Monthly Archives: September 2023

September 1, 2023

By David Snowball

Dear friends,

Welcome to the end of the summer. And to the beginning of … the weakest month of the year for the stock market, with an average monthly loss of about 0.7%. And the threshold of the most volatile month of the year, October, which sees an intramonth movement of 8.3%; that is, since 1928, the record says that your portfolio will bounce 8.3% in October (but only 5.2% in February). My inbox overflows with apocalyptic forecasts and also of celebrations of The New Bull. Recognizing that it’s all bull of a sort, I move on.

Augustana welcomes the largest first-year class in its 163-year history, materially (and disconcertingly) fed by the Augustana Possible scholarships that debuted this fall. Alumni-supporting, Augustana Possible fills the aid gap for any high-achieving student from a lower-income family. Good news: 800 amazing newcomers, including 160 students from 33 countries beyond the US. Their courage and ambition is amazing! Bad news: that’s rather more than we have dorm space for. Hmmm … I’ll be curious to see if anyone’s slipped bunkbeds into my office by Labor Day.

And, of course, the presidential nominating circus in which people whom we might not trust to run a dog-walking business will try to howl their way into our hearts in pursuit of running a national government.

But, too, it’s the beginning of Oktoberfest (September 16th is the kick-off; the original was a five-day celebration of the marriage of Prince Ludwig beginning 12 October 1810 with the date shifting as partiers noticed that October days were short and nights were nippy) and of apple season. Which also means apple cider donut season! Which also means that Chip and I have a date with the Brightonwoods Orchard, which has over 200 heirloom apple varieties.

If you’ve got taste buds and a taste for adventure, you really should find time in the next month to get away to an heirloom / antique orchard in your region. Snacking on an apple that dates to the Roman invasion of Gaul, or one that tastes a lot like caramel, is a trip in time.

In the September MFO

A quick and tasty issue, shortened a bit by our late August appearance. Devesh talks emerging markets value with Rakesh Bordia of Pzena Emerging Markets Value. I profile Artisan International Explorer, an extension of David Samra’s international value strategy led by Bieni Zhou and Anand Vasagiri. Lynn Bolin ranks and rates notable young ETFs for you and also walks through the process of assessing tax-exempt bond funds. Finally, The Shadow offers a round-up of industry news – including several notable announcements – in Briefly Noted.

And a special shout-off to Aahan Shah, Devesh’s computer-savvy son, who has spent much of the summer upgrading the Fund Archives for you. He’s made hundreds of edits to update names, fates, managers, expenses, and so on. We’re deeply grateful to him!

But, before all that, there are …

Ten things I learned in August that only I might find interesting.

But, who knows? You’re weird. You might be intrigued, too. Let’s see.

For college professors, as for many of us, summer is a time to sneak in a bit of reading and reflection that the hubbub of the busy part of the year forbids. As we transition from summer issues of MFO and relaxed evenings huddled away from the heat, I surveyed some of the most interesting snippets that I discovered in late summer (some financial, some not) and thought I’d share.

There is a best age for making financial decisions.

It’s 53.

Our abilities are controlled by two distinct types of intelligence, a sort of mental yin and yang. Fluid intelligence is a measure of our ability to make graceful mental leaps, connecting disparate things in ways no one has done before. Researchers say it peaks in our late 20s and, more or less gradually, declines thereafter. Crystallized intelligence is a measure of the amount of stuff we’ve learned (and learn how to do) over the years and can access when we encounter a challenge. It accumulates steadily through adulthood, maxing out somewhere around 70. The difference is important: if you have a problem requiring a brilliant leap (“How do we manage the threat from AI to the trust we’ve built with investors?”), find someone young and brilliant. If you have a problem that requires knowing stuff and having a sense of perspective, hire me. Well, older people.

Making good decisions, especially of a type we haven’t made before, benefits from having both types of intelligence. Researchers have looked at how we think about finances and how we make our decisions across our lives. Some of the research looked at crystallized knowledge of finance. Some looked at financial problem-solving. And both sets come to very similar conclusions:

Rafal Chomik, an economist in Australia at the ARC Centre of Excellence in Population Ageing Research … led a 2022 study that looked at financial literacy, which is the ability to understand financial information and apply it to managing personal finances. Financial literacy typically peaks at age 54 and then declines, according to the study.

In [another] study, economists looked at financial choices made by adults in 10 financial areas, including home-equity loans, lines of credit, mortgages and credit cards, and how those decisions affected fees and interest payments. Fees and interest payments, across all 10 areas, are at their lowest levels around age 53, according to the 2009 study in the Brookings Papers on Economic Activity. That age was referred to as the “age of reason.” (Claire Ansberry, “The Exact Age When You Make Your Best Financial Decisions,” Wall Street Journal,” 8/26/2023)

Good news: Chip is 53! Bad news: She’s been letting me handle our portfolio. (I think I can hear the account passwords changing from here.) Hmmm … I wonder what my allowance will be? On the upside, given the research, she’ll pick the perfect amount.

Collapsing attention spans: a portfolio perspective.

There is a robust body of research that supports two conclusions. First, our attention spans are short. Second, they’re getting shorter. (Did you even finish that sentence?)

Indeed, research [Gloria Mark, a professor of informatics at the University of California, Irvine, and author of Attention Span: A Groundbreaking Way to Restore Balance, Happiness and Productivity] suggests we’re giving into digital temptation more and more. In the early 2000s, she and her team tracked people while they used an electronic device and noted each time their focus shifted to something new—roughly every 2.5 minutes, on average. In recent repeats of that experiment, she says, the average has gone down to about 47 seconds.   Why Everyone’s Worried About Their Attention Span—and How to Improve Yours, Time Magazine, 8/10/2023)

Yikes. We have to measure attention indirectly by looking at what you’re doing and how long you stick with it before getting bored or distracted and moving on. A bunch of different measures, used by a bunch of different scholars, reach the same general conclusion: We have trained our brains to surrender to distraction (check how many tabs or apps you have open at this very second), and our brains have gotten the message: “peek and run away!”

Good news: that’s longer than a goldfish’s attention span (about 9 seconds), and we’ve never tried measuring a butterfly’s. That’s about it for good news.

The definitive MFO Portfolio Guide in 46 seconds:

  1. Take the year you were born. Add 70.
  2. Take the resulting number and round down to the next number ending “0” or “5.”
  3. Invest your portfolio in a T. Rowe Price fund ending with that number.
  4. Never touch your money again, you butterfly!

Really. Money is important. If you don’t have time to do it right, do it simply, as in the example above. Our only amendment for those with an extra five seconds:

3A. Stash $2,000 in a high-rate money market fund to cover inevitable emergencies.

Bad ideas are quietly bleeding to death.

Quite apart from the demise of the stupid Long Cramer ETF, which The Shadow chronicles in this month’s “Briefly Noted.”

Stupid ideas and converted mutual funds are the lifeblood of the ETF industry. By stupid ideas, I mean funds that were imagined in some sort of Red Bull fueled marketing scrum by desperate people who had seen something cross their news feeds (“More states legalize pot” or “Boeing unveils hypersonic aircraft model” or “you can buy used undies from vending machines in Japan” – really) and cried out “that’s it! Let’s go for it!” And, you end up with the Yield Premium Coca Cola ETF, or the Asian Middle Class ETF, or the KPOP and Korean Entertainment ETF.

The industry does that because they have no competitive advantage (no “edge,” in Devesh’s term) in investing in recognized asset classes and are appealing to an investor base with a 47-second attention span.

Good news: those funds are withering and dying in droves.

Exchange-traded funds are closing down at a rapid clip, with many niche products in the industry struggling to attract investors in a market dominated by a handful of big technology stocks. Global fund closures have climbed to 929 in 2023, rising at a record pace from 373 at the same point last year …

Many of the closed funds were launched just a year or two ago with a narrow thematic focus and never attracted a sustainable asset base. Small asset managers rushed to tap into the individual investing boom with specialized funds that gave everyday investors the tools to trade like a Wall Street pro or bet on the latest hot theme. Just a few years later, they are reckoning with the reality that there might not be enough demand to support many of the funds.

Among this year’s casualties: a metaverse equity ETF focused on the concept popularized by Mark Zuckerberg, a “Generation Z” ETF that promised to invest in companies aligned with the values of the younger generation, a pair of ETFs that bought stocks purchased by Republican or Democratic members of Congress, and a suite of funds offering leveraged exposure to various single stocks. One of the most recent closures came Friday when a cannabis-themed ETF whose shares had declined about 90% since its 2021 launch was liquidated. (Jack Pitcher, “Investors Say No Thanks to Gen-Z, Metaverse Funds,” WSJ, 8/30/2023, paywall)

Oops! I did it again!

And really, who understands the financial management business better than Brittney Spears?

Oops, I did it again
I played with your heart, got lost in the game
Oh baby, baby
Oops, you think I’m in love
That I’m sent from above
I’m not that innocent.

Speaking of “doing it again” and “not noticeably innocent,” the kleptomaniacal Wells Fargo has done it again. The SEC has again slammed Wells Fargo for ripping off the people who trusted it: “For years (emphasis added), Wells Fargo and its predecessor firms negotiated reduced advisory fees with thousands of clients, but failed to honor them, overcharging those clients millions of dollars as a result.” In this case, the SEC found Wells was guilty of “overcharging more than 10,900 investment advisory accounts more than $26.8 million in advisory fees.”

We’ll ask again the question we asked back in January 20223:

Why does Wells Fargo have any customers left?


These people are so consistently predatory that the director of the federal Consumer Financial Protection Bureau has denounced Wells’ “rinse-repeat cycle of violating the law” and imposed nearly $4 billion in penalties. That follows the $3 billion penalty imposed by the Department of Justice and SEC two years ago. The latest crimes involve illegal repossession of people’s homes and cars, on top of profitable and illegal overdraft fees.

Ethan Wolf-Mann chronicled the complete list of Wells Fargo scandals for 2016-2019, where the firm managed a rigorous pace with nearly one scandal per month. The Congressional Research Service covers the same time range in a less engaging style. The FinanChill blog extended the scandal roster back to 2010.

The “lather-rinse-repeat” cycle mentioned above is almost reassuring in its constancy: combine rapacious impulses and a near-total disregard for the need for internal control structures, screw the people who’ve entrusted their financial security to you, get caught, flop about, then pay another couple billion in penalties while promising that this time is really is THE NEW Wells Fargo, then repeat. While other firms have been more egregious, none of them have survived.

If you search “Wells Fargo” at MFO, you’ll find more than 500 mentions of the firm. Many are from the MFO Discussion Board … and well more than half appear to highlight the firm’s scandals.

We’re slowly catching up with Roman building technology.

There are three things you need to know about concrete.

  1. We use mountains of it. Concrete is the most widely used material on the planet. We use 14 billion metric tons of it each year. That includes 3-4 billion tons of cement (the stuff that holds it together, known as “clinker”) and 10 billion tons of aggregate (the rock and sand that make up the body. Since the start of the industrial revolution, we’ve poured over 900 billion tons of the stuff.
  2. It’s not very good. Our concrete tends to crack and crumble; it’s almost impossible to make long-lasting repairs, and so it’s got to be replaced all the time. (Do a quick check on your driveway. Notice your blood pressure on your drive to work as you dodge craters and creep through construction.) Nominally, a reinforced concrete structure might last 50-100 years, but the “economic life” of it, the tipping point on a repair-or-replace decision, is just 30 years.
  3. It is an unparalleled environmental disaster. We produce cement by burning rocks in kilns at 2,732 degrees; that process consumes 5% of all of the world’s energy, something like 9% of our industrial water use, and produces 8% of all of its greenhouse gas emissions. We produce aggregate by dredging sand and gravel from rivers and deltas, which plays havoc with water quality and the aquatic environment.

The curious thing is that Romans made what was, in many ways, better concrete than ours. Roman structures persist, structurally sound, after 1800 – 2000 years, and there’s no evidence that they’re near the end of their lives.

Grain of Roman concrete, with calcium and a big ol’ lime clast in red

The key is that Roman concrete, unlike ours, is self-healing. The Romans incorporated two substances into their concrete – volcanic ash and clast – that caused cracks to seal before the concrete was damaged. More importantly, the new “healed” sections of the concrete were stronger than the original. As a result, with time, Roman concrete becomes stronger and more impermeable. Ours becomes cracked, weaker, and crumbles.

Why so? In marine concrete, the volcanic ash used by the Romans would be exposed to seawater when it cracked. The seawater would dissolve part of the ash, but the resulting solution would form interlocking crystals that were stronger than concrete and impervious to water. In inland concrete, the clast – relatively big chunks of lime – functioned the same way. Traditionally, we thought the clast was inadvertent, the result of Roman carelessness. Hah, stupid us!

As soon as tiny cracks start to form within the concrete, they can preferentially travel through the high-surface-area lime clasts. This material can then react with water, creating a calcium-saturated solution, which can recrystallize as calcium carbonate and quickly fill the crack, or react with [volcanic] materials to further strengthen the composite material. These reactions take place spontaneously and therefore automatically heal the cracks before they spread … the team produced samples of hot-mixed concrete that incorporated both ancient and modern formulations, deliberately cracked them, and then ran water through the cracks. Sure enough: Within two weeks the cracks [in Roman concrete] had completely healed and the water could no longer flow. (“Riddle solved: Why was Roman concrete so durable?” MIT News, 1/6/2023)

We need to use less concrete. That occurs if (1) our concrete lasts longer, (2) our concrete is stronger, so we need less of it, and (3) we find a substitute for some applications. Good news: we’re making gains in all three.

Scientists have now discovered how to incorporate burnt coffee grounds into concrete, displacing traditional aggregate and making it 30% stronger in the process. We produce 60 million pounds of grounds each year, so that makes a substantial difference. (Chip and I alone could repave 53rd Street in Davenport.)

They have also discovered that incorporating graphene – a one-atom-thick honeycomb made of carbon – into concrete makes it “2.5 times stronger and four times less water permeable than standard concrete. It uses much less cement to deliver the desired strength. As a result, it is expected to reduce CO2 emissions by 30%” (Materials of the future: Graphene and concrete, 2023).

Other teams this year explored the potential of fungus (don’t go “yuck”!) as a building material. They call it “myocrete.” Mushrooms are just the surface manifestations of networks of ultra-strong roots, called mycelium, that can extend for miles. In a true science fiction moment, researchers have learned how to literally build fire-proof, lightweight walls (“The growing field of fungus in low carbon, sustainable building materials,” 8/3/2023). That sort of construction is central to the “Monk and Robot” science fiction duology, Prayer for the Wild-Built and A Prayer for the Crown-Shy. They are, between them, profoundly optimistic tales about our ability to work ourselves out of our current mess.

Still, other teams are working on creating self-healing concrete through embedding bacteria, which, when water reaches them, consumes the water and some of the surrounding concrete to protect new limestone, sealing the crack for good.

Best of all, concrete is a carbon sink. That is, concrete absorbs CO2 naturally for as long as it stands. If we can produce buildings with walls that will last centuries and don’t need to be enormously thick for strength, they will passively wick greenhouse gases out of the air for centuries.

Most wildfires are actually grass fires.

The horror of the fires in Maui – one of the five deadliest in American history – have furnished lead stories in the news worldwide. But as we mourn the losses from the hundreds of fires burning across Canada and the western US, we tend to lose sight of the fact that these aren’t primarily “forest fires.” They’re grass fires, often fueled by non-native grasses withered by drought. Estimated are that two-thirds of all wildfires, including those that spread to forests, are fundamentally burning grass.

Grass fires are particularly pernicious because they’re so hard to take seriously. “Your lawn caught fire? Seriously? Okay, I’ll grab a hose and …” That misplaced sense of familiarity is fatal. Fortunately, understanding that grass is the risk allows us – individually and collectively – to better anticipate and control a lot of the conditions that put us at risk.

Buying buy-write funds as a magic shield or not

Anxious investors look for magical solutions: wands, shields, and wizards. One source of that magic is the option-trading or buy-write funds. The shortest version is that the fund puts 95% of its assets in a traditional asset class and uses the remaining 5% to buy an insurance policy against loss.

The folks at the Leuthold Group wanted to check whether the promised magic in these 200 or so funds and ETFs is all that. Their conclusion, which I’ll quote in full, is that very few such funds provide a reasonable amount of downside protection coupled with a reasonable amount of participation in the market’s upside. Though a few, which they named, do.

The point, here, is not to grade buy-write funds as a thumbs-up or a thumbs-down. Rather, Reditus Emptor Caveat—a twist on the old Latin proverb—is our cautionary advice to “Let the Income Buyer Beware,” and reflects our objective to dig into the subtleties of this rapidly growing corner of the fund universe. We hope this analysis better equips investors to make sound decisions as to whether a buy-write strategy deserves a spot in their portfolio mix. From our perspective, the following are the most important takeaways.

    • Buy-write funds provide excellent current income but achieve that by selling away the upside for equities. This financial alchemy is not genius at work, just a simple conversion of capital gains into current income.
    • Buy-write strategies are not a substitute for equities in a bull market and may not provide the growth component that stocks bring to a balanced portfolio. Nor are buy-write funds a proxy for fixed income as a defensive haven during bear markets.
    • If these funds do not fill an equity or fixed income role, they must be evaluated as a distinctly different asset. How do investors decide if the skewed payoff is attractive? One simple test is to ask if you would be comfortable selling a naked put on the market. Because selling a naked put has the same return pattern as a covered call, if you are not at ease with the former, don’t let the eye candy of a 10% yield tempt you into the latter.
    • BXM uses a straightforward at-the-money approach. Newer offerings include variations on the strategy such as: (a) only selling calls on a portion of the underlying portfolio; or (b) adjusting the “moneyness” of the calls based on volatility or a target level of desired yield, which influences the amount of the upside sold away and the premium earned. Given the importance of price appreciation in a portfolio’s equity sleeve, we are partial to both of those modifications. We encourage investors interested in the covered call strategy to look for a product incorporating such design tweaks to boost the chances of achieving the twin goals of income and growth. (Scott Opsal, “Reditus Emptor Caveat,” 8/28/2023)

The full report was produced for Leuthold’s institutional clients, but if you’d like a copy, the folks at Leuthold will give you access to the full report if you send an email to [email protected] and mention Mutual Fund Observer.

Buying the ARK Innovation bandwagon in blue-and-white

The one-star, $7.4 billion ARK Innovation ETF (ARKK) remains curiously attractive to investors and “journalists” who featured it in 102 articles in August 2023 alone (from “ARK Fund is dead money” to “Best 3 actively managed ETFs to buy now,” with lots and lots of breathless “did you see what bold and visionary thing Cathie Woods just did????” stories in between). Money continues to trickle in.

The fund trails 100% of its peers over the past month … but leads 98% so far this year … but trails 100% over the past three years. They’ve managed the feat by placing in the top 1-2% of funds in 2017, 2020, and 2023 (through August). And the bottom 1% of funds in 2021 and 2022. In its short life, it has posted single-year gains of 87% and 153% but also single-year losses of 23% and 67%.

Since inception, ARKK has outpaced the S&P 500 by 0.2% per year (11.9% versus 12.1%)  …with double the volatility, hence half of the risk-adjusted returns.

If you’re an investor in ARKK today, what are the chances you’ve made money? Here’s a simple way of understanding the improbability of that. ARKK’s current NAV is the dashed line. If you bought ARKK only when it was lower than today – those little white spaces in 2018 and over the past year, you’re in the black. If you bought anywhere in the blue zone, you’ve lost. All purchases from 2019 through the middle of 2022 are losers.

Morningstar’s “investor returns” calculations suggest that ARKK investors have, on the whole, been killed by the fund. The returns seen by investors, who tended to buy high, trail the fund’s raw returns since inception by more than 30% (Why ARKK Shareholders Are Still Underwater, 6/5/2023).

Our recommendations remain the same and are embedded in all of MFO’s metrics: do not chase returns, do not invest in high-vol products, do not place more money at risk than you can afford to lose.

The Corporate Green Conundrum rolls on.

Vanguard joined BlackRock in Green Flight, in this case, from collapsing support for shareholder motions concerning ESG issues. At the same time, Biden’s landmark “Inflation Reduction Act” (IRA) has seen a huge upward revision in its impact on the federal deficit precisely because its provisions have seen unprecedented support from Corporate America.

That became an issue in the first Republican “debate” when Nikki Haley claimed that the green incentives in the IRA had failed. She was quickly fact-checked.

Source: Fact-Checking the First Republican Debate,, 8/23/2023

The IRA was initially scored as reducing long-term debt by $200 billion or so. It’s now seen as added more than a trillion to the debt, precisely because it’s corporate incentives are acting in exactly the way they were designed to.

Go green, Corporate America! Quickly. And, per our earlier note, concretely!

Morningstar named names.

Our final note is that Morningstar released a report that named which investment advisers took environmental issues seriously and which blew them off entirely. It is The Morningstar ESG Commitment Level: Our assessment of 108 asset managers (8/30/2023). Only eight advisors, in the US and overseas, stood out for the depth of their commitment:

Out of the 108 asset managers covered under the Morningstar ESG Commitment Level, we have awarded the highest honors to just eight. Robeco, Impax, Parnassus, Australian Ethical, Boston Trust Walden, Domini Asset Management, Affirmative Investment Management, and Stewart Investors all earn Morningstar ESG Commitment Levels of Leader.

The list of “not my problem” investors is far longer and includes American Century, Ariel, BNY Mellon, DFA, Dodge & Cox, Fidelity, GQG Partners, Janus Henderson, Schwab, Van Eck and Vanguard.

Bonus: Morningstar still favors EM investing

In an August analysis, they argue that Europe, banks, and emerging markets are the stock sectors with the highest forward-looking 10-year returns (3 Asset Classes That Still Hold Opportunities for Long-Term Investors, 8/16/2023). They foresee the broad US equity markets gaining 4.8% annually while banks, various European markets, and emerging markets exceed 10% per year.

Devesh checks in from vacation with a caution about TIPS

“Over the last four weeks, I have reduced my allocation to the 30-year TIPS bonds, and I am also a lot less sure about those bonds than I was at the start of the year. The reason for changing is rather simple. I thought I understood the bond market and waited long enough to buy at the right price.

But, observing price action over the past few months has made me realize that there is too much I don’t know. The biggest thing I am not sure about is how high yields can go and how low bonds can go. Is it credit risk, is it federal deficit magnitude, or is it the Fed not buying bonds like it used to? I cannot nail it down. Having realized this lack of conviction, I have switched about two-thirds of my TIPS position into short-dated T-bills.

  • Rule number one: don’t lose money.
  • Rule number two: never forget rule number one.”

Cheers from the beach, Devesh.

Rupal on the move

Rupal Bhansali is leaving Ariel to launch her own firm. We have no idea why, but it seems sudden. Ms. Bhansali stepped down as manager of Ariel Global and Ariel International on August 31. Between them, the funds have over $800 million in assets. Bhansali will remain as a consultant until February.

She will be succeeded by Henry Mallari-D’Auria, who joined the firm from AllianceBernstein in April, bringing along five associates. He was the head of emerging markets for Ariel until the announcement of Bhansali’s departure, at which point he became head of global and international equities for them. He was CIO for EM Equity Value to AllianceBernstein from 2002-2023.

Ariel Global is a four-star fund. Ariel International is vastly larger and has earned three stars. MFO Premium tracks Global against Lipper’s Global Multi-Cap Value peer group. Global has average returns (it trails the group by 0.2% APR) but substantially lower volatility and substantially higher risk-adjusted returns (Sharpe Ratio is 0.62 since inception versus the peer group’s 0.50). International tracks the International Large Core group, where it substantially trails its peers in returns, has substantially lower volatility, and comparable risk-adjusted performance.

Mr. Mallari-D’Auria ran a Europe-based EM hedge fund (Next 50) for AllianceBernstein. He manages two SMA strategies for Ariel (EM Value and EM ex-China Value). He also ran AB Emerging Markets Value Equity, which also appears to be a quarter-billion-dollar SMA strategy. That strategy earned three stars from Morningstar. Like the Ariel funds, it’s a value strategy that substantially trails its (non-value) peer group since inception. The gap is about 200 bps. But it’s not evident that he’s ever run a mutual fund before.

Rupal is a remarkable investor and thoughtful person. I’ve reached out to her via LinkedIn to see if she’ll chat in the month ahead about her plans.

Thanks, as ever …

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


david's signature

In Conversation with Rakesh Bordia, Portfolio Manager of the Pzena Emerging Markets Value Fund (PZIEX/PZVEX)

By Devesh Shah

Rakesh Bordia co-manages Pzena Emerging Markets Value Fund (“the fund”) with tenured co-managers Caroline Cai, Allison Fisch, and (recently added) Akhil Subramanian. The strategy has approximately $1.35 billion under management and has been around just since 2014. Investing in emerging markets has been no cakewalk for this window. The passive Vanguard FTSE Emerging Markets ETF (VWO), over the past 15 years, has earned just south of 3% annualized.

Pzena EM Value Fund has earned just north of 4% a year since its inception. The interesting part of capitalism is that there is always something going on. Since the pandemic lows, this fund has earned 23% annualized, almost double the VWO.

Lifetime Performance (April 2014 – July 2023)

  Annual return Max drawdown Standard deviation Downside deviation Ulcer
Pzena Emerging Markets Value 4.8% -38.0 18.9 12.6 16.1 0.19
Lipper EM Equity Peers 2.0 -41.4 18.8 13.2 18.0 0.08

Source: MFO Premium fund screener and Lipper Global Data Feed

A year ago, we had a series of long, detailed conversations with six of the industry’s best emerging markets managers, representing a variety of investment strategies and advisors from Causeway to Pzena. Those conversations led to two articles: Emerging Markets (EM) Investing in the Next Decade: The Game and Emerging Markets Investing in the Next Decade: The Players. At that time, he had made the case for the fund:  

  • People panic in EM far more than in DM. These panic moments create value opportunities in those countries where a great asset might be hit along with everything else.
  • We like to swoop in then, accompanied by deep research, value analysis, and long-term holding periods.
  • Many high-quality value businesses are trading at 10-15% FCF yield with good ongoing business models. But…
  • EM returns are very lumpy. This compelling valuation starting point means that stock returns are obvious, but the timing is always unclear in our business.

On a sleepy day in early August 2023, we got on a Zoom call, where I had a chance to pick Rakesh’s brain on what was working and why his fund’s performance was a solid 20% year-to-date in 2023.

“We were lucky,” he said humbly. “In a different comparison window, we wouldn’t look as good. End point bias matters when comparing funds and performance.”

It’s true that we are prejudiced and more likely to be interested in funds and managers where something is working than where it’s not. Winners see the ball differently, and the rest of us can always benefit by improving our game. Since we also know that the market has NOT generally been rewarding strategies in EM or Value, this fund’s performance matters even more. The combination of different and winner is too good to not investigate. This is the stuff real diversification is made of.

I share some themes of what Rakesh Bordia (RB) shared with me on the Zoom call.

RB: The story consists of 3 important ingredients: We are active investors in EM, Pzena’s research process is very deep, and we should talk about how our fund traversed the last many years and why that has continued to work for us.

[Let’s use a stock that Rakesh brought up – a Chinese company called Weichai Power, a 1.4% holding in the fund – to get a glimpse into their process.]

RB: Weichai is the largest heavy-duty truck engine manufacturer in China (among other industrial business in equipment, logistics, and supply chain services). In China, trucks have a lower shelf life. In the USA, a truck might be driven about 10 hours a day. In China, the same truck would be driven 15 hours a day in two shifts. Because it’s driven more, a truck in China needs to be replaced every seven years (compared to 10 years in the US).

The fund managers are aware that the Chinese GDP is slowing and the economy is maturing. However, looking at the replacement demand for trucks over the next ten years already makes the stock cheap. If the GDP grows anything more than the 3% of mature economies, the business is very attractive. Plus, there is a European business that has upside potential.

Pzena’s sweet spot is bad macro + company-specific issues, leading to a sharp sell-off in the stock. We want to find cheap businesses where there are NO CATALYSTS immediately in sight. We want opportunities where 3-5 years might be required to turn things around. In EM, management and governance changes take a lot of time.

The Seth Klarman interlude: new edition of Security Analysis, classic investing insights

Graham and Dodd’s Value Investing Bible – Security Analysis – just released a 7th edition. Seth Klarman, the founder and portfolio manager of hedge fund Baupost, plays the role of Editor. This is a must-read for any serious investor because of the cover chapters written by excellent investors like Klarman himself, Todd Combs of Berkshire Hathaway, Howard Marks, and others. Seth Klarman rarely talks in public, but in conjunction with the book release, he did a long podcast with Ted Seides. The Capital Allocators Podcasts are phenomenal listening material, and this one with Klarman did not disappoint.

If we listen closely to what he said and what he wrote in the cover chapter for Security Analysis, Klarman talks about his value investing hedge fund process. This was an important learning moment as it highlighted the difference between what Pzena and Baupost are trying to do.

Both are successful value investors, but Baupost needs a catalyst along with value.

Pzena being long-only money may look for value opportunities with no immediate catalysts in sight. In fact, to them, that’s the sweet spot because those stocks would be untouchable for hedge funds.

RB: Weichai took several months of research. They have the highest market share in China. We looked into the risks of hydrogen and EV batteries. Hydrogen is at least ten years away. Weichai has a great Balance sheet. Their construction and forklift divisions are gaining tremendous market share. Europe + macro + engine demand can all improve, and you are not paying for any of it. Once we determined that there was value, we did lots of research and scenario analysis before initiating the position. One cannot just look at trucking in the US and assume that’s how it will be replicated globally. Fundamental research shows the nuances and thus the opportunities.

RB: It’s not enough for the stock to just be cheap. Enormous research goes into avoiding value traps. We look for a $1.5 Billion minimum market cap. All investment decisions require unanimous agreement among the managers.

Discipline: To us, it is always “what you are paying vs. what you are getting.” We are never, ever, going to be out-researched. The firm’s process has been disciplined since 1995 as deep value investors. The EM team has been together for about seven years now, with very long-tenured members serving as portfolio managers. In EM, more than anywhere else, a long-term waiting period for your holdings is important.

Skirting China: From 2017 to 2019, Chinese equities were most loved in EM, and mega tech Chinese names could do no wrong. Our goal is to find great businesses at cheap valuations, and we could not find many businesses to buy in China. Despite their huge weights in the EM Indices, we avoided stocks like Tencent and Alibaba. When China was 42% of EM Equities, our allocation was only 17%. When clients questioned this, our explanation was that those businesses were priced for perfection. We were also worried about political and regulatory risks. We got a lot of scrutiny for our Chinese underweight (but no money was pulled).

The Yin became Yang: In 2021-2022, Chinese stocks were down 30%, while the Rest of EM was up 15%. We benefitted from being out. After the washout, Chinese businesses started screening attractive again. While the EM Index Chinese weights have gone down (ed note – from 42 to 32%), Pzena’s EM fund weight has gone up to 27%.

[The conversation was much longer with lots of insight into EM indices, US stocks, and cap-weighted indices. One particular point stands out about passive investing.]

RB: Think of a large growth stock in US indices in 2018 vs. 2022. In 2018, let’s say the stock had an EPS of 10 and a market cap of 100. In 2022, the stock still has an EPS of 10 but a market cap of 400. The passive index has a 4X investment in that stock in 2022 compared to 2018. Overall, passive is pro-cyclical. For many investors, the true way to make money is by betting on countercyclical investments. That is, buying something truly out of favor for much cheaper than you can buy it in an efficient world. The curse of the investment management industry is that it forces us to be index huggers.

Pzena’s managers are pure stock pickers and remarkably successful ones

Pzena shared an attribution report with MFO, a report they would usually share with potential investors. The simple takeaway from that report was that Pzena’s returns come not from choosing countries and sectors within EM but pure stock selection. They are stock people. Process people. And that’s all they do — day in and day out. It’s important to understand this as we think about why it makes sense to trust some active managers with our investments.

So, what do the results for being EM + active + deep value Pzena style look like? To compare (yes, yes, I know), we have here three assets: the SPDR S&P 500 ETF (SPY), the Vanguard FTSE Emerging Market ETF (VWO), and Pzena’s EM Value Fund (PZIEX) over the last three years. As you can see with the purple line, PZIEX outperformed both the S&P 500 and VWO. It beat the passive EM by close to 46% total return and even beat the mighty S&P 500 by more than 10% points over that period.

RB: Investors recognize and trust Pzena’s process, which is why we have been receiving more than our fair share of inflows as other managers in the EM world are going through hiccups.

[I asked him how he would manage his own money in the future, advice for our readers.]

RB: I would find two good Value investors and two good Growth investors. I would want them to be consistent and disciplined with their process across time.

In Conclusion

 In the last few months, we have sat down with a series of value-oriented managers. Moerus, Aegis, Seafarer, and now Pzena. Process and stock selection are incredibly important to these managers. Pzena does what it does – deep value investing. Many investors no longer want to be in EM. That’s fine because of the performance of passive EM indices. But funds like Pzena’s should at least make one pause and think about one’s conviction to not be invested in EM equities. I am an investor in Pzena’s EM fund.

Evaluating Tax-Exempt Funds

By Charles Lynn Bolin

With yields at high levels and inflation falling, I sold a poor-performing stock to buy two Tax-Exempt bond funds. In this article, I look at municipal money market and bond funds for tax-efficient accounts. I began this search by looking at funds that are available at Fidelity or Vanguard with no transaction fees. I further based the selection on both longer and shorter performance relative to peers, Fund Family Rating, Fidelity Fund Picks, and Morningstar Ratings among other factors.

This article is divided into the following sections:


Municipal bonds (and funds) are exempt from federal taxes. J.B. Maverick describes in “How Are Municipal Bonds Taxed?” at Investopedia some aspects of taxes on municipal bonds. The key points are:

Municipal bonds are debt securities issued by state, city, and county governments to help cover spending needs.

From an investor’s perspective, munis are interesting because they are not taxable on the federal level and often not taxable at the state level.

Munis are often favored by investors in high-income tax brackets because of the tax advantages.

If an investor buys the muni bonds of another state, their home state may tax interest income from the bond.

It is beneficial to check the tax implications of each specific municipal bond before adding one to your portfolio, as you might be unpleasantly surprised by unexpected tax bills on any capital gains.


Financial Planners try to balance multiple goals, which may include income security, transferring inheritance, gifting, and/or taxes. One factor that impacts me is the desire to convert a Traditional IRA to a Roth IRA in a tax-efficient manner (2023 Tax Rates). The Tax Cuts and Jobs Act (TCJA) of 2017 will expire (sunset) at the end of 2025, and taxes are likely to revert higher in 2026. This creates a window of opportunity for me while deferring social security, and my income is low.

Medicare Premiums are based on Modified Adjusted Gross Income levels, which include non-taxable Social Security income and tax-exempt interest. I calculated a target amount for a Roth Conversion to balance taxes with higher Medicare premiums.

I also ran a break-even analysis to determine that family social security benefits will be higher if I begin drawing benefits at age 69 instead of deferring until I reach age 70. The reason is that my wife falls under the Social Security Government Offset Provision (GOP), which reduces her Spousal and Survivor benefits by two-thirds. She can only draw spousal benefits once I have started drawing mine, and they are based on my full retirement date and don’t include a higher amount for me deferring until age 70.

These factors combined are an incentive to keep taxable income low, and tax-exempt funds are part of my financial plan. As a final note, I have already matched fixed-income ladders with withdrawal needs such as Required Minimum Distributions for Traditional IRAs.


The forecast from the Conference Board calls for a recession, while the Philadelphia Fed Survey of Professional Forecasters implies a “soft landing” with slowing growth. Real Consumer Spending accounts for about seventy percent of GDP and has been relatively flat for the past two years while government expenditures have been rising and helped buoy the economy. Whether the US experiences a “soft landing” or a recession remains to be seen, but growth is likely to slow and market volatility to increase. The New York Federal Reserve estimates the probability of a recession occurring during the first seven months of 2024 to be higher than fifty percent based on the yield curve.

Figure #1: Real GDP Estimates

Year Quarter Conference Board Philadelphia Fed Reserve Survey
2023 Q2 2.4 2.4
Q3 1.3 1.9
Q4 -1.0 1.2
2024 Q1 -0.8 1.1
Q2 1.0 1.0
Q3 2.1 1.3

Source: Conference Board, Philadelphia Fed Survey of Professional Forecasters

Easy monetary policy has driven up asset prices. Over the past decade, there have been so many reasons presented describing why the stock market was not overvalued, such as low interest rates and inflation. I have incorporated some of these methodologies into my Valuation Indicator, where +1 is very favorable, and -1 is very unfavorable. With money market funds paying 5% and intermediate Treasuries paying over 4%, bond funds continue to be attractive relative to stocks, in my opinion. Of course, investors should maintain diversified portfolios.

Figure #2: Author’s Valuation Indicator

Source: Author Using St. Louis Federal Reserve and S&P Global

Stocks outperform bonds over sufficiently long periods of time. I prefer a tilt toward bonds over the intermediate term because of a likely economic slow-down or recession, high equity valuations, and high yields with falling inflation.


Tax-exempt money market funds may be suitable for investors concerned about taxes, particularly when rates are rising, as well as for meeting short-term expenses. Since rates appear to be plateauing, longer-term funds might be better located in bond funds with longer durations.

Fidelity Tax-Exempt Money Market Fund (FDEXX) has a seven-day yield of 2.51%, while the premium version (FZEXX) has a seven-day yield of 2.99%. The Vanguard Municipal Money Market Fund (VMSXX) has a seven-day yield of 3.15%. By comparison, Treasury money market funds like FZFXX have a seven-day yield of nearly 5%. Tax-exempt funds are more applicable to those in higher income brackets.

Table #1: Money Market Tax-Exempt (YTD)

Source: MFO Premium data screener, Lipper global data feed


Short-term municipal bonds will generally be less volatile than bond funds with longer durations. Currently, they are benefiting from high yields from an inverted yield curve. Yields on Treasuries with durations less than two years are generally higher than five percent. These will benefit to a small extent as yields start to normalize. Yields on these short-term municipal bond funds range from 2.87% to 3.46%.

Table #2: Municipal Short Debt (YTD)

Source: MFO Premium data screener, Lipper global data feed


Short-intermediate term bond funds may be suitable for someone who does like the volatility of higher duration bond funds.

Table #3: Municipal Short-Intermediate Debt (YTD)

Source: MFO Premium data screener, Lipper global data feed


Yields on intermediate bonds are lower than most short-term bond funds because of inverted yield curves. Buying intermediate bond funds may be beneficial for investors wishing to lock in yields for longer periods and will benefit more than short-duration bond funds when yields start to fall, as happens when the economy slows. This is one of the Lipper Categories that I am most interested in.

Each of the Municipal Intermediate Funds shown in Table #4 are quality funds. USATX is available at Fidelity with a transaction fee. Vanguard’s VWITX has an expense ratio advantage, followed by MMIT. For convenience in an account at Fidelity and low expense ratio, I like FLTMX and MMIT. For long term performance, I like EALTX.

Table #4: Municipal Intermediate Debt (YTD)

Source: MFO Premium data screener, Lipper global data feed


General & Insured Municipal Debt Funds are those that generally invest in the top four credit ratings. I favor this category in this environment, in addition to intermediate bond funds. Again, Table #5 contains quality funds. For a Fidelity account, I favor FTABX for its long-term performance and for its low fees, followed by TAXF.

Table #5: Municipal General and Insured Debt (YTD)

Source: MFO Premium data screener, Lipper global data feed


Table #6 and Figure #3 are comparisons of the Municipal Intermediate and General & Insured Debt funds that I identified in this article.

Table #6: Comparison of Author’s Short-Listed Funds

Source: MFO Premium data screener, Lipper global data feed

 Figure #3: Comparison of Author’s Short-Listed Funds

Source: MFO Premium data screener, Lipper global data feed

For tax-exempt bond funds in a Fidelity account, I favor the Fidelity Tax-Free Bond Fund (FTABX) and American Century Diversified Municipal Bond ETF (TAXF). FTABX has a minimum investment of $25,000. FLTMX is a good alternative with a lower minimum investment.

Closing Thoughts

As a result of writing this article, I invested in Fidelity Tax-Free Bond Fund (FTABX). I also bought a single-state municipal bond where I live because interest will be deductible from state income taxes.

Artisan International Explorer (ARDBX/ARHBX)

By David Snowball

Objective and strategy

The investment team seeks to invest in high-quality, undervalued businesses with the potential for superior risk/reward outcomes. The investment universe is generally non-US equities with market caps below $5 billion. The portfolio is typically 25-50 holdings, with individual holdings capped at about 10% and cash generally under 15%.


Artisan Partners, L.P. Artisan is a remarkable operation. They advise the 21 Artisan funds, as well as a number of separate accounts. Artisan Partners is organized into eight autonomous investment teams, each responsible for a specific strategy (Growth, Global Equity, US Value, International Value, Global Value, Sustainable EM, Developing World, and Credit plus Antero Peak and EMsights Capital groups), and each is given logistical support from the central operations team. Their management teams are stable and invest heavily in their own funds. Artisan manages about $129 billion in assets for 272 clients, including $32 billion for non-US citizens (per Form ADV, 3/31/2023).

Morningstar considers them an “above average” advisor, with special recognition of the managers’ willingness to close funds to new investors in order to protect existing ones: “Capacity management has been a strong point here, with more than half the firm’s lineup having been closed to new investors when the managers deem fit.” Currently, four of 21 funds, including International Value, are closed to new investors.


Beini Zhou and Anand Vasagiri. Both Zhou and Vasagiri were trained as Artisan analysts on the International Value team by David Samra (2005-12 and 2007-10, respectively) before talent and ambition led them to leave the firm in order to lead their own portfolios. Both have 18 years of experience.

Beini Zhou, CFA, is a co-portfolio manager for the Artisan International Small Cap Value Strategy. Prior to returning to Artisan Partners in September 2020, Mr. Zhou was a portfolio manager at Matthews Asia, where he managed the Emerging Markets Equity and Asia Value Strategies.

Anand Vasagiri is a co-portfolio manager for the Artisan International Explorer Strategy. Prior to returning to Artisan Partners in September 2020, Mr. Vasagiri was co-head and portfolio manager of the Global Small Cap Strategy for Paradice Investment Management, an Australia-based adviser launched by another Artisan alumnus, from 2010 to 2019.

David Samra plays a supporting role as Managing Director; he has no day-to-day responsibilities but works with the team as a mentor, advisor, and sounding board. Mr. Samra leads Artisan’s International Value Team, manages the (closed) International Value Fund, and has 30 years of experience. Since its inception, Mr. Samra’s International Value Fund has trounced its peers.

Comparison of Lifetime Performance (Since 10/2002 – 07/2023)




Artisan International Value 11.6 -47.0 38 15.8 10.2 10.4 0.65 1.01 0.99
International Large-Cap Value Category Average 7.3 -56.0 95 17.4 11.9 17.7 0.35 0.51 0.37
S&P 500 10.8 -51.0 53 14.8 9.9 12.0 0.64 0.96 0.79

The discipline that Mr. Samra practices is the one that he taught to Messrs. Vasagiri and Zhou and which is practiced across the International Value team.

Strategy capacity and closure

Artisan is very good at closing funds before they become unmanageably large. The managers view this as a capacity-constrained strategy but are understandably reluctant to get pinned down to a particular number.  

Management’s stake in the fund

Artisan reports that all three of the portfolio managers have seven-figure sums invested in the strategy, which translates to a material percentage of net wealth for Mr. Zhou and Mr. Vasagiri.

Opening date

May 16, 2022. The fund embodies a strategy that was launched on November 1, 2020.

Minimum investment

By prospectus, $250,000 for Advisor, $1 million for Institutional. At Schwab, Advisor shares are available for $2,500 in a regular account and $1,000 in a tax-advantaged one. Other online brokerages have similar arrangements for the fund.

Expense ratio

1.41% for Advisor and 1.36% for Institutional on fund assets of $80 million. The total AUM for the Artisan International Explorer strategy as of 7/31/23 was $213 million, including the fund plus a private fund and $101 million in separate accounts.


There are many reasons to distrust active fund management.

There are even more reasons to trust Artisan.

Most active managers pursue a losing strategy: they anxiously assemble sprawling portfolios of the same large cap US stocks as hundreds of their peers. By our count, 720 funds and ETFs are largely or entirely devoted to US large cap stocks. When 720 funds are all chasing the same 700 large cap stocks, you have “a crowded trade.” How crowded? By recent count, 1020 funds and 590 ETFs own Apple stock. It’s impossible to expect exceptional gains when a thousand analysts are dissecting, and a thousand managers are bidding upon, the same stock.

Artisan is doing the opposite. Managers Zhou and Vasagiri started with the question, “Where is there the opportunity for exceptional gains?” Their research led them to the world’s least crowded trades: international small- and micro-cap stocks. Their investable universe is the 52,000 or so companies with market caps under $5 billion. It is safe to say that more analysts follow Apple than all international small caps combined. When the team meets with company management, they are sometimes greeted with surprise; when they ask about the last time a stock analyst spoke with them, the answers range from “months ago” or “a year ago” to “I don’t recall one ever.” Even index funds don’t find them; by Mr. Vasagiri’s estimation, only about 8% of their investable universe makes it to the “all-world” index. That utter lack of coverage creates opportunities for mispricing.

The managers were both trained by David Samra, one of Artisan’s senior members, who they worked for as analysts in the 2005-2012 window. Young and ambitious, they left Artisan to take the discipline to their own funds (at Paradice and Matthews Asia), succeeded, and then returned in September 2020 to launch their own strategy. They launched this strategy within about eight weeks.

The strategy is straightforward: find a few high-quality firms that are substantially undervalued in light of their growth trajectories. Buy them. Engage regularly with management. Sell if conditions change; otherwise, hold on to them for the long term.

The distinctions in the strategy carry several implications:

  1. It eschews traditional valuation metrics in favor of an intrinsic value of calculation, which means that it might look like a growth portfolio from the outside.
  2. It is substantially more concentrated than its peers, so the importance of getting each individual position right is magnified.
  3. It is sector, valuation metric, and region agnostic, so it might be substantially out-of-line with its peers. Its current portfolio, for instance, has a much lower market cap, much less exposure to Japan and utilities stocks than its peers, and no exposure to energy and banks, but much more exposure to Latin America, high-quality names.
  4. It requires more human judgment and interaction than you might see in larger, larger cap sprawling portfolios. One challenge for the managers here is figuring out who really runs the businesses they’re investing in, which might be some combination of senior family members whose names are not necessarily on the door. Having identified them and their vision, the managers need to track management dynamics, understand them, and occasionally influence them.
  5. It is substantially capacity constrained because returns are driven by the performance of small, and sometimes very small, companies. No matter how well the stock of your Indonesian department store chain or Indian credit ratings agency performs, they are too small to make a difference in a large fund’s performance, and they trade too lightly to make it past an index fund’s liquidity screens. In consequence, the gains in this mispriced corner of the market are best harvested by small, active funds.

All of which the managers are trained to handle and all of which they (and, famously, Mr. Samra) have handled. Short track records are deceptive, but readers should know that:

  1. from inception through August 2023, the fund has outperformed its Morningstar international SMID blend peer group, with a lifetime gain of 8.9% against their peers 5.5%.
  2. from inception through July 2023, the fund has underperformed its Lipper International Small / Mid-Cap Value peer group.
  3. from inception through June 2023, the fund has roughly tripled the returns of its MSCI AC World ex-US Small Cap Index benchmark. That reflects both the strength of the strategy and the weakness in the index’s design.
  4. from inception through June 2023, the strategy has more than doubled the returns of its MSCI AC World ex-US Small Cap Index benchmark. Remember, the “strategy,” offered in high minimum accounts, was launched about 18 months before the fund.

There are always reasons for investors to approach new options with curiosity and skepticism. Skeptics might reasonably note that the team has not managed together for a long period, and neither the fund nor the strategy has yet established a three-year record.

Bottom Line

Artisan International Value Strategy works. Demonstrably, repeatedly, over time, and across market cycles. Mr. Samra and his colleagues have demonstrated that at the huge, closed Artisan International Value Fund since 2002. In Artisan International Explorer, you get exposure to what International Value was in its first years: a small, agile portfolio that can benefit from positions in small, obscure, badly mispriced stocks.

The team here has a 50,000+ stock universe, but they do not need to assess 50,000 stocks. They need to find 25-50 stocks (o.05% of its universe) that are substantially mispriced, and they need to make ongoing, intelligent judgments about those few stocks. That seems a manageable challenge.

Artisan’s record in launching new funds is nearly unparalleled. The firm’s screening of teams interested in becoming Partners is rigorous, with the vast majority failing the firm’s “potential category-crusher” threshold. Of the 16 Artisan funds with a record of at least three years, 13 have outperformed their peers since inception (through July 2023) in total returns and 12 in risk-adjusted returns, as measured by the Sharpe ratio.

Investors looking for intelligent eclecticism and a strong family should add Artisan International Explorer to their due diligence list.

Fund website

Artisan International Explorer

Notable Young ETFs

By Charles Lynn Bolin

Younger funds often excel due to technical advantages, innovation, and/or management. For this article, I sifted through over a thousand actively managed Exchange Traded Funds to find thirty-three funds that are less than five years old and have performed better than their peers over their respective lives. Are these the success stories of the future?

One of my favorite Lipper Categories is the Flexible Portfolio because managers have the ability to invest across asset classes according to market conditions. Of these young funds, Leuthold Core ETF (LCR) in the Flexible Portfolio Category stands out for early performance in this turbulent market. I included Fidelity New Millennium ETF (FMIL) and American Century Avantis All Equity Markets ETF (AVGE), which I have written about in order to monitor their performance.

This article is divided into the following sections:

Young ETF Universe

There are over a thousand actively managed exchange-traded funds that are less than five years old as shown in Assets Under Management versus Age in Years (Figure #1). The difficulty in identifying the best-performing funds lies in the lack of historical performance data of the youngest funds. I used the growth of Assets Under Management to reflect investor sentiment and Fund Family Rating initially to help pare down the list. I then used return relative to peers by age group to further reduce the list. As a final check, I used the Morningstar Analyst Rating about Process, People, and Parent.

Figure #1: Young Funds Assets Under Management vs Age

Source: Author Using MFO Premium database and screener

Four-Year-Old Funds

Fund Spotlight:  Vanguard ESG US Stock ETF (ESGV)

ESGV only gets two stars from Morningstar but a Silver Analyst Rating based on a high conviction that it will outperform over a market cycle.  ESGV and NTSX have over 30% allocated to the technology sector while IUS has 23%.

Table #1: Four-Year-Old Actively Managed ETFs (July 2023)

Source: Author Using MFO Premium database and screener

Figure #2: Four-Year-Old Actively Managed ETFs

Source: Author Using MFO Premium database and screener

Three-Year-Old Funds

Fund Spotlight: Fidelity New Millennium ETF (FMIL)

FMIL gets five stars from Morningstar but only a Neutral Analyst Rating. JPMorgan Equity Premium ETF (JEPI) gets four stars from Morningstar. Leuthold Core ETF (LCR) is the Fund Spotlight later in this article. LCR gets four stars from Morningstar and a Gold Analyst Rating. Morningstar gives AVUS five stars and an Analyst Rating of Silver.

I wrote Fidelity New Millennium ETF (FMIL) in the MFO September 2022 newsletter. The fund is still an outstanding performer but has not yet attracted much attention from investors. JPMorgan Equity Premium ETF (JEPI) is an outlier in that it has attracted the most assets under management. Leuthold Core ETF (LCR) deserves consideration for its above-average returns and risk-adjusted returns as measured by the Martin Ratio for the Flexible Portfolio Category. FMIL has 29% allocated to the technology sector, while FBCG has about 50%, and AVUS has 23%.  The international funds (AVDE and DMXF) have low allocations to technology.

Table #2: Three-Year-Old Actively Managed ETFs (July 2023)

Source: Author Using MFO Premium database and screener

Figure #3: Three-Year-Old Actively Managed ETFs (July 2023)

Source: Author Using MFO Premium database and screener

One and Half-Year-Old Funds

Fund Spotlight:  JPMorgan Active Value ETF (JAVA)

JAVA is too young to get a Morningstar star rating but gets an Analyst Rating of Gold. It has a low allocation to the technology sector.

Table #3: One and a Half Old Actively Managed ETFs (July 2023)

Source: Author Using MFO Premium database and screener

Figure #4: One and a Half Old Actively Managed ETFs (July 2023)

Source: Author Using MFO Premium database and screener

Funds Still in Their Infancy (< 1.5 Years Old)

Fund Spotlight:  Capital Group Global Growth Equity ETF (CGGO)

CGGO gets an Analyst Rating of Gold from Morningstar. I wrote American Century Avantis All Equity Markets ETF (AVGE) in the MFO February 2023 newsletter. It is an actively managed fund of funds that I own and will buy more if the performance continues as I expect it will. AVGE does not have a high concentration in the technology sector.

Table #4: Infant (<1.5 Years Old) Actively Managed ETFs (Stats: Life of Fund)

Source: Author Using MFO Premium database and screener

Figure #5: Infant (<1.5 Years Old) Actively Managed ETFs

Source: Author Using MFO Premium database and screener

Best Year-to-Date Performance

The best-performing funds year-to-date, as measured by APR vs. Peer, are shown in this section. Metrics are for the life of the fund.

Table #5: Best Performing Actively Managed ETFs Year-To-Date (Stats: Life of Fund)

Source: Author Using MFO Premium database and screener

Figure #6: Best Performing Actively Managed ETFs Year-To-Date as of June 2023

Source: Author Using MFO Premium database and screener

Young Fund Shortlist

In reviewing the performance of the funds and Morningstar Analyst Ratings, I show the funds that make my short list of best performing actively managed young exchange-traded funds. These are on my Watchlist.

Table #6: Author’s Shortlist of Actively Managed ETFs (Stats: Life of Fund)

Source: Author Using MFO Premium database and screener

Figure #7: Author’s Shortlist of Actively Managed ETFs

Source: Author Using MFO Premium database and screener

Fund Spotlight: Leuthold Core ETF (LCR)

I chose to profile Leuthold Core ETF (LCR) because it is a high-performing young fund in the Flexible Portfolio Lipper Category, and Morningstar gives it four stars with an Analyst Rating of Gold. Leuthold Core Investment Retail (LCORX) is a twenty-seven-year-old Flexible Portfolio fund with an MFO Rating of “4” over its life. David Snowball wrote Leuthold Core Investment (LCORX/LCRIX) in the MFO June 2023 newsletter for those who want more information. Professor Snowball gives LCR a “David’s Take” of positive. LCORX has returned 7.9% over the past twenty-seven years and beaten peers by 0.7%. LCR tracks LCORX closely, as shown in Figure #8.

The principal investment strategies of the fund (LCR) are found in the prospectus:

The Fund is an actively-managed “exchange-traded fund of funds” and seeks to achieve its objective by investing primarily in other registered investment companies, including other actively-managed exchange-traded funds (“ETFs”) and index-based ETFs (collectively, “Underlying Funds”), that provide exposure to a broad range of asset classes. The Fund will not invest more than 25% in any Underlying Fund. The Underlying Funds may invest in equity securities of U.S. or foreign companies; debt obligations of U.S. or foreign companies or governments; or investments such as volatility indexes and managed futures. The Fund allocates its assets across asset classes, geographic regions, and industries, subject to certain diversification and liquidity considerations. The Fund’s investments in foreign countries may include exposure to emerging markets…

Table #7: Leuthold Core ETF (LCR)

Source: Author Using MFO Premium database and screener

Figure #8: Leuthold Core ETF (LCR) and LCORX

Source: Author Using MFO Premium database and screener

Closing Thoughts

My investment strategy has changed this year due to the availability of high yields on quality fixed income. I have created ladders of Treasuries, agency bonds, and certificates of deposits to lock in returns for low-risk investments. I began using Vanguard’s Personal Advisory Service in addition to Fidelity’s Wealth Management Service to manage longer-term portions of my investments. These changes in strategy shifted my focus from mixed-asset funds to well-managed equity funds in order to maintain a target stock-to-bond allocation of 50% within a range of 35% to 65%. I am currently near the 40% allocated to stocks.

At the moment, as fixed income in ladders mature, I look to extend the duration. In the future, I will monitor the following funds for when I want to increase allocations to equity: American Century Avantis All Equity Markets ETF (AVGE), Fidelity New Millennium ETF (FMIL), American Century Avantis US Equity ETF (AVUS), and JPMorgan Active Value ETF (JAVA).

Briefly Noted . . .

By TheShadow

The AXS 1.25X NVDA Bear Daily ETF underwent a 1-5 reverse stock split on or about August 14.

The Champlain Strategic Focus Fund is in registration. The fund invests primarily in securities of mid- to large-capitalization companies. Annual fund expenses will be 1.10% for the advisor share class and 0.85% for the institutional share class. The fund will utilize several portfolio managers with Champlain Investment Partners, LLC.

The GMO U.S. Quality ETF is in registration.  Expenses have not been stated. The investment strategy will be an actively managed exchange-traded fund that seeks to achieve its investment objective by investing primarily in equities of U.S. companies, which the adviser believes to be of high quality.  The investment team will consist of Thomas Hancock, Ty Cobb, and Anthony Hene.

Poster ET91 posted that the Osterweis’ Sustainable Credit and Short Duration Funds were referenced in its July 19, 2023 shareholder newsletter and that while both funds’ performance was not up to standards, there were some reasons behind the lackluster performance.  The markdown was due to two holdings:

The markdown in our portfolio this quarter can be almost entirely explained by two holdings. Both found themselves in truly unexpected restructuring negotiations, sparked initially by a lack of information and one or two indiscriminate sellers. However, that perception and the resulting lower prices opened the door for opportunistic investors to exploit the uncertainty. While we are limited in what we can discuss at the moment, we are actively engaged in both situations to make sure we get as much value back from these positions as we can under the circumstances… 

The shareholder letter further states,

…aside from these two positions, nearly all other positions contributed positively to performance, and for those few that had negative contribution, the impact was tiny…

We have adjusted and reaffirmed exposures in their other holdings. We did this with a singular focus of making sure our risk profile is consistent with our absolute return mindset… 

We will wait to see how their changes affect the next quarter results.

Changes at the top for TCW Fixed Income: Laird Landmann is retiring at the end of 2023, and Stephen Kane will depart at the end of 2024. Messrs. Landmann and Kane bear the titles “founding partner and portfolio manager” with regard to several MetWest fixed-income funds. Mr. Landmann appears responsible for $105 billion in assets, while Mr. Kane lopes with about $90 billion. That’s over half of the firm’s total assets. The TCW SAI reports that they are responsible for 22 and 19 funds, respectively. The larger funds directly affected are Metropolitan West Total Return Bond, TCW Core Fixed Income, Metropolitan West Low Duration Bond, and Metropolitan West Unconstrained Bond. Morningstar is stroking its chin, thoughtfully, about the fund’s Analyst Rating, especially in light of several other senior leaders in the past couple of years.

The Vanguard International Dividend Growth Fund is in registration. The fund will have an expense ratio of 0.54% and will be managed by Peter Fisher, who co-manages the Vanguard Dividend Growth Fund with Don Kilbride. The fund is expected to be launched in late 2023.


None noted.

Old Wine, New Bottles

Boston hedge fund Clough Capital Partners, a Boston hedge fund company, has acquired Changebridge Capital, an ETF firm founded by a former Clough manager in 2020. With the acquisition comes manager/founder Vince Lorusso and his Changebridge Select Equity and Changebridge Long/Short Equity ETFs. No sign of a name change.

The $468 million JPMorgan International Value Fund has been renamed the JPMorgan Developed International Value Fund.

The Vert Global Sustainable Real Estate Fund will be reorganized into an exchange-traded fund, which is expected to occur in the fourth quarter of 2023. The adviser believes it will provide numerous benefits to shareholders, including lower expenses, enhanced investor and financial intermediary access as an ETF, and greater tax efficiency. 

Closings (and related inconveniences)

The Blackrock Capital Appreciation Fund will be reorganized into the BlackRock Large Cap Growth Focus Fund, which will subsequently change its name to the BlackRock Large Cap Growth Equity Fund.  The reorganization is expected to occur during the fourth quarter of 2023.

The Brandes U.S. Value Fund will be liquidated on or about September 28.

City National Rochdale California Tax Exempt Bond Fund will be liquidated on or about October 16.

DoubleLine Funds will liquidate its Multi-Asset Growth and Real Estate and Income Funds on or about October 31.

The Janus Henderson Net Zero Transition Resources ETF will be liquidated on or about October 26.

The Janus Henderson Sustainable Multi-Asset Allocation Fund will be liquidated on or about October 19.

JPMorgan Asset Management plans to liquidate two ETFs and one mutual fund later this year.  JPMorgan ActiveBuilders US Large Cap Equity ETF goes first on September 21, followed by JPMorgan ActiveBuilders International Equity ETF departing on October 18. JPMorgan also plans to liquidate the JPMorgan Opportunistic Equity Long/Short fund. Assets across the board were too low to maintain the advisor’s interest.

The Long Cramer Tracker ETF will be liquidated on or about September 21. That’s just after its six-month anniversary. The ETF attempted to create a portfolio of Jim “The Screamer” Cramer’s daily stock picks. According to folks on the discussion board tracking the mess, the adviser now claims that the ETF wasn’t really an ETF; it was just a way to get Jim to engage with them. Frankly, it would have been cheaper to buy him a drink and tell him that his eyes are beautiful.

Meanwhile, the $3 million sibling ETF, which attempts to short Cramer’s picks (SJIM), stumbles along with neither assets, returns (in the red since the March ’23 launch), nor rationale for continuing.

NightShares 500 1x/1.5x ETF will be liquidated on or about September 8.

The Northern Engage360 Fund will be liquidated on or about October 27. Engage360 was an intriguing idea: the best way to have a socially responsible fund is to hire firms representing diverse communities, that is, renowned professional investors who were women or people of color. Nominally, two Northern Trust employees, who had no personal investment in the fund, were responsible for overseeing five sub-advisors: Boston Common Asset Management, Mar Vista Investment Partners, Ariel Investments, Earnest Partners, and Aristotle Capital Management. Returns trailed the peer group by 0.9% annually, and The Shadow notes on our discussion board that there has been frequent sub-adviser turnover. Assets remained small, and Northern pulled the plug.

The Pear Tree Axiom Emerging Markets World Equity Fund will be reorganized into the Pear Tree Polaris International Opportunities Fund. Completion of the reorganization is subject to receipt of approval by shareholders of the target fund.

Ziegler FAMCO Hedged Equity Fund will be reorganized into the DCM/INNOVA High Equity Income Innovation Fund. The reorganization is expected to occur on or about the close of September 29.