@Maurice. Regarding what you said, "When I first was looking at FAIRX more than 10 years ago, Berkowitz had at least a third of the fund invested in Berkshire Hathaway. So if this style of investment makes you queasy, I can understand that. But Berkowitz's style hasn't changed a lot, since the fund was started. He has been consistent. Isn't that a characteristic that most of us want to see in mutual fund manager?"
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I think Berkowitz investing a significant amount in Berkshire Hathaway is different, because Berkshire Hathaway is more like a mutual fund than a typical individual stock, since there are so many stocks owned by Berkshire Hathaway, as well as very many wholly owned companies such as See's Candies, Nebraska Furniture, etc. So it's like owning a mutual fund run by Warren Buffett. I was in FAIRX for 11 years, and don't recall how much Berkshire Hathaway was in FAIRX, but it didn't approach the 52% that was in AIG not that long ago. The Sequoia Fund used to regularly hold large positions in Berkshire Hathaway for many years.
I'm not sure Berkowitz has been consistent. I kept tabs on him for many years; my take is that he has changed. I see the portfolio as significantly more risky than in years past, both in terms of the percentage concentration in individual names, concentration in the financial sector itself, and the riskiness of some of the individual names, such as Sears, St. Joe, Fannie and Freddie. In my opinion, investing in Sears, St. Joe, Fannie and Freddie is not consistent with having Rule Number 1, Don't Lose Money; Rule Number 2, Don't Forget Rule Number 1. No one knows what is going to happen with Fannie and Freddie. Clearly, it's quite possible to lose one's entire investment in them, if the government carries through it's plan to dissolve the companies, although I doubt that happens. My guess is that Bruce wins big time with them, but they are clearly not investments for someone whose Rule Number 1 is Don't Lose Money. Just not consistent. Probably Bruce wins with all four of those names, as well as with his ultra concentrated bet on AIG, but you don't invest this way if your first rule is don't lose money. He needs to change his talk to match his walk.

How about examining fund stewardship by plotting growth of AUM vs. actual expense ratios paid by investors ? Looking at the latest annual report for MFLDX, this would clearly reveal poor fund stewardship by the manager and the fund board of directors. This matters to me, but obviously it doesn't pop up on the M* radar, and I'm sure Mainstay feels just like David Winters does about fund expenses.
Kevin

I wonder if a financial services company couldn't make a great deal of money by buying up hot independent funds, letting the assets bloat while holding fees fixed, then abandoning the fund (etc.) when the investing public catches on the the fund isn't the fund of old. Rinse. Repeat. Probably not a bad way to make money. If you're a fin services firm.

Bruce once stated he managed his portfolio as if his clients had all of their money invested with him (Wealthtrack interview). In late 2010, I noticed he changed the portfolio drastically; I sold. Fortunately, I did not get hurt by the big drop then. I believe he is talented but I wouldn't want him taking this kind of risk with 'all' of my money.

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I think he's nuts to have half his portfolio in one stock, AIG.
.

There is an exceptional amount of risk when you have a concentration to the degree that 50% of a portfolio (more or less) is in one stock, which I don't think is really appreciated by the financial media when discussing FAIRX. Not only from the standpoint of something happening to the company, but the risk that the position is difficult to unwind, other funds could try to squeeze you if things become difficult, etc.
Someone can have an exceptional amount of confidence in something, but nothing in investing is certain and 50% in one stock really starts to get to a place where the potential risk is - I think - really unappealing. I could say it's a hedge fund, but I think there's few hedge funds that would effectively take such an "all-in" bet with shareholder money.
Beyond that, I've often said that the financial companies still present a risk from the standpoint of not learning anything from 2008 and continuing to lack transparency. You can talk about book value, but I don't trust that the book value is as stated.
The Kiplinger quote that I often refer to:
A lot of well-known value investors fell on their faces the past year or two. Why did Fairholme hold up as well as it did?
"Maybe it's because I don't invest in things I can't understand....Or take American International Group. If you looked at an AIG annual report six or seven years ago, you saw one paragraph on derivatives. You look at an AIG annual report today and you see 15 pages on derivatives. I don't think company insiders fully understand what's going on, let alone outsiders. So if I don't understand something, I've learned to walk away."
http://www.kiplinger.com/article/investing/T041-C000-S002-a-bargain-hunter-stands-tall.html?page=1
Well, you have Citi's recent scandal, as well as BAC's recent incident. I still think these companies do not know/cannot comprehend the extent of what they have in their books/what's going on in the organization (when too big to fail becomes too big to fully control/comprehend) and that there will be more incidents like BAC's recent announcement.
I still think the full understanding isn't there, but Berkowitz rode the idea that these companies would continue to be supported and catered to long after they were bailed out.
As for Sears Holdings, I've discussed it at great length before. The parts and pieces are worth more than the current price (and that's if everything goes right, there's a mountain to climb between here and there), but I completely disagree with the overly optimistic case.

During the height of 2008 financial crisis Hasenstab bought Irish government bonds while everyone are frozen in fear. This is typical of Hasenstab's contrarian approach. It paid off handsomely years after as Ireland recovers.
Here we are in a similar situation again with Ukraine. This time the difference is that Ukrainian bonds carry a significantly higher geopolitical risk in addition of its credit risk. I invest with him because his expertise and I trust his assessment on the longer term perspective on that region of the world.

MarkM: Thanks. What is Jim Stack's performance record? I know the Hulbert Financial Digest tracks him closely, but I don't subscribe to that. What was Jim Stack's performance during bear markets, such as March 15, 2000-October 2002, or October 2007-March 9, 2009, and during bull markets, such as the past 5 years, and 1991-March 2000?
Are you in Meb Faber's ETF's? I just read his book, Global Value.

Hi Guys,
The most likely answer to Ron’s question about the morphing of Marc Faber from Mr. Doom to Mr. Happy is never. He is committed to his own worldview and the present circumstances and data are nearly irrelevant.
In the financial community he exhibits all the characteristics of a Mr. No. I use the term Mr. No to conveniently contrast his behavior with a dedicated Mr. Yes. In many circles, adventurer Richard Branson is fondly called Mr. Yes. His most famous saying is “Screw it. Let’s do it”. That aggressive motto has earned him innumerable successes, and an occasional backslide.
I don’t buy into these pre-judgments, these by-gosh-and-by-golly pre-commitments. I think of them as lazy folly. It sure eases the decision process. Although that’s attractive in many commonplace instances, it can get an investor into deep hot water. Although the markets do reflect a cyclical behavior, each cycle differs from past experience sufficiently to merit a separate review and evaluation.
The marketplace is far too complex to be modeled by overly simplistic correlations. As Albert Einstein cautioned “Everything Should Be Made as Simple as Possible, But Not Simpler”. Oversimplification introduces the possibility of allowing the really significant market drivers to escape detection.
Perhaps this is the logic that InvesTech’s Jim Stack uses in his multidimensional set of market direction criteria. He adjusts his portfolio holdings incrementally as the various signals penetrate their threshold levels. I do buy into that conservative multi-criteria approach.
The last quarter’s GDP growth numbers were dismal. Over the long haul, academic and industry research find zero or nearly zero correlation between market returns and GDP growth values. But more recent and more nuanced studies, that introduced a wider array of independent parameters, suggest otherwise. The more nuanced assessment includes parameters like inflation, policy stance, and interest rates to augment GDP growth rate data.
Here are Links to a sample of the longer-term GDP growth study data, a GDP growth per capita data set, and the more nuanced findings:
http://www.businessinsider.com/correlation-between-equity-returns-gdp-growth-2013-11
http://www.businessinsider.com/equity-returns-and-gdp-per-capita-2014-2
http://www.schroders.com/staticfiles/schroders/sites/Americas/US Institutional 2011/pdfs/Equity-Returns-and-GDP.pdf
All of this is good stuff. They might well serve as partial signals to help guide your portfolio asset allocation decisions. I would never suggest that these are decisive by themselves. The issue is much more complex.
For example, I have always included some measure of the equity markets Price to Earnings ratio (P/E or more recently CAPE) as part of my decision making process. Today, that signal is above its historical average, but it’s been in that dangerous zone for quite some time now. This bit of evidence supports the Faber assertion. At some point he will be proven correct, but who knows the unknowable timetable?
Today, I’m still into equities at my long-term percentage. But I am getting a little queasy, a little antsy. I’m taking no immediate action. I’m waiting for more evidence, one way or the other. As a general rule, I am not a market timer.
Stay loose guys. Don’t prejudge like either Faber or Branson. Let the accumulating data and whatever criteria you deploy be your final guide. Good luck to all of us.
Best Regards.

www.onwallstreet.com/news/investment_insights/fund-manager-profile-bob-zenouzi-delaware-dividend-income-fund-2689043-1.html?zkPrintable=truec
Total Return Approach to Dividend Stocks
by: Joseph Lisanti
Advisors face this problem every day: Fixed-income rates are low, but aging clients need to generate income. “People are looking for yield,” says Bob Zenouzi, lead manager of the Delaware Dividend Income Fund.
Despite the name of his fund, Zenouzi prefers to offer his investors total return these days. He believes that it is the best way to approach the mismatch between current yields and investors’ income needs.
Zenouzi contends that many traditional income bastions — including utilities, master limited partnerships, mortgage REITs and health care REITs — have become “bond surrogates” and are therefore too pricey in today’s market. “When you look at the highest quintile dividend yield, the P/Es of those companies are trading at a 20% premium to the S&P 500 P/E; and historically they traded at a 20% discount,” he says.
“We own some, but we’re just really underweight,” he explains. “So we’ve lowered the yield in our fund — which, frankly, hasn’t been too popular with many advisors and investors, but we think it’s the right thing to do.”
Instead of focusing on the juiciest yields, Zenouzi’s team buys issues that it believes are likely to increase dividend payments. “To me the risk isn’t so much in buying good equities with competitive dividend yields that can grow; the risk is chasing the highest yields,” Zenouzi says. He sees danger in overvalued, high-yielding equities as interest rates inevitably rise. “When they get to these expensive levels, they become much more correlated to the 10-year Treasury,” he explains.
The fund’s 30-day SEC yield was recently 1.92%, though the 12-month trailing yield was slightly higher at 2.25%. Competitors who stuck to higher-yielding stocks underperformed last year, Zenouzi says. His fund delivered a total return of 19.7% in 2013, vs. 16.48% for the moderate allocation category, according to Morningstar.
As is often the case, Morningstar compares Delaware Dividend Income in multiple categories. Against the Morningstar moderate target risk category, the fund does even better. Moderate target risk funds returned 14.31% last year on average, so Zenouzi’s portfolio outpaced them by more than five percentage points.
This year through March 31, DDIAX ranks 13th out of 920 funds in the moderate target risk category, according to Morningstar; over five years it ranks third among 666 funds in the category. Morningstar awards the load-waived version of the fund, available through advisors, an overall ranking of four stars out of five, observing that it delivers above-average returns but also carries above-average risk.
The research firm measures the fund’s beta at 0.65 vs. the Russell 1000 Value total return index, which Morningstar calls the “best fit” benchmark.
One reason for the lower volatility is that Delaware Dividend Income isn’t limited to common stocks. Although the fund may have up to 45% of assets in junk bonds, the entire bond portion of the portfolio was recently a little more than 18% of the fund, and fixed-income investments are concentrated in high-yield debt and convertible securities.
Zenouzi notes that these securities provide a little extra safety because they sit higher in a corporation’s capital structure than common stocks. The fund may also buy investment-grade bonds, but it doesn’t currently hold these issues because, Zenouzi says, they are more interest-rate sensitive.
REAL ESTATE HOLDINGS
Zenouzi, who helped create Delaware Dividend Income in 1996 and who has been lead manager since 2006, heads a team of 35 managers and analysts who work on the fund. He monitors the overall asset allocation and makes the final decision on it. Because he also serves as chief investment officer and lead manager for Delaware’s real estate securities and income solutions group, he is deeply involved in managing the realty sleeve of the portfolio, recently about 8.5% of holdings.
Currently, Zenouzi favors mall, apartment and shopping center REITs. But not all real estate can pass muster. One factor he considers is average lease length. “We want shorter-duration leases within the REIT,” he says, noting that a shorter lock-in of rents primes the properties better for economic growth. Recent REIT holdings included Simon Property Group, General Growth Properties and AvalonBay Communities.
The fund has underweighted financials, especially banks. “Given Dodd-Frank and Basel III and capital ratio rules, they are less levered and they’ll have less earnings growth going forward,” Zenouzi says. “We think that, over time, they’re going to act more like utilities.”
Although DDIAX can invest up to 30% of its assets in stocks and bonds outside the United States, the vast majority of its holdings are U.S.-based. Emerging market issues are almost invisible in the current asset lineup. Zenouzi explains that, about four years ago, the fund’s managers concluded that slowing growth in China would cause emerging market investments to fall out of favor. “I contend that the U.S. will continue to outperform the emerging markets for the next couple of years,” he says.
For a fund that values dividend growth, Delaware Dividend Income appears to have fairly rapid portfolio turnover at roughly 50% annually. But initial appearances can be deceptive. Most of the turnover is in the high-yield bond sleeve, Zenouzi says. In large-cap value equities, which constitute about 45% of assets, the managers have very low turnover of about 8% annually.
“They haven’t put a new name in the fund in probably a year and a half,” Zenouzi explains.
EQUITY APPROACH
In addition to real estate, the fund also favors energy, health care and communications services stocks. Among the fund’s recent top equity holdings are Halliburton (HAL), first bought in 2012, Merck (MRK), first purchased in 2009, and Verizon Communications (VZ), held since 2005.
The fund’s top 10 stock positions account for 14.5% of assets. The weighted average market cap of DDIAX’s holdings is $66.6 billion.
In evaluating the large-cap value stocks that make up the largest portion of Delaware Dividend Income’s equity holdings, Zenouzi’s team considers price-to-earnings, price-to-sales, price-to-cash-flow and price-to-book ratios. Those metrics are compared with both the sector the company is in and the universe of stocks available. “Valuation should always be the primary factor for investors, because that’s how you protect your downside,” Zenouzi says. “That’s your margin of safety.”
Current conditions are far from ideal for managing an income portfolio: The Fed is tapering asset purchases, yields remain low and unemployment is still stubbornly high.
“It is challenging,” admits Zenouzi, who contends that his team’s policy of steering clear of equities with the richest yields will continue to be the best course for now. He believes that the Fed’s tapering will create some “yield opportunities” down the road, but for now investors seeking higher yields will face headwinds.
Zenouzi worries that some older baby boomers may still believe that they will be able to sell their stocks, buy bonds and just clip their coupons. “You can’t do that anymore,” he says. “You can’t live on yield alone. You need to grow your capital or you will run out of money.”
Joseph Lisanti, a Financial Planning contributing writer in New York, is a former editor-in-chief of Standard & Poor’s weekly investment advisory newsletter, The Outlook.

Effective at the end of market trading (4:00 p.m. EST) on May 9, 2014, the Wasatch Frontier Emerging Small Countries Fund (WAFMX) will close to new investors. The Fund will remain open to existing Fund shareholders, as well as current and future clients of financial advisors and retirement plans with an established position in the Fund.
The Fund will also remain open to new and existing shareholders who purchase shares directly from Wasatch Funds.
Wasatch takes fund capacity very seriously. We monitor assets in each of our funds carefully and commit to shareholders to close funds before asset levels rise to a point that would alter our intended investment strategy. At this time we believe it is appropriate to begin limiting future access to the Frontier Emerging Small Countries Fund.
If you have any questions, please don't hesitate to call us at 800.551.1700.
Regards,
Gene Podsiadlo
Director of Mutual Funds
Wasatch Funds

This is about risk posed *by* Fidelity to the financial system, not to you or me as customers. A complete nonstory, even by lame-o WSJ standards.

cman- Before you came on the scene I wasted much time attempting to deflate (or at least to temper) the arrogant pomposity of MJG as he preaches from his self-appointed position of MFO mentor. He grates from the beginning with the syrupy "Hi guys" attempt to establish himself as "just one of the regular folks".
He then strives to impress us with his erudition by a showy display of what he believes to be an extensive vocabulary, reminiscent of a feature of the Reader's Digest back in the 1940's called "It Pays to Increase Your Word Power". Never use a short or common word when a long or fancy one is available! Oddly enough, he evidently fails to recognize "hubris" when it stares him in the face: I once defined it for him, but to no avail.
Your observations are accurate: he would indeed have made a good lawyer, at least from the perspective of courtroom posturing and slight-of-hand, but it is my belief that he comes from the engineering side of the intellectual universe. I've attempted to point out that human behavior, especially in the financial or investment arena, is so subject to emotional inputs that it's complexity frequently defies accurate reduction to an engineering or mathematical algorithm: the frequent failures of the financial "quants" and the pathetic desire of academic financial "authorities" to have their "junk science" accepted as a legitimate branch of engineering are testimony to that.
I finally succeeded in irritating him to the extent that he no longer recognizes me when I raise my hand for a question or comment. Your post (above) might also earn you the same compliment. Good work!
:-) Regards- OJ

No standalone active-passive fund management study is conclusive by itself. The issue has far too many dimensions to permit a single, all-inclusive analysis to address and to resolve all the multitude of issues. Since no universal investment Ironclad laws exist, all studies are empirical in nature. All models are simplifications of reality; hopefully they still capture the governing elements of that reality. They are all imperfect.

Now it is time to do damage control of the destruction of your own evidence from your opponent's arguments you cannot refute with a counter argument. This requires careful wording because it may require you to contradict your own introduction of the evidence based on which you made rather strong and definitive statements. The easiest is to use logical fallacies to create wiggle room. For example, if your evidence was shown to be invalid or flawed, then use the logical fallacy of the type "all evidence is incomplete and empirical and capture some reality, therefore mine does too". Jury will not see the well known sweeping generalization fallacy.

Selecting bias free data and study timeframes will always influence findings. That’s specifically why numerous studies are needed and will continue to yield more realistic insights. The MIG study fits into that grouping.

You can also use the fallacy of the type "different evidence validates different truths, thus this evidence as part of that group validates some truths". Jury will not recognize the false premise. Only valid and untainted evidence validate truths not all.

I believe the MIG team did an honest job. I even think they were somewhat surprised by their findings. I’m nudged in that direction by the way they presented their findings. Their very first table shows that 4 of their 6 major fund categories delivered positive Alpha before costs. But nobody invests without costs.

Now, it is time to build credibility of your own evidence. Asserting objectivity of the evidence gatherers is critical. Easiest to claim that they reported something they did not expect themselves for this. What better way to establish credibility? Jury will not know that this is well known in prior studies and claims have always been about after costs and fees. The thing that was new was including data from defunct funds.

In the same paragraph, MIG adjusts for costs and concludes that : “When comparing the median outperformance to the median fee for each asset class, the gross outperformance of the median manager has not justified the historical median fee. In other words, it seems that in the asset classes where active managers have added value, the median level of fees negated any advantage.”

Now repeat the already available prior studies' claims ignoring the very criticusm of this study. Even when your opponent has stipulated the valid conclusion of this study, that the average data over all funds is meaningful only if you choose a fund randomly over all existing and defunct funds, the main objection to the structure of the study.
There is no controversy about the performance after fees with that limitation in selection, so repeating this without the actual objection contributes to establishing credibility of the evidence. Remember, it is about convincing the jury, not arriving at the truth or knowledge.

Cman emphasized the “no cost” result to the detriment of the overarching negative Alpha after fees conclusion. That’s a little disingenuous, especially if you proclaim to have no ponies in the race.

With that, it is time to go on the attack again. By this time, the jury has tuned out or asleep to notice misquoting or mischaracterizing the opponent. For example, you can take a statement that talks about both before and after in the same sentence as a disingenuous attempt to emphasize the former. Strong words like disingenuous wake up the jury and it will stick.

Yet Cman elects to destroy the credibility of MIG’s efforts with ad hominem attack words like Junk Science and GIGO. All research is subject to errors ranging from incomplete data collection to poor practices to flawed data interpretations. But an honest attack requires full documentation, not merely shaky comprehensive assertions.

Now attempt to cast the opponent as destroying the credibility with strong words (while you smirk at the irony) rather than pointing out the flaws and limitations of the study to model reality. If the jury is still listening at this point, they will think it true because you have repeated often enough.
You can make the same assertion that the argument against the study requires documentation without mentioning that the only documentation needed to support a logical argument of the valid inference and limitations of the study is a book in logic. But the jury will think the opponent made some unsubstantiated claim of fact. Remember that it is all about credibility and narrative, not arriving at truth and knowledge.

It is not at all clear why MIG would have incentives to prepare a defective report since their reputation is at risk. They do have much skin in the game.

You can also use logical fallacies to establish the credibility of your evidence. One may create a defective report without incentives. It may not be defective at all for the audience it is targeted towards because it confirms a widely held view and there is a financial incentive for that purpose. But claiming ignorance of any such thing and asserting it must be valid because otherwise it would damage the firm is a fallacy of false choice since it assumes they are either necessarily aware of it or that if they were aware of the shortcomings they would necessarily care for the purpose it is used.

The MIG team that Cman so firmly criticized has over 600 billion dollars under management, has been in the consulting business since 1978, and has recently been awarded a competitively bid contract from the California State Teachers’ Retirement System (CalSTRS). I’m sure they have been on the wrong side of some investment advice, but so has everyone else. As a minimum, MIG has demonstrated staying power.

The fallacy of argument from authority is always a useful tool to have in one's pocket because it allows you to throw in a lot of irrelevant data. One can be all that and still write a flawed or a falsely concluded article but it always impresses the jury to throw credentials.

I wouldn't recommend @Ted's allocation to my worst enemy :-) And I am saying this as someone who will have a beer with him any day if I ever meet him. He seems what you see, no more, no less. That is refreshing even if I don't necessarily agree with his opinions or attitude all the time.
@charles, this is why women make better money managers because they don't equate risk taking with manhood (yes, I know your comment was flippant) :-)
I don't know Ted's financial situation or his contingency plans for the risk he assumes so I cannot speak for the propriety of his choices. But he is also a guy who keeps track of the market on a daily basis and not afraid to trade when needed and be highly concentrated. You can make money that way.
Without that context, however, his unqualified investment suggestions seem irrelevant to most if not dangerous. That is the downside of online forums.

MJG noted:
"I’ve hesitated to recommend it to the MFO membership because it devotes only a minor portion to investment advice. It is not sophisticated in that it covers many broad financial matters in a simplified format. It is a great introductory-like tutorial that might well satisfy the needs of very financially illiterate folks. In closing each brief chapter, Clements provides a short “street Smarts” tips section"
>>>seems like a good enough reason from where I sit.........ain't much new to learn, anyway.............,eh?

Hi Guys,
I am pleased that Jonathan Clements has come home to the WSJ. I missed his commonsense columns that were much more than just investment advice. Welcome back Jonathan.
His reintroductory article to his WSJ audience clearly shows that he will continue exploring life style issues in addition to investment topics. Clements has always believed that financial success is about more than money. In fact that’s the title of Chapter 21 in his most recent book.
The title of that book is “The Little Book of Main Street Money”. I’ve owned a copy for several years. Typical of all Clements writings, it is an informative, breezy and easy read.
I’ve hesitated to recommend it to the MFO membership because it devotes only a minor portion to investment advice. It is not sophisticated in that it covers many broad financial matters in a simplified format. It is a great introductory-like tutorial that might well satisfy the needs of very financially illiterate folks. In closing each brief chapter, Clements provides a short “street Smarts” tips section.
Clements is the only notable financial writer that I have personally met. At least 15 years ago he lived in Metuchen, New Jersey; so did my sister. On a visit, our paths accidentally crossed while walking around a lake in a State park. I believe he initiated a conversation.
We talked a little about investing. The discussion turned to decision making, and the errors that even professionals are guilty of. That allowed me to introduce my favorite sports example of faulty decisions because of not understanding the odds. I’ve told this story on earlier MFO posts, but I’ll repeat it now.
A basketball team is two points behind with seconds remaining when the coach calls a timeout. The question: Should the team try for a 2 or 3 point basket? Given typical shooting percentages, the answer is to go for the 3-pointer. Many coaches do the opposite. Here’s why.
Most teams successfully execute a 2-point shot with 50% likelihood. Given the closeness of the game, the probability of winning in overtime is also 50%. To register a win, both events must happen. Therefore the odds of winning the game are 25% (0.5 times 0.5).
Most teams have shooters who convert 3-pointers at about the 33% level. Therefore, a well-informed coach should always try for an immediate victory given those odds.
Clements really liked that story. Later, it appeared in his columns. Although I can never be 100% sure, I like to assume I influenced his writing in that singular instance.
Best Regards.

@heezsafe & Other MFO Members:
4/18/14 Copy & Paste: Kirsten Grind WSJ
(Mutual Funds Moonlight As Venture Capitalist)
That mutual fund in your retirement plan may be moonlighting as a venture capitalist.
BlackRock Inc., BLK -0.57% T. Rowe Price Group Inc. TROW +0.36% and Fidelity Investments are among the mutual-fund firms pushing into Silicon Valley at a record pace, snapping up stakes in high-profile startup companies including Airbnb Inc., Dropbox Inc. and Pinterest Inc.
The investments could pay off big if the companies go public or are sold, helping boost fund returns. But, as the recent turmoil in the market for technology stocks and initial public offerings has shown, such deals also carry major risks not typically associated with mutual funds.
"These are unproven companies that could very well fail," says Todd Rosenbluth, director of mutual fund research at S&P Capital IQ. If things go badly for a startup, "there may not be an exit strategy" for the fund fir
Last year, BlackRock, T. Rowe, Fidelity and Janus Capital Group Inc. JNS +1.58% together were involved in 16 private funding deals—up from nine in 2012 and six in 2011, according to CB Insights, a venture-capital tracking firm.
This year, the four firms already have participated in 13 closed deals, putting 2014 on track to be a banner year for participation by mutual funds in startup funding. On Friday, T. Rowe was part of an investor group that finished a deal to pour $450 million into Airbnb, said people familiar with the matter.
Last week, peer-to-peer financing company LendingClub Corp. raised $115 million in equity and debt, the bulk of which came from fund firms including T. Rowe, BlackRock and Wellington Management Co.
Investors put money into venture-capital funds knowing it is a bet that a few untested companies will become big winners, making up for many losers. But mutual funds, the mainstay of the U.S. retirement market with $15 trillion in assets, aren't typically supposed to swing for the fences. Instead, they put most of their money into established companies with the aim of making steady, not spectacular gains.
The risks of putting money into unproven startups were highlighted by the recent slump in technology stocks, which aggravated worries that valuations for pre-IPO companies may be inflated as well.
"We are not at the beginning of the cycle and that's probably the most diplomatic way to put it," says Chris Bartel, senior vice president of global equity research at Fidelity, noting his firm is cautious about investments.
Like other fund executives, he said startup investments represent a small portion of overall assets and that his firm targets companies that are likely to go public or be sold in the near future.
Nothing prevents mutual funds from buying pieces of startups, though the Securities and Exchange Commission limits them to keeping less than 15% of their portfolios in illiquid securities.
Mutual funds have turned to private technology companies as a way to boost investor returns while growth has stalled at larger, more well-known firms, says Mr. Rosenbluth of S&P Capital IQ.
But these deals are more opaque than most fund investments: Fund firms aren't required to immediately disclose such investment decisions to investors, and privately held companies are also more challenging to value, making it more difficult to gauge how a stake is performing.
For startups, fund companies are attractive because they have a longer-term investing horizon than venture capitalists.
Bellevue, Wash.-based startup Apptio has received funding from three mutual-fund companies. T. Rowe was an early investor and Janus participated in the company's recent funding round of $45 million last May, as did Fidelity, according to people familiar with the matter.
Sunny Gupta, co-founder and chief executive of the startup, which helps businesses manage their technology spending, said he was interested in having the fund companies on board in part because he "wanted a different style of investor" that also brought in-depth financial expertise.
Having mutual funds on board also helps on the road to an initial public offering because big-name investors can provide peace of mind to others thinking about taking a stake. With T. Rowe, for example, Mr. Gupta said "there is an incredible amount of brand recognition" on Wall Street.
Similarly, Bill Harris, the chief executive of Personal Capital, a personal-finance and wealth-management website in Redwood City, Calif., said BlackRock's knowledge of the financial world has benefited the startup since the fund company took part in a $25 million funding round last June. Mr. Harris said he hadn't sought out a fund company and that BlackRock had approached him.
The competition among fund companies is driving up valuations of recent deals, said one person with direct knowledge of startups' funding rounds.
The bellwether for the industry is T. Rowe Price, the Baltimore-based fund family that has backed 30 private tech deals since 2009, according to CB Insights.
Henry Ellenbogen, manager of T. Rowe's $16.2 billion New Horizons Fund, put money into Twitter Inc. TWTR +1.33% before it went public, and has since bought shares in other big names including LivingSocial Inc., a daily deals site, and GrubHub Inc., GRUB -4.18% a food-delivery service, according to T. Rowe.
Mr. Ellenbogen's fund returned 49.1% last year, beating its benchmark, the S&P 500, which returned 32.4%, according to fund-research firm Morningstar Inc. He invests only a small percentage of the funds' assets in any one startup and holds about 260 stocks in the fund, realizing that some of the startups might fail, according to a person familiar with his thinking.
BlackRock, never a big player in Silicon Valley in the past, has funded 10 deals in the past two years, including four this year: software company Hortonworks Inc. in March and Dropbox in January. BlackRock doesn't disclose which of its mutual funds have invested, and declined to say how much the firm put into each company. The deals generally "represent a small portion of the total portfolio of a fund, but with the intent of adding incremental returns," a spokesman said.
Fidelity, likewise, has stepped up. The Boston-based fund firm has participated in 14 privately held tech-company rounds of funding since 2010, including six last year and four this year that have closed, including One Kings Lane, a home-décor website.
Another fear among some analysts is that this rush into pre-IPO stocks has echoes of the 1990s dot-com bubble, when many fund managers got badly burned by ill-timed moves into technology shares. Janus and Fidelity had funds that suffered large losses in the dot-com crash.
A spokesman for Janus declined to comment.
Mr. Bartel of Fidelity conceded the firm is seeing valuations that "aren't as compelling," as they used to be but also said it is seeing more pitches than ever.
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Hi Kaspa,
I think it’s worthwhile to look at portfolios of low turnover funds, historically lower turnover funds have better returns. Here ‘s an alternate view: Figure out what your ideal sector allocation in equities should look like. Determine where your holes are or where you are overweight and then research which companies are the best ones to buy in those sectors. Basically top down, bottom up selections.
I like looking at themes, what sectors are likely to outperform in the future, not necessarily right now, but that show promise in the not too distant future There are numerous sources for articles and opinions which ones they are. If you are not interested in trying to do it yourself, why not hire an hourly rate financial advisor help you come up with a plan?
I know MFO has a combination of members that are do it yourselfers and some that use a financial advisor. I tend to be both. I like choosing some of my own stocks and funds, but also have ones my advisor recommended. I know that I could simply put everything in index funds and a few carefully chosen mutual funds and then set it and forget it. But where is the fun in that ? LOL. I love researching and finding new possibilities to give my portfolio some alpha. More than 80% of my equity side are well known stocks and funds that I consider long term holds, but I always like a few trading stocks that can capture a trend. Hope this helps.

mcmarasco you are exactly right, I feel the wasatch fund has more Africa and consumables whiles Morgan Stanely has more middle east and financial. A good way to hedge my bets. Thanks for the input.

Sorry for the late addition. Looks like the thread was closed by mutual consent of the participants. Inasmuch as conflict and vitriol often attract attention, I've skimmed the lengthy proceedings and can't help offering a couple thoughts - but hope to shy away from the divisive elements.
1. One comments: "These statistics strongly demonstrate the asymmetric upward bias to positive market rewards." Hmm ... I doubt we need to resort to statistical analysis for this audience to appreciate that point. Seems to me it's pretty much a given that over longer periods of time ownership of productive assets, including (but not limited to) equities, does provide better rewards to participants than will investments in fixed income - or for that matter hybrid investments with both equity-like and fixed income-like characteristics. (I hope I haven't muddied the original premise too much.) Suspect most of us first learned this important economic concept somewhere during our junior high school years, along with a strong indoctrination in all the other finer attributes of the "Capitalist" system. In its simplest form, it was explained to me thru the provocative question: "Would you rather own a company or lend your money to those who do?"
2. My own belief is that the increasing concentration of wealth in the hands of the very rich in this country and a string of Supreme Court rulings which will serve to strengthen their influence on the levers of government will likely assure for the foreseeable future the advantages accruing to the wealthiest, namely those who own and control what may loosely be termed "the means of production" (accomplished in a variety of subtle and not so subtle ways, including through bias embedded in tax codes, lax government "oversight" of corporations, labor laws and regulation, and retrenchment on "entitlement" spending). As investors, I think that's a salient point - regardless of political persuasion.
3. I have never understood the importance some place on distinguishing between income-producing assets and more growth oriented ones within the context of long term financial planning. The goal is grow our money at a steady and reasonably predictable rate. Right? While no plan is foolproof, I suspect that a well diversified portfolio containing growth stocks, income-producing ones, fixed income investments of varying duration and credit quality and some hard assets, including real estate, should do just fine over most time frames and likely provide a slightly higher rate of return which is not much more volatile than a strategy fully invested in income producing stocks. (Of course, for time frames shorter than 5-10 years, one should avoid most investments riskier than cash or cash equivalents.)
Thanks for the opportunity to comment on the above deliberations at such a late time. Regards

Hi Guys,
The Meketa Investment Group (MIG) does first-class internal financial research. That’s not exactly unique but allowing individuals free access to this fine work sets them somewhat apart. Thank you MIG for entrée to your many informative White Papers.
Here is the generic Link to the MIG website immediately followed by a direct Link to their White Paper listing:
http://www.meketagroup.com/
http://www.meketagroup.com/investment-research-white-papers.asp
In this instance, I direct your attention to their most recent addition titled “ Active Manager Performance: Alpha and Persistence”. MIG only releases a few of these reports annually; it reflects the care that is exercised in their preparation.
Please examine this active fund manager update. The MIG team made a special effort to identify a complete listing including defunct entities, to cull that expanded database, to properly classify funds into their real categories, and to meticulously evaluate their Alpha/Persistence performance metrics.
The MIG team made a valiant effort to establish Alpha winners and the persistency characteristics of these rare winners for 6 fund classifications: core bonds, high yield bonds, domestic large cap equities, domestic small cap equities, foreign large cap equities, and emerging market stocks.
The findings are not shocking. I’ll summarize the most pertinent findings without further comment. In general, results are presented as each groups Median (not average) performance against a relevant benchmark. Here are MIG’s primary conclusions.
Even before fees, the core bond and the Foreign Large Cap group’s Median performance is negative relative to their appropriate benchmarks.
After fees are subtracted, the “median level of fees negated any (stock picking) advantage” for all 6 categories.
In an expansion of the US large and small cap groups into growth and value classes, small cap value equity managers made a statistically significant positive stock picking contribution.
The data were examined as a function of time. In some categories, active management made a positive difference during market meltdown plunges.
More recently, active managers have found it more challenging to outdistance benchmarks. The competition is more evenly matched and active manager investment edges are disappearing
Performance persistence among active fund managers is nonexistent. MIG concluded that “managers who outperformed over a 5-year period were no more likely to outperform over the next 5-year period than any other manager selected at random”.
The overarching final MIG conclusion is that “identifying managers that will perform ex-ante by relying on past performance alone will prove to be a fool’s errand”.
These findings need not be the death knell for active fund management. The inclusion of the word “alone” in the final conclusion is a critical qualifier. Other factors do enter into the fund manager selection equation. Keeping costs down will surely increase the outperformance odds. Situational awareness can also improve the odds of a successful selection process.
The referenced article has a pile of useful historical data and charts (especially in the appendix section). There are many lessons to be learned from this work Once again, please read the White Paper.
Best Regards and Happy Easter.

Never heard of it. I'll go onto Morningstar and take a fresh, unbiased look. $33.5 MM in assets; 5.75% load; 1.33% expense ratio; TTM yield, an astonishing 8.54%. There is nothing listed under the 30 day SEC yield in Morningstar. I looked at the top portfolio holdings, even googled the top holding: not easy to find information about it.
A very esoteric investment portfolio. A lot of futures contracts. Maybe some fixed income arbitrage, things I know almost nothing about. I would call the fund company and discuss the portfolio with them in depth. The portfolio is extremely unusual, and that is a big understatement. The fund has 66% in cash per M*. Major short positions. One of the fund managers has a PhD, quite unusual, and one of the fund managers at the fund's inception had a PhD. Obviously a lot of brain power here. That in and of itself doesn't say anything good or bad. Long Term Capital Management had the ultimate in brain power, and that didn't end too well. Some major "Quant" brainpower at this fund! Excellent performance history compared to M*'s tactical allocation category. My opinion is that Loads are confiscatory unless one has a financial adviser, and the load is the method of payment for those services. But of course, a fund like this so unusual that you're not going to have a bunch of no load alternatives. Personally I wouldn't invest in a fund with only $33.5 million in assets. That's not a lot of skin in the game from the managers, their families, relatives and friends, the fund family itself and all their associates, the fund board and all of their associates, etc. The fund has been in operation for 3 years and 3 months, and not enough people associated with it are making significant personal financial commitments. Not a good sign to me at all. I would need to read the Prospectus and the fund reports, perform due diligence on the fund managers, explore the googled hits to see if I could find interviews of the fund managers, analysis and opinions about the fund. I'd go to Yahoo Finance and see if there are any posts about the fund in the message boards, and generally, turn over as many 'rocks' as I could. Let us know what you find out!