Monthly Archives: March 2023

March 1, 2023

By David Snowball

Dear friends,

Welcome to Spring. Some diehards erroneously insist that they’re “officially” winter-bound until the Spring equinox, March 20th this year. It need not be so.

There are two springs. Meteorological spring, which is aligned with temperatures and growing seasons, is March 1st. Astronomical spring, which is aligned with the wobble of the earth on its axis (called “precession”), begins with the spring equinox.

To get a reading on what the season was, I cruised the grounds outside of Old Main. Based on my extensive survey of hyacinths, hostas, and croci… it’s spring. That’s my story, and I’m sticking to it. Even when it snows.

It’s a time when my students’ fancy turns lightly to … well, you know, sorority rush, summer, and pretty much anything other than the projects I’ve assigned them. But it is also, Tolstoy declared, “the time of plans and projects.” We have some!

Celebrate spring by making a difference

The Russian war in Ukraine seems to have devolved into simple genocide. As with the First World War, the utter inability to formulate a plan that allows either decisive victory or clean withdrawal has led to a simple equation: if we Russians die by the tens of thousands and the Ukrainians die by the thousands, we might eventually “win” by attrition.

Consider donating, as we’ve done on several occasions in the past month, to the UN Commission for Refugees or one of the groups vetted by Charity Navigator. Victoria Odinotska, a native of Ukraine and president of a really good media relations firm, Kanter Public Relations, believes that the two of the most compelling Ukraine-based options for those looking to offer support is Razom for Ukraine (where “razom” translates as “together”) and United Help Ukraine, which has both humanitarian aid for civilians and a wounded warriors outreach.

There are small children who will remember the conflict for the rest of their lives; I’m hopeful that they have cause to remember the unstinting kindness of strangers as well.

In this issue …

Our modestly late launch reflects a modestly chaotic week for us. Many adventures, some of which will surely turn out well for us. For now, here’s the 411:

Devesh has been thinking about international investing and the heretical, for him, notion that active investors might be the way to go. He offers a limited endorsement of the notion in “Just short of two cheers for active, international investing.”

Devesh’s most recent conversations on the subject have been with Amit Wadhwaney, founder of Moerus Capital Management and manager of the resurgent Moerus Worldwide Value fund. Devesh shares a detailed summary of Mr. Wadhwaney’s career and his take on how best to invest in “Interview with Amit Wadhwaney.”

Lynn Bolin tries to untangle some of the threads from the tapestry of the maddening uncertainty and contradictions we’re confronting in the market, in “Looking Beyond 2023 Investing – Lies and Statistics.”

Lynn, at the same time, approached the question of whether his own portfolio was overdue for a haircut. He walks us through the process of assessing the continued attractiveness of individual funds in “To Sell or Not to Sell? (REMIX, PQTAX, GPANX, COTZX)” If you don’t recognize the symbols, they are

  • REMIX: Standpoint Multi-Asset
  • PQTAX: Allianz PIMCO TRENDS Managed Futures Strategy
  • GPANX: Grant Park Multi Alternative Strategies
  • COTZX: Columbia Thermostat

Spoiler alert: It’s good news for COTZX, okay news for PQTAX, and a holding pattern for REMIX and GPANX. Even okay news is good news for REMIX: Lynn decided that his current position was substantial and justified, even if it didn’t need to grow.

I build off of Lynn’s concerns and, to some extent, his portfolio, in “Two strategies for navigating unstable markets.” It seems likely that the current market euphoria is likely to end … badly … soonly. That said, timing in and out of the market is a disaster for most people who try it (even the ones who swear to their brothers-in-law that they totally killed it in 2022). We searched for funds that proved their ability to protect you in the short term and outperform in the long term. And so we share The Young Defenders – funds under five years old with impeccable risk-return records – and The Wizards – flexible funds that have been making money and protecting investors for a quarter century or more.

Two funds that we’ve written about recently stand out from The Young Defenders screen: Towpath Focus and Standpoint Multi Asset. We commend them both for your consideration.

As ever, The Shadow chronicles the endless osmotic process of turning funds into ETFs and living funds and ETFs into mere memories and footnotes, in Briefly Noted.

Finally, one of this issue’s essays was written by one of our robot overlords-in-training, ChatGPT. Increasingly, humans are turning in work completed by chatbots as their own; this includes a flood of fraudulent student papers, the prospect of entire news websites appearing out of thin air, and (lazy) cybercriminals using it to write phishing emails. We wanted to give MFO readers a chance to see what such programs produce, and we offer a short self-defense guide.

Kudos to Ariel Investments

Ariel Investments, adviser to America’s first black-owned mutual fund, celebrated its 40th anniversary by announcing the successful closing of their venture capital fund. “Closing,” in this sense, means “reached their capitalization goal.” Ariel raised $1.45 billion from Qatar’s investment fund and a set of corporate partners – from Amerisource Bergen to Walmart – who each anted up at least $100 million.

The venture capital fund, dubbed Project Black, will seek to invest in six to 10 midsize Black and Latino-owned companies with $100 million to $1 billion in revenue. The vast majority – 95% – of America’s 9.5 million minority-owned enterprises have under $5 million a year in revenue. Ariel believes that their active investment in, and support of, the best of them will allow them to acquire the scale necessary to meet vendor needs for large companies across a range of industries. The success of those businesses will ultimately benefit their employees, their investors, and their communities.

At the same time, Ariel also snagged a large and well-respected emerging markets team from Alliance Bernstein and announced plans to launch a global long/short strategy. Details are in Briefly Noted. More importantly, they’ve updated the turtle in their logo and have adopted the marketing motto, “Active Patience.”

Oh, right … and their funds are very solid. Rupal Bhansali, in particular, has done a fine job leading Ariel Global and Ariel International. One of the most useful and least-used metrics from risk-conscious investors is the Ulcer Index. That index looks at two factors – how far a fund has fallen and how long it took to recover from its fall – to calculate the Ulcer Index. The name derives from the observation that funds that fall less and recover quickly give their investors far fewer ulcers than the others do. So, lower index = fewer ulcers. By that measure, Ms. Bhansali’s funds have far outstripped their peers since inception:

  Fund’s Ulcer Index Peers’ Ulcer Index 10 year rank
Ariel Global 4.2 8.8 #1 of 39
Ariel International 6.3 9.7 #1 of 50

In each case, the fund’s pure returns are “solid” rather than “spectacular,” but they’ve been achieved with exceptional risk management as Ms. Bhansali navigates “a market on opioids.” We profiled Global in 2019.

Snowball’s portfolio: Schwab and Osterweis

With the completion of its TD Ameritrade acquisition, I now have a brokerage account at Schwab. I’ll work hard to learn their system, though my “do something once every couple of years or so” investing style doesn’t warrant much exploration o the intricacies of my (money’s) new home.

One change that is likely to happen in March will be the purchase of shares of Osterweis Strategic Income. My portfolio review in January showed that I was well below my target allocation to bonds. There’s a strong case to be made that bonds are far better investments than stocks just now, but my tendency is to find managers who are flexible, successful, experienced, and risk-conscious. Osterweis seems to fit that to a “T.” Mostly short duration high yield with a dollop of other income-producing securities, from distressed equities to busted convertibles. (No, that’s not a Camaro.)

Lipper (hence MFO Premium) categorizes them as a multi-sector income fund, one of 67 such funds with a track record of at least ten years. Here’s where they stack up against those peers over ten years.

Annual return Standard deviation Sharpe ratio Ulcer Index Maximum drawdown Capture ratio – US bond mkt
5th of 67 14th 5th 9th 8th 3rd

They have earned MFO’s Great Owl designation for top quintile risk-adjusted performance for the trailing 3-, 5-, 10- and 20-year periods. Morningstar rates it as a four-star fund, though they’re a bit sniffy about the team’s prospects.

It’s not a done deal, but I like their independence, and professionals I trust, trust Osterweis. I’ll do the research and share the results.

Thanks, as ever …

To our stalwart regulars Wilson, S &F Investment Adivsors, Gregory, William, Brian, William, David, and Doug – we thank you. Also, thank you to Dennis from Columbia!

To the folks who have been sharing story ideas and bits of industry news with us. The Shadow and I both appreciate the support and suggestions, and we’ve incorporated what you’ve shared into this month’s Briefly Noted.

As ever,

david's signature

Two strategies for navigating unstable markets

By David Snowball

The US stock market remains among the most extreme valuation of the past 150 years, at least as measured by the Schiller 10-year PE ratio.

Traditionally bear markets bottom out with a price/earnings ratio in the single digits … not at 29. Leuthold ruefully observes:

If the October S&P 500 low holds, the normalized P/E ratio of 22.7x on that date will signify the priciest bear market bottom in history; in fact, it is exactly the same level reached as at the August-1987 bull market high. Since October, the normalized P/E multiple has grown to 25.5x—higher than all but three previous bull market peaks. (Green Book, February 2023)

On the whole, they conclude, “The hostile monetary backdrop makes recent stock market exuberance even more irrational than in early 2021” (February 2023). James Mackintosh, senior markets columnist at the Wall Street Journal, has been buying “storm warning” flags in bulk: “this is no more than a brief interruption to the bear market” (2/22/2023), buy bonds now because they “provide some protection against the risk that stocks aren’t merely highly valued, but still overpriced” (2/23/2023), the recent rally in speculative stocks and CCC-rated bonds is just “a wild race to load up on risk” (2/8/2023) and “Investing is all about risk and reward, but at the moment it’s mostly about risk” (2/2/2023). Much of the euphoria is driven by the fantasy that “this time is different, inflation will vanish (it hasn’t; it clocked in at nearly 300% of the fed target rate and unemployment remains at a 50-year low), the Fed will lower rates (they won’t), and we can bet on “no landing” as easily as a “soft landing” (you shouldn’t since the Fed has managed that feat precisely once in 35 years).

On March 2nd, Christopher Waller, a member of the Fed’s board of governors, warned business leaders; “Recent data suggest that consumer spending isn’t slowing that much, that the labor market continues to run unsustainably hot and that inflation is not coming down as fast as I had thought.” In a carefully orchestrated show, three other Fed governors made separate comments, including “we need to go higher,” the Fed “needs to do a little more” to raise rates, and “I lean towards continuing to raise further.”

They are not trying to be subtle. They are saying, as clearly as Fed officials ever do: “read our lips: we will continue tightening the vise until we break the back of inflation.”

In general, we do not suggest that you run and hide. Having “strategic cash” that’s earmarked for opportunistic buying is good as long as you know what you’re going to buy and when you’re going to buy it … and you have the fortitude to do so. Most investors are better off giving up the illusion that they’re Warren Buffett.

The alternative is to invest regularly, through thick and thin, with people who are good at managing uncertain markets on your behalf. They are generally obsessive and apt to wake at 3:00 a.m. wondering about the state of the Euro/dollar exchange rate. Our motto: let them get ulcers, so you don’t have to.

We will offer you two sets of leads. The first set, The Young Defenders, focused on funds that are less than five years old but that have posted utterly impeccable risk and return metrics. This crowd has been, since inception, top-tier across all measures. The second set, The Wizards, focuses on funds that have managed to combine high degrees of flexibility with top-tier returns and below- to much-below-average volatility for decades.

The Young Defenders

A handful of young funds, by luck or design, have managed the rare feat of peer-beating returns since inception with risk-rated, risk-adjusted returns (MFO rating, Ulcer rating) and risk metrics (downside deviation, bear market deviation, down market deviation).

Investors leery of the state of the market might cast an eye in their direction.

Cells marked in blue represent the top 20% of performance.

Columns 3 & 4 measure a fund’s raw returns. Column 5, MFO Rating, is a risk-return balance. We then report relative performance based on downside deviation (a measure of day-to-day downtime volatility), bear market deviation (performance when markets are very ugly), down market deviation (performances when markets are merely ugly), and Ulcer Index (which combined the length and depth of a fund’s maximum drawdown; the idea is that funds that don’t fall much – or fall but recover quickly – are much less likely to give you ulcers than funds than fall hard and stay down.)

A handful of other funds also made the cut but appear to be unavailable to mere mortals, normal investors, and the folks I know. For the sake of the richly resourced, we wanted to include the restricted funds with some notes about their distinction.

The Wizards

At the other end of the extreme are an even smaller handful of funds that have two virtues. First is the freedom of maneuver. Their managers, by prospectus and discipline, have the ability to change the shape of their portfolios, possibly moving from 90% European equities in one market to a split between short-term bonds and real estate in another. Second is a demonstrable record of getting it right. While a fund’s returns profile changes unpredictably (it’s about impossible to “beat the market” year in and year on), a manager’s risk profile is really consistent. Managers who have a discipline that values absolute returns over relative ones and a willingness to shy away from overpriced assets tend to demonstrate that perspective consistently over time.

Performance is only skin-deep; risk management goes right to the bone.

We searched for “flexible portfolio” funds with a track record of 25 or more years and a combination of above-average returns and lower – sometimes dramatically lower – volatility than their peers. Only four funds make the cut.

Cells marked in blue represent the top 20% performance, while green is the next highest 20%, and yellow is in the group’s mid-range. These are the same metrics we described above under the “young defenders” table.

Who are these wily creatures? First, they all appeared as our “best-of-class flexible allocation fund” based on their 25-year Sharpe ratios. That was in our January 2023 article, “The Investor’s Guide to 2023: Three Opportunities to Move Toward.”

Bruce Fund will invest as heavily in stocks as the market warrants, which might be 40% and it might be near 80%. The equity portfolio is not constrained by market capitalization, but the managers prefer small-cap stocks. The bond portfolio is primarily convertible and long-dated “zero coupon” corporate bonds. The managers might invest in distressed securities, both in equity and fixed-income portfolios. They may be “a large cash position for a transitional period of time.”

First Eagle Global is an absolute return fund managed on a sort of Benjamin Graham / Warren Buffett model. It has “the ability to invest across asset classes, regions, sectors/industries, market-capitalization ranges, and without regard to a benchmark.” Turnover is low, and active share is high. Investors with a long memory will recall its early days as Jean-Marie Eviellard’s SoGen International Fund; a new millennium brought a new name. As you can tell from its sheer size, this is not a “star in the shadows” fund.

Leuthold Core Investment is a purely quant fund managed by a team from The Leuthold Group led by Doug Ramsey (who has the distinction of being the finest fund manager ever to graduate from Coe College in nearby Cedar Rapids, Iowa). Leuthold’s core business is rigorous market research driven by an irreproducibly deep database provided to institutional investors. Their analysis was so good that they were urged to produce an investment vehicle based on it. That’s this fund. They start with “proper asset class selection and a highly disciplined, unemotional method of evaluating risk/reward potential across investment choices. We adjust the exposure to each asset class to reflect our view of the potential opportunity and risk offered within that category. Flexibility is central to the creation of an asset allocation portfolio that is effective in a variety of market conditions. We possess the flexibility and discipline to invest where there is value and to sell when there is an undue risk.” They don’t pretend to be stock selectors and tend to buy baskets of stocks to execute their asset allocations.

BlackRock Global Allocation has a go-anywhere discipline. A sense of how not “60/40” they are comes from looking at their custom benchmark index: 36% US equities, 24% international equities, 24% 5-year Treasuries, and 16% global bonds. It comes with both global overlays and individual security selection with a bunch of unconventional data sources (e.g., internet search frequency, credit card charges). The allocation can change a lot depending on their reading of conditions and trends. The team is deep, richly resourced, and has, since 2019, been getting stronger (per Morningstar). It must be nice to have a “parent” with $10 trillion in assets behind you.

Bottom line:

Our recommendation is stick with your discipline. Stay in the market. Invest consistently; most especially, invest when you’re feeling most panicked. And simply your life by choosing a manager who has the skills, fortitude and authority to make the decisions in bad times that most benefit you in good ones.

Looking Beyond 2023 Investing – Lies and Statistics

By Charles Lynn Bolin

Mark Twain wrote in 1907, “There are three kinds of lies: lies, damned lies, and statistics.” The differences in opinion about soft or hard landings center on how trends are measured, data accuracy, revisions, seasonal adjustments, and which data to follow. I provide Chart #3 of what I am monitoring over the next six months as the story about soft or hard landings unfolds.

This article is divided into the following sections:

Readers who want support that a recession is coming should read Recession Signal As Consumers Struggle To Pay Bills at RIA Advice by Lance Roberts. For those who want to read support for a soft landing, I suggest What recession? Inflation, GDP offer hope for ‘soft landing’ by Tobias Burns at The Hill. Stacey Vaneck Smith at NPR points out the middle ground of a mild recession in Is the Economy Headed for Recession Or a Soft Landing?

Lies, Damned Lies, and Statistics

Chart #1 illustrates various methods of interpreting inflation using the Consumer Price Index. The solid black line is the raw CPI index, and the dashed black line is a trend line from the start in July 2020 through the peak in June 2022. Clearly, the growth of inflation began to peak in June 2022. The year-over-year change in CPI (blue line) shows that inflation is 6.4% compared to a year ago; however, the shortcomings are that it compares inflation today to circumstances a year ago and does not emphasize the short-term trends. The red line is the continuously compounded annual rate of change in the CPI. The markets got the jitters in February because the January reading was higher than expected, in part due to revisions. The fourth quarter trend indicated inflation of 3.3% setting high expectations for disinflation until the January number jumped to 6.2%, impacting fears of higher rate hikes. Lions and tigers and bears, Oh My! The problem is there is too much noise in the data to rely on a single month.

Chart #1: Three Views of the Consumer Price Index

Source: Author Using BLS Data from the St. Louis Federal Reserve (FRED)

The bond market is now aligning more with what the Fed has been saying about inflation, but the stock market is slower to accept. Some prices are “sticky,” and it will take time to realize the lag in the effect of rate hikes as these prices, like labor costs, are slow to fall.

Paul Donavan at UBS gives a good, brief summary of the calculations about seasonal adjustments and their huge impact in “Please Adjust Your Data Set.” He points this out using employment as an example, “In January, the number of jobs in the U.S. fell by more than two and a half million. It was reported as a rise of just over half a million.” Seriously?!

One of the reasons for seasonal impacts on Labor is layoffs and discharges, which tend to be highest during December and January and lowest in February and the summer months, as shown in Chart #2. On average, since 2001, there have been an average of 1.9M layoffs and discharges per month, but 2022 was unusual, with only 1.4M per month. The trend may be changing, though. In December of last year, twenty percent of the layoffs from 2022 occurred compared to a longer historical average of nine percent for December. Is this a one-month aberration or the start of a trend? The U.S. Bureau of Labor Statistics will release the Job Openings and Labor Turnover Survey for January on March 8.

Chart #2: Seasonal Layoffs and Discharges by Month

Source: Author Using St. Louis Federal Reserve (FRED) Database

Frosted Crystal Balls

I try to filter out the noise from the media and listen to the more researched and unbiased opinions. The Conference Board is an organization with a long and respectable track record. I quote Ataman Ozyildirim (Ph.D.), Senior Director of Economics at The Conference Board:

“Among the leading indicators, deteriorating manufacturing new orders, consumers’ expectations of business conditions, and credit conditions more than offset strengths in labor markets and stock prices to drive the index lower in the month… While the LEI continues to signal a recession in the near term, indicators related to the labor market—including employment and personal income—remain robust so far. Nonetheless, The Conference Board still expects high inflation, rising interest rates, and contracting consumer spending to tip the U.S. economy into recession in 2023.

Source: The Conference Board, February 17, 2023

I created Chart #3 of the economy and financial markets to remove some of the frost off my crystal ball. The K.C. Fed Labor Market Conditions Index, Momentum Indicator (double green lines) shows Labor Conditions have peaked and are softening. The Weekly Economic Index (Lewis-Mertens-Stock) (solid red line) shows that economic growth is below historical trends. The S&P 500 Earnings Per Share (solid blue line) peaked in the fourth quarter of 2021 and is declining. The Federal Reserve Bank of New York Yield Curve Leading Indicator (black dotted line) estimates the probability of being in a recession by January 2024 to be 57%. The Smoothed U.S. Recession Probabilities (solid black line) is the Marcelle Chauvet and Jeremy Max Piger model, which is accurate and coincident without much lead time. It is starting to show that recession risk is rising. Finally, there is the dashed black line which is the number of months that the 10-year/1-year spread has been inverted. A Wells Fargo study found that there is an 80% chance that the upcoming recession will be longer than historical if it is inverted for 12 months or longer. It has been inverted for seven months now. The three black lines are the metrics that I will pay the most attention to over the next three to six months to gauge the probability and severity of a recession.

Chart #3: My Short-Term Crystal Ball

Source: Author Using St. Louis Federal Reserve (FRED)

The Real-Time U.S. Recession Probabilities will be updated by Jeremy Piger, Professor of Economics at the University of Oregon, for January around the end of February.

Okay, so how strong is the consumer? Chart #4 shows the inflation-adjusted Retail Sales, Personal Consumption Expenditures, Merchant Wholesalers Sales, and Total Business Sales, which comprise most of the sub-indicators in my Spending Indicator. They are set to 100 in April of 2022 when Real Retail Spending peaked. Inflation is taking a bite out of spending, and for the past ten months, the consumer is not keeping up with inflation. Pandemic-era savings are being depleted, credit card purchases are rising, and delinquencies are increasing, along with banks tightening consumer loan lending standards. Slowing real sales, softening labor conditions, and falling earnings may result in companies having more layoffs or deferring hiring.

Chart #4: Consumer and Business Spending Trends

Source: Author Using St. Louis Federal Reserve (FRED) Database

Melissa Repko looks beyond the data trends by reading retailer company reports in “Retailers Could Face Cost Cuts and Slower Sales This Year” on CNBC. She notes that holiday sales were below expectations, retailers are increasing cost-cutting measures, including layoffs, credit card balances have risen, and consumer behavior is becoming more conservative.

Balance Between Aggressiveness and Defensiveness

Howard Marks, the co-founder of Oaktree Capital Management, wrote in Mastering the Market Cycle: Getting the Odds on your Side:

In my view, the greatest way to optimize the positioning of a portfolio at a given point in time is through deciding what balance it should strike between aggressiveness/defensiveness. And I believe the aggressiveness/ defensiveness should be adjusted over time in response to changes in the state of the investment environment and where a number of elements stand in their cycles.

Several years ago, I created Chart #5 of my favorite momentum indicator, the Moving Average Convergence Divergence (MACD), using a spreadsheet linked to the St. Louis Federal Reserve (FRED) database. It is based on exponential moving averages and produces a “Buy and Sell” signal. The MACD generated a “Sell” signal on February 10. I don’t do short-term trades, but the MACD can be useful for entry and exit points as well as a reality check for “Fear of Missing Out (FOMO).”

Chart #5: S&P 500 Momentum

Source: Author Using St. Louis Federal Reserve (FRED)

Doug Noland’s Weekly Commentary on Seeking Alpha is a painfully detailed and highly informative collection of article summaries that dive into the details of the data often before their trends become apparent. He summarizes an article on Bloomberg by Farah Elbahrawy on February 13 that explains why the S&P 500 is losing its momentum. Ms. Elbahrawy states, “U.S. stocks are ripe for a selloff after prematurely pricing in a pause in Federal Reserve rate hikes, according to Morgan Stanley strategists.”

Interest Rate Opportunities Along the Yield Curve

This month, I created MACD momentum charts for Treasuries along the yield curve. Interest rates have risen in response to the “hotter” than expected January CPI data point. Chart #6 shows the changes in the Yield Curve over the past four months. The black line is the latest Yield Curve, along with the MACD buy and sell signals. The red arrows show the volatility around the ten-year Treasury yields. My interpretation is that yields are still increasing, which is hurting bond fund performance. The Fed Funds rate is likely to hit 5.25% by mid-year. I have a screener set up at Fidelity for bullish bond ETFs using indicators such as MACD. Currently, most bullish bond ETFs are short-duration. Cash is king.

Chart #6: Yield Curve Changes with MACD Buy and Sell Signals

Source: Author Using St. Louis Federal Reserve (FRED)

Let’s not forget that the U.S. could default as early as June if the debt ceiling is not lifted. I believe that neither political party wants that, and it is unlikely but not absolute that it will not happen. On August 5, 2011, S&P downgraded U.S. sovereign debt after issuing warnings. The U.S. did not default. According to Wikipedia, S&P said, “The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy.” Sound familiar? Around this time in 2011, the yield on the ten-year Treasury fell from over 3% to less than 2% while the stock market fell over ten percent.

Chart #7: Time Surrounding S&P Downgrade of U.S. Sovereign Debt on August 5, 2011

Source: Author Using St. Louis Federal Reserve (FRED)

As a precaution and consistent with my 2023 strategy, I expect to finish extending durations of Treasury bond ladders before mid-year and then add to intermediate bond funds. Falling yields, like in August 2011, would benefit bond prices.

Taking the Long-Term View      

Looking beyond the short-term frost over our crystal balls, Christine Benz at Morningstar, wrote “Experts Forecast Stock and Bond Returns: 2023 Edition,” where she provides the following chart of ten-year forecasts. It shows that the risk premium of stocks compared to bonds has diminished since rates have risen. Secondly, it shows that there may be opportunities in developed markets and emerging markets. I expect that at some point after mid-year, to begin reinvesting short-term Treasuries as they mature into equity mutual funds and ETFs.

Chart #8: Forecasts for Long-Term Asset-Class Returns

Source: “Experts Forecast Stock and Bond Returns: 2023 Edition” by Christine Benz, Morningstar

Closing Thoughts

It will become clearer in the next few months whether there will be a hard or soft landing or somewhere in between. Regardless, highly rated bonds have become more attractive. Harry Markowitz, Nobel laureate and author of numerous books, including Risk-Return Analysis, said that “Diversification is the only free lunch.” My base case remains unchanged that the Fed will raise rates by a quarter point one or two more times this year, inflation will continue to fall but remain above 2% for longer, the economy will show more weakness in the coming months, and a recession is likely during the latter part of the year.

Special thanks go to my friend, Dave Hogle, who started me on the investing journey by loaning me The Four Pillars of Investing by William Bernstein twenty years ago, for our numerous long-distance Costco runs discussing everything under the sun, and for his insightful suggestions for these articles.

I learned from a Reader and member of MFO (Thank You) in January that the MACD and Bollinger Bands are available on the free version of for ten-year Treasury yields, using the symbol $UST10Y. Bond prices move inversely with yields. I followed up, and the Fidelity Active Trader Pro and are also capable of running these metrics for mutual funds, which is a useful tool.

Interview with Amit Wadhwaney: Co-Founder and Portfolio Manager, Moerus Capital Management

By Devesh Shah

Recently, I had a long chat with Amit Wadhwaney, the founder of Moerus Capital Management and the adviser to Moerus Worldwide Value Fund. He is a very thoughtful and seasoned investor. Here are some of his thoughts on his fund and his stock-picking style. I’ve presented a summary of my notes rather than an actual Q&A, but the flavor of their investing style will hopefully come through.

History and training:

Mr. Wadhwaney is broadly educated. He earned a Bachelor of Science in chemical engineering from Minnesota, then both a Bachelor of Arts and a Master’s in Economics from Concordia University, Montreal. He followed those with an M.B.A. from the University of Chicago.

His career began as a business analyst at Domtar, a Canadian forest products company, then at the Canadian brokerage Bunting Warburg, studying … well, the forest products industry. He earned a position as a securities analyst and then as Director of Research at M.J. Whitman LLC, a New York-based broker-dealer. Mr. Whitman founded Third Avenue Management, where Amit worked from 1990 – 2014. In his time at the firm, he was responsible for both hedge funds (Third Avenue Global Value Fund, LP and the Third Avenue Emerging Markets Fund, LP) and a US mutual fund (Third Avenue International Value). Amid what might be politely described as “considerable turmoil at Third Avenue,” Mr. Wadhwaney left to found Moerus Capital Management.

Mandate at Moerus:

The mandate is to run an unconstrained, global portfolio. That means US, developed international, and emerging market stocks. The goal is to be prudently opportunistic but with a low turnover. The portfolio changes every three to five years.

Moerus currently has about 34 holdings, with Tidewater being the biggest position. Wadhwaney recognizes the high mutual fund expenses ratio of 1.65%, but it’s a small fund, and he has expenses to pay. Wadhwaney says that Moerus is at one end of the value chain. A number of their peers have disappeared, and some have diminished. The business of value investing had to stretch very hard to justify its existence. Moerus are not great storytellers, but they know how to buy businesses that are able to fix themselves, and they buy these businesses at good prices. That’s their Edge.

Why Global? Why not just buy US companies for international exposure?

  1. Cheapness is hard to find in the USA.
  2. There are businesses – business models or monopolies – abroad that you will not find in the US.

How do you think about risk?

When they think of what can hurt the business of the stocks they buy, they look at:

  1. FX Asset-liability mismatch
  2. Nature of debt structure
  3. Sensitivity to inflation

Thus, they are macro-aware. But macro does not determine their stock picking. They are not sitting around trying to guess the level of interest rates, central bank policy, or commodity prices. They try to be in good neighborhoods and try to buy beaten up and depressed stocks. They understand that the time to fixing a beaten-up stock is quite variable. Unlike bonds, stocks have an indeterminate payoff date.

Recent performance

2020 was a bad year for the fund, down 10%. They bounced back in 2021, up a solid 18%. But they did even better in 2022. The fund was up 6% when the markets were down 15-20%.

What changed in 2021 and especially 2022, compared to 2020?

In what “we did,” nothing changed. Let’s take the case of three stocks in which we were invested.

Stock 1: Tidewater

Tidewater, an offshore oil exploration and drilling company, is one of their largest holdings, bought 3-4 years ago. They bought it when it emerged from bankruptcy with a clean balance sheet. Then in 2020, oil went to a negative price. Stock went from $20 to $4. The company was financially solid and well set up to deal with it. Because of its great balance sheet, it is a preferred counterparty to the biggies like Exxon and Amerada Hess, who want strong service providers in the North Sea. The stock came back in a very big way. Tidewater was not an oil bet. It was a bet on a financially strong company that was built to survive in a low oil price regime and thrived when oil prices went higher.

Stock 2: UniCredit

UniCredit, an Italian banking group, is another example. When interest rates were low, all kinds of financial companies – banks and insurance companies – were impacted. Moerus bought UniCredit because such low level of interest rates was unintuitive to them. UniCredit did a massive equity issuance and jettisoned a lot of bad debt. Internally, it continued to fix the business and balance sheet. The bank sold a unit to Amundi, a European asset manager. Improvements were happening and the company was all set to declare dividends and buybacks, when all of a sudden, the pandemic hit. Banks, UniCredit including, cratered. Moerus bought more of the stock. After the pandemic, UniCredit came out much stronger due to all of its internal fixing. Recently, the ECB has allowed UniCredit to conduct buybacks. Now, the stock is doing great.

Stock 3: Standard Chartered Bank

Standard Chartered Bank (Stanchart) is a very big bank operating in Asia. The previous CEO was involved in reckless lending. To win capital markets business from Indian promoters and Indian companies, the bank extended these promoters unsecured loans. This led to predictable disaster. Bill Winters was hired from JP Morgan and started cleaning up. While 2020 was a tough year for the bank, the capital internally was building up. Rising interest rates and internal self-help have gone a long way to help Stanchart’s stock price.

Bottom Line: learning from his embrace of Astoria, Queens

Wadhwaney came to New York, and in 1991 determined Manhattan real estate prices were too high. Once a value investor, always a value investor. He went to Astoria, liked what he saw, and still lives in that part of Queens. “I like the space and access to fresh produce, and the cost of living is much better.”

That tells an investor everything they want to know about Moerus. They are not chasing growth. They are looking for a margin of safety in investments, an art that is now lost in an age of Zero Day Trading Options. Don’t ask if Moerus is a good fund. Ask if you are the right investor to be invested in Moerus. If the frequency matches, it’s hard to not make money over a long period.

Just short of two cheers for active, international investing

By Devesh Shah

Readers know that I long ago concluded that active management rarely adds value to an investor’s portfolio. There are too many managers fighting over the same stocks. Very few of them have a meaningful Edge over the others. Most of those who add some value rarely add enough to overcome the drag imposed by their expenses and higher tax burden. Some few add serious value, but they are almost impossible to reliably identify in advance.

That said, I am about to commit two heresies in one column: I will suggest that you consider investing internationally, and if you choose to do so, I will suggest that you consider entrusting your money to an experienced active manager. (I know. It surprised me, too.)

International equities and a good question:

“Why do you still invest in the international markets (stocks outside the USA)?” I was asked by a highly astute head of a large family office at a recent lunch. The question was in response to my description of an asset allocation portfolio that invested in U.S., International, and Emerging Markets Stocks, along with Bonds and REITs.

The last decade has not been kind to foreign stocks:

It takes one look at the following chart to determine the basis for his question. From the start of 2009 to Feb-end 2023, U.S. equities measured by the returns of the Vanguard Total Stock Market ETF (VTI) enjoyed a total return of 277%, while the Vanguard International Developed Markets (VXUS) returned 55%, and Vanguard Emerging Markets (VWO) only 16% (or an annualized return of 1%, just 1% a year … a return I would have beaten with a carefully timed investment in a lemonade stand!!). Since that includes dividends, the price returns are even less.

His arrow, therefore, was aimed at the practice of the Vanguard idea of low-cost, passive, broad-based investing – except this time in foreign and emerging markets stocks. While in the decades past, it was considered acceptable to say some nonsense like “the diversification benefits of investing in a major asset class uncorrelated to U.S. equities,” anyone with money in these foreign markets knows better. It is now clear that the idea of passive investing that works so well in the United States has been a disaster when looking at foreign equity assets.

That decade-long lag raises two important perspectives. First, because valuations globally are lower than valuations locally, many capital models project a decade of international outperformance relative to U.S. stocks. Charles Schwab’s capital model, for instance, projects a 150 bps advantage for international large caps over domestic ones with returns of 7.6% versus 6.1% annually. Second, the mere existence of a period of U.S. outperformance is not remarkable. Historically, U.S. and international stocks quite typically trade periods of extended dominance.

Source: The Onveston Letter (2023) via Alex MacKinnon, Twitter

We might be at the point of such a trade.

Passive diversification has not worked

For the well-meaning U.S. investor trying to behave virtuously by spreading her bets in a systematic manner across the world, the reality is humbling. Across any recent time period, international stocks have not zigged when the U.S. stocks zagged, therefore, providing no particular diversification benefit. There are no large swaths of foreign markets where capitalism works better than the U.S., where corporate management is better, where earnings are higher or smoother, and where the currency is consistently more stable than the U.S. dollar because of institutional strengths of the regulatory and judicial bodies or their prudential Central bank policies. It took some of us a few decades to learn this, but now we know.

When does passive international investing work?

Home Sweet Home Investing

The disdain for investing in “foreign” markets – even if the foreign market in question is the US – is described as “home bias,” and it is nearly universal.  Home bias in India is nearly 100%, according to Morningstar. An analysis of equity holdings in mutual funds from 26 different countries shows that equity home bias is universal. All 26 exhibit domestic bias: Greece, for example, has the highest percentage of average mutual fund holdings in its domestic market (93.5%), as compared to its mean world market capitalization weight of 0.46%, a 200:1 overweight. In Austria, the overweight was 75:1; in Mexico, 30:1. Chan, et al, “What determines the domestic bias and foreign bias? Evidence from mutual fund equity allocations worldwide. Journal of Finance (2005)

To be fair, there are times when passive investing in foreign stocks does work well:

  1. When you get lucky – For example, if you picked India, rather than Brazil or China.
  2. When foreign currencies rise in value compared to the U.S. Dollars. Usually, during these periods, commodities tend to go up in price as well. Foreign equity indices in U.K. and Australia are heavily made up of commodity companies. Thus, a boost from both the F.X. and Commodities leads to foreign stocks doing well.
  3. After a large crash in risk assets, foreign stocks, which generally decline more than U.S. stocks because of their illiquidity, usually see a big rebound when the markets settle down.

Predicting the future (India over China), or the direction of F.X. and commodity prices should not be a requirement for investing. That belongs more in the category of tactical rather than strategic investing. Buying stocks after a crash is always a good idea, no matter what asset class, but how many will?

We can keep making excuses for the U.S. equity outperformance – growth stocks, tech stocks, quantitative easing, stimulus, buyback, etc. But at some point, we must face the music. Large US companies seem to be mostly a fine way to gain exposure to international markets. The need and rationale for passive investing abroad is the weakest it’s been in a while, and there is no reason to see that change. True, valuations abroad are cheap and have been seen so for a long period. We only understand the reasons now. Those markets never deserved a high valuation. U.S. stocks can come down too, but for this article, we are discussing International equities.

Active Investing over Passive outside the USA

No international large cap index fund has won in the long-term

We searched the MFO Premium database for the 20-year returns of all international large cap funds and ETFs. No diversified passive fund outperformed its peer group average and only one matched the group average. Of 71 qualifying funds, no index fund made the top 50%. The one exception: MSCI Canada ETF, a non-diversified fund that badly trailed the only actively managed Canada fund, Fidelity Canada, on the list

At MFO, we have the privilege of meeting lots of Active Fund managers focusing on international markets. To their credit, many of them have done much better than the passive indices they track. We did a piece on Emerging Markets Players that covered some of the well-run Active EM funds from Seafarer, Rondure, Causeway, William Blair, Pzena, and Harding Loevner. Fortified with the knowledge acquired in talking to many of these managers and reading their letters, my response to the proposed question of “why international markets” was that the case for International Investing now rests on the shoulders of Active Management. It is better to adapt and choose Active Managers rather than completely exit international investing. There are opportunities everywhere and we need to learn how to capture them.

Good Active Investing is also about what not to buy

Major Holders of Adani Enterprises

Of the 20 largest holders of Adani Enterprises, the company’s flagship entity, 17 are index funds, two are active funds for Indian investors – Kotak Balanced and SBI Balanced, one is a global fund – GS EM Core – not available to US investors. None of the 20 largest holders is an actively managed US fund or ETF. Per

Good active investing is as much about what not to hold as it is about what to hold. Take the case of the various Adani companies based in India. As of Aug 2022 prospectus, the MSCI India ETF owned Adani Transmission ($61mm), Adani Total Gas ($58mm), Adani Green Energy ($43mm), Adani Power ($17mm), Adani Enterprises ($51mm), and Adani Ports ($25mm). That’s $255mm out of an AUM of $4.1 Billion, or roughly 6.2% of the fund. When the US-based short seller, Hindenburg Research, put out a negative thesis on Adani, many of these stocks lost more than 50-70% in less than a month. Some of the Adani stocks have not even opened for trading since the day after the research note.

Here’s the interesting part – every smart fund manager focused on India had long avoided all Adani stocks. One understood Mr. Gautam Adani’s special place in Indian business because of his long-standing friendship with the current Prime Minister, and therefore, did not short the companies. But most Indian fund managers worth their salt were not long the stocks either. The bag holders were local retail investors chasing momentum and local and global ETF investors. MSCI India recently reduced Adani stock weights by adjusting down its free float, and several ESG funds reduced their holdings after “further analysis” – also known as buying puts after the market has crashed.

How my personal portfolio has evolved:

My own portfolio of non-US stock investments has evolved over time. I can attest that I currently do not own any International or Emerging Passive ETFs. I own an actively managed Private Equity fund in India, where I have been an investor for over 15 years. I own a Hedge fund, also focused on India. Both these funds are run by friends, making them much easier to be invested in. I grew up with these people. In public markets, I own two actively managed equity mutual funds run by Seafarer – the Emerging Market fund (Andrew Foster) and the International Value Fund (Paul Espinosa). I might tactically purchase specific country or style ETFs but would be hard-pressed to strategically and long-term invest in foreign markets anymore using passive investing.

In conclusion:

  1. International investing is not for everyone. Most of us will lose patience along the way. 
  2. If you are going to go down the road of investing in foreign securities, choose Active over Passive. Passive indices are constructed poorly overseas. What’s worked in the U.S. does not work abroad.
  3. Proper Active needs talent and skill.
  4. Even more importantly, proper Active needs <<<TIME>>>
  5. When we invest in Mutual Funds pursuing International investing, especially those with a Value bent, we need to give them a lot of time – almost as if it was an illiquid private equity investment.
  6. It helps to invest with managers with significant battle experience and a significant amount of their own assets in the fund.


The argument for an actively managed emerging markets fund – as composed by a robot

By David Snowball

It is painfully clear that many investing sites operate at the lowest common denominator level. They might rely on mechanical articles written to a pretty crude template; you could refer to our analysis of Zacks as an example.

(The robo-writers are everywhere! February 2020)  Or they accept scammy articles pushed by article farms, “professional grade, custom written articles specific to your site’s mission!” MFO gets 1-3 of those offers daily, including articles from people who want to tell you about funeral expenses and gun safety.

I wanted to know if you accept Guest Posts on

I have clients within the iGaming and Sports Betting industry that would be interested.

Please can you let me know the following:

  • Price
  • Article will not be marked as sponsored
  • Article will be permanent
  • Link will be do-follow

Inevitably, the next frontier will simply be relying on free, nearly intelligent software packages such as ChatGPT – “an artificial intelligence chatbot” – to write articles for them. ChatGPT scrapes other websites for data and phrasing, then assembles its findings in a conversational format. ChatGPT exercises no judgment, does not engage in fact-checking, and relies on sources of unverifiable reliability.

But it is free.

And it does write more coherently than 90% of the pay-to-play writers that many sites rely on. To help MFO readers get a sense of what the future of bad investment journalism looks like, Chip decided to have a conversation with ChatGPT on your behalf. Her subject: investing in actively managed emerging markets mutual funds. Her questions appear in beige boxes, and the chatbot’s responses are indented in blue.

write a 1,000 word article for a financial news blog about actively managed emerging markets mutual funds. use a conversational and engaging tone. 

When it comes to investing in emerging markets, many investors prefer actively managed mutual funds. These funds are managed by professional fund managers who actively pick and choose the stocks in the fund’s portfolio. The goal of these fund managers is to outperform the market and generate higher returns for their investors.

Emerging markets are countries that are experiencing rapid economic growth and industrialization. These countries are often characterized by a growing middle class, a young and dynamic population, and a burgeoning consumer market. Some examples of emerging markets include China, India, Brazil, Russia, and South Africa.

Emerging markets can be volatile and unpredictable … this is where actively managed funds can come in handy since they are managed by experienced professionals who have a deep understanding of emerging markets and the risks associated with them.

Investing in emerging markets can be an exciting opportunity for investors looking to diversify their portfolio and potentially capture higher returns. However, investing in these markets can also be challenging due to the higher level of risk associated with them. Emerging markets can be volatile and unpredictable, and political instability, currency fluctuations, and regulatory changes can all have a significant impact on the performance of investments in these markets.

This is where actively managed mutual funds can come in handy. These funds are managed by experienced professionals who have a deep understanding of the emerging markets and the risks associated with them. These managers conduct thorough research and analysis to identify investment opportunities and manage the risks associated with them.

One of the biggest advantages of actively managed mutual funds is that they provide investors with access to a diversified portfolio of emerging market investments. These funds typically invest in a range of different companies and industries, which helps to spread out the risk associated with investing in these markets. This means that if one company or industry underperforms, the impact on the overall performance of the fund may be limited.

Actively managed mutual funds provide investors with the opportunity to generate higher returns than they would with a passive investment strategy.

Another advantage of actively managed mutual funds is that they provide investors with the opportunity to generate higher returns than they would with a passive investment strategy. The goal of these funds is to outperform the market, and many fund managers have a proven track record of doing just that. Of course, past performance is not a guarantee of future returns, but the experience and expertise of these fund managers can be a valuable asset for investors looking to invest in emerging markets.

That being said, it’s important to keep in mind that actively managed mutual funds come with higher fees than passive index funds. These fees are typically higher because of the additional research and analysis that goes into managing the fund. Investors should carefully consider the fees associated with a particular fund before investing to ensure that they are comfortable with the costs.

It’s also worth noting that actively managed mutual funds can be more volatile than passive index funds. Because the fund manager is actively choosing which stocks to invest in, the performance of the fund can be more closely tied to the performance of individual companies or industries. This means that if a particular company or industry experiences a downturn, the fund’s performance may suffer as a result.

When choosing an actively managed mutual fund for investing in emerging markets, investors should look for funds that have a strong track record of performance and experienced fund managers with a deep understanding of the markets they are investing in. They should also consider the fees associated with the fund and ensure that they are comfortable with the level of risk associated with investing in emerging markets.

In conclusion, actively managed mutual funds can be a valuable tool for investors looking to invest in emerging markets. These funds provide access to a diversified portfolio of investments, as well as the expertise and experience of professional fund managers. However, investors should carefully consider the fees associated with these funds and be prepared for a higher level of volatility than passive index funds. With the right research and due diligence, investors can potentially generate higher returns and diversify their portfolio by investing in actively managed emerging markets mutual funds.

add a recommendation for three highly rated emerging market mutual funds

Certainly, there are a number of highly rated emerging market mutual funds available in the market today. Here are three that investors may want to consider:

    1. Vanguard Emerging Markets Stock Index Fund (VEIEX) – This actively managed mutual fund from Vanguard has an expense ratio of 0.32% and a minimum investment of $3,000. The fund invests in a diversified portfolio of emerging market stocks and has a long-term track record of solid performance.
    2. T. Rowe Price Emerging Markets Stock Fund (PRMSX) – This fund from T. Rowe Price has an expense ratio of 0.95% and a minimum investment of $2,500. The fund is managed by a team of experienced professionals who conduct in-depth research to identify promising investment opportunities in emerging markets.
    3. Fidelity Emerging Markets Fund (FEMKX) – This actively managed mutual fund from Fidelity has an expense ratio of 1.08% and a minimum investment of $2,500. The fund invests in a diversified portfolio of emerging market stocks and has a strong track record of performance over the long term.

Of course, it’s important for investors to conduct their own due diligence and research before investing in any mutual fund, including those focused on emerging markets. Factors to consider when evaluating mutual funds may include the fund’s historical performance, expense ratios, minimum investment requirements, and the experience and expertise of the fund’s management team. By carefully evaluating these factors and choosing a fund that aligns with their investment goals and risk tolerance, investors can potentially generate solid returns by investing in emerging market mutual funds.

add a list of three emerging market mutual funds that have launched in the past year.

Certainly, here are three emerging market mutual funds that have launched in the past year:

  1. JPMorgan Emerging Markets Equity Fund – This actively managed mutual fund from JPMorgan was launched in January 2022 and has an expense ratio of 1.00%. The fund invests in a diversified portfolio of emerging market equities and is managed by a team of experienced professionals.
  2. American Funds Emerging Markets Fund – This actively managed mutual fund from American Funds was launched in October 2021 and has an expense ratio of 1.22%. The fund invests in a diversified portfolio of emerging market stocks and is managed by a team of experienced investment professionals.
  3. BlackRock Emerging Markets Flexi Dynamic Fund – This actively managed mutual fund from BlackRock was launched in December 2021 and has an expense ratio of 1.55%. The fund invests in a diversified portfolio of emerging market equities and uses a flexible approach to adjust its holdings based on changing market conditions.

It’s worth noting that new mutual funds may not have a long track record of performance, which can make it difficult for investors to evaluate their potential for generating returns. Additionally, new mutual funds may have higher expense ratios as they work to establish themselves in the market. As such, investors should carefully evaluate the potential risks and rewards of any new mutual fund before making an investment decision.

Bottom line

About that BlackRock Fund it’s recommending: so far as we can tell, it doesn’t exist. The SEC has never heard of it. BlackRock does have a Flexi Dynamic Bond Fund, but it’s… well, bonds rather than equities and launched in 2013, not 2021. And it is a fund strictly for European investors. Though it might have added a share class in 2021?

Likewise, that “American Funds” fund doesn’t exist.

On the upside, JP Morgan Emerging Markets Equity Fund does exist (score one for chatbot!!) … but it didn’t launch in 2022. The fund launched in 1993.

Since bots don’t (yet) lie, we know that something, somewhere, made it look like these new funds existed … sort of, possibly, somewhere, or not. ChatGPT cannot judge what it scrapes and cannot be forced to explore where it got this crap. It can only do what it’s written to do.

The Investors Guide to Cyber-Safety

  1. Ask “what reason is there to trust this source?” What are their qualifications, and what’s their motive for writing it? Are they trying to get you to buy something they’ll benefit from? Are they just trying to get clicks? Are they the desperate representative of a failing enterprise that they’re trying to prop up?
  2. Ask “who is paying for this work?”
  3. If you wouldn’t trust them to spend time alone with your children, don’t click on their links.

If your answer to either is “I don’t know,” run away. Do not read the article. Do not reward the site. And, especially with Question 2, if you answer “I don’t know,” then you’re actually saying, “I am, I just don’t know how. Yet.”

For investors and other readers, the lesson is clear. Read people who have earned your trust. Period. Do not surrender to the temptation to read articles from “Yahoo News” in your news feed. Reddit is not a reliable source, it’s a mob. Do not rely on social media to vet and assess; that’s not what they do.

Often “people who have earned your trust” charge for their services. If you’ve got money at risk, pay the d**ned subscription fee. It will be infinitely less costly than relying on “free stuff I found on the web.”

To Sell or Not to Sell? (REMIX, PQTAX, GPANX, COTZX)

By Charles Lynn Bolin

This is my annual assessment of the funds that I own and whether it makes sense to hold them with my annual outlook, as described in this month’s companion article. My outlook is “Risk Off” because of economic uncertainty, plus bonds are now paying an attractive yield. The funds assessed in this article exclude bond funds, individual stock, and American Century Advantis All Equity Markets (AVGE). As interest rates rose and stocks and bonds fell, I gradually sold my most volatile funds and bought short-term ladders of certificates of deposit and Treasuries to lock in higher yields. With interest rates higher, I now ask myself, would I rather own my remaining funds in my intermediate buckets or make four or five percent in safer investments? That is the question.

I use the “Bucket Approach” and have Fidelity Wealth Management manage my longer-term portfolios, which collectively resemble a diversified, traditional 60% stock to 40% bond portfolio, including small cap and emerging market exposure. My short-term bucket consists of money markets and short-term CD and Treasury ladders. Intermediate buckets consist of Treasury ladders to match RMD withdrawal needs along with the funds in this article, plus a small position in American Century Advantis All Equity Markets (AVGE). These intermediate buckets tend to be more conservative with large-cap developed market funds and quality bond funds of short to intermediate duration. All of the funds in the intermediate buckets included in the article are actively managed, which I favor for their versatility to adapt to changing environments.

This article is divided into the following sections:

Mutual Fund Observer Tools

The Mutual Fund Observer MultiSearch Screener is powerful in that it allows an investor to find funds based on an extremely wide range of risk and risk-adjusted-performance criteria. In this section, I explore the MFO Analyze and Portfolio Tools with respect to my funds using some of my favorite metrics. I own the following funds except for the Vanguard 500 Index (VFINX) and State Street SPDR S&P 500 (SPY), which I include as baseline funds.

Chart #1 provides a focused summary of the funds. All but Grant Park Multi Alternative Strategies (GPANX) and Columbia Thermostat (COTZX/CTFAX) are classified as MFO Great Owl Funds. The funds are sorted with the lowest risk fund (GPANX) as measured by the Ulcer Index on the left to the highest (VFINX) on the right. All funds are rated as “Best” with an MFO Rating of 5 for Risk Adjusted Performance in their category representing the top quintile except for COTZX, which is rated “4” (Above Average). GPANX and COTZX/CTFAX are the least tax efficient and should be held in tax-advantaged accounts if possible.

Chart #1: MFO ANALYZE – COMPARE (Three Years)

Source: Author Using Mutual Fund Observer

Chart #2 contains the period returns sorted by the lowest three-year return to the highest. During this period, the U.S. economy has experienced the COVID-induced recession, high stimulus, a rapidly rising Fed Funds rate, and last year’s bear market. The next three years will probably be characterized by a recession, falling rates, and quantitative tightening. The next three years favor funds with a high percentage allocated to bonds with longer durations, assuming inflation is contained. This will favor COTZX/CTFAX, VWIAX/VWINX, VGYAX, VTMFX, and VGWAX. Valuations are higher in the U.S., which favors funds with higher international exposure, such as VGYAX, VGWAX, PQTAX, and REMIX. The S&P 500 has benefited from the massive stimulus, low-interest rates, strong dollar, and buybacks over the past decade, which won’t exist in the coming decade. Funds with better long-term performance are VTMFX, COTZX/CTFAX, VWIAX, and PQTAX. Standpoint Multi-Asset (REMIX) is a newer fund with only a three-year history.


Source: Author Using Mutual Fund Observer

Chart #3 reflects recent performance. Allianz PIMCO Trends Managed Futures (PQTAX), Standpoint Multi-Asset (REMIX), and Grant Park Multi Alternative Strategies (GPANX) had better performance during 2022, followed by Vanguard Funds (VGYAX, VGWAX, VWIAX/VWINX). Vanguard Tax-Managed Balanced (VTNFX) and Columbia Thermostat (COTZX/CTFAX) had the worst 2022 performance losing about 13% compared to 18% for the S&P 500. I reduced allocations to PQTAX in some portfolios as it became more volatile at the end of the year. GPANX (blue line) has remarkably low volatility.


Source: Author Using Mutual Fund Observer

Chart #4 shows the recent trends in the funds, with the Vanguard Global Funds (VGYAX and VGWAX) benefiting the most, followed by the Vanguard Wellesley Income Fund (VWIAX/VWINX). The best performers from 2022 (PQTAX, REMIX, and GPANX) have had the lowest momentum recently, followed by the Vanguard Tax Managed Balanced Fund (VTMFX).


Source: Author Using Mutual Fund Observer

How would a portfolio of these funds have performed over the past three years? Chart #5 shows that with a near equal weighting, including the S&P 500, the portfolio would have made 7.4% with a maximum drawdown of 7.4%. The Ulcer Index of the portfolio is 2.5, which is lower than all but two of the funds reflecting the benefits of the low correlation. Expenses are relatively high at 0.87%.

Chart #5: MFO – PORTFOLIO (Three Years)

Source: Author Using Mutual Fund Observer

How might a defensive portfolio look if we take into account a recession and falling rates over the next two years? One possibility shows how a slightly more defensive portfolio would have performed over the past twelve months ending January. It would have nearly broken even and had a maximum drawdown of less than eight percent. I increased allocations to GPANX for its stability, VWIAX as a conservative domestic value-oriented fund, and COTZX because it increases allocation to equities as the stock market falls. I held allocations to REMIX at ten percent because it has less history, and to PQTAX, even though it has been a top performer because of its volatility. I show low allocations to VTMFX because of its higher volatility.

Chart #6: MFO – PORTFOLIO (One Year)

Source: Author Using Mutual Fund Observer

After reviewing each of these funds in Mutual Fund Observer, I assess that they are respectable holdings for this year, given the uncertainty of hard or soft landings and inflation.

Portfolio Visualizer Optimization Tools

I find the primary strength of Portfolio Visualizer to be optimizing and analyzing allocations for different time periods. The link to Portfolio Visualizer is here. I ran two scenarios to maximize return at 12% volatility (blue line) and to maximize the Sharpe Ratio (red line) using the Vanguard Balance Fund (VBIAX) as a baseline. These two options, along with bonds, are what I am striving for over the next two years – stability with respectable risk-adjusted returns.


Source: Author Using Portfolio Visualizer

Chart #8 shows the Efficient Frontier (blue line), which is the maximum return for the level of volatility over the past three years. The Expected Return (11.3%) and Standard Deviation (21.1%) of the S&P 500 are outside of the chart scales. GPANX, REMIX, PQTAX, and COTZX are good choices, with VWIAX and VGYAX requiring more understanding of why their poor performance won’t continue. These two will benefit from stabilizing or falling yields. VTMFX is a good long-term holding in a tax-efficient account.


Source: Author Using Portfolio Visualizer

Chart #9 is useful for investors to understand their own risk tolerance and outlooks. If one is more “Risk Off” and wants less volatility then they should increase allocations to GPANX, VGYAX, and VWIAX. If one is more “Risk On” and wants more return then they should increase allocations to the S&P 500, VGWAX, and REMIX. PQTAX and COTZX are good funds to own across all ranges. (Hint: The Legend going from left (GPANX) to right (SPY) matches the funds in the chart from bottom (GPANX) to top (SPY))


Source: Author Using Portfolio Visualizer

To smooth out volatility, one might seek uncorrelated funds. Chart #10 shows that VGYAX, VWIAX, VGWAX, COTZX, VTMFX, and the S&P 500 (SPY) are the most correlated, with COTZX being slightly less correlated, and one could combine some of these funds if the goal is to keep it simple.


Source: Author Using Portfolio Visualizer

Chart #11 shows the allocations that were used to create the portfolios in Chart #7. In both portfolios, REMIX, PQTAX, and COTZX have high allocations. Also, in both portfolios, VGYAX has the lowest allocations. I have reduced allocations to Vanguard Global Wellington (VGWAX) and increased allocations to the more conservative Vanguard Global Wellesley (VGYAX) because of being more “risk off.”


Source: Author Using Portfolio Visualizer

Answering the Question – To Sell or Not to Sell?

In short, I am pleased with the changes that I made last year, and I don’t plan to sell any of the funds that I own this year and invest the proceeds into cash or bonds. In fact, as short-term ladders mature, I will add to some of these funds toward the middle of the year after matching bond ladders with withdrawal needs. My preference is to own five to ten funds in a portfolio with five to fifteen percent of a bucket in each fund. My “Buy,” “Sell,” and “Hold” comments reflect this.

Vanguard Funds

I view the pairs of Vanguard funds Wellesley/Wellington and Global Wellesley/Global Wellington as “risk off” and “risk off” trades. They are mostly “buy and hold,” but if I have a good sense that risk is increasing, then I shift allocations from Wellington to Wellesley. I sold Vanguard Wellington (VWELX) last year because of its high volatility and allocations to the technology sector. I plan to “Hold” these three funds this year. I am currently tilted toward VWIAX and VGYAX.

  1. Vanguard Wellesley Income Adm (VWIAX), Mixed-Asset Target Allocation Conservative (38% equities, large-cap value-oriented, effective duration 6.8 years, average credit rating A+)
  2. Vanguard Global Wellesley Income Admiral (VGYAX), Mixed-Asset Target Allocation Conservative (15% U.S. equities, 21% non-US equity, large-cap value-oriented, effective duration 5.9 years, average credit rating A)
  3. Vanguard Global Wellington Admiral (VGWAX), Mixed-Asset Target Allocation Growth (36% U.S. equities, 28% non-US equity, large-cap value-oriented, effective duration 5.9 years, average credit rating A)

Conservative Funds

GPANX has been the least volatile of all of the funds and a consistent performer. It is 58% allocated to fixed income and 35% to cash. The majority (66%) is in government securities and cash & cash equivalents (21%). It is available at Fidelity but not at Vanguard. Expenses are a high 1.8%. I have to ask myself, “Why should I own a fund that has earned 4.7% over the past three years when money markets and short-term treasuries are paying 4 to 5%? I have plenty in Treasury ladders, but I believe that GPANX provides some diversification through active management. The yields on short-term bonds will fall over the next two years, but hopefully, GPANX will make money in different environments. I have a large enough allocation to GPANX that I will “Hold.”

  1. Grant Park Multi Alternative Strategies (GPANX), Alternative Multi-Strategy (4% equities, 58% fixed income, 35% cash, 66% government sector)

Flexible Portfolio and Managed Futures Funds

Flexible Portfolio funds are one of my favorite multi-asset/multi-strategy funds because they allow the managers the ability to adapt. I reduced allocations to COTZX/CTFAX last year because it was losing value as yields rose. I plan to increase allocations (Buy) to COTZX/CTFAX during the first half of the year. I have a large enough allocation to REMIX that I plan to “Hold.”

  1. Standpoint Multi-Asset Inv (REMIX), Flexible Portfolio (26% U.S. equities, 16% non-US equity, large-cap blend oriented, 39% cash) The link to Standpoint Multi-Asset Inv (REMIX) on the Standpoint website is provided here.
  2. Columbia Thermostat Inst (COTZX), Flexible Portfolio (Fund of funds, 27% equities, large-cap blend oriented, effective duration 5.9 years, average credit rating A.A.-) The link to Columbia Thermostat Fund (COTZX) on the Columbia Threadneedle website is provided here.

Managed Futures Fund

I am new to managed futures funds which is why I have been cautious with PQTAX. I decreased allocations to PQTAX at the end of last year because it was falling. Given my research in this article, I will probably increase allocations to PQTAX this year, but for now, I will “Hold” what I have. The link to PQTAX on the PIMCO website is provided here.

  1. Allianz PIMCO TRENDS Managed Futures Strategy (PQTAX),

Vanguard Tax-Managed Balanced (VTMFX)

I don’t own VTMFX personally, but have it in family members’ portfolios that I assist with. It is a good long-term holding on a risk-adjusted basis. I reduced allocations last year based on the risk tolerance of the portfolio owners. The allocation is about half to stocks or bonds, but volatility was high because of high allocations to consumer cyclical and technology sectors. It would fit into some portfolios of those who want long-term tax efficiency and good risk-adjusted performance. Since allocations to VTMFX are low, I give it a “Hold.”

  1. Vanguard Tax-Managed Balanced Admiral (VTMFX), Mixed-Asset Target Allocation Moderate (47% U.S. equities, large-cap blend oriented, effective duration 4.6 years, average credit rating AA-)

Closing Thoughts

I plan to make no major change to the funds in this article except to increase allocations to COTZX/CTFAX and possibly PQTAX this year. COTZX and CTFAX are different share classes of the same fund. COTZX, with lower expenses, is available at Vanguard, and CTFAX is available at Fidelity. Each month, I need to make small decisions as to where to invest short-term ladders as they mature. These decisions appear to be 1) extend the duration of ladders to meet withdrawal needs as yields stabilize, 2) buy intermediate bond funds after completing bond ladders, 3) increase allocations to AVGE in the second half of the year if conditions warrant, and 4) search for more equity funds to compliment AVGE. In addition, I have more research to do about buying Treasure Inflation Protected notes, and I bought my first one yesterday to test the water.

Briefly Noted

By TheShadow


Ariel Funds picks up a new team and two new strategies. Henry Mallari-D’Auria, previously the CIO of emerging markets value at AllianceBernstein, will join the firm in April. Four of his colleagues have moved with him, and they have plans to build the team out more. Ariel’s co-CEOs note that “a dedicated EM strategy became our next natural product extension.”

In addition, Ariel intends a most un-Ariel move in launching a global long/short strategy led by Micky Jagirdar, who is already the firm’s head of global equities.

Driehaus Funds has filed an SEC registration filing for the Driehaus Global Fund. The fund was formerly known as the Driehaus Emerging Markets Opportunities Fund. Expenses have not been stated. The Fund, as repurposed, will no longer focus its investments in emerging markets or invest in debt securities and will no longer engage in hedging transactions, such as derivatives or short sales. Rather, the fund will invest in a diversified portfolio of equity securities in issuers located across the world, including the United States. The global fund will invest in a diversified portfolio, including common stocks and other forms of equity investments (or instruments with similar economic characteristics), of issuers located worldwide, including the United States (U.S.) and in both developed and emerging markets. The portfolio managers will be Howard Schwab, Richard Thies, and Daniel Burr.

Fidelity has filed to launch a new series of funds, the Fidelity Sustainable Target Date Funds. Each, from “Sustainable Income” to “Sustainable Target-Date 2065,” will be a fund-of-Fidelity-funds. Three sorts of Fidelity funds qualify for inclusion:

 (i) Fidelity funds that invest in securities of issuers that … have proven or improving sustainability practices or positive environmental, social, and governance (ESG) characteristics (Fidelity Sustainable Funds), (ii) Fidelity index funds that track an ESG Index (Fidelity Sustainable Index Funds), and (iii) Fidelity funds that do not have a principal ESG investment strategy but invest at least 80% of assets in [ESG-screened] U.S. and international sovereign or government-related debt securities (Fidelity Traditional Funds)

The glidepath is pretty conventional:

That’s grainy, but it’s what the prospectus provides. The funds start at 90% equity, which a particularly large international allocation. They drop to about 60% at their target date and bottom out at 20-25% equities. Expenses run around 0.4% and there will be no investment minimum.

Rondure Global Advisors and Grandeur Peak Global Advisors are “reorganizing their funds.” What does that mean? To investors, nothing. Zero, zip, zilch. It means that they’ve changed service providers, which requires them to transition from one trust to another. All is well.

Speaking of transitioning, Cambiar Aggressive Value Fund is now the Cambiar Aggressive Value ETF. The adviser describes it asproviding investors with exposure to a concentrated, best ideas strategy in a streamlined and efficient wrapper.” They also promise to “refine the predecessor mutual fund’s investment parameters” and offer lower expenses.

MFO’s assessment of the fund is substantially more positive than Morningstar’s. Morningstar designates it as a one-star, global large-core fund though the advisers themselves describe it as a complementary fund. MFO and Lipper classify it as a global multi-cap value which reflects the fact that there’s a lot of small- to mid-cap exposure. Here’s the picture of performance since inception, about 15 years.

Comparison of Lifetime Performance (09/2007 – 02/2023)

Name APR Max DD Recvrymo STDEV DSDEV Ulcer Index Sharpe Ratio SortinoRatio Martin Ratio
Cambiar Aggressive Value 7.0% -58.1% 29 24.7 16.7 18.2 0.26 0.38 0.35
Global Multi-Cap Value Average 4.8 -51.4 63 18.0 12.7 17.2 0.25 0.35 0.29

I guess the “aggressive” part of “aggressive value” plays out as higher returns along with higher volatility (maximum drawdown, standard deviation, downside deviation), but the risk-return metrics remain mostly in Cambiar’s favor.

Similarly, Touchstone Dynamic Allocation Fund will be converted into an exchange-traded fund. The reorganization is expected to be completed in the fourth quarter of 2023.


One of the largest of all EM funds, Invesco Developing Markets Fund, announced it is reopening to new investors on February 28. The fund has been closed since April 12, 2013, to new investors except in limited circumstances. The fund is rated three stars by Morningstar. The fund holds $25 billion in assets, more than $20 billion below its 2020 peak girth. It trails 87% of its peers over the past three years, reputedly in part because of abnormally large stakes in Russia and in Chinese online education firms, which were hit with a government crackdown.

JPMorgan Hedged Equity Fund announced the fund has reopened to new investors effective February 17. It is rated five stars by Morningstar.

CLOSINGS (and related inconveniences)

None sighted.


Conestoga Micro Cap Fund will change its name to Conestoga Discovery Fund on or about April 18.

Element EV, Solar & Battery Materials (Lithium, Nickel, Copper, Cobalt) Futures Strategy ETF (CHRG) is becoming less Element-al and was rechristened as The Energy & Minerals Group EV, Solar & Battery Materials (Lithium, Nickel, Copper, Cobalt) Futures Strategy ETF on February 3, 2023. Same advisor, new name. 17 words and 96 characters might be an investment product name record!

Less Q, more Integrated: T. Rowe Price decided to change both the names and investment strategies for several of its funds. The former T Rowe Price QM funds, which relied on a Quantitative Model, will become the T Rowe Price Integrated funds, which will rely on an integration of fundamental analysis with the funds’ quantitative models. The affected funds are:

  • T. Rowe Price QM U.S. Small-Cap Growth Equity
  • T. Rowe Price QM U.S. Value Equity
  • T. Rowe Price QM U.S. Small & Mid-Cap Core Equity and
  • T. Rowe Price QM Global Equity.

Victory Funds is removing the USAA moniker of many mutual funds. Forty-five funds have been identified in the filing. USAA’s core business is providing insurance, loans, and related services to military members and their families. They had no special competence in fund management, though they did have some perfectly fine funds and chose to sell their fund business to Victory.

WPG Partners Small/Micro Cap Value Fund changed its name to WPG Partners Small Cap Value Diversified Fund effective February 17


Calamos Global Sustainable Equities Fund will be liquidated on or about March 27.

Day Hagan Smart Value Fund will be liquidated on or about March 17.

Federated Hermes International Developed Equity Fund will be liquidated on or about April 21.

Invesco PureBeta FTSE Emerging Markets, Invesco PureBeta FTSE Developed ex-North America, Invesco PureBeta MSCI USA Small Cap, Invesco PureBeta US Aggregate Bond, Invesco Balanced Multi-Asset Allocation, Invesco Conservative Multi-Asset Allocation, Invesco Growth Multi-Asset Allocation, and Invesco Moderately Conservative Multi-Asset Allocation ETF have all been notified that their services will be no longer needed as of June 30, 2023.

Janus Henderson International Opportunities Fund will be reorganized into the Janus Henderson Overseas Fund. If approved by shareholders, the merger will be effective on or about June 2, 2023

Lazard Emerging Market Debt Portfolio will soon be liquidated, with proceeds reaching its former investors on or about April 25, 2023.

Morgan Creek-Exos Active SPAC Arbitrage ETF will be liquidated on or about March 24.

Penn Capital Floating Rate Income Fund was liquidated as of the close of business on February 27.

Rimrock Core Bond Fund was liquidated on February 28.

Stone Ridge U.S. Hedged Equity Fund will be liquidated on or about March 27.

Dead or playing possum? In the beginning, there was Rochdale. And Rochdale begat City National Rochdale, and City National Rochdale begat Fiera Capital, and Fiera Capital begat Sunbridge. Then, last month, it seemed that the Line of Rochdale reached its end. Last month, it was announced “the Board of Trustees … authorizes the termination, liquidation, and dissolution of the [Sunbridge Capital Emerging Markets] Fund.” that Fund would initiate a share class reorganization by December 31 with the institutional share class being liquidated on or about February 10. Upon reviewing the Sunbridge Capital Partners’ website, it states that “We will be back soon. Something new is coming.” Interested investors can subscribe for updates. Reader Shawn McFarlane wrote to remind us of the fund’s disappearance and to lament the disappearance of “a low-investment minimum relatively low-fee emerging markets open-end mutual fund” with a decent record.

But then, on the adviser’s website, we see:

We’ll keep watch for you.

T. Rowe Price Emerging Europe Fund closed even to existing investors on February 17. The fund closed to new investors on May 9, 2022. The fund’s benchmark, the MSCI Emerging Markets Europe index, removed Russian securities at a price essentially zero due to Russia’s February 24, 2022, attack on Ukraine. Unfortunately, Russian stocks were a significant percentage of the MSCI Emerging Markets Europe Index.

Vanguard Alternative Strategies Fund will be liquidated between April 1 through June 30. The fund was launched in 2015 to help investors further diversify beyond traditional asset classes, with the potential to lower a portfolio’s overall volatility. The fund, however, has not gained broad acceptance among investors. This fund, as well as the Vanguard Managed Allocation Fund, were both managed by Fei Xu.

Vanguard Managed Allocation Fund will be reorganized into the Vanguard LifeStrategy Moderate Growth Fund. The reorganization is expected to occur between April 1 through June 30.

Manager changes

  Who’s out? Who’s left about?
CIBC Atlas Income Opportunities Fund   No one. Sean D. Usechek now serves as a portfolio manager with founding managers Brant Houston and Gary Pzegeo.
Columbia Acorn Daniel Cole is leaving the team. Erika K Maschmeyer and John Emerson remain. Ralph Wanger left his five-star, $6.5 billion fund 20 years ago. In the succeeding decades, it’s taken twelve different managers to guide Acorn from being iconic to being a one-star disappointment (it trails more than 90% of its peers for the past 3-, 5-, 10- and 15-year periods) that still harbors $2.7 billion in assets.
Ranger Micro Cap Fund   Brown McCullough, a partner at the Dallas-based firm, is now a portfolio manager, the latest addition to a four-person management team for this five-star fund. And Devin Holland has been named partner and senior analyst. 
T. Rowe Price International Bond Fund, and T. Rowe Price International Bond Fund (USD Hedged) On 2/28/23, Arif Husain stepped down Andrew J. Keirle will join Kenneth A. Orchard as co-portfolio manager