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,

Dear friends,

Are you feeling better?  2011 saw enormous stock market volatility, ending with a total return of one-quarter of one percent in the total stock market.  Who then would have foreseen Q1 2012: the Dow and S&P500 posted their best quarter since 1998.  The Dow posted six consecutive months of gains, and ended the quarter up 8%.  The S&P finished up 12% and the NASDAQ up 18% (its best since 1991).

Strong performance is typical in the first quarter of any year, and especially of a presidential election year.  Investors, in response, pulled $9.4 billion out of domestic equity funds and – even with inflows into international funds – reduced their equity investments by $3.2 billion dollars.  They fled, by and large, into the safety of the increasingly bubbly bond market.

It’s odd how dumb things always seem so sensible when we’re in the midst of doing them.

Do You Need Something “Permanent” in your Portfolio?

The title derives from the Permanent Portfolio concept championed by the late Harry Browne.  Browne was an advertising executive in the 1960s who became active in the libertarian movement and was twice the Libertarian Party’s nominee for president of the United States.  In 1981, he and Terry Coxon wrote Inflation-Proofing Your Investments, which argued that your portfolio should be positioned to benefit from any of four systemic states: inflation, deflation, recession and prosperity.  As he envisioned it, a Permanent Portfolio invests:

25% in U.S. stocks, to provide a strong return during times of prosperity.

25% in long-term U.S. Treasury bonds, which should do well during deflation.

25% in cash, in order to hedge against periods of recession.

25% in precious metals (gold, specifically), in order to provide protection during periods of inflation.

The Global X Permanent ETF (PERM) is the latest attempt to implement the strategy.  It’s also the latest to try to steal business from Permanent Portfolio Fund (PRPFX) which has drawn $17.8 billion in assets (and, more importantly from a management firm’s perspective, $137 million in fees for an essentially passive strategy).  Those inflows reflect PRPFX’s sustained success: over the past 15 years, it has returned an average of 9.2% per year with only minimal stock market exposure.

PRPFX is surely an attractive target, since its success not attributable to Michael Cuggino’s skill as a manager.  His stock picking, on display at Permanent Portfolio Aggressive Growth (PAGRX) is distinctly mediocre; he’s had one splendid year and three above-average ones in a decade.  It’s a volatile fund whose performance is respectable mostly because of his top 2% finish in 2005.  His fixed income investing is substantially worse.  Permanent Portfolio Versatile Bond (PRVBX) and Permanent Portfolio Short Term Treasury (PRTBX) are flat-out dismal.  Over the past decade they trail 95% of their peer funds.  All of his funds charge above-average expenses.  Others might conclude that PRPFX has thrived despite, rather than because of, its manager.

Snowball’s annual rant: Despite having received $48 million as his investment advisory fee (Mr. Cuggino is the advisor’s “sole member,” president and CEO), he’s traditionally been shy about investing in his funds though that might be changing.  “As of April 30, 2010,” according to his Annual Report, “Mr. Cuggino owned shares in each of the Fund’s Portfolios through his ownership of Pacific Heights.” A year later, that investment is substantially higher but corporate and personal money (if any) remain comingled in the reports.  In any case, he “determines his own compensation.”  That includes some portion of the advisor’s profits and the $65,000 a year he pays himself to serve on his own board of trustees.  On the upside, the advisor has authorized a one basis point fee waiver, as of 12/31/11.  Okay, that’s over.  I promise I’ll keep quiet on the topic until the spring of 2013.

It’s understandable that others would be interested in getting a piece of that highly-profitable action.  It’s surprising that so few have made the attempt.  You might argue that Hussman Strategic Total Return (HSTRX) offers a wave in the same direction and the Midas Perpetual Portfolio (MPERX), which invests in a suspiciously similar mix of precious metals, Swiss francs, growth stocks and bonds, is a direct (though less successful) copy.  Prior to December 29, 2008, MPERX (then known as Midas Dollar Reserves) was a government money market fund.  That day it changed its name to Perpetual Portfolio and entered the Harry Browne business.

A simple portfolio comparison shows that neither PRPFX nor MPERX quite matches Browne’s simple vision, nor do their portfolios look like each other.

Should you invest in one, or any, of these vehicles?  If so, proceed with extreme care.  There are three factors that should give you pause.  First, two of the four underlying asset classes (gold and long-term bonds) are three decades into a bull market.  The projected future returns of gold are unfathomable, because its appeal is driven by psychology rather than economics, but its climb has been relentless for 20 years.  GMO’s most recent seven-year asset class projections show negative real returns for both bonds and cash.  Second, a permanent portfolio has a negative correlation with interest rates.  That is, when interest rates fall – as they have for 30 years – the funds return rises.  When interest rates rise, the returns fall.  Because PRPFX was launched after the Volcker-induced spike in rates, it has never had to function in a rising rate environment.  Third, even with favorable macro-economic conditions, this portfolio can have long, dismal stretches.  The fund posts its annual returns since inception on its website.  In the 14 years between 1988 and 2001, the fund returned an average of 4.1% annually.  During those same years inflation average 3% annually, which means PRPFX offered a real return of 1.1% per year.

And, frankly, you won’t make it to any longer-term goal with 1.1% real returns.

There are two really fine analyses of the Permanent Portfolio strategy.  Geoff Considine penned “What Investors Should Fear in the Permanent Portfolio” for Advisor Perspectives (2011) and Bill Bernstein wrote a short piece “Wild About Harry” for the Efficient Frontier (2010).

RiverPark Funds: Launch Alert and Fund Family Update

RiverPark Funds are making two more hedge funds available to retail investors, folks they describe as “the mass affluent.”  Given the success of their previous two ventures in that direction – RiverPark/Wedgewood Fund (RWGFX) and RiverPark Short Term High Yield (RPHYX, in which I have an investment) – these new offerings are worth a serious look.

RiverPark Long/Short Opportunity Fund is a long/short fund that has been managed by Mitch Rubin since its inception as a hedge fund in the fall of 2009.  The RiverPark folks believe, based on their conversation with “people who are pretty well versed on the current mutual funds that employ hedge fund strategies” that the fund has three characteristics that set it apart:

• it uses a fundamental, bottom-up approach
• it is truly shorting equities (rather than Index ETFs)
• it has a growth bias for its longs and tends to short value.

Since inception, the fund generated 94% of the stock market’s return (33.5% versus 35.8% for the S&P500 from 10/09 – 02/12) with only 50% of its downside risk (whether measured by worst month, worst quarter, down market performance or max drawdown).

While the hedge fund has strong performance, it has had trouble attracting assets.  Morty Schaja, RiverPark’s president, attributes that to two factors.  Hedge fund investors have an instinctive bias against firms that run mutual funds.  And RiverPark’s distribution network – it’s most loyal users – are advisors and others who are uninterested in hedge funds.  It’s managed by Mitch Rubin, one of RiverPark’s founders and a well-respected manager during his days with the Baron funds.  The expense ratio is 1.85% on the institutional shares and 2.00% on the retail shares and the minimum investment in the retail shares is $1000.  It will be available through Schwab and Fidelity starting April 2, 2012.

RiverPark/Gargoyle Hedged Value Fund pursued a covered call strategy.  Here’s how Gargoyle describes their investment strategy:

The Fund invests all of its assets in a portfolio of undervalued mid- to large-cap stocks using a quantitative value model, then conservatively hedges part of its stock market risk by selling a blend of overvalued index call options, all in a tax-efficient manner. Proprietary tools are used to maintain the Fund’s net long market exposure within a target range, allowing investors to participate as equities trend higher while offering partial protection as equities trend lower.

Since inception (January 2000), the fund has posted 900% of the S&P500’s returns (150% versus 16.4%, 01/00 – 02/12).  Much of that outperformance is attributable to crushing the S&P from 2000-2002 but the fund has still outperformed the S&P in 10 of 12 calendar years and has done so with noticeably lower volatility.  Because the strategy is neither risk-free nor strongly correlated to the movements of the stock market, it has twice lost a little money (2007 and 2011) in years in which the S&P posted single-digit gains.

Mr. Schaja has worked with this strategy since he “spearheaded a research effort for a similar strategy while at Donaldson Lufkin Jenrette 25 years ago.”  Given ongoing uncertainties about the stock market, he argues “a buy-write strategy, owning equities and writing or selling call options on the underlying portfolio offers a very attractive risk return profile for investors. . . investors are willing to give up some upside, for additional income and some downside protection.  By selling option premium of about 1 1/2% per month, the Gargoyle approach can generate attractive risk adjusted returns in most markets.”

The hedge fund has about $190 million in assets (as of 02/12).  It’s managed by Joshua Parker, President of Gargoyle, and Alan Salzbank, its Managing Partner – Risk Management.  The pair managed the hedge fund since inception (including of its predecessor partnership since its inception in January 1997).  The expense ratio is 1.25% on the institutional shares and 1.5% on the retail shares and the minimum investment in the retail shares is $1000.  The challenge of working out a few last-minute brokerage bugs means that Gargoyle will launch on May 1, 2012.

Other RiverPark notes:

RiverPark Large Growth (RPXFX) is coming along nicely after a slow start. It’s a domestic, mid- to large-cap growth fund with 44 stocks in the portfolio.  Mitch Rubin, who managed Baron Growth, iOpportunity and Fifth Avenue Growth as various points in his career, manages it. Its returns are in the top 3% of large-growth funds for the past year (through March 2012), though its asset base remains small at $4 million.

RiverPark Small Cap Growth (RPSFX) continues to have … uh, “modest success” in terms of both returns and asset growth.  It has outperformed its small growth peers in six of its first 17 months of operation and trails the pack modestly across most trailing time periods. It’s managed by Mr. Rubin and Conrad van Tienhoven.

RiverPark/Wedgewood Fund (RWGFX) is a concentrated large growth fund which aims to beat passive funds at their own game.  It’s been consistently at or near the top of the large-growth pack since inception.  David Rolfe, the manager, strikes me as bright, sensible and good-humored and the fund has drawn $200 million in assets in its first 18 months of operation.

RiverPark Short Term High Yield (RPHYX) pursues a distinctive, and distinctly attractive, strategy.  He buys a bunch of securities (called high yield bonds among them) which are low-risk and inefficiently priced because of a lack of buyers.  The key to appreciating the fund is to utterly ignore Morningstar’s peer rankings.  He’s classified as a “high yield bond fund” despite the fact that the fund’s objectives and portfolio are utterly unrelated to such funds.  It’s best to think of it as a sort of cash-management option.  The fund’s worst monthly loss was 0.24% and its worst quarter was 0.07%.   As of 3/28/12, the fund’s NAV ($10.00) is the same as at launch but its annual returns are around 4%.

Finally, a clarification.  I’ve fussed at RiverPark in the past for being too quick to shut down funds, including one mutual fund and several actively-managed ETFs.  Matt Kelly of RiverPark recently wrote to clear up my assumption that the closures were RiverPark’s idea:

Adam Seessel was the sub-adviser of the RiverPark/Gravity Long-Biased Fund. . . Adam became friendly with Frank Martin who is the founder of Martin Capital Management . . . a year ago, Frank offered Adam his CIO position and a piece of the company. Adam accepted and shortly thereafter, Frank decided that he did not want to sub-advise anyone else’s mutual fund so we were forced to close that fund.

Back in 2009, [RiverPark president Morty Schaja] teamed up with Grail Advisers to launch active ETFs. Ameriprise bought Grail last summer and immediately dismissed all of the sub-advisers of the grail ETFs in favor of their own managers.

Thanks to Matt for the insight.

FundReveal, Part 2: An Explanation and a Collaboration

For our “Best of the Web” feature, my colleague Junior Yearwood sorts through dozens of websites, tools and features to identify the handful that are most worth your while.  On March 1, he identified the low-profile FundReveal service as one of the three best mutual fund rating sites (along with Morningstar and Lipper).  The award was made based on the quality of evidence available to corroborate a ratings system and the site’s usability.

Within days, a vigorous and thoughtful debate broke out on the Observer’s discussion board about FundReveal’s assumptions.  Among the half dozen questions raised, two in particular seemed to resonate: (1) isn’t it unwise to benchmark everything – including gold and short-term bond funds – against the risk and return profile of the S&P 500?  And (2) you assume that past performance is not predictive, but isn’t your system dependent on exactly that?

I put both of those questions to the guys behind FundReveal, two former Fidelity executives who had an important role to play in changing the way trading decisions were made and employees rewarded.  Here’s the short version of their answers.  Fuller versions are available on their blog.

(1) Why does FundReveal benchmark all funds against the S&P? Does the analysis hold true if other benchmarks are used?

FundReveal uses the S&P 500 as a single, consistent reference for comparing performance between funds, for 4 of its 8 measures. The S&P also provides a “no-brainer” alternative to any other investments, including mutual funds. If an investor wishes to participate in the market, without selecting specific sectors or securities, an S&P 500 index fund or ETF provides that alternative.

Four of FundReveal’s eight measurements position funds relative to the index. Four others are independent of the S&P 500 index comparison.

An investor can compare a fund’s risk-return performance against any index fund by simply inserting the symbol of an index fund that mimics the index. Then the four absolute measures for a fund (average daily returns, volatility of daily returns, worst case return and number of better funds) can be compared against the chosen index fund.

ADR and Volatility are the most direct and closest indicators of a mutual fund’s daily investment and trading decisions. They show how well a fund is being managed. High ADR combined with low Volatility are indicators of good management. Low ADR with high Volatility indicates poor management.

(2) Why is it that FundReveal says that past total returns are not useful in deciding which funds to invest in for the future? Why do your measures, which are also calculated from past data, provide insight into future fund performance?

Past total returns cannot indicate future performance. All industry performance ratings contain warnings to this effect, but investors continue using them, leading to “return chasing investor behavior.”

[A conventional calculations of total return]  includes the beginning and ending NAV of a fund, irrespective of the NAVs of the fund during the intervening time period. For example, if a fund performed poorly during most of the days of a year, but its NAV shot up during the last week of the year, its total return would be high. The low day-to-day returns would be obscured. Total Return figures cannot indicate the effectiveness of investment decisions made by funds every day.

Mutual funds make daily portfolio and investment decisions of what and how much to hold, sell or buy. These decisions made by portfolio managers, supported by their analysts and implemented by their traders, produce daily returns: positive some days, and negative others. Measuring their average daily values and their variability (Volatility) gives direct quantitative information about the effectiveness of the daily investment decisions. Well managed funds have high ADR and low Volatility. Poorly managed funds behave in the opposite manner.

I removed a bunch of detail from the answers.  The complete versions of the S&P500 benchmark and past performance as predictor are available on their blog.

My take is two-fold: first, folks are right in criticizing the use of the S&P500 as a sole benchmark.  An investor looking for a conservative portfolio would likely find himself or herself discouraged by the lack of “A” funds.  Second, the system itself remains intriguing given the ability to make more-appropriate comparisons.  As they point out in the third paragraph, there are “make your own comparison” and “look only at comparable funds” options built into their system.

In order to test the ability of FundReveal to generate useful insights in fund selection, the Observer and FundReveal have entered into a collaborative arrangement.  They’ve agreed to run analyses of the funds we profile over the next several months.  We’ll share their reasoning and bottom line assessment of each fund, which might or might not perfectly reflect our own.  FundReveal will then post, free, their complete assessment of each fund on their blog.  After a trial of some months, we’re hoping to learn something from each other – and we’re hoping that all of our readers benefit from having a second set of eyes looking at each of these funds.

Both the Tributary and Litman Gregory profiles include their commentary, and the link to their blog appears at the end of each profile.  Please do let me know if you find the information helpful.

Lipper: Your Best Small Fund Company is . . .

GuideStone Funds.

GuideStone Funds?

Uhh … Lipper’s criterion for a “small” company is under $40 billion under management which is, by most standards, not small.  Back to GuideStone.

From their website: “GuideStone Funds, a controlled affiliate of GuideStone Financial Resources, provides a diversified family of Christian-based, socially screened mutual funds.”

Okay.  In truth, I had no prior awareness of the family.  What I’ve noticed since the Lipper awards is that the funds have durn odd names (they end in GS2 or GS4 designations), that the firm’s three-year record (on which Lipper made their selection) is dramatically better than either the firm’s one-year or five-year record.  That said, over the past five years, only one GuideStone fund has below-average returns.

Fidelity: Thinking Static

As of March 31, 2012, Fidelity’s Thinking Big viral marketing effort has two defining characteristics.  (1) it has remained unchanged from the day of its launch and (2) no one cares.  A Google search of the phrase Fidelity  +”Thinking Big” yields a total of six blog mentions in 30 days.

Morningstar: Thinking “Belt Tightening”

Crain’s Chicago Business reports that Morningstar lost a $12 million contact with its biggest investment management client.  TransAmerica Asset Management had relied on Morningstar to provide advisory services on its variable annuity and fund-of-funds products.  The newspaper reports that TransAmerica simplified things by hiring Tim Galbraith, Morningstar’s director of alternative investments, to handle the work in-house.  TransAmerica provided about 2% of Morningstar’s revenue last year.

Given the diversity of Morningstar’s global revenue streams, most reports suggest this is “unfortunate” rather than “terrible” news, and won’t result in job losses.  (source: “Morningstar loses TransAmerica work,” March 27 2012)

James Wang is not “the greatest investor you’ve never heard of”

Investment News gave that title to the reclusive manager of the Oceanstone Fund (OSFDX) who was the only manager to refuse to show up to receive a Lipper mutual fund award.  He’s also refused all media attempts to arrange an interview and even the chairman of his board of trustees sounds modestly intimidated by him.  Fortune has itself worked up into a tizzy about the guy.

Nonetheless, the combination of “reclusive” and an outstanding five-year record still don’t add up to “the greatest investor you’ve never heard of.”  Since you read the Observer, you’ve surely heard of him, repeatedly.  As I’ve noted in a February 2012 story:

1. the manager’s explanation of his investment strategy is nonsense.  He keeps repeating the magic formula: IV = IV divided by E, times E.  No more than a high school grasp of algebra tells you that this formula tells you nothing.  I shared it with two professors of mathematics, who both gave it the technical term “vacuous.”  It works for any two numbers (4 = 4 divided by 2, times 2) but it doesn’t allow you to derive one value from the other.
2. the shareholder reports say nothing. The entire text of the fund’s 2010 Annual Report, for example, is three paragraph.  One reports the NAV change over the year, the second repeats the formula (above) and the third is vacuous boilerplate about how the market’s unpredictable.
3. the fund’s portfolio turns over at triple the average rate, is exceedingly concentrated (20 names) and is sitting on a 30% cash stake.  Those are all unusual, and unexplained.

That’s not evidence of investing genius though it might bear on the old adage, “sometimes things other than cream rise to the top.”

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.

Litman Gregory Masters Alternative Strategies (MASNX): Litman Gregory has assembled four really talented teams (order three really talented teams and “The Jeffrey”) to manage their new Alternative Strategies fund.  It has the prospect of being a bright spot in valuable arena filled with also-ran offerings.

Tributary Balanced, Institutional (FOBAX): Tributary, once identified with First of Omaha bank and once traditionally “institutional,” has posted consistently superb returns for years.  With a thoughtfully flexible strategy and low minimum, it deserves noticeably more attention than it receives.

The Best of the Web: A Week of Podcasts

Our second “Best of the Web” feature focuses on podcasts, portable radio for a continually-connected age.  While some podcasts are banal, irritating noise (Junior went through a month’s worth of Advil to screen for a week’s worth of podcasts), others offer a rare and wonderful commodity: thoughtful, useful analysis.

In “A Week of Podcasts,” Junior and I identified four podcasts to help power you through the week, three to help you unwind and (in an exclusive of sorts) news of Chuck Jaffe’s new daily radio show, MoneyLife with Chuck Jaffe.

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’ve 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.

Briefly noted . . .

Seafarer Overseas Growth and Income (SFGIX), managed by Andrew Foster, is up about 3% since its mid-February launch.  The average diversified emerging markets fund is flat over the same period.  The fund is now available no-load/NTF at Schwab and Scottrade.  For reasons unclear, the Schwab website (as of 3/31/12) keeps saying that it’s not available.  It is available and the Seafarer folks have been told that the problem lies in Schwab’s website, portions of which only update once a month. As a result, Seafarer’s availability may not be evident until April 11..

On the theme of a very good fund getting dramatically better, Villere Balanced Fund (VILLX) has reduced its capped expense ratio from 1.50% to 0.99%.  While the fund invests about 60% of the portfolio in stocks, its tendency to include a lot of mid- and small-cap names makes it a lot more volatile than its peers.  But it’s also a lot more rewarding: it has top 1% returns among moderate allocation funds for the past three-, five- and ten-year periods (as of 3/30/2012).  Lipper recently recognized it as the top “Mixed-Asset Target Allocation Growth Fund” of the past three and five years.

Arbitrage Fund (ARBFX) reopened to investors on March 15, 2012. The fund closed in mid-2010 was $2.3 billion in assets and reopened with nearly $3 billion.  The management team has also signed-on to subadvise Litman Gregory Masters Alternative Strategies (MASNX), a review of which appears this month.

Effective April 30, 2012, T. Rowe Price High Yield (PRHYX, and its advisor class) will close to new investors.  Morningstar rates it as a Four Star / Silver fund (as of 3/30/2012).

Neuberger Berman Regency (NBRAX) has been renamed Neuberger Berman Mid Cap Intrinsic Value and Neuberger Berman Partners (NPNAX) have been renamed Neuberger Berman Large Cap Value.  And, since there already was a Neuberger Berman Large Cap Value fund (NVAAX), the old Large Cap Value has now been renamed Neuberger Berman Value.  This started in December when Neuberger Berman fired Basu Mullick, who managed Regency and Partners.  He was, on whole, better than generating high volatility than high returns.  Partners, in particular, is being retooled to focus on mid-cap value stocks, where Mullick tended to roam.

American Beacon announced it will liquidate American Beacon Large Cap Growth (ALCGX) on May 18, 2012 in anticipation of “large redemptions”. American Beacon runs the pension plan for American Airlines.  Morningstar speculates that the termination of American’s pension plan might be the cause.

Aberdeen Emerging Markets (GEGAX) is merging into Aberdeen Emerging Markets Institutional (ABEMX). Same managers, same strategies.  The expense ratio will drop substantially for existing GEGAX shareholders (from 1.78% to 1.28% or so) but the investment minimum will tick up from $1000 to $1,000,000.

Schwab Premier Equity (SWPSX) closed at the end of March as part of the process of merging it into Schwab Core Equity (SWANX).

Forward is liquidating Forward International Equity Fund, effective at the end of April.  The combination of “small, expensive and mediocre” likely explains the decision.

Invesco has announced plans to merge Invesco Capital Development (ACDAX) into Invesco Van Kampen Mid Cap Growth (VGRAX) and Invesco Commodities Strategy (COAAX) Balanced-Risk Commodity Strategy (BRCAX).  In both mergers, the same management team runs both funds.

Allianz is merging Allianz AGIC Target (PTAAX) into Allianz RCM Mid-Cap (RMDAX), a move which will bury Target’s large asset base and modestly below-average returns into Mid-Cap’s record of modestly above-average returns.

ING Equity Dividend (IEDIX) will be rebranded as ING Large Cap Value.

Lord Abbett Mid-Cap Value (LAVLX) has changed its name to Lord Abbett Mid-Cap Stock Fund at the end of March.

With this month’s issue, we celebrate the first anniversary of the Observer’s launch.  I am delighted by our first year and delighted to still be here.  The Internet Archive places the lifespan of a website at 44-70 days.  It’s rather like “dog years.”  In “website lifespan years,” we are actually celebrating something between our fifth and eighth anniversary.  In truth, there’s no one we’d rather celebrate it with that you folks.

Highlights of a good year:

• We’ve seen 65,491 “Unique Visitors” from 103 countries. (Fond regards to Senegal!).
• Outside North America, Spain is far and away the source of our largest number of visits.  (Gracias!)
• Junior’s steady dedication to the site and to his “Best of the Web” project has single-handedly driven Trinidad and Tobago past Sweden to 24^th place on our visitor list.  His next target: China, currently in 23^rd.
• 84 folks have made financial contributions (some more than once) to the site and hundreds of others have used our Amazon link.   We have, in consequence, ended our first year debt-free, bills paid and spirits high.  (Thanks!)
• Four friends – Chip, Anya, Accipiter, and Junior – put in an enormous number of hours behind the scenes and under the hood, and mostly are compensated by a sense of having done something good. (Thank you, guys!)
• We are, for many funds, one of the top results in a Google search.  Check PIMCO All-Asset All-Authority (#2 behind PIMCO’s website), Seafarer Overseas Growth & Income (#4), RiverPark Short Term High Yield (#5), Matthews Asia Strategic Income (#6), Bretton Fund (#7) and so on.

That reflects the fact that we – you, me and all the folks here – are doing something unusual.  We’re examining funds and opportunities that are being ignored almost everywhere else.  The civility and sensibility of the conversation on our discussion board (where a couple hundred conversations begin each month) and the huge amount of insight that investors, fund managers, journalists and financial services professionals share with me each month (you folks write almost a hundred letters a month, almost none involving sales of “v1agre”) makes publishing the Observer joyful.

We have great plans for the months ahead and look forward to sharing them with you.

See you in a month!