Monthly Archives: February 2023

February 1, 2023

By David Snowball

Dear friends,

Welcome to February. It’s a month we associate with love, St. Valentine’s Day. As holidays go, it’s another triumph for the marketers. The holiday began life as a Roman fertility festival, Lupercalia, and its attendant parties. Eventually, the Christian church made the same move here as they did with the pagan year-end festival; they repurposed the December solstice festival into Christmas and the February fertility festival into St. Valentine’s Day. The moves gave them one more tool for converting party-loving pagans into … well, party-loving nominal Christians.

February itself was the month of purification, “februa” means “to cleanse,” ahead of the Roman New Year, which began with the planting of crops in March. And so you’d take one last opportunity to resolve old grudges, clear the air with aggrieved friends, review your portfolio, repent your mistakes, and begin your new year with a clean slate.

Okay, I might have slipped the “review your portfolio” bit in, but the rest was totally Roman.

Thinking about the new year

For most investors, 2022 was an execrable year full of bad results and worst prophecies. 2023 has started off with a ferocious rally among some of the lowest-quality stocks; Morningstar’s screener shows 300 of the lowest-quality stocks (domestic companies with no economic moat and “extreme” value uncertainty ratings) rose by 100 – 10,000% in January 2023.  On the flip side, no wide moat / low uncertainty stock returned more than 24%.

Morningstar, and others, believe that the markets are broadly undervalued and that “the best days for investors lie ahead” (“Are We in a Low Return World? We Doubt It,” 1/27/2023). Their oddly cheerful conclusion is that bonds are priced to deliver 1.5-2.0% real returns over the coming decade, with a 60/40 portfolio set to reel in 3.6% real returns.

They might be right, but my colleagues and I suggest thoughtful caution.

Devesh’s essay this month, “In Defense of Taking Risk,” walks readers through the process of understanding and calibrating the risks they’re exposing themselves to. One tool he offers is a scenario analysis that begins to answer the questions, “how bad might it get?” and “what will I do if it does?” A simplified version: (1) lay out your current portfolio by asset class, then (2) discount your stocks by 25%, your bonds by 10%, and your cryptocurrencies by 100%. The percentages represent typical bear market outcomes. Check the resulting values and ask, “what should I do if this comes to pass?”

  January 23 December 23
Stocks $30,000 $22,500
Bonds $15,000 $13,500
Crypto $5,000 $o
  $50,000 $36,000

Why assign zero value to crypto? Simple. Because crypto is utterly disconnected from anything other than pure speculation, there is no way of predicting its value. Since you can’t count on it to be there (over 900 cryptocurrencies a year fail, and their accounts go to zero), prudent budgets assume it won’t be there.

In concert with Devesh’s work, I’ve shared the shape and results of Snowball’s indolent portfolio again this year. Using the tools at MFO Premium, I calculated my year’s performance and how it compared to what would have happened if I had held the average fund in each niche rather than the ones I picked.

The result: the portfolio was down but by less than expected. We found the same thing when we looked at its performance during the Covid Bear in 2020. It appears that risk is stickier than returns (John Rekenthaler, below, found the exact same thing in his search for bear-resistant winners); there’s a predictive validity in selecting managers who perform well in the long-term and have a record of thriving during downturns. That essay suggests a few lessons from my occasional wins and many mistakes.

Lynn Bolin departs from his normal habit of constructing and testing portfolios to offer an extended analysis of a single fund, American Century Avantis All Equity Markets ETF, a low-cost, actively managed fund-of-funds that aims to outperform a passive benchmark. The fact that it’s led by DFA’s former chief investment officer, Eduardo Repetto, gives you a sense of the commitment to harvesting the advantages of both active (flexibility, adaptability) and passive (cheap, transparent) approaches. Collectively the management team has over 80 years of experience at a half-dozen top-tier firms.

On the theme of single funds, I also share an update on The Cook & Bynum Fund, which suddenly finds itself atop Morningstar’s emerging markets (??) heap, and the newly launched Matthews Emerging Markets ex-China Active ETF. The potential resurgence of emerging markets investing will guide a bunch of our coverage in the months ahead.

Finally, The Shadow gathers “all the news you need to know,” at least about the investment industry, into his short and sharp Briefly Noted.

On politicians and sustainable investing options: Please shut up.

Our planet is in trouble.

Investors’ decisions about where to commit trillions of dollars in assets might make at least a little difference in the fight to keep the world habitable for us all.

That, in a nutshell, is the case for sustainable investing. There are, however, three problems with sustainable investing:

  1. It’s incredibly complicated – what counts as “good”? What do you do with a firm that’s 50.1% good and 49.9% bad? What do you do with the best firm in the worst industry? How do you weigh exposure to carbon production as one risk factor relative to, say, mediocre management or high debt loads, as others?
  2. Its friends. During The Great Green Orgy of 2020-21, investment marketers rebranded every slow-moving fund in their stable as an ESG vehicle as well as rolling out everything from the Vegan ETF to endless Carbon-Free, Carbon-Lite, Carbon-Neutral, and Inverse Double-Carbon Whammy funds and ETFs with great fanfare but without any profound analysis of their impact. The term of the year was “greenwashing.”
  3. Its enemies. Conservative politicians, operating with even less reflection than industry marketers, have latched onto ESG funds with the same passion that a bulldog latches onto a chunk of brisket. Apparently, the scent of red meat triggers both. State-level bans on “woke investing” followed.

Utah officials demanded that S&P withdraw its ESG scores for state bonds, and Missouri’s attorney general is leading a multi-state investigation. Eighteen states are investigating Morningstar and its Sustainalytics arm. Nineteen states sent a nastygram to BlackRock CEO, charging that BlackRock’s ESG sensitivity would “force the phase-out of fossil fuels, increase energy prices, drive inflation, and weaken the national security of the United States.” Texas bans cities from using financial firms that are woke. Florida barred the state’s pension fund from considering ESG factors at all; it was quickly followed by eight to ten other states.

In theory, this is all being done to protect investors’ returns. In practice, it’s another tirade designed to advance a set of political ambitions in the name of defeating another set of them. The New York Times highlighted the statements of Louisiana’s treasurer as an illustration: he denounced ESG investing because of “Louisiana law on fiduciary duties, which requires a sole focus on financial returns for the beneficiaries of state funds” but then contradicted himself by declaring his actions were “necessary to protect Louisiana from actions and policies that would actively seek to hamstring our fossil fuel sector. Simply put, we cannot be party to the crippling of our own economy” (“Politicians Want to Keep Money Out of E.S.G. Funds. Could It Backfire?” 1/30/2023). If your “sole focus” is on financial returns, then protecting one politically powerful industry should be off the table.

But, for politicians, politics is never off the table.

To which we respond, please shut up.

The truth is that investing is all about managing risks and maximizing returns. Products which fail one or both of those tests are dead. Period. Investors will not consistently commit their resources to high risk / low return vehicles. That explains why funds and ETFs have been liquidated by the hundreds and why underperforming managers are routinely fired by investment committees. Telling professionals that they are forbidden from considering certain sorts of risks does not improve our prospects. The smooth operation of that system requires transparency. It does not require the intervention of politicians.

By all means, police greenwashing. Standardize disclosures and reporting. Publicize benchmarks and metrics. Encourage alternatives. But otherwise, keep out of people’s portfolios.

John Rekenthaler discovers the sad truths about all-weather funds

Truth #1: there are some, and they have predictable characteristics.

Truth #2: no one invests in them.

Mr. Rekenthaler, Morningstar’s curmudgeon-in-chief and longest-tenured fund savant, recently went on the search for funds that you might plausibly buy and hold forever. Consistent with our discussion of risk and return management above, he looked for folks who outperformed the stock market in the long term and protected you during market turmoil. His criteria were:

all-weather U.S. equity funds as those funds that have outgained the overall stock market over the long haul while also experiencing less than 70% of the stock market’s decline in 2002, 2008, and 2022.

His happy finding was that the funds that protected you in 2002 also likely protected you from the very different turmoil in 2008 and the still-different turmoil in 2022. That is, risk management was something that could be maintained across different markets and different threats.

In the end, Mr. Rekenthaler identified five funds that have been winning on your behalf over the course of this century.

As he studies the common characteristics of his winners, he notes,

the all-weather winners stand out from the mainstream. Each of the five all-weather funds is sponsored by a niche organization. The funds have relatively few shareholders, and their performances are driven by small to midsized companies that sell at low price multiples. Predictably, their expense ratios also sharply exceed that of the index fund.

. . . the most successful all-weather funds walk where others have feared to tread. Their rivals’ reluctance is understandable. Small-value funds can languish for long bull-market stretches, as during the late 1990s and then again two decades later. Those times are intensely frustrating. (Perhaps even worse for investors than suffering outright losses is watching while others score fat profits.) Such lulls, along with unfavorable publicity, have limited the amount of assets in small-value funds—especially, as we have seen, among the all-weather winners. (All-Weather Stock Funds Do Exist, 1/12/2023).

By Morningstar’s calculation, four of the five funds have “active share” ratings of above 95; Northern Small Cap Value, a quant fund whose program stops it from deviating from its benchmark by too much, is the only exception. Four of the five have MFO’s highest performance rating over the past 20 years, with Northern coming in just a notch below. We would commend any of them to investors who suspect that the next market might be more sensitive to valuations and less enamored with mega-cap growth than the frenzy just passed.

Teresa Kong: Living my values.

One small change coming to my portfolio will be finding a replacement for Matthews Asia Total Return Bond (MAINX) fund, a tiny “curiosity position” in my retirement portfolio. Manager Teresa Kong quietly left the firm in July 2022, and Matthews announced their decision to liquidate their two fixed-income funds, both originally managed by her, in December 2022.

We’ve spoken with Ms. Kong on several occasions over the years. The fact that she’s brilliant, dedicated, and thoughtful is beyond question. Her arguments on the long-term prospects of Asian fixed income markets led me to long ago establish positions in her flagship fund, a curiosity position in my retirement portfolio – that is, just enough money to remind me to pay attention – and in my non-retirement one.

We caught up with Teresa in January 2023 to pursue two questions: (1) where are you? And (2) what should I do with my portfolio? She had a fascinating answer to one of those two.

Teresa grew up in Minnesota but has lived in Hong Kong, China, and Germany, where she met her husband, a Czech citizen. She’s studied at some of the world’s best schools and has worked for some of its best financial firms. And she decided, after 25 years in the business, it was time for a change.

“Curiosity has always been one of my core values. Living in Hong Kong then China, I couldn’t help but wonder about why some places prosper, other wither. Why some have lives full of meaning, and others don’t. And so I’ve decided to center this chapter of my life around my values.”

In particular, she’s working with two small firms on projects that might end up being really consequential. The “moon shot” project is working with a start-up that’s trying to help people reassert “data sovereignty.” The short version is that Google, Meta, and others make billions of dollars a year by vacuuming up your personal information – what apps you use, what sites you visit, what searches you conduct, what people you contact, what businesses you’re connected with – and selling it to other corporations. They get billions. You get bupkus. (Technically, you get your privacy invaded, in addition to bupkus.) The startup is looking at technology that might allow you to achieve negotiating leverage with the Googles of the world: “you get (a) the data I choose to release so long as (b) I get fair compensation for it.”

The second project is the pursuit of “food sovereignty” through the creation of a vertical farm in Wilmington, Delaware. In addition to being Joe Biden’s home district, Wilmington is a food desert, a place where the majority of residents don’t have routine access to fresh, healthy, affordable food. Teresa’s project – which includes a community space, learning space, and kitchen in addition to the farm itself – aims to change that. They have an architect working on securing a site and are working through the IRS paperwork to become a 501(c)3 non-profit organization.

The one question she couldn’t answer is what to do with my portfolio. There is, she agrees, nothing quite like the Matthews Asia fixed income funds. She has promised to mull over the possibilities and share her conclusions in the months to come.

We wish her well.

Jeff DeMaso: Living my newsletter!

We noted in January that Daniel Wiener’s iconic Vanguard investor newsletter was undergoing two epochal changes. First, following a decision by their long-time publisher, they were ceasing production of their physical newsletter and moving entirely online. Second, Dan’s long-time associate Jeff DeMaso was succeeding Dan as the face of the franchise.

Tania Mitra, writing for CityWire, reports that “Adviser Investments’ director of research Jeff DeMaso has left the firm after 12 years to focus on his newsletter, The Independent Vanguard Advisor” (“Adviser Investments gatekeeper exits to focus on Vanguard funds newsletter,” 2/1/2023). Mitra quotes Jeff as saying

What’s next for me is really going all in on this newsletter, that in some ways, I’ve been working on for the better part of a decade. The new wrinkle and the why now is that I got an opportunity to self-publish and own the newsletter and getting the chance to go all in [and] focus on the entrepreneurial angle of starting a new newsletter appealed to me and [it] wasn’t something I could turn down.

The Independent Vanguard Adviser website offers some new free content weekly, as well as peeks at its premium content. The most recent weekly newsletter highlights a new fund launch, manager changes, and Jeff’s outlook for the year (umm … positive).

We wish him and his venerable senior partner great success as they try to help investors make the best possible use of the increasingly troubled $2 trillion beast.

One more certainty lost: “A pint’s a pound the world around!”

Charles Adiel Lewis Totten (1851 –1908), a 19th-century British eccentric (the term is virtually a tautology), wrote the theme song for the International Institute for Preserving and Perfecting (Anglo-Saxon) Weights and Measures. He entitled his pub favorite hit, “A Pint’s a Pound the World Around,” in 1883, which included these lines:

Then swell the chorus heartily.
Let every Saxon sing:
“A pint’s a pound the world around.”
Till all the earth shall ring.
“A pint’s a pound the world around”
For rich and poor the same;
Just measure and a perfect weight
Called by their ancient name!

I’ve discovered this month that shrinkflation has gutted this last brave outpost of (Anglo-Saxon) Weights and Measures. Hefting my 15 ounce pint container of yogurt next to my 10.5 ounce pound of coffee (down from last year’s 12 ounce pound), I saw the last remnant of cosmic certainty drift away like the fog.

At least I can console myself with Charmin’s wider sheets**.

About those **.  Bathroom tissue, to be polite, was once standardized at 4.5 x 4.5”. To mask price increases, the sheets were trimmed to 4.2 x 4.2”. And now manufacturers offer you a reason to stop complaining about price gouging: you’re getting Wider Sheets! But also shorter ones (4,” down from 4.2 and 4.5), which we needn’t mention.

Thanks, as ever …

Lupercalian blessings to our dependable regulars, the good folks at S&F Investment Advisors, Wilson, Gregory, William, the other William, Brian, David, and Doug.

On January 2nd we received a note and a contribution from an old friend, Crash, who’s enjoying retirement and still adding to his collection of 8300 comments on the MFO Discussion board. Cheers, big guy!

Finally, Gardey Financial Advisors, Benjamin from Ann Arbor (the eternal squabble is whether I win and we go to Zingerman’s first or she wins and we go to Found … TBH, she wins), Joseph, Andrew from Akron, and John. We thank you all.

As ever,

david's signature


One of a Kind: American Century Avantis All Equity Markets ETF (AVGE)

By Charles Lynn Bolin

My last article on Seeking Alpha suggested that value, international, small caps, and emerging markets would outperform over the coming years. David Snowball wrote “The Investor’s Guide to 2023: Three Opportunities to Move Toward” last month along the same lines and offers his insight into these asset classes along with some excellent funds. I follow the Bucket Approach, where some Buckets have similarities to Dr. Snowball’s “Terrified Investor,” “Exhausted Investor,” or “Enterprising Investor.” A Reader on Seeking Alpha asked my opinion about American Century Avantis All Equity Markets ETF (AVGE) as a one-stop fund for these categories. This article represents my opinion of AVGE.

American Century Avantis All Equity Markets ETF (AVGE) is an actively managed exchange-traded fund in the Global Multi-Cap Core Lipper Category constructed of ten Avantis equity ETFs. AVGE is unique in that if you use the MFO Multi-Search Screen for the Global Multi-Cap Core Category with 20 or fewer holdings and over $50 million in assets, AVGE is the only fund. American Century now has eighteen Avantis ETFs, many with three years of history, so we can take a deeper dive.

With bonds now earning competitive yields, I have adapted my strategy to match withdrawal needs with individual CDs and bonds. The consequence is that I need to shift from multi-asset funds towards equity funds in order to increase allocations to equities. In this article, I explore how AVGE works and performs. While I do not view AVGE as a one-stop equity fund, it satisfies my desire to be the “Enterprising Investor” positioning some Buckets for “active, long-term” growth.

This article is divided into the following sections:

Section 1, What or Who is Avantis?

Section 2, Avantis All Equity Markets ETF (AVGE)

Section 3, Comparison to Global Multi-Cap Funds

What or Who is Avantis?

Professor Snowball covered the launch of Avantis and one of the Avantis funds in Launch Alert: Avantis International Small Cap Value (AVDV) in 2019. According to American Century in “Unthink ETFs, Rethink Possibilities,” the company was formed in 1958 by James E. Stowers Jr. and manages more than $200B in assets. Currently, over 40% of its annual profits go to funding the Stowers Institute for Medical Research.

Using the MFO Premium fund screener, American Century has 140 funds with $164B in assets under management. They have three funds that are more than fifty years old. The MFO Family Rating for the past three years is a respectable “Upper.” American Century has thirty-five ETFs with $19B in Assets under management.

American Century Investments formed Avantis in 2018, and it manages eighteen ETFs with $17B in assets and nine mutual funds with $1.5B in assets. Eduardo Repetto (PhD) is the Chief Investment Officer at Avantis Investors. He was formerly the Co-Chief Executive Officer and Co-Chief Investment Officer at Dimensional Fund Advisers, a private investment firm well known for its active management approach. The Avantis website is located here. “Our Scientific Approach To Investing” by Avantis in April 2021 describes their approach based on valuation and profitability with a watchful eye on diversification, turnover, and costs, summarized as shown in Chart #1.

Chart #1: Avantis Process

Source: “Our Scientific Approach To Investing,” Avantis Investors, April 2021

Of the ten Avantis Funds that are three years old and older, the categories include international, small-cap, and emerging markets. Of these ten funds, six receive the MFO classification of “Great Owl” for high-risk adjusted performance, and seven had an MFO rating of above average or better (4 or 5). Eight of the ten funds had an MFO Risk Rating of 4 (similar to the S&P 500), and two had a rating of 5 for higher risk. Six had a Lipper Preservation rating of average or better (3 to 5). In other words, these funds carry much of the risk of their respective Lipper Categories but are better performers on a risk-adjusted basis.

Avantis All Equity Markets ETF (AVGE)

Morningstar rates the AVGE process as above average and gives All Equity Markets ETF (AVGE) a “Bronze Analyst Rating” based largely on the process:

The managers will strategically allocate to the underlying funds across geographies and investment styles to achieve the desired allocation. The underlying funds represent a broadly diversified basket of equity securities that seek to overweight securities that are expected to have higher returns or better risk characteristics than a passive and market-cap-weighted index.

The main disadvantage of the Avantis All Equity Markets ETF (AVGE) is its inception date of September 2022. However, investors have shown a belief in the fund by investing over $100M in this short time period. The Avantis All Equity Markets ETF (AVGE) is managed by Dr. Eduardo Repetto (CIO), Mitchell Firestein (Senior Portfolio Manager), Daniel Ong (CFA, Senior Portfolio Manager), Theodore Randall (Senior Portfolio Manager), and Matthew Dubin (Associate Portfolio Manager), collectively with eighteen years average experience. AVGE is leading a trend that I think will continue as an actively managed equity “fund of funds.” AVGE has a significant cost advantage over Global Multi-Cap Funds with an expense ratio of 0.23 compared to a median of 86 funds with an expense ratio of about 0.75.

From the Prospectus, a summary of the Principal Investment Strategies is:

Avantis All Equity Markets ETF is a “fund of funds,” meaning that it seeks to achieve its objective by investing in other Avantis exchange-traded funds (ETFs) (collectively, the underlying funds). The underlying funds represent a broadly diversified basket of equity securities that seek to overweight securities that are expected to have higher returns or better risk characteristics than a passive, market-cap weighted index…

To identify those securities with higher expected returns, the underlying funds generally place enhanced emphasis on securities of companies with smaller market capitalizations and securities of companies with higher profitability and value characteristics…

Under normal market conditions, the fund will invest at least 80% of its assets in equity ETFs. The managers will strategically allocate to the underlying funds across geographies and investment styles to achieve the desired allocation…

In the event of exceptional market or economic conditions, the fund may take temporary defensive positions that are inconsistent with the fund’s principal investment strategies…

Table #1 shows the fund’s target weight and range for allocation among the fund’s major asset classes and shows the underlying funds.

Table #1: Target Weights and Ranges

  Target Weight Target Range
U.S. Equity 70% 63% to 77%
Avantis U.S. Equity ETF    
Avantis U.S. Small Cap Equity ETF    
Avantis U.S. Large Cap Value ETF    
Avantis U.S. Small Cap Value ETF    
Non-U.S. Developed Markets 17% 10% to 24%
Avantis International Equity ETF    
Avantis International Large Cap Value ETF    
Avantis International Small Cap Value ETF    
Emerging Markets 10% 3% to 17%
Avantis Emerging Markets Equity ETF    
Avantis Emerging Markets Value ETF    
Sector Equity 3% 1% to 6%
Avantis Real Estate ETF    

Source: Prospectus, Avantis Investors, January 2023)

To partially overcome the short history of AVGE, I loaded the AVGE portfolio into the MFO premium portfolio tool. The results are shown in Table #2. The age of the youngest fund is approximately ten months old. During this ten-month period, all Avantis funds performed above average on a risk-adjusted return basis. I included SPY with no allocation for comparison purposes. The annualized return of AVGE, had the fund existed for the past ten months with the same allocation, would have been nearly -9% on a monthly basis compared to nearly -14% for the S&P 500. The drawdown and Ulcer Index are slightly lower than the S&P 500.

Table #2: MFO Portfolio Tool

Source: MFO Premium Portfolio

A second possible drawback of AVGE is whether the allocation is appropriate for investors. Rob Berger, in the Financial Freedom Show, describes the use of Avantis All Equity Markets ETF (AVGE) as a one-stop equity fund. Mr. Berger describes both Avantis and AVGE. Mr. Berger’s conclusion is that he likes AVGE. However, he would not use it for all of an investor’s allocation to equity because it is so new.

I used Morningstar to view their factor ratings AVGE shown in Chart #2.

Chart #2: Morningstar Factor Ratings

Source: Morningstar

For regional allocation, AVGE currently has 73% allocated to North America and about 29% allocated to International Countries. Approximately 8 to 10% is allocated to diverse Developing Economies, with the majority allocated to Asia Emerging Markets. AVGE has a sector allocation consistent with the S&P 500 but with a tilt toward Basic Materials, Financial Services, Energy, and Industrials, and away from Technology, Consumer Defense, Healthcare, and Utilities.

In some regards, a distant cousin to Avantis All Equity Markets ETF (AVGE) is mutual fund target retirement funds with a date older than 2045. These funds tend to invest using a passive, global multi-cap approach but include about 15% in bonds and get more conservative over time. Chart #3 shows the Total Return performance of AVGE compared to the S&P 500 and the Vanguard Target Retirement 2024 mutual fund. AVGE (orange line) performed well over the four-month period.

Chart #3: All Equity Markets (AVGE) Total Return vs Vanguard Target Retirement 2045 (VTIVX)

Source: Seeking Alpha

Comparison to Global Multi-Cap Funds

I used Portfolio Visualizer Backtest to compare the current allocation in AVGE to other quality Global Multi-Cap funds available to individual investors. There are few peers in this Lipper Category that are available to individual investors. This is a conceptual exercise because AVGE was not in existence for the full year. The AVGE portfolio would have done well.

Chart #4: Portfolio Visualizer of Current AVGE Allocation vs. Peers

Source: Author Using Portfolio Visualizer

Closing Thoughts

One should always consider risk first when making investments. I quote Ataman Ozyildirim (PhD), Senior Director, Economics, at The Conference Board, an organization with a long and respectable track record:

“There was widespread weakness among leading indicators in December, indicating deteriorating conditions for labor markets, manufacturing, housing construction, and financial markets in the months ahead. Meanwhile, the coincident economic index (CEI) has not weakened in the same fashion as the LEI because labor market related indicators (employment and personal income) remain robust. Nonetheless, industrial production— also a component of the CEI—fell for the third straight month. Overall economic activity is likely to turn negative in the coming quarters before picking up again in the final quarter of 2023.

Source: The Conference Board, January 23, 2023

I favor Avantis All Equity Markets ETF (AVGE) for my Buckets that have intermediate Treasuries to meet withdrawal needs and need equity for longer term growth. AVGE invests in categories that I believe have growth potential over the next several years and has the flexibility to adjust. The short history of AVGE does not concern me because of the strength and performance of American Century and the strong Avantis management team with prior experience in this methodology.

I will watch the yield curve and other economic and financial indicators to show signs that economic risk is starting to decrease before buying a significant amount of AVGE. I do not see AVGE as a one-stop fund because I like diversification, but I do see it being a major holding in some of my Buckets over the course of the next few years.

My project this weekend is to re-organize the garage. It is a daunting but rewarding task after our move to Colorado.

Best wishes.

Richard Cook, “Where there’s mystery, there’s margin”

By David Snowball

I’m a sucker for an intriguing headline, and CityWire’s John Coumarianos came up with a doozy: “EM managers had (another) year to forget. But one fund defied the gloom” (1/9/2023). The triumphant reveal was:

only one out of the 816 funds in the Morningstar Diversified Emerging Markets category with a 2022 track record posted a positive number. That was the relatively unknown Cook & Bynum fund (COBYX), which returned 9.29%.

There are four problems with that announcement. They are

  1. Morningstar does not list 816 diversified emerging market funds. Mr. Coumarianos gets that from a performance chart at Morningstar, but the number is inconsistent with the rest of Morningstar’s data. A screen on 1/31/2023 gives 763 results which is wildly misleading because …
  2. The 763/816 number double counts dozens of funds because it is actually reporting each share class as if it were a separate fund. By this tally, American Funds Developing World Growth & Income counts as 19 separate funds. It’s actually one fund with 19 different marketing agreements, each enshrined in a separate share class. If we count each fund once, the Morningstar tally drops to 226 funds, but …
  3. The tally ignores ETFs which are substantial players in the emerging markets and direct competitors with traditional funds. Lipper’s database, which the MFO Premium data screener draws from – and which, unlike, allows head-to-head comparison of funds and ETFs, shows that you had 346 distinct options. Of those, four – not including COBYX – posted positive returns, including the slightly loony 105% gain registered by iShares MSCI Turkey ETF (TUR). All of which is dwarfed by one final concern …
  4. Cook & Bynum Fund is not an emerging markets fund, regardless of what box Morningstar drops it in.

The Cook & Bynum Fund launched on July 1, 2009, and was modeled on a private fund that the team has run since August 2001. We wrote in our 2013 profile that the managers pursued a concentrated, absolute value portfolio. The translation is (1) they are willing to hold substantial positions in a very few stocks, and (2) they are willing to hold cash when they don’t find compelling opportunities in the stock market. We noted:

They’re willing to do what you won’t. Most of us profess a buy low / buy the unloved / break from the herd / embrace our inner contrarian ethos. And most of us are deluded. Cook and Bynum seem rather less so: they’re holding cash now while others buy stocks after the market has doubled and profits margins hit records, but in the depth of the 2008 meltdown, they were buyers. (They report having skipped Christmas presents in 2008 in order to have extra capital to invest.) As the market bottomed in March 2009, the fund was down to 2% cash.

They have been investing in the emerging markets since 2006, most famously in Latin American bottlers and distributors of Coca-Cola products. And they have been successful at it; by Mr. Cook’s estimation, over the history of the firm, their EM picks have substantially outperformed the emerging market index. Nonetheless, they define their investable universe much more broadly:

At Cook & Bynum, we are long-term investors in undervalued businesses that have sustainable competitive advantages and are run by well-aligned managers. We identify these businesses through immersive, on-the-ground research around the world, and we think carefully about which companies fall within our circle of competence. Since 2001, we have consistently applied this strategy in global public equity markets to companies of all sizes.

The fund has only owned 31 stocks since inception and rarely holds more than 10 at any time. Depending on how you count ownership of two separate share classes of Liberty Latin America, the portfolio currently holds eight stocks and has 65% of its assets invested in Latin America.

Cook & Bynum is an intriguing fund. It has substantial EM exposure. That still does not make it an emerging markets fund.

Assessing Cook & Bynum’s performance is tricky because they have always been so independent that they’re a poor match for most any peer group. The average EM equity fund has a higher correlation with the average global large value fund than Cook & Bynum has with either. And because Morningstar recently shifted the fund’s peer group, the long-term performance table is gibberish. Taken at face value, Morningstar now says that in 2013 the fund made 11.3% while its average peer lost 0.1%, making it the worst fund in its class.

Here’s the snapshot of the fund since inception from MFO Premium.

Comparison of Lifetime Performance (Since 200908)

  APR MAXDD STDEV DSDEV Ulcer Index Sharpe Ratio Sortino Ratio Martin Ratio
Cook & Bynum 5.68 -31.00 11.56 7.87 9.50 0.44 0.65 0.54
Global Multi-Cap Value Average 7.4 -30.6 16.1 10.8 10.0 0.45 0.67 0.89
S&P 500 12.87 -23.86 14.74 9.36 5.59 0.83 1.31 2.20

So over the long term, the fund has lower returns (5.7% vs. 7.4%) than its peers but dramatically lower volatility (11.5% standard deviation vs. 16.1%), giving it a comparable risk-return profile. The fund has had three down years in the past decade (2015, 2018, 2020), a period that strongly favored all of the things that the manager strongly dislikes: high-priced, high momentum, high volatility story stocks whose stock performance is disconnected from the prospects of the underlying business.

So what are they doing in the emerging markets? We spoke with manager Richard Cook in late January 2023.

The first part of his answer is that they seek undervalued stocks. The emerging markets may be the world’s last reservoir of high-quality, undervalued businesses. While the US market is cheaper after the 2022 swoon, it’s by no means cheap. That means that opportunities might be few and fleeting.

Manager Richard Cook

The second part is that he wants to invest where he and his team can add value. Much of the US market is highly efficient, and the traditional pockets of inefficiency have contracted. “Private equity makes small caps much more efficient,” he argues, “which makes it hard to find excess return.” The emerging markets, contrarily, are marked by “less sophisticated investors using less sophisticated tools, which creates more possibility for us to uncover and exploit mispricing.” Many EM corporations have no investor relations team and might issue their investor documents in a language other than English, which keeps many investors away. Of the nine stocks in his portfolio, he’s the only fund investing in one and one of only two funds into a couple more.

The opportunity set is tempting enough that his investors encouraged him to launch a new private fund to pursue them exclusively, the Cook & Bynum Emerging Markets Ex China, LP, which is available only to high-net-worth investors. That said, in its first six months, the fund is up 22% net of expenses while the MSCI Emerging Markets Ex China Index declined by 2.6%. In explaining their decision to avoid China, Mr. Cook noted that “Many Chinese businesses are driven by the government, and we’re trying to avoid those businesses since we don’t have any idea of what the government is going to do. We want to avoid government entanglement and invest in high-quality businesses with durable advantages when we can buy their stocks with a sufficient margin of safety. It’s that simple.”

Bottom line

Cook & Bynum are in the emerging markets and will remain precisely as long as they believe they’re finding the best value in the world there. If the locus of value changes, say back to the US, that’s where the portfolio will go to. While Mr. Cook admits that valuation cycles can last decades, he counsels potential investors not to count on it or on C&B’s permanent presence in such markets.

The fund is disciplined, consistent, sensible, and distinctive. It has had a horrendous five-year run which net returns of 0.17% annually (per Morningstar). Prior to the period when the Fed subsidized irrational risk-taking and investors rewarded managers who targeted great businesses and good prices, COBYX had first-tier returns.

Much of the question is, have we moved past the period of “investing as a Fed feeding frenzy?” That is, is the decade ahead likely to be marked by more modest returns and a more consistent link between valuation, corporate strength, and market returns? If you think so, Cook & Bynum might well warrant more of your attention than it has lately received.

In Defense of Taking Risk

By Devesh Shah

The S&P 500 Index peaked at 4800 in December 2021. Thirteen months later, at the end of January 2023, the Index is down 16%, at a level of 4076. Suppose you did a Rip Van Winkle and woke up just in time for the New Year 2024 celebration… and found the S&P 500 index trading at 2400, putting the index 50% below its all-time peak. Would you buy the market, perhaps doze off again, or would you sell? The record is clear: most investors would do the latter.

In this article, I hope to make a small point about Taking Risk by visualizing scenarios. I find the art of engaging in imaginary market scenarios as a helpful mental model in the quest to become a better investor. This art has to be grounded in the science of proper asset allocation, or it may lead to capital destruction.

My experience during the COVID Crash and how I have changed my mindset

I sold stocks during the Covid crash in March 2020, not sure what lay ahead then. Fortunately, I have a strong partner in my wife, who thinks far more clearly than I do, and she reminded me why we invest in the first place: Without taking risks, there can never be an expectation of a return to be earned. You see, I knew this, and yet, I liquidated. It felt better at the moment to liquidate, to stop the pain, and to join others in doing the same. Even when I knew it was a mistake, I thought I was being smart. Even when I knew I ought to be buying, not selling stocks, I got out of a large chunk of equities. A deep, thoughtful, in advance, scenario analysis might have protected me from making trading decisions that cost me a lot in taxes, if not in investment returns. I now do this kind of scenario analysis regularly across all my investments.

Starting the year 2000, there have been two instances: from March 2000 to March 2003 and from July 2007 to March 2009, when the S&P 500 Index went down about 50% from peak to trough. We know that US equities often crashed, sometimes crash a lot, but almost never crash by more than half. Twice in a century, actually, and in both cases, the markets bounced.

Northern Trust, A History of Drawdowns, 2022

Depending on which long-term time period one uses, the S&P 500 Index has had a total return of between 9-12% annually. Most investors agree that US equities are a major asset class and that they belong in a portfolio. Even though I do not expect a 50% crash in stocks this time around, I ask myself every morning, “Devesh, what will you do when the market is at 2400?” I train my mind and body to answer, “I will sell bonds and buy stocks.”

Without this mental training, I know I am bound to make mistakes. Taking RISK is very important for making money but taking risks is scary for most of us.

Benefits of Scenario Analysis

Here are some benefits of visualizing a 50% crash scenario in the S&P 500 Index I have found along the way:

  1. I calculate the potential loss in my current portfolio and ask myself if I can live with that notional loss. An honest answer is a good guide to knowing the right amount of stocks for me to hold today.
  2. I might decide to alter my US equity index portfolio, reducing or adding as needed.
  3. When that crash scenario ever arrives, I will be more prepared for it mentally. I will have run that number in my head hundreds of times and visualized it. It’s like imagining death. We know it’s going to come, and we know we are going to feel differently about it at that moment. The more we can visualize the scenario and prepare our minds, the more detached we become from the inevitable outcome. An acceptance of the outcome might free our minds to start living fully today.
  4. Once my emotions are well managed, I start processing them logically. If a 50% crash means I would want to be 100% invested in US stocks, what would a 40% crash mean? It would mean there is a risk of a further only 10% decline. This is where things get interesting. Knowing that an asset class can go down only 10% but historically can return up 10-12%, year after year, for long periods, makes this an interesting game theory question. Should I even wait for stocks to be down 50%? Why not buy them when they are down just 40% or 35% from the peak? A 35% sell-off from the recent S&P 500 peak would put the market at a level of 3100. Now my mind is on fire. David Snowball relates the story of Richard Cook, the fund manager so willing to charge into the crashing market in 2008 that his family even agreed to skip Christmas presents that year so they had more capital to allocate to the market. His investors (and, presumably, his children) were richly rewarded in the years that followed. Thus, slowly but surely, I can train the mind to move away from the fear of taking risks to embrace taking risks in US equities during a potential crash.
  5. I was able to use such an analysis to increase equity allocations substantially in the summer and fall of last year when equities were being liquidated heavily. As the markets bounced back, the same analysis helped me reduce my equity allocations.

Replicating Scenario Analysis across Other Major Asset Classes

My January MFO article on 30-year TIPS was well received. Thank you for sending me the feedback. Many people felt this article, along with previous articles on TIPS, helped them get more comfortable with using TIPS as an inflation hedge. Others were candid enough to share that while they liked the article, they didn’t understand enough about TIPS to invest themselves. Up until two-three years ago, I didn’t know that much about TIPS either.

When rates were very low, when inflation looked inevitable, I felt I needed instruments to hedge against rising inflation. Reading David Swensen’s Unconventional Success (2005) clarified for me the importance of holding TIPS. I learn about Series I Bonds and then slowly educated myself on TIPS. When I knew enough and looked at the Real Yields embedded in TIPS, they felt like terrible investments at that time.

It’s only recently that the Real Yields have become high enough for me to get excited about longer-term TIPS. I have attached a chart of 10-year TIPS and 30-year TIPS Real Yields. You can see that the rise in yields has been one of the quickest and biggest on record. My scenario analysis mind is on fire. By buying TIPS now, surely, I take on risk, but I am willing to take that risk because the risk-reward scenario looks far more favorable now.

No one knows the future

Not me, not you, nobody knows the future. This much we know. As Captain Algren said in The Last Samurai, “I think a man does what he can until his destiny is revealed.” Whether I am right or wrong on TIPS or anything else, I do not know.

When I wrote in November about Texas Pacific Land being an unusually large weight in Kinetics mutual funds and the associated risk, I did not know that we would go on to see Texas Pacific down 15%, Kinetics Funds down between 5 and 8%, while the S&P 500 was up 5% in the three-month period starting Nov 1, 2022.

All any of us can do is make good decisions. If I can make decisions where the risk-reward is increasingly in my favor, where if I am wrong, I lose X, but if I am right, I can make multiples of X, then I am ahead of the game. This is all I can do. Scenario analysis helps to see the worst of the risks and also to visualize the potential rewards. In the case of TIPS, three things were important to me last month and even today:

  1. I can wait a long time for this investment because of the positive real rates and inflation protection. I am getting paid to hold these bonds.
  2. TIPS are a major asset class – a security issued by the US Government.
  3. I am adequately diversified across other asset classes.

Sometimes, we see investors using the correct mental models and framework for the wrong asset classes and investments. That will not do. That mental dishonesty or ineptitude will lead to complete capital destruction.

Does not work in all investments 

Charles Boccadoro, who built and runs the MFO Premium search engine, and I tried to classify the 5900 ETFs and mutual funds in the market available to US investors. He is a meticulous man and erudite in his analysis. MFO is lucky to have someone with his expertise building a search engine that is as thorough and deep as MFO Premium.

In his classification process and after a lot of back and forth, we settled on 72 asset subclasses. Are investors supposed to invest in each one of them? Are there even 72 asset classes? In fact, many of these so-called “sub-asset classes” aren’t assets at all. Very few categories carry the weight of US Equities and US Treasuries. Developed market Stocks, yes. Emerging Markets, if done properly. Real Estate Trusts, maybe. But Precious Metals Stocks, Commodities, a single Emerging Market, and some levered Volatility products are not bona fide asset classes. Absolutely not. Those assets have no individual floor, or the floor is not as predictable as the 50% floor for the S&P 500 Index.

Buying the ARKK ETF or Bitcoin (because it’s down so much) could lead to a permanent loss of capital. This is also the reason why one shouldn’t have too much money in speculative stocks. Taking Risk in minor or speculative asset classes cannot be qualified as prudent risk-taking. This activity falls in the category of casino visits (without the free drinks).


It is important for investors to take risks, even a serious amount of risk, if they want their investments to generate strong returns. By being invested in major asset classes, and only in major asset classes, by studying these assets properly, by running scenario analysis in our minds, visualizing worst case scenarios, and preparing for them, we can strengthen our minds to face what is sometimes inevitable. In those moments of distress, we can then pursue serious risk taking, knowing that we have considered the worst-case scenarios and the risk-reward is in our favor.

As Mr. Swensen counseled, “investment success requires sticking with positions made uncomfortable by their variance with popular opinion. Casual commitments invite casual reversal … Only with the confidence created by a strong decision-making process can investors sell mania-induced excess and buy despair-driven value” (Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment, 2009) Successful investing is not about making correct predictions; it is about the humble approach of taking serious risk when the odds are in our favor. I hope I’ve convinced you that a simple, uncomfortable exercise now might well create the confidence your family needs you to have when chaos and opportunity arrive together.

Snowball’s Indolent Portfolio

By David Snowball

A tradition dating back to the days of FundAlarm was to annually share our portfolios and reflections on them with you. My portfolio, indolent in design and execution, makes for fearfully dull reading. That is its primary charm.

2022 was replete with adventures and surprises:

  • Russia invaded Ukraine, which is both the most important and the most tragic story of the year. But also …
  • The Federal Reserve invaded the stock market, following which two events …
  • The stock market crashed, then soared, then crashed, then … something else. The NASDAQ ended down by 33% and the S&P 500 by 19%.
  • The bond market had its worst year since the 1840s
  • The crypto market crashed, sparked by the vast FYX fraud, evaporating $2 trillion
  • Oil soared, ESG soured, and politicians’ lips flapped concerning both.
  • Roe v. Wade was overturned, Mar-a-Lago was searched, Abe was assassinated, the Queen died, Musk rushed about squawking and costing his investors a half trillion dollars, and the “red wave” fizzled.

At year’s end, the wise and the wizards confidently forecast a further double-digit loss in 2023 (GMO, Morgan Stanley, Chanos & co., Ritzholz Wealth Management) or the triumphant return of the bull market in 2023 (Ken Fisher, FundStrat, Motley Fool over and over).

In response to which, I astutely did very nearly nothing with my portfolio. 

I was, I think, awake and richly engaged with a world that was rocked by challenges. My son started graduate school. Chip and I vacationed in the peace of Door County. I rather more than doubled my charitable giving in response to war, disease, and inflation. We voted. We continued trying to make our gardens wilder and a bit more sustainable. I became the director of the college’s honors program, with the charge to renew it. I taught. (I think I taught. Just occasionally, my students make me wonder whether that’s a delusion.)

And personally, I find the bear case substantially more compelling than the alternate. The bear case makes two points. First, the fact that the market is cheaper does not mean that the market is cheap. While the most egregiously overvalued stocks took a substantial beating (the ARK Innovation ETF portfolio, an avatar for such stocks, was repriced by 67% last year but sprinted upward by 28% in January), the rest of the historically expensive market saw a far more modest decline. At the end of the year, the market was still broadly and substantially overvalued by historic standards. The pain of a broad-based adjustment will be widely felt. Second, there is no evidence that the Fed is done with us yet. The Fed vowed “to break the back of inflation.” On February 1, 2023, the stock market rallied when the Fed raised rates only by a quarter point … ignoring the Fed chair’s warning that day that “inflation is still running very hot” and his refusal to even hint at victory in their fight. Nonetheless, pundits began announcing rate cuts by mid-year, a soft landing and good times. They are mostly delusional.

But I didn’t play with my portfolio. By design, my portfolio is meant to be mostly ignored for all periods because, on the whole, I have much better ways to spend my time, energy, and attention. For those who haven’t read my previous discussions, here’s the short version:

Stocks are great for the long term (think: time horizon for 10+ years) but do not provide sufficient reward in the short-term (think: time horizon of 3-5 years) to justify dominating your non-retirement portfolio.

An asset allocation that’s around 50% stocks and 50% income gives you fewer and shallower drawdowns while still returning around 6% a year with some consistency. That’s attractive to me.

“Beating the market” is completely irrelevant to me as an investor and completely toxic as a goal for anyone else. You win if and only if the sum of your resources exceeds the sum of your needs. If you “beat the market” five years running and the sum of your resources is less than the sum of your needs, you’ve lost. If you get beaten by the market five years running and the sum of your resources is greater than the sum of your needs, you’ve won.

“Winning” requires having a sensible plan enacted with good investment options and funded with some discipline. It’s that simple.

My portfolio is built to allow me to win. It is not built to impress anyone. So far, it’s succeeding on both counts. I built it in two steps:

  1. Select an asset allocation that gives me the best chance of achieving my goals. Many investors are their own worst enemies, taking too much risk and investing too little each month. I tried to build a risk-sensitive portfolio which started with the research on how much equity exposure – my most volatile niche – I needed. The answer was that 50% equities historically generated more than 6% annually with a small fraction of the downside that a stock-heavy portfolio endured.
  2. Select appropriate vehicles to execute that plan. My strong preference is for managers who
    • have been tested across a lot of markets
    • articulate distinctive perspectives that might separate them from the herd
    • loath losing (my) money
    • have the freedom to zip when the market zags, and
    • are heavily invested alongside me.

With one exception (Matthews), my managers have more than $500,000 of their own money in their fund and/or own the firm.

My target asset allocation: 50% stocks and 50% income. Within stocks, 50% domestic, 50% international and 50% large cap, 50% small- to mid-cap. Within income, 50% cash-like and 50% more venturesome. I have an automatic monthly investment flowing to five of my nine funds. Not big money, but a steady investment over the course of decades.

So here’s where I ended up:

Domestic equity Nailed it! Traditional bonds Underweight
Target 25% 2022: 25% Target: 25% 2022: 15%
Also managed a 50% large-cap / 50% small-cap weight. Surprising sources: Palm Valley is 25% short-term bonds
International equity Overweight Cash / market neutral / liquid Nailed it!
Target 25% 2022: 40% Target: 25% 2022: 25%
That’s down from where the year began, mostly because several funds fell a lot. My “global” managers are 4:1 international, which accounts for most of the imbalance. Morningstar codes several funds as having double-digit cash holdings: RiverPark, Palm Valley, T Rowe Price Multi-Sector, and FPA Crescent. For Palm Valley and Crescent, I read that as “substantial dry powder awaiting the arrival of bargains.”

The rebalance will be tough but is still called for. It’s tough because several of my managers have the freedom to move between foreign and domestic, equity and bonds, depending on where the most compelling opportunities lay. So reducing my FPA Crescent holding will reduce non-US equity … but also reduces US equity and bonds at the same time.

Here’s the detail for the non-retirement piece:

  M-star Lipper Category Weight 2022 return APR vs. Peer MAXDD %
FPA Crescent 4 star, Gold Flexible Portfolio 22.00% -9.2 4.6 -16.3
Seafarer Overseas Growth and Income 5 star, Silver Emerging Markets 17.00 -11.7 10.3 -20.2
Grandeur Peak Global Micro Cap 5 star, Gold Global Small- / Mid-Cap 15.00 -31.7 -10 -39.3
T Rowe Price Multi-Strategy Total Return 3 star, NR Alternative Multi-Strategy 9.00 -4.7 -1.5 -5.9
Palm Valley Capital 5 star, neutral Small-Cap Growth 8.00 3.2 29.5 -2.8
T Rowe Price Spectrum Income 3 star, Bronze Multi-Sector Income 7.00 -10.6 -0.2 -14.3
RiverPark Short Term High Yield 4 star, negative Short High Yield 6.00 2.7 7.1 -0.2
Cash @ TD Ameritrade     6.00      
Brown Advisory Sustainable Growth 5 star, Silver Multi-Cap Growth 5.00 -31 0.5 -32.8
Matthews Asian Growth & Income 3 star, Bronze Pacific Ex Japan 5.00 -18.4 1.8 -30.8
        -12.1 3.8 -18

So, my portfolio is about two-thirds equity. It dropped 12.1% in 2022, but that’s substantially better – 3.8% or 380 basis points better – than I would have achieved with purely average funds. My managers earned their keep. My portfolio’s maximum drawdown averaged 18%, driven largely by international exposure in my most aggressive funds; still, two of the three funds with the greatest drawdowns ended up the year outperforming their peers.

Palm Valley and RiverPark both earned MFO Great Owl designations for posting top-tier risk-adjusted returns in every trailing period we monitor. Morningstar mostly approves (though that’s not a driver for me, just an FYI for you). They dislike small and odd, which might account for their tendency to sniff at RiverPark Short Term (one-of-a-kind strategy, but it has the highest Sharpe ratio – by a lot – for any fund in existence for the past 6, 8, 10, and 12-year periods) and Palm Valley (small firm).

What will 2023 bring?

A vacation to the Shetland Islands, off the north coast of Scotland? Dramatically redoing the vegetable garden? Revising one of my books, Miscommunication in the Workplace?

Oh, you mean with my portfolio!

Not much. I could imagine shifting part of my Seafarer Overseas Growth & Income investment into Seafarer Overseas Value. The case for EM value seems compelling, and Seafarer is about the best at it. They were the top-performing EM fund in 2022 (down less than 1% on a fully invested portfolio), except for a couple of freakish single-country ETFs.

I would like to find an “impact” bond fund that complements my portfolio. Sustainable investing has two broad branches: (1) avoiding the idiots and (2) rewarding the good guys. On the whole, option 1 is easier to achieve, so it’s more popular. Option 2 calls to me as a concerned citizen: an “impact” bond fund attempts to actively seek out and affordably underwrite socially desirable projects. It might, for example, support community banks or build affordable housing or urban revitalization projects. Such funds earn slightly less than market rates, on average (about 1% over the past 10 years, which, sad to say, pretty much matches the broad bond market return for the same period) but do substantially more for the world. And, to me, that’s a tradeoff I can embrace. TIAA-CREF and Domini have such funds, but I’m not yet sold on them. I’ll keep learning.

There are two funds that I’m really interested in learning about: the closed-end interval fund Bluerock Total Income+ Real Estate Fund and the Freedom 100 Emerging Markets ETF (FRDM), a quasi-index fund that targets emerging markets with the most protection for personal and economic freedom. I approve of the underlying insight.  

Finally, a word about my retirement accounts. I don’t much talk about them because I don’t much have control over them anymore. For entirely sensible reasons, my employer dramatically limited our investment options and increased the incentives to save for retirement. Those moves stopped me from investing in some traditional options (T. Rowe Price and Fidelity) and severely limited my choices at the other (TIAA-CREF).

About half of my money is at TIAA-CREF, with 70% in a target date fund or PIMCO Inflation-Response Multi-Asset Fund, 7% in a fixed annuity, and 23% in the real estate account. The TIAA Real Estate Account operates with negligible correlation to the stock and bond markets, has returned 6.5 – 7.5% annually over the long term, and made 8.2% in 2022. The portfolio as a whole dropped just 10.4% in 2022.

About half of my money is at T. Rowe Price, with 70% in a very good target date fund – Retirement 2025 – with the remainder giving me more international exposure (to EM value and international small caps) or somewhat hedging that exposure (through Multi-Strategy Total Return). The portfolio as a whole dropped about 19% in 2022, driven down by that international exposure.

Launch Alert: Matthews Emerging Markets ex-China Active ETF

By David Snowball

On January 11, 2023, Matthews Asia launched Matthews Emerging Markets ex China Active ETF (MEMX). It is an actively managed ETF that might invest in every country in the world except China, the United States, Australia, Canada, Hong Kong, Israel, Japan, New Zealand, Singapore, and most of the countries in Western Europe.

Our January issue originally, and mistakenly, suggested that the fund had launched on 12/31/2022. That was corrected as soon as Matthew’s representatives let us know of the error. Our regrets!

The fund will be managed by John Paul Lech, the lead manager, and Alex Zarechnak. Mr. Lech joined Matthews in 2018 after a decade as an EM manager for Oppenheimer Funds. Mr. Zarechnak joined Matthews in 2020 after a 15-year stint with Wellington Management, primarily as an analyst in the EM equity group. He has shorter stays with Capital Group and Templeton Funds. Together they also manage Matthews EM Equity Fund (MEGMX) and Matthews EM Equity Active ETF (MEM).

The ETF will follow the same strategy that the managers embody in Matthews Emerging Markets Equity Active ETF. They describe the new fund as “a subset or an extension of the Matthews Emerging Markets Equity Active ETF (MEM). We’ve kept the approach simple. Aside from excluding China, the investment approach is the same as the MEM. MEMX employs a bottom-up stock-picking strategy focused on companies rather than themes and geographical markets … We seek out high-growth, high-quality companies across emerging markets and across the market capitalization spectrum. And by employing an all-cap approach, we believe small companies may offer attractive potential for generating alpha and that incumbency can be an advantage that compounds over time.”

The team’s picture of the pieces of the portfolio puzzle for the benefit of visual learners:

There are three arguments for considering MEMX

1. Dictatorships make for bad investments

Making a good long-term investment starts with the simple faith that a firm’s managers will make their decisions based on their assessment of the firm’s long-term financial interests. If you take that as your starting point, then managers (or index designers) try to identify the managers, companies, and industries which embody the best economic prospects.

Investing in a dictatorship plays hobs with that first principle. In a dictatorship, decisions are made based on the dictator’s vision of where they want to take the entire country; individual companies – whether state-owned enterprises or not – are simply along for the ride. Managers do what the government directs and are forced to live with the consequences of the government’s choices.

Under such circumstances, neither dissent nor independent thought is much tolerated, a lesson embodied by the former Russian oligarchs – Wikipedia actively tracks the deaths of Russian oligarchs, about 30 of whom have died since January 2022 – and former Chinese billionaires – with Forbes wryly commenting on China’s “disappearing” billionaires. That deteriorating rule of law has made such countries “uninvestable” in the judgment of some professional investors.

2.  Existing EM – ex China options are pretty limited

The average EM fund invests about 32% of its portfolio in China. 

US investors who would like to have vibrant emerging markets exposure have few attractive options. Including MEMX, we identified 10 funds that promised emerging markets but foreswore China.

WisdomTree Emerging Markets ex-China Fund (XC) n/a It did not launch until 9/22/2022
Strive Emerging Markets Ex-China ETF (STXE) n/a Launched 1/30/2023
abrdn Emerging Markets Ex-China Fund n/a Launched in August 2000 as Aberdeen Global Equity, but did not become an EM ex China fund until Feb 28, 2022
GMO Emerging Markets Ex-China Fund III -32.9 Institutional fund, minimums range from $5M – $750M
KraneShares MSCI EM ex China ETF -19.3 Tracks a mid- to large-cap index holding 282 stocks
iShares MSCI Emerging Markets ex China ETF (EMXC)   -19.3 Tracks a mid- and large-cap index, excludes state-owned enterprises
Columbia EM Core ex-China ETF XCEM -17.6 Index fund holding 256 mid- to large-cap stocks with about 60% in Taiwan, India & Korea
DFA EM ex China Core Equity -15.8 With 3800 stocks, this is more like EM-all-equity than EM-core-equity. Like most DFA products, it has size and value tilts and is advisor-sold only
Freedom 100 Emerging Markets ETF (FRDM) -14.4 A freedom- and liquidity-weighted index of 100 stocks from “countries with higher human and economic freedom scores”
Benchmarks and comparisons    
MSCI ex China index -19.3  
MSCI EM index -18.5  
Matthews EM -20.9 Not explicitly ex-China but carries one-third the China weight of its peers, about 10%
Seafarer Overseas Growth & Income -11.8% Not explicitly ex China but carries just an 11% weighting there

Of the 10 funds, two are unavailable to independent retail investors (GMO, DFA), four have a track record of under one year, and three track the same or similar mid- to large-cap indexes.

Two stand out. The Freedom 100 Emerging Markets ETF seems to take “ex-China” to another level by investing “ex-any-stinkin’-dictatorship.” It tracks a specialized index that weights emerging markets by their degree of freedom, then invests in the 10 most liquid, not-state-owned corporations in their top markets. It’s managed by a former Fidelity adviser.

3. Matthews has a solid track record

The other standout is Matthews Emerging Markets ex-China Active ETF. While the fund is new, it uses the same team and follows the same investment discipline embodied in an active mutual fund and ETF. The fund is not quite three years old but has performed quite solidly.

Matthews EM Equity Fund, Lifetime Performance (Since May 2020)

  APR MAXDD STDEV DSDEV Ulcer Index Sharpe Ratio Sortino Ratio Martin
Matthews EM Equity 9.50 -35.41 19.77 12.10 16.64 0.44 0.72 0.52
EM Equity peers 3.8 -36.5 20.3 13.2 16.5 0.22 0.39 0.38

The translation: since inception, the fund has returned an annualized 9.5%, two-and-a-half times the return of its average peer. Its volatility – measured by drawdown, standard deviation, and downside deviation – has been comparable to, or a bit better than, its peers. That leaves it with stronger risk-adjusted returns, measured variously by the Sharpe, Sortino, and Martin ratios.

The best short exposition of the “emerging markets without China” argument was made by WisdomTree in “The Case for Emerging Markets ex-China Fund” (2022), which holds that state-owned enterprises are underperformers and, on the whole, low-quality enterprises.

For those seeking an apolitical analysis, it’s well worth reading. Goldman Sachs makes the case at greater length (EM ex-China as a separate equity asset class, 2021), though it too soft-pedals any geopolitical judgments.

Likewise, Matthews offers an extended discussion of the MEMX strategy and prospects on their website.

Briefly Noted

By TheShadow


The sad saga of Phaeacian Global Value and Phaeacian Accent International Value funds rolls on long after the funds’ liquidation. As MFO readers know, both started life as (entirely excellent) FPA funds. FPA and the managers negotiated a deal with London-based Polar Capital for the funds and their teams to be adopted by Polar under the Phaeacian brand. In principle, the deal made sense for both parties, with the funds receiving broader distribution and FPA receiving a revenue-sharing agreement and a chance to refocus on their core products.

In reality, the partnership imploded in recrimination and accusation within a couple of years. It has culminated in suit and counter-suit. Will Schmitt of CityWire has read the managers’ (redacted) filing against Polar Capital. Nuggets that he uncovered:

tensions between Polar and portfolio manager Py reared their head almost instantly after Phaeacian launched.  

Py was quietly suspended twice by his new employer, in March 2021 and January 2022, a step that included blocking him from trading.  

Py’s part-time residency in Switzerland might have triggered one of them

in 2021 Phaeacian was asked to allow Polar to control its bank accounts

Phaeacian regained control then Py was suspended again in January 2022 with the demand that Polar regain control of the bank accounts

The duo has also claimed that Polar ‘delayed multiple times’ the launch of a small-cap strategy that had been approved and seeded, that it lacked a business development team to help sell their strategies, and that it ‘blocked’ Phaeacian from hiring marketing staff, among other issues.   

Py and Herr claim that these actions led to the ‘destruction of the business’.

The filings with the Delaware Court of Chancery are held by a third-party service provider, and we’ve applied for public access to the documents. Until then, interested parties should read Mr. Schmitt’s long report (“Bank battles and suspended PMs: Inside a boutique’s ‘destruction,’” 12/8/2022).

Briefly Noted . . .

PIMCO Funds has announced several reverse stock splits.  Its PIMCO Extended Duration, PIMCO Long-Term U.S. Government, and PIMCO RealEstateRealReturn Strategy Fund will have a one-for-four reverse split. PIMCO RAE PLUS, PIMCO StocksPLUS Long Duration, PIMCO CommodityRealReturn Strategy, and PIMCO Long-Term Real Return Funds will have a one-for-three reverse split. The reverse splits will be effective March 24.

The beat goes on … ETF Trends reports that “Since March of 2021, 33 mutual funds, with almost $60 billion in AUM, converted themselves into ETFs” (ETF Trends, 1/27/2023). We will move to 34 conversions when Matthews Korea Fund is reorganized into an active ETF titled the Korea ETF. The Korea ETF will be managed in a substantially similar manner as the Fund, with identical investment objectives and fundamental investment policies, and substantially similar investment strategies. It is anticipated the reorganization will be completed in early 2023.

The good news about the fund is that it has roughly and consistently doubled the return of the Korean stock market. The less-good news is that its absolute returns remain subdued, about 5.7% annually since 1995 and 3.65% over the past decade.

In mid-June 2022, Matthews welcomes a new CEO, Cooper Abbott, to succeed the retiring Bill Hackett. Mr. Abbott has more than 20 years of senior investment management experience and served as president and chairman at Carillon Tower Advisors. The firm has seen a flurry of changes since his arrival, including manager departures, fund liquidations, and ETF launches. Given the challenges that the firm faces, that’s not automatically negative. Morningstar’s William Samuel Rocco concludes, “All this means that the CEO transition from Hackett to Abbott isn’t cause for fund investors to be concerned.”

Sunbridge Capital Emerging Markets Fund will liquidate its institutional share class of the fund on or about February 10.  The fund’s Investor share class will be redesignated as the institutional share class as of December 30, with the investor share class having the same fee structure as the institutional share class.  Total annual fund operating expenses have been agreed upon to be limited at 1.35% from its previous 1.60% of average daily net assets. The decision to combine share classes was recommended by the advisor to rationalize the fund’s expenses in the best interest of the fund’s shareholders. 

As was previously announced in the January commentary, North Star Investment Management was selected as the advisor to Walthausen Small Cap Value Fund. The Walthausen Small Cap Value Fund is being reorganized into the North Star Small Cap Value Fund. The investment strategy will be primarily in common stocks of small capitalization companies that the Adviser believes have the potential for capital appreciation with market capitalizations of $2 billion or less at the time of purchase.

We regret to announce the passing of Allen D. Steinkopf (1961-2022), one of the managers of the Mairs & Power Small Cap Fund, on December 21. Mr. Steinkopf was the fund’s co-manager, but Mairs & Power chose to focus on the greater significance of the loss: of a friend, mentor, husband, father, son, and friend. They write:

Allen brought so much more to us than his keen intellect and thoughtful analysis. He was passionate about coaching and mentoring people to enable them to believe in themselves. He touched people’s hearts and changed their lives. He is survived by many family and friends. Please keep them in your thoughts and prayers as they navigate through this tremendous loss.

It feels especially sad that Allen had already planned to retire at the end of 2023. The firm had been positioning the leadership of the fund in anticipation of that change. “As part of planning for his retirement, Allen had been working with backup investment managers for his separately managed accounts and sharing coverage of the companies he follows with the other investment professionals who are on the investment committee. Since 2019, we have strengthened the bench of the Small Cap team by bringing on Chris Strom and Mike Marzolf to join Andy Adams, lead manager of the Small Cap Fund.”

Our condolences to his family and friends on their loss.


Champlain Mid Cap Fund reopened to investors on January 17.  The five-star rated fund was closed to new investors on October 1, 2017. According to Citywire:

“Its assets continued to grow since then, peaking at $7.5bn in October 2021. Like almost all growth funds, the strategy suffered last year, falling 26.5% with assets dropping from $7.4bn at the end of 2021 to $5.3bn at the end of 2022 amid a  steep selloff in equities. Net outflows over the year were relatively muted at just  $123m.”

Frontier MFG Global Equity Fund reopened to new investors on January 9. 

Vanguard Multi-Sector Income Bond Fund (VMSAX, VMSIX) became available to investors on January 26.

CLOSINGS (and related inconveniences)

None in sight.


A long series of Pacific Funds – Portfolio Optimization Conservative, Portfolio Optimization Moderate-Conservative, Portfolio Optimization Moderate, Portfolio Optimization Growth, Portfolio Optimization Aggressive-Growth, Ultra Short Income, Short Duration Income, Core Income, ESG Core Bond, Strategic Income, Floating Rate Income, High Income, Small/Mid-Cap, Small-Cap, and Small-Cap Value Funds – into a newly created corresponding series of Aristotle Funds. A proxy statement will be sent to shareholders in February 2023, seeking their approval.

Q3 All-Season Sector Rotation Fund will undergo a reorganization. The name of the fund will be changed to the Q3 All-Season Systematic Opportunities Fund. The investment objective will be changed to reflect that the Fund will seek to achieve capital appreciation. The reorganization is anticipated to take effect on or about March 30, 2023.


Hartford Schroders Securitized Income Fund will be liquidated on or about February 28.

Invesco International Core Equity Fund will be liquidated on or about April 10.

Additionally, Invesco will liquidate the following ETFs: Invesco Balanced Multi-Asset Allocation ETF, Invesco Conservative Multi-Asset Allocation ETF, Invesco Focused Discovery Growth ETF, Invesco Growth Multi-Asset Allocation ETF, Invesco Moderately Conservative Multi-Asset Allocation ETF, Invesco Select Growth ETF,  Invesco US Large Cap Core ESG ETF, Invesco BulletShares 2023 USD Emerging Markets Debt ETF, Invesco BulletShares 2024 USD Emerging Markets Debt ETF, Invesco Investment Grade Value ETF, Invesco RAFI Strategic Developed ex-US ETF, Invesco RAFI Strategic Emerging Markets ETF, Invesco RAFIStrategic US all Company ETF, Invesco FTSE International Low Beta Equal Weight ETF, Invesco S&P International Developed High Dividend Low Volatility ETF. Invesco PureBeta FTSE Emerging Markets ETF, Invesco PureBeta FTSE Developed ex-North America ETF, Invesco PureBeta MSCI USA all Cap ETF, Invesco PureBeta US Aggregate Bond ETF, Invesco Russell 1000 Enhanced Equal Weight ETF, Invesco Russell 1000 Low Beta Equal Weight ETF, Invesco BLDRS Emerging Markets 50 ADR Index Fund, and Invesco S&P allCap 600 Equal Weight ETF will be liquidated on or about April 6.

Matthews Asia Total Return Bond and Matthews Asia Credit Opportunities, the firm’s only two bond funds, are being liquidated. Founding manager and fixed-income CIO Teresa Kong left the firm in August 2022. Ms. Kong’s argument was that the center of the globe’s financial universe is shifting irreversibly toward Asia and that long-term investors should get there ahead of the crowd. She might well be right, though China’s Xi Jinping may have moved from wild card to joker in the game. Despite excellent performance – Total Return has top decile returns over the past decade, the more-aggressive Credit Opportunities fund has a more mixed record – the funds did not thrive in the marketplace and are finito.

The Securian AM Balanced Stabilization and the Securian AM Equity Stabilization Funds will be liquidated on or about February 27, 2023.

Manager changes

Matthews Asia announced several management changes. Effective January 31, Yu Zhang will no longer be the portfolio manager of the Matthews Asia Dividend and China Dividend Funds. Robert J. Horrocks, Ph.D., and Kenneth Lowe, CFA, will continue to act as Lead Managers along with Siddharth Bhargava, Elli Lee, and Winnie Chwang (effective January 5) will continue to act as Co-Managers of the Matthews Asia Dividend Fund; Sherwood Zhang, CFA, and Winnie Chwang will continue to act as Lead Managers along with Elli Lee and Andrew Mattock, CFA, will continue to act as Co-Managers of the Matthews China Dividend Fund.