Dear friends,
Rather more than 50 folks dialed in and participated on our call with Matthew and Ian today. I'm suffering from some combination of a major head cold, the side effects of the OTC meds I'm taking for it and the gallon or so of green tea with honey and lemon that I've chugged this morning, so I'm only guessing when I nominate these as highlights of the call.
The guys run two strategies for US investors. The older one, Global Innovators, is a growth strategy that Guinness has been pursuing for 15 years. The newer one, Dividend Builder, is a value strategy that the managers propounded on their own in response to a challenge from founder Tim Guinness. These strategies are manifested in "mirror funds" open to European investors. Curiously, American investors seem taken by the growth strategy ($180M in the US, $30M in the Euro version) while European investors are prone to value ($6M in the US, $120M in the Euro). Both managers have an ownership stake in Guinness Atkinson and hope to work there for 30 years, neither is legally permitted to invest in the US version of the strategy, both intend - following some paperwork - to invest their pensions in the Dublin-based version. The paperwork hang up seems to affect, primarily, the newer Dividend Builder (in Europe, "Global Equity Income") strategy and I failed to ask directly about personal investment in the older strategy.
The growth strategy, Global Innovators IWIRX, starts by looking for firms "doing something smarter than the average company in their industry. Being smarter translates, over time, to higher return on capital, which is the key to all we do." They then buy those companies when they're underpriced. The fund hold 30 equally-weighted positions.
Innovators come in two flavors: disruptors - early stage growth companies, perhaps with recent IPOs, that have everyone excited and continuous improvers - firms with a long history of using innovation to maintain consistently high ROC. In general, the guys prefer the latter because the former tend to be wildly overpriced and haven't proven their ability to translate excitement into growth.
The example they pointed to was the IPO market. Last year they looked at 180 IPOs. Only 60 of those were profitable firms and only 6 or 7 of the stocks were reasonably priced (p/e under 20). Of those six, exactly one had a good ROC profile but its debt/equity ration was greater than 300%. So none of them ended up in the portfolio. Matthew observes that their portfolio is "not pure disruptors. Though those can make you look extremely clever when they go right, they also make you look extremely stupid when they go wrong. We would prefer to avoid that outcome."
This also means that they are not looking for a portfolio of "the most innovative companies in the world." A commitment to innovation provides a prism or lens through which to identify excellent growth companies. That's illustrated in the separate paths into the portfolio taken by disruptors and continuous improvers. With early stage disruptors, the managers begin by looking for evidence that a firm is truly innovative (for example, by looking at industry coverage in Fast Company or MIT's Technology Review) and then look at the prospect that innovation will produce consistent, affordable growth. For the established firms, the team starts with their quantitative screen that finds firms with top 25% return on capital scores in every one of the past ten years, then they pursue a "very subjective qualitative assessment of whether they're innovative, how they might be and how those innovations drive growth."
In both cases, they have a "watch list" of about 200-250 companies but their discipline tends to keep many of the disruptors out because of concerns about sustainability and price. Currently there might be one early stage firm in the portfolio and lots of Boeing, Intel, and Cisco.
They sell when price appreciates (they sold Shire pharmaceuticals after eight months because of an 80% share-price rise), fundamentals deteriorate (fairly rare - of the firms that pass the 10 year ROC screen, 80% will continue passing the screen for each of the subsequent five years) or the firm seems to have lost its way (shifting, for example, from organic growth to growth-through-acquisition).
The value strategy, Dividend Builder GAINX is a permutation of the growth strategy's approach to well-established firms. The value strategy looks only at dividend-paying companies that have provided an inflation-adjusted cash flow return on investment of at least 10% in each of the last 10 years. The secondary screens require at least a moderate dividend yield, a history of rising dividends, low levels of debt and a low payout ratio. In general, they found a high dividend strategy to be a loser and a dividend growth one to be a winner.
In general, the guys are "keen to avoid getting sucked into exciting stories or areas of great media interest. We’re physicists, and we quite like numbers rather than stories." They believe that's a competitive advantage, in part because listening to the numbers rather than the stories and maintaining a compact, equal-weight portfolio both tends to distance them from the herd. The growth strategy's active share, for instance, is 94. That's extraordinarily high for a strategy with a de facto large cap emphasis.
For those interested but unable to join us, here's a link to the mp3.
I'd be delighted to hear others' reactions to the call.
David

@Shadow & MFO Members: Brown Management was founded by Eddie Brown, a guest on Louis Rukeyser's Wall Street Week for many years.
Regards,
Ted

Hank,I got started late with Roths, I always used IRAs for income reduction in my high income years, later I realized Roths could be an annual source of income in retirement, without taxes...now playing catch up best I can, even doing some conversions, while staying in same low tax brackets,
Bonds have been a cash substitute for me while they continue to bring in earnings, also I keep funds open in all my various accounts for easy movement of cash, from equity sales. drags total returns slightly, but necessary evil/convenience

I'm hoping/expecting to join the call, but here are the questions I have so far.
1. How do you weight the different aspects of innovation against price? For instance, does a longer history of innovation as you view it trump a particularly insightful innovation without the history? And how do you choose between a company that has been particularly innovative but also sells at a smaller discount to your estimate of intrinsic value compared to a company that may not be as innovative but sells for less?
2. How would you describe the difference between the way you evaluate innovation compared to others who offer funds that are also pursuing innovative companies? (a duplication of davidmoran's question)
3. Is your portfolio primarily large cap because your approach to innovation requires a company to achieve a size where they “need” to innovate? Or do you also try to find particularly innovative small or mid-size companies that have the potential to grow much bigger?
4. When you look for innovative companies, or when you’re invested in them, how often is that innovation “people dependent” and how often is it built into the culture of the business? And, for example, if you viewed Apple as particularly innovative “because” of Steve Jobs, would his departure make you sell the stock?
5. Your positions are mostly US companies currently and of your purchases in the last 2 plus years, they've also been two-thirds US companies. Is that balance primarily being driven by where you're able to find innovation or is it just where the price of innovation has been more attractive in the last few years?
Thanks for arranging this! I own the fund thanks to reading about it on MFO and am looking forward to hearing from the managers.

Lord Abbett has two funds, LMIYX and LMVYX, that seem to be institutional in nature but I never trust M*'s purchase information so I'm listing them just in case
Allianz has GMACX that carries a load but maybe there are places you can get it with the load waived
AMG Managers Essex fund, MBRSX, seems to be more widely available and without a load.
DFA has a fund, DFSCX, but I think DFA funds are only available through advisors. M* says its available at Scottrade with a transaction fee but that doesn't make a lot of sense to me considering what I've read about DFA.
RBC offers TMVAX with a load, and the institutional class without a load, but its offered broadly so maybe someone waives the load.
Perritt offers a couple of funds that are on Ted's list, PRCGX (bronze fund at M*) and PREOX
Rice Hall James, who I've never heard of, has RHJSX which seems to be broadly available.
Jacob has a tiny fund, JMCGX, that again I've never heard of but with an expense ratio over 2% and only $13 MM in assets I imagine a guy sitting in his basement managing money for his brother-in-law
Victory Integrity has a fund, MMEAX, that normally carries a load but might be load-waived at Schwab. Alternative class MMECX seems to be more broadly available with a deferred load but a much higher expense ratio
Robeco offers WPG Small/Microcap Value, WPGTX, which seems to be only an institutional class but available at the major fund supermarkets so maybe someone drops the minimum initial investments
Those, along with the Royce and Wasatch funds you mentioned and the Oberweis fund I mentioned, have all been around at least 10 years. It seems Wasatch has a second micro-cap fund, WMICX, that has also been around for 10 years and Royce has an international micro-cap fund, ROIMX that has less than 5 years of history.
Acuitas has a fund, AFMCX, that seems to be offered at Fidelity but there's only an institutional class with $100K minimum, unless someone waives that. History? Less than one year.
AlphaOne has a fund, AOMAX, that's supposedly available at Fidelity and has been around more than 3 years
Ancora has a fund, ANCCX, that is theoretically available to Fidelity retail customers. This is the institutional class, but according to M* it has the same minimum $5K investment, its available the same places, but it has a much lower expense ratio and no 12b-1 fee. It has more than 5 years of history.
BMO has a fund, BMMYX that seems to be available at Fidelity NTF but only $4MM in assets and between 1 and 3 years old
Foundry's FMCIX seems only to be a TD Ameritrade Trust fund so not sure you'll find it anywhere
Ivy has a fund, IGWAX, that seems to have a lot of share classes, but they look like other funds I've research more where those other classes are historical in nature and only available to investors who hold those classes. The symbol I included refers to the share that carries a load which may be waived at a few places like Schwab and/or JP Morgan. History is more than 5 years but less than 10
James has a fund, JMCRX, with 3 years of history but not 5. It seems to be available on most of the fund supermarkets but not without a transaction fee if I'm reading things right (and if M* has their information right)
Morgan Dempsey, another name I've never heard before, has MITYX which seems to be available at a handful of places and for a tiny little fund actually has a reasonable expense ratio
North Star has NSMVX, which has been around for a couple years but M* doesn't even list an expense ratio. Not sure what's going on there
Paradigm has a fund, PVIVX, that seems to be available on most fund supermarkets and has more than 5 years of history
Thomson Horstmann & Bryant, which sounds more like a law firm than a money manager, has THBVX which has somewhere between 1 and 3 years of history
Finally, Westcore has WTMIX which has been around for more than 5 years.
The Driehaus fund I mentioned has only been around a few years. Some of the funds mentioned above, and probably others, didn't come up on my list because they don't have 'micro' in the name. The Franklin funds on Ted's linked list also didn't come up, but maybe they're close because I screened for funds that are open. In theory Grandeur Peak will eventually offer a global micro cap fund and it seems like the consensus has it being later this year but who knows.
Good hunting! Maybe if you tell Duke you're going hunting for a good micro-cap fund he'll be more excited :)
LLJB

FAMFX is micro in market cap and quite small in size. Only a couple of years old and only holds a small number of stocks (23 last time I checked). Not too expensive, either, for a microcap fund.

@TPA - Thanks
What I discern is you are geared for growth and "letting go" won't be easy. Several years into withdrawals (69) I find that aspect much harder than the accumulation stage.
We've continued to grow a bit more than we're taking out. That will change some day of course. I've tried to put larger and larger segments on auto pilot, reducing my ability to muck things up too much by miscalculation. Overall, we're somewhat more conservatively positioned than ten years ago - but not dramatically so.
Your reference to buying Roths is interesting, as is your reference to bonds. Not to criticize or question those choices. Just that it surprised me a little.

Might start "taking" some money this year from some non IRA investments (67yo), figure 20 years of spending Money (should be easy), at same time have to still buy Roth Ira's as much as limited w2 income will allow,
Have developed a withdraw strategy that I have titled "thinning the herd" (patent pending): Really?
Bascially.... investments that are not holding their own (portfolio averages) will go first and thus lower in Gains with no taxes....Big gainers, steady earners and Roth money will be taken as tax schedules/rules will allow for min. payments to the Gov.(taxes) , Risk control will be mainly by Bond adjustments if Equities get into trouble... Spend less? probably not....
Not perfected but a starting plan for 2015....Will SEE

Interesting that in his personal portfolio, Eveillard owns "just over 15%" in gold bullion/gold equities, and he owns NO bonds......
He is always cautious and quite risk-averse, always has been by nature.
And that's how he ran his fund for 25-30 years, SGENX, which had a great risk adjusted return under him. He won a lifetime achievement award by Morningstar, and also a Manager of the Year award.
In the bear market of 2000-2002, his fund was up 10% in each of those 3 years.....
Eveillard is also a person of high moral character and concern for people.

"As senior columnist Jeff Benjamin wrote in last week's issue, any portfolio that earned a return equal to the Standard & Poor's 500 return was assuming too much risk. A diversified portfolio in stocks and bonds should have returned less than 5%"
Lets hope Jeff is not also a financial adviser (wizard), because if HE couldn't get more than 5% out of the market the last 6-7 years, he would be writing investment articles for a living......OH he is...sorry

Charles, you are among the nicest and most down to earth posters on this board. You never speak ill and always even tempered (unlike me sometimes) and when your holdings have a bad day you don't try and hide or make excuses. I for one hope you prosper and thrive over the coming years and show that good guys can indeed finish first - contrary to the phase sometimes attributed to Leo Durocher that goods guys always finish last.

>> Guinness Atkinson Global Innovators is the #1 Global Multi-Cap Growth Fund across all time periods (1,3,5,& 10 years) this quarter ending 12/31/14 based on fund total returns. They are ranked 1 of 500 for 1 year, 1 of 466 for 3 years, 1 of 399 for 5 years and 1 of 278 for 10 years in the Lipper category Global Multi-Cap Growth.

Interesting they lean on that, both the global category and the legacy timespan.Their US / non-US ratio in M*'s terms is higher than, say, the almost multicap FLPSX, and, as you note, the Brits (physicists) have been involved for the last 5 or 4 good years (the latter did join the firm 9y ago). More pertinent, since everyone loves (successful) innovation, yay, or comes to do so at least when it results in profitable sales --- the appeal as self-evident as motherhood and pie --- the second bullet is key to quantify: How, specifically, do they decide? What do they do that others do not do, macro trends or deep diligence or otherwise? Everybody wants to own winning innovators.
Should be an intriguing conversation.

@David_Snowball The past several years have been so challenging/treacherous for EM managers. I don't expect their predicament to improve any time soon. It makes it difficult to assess the relative performance of any of the new offerings in this space (there is only one fund I am watching closely). But, as you point out, and my impression of the Artisan offering is the same--- I think they could do better.
In that vein, some of the reasons for recent PM challenges in the EM space were just adumbrated by Andrew Foster yesterday, in his Qtr4 commentary. As usual, and as we've come to expect from him, he provides some concise detail on the "forces of contention" swirling in the world, as well as some specific suggestions to what he thinks we, as investors, should pay most attention. [and, yes, I suspect you will finish his essay and sigh, "now, was that so hard to do? when will other PMs come to Jesus on this?]
http://updates.seafarerfunds.com/t/r-l-qphhyk-nhulltujr-b/

i would like to hear more about GAINX. the fund has been around for over 2 years and doesn't seem as a resounding commercial success @ just $5.5mm. Thus here my questions, if i may:
• Since the fund expenses are being heavily subsidized, for how long are they willing to continue without assets?
• GAINX has “dividend builder” in its name. What if a current holding has an attractive yield – due to its share depreciation (not just in sympathy with the market movement, but due to the company-specific issues) – would they retain the holding?
• Related to the above: Would they consider protecting ‘total return’ or do ‘dividends’ take priority?
Thanks. fa

Actually the other "Bruce" fund (BRUFX) has outperformed FAIRX significantly over the last 15 years with much less volatility (16.56% annualized). I invested some Roth IRA money in BRUFX about 10 years ago and sort of forgot about it. Surprised at how it has grown since then.

Easy...
1) the BEST manager you can find
2) only the best Companys as holdings
3) higher than catagory/market returns over long periods.... at least 10 years
Then you have a winner

Hi @ron
PRAIX is an "enhanced" TIPs fund at this time; with all the "adjustment" tools available with many Pimco funds. I know you are aware of this, too; if this is what you want to add to your mix.
We maintain our holding of PIMIX; although the fund is having a rough start to this year, but is hopefully adjusting as this current crazy bond market moves along. But, PIMIX has been fairly steady/smooth relative to some other bond funds. I have placed this fund with the one you mentioned and two others for reference.
Hopefully, this chart will be viewable to you in the 3 year mode. NOPE.....didn't link the 3 year this time...........drag the left end of the 200 day slider to about 750 days for a 3 year view.
Are you willing to list your other bond funds or bond holdings for an overview.
Away to upgrade our modem here and hope that this goes well.
Chart of PIMIX v PRAIX v TIP v TLT past 3 years.
Take care,
Catch

In four years, AUM has gone from $18.8B to $6.6B. At that rate he only has a couple of years left to prove he is right.

Interesting to do a search for international (blend, growth, value) funds that are in the top 15% for 1,3,and 5-yr periods. Only four funds show up, and only two of those have had the current manager at the helm for five years: Ivy International Core Equity and Great-West MFS International Value. Ivy's John Maxwell has done outstanding work, under the radar, since he came to the fund in 2006. We use ICEIX, but IVVYX may also be available. Unfortunately, Maxwell's fund is not on the Fidelity no-load platform. You may have to work hard to find the fund and not pay a commission. But worth a look if you do.
Other managers worth checking are Bernie Horn from QFVIX, Mark Yockey from ARTMX, and Walter Bean/Daniel Peris from IVFIX. The latter is particularly interesting if you like to emphasize dividend yields, which is an attractive 4.97% and has a very low 11% turnover.

".even, Eddie Lampert, who he knows is no longer regarded very highly by public."
Well, at least he realizes that.
"And, to Scott's point, on when BB may have turned. I believe it was 2011 and he went all financials."
I understand that some people don't like diversification. However, I'm not going to sit and trade all day. Neither is a mutual fund.
I like Visa (to use an example.) Actually, I really like Visa. However, I would not want Visa to be half my portfolio. I have a good deal in various themes (credit cards, rails, etc.), but there is an attempt to orchestrate the portfolio so that I don't start feeling like one theme wholly and completely dominates daily, weekly, monthly or yearly performance. I really would not want to be so heavily reliant upon one name, either. This is just me, but if I saw a mutual fund I owned with half the portfolio in one name, I'd be out of it.
When you have a mutual fund like Fairholme set up like it is currently, the manager is asking for a level of belief that I don't think most investors in this day and age have, as these bets are going to take a long time to play out. Or are taking longer to play out than thought. Or in the case of Sears will play out when pigs fly.
It's almost better set up as a hedge fund where people are locked in until the occasional redemption period. Berkowitz saying that those invested with him now are "in it for the long haul" is laughable. When you have a fund whose performance is based largely around a few long-term bets (including one that is highly risky from the standpoint of its half your portfolio and the same company you said you'd walk away from in 2009 because you didn't understand its derivative book), once the performance starts to lag for 1,3 and even 5 years (people can't tolerate under-performance for 3-6 months in this day and age), people exit. I can't believe FAIRX still has the AUM it has, but it's down.
Mutual fund holders aren't going to wait for your thesis on Sears to play out. There's been so many examples of flight from star managers (Heebner and CGM Focus, which I still say was over-and-done once Cramer called it his favorite mutual fund on a morning TV show) that that should be obvious to anyone in the industry.