenal, low-debt, high-quality businesses available if only you know how to look. Those higher quality microcaps have higher returns, lower volatility, better Sharpe ratios and better Sortino ratios than their peers. Low-debt microcaps returned 9.5% annually from 2000-17, which is 130 bps above microcaps as a whole and 175 bps higher than the Russell 2000 Index (Foundry Partners, 2018). Over long periods, microcaps decisively outperform stocks of any other size … but that outperform comes at the price of higher volatility.

If you become a specialist in understanding investments that others barely grasp, and in understanding how to assemble them as a portfolio that won’t implode, you can generate serious gains for your investors. That’s Conestoga’s niche and core competency. Their portfolio companies have stronger revenue and earnings growth, higher gross margins, stronger return on equity, and substantially less debt than their microcap peers as a whole.

The record of the Conestoga Micro Cap, which includes its years as a limited partnership and which is reported in the fund’s regulatory documents, shows many of the same strengths we see in its sibling.

In the three years since its launch, it appears that the strategy has outperformed in exuberant markets (2020), tepid ones (2021), and declining ones (2022, through April).

The Micro Cap portfolio is an extension of Small Cap’s, with many firms that they’ve researched but concluded were too small for the Small Cap fund included in Micro Cap. Indeed, 11 stocks appear in both portfolios. The team concludes:

Our conviction in the portfolio companies remains high, and we believe that our emphasis on higher-quality companies that are generating profits, with low debt levels, and high returns on equity will be rewarded during more volatile markets over the long-term.

Bottom Line

For the past 15 years, the key driver of performance for risk assets has been a combination of near zero interest rates (aka “free money”) and the unquestioned faith that the Fed would always step in to keep the stock market from falling too far (aka “the Fed put”). That has, richly, rewarded momentum-based strategies that concentrated on fewer and fewer stocks that were larger and larger.

If you are an equity investor who suspects that those heady days are gone now, you need to look where the crowd hasn’t gone and you need managers who are skilled in the patient management of risk in pursuit of long-term returns. On whole, Conestoga Micro Cap warrants a place on your due diligence list.

Fund website

Neither the fund’s homepage nor the strategy’s yet offers a huge amount of immediate information, but the material is clear and the quarterly commentaries are steady and sensible.

An Investor’s Journeys, In Body and Mind

By Devesh Shah

Hope your road is a long one.
May there be many summer mornings when,
with what pleasure, what joy,
you enter harbors you’re seeing for the first time;
may you stop at Phoenician trading stations
to buy fine things,
mother of pearl and coral, amber and ebony,
sensual perfume of every kind—
as many sensual perfumes as you can;
and may you visit many Egyptian cities
to learn and go on learning from their scholars.

Keep Ithaka always in your mind.
Arriving there is what you’re destined for.
But don’t hurry the journey at all.
Better if it lasts for years,
so you’re old by the time you reach the island,
wealthy with all you’ve gained on the way,
not expecting Ithaka to make you rich.

(C.P. Cavafy, “Ithaka,” 1894, 1910 … maybe a little 1911)

I’ve been traveling a lot recently. My mind often travels, through books and arguments and streams of data; more recently, my body has gone on the road as well. I’d like to share a little of what those travels have meant, to me as a person as an investor.

Journeys of the body

I finally went to Mumbai to meet my parents after two years of pandemic-related travel disruption. The weather was still mild in late March, early April and we were lucky to travel for a few days to the holy city of Rishikesh, in northern India. The journey allowed me to fulfill a life-long desire to take a dip in the holy Ganga river. In mid-April, we went to Provence for the kids’ spring break. Finally, in mid-May, I went to Chicago to attend the Morningstar Investor Conference where I finally met in person Charles Boccadoro, David Snowball, and some very thoughtful fund managers.

Traveling is very important to me because I crave to hear first person stories of what’s going on in our world. Our planet represents billions of experiences and while it’s convenient to look for an easy narrative in the news, travel offers purely divine lessons for the curious minded. When I travel, I try and listen carefully. Whether it is the gentle flow of the Ganga or the wildly different perspectives of strangers, there is so much to learn and so many old delusions that need to get destroyed.

Journeys of the body

Hearing the flow of the waters of the Ganga near Rishikesh

At Devprayag, where two rivers, the Bhagarathi and Alaknanda merge with the underground Saraswati River, to form the Holy Ganga.

At the Pont Du Gard where a two millennium-old aqueduct crosses the river Gardon.

And in Chicago, with Charles

Journeys of the mind

I am also listening to lots of professional investors and fund managers. By watching their videos, podcasts, and reading their letters to shareholders, we get to view the market through their lenses. There is a saying on Wall Street: Nobody ever made money talking. Listen carefully. What better time than the financial turmoil of 2022 to listen carefully. Genuine internal progress is made through reading, listening, observing, and then analyzing and thinking. Finally, we must adapt the knowledge to what works for each one of us individually.

Unexpected market environments bring portfolio losses for almost everyone. We know that to be the price for being in liquid capital market assets. But for that price, we also get a silver lining. Among some benefits of a market selloff are forced humility, healthier valuations, tax loss harvesting, and a good starting point for the lightly invested folks. One more benefit is to learn from a variety of professional fund managers to see how they played this game so far and what they think is next on the horizon. It is also an opportunity to calibrate what we thought would happen to our portfolio versus what actually happened to the portfolio.


I use three (paid) services to track a growing list of active fund managers: MFO Premium, Y Charts and Portfolio Visualizer. I’ve set up templates with all the funds (and some stocks) I follow. I sort the funds by year-to-date returns and pick 4 categories of funds: best absolute returns, worst returns, top benchmark outperformers, and some self-selected funds where I might have met the managers or heard about their investing prowess. I include the bottom performers because when times are tough, fund managers open up with greater willingness than usual to share their thoughts and processes.

It’s easy to be carried away and be judgmental. I find that exercise not helpful. I have invested long enough to know it’s really difficult to do it well, to be consistent, and to perform in the public eye. I try to learn when I can from those who are on the front lines of the battlefield, and if there is nothing to learn, we can move on to the next fund.

Nature of Fund Manager/CEO Letters

The qualitative part of most fund manager letters are configured in three parts: the manager’s perspective of the macro environment, portfolio construction that’s hurt or helped, and individual security analysis that the manager feels confident in sharing.

I usually focus just on the macro-outlook and portfolio construction. I avoid reading too much about individual securities because a good stock or credit analyst can pretty much convince me of anything they want to convince me of. We know the fund managers know how to analyze securities; we want to know how well they were able to use that knowledge to make money.

The first time I read a letter from a fund manager, I want to match the fund’s performance to portfolio construction. If I think the manager is good at setting up a framework and laying out a portfolio that lives by that framework, I then go back into the archives and read from 6 months, 12 months, and 24 months ago. How was the portfolio constructed at those points compared to the fund manager’s thought process? I like to know if the fund manager investment picks worked well when they called the market well. And I want to know what happened to the fund when they didn’t call the market well. I don’t believe anyone can see the future; but good investors can pick investments where the odds are in their favor, regardless of the future.

When I read a letter where the fund is struggling, I want to see if the fund manager is reducing risk or adding to positions. What are they rooting for? Are they pragmatic? If not, is it because the incentives are not set up right? For example, is a growth manager always going to tout growth stocks no matter what the season. Is that stubborn touting helpful to me as an investor? Are there growth managers who raised cash when valuations got excessive? Do they have a habit of making such wise decisions or was this one off?

Finally, many fund managers have fantastic websites with lots of information. On the opposite end, some managers have very dry websites. I think it’s very important for fund managers to communicate with current and prospective investors. Fund managers should write for themselves (and then post it online so others can benefit). Even if we investors don’t learn anything, you will become a better fund manager by writing out your thoughts and trying to present them more clearly to us.

Berkshire Hathaway’s annual shareholder letter is a great starting point for acquiring wisdom on investing and the markets. With the Annual meeting televised since the last few years, I found myself glued to CNBC watching Buffett and Munger tackle questions for a great part of the morning and afternoon on the 1st of May. He talks a lot about companies self-selecting shareholders and has done a particularly good job in laying out his framework. I think this kind of framework showcasing is very important for active fund managers to attract the right kind of fund shareholders, and I hope more managers will be involved in this process. Without the lack of thoughtful reading from the manager’s desk, the end investor can only rely on performance chasing, which is the worst way to accumulate assets and investors.

Here are some other handpicked comments and charts from a smattering of MFO Profiled funds I have started following. The Total Returns for each fund are as of May 24th, 2022.

The Outperformers

Invenomic Fund: (BIVIX, formerly Balter Invenomic) +49.73% YTD (commentary as of mid-May). The fund is closed to most new investors.

Our short portfolio drove performance for the fund again in April. Year-to-date through April, our short portfolio has contributed approximately 36.6% to our returns on a gross basis…. Given the sharp selloff in risk assets, our net exposure has drifted higher from the end of April to mid-May. One of the main reasons for the increase in net exposure is our shorts getting smaller as they fall toward our price targets. We are also adding new longs to the portfolio as stocks drop and hit our buy targets…. We are finding opportunities to buy attractive assets at fantastic valuations, while continuing to short, overvalued companies likely to disappoint investors, in our opinion. We expect the volatility in the market to remain elevated for the foreseeable future.

Aegis Value Fund (AVALX) +13.29% YTD (Commentary for H2 2021)

Conventional investors, intoxicated on recent returns, have been ignoring increasingly precarious financial conditions… While pundits laud these mostly mega-cap technology investments as the new safe havens, given the nose-bleedingly high valuations to which these stocks have ascended, we suspect that owning these stocks has become a massively overcrowded trade… At the Aegis Value Fund, we have worked to hitch our own wagon to equities that we believe are among the most undervalued in the market today.

(Table as of March 31, 2022)

[Ed. Note: Look at the contributions to Energy and Materials coming into the year for the fund! Genius or too risky?]

AXS Market Neutral Fund (COGMX, formerly Cognios Market Neutral): +5.63% (commentary as of March 2022)

Our conclusion is that while the stock market as a whole is expensive, there is increasingly a group of extremely expensive stocks and an oasis of very reasonably priced stocks, providing an opportunity for both long-only, value-oriented investors and those investors interested in the arbitrage opportunity between these cheap and expensive stocks in a long-short/market-neutral fashion.

RiverPark Short Term High Yield (RPHIX) +0.24%

The Fed is using higher interest rates and quantitative tightening to quell inflation. Whether they will be successful, we have no opinion….

For a manager who says we have no opinion I find it fascinating how this bond fund is UP this year given the brutal selloff in the entire fixed income universe. The Q1 2022 letter is full of details explaining investment process, portfolio construction, the SPAC redemption strategy, and the macro environment.

Funds where the going is tough right now

Riverpark Long Short Opportunity (RLSIX) -50.38% (Q1 2022 Commentary)

Although many of these companies were “COVID Winners” that helped propel strong results for the Fund in 2H20 (and remain amongst the most exciting growth businesses we own), investors have aggressively rotated away from these (and many other) high growth names in a “risk off” reaction to the current macro and geopolitical landscape.

Rather than follow the market’s so-called “de-risking” strategy, we “leaned in”… Given the impressive fundamentals throughout the long portfolio, our current long book now represents the highest revenue and earnings growth portfolio that we have owned since the fund’s inception in 2009.

Artisan Small Cap Investor (ARTSX) -34.99%

But market rotations away from growth can make this a “self-correcting problem,” leaving us with a more attractively valued portfolio (which we believe we have been able to upgrade during the rotation) that has performed well over full market cycles. We perhaps don’t say this frequently enough—it is our clients’ trust and patience that have allowed us to maintain this long-term perspective during periods of underperformance.

Seafarer Overseas Growth and Income (SIGIX) -8.24% (outperforming EM benchmark indices)

David Snowball introduced me to Andrew Foster at the Morningstar Investor Conference, and I had the opportunity to ask him many questions on EM investing. I walked away wanting to read a lot more of his writing because he said, “Our research pieces seem to be inconclusive and not prone to one word Buy or Sell recommendations.” Mr. Foster’s anti-twitter philosophy of investing clicked with me. Later, upon doing research I noticed that Seafarer had beaten the benchmarks handily because it had managed to avoid Chinese internet stocks and Russian stocks. It took me a while to go through the various articles and come across this gem of a theory the fund manager labels Control Party Analysis.

In my work, I utilize an analytical technique that I call “control party analysis” to determine which person or entity controls a company. Experience has taught me that it is problematic to assume that a large shareholder, founder, or executive board is in control of a company, regardless of public perception. Instead, I prefer to create a hypothesis as to the identity of the control party, and then use the company’s historical transaction record (i.e., financial statements, and major corporate actions and decisions) as evidence to test the hypothesis….

These facts, when taken together, suggest the government enjoys material sway over the sector. Further, the facts suggest that the government exercises control not only via ad-hoc restrictions and censorship, but also over cash flows and capital allocation. Given the government’s past record of intervention in the banking sector, this gives me pause. At best, I know that despite the public image of the Chinese internet sector, it is not made up of growth-seeking companies piloted by visionaries. At worst, I wonder whether the future of the sector will fall short of the potential that investors currently ascribe to it, and whether such inflated valuations will persist. (Commentary from Q2 2017)

The challenge for investors and fund managers

Some active fund managers are working hard to differentiate themselves from index hugging. Investors looking for alpha may be tempted to eschew indices and instead look for a growth fund here, a value fund there, or an international small cap fund somewhere. This product hunting is a mistake. When investors go product hunting, they get married into innovation, ESG, crypto, etc. Instead, spend time focusing on the manager.

When you read letters, read about how the managers thinks. If you like the way they think based on their current commentary and performance, go back into the archives, and read more.

Maybe after reading hundreds of letters, we might be lucky to find a few good managers. We hope they will be smarter than us, more tenacious, lucky in investing, skilled in their craft, and determined to invest in the markets despite the tough love markets dish to all who come to it.

There are many rivers in India but only one considered to be the holy Ganga. All rivers are important, and we need every one of them, but it takes a special kind of river to help get us to where we want to be.

A Return To Normalcy: MICUS Chicago 2022

By Charles Boccadoro

Morningstar held its annual investment conference [Morningstar Investment Conference US (MICUS) 2022] in Chicago during the beautiful month of May, beginning on the month’s 16th day.

And with it came the return of …

  • The expansive venue of Chicago’s McCormick Place … “the largest and most flexible use convention center in North America.”
  • In-person attendees of 1500, plus another 500 virtual participants.
  • In-person appearances of top money managers, like T. Rowe Price’s David Giroux and AQR’s Cliff Asness.
  • The massive keynote luncheon, which included large round tables with white table clothes and an army of waiters in black vests.
  • Dozens of mutual fund house kiosks with sharply dressed staffers answering questions and handing out promotional material and trinkets.
  • Roof-top social gatherings at venues like the Chicago Athletic Club, with lots of smiles and chatter.
  • The traditional press dinner where Morningstar executives and analysts give generous amounts of time answering questions and providing industry perspectives.

Gone were the masks and mandatory temperature testing before entering the venue.

It was a welcomed return to normalcy post COVID restrictions in the US.

Active Personalization
This year marked Kunal Kapoor’s 25th conference as a Morningstar employee; the last five as CEO. (See “A Leap of Faith – MICUS Chicago 2021.”) He described the conference: advisor focused, investing centric, and no pay-to-play. Its recurring theme: Morningstar’s desire to help advisors personalize their practices at scale, particularly with the growing younger investors aged 18-35, which represent 30% of its website’s visitors. “At Morningstar we believe that active personalization is the new active investing.”

Kapoor’s approach comprises three elements: returns (aka winning strategies), risk (aka personalized portfolios), and sustainability (aka investable world).

“Let’s face it, without good results no amount of personalization is going to matter,” he stated with brutal honesty. He then highlighted the how funds that receive Morningstar’s qualitative, analyst-rated gold, silver, and bronze medals outperform their peers. He doubled down on importance of these analyst ratings as well as its algorithmic quantitative surrogate ratings in helping advisors sort through the ever-expanding product offerings, especially in “avoiding bad apples.” He noted that gold-rated funds have nearly 100 times more advisor and investor engagement than non-rated and negatively rated funds.

Multi-Asset Oysters
The opening keynote session, entitled “The World Is Your Oyster,” contrasted multi-asset investing styles between David Giroux, manager of T. Rowe Price Capital Appreciation (PRWCX) and BlackRock’s Kate Moore, part of the team behind BlackRock Global Allocation (MALOX). Morningstar awards PRWCX a gold medal and describes it as “one of the best in the business,” while MALOX maintains a silver metal. PRWCX is also an MFO Great Owl and Honor Roll fund. Since the beginning of the current bull market back in March 2009, some 13 years ago, all of which under Giroux’s guidance, the fund has rewarded its investors with 14.2% per year. That kind of performance turns $10,000 into $60,000. Its outperformance remains remarkably consistent, as evidenced in Ferguson and rolling average ratings available in MFO Premium.

Giroux does not see a recession coming, certainly not a severe one, but it’s probably already priced in. He believes recessions are rare, but recession predictions are constant. He keeps things simple, takes a 3-5 year view, using a 90% company fundamentals and 10% macro economic approach. He believes macro views can change rapidly and are usually wrong, so taking the opposing view has served the fund well. “Our mantra is we zig when the markets zag.”

He likes stable growth at reasonable price (GARP) stocks. And he likes levered-loans in fixed income part of portfolio. Treasuries are starting to pay decent yields. The fund used the current correction to reduce its cash from 12% to 3% and go overweight equities. If equities decline further, he will add more, but does not see a systemic risk in markets like 2008. If there is not a recession, like there was not when predicted in 2011 and 2018, the portfolio is now well positioned to grow.

Giroux believes deploying capital well is the most important responsibility of company leadership and ultimately drives stock price. He recently authored a new book, entitled “Capital Allocation: Principles, Strategies, and Processes for Creating Long-Term Shareholder Value.”

In the press room session, he stated GE under Immelt “is just a really, really sad story.” It represents one of the greatest destruction of capital ever, by what was once considered the best American company. And GE now? They’re doing everything right under new leadership, but just having a string of bad luck (e.g., COVID). He avoids empire builders. He avoids commodity stocks, like oil companies, because traditionally they have been bad capital allocators, have high volatility, and marginalized influence of company leadership … all companies rise and fall with the commodity price.

He finds Amazon the most disappointing stock. Its cloud operation alone (AWS) is worth $2000 per share, which means the rest of company is run “like a non-profit … good for customers, but bad for shareholders.”

Per Moore: “I’m not bearish just more measured” in her positioning. BlackRock takes a more macro view and employs a full suite of asset classes, including heavy use of options. Contrary to Giroux’s fund, MALOX holds close to 30% cash and is overweight energy. While she too sees little chance of recession, valuations remain elevated, and she does not see a lot of positives driving equities higher.

An Uncomfortable Luncheon
The keynote luncheon speaker was not Daniel Kahneman, Doris Kearns Goodwin, Michael Lewis, or Eugene Fama. Instead, Mary Childs discussed her new book about the rise and fall of Bill Gross, entitled “The Bond King: How One Man Made a Market, Built an Empire, and Lost It All.”

She recalled one of most gobsmacked moments in Morningstar conference history, when Bill Gross, legendary founder of PIMCO and manager of the then gold-medaled PIMCO Total Return (PTTRX) and largest bond fund, appeared on stage in Men In Black sunglasses and compared himself to Justin Bieber. That was June of 2014; by November, Gross was gone from PIMCO. Childs expects the cautionary tale she penned to be made into a movie. Honestly, sitting through the conversation made me as uncomfortable as witnessing Gross that year. The lunch itself? Excellent.

No Pain, No Premium
Morningstar’s Ben Johnson started with the hard question first, paraphrasing: How do your investors stick with a strategy that is not performing well? Value was clobbered from 2018 through 2020, especially when COVID hit. AQR’s Cliff Asness explained that in a perfect world, you can stick with an underperforming strategy as long as you can understand why it is underperforming. But he acknowledges, the world is not perfect. While he remains firm in his belief that the best fund an investor can own is the one he or she can stick with, some of AQR’s strategies may be suitable to fewer investors. Or, at least, they must allocated appropriately in a diversified portfolio.

And value prospects now? He’s as excited as he’s allowed to be. While he expects the outsized growth-to-value spread bodes well for value in the next three years, similar to post dot-com bubble, he’s bracing for volatility in the near-term because “nothing is linear.” So, he believes “markets may not be perfect, but they are not usually totally insane.” Right now he sees historic spread and momentum supporting value. “Perfect combination,” he insisted. Then added, “but nothing is guaranteed.”

He does not believe a portfolio constrained by ESG will provide “free lunch,” getting paid to do good. “There is no world where imposing more constraints make you better off.”

Ben saved the easy question for last: If value factor were a superhero, which superhero would it be? “Spiderman is a value factor,” Cliff answered promptly, “because he always had problems. Superman is a growth factor.” In addition to recent value behavior helping reverse years of mediocre performance at AQR, the firm boasts nine alternatives with double-digit returns, as depicted in YTD table below through April. Over the 12 months, 91% of AQR’s 23 funds have beaten their peers. Much better than 55%, its 5-year record.

Pure Speculation
Morningstar recently published its first coverage report on crypto, entitled “2022 Cryptocurrency Landscape.” Not because it thinks crypto is a good investment or even views crypto as an investment period, but because crypto now represents the 4th largest asset class by market valuation at $1.7 trillion, after stocks, mutual funds, and bonds (as of 5 April 2022).

Here’s how senior Morningstar analyst Madeline Hume characterizes the space:

Cryptocurrencies warrant extreme caution. Today, cryptocurrencies lack academically substantiated valuation methodologies. Until more methods for valuing these securities become available, the absence of intrinsic valuations disqualifies cryptocurrencies as a fundamental investment. As high-octane securities with a spotty past, investors should treat any purchase of cryptocurrencies as sunk cost.

Baird’s Hybrid Approach
All ten Baird bond fund have beaten their peers since inception. Baird’s Mary Ellen Stanek, 2016 Morningstar Fixed-Income Manager of the Year, described their strategy as a hybrid: passive with regard to duration neutrality against the benchmark, but active when it comes to credit and portfolio construction.

Half of its funds have been around for 20 years, nominally. So, all have benefitted from the secular bond bull market. This year, however, while still early, its funds have suffered along with the benchmarks because of rising rates.

Could investors now face a reversal … a 40-year bond bear? She does not think so. For one thing, as rates rise, bonds become more attractive, which helps stabilize market sell-offs, especially as expectations get priced in.

The firm, which now manages over $100B, instituted a low-fee policy from the outset, most just 30bps. “The bigger the fee or the drag the bigger the hole you are digging for your investors.” It’s a privately held, employee-owned firm with investor-aligned priorities and long tenured employees. Hers was a refreshing perspective.

The Coverage
Morningstar’s coverage of the conference remains comprehensive and improves each year with new communication technologies, from access to money managers and Morningstar analysts, session videos and briefings. If you’re an avid investor or an advisor, MICUS should be an annual pilgrimage. Here’s a link to more of this year’s conference, which remains in Chicago, Morningstar’s headquarters.

In the press room, veteran financial journalist Chuck Jaffe, always bigger than life, remains a constant presence, interviewing fund managers and analysts, generously sharing his experiences and views. He took the opportunity this year to get an update on our own David Snowball, along with several fund managers attending the conference, including Seafarer’s Andrew Foster. Here’s a link to his Money Life podcast: “Investors are entering the market’s ‘most interesting, terrifying exciting period’.”

Getting Real

By Mark Freeland

Real estate investing has always been haunted by charlatans and scandals. Timeshare condominiums, swampland (ummm … critical wetlands) in Florida, bridges near Manhattan … heck, the whole reason that Greenland is called “Greenland” and not “utterly f’ing desolate wasteland covered with 1000 carnivores who scare even grizzlies land” was a real estate marketing scam.

The cold coast of Greenland is barren and bare,
No seed-time nor harvest is ever known there.
And the birds here sing sweetly in mountain and dale
But there’s no bird in Greenland to sing to the whale.

There is no habitation for a man to live there
And the king of that country is the fierce Greenland bear.

                                “Farewell to Tarwathie,” ca 1850

At the same time, Americans and their English forebears are especially passionate are owning their own little patch of ground. Fewer of us think about real estate as a part of our investment portfolios; we consign that sort of thing to the Trumps of the world. (Though the former president no longer makes The Forbes 400 List, two dozen others on the list are there by dint of their real estate holdings.)

While 60 million investors own REITs directly or through their funds, they represent a fairly small slice of the average portfolio and are still held by a minority of investors. Morningstar, which is pretty dispassionate about such things, concluded that a well-diversified portfolio would gain from a 13% allocation to real estate. That was news to me.

Normally I write about subjects I’m familiar with. This is a little different. It’s a piece about real estate funds, a sector I don’t have much experience with. But some people here have raised questions about the sector. So it seemed like a good opportunity to gain some knowledge on the subject and pass along what I find.

We’ll see how well I simultaneously read about a less familiar subject and write about it. I even throw in a little ‘rithmetic. For the most part what follows is fairly basic. It considers what it means to invest in real estate (and funds in particular), what makes the sector attractive, and how the investments work. It concludes with a list of representative funds and what makes them interesting.

Types of real estate investments

What is real estate and what does it mean to invest in real estate? Black’s Law Dictionary defines real estate as “Land and anything permanently affixed to the land, such as buildings, fences, and those things attached to buildings such as light fixtures, plumbing, and heating fixtures …” That comports pretty well with one’s common sense.

At first blush, investing in real estate suggests investing in buildings that one can operate and rent out to tenants. Apartment buildings, office space, shopping malls, lodging (hotels/motels), maybe even individual houses. More specialized or “modern” types of buildings that can be rented out include infrastructure (cell towers, etc.), data centers, self-storage facilities, and healthcare space.

Going in the opposite direction, rather than “improving” the land with specialized buildings, one could acquire and rent unimproved land to farmers. Or one could rent out land, trees, and facilities for lumber production.

The common theme is that all these types of land-associated properties are rented out by the owners/investors and generate income streams. If the property isn’t somehow associated with land, then buying it isn’t considered a real estate investment. So car rental companies don’t count.

REITs for income, REOCs for growth

Oh my!

One may invest for income, for growth (appreciation), or for both. The types of real estate investments presented above are income oriented. One owns these properties primarily for the income they generate. This is similar to investing in “equity income” funds, where one owns companies for the profits they distribute as dividends.

A Real Estate Investment Trust (REIT) is a legal structure created to invest in real estate for income. Like a mutual fund, it passes its earnings through to its owners in the form of dividends. So it doesn’t pay taxes itself. And because it doesn’t retain its earnings, it can’t easily plow those earnings back into more properties.

A different form of real estate ownership, the Real Estate Operating Company (REOC) is oriented more toward growth. It isn’t required to pass earnings through to its investors. But someone is still responsible for the taxes on those earnings. It is the REOC that pays the tax bill.

What all of this has to do with real estate mutual funds is that mutual funds are generally limited to owning securities, not land. They can invest in real estate only indirectly. So they invest in REITs, REOCs and other forms of land ownership that are considered securities.

Looking at the portfolio composition of Vanguard Real Estate Index Fund (VGSLX / VNQ) we get a good sense of just how much of the real estate market is wrapped up in REITs. The various REIT sectors in the fund add up to 95.5% of the portfolio. While it is not entirely accurate to call real estate mutual funds “REIT funds”, for all practical purposes, most are.

Reasons to invest (or not) in real estate

Returns, diversification, inflation protection, and income are often given as reasons to invest in the sector. Typical arguments against investing in real estate are that you already have a large real estate investment if you own a home and also that the sector is more volatile than equities. All of these considerations can be scrutinized. There’s some truth in them, but they are not as one-sided as they seem.

Real estate contribution to a portfolio – returns, diversification, volatility

Depending on the time frame analyzed, real estate has returned a bit more, a bit less, or about the same amount as the stock market. The graphs below show performance between 1991 and 2021. They come from Cohen and Steers, a granddaddy of real estate mutual funds. Its first fund, Realty Shares (CSRSX), started in 1991.

Over these 30 years, domestic real estate modestly outperformed stocks, while globally real estate ever so slightly underperformed stocks. Had the time frame selected been 15 years (2006 – 2021) instead, real estate would have fared worse than stocks. One can see a large real estate peak in 2006, after which it fell much more sharply than stocks. It is not unreasonable to say that real estate and stocks have performed similarly, though by following different paths, over the long term.

Real estate has been more volatile than stocks over the long term. Portfolio Visualizer reports that between 1994 and 2021, REITs had a standard deviation of 19.13%, while the standard deviation of the US stock market was significantly lower, at 15.22%. Meanwhile, the returns of each asset class were close together: 12.07% for REITs vs. 11.91% for stocks.

Despite the volatility of real estate being higher than that of stocks, adding real estate to a pure stock portfolio can reduce its volatility while increasing expected returns. This magic happens because the correlation between the two asset classes over the same time period was just 60%. Portfolio Visualizer shows the potential efficient frontier map, and reports that a roughly 75/25 stock to REIT mix would give the highest Sharpe ratio.

Such analyses can only go so far. Portfolio Visualizer reports that the optimal (maximum Sharpe ratio) blend of US stocks, US bonds, and REITS over the same period is 84% bonds, with the rest being stocks. That’s not a portfolio typically suggested for anyone including retirees.

Income and inflation protection

Real assets provide substantial inflation protection due to intrinsic value independent of money supply. Further, when it comes to land, they aren’t making more of it. So disregarding short term fluctuations, real estate should hold its value if not appreciate in real terms.

That expectation is borne out by a comparison of equity and REIT returns over the 50 years between 1972-2022.


But wait, there’s more than just price gains. Unlike an investment such as gold, land actually generates income. You get rent from it. In this sense, real estate resembles businesses. This is why Warren Buffett grouped it together with businesses and farms as productive assets in his 2011 annual letter to Berkshire Hathaway shareholders.

That rental income results in a relatively high dividend rate for REITs and the mutual funds that invest in them. To the extent that the dividends represent rent, they are taxed as ordinary income. But there are a couple of tax quirks that reduce this impact. The 2017 Tax Cuts and Jobs Act introduced a 20% tax deduction for dividends of REITs and of funds that invest in them. That ends (sunsets) after 2025. REITs are also able to depreciate their investment property. On paper, that reduces their taxable income. So some of part of the dividends may be characterized as nontaxable return of capital.

For those looking for even more income, there’s something called a mortgage REIT (mREIT). Instead of investing in real estate, they invest in mortgage-backed securities. Since these are related to ownership of real estate, they’re still considered real estate investments. And since these are actually bond investments, usually leveraged, they tend to have even higher yields than equity REITs. These mREITs are used more often in real estate mutual funds focused specifically on income.


Owning a home

Is a home an investment? What Cohen and Steers writes:

A house is generally considered a consumption item, not an investment. Rather than generating income, a primary residence consumes it in the form of mortgage interest, real estate taxes, insurance payments, utility expenses and the costs of repairs and maintenance. In contrast, REITS generate rental income from real estate such as commercial, industrial and multi-family residential, which is then distributed to shareholders via tax-advantaged dividends.

That’s one take. My view is aligned with the Bureau of Labor Statistics. In calculating the inflation component of housing, it deconstructs real estate into an investment component and a shelter component.

If you buy a house, rent it out for $3K/month that’s an investment. But you have to live somewhere, so you rent an identical house and pay the same $3K/month to live in it. That is equivalent to living in your own house and paying yourself that $3K rent. It sounds silly, but economically there’s no difference. Either way your cost of “consuming” shelter is $3K and your house is an investment asset that brings in rent (sort of) and should appreciate over time.

On the other hand, your house is much less liquid than a REIT or a real estate mutual fund. And you could be forced into a fire sale if your job relocates and the market is swooning. There are ways to mitigate these effects, but with costs and effort.

So, owning your home does give you some exposure to the real estate market, but it isn’t the same as a pure real estate investment. Home ownership is just another factor to consider when investing in real estate.

A few funds to consider

The funds below are mostly the usual suspects. They are accompanied by brief descriptions of why these particular funds are included here.

  1. Index funds

Vanguard Real Estate Index (VGSLX / VNQ) – the elephant in the room, about nine times as large as the next largest fund (excluding TIAA, below). Broadly diversified in subsectors and in quantity (160+), middle of the pack, high trailing yield (2.9%).

State Street Real Estate Select Sector SPDR (XLRE) – broad subsector diversification while concentrated (30+ holdings), excellent performance (MFO Great Owl, Morningstar 5 star fund), high trailing yield (2.7%).

  1. Actively managed funds

Cohen and Steers Realty Shares (CSJAX / CSJIX) – Cohen and Steers is the actively managed fund family elephant, running this and similar sibling funds, ETFs, and other real estate vehicles. This retail fund is still open to new investors and dates back to 1991, so it is useful as a benchmark. Because it and its siblings are actively managed, its large size and concentrated portfolio (30+ holdings) is a concern. Nevertheless, the fund and the firm have stood the test of time. The fund is currently rated 4 or 5 star by Morningstar depending on share class. Trailing yield is a respectable 1.6%-1.8%.

TIAA-CREF Real Estate Securities (TCREX / TIREX) – a pretty standard fund with low expenses (ER), fair trailing returns (1.2% – 1.4%) and a solid 5 star performance.

TIAA Real Estate Account (QREARX) – a unique investment. It is not a mutual fund, but an account that is available within some TIAA annuities. Unlike mutual funds, it owns real estate directly. In a sense it is itself a giant REIT, one that invests only in “traditional” real estate – offices, apartments, retail, etc.

This apparently gives it a distinctive performance profile. The account operates as an almost pure diversifier, with a ten-year negative correlation to the stock market. TIAA reports:

Returns are largely unaffected by movements in stock or bond markets since returns are generated by rental income and changes in property values. For the 10-year period ended September 30, 2021, REA correlation to the S&P 500 Index and Barclay’s Aggregate Bond Index was -0.03 and -0.09, respectively. Over this same period, correlation between the FTSE Nareit All Equity REIT Index and the S&P 500 Index was 0.71.

The account has returned 6-9% annually over periods between three and 30 years. While 6.58% – its annualized return since inception – doesn’t seem like much to write home about, its independence of the stock market means that it may be your sole stalwart when other assets falter. By way of illustration, it has returned 9.68% YTD as of Memorial Day, 2022. In comparison, the best YTD performance of open- end real estate funds on Morningstar’s site is -5.91%. That may explain my colleague David Snowball’s decision to devote 20% of the TIAA-CREF slice of his retirement account to the real estate account, though he warns that it suffered a bloody fate in the 2008 real estate market implosion.

Our colleague Devesh Shah released a great investing video series on real estate, with the second half of this video focused on the TIAA account. Devesh notes that it can be purchased directly from TIAA.

If you have a 403(b) with TIAA, you probably have access to this fund. If you are in the same family as someone with a TIAA 403(b) you can open an IRA with access to the same accounts including this Real Estate Account.

  1. Income oriented real estate funds

Fidelity Real Estate Income (FRIFX) – a usual suspect, included as an example of a fund that may invest a substantial portion of its portfolio outside of equity REITs. It currently holds about half its assets in fixed income, largely commercial mortgage-backed securities. And yet its trailing 1.4% yield is not enough to stand out.

iShares Mortgage Real Estate Capped ETF (REM) – a pure play in mortgage REITs. Higher yield (7%) than equity oriented real estate funds, and a lower total return.

  1. Fund with significant REOC and other real estate management holdings

Baron Real Estate (BREFX) – the focus is on growth, not on income. This is reflected in its trailing yield – a perfect 0%. Excellent long term growth: an MFO Owl, a Morningstar 5 star rating. A high octane fund, atypical of real estate funds.

For readers looking for the Great Owls in the bunch, here are the six funds (and two benchmarks) that earned Great Owl status from 2015-2022.


In limited doses, real estate funds have the potential to temper a portfolio’s volatility and generate a fair amount of dividends. The vanilla (equity REIT focused) funds are likely to best serve this purpose. Alternatives exist if one is more focused on income or if one is more interested in real estate-related growth.

Briefly Noted…

By TheShadow

Allianz Global Investors admitted to one count of criminal securities fraud in relation to its Structured Alpha Funds. This admittance resulted in a 10-year ban on Allianz advising on any mutual funds in the U.S.

AllianzGI has agreed to pay more than $1 billion in penalties and $5 billion in compensation to investors.  The Structured Alpha funds suffered huge losses during the Covid episode in March 2020.  The funds offered complex hedge strategies that were intended to protect investors in the event of a sharp selloff.

The mutual funds and investment teams will move to Voya Investment Management. The Voya Corporate Leaders Trust “B” (LEXCX, formerly ING Corporate Leaders Trust and originally Lexington Corporate Leaders) remains a fine choice and the purest example of passive management, ever. On the verge of the Great Depression, the fund’s original advisor built a portfolio of America’s greatest companies and limited the fund, forever, to own only those companies (or, in the case of mergers, spinoffs, bankruptcies, or whatever, their direct successors). The fund has no manager, a turnover rate of near zero, and 4% YTD (through 5/27/2022) gain. In our profiles, we’ve called it the ghost ship of the investing world.

On May 23, the Securities and Exchange Commission today charged BNY Mellon Investment Adviser, Inc. for misstatements and omissions about Environmental, Social, and Governance (ESG) considerations in making investment decisions for certain mutual funds that it managed. To settle the charges, BNY Mellon Investment Adviser agreed to pay a $1.5 million penalty.

The SEC’s order finds that, from July 2018 to September 2021, BNY Mellon Investment Adviser represented or implied in various statements that all investments in the funds had undergone an ESG quality review, even though that was not always the case. The order finds that numerous investments held by certain funds did not have an ESG quality review score as of the time of investment.

Bridgeway Capital Management has announced that it will reorganize its Blue Chip Fund (BRLIX, formerly the Blue Chip 35 Index which targets “ultra-large” stocks as a complement in its Ultra Small Company funds) into EA Bridgeway Blue Chip ETF, an actively managed exchange traded fund.  The new ETF will be sub-advised by Bridgeway Capital Management. The reorganization should be completed during the fourth quarter of 2022.

Upgrading goes undercover: The two-star FundX Upgrader and FundX Aggressive Upgrader funds will soon be repackaged as the FundX ETF and FundX Aggressive ETF, respectively. The “investment objective, investment strategies or portfolio management” remain the same.

Josh Stewart left Seven Canyon Funds on May 9.  Mr. Stewart is one of the sons of Sam Stewart, who founded both Wasatch Fund and later Seven Canyons Advisor. His future plans were not disclosed and his brother Spencer remains atop SCA.

Poster/contributor ET91 posted that Lydia So accepted a portfolio manager position with Seafarer Funds. She left Rondure Global Advisors in early May. Prior to joining Rondure, she was with Matthews International Capital Management, where she was the manager of the   Matthews Asia Small Companies Fund (known now as the Matthews Emerging Markets Small Companies Fund) from its inception in 2008 to 2020. Lydia was also a Co-Portfolio Manager of the Matthews Asia Science and Technology Fund (known now as the Matthews Asia Innovators Fund) from 2008 to 2017 and Co-Portfolio Manager of the Matthews China Small Companies Fund from 2019 to 2020.

Charles, David, and Devesh met with Seafarer founder Andrew Foster at the Morningstar Investment Conference. Mr. Foster is a Matthews Asia alumnus and famously a “core” sort of investor with a preference for well-managed firms that generate enough revenue to allow them to grow without reliance on sometimes iffy capital markets. As part of his plan to broaden the perspectives available to himself and his investors, Andrew added a dedicated value guy (Paul Espinosa) and a growth specialist (Inbok Song). Eventually, Inbok returned to Matthews Asia, where she now co-manages the $6 billion Pacific Tiger Fund and strategy.

Lydia So inherits the mantle that Ms. Song once wore. She’s been charged with building a growth team and strategy but she will not be immediately assigned to manage a fund.

T. Rowe Price has filed a registration notice to establish two actively managed ETFs, T. Rowe Price U.S. High Yield and T Rowe Price Floating Rate ETFs. The T. Rowe Price Floating Rate ETF will have an expense ratio of .61%; T. Rowe Price US High Yield ETF will have an expense ratio of .56%. T. Rowe Price U.S. High Yield and T. Rowe Price Floating Rate ETFs will be managed by Kevin Loome and Paul Massaro, respectively; both of whom manage the mutual funds bearing similar names.


Grandeur Peak Advisors has announced that it will re-open its Grandeur Peak Emerging Markets Opportunities, Global Opportunities, Global Micro Cap, International Opportunities, and International Stalwarts Funds to third-party financial intermediaries effective May 16 due to current market sell-off.

Capital Funds has lowered the expense fee on several of its equity and bond funds. The 11 fixed income funds to get management fee reductions include the: American Funds Corporate Bond Fund, lowered (0.25% from 0.36%); AF Emerging Markets Bond Fund (0.46% from 0.55%); AF Multi-Sector Income Fund (0.33% from 0.42%); AF Strategic Bond Fund (0.28% from 0.30%); and AF Mortgage Fund (0.18% from 0.19%).

The Short-Term Bond Fund of America and AF Inflation-Linked Bond Fund have each been reduced to 0.25% from 0.26%.

The other fixed income funds to get management fee reductions were the: AF Short-Term Tax-Exempt Bond Fund (0.20% from 0.33%); AF Tax-Exempt Fund of NY (0.24% from 0.29%); AF Tax-Exempt Fund of California (0.23% from 0.26%); Limited Term Tax-Exempt Bond Fund of America (0.18% from 0.20%); and American High-Income Municipal Bond Fund (0.24% from 0.25%).

Three Capital Group equity funds got management fee reductions: American Funds International Vantage Fund, to 0.48% from 0.60%; American Funds Developing World Growth & Income Fund, to 0.65% from 0.73%; and American Funds Global Insight Fund, to 0.41% from 0.42%.

Meanwhile, the Capital Group Emerging Markets Growth Fund was reduced to 0.62% from 0.76%, and two of its American Funds Insurance Series were reduced: the VI Ultra Short Bond Fund, to 0.26% from 0.32%, and VI International Fund, to 0.48% from 0.49%.

JP Morgan Asset Management has registered its JPMorgan Nasdaq Equity Premium Income ETF (JEPQ). The active equity ETF seeks to deliver an attractive distributable yield while also delivering a significant portion of the returns associated with the fund’s primary benchmark, the Nasdaq-100 Index, with less volatility utilizing large cap companies included in the Nasdaq-100 Index and will incorporate an options strategy to generate income while lowering the volatility of the overall portfolio. Hamilton Reiner will be the lead portfolio manager with portfolio managers Eric Moreau and Andrew Stern. Management fees will be .35%.

Old Wine, New Bottles

AXS Managed Futures Strategy Fund is to be reorganized into the AXS Chesapeake Strategy Fund.  The reorganization is expected to take effect in the third quarter of 2022.

The Point Bridge GOP Stock Tracker ETF is being rebranded as the Point Bridge America First ETF. In both cases, the goal is to invest in companies that contribute heavily to Republican candidates for elected federal office. We’ll note that this is an old and failing game: Blue- and Red-branded funds launch pretty regularly, and disappear without notice equally regularly.


BNY Mellon International Small Cap Fund is to liquidate on or about July 18, 2022.

BNY Mellon Emerging Markets Securities Fund is to liquidate on or about July 22, 2022.

The AINN Fund, a fund of ETFs, was liquidated on May 6.

Left Brain Compound Growth Fund will discontinue its operations effective June 24, 2022. On that whole “compounding” thing, the fund’s portfolio targeted growth stocks and high-yield securities, its cumulative return since inception is -27%, and neither manager chose to invest in the fund.

The Infusive Compounding Global Equities ETF follows suit on or about June 17, 2022.

The Pinnacle Sherman Breakaway Strategy Fund (IPTRX, which Morningstar designates the Pinnacle TrendRating Innovative Equity Fund) breathes its last on June 24, 2022.