Category Archives: Archives of FundAlarm

Sextant Growth (SSGFX), January 2007

By Editor

. . . from the archives at FundAlarm

These profiles have not been updated. The information is only accurate as of the original date of publication.

January 1, 2007

FundAlarm Annex – Fund Report


The fund seeks long-term growth by investing in common stocks, as well as convertible and preferred shares. While Morningstar classifies it as a mid-cap growth fund, the firm claims to follow a “value approach to investing” in looking at stocks with favorable potential over the next one to four years. They list a variety of predictable factors (revenue growth, p/e and p/b ratios, industry position and so on) in their selection criteria. No more than 5% of the fund may be invested in foreign companies.


Saturna Capital. Saturna oversees four Sextant funds, the Idaho Tax-Free fund and two Amana funds. The Amana funds invest in accord with Islamic investing principles and were recognized as the best Islamic fund manager for 2005.


Nicholas Kaiser. Mr. Kaiser is president and founder of Saturna Capital. He has degrees from Chicago and Yale. In the mid 1970s and 1980s, he ran a mid-sized investment management firm (Unified Management Company) in Indianapolis. In 1989 he sold Unified and subsequently bought control of Saturna. As an officer of the Investment Company Institute, the CFA Institute, the Financial Planning Association and the No-Load Mutual Fund Association, he has been a significant force in the money management world. He’s also a philanthropist and is deeply involved in his community. By all accounts, a good guy all around. Morningstar must think so, too, because he’s a finalist for its 2006 Domestic Manager of the Year award.


December 30, 1990, though its name was then Northwest Growth Fund. Morningstar insists that the Growth Fund was launched in 1987. Saturna claims 1990, either October or December, for its predecessor fund and 1995 for the fund under its current configuration.

Minimum investment

$1,000 for regular accounts, $100 for IRAs.

Expense ratio

1.01% for Investor class shares and 0.77% for Institutional class shares on an asset base of about $62 million, as of July 2023. There’s a considerable performance adjustment built into the fee: management fee will change by as much as 0.20% based on performance in the trailing year. There is no redemption fee. 


This seems like a wonderfully admirable little fund. It should, in principle, do well. Expenses are quite low for such a tiny fund and management has linked its compensation to a solid performance fee. Its base management fee is 0.60% and the performance fee of up to 0.30% can cut the manager’s profits by half if he screws up. The fund holds stocks across all market capitalizations and ranges from deep value to growth holdings. The portfolio is pretty compact at 55 names, the manager is tax-sensitive and turnover is virtually non-existent. Morningstar reports 4% turnover, Saturna reports 0% for the year ending in May 2006. The fund reports virtually no frictional loss to taxes; that is, the annual tax cost on unsold shares trims less than 0.20% from the fund’s pre-tax returns. Finally, the manager, his employees and their families own nearly 40% of all outstanding shares. Which is good, since Mr. Kaiser’s pay is remarkably modest: $81,360 in total compensation for calendar 2005.

Happily, principle is aligned with practice. Sextant Growth has compiled a remarkable record for consistent excellence. It is one of just a tiny handful of equity funds that seems always above average, at least as measured by Morningstar’s metrics. Sextant Growth currently qualifies as four-star fund, but has also earned four stars for the preceding three-year, five-year and ten-year periods. For every trailing period, Morningstar gives it “above average” returns and “below average” risk.

Sextant Growth ranks in the top 15% of mid-cap growth funds over the long term, but the comparison is not terribly meaningful since the fund does not particularly target mid-caps (or, for that matter, growth stocks). It has returned 11.6% annually over the past decade and has substantially led the S&P 500 for the preceding three, five and ten years. It does tend to lag, but perform well, in growth markets: for example, it had a bottom decile rank in 2003 but still racked up gains of 26% and a bottom third rank in ’99 with returns of 41%.

Bottom line

The “Growth” name and “value” claim notwithstanding, this strikes me as a really solid core holding. The manager is experienced, the fund has prospered in a wide variety of market conditions, and the management firm seems highly principled. Kind of like a tiny little version of T. Rowe Price. It’s well deserving of substantially greater attention.

Company link

Sextant Growth Fund

Fact Sheet

Wasatch Global Opportunities (WAGOX), May 2010

By Editor

. . . from the archives at FundAlarm

These profiles have not been updated. The information is only accurate as of the original date of publication.

FundAlarm Annex – Fund Report
May 1, 2010


The Fund invests in small and micro cap foreign and domestic companies, though it reserves the right to put up to 35% in larger companies. Up to 90% of the portfolio may be in micro caps and up to 50% in emerging markets.  Currently the US is about 40% of the portfolio which, if I’ve read the prospectus rightly, is at the high end of the anticipated range.  The fund is technically non-diversified, but currently holds 330 stocks. They use quantitative screens to focus their attention, then “bottom up” analysis – including extensive, expensive company visits – to make the final selections.


Wasatch Advisors of Salt Lake City, Utah.  Wasatch has been around since 1975.  It both advises the 18 Wasatch funds – including the recently acquired 1st Source funds – and manages money for high
net worth individuals and institutions. Across the board, the strength of the company lies in its ability to
invest profitably in smaller (micro- to mid-cap) companies.  As of January 2010, the firm had $7 billion
in assets under management, about $5 billion of which were in their funds.


Robert Gardiner and Blake Walker.  Mr. Gardiner had previously been Wasatch’s research director and managed three exceedingly strong Wasatch funds, Micro Cap, Micro Cap Value and Small Cap Value. With the launch of this fund, he gave up his other charges to focus here.  Mr. Walker co-managed Wasatch International Opportunities.  They both speak French.  Mais oui!

Management’s Stake in the Fund

Mr. Gardiner has over a million dollars in the fund.  Mr. Walker is in the $10,000 – $50,000 range, with a larger investment in his other fund.

Opening date

November 17, 2008. 

Minimum investment

$2,000 for regular accounts, $1,000 for IRAs and Coverdells.

Expense ratio


1.19% for Investor class shares and 1.05% for Institutional class shares, after a waiver, on assets of $195 million, as of August 2023. There’s also a 2% redemption fee for shares held fewer than 60 days.


There’s a lot to be said for investing with specialist firms. Firms that know what they’re after and foster a culture that focuses on their core competency, tend to succeed. It’s clear that Matthews is the place to go for Asia funds.  Royce is your single best bet for small cap value investing.  Bridgeway is better at quant work than pretty much anyone else.  And Wasatch is as close as we have to a small growth specialist.  They define themselves by their expertise in the area, though they’ve purchased funds with other mandates.  They promise incredibly thorough research, cross-team collaboration, and discipline in pursuit of “the World’s Best Growth Companies.”

They started with a couple very fine funds whose success drove them to quick closings.  While they’ve added more flavors of funds lately – Emerging Markets Small Cap, Microcap Value, and Global Tech – their focus on great, smaller companies has remained.

Mr. Gardiner is likely one of their best managers.  He ran, most famously, Wasatch Microcap from its inception through 2007.  His success there was stunning.  If you had invested $10,000 with Mr. Gardiner  on the day he opened Micro Cap and sold on the day he retired as manager, you would have made $129,000.  Put another way, your $10,000 investment would have grown by an additional $10,000 a year
for 12 years.  That is almost four times more than his peers managed in the same period. Microcap Value – in which both Roy and I have personal investments – did almost as well, both during the years in which he served as mentor to the fund’s managers and afterward.  His new charge is off to a similar performance: WAGOX has turned $10,000 into $20,000 from its launch at the end of 2008 to April 29, 2010.  Its world-stock peers have returned about half as much.

The managers recognize that such returns are unsustainable, and seem to expect turbulence ahead.  In their April 20th note to investors, Messrs. Gardiner and Walker sound a note of caution:

Given our view of the world, our main focus continues to be on quality. In each and every market, including emerging markets, we are trying to invest in what we consider to be the highest-quality
names. If the global economy ends up growing faster than we expect, stocks of high-quality companies may not lead the market, but they should do just fine. And if we see the type of subdued growth we envision, we believe high-quality stocks will do better than average.

Investing is never a sure thing.  Several of Wasatch’s star funds have faded.  Wasatch, here and in its
other funds, are purposefully targeting higher risk, higher return asset classes.  That tends to make for “lumpy” returns: a string of great years followed by a few intensely painful ones. And Wasatch charges a lot – over 2% on average for their international and global offerings – for its services.

That saidWasatch tends to find and keep strong employees.  They’ve got a track record for “tight” closings to protect their funds.  Their communications are timely and informative and, in the long run, they reward
their investors confidence. 

Bottom Line

This is a choice, not an echo.  Most “global” funds invest in huge, global corporations.  While that dampens risk, it also tends to dampen rewards and produces rather less diversification value for a portfolio.  This bold newer fund goes where virtually no one else does: tiny companies across the globe.  Only Templeton Global Smaller Companies (TEMGX) – with a value bent and a hefty sales load – comes close. Folks looking for a way to add considerable diversity to the typical large/domestic/balanced portfolio really owe it to themselves to spend some time here.

Fund website

Wasatch Global Opportunities

Fact Sheet


FundAlarm © 2010

February, 2010

By Editor

. . . from the archives at FundAlarm

These profiles have not been updated. The information is only accurate as of the original date of publication.

FundAlarm – Highlights & Commentary – (Updated 1st of Each Month)

David Snowball’s
New-Fund Page for February, 2010

Dear friends,

You can’t imagine the sinking feeling I had at the beginning of January, when I read the headline “Stocks have best first week since 1987.” Great, start with parallels to a year that had one of the market’s greatest-ever traumas. I was somehow less disturbed to read three headlines in quick succession at the end of that same month: “January barometer forecasts a down 2010” and “Three crummy weeks for stocks” on the same day as “Growth hits 6-year high” and “Energy prices dip in January.” There’s such a sense of disconnect between Wall Street’s daily gyrations (and clueless excesses) and the real-world that there’s not much to do, other than settle back and work toward a sensible long-term plan.

Portfolio Peeking Season

As is our tradition, Roy and I take a few minutes each February to share our portfolios and the thinking that shapes them. Our hope is that our discussions might give you the courage to go look at the bigger picture of your own investments and might, too, give you some guidance on how to make sense out of what you see.

My portfolio lives in two chunks: retirement (which used to be 15 years away but now, who knows?) and not. My retirement portfolio is overseen by three entities: TIAA-CREF, T. Rowe Price, and Fidelity. Within each retirement portfolio, I have three allocation targets:

  • 80% equity / 20% income (which includes real estate)
  • 50% domestic / 50% international in the equity sleeve
  • 75% developed / 25% developing in the international sleeve

Inevitably things vary a bit from those weightings (TIAA-CREF is closer to 75% domestic / 25% international, for example), but I get pretty close. Over the past decade, that allocation and good managers have allowed me to pretty consistently outperform the Vanguard Total Stock Market (VTSMX) by 1 to 2% per year. In 2008, I lost about 36% — a percent better than Vanguard’s Total Stock Market but a percent worse than my benchmark composite. In 2009, I gained about 37% — eight percent better than Vanguard’s Total Stock Market, almost five percent better than either Vanguard’s Total World Stock Market ETF (VT) or my benchmark.

The same factors that drove the portfolio down in 2008 (a lot of international exposure and a lot of emerging markets exposure) drove it back up in 2009. Early in 2009 I rebalanced my account, which meant adding equity exposure and, in particular, emerging market equity exposure. None of my funds earned less than 20% and four of them – T. Rowe Price International Discovery (PRIDX), T. Rowe Price Emerging Market Stock (PRMSX), Fidelity Emerging Middle East and Africa (FEMEX) and Wasatch Microcap Value (WAMVX, in a Roth IRA) – returned more than 50%.

My non-retirement portfolio is considerably more conservative: it’s supposed to be about 25% US stocks, 25% foreign stocks, 25% bonds and 25% cash. It lost about 20% in 2008 and made about 30% in 2009.

Right now that’s accomplished with six funds:

  • TIAA-CREF Money Market, which generates income of $2.66 for every $1000 in my account. Sigh.
  • T. Rowe Price Spectrum Income (RPSIX): a fund of Price’s income-oriented funds. Technically a multi-sector bond fund, its relative performance is often controlled by what happens with the one stock fund that’s included in its portfolio. In general, it serves as a low-volatility way for me to keep ahead of inflation without losing much sleep. It’s pretty consistently churned out 5-6% returns and has lost money only during the 2008 meltdown. I could imagine being talked into a swap for Hussman Strategy Total Return (HSTRX), which didn’t lose money in 2008 and which also offers a low-volatility way to keep ahead of inflation. It has pretty consistently outperformed Price by 2-3% annually, but HSTRX’s fate lies in the performance of one guy – John Hussman, PhD – while Price is spread across eight or nine managers.
  • Artisan International Value (ARTKX): a very solid fund run by two Oakmark alumni. Made 33% in 2009, while lagging the vast majority of its peers. I’m fine with that, since leading in a frothy market is often a sign of an undisciplined portfolio. My only question is whether I’d be better in Artisan Global Value (ARTGX), which is smaller, more flexible and run by the same team.
  • Leuthold Global (GLBLX) is one manifestation of my uncertainty about the global economy and markets. It’s a go-anywhere (really: think “pallets of palladium in a London warehouse”) fund driven by a strict quantitative discipline. I bought it because of my admiration for the long-term success of Leuthold Core (LCORX), of which this is the “global” version. It made about 32% in 2009, well beyond its peers. I’d be substantially happier if it didn’t cost 1.82% but I’m willing to give Leuthold the chance to prove that they can add enough value to overcome the higher cost.
  • Finally, my portfolio by enlivened by the appearance of two new players: FPA Crescent (FPACX) and Matthews Asian Growth & Income (MACSX). I started 2009 with a pile of cash generated by my sale of Utopia Core (which was closed and liquidated, at a painful loss) and Baron Partners (which talked big about having the ability to take short positions – which I hoped would provide a hedge in turbulent markets – but then never got around to actually doing it). After much debate, I split the money between FPA and Matthews. FPA Crescent is a no-load fund from a mostly “loaded” family. Its manager, Steven Romick, has the flexibility to invest either in a company’s stock or its bonds, to short either, or to hold cash. This has long been a fixture of Roy’s portfolio and I finally succumbed to his peer pressure (or good common sense). The Matthews fund is about the coolest Asian fund I know of: strong absolute returns and the lowest risk of any fund in the region. Once it reopened to new investors, I began piling up my pennies. In 2009, it did what it always does in soaring markets: it made a lot of money in absolute terms (about 40%) but trailed almost all of its peers (97% of them). Which is just fine by me.

A more rational person might be drawn to MACSX’s sibling fund, Matthews Asia Dividend (MAPIX). Over its first three years, it has actually outperformed MACSX (by almost 2:1) with no greater risk. “Bob C.,” on the FundAlarm discussion board, mentioned that he’d been moving some of his clients’ assets into the fund. In retrospect, that looks like a great move but I’m reluctant to sell a fund that’s doing what I bought it to do, so I’ll probably watch and learn a bit longer.

What does the next year bring? Not much. Most of my investment success has been driven by two simple impulses: don’t take silly risks (which is different from “don’t take risks”) and save like mad. I continue to gravitate toward conservative managers who have a fair amount of portfolio flexibility and a great record for managing downside risks. And I continue saving as much as I can: about 13.5% of my annual income goes to retirement, my employer – Augustana College – contributes the equivalent of 10%, and about 10% of my take-home pay goes into the funds I’ve just mentioned. While college professors don’t make a huge amount of money, the fact that all of my investments are set on auto-pilot helps me keep with the program. Although I’ve profiled several incredibly intriguing funds over the past year, I’ll probably not add any new funds right now – I don’t have any really obvious holes and I’m not great at keeping control of large numbers of funds.

Roy writes:

Alas, I am quite a bit less systematic than David in designing my portfolio, not that there is anything wrong with David’s approach (in fact, it is quite good). Basically, I try to keep my portfolio roughly divided into broad capitalization “thirds” — one-third each large cap, mid-cap and small-cap funds — and within each third roughly divided into value, blend, and growth orientation. In other words, I try to fill each square of the venerable, nine-square Morningstar style box with a roughly equal percentage of my portfolio, with a further goal to have about 15% of my portfolio in foreign stocks, and an overweight in the health care, technology and fiancial services sectors (I’ll get back to you in about 10 years on that last one). To get an overview of my portfolio for this purpose, I use the Morningstar portfolio X-ray tool (which, by the way, is available free on the T. Rowe Price WSeb site).

Roy’s Mutual Fund Portfolio (as of December 31, 2009, in alphabetical order within each percentage category)

More than 15% by dollar value

  • Buffalo Small Cap (BUFSX)
  • iShares Russell 3000 Index ETF (IWV)

Less than 15% by dollar value

  • Allianz RCM Global Technology D (DGTNX)
  • Bridgeway Ultra-Small Company Market (BRSIX)
  • Cohen & Steers Realty Shares (CSRSX)
  • Fidelity Select Brokerage & Investment (FSLBX)
  • FPA Crescent (FPACX)
  • Vanguard 500 Index (VFINX)
  • Vanguard European Stock Index (VEURX)
  • Vanguard Health Care (VGHCX)
  • Vanguard Total Stock Market ETF (VTI)
  • Wasatch Global Technology (WAGTX)
  • Weitz Partners Value (WPVLX)

In early 2010, shortly after the snapshot above, I sold Bridgeway Ultra-Small Company Market, due to poor performance, and invested the proceeds in Wasatch Mid Cap Value (WAMVX). I also have arranged to invest this year’s retirement plan contributions in WAMVX.

To simplify things a bit, I probably should sell my shares of Vanguard 500 Index (VFINX) and invest the proceeds in iShares Russell 3000 Index ETF. But I hold the VFINX in a taxable acccount, and my desire not to pay capital gains tax outweighs my need to tidy up. Likewise, to reduce the number of my holdings, I should sell my shares of Vanguard Total Stock Market ETF (VTI) and invest the proceeds in iShares Russell 3000 Index ETF (IWV), which plays a very similar role in my portfolio (the shares of VTI are held in a retirement account so, in this case, such a sale would have no tax consequences). Here, I just don’t want to pay the transaction fees which, while minor, ultimately strike me as unnecessary.

[Back to David] Forward Long/Short Credit Analysis: a clarification and correction

In January, I profiled

Forward Long/Short Credit Analysis (FLSRX), a unique fund which takes long and short positions in the bond market. The fund’s appeal is due to (a) its prospects for extracting value in an area that most other mutual funds miss and (b) its pedigree as a hedge fund. Forward’s president was particularly proud of this latter point, and took some pains to dismiss the efforts of competitors who could come up with nothing more than hedge fund wannabes:

Unlike the “hedge fund light” mutual funds, this one is designed just like a hedge fund, but with daily pricing, daily liquidity, and mutual fund-like transparency.

Forward’s commitment to the fund’s hedge roots was so strong that it was initially available only to qualified investors: folks with a net worth over $1.5 million or at least $750,000 invested in the fund.

Since Forward says that FSLRX models a Cedar Ridge hedge fund, but doesn’t specify which hedge fund they mean, I guessed that it was Cedar Ridge Master Fund and highlighted Cedar Ridge’s performance as an illustration of FSRLX’s potential.

I was wrong on two counts. First, I had the wrong hedge fund. “Evan,” one of our readers, wrote to inform me that the correct fund was Cedar Ridge Investors Fund I, LP. Second, the Investors’ fund record raises serious questions about FSLRX. The Cedar Ridge Master Fund lost 6% in 2008, a respectable performance. Cedar Ridge Investors, however, lost 31% — which is far less reassuring. Worse, there was a cosmic gap between the 2009 performance of Cedar Ridge Investors (up 98%) and its doppelganger, FSLRX (up 47%). When I asked about the gap in performance, the folks at Forward passed along this explanation:

The Forward Long/Short Credit Analysis Fund is based on the Cedar Ridge Investors I. The performance difference in 2009 between the two is easily explained. Compared to the Cedar Ridge fund, FLSRX fund is more diversified and uses less leverage to be able to provide daily liquidity and operate as a fund for retail investors.

Somehow that 2:1 return difference is making the Forward fund look pretty durned “hedge fund light” about now. (Many thanks to Evan for pointing me, finally, in the right direction.)

Akre Focus: Maybe it is worth all the fuss and bother

In the January issue, I took exception to the uncritical celebration by financial journalists of the new Akre Focus (AKREX) fund. Manager Chuck Akre intends to manage AKREX using the same strategy he employed with the successful FBR Focus (FBRVX) fund, and Akre is the only only manager FBRVX has ever known. AKREX – for all intents and purposes – is FBRVX: same manager, same expenses, same investment requirement, same strategy. I was, however, still suspicious: FBRVX has a very streaky record, Mr. Akre’s entire analyst team resigned in order to stay with the FBR Fund and, in doing so, they were reported as making comments that suggested that Mr. Akre might have been something less than the be-all and end-all of the fund. I e-mailed Akre Capital Management in December, asking for a chance to talk but never heard back.

Victoria Odinotska, president of a public relations firm that represents Akre Focus, read the story and wrote to offer a chance to chat with Mr. Akre about his fund and his decision to start Akre Focus. I accepted her offer and gave our Discussion Board members a chance to suggest questions for Mr. Akre. I got a bunch, and spent an hour in January chatting with him.

Our conversation centered on three questions.

Question One: Why did you leave? Answer: Because, according to Mr. Akre, FBR decided to squeeze, if not kill, the goose that laid its golden eggs. As Mr. Akre, explained, FBR is deeply dependent on the revenue that he generated for them. He described his fund as contributing “80% of FBR’s assets and 100% of net income.” While I cannot confirm his exact numbers, there’s strong evidence that Focus is, indeed, the lynchpin of FBR’s economic model. At year’s end, FBR funds held $1.2 billion in assets. A somewhat shrunken Focus fund accounted for $750 million, which works out to about 63% of assets. By Mr. Akre’s calculation, he managed $1 billion for FBR, which represents about 80%. More importantly, most of FBR’s funds are run at a substantial loss, based on official expense ratios:

Expense ratio before waivers

Expense ratio after waivers

Loss on the fund

FBR Pegasus Small Cap Growth




FBR Pegasus Mid-Cap




FBR Pegasus Small Cap




FBR Technology




FBR Pegasus




FBR Focus



FBR Large Cap Financial



FBR Small Cap Financial



FBR Gas Utilities Index



Source: FBR Annual Report, “Financial Highlights, Year Ending 10/31/09”

Based on these numbers, virtually all of FBR’s net income was generated by two guys (Mr. Akre, whose Focus fund generated $10.8 million, and David Ellison whose two Financial funds chipped in another $3.5 million), as well as one modestly over-priced index fund (which grossed $1.5 million)

FBR underwent a “change of control” in early 2009 and, as Mr. Akre describes it, they decided they needed to squeeze the goose that was laying their golden eggs. After a series of meetings, FBR announced their new terms to Akre, which he says consisted of the following:

  • He needed to take a 20% cut in compensation (from about 55 basis points on his fund to 45 basis points), a potential cash savings to management that he did not believe would be passed on to fund shareholders.
  • He would need to take on additional marketing responsibilities, presumably to plump the goose.
  • And he had eight days to make up his mind.

Mr. Akre said “no” and, after consulting with his team of three analysts who agreed to join him, decided to launch Akre Focus. The fund was approved by the SEC in short order and, while his analysts worked on research back at the home office, Mr. Akre took a road trip. Something like three days into that trip, he got a call. It was his senior analyst who announced that all three analysts had resigned from his new fund. The next day, FBR announced the hiring of the three analysts to run FBR Focus.

FBR has been taking a reasonably assertive tack in introducing their new portfolio managers. They don’t quite claim that they’ve been running the fund all this time, but they come pretty close. FBR Focus’s Annual Report, January 2010, says this: “Finally, we are pleased to be writing this letter to you in our expanded role as the Fund’s co-Portfolio Managers. We assumed this position on August 22, 2009, after working a cumulative 23 years as the analysts responsible for day to day research and management of the Fund’s investments (emphasis added).” Mr. Akre takes exception to these claims. He says that his analysts were just that — analysts — and not shadow managers, or co-managers, or anything similar. Mr. Akre notes, “My analysts haven’t run the fund. They have no day-to-day investment management experience. They were assigned to research companies and write very focused reports on them. As a professional development opportunity, they did have a chance to offer a recommendation on individual names. But the decision was always mine.”

Mr. Akre’s recollection is certainly consistent with the text of FBR’s annual and semi-annual reports, which make no mention of a role for the analysts, and don’t even hint at any sort of team or collegial decision-making.

Question Two: How serious is the loss of your entire staff ? Answer: not very. After a national search, he hired two analysts who he feels are more experienced than the folks they replaced:

  • Tom Saberhagen: Since 2002, a Senior Analyst with the Aegis Value Fund (AVALX), which I’ve profiled as a “star in the shadows”.
  • John Neff, who has been in the financial services industry for 15 years. He was a sell-side equity analyst for William Blair & Company and previously was in the First Scholar program at what was then First Chicago Corporation (now JP Morgan).

Question Three: What can investors expect from the new fund? Mr. Akre has some issues with how the size of FBR Focus was managed at the corporate level. It’s reasonable to assume that he will devote significant attention to properly managing the size of his own fund.

In general, Mr. Akre is very concerned about the state of the market and determined to invest cautiously, “gingerly” in his terms. He plans to invest using precisely the discipline that he’s always followed, and seems exceptionally motivated to make a success of the fund bearing his name. In recognition of that, I’ve profiled Akre Focus this month as a “star in the shadows.”

Thanks again to Mr. Akre for taking the time to talk with me, and for giving us some rare behind-the-scenes views of fund management. Of course, if there are credible viewpoints that differ from Mr. Akre’s, we’d like to hear them, and we’ll carefully consider printing them as well.

Noted briefly:

RiverNorth Core Opportunity(RNCOX), was recognized by Morningstar as the top-performing moderate allocation/hybrid fund over the past three years. My profile of RNCOX was also the subject of vigorous discussion on the FundAlarm Discussion Board, where some folks were concerned that the closed-end market was not currently ripe for investment. (Source:, 1/12/10)

Manning & Napier, Matthews Asia and Van Eck were recognized by Strategic Insight (a research firm) as the fastest-growing active fund managers in 2009. I know little about Van Eck, but have profiled several funds from the other two firms and they do deserve a lot more attention than they’ve received. (Source:, 1/14/10)

T. Rowe Pricewas the only pure no-load manager to make Lipper/Barron’s list of “best fund families, 2009.” The top three families overall were Putnam (#1 – who would have guessed?), Price and Aberdeen Asset Management. Top in U.S. equity was Morgan Stanley, Price topped the world equity category, and Franklin Templeton led in mixed stock/bond funds. Fidelity ranked 26/61 while Vanguard finished 40th. (Source: “The New Champs,” Barron’s, 2/01/10).

Raising the prospect that Forward Long/Short Credit Analysis (FSLRX, discussed above and profiled last month) might be onto something, Michael Singer, head of alternative investments for Third Avenue Management, claims that the best opportunities in 2010 will come distressed debt (a specialty for the new Third Avenue Focused Credit (TFCVX) fund), long-short credit (à la Forward) and emerging markets. Regarding long-short credit, he says, “Last year, making money in long-short credit was like shooting fish in a barrel. This year talented traders can make money on both the long and short side, but you better be in the right credits.” (Source: “Tricky Sailing for Hedge Funds,” Barron’s, 2/01/10).

In closing . . .

I’ve written often about the lively and informative debates that occur on FundAlarm’s discussion board. For folks wondering whether supporting FundAlarm is worth their time, you might consider some of the gems scattered up and down the Board as I write:

  • MJG” linked to the latest revision of well-regarded Callan Periodic Table of Investment Returns, which provides – in a single, quilt-like visual – 20 years’ worth of investment returns for eight different asset classes. “Bob C” had reservations about the chart’s utility since it excludes many au currant asset classes, such as commodities. After just a bit of search, Ron (a distinct from rono) tracked down a link to the Modern Markets Scorecard which provides a decades’ worth of data on classes as standard as the S&P500 and as edgy as managed futures. You can find the Scorecard here: Link to Scorecard (once you get to this page, on the Rydex Web site, click on the appropriate PDF link).
  • After a January 28 market drop, “Fundmentals” offered up a nice piece of reporting and interpretation on the performance of variously “hedged” mutual funds.

Posted by Fundmentals
on January 28, 2010 at 20:02:18:

The long/short category in M* includes many different strategies which may not be correlated with each other but days like this expose the different strategies and how they behave.

I have divided the funds into several behavioral categories

Long huggers: These are the category equivalent of closet indexers in active long-only funds. Their short/hedging positions don’t prevent them from being close to the market movements (say upto -1% on a day like this). These should be avoided if they do this consistently. Examples include:

Astor Long/Short ETF I ASTIX -0.71% (try shorting for a change bud)
Old Mutual Analytic Z ANDEX -1.01% (need more analytics it seems)
Schwab Hedged Equity Select SWHEX -0.85% (hedged? try again)
Sound Mind Investing Managed Volatility SMIVX -0.90% (no one with sound mind will think this is managing volatility)
The Collar COLLX -0.67% (cute name but is the manager a dog?)
Threadneedle Global Extended Alpha R4 REYRX -0.94% (What alpha? Missing the needle)
Virtus AlphaSector Allocation I VAAIX -0.71% (Pick whether you want to be an alpha fund or a sector fund)
Wasatch-1st Source Long/Short FMLSX -0.95% (Perhaps time to try the 2nd Source for ideas?)
Wegener Adaptive Growth WAGFX -1.12% (Sorry bud, you ain’t adapting nor growing)

Long-biased: These hedge/short sufficiently to reduce downside but still manage to lose with some correlation to the market (say around -0.5% on a day like this. Examples include

AQR Managed Strategy Futures N AQMNX -0.51% (future ain’t looking bright with this)
Beta Hedged Strategies BETAX -0.41% (need more cowbells.. er.. hedging)
Glenmede Long/Short GTAPX -0.37% (a bit more short perhaps?)
Highland Long/Short Equity Z HEOZX -0.56% (High on long?)
ICON Long/Short Z IOLZX -0.58% (Not too long if you please?)
Janus Long/Short T JLSTX -0.51% (More like long T-shirt, try a short size)
Nakoma Absolute Return NARFX -0.55% (absolute loss?)

Market neutral: These funds are hedged/short sufficiently to provide a return largely unrelated to the market movement (say between -0.3% to 0.3% on a day like this). Most of them fall here and are what you need in this category

Alpha Hedged Strategies ALPHX -0.30%
Alternative Strategies I AASFX -0.16%
American Century Lg-Shrt Mkt Netrl Inv ALHIX +0.20
Arbitrage R ARBFX -0.08%
DWS Disciplined Market Neutral S DDMSX +0.22
First American Tactical Market Oppt Y FGTYX -0.1%
GMO Alpha Only III GGHEX 0.00%
Goldman Sachs Absolute Return Tracker IR GSRTX -0.11%
ING Alternative Beta W IABWX -0.18%
Merger MERFX +0.06%
MFS Diversified Target Return I DVRIX -0.22%
Robeco Long/Short Eq Inv BPLEX +0.12%
TFS Market Neutral TFSMX -0.33%
Turner Spectrum Inv TSPCX +0.18%
Vantagepoint Diversifying Strategies VPDAX -0.20%

Short biased: These are hedged/short sufficiently that they are mostly inverse correlated with the market but do have some upside in up markets (say around +0.5% on a day like this)

None I can find

Short huggers: This is the opposite of the long huggers who are so hedged/short that they are more correlated with inverse funds than being short biased and are likely to do poorly in up markets. Avoid if they do this consistently. Examples

Hussman Strategic Growth HSGFX +0.95% (The strategy is to grow only when everyone is shrinking?)
In addition to well-earned words of thanks, many of the 20 replies offered up other hedged and risk-diversifying funds worthy of consideration and suggestions for ways to interpret the inconsistent ability of managers to live up to the “market neutral” moniker.

Of the 20 funds with “absolute” in their names, precisely half have managed to break even so far in 2010. Only two “absolute return” funds actually managed to achieve their goal by staying above zero in both 2008 and 2009 — Eaton Vance Global Macro Absolute Return (EAGMX) and RiverSource Absolute Return Currency & Income (RARAX). Both also made money in January.

  • In common with many nervous investors, “Gandalf” was curious about how much investable cash other folks were holding in the face of the market’s (so far) minor correction. You might be interested to read why several respondents were at 75% cash – and what they intended to do next.

The joys of the board are varied, but fleeting – after a week to 10 days, each post passes into The Great Internet Beyond so that we can make room for the next generation. As we pass the 280,000 post mark, the members of the discussion community have offered up a lot of good sense and sharp observations. Roy and I invite you to join in the discussion, and to help provide the support that makes it all possible.

Please do let us know, via the board or e-mail, what you like, what makes you crazy and how we can make it better. We love reading this stuff!

With respect,


FundAlarm © 2010

American Century One Choice funds: Income (ARTOX), 2025 (ARWIX), 2035 (ARYIX), and 2045 (AROIX) (formerly American Century LIVESTRONG funds), June 2006

By Editor

At the time of publication, this fund was named American Century LIVESTRONG funds.

. . . from the archives at FundAlarm

These profiles have not been updated. The information is only accurate as of the original date of publication.

June 1, 2006

FundAlarm Annex – Fund Report


These are “funds of funds” which grow increasingly conservative as the
retirement target date approaches.


American Century Investment Management.  American Century is located in Kansas City and manages about $80 billion through 70 funds.  That slightly overstates the case since 10 of their offerings – the LIVESTRONG and One Choice groups – are “funds of funds.”


Richard Weiss, Vidya Rajappa, Radu Gabudean, Scott Wilson and Brian Garbe.

Mr. Weiss is the chief investment officer for multi-asset strategies and oversees the team that manages all of the firm’s multi-asset strategies, including the OneChoice, Strategic Allocation and college savings portfolios. Ms. Rajappa, formerly director of quantitative research at AllianceBernstein, is head of portfolio management. Mr. Gabudean is a portfolio manager who previously was the vice president for quantitative strategies at Barclays Capital. Mr. Wilson has been an American Century portfolio manager since 2011; prior to that he was an equity analyst for 20 years. Mr. Garbe is a senior portfolio manager. Prior to joining American Century in 2010, he was a portfolio manager for the investment wings at several banks and hedge funds.

Opening date

August 31, 2004.  Formerly called the “My Retirement” funds (another marketing gem), they were rebranded as LIVESTRONG funds on May 15, 2006. 

Minimum investment

$2500 for both regular and tax-sheltered accounts, and $2000 for a Coverdell Education Savings Account.  The IRA minimum is $500 if you establish a monthly automatic investing plan.

Expense ratio

0.75% for Investor class shares, as of June 2023. In general, Morningstar classifies this fund, and the other funds in the One Choice series, as having high expense ratios. The One Choice series of funds collectively hold $1.8 billion, as of June 2023.


The LIVESTRONG funds, like the MY RETIREMENT ones before them, invest in 14 other American Century funds.  The funds had very modest performance in their first year or so of operation and drew little interest from retail investors.  In rebranding the funds as  LIVESTRONG, American Century did four things:

  • It acquired Lance Armstrong as a spokesmodel.
  • It agreed to contribute at least $1 million of corporate – not investor – money to the Lance Armstrong Foundation in each of the next several years.
  • It eliminated tobacco companies from the investment mix.
  • And it latched on to a sort of goofy marketing slogan (“Get your Lance face on!”), accompanied by a very odd website.

All of which is unobjectionable, despite some snickering from the pundit gallery (“Tour de Funds”).  The Armstrong Foundation is
generally well-respected and highly-rated by the charity watchdog groups.  There’s a logical tie for the American Century funds, whose founder and founder’s wife are both cancer survivors.  The founder already supports a cancer research center. Fidelity has already led the way on celebrity spokesmodels (Sir Paul McCartney) and a number of other fund companies (Ariel and Bridgeway among them)  have charitable missions.

But none of that offers a reason to invest in the funds.  They seem a tiny bit more costly and noticeably less aggressive than the offerings from the Big Three.  Here, for example, is a comparison of American Century’s target-date 2025 fund to those of the Big Three:


American Cent.




 US stocks





Int’l stocks




















*The Vanguard portfolio reflects changes that will occur early in June, 2006. We reported on those earlier.

The LIVESTRONG funds are distinguished by their annual asset mix adjustment, while the others wait for five years.  The LIVESTRONG funds also hold a few international bonds (something like a half percent for 2025), a little real estate (2%), some emerging markets equity exposure (3%), and the manager is meditating upon commodities.

Bottom line

It’s not clear that there’s any particular reason to choose these funds over their competitors. Retirement investors seeking a more-aggressive portfolio might consider T. Rowe Price and then make their own contribution (and receive their own tax deduction) to a worthy charity such as the Armstrong Foundation.  (While you’re at it, send a little to FundAlarm as well.)

Company website

One Choice portfolio strategy outline:

Al Frank Fund (VALUX), April 2008

By Editor

. . . from the archives at FundAlarm

These profiles have not been updated. The information is only accurate as of the original date of publication.

April 1, 2008

FundAlarm Annex – Fund Report


The objective of the Al Frank Fund is long-term capital appreciation. The manager selects equity securities that he believes are out of favor and undervalued, then purchases and holds them until it believes that the securities have reached a fair value. That tends to take a while, so portfolio turnover is quite low and the portfolio is quite diverse: just under 300 holdings, across all valuations and size ranges. Currently the portfolio is comprised mostly of U.S. names.


Al Frank Asset Management. The adviser, named for its late founder, manages two mutual funds (Al Frank and Al Frank Dividend Value) and about 800 separate accounts. Altogether, it manages about $750 million in assets.


John Buckingham and Jessica Chiaverini. Mr. Buckingham is the Chief Investment Officer for Al Frank, which he joined in 1987. He’s responsible for the fund’s day-to-day management. He’s also the Director of Research and editor of both The Prudent Speculator and the TechValue Report newsletters. Ms. Chiaverini works mostly with the firm’s separate accounts and the analysts.

Management’s Stake in the Fund

Mr. Buckingham has between $100,000 and $500,000 in each of the funds and owns about 20% of the adviser. Ms. Chiaverini has a marginal investment in the fund, but does buy many of the individual stocks recommended by The Prudent Speculator and held in the fund. Because Al Frank is part of the Advisers Series Trust, which provides the fund’s administrative and legal services, their board is actually a group designated to oversee all of the Advisers Series funds. As a result, they generally have no investment in either of the Al Frank funds.

Opening date

January 2, 1998.

Minimum investment

$1,000 for regular and IRA/UGMA accounts.

Expense ratio

1.24% after a waiver on assets of $67 million, as of August 2023. There’s a 2.0% redemption fee on shares held fewer than sixty days.


Since I’m working on next week’s quizzes for my Advertising and Social Influence class at Augustana, I thought I’d toss in a short quiz for you folks, too. Here’s the set-up to the question:

Fund-tracker Morningstar provides an analysis in visual form of each mutual fund’s “ownership zone.” They define the “ownership zone” this way:

Ownership zones are the shaded areas of the style box intended to be a visual measure of a fund’s style scope–that is, the primary area of a fund’s ownership within the style box. Some key points to remember about the ownership zone are that it encompasses 75% of the stock holdings in the fund’s portfolio, and that it is centered around a centroid that is determined using an asset-weighted calculation.

Please match each fund with its corresponding ownership zone:

a. Al Frank Fund b. Fidelity Low-Priced Stock c. Vanguard Total Stock Market


1. 2. 3.


If you thought Fidelity’s Low-Priced is represented by image #1, you get a point. If you thought Vanguard’s Total Stock Market index is represented by index #3, you’re wrong. Terribly wrong. Image #3 represents a picture of the Al Frank Fund’s holdings.

For a fund whose ticker is VALUX, you might imagine . . . well, you know, “value” stocks in the portfolio. And while Mr. Buckingham thinks of himself as a value investor, he is wary of letting his portfolio get anchored merely to traditional value sectors like financials and utilities (the latter of which, by the way, he does not own). He argues that non-traditional realms, like tech, can offer good – and occasionally spectacular – values which are missed when you stick strictly to traditional valuation metrics. He argues that tech firms (the subject of his TechValue Report) might have no earnings but nonetheless represent legitimate “value” investments if the business shows evidence of substantial growth potential and the available valuations are at the low end of their historic ranges. He write:

In short, we seek bargains wherever they reside. If Blue-Chips seem cheap, we buy them. If technology stocks appear undervalued, we snap them up. We believe that limiting our investment universe by market-cap or value-versus-growth distinctions likely will serve only to limit our potential returns.

As new money comes (slowly, he grumps) into the fund, Mr. Buckingham rebalances the portfolio by investing in the new names with the most compelling valuations rather than adding to his existing positions. He argues that having a sprawling portfolio offers the best prospect for long-term success, in part because much of a portfolio’s gain is driven by a relative handful of wildly successful investments. Since it’s hard to predict which invest will be spectacular as opposed to merely “good” and since something like a third of any good investor’s choices “simply don’t work out,” he holds “200 or more stocks in our Funds, to improve our chances of owning those rare few stocks that everyone wishes they’d noticed earlier. This disciplined approach makes it possible for us to put patience – perhaps the most elusive of investment qualities – to work.” Skeptics might recall that Joel Tillinghast, on the short list of the best investment managers ever to work for Fidelity, consistently holds 700 or more stocks in his Fidelity Low-Priced Stock (FLPSX) portfolio. That’s complemented by the fact that Mr. Buckingham’s newsletter, “The Prudent Speculator has evolved to become the #1 newsletter as ranked by The Hulbert Financial Digest in its fifteen-, twenty- and twenty-five-year categories for total return performance through May 31, 2007.”

Over the decade of Al Frank fund’s existence, it’s landed in the top 2% of its peer group clocking in with annual returns of 12.7%, which tops the S&P500 and its mid-cap blend peer group by about 5% a year. Its absolute returns over the past five years – 19% annually – are stronger while its relative returns and about the same as for the longer period. The headache for investors comes in the pattern of year-to-year performance that leads to those strong, long-term numbers.



Peer Group Ranking


Top 10%


Bottom 10%


Top 10%


Bottom 10%


Top 10%


Bottom 10%


Just below average


On whole, that pattern doesn’t bother him. Citing Warren Buffett’s famous dictum, “At Berkshire, we would rather earn a lumpy 15% over time than a smooth 12%,” Mr. Buckingham takes lumpiness as an inevitable consequence of independent thinking.

Bottom Line

Al Frank definitely offers lumpy returns. The manager neither aspires to nor achieves smoothly mediocre results. He tends to make a lot of money for his investors, but punctuates periods of stout returns with periods where a good glass of stout might be called for. For folks willing to take the bad with the good, they’ve got access to a strong track record and devoutly original thinking.

Fund website

FundAlarm © 2008

Driehaus International Small Cap Growth (DRIOX), November 2007

By Editor

. . . from the archives at FundAlarm

These profiles have not been updated. The information is only accurate as of the original date of publication.

November 1, 2007

FundAlarm Annex – Fund Report


The Driehaus International Small Cap Growth Fund seeks to maximize capital appreciation.  The Fund invests primarily in equity securities of smaller capitalization non-U.S. companies exhibiting strong growth characteristics. The fund invests at least 80% of its net assets in the equity securities of non-U.S. small capitalization companies, currently that is companies whose market capitalization is less than $2.5 billion at the time of investment.


Driehaus Capital Management LLC, which was organized in 1982 to provide investment advice to high net worth individuals and institutions. As of July 31, 2007, it managed approximately $4.4 billion in assets. Driehaus runs three other mutual funds: Emerging Markets Growth (closed to new investors), International Discovery, and International Yield Opportunities (new in 2007).


Howard Schwab and David Mouser. Schwab is the lead manager here and was the lead manager for the Driehaus International Opportunities Fund, L.P., the predecessor limited partnership from its inception in August, 2002 until it transformed into this mutual fund. Schwab is also a co-manager of the Driehaus Emerging Markets Growth Fund and, for several months, helped manage the Driehaus International Equity Yield Fund. Mr. Mouser has “certain responsibilities” for investment decision-making on fund, “subject to Mr. Schwab’s approval,” just as he did with the limited partnership.

Management’s Stake in the Fund

Technically none, since the fund began operation after the date of the last SAI.

Opening date

September 17, 2007. If you don’t like that date, you could choose July 1, 2001 (the date on which Schwab began managing separate accounts using this strategy) or August 1, 2002 (the date that they launched the International Opportunities Fund, L.P., whose assets and strategies the mutual fund inherits). Technically you might also choose February 26, 2007, the date that the fund was “established as a series of Driehaus Mutual Funds” but apparently had no assets or investors. It’s a little confusing, but it does offer a certain richness of data.

Minimum investment

$10,000 for regular accounts, $2,000 for IRAs. The minimum subsequent investment for regular accounts is high, at $2,000, but it’s only $100 with an automatic investment plan. In any case, it’s a lot more affordable for most of us than the $20 million minimum required for a separate account that uses this same strategy.

Expense ratio

1.16% on assets of $205.8 million, as of July 2023. 


DRIOX represents an interesting case for investors. It’s a new fund but it’s directly derived from two predecessor entities. There are separately managed accounts with combined assets of $210 million and there was a Limited Partnership with assets of $100 million, both managed by the same guys with the same strategies. But they were also managed under very different legal structures (for example, the L.P.s don’t have to pay out distributions the way that funds are required to do) for very different sorts of clients (that is, folks with $20 million or more to invest). In addition, Driehaus runs two other mutual funds with different management teams but with the same investment discipline.

In general, all Driehaus managers are growth guys who look for companies which have:

  • Dominant products or market niches
  • Improved sales outlook or opportunities
  • Demonstrated sales and earnings growth
  • Cost restructuring programs which are expected to positively affect company earnings
  • Increased order backlogs, new product introductions, or industry developments which are expected to positively affect company earnings

They also consider macroeconomic and technical information in evaluating stocks and countries for investment.

What might we learn from all of that data? Driehaus makes gobs of money for its investors.

  • The International Small Cap Growth separate accounts have returned 36.9% annually since inception. Their benchmark has returned 13.5% over the same period.
  • The International Opportunities LP returned 36.75% annually since inception. Its benchmark returned 27.3% over the same period.
  • Emerging Markets Growth fund (DREGX) has returned 22.3% annually since inception. Its benchmark returned 13.6%. Over the past five years it has returned 44.2% annually, while its Morningstar peer group returned 36.7%.
  • International Discovery fund (DRIDX) has returned 22.2% annually since inception. Its benchmark returned 7.2%. Over the past five years it has returned 34.4% annually, while its Morningstar peer group returned 24.0%.

While I’m generally not impressed by big numbers, those are really big performance advantages, delivered through a variety of investment vehicles over a considerable set of time frames.

There are two risks which are especially relevant here. The first is that Driehaus is a very aggressive investor. Morningstar classifies Emerging Markets Growth and International Discovery as having Above Average risk. Both of the funds have turnover rates around 200%. That aggressiveness is reflected in considerable swings in performance. International Discovery, for example, has the following peer ranks:

Year Morningstar Peer Rank, Percentile










Emerging Markets shows the same saw-tooth pattern, though in a tighter range:

Year Morningstar Peer Rank, Percentile












The performance data for the International Small Growth separate accounts makes the strategy’s strengths and limits pretty clear. They calculate “capture ratios,” which are essentially volatility estimates which measure performance in rising and falling markets separately. A score of 100 means you rise (or fall) in synch with the market. A score of 110 up and 130 down means that you rise 10% more than the market when it’s going up and fall 30% more when it’s going down. Here are the most recent capture ratios, as of 9/30/07:


3 Years

5 Years







Which is to say, it rises 80% more in good times and drops 40% more in bad than does the market. You don’t want to be here when the rain is falling.

The second risk is Driehaus’s penchant for closing and/or liquidating funds. Driehaus had a bunch of other funds that they seem to have liquidated: Driehaus International Growth (DRIGX), Driehaus European Opportunity (DREOX) and Driehaus Asia Pacific Growth (DRAGX), all of which died in 2003. The very successful Emerging Markets Growth fund just closed to new investors.

Bottom Line

For investors with $10,000 to spare and a high tolerance for risk, this might be as good as bet for sheer, pulse-pounding, gut-wrenching, adrenaline-pumping performance as you’re going to find.

Fund website


Guinness Atkinson Alternative Energy (GAAEX), September 2007

By Editor

. . . from the archives at FundAlarm

These profiles have not been updated. The information is only accurate as of the original date of publication.

September 1, 2007

FundAlarm Annex – Fund Report


The fund seeks long-term capital appreciation by investing in US and overseas of companies involved in the alternative energy or energy technology sectors, which includes companies that increase energy efficiency but excludes nuclear.


Guinness Atkinson Asset Management, headquartered in Woodland Hills CA but also has offices in London. The company was founded by a number of then and former managers for Investec, a multinational investment firm. The firm manages mutual funds whose net assets are about $340 million.


Tim Guinness, Ed Guinness and Matthew Page. Tim Guinness is the lead manager, the firm’s Chief Investment Officer and manager of the Global Energy and Global Innovators funds. Immediately prior to founding GA, he was joint chairman of Investec. Ed Guinness, Tim’s son, has engineering and management degrees from Cambridge. Before joining Guinness Atkinson, he worked on tech investing at HSBC and risk arbitrage for Tiedemann Investment Group in New York. Matthew Page has a Master’s degree in Physics from Oxford and worked briefly at Goldman Sachs before joining GA.

Opening date

March 31, 2006.

Minimum investment

$5000 for regular accounts, $2500 for regular accounts for individuals who own shares in other GA funds, $1000 for IRAs and $100 for accounts opened with an automatic investing plan.

Expense ratio

1.1% after waivers on $33.7 million in assets as of July 2023. 


More than is usually the case, I feel like I’m on a precipice over a gaping dark chasm of ignorance. There are two questions – is there a strong case now for alternative energy investing? and if so, is there a strong case for making that investment through an open-end mutual fund? Those are good questions for which good answers would take pages. Multiple, many, numerous pages. Little of which I’m competent to write. As a result, I’ll try to offer the second-grader’s version of the story and will ask the indulgence of folks who have profound professional knowledge of the subject.

Is there a case now for alternative energy investing? Well, there’s certainly a case for alternative energy so there’s likely a parallel case for investing in the field. What’s the case?

  • The world is running out of affordable oil and gas 

While there’s no question of imminent physical exhaustion, a number of economists project the future price of oil based on the notion of “peak oil.” At base, the peak oil theory says that once half of the oil in a particular reservoir is withdrawn, the price for removing the other half escalates sharply. There’s no single, definitive estimate for when a peak has been passed, since every oil field has its own life cycle. In general, though, experts seem to agree that the US peaked in the early 1970s and the North Sea peaked in the early 2000s. The most pessimistic estimates claim that global production is has already passed its peak (this is a subject, by the way, that causes Saudi oil ministers to sputter mightily), with 54 of the world’s 65 major producing nations in decline. A more cautious study commissioned by the US Department of Energy (Hirsch, et al, Peaking Of World Oil Production: Impacts, Mitigation, & Risk Management, 2005) predicted the peak would be “soon,” by which they meant within 20 years. Natural gas is not substantially better off.

That study made two other important claims: (1) “As peaking is approached, liquid fuel prices and price volatility will increase dramatically, and, without timely mitigation, the economic, social, and political costs will be unprecedented.” And (2) “Viable mitigation options exist on both the supply and demand sides, but to have substantial impact, they must be initiated more than a decade in advance of peaking.”

A point rarely recognized is that much of the oil that remains is not light sweet crude; it’s generally a heavy, sour oil that’s hard to refine and a relatively poor source of higher distillates such as gasoline.

  • Fossil fuel consumption is irreparably affecting the global climate

You don’t actually need to believe this argument, you mostly need to agree that it is moving into the area of “commonly accepted wisdom,” since that’s what motivates governments and other organizations to act.

I’ll note, in passing, that I’m not a climatologist and so I’m not competent to judge the technical merit of what appears to be an enormous and growing body of peer-reviewed research which substantiates this claim. I am, as it turns out, trained to assess arguments. From that perspective, I’m note that those arguing against the theory of human-induced climate change generally support their case through deceptive and misleading arguments – they mischaracterize their sources, suppress inconvenient conclusions found in the research they cite, over-claim their own qualifications, and shift argument grounds midway through. The vast majority of the skeptics’ discourse appears in blogs rather than in peer-reviewed journals and little of it is research per se but rather they focus on often-narrow methodological critiques (one recent controversial was over a quarter-degree difference in a calculation). With the possibility that the future of human civilization hangs in the balance, we deserve much more honest debate.

  • In anticipation of the two preceding arguments, governments are going to push hard for alternatives to fossil fuels

Whether through taxation, carbon emission caps, subsidies or legal protections (e.g., relaxed siting requirements), governments around the world are moving to support the production of alternative energy.

The tricky question is the “now” part – is it currently prudent to invest in this field? The Guinness Atkinson folks are refreshingly blunt, both in print and on the phone, about the undeniable risks in the field:

. . . a large percentage of alternative energy companies are thinly traded small cap stocks . . . many of these companies are loss making or just beginning to produce profits [and] many alternative energy stocks have appreciated significantly recently as a result of increased energy prices (Guinness Atkinson, The Alternative Energy Revolution, March 2006).

In a phone conversation, Jim Atkinson (GA’s president) stressed that these were voluntary caveats that GA included because they wanted well-informed investors who were willing to hold on through inevitable, short-term dislocations. The company does, indeed, support the goal of informed investors. Their monthly Alternative Energy Briefs provides a richness of information that I’ve rarely seen from a fund company.

Three factors specific to Guinness Atkinson cut against these concerns: (1) the elder Mr. Guinness has a lot of experience in the field of energy investing. The Alternative Energy fund is the offspring of a successful, offshore global energy fund of his. Both of the younger fund managers have graduate training in technical fields (engineering and physics) which bears on their ability to read and assess information about firms and their technologies. And (2) they’re reasonable conservative in their choice of companies. By Mr. Guinness’ calculation, about 82% of the portfolio companies have “positive earnings forecasts for 2007.” That number climbs to 90% by 2008. Finally (3) they build risk management into portfolio construction. They expect to have 30 or so stocks in the portfolio and, in a perfect world, they’d assign 1/30th of their assets to each stock. Lacking perfect confidence in all of their companies, they assign a full share only to companies in which they have the greatest confidence, a half share to those in which they have fair confidence and a “research share” – that is, a very small amount – to those whose prospects are most speculative but which they’d like to track. The managers note that their poorest performers are generally held in the “research” pool, which both vindicates their stock assessment and limits the damage.

Is there a strong case for making that investment through an open-end mutual fund? I’m rather more confident that the answer here is, yes. The alternative channel for alternative energy investing is one of about three exchange traded funds:

  • PowerShares WilderHill Clean Energy

(PBW) which invests in clean energy and conservation technologies. Its top holding is Echelon Corporation which provides “control networking technology for automation systems.” Echelon’s website highlights their work in improving McDonald’s kitchens. Net assets are $1.1 billion with expenses of 0.70%.

  • Market Vectors Global Alternatives

(GEX) which tracks the Ardour Global Index (Extra Liquid) of companies “engaged in the business of alternative energy.” Net assets are $61 million, expense ratio is not available.

  • First Trust NASDAQ Clean Edge US Liquid

(QCLN) tracks the NASDAQ Clean Edge U.S. Index of “clean energy” companies, which includes lots of semiconductor makers. The fund has $23 million in assets.

There are several “clean technology” ETFs, which invest in pollution control, networking, and efficiency-supporting companies. There are, in addition, a number of specialized “green” mutual funds (Spectra Green) and ETFs (Claymore/LGA Green) which don’t particularly focus on the energy sector. They like, for example, Starbuck’s because of its commitment to recycling and environmental causes.

So why not an ETF? At base, the only argument for them is low-cost: their expense ratios are about 0.7% and Guinness’ is about 1.7%. That cost advantage is overstated by three factors: (1) Guinness e.r. is declining, their’s isn’t. (2) Brokerage fees aren’t included – each purchase of an ETF goes through a broker for whose services you pay. And (3) ETFs don’t trade at their net asset value. When ETFs trade at a premium, you actually pay for less than you get. Premiums on the alternative energy ETFs have run lately from 33 to 260 basis points. By way of translation, a fund with a 70 basis point expense ratio and a 260 basis point premium to NAV is costing an investor 3.3% to buy.

The arguments against the ETFs are (1) that they’re limited to liquid investments. That’s why you’ll notice the “liquid” in the names of several. That generally excludes them from investing in private placements or very small companies. (2) You have to have a lot of confidence in the quality of the underlying index. A number of commentators don’t. Of PowerShares WilderHill Clean Energy, which has more assets than all of the other investment options combined, Morningstar recently opined:

. . . this fund lacks a well-reasoned strategy as well as a sensible, diversified benchmark. Instead, its index holds lots of companies with unproven business models and speculative stock prices. For example, the index’s average return on equity is actually negative, despite its rich average price/earnings multiple of 25 (Analyst Report, 3/5/07).

They concluded that investors “would be better off with an active manager,” though that was not a particular endorsement of Guinness Atkinson. In addition, (3) ETFs can be sold short and otherwise made part of the arbitrage games of hedge fund managers. Which isn’t a recipe for stable returns.

Perhaps as a result, Guinness Atkinson has consistently outperformed the ETFs. It benchmarks its performance against the WilderHill Clean Energy index. Here are the performance comparisons, as of 7/30/07:

  Guinness WilderHill
YTD 30.60% 25.01%
Trailing twelve months 34.35 22.39
Since fund inception 14.53 0.64


Bottom Line

If I were to invest in alternative energy, I think there’s a strong case to be made for investing with an active manager who has broad discretion and considerable experience. The ETF’s cost advantages are simply not sufficient to overcome their design limitations. Even if Guinness did not have a corner on the market for no-load alternative energy funds, their excellent work in a range of other funds, thoughtful portfolio construction and broad expertise makes them a strong candidate for the role.

(By way of full disclosure, my wife – who has degrees in environmental planning and law – reviewed a bunch of the literature I’ve been working through and chose to invest several thousand dollars of her retirement account in the Guinness Atkinson fund.)

Fund website

Alternative Energy Fund

Northern Active M International Equity (formerly Active M International Equity), (NMIEX), November 2006, July 2010

By Editor

At the time of publication, this fund was named Northern Multi-Manager International Equity (NIEWX) Fund.
This fund was formerly named Active M International Equity.

. . . from the archives at FundAlarm

These profiles have not been updated. The information is only accurate as of the original date of publication.

November 1, 2006
Update (posted July 1, 2010)

FundAlarm Annex – Fund Report


The fund seeks long-term capital appreciation through a diversified portfolio of non-U.S. securities. Income is “incidental.” It’s willing to invest in companies of any size, though primarily in the developed markets. The portfolio is allocated among four independent, outside managers.


Northern Trust. The parent company was founded in 1889 and has about $650 billion in assets under management. Northern Trust Global Advisors (NGTA) has been managing money for institutional investors for about a quarter century.


Andrew Smith, Senior Vice President and Chief Investment Officer for NTGA since 2000. Before that, he managed about a billion dollars in asset allocation funds for Spectrum Investments. Smith’s task here is primarily to select and monitor the fund’s sub-advisers. The four current sub-advisers are:

  • Altrinsic Global Advisors – A Connecticut-based firm with about $3 billion under management. They focus on large, high quality companies. Northern describes them as having a “relative value style: expected to protect capital in negative markets.”
  • Nicholas-Applegate Capital Management – A California-based adviser with about $15 billion under management. These folks provide an aggressive-growth element to the portfolio.
  • Oechsle International Advisors – A Boston firm which oversees about $18 billion. This is a fairly GARP-y, conservative growth group. Oechsle was subject to a disciplinary action by the SEC in 1998 for failing to adequately supervise one of its private portfolio managers, who has since left the firm. Oechsle subsequently reimbursed its clients for the monetary losses they suffered.
  • Tradewinds NWQ Global Investors – This is a wholly-owned subsidiary of Nuveen Investments with about $23 billion under management. These folks pursue an “absolute value” style which is “distinguished by deep specialization, fundamental analysis and transparency.” In theory they’ll provide the best down-side protection for the portfolio.


June 22, 2006.

Minimum investment

$2,500 for regular accounts, $500 for IRAs and $250 with an automatic investment plan.

Expense ratio

0.84%, after waivers from a 0.90% gross expense ratio, on assets of $475.1 million, as of July 2023. There’s also a 30-day, 2% redemption fee to discourage active traders.


The argument for Northern’s various multi-manager funds is pretty straightforward. Northern has been selecting investment managers for really rich people for 125 years. They’ve done it well enough that Northern has been entrusted with assets that are starting to creep up on the trillion dollar mark. They sorted through a set of 500 managers before selecting these four.

And, in general, they seem to be getting it right. Collectively Morningstar awards four-stars to Northern’s international fund line-up and praises their “very low” expense ratios. Nicholas-Applegate runs a bunch of pretty solid international funds, but their investment minimums are typically around a quarter million dollars. Tradewinds has only a few funds, but they’re solid, disciplined performers. Altrinsic and Oechsle’s public records are mostly with funds for sale to Canadian investors. In the US, they seem to serve mostly high net-worth individuals.

Northern positions this as a fairly aggressive choice. On their risk-reward spectrum, it occupies the fourth spot from the top behind the emerging markets, international real estate and international growth funds and next to their international index fund.

Bottom line

This fund is a calculated risk, in some ways more than most. You’re basically betting on Northern’s ability to assemble a group of superior investors whose services are not generally available. Mr. Smith has been doing this for better than 20 years and seems to be rising steadily within his profession. And Northern has been doing it, to the apparent satisfaction of “a well-heeled client” for better than a century. This seems to create a fair presumption in their favor, especially at a time when compelling choices in international funds are few.

Company link

November 1, 2006

Update (posted July 1, 2010)

Assets: $2.7 billion Expenses: 1.4%
YTD return (through 6/17/10): (4.0%)  

Our original thesis

This fund is a calculated risk, in some ways more than most. You’re basically betting on Northern’s ability to assemble a group of superior investors whose services are not generally available.

Our revised thesis

So far, so good.

Since inception, NMIEX has performed modestly better than its peers or its index. The fund is down about 6% since inception, its international core peer group is down about 7% and its primary benchmark is down about 9%. It has earned those modestly above-average returns with modestly below-average volatility. It substantially outperformed its peers and benchmark during the 2007-09 crash, slightly outperformed them in the May 2010 mini-crash and substantially trailed (47% for NMIEX versus 61% for its benchmark index) through during the 12 month surge following the market low. Both the better performance in the down market and the poorer performance, especially in the early phases of the rebound, are attributable to the same factor: the fund had only about half of the exposure to European financial stocks as did its peers.

In general, the seven Northern Multi-Manager funds have been entirely respectable performers over the short life spans. Like Price funds, they generally seem to do a bit better than the peers over time and rarely end a year in the basement. Northern has been pretty vigilant about monitoring the performance of its sub-advisors and has not been reluctant to replace teams that are drifting (mostly notably in the underperforming Small Cap NMMSX fund, where they’ve made three switches in about 12 months).

It’s regrettable that the fund’s expense ratio has remained virtually unchanged, despite the tripling of assets under management from 2007 through 2010. The 1.4% fee here compares to 1.1% for the average international fund, and rather less than that for the average large cap, developed market international fund.

This is a solid choice whose low minimum investment (down to $250 for folks setting up an automatic investment plan) and broad diversification might recommend it to a wide audience.

FundAlarm © 2006, 2010

July, 2010

By Editor

. . . from the archives at FundAlarm

David Snowball’s
New-Fund Page for July, 2010

Dear friends,

In celebration of the hazy, lazy, crazy days of summer, we’ve decided to slow down, take a deep breath, and enjoy the long days. At least to the extent that you can enjoy days when a twitchy computer program can appreciably change your fortunes in a fraction of a second. So we’re taking time to catch up with the funds we’re already presented, starting with . . .

The Billionaire’s Club

Attracting a billion dollars’ in assets is hard. There are about 5200 funds below that threshold and only 1200 over it. 260 of those smaller funds have earned five stars from Morningstar and some of those smaller five-star funds (CGM Mutual, Mair & Powers Balanced, Valley Forge, FMI Common, Greenspring . . . ) have been in operation for decades. As a result, it’s noteworthy when a new fund is able to draw more than a billion in just a few years. This month’s New Fund page focuses on the nine funds that we’ve previously profiled which have crossed that threshold. Here’s the snapshot and link to each.

Dodge & Cox Global (DODWX), launched 05/01/2008 and now at $1.1 billion. Dodge & Cox is one of the most respected names in investing. They do just about everything right, and have been doing it right for 80 years. Global, which had a wretched 2008, combines the strengths of Dodge & Cox Stock (DODGX) and Dodge & Cox International (DODFX).

Leuthold Asset Allocation (LAALX), launched 05/25/2006 and now at $1.3 billion. Before the Leuthold funds, there was The Leuthold Group which did quantitative historical research to develop sophisticated models for institutional investors. Steve Leuthold was prevailed upon to launch a fund, Leuthold Core (LCORX), to give folks with less than a million to invest access to his models. LCORX’s closing led to the launch of look-alike LAALX. Steven Goldberg, writing for Kiplinger’s, was unambiguous about the virtues of these eclectic offerings: “In uncertain times, I think Leuthold Asset Allocation will prove its worth. Put 20% of your money here.” Yes, sir! (See “The 7 Best Mutual Funds for This Market,” 06/22/2010)

Northern Multi-Manager International Equity (NMIEX), launched 06/22/2006 and now at $2.6 billion. Northern’s multi-manager funds proceed from a simple premise: different people do different things well. Pick out what needs done well, then go find the best managers for the job. Northern concluded, for example, that “absolute value” stocks should be represented as should “aggressive growth” ones, so they hired high value institutional managers who specialize in each of those niches. With the large size of the resulting management teams, some worry that too many cooks might spoil the broth. Northern, though, hires only one broth chef (to complement the pastry chef and the soup guy). The results have been consistently solid.

PIMCO Global Advantage Strategy Bond, “D” shares (PGSDX) launched 02/05/2009 and now at $1.8 billion. PIMCO’s chief, the legendary Bill Gross, is unambiguous: “Bonds have seen their best days.” The question is, what’s a bond specialist like PIMCO to do about it? They’ve offered two answers, in Global Advantage and Global Multi-Asset, below. Global Advantage addresses the risk of a bond market bubble and long, slow decline by changing the rules for bond investing. Instead of focusing on the biggest borrowers (the “market cap” approach used by virtually all bond indexes and benchmarks), shift to the credit-worthy borrowers (those whose Gross Domestic Products are large enough, and growing vigorously enough, to support their bond obligations). Global Multi-Asset goes a step further.

PIMCO Global Multi-Asset, “D” shares (PGMDX), launched 10/29/2008 and now at $2.2 billion. PIMCO tried diversifying away from bonds before, in the 1980s, but Mr. Gross’s heart simply wasn’t in the move. When their handful of stock investors tried to get PIMCO invested at the start of the greatest bull market in the 20th century, they got shut down. Mr. Gross admits, “Those sessions basically said, ‘Hey, we’re a bond shop. This is what we’re going to do. It’s the party line.’” With the help of CEO Mohamed El-Erian, a distinguished emerging markets investor and former head of Harvard Management Company, PIMCO is beginning to market opportunistic strategies that encompass a far wider array of asset classes and economic possibilities than ever before.

Rydex/SGI Managed Futures Strategy (RYMFX), launched 03/02/2007 and now at $2.3 billion. Sometimes it seems that intriguing new asset classes remain excellent options only until you invest in them. That must be the way that RYMFX investors feel. The fund, which holds long and short positions solely in financial instruments (e.g., currency futures and bonds) and commodities, amazed everyone by completing ignoring the 2008 market crisis and turning a handsome profit. But as the investors rushed in, the underlying market conditions changed and the fund has spent 18 months drifting lower. Fans argue that the long-term record of its underlying index (the Diversified Trends Index) gives reason for cheer: once financial markets start being “normal” again, this fund will take off again.

T. Rowe Price Overseas (TROSX), launched 12/29/2006 and now at $2.2 billion. Back in 2006, T. Rowe Price had a problem: their flagship international fund Price International (PRITX) utterly mediocre and had been so for years. In apparent response, they delegated the very successful manager of one of their smaller international funds (International Growth and Income TRIGX) to manage both this fund and his old charge. That turns out poorly, as TRIGX sagged to mediocrity while TROSX never rose above it. But the other response, fix the original problem by getting a more-focused manager for PRITX, has done a world of good for that fund.

Vanguard Dividend Appreciation Index (VDAIX), launched 04/21/2006 and now at $3.9 billion. In 2006, a lot of new investments were aimed at exploiting the virtues of dividends: high dividends, high dividend growth, high relative dividends or whatever. Most of them have fallen flat, but VDAIX (and its ETF clone, VIG), have gotten it right: high alpha, low beta large cap domestic investing. With low expenses and a focus on companies, that advantage seems likely to prove durable.

Wintergreen (WGRNX), launched 10/17/2005 and now at $1 billion. This is what mutual funds were supposed to be. Not “wimpy, cover my butt, don’t get too far out of line and do keep CNBC blaring in the background” investing, but “I’m smarter and I’m getting their first” investing. If DC Comics ever wanted to create a new super-hero, The Superman-ager, they’d surely model him off Mr. Winters who presents the perfect alter ego (funny, thoughtful, self-effacing, the unremarkable guy in the next cubicle over). But when night falls, off comes the green (wintergreen?) tie and out The Superman-ager flies.

The oddest thing about the Billionaire’s Club? No Fidelity funds. The titan of asset accumulation is still rolling out new funds – something like 65 in three years – but the vast majority are either retirement products (their target-date funds of funds), funds open only to other Fidelity funds or cloned share classes of long-standing funds (for example, the all-important “F” and “K” classes of Diversified International). Their most-successful new retail funds – at least as measured by their ability to attract assets – areDynamic Strategies (FDYSX, at $250 million) and Emerging Middle East and Africa (FEMEX, at $120 million). There are profiles of both in the archives, below. Beyond that, their most successful launches are index funds and “enhanced” index funds.

Fidelity. Small. Index funds. Eeeek.

Quick Updates from SteelPath

SteelPath offers the only open-end mutual funds which invest exclusively in master limited partnerships. In my June 2010 profile of SteelPath Alpha (MLPAX), I argued that “This seems to be an asset class with sustained, compelling advantages. SteelPath is, currently, the only game in town for mutual fund investors. Fortunately they seem to be a pretty good game: experienced players, rational arguments about their portfolio, and reasonable expenses especially for folks who can access the no-load shares.” Some of the posters on FundAlarm’s discussion board had follow-up questions, in particular about the peculiar tax status of MLPs. I put those questions to SteelPath and Gabriel Hammond, SteelPath’s founder and the fund’s manager, was kind enough to respond. Here are the highlights:

Q. Since your fund is structured as a corporation, are payments to shareholders taxed as income?

A. “No, the Funds’ distributions are taxed as qualified dividends. The Funds’ distributions may also be classified as return of capital in some cases, and not subject to taxation.”

Q. Since MLPs represent a relatively small portion of the investment universe, will you be constrained to close your funds while they’re still relatively small?

A. “We believe that a manager would have difficulty delivering the type of outperformance we envision if he held more than 1%-1.5% of the float of the securities in the space. As such we would consider a soft close at $1.25bb.” Given their different mandates, SteelPath’s Alpha 40 fund doesn’t face a meaningful upper limit and the Income fund might see “a soft close at $1.75bb.”

Q. While MLPs have been great portfolio diversifiers so far – their long-term correlation to the S&P500 is 0.24, rather lower than emerging market equities’ – do you anticipate an increasing correlation to the stock market as MLPs become increasingly securitized, or mainstream?

A. Over time, as the MLP asset class becomes more institutionalized, there may be a marginal increase in correlation with other market sectors, but fundamentally, because the underlying cash flows are uncorrelated (that’s the key difference: REITS are correlated not because they’re institutionalized, but because their distributions go up and down with the vicissitudes of the broader economy, as do the cash flows of the average widget maker in the S&P 500) so we expect MLPs to remain largely uncorrelated.

The fund also offered great news for interesting individual investors. While the fund has a 5.75% front load, “the fund is available with no load if purchased through Schwab, TD, among others and directly from the Fund, through its website, telephone, or mail.”

Quick Updates from Wasatch

Several months ago, Kenster, a contributor to FundAlarm’s Discussion Board, recommended Wasatch Global Opportunities(WAGOX) to me as a fund worthy of much more attention. I did the research and concluded, not surprisingly, that Kenster was right again. In my May 2010 profile of WAGOX, I concluded: “This is a choice, not an echo. Most global funds invest in huge, global corporations. While that dampens risk, it also tends to dampen rewards and produces rather less diversification value for a portfolio. This bold newer fund goes where virtually no one else does: tiny companies across the globe. Only Templeton Global Smaller Companies (TEMGX) with a value bent and a hefty sales load comes close. Folks looking for a way to add considerable diversity to the typical . . . portfolio really owe it to themselves to spend some time here.” I reported that the fund held 330 stocks, more than triple the average global fund’s average. Some of the folks on the Discussion Board were concerned that this might represent a watering-down of performance. Eric Huefner, a Wasatch Vice President and Director of Mutual Funds & Brand Management, wrote in early June:

Robert Gardiner [the manager] always ran a longer list than most others at Wasatch in his domestic funds. He feels like he is able to get to know the most promising companies better if they are actually in the portfolio, and as his confidence grows in a company so does his position size. As Robert & [co-manager] Blake [Walker] traverse the globe they are finding a handful or more of promising companies in each country they visit. In Robert’s classic style, they have initially purchased small positions in each of these companies of greatest interest. Over time you are likely to see the concentrations and number of holdings fluctuate. Even with a list of 350 holdings, Robert describes the list as we he thinks are the best 2-3% of the companies in his consideration universe.

I’ll also note that the estimable Fidelity Low-Priced Stock Fund (FLPSX) has long favored holding many hundreds of small companies – nearly 900 at the moment – without a noticeable detriment in performance.

More great small funds are disappearing!

Oak Value (OAKVX), which has recently become small enough – about $80 million, but once four times that large – to interest me and appall the managers, has agreed to become the RS Capital Appreciation fund by September. OAKVX has a very tight, large cap portfolio (27 stocks), and a long record of producing above-average returns at the cost of above-average volatility. In moving to RS, which used to be the fine no-load firm Robertson Stephens, OAKVX will gain a 4.75% sales load though the expense ratio will initially drop about 25 bps. Those who buy before the formal acquisition get “grandfathered-in” to the no-load share class.

FBR Pegasus Small Cap Growth (FBRCX) is merging into FBR Pegasus Small Cap (FBRYX) at the end of summer. In my January 2010 profile of FBRCX, I argued that the fund was “fundamentally sensible: they offer most of the upside without much of the gut-wrenching volatility. It’s hard to find managers who can consistently pull it off. Mr. Barringer seems to be one of those people, and he deserves a serious look by folks looking for core small cap exposure.” In the short term, it’s “no harm, no foul.” Mr. Barringer runs the acquiring fund and the expenses are identical. Neither fund is economically viable – the $24 million growth fund is being rolled into the $9 million core fund and FBR had to waive $90,000 in fees on each fund in 2009 – which seems to be a problem for a number of FBR funds.

Why isn’t there an Emerging Markets Hybrid fund?

There are a couple dozen funds, mostly of the “global allocation” variety, which have at least 25% of their portfolios in bonds and at least 25% in non-U.S. stocks. None of them has even 10% of their money in the emerging markets. Why would anyone want such a crazy creature? Let’s see:

Over the past ten years, the EM bond group has returned about 11% per year while the EM stock group turned in 10% annually.

GMO predicts that the highest-returning equity class over the next 5-7 years will be emerging markets equities and the highest-returning debt class will be emerging markets bonds (GMO 7-Year Asset Class Return Forecasts, 5/31/2010).

EM bonds are weakly correlated to EM stocks in the long run (around 30), though all correlations spike during crises. EM bonds also have a weak-to-negative correlation with all domestic bonds, except for high yield bonds (all of that derived from the site

The EM market is investable and broadly diversified. According to the Emerging Markets Traders Association, by 2007, secondary market trading volumes for emerging market debt (Brady bonds, sovereign and corporate Eurobonds, local markets instruments, debt options and sovereign loans) was about U.S.$6.5 trillion, with local bonds (as opposed to Brady bonds) comprising nearly 66%. Trading in such bonds was down by a third in 2008 and 2009 figures don’t seem yet available.

There are eight emerging markets bond funds and 32 emerging markets equity funds with over $1 billion in assets. A half dozen of the bond funds and 26 of the stock funds have records longer than 15 years.

But there are no funds, with a total of no assets, which systematically invest in both.

Admittedly EM bonds cratered in September and October 2008, with Fidelity New Markets (FNMIX) losing a third of their value in six weeks. That said, it has also rebounded to a new high by the following June.


Briefly noted:

Fidelity had picked up on the alternative energy bandwagon. The former Fidelity Select Environmental Portfolio (FSLEX) has become the Select Environment and Alternative Energy Portfolio and adopted the FTSE Environmental Opportunities & Alternative Energy Index as its benchmark. The fund’s target will be “companies engaged in business activities related to alternative and renewable energy, energy efficiency, pollution control, water infrastructure, waste and recycling technologies, or other environmental support services.” Alternative and renewable energy and water infrastructures are all new, energy efficiency is more prominent now than in the old portfolio. FSLEX has been around for 20 years but has accumulated only about $50 million in assets. Morningstar classifies itself as a midcap growth fund, a group which it has solidly trounced over the past decade.

The $1.4 billion Arbitrage Fund (ARBFX) is slated to close to new investors on July 19th. The advisor announced the closing about a month ahead of time, which is almost never in the best interest of existing shareholders since it constitutes an open invitation for “hot money” investors to get in while they still can. The managers had previously planned on closing at $1 billion, so this might be a bit late. Their closest peer, Merger Fund (MERFX), is even-larger at $3.2 billion.

The Forward Frontier Markets fund (FRONX) has been recommissioned as the Forward Frontier MarketStrat fund. The difference in focus is not entirely clear from the revised prospectus. Given that Forward trails virtually all frontier market, regional frontier market and emerging markets funds since inception, the desire to make some sort of change is understandable. I just wish I understood what they were doing.

Let’s not be hasty about this whole execution thing! On May 6, 2010, the Board of Directors voted to close, liquidate and terminate (not just “liquidate,” mind you – “liquidate and terminate”) the SAM Sustainable Climate FundSustainable Water Fund andSustainable Global Active Fund. On June 14, 2010, the Board issued an unexplained “hold on there!” and voted to reopen (hence, “and neither liquidate nor terminate”) the SAM Sustainable Global Active Fund (SGAQX). The funds were launched between late 2007 and late 2009, presumably to capture the then-trendy green investing passion.

The Intrepid All Cap and Income funds have added institutional share classes. Both of the funds are small, newish and have performed very solidly. These shares will be 25 basis points cheaper than the retail shares but will have a $250,000 investment minimum. Tickers not yet assigned.

For reasons unexplained, Global X has announced that the following ETFS are “not operational and unavailable for purchase:Global X Brazil Consumer ETF, Global X Brazil Financials ETF, Global X Brazil Industrials ETF, Global X Brazil Materials ETF, Global X Brazil Utilities ETF [and] Global X China Mid Cap ETF.” Geez, this really derails my plan to make a play on the booming Brazilian snack foods market.

In closing . . .

Well, that’s it for now. The time spent with your families is far more precious than money. Enjoy it while you can. Our new fund and stars profiles will return as soon as the weather cools.

As ever,


August, 2010

By Editor

. . . from the archives at FundAlarm

David Snowball’s
New-Fund Page for August, 2010

Dear friends,

In celebration of the Dog Days of Summer (which have turned out to be less “lazy, hazy” and more “crazy” than I’d liked), we continue with one last potpourri of fund news before returning to the serious business of autumn.

If you didn’t know that “potpourri” originally meant “meat stew” and, in particular “slightly-rotten meat stew,” you might want to check my “Closing” note for a lead to a book purchase which will leave you enlightened and amused (and, as always, will support FundAlarm’s continued financial health).

The fund industry’s awareness of how quickly the sands are shifting is illustrated by a series of recent repackagings, renamings, and rechristenings. Since this stuff sometimes drives me to drink (in the summer heat: iced lambrusco festooned with raspberries, maybe sangria), I tend to think of them in terms of wines and bottles.

Old Wine in New Bottles

The Bridgeway Balanced Fund (BRBPX) is now the Bridgeway Managed Volatility Fund (still BRBPX). Most Bridgeway funds have names descriptive of their composition (Ultra-Small CompanyLarge Cap Value), rather than their outcomes. The new name is meant to reflect, rather than change, the fund’s long-time goals. Dick Cancelmo, the fund’s manager since inception, writes:

We seek to provide a high current return with short-term risk less than or equal to 40% of the stock market – new name has more alignment with the objective. Balanced Funds are typically a fairly generic mix of equity and fixed income. Our fund also uses options and futures to dampen risk and we wanted to highlight that distinction.

Mr. Cancelmo felt compelled to highlight that distinction, since “I can’t tell you how many times I have told an advisor that I manage a balanced fund and I am told they won’t look at it.” They hope that the new name “will at least get us a better look.”

The fund certainly warrants a long, hard look. Since inception in June 2001, it has managed to earn 2.46% per year against the S&P’s 0.01% with a beta of just 44 (pretty close to his target of 40). The fund’s recent record has been damaged by the 15% or so of the portfolio dedicated to investments mirroring those in Bridgeway Aggressive Growth I (BRAGX). BRAGX’s computer programs performed brilliantly for more than a decade, but cratered in the past three years. That collapse has reportedly led to a substantial rewriting of the programs.

In another set of changes, the IQ funds have shaken the fund world by renaming IQ CPI Inflation Hedged ETF (and the similarly-named underlying index) to IQ Real Return ETF (and similarly-named index). They compounded the tremor by dropped “ARB” from the names of IQ ARB Merger Arbitrage and IQ ARB Global Resources.

New Wine in Old Bottles

Effective at the end of June, PowerShares Value Line Industry Rotation Portfolio became the PowerShares Morningstar StockInvestor Core Portfolio (PYH) and Value Line TimelinessTM Select Portfolio became the PowerShares S&P 500 High Quality Portfolio (PIV).

Since inception, both of the Value Line versions of the fund had laughably bad performance (losing more in 2008, earning less in 2009, trailing enormously since their respective inceptions) compared to any of their benchmarks. The decision was announced on April 29. But since these are not new funds, they don’t require vetting by that sleepy ol’ SEC. The mere fact that nothing about the new funds’ strategy or portfolio will have any resemblance to the old funds’ apparently doesn’t rise to the level of material change. PowerShares is a relatively new player on the fund scene, but it’s already learning the lessons of cynicism and customer-be-damned quite well. We’re guessing that there’s more like this in the PowerShares future.

The other changes: PowerShares Autonomic Growth NFA Global Asset Portfolio became PowerShares Ibbotson Alternative Completion Portfolio, and PowerShares Autonomic Balanced Growth NFA Global Asset Portfolio became PowerShares RiverFront Tactical Balanced Growth Portfolio.

A Nice Table Wine: Tweaked Blend, New Label

T. Rowe Price has changed its internal Short-Term Income fund into its internal Inflation-Focused Fund. Inflation-Focused is only available to the managers of Price’s funds-of-funds, but I was curious about what the rest of us might learn from the rationale for the change. Wyatt Lee, a member of Price’s asset allocation team, explained the fund’s evolution this way: originally, Price’s funds-of-funds invested separately in a short-term bond fund and cash, as part of the most conservative sleeve of their portfolios. That struck Price as clunky, so they shaped the portfolio of the Short-Term Income fund to balance cash and short-term bonds. The new version of the fund will invest in a “diversified portfolio of short- and intermediate-term investment-grade inflation-linked securities . . . as well as corporate, government, mortgage-backed and asset-backed securities. The fund may also invest in money market securities, bank obligations, collateralized mortgage obligations, foreign securities, and hybrids.”

Why now? Mr. Lee stressed the fact that Price is not acting in anticipation of higher short-term inflation. They’re projected 1% or so this year and around 2% in 2011. Instead, their research suggested that they can decrease the fund’s volatility without decreasing returns, and still be positioned for the inevitable uptick in inflation when the global economy recovers. Mr. Lee says that Price isn’t discussing a comparable change to its retail Short-Term Bond fund, but he left open the possibility.

Price has a second, more aggressive internal fund in registration, the Real Asset Fund. Real Asset will invest both in “real assets” and in the securities of companies that derive their revenue from real assets. Such assets include energy and natural resources, real estate, basic materials, equipment, utilities and infrastructure, and commodities. It’s typical of Price’s approach to pursue such a fund when everyone else is turning away from the sector and it might be prudent for the rest of us to ask whether investing in, say, T. Rowe Price New Era (PRNEX) when it’s down (by about 6% YTD through July 27) is better than waiting to rush in after it’s gone up.

Broken Bottles, Spilt Wine

AARP is liquidating all four of their funds. Damn, damn, damn. Four funds, all rated five-star by Morningstar, and all rated somewhere between “solid” and “outstanding” by Lipper. The three stock-oriented funds (Aggressive, Moderate, Conservative) are all way above average for 2010 after posting unspectacular results in the 2009 surge. Low expenses (0.5%). Ultra-low minimum ($100). Straightforward, low turnover strategy (invest in varying combinations of four indexes). All of which generated quite modest investor interest: between $20 and $50 million in assets after almost five years of operation.

These would be great funds to test Chuck Jaffe’s suggestion that retail giants might be logical marketers for lines of mutual funds (“Aisle 1: Frozen Foods, Aisle 2: Mutual Funds,” Wall Street Journal, July 13 2010). Here’s the oversimplified version of Mr. Jaffe’s argument: funds have been increasingly like commodities over the past two decades, and they’d be a good complement to firms (Wal-Mart, Microsoft) which have brand recognition and a knack for selling mass consumption items. While I like the branding possibilities of the very fine GRT Value (GRTVX) fund – it’s already Wal-Mart’s brand – the simplicity, ease of expansion, and sensibility of AARP’s approach makes it a natural fit.

AARP’s Board is not alone in the painful decision they had to make. Investors remain deeply skittish about stock investing and fund flows generally are negative, especially to “vanilla” products that don’t tout downside protection. That’s annoying to Fidelity but catastrophic to boutique firms or mom-and-pop funds

Of the 401 funds which hold Morningstar’s five-star designation (as of late July, 2010), 46 live at the edge of financial extinction, with assets under $50 million. While I would not propose a No-Load Death Watch list, investors might have reasonable concern about and, in several cases, interest in:

Aegis High Yield AHYFX A great value-stock manager’s bond fund, which makes sense because the small value companies that Mr. Barbee and his team were researching were also issuers of high yield bonds. 2010 has been tough, but it’s a top 1% performer since inception with annual returns of better than 8%.
Akros Absolute ReturnAARFX A well-qualified manager with a complex long-short strategy that I don’t actually understand. Morningstar’s analysts are impressed, which is a good thing. The fund charges over 2%, which is less good, but not surprising for a long-short fund. It lost only 2% in 2008 and has a string of solid years relative to its peer group.
Bread & Butter BABFX It sounded like a goofy fund when it was launched in 2005 and the strategy still sounds stilted and odd: the Contrarian/Value Investment Strategy driven by analyses of things like “overall management strategy” and “financial integrity.” Except for a relatively outstanding 2008 (admittedly, a big exception), the fund has been a lackluster performer.
CAN SLIM Select GrowthCANGX The newspaper Investor’s Business Daily has a list of can’t miss aggressive growth stocks. The point is to identify solid firms whose stocks are about to pop and to exercise a rigid sell discipline (if a stock drops 7% below the purchase price, it’s history – no exceptions). Unlike the funds attempting to profit from Value Line’s rating system, this one actually works, though not quite as well as the theory predicts.
FBR Pegasus InvestorFBRPX, Midcap FBRMX and Small Cap FBRYX The Pegasus line of funds is FBR’s most distinguished and all are managed by David Ellison, a long-time colleague of the now-departed Chuck Akre.
Kinetics Water Infrastructure KINWX Kinetics just fired the fund’s sub-adviser, Brennan Investment Partners LLC, presumably because the fund managers left Brennan. Unconcerned by … oh, qualifications, Kinetics then put their regular team of (non-water) managers in place.
LKCM Balanced LKBAX A mix of mostly dividend-paying stocks plus investment grade bonds, reasonable expenses, low risk, same team since inception. A thoroughly T. Rowe Price sort of offering.
Marathon Value MVPFX Small, low turnover, low risk, domestic large cap fund with pretty consistently top 10% returns and the same manager for a decade.
Midas Perpetual PortfolioMPERX “Perpetual Portfolio.” “Permanent Portfolio.” What’s the diff? These two funds invest in the same sorts of precious metals, solid currencies, commodities and growth stocks.Permanent Portfolio (PRPFX) just does it a lot better. Perpetual shows a remarkablysmooth, slow, upward trending return line over the past decade. It has essentially ignored the stock market’s gyrations and made about 40% over the decade, about 3.5% per year. Permanent Portfolio made about 160%, 10% a year.Perpetual Portfolio’s managers have shown no interest in investing in their fund. Three of the four managers have invested zero and one has a token investment.
Monetta Young InvestorMYIFX “Young investor” funds typically buy Apple and Disney, with the illusory hope that “young investors” will be drawn to their favorite brands. Here, the fund’s top 10 holdings are all broad ETFs. Fairly short history with market-like risk but above-market returns.
Needham AggressiveNEAGX and Small Cap Growth NESGX Needham’s funds suffer from relatively high cost and high manager turnover but both of these have produced strong returns with limited volatility.
Neiman Large Cap ValueNIEMX Purely domestic, same managers since inception (2003), low volatility, solid returns, rather more impressive in down markets than in rallies.
Royce Global SelectRSFTX The fund invests in a combination of larger stocks, preferred shares and debt. With a $50,000 minimum, it seems unlikely that Royce cares about the fund’s asset level.
Sextant Core SCORX andGrowth SSGFX Part of Nicholas Kaiser’s fleet of outstanding funds, both here and through the Amana group. Core is a balanced fund,Growth is a low-risk, large cap domestic growth fund.
Tilson Dividend TILDX The larger and stronger of value guru Whitney Tilson’s two funds.
Valley Forge VAFGX Bernand Klawans, now 89, has run the fund since the first Nixon administration. His co-manager, added in 2008, owns 75% of the fund’s advisor, but has only $1000 invested and does not contribute (according to the latest SAI) to the fund’s day-to-day operation. The fund’s fate after Mr. Klawans eventual departure is unclear.

The Brazos drama continues. Brazos was a line of fine, small no-load funds launched in the late 1990s. It became a loaded family in 1999 when the advisor was bought by AIG (booo! Hissss!). Its original no-load shares were redesignated as institutional shares and a new share class was launched. Their flagship Micro-cap fund closed in 2001 with $300 million in assets. In 2002, they dropped the funds’ sales loads (hooray!). In 2003, they settled an SEC case involving improper, but not fraudulent, actions. Fast forward to 2008, when the funds suffered losses of 48 to 54% which, shall we say, dented investor enthusiasm for them. In January 2010, PineBridge bought and renamed the four Brazos funds. Shareholders quickly rubber-stamped the Board’s proposal that the funds’ investment objectives were “not fundamental,” though for the life of me I can’t imagine anything more fundamental to a fund than its reason for existence. And, after all that, they’ve concluded that their US Mid Cap Growth Fund (PBDRX) is unsalvageable, so it’s being liquidated.

Aston Funds closed Aston/Optimum Large Cap Opportunity Fund [AOLCX] in mid-July. The fund will be liquidated by mid-August.

Speaking of Deathwatches, the ETF Deathwatch List has grown to 133 funds, up 54% in the past year. The Deathwatch List targets funds which trade under $100,000 daily. The most moribund of the lot is FaithShares Lutheran Values (FKL), which trades an average of 41 shares a day and which doesn’t trade at all on most days. (That’s a trading volume usually associated with stocks on the smallest African frontier market exchanges.) It’s especially annoying to be trailing the durn Baptists, whose Baptist Values ETF (FZB) is equally tiny, but modestly more successful YTD.

The most interesting note is Ron Rowland’s speculation that many of these funds serve as mere “placeholders,” that is, once launched they become tools for the advisors who can – as with the PowerShares funds mentioned above – keep flipping the fund’s mission and composition until they find something that draws money. And when it stops drawing, they cut it loose again. (“ETF Deathwatch List Is Longest In A Year,”, July 19 2010)

What am I, chopped livah?

Another in a long line of “best investments you’ve never heard of . . . unless you read FundAlarm” articles, Kiplinger’s senior editor Jeffrey Kosnett offers up master limited partnerships for your consideration.

We lionize a mutual fund that returns 20% during a bear market. Or we assume that anything earning such fabulous returns must be a fraud or caught in a bubble. Now consider a whole class of investments, many of which have returned double digits annualized during the stock-market quagmire of the past decade. More remarkable: Few of us are aware of this phenomenon called pipeline master limited partnerships. (“The Best Investment You’ve Never Heard Of,” July 15 2010)

Kosnett’s short article reviews the asset class and options for owning MLPs, including direct ownership, ETFs and the SteelPath funds. We part company on his endorsement of direct ownership; I suspect that might be best for folks looking for a meaningful, long-term relationship with their tax accountants. Folks interested in more depth on MLPs, links to the research and a profile of the (no-load) SteelPath funds might check either FundAlarm’s June 2010 profile of SteelPath Alpha or the July 2010 update on the fund’s no-load availability, investment capacity and tax status.

SteelPath’s Investor Commentary for June 30, 2010, made two interesting points:

MLPs as a group registered gains on 63% of the trading days in June. The Alpha fund was in the black for the month as well.

The sector might be experiencing a new type of fund inflows. Traditionally MLPs have been dominated by leveraged hedge fund trading but much of the new money seems to originate with institutional investors, who are less likely to fall prey to “hot money” impulses. As a result, demand for MLP shares might see a steady, sustainable rise.

In Closing . . .

As we move into fall, we’ll also move back to the normal rhythm of things: new fund profiles and stars in the shadows, snarky comments and interviews. But before getting all serious again, you should indulge in a last few moments of diversion. Of late, I’ve been reading Martha Barnette’s amusing Ladyfingers & Nun’s Tummies (2005). Barnette tracks the origins of our food names and food related words, including a remarkable array of foods named for the body parts or … uh, bodily functions of revered religious figures. The number of foods dedicated to nuns’ … uh, toots (occasionally cleaned up for children by calling them “nun’s kisses”) is striking. If you enjoy food and diversion, and would like to painlessly help support FundAlarm, please use our link to to pick up a copy. While you’re there, you might pick up a can or two of delicious Spotted Dick, which you’ll probably enjoy more before you read Barnette’s history of the name.

Take care and we’ll talk again as the weather cools!



September, 2010

By Editor

. . . from the archives at FundAlarm

David Snowball’s
New-Fund Page for September, 2010

Dear friends,

The Silly Season is upon us. It’s the time of year when Cleveland Brown fans believe in the magic of Jake Delhomme (those last 18 interceptions were just a fluke). And it’s when investors rush to sell low-priced assets (by some measures, the U.S. stock market’s p/e ratio is lower now than at the March ’09 market bottom) in order to stock up on over-priced ones (gold at $1240/ounce, up 30% in 12 months and 275% over five years). Again. Three examples of the latest silliness popped up in late August.

Trust us: We’re not like those other guys

A small advisory service, MarketRiders, is thrashing about mightily in an effort to get noticed. The firm offers a series of ETF portfolios. The portfolios range from 80% bonds to 80% stocks, with each portfolio offering some exposure to TIPs, emerging markets and so on. You take a sort of risk/return survey, they recommend one of their five packages, and then update you when it’s time to rebalance. $10/month. A reasonable-enough deal, though it’s not entirely clear why the average investor — having been assigned a portfolio and needing only to rebalance periodically — would stick around to pay for Month #2.

MarketRider’s key business development strategy seems to be hurling thunderbolts about, hoping to become . . . I don’t know, edgy? Their basic argument is that every other investment professional, from financial advisors to investment managers, operates with the singular goal of impoverishing you for their own benefit. They, alone, represent truth, virtue and beauty.

The last thing Wall Street wants you to do is start using a system that works. . . So here’s The System. Yale, Harvard, and wealthy families all over the world use it. Experts recommend it. MarketRiders has revealed and made it simple for you.

Actually, no. Harvard has 13% of its money in private equity, 16% in absolute return strategies, and 23% in real assets. Yale has 26% in private equity, 37% in real assets. God only knows what “wealthy families all over the world” buy.

One of their more recent rants compared the mutual fund industry to the tobacco industry, and likened Morningstar to the industry’s dissembling mouthpiece, The Tobacco Institute. A money blog hosted by the New York Times quoted their marketing e-mail at length, including the charge

For years, the mutual fund industry has waged a similar war against the passive index investment methods that we support. Like big tobacco, the mutual fund industry is large, profitable and immensely powerful. With large advertising budgets to influence “unbiased” mainstream media, they guide investors into bad investments. Morningstar has lined its pockets as a willing accomplice.

Given the presence of over 300 conventional index funds, including the world’s third-largest fund and 20 indexes with over $10 billion each, one might be tempted to sigh and move on. Add the 900 eagerly-marketed ETFs – including those from fund giants Vanguard and PIMCO – and the move away might become a determined trot.

In response to the Times blog, the estimable John Rekenthaler, Morningstar’s vice president of research, chimed in with a note that suggested MarketRiders substantially misrepresented the research both on Morningstar and on fund manager performance. Rather than respond to the substantive charge, MarketRiders’ president issued a typically pointless challenge to a five-year portfolio contest (following MarketRiders’ rules), with the loser donating a bunch of money to charity. JR has not yet responded, doubtless because he’s hiding under his desk, trembling, for having been exposed as a huckster. (Or not.)

It’s not clear that any of MarketRiders’ staff carries any particular qualifications in finance, though they might wear that as a badge of honor. They have only four employees:

Mitch Tuchman, CEO: venture capitalist. According to his various on-line biographies, for “27 years, Mitch has invested in and served as a troubleshooter for technology, software, and business services companies.” In 2000, he co-founded a venture capital fund specializing in b2b e-commerce projects. Later he advised APEX Capital “on the firm’s technology micro-cap and special situations portfolio.”

Steve Beck: “serial entrepreneur” with a B.A. in Speech.

Ryan Pfenninger: “accomplished technologist” with experience in computer games.

Sally Brandon: offers “diverse experience in product management, market analysis and client relations.”

They have no public performance record. Their website reports the back-tested results of hypothetical portfolios. Like all back-tests, it shows precisely what its creators designed it to show: that if, five years ago, you’d invested between 2.0 – 8.5% in emerging markets equities, you’d be better off than if you’d sunk all of your money into the S&P500. Which doesn’t tell us anything about the wisdom of that same allocation in the five years ahead (why 8.5%? Because that’s what we now know would have worked back then).

On whole, you’re almost certainly better off plunking your money in one of Vanguard’s Target Retirement funds (average expense ratio: 0.19% and falling).

Hindenburg (Omen) has appeared in the skies!

Be ready to use it as a convenient excuse to damage your portfolio. As one on-line investor put it in September of 2005, “The Hindenburg Omen thing weirded me right out of the market.” “Weirded boy” presumably missed the ensuing 4% drop, and likely the subsequent 12% rise.

This seems to be the Omen’s main utility.

The story of “the Omen” is pretty straightforward. A guy named James Miekka, who has no formal training in finance or statistics, generated a pattern in the mid 1990s that described market movements from the mid 1980s. At base, he found that a rising stock market characterized simultaneously by many new highs and many new lows was unstable. Within a quarter, such markets had a noticeable fall.

We are, according to some but not all technicians, in such a market now. For the past month, based on a Google News search, the Omen has appeared in about 10 news stories each day. The number is slightly higher if you include people incapable of spelling “Hindenburg” but more than willing to agonize about it.

The Hindenburg has passed overhead on its way to its fateful Lakehurst, NJ, mooring 27 times since 1986 (per CXO Advisory, 23 August). Its more recent appearances include:

April 14, 2004

October 5 2005

May 22 2006

October 27 2007

June 6 and 17 2008

August 16 2009

Faithful followers have managed to avoid five of the past two market declines. It’s about 25% accurate, unless you lower the threshold of accuracy: in 95% of the quarters following a Hindenburg warning, the market records at least one drop of 2% or more. (2%? The market moves by more than that on rumors that Bernanke hasn’t had enough fiber in his diet.)

So why take it seriously?

First, it’s more dignified than saying “I’m not only living in the state of Panic, I’ve pretty much relocated to the state capitol.” The condition is true for most investors since the “fear versus greed” pendulum has swung far to the left. But it’s undignified to admit that you invest based on panic attacks, so having The Hindenburg Omen on your side dignifies your actions. Fair enough.

And too, Glenn Beck uses it as proof that the Obama administration’s economic policies aren’t working.

Second, it has a cool back story (mostly untrue). The story begins with James Miekka, almost universally designated a “mathematician” though occasionally “brilliant technical analyst,” “blind mathematician” or “blind oracle.” Which sounds ever so much cooler than the truth: “legally blind former high school algebra and science teacher with a secondary education.” The exact evolution of the Omen is fuzzy. It appeared that Mr. Miekka sat and fiddled with data until he got a model that described what had happened even if it didn’t exactly predict what would happen. Then he adjusted the model to align with each new incident, while leaving enough vagueness (it only applies in “a rising market” – the definitions of which are as varied as the technicians seeking to use it) that it becomes non-falsifiable.

Third, it has a cool name. The Hindenburg Omen. You know: “Ohhhhh! It’s–it’s–it’s the flames, . . . It’s smoke, and it’s flames now . . . This is the worst thing I’ve ever witnessed.” Technicians love spooky names. They’re very marketable. Actual names of technical indicators include: The Death Cross. The Black Cross. The Abandoned Baby. The Titanic Omen. The Lusitania Omen.

Miekka actually wanted “The Titanic Omen,” but it was already taken so a friend rummaged up the poor old Hindenburg. As a public service, FundAlarm would like to offer up some other possibilities for technicians looking for The Next Black Thing. How about, The Spanish Flu Pandemic of 1918 Omen (it occurs when a third-tier nation manages to sicken everyone else)? Or, The Half Billion Contaminated Egg Recall of 2010 Omen (which strikes investors who made an ill-timed, imprudent commitment to commodities)? Maybe, the Centralia Fire Signal (named for the half-century old underground fire which forced the abandonment of Centralia, PA, the signal sounds when small investors have discovered that it’s a bit too hot in the kitchen for them).

“Danger, Will Robinson, Danger! I detect the presence of bad academic research”

Academic research really ought to come with a bright red and silver warning label. Or perhaps Mr. Yuk’s lime-green countenance. With the following warning: “Hey, you! Just so you know, we need to publish something about every four months or we’ll lose our jobs. And so, here’s our latest gem-on-a-deadline. We know almost no one will read it, which allows us to write some damned silly stuff without consequence. Love, Your Authors.”

The latest example is an exposé of the fund industry, entitled “When Marketing is More Important than Performance.” It’s one of those studies that contains sentences like:

R − R =α +β *MKTRF +β * SMB +β *HML +β *UMD +ε ,t=T-36,T-1

The study by two scholars at France’s famed INSEAD school, finds “first direct evidence of trade off between performance and marketing.” More particularly, the authors make the inflammatory claim to have proof that fund managers intentionally buy stinky stocks just because they’re trendy:

. . . fund managers deliberately prefer marketing over performance.

Funds deliberately sacrifice performance in order to have a portfolio composition that attracts investors.

Their work was promptly featured in a posting on the AllAboutAlpha blog and was highlighted (“A New Study Casts Fundsters in an Unflattering Light”) on the Mutual Fund Wire news service.

All of which would be more compelling if the study were worth . . . oh, say, a pitcher of warm spit (the substantially cleaned-up version of John Nance Garner’s description of the vice presidency).

The study relies a series of surrogate measures. Those are sort of fallback options that scholars use when they can’t get real data; for example, if I were interested in the weight of a bunch of guys but couldn’t find a way to weigh them, I might use their shirt sizes as a surrogate (or stand in) for their weight. I’d assume the bigger shirt sizes correlated with greater weight. Using one surrogate measure introduces a bit of error into a study. Relying on six of them creates a major problem. One key element of the study is the judgment of whether a particular fund manager had access to super-duper stock information, but failed to use it.

They obviously can’t know what managers did or did not know, and so they’re forced to create two surrogate measures: fund family size and the relationship of portfolio rebalancing to changes in analyst recommendation. They assume that if a fund is part of a large fund complex, the manager automatically had access to more non-public information than if the fund is part of a boutique.

The folks are Matthews Asia Funds beg to differ.

Scott Barbee of sub-microcap Aegis Value (AVALX) rolls his eyes

John Montgomery, whose Bridgeway funds have no use for any such information, goes back to fine-tuning his models.

The managers tend go on to correlate the often six-month old fund portfolio data with analyst recommendations which change monthly, in order to generate a largely irrelevant correlation.

And, even with a meaningful correlation, it is not logically possible to reach the author’s conclusions – which attribute specific personal motivations to the managers – based on statistical patterns. By way of analogy, you couldn’t confidently conclude anything about my reasons for speeding from the simple observation that I was speeding.

At most, the authors long, tortured analysis supports the general conclusion that contrarian investing (buying stocks out of favor with the public) produced better results than momentum investing (buying stocks in favor with the public), though making trendy, flavor-of-the-month investments does attract more investor interest.

To which we say: duh!

Briefly noted:

Harbor has abandoned plans to launch Harbor Special Opportunities fund. The fund has been in a holding pattern since March 2009. Harbor filed a prospectus that month, then filed “post effective amendments” every month since in order to keep the fund on hold. On August 26 they finally gave up the ghost. Harbor is also liquidating their distinctly mediocre Harbor Short Duration Fund [HRSDX) in the next month.

Speaking of ghosts, four more Claymore ETFs have left this world of woe behind. Claymore/Zacks Country Rotation,Claymore/Beacon Global Exchanges, Brokers & Asset Managers Index ETF, Claymore/Zacks Dividend Rotation, andClaymore/Robb Report Global Luxury Index ETF are now all defunct. According to the firm’s press release, these are dumb ideas that failed in the marketplace. No, they’re celebrating “product lineup changes.”

The Robb Report Global Luxury ETF? For those who don’t subscribe, The Robb Report is a magazine designed to let rich people (average household income for subscribers: $1.2 million) immerse themselves in pictures of all the things they could buy if they felt like it. If you want the scoop on a $418,000 Rolls Royce Phantom Coupé, these are the guys to turn to. The ETF gave you the chance to invest in the companies whose products were most favored by the nouveau riche. Despite solid returns, the rich apparently decided to buy the car rather than the ETF.

Does it strike you that, for “the investment innovation of the millennium,” ETFs are plagued with rather more idiocy than most other investment options?

Two actively managed ETFs, Grail RP Financials and Grail RP Technology are also being . . . hmm, “moved out of the lineup.”About two dozen other ETFs have liquidated so far in 2010, with another 350 with small-enough asset bases that they may join the crowd.

Folks not able to make it to Iowa this fall might find that the next-best thing is to pick up shares of a new ETF: Teucrium Corn CORN. Long-time commodity trader Sal Gilbertie was “shocked” (“shocked, do you hear?”) to learn that no one offered pure-play corn exposure so he stepped in to fill the void. Soon to follow are Teucrium Sugar, Trecrium Soybean and Teucrium Wheat Fund.

Shades of Victor Kiam! The employees of Montag & Caldwell liked their funds so much, they bought the company. Montag was a very fine, free-standing investment advisor in the 1990s which was bought by ABN AMRO, which merged with Fortis, which was lately bought by BNP Paribas. Crying “no mas!” the Montag folks have reasserted control of their firm.

In addition to merged FBR Pegasus Small Cap Growth into the FBR Small Cap, FBR has decided to strip the “Pegasus” name from the series of very successful funds that David Ellison runs: FBR Pegasus becomes FBR Large Cap with a new “principal investment strategy” of investing in large cap stocks. FBR Pegasus Mid-Cap and FBR Pegasus Small Cap lose the “Pegasus” but keep their strategies.

In closing . . .

As summer ends, I mourn all the great places that I haven’t had a chance to visit. My morose mood was greatly lightened by Catherine Price’s new book, 101 Places Not to See Before You Die (Harper, 2010). I’ve always been annoyed by the presumptuous twits who announce that my life will be incomplete unless I follow their to-do list. The “before you die” genre includes 2001 Things to Do, 1000 Places to See, Five Secrets You Must Discover, 1001 Natural Wonders You Must See, 1001 Foods You Must Taste and unnumbered Unforgettable Things You Must Do. I was feeling awfully pressured by the whole thing but Ms. Price came along and freed me of a hundred potential obligations. She X’s out the Beijing Museum of Tap Water, the Blarney Stone and the entire State of Nevada. I’m feeling lighter already. If you’d like to share in my ebullience and help support FundAlarm, use FundAlarm’s special link to to pick up a copy. (By the way, there’s a similarly-titled book, Adam Russ’s 101 Places Not to Visit: Your Essential Guide to the World’s Most Miserable, Ugly, Boring and Inbred Destinations while is a parody of the “before you die” genre while Price actually did visit, and abhor, all of the places in her book.)

I’ll see you next when the trees start to don their autumnal colors!


October, 2010

By Editor

. . . from the archives at FundAlarm

David Snowball’s
New-Fund Page for October, 2010

Dear friends,

September: who’d have guessed? The NFL has three remarkably unlikely undefeated teams: the Pittsburgh Steelers (led by the world’s nicest fourth-string quarterback), Da Bears, and the Kansas City Chiefs (4-12 last year). The Hindenburg has moved from being an Omen back to another of history’s sad tales (press mentions of The Hindenburg Omen dropped by 60% between August and September, and the remaining coverage scoffs at all of last month’s chumps). Ninety-five percent of all mutual funds (6,100+ by count) made money this month and over 1000 returned 10% or more in September. All of that from what is, historically, the cruelest month of all for stock investors.

A Celebration of Predictably Bad Funds

The math on bad funds is irresistible. Morningstar tracks 6400 funds. By definition, 3200 of them will post below-average performances this year. If performance were determined by pure chance (hello, Mr. Bogle!), 1600 funds would post back-to-back sub-par years, while the rest of the progress is shown below.

To test that hypothesis, I counted 2010 as a complete year and then checked a database for the number of funds that have managed to turn in below average returns year after year after year.

Consecutive Years
Below Average
Predicted Number Observed Number
1 3200 3016
2 1600 1693
3 800 413
4 400 173
5 200 62
6 100 25
7 50 14
8 25 11
9 12 7
10 6 5

Good news, I guess. “Continually horrible” is a bit less likely than you might guess. Two reasons suggest themselves. Fund companies either (1) bury the manager or (2) bury the fund. If you want to wander through the graveyard, check out FundAlarm’s master list of manager changes.

Highlights from the list of awful funds:

The Futile Five are Davis Government Bond “B,” Embarcadero Market Neutral (Garret Van Wagoner is back in the saddle again!), ING Emerging Countries “A”, Performance (that’s ironic)Short-Term Government Income and ProFunds Bull. Between them, they hold $465 million in assets. Two of the four funds (Davis and Performance) have had the same manager for the entire period, while Embarcadero had no manager for a number of years (it was one of the Van Wagoner zombie funds), and ING has all-new managers in 2010. I wish them well.

Over the past three years, investors in the Invesco funds, 17 of which are on three-year cold streaks, have suffered the greatest misery. Likewise 16 Fidelity, six Bridgeway and three Hennessy funds. (That probably makes it a poor time for Mr. Hennessey to pick a public fight with the Bogles, pere and fils, over fund fees and performance. Mr. Bogle the Elder recently suggested, “[Hennessy] is running an enormously profitable management company with inferior performance in these funds, in part because of the excessive fees he charges.”)

At the five-year mark, there are two Hennessy funds, five from Invesco and four from Fido. After eight years, Fidelity Growth & Income (FGRIX) is still hanging on as the $5 billion poster child for irremediable incompetence. In defense of the new manager, James Catudal, who was appointed in January 2009, the fund now consistently trails its peers and benchmark – but by less than it used to.

Permanent Portfolio: Unlikely Superstar?

I was prepared, from the outset, to dislike Jason Zweig’s recent article on the $6 billion Permanent Portfolio Fund (PRPFX) (“Unlikely Superstar: How a Forgotten Fund Got Hot in a Hurry,” WSJ, September 18-19, 2010). Mr. Z., however, produced an essay more thoughtful than the headline assigned to it.

For those unfamiliar with Permanent Portfolio, the fund holds a series of uncorrelated assets, some of which are likely to thrive regardless of the state of the market or of the economy. Harry Browne propounded the underlying notion in the 1970s. He saw the strategy as, of all things, a way to run toward the despised stock market rather than away from it. The fund’s asset allocation never changes, except in the sense that sharp market fluctuations might temporarily throw it out of whack. Give or take a little, the fund invests:

20% in gold

5% in silver

10% in Swiss francs

15% in real estate and natural resources stocks

15% in aggressive growth stocks

35% in cash and U.S. bonds

The fund has produced perfectly splendid results over the past decade, with an annualized return of 10.7% and a 2008 loss of only 8%. The fund is no-load, it takes only $1000 to get in and expenses are 0.8%.

Mr. Zweig’s article makes two points. First, much of the fund’s success is driven by mania. Bill Bernstein of Efficient Frontier Advisors wrote an essay critical of Permanent Portfolio’s newfound popularity. Fifty-five percent of the fund is in bonds and gold, which Bill Bernstein describes as being in the midst of “a non-stop beer-and-pizza party.” Those same wildly attractive assets, over the long term, have been dismal losers. Mr. Bernstein reports:

Diversifying asset classes, as Harry Browne knew well, can benefit a portfolio. The secret is deploying them before those diversifying assets shoot the lights out. Harry certainly did so by moving away from gold and into poorly performing stocks and bonds in the late 1970s. Sadly, this is the opposite of what the legions of new TPP adherents and PRPFX owners have been doing recently—effectively increasing their allocations to red-hot long Treasuries and gold. Consider: over the long sweep of financial history, the annual real return of long bonds and gold have been 2% and 0%, respectively; over the decade ending 2009, they were 5% and 11%. (“Wild About Harry“)

Second, all of the money that poured in will – just as quickly – pour out. “[M]any of its new buyers,” Zweig opines, “seem to be seeking capital appreciation – chasing this fund the same way they chased Internet funds in 1999 and 2000. They could leave just as quickly.” Mr. Bernstein is rather more pointed: “During the frothy 1990s stock market, however, investors abandoned the fund in droves.”

That is, by the way, an enormous problem for the remaining shareholders. The rush out forces the manager to sell, without regard to the wisdom of selling, just to meet redemptions.

Some of FundAlarm’s most thoughtful professional investors use Permanent Portfolio as a core position in their more conservative portfolios, providing substantial and consistent profits for their clients in the process. Despite that fact, I have never warmed up to the fund, and doubt that I ever will.

Setting aside the fact that it’s an index fund that charges 0.8%, I’m troubled by two things. First, the manager has neither closed nor even discussed the possibility of closing the fund. In most cases, responsible managers seek to dissuade a mindless inrush of (highly profitable) cash. Vanguard imposes high investment minimums, for example, $25,000 in the case of its Health Care fund (VGHCX). Oakmark restricts access through third-party vendors for several of its funds. Bridgeway, Artisan, Leuthold, Wasatch and others simply close their funds. Permanent Portfolio, instead, welcomed an additional $3,000,000,000 in the first eight months of the year – which provides an additional $24,000,000 in revenue to the advisor. In 2009, Mr. Cuggino’s firm, of which he is sole owner, received $31,286,640 in fees from the fund. In 2010, that’s likely to approach $60,000,000.

Mr. Cuggino does report “I’ve educated people right out of our fund.” Given that the fund’s website dubs it “a fund for all seasons” and the manager is a frequent speaker at money shows, it’s not clear exactly who he has talked away or how.

Second, the manager’s interests are not aligned with his investors. Though Mr. Cuggino has had a long association with the fund and has managed it since 2003, he’s been very reluctant to invest any of his own money in it. The fund’s 2006 Statement of Additional Information reports, “As of April 30, 2006, Mr. Cuggino and his immediate family members owned no shares of the Fund.” A year later that changed, but in an odd way. The SAI now reports that Mr. Cuggino 2,3 owns “over $100,000” in fund shares. Those footnotes, though, indicate that “As of April 30, 2010, Mr. Cuggino owned shares in each of the Fund’s Portfolios through his ownership of Pacific Heights.”

Which seems to say, the company buys the shares for him. And the company likely pays him well. My favorite passage from the 2010 SAI, with emphasis added,

Pacific Heights, of which Mr. Cuggino is the manager and sole member (also its President and Chief Executive Officer), compensates Mr. Cuggino for service as the portfolio manager for each of the Fund’s Portfolios. As the manager and sole member of Pacific Heights, Mr. Cuggino is the owner of Pacific Heights and determines his own compensation. Mr. Cuggino’s compensation from Pacific Heights is in the form of a share of Pacific Heights’ total profits.

So he collects a salary (“not based directly on the performance of any of the Fund’s Portfolios or their levels of net assets”) for serving as the firm’s president and gets to allocate to himself (apparently at his discretion) a share of the firm’s considerable profits.

What does he do with his money, if not invest it alongside his shareholders? I don’t know, though the SAI contains the slightly-nervous warning that

Actual or apparent conflicts of interest may arise because Mr. Cuggino has day-to-day management responsibilities with respect to each of the Fund’s Portfolios and certain personal accounts. The management of the Fund’s Portfolios and these other accounts may result in Mr. Cuggino devoting unequal time and attention to the management of the Fund’s Portfolios and these other accounts.

Mr. Cuggino is subject to the Fund’s and Pacific Heights’ Amended and Restated Code of Ethics, discussed in this SAI under “Code of Ethics,” which seeks to address potential conflicts of interest that may arise in connection with Mr. Cuggino’s management of any personal accounts. There is no guarantee, however, that such procedures will detect each situation in which a potential conflict may arise.

There is no reason to believe that Mr. Cuggino has done, is doing or ever will do anything improper in his management of the fund (unless sopping up assets to generate huge fees is wrong). Nonetheless, given the tremendously foul history of the fund under its previous management (after repeated violations of SEC rules, Morningstar became so disgusted that they dropped commentary on the fund for 15 years), a far more transparent approach would seem appropriate.

Update on the best fund that doesn’t exist

A couple months ago, I pointed out the obvious hole in the fund and ETF universe: there is no emerging markets balanced fund in existence. Given that both E.M. stocks and E.M. bonds are seen as viable, perhaps imperative, investments, I can’t for the life of me figure out why no enterprising group has pursued the idea.

In the decade just passed, the storied “Lost Decade,” a perfectly sensible investment of $10,000 into Vanguard’s Total Stock Market Index (VTSMX) on the first day of the decade (January 1, 2000) would be worth $9700 on the last day of the decade (December 31, 2009).

I attempted a painfully simple, back-of-the-napkin calculation for the returns generated by a 60/40 emerging markets balanced fund over that same period. I did that by starting with T. Rowe Price’s Emerging Markets Stock (PRMSX) and Emerging Markets Bond (PREMX) funds. I placed 60% of a hypothetical $10,000 investment into stocks and 40% into bonds. On January 1 of every year thereafter, I rebalanced to 60/40. Mostly that meant selling bonds and buying stocks. Here’s how the hypothetical E.M. balanced fund (ROYX) would compare to investing all of the money into either of the Price funds:

“FundAlarm Emerging Markets Balanced” (ROYX) $30,500
Price Emerging Markets Stocks (PRMSX) 24,418
Price Emerging Markets Bonds (PREMX) 30,600

Had the fund existed, it would have suffered two losing years in the past decade (down 9.7% in 2000 and 43.4% in 2008), while an all-stock portfolio would have had twice as many losing years including a gut-wrenching 61% drop in 2008. An all-bond portfolio would have suffered one losing year, 2008, in which it would have lost 18%.

It’s clear that a pure emerging markets bonds commitment would have been a (slightly) better bet. In reality, though, it’s a bet that almost no investor would make or would long live with.

We can also compare our hypothetical balanced fund with the best of the global funds, including the highly flexible Leuthold Core (LCORX) fund and a number of the Morningstar “analyst pick” picks which have been around for the whole decade.

“FundAlarm Emerging Markets Balanced” (ROYX) $30,500
Oakmark Global (OAKGX): 30,300
Leuthold Core (LCORX): 23,700
Mutual Quest (TEQIX): 20,700
American Funds New World Perspective(ANWPX): 14,800

The results are pretty striking, though I’m not pretending that a simple back-test provides anything more than a reason to stop and go, “hmmmmm.”

Briefly noted

David Dreman, one of those guys to whom terms like “guru” and “legend” are attached, has decided to step down as his firm’s co-CIO. The 74-year-old, who started his firm 33 years ago, will keep busy running two funds (High Opportunity and Market Overreaction), serving as chairman and writing a fifth book.

The very fine Intrepid Small Cap fund (ICMAX) lost manager Eric Cinnamond at the start of September. He’s joined institutional manager River Road Asset Manager as head of their “Independent Value strategy.” The fund remains in good hands, since the two co-managers added in 2009 also guide Intrepid Capital (ICMBX, a star in the shadows!).

Oak Value (OAKVX) just became RS Capital Appreciation. Oak Value gathered only $70 million in 17 years of operation, despite a strong record and stable management. After the acquisition, everything stays the same for this fine small fund. Except a change in name and ticker symbol (RCAPX for the “A” shares). And, oh yes, the imposition of a 4.75% front load.

Driehaus Select Credit Fund (DRSLX), which seeks “to provide positive returns under a variety of market conditions” through long and short positions in both equity and debt (primarily US) went live on September 30th. The lead manager, K.C. Nelson, also runs Driehaus Active Income(LCMAX). The fund’s $25,000 minimum and 2.0% expenses might spook off most folks except, perhaps, those looking to add to their hedge fund collection.

In closing . . .

I want to offer a belated thanks to Stacy Havener of Havener Capital Partners LLC for recommending that I profile Evermore Global Value (EVGBX). Back in August, she mentioned that Mr. Marcus has “banded together a team of former Mutual Series people (including Jae Chung most recently PM at Davis Advisors) to start a new firm called Evermore Global Advisors. David and team are utilizing the same deep value with catalyst investment approach learned under the tutelage of Michael Price.” I was, as is too often the case, entirely clueless and deeply grateful for her perceptiveness.

Thanks to Kenster, a contributor to FundAlarm’s boisterous Discussion Board, for the New York Magazine article on hedge fund managers. The last quarter of the article includes a discussion with David Marcus, formerly of Mutual Series and now lead manager at Evermore. Mr. Marcus certainly comes across as the voice of anguished reason in a story redolent with self-important young fools.

I often stockpile reader suggestions over the summer for use in fall. I’d like to acknowledge a couple particularly good ones. First, apologies to Scott Lee, who recommended this summer a fund that I haven’t yet written about (but will). Scott writes of an “undiscovered fund manager here in Birmingham. I’m sure you’re aware of Southeastern Asset Management, the advisers behind the Longleaf Partners funds. Three years ago, Mason Hawkins’s ‘second in command,’ C.T. Fitzpatrick left Longleaf after running money there for about 20 years. . . C.T. Fitzpatrick resurfaced in his hometown of Birmingham, AL and has now started a new fund company known as Vulcan Value Partners. Thus far he has put up astounding performance numbers, with his small-cap value fund (VVPSX) ranked in top decile amongst its peer group.” Vulcan Value Partners Small Cap (VVPSX) launched in December 2009, has returned 4.6% over the first nine months of 2010. That places it in the top 4% of small core funds. The large cap Vulcan Value Partners (VVPLX) made a modest 2.5% in the same period.

Brian Young, another sensible soul, recommended that I look at two funds in the months ahead:Iron Strategic Income (IRNIX) – “a great way to get exposure to high-yield bonds without losing your shorts” – and Sierra Core Retirement (SIRIX) – “fund of funds asset allocation fund that looks more like a multisector bond fund.” Folks on the Discussion Board have had a lengthy conversation – diplomats use phrases like “frank and open” to describe the tenor of such conversations – about Sierra in late June and early July of this year. The funds are a bit larger ($500 million) than those I normally cover (under three years old and/or under $100 million), but are definitely worth a look.

Speaking of the Discussion Board, we’re quickly coming up on another milestone: our 300,000thpost. The range of topics covered in a single day – the allure of emerging market debt funds, the growing timidity of Fidelity’s equity managers, what small cap fund might be appropriate for a college-aged investor – is remarkable. If you haven’t visited and spoken up, you should! If you have, then you’ve got a sense of the value that FundAlarm offers. Please consider using a strategy as simple to FundAlarm’s link to Amazon to help support its continued vitality.

As ever,


November, 2010

By Editor

. . . from the archives at FundAlarm

David Snowball’s
New-Fund Page for November, 2010

Dear friends,

Having survived what are, historically, the two worst months for equity investors, we now enter the “sweet spot” on the calendar. The great bulk of the stock market’s annual returns since 1927 have occurred in the late fall and winter months. In theory, we should all be happy and relieved. Instead, I keep hearing Warren Buffett in the background: “Investors should remember that excitement and expenses are their enemies. . . they should try to be fearful when others are greedy and greedy when others are fearful.” And so, just as we have reason to relax, I think I’ll work a bit on being anxious.

Abetted by financial advisors who are confronting “career risk” (that is, what happens when you annoy enough clients), investors continue to sell domestic equity funds – which have seen steady outflows in each of the past six months – and buy (overpriced) bonds. About the most hopeful sign is that the rates of outflow have slowed dramatically from $7 billion/week at the start of September to just $200 million/week now.

Sniping at the Absolute Return crowd

The pressure to find something new to say, pretty much every day, occasionally produces spectacularly weak arguments. Such was the case with Daisy Maxey’s recent dismissal of absolute return funds in the Wall Street Journal(“Absolute-Return Funds: Low Risk, Low Return,” October 29 2010). Ms. Maxey analyzes three funds (only one of which is an absolute return fund) and quotes as her authorities the manager of a small wealth management firm (albeit one that offers you “a business plan for life”) and a young man who just made the leap from “summer intern” to “new employee” at a well-respected financial research corporation. Her conclusion, unsupported by data or testimony, was that “such funds tend to minimize risk but aren’t likely to consistently deliver positive returns.” There are 16 funds with “Absolute Return” in their names, though she notes that there is no “absolute return” category or peer group in systems such as Morningstar’s, that many de facto absolute return funds don’t use the phrase in their names and that funds whose marketers have chosen the phrase “absolute return” often have nothing in common. Her one source does sniff that “a lot of absolute-return funds [are] coming out that will be what I call ‘no-return funds'” but that’s about it for evidence.

Ms. Maxey’s concern is either that the funds produce “low returns” or that they won’t “consistently deliver positive returns,” which are two very different complaints. I’ll take them in turn as we look at funds (in Morningstar’s system, market neutral, long/short, conservative allocation) whose goal is something like absolute returns.

First, most absolute return funds don’t promise high returns. They attempt to provide something greater than zero (that’s the “absolute” part), regardless of the market environment. Most of the managers I’ve spoken with would be very happy if they could produce consistent gains in the 5 to 7% range. It’s hardly a knock on the funds that they don’t produce something they never claim to produce.

The more serious objection is that they don’t produce absolute returns either. Unfortunately, the market crisis of 2008 – the worst mess in more than three –quarters of a century – makes it hard to generalize since pretty much everything except Treasuries cratered. By way of illustration, there are 422 funds that have produced positive returns in each of the past five years, of which 416 are bond funds. If you change the criteria to “four years of gains and no worse than single-digit losses in 2008,” you get a much more positive picture. Two dozen no-load funds pass the test.

Among the funds that use absolute return strategies, such as shorting the market, a handful survived 2008 and went on to produce gains in both 2009 and 2010. They are:

2008 2009 2010,through 10/29 3 year average
Driehaus Active Income LCMAX 0.4 22.1 4.0 8.4
Quaker Akros Absolute Strategies A AARFX,formerly no-load (2.9) 13.9 1.8 4.2
Vantagepoint Diversifying Strategies VPDAX (6.7) 6.6 4.8 n/a
TFS Market Neutral TFSMX (7.3) 16.6 3.5 4.8
Hussman Strategic Growth HSGFX (9.0) 4.6 2.2 (0.8)

None of the other no-load “Absolute Return” funds qualify under this screen.

Three funds with exceedingly broad mandates – a little stock with precious metals, bonds and cash – have made a case for themselves. Midas Perpetual Portfolio (PRPFX) and Mr. Hussman’s less ambitious Total Return fund, first profiled here in early 2008, are among the few funds never to have lost money in a calendar year. Both have strategies reflecting the Permanent Portfolio (PRPFX ) approach. PRPFX is a fund which makes me slightly crazy (see Permanent Portfolio: Unlikely Superstar? in the September 2010 essay), but which has made its investors a lot of money.

2008 2009 2010,through 10/29 3 year average
Hussman Strategic Total Return HSTRX 6.3 5.8 7.9 7.5
Midas Perpetual Portfolio MPERX 1.2 17.0 6.1 9.1
Permanent Portfolio PRPFX (8.4) 19.1 13.8 7.4

Another fine year for The Fund Morningstar Loves to Hate

Let’s say you had a mutual fund that posted the following returns:

Period Absolute Return Relative Return
Past year 19.4% Top 1% of peer group
Three years (5.3) Top 10%
Five years 9.1 Top 1%
Ten years 11.5 Top 1%
Fifteen years 11.9 Top 1%

And let’s assume that the fund had a substantially below-average expense ratio, and a five-star rating. Add to our fantasy: above average returns in 11 of the past 12 years and top 5% returns about two-thirds of the time. And, what the heck, high tax-efficiency.

How might the good folks at Morningstar react? Oh, about the same way you react when, in a darkened room in the middle of the night you step on something squishy. Which is to say, with disgust.

The fund in question is Fidelity Canada (FICDX) and its record has been spectacular. The tiny handful of international funds with comparable 15-year records include First Eagle Global (SGENX), Matthews Asian Growth & Income(MACSX), First Eagle Overseas (SGOVX) and Janus Overseas (JAOSX). Which leads Morningstar to observe:

  • This is one of two funds focused on Canada. If we had to pick, we’d choose the other one. (2009)
  • Approach this mutual fund with caution. (2007)
  • Do you really need a Canada fund, especially now? (2006) Answer: no, “it’s unnecessary and risky.”
  • This mutual fund has been on a hot streak, but cool north winds could easily prevail. (2005)
  • A reversal of fortune. (2004)
  • Should you be looking at this chart-topper? (2003) Answer: no, “it’s hard to justify owning” it.
  • Beating its index-tracking rival handily. (2002) Nonetheless, “it’s a tough sell.”
  • This fund’s purpose can be questioned, but not its execution. (2001)
  • Fidelity Canada has shown resilience in the face of adversity. (2001) Though the fund still “doesn’t have broad appeal.”
  • Fidelity Canada’s high return doesn’t make it a compelling choice. (2001) “It’s hard to make a case for buying this fund.”
  • Even the most loyal Canadian would have a tough time defending Fidelity Canada Fund. (1998)
  • Fidelity Canada Fund is unusual, but it’s not clear if its appeal goes beyond that. (1997)
  • Fidelity Canada Fund looks–and acts–a lot like a natural-resources offering. (1997)
  • Fidelity Canada Fund’s sector bets are giving it a bad case of frostbite. (1997)
  • Fidelity Canada Fund looks more like Siberia. (1996)
  • Fidelity Canada Fund makes about as much sense as a spring break in Saskatoon (1996)

Morningstar’s latest complaint: the manager Doug Lober “isn’t introspective enough.” I think this is the first time I’ve seen Morningstar complain about a manager’s mental acuity. The dim bulb has, by the way, placed the fund in the top 5% of international large-core funds in 2010.

In the meanwhile, Greg Frasier, who managed Fidelity Diversified International (FDIVX) and who was described by Morningstar as “a legend,” attributed his fund’s consistent outperformance to two factors: the wise use of ADRS, and a willingness to invest in Canada. The case for investing in Canada might not be a slam-dunk, but it’s surely better than “spring break in Saskatoon.”

Small, newer funds can be good investments!

Well duh.

Two new studies prove the obvious: old and large aren’t requirements for investment success.

Northern Trust, based in Chicago, specializes in picking fund managers rather than picking individual securities. Their recent study of large-cap manager performance and size, No Contest: Emerging Managers Lap Investment Elephants, concludes that smaller investment firms have better five-year records than either managers at larger firms or the S&P 500, have better performance during bear markets, and are more likely than larger managers to end up in the top quarter of funds.

Lipper reached the same conclusion earlier this year. Their study of Europe-based funds, Ruling Out New Funds? Wrong Decision, finds “[n]o evidence . . . that funds with long track records enjoy better performance or incur less risk than new funds. On the contrary, the empirical data suggest that newly- launched funds post higher average total returns and lower risk data.”

Fund managers respond to charge: “We are not a stegosaurus”

Barron’s writer Tom Sullivan just announced, “It’s Adapt or Die for Fund Businesses” (October 30, 2010). Drawing on a survey of 1000 “distribution professionals” conducted by Strategic Insight, a New York-based research and consulting firm, Sullivan reports that equity funds – which used to draw 65% of inflows – now draw only 25%. The brands of many larger firms have suffered damage that will take years to undo, while smaller and midsized firms have a competitive advantage.

Fund companies seem to be endorsing Mr. Sullivan’s prognosis. One sign of that: the number of long-only equity managers who are suddenly enamored of funky global strategies. Among the funds, newly-launched or still in registration, are:

Aston/River Road Long-Short Fund, in registration and likely to launch around year’s end.

Causeway Global Absolute Return Fund, likewise in registration.

Fairholme Allocation Fund, which will invest in anything, anywhere, in any direction.

Forward Commodity Long/Short Strategy Fund which tracks the Credit Suisse Momentum and Volatility Enhanced Return Strategy Index.

GRT Absolute Return Fund, run by three brilliant equity investors.

Navigator Equity Hedged, which will buy ETFs and put options.

River Park/Gravity Long-Biased Fund, one of five new funds from an advisor founded by Baron Asset alumni.

That’s in addition to Third Avenue’s decision to launch an unconventional income fund (Third Avenue Focused Credit), Fairholme’s to launch a Focused Income fund, and Driehaus’s to buy an “active income” fund in 2009 and to give the same team a second fund (Driehaus Select Credit). Even some “alternative” managers are branching out, as in the case of Arbitrage Event-Driven or RiverNorth/DoubleLine Strategic Income Fund.

Two questions that potential investors had better answer before opening their wallets: (1) is there any reason to believe that success in long-only equity investing translates to success anywhere else (answer: not particularly) and (2) is there reason to be concerned that adding the obligation to manager complex new vehicles may over-extend the managers and weaken their performance across the board (answer: no one is sure, would you like to figure it out with your money?).

Briefly Noted:

Move over, Geico gecko, here comes Jerry Jordan. Mr. Jordan is now running TV commercials for his five-star Jordan Opportunity (JORDX) fund. The spots, airing on Bloomberg TV, reported show an investor using and finding Jordan Opportunity. Why Morningstar rather than FundAlarm for the spot? “[I]f you’re quoting Morningstar,” the ad agency’s president opines, “you’re basically quoting the Bible.” (I knew I shouldn’t have brought my copy of The Satanic Verses to our last staff meeting!)

Hakan Castegren, manager of the Harbor International Fund and Morningstar’s International Stock Fund Manager of the Year award for 1996 and 2007, passed away October 2, one week shy of his 76th birthday. He was, by all accounts, a good man and a phenomenal manager. His firm, Northern Cross, will continue to sub-advise the Harbor fund.

On October 7, Reuters reported “AQR seeks smaller investors.” Ten days later Investment News updated the search for smaller investors: “Retail investors will no longer be able to buy mutual funds from AQR.” AQR is, of course, AQR Capital Management, a $29 billion institutional quant investor which launched a line of retail funds in 2009. Apparently the numbers weren’t looking good, and the company shifted all of its sales to the advisor-sold channel.

The Board of Trustees approved the liquidation of a slug of PowerShares ETFs, with the executions to occur just before Christmas. The walking dead include

  • Dynamic Healthcare Services Portfolio (PTJ)
  • Dynamic Telecommunications & Wireless Portfolio (PTE)
  • FTSE NASDAQ Small Cap Portfolio (PQSC)
  • FTSE RAFI Europe Portfolio (PEF)
  • FTSE RAFI Japan Portfolio (PJO)
  • Global Biotech Portfolio (PBTQ)
  • Global Progressive Transportation Portfolio (PTRP)
  • NASDAQ-100 BuyWrite Portfolio (PQBW)
  • NXQ Portfolio (PNXQ)
  • Zacks Small Cap Portfolio (PZJ)

Standard & Poor’s recently announced finalists for its U.S. Mutual Fund Excellence Awards Program. Three funds were designated as “new and notable.” They are Dodge & Cox Global (DODWX), Northern Global Sustainability Index Fund(NSRIX) and T. Rowe Price US Large-Cap Core (TRULX).

Those folks at Mutual Fund Wire need to get out more. Writer Hung Tran trumpeted the fact that “[r]ookie mutual fund shop Simple Alternatives is making headlines with its first product: a mutual fund of hedge funds.” The great advantage of their fund (called “S1”) is that it offers “mutual fund-like liquidity terms and fees. The new fund, which debuted on Monday, reportedly charges just 2.95 percent and offers daily redemptions without notice.” Earth to MFWire: 2.95% is extortionate and shouldn’t be preceded by the word “just.” Out of 6250 mutual funds, only 30-odd have expenses this high and they’re generally sad little fly-specks.

The folks at Ironclad Investments (“ironclad” as in the Civil War era navy vessels) just launched two risk-managed funds which use the popular institutional strategy of buying and selling options to limit their volatility while still participating in the market. Ironclad Managed Risk Fund (IRONX, precariously close to IRONY) sells covered put options on a variety of indexes while Ironclad Defined Risk Fund (CLADX) purchases of call options and sells call and put options on ETFs and equity indexes. Both are run by Rudy Aguilera and Jon Gold, both charge 1.25% and have $2500 investment minimums. Since I’d missed them in the “Coming Attractions,” it felt right to acknowledge them here.

In closing . . .

We celebrate the passing of a milestone. FundAlarm’s discussion board recorded its 300,000th message late in October (ironically, one asking about the 300,000th message), then quickly tagged on another 500 messages as folks sorted through their options for finding funds invested in “high quality” American companies and ones holding “rare earth metals” stocks. The board is wonderfully dynamic and diverse. If you haven’t visited, you should. If you have visited but consigned yourself to lurking, speak up, dude! It’s not a discussion without you.



December, 2010

By Editor

. . . from the archives at FundAlarm

David Snowball’s
New-Fund Page for December, 2010

Dear friends,

Multiple stories in the past month (“Hedged mutual funds on the ascent,” “Here come the ‘hedged’ mutual funds”), complemented by a series of high profile fund launches, are heralding hedge funds as the future of mutual funds. So, despite their questionable performance, expensive strategies, secretive nature, frantic trading and tendency to be liquidated by the thousands, it appears that

It’s Hedge-Mania Time!

There are three ways in which we discuss “hedges” in regard to mutual funds: currency hedging by international funds, hedge fund-like strategies adopted by mutual funds, or mutual funds that attempt to replicate the performance of the hedge fund universe.

Currency hedging

The oldest, least expensive and least controversial practice is currency hedging by international funds. Currency hedges are a sort of insurance which, for a price, can largely nullify the effect of changing currency values on an international fund’s performance.

The simplest way to measure the effects of currency changes is to compare the performance of Tweedy, Browne Global Value (TBGVX), which does hedge its currency exposure, with Tweedy, Browne Global Value II (TBCUX) which is identical except that it doesn’t purchase currency hedges.

Over the past twelve months, the hedged version of the fund has earned its investors 12.85%, which places it in the top 1% of its peer group. The unhedged version (same stocks, same manager, same expenses) has returned 4.75%. Tweedy’s managers believe that, in the long term, neither currency strategy has an inherit advantage: the hedges cost some money but moderate short term volatility.

Hedge fund strategies

The second strategy, which has been around for a decade or more, has been the importation of hedge fund strategies into mutual fund portfolios. While the extent of those strategies is limited by federal regulation, such funds might sell securities shorts in order to benefit from their falling values, use leverage to over-expose themselves to a market, or use derivatives to hedge various risks. All of which is expensive: the average long-short fund charges 2.04% in expenses, with the worst of them charging over 5% annually for their services. With considerable confidence and absolutely no evidence, Alistair Barr and Sam Mamudi of The Wall Street Journal recently (11/15/10) assured readers that “Hedged mutual funds provide stock-like returns with less volatility.” Oddly, the only fund they point to – Thesis Flexible Fund (TFLEX) – had lost 0.4% since inception while the S&P was up 10%. Of all 562 “alternative” mutual funds tracked by Morningstar, only 86 managed “stock-like returns” in 2010. Nonetheless, the Journal’s sources pronounce us in “the very early stages of a multitrillion-dollar wave that’s going to wash over” the fund industry.

Whether “multi-trillion” or not, it’s clear that more and more long-established equity managers – recently Turner, Fairholme, Aston, Causeway, GRT, plus the bond guys at DoubleLine – have committed to new hedge-like funds.

Hedge fund replication

The most recent manifestation of hedge mania are the so-called “hedge fund replication” funds. Operating under the assumption that hedge funds are, by definition, good, these funds use complex mathematical modeling to construct portfolios of traditional investments (for example, convertible bonds) whose performance matches the risk and return profile of some part of the hedge fund universe. In theory, they offer all of the advantages of hedge fund investing with none of the pesky fees, minimums and liquidity problems.

The fact that they don’t work seems secondary. I compared the returns since inception for all of the “hedge fund replication” funds that I could identify with the returns of the simplest, blandest and cheapest alternative I could identify: Vanguard’s Balanced Index fund (VBINX). The Balanced Index charges next to nothing (0.08 – 0.25%, depending on share class) and offers a very simple 60/40 stock/bond split.

To date, every hedge fund replicant, from inception to late November 2010, trails the returns of the VBINX. Here’s the comparison of what you’d get it you’d place $10,000 either in a hedge replicating fund on the day it opened or in the balanced index on that same day. All results are rounded to the nearest $100:

Natixis ASG Global Alternatives (“A” shares) 11,000
Vanguard Balanced Index 11,500
Goldman Sachs Absolute Return Tracker (“A”) 9,100
Vanguard Balanced Index 10,400
IQ Alpha Hedge Strategy 10,800
Vanguard Balanced Index 10,900
Ramius Dynamic Replication (“A”) 10,000
Vanguard Balanced Index 10,600
IQ Hedge Multi-Strategy Tracker ETF QAI 11,100
Vanguard Balanced Index 13,900

While it’s true that the records of these funds are too short (between one and 30 months) to offer a great test, the fact that none of them have outperformed a simple alternative does remind us of Occam’s Razor. William of Ockham was a 14th century logician and friar, who embraced the minimalist notion that “entities must not be multiplied beyond what is necessary.” His “Razor” is generally rendered as “the simplest explanation is more likely the correct one” or “when you have two competing theories that make exactly the same predictions, the simpler one is the better.” The same, perhaps, might be said of investing: “if two different investments get you to the same spot, the simpler one is the better.”

Shaving USAA Total Return Strategy with Occam’s Razor

“Scott,” an active and cheerful contributor to FundAlarm’s discussion board, made a sharp-eyed observation about the USAA Total Return Strategy (USTRX) fund: “it has 70% in SPY [an ETF which tracks the S&P 500]. I’ve never seen a mutual fund with 70% of its weighted portfolio in one position. . . For the record, the performance combined with the expenses of the fund are not attractive. In its worst year it lost almost twice as much as it gained in its best year. Have you ever seen a fund with almost 75% in one ETF?”

Actually, Scott, not until now.

USAA is a financial services company open to “anyone who has ever served honorably in the military,” a restriction you could dodge by investing through one of the several fund supermarkets who offer the funds NTF. Since they restrict information about their funds to members, outsiders need to work through SEC filings to get much detail.

The Total Return portfolio is divided into three parts. There’s a tiny market-neutral sleeve, which invests long and short in equities. There’s a tiny, bizarre sleeve invested in a hedge fund. Here’s their attempt to explain it:

[We employ] a global tactical asset allocation overlay strategy (GTAA) by investing in hedge or other funds that invests in short-term money market instruments and long and short positions in global equity and fixed-income exchange-traded futures, currency forward contracts, and other derivative instruments such as swaps.

But 92% of the portfolio consists of SPY (70%) and “Currency United States” (at 21% and somehow distinct from “cash”). The strategy is to sell index calls or buy puts in an “attempt to create a collar on our stock market exposure that effectively limits downside (and upside) potential and gives us the flexibility to quickly change the Fund’s risk.”

Which would be nice except for the fact that it doesn’t actually do anything. $10,000 invested in the fund nearly six years ago has grown to $10,100. The same investment in the bland Vanguard Balanced Index grew to $12, 900. (The fund trails its Lipper Flexible Portfolio Funds peer group by a comparable amount.) And the Balanced Index imposed virtually the same degree of volatility (a five-year standard deviation of 11.27 versus USTRX’s 10.84), had virtually the same downside (down 22% in 2008 versus 21% for USTRX) and charges one-fifth as much.

And in the background, one hears the good Friar Ockham intoning, “don’t make it unnecessarily complicated, ye sinners.”

Silly advice of the month: “Why You Must ‘Time’ This Market”

Levisohn & Kim’s lead story in The Wall Street Journal’s “Weekend Investor” section (11/13/10) begins: “Forget ‘buy and hold.’ It’s time to time the stock market.”

You can’t imagine how much of a headache these stories give me. The story begins with the conspiratorial insight, if timing “sounds like sacrilege, it may be because mutual-fund firms have spent decades persuading you to keep your money in their stock funds through thick and thin so they could collect bigger profits.” The depth of the conspiracy is illustrated by a hypothetical $1 million doing investment (because bigger numbers are, well, bigger) in the S&P 500 made on December 24 1998. Since then, you’d have made nuthin’.

The solution? Tactical allocation funds which “have the flexibility to jump into and out of asset classes to avoid market losses.”

There are three problems with Levisohn and Kim’s advice:

First, it tells you what might have worked 12 years ago, which is a lot different than telling you what will work in the years ahead. Did the WSJ advocate market timing in 1998 (or 2002, for that matter)? Nope, not so far as I can find in the paper’s archive. Why not? Because they had no idea of what the next decade in the market would be like. Nor do Levisohn and Kim have any particular evidence of insight into the decade ahead.

Second, it relies on your ability to time the market. “And,” they assure us, “it turns out sometimes you can.” Sometimes, it turns out, is a dangerous notion. Their faith depends on knowing that you’re “stuck in a trading range for an extended period” (the same assumption made by the folks selling you day-trading software). Unfortunately, the market of the past 12 years hasn’t been stuck in a trading range: it’s had two catastrophic collapses and two enormous rallies.

Third, most of the solution seems to come down to the fact that two funds have done well. The authors point to the sparkling performance of FPA Crescent(FPACX) and Ivy Asset Strategy (WASAX). Of the remaining 82 funds in the “world allocation” category, three-quarters either haven’t made it to their fifth anniversary, or have made it and still trail the modest returns of Vanguard’s Total Stock Market Index (VTSMX).

“Transparent” is relative

“Ira Artman,” a long-time reader and thoughtful guy, wrote one of the shortest and most provocative notes that Roy and I have lately received. Here, in its entirety, is Ira’s note concerning the Transparent Value family of funds:


Which got me to thinking: “what’s up, Ira?”

Might it be that the actual names of the funds are longer than some summary prospectuses, as in: Transparent Value Dow Jones RBP® U.S. Large-Cap Aggressive Index Fund (Class F-1 shares)? The name’s long enough that you can’t search for “Transparent Value” at Morningstar, which squeezed the name to Transparent Val DJ RBP US LC Agr Idx F-1.

Or that the funds’ “Principal Investment Strategies” appear to have been penned by an irascible French historian?

The Aggressive Index consists of common stock of companies in the Dow Jones U.S. Large-Cap Total Stock Market IndexSMthat Dow Jones Indexes has selected for inclusion in the Index by applying Required Business Performance® (RBP®) Probability scores (as defined below), as further described in the “Index Construction” section on page 22 of this prospectus. Dow Jones Indexes is part of CME Group Index Services LLC, a joint-venture company which is owned 90% by CME Group and 10% by Dow Jones (“Dow Jones Indexes”). The RBP® Probability scores are derived from a quantitative process of Transparent Value, LLC.

Might he wonder about the claim that the fund offers “High RBP, weighted by RBP”?

Perhaps even that the fund tracks its index by investing in stuff not included in the index?

The Fund also may invest up to 20% of its net assets in securities not included in the Index, but which the Adviser, after consultation with the Sub-Adviser, believes will help the Fund track the Index . . .

He might be worried about his difficulty in “seeing through” management’s decision to charge 1.50% (after waivers) for an index fund that has, so far, done nothing more than track the S&P 500.

The fact that Morningstar has cross-linked all of Tamarack Value’s (TVAAX) analyst reports with Transparent Value’s fund profile doesn’t materially help.

Doubtless, Ira will clear it all up for us!

Searching for “perfect” mutual funds

Warren Boroson has been writing about personal finance for several decades now. (He has also written about blondes, dueling, and Typhoid Mary – though not in the same column.) Lately he decided to go “In search of ‘perfect’ mutual funds” (10/18/2010), which he designates as “six star funds.” That is, funds which combine a current five-star rating from Morningstar with a “high” rating for return and a “low” rating for risk. In addition to funds that his readers certainly have heard of, Boroson found three “intriguing newcomers, funds that may become the Fidelity Magellans, Vanguard Windsors, or Mutual Series funds of tomorrow.” They are:

  • Appleseed (APPLX) which he describes as “a mid-cap value fund.” One might note that it’s a socially responsible investor with no particular commitment to midcaps and a 15% gold stake
  • Pinnacle Value (PVFIX), “a small-cap fund, run by John Deysher, a protégé of Charles Royce . . . 47% in cash.” Actually Mr. Deysher is 57% in cash as of his last portfolio report which is absolutely typical for the fund. The fund has held 40-60% in cash every year since launch.
  • Intrepid Small Cap (ICMAX), “a value fund . . . [r]un by Eric Cinnamond . . . Up an amazing 12.24%-a-year over three years.”

Or not. Mr. Cinnamond resigned from the fund six weeks before Mr. Boroson’s endorsement, and now works for River Road Asset Management. The fund’s lead manager, Jayme Wiggins, returned to the company from b-school just weeks before taking over the Small Cap fund. Wiggins was a small cap analyst at the turn of the century, but his last assignment before leaving for school was to run the firm’s bond fund. He’s assisted by the team that handles Intrepid Capital (ICMBX), which I described as “a fund that offers most of the stock market’s thrills with only a fraction of its chills.”

All of which raises the question: should you follow Mr. Cinnamond out the door? He was clearly a “star manager” and his accomplishments – though, go figure, not his departure – are celebrated at Intrepid’s website. One way to answer that question is to look at the fate of funds which lost their stars. I’ve profiled seven funds started by star managers stepping out on their own. Two of those funds are not included in the comparison below: Presidio (PRSDX) was splendid, but manager Kerry O’Boyle lost interest in liquidated the fund. And the River Park Small Cap Growth fund, at only a month, is too new. Here’s the performance of the five remaining funds, plus a first look at the decade’s highest-profile manager defection (Jeff Gundlach from TCW).

Manager Inception New fund Old fund Peer group
Chuck Akre 09/01/09 $11,900 Akre Focus $13,400, FBR Focus $13,600, mid-growth
David Winters 10/17/05 $14,200, Wintergreen $14,200, Mutual Discovery Z $12,200, global
David Marcus 12/31/09 $10,000, Evermore Global Value $10,700, Mutual Shares Z $10,900, global
Rudolph Kluiber 05/01/08 $11,000, GRT Value $9600, Black Rock Mid-Cap Value $10,000, mid-blend
John B. Walthausen 02/01/08 $15,200, Walthausen Small Cap Value $11,200, Paradigm Value $10,700, small value
Jeffrey Gundlach 04/06/10 $11,700,DoubleLine Total Return $11,000, TCW Total Return $10,600, intermediate bond

What are the odds? The managers new fund has outperformed his previous charge four times out of six (Wintergreen was a touch ahead before rounding). But the old funds continue to perform solidly: three of the six beat their peer group while another two were pretty close. The only substantial loser is BlackRock Mid-Cap Value (BMCAX) which is only a distant echo of Mr. Kluiber’s State Street Aurora fund.

Briefly noted . . .

Oops! They may have done it again! The folks at Janus are once again attracting the interest of Federal enforcement agencies. According to the New York Times, “SAC Capital Advisors, the hedge fund giant run by the billionaire investor Steven A. Cohen, received an ‘extraordinarily broad’ subpoena from federal authorities” while Wellington Management Company and the Janus Capital Group were among the fund companies which received subpoena requests seeking “a wide range of information.” Coincidentally or not, the subpoenas were revealed the day after the feds raided the offices of three hedge funds. This is part of a year-long investigation in which the funds are suspected of insider trading. Wellington and Janus, I presume, became implicated because they’re clients of John Kinnucan, a principal at Broadband Research, who is suspected of passing insider information to his clients. The WSJ quotes BU law professor Tamar Frankel as concluding that the investigation is building a picture of a vast “closed market in insider information.”

In a letter filed with the SEC, Janus’s CFO, Greg Frost, announced that Janus “intends to cooperate fully with that inquiry [but] does not intend to provide any further updates concerning this matter unless and until required by applicable law.”

As some of you may recall, Janus was knee-deep in the market-timing scandals from several years ago, and afterward the firm underwent a self-described transformation of its corporate culture. Note to Janus: In the area of “disclosing more than the bare minimum required by law,” it looks like you have a bit more work to do.

Repeat after Jack: “All men are mortal. Bruce Berkowitz is a man. Therefore…” In a recent interview, Vanguard founder Jack Bogle explained away Bruce Berkowitz’s inconvenient success. Mr. Berkowitz’s Fairholme Fund (FAIRX) has crushed his peers by turning $10,000 into $30,000 over the course of “the lost decade.” Mr. Bogle rather skirted the prospect that this performance qualifies as evidence of skill on Mr. Berkowitz part (“he seems like an intelligent manager” was about as good as it got) and focused on the real issue: “investors who start out in their 20s today could end up investing for 70 years, since people are living longer. Well, Bruce Berkowitz is not going to be around managing funds 70 years from now.” On the other hand, at 51, Mr. Berkowitz could be managing funds for another quarter century or more. For most people, that’s likely a good consolation prize.

TIAA-CREF seems to be steadily slipping. The Wall Street Journal reports (11/17) that T-C led all providers in sales of variable annuities in 2008, with $14.4 billion sold. In 2009 they slipped to third, with $13.9 in sales. During the first three quarters of 2010, they finished fourth with sales of $10.4 billion. That might reflect investor disenchantment (Morningstar’s ratings for their variable annuities, with the exception of Social Choice, reflect respectable mediocrity), or simply more competent competition.

Susan Bryne and the nice people at the Westwood Holdings Group just acquired McCarthy Multi-Cap Stock fund (MGAMX) to add to their family. It’s a solid little fund: $65 million in assets, mostly mid- to large-cap, mostly value-tilted, mostly domestic. The fund won’t quite compete with Ms. Bryne’s own WHG LargeCap Value (WHGLX), which has a substantially higher market cap and a slightly greater value tilt. On whole, it’s not good to compete with your new boss and downright bad to beat her (which MGAMX does, while both funds far outstrip their Morningstar peer group).

Fidelity Canada (FICDX), the fund Morningstar loves to hate, has posted top percentile returns in 2010 (through 11/26). Which isn’t unusual. FICDX has returns in the top 1% for the week, month, year, five year, ten year and fifteen year periods.

Driehaus International Small Cap Growth Fund (DRIOX ) will close to new investors on the last day of 2010. In my original profile of the fund, I concluded that “for investors with $10,000 to spare and a high tolerance for risk, this might be as good as bet for sheer, pulse-pounding, gut-wrenching, adrenaline-pumping performance as you’re going to find.” That’s still true: $10,000 invested in the fund at launch (August 2002) has grown to $53,000 versus $28000 for international small cap peers. The fund holds about a third of its assets in emerging markets, roughly twice its peers’ stake. Despite above average volatility, it has trailed peers only once, ever, and spent four of its eight years in the top 10% of international small cap funds. It remains, for 30 days, an intriguing option for the bold.

The launch of the Market Vectors Kuwait Index ETF is been delayed until, at least, the week before Christmas. Dang, I’d been so looking forward to investing in an exchange with “an independent judicial personality with the right of litigation in a mode facilitating the performance of its functions for the purpose of realizing the objectives of its organization in the best manner within the scope of regulations and laws governing the Stock Exchange operations.” So saith the Kuwaiti Stock Exchange. Likewise RiverFront Strategic Income has been delayed.

The former Dreman Contrarian Large Cap Value (DRLVX) morphed into an institutional fund Dreman High Opportunity with loaded retail shares in 2010, so it’s being dropped from our Archive listings.

In closing . . .

For most folks, the “fourth quarter holiday retail season” (4QHRS) is the easiest time of year to help support FundAlarm. Folks spend, on average, $400 on gifts, and another $800 on entertaining and decorations, over next four weeks. As many of you know, if you choose to shop using FundAlarm’s link to Amazon, FundAlarm receives an amount equivalent to about 7% of your purchase that Roy uses to defray the cost of servers and bandwidth and such.

Many folks think of Amazon as a bookseller, but my own holiday purchases highlight the breadth of its opportunities. Among other things, I’ve recently squirreled away are a case of herbal tea, an iPod and a smart phone, a really nice chef’s knife (8″ Victorinox Fibrox, wonderfully light, wickedly sharp), a hospital quality air cleaner, four movies, a dozen books and a videogame.

For bookish Bogleheads, one new book stands out: Goldie and Murray’s Investment Answer Book. Mr. Murray is a former Goldman Sachs institutional bond seller and Managing Director at Lehman Brothers. He discovered, only after retirement, that most of his professional life – spent trying to beat the market – was wasted. He became a consultant to Dimensional Fund Advisers and then discovered he was dying of a brain tumor. Last summer he ceased his medical treatments and worked to complete a readable, short book that reduces your investment plan to five decisions, the fourth of which is whether you want to continue pouring your money down the rathole of actively managed investing. (His sentiments, not mine.) Mr. Murray hopes to see Christmas, but has little prospect of experiencing another spring. By all accounts, the book is readable, sensible and useful.

For the merely perverse, my favorite travel book ever, The Clumsiest People in Europe: Or, Mrs. Mortimer’s Bad-Tempered Guide to the Victorian World, has been rereleased in paperback. Mrs. Mortimer, a wildly popular Victorian travel writer, seems never to have ventured five miles from home. Nonetheless she offers up sober, unintentionally ridiculous descriptions of two dozen nations from Ireland (“there are no huts in the world so miserable as Irish cottages”) or China (“All the religions of China are bad, but of the three, the religion of Confucius is least foolish”). It’s at least as delightful as Michael Bell’s Scouts in Bondage: And Other Violations of Literary Propriety or Catherine Price’s 101 Places Not to See Before You Die. All worthy whimsies to lighten a winter’s eve.

Oh, and those of you who had the good sense to respond to our profiles of Wasatch Emerging Markets Small Cap (WAEMX) or Walthausen Small Cap Value (WSCVX) — both up 35% this year — well, you might choose the simpler route of a direct contribution through PayPal.

Wishing you all a wonderful 4QHRS,


January, 2011

By Editor

. . . from the archives at FundAlarm

David Snowball’s
New-Fund Page for January, 2011

Dear friends,

Welcome to the New Year! Having survived The Death Cross and the Hindenburg Omen, as well as Elliott Wave theorists’ prediction of a civil war, we enter a new year heartened by a New York Times’ prediction that “most of the good news is already behind us” (“Why Investor Optimism May Be a Red Flag,” 12/25/10). Before embracing the cover stories that tell us “Where to Invest in 2011” (Kiplinger’s) or direct us to “Make Money in 2011” (Money), I thought we might take a look at the decade just passed.

This just in: sometimes academics are right!

Academic researchers seem comfortable with a series of conclusions: over time, small beats large, value beats growth, cheap beats costly, focused beats unfocused, and so on. The combination of our miserable communication skills (“Ex ante asset pricing models provide the normative basis for the commonly used ex post estimation models”) and overweening sense of self-importance (see Robert Arnott) sometimes masks the fact that researchers can have useful things to say. So here’s a quick decennial perspective on the research.

Researcher’s say, expect small to outperform large, value to outperform growth, small value is optimal.

Hey, it did!

Morningstar’s “investment radar” offers a really striking visual representation of the effect. If you set the radar to show all domestic funds, then to show ten-year returns, you’ll see a thousand colored dots each representing one fund. The funds are divided by deciles (top 10% of all funds, next 10%…). If you turn off the middle 80%, leaving only the best 10% and the worst, a striking visual pattern emerges: there’s an almost perfect dividing line from the northwest corner down to the southeast corner. Virtually everything on the left of the line (smaller, lower priced) is bright green, virtually everything on the right (larger, growthier) is bright red.

Almost nothing that favored smaller and cheaper failed. The only wretched funds in that half of the universe were NYSA (NYSAX) whose website has vanished, ING Small Cap Opportunities (five share classes), PFW Water (PFWCX) which used to be the really bad Bender Growth fund before becoming the really bad Water fund, Oberweis Small Cap Opportunity (OBSOX) and Maxim Small Cap Growth(MXSGX) whose manager claims to run “top performing institutional small cap growth portfolios.”

A nearly identical number of funds represented the few bright spots on the larger, growth side. These include Baron Opportunity(BIOPX) and Wasatch Small Growth (WAAEX) are the growthiest survivors. Yacktman (YACKX), Yacktman Focused(YAFFX),Fairholme (FAIRX), MassMutual Select Focused Value(five share classes) and Columbia Strategic (CSVFX) are the large cap winners.

The most striking difference between the winners and the losers: with the exception of the Water fund (constrained by the limited number of watery stocks available) the losers traded at two- to ten-times (125-250% turnover) the rate of the winners (8-75% turnover), and had substantially more expansive portfolios (150 for losers versus 50 for winners).

Researchers say, expect the slow, steady advantages of index funds to win out in the long run

One simple test is to ask how, over the long term, Vanguard’s index funds have fared against the actively-managed universe. Of 23 Vanguard index funds with a record of 10 years or more, 18 have posted average (S&P500, Extended Market) or better (16 others) performance. That is, about 77% are okay to excellent. The laggards in the group are a motley collection: Value, Small Value, Europe, Pacific, and Social Choice.

The second test, though, is to look at Vanguard’s index funds against their comparable actively-managed funds. For this test, I focused on what might be considered “core” funds in a portfolio. Vanguard has 13 actively-managed large cap domestic equity funds and six index funds in the same space. Ten of the 13 actively-managed funds, about 77% by coincidence, have outperformed their indexed counterparts over the past decade. On average, the active funds returned 2.2% per year while the indexes earned 1.4%.

Vanguard’s active fund charge between 0.3 – 0.45% in expenses. If they charged the more-typical 1.25%, their advantage over the indexes would have been lost. So, if it’s not a game of inches, it’s certainly a game of pennies.

Researchers say, Expect focus to win out over diversified.

And it did.

The best test I have is to compare sibling funds. In four instances, a particular manager runs too nearly identical funds, one diversified and one focused. If the researchers are right, the managers’ focused funds should prevail over his more diffuse portfolios. The four sets of funds are Mainstay ICAP Equity and Select, Marsico Growth and Focus, Oakmark and Select, Yacktman and Focused. In every case, the focused fund outperformed the diversified one, though often by fractions of a percent per year.

Researchers say: don’t buy based on past returns. It’s such a powerful temptation that the SEC requires funds to tell investors that a fund’s past performance does not necessarily predict future results.

I looked at the top large cap core funds of the 1990s, and tracked their performance over the past 10 years. Here are their subsequent absolute returns and performance relative to their peers.

10 year return 10 year rank
Hartford Capital Appreciation (ITHAX) 5.23% Top 10% , the fund has been run by the same group of Wellington managers since 1996
Legg Mason Value(LMVTX) (1.65) Bottom 5% overall, with bottom 1% returns in four of the past five years.
Oppenheimer Main Street (MSIGX) 1.64% A bit above average.
Putnam Investors(PINVX) (1.36) Bottom 5% — though rallying. The winning team was gone (without a trace) by 2002 with 10 individuals cycling through since then. Currently it’s no more than a high cost index fund (1.27% expenses despite assets of $4 billion and an index correlation of 98)
RS Large Cap Alpha(GPAFX) 1.32% A bit below average – with six complete management changes in 10 years.

The odds are unlikely to improve. The 25 best funds of the 2000s clocked over 20% annual returns through “the lost decade,” but did it by investing in gold and dictatorships (primarily Russia and China, though I lumped emerging markets in general into this category). While it’s not impossible that one asset class and two countries will rise 750% over the next decade – the outcome of 20% or better growth – it seems vanishingly unlikely.

284 funds beat the 10% threshold that defines the long-term returns of the US stock market. The best diversified equity funds in the bunch were Bridgeway Ultra-Small (BRUSX at 15.6%), CGM Focus (CGMFX, 15%), FBR Focus (FBRVX, 15%), Satuit Microcap(SATMX, 14.7%), Perritt Microcap (PRCGX, 14.5%) and Heartland Value Plus (HRVIX, 14.4%). For the record, that’s four microcap funds, one mid-cap fund whose star manager was squeezed out (and now runs Akre Focus, AKREX) and one fund so volatile (about twice the market’s standard deviation and a 500% annual turnover rate) that is has virtually no long-term investors.

One good strategy is to avoid the previous decade’s biggest losers, a simple notion that has evaded millions of investors.

Vanguard’s worst diversified loser of the decade: Vanguard U.S. Growth (VWUSX), which is closer to Vanguard U.S. Decline with an annualized loss of 3.7%. And $4 billion in assets. Fidelity contributes Fidelity Decline Strategies . . . sorry, Fidelity Growth Strategies(FDEGX), formerly Fidelity Too-Aggressive Growth and Fidelity Submerging Growth, to the list with 5.4% annual losses and over $2 billion in assets. American Century Select (TCWIX) pares $2 billion assets with a half-percentage annual loss. The Janus Fund(JANDX) has dropped 1.1% per year while Legg Mason All Cap (SPAAX) holds a half billion while steadily shrinking by 2.5% per annum.

Legg Mason added Bill Miller to the management team here at the start of 2009, and the fund rallied mightily. At the same time, Miller announced his own successor at the flagship Legg Mason Capital Management Value “C” class shares (LMVTX, formerly just Legg Mason Value). Remarkably low returns remain paired there with remarkably high fees.

Less venturesome folks might have done with boring ol’ planners and scholars suggested: diversify across asset classes, rebalance periodically, keep your expenses down. Funds that followed that simple discipline, and which I’ve used as benchmarks, had an okay decade:

Vanguard Balanced Index (VBINX): up 4.2%

Fidelity Global Balanced (FGLBX) : up 6.7%

Vanguard STAR (VGSTX): up 5.3%

T. Rowe Price Capital Appreciation (PRWCX): up 8.9%

Another possible hedge against this disturbing reality is to consider investing some of your portfolio with companies that get it right. There are a set of boutique firms which have consistently by sticking to their discipline and building stable, supportive management teams. Among the fund companies whose products we’ve profiled, there are a number whose funds beat their benchmarks consistently over the long term. Below are four such companies. Artisan Partners hires only experienced teams of risk-conscious managers and has a tradition of shareholder friendly practices (low minimums, falling expenses, closing funds). Matthews knows Asia better than anyone.Harris Associates understands value. Royce does small and value with passion and discipline. Here’s a recap of their funds’ performance:

Number of funds Winners since inception Winners over 10 years
Artisan 11 11/11 6/6
Matthews 11 9/11 6/6
Oakmark 7 7/7 6/6
Royce 27 19/22 9/9

The poorest Royce funds are only a year or two old. The poorest Matthews ones are single country funds.

There are no guarantees. Ten years ago I might have (though, in truth, wasn’t) writing about Oak Associates or Janus. But there are ways to at least tilting the odds in your favor.

The research says so!

2010: the cloudy crystal ball

It’s the time of year when every financial publication promises to make you rich as Croesus in the year ahead. As a reality check just ahead of that exercise, you might want to consider the one thing the publications rarely mention: the track record of their set of “best funds for 2010.”

For each of four major publications, I created an equally weighted portfolio of their 2010 fund picks and compared it to the simplest-available benchmark: a balanced index for portfolios with balance, and a stock or bond index otherwise. They appear in rank-order, by performance. Performance is as of 12/20/2010.

  • Kiplingers. Steven Goldberg, “The 5 Best Stock Funds for 2010,” December 18, 2009
Absolute 2010 return Relative 2010 return
Primecap Odyssey Growth (POGRX) 15.5% Middle third
T. Rowe Price Small-Cap Value (PRSVX) 24.5 Middle third
T. Rowe Price Emerging Markets Stock (PRMSX) 15.5 Middle third
Fairholme (FAIRX) 21.5 Top 1%
Masters’ Select International (MSILX) 13.0 Top 10%
Portfolio return:
Vanguard Total World Index (VT) 11% Top third

Comments: good recovery, Mr. G! His 2009 picks including Primecap and Price Emerging Markets, but also two terribly disappointing funds: CGM Focus and Bridgeway Aggressive Investors I. He seems to have dialed-back the risk for 2010, and profited from it.

  • Morningstar. “Where to Invest, 2010.”

This is a long Morningstar stand-alone document, including both market analyses and individual equity recommendations as well as the industry’s longest list of fund recommendations.

Absolute 2010 return Relative 2010 return
Mutual Quest TEQIX 9% Bottom third
T Rowe Price Spectrum Income RPSIX 8.5 Bottom third
Dodge & Cox Income DODIX 6.5 Middle third
Fidelity Government Income FGOVX 5 Middle third
Manning & Napier Worldwide EXWAX 7.5 Middle third
Artisan International Value ARTKX 17.5 Middle third
Wasatch Small Cap Growth WAAEX 29 Middle third
Schwab Total Market Index SWTSX 16 Top third
Royce Premier RYPRX 26 Top third
Vanguard Inflation-Protected Securities VIPSX 6 Top third
Vanguard Convertible Securities VCVSX 18 Top third
Longleaf Partners LLPFX 16.5 Top 10%
Portfolio return: 14%
Vanguard Balanced Index 12.5% Top third

Comments: a nicely-done, T. Rowe Price-ish sort of performance. The collection succeeds less by picking a few “shoot out the lights” stars and more by avoiding silly risks. When your two worst funds are rock-solid, risk-conscious gems, you’re doing good.

  • Money. “Make Money in 2010,” Money magazine, December 2009
Absolute 2010 return Relative 2010 return
FPA New Income (FPNIX) 3.0% Bottom 1%
FMI Large Cap (FMIHX) 11 Bottom third
Jensen (JENSX) 12 Bottom third
T. Rowe Price New Era (PRNEX) 17.5 Middle third
iShares Barclays TIPS Bond (TIP) 5.5 Middle third
Templeton Global Bond (TPINX) 11 Top 5%
Portfolio return:
Vanguard Balanced Index 12.5% Top third

Comments: The folks at Money assumed that high-quality investments – blue chip multinationals, AA bonds – were finally due for their day in the sun. “Don’t hold your breath waiting for gains much beyond 6% in either stocks or bonds for 2010. …The key to surviving is to go for high quality, in both stocks and bonds.” Off by 300% on stocks – the Total Stock Market Index (VTSMX) was up near 18% in late December – but close on bonds. And wrong, for the moment, on quality: Morningstar’s index of high-quality stocks returned about 8% while junkier small-growth stocks returned four times as much.

  • Smart Money. “Where to Invest 2010,” Smart Money, January 2010.
Absolute 2010 return Relative 2010 return
T. Rowe Price Short-Term Bond (PRWBX) 3% Bottom third
Vanguard GNMA (VFIIX) 6.5 Top third
iPath S&P 500 VIX Short-Term Futures ETN (VXX) (72.5) Worst fund in the world
Vanguard Total Bond Market (VBMFX) 6%

Comments: I despaired of this particular essay last year, claiming that “It’s hard to imagine a more useless article for the average investor.” The difficulty is that Smart Money offered four broad scenarios with no probabilities. “If you think that we’ll plod along, then…” without offering their expert judgment on whether plodding would occur. Thanks, Dow Jones!

The funds, above, come from elsewhere in the “Where to” issue and received positive reviews there.

The Strange Life and Quiet Death of Satuit Small Cap

Readers of FundAlarm’s discussion board pointed out, recently, that I failed to eliminate the archived profile of Satuit Small Cap. Sorry ‘bout that!

In reality, Small Cap turned out to be the firm’s lonely step-child. It was an adopted child, have begun life as the Genomics Fund,world’s first and only mutual fund specializing in investing in the dynamic, new genomics industry!” After years of wretched performance, Satuit Microcap’s manager took over the fund and, eventually, rebranded it as Satuit Small Cap. I could do so because an exciting genomics fund is virtually identical to a diversified small cap one with virtually no genomics investments. We know that’s true because the fund solemnly attested to the fact: “The Fund was reorganized as a separate series of the Satuit Capital Management Trust on November 1, 2007. The Fund has the same investment strategy as the Predecessor Fund.” Similarly, PFW Water fund (ridiculed above) had the same strategy as Bender Growth, give or take investing in water.

The firm’s passion for the fund seemed limited from the start: there was little information about it at Satuit’s website, the website continued to refer to Microcap as if it were the firm’s only product, and the manager declined the opportunity to invest it in. There’s limited information about the new fund on the website. For example, most of the site’s text says “the” fund when referring to Satuit Microcap.

The manager’s last letter to his few investors (the fund had under $2 million, down by more than 60%) was full of . . . uh, full of . . . optimism!

I began writing this letter on Tuesday September 15th, 2009.  What a difference a year makes.  Last year I was writing about Monday September 15th, 2008.  It was the day that Lehman Bros filed for Chapter 11 Bankruptcy and Bank of America bought Merrill Lynch. And I said, “My sense is that by the time you read this letter, those events will be water-under-the-bridge, much like the JP Morgan acquisition of Bear Stearns and the Treasury take-over of Fannie Mae and Freddie Mac are today.”  Fortunately, these events are water under a very high bridge.  I’m glad it’s all behind us!


Robert J. Sullivan

Chief Investment Officer

Portfolio Manager, SATSX

Eight weeks late, the Board – presumably at Mr. Sullivan’s recommendation – liquidated the fund. There was no explanation for why the fund wasn’t simply merged into its successful sibling.

Briefly noted:

  • Causeway has added an “investor” share class to their Global Value (CGVIX) fund. Up until now, Global Value has required a $1 million minimum. The fund is not quite two years old and has been a respectable but unspectacular performer. The new share class charges 1.35% with a $5000 investment minimum.
  • Brett Favre is not the only weary warrior leaving the field one last (?) time. Michael Fasciano decided in October to liquidate the new Aston/Fasciano SmallCap Fund (AFASX). Mike explained it as a matter of simple economics: despite respectable returns in its first three quarters of operation, Aston was able to attract very little interest in the fund. Under the terms of his operating agreement, Mike had to underwrite half the cost of operating AFASX. Facing a substantial capital outflow and no evidence that assets would be growing quickly, he made the sensible, sad, painful decision to pull the plug. The fund ends its short life having made a profit for its investors, a continuation of a quarter-century tradition of which Mike is justifiably proud.
  • When a door closes, a window opens. Just as Aston/Fasciano liquidates, Aston/River Road Independent Value (ARIVX) launches! Eric Cinnamond, the founding manager of Intrepid Small Cap (ICMAX) left to join River Road in September. He’s been heading River Road’s “Independent Value” team and has just opened his new Independent Value fund. The fund focuses on high-quality small- to mid-cap stocks. The initial expense ratio is 1.41% with a $2500 investment minimum, which exactly match the terms and conditions of his former fund. Given Mr. Cinnamond’s top 1% returns, consistently low risk scores and string of five-star ratings from Morningstar, fans of his work have reason to be intrigued by the chance to access Mr. Cinnamond’s skills tied to a tiny asset base. With luck, we’ll profile his new fund in the months ahead.

In closing . . .

Ten years ago, the FundAlarm discussion board was abuzz. In his December “Highlights and Commentary,” Roy reviewed the recent scandal in Strong’s bond funds, which would eventually doom the firm, and lambasted a remarkable collection of sad-sack Internet funds (Monument Digital Technology or de Leon Internet 100, anybody?) Bob C warned of the imminent closing of Scudder Funds’ no-load shares. Roy offered T. Rowe Price Science & Tech as a stocking stuffer, which was certainly a better idea than most of the other options circulating on the board: Firsthand E-CommerceIPS MillenniumStrong Enterprise . . . Happily, most of the comments about those funds were deeply cautionary and much of the discussion center on tax-management, portfolio allocations and strong management teams. Ten years, and 280,000 posts (!) later, we’d like to recognize the good and thoughtful folks who have been sharing their reflections, now and over the decade past.

Below is a Wordle, a visual representation of data frequency generated at I sampled the names appearing on our current discussion threads and added those prominent in December 2005 and December 2000. To you all, and to them all, thanks for making FundAlarm what it is!

{image removed}

A blessed New Year to all!


Ariel Focus (ARFFX), May 2006 (updated June 2023)

By Editor

. . . from the archives at FundAlarm

These profiles have not been updated. The information is only accurate as of the original date of publication.

Fund name

Ariel Focus (ARFFX)


Non-diversified, mid- to large-cap domestic value fund. Generally speaking, the fund will invest in 20 stocks with a market cap in excess of $10 billion each; half of those stocks will be drawn from the portfolios of Ariel Fund or Ariel Appreciation. Ariel funds favor socially-responsible company management; the firm avoids tobacco, nuclear power and handgun companies. Ariel argues that such corporations face substantial, and substantially unpredictable, legal liabilities.


Ariel Capital Management, LLC. Ariel manages $19 billion in assets, with $8 billion in its two veteran mutual funds. Ariel provides a great model of a socially-responsible management team: the firm helps run a Chicago public charter school, is deeply involved in the community, has an intriguing and diverse Board of Trustees, is employee-owned, and its managers are heavily invested in their own funds. One gets a clear sense that these folks aren’t going to play fast and loose either with your money or with the rules.


Investment team led by Charlie Bobrinskoy (Ariel’s Vice Chairman and Director of Trading, previously with Salomon/Citigroup), and Tim Fidler (Ariel’s Director of Research).

Opening date

It varies. The firm ran in-house money using this strategy from March 1 through June 29 2005. The fund was offered to Illinois residents and Ariel employees beginning June 30, 2005. It became available nationally on February 1, 2006.

Minimum investment

$1000 for regular accounts, $250 for an IRA. The minimum is waived for investors establishing an automatic monthly investment of at least $50.

Expense ratio

1.00% (after expense waiver) with assets of $41 million. Ariel estimates that first-year expenses would be 1.13% without the waiver. The waiver is active through September 2024. 


This is the latest entrant into the “I want to be like Warren Buffett” sweepstakes. I had the opportunity to speak with Tim Fidler, one of the co-managers, and he’s pretty clear that Mr. Buffett provides the model for Ariel investing, in general, and Ariel Focus, in particular. The managers are looking for companies with a sustainable economic advantage — Mr. Buffett calls them companies with “moats.” Ariel looks for “high barriers to entry, sustainable competitive advantages, predictable fundamentals that allow for double digit earnings growth, quality management teams, [and] solid financials.” In addition, Ariel espouses a concentrated, low-turnover, low-price style. Mr. Fidler had been reading Artisan Opportunistic’s materials and was struck by many similarities in the funds’ positioning; he characterized his fund as likely “more contrarian,” which might suggest more patience and longer holding times. (Artisan Opportunistic was discussed in last month’s FundAlarm Annex.)

Ironically, for all of the Buffett influence, there’s no overlap between Buffett’s (i.e., Berkshire Hathaway’s) 32-stock portfolio and the 20 stocks in Ariel Focus.

What might drive your investment consideration with Ariel Focus? Two factors:

  1. It’s a concentrated, non-diversified portfolio. That should, in theory, drive risk and return higher. In practice, the evidence for either proposition is mixed. There are four firms that each offer two funds with the same managers and the same value philosophy, one diversified and one focused. They are Oakmark/Select, Yacktman/Focused, ICAP Equity/Select, and Clipper/Focus (yes, I know, there’s been a recent manager change, but most of the three-year record was generated by the same management team). Generally speaking, the focused fund has exhibited higher volatility, but only by a little (the standard deviations for Oakmark and Oakmark Select are typical: 8.2% versus 8.9%). The question is whether you’re consistently paid for the greater risk,and the answer seems to be “no.” There’s only one of the four pairs for which the Sharpe ratio (a measure of risk-adjusted returns) is higher for the focused fund than for the diversified one. The differences are generally small but have, lately, favored diversification.
  2. The fund is building off a solid foundation. In general, 50% of the Focus portfolio will be drawn from names already in Ariel or Ariel Appreciation. Those are both solid, low-turnover performers with long track records. Focus will depend on the same 15 person management team as Ariel; most of those folks are long-tenured and schooled in Ariel’s discipline. Their task is to apply a fairly straightforward discipline to a limited universe of new, larger stocks, about 90 companies, in all. If they’re patient, it should work out. And they do have a reputation for patience (their corporate motto, after all, is “slow and steady wins the race”).

Bottom line

If you believe in buying and holding the stocks of good, established companies, this is an entirely worthwhile offering. The advisor’s high standards of corporate behavior are pure gravy.

Company link

Ariel Focus (Ariel Web site)

May 1, 2006


(posted September 1, 2008)

Assets: $40 million

Expenses: 1.25%

YTD return: (4.8%)(as of 8/29/08)

Ariel Focus has been slowly gaining traction. Its first year (2006) was a disaster as the fund trailed 97% of its peers and 2007 was only marginally better with the fund trailing 79% of its peers. 2008 has been a different story, with the fund now leading 97% of its peers. That performance has helped the fund move back to the middle of the pack, with a three-year annual return of 2.3%.

The managers attribute most of their recent success, which began in the second half of 2007, to the hard-hit financial sector. Financials helped ARFFX because (1) they didn’t own many of them and (2) the companies they did hold – Berkshire-Hathaway, JPMorgan, Aflac – weren’t involved in the most-toxic part of the mess. They were also helped by the managers’ skepticism about the durability of the commodity and oil bubble, which has helped its consumer holdings in the past several months.

Unfortunately the fund’s improving fortunes haven’t been enough to forestall layoffs at Ariel. The company is celebrating its 25th anniversary this year but the party’s a bit bittersweet since it’s accompanied by the loss of a contract to manage part of Massachusetts’ retirement fund and the laying off of 18 staff members.

© Mutual Fund Observer, 2011.  All rights reserved.  The information here reflects publicly available information current at the time of publication.  For reprint/e-rights contact [email protected].