North Square Strategic Income (formerly Advisory Research Strategic Income), (ADVNX), September 2013

At the time of publication, this fund was named Advisory Research Strategic Income.

Objective and Strategy

The fund seeks high current income and, as a secondary objective, long term capital appreciation.  It invests primarily in straight, convertible and hybrid preferred securities but has the freedom to invest in other income-producing assets including common stock.  The advisor wants to achieve “significantly higher yields” than available through Treasury securities while maintaining an investment-grade portfolio.  That said, the fund may invest “to a limited extent” in high-yield bonds, may invest up to 20% in foreign issues and may write covered call options against its holdings.  Morningstar categorizes it as a Long-Term Bond fund, which is sure to generate misleading peer group performance stats since it’s not a long-term bond fund.


Advisory Research (ARI).  AR is a Chicago-based advisor for some of the nation’s wealthiest individuals, as well as privately-held companies, endowments, foundations, pensions and profit-sharing plans. They manage over $10.0 billion in total assets and advise the five AR funds.


Brien O’Brien, James Langer and Bruce Zessar.  Mr. O’Brien is ARI’s CEO.  He has 34 years of investment experience including stints with Marquette Capital, Bear Stearns and Oppenheimer.  He graduated with honors from Boston College with a B.S. in finance and theology.  He oversees four other AR funds.   Mr. Langer is a Managing Director and helps oversee two other AR funds.  Like Mr. O’Brien, he worked for Marquette Associates.  His career started at the well-respected Center for Research in Security Prices at the University of Chicago.  Mr. Zessar has a J.D. from Stanford Law and 11 years of investing experience.  Mr. Zessar also co-manages All-Cap Value (ADVGX). The team manages about $6 billion in other accounts.

Management’s Stake in the Fund

Mr. O’Brien provided a seed investment when the strategy was launched in 2003, and today has over $1 million in the fund.  Mr. Langer has around a half million in the fund and Mr. Zessar had between $10,000 and $50,000 in the fund.   

Strategy capacity and closure

They estimate a strategy capacity of about $1 billion; since they do invest heavily in preferred shares but have the ability to invest elsewhere, they view the cap as flexible.  Mr. Zessar notes that the few others open-end funds specializing in preferred shares have asset bases of $1 – 5 billion.

Opening date

December 31, 2012 after the conversion of one limited partnership account, Advisory Research Value Income Fund, L.P., which commenced operations on June 30, 2003 and the merger of another.

Minimum investment


Expense ratio

0.90%, after waivers, on assets of $167.9 million, as of July 2023. 1.15%, after waivers, for “A” class shares. 


Preferred stocks are odd creatures, at least in the eyes of many investors.  To just say “they are securities with some characteristics of a bond and some of a stock” is correct, but woefully inadequate.  In general, preferred stock carries a ticker symbol and trades on an exchange, like common stock does.  In general, preferred stockholders have a greater claim on a firm’s dividend stream than do common stockholders: preferred dividends are paid before a company decides whether it can pay its common shareholders, tend to be higher and are often fixed, like the coupon on a bond. 

But preferred shares have little potential for capital appreciation; they’re generally issued at $25 and improving fortunes of the issuing firm don’t translate to a rising share price.  A preferred stock may or may not have maturity like a bond; some are “perpetual” and many have 30-40 year maturities.  It can either pay a dividend or interest, usually quarterly or semi-annually.  Its payments might be taxed at the dividend rate or at your marginal income rate, depending.  Some preferred shares start with a fixed coupon payment for, say, ten years and then exchange it for a floating payment fixed to some benchmark.  Some are callable, some are not.  Some are convertible, some are not.

As a result of this complexity, preferred shares tend to be underfollowed and lightly used in open-end funds.  Of the 7500 extant open-end mutual funds, only four specialize in preferred securities: ADVNX and three load-bearing funds.  A far larger number of closed-end funds invest in these securities, often with an overlay of leverage.

What’s the case for investing in preferred stocks

Steady income.  Strategic Income’s portfolio has a yield of 4.69%.  By comparison, Vanguard Intermediate-Term Treasury Fund (VFITX) has a 30-day yield of 1.38% and its broader Intermediate-Term Bond Index Fund (VBIIX) yields 2.64%.

The yield spread between the fed funds rate and the 10-year Treasury is abnormally large at the moment (about 280 bps in late August); when that spread reverts to its normal level (about 150 bps), there’s also the potential for a little capital appreciation in the Strategic Income fund.

In the long term, the managers believe that they will be able to offer a yield of about 200-250 basis points above what you could get from the benchmark 10-year Treasury.  At the same time, they believe that they can do so with less interest rate sensitivity; the fund has, in the past, shown the interest rate sensitivity associated with a bond portfolio that has a six or seven year maturity.

In addition, preferred stocks have traditionally had low correlations to other asset classes.   A 2012 report from State Street Global Advisors, The Case for Preferred Stocks, likes the correlation between preferred shares and bonds, international stocks, emerging markets stocks, real estate, commodities and domestic common stocks for the 10 years from 2003 to 2012:


As a result, adding preferred stock to a portfolio might both decrease its volatility and its interest rate sensitivity while boosting its income.

What’s the case for investing with Advisory Research

They have a lot of experience in actively managing this portfolio.

Advisory Research launched this fund’s predecessor in 2003.  They converted it to a mutual fund at the end of 2012 in response to investor demands for daily liquidity and corrosive skepticism of LPs in the wake of the Madoff scandal. The existing partners voted unanimously for conversion to a mutual fund.

From inception through its conversion to a mutual fund, the L.P. returned 4.24% annually while its benchmark returned 2.44%, an exceptionally wide gap for a fixed-income fund.  Because it’s weakly correlated to the overall stock market, it has held up relatively well in downturns, losing 25.8% in 2008 when the S&P 500 dropped 37%.  The fund’s 28.1% gain in 2009 exceeded the S&P’s 26.5% rebound.  It’s also worth noting that the same management team has been in place since 2003.

The team actively manages the portfolio for both sector allocation and duration.  They have considerable autonomy in allocating the portfolio, and look to shift resources in the direction of finding “safe spread.”  That is, for those investments whose higher yield is not swamped by higher risk.  In mid-2012, 60% of the portfolio was allocated to fixed preferred shares.  In mid-2013, they were half that.  The portfolio instead has 50% in short-term corporate bonds and fixed-to-floating rate securities.  At the same time, they moved aggressively to limit interest-rate risk by dramatically shortening the portfolio’s duration.

Bottom Line

This is not a riskless strategy.  Market panics can drive even fundamentally sound securities lower.  But panics are short-term events.  The challenge facing conservative investors, especially, is long-term: they need to ask the question, “where, in the next decade or so, am I going to find a reasonable stream of income?”  With the end of the 30-year bond bull market, the answer has to be “in strategies that you’ve not considered before, led by managers whose record is solid and whose interests are aligned with yours.” With long-term volatility akin to an intermediate-term corporate bond fund’s, substantial yield, and a stable, talented management team, Advisory Research Strategic Income offers the prospect of a valuable complement to a traditional bond-centered portfolio.

Fund website

North Square Strategic Income.  SSgA’s The Case for Preferred Stock (2012) is also worth reading, recalling that ADVNX’s portfolio is neither all-preferred nor locked into its current preferred allocation.

SSgA’s Preferred Securities 101

2023 Semi-Annual Report

Fact Sheet

© Mutual Fund Observer, 2013. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.

Manager Changes, December 2021

Each month we track changes to the management teams of actively managed, equity-oriented funds and ETFs. That excludes index funds and most fixed income funds. The index fund exclusion is pretty straightforward: in a passive fund, the managers are interchangeable cogs whose presence or absence is almost always inconsequential to the fund’s performance.

Similarly, most bond fund managers have a very limited ability to add value. For instance, over the past ten years, the top-performing Core Bond fund in the Lipper universe outperformed its peers by just 1% per year with a virtually identical Sharpe ratio (0.98 for the top returning fund, 0.97 for the top returning the average fund). The best global income and flexible income managers outperformed by 3.5 and 2.4%, respectively, which is comparable to the margin between the best large-core equity fund managers and the pack.

This month, we noted just 37 funds Continue reading →

Inflation, Trends, and Market Manipulation

This past week has seen some significant market turmoil as the yield on 10-year treasuries climbed quickly to 1.5% while the S&P 500 dipped 2.5% on Thursday, February 25th. I show the Moving Average Convergence Divergence indicator below. The trends are short-term bearish. In this article, I focus on funds that lost less than a half percent on Thursday and were trending up over the past several months for clues on where to invest with the possibility of inflation rising.

This article is divided into four sections for those Continue reading →

As I Age

I won’t grow up,
I don’t want to wear a tie.
Or a serious expression
In the middle of July.
And if it means I must prepare
To shoulder burdens with a worried air,
I’ll never grow up, never grow up, never grow up
Not me,
Not I,
Not me!

Peter Pan

Several readers have asked that I expand on a comment I made about aging a few months ago. This is a hard article for me to write because it means looking at investing from a different perspective. The typical American works 30 to 50 years before retiring and must save enough to last another 20 to 30 years, or more. This means saving diligently and investing wisely while Continue reading →

Searching for Yield in the Coming Lost Decade

In this article, I look at Janus Henderson Flexible Bond (JANFX), BlackRock iShares Aaa – A Rated Corporate Bond ETF (QLTA), Carillon Reams Unconstrained Bond (SUBFX), BBH Income (BBNIX), T Rowe Price Multi-Strategy Total Return (TMSRX), Advisory Research Strategic Income (ADVNX), and Vanguard LifeStrategy Income Inv (VASIX) as potential income funds to own during a lost decade that starts with high valuations and low interest rates. The second section looks at why I expect the next decade to have low returns for equity and bonds. The third section looks at Risk to Reward comparisons for Continue reading →

Alternative and Global Funds during a Global Recession

I am selective in the analysts that I receive market commentary from. They are overwhelmingly cautious. The buzz word “FOMO or Fear Of Missing Out” is used to describe retail investors piling into markets. The quote that sums up my feelings best comes from Liz Ann Sonders of Charles Schwab in “High Hopes: S&P 500 Hits All Time High Amid Pandemic/Recession”, published on Advisor Perspectives.

I worry about the signs of froth in the market and among some behavioral measures of investor sentiment: not to mention traditional valuation metrics that are historically stretched. This is not an environment in which greed should dominate investment decisions; but instead one for discipline around diversification and periodic rebalancing…

This article looks at a brief Continue reading →

Briefly Noted

This is a first for us. Aspiriant Defensive Allocation Fund (RMDFX) will be reorganized as a newly created closed-end fund called (ready?) Aspiriant Defensive Allocation Fund that will operate as an interval fund.  The change should occur by the end of the first quarter of 2020.

Closed-end funds? Hard to remember that they’re alive and well. That slice of the industry originated in the 1890s and they’re sort of an open-end mutual/active ETF Continue reading →

Manager changes, November 2013

Because bond fund managers, traditionally, had made relatively modest impacts of their funds’ absolute returns, Manager Changes typically highlights changes in equity and hybrid funds.



Out with the old

In with the new



Advisory Research All Cap Value Fund

Brien O’Brien is no longer a manager

James Langer, Matthew Swaim, and Bruce Zessar remain



Advisory Research Global Value Fund

Brien O’Brien is no longer a manager

James Langer, Matthew Swaim, Jonathan Brodsky, Drew Edwards, and Marco Priani remain and are joined by Bruce Zessar.



Advisory Research International All Cap Value Fund

Brien O’Brien is no longer a manager

Jonathan Brodsky, Drew Edwards, and Marco Priani remain



Advisory Research International Small Cap Value Fund

Brien O’Brien is no longer a manager

Jonathan Brodsky, Drew Edwards, and Marco Priani remain



Advisory Research Strategic Income Fund

Brien O’Brien is no longer a manager

James Langer and Bruce Zessar remain.



AllianzGI Large Cap Growth Fund

Peter Goetz

The rest of the team remains.



ALPS/Kotak India Growth Fund

Harish Krishan is out.

Nitin Jain remains as the sole portfolio manager.



American Beacon Small Cap Value II Fund

Robert Milmore leaves the team

Patrick O’Brien joins the team



American Funds Intermediate Bond Fund of America

David Hoag is off the fund, but remains with the firm

David Lee and Fergus MacDonald will replace him on the team



American Independence Fusion Fund

Subadvisor Eddystone Capital is out, along with managers Francis Ledwidge and Timothy Voake

In house manager Robert Shea will manage the fund.



BBH International Equity Fund

Ian Clark and Kenneth Lyall leave the team

Hilda West joins the remaining team members.



Bishop Street Strategic Growth Fund

Hubert Goye and subadvisor BNP Paribas Asset Management are out.

Subadvisor, Columbia Management Investment Advisers, along with Todd Herget, Thomas Galvin, and Richard Carter, are in



BNY Mellon Asset Allocation Fund

Jeffrey Mortimer and Bernard Schoenfeld are out

Warren Chiang and Ronald Gala are in.



BNY Mellon Large Cap Stock

Jeffrey McGrew and Sean Fitzgibbon are out

Warren Chiang and Ronald Gala are in.



Caritas All-Cap Growth

Brenda Smith is out, as the fund enters an Interim Investment Advisory Agreement with Goodwood Advisors.  Goodwood???

Ryan Thibodeaux and Joshua Pesses are the managers from Goodwood.



Collins Alternative Solutions Fund

No one, but . . .

Seven Locks Capital Management becomes the sixth subadvisor to the fund



Columbia Acorn

Charles McQuaid is leaving the fund, but remaining with the firm.

Rob Mohn will continue on and will be joined by David Frank in January



Columbia Acorn USA

No one, but . . .

William Doyle will join manager, Robert Mohn, in January



Columbia Thermostat

No one, but . . .

Charles McQuaid will be joined by Christopher Olsen in January



Consulting Group Capital Markets Funds International Equity Investments

Virginie Maisonneuve

The rest of the team remains.



Dreyfus Select Managers Small Cap Growth Fund

No one, but . . .

Granite Investment Partners and Rich Hall James & Assoc. become new subadvisors to the fund.



Dunham Emerging Markets Stock

David Schaen

Anthony Craddock, Peter Hill, and Eric Leve



Dunham Small Cap Value

Troy Dayton and Kris Herrick

John Albert and Kevin Finn



Eaton Vance Dividend Builder Fund

Judith Saryan is leaving

Charles Gaffney carries on alone



Eaton Vance Greater China Growth Fund

No one, but . . .

May Ling Wee joins Pamela Chan as a comanager.



Eaton Vance Multi-Cap Growth Fund

Gerald Moore, G.R. Nelson, and Kwang Kim are out.

Yana Barton and Lewis Piantedosi are in



Eaton Vance Small Cap Value Fund

Robert Milmore leaves the team

Patrick O’Brien joins team leader, Gregory Greene and and comanager, J. Bradley Ohlmuller



Eaton Vance Tax-Managed Multi-Cap

Gerald Moore, G.R. Nelson, and Kwang Kim are out.

Yana Barton and Lewis Piantedosi are in



First Eagle Gold Fund

The firm announced the death of manager, Rachel Benepe, who’d been on leave.

Comanager, Matthew McLennan, will take over full management duties.



First Western Short Duration Bond Fund

Greg Haendel has resigned

Barry Julien will continue on his own



Forward Credit Analysis Long/Short Fund

Subadvisor, Cedar Ridge Partners

PIMCo will be the new subadvisor, with Joe Deane and David Hammer at the helm



Gabelli Focus Five Fund

Elizabeth Lilly and Sarah Donnelly have resigned

Dennis Miller remains on the fund



GuideStone Funds Emerging Markets Equity

AQR Capital Management is out as a subadvisor, along with Jacques Friedman, Oktay Kurbanov, and Lars Nielsen.

Genesis Asset Managers and Genesis Investment Management remain as subadvisors, with Karen Yerburgh, Karen Royden, and Andrew Elder at the helm.



Ivy High Income Fund

Bryan Krug is leaving the firm to join Artisan Partners and form a new investment team.

William Nelson will take the lead



Jensen Quality Growth

No one, but . . .

Adam Calamar joins as comanager



Legg Mason Batterymarch Global Equity Fund

Michael McElroy is out.

Joseph Giroux joins Stephen Lanzendorf



Legg Mason Strategic Real Return

Michael McElroy is out.

Philip Smeaton joins the team



Litman Gregory Masters Smaller Companies Fund

Rikard Ekstrand has retired.

The rest of the team remains.



Northern Technology Fund

Matthew Peron is out

Sandeep Soorya joins remaining manager, Deborah Koch.



Old Westbury Global Opportunities Fund

No one, but . . .

Muzinich & Co becomes the fourth subadvisor to the fund with Michael McEachern joining the management team



PIMCO Global Multi-Asset

Comanager Saumil Parikh is leaving the fund for other work with the firm

Manager, Mohamed El-Erian, remains, along with Vineer Bhansali and Curtis Mewbourne



Principal Capital Appreciation

No one, but . . .

Sarah Radecki joins as a comanager



Seafarer Overseas Growth and Income Fund

William Maeck is no longer an associate portfolio manager

Andrew Foster and Kate Jaquet remain



T. Rowe Price Global Infrastructure

Susanta Mazumdar is out as the fund prepares to merge into TRP Real Assets

Kes Visuvalingam



The Wall Street Fund

Robert Morse is out after 29 years at the helm

Timothy Evnin and Charles Ryan remain.



Thornburg CA Limited-Term Municipal

Christopher Ihlefeld has retired

Josh Gonze and Christopher Ryon remain



Thornburg Intermediate Municipal

Christopher Ihlefeld has retired

Josh Gonze and Christopher Ryon remain



Thornburg Limited-Term Municipal

Christopher Ihlefeld has retired

Josh Gonze and Christopher Ryon remain



Thornburg NM Intermediate Municipal

Christopher Ihlefeld has retired

Josh Gonze and Christopher Ryon remain



Thornburg NY Intermediate Municipal

Christopher Ihlefeld has retired

Josh Gonze and Christopher Ryon remain



Thornburg Strategic Municipal Income

Christopher Ihlefeld has retired

Josh Gonze and Christopher Ryon remain



Turner Market Neutral Fund

Matthew Glaser is off the fund

Robert Turner and David Kovacs take over.



VALIC Company II Mid Cap Growth

Columbia Management Advisors

Wells Capital Management with Thomas Pence, Michael Smith and Chris Warner



Van Eck Emerging Markets

Team member Edward Kuczma is leaving the firm to pursue other opportunities

Manager, David Semple remains with team member, Angus Shillington



Vanguard Precious Metals and Mining

Graham French is stepping down.

Comanager Randeep Sornel is moving up.



Virtus Quality Small-Cap Fund

Robert Schwarzkopt is out

Julie Kutasov and Craig Stone remain



Wells Fargo Advantage Global Opportunities fund

No one, but . . .

Bryant VanCronkhite joins the team



Wells Fargo Advantage Special Small Cap Value Fund

No one, but . . .

Bryant VanCronkhite joins the team


September 1, 2013

Dear friends,

richardMy colleagues in the English department are forever yammering on about this Shakespeare guy.I’m skeptical. First, he didn’t even know how to spell his own name (“Wm Shakspē”? Really?). Second, he clearly didn’t understand seasonality of the markets. If you listen to Gloucester’s famous declamation in Richard III, you’ll see what I mean:

Now is the winter of our discontent
Made glorious summer by this sun of York;
And all the clouds that lour’d upon our house
In the deep bosom of the ocean buried.
Now are our brows bound with victorious wreaths;
Our bruised arms hung up for monuments;
Our stern alarums changed to merry meetings,
Our dreadful marches to delightful measures.

It’s pretty danged clear that we haven’t had anything “made glorious summer by the sun of [New] York.” By Morningstar’s report, every single category of bond and hybrid fund has lost money over the course of the allegedly “glorious summer.” Seven of the nine domestic equity boxes have flopped around, neither noticeably rising nor falling.

And now, the glorious summer passed, we enter what historically are the two worst months for the stock market. To which I can only reply with three observations (The Pirates are on the verge of their first winning season since 1992! The Steelers have no serious injuries looming over them. And Will’s fall baseball practices are upon us.) and one question:

Is it time to loathe the emerging markets? Again?

Yuh, apparently. A quick search in Google News for “emerging markets panic” turns up 3300 stories during the month of August. They look pretty much like this:


With our preeminent journalists contributing:


Many investors have responded as they usually do, by applying a short-term perspective to a long-term decision. Which is to say, they’re fleeing. Emerging market bond funds saw a $2 billion outflow in the last week of August and $24 billion since late May (Emerging Markets Fund Flows Investors Are Dumping Emerging Markets at an Accelerating Pace, Business Insider, 8/30/13). The withdrawals were indiscriminate, affecting all regions and both local currency and hard currency securities. Equity funds saw $4 billion outflows for the week, with ETFs leading the way down (Emerging markets rout has investors saying one word: sell, Marketwatch, 8/30/13).

In a peculiar counterpoint, Jason Kepler of Investment News claims – using slightly older data – that Mom and pop can’t quit emerging-market stocks. And that’s good (8/27/13). He finds “uncharacteristic resiliency” in retail investors’ behavior. I’d like to believe him. (The News allows a limited number of free article views; if you’d exceeded your limit and hit a paywall, you might try Googling the article title. Or subscribing, I guess.)

We’d like to make three points.

  • Emerging markets securities are deeply undervalued
  • Those securities certainly could become much more deeply undervalued.
  • It’s not the time to be running away.

Emerging markets securities are deeply undervalued

Wall Street Ranter, an anonymous blogger from the financial services industry and sometime contributor to the Observer’s discussion board, shared two really striking bits of valuation data from his blog.

The first, “Valuations of Emerging Markets vs US Stocks” (7/20/13) looks at a PIMCO presentation of the Shiller PE for the emerging markets and U.S., then at how such p/e ratios have correlated to future returns. Shiller adjusts the market’s price/earnings ratio to eliminate the effect of atypical profit margins, since those margins relentlessly regress to the mean over time. There’s a fair amount of research that suggests that the Shiller PE has fair predictive validity; that is, abnormally low Shiller PEs are followed by abnormally high market returns and vice versa.

Here, with Ranter’s kind permission, is one of the graphics from that piece:


At June 30, 2013 valuations, this suggests that US equities were priced for 4% nominal returns (2-3% real), on average, over the next five years while e.m. equities were priced to return 19% nominal (17% or so real) over the same period. GMO, at month’s end, reached about the same figure for high quality US equities (3.1% real) but a much lower estimate (6.8%) for emerging equities. By GMO’s calculation, emerging equities were priced to return more than twice as much as any other publicly traded asset class.

Based on recent conversations with the folks at GMO, Ranter concludes that GMO suspects that changes in the structure of the Chinese economy might be leading them to overstate likely emerging equity returns. Even accounting for those changes, they remain the world’s most attractive asset class:

While emerging markets are the highest on their 7 year forecast (approx. 7%/year) they are treating it more like 4%/year in their allocations . . . because they believe they need to account for a longer-term shift in the pace of China’s growth. They believe the last 10 years or so have skewed the mean too far upwards. While this reduces slightly their allocation, it still leaves Emerging Markets has one of their highest forecasts (but very close to International Value … which includes a lot of developed European companies).

Ranter offered a second, equally striking graphic in “Emerging Markets Price-to-Book Ratio and Forward Returns (8/9/13).”


At these levels, he reports, you’d typically expect returns over the following year of around 55%. That data is available in his original article. 

In a singularly unpopular observation, Andrew Foster, manager of Seafarer Overseas Growth & Income (SFGIX/SIGIX), one of the most successful and risk-alert e.m. managers (those two attributes are intimately connected), notes that the most-loathed emerging markets are also the most compelling values:

The BRICs have underperformed to such an extent that their aggregate valuation, when compared to the emerging markets as a whole, is as low as it has been in eight years. In other words, based on a variety of valuation metrics (price-to-book value, price-to-prospective-earnings, and dividend yield), the BRICs are as cheap relative to the rest of the emerging markets as they have been in a long time. I find this interesting. . . for the (rare?) subset of investors contemplating a long-term (10-year) allocation to EM, just as they were better off to avoid the BRICs over the past 5 years when they were “hot,” they are likely to be better off over the next 10 years emphasizing the BRICs now they are “not.”

Those securities certainly could become much more deeply undervalued.

The graphic above illustrates the ugly reality that sometimes (late ’98, all of ’08), but not always (’02, ’03, mid ’11), very cheap markets become sickeningly cheap markets before rebounding. Likewise, Shiller PE for the emerging markets occasionally slip from cheap (10-15PE) to “I don’t want to talk about it” (7 PE). GMO mildly notes, “economic reality and investor behavior cause securities and markets to overshoot their fair value.”

Andrew Foster gently dismisses his own predictive powers (“my record on predicting short-term outcomes is very poor”). At the same time, he finds additional cause for short-term concern:

[M]y thinking on the big picture has changed since [early July] because currencies have gotten into the act. I have been worried about this for two years now — and yet even with some sense it could get ugly, it has been hard to avoid mistakes. In my opinion, currency movements are impossible to predict over the short or long term. The only thing that is predictable is that when currency volatility picks up, is likely to overshoot (to the downside) in the short run.

It’s not the time to be running away.

There are two reasons driving that conclusion. First, you’ve already gotten the timing wrong and you’re apt to double your error. The broad emerging markets index has been bumping along without material gain for five years now. If you were actually good at actively allocating your portfolio, you’d have gotten out in the summer of 2007 instead of thinking that five consecutive years of 25%+ gains would go on forever. And you, like the guys at Cook and Bynum, would have foregone Christmas presents in 2008 in order to plow every penny you had into an irrationally, shockingly cheap market. If you didn’t pull it off then, you’re not going to pull it off this time, either.

Second, there are better options here than elsewhere. These remain, even after you adjust down their earnings and adjust them down again, about the best values you’ll find. Ranter grumbles about the thoughtless domestic dash:

Bottom line is I fail to see, on a relative basis, how the US is more tempting looking 5 years out. People can be scared all they want of catching a falling knife…but it’s a lot easier to catch something which is only 5 feet in the air than something that is 10 feet in the air.

If you’re thinking of your emerging markets stake as something that you’ll be holding or building over the next 10-15 years (as I do), it doesn’t matter whether you buy now or in three months, at this level or 7% up or down from here. It will matter if you panic, leave and then refuse to return until the emerging markets feel “safe” to you – typically around the top of the next market cycle.

It’s certainly possible that you’re systemically over-allocated to equities or emerging equities. The current turbulence might well provide an opportunity to revisit your long-term plan, and I’d salute you for it. My argument here is against actions driven by your gut.

Happily, there are a number of first rate options available for folks seeking risk-conscious exposure to the emerging markets. My own choice, discussed more fully below, is Seafarer. I’ve added to my (small investor-sized) account twice since the market began turning south in late spring. I have no idea of whether those dollars with be worth a dollar or eighty cents or a plugged nickel six months from now. My suspicion is that those dollars will be worth more a decade from now having been invested with a smart manager in the emerging markets than they would have been had I invested them in domestic equities (or hidden them away in a 0.01% bank account). But Seafarer isn’t the only “A” level choice. There are some managers sitting on large war chests (Amana Developing World AMDWX), others with the freedom to invest across asset classes (First Trust/Aberdeen Emerging Opportunities FEO) and even some with both (Lazard Emerging Markets Multi-Strategy EMMOX).

To which Morningstar says, “If you’ve got $50 million to spend, we’ve got a fund for you!”

On August 22nd, Morningstar’s Fund Spy trumpeted “Medalist Emerging-Markets Funds Open for Business,” in which they reviewed their list of the crème de la crème emerging markets funds. It is, from the average investor’s perspective, a curious list studded with funds you couldn’t get into or wouldn’t want to pay for. Here’s the Big Picture:


Our take on those funds follows.

The medalist …

Is perfect for the investor who …

Acadian EM (AEMGX)

Has $2500 and an appreciation of quant funds

American Funds New World (NEWFX)

Wants to pay 5.75% upfront

Delaware E.M. (DEMAX)

Wants to pay 5.75% upfront for a fund whose performance has been inexplicably slipping, year by year, in each of the past five calendar years.


Has $50,000,000 to open an account

Harding Loevner E.M. Advisor (HLEMX)

Is an advisor with $5000 to start.

Harding Loevner Inst E.M. (HLMEX)

Has $500,000 to start

ING JPMorgan E.M. Equity (IJPIX)

Is not the public, since “shares of the Portfolio are not offered to the public.”

Parametric E.M. (EAEMX)

Has $1000 and somewhat modest performance expectations

Parametric Tax-Mgd E.M. Inst (EITEX)

Has $50,000 and tax-issues best addressed in his e.m. allocation

Strategic Advisers E.M. (FSAMX)

Is likewise not the general public since “the fund is not available for sale to the general public.”

T. Rowe Price E.M. Stock (PRMSX)

Has $2500 and really, really modest performance expectations.

Thornburg Developing World A (THDAX)

Doesn’t mind paying a 4.50% load

Our recommendations differ from theirs, given our preference for smaller funds that are actually available to the public. Our shortlist:

Amana Developing World (AMDWX): offers an exceedingly cautious take on an exceedingly risky slice of the world. Readers were openly derisive of Amana’s refusal to buy at any cost, which led the managers to sit on a 50% cash stake while the market’s roared ahead. As those markets began their swoon in 2011, Amana began moving in and disposing of more than half of its cash reserves. Still cash-rich, the fund’s relative performance is picking up and its risks remain very muted.

First Trust/Aberdeen Emerging Opportunity (FEO): one of the first emerging markets balanced funds, it’s performed very well over the long-term and is currently selling at a substantial discount to NAV: 12.6%, about 50% greater than its long-term average. That implies that investors might see something like a 5% arbitrage gain once the current panic abates, above and beyond whatever the market provides.

Grandeur Peak Emerging Markets Opportunities (GPEOX): the Grandeur Peak team has been brilliantly successful both here and at Wasatch. Their intention is to create a single master fund (Global Reach) and six subsidiary funds whose portfolios represent slices of the master profile. Emerging Markets has already cleared the SEC registration procedures but hasn’t launched. The Grandeur Peak folks say two factors are driving the delay. First, the managers want to be able to invest directly in Indian equities which requires registration with that country’s equity regulators. They couldn’t begin the registration until the fund itself was registered in the US. So they’re working through the process. Second, they wanted to be comfortable with the launch of Global Reach before adding another set of tasks. Give or take the market’s current tantrum (one manager describes it as “a taper tantrum”), that’s going well. With luck, but without any guarantees, the fund might be live sometime in Q4.

Seafarer Overseas Growth & Income (SFGIX): hugely talented manager, global portfolio, risk conscious, shareholder-centered and successful.

Wasatch Frontier Emerging Small Countries (WAFMX): one of the very few no-load, retail funds that targets the smaller, more dynamic markets rather than markets with billions of people (India and China) or plausible claim to be developed markets (e.g., Korea). The manager, Laura Geritz, has been exceedingly successful. Frontier markets effectively diversify emerging markets portfolios and the fund has drawn nearly $700 million. The key is that Wasatch is apt to close the fund sooner rather than later.

Snowball’s portfolio

Some number of folks have, reasonably enough, asked whether I invest in all of the funds I profile (uhhh … there have been over 150 of them, so no) or whether I have found The Secret Formula (presumably whatever Nicholas Cage has been looking for in all those movies). The answer is less interesting than the question.

I guess my portfolio construction is driven by three dictums:

  1. Don’t pretend to be smarter than you are
  2. Don’t pretend to be braver than you are
  3. There’s a lot of virtue in doing nothing

Don’t pretend to be smarter than you are. If I knew which asset classes were going to soar and which were going to tank in the next six months or year or two, two things would happen. First, I’d invest in the winners. Second, I’d sell my services to ridiculously rich people and sock them with huge and abusive fees that they’d happily pay. But, I don’t.

As a result, I tend to invest in funds whose managers have a reasonable degree of autonomy about investing across asset classes, rather than ones pigeonholed into a small (style) box. That’s a problem: it makes benchmarking hard, it makes maintaining an asset allocation plan hard and it requires abnormally skilled managers. My focus has been on establishing a strategic objective (“increasing exposure to fast growing economies”) and then spending a lot of time trying to find managers whose strategies I trust, respect and understand.

Don’t pretend to be braver than you are. Stocks have a lot in common with chili peppers. In each case, you get a surprising amount of benefit from a relatively small amount of exposure. In each case, increasing exposure quickly shifts the pleasure/pain balance from pleasantly piquant to moronically painful. Some readers think of my non-retirement asset allocation is surprisingly timid: about 50% stocks, 30% bonds, 20% cash equivalents. They’re not much happier about my 70% equity stake in retirement funds. But, they’re wrong.

T. Rowe Price is one of my favorite fund companies, in part because they treat their investors with unusual respect. I found two Price studies, in 2004 and again in 2010, particularly provocative. Price constructed a series of portfolios representing different levels of stock exposure and looked at how the various portfolios would have played out over the past 50-60 years.

The original study looked at portfolios with 20/40/60/80/100% stocks. The update dropped the 20% portfolio and looked at 0/40/60/80/100%. Below I’ve reproduced partial results for three portfolios. The original 2004 and 2010 studies are available at the T. Rowe Price website.


20% stocks

60% stocks

100% stocks


Conservative mix, 50% bonds, 30% cash

The typical “hybrid”

S&P 500 index

Years studied




Average annual return (before inflation)




Number of down years




Average loss in a down year




Standard deviation




Loss in 2008




* based on 20% S&P500, 30% one-year CDs, 50% total bond index

 Over a 10 year period – reasonable for a non-retirement account – a portfolio that’s 20% stocks would grow from $10,000 to $21,000. A 100% stock portfolio would grow to $28,000. Roughly speaking, the conservative portfolio ends up at 75% of the size of the aggressive one but a pure stock portfolio increases the probability of losing money by 400% (from a 6% chance to 23%), increases the size of your average loss by 2500% (from 0.5% to 12.5%) and triples your volatility. Somewhere in there, it will face the real prospect of a 51% loss, which is the average maximum drawdown for large core stock funds that have been around 20 years or more. Sadly, there’s no way of knowing whether the 51% loss will occur in Year One (where you might have some recovery time) or Year Ten (where you’d be toast).

At 50% equities, I might capture 80% of the market’s gain with 50% of its volatility. If domestic bonds weren’t in such dismal straits, a smaller stock exposure might be justifiable. But they suck so I’m stuck.

There’s a lot of virtue in doing nothing. Our action tends to be a lot more costly than our inaction, so I change my target allocation slowly and change my fund line-up slowly. I’ve held a few retirement plan funds (e.g., Fidelity Low Priced Stock FLPSX) for decades and a number of non-retirement funds since their inception. In general, I’ll only add a fund if it represents an entirely new opportunity set or if it’s replacing an existing fund. On average, I might change out one fund every year or two.

My retirement portfolio is dominated by the providers in Augustana’s 403(b) plan: Fidelity, T. Rowe Price and TIAA-CREF. The college contribution to retirement goes exclusively into TIAA-CREF. CREF Stock accounts for 68%, TIAA Real Estate holds 22% and the rest is in a target-date fund. The Fidelity and Price allocations mirror one another: 33% domestic stock (with a value bias), 33% international stock (with an emerging markets bias) and 33% income (of the eclectic Spectrum Income/Global High Income sort).

My non-retirement portfolio is nine funds and some cash waiting to be deployed.



Portfolio weight

What was I, or am I, thinking?

Artisan Int’l Value



I bought Artisan Int’l (ARTIX) in January 1996 because of my respect for Artisan and Mr. Yockey’s record. I traded-in my ARTIX shares and bought Int’l Value as soon as it launched because of my respect for Artisan, Mr. Samra and O’Keefe’s pedigree and my preference for value investing. Right so far: the fund is top 1% returns for the year-to-date and the trailing 1-, 3-, 5- and 10-year periods. I meditated upon switching to the team’s Global Value Fund (ARTGX) which has comparable returns, more flexibility and fewer assets.

Artisan Small Value



I bought Artisan Small Cap (ARTSX) in the weeks before it closed, also January 1996, for the same reasons I bought ARTIX. And I traded it for Small Cap Value in late 1997 for the same reasons I traded International. That original stake, to which I added regularly, has more than quadrupled in value. The team has been out-of-step with the market lately which, frankly, is what I pay them for. I regret only the need to sell some of my shares about seven years ago.

FPA Crescent



Crescent is my surrogate for a hedge fund: Mr. Romick has a strong contrarian streak, the ability to invest in almost anything and a phenomenal record of having done so. If you really wanted to control your asset allocation, this would make it about impossible. I don’t.

Matthews Asia Strategic Income



I bought MAINX in the month after the Observer profiled the fund. Matthews is first rate, the arguments for reallocating a portion of my fixed-income exposure from developed to developing markets struck me as sound and Ms. Kong is really sharp.

And it’s working. My holding is still up about 3% while both the world bond group and Aberdeen Asia Bond trail badly. She’s hopeful that pressure of Asian currencies will provoke economic reform and, in the meantime, has the freedom to invest in dollar-denominated bonds.

Matthews Asian Growth & Income



I originally bought MACSX while Andrew Foster was manager, impressed by its eclectic portfolio, independent style and excellent risk management. It’s continued to do well after his departure. I sold half of my stake here to invest in Seafarer and haven’t been adding to it in a while because I’m already heavily overweight in Asia. That said, I’m unlikely to reduce this holding either.

Northern Global Tactical Asset Allocation



I bought BBALX shortly after profiling it. It’s a fund-of-index-funds whose allocation is set by Northern’s investment policy committee. The combination of very low expenses (0.64%), very low turnover portfolios, wide diversification and the ability to make tactical tilts is very attractive. It’s been substantially above average – higher returns, lower volatility – than its peers since its 2008 conversion.

RiverPark Short Term High Yield



Misplaced in Morningstar’s “high yield” box, this has been a superb cash management option for me: it’s making 3-4% annually with negligible volatility.

Seafarer Overseas Growth & Income



I’m impressed by Mr. Foster’s argument that many other portions of the developing world are, in 2013, where Asia was in 2003. He believes there are rich opportunities outside Asia and that his experience as an Asia investor will serve him in good stead as the new story rolls out. I’m convinced that having an Asia-savvy manager who has the ability to recognize and make investments beyond the region is prudent.

T. Rowe Price Spectrum Income



This is a fund of income-oriented funds and it serves as the second piece of the cash-management plan for me. I count on it for about 6% returns a year and recognize that it might lose money on rare occasion. Price is steadfastly sensible and investor-centered and I’m quite comfortable with the trade-off.




This is the holding pool in my Scottrade account.

Is anyone likely to make it into my portfolio in 2013-14? There are two candidates:

ASTON/River Road Long-Short (ARLSX). We’ve both profiled the fund and had a conference call with its manager, both of which are available on the Observer’s ARLSX page. I’m very impressed with the quality and clarity of their risk-management disciplines; they’ve left little to chance and have created a system that forces them to act when it’s time. They’ve performed well since inception and have the prospect of outperforming the stock market with a fraction of its risk. If this enters the portfolio, it would likely be as a substitute for Northern Global Tactical since the two serve the same risk-dampening function.

RiverPark Strategic Income (not yet launched). This fund will come to market in October and represents the next step out on the risk-return spectrum from the very successful RiverPark Short Term High Yield (RPHYX). I’ve been impressed with David Sherman’s intelligence and judgment and with RPHYX’s ability to deliver on its promises. We’ll be doing fairly serious inquiries in the next couple months, but the new fund might become a success to T. Rowe Price Spectrum Income.

Sterling Capital hits Ctrl+Alt+Delete

Sterling Capital Select Equity (BBTGX) has been a determinedly bad fund for years. It’s had three managers since 1993 and it has badly trailed its benchmark under each of them. The strategy is determinedly nondescript. They’ve managed to return 3.2% annually over the past 15 years. That’s better – by about 50 bps – than Vanguard’s money market fund, but not by much. Effective September 3, 2013, they’re hitting “reformat.”

The fund’s name changes, to Sterling Capital Large Cap Value Diversified Fund.

The strategy changes, to a “behavioral financed” based system targeting large cap value stocks.

The benchmark changes, to the Russell 1000 Value

And the management team changes, to Robert W. Bridges and Robert O. Weller. Bridges joined the firm in 2008 and runs the Sterling Behavioral Finance Small Cap Diversified Alpha. Mr. Weller joined in 2012 after 15 years at JPMorgan, much of it with their behavioral finance team.

None of which required shareholders’ agreement since, presumably, all aspects of the fund are “non-fundamental.” 

One change that they should pursue but haven’t: get the manager to put his own money at risk. The departing manager was responsible for five funds since 2009 and managed to find nary a penny to invest in any of them. As a group, Sterling’s bond and asset allocation team seems utterly uninterested in risking their own money in a lineup of mostly one- and two-star funds. Here’s the snapshot of those managers’ holdings in their own funds:

stategic allocation

You’ll notice the word “none” appears 32 times. Let’s agree that it would be silly to expect a manager to own tax-free bonds anywhere but in his home jurisdiction. That leaves 26 decisions to avoid their own funds out of a total of 27 opportunities. Most of the equity managers, by contrast, have made substantial personal investments.

Warren Buffett thinks you’ve come to the right place

Fortune recently published a short article which highlighted a letter that Warren Buffett wrote to the publisher of the Washington Post in 1975. Buffett’s an investor in the Post and was concerned about the long-term consequences of the Post’s defined-benefit pension. The letter covers two topics: the economics of pension obligations in general and the challenge of finding competent investment management. There’s also a nice swipe at the financial services industry, which most folks should keep posted somewhere near their phone or monitor to review as you reflect on the inevitable marketing pitch for the next great financial product.


I particularly enjoy the “initially.” Large money managers, whose performance records were generally parlous, “felt obliged to seek improvement or at least the approach of improvement” by hiring groups “with impressive organizational charts, lots of young talent … and a record of recent performance (pg 8).” Unfortunately, he notes, they found it.

The pressure to look like you were earning your keep led to high portfolio turnover (Buffett warns against what would now be laughably low turnover: 25% per annum). By definition, most professionals cannot be above average but “a few will succeed – in a modest way – because of skill” (pg 10). If you’re going to find them, it won’t be by picking past winners though it might be by understanding what they’re doing and why:


The key: abandon all hope ye who invest in behemoths:


For those interested in Buffett’s entire reflection, Chip’s embedded the following:

Warren Buffett Katharine Graham Letter

And now for something completely different …

We can be certain of some things about Ed Studzinski. As an investor and co-manager of Oakmark Equity & Income (OAKBX), he was consistently successful in caring for other people’s money (as much as $17 billion of it), in part because he remained keenly aware that he was also caring for their futures. $10,000 entrusted to Ed and co-manager Clyde McGregor on the day Ed joined the fund (01 March 2000) would have grown to $27,750 on the day of his departure (31 December 2011). His average competitor (I’m purposefully avoiding “peer” as a misnomer) would have managed $13,900.

As a writer and thinker, he minced no words.

The Equity and Income Fund’s managers have both worked in the investment industry for many decades, so we both should be at the point in our careers where dubious financial-industry innovations no longer surprise us. Such an assumption, however, would be incorrect.

For the past few quarters we have repeatedly read that the daily outcomes in the securities markets are the result of the “Risk On/Risk Off” trade, wherein investors (sic?) react to the most recent news by buying equities/selling bonds (Risk On) or the reverse (Risk Off). As value investors we think this is pure nonsense. 

Over the past two years, Ed and I have engaged in monthly conversations that I’ve found consistently provocative and information-rich. It’s clear that he’s been paying active attention for many years to contortions of his industry which he views with equal measures of disdain and alarm. 

I’ve prevailed upon Ed to share a manager’s fuss and fulminations with us, as whim, wife and other obligations permit. His first installment, which might also be phrased as the question “Whose skin in the game?” follows.

“Skin in the Game, Part One”

“Virtue has never been as respectable as money.” Mark Twain

One of the more favored sayings of fund managers is that they like to invest with managements with “skin in the game.” This is another instance where the early Buffett (as opposed to the later Buffett) had it right. Managements can and should own stock in their firms. But they should purchase it with their own money. That, like the prospect of hanging as Dr. Johnson said, would truly clarify the mind. In hind sight a major error in judgment was made by investment professionals who bought into the argument that awarding stock options would beneficially serve to align the interests of managements and shareholders. Never mind that the corporate officers should have already understood their fiduciary obligations. What resulted, not in all instances but often enough in the largest capitalization companies, was a class of condottieri such as one saw in Renaissance Italy, heading armies that spent their days marching around avoiding each other, all the while being lavishly paid for the risks they were NOT facing. This sub-set of managers became a new entitled class that achieved great personal wealth, often just by being present and fitting in to the culture. Rather than thinking about truly long-term strategic implications and questions raised in running a business, they acted with a short-duration focus, and an ever-present image of the current share price in the background. Creating sustainable long-term business value rarely entered into the equation, often because they had never seen it practiced.

I understood how much of a Frankenstein’s monster had been created when executive compensation proposals ended up often being the greater part of a proxy filing. A particularly bothersome practice was “reloading” options annually. Over time, with much dilution, these programs transferred significant share ownership to management. You knew you were on to something when these compensation proposals started attracting negative vote recommendations. The calls would initially start with the investor relations person inquiring about the proxy voting process. Once it was obvious that best practices governance indicated a “no” vote, the CFO would call and ask for reconsideration.

How do you determine whether a CEO or CFO actually walks the walk of good capital allocation, which is really what this is all about? One tip-off usually comes from discussions about business strategy and what the company will look like in five to ten years. You will have covered metrics and standards for acquisitions, dividends, debt, share repurchase, and other corporate action. Following that, if the CEO or CFO says, “Why do you think our share price is so low?” I would know I was in the wrong place. My usual response was, “Why do you care if you know what the business value of the company is per share? You wouldn’t sell the company for that price. You aren’t going to liquidate the business. If you did, you know it is worth substantially more than the current share price.” Another “tell” is when you see management taking actions that don’t make sense if building long-term value is the goal. Other hints also raise questions – a CFO leaves “because he wants to enjoy more time with his family.” Selling a position contemporaneously with the departure of a CFO that you respected would usually leave your investors better off than doing nothing. And if you see the CEO or CFO selling stock – “our investment bankers have suggested that I need to diversify my portfolio, since all my wealth is tied up in the company.” That usually should raise red flags that indicate something is going on not obvious to the non-insider.

Are things improving? Options have gone out of favor as a compensation vehicle for executives, increasingly replaced by the use of restricted stock. More investors are aware of the potential conflicts that options awards can create and have a greater appreciation of governance. That said, one simple law or regulation would eliminate many of the potential abuses caused by stock options. “All stock acquired by reason of stock option awards to senior corporate officers as part of their compensation MAY NOT BE SOLD OR OTHERWISE DISPOSED OF UNTIL AFTER THE EXPIRATION OF A PERIOD OF THREE YEARS FROM THE INDIVIDUAL’S LAST DATE OF SERVICE.” Then you might actually see the investors having a better chance of getting their own yachts.

Edward A. Studzinski

If you’d like to reach Ed, click here. An artist’s rendering of Messrs. Boccadoro and Studzinski appears below.


Introducing Charles’ Balcony

balconeySince his debut in February 2012, my colleague Charles Boccadoro has produced some exceedingly solid, data-rich analyses for us, including this month’s review of the risk/return profiles of the FundX family of funds. One of his signature contributions was “Timing Method Performance Over Ten Decades,” which was widely reproduced and debated around the web.

We’re pleased to announce that we’ve collected his essays in a single, easy-to-access location. We’ve dubbed it “Charles’ Balcony” and we even stumbled upon this striking likeness of Charles and the shadowy Ed Studzinski in situ. I’m deeply hopeful that from their airy (aerie or eery) perch, they’ll share their sharp-eyed insights with us for years to come.

Observer fund profiles

Each month the Observer provides in-depth profiles of between two and four funds. Our “Most Intriguing New Funds” are funds launched within the past couple years that most frequently feature experienced managers leading innovative newer funds. “Stars in the Shadows” are older funds that have attracted far less attention than they deserve. 

Advisory Research Strategic Income (ADVNX): you’ve got to love a 10 month old fund with a 10 year track record and a portfolio that Morningstar can only describe as 60% “other.” AR converted a successful limited partnership into the only no-load mutual fund offering investors substantial access to preferred securities.

Beck, Mack and Oliver Partners (BMPEX): we think of it as “Dodge and Cox without the $50 billion in baggage.” This is an admirably disciplined, focused equity fund with a remarkable array of safeguards against self-inflicted injuries.

FPA Paramount (FPRAX): some see Paramount as a 60-year-old fund that seeks out only the highest-quality mid-cap growth stocks. With a just-announced change of management and philosophy, it might be moving to become a first-rate global value fund (with enough assets under management to start life as one of the group’s most affordable entries).

FundX Upgrader (FUNDX): all investors struggle with the need to refine their portfolios, dumping losers and adding winners. In a follow-up to his data-rich analysis on the possibility of using a simple moving average as a portfolio signal, associate editor Charles Boccadoro investigated the flagship fund of the Upgrader fleet.

Tributary Balanced (FOBAX): it’s remarkable that a fund this consistently good – in the top tier of all balanced funds over the past five-, ten-, and fifteen-year periods and a Great Owl by my colleague Charles’ risk/return calculations – hasn’t drawn more attention. It will be more remarkable if that neglect continues despite the recent return of the long-time manager who beat pretty much everyone in sight.

Elevator Talk #8: Steven Vannelli of GaveKal Knowledge Leaders (GAVAX)

Since the number of funds we can cover in-depth is smaller than the number of funds worthy of in-depth coverage, we’ve decided to offer one or two managers each month the opportunity to make a 200 word pitch to you. That’s about the number of words a slightly-manic elevator companion could share in a minute and a half. In each case, I’ve promised to offer a quick capsule of the fund and a link back to the fund’s site. Other than that, they’ve got 200 words and precisely as much of your time and attention as you’re willing to share. These aren’t endorsements; they’re opportunities to learn more.

Steve w logo

Steven Vannelli, Manager

GaveKal Knowledge Leaders (GAVAX) believes in investing only in firms that are committed to being smart, so where did the dumb name come from? GaveKal is a portmanteau formed from the names of the firm’s founders: Charles Gave, Anatole Kaletsky and Louis-Vincent Gave. Happily it changed the fund’s original name from GaveKal Platform Company Fund (named after its European counterpart) to Knowledge Leaders. 

GaveKal, headquartered in Hong Kong, started in 2001 as a global economics and asset allocation research firm. Their other investment products (the Asian Balanced Fund – a cool idea which was rechristened Asian Absolute Return – and Greater China Fund) are available to non-U.S. investors as, originally, was Knowledge Leaders. They opened a U.S. office in 2006. In 2010 they deepened their Asia expertise by acquiring Dragonomics, a China-focused research and advisory firm.

Knowledge Leaders has generated a remarkable record in its two-plus years of U.S. operation. They look to invest in “the best among global companies that are tapping a deep reservoir of intangible capital to generate earnings growth,” where “R&D, design, brand and channel” are markers of robust intangible capital. From launch through the end of June, 2013, the fund modestly outperformed the MSCI World Index and did so with two-thirds less volatility. Currently, approximately 30% of the portfolio is in cash, down from 40% earlier in summer.

Manager Steven Vannelli researches intangible capital and corporate performance and leads the fund’s investment team. Before joining GaveKal, he spent a decade at Alexander Capital, a Denver-based investment advisor. Here’s Mr. Vannelli’s 200 words making his case:

We invest in the world’s most innovative companies. Decades of academic research show that companies that invest heavily in innovation are structurally undervalued due to lack of information on innovative activities. Our strategy capitalizes on this market inefficiency.

To find investment opportunities, we identify Knowledge Leaders, or companies with large stores of intangible assets. These companies often operate globally across an array of industries from health care to technology, from consumer to capital goods. We have developed a proprietary method to capitalize a company’s intangible investments, revealing an important, invisible layer of value inherent to intangible-rich companies. 

The Knowledge Leaders Strategy employs an active strategy that offers equity-like returns with bond-like risk. Superior risk-adjusted returns with low correlation to market indices make the GaveKal Knowledge Leaders Strategy a good vehicle for investors who seek to maximize their risk and return objectives.

The genesis of the strategy has its origin in the 2005 book, Our Brave New World, by GaveKal Research, which highlights knowledge as a scare asset.

As a validation of our intellectual foundation, in July, the US Bureau of Economic Analysis began to capitalize R&D to measure the contribution of innovation spending on growth of the US economy.

The minimum initial investment on the fund’s retail shares is $2,500. There are also institutional shares (GAVIX) with a $100,000 minimum (though they do let financial advisors aggregate accounts in order to reach that threshold). The fund’s website is clean and easily navigated. It would make a fair amount of sense for you to visit to “Fund Documents” page, which hosts the fund’s factsheet and a thoughtful presentation on intangible capital

Our earlier Elevator Talks were:

  1. February 2013: Tom Kerr, Rocky Peak Small Cap Value (RPCSX), whose manager has a 14 year track record in small cap investing and a passion for discovering “value” in the intersection of many measures: discounted cash flows, LBO models, M&A valuations and traditional relative valuation metrics.
  2. March 2013: Dale Harvey, Poplar Forest Partners (PFPFX and IPFPX), a concentrated, contrarian value stock fund that offers “a once-in-a-generation opportunity to invest with a successful American Funds manager who went out on his own.”
  3. April 2013: Bayard Closser, Vertical Capital Income Fund (VCAPX), “a closed-end interval fund, VCAPX invests in whole mortgage loans and first deeds of trust. We purchase the loans from lenders at a deep discount and service them ourselves.”
  4. May 2013: Jim Hillary, LS Opportunity Fund (LSOFX), a co-founder of Marsico Capital Management whose worry that “the quality of research on Wall Street continues to decline and investors are becoming increasingly concerned about short-term performance” led to his faith in “in-depth research and long-term orientation in our high conviction ideas.”
  5. July 2013: Casey Frazier, Versus Capital Multi-Manager Real Estate Income Fund (VCMRX), a second closed-end interval fund whose portfolio “includes real estate private equity and debt, public equity and debt, and broad exposure across asset types and geographies. We target a mix of 70% private real estate with 30% public real estate to enhance liquidity, and our objective is to produce total returns in the 7 – 9% range net of fees.”
  6. August 2013: Brian Frank, Frank Value Fund (FRNKX), a truly all-cap value fund with a simple, successful discipline: if one part of the market is overpriced, shop elsewhere.
  7. August 2013: Ian Mortimer and Matthew Page of Guinness Atkinson Inflation Managed Dividend (GAINX), a global equity fund that pursues firms with “sustainable and potentially rising dividends,” which also translates to firms with robust business models and consistently high return on capital.

Upcoming conference call: A discussion of the reopening of RiverNorth Strategy Income (RNDLX)

rivernorth reopensThe folks at RiverNorth will host a conference call between the fund’s two lead managers, Patrick Galley of RiverNorth and Jeffrey Gundlach of DoubleLine, to discuss their decision to reopen the fund to new investors at the end of August and what they see going forward (the phrase “fear and loathing” keeps coming up). 

The call will be: Wednesday, September 18, 3:15pm – 4:15pm CDT

To register, go to

The webcast will feature a Q&A with Messrs. Galley and Gundlach.

RNDLX (RNSIX for the institutional class), which the Observer profiled shortly after launch, has been a very solid fund with a distinctive strategy. Mr. Gundlach manages part of his sleeve of the portfolio in a manner akin to DoubleLine Core Fixed Income (DLFNX) and part with a more opportunistic income strategy. Mr. Galley pursues a tactical fixed-income allocation and an utterly unique closed-end fund arbitrage strategy in his slice. The lack of attractive opportunities in the CEF universe prompted the fund’s initial closure. Emily Deter of RiverNorth reports that the opening “is primarily driven by the current market opportunity in the closed-end fund space. Fixed-income closed-end funds are trading at attractive discounts to their NAVs, which is an opportunity we have not seen in years.” Investment News reported that fixed-income CEFs moved quickly from selling at a 2% premium to selling at a 7% discount. 

That’s led Mr. Galley’s move from CEFs from occupying 17% of the portfolio a year ago to 30% today and, it seems, he believes he could pursue more opportunities if he had more cash on hand.

Given RiverNorth’s ongoing success and clear commitment to closing funds well before they become unmanageable, it’s apt to be a good use of your time.

The Observer’s own series of conference calls with managers who’ve proven to be interesting, sharp, occasionally wry and successful, will resume in October. We’ll share details in our October issue.

Funds in Registration

New mutual funds must be registered with the Securities and Exchange Commission before they can be offered for sale to the public. The SEC has a 75-day window during which to call for revisions of a prospectus; fund companies sometimes use that same time to tweak a fund’s fee structure or operating details.

Every day David Welsch, an exceedingly diligent research assistant at the Observer, scours new SEC filings to see what opportunities might be about to present themselves. David tracked down nearly 100 new funds and ETFs. Many of the proposed funds offer nothing new, distinctive or interesting. Some were downright mystifying. (Puerto Rico Shares? Colombia Capped ETF? The Target Duration 2-month ETF?) There were 26 no-load funds or actively-managed ETFs in registration with the SEC this month. 

Funds in registration this month won’t be available for sale until, typically, the end of October or early November 2013.

There are probably more interesting products in registration this month than at any time in the seven years we’ve been tracking them. Among the standouts:

Brown Advisory Strategic European Equity Fund which will be managed by Dirk Enderlein of Wellington Management. Wellington is indisputably an “A-team” shop (they’ve got about three-quarters of a trillion in assets under management). Mr. Enderlein joined them in 2010 after serving as a manager for RCM – Allianz Global Investors in Frankfurt, Germany (1999-2009). Media reports described him as “one of Europe’s most highly regarded European growth managers.”

DoubleLine Shiller Enhanced CAPE will attempt to beat an index, Shiller Barclays CAPE® US Sector TR USD Index, which was designed based on decades of research by the renowned Robert Shiller. The fund will be managed by Jeffrey Gundlach and Jeffrey Sherman.

Driehaus Micro Cap Growth Fund, a converted 15 year old hedge fund

Harbor Emerging Markets Equity Fund, which will be sub-advised by the emerging markets team at Oaktree Capital Management. Oaktree’s a first-tier institutional manager with a very limited number of advisory relationships (primarily with Vanguard and RiverNorth) in the mutual fund world. 

Meridian Small Cap Growth, which will be the star vehicle for Chad Meade and Brian Schaub, who Meridian’s new owner hired away from Janus. Morningstar’s Greg Carlson described them as “superb managers” who were “consistently successful during their nearly seven years at the helm” of Janus Triton.

Plus some innovative offerings from Northern, PIMCO and T. Rowe Price. Details and the list of all of the funds in registration are available at the Observer’s Funds in Registration page or by clicking “Funds” on the menu atop each page.

Manager Changes

On a related note, we also tracked down a record 85 fund manager changes. Investors should take particular note of Eric Ende and Stephen Geist’s exit from FPA Paramount after a 13 year run. The change is big enough that we’ve got a profile of Paramount as one of the month’s Most Intriguing New Funds.


brettonBretton Fund (BRTNX) is now available through Vanguard. Manager Stephen Dodson writes that after our conference call, several listeners asked about the fund’s availability and Stephen encouraged them to speak directly with Vanguard. Mirabile dictu, the Big V was receptive to the idea.

Stephen recently posted his most recent letter to his shareholders. He does a nice job of walking folks through the core of his investing discipline with some current illustrations. The short version is that he’s looking for firms with durable competitive advantages in healthy industries whose stocks are selling at a substantial discount. He writes:

There are a number of relevant and defensible companies out there that are easily identifiable; the hard part is finding the rare ones that are undervalued. The sweet spot for us continues to be relevant, defensible businesses at low prices (“cheap compounders”). I continue to spend my waking hours looking for them.

Q2 2013 presented slim pickin’s for absolute value investors (Bretton “neither initiated nor eliminated any investments during the quarter”). For all of the market’s disconcerting gyrations this summer, Morningstar calculates that valuations for its Wide Moat and Low Business Uncertainty groups (surrogates for “high quality stocks”) remains just about where they were in June: undervalued by about 4% while junkier stocks remain modestly overvalued.

Patience is hard.

Briefly Noted . . .

Calamos loses another president

James Boyne is resigning as president and chief operating officer of Calamos Investments effective Sept. 30, just eight months after being promoted to president. The firm has decided that they need neither a president nor a chief operating officer. Those responsibilities will be assumed “by other senior leaders” at the firm (see: Black, Gary, below). The preceding president, Nick P. Calamos, decided to “step back” from his responsibilities in August 2012 when, by coincidence, Calamos hired former Janus CEO Gary Black. To describe Black as controversial is a bit like described Rush Limbaugh as opinionated.

They’re not dead yet!

not-dead-yetBack in July, the Board of Caritas All-Cap Growth (CTSAX): “our fund is tiny, expensive, bad, and pursues a flawed investment strategy (long stocks, short ETFs).” Thereupon they reached a sensible conclusion: euthanasia. Shortly after the fund had liquidated all of its securities, “the Board was presented with and reviewed possible alternatives to the liquidation of the Fund that had arisen since the meeting on July 25, 2013.”

The alternative? Hire Brenda A. Smith, founder of CV Investment Advisors, LLC, to manage the fund. A quick scan of SEC ADV filings shows that Ms. Smith is the principal in a two person firm with 10 or fewer clients and $5,000 in regulated AUM. 


(I don’t know more about the firm because they have a one page website.)

At almost the same moment, the same Board gave Ms. Smith charge of the failing Presidio Multi-Strategy Fund (PMSFX), an overpriced long/short fund that executes its strategy through ETFs. 

I wish Ms. Smith and her new investors all the luck in the world, but it’s hard to see how a Board of Trustees could, with a straight face, decide to hand over one fund and resuscitate another with huge structural impediments on the promise of handing it off to a rookie manager and declare that both moves are in the best interests of long-suffering shareholders.

Diamond Hill goes overseas, a bit

Effective September 1, 2013, Diamond Hill Research Opportunities Fund (DHROX) gains the flexibility to invest internationally (the new prospectus allows that it “may also invest in non-U.S. equity securities, including equity securities in emerging market countries”) and the SEC filing avers that they “will commence investing in foreign securities.” The fund has 15 managers; I’m guessing they got bored. As a hedge fund (2009-2011), it had a reasonably mediocre record which might have spurred the conversion to a ’40 fund. Which has also had a reasonably mediocre lesson, so points to the management for consistency!

Janus gets more bad news

Janus investors pulled $2.2 billion from the firm’s funds in July, the worst outflows in more than three years. A single investor accounted for $1.3 billion of the leakage. The star managers of Triton and Venture left in May. And now this: they’re losing business to Legg Mason.

The Board of Trustees of Met Investors Series Trust has approved a change of subadviser for the Janus Forty Portfolio from Janus Capital Management to ClearBridge Investments to be effective November 1, 2013 . . . Effective November 1, 2013, the name of the Portfolio will change to ClearBridge Aggressive Growth Portfolio II.

Matthews chucks Taiwan

Matthews Asia China (MCHFX), China Dividend (MCDFX) and Matthews and China Small Companies (MCSMX) have changed their Principal Investment Strategy to delete Taiwan. The text for China Dividend shows the template:

Under normal market conditions, the Matthews China Dividend Fund seeks to achieve its investment objective by investing at least 80% of its net assets, which include borrowings for investment purposes, in dividend-paying equity securities of companies located in China and Taiwan.


Under normal market conditions, the Matthews China Dividend Fund seeks to achieve its investment objective by investing at least 80% of its nets assets, which include borrowings for investment purposes, in dividend-paying equity securities of companies located in China.

A reader in the financial services industry, Anonymous Dude, checked with Matthews about the decision. AD reports

The reason was that the SEC requires that if you list Taiwan in the Principal Investment Strategies portion of the prospectus you have to include the word “Greater” in the name of the fund. They didn’t want to change the name of the fund and since they could still invest up to 20% they dropped Taiwan from the principal investment strategies. He said if the limitation ever became an issue they would revisit potentially changing the name. Mystery solved.
The China Fund currently has nothing investing in Taiwan, China Small is 14% and China Dividend is 15%. And gracious, AD!

T. Rowe tweaks

Long ago, as a college administrator, I was worried about whether the text in a proposed policy statement might one day get us in trouble. I still remember college counsel shaking his head confidently, smiling and saying “Not to worry. We’re going to fuzz it up real good.” One wonders if he works for T. Rowe Price now? Up until now, many of Price’s funds have had relatively detailed and descriptive investment objectives. No more! At least five of Price’s funds propose new language that reduces the statement of investment objectives to an indistinct mumble. T. Rowe Price Growth Stock Fund (PRGFX) goes from

The fund seeks to provide long-term capital growth and, secondarily, increasing dividend income through investments in the common stocks of well-established growth companies.


The fund seeks long-term capital growth through investments in stocks.

Similar blandifications are proposed for Dividend Growth, Equity Income, Growth & Income and International Growth & Income.

Wasatch redefines “small cap”

A series of Wasatch funds, Small Growth, Small Value and Emerging Markets Small Cap are upping the size of stocks in their universe from $2.5 billion or less to $3.0 billion or less. The change is effective in November.

Can you say whoa!? Or WOA?

The Board of Trustees of an admittedly obscure little institutional fund, WOA All Asset (WOAIX), has decided that the best way to solve what ails the yearling fund is to get it more aggressive.

The Board approved certain changes to the Fund’s principal investment strategies. The changes will be effective on or about September 3, 2013. . . the changes in the Fund’s strategy will alter the Fund’s risk level from balanced strategy with a moderate risk level to an aggressive risk level.

Here’s the chart of the fund’s performance since inception against conservative and moderate benchmarks. While that might show that the managers just need to fire up the risk machine, I’d also imagine that addressing the ridiculously high expenses (1.75% for an institutional balanced fund) and consistent ability to lag in both up and down months (11 of 16 and counting) might actually be a better move. 


WOA’s Trustees, by the way, are charged with overseeing 24 funds. No Trustee has a dollar invested in any of those funds.


The Board of Trustees of the Direxion Funds and Rafferty Asset Management have decided to make it cheaper for you to own a bunch of funds that you really shouldn’t own. They’re removed the 25 bps Shareholder Servicing Fee from

  • Direxion Monthly S&P 500® Bull 2X Fund
  • Direxion Monthly S&P 500® Bear 2X Fund
  • Direxion Monthly NASDAQ-100® Bull 2X Fund
  • Direxion Monthly Small Cap Bull 2X Fund
  • Direxion Monthly Small Cap Bear 2X Fund
  • Direxion Monthly Emerging Markets Bull 2X Fund
  • Direxion Monthly Latin America Bull 2X Fund
  • Direxion Monthly China Bull 2X Fund
  • Direxion Monthly Commodity Bull 2X Fund
  • Direxion Monthly 7-10 Year Treasury Bull 2X Fund
  • Direxion Monthly 7-10 Year Treasury Bear 2X Fund
  • Dynamic HY Bond Fund and
  • U.S. Government Money Market Fund.

Because Eaton Vance loves you, they’ve decided to create the opportunity for investors to buy high expense “C” class shares of Eaton Vance Bond (EVBCX). The new shares will add a 1.00% back load for sales held less than a year and a 1.70% expense ratio (compared to 0.7 and 0.95 for Institutional and A, respectively). 

The Fairholme Fund (FAIRX) reopened to new investors on August 19, 2013. The other Fairholme family funds, not so much.

The Advisor Class shares of Forward Select Income Fund (FSIMX) reopened to new investors at the end of August.

The Board of Directors of the Leuthold Global Industries Fund (LGINX) has agreed to reduce the Fund’s expense cap from 1.85% to 1.60%.

JacksonPark Capital reduced the minimum initial investment on Oakseed Opportunity Institutional shares (SEDEX) from $1 million to $10,000. Given the 18% lower fees on the institutional class (capped at 1.15% versus 1.40% for retail shares), reasonably affluent retail investors ought to seriously consider pursuing the institutional share class. That said, Oakseed’s minimum investment for the retail shares, as low as $100 for accounts set up with an AIP, are awfully reasonable.

RiverNorth DoubleLine Strategic Income (RNDLX/RNSIX) reopened to new investors at the end of August. Check the “upcoming conference calls” feature, above, for more details.

Westcore Blue Chip Dividend Fund (WTMVX ) lowered the expense ratio on its no-load retail shares from 1.15% to 0.99%, effective September 1. They also changed from paying distributions annually to paying them quarterly. It’s a perfectly agreeable, mild-mannered little fund: stable management, global diversified, reasonable expenses and very consistently muted volatility. You do give up a fair amount of upside for the opportunity to sleep a bit more quietly at night.

CLOSINGS (and related inconveniences)

American Beacon Stephens Small Cap Growth Fund (STSGX) will close to new investors, effective as of September 16, 2013. The no-class share class has returned 11.8% while its peers made 9.3% and it did so with lower volatility. The fund is closing at a still small $500 million.

Neither high fees nor mediocre performance can dim the appeal of AQR Multi-Strategy Alternative Fund (ASANX/ASAIX). The fund has drawn $1.5 billion and has advertised the opportunity for rich investors (the minimum runs between $1 million and $5 million) to rush in before the doors swing shut at the end of September. It’s almost always a bad sign that a fund feels the need to close and the need to put up a flashing neon sign six weeks ahead.

Morgan Stanley Institutional Global Franchise (MSFAX) will close to new investors on Nov. 29, 2013. The current management team came on board four years ago (June 2009) and have posted very good risk-adjusted returns since then. Investors might wonder why a large cap global fund with a small asset base needs to close. The answer is that the mutual fund represents just the tip of the iceberg; this team actually manages almost $17 billion in this strategy, so the size of the separate accounts is what’s driving the decision.


At the end of September Ariel International Equity Fund (AINTX) becomes Ariel International Fund and will no longer be required to invest at least 80% of its assets in equities. At the same time, Ariel Global Equity Fund (AGLOX) becomes Ariel Global Fund. The advisor avers that it’s not planning on changing the funds’ investment strategies, just that it would be nice to have the option to move into other asset classes if conditions dictate.

Effective October 30, Guggenheim U.S. Long Short Momentum Fund (RYAMX) will become plain ol’ Guggenheim Long-Short Fund. In one of those “why bother” changes, the prospectus adds a new first sentence to the Strategy section (“invest, under normal circumstances, at least 80% of its assets in long and short equity or equity-like securities”) but maintains the old “momentum” language in the second and third sentences. They’ll still “respond to the dynamically changing economy by moving its investments among different industries and styles” and “allocates investments to industries and styles according to several measures of momentum. “ Over the past five years, the fund has been modestly more volatile and less profitable than its peers. As a result, they’ve attracted few assets and might have decided, as a marketing matter, that highlighting a momentum approach isn’t winning them friends.

As of October 28, the SCA Absolute Return Fund (SCARX) will become the Granite Harbor Alternative Fund and it will no longer aim to provide “positive absolute returns with less volatility than traditional equity markets.” Instead, it’s going for the wimpier “long-term capital appreciation and income with low correlation” to the markets. SCA Directional Fund (SCADX) will become Granite Harbor Tactical Fund but will no longer seek “returns similar to equities with less volatility.” Instead, it will aspire to “long term capital appreciation with moderate correlation to traditional equity markets.” 

Have you ever heard someone say, “You know, what I’m really looking for is a change for a moderate correlation to the equity markets”? No, me neither.

Thomas Rowe Price, Jr. (the man, 1898-1983) has been called “the father of growth investing.” It’s perhaps then fitting that T. Rowe Price (the company) has decided to graft the word “Growth” into the names of many of its funds effective November 1.

T. Rowe Price Institutional Global Equity Fund becomes T. Rowe Price Institutional Global Focused Growth Equity Fund. Institutional Global Large-Cap Equity Fund will change its name to the T. Rowe Price Institutional Global Growth Equity Fund. T. Rowe Price Global Large-Cap Stock Fund will change its name to the T. Rowe Price Global Growth Stock Fund.

Effective October 28, 2013, USB International Equity Fund (BNIEX) gets a new name (UBS Global Sustainable Equity Fund), new mandate (invest globally in firms that pass a series of ESG screens) and new managers (Bruno Bertocci and Shari Gilfillan). The fund’s been a bit better under the five years of Nick Irish’s leadership than its two-star rating suggests, but not by a lot.

Off to the dustbin of history

There were an exceptionally large number of funds giving up the ghost this month. We’ve tracked 26, the same as the number of new no-load funds in registration and well below the hundred or so new portfolios of all sorts being launched. I’m deeply grateful to The Shadow, one of the longest-tenured members of our discussion board, for helping me to keep ahead of the flood.

American Independence Dynamic Conservative Plus Fund (TBBIX, AABBX) will liquidate on or about September 27, 2012.

Dynamic Canadian Equity Income Fund (DWGIX) and Dynamic Gold & Precious Metals Fund (DWGOX), both series of the DundeeWealth Funds, are slated for liquidation on September 23, 2013. Dundee bumped off Dynamic Contrarian Advantage Fund (DWGVX) and announced that it was divesting itself of three other funds (JOHCM Emerging Markets Opportunities Fund JOEIX, JOHCM International Select Fund JOHIX and JOHCM Global Equity Fund JOGEX), which are being transferred to new owners.

Equinox Commodity Strategy Fund (EQCAX) closed to new investors in mid-August and will liquidate on September 27th.

dinosaurThe Evolution Funds face extinction! Oh, the cruel irony of it.

Evolution Managed Bond (PEMVX) Evolution All-Cap Equity (PEVEX), Evolution Market Leaders (PEVSX) and Evolution Alternative Investment (PETRX) have closed to all new investment and were scheduled to liquidate by the end of September. Given their disappearance from Morningstar, one suspects the end came more quickly than we knew.

Frontegra HEXAM Emerging Markets Fund (FHEMX) liquidates at the end of September.

The Northern Lights Board of Trustees has concluded that “based on, among other factors, the current and projected level of assets in the Fund and the belief that it would be in the best interests of the Fund and its shareholders to discontinue the Hundredfold Select Global Fund (SFGPX).”

Perhaps the “other factors” would be the fact that Hundredfold trailed 100% of its peers over the past three- and five-year periods? The manager was unpaid and quite possibly the fund’s largest shareholder ($50-100k in a $2M fund). His Hundredfold Select Equity (SFEOX) is almost as woeful as the decedent, but Hundredfold Select Alternative (SFHYX) is in the top 1% of its peer group for the same period that the others are bottom 1%. That raises the spectre that luck, rather than skill, might be involved.

JPMorgan is cleaning house: JPMorgan Credit Opportunities Fund (JOCAX), JPMorgan Global Opportunities Fund (JGFAX) and JPMorgan Russia Fund (JRUAX) are all gone as of October 4.

John Hancock intends to merge John Hancock High Income (JHAQX) into John Hancock High Yield (JHHBX). I’m guessing at the fund tickers because the names in the SEC filing don’t quite line up with the Morningstar ones.

Legg Mason Esemplia Emerging Markets Long-Short Fund (SMKAX) will be terminated on October 1, 2013. Let’s see: hard-to-manage strategy, high risk, high expenses, high front load, no assets . . . sounds like Legg.

Leuthold Asset Allocation Fund (LAALX) is merging into Leuthold Core Investment Fund (LCORX). The Board of Directors approved a proposal for the Leuthold Asset Allocation to be acquired by the Leuthold Core, sometime in October 2013. Curious. LAALX, with a quarter billion in assets, modestly lags LCORX which has about $600 million. Both lag more mild-mannered funds such as Northern Global Tactical Asset Allocation (BBALX) and Vanguard STAR (VGSTX) over the course of LAALX’s lifetime. This might be less a story about LAALX than about the once-legendary Leuthold Core. Leuthold’s funds are all quant-driven, based on an unparalleled dataset. For years Core seemed unstoppable: between 2003 and 2008, it finished in the top 5% of its peer group four times. But for 2009 to now, it has trailed its peers every year and has bled $1 billion in assets. In merging the two, LAALX investors get a modestly less expensive fund with modestly better performance. Leuthold gets a simpler administrative structure. 

I halfway admire the willingness of Leuthold to close products that can’t distinguish themselves in the market. Clean Tech, Hedged Equity, Undervalued & Unloved, Select Equities and now Asset Allocation have been liquidated.

MassMutual Premier Capital Appreciation Fund (MCALX) will be liquidated, but not until January 24, 2014. Why? 

New Frontiers KC India Fund (NFIFX) has closed and began the process of liquidating their portfolio on August 26th. They point to “difficult market conditions in India.” The fund’s returns were comparable to its India-focused peers, which is to say it lost about 30% in 18 months.

Nomura Partners India Fund (NPIAX), Greater China Fund (NPCAX) and International Equity Fund (NPQAX) will all be liquidated by month’s end.

Nuveen Quantitative Enhanced Core Equity (FQCAX) is slated, pending inevitable shareholder approval, to disappear into Nuveen Symphony Low Volatility Equity Fund (NOPAX, formerly Nuveen Symphony Optimized Alpha Fund)

Oracle Mutual Fund (ORGAX) has “due to the relatively small size of the fund” underwent the process of “orderly dissolution.” Due to the relatively small size? How about, “due to losing 49.5% of our investors’ money over the past 30 months, despite an ongoing bull market in our investment universe”? To his credit, the advisor’s president and portfolio manager went down with the ship: he had something between $500,000 – $1,000,000 left in the fund as of the last SAI.

Quantitative Managed Futures Strategy Fund (QMFAX) will “in the best interests of the Fund and its shareholders” redeem all outstanding shares on September 15th.

The directors of the United Association S&P 500 Index Fund (UASPX/UAIIX) have determined that it’s in their shareholders’ best interest to liquidate. Uhhh … I don’t know why. $140 million in assets, low expenses, four-star rating …

Okay, so the Oracle Fund didn’t seem particularly oracular but what about the Steadfast Fund? Let’s see: “steadfast: firmly loyal or constant, unswerving, not subject to change.” VFM Steadfast Fund (VFMSX) launched less than one year ago and gone before its first birthday.

In Closing . . .

Interesting stuff’s afoot. We’ve spoken with the folks behind the surprising Oberweis International Opportunities Fund (OBIOX), which was much different and much more interesting that we’d anticipated. Thanks to “Investor” for poking us about a profile. In October we’ll have one. RiverPark Strategic Income is set to launch at the end of the month, which is exciting both because of the success of the other fund (the now-closed RiverPark Short Term High Yield Fund RPHYX) managed by David Sherman and Cohanzick Asset Management and because Sherman comes across as such a consistently sharp and engaging guy. With luck, I’ll lure him into an extended interview with me and a co-conspirator (the gruff but lovable Ed Studzinski, cast in the role of a gruff but lovable curmudgeon who formerly managed a really first-rate mutual fund, which he did).

etf_confMFO returns to Morningstar! Morningstar is hosting their annual ETF Invest Conference in Chicago, from October 2 – 4. While, on whole, we’d rather drop by their November conference in Milan, Italy it was a bit pricey and I couldn’t get a dinner reservation at D’O before early February 2014 so we decided to pass it up. While the ETF industry seems to be home to more loony ideas and regrettable business practices than most, it’s clear that the industry’s maturing and a number of ETF products offer low cost access to sensible strategies, some in areas where there are no tested active managers. The slow emergence of active ETFs blurs the distinction with funds and Morningstar does seem do have arranged both interesting panels (skeptical though I am, I’ll go listen to some gold-talk on your behalf) and flashy speakers (Austan Goolsbee among them). With luck, I’ll be able to arrange a couple of face-to-face meetings with Chicago-based fund management teams while I’m in town. If you’re going to be at the conference, feel free to wave. If you’d like to chat, let me know.

mfo-amazon-badgeIf you shop Amazon, please do remember to click on the Observer’s link and use it. If you click on it right now, you can bookmark it or set it as a homepage and then you won’t forget. The partnership with Amazon generates about $20/day which, while modest, allows us to reliably cover all of our “hard” expenses and underwrites the occasional conference coverage. If you’d prefer to consider other support options, that’s great. Just click on “support us” on the top menu bar. But the Amazon thing is utterly painless for you.

The Sufi poet Attar records the fable of a powerful king who asks assembled wise men to create a ring that will make him happy when he is sad, and vice versa. After deliberation the sages hand him a simple ring with the words “This too will pass.” That’s also true of whatever happens to the market and your portfolio in September and October.

Be brave and we’ll be with you in a month!


July 1, 2013

Dear friends,

Welcome to summer, a time of year when heat records are rather more common than market records.  


What’s in your long/short fund?

vikingEverybody’s talking about long/short funds.  Google chronicles 273,000 pages that use the phrase.  Bloomberg promises “a comprehensive list of long/short funds worldwide.”  Morningstar, Lipper and U.S. News plunk nearly a hundred funds into a box with that label.  (Not the same hundred funds, by the way.  Not nearly.)  Seeking Alpha offers up the “best and less long/short funds 2013.”

Here’s the Observer’s position: Talking about “long/short funds” is dangerous and delusional because it leads you to believe that there are such things.  Using the phrase validates the existence of a category, that is, a group of things where we perceive shared characteristics.  As soon as we announce a category, we start judging things in the category based on how well they conform to our expectations of the category.  If we assign a piece of fruit (or a hard-boiled egg) to the category “upscale dessert,” we start judging it based on how upscale-dessert-y it seems.  The fact that the assignment is random, silly and unfair doesn’t stop us from making judgments anyway.  The renowned linguist George Lakoff writes, “there is nothing more basic than categorization to our thought, perception, action and speech.”

Do categories automatically make sense?  Try this one out: Dyirbal, an Australian aboriginal language, has a category balan which contains women, fire, dangerous things, non-threatening birds and platypuses.

When Morningstar groups 83 funds together in the category “long/short equity,” they’re telling us “hey, all of these things have essential similarities.  Feel free to judge them against each other.”  We sympathize with the analysts’ need to organize funds.  Nonetheless, this particular category is seriously misleading.   It contains funds that have only superficial – not essential – similarities with each other.  In extended conversations with managers and executives representing a half dozen long/short funds, it’s become clear that investors need to give up entirely on this simple category if they want to make meaningful comparisons and choices.

Each of the folks we spoke to have their own preferred way of organizing these sorts of “alternative investment” funds.   After two weeks of conversation, though, useful commonalities began to emerge.  Here’s a manager-inspired schema:

  1. Start with the role of the short portfolio.  What are the managers attempting to do with their short book and how are they doing it? The RiverNorth folks, and most of the others, agree that this should be “the first and perhaps most important” criterion. Alan Salzbank of the Gargoyle Group warns that “the character of the short positions varies from fund to fund, and is not necessarily designed to hedge market exposure as the category title would suggest.”  Based on our discussions, we think there are three distinct roles that short books play and three ways those strategies get reflected in the fund.


    Portfolio tool


    Add alpha

    Individual stock shorts

    These funds want to increase returns by identifying the market’s least attractive stocks and betting against them

    Reduce beta

    Shorting indexes or sectors, generally by using ETFs

    These funds want to tamp market volatility by placing larger or smaller bets against the entire market, or large subsets of it, with no concern for the value of individual issues


    Various option strategies such as selling calls

    These funds believe they can generate considerable income – as much as 1.5-2% per month – by selling options.  Those options become more valuable as the market becomes more volatile, so they serve as a cushion for the portfolio; they are “by their very nature negatively correlated to the market” (AS).

  2. Determine the degree of market exposure.   Net exposure (% long minus % short) varies dramatically, from 100% (from what ARLSX manager Matt Moran laments as “the faddish 130/30 funds from a few years ago”) to under 25%.  An analysis by the Gargoyle Group showed three-year betas for funds in Morningstar’s long/short category ranging from 1.40 to (-0.43), which gives you an idea of how dramatically market exposure varies.  For some funds the net market exposure is held in a tight band (40-60% with a target of 50% is pretty common).   Some of the more aggressive funds will shift exposure dramatically, based on their market experience and projections.  It doesn’t make sense to compare a fund that’s consistently 60% exposure to the market with one that swings from 25% – 100%.

    Ideally, that information should be prominently displayed on a fund’s fact sheet, especially if the manager has the freedom to move by more than a few percent.  A nice example comes from Aberdeen Equity Long/Short Fund’s (GLSRX) factsheet:


    Greg Parcella of Long/Short Advisors  maintains an internal database of all of long/short funds and expressed some considerable frustration in discovering that many don’t make that information available or require investors to do their own portfolio analyses to discover it.  Even with the help of Morningstar, such self-generated calculations can be a bit daunting.  Here, for example, is how Morningstar reports the portfolio of Robeco Boston Partners Long/Short Equity BPLEX in comparison to its (entirely-irrelevant) long-short benchmark and (wildly incomparable) long/short equity peers:


    So, look for managers who offer this information in a clear way and who keep it current. Morty Schaja, president of RiverPark Advisors which offers two very distinctive long/short funds (RiverPark Long/Short Opportunity RLSFX and RiverPark/Gargoyle Hedged Value RGHVX) suggest that such a lack of transparency would immediately raise concerns for him as an investor; he did not offer a flat “avoid them” but was surely leaning in that direction.

  3. Look at the risk/return metrics for the fund over time.  Once you’ve completed the first two steps, you’ve stopped comparing apples to rutabagas and mopeds (step one) or even cooking apples to snacking apples (step two).  Now that you’ve got a stack of closely comparable funds, many of the managers call for you to look at specific risk measures.  Matt Moran suggests that “the best measure to employ are … the Sharpe, the Sortino and the Ulcer Index [which help you determine] how much return an investor is getting for the risk that they are taking.”

As part of the Observer’s new risk profiles of 7600 funds, we’ve pulled all of the funds that Morningstar categorizes as “long/short equity” into a single table for you.  It will measure both returns and seven different flavors of risk.  If you’re unfamiliar with the varied risk metrics, check our definitions page.  Remember that each bit of data must be read carefully since the fund’s longevity can dramatically affect their profile.  Funds that were around in the 2008 will have much greater maximum drawdowns than funds launched since then.  Those numbers do not immediately make a fund “bad,” it means that something happened that you want to understand before trusting these folks with your money.

As a preview, we’d like to share the profiles for five of the six funds whose advisors have been helping us understand these issues.  The sixth, RiverNorth Dynamic Buy-Write (RNBWX), is too new to appear.  These are all funds that we’ve profiled as among their categories’ best and that we’ll be profiling in August.


Long/short managers aren’t the only folks concerned with managing risk.  For the sake of perspective, we calculated the returns on a bunch of the risk-conscious funds that we’ve profiled.  We looked, in particular, at the recent turmoil since it affected both global and domestic, equity and bond markets.

Downside protection in one ugly stretch, 05/28/2013 – 06/24/2013


Represented by


Traditional balanced

Vanguard Balanced Index Fund (VBINX)


Global equity

Vanguard Total World Stock Index (VTWSX)


Absolute value equity a/k/a cash-heavy funds

ASTON/River Road Independent Value (ARIVX)

Bretton (BRTNX)

Cook and Bynum (COBYX)

FPA International Value (FPIVX)

Pinnacle Value (PVFIX)






Pure long-short

ASTON/River Road Long-Short (ARLSX)

Long/Short Opportunity (LSOFX)

RiverPark Long Short Opportunity (RLSFX)

Wasatch Long/Short (FMLSX)





Long with covered calls

Bridgeway Managed Volatility (BRBPX)

RiverNorth Dynamic Buy-Write (RNBWX)

RiverPark Gargoyle Hedged Value (RGHVX)




Market neutral

Whitebox Long/Short Equity (WBLSX)



MainStay Marketfield (MFLDX)


Charles, widely-read and occasionally whimsical, thought it useful to share two stories and a bit of data that lead him to suspect that successful long/short investments are, like Babe Ruth’s “called home run,” more legend than history.

Notes from the Morningstar Conference

If you ever wonder what we do with contributions to the Observer or with income from our Amazon partnership, the short answer is, we try to get better.  Three ongoing projects reflect those efforts.  One is our ongoing visual upgrade, the results of which will be evident online during July.  More than window-dressing, we think of a more graphically sophisticated image as a tool for getting more folks to notice and benefit from our content.  A second our own risk profiles for more than 7500 funds.  We’ll discuss those more below.  The third was our recent presence at the Morningstar Investment Conference.  None of them would be possible without your support, and so thanks!

I spent about 48 hours at Morningstar and was listening to folks for about 30 hours.  I posted my impressions to our discussion board and several stirred vigorous discussions.  For your benefit, here’s a sort of Top Ten list of things I learned at Morningstar and links to the ensuing debates on our discussion board.

Day One: Northern Trust on emerging and frontier investing

Attended a small lunch with Northern managers.  Northern primarily caters to the rich but has retail share class funds, FlexShare ETFs and multi-manager funds for the rest of us. They are the world’s 5th largest investor in frontier markets. Frontier markets are currently 1% of global market cap, emerging markets are 12% and both have GDP growth 350% greater than the developed world’s. EM/F stocks sell at a 20% discount to developed stocks. Northern’s research shows that the same factors that increase equity returns in the developed world (small, value, wide moat, dividend paying) also predict excess returns in emerging and frontier markets. In September 2012 they launched the FlexShares Emerging Markets Factor Tilt Index Fund (TLTE) that tilts toward Fama-French factors, which is to say it holds more small and more value than a standard e.m. index.

Day One: Smead Value (SMVLX)

Interviewed Bill Smead, an interesting guy, who positions himself against the “brilliant pessimists” like Grantham and Hussman.  Smead argues their clients have now missed four years of phenomenal gains. Their thesis is correct (as were most of the tech investor theses in 1999) but optimism has been in such short supply that it became valuable.  He launched Smead Value in 2007 with a simple strategy: buy and hold (for 10 to, say, 100 years) excellent companies.  Pretty radical, eh?  He argues that the fund universe is 35% passive, 5% active and 60% overly active. Turns out that he’s managed it to top 1-2% returns over most trailing periods.  Much the top performing LCB fund around.  There’s a complete profile of the fund below.

Day One: Morningstar’s expert recommendations on emerging managers

Consuelo Mack ran a panel discussion with Russ Kinnel, Laura Lallos, Scott Burns and John Rekenthaler. One question: “What are your recommendations for boutique firms that investors should know about, but don’t? Who are the smaller, emerging managers who are really standing out?”

Dead silence. Glances back and forth. After a long silence: FPA, Primecap and TFS.

There are two possible explanations: (1) Morningstar really has lost touch with anyone other than the top 20 (or 40 or whatever) fund complexes or (2) Morningstar charged dozens of smaller fund companies to be exhibitors at their conference and was afraid to offend any of them by naming someone else.

Since we notice small funds and fund boutiques, we’d like to offer the following answers that folks could have given:

Well, Consuelo, a number of advisors are searching for management teams that have outstanding records with private accounts and/or hedge funds, and are making those teams and their strategies available to the retail fund world. First rate examples include ASTON, RiverNorth and RiverPark.


That’s a great question, Consuelo.  Individual investors aren’t the only folks tired of dealing with oversized, underperforming funds.  A number of first-tier investors have walked away from large fund complexes to launch their own boutiques and to pursue a focused investing vision. Some great places to start would be with the funds from Grandeur Peak, Oakseed, and Seafarer.

Mr. Mansueto did mention, in his opening remarks, an upcoming Morningstar initiative to identify and track “emerging managers.”  If so, that’s a really good sign for all involved.

Day One: Michael Mauboussin on luck and skill in investing

Mauboussin works for Credit Suisse, Legg Mason before that and has written The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing (2012). Here’s his Paradox of Skill: as the aggregate level of skill rises, luck becomes a more important factor in separating average from way above average. Since you can’t count on luck, it becomes harder for anyone to remain way above average. Ted Williams hit .406 in 1941. No one has been over .400 since. Why? Because everyone has gotten better: pitchers, fielders and hitters. In 1941, Williams’ average was four standard deviations above the norm. In 2012, a hitter up by four s.d. would be hitting “just” .380. The same thing in investing: the dispersion of returns (the gap between 50th percentile funds and 90th percentile funds) has been falling for 50 years. Any outsized performance is now likely luck and unlikely to persist.

This spurred a particularly rich discussion on the board.

Day Two: Matt Eagan on where to run now

Day Two started with a 7:00 a.m. breakfast sponsored by Litman Gregory. (I’ll spare you the culinary commentary.) Litman runs the Masters series funds and bills itself as “a manager of managers.” The presenters were two of the guys who subadvise for them, Matt Eagan of Loomis Sayles and David Herro of Oakmark. Eagan helps manage the strategic income, strategic alpha, multi-sector bond, corporate bond and high-yield funds for LS. He’s part of a team named as Morningstar’s Fixed-Income Managers of the Year in 2009.

Eagan argues that fixed income is influenced by multiple cyclical risks, including market, interest rate and reinvestment risk. He’s concerned with a rising need to protect principal, which leads him to a neutral duration, selective shorting and some currency hedges (about 8% of his portfolios).

He’s concerned that the Fed has underwritten a hot-money move into the emerging markets. The fundamentals there “are very, very good and we see their currencies strengthening” but he’s made a tactical withdrawal because of some technical reasons (I have “because of a fund-out window” but have no idea of what that means) which might foretell a drop “which might be violent; when those come, you’ve just got to get out of the way.”

He finds Mexico to be “compelling long-term story.” It’s near the US, it’s capturing market share from China because of the “inshoring” phenomenon and, if they manage to break up Pemex, “you’re going to see a lot of growth there.”

Europe, contrarily, “is moribund at best. Our big hope is that it’s less bad than most people expect.” He suspects that the Europeans have more reason to stay together than to disappear, so they likely will, and an investor’s challenge is “to find good corporations in bad Zip codes.”

In the end:

  • avoid indexing – almost all of the fixed income indexes are configured to produce “negative real yields for the foreseeable future” and most passive products are useful mostly as “just liquidity vehicles.”
  • you can make money in the face of rising rates, something like a 3-4% yield with no correlation to the markets.
  • avoid Treasuries and agencies
  • build a yield advantage by broadening your opportunity set
  • look at convertible securities and be willing to move within a firm’s capital structure
  • invest overseas, in particular try to get away from the three reserve currencies.

Eagan manages a sleeve of Litman Gregory Masters Alternative Strategies (MASNX), which we’ve profiled and which has had pretty solid performance.

Day Two: David Herro on emerging markets and systemic risk

The other breakfast speaker was David Herro of Oakmark International.  He was celebrated in our May 2013 essay, “Of Oaks and Acorns,” that looked at the success of Oakmark international analysts as fund managers.

Herro was asked about frothy markets and high valuations. He argues that “the #1 risk to protect against is the inability of companies to generate profits – macro-level events impact price but rarely impact long-term value. These macro-disturbances allow long-term investors to take advantage of the market’s short-termism.” The ’08-early ’09 events were “dismal but temporary.”

Herro notes that he had 20% of his flagship in the emerging markets in the late 90s, then backed down to zero as those markets were hit by “a wave of indiscriminate inflows.” He agrees that emerging markets will “be the propellant of global economic growth for the next 20 years” but, being a bright guy, warns that you still need to find “good businesses at good prices.” He hasn’t seen any in several years but, at this rate, “maybe in a year we’ll be back in.”

His current stance is that a stock needs to have 40-50% upside to get into his portfolio today and “some of the better quality e.m. firms are within 10-15% of getting in.”  (Since then the e.m. indexes briefly dropped 7% but had regained most of that decline by June 30.) He seemed impressed, in particular, with the quality of management teams in Latin America (“those guys are really experienced with handling adversity”) but skeptical of the Chinese newbies (“they’re still a little dodgy”).

He also announced a bias “against reserve currencies.” That is, he thinks you’re better off buying earnings which are not denominated in dollars, Euros or … perhaps, yen. His co-presenter, Matt Eagan of Loomis Sayles, has the same bias. He’s been short the yen but long the Nikkei.

In terms of asset allocation, he thinks that global stocks, especially blue chips “are pretty attractively priced” since values have been rising faster than prices have. Global equities, he says, “haven’t come out of their funk.” There’s not much of a valuation difference between the US and the rest of the developed world (the US “is a little richer” but might deserve it), so he doesn’t see overweighting one over the other.

Day Two: Jack Bogle ‘s inconvenient truths

Don Phillips had a conversation with Bogle in a huge auditorium that, frankly, should dang well have had more people in it.  I think the general excuse is, “we know what Bogle’s going to say, so why listen?”  Uhhh … because Bogle’s still thinking clearly, which distinguishes him from a fair number of his industry brethren?  He weighed in on why money market funds cost more than indexed stock funds (the cost of check cashing) and argued that our retirement system is facing three train wrecks: (1) underfunding of the Social Security system – which is manageable if politicians chose to manage it, (2) “grotesquely underfunded” defined benefit plans (a/k/a pension plans) whose managers still plan to earn 8% with a balanced portfolio – Bogle thinks they’ll be lucky to get 5% before expenses – and who are planning “to bring in some hedge fund guys” to magically solve their problem, and (3) defined contribution plans (401k’s and such) which allow folks to wreck their long-term prospects by cashing out for very little cause.

Bogle thinks that most target-date funds are ill-designed because they ignore Social Security, described by Bogle as “the best fixed-income position you’ll ever have.”  The average lifetime SS benefit is something like $300,000.  If your 401(k) contains $300,000 in stocks, you’ll have a 50/50 hybrid at retirement.  If your 401(k) target-date fund is 40% in bonds, you’ll retire with a portfolio that’s 70% bonds (SS + target date fund) and 30% stocks.  He’s skeptical of the bond market to begin with (he recommends that you look for a serious part of your income stream from dividend growth) and more skeptical of a product that buries you in bonds.

Finally, he has a strained relationship with his successors at Vanguard.  On the one hand he exults that Vanguard’s structural advantage on expenses is so great “that nobody can match us – too bad for them, good for us.”  And the other, he disagrees with most industry executives, including Vanguard’s, on regulations of the money market industry and the fund industry’s unwillingness – as owners of 35% of all stock – to stand up to cultures in which corporations have become “the private fiefdom of their chief executives.”  (An issue addressed by The New York Times on June 29, “The Unstoppable Climb in CEO Pay.”)  At base, “I don’t disagree with Vanguard.  They disagree with me.”

Day Three: Sextant Global High Income

This is an interesting one and we’ll have a full profile of the fund in August. The managers target a portfolio yield of 8% (currently they manage 6.5% – the lower reported trailing 12 month yield reflects the fact that the fund launched 12 months ago and took six months to become fully invested). There are six other “global high income” funds – Aberdeen, DWS, Fidelity, JohnHancock, Mainstay, Western Asset. Here’s the key distinction: Sextant pursues high income through a combination of high dividend stocks (European utilities among them), preferred shares and high yield bonds. Right now about 50% of the portfolio is in stocks, 30% bonds, 10% preferreds and 10% cash. No other “high income” fund seems to hold more than 3% equities. That gives them both the potential for capital appreciation and interest rate insulation. They could imagine 8% from income and 2% from cap app. They made about 9.5% over the trailing twelve months through 5/31. 

Day Three: Off-the-record worries

I’ve had the pleasure of speaking with some managers frequently over months or years, and occasionally we have conversations where I’m unsure that statements were made for attribution.  Here are four sets of comments attributable to “managers” who I think are bright enough to be worth listening to.

More than one manager is worried about “a credit event” in China this year. That is, the central government might precipitate a crisis in the financial system (a bond default or a bank run) in order to begin cleansing a nearly insolvent banking system. (Umm … I think we’ve been having it and I’m not sure whether to be impressed or spooked that folks know this stuff.) The central government is concerned about disarray in the provinces and a propensity for banks and industries to accept unsecured IOUs. They are acting to pursue gradual institutional reforms (e.g., stricter capital requirements) but might conclude that a sharp correction now would be useful. One manager thought such an event might be 30% likely. Another was closer to “near inevitable.”

More than one manager suspects that there might be a commodity price implosion, gold included. A 200 year chart of commodity prices shows four spikes – each followed by a retracement of more than 100% – and a fifth spike that we’ve been in recently.

More than one manager offered some version of the following statement: “there’s hardly a bond out there worth buying. They’re essentially all priced for a negative real return.”

More than one manager suggested that the term “emerging markets” was essentially a linguistic fiction. About 25% of the emerging markets index (Korea and Taiwan) could be declared “developed markets” (though, on June 11, they were not) while Saudi Arabia could become an emerging market by virtue of a decision to make shares available to non-Middle Eastern investors. “It’s not meaningful except to the marketers,” quoth one.

Day Three: Reflecting on tchotchkes

Dozens of fund companies paid for exhibits at Morningstar – little booths inside the McCormick Convention Center where fund reps could chat with passing advisors (and the occasional Observer guy).  One time honored conversation starter is the tchotchke: the neat little giveaway with your name on it.  Firms embraced a stunning array of stuff: barbeque sauce (Scout Funds, from Kansas City), church-cooked peanuts (Queens Road), golf tees, hand sanitizers (inexplicably popular), InvestMints (Wasatch), micro-fiber cloths (Payden), flashlights, pens, multi-color pens, pens with styluses, pens that signal Bernanke to resume tossing money from a circling helicopter . . .

Ideally, you still need to think of any giveaway as an expression of your corporate identity.  You want the properties of the object to reflect your sense of self and to remind folks of you.  From that standard, the best tchotchke by a mile were Vanguard’s totebags.  You wish you had one.  Made of soft, heavy-weight canvas with a bottom that could be flattened for maximum capacity, they were unadorned except for the word “Vanguard.”  No gimmicks, no flash, utter functionality in a product that your grandkids will fondly remember you carrying for years.  That really says Vanguard.  Good job, guys!

vangard bag 2

The second-best tchotchke (an exceedingly comfortable navy baseball cap with a sailboat logo) and single best location (directly across from the open bar and beside Vanguard) was Seafarer’s.  

It’s Charles in Charge! 

My colleague Charles Boccadoro has spearheaded one of our recent initiatives: extended risk profiles of over 7500 funds.  Some of his work is reflected in the tables in our long/short fund story.  Last month we promised to roll out his data in a searchable form for this month.  As it turns out, the programmer we’re working with is still a few days away from a “search by ticker” engine.  Once that’s been tested, chip will be able to quickly add other search fields. 

As an interim move, we’re making all of Charles’ risk analyses available to you as a .pdf.  (It might be paranoia, but I’m a bit concerned about the prospect of misappropriation of the file if we post it as a spreadsheet.)  It runs well over 100 pages, so I’d be a bit cautious about hitting the “print” button. 

Charles’ contributions have been so thoughtful and extensive that, in August, we’ll set aside a portion of the Observer that will hold an archive of all of his data-driven pieces.  Our current plan is to introduce each of the longer pieces in this cover essay then take readers to Charles’ Balcony where complete story and all of his essays dwell.  We’re following that model in …

Timing method performance over ten decades

literate monkeyThe Healthy DebateIn Professor David Aronson’s 2006 book, entitled “Evidence-Based Technical Analysis,” he argues that subjective technical analysis, which is any analysis that cannot be reduced to a computer algorithm and back tested, is “not a legitimate body of knowledge but a collection of folklore resting on a flimsy foundation of anecdote and intuition.”

He further warns that falsehoods accumulate even with objective analysis and rules developed after-the-fact can lead to overblown extrapolations – fool’s gold biased by data-mining, more luck than legitimate prediction, in same category as “literate monkeys, Bible Codes, and lottery players.”

Read the full story here.

Announcing Mutual Fund Contacts, our new sister-site

I mentioned some months ago a plan to launch an affiliate site, Mutual Fund Contacts.  June 28 marked the “soft launch” of MFC.  MFC’s mission is to serve as a guide and resource for folks who are new at all this and feeling a bit unsteady about how to proceed.  We imagine a young couple in their late 20s planning an eventual home purchase, a single mom in her 30s who’s trying to organize stuff that she’s not had to pay attention to, or a young college graduate trying to lay a good foundation.

Most sites dedicated to small investors are raucous places with poor focus, too many features and a desperate need to grab attention.  Feh.  MFC will try to provide content and resources that don’t quite fit here but that we think are still valuable.  Each month we’ll provide a 1000-word story on the theme “the one-fund portfolio.”  If you were looking for one fund that might yield a bit more than a savings account without a lot of downside, what should you consider?  Each “one fund” article will recommend three options: two low-minimum mutual funds and one commission-free ETF.  We’ll also have a monthly recommendation on three resources you should be familiar with (this month, the three books that any financially savvy person needs to start with) and ongoing resources (this month: the updated “List of Funds for Small Investors” that highlights all of the no-load funds available for $100 or less – plus a couple that are close enough to consider).

The nature of a soft launch is that we’re still working on the site’s visuals and some functionality.  That said, it does offer a series of resources that, oh, say, your kids really should be looking at.  Feel free to drop by Mutual Fund Contacts and then let us know how we can make it better.

Everyone loves a crisis

Larry Swedroe wrote a widely quoted, widely redistributed essay for CBS MoneyWatch warning that bond funds were covertly transforming themselves into stock funds in pursuit of additional yield.  His essay opens with:

It may surprise you that, as of its last reporting date, there were 352 mutual funds that are classified by Morningstar as bond funds that actually held stocks in their portfolio. (I know I was surprised, and given my 40 years of experience in the investment banking and financial advisory business, it takes quite a bit to surprise me.) At the end of 2012, it was 312, up from 283 nine months earlier.

The chase for higher yields has led many actively managed bond funds to load up on riskier investments, such as preferred stocks. (Emphasis added)

Many actively managed bond funds have loaded up?

Let’s look at the data.  There are 1177 bond funds, excluding munis.  Only 104 hold more than 1% in stocks, and most of those hold barely more than a percent.  The most striking aspect of those funds is that they don’t call themselves “bond” funds.  Precisely 11 funds with the word “Bond” in their name have stocks in excess of 1%.  The others advertise themselves as “income” funds and, quite often, “strategic income,” “high income” or “income opportunities” funds.  Such funds have, traditionally, used other income sources to supplement their bond-heavy core portfolios.

How about Larry’s claim that they’ve been “bulking up”?  I looked at the 25 stockiest funds to see whether their equity stake should be news to their investors.  I did that by comparing their current exposure to the bond market with the range of exposures they’ve experienced over the past five years.  Here’s the picture, ranked based on US stock exposure, starting with the stockiest fund:



Bond category

Current bond exposure

Range of bond exposure, 2009-2013

Ave Maria Bond





Pacific Advisors Government Securities


Short Gov’t



Advisory Research Strategic Income




n/a – new

Northeast Investors


High Yield



Loomis Sayles Strategic Income





JHFunds2 Spectrum Income





T. Rowe Price Spectrum Income





Azzad Wise Capital




20-42 *

Franklin Real Return





Huntington Mortgage Securities





Eaton Vance Bond




n/a – new

Federated High Yield Trust


High Yield



Pioneer High Yield


High Yield



Chou Income





Forward Income Builder





ING Pioneer High Yield Portfolio


High Yield



Loomis Sayles High Income


High Yield



Highland Floating Rate Opportunities


Bank Loan



Epiphany FFV Strategic Income





RiverNorth/Oaktree High Income




n/a – new

Astor Active Income ETF





Fidelity Capital & Income


High Yield



Transamerica Asset Allc Short Horizon





Spirit of America Income





*WISEX invests within the constraints of Islamic principles.  As a result, most traditional interest-paying, fixed-income vehicles are forbidden to it.

From this most stock-heavy group, 10 funds now hold fewer bonds than at any other point in the past five years.  In many cases (see T Rowe Price Spectrum Income), their bond exposure varies by only a few percentage points from year to year so being light on bonds is, for them, not much different than being heavy on bonds.

The SEC’s naming rule says that if you have an investment class in your name (e.g. “Bond”) then at least 80% of your portfolio must reside in that class. Ave Maria Bond runs right up to the line: 19.88% US stocks, but warns you of that: “The Fund may invest up to 20% of its net assets in equity securities, which include preferred stocks, common stocks paying dividends and securities convertible into common stock.”  Eaton Vance Bond is 12% and makes the same declaration: “The Fund may invest up to 20% of its net assets in common stocks and other equity securities, including real estate investment trusts.”

Bottom line: the “loading up” has been pretty durn minimal.  The funds which have a substantial equity stake now have had a substantial equity stake for years, they market that fact and they name themselves to permit it.

Fidelity cries out: Run away!

Several sites have noted the fact that Fidelity Europe Cap App Fund (FECAX) has closed to new investors.  Most skip the fact that it looks like the $400 million FECAX is about to get eaten, presumably by Fidelity Europe (FIEUX): “The Board has approved closing Fidelity Europe Capital Appreciation Fund effective after the close of business on July 19, 2013, as the Board and FMR are considering merging the fund.” (emphasis added)

Fascinating.  Fidelity’s signaling the fact that they can no longer afford two Euro-centered funds.  Why would that be the case? 

I can only imagine three possibilities:

  1. Fidelity no longer finds with a mere $400 million in AUM viable, so the Cap App fund has to go.
  2. Fidelity doesn’t think there’s room for (or need for) more than one European stock strategy.  There are 83 distinct U.S.-focused strategies in the Fidelity family, but who’d need more than one for Europe?
  3. Fidelity can no longer find managers capable of performing well enough to be worth the effort.



    Returns TTM

    Returns 5 yr

    Compared to peers – 5 yr

    Fidelity European funds for British investors

    Fidelity European Fund A-Accumulation

    1.72% on $4.1B




    Fidelity Europe Long-Term Growth Fund

    1.73 on $732M




    Fidelity European Opportunities

    1.73 on $723M




    Fidelity European funds for American investors

    Fidelity European Capital Appreciation

    0.92% on $331M




    Fidelity Europe

    0.80 on $724M




    Fidelity Nordic

    1.04% on $340M



    The Morningstar peer group is “miscellaneous regions” – ignore it

    Converted at ₤1 = $1.54, 25 June 2013.

In April of 2007, Fidelity tried to merge Nordic into Europe, but its shareholders refused to allow it.  At the time Nordic was one of Fidelity’s best-performing international funds and had $600 million in assets.  The announced rationale:  “The Nordic region is more volatile than developed Europe as a whole, and Fidelity believes the region’s characteristics have changed sufficiently to no longer warrant a separate fund focused on the region.”  The nature of those “changes” was not clear and shareholders were unimpressed.

It is clear that Fidelity has a personnel problem.  When, for example, they wanted to bolster their asset allocation funds-of-funds, they added two new Fidelity Series funds for them to choose from.  One is run by Will Danoff, whose Contrafund already has $95 billion in assets, and the other by Joel Tillinghast, whose Low-Priced Stock Fund lugs $40 billion.  Presumably they would have turned to a young star with less on their plate … if they had a young star with less on their plate.  Likewise, Fidelity Strategic Adviser Multi-Manager funds advertise themselves as being run by the best of the best; these funds have the option of using Fidelity talent or going outside when the options elsewhere are better.  What conclusions might we draw from the fact that Strategic Advisers Core Multi-Manager (FLAUX) draws one of its 11 managers from Fido or that Strategic Advisers International Multi-Manager (FMJDX) has one Fido manager in 17?  Both of the managers for Strategic Advisers Core Income Multi-Manager (FWHBX) are Fidelity employees, so it’s not simply that the SAMM funds are designed to showcase non-Fido talent.

I’ve had trouble finding attractive new funds from Fidelity for years now.  It might well be that the contemplated retrenchment in their Europe line-up reflects the fact that Fido’s been having the same trouble.

Observer Fund Profiles:

Each month the Observer provides in-depth profiles of between two and four funds.  Our “Most Intriguing New Funds” are funds launched within the past couple years that most frequently feature experienced managers leading innovative newer funds.  “Stars in the Shadows” are older funds that have attracted far less attention than they deserve. 

Forward Income Builder (IAIAX): “income,” not “bonds.”  This is another instance of a fund that has been reshaped in recent years into an interesting offering.  Perception just hasn’t yet caught up with the reality.

Smead Value (SMVLX): call it “Triumph of the Optimists.”  Mr. Smead dismisses most of what his peers are doing as poorly conceived or disastrously poorly-conceived.  He thinks that pessimism is overbought, optimism in short supply and a portfolio of top-tier U.S. stocks held forever as your best friend.

Elevator Talk #5: Casey Frazier of Versus Capital Multi-Manager Real Estate Income Fund

Since the number of funds we can cover in-depth is smaller than the number of funds worthy of in-depth coverage, we’ve decided to offer one or two managers each month the opportunity to make a 200 word pitch to you. That’s about the number of words a slightly-manic elevator companion could share in a minute and a half. In each case, I’ve promised to offer a quick capsule of the fund and a link back to the fund’s site. Other than that, they’ve got 200 words and precisely as much of your time and attention as you’re willing to share. These aren’t endorsements; they’re opportunities to learn more.

versusVersus Capital Multi-Manager Real Estate Income Fund is a closed-end interval fund.  That means that you can buy Versus shares any day that the market is open, but you only have the opportunity to sell those shares once each quarter.  The advisor has the option of meeting some, all or none of a particular quarter’s redemption requests, based on cash available and the start of the market. 

The argument for such a restrictive structure is that it allows managers to invest in illiquid asset classes; that is, to buy and profit from things that cannot be reasonably bought or sold on a moment’s notice.  Those sorts of investments have been traditionally available only to exceedingly high net-worth investors either through limited partnerships or direct ownership (e.g., buying a forest).  Several mutual funds have lately begun creating into this space, mostly structured as interval funds.  Vertical Capital Income Fund (VCAPX), the subject of our April Elevator Talk, was one such.  KKR Alternative Corporate Opportunities Fund, from private equity specialist Kohlberg Kravis Roberts, is another.

Casey Frazieris Chief Investment Officer for Versus, a position he’s held since 2011.  From 2005-2010, he was the Chief Investment Officer for Welton Street Investments, LLC and Welton Street Advisors LLC.  Here’s Mr. Frazier’s 200 (and 16!) words making the Versus case:

We think the best way to maximize the investment attributes of real estate – income, diversification, and inflation hedge – is through a blended portfolio of private and public real estate investments.  Private real estate investments, and in particular the “core” and “core plus” segments of private real estate, have historically offered steady income, low volatility, low correlation, good diversification, and a hedge against inflation.  Unfortunately institutional private real estate has been out of reach of many investors due to the large size of the real estate assets themselves and the high minimums on the private funds institutional investors use to gain exposure to these areas.  With the help of institutional consultant Callan Associates, we’ve built a multi-manager portfolio in a 40 Act interval structure we feel covers the spectrum of a core real estate allocation.  The allocation includes real estate private equity and debt, public equity and debt, and broad exposure across asset types and geographies.  We target a mix of 70% private real estate with 30% public real estate to enhance liquidity, and our objective is to produce total returns in the 7% – 9% range net of fees with 5% – 6% of that coming from income.  Operationally, the fund has daily pricing, quarterly liquidity at NAV, quarterly income, 1099 reporting and no subscription paperwork.

Versus offers a lot of information about private real estate investing on their website.  Check the “fund documents” page. The fund’s retail, F-class shares carry an annual expense of 3.30% and a 2.00% redemption fee on shares held less than one year.  The minimum initial investment is $10,000.  

Conference Call Upcoming: RiverNorth/Oaktree High Income, July 11, 3:15 CT


While the Observer’s conference call series is on hiatus for the summer (the challenge of coordinating schedules went from “hard” to “ridiculous”), we’re pleased to highlight similar opportunities offered by folks we’ve interviewed and whose work we respect.

In that vein, we’d like to invite you to join in on a conference call hosted by RiverNorth to highlight the early experience of RiverNorth/Oaktree High Income Fund.  The fund is looking for high total return, rather than income per se.  As of May 31, 25% of the portfolio was allocated to RiverNorth’s tactical closed-end fund strategy and 75% to Oaktree.  Oaktree has two strategies (high yield bond and senior loan) and it allocates more or less to each depending on the available opportunity set.

Why might you want to listen in?  At base, both RiverNorth and Oaktree are exceedingly successful at what they do.  Oaktree’s services are generally not available to retail investors.  RiverNorth’s other strategic alliances have ranged from solid (with Manning & Napier) to splendid (with DoubleLine).  On the surface the Oaktree alliance is producing solid results, relative to their Morningstar peer group, but the fund’s strategies are so distinctive that I’m dubious of the peer comparison.

If you’re interested, the RiverNorth call will be Thursday, July 11, from 3:15 – 4:15 Central.  The call is web-based, so you’ll be able to read supporting visuals while the guys talk.  Callers will have the opportunity to ask questions of Mr. Marks and Mr. Galley.  Because RiverNorth anticipates a large crowd, you’ll submit your questions by typing them rather than speaking directly to the managers. 

How can you join in?  Just click


You can also get there by visiting and clicking on the Events tab.

Launch Alert

Artisan Global Small Cap (ARTWX) launched on June 25, after several delays.  It’s managed by Mark Yockey and his new co-managers/former analysts, Charles-Henri Hamker and Dave Geisler.  They’ll apply the same investment discipline used in Artisan Global Equity (ARTHX) with a few additional constraints.  Global Small will only invest in firms with a market cap of under $4 billion at the time of purchase and might invest up to 50% of the portfolio in emerging markets.  Global Equity has only 7% of its money in small caps and can invest no more than 30% in emerging markets (right now it’s about 14%). Just to be clear: this team runs one five-star fund (Global), two four-star ones (International ARTIX and International Small Cap ARTJX), Mr. Yockey was Morningstar’s International Fund Manager of the Year in 1998 and he and his team were finalists again in 2012.  It really doesn’t get much more promising than that. The expenses are capped at 1.50%.  The minimum initial investment is $1000.

RiverPark Structural Alpha (RSAFX and RSAIX) launched on Friday, June 28.  The fund will employ a variety of options investment strategies, including short-selling index options that the managers believe are overpriced.  A half dozen managers and two fund presidents have tried to explain options-based strategies to me.  I mostly glaze over and nod knowingly.  I have become convinced that these represent fairly low-volatility tools for capturing most of the stock market’s upside. The fund will be comanaged by Justin Frankel and Jeremy Berman. This portfolio was run as a private partnership for five years (September 2008 – June 2013) by the same managers, with the same strategy.  Over that time they managed to return 10.7% per year while the S&P 500 made 6.2%.  The fund launched at the end of September, 2008, and gained 3.55% through year’s end.  The S&P500 dropped 17.7% in that same quarter.  While the huge victory over those three months explains some of the fund’s long-term outperformance, its absolute returns from 2009 – 2012 are still over 10% a year.  You might choose to sneeze at a low-volatility, uncorrelated strategy that makes 10% annually.  I wouldn’t.  The fund’s expenses are hefty (retail shares retain the 2% part of the “2 and 20” world while institutional shares come in at 1.75%).  The minimum initial investment will be $1000.

Funds in Registration

New mutual funds must be registered with the Securities and Exchange Commission before they can be offered for sale to the public. The SEC has a 75-day window during which to call for revisions of a prospectus; fund companies sometimes use that same time to tweak a fund’s fee structure or operating details. Every day we scour new SEC filings to see what opportunities might be about to present themselves. Many of the proposed funds offer nothing new, distinctive or interesting.

Funds in registration this month won’t be available for sale until, typically, the end of August 2013. There were 13 funds in registration with the SEC this month, through June 25th.  The most interesting, by far, is:

RiverPark Strategic Income Fund.  David Sherman of Cohanzick Management, who also manages the splendid but closed RiverPark Short Term High Yield Fund (RPHYX, see below) will be the manager.  This represents one step out on the risk/return spectrum for Mr. Sherman and his investors.  He’s giving himself the freedom to invest across the income-producing universe (foreign and domestic, short- to long-term, investment and non-investment grade debt, preferred stock, convertible bonds, bank loans, high yield bonds and up to 35% income producing equities) while maintaining a very conservative discipline.  In repeated conversations, it’s been very clear that Mr. Sherman has an intense dislike of losing his investors’ money.  His plan is to pursue an intentionally conservative strategy by investing only in those bonds that he deems “Money Good” and stocks whose dividends are secure.  He also can hedge the portfolio and, as with RPHYX, he intends to hold securities until maturity which will make much of the fund’s volatility more apparent than real.   The expense ratio is 1.25% for retail shares, 1.00% for institutional. The minimum initial investments will be $1000 for retail and $1M for institutional.

Details and the list of all of the funds in registration are available at the Observer’s Funds in Registration page or by clicking “Funds” on the menu atop each page.

Manager Changes

On a related note, we also tracked down a near-record 64 fund manager changes

Briefly Noted . . .

If you own a Russell equity fund, there’s a good chance that your management team just changed.  Phillip Hoffman took over the lead for a couple funds but also began swapping out managers on some of their multi-manager funds.  Matthew Beardsley was been removed from management of the funds and relocated into client service. 


Seventeen BMO Funds dropped their 2.00% redemption fees this month.

BRC Large Cap Focus Equity Fund (BRCIX)has dropped its management fee from 0.75% to 0.47% and capped its total expenses at 0.55%.  It’s an institutional fund that launched at the end of 2012 and has been doing okay.

LK Balanced Fund (LKBLX) reduced its minimum initial investment for its Institutional Class Shares from $50,000 to $5,000 for IRA accounts.  Tiny fund, very fine long-term record but a new management team as of June 2012.

Schwab Fundamental International Small Company Index Fund (SFILX) and Schwab Fundamental Emerging Markets Large Company Index Fund (SFENX) have capped their expenses at 0.49%.  That’s a drop of 6 and 11 basis points, respectively.

CLOSINGS (and related inconveniences)

Good news for RPHYX investors, bad news for the rest of you.  RiverPark Short Term High Yield (RPHYX) has closed to new investors.  The manager has been clear that this really distinctive cash-management fund had a limited capacity, somewhere between $600 million and $1 billion.  I’ve mentioned several times that the closure was nigh.  Below is the chart of RPHYX (blue) against Vanguard’s short-term bond index (orange) and prime money market (green).



For all of the excitement over China as an investment opportunity, China-centered funds have returned a whoppin’ 1.40% over the past five years.  BlackRock seems to have noticed and they’ve hit the Reset button on BlackRock China Fund (BACHX).  As of August 16, it will become BlackRock Emerging Markets Dividend Fund.  One wonders if the term “chasing last year’s hot idea” is new to them?

On or about August 5, 2013, Columbia Energy and Natural Resources Fund (EENAX, with other tickers for its seven other share classes) will be renamed Columbia Global Energy and Natural Resources Fund.  There’s no change to the strategy and the fund is already 35% non-U.S., so it’s just marketing fluff.

“Beginning on or about July 1, 2013, all references to ING International Growth Fund (IIGIX) are hereby deleted and replaced with ING Multi-Manager International Equity Fund.”  Note to ING: the multi-manager mish-mash doesn’t appear to be a winning strategy.

Effective May 22, ING International Small Cap Fund (NTKLX) may invest up to 25% of its portfolio in REITs.

Effective June 28, PNC Mid Cap Value Fund became PNC Mid Cap Fund (PMCAX).

Effective June 1, Payden Value Leaders Fund became Payden Equity Income Fund (PYVLX).  With only two good years in the past 11, you’d imagine that more than the name ought to be rethought.


Geez, the dustbin is filling quickly.

The Alternative Strategies Mutual Fund (AASFX) closed to new investors in June and will liquidate by July 26, 2013.  It’s a microscopic fund-of-funds that, in its best year, trailed 75% of its peers.  A 2.5% expense ratio didn’t help.

Hansberger International Value Fund (HINTX) will be liquidated on or about July 19, 2013.   It’s moved to cash pending dissolution.

ING International Value Fund (IIVWX) is merging into ING International Value Equity (IGVWX ), formerly ING Global Value Choice.   This would be a really opportune moment for ING investors to consider their options.   ING is merging the larger fund into the smaller, a sign that the marketers are anxious to bury the worst of the ineptitude.  Both funds have been run by the same team since December 2012.  This is the sixth management team to run the fund in 10 years and the new team’s record is no better than mediocre.    

In case you hadn’t noticed, Litman Gregory Masters Value Fund (MSVFX) was absorbed by Litman Gregory Masters Equity Fund (MSENX) in late June, 2013.  Litman Gregory’s struggles should give us all pause.  You have a firm whose only business is picking winning fund managers and assembling them into a coherent portfolio.  Nonetheless, Value managed consistently disappointing returns and high volatility.  How disappointing?  Uhh … they thought it was better to keep a two-star fund that’s consistently had higher volatility and lower returns than its peers for the past decade.  We’re going to look at the question, “what’s the chance that professionals can assemble a team of consistently winning mutual fund managers?” when we examine the record (generally parlous) of multi-manager funds in an upcoming issue.

Driehaus Large Cap Growth Fund (DRLGX) was closed on June 11 and, as of July 19, the Fund will begin the process of liquidating its portfolio securities. 

The Board of Fairfax Gold and Precious Metals Fund (GOLMX and GOLLX) “has concluded that it is in the best interests of the Fund and its shareholders that the Fund cease operations,” which they did on June 29, 2013

Forward Global Credit Long/Short Fund (FGCRX) will be liquidated on or around July 26, 2013.  I’m sure this fund seemed like a good idea at the time.  Forward’s domestic version of the fund (Forward Credit Analysis Long/Short, FLSRX) has drawn $800 million into a high risk/high expense/high return portfolio.  The global fund, open less than two years, managed the “high expense” part (2.39%) but pretty much flubbed on the “attract investors and reward them” piece.   The light green line is the original and dark blue is Global, since launch.


Henderson World Select Fund (HFPAX) will be liquidated on or about August 30, 2013.

The $13 million ING DFA Global Allocation Portfolio (IDFAX) is slated for liquidation, pending shareholder approval, likely in September.

ING has such a way with words.  They announced that ING Pioneer Mid Cap Value Portfolio (IPMVX, a/k/a “Disappearing Portfolio”) will be reorganized “with and into the following ‘Surviving Portfolio’ (the ‘Reorganization’):

 Disappearing Portfolio

Surviving Portfolio

ING Pioneer Mid Cap Value Portfolio

ING Large Cap Value Portfolio

So, in the best case, a shareholder is The Survivor?  What sort of goal is that?  “Hi, gramma!  I just invested in a mutual fund that I hope will survive?” Suddenly the Bee Gees erupt in the background with “stayin’ alive, stayin’ alive, ah, ah, ah … “  Guys, guys, guys.  The disappearance is scheduled to occur just after Labor Day.

Stephen Leeb wrote The Coming Economic Collapse (2008).  The economy didn’t, his fund did.  Leeb Focus Fund (LCMFX) closed at the end of June, having parlayed Mr. Leeb’s insights into returns that trailed 98% of its peers since launch. 

On June 20, 2013, the board of directors of the Frontegra Funds approved the liquidation of the Lockwell Small Cap Value Fund (LOCSX).  Lockwell had a talented manager who was a sort of refugee from a series of fund mergers, acquisitions and liquidations in the industry.  We profiled LOCSX and were reasonably positive about its prospects.  The fund performed well but never managed to attract assets, partly because small cap investing has been out of favor and partly because of an advertised $100,000 minimum.  In addition to liquidating the fund, the advisor is closing his firm. 

Tributary Core Equity Fund (FOEQX) will liquidate around July 26, 2013.  Tributary Balanced (FOBAX), which we’ve profiled, remains small, open and quite attractive. 

I’ve mentioned before that I believe Morningstar misleads investors with their descriptions of a fund’s fee level (“high,” “above average” and so on) because they often use a comparison group that investors would never imagine.  Both Tributary Balanced and Oakmark Equity & Income (OAKBX) have $1000 minimum investments.  In each case, Morningstar insists on comparing them to their Moderate Allocation Institutional group.  Why?

In Closing . . .

We have a lot going on in the month ahead: Charles is working to create a master listing of all the funds we’ve profiled, organized by strategy and risk.  Andrew and Chip are working to bring our risk data to you in an easily searchable form.  Anya and Barb continue playing with graphics.  I’ve got four profiles underway, based on conversations I had at Morningstar.

And … I get to have a vacation!  When you next hear from me, I’ll be lounging on the patio of LeRoy’s Water Street Coffee Shop in lovely Ephraim, Wisconsin, on the Door County peninsula.  I’ll send pictures, but I promise I won’t be gloating when I’m doing it.