Hmmm ... I've been writing about individual funds, between FA and here, for just about
11 years. There are two profiles, both from FundAlarm days, the thought of which still makes me queasy. By worst the worst were the Utopia Funds, launched by a small advisor in Michigan. They had go-anywhere portfolios with remarkably low minimum initial investments and reasonable expenses. Five funds, ranked from "Income" to "Aggressive." They were based on a really successful set of separate accounts that thrived
because they were small; they picked up bits and pieces of "orphan" investments that larger advisors found too small to be worth the effort. Those ranged from regional micro-cap stocks to called bonds. In practice, the funds started okay then sank into the average-to-bad range. Not "awful," but clearly "bad" when judged by their ability to maintain the targeted risk level. Then, without warning, they closed and liquidated. When I tried to contact them to ask about the decision, I got silence in return.
That was useful to me and, arguably, profitable to you because I stewed a lot about what contributed to the mistake. Part of the lack of a mutual fund record, as opposed to an SMA record and part was that the two managers executing the fund strategies were only assistants on the SMA strategy. Both of those conclusions helped me tighten the criteria for funds I've written about. That played out in the case of Auer Growth (AUERX), where the senior Mr. Auer managed his retirement account to something like a
10:
1 advantage over the broad market over some ridiculously long time; the junior Mr. Auer talked him into launching the strategy as a fund. I was, I hope, clearly skeptical about it. A one-star fund with bottom 2% performance followed.
The only queasy interval was Nakoma Absolute Return, which was managed by one of the guys at the U of Wisconsin's famous securities analysis program. These guys cranked out a string of first-tier managers and ran a very successful long-short hedge fund which they eventually offered to the public as a mutual fund. I 'fesseup to the problem with the fund a long time ago (07/
11) in a discussion started by Vintage Freak:
The general problem is that Mr. Pickett has been skeptical about the US market for much of the decade, has maintained about as many short as long positions (bad idea in a rising market) and has been repeatedly wrong in security selection. None of which I would have predicted. Indeed, none of which I did predict.
I've become more cautious about hedge fund conversions as a result; my experience is that those often end up as being okay funds but mostly shadows of their former selves. Why? Rekenthaler made a good argument this month: hedge fund conversions are cherry-picked and we don't know anything about the rest of the crop. A hedge fund manager might have
10 funds, nine of which smell like the beach at low tide and one of which has had (maybe, "has lucked into") eye-popping results. The existence of the nine dogs doesn't have to be disclosed so we falsely assume that the one winner is representative of the managers' skills. While that's not always the case - that is, some hedge fund conversions produce reputable mutual funds - it's something that we need to approach with skepticism.
--
I'm
mostly able to sleep at night when I consider the other funds we're written about. Mostly. Some have been spectacular successes, which is nice, but I draw more comfort from the fact that most of the managers (including Mr. Cinnamond) have invested heavily in their funds and have done precisely what they said they were going to do. That is, they were disciplined and true to that discipline. Mr. Barbee (AVALX) told you he was going to stay fully invested, at all times, in the tiniest and cheapest stocks in existence. It's been clear from Day One that that's a rocket-and-crash discipline. The fund made a mint during the 2000-02 bear, dipped by 65% in the 2007-09 one, and is beating the competition by over 300 bps since. Its cumulative (i.e. compounded) advantage since launch is huge. That said, I'd never invest in it since I much prefer
not to have my long-term returns punctuated by apocalypse. But I'm perfectly comfortable with what we wrote about it.
For what that's worth,
David
