I currently own 3 small cap domestic equity funds. I am considering cutting that down and would welcome advice. I own the following:
BRUSX (my favorite): great long term returns despite a horrible 2008-09, 1.17% expenses which strike me as a bargain for a microcap fund with only $157 million in assets that is closed to new investors.
CIPSX: Lousy 5 year returns, but holds up well in down markets. Its outperformance in 2008 means it (and me, since I bought it in 2006) are well ahead of its benchmark and the S&P for the time period that I have owned it. I am disappointed it did not do better during the dip at the start of the year, but long-term it is a fund that outperforms during weak markets (2011 tpp.) 1.38% expenses, which I think a little high considering it has $1.2 billion in assets, but I guess that's about average for small cap funds.
HUSIX: Great 5 year returns, a disaster in 2008-09, but like BRUSX it has made up for it since. I bought it about a year ago (with funds raised from closing out ARIVX). 1.85% expenses, which I find very high considering the firm has (including private accounts) over a billion in this strategy, but it is extraordinarily tax efficient which takes some of the bite out of expenses.
I also own GPIOX for foreign small cap exposure.
Looking at 5 year returns it seems that dropping CIPSX is a no brainer, but had I bought all the funds at the start of 2007, CIPSX would have been the outperformer until about October last year, when HUSIX finally overtook it. Preserving capital in a crash is a powerful thing. If I had not proved to myself that I have the guts to add to good funds when they are crashing it should probably be my only fund.
My thoughts are either to
1) Sell HUSIX and keep the cash in case there is a correction. Keeping BRUSX (a high beta quant fund) and CIPSX (a low beta fundamental fund) might provide good diversity.
2) Sell CIPSX and put part in HUSIX and part in cash (a mix of high beta funds + cash in case they crash could be effective).
3) Obey the "the fewer funds, the better) mantra," sell HUSIX and CIPSX, add half of the money raised to BRUSX, keeping it as my only small cap fund, and have a lot of cash in case of correction.
4) Do nothing, keep these 3 good funds, stop thinking about this stuff obsessively, and come back next year.
Thoughts? The tax hit of all changes is acceptable.
Comments
You are obviously a sophisticated mutual fund investor, and you are more familiar with these funds than I am, so I'm not sure if I can help you or not, but let's talk about it a little.
BRUSX is your favorite, so you're not going to sell that one anyway. I like Bridgeway and I like John Montgomery. I think he applies his craft diligently, and with humility. I also think he brings a rare level of frankness and openness in his communications with investors. Additionally, I like the sliding scale for management fees which actually tosses extra money into the fund after the performance has been poor enough.
Having said all that, as you no doubt realize, you may have to hold Bridgeway funds even longer than the average mutual fund to fully benefit from their gains. I follow Bridgeway Aggressive Growth (BRAGX) as one of the 30 funds on my blog. It comes in dead last for ten year performance at #30, but when I run the 15 year numbers it tops everything else and finishes #1.
And speaking of 15 year numbers, your BRUSX is off the charts wonderful at 17% annualized. That turned $10,000 into $105,000 over a fifteen year period.
As for the other two funds, you clearly know them better than I do. It gets very tricky deciding which of 2 funds to part with. We would like to sell the one than will do worse and keep the one that will do better. Mathematically your odds of being correct should be at least 50-50. In venturing to choose, one must feel that his odds are at least materially better than that. Do you feel that you would have a 2/3 chance of choosing correctly? A 3/4 chance? This is a thicket that I am just not comfortable wading into.
If you were going to offer me an investment in 2 of these funds, I would choose BRUSX and CIPSX, but that may say more about me than about the funds. I am risk averse, and I eschew funds with high fees.
You are first going to have to decide if you do in fact need to raise cash. Personally, I agree with Bruce Berkowitz that a good investor never runs out of cash, but only you can decide what is enough for you. If you do need to be holding more cash, you might consider redeeming a few shares from all 3 of the funds.
In considering this whole business, I am reminded of Warren Buffet's "forth law of motion":
“Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.”
Having quoted that quote, you may be able to guess that the choice which most immediately appeals to me is your #4
"4) Do nothing, keep these 3 good funds, stop thinking about this stuff obsessively, and come back next year."
Although I am guessing you may be a little like me. While you may well be able to keep these three good funds, you will not stop thinking about these things obsessively, and you will most certainly not wait until next year to come back. Heck, you'll be back tomorrow morning!
dryflower
When Small cap funds under perform by 10% or more atttempt to commit additional resources while they are "on sale". BRUSX is a persistent outperforming fund with ocassional "under performance". Train yourself to take advantage of short term under performance events and buy the dips.
Good investing, all!
Regards,
Ted
But I've made too many changes lately so I guess I'll hold fast.
One of those funds that you just want to store away and look at once every, I don't know, twenty years or so
And as long as John Montgomery is there to quarterback.
I don't know if I would buy CIPSX today, but I'd take a small tax hit on selling it, and since over the life of the fund, as your graph shows, it has overperformed the S&P by an average of 4 p.p. a year while having a smaller maximum drawdown, there seems no rush to sell it despite its current 2 star rating from M*.
But at the next correction I will add to BRUSX.
Shadow, yes, that's how I got into BRUSX as well! I'd been waiting for such an opportunity for years. I previously had some other Bridgeway small cap funds as well as BRAGX, which I still hold.