Monthly Archives: November 2023

November 1, 2023

By David Snowball

Dear friends,

Happy New Year! And oíche Shamhna shona duit!

November 1st is Samhain (pronounced “sow-in” in case you’re curious), the traditional beginning of the new year in Gaelic culture. It’s proceeded not only by Samhain Eve but also by … well, three days of drinking. And then followed by three days of regretting it, at least a little.

Samhain marked the end of the harvest season and the onset of “the darker half” of the year, a time of increasing isolation and decreasing food stocks. It made all the sense in the world to do what people do in the face of adversity: throw a big communal gathering, feast, and dress up in scary costumes, and tell the agents of darkness to go elsewhere.

The Christian church, always on the lookout for a pagan holiday that they could cadge, imported it. In the eighth century, Pope Gregory III designated November 1 as a time to honor all saints. All Saints Day, or “All Hallows Day” in an older iteration, incorporated some of the traditions of Samhain in its All Hallows Eve festivities.

And so, I guess, a season of changes and a reminder that we best face adversity when we are shoulder-to-shoulder with our neighbors, hopeful and generous in spirit. (And spirits.)

The campus pond, aka “the slough,” and path, Augustana College, 30 October 2023

In this month’s Mutual Fund Observer

My colleague Devesh Shah shares another thoughtful report of a long luncheon conversation with Cohanzick’s David Sherman. Their talk is wide-ranging, touching on subjects from investing in India and MFO’s future to the foolishness of investment benchmarks. Part of the criticism there is driven by Mr. Sherman’s reading of a provocative essay by Howard Marks.

Howard Marks is the legendary co-founder and co-CEO of Oaktree Capital Management. I use “legendary” in recognition of two facts: (1) reportedly, his funds have returned 19% annually since inception, and (2) pretty much every grown-up in the industry takes Mr. Marks’ essays seriously. Oaktree invests $183 billion in “alternatives,” about two-thirds of which is invested in credit (sometimes called “high yield”) strategies. Their corporate philosophy centers on risk control, consistency of performance, and responsibility to stakeholders and to society. It is, on the whole, an admirable bunch.

Howard Marks’ essay to which Devesh and David Sherman refer, “Further Thoughts on Sea Change” (10/13/2023), makes two provocative arguments:

If the declining and/or ultra-low interest rates of the easy-money period aren’t going to be the rule in the years ahead … after a long period when everything was unusually easy in the world of investing, something closer to normalcy is likely to set in.

And …

Thanks to the changes over the last year and a half, investors today can get equity-like returns from investments in credit.

The Standard & Poor’s 500 Index has returned just over 10% per year for almost a century, and everyone’s very happy (10% a year for 100 years turns $1 into almost $14,000). Nowadays, the ICE BofA U.S. High Yield Constrained Index offers a yield of over 8.5%, the CS Leveraged Loan Index offers roughly 10.0%, and private loans offer considerably more. In other words, expected pre-tax yields from non-investment grade debt investments now approach or exceed the historical returns from equity.

And, importantly, these are contractual returns.

By “contractual returns,” Mr. Marks means that absent a corporate default, if you hold one of these bonds to maturity, you will get your 10% per year. With stocks, contrarily, the best we can say is “if we hold stocks for at least 20 years, it’s pretty durn likely that the years of 50% declines and 70% gains will average out to around 10%. Probably.”

Mr. Marks, half facetiously, advised a non-profit on whose board he sits to “Sell off the big stocks, the small stocks, the value stocks, the growth stocks, the U.S. stocks, and the foreign stocks. Sell the private equity along with the public equity, the real estate, the hedge funds, and the venture capital.” The flip side is the perfectly serious observation that “if the developments I describe really constitute a sea change as I believe – fundamental, significant, and potentially long-lasting – credit instruments should probably represent a substantial portion of portfolios . . . perhaps the majority.” (The MFO discussion of the essay does flag the ugly risks inherent in owning high-yield if a recession strikes, fyi.)

I take Mr. Marks (and Mr. Sherman and Mr. Shah) seriously in “Investing Beyond The Great Distortion.” In that essay, I try to show both the empirical effects of The Great Distortion – the period of extraordinary events that Mr. Marks decries – and to highlight four funds that might make a material contribution to your portfolio in the market beyond it.

Lynn Bolin reflects on his adaptations of his own portfolio to some of the same forces in “Short Term Market Momentum.” Like others, Lynn is thinking about long-dated bonds as a potential source of capital appreciation rather than just income.

We also profile First Foundation Total Return, a fund nearly left for dead some years ago. Operating as Highland Total Return under a different adviser and burdened by at least two sets of bad inherited fixed-income holdings, the fund was staggering toward demise when First Foundation adopted it and revived it with great success. We share a bit of the story.

Finally, The Shadow does what The Shadow does, and shares three dozen changes – including three pieces of rare good news – in the industry. His Briefly Noted is well worth your time.

MFO neither engages in, nor particularly endorses, market-timing behavior. It’s a very good way to lose rather a lot of money. That said, the “sea change” argument advanced by Mr. Marks and others suggests an enduring, near-permanent change in the rules might be in the offing. We wanted to pair your consideration of that big-picture strategic possibility with a simultaneous change in the tactical situation. For that, we rely on the good folks at The Leuthold Group.

Leuthold: the lights have all turned red, time to lighten up on stocks

The Leuthold Group was originally a research provider to institutional and high-net-worth investors. The success of their research enterprise led them to begin managing money for rich people as a side business, and then to managing money for bright individual investors. Since investing is purely a mind game (a stock is worth what people believe it’s worth, a market rises when people believe it will rise … and act accordingly), they have identified and continuously tracked a huge variety of cues that have more or less greater predictive reliability when it comes to the economy and markets.

The snapshot is their Major Trend Index, which looks at changes in four broad aggregates: sentiment, valuations, technicals (e.g., trendlines or market breadth), and cyclicals (the behavior of assets that rise and fall with the rhythms of the economy and market). They say: “Major Trend Index is a weekly email update on the status of our 130+ factor assessment of stock market risk.”

In early October, it went broadly negative. By the third week of October, it became redder still as the Major Trend Index went “into the dumpster.” That decline caused Leuthold to “further reduce equity weightings in our tactical portfolios. In the Leuthold Core Fund, Core private accounts, and Leuthold Global Fund, equity hedges were adjusted to decrease net equity exposure to 44%.” (“MTI: Turned Negative, Trimming Equities Further,” 10/10/2023)

They’re pretty good at what they do. Their core product is Leuthold Core Investment, which is a five-star, Gold-rated tactical allocation fund. Neither allocation is 60/40, but they can drop stocks as low as 40%. Since its inception in 1995, they’ve made 7.8% APR; in every trailing period, they post higher returns than their peers (0.7-3.5% APR) with noticeably lower volatility. Their portfolio decisions are driven by the output of their quant models, not by their managers’ gut. On the whole, I would describe them as institutionally cautious.

In the last three months of decline, LCORX has lost 50% of what its peers have; over the past three years, it has made 250% of what they have (per Morningstar).

Here’s the LCORX homepage, which is moderately interesting.

The Season of Changes

Changes come, sought or not. We caught up with three people we greatly respect this month to become apprised of the changes in their lives.

Dan Wiener

Dan Wiener (celebrated by one of my senior colleagues as “Dan, Dan, the Vanguard Man”) began publishing The Independent Adviser for Vanguard Investors in 1991. It is the most widely read, cited, and respected of the publications focusing on the $8 trillion investment behemoth. Alongside that, he crafted a $15 billion investment advisory.

A lot to cover for one guy … so he brought in one more. Then, sensibly enough, stepped back. We caught up with Dan on October 17th and poked him, just a bit, about his plans and his lessons from decades in the business.

On the next chapter:

We shall see what the next chapter brings. Right now I’m getting more involved with some of the private investments I’ve made (you could call them alternatives) in everything from energy to environmental safety to technology, plus a few food service businesses that have done amazingly well, contrary to popular belief. I also have plans to go skiing in Japan in February and take my son helicopter skiing in March. Plus, spend more time with my three grandkids.

On his advice for the readers we worry about most, the young folks just starting out and all the folks who are feeling strapped and uncertain:

My advice on investing for the young and uninitiated is the Nike advice, “Just do it!” But here’s the thing, no matter what anyone says about diversification or bonds, don’t listen. You want to go all in on stocks. Period. I have been investing since the 80s and even during the biggest bond bull market in history, you would have been a chump to have taken any money from stocks and put it into bonds. From December 1979 through December 2021, the Agg’s total return was 1,813%. The S&P 500 returned 13,162%. The Russell 2000 did 8,023%. The EAFE did 3,212%. So, even if you went all in on foreign stocks you still about doubled the return on bonds during a four decade bond bull market.

Anyway, a kid should do two things: 1, get in the habit of saving, and 2, buy stocks. I will leave it to you and your genius to tell them how to buy stocks. Me, I put my kids’ money into funds run by the PRIMECAP team and they did very, very well, thank you very much.

We celebrate the fact that Dan’s perspective on where best to invest is a bit at odds with the recommendations of other folks, who you’ll encounter below. That diversity of views is critical to your ability to sort through your own tolerance for risk and need for returns, in order to make the best decision for you and your family.

What do you know now that you wish you’d have known then?

As for what I wish I’d known 30 years ago, nothing immediately comes to mind. But two things do stand out. One is that luck and timing can help a lot. I was lucky to have come of age (professionally) when mutual funds were democratizing the markets. And as a journalist I had a front-row seat.

The one thing I would tell any youngster under your tutelage is that whatever they are into or whatever career they seek to pursue, to read, read, read. Immerse themselves in the industry, in the business, in the data of whatever they are doing. Become the expert. Stop playing video games and reading science fiction. Read trade journals. Read the WSJ. Read everything you can and talk to experts in the field. I think that’s one place where I was lucky as a journalist in that I had access to scores of publications and data and experts. (I never left the office without a briefcase full of stuff to read on my subway rides to and from home.)

Zeke Ashton

Zeke Ashton, founder, managing partner, and a portfolio manager of Centaur Capital Partners L.P., managed Centaur Total Return Fund from its inception. On November 1, 2018, the fund’s Board of Trustees announced an epochal change: Zeke, the last of its four founding managers, had notified the Board that he intended to resign after a run of 13.5 years. Before founding Centaur in 2002, he spent three years working for The Motley Fool, where he developed and produced investing seminars, subscription investing newsletters, and stock research reports, in addition to writing online investing articles. He graduated from Austin College, a good liberal arts college, in 1995 with degrees in Economics and German and subsequently has served on the college’s Board of Trustees.

Centaur was a remarkably good little fund. All-weather, great returns over time, absolute value orientation. Zeke wanted to have a fully invested equity portfolio but has kept 40-60% in cash since the market became richly valued. It’s made 12% annually over the decade because his stock picks perform really well; In 2017, he had a 13.5% return sitting on 50% cash, which means his stocks returned about 27%. We profiled it several times. 

Zeke explained the decision to liquidate both the fund and its companion hedge fund as a decision about balance and meaning in life. “Being a professional investor takes so much effort, working weekends and nights. We’ve had no vacation in six years. We’ve been married for 14 years, running the strategy for 14 years. Business has come to dominate our relationship.” After chatting about family and health challenges, Zeke concluded, “This all made me realize, that the stock market is always going to be there, but the people you love won’t always be.”

This week, Zeke announced the decision to launch a hedge fund, Ashton Capital. (All the good names, he laments, were taken). Equity long/short, benchmark-free, and its historic total return emphasis. He promises “no crazy ARKK-like risks” but allows that he’s “too young to take no risks. We’ve been focusing on joy through this all, and I think that investing has brought the joy back.”

There is no plan to launch a mutual fund (too many headaches, too much competition), but RIAs and other qualified investors might follow his launch, and consider talking to the man himself.

Pierre Py

A short note on Pierre Py, one of the two founding managers of FPA International Value, which eventually (a) transitioned to a new advisor and a new name – Phaeacian Global Value and Phaeacian Accent International Value – and (b) famously crashed in a bitter business dispute between Mr. Py and his team on the one hand and the adviser, Polar Capital, on the other.

The dispute initially involved Polar Capital and FPA, but that piece has now been resolved.

The Polar/Py dispute has not yet reached a resolution, but he’s hopeful that the contest is much closer to its end than to its beginning.

In the interim, he and his long-time co-manager continue investing. For the moment, they continue managing the strategy through separately managed accounts. While the AUM is small, they have continued to add substantial alpha in 2022-23.

As we talked about the future, Pierre expressed a passionate desire to serve “the little guy.” He’s pretty openly critical of the direction that the investment industry has taken, producing “commoditized goods” driven by the demands of the marketing and distribution teams. The professional investors – the manufacturers, so to speak – have been devalued by years of relentlessly rising markets that seem to have convinced many that neither skill nor an appreciation of risk has any enduring value. “The investment industry gutted itself in favor of counting on rising markets; in a higher inflation and higher interest rate environment, that’s going to be really hard, and nearly impossible with a 200 name portfolio.”

We could, he notes, “have worked for a hedge fund or very rich individuals, but that’s not where our passion lies. I’m very keen to return to working on behalf of retail investors.”

We will keep an eye out and fingers crossed, both for Mr. Py’s sake and for yours.

JP Morgan: do yourself a favor, don’t overthink this one

An essay in the Financial Times argues in favor of radically simplifying one’s strategic asset allocation. It argues, at base, that unusual assets produce unusual returns only until they are discovered by the hoi polloi and the industry arbitrages away the exceptional gain. As a result, the real money is made by first movers, and the real costs are borne by those of us who try to get in later.

Here’s the core:

On average, research shows around 100 per cent of their total returns can be ascribed to their choice of policy benchmark [i.e., their strategic asset allocation], along with around 90 per cent of their return volatility. The outcomes of those judgments are often complex.

Jan Loeys, JPMorgan’s veteran asset allocation guru, says in a recent client note that this complexity is both pointless and counterproductive. Pointless, because investors need only two assets: a global equity one and a local bond one, with the relative amounts driven by their ability to withstand short-term drawdowns and return needs. (Less is more when it comes to strategic asset allocation,”, 10/17/2023)

There’s a really healthy discussion on the MFO discussion board that thinks through the implications of Mr. Loeys’ radical simplification. You might enjoy it.

Hard things done well

In 1983, John Osterweis founded Osterweis Capital Management to manage assets for individuals, families, endowments, and institutions. The firm, headquartered in San Francisco, manages $6.5 billion in assets and advises the Osterweis funds.

In general, Osterweis is distinguished in a number of ways. First, it detests the prospect of losing its shareholders’ money, especially needlessly. Second, it pursues strategies that don’t mesh well with Morningstar’s style-box-driven view of the world. Third, it’s very serious about doing good work for its shareholders. The fund is primarily employee-owned, and its management teams tend to be stable and loyal.

That makes it striking that the firm chose to liquidate three mutual funds in short order. The first two were the former Zeo funds. In October, they announced that Osterweis Total Return was following them to the graveyard. Curious, I reached out and was pleased by the opportunity to chat directly with Carl Kaufman, the #2 guy at Osterweis behind founder John Osterweis.

Here’s the short version of Carl’s explanation:

Most Osterweis fixed-income investing focuses on credit opportunities, not investment grade. That better credit offers a richer opportunity set, and the fate of a credit-driven portfolio is in the hands of the investors. An investment grade portfolio is subject to interest rate risk; as an example, Vanguard’s passive Long Term Bond ETF is down 44.5% since its peak in July 2020, at that’s through no fault of its own. Interest rates tick up, and long bonds die a bloody death. In general, that’s not a fight investors can win, and it’s not one that Osterweis – generally – wants any part of.

Total Return was the exception. Osterweis believed that they could construct an investment portfolio that would weather the market’s storms more than a portfolio with lower-rated bonds might. They found a good team, allocated resources to the fund, and stepped back and watched it for the past seven years. It started with two really solid years, then two okay years, and then the turbulence hit.

What they saw was disappointing. Mr. Kaufman somberly reports, “The fund was simply not serving its investors’ needs; it supposed to do much better in down markets than the typical bond aggregate fund. Heck, we thought it had a pretty good chance to go up last year. 2022 (when the fund lost 6.5%, a purely mediocre relative performance) was eye-opening. It had the promise, not the performance. It was time to react to reality. Really great team, but it is what it is.”

Mr. Kaufman commended to me a book that he’s been reading, Quit: The Power of Knowing When to Walk Away (2022). The author is, among other things, a professional poker player and has studied cognitive psychology with funding from the National Science Foundation. As a culture, we worship persistence, from adages like “winners never quit, quitters never win” to celebrations of guys who pushed on through all the red lights to summit Mt. Everest (where they heroically, well, died).

Ms. Duke argues that winning sometimes requires quitting:

Quitting, when done right, allows you to achieve your goals more quickly. This is counterintuitive, because we think of quitting as stopping our progress. But that’s not true when the thing you started isn’t worthwhile. If you quit, that frees up all of those resources to switch to something that will actually help.

I suggest creating what I call “kill criteria” in advance. Don’t trust yourself to do it in the moment. Ask yourself: what are the signals I could see in the future that would tell me that it’s time to quit?

Mr. Kaufman notes that Osterweis, effectively, has “kill criteria” for each of their strategies. They have expectations, criteria, and benchmarks for each strategy. They’ve got patience. And they’ve got a determination to end strategies that aren’t up to their standards. They closed their hedge funds in 2012 because of it, and they made the same painful decision with their three funds this fall.

Their decision strikes me as both rational and principled. And the conversation convinced me to pick up a copy of Quit from my local Barnes and Noble. (Amazon has proven to be so consistently predatory of its workers, suppliers, partners, and community that I’ve been trying to avoid them whenever possible.)

I’ll let you know what I learn.

Towle Deep Value Fund: what a difference 10 days can make

Towle Deep Value Fund is a deep value / small cap fund. It’s about the purest deep value play around, which is attractive because the academic research says that the “value effect” is most apparent in really deep value, just as the small-cap effect is most visible in really small caps.

Nice people doing hard stuff.

They’re currently a one-star fund in Morningstar’s system. Charles’s rating of them since inception (2011) is comparable: 1 (lowest 20% in the peer group based on risk-adjusted returns). This made their quarterly report pop, as they noted that their SMA composite for their strategy returned just over 19% annually for the past three years. Morningstar’s three-year numbers, which by default at the last 36 months from today, are far lower. Curious, I checked.

What a difference 10 days makes: the fund loses one-third of its trailing three-year returns when you shift from 9/30/23 as your end date to 10/13/2023. That’s about 10 trading days. But the opposite effect is seen in the five-year returns, which improve by 50%.

Three year returns (per Morningstar)
As of 9/30/23: 19.18% 
As of 10/13/23: 12.74% – a 33% decline

Five year returns 
As of 9/30/23: 2.47% 
As of 10/13/23: 3.76% – a 50% rise

Ten year returns 
As of 9/30/23: 6.43% 
As of 10/13/23: 5.86% – a 10% decline

One reason that MFO traditionally pushed “full market cycles” as the metric rather than arbitrary windows (what is the significance of “three years”?) is that you need to find a way to avoid being misled by performance reports that might reflect one performance bubble rolling off just as a drawdown rolls on.

Which is to say: look long and hard (looking at you, Ms. Woods) before concluding, “those numbers are sweet! Here’s my money!”

Morningstar’s continuing weirdness

I received over 60 test emails from Morningstar “as part of my StockInvestor subscription,” over the course of two weeks. Nothing I did – including writing to media relations and retail support – stemmed the tide.

(I don’t even subscribe to StockInvestor.) In the face of all of that, the eventual response was almost laughable.

Hello David,

We hope you are doing well.

We would like to inform you that the team responded to us that they were not sending any emails but they will be cautious for any future reference.

Best regards,
Morningstar Global Product Support

“They are not sending any emails”? Ummm … yes, they were.

If you’re seeking a really good reason to support an alternative to Morningstar, quite apart from the abandonment of retail fund investors, dominance of AI-written text, and mindless fund screener, that might be it.


To The Faithful Few, whose monthly contributions keep spirits up and the lights on: S & F Investment Advisers, Wilson, Brian, Gregory, Doug, David, William, and William. If you’d like to do your part to keep MFO up and running, please click on the “Support Us” link above or join the MFO Premium folks who, for just $120/year, get access to maestro Charles and some of the most advanced search tools available (or, at least, “available for less than the $16,000 that some others charge”).


david's signature

Investing Beyond The Great Distortion

By David Snowball

Devesh Shah and David Sherman engaged in a free-range conversation that touched on benchmark-free investing over hot drinks and fresh pastries. Benchmark-free investing starts with the question, “If you simply didn’t care about ‘the conventional wisdom’ concerning which assets you were supposed to own, what assets would you own?”

Mr. Sherman and Oaktree’s Howard Marks seem to endorse the same conclusion: “likely high-yield bond, surely not stocks.” That’s certainly contrary to conventional wisdom, which is centered on Jeremy Siegel’s chant, “Stocks for the long run!”

The case for stocks is driven by The Great Distortion, the period from the point that the Fed moved heaven and earth to stock the Global Financial Crisis (2007-09) from spiraling into a second Great Depression.

Let’s test the stock hypothesis, starting with …

Two quick quiz questions:

  1. would you want an investment with the highest returns (that is, the bottom line regardless of volatility) or the highest risk-adjusted returns?
  2. In the long term, which asset class gives you the highest risk-adjusted returns?

If we ask the first question of the “average investor,” their declared answer is, “Show me the money!” But if we measure their actions, their actual answer is, “I’m fearless as long as markets are rising steadily! Roooar! (But when things get scary, I’m outta here!).” That’s the consistent finding of Morningstar’s “Mind the Gap” research: “poorly timed purchases and sales of fund shares, which cost investors roughly one-fifth the return they would have earned if they had simply bought and held.” In general, investing in more volatile funds or asset classes (e.g., sector funds) led to vastly larger gaps in performance.

If we ask the second question of our same investor, the answer is likely to be “stocks! Stocks! Stocks for the long run!” That is, we all agree that short-term volatility in equities is the price of their dominance for long-term investors.

The simplest test of that hypothesis is to look at Fidelity’s family of Asset Manager funds. The funds vary from one another primarily in the degree to which they invest in stocks. Asset Manager 20% is … well, 20% equities, while Asset Manager 85% is 85% invested in equities all the time. Otherwise, the same manager, same underlying investments, comparable expense ratios.

Using the MFO Premium fund screener, we pulled the 15-year record for all six Asset Manager funds. That roughly corresponds with the age of the group’s newest funds. The three columns with blue headers are the good news: the average annual return, the performance of the fund relative to its peers, and the average annual return for an investor willing to buy and hold for three years.

The orange/peach headers are the bad news: the fund’s biggest drop in the past 15 years, its typical volatility (called “standard deviation”), and its volatility in falling markets.

Finally, the green columns give the risk-return trade-off. The Sharpe ratio is the industry’s standard measure; with Sharpe, higher is better. The Ulcer Index is pretty much distinctive to MFO Premium: it combines measures of how a fund falls and how long it stays down. Here, lower is better since a higher number corresponds with a bigger ulcer.

Finally, the 60/40 capture ratio is a sort of “bang for the buck” measure, measured against the performance of a simple and unchanging 60% stock / 40% bond portfolio. It divides the percentage of the benchmark’s upside your fund captures against the percentage of its downside. So, a fund that captured 10% of the benchmark’s upside but only 1% of its downside would have a capture ratio of 10. If you captured 20% of the upside and 20% of the downside, or 47% of the upside and 47% of the downside, or 150% of the upside and 150% of the downside, you’d have a capture ratio of 1.0. With capture ratios, higher is better.

Fidelity Asset Manager performance of 15 years, sorted by highest Sharpe ratio

Fidelity Asset Manager APR APR vs
APR Avg 3-yr Roll MAX Drop Std Dev Down- market dev Sharpe
60/40 Capture Ratio
20% 4.0 -0.5 4.6 -12.7 5.2 3.5 0.62 3.3 1.1
30% 4.9 0.4 5.7 -15.4 6.8 4.6 0.60 4.2 0.99
50% 6.4 0.5 7.6 -20.8 9.9 6.7 0.57 5.6 0.92
60% 7.0 1.1 8.3 -23.1 11.4 7.6 0.55 6.2 0.90
70% 7.6 0.4 9.2 -27.4 13.0 8.8 0.52 7.0 0.88
85% 8.4 1.0 10.3 -31.1 15.2 10.2 0.50 8.1 0.87

Source: MFO Premium fund screener and Lipper Global data feed

And here, we highlight the winner in each column with bold green text:

Fidelity Asset Manager performance of 15 years

Fidelity Asset Manager APR APR vs
APR Avg 3-yr Roll MAX Drop Std Dev Down- market dev Sharpe
60/40 Capture Ratio
20% 4.0 -0.5 4.6 -12.7 5.2 3.5 0.62 3.3 1.1
30% 4.9 0.4 5.7 -15.4 6.8 4.6 0.60 4.2 0.99
50% 6.4 0.5 7.6 -20.8 9.9 6.7 0.57 5.6 0.92
60% 7.0 1.1 8.3 -23.1 11.4 7.6 0.55 6.2 0.90
70% 7.6 0.4 9.2 -27.4 13.0 8.8 0.52 7.0 0.88
85% 8.4 1.0 10.3 -31.1 15.2 10.2 0.50 8.1 0.87

Misleading takeaway: in every measure of returns, more equity is better. In every measure of risk and of risk-adjusted returns, less equity is better. Several earlier MFO essays on the discreet charm of stock-lite portfolios found the same relationship is true for periods dating back 100 years. Lightening up equity exposure reduces your volatility by a lot more than it reduces your returns, so it always seems like the best move for risk-conscious investors.

Until TINA (There Is No Alternative – to stocks) came along. The Fed’s decision to zero out interest rates for the better part of a decade killed the returns on cash and cash-like bonds. Then the US bond market, which peaked in July 2020, entered “the worst bear market in the nearly 250-year history of the U.S., according to Bank of America’s Michael Hartnett” (Joseph Adinolfi, “Treasury-market selloff has become the worst bond bear market of all time, according to BofA,” MarketWatch, 10/9/2023). At the same time, zero interest rates underwrote radical risk-taking in the stock market. Rupal Bhansali, then-manager of Ariel Global, decried a period when we went from “a market on steroids to a market on opioids!” Those two historic disruptions have skewed all of the historically stable relationships between asset allocations and risk-adjusted returns. We could call it The Great Distortion.

Risk–return trade-offs during The Great Distortion

For each of the following periods, we examined the risk-return profiles for all seven Fidelity Asset Manager funds for every trailing period from one to fifteen years. The 15-year record captures only the beginning of The Great Distortion, while the 20-year record captures the years before the distortion began.

  Best Sharpe ratio Best capture Worst Sharpe ratio Worst capture
1-year 85% 85% 20% 20%
2-year 85% 85% 20% 20%
3-year 85% 85% 20% 20%
4-year 85% 85% 20% 20%
5-year 85% Virtual 7-way tie 20% Virtual 7-way tie
6-year 85% 85% 20% 20%
7-year 85% 70% 20% 20%
8-year 85% Virtual 7-way tie 20% Virtual 7-way tie
9-year 85% 20% 20% 50%
10-year 85% 20% 20% 85%
11-year 85% Virtual 7-way tie 20% Virtual 7-way tie
12-year 85% 20% 20% 60%
13-year 40% 20% 20% 85%
14-year 40% 20% 20% 85%
15-year 30% 20% 85% 85%
20-year 20% 20% 85% 85%

Outside of The Great Distortion, the risk-adjusted returns of a stock-heavy portfolio wane. The most interesting comparison builds on Mr. Sherman’s and Mr. Marks’ argument: high-yield bonds are actually the more rational choice.

To test that guess, we looked at the long-term records of three Fidelity funds: one is heavy on stocks (FAM 85%), one is heavy on investment grade bonds (FAM 20%), and the third is heavy on high-yield bonds with just a dash of high-yield stocks: Fidelity Capital & Income, a Great Owl fund.


Fidelity Capital & Income Fund is a diversified high-yield bond strategy that seeks income and capital growth by investing primarily in the bonds of non-investment-grade companies.

We apply an opportunistic investment approach, which results in tactical positions aimed to capitalize on relative value across a company’s capital structure, including high-yield bonds, stocks, convertible securities, leveraged loans and preferred stocks.

In particular, we seek companies with strong balance sheets, high free cash flow, improving business/industry fundamentals and sharp management teams that are motivated to reduce debt. In doing so, we take a longer-term investment outlook and also may take advantage of opportunities based on where we are in the credit cycle.

20-year records for high-yield heavy, investment-grade heavy, and stock-heavy funds

Name APR APR vs Peer MAXDD STDEV Sharpe Ratio Ulcer Index 60/40 Capture Ratio
Fidelity Capital & Income 7.6 2.0 -35.3 10.4 0.60 6.7 1.1
Fidelity Asset Manager 20% 4.1 -0.5 -16.8 5.0 0.55 3.7 1.1
Fidelity Asset Manager 85% 7.5 0.4 -49.2 14.4 0.42 11.7 0.85

Hmmm … over the past 20 years, through three stock market crashes, a bond market crash, and a cash crash, a heavy investment in high-yield bonds produced essentially the same returns as a heavy investment in stocks but with a reduction of about one-third in the volatility. In consequence, high yield produced far stronger risk-adjusted returns than stocks on all three of the risk-adjusted metrics we’ve used.

Bottom line: If you suspect that The Great Distortionzero interest rates, zero inflation, a permanent bond bull market, and an infinitely accommodative fed – is unwinding, you need to reconsider the automatic impulse toward 60% US large cap stocks and 40% investment grade bonds. One place to look is at managers who have the ability and the flexibility to look at other sources of gain.

Four distinguished opportunities

“Great Owl” funds are an MFO designation for funds with uniformly excellent risk-adjusted returns. Technically, the standard is “top quintile risk-adjusted returns, based on Martin Ratio, in its category for evaluation periods of 3, 5, 10, and 20 years, as applicable.”

These are funds whose styles are largely at odds with the risk-on, highly speculative style favored during The Great Distortion. They rejected both style boxes and speculative risk, stuck with their discipline, and thrived. They represent different strategies for addressing a fundamentally changed environment and are worthy of attention.

10-year performance (through 10/2023)

Great Owl The Game Verdict Avg annual return Std dev Max draw down Sharpe ratio
Fidelity Capital & Income High-yield bonds plus some equities from high-quality corporations Great Owl, five-star, 45-year record 6.0 9.2 -17.5 0.53
FPA Crescent An absolute value fund that aims to protect capital first and create long-term equity-like returns second. They invest across the capital structure, asset classes, market caps, industries, and geographies. We are willing to hold cash. Great Owl, five-star, Gold rated, 30-year record 7.0 12.1 -20.5 0.49
Osterweis Strategic Income They want to preserve capital and earn long-term total returns through a combination of income and moderate capital appreciation. The base is high-yield bonds, but they shift to higher quality or shorter duration securities and cash as circumstances demand. Great Owl, four-star, 20-year record 3.8 4.7 -9.6 0.57
RiverPark Strategic Income Opportunistic, but loss-averse mix of shorter-term high-yield bonds with some investment grade and some equities as market conditions demand. Great Owl, five-star, 10-year record 3.7 5.3 -13.6 0.49
Benchmark An average of the high-yield and flexible portfolio groups   4.0 9.0 -18.0 .34


Hot Coffee and Hot Chocolate – A Brunch and Walk with David Sherman

By Devesh Shah

The leaves are turning crimson and gold in Central Park. On the Upper West Side, surrounding the American Museum of Natural History, are oak trees. They line the pedestrian walkway and are swinging to the rhythm of a light chill wind, marking the beginning of fall in New York. Acorns and dry leaves crunch under our feet. There is a farmer’s market which starts on 81st and Columbus Avenue, continues down to 77th Street, and then wraps around the museum to Central Park West. Varied hot dogs, kababs, and coffee carts line the path where the farmer’s market ends. It’s not your standard Broadway street fair with trinkets; it’s a proper market where locals get their meat and vegetable shopping done for the week. The first stand on Columbus is Kernan Farms.

“I grew up near this farm in New Jersey,” says David Sherman, founder, and portfolio manager of CrossingBridge funds, one of the most consistent short-term and high-yield bond fund houses, and no stranger to the Mutual Fund Observer readers. The sweet potatoes look really good. He picks some up for his wife. But no tomatoes; they are out of season, he says.

I thought everything was in season all twelve months in Manhattan, and am happy to learn something new. I’ve been betrayed by Whole Foods.

We walk the museum loop. At a coffee stand across from where once stood the statue of Teddy Roosevelt, and now a void, David orders a hot chocolate and a coffee and proceeds to mix it.

We’ve just had a two-hour brunch at our neighborhood Italian Tarallucci e Vino, where he got an omelet, and I had a farro salad. David quizzed me about fifty things in investing in the first ten minutes. I can handle the questions. But it’s his answers I am here for.

I’d like to do a repeat of what we did for the June MFO article. I’d love to hear his take on the various asset classes and investment trends. But the conversation veers off, and we have a different bouquet of ideas this time. We must go with the flow.

David’s been investing professionally for over 40 years. He has been investing his own money through the decades, is a wide-ranging and original thinker, and teaches an investing class at NYU where he invites a range of successful money managers to speak. He is generous with his time to MFO readers, and we are grateful for that.


David: Do you know who you are?

Devesh (to himself): I have been born countless times to find the answer to that question, but I am sure he is not talking about that. Silence.

David: You – MFO – are a content provider. And I am the content!

On India

David: INDIA: I recently invested in an India equity fund. It’s a public markets hedge fund. I met the guy, and he seems like he and his partners have good ideas and seem honest. I didn’t want to invest in Private Equity because liquidity, the ability to get out, is important to me. I didn’t want to invest in a public ETF. I think this fund has been successful in sourcing smaller companies and investing in them. I will give them a few years, and if they are down 20% in total return compounded, I might decide then, but I know I have an exit. With Private Equity, I don’t have an exit. I used to be in Indian stocks (ed note – for his mother) starting in 1999 and exited. This is a new India position for me.

Devesh: I know he’s liked India in the past and is bullish about the Lollapalooza effect. Everything is coming together for Mother India to have sustainable growth for decades ahead. One of my friends who runs another Indian hedge fund, Nischay Goel of Duro Capital out of Singapore, calls the investment opportunity in India over the next ten years Ridonculous!! The success of the South Pole moon landing, the G20, the dominance of Narendra Modi’s political party, and the common man finally being full of pride and seeing the benefits accrue from progress is a sight to behold. Infrastructure is improving throughout the country, and there’s going to be a truckload of billionaires being minted in India over the next ten years. $39 billion dollars of domestic money flows into stocks each year as domestic wealth generation and liquidity events unbound, and most investors cannot take their money abroad. The flip side: Indian stocks are expensive, at the highest valuation in Emerging Markets.

On Japan

David: JAPAN: I bought into a Japan Passive-Active fund lately. In Japan, it is still difficult to get board seats and change the company’s direction. But you are allowed to tender for shares. And when you accumulate enough stock position, you can then partner with a larger player and buy out the company. The fund I’ve invested in does that. It’s active in the sense that it buys substantial quantities of shares of public companies. But it’s passive in that it’s going to roll up its equity stake into the privatization of companies to make them more profitable. Japanese markets have gone up decently over the last few years, but I still like them.

Devesh: Readers should note that these investments are for Qualified Investors. There is information in both the vehicle and the assets he has picked. He is long Equities in Japan and India. But he is not buying a passive ETF. He is selecting a fund that is appropriate for his needs. Individual investors should read that these are where VERY LONG-TERM opportunities must exist. When to buy and what to buy is up to each investor. I ask him to refresh his thoughts for the readers on domestic US assets, recalling he feels US stocks are expensive.

On venture capital and his personal investments

David: Two years ago, I sold practically all of my US stocks. When Venture Capital was fighting with each other to throw money at any startup, it felt like a low-quality investment opportunity to be invested in US stocks. I sold everything. (Sips his hot coffee/chocolate concoction).

David: I also didn’t need to take a mortgage, but they were letting me borrow money at 2.5%, so I took one! Imagine a world where there were trillions of negative-yielding instruments. Why would someone buy them? Only because they would think they would lose less money in those bonds than they would in other assets. Something has to be massively wrong with the world for a long time. We’ve seen what’s happened to inflation and interest rates since the era of negative rates. And when the cost of interest rates goes up for the US Government, it goes up for everyone. Some stocks looked okay when the 10-year Interest rates were at 2.5% but not as good at 5% interest rates.

Warren, Berkshire, and Sherman

Devesh: I asked him his thoughts on Berkshire Hathaway. He had liked Buffett’s moves in Japan and elsewhere when we last met.

David: When I sold in the US, my intent wasn’t to hold on to one stock. I sold practically everything. Berkshire is a great private equity + mutual fund manager. It’s very well managed. Munger and Buffett’s ages have to be taken into consideration. What’s the P/E of Berkshire?

Devesh: It’s trading at 1.35x book value, and it also has $147 Billion in Cash with the Optionality value to do something with it. Let’s put the number at about 20 times operating earnings.

David: At 20x earnings, you are basically buying an investment with an Earnings Yield of 5% (1 divided by 20).

Devesh: He leaves the conclusion to me. I ask him about the fiscal debt, the deficit, the potential money printing, and higher inflation, the need for companies with real assets, companies that have large ground prints, and companies with the ability to reset prices.

Inflation, the dollar as global currency, and your future

David: We don’t know what inflation in the future is going to look like. We just don’t. And inflation is particular to you and to me. Once you have lifestyle creep, I have news for you: your expenses are not going down. And we haven’t figured out what to do when and if the US Dollar is no longer the reserve currency of the world. What are you going to do then?! If you are thinking about inflation, you should think about the reserve currency status as well.

Devesh: The conversation is unsettling. Most individual investors don’t do much other than allocating across some funds, stocks, and bonds. If David makes no money in his investments, he is fine with it, as long as he doesn’t lose in investments he doesn’t like. Being invested for the sake of being invested is anathema to David.

On benchmarking your investments

Meanwhile, as a standalone investor, long-term investing and earning risk premium across asset classes is all I have. When I ask him which benchmark an investor must follow to be comfortable not being invested in US stocks (the way he is), I get a sharp poke in the eye.


Devesh: If you look at what a majority of institutions do around the world, they follow benchmarks. Trillions upon trillions of dollars follow indexing, benchmarks, diversification, passive or active, and deploy their funds accordingly. Without a benchmark, how do you know if you are doing well and if the fund you invested in is doing well in its asset category? A benchmark is what brings discipline to the average investor.

David: What you are suggesting is that if a benchmark tells you to buy a lemon, you should buy a lemon!

Devesh: If David doesn’t think an asset class, let’s say, US or International Developed or Emerging Markets equities as an asset class, is interesting, he is not going to waste his time finding a fund manager in these places. He is OUT. Benchmark is irrelevant. The Bogle three-fund or four-fund solution or 60/40 or whatever is immaterial if the asset on offer is a lemon.

How to spend your time

David: Most people pay sufficient attention to their careers. One gets feedback, one looks at reviews, and one tries to improve their skill set so they can get paid well for the amount of stress they are willing to take.

Every investor similarly needs to spend time on their investment portfolio.

  1. Start with identifying how much you need in years 1, 2, 3, 5, 10, and longer periods.
  2. Avoid leverage in investments and trading. It’s one thing that kills most investors.
  3. If you truly want to be levered, borrow money against your house for 30 years and let that cost of mortgage funding be your leverage. If your mortgage cost is 8% and you can’t find an investment to beat that, maybe there isn’t much that leverage can do for you.
  4. In practice, you don’t need more than one stock manager and one bond manager. Spend time with a wealth advisor to pick the right manager for your needs.
  5. Understand that the best investors go through periods of mediocre performance. Buffett sucked wind for a large part of the last decade. So did Ron Baron recently. But in the end, investors who stick with the really good quality managers are okay.
  6. The majority of investors who get involved in long-short strategies, options, and other complex strategies are trying to avoid volatility. But why are they managing the volatility of their portfolio? It’s because they have not fully thought about their portfolio.
  7. If your bases and needs are covered, what do you care what the market “benchmark” does? It’s irrelevant. Since inception, RSIIX has barely underperformed the Morningstar US HY BD TR USD by less around a cumulative 100 bp or less than 10 bp per year. There have been periods of significant outperformance (particularly recently) and periods of significant underperformance. But volatility and consistency have been far superior. Does it matter? Return of capital matters more than return on capital. The quality/risk of our portfolio is much better than the passive index.
  8. You want your manager to follow the two rules. Rule 1: don’t lose money. Rule 2: don’t forget rule 1.

Devesh: This is good, very good. It helps me understand how David Sherman thinks about the risk, rewards, and simplicity of investing. It also reconciles his own investment positions for his personal assets with academic theory as we understand it. I elaborate on my thoughts later in the article.

On the Middle East

I asked David for his thoughts on the situation in the Middle East. As he describes his observations and analysis of the options available for peace and war, I can see he feels the situation viscerally.

The situation in the Middle East is tragic for everyone! There are no good outcomes.

“On a very personal basis, you have to understand that antisemitism is still present. And what starts as antisemitism can easily end in generalized bigotry.” 

We continue walking. The River Ranch farm stand makes paneer and mango lassi. The Caucasian farmer spent time in India, worked with a Punjabi employee, and now is our go-to guy for milk products every weekend. All of the employees for Kernan Farms are Nepalese. That we all understand and embrace this multi-cultural melting pot as ours is a gift. That we also understand that peace is hard to achieve and keep and that the Middle East is going to see countless deaths, and that most of us will be unable to change a thing is also a curse for us to accept and live with.

I thank David Sherman for a thought-provoking and insightful meal. He has given our readers a lot to process. Until next time, David.

Note and afterthoughts

All investment returns for all market participants combined can come from just three different buckets:

  1. Asset Allocation (which assets – stock/bond/real estate + private/public)
  2. Security Selection (which fund, which stock, or bond particularly)
  3. Market Timing (deciding when to be in or out)

David’s asset liability equation may not be yours or mine. His choice of being indifferent to the benchmarks, and avoiding asset allocation if there is a lemon, is incredibly thoughtful, for him.

I know people in their 80s who hold 60 to 80% of their positions in US equities for reasons many readers will recognize:

  1. Their liabilities (expenses) are covered.
  2. These investments are for their children and grandchildren, who, in turn, have a much longer investing window.
  3. American companies do a third of their business abroad. In the past, they saw reasons to hold foreign stocks, but they don’t anymore because business has changed. They are okay with their asset allocation being mostly American stocks.
  4. In the past, picking individual stocks worked because US equities were under-owned, and because there weren’t as many hedge funds as today with their computers. Now, it doesn’t. Security selection for the average investor provides questionable value.
  5. What about market timing?

There is a recent article by Howard Marks, Further Thoughts on Sea Change (5/30/2023). Here, Marks specifically wants to shake the status quo. I paraphrase him here: Look, you don’t need to own equities right now and all the volatility that equities will bring because you can earn 9% in high yield.

Marks knows we are not going to liquidate stocks, but he is still saying we should consider it because the world of interest rates has changed entirely compared to the last forty years.

David Sherman’s choice to be out of US equities and Howard Marks’ article are infinitely wise and probably prescient because these investors are ahead of the game. They have thought through the risk rewards, and when the world changes in the future, they will rethink them quickly again and act on it.

Meanwhile, the average investor has also learnt. It’s a difficult thing to outsmart the market. The only thing an investor can do is allocate across assets, take the volatility, and hope, that, in the long run, they earn the risk premium embedded in various asset classes. This is why many choose to avoid market timing.

There is an in-between place, though. None of this precludes investors from reducing risk in one place and adding in another. We don’t have to be in or out. We can reduce and increase allocations. That is in our hands.

Finally, let us also accept that none of us knows the future.

Short-Term Market Momentum

By Charles Lynn Bolin

The S&P 500 has fallen from 4,598 on July 27th of this year to 4,117 on October 28th for a decline of 10.5%, while yields on the ten-year Treasury have risen from 4.01% to 4.85% for a rise of 20.9%. The Fidelity Intermediate Treasury Bond Index (FUAMX) has had a price decline of 4% during this three-month period. I expected a larger decline in the S&P 500 and a lower rise in yields. Money market yields are hovering around 5%, and “cash is king.”

Economic growth is robust, along with relatively stable employment, while inflation has moderated. However, pandemic-era savings are being depleted, delinquency rates are rising, bankruptcies among small businesses are rising, and banks are tightening lending standards. The yield curve is still inverted. A possible recession has been pushed into early or mid-2024, the Federal Reserve has peaked its rate hikes or soon will, and speculation is that the Federal Reserve will begin lowering rates in mid-2024. How should we invest now?

I have concentrated on building fixed-income ladders for the past year, and as they mature, I have rolled them over into bond funds with longer durations. I have also employed wealth management services at Fidelity and Vanguard for longer horizon buckets. This month, I updated my spreadsheet that tracks the performance of over six hundred funds available at either Fidelity or Vanguard. I created a ranking system to reflect short-term performance and sentiment at this inflection point using 1) a three-month exponential moving average, 2) money flow, and 3) returns during September and October.

This article is divided into the following sections:


Table #1 contains the top-performing Lipper Categories for the 635 funds that I currently track. The first group of funds is money markets and short-term quality fixed income. Cash is king. Ulcer Index measures the depth and duration of drawdowns over the past two years, while Martin Ratio measures the risk-adjusted performance over the past two years. The next group of categories doing well is higher-risk fixed income. The third category performing well is “Alternatives”, some of which I have written about over the past year.  International small and multi-cap funds that I track are performing better than domestic large-cap funds.

A balanced, low-volatility portfolio will contain funds that move in different directions at different times. The final section looks at how some of the uncorrelated [to the S&P 500] funds that I own compare during the past few months.

Table #1: Trending Lipper Categories – Ulcer & Martin Stats – Two Years

Source: Created by the Author Using the MFO Premium Multi-search Tool


Table #2 contains the money market and short-term fixed-income funds that have done well over the past few months. The quality funds should continue to do well over the next year while the Federal Reserve is holding rates higher for longer. Lower-quality bond funds are likely to come under pressure if a recession becomes more likely. My current strategy is to invest in longer-duration funds of quality bonds while interest rates are high.

Table #2: Trending Fixed Income Funds (Metrics -Four Months)

Source: Created by the Author Using the MFO Premium Multi-search Tool

Figure #1: Trending Fixed Income Funds (Metrics -Four Months)

Source: Created by the Author Using the MFO Premium Multi-search Tool


The types of alternative fund categories shown in Table #3 often tend to do well during times of uncertainty. As I have written, I own several of these and will continue to do so until the U.S. economy enters its next growth stage. I plan to maintain low allocations to equity for the next six months because of high geopolitical risks and recession risks.

Table #3: Trending Alternative and Equity Funds (Metrics -Four Months)

Source: Created by the Author Using the MFO Premium Multi-search Tool

Note that the two international value funds (AVDV, DFIV) have been trending higher lately.

Figure #2: Trending Alternative and Equity Funds (Metrics -Four Months)

Source: Created by the Author Using the MFO Premium Multi-search Tool


This section covers funds that performed relatively well over the past several months. These funds were selected by looking at individual funds instead of focusing first on the Lipper Category.

Table #4: Short List of Trending Funds (Metrics -Four Months)

Source: Created by the Author Using the MFO Premium Multi-search Tool

Pacer US Cash Cows (COWS) has done well over the past few years. In the next section, I add the Pacer Trendpilot 100 Fund (PTNQ) for comparison.

Figure #3: Short List of Trending Funds (Metrics -Four Months)

Source: Created by the Author Using the MFO Premium Multi-search Tool


In this section, I selected some of the more conservative funds from the previous section and compared them to some of the funds that I own (PQTAX, REMIX, GPANX, CTFAX). I want to take a closer look at the two Alternative Multi-Strategy funds (FSMSX and GPANX) and the two Flexible Portfolio Funds (PMAIX and CTFAX) to see if I want to make a trade.

“APR MTD” returns are October returns through the 24th. I own a small starter position in American Century Avantis All Equity Markets (AVGE) and plan to add to it on major pullbacks.

Table #5: Comparison to Author’s Funds

Source: Created by the Author Using the MFO Premium Multi-search Tool

While I am a bit disappointed with the short-term performance of GPANX and CTFAX, I am satisfied with their longer-term performance and not ready to make a trade at this time.

Figure #4: Comparison of Author’s Funds to Similar Categories

Source: Created by the Author Using the MFO Premium Multi-search Tool

Closing Thoughts

October is typically a poor-performing month for stocks, and last month, stocks supported this trend. I initiated a Roth Conversion in a managed account, which will have a small impact on increasing allocations to equities. For the next few months, I will continue to extend the duration of bond funds. I expect that stocks will be lower next year as the economy slows, and I plan another Roth Conversion next year. If stocks do fall as I expect (hope), I will switch from buying longer-duration bond funds to equities.

Fire-and-Forget Gone Wrong: First Foundation Total Return

By David Snowball

In the military realm, “fire and forget” designates a weapon that you don’t need to think about once it’s been launched. In investing, “fire and forget” could be used to describe several sorts of mistakes centering on our impulse to look away once we’ve made a decision. One of those mistakes is to buy a fund (presumably for a good reason), then sell it (presumably for a good reason), and then never re-examine your decision.

Managers – both corporate and fund – make mistakes. You can’t avoid it. They can’t. The best of them realize it, learn from it, correct it, and return to doing fine work. After inheriting Highland Total Return in 2015, the team at First Foundation seems to have diagnosed and corrected a fairly serious mistake they inherited.

First Foundation Total Return (FBBYX) was launched in November 1993. Sort of.

It is incredibly difficult to trace the actual history of this fund. It appears that it might have originated as a General Electric Asset Management fund, and it appears that GEAM might have sold its assets to Highland Capital after the financial crisis but continued to manage it, or most of it. For sure, Highland Total Return was managed by First Foundation after February 1, 2015, but the First Foundation team inherited a small fund with over 800 legacy holdings from the earlier teams.

The Highland Funds were somewhere between a mess and a dumpster fire. At MFO, they mostly appeared in articles about funds that were embarrassing and/or disappearing. One of those funds was Highland Total Return, of which we wrote:

On December 14, 2020, Highland Total Return Fund and Highland Fixed Income Fund morph into First Foundation Total Return Fund and First Foundation Fixed Income Fund. No substantial changes which, let’s be honest, is unfortunate. Total Return is a one-star fund with $67 million …

Since then, the fund has staged a remarkable turnaround. It is a five-star stock/bond hybrid that has substantially outperformed its peers since the change. Morningstar places it in the top 1% of its peer group for the past 1-, 3- and 5-year periods. As a result, flows have been steady, and the fund has $125 million invested today.

The fund has roughly tripled the returns of its peers over the past three years: 17.12% for FBBYX versus 5.84% for its peers (through 10/1/2023, per Morningstar). While the fund can be volatile, its returns and risk-adjusted returns are both purely first-rate.

Comparison of 3-Year Performance (Sept. 2020)

Return metrics APR #1 of 239
  Upside capture / S&P 500 #2
  Upside capture / 60/40 bm #2
Risk metrics Standard deviation #215
  Downside deviation #73
  Downmarket deviation #73
  Bear market deviation #50
  Maximum drawdown #6
  Downside capture / S&P 500 #29
  Downside capture / 60/40 bm #40
Risk-adjusted return metrics Sharpe ratio #1
  Sortino ratio #1
  Ulcer Index #2
  Capture ratio / S&P 500 #1
  Capture ratio / 60/40 bm #1

Source: MFO Premium fund screener and Lipper global data feed

How did that happen?

First Foundation Total Return’s strategy is to focus primarily, but not exclusively, on growth stocks at value prices. Their targets are mid- to large-cap companies with

  • strong earnings growth
  • favorable valuation
  • a presence in successful industries
  • high-quality management focused on generating shareholder value. The managers actually sit, without compensation, on the boards of some of their portfolio companies to help advance their investors’ interests. When board fees have been paid, it has been deposited directly into the mutual fund, akin to a dividend.

The “not exclusively” proviso reflects the managers’ conviction that there are times when investors’ enthusiasm has gotten far enough ahead of fundamentals that it’s prudent to increase exposure to “ballast” companies. Currently, for example, Morningstar locates the core of the fund’s equity holdings in the mid-cap value box (as of 6/30/2023). At the same time, half of the equity portfolio is in companies domiciled in France or Canada (again, as of 6/30/2023).

In terms of priorities on the equity side, you might imagine a funnel from the investable universe to the portfolio: they look first for securities selling for a fair price, then at companies with great alignment, and then finally at the quality of the business.

The most dramatic change in the transition from Highland to First Foundation was on the fixed-income side of the equation. When First Foundation took over that part of the portfolio, they found that “we then owned things like two mortgage back securities per issue and there were hundreds and hundreds of holdings, it was probably closer to a thousand,” some of which they were not able to sell. They held such issues to maturity and let them roll incrementally off the books, with just a few hundred thousand dollars tied up in such issues now.

The fixed-income portfolio is quite compact (under 40 issues), with the team looking for debt securities with characteristics such as:

  • attractive yields and prices
  • the potential for capital appreciation
  • reasonable credit quality, which means they typically buy investment-grade debt and frequently buy Treasuries.

The managers pursue what many readers might consider a T. Rowe Price model of investing, with the distinctive advantage that the funds are small enough to benefit substantially by aligning themselves with, and perhaps strengthening, “family-controlled companies whose managers act like principals rather than agents.”

This alignment of interest is something the managers have pursued firsthand as board members of some of their companies. Mr. Speron notes, “Capitalism works for owners when principals and agents are aligned. Low valuations and lower correlations mean small cap is important in a portfolio context, but mitigating agency risk has required real effort.” Those efforts have paid off for the fund’s investors. It’s an investment well worth remembering.

Briefly Noted

By TheShadow


Matthews Asia has named Sean Taylor as its incoming chief investment officer, taking over from Robert Horrocks at the start of next year. Taylor was CIO for Asia Pacific and head of emerging markets at DWS and will assume his new role at Matthews on January 1, 2024. Mr. Horrocks, who has been with Matthews Asia since 2008, will retain his portfolio management responsibilities, which include Matthews Asia Dividend and Matthews Asian Growth & Income.

Matthews hired a new CIO, Cooper Abbott, in the summer of 2022. Since then, the firm has undergone considerable … turmoil? Renewal? Matthews liquidated its two fixed-income funds, launched five active ETFs, and reorganized the management teams at four other funds.

As we reported last month, MFO’s publisher sold his entire position in Matthews Asia Growth & Income. His rationale: “The fund is one of the most conservative ways to access Asian equities, but … it was a holdover from Ancient Times when Andrew Foster (now of Seafarer) managed the fund. The fund has earned 0.20% annually for the past five years and 1.20% for the past decade, and my exposure to stocks (60%) and international stocks (40%) were both far above their targets.”

Briefly Noted . . .

CLOSINGS (and related inconveniences)

Four Aperture Funds were closed immediately to new and existing investors: Aperture New World Opportunities Fund, Aperture Endeavour Equity Fund, Aperture Discover Equity Fund, and Aperture International Equity Fund. No explanation was provided for the closures. Given that current shareholders with automatic investment plans are also being locked out, expect an obituary announcement soon.


Blueprint Adaptive Growth Allocation Fund, investor share class, will be converted to institutional shares on December 8. The fund’s minimum initial investment will also be changed from $15,000 to $5,000. The fund is rated two stars by Morningstar.

Diamond Hill Small-Mid Cap Fund reopened to new investors on October 5. The fund has been closed since the close of business on April 30, 2016. The fund is rated two stars by Morningstar.

Cromwell Marketfield L/S Fund will convert its Class C shares into Investor Class shares on November 17, 2023. It’s a “win” in the same that the “A” shares charge only 2.31% for modestly sub-standard performance, rather than the “C” shares’ 3.06% for substantially sub-standard performance.

Performance since inception (note different inception for the original share class)

MFLDX was, in its prime, the 800-pound gorilla of the long/short fund universe.

RiverPark Short Term High Yield Fund reopened to new investors on October 11. The fund has been closed since June 18, 2021. The fund is rated four stars by Morningstar.

The Vulcan Small Cap Fund reopened to new investors on October 1 after being closed on November 29, 2013. The fund is rated one star by Morningstar.


Effective on or about November 10, 2023, the AlphaCentric Strategic Income Fund becomes AlphaCentric Strategic Real Estate Income Fund.

HSBC RadiantESG U.S. Smaller Companies Fund is embracing the “green flight” movement. “In anticipation of a change in the name of the Fund’s current subadviser, the Fund’s name will change to HSBC Radiant U.S. Smaller Companies Fund” without any material change in the fund’s ESG profile or process.

iShares North American Tech-Multimedia Networking ETF has been renamed iShares U.S. Digital Infrastructure and Real Estate ETF. No indication that the addition of “Real Estate” to the name makes any difference in the portfolio.

Knowledge Leaders Developed World ETF is being reorganized into AXS Knowledge Leaders ETF. A shareholder meeting will occur on or about December 20, 2023. If the reorganization is approved by shareholders, the reorganization is expected to take effect in the fourth quarter of 2023.

Loncar China BioPharma ETF is being “reorganized” into the Range Cancer Therapeutics ETF (formerly known as the Loncar Cancer Immunotherapy ETF). The acquiring fund has zero exposure to China. That engenders one small problem: the IRS doesn’t recognize the “reorganization” as, well, a reorganization:

The Reorganization is not expected to qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”). Accordingly, it is anticipated that the Reorganization should be a taxable transaction, and that the Acquired Fund should recognize gain or loss, if any, in connection with the transfer of its assets to the Acquiring Fund, which may require the Acquired Fund to make taxable distributions to its shareholders. Further, a shareholder’s exchange of Acquired Fund shares for Acquiring Fund shares is expected to be a taxable event with the exception of shareholders who hold shares in a tax deferred account. As a result, the Board considered alternatives to the Reorganization and believes that the only viable alternative to the Reorganization is liquidating the Acquired Fund, and that the tax implications of liquidation would be substantially similar to those following the Reorganization.

Basically, the China Bio ETF is a failure (Morningstar calculates that it has turned a $10,000 investment at inception into $6116 at the end of 10/20223) and the adviser needs to either liquidate the fund (and lose the $4 million in assets) or finagle a “reorganization” that pumps $4 million into their surviving ETF which itself has only $9 million in assets.

Oberweis International Opportunities Institutional Fund is being reorganized into the Oberweis International Opportunities Fund as the institutional class of the fund is being eliminated. A shareholders’ meeting will be held on December 21 to vote on the proposal. If shareholders approve the reorganization, the merger will become effective on or about December 22.

Vert Global Sustainable Real Estate Fund will become an ETF, Vert Global Sustainable Real Estate ETF, on or about December 4, 2023.


Advocate Rising Rate Hedge ETF will be liquidated on or about October 31.

ASYMmetric ETFs Trust liquidated ASYMmetric Smart S&P 500 ETF, ASYMmetric Smart Alpha S&P 500 ETF, and ASYMmetric Smart Income ETF on October 18, 2023.

BlackRock Large Cap Focus Growth Fund is slated to merge into BlackRock Capital Appreciation Fund, though we don’t yet know the date.

Brown Advisory Equity Income Fund will be liquidated on or about January 15, 2024.

Cavanal Hill Opportunistic Fund “will distribute cash or in-kind pro rata to all shareholders who have not previously redeemed or exchanged all of their shares on or about December 14, 2023.” That’s a new way of phrasing the death notice.

Ecofin Global Energy Transition Fund will be liquidated on or around November 15, 2023, based on the fund’s “limited prospects for meaningful growth.”

Global X doin’ what Global X does: Global X Founder-Run Companies ETF (BOSS), Global X Emerging Markets Internet & E-Commerce ETF, Global X Education ETF, and Global X China Innovation ETF will all reach the end of the road on November 10, 2023

KL Allocation Fund is being reorganized into the AXS Astoria Inflation Sensitive ETF. A shareholder meeting will occur on or about January 12, 2024. If the reorganization is approved by shareholders, the reorganization is expected to take effect in the first quarter of 2024.

Osterweis Total Return Fund is being liquidated after the close of business on December 15. The October 16 supplement states the decision was made due to the fund’s inability to obtain a level of assets necessary for it to be viable.

The Simplify Emerging Markets Equity PLUS Downside Convexity ETF and Simplify Developed Ex-US PLUS Downside Convexity ETF face final simplification on November 3, 2023. 

Touchstone Dynamic Allocation is merging into Touchstone Dynamic International ETF on or about December 4, 2023. Given that only one-quarter of the ETF’s current portfolio has been … umm, dynamically allocated to international stocks, this is likely to entail a wholesale housecleaning and something of a surprise to the fund’s current investors.

Touchstone Anti-Benchmark US Core Equity Fund is expected to be closed and liquidated on or about December 8, 2023, due to its small size and limited growth potential.