August 1, 2016

By David Snowball

Dear friends,

aAugust, famously “summer’s last messenger of misery,” is upon us. It’s a month mostly celebrated by NFL fans (for the start of training camp and the endless delusion that this might be the year) and wiccans (who apparently have a major to-do in the stinkin’ heat). All of us whose lives and livelihoods are tied to the education system feel sympathy for the poet Elizabeth M. Taylor:

August rushes by like desert rainfall,
A flood of frenzied upheaval,
But still catching me unprepared.
Like a match flame
Bursting on the scene,
Heat and haze of crimson sunsets.
Like a dream
Of moon and dark barely recalled,
A moment,
Shadows caught in a blink.
Like a quick kiss;
One wishes for more
But it suddenly turns to leave,
Dragging summer away.

I could, I suppose, grumble again about the obvious (the combination of repeated stock market records with withering corporate fundamentals isn’t good), but Ed bade me keep silent on the topic. So we’ll try to offer up a bunch of lighter pieces, suitable to summer. Continue reading →

Morningstar’s “undiscovered” funds

By David Snowball

In case you’re wondering, here is the Observer’s mission:

The Mutual Fund Observer writes for the benefit of intellectually curious, serious investors— managers, advisers, and individuals—who need to go beyond marketing fluff, beyond computer- generated recommendations and beyond Morningstar’s coverage universe … Our special focus is on innovative, independent new and smaller funds. MFO’s mission is to provide readers with calm, intelligent arguments and to provide independent fund companies with an opportunity to receive thoughtful attention even though they might not yet have drawn billions in assets. Its coverage universe has been described as “the thousands of funds off Morningstar’s radar,” a description one fund manager echoes as “a Morningstar for the rest of us.”

Morningstar is in the business of helping investors. Since most investors have most of their money in large funds, Continue reading →

Bill Gross goes commando again

By David Snowball

Janus has announced the departure of Kumar Palghat from Janus Unconstrained Global Bond Fund (JUCAX). Mr. Palghat, a very accomplished investor with a long record of success at PIMCO and elsewhere, will become the manager of Janus Short Duration Income ETF. Mr. Palghat worked with the fund for just over one year. In his absence, Bill Gross returns to complete control. Continue reading →

Third Avenue seeks a buyer

By David Snowball

The disaster of Third Avenue Focused Credit (TFCVX) rolls on. For those not following December’s drama, TFCVX offered the impossible: it would invest in illiquid securities (that is, stuff that couldn’t be sold at the drop of a hat) but provide investors with daily liquidity (that is, act as if portions of the portfolio could be sold at the drop of a hat). That worked fine as long as the market was rising and no one actually wanted their money back, but when the tide began to go out and investors wanted their money, the poop hit the propeller. Continue reading →

Have We Been Here Before?

By Edward A. Studzinski

“The past is never dead. It’s not even past.”

William Faulkner

I recently had coffee with one of my former colleagues in the investment management world. He asked me if our readers understood that, in the world of mutual fund managements, it was all about assets under management and profitability to the various stakeholders in the business. Thoughts about the returns for the investor were generally secondary, or put differently, whether the investors actually got any yachts (or vacations in the Caribbean or second homes on Hilton Head Island) did not matter. Having recently reviewed some posts on our Bulletin Board, I told him that no, many of our readers were still operating under the belief that there was, somewhere in that room full of manure, a pony.

Our desire for hope and change (at least in terms of investment returns) often leads us to ignore the evidence of simple mathematics working against us. Continue reading →

Fund Facts

By Charles Boccadoro

At the recent Chicago conference, Morningstar’s Gregg Warren stated that asset management remains an attractive business because of steady fees, high operating margins, low start-up costs, and because “investment inertia is its best friend.”

Through June there were 281 funds with assets over $10B, including 8 that have trailed their peers in absolute return by at least 1.7% per year during the current market cycle since November 2007, or about 14% or more in underperformance. (See table below, click on image to enlarge.) Most are bottom quintile performers, trail nearly 90% of their peers, and four are Three Alarm funds. They include Templeton Growth (TEPLX), Thornburg Investment Income Builder (TIBAX), Davis New York Venture (NYVTX), Fidelity Magellan (FMAGX), and American Funds’ Bond Fund of America (ABNDX) and Intermediate Bond Fund of America (AIBAX). The folks invested in these funds certainly can’t be accused of chasing returns. Continue reading →

When to be Scared of the Stock Market

By Samuel Lee

Sometimes it is sensible to be scared of being in the stock market. Those times are rare. I want to describe them from the perspective of a value investor, who only cares about the future cash flows of his investments; I am not offering a method of short-term market timing.

The key fact to grasp is just how resilient corporate earnings are in a big, developed country with strong institutions. The chart below shows the per-share inflation-adjusted earnings of the S&P 500 as well as its 10-year moving average. Though there are violent swings in the per-share earnings series, the moving average shows that the normalized earnings power of U.S. publicly traded corporations grew right through them, rarely reversing for long. Over this period, the U.S. experienced the Great Depression, two world wars, the Cold War, massive corporate tax hikes, oil crises, stagflation, corrupt and incompetent leaders, the 9/11 attacks, countless scandals in leading corporations, the financial crisis and so on. Continue reading →

Keeping A Watchful Eye on Your Manager

By Leigh Walzer

By Leigh Walzer

It’s summertime. You are reading this from the vacation house. Or perhaps you are at the ballgame like Professor Snowball, rooting for the Quad City River Bandits. There is no event risk on the horizon. You trust your fund managers.  The portfolios can stay on autopilot until Labor Day.

As advisors struggle with the new fiduciary rules, they may wonder how frequently manager selection decisions need to be reviewed. We set out to answer the question: What is the likelihood that a portfolio left on autopilot will go bad over time.

We compared the ratings on 7000 mutual funds to see how much the probability metrics changed over time. Trapezoid’s data and models (which can be trialled at tell us the probability a given fund class will deliver skill over the next 12 months. For most funds, skill is a function of value-added from security or sector selection.  Skill takes into account a manager’s returns each period adjusted for factor exposures and other attributes. Continue reading →

Ariel Global (AGLOX), August 2016

By David Snowball

Objective and strategy

Ariel Global Fund’s fundamental objective is long-term capital appreciation. The manager pursues an all-cap global portfolio. The fund is, in general, currency hedged so that the returns you see are driven by stock selection rather than currency fluctuation. The manager pursues a “bottom up” discipline which starts by weeding out as much trash as humanly possible before proceeding to a meticulous investment in both the fundamentals of the remaining businesses and their intrinsic value. The fund is diversified and will generally hold 50-150 positions. As of July 2016, there are 84. Continue reading →

Catalyst/MAP Global Balanced (TRXAX, TRXIX), August 2016

By David Snowball

At the time of publication, this fund was named Catalyst/MAP Global Total Return Income.

Objective and strategy

The manager attempts to preserve capital while generating a combination of current income and moderate long-term capital gains. The portfolio has four sleeves:

  • 40-65 global equity positions constituting 30-70% of the portfolio depending on market conditions. Over the past five years, the range has been 54-62%.
  • Income-generating covered calls which might be sold on 0-30% of the portfolio. Of late option premiums have not justified writing.
  • Short/intermediate-term bonds, generally rated B+ or better and generally with an average maturity of approximately a year.
  • Cash, which has traditionally been 5-15% of the portfolio.

The portfolio is unconstrained by geography, credit quality or market cap. The manager is risk conscious, looking for securities that combine undervaluation with a definable catalyst which will lead the market to recognize its intrinsic value. Continue reading →

old alarm clock

Manager changes, July 2016

By Chip

Wow. Barely three dozen managers were subjected to the walk of shame (or, perhaps, the happy dance out the door) this month. There were two high profile changes.

Rob Taylor is retiring from management of Oakmark Global and Oakmark International, both of which are reopening to new investors. David Herro is being added as co-manager of the former and becomes sole manager of the latter. Since Mr. Herro is already managing $20 billion, the additional assignments either suggest that Oakmark is running out of talent or that Mr. Herro is feeling a bit megalomaniacal.

At we noted above, for reasons unexplained, Kumar Palghat has left Janus Unconstrained Global Bond (JUCAX) after one year.

In iconic changes, as we note below, West Shore is out at West Shore and Burnham is out at Burnham.  Continue reading →

old license plates on a wall

Funds in registration, August 2016

By David Snowball

Newly-proposed funds need to sit quietly for 75 days. During that time the Securities and Exchange Commission staff reviews their prospectuses and has the right to demand changes. If the SEC doesn’t object, the advisor earns the right – but not the obligation, oddly enough – to release the fund to the public. Funds currently in registration are apt to launch at the end of September so that they will be able to report complete results for the fourth quarter of 2016.

Setting aside whacko ideas (The Wearable Technology ETF? Did we learn nothing from the adventures of the 3D Printing ETF? Or the Obesity ETF?), there were 13 new no-load retail funds or active ETFs in registration this month. Continue reading →