Dear friends,
The season of darkness and light is upon us, which is a pretty good signal that the December issue of the Mutual Fund Observer has launched. You can find it at http://www.mutualfundobserver.com/issue/december-2016/
If you prefer the long scrolling read, that's available at http://www.mutualfundobserver.com/2016/12/
Highlights of our December issue include:
Snowball’s reflections on how to react to the fact that five major U.S. equity indices reached all-time highs at the end of November (short version: the last such occurrence was 12/31/1999, which implies a degree of circumspection is in order) and to the fact that Donald Trump is president-elect (short version: don’t).
Leigh Walzer, president of Trapezoid LLC, starts with the premise that investment risks are now tilted strongly toward inflation but that traditional inflation hedges (e.g. TIPs) are unattractively value. As he models superior alternatives, he offers up the surprising possibility that modest doses of small cap funds might well make a major difference.
Ed Studzinski has far more extensive investment experience than the rest of us and often pursues matters into the thickets. This month he looks at not-quite criminal misstatements of qualifications in a case surrounding a royalty trust to raise the prospect that we need to be a bit less credulous when our managers are introduced to us, then recommends James Cloonan’s new Investing at Level 3 for its cautions on conflicts faced by mutual fund directors. He ends by encouraging folks to learn from Yale’s David Swensen’s advice, don’t hire managers who seem bewildered by their own portfolios.
Many of us have portfolios that have sprouted funds like a garden sprouts weeds; Charles Boccadoro offers another tutorial on how to systematically assess and simplify a portfolio, using a friend’s USAA collection as a guide.
One of the great virtues of scholarly writing is that it’s valued for its care and precision, not for its ability to generate clicks or get the author invited onto some Fox Business show. That sometimes masks the fact that really important insights are available, if only you’ll look for them. This month Snowball highlight’s three of the most interesting bits of research from 2016: (1) the largest sample of funds ever assembled offers evidence that small funds consistently outperform large ones, (2) a study of over 3000 fund management teams finds that intellectual diversity on the team is a major predictor of performance and (3) an examination of the behavior of 7000 German individual investors shows that introducing ETFs into a portfolio drives performance down. We offer summaries of what each scholar did and found, and how it might affect you plus there’s a link directly back to the original.
Mark Wilson, the Cap Gains Valet, offers a short Thanksgiving reflection on the cap gains season: less pain, more time with family.
Snowball profiles the best small cap fund you’ve never heard of. Really. 20 year record. Same manager. Asymmetrical risk-return profile over the last 3 years. And the last 5. And 10. And 20. It’s never made it to the top of the hot, hot, hot list but continues offering what you need: reasonable gain, minimal pain. (And it’s from Nebraska.)
Like Leigh Walzer, T. Rowe Price is worried about instability in the world economy and in the fixed-income market, which led them to launch a new fund at the beginning of November. We offer a first look in our Launch Alert for T. Rowe Price Total Return.
One development that’s not important to you yet, but might soon be, is the decision of former Wasatch manager Laura Geritz to launch her own advisory firm in partnership with her former Wasatch colleagues who launched Grandeur Peak. We spoke with Eric Huefner of Grandeur Peak to give you a clue of where that partnership is going.
But wait, there’s more! We detail 36 fund liquidations that make sense, and three or four that don’t. Chip tracked down 50 manager changes, one of which might be portentous. We found only a few funds (and one really irksome ETF) in registration. And, well, stuff. There’s other stuff, too.
We hope you enjoy it all in the December Mutual Fund Observer at www.mutualfundobserver.com!

Oppenheimer does this all the time. Don't know if this clause exists in all their Prospectuses, but it's certainly in many. The following excerpt is from the Prospectus for their Flexible Strategies fund. The same setup (Cayman Islands Subsiderary) was used with my Commodities Total Return fund (QRAAX) before it crashed and burned last spring. Hmm ... I haven't seen anything like this from my other fund houses. I supposed in the past that with Oppenheimer it was either (1) a tax-dodge or (2) some way of their limiting liability from disappointed investors (of which they've had many). Just a guess.
(Excerpt) "ABOUT THE FUND’S WHOLLY-OWNED SUBSIDIARY. The Subsidiary is an exempted company incorporated with limited liability under the laws of the Cayman Islands and is overseen by its own board of directors. The Fund is the sole shareholder of the Subsidiary and it is currently expected that shares of the Subsidiary will not be sold or offered to other investors. If, at any time in the future, the Subsidiary proposes to offer or sell its shares to any investor other than the Fund, shareholders will receive 60 days’ prior notice of such offer or sale and this prospectus will be revised accordingly."
https://www.transamericaannuities.com/media/PDF/MerrillLynch/Prospectus/IRA_Annuity/Oppenheimer-Flexible-Strategies-Fund.pdf
PS: Oppenheimer's operations in many respects offer a stark contrast with those of T. Rowe Price. I've owned a few class A shares there for near 20 years. I'm planning on dumping them in a few more years. I converted to a Roth in early '15 and prefer to leave that money with them until the 5-year holding period is met (just my intent - not a requirement).

A big advantage of commission free ETFs for advisors is that you can split up your trade into many smaller pieces so you have less market impact. Let's say an advisor wants to buy 10,000 shares. Instead of entering one order for 10,000 shares which will move the market, he can enter 50 trades of 200 shares each, spacing them out over time. Even for a larger account, saving 50 commissions is a sizable amount.

@Alban - I don't know why AF created fully owned subsidiaries. Maybe it gives them more legal protection? What I can offer is their 2012 SEC filing where they requested exemption from some rules so that they could run their funds this way:
https://www.sec.gov/rules/ic/2012/ic-30150.pdf
In that filing, they say (item #6) that from the investor perspective, "the roles of the Adviser and Wholly Owned Sub-Adviser(s) with respect to the Fund will be substantially equivalent to the roles of an investment adviser and its portfolio-manager employees under a more traditional structure". Exactly what you described. So from the perspective of running the funds, I don't think this structure has any effect whatsoever.
However, one of the exemptions they sought was to avoid reporting how much these subadvisors were paid (under the rationale that, hey, it's all one big Capital Group business, and investors don't care about the internal workings); that's in #5.
Likewise, they don't need to get shareholder approval if a fund switches from one internal subadvisor to another. That's #4.
Finally, here's the SEC response, approving these exemptions:
https://www.sec.gov/rules/ic/2012/ic-30173.pdf

Confirming your statement about AF that they're marketing experts. Didn't matter whether the F shares did anything new, they were sold as "new and improved".
I took a quick look at EuroPacific Growth. The first prospectus in which class F shares appear (3/15/2001) shows expenses of 0.46% (management) + 0.25% (12b-1) + 0.21% (other) for a total of 0.92%.
The prospectus from ten years ago (6/1/2006) shows expenses of 0.43% + 0.25% + 0.16% for a total of 0.84%.
The current prospectus (6/1/2016) has class F-1 figures of 0.42% + 0.25% + 0.19% for a total of 0.86%.
It is true that the F (now called F-1) shares tend to run a few basis points higher than class A shares. The difference is entirely in "other expenses", and I've always guessed that's because the share classes hit slightly different target audiences and the servicing costs are slightly different, though not enough to complain about. Maybe expenses have gone up in the past ten years for some other AF funds. Maybe even most of them. But not for my limited sample of 1.

Some may recall I got burned a bit pulling my 2016 distributions early in the current year. What a bum start we had. Learned my lesson. Been shifting a little at a time into ultra short as things move up. Can still pull it out in Jan. as a '17 distribution. (PRNEX - the gift that keeps giving.) As luck would have it, I'll probably wish I'd waited longer. Never can predict these *##** markets. :)
What a strange day. Doubt if anything outside energy is doing well in the equity end. NAS down big time. If I was a bond person, I'd probably be dabbling in something now after the rout. But don't really understand or follow them much. Good luck all.

Gundlach obviously knows bonds (albeit not corporate junk bonds where he is almost always bearish) but he certainly knows no more than you, me, and the man in the moon when it comes to stocks.
Here's his call in early March where he said stocks had at most 2% on the upside but 20% on the downside. He said stocks are a "big losing proposition."
Who knows, his broken record bearishness on stocks may someday be right like the proverbial stopped clock.
http://kingworldnews.com/jeff-gundlach-says-stay-long-gold-rally-will-continue-to-1400/

FYI: Financial markets could reverse the solid momentum in equities at the latest by U.S. President-elect Donald Trump’s Jan. 20, 2017, inauguration, Jeffrey Gundlach, chief executive of DoubleLine Capital, said on Thursday.
Regards,
Ted
http://www.reuters.com/article/us-funds-doubleline-gundlach-idUSKBN13Q5FL

Ok, guys. Nice to know you're out there. @JohnChisum: PREMX has paid me over $1,300.00 in 2016, in monthly divs. If there is a very small cap gain---as in years past, all well and good. But they've been paying, right along. I'm gonna just call them. gotta run, right now. Thanks.

FYI: Are U.S. stocks cheap, expensive, or fairly valued? Here are our 5 discussion points:
Regards,
Ted
http://ritholtz.com/2016/12/u-s-stocks-cheap-expensive-fairly-valued/

Crash: I stand corrected. What I saw , paid in 2015 adjusted 2016. short-term cap. gains to qualified dividends. Sorry I couldn't help.
Derf

FYI: The negative effects on the Mexican peso from potential trade restrictions have been excessively priced in by markets and do not reflect fair value, Michael Hasenstab, chief investment officer of Templeton Global Macro, said on Thursday.
Regards,
Ted
http://www.reuters.com/article/emerging-investment-templeton-idUSL9N18Y024

FYI: There’s a growing number of ETFs being offered commission-free across various platforms. But when it comes to picking the right ETF for a client, are advisors swayed by the appeal of commission-free ETFs? In other words, is that a key driver in advisor choice of one ETF over another in a given segment?
Regards,
Ted
http://www.etf.com/sections/features-and-news/do-commission-free-etfs-sway-decisions?nopaging=1

The OER did rise, from 2015 to 2016 (3 bps).

PREMX. The fund is still up quite a bit in 2016, though bonds got hammered after the election. There's a good yield on it. What confuses me is: why would a fund continue to pay such a good monthly dividend ALL YEAR LONG, then decide after most of the year is behind us that some contingency measure must be resorted to? (Footnote 5 from est. year-end pay-out page at TRP.)

In light of the fact that OERs for all Oakmark funds increased from 2015 to 2016, while AUM dropped, one can understand the rationale underlying this change.

There is a longer article on the same subject with more ideas from September
http://www.etf.com/sections/features-and-news/using-etfs-hedge-against-rising-rates?nopaging=1
It might be hard to overcome the spread on such thinly traded ETFs. Wouldn't it be more profitable to short treasuries with inverse Bond ETFs? You could also control your exposure

Oakmark is adding advisor and institutional share classes for all of its funds. Advisor minimum is $100k, and institutional minimum is $1M.
"We anticipate that the expense ratio for each Fund’s Advisor and Institutional classes will be less than the current Investor class (Class I)."
http://www.oakmark.com/News/Oakmark-Funds-Add-Two-New-Share-Classes.htm

@JohnChisum: Yes, the 10% and 15% bracket don't pay cap gains tax. And this is in a Trad. IRA, anyhow. My question, though, is about the "why." and whether this is a danger signal, a red flag, with regard to PREMX?

Summary prospectus. A $20.00 FEE if acct. is less than $10,000.00. What about retirement shares? Are those the "Advisor Class?"
https://prospectus-express.newriver.com/summary.asp?doctype=spro&clientid=trowepll&fundid=872803101
From the full prospectus: R Class
"The R Class is designed to be sold through financial intermediaries for employer-sponsored defined contribution retirement plans and certain other accounts. The R Class must be purchased through an eligible financial intermediary (except for certain retirement plans held directly with T. Rowe Price)."
Could you be any more VAGUE? Does my Rollover IRA count for anything, here?
.....Otherwise, I might be interested in this fund, just to simplify, and put more of my stuff under the TRP roof.