Little Hug Here Too.
Long/Short ideas from Otter Creek OTCRX YTD +2,51 1 Yr +12.26
From Jan 20th 2016
THE MACRO and MARKET ENVIRONMENT: CONCLUSION
Framing the macro environment
•
US is a bifurcated economy
(+) Favorable consumer trends (labor, low gas prices), we believe the age of government austerity is over
(-) Downside risk from prolonged slump in industrial and commodity activity, weaker survey data
•
Global growth will likely remain challenged, more downside risk to growth than upside in the near term
•
The decline in global trade volumes is concerning
•
We believe high levels of US denominated debt in emerging markets will continue to weigh on growth
•
Uncertainty around the Fed’s rate cycle (the “dots”) will lead to ongoing volatility
•
Yield curve has not inverted (inverted yield curve has predicted every recession since 1962)
•
The “goldilocks” credit environment is a thing of the past
•
We expect large scale bankruptcies if commodities remain weak, this could force a repricing in risk assets
•
Many developing markets go through a cycle of increasing non-performing loans which could weigh on credit growth
Framing the markets
•
Market valuations appear full, especially relative to sales and earnings growth recently
•
The low market breadth is concerning, leading indicators of the economies health (transports) making new lows
•
Ex. energy, there is moderate earnings growth, margins have likely peaked, but forex headwinds should abate
WEBCASTS
January 20th presentations
http://www.ottercreekfunds.com/index_webcasts012016.html
Audio - January 20, 2016
http://www.ottercreekfunds.com/media/pdfs/Q42015_CC.mp3

MWHYX 31 Dec 2015
https://www.tcw.com/~/media/Downloads/MetWest_Funds/Monthly_Characteristics/Monthly/CHAR_HYB.ashx
defensive posture
12% cash
9% IG stuff
keeping duration relatively short

That extra 1% by not rebalancing resulted in a stark difference with the non-rebalanced portfolio worth more than double the one which was frequently rebalanced at the end. I'm shocked 1% compounded could make that kind of difference.
However, from 1926 - 2009 is a longer investment horizon than most of us have (approximately 83 years). To achieve the identical result one would need to have accumulated all the money initially invested by age 12 and than to have waited until age 95 to withdraw a single penny.
Anybody here fit that description?

MWHYX, per the last report, as of the end of Q3-15, had a little more than 16% in commodity energy. Maybe they sold a lot of that since, because the fund has done pretty well YTD; either that, or they made some really good picks in energy overall.

Below are some 2015 risk/return metrics for the M* winners.
The loaded American fund ANWPX is probably my only real disappointment, but I feel that way about all loaded funds ... especially American's since they have highest number of share classes of any fund house.
VWINX and BCSIX hold dual MFO Great Owl and Honor Roll designations.
PTSHX is an Honor Roll fund.

FYI: Recent events have served up a not-so-gentle reminder of the perils of investing in exchange-traded notes.
Regards,
Ted
http://news.morningstar.com/articlenet/article.aspx?id=737584

May be the problem with this fund is more than just mark-to-market which can be temporary or indicate a problem with the investment thesis. Does one understand the fund enough to take a bet?
I am noticing a pattern in the forum of people getting into new unproven funds and getting burned. I like this investor behavior when they fund startups but are you sure you aren't playing VC to mutual fund startups but without the high upside? :)
The fund going down more than 1% for a 2% markdown implies they are more than 50% in CLOs. Is that what you signed up for? The response mentions that the notes in these CLOs are senior bank loans. So are the notes in most Floating Rate bank loan funds. But that isn't the whole story. The CLOs have tranches with a pecking order. Insurance companies typically take the most senior tranches for less risk and lower rates, hedge funds somewhere in the middle and the yield hungry mutual funds and investors the junior tranches with the highest rates but with most risk. Did the material he sent explain this and where they stand? Otherwise, the statement he made could be misleading even if unintentional.
From a due diligence perspective, the two senior managers came from WaMu when it collapsed in 2008-09 and were in their mortgage division. May be they were the two guys who were not involved at all or have learnt from their mistakes and getting a do-over with Collaterization 2.0. Or may be not if they are doing so with your money.
I also note that this company has affiliates that have started to originate securitization of subprime mortgages with the same individuals involved. Nothing wrong with that on its own especially if they have learnt from mistakes before. But the fact this company is on both the supply side and the demand side of this securitization would make me nervous even if in theory they have all the safeguards to keep things at arm's length and fiduciary responsibilities, governance boards, etc to prevent misdeeds. In theory.
I apologize if I come across as criticizing the choice. I am not trying to. The above is the kind of minimum thinking and due diligence an investor does when deciding whether to invest in a startup. Perhaps it is being in that world that makes me more conservative in my fund investments. Without sufficient information to decide one way or the other, one avoids a particular investment in the same way one keeps a respectful distance from a car that appears banged up while driving. You don't know if the driver is responsible but don't have sufficient upside in testing their driving skills. You don't owe them the benefit of the doubt.
Do we really need to invest in such funds?
PS: Please redact the personal phone numbers of the guy who responded to you out of courtesy. It is unnecessary and bad for them when such things float around from their private emails in searchable internet content. Thanks.

I was fortunate enough to get a follow-up reply from Angel Oak to this email:
May I ask one more question? How disruptive to the fund’s daily operations is the large outflow of assets that have occurred over the past four months? As of 9/30/15, the fund’s assets stood at $421MM. As of today, they stand at $323MM (per Morningstar). Has that resulted in the fund selling more of its liquid holdings and left the fund with a greater risk of illiquidity? How close is ANFLX to a Third Avenue fund situation?
Thanks again for your feedback.
Mike Edwards
Angel Oak's response follows:
That’s a great question, Mike. Fortunately the spreads on our bonds hadn’t widened out when we started seeing redemptions, so it wasn’t difficult to meet them organically. There was no forced selling of bonds like you saw in some hedge funds last year.
Back in the beginning of the fourth quarter, we also saw the signs that credit markets could get even choppier than they were in July and August, which initially effected high yield due to oil selling off. When we saw those signs, we got conservative in our cash management. As of 12/31 we held roughly a ~17% position in cash. We raised this by minimizing our CMBS position, which we fortunately were able to do before spreads really started widening in that space. In terms of how we are on liquidity, we basically traded very liquid CMBS for cash, so it’s roughly a net zero sum trade off.
I am happy to say we are nowhere close to where Third Avenue found themselves last year. While we are a credit fund, we invest in considerably different areas than where Third Avenue traded. Third Ave basically was reaching into deeply distressed areas of credit where it could take a lot of time for the trades to come to fruition. Unfortunately for them, when they started seeing redemptions, they could only sell what the street would buy – i.e., their liquid positions. They were left with roughly 7 illiquid positions including deeply distressed restructuring deals which were trading at pennies on the dollar. An interesting tidbit, In typical wall street shark fashion rival traders at hedge funds were shorting a lot of their positions because they knew they were going to see redemptions and would be forced to sell quickly at incredibly wide levels given their mutual fund/daily liquid structure. It’s definitely a cautionary tale that the market has witnessed – they were really doing a hedge fund trade in a 40act fund. Returns were great for a time, but when things got bad it was evident why a less liquid vehicle is important for those types of distressed trades that take a long time to see the result of an investment.
To contrast what we do to Third Ave, most of the bonds we buy have embedded credit enhancement or aka principal protection. On our CLOs, we have roughly 8-15% credit enhancement, depending on the deal, meaning we could see 8-15% losses annually before we saw a dollar in principal loss – we believe that gives us a lot of insulation from credit events. To give you an idea, historical default rates in CLOs are around 4% and during the crisis they peaked at 9%, so in short we can say with fairly relative certainty that these are money good bonds. Unfortunately they can see some mark-to-market volatility like yesterday.

Here is an academic study that looked at valuations of corporate bonds by mutual funds
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1104508

After today will be up to around 6% in the junk corps with 84% in the junk munis and the rest in cash. Would like to sell some of the munis to get heavier in the corps if the market cooperates by working higher. Then again, the worst may be yet to come in the corps if the *experts* are correct. And as we know, the *experts* are never wrong.
Edit: Make that 8% junk corps.

Today is looking like the 5th consecutive day of gains in the junk corporates (and no, HYG and JNK don't tell the story) Quite a divergence from equities. Some of the better open end are down less than 1% for the year. Not exactly the crash we have been lead to believe that is occurring in that sector. Will be interesting to see if the cash market gains continue after the Fed meeting. Will be lightening up on the munis. My meager 8% exposure to the corps may have to be increased quite a bit.

Sorry, Chuck ... but you're no Jason Zweig. His 2015 "Devil's Dictionary of Finance" is a must-read. This was a thinly-veiled homage to that at best. Useful, sure -- but clearly trying to horn in on his work.

FYI: The inauspicious start to the year coincides with the time when mutual fund managers are writing their annual notes to shareholders. Now a manager must explain average or mediocre results from 2015, as well as allay the rising fears shareholders have after 2016’s rocky start.
Yet too often there’s a difference between what fund managers say and what they mean. Knowing the catch phrases and double-talk can help you determine if your manager has courage in their methods and convictions, or are spewing sewage.
Regards,
Ted
http://www.marketwatch.com/story/what-fund-managers-say-about-your-money-isnt-always-what-they-mean-2016-01-27/print

I should have monitored their AUM, perhaps it was sending us a clue: $421MM on 9/30/15. It is now $327MM. A drop of 22% in less than four months for a bond fund!

Got my lesson 3rd Q 2015
Bought ANFLX on 9/18/15 out 01/11/16 @-2.37% loss
Sep 30, 2015 10.08 Close
Sep 30, 2015 0.04 Dividend
Sep 29, 2015 10.24 Close
https://finance.yahoo.com/q/hp?s=ANFLX&d=0&e=26&f=2016&g=d&a=10&b=3&c=2014&z=66&y=66
Down today ????
Angel Oak Flexible Income Fund Class A
(MUTF:ANFLX)
9.66-0.12(-1.23%)
Jan 26, 4:00PM EST
https://www.google.com/finance?q=MUTF:ANFLX&ei=rA6oVsnHCsLlmAG836_gBw

FYI: Check out the winners, and discover what makes them stand out.
Regards,
Ted
http://news.morningstar.com/articlenet/article.aspx?id=737661

Here is a reasonable recap of the company:
https://www.washingtonpost.com/news/to-your-health/wp/2015/10/16/a-comprehensive-guide-to-theranos-troubles-and-what-it-means-for-you/
press

I believe I read Theranos is using Walgreens in the AZ area as a test market for some of their services (ie low cost blood tests).
walgreens.com/pharmacy/lab-testing/home.jsp

I've been following Theranos for awhile now, as its technology has the opportunity to be uniquely disruptive to the delivery of healthcare services both inside a hospital/clinic environment and outside as well.
The technology does have a 'black-box" quality to it, as it hasn't gone through routine peer review testing, but is relying instead on the FDA for this verification. This has a local flavor for me, as the Cleveland Clinic stepped forward to establish a partnership with Theranos, with the Clinic doing this testing and verification external to the FDA.
If this turns out to truly be a viable technology and the company goes public, it may be the most anticipated IPO in years.
Here is a reasonable recap of the company:
https://www.washingtonpost.com/news/to-your-health/wp/2015/10/16/a-comprehensive-guide-to-theranos-troubles-and-what-it-means-for-you/
press

FYI: Some mutual funds within 401(k)s are just toxic. They eat up your nest egg through poor performance and high fees. You need to identify them and dump them.
Regards,
Ted
http://www.forbes.com/sites/johnwasik/2016/01/25/how-to-purge-your-401k-of-toxic-funds/print/

Our colleague Sam Lee profiled beautifully these two young AQR alternative funds last September:
http://www.mutualfundobserver.com/2015/09/aqr-style-premia-alternative-i-qspix-aqr-style-premia-alternative-lv-i-qslix-september-2015/
Here are their risk/return numbers through December ... both have been eye-watering:

The Fairholme Focused Income Fund and The Fairholme Allocation Fund Reduce Minimum Investment Amounts from $25,000 to $10,000.
http://www.fairholmefundsinc.com/Bulletin/FOCIXFAAFX20160125.pdf