FYI: Watch for American Century's [profile] new ETF team to expand in 2018.
Ed Rosenberg, head of ETFs at the Kansas City, Missouri-based mutual
fund shop, confirms that he's "interviewing for some sales roles" on
his team.
Regards,
Ted
http://www.mfwire.com/common/artprint2007.asp?storyID=57421&wireid=2

Hi @Old_Skeet
You noted: "Probally, small will lead large as we enter 2018 up towards spring. Then large will lead small through the summer and into fall. Come fall small will again become the leader."
And the reasoning behind this scenario?
Thanks,
Catch

I'm thinking both asset classes will do well in 2018. Probally, small will lead large as we enter 2018 up towards spring. Then large will lead small through the summer and into fall. Come fall small will again become the leader. With this, I am not sure which will have the better overall year. Old Skeet has a good representation of both (domestic & foreign).

Will small or large cap stocks be the winner in the new year, that is assuming one or the other will be the best place for stock invested dollars?

FYI: Wall Street doesn’t expect technology stocks to repeat 2017’s banner year that has seen the sector return almost twice as much as the S&P 500 index. After four consecutive years of outperformance, tech companies face mounting concerns about the potential for increased government regulation and continued rotation by investors into higher-taxed industries as a result of U.S. tax reform. Most analysts see the bull market continuing, but at a less ferocious pace. Here’s a look at their predictions.
Regards,
Ted
https://www.bloomberg.com/news/articles/2017-12-20/party-s-over-for-tech-stocks-as-outlook-grows-cautious-for-2018

Since there has been much talk about value investing overseas, I thought I'd mention this one run by Brandes alumni as it has some of the lowest valuation metrics out there. It's too small and new really for me to write a profile of it, but it seems perfectly suited for discussion here. Also, interestingly and refreshingly, it is run by women, a rarity in the fund world. It's underperforming this year as deep value has lagged, but beat the pants off the market in 2016:
portfolios.morningstar.com/fund/summary?t=METAX&region=usa&culture=en-US
performance.morningstar.com/fund/performance-return.action?t=METAX&region=usa&culture=en-US
https://metisgp.com/metis-team/

Hi @Mitchelg
You note a good point about flexibility with some investment houses. Several years ago I had a "finger problem" combined with a "too busy of a day syndrome" with a Fidelity purchase. I bought a Fido fund I had not intended to purchase. The fund happened to be one with the 60 day holding period or a 1% sell fee would be subtracted. I didn't realize the purchase problem until the next day. A phone call explaining the error removed the errant purchase and no fees were attached. Customer service/relationship has always been a most positive experience for us with Fidelity.
Never hurts to ask, eh?
Regards,
Catch

High yield and junk bonds, active or not, do not fare well in down market as many investors sell at the same time. The risk is illustrated by Dan Fuss of Loomis Sayles Bond fund where the fund lost over 30% in 2008 due the lack of buyers of junk bonds and too many sellers. Each day the bond price kept falling as they are marked to market. In the meanwhile, the total bond index rose for several % that year.
For disclosure, I had a small holding, <1% in Loomis Sayles Bond in the beginning of 2008, and held on to it as it declined and recovered strongly in 2009. Lesson learned for sure.

A nice piece by Grantham who pretty much covers the bases in his suggestions. And I get the feeling he’s as befuddled by today’s equity markets as I am. Makes a lot of different suggestions depending which way markets run. I get that he likes EM. The problem with those kinds of suggestions is they can take years to pay off. Might double next week. Might also fall 25% in a year before rebounding and rising 50% over 6 months. Not for the conservative investor.
One of his suggestions is “liquid alternatives” - which Investopedia loosely defines as hedge funds for the little guy (low minimums and few restrictions on redemption) - as the answer to the conundrum he sets up. But, with these you’re paying a ton in management fees and are highly vulnerable to the decision making of the manager. I’m not convinced most are any better at guessing which direction to lean toward at any given moment than most of us are. Some get it right. Many don’t. A change in manager can spell disaster for a previously successful fund. Shorting equities costs the fund additional money in the form of interest and also increases risk. So I’m not a fan of liquid alts.
@bee - The knock against PRPFX has always been that as an individual you can purchase the bonds, gold, silver, natural resource stocks, Swiss Francs, real estate and aggressive growth holdings (and in the same proportions) cheaper yourself than paying Mr. C to do that for you. My answer is: Yes you can. But who among us has the time, resources and wherewithal to do all that - and than to rebalance it all periodically? If anyone here is replicating the fund on their own, they haven’t voiced it. I don’t know what the “right” amount is for that type of holding. I hold a bit - and sleep very well on it. Guess it amounts to something like 5-10% of my total. Content to leave it alone and take distributions elsewhere. I do consider it something of a liquid alt - but not as normally viewed or defined in the investment community.

"The momentum factor utilized by academics typically looks at the previous three, six or 12-month performance and buys the securities that have performed the best."
Momentum strategies are very hard to build. It's a lot more complicated than the article suggests. And they are fraught with danger, as high-flying stocks can sell off hard.

explain your disagreement.
https://www.bloomberg.com/news/articles/2017-10-05/this-is-how-to-create-the-top-emerging-markets-etf

The word "value" doesn't appear once in that article.

It would take a major correction for EMQQ to be considered a "value" play. The fund is exclusively Internet and Ecommerce companies, which gives the fund and significant growth bias...

FYI: Since I wrote this piece for Bloomberg in late-October there has been an additional 14 new all-time highs in the S&P 500. I’m often asked why the market continues to trudge higher in the face of so much uncertainty in the world. The simplest explanation is this idea of momentum. Momentum is by far the best performing academic risk factor in the markets historically, but it’s not always so easy to take advantage of and most investors don’t understand what it actually is. This piece takes a deep dive into what the momentum factor is and details some of the struggles the fund world has had in capturing its risk premium.
Regards,
Ted
http://awealthofcommonsense.com/2017/12/the-pros-cons-of-momentum-investing/

Whenever you read expressions like "innovative" and "sets itself apart" (here, "in that the minimum management fee goes to zero if the funds don’t outperform their benchmark"), you should be wary of hype.
Here's what M* had to say: "It's a rare [but not unique] situation in the industry. The performance fees of most other funds that levy them are structured in a way that makes a negative or zero net expense ratio mathematically impossible."
It wasn't writing about these funds. That's a quote from 2011, where M* was describing Bridgeway Funds. The title of that article was "Bridgeway Pays Shareholders to Invest, for Now". Bridgeway reduced management fees so low (well below zero, unlike Allianz) that the total ER of two funds were 0.00% or less.
Basing a performance fee on a twelve month performance is akin to companies jiggering quarterly performance to keep the market happy. A year is too short a period of time to allow a manager's strategy to play out. Instead, it encourages window dressing and conservative investing if the fund is slightly ahead, and excessive risk taking if the fund is way behind.
As noted in this CBS Moneywatch article also about Bridgeway in 2011:
"[Bridgeway's] aggressive performance fee ... is calculated on the fund's average assets over the trailing five years, instead of the more common three years".
Funds don't generally use one year performance figures. For example, Fidelity uses a rolling 36 month period to benchmark performance.
See also Barron's Should Fund Managers Get Paid for Performance

Appendix: I struggled to uncover the options trading in which PRWCX engaged at one point. Geez - had to go way back to their December 31, 2011 Annual Report to locate it.
FWIW - “Before we review the portfolio, we want to briefly discuss the Capital Appreciation Fund’s covered call overwriting strategy, which we have employed for more than three years. Covered call overwriting involves buying a stock and then selling a call option—a contract whereby we agree at a future date to sell the stock at a predetermined (strike) price if the stock is above the predetermined (strike) price. In return for selling this call option, we are paid a premium (typically 3% to 6% per annum) that provides extra income to the fund and its investors. While this strategy caps our upside in an individual stock (usually 10% or higher), it provides incremental income that can enhance total returns and lower our downside risk. Over the last three years, this strategy (return combination of underlying stocks, call income, and dividend income) has generated a stronger return than the fund itself and has done so with materially lower risk. As of December 31, 2011, a little more than 20% of our equity holdings have calls written against them. Given the excellent returns and even more excellent risk/reward profile of this strategy, we believe it will continue to play a meaningful role in your fund.”

Good find @Hank!!

FYI: The Polen U.S. Small Company Growth Fund (PBSRX) intends to base the management and make-up on the existing U.S. Small Company Growth strategy. The Fund’s strategy aims to outperform by investing in stocks of businesses that the adviser believes are positioned to capitalize on long-term growth opportunities and have strong financials, a sustainable competitive advantage. We also focus on the potential for durable five-year earnings growth.
Regards,
Ted
https://www.businesswire.com/news/home/20171219005516/en
M: Snapshot PBSRX:
http://www.morningstar.com/funds/XNAS/PBSRX/quote.html
Polen Capital Management Website:
https://www.polencapital.com/pdf/Media/USSmallCompanyGrowthMutualFundLaunchPressRelease.pdf

FYI: Allianz Global Investors (AllianzGI), one of the world’s leading active investment managers, announced today the launch of the AllianzGI PerformanceFee Fund suite of products offering a performance fee structure in which the management fee goes to zero if the funds don’t beat their benchmarks over a rolling 12 month performance period.
Regards,
Ted
https://www.businesswire.com/news/home/20171219005678/en

FYI: Mark Hulbert, a fellow MarketWatch columnist and respected observer of the financial advising business, recently wrote a thoughtful critique of the massive rush to index-style investing.
I just wish the headline had been different.
Regards,
Ted
https://www.marketwatch.com/story/jack-bogle-to-investors-avoid-these-junk-etfs-2017-12-19/print

FYI: Dave Nadig of ETF.com sends the following along from a friend — the original author is anonymous:
Regards,
Ted
http://ritholtz.com/2017/12/prayer-saint-active/

@bee Interesting observations. My hunch is the most likely outcome for China is that they will continue to muddle through -- at least in the short to intermediate term. But your concerns make sense to me. Andrew Foster shared some interesting thoughts about China in a recent shareholder letter ( http://www.seafarerfunds.com/letters-to-shareholders/2017/10/semi-annual ). He is likewise concerned/disappointed.
It does not make sense to me to focus on Japan until the crisis in Korea resolves itself. I remember from a few decades ago how short the boat ride was from Japan to Korea. Unfortunately, by missile the ride would be very much shorter. Both Korea and Japan seem quite risky to me at present.
Your pondering about whether it is time for PRPFX is interesting. Last summer I began to decide what to do with a pot of new cash derived from the sale of a "winter" house. In July, in part using the sort of thinking you presented in a recent post about high yield, I made the following investments: MCRDX = 12.5%, PONDX = 12.5%, IOFIX = 16.7%, RPGAX = 16.7%, and GDMZX = 16.7%. Since then I have added DSENX = 6.3%, WEMMX = 6.3% and SIVLX = 7.5%. That leaves 5% which will probably soon become MEASX. All but 2 of these investments represent increases to existing holdings. This results in about 40% in stocks with about 45% of that foreign. (I allot the bonds in DSENX to the domestic stock percentage given the benchmark DSENX ties itself to.) Bonds are a little over 50% of this pot. It will be interesting to watch how this "pot" of new investments performs going forward. Its about 10% lighter in stocks and 10% heavier in bonds than the rest of my portfolio.