Dear friends,

Welcome to what are, historically, the two most turbulent months in the market.  Eight of the Dow’s 20 biggest one-day gains ever have occurred in September or October but so have 12 of the 20 biggest one-day losses.

And that might be a good thing.  Some exceedingly talented investors, like Eric “I Like Volatility” Cinnamond (see below), visibly perk up at the opportunities that panic presents.  And it will help distract us from the fact that, of all the things the two major political parties are about to launch (and they’re gonna launch a lot), the nicest is mud.

I wonder if this explains why the Germans have Octoberfest, but launch it in September?

Gary Black as savior?  Really?

Calamos Investments announced August 23 that they had appointed Gary Black as their new “global co-CIO.”  That was coincident with the departure of Nick Calamos from the co-CIO role.  Mr. Calamos had a sudden urge “to pursue personal interests.”

Gary Black?

That Gary Black? 

Black is most famous for serving for three years as CEO of Janus Investments.  During his watch, at least 15 equity managers left Janus and one won a $7.5 million lawsuit.  At the time of his dismissal (“amicable,” of course), he was reportedly trying to sell Janus to a larger firm.  The board disapproved, though we don’t know whether they disapproved of selling the firm or of Black’s inability to get an appropriate price for it.

A snapshot of Janus Capital Group’s balance sheet doesn’t exactly represent a ringing endorsement of Black’s tenure.

(source: Morningstar and the 2009 Janus annual report)

Some might summarize it as: “huge expense, huge controversy, rising debt, falling value.”

Do you suppose, in light of all of that, that the deposed Nick Calamos’s endorsement of Black might have had a tinge of “I hope you like what you get?”  He says, “The Calamos investment team is in good hands given Gary’s significant experience in leading investment teams on a global basis.”

Calamos, of course, is not hiring him as CEO.  Nope. That role is held by the firm’s 72-year-old founder.  They’re hiring him on the basis of his ability as chief investment officer.

How does he do as CIO?  Well, a lot of his retooled Janus funds absolutely cratered in the 2008 meltdown.  And his own investment firm doesn’t seem poised to appear on the cover of Barron’s quite yet.  Part of the agreement includes acquisition of Black’s investment firm, Black Capital Management.  Black Capital has a trivial asset base ($70 million) and a bunch of small separate accounts (average value: $370,000).  Black filed in March to launch his own long-short mutual fund, but it never got off the ground.

Aston / River Road Independent Value reopens

Aston/River Road Independent Value (ARIVX) is an exceptionally good young fund from Eric Cinnamond, a manager who has a great 16 year record as a small cap, absolute return investor.  The fund opened in December 2010, we profiled it with some enthusiasm in February 2011.  The fund quickly established its bona fides, drew a lot of assets and, in a move of singular prudence, was closed while still small and maneuverable.

On September 4, it reopens to new investors.  While that’s good news, it also raises a serious question: “you’re bigger than you were when you closed and you’re sitting at 50% cash, so why on earth is this time to reopen?”

Mr. Cinnamond’s answer comes in two parts.  First, the fund reserved $200 million in capacity for anticipated institutional inflows which never materialized.  At the same time, lots of advisors have been disappointed at getting shut off.  Eric writes:

Yes, the Independent Value Fund is opening again.  The rationale was simple.  The $200 million we set aside for possible institutional investors was not allocated.  In other words, institutional consultants (there are a few exceptions), remain committed to the relative world of investing — a world that has never made sense to me.  Meanwhile, we’ve had like-minded advisors who want to purchase the Fund.  So our capacity target of the Portfolio has not changed, but we have changed our expectation of mix between advisor (the fund) vs. institutional assets (separate accounts).  More advisor assets and fewer institutional assets.

Second, the fund’s cash level and capacity are separate issues.  Right now companies are achieving utterly unsustainable profit margins, which makes them look cheap and attractive.  He shares Jeremy Grantham’s belief (or Jeremy shares Eric’s) that this is a bubble and it will inevitably (and painfully) end when profit margins regress to the mean.  In a non-bubbled world, he would have use for several hundred million dollars more than the fund holds. Again, Mr. Cinnamond:

The other obvious question is, “If you have so much cash, why would you want to grow assets?”  The size of the fund doesn’t impact our cash levels. Our opportunity set drives cash. If the fund is $1 million or $1 billion, cash would be the same percentage of the portfolio. We are simply reopening the fund to fill remaining capacity that was not taken by institutions.

In order to get the get the fund fully invested, I’m going to need higher volatility and improved valuations. With what appears to be an experiment in unlimited balance sheet expansion at the Federal Reserve, the timing of the return of free markets and volatility remains unknown. However, as with the mortgage credit boom and the tech bubble before, what is not sustainable will not be sustained. I am confident of that and I am confident the current profit cycle will revert as all others before it (there has never been a linear profit cycle). As peak corporate margins and profits revert, I believe the fund is position well to take advantage of the eventual return of the risk premium and volatility.

To those who suspect that he or River Road or Aston is simply making an asset grab, he notes that they are not going to market the reopened fund and that they even suspect that they may lose assets as skeptics pull their accounts.

We may actually lose assets initially due to the reopening (it may be frowned upon by some), I really don’t know and have never been too concerned about AUM.  One of my favorite investment quotes of all time is “I would rather lose half of my shareholders than half of their money” (I think this was Jean-Marie Eveillard). I strongly believe in this. Also, we do not plan on actively marketing the fund and my focus will remain on small cap research/analysis and portfolio management. As far as portfolio management goes, I remain committed to not violating our investment discipline of only allocating capital when getting adequately compensated relative to risk assumed.

As he waits for those bigger opportunities, he’s reallocating money toward some attractively priced small cap exploration and production and energy service companies.

We’ve updated our profile of the fund for folks interested in learning more.

Writing about real asset investing: stuff in the ground versus stuff on the page

We’re currently working on an essay about “real asset” investing and the quickly growing pool of real asset investment vehicles.  Real assets are things that have physical properties: precious metals, commodities, residential or commercial real estate, farmland, oil and gas fields, power generation plants, pipelines and other distribution systems, forestland and timber.

Advocates of real asset investing tend to justify inclusion of real assets on either (or both) of two grounds: normal and apocalyptic.

The “normal” argument observes that inflation is deadly to long-term returns, silently eroding the value of all gains. If inflation were to accelerate, that erosion might be dramatic. Neither stocks nor (especially) bonds generate real returns in periods of high and rising inflation. Real assets do.

The “apocalyptic” argument observes that we might be entering a period of increasingly unmanageable imbalances between the supply of everything from food and fertilizer to energy and metals, and the demand for them. The market’s way of addressing that imbalance is to raise the price of the items demanded. That should stimulate production and decrease consumption. Some pessimists, GMO’s Jeremy Grantham prime among them, believe that the imbalance might well be irreparable which will make the owners of resources very rich at the expense of others.

Regardless of which justification you use, you end up with inflation. Investors have the option of addressing inflation through a combination of two strategies: investing in real or tangible assets or investing in inflation-linked derivations. In the first case, you’d buy oil or the stocks of oil producing companies. In the second, you might buy TIPs or commodity index futures. The first strategy is called “real asset” investing. The second is “real return” investing.

Gaining the advantages of real asset investing requires devoting a noticeable but modest portion of your portfolio (5% at the low end and 25% at the high end) to such assets, but doing so with the knowledge that they’ll lag other investments as long as inflation stays low.

While there is a huge discussion of this issue in the institutional investment community, there’s very little directed to the rest of us. There’s only one no-load real assets fund, T. Rowe Price Real Assets (PRAFX). The fund was launched for exclusive use in Price’s asset allocation products, such as their Retirement Date funds. It has only recently been made available to the public. There are a half dozen load-bearing funds, two with quite reasonable performance, one diversified real assets ETF and a thousand ETFs representing individual slices of the real asset universe.

I’d planned on profiling both real asset investing and PRAFX this month, but the research is surprisingly complex and occasionally at odds. Rather than rush to print with a second-rate essay, we’ll keep working on it for our October issue.

Note to Paul Ryan, Investor: Focus!

For someone professing great economic knowledge, Paul Ryan’s portfolio reflects the careful discipline of a teenager at the mall. That, at least, is one reading of his 2012 financial disclosure statements on file with the Clerk of the U.S. House of Representatives. (The statement was amended a week later to add a million or so held by his wife in a trust.)

Highlights of his financials:

• Ryan is a real assets investor. Woo-hoo! Among his largest investments are shares of a mining partnership (Ava O Limited), gravel rights to a quarry in Oklahoma (Blondie & Brownie, LLC – I’m sure Obama’s people are sniffing around that one), IPath Dow Jones UBS Commodity fund, Nuveen Real Estate Securities, and a bunch of assets (time, mineral rights, a cabin?, and land) through the Little Land Company LP.
• In 2011, he was adding to his real asset holdings. He bought shares of a commodity ETF (and sold part four months later), Pioneer Natural Resources Co, a TIPS fund and (on three occasions) a real estate fund.
• Directly or through family trusts, Ryan owns about three dozen mutual funds, mostly solid and unexceptional (think Artisan, Fido, Hartford, T Rowe).
• He’s neither a fan of The Great Man theory of investing nor of passively managed investments. While he owns shares of Berkshire-Hathaway and PIMCO Total Return (PTTRX), the Berkshire holding is trivial ($1-15,000). The PIMCO one, mediated through two trusts, is under $50,000. Bill Gross tweeted approval (“Thanks Paul Ryan @RepPaulRyan @PaulRyanVP for investing in a PIMCO fund. Your reputation as a numbers guy is validated”), conceivably before he noticed that Ryan had been selling his shares in the fund. Other than the ETFs in his partnerships, he has no passive investments and he made 35 portfolio transactions in the year.
• He hasn’t, for reasons political or economic, bought into the notion of emerging markets. While he has several global or international funds (Artisan, Hartford, Oakmark, Scout, Vanguard), he has just one small sliver of an emerging markets ETF inside a partnership.
• He’s got a lot of economically inefficiently little investments. Footnotes to the financials reveal a fair number of holdings just above or just below the $1000 reporting threshold.
• He’s taking care of his three children’s education through two fairly substantial accounts (on in the $50-100,000 range and the other in $100-250,000) in Wisconsin’s 529 plan. That warrants a second woo-hoo.

If you’d like to find out whether your Representative should be trusted with any amount greater than a $20 weekly allowance, all of the member reports are available at the House of Representatives’ financial disclosure page.

Another take on Ryan’s finances comes in a story by Stan Luxenberg at TheStreet.com. There’s a certain irony to the fact that Luxenberg decries Ryan’s jumbled portfolio in a muddled mess of an article. Ryan owns shares of four partnerships (CMR, Little Land Co., Ryan-Hutter Investment and Ryan Limited Partnership) and an IRA. Dramatically simplifying his fund holdings would likely require merging or liquidating those partnerships. Whether the partnerships themselves make sense or are just a tax dodge is a separate question.

Artio implodes?

Artio, formerly Julius Baer, is closing their domestic equity funds. On August 30, 2012, the Artio board voted to shut down Artio US Multicap, US Midcap, US Smallcap and US Microcap funds.

While the closures may have come as a surprise to many, BobC warned members of the Observer discussion board on August 8 of the impending decision. In following up on the lead, he discovered a more ominous problem: that Artio’s famous flagship fund is taking on water fast.

This caused us to probe a bit, and we discovered that Artio’s so-called flagship international funds (BJBIX, JETAX, JETIX, JIEIX) have been bleeding assets like a proverbial stuck pig, if not worse. For the oldest fund BJBIX, which was originally marketed as Julius Baer International Equity Fund in 1993, and where current managers Pell and Younes came aboard in 1995, fund assets peaked in 2007 at just under $11 billion. We started using the fund in the late 1990’s. Today, assets are under $1 billion. A similar disaster has occurred in the other international fund ticker symbols, but they do not have the long, storied history of BJBIX. This fund was once the best-performing international fund, but it never recovered from 2008, following that year’s average numbers by really awful relative performance in 2009-2011. And year to-date it is in the bottom 10%. We exited the fund several years ago when Pell and Younes would no longer take our calls. That’s usually a pretty big red flag that something is amiss.

But based on this, it would appear that Pell and Younes’ purchase of Bank Julius Baer’s U.S. fund management company was the beginning of the end.

Unfortunately, we are now concerned about Artio’s Total Return Bond Fund (JBGIX, BJBGX), which has a tremendous history and great management. If the asset bleed should occur there, for no other reason than perception of the future of Artio as a company, this would be a big problem for investors.

A lively discussion of the company’s future, alternatives and implications followed.  If you haven’t visited the board in a while, you owe it to yourself to drop by.  There’s a remarkable depth of information available there.

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.

Aston/River Road Independent Value (ARIVX), update: stubborn short-sightedness on the part of institutional account managers translates to a big win for small investors. When ARIVX closed, they reserved $200 million in capacity for institutional investors who didn’t show up.  That’s give you $200 million in room to add one of the industry’s most profitable and stable small cap value funds to your portfolio.

Northern Global Tactical Asset Allocation (BBALX), update: this formerly mild-mannered balanced fund is maturing into a fascinating competitor to Vanguard’s splendid STAR (VGSTX) fund. The difference may come down to Northern’s greater flexibility and reliance on (gasp!) index funds.

The Best of the Web

Our friend and collaborator, Junior Yearwood, is working to manage a chronic medical condition.  He won’t, for just a bit, we hope, be able to contribute to the Observer.  While he’s gone we’ll keep his “Best of” feature on hiatus. I wish Junior a swift recovery and encourage folks who haven’t done so to find our picks for best retirement income calculator, best financial news site, best small fund website and more at Best of the Web.

Launch Alert: Manning & Napier Strategic Income funds

Manning & Napier launched Strategic Income Conservative (MSCBX) and Strategic Income Moderate (MSMSX) on August 2, 2012.  They both combine shares of four other Manning & Napier funds (Core Bond (EXCRX), Dividend Focus (MNDFX), High Yield Bond (MNHYX) and Real Estate (MNRIX) in pursuit of income, growth, and risk management. Conservative will hold 15-45% in Dividend Focus and Real Estate while Moderate will hold 45-75%. Both have low investment minimums, reasonable fees and Manning’s very steady management team.

Launch Alert: William Blair International Leaders

William Blair & Company launched William Blair International Leaders Fund (WILNX) on August 16. The fund is managed by George Greig, who has an outstanding 25 year record and two very solid funds (International Growth WBIGX and Global Growth WGGNX) and Ken McAtamney, who is being elevated from the analyst ranks. The new fund will invest in “foreign companies with above-average returns on equity, strong balance sheets, and consistent, above-average earnings growth, resulting in a focused portfolio of leading companies.”  That’s an admirably Granthamite goal. $5000 investment minimum, reduced to $1000 for accounts with an automatic investing provision.  The expense ratio will be 1.45% after waivers. Grieg’s record is very strong and his main fund closed to new investors in June, so we’re putting WILNX on the Observer’s watch-list for a profile.

RiverPark Short-Term High Yield conference call

There are few funds to have stirred more conversation, or engendered more misunderstanding, than RiverPark Short-Term High Yield (RPHYX). It’s a remarkably stable, profitable cash management fund whose name throws off lots of folks.

Manager David Sherman of Cohanzick Asset Management and RiverPark’s president, Morty Schaja, have generously agreed to participate in a conference call with Observer readers. I’ll moderate the call and David will field questions on the fund’s strategies and prospects. The call is September 13 at 7:00 p.m., Eastern.

You can register for the conference by navigating to  http://services.choruscall.com/diamondpass/registration?confirmationNumber=10017662 and following the prompts.  If you’ve got questions, feel free to write me or post a query on the discussion board.

The Observer in the News

I briefly interrupted my August vacation to answer a polite question from the investing editor of U.S. News with a rant.

The question: “what should an investor do when his or her fund manager quits?”

The rant: “in 90% of the cases, nothing.”

Why?  Because, in most instances, your fund manager simply doesn’t much matter.  Some very fine funds are led by management teams (Manning & Napier, Dodge & Cox) and some fund firms have such strong and intentional corporate cultures (T. Rowe Price) that new managers mostly repeat the success of their predecessors.  Most funds, and most larger funds in particular, are managed with an eye to unobjectionable mediocrity.  The firm’s incentive is to gather and keep assets, not to be bold.  As a result, managers are expected to avoid the sorts of strategies that risk landing them outside of the pack.

There are, however, some funds where the manager makes a huge difference.  Those are often smaller, newer, boutique funds where management decisions are driven by ideas more compelling than “keep our institutional clients quiet.”  You can read the whole story in “What to Do When Your Fund Manager Quits,” US News, August 6, 2012.

If you’ve ever read the Observer and (understandably) wondered “who is this loon and what is he up to?” there’s a reasonable article written by a young local reporter about the Observer and me.  It’s a fairly wide-ranging discussion and includes pictures that led my departmental colleagues to begin a picture captioning contest.  Anya and Chip both weigh in. “Augustana professor attracts international attention with investment site,” Rock Island Argus and Moline Dispatch, August 20, 2012.

Briefly Noted . . .

SMALL WINS FOR INVESTORS

Effective September 4, 2012, The Brown Capital Management Small Company Fund (BCSIX) will re-open for investment to all investors. Morningstar designates this as one of the Gold small-growth funds. Its returns are in the top 10% of its peer group for the past 5, 10 and 15 years. It strikes me as a bit bulky at $1.4 billion but it continues to perform. Average expenses, $5000 minimum, low turnover. (Special thanks to “The Shadow” for posting to the discussion board word of the Brown and ARIVX re-openings.  S/he is so quick at finding this stuff that it’s scary.)

Jake Mortell of Candlewood Advisory writes to say that “One of the funds I am working with, The Versus Capital Multimanager Real Estate Income Fund (VCMRX) is reducing fees on the first $25 million in assets into the fund as a risk offset to early adopters. The waiver reduces fees from 95 bps to 50 bps on the first $25 million in assets to the fund for a period of 12 months.”  It’s a closed-end fund managed by Callan Associates, famed for the Callan Periodic Table of Investment Returns.

CLOSINGS

Invesco Van Kampen High Yield Municipal (ACTHX) will close on September 4, 2012. The fund is huge ($7 billion), good (pretty consistently in the top 25% of its peer group over longer periods) and has been closed before.

Touchstone Small Cap Core Fund (TSFAX) will close to new investments on September 21, 2012. It’s an entirely decent fund that has drawn almost $500 million in under three years.

OLD WINE, NEW BOTTLES

In November, two perfectly respectable AllianceBernstein funds get rechristened. AllianceBernstein Small/Mid Cap Growth (CHCLX) becomes AllianceBernstein Discovery Growth while AllianceBernstein Small/Mid Cap Value (ABASX) will change to AllianceBernstein Discovery Value.  Same managers, same mandate, different marketing.

AllianceBernstein Balanced Shares (CABNX) becomes AllianceBernstein Global Risk Allocation on Oct. 8, 2012. New managers and a new mandate (more global allocating will go on) follow.

Artio is changing Artio Global Equity’s (BJGQX) name to Artio Select Opportunities.

BlackRock Emerging Market Debt (BEDIX) will change its name to BlackRock Emerging Market Local Debt on Sept. 3, 2012. The fund also picked up a new management team (Sergio Trigo Paz, Raphael Marechal, and Laurent Develay), all of whom are new to BlackRock. .

In mid-August, Pax World Global Green Fund became Pax World Global Environmental Markets Fund (PGRNX, “pea green”?  Hmmm…). It also became almost impossible to find at Morningstar. Search “Pax World” and you find nothing. The necessary abbreviation is “Pax Wld Glbl.” While it might be a nice idea, the fund has yet to generate the returns needed to validate its focus.

I failed to mention that PineBridge US Micro Cap Growth Fund became the Jacob Micro Cap Growth Fund (JMCGX). With the same management in place, it seems likely that the fund will continue to pursue the same high expense, high risk strategy that’s handicapped it for the past decade.

WisdomTree International Hedged Equity ETF became WisdomTree Europe Hedged Equity Fund (HEDJ – “hedge,” get it?) at the end of August. The argument is that if you hedge out the effects of the collapsing euro, there are some “export-driven European-based firms that pay dividends” which are great businesses selling at compelling valuations. The valuations are compelling, in part, because so many investors are (rightly) spooked by the euro and euro-zone financial stocks. Hedge one, avoid the other, et voila!

OFF TO THE DUSTBIN OF HISTORY

John Houseman, Smith Barney spokesperson.

Smith Barney passed away at age 75. Morgan Stanley is dropping the name from its brokerage unit in favor of Morgan Stanley Wealth Management. The Smith (1892) and Barney (1873) brokerages merged in 1938, with the resulting firm operating under a half dozen different monikers over the years. Investors of a certain age associate Smith Barney primarily with John Houseman, the actor who served as their spokesman (“They make money the old-fashioned way. They earn it”) in the late 1970s and 1980s. The change is effective this month.

SmartMoney, the magazine, is no more. Originally (1992) a joint venture between Hearst and Dow-Jones, Dow bought Heart’s take in the magazine in 2010. The final print issue, September 2012, went on newsstands on August 14. In one of those fine bits of bloodless corporate rhetoric, Dow-Jones admitted that “[a]pproximately 25 staff positions for the print edition are being impacted.”  “Impacted.”  Uh… eliminated. Subscribers have the option of picking up The Wall Street Journal or, in my case, Barron’s.

American Independence is liquidating its Nestegg series of target-date funds. The five funds will close at the end of August and cease operations at the end of September 2012. They’re the fourth firm (after Columbia, Goldman Sachs and Oppenheimer) to abandon the niche this summer.

BMO plans to liquidate BMO Large-Cap Focus (MLIFX).

In what surely qualifies as a “small win” for investors, Direxion is liquidating its nine triple-leveraged ETFs (for example, Direxion Daily BRIC Bear 3X Shares BRIS) by mid-September.

Dreyfus plans to merge Dreyfus/Standish Fixed Income (SDFIX) into Dreyfus Intermediate-Term Income (DRITX) in January 2013. Same manager on both.

DWS Clean Technology (WRMAX) is liquidating in September 2012.

FocusShares announced plans to close and liquidate its entire lineup of 15 exchange-traded funds, all of which have minimal asset levels. The Scottrade subsidiary, which launched its ETFs last year, cited current market conditions, the funds’ inability to draw assets and their future viability, as well as prospects for growth in the ETFs’ assets, for the closing.

Guggenheim Long Short Equity (RYJJX) and Guggenheim All Cap Value (SESAX) are both slated for liquidation. Apparently the Long-Short managers screwed up:

Due to unfavorable market conditions, the Long Short Equity Strategy Fund (the “Fund”) has assumed a defensive investment position in an effort to protect the current value of the Fund. While the Fund is invested in this manner, it does not invest in accordance with certain of its investment policies, including its investment policy to invest, under normal circumstances, at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities, and/or derivatives thereof.

With no assets, terrible returns and a portfolio turnover rate approaching 1000%, one hardly needed additional reasons to close the fund. All Cap Value is going just because it was tiny and bad.

Jones Villalta Opportunity Fund (JVOFX), managed by Messrs Jones and Villalta, is being liquidated on September 21. The fund had a great 2009 and a really good 2010, followed by miserable performance in 2011 and 2012. It never gained any market traction and the management finally gave up.

Marsico Emerging Markets (MERGX) will be liquidated on September 21, 2012. The fund, less than two years old, had a rotten 2011 and a mediocre 2012. One of its two managers, Joshua Rubin, resigned in July. Frankly, the larger factor might be that Marsico is in crisis and they simply couldn’t afford to deal with this dud in the midst of their other struggles. Star managers Doug Rao and Cory Gilchrist have both left in the past 12 months, leaving an awfully thin bench.

Nuveen Large Cap Value (FASKX) will likely merge into Nuveen Dividend Value (FFEIX) in October 2012. Nuveen Large Cap Value’s assets have dwindled to less than $140 million after several years of steady outflows. The move also makes sense as both funds are run by the same management team. Owners of Nuveen Large Cap Value should expect to see fees drop by 5 basis points as a result of the merger.

The Profit Opportunity (PROFX) fund has closed and will be liquidated by the end of September.  It was minuscule (around $300,000), young (under two years) and inexplicably bad. PROFX is a small cap fund run by Eugene Profit, whose other small cap fund (Profit PVALX) is small but entirely first-rate. Odd disconnect.

Russell Investments is shutting down all 25 of its passively managed funds, with a combined total of over $310 million. The one ETF that will remain in operation is the Russell Equity ETF (ONEF) with $4.2 million in AUM. The shutdown will take place over the middle two weeks of October.

About the same time, Russell U.S. Value Fund (RSVIX) is merging in Russell U.S. Defensive Equity Fund (REQAX). They’re both closet index funds (R-squared of about 99) with mediocre records. The key difference is that REQAX is a large and reasonably profitable mediocre, closet-index fund.  RSVIX was not.

Sterling Capital Management has filed to liquidate the Sterling Capital National Tax-Free Money Market, Sterling Capital Prime Money Market Fund, and Sterling Capital U.S. Treasury Money Market Fund. The funds will be liquidated on December 14, 2012.

Touchstone Intermediate Fixed Income (TCFIX) has been liquidated after poor performance led to the departure of a major shareholder.

In Closing . . .

Each month we highlight changes in the fund world that you might not otherwise notice. This month we’ve found a near-record 69 fund manager changes. In addition, there are 10 new funds in registration with the SEC. They are not yet available for sale but knowing about them (say, for example, Wasatch’s new focused Emerging Markets fund) might help your planning. Most will come on the market by Thanksgiving.

In about a week the discussion board is undergoing a major software upgrade.  Chip and Accipiter have built some cool new functions into the latest version of Vanilla.  Chip highlights these:

1. There’s an add-on that will let folks more easily format their posts: a hyperlink function (much requested) and easy images are part of it;
2. A polling add-on that will allow us to quickly survey members;
3. Enhancements to the administration of the discussion board;
4. Pop up alerts, that you can choose to enable or disable, to notify you when certain content is updated or posts are responded to; and most importantly
5. We’ll be able to take advantage of some of cool add-ons that Accipiter’s been working over the past months.

We might be offline for a couple hours, but we’ll post a notice of the exact time well in advance.

I’m often amazed at what goes on over there, by the way. There have been over 2.5 million pageviews and 3300 discussions launched. That’s made possible by a combination of the wit and generosity of the posters and the amazing work that Chip and Accipiter have done in programming and reprogramming the board to make it ever more responsive to folks’ needs (and now to Old Joe’s willingness to turn his considerable talents as a technical writer to the production of a User’s Guide for newcomers). Quiet thanks to you all.

Following from the enthusiasm of the folks on our discussion board, we’re scheduled to profile T. Rowe Price Real Assets PRAFX (waves to Polina! It’s sort of a “meh” fund but is looking like our best no-load option), Artisan Global Equity ARTHX (“hey, Investor.  I’ve been putting this one off because I was starting to feel like a shill for Artisan. They’ve earned the respect, but still …”) and the Whitebox funds (subject of a Barron’s profile and three separate discussion threads. Following our conversation with David Sherman at Cohanzick, we have an update of RiverPark Short Term High Yield (RPHYX) in the works and owe one for the splendid, rapidly growing RiverPark Wedgewood Growth (RPGFX) fund.

The following announcement is brought to you by Investor, a senior member of the Observer’s discussion community:

And speaking of fall, it’s back-to-school shopping time! If you’re planning to do some or all of your b-t-s shopping online, please remember to Use the Observer’s link to Amazon.com. It’s quick, painless and generates the revenue (equal to about 6% of the value of your purchases) that helps keep the Observer going.

My theory is that if I keep busy enough, I won’t notice either the daily insanity of the market or what happens next to the Steelers’ increasingly fragile O-line.

We’ll look for you then,

Dear friends,

Welcome to the Summer Break edition of the Mutual Fund Observer. I’m writing from idyllic Ephraim, Wisconsin, a beautiful little village in Door County on the shores of Green Bay. Here’s a quick visual representation of how things are going:

Thanks to Kathy Glasnap, a very talented artist who has done some beautiful watercolors of Door County, for permission to use part of one of her paintings (“All in a Row”). Whether or not you’ve (yet) visited the area, you should visit her gallery online at http://www.glasnapgallery.com/

Chip, Anya, Junior and I bestirred ourselves just long enough to get up, hit <send>, refill our glasses with sangria and settle back into a stack of beach reading and a long round of “Mutual Fund Truth or Dare.”  (Don’t ask.)

In celebration of the proper activities of summer (see above), we offer an abbreviated Observer.

MFO in Other Media: David on Chuck Jaffe’s MoneyLife Radio Show

I’ll be the first to admit it: I have a face made for radio and a voice made for print.  Nonetheless, I was pleased to make an appearance on Chuck Jaffe’s MoneyLife radio show (which is also available as a podcast).  I spoke about three of the funds that we profiled this month, and then participated in a sort of “stump the chump” round in which I was asked to offer quick-hit opinions in response to listener questions.

Dodge & Cox Global Stock (DODWX) for Rick in York, Pa.  It’s easy to dismiss DODWX if you’ve give a superficial glance at its performance.  The fund cratered immediately after launch in 2008 when the managers bought financial stocks that were selling at a once-in-a-generation price only to see them fall to a once-in-a-half-century price.  But those purchases set up a ferocious run in 2009.  It was hurt in 2011 by an oversized emerging markets stake which paid off handsomely in the first quarter of 2012.  It’s got a great management team and an entirely sensible investment discipline.  It’ll be out-of-step often enough but will, in the long run, be a really good investment.

Fidelity Emerging Markets (FEMKX) for Brad in Cazenovia, NY.  My bottom line was “it’s not as bad as it used to be, but there’s still no compelling reason to own it.”  If you’re investing with Fido, their new Fidelity Total Emerging Markets (FTEMX) is a more much intriguing option.

Leuthold Core Investment (LCORX) for Scott in Redmond, Ore. This was the original go-anywhere fund, born of Leuthold’s sophisticated market analysis service.  Quant driven, quite capable of owning pallets of lead or palladium.  Brilliant for years but, like many computer-driven funds, largely hamstrung lately by the market’s irrational jerks and twitches.  If you anticipate a return to a more-or-less “normal” market where returns aren’t driven by fears of the Greeks, it’s likely to resume being an awfully attractive, conservative holding.

Matthews Asia Dividend Fund (MAPIX) for Robert in Steubenville, Ohio.  With Matthews Asian Growth & Income (MACSX), this fund has the best risk-return profile of any Asian-focused fund.  The manager invests in strong companies with lots of free cash flow and a public commitment to their dividend.  What it lacks in MACSX’s bond and convertibles holdings, it makes up for in good country selection and stock picking.  If you want to invest in Asia, Matthews is the place to start.

T. Rowe Price Capital Appreciation (PRWCX) for Dennis in Strongsville, Ohio. PRWCX usually holds about 65% of the portfolio in large, domestic dividend-paying stocks and a third in other income-producing securities.  Traditionally the fund held a lot of convertible securities though David Giroux, manager since 2006, has held a bit more stock and fewer converts.  The fund has lost money once in a quarter century and a former manager chuckled over the recollection that Price’s internal allocation models kept coming to the same conclusion: “invest 100% in PRWCX.”

MFO in Other Media: David on “The Best Fund for the Next Six Months … and Beyond”

Early in July, John Waggoner wrote to ask for recommendations for “the remainder of 2012.”  Answers from three “mutual fund experts” (I shudder) appear in John’s July 5^th column.  Dan Wiener tabbed PrimeCap Odyssey Aggressive Growth (POAGX) and Jim Lowell picked Fidelity Total Emerging Markets (FTEMX).  I highlighted the two most recent additions to my non-retirement portfolio:

RiverPark Short Term High Yield (RPHYX), which I described as “one of the most misunderstood funds I cover. It functions as a cash management fund for me — 3% to 4% returns with (so far) negligible volatility. Its greatest problem is its name, which suggests that it invests in short-term, high-yield bonds (which, in general, it doesn’t) or that it has the risk profile of a high-yield fund (ditto).”

David Sherman, the manager, stresses that RPHYX “is not an ATM machine.”  That said, the fund returned 2.6% in the first seven months of 2012 with negligible volatility (the NAV mostly just drops with the month-end payouts).  That’s led to a Sharpe ratio above 3, which is simply great.  Mr. Sherman says that he thinks of it as a superior alternative to, say, laddered bonds or CDs.  While in a “normal” bond market this will underperform a diversified fund with longer durations, in a volatile market it might well outperform the vast majority.

Seafarer Overseas Growth & Income (SFGIX), driven by the fact that Mr. Foster “performed brilliantly at Matthews Asian Growth & Income (MACSX), which was the least volatile (hence most profitable) Asian fund for years. With Seafarer, he’s able to sort of hedge a MACSX-like portfolio with limited exposure to non-Asian emerging markets. The strategy makes sense, and Mr. Foster has proven able to consistently execute it.”

SFGIX has substantially outperformed the average emerging-Asia, Latin America and diversified emerging markets fund in the months since its launch, though it trails MACSX.  The folks on our discussion board mostly maintain a “deserves to be on the watch-list” stance, based mostly on MACSX’s continued excellence.  I’m persuaded by Mr. Foster’s argument on behalf of a portfolio that’s still Asia-centered but not Asia exclusively.

Seafarer Overseas Piques Morningstar’s Interest

One of Morningstar’s most senior analysts, Gregg Wolper, examined the struggles of two funds that should be attracting more investor interest than they are, in “Two Young Funds Struggle to Get Noticed” (July 31, 2012).

One is TCW International Small Cap (TGICX) which launched in March 2011.  It’s an international small-growth fund managed by Rohit Sah.  Sah had “an impressive if volatile record” in seven years at Oppenheimer International Small Company (OSMAX).  The problem is that Sah has a high-volatility strategy even by the standards of a high-volatility niche, which isn’t really in-tune with current investor sentiment.  Its early record is mostly negative which isn’t entirely surprising.  No load, $2000 investment minimum, 1.44% expense ratio.

The other is Seafarer Overseas Growth and Income (SFGIX).  Wolper recognizes Mr. Foster’s “impressive record” at Matthews and his risk-conscious approach to emerging markets investing.  “His fund tries to cushion the risks of emerging-markets investing by owning less-volatile, dividend-paying stocks and through other means, and in fact over the past three months it has suffered a much more moderate loss than the average diversified emerging-markets fund.”  Actually, from inception through July 31 2012, Seafarer was up by 0.4% while the average emerging markets fund had lost 7.4%.

Mr. Wolper concludes that when investors’ appetite for risk returns, these will both be funds to watch:

At some point, though, certain investors will be looking for a bold fund to fill a small slot in their portfolio. Funds with modest asset bases have more flexibility than their more-popular rivals to own smaller, less-liquid stocks in less-traveled markets should they so choose. For that reason, it’s worth keeping these offerings in mind. Their managers are accomplished, and though there are caveats with each, including their cost, they feature strategies that are not easy to find at rival choices.

It’s What Makes Yahoo, Yahoo

Archaic, on the Observer’s discussion board, complained, “When I use Yahoo Finance to look at a particular fund … [its] Annual Total Return History, the history is complete through 2010 but ends there. No 2011. Anyone know why?”

The short answer is: because it’s Yahool.  This is a problem that Yahoo has known about for months, but has been either unable or unmotivated to correct.  Here’s their “Help” page on the problem:

I added a large arrow only because I don’t know how to add either a flashing one or an animated GIF of a guy slapping himself on the forehead.  Yahoo has known about this problem for at least three months without correcting it.

Note to Marissa Mayer, Yahoo’s new CEO: Yahoo describes itself as “a company that helps consumers find what they are looking for and discover wonders they didn’t expect.”  In this case, we’re looking for 2011 data and the thing we wonder about is what it says about Yahoo’s corporate culture and competence.  Perhaps you might check with the folks at Morningstar for an example of how quickly and effectively a first-rate organization identifies, addresses and corrects problems like this.

Too Soon Gone: Eric Bokota and FPA International Value (FPIVX)

I had the pleasure of a long conversation with Eric Bokota at the Morningstar Investment Conference in June.  I was saddened to hear that events in his private life have obliged him to resign from FPA.  The FPA folks seemed both deeply saddened and hopeful that one day he’ll return.  I wish him Godspeed.

Four Funds That Are Really Worth Your Time (even in summer!)

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 three newer funds and an update ING Corporate Leaders, a former “Star in the Shadows” whose ghostly charms have attracted a sudden rush of assets.

FPA International Value (FPIVX): led by Oakmark alumnus Pierre Py, FPA’s first new fund in almost 30 years has the orientation, focus, discipline and values to match FPA’s distinguished brand.

ING Corporate Leaders Trust (LEXCX): the ghost ship of the fund world sails into its 78^th year, skipperless and peerless.

RiverPark Long/Short Opportunity Fund (RLSFX): RiverPark’s successful hedge, now led by a guy who’s been getting it consistently right for almost two decades, is now available for the rest of us.

The Cook and Bynum Fund (COBYX): you think your fund is focused?  Feh! You don’t know focused until you’ve met Messrs. Cook and Bynum.

The Best Small Fund Websites: Seafarer and Cook & Bynum

The folks at the Observer visit scores of fund company websites each month and it’s hard to avoid the recognition that most of them are pretty mediocre.  The worst of them post as little content as possible, updated as rarely as possible, signaling the manager’s complete disdain for the needs and concerns of his (and very rarely, her) investors.

Small fund companies can’t afford such carelessness; their prime distinction from the industry’s bloated household names is their claim to a different and better relationship with their investors.  If investors are going to win the struggle against the overwhelming urge to buy high and leave in a panic, they need a rich website and need to use it.  If they can build a relationship of trust and understanding with their managers, they’ve got a much better chance of holding through rough stretches and profiting from rich ones.

This month, Junior and I enlisted the aid of two immensely talented web designers to help us analyze three dozen small fund websites in order to find and explain the best of them.  One expert is Anya Zolotusky, designer of the Observer’s site and likely star of a series of “Most Interesting Woman in the World” sangria commercials.  The other is Nina Eisenman, president of Eisenman Associates and founder of FundSites, a firm which helps small to mid-sized fund companies design distinctive and effective websites.

If you’re interested in why Seafarer and Cook & Bynum are the web’s best small company sites, and which twelve earned “honorable mention” or “best of the rest” recognition, the entrance is here!

Launch Alert: RiverNorth and Manning & Napier, P. B. and Chocolate

Two really good fund managers are combining forces.  RiverNorth/Manning & Napier Dividend Income (RNMNX) launched on July 18^th.  The fund is a hybrid of two highly-successful strategies: RiverNorth’s tactical allocation strategy based, in part, on closed-end fund arbitrage, and Manning & Napier’s largely-passive dividend focus strategy.  Both are embedded in freestanding funds, though the RiverNorth fund is closed to new investors.  There’s a lively discussion of the fund and, in particular, whether it offers any distinct value, on our discussion board.  The minimum investment is $5000 and we’re likely to profile the fund in October.

Briefly Noted . . .

As a matter of ongoing disclosure about such things, I want to report several changes in my personal portfolio that touch on funds we’ve profiled or will soon profile.  In my non-retirement portfolio, I sold off part of my holdings of Matthews Asian Growth and Income (MACSX) and invested the proceeds in Seafarer Overseas Growth & Income (SFGIX).  As with all my non-retirement funds, I’ve established an automatic investment plan in Seafarer.  In my retirement accounts, I sold my entire position in Fidelity Diversified International (FDIVX) and Canada (FICDX) and invested the proceeds in a combination of Global Balanced (FGBLX) and Total Emerging Markets (FTEMX).  FDIVX has gotten too big and too index-like to justify inclusion and Canada’s new-ish manager is staggering around, and I’m hopeful that the e.m. exposure in the other two funds will be a significant driver while the fixed-income components offer some cushion.  Finally, also in my retirement accounts, I sold T. Rowe Price New Era (PRENX) and portions of two other funds to buy Real Assets Fund (PRAFX).  What can I say?  Jeremy Grantham is very persuasive.

SMALL WINS FOR INVESTORS

A bunch of funds have tried to boost their competitiveness by cutting expenses or at least waiving a portion of them.

Cohen & Steers Dividend Value (DVFAX) will limit fund expenses to 1.00% for A shares through June 2014.

J.P. Morgan announced 9 basis point cuts for JP Morgan US Dynamic Plus (JPSAX) and JP Morgan US Large Cap Core Plus (JLCAX).

Legg Mason capped expenses on Legg Mason BW Diversified Large Cap Value (LBWAX) at between 0.85% – 1.85%, depending on share class.

Madison Investment Advisors cuts fees on Madison Mosaic Investors (MINVX) by 4 bps, Madison Mosaic Mid Cap (GTSGX) by 10, and Madison Mosaic Dividend Income (BHBFX, formerly Balanced) by 30.

Managers is dropping fees for Managers Global Income Opportunity (MGGBX), Managers Real Estate Securities (MRESX), and Managers AMG Chicago Equity Partners Balanced (MBEAX) by 11 – 16 bps.

Alger Small Cap Growth (ALSAX) and its institutional brother reopened to new investors on Aug. 1, 2012.  It was once a really solid fund but it’s been sagging in recent years so your ability to get into it really does qualify as a “small win.”

CLOSINGS

Columbia Small Cap Value (CSMIX) has closed to new investors. For those interested, The Wall Street Journal publishes a complete closed fund list each month.  It’s available online with the almost-poetic name, Table of Mutual Funds Closed to New Investors.

OLD WINE, NEW BOTTLES

Just as a reminder, the distinguished no-load Marketfield (MFLDX) will become the load-bearing MainStay Marketfield Fund on Oct. 5, 2012.  The Observer profile of Marketfield appeared in July.

At the end of September, Lord Abbett Capital Structure (LAMAX), a billion dollar hybrid fund, will be relaunched as Lord Abbett Calibrated Dividend Growth, with a focus on dividend-paying stocks and new managers: Walter Prahl and Rick Ruvkun.  No word about why.

Invesco announced it will cease using the Van Kampen name on its funds in September.  By way of example, Invesco Van Kampen American Franchise “A” (VAFAX) will simply be Invesco American Franchise “A”.

Oppenheimer Funds is buying and renaming the five SteelPath funds, all of which invest in master limited partnerships and all of which have sales loads.  There was a back door into the fund, which allowed investors to buy them without a load, but that’s likely to close.

OFF TO THE DUSTBIN OF HISTORY

BlackRock is merging its S&P 500 Index (MDSRX) and Index Equity (PNIEX) funds into BlackRock S&P 500 Stock (WFSPX).  And no, I have no idea of what sense it made to run all three funds in the first place.

DWS Clean Technology (WRMAX) will be liquidated in October 2012.

Several MassMutual funds (Strategic Balanced, Value Equity, Core Opportunities, and Large Cap Growth) were killed-off in June 2012.

Oppenheimer is killing off their entry into the retirement-date fund universe by merging their regrettable Transition Target-Date into their regrettable static allocation hybrid funds.  Oppenheimer Transition 2030 (OTHAX), 2040 (OTIAX), and 2050 (OTKAX) will merge into Active Allocation (OAAAX). The shorter time-frame Transition 2015 (OTFAX), 2020 (OTWAX), and 2025 (OTDAX) will merge into Moderate Investor (OAMIX).  Transition 2010 (OTTAX) will, uhhh … transition into Conservative Investor (OACIX). The same management team oversaw or oversees the whole bunch.

Goldman Sachs took the easier way out and announced the simple liquidation of its entire Retirement Strategy lineup.  The funds have already closed to new investors but Goldman hasn’t yet set a date for the liquidation.   It’s devilishly difficult to compete with Fidelity, Price and Vanguard in this space – they’ve got good, low-cost products backed up by sophisticated allocation modeling.  As a result they control about three-quarters of the retirement/target-date fund universe.  If you start with that hurdle and add mediocre funds to the mix, as Oppenheimer and Goldman did, you’re somewhere between “corpse” and “zombie.”

Touchstone Emerging Markets Equity II (TFEMX), a perfectly respectable performer with few assets, is merging into Touchstone Emerging Markets Equity (TEMAX). Same management team, similar strategies.

In a “scraping their name off the door” move, ASTON has removed M.D. Sass Investors Services as a subadvisor to ASTON/MD Sass Enhanced Equity (AMBEX). Anchor Capital Advisors, which was the other subadvisor all along, now gets its name on the door at ASTON/Anchor Capital Enhanced Equity.

Destra seems already to have killed off Destra Next Dimension (DLGSX), a tiny global stock fund managed by Roger Ibbotson.

YieldQuest Total Return Bond (YQTRX), one of the first funds I profiled as an analyst for FundAlarm, has finally ceased operations.  (P.S., it was regrettable even six years ago.)

In Closing . . .

Some small celebrations and reminders.  This month the Observer passed its millionth pageview on the main site with well over two million additional pageviews on our endlessly engaging discussion board (hi, guys!).  We’re hopeful of seeing our 100,000^th new reader this fall.

Speaking of the discussion board, please remember that registration for participating in the board is entirely separate from registering to receive our monthly email reminder.  Signing up for board membership, a necessary safeguard against increasingly agile spambots, does not automatically get you on the email list and vice versa.

And speaking of fall, it’s back-to-school shopping time!  If you’re planning to do some or all of your b-t-s shopping online, please remember to Use the Observer’s link to Amazon.com.  It’s quick, painless and generates the revenue (equal to about 6% of the value of your purchases) that helps keep the Observer going.  Once you click on the link, you may want to bookmark it so that your future Amazon purchases are automatically and invisibly credited to the Observer. Heck, you can even share the link with your brother-in-law.

A shopping lead for the compulsive-obsessive among you: How to Sharpen Pencils: A Practical & Theoretical Treatise on the Artisanal Craft of Pencil Sharpening for Writers, Artists, Contractors, Flange Turners, Anglesmiths, & Civil Servants (2012).  The book isn’t yet on the Times’ bestseller lists, though I don’t know why.

A shopping lead for folks who thought they’d never read poems about hedge funds: Katy Lederer’s The Heaven-Sent Leaf (2008).  Lederer’s an acclaimed poet who spent time working at, and poetrifying about, a New York hedge fund.

In September, we’ll begin looking at the question “do you really need to buy a dedicated ‘real assets’ fund?”  T. Rowe Price has incorporated one into all of their retirement funds and Jeremy Grantham is increasingly emphatic on the matter.  There’s an increasing area of fund and ETF options, including Price’s own fund which was, for years, only available to the managers of Price funds-of-funds.

We’ll look for you.

photo by rcbodden on Flickr.

Dear friends,

“Summertime and the livin’ is easy”?

“Roll out those lazy, hazy, crazy days of summer,
Those days of soda and pretzels and beer”

“That’s when I had most of my fun back …
Hot fun in the summertime.”

“In summer, the song sings itself.”

What a crock.  I’m struck by the intensity of the summer storms, physical and financial.  As I write, millions are without power along the Eastern seaboard after a ferocious storm that pounded the Midwest, roared east and killed a dozen.  Wildfires continue unchecked in the west and the heat and drought in Iowa have left the soil in my yard fissured and hard.  Conditions in the financial markets are neither better nor more settled.  The ferocious last day rally in June created the illusion of a decent month, when in fact it was marked by a series of sharp, panicky dislocations.

I’m struck, too, by the ways in which our political leaders have responded, which is to say, idiotically.  Republicans continue to deny the overwhelming weight of climate science.  Democrats acknowledge it, then freeze for fear of losing their jobs.  And both sides’ approach to the post-election fiscal cliff is the same: “let’s get through the election first.”

It’s striking, finally, how rarely the thought “let’s justify being elected” seems to get any further than “let’s convince voters that the other side is worse.”

Snippets from MIC

I had the pleasure of attending the Morningstar Investment Conference in late June.  The following stories are derived from my observations there.  I also had an opportunity to interview two international value managers, David Marcus of Evermore and Eric Bokota of FPA, there.  Those interviews will serve as elements of an update of the Evermore Global Value profile and a new FPA International Value profile, both in August.

David Snowball at MIC, courtesy of eventtoons.com

BlackRock and the Graybeards

On Day One of the conference, Morningstar hosted a keynote panel titled “A Quarter-Century Club” in which a trio of quarter-centenarians (Susan Byrne, Will Danof and Brian Rogers) reflected in their years in the business.  All three seemed to offer the same cautionary observation: “the industry has lost its moral compass.”  All three referred to the pressure, especially on publicly traded firms, to “grow assets” as the first priority and “serve shareholders” somewhere thereafter.

Susan Byrne, chairman and founder of Westwood Management Corp., the investment advisor to the Westwood Funds, notes that, as a young manager, it was drilled into her head that “this is not our money.” It was money held in trust, “there are people who trust you (the manager) individually to take care for them.” That’s a tremendously important value to her but, she believes, many younger professionals don’t hear the lesson.

Will Danoff, manager of Fidelity Contrafund (FCNTX), made a thoughtful, light-hearted reference to one of his early co-workers, George.  “George didn’t manage money and he didn’t manage the business.  His job, so far as I can tell, was to walk up to the president every morning, look him in the eye and ask ‘how are you going to make money today for our shareholders?’ You don’t hear that much anymore.”

Brian Rogers, CIO of T Rowe Price made a similar, differently nuanced point: “when we were hired, it was by far smaller firms with a sense of fiduciary obligation, not a publicly-traded company with an obligation to shareholders. Back then we learned this order of priorities: (1) your investors first, (2) your employees and then (3) your shareholders.” In an age of large, publicly-traded firms, “new folks haven’t learned that as deeply.”

As I talk with managers of small funds, I often get a clear sense of personal connection with their shareholders and a deep concern for doing right by them. In a large, revenue-driven firm, that focus might be lost.

The extent of that loss has been highlighted by some very solid reporting by Aaron Pressman and Jessica Toonkel of Reuters.   Pressman and Toonkel document what looks like the unraveling of BlackRock, the world’s largest private investment manager. In short order:

• Robert Capaldi, senior client strategist for Chief Executive Laurence Fink, left.
• Susan Wagner, a founding partner and vice chairman, announced her immediate retirement.  Wagner had overseen much of BlackRock’s growth-through-acquisition strategy which included purchase of Barclay’s Global Investors and Merrill Lynch’s funds, a total of $2.4 trillion in assets.
• Chief equity strategist Boll Doll announced his retirement (at 57) as evidence began to surface that his and BlackRock’s long-time claim of “proprietary” investment models was false.
• Star energy fund manager Daniel Rice resigned in the wake of criticism of his decision to invest substantial amounts of his shareholders’ money into a firm in which he had a personal, if indirect, stake.  He did so without notifying anyone outside of the firm.  BlackRock, reportedly, had no explanation for investors.

Insiders report to Reuters that “further senior-level changes” are imminent.

BlackRock’s plans to double its mutual fund business in the next 18 months by targeting RIAs remain in place.  Why double the business?  Whose interests does it serve?  BlackRock has demonstrated neither any great surplus of investment talent nor of innovative investment ideas, nor can they plausibly appeal (at $4 trillion of AUM) to “economies of scale.”

No, doubling their business is in the best interests of BlackRock executives (bonuses get tied to such things) and, likely, to BlackRock shareholders.  There’s no evidence for why RIAs or fundholders are anything more than tools in BlackRock’s incessant drive from growth.  The American essayist and critic Edward Abbey observed, “Growth for the sake of growth is the ideology of the cancer cell.”  And, apparently, of the publicly traded megacorp.

Advice from a Conservative Domestic Equity Manager: Go Elsewhere

The Quarter Century panel of senior started talking about the equity market going forward. They were uniformly, if cautiously, optimistic. Rogers drew some parallels to the economy and market of 1982. I liked Susan Byrne’s comments rather more: “It feels like 1982 when you believed that any rally was a trap, designed to fool me, humiliate me and keep me poor.” Mr. Danoff argued that global blue chips “have absolutely flat-lined for years,” and represent substantial embedded value. They argued for pursuing stocks with growing dividends, a strategy that will consistently beat fixed income or inflation.

In closing, Don Phillips asked each for one bit of closing advice or insight. Brian Rogers, T. Rowe Price’s CIO and manager of their Equity Income fund (PRFDX) offered these two:

1. it’s time to remember Buffett’s adage, “be fearful when others are greedy, and greedy when others are fearful.”

and

2. “take a look at the emerging markets again.”

That’s striking advice, given Mr. Rogers’ style: he’s famously cautious and consistent, invests in large dividend-paying companies and rarely ventures abroad (5% international, 0.25% emerging markets). He didn’t elaborate but his observation is consistent with the recurring theme, “emerging markets are beginning to look interesting again.”

Note to the Scout Funds: “See Grammarian”

The marketing slogan for the Scout Funds is “See Further.”  Uhhh .. no.  “Farther.”  In this usage, “further” would be “additional,” as in “see further references in the footnotes.”  Farther refers to distance (“dad, how much farther is it?”) which is presumably what would concern a scout.

Scout’s explanation for the odd choice: “One of our executives wanted ‘See Farther’ but discovered that some other fund company already used it and so he went with ‘See Further’ instead.”

I see.

No, I don’t.  First, I can’t find a record for the “see farther” motto (though it is plausible) and, second, that still doesn’t justify an imprecise and ungrammatical slogan.

Kudos to Morningstar: They Get It Right, and Make It Right, Quickly

In June I complained about inconsistencies in Morningstar’s data reports on expense ratios and turnover, and the miserable state of the Securities and Exchange Commission database.

The folks at Morningstar looked into the problems quite quickly. The short version is this: fund filings often contain multiple versions of what’s apparently the same data point. There are, for example, a couple different turnover ratios and up to four expense ratios. Different functions, developed by different folks at different times, might inadvertently choose to pull stats from different places. Mr. Rekenthaler described them as “these funny little quirks where a product somewhere sometime decided to do something different.” Both stats are correct but also inconsistent. If they aren’t flagged so that readers can understand the differences, they can also be misleading.

Morningstar is interested in providing consistent, system-wide data.  Both John Rekenthaler, vice president of research, and Alexa Auerbach in corporate communications were in touch with us within a week. Once they recognized the inconsistency, they moved quickly to reconcile it.  Rekenthaler reports that their data-improvement effort is ongoing: “senior management is on a push for Morningstar-wide consistency in what data we publish and how we label the data, so we should be ferreting out the remaining oddities.”  As of June 19, the data had been reconciled. Thanks to the Wizards on West Wacker for their quick work.

FBR Funds Get Sold, Quickly

On June 26 2012, FBR announced the sale of their mutual fund unit to Hennessy Advisors.   Of the 10 FBR funds, seven will retain their current management teams. The managers of FBR’s Large Cap, Mid Cap and Small Cap funds are getting dumped and their funds are merging into Hennessy funds. One of the mergers (Large Cap) is likely a win for the investors. One of the mergers (Mid Cap) is a loss and the third (Small Cap) has the appearance of a disaster.

FBR Large Cap (FBRPX, 1.25% e.r., 9.2% over three years) merges into Hennessy Cornerstone Large Growth (HFLGX), three year old large value fund, 1.3% e.r., 13.8% over 3 years. Win for the FBR shareholders.

FBR Mid Cap (FBRMX, 1.35% e.r., five year return of 3.0%) merges into Hennessy Focus 30 (HFTFX), midcap fund, 1.36% e.r., five year return of 1.25%. Higher minimum, same e.r., lower returns – loss for FBR shareholders.

FBR Small Cap (FBRYX, 1.45% e.r., five year return of 4.25%) merges into Hennessy Cornerstone Growth (HGCGX), small growth fund, 1.33% e.r., five year return of (8.2). Huh? Slightly lower expenses but a huge loss in performance. The 1250 basis point difference is 5-year performance does not appear to be a fluke. The Hennessy fund is consistently at the bottom of its peer group, going back a decade.   The fact that founder and CIO Neil Hennessy runs Cornerstone Growth might explain the decision to preserve the weaker fund and its strategy. This is a clear “run away!” for the FBR shareholders.

One alternative for FBRYX investors is into FBR’s own Small Cap Financial fund (FBRSX), run by Dave Ellison, FBR’s CIO. Ellison’s funds used to bear the FBR Pegasus brand. The fund only invests in the finance industry, but does it really well. That said, it’s more expensive than FBRYX with weaker returns, reflecting the sector’s disastrous decade.

The fate of FBR’s Gas Utility Index fund (GASFX) is unclear.  The key question is whether Hennessy will increase fees.  An FBR representative at Morningstar expressed doubt that they’d do any such thing.

The Long-Short Summer Series: Trying to Know if You’re Winning

As part of our summer series on long-short funds, we look this month at the performance of the premier long-short funds, of interesting newcomers, and of two benchmarks.

The challenge is to know when you’re winning if your goal is not the easily measurable “maximum total return.”  With long-short funds, you’re shooting for something more amorphous, akin to “pretty solid returns without the volatility that makes me crazy.”  In pursuit of funds that meet those criteria, we looked at the performance of long-short funds on one terrible day (June 1) and one great day (June 29), as well as during one terrible month (May 2012) and one really profitable period (January – June, 2012).

We looked at the return of Vanguard’s Total Stock Market Index fund for each period, and highlighted (in green) those funds which managed to lose half as much as the market in the two down periods (May and June 1) but gain at least two-thirds of the market in the two up periods.  Here are the results, sorted by 2012 returns.

As we noted last month, in comparing the long-term performance of long-short funds to a very conservative bond index, consistent winners are hard to find.  Interesting possibilities from this list:

RiverPark Long Short Opportunity (RLSFX), which converted from an in-house hedge fund in March and which we’ll profile in August.

Marketfield (MFLDX), the mutual fund version of a global macro hedge fund, which we’re profiling this month.

ASTON/River Road Long Short (ARLSX), a disciplined little fund that we profiled last month.

New on our radar is Robeco Boston Partners Long/Short Research (BPRRX), sibling to the one indisputable gold-standard fund in the group, Robeco Long Short (BPLEX).  While the two follow the same investment discipline, BPLEX has a singular focus on small and micro stocks while BPRRX has a more traditional mid- to large-cap portfolio.

The chart below tracks BPPRX against its peer group average (orange) and the group’s top funds, including BPLEX (green), Marketfield (burgundy), and Wasatch (gold).  BPPRX itself is the blue line.

Since inception, BPRRX has been (1) well above average and (2) well below BPLEX.  It’s worth further research.

FundReveal perspective on Long-Short funds

Nearly all of the Long-Short funds examined exhibit consistently low risk.  Many of them also beat the S&P 500’s Average Daily Returns.  Of the six funds analyzed by David (see bullets below) those rated as “A-Best” in one year most often beat the S&P in total returns the next year, a finding consistent with the out-of-sample forward testing that we have conducted for the entire market.

One thing that remains surprising is that the Long-Short funds great idea hasn’t really panned out.  It makes such sense to use all positive and negative information about companies and securities available when investing.   Doesn’t only investing long leave “money [information] on the table.”  But, in general, these funds have not delivered on that perceived potential.

BPLSX, Robeco Boston Partners Long/Short Fund has been delivering.  We agree with David that it can be seen as the gold standard.  From FundReveal’s perspective, the fund has persistently delivered “A-Best” performance, beating the S&P on both risk and return measures. Since 2005 the fund has been rated A-Best six times and C twice.  This includes a whopping 82% total return in 2009.  In 2009, 2010, and 2011 positive total returns followed A Best risk return rating in the preceding year.  Don’t get too excited:  the fund is closed.

David has commented or will comment on the following funds in the Mutual Fund Observer.

• ARLSX  – Aston/River Road Long/Short
• FMLSX – Wasatch 1st Source Long/Short
• MFLDX – Marketfield Fund
• AMBEX – Aston/River Long/Short
• JAZZX – James Advantage Long/Short
• GRTHX – GRT Absolute Return Fund

Good:

The two funds with positive investment decision-making attributes based on the FundReveal model are FMLSX and MFLDX.  Both persistently deliver A-Best risk-return performance, and relatively high Persistence Ratings, a measurement of the likelihood of A performance in the future: FMLSX: 40%, and MFLDX: 44%.

Not so Good:

JAZZX has demonstrated high Volatility and low Average Daily Return relative to its peers and the S&P.   It has only been in existence a short time; we have data from 2011 and 2012 YTD, but it is not faring well.   A wait and see position is probably justified.

Some additional candidates for consideration garnered from the FundReveal “Best Funds List” (free the FundReveal site).

VMNFX Vanguard Market Neutral Fund.  A solid low risk fund with 45% Persistence.  It has not hit the ball out of the park, but the team is demonstrating good decision- making as inferred from FundReveal measurements.

ALHIX American Century Equity Market Neutral Fund.  A solid fund with 4% volatility, market beating Average Daily Return in 2011, and Persistence of 44%.

FLSRX Forward Long/Short Credit Analysis Fund.  This fund may not even belong in this discussion since the others are stock funds.  Morningstar classifies this as an alternative bond fund.  Its portfolio is nearly exclusively Muni Bonds.  It is 34% Short and 132% Long in the Muni Bonds that make up 99% of its portfolio.  It has low Volatility, high Average Daily Return, Persistence Rating of 44%, and extraordinary performance in down markets (32% above the S&P).

A complete version of this analysis with tables and graphics is available on the FundReveal blog.

Best of the Web: Our Summer Doldrums Edition

Our contributing editor, Junior Yearwood, in collaboration with financial planner Johanna Fox-Turner have fine-tuned their analysis of retirement income calculators, a discussion they initiated last month.  In addition, Junior added a review of Chuck Jaffe’s new MoneyLife podcast.  Drop by Best of the Web to sample both!

Two Funds and Why They’re Really Worth Your While

Each month, the Observer profiles between two and four mutual funds that you likely have not heard about, but really should have.  Our “Most intriguing new funds: good ideas, great managers” do not yet have a long track record, but 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 “stars in the shadows” aren’t all worthy of your “gotta buy” list, but all of them are going to be fundamentally intriguing possibilities that warrant some thought. Two intriguing  funds are:

Seafarer Overseas Growth & Income (SFGIX): Andrew Foster, who performed brilliantly as a risk-conscious emerging Asia manager for Matthews, is now leading this Asia-centric diversified emerging markets fund.  It builds on his years of experience and maintains its cautiousness, while adding substantial flexibility.

Marketfield (MFLDX): there are two reasons to read, now and closely, about Marketfield.  One, it’s about the most successful alternative-investment fund available to retail investors.  Two, it’s just been bought by New York Life and will be slapped with a front-end load come October.  Investors wanting to maintain access to no-load shares need to think, now, about their options.

Rest in Peace: Industry Leaders Fund (ILFIX)

I note with sadness the closing of Industry Leaders fund, a small sensible fund run by Gerry Sullivan, a remarkably principled investor.  The fund identified industries in which there was either one or two dominant players, invested equally in them and rebalanced periodically.  The idea (patented) was to systematically exclude sectors where leaders never emerged or were quickly overthrown.  The fund did brilliantly for the first half of its existence and passably in the second half, weighed down by exposure to global financial firms, but never managed any marketing track.

Sullivan continues as the (relatively new) manager of Vice Fund (VICEX), which has a long and oddly-distinguished record.

Briefly noted …

Several months ago we reported on the Zacks fund rating service, noting that it was sloppy, poorly explained, unclear, and possibly illogical.  Doubtless emboldened by our praise, Mitch and Ben Zacks have launched two ETFs: Zacks Sustainable Dividend ETF and Zacks MLP ETF.  There’s no evident need for either, an observation quite irrelevant in the world of ETFs.

Small Wins for Investors

Schwab reduced the expense ratio on Laudus Small-Cap MarketMasters (SWOSX) by 10 basis points and Laudus International MarketMasters (SWOIX) by 19 basis points.

Forward Frontier Strategy (FRNMX) has capped the fund’s expenses at 1.09 – 1.49%, depending on share class.

The three Primecap Odyssey funds (Stock POSKX, Growth POGRX and Aggressive Growth POAGX) have all dropped their 2% redemption fees.  That’s not really much of a win for investors since the redemption fees are designed to discourage rapid trading of fund shares (which is a bad thing), but I take what small gains I can find.

Touchstone Emerging Markets Equity (TEMAX) has reopened to new investors after 16 months.

Former Seligman Manager in Insider-Trading Case

The SEC announced that former Seligman Communications and Information comanager Reema Shah pled guilty to securities fraud and is barred permanently from the securities industry. The SEC says that Shah and a Yahoo (YHOO) executive swapped insider tips and that the Seligman fund she comanaged and others at the firm netted a $389,000 profit from trading based on insider information on Yahoo.

Farewells

Gary Motyl, chief investment officer for the Franklin, Templeton, and Mutual Series fund families, passed away.  Motyl was one of Sir John Templeton’s first hires and he’s been Franklin’s CIO for 12 years.  Pending the appointment of a new CIO later this summer, his duties are being covered by three other members of Franklin’s staff.

Closings

Delaware Select Growth (DVEAX) closed to new month on June 8th.

Franklin Double Tax-Free Income (FPRTX) initiated a soft close on June 15^th and will switch to a hard close on August 1^st.

Prudential Jennison Health Sciences (PHLAX) closed on June 29^th after siphoning up $300 million in 18 months.

For those interested, The Wall Street Journal publishes a complete closed fund list each month.  It’s available online with the almost-poetic name, Table of Mutual Funds Closed to New Investors.

Old Wine, New Bottles

JPMorgan Asia Pacific Focus has changed its name to JPMorgan Asia Pacific (JASPX). The management of the team will be Mark Davids and Geoff Hoare.

Columbia Strategic Investor (CSVAX) will be renamed Columbia Global Dividend Opportunity. Actually it will become an entirely different fund under the guise of being “tweaked.”  I love it when they do that.  The former small cap and convertibles fund gets reborn as an all-cap global stock fund benchmarked against the MSCI All World Country Index. CSVAX’s managers have been fired and replaced by a team of guys who already run six other Columbia funds.

Ivy International Balanced (IVBAX) is being renamed Ivy Global Income Allocation.  It also picked up a second manager.

Off to the Dustbin of History

September will be the last issue of SmartMoney, a magazine once head-and-shoulders sharper and more data-driven than its peers.  According to a phone rep for SmartMoney, Dow is likely to convert SmartMoney.com into a pay site.  Dow will, they promise, “beef up” the online version and add editorial staff.  Plans have not yet been made final, but it sounds like SmartMoney subscribers will get free access to the site and might get downloadable versions of the articles.

It was a busy month for Acadia Principal Conservation Fund (APCVX).  On June one, the board cut its offensively high 12(b)1 fee in half (to an industry-standard 0.25%) and dropped its expense ratio by 10 basis points.  On June 25^th, they closed and liquidated the fund.  On the upside, the fund (mostly) preserved principal in its two years of existence.  On the downside, it made no money for its investors and had a negative real return.  Still, that doesn’t speak to the coherence of their planning.

Effective June 1, Bridgeway Aggressive Investors 2 (which I once dubbed “Bridgeway Not Quite So Aggressive Investors”) and Micro-Cap Limited both ceased to exist, having merged into Aggressive Investors 1 (BRAGX) and Ultra-Small Company (BRUSX).  Both of the remaining funds had long, brilliant runs before getting nailed in recent years by the apparent implosion of Bridgeway’s quant models.

Fido plans to merge Fidelity Advisor Stock Selector All Cap (FARAX) into Fidelity Stock Selector All Cap (FDSSX), which would lead to an expense reduction for the Advisor shareholders.  By year’s end, Fidelity will merge Mid Cap Growth (FSMGX) into Stock Selector Mid Cap Fund (FSSMX). They’ve already closed Mid Cap Growth in preparation for the move.

JPMorgan Asia Equity (JAEAX) is being liquidated on July 20, 2012.  It’s a bad fund that has seen massive outflows.  The managers, nonetheless, will remain with JPMorgan.

Nuveen Large Cap Value (FASKX) merges into Nuveen Dividend Value (FFEIX), also in October.  That’s a win for Large Cap shareholders: they get the same management team and a comparable strategy with lower expenses.

Oppenheimer Fixed Income Active Allocation (OAFAX) will merge into Oppenheimer Global Strategic Income (OPSIX) in early October, 2012.

Victory Value (SVLSX), which spiraled from mediocre to awful in the last two years, will liquidate at the end of August.  Friends and mourners still have access to Victory Special Value (SSVSX, a weak mid-cap growth fund) and Victory Established Value (VETAX, actually very solid mid-cap value fund).

I’m off to Washington for the Fourth of July week with family.  Preparation for that trip and ten days of often-hectic travel in June kept me from properly thanking several contributors (thanks!  A formal acknowledgement is coming!) and from completing profiles of a couple fascinating funds: Cook and Bynum (COBYX) and FPA International (FPIVX), one of which will be part of a major set of new profiles in August.

Until then, take care, keep cool and celebrate family!

Dear friends,

I’m intrigued by the number of times that really experienced managers have made one of two rueful observations to me:

“I make all my money in bear markets, I just don’t know it at the time”

 “I add most of my value when the market’s in panic.”

With the market down 6.2% in May, Morningstar’s surrogate for high-quality domestic companies down by nearly 9% and only one equity sector posting a gain (utilities were up by 0.1%), presumably a lot of investment managers are gleefully earning much of the $10 billion in fees that the industry will collect this year.

Long-Short Funds and the Long, Hot Summer

The investment industry seems to think you need a long-short fund, given the number of long-short equity funds that they’ve rolled-out in recent years.  They are now 70 long-short funds (a category distinct from market neutral and bear market funds, and from funds that occasionally short as a hedging strategy).  With impeccable timing, 36 were launched after we passed the last bear market bottom in March 2009.

Long-short fund launches, by year

The idea of a long-short fund is unambiguously appealing and is actually modeled after the very first hedge fund, A. W. Jones’s 1949 hedged fund.  Much is made of the fact that hedge funds have lost both their final “d” and their original rationale.  Mr. Jones reasoned that we could not reliably predict short-term market movements, but we could position ourselves to take advantage of them (or at least to minimize their damage).  He called for investing in net-long in the stock market, since it was our most reliable engine of “real” returns, but of hedging that exposure by betting against the least rational slices of the market.  If the market rose, your fund rose because it was net-long and invested in unusually attractive firms.  If the market wandered sideways, your fund might drift upward as individual instances of irrational pricing (the folks you shorted) corrected.  And if the market fell, ideally the stocks you shorted would fall the most and would offer a disproportionately large cushion.  A 30% short exposure in really mispriced stocks might, hypothetically, buffer 50% of a market slide.

Unfortunately, most long-short funds aren’t able to clear even the simplest performance hurdle, the returns of a conservative short-term bond index fund.  Here are the numbers:

In general, over the past five years, you’d have been much better off buying the Vanguard Short-Term Bond Index (VBISX), pocketing your 4.6% and going to bed rather than surrendering to the seductive logic and the industry’s most-sophisticated strategies.

Indeed, there is only one long-short fund that’s unambiguously worth owning: Robeco Long/Short Equity (BPLSX).  But it had a $100,000 investment minimum.  And it closed to new investors in July, 2010.

Nonetheless, the idea behind long/short investing makes sense.  In consequence of that, the Observer has begun a summer-long series of profiles of long-short funds that hold promise, some few that have substantial track records as mutual funds and rather more with short fund records but longer pedigrees as separate accounts or hedge funds.  Our hope is to identify one or two interesting options for you that might help you weather the turbulence that’s inevitably ahead for us all.

This month we begin by renewing the 2009 profile of a distinguished fund, Wasatch Long/ Short (FMLSX) and bringing a really promising newcomer, Aston / River Road Long- Short (ARLSX) onto your radar.

Our plans for the months ahead include profiles of Aston/MD Sass Enhanced Equity (AMBEX), RiverPark Long/Short Opportunity (RLSFX), RiverPark/Gargoyle Hedged Value (RGHVX), James Long-Short (JAZZX), and Paladin Long Short (PALFX).  If we’ve missed someone that you think of a crazy-great, drop me a line.  I’m open to new ideas.

FBR reaps what it sowed

FBR & Co. filed an interesting Regulation FD Disclosure with the SEC on May 30, 2012.  Here’s the text of the filing:

FBR & Co. (the “Company”) disclosed today that it has been working with outside advisors who are assisting the Company in its evaluation of strategic alternatives for its asset management business, including the sale of all or a portion of the business.

There can be no assurance that this process will result in any specific action or transaction. The Company does not intend to further publicly comment on this initiative unless the Company executes definitive deal documentation providing for a specific transaction approved by its Board of Directors.

FBR has been financially troubled for years, a fact highlighted by their decision in 2009 to squeeze out their most successful portfolio manager, Chuck Akre and his team.  In 1997, Mr. Akre became of founding manager of FBR Small Cap Growth – Value fund, which became FBR Small Cap Value, the FBR Small Cap, and finally FBR Focus (FBRVX). Merely saying that he was “brilliant” underestimates his stewardship of the fund.  Under his watch (December 1996 – August 2009), Mr. Akre turned $10,000 invested in the fund at inception to $44,000.  His average peer would have yielded $18,000.  Put another way: he added $34,000 to the value of your opening portfolio while the average midcap manager added $8,000.  Uhh: he added four times as much?

In recognition of which, FBR through the Board of Trustees whose sole responsibility is safeguarding the interests of the fund’s shareholders, offered to renew his management contract in 2009 – as long as he accepted a 50% pay cut. Mr. Akre predictably left with his analyst team and launched his own fund, Akre Focus (AKREX).  In a singularly classy move, FBR waited until Mr. Akre was out of town on a research trip and made his analysts an offer they couldn’t refuse.  Akre got a phone call from his analysts, letting him know that they’d resigned so that they could return to run FBR Focus.

Why?  At base, FBR was in financial trouble and almost all of their funds were running at a loss.  The question became how to maximize the revenue produced by their most viable asset, FBR Focus and the associated separate accounts which accounted for more than a billion of assets under management.  FBR seems to have made a calculated bet that by slashing the portion of fund fees going to Mr. Akre’s firm would increase their own revenues dramatically.  Even if a few hundred million followed Mr. Akre out the door, they’d still make money on the deal.

Why, exactly, the Board of Trustees found this in the best interests of the Focus shareholders (as opposed to FBR’s corporate interests) has never been explained.

How did FBR’s bet play out?  Here’s your clue: they’re trying to sell their mutual fund unit (see above).  FBR Focus’s assets have dropped by a hundred million or so, while Akre Focus has drawn nearly a billion in new assets.  FBR & Co’s first quarter revenues were $39 million in 2012, down from $50 million in 2011.  Ironically, FBR’s 10 funds – in particular, David Ellison’s duo – are uniformly solid performers which have simply not caught investors’ attention.  (Credit Bryan Switzky of the Washington Business Journal for first writing about the FD filing, “FBR & Co. exploring sale of its asset management business,” and MFWire for highlighting his story.)

Speaking of Fund Trustees

An entirely unremarkable little fund, Autopilot Managed Growth Fund (AUTOX), gave up the ghost in May.  Why?  Same as always:

The Board of Trustees of the Autopilot Managed Growth Fund (the “Fund”), a separate series of the Northern Lights Fund Trust, has concluded that it is in the best interests of the Fund and its shareholders that the Fund cease operations.  The Board has determined to close the Fund, and redeem all outstanding shares, on June 15, 2012.

Wow.  That’s a solemn responsibility, weighing the fate of an entire enterprise and acting selflessly to protect your fellow shareholders.

Sure would be nice if Trustees actually did all that stuff, but the evidence suggests that it’s damned unlikely.  Here’s the profile for Autopilot’s Board, from the fund’s most recent Statement of Additional Information.

A footnote adds that each Trustee oversees between two and 14 other funds.

How is it that Autopilot became 1% of a Trustee’s responsibilities?  Simple: funds buy access to prepackaged Boards of Trustees as part of the same arrangement  that provides the rest of their “back office” services.  The ability of a fund to bundle all of those services can dramatically reduce the cost of operation and dramatically increase the feasibility of launching an interesting new product.

So, “LMB” is overseeing the interests of the shareholders in 109 mutual funds, for which he’s paid $65,000.  Frankly, for LMB and his brethren, as with the FBR Board of Trustees (see above), this is a well-paid, part-time job.  His commitment to the funds and their shareholders might be reflected by the fact that he’s willing to pretend to have time to understand 100 funds or by the fact that not one of those hundred has received a dollar of his own money.

It is, in either case, evidence of a broken system.

Trust But Verify . . .

Over and over again.

Large databases are tricky creatures, and few are larger or trickier than Morningstar’s.  I’ve been wondering, lately, whether there are better choices than Leuthold Global (GLBLX) for part of my non-retirement portfolio.  Leuthold’s fees tend to be high, Mr. Leuthold is stepping away from active management and the fund might be a bit stock-heavy for my purposes.  I set up a watchlist of plausible alternatives through Morningstar to see what I might find.

What I expected to find was the same data on each page, as was the case with Leuthold Global itself.

What I found was that Morningstar inconsistently reports the expense ratios for five of seven funds, with different parts of the site offering different expenses for the same fund.  Below is the comparison of the expense ratio reported on a fund’s profile page at Morningstar and at Morningstar’s Fund Spy page.

I called and asked about the discrepancy.  The best explanation that Morningstar’s rep had was that Fund Spy updated monthly and the profile daily.  When I asked how that might explain a 50% discrepancy in expenses, which don’t vary month-to-month, the answer was an honest: “I don’t know.”

The same problem appeared when I began looking at portfolio turnover data, occasioned by the question “does any SCV fund have a lower turnover than Huber Small Cap?”   Morningstar’s database reported 15 such funds, but when I clicked on the linked profile for each fund, I noticed errors in almost half of the reports.

Just to be clear: these sorts of errors, while annoying, might well be entirely unavoidable.  Morningstar’s database is enormous – they track 375,000 investment products each day – and incredibly complex.  Even if they get 99.99% accuracy, they’re going to create thousands of errors.

One responsibility lies with Morningstar to clear up, as soon as is practical, the errors that they’ve learned of.  A greater responsibility lies with data users to double-check the accuracy of the data upon which they’re basing their decisions or forming their judgments.  It’s a hassle but until data providers become perfectly reliable, it’s an essential discipline.

Proof that Time Travel is Possible: The SEC’s Current Filings

Each day, the Securities and Exchange Commission posts all of their current filings on their website.  For example, when a fund company files a new prospectus or a quarterly portfolio list, it appears at the SEC.  Each filing contains a date.  In theory, the page for May 22 will contain filings all of which are dated May 22.

How hard could that be?

Here’s a clue: of 187 entries for May 22, 25 were actually documents filed on May 22^nd.  That’s 13.3%.  What are the other 86.7% of postings?  137 of them are filings originally made on other days or in other years.  25 of them are duplicate filings that are dated May 22.

I’ve regularly noted the agency’s whimsical programming.  This month I filed two written inquiries with them, asking why this happens.  The first query provoked no response for about 10 days, so I filed the second.  That provoked a voicemail message from an SEC attorney.  The essence of her answer:

1. I don’t know
2. Other parts of the agency aren’t returning our phone calls
3. But maybe they’ll contact you?

Uhh … no, not so far.  Which leads me to the only possible conclusion: time vortex centered on the SEC headquarters.  To those of us outside the SEC, it was May 22, 2012.  To those inside the agency, all the dates in recent history had actually converged and so it was possible that all 15 dates recorded on the May 22 page were occurring simultaneously. 

And now a word from Chip, MFO’s technical director: “dear God, guys, hire a programmer.  It’s not that blinkin’ hard.”

Launch Alert 1: Rocky Peak Small Cap Value

On April 2, Rocky Peak Capital Management launched Rocky Peak Small Cap Value (RPCSX).  Rocky Peak was founded in 2011 by Tom Kerr, a Partner at Reed Conner Birdwell and long-time co-manager of CNI Charter RCB Small Cap Value fund.  He did well enough with that fund that Litman Gregory selected him as one of the managers of their Masters Smaller Companies fund (MSSFX).

While RPCSX doesn’t have enough of a track record to yet warrant a full profile, the manager’s experience and track record warrant adding it to a watch-list.  His plan is to hold 35-40 small cap stocks, many that pay dividends, and to keep risk-management in the forefront of his discipline.  Among the more interesting notes that came out of our hour-long conversation was (1) his interest in monitoring the quality of the boards of directors which should be reflected in both capital allocation and management compensation decisions and (2) his contention that there are three distinct sub-sets of the small cap universe which require different valuation strategies.  “Quality value” companies often have decades of profitable operating history and would be attractive at a modest discount to fair value.  “Contrarian value” companies, which he describes as “Third Avenue-type companies” are often great companies undergoing “corporate events” and might require a considerably greater discount.  “Smaller unknown value” stocks are microcap stocks with no more than one analyst covering them, but also really good companies (e.g. Federated Investors or Duff & Phelps).  I’ll follow it for a bit.

The fund has a $10,000 investment minimum and 1.50% expense ratio, after waivers.

Launch Alert 2: T. Rowe Price Emerging-Markets Corporate Bond Fund

On May 24, T. Rowe Price launched Emerging Markets Corporate Bond (TRECX), which will be managed by Michael Conelius, who also manages T. Rowe Price Emerging Markets Bond (PREMX).  PREMX has a substantial EM corporate bond stake, so it’s not a new area for him.  The argument is that, in a low-yield world, these bonds offer a relatively low-risk way to gain exposure to financially sound, quickly growing firms.  The manager will mostly invest in dollar-denominated bonds as a way to hedge currency risks and will pursue theme-based investing (“rise of the Brazilian middle class”) in the same way many e.m. stock funds do.  The fund has a $2500 investment minimum, reduced to $1000 for IRAs and will charge a 1.15% expense ratio, after waivers.  That’s just above the emerging-markets bond category average of 1.11%, which is a great deal on a fund with no assets yet.

Launch Alert 3: PIMCO Short Asset Investment Fund

On May 31, PIMCO launched this fund has an alternative to a money-market fund.  PIMCO presents the fund as “a choice for conservative investors” which will offer “higher income potential than traditional cash investments.”  Here’s their argument:

Yields remain compressed, making it difficult for investors to obtain high-quality income without taking on excess risk. PIMCO Short Asset Investment Fund offers higher income potential than traditional cash investments by drawing on multiple high-quality fixed income opportunity sets and PIMCO’s expertise.

The manager, Jerome Schneider, has access to a variety of higher-quality fixed-income products as well as limited access to derivatives.  He’s “head of [their] short-term funding desk and is responsible for supervising all of PIMCO’s short-term investment strategies.”  The “D” class shares trade under the symbol PAIUX, have a $1000 minimum, and expenses of 0.59% after waivers.  “D” shares are generally available no-load/NTF at a variety of brokerages.

Four Funds and Why They’re Really Worth Your While

Each month, the Observer profiles between two and four mutual funds that you likely have not heard about, but really should have.  Our “Most intriguing new funds: good ideas, great managers” 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. Two intriguing newer funds are:

Aston / River Road Long-Short (ARLSX). There are few successful, time-tested long-short funds available to retail investors.  Among the crop of newer offerings, few are more sensibly-constructed, less expensive or more carefully managed that ARLSX seems to be.  It deserves attention.

Osterweis Strategic Investment (OSTVX). For folks who remain anxious about the prospects of a static allocation in a dynamic world, OSTVX combines the virtues of two highly-flexible Osterweis funds in a single package.  The fund remains a very credible choice along with stalwarts such as PIMCO All-Asset (PASDX) and FPA Crescent (FPACX).  This is an update to our May 2011 profile.  We’ve changed styles in presenting our updates.  We’ve placed the new commentary in a text box but we’ve also preserved all of the original commentary, which often provides a fuller discussion of strategies and the fund’s competitive universe.  Feel free to weigh-in on whether this style works for you.

The “stars in the shadows” are all time-tested funds, many of which have everything except shareholders.

Huber Small Cap Value (HUSIX). Huber Small Cap is not only the best small-cap value fund of the past three years, it’s the extension of a long-practice, intensive and successful discipline with a documented public record.  For investors who understand that even great funds have scary stretches and are able to tolerate “being early” as a condition of long-term outperformance, HUSIX justifies as close a look as any fund launched in the past several years.

Wasatch Long Short (FMLSX).  For folks interested in access to a volatility-controlled equity fund, the case for FMLSX was – and is – remarkably compelling.  There’s only one demonstrably better fund in its class (BPLSX) and you can’t get into it.  FMLSX is near the top of the “A” list for those you can consider. This is an update to our 2009 profile.

The Best of the Web: Retirement Income Calculators

Our fourth “Best of the Web” feature focuses on retirement income calculators.  These are software programs, some quite primitive and a couple that are really smooth, that help answer two questions that most of us have been afraid to ask:

1. How much income will a continuation of my current efforts generate?

and

1. Will it be enough?

The ugly reality is that for most Americans, the answers are “not much” and “no.”  Tom Ashbrook, host of NPR’s On Point, describes most of us as “flying naked” toward retirement.  His May 29 program entitled “Is the 401(k) Working?” featured Teresa Ghilarducci, an economics professor at The New School of Social Research, nationally-recognized expert in retirement security and author of When I’m Sixty-Four: The Plot against Pensions and the Plan to Save Them (Princeton UP, 2008).  Based on her analysis of the most recent data, it “doesn’t look good at all” with “a lot of middle-class working Americans [becoming] ‘poor’ or ‘near-poor’ at retirement.”

Her data looks at the investments of folks from 50-64 and finds that most, 52%, have nothing (as in: zero, zip, zilch, nada, the piggy bank is empty).   In the top quarter of wage earners, folks with incomes above $75,000, one quarter of those in their 50s and 60s have no retirement savings.  Among the bottom quarter, 77% have nothing and the average account value for those who have been saving is $10,000.

The best strategy is neither playing the lottery nor pretending that it won’t happen.  The best strategy is a realistic assessment now, when you still have the opportunity to change your habits or your plans. The challenge is finding a guide that you can rely upon.  Certainly a good fee-only financial planner would be an excellent choice but many folks would prefer to turn to the web answers.  And so this month we trying to ferret out the best free, freely-available retirement income calculators on the web.

MFO at MIC

I’m pleased to report that I’ll be attending The Morningstar Investment Conference on behalf of the Observer.  This will be my first time in attendance.  I’ve got a couple meetings already scheduled and am looking forward to meeting some of the folks who I’ve only known through years of phone conversations and emails.

I’m hopeful of meeting Joan Rivers – I presume she’ll be doing commentary on the arrival of fashionistas Steve Romick, Will Danoff & Brian Rogers – and am very much looking forward to hearing from Jeremy Grantham in Friday’s keynote.  If folks have other suggestions for really good uses of my time, I’d like to hear from you.  Too, if you’d like to talk with me about the Observer and potential story leads, I’d be pleased to spend the time with you.

There’s a cheerful internal debate here about what I should wear.  Junior favors an old-school image for me: gray fedora with a press card in the hatband, flash camera and spiral notebook.   (Imagine a sort of balding Clark Kent.)  Chip, whose PhotoShop skills are so refined that she once made George W. look downright studious, just smiles and assures me that it doesn’t matter what I wear.  (Why does a smile and the phrase “Wear what you like and I’ll take care of everything” make me so apprehensive? Hmmm…)

Perhaps the better course is just to drop me a quick note if you’re going to be around and would like to chat.

Briefly noted . . .

Dreyfus has added Vulcan Value Partners as a sixth subadvisor for Dreyfus Select Managers Small Cap Value (DMVAX).  Good move!  Our profile described Vulcan Value Partners Small Cap fund as “a solid, sensible, profitable vehicle.”  Manager C.T. Fitzpatrick spent 17 years managing with Longleaf Partners before founding the Vulcan Value Partners.

First Eagle has launched First Eagle Global Income Builder (FEBAX) in hopes that it will provide “a meaningful but sustainable income stream across all market environments.”  Like me, they’re hopeful of avoiding “permanent impairment of capital.”  The management team overlaps their four-star High Yield Fund team.  The fund had $11 million on opening day and charges 1.3%, after waivers, for its “A” shares.

Vanguard Gets Busy

In the past four weeks, Vanguard:

Closed Vanguard High-Yield Corporate (VWEHX), closed to new investors.  The fund, subadvised by Wellington, sucked in $1.5 billion in new assets this year.  T. Rowe Price closed its High Yield (PRHYX) fund in April after a similar in-rush.

Eliminated the redemption fee on 33 mutual funds

Cut the expense ratios for 15 fixed-income, diversified-equity, and sector funds and ETFs.

Invented a calorie-free chocolate fudge brownie.

Osterweis, too

Osterweis Strategic Income (OSTIX) has added another fee breakpoint.  The fund will charge 0.65% on assets over $2.5 billion.  Given that the fund is a $2.3 billion, that’s worthwhile.  It’s a distinctly untraditional bond fund and well-managed.  Because its portfolio is so distinctive (lots of short-term, higher-yielding debt), its peer rankings are largely irrelevant.

At Least They’re Not in Jail

Former Seligman Communications and Information comanager Reema Shah pled guilty to securities fraud and is barred from the securities industry for life. She traded inside information with a Yahoo executive, which netted a few hundred thousand for her fund.

Authorities in Hong Kong have declined to pursue prosecution of George Stairs, former Fidelity International Value (FIVLX) manager.  Even Fido agrees that Mr. Stairs “did knowingly trade on non-public sensitive information.” Stairs ran the fund, largely into the ground, from 2006-11.

Farewells

Henry Berghoef, long-time co-manager of Oakmark Select (OAKLX), plans to retire at the end of July.

Andrew Engel, who helped manage Leuthold’s flagship Core Investment(LCORX) and Asset Allocation(LAALX) funds, died on May 9, at the age of 52.  He left behind a wife, four children and many friends.

David Williams, who managed Columbia Value & Restructuring (EVRAX, which started life as Excelsior Value & Restructuring), has retired after 20 years at the helm. The fund was one of the first to look beyond simple “value” and “growth” categories and into other structural elements in constructing its portfolio.

Closings

Delaware Select Growth (DVEAX) will close to new investors at the beginning of June, 2012.

Franklin Double Tax-Free Income (FPRTX) will soft-close in mid-June then hard-close at the beginning of August.

Goldman Sachs Mid Cap Value (GCMAX) will close to new investors at the end of July. Over the past five years the fund has been solidly . .. uh, “okay.”  You could do worse.  It doesn’t suck often. Not clear why, exactly, that justifies $8 billion in assets.

Old Wine, New Bottles

Artisan Growth Opportunities (ARTRX) is being renamed Artisan Global Opportunities.  The fund is also pretty global and the management team is talented and remaining, so it’s mostly a branding issue.

BlackRock Multi-Sector Bond Portfolio (BMSAX) becomes BlackRock Secured Credit Portfolio in June.  It also gets a new mandate (investing in “secured” instruments such as bank loans) and a new management team.  Presumably BlackRock is annoyed that the fund isn’t drawing enough assets (just $55 million after two years).  Its performance has been solid and it’s relatively new, so the problem mostly comes down to avarice.

Likewise BlackRock Mid-Cap Value Equity (BMCAX) will be revamped into BlackRock Flexible Equity at the end of July.  After its rebirth, the fund will become all-cap, able to invest across the valuation spectrum and able to invest large chunks into bonds, commodities and cash.  The current version of the fund has been consistently bad at everything except gathering assets, so it makes sense to change managers.  The eclectic new portfolio may reflect its new manager’s background in the hedge fund world.

Buffalo Science & Technology (BUFTX) will be renamed Buffalo Discovery, effective June 29, 2012.

Goldman Sachs Ultra-Short Duration Government (GSARX) is about to become Goldman Sachs High Quality Floating Rate and its mandate has been rewritten to focus on foreign and domestic floating-rate government debt.

Invesco Small Companies (ATIAX) will be renamed Invesco Select Companies at the beginning of August.

Nuveen is reorganizing Nuveen Large Cap Value (FASKX) into Dividend Value (FFEIX), pending shareholder approval of course, next autumn.  The recently-despatched management team managed to parlay high risk and low returns into a consistently dismal record so shareholders are apt to agree.

Perritt Emerging Opportunities (PREOX) has been renamed Perritt Ultra MicroCap.  The fund’s greatest distinction is that it invests in smaller stocks, on whole, than any other fund and their original name didn’t capture that reality.  The fund is a poster child for “erratic,” finishing either in the top 10% or the bottom 10% of small cap funds almost every year. Its performance roughly parallels that of Bridgeway’s two “ultra-small company” funds.

Nuveen Tradewinds Global All-Cap (NWGAX) and Nuveen Tradewinds Value Opportunities (NVOAX) have reopened to new investors after the fund’s manager and a third of assets left.

Off to the Dustbin of History

AllianceBernstein Greater China ’97 (GCHAX) will be liquidated in early June. It’s the old story: high expenses, low returns, no assets.

Leuthold Hedged Equity will liquidate in June 2012, just short of its third anniversary.  The fund drew $4.7 million between two share clases and the Board of Trustees determined it was in the best interests of shareholders to liquidate.  Given the fund’s consistent losses – it turned $10,000 into $7900 – and high expenses, they’re likely right.  The most interesting feature of the fund is that the Institutional share class investors were asked to pony up $1 million to get in, and were then charged higher fees than were retail class investors.

Lord Abbett Large Cap (LALAX) mergers into Lord Abbett Fundamental Equity (LDFVX) on June 15.

Oppenheimer plans to merge Oppenheimer Champion Income (OPCHX) and Oppenheimer Fixed Income Active Allocation (OAFAX) funds will merge into Oppenheimer Global Strategic Income (OPSIX) later this year.  That’s the final chapter in the saga of two funds that imploded (think: down 80%) in 2008, then saw their management teams canned in 2009. The decision still seems odd: OPCHX has a half-billion in assets and OAFAX is a small, entirely solid fund-of-funds.

In closing . . .

Thanks to all the folks who’ve provided financial support for the Observer this month.  In addition to a handful of friends who provided cash contributions, either via PayPal or by check, readers purchased almost 210 items through the Observer’s Amazon link.  Thanks!  If you have questions about how to use or share the link, or if you’re just not sure that you’re doing it right, drop me a line.

It’s been a tough month, but it could be worse.  You could have made a leveraged bet on the rise of Latin American markets (down 25% in May).  For folks looking for sanity and stability, though, we’ll continue in July our summer-long series of long-short funds, but we’ll also update the profiles of RiverPark Short-Term High Yield (RPHYX), a fund in which both Chip and I invest, and ING Corporate Leaders (LEXCX), the ghost ship of the fund world.  It’s a fund whose motto is “No manager? No problem!”  We’re hoping to have a first profile of Seafarer Overseas Growth & Income (SFGIX) and Conestoga Small Cap (CCASX).

Until then, take care and keep cool!

Dear friends,

April started well, with the super-rich losing more money in a week than I can even conceive of.  Bloomberg reports that the 20 wealthiest people on Earth lost a combined $9.1 billion in the first week of April as renewed concerns that Europe’s debt crisis might worsen drove the Standard & Poor’s 500 Index to its largest decline of 2012.  Bill Gates, a year older than me, lost $558.1 million on the week. (World’s Richest Lose $9 Billion as Global Markets Decline).

I wonder if he even noticed?

Return of the Giants

Mark Jewell, writing for the AP, celebrated the resurgence of the superstar managers (Star Fund Managers Recover Quickly from Tough 2011).  He writes, “A half dozen renowned managers are again beating their peers by big margins, after trailing the vast majority last year. Each is a past winner of Morningstar’s manager of the year award in his fund category, and four have been honored as top manager of the decade.”  Quick snapshots of Berkowitz, Miller and Bill Gross follow, along with passing mention of Brent Lynn of Janus Overseas Fund (JDIAX), Michael Hasenstab of Templeton Global Bond (TPINX) and David Herro of Oakmark International (OAKIX).

A number of funds with very good long-term records were either out-of-step with the market or made bad calls in 2011, ending them in the basement.  There are 54 four- or five-star rated funds that tanked in 2011; that is, that trailed at least 90% of their peers.  Of those, 23 – 43% of the group – rebounded sharply this year and ended up with 10% returns for the year, through 4/30/11.  The rest of the worst-to-first roster:

American Century Zero Coupon 2015 and 2020

Fairholme

Federated International Leader

Jones Villalta Opportunity

SEI Tax-Exempt Tax-Advantaged

Fidelity Advisor Income Replacement 2038, 2040 and 2042

JHancock3 Leveraged Companies

Templeton Global Total Return CRM International Opportunity

Fidelity Capital & Income

REMS Real Estate Value Opportu

Templeton Global Bond and Maxim Templeton Global Bond

Catalyst/SMH Total Return Income

Fidelity Leveraged Company Stock

ING Pioneer High Yield

Templeton International Bond

API Efficient Frontier Income

Hartford Capital Appreciation

PIMCO Total Return III

Before we become too comfortable with the implied “return to normal, we really can trust The Great Men again,” we might also look at the roster of great funds that got hammered in 2011 and are getting hammered again in 2012.  Brian Barash at Cambiar Aggressive Value, Leupp and Ronco (no, not the TV gadgets guy) at Lazard U.S. Realty Income Open, The “A” team at Manning & Napier Pro-Blend Maximum Term and Whitney George & company at Royce Micro-Cap range from the bottom 2 – 25% of their peer groups.

Other former titans – Ariel (ARGFX), Clipper (CFIMX, a rare two-star “Gold” fund), Muhlenkamp Fund (MUHLX), White Oak Growth (WOGSX) – seem merely stuck in the mud.

“A Giant Sucking Sound,” Investor Interest in Mutual Funds . . .

and a lackadaisical response from the mutual fund community.

Apropos my recent (and ongoing) bout with the flu, we’re returning to the odd confluence of the Google Flu tracker and the fate of the fund industry.  In October 2011, we posted our first story using the Google Trends data, the same data that allows Google to track incidence of the flu by looking at the frequency and location of flu-related Google searches.  In that article, we included a graph, much like the one below, of public interest in mutual funds.  Here was our original explanation:

That trend line reflects an industry that has lost the public’s attention.  If you’ve wondered how alienated the public is, you could look at fund flows – much of which is captive money – or you could look at a direct measure of public engagement.   The combination of scandal, cupidity, ineptitude and turmoil – some abetted by the industry – may have punched an irreparable hole in industry’s prospects.

This is a static image of searches in the U.S. for “mutual funds,” from January 2004 to April 2012.

And it isn’t just a retreat from investing and concerns about money.  We can separately track the frequency of “mutual funds” against all finance-related searches, which is shown on this live chart:

In brief, the industry seems to have lost about 75% of its mindshare (sorry, it’s an ugly marketing neologism for “how frequently potential buyers think about you”).

That strikes me as “regrettable” for Fidelity and “potentially fatal” for small firms whose assets haven’t yet reached a sustainable level.

I visit a lot of small fund websites every month, read more shareholder communications than I care to recall and interview a fair number of managers.  Here’s my quick take: a lot of firms materially impair their prospects for survival by making their relationship with their shareholders an afterthought.  These are the folks who take “my returns speak for themselves” as a modern version of “Build a better mousetrap, and the world will beat a path to your door” (looks like Emerson actually did say it, but in a San Francisco speech rather than one of his published works).

In reality, your returns mumble.  You’re one of 20,000 datapoints and if you’re not a household name, folks aren’t listening all that closely.

According to Google, the most popular mutual-fund searches invoke “best, Vanguard (three variants), Fidelity (three variants), top, American.”

On whole, how many equity managers do you suppose would invest in a company that had no articulated marketing strategy or, at best, mumbled about the quality of their mousetraps?

And yet, this month alone, in the course of my normal research, I dealt with four fund companies that don’t even have working email links on their websites and several more whose websites are akin to a bunch of handouts left on a table (one or two pages, links to mandatory documents and a four-year-old press release).  And it’s regrettably common for a fund’s annual report to devote no more than a paragraph or two to the fund itself.

There are small operations which have spectacularly rich and well-designed sites.  I like the Observer’s design, all credit for which goes to Anya Zolotusky of Darn Good Web Design.  (Anya’s more interesting than you or me; you should read her bio highlights on the “about us” page.)  I’ve been especially taken by Seafarer Funds new site.  Three factors stand out:

• The design itself is clear, intuitive and easily navigated;
• There’s fresh, thoughtful content including manager Andrew Foster’s responses to investor questions; and,
• Their portfolio data is incredibly rich, which implies a respect for the active intelligence and interest of their readers.

Increasingly, there are folks who are trying to make life easier for small to mid-sized firms.  In addition to long established media relations firms like Nadler & Mounts or Kanter & Company, there are some small firms that seem to be seeking out small funds.  I’ve had a nice exchange with Nina Eisenman of FundSites about her experience at the Mutual Fund Education Alliance’s eCommerce show.  Apparently some of the big companies are designing intriguing iPad apps and other mobile manifestations of their web presence while representatives of some of the smaller companies expressed frustration at knowing they needed to do better but lacking the resources.

“What we’re trying to do with FundSites is level the playing field so that a small or mid-sized fund company with limited resources can produce a website that provides investors and advisors with the kind of relevant, timely, compliant information the big firms publish. Seems like there is a need for that out there.”

I agree but it really has to start at the top, with managers who are passionate about what they’re doing and about sharing what they’ve discovered.

Barron’s on FundReveal: Meh

Speaking of mousetraps, Barron’s e-investing writer Theresa Carey dismissed FundReveal as “a lesser mousetrap” (04/21/12). She made two arguments: that the site is clunky and that she didn’t locate any commodity funds that she couldn’t locate elsewhere.  Her passage on one of the commodity funds simultaneously revealed both the weakness in her own research and the challenge of using the FundReveal system.  She writes:

The top-ranked fund from Fidelity over the past three years is the Direxion Monthly Commodity Bull 2X (DXCLX). While it gets only two Morningstar stars, FundReveal generally likes it, awarding a “B” risk-return rating, second only to “A.” Scouring its 20,000-fund database, FundReveal finds just 61 funds that performed better than the Fidelity pick. (emphasis mine)

Here’s the problem with Theresa’s research: FundReveal does not rank funds on a descending scale of A, B, C, and D. Each of the four quadrants in their system gets a letter designation: “A” is “higher return, lower risk” and “B” is higher return, higher risk.”  Plotted in the “B” quadrant are many funds, some noticeably riskier than the others.  Treating “B” as if it were a grade on a junior high report card is careless and misleading.

And I’m not even sure what she means by “just 61 funds … performed better” since she’s looking at simple absolute returns over three years or FundReveal’s competing ADR calculation.  In either case, we’d need to know why that’s a criticism.  Okay, they found 61 superior funds.  And so … ?

Her article does simultaneously highlight a challenge in using the FundReveal system.  For whatever its analytic merits, the site is more designed for folks who love spreadsheets than for the average investor and the decision to label the quadrants with A through D does carry the risk of misleading casual users.

The Greatest Fund that’s not quite a Fund Anymore

In researching the impending merger of two Firsthand Technology funds (recounted in our “In Brief” section), I came across something that had to be a typo: a fund that had returned over 170% through early April.  As in, 14 weeks, 170% returns.

No typo, just a familiar name on a new product.  Firsthand Technology Value Fund, despite having 75% of their portfolio in cash (only $15.5 of $68.4 million was invested), peaked at a 175% gain.

What gives?  At base, irrational exuberance.  Firsthand Technology Value was famous in the 1990s for its premise – hire the guys who work in Silicon Valley and who have firsthand knowledge of it to manage your investments – and its performance.  In long-ago portfolio contests, the winner routinely was whoever had the most stashed in Tech Value.

The fund ran into performance problems in the 2000s (duh) and legal problems in recent years (related to the presence of too many illiquid securities in the portfolio).  As a result, it transformed into a closed-end fund investing solely in private securities in early 2011.  It’s now a publicly-traded venture capital fund that invests in technology and cleantech companies that just completed a follow-on stock offering. The fund, at last report, held stakes in just six companies.  But when one of those companies turned out to be Facebook, a bidding frenzy ensued and SVVC’s market price lost all relationship to the fund’s own estimated net asset value.  The fund is only required to disclose its NAV quarterly.  At the end of 2011, it was $23.92.  At the end of the first quarter of 2012, it was $24.56 per share.

Right: NAV up 3%, market price up 175%.

In April, the fund dropped from $46.50 to its May 1 market price, $26.27.  Anyone who held on pocketed a gain of less than 10% on the year, while folks shorting the stock in April report gains of 70% (and folks who sold and ran away, even more).

It’s a fascinating story of mutual fund managers returning to their roots and investors following their instincts; which is to say, to rush off another cliff.

Four Funds and Why They’re Really Worth Your While

Each month, the Observer profiles between two and four mutual funds that you likely have not heard about, but really should have.  Our “Most intriguing new funds: good ideas, great managers” do not yet have a long track record, but 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. Two intriguing newer funds are:

Amana Developing World Fund (AMDWX): Amana, which everyone knew was going to be cautious, strikes some as near-comatose.  We’ve talked with manager Nick Kaiser about his huge cash stake and his recent decision to begin deploying it.  This is an update on our May 2011 profile.

FMI International (FMIJX): For 30 years, FMI has been getting domestic stock investing right.  With the launch of FMI International, they’ve attempted to “extend their brand” to international stocks.  So far it’s been performing about as expected, which is to say, excellently

The “stars in the shadows” are all time-tested funds, many of which have everything except shareholders.

Artisan Global Value (ARTGX): can you say, “it’s about time”?  While institutional money has long been attracted to this successful, disciplined value strategy, retail investors began to take notice just in the past year. Happily, the strategy has plenty of capacity remaining.  This is an update on our May 2011 profile.

LKCM Balanced (LKBAX): LKCM Balanced (with Tributary Balanced, Vanguard Balanced Index and Villere Balanced) is one of a small handful of consistently, reliably excellent balanced funds.  The good news for prospective shareholders is that LKCM slashed the minimum investment this year, from $10,000 to $2,000, while continuing its record of great, risk-conscious performance.

The Best of the Web: Curated Financial News Aggregators

Our third “Best of the Web” feature focuses on human-curated financial news aggregators.  News aggregators such as Yahoo! News and Google News are wildly popular.  About a third of news users turn to them and Google reports about 100,000 clicks per minute at the Google News site.

The problem with aggregators such as Google is that they’re purely mechanical; the page content is generated by search algorithms driven by popularity more than the significance of the story or the seriousness of the analysis.

In this month’s “Best of the Web,” Junior and I test drove a dozen financial news aggregators, but identified only two that had consistently excellent, diverse and current content.  They are:

Abnormal Returns: Tadas Viskanta’s six year old venture, with its daily linkfests and frequent blog posts, is for good reason the web’s most widely-celebrated financial news aggregator.

Counterparties: curated by Felix Salman and Ryan McCarthy, this young Reuter’s experiment offers an even more eclectic mix than AR and does so with an exceptionally polished presentation.

As a sort of mental snack, we also identified two cites that couldn’t quite qualify here but that offered distinctive, fascinating resources: Smart Briefs, a sort of curated newsletter aggregator and Fark, an irreverent and occasionally scatological collection of “real news, real funny.”  You can access Junior’s column from “The Best” tab or here.  Columns in the offing include coolest fund-related tools, periodic tables (a surprising number), and blogs run by private investors.

We think we’ve done a good and honest job but Junior, especially, would like to hear back from readers about how the feature works for you and how to make it better, about sites we’re missing and sites we really shouldn’t miss.  Drop us a line. We read and appreciate everything and respond to as much as we can.

A “Best of” Update: MoneyLife with Chuck Jaffe Launches

Chuck Jaffe’s first episode of the new MoneyLife show aired April 30^th. The good news: it was a fine debut, including a cheesy theme song and interviews with Bill O’Neil, founder of Investor’s Business Daily and originator of the CAN-SLIM investing system, and Tom McIntyre.  The bad news: “our Twitter account was hijacked within the 48 hours leading up to the show, which is one of many adventures you don’t plan for as you start something like this.”  Assuming that Chuck survives the excitement of his show’s first month, Junior will offer a more-complete update on June 1.  For now, Chuck’s show can be found here.

Briefly noted …

Steward Capital Mid-Cap Fund (SCMFX), in a nod to fee-only financial planners, dropped its sales load on April 2.  Morningstar rates it as a five-star fund (as of 4/30/12) and its returns over the past 1-, 3- and 5-year periods are among the best of any mid-cap core fund.  The investment minimum is $1000 and the expense ratio is 1.5% on $35 million in assets.

Grandeur Peak Global Advisors recently passed $200 million in assets under management.  Roughly $140M is in Global Opportunities (GPGOX/GPGIX) and $60M is in International Opportunities (GPIOX/GPIIX).  That’s a remarkable start for funds that launched just six months ago.

Calamos is changing the name of its high-yield fixed-income fund to Calamos High Income from Calamos High Yield (CHYDX) on May 15, 2012 because, without “income” in the name investors might think the fund focused on high-yielding corn hybrids (popular here in Iowa).

T. Rowe Price High Yield (PRHYX) and its various doppelgangers closed to new investors on April 30, 2012.

Old Mutual Heitman REIT is in the process of becoming the Heitman REIT Fund, but I’m not sure why I’d care.

ING’s board of directors approved merging ING Index Plus SmallCap (AISAX) into ING Index Plus MidCap (AIMAX) on or about July 21, 2012. The combined funds will be renamed ING SMID Cap Equity. In addition, ING Index Plus LargeCap (AELAX) was approved to merge into ING Corporate Leaders 100 (IACLX) on or about June 28, 2012.  Let’s note that ING Corporate Leaders 100 is a different, and distinctly inferior fund, than ING Corporate Leaders Trust “B”.

Huntington New Economy Fund (HNEAX), which spent most of the last decade in the bottom 5-10% of mid cap growth funds, is being merged into Huntington Mid Corp America Fund (HUMIX) in May 2012.  HUMIX is less expensive than HNEAX, though still grievously overpriced (1.57%) for its size ($139 million in assets) and performance (pretty consistently below average).

The Firsthand Funds are moving to merge Firsthand Technology Leaders Fund (TLFQX) into Firsthand Technology Opportunities Fund TEFQX). The investment objective of TLF is identical to that of TOF and the investment risks of TLF are substantially similar to those of TOF.  TLF is currently managed solely by Kevin Landis (TLF was co-managed by Kevin Landis and Nick Schwartzman from April 30, 2010 to December 13, 2011).

The $750 million Delaware Large Cap Value Fund is being merged into the $750 million Delaware Value® Fund, which “does not require shareholder approval, and you are not being asked to vote.”

The reorganization has been carefully reviewed by the Trust’s Board of Trustees. The Trustees, most of whom are not affiliated with Delaware Investments®, are responsible for protecting your interests as a shareholder. The Trustees believe the reorganization is in the best interests of the Funds based upon, among other things, the following factors:

Shareholders of both Funds could benefit from the combination of the Funds through a larger pool of assets, including realizing possible economies of scale . . .

Uhhh . . . notes to the “Board of Trustees [who] are responsible for protecting [my] interests”: (1) it’s “who,” not “whom.”  (2) If Delaware Value’s asset base is doubling and you’re anticipating “possible economies of scale,” why didn’t you negotiate a decrease in the fund’s expense ratio?

Snow Capital All Cap Value Fund (SNVAX) is being closed and liquidated as of the close of business on May 14, 2012.  The fund, plagued by high expenses and weak performance, had attracted only $3.7 million despite the fact that the lead manager (Richard Snow) oversees $2.6 billion.

Likewise,  Dreyfus Dynamic Alternatives Fund and Dreyfus Global Sustainability Fund were both liquidated in mid-April.

Forward seems to be actively repositioning itself away from “vanilla” products and into more-esoteric, higher cost funds.  In March, Forward Banking and Finance Fund and Forward Growth Fund were sold to Emerald Advisers, who had been running the funds for Forward, rebranded as Emerald funds.  Forward’s board added International Equity to the dustbin of history on April 30, 2012 and Mortgage Securities in early 2011.  Balancing off those departures, Forward also launched four new funds in the past 12 months: Global Credit Long/Short, Select Emerging Markets Dividend, Endurance Long/Short, Managed Futures and Commodity Long/Long.

On April 17, 2012, the Board of Trustees of the ALPS ETF Trust authorized an orderly liquidation of the Jefferies|TR/J CRB Wildcatters Exploration & Production Equity Fund (WCAT), which will be completed by mid-May.  The fund drew fewer than $10 million in assets and managed, since inception, to lose a modest amount for its (few) investors.

Effective on June 5, 2012, the equity mix in Manning & Napier Pro-Blend Conservative Term will include a greater emphasis on dividend-paying common stocks and a larger allocation to REITs and REOCs. Their other target date funds are shifting to a modestly more conservative asset allocation.

Nice work if you can get it.  Emily Alejos and Andrew Thelen were promoted to become the managers of Nuveen Tradewinds Global All-Cap Plus Fund of April 13.  The fund,  after the close of business on May 23, 2012, is being liquidated with the proceeds sent to the remaining shareholders.  Nice resume line and nothing they can do to goof up the fund’s performance.

News Flash: on April 27, 2012 Wilmington Multi-Manager International Fund (GVIEX), a fund typified by above average risks and expenses married with below average returns, trimmed its management team from 27 managers down to a lean and mean 26 with the departure of Amanda Cogar.

In closing . . .

Thanks to all the folks who supported the Observer in the months just passed.  While the bulk of our income is generated by our (stunningly convenient!) link to Amazon, two or three people each month have made direct financial contributions to the site.  They are, regardless of the amount, exceedingly generous.  We’re deeply grateful, as much as anything, for the affirmation those gestures represent.  It’s good to know that we’re worth your time.

In June we’ll continuing updating profiles including Osterweis Strategic Investment (OSTVX – gone from “quietly confident” to “thoughtful”) and Fidelity Global Strategies (FDYSX – skeptical then, skeptical now).  We’ll profile a new “star in the shadows,” Huber Small Cap Value (HUSIX) and greet the turbulent summer months by beginning a series of profiles on long/short funds that might be worth the money.  June’s profile will be ASTON/River Road Long-Short Fund (ARLSX).

As ever,