Category Archives: Old Profile

These profiles have been updated since the original publication, but remain here for permalinks. A link to the fully updated profile should be included at the top.

Artisan Global Value Fund (ARTGX) – May 2011

By Editor

Objective

The fund pursues long-term growth by investing in 30-50 undervalued global stocks. Generally it avoids small cap caps, but can invest up to 30% in emerging and less developed markets. The managers look for four characteristics in their investments:

A high quality business
With a strong balance sheet
Shareholder-focused management
Selling for less than it’s worth.

The managers can hedge their currency exposure, though they did not do so until they confronted twin challenges to the Japanese yen: unattractive long-term fiscal position plus the tragedies of March 2011. The team then took the unusual step of hedging part of their exposure to the Japanese yen.

Adviser

Artisan Partners of Milwaukee, Wisconsin. Artisan has five autonomous investment teams that oversee twelve distinct U.S., non-U.S. and global investment strategies. Artisan has been around since 1994. As of 3/31/2011 Artisan Partners had approximately $63 billion in assets under management (March 2011). That’s up from $10 billion in 2000. They advise the 12 Artisan funds, but only 6% of their assets come from retail investors. Update – Artisan Partners had approximately $57.1 billion in assets under management, as of 12/31/2011.

Manager

Daniel J. O’Keefe and David Samra, who have worked together since the late 1990s. Mr. O’Keefe co-manages this fund, Artisan International Value (ARTKX) and Artisan’s global value separate account portfolios. Before joining Artisan, he served as a research analyst for the Oakmark international funds and, earlier still, was a Morningstar analyst. Mr. Samra has the same responsibilities as Mr. O’Keefe and also came from Oakmark. Before Oakmark, he was a portfolio manager with Montgomery Asset Management, Global Equities Division (1993 – 1997). Messrs O’Keefe, Samra and their five analysts are headquartered in San Francisco. ARTKX earns Morningstar’s highest accolade: it’s an “analyst pick” (as of 04/11).

Management’s Stake in the Fund

Each of the managers has over $1 million here and over $1 million in Artisan International Value.

Opening date

December 10, 2007.

Minimum investment

$1000 for regular accounts, reduced to $50 for accounts with automatic investing plans. Artisan is one of the few firms who trust their investors enough to keep their investment minimums low and to waive them for folks willing to commit to the discipline of regular monthly or quarterly investments.

Expense ratio

1.5%, after waivers, on assets of $57 million (as of March 2011). Update – 1.5%, after waivers, on assets of $91 million (as of December 2011).

Comments

Artisan Global Value is the first “new” fund to earn the “star in the shadows” designation. My original new fund profile of it, written in February 2008, concluded: “Global is apt to be a fast starter, strong, disciplined but – as a result – streaky.” I have, so far, been wrong only about the predicted streakiness. The fund’s fast, strong and disciplined approach has translated into consistently superior returns from inception, both in absolute and risk-adjusted terms. Its shareholders have clearly gotten their money’s worth, and more.

What are they doing right?

Two things strike me. First, they are as interested in the quality of the business as in the cost of the stock. O’Keefe and Samra work to escape the typical value trap (“buy it! It’s incredibly cheap!”) by looking at the future of the business – which also implies understanding the firm’s exposure to various currencies and national politics – and at the strength of its management team. One of the factors limiting the fund’s direct exposure to emerging markets stocks is the difficulty of finding sufficiently high quality firms and consistently shareholder-focused management teams. If they have faith in the firm and its management, they’ll buy and patiently wait for other investors to catch up.

Second, the fund is sector agnostic. Some funds, often closet indexes, formally attempt to maintain sector weights that mirror their benchmarks. Others achieve the same effect by organizing their research and research teams by industry; that is, there’s a “tech analyst” or “an automotive analyst.” Mr. O’Keefe argues that once you hire a financial industries analyst, you’ll always have someone advocating for inclusion of their particular sector despite the fact that even the best company in a bad sector might well be a bad investment. ARTGX is staffed by “research generalists,” able to look at options across a range of sectors (often within a particular geographic region) and come up with the best ideas regardless of industry. That independence is reflected in the fact that, in eight of ten industry sectors, ARTGX’s position is vastly different than its benchmark’s. Too, it explains part of the fund’s excellent performance during the 2008 debacle. During the third quarter of 2008, the fund’s peers dropped 18% and the international benchmark plummeted 20%. Artisan, in contrast, lost 3.5% because the fund avoided highly-leveraged companies, almost all banks among them.

Why, then, are there so few shareholders?

Manager Dan O’Keefe offered two answers. First, advisors (and presumably many retail investors) seem uncomfortable with “global” funds. Because they cannot control the fund’s asset allocation, such funds mess up their carefully constructed plans. As a result, many prefer picking their international and domestic exposure separately. O’Keefe argues that this concern is misplaced, since the meaningful question is neither “where is the firm’s headquarters” or “on which stock exchange does this stock trade” (the typical dividers for domestic/international stocks) but, instead, “where is this company making its money?” Colgate-Palmolive (CL) is headquartered in the U.S. but generates less than a fifth of its sales here. Over half of its sales come from its emerging markets operations, and those are growing at four times the rate of its domestic or developed international market shares. (ARTGX does not hold CL as of 3/31/11.) His hope is that opinion-leaders like Morningstar will eventually shift their classifications to reflect an earnings or revenue focus rather than a domicile one.

Second, the small size is misleading. The vast majority of the assets invested in Artisan’s Global Value Strategy, roughly $3.5 billion, are institutional money in private accounts. Those investors are more comfortable with giving the managers broad discretion and their presence is important to retail investors as well: the management team is configured for investing billions and even a tripling of the mutual fund’s assets will not particularly challenge their strategy’s capacity.

What are the reasons to be cautious?

There are three aspects of the fund worth pondering. First, the expense ratio (1.50%) is above average even after expense waivers. Even fully-grown, the fund’s expenses are likely to be in the 1.4% range (average for Artisan). Second, the fund offers limited direct exposure to emerging markets. While it could invest up to 30%, it has never invested more than 9% and, since late-2009, has had zero. Many of the multinationals in its portfolio do give it exposure to those economies and consumers. Third, the fund offers no exposure to small cap stocks. Its minimum threshold for a stock purchase is a $2 billion market cap. That said, the fund does have an unusually high number of mid-cap stocks.

Bottom Line

On whole, Artisan Global Value offers a management team that is as deep, disciplined and consistent as any around. They bring an enormous amount of experience and an admirable track record stretching back to 1997. Like all of the Artisan funds, it is risk-conscious and embedded in a shareholder-friendly culture. There are few better offerings in the global fund realm.

Fund website

Artisan Global Value fund

Update – December 31, 2011 (4Q) – Fact Sheet (pdf)

Akre Focus (AKREX), 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.

February 1, 2010

FundAlarm Annex – Fund Report

Objective

The fund seeks long-term capital appreciation by investing, mostly, in US stocks of various sizes, though it is likely to hold small and mid-cap stocks more frequently than large cap ones. The fund may also invest in “other equity-like instruments.” The manager looks for companies with good management teams (those with “a history of treating public shareholders like partners”), little reliance on debt markets and above-average returns on equity. Once they find such companies, they wait until the stock sells at a discount to “a conservative estimate of the company’s intrinsic value.” The Fund is non-diversified, with both a compact portfolio (25 or so names) and a willingness to put a lot of money (often three or four times more than a “neutral weighting” would suggest) in a few sectors.

Adviser

Akre Capital Management, LLC, an independent Registered Investment Advisor located in Middleburg, VA. Mr. Akre, the founder of the firm, has been managing portfolios since 1986, and has worked in the industry for over 40 years. At 12/30/09, the firm had over $500 million in assets under management split between Akre Capital Management, which handles the firm’s separately managed accounts ($1 million minimum), a couple hedge funds, and Akre Focus Fund. Mr. Akre founded ACM in 1989, while his business partners went on to form FBR. As a business development move, it operated it as part of Friedman, Billings, Ramsey & Co. from 1993 – 1999 then, in 2000, ACM again became independent.

Manager

Charles Akre, who is also CEO of Akre Capital Management. Mr. Akre has been in the securities business since 1968 and was the sole manager of FBR Focus (FBRVX) from its inception in 1996 to mid-2009. He holds a BA in English Literature from American University, which I mention as part of my ongoing plug for a liberal arts education.

Managements Stake in the Fund

Mr. Akre and his family have “a seven figure investment in Akre Focus, larger than my investment in the FBR fund had been.”

Opening date

August 31, 2009 though the FBR Focus fund, which Mr. Akre managed in the same style, launched on December 31, 1996.

Minimum investment

$2,000 for regular accounts, $1000 for IRAs and accounts set up with automatic investing plans.

Expense ratio

1.46% on assets of about $150 million. There’s also a 1.00% redemption fee on shares held less than 30 days.

Comments

In 1997, Mr. Akre became of founding manager of FBR Small Cap Growth – Value fund, which became FBR Small Cap Value, the FBR Small Cap, and finally FBR Focus (FBRVX). Across the years and despite many names, he applied the same investment strategy that now drives Akre Focus.

Here’s his description of the process:

The process we employ for evaluating and identifying potential investments (compounding machines) consists of three key steps:

We look for companies with a history of above average return on owner’s capital and, in our assessment, the ability to continue delivering above average returns going forward. Investors who want returns that are better than average need to invest in businesses that are better than average. This is the pond we seek to fish in.

We insist on investing only with firms whose management has demonstrated an acute focus on acting in the best interest of all shareholders. Managers must demonstrate expertise in managing the business through various economic conditions, and we evaluate what they do, say and write for demonstrations of integrity and acting in the interest of shareholders.

We strive to find businesses that, through the nature of the business or skill of the manager, present clear opportunities for reinvestment in the business that will deliver above average returns on those investments.

Whether looking at competitors, suppliers, industry specialists or management, we assess the future prospects for business growth and seek out firms that have clear paths to continued success.

Mr. Akre’s discipline leads to four distinguishing characteristics of his fund’s portfolio:

It tends to be concentrated in (though not technically limited to) small- to mid-cap stocks. His explanation of that bias is straightforward: “that’s where the growth is.”
It tends to make concentrated bets. He’s had as much as a third of the portfolio in just two industries (gaming and entertainment) and his sector weightings are dramatically different from those of his peers or the S&P500.
It tends to stick with its investments. Having chosen carefully, Mr. Akre tends to wait patiently for an investment to pay off. In the past ten years, FBRVX never had a turnover ratio above 26% and often enough it was in the single digits.
It tends to have huge cash reserves when the market is making Mr. Akre queasy. From 2001 – 04, FBRVX’s portfolio averaged 33.5% cash – and crushed the competition. It was in the top 2% of its peer group in three of those four years and well above average in the fourth year.

Those same patterns seem to be playing out in Akre Focus. At year’s end, he was 65% in cash. Prompted by a reader’s question, I asked whether he had a goal for deploying the cash; that is, did he plan to be “fully invested” at some point? His answer was,no. He declared himself to be “very cautious about the market” because of the precarious state of the American consumer (overextended, uncertain, underemployed). He allowed that he’d been moving “gingerly” into the market and had been making purchases weekly. He’s trying to find investments that exploit sustained economic weakness. While he has not released his complete year-end portfolio, three of his top ten holdings at year-end were added during the fourth quarter:

WMS Industries, a slot machine manufacturer. He’s been traditionally impressed by the economics of the gaming industry but with the number of casino visits and spending per visit both down dramatically, his attention has switched from domestic casino operators to game equipment manufacturers who serve a worldwide clientele. By contrast, long-time FBRVX holding Penn National Gaming – which operates racetracks and casinos – is a “dramatically smaller” slice of AKREX’s portfolio.
optionsXpress, an online broker that allows retail investors to leverage or hedge their market exposure.
White River Capital, which securitizes and services retail car loans and which benefits from growth in the low-end, used car market

Potential investors need to be aware of two issues.

First, despite Morningstar’s “below average” to “low” risk grades, the fund is not likely to be mild-mannered. FBRVX has trailed its peer group – often substantially – in four of the past ten years. If benchmarked against Vanguard’s Midcap Index fund (VIMSX), the same thing would be true of Mr. Akre’s private account composite. Over longer periods, though, his returns have been very solid. Over the past decade returns for FBRVX (11% annually, as of 12/31/09) more than doubled its average peer’s return while his separate accounts (8%) earned about a third more than VIMSX (6%) and trounced the S&P500 (-1.0%).

Second, Mr. Akre, at age 67, is probably . . . uhhh, in the second half of his investing career. Marty Whitman, Third Avenue Value’s peerless 83-year-old star manager, spits in my general direction for mentioning it. Ralph Wanger, who managed Acorn (ACRNX) to age 70 and won Morningstar’s first “fund manager lifetime achievement award” in the year of his retirement from the fund, might do the same – but less vehemently. Mr. Akre was certainly full of piss and vinegar during our chat and the new challenge of building AKREX as an independent fund is sure to be invigorating.

Bottom Line:

Partnership is important to Mr. Akre. He looks for it in his business relationships, in his personal life, and in his investments. Folks who accept the challenge of being Mr. Akre’s partner – that is, investors who are going to stay with him – are apt to find themselves well-rewarded.

Fund website

Akre Focus Fund

Aegis Value (AVALX) – May 2009

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.

May 1, 2009

FundAlarm Annex – Fund Report

Fund name:

Aegis Value (AVALX)

Objective

The fund seeks long-term capital appreciation by investing (mostly) in domestic companies whose market caps are ridiculously small. On whole, these are stocks smaller than those held in either of Bridgeway’s two “ultra-small” portfolios.

Adviser:

Aegis Financial Corporation of Arlington, VA. AFC, which has operated as a registered investment advisor since 1994, manages private account portfolios, and has served as the Fund’s investment advisor since the fund’s inception. They also advise Aegis High Yield.

Manager

Scott L. Barbee, CFA, is portfolio manager of the fund and a Managing Director of AFC. He was a founding director and officer of the fund and has been its manager since inception. He’s also a portfolio manager for approximately 110 equity account portfolios of other AFC clients managed in an investment strategy similar to the Fund with a total value of approximately $80 million. Mr. Barbee received an MBA degree from the Wharton School at the University of Pennsylvania.

Management’s Stake in the Fund:

As of August 31, 2008, Mr. Barbee owned more than $1 million of fund shares. He will also be the sole owner of the adviser upon retirement of the firm’s co-founder this year.

Opening date

May 15, 1998

Minimum investment

$10,000 for regular accounts and $5,000 for retirement accounts, though at this point they might be willing to negotiate.

Expense ratio

1.43% on assets of $66 million

Comments:

Let’s get the ugly facts of the matter out of the way first. Aegis Value is consistently a one- to two-star small value fund in Morningstar’s rating system. It has low returns and high risk. The fund’s assets are one-tenth of what they were five years ago.

‘Nuff said, right?

Maybe. Maybe not. I’ll make four arguments for why Aegis deserves a second, third, or perhaps fourth look.

First, if we’d been having this discussion one year ago (end of April 2008 rather than end of April 2009), the picture would have been dramatically different. For the decade from its founding through last May, Aegis turned a $10,000 initial investment into $36,000. Its supposed “small value” peer group would have lagged almost $10,000 behind, while the S&P500 would have been barely visible in the dust. Over that period, Aegis would have pretty much matched the performance of Bridgeway’s fine ultra-small index fund (BRSIX) with rather less volatility.

Second, ultra-small companies are different: benchmarking them against either small- or micro-cap companies leads to spurious conclusions. By way of simple example, Aegis completely ignored the bear market for value stocks in the late 1990s and the bear market for everybody else at the beginning of this century. While it’s reasonable to have a benchmark against which to measure a fund’s performance, a small cap index might not be much more useful than a total market index for this particular fund.

Third, ultra-small companies are explosive: Between March 9 and April 29, 2009, AVALX returned 66.57%. That sort of return is entirely predictable for tiny, deep-value companies following a recession. After merely “normal” recessions, Morningstar found that small caps posted three-year returns that nearly doubled the market’s return. But the case for tiny stocks after deep declines is startling. Mr. Barbee explained in his January 22 shareholder letter:

. . . in the 5 years following 1931, the Fama/French Small Value Benchmark returned a cumulative 538 percent without a down year, or over 44 percent per year. Even including the damaging “double-dip” recession of 1937, the benchmark returned over 21 percent annually for the 7 years through 1938. After market declines in 1973 and 1974, over the next 7 years (1975 through 1981), the Fama/French Small Value Benchmark returned a cumulative 653 percent without a down year, or greater than 33 percent per year.

Fourth, the case for investing in ultra-small companies is especially attractive right now. They are deeply discounted. Despite the huge run-up after March 9, “the companies held by the … Fund now trade at a weighted average price-to-book of 29.4%, among the very lowest in the Fund’s nearly 11-year history.” The universe of stocks which the manager finds most attractive – tiny companies selling for less than their book value – has soared to 683 firms or about five times the number available two years ago. After the huge losses of 2008 and early 2009, the fund now packs a tax-loss carryforward which will make any future gains essentially tax-free.

Bottom Line

Mr. Barbee, his family and his employees continue to buy shares of Aegis Value. He’s remained committed to “buying deeply-discounted small-cap value stocks,” many of which have substantial cash hoards. Investors wondering “how will I ever make up for last year’s losses?” might find the answer in following his lead.

Fund website

Aegis Value fund

Pinnacle Value (PVFIX), November 2011

By Editor

Fund name

Pinnacle Value (PVFIX)

Objective

Pinnacle Value seeks long-term capital appreciation by investing in small- and micro-cap stocks that it believes trade at a discount to underlying earnings power or asset values. It might also invest in companies undergoing unpleasant corporate events (companies beginning a turnaround, spin-offs, reorganizations, broken IPOs) as well as illiquid investments. It also buys convertible bonds and preferred stocks which provide current income plus upside potential embedded in their convertibility. The fund can also use shorts and options for hedging. The manager writes that “while our structure is a mutual fund, our attitude is partnership and we built in maximum flexibility to manage the portfolios in good markets and bad.”

Adviser

Bertolet Capital of New York. Bertolet advises one $10 million account as well as this fund.

Manager

John Deysher, Bertolet’s founder and president. From 1990 to 2002 Mr. Deysher was a research analyst and portfolio manager for Royce & Associates. Before that he managed equity and income portfolios at Kidder Peabody for individuals and small institutions. The fund added an equities analyst, Mike Walters, in January 2011.

Manager’s Investment in the fund

In excess of $1,000,000, making him the fund’s largest shareholder. He also owns the fund’s advisor.

Opening date

April Fool’s Day, 2003.

Minimum investment

$2500 for regular accounts and $1500 for IRAs. The fund is currently available in 25 states, though – as with other small funds – the manager is willing to register in additional states as demand warrants. A key variable is the economic viability of registered; Mr. Deysher notes that the registration fees in some states exceed $1000 while others are only $100. The fund is available through TD Ameritrade, Fidelity, Schwab, Vanguard and other platforms.

Expense ratio

1.47% on assets of $47 million. Some sources report a slightly higher ratio, but that’s based on the fund’s ownership of a number of closed-end and exchange-traded funds. There is a 1% redemption fee for shares held less than a year.

Comments

Could you imagine a “Berkshire Hathaway for ultra-micro-caps”? Five factors bring the comparison to mind. With Deysher, you’re got:

a Buffett devotee. This is one of very few funds that provides a link to Berkshire Hathaway on its homepage and which describes Mr. Buffett’s reports as a source of ideas for companies small enough to fit the portfolio.
Like Mr. Buffett, Mr. Deysher practices high commitment investing and expects it of the companies he invests in. His portfolio holds only 47 stocks and his largest holding consumes 4% of the fund. The fund’s prospectus allows for as much as 10% in a single name. One of the key criteria for selecting stocks for the portfolio is high insider ownership, because, he argues, that personal investment makes them “pay more attention to capital allocation and not do dumb things just to satisfy Wall Street.”

Also like Buffett, he invests in businesses that he can understand and companies which practice very conservative accounting and have strong balance sheets. That excludes many financial and tech names from consideration.
a willingness to go against the crowd. Deysher invests in companies so small that, in some instances, no other fund has even noticed them. He owns companies with trade on exchanges, but also bulletin board and pink sheet stocks. As a result, his median market cap (MMC) is incredibly low. How low?
The average market cap is under $250 million, 10^thlowest of the 2300 domestic stock funds that Morningstar tracks, and he’s willing to consider companies with a market cap as low as $10 million.

Deysher acquires these shares through both open-market and private placements. He seems intensely aware of the need to do fantastic original research on these firms and to proceed carefully so as not to upset the often-thin market for their shares.

One interesting measure of his independence is Morningstar’s calculation of his “best fit” index. Morningstar runs regressions to try to figure out what a fund “acts like.” Vanguard’s Small Value Index acts like, well, an index – it tracks the Russell 2000 Value almost perfectly. Pinnacle acts like, well, nothing else. Its “best fit” index is the Russell Mid-Cap Value index which tracks firms 22 times larger than those in Pinnacle. When last I checked, the closest surrogate was the MSCI EAFE non-dollar index. That is, from the perspective of statistical regression, the fund acted more like a foreign stock fund than a small cap US one. (Not to worry – even there the correlation was extremely small.)
a patient, cash-rich investor. Like Mr. Buffett, Mr. Deysher sort of likes financial panic. He’s only willing to buy stocks that have been deeply discounted, and panics often provide such opportunities. “Volatility,” he says, “is our friend.” Since his friend has visited so often, I asked whether he had gone on a buying spree. The answer was, yes, on a limited basis. Even after the instability of the past months, most small caps still carry an unattractive premium to the price he’s willing to pay. There are “not a lot of bargains out there.” He does allow, however, that we’re getting within 5 – 10% of some interesting buying opportunities for his fund.
And he does have the resources to go shopping. Just over 42% of the portfolio is in cash (as of mid-October, 2011). While that is well down from the 53% it held at the end of the first quarter of 2011, it still provides a substantial war chest in the case of instability in the months ahead. Part of those opportunities come when stocks “go dark,” that is they deregister with the SEC and delist from NASDAQ. At that point, there’s often a sharp price drop which can provide a valuable entry point for watchful investors.
a strong track record. All of this wouldn’t matter if he weren’t successful. But he is. The fund has returned 3.9% annually over the past five years (as of 9/30/2011), while its average peer lost 1.4%. As of that same date, it earned top 1% returns for the past month, three months, six months and year-to-date, with top 2% returns for the past year and for the trailing five years. That’s accomplished by staying competitive in rising markets and strongly outperforming in falling ones. During the market meltdown from October 2007 to March 2009, Pinnacle lost 25% while his peers lost over 50%. While his peers roared ahead in the junk-driven rally in 2009 and early 2010, they still trail Pinnacle badly from the start of the meltdown to now (i.e., October 2011). That reflects the general pattern: by any measure of volatility, Pinnacle has about one-third of the downside risk experienced by its peers.
a substantial stake in the fund’s outcome. As is often the case, Mr. Deysher is his own largest shareholder. Beyond that, though, he receives no salary, bonus or deferred compensation. All of his income comes from Bertolet’s profits. And he has committed to investing all of those profits into shares of the fund.
He has, in addition, committed to closing the fund as soon as money becomes a problem. His argument, often repeated, is pretty clear: “We expect to close the fund at some point. We don’t know if we will close it at $100 million or $500 million, but we won’t dilute the quality of investment ideas just to grow assets.”

Over the past few years, Mr. Deysher experimented with adding some additional elements to the portfolio. Those included a modest bond exposure and short positions on a growth index, both achieved with ETFs. He also added some international exposure when he bought closed-end funds that were selling at a “crazy” discount to their own NAVs.

Quick note on CEF pricing: CEFs have both a net asset value (the amount a single share of the fund is worth, based on the minute-to-minute value of all the stocks in the portfolio) and a market value (the amount that a single share of the fund is worth, based on what it’s selling for at that moment. In a panicked market, there can be huge disconnects between those two prices. Those disconnects sometimes allow investors to buy $100 in stock for $60. Folks who purchase such deeply discounted shares can pocket substantial profits even if the market continues to fall.

Mr. Deysher reports that the bond ETF purchase was about a break even proposition, but that the short ETFs have been sold to generate tax losses. He pledges to avoid both “inverse and long-macro bets” in the future, but notes that the CEFs have been very profitable. While those positions have been pared back, he’s open to repeating that investment should the opportunity again present itself.

Bottom line

The manager trained with and managed money for twelve years with the nation’s premium small cap investor, Chuck Royce. He seems to have internalized many of the precepts that have made both Mr. Royce and Mr. Buffett successful.

Pinnacle Value offers several compelling advantages over better known rivals: the ability to take meaningful positions in the smallest of the small, a willingness to concentrate and the ability to hedge.

Many smart people hold two beliefs in tension about small cap investing: (1) it’s a powerful tool in the long term and (2) it may have come too far too fast. If you share those concerns, Pinnacle may offer you a logical entry point – Mr. Deysher shares your concerns, he has his eye on good companies that will become attractive investments should their price fall, and he’s got the cash to move when it’s time. In the interim, the cash pile offers modest returns through the interest it earns and considerable downside cushion.

Company website

Pinnacle Value

Mairs and Power Small Cap Fund (MSCFX), October 2011

By Editor

Objective

The fund will pursue above-average long-term capital appreciation by investing in 40-45 small cap stocks. For their purposes, “small caps” have a market capitalization under $3.4 billion at the time of purchase. The manager is authorized to invest up to 25% of the portfolio in foreign stocks and to invest, without limit, in convertible securities (but he plans to do neither). Across all their portfolios, Mairs & Power invests in “carefully selected, quality growth stocks” purchased “at reasonable valuation levels.”

Adviser

Mairs & Power, Inc. Mairs and Power, chartered in 1931, manages approximately $4.2 billion in assets. The firm provides investment services to individuals, employee benefit plans, endowments, foundations and close to 50,000 accounts in its three mutual funds (Growth, Balanced and Small Cap).

Manager

Andrew Adams. Mr. Adams joined Mairs & Power in 2006. From August 2004 to March 2007, he helped manage Nuveen Small Cap Select (EMGRX). Before that he was the co-manager of the large cap growth portfolio at Knelman Asset Management Group in Minneapolis. He also manages about $67 million in 64 separate accounts (as of 08/11).

Management’s Stake in the Fund

Mr. Adams and the other Mairs & Power staff have invested about $2 million in the fund. At last report, that’s 83% of the fund’s assets. Mr. Adams describes the process as “passing the hat” after “the lowest key sales talk you could imagine.”

Opening date

August 11, 2011.

Minimum investment

$2500, reduced to $1000 for various tax-sheltered accounts. The fund should be available through Fidelity, Schwab, Scottrade, TD Ameritrade and a few others.

Expense ratio

1.25% after substantial waivers (the actual projected first-year cost is 12.4%) on an asset base of $2.4 million.

Comments

If you’re looking for excitement, look elsewhere. If you want the next small cap star, go away. It’s not here.

If you’d like a tax efficient way to buy high-quality small caps, you can stay. But only if you promise not to make a bunch of noise; it startles the fish.

The Mairs & Power funds are extremely solid citizens. Much has been made of the fact that this is M&P’s first new fund in 50 years. Less has been said about the fact that this fund has been under consideration for more than five years. This is not a firm that rushes into anything.

Small Cap is a logical extension of Mairs & Power Growth (MPGFX). While Mr. Adams was a successful small cap fund manager, his prime responsibility up until now has been managing separate accounts using a style comparable to the Growth funds. That style has three components.

They like buying good quality, but they’re not willing to overpay.
They like buying what they know best. About two-thirds of the Growth and Small Cap portfolios are companies based in the upper Midwest, often in Minnesota. They are unapologetic about their affinity for Midwestern firms: “we believe there are an unusually large number of attractive companies in this region that we have been following for many years. While the Funds have a national charter, their success is largely due to our focused, regional approach.”
And once they’ve bought, they keep it. Turnover in Mairs & Power Growth is 2% per year and in Balanced, where most of their bonds are held all the way to maturity, it’s 6%.

Mr. Adams intends to do the same here. He’s looking for consistent performers, and won’t sacrifice quality to get growth. About two-thirds of his portfolio are firms domiciled in the upper Midwest. While he can invest overseas, in a September 2011 conversation, he said that he has no plan to do so. The prospectus provision reflects the fact that there are some mining and energy companies operating in northern Minnesota whose headquarters are in Canada. If they become attractive, he wants authority to buy them. Likewise, he has the authority to buy convertible securities but admits that he “doesn’t see investing there.” And he anticipates portfolio turnover somewhere in the 10-20% range. That’s comparable to the turnover in a small cap index fund, and far below the 50% annual turnover which is typical in other actively-managed small cap core funds.

Mairs & Powers’ sedate exterior hides remarkably strong performance. Mairs & Power Growth (MPGFX) moves between a four-star and five-star rating, with average to below-average risk and above-average to high returns. Lipper consistently rates it above-average for returns and excellent for capital preservation. Mairs & Power Balanced (MAPOX) offers an even more attractive combination of modest volatility and strong returns.

Bottom Line:

There’s simply no reason to be excited about this fund. Which is exactly what Mairs & Power wants. Small Cap will, almost certainly, grow into a solidly above-average performer that lags a bit in frothy markets, leads in soft ones and avoids making silly mistakes. It’s the way Mairs & Power has been winning for 80 years and it’s unlikely to change now.

Fund website

Mairs & Power Small Cap fund

Walthausen Select Value (WSVRX), September 2011

By Editor

Objective

The Fund pursues long-term capital appreciation by investing primarily in common stocks of small and mid capitalization companies. Small and mid capitalization companies are those with market capitalizations of $4 billion or less at the time of purchase. The Fund typically invests in 40 to 50 companies. The manager reserves the right to go to cash as a temporary move.

Adviser

Walthausen & Co., LLC, which is an employee-owned investment adviser located in Clifton Park, NY. Mr. Walthausen founded the firm in 2007. In September 2007, he was joined by the entire investment team that had worked previously with him at Paradigm Capital Management, including an assistant portfolio manager, two analysts and head trader. Subsequently this group was joined by Mark Hodge, as Chief Compliance Officer, bringing the total number of partners to six. It specializes in small- and mid-cap value investing through separate and institutional accounts, and its two mutual funds. They have about $540 million in assets under management.

Manager

John B. Walthausen. Mr. Walthausen is the president of the Advisor and has managed the fund since its inception. Mr. Walthausen joined Paradigm Capital Management on its founding in 1994 and was the lead manager of the Paradigm Value Fund (PVFAX) from January 2003 until July 2007. He oversaw approximately $1.3 billion in assets. He’s currently responsible for about half that amount. He’s got about 30 years of experience and is, as I noted above, supported by the team from his former employer. He’s a graduate of Kenyon College (a very fine liberal arts college in Ohio), the City College of New York (where he earned an architecture degree) and New York University (M.B.A. in finance).

Inception

December 27 2010.

Management’s Stake in the Fund

Mr. Walthausen has between $100,000 and $500,000 in this fund, over $1 million invested in his flagship fund and also owns the fund’s adviser.

Minimum investment

$2,500 for all accounts. There’s also an “investor” share class with a $10,000 minimum and 1.46% expense ratio.

Expense ratio

1.70% on an asset base of about $1.2 million (as of 01/31/2011).

Comments

The case for Walthausen Select Value is Paradigm Value (PVFAX), Paradigm Select (PFSLX) and Walthausen Small Cap Value (WSCVX). Mr. Walthausen is a seasoned small- and mid-cap investor, with 35 years of experience in the field. From 1994 to 2007 he was a senior portfolio manager at Paradigm Capital. He managed Paradigm Value from its inception until his departure, Paradigm Select Value from inception until his departure and Walthausen Small Cap Value from its inception until now.

Mr. Walthausen’s three funds have two things in common: each holds a mix of small and mid-cap stocks and each has substantially outperformed its peers.

Walthausen Select parallels Paradigm Select. Each has a substantial exposure to mid-cap stocks but remains overweight in small caps. In his two years at Paradigm Select, Morningstar classified the portfolio as “small blend.” Paradigm currently holds about one third of its assets in mid-caps while Walthausen Select is a bit higher, at 45% (as of 04/30/2011). In each case, the stocks were almost-entirely domestic. Walthausen Small Cap Value has about 85% small cap and 15% mid-cap, while Paradigm Value splits about 80/20. In short, Mr. Walthausen is a small cap investor with substantial experience in mid-cap investing as well.

Each of Mr. Walthausen’s funds has substantially outperformed its peers under his watch.

Paradigm Select turned $10,000 invested at inception into $16,000 at his departure. His average mid-blend peer would have returned $13,800.

Paradigm Value turned $10,000 invested at inception to $32,000 at his departure. His average small-blend peer would have returned $21,400. From inception until his departure, PVFAX earned 28.8% annually while its benchmark index (Russell 2000 Value) returned 18.9%.

Walthausen Small Cap Value turned $10,000 invested at inception to $14,000 (as of 08/2/2011). His average small-value peer would have returned $10,400. Since inception, WSCVX has out-performed every Morningstar “analyst pick” in his peer group. That includes Royce Special (RYSEX), Paradigm Value (PVFAX), Vanguard Tax-Managed Small Cap (VTMSX), Bogle Small Cap Growth (BOGLX), Third Avenue Small-Cap Value (TASCX) and Bridgeway Small-Cap Value (BRSVX). WSCVX earned more than 40% in each of its first two full years.

Investors in Walthausen Select are betting that Mr. Walthausen’s success is not due to chance and that he’ll be able to parlay a more-flexible, more-focused portfolio in a top tier performer. A number of other small cap managers (at Artisan, Fidelity, Royce and elsewhere) have handled the transition to “SMID-cap” investing without noticeable difficulty. Mr. Walthausen reports that there’s a 40% overlap between the holdings of his two funds. There are only a few managers handling both focused and diversified portfolios (Nygren at Oakmark and Oakmark Select, most famously) so it’s hard to generalize about the effects of that change.

There are, of course, reasons for caution. First, Mr. Walthausen’s other funds have been a bit volatile. Investors here need to be looking for alpha (that is, high risk-adjusted returns), not downside protection. Because it will remain fully-invested, there’s no prospect of sidestepping a serious market correction. Second, this fund is more concentrated than any of his other charges. It currently holds 42 stocks, against 80 in Small Cap Value and 65 in his last year at Paradigm Select. Of necessity, a mistake with any one stock will have a greater effect on the fund’s returns. At the same time, Mr. Walthausen believes that 75% of the stocks will represent “good, unexciting companies” and that it will hold fewer “special situation” or “deeply troubled” firms than does the small cap fund. And these stocks are more liquid than are small or micro-caps. All that should help moderate the risk. Third, Mr. Walthausen, born in 1945, is likely in the later stages of his investing career. Finally, the fund’s expenses are high which will be a major hassle in a market that’s not surging.

Bottom line

There’s considerable reason to give Walthausen Select careful consideration despite its slow start. From inception through late August 2011, the fund has slightly underperformed a 60/40 blend of Morningstar’s small-core and midcap-core peer groups. Mr. Walthausen’s track record is solid and he’s confident that this fund “will be better in a muddled market” than most. While it’s more concentrated than his other portfolios, it’s concentrated in larger, more stable names. Folks willing to deal with a bit of volatility in order to access Mr. Walthausen’s considerable skill at adding alpha should carefully track the evolution of this little fund.

Company link

Walthausen Funds homepage, which is a pretty durn Spartan spot but there’s a fair amount of information if you click on the tiny text links across the top.

T Rowe Price Global Infrastructure (TRGFX), August 2011

By Editor

Update: This fund has been liquidated.

Objective

The fund seeks long-term growth by investing in global corporations involved in infrastructure and utility projects. The fund holds about 100 stocks, 70% of its investments (as of 3/31/11) are outside of the U.S and 20% are in emerging markets. The manager expects about 33% of the portfolio to be invested in emerging markets. The portfolio is dominated by utilities (45% of assets) and industrials (40%). Price highlights the fund’s “substantial volatility” and recommends it as a complement to a more-diversified international fund.

Adviser

T. Rowe Price. Price was founded in 1937 and now oversees about a half trillion dollars in assets. They advise nearly 110 U.S. funds in addition to European funds, separate accounts, money markets and so on. Their corporate culture is famously stable (managers average 13 years with the same fund), collective and risk conscious. That’s generally good, though there’s been some evidence of groupthink in past portfolio decisions. On whole, Morningstar rates the primarily-domestic funds higher as a group than it rates the primarily-international ones.

Managers

Susanta Mazumdar. Mr. Mazumdar joined Price in 2006. He was, before that, recognized as one of India’s best energy analysts. He earned a Bachelor of Technology in Petroleum Engineering and an M.B.A., both from the Indian Institute of Technology.

Management’s Stake in the Fund

None. Since he’s not resident in the U.S., it would be hard for him to invest in the fund. Ed Giltanen, a TRP representative, reports (7/20/11) that “we are currently exploring issues related to his ability to invest” in his fund. Only one of the fund’s directors (Theo Rodgers, president of A&R Development Corporation) has invested in the fund. There are two ways of looking at that pattern: (1) with 129 portfolios to oversee, it’s entirely understandable that the vast majority of funds would have no director investment or (2) one doesn’t actually oversee 129 funds, one nods in amazement at them.

Opening date

January 27, 2010.

Minimum investment

$2,500 for all accounts.

Expense ratio

1.10%, after waivers, on assets of $50 million (as of 5/31/2011). There’s also a 2% redemption fee on shares held fewer than 90 days.

Comments

Infrastructure investing has long been the domain of governments and private partnerships. It’s proven almost irresistibly alluring, as well as repeatedly disappointing. In the past five years, the vogue for global infrastructure investing has reached the mutual fund domain with the launch of a dozen funds and several ETFs. In 2010, T. Rowe Price launched their entrant. Understanding the case for investing there requires us to consider four questions.

What do folks mean by “infrastructure investing”? “Infrastructure” is all the stuff essential to a country’s operation, including energy, water, and transportation. Standard and Poor’s, which calculates the returns on the UBS World Infrastructure and Utilities Index, tracks ten sub-sectors including airports, seaports, railroads, communications (cell phone towers), toll roads, water purification, power generation, power distribution (including pipelines) and various “integrated” and “regulated” categories.

Why consider infrastructure investing? Those interested in the field claim that the world has two types of countries. The emerging economies constitute one type. They are in the process of spending hundreds of billions to create national infrastructures as a way of accommodating a growing middle class, urbanization and the need to become economically competitive (factories without reliable electric supplies and functioning transportation systems are doomed). Developed economies are the other class. They face the imminent need to spend trillions to replace neglected, deteriorating infrastructure that’s often a century old (a 2009 engineering report gave the US a grade of “D” in 15 different infrastructure categories). CIBC World Markets estimates there will be about $35 trillion in global infrastructure investing over the next 20 years.

Infrastructure firms have a series of unique characteristics that makes them attractive to investors.

They are generally monopolies: a city tends to have one water company, one seaport, one electric grid and so on.
They are in industries with high barriers to entry: the skills necessary to construct a 1500 mile pipeline are specialized, and not easily acquired by new entrants into the field.
They tend to enjoy sustained and rising cash flows: the revenues earned by a pipeline, for example, don’t depend on the price of the commodity flowing through the pipeline. They’re set by contract, often established by government and generally indexed to inflation. That’s complemented by inelasticity of demand. Simply put, the rising price of water does not tend to much diminish our need to consume it.

These are many of the characteristics that made tobacco companies such irresistible investments over the years.

While the US continues to defer much of its necessary infrastructure investment, demand globally has produced startling results among infrastructure stocks. The key index, UBS Global Infrastructure and Utilities, was launched in 2006 with backdated results from 1990. It’s important to be skeptical of any backdated or back-tested model, since it’s easy to construct a model today that would have made scads of money yesterday. Assuming that the UBS model – constructed by Standard and Poor’s – is even modestly representative, the sector’s 10-year returns are striking:

UBS World Infrastructure and Utilities	8.6%
UBS World Infrastructure	11.1
UBS World Utilities	8.4
UBS Emerging Infrastructure and Utilities	16.5
Global government bonds	7.0
Global equities	1.1
All returns are for the 10 years through March 2010

Now we get to the tricky part. Do you need a dedicated infrastructure fund in your portfolio? No, it’s probably not essential. A complex simulation by Ibbotson Associates concluded that you might want to devote a few percent of your portfolio to infrastructure stocks (no more than 6%) but that such stocks will improve your risk/return profile by only a tiny bit. That’s in part true because, if you have an internationally diversified portfolio, you already own a lot of infrastructure stocks. TRGFX’s top holding, the French infrastructure firm Vinci, is held by not one but three separate Vanguard index funds: Total International, European Stock and Developed Markets. It also appears in the portfolios of many major, actively managed international and diversified funds (Artisan International, Fidelity Diversified International, Mutual Discovery, Causeway international Value, CREF Stock). As a result, you likely own it already.

A cautionary note on the Ibbotson study cited above: Ibbotson says you need marginal added exposure to infrastructure. The limitation of the Ibbotson study is that it assumed that your portfolio already contained a perfect balance of 10 different asset classes, with infrastructure being the 11^th. If your portfolio doesn’t match that model, the effects of including infrastructure exposure will likely be different for you.

Finally, if you did want an infrastructure fund, do you want the Price fund? Tough question. The advantages of the Price fund are substantial, and flow from firmwide commitments: expect below average expenses, a high degree of risk consciousness, moderate turnover, management stability, and strong corporate oversight. That said, the limitations of the Price fund are also substantial:

Price has not produced consistent excellence in their international funds: almost all of them are best described with words like “solid, consistent, reliable, workman-like.” While several specialized funds (Africa and Middle East, for example) appear strikingly weak, part of that comes from Morningstar’s need to place very specialized funds into their broad emerging markets category. The fact that the Africa fund sucks relative to broadly diversified emerging markets funds doesn’t tell us anything about how the Africa fund functions against an African benchmark. Only one of the Price international funds (Global Stock) has been really bad of late (top 10% of its peer group over the three years ending 7/22/11), and even that fund was a star performer for years.

Mr. Mazumdar has not proven himself as a manager: this is his first stint as a manager, though he has been on the teams supporting several other funds. To date, his performance has been undistinguished. Since inception, the fund substantially trails its broad “world stock” peer group. That might be excused as a simple reflection of weakness in its sector. Unfortunately, it also trails almost everyone in its sector: for both 2011 (through late July) and for the trailing 12 months, TRGFX has the weakest performance of any of the twelve mutual funds, CEFs and ETFs available to retail investors. The same is true of the fund’s performance since inception. It’s a short period and his holdings tend to be smaller companies than his peers, but the evidence of superior decision-making has not yet appeared.

The manager proposes a series of incompletely-explained changes to the fund’s approach, and hence to its portfolio. While I have not spoken with Mr. Mazumdar, his published work suggests that he wants to move the portfolio to one-third North America, one-third Europe and one-third emerging markets. That substantially underweights North America (50% of global market cap) while hugely overweighting the emerging markets (11%) and ignoring developed markets such as Japan. The move might be brilliant, but is certainly unexplained. Likewise, he professes a plan to shift emphasis from the steadier utility sector toward the more dynamic (i.e., volatile) infrastructure sector without quite explaining why he’s seeking to rebalance the fund.

Bottom Line

The case for a dedicated infrastructure fund, and this fund in particular, is still unproven. None of the retail funds has performed brilliantly in comparison to the broad set of global funds, and none has a long track record. That said, it’s clear this is a dynamic sector that’s going to draw trillions in cash. If you’re predisposed to establish a small position there as a test, TRGFX offers a sensible, low cost, highly professional choice. To the extent it reflects Price’s general international record, expect performance somewhat on par with an index fund’s.

Fund website

T. Rowe Price Global Infrastructure. For those with a finance degree and a masochistic streak (or an abnormal delight in statistics, which is about the same thing), Ibbotson’s analysis of the portfolio-level effects of adding infrastructure investments is available as Infrastructure and Strategic Asset Allocation, 2009.

RiverNorth Core Opportunity (RNCOX), June 2011

By Editor

Objective

The fund seeks long-term capital appreciation and income, while trying to maintain a sense of “prudent investment risk over the long-term.” RNCOX is a “balanced” fund with several twists. First, it adjusts its long-term asset allocation in order to take advantage of tactical allocation opportunities. Second, it invests primarily in a mix of closed-end mutual funds and ETFs.

Adviser

RiverNorth Capital, which was founded in 2000. RiverNorth manages about $700 million in assets, including two funds, a limited partnership and a number of separate accounts.

Managers

Patrick Galley and Stephen O’Neill. Mr. Galley is the chief investment officer for RiverNorth Capital. Before that, he was a Vice President at Bank of America in the Portfolio Management group. Mr. O’Neill is “the Portfolio Manager for RiverNorth Capital,” and also an alumnus of Bank of America. Messrs Galley and O’Neill also manage part of one other fund (RiverNorth/DoubleLine Strategic Income, RNSIX), one hedge fund and 700 separate accounts, valued at $150 million. Many of those accounts are only nominally “separate” since the retirement plan for a firm’s 100 employees might be structured in such a way that it needs to be reported as 100 separate accounts. Galley and O’Neill are assisted by a quantitative analyst whose firm specializes in closed-end fund trading strategies.

Management’s Stake in the Fund

Mr. Galley and Mr. O’Neill each has invested between $100,000 – $500,000 in the fund, as of the January, 2011 Statement of Additional Information. In addition, Mr. Galley founded and owns more than 25% of RiverNorth.

Opening date

December 27, 2006.

Minimum investment

$5,000 for regular accounts and $1,000 for retirement accounts.

This fund is closing at the end of June 2011.

Expense ratio

2.39% after minimal expense deferrals.

Comments

The argument in favor of RNCOX is not just its great performance. It does have top flight performance credentials:

five-star rating from Morningstar, as of June 2011
a Lipper Leader for total and consistent returns, also as of June 2011
annualized return of 9.2% since inception, compared to 0.6% for the S&P 500
above average returns in every calendar year of its existence
top 2% returns since inception

and so on. All of that is nice, but not quite central.

The central argument is that RNCOX has a reason to exist, a claim that lamentably few mutual funds can seriously make. RNCOX offers investors access to a strategy which makes sense and which is not available through – so far as I can tell – any other publicly accessible investment vehicle.

To understand that strategy, you need to understand the basics of closed-end funds (CEFs). CEFs are a century-old investment vehicle, older by decades that conventional open-end mutual funds. The easiest way to think of them is as actively-managed ETFs: they are funds which can be bought or sold throughout the day, just like stocks or ETFs. Each CEF carries two prices. Its net asset value is the pro-rated value of the securities in its portfolio. Its market price is the amount buyers are willing to pay to obtain one share of the CEF. In a rational, efficient market, the NAV and the market price would be the same. That is, if one share of a CEF contained $100 worth of stock (the NAV), then one share of the fund would sell for $100 (the market price). But they don’t.

Why not? Because investors are prone to act irrationally. They panic and sell stuff for far less than its worth. They get greedy and wildly overpay for stuff. Because the CEF market is relatively small – 644 funds and $183 billion in assets (Investment Company Institute data, 5/27/2009) – panicked or greedy reactions by a relatively small number of investors can cause shares of a CEF to sell at a huge discount (or premium) to the actual value of the securities that the fund sells. By way of example, shares of Charles Royce’s Royce Micro-cap Trust (RMT) are selling at a 16% discount to the fund’s NAV; if you bought a share of RMT last Friday and Mr. Royce did nothing on Monday but liquidate every security in the portfolio and return the proceeds to his investors, you would be guaranteed a 16% profit on your investment. Funds managed by David Dreman, Mario Gabelli, the Franklin Mutual Series team, Mark Mobius and others are selling at 5 – 25% discounts.

It’s common for CEFs to maintain modest discounts for long periods. A fund might sell at a 4% discount most of the time, reflecting either skepticism about the manager or the thinness of the market for the fund’s shares. The key to RNCOX’s strategy is the observation that those ongoing discounts occasionally balloon, so that a fund that normally sells at a 4% discount is temporarily available at a 24% discount. With time, those abnormal discounts revert to the mean: the 24% discount returns to being a 4% discount. If an investor knows what a fund’s normal discount is and buys shares of the fund when the discount is abnormally large, he or she will almost certainly profit when the discount reverts to normal. This tendency to generate panic discounts offers a highly-predictable source of “alpha,” largely independent of the skill of the manager whose CEF you’re buying and somewhat independent of what the market does (a discount can evaporate even when the overall market is flat, creating a profit for the discount investor). The key is understanding the CEF market well enough to know what a particular fund’s “normal” discount is and how long that particular fund might maintain an “abnormal” discount.

Enter Patrick Galley and the RiverNorth team. Mr. Galley used to work for Bank of America, analyzing mutual fund acquisition deals and arranging financing for them. That work led him to analyze the value of CEFs, whose irrational pricing led him to conclude that there were substantial opportunities for arbitrage and profits. After exploiting those opportunities in separately managed accounts, he left to establish his own fund.

RiverNorth Core’s portfolio is constructed in two steps: asset allocation and security selection. The fund starts with a core asset allocation, a set of asset classes which – over the long run – produce the best risk-adjusted returns. The core allocations include a 60/40 split between stocks and bonds, about a 60/40 split in the bond sleeve between government and high-yield bonds, about an 80/20 split in the stock sleeve between domestic and foreign, about an 80/20 split within the foreign stock sleeve between developed and emerging, and so on. But as any emerging markets investor knows from last year’s experience, the long-term attractiveness of an asset class can be interrupted by short periods of horrible losses. In response, RiverNorth makes opportunistic, tactical adjustments in its asset allocation. Based on an analysis of more than 30 factors (including valuation, liquidity, and sentiment), the fund can temporarily overweight or underweight particular asset classes.

Once the asset allocation is set, the managers look to implement the allocation by investing in a combination of CEFs and ETFs. In general, they’ll favor CEFs if they find funds selling at abnormal discounts. In that case, they’ll buy the CEF and hold it until the discount returns to normal. (I’ll note, in passing, that they can also short CEFs selling at abnormal premiums to the NAV.) They’ll then sell and if no other abnormally discounted CEF is available, they’ll buy an ETF in the same sector. If there are no inefficiently-priced CEFs in an area where they’re slated to invest, the fund simply buys ETFs.

In this way, the managers pursue profits from two different sources: a good tactical allocation (which other funds might offer) and the CEF arbitrage opportunity (which no other fund offers). Given the huge number of funds currently selling at double-digit discounts to the value of their holdings, it seems that RNCOX has ample opportunity for adding alpha beyond what other tactical allocation funds can offer.

There are, as always, risks inherent in investing in the fund. The managers are experts at CEF investing, but much of the fund’s return is driven by asset allocation decisions and they don’t have a unique competitive advantage there. Since the fund sells a CEF as soon as it reverts to its normal discount, portfolio turnover is likely to be high (last year it was 300%) and tax efficiency will suffer. The fund’s expenses are much higher than those of typical no-load equity funds, though not out of line with expenses typical of long/short, market neutral, and tactical allocation funds. Finally, short-term volatility could be substantial: large CEF discounts can grow larger and the managers intend to buy more of those more-irrationally discounted shares. In Q3 2008, for example, the fund lost 15% – about three times as much as the Vanguard Balanced Index – but then went on to blow away the index over the following three quarters.

Bottom Line

For investors looking for a core fund, especially one in a Roth or other tax-advantaged account, RiverNorth Core really needs to be on your short list of best possible choices. The managers have outperformed their peer group in both up- and down-markets and their ability to exploit inefficient pricing of CEFs is likely great enough to overcome the effects of high expenses and still provide superior returns to their investors.

Fund website

RiverNorth Funds

RiverNorth Core Opportunity

Fact Sheet

Fidelity Global Strategies (FDYSX), June 2011

By Editor

Since publication, this fund has merged into Fidelity Asset Manager 60%.

Objective

The fund seeks to maximize total returns. It will, in theory, do that by making top-down judgments about the short- and long-term attractiveness of all available asset classes (domestic, international and emerging markets equities; domestic, international, emerging markets, high yield, investment grade and inflation protected bonds, floating rate loans, and ETNs; and up to 25% commodities). It will then allocate its resources to some combination of Fidelity funds, a Fidelity-owned commodities fund based in the Cayman Islands, exchange-traded funds and notes, and “direct investments.” They highlight the note that they might place “a significant portion of the fund’s assets in non-traditional assets” including market-neutral funds.

Adviser

Fidelity Management & Research Company, the investment advisor to all 300 Fidelity mutual funds. Fidelity employs (give or take a layoff or two) 500 portfolio managers, analysts and traders and has $1.4 trillion in assets under management.

Manager

Jurrien Timmer and Andrew Dierdorf. Mr. Timmer has been Fidelity’s Director of Market Research for the past 12 years and is a specialist in tactical asset allocation. Mr. Dierdorf is a relative newcomer to Fidelity and co-manages 24 of Fidelity’s Freedom funds.

Management’s Stake in the Fund

Mr. Dierdorf has between $50,000 – 100,000 in the fund and Mr. Timmer had invested between $500,000 and $1,000,000. Only two of the fund’s nine trustees (Albert Gamper and James Keyes) had large investments in the fund while six (including Abby Johnson) had nothing. Fidelity’s directors make between $400,000 – 500,000 per year (sign me up!) and their compensation is pro-rated over the number of funds they oversee; as of the most recent SAI, each director had received $120 in compensation for his or her work with this fund.

Opening date

November 1, 2007.

Minimum investment

$2500 for a regular account and $500 for an IRA.

Expense ratio

1.00% on assets of $450 million.

Comments

From 2007 through June 2011, this was the Fidelity Dynamic Strategies Fund. It was rechristened as Global Strategies on June 1, 2011. The fund also adopted a new benchmark that increases international equity and bond exposure, while decreasing US bond and money market exposure:

Dynamic Strategies benchmark	Global Strategies benchmark
50% S&P 500	60% MSCI All Country World
40% Barclays US bond index	30% Barclays US bond
10% Barclays US-3 Month T-bill index	10% Citigroup Non-US G7 bond

Here’s the theory: Fidelity has greater analytic resources than virtually any of its competitors do. And it has been moving steadily away from “vanilla” funds and toward asset allocation and niche products. That is, they haven’t been launching diversified, domestic mid-cap funds as much as 130/30, enhanced index, frontier market, strategic objective and asset allocation funds. They’ve been staffing-up to support those projects and should be able to do an exceptional job with them.

Fidelity Global Strategies is the logical culmination of those efforts: like Leuthold Core (LCORX) or PIMCO All-Asset (PAAIX), its managers make a top-down judgment about the world’s most attractive investment opportunities and then move aggressively to exploit those opportunities.

My original 2008 assessment of the fund was this:

In theory, this fund should be an answer to investors’ prayers. In practice, it looks like a mess . . . Part of the problem surely is the managers’ asset allocation (mis)judgments. On June 30 (2008), at the height of the recent energy price bubble, they combined “high conviction secular themes – commodities . . . our primary ‘ace in the hole’ for the period” with “our conviction, and our positive view on energy and materials stocks” to position the portfolio for a considerable fall.

Those errors had to have been compounded by the sprawling mess of a portfolio they oversee . . . The fund complements its portfolio of 38 Fidelity funds (28 stock funds, six bond funds and 4 money market and real estate funds) with no fewer than 75 exchange-traded funds. In many cases, the fund invests simultaneously in overlapping Fidelity funds and outside ETFs.

The bottom line:

At 113 funds, this strikes me as an enormously, inexplicably complex creation. Unless and until the managers accumulate a record of consistent downside protection or consistent up-market out-performance, neither of which is yet evident, it’s hard to make a case for the fund.

Neither the experience of the last two years nor the recent revamping materially alters those concerns.

Since inception, the fund has not been able to distinguish itself from most of the plausible, easily-accessible alternatives. Here’s the comparison of $10,000 invested at the opening of Dynamic Strategies, compared with a reasonable peer group.

Dynamic Strategies	$10,700
Vanguard Balanced Index (VBINX), an utterly vanilla 60/40 split between US stocks and US bonds	10,800
Vanguard STAR (VGSTX), a fund of Vanguard funds with a pretty static stock/bond mix	10,700
Fidelity Global Balanced (FGBLX)	10,800
Morningstar benchmark index (moderate target risk)	10,900

In short, the fund’s ability to actively allocate and to move globally has not (yet) outperformed simple, low-cost, low-turnover competitors. In its first 13 quarters of existence, the fund has outperformed half the time, underperformed half the time, and effectively tied once. More broadly, that’s reflected in the fund’s Sharpe ratio. The Sharpe ratio attempts to measure how much extra return you get in exchange for the extra risk that a manager chooses to subject you to. A Sharpe ratio greater than zero is, all things being equal, a good thing. FDYSX’s Sharpe ratio is 0.34, not bad but no better than its benchmark’s 0.36.

The portfolio continues to be large (24 Fidelity funds and 45 ETFs), though much improved over 2008. It continues to

By way of example:

The fund holds three of Fidelity’s emerging markets funds (Emerging Markets, China and Latin America) but also 14 emerging markets ETFs (mostly single country or frontier markets). It does not, however, hold Fidelity’s Emerging EMEA (FEMEX) fund which would have been a logical first choice in lieu of the ETFs.
The fund holds Fidelity’s Mega Cap and Disciplined Equity stock funds, but also the S&P500 ETF. For no apparent reason, it invests 1% of the portfolio in the Institutional class of the Advisor class of Fidelity 130/30 Large Cap. In consequence, it has staked a bold 0.4% short position on the domestic market. But why?

The recent changes don’t materially strengthen the fund’s prospects. It invests far less internationally (15%) than it could and invests about as much (20%) on commodities now as it will be able to with a new mandate. The manager’s most recent commentary (“Another Fork in the Road,” 04/28/2011) foresees higher inflation, lax Fed discipline and an allocation with is “neutral on stocks, short on bonds, and long on hard assets.” The notion of a flexible global allocation is certainly attractive. Still neither a new name nor a tweaked benchmark, both designed according to Fidelity, “to better reflect its global allocation,” is needed to achieve those objectives.

Bottom Line

I have often been skeptical of Fidelity’s funds and have, I blush to admit, often been wrong in that skepticism. Undeterred, I’m skeptical here, too. As systems become more complex, they became more prone to failure. This remains a very complex fund. Investors might reasonably wait for it to distinguish itself in some way before considering a serious commitment to it.

Fund website

Fidelity Global Strategies

Amana Developing World Fund (AMDWX), May 2011

By Editor

Objective

The fund seeks long-term capital growth by investing exclusively in stocks of companies with significant exposure (50% or more of assets or revenues) to countries with developing economies and/or markets. That investment can occur through ADRs and ADSs. Investment decisions are made in accordance with Islamic principles. The fund diversifies its investments across the countries of the developing world, industries, and companies, and generally follows a value investment style.

Adviser

Saturna Capital, of Bellingham, Washington. Saturna oversees five Sextant funds, the Idaho Tax-Free fund and three Amana funds. The Sextant funds contribute about $250 million in assets while the Amana funds hold about $3 billion (as of April 2011). The Amana funds invest in accord with Islamic investing principles. The Income Fund commenced operations in June 1986 and the Growth Fund in February, 1994. Mr. Kaiser was recognized as the best Islamic fund manager for 2005.

Manager

Nicholas Kaiser with the assistance of Monem Salam. Mr. Kaiser is president and founder of Saturna Capital. He manages five funds (two at Saturna, three here) and oversees 26 separately managed accounts. 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. Mr. Monem Salam, vice president and director of Islamic investing at Saturna Capital Corporation, is the deputy portfolio manager for the fund.

Inception

September 28, 2009.

Management’s Stake in the Fund

Mr. Kaiser directly owned $500,001 to $1,000,000 of Developing World Fund shares and indirectly owned more than $1,000,000 of it. Mr. Salam has something between $10,00 to $50,000 Developing World Fund. As of August, 2010, officers and trustees, as a group, owned nearly 10% of the Developing World Fund.

Minimum investment

$250 for all accounts, with a $25 subsequent investment minimum. That’s blessedly low.

Expense ratio

1.59% on an asset base of about $15 million. There’s also a 2% redemption fee on shares held fewer than 90 days.

Comments

Mr. Kaiser launched AMDWX at the behest of many of his 100,000 Amana investors and was able to convince his board to authorize the launch by having them study his long-term record in international investing. That seems like a decent way for us to start, too.

Appearances aside, AMDWX is doing precisely what you want it to.

Taken at face value, the performance stats for AMDWX appear to be terrible. Between launch and April 2011, AMDWX turned $10,000 into $11,000 while its average peer turned $10,000 to $13,400. As of April 2011, it’s at the bottom of the pack for both full years of its existence and for most trailing time periods, often in the lowest 10%.

And that’s a good thing. The drag on the fund is its huge cash position, over 50% of assets in March, 2011. Sibling Sextant International (SSIFX) is 35% cash. Emerging markets have seen enormous cash inflows. As of late April, 2011, emerging markets funds were seeing $2 billion per week in inflows. Over 50% of institutional emerging markets portfolios are now closed to new investment to stem the flow. Vanguard’s largest international fund is Emerging Markets Stock Index (VEIEX) at a stunning $64 billion. There’s now clear evidence of a “bubble” in many of these small markets and, in the past, a crisis in one region has quickly spread to others. In response, a number of sensible value managers, including the remarkably talented team behind Artisan Global Value (ARTGX), have withdrawn entirely from the emerging markets. Amana’s natural caution seems to have been heightened, and they seem to be content to accumulate cash and watch. If you think this means that “bad things” and “great investment values” are both likely to manifest soon, you should be reassured at Amana’s disciplined conservatism.

The only question is: will Amana’s underperformance be a ongoing issue?

No.

Let me restate the case for investing with Mr. Kaiser.

I’ve made these same arguments in profiling Sextant International (SSIFX) as a “star in the shadows.”

Mr. Kaiser runs four other stock funds: one large value, one large core international (which has a 25% emerging markets stake), one large growth, and one that invests across the size and valuation spectrum. For all of his funds, he employs the same basic strategy: look for undervalued companies with good management and a leadership position in an attractive industry. Buy. Spread your bets over 60-80 names. Hold. Then keep holding for between ten and fifty years.

Here’s Morningstar’s rating (as 4/26/11) of the four equity funds that Mr. Kaiser manages:

	3-year	5-year	10-year	Overall
Amana Trust Income	«««««	«««««	«««««	«««««
Amana Trust Growth	«««««	«««««	«««««	«««««
Sextant Growth	««««	«««	«««««	««««
Sextant International	«««««	«««««	«««««	«««««

In their overall rating, every one of Mr. Kaiser’s funds achieves “above average” or “high” returns for “below average” or “low” risk.

Folks who prefer Lipper’s rating system (though I’m not entirely clear why they would do so), find a similar pattern:

	Total return	Consistency	Preservation	Tax efficiency
Amana Income	«««««	««««	«««««	«««««
Amana Growth	«««««	«««««	«««««	««««
Sextant Growth	««««	«««	«««««	«««««
Sextant International	«««««	««	«««««	«««««

I have no idea of how Lipper generated the low consistency rating for International, since it tends to beat its peers in about three of every four years, trailing mostly in frothy markets. Its consistency is even clearer if you look at longer time periods. I calculated Sextant International’s returns and those of its international large cap peers for a series of rolling five-year periods since with the fund’s launch in 1995. I looked at what would happen if you invested $10,000 in the fund in 1995 and held for five years, then looked at 1996 and held for five, and so on. There are ten rolling five-year periods and Sextant International outperformed its peers in 100% of those periods. Frankly, that strikes me as admirably consistent.

At the Sixth Annual 2010 Failaka Islamic Fund Awards Ceremony (held in April, 2011), which reviews the performance of all managers, worldwide, who invest on Islamic principles, Amana received two “best fund awards.”

Other attributes strengthen the case for Amana

Mr. Kaiser’s outstanding record of generating high returns with low risk, across a whole spectrum of investments, is complemented by AMDWX’s unique attributes.

Islamic investing principles, sometimes called sharia-compliant investing, have two distinctive features. First, there’s the equivalent of a socially-responsible investment screen which eliminates companies profiting from sin (alcohol, porn, gambling). Mr. Kaiser estimates that the social screens reduce his investable universe by 6% or so. Second, there’s a prohibition on investing in interest-bearing securities (much like the 15 or so Biblical injunctions against usury, traditionally defined as accepting an interest or “increase”), which effective eliminates both bonds and financial sector equities. The financial sector constitutes about 25% of the market capitalization in the developing world. Third, as an adjunct to the usury prohibition, sharia precludes investment in deeply debt-ridden companies. That doesn’t mean a company must have zero debt but it does mean that the debt/equity ratio has to be quite low. Between those three prohibitions, about two-thirds of developing market companies are removed from Amana’s investable universe.

This, Mr. Kaiser argues, is a good thing. The combination of sharia-compliant investing and his own discipline, which stresses buying high quality companies with considerable free cash flow (that is, companies which can finance operations and growth without resort to the credit markets) and then holding them for the long haul, generates a portfolio that’s built like a tank. That substantial conservatism offers great downside protection but still benefits from the growth of market leaders on the upside.

Risk is further dampened by the fund’s inclusion of multinational corporations domiciled in the developed world whose profits are derived in the developing world (including top ten holding Western Digital and, potentially, Colgate-Palmolive which generates more than half of its profits in the developing world). Mr. Kaiser suspects that such firms won’t account for more than 20% of the portfolio but they still function as powerful stabilizers. Moreover, he invests in stocks and derivatives which are traded on, and settled in, developed world stock markets. That gives exposure to the developing world’s growth within the developed world’s market structures. As of 1/30/10, ADRs and ADSs account for 16 of the fund’s 30 holdings.

An intriguing, but less obvious advantage is the fund’s other investors.

Understandably enough, many and perhaps most of the fund’s investors are Muslims who want to make principled investments. They have proven to be incredibly loyal, steadfast shareholders. During the market meltdown in 2008, for example, Amana Growth and Amana Income both saw assets grow steadily and, in Income’s case, substantially.

The movement of hot money into and out of emerging markets funds has particularly bedeviled managers and long-term investors alike. The panicked outflow stops managers from doing the sensible thing – buying like mad while there’s blood in the streets – and triggers higher expenses and tax bills for the long-term shareholders. In the case of T. Rowe Price’s very solid Emerging Market Stock fund (PRMSX), investors have pocketed only 50% of the fund’s long-term gains because of their ill-timed decisions.

In contrast, Mr. Kaiser’s investors do exactly the right thing. They buy with discipline and find reason to stick around. Here’s the most remarkable data table I’ve seen in a long while. This compares the investor returns to the fund returns for Mr. Kaiser’s four other equity funds. It is almost universally the case that investor returns trail far behind fund returns. Investors famously buy high and sell low. Morningstar’s analyses suggest s the average fund investor makes 2% less than the average fund he or she owns and, in volatile areas, fund investors often lose money investing in funds that make money.

How do Amana/Sextant investors fare on those grounds?

	Fund’s five-year return	Investor’s five-year return
Sextant International	6.3	12.9
Sextant Growth	2.5	5.3
Sextant Core	3.8 (3 year only)	4.1 (3 year only)
Amana Income	7.0	9.0
Amana Growth	6.0	9.8

In every case, those investors actually made more than the nominal returns of their funds says is possible. Having investors who stay put and buy steadily may offer a unique, substantial advantage for AMDWX over its peers.

Is there reason to be cautious? Sure. Three factors are worth noting:

For better and worse, the fund is 50% cash, as of 3/31/11.
The fund’s investable universe is distinctly different from many peers’. There are 30 countries on his approved list, about half as many as Price picks through. Some countries which feature prominently in many portfolios (including Israel and Korea) are excluded here because he classifies them as “developed” rather than developing. And, as I noted above, about two-thirds of developing market stocks, and the region’s largest stock sector, fail the fund’s basic screens.
Finally, a lot depends on one guy. Mr. Kaiser is the sole manager of five funds with $2.8 billion in assets. The remaining investment staff includes his fixed-income guy, the Core fund manager, the director of Islamic investing and three analysts. At 65, Mr. Kaiser is still young, sparky and deeply committed but . …

Bottom line

If you’re looking for a potential great entree into the developing markets, and especially if you’re a small investors looking for an affordable, conservative fund, you’ve found it!

Company link

Amana Developing World

LKCM Balanced Fund (LKBAX), May 2011

By Editor

Objective

The fund seeks current income and long-term capital appreciation. The managers invest in a combination of blue chip stocks, investment grade intermediate-term bonds, convertible securities and cash. In general, at least 25% of the portfolio will be bonds. In practice, the fund is generally 70% equities. The portfolio turnover rate is modest, typically 25% or below.

Adviser

Founded in 1979 Luther King Capital Management provides investment management services to investment companies, foundations, endowments, pension and profit sharing plans, trusts, estates, and high net worth individuals. Luther King Capital Management has seven shareholders, all of whom are employed by the firm, and 29 investment professionals on staff. As of December, 2010, the firm had about $8 billion in assets. They advise the five LKCM funds and the three LKCM Aquinas funds, which invest in ways consistent with Catholic values.

Manager

Scot Hollmann, J. Luther King and Mark Johnson. Mr. Hollman and Mr. King have managed the fund since its inception, while Mr. Johnson joined the team in 2010.

Management’s Stake in the Fund

Hollman has between $100,00 and $500,000 in the fund, Mr. King has over $1 million, and Mr. Johnson has a pittance (but it’s early).

Opening date

December 30, 1997.

Minimum investment

$10,000 across the board.

Expense ratio

0.81%, after waivers, on an asset base of $19 million (as of April 2011).

Comments

The difference between a successful portfolio and a rolling disaster, is the investor’s ability to do the little things right. Chief among those is keeping volatility low (high volatility funds tend to trigger disastrous reactions in investors), keeping expenses low, keeping trading to a minimum (a high-turnover strategy increases your portfolio cost by 2-3% a year) and rebalancing your assets between stocks, bonds and cash. All of which works, little of which we have the discipline to do.

Enter: the hybrid fund. In a hybrid, you’re paying a manager to be dull and disciplined on your behalf. Here’s simple illustration of how it works out. LKCM Balanced invests in the sorts of stocks represented by the S&P500 and the sorts of bonds represented by an index of intermediate-term, investment grade bonds such as Barclay’s. The Vanguard Balanced Index fund (VBINX) mechanically and efficiently invests in those two areas as well. Here are the average annual returns, as of March 31 2011, for those four options:

	3 year	5 year	10 year
LKCM Balanced	6.1%	5.5	5.4
S&P 500 index	2.6	3.3	4.2
Barclays Intermediate bond index	5.7	5.2	5.6
Vanguard Balanced Index fund	4.9	4.7	5.2

Notice two things: (1) the whole is greater than the sum of its parts. LKCM tends to return more than either of its component parts. (2) the active fund is better than the passive. The Vanguard Balanced Index fund is an outstanding choice for folks looking for a hybrid (ultra-low expenses, returns which are consistently in the top 25% of peer funds over longer time periods). And LKCM consistently posts better returns and, I’ll note below, does so with less volatility.

While these might be the dullest funds in your portfolio, they’re also likely to be the most profitable part of it. Their sheer dullness makes you less likely to bolt. Morningstar research found that the average domestic fund investor made about 200 basis points less, even in a good year, than the average fund did. Why? Because we showed up after a fund had already done well (we bought high), then stayed through the inevitable fall before we bolted (we sold low) and then put our money under a mattress or into “the next hot thing.” The fund category that best helped investors avoid those errors was the domestic stock/bond hybrids. Morningstar concluded:

Balanced funds were the main bright spot. The gap for the past year was just 14 basis points, and it was only 8 for the past three years. Best of all, the gap went the other way for the trailing 10 years as the average balanced-fund investor outperformed the average balanced fund by 30 basis points. (Russel Kinnel, “Mind the Gap 2011,” posted 4/18/2011)

At least in theory, the presence of that large, stolid block would allow you to tolerate a series of small volatile positions (5% in emerging markets small caps, for example) without panic.

But which hybrid or balanced fund? Here, a picture is really worth a thousand words.

This is a risk versus return scatterplot for domestic balanced funds. As you move to the right, the fund’s volatility grows – so look for funds on the left. As you move up, the fund’s returns rise – so look for funds near the top. Ideally, look for the fund at the top left corner – the lowest volatility, highest return you can find.

That fund is LKCM Balanced.

You can reach exactly the same conclusion by using Morningstar’s fine fund screener. A longer term investor needs stocks as well as bonds, so start by looking at all balanced funds with at least half of their money in stocks.

There are 302 such funds.

To find funds with strong, consistent returns, ask for funds that at least matched the returns of LKCM Balanced over the past 3-, 5- and 10-years.

You’re down to four fine no-load funds (Northern Income Equity, Price Capital Appreciation, Villere Balanced, and LKCM).

Finally, ask for funds no more volatile than LKBAX.

And no one else remains.

What are they doing right?

Quiet discipline, it seems. Portfolio turnover is quite low, in the mid-teens to mid-20s each year. Expenses, at 0.8%, are low, period, and remarkably low for such a small fund. The portfolio is filled with well-run global corporations (U.S. based multinationals) and shorter-duration, investment grade bonds.

Why, then, are there so few shareholders?

Three issues, none related to quality of the fund, come to mind. First, the fund has a high minimum initial investment, $10,000. Second, the fund is not a consistent “chart topper,” which means that it receives little notice in the financial media or by the advisory community. Finally, LKCM does not market its services. Their website is static and rudimentary, they don’t advertise, they’re not located in a financial center (Fort Worth), and even their annual reports offer one scant paragraph about each fund.

What are the reasons to be cautious?

On whole, not many since LKCM seems intent on being cautious on your behalf. The fund offers no direct international exposure; currently, 1% of the portfolio – a single Israeli stock – is it. It also offers no exposure (less than 2% of the portfolio, as of April 2011) to smaller companies. And it does average 70% exposure to the U.S. stock market, which means it will lose money when the market tanks. That might make it, or any fund with substantial stock exposure, inappropriate for very conservative investors.

Bottom Line

This is a singularly fine fund for investors seeking equity exposure without the thrills and chills of a stock fund. The management team has been stable, both in tenure and in discipline. Their objective remains absolutely sensible: “Our investment strategy continues to focus on managing the overall risk level of the portfolio by emphasizing diversification and quality in a blend of asset classes.”

Fund website

LKCM Balanced

Centaur Total Return Fund (TILDX)

By Editor

This profile has been updated. Find the new profile here.

Objective

The fund seeks “maximum total return” through a combination of capital appreciation and income. The fund invests in undervalued securities, included (mostly domestic) high dividend large cap stocks, REITs, master limited partnerships, royalty trusts and convertibles. The manager invests in companies “that it understands well.” The managers also generate income by selling covered calls on some of their stocks.

Adviser

T2 Partners Management, LP. T2, named for founders Whitney Tilson and Glenn Tongue, manages about $150 million through its two mutual funds (the other is Tilson Focus TILFX) and three hedge funds (T2 Accredited, T2 Qualified and Tilson Offshore). These are Buffett-worshippers, in the Warren rather than Jimmy sense. The adviser was founded in 1998.

Manager

Zeke Ashton, founder, managing partner, and a portfolio manager of Centaur Capital Partners L.P., has managed the fund since inception. Mr. Ashton is the the Sub-Advisor. Before founding Centaur in 2002, he spent three years working for The Motley Fool where he developed and produced investing seminars, subscription investing newsletters and stock research reports in addition to writing online investing articles. He graduated from Austin College, a good liberal arts college, in 1995 with degrees in Economics and German.

Management’s Stake in the Fund

Somewhere between $100,000 and $500,000 as of October 2009.

Opening date

March 16, 2005

Minimum investment

$1,500 for regular and tax-advantaged accounts, reduced to $1000 for accounts with an automatic investing plan

Expense ratio

2.00% after waivers on an asset base of $40 million, plus a 2% redemption fee on shares held less than a year.

Comments

Tilson Dividend presents itself as an income-oriented fund. The argument for that orientation is simple: income stabilizes returns in bad times and adds to them in good. The manager imagines two sources of income: (1) dividends paid by the companies whose stock they own and (2) fees generated by selling covered calls on portfolio investments.

The core of the portfolio are a limited number (currently about 25) of high quality stocks. In bad markets, such stocks benefit from the dividend income – which helps support their share price – and from a sort of “flight to quality” effect, where investors prefer (and, to an extent, bid up) steady firms in preference to volatile ones. About three-quarters of those stocks are domestic, and one quarter represent developed foreign markets.

The manager also sells covered calls on a portion of the portfolio. At base, he’s offering to sell a stock to another investor at a guaranteed price. “If GM hits $40 a share within the next six months, we’ll sell it to you at that price.” Investors buying those options pay a small upfront price, which generates income for the fund. As long as the agreed-to price is approximately the manager’s estimate of fair value, the fund doesn’t lose much upside (since they’d sell anyway) and gains a bit of income. The profitability of that strategy depends on market conditions; in a calm market, the manager might place only 0.5% of his assets in covered calls but, in volatile markets, it might be ten times as much.

The fund currently generates a lot of income but the reported yield is low because the fund’s expenses are high, and covering operating expenses has the first call on income flow. While it has a high cash stake (about 20%), cash is not current generating appreciable income.

The fund’s conservative approach is succeeded (almost) brilliantly so far. At the fund’s five year anniversary (March 2010), Lipper ranked it as the best performing equity-income fund for the trailing three- and five-year periods. At that same point, Morningstar ranked it in the top 1% of mid-cap blend funds. It’s maintained that top percentile rank since then, with an annualized return of 9.3% from inception through late November 2010.

The fund has achieved those returns with remarkably muted volatility. Morningstar rates its risk as “low” (and returns “high”) and the fund’s five-year standard deviation (a measure of volatility) is 15, substantially below its peers score of 21.

And, on top of it all, the fund has substantially outperformed its more-famous stable-mate. Tilson Focus (TILFX), run by value investing guru Whitney Tilson, has turned a $10,000 investment at inception into $13,100 (good!). Tilson Dividend turned that same investment into $16,600 (better! Except for that whole “showing up the famous boss” issue).

Bottom Line

There are risks with any investment. In this case, one might be concerned that the manager has fine-tuned his investment discipline to allow in a greater number of non-income-producing investments. That said, the fund earned a LipperLeader designation for total returns, consistency and preservation of gains, and a five-star designation from Morningstar. For folks looking to maintain their stock exposure, but cautiously, this is an awfully compelling little fund.

Fund website

Tilson mutual funds website

Aston/River Road Independent Value Fund (ARIVX) – updated September 2012

By Editor

This profile was updated in September 2012. You will find the updated profile at http://www.mutualfundobserver.com/2012/09/astonriver-road-independent-value-fund-arivx-updated-september-2012/

Objective and strategy

The fund seeks to provide long-term total return by investing in common and preferred stocks, convertibles and REITs. The manager attempts to invest in high quality, small- to mid-cap firms (those with market caps between $100 million and $5 billion). He thinks of himself as having an “absolute return” mandate, which means an exceptional degree of risk-consciousness. He’ll pursue the same style of investing as in his previous charges, but has more flexibility than before because this fund does not include the “small cap” name.

Adviser

Aston Asset Management, LP. It’s an interesting setup. As of June 30, 2012, Aston is the adviser to twenty-seven mutual funds with total net assets of approximately $10.5 billion and is a subsidiary of the Affiliated Managers Group. River Road Asset Management LLC subadvises six Aston funds; i.e., provides the management teams. River Road, founded in 2005, oversees $7 billion and is a subsidiary of the European insurance firm, Aviva, which manages $430 billion in assets. River Road also manages five separate account strategies, including the Independent Value strategy used here.

Manager

Eric Cinnamond. Mr. Cinnamond is a Vice President and Portfolio Manager of River Road’s independent value investment strategy. Mr. Cinnamond has 19 years of investment industry experience. Mr. Cinnamond managed the Intrepid Small Cap (ICMAX) fund from 2005-2010 and Intrepid’s small cap separate accounts from 1998-2010. He co-managed, with Nola Falcone, Evergreen Small Cap Equity Income from 1996-1998. In addition to this fund, he manages six smallish (collectively, about $50 million) separate accounts using the same strategy.

Management’s Stake in the Fund

As of October 2011, Mr. Cinnamond has between $100,000 and $500,000 invested in his fund. Two of Aston’s 10 trustees have invested in the fund. In general, a high degree of insider ownership – including trustee ownership – tends to predict strong performance. Given that River Road is a sub-advisor and Aston’s trustees oversee 27 funds each, I’m not predisposed to be terribly worried.

Opening date

December 30, 2010.

Minimum investment

$2,500 for regular accounts, $500 for various sorts of tax-advantaged products (IRAs, Coverdells, UTMAs).

Expense ratio

1.42%, after waivers, on $616 million in assets.

Update Our original analysis, posted February, 2011, appears just below this update. It describes the fund’s strategy, Mr. Cinnamond’s rationale for it and his track record over the past 16 years.	September, 2012
2011 returns: 7.8%, while his peers lost 4.5%, which placed ARIVX in the top 1% of comparable funds. 2012 returns, through 8/30: 5.3%, which places ARIVX in the bottom 13% of small value funds.
Asset growth: about $600 million in 18 months, from $16 million. The fund’s expense ratio did not change.
What are the very best small-value funds? Morningstar has designated three as the best of the best: their analysts assigned Gold designations to DFA US Small Value (DFSVX), Diamond Hill Small Cap (DHSCX) and Perkins Small Cap Value (JDSAX). For my money (literally: I own it), the answer has been Artisan Small Cap(ARTVX).And where can you find these unquestionably excellent funds? In the chart below (click to enlarge), you can find them where you usually find them. Well below Eric Cinnamond’s fund. That chart measures only the performance of his newest fund since launch, but if you added his previous funds’ performance you get the same picture over a longer time line. Good in rising markets, great in falling ones, far steadier than you might reasonably hope for. Why? His explanation is that he’s an “absolute return” investor. He buys only very good companies and only when they’re selling at very good prices. “Very good prices” does not mean either “less than last year” or “the best currently available.” Those are relative measures which, he says, make no sense to him. His insistence on buying only at the right price has two notable implications. He’s willing to hold cash when there are few compelling values. That’s often 20-40% of the portfolio and, as of mid-summer 2012, is over 50%. Folks who own fully invested small cap funds are betting that Mr. Cinnamond’s caution is misplaced. They have rarely won that bet. He’s willing to spend cash very aggressively when there are many compelling values. From late 2008 to the market bottom in March 2009, his separate accounts went from 40% cash to almost fully-invested. That led him to beat his peers by 20% in both the down market in 2008 and the up market in 2009. This does not mean that he looks for low risk investments per se. It does mean that he looks for investments where he is richly compensated for the risks he takes on behalf of his investors. His July 2012 shareholder letter notes that he sold some consumer-related holdings at a nice profit and invested in several energy holdings. The energy firms are exceptionally strong players offering exceptional value (natural gas costs $2.50 per mcf to produce, he’s buying reserves at $1.50 per mcf) in a volatile business, which may “increase the volatility of [our] equity holdings overall.” If the market as a whole becomes more volatile, “turnover in the portfolio may increase” as he repositions toward the most compelling values. The fund is apt to remain open for a relatively brief time. You really should use some of that time to learn more about this remarkable fund.

Comments

While some might see a three-month old fund, others see the third incarnation of a splendid 16 year old fund.

The fund’s first incarnation appeared in 1996, as the Evergreen Small Cap Equity Income fund. Mr. Cinnamond had been hired by First Union, Evergreen’s advisor, as an analyst and soon co-manager of their small cap separate account strategy and fund. The fund grew quickly, from $5 million in ’96 to $350 million in ’98. It earned a five-star designation from Morningstar and was twice recognized by Barron’s as a Top 100 mutual fund.

In 1998, Mr. Cinnamond became engaged to a Floridian, moved south and was hired by Intrepid (located in Jacksonville Beach, Florida) to replicate the Evergreen fund. For the next several years, he built and managed a successful separate accounts portfolio for Intrepid, which eventually aspired to a publicly available fund.

The fund’s second incarnation appeared in 2005, with the launch of Intrepid Small Cap (ICMAX). In his five years with the fund, Mr. Cinnamond built a remarkable record which attracted $700 million in assets and earned a five-star rating from Morningstar. If you had invested $10,000 at inception, your account would have grown to $17,300 by the time he left. Over that same period, the average small cap value fund lost money. In addition to a five star rating from Morningstar (as of 2/25/11), the fund was also designated a Lipper Leader for both total returns and preservation of capital.

In 2010, Mr. Cinnamond concluded that it was time to move on. In part he was drawn to family and his home state of Kentucky. In part, he seems to have reassessed his growth prospects with the firm.

The fund’s third incarnation appeared on the last day of 2010, with the launch of Aston / River Road Independent Value (ARIVX). While ARIVX is run using the same discipline as its predecessors, Mr. Cinnamond intentionally avoided the “small cap” name. While the new fund will maintain its historic small cap value focus, he wanted to avoid the SEC stricture which would have mandated him to keep 80% of assets in small caps.

Over an extended period, Mr. Cinnamond’s small cap composite (that is, the weighted average of the separately managed accounts under his charge over the past 15 years) has returned 12% per year to his investors. That figure understates his stock picking skills, since it includes the low returns he earned on his often-substantial cash holdings. The equities, by themselves, earned 15.6% a year.

The key to Mr. Cinnamond’s performance (which, Morningstar observes, “trounced nearly all equity funds”) is achieved, in his words, “by not making mistakes.” He articulates a strong focus on absolute returns; that is, he’d rather position his portfolio to make some money, steadily, in all markets, rather than having it alternately soar and swoon. There seem to be three elements involved in investing without mistakes:

Buy the right firms.
At the right price.
Move decisively when circumstances demand.

All things being equal, his “right” firms are “steady-Eddy companies.” They’re firms with look for companies with strong cash flows and solid operating histories. Many of the firms in his portfolio are 50 or more years old, often market leaders, more mature firms with lower growth and little debt.

Like many successful managers, Mr. Cinnamond pursues a rigorous value discipline. Put simply, there are times that owning stocks simply aren’t worth the risk. Like, well, now. He says that he “will take risks if I’m paid for it; currently I’m not being paid for taking risk.” In those sorts of markets, he has two options. First, he’ll hold cash, often 20-30% of the portfolio. Second, he moves to the highest quality companies in “stretched markets.” That caution is reflected in his 2008 returns, when the fund dropped 7% while his benchmark dropped 29%.

But he’ll also move decisively to pursue bargains when they arise. “I’m willing to be aggressive in undervalued markets,” he says. For example, ICMAX’s portfolio went from 0% energy and 20% cash in 2008 to 20% energy and no cash at the market trough in March, 2009. Similarly, his small cap composite moved from 40% cash to 5% in the same period. That quick move let the fund follow an excellent 2008 (when defense was the key) with an excellent 2009 (where he was paid for taking risks). The fund’s 40% return in 2009 beat his index by 20 percentage points for a second consecutive year. As the market began frothy in 2010 (“names you just can’t value are leading the market,” he noted), he let cash build to nearly 30% of the portfolio. That meant that his relative returns sucked (bottom 10%), but he posted solid absolute returns (up 20% for the year) and left ICMAX well-positioned to deal with volatility in 2011.

Unfortunately for ICMAX shareholders, he’s moved on and their fund trailed 95% of its peers for the first couple months of 2011. Fortunately for ARIVX shareholders, his new fund is leading both ICMAX and its small value peers by a comfortable early margin.

The sole argument against owning is captured in Cinnamond’s cheery declaration, “I like volatility.” Because he’s unwilling to overpay for a stock, or to expose his shareholders to risk in an overextended market, he sidelines more and more cash which means the fund might lag in extended rallies. But when stocks begin cratering, he moves quickly in which means he increases his exposure as the market falls. Buying before the final bottom is, in the short term, painful and might be taken, by some, as a sign that the manager has lost his marbles. He’s currently at 40% cash, effectively his max, because he hasn’t found enough opportunities to fill a portfolio. He’ll buy more as prices on individual stocks because attractive, and could imagine a veritable buying spree when the Russell 2000 is at 350. At the end of February 2011, the index was close to 700.

Bottom Line

Aston / River Road Independent Value is the classic case of getting something for nothing. Investors impressed with Mr. Cinnamond’s 15 year record – high returns with low risk investing in smaller companies – have the opportunity to access his skills with no higher expenses and no higher minimum than they’d pay at Intrepid Small Cap. The far smaller asset base and lack of legacy positions makes ARIVX the more attractive of the two options. And attractive, period.

Fund website

Aston/River Road Independent Value

GRT Absolute Return (GRTHX)

By Editor

Update: This fund has been liquidated.

Objective

The fund seeks total return by investing, long and short, in the entire investable universe. It starts with a sensible neutral asset allocation and tries to “add alpha around the edges.” The fund parallels the firm’s Topaz hedge fund. It can short stocks, to a maximum of 30%. Unlike other hedge funds, Topaz avoids extensive leverage and highly concentrated bets. The fund will do likewise.

Adviser

GRT Capital Partners. GRT was founded in 2001 by Gregory Fraser, Rudolph Kluiber and Timothy Krochuk. GRT offers investment management services to institutional clients and investors in its limited partnerships. As of 2/1/11, they had over $300 million in assets under management and were experiencing healthy inflows. They also manage GRT Value (GRTVX) and ten separate account strategies.

Manager

The aforementioned Gregory Fraser, Rudolph Kluiber and Timothy Krochuk. Mr. Fraser is the lead manager. He managed Fidelity Diversified International (FDIVX) from 1991 to 2001. Before that he analyzed stuff (shoes, steel, casinos) for Fidelity. Mr. Kluiber, from 1995 to 2001, ran State Street Research Aurora (SSRAX), a small cap value fund. Before that, he was a high yield analyst and assistant manager on State Street Research High Yield. Mr. Krochuk managed Fidelity TechnoQuant Growth Fund from 1996 to 2001 and Fidelity Small Cap Selector fund in 2000 and 2001. Since 2001, they’ve worked together on limited partnerships and separate accounts for GRT Capital. All three managers earned BAs from Harvard, where Mr. Kluiber and Mr. Fraser were roommates. Messrs Kluiber and Fraser have both earned MBAs from UCLA and Pennsylvania, respectively.

Management’s Stake in the Fund

Not yet reported. That said, the managers own the advisory firm, and Mr. Krochuk attsts that “all of our managers own shares in their products” and “most of our net worth is in those products.”

Opening date

December 8, 2010.

Minimum investment

$2500, reduced to $500 for IRAs.

Expense ratio

2.39% on assets of $10 million.

Comments

Investors are often panicked by the simple fact that virtually no asset class is attractively priced any longer. Cash is at zero. Bonds have a near zero real return, with the spread between the riskiest bonds and Treasuries collapsing to 4.6%. U.S. stocks have nearly doubled in under two years while emerging markets and REITs have risen by even more. Gold, a classic inflation hedge, has risen from $272 in 2000 to $1363 in February 2011.

The argument that no asset class is undervalued does not mean that it’s impossible to make money; just that you’re less likely to make it with a static asset allocation and exposure to market indexes. That, at least, is the argument advanced by Tim Krochuk and the good folks at GRT Capital Partners in support of their new absolute return fund. “Active management is,” he argues, “oversold while ETFs are screaming skyward.”

Mr. Krochuk’s argument is that managers need the flexibility to make gains wherever an uncertain market offers them, a strategy which requires the ability to invest both long and short, in a wide variety of asset classes.

GRT Absolute Return (GRTHX), launched in December, offers three distinctive features.

First, it has a sensible neutral allocation. By shifting the classic 60/40 split between stocks and bonds to a 55/35/10 split between stocks, bonds and cash, GRT produced a benchmark with great stability that outperformed the traditional allocation in 100% of the rolling five year periods they studied. From 2005 – 10, GRT’s neutral allocation returned 31% while a 60/40 split returned 20% and the S&P500 was in the red.

Second, it doesn’t try to over-promise or over-extend itself. GRT has a remarkably vibrant quant culture, and their studies conclude that “a little shorting goes a long way.” As a result, the fund won’t short more than 30%, which provides “major downside protection” as well as contributing alpha in some markets. How much downside protection? A 2004 asset allocation study, published by T. Rowe Price, gives a hint. They studied the effects of various broad asset allocations (100% stock, 80% stock/20% bonds, and so on). In general, reducing your stock exposure by 20% reduces the average down year loss by 4%. For example, a portfolio 80% in stocks lost an average of 10% in its down years. Dropping that to 60% stocks cut the average loss to 6.5%. There was surprisingly little loss in returns occasioned by easing up on stocks: a static 60% stock portfolio earned 9.3% per year over 50 years while 80% stocks earned 10%.

We can, Krochuk concludes, “add alpha by investing around the edges of a good allocation benchmark.” They also avoid leverage, which dramatically boosts returns — but only if you’re very right and have impeccable timing. The underlying portfolio will be well diversified, rather than making a series of hedge fund-like bets on a small basket of securities. They’ve found that they can use U.S. blue chip stocks (liquid and dividend paying) in lieu of a large cash stake. And the managers invest major amounts in their funds. The prospect of losing much of your life savings, Mr. Krochuk notes, has a wonderfully sobering effect on investor behavior.

Finally, the fund has Greg Fraser (and company). Mr. Fraser, the lead manager, performed brilliantly at Fidelity Diversified International (FDIVX) for a decade, outperforming in both rising and falling markets. In the five years before FDIVX, he was one of Fidelity’s top stock analysts. In the decade since FDIVX, he’s run both a long/short hedge fund and a natural resources hedge fund for GRT. As I noted in my profile of GRT Value (GRTVX) and my March 2011 cover essay, G, R & T represent a major pool of time-tested talent.

GRT employs another half dozen managers on their private accounts, and several of those have outstanding records as mutual fund managers. While those managers do not directly contribute to this fund, their presence strengthens the fund in at least two ways. First, there’s an ongoing flow of information between the managers; informally on a daily basis and formally at monthly meetings. Second, the advisor monitors the performance of each of its 10 strategies every day. Those strategies are, in normal times, uncorrelated. A spike in correlations has been a reliable sign of an impending market fall. That information is available only to GRT and allows them to anticipate events and adjust their portfolio positions.

Bottom Line

The price of entering the fund ($2500) is low, though the price of staying in is rather high (2.39% at the outset). That said, highly active, alternative-investment funds are pricey are a group (the $1.4 billion Wintergreen fund charges 2%, for example) and expenses are likely to fall as assets rise. As importantly, the managers have a record of earning their money. Beyond GRTVX’s strong performance, there’s also decades of great absolute and risk-adjusted returns posted by all three members of the management team. Ensconced now in a partnership of their own creation, with a sensible corporate structure and a cadre of managers whose work they respect, there’s good reason to believe the GRT will achieve their goal of becoming “a mini-Wellington.” That is, an exceedingly stable firm dedicated to providing strong, sustainable long-term gains for their clients.

Fund website

GRT Capital Partners, then click on “mutual funds” in the lower right. The funds portion of the site has minimal information (links to the prospectus, SAI and required reports but not a profile, holdings, commentary or performance). The rest of the site, though, has a fair amount of relevant information to help folks understand the management team and their approach.

Evermore Global Value “A” (EVGBX)

By Editor

This profile has been updated. Find the new profile here.

Objective

Evermore Global Value seeks capital appreciation by investing, primarily, in the stock of companies that are both undervalued and undergoing change and, secondarily, in securities of “distressed” companies or those involved in merger/arbitrage situations. It may invest in any country, any market capitalization, and any industry. It generally invests in mid- and large-capitalization companies. 40-100% of the portfolio will be non-US, with the option buying holding sovereign debt and participations in foreign government debt. It can short.

Adviser

Evermore Global Advisor, LLC. Evermore was founded in 2009 by two alumni of the Mutual Series funds, David Marcus and Eric LeGoff. They have two investment strategies, Global Value and European Value, which are packaged for individual and institutional investors through their two mutual funds, separately managed accounts, at least one hedge fund, and offshore funds for non-U.S. residents.

Manager(s)

David Marcus and Jae Chung. Mr. Marcus is co-founder, chief executive officer, and chief investment officer of Evermore Global and lead portfolio manager of the Funds. He’s had a varied and colorful career. He was a research analyst at Heine, the advisor to the original Mutual Series funds. He joined Franklin when the Mutual Series was acquired, and managed or co-managed Franklin Mutual European, Franklin Mutual Shares, and Franklin Mutual Discovery. He left Franklin in 2000 and managed a couple hedge funds and the family office for the Stenbecks, one of Sweden’s wealthiest families. Mr. Chung served as a research analyst (and, briefly, fund co-manager) during Mr. Marcus’s years at Franklin, then went on to work as a senior research analyst at Davis Advisors, advisers of a very fine group of value-oriented funds including Davis New York Venture Fund, as well as the Davis Global, International, and Opportunity Funds. He also ran several Asia-domiciled funds. Mr. Chung is a graduate of Yale University. They’re supported by one research analyst.

Management’s Stake in the Fund

As of December 11, 2009, Mr. Marcus had less than $50,000 in the fund and Mr. Chung had nothing. Given that the fund hadn’t yet been offered to the public, that’s not terribly surprising.

Opening date

December 30, 2009.

Minimum investment

$5000 for regular accounts $2000 for IRAs

Expense ratio

1.6% on assets of $22 million. The “A” shares carry at 5.0% front load but are available no-load, NTF from Schwab and Scottrade.

Comments

There are a few advisors that get active management consistently right. But they are few indeed. Getting it right requires not only skill and insight (knowing what to buy or sell), but also a fair amount of courage (being willing to act despite the risks). Large firms may have the insight (one imagines that Fidelity probably generates a fair number of intriguing leads) but they lack the courage. Their business model relies on steady inflows from retirement accounts – directly or through pension managers — and those folks are not looking for thrills. In addition to the ubiquitous market risk, such managers face what Jeremy Grantham calls “career risk.” One disastrous, or wildly premature, call leads to a billion in outflows and a quick trip to the unemployment line.

That leaves much of the hope for active management in the realm of smaller funds. Even here, some lack the fortitude. Many lack the skill.

There are a handful of investment families, though, that have made a long tradition of making bold moves and getting them right. The Acorn Fund (ACRNX) under Ralph Wanger was one. The Third Avenue Funds under Marty Whitman are another. But the poster child for aggressive value investing are the folks trained by the legendary Max Heine or Heine’s more legendary protégé Michael Price, jointly designated by Fortune (12/20/99) as two of the “Investors of the Century.” (Mr. Price alone carried, and deeply resented, Fortune’s designation as “The Meanest SOB on Wall Street.”) Mr. Price’s protégés include David Winters, manager of the phenomenally successful Wintergreen Fund (WGRNX) and many of the folks who went on to apply his discipline in running the Mutual Series funds.

Mr. Marcus, lead manager for Evermore Global Value, was another of Price’s students. He left the Mutual Series funds shortly after Mr. Price’s own departure, but in the wake of their firm’s acquisition by Franklin. He spent the next decade in Europe, working with one of Sweden’s wealthiest families and running hedge funds. At some point, he reputedly became nostalgic for the camaraderie he experienced at Mutual Series pre-Franklin, and resolved to work to recreate it.

Evermore’s investment discipline parallels Wintergreen’s and Mutual Series’. They look for deeply undervalued stocks, but they don’t take the “buy dirt cheap and wait to see what happens” approach. Many value managers are essentially passive; they buy, expecting or hoping for a turnaround, and sell quickly if “bad” becomes “worse.” The Price protégés look further afield – into distressed debt, “special situations,” bankruptcies, corporate spin-offs – and actively “assist” recalcitrant corporate managers unlock value. That willingness to pressure poorly run companies earned Mr. Price the “SOB” sobriquet. Mr. Winters puts a far more affable spin on the same strategy; he argues that even ineffective managers want to be effective but sometimes lack the will or insight. He helps provide both. Mr. Marcus seems intent on using the same strategy: “We often buy substantial stakes and, from time to time if necessary, use our influence to foster value creation.”

He imagines a compact (20-40 name) portfolio with low turnover (20% or so), roughly akin to Wintergreen’s. The fund’s asset allocation roughly matches that for Wintergreen and Mutual Global Discovery. From inception through the end of August 2010, the fund has performed in-line with its World Stock peers though it substantially outperformed them over the volatile summer months.

Bottom Line

The Heine/Price/Mutual Discovery lineage is compelling. The fact that they have Mr. Price as an advisor helps more. The Mutual Series managers, past and present, folks tend to embody the best of active management: bold choices, high conviction portfolios, and a willingness to understand and exploit parts of the market that few others approach. Evermore, for those who access the no-load shares, is priced more attractively than either Discovery or Wintergreen. For folks still brave enough to put new money in equities, this is a very attractive option.

Fund website

Evermore Global Advisors