Author Archives: Charles Boccadoro

About Charles Boccadoro

Charles Boccadoro, BS (MIT), Post Graduate Diploma (von Karman Institute, BELGIUM). Associate editor, data wizard. Described by Popular Science as “enthusiastic, voluble and nattily-dressed,” Charles describes himself as “a recently retired aerospace engineer.” He doesn’t brag about a 30 year career that included managing Northrop Grumman’s Quiet Supersonic Platform and Future Strike Systems projects, working with NASA and receiving a host of industry accolades. Charles is renowned for thoughtful, data-rich analyses and is the driving force behind the Observer’s fund ratings and fund screeners.

Morningstar ETF Conference – Chicago 2017

By Charles Boccadoro

If someone invented levitation tomorrow, it would still take five years to catch on.

             Alan H. Epstein

The last panel, entitled “Meet the Pundits,” enjoyed a winner’s circle atmosphere this year. It included Barron’s Crystal Kim, Morningstar’s Ben Johnson, Matt Hougan of Inside ETFs , Tom Lydon of ETF Trends , and Continue reading →

Rolling Averages, Finally!

By Charles Boccadoro

Maybe the mind’s best trick of all was to lead its owner to a feeling of certainty about inherently uncertain things.

        Michael Lewis’ The Undoing Project

Took a while, but we’ve finally added rolling average analysis to the MFO Premium site.

The new Rolling Averages tool provides insight into how returns vary for selected rolling periods of interest. Each period overlaps the next, separated by one month, across the life of the fund. This insight is especially important when establishing expectations based on an investor’s risk tolerance and time-line, as it reveals Continue reading →

Historically Low Volatility

By Charles Boccadoro

Experts often possess more data than judgment.

Colin Powell

The S&P 500 closed August yesterday with an annualized standard deviation below 6%. Typically, since about 1940, which marked the end of The Great Depression, annualized standard deviation runs between 13 and 14%. It was the second consecutive month to break the 6% threshold; in fact, only five times has volatility remained this low for consecutive months: 1964, 1993, 1995, 2006 and 2017.

Continue reading →

Inside Smart Beta Conference – New York 2017

By Charles Boccadoro

Matt Hougan of Inside ETFs and Dave Nadig of ETF.com hosted an Inside Smart Beta Conference this past month in New York City. Their career paths overlapped at ETF.com, which promotes itself, arguably so, as the “world’s leading authority on exchange-traded funds.” I find both Matt and Dave articulate thought leaders on ETFs and investing generally. They co-authored CFA’s A Comprehensive Guide to ETFs. Continue reading →

How Bad Can It Get?

By Charles Boccadoro

In last month’s commentary, David challenged readers to review their portfolios and be sure they understand how bad it could get when markets head south. “There’s a break in the rain. Get up on the roof!” he’ll often advise. He shared his own portfolio, which maintains a modest 50/50 stock/bond allocation. He estimated his drawdown to be 30% for perhaps three to five years, using the bear market of 2008 as guide. A look back at US market volatility since 1926 helps provide further insight into the question of just “How Bad Can It Get?”

The results presented below use the monthly database maintained by Amit Goyal, the same database referenced in Timing Method Performance Over Ten Decades, but updated as appropriate from January 1960 through April 2017 with our Lipper Data Feed Service. The three principal indicies modeled are S&P 500 Monthly Reinvested Index, Bloomberg Barclays US Treasury Long Total Return Index, and US 3-Month Treasury Bill Total Return Index. Continue reading →

Observations from Morningstar Conference – Chicago 2017

By Charles Boccadoro

Morningstar held its annual investment conference in its headquartered city of Chicago last week. That’s a couple months earlier than typical, perhaps to give it some distance from September’s ETF conference. Pink and purple tulips lined Michigan Avenue and Millennial Park. April showers abounded. The Intelligentsia coffee bar at 53 West Jackson Blvd each morning never smelled better. Continue reading →

Litman Gregory Masters Alternative Strategies Fund (MASFX/MASNX), April 2017

By Charles Boccadoro

Objective and Strategy

The Litman Gregory Masters Alternative Strategies Fund seeks to provide attractive “all-weather” returns relative to conservative benchmarks, but with lower volatility than the stock market. It seeks this objective through a combination of skilled active managers, high conviction “best ideas,” hedge fund strategies, low beta, and low correlation to stock and bond market indices.

The fund’s risk-averse managers, asset allocations, and hedging strategies position it as an alternative to traditional 80/20% or 60/40% bond/stock portfolios for conservative or Continue reading →

No Load MFO Ratings

By Charles Boccadoro

We’ve eliminated load from our MFO Ratings methodology, following Morningstar’s lead, effective immediately on our premium site and starting with 4th quarter update on our main site. Previously annualized return calculations included any maximum front load specified in the prospectus, which is what an investor may pay when purchasing shares of a fund, expressed as percentage of the purchase amount.

Morningstar’s Director of Global ETF Research, Ben Johnson, was quoted recently that “fewer investors are paying commissions or sales charges, which is why we’re removing Continue reading →

A Low Cost Alternative To One USAA Managed Portfolio

By Charles Boccadoro

USAA was founded in San Antonio, Texas, when 25 Army officers decided to insure each other’s automobiles. The year was 1922. Its original name: United States Army Automobile Association. Today, USAA stands for United Services Automobile Association – a Fortune 500 diversified financial services organization that caters to US military personnel and families. It has more than 11 million members. Its chairman is retired General Lester Lyles. Why choose to invest with USAA? “Military Values: Our disciplined approach stems from our military values of service, loyalty, honesty and integrity.” Continue reading →

Morningstar’s ETF Conference – Chicago 2016

By Charles Boccadoro

The good folks at Morningstar hosted the seventh annual ETF conference in Chicago, its global headquarters, this past month. More than 650 total attendees, including more than 500 registered attendees (mostly advisors), more than 80 sponsor attendees, nearly 40 speakers, and more than 30 members of the press. An increase from last year.

moetf16_1 Continue reading →

The Diversified Portfolio of Less Correlated Asset Classes

By Charles Boccadoro

“… over the long term the benefits offered by diversifying a portfolio of less correlated asset classes can be significant … investing in a diversified portfolio across equity and fixed income is the best option for most individuals,” wrote Jeremy Simpson in 2015, then director of Morningstar Investment Management in the article The Benefits of Diversification.

In Mebane Faber’s classic The Ivy Portfolio, he cites multiple sources on the benefits of diversification Continue reading →

Fund Facts

By Charles Boccadoro

At the recent Chicago conference, Morningstar’s Gregg Warren stated that asset management remains an attractive business because of steady fees, high operating margins, low start-up costs, and because “investment inertia is its best friend.”

Through June there were 281 funds with assets over $10B, including 8 that have trailed their peers in absolute return by at least 1.7% per year during the current market cycle since November 2007, or about 14% or more in underperformance. (See table below, click on image to enlarge.) Most are bottom quintile performers, trail nearly 90% of their peers, and four are Three Alarm funds. They include Templeton Growth (TEPLX), Thornburg Investment Income Builder (TIBAX), Davis New York Venture (NYVTX), Fidelity Magellan (FMAGX), and American Funds’ Bond Fund of America (ABNDX) and Intermediate Bond Fund of America (AIBAX). The folks invested in these funds certainly can’t be accused of chasing returns. Continue reading →

Morningstar Conference: Grasping at Straws, Department of Labor’s Fiduciary Rule, and Vanguard CEO McNabb

By Charles Boccadoro

During our annual (sometimes bi-annual) excursion to Chicago this past month, I was reminded of the old adage:

“We see things not as they are but as we are–that is, we see the world not as it is, but as molded by the individual peculiarities of our minds.”

Quickly followed by:

“It’s better to be uninformed than misinformed.”

morningstar_1

Company President Kunal Kapoor started the first day general session by showing Morningstar’s Market Fair Value metric … “It says the US market is fair valued.”

Gold-star fund manager Michael Hasenstab of Templeton Global Bond (TPINX) stated that “we are at a pretty rare point in markets where you have huge dislocations … unprecedented and untested monetary policy experiments creating tremendous amount of volatility.” The Fed will inevitably be raising rates, due to inflation and a labor market with little or no excess capacity. He is negative US Treasuries (“valuations nowhere near justified”), but sees “real upside opportunities in select emerging markets … the most unloved asset class.”

Later the same day, famed author and investing advisor Bill Bernstein stated that “I do find foreign equities valuations more attractive. Of course, there is good reason for that. Stocks don’t get cheap without good reason.”

The day two general session featured a polite debate called “Meeting of the (Big) Minds: Arnott and Asness.” Mr. Arnott’s firm Research Affiliates maintains an Asset Allocation site that provides 10-year Expected Returns across various securities and asset classes. The bottom-line: near zero real return expected for traditional asset classes. “Valuations matter,” he explains. He sides with Professor Shiller that US equities based on historical norms are currently overvalued.

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During a sidebar with Tadas Viskanta, founder and editor of Abnormal Returns, he offered his impression of the conference: “Grasping at straws…”

Our colleague Ed Studzinski later added: “Half the people in this room will not be here five years from now.”

How many people were there? 2016, including 831 paid advisors, 581 exhibitors, and 43 speakers.

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Why might Ed think the attendance will be under pressure? I’ll offer two reasons: The Department of Labor’s (DOL’s) Fiduciary Rule and Vanguard; basically, the two elephants at the conference.

As background, please reference:

  • Fact Sheet – DOL Finalizes Rule To Address Conflicts of Interest In Retirement Advice, Saving Middle-Class Families Billions of Dollars Every Year.
  • Why Vanguard Will Take Over the World,” by our colleague Sam Lee from October 2015 commentary.

The new fiduciary rule requires investment professionals, consultants, brokers, insurance agents and other advisers “to abide by a fiduciary standard—putting their clients’ best interest before their own profits.”

Patrick Clary, Chief Compliance Officer at AlphaArchitect (former USMC Captain, a Harvard MBA, ops/complinance ninja) puts the meaning of fiduciary in proper perspective in the insightful March 2015 post “Distribution Economics – Understanding Wall Street’s Conflict of Interest Problem”:

Fiduciary responsibility matters in financial services more than in any other product category outside of urgent medical care. Shouldn’t this fiduciary have your best interests at heart? Just as you don’t want your doctor to receive kickbacks from Pfizer for overdosing you on Oxycodone, why would you want your financial advisor–or their institution–to receive kickbacks for overdosing you on inefficient, overpriced, investment product that probably won’t help you achieve your investment goals?

HBO’s John Oliver recently gave a more humorous but no less accurate account (click on image to play YouTube video):

morningstar_4

In the same session where Bill Bernstein spoke, Morningstar’s Don Phillips warned the fiduciary rule will usher in an “era of blame … litigation heaven.” And in fact, several groups have filed suit against implementation, which is scheduled to become effective initially April 2017, with final compliance required by 1 January 2018.

During the conference break-out session “The Fiduciary Rule and the Future of the Industry,” analyst Michael Wong presented an assessment of impact of rule on financial industry:

morningstar_5

He predicts three main trends:

  • The movement to fee-based from commission-based full-service wealth management accounts.
  • Adoption of robo-advisors and digital advice solutions.
  • Shift to relatively lower-cost passive investment products from actively managed.

Morningstar was kind enough to share the session’s presentation charts, here.

Here is a telling example of landscape investors face today. Lipper identifies 42 funds in the category “S&P500 Index,” oldest share class only, at least three months old, as of May 2015. The expense ratios range from less than 20 basis points for funds offered by Vanguard, State Street, Schwab, Northern Funds, Fidelity, Blackrock, and DFA to nearly 60 basis points and higher for funds offered by Legg Mason, Great-West, and Nuveen.

Hard to see how any advisor “acting as a fiduciary” could recommend the funds with the substantially higher expense ratios.

Lipper shows 693 US large cap equity funds, but exclude the S&P Index and other index funds, the number is 532. There are more actively managed large-cap funds than stocks traded in the S&P500! Some industry experts believe the fiduciary rule will help flush out “closet indexers.”

Similarly, Lipper shows 2,447 US Equity funds, which is nearly as many funds as there are equities in the Russell 3000 Index, representing 98% of the US public equity market. How can that be? David is fond of enlightening us: “… 80% of all funds, active and passive, could vanish without any loss to anyone other than their sponsors.”

Maybe Ed has underestimated.

Michael Wong reports: “We’ve already seen the exit of several foreign banks (Barclays, Credit Suisse, Deutsche Bank) from the U.S. wealth management landscape, sale of life insurance retail advisory businesses (AIG, MetLife), and restructuring of wealth management platforms (LPL Financial, RCS Capital, Waddell & Reed) in anticipation of the rule.”

At the same session, Morningstar Australia’s Anthony Serhan stated that the rule, which effectively imposes “fiduciary” criteria in place of “suitability” criteria currently practiced, will help force brokers and fund companies to unbundle their proprietary products from financial advice. The rule will bring more transparency … like turning on a light in a dark room. Serhan warns: “Put decent value on table or be challenged.”

One fund manager speculated that brokers will likely switch to using Morningstar ratings instead of their own “Select Lists” or “Preferred Lists” currently practiced.

On day three general session, Vanguard CEO Bill McNabb encouraged advisors not put off implementation of DOL’s fiduciary rule because of current lawsuits … will take 12-18 months to implement required processes so “prepare as if court cases will not be successful.”

morningstar_6_cr

The new fiduciary rule will only help to advance Vanguard’s already dominant position. Of the 9,360 US mutual funds through May, excluding money market and funds less than 3 months old, Vanguard has five of the top six funds by assets under management (AUM):

morningstar7a

It has 36 funds in the top 100. It has $3.4T in AUM. Our MFO Fund Family Scorecard shows 76% of Vanguard’s 164 funds have beaten their peers since inception.

Its fees are amongst the lowest in industry. Its robo-advisor, Vanguard Personal Advisor Services VPAS, has quickly gained $40B in AUM mostly from existing Vanguard customers.

Mr. McNabb stated VPAS targets accounts between $50 – 200K and charges 30 bps points versus the 1% charged by most advisors. His advice to other advisors: “Go lower, or do more.”

Going forward McNabb’s vision for Vanguard in 2026 “will be a far more global firm … where we really run all of our investments on a global basis.” Only $300B of its AUM is from non-US clients. He sees tremendous demand for Vanguard products globally and meeting that demand will be “the most profound change in Vanguard over the next decade.”

On the product side, he sees making more tools available to advisor community, particularly to help manage the “drawdown phase” facing retired baby boomers. And also sees simplification of services … vibrant applications for mobile and a move away from PC-based tools.

While enjoying deep dish pizza after the conference at the famed Giordano’s and then stroll afterward to walk it off up Michigan Avenue to Chicago’s magnificent Millennium Park, our colleague Sam Lee pondered that scandal would be the only threat to Vanguard’s continued dominance.

morningstar_8a

Meb Faber Podcast

By Charles Boccadoro

mebfaber_podcast

Meb recently debuted his new podcast about investing with the same casual, refreshing, and insightful perspective we’ve come to respect and appreciate, since first profiling him in May 2014 with The Existential Pleasures of Engineering Beta.  

The podcast is definitely worth tuning into. The first five episodes are now on iTunes, available for free. You can subscribe here. They are:

  1. Global Asset Allocation – Investing 101
  2. Patrick O’Shaughnessy – An Unexpected Drop-in from Patrick O’Shaughnessy
  3. Jeff Remsburg – Where Are the Best Global Values Right Now?
  4. Wes Gray – “Even God Would Get Fired as an Active Investor”
  5. EJared Dillian – “If You Think 2016 is the Opposite of 1981, then You Should Do the Opposite”

Material referenced during the podcast is nicely provided on Meb’s website, like here from Episode 1. 

On Financial Planners

By Charles Boccadoro

A family friend recently asked me to look at his mutual fund investments. He contributes to these investments periodically through his colleague, a Certified Financial Planner at a long-time neighborhood firm that provides investment services. The firm advertises it’s likely more affordable than other firms thanks to changes in how clients are billed, so it does not “charge hefty annual advisor fees of 1% or more.”

I queried the firm and planner on FINRA’s BrokerCheck site and fortunately found nothing of concern. FINRA stands for Financial Industry Regulatory Authority and is a “not-for-profit organization authorized by Congress to protect America’s investors by making sure the securities industry operates fairly and honestly.”

A couple recent examples of its influence: FINRA Fines Raymond James $17 Million for Systemic Anti-Money Laundering Compliance Failures and FINRA Sanctions Barclays Capital, Inc. $13.75 Million for Unsuitable Mutual Fund Transactions and Related Supervisory Failures.

The BrokerCheck site should be part of the due-diligence for all investors. Here for example is the type of allegations and settlements disclosed against the firm Edward Jones in 2015: “The firm was censured and agreed to pay $13.5 million including interest in restitution to eligible customers … that had not received available sales charge waivers … since 2009, approximately 18,000 accounts purchased mutual fund shares for which an available sales charge waiver was not applied.”

And, here an example of experience listed for an “Investment Adviser Representative” …

ej_qual

But I’m getting sidetracked, so back to my friend’s portfolio review.  Here’s what I found:

  • He has 5 separate accounts – 2 Traditional IRAs, 2 Roth IRAs, and one 529.
  • All mutual funds are American Funds, accessed directly through American Funds website.
  • He owns 34 funds, across the 5 accounts.
  • Adjusting for different share classes (both front-loaded A, and back-loaded B … no longer offered), he owns 8 unique funds.
  • The 8 “unique” funds are not all that unique. Many hold the very same stocks. Amazon was held in 6 different funds. Ditto for Phillip Morris, Amgen, UnitedHealth Group, Home Depot, Broadcom, Microsoft, etc.
  • The 8 funds are, in order of largest allocation (A class symbols for reference): Growth Fund of America (AGTHX), Capital World Growth & Income (CWGIX), Capital Income Builder (CAIBX), American Balanced (ABALX), AMCAP (AMCPX), EuroPacific Growth (AEPGX), New Perspective (ANWPX), and New Economy (CNGAX).

After scratching my head a bit at the sheer number of funds and attendant loads, annual expense ratios, and maintenance fees, I went through the exercise of establishing a comparable portfolio using only Vanguard index funds.

I used Morningstar’s asset allocation tool to set allocations, as depicted below. Not exact, but similar, while exercising a desire to minimize number of funds and maintain simple allocations, like 60/40 or 80/20. I found three Vanguard funds would do the trick: Total Stock Market Index 60%, Total International Market Index 20%, and Total Bond Index 20%.

af_vanguard_alloc

The following table and corresponding plot shows performance since November 2007, start of current market cycle, through April 2016 (click on image to enlarge):

af_vanguard_table_comparable af_vanguard_comparable

As Mr. Buffet would be quick to point out, those who simply invested in the Total Stock Market Index fund received the largest reward, if suffering gut-wrenching drawdown in 2009. The Total Bond Index rose rather steadily, except for brief period in 2013. The 60/40 Balanced Index performed almost as well as the Total stock index, with about 2/3 the volatility. Suspect such a fund is all most investors ever need and believe Mr. Bogle would agree. Similarly, the Vanguard founder would not invest explicitly in the Total International Stock fund, since US S&P 500 companies generate nearly half their revenue aboard. Over this period anyway, underperformance of international stocks detracted from each portfolio.

The result appears quite satisfying, since returns and volatility between the two portfolios are similar. And while past performance is no guarantee of future performance, the Vanguard portfolio is 66 basis points per year cheaper, representing a 5.8% drag to the American Funds’ portfolio over an 8.5 year period … one of few things an investor can control. And that difference does not include the loads American Funds charges, which in my friend’s case is about 3% on A shares.

My fear, of course, is that while this Certified Financial Planner may not directly “charge hefty annual advisor fees,” my friend is being directed toward fee-heavy funds with attendant loads and 12b-1 expenses that indirectly compensate the planner.

Inspired by David’s 2015 review of Vanguard’s younger Global Minimum Volatility Fund (VMVFX/VMNVX) I made one more attempt to simplify the portfolio even more and reduce volatility, while keeping global exposure similar. This fund’s 50/50 US/international stock split combined with the 60/40 stock/bond split of the Vanguard Balanced Fund, produces an even more satisfying allocation match with the American Funds portfolio. So, just two funds, each held at 50% allocation.

Here is updated allocation comparison: 

af_vanguard_alloc_2

And here are the performance comparison summary table and plot from January 2014 through April 2016, or 2.33 years (click image to enlarge):

af_vanguard_table_comparable_2

af_vanguard_comparable_2

I should note that the Global Volatiliy Fund is not an index fund, but actively managed by Vanguard’s Quantitative Equity Group, so this portfolio is also 50/50 passive/active. While the over-performance may temper, lower volatility will persist, as will the substantially lower fees.

Other satisfying aspects of the two comparable Vanguard portfolios are truly unique underlying holdings in each fund and somewhat broader exposure to value and mid/small cap stocks. Both these characteristics have shown over time to deliver premiums versus growth and large cap stocks.

Given the ease at which average investors can obtain and maintain mutual fund portfolios at Vanguard, like those examined here, it’s hard to see how people like my friend will not migrate away from fee-driven financial planners that direct clients to fee-heavy families like American Funds.

Fund Family Scorecard

By Charles Boccadoro

Originally published in May 1, 2016 Commentary

We started looking at fund family performance two years ago, first in June 2014 commentary with How Good Is Your Fund Family?, and then An Update in May 2015.

Below please find our MFO Family Fund Scorecard for May 2016, which reflects fund performance through 1st quarter. As a reminder, the card measures how well each fund in a family has performed against its peers since inception (or at least back to January 1960, which starts our Lipper database). Performance is absolute total return, reflecting reinvested dividends, but inclusive of fees and maximum front load, if applicable. The card groups families by quintile. (Download pdf version here.)

family_1cfamily_2family_3family_4family_5

Some changes to methodology since last year:

  • Categories now reflect those used by Lipper versus Morningstar, as discussed in Comparing Lipper Ratings. Similarly, all categories except money market are included, even so-called trading categories.
  • Reduced from five to three the number of funds required to comprise a “fund family.” These changes respond to reader feedback from last year’s score card (eg., Where’s PRIMECAP?).
  • Reduced from three years to just three months the minimum age for evaluation. Reasoning here being the desire to get heads-up of which young families are beating their peers out of the gate (eg., Grandeur Peak).

The result is about 400 “fund families,” or more precisely fund management companies; distilled from the 9,350 funds overall, oldest share class only.

We recognize the card is flawed from the start. Results can be skewed by multiple factors, including survivorship-bias, share class differences, “improper” categorization, adviser and fund ownership changes, multiple sub-advisers, and inconsistent time frames … three months is too short to matter, lifetime is too long to care.  Flaws notwithstanding, there is value in highlighting families that, for example, have not had a single fund beat its category average since inception. Like our legacy Three Alarm designation, prospective investors should ask: Why is that?

Take Saratoga Capital Management who is celebrating 20 years and offers a line-up of mutual funds as “The Portfolios of the Saratoga Advantage Trust.” From its brochure: “There are over 22,000 investment management firms in the United States. How do you choose the right one? Research, research and more research.” Fourteen of the funds offered in its line-up are managed by Saratoga itself. Average age: 15.6 years. How many have beaten average return in their respective categories? None. Zero. 0.

saratoga

Fact is all seventeen funds in the Saratoga Advantage line-up have underperformed category average since inception. Why is that?

On a more positive note, a closer look at a couple groupings …

Good to see: Vanguard heads list of Top Families with Largest Assets Under Management (AUM), along with other shareholder friendly firms, like Dodge & Cox.

top_aumAnd, a nod to the young and unbeaten … a short list of top families where every fund beats its category average.

young_unbeaten_a

Gotham is led by renowned investor Joel Greenblatt. As for Grandeur Peak, David has been an outspoken champion since its inception. Below are its MFO Ratings (click image to enlarge):

grandeur

MFO Fund Family Scorecard will soon be a regular feature on our Premium site, updated monthly, with downloadable tables showing performance and fund information for all families, like average ER, AUM, load, and shares classes.

Share Classes

By Charles Boccadoro

Originally published in April 1, 2016 Commentary

Last month, David Offered Without Comment: Your American Funds Share Class Options. The simple table showing 18 share classes offered for one of AF’s fixed income funds generated considerable comment via Twitter and other media, including good discussion on the MFO Discussion Board.

We first called attention to excessive share classes in June 2014 with How Good Is Your Fund Family?  (A partial update was May 2015.) American Funds topped the list then and it remains on top today … by far. It averages more than 13 share classes per unique fund offering.

The following table summarizes share class stats for the largest 20 fund management companies by assets under management (AUM) … through February 2016, excluding money market and funds less than 3 months old.

share_classes_1

At the end of the day, share classes represent inequitable treatment of shareholders for investing in the same fund. Typically, different share classes reflect different expense ratios depending on initial investment amount, load or transaction fee, or association of some form, like certain 401K plans. Here’s a link to AF’s web page explaining Share Class Pricing Details. PIMCO’s site puts share class distinction front and center, as seen in its Products/Share Class navigator below, a bit like levels of airline frequent flyer programs:

share_classes_2

We’ve recently added share class info to MFO Premium’s Risk Profile page. Here’s an example for Dan Ivascyn’s popular Income Fund (click on image to enlarge):

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In addition to the various differences in 12b-1 fee, expense ratio (ER), maximum front load, and initial purchase amount, notice the difference in dividend yield. The higher ER of the no-load Class C shares, for example, comes with an attendant reduction in yield. And, another example, from AF, its balanced fund:

share_classes_4

Even Vanguard, known for low fees and equitable share holder treatment, provides even lower fees to its larger investors, via so-called Admiral Shares, and institutional customers. Of course, the basic fees are so low at Vanguard that the “discount” may be viewed more as a gesture.

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The one fund company in the top 20 that charges same expenses to all its investors, regardless of investment amount or association? Dodge & Cox Funds.

We will update the MFO Fund House Score Card in next month’s commentary, and it will be updated monthly on the MFO Premium site.

MFO Rating Metrics

By Charles Boccadoro

Originally published in March 1, 2016 Commentary

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 …

ratings_1A 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:

ratings_2Notables 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.

Smallest, Shortest, Lowest

By Charles Boccadoro

Originally published in February 1, 2016 Commentary

David invariably cuts to the chase when it comes to assessing mutual funds. It’s a gift he shares with us each month.

So, in evolving the MFO Premium site, he suggested we provide lists of funds satisfying interesting screening criteria to help users get the most from our search tools.

Last month we introduced two such lists: “Best Performing Rookie Funds” and “Dual Great Owl & Honor Roll Funds.”

This month our MultiSearch screener incorporates three more: “Smallest Drawdown Fixed Income Funds,” “Shortest Recovery Time Small Caps,” and “Lowest Ulcer Moderate Allocation Funds.”

Smallest Drawdown Fixed Income Funds generates a list of Fixed Income (e.g., Bond, Muni) funds that have experienced the smallest levels of Maximum Drawdown (MAXDD) in their respective categories. More specifically, they are in the quintile of funds with smallest MAXDD among their peers.

Looking back at performance since the November 2007, which represents the beginning of the current full market cycle, we find 147 such funds. Two top performing core bond funds are TCW Core Fixed-Income (TGCFX) and RidgeWorth Seix Total Return (SAMFX). The screen also uncovered notables like First Pacific Advisors’ FPA New Income (FPNIX) and Dan Ivascyn’s PIMCO Income (PIMIX).

Here are some risk/return metrics for these Fixed Income funds (click on images to enlarge):

TCW Core Fixed-Income (TGCFX) and RidgeWorth Seix Total Return (SAMFX)
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First Pacific Advisors’ FPA New Income (FPNIX)
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PIMCO Income (PIMIX)
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Shortest Recovery Time Small Caps generates a list of Small Cap (Small Core, Small Value, Small Growth) funds that have incurred shortest Recovery Times (number of months a fund retracts from previous peak) in their respective categories.

For Full Cycle 5, this screen produces 62 such funds through December 2015. Among the best performing funds with shortest Recovery Times, under 30 months, only one remains open and/or accessible: Queens Road Small Cap Value (QRSVX). It was profiled by David in April 2015.

Here’s a short list and risk/return numbers for QRSVX across various timeframes:
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Queens Road Small Cap Value (QRSVX)

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Lowest Ulcer Moderate Allocation Funds
 generates a list of Mixed Asset Moderate Allocation funds that have incurred the lowest Ulcer Indices in their respective categories. 

Topping the list (fund with lowest UI) is James Balanced: Golden Rainbow (GLRBX), profiled last August :
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