Category Archives: Funds

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

Artisan Value (ARTLX), April 2011

By Editor

Objective

Multi-cap value equity. The managers have three broad criteria for equity selection: attractive valuation, sound financial condition and attractive business economics. The managers may invest in turnarounds, companies in transition, and companies that have experienced (short-term) earnings shortfalls. The minimum market cap $1.5 billion. While the primary focus is on U.S. companies, up to 25% of the portfolio can be invested in foreign firms.

Adviser

Artisan Partners, LP. Artisan manages $45 billion in eight mutual funds, including Opportunistic Value and separate accounts. Five of its seven existing funds are closed to new investors. Artisans’ managers are all co-owners of the advisory firm.

Managers

Daniel L. Kane, Thomas A. Reynolds IV, and Craig Inman.

Opening date

March 27, 2006

Minimum investment

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

Expense ratio

1.06% on assets of $260 million, as of June 2023.

David’s comments

There are two concerns before investing in Opportunistic Value. First, is there any reason to believe that the managers have the expertise to invest large caps? That’s a good question and one for which there’s no immediate answer. And, second, with two closed funds and separate account assets already, are they overstretched? The fund assets sit around $5 billion, each has 50% turnover. That’s a lot of money, though certainly not beyond the range of what many multi-cap managers at smaller firms (Ron Muhlenkamp and four analysts handle over $3 billion, Wally Weitz handle $5 billion, the folks at Longleaf handle $9 billion). For both questions, the answer might be “a stretch but not necessarily overstretched.”

Weighed against that

(1) Artisan gets it right. Artisan has a great track record for new fund launches. The company launches a new fund only when two conditions are satisfied: it believes it can add significant value and it has a manager who has the potential to be a “category killer.” Almost all of Artisan’s new funds have had very strong first-year performance (their most recent launches – International Small Cap and International Value – finished in the top 1% and 24%, respectively) and above average long-term performance. All of the managers are risk-conscious, so even the “growth” managers tend toward the “value” end of the spectrum. Beyond that, Artisan tends to charge below average expenses, they don’t pay for marketing, and close their funds early.

(2) Satterwhite gets it right. Before joining Artisan in 1997, the lead manager – Scott Satterwhite – ran a very successful small-value portfolio called Biltmore (later, Wachovia) Special Values. His main charge at Artisan, Small Cap Value (ARTVX), tends to have modest volatility and above average returns. It tends to outperform its peers in rocky markets and trail only slightly in boisterous ones. His newer charge, Midcap Value (ARTQX) has had a phenomenal four-year history despite cooling over the past twelve months.

(3) A tested discipline should help them keep it right. Opportunistic Value will use the same stock selection criteria that have served the managers well for the past decade in their other two funds. As a result, there should be relatively few surprises in store.

Bottom line

For investors interested in a place on the “all cap” bandwagon, this is about as promising as a new offering can get.

Company link

http://www.artisanfunds.com/mutual_funds/artisan_funds/value.cfm

April 1, 2006
© Mutual Fund Observer, 2011. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact [email protected].