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.

Introducing Ferguson Metrics

By Charles Boccadoro

Ferguson Metrics help identify funds with equity-like returns but volatility that makes them “easier for investors to own through turbulent times,” describes Brad Ferguson of Halter Ferguson Financial, a fee-only independent financial advisor based in Indianapolis. They serve as a starting point for delving deeper, but also as litmus test when salespeople offer him funds to include in the firm’s portfolios.

There are three main metrics in Brad’s Continue reading →

Zeo Short Duration Income (ZEOIX), July 2018

By Charles Boccadoro

“Perhaps time’s definition of coal is the diamond.”

Kahlil Gibran

Objective and Strategy

The Zeo Short Duration Income Fund (ZEOIX), previously known as the Zeo Strategic Income Fund, is a non-diversified, actively managed, total return, fixed-income fund that seeks …

  • “ … to deliver low volatility, risk-managed solutions for the prudent investor.”
  • “ … low volatility and absolute returns consisting of income and moderate capital appreciation.”
  • “ … long-term capital preservation, income and moderate capital appreciation across market environments.”
  • “ … low volatility, absolute returns in a long-only fixed income portfolio.”
  • “ … to deliver a consistent, low-volatility risk profile suitable for both short and long time horizons.”
  • “ … to deliver low volatility.”

Clearly, ZEOIX’s focus is Continue reading →

Premium Site Update – Much Expanded Data Feed

By Charles Boccadoro

“I’ve come loaded with statistics, for I’ve noticed that a man can’t prove anything without statistics.”

                                                                                              Mark Twain

We launched our premium site in November 2015. Its origin stems from our desire to identify funds that minimized downside performance across full market cycles, using metrics and evaluation periods not readily available on other sites at that time. Parameters of interest included maximum Continue reading →

Democratizing Quant: An Update on Alpha Architect

By Charles Boccadoro

“In investing, what is comfortable is rarely profitable.”

        Robert Arnott

“An investment in knowledge pays the best interest.”

        Benjamin Franklin

MFO profiled Alpha Architect’s US Quantitative Value ETF  (QVAL) in December 2014, shortly after the fund’s launch and after our colleague, Sam Lee, praised QVAL’s strategy in a Morningstar piece, entitled “A Deep Value Quantitative Hedge Fund Strategy.” The firm’s CEO Wes Gray first impressed us during his presentation “Beware of Geeks Bearing Formula” at Morningstar’s ETF Conference in Chicago earlier that same year.

I had a chance to visit Wes, his partner and CIO/CFO Jack Vogel, and the rest of his team recently at the Alpha Architect office in Broomall, Pennsylvania. The picturesque town is nearby Bryn Mawr, Haverford, and Swarthmore Colleges; Villanova and Drexel Universities; and The Wharton School of University of Pennsylvania. Wes earned his PhD from University of Chicago, with Nobel Prize Continue reading →

AlphaCentric Income Opportunities Fund (IOFIX), February 2018

By Charles Boccadoro

“Timing, perseverance, and ten years of trying

will eventually make you look like an overnight success.”

        Biz Stone

Objective and Strategy

The AlphaCentric Income Opportunities Fund seeks to provide current income. Presently, it invests in often overlooked (some call “pejorative”) segments of non‐agency (private label) residential mortgage-backed securities (RMBS), specifically in seasoned (2007 or earlier) subprime mortgages with floating rate coupons.

The irony is that 10 years after the housing collapse these bonds, once highly discounted if not feared worthless, represent one of the more sought after asset classes, as described nicely in Claire Boston’s Bloomberg Continue reading →

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.”

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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.

morningstar_2

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.

morningstar_3

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.”

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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):

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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.

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