Dear friends,

It’s spring! Sort of. Despite the steady, light snow falling outside my window, March 1 is the beginning of “meteorological spring” and I’m indisputably in the middle of Augustana’s Spring Break. (It always looked better on MTV.) Spring training, both for major leaguers and my son’s high school team, has begun. There are stirrings in my garden and a couple newly-arrived catalogs (yes, I still get real mail) are encouraging horticultural fantasies: a swath of pollinator-friendly native plants taking over the southwest corner of the yard, a new home for my towering wall of sunflowers, some experiments with carrots, replacing more of the lawn with a rain garden to reduce run-off, regrowing a full head of hair … anything’s imaginable and everything’s possible, at least until I have to figure out how to pull it off.

Sadly, as Rudyard Kipling observed, “gardens are not made by sitting in the shade.”

For one more month, at least, I focus on tidying up my financial garden. We start this month’s issue with three of the most important kind of story: ones that actually affect me.

Artisan pulls the plug

Artisan has announced the liquidation of Artisan Small Cap Value (ARTVX), my oldest holding. My first fund, purchased when I was young and dumb, was AIM Constellation, then a very good mid-cap growth fund that carried a 5.5% load. After a bit, I learned that paying sales loads without any compensating benefit was stupid, so I stopped. I sold my shares and, shortly before it closed, invested the proceeds in Artisan Small Cap (ARTSX). Shortly after Artisan launched Small Cap Value in 1997, I moved my investment over from Small Cap. The $367 million fund, down from a peak of $3 billion in 2011, will be merged into Artisan Mid Cap Value (ARTQX) in May, 2016.

After a couple withdrawals and almost 19 years of paying taxes on the account, I’m disconcerted to report that I’ll be able to report a 30% tax loss on my 2016 taxes.

What happened? The managers’ discipline (and the dictates of marketing to advisors who want to execute their own asset allocation plans) does not encompass holding significant cash. And so, despite the fact that “We’ve complained for a long time now that too much of the market is fully- or fairly valued,” they stayed fully-invested. Their discipline also pushed them toward overweighting the best-valued stocks they could find and those turned out to be in two of the market’s worst areas: energy and industrials, that latter of which “have backdoor exposure to energy.” They eventually overweighted those areas by more than 2:1. That’s, at best, a very partial explanation for the fact that the fund trailed 90% or more of its small-value peers in five of the past six years, including years with high oil prices.

The folks at Artisan position this as a simple economic decision: “a determination was made that the strategy/fund was no longer commercially viable… Given our past few years of underperformance, we have seen outflows (and passive has been an asset flow winner here). We are also hearing that fewer folks plan to use dedicated small-cap value allocations going forward.” The management team “drove the decision” and they “still believe in the asset class.”

This is the first fund liquidation in Artisan’s history.

The team manages two other funds, Mid Cap Value (ARTQX) and the large-cap oriented Value (ARTLX). Over the full market cycle, ARTQX modestly leads its peer group in performance (40 bps/year) with subdued volatility. ARTLX trails its Lipper peers (80 bps/year) with somewhat higher volatility.

Bottom line

I prefer to maintain exposure to small value stocks, so I won’t wait around for the impending transition to the team’s mid-cap value fund. I’ll book my tax loss and move on.

The finalists for this slot in my portfolio are two cash-rich, low-vol funds: John Deysher’s Pinnacle Value Fund (PVFIX) and the team-managed Intrepid Endurance Fund (ICMAX, formerly Intrepid Small Cap). Both are run by absolute value investors. They have similar expense ratios, though Intrepid is five times Pinnacle’s size. Intrepid’s about two-thirds cash right now, Pinnacle about 50%. They are, by far, the two least volatile small cap funds around. Pinnacle’s market cap and turnover are both far lower.

We profiled Pinnacle one year ago. I think we’ll try to prepare a profile of Intrepid for our April issue and see if that helps decide things.

The tough question remaining

How long should you wait before you write off a manager or a fund? My normal rule is pretty straightforward: if I haven’t changed and they haven’t changed, then we’re not going to change. That is, if my portfolio needs remain the same, the management team remains intact and true to their discipline, then I’m not going to second-guess my due diligence. This may be the first time I’ve sold a fund in a decade. Leigh Walzer’s research on stumbling funds suggests that I should have sold in mid-2014 which would have spared me about a 10% loss assuming that I’d put it in a merely average SCV fund.

Romick stares reality in the face, and turns away

My single largest non-retirement holding is FPA Crescent (FPACX), which has always struck me as the quintessence of active management. While other managers were constrained to invest in a single asset class or in a single country, or to remain fully invested or unhedged, manager Steve Romick declared himself to be “the free-range chicken” of the investing world. He’d look for firms that offered compelling advantages, would analyze their capital structure and then invest in whatever instrument – common stock, warrants, senior debt – offered the most compelling opportunities. If nothing was compelling, he sat on cash.

That strategy performed wonderfully for years. Over the past decade the fund has led its Morningstar peer group by 1.12% annually though, by freakish coincidence, Morningstar also calculates that you lost 1.12% annually to taxes over the same period. Over the past three years, the fund has either been about average (using Morningstar’s “moderate allocation” peer group) or well-above average (using Lipper’s “flexible portfolio” one). In 2015, the fund lost money and finished in the bottom third of its Morningstar peer group.

Those two things do not bother me. Two others do. First, the fund has ballooned in size with no apparent effort at gatekeeping. In 2005, it performed gloriously but had under $1 billion in assets. In 2010, it performed solidly with $2.7 billion. It hit $10 billion in 2013 and $20 billion in 2015 and remains open today. While some funds have doubtless thrived in the face of huge, continual inflows, those are rare.

Second, Romick blinked. His recently released Annual Report offered the following announcement on page two:

At first glance, it appears that we’ve declined as much as the market — down 11.71% since May 2015’s market peak against the S&P 500’s 11.30% decline — but that’s looking at the market only through the lens of the S&P 500. However, roughly half of our equity holdings (totaling almost a third of the Fund’s equity exposure) are not included in the S&P 500 index. Our quest for value has increasingly taken us overseas and our portfolio is more global than it has been in the past. We therefore consider the MSCI ACWI a pertinent alternative benchmark.

What?

“We look pretty good compared to a global all-equity benchmark”?

Uhhh … the fund is 37% cash. Morningstar reports a net exposure (11% long minus 3% short) of only 8.5% to international stocks. The most recent report on FPA’s website suggests 16% but doesn’t separate long/short. If Morningstar is right, net exposure is way less global than either its Morningstar benchmark or Morningstar peer group.

Underperformance doesn’t bother me. Obfuscation does. The irony is that it bothers Mr. Romick as well, at least when it’s being practiced by others. In a 2012 letter criticizing the Fed, he explained what we ought to demand of our leaders and ourselves:

Blind faith has gotten us into trouble repeatedly throughout history. Just consider the rogue’s gallery of false idols, dictators, and charlatans we have followed, hoping for something different, something better. That misplaced conviction corrupts and destroys. Daily life does require we put our trust in others, but we should do so judiciously.

Nobody has all the answers. Genius fails. Experts goof. Rather than blind faith, we need our leaders to admit failure, learn from it, recalibrate, and move forward with something better… As the author Malcolm Gladwell so eloquently said, “Incompetence is the disease of idiots. Overconfidence is the mistake of experts…. Incompetence irritates me. Overconfidence terrifies me.”

FPA once ran funds in a couple of different styles, Mr. Romick’s and the other one. They’ve now purged themselves of their quality-growth team and have renamed and repurposed those funds. In repurposing Paramount, they raised the expense ratio, ostensibly to create parity with the Perennial fund. In a private exchange I asked why they didn’t simply lower Perennial’s e.r. rather than raising it and was assured that they really needed the extra cash for as-yet undisclosed enhancements.

I’ve lost faith.

Bottom line

I’m not sure whether FPA is now being driven by investment discipline, demands for ideological purity or a rising interest in gathering assets. Regardless, I’m going. I have long respected the folks at the Leuthold Group and we recently profiled their flagship Leuthold Core Investment Fund (LCORX). Leuthold has delivered on such promises more consistently, with more discipline, for a longer period than virtually any competitor.” They’re apt to be the home for the proceeds from an FPA sale plus closing two small accounts.

Morningstar doesn’t share my reservations and FPACX retains a “Gold” analyst rating from the firm.

The tough question remaining

How do we account for cultural change in assessing a firm? Firms never admit to their internal machinations, the story is always “a long heritage and a strict discipline, honored, preserved, extended!” They say it because they must and, often, because they believe it. From the outside, it’s about impossible to test those claims and people get downright offended when you even broach the subject. Some folks have managed beautifully; Mairs and Power come to mind. Some have been disasters, Third Avenue most recently. And others, such as Royce Funds, are just now trying to navigate it. Without access to contacts within the organization or with their peers, we only see shadows and flickers, “as through a glass, darkly.”

Hate it when that happens.

Andrew Foster, Sufi master

Sell your cleverness and buy bewilderment.
Cleverness is mere opinion, bewilderment intuition.
― Rumi, Masnavi I Ma’navi,ca. 1270

I like Andrew Foster, manager of Seafarer Overseas Growth & Income (SFGIX). I also respect him. The confluence of those two is rare.

In his essay “Self Reliance,” Emerson describes “foolish consistency” as “the hobgoblin of little minds.” The rough translation is the people don’t like to admit that they’re unsure, whether it’s about what to think or what to do, even to themselves. And so they come up with procedures, policies, explanations, Great Insights and Magic Rules and claim you can stop thinking worrying now. You’ll notice this in the classroom: young teachers are terrified at losing control or losing respect while really experienced ones are comfortable admitting that they simply don’t have nearly as many answers as they’ve got questions, suspicions or possibilities.

That came to mind in reading two of Mr. Foster’s recent pieces, his Fourth Quarter 2015 Portfolio Review and his Semi-Annual Report. Between the two, you get a sense of a guy who is really sharp but not under the illusion of his own omniscience.

The short version of investing in the emerging markets over the last couple years: things have been wildly volatile and mostly negative, China’s been a concern, Seafarer’s doing better than the great majority of its peers.

Most managers, whether they’re small minded or they think you are, would have said that in about three paragraph – emphasizing their own excellence in the latter – and hit “send.”

Mr. Foster approached things differently. His analysis was more nuanced, sharper, more self-effacing and more respectful of his readers’ intelligence than almost any of what I’ve read in the professional press. You should read it, but only if you have the time to think about what you’ve read because you’ll encounter more careful speculation than illusory certainty.

Why was the market rising at the start of the fourth quarter?

Between October 1 and November 4, the benchmark index rose 9.72%. There was no obvious reason for this gain.

Okay, so what explains Seafarer’s outperformance?

The Fund’s marginal outperformance was due to selected holdings in China, Japan, Indonesia and Turkey. Those holdings had no unifying theme or idea that could explain the basis for their performance during the quarter.

Perhaps it’s because you were defensively positioned on China?

Unfortunately, my notion of “defensive” valuations proved faulty.

Oh. Dja do any better on currencies?

My prediction [there] was terribly wrong.

Ah, I see. You’ve described Seafarer as a China-centric portfolio. What’s going on there?

I wish I knew with certainty. Unfortunately, the situation is sufficiently opaque that facts are scant, and thus I can only speculate as to the cause behind the A-share market’s sudden collapse.

Well, how about a guess then? Surely you’ll do better than the bobbleheads in the media.

Unfortunately, I can only speculate as to the actual cause of the decline, so my thoughts on the matter are frankly no better than the media’s. I have very few facts to substantiate my arguments; all I can do is look at the pattern of events that has unfolded, and speculate as to the causes. 

I’m getting desperate here, Andrew. Why not just fling a wild speculation or two at us?

I would suggest two possible scenarios that might have caused the sell-off:

1. The Renminbi’s weakness is not the direct cause of the decline, but it is a precursor for a growing liquidity shortage within the Chinese financial system. The currency’s persistent weakness may indicate that one or more banks, or perhaps some portion of the “shadow banking system,” may soon experience a liquidity crisis. This explanation would suggest the currency is signaling stressed liquidity within the financial system, to which stocks have reacted swiftly and punitively.
2. The current government is unstable. Over the past three years, the government has propagated a sweeping anti-corruption campaign that has sometimes terminated in controversial political purges. The government has also introduced bold economic reforms – reforms that I largely support – but that have undoubtedly alienated powerful vested interests. Meanwhile, the current president has sought to consolidate power in a manner not seen since Mao’s era. It might be that such dramatic actions have silently eroded support for the current government among powerful factions within the Communist party. If so, the weakness in the currency and the stock market might portend a deeper source of instability.

Either scenario might have been the root cause of the volatility we observed; it is also possible that both acted in tandem.

You get the idea, I think: rather more insight than ego, important arguments made in a clear and accessible style.

In terms of portfolio positioning, he’s finding better values in Latin America and Emerging Europe than in Asia, so the portfolio is the least Asia-centered in its history. Similarly, there are intriguing opportunities in larger firms than in smaller ones right now; he’s actually been surprised at his portfolio’s small- to mid-cap positioning, but that’s where the value has been.

Bottom line

Seafarer remains a core position in my non-retirement portfolio and I’ve been adding to it steadily. Valuations in the emerging markets are compelling, with stocks trading at P/E ratios of 5 or 6. I’m tempted to sell my holdings in Matthews Asia Growth & Income (MACSX) and roll them into Seafarer, mostly as an attempt to simplify, but the two really do seem to be driven by diverse forces.

For now, I’ll continue to invest in each and, mostly, ignore the noise.

The tough question remaining

If emerging markets are simultaneously our best and our worst investment option, what on earth do we do with them? There’s a near-universal agreement that they represent the cheapest stocks and most dynamic economies in the world. And yet, collectively, over the last decade EM equity funds have made 1.3% annually with a standard deviation of 23. Run away? Pretend that investing in Nestle is the same just because they sell a lot in emerging markets? Hedge, which is tough? Hybrid? Hope? The worst case is “hire Greed and Panic to manage your investments,” though that seems awfully popular.

The Weather

By Edward Studzinski

“When we unleash the dogs of war, we must go where they take us.”

Dowager Countess of Grantham

Starting off one of these monthly discussions with a title about the weather should be indicative that this piece will perhaps be more disjointed than usual, but that is how the world and markets look to me at present. And there is very little in the way of rational explanation for why the things that are happening are happening. My friend Larry Jeddeloh, of The Institutional Strategist, would argue that this country has been on a credit cycle rather than a business cycle for more than fifteen years now. Growth in the economy is tied to the price and availability of credit. But the cost of high yield debt is rising as spreads blow out, so having lots of cheap credit available is not doing much to grow the economy. Put another way, those who need to be able to borrow to either sustain or grow their business, can’t. A friend in the investment banking business told me yesterday about a charter school that has been trying to refinance a debt package for several years now, and has not been able to (thank you, Dodd-Frank). So once again we find ourselves in a situation where those who don’t need the money can easily borrow, and those who need it, are having difficulty obtaining it. We see this in another area, where consumers, rather than spend and take on more debt, have pulled back.

Why? We truly are in a moment of deflation on the one hand (think fuel and energy costs) and the hints of inflation on the other (think food, property taxes, and prescription drug costs on the other). And the debt overload, especially public debt, has reached a point where something has to be done other than kicking the can down the road, or other major crisis. I would argue we are on the cusp of that crisis now, where illiquidity and an inability to refinance, is increasingly a problem in the capital markets. And we see that, where the business models of businesses such as energy-related master limited partnerships, premised on always being able to refinance or raise more equity, face issues.

I was reading through some old articles recently, and came across the transcript in Hermes, the Columbia Business School publication, of a seminar held in May 1985 there. The speakers were Warren Buffett, James Rogers, Jr., and Donald Kurtz. As is often the case, sifting through the older Buffett can be rewarding albeit frustrating when you realize he saw something way before its time. One of the things Buffett said then was that, based on his observations of our political system, “ … there is a small but not insignificant probability that we will lose fiscal control at some point.” His point was that given a choice, politicians will always opt for an implicit tax rather than an explicit tax. If expenditures should determine the level of explicit taxes, than taxes should cover expenditures. Instead, we have built in implicit taxation, expecting inflation to cover things without the citizens realizing it (just as you are not supposed to notice how much smaller the contents are with the packaging changes in food products – dramatically increasing your food budget).

The easier way to think of this is that politicians will always do what allows them to keep doing what they like, which is to stay in office. Hence, the bias ends up being to debase the currency through the printing presses. So you say, what’s the problem? We have more deflation than inflation at this point?

And the problem is, if you look at history, especially Weimar Germany, you see that you had bouts of severe inflation and sharp deflationary periods – things did not move in a straight line.

Now we have had many years of a bull market in stocks and other assets, which was supposed to create wealth, which would than drive increases in consumption. The wealth aspect happened, especially for the top 5%, but the consumption did not necessarily follow, especially for those lower on the economic ladder. So now we see stock and asset prices not rising, and the unspoken fear is – is recession coming?

My take on it, is that we have been in a huge jobless recovery for most of the country, that the energy patch and those industries related to it (and the banks that lent money) are now beyond entering recession, and that those effects will continue to ripple through the rest of the economy. Already we see that, with earnings estimates for the S&P 500 continuing to drift lower. So for most of you, again, my suggestion is to pay attention to what your investment time horizons and risk tolerances are.

Moving totally down a different path, I would like to suggest that an article in the February 28, 2016 New York Sunday Times Magazine entitled “Stocks & Bots” is well worth a read. The focus of the article is about the extent to which automation will eliminate jobs in the financial services industry going forward. We are not talking about clerks and order entry positions. That revolution has already taken place, with computerized trading over the last twenty years cutting by way of example, the number of employees buying and selling stock over the phone from 600 to 4 at one of the major investment banking firms. No, we are talking about the next level of change, where the analysts start getting replaced by search programs and algorithms. And it then moves on from there to the people who provide financial advice. Will the Millennials seek financial advice from programs rather than stock brokers? Will the demand grow exponentially for cheaper investment products?

I think the answer to these questions is yes, the Millennials will do things very differently in terms of utilizing financial services, and the profit margins of many of today’s investment products, such as mutual funds, will be driven much lower in the not too distant future. Anecdotally, when one has a year in the markets like 2015 and the beginning of 2016, many investment firms would push down the bonus levels and payments from the highest paid to take care of the lower ranks of employees. I was not surprised however to hear that one of the largest asset managers in the world, based in Boston, had its senior employees elect to keep the bonuses high at the “partner” levels and not take care of the next levels down this past year. They could see the handwriting on the wall.

All of which brings me back to the weather. Probably suggesting that one should read a politically incorrect writer like Mark Twain is anathema to many today, but I do so love his speech on the New England weather. For a preview for those so inclined, “The lightning there is peculiar; it is so convincing that, when it strikes a thing it doesn’t leave enough of that thing behind for you tell whether – Well, you’d think it was something valuable, and a Congressman had been there.”

At a future point I will come back for a discussion of Mr. Twain’s essay “On the Decay of the Art of Lying” which might be essential reading as this year’s elections take shape.

High Dividends, Low Volatility

From the Trapezoid Mailbag:

A financial advisor in Florida is interested in low-volatility products. With the market so choppy, he would like to dial down risk in his client’s portfolio. He wondered whether SEI Institutional Managed Trust Tax-Managed Volatility Fund (TMMAX) was a suitable choice.

As Exhibit I illustrates low-volatility has been a successful investment strategy in recent years. A good argument can be made that historically, low-volatility stocks were mispriced. Players like Berkshire Hathaway and private equity capitalized on this by levering up these firms to deliver strong risk-adjusted returns. There is a heavy overlap between the low-volatility universe and the high-dividend universe. Many high-dividend stocks have dropped assets into REITs in recent years which have fueled better returns for this sector. Low volatility has outperformed the broad market meaningfully for the past two quarters, partly due its lower beta.

Trapezoid doesn’t take a view on whether these trends will continue or whether low-volatility is the best place to hide out in a tough market. In this instance, we wonder whether the “private equity bid” which contributed to the sector’s strong performance will be as reliable as corporate credit markets tighten and whether the increasing use of REIT/MLP structures has about run its course. What Trapezoid does do is help investors, advisors, and allocators find the best instruments to express their investment strategy based on extrapolation of historic skill in relation to risk.

There are several passive strategies which express the same theme. For example, Power Shares markets an S&P 500 Low Volatility Portfolio (SPLV) and an S&P 500 High Dividend Low Volatility Portfolio (SPHD). Those two funds move virtually in lockstep, underscoring the overlap between high dividend and low volatility. The correlation between the PowerShares indices and TMMAX is 98.5% and the expense ratio is 70-75 basis points lower.

Despite the availability of good passive indices, we would nonetheless consider TMMAX. The fund’s track record has been slightly above average, making us slightly confident (53%) it is worth the added cost. SEI also manages the SEI US Managed Volatility Fund which has a 50% confidence rating (slightly lower due mainly to higher expense ratio.)

SEI relies on three subadvisors to manage the fund. The largest sleeve is managed by Analytic Investors (39%) followed by LSV (35%) and AJO. While we don’t have sleeve-level data, we can evaluate the body of work by Analytic and LSV looking at comparable sole-managed funds. Analytic’s track record the past five years on Touchstone Dynamic Equity Fund (TDELX) is good but the previous five years were poor. LSV’s record at LSV Conservative Value Equity Fund (LSVVX) and Harbor Mid-Cap Value Fund (HIMVX) was middling.

We have discussed in the past that Morningstar star ratings have some predictive value but that even a five-star rating is not sufficient to make an investment decision. The SEI funds are good examples. TMMAX, SEVIX, and SXMAX all carry five star ratings, and we agree investors are better off choosing these funds than many of the alternatives but the evidence of manager skill is inconclusive.

If the advisor is willing to expand his horizons a little, he can find similar funds which improve the odds a little. We used the Orthogonal Attribution Engine to find highly correlated funds with better confidence ratings and came up with the following.

A few observations

• T. Rowe Price Capital Appreciation Fund (PRWCX) is closed to new investors
• The two Vanguard funds attempt to outperform their benchmark indices using a quantitative strategy.
• Many of the other similar funds have higher betas, which may be a deal breaker for our advisor who wants to reduce his client’s market exposure
• Many of these funds are large blend funds, accessible to demo customers at the www.fundattribution.com website.
• Our confidence ratings are based on data through 10/30/15. In the subsequent months TMMAX’s performance lagged the lower-cost PowerShares indices. This may serve to erode our confidence that active management pays for itself. Updated data will be posted shortly

The heightened appeal of low-volatility funds might suggest something else: Advisors are more focused on extreme negative outcomes which could get them fired than extreme positive outcomes. In a choppy market, low-volatility funds have the allure of a safe haven. We don’t have a view on the wisdom of this. But we are interested in helping allocators avoid individual managers who have the potential to “blow up.” One of Trapezoid’s forthcoming new metrics hones in on this risk by focusing on the likelihood of extreme negative outcomes.

Offered without comment: Your American Funds share class options

MFO Rating Metrics

When MFO introduced its rating system in June of 2013, it chose Martin Ratio as the principal performance rating metric. Martin is a risk adjusted return metric that is the ratio between excess return, which is the compounded annualized total return above risk free T-Bill return, divided by the so-called Ulcer Index, which is a measure of extent and duration of drawdown. Our friend Peter Matin formulated the Ulcer Index as described in An Alternative Approach to the Measurement of Investment Risk & Risk-Adjusted Performance.

For each fund category, like Large Growth or Moderate Allocation, the MFO Rating system divides funds into five groups or “quintiles” based on the risk adjusted return over selected evaluation periods. Funds with the highest Martin in each category are assigned a 5, while those with the lowest receive a 1.

While this approach suits many MFO readers just fine, especially having lived through two 50 percent equity market drawdowns in the past 15 years, others like Investor on the MFO Discussion Board, were less interested in risk adjusted return and wanted to see ratings based on absolute return. Others wanted to see ratings based on the more traditional risk adjusted Sharpe Ratio. (For more definitions, see A Look A Risk Adjusted Returns.)

It took a while, but subscribers on our MFO Premium site can now choose which rating metric they prefer, including multiple rating metrics simultaneously.

For example, since the start of the current market cycle in November 2007, which Small Cap funds have delivered the best absolute return (APR) and the best Martin Ratio and the best Sharpe Ratio? To find the answer, enter the selection criteria on the MFO MultiSearch tool, as depicted below (click image to enlarge), then hit the “Submit Search” button …

A total of 28 funds appear from the more than 9,000 unique funds in the MFO database. Here are the first 10, sorted by MFO Risk and then name:

Notables include Brown Capital Mgmt Small Company (BCSIX), Champlain Small (CIPSX), Conestoga Small Cap (CCASX), and FMI Common Stock (FMIMX). The closed BCSIX is both an MFO Great Owl and Fund Alarm Honor Roll fund. It is also a Morningstar Gold Medal fund, while Silver goes to CIPSX and CCASX.

Intrepid Endurance (ICMAX) has the lowest risk rating with a MFO Risk of 3, which means this fund has historically carried volatility suited for investors with Moderate risk tolerance. Unlike other metrics in the MFO ratings system, and in fact the risk metric in Morningstar’s rating system, which assign risk relative to other funds in category, the MFO Risk metric assigns its rating based on volatility relative to the overall market.

The MFO MultiSearch tool now enables searches using more than 55 screening criteria, organized by Basic Info, Period Metrics, Composite Period Metrics, MFO Designations, Portfolio Characteristics, and Purchase Info. A list of current criteria can be found here.

The Alt Perspective: Commentary and news from DailyAlts.

Pruning Season

You can call it a cycle, a season, or even a cleansing process, but when one looks at the liquid alternatives market, it’s apparent that there is some pruning going on. Some cleaning out of the products that no longer appeal to investors, those that hit a performance patch from which it would be near impossible to recover, or just didn’t gather the requisite assets for a fund to be viable. Clean out the funds that are not producing the intended results, or just aren’t resonating with investors.

This is all a healthy process as it makes room for newer products, the next generation. It also allows for a greater investment into existing products. Interestingly, we have already seen 9 alternative funds liquidated in the first two months of the year (and at least two more schedule to be liquidated) – some announced late last year, but nonetheless, fully liquidated in 2016. And these are from some bigger names in the industry, such as Lazard, Collins, Whitebox, Virtus, Ramius and Clinton. Some seasoned hedge fund managers in there, along with seasoned asset management firms.

Four of the liquidate funds were long/short equity funds, two were multi-alternative funds, and the remaining three included market neutral, event driven and non-traditional bonds. All in all, I think we will see more pruning in the coming months as fund managers rationalize their fund lineup as markets sell off, and begin thinking about the next set of products to introduce to the market.

The pruning process is healthy and helps future growth, so don’t be surprised to see more down the road. It’s just part of the natural cycle.

Asset Flows

January saw a continuation of 2015 where investors continued to pour money into multi-alternative funds and managed futures funds (inflows of $1.2 billion and $1.5 billion, respectively), while pulling assets from non-traditional bond funds, long/short equity and market neutral (-$3 billion, -$390 million and -$340 million, respectively). Excluding non-traditional bond funds and commodities, alternative mutual funds and ETFs gathered a total of $2.4 billion in January, bringing the total 12-month haul to $18.7 billion, third of any category behind international equity and municipal bonds and 11.5% of all net asset inflows.

Commodities bounced back in January with total inflows of $3.3 billion, led primarily by flows to precious metals funds, and gold funds in particular. Non-traditional bond funds, viewed as an alternative to long-only bond funds and a protective hedge against interest rate increases, have continued to disappoint in the aggregate. As a result, investors have pulled $17.9 billion of assets from these funds over the past 12 months.

Extended Reading

What did DailyAlts readers enjoy the most this past month? The three of the most widely read articles this past month were:

• Adding Liquid Alts to DC Plans and Target-Date Funds
• Distinction Between Mutual Funds and Hedge Funds Is Eroding
• Understanding Liquid Alternatives: Ask The Right Questions

While it appears to be pruning season, that doesn’t mean it is time to stop looking for alternative funds. With Spring approaching, now is a good time to take a look across your portfolio at the risks you have exposure to, and perhaps do a bit of pruning of your own to balance risks and hedge for what might be more volatility ahead.

Have a great March, and to keep up with daily or weekly news in the liquid alts market, be sure to sign up for our newsletter.

Observer Fund Profiles: LSOFX / RYSFX

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.

LS Opportunity Fund (LSOFX): this was a really solid long/short fund that had to press the “reset” button last May when their sub-advisor decided to pack it up and call it a career. In Prospector Partners, they may have found a team that executes the same stock-by-stock discipline even more excellently than their predecessors.

Royce Global Financial Services (RYFSX): when you think “financial services,” you likely think “monstrous big banks with tendrils everywhere and eight-figure bonuses.” Royce thinks differently, and their focus on smaller firms that dominate financial niches worldwide has made a remarkable difference for their investors.

Elevator Talk: Jim Robinson, Robinson Tax-Advantaged Income (ROBAX)

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.

Jim Robinson formed Robinson Capital Management, located in Detroit’s ritzy Grosse Pointe suburb, in December, 2012. The firm manages about a quarter billion in assets for a handful of high net worth clients and advises two (soon to be three) mutual funds.

From 1987-1999, Mr. Robinson served as the Fixed Income CIO for the Munder Funds. During his stint, he grew fixed income AUM from $100 million to $20 billion. Eventually promoted to Chairman, CEO and President, he was responsible for about $38 billion in assets. He left Munder for Telemus Capital Partners, LLC, with whom his firm still has a relationship.

Robinson Capital uses a variety of strategies in their separate accounts. The Tax-Advantaged Income Fund pursues one strategy: it invests in closed-end muni bond funds. Closed-end funds (CEFs) are strange creatures, the forerunners of today’s actively-managed ETFs. They have managers and portfolios like open-end mutual funds do, but trade on exchanges like stocks and ETFs do. Such funds have several relevant characteristics:

1. They are far more likely to pursue income-oriented strategies than are open-end funds
2. They are far more likely to make extensive use of leverage and hold more illiquid securities than are open-end funds
3. Because they trade on exchanges, the managers never need to worry about meeting redemptions or closing the fund to new investors; they issue a set number of shares of the CEF during their initial public offering but after that they let buyers and sellers find each other.
4. Because they trade on exchanges, the market price of their shares changes minute-by-minute, and
5. Because they trade on exchanges, the net asset value of a share (the market value of all of the fund’s holdings divided by the number of shares outstanding) can diverge dramatically from that share’s market price (that is, the amount a potential seller can get at one particular moment for a share of the fund).

When shareholders panic, they may succumb to the temptation to sell shares of their fund for 15, 20 or even 40% less than they’re nominally worth, just because the seller really wants cash-in-hand. That’s mostly irrational. A handful of mutual fund firms – RiverNorth, Matisse, and Robinson among them – look to profit from panic. Using various metrics, they decide when to move in and buy shares that are selling at an unsustainable discount to their net asset values.

If everything goes according to plan, that strategy offers the potential for sustained, substantial, market-neutral gains: as soon as panic subsides, even if the market is still falling, a degree of rationality returns, investors start buying the discounted CEF shares, that bids up the price and the discount closes. If you invest before the crowd, you benefit when the shares you bought at, say, a 25% discount can now be sold at just a 5% discount.

Here’s a hypothetical illustration: the NAV of the Odd Income Fund is $100/share but, when rumors of dinosaurs rampaging down Wall Street rattles people, its market price drops to $75/share. Robinson moves in. In six months, the panic has passed, Odd Income’s NAV has risen a couple percent and its discount contracted to its non-panic norm of 5%. In such a scenario, Odd Income has earned 2% but folks who bought shares during the panic earned 29%.

There are distinct risks to playing this game, of course. The falling knife might continue to fall harder and faster than you’d imagined so that the 25% discount might widen to 35%. The manager of the underlying CEF might find that using leverage in a panicky market drives down the fund’s NAV as well as its market price. And, too, the CEF manager might simply do something stupid. It happens.

The folks who manage CEF-focused funds argue that downside risks are manageable through a combination of careful security selection, position-size limits and hedging. The upside can be dramatic. Here is the performance chart for ROBAX against two possible benchmarks: its Morningstar non-traditional bond peer group (orange) and long-term national muni bond group (yellow).

Here are Mr. Robinson’s 200 words on why investors concerned about income and income taxes should add ROBAX to their due-diligence list:

I generally tell people that the first three things you need to know about our fund are these:

• We pay out 40 basis points a month in tax-exempt income, on average
• We present very little credit risk; our portfolio’s credit quality is A/A+
• We hedge out interest rate risk, such that our effective duration is under a year.

There are 191 Tax-exempt closed-end funds. Today, 150 are trading at a discount to NAV. Some of those discounts are rational; if you have a poorly-managed fund buying difficult-to-price securities and misusing leverage, it should be trading at a discount. Heck, I analyze some of these funds and suspect the discount should be bigger than it is.

What we do is move money from rationally discounted funds to irrationally discounted ones. Six large fund companies – BlackRock, PIMCO, Nuveen and company – dominate the CEF space. That’s important because those companies have pretty good governance practices in place; BlackRock is aggressive about merging funds to harvest economies of scale, others do share buybacks and so on. When funds with good management, good governance and good portfolios sell at irrational discounts, we move. Bill Gross did me a big favor. Two days before we launched, he resigned from PIMCO. Gross had nothing to do with PIMCO’s CEFs but suddenly funds that always trade at a premium were available at a discount. We moved in, the discount predictably reversed, and we closed the position at a nice profit. That discount arbitrage adds about 200 bps to our performance.

The other thing we do that individual investors can’t, and that most advisors would find tough, time-consuming and expensive, is we largely hedge interest rate risk out of the portfolio. Tax-exempt CEFs tend to be long-dated and leveraged so they typically have 10-12 year weighted durations. In a year like 2013 when rates rise 1%, they lose 10-12% in principal value. Our hedge is not perfect, since Treasuries and munis don’t trade in perfect sync, but it’s pretty good.

Robinson Tax-Advantaged Income has a $2500 minimum initial investment for the “A” shares and $1,000,0000 for “I” shares. While there’s a sales load, load-waived shares are widely available. Direct expenses are capped at 1.60% on the “A” shares. Since the fund invests in other funds, you indirectly pay (through lower returns) a portion of those funds’ expenses. In 2014, that added 1.14% to ROBAX’s today expenses. The fund has about gathered about $74 million in assets since its September 2014 launch. Here’s the fund’s homepage.

Funds in Registration

Funds need to submit their prospectuses for SEC review before they’re permitted to offer the fund to the public. The SEC has 75 days in which to ponder the matter, which means that proposed new funds cool their heels for about two and a half months. During that time their prospectuses are available for review on the SEC’s website but fund advisors are forbidden to talk publicly about them. Each month Funds in Reg gives you a heads-up about what’s in the SEC pipeline.

Except for last month, when I stupidly forgot to include the file in our February issue. As a result, this month we cover the last two sets of no-load retail funds that will become available between March and May. We found 17 funds that qualify. Particularly interesting morsels include:

• 361 Domestic Long/Short Equity Fund, which will be managed by a really renowned investor – Harindra de Silva – who has a earned a great deal of respect in the industry and who already manages a number of top-ranked funds.
• Matthews Asia Credit Opportunities, which appears to be a high-yield, distressed securities version of the very fine Matthews Asia Strategic Income Fund.
• RiverPark Commercial Real Estate Fund, the latest entry in RiverPark’s quest to bring hedge fund strategies to “the mass affluent.” This fund has been running as a hedge fund for about five years now.

Sadly, there are a handful of future “Off to the Dustbin of History” nominees as well but I suppose that’s the magic of capitalism: 90% of the stuff we try fails, 9% does okay and 1% changes the world.

Uzès Grands Crus I

The French, being French, have their financial priorities in order. In February, Financière D’uzès announced the launch of their third mutual fund devoted to the investment potential of bottles of fine wine. At least 75% of the fund’s assets will be bottles of fine and their aim is “to outperform the annual rate for the five-year French treasury bond (OAT) with a minimum return of 5%.”

I reflected, very very briefly, on the investment value of the bottle of Lambrusco I bought at Trader Joe’s for $4.99, then made mid-winter sangria instead.

Manager Changes

The biggest news, by far, this month is the impending departure of Taymour R. Tamaddon from T. Rowe Price Health Sciences (PRHSX) and Donald Yacktman from his namesake funds. When Kris Jenner left the fund three years ago (how time flies!), the accepted wisdom was that nobody could live up to his legacy. Mr. Tamaddon then led the fund to 22.4% annualized returns, nearly 500 bps above his peers and good enough for a top 2% record.

Mr. Tamaddon steps down on July 1, 2016, is succeeded by Ziad Bakri then becomes manager of the $12 billion T. Rowe Price Institutional Large-Cap Growth Fund (TRLGX) on January 1, 2017.

Effective May 1, 2016, Donald A. Yacktman will transition to an advisory role and will no longer serve as a portfolio manager for AMG Yacktman (YACKX) and AMG Yacktman Focused (YAFFX) funds. The roughly corresponds with his 75^th birthday. Mr. Yacktman has been managing mutual funds since 1968, starting with Stein, Roe and the Selected American Shares before founding Yacktman Asset Management in 1992. $10,000 invested in YACKX that year would have grown to $95,000 today, which compares well to the returns on an investment in the S&P500 ($76,000) or the average large-value fund ($56,000). He was named Morningstar’s Manager of the Year in 1991 and was joined on the management team by his son, Stephen, in 2002. Stephen Yacktman and Jason Subotky will manage the funds after the transition.

Other than that, we found about 36 manager changes, a few years overdue.

Updates

Sequoia Fund (SEQUX) continues its defense of Valeant Pharmaceuticals in its Annual Report (2016) and they continued dodging the issue.

For the stock to regain credibility with long-term investors, Valeant will need to generate strong earnings and cash flow this year, make progress in paying down some of its debt, demonstrate that it can launch new drugs from its own development pipeline and avoid provoking health care payers and the government. The company has committed to doing all of these things and we are confident interim CEO Howard Schiller and interim board chairman Robert Ingram are focused on the right metrics. Before CEO J. Michael Pearson went out on an extended medical leave, he also seemed committed to this path.

“Avoid provoking health care payers.” Oh, right. That would be the predatory pricing model that attracted Sequoia to Valeant in the first place: Valeant would borrow money to buy a small pharmaceutical firm, then quintuple the price of the firm’s products. If that meant putting a few inexpensive lives at risk, well, that wasn’t Valeant’s problem.

Until it was. Before the blow-up, manager David Poppe’s tone was openly affectionate about “Mike,” Valeant’s president and almost giddy about the prospects. Valeant’s high-profile implosion cost Sequoia a lot:

As the largest shareholder of Valeant, our own credibility as investors has been damaged by this saga. We’ve seen higher-than-normal redemptions in the Fund, had two of our five independent directors resign in October and been sued by two Sequoia shareholders over our concentration in Valeant. We do not believe the lawsuit has merit and intend to defend ourselves vigorously in court. Moving along …

“Moving along”? No, it’s not time to move along, guys. Barron’s Chris Dieterich provides a nice synopsis of developments that transpired on February 29, the day Sequoia released their report:

Monday ushered in a nightmarish combination of trouble. First, Valeant said it would delay the release of its quarterly results. Then, news broke that Allergan (AGN) is challenging the patent to Xifaxan. Third, Moody’s Investors Service warned that it may need to downgrade portions of the company’s $31 billion of debt. Finally, headlines crossed the tape that Valeant faces a previously undisclosed investigation by the Securities and Exchange Commission.

All told, the stock plunged 18% to $65.80 — a fresh three-year low (“Sequoia Fund Picked A Bad Time To Stick Up For Valeant”).

The bigger, unanswered question is what does this say about you as investors? Any damage to your credibility is (a) self-inflicted and (b) deserved. You committed one third of your fund and all of your credibility to an amoral little schemer who, on his best days, stayed right at the edge of what’s legal. That’s a fact you acknowledged. Then you implicitly compared him to Warren Buffett, an investor whose moral compass, operating style and record makes him utterly incomparable.

Investors might, heck, investors must, ask: where was your brain? Were you so blinded by the prospect of easy money that you chose to ignore the hard questions? The most optimistic interpretation is that you’re not addressing such questions because you’re being sued and you can’t afford to admit to whatever idiocy led to the resignations of 40% of your board last fall. The worrisome interpretation is that Sequoia isn’t Sequoia anymore; that the clarity of thought that guided it to renown in decades past mostly now serves to mask a less exalted management.

Think it can’t happen? Check Magellan, Fidelity (FMAGX), the other Titan which has now managed to trail its peers over the past five, ten, fifteen and twenty year periods. Utterly dominant in the market cycle from 1973-1987 when it beat its peers by 1000 basis points/year, the fund hasn’t even managed consistent mediocrity since.

Morningstar doesn’t share my reservations and SEQUX retains a “Gold” analyst rating from the firm. Their equity analyst also doesn’t share my concerns about Valeant, which they rate (on 3/1/16) as a five-star stock whose shares are selling at about one-third of their fair value. Senior equity analyst Michael Waterhouse doesn’t “anticipate any major shift in our long-term thinking for the company.”

Briefly Noted . . .

SMALL WINS FOR INVESTORS

Chou has voluntarily decided to waive its entire advisory fee on the Chou Opportunity Fund (CHOEX) beginning on January 1, 2016. In addition, on February 18, 2016 Chou made a voluntary capital contribution to the Opportunity Fund in the amount of $918,468, which approximates the advisory fees retained by Chou with respect the Opportunity Fund last year. Why, you ask? The advisor describes it as “a gesture of goodwill … in recognition of the fund’s underperformance” in 2015. That’s an oblique reference to having lost 22% in 2015 and another 20% in the first two months of 2016.

The advisor to the Great Lakes Bond Fund has closed the fund’s Investor Class (GLBDX) and converted the former Investor accounts into Institutional Class (GLBNX) ones. They then lowered the minimum on the Institutional shares by 99%, from $100,000 to $1,000. Net, potential retail investors save 25 bps.

Hotchkis & Wiley Mid-Cap Value Fund (HWMAX) has reopened to new investors.

RS Partners Fund (RSPFX) reopened to new investors on March 1, 2016. None of the fund’s independent trustees have chosen to partner with you by investing in the fund. The managers’ investment in the fund ranges between “modest” and “none.”

Walthausen Small Cap Value Fund (WSCVX) reopened to new investors on March 1, 2016.

Wasatch Emerging Markets Small Cap Fund (WAEMX) has reopened to new investors. Thanks for the heads up, Openice!

CLOSINGS (and related inconveniences)

Nope, turns out “turning away money” wasn’t a popular move in February. We found no funds closing their doors.

OLD WINE, NEW BOTTLES

Armor Alternative Income Fund (AAIFX) has become Crow Point Alternative Income Fund. 

Diamond Hill Strategic Income Fund (DSIAX) has been renamed the Diamond Hill Corporate Credit Fund to better reflect what it’s up to.

Forward no more. On May 1, 2016, the name “Forward” disappears from the world of mutual funds. In general, all of the former Forward Funds will be renamed as Salient Funds, which no change other than substituting “Salient” for “Forward” in the name. There are a few exceptions,

TIAA-CREF has boldly rebranded itself as TIAA.

Straightforward. Yep. 74%. Unless you’re buying the retail share class in which case it’s nine of 33 funds excluding money markets, or 27%. 32.5% of all funds receive either four- or five-stars from Morningstar.

And about that “uncomplicated” thing? Count the number of clicks it takes you to get to any particular fund. It took me two cups of coffee before I finally got to the one I wanted.

As of May 9, 2016, Transparent Value becomes … well, insert your own snark here. In any case, the Transparent Value Funds become Guggenheim Funds.

On March 1, 2016, The Wall Street Fund (WALLX) became Evercore Equity Fund (EWMCX). The word “Equity” in the name also triggered a new promise in the prospectus that the fund, which already invests in equities, promises to invest in equities.

OFF TO THE DUSTBIN OF HISTORY

On whole, fund companies would be well-advised to extract their heads from their behinds. If you’re not willing to stick with a new fund for, say, a whole market cycle, then don’t launch the damned thing. The hypocrisy of declaring that you’re “long-term investors” and that you want to be “partners” with your investors, then closing a fund after 12-24 months, is toxic. It conveys some combination of the following three messages: (1) we’re panicked. (2) We have no ability to plan. (3) Pretty much everything we said when we launched the fund was cynical B.S. crafted by marketers who were, themselves, probably disgusted with us.

Which of those messages do you really want to be associated with?

Okay, back to the ranks of the walking dead and the dead dead after a short word of thanks to The Shadow, one of the stalwarts of our discussion board whose daily updates on the comings and goings is enormously helpful in keeping this list current.

Let’s go to Plan B: Under Plan A, Arden Alternative Strategies Fund (ARDNX) was slated to become Aberdeen Multi-Manager Alternative Strategies Fund (no ticker) on March 31, 2016. That made perfect sense since Aberdeen acquired Arden. Plan A survived for about a week when someone likely noticed that the fund wasn’t actually very good, was shrinking in size and required an annual expense subsidy from the adviser, whereupon Plan B emerged: kill it. Same date.

BPV Core Diversification Fund (BPADX) has closed and will be terminated on March 11, 2016. It’s a tiny, conservative fund that’s still managed to lose money over the past three years and trail 90% of its peers.

On February 17, 2016, the CGM Advisor Targeted Equity Fund (NEFGX, reflecting its birth name: New England Growth Fund) was liquidated. Financial Advisor magazine managed to wax nostalgic over the loss of a “venerable” and “once-vaunted” fund. Two quick notes about this: (1) the fund hasn’t earned its keep over the past 20 years. Its closing NAV was below its NAV in 1994. The 20 year performance chart is the very image of what to avoid in your investments:

And (2) you can still access the manager’s skills, if you’d like. Natixis, the fund’s sponsor, no longer has an ownership stake in CGM and so they had no interest in continuing to sponsor a fund. Mr. Heebner continues to run three other CGM funds. Their website would also win the award for the industry’s least useful.

Collins Alternative Solutions Fund (CLLAX) liquidated on February 26, 2016. The fund had about $19 million in assets and dropped 19% in its final year of operation.

Crystal Strategy Absolute Income Fund (CSTFX), Crystal Strategy Absolute Return Fund (CSRAX) and Crystal Strategy Absolute Return Plus Fund (CSLFX) will, based on the recommendation of Brinker Capital, LLC, the investment adviser, be liquidated on March 18, 2016. The funds are just past their second anniversary. Between them they have $16 million in assets and a sorrowful performance record.

Dreyfus Strategic Beta U.S. Equity Fund (DOUAX) will liquidate in mid-April.

The Fortress has fallen! Fortress Long/Short Credit Fund (LPLAX) liquidated on February 12, 2016, about three years too late. The fund lost about 25% over its lifetime. It peaked in December 2012 and its chart since then looks, for all the world, like a child’s drawing of steps leading down to the basement.

Frost International Equity Fund (FANTX) will liquidate on March 31, 2016. The announcement helpfully notes that they’ll refer to that as “the liquidation date.” I think I went on one of those in college.

Gottex Endowment Strategy Fund (GTEAX) is liquidating after about 20 months of operation. In that time it lost about 12% for its few investors.

Guidestone Real Assets Fund (GRAZX) will liquidate on April 29, 2016. It’s a tiny fund-of-funds that’s designed to protect you from inflation by investing in things that are cratering. That’s not intentional, of course, but sectors that would be durable if inflation arose – energy, natural resources, real estate – have been disasters.

The $3 million JPMorgan Asia Pacific Fund (JAPFX) will liquidate on April 6, 2016.

Investors in the Lazard Master Alternatives Portfolio (LALOX) need to find an alternative since the fund was liquidated on March 1, 2016. The fund was 14 months old.

MassMutual Barings Dynamic Allocation Fund (MLBAX) will be dissolved on July 8, 2016. It isn’t an awful tactical allocation fund but it’s tiny and misallocated in the last year, costing its investors 11.5%.

Merk Asian Currency Fund (MEAFX) liquidated on February 29, 2016. From inception in 2008 until liquidation, the fund was above water once, briefly, in 2011.

Meyers Capital Aggressive Growth Fund (MAGFX) liquidated on February 29, 2016, on about three weeks’ notice. Since the manager owns 87% of the funds’ shares, he might have seen it coming. The oddest development is the collapse of the fund’s asset base: in May, Mr. Meyers owned over $1,000,000 in fund shares. By February 2016,the fund only had $130,000 in assets.

Oberweis Asia Opportunities Fund (OBAOX) will be merged into Oberweis China Opportunities Fund (OBCHX) on or about April 29, 2016.

Philadelphia Investment Partners New Generation Fund (PIPGX), having lost 35% in the past 12 months, is now going to lose its head. The execution is March 30, 2016.

After the advisor concluded that Satuit Capital U.S. SMID Cap Fund (SATDX) was not economically viable, they decided “to close the Fund, wind up its affairs, liquidate its portfolio.” I’ve never seen “wind up its affairs,” which the announcement uses twice, in a fund liquidation filling before. Huh. The fund is not yet two years old and had attracted only a couple million, despite a really strong record. The deed is done on April 30, 2016.

Having concluded that the Smith Group Small Cap Focused Growth Fund (SGSVX) has “limited prospects for meaningful growth,” its board authorized liquidation of the fund on March 31, 2016. One can’t fault the managers for a lack of commitment: internal ownership accounted for about two-thirds of the fund’s $600,000 in assets.

Strategic Latin America Fund (SLATX) liquidated in late February, 2016. 

Touchstone Global Real Estate Fund (TGAAX) will liquidate on March 30, 2016. The board attributes the decision to “the Fund’s small size and limited growth potential.” An interim manager, apparently someone who specializes in “safeguard[ing] shareholder interests during the liquidation period,” has been appointed. It’s the sad case of a good fund not finding its audience: top 25% returns over the past five years and even better returns recently, but still only $17 million in assets.

Sometime in mid-summer Victory CEMP Multi-Asset Balanced Fund (CTMAX) will be absorbed by Victory Strategic Allocation Fund (SBALX). As is so often the case, CTMAX is larger and weaker so they’ll bury its record while tripling SBALX’s assets.

On February 5, 2016, Virtus Dynamic Trend Fund merged into Virtus Equity Trend Fund (VAPAX). I’m slightly startled to report that, despite trailing 98—99% of its peers over the intermediate term, VAPAX retains $1.5 billion in assets.

Wanger International Select (WAFFX) will liquidate at the end of March. It appears to be available only through insurance products.

WHV/EAM Emerging Markets Small Cap Equity Fund (WVEAX) and WHV/EAM International Small Cap Equity Fund (WHSAX), rather less than two years old, will liquidate on or about March 31, 2016. Both funds had very strong performance. WHV/Seizert Small Cap Value Equity Fund (WVSAX), a bit more than two years old, will liquidate a month later.

In Closing . . .

Thanks, as always, to folks who’ve supported the Observer in thought, word or deed. Welcome, especially, to Nick Burnett, long-time friend, grad school roommate and mastermind behind the CapRadioCurriculum which helps teachers connect public radio content with classroom lessons. There’s a cool one on multilingual public relations that I rather liked. Thanks, as ever to the ongoing generosity of the folks at Gardey Financial and our first subscribers, Deb and Greg. Thanks to Gary, who didn’t particularly want premium access but did want to help out. Mission accomplished, big guy! Too, to MaryRose, we’re trying to help. Welcome to Abdon Bolivar, working hard to get people to understand the role that plan administrators play in creating and sustaining bad options for investors. By coincidence, Tony Isola and the folks are Ritholtz Wealth Management are pursuing a parallel track trying to educate educators about what to do if they’re getting screwed by the 403(b). And, in a horrifying number of cases, they are.

And so, thanks to you all, not just for your support of the Observer but for all the good work you’re doing for a lot of people.

We’re waiting to talk with the folks at Otter Creek Partners, a hedge fund firm with a small long/short fund that’s performed splendidly. That conversation will let us finish up our profile of Otter Creek Long/Short Opportunity (OTCRX) and share it with you. We’ll add a look at Intrepid Endurance (ICMAX) in conjunction with my own portfolio review. We’ll look for the launch of Seafarer Overseas Value, likely around the 75^th day of 2016. We’ll look for you.

Dear friends,

I love language, in both its ability to clarify and to mystify.

Take the phrase “think outside the box.”  You’ve heard it more times than you’d care to count but have you ever stopped to wonder: what box are they talking about?  Maybe someone invented it for good reason, so perhaps you should avoid breaking the box?

In point of fact, it’s this box:

Here’s the challenge that lies behind the aphorism: link all nine dots using four straight lines or fewer, without lifting the pen and without tracing the same line more than once.  There are only two ways to accomplish the feat: (1) rearrange the dots, which is obviously cheating, and (2) work outside the box.  For example:

As we interviewed managers this month, Ed Studzinski, they and I got to talking about investors’ perspectives on the future.  In one camp there are the “glass half-full” guys. Dale Harvey of Poplar Forest Partners Fund (PFPFX) allowed, for example, that there may come a time to panic about the stock market, but it’s not now. He looks at three indicators and finds them all pretty green:

1. His ability to find good investment ideas.  He’s still finding opportunities to add positions to the fund.
2. What’s going on with the Fed? “Don’t fight the Fed” is an axiom for good reason, he notes.  They’ve just slowing the rate of stimulus, not slowing the economy.  You get plenty of advance notice when they really want to start applying the brakes.
3. What’s going on with investor attitudes?  Folks aren’t all whipped-up about stocks, though there are isolated “story” stocks that folks are irrational over.

Against those folks are the “glass half-empty” guys.  Some of those guys are calling the alarm; others stoically endure that leaden feeling in the pit of their stomachs that comes from knowing they’ve seen this show before and it never ends well. By way of illustration:

1. The Leuthold Group believes that large cap stocks are more than 25% overvalued, small caps much more than that, that there could be a substantial correction and that corrections overshoot, so a 40% drop is not inconceivable.
2. Jeremy Grantham of GMO places the market at 65% overvalued. Fortunately, according to a Barron’s interview, it won’t become “a true bubble” until it inflates 30% more and individual investors, still skittish, become “gung-ho.”
3. Mark Hulbert notes that “true insider” stock sales have reached their highest level in a quarter century.  Hulbert notes that insider selling isn’t usually predictive because the term “insider” encompasses both true insiders (directors, presidents, founders, operating officers) and legal insides (any investor who controls more than 5% of the stock).  It turns out that “true” insider selling is predictive of a stock market fall a couple quarters later.  He makes his argument in two similar, but not quite identical, articles in Barron’s and MarketWatch.  (Go read them.)

And me, you ask?  I guess I’m neither quite a glass half full nor a glass half empty sort of investor.  I’m closer to a “don’t drop the glass!” guy.  My non-retirement portfolio remains about where it always is (25% US stocks with a value bias, 25% international stocks with a small/emerging bias, 50% income) and it’s all funded on auto-pilot.  I didn’t lose a mint in ’08, I didn’t make a mint in ’13 and I spend more time thinking about my son’s average (the season starts in the first week of April and he’ll either be on the mound or at second) than about the Dow’s.

“Judge Our Performance Over a Full Market Cycle”

Uh huh! Be careful of what you wish for, Bub. Charles did just check your performance across full market cycles, and it’s not as pretty as you’d like. Here are his data-rich findings:

Ten Market Cycles

In response to the article In Search of Persistence, published in our January commentary, NumbersGirl posted the following on the MFO board:

I am not enamored of using rolling 3-year returns to assess persistence.

A 3-year time period will often be all up or all down. If a fund manager has an investing personality or philosophy then I would expect strong relative performance in a rising market to be negatively correlated with poor relative performance in a falling market, etc.

It seems to me that the best way to measure persistence is over 1 (or better yet more) market cycles.

There followed good discussion about pros and cons of such an assessment, including lack of consistent definition of what constitutes a market cycle.

Echoing her suggestion, fund managers also often ask to be judged “over full cycle” when comparing performance against their peers.

A quick search of literature (eg., Standard & Poor’s Surviving a Bear Market and Doug Short’s Bear Markets in the S&P since 1950) shows that bear markets are generally “defined as a drop of 20% or more from the market’s previous high.” Here’s how the folks at Steele Mutual Fund Expert define a cycle:

Full-Cycle Return: A full cycle return includes a consecutive bull and bear market return cycle.

Up-Market Return (Bull Market): A Bull market in stocks is defined as a 20% rise in the S&P 500 Index from its previous trough, ending when the index reaches its peak and subsequently declines by 20%.

Down-Market Return (Bear Market): A Bear market in stocks is defined as a 20% decline in the S&P 500 Index from its previous peak, and ends when the index reaches its trough and subsequently rises by 20%.

Applying this definition to the SP500 intraday price index indicates there have indeed been ten such cycles, including the current one still in process, since 1956:

The returns shown are based on price only, so exclude dividends. Note that the average duration seems to match-up pretty well with so-called “short term debt cycle” (aka business cycle) described by Bridgewater’s Ray Dalio in the charming How the Economic Machine Works – In 30 Minutes video.

Here’s break-out of bear and bull markets:

The graph below depicts the ten cycles. To provide some historic context, various events are time-lined – some good, but more bad. Return is on left axis, measured from start of cycle, so each builds where previous left off. Short-term interest rate is on right axis.

Note that each cycle resulted in a new all-time market high, which seems rather extraordinary. There were spectacular gains for the 1980 and 1990 bull markets, the latter being 427% trough-to-peak! (And folks worry lately that they may have missed-out on the current bull with its 177% gain.) Seeing the resiliency of the US market, it’s no wonder people like Warren Buffett advocate a buy-and-hold approach to investing, despite the painful -50% or more drawdowns, which have occurred three times over the period shown.

Having now defined the market cycles, which for this assessment applies principally to US stocks, we can revisit the question of mutual fund persistence (or lack of) across them.

Based on the same methodology used to determine MFO rankings, the chart below depicts results across nine cycles since 1962:

Blue indicates top quintile performance, while red indicates bottom quintile. The rankings are based on risk adjusted return, specifically Martin ratio, over each full cycle. Funds are compared against all other funds in the peer group. The number of funds was rather small back in 1962, but in the later cycles, these same funds are competing against literally hundreds of peers.

(Couple qualifiers: The mural does not account for survivorship-bias or style drift. Cycle performance is determined using monthly total returns, including any loads, between the peak-to-peak dates listed above, with one exception…our database starts Jan 62 and not Dec 61.)

Not unexpectedly, the result is similar to previous studies (eg., S&P Persistence Scorecard) showing persistence is elusive at best in the mutual fund business. None of the 45 original funds in four categories delivered top-peer performance across all cycles – none even came close.

Looking at the cycles from 1973, a time when several now well know funds became established, reveals a similar lack of persistence – although one or two come close to breaking the norm. Here is a look at some of the top performing names:

MFO Great Owls Mairs & Powers Balanced (MAPOX) and Vanguard Wellington (VWELX) have enjoyed superior returns the last three cycles, but not so much in the first. The reverse is true for legendary Fidelity Magellan (FMAGX).

Even a fund that comes about as close to perfection as possible, Sequoia (SEQUX), swooned in the late ‘90s relative to other growth funds, like Fidelity Contrafund (FCNTX), resulting in underperformance for the cycle. The table below details the risk and return metrics across each cycle for SEQUX, showing the -30% drawdown in early 2000, which marked the beginning of the tech bubble. In the next couple years, many other growth funds would do much worse.

So, while each cycle may rhyme, they are different, and even the best managed funds will inevitably spend some time in the barrel, if not fall from favor forever.

We will look to incorporate full-cycle performance data in the single-ticker MFO Risk Profile search tool. As suggested by NumbersGirl, it’s an important piece of due diligence and risk cognizance for all mutual fund investors.

26Mar14/Charles

Celebrating one-star funds, part 2!

Morningstar faithfully describes their iconic star ratings as a starting place for additional research, not as a one-stop judgment of a funds merit.  As a practical matter investors do use those star ratings as part of a two-step research process:

Step One: Eliminate those one- and two-star losers

Step Two: Browse the rest

In general, there are worse strategies you could follow. Nonetheless, the star ratings can seriously misrepresent the merits of individual funds.  If a fund is fundamentally misfit to its category (in March we highlighted the plight of short-term high income funds within the high-yield peer group) or if a fund is highly risk averse, there’s an unusually large chance that its star rating will conceal more than it will reveal.  After a long statistical analysis, my colleague Charles concluded in last month’s issue that:

 A consequence of Morningstar’s methodology is that low volatility funds with below average returns can quite possibly be out-ranked by average volatility funds with average returns. Put another way, the methodology generally penalizes funds with high volatility more so than it rewards funds with low volatility.

The Observer categorizes funds differently: our Great Owl funds are those whose risk-adjusted returns are in the top 20% of their peer group for every measurement period longer than one year.  Our risk-adjustment is based on a fund’s Martin ratio which “excels at identifying funds that have delivered superior returns while mitigating drawdowns.”  At base, we’ve made the judgment that investors are more sensitive to the size of a fund’s drawdown – its maximum peak to trough loss – than to the background noise of day-to-day volatility.  As a result, we reward funds that provide good returns while avoiding disastrous losses.

For those interested in a second opinion, here’s the list of all one-star Great Owl funds:

• American Century One Choice 2035 A (ARYAX)
• Aquila Three Peaks High Income A (ATPAX)
• ASTON/River Road Independent Value (ARIVX)
• BlackRock Allocation Target Shares (BRASX)
• Dividend Plus Income (MAIPX)
• Fidelity Freedom Index 2000 (FGIFX)
• Intrepid Income (ICMUX)
• Invesco Balanced-Risk Retire 2030 (TNAAX)
• Invesco Balanced-Risk Retire 2040 (TNDAX)
• Invesco Balanced-Risk Retire 2050 (TNEAX)
• PIMCO 7-15 Year U.S. Treasury Index ETF (TENZ)
• PIMCO Broad U.S. Treasury Index ETF (TRSY)
• RiverPark Short Term High Yield (RPHYX)
• Schwab Monthly Income Max Payout (SWLRX)
• SEI New Jersey Municipal Bond A (SENJX)
• SPDR Nuveen S&P VRDO Municipal Bond (VRD)
• Symons Value (SAVIX)
• Weitz Nebraska Tax-Free Income (WNTFX)
• Wells Fargo Advantage Dow Jones Target 2015 (WFQEX)
• Wells Fargo Advantage Short Term High-Yield Bond (STHBX)

Are we arguing that the Great Owl metric is intrinsically better than Morningstar’s?

Nope.  We do want to point out that every rating system contains biases, although we somehow pretend that they’re “purely objective.”  You need to understand that the fact that a fund’s biases don’t align with a rater’s preferences is not an indictment of the fund (any more than a five-star rating should be taken as an automatic endorsement of it).

Still waiting by the phone

Last month’s celebration of one-star funds took up John Rekenthaler’s challenge to propose new fund categories which were more sensible than the existing assignments and which didn’t cause “category bloat.”

Amiably enough, we suggested short-term high yield as an eminently sensible possibility.  It contains rather more than a dozen funds that act much more like aggressive short-term bond funds than like traditional high-yield bond funds, a category dominated by high-return, high-volatility funds with much longer durations.

So far, no calls of thanks and praise from the good folks in Chicago.  (sigh)

How about another try: emerging markets allocation, balanced or hybrid?  Morningstar’s own discipline is to separate pure stock funds (global or domestic) from stock-bond hybrid funds, except in the emerging markets.  Almost all of the dozen or so emerging markets hybrid funds are categorized as, and benchmarked against, pure equity funds.  Whether that advantages or disadvantages a hybrid fund at any given point isn’t the key; the question is whether it allows investors to accurately assess them.  The hybrid category is well worth a test.

Who’s watching the watchers?

Presidio Multi-Strategy Fund (PMSFX) will “discontinue operations” on April 10, 2014.  It’s a weird little fund with a portfolio about the size of my retirement account.  This isn’t the first time we’ve written about Presidio.  Presidio shared a board with Caritas All-Cap Growth (CTSAX, now Goodwood SMIDcap Discovery).   In July 2013, the Board decided to liquidate Caritas.  In August they reconsidered and turned both funds’ management over to Brenda Smith.  At that time, I expressed annoyance with their limited sense of responsibility:

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.

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.

By October, she was gone from Caritas but she’s stayed with Presidio to the bitter end which looks something like this:

This isn’t just a note about a tiny, failed fund.  It’s a note about the Trustees of your fund boards.  Your representatives.  Your voice.  Their failures become your failures.  Their failures cause your failures.

Presidio was overseen by a rent-a-board (more politely called “a turnkey board”); a group of guys who nominally oversee dozens of unrelated funds but who have stakes in none of them.  Here’s a quick snapshot of this particular board:

The Board members are paid $2,000 per fund overseen and meet seven times a year.  The manager received rather more: “For the fiscal year ended May 31, 2013, Presidio Capital Investments, LLC received fees for its services to the Fund in the amount of $101,510,” for managing a $500,000 portfolio.

What other funds do they guide?  There are 22 of them:

• CV Asset Allocation Fund (CVASX);
• Arin Large Cap Theta Fund (AVOAX) managed by Arin Risk Advisors, LLC;
• Crescent Large Cap Macro, Mid Cap Macro and Strategic Income Funds managed by Greenwood Capital Associates, LLC;
• Horizons West Multi-Strategy Hedged Income Fund (HWCVX, formerly known as the Prophecy Alpha Trading Fund);
• Matisse Discounted Closed-End Fund Strategy (MDCAX) managed by Deschutes Portfolio Strategies;
• Roumell Opportunistic Value Fund (RAMVX) managed by Roumell Asset Management, LLC;
• The 11 RX funds (Dynamic Growth, Dynamic Total Return, Non Traditional, High Income, Traditional Equity, Traditional Fixed Income, Tactical Rotation, Tax Advantaged, Dividend Income, and Premier Managers);
• SCS Tactical Allocation Fund (SCSGX) managed by Sentinel Capital Solutions, Inc.;
• Sector Rotation Fund (NAVFX) managed by Navigator Money Management, Inc.; and
• Thornhill Strategic Equity Fund (TSEQX) managed by Thornhill Securities, Inc.

Oh, wait.  Not quite.  Crescent Mid Cap Macro (GCMIX) is “inactive.”  Thornhill Strategic Equity (TSEQX)?  No, that doesn’t seem to be trading either. Can’t find evidence that CV Asset Allocation ever launched. Right, right: the manager of Sector Rotation Fund (NAVFX) is under SEC sanction for “numerous misleading claims,” including reporting on the performance of the fund for periods in which the fund didn’t exist.

The bottom line: directors matter. Good directors can offer a manager access to skills, perspectives and networks that are far beyond his or her native abilities.  And good directors can put their collective foot down on matters of fees, bloat and lackluster performance.

Every one of your funds has a board of directors and you really need to ask just three questions about these guys:

1. What evidence is there that the directors are bringing a meaningful skill set to their post?
2. What evidence is there that the directors have executed serious oversight of the management team?
3. What evidence is there that the directors have aligned their interests with yours?

You need to look at two documents to answer those questions.  The first is the Statement of Additional Information (SAI) which is updated every time the prospectus is.  The SAI lists the board members’ qualifications, compensation, the number of funds each director oversees and the director’s investment in each of them. Here’s a general rule: if they’re overseeing dozens of funds and investing in none of them, back away.  There are some very good funds that use what I refer to as rent-a-boards as a matter of administrative convenience and financial efficiency, but the use of such boards weakens a critical safeguard.  If the board isn’t deeply invested, you need to see that the management team is.

The second document is called the Renewal of Investment Advisory Contract.  Boards are legally required to document their due diligence and to explain to you, the folks who elected them, exactly what they looked at and what they concluded.  These are sometimes freestanding documents but they’re more likely included as a section of the fund’s annual report. Look for errant nonsense, rationalizations and wishful thinking.  If you find it, run away!  Here’s an example of the discussion of fees charged by a one-star fund that trails 96-98% of its peers but charges a mint:

Fee Rate and Profitability – The Trustees considered that the Fund’s advisory fee is the highest in its peer group, while its expense ratio is the second highest. The Trustees considered [the manager’s] explanation that several funds included in the Fund’s peer group are passive index funds, which have extremely low fees because, unlike the Fund, they are not actively managed. The Trustees also considered [the] explanation that the growth strategy it uses to manage the Fund is extremely expensive and labor intensive because it involves reviewing and evaluating 8,000+ stocks four times a year.

Here’s the argument that the board bought: the fund has some of the highest fees in its industry but that’s okay because (1) you can’t expect us to be as cheap as an index fund and (2) we work hard, apparently unlike the 98% of funds that outperform us or charge less.

If you had an employee who was paid more and produced less than anyone else, what would you do?  Then ask: “and why didn’t my board do likewise?”

It’s The Money, Stupid!

By Edward Studzinski

“To be clever enough to get a great deal of money, one must be stupid enough to want it.”

G.K. Chesterton

There is a repetitive scene in the movie “Shakespeare in Love” – an actor and a director are reading through one of young Master Shakespeare’s newest plays, with the ink still drying.  The actor asks how a particular transition is to be made from one scene to the next.  The answer given is, “I don’t know – it’s a mystery.”  Much the same might be said for the process of setting and then regularly reviewing, mutual fund fees. One of my friends made the Long March with Morningstar’s Joe Mansueto from a cave deep in western China to what should now be known now as Morningstar Abbey in Chicago. She used to opine about how for commodity products like equity mutual funds, in a world of perfect competition if one believed economic theory as taught at the University of Chicago, it was rather odd that the clearing price for management fees, rather than continually coming down, seemed mired at one per cent. That comment was made almost twenty years ago. The fees still seem mired there.

One argument might be that you get what you pay for. Unfortunately many actively-managed equity funds that charge that approximately one per cent management fee lag their benchmarks. This presents the conundrum of how index funds charging five basis points (which Seth Klarman used to refer to as “mindless investing”) often regularly outperform the smart guys charging much more. The public airing of personality clashes at bond manager PIMCO makes for interesting reading in this area, but is not necessarily illuminating. For instance, allegedly the annual compensation for Bill Gross is $200M a year. However, much of that is arguably for his role in management at PIMCO, as co-chief investment officer. Some of it is for serving on a daily basis as the portfolio manager for however many funds his name is on as portfolio manager. Another piece of it might be tied to his ownership interest in the business.

The issue becomes even more confusing when you have similar, nay even almost identical, funds being managed by the same investment firm but coming through different channels, with different fees. The example to contrast here again is PIMCO and their funds with multiple share classes and different fees, and Harbor, a number of whose fixed income products are sub-advised by PIMCO and have lower fees for what appear, to the unvarnished eye, to be very similar products often managed by the same portfolio manager. A further variation on this theme can be seen when you have an equity manager running his own firm’s proprietary mutual fund for which he is charging ninety basis points in management fees while his firm is running a sleeve of another equity mutual fund for Vanguard, for which the firm is being paid a management fee somewhere between twenty and thirty basis points, usually with incentives tied to performance. And while the argument is often made that the funds may have different investment philosophies and strategies and a different portfolio manager, there is often a lot of overlap in the securities owned (using  the same research process and analysts).

So, let’s assume that active equity management fees are initially set by charging what everyone else is charging for similar products. One can see by looking at a prospectus, what a competitor is charging. And I can assure you that most investment managers have a pretty good idea as to who their competitors are, even if they may think they really do not have competitors. How do the fees stay at the same level, especially as, when assets under management grow there should be economies of scale?

Ah ha!  Now we reach a matter that is within the purview of the Board of Trustees for a fund or fund group. They must look at the reasonableness of the fees being charged in light of a number of variables, including investment philosophy and strategy, size of assets under management, performance, etc., etc., etc.  And perhaps a principal underpinning driving that annual review and sign-off is the peer list of funds for comparison.

Probably one of the most important assignments for a mutual fund executive, usually a chief financial officer, is (a) making sure that the right consulting firm is hired to put together the peer list of similar mutual funds and (b) confirming that the consulting firm understands their assignment. To use another movie analogy, there is a scene early on in “Animal House” where during pledge week, two of the main characters visit a fraternity house and upon entering, are immediately sent to sit on a couch off in a corner with what are clearly a small group of social outliers. Peer group identification often seems to involve finding a similar group of outliers on the equivalent of that couch.

Given the large number of funds out there, one identifies a similar universe with similar investment strategies, similar in size, but mirabile dictu, the group somehow manages to have similar or inferior performance with similar or higher fees and expenses. What to do, what to do?  Well of course, you fiddle with the break points so that above a certain size of assets under management in the fund, the fees are reduced. And you never have to deal with the issue that the real money is not in the break points but in fees that are too high to begin with. Perish the thought that one should use common sense and look at what Vanguard or Dodge and Cox are charging for base fees for similar products.

There is another lesson to be gained from the PIMCO story, and that is the issue of ownership structure. Here, you have an offshore owner like Allianz taking a hands-off attitude towards their investment in PIMCO, other than getting whatever revenue or income split it is they are getting. It would be an interesting analysis to see what the return on investment to Allianz has been for their original investment. It would also be interesting to see what the payback period was for earning back that original investment. And where lies the fiduciary obligation, especially to PIMCO clients and fund investors, in addition to Allianz shareholders?  But that is a story for another time.

How is any of this to be of use to mutual fund investors and readers of the Observer. I am showing my age, but Vice President Hubert Humphrey used to be nick-named the “Happy Warrior.” One of the things that has become clear to me recently as David and I interview managers who have set up their own firms after leaving the Dark Side, LOOK FOR THE HAPPY WARRIORS. For them, it is not the process of making money. They don’t need the money. Rather they are doing it for the love of investing.  And if nobody comes, they will still do it to manage their own money.  Avoid the ones for whom the money has become an addiction, a way of keeping score. For supplementary reading, I commend to all an article that appeared in the New York Sunday Times on January 19, 2014 entitled “For the Love of Money” by Sam Polk. As with many of my comments, I am giving all of you more work to do in the research process for managing your money. But you need to do it if you serious about investing.  And remember, character and integrity always show through.

And those who can’t teach, teach gym (part 2)

Beginning in 1997, the iconically odd-looking Jim Jubak wrote the wildly-popular “Jubak’s Picks” column for MSN Money.  In 2010, he apparently decided that investment management looked awfully easy and so launched his own fund.

Which stunk.  Over the three years of its existence, it’s trailed 99% of its peers.   And so the Board of Trustees of the Trust has approved a Plan of Liquidation which authorizes the termination, liquidation and dissolution of the Jubak Global Equity Fund (JUBAX). The Fund will be T, L, and D’d on or about May 29, 2014. (It’s my birthday!)

Here’s the picture of futility, with Mr. Jubak on the blue line and mediocrity represented by the orange one:

Yup, $16 million in assets – none of it representing capital gains.

Mr. Jubak joins a long list of pundits, seers, columnists, prognosticators and financial porn journalists who have discovered that a facility for writing about investments is an entirely separate matter from any ability to actually make money.

Among his confreres:

Robert C. Auer, founder of SBAuer Funds, LLC, was from 1996 to 2004, the lead stock market columnist for the Indianapolis Business Journal “Bulls & Bears” weekly column, authoring over 400 columns, which discussed a wide range of investment topics.  As manager of Auer Growth (AUERX), he’s turned a $10,000 investment into $8500 over the course of six years.

Jonathan Clements left a high visibility post at The Wall Street Journal to become Director of Financial Education, Citi Personal Wealth Management.  Sounds fancy.  Frankly, it looks like was relegated to “blogger.”  Mr. Clements recently announced his return to journalism, and the launch of a weekly column in the WSJ.

John Dorfman, a Bloomberg and Wall Street Journal columnist, launched Dorfman Value Fund which finally became Thunderstorm Value Fund (THUNX). Having concluded that low returns, high expenses, a one-star rating, and poor marketing aren’t the road to riches, the advisor recommended that the Board close (on January 17, 2012) and liquidate (on February 29, 2012) the fund.

Ron Insana, who left CNBC in 2006 to form a hedge fund and returned to part-time punditry three years later.  He’s currently (March 28, 2014) prognosticating “a very nasty pullback” in the stock market.

Scott Martin, a contributor to FOX Business Network and a former columnist with TheStreet.com, co-managed Astor Long/Short ETF Fund (ASTLX) for one undistinguished year before moving on.

Steven J. Milloy, “lawyer, consultant, columnist, adjunct scholar,” managed the somewhat looney Free Enterprise Action Fund which merged with the somewhat looney $12 million Congressional Effect Fund (CEFFX), which never hired Mr. Milloy and just fired Congressional Effect Management.

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.

During March, Bro. Studzinski and I contacted a quartet of distinguished managers whose careers were marked by at least two phases: successfully managing large funds within a fund complex and then walking away to launch their own independent firms.  We wanted to talk with them both about their investing disciplines and current funds and about their bigger picture view of the world of independent managers.

Our lead story in May carries the working title, “Letter to a Young Fund Manager.”  We are hoping to share some insight into what it takes to succeed as a boutique manager running your own firm.  Our hope is that the story will be as useful for folks trying to assess the role of small funds in their portfolio as it will be to the (admittedly few) folks looking to launch such funds.

As a preview, we’d like to introduce the four managers and profile their funds:

Evermore Global Value (EVGBX): David Marcus was trained by Michael Price, managed Mutual European and co-managed two other Mutual Series funds, then spent time investing in Europe before returning to launch this remarkably independent “special situations” fund.

Huber Equity Income (HULIX): Joe Huber designed and implemented a state of the art research program at Hotchkis and Wiley and managed their Value Opportunities fund for five years before striking out to launch his own firm and, coincidentally, launched two of the most successful funds in existence.

Poplar Forest Partners (PFPFX): Dale Harvey is both common and rare.  He was a very successful manager for five American Funds who was disturbed by their size.  That’s common.  So he left, which is incredibly rare.  One of the only other managers to follow that path was Howard Schow, founder of the PrimeCap funds.

Walthausen Select Value (WSVRX): John Walthausen piloted both Paradigm Value and Paradigm Select to peer-stomping returns.  He left in 2007 to create his own firm which advises two funds that have posted, well, peer stomping returns.

Launch Alert: Artisan High Income (ARTFX)

On March 19^th, Artisan launched their first fixed-income fund.  The plan is for the manager to purchase a combination of high-yield bonds and other stuff (technically: “secured and unsecured loans, including, without limitation, senior and subordinated loans, delayed funding loans and revolving credit facilities, and loan participations and assignments”). There’s careful attention given to the quality and financial strength of the bond issuer and to the magnitude of the downside risks. The fund might invest globally.

The Fund is managed by Bryan C. Krug.  For the past seven years, Mr. Krug has managed Ivy High Income (WHIAX).  His record there was distinguished, especially for his ability to maneuver through – and profit from – a variety of market conditions.  A 2013 Morningstar discussion of the fund observes, in part:

[T]he fund’s 26% allocation to bonds rated CCC and below … is well above the 15% of its typical high-yield bond peer. Recently, though, Krug has been taking a somewhat defensive stance; he increased the amount of bank loans to nearly 34% as of the end of 2012, well above the fund’s 15% target allocation … Those kinds of calls have allowed the fund to mitigate losses well–performance in 2011’s third quarter and May 2012 are ready examples–as well as to deliver strong results in a variety of other environments. That record and relatively low expenses make for a compelling case here.

$10,000 invested at the beginning of Mr. Krug’s tenure would have grown to $20,700 by the time of his departure versus $16,700 at his average peer. The Ivy fund was growing by $3 – 4 billion a year, with no evident plans for closure.  While there’s no evidence that asset bloat is what convinced Mr. Krug to look for new opportunities, indeed the fund continued to perform splendidly even at $11 billion, a number of other managers have shifted jobs for that very reason.

The minimum initial investment is $1000 for the Investor class and $250,000 for Advisor shares.  Expenses for both the Investor and Advisor classes are capped at 1.25%.

Artisan’s hiring standard has remained unchanged for decades: they interview dozens of management teams each year but hire only when they think they’ve found “category killers.” With 10 of their 12 rated funds earning four- or five-stars, they seem to achieve that goal.  Investors seeking a cautious but opportunistic take on high income investing really ought to look closer.

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.

Funds in registration this month are eligible to launch in late May or early June 2014 and some of the prospectuses do highlight that date.

This month David Welsch tracked down five funds in registration, the lowest totals since we launched three years ago.  Curious.

Manager Changes

On a related note, we also tracked down 43 sets of fund manager changes. The most intriguing of those include Amit Wadhwaney’s retirement from managing Third Avenue International Value (TAVIX) and Jim Moffett’s phased withdrawal from Scout International (UMBWX).

Updates

Our friends at RiverRoad Asset Management report that they have entered a “strategic partnership” with Affiliated Managers Group, Inc.  RiverRoad becomes AMG’s 30^th partner. The roster also includes AQR, Third Avenue and Yacktman.  As part of this agreement, AMG will purchase River Road from Aviva Investors.  Additionally, River Road’s employees will acquire a substantial portion of the equity of the business. The senior professionals at RiverRoad have signed new 10-year employment agreements.  They’re good people and we wish them well.

Even more active share.

Last month we shared a list of about 50 funds who were willing to report heir current active share, a useful measure that allows investors to see how independent their funds are of the index.  We offered folks the chance to be added to the list. A dozen joined the list, including folks from Barrow, Conestoga, Diamond Hill, DoubleLine, Evermore, LindeHanson, Pinnacle, and Poplar Forest. We’ve given our active share table a new home.

ARE YOU ACTIVE?  WOULD YOU LIKE SOMEONE TO NOTICE?

We’ve been scanning fund company sites, looking for active share reports. If we’ve missed you, we’re sorry. Help us correct the oversight  by sending us the link to where you report your active share stats. We’d be more than happy to offer a permanent home for the web’s largest open collection of active share data.

Briefly Noted . . .

For reasons unexplained, GMO has added a “purchase premium” (uhhh… sales load?) and redemption fee of between 8 and 10 basis points to three of its funds: GMO Strategic Fixed Income Fund (GMFIX), GMO Global Developed Equity Allocation Fund (GWOAX) and GMO International Developed Equity Allocation Fund (GIOTX).  Depending on the share class, the GMO funds have investment minimums in the $10 million – $300 million range.  At the lower end, that would translate to an $8,000 purchase premium.  At the high end, it might be $100,000.

Effective April 1, 2014, the principal investment strategy of the Green Century Equity Fund (GCEQX) will be revised to change the index tracked by the Fund, so as to exclude the stocks of companies that explore for, process, refine or distribute coal, oil or gas.

SMALL WINS FOR INVESTORS

The Board of Mainstay Marketfield Fund (MFLDX) has voted to slash the management fee (slash it, I say!) by one basis point! So, in compensation for a sales load (5.75% for “A” shares), asset bloat (at $21 billion, the fund has put on nearly $17 billion since being acquired by New York Life) and sagging performance (it still leads its long/short peer group, but by a slim margin), you save $1 – every year – for every $10,000 you invest.  Yay!!!!!

CLOSINGS (and related inconveniences)

Robeco Boston Partners Long/Short Research Fund (BPRRX)  closed on a day’s notice at the end of March, 2014 because of “a concern that a significant increase in the size of the Fund may adversely affect the implementation of the Fund’s strategy.”  The advisor long-ago closed its flagship Robeco Boston Partners Long/Short Equity (BPLEX) fund.  At the beginning of January 2014 they launched a third offering, Robeco Boston Partners Global Long/Short (BGLSX) which is only available to institutional investors.

Effective as of the close of business on March 28, 2014, Perritt Ultra MicroCap Fund (PREOX) closed to new investors.

OLD WINE, NEW BOTTLES

On March 31, Alpine Innovators Fund (ADIAX) became Alpine Small Cap Fund.  It also ceased to be an all-cap growth fund oriented toward stocks benefiting from the “innovative nature of each company’s products, technology or business model.”  It was actually a pretty reasonable fund, not earth-shattering but decent.  Sadly, no one cared.  It’s not entirely clear that they’re going to swarm on yet another small-blend fund.  The upside is that the new managers have a stint with Lord Abbett Small Cap Blend Fund

Effective on or about April 28, 2014, BNY Mellon Small/Mid Cap Fund‘s (MMCIX) name will be changed to BNY Mellon Small/Mid Cap Multi-Strategy Fund and they’ll go all multi-manager on you.

Effective March 21, 2014, the ticker for the Giant 5 Total Investment System changed from FIVEX to CASHX. Cute.  The board had previously approved replacement of the phrase “Giant 5” with “Index Funds” (no, really), but that hasn’t happened yet.

At the end of April, 2014, Goldman Sachs has consented to modestly shorten the names of some of their funds.

They still don’t fit on one line.

Johnson Disciplined Mid-Cap Fund (JMDIX) is slated to become Johnson Opportunity on May 1, 2014.  At that point, it won’t be restricted to investing in mid-cap stocks anymore.  Good thing, too, since they’re only … how to say this? Intermittently excellent at that discipline.

On May 5, Laudus Mondrian Global Fixed Income Fund (LMGDX) becomes Laudus Mondrian Global Government Fixed Income Fund.  It’s already 90% in government bonds, so the change is mostly symbolic.  At the same time, Laudus Mondrian International Fixed Income Fund (LIFNX) becomes Laudus Mondrian International Government Fixed Income Fund.  It, too, invests now in government bonds.

Effective March 17, 2014, Mariner Hyman Beck Fund (MHBAX) was renamed the Mariner Managed Futures Strategy Fund.

OFF TO THE DUSTBIN OF HISTORY

Effective on or about May 16, 2014, AllianzGI Disciplined Equity Fund (ARDAX) and AllianzGI Dynamic Emerging Multi-Asset Fund (ADYAX) will be liquidated and dissolved. The former is tiny and mediocre, the latter tinier and worse.  Hasta!

Avatar Capital Preservation Fund (ZZZNX), Avatar Tactical Multi-Asset Income Fund (TAZNX), Avatar Absolute Return Fund (ARZNX) and Avatar Global Opportunities Fund (GOWNX) – pricey funds-of-ETFs – ceased operations on March 28, 2014.

Epiphany FFV Global Ecologic Fund (EPEAX) has closed to investors and will be liquidated on April 28, 2014.

Goldman Sachs China Equity Fund (GNIAX) is being merged “with and into” the Goldman Sachs Asia Equity Fund (GSAGX). The SEC filing mumbled indistinctly about “the second quarter of 2014” as a target date.

The $200 million Huntington Fixed Income Securities Fund (HFIIX) will be absorbed by the $5.6 billion Federated Total Return Bond Fund (TLRAX), sometime during the second quarter of 2014.  The Federated fund is pretty consistently mediocre, and still the better of the two.

On March 17, 2014, Ivy Asset Strategy New Opportunities Fund merged into Ivy Emerging Markets Equity Fund (IPOAX, formerly Ivy Pacific Opportunities Fund). On the same day, Ivy Managed European/Pacific Fund merged into Ivy Managed International Opportunities Fund (IVTAX).  (Run away!  Go buy a nice index fund!)

The $2 billion, four-star Morgan Stanley Focus Growth Fund (OMOAX) is merging with $1.3 billion, four-star Morgan Stanley Institutional Growth (MSEGX) at the beginning of April, 2014.  They are, roughly speaking, the same fund.

Parametric Currency Fund (EAPSX), $4 million in assets, volatile and unprofitable after two and a half years – closed on March 25, 2014 and was liquidated a week later.

Pax World Global Women’s Equality Fund (PXWEX) is slated to merged into a newly-formed Pax Global Women’s Index Fund.

On February 25, 2014, the Board of Trustees of Templeton Global Investment Trust on behalf of Templeton Asian Growth Fund approved a proposal to terminate and liquidate Templeton Asian Growth Fund (FASQX). The liquidation is anticipated to occur on or about May 20, 2014. I’m not sure of the story.  It’s a Mark Mobius production and he’s been running offshore versions of this fund since the early 1990s.  This creature, launched about four years ago, has been sucky performance and negligible assets.

Turner Emerging Markets Fund (TFEMX) is being liquidated on or about April 15, 2014.  Why? “This decision was made after careful consideration of the Fund’s asset size, strategic importance, current expenses and historical performance.”  Historical performance?  What historical performance?  Turner launched this fund in August of 2013.  Right.  After six months Turner pulled the plug.  Got long-term planning there, guys!

In Closing . . .

Happy anniversary to us all.  With this issue, the Observer celebrates its third anniversary.  In truth, we had no idea of what we were getting into but we knew we had a worthwhile mission and the support of good people.

We started with a fairly simple, research-based conviction: bloated funds are not good investments.  As funds swells, their investible universes contract, their internal incentives switch from investment excellence to avoiding headline risk, and their reward systems shift to reward asset growth and retention.  They become timid, sclerotic and unrewarding.

To be clear, we know of no reason which supports the proposition that bigger is better, most especially in the case of funds that place some or all of their portfolios in stocks.  And yet the industry is organized, almost exclusively, to facilitate such beasts.  Independent managers find it hard to get attention, are disadvantaged when it comes to distribution networks, and have almost no chance of receiving analyst coverage.

We’ve tried to be a voice for the little guy.  We’ve tried to speak clearly and honestly about the silly things that you’re tempted into doing and the opportunities that you’re likely overlooking.  So far we’ve reached over 300,000 readers who’ve dropped by for well over a million visits.  Which is pretty good for a site with neither commercial endorsements or pictures of celebrities in their swimwear.

In the year ahead, we’ll try to do better.  We’re taking seriously our readers’ recommendation.  One recommendation was to increase the number of fund profiles (done!) and to spend more time revisiting some of the funds we’ve previously written about (done!).  As we reviewed your responses to “what one change could we make to better serve you” question, several answers occurred over and over:

1. People would like more help in assembling portfolios, perhaps in form of model portfolios or portfolio templates.  A major goal for 2014, then, is working more with our friends in the industry to identify useful strategies for allowing folks to identify their own risk/return preferences and matching those to compatible funds.  We need to be careful since we’re not trained as financial advisors, so we want to offer models and illustrations rather than pretend to individual advice.
2. People would like more guidance on the resources already on-site.  We’ve done a poor job in accommodating the fact that we see about 10,000 first-time visitors each month.  As a result, people aren’t aware that we do maintain an archive of every audio-recording of our conference calls (check the Funds tab, then Featured Funds), and do have lists of recommended books (Resources -> Books!) and news sources (Best of the Web).  And so one of our goals for the year ahead is to make the Observer more transparent and more easily navigable.
3. Many people have asked about mid-month updates, at least in the case of closures or other developments which come with clear deadlines.  We might well be able to arrange to send a simple email, rarely more than once a month, if something compelling breaks.
4. Finally, many people asked for guidance for new investors.

Those are all wonderfully sensible suggestions and we take them very seriously.  Our immediate task is to begin inventorying our resources and capabilities; we need to ask “what’s the best we can do with what we’ve got today?” And “how can we work to strengthen our organizational foundation, so that we can help more?”

Those are great questions and we very much hope you join us as we shape the answers in the year ahead.

Finally, I’ll note that I’m shamefully far behind in extending thanks to the folks who’ve contributed to the Observer – by check or PayPal – in the past month.  I’ve launched on a new (and terrifying) adventure in home ownership; I spent much of the past month looking at houses in Davenport with the hopes of having a place by May 1.  I’m about 250 sets of signatures and initials into the process, with just one or two additional pallets of scary-looking forms to go!  Pray for me.

And thanks to you all.

Dear friends,

We’ve been listening to REM’s “It’s the End of the World (as we know it)” and thinking about copyrighting some useful terms for the year ahead.  You know that Bondpocalypse and Bondmageddon are both getting programmed into the pundits’ vocabulary.  Chip suggests Bondtastrophe and Bondaster.  

Bad asset classes (say, TIPs and long bonds) might be merged in the Frankenfund.  Members of the Observer’s discussion board offered bond doggle (thanks, Bee!), the Bondfire of the Vanities (Shostakovich’s entry and probably our most popular), the New Fed (which Hank thinks we’ll be hearing by year’s end) which might continue the racetodebase (Rono) and bondacious (presumably blondes, Accipiter’s best).  Given that snowstorms now get their own names (on the way to Pittsburgh, my son and I drove through the aftermath of Euclid), perhaps market panics, too?  We’d start of course with Market Crisis Alan, in honor of The Maestro, but we haven’t decided whether that would rightly be followed by Market Crisis Ben, Barack or Boehner.  Hopeful that they couldn’t do it again, we could honor them all with Crash B3 which might defame the good work done by vitamin B3 in regulating sex and stress.

Feel free to join in on the 2013 Word of the Year thread, if only if figure out how Daisy Duke got there.

The Big Bond Bubble Boomnanza?

I’m most nervous when lots of other folks seem to agree with me.  It’s usually a sign that I’ve overlooked something.

I’ve been suggesting for quite a while now that the bond market, as a whole, might be in a particularly parlous position.   Within the living memory of almost the entire investing community, investing in bonds has been a surefire way to boost your portfolio.  Since 1981, the bond market has enjoyed a 31-year bull market.  What too many investors forget is that 1981 was preceded by a 35-year year bear market for bonds.  The question is: are we at or near another turning point?

The number of people reaching that conclusion is growing rapidly.  Floyd Norris of The New York Times wrote on December 28^th: “A new bear market almost certainly has begun” (Reading Pessimism in the Market for Bonds).  The Wall Street Journal headlined the warning, “Danger Lurks Inside the Bond Boom amid Corporate-Borrowing Bonanza, Some Money Managers Warn of Little Room Left for Gains” (12/06/2012).  Separately, the Journal warned of “a rude awakening” for complacent bond investors (12/24/2012).  Barron’s warns of a “Fed-inflated bond bubble” (12/17/2012). Hedge fund manager Ray Dalio claims that “The biggest opportunity [in 2013] will be – and it isn’t imminent – shorting bond markets around the world” (our friends at LearnBonds.com have a really good page of links to commentaries on the bond market, on which this is found).

I weighed in on the topic in a column I wrote for Amazon’s Money and Markets page.  The column, entitled “Trees Do Not Grow to the Sky,” begins:

You thought the fallout from 2000-01 was bad?  You thought the 2008 market seizure provoked anguish?  That’s nothing, compared to what will happen when every grandparent in America cries out, as one, “we’ve been ruined.”

In the past five years, investors have purchased one trillion dollars’ worth of bond mutual fund shares ($1.069 trillion, as of 11/20/12, if you want to be picky) while selling a half trillion in stock funds ($503 billion).

Money has flowed into bond mutual funds in 53 of the past 60 weeks (and out of stock funds in 46 of 60 weeks).

Investors have relentlessly bid up the price of bonds for 30 years so they’ve reached the point where they’re priced to return less than nothing for the next decade.

Morningstar adds that about three-quarters of that money went to actively-managed bond funds, a singularly poor bet in most instances.

I included a spiffy graph and then reported on the actions of lots of the country’s best bond investors.  You might want to take a quick scan of their activities.  It’s fairly sobering.

Among my conclusions:  

Act now, not later. “Act” is not investment advice, it’s communication advice.  Start talking with your spouse, financial adviser, fund manager, and other investors online, about how they’ve thought about the sorts of information I’ve shared and how they’ve reacted to it.  Learn, reflect, then act.

We’re not qualified to offer investment advice and we’re not saying that you should be abandoning the bond market. As we said to Charles, one of our regular readers,

I’m very sensitive to the need for income in a portfolio, for risk management and for diversification so leaving fixed-income altogether strikes me as silly and unmanageable.  The key might be to identify the risks your exposing yourself to and the available rewards.  In general, I think folks are most skeptical of long-term sovereign debt issued by governments that are … well, broke.  Such bonds have the greatest interest rate sensitivity and then to be badly overpriced because they’ve been “the safe haven” in so many panics.  

So I’d at the very least look to diversify my income sources and to work with managers who are not locked into very narrow niches. 

MFWire: Stock Fund Flows Are Turning Around

MF Wire recently announced “Stock Funds Turn Around” (December 28, 2012), which might also be titled “Investors continue retreat from U.S. stock funds.” In the last full week of 2012, investors pulled $750 million from US stock funds and added $1.25 billion into international ones.

Forbes: Buy Bonds, Sleep Well

Our take might be, Observer: buy bonds, sleep with the fishes.  On December 19^th, Forbes published 5 Mutual Funds for Those Who Want to Sleep Well in 2013.  Writer Abram Brown went looking for funds that performed well in recent years (always the hallmark of good fund selection: past performance) and that avoided weird strategies.  His list of winners:

PIMCO Diversified Income (PDVDX) – a fine multi-asset fund.

MFS Research Bond R3 (MRBHX) – R3 shares are only available through select retirement plans.  The publicly available “A” shares carry a sales load, which has trimmed about a percent a year off its returns.

Russell Strategic Bond (RFCEX) – this is another unavailable share class; the publicly available “A” shares have higher expenses, a load, and a lower Morningstar rating.

TCW Emerging Markets Income (TGEIX) – a fine fund whose assets have exploded in three years, from $150 million to $6.2 billion.

Loomis Sayles Bond (LBFAX) – the article points you to the fund’s Administrative shares, rather than the lower-cost Retail shares (LSBRX) but I don’t know why.

Loomis might illustrate some of the downsides to investing in the past.  Its famous lead manager, Dan Fuss, is now 79 years old and likely in the later stages of his career.  His heir apparent, Kathleen Gaffney, recently left the firm.  That leaves the fund in the hands of two lesser-known managers.

I’m not sure of how well most folks will sleep when their manager’s toting 40-100% emerging markets exposure or 60% junk bonds when the next wave crashes over the market, but it’s an interesting list.

Forbes is, by the way, surely a candidate for the most badly junked up page in existence, and one of the least useful.  Only about a third of the screen is the story, the rest are ads and misleading links.  See also “10 best mutual funds” does not lead to a Forbes story on the subject – it leads to an Ask search results page with paid results at top.

Vanguard: The Past 10 Years

In October we launched “The Last Ten,” a monthly series, running between now and February, looking at the strategies and funds launched by the Big Five fund companies (Fido, Vanguard, T Rowe, American and PIMCO) in the last decade.

Here are our findings so far:

Fidelity, once fabled for the predictable success of its new fund launches, has created no compelling new investment option and only one retail fund that has earned Morningstar’s five-star designation, Fidelity International Growth (FIGFX).  We suggested three causes: the need to grow assets, a cautious culture and a firm that’s too big to risk innovative funds.

T. Rowe Price continues to deliver on its promises.  Of the 22 funds launched, only Strategic Income (PRSNX) has been a consistent laggard; it has trailed its peer group in four consecutive years but trailed disastrously only once (2009).  Investing with Price is the equivalent of putting a strong singles-hitter on a baseball team; it’s a bet that you’ll win with consistency and effort, rather than the occasional spectacular play.

PIMCO has utterly crushed the competition, both in the thoughtfulness of their portfolios and in their performance.  PIMCO has, for example, about three times as many five-star funds – both overall and among funds launched in the last decade – than you’d predict.

The retirement of Gus Sauter, Vanguard’s long-time chief investment officer, makes this is fitting moment to look back on the decade just past.

Measured in terms of the number of funds launched or the innovativeness of their products, the decade has been unremarkable.  Vanguard:

• Has 112 funds (which are sold in over 278 packages or share classes)
• 29 of their funds were launched in the past decade
• 106 of them are old enough to have earned Morningstar ratings
• 8 of them has a five star rating (as of 12/27/12)
• 57 more earned four-star ratings.

Morningstar awards five-stars to the top 10% of funds in a class and four-stars to the next 22.5%.  The table below summarizes what you’d expect from a firm of Vanguard’s size and then what they’ve achieved.

What does the chart suggest?  Vanguard is less likely to be “spectacular” than the numbers would suggest but more than twice as likely to be “really good.”  That makes a great deal of sense given the nature of Vanguard’s advantage: the “at cost” ethos and tight budget controls means that they enter each year with a small advantage over the market.  With time that advantage compounds but remains modest.

The funds launched in the past decade are mostly undistinguished, in the sense that they incorporate neither unusual combinations of assets (no “emerging markets balanced” or “global infrastructure” here) nor innovative responses to changing market conditions (as with “real return” or “inflation-tuned” ones).   The vast bulk are target-date funds, other retirement income products, or new indexed funds for conventional market segments.

They’ve launched about five new actively-managed retail funds which, as a group, peak out at “okay.”

This is not to suggest that Vanguard has been inattentive of their shareholders best interests.  Rather they seem to have taken an old adage to heart: “be like a duck, stay calm on the surface but paddle like hell underwater.”  I’m indebted to Taylor Larimore, co-founder of the Bogleheads, for sharing the link to a valedictory interview with Gus Sauter, who points out that Vanguard’s decided to shift the indexes on which their funds are based.  That shift will, over time, save Vanguard’s investors hundreds of millions of dollars.  It also exemplifies the enduring nature of Vanguard’s competitive advantage: the ruthless pursuit of many small, almost invisible gains for their investors, the sum of which is consistently superior results.

Celebrating Small Cap Season

The Observer has, of late, spent a lot of time talking about the challenge of managing volatility.  That’s led us to discussions of long/short, covered call, and strategic income funds.  The two best months for small cap funds are January and February.  Average returns of U.S. small caps in January from 1927 to 2011 were 2.3%, more than triple those in February, which 0.72%.  And so we teamed up again with the folks at FundReveal to review the small cap funds we’ve profiled and to offer a recommendation or two.

You can reach the individual profiles by clicking in the “Funds” tab on our main navigation bar.  We’re in the process of updating them all during January.  Because our judgments embody a strong qualitative element, we asked our resolutely quantitative friends at FundReveal to look at our small caps and to offer their own data-driven reading of some of them. Their full analysis can be found on their blog.

FundReveal’s strategy is to track daily return and volatility data, rather than the more common monthly or quarterly measures.  They believe that allows them to look at many more examples of the managers’ judgment at work (they generate 250 data points a year rather than four or twelve) and to arrive at better predictions about a fund’s prospects.  One of FundReveal’s key measures is Persistence, the likelihood that a particular pattern of risk and return repeats itself, day after day.  In general, you can count on funds with higher persistence. Here are their highlights:

The MFO funds display, in general, higher volatility than the S&P 500 for both 2012 YTD and the past 5 years.  The one fund that had lower volatility in both time horizons is Pinnacle Value (PVFIX).   PVFIX demonstrates consistent performance with low volatility, factors to be combined with subjective analysis available from other sources.

Two other funds have delivered high ADR (Average Daily Return), but also present higher risk than the S&P.  In this case Southern Sun Small Cap (SSSFX) and Walthausen Small Cap (WSCVX) have high relative volatility, but they have delivered high ADR over both time horizons.  From the FundReveal perspective, SSSFX has the edge in terms of decision-making capability because it has delivered higher ADR than the S&P in 10 Quarters and lower ADR in 6 Quarters, while WSCVX had delivered higher ADR than the S&P in 7 Quarters and lower ADR in 7 Quarters.  

So, bottom line, from the FundReveal perspective PVFIX and SSSFX are the more attractive funds in this lineup. 

Some Small Cap funds worthy of consideration:

Small Blend 

• Schwartz Value fund (RCMFX): Greater than S&P ADR, Lower Volatility (what we call “A” performance) for 2012 YTD and 2007-2012 YTD.  It has a high Persistence Rating (40%) that indicates a historic tendency to deliver A performance on a quarterly basis. 
• Third Avenue Small-Cap Fund (TVSVX): Greater than S&P ADR, Lower Volatility with a medium Persistence Rating (33%).

Small Growth

• Wasatch Micro Cap Value fund (WAMVX): Greater than  S&P ADR, Lower Volatility 2007-2012 YTF, with a medium Persistence Rating (30%).  No FundReveal covered Small Growth funds delivered “A” performance in 2012 YTD. (WAMVX is half of Snowball’s Roth IRA.)

Small Value

• Pinnacle Value Fund (PVFIX): An MFO focus fund, discussed above.  It has a high Persistence Rating (50%).
• Intrepid Small Cap Fund (ICMAX ): Greater than  S&P ADR, Lower Volatility for 2007-2012 YTF, with a high Persistence Rating (55%). Eric Cinnamond, who now manages Aston River Road Independent Value, managed ICMAX from 2005-10.
• ING American Century Small-Mid Cap Value (ISMSX): Greater than  S&P ADR, Lower Volatility for 2007-2012 YTF, with a medium Persistence Rating (25%).

If you’re intrigued by the potential for fine-grained quantitative analysis, you should visit FundReveal.  While theirs is a pay service, free trials are available so that you can figure out whether their tools will help you make your own decisions.

Ameristock’s Curious Struggle

Nick Gerber’s Ameristock (AMSTX) fund was long an icon of prudent, focused investing but, like many owner-operated funds, is being absorbed into a larger firm.  In this case, it’s moving into the Drexel Hamilton family of funds.

Or not.  While these transactions are generally routine, a recent SEC filing speaks to some undiscussed turmoil in the move.  Here’s the filing:

As described in the Supplement Dated October 9, 2012 to the Prospectus of Ameristock Mutual Fund, Inc. dated September 28, 2012, a Special Meeting of Shareholders of the Ameristock Fund  was scheduled for December 12, 2012 at 11:00 a.m., Pacific Time, for shareholders to vote on a proposed Agreement and Plan of Reorganization and Termination pursuant to which the Ameristock Fund would be reorganized into the Drexel Hamilton Centre American Equity Fund, a series of Drexel Hamilton Mutual Funds, resulting in the complete liquidation and termination of the Ameristock Fund. The Special Meeting convened as scheduled on December 12, 2012, but was adjourned until … December 27, 2012.   … The Reconvened Special Meeting was reconvened as scheduled on December 27, 2012, but has again been adjourned and will reconvene on Thursday, January 10, 2012 …

Uh-huh. 

Should Old Acquaintance Be Forgot and Never Brought to Mind?

Goodness, no.

How long can a fund be incredibly, eternally awful and still survive?  The record is doubtless held by the former Steadman funds, which were ridiculed as the Deadman funds and eventually hid out as the Ameritor funds. They managed generations of horrible ineptitude. How horrible?  In the last decade of their existence (through 2007), they lost 98.98%.  That’s the transformation of $10,000 into $102. Sufficiently horrible that they became a case study at Stanford’s Graduate School of Business.

In celebrating the season of Auld Lang Syne, I set out to see whether there were any worthy successors on the horizon.  I scanned Morningstar’s database for funds which trailed at least 99% of the peers this year.  And over the past five years.  And 10 and 15 years.

Five funds actually cropped up as being that bad that consistently.  The good news for investors is that the story isn’t quite as bleak as it first appears.

Jaffe’s Year-End Explosion

I’m not sure that Chuck Jaffe is the hardest-working man in the fund biz, but he does have periods of prodigious output.  December is one of those periods.   Chuck ran four features this month worth special note.

• Farewell to Stupid Investments.  After nearly a decade, Chuck has ended down his “Stupid Investment of the Week” column.  Chuck’s closing columns echoes Cassius, in Shakespeare’s Julius Caesar: “The fault, dear Brutus, is not in our stars, But in ourselves, that we are underlings.”  Or perhaps Pogo, “we have met the enemy and he is us.”
• 17^th Annual Lump of Coal Awards, December 10 and December 17.  This is the litany of stupidity surrounding the fund industry, from slack-wit regulators to venal managers.  One interesting piece discusses Morningstar’s analyst ratings.  Morningstar’s ratings roughly break the universe down into good ideas (gold, silver, bronze), okay ideas (neutral) and bad ideas (negative).  Of the 1000+ funds rated so far, only 5%qualify for negative ratings.  Morningstar’s rejoinder is that there are 5000 unrated funds, the vast bulk of which don’t warrant any attention.  So while the 5% might be the tip of a proverbial iceberg, they represent the funds with the greatest risk of attracting serious investor attention.

  My recommendation, which didn’t make Chuck’s final list, was to present a particularly grimy bit o’ bituminous to the fund industry for its response to the bond mania.  Through all of 2012, the industry closed a total of four funds to new investment while at the same time launching 39 new bond funds.  That’s looks a lot like the same impulse that led to the launch of B2B Internet Services funds (no, I’m not making that up) just before the collapse of the tech bubble in 2000; a “hey, people want to buy this stuff so we’ve got an obligation to market it to them” approach.

• Tales from the Mutual Fund Crypt, December 26: stories of recently-departed funds.  A favorite: the Auto-Pilot fund’s website drones on, six months after the fund’s liquidation.  It continues to describe the fund as “new,” six years after launch.

  My nominee was generic: more funds are being shut down after 12 – 18 months of operation which smacks of hypocrisy (have you ever heard of a manager who didn’t preach the “long-term investor” mantra yet the firms themselves have a short-term strategy) and incompetence (in fund design and marketing both).

Chuck’s still podcasting, MoneyLife with Chuck Jaffe.  One cool recent interview was with Doug Ramsey, chief investment officer for the Leuthold Funds.

ASTON/River Road Long-Short Conference Call

On December 17, about fifty readers joined us for an hour-long conversation with Matt Moran and Daniel Johnson, managers of ASTON/River Road Long-Short (ARLSX).  For folks interested but unable to join us, here’s the complete audio of the hour-long conversation.  It starts with Morty Schaja, River Road’s president, talking about the fund’s genesis and River Road’s broader discipline and track record: 

If you’d like a preview before deciding whether you listen in, you might want to read our profile of ARLSX (there’s a printable .pdf of the profile on Aston’s website and an audio profile, which we discuss below).  Here are some of the highlights of the conversation:

Quick highlights:

1. they believe they can outperform the stock market by 200 bps/year over a full market cycle. Measuring peak to peak or trough to trough, both profit and stock market cycles average 5.3 years, so they think that’s a reasonable time-frame for judging them.
2. they believe they can keep beta at 0.3 to 0.5. They have a discipline for reducing market exposure when their long portfolio exceeds 80% of fair value. The alarms rang in September, they reduce expose and so their beta is now at 0.34, near their low.
3. risk management is more important than return management, so all three of their disciplines are risk-tuned. The long portfolio, 15-30 industry leaders selling at a discount of at least 20% to fair value, tend to be low-beta stocks. Even so their longs have outperformed the market by 9%.
4. River Road is committed to keeping the fund open for at least 8 years. It’s got $8 million in asset, the e.r. is capped at 1.7% but it costs around 8% to run. The president of River Road said that they anticipated slow asset growth and budgeted for it in their planning with Aston.
5. The fund might be considered an equity substitute. Their research suggests that a 30/30/40 allocation (long, long/short, bonds) has much higher alpha than a 60/40 portfolio.

An interesting contrast with RiverPark, where Mitch Rubin wants to “play offense” with both parts of the portfolio. Here the strategy seems to hinge on capital preservation: money that you don’t lose in a downturn is available to compound for you during the up-cycle.

Conference Calls Upcoming: Matthews, Seafarer, Cook & Bynum on-deck

As promised, we’re continuing our moderated conference calls through the winter.  You should consider joining in.  Here’s the story:

• Each call lasts about an hour
• About one third of the call is devoted to the manager’s explanation of their fund’s genesis and strategy, about one third is a Q&A that I lead, and about one third is Q&A between our callers and the manager.
• The call is, for you, free.  Your line is muted during the first two parts of the call (so you can feel free to shout at the danged cat or whatever) and you get to join the question queue during the last third by pressing the star key.

Our next conference call features Teresa Kong, manager of Matthews Asia Strategic Income (MAINX).  It’s Tuesday, January 22, 7:00 – 8:00 p.m., EST.

Matthews is the fund world’s best, deepest, and most experienced team of Asia investors.  They offer a variety of funds, all of which have strong – and occasionally spectacular – long-term records investing in one of the world’s fastest-evolving regions.  While income has been an element of many of the Matthews portfolios, it became a central focus with the December 2011 launch of MAINX.  Ms. Kong, who has a lot of experience with first-rate advisors including BlackRock, Oppenheimer and JPMorgan, joined Matthews in 2010 ahead of the launch of this fund. 

Why might you want to join the call? 

Bonds across the developed world seem poised to return virtually nothing for years and possibly decades. For many income investors, Asia is a logical destination. Three factors support that conclusion:

1. Asian governments and corporations are well-positioned to service their debts. Their economies are growing and their credit ratings are being raised.
2. Most Asian debt supports infrastructure, rather than consumption.
3. Most investors are under-exposed to Asian debt markets. Bond indexes, the basis for passive funds and the benchmark for active ones, tend to be debt-weighted; that is, the more heavily indebted a nation is, the greater weight it has in the index. Asian governments and corporations have relatively low debt levels and have made relatively light use of the bond market. An investor with a global diversified bond portfolio (70% Barclays US Aggregate bond index, 20% Barclays Global Aggregate, 10% emerging markets) would have only 7% exposure to Asia. However you measure Asia’s economic significance (31% of global GDP, rising to 38% in the near future or, by IMF calculations, the source of 50% of global growth), even fairly sophisticated bond investors are likely underexposed.

The question isn’t “should you have more exposure to Asian fixed-income markets,” but rather “should you seek exposure through Matthews?” The answer, in all likelihood, is “yes.” Matthews has the largest array of Asia investment products in the U.S. market, the deepest analytic core and the broadest array of experience. They also have a long history of fixed-income investing in the service of funds such as Matthews Asian Growth & Income (MACSX). Their culture and policies are shareholder-friendly and their success has been consistent. Ms. Kong has outstanding credentials and has had an excellent first year.

How can you join in? 

Click on the “register” button and you’ll be taken to Chorus Call’s site, where you’ll get a toll free number and a PIN number to join us.  On the day of the call, I’ll send a reminder to everyone who has registered.

Would an additional heads up help? 

About a hundred readers have signed up for a conference call mailing list.  About a week ahead of each call, I write to everyone on the list to remind them of what might make the call special and how to register.  If you’d like to be added to the conference call list, just drop me a line.

Podcasts and Profiles

If you look at our top navigation bar, you’ll see a new tab and a new feature for the Observer. We’re calling it our Podcast page, but it’s much more.  It began as a suggestion from Ira Artman, a talented financial services guy and a longtime member of the FundAlarm and Observer community.  Ira suggested that we archive together the audio recordings of our conference calls and audio versions of the corresponding fund profiles. 

Good idea, Ira!  We went a bit further and create a resource page for each fund.  The page includes:

• The fund’s name, ticker symbols and its manager’s name
• Written highlights from the conference call
• A playable/downloadable .mp3 of the call
• A link to the fund profile
• A playable/downloadable .mp3 of the fund profile.  The audio profiles start with the print profile, which we update and edit for aural clarity.  Each profile is recorded by Emma Presley, a bright and mellifluous English friend of ours.
• A link to the fund’s most recent fact sheet on the fund’s website.

We have resource pages for RiverPark Short Term High-Yield, RiverPark Long/Short Opportunity and Aston/River Road Long Short.  The pages for Matthews Asia Strategic Income, Seafarer Overseas Growth & Income, and Cook and Bynum are in the works.

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. This month’s lineup features a single Star in the Shadows:

Bridgeway Managed Volatility (BRBPX): Dick Cancelmo appreciates RiverNorth Dynamic Buy-Write’s strategy and wishes them great success, but also points out that others have been successful using a similar strategy for well over a decade.  Indeed, over the last 10 years, BRBPX has quietly produced 70% of the stock market’s gains with just 40% of its volatility.

BRBPX and the Mystery of the Incredible Shrinking Fund

While it’s not relevant to the merit of BRBPX and doesn’t particularly belong in its profile, the collapse of the fund’s asset base is truly striking.  In 2005, assets stood around $130 million.  Net assets have declined in each of the past five years from $75 million to $24 million.  The fund has made money over that period and is consistently in the top third of long/short funds.

Why the shrinkage?  I don’t know.  The strategy works, which should at least mean that existing shareholders hang on but they don’t.  My traditional explanation has been, because this fund is dull. Dull, dull, dull.  Dull stocks and dull bonds with one dull (or, at least, technically dense) strategy to set them apart.  Part of the problem is Bridgeway.  This is the only Bridgeway fund that targets conservative, risk-conscious investors which means the average conservative investor would find little to draw them to Bridgeway and the average Bridgeway investor has limited interest in conservative funds.  Bridgeway’s other funds have had a performance implosion.  When I first profiled BRBPX, five of the six funds rated by Morningstar had five-star designations.  Today none of them do.  Instead, five of eight rated funds carry one or two stars.  While BRBPX continues to have a four-star rating, there might be a contagion effect. 

Mr. Cancelmo attributes the decline to Bridgeway’s historic aversion to marketing.  “We had,” he reports, “the ‘if you build a better mousetrap’ mindset.  We’ve now hired a business development team to help with marketing.”  That might explain why they weren’t drawing new assets, but hardly explains have 80% of assets walking out the door.

If you’ve got a guess or an insight, I’d love to hear of it.  (Dick might, too.)  Drop me a note.

As a side note, Bridgeway probably offers the single best Annual Report in the industry.  You get a startling degree of honesty, thoughtfulness and clarity about both the funds and their take on broader issues which impact them and their investors.  I was particularly struck by a discussion of the rising tide of correlations of stocks within the major indices.  Here’s the graphic they shared:

What does it mean?  Roughly, a generation ago you could explain 20% of the movement of the average stock’s price by broader movements in the market.   As a greater and greater fraction of the stock market’s trades are made in baskets of stocks (index funds, ETFs, and so on) rather than individual names, more and more of the fate of each stock is controlled by sentiments surrounding its industry, sector, peers or market cap.  That’s the steady rise of the line overall.  And during a crisis, almost 80% of a stock’s movement is controlled by the market rather than by a firm’s individual merits.  Bridgeway talks through the significance of that for their funds and encourages investors to factor it into their investment decisions.

The report offers several interesting, insightful discussions, making it the exact opposite of – for example – Fidelity’s dismal, plodding, cookie cutter reports.

Here’s our recommendation: if you run a fund, write such like Bridgeway’s 2012 Annual Report.  If you’re trying to become a better investor, read it!

Launch Alert: RiverNorth/Oaktree High Income (RNHIX, RNOTX)

RiverNorth/Oaktree High Income Fund launched on December 28.  This is a collaboration between RiverNorth, whose specialty has been tactical asset allocation and investing in closed-end funds (CEFs), and Oaktree.  Oaktree is a major institutional bond investor with about $80 billion under management.  Oaktree’s clientele includes “75 of the 100 largest U.S. pension plans, 300 endowments and foundations, 10 sovereign wealth funds and 40 of the 50 primary state retirement plans in the United States.”  Their specialties include high yield and distressed debt and convertible securities.  Until now, the only way for retail investors to access them was through Vanguard Convertible Securities (VCVSX), a four-star Gold rated fund.

Patrick Galley, RiverNorth’s CIO, stresses that this is “a core credit fund (managed by Oaktree) with a high income opportunistic CEF strategy managed by RiverNorth.”  The fund has three investment strategies, two managed by Oaktree.  While, in theory, Oaktree’s share of the portfolio could range from 0 – 100%, as a normal matter they’ll manage the considerable bulk of the portfolio.  Oaktree will have the freedom to allocate between their high-yield and senior loan strategies.  RiverNorth will focus on income-producing CEFs.

For those already invested in RiverNorth funds, Mr. Galley explained the relationship of RNHIX to its siblings:

We are staying true to the name and focusing on income producing closed-end funds, but unlike RNSIX (which focuses on income producing fixed income) and RNDIX (which focuses on income producing equities) and RNCOX (which doesn’t have an income mandate and only distributes once a year), RNHIX will invest across the CEF spectrum (i.e. all asset classes) but with a focus on income without sacrificing/risking total return.

The argument for considering this fund is similar to the argument for considering RiverNorth/DoubleLine Strategic Income.  You’re hiring world-class experts who work in inefficient segments of the fixed-income universe. 

RiverNorth had the risk and return characteristics for a bunch of asset classes charted.

You might read the chart as saying something like: this is a strategy that could offer equity-like returns with more nearly bond-like volatility.  In a world where mainstream, investment-grade bonds are priced to return roughly nothing, that’s an option a reasonable person would want to explore.

The retail expense ratio is capped at 1.60% and the minimum initial investment is $5000.

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.  Some are downright horrors of Dilbertesque babble.

Funds in registration this month won’t be available for sale until, typically, the beginning of March 2013. We found 15 funds in the pipeline, notably:

Investors Variable NAV Money Market Fund, one of a series of four money markets managed by Northern Trust, all of which will feature variable NAVs.  This may be a first step in addressing a serious problem: the prohibition against “breaking the buck” is forcing a lot of firms to choose between underwriting the cost of running their money funds or (increasingly) shutting them down.

LSV Small Cap Value Fund is especially notable for its management team, led by Josef Lakonishok is a reasonably famous academic who did some of the groundbreaking work on behavioral finance, then translated that research into actual investment strategies through private accounts, hedge funds, and his LSV Value Equity Fund (LSVEX) fund.

Details on these funds 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.

On a related note, we also tracked down 31 fund manager changes, including a fair number of folks booted from ING funds.

Briefly Noted

According to a recent SEC filing, Washington Mutual Investors Fund and its Tax-Exempt Fund of Maryland and Tax-Exempt Fund of Virginia “make available a Spanish translation of the above prospectus supplement in connection with the public offering and sale of its shares. The English language prospectus supplement above is a fair and accurate representation of the Spanish equivalent.”  I’m sure there are other Spanish-language prospectuses out there, but I’ve never before seen a notice about one.  It’s especially interesting given that tax-exempt bond funds target high income investors. 

Effective January 1, DWS is imposing a $20/year small account service fee for shareholders in all 49 of their funds.  The fee comes on top of their sales loads.  The fee applies to any account with under $10,000 which is regrettable for a firm with a $1,000 minimum initial investment.  (Thanks to chip for having spotted this filing in the SEC’s database.  Regrets for having gotten friends into the habit of scanning the SEC database.)

Closings

Eaton Vance Atlanta Capital SMID-Cap (EAASX) is closing to new investors on Jan. 15.  More has been pouring in (on the order of $1.5 billion in a year); at least in part driven by a top-notch five-year rating.

Walthausen Small Cap Value (WSCVX) closed to new investors at the end of the year.  At the same time, the minimum initial investment for the $1.7 million Walthausen Select Value Investor Class (WSVIX) went from $10,000 to $100,000.  WSCVX closed on January 1 at $560 million which might explain was they’re making the other fund’s institutional share class harder to access.

William Blair International Growth (WBIGX) closed to new investors, effective Dec. 31.

Old Wine in New Bottles

American Century Inflation Protection Bond (APOIX) has been renamed American Century Short Duration Inflation Protection Bond. The fund has operated as a short-duration offering since August 2011, when its benchmark changed to the Barclays U.S. 1-5 Year Treasury Inflation Protected Securities Index.

Federated Prudent Absolute Return (FMAAX) is about to become less Prudent.  They’re changing their name to Federated Absolute Return and removed the manager of the Prudent Bear fund from the management team.

Prudential Target Moderate Allocation (PAMGX) is about to get a new name (Prudential Defensive Equity), mandate (growth rather than growth and income) and management structure (one manager team rather than multiple).  It is, otherwise, virtually unchanged. 

Prudential Target Growth Allocation (PHGAX) is merging into Prudential Jenison Equity Income (SPQAX).

U.S. Global Investors Global MegaTrends (MEGAX) is now U.S. Global Investors MegaTrends and no longer needs to invest outside the U.S. 

William Blair Global Growth (WGGNX) will change its name to William Blair Global, and William Blair Emerging Leaders Growth (WELNX) will change its name to William Blair Emerging Markets Leaders.

Small wins for investors

Cook & Bynum Fund (COBYX), a wildly successful, super-concentrated value fund, has decided to substantially reduce their expense ratio.  President David Hobbs reports:

… given our earlier dialogue about fees, I wanted to let you know that as of 1/1/13 the all-in expense ratio for the fund will be capped at 1.49% (down from 1.88%).  This is a decision that we have been wrestling with for some time internally, and we finally decided that we should make the move to broaden the potential appeal of the fund. . . .  With the fund’s performance (and on-going 5-star ratings with Morningstar and S&P Capital IQ), we decided to take a calculated risk that this new fee level will help us grow the fund.

Our 2012 profile of the fund concluded, “Cook and Bynum might well be among the best.  They’re young.  The fund is small and nimble.  Their discipline makes great sense.  It’s not magic, but it has been very, very good and offers an intriguing alternative for investors concerned by lockstep correlations and watered-down portfolios.”  That makes the decreased cost especially welcome.  (They also have a particularly good website.)

Effective January 2, 2013, Calamos Growth and Income and Global Growth and Income Funds re-opened to new investors. (Thanks to The Shadow for catching this SEC filing.)

ING Small Company (AESAX) has reopened.  It’s reasonably large and not very good, really.

JPMorgan (JPM) launched Total Emerging Markets (TMGGX), an emerging-markets allocation fund.

Fund firms have been cutting expenses of late as they pressure to gather and hold assets builds. 

Fidelity has reduced the minimum investment on its Advantage share class from $100,000 to $10,000.  The Advantage class has lower expense ratios (which is good) and investors who own more than $10,000 in a fund’s retail Investor class will be moved automatically to the less-expensive Advantage class.

Fido also dropped the minimums on nearly two dozen index and enhanced index products from $10,000 to $2,500, which gives a lot more folks access to low-cost passive (or nearly-passive) shares. 

Fido also cut fees on eight Spartan index funds, between one to eight basis points.  The Spartan funds had very low expenses to begin with (10 basis points in some cases), so those cuts are substantial.

GMO Benchmark-Free Allocation (GBMFX) has decreased its expense ratio from 87 basis points down to 81 bps by increasing its fee waiver.  The fund is interesting and important not because I intend to invest in in soon (the minimum is $10 million) but because it represents where GMO thinks that an investor who didn’t give a hoot about other people’s opinions (that’s the “benchmark-free” part) should invest.

Effective January 1, Tocqueville Asset Management L.P. capped expenses for Tocqueville International Value at 1.25% of the fund’s average daily net assets.  Until now investors have been paying 1.56%. 

Also effective January 1, TCW Investment Management Company reduced the management fees for the TCW High Yield Bond Fund from 0.75% to 0.45%.

Vanguard has cut fees on 47 products, which include both ETFs and funds. Some of the cuts went into effect on Dec. 21, while others went into effect on Dec. 27th.  The reductions on eleven ETFs — four stock and seven bond — on December 21. Those cuts range from one to two basis points. That translates to reductions of 3 – 15%.

Off to the Dustbin of History

The board of trustees of Altrius Small Cap Value (ALTSX) has closed the fund and will likely have liquidated it by the time you read this.  On the one hand, the fund only drew $180,000 in assets.  On the other, the members of the board of trustees receive $86,000/year for their services, claim to be overseeing between 97 – 100 funds and apparently have been doing so poorly, since they received a Wells Notice from the SEC in May 2012.  They were bright even not to place a penny of their own money in the fund.  One of the two managers was not so fortunate: he ate a fair portion of his own cooking and likely ended up with a stomach cramp.

American Century will liquidate American Century Equity Index (ACIVX) in March 2013. The fund has lost 75% of its assets in recent years, a victim of investor disillusionment with stocks and high expenses.  ACIVX charged 0.49%, which seems tiny until you recall that identical funds can be had for as little as 0.05% (Vanguard, naturally).

Aston Asset Management has fired the Veredus of Aston/Veredus Small Cap Growth (VERDX) and will merge the fund in Aston Small Cap Growth (ACWDX).  Until the merger, it will go by the name Aston Small Cap.

The much-smaller Aston/Veredus Select Growth (AVSGX) will simply be liquidated.  But were struggling.

Federated Capital Appreciation, a bottom 10% kind of fund, is merging Federated Equity-Income (LEIFX).  LEIFX has been quite solid, so that’s a win.

GMO is liquidating GMO Inflation Indexed Plus Bond (GMIPX).  Uhh, good move.  Floyd Norris, in The New York Times, points out that recently-auctioned inflation-protected bonds have been priced to lock in a loss of about 1.4% per year over their lifetimes.   If inflation spikes, you might at best hope to break even.

HSBC will liquidate two money-market funds, Tax-Tree and New York Tax-Free in mid-January.

ING Index Plus International Equity (IFIAX) has closed and is liquidating around Feb. 22, 2013.  No, I don’t know what the “Plus” was.

Invesco is killing off, in April, some long-storied names in its most recent round of mergers.  Invesco Constellation (CSTGX) and Invesco Leisure (ILSAX) are merging into American Franchise (VAFAX).  Invesco Dynamics (IDYAX) goes into Mid Cap Growth (VGRAX), Invesco High-Yield Securities (HYLAX) into High Yield (AMHYX), Invesco Leaders (VLFAX) into Growth Allocation (AADAX), and Invesco Municipal Bond (AMBDX) will merge into Municipal Income (VKMMX).   Any investors in the 1990s who owned AIM Constellation (I did), Invesco Dynamics and Invesco Leisure would have been incredibly well-off.

Leuthold Global Clean Technology (LGCTX) liquidated on Christmas Eve Day. Steve Leuthold described this fund, at its 2009 launch, as “the investment opportunity of a generation.”  Their final letter to shareholders lamented the fund’s tiny, unsustainable asset base despite “strong performance relative to its comparable benchmark index” and noted that “the Fund operates in a market sector that has had challenging.”  Losses of 20% per year are common for green/clean/alternative funds, so one can understand the limited allure of “strong relative performance.”

Lord Abbett plan to merge Lord Abbett Stock Appreciation (LALCX) into Lord Abbett Growth Leaders (LGLAX) in late spring, 2013.

Munder International Equity (MUIAX) is merging into Munder International Core Equity (MAICX).

Natixis Absolute Asia Dynamic Equity (DEFAX) liquidated in December.  (No one noticed.)

TCW Global Flexible Allocation Fund (TGPLX) and TCW Global Moderate Allocation Fund (TGPOX) will be liquidated on or about February 15, 2013.  Effective the close of business on February 8, 2013, the Funds will no longer sell shares to new investors or existing shareholders.  These consistent laggards, managed by the same team, had only $10 million between them.  Durn few of those $10 million came from the managers.  Only one member of the management team had as much as a dollar at risk in any of TCW’s global allocation funds.  That was Tad Rivelle who had a minimal investment in Flexible.

In Closing …

Thank you all for your support in 2012. There are a bunch of numerical measures we could use. The Observer hosted 78,645 visitors and we averaged about 11,000 readers a month.  Sixty folks made direct contributions to the Observer and many others picked up $88,315.15 worth of cool loot (3502 items) at Amazon.  And a thousand folks viewed something like 1.6 million discussion topics. 

But, in many ways, the note that reads “coming here feels like sitting down with an old friend and talking about something important” is as valuable as anything we could point to. 

So thanks for it all.

If you get a chance and have a suggestion about how to make the Observer better in the year ahead, drop me a note and let me know.  For now, we’ll continue offering (and archiving) our monthly conference calls.  During January we’ll be updating our small cap profiles and February will see new profiles for Whitebox Long Short Equity (WBLSX) and PIMCO Short Asset Investment (PAIUX).

Until then, take care.

With hopes for a blessed New Year,

Dear friends,

Almost all of the poems about the end of summer and beginning of fall are sad, wistful things.  They’re full of regrets about the end of the season of growth and crammed with metaphors for decline, decay, death and despair.

It’s clear that poets don’t have investment portfolios.

The fact that benchmarks such as the Dow Jones Industrial average and Vanguard Total Bond Market are both showing gains for the year masks the trauma that has led investors to pull money out of long-term funds for six consecutive weeks.  Whether having the greatest outflows since the market bottom in March 2009 is a good thing remains to be seen.

Roller coasters are funny things.  They’re designed to scare the daylights out of you, and then deposit you back exactly where you started.  It might be a sign of age (or, less likely, wisdom) that I’d really prefer a winding garden path or moving walkway to the thrills now on offer.

The Latest Endangered Species: Funds for Small Investors

Beginning in the mid-1990s, I maintained “The List of Funds for Small Investors” at the old Brill/Mutual Funds Interactive website.  I screened for no-load funds with minimums of $500 or less and for no-load funds that waived their investment minimums for investors who were willing to start small but invest regularly.  That commitment was made through an Automatic Investing Plan, or AIP.

At the time, the greatest challenge was dealing with the sheer mass of such funds (600 in all) and trying to identify the couple dozen that were best suited to new investors trying to build a solid foundation.

Over the years, almost all of those funds ceased to be “funds for small investors.”  Some closed and a fair number added sales loads but the great majority simply raised their investment minimums.  In the end, only one major firm, T. Rowe Price, persevered in maintaining that option.

And now they’re done with it.

Effective on August 1, Price eliminated several policies which were particularly friendly to small investors.  The waiver of the minimum investment for accounts with an Automatic Asset Builder (their name for the AIP) has been eliminated. Rather than requiring a $50 minimum and $50/month thereafter, AAB accounts now require $2500 minimum and $100/thereafter.

The minimum subsequent investment on retail accounts was raised from $50 to $100.

The small account fee has been raised to $20 per account under $10,000. The fee will be assessed in September. You can dodge the fee by signing up for electronic document delivery.

Price changed the policies in response to poor behavior on the part of investors. Too many investors started with $50, built the account to $300 and then turned off the asset builder. Price then had custody of a bunch of orphaned accounts which were generating $3/year to cover management and administrative expenses.  It’s not clear how many such accounts exist. Bill Benintende, one of Price’s public relations specialists, explains “that’s considered proprietary information so it isn’t something we’d discuss publicly.”  This is the same problem that long-ago forced a bunch of firms to raise their investment minimums from $250- 500 to $2500.

Two groups escaped the requirement for larger subsequent investments.  Mr. Benintende says that 529 college savings plans remain at $50 and individuals who already have operating AAB accounts with $50 investments are grandfathered-in unless they make a change (for example, switching funds or even the day of the month on which an investment occurs).

That’s a real loss, even if a self-inflicted one, for small investors.  Nonetheless, there remain about 130 funds accessible to folks with modest budgets and the willingness to make a serious commitment to improving their finances.  By my best reading, there are thirteen smaller fund families and a half dozen individual funds still taking the risk of getting stiffed by undisciplined investors.  The families willing to waive their normal investment minimums are:

There are, in addition, a number of individual funds with minimums reduced or waived for folks willing to commit to an automatic investment.  Those include Barrett  Opportunity (SAOPX), Cullen High Dividend Equity (CHDEX), Giordano (GIORX), Primary Trend (PTFDX), Sector Rotation (NAVFX), and Stonebridge Small Cap Growth (SBAGX).

On a related note: Fidelity would like a little extra next year

Fidelity will begin charging an “annual index fund fee” of $10.00 per fund position to offset shareholder service costs if your fund balance falls below $10,000, effective December 2011.  They’re using the same logic: small accounts don’t generate enough revenue to cover their maintenance costs.

The Quiet Comeback of Artisan Small Cap (ARTSX)

The second fund in which I ever invested (AIM Constellation was the first) was Artisan Small Cap (ARTSX). Carlene Murphy Ziegler had been a star manager at Stein, Roe and at Strong.  With the support of her husband, Andrew, she left to start her own fund company and to launch her own fund.  Artisan Small Cap was a solid, mild-manned growth-at-a-reasonable price creature that drew a lot of media attention, attracted a lot of money, helped launch a stellar investment boutique, and quickly closed to new investors.

But, somewhere in there, the fund got out of step with the market.  Rather than being stellar, it slipped to okay and then “not too bad.”  It had some good years and was never terrible, but it also never managed to have two really good years back-to-back.  The firm added co-managers including Marina Carlson, who had worked so successful with Ziegler at the Strong Funds.  Ziegler stepped aside in 2008 and Carlson in 2009.

At that point, manager responsibilities were given to Andrew Stephens and the team that runs Artisan Mid Cap Fund (ARTMX).  ARTMX has posted remarkably strong, consistent results for over a decade.  It’s been in the top 10-15% of midcap growth funds for the past 1, 3, 5 and 10 year periods.  It has earned four or five star ratings from Morningstar for the past 3, 5, and 10 year periods.

Since taking over in October 2009, ARTSX has outperformed its peers.  $10,000 invested on the day the new team arrived would have gain to $13,900, compared to $13,100 at its peers.   Both year to date and for the three, turbulent summer months, it’s in the top 2% of small growth funds.  It has a top 5% record over the past year and top 15% over the past three.

Artisan has a very good record of allowing successful teams to expand their horizons. Scott Satterwhite’s team from Artisan Small Cap Value (ARTVX) inherited Artisan Mid Cap Value (ARTQX) and the large cap Artisan Value (ARTLX) funds, and has reproduced their success in each.  The same occurred with the Artisan International Value team running Artisan Global Value and Artisan International running Artisan International Small Cap.

Given that track record and the fund’s resurgence under the Stephen’s team, it might be time to put Artisan Small Cap back on the radar.

Fund Update: RiverPark Short-Term High Yield

We profiled RPHYX in July as one of the year’s most intriguing new funds. It’s core strategy – buying, for example, called high yield bonds – struck me “as a fascinating fund.  It is, in the mutual fund world, utterly unique . . .  And it makes sense.  That’s a rare and wonderful combination.”

The manager, David Sherman of Cohanzick Management, has been in remarkably good spirits, if not quite giddy, because market volatility plays into the fund’s strengths.  There are two developments of note.

The manager purchased a huge number of additional shares of RPHYX after the market rout on Monday, August 8.  (An earlier version of this note, on the Observer’s discussion board, specified an amount and he seemed a bit embarrassed by the public disclosure so I’ve shifted to the demure but accurate ‘huge number’ construction.)

The fund’s down about 0.4% since making its monthly distribution (which accounts for most of its NAV changes). For those keeping score, since August 1, Fidelity Floating Rate High Income (FFHRX, a floating-rate loan fund that some funds here guessed would parallel RiverPark) is down 4%, their new Global High-Income fund (FGHNX) is down 5% and Fidelity High Income (SPHIX) is down 4.5%.

Fortunately, the fund generates huge amounts of cash internally. Because durations are so short, he’s always got cash from the bonds which are being redeemed. When we spoke on August 10^th, he calculated that if he did nothing at all with the portfolio, he’d get a 6% cash infusion on August 16, a 10% infusion on August 26th, and cash overall would reach 41% of the portfolio in the next 30 days. While he’s holding more cash than usual as a matter of prudent caution, he’s also got a lot to buy with.

And the market has been offering a number of exceptional bargains. He pointed to called HCA bonds which he first bought on July 27 at a 3.75% annualized yield. This week he was able to buy more at a 17% yield. Since the bonds would be redeemed at the end of August by a solidly-profitable company, he saw very little risk in the position. Several other positions (Las Vegas Sands public preferred and Chart Industries convertibles) have gone from yielding 3-3.5% to 5-6% available yields in the last two weeks.

He was also shortening up the portfolio to take advantage of emerging opportunities. He’s selling some longer-dated bonds which likely won’t be called in order to have more cash to act on irrational bargains as they present themselves. Despite an ultra-short duration, the fund is now yielding over 5%. The Fed, meanwhile, promises “near zero” interest rates for the next two years.

Mr. Sherman was at pains to stress that he’s not shilling for the fund. He doesn’t want to over-promise (this is not the equivalent of a savings account paying 5%) and he doesn’t want to encourage investors to join based on unrealistic hopes of a “magic” fund, but he does seem quite comfortable with the fund and the opportunity set available to him.

Note to the Securities and Exchange Commission: Hire a programmer!

Every day, the SEC posts all of its just-received filings online and every day I read them.  (Yep.  Really gotta get a life.) Here is a list of all of today’s prospectus filings.  In theory, if you visit on September 1^st and click on “most recent,” you’ll get a screen full of filings dated September 1^st.

Except when you don’t.  Here, for example, is a screen cap of the SEC new filings for August 22, 2011:

Notice how very far down this list you have to go before finding even one filing from August 22^nd (it’s the ING Mutual Funds listing).  On July 25th, 43 of 89 entries were wrong (including one originally filed in 2004).

Two-thirds of all Wall Street trades emanate from high-frequency traders, whose computers execute trades in 250 microseconds (“Not So Fast,” The Economist, 08/06/11).  Those trades increase market volatility and asset correlations, to the detriment of most investors.  The SEC’s difficulty in merely getting the date right on their form postings doesn’t give me much confidence in their ability to take on the problems posed by technology.

Four Funds, and why they’re worth your time

Really worth it.  Every month the Observer profiles two to four funds that we think you really need to know more about.  They fall into two categories:

Most intriguing new funds: good ideas, great managers. These are funds that do not yet have a long track record, but which have other virtues which warrant your attention.  They might come from a great boutique or be offered by a top-tier manager who has struck out on his own.  The “most intriguing new funds” aren’t all worthy of your “gotta buy” list, but all of them are going to be fundamentally intriguing possibilities that warrant some thought.  This month’s two new funds:

RiverPark/Wedgewood (RWGFX): David Rolfe makes it seem so simple.  Identify great companies, buy only the best of them, buy only when they’ve on sale, and hold on.  For almost 19 years he’s been doing to same, simple thing – and doing it with unparalleled consistency and success.  His strategy is now available to retail investors.

Walthausen Select Value (WSVRX): the case for this focused small- to mid-cap fund is simple.  Manager John Walthausen has performed brilliantly with the last three funds he’s run and his latest fund seeks to build on one of those earlier models.

Stars in the shadows: Small funds of exceptional merit. There are thousands of tiny funds (2200 funds under $100 million in assets and many only one-tenth that size) that operate under the radar.  Some intentionally avoid notice because they’re offered by institutional managers as a favor to their customers (Prospector Capital Appreciation and all the FMC funds are examples).  Many simply can’t get their story told: they’re headquartered outside of the financial centers, they’re offered as part of a boutique or as a single stand-alone fund, they don’t have marketing budgets or they’re simply not flashy enough to draw journalists’ attention.  There are, by Morningstar’s count, 75 five-star funds with under $100 million in assets; Morningstar’s analysts cover only eight of them.

The stars are all time-tested funds, many of which have everything except shareholders.

Northern Global Tactical Asset Allocation (BBALX): up until August 1^st, you could access to the best ideas of Northern Investment Policy Committee only if you had $5 million to meet this fund’s minimum or $500 million in assets at Northern.  And then it became a retail fund ($2500) with an institutional pedigree and expenses (0.68%).  Folks looking for a conservative core fund just stumbled onto a really solid option.

Walthausen Small Cap Value (WSCVX): we profiled this fund shortly after launch as one of the year’s best new funds.  Three years on, it’s running rings around its competition and starting to ask about when it will be necessary to close to new investors.  A somewhat volatile choice, it has produced remarkable results.

Briefly noted . . .

Berwyn Income (BERIX) will reopen to new investors on Sept. 19. The $1.3 billion fund closed in November 2010, but says the board, “recent volatility in the market has led to new investment opportunities for the Fund.”  BERIX makes a lot of sense in turbulent markets: modest stake in dividend-paying stocks and REITs, plus corporate bonds, preferred shares, convertibles and a slug of cash.  Lots of income with some prospect for capital growth.  The fund more than doubled in size between 2008 and 2009, then doubled in size again between 2009 and 2010.  At the end of 2008, it was under $240 million.  Today it carries a billion more in heft.  Relative performance has drifted down a bit as the fund has grown, but it remains really solid.

Fidelity is bringing out two emerging market funds in mid-October. The less interesting, Emerging Markets Discovery, will be their small- to mid-cap fund. Total Emerging Markets will be a 60/40 balanced fund. The most promising aspect of the balanced fund is the presence of John Carlson, who runs New Markets Income (FNMIX) at the head of the management team.  FNMIX has a splendid long-term record (Carlson’s been there for 16 years) but it’s currently lagging because it focuses on dollar-denominated debt rather than the raging local currency variety.  Carlson argues that local currencies aren’t quite the safe haven that newbies believe and that, in any case, they’re getting way overvalued.  He’ll have a team of co-managers who, I believe, run some of Fidelity’s non-U.S. funds.  Fido’s emerging markets equity products have not been consistently great, so investors here might hope for index-like returns and a much more tolerable ride than a pure equity exposure would offer. The opening expense ratio will be 1.4% and the minimum investment will be $2500.

Northern Funds are reducing the operating expenses on all of their index funds, effective January 1, 2012.  The seven funds involved are:

Nicely done!

Forward Management introduced a new no-load “investor” share class for Forward International Real Estate Fund (FFIRX), the Forward Real Estate Long/Short Fund (FFSRX), and the Forward Global Infrastructure Fund (FGLRX). Forward Real Estate (FFREX) already had a no-load share class.  The funds are, on whole, respectable but not demonstrably great. The minimum investment is $4,000.

DWS Strategic Income (KSTAX) becomes DWS Unconstrained Income on Sept. 22, 2011. At that point, Philip Condon will join the management team of the fund.  “Unconstrained” is the current vogue term for income funds, with PIMCO leading the pack by offering unconstrained Bond (also packaged as Harbor Unconstrained Bond), Tax-Managed Bond and Fixed Income funds.  All of them have been underperformers in their short lives, suggesting that the ability to go anywhere doesn’t immediately translate into the wisdom to go somewhere sensible.

Litman Gregory Asset Management has renamed its entire line of Masters’ Select funds as Litman Gregory Masters Funds name.

PIMCO Developing Local Markets (PLMIX) has changed its name to PIMCO Emerging Markets Local Currency, presumably to gain from the “local currency debt” craze.

Dreyfus S&P Stars Opportunities (BSOBX) will change its name to Dreyfus MidCap Core on Nov. 1, 2011.

DWS RREEF Real Estate Securities (RRRRX) will close Sept. 30, 2011.

JPMorgan U.S. Large Cap Core Plus (JLCAX) closed to new investors on Sept. 2, 2011.

Scout TrendStar Small Cap (TRESX) is merging into Scout Small Cap (UMBHX).

MFS Core Growth (MFCAX) merged into MFS Growth (MFEGX) in August.

Effective Sept. 15, 2011, GMO Global Balanced Asset Allocation Fund (GMWAX) will be renamed GMO Global Asset Allocation Fund and it will no longer be bound to keep at least 25% each in stocks and bonds.

Forward Funds is changing Forward Large Cap Equity (FFLAX), a mild-mannered fund with a slight value bias, into Forward Large Cap Dividend Fund.  After November 1, at least 80% of the portfolio will be in . . . well, large cap, dividend-paying stocks.   Not to rain on anybody’s parade, but all of its top 25 holdings are already dividend-paying stocks which implies marketing rather than management drove the change.

Likewise, Satuit Capital Micro Cap has been changed to the Satuit Capital U.S. Emerging Companies Fund (SATMX).   The Board hastened to assure shareholders that the change was purely cosmetic: “there are no other changes to the Fund being contemplated as a result of this name change.”  Regardless, it’s been a splendid performer (top 1% over the past decade) with an elevated price tag (1.75%)

DWS Climate Change (WRMAX) becomes DWS Clean Technology on October 1, 2011.

A few closing notes . . .

We’re very pleased to announce the launch of The Falcon’s Eye.  Originally written by a FundAlarm board member, Falcon, the Eye provides a quick and convenient link to each of the major profiles for any particular fund.  Simply click on “The Falcon’s Eye” link on the main menu bar atop this page and enter one or more ticker symbols.  A new windows pops up, giving the fund name and direct links to ten major source of information:

And, of course, the Observer itself.

Mark whichever sources interest you, click, and the Eye will generate direct links to that site’s profile of or reporting on your fund.  Thanks to Accipiter for his tireless work on the project, and to Chip, Investor, Catch22 and others for their support and beta testing of it.  It is, we think, a really useful tool for folks who are serious about understanding their investments.

Thanks to all of you for using or sharing the Observer’s link to Amazon.com, which is providing a modest but very steady revenue stream.  Special thanks for the folks who’ve chosen to contribute to the Observer this month and, especially, to the good folks at Milestones Financial Planning in Kentucky for their ongoing support.  We’re hoping for a major upgrade in the site’s appearance, in addition to the functionality upgrades that Chip and Accipiter have worked so faithfully on.

Looking for the archive? There is an archive of all Observer and later FundAlarm commentaries, links to which usually appear at the top of this page. This month we encountered a software glitch that was scrambling the list, so we’ve temporarily hidden it. Once out tech folks have a chance to play with the code, it’ll be back where it belongs. Thanks for your patience!

Keep those cards and letters, electronic or otherwise, coming.  I love reading your thoughts.

See you in October!

David