Dear friends,

I know that for lots of you, this is the season of Big Questions:

• Is the Fed’s insistence on destroying the incentive to save (my credit union savings account is paying 0.05%) creating a disastrous incentive to move “safe” resources into risky asset classes?
• Has the recent passion for high quality, dividend-paying stocks already consumed most of their likely gains for the next decade?
• Should you Sell in May and Go Away?
• Perhaps, Stay for June and Endure the Swoon?

My set of questions is a bit different:

• Why haven’t those danged green beans sprouted yet?  It’s been a week.
• How should we handle the pitching rotation on my son’s Little League team?  We’ve got four games in the span of five days (two had been rained out and one was hailed out) and just three boys – Will included! – who can find the plate.
• If I put off returning my Propaganda students’ papers one more day, what’s the prospect that I’ll end up strung up like Mussolini?

Which is to say, summer is creeping upon us.  Enjoy the season and life while you can!

Of Acorns and Oaks

It’s human nature to make sense out of things.  Whether it’s imposing patterns on the stars in the sky (Hey look!  It’s a crab!) or generating rules of thumb for predicting stock market performances (It’s all about the first five days of the day), we’re relentless in insisting that there’s pattern and predictability to our world.

One of the patterns that I’ve either discerning or invented is this: the alumni of Oakmark International seem to have startlingly consistent success as portfolio managers.  The Oakmark International team is led by David Herro, Oakmark’s CIO for international equities and manager of Oakmark International (OAKIX) since 1992.  Among the folks whose Oakmark ties are most visible:

The Oakmark alumni certainly extend far beyond this list and far back in time.  Ralph Wanger, the brilliant and eccentric Imperial Squirrel who launched the Acorn Fund (ACRNX) and Wanger Asset Management started at Harris Associates.  So, too, did Morningstar founder Joe Mansueto.  Wanger frequently joked that if he’d only hired Mansueto when he had the chance, he would not have been haunted by questions for “stylebox purity” over the rest of his career.  The original manager of Oakmark Fund (OAKMX) was Robert Sanborn, who got seriously out of step with the market for a bit and left to help found Sanborn Kilcollin Partners.  He spent some fair amount of time thereafter comparing how Oakmark would have done if Bill Nygren had simply held Sanborn’s final portfolio, rather than replacing it.

In recent times, the attention centers on alumni of the international side of Oakmark’s operation, which is almost entirely divorced from its domestic investment operation.  It’s “not just on a different floor, but almost on a different world,” one alumnus suggested.  And so I set out to answer the questions: are they really that consistently excellent? And, if so, why?

The answers are satisfyingly unclear.  Are they really consistently excellent?  Maybe.  Pierre Py made a couple interesting notes.  One is that there’s a fair amount of turnover in Herro’s analyst team and we only notice the alumni who go on to bigger and better things.  The other note is that when you’ve been recognized as the International Fund Manager of the Decade and you can offer your analysts essentially unlimited resources and access, it’s remarkably easy to attract some of the brightest and most ambitious young minds in the business.

What, other than native brilliance, might explain their subsequent success?  Dan O’Keefe argues that Herro has been successful in creating a powerful culture that teaches people to think like investors and not just like analysts.  Analysts worry about finding the best opportunities within their assigned industry; investors need to examine the universe of all of the opportunities available, then decide how much money – if any – to commit to any of them.  “If you’re an auto industry analyst, there’s always a car company that you think deserves attention,” one said.  Herro’s team is comprised of generalists rather than industry specialists, so that they’re forced to look more broadly.  Mr. Py compared it to the mindset of a consultant: they learn to ask the big, broad questions about industry-wide practices and challenges, rising and declining competitors, and alternatives.  But Herro’s special genius, Pierre suggested, was in teaching young colleagues how to interview a management team; that is, how to get inside their heads, understand the quality of their thinking and anticipate their strengths and mistakes.   “There’s an art to it that can make your investment process much better.”  (As a guy with a doctorate in communication studies and a quarter century in competitive debate, I concur.)

The question for me is, if it works, why is it rare?  Why is it that other teams don’t replicate Herro’s method?  Or, for that matter, why don’t they replicate Artisan Partner’s structure – which is designed to be (and has been) attractive to the brightest managers and to guard (as it has) against creeping corporatism and groupthink?  It’s a question that goes far beyond the organization of mutual funds and might even creep toward the question, why are so many of us so anxious to be safely mediocre?

Three Messages from Rob Arnott

Robert D. Arnott manages PIMCO’s All Asset (PAAIX) and leveraged All Asset All Authority (PAUIX) funds. Morningstar gives each fund five stars for performance relative to moderate and world allocation peers, in addition to gold and silver analyst ratings, respectively, for process, performance, people, parent and price. On PAAIX’s performance during the 2008 financial crises, Mr. Arnott explains: “I was horrified when we ended the year down 15%.” Then, he learned his funds were among the very top performers for the calendar year, where average allocation funds lost nearly twice that amount. PAUIX, which uses modest leverage and short strategies making it a bit more market neutral, lost only 6%.

Of 30 or so lead portfolio managers responsible for 110 open-end funds and ETFs at PIMCO, only William H. Gross has a longer current tenure than Mr. Arnott. The All Asset Fund was launched in 2002, the same year Mr. Arnott founded Research Affiliates, LLC (RA), a firm that specializes in innovative indexing and asset allocation strategies. Today, RA estimates $142B is managed worldwide using its strategies, and RA is the only sub-advisor that PIMCO, which manages over $2T, credits on its website.

On April 15^th, CFA Society of Los Angeles hosted Mr. Arnott at the Montecito Country Club for a lunch-time talk, entitled “Real Return Investing.” About 40 people attended comprising advisors, academics, and PIMCO staff. The setting was elegant but casual, inside a California mission-style building with dark wooden floors, white stucco walls, and panoramic views of Santa Barbara’s coast. The speaker wore one of his signature purple-print ties. After his very frank and open talk, which he prefaced by stating that the research he would be presenting is “just facts…so don’t shoot the messenger,” he graciously answered every question asked.

Three takeaways: 1) fundamental indexing beats cap-weighed indexing, 2) investors should include vehicles other than core equities and bonds to help achieve attractive returns, and 3) US economy is headed for a 3-D hurricane of deficit, debt, and demographics. Here’s a closer look at each message:

Fundamental Indexation is the title of Mr. Arnott’s 2005 paper with Jason Hsu and Philip Moore. It argues that capital allocated to stocks based on weights of price-insensitive fundamentals, such as book value, dividends, cash flow, and sales, outperforms cap-weighted SP500 by an average of 2% a year with similar volatilities. The following chart compares Power Shares FTSE RAFI US 1000 ETF (symbol: PRF), which is based on RA Fundamental Index (RAFI) of the Russell 1000 companies, with ETFs IWB and IVE:

And here are the attendant risk-adjusted numbers, all over same time period:

RAFI wins, delivering higher absolute and risk-adjusted returns. Are the higher returns a consequence of holding higher risk? That debate continues. “We remain agnostic as to the true driver of the Fundamental indexes’ excess return over the cap-weighted indexes; we simply recognize that they outperformed significantly and with some consistency across diverse market and economic environments.” A series of RAFIs exist today for many markets and they consistently beat their cap-weighed analogs.

All Assets include commodity futures, emerging market local currency bonds, bank loans, TIPS, high yield bonds, and REITs, which typically enjoy minimal representation in conventional portfolios. “A cult of equities,” Mr. Arnott challenges, “no matter what the price?” He then presents research showing that while the last decade may have been lost on core equities and bonds, an equally weighted, more broadly diversified, 16-asset class portfolio yielded 7.3% annualized for the 12 years ending December 2012 versus 3.8% per year for the traditional 60/40 strategy. The non-traditional classes, which RA coins “the third pillar,” help investors “diversify away some of the mainstream stock and bond concentration risk, introduce a source of real returns in event of prospective inflation from monetizing debt, and seek higher yields and/or rates of growth in other markets.”

Mr. Arnott believes that “chasing past returns is likely the biggest mistake investors make.” He illustrates with periodic returns such as those depicted below, where best performing asset classes (blue) often flip in the next period, becoming worst performers (red)…and rarely if ever repeat.

Better instead to be allocated across all assets, but tactically adjust weightings based on a contrarian value-oriented process, assessing current valuation against opportunity for future growth…seeking assets out of favor, priced for better returns. PAAIX and PAUIX (each a fund of funds utilizing the PIMCO family) employ this approach. Here are their performance numbers, along with comparison against some competitors, all over same period:

The All Asset funds have performed very well against many notable allocation funds, like OAKBX and VWENX, protecting against drawdowns while delivering healthy returns, as evidenced by high Martin ratios. But static asset allocator PRPFX has actually delivered higher absolute and risk-adjusted returns. This outperformance is likely attributed its gold holding, which has detracted very recently. On gold, Mr. Arnott states: “When you need gold, you need gold…not GLD.” Newer competitors also employing all-asset strategies are ABRYX and AQRIX. Both have returned handsomely, but neither has yet weathered a 2008-like drawdown environment.

The 3-D Hurricane Force Headwind is caused by waves of deficit spending, which artificially props-up GDP, higher than published debt, and aging demographics. RA has published data showing debt-to-GDP is closer to 500% or even higher rather than 100% value oft-cited, after including state and local debt, Government Sponsored Enterprises (e.g., Fannie Mae, Freddie Mac), and unfunded entitlements. It warns that deficit spending may feel good now, but payback time will be difficult.

“Last year, the retired population grew faster than the population of working age adults, yet there was no mention in the press.” Mr. Arnott predicts this transition will manifest in a smaller labor force and lower productivity. It’s inevitable that Americans will need to “save more, spend less, and retire later.” By 2020, the baby boomers will be outnumbered 2:1 by votes, implying any “solemn vows” regarding future entitlements will be at risk. Many developed countries have similar challenges.

Expectations going forward? Instead of 7.6% return for the 60/40 portfolio, expect 4.5%, as evidenced by low bond and dividend yields. To do better, Mr. Arnott advises investing away from the 3-D hurricane toward emerging economies that have stable political systems, younger populations, and lower debt…where fastest GDP growth occurs. Plus, add in RAFI and all asset exposure.

Are they at least greasy high-yield bonds?

One of the things I most dislike about ETFs – in addition to the fact that 95% of them are wildly inappropriate for the portfolio of any investor who has a time horizon beyond this afternoon – is the callous willingness of their boards to transmute the funds.  The story is this: some marketing visionary decides that the time is right for a fund targeting, oh, corporations involved in private space flight ventures and launches an ETF on the (invented) sector.  Eight months later they notice that no one’s interested so, rather than being patient, tweaking, liquidating or merging the fund, they simply hijack the existing vehicle and create a new, entirely-unrelated fund.

Here’s news for the five or six people who actually invested in the Sustainable North American Oil Sands ETF (SNDS): you’re about to become shareholders in the YieldShares High Income ETF.  The deal goes through on June 21.  Do you have any say in the matter?  Nope.  Why not?  Because for the Sustainable North American Oil Sands fund, investing in oil sands companies was legally a non-fundamental policy so there was no need to check with shareholders before changing it. 

The change is a cost-saving shortcut for the fund sponsors.  An even better shortcut would be to avoid launching the sort of micro-focused funds (did you really think there was going to be huge investor interest in livestock or sugar – both the object of two separate exchange-traded products?) that end up festooning Ron Rowland’s ETF Deathwatch list.

Introducing the Owl

Over the past month chip and I have been working with a remarkably talented graphic designer and friend, Barb Bradac, to upgrade our visual identity.  Barb’s first task was to create our first-ever logo, and it debuts this month.

Cool, eh?

We started by thinking about the Observer’s mission and ethos, and how best to capture that visually.  The apparent dignity, quiet watchfulness and unexpected ferocity of the Great Horned Owl – they’re sometimes called “tigers with wings” and are quite willing to strike prey three times their own size – was immediately appealing.  Barb’s genius is in identifying the essence of an image, and stripping away everything else.  She admits, “I don’t know what to say about the wise old owl, except he lends himself soooo well to minimalist geometric treatment just naturally, doesn’t he? I wanted to trim off everything not essential, and he still looks like an owl.”

At first, we’ll use our owl in our print materials (business cards, thank-you notes, that sort of thing) and in the article reprints that funds occasionally commission.  For those interested, the folks at Cook and Bynum asked for a reprint of Charles’s excellent “Inoculated by Value”  essay and our new graphic identity debuted there.  With time we’ll work with Barb and Anya to incorporate the owl – who really needs a name – into our online presence as well.

The Observer resources that you’ve likely missed!

Each time we add a new resource, we try to highlight it for folks.  Since our readership has grown so dramatically in the past year – about 11,000 folks drop by each month – a lot of folks weren’t here for those announcements.  As a public service, I’d like to highlight three resources worth your time.

The Navigator is a custom-built mutual fund research tool, accessible under the Resources tab.  If you know the name of a fund, or part of the name or its ticker, enter it into The Navigator.  It will auto-complete the fund’s name, identify its ticker symbols and  immediately links you to reports or stories on that fund or ETF on 20 other sites (Yahoo Finance, MaxFunds, Morningstar).  If you’re sensibly using the Observer’s resources as a starting point for your own due diligence research, The Navigator gives you quick access to a host of free, public resources to allow you to pursue that goal.

Featured Funds is an outgrowth of our series of monthly conference calls.  We set up calls – free and accessible to all – with managers who strike us as being really interesting and successful.  This is not a “buy list” or anything like it.  It’s a collection of funds whose managers have convinced me that they’re a lot more interesting and thoughtful than their peers.  Our plan with these calls is to give every interested reader to chance to hear what I hear and to ask their own questions.  After we talk with a manager, the inestimably talented Chip creates a Featured Fund page that draws together all of the resources we can offer you on the fund.  That includes an mp3 of the conference call and my take on the call’s highlights, an updated profile of the fund and also a thousand word audio profile of the fund (presented by a very talented British friend, Emma Presley), direct links to the fund’s own resources and a shortcut to The Navigator’s output on the funds.

There are, so far, seven Featured Funds:

• ASTON/RiverRoad Long/Short (ARLSX)
• Cook and Bynum (COBYX)
• Matthews Asia Strategic Income (MAINX)
• RiverPark Long/Short Opportunity (RLSFX)
• RiverPark Short-Term High Yield (RPHYX)
• RiverPark/Wedgewood (RWGFX)
• Seafarer Overseas Growth and Income (SFGIX)

Manager Change Search Engine is a feature created by Accipiter, our lead programmer, primarily for use by our discussion board members.  Each month Chip and I scan hundreds of Form 497 filings at the SEC and other online reports to track down as many manager changes as we can.  Those are posted each month (they’re under the “Funds” tab) and arranged alphabetically by fund name.  Accipiter’s search engine allows you to enter the name of a fund company (Fidelity) and see all of the manager changes we have on record for them.  To access the search engine, you need to go to the discussion board and click on the MGR tab at top.  (I know it’s a little inconvenient, but the program was written as a plug-in for the Vanilla software that underlies the discussion board.  It will be a while before Accipiter is available to rewrite the program for us, so you’ll just have to be brave for a bit.)

Valley Forge Fund staggers about

For most folks, Valley Forge Fund (VAFGX) is understandably invisible.  It was iconic mostly because it so adamantly rejected the trappings of a normal fund.  It was run since the Nixon Administration by Bernard Klawans, a retired aerospace engineer.  He tended to own just a handful of stocks and cash.  For about 20 years he beat the market then for the next 20 he trailed it.  In the aftermath of the late 90s mania, he went back to modestly beating the market.  He didn’t waste money on marketing or even an 800-number and when someone talked him into having a website, it remained pretty much one page long.

Mr. Klawans passed away on December 22, 2011, at the age of 90.  Craig T. Aronhalt who had co-managed the fund since the beginning of 2009 died on November 3, 2012 of cancer.  Morningstar seems not to have noticed his death: six months after passing away, they continue listing him as manager. It’s not at all clear who is actually running the thing though, frankly, for a fund that’s 25% in cash it’s having an entirely respectable year with a gain of nearly 10% through the end of April.

The more-curious development is the Board’s notice, entitled “Important information about the Fund’s Lack of Investment Adviser”

For the period beginning April 1, 2013 through the date the Fund’s shareholders approve a new investment advisory agreement (estimated to be achieved by May 17, 2013), the Fund will not be managed by an investment adviser or a portfolio manager (the “Interim Period”).  During the Interim Period, the Fund’s portfolio is expected to remain largely unchanged, subject to the ability of the Board of Directors of the Fund to, as it deems appropriate under the circumstances, make such portfolio changes as are consistent with the Fund’s prospectus.  During the Interim Period, the Fund will not be subject to any advisory fees.

Because none of the members of Fund’s Board of Directors has any experience as portfolio managers, management risk will be heightened during the Interim Period, and you may lose money.

How does that work?  The manager died at the beginning of November but the board doesn’t notice until April 1?  If someone was running the portfolio since November, the law requires disclosure of that fact.  I know that Mr. Buffett has threatened to run Berkshire Hathaway for six months after his death, so perhaps … ? 

If that is the explanation, it could be a real cost-savings strategy since health care and retirement benefits for the deceased should be pretty minimal.

Observer Fund Profiles:

Each month the Observer provides in-depth profiles of between two and four funds.  Our “Most Intriguing New Funds” are funds launched within the past couple years that most frequently feature experienced managers leading innovative newer funds. 

FPA International Value (FPIVX): It’s not surprising that manager Pierre Py is an absolute return investor.  That is, after all, the bedrock of FPA’s investment culture.  What is surprising is that it has also be an excellent relative return vehicle: despite a substantial cash reserve and aversion to the market’s high valuations, it has also substantially outperformed its fully-invested peers since inception.

Oakseed Opportunity Fund (SEEDX): Finally!  Good news for all those investors disheartened by the fact that the asset-gatherers have taken over the fund industry.  Jackson Park has your back.

“Stars in the Shadows” are older funds that have attracted far less attention than they deserve. 

Artisan Global Value Fund (ARTGX): I keep looking for sensible caveats to share with you about this fund.  Messrs. Samra and O’Keefe keep making my concerns look silly, so I think I might give up and admit that they’re remarkable.

Payden Global Low Duration Fund (PYGSX): Short-term bond funds make a lot of sense as a conservative slice of your portfolio, most especially during the long bull market in US bonds.  The question is: what happens when the bull market here stalls out?  One good answer is: look for a fund that’s equally adept at investing “there” as well as “here.”  Over 17 years of operation, PYGSX has made a good case that they are that fund.

Elevator Talk #4: Jim Hillary, LS Opportunity Fund (LSOFX)

Since the number of funds we can cover in-depth is smaller than the number of funds worthy of in-depth coverage, we’ve decided to offer one or two managers each month the opportunity to make a 200 word pitch to you. That’s about the number of words a slightly-manic elevator companion could share in a minute and a half. In each case, I’ve promised to offer a quick capsule of the fund and a link back to the fund’s site. Other than that, they’ve got 200 words and precisely as much of your time and attention as you’re willing to share. These aren’t endorsements; they’re opportunities to learn more.

Mr. Hillary manages Independence Capital Asset Partners (ICAP), a long/short equity hedge fund he launched on November 1, 2004 that serves as the sub-advisor to the LS Opportunity Fund (LSOFX), which in turn launched on September 29, 2010. Prior to embarking on a hedge fund career, Mr. Hillary was a co-founder and director of research for Marsico Capital Management where he managed the Marsico 21^st Century Fund (MXXIX) until February 2003 and co-managed all large cap products with Tom Marsico. In addition to his US hedge fund and LSOFX in the mutual fund space, ICAP runs a UCITS for European investors. Jim offers these 200 words on why his mutual fund could be right for you:

In 2004, I believed that after 20 years of above average equity returns we would experience a period of below average returns. Since 2004, the equity market has been characterized by lower returns and heightened volatility, and given the structural imbalances in the world and the generationally low interest rates I expect this to continue.  Within such an environment, a long/short strategy provides exposure to the equity market with a degree of protection not provided by “long-only” funds.

In 2010, we agreed to offer investors the ICAP investment process in a mutual fund format through LSOFX. Our process aims to identify investment opportunities not limited to style or market capitalization. The quality of research on Wall Street continues to decline and investors are becoming increasingly concerned about short-term performance. Our in-depth research and long-term orientation in our high conviction ideas provide us with a considerable advantage. It is often during times of stress that ICAP uncovers unusual investment opportunities. A contrarian approach with a longer-term view is our method of generating value-added returns. If an investor is searching for a vehicle to diversify away from long-only, balanced or fixed income products, a hedge fund strategy like ours might be helpful.

The fund has a single share class with no load and no 12b-1 fees. The minimum initial investment is $5,000 and net expenses are capped at 1.95%. More information about the Advisor and Sub-Advisor can be found on the fund’s website, www.longshortadvisors.com. Jim’s most recent commentary can be found in the fund’s November 2012 Semi-Annual Report.

RiverPark/Wedgewood Fund: Conference Call Highlights

I had a chance to speak with David Rolfe of Wedgewood Partners and Morty Schaja, president of RiverPark Funds. A couple dozen listeners joined us, though most remained shy and quiet. Morty opened the call by noting the distinctiveness of RWGFX’s performance profile: even given a couple quarters of low relative returns, it substantially leads its peers since inception. Most folks would expect a very concentrated fund to lead in up markets. It does, beating peers by about 10%. Few would expect it to lead in down markets, but it does: it’s about 15% better in down markets than are its peers. Mr. Schaja is invested in the fund and planned on adding to his holdings in the week following the call.

The strategy: Rolfe invests in 20 or so high-quality, high-growth firms. He has another 15-20 on his watchlist, a combination of great mid-caps that are a bit too small to invest in and great large caps a bit too pricey to invest in. It’s a fairly low turnover strategy and his predilection is to let his winners run. He’s deeply skeptical of the condition of the market as a whole – he sees badly stretched valuations and a sort of mania for high-dividend stocks – but he neither invests in the market as a whole nor are his investment decisions driven by the state of the market. He’s sensitive to the state of individual stocks in the portfolio; he’s sold down four or five holdings in the last several months nut has only added four or five in the past two years. Rather than putting the proceeds of the sales into cash, he’s sort of rebalancing the portfolio by adding to the best-valued stocks he already owns.

His argument for Apple: For what interest it holds, that’s Apple. He argues that analysts are assigning irrationally low values to Apple, somewhere between those appropriate to a firm that will never see real topline growth again and one that which see a permanent decline in its sales. He argues that Apple has been able to construct a customer ecosystem that makes it likely that the purchase of one iProduct to lead to the purchase of others. Once you’ve got an iPod, you get an iTunes account and an iTunes library which makes it unlikely that you’ll switch to another brand of mp3 player and which increases the chance that you’ll pick up an iPhone or iPad which seamlessly integrates the experiences you’ve already built up. As of the call, Apple was selling at $400. Their sum-of-the-parts valuation is somewhere in the $600-650 range.

On the question of expenses: Finally, the strategy capacity is north of $10 billion and he’s currently managing about $4 billion in this strategy (between the fund and private accounts). With a 20 stock portfolio, that implies a $500 million in each stock when he’s at full capacity. The expense ratio is 1.25% and is not likely to decrease much, according to Mr. Schaja. He says that the fund’s operations were subsidized until about six months ago and are just in the black now. He suggested that there might be, at most, 20 or so basis points of flexibility in the expenses. I’m not sure where to come down on the expense issue. No other managed, concentrated retail fund is substantially cheaper – Baron Partners and Edgewood Growth are 15-20 basis points more, Oakmark Select and CGM Focus are 15-20 basis points less while a bunch of BlackRock funds charge almost the same.

Bottom Line: On whole, it strikes me as a remarkable strategy: simple, high return, low excitement, repeatable and sustained for near a quarter century.

For folks interested but unable to join us, here’s the complete audio of the hour-long conversation.

The RWGFX Conference Call

When you click on the link, the file will load in your browser and will begin playing after it’s partially loaded. If the file downloads, instead, you may have to double-click to play it.

Conference Call Upcoming: Bretton Fund (BRTNX), May 28, 7:00 – 8:00 Eastern

Manager Steve Dodson, former president of the Parnassus Funds, is an experienced investment professional, pursuing a simple discipline.  He wants to buy deeply discounted stocks, but not a lot of them.  Where some funds tout a “best ideas” focus and then own dozens of the same large cap stocks, Mr. Dodson seems to mean it when he says “just my best.”

As of 12/30/12, the fund held just 16 stocks.  Nearly as much is invested in microcaps as in megacaps. In addition to being agnostic about size, the fund is also unconstrained by style or sector.  Half of the fund’s holdings are characterized as “growth” stocks, half are not.   The fund offers no exposure at all in seven of Morningstar’s 11 industry sectors, but is over weighted by 4:1 in financials. 

In another of those “don’t judge it against the performance of groups to which it doesn’t belong” admonitions, it has been assigned to Morningstar’s midcap blend peer group though it owns only one midcap stock.

Our conference call will be Tuesday, May 28, from 7:00 – 8:00 Eastern.

How can you join in?  Just click

Members of our standing Conference Call Notification List will receive a reminder, notes from the manager and a registration link around the 20^th of May.  If you’d like to join about 150 of your peers in receiving a monthly notice (registration and the call are both free), feel free to drop me a note.

Launch Alert: ASTON/LMCG Emerging Markets (ALEMX)

This is Aston’s latest attempt to give the public – or at least “the mass affluent” – access to managers who normally employ distinctive strategies on behalf of high net worth individuals and institutions.  LMCG is the Lee Munder Capital Group (no, not the Munder of Munder NetNet and Munder Nothing-but-Net fame – that’s Munder Capital Management, a different group).  Over the five years ended December 30, 2012, the composite performance of LMCG’s emerging markets separate accounts was 2.8% while their average peer lost 0.9%.  In 2012, a good year for emerging markets overall, LMCG made 24% – about 50% better than their average peer.  The fund’s three managers, Gordon Johnson, Shannon Ericson and Vikram Srimurthy, all joined LMCG in 2006 after a stint at Evergreen Asset Management.  The minimum initial investment in the retail share class is $2500, reduced to $500 for IRAs.  The opening expense ratio will be 1.65% (with Aston absorbing an additional 4.7% of expenses).  The fund’s homepage is cleanly organized and contains links to a few supporting documents.

Launch Alert II: Matthews Asia Focus and Matthews Emerging Asia

On May 1, Matthews Asia launched two new funds. Matthews Asia Focus Fund (MAFSX and MIFSX) will invest in 25 to 35 mid- to large-cap stocks. By way of contrast, their Asian Growth and Income fund has 50 stocks and Asia Growth has 55. The manager wants to invest in high-quality companies and believes that they are emerging in Asia. “Asia now [offers] a growing pool of established companies with good corporate governance, strong management teams, medium to long operating histories and that are recognized as global or regional leaders in their industry.” The fund is managed by Kenneth Lowe, who has been co-managing Matthews Asian Growth and Income (MACSX) since 2011. The opening expense ratio, after waivers, is 1.91%. The minimum initial investment is $2500, reduced to $500 for an IRA.

Matthews Emerging Asia Fund (MEASX and MIASX) invests primarily in companies located in the emerging and frontier Asia equity markets, such as Bangladesh, Cambodia, Indonesia, Malaysia, Myanmar, Pakistan, Philippines, Sri Lanka, Thailand and Vietnam. It will be an all-cap portfolio with 60 to 100 names. The fund will be managed by Taizo Ishida, who also manages managing the Asia Growth (MPACX) and Japan (MJFOX) funds. The opening expense ratio, after waivers, is 2.16%. The minimum initial investment is $2500, reduced to $500 for an IRA.

Funds in Registration

New mutual funds must be registered with the Securities and Exchange Commission before they can be offered for sale to the public. The SEC has a 75-day window during which to call for revisions of a prospectus; fund companies sometimes use that same time to tweak a fund’s fee structure or operating details. Every day we scour new SEC filings to see what opportunities might be about to present themselves. Many of the proposed funds offer nothing new, distinctive or interesting. Some are downright horrors of Dilbertesque babble (see “Synthetic Reverse Convertibles,” below).

Funds in registration this month won’t be available for sale until, typically, the beginning of July 2013. We found fifteen no-load, retail funds (and Gary Black) in the pipeline, notably:

AQR Long-Short Equity Fund will seek capital appreciation through a global long/short portfolio, focusing on the developed world.  “The Fund seeks to provide investors with three different sources of return: 1) the potential gains from its long-short equity positions, 2) overall exposure to equity markets, and 3) the tactical variation of its net exposure to equity markets.”  They’re targeting a beta of 0.5.  The fund will be managed by Jacques A. Friedman, Lars Nielsen and Andrea Frazzini (Ph.D!), who all co-manage other AQR funds.  Expenses are not yet set.  The minimum initial investment for “N” Class shares is $1,000,000 but several AQR funds have been available through fund supermarkets for a $2500 investment.  AQR deserves thoughtful attention, but their record across all of their funds is more mixed than you might realize.  Risk Parity has been a fine fund while others range from pretty average to surprisingly weak.

RiverPark Structural Alpha Fund will seek long-term capital appreciation while exposing investors to less risk than broad stock market indices.  Because they believe that “options on market indices are generally overpriced,” their strategy will center on “selling index equity options [which] will structurally generate superior returns . . . [with] less volatility, more stable returns, and reduce[d] downside risk.”  This portfolio was a hedge fund run by Wavecrest Asset Management.  That fund launched on September 29, 2008 and will continue to operate under it transforms into the mutual fund, on June 30, 2013.  The fund made a profit in 2008 and returned an average of 10.7% annually through the end of 2012.  Over that same period, the S&P500 returned 6.2% with substantially greater volatility.  The Wavecrest management team, Justin Frankel and Jeremy Berman, has now joined RiverPark – which has done a really nice job of finding talent – and will continue to manage the fund.   The opening expense ratio with be 2.0% after waivers and the minimum initial investment is $1000.

Curiously, over half of the funds filed for registration on the same day.  Details on these funds and the list of all of the funds in registration are available at the Observer’s Funds in Registration page or by clicking “Funds” on the menu atop each page.

Manager Changes

On a related note, we also tracked down 37 fund manager changes. Those include Oakmark’s belated realization that they needed at least three guys to replace the inimitable Ed Studzinski on Oakmark Equity and Income (OAKBX), and a cascade of changes triggered by the departure of one of the many guys named Perkins at Perkins Investment Management.

Briefly Noted . . .

Seafarer visits Paris: Seafarer has been selected to manage a SICAV, Essor Asie (ESSRASI).  A SICAV (“sea cav” for the monolingual among us, Société d’Investissement À Capital Variable for the polyglot) is the European equivalent of an open-end mutual fund. Michele Foster reports that “It is sponsored by Martin Maurel Gestion, the fund advisory division of a French bank, Banque Martin Maurel.  Essor translates to roughly arising or emerging, and Asie is Asia.”  The fund, which launched in 1997, invests in Asia ex-Japan and can invest in both debt and equity.  Given both Mr. Foster’s skill and his schooling at INSEAD, it seems like a natural fit.

Out of exuberance over our new graphic design, we’ve poured our Seafarer Overseas Growth and Income (SFGIX) profile into our new reprint design template.  Please do let us know how we could tweak it to make it more visually effective and functional.

Nile spans the globe: Effective May 1, 2013, Nile Africa Fixed Income Fund became Nile Africa and Frontier Bond Fund.  The change allows the fund to add bonds from any frontier-market on the planet to its portfolio.

Nationwide is absorbing 17 HighMark Mutual Funds: The changeover will take place some time in the third quarter of 2013.  This includes most of the Highmark family and the plan is for the current sub-advisers to be retained.  Two HighMark funds, Tactical Growth & Income Allocation and Tactical Capital Growth, didn’t make the cut and are scheduled for liquidation.

USAA is planning to launch active ETFs: USAA has submitted paperwork with the SEC seeking permission to create 14 actively managed exchange-traded funds, mostly mimicking already-existing USAA mutual funds. 

Small Wins for Investors

On or before June 30, 2013, Artio International Equity, International Equity II and Select Opportunities funds will be given over to Aberdeen’s Global Equity team, which is based in Edinburgh, Scotland.  The decline of the Artio operation has been absolutely stunning and it was more than time for a change.  Artio Total Return Bond Fund and Artio Global High Income Fund will continue to be managed by their current portfolio teams.

ATAC Inflation Rotation Fund (ATACX) has reduced the minimum initial investment for its Investor Class Shares from $25,000 to $2,500 for regular accounts and from $10,000 to $2,500 for IRA accounts.

Longleaf Partners Global Fund (LLGLX) reopened to new investment on April 16, 2013.  I was baffled by its closing – it discovered, three weeks after launch, that there was nothing worth buying – and am a bit baffled by its opening, which occurred after the unattractive market had risen by another 3%.

Vanguard announced on April 3 that it is reopening the $9 billion Vanguard Capital Opportunity Fund (VHCOX) to individual investors and removing the $25,000 annual limit on additional purchases.  The fund has seen substantial outflows over the past three years.  In response, the board decided to make it available to individual investors while leaving it closed to all financial advisory and institutional clients, other than those who invest through a Vanguard brokerage account.  This is a pretty striking opportunity.  The fund is run by PRIMECAP Management, which has done a remarkable job over time.

Closings

DuPont Capital Emerging Markets Fund (DCMEX) initiated a “soft close” on April 30, 2013.

Effective June 30, 2013, the FMI Large Cap (FMIHX) Fund will be closed to new investors.

Eighteen months after launching the Grandeur Peak Funds, Grandeur Peak Global Advisors announced that it will soft close both the Grandeur Peak Global Opportunities Fund (GPGOX) and the Grandeur Peak International Opportunities (GPIOX) Fund on May 1, 2013.

After May 17, 2013 the SouthernSun Small Cap Fund (SSSFX) will be closed to new investors.  The fund has pretty consistently generated returns 50% greater than those of its peers.  The same manager, Michael Cook, also runs the smaller, newer, midcap-focused SouthernSun US Equity Fund (SSEFX).  The latter fund’s average market cap is low enough to suggest that it holds recent alumni of the small cap fund.  I’ll note that we profiled all four of those soon-to-be-closed funds when they were small, excellent and unknown.

Touchstone Merger Arbitrage Fund (TMGAX) closed to new accounts on April 8, 2013.   The fund raised a half billion in under two years and substantially outperformed its peers, so the closing is somewhere between “no surprise” and “reassuring.”

Old Wine, New Bottles

In one of those “what the huh?” announcements, the Board of Trustees of the Catalyst Large Cap Value Fund (LVXAX) voted “to change in the name of the Fund to the Catalyst Insider Buying Fund.” Uhh … there already is a Catalyst Insider Buying Fund (INSAX). 

Lazard U.S. High Yield Portfolio (LZHOX) is on its way to becoming Lazard U.S. Corporate Income Portfolio, effective June 28, 2013.  It will invest in bonds issued by corporations “and non-governmental issuers similar to corporations.”  They hope to focus on “better quality” (their term) junk bonds. 

Off to the Dustbin of History

Dreyfus Small Cap Equity Fund (DSEAX) will transfer all of its assets in a tax-free reorganization to Dreyfus/The Boston Company Small Cap Value Fund (STSVX).

Around June 21, 2013, Fidelity Large Cap Growth Fund (FSLGX) will disappear into Fidelity Stock Selector All Cap Fund (FDSSX). This is an enormously annoying move and an illustration of why one might avoid Fidelity.  FSLGX’s great flaw is that it has attracted only $170 million; FDSSX’s great virtue is that it has attracted over $3 billion.  FDSSX is an analyst-run fund with over 1100 stocks, 11 named managers and a track record inferior to FSLGX (which has one manager and 134 stocks).

Legg Mason Capital Management All Cap Fund (SPAAX) will be absorbed by ClearBridge Large Cap Value Fund (SINAX).  The Clearbridge fund is cheaper and better, so that’s a win of sorts.

In Closing …

If you haven’t already done so, please do consider bookmarking our Amazon link.  It generates a pretty consistent $500/month for us but I have to admit to a certain degree of trepidation over the imminent (and entirely sensible) change in law which will require online retailers with over a $1 million in sales to collect state sales tax.  I don’t know if the change will decrease Amazon’s attractiveness or if it might cause Amazon to limit compensation to the Associates program, but it could.

As always, the Amazon and PayPal links are just … uhh, over there —>

That’s all for now, folks!

Dear friends,

As most of you know, my day job is as a professor at Augustana College in Rock Island, Illinois. We have a really lovely campus (one prospective student once joked that we’re the only college he’d visited that actually looked like its postcards) and, as the weather has warmed, I’ve returned to taking my daily walk over the lunch hour.

We have three major construction projects underway, a lot for a school our size. We’re renovating Old Main, which was built in 1884, originally lit gas lanterns and warmed by stoves in the classrooms. After a century of fiddling with it, we finally resolved to strip out a bunch of “improvements” from days gone by, restore some of its original grandeur and make it capable of supporting 21^st century classes.

We’re also building Charles D. Lindberg Stadium, where our football team will finally get to have a locker room and seating for 1800. It’s emblematic that our football stadium is actually named for a national debate champion; we’re kind of into the whole scholar-athlete ethos. (We have the sixth greatest number of Academic All-Americans of any school in the country, just behind Stanford and well ahead of Texas.)

And we’re creating a Center for Student Life, which is “fused” to the 4^th floor of our library. The Center will combine dining, study, academic support and student activities. It’s stuff we do now but that’s scattered all over creation.

Two things occurred to me on my latest walk. One is that these buildings really are investments in our future. They represent acts of faith that, even in turbulent times, we need to plan and act prudently now to create the future we imagine. And the other is that they represent a remarkable balance: between curricular, co-curricular and extra-curricular, between mind, body and spirit, between strengthening what we’ve always had and building something new.

On one level, that’s just about one college and one set of hopes. But, at another, it strikes me as surprisingly useful guidance for a lot more than that: plan, balance, act, dare.

Oh! So that’s what a Stupid Pill looks like!

In a widely misinterpreted March 25^th column, Chuck Jaffe raises the question of whether it’s time to buy a bear market fund.  Most folks, he argues, are addicted to performance-chasing.  What better time to buy stocks than after they’ve doubled in price?  What better time to hedge your portfolio than after they’re been halved?  That, of course, is the behavior of the foolish herd.  We canny contrarians are working now to hedge our gains with select bets against the market, right?  

Talk to money managers and the guys behind bear-market funds, however, and they will tell you their products are designed mostly to be a hedge, diversifying risks and protecting against declines. They say the proper use of their offerings involves a small-but-permanent allocation to the dark side, rather than something to jump into when everything else you own looks to be in the tank.

They also say — and the flows of money into and out of bear-market issues shows — that investors don’t act that way.

At base, he’s not arguing for the purchase of a bear-market fund or a gold fund. He’s using those as tools for getting folks to think about their own short time horizons and herding instincts.

He generously quotes me as making a more-modest observation: that managers, no matter the length or strength of their track records, are quickly dismissed (or ignored) if they lag their peers for more than a quarter. Our reaction tends to be clear: the manager has taken stupid pills and we’re leaving.  Jeff Vinik at Magellan: Manager of the Year in 1993, Stupid Pill swallower in ’95, gone in ’96.  (Started a hedge fund, making a mint.) Bill Nygren at Oakmark Select: intravenous stupid drip around 2007.  (Top 1% since then on both his funds.)  Bruce Berkowitz at Fairholme: Manager of the Decade, slipped off to Walgreen’s in 2011 for stupid pills, got trashed and saw withdrawals of a quarter billion dollars a week. (Top 1% in 2012, closed his funds to new investments, launching a hedge fund now). 

By way of example, one of the most distinguished small cap managers around is Eric Cinnamond who has exercised the same rigorous absolute-return discipline at three small cap funds: Evergreen, Intrepid and now Aston/River Road.  His discipline is really simple: don’t buy or hold anything unless it offers a compelling, absolute value.  Over the period of years, that has proven to be a tremendously rewarding strategy for his investors. 

When I spoke to Eric late in March, he offered a blunt judgment: “small caps overall appear wildly expensive as people extrapolate valuations from peak profits.” That is, current valuations make sense only if you believe that firms experiencing their highest profits won’t ever see them drop back to normal levels.  And so he’s selling stuff as it becomes fully valued, nibbling at a few things (“hard asset companies – natural gas, precious metals – are getting treated as if they’re in a permanent depression but their fundamentals are strong and improving”), accumulating cash and trailing the market.  By a mile.  Over the twelve months ending March 29, 2013, ARIVX returned 7.5% – which trailed 99% of his small value peers. 

The top SCV fund over that period?  Scott Barbee’s microcap Aegis Value (AVALX) fund with a 32% return and absolutely no cash on the books.  As I noted in a FundAlarm profile, it’s perennially a one- or two-star fund with more going for it than you’d imagine.

Mr. Cinnamond seemed acquainted with the sorts of comments made about his fund on our discussion board: “I bailed on ARIVX back in early September,” “I am probably going to bail soon,” and “in 2012 to the present the funds has ranked, in various time periods, in the 97%-100% rank of SCV… I’d look at other SCV Funds.”  Eric nods: “there are investors better suited to other funds.  If you lose assets, so be it but I’d rather lose assets than lose my shareholders’ capital.”  John Deysher, long-time manager of Pinnacle Value (PVFIX), another SCV fund that insists on an absolute rather than relative value discipline, agrees, “it’s tough holding lots of cash in a sizzling market like we’ve seen . . . [cash] isn’t earning much, it’s dry powder available for future opportunities which of course aren’t ‘visible’ now.”

One telling benchmark is GMO Benchmark-Free Allocation IV (GBMBX). GMO’s chairman, Jeremy Grantham, has long argued that long-term returns are hampered by managers’ fear of trailing their benchmarks and losing business (as GMO so famously did before the 2000 crash).  Cinnamond concurs, “a lot of managers ‘get it’ when you read their letters but then you see what they’re doing with their portfolios and wonder what’s happening to them.” In a bold move, GMO launched a benchmark-free allocation fund whose mandate was simple: follow the evidence, not the crowd.  It’s designed to invest in whatever offers the best risk-adjusted rewards, benchmarks be damned.  The fund has offered low risks and above-average returns since launch.  What’s it holding now?  European equities (35%), cash (28%) and Japanese stocks (17%).  US stocks?  Not so much: just under 5% net long.

For those interested in other managers who’ve followed Mr. Cinnamond’s prescription, I sorted through Morningstar’s database for a list of equity and hybrid managers who’ve chosen to hold substantial cash stakes now.  There’s a remarkable collection of first-rate folks, both long-time mutual fund managers and former hedge fund guys, who seem to have concluded that cash is their best option.

This list focuses on no-load, retail equity and hybrid funds, excluding those that hold cash as a primary investment strategy (some futures funds, for example, or hard currency funds).  These folks all hold over 25% cash as of their last portfolio report.  I’ve starred the funds for which there are Observer profiles.

(We’re not endorsing all of those funds.  While I tried to weed out the most obvious nit-wits, like the guy who was 96% cash and 4% penny stocks, the level of talent shown by these managers is highly variable.)

Mr. Deysher gets to the point this way: “As Buffett says, Rule 1 is ‘Don’t lose capital.’   Rule 2 is ‘Don’t forget Rule 1.’”  Steve Romick, long-time manager of FPA Crescent (FPACX), offered both the logic behind FPA’s corporate caution and a really good closing line in a recent shareholder letter:

At FPA, we aspire to protect capital, before seeking a return on it. We change our mind, not casually, but when presented with convincing evidence. Despite our best efforts, we are sometimes wrong. We take our mea culpa and move on, hopefully learning from our mistakes. We question our conclusions constantly. We do this with the approximately $20 billion of client capital entrusted to us to manage, and we simply ask the same of our elected and appointed officials whom we have entrusted with trillions of dollars more.

Nobody has all the answers. Genius fails. Experts goof.  Rather than blind faith, we need our leaders to admit failure, learn from it, recalibrate, and move forward with something better. Although we cannot impose our will on this Administration as to Mr. Bernanke’s continued role at the Fed, we would at least like to make our case for a Fed chairman more aware (at least publicly) of the unintended consequences of ultra-easy monetary policy, and one with less hubris. As the author Malcolm Gladwell so eloquently said, “Incompetence is the disease of idiots. Overconfidence is the mistake of experts…. Incompetence irritates me. Overconfidence terrifies me.”

It’s clear that over-confidence can infest pessimists as well as optimists, which was demonstrated in a March Business Insider piece entitled “The Idiot-Maker Rally: Check Out All Of The Gurus Made To Look Like Fools By This Market.”  The article is really amusing and really misleading.  On the one hand, it does prick the balloons of a number of pompous prognosticators.  On the other, it completely fails to ask what happened to invalidate – for now, anyway – the worried conclusions of some serious, first-rate strategists?

Triumph of the optimists: Financial “journalists” and you

It’s no secret that professional journalism seems to be circling a black hole: people want more information, but they want it now, free and simple. That’s not really a recipe for thoughtful, much less profitable, reporting. The universe of personal finance journals is down to two (the painfully thin Money and Kiplinger’s), CNBC’s core audience viewership is down 40% from 2008, the PBS show “Nightly Business Report” has been sold to CNBC in a bid to find viewers, and collectively newspapers have cut something like 40% of their total staff in a decade.

One response has been to look for cheap help: networks and websites look to publish content that’s provided for cheap or for free. Often that means dressing up individuals with a distinct vested interest as if they were journalists.

Case in point: Mellody Hobson, CBS Financial Analyst

I was astounded to see the amiable talking heads on the CBS Morning News turn to “CBS News Financial Analyst Mellody Hobson” for insight on how investors should be behaving (Bullish, not a bubble, 03/18/2013). Ms. Hobson, charismatic, energetic, confident and poised, received a steady stream of softball pitches (“Do you see that there’s a bubble in the stock market?” “I know people are saying we’re entering bubble territory. I don’t agree. We’re far from it. It’s a bull market!”) while offering objective, expert advice on how investors should behave: “The stock market is not overvalued. Valuations are really pretty good. This is the perfect environment for a strong stock market. I’m always a proponent of being in the market.” Nods all around.

The problem isn’t what CBS does tell you about Ms. Hobson; it’s what they don’t tell you. Hobson is the president of a mutual fund company, Ariel Investments, whose only product is stock mutual funds. Here’s a snippet from Ariel’s own website:

Should CBS mention this to you? The Code of Ethics for the Society of Professional Journalists kinda hints at it:

Journalists should be free of obligation to any interest other than the public’s right to know.

Journalists should:

• Avoid conflicts of interest, real or perceived.
• Remain free of associations and activities that may compromise integrity or damage credibility.
• Refuse gifts, favors, fees, free travel and special treatment, and shun secondary employment, political involvement, public office and service in community organizations if they compromise journalistic integrity.
• Disclose unavoidable conflicts.

CBS’s own 2012 Business Conduct Statement exults “our commitment to the highest standards of appropriate and ethical business behavior” and warns of circumstances where “there is a significant risk that the situation presented is likely to affect your business judgment.” My argument is neither that Ms. Hobson was wrong (that’s a separate matter) nor that she acted improperly; it’s that CBS should not be presenting representatives of an industry as disinterested experts on that industry. They need to disclose the conflict. They failed to do so on the air and don’t even offer a biography page for Hobson where an interested party might get a clue.

MarketWatch likewise puts parties with conflicts of interest center-stage in their Trading Deck feature which lives in the center column of their homepage, but at least they warn people that something might be amiss:

That disclaimer doesn’t appear on the homepage with the teasers, but it does appear on the first page of stories written by people who . . . well, probably shouldn’t be taken at face value.

The problem is complicated when a publisher such as MarketWatch mixes journalists and advocates in the same feature, as they do at The Trading Deck, and then headline writers condense a story into eight or ten catchy, misleading words. 

The headline says “This popular mutual fund type is losing you money.”  The story says global stock funds could boost their returns by up to 2% per year through portfolio optimization, which is a very different claim.

The author bio says “Roberto Rigobon is the Society of Sloan Fellows Professor of Applied Economics at MIT’s Sloan School of Management.”  He is a first-class scholar.  The bio doesn’t say “and a member of State Street Associates, which provides consulting on, among other things, portfolio optimization.”

The other response by those publications still struggling to hold on is adamant optimism.

In the April 2013 issue of Kiplinger’s Personal Finance, editor Knight Kiplinger (pictured laughing at his desk) takes on Helaine Olen’s Pound Foolish: Exposing the Dark Side of the Personal Finance Industry (2012). She’s a former LA Times personal finance columnist with a lot of data and a fair grasp of her industry. She argues “most of the financial advice published and dished out by the truckload is useless” – its sources are compromised, its diagnosis misses the point and its solutions are self-serving. To which Mr. Kiplinger responds, “I know quite a few longtime Kiplinger readers who might disagree with that.” That’s it. Other than for pointing to Obamacare as a solution, he just notes that . . . well, she’s just not right.

Skipping the stories on “How to Learn to Love (Stocks) Again” and “The 7 Best ETFs to Buy Now,” we come to Jane Bennett Clark’s piece entitled “The Sky Isn’t Falling.” The good news about retirement: a study by the Investment Company Institute says that investment companies are doing a great job and that the good ol’ days of pensions were an illusion. (No mention, yet again, of any conflict of interest that the ICI might have in selecting either the arguments or the data they present.) The title claim comes from a statement of Richard Johnson of the Employee Retirement Benefit Institute, whose argument appears to be that we need to work as long as we can. The oddest statement in the article just sort of glides by: “43% of boomers … and Gen Xers … are at risk of not having enough to cover basic retirement expenses and uninsured health costs.” Which, for 43% of the population, might look rather like their sky is falling.

April’s Money magazine offered the same sort of optimistic take: bond funds will be okay even if interest rates rise, Japan’s coming back, transportation stocks are signaling “full steam ahead for the market,” housing’s back and “fixed income never gets scary.”

Optimism sells. It doesn’t necessarily encourage clear thinking, but it does sell.

Folks interested in examples of really powerful journalism might turn to The Economist, which routinely runs long and well-documented pieces that are entirely worth your time, or the radio duo of American Public Media (APM) and National Public Radio (NPR). Both have really first rate financial coverage daily, serious and humorous. The most striking example of great long-form work is “Unfit for Work: The startling rise of disability in America,” the NPR piece on the rising tide of Americans who apply for and receive permanent disability status. 14 million Americans – adults and children – are now “disabled,” out of the workforce (hence out of the jobless statistics) and unlikely ever to hold a job again. That number has doubled in a generation. The argument is that disability is a last resort for older, less-educated workers who get laid off from a blue collar job and face the prospect of never being able to find a job again. The piece stirred up a storm of responses, some of which are arguable (telling the story of hard-hit Hale County makes people think all counties are like that) and others seem merely to reinforce the story’s claim (the Center for Budget and Policy Priorities says most disabled workers are uneducated and over 50 – which seems consistent with the story’s claim).

Who says mutual funds can’t make you rich?

Forbes magazine published their annual list of “The Richest People on the Planet” (03/04/2013), tracking down almost 1500 billionaires in the process. (None, oddly, teachers by profession.)

MFWire scoured the list for “The Richest Fundsters in the Game” (03/06/2013). They ended up naming nine while missing a handful of others. Here’s their list with my additions in blue:

• Charles Brandes, Brandes funds, #1342, $1.0 billion
• Thomas Bailey, Janus founder, #1342, $1.0 billion
• Mario Gabelli, Gamco #1175, $1.2 billion
• Michael Price, former Mutual Series mgr, #1107, $1.3 billion
• Fayez Sarofim, Dreyfus Appreciation mgr, #1031, $1.4 billion
• Ron Baron, Baron Funds #931, $1.6 billion
• Howard Marks, TCW then Oaktree Capital, #922, $1.65 billion
• Joe Mansueto, Morningstar #793, $1.9 billion
• Ken Fisher, investment guru and source of pop-up ads, #792, $1.9 billion
• Bill Gross, PIMCO, #641, $2.3 billion
• Charles Schwab (the person), Charles Schwab (the company) #299, $4.3 billion
• Paul Desmarais, whose Power Financial backs Putnam #276, $4.5 billion
• Rupert Johnson, Franklin Templeton #215, $5.6 billion
• Charles Johnson, Franklin Templeton #211, $5.7 billion
• Ned Johnson, Fidelity #166, worth $7 billion
• Abby Johnson, Fidelity #74, $12.7 billion

For the curious, here’s the list of billionaire U.S. investors, which mysteriously doesn’t include Bill Gross. He’s listed under “finance.”

The thing that strikes me is how much of these folks I’d entrust my money to, if only because so many became so rich on wealth transfer (in the form of fees paid by their shareholders) rather than wealth creation.

Two new and noteworthy resources: InvestingNerd and Fundfox

I had a chance to speak this week with the folks behind two new (one brand-new, one pretty durn new) sites that might be useful to some of you folks.

InvestingNerd (a little slice of NerdWallet)

NerdWallet launched in 2010 as a tool to find the best credit card offers.  It claimed to be able to locate and sort five times as many offers as its major competitors.  With time they added other services to help consumers save money. For example the TravelNerd app to help travelers compare costs related to their travel plans, like finding the cheapest transportation to the airport or comparing airport parking prices, the NerdScholar has a tool for assessing law schools based on their placement rates. NerdWallet makes its money from finder’s fees: if you like one of the credit card offers they find for you and sign up for that card, the site receives a bit of compensation. That’s a fairly common arrangement used, for example, by folks like BankRate.com.

On March 27, NerdWallet launched a new site for its investing vertical, InvestingNerd. It brings together advice (TurboTax vs H&R Block: Tax Prep Cost Comparison), analysis (Bank Stress Test Results: How Stressful Were They?) and screening tools.

I asked Neda Jafarzadeh, a public relations representative over at InvestingNerd, what she’d recommend as most distinctive about the site.  She offered up three features that she thought would be most intriguing for investors in particular: 

• InvestingNerd recently rolled out a new tool – the Mutual Fund Screener. This tool allows investors to find, search and compare over 15,000 funds. In addition, it allows investors to filter through funds based on variables like the fund’s size, minimum required investment, and the fund’s expense ratio. Also, investors can screen funds using key performance metrics such as the fund’s risk-adjusted return rate, annual volatility, market exposure and market outperformance.
• In addition, InvestingNerd has a Brokerage Comparison Tool which provides an unbiased comparison of 69 of the most popular online brokerage accounts. The tool can provide an exact monthly cost for the investor based on their individual trading behavior.
• InvestingNerd also has a blog where we cover news on financial markets and the economy, release studies and analyses related to investing, in addition to publishing helpful articles on various other investment and tax related topics.

Their fund screener is . . . interesting.  It’s very simple and updates a results list immediately.  Want an equity fund with a manager who’s been around more than 10 years?  No problem.  Make it a small cap?  Sure.  Click.  You get a list and clickable profiles.  There are a couple problems, though.  First, they have incomplete or missing explanations of what their screening categories (“outperformance”) means.  Second, their results list is inexplicably incomplete: the same search in Morningstar turns up noticeably more funds.   Finally, they offer a fund rating (“five stars”) with no evidence of what went into it or what it might tell us about the fund’s future.  When I ask with the folks there, it seemed that the rating was driven by risk-adjusted return (alpha adjusted for standard deviation) and InvestingNerd makes no claim that their ratings have predictive validity.

It’s worth looking at and playing with.  Their screener, like any, is best thought of as a tool for generating a due diligence list: a way to identify some funds worth digging into.  Their articles cover an interesting array of topics (considering a gray divorce?  Shopping tips for folks who support gay rights?) and you might well use one of their tools to find the free checking account you’ve always dreamed of.

Fundfox

Fundfox is a site for those folks who wake in the morning and ask themselves, “I wonder who’s been suing the mutual fund industry this week?” or “I wonder what the most popular grounds for suing a fund company this year is?”

Which is to say fund company attorneys, compliance folks, guys at the SEC and me.

It was started by David Smith, who used to work for the largest liability insurance provider to the fund industry, as a simpler, cleaner, more specialized alternative to services such as WestLaw or Lexis. It covers lawsuits filed against mutual funds, period. That really reduces the clutter. The site does include a series of dashboards (what fund types are most frequently the object of suits?) and some commentary.

You can register for free and get a lot of information a la Morningstar or sign up for a premium membership and access serious quantities of filings and findings. There’s a two week trial for the premium service and I really respect David’s decision to offer a trial without requiring a credit card. Legal professionals might well find the combination of tight focus, easy navigation and frequent updates useful.

Introducing: The Elevator Talk

The Elevator Talk is a new feature which began in February. Since the number of funds we can cover in-depth is smaller than the number of funds worthy of in-depth coverage, we’ve decided to offer one or two managers each month the opportunity to make a 200 word pitch to you. That’s about the number of words a slightly-manic elevator companion could share in a minute and a half. In each case, I’ve promised to offer a quick capsule of the fund and a link back to the fund’s site. Other than that, they’ve got 200 words and precisely as much of your time and attention as you’re willing to share. These aren’t endorsements; they’re opportunities to learn more.

Elevator Talk #3: Bayard Closser, Vertical Capital Income Fund (VCAPX)

Mr. Closser is president of the Vertical Capital Markets Group and one of the guys behind Vertical Capital Income Fund (VCAPX), which launched on December 30, 2011. VCAPX is structured as an interval fund, a class of funds rare enough that Morningstar doesn’t even track them. An interval fund allows you access to your investment only at specified intervals and only to the extent that the management can supply redemptions without disrupting the portfolio. The logic is that certain sorts of investments are impossible to pursue if management has to be able to accommodate the demands of investors to get their money now. Hedge funds, using lock-up periods, pursue the exact same logic. Given the managers’ experience in structuring hedge funds, that seems like a logical outcome. They do allow for the possibility that the fund might, with time, transition over to a conventional CEF structure:

Vertical chose an interval fund structure because we determined that it is the best delivery mechanism for alternative assets. It helps protect shareholders by giving them limited liquidity, but also provides the advantages of an open-end fund, including daily pricing and valuation. In addition, it is easy to convert an interval fund to a closed-end fund as the fund grows and we no longer want to acquire assets.

Here’s what Bayard has to say (in a Spartan 172 words) about VCAPX:

A closed-end interval fund, VCAPX invests in whole mortgage loans and first deeds of trust. We purchase the loans from lenders at a deep discount and service them ourselves through our sister company Vertical Recovery Management, which can even restructure loans for committed homeowners to help them keep current on monthly payments.

Increasingly, even small investors are seeking alternative investments to increase diversification. VCAPX can play that role, as its assets have no correlation or a slight negative correlation with the stock market.

While lenders are still divesting mortgages at a deep discount, the housing market is improving, creating a “Goldilocks” effect that may be “just right” for the fund.

VCAPX easily outperformed its benchmark in its first year of operation (Dec. 30, 2011 through Dec. 31, 2012), with a return of 12.95% at net asset value, compared with 2.59% for the Barclays U.S. Mortgage-Backed Securities (MBS) Index.

At the fund’s maximum 4.50% sales charge, the return was 7.91%. The fund also declared a 4.01% annualized dividend (3.54% after the sales charge).

The fund’s minimum initial investment is $5,000 for retail shares, reduced to $1,000 for IRAs. There’s a front sales load of 4.5% but the fund is available no-load at both Schwab and TDAmeritrade. They offer a fair amount of background, risk and performance information on the fund’s website. You might check under the “Resource Center” tab for copies of their quarterly newsletter.

The Cook and Bynum Fund, Conference Call Highlights

Recently published research laments the fact that actively-managed funds have become steadily less active and more index-like over time.

The changing imperatives of the fund industry have led many managers to become mediocre by design. Their response is driven by the anxious desire for so-called “sticky” assets. The strategy is simple: design a product to minimize the risk that it will ever spectacularly trail its peer group. If you make your fund very much like its benchmark, you will never be a singular disaster and so investors (retirement plan investors, particularly) will never be motivated to find something better. The fact that you never excel is irrelevant. The result is a legion of large, expensive, undistinguished funds who seek safety in the herd.

The Cook and Bynum Fund (COBYX) strikes me as the antithesis of those. Carefully constructed, tightly focused, and intentionally distinct. On Tuesday, March 5, we spoke with Richard Cook and Dowe Bynum in the first of three conversations with distinguished managers who defy that trend through their commitment to a singular discipline: buy only the best. For Richard and Dowe, that translates to a portfolio with only seven holdings and a 34% cash stake. Since inception (through early March, 2013), they managed to capture 83% of the market’s gains with only 50% of its volatility; in the past twelve months, Morningstar estimates that they captured just 7% of the market’s downside.

Among the highlights of the call for me:

1. The guys are willing to look stupid. There are times, as now, when they can’t find stocks that meet their quality and valuation standards. The rule for such situations is simply: “When compelling opportunities do not exist, it is our obligation not to put capital at risk.” They happily admit that other funds might well reap short-term gains by running with the pack, but you “have to be willing to look stupid.” Their current cash stake is about 34%, “the highest cash level ever in the fund.” That’s not driven by a market call; it’s a simple residue of their inability to find great opportunities.
2. The guys are not willing to be stupid. Richard and Dowe grew up together and are comfortable challenging each other. Richard knows the limits of Dowe’s knowledge (and vice versa), “so we’re less likely to hold hands and go off the cliff together.” In order to avoid that outcome, they spend a lot of time figuring out how not to be stupid. They relegate some intriguing possibilities to the “too hard pile,” those businesses that might have a great story but whose business model or financials are simply too hard to forecast with sufficient confidence. They think about common errors (commitment bias, our ability to rationalize why we’re not going to stop doing something once we’ve started, chief among them) and have generated a set of really interesting tools to help contain them. They maintain, for example, a list all of the reasons why they don’t like their current holdings. In advance of any purchase, they list all of the conditions under which they’d quickly sell (“if their star CEO leaves, we do too”) and keep that on top of their pile of papers concerning the stock.
3. They’re doing what they love. Before starting Cook & Bynum (the company), both of the guys had high-visibility, highly-compensated positions in financial centers. Richard worked for Tudor Investments in Stamford, CT, while Dowe was with Goldman Sachs in New York. The guys believe in a fundamental, value- and research-driven, stock-by-stock process. What they were being paid to do (with Tudor’s macro event-driven hedge fund strategies for Richard) was about as far from what they most wanted as they could get. And so they quit, moved back to Alabama and set up their own shop to manage their own money and the investments of high net-worth individuals. They created Cook & Bynum (the fund) in response to an investor’s request for a product accessible to family and friends.  The $250 million invested with them (about $100 million in the fund) includes 100% of their own liquid net worth, with their investment split between the fund and the partnerships. Since both sets of vehicles use the same fees and structure, there’s no conflict between the two.
4. They do prodigious research without succumbing to the “gotta buy something” impulse. While they spend the majority of their time in their offices, they’re also comfortable with spending two or three weeks at a time on the road. Their argument is that they’ve got to understand the entire ecosystem in which a firm operates – from the quality of its distribution network to the feelings of its customers – which they can only do first-hand. Nonetheless, they’ve been pretty good at resisting “deal momentum.”  They spent, for example, some three weeks traveling around Estonia, Poland and Hungary. Found nothing compelling. Traveled Greece and Turkey and learned a lot, including how deeply dysfunctional the Greek economy is, but bought nothing.
5. They’re willing to do what you won’t. Most of us profess a buy low / buy the unloved / break from the herd / embrace our inner contrarian ethos. And most of us are deluded. Cook and Bynum seem rather less so: they’re holding cash now while others buy stocks after the market has doubled and profits margins hit records but in the depth of the 2008 meltdown they were buyers. (They report having skipped Christmas presents in 2008 in order to have extra capital to invest.) As the market bottomed in March 2009, the fund was down to 2% cash.

Bottom Line: the guys seem to be looking for two elusive commodities. One is investments worth pursuing. The other is investing partners who share their passion for compelling investments and their willingness to let other investors charge off in a herd. Neither is as common as you might hope.

For folks interested but unable to join us, here’s the complete audio of the hour-long conversation.

The COBYX conference call

When you click on the link, the file will load in your browser and will begin playing after it’s partially loaded. If the file downloads, instead, you may have to double-click to play it.

We periodically invite our colleague, Charles Boccadoro, to share his perspectives on funds which were the focus of our conference calls. Charles’ ability to apprehend and assess tons of data is, we think, a nice complement to my strengths which might lie in the direction of answering the questions (1) does this strategy make any sense? And (2) what’s the prospect that they can pull it off? Without further ado, here’s Charles on Cook and Bynum

Inoculated By Value

To describe Richard P. Cook and J. Dowe Bynum (C&B) as value investors would be accurate, but certainly not adequate. Their website is rich with references to value investment principles championed by Benjamin Graham, John Burr Williams, Charlie Munger, and Warren Buffet. “The value investing inoculation took immediately,” C&B explain, after reading Mr. Buffett’s biography in high school. They have been investing together literally since childhood and at age 23 they actually tried to start their own mutual fund. That did not happen, but years later in 2001 they established Cook & Bynum Capital Management and in mid-2009 they launched their namesake The Cook & Bynum Fund COBYX, which turned out to be perfect timing.

Like many experienced investors on MFO, C&B do not view volatility as risk, but as opportunity. That said, the lack of volatility in 43 months of COBYX performance through February 2013 is very alluring and likely helped propel the fund’s popularity, now with $102M AUM. Its consistent growth rate resembles more a steady bond fund, say PONDX, than an equity fund. The fund received a 5-Star Morningstar Rating for the 3-year period ending mid-2012.

Other than strictly adhering to the three most important words of value investing (“Margin of Safety”) when assessing stock price against inherent value, C&B do not impose explicit drawdown control or practice dynamic allocation, like risk-parity AQRNX or long-short ARLSX. They try instead to buy wonderful businesses at discounted prices. To quote Mr. Buffett: “If you’re right about what, you don’t have to worry about when very much.”

Fortunately, history is on their side. The chart below depicts drawdowns for the last 50 years, comparing value versus growth large cap fund averages. Value funds indeed generally suffer smaller and shorter drawdowns. But not always. The term “value trap” became ubiquitous during the financial collapse of 2008, when many highly respected, long established, and top performing value funds (prime example DODGX) were simply hammered. And, when the forest is burning, all the trees go with it.

While Mr. Cook and Mr. Bynum must have managed their private accounts through such turbulent times, COBYX has enjoyed bull market conditions since its inception. (Perhaps a reluctant bull, but nonetheless…) Still, when the market dipped 7% in May 2012, COBYX did not drop at all. In September 2011, SP500 dropped 16%, COBYX dipped only 5%. Its biggest drawdown was June 2010 at 9% versus 13% for the market. The tame behavior is due partly to C&B’s propensity to hold cash. Not as a strategy, they explain, but as residual to value opportunities available. They unloaded Kraft, for example, shortly after the company split its international and domestic businesses. Here is an excerpt from COBYX’s 2012 annual report explaining their move:

Despite neither of the companies’ fundamental business prospects changing one iota, the market reacted to the news by trading both of the stocks higher. We used this opportunity to liquidate our stake in both companies. It is popular, even within our value discipline, for investors to advocate various financial engineering strategies in an attempt to drive near-term stock price appreciation rather than to focus on a company’s long-term cash flows – where real value resides.

C&B take pride in not being “closet indexers” to their benchmarks SP500 and MSCI All Country World Index (ACWI). So far they have tended to hold consumer defensive stocks, like Wal-Mart, Procter & Gamble, and Coca-Cola. Although more recently, they own Microsoft, which accounts for 16% of the portfolio. COBYX’s lifetime correlation to SP500 is 66% and its beta is only 0.47.

The strategy has delivered handsomely. Just how good is it? Below compares COBYX with several other Morningstar 5 star funds, including Charles Akre’s AKREX, Steven Romick’s FPA Crescent Fund, Donald Yacktman’s YAFFX, Sequoia Fund (perhaps the greatest fund ever), plus landmark Berkshire Hathaway.

Since COBYX inception, it has produced the highest risk adjusted returns, based on both Sharpe and Sortino Ratios, with the lowest standard and downside volatilities. It has delivered more than 90% of SP500 total return with less than 60% of its volatility. Interestingly, all of these top-performing mutual funds have low beta against SP500, like COBYX, but again for the record, C&B reject metrics like beta: “Risk is not volatility.”

COBYX is also highly concentrated. As of December 2012, it held only seven equities. C&B’s strategy is to focus only on companies whose businesses they can understand – depth of insight is the edge they seek. They employ Kelly Criterion to size positions in their portfolio, which represents an implicit form of risk management. John Kelly developed it in 1950s at AT&T’s Bell Labs to optimize transmission rate through long distance phone lines. Edward Thorpe then famously employed the technique to “Beat the Dealer” and later to help optimize his hedge fund investments at Princeton/Newport Partners. In C&B’s implementation, Kelly is edge over odds, or expected returns over range of outcomes. What is currently their biggest position? Cash at 34%.

Bottom-line: Hard not to love this young fund, performance to date, and philosophy employed by its managers. High ER, recently dropped from 1.88 to 1.49, has been its one detractor. Hopefully, ER reduction continues with AUM growth, since world-stock fund median is already a hefty 1.20 drag.

(Thank you, sir! David)

Conference Call Upcoming: RiverPark Wedgewood Growth, April 17

Large-cap funds, and especially large large-cap funds, suffer from the same tendency toward timidity and bloat that I discussed above. On average, actively-managed large growth funds hold 70 stocks and turn over 100% per year. The ten largest such funds hold 311 stocks on average and turn over 38% per year.

The well-read folks at Wedgewood see the path to success differently. Manager David Rolfe endorses Charles Ellis’s classic essay, “The Losers Game” (Financial Analysts Journal, July 1975). Reasoning from war and sports to investing, Ellis argues that losers games are those where, as in amateur tennis:

The amateur duffer seldom beats his opponent, but he beats himself all the time. The victor in this game of tennis gets a higher score than the opponent, but he gets that higher score because his opponent is losing even more points.

Ellis argues that professional investors, in the main, play a losers game by becoming distracted, unfocused and undistinguished. Mr. Rolfe and his associates are determined not to play that game. They position themselves as “contrarian growth investors.” In practical terms, that means:

1. They force themselves to own fewer stocks than they really want to. After filtering a universe of 500-600 large growth companies, Wedgewood holds only “the top 20 of the 40 stocks we really want to own.” Currently, 55% of the fund’s assets are in its top ten picks.
2. They buy when other growth managers are selling. Most growth managers are momentum investors, they buy when a stock’s price is rising. Wedgewood would rather buy during panic than during euphoria.
3. They hold far longer once they buy. The historical average for Wedgewood’s separate accounts which use this exact discipline is 15-20% turnover and the fund is around 25%.
4. And then they spend a lot of time watching those stocks. “Thinking and acting like business owners reduces our interest to those few businesses which are superior,” Rolfe writes, and he maintains a thoughtful vigil over those businesses.

David is articulate, thoughtful and successful. His reflections on “out-thinking the index makers” strike me as rare and valuable, as does his ability to manage risk while remaining fully invested.

Our conference call will be Wednesday, April 17, from 7:00 – 8:00 Eastern.

How can you join in?

If you’d like to join in, just click on register and you’ll be taken to the Chorus Call site. In exchange for your name and email, you’ll receive a toll-free number, a PIN and instructions on joining the call. If you register, I’ll send you a reminder email on the morning of the call.

Remember: registering for one call does not automatically register you for another. You need to click each separately. Likewise, registering for the conference call mailing list doesn’t register you for a call; it just lets you know when an opportunity comes up.

Observer Fund Profiles

Each month the Observer provides in-depth profiles of between two and four funds. Our “Most Intriguing New Funds” are funds launched within the past couple years that most frequently feature experienced managers leading innovative newer funds. “Stars in the Shadows” are older funds that have attracted far less attention than they deserve. This month’s lineup features:

The Cook and Bynum Fund (COBYX): an updated profile of this concentrated value fund.

Whitebox Long Short Equity (WBLSX): the former hedge fund has a reasonably distinctive, complicated strategy and I haven’t had much luck in communicating with fund representatives over the last month or so about the strategy. Given a continued high level of reader interest in the fund, it seemed prudent to offer, with this caveat, a preliminary take on what they do and how you might think about it.

Launch Alert: BBH Global Core Select (BBGRX)

There are two things particularly worth knowing about BBH (for Brown Brothers Harriman) Core Select (BBTRX): (1) it’s splendid and (2) it’s closed. It’s posted a very consistent pattern of high returns and low risk, which eventually drew $5 billion to the fund and triggered its soft close in November. At the moment that BBH closed Core Select, they announced the launch of Global Core Select. That fund went live on March 28, 2013.

Global Core Select will be co-managed by Regina Lombardi and Tim Hartch, two members of the BBH Core Select investment team. Hartch is one of Core Select’s two managers; Lombardi is one of 11 analysts. The Fund is the successor to the BBH private investment partnership, BBH Global Funds, LLC – Global Core Select, which launched on April 2, 2012. Because the hedge fund had less than a one year of operation, there’s no performance record for them reported. The minimum initial investment in the retail class is $5,000. The expense ratio is capped at 1.50% (which represents a generous one basis-point sacrifice on the adviser’s part).

The strategy snapshot is this: they’ll invest in 30-40 mid- to large-cap companies in both developed and developing markets. They’ll place at least 40% outside the US. The strategy seems identical to Core Select’s: established, cash generative businesses that are leading providers of essential products and services with strong management teams and loyal customers, and are priced at a discount to estimated intrinsic value. They profess a “buy and own” approach.

What are the differences: well, Global Core Select is open and Core Select isn’t. Global will double Core’s international stake. And Global will have a slightly-lower target range: its investable universe starts at $3 billion, Core’s starts at $5 billion.

I’ll suggest three reasons to hesitate before you rush in:

1. There’s no public explanation of why closing Core and opening Global isn’t just a shell game. Core is not constrained in the amount of foreign stock it owns (currently under 20% of assets). If Core closed because the strategy couldn’t handle the additional cash, I’m not sure why opening a fund with a nearly-identical strategy is warranted.
2. Expenses are likely to remain high – even with $5 billion in a largely domestic, low turnover portfolio, BBH charges 1.25%.
3. Others are going to rush in. Core’s record and unavailability is going to make Global the object of a lot of hot money which will be rolling in just as the market reaches its seasonal (and possibly cyclical) peak.

That said, this strategy has worked elsewhere. The closed Oakmark Select (OAKLX) begat Oakmark Global Select (OAKWX) and closed Leuthold Core (LCORX) led to Leuthold Global (GLBLX). In both cases, the young fund handily outperformed its progenitor. Here’s the nearly empty BBH Global Core Select homepage.

Launch Alert: DoubleLine Equities Small Cap Growth Fund (DLESX)

DoubleLine continues to pillage TCW, the former home of its founder and seemingly of most of its employees. DoubleLine, which manages more than $53 billion in mostly fixed income assets, has created a DoubleLine Equity LP division. The unit’s first launch, DoubleLine Equities Small Cap Growth Fund, occurs April 1, 2013. Growth Fund (DLEGX) and Technology Fund (DLETX) are close behind in the pipeline.

Husam Nazer, who oversaw $4-5 billion in assets in TCW’s Small and Mid-Cap Growth Equities Group, will manage the new fund. DoubleLine hired Nazer’s former TCW investing partner, Brendt Stallings, four stock analysts and a stock trader. Four of the new hires previously worked for Nazer and Stallings at TCW.

The fund will invest mainly in stocks comparable in size to those in the Russell US Growth index (which tops out at around $4 billion). They’ll invest mostly in smaller U.S. companies and in foreign small caps which trade on American exchanges through ADRs. The manager professes a “bottom up” approach to identify investment. He’s looking for a set of reasonable and unremarkable characteristics: consistent and growing earnings, strong balance sheet, good competitive position, good management and so on. The minimum initial investment in the retail class is $2,000, reduced to $500 for IRAs. The expense ratio is capped at 1.40%.

I’ll suggest one decent reason to hesitate before you bet that DoubleLine’s success in bonds will be matched by its success in stocks:

Mr. Nazer’s last fund wasn’t really all that good. His longest and most-comparable charge is TCW Small Cap Growth (TGSNX). Morningstar rates it as a two-star fund. In his eight years at the fund, Mr. Nazer had a slow start (2005 was weak) followed by four very strong years (2006-2009) and three really bad ones (2010-2012). The fund’s three-year record trails 97% of its peers. It has offered consistently above-average to high volatility, paired with average to way below-average returns. Morningstar’s generally-optimistic reviews of the fund ended in July 2011. Lipper likewise rates it as a two-star fund over the past five years.

The fund might well perform brilliantly, assuming that Mr. Gundlach believed he had good reason to import this team. That said, the record is not unambiguously positive.

Funds in Registration

New mutual funds must be registered with the Securities and Exchange Commission before they can be offered for sale to the public. The SEC has a 75-day window during which to call for revisions of a prospectus; fund companies sometimes use that same time to tweak a fund’s fee structure or operating details. Every day we scour new SEC filings to see what opportunities might be about to present themselves. Many of the proposed funds offer nothing new, distinctive or interesting. Some are downright horrors of Dilbertesque babble (see “Synthetic Reverse Convertibles,” below).

Funds in registration this month won’t be available for sale until, typically, the beginning of June 2013. We found a handful of no-load, retail funds in the pipeline, notably:

Robeco Boston Partners Global Long/Short Fund will offer a global take on Boston Partner’s highly-successful long/short strategy. They expect at least 40% international exposure, compared to 10% in their flagship Long/Short Equity Fund (BPLEX) and 15% in the new Long/Short Research Fund (BPRRX). There are very few constraints in the prospectus on their investing universe. The fund will be managed by Jay Feeney, an original Boston Partner, co-CEO and CIO-Equities, and Christopher K. Hart, Equity Portfolio Manage. The minimum initial investment in the retail class is $2,500. The expense ratio will be 3.77% after waivers. Let me just say: “Yikes.” At the risk of repeating myself, “Yikes!” With a management fee of 1.75%, this is likely to remain a challenging case.

T. Rowe Price Global Allocation Fund will invest in stocks, bonds, cash and hedge funds. Yikes! T. Rowe is getting you into hedge funds. They’ll active manage their asset allocation. The baseline is 30% US stocks, 30% international stocks, 20% US bonds, 10% international bonds and 10% alternative investments. A series of macro judgments will allow them to tweak those allocations. The fund will be managed by Charles Shriver, lead manager for their Balanced, Personal Strategy and Spectrum funds. The minimum initial purchase is $2500, reduced to $1000 for IRAs. Expense ratio will be 1.05%.

Details on these funds and the list of all of the funds in registration are available at the Observer’s Funds in Registration page or by clicking “Funds” on the menu atop each page.

Manager Changes: Two giants begin to step back

On a related note, we also tracked down 71 fund manager changes. Those include decisions by two fund company founders to begin lightening their loads. Nicholas Kaiser, president of Saturna Investments which advises the Sextant and Amana funds, no longer co-manages Sextant Growth (SSGFX) and John Kornitzer, founder of Kornitzer Capital which advises the Buffalo funds, stepped back from Buffalo Dividend Focus (BUFDX) four months after launch.

Snowball on the transformative power of standing around, doing little

I’m occasionally asked to contribute 500 words to Amazon’s Money & Markets blog. Amazon circulates a question (in this case, “how should investors react to sequestration?”) and invites responses. I knew they won’t publish “oh, get real,” so I wrote something just slightly longer.

Don’t Just Do Something. Stand There.

When exactly did the old midshipman’s rule, “When in danger or in doubt, run in circles, scream and shout,” get enshrined as investing advice?

There are just three things we don’t know about sequestration: (1) what will happen, (2) how long it will last and (3) what will follow. Collectively, they tell you that the most useful thing a stock investor might do in reaction to the sequestration is, nothing. Whatever happens will certainly roil the markets but stock markets are forever being roiled. This one is no different than all of the others. Go check your portfolio and ask four things:

1. Do I have an adequate reserve in a cash-management account to cover my basic expenses – that is, to maintain a normal standard of living – if I need six months to find a new job?
2. Do I have very limited stock exposure (say, under 20%) in the portion of the portfolio that I might reasonably need to tap in the next three or five years?
3. Do I have a globally diversified portfolio in the portion that I need to grow over a period of 10 years or more?
4. Am I acting responsibly in adding regularly to each?

If yes, the sequestration is important, but not to your portfolio. If no, you’ve got problems to address that are far more significant than the waves caused by this latest episode of our collective inability to manage otherwise manageable problems. Address those, as promptly and thoughtfully as you can.

The temptation is clear: do something! And the research is equally clear: investors who reactively do something lose. Those who have constructed sensible portfolios and leave them be, win.

Be a winner: stand there.

Happily, the other respondents were at least as sensible. There’s the complete collection.

Briefly Noted ….

Vanguard is shifting

Perhaps you should, as well? Vanguard announced three shifts in the composition of income sleeve of their Target Retirement Funds.

• They are shifting their bond exposure from domestic to international. Twenty percent of each fund’s fixed income exposure will be reallocated to foreign bonds through investment in Vanguard Total International Bond Index Fund.
• Near term funds are maintaining their exposure to TIPS but are shifting all of their allocation to the Short-Term Inflation-Protected Securities Index Fund rather than Vanguard Inflation-Protected Securities Fund.
• The Retirement Income and Retirement 2010 funds are eliminating their exposure to cash. The proceeds will be used to buy foreign bonds.

PIMCO retargets

As of March 8, 2013 the PIMCO Global Multi-Asset Fund changed its objective from “The Fund seeks total return which exceeds that of a blend of 60% MSCI World Index/40% Barclays U.S. Aggregate Index” to “The Fund seeks maximum long-term absolute return, consistent with prudent management of portfolio volatility.” At the same time, the Fund’s secondary index is the 1 Month USD LIBOR Index +5% which should give you a good idea of what they expect the fund to be able to return over time.

PIMCO did not announce any change in investment policies but did explain that the new, more conservative index “is more closely aligned with the Fund’s investment philosophy and investment objective” than a simple global stock/bond blend would be.

Capital Group / American Funds is bleeding

Our recent series on new fund launches over the past decade pointed out that, of the five major fund groups, the American Funds had – by far – the worst record. They managed to combine almost no innovation with increasingly bloated funds whose managers were pleading for help. A new report in Pensions & Investments (Capital Group seeking to rebuild, 03/18/2013) suggests that the costs of a decade spent on cruise control were high: the firm’s assets under management have dropped by almost a half-trillion dollars in six years with the worst losses coming from the institutional investment side.

Matthews and the power of those three little words.

Several readers have noticed that Matthews recently issued a supplement to the Strategic Income Fund (MAINX) portfolio. The extent of the change is this: the advisor dropped the words “and debt-related” from a proviso that at least 50% of the fund’s portfolio would be invested in “debt and debt-related securities” which were rated as investment-grade.

In talking with folks affiliated with Matthews, it turns out that the phrase “and debt-related” put them in an untenable bind. “Debt-related securities” includes all manner of derivatives, including the currency futures contracts which allow them to hedge currency exposure. Such derivatives do not receive ratings from debt-rating firms such as Fitch meaning that it automatically appeared as if the manager was buying “junk” when no such thing was happening. That became more complicated by the challenge of assigning a value to a futures contract: if, hypothetically, you buy $1 million in insurance (which you might not need) for a $100 premium, do you report the value of $100 or $1 million?

In order to keep attention focused on the actual intent of the proviso – that at least 50% of the debt securities will be investment grade – they struck the complicating language.

Good news and bad for AllianzGI Opportunity Fund shareholders

Good news, guys: you’re getting a whole new fund! Bad news: it’s gonna cost ya.

AllianzGI Opportunity Fund (POPAX) is a pretty poor fund. During the first five years of its lead manager’s ten year tenure, it wasn’t awful: two years with well above average returns, two years below average and one year was a draw. The last five have been far weaker: four years way below average, with 2013 on course for another. Regardless of returns, the fund’s volatility has been consistently high.

The clean-up began March 8 2013 with the departure of co-manager Eric Sartorius. On April 8 2013, manager Mike Corelli departs and the fund’s investment strategy gets a substantial rewrite. The current strategy “focuses on bottom-up, fundamental analysis” of firms with market caps under $2 billion. Ironically, despite the “GI” designation in the name (code for Growth & Income, just as TR is Total Return and AR is Absolute Return), the prospectus assures us that “no consideration is given to income.” The new strategy will “utilize a quantitative process to focus on stocks of companies that exhibit positive change, sustainability, and timely market recognition” and the allowable market cap will rise to $5.3 billion.

Two bits of bad news. First, it’s likely to be a tax headache. Allianz warns that “the Fund will liquidate a substantial majority of its existing holdings” which will almost certainly trigger a substantial 2013 capital gains bill. Second, the new managers (Mark Roemer and Jeff Parker) aren’t very good. I’m sure they’re nice people and Mr. Parker is CIO for the firm’s U.S. equity strategies but none of the funds they’ve been associated with (Mr. Roemer is a “managed volatility” specialist, Mr. Parker focuses on growth) have been very good and several seem not to exist anymore.

Direxion splits

A bunch of Direxion leveraged index and reverse index products split either 2:1 or 3:1 at the close of business on March 28, 2013. They were

Small Wins for Investors

Effective April 1, 2013, Advisory Research International Small Cap Value Fund’s (ADVIX) expense ratio is capped at 1.25%, down from its current 1.35%. Morningstar will likely not reflect this change for a while

Aftershock Strategies Fund (SHKNX) has lowered its expense cap, from 1.80 to 1.70%. Their aim is to “preserve capital in a challenging investment environment.” Apparently the absence of a challenging investment environment inspired them to lose capital: the fund is down 1.5% YTD, through March 29, 2013.

Good news: effective March 15, 2013, Clearwater Management increased its voluntary management fee waiver for three of its Clearwater Funds (Core, Small Companies, Tax-Exempt Bond). Bad news, I can’t confirm that the funds actually exist. There’s no website and none of the major the major tracking services now recognizes the funds’ ticker symbols. Nothing posts at the SEC suggests cessation, so I don’t know what’s up.

Fidelity is offering to waive the sales loads on an ever-wider array of traditionally load-only funds through its supermarket. I learned of the move, as I learn of so many things, from the folks at MFO’s discussion board. The list of load-waived funds is detailed in msf’s thread, entitled Fidelity waives loads. A separate thread, started by Scott, with similar good news announces that T. Rowe Price funds are available without a transaction fee at Ameritrade.

Vanguard is dropping expenses on two more funds including the $69 billion Wellington (VWELX) fund. Wellington’s expenses have been reduced in three consecutive years.

Closings

American Century Equity Income (TWEAX) closed to new investors on March 29, 2013. The fund recently passed $10 billion in assets, a hefty weight to haul. The fund, which has always been a bit streaky, has trailed its large-value peers in five of the past six quarters which might have contributed to the decision to close the door.

The billion-dollar BNY Mellon Municipal Opportunities Fund (MOTIX) closed to new investors on March 28, 2013.

Effective April 30, 2013 Cambiar Small Cap Fund (CAMSX) will close to new investors. It’s been a very strong performer and has drawn $1.4 billion in assets.

Prudential Jennison Mid Cap Growth (PEEAX) will close to new investors on April 8, 2013. The fund’s assets have grown substantially over the past three years from under $2 billion at the beginning of 2010 to over $8 billion as of February 2013. While some in the media describe this as “a shareholder-friendly decision,” there’s some question about whether Prudential friended its shareholders a bit too late. The fund’s 10 year performance is top 5%, 5-year declines to top 20%, 3 year to top 40% and one year to mediocre.

Effective April 12, 2013, Oppenheimer Developing Markets Fund (ODMAX) closed to both new and existing shareholders. In the business jargon, that’s a “hard close.”

Touchstone Sands Capital Select Growth (PTSGX) and Touchstone Sands Institutional Growth (CISGX), both endorsed by Morningstar’s analysts, will close to new investors effective April 8, 2013. Sands is good and also subadvises from for GuideStone and MassMutual.

Touchstone has also announced that Touchstone Merger Arbitrage (TMGAX), subadvised by Longfellow Investment Management, will close to new investors effective April 8. The two-year old fund has about a half billion in assets and management wants to close it to maintain performance.

Effective April 29, 2013, Westcore International Small-Cap Fund (WTIFX) will close to all purchase activity with the exception of dividend reinvestment. That will turn the current soft-close into a hard-close.

Old Wine in New Bottles

On or about May 31, 2013. Alger Large Cap Growth Fund (ALGAX) will become Alger International Growth Fund, but its investment objective to seek long-term capital appreciation will not change. The Fund will be managed by Pedro V. Marcal. At the same time, Alger China-U.S. Growth Fund (CHUSX) will become Alger Global Growth Fund, but its investment objective to seek long-term capital appreciation will not change. The Fund will continue to be managed by Dan Chung and Deborah Vélez Medenica, with the addition of Pedro V. Marcal. These are both fundamentally sorrowful funds. About the only leads I have on Mr. Marcal is that he’s either a former Olympic fencer for Portugal (1960) or the author of a study on market timing and technical analysis. I’m not sure which set of skills would contribute more here.

Effective April 19, BlackRock S&P 500 Index (MASRX) will merge into BlackRock S&P 500 Stock (WFSPX). Uhhh … they’re both S&P500 index funds. The reorganization will give shareholders a tiny break in expenses (a drop from 13 bps to 11) but will slightly goof with their tax bill.

Buffalo Micro Cap Fund (BUFOX) will become Buffalo Emerging Opportunities Fund, around June 3, 2013. That’s a slight delay in the scheduled renaming, which should have already taken place under the original plan. The renamed beast will invest in “domestic common stocks, preferred stocks, convertible securities, warrants and rights of companies that, at the time of purchase by the Fund, have market capitalizations of $1 billion or less.

Catalyst Large Cap Value Fund (LVXAX) will, on May 27 2013, become Catalyst Insider Buying Fund. The fund will no longer be constrained to invest in large cap value stocks.

Effective April 1, 2013, Intrepid All Cap Fund (ICMCX) changed its name to Intrepid Disciplined Value Fund. There was a corresponding change to the investment policies of the fund to allow it to invest in common stocks and “preferred stocks, convertible preferred stocks, warrants and foreign securities, which include American Depositary Receipts (ADRs).”

PIMCO Worldwide Fundamental Advantage TR Strategy (PWWIX) will change its name to PIMCO Worldwide Fundamental Advantage AR Strategy. Also, the fund will change from a “total return” strategy to an “absolute return” strategy, which has more flexibility with sector exposures, non-U.S. exposures, and credit quality.

Value Line changed the names of Value Line Emerging Opportunities Fund to the Value Line Small Cap Opportunities Fund (VLEOX) and the Value Line Aggressive Income Trust to the Value Line Core Bond Fund (VAGIX).

Off to the Dustbin of History

AllianzGI Focused Opportunity Fund (AFOAX) will be liquidated and dissolved on or about April 19, 2013.

Armstrong Associates (ARMSX) is merging into LKCM Equity Fund (LKEQX) effective on or about May 10, 2013. C.K. Lawson has been managing ARMSX for modestly longer – 45 years – than many of his peers have been alive.

Artio Emerging Markets Local Debt (AEFAX) will liquidate on April 19, 2013.

You thought you invested in what? The details of db X-trackers MSCI Canada Hedged Equity Fund will, effective May 31 2013, be tweaked just a bit. The essence of the tweak is that it will become db X-trackers MSCI Germany Hedged Equity Fund (DBGR).

The Forward Focus and Forward Strategic Alternatives funds will be liquidated pursuant to a Board-approved Plan of Liquidation on or around April 30, 2013.

The Guardian Fund (LGFAX) guards no more. It is, as of March 28, 2013, a former fund.

ING International Value Choice Fund (IVCAX) will merge with ING International Value Equity Fund (NIVAX, formerly ING Global Value Choice Fund), though the date is not yet set.

Janus Global Research Fund merged into Janus Worldwide Fund (JAWWX) effective on March 15, 2013.

In a minor indignity, Dreman has been ousted as the manager of MIST Dreman Small Cap Value Portfolio, an insurance product distributed by MET Investment Series Trust (hence “MIST”) and replaced by J.P. Morgan Investment Management. Effective April 29, 2013, the fund becomes JPMorgan Small Cap Value Portfolio. No-load investors can still access Mr. Dreman’s services through Dreman Contrarian Small Cap Value (DRSVX). Folks with the attention spans of gnats and a tendency to think that glancing at the stars is the same as due diligence, will pass quickly by. This small fund has a long record of outperformance, marred by 2010 (strong absolute returns, weak relative ones) and 2011 (weak relative and absolute returns). 2012 was so-so and 2013, through March, has been solid.

Munder Large-Cap Value Fund was liquidated on March 25, 2013.

JPMorgan is planning a leisurely merger JPMorgan Value Opportunities (JVOIX) into JPMorgan Large Cap Value (HLQVX), which won’t be effective until Oct. 31, 2014. The funds share the same manager and strategy and . . . . well, portfolio. Hmmm. Makes you wonder about the delay.

Lord Abbett Stock Appreciation Fund merged into Lord Abbett Growth Leaders Fund (LGLAX) on March 22, 2013.

Pioneer Independence Fund is merging into Pioneer Disciplined Growth Fund (SERSX) which is expected to occur on or about May 17, 2013. The Disciplined Growth management team, fees and record survives while Independence’s vanishes.

Effective March 31, 2013 Salient Alternative Strategies Fund, a hedge fund, merged into the Salient Alternative Strategies I Fund (SABSX) because, the board suddenly discovered, both funds “have the same investment objectives, policies and strategies.”

Sentinel Mid Cap II Fund (SYVAX) has merged into the Sentinel Mid Cap Fund (SNTNX).

Target Growth Allocation Fund would like to merge into Prudential Jennison Equity Income Fund (SPQAX). Shareholders consider the question on April 19, 2013 and approval is pretty routine but if they don’t agree to merge the fund away, the Board has at least resolved to firm Marsico as one of the fund’s excessive number of sub-advisers (10, currently).

600,000 visits later . . .

609,000, actually. 143,000 visitors since launch. About 10,000 readers a month nowadays. That’s up by 25% from the same period a year ago. Because of your support, either direct contributions (thanks Leah and Dan!) or use of our Amazon link (it’s over there, on the right), we remain financially stable. And a widening circle of folks are sharing tips and leads with us, which gives us a chance to serve you better. And so, thanks for all of that.

The Observer celebrates its second anniversary with this issue. We are delighted and honored by your continuing readership and interest. You make it all worthwhile. (And you make writing at 1:54 a.m. a lot more manageable.) We’re in the midst of sprucing the place up a bit for you. Will, my son, clicked through hundreds of links to identify deadsters which Chip then corrected. We’ve tweaked the navigation bar a bit by renaming “podcasts” as “featured” to better reflect the content there, and cleaned out some dead profiles. Chip is working to track down and address a technical problem that’s caused us to go offline for between two and 20 minutes once or twice a week. Anya is looking at freshening our appearance a bit, Junior is updating our Best of the Web profiles in advance of adding some new, and a good friend is looking at creating an actual logo for us.

Four quick closing notes for the months ahead:

1. We are still not spam! Some folks continue to report not receiving our monthly reminders or conference call updates. Please check your spam folder. If you see us there, just click on the “not spam” icon and things will improve.
2. Morningstar is coming. Not the zombie horde, the annual conference. The Morningstar Investor Conference is June 12-14, in Chicago. I’ll be attending the conference on behalf of the Observer. I had the opportunity to spend time with a dozen people there last year: fund managers, media relations folks, Observer readers and others. If you’re going to be there, perhaps we might find time to talk.
3. We’re getting a bit backed-up on fund profiles, in several cases because we’ve had trouble getting fund reps to answer their mail. Our plan for the next few months will be to shorten the cover essay by a bit in order to spend more time posting new profiles. If you have folks who strike you as particularly meritorious but unnoticed, drop me a note!
4. Please do use the Amazon link, if you don’t already. We’re deeply grateful for direct contributions but they tend to be a bit unpredictable (many months end up in the $50 range while one saw many hundreds) while the Amazon relationship tends to produce a pretty predictable stream (which makes planning a lot easier). It costs you nothing and takes no more effort than clicking and hitting the “bookmark this page” button in your browser. After that, it’s automatic and invisible.

Take great care!

Dear friends,

We’ve been listening to REM’s “It’s the End of the World (as we know it)” and thinking about copyrighting some useful terms for the year ahead.  You know that Bondpocalypse and Bondmageddon are both getting programmed into the pundits’ vocabulary.  Chip suggests Bondtastrophe and Bondaster.  

Bad asset classes (say, TIPs and long bonds) might be merged in the Frankenfund.  Members of the Observer’s discussion board offered bond doggle (thanks, Bee!), the Bondfire of the Vanities (Shostakovich’s entry and probably our most popular), the New Fed (which Hank thinks we’ll be hearing by year’s end) which might continue the racetodebase (Rono) and bondacious (presumably blondes, Accipiter’s best).  Given that snowstorms now get their own names (on the way to Pittsburgh, my son and I drove through the aftermath of Euclid), perhaps market panics, too?  We’d start of course with Market Crisis Alan, in honor of The Maestro, but we haven’t decided whether that would rightly be followed by Market Crisis Ben, Barack or Boehner.  Hopeful that they couldn’t do it again, we could honor them all with Crash B3 which might defame the good work done by vitamin B3 in regulating sex and stress.

Feel free to join in on the 2013 Word of the Year thread, if only if figure out how Daisy Duke got there.

The Big Bond Bubble Boomnanza?

I’m most nervous when lots of other folks seem to agree with me.  It’s usually a sign that I’ve overlooked something.

I’ve been suggesting for quite a while now that the bond market, as a whole, might be in a particularly parlous position.   Within the living memory of almost the entire investing community, investing in bonds has been a surefire way to boost your portfolio.  Since 1981, the bond market has enjoyed a 31-year bull market.  What too many investors forget is that 1981 was preceded by a 35-year year bear market for bonds.  The question is: are we at or near another turning point?

The number of people reaching that conclusion is growing rapidly.  Floyd Norris of The New York Times wrote on December 28^th: “A new bear market almost certainly has begun” (Reading Pessimism in the Market for Bonds).  The Wall Street Journal headlined the warning, “Danger Lurks Inside the Bond Boom amid Corporate-Borrowing Bonanza, Some Money Managers Warn of Little Room Left for Gains” (12/06/2012).  Separately, the Journal warned of “a rude awakening” for complacent bond investors (12/24/2012).  Barron’s warns of a “Fed-inflated bond bubble” (12/17/2012). Hedge fund manager Ray Dalio claims that “The biggest opportunity [in 2013] will be – and it isn’t imminent – shorting bond markets around the world” (our friends at LearnBonds.com have a really good page of links to commentaries on the bond market, on which this is found).

I weighed in on the topic in a column I wrote for Amazon’s Money and Markets page.  The column, entitled “Trees Do Not Grow to the Sky,” begins:

You thought the fallout from 2000-01 was bad?  You thought the 2008 market seizure provoked anguish?  That’s nothing, compared to what will happen when every grandparent in America cries out, as one, “we’ve been ruined.”

In the past five years, investors have purchased one trillion dollars’ worth of bond mutual fund shares ($1.069 trillion, as of 11/20/12, if you want to be picky) while selling a half trillion in stock funds ($503 billion).

Money has flowed into bond mutual funds in 53 of the past 60 weeks (and out of stock funds in 46 of 60 weeks).

Investors have relentlessly bid up the price of bonds for 30 years so they’ve reached the point where they’re priced to return less than nothing for the next decade.

Morningstar adds that about three-quarters of that money went to actively-managed bond funds, a singularly poor bet in most instances.

I included a spiffy graph and then reported on the actions of lots of the country’s best bond investors.  You might want to take a quick scan of their activities.  It’s fairly sobering.

Among my conclusions:  

Act now, not later. “Act” is not investment advice, it’s communication advice.  Start talking with your spouse, financial adviser, fund manager, and other investors online, about how they’ve thought about the sorts of information I’ve shared and how they’ve reacted to it.  Learn, reflect, then act.

We’re not qualified to offer investment advice and we’re not saying that you should be abandoning the bond market. As we said to Charles, one of our regular readers,

I’m very sensitive to the need for income in a portfolio, for risk management and for diversification so leaving fixed-income altogether strikes me as silly and unmanageable.  The key might be to identify the risks your exposing yourself to and the available rewards.  In general, I think folks are most skeptical of long-term sovereign debt issued by governments that are … well, broke.  Such bonds have the greatest interest rate sensitivity and then to be badly overpriced because they’ve been “the safe haven” in so many panics.  

So I’d at the very least look to diversify my income sources and to work with managers who are not locked into very narrow niches. 

MFWire: Stock Fund Flows Are Turning Around

MF Wire recently announced “Stock Funds Turn Around” (December 28, 2012), which might also be titled “Investors continue retreat from U.S. stock funds.” In the last full week of 2012, investors pulled $750 million from US stock funds and added $1.25 billion into international ones.

Forbes: Buy Bonds, Sleep Well

Our take might be, Observer: buy bonds, sleep with the fishes.  On December 19^th, Forbes published 5 Mutual Funds for Those Who Want to Sleep Well in 2013.  Writer Abram Brown went looking for funds that performed well in recent years (always the hallmark of good fund selection: past performance) and that avoided weird strategies.  His list of winners:

PIMCO Diversified Income (PDVDX) – a fine multi-asset fund.

MFS Research Bond R3 (MRBHX) – R3 shares are only available through select retirement plans.  The publicly available “A” shares carry a sales load, which has trimmed about a percent a year off its returns.

Russell Strategic Bond (RFCEX) – this is another unavailable share class; the publicly available “A” shares have higher expenses, a load, and a lower Morningstar rating.

TCW Emerging Markets Income (TGEIX) – a fine fund whose assets have exploded in three years, from $150 million to $6.2 billion.

Loomis Sayles Bond (LBFAX) – the article points you to the fund’s Administrative shares, rather than the lower-cost Retail shares (LSBRX) but I don’t know why.

Loomis might illustrate some of the downsides to investing in the past.  Its famous lead manager, Dan Fuss, is now 79 years old and likely in the later stages of his career.  His heir apparent, Kathleen Gaffney, recently left the firm.  That leaves the fund in the hands of two lesser-known managers.

I’m not sure of how well most folks will sleep when their manager’s toting 40-100% emerging markets exposure or 60% junk bonds when the next wave crashes over the market, but it’s an interesting list.

Forbes is, by the way, surely a candidate for the most badly junked up page in existence, and one of the least useful.  Only about a third of the screen is the story, the rest are ads and misleading links.  See also “10 best mutual funds” does not lead to a Forbes story on the subject – it leads to an Ask search results page with paid results at top.

Vanguard: The Past 10 Years

In October we launched “The Last Ten,” a monthly series, running between now and February, looking at the strategies and funds launched by the Big Five fund companies (Fido, Vanguard, T Rowe, American and PIMCO) in the last decade.

Here are our findings so far:

Fidelity, once fabled for the predictable success of its new fund launches, has created no compelling new investment option and only one retail fund that has earned Morningstar’s five-star designation, Fidelity International Growth (FIGFX).  We suggested three causes: the need to grow assets, a cautious culture and a firm that’s too big to risk innovative funds.

T. Rowe Price continues to deliver on its promises.  Of the 22 funds launched, only Strategic Income (PRSNX) has been a consistent laggard; it has trailed its peer group in four consecutive years but trailed disastrously only once (2009).  Investing with Price is the equivalent of putting a strong singles-hitter on a baseball team; it’s a bet that you’ll win with consistency and effort, rather than the occasional spectacular play.

PIMCO has utterly crushed the competition, both in the thoughtfulness of their portfolios and in their performance.  PIMCO has, for example, about three times as many five-star funds – both overall and among funds launched in the last decade – than you’d predict.

The retirement of Gus Sauter, Vanguard’s long-time chief investment officer, makes this is fitting moment to look back on the decade just past.

Measured in terms of the number of funds launched or the innovativeness of their products, the decade has been unremarkable.  Vanguard:

• Has 112 funds (which are sold in over 278 packages or share classes)
• 29 of their funds were launched in the past decade
• 106 of them are old enough to have earned Morningstar ratings
• 8 of them has a five star rating (as of 12/27/12)
• 57 more earned four-star ratings.

Morningstar awards five-stars to the top 10% of funds in a class and four-stars to the next 22.5%.  The table below summarizes what you’d expect from a firm of Vanguard’s size and then what they’ve achieved.

What does the chart suggest?  Vanguard is less likely to be “spectacular” than the numbers would suggest but more than twice as likely to be “really good.”  That makes a great deal of sense given the nature of Vanguard’s advantage: the “at cost” ethos and tight budget controls means that they enter each year with a small advantage over the market.  With time that advantage compounds but remains modest.

The funds launched in the past decade are mostly undistinguished, in the sense that they incorporate neither unusual combinations of assets (no “emerging markets balanced” or “global infrastructure” here) nor innovative responses to changing market conditions (as with “real return” or “inflation-tuned” ones).   The vast bulk are target-date funds, other retirement income products, or new indexed funds for conventional market segments.

They’ve launched about five new actively-managed retail funds which, as a group, peak out at “okay.”

This is not to suggest that Vanguard has been inattentive of their shareholders best interests.  Rather they seem to have taken an old adage to heart: “be like a duck, stay calm on the surface but paddle like hell underwater.”  I’m indebted to Taylor Larimore, co-founder of the Bogleheads, for sharing the link to a valedictory interview with Gus Sauter, who points out that Vanguard’s decided to shift the indexes on which their funds are based.  That shift will, over time, save Vanguard’s investors hundreds of millions of dollars.  It also exemplifies the enduring nature of Vanguard’s competitive advantage: the ruthless pursuit of many small, almost invisible gains for their investors, the sum of which is consistently superior results.

Celebrating Small Cap Season

The Observer has, of late, spent a lot of time talking about the challenge of managing volatility.  That’s led us to discussions of long/short, covered call, and strategic income funds.  The two best months for small cap funds are January and February.  Average returns of U.S. small caps in January from 1927 to 2011 were 2.3%, more than triple those in February, which 0.72%.  And so we teamed up again with the folks at FundReveal to review the small cap funds we’ve profiled and to offer a recommendation or two.

You can reach the individual profiles by clicking in the “Funds” tab on our main navigation bar.  We’re in the process of updating them all during January.  Because our judgments embody a strong qualitative element, we asked our resolutely quantitative friends at FundReveal to look at our small caps and to offer their own data-driven reading of some of them. Their full analysis can be found on their blog.

FundReveal’s strategy is to track daily return and volatility data, rather than the more common monthly or quarterly measures.  They believe that allows them to look at many more examples of the managers’ judgment at work (they generate 250 data points a year rather than four or twelve) and to arrive at better predictions about a fund’s prospects.  One of FundReveal’s key measures is Persistence, the likelihood that a particular pattern of risk and return repeats itself, day after day.  In general, you can count on funds with higher persistence. Here are their highlights:

The MFO funds display, in general, higher volatility than the S&P 500 for both 2012 YTD and the past 5 years.  The one fund that had lower volatility in both time horizons is Pinnacle Value (PVFIX).   PVFIX demonstrates consistent performance with low volatility, factors to be combined with subjective analysis available from other sources.

Two other funds have delivered high ADR (Average Daily Return), but also present higher risk than the S&P.  In this case Southern Sun Small Cap (SSSFX) and Walthausen Small Cap (WSCVX) have high relative volatility, but they have delivered high ADR over both time horizons.  From the FundReveal perspective, SSSFX has the edge in terms of decision-making capability because it has delivered higher ADR than the S&P in 10 Quarters and lower ADR in 6 Quarters, while WSCVX had delivered higher ADR than the S&P in 7 Quarters and lower ADR in 7 Quarters.  

So, bottom line, from the FundReveal perspective PVFIX and SSSFX are the more attractive funds in this lineup. 

Some Small Cap funds worthy of consideration:

Small Blend 

• Schwartz Value fund (RCMFX): Greater than S&P ADR, Lower Volatility (what we call “A” performance) for 2012 YTD and 2007-2012 YTD.  It has a high Persistence Rating (40%) that indicates a historic tendency to deliver A performance on a quarterly basis. 
• Third Avenue Small-Cap Fund (TVSVX): Greater than S&P ADR, Lower Volatility with a medium Persistence Rating (33%).

Small Growth

• Wasatch Micro Cap Value fund (WAMVX): Greater than  S&P ADR, Lower Volatility 2007-2012 YTF, with a medium Persistence Rating (30%).  No FundReveal covered Small Growth funds delivered “A” performance in 2012 YTD. (WAMVX is half of Snowball’s Roth IRA.)

Small Value

• Pinnacle Value Fund (PVFIX): An MFO focus fund, discussed above.  It has a high Persistence Rating (50%).
• Intrepid Small Cap Fund (ICMAX ): Greater than  S&P ADR, Lower Volatility for 2007-2012 YTF, with a high Persistence Rating (55%). Eric Cinnamond, who now manages Aston River Road Independent Value, managed ICMAX from 2005-10.
• ING American Century Small-Mid Cap Value (ISMSX): Greater than  S&P ADR, Lower Volatility for 2007-2012 YTF, with a medium Persistence Rating (25%).

If you’re intrigued by the potential for fine-grained quantitative analysis, you should visit FundReveal.  While theirs is a pay service, free trials are available so that you can figure out whether their tools will help you make your own decisions.

Ameristock’s Curious Struggle

Nick Gerber’s Ameristock (AMSTX) fund was long an icon of prudent, focused investing but, like many owner-operated funds, is being absorbed into a larger firm.  In this case, it’s moving into the Drexel Hamilton family of funds.

Or not.  While these transactions are generally routine, a recent SEC filing speaks to some undiscussed turmoil in the move.  Here’s the filing:

As described in the Supplement Dated October 9, 2012 to the Prospectus of Ameristock Mutual Fund, Inc. dated September 28, 2012, a Special Meeting of Shareholders of the Ameristock Fund  was scheduled for December 12, 2012 at 11:00 a.m., Pacific Time, for shareholders to vote on a proposed Agreement and Plan of Reorganization and Termination pursuant to which the Ameristock Fund would be reorganized into the Drexel Hamilton Centre American Equity Fund, a series of Drexel Hamilton Mutual Funds, resulting in the complete liquidation and termination of the Ameristock Fund. The Special Meeting convened as scheduled on December 12, 2012, but was adjourned until … December 27, 2012.   … The Reconvened Special Meeting was reconvened as scheduled on December 27, 2012, but has again been adjourned and will reconvene on Thursday, January 10, 2012 …

Uh-huh. 

Should Old Acquaintance Be Forgot and Never Brought to Mind?

Goodness, no.

How long can a fund be incredibly, eternally awful and still survive?  The record is doubtless held by the former Steadman funds, which were ridiculed as the Deadman funds and eventually hid out as the Ameritor funds. They managed generations of horrible ineptitude. How horrible?  In the last decade of their existence (through 2007), they lost 98.98%.  That’s the transformation of $10,000 into $102. Sufficiently horrible that they became a case study at Stanford’s Graduate School of Business.

In celebrating the season of Auld Lang Syne, I set out to see whether there were any worthy successors on the horizon.  I scanned Morningstar’s database for funds which trailed at least 99% of the peers this year.  And over the past five years.  And 10 and 15 years.

Five funds actually cropped up as being that bad that consistently.  The good news for investors is that the story isn’t quite as bleak as it first appears.

Jaffe’s Year-End Explosion

I’m not sure that Chuck Jaffe is the hardest-working man in the fund biz, but he does have periods of prodigious output.  December is one of those periods.   Chuck ran four features this month worth special note.

• Farewell to Stupid Investments.  After nearly a decade, Chuck has ended down his “Stupid Investment of the Week” column.  Chuck’s closing columns echoes Cassius, in Shakespeare’s Julius Caesar: “The fault, dear Brutus, is not in our stars, But in ourselves, that we are underlings.”  Or perhaps Pogo, “we have met the enemy and he is us.”
• 17^th Annual Lump of Coal Awards, December 10 and December 17.  This is the litany of stupidity surrounding the fund industry, from slack-wit regulators to venal managers.  One interesting piece discusses Morningstar’s analyst ratings.  Morningstar’s ratings roughly break the universe down into good ideas (gold, silver, bronze), okay ideas (neutral) and bad ideas (negative).  Of the 1000+ funds rated so far, only 5%qualify for negative ratings.  Morningstar’s rejoinder is that there are 5000 unrated funds, the vast bulk of which don’t warrant any attention.  So while the 5% might be the tip of a proverbial iceberg, they represent the funds with the greatest risk of attracting serious investor attention.

  My recommendation, which didn’t make Chuck’s final list, was to present a particularly grimy bit o’ bituminous to the fund industry for its response to the bond mania.  Through all of 2012, the industry closed a total of four funds to new investment while at the same time launching 39 new bond funds.  That’s looks a lot like the same impulse that led to the launch of B2B Internet Services funds (no, I’m not making that up) just before the collapse of the tech bubble in 2000; a “hey, people want to buy this stuff so we’ve got an obligation to market it to them” approach.

• Tales from the Mutual Fund Crypt, December 26: stories of recently-departed funds.  A favorite: the Auto-Pilot fund’s website drones on, six months after the fund’s liquidation.  It continues to describe the fund as “new,” six years after launch.

  My nominee was generic: more funds are being shut down after 12 – 18 months of operation which smacks of hypocrisy (have you ever heard of a manager who didn’t preach the “long-term investor” mantra yet the firms themselves have a short-term strategy) and incompetence (in fund design and marketing both).

Chuck’s still podcasting, MoneyLife with Chuck Jaffe.  One cool recent interview was with Doug Ramsey, chief investment officer for the Leuthold Funds.

ASTON/River Road Long-Short Conference Call

On December 17, about fifty readers joined us for an hour-long conversation with Matt Moran and Daniel Johnson, managers of ASTON/River Road Long-Short (ARLSX).  For folks interested but unable to join us, here’s the complete audio of the hour-long conversation.  It starts with Morty Schaja, River Road’s president, talking about the fund’s genesis and River Road’s broader discipline and track record: 

If you’d like a preview before deciding whether you listen in, you might want to read our profile of ARLSX (there’s a printable .pdf of the profile on Aston’s website and an audio profile, which we discuss below).  Here are some of the highlights of the conversation:

Quick highlights:

1. they believe they can outperform the stock market by 200 bps/year over a full market cycle. Measuring peak to peak or trough to trough, both profit and stock market cycles average 5.3 years, so they think that’s a reasonable time-frame for judging them.
2. they believe they can keep beta at 0.3 to 0.5. They have a discipline for reducing market exposure when their long portfolio exceeds 80% of fair value. The alarms rang in September, they reduce expose and so their beta is now at 0.34, near their low.
3. risk management is more important than return management, so all three of their disciplines are risk-tuned. The long portfolio, 15-30 industry leaders selling at a discount of at least 20% to fair value, tend to be low-beta stocks. Even so their longs have outperformed the market by 9%.
4. River Road is committed to keeping the fund open for at least 8 years. It’s got $8 million in asset, the e.r. is capped at 1.7% but it costs around 8% to run. The president of River Road said that they anticipated slow asset growth and budgeted for it in their planning with Aston.
5. The fund might be considered an equity substitute. Their research suggests that a 30/30/40 allocation (long, long/short, bonds) has much higher alpha than a 60/40 portfolio.

An interesting contrast with RiverPark, where Mitch Rubin wants to “play offense” with both parts of the portfolio. Here the strategy seems to hinge on capital preservation: money that you don’t lose in a downturn is available to compound for you during the up-cycle.

Conference Calls Upcoming: Matthews, Seafarer, Cook & Bynum on-deck

As promised, we’re continuing our moderated conference calls through the winter.  You should consider joining in.  Here’s the story:

• Each call lasts about an hour
• About one third of the call is devoted to the manager’s explanation of their fund’s genesis and strategy, about one third is a Q&A that I lead, and about one third is Q&A between our callers and the manager.
• The call is, for you, free.  Your line is muted during the first two parts of the call (so you can feel free to shout at the danged cat or whatever) and you get to join the question queue during the last third by pressing the star key.

Our next conference call features Teresa Kong, manager of Matthews Asia Strategic Income (MAINX).  It’s Tuesday, January 22, 7:00 – 8:00 p.m., EST.

Matthews is the fund world’s best, deepest, and most experienced team of Asia investors.  They offer a variety of funds, all of which have strong – and occasionally spectacular – long-term records investing in one of the world’s fastest-evolving regions.  While income has been an element of many of the Matthews portfolios, it became a central focus with the December 2011 launch of MAINX.  Ms. Kong, who has a lot of experience with first-rate advisors including BlackRock, Oppenheimer and JPMorgan, joined Matthews in 2010 ahead of the launch of this fund. 

Why might you want to join the call? 

Bonds across the developed world seem poised to return virtually nothing for years and possibly decades. For many income investors, Asia is a logical destination. Three factors support that conclusion:

1. Asian governments and corporations are well-positioned to service their debts. Their economies are growing and their credit ratings are being raised.
2. Most Asian debt supports infrastructure, rather than consumption.
3. Most investors are under-exposed to Asian debt markets. Bond indexes, the basis for passive funds and the benchmark for active ones, tend to be debt-weighted; that is, the more heavily indebted a nation is, the greater weight it has in the index. Asian governments and corporations have relatively low debt levels and have made relatively light use of the bond market. An investor with a global diversified bond portfolio (70% Barclays US Aggregate bond index, 20% Barclays Global Aggregate, 10% emerging markets) would have only 7% exposure to Asia. However you measure Asia’s economic significance (31% of global GDP, rising to 38% in the near future or, by IMF calculations, the source of 50% of global growth), even fairly sophisticated bond investors are likely underexposed.

The question isn’t “should you have more exposure to Asian fixed-income markets,” but rather “should you seek exposure through Matthews?” The answer, in all likelihood, is “yes.” Matthews has the largest array of Asia investment products in the U.S. market, the deepest analytic core and the broadest array of experience. They also have a long history of fixed-income investing in the service of funds such as Matthews Asian Growth & Income (MACSX). Their culture and policies are shareholder-friendly and their success has been consistent. Ms. Kong has outstanding credentials and has had an excellent first year.

How can you join in? 

Click on the “register” button and you’ll be taken to Chorus Call’s site, where you’ll get a toll free number and a PIN number to join us.  On the day of the call, I’ll send a reminder to everyone who has registered.

Would an additional heads up help? 

About a hundred readers have signed up for a conference call mailing list.  About a week ahead of each call, I write to everyone on the list to remind them of what might make the call special and how to register.  If you’d like to be added to the conference call list, just drop me a line.

Podcasts and Profiles

If you look at our top navigation bar, you’ll see a new tab and a new feature for the Observer. We’re calling it our Podcast page, but it’s much more.  It began as a suggestion from Ira Artman, a talented financial services guy and a longtime member of the FundAlarm and Observer community.  Ira suggested that we archive together the audio recordings of our conference calls and audio versions of the corresponding fund profiles. 

Good idea, Ira!  We went a bit further and create a resource page for each fund.  The page includes:

• The fund’s name, ticker symbols and its manager’s name
• Written highlights from the conference call
• A playable/downloadable .mp3 of the call
• A link to the fund profile
• A playable/downloadable .mp3 of the fund profile.  The audio profiles start with the print profile, which we update and edit for aural clarity.  Each profile is recorded by Emma Presley, a bright and mellifluous English friend of ours.
• A link to the fund’s most recent fact sheet on the fund’s website.

We have resource pages for RiverPark Short Term High-Yield, RiverPark Long/Short Opportunity and Aston/River Road Long Short.  The pages for Matthews Asia Strategic Income, Seafarer Overseas Growth & Income, and Cook and Bynum are in the works.

Observer Fund Profiles

Each month the Observer provides in-depth profiles of between two and four funds.  Our “Most Intriguing New Funds” are funds launched within the past couple years that most frequently feature experienced managers leading innovative newer funds.  “Stars in the Shadows” are older funds that have attracted far less attention than they deserve. This month’s lineup features a single Star in the Shadows:

Bridgeway Managed Volatility (BRBPX): Dick Cancelmo appreciates RiverNorth Dynamic Buy-Write’s strategy and wishes them great success, but also points out that others have been successful using a similar strategy for well over a decade.  Indeed, over the last 10 years, BRBPX has quietly produced 70% of the stock market’s gains with just 40% of its volatility.

BRBPX and the Mystery of the Incredible Shrinking Fund

While it’s not relevant to the merit of BRBPX and doesn’t particularly belong in its profile, the collapse of the fund’s asset base is truly striking.  In 2005, assets stood around $130 million.  Net assets have declined in each of the past five years from $75 million to $24 million.  The fund has made money over that period and is consistently in the top third of long/short funds.

Why the shrinkage?  I don’t know.  The strategy works, which should at least mean that existing shareholders hang on but they don’t.  My traditional explanation has been, because this fund is dull. Dull, dull, dull.  Dull stocks and dull bonds with one dull (or, at least, technically dense) strategy to set them apart.  Part of the problem is Bridgeway.  This is the only Bridgeway fund that targets conservative, risk-conscious investors which means the average conservative investor would find little to draw them to Bridgeway and the average Bridgeway investor has limited interest in conservative funds.  Bridgeway’s other funds have had a performance implosion.  When I first profiled BRBPX, five of the six funds rated by Morningstar had five-star designations.  Today none of them do.  Instead, five of eight rated funds carry one or two stars.  While BRBPX continues to have a four-star rating, there might be a contagion effect. 

Mr. Cancelmo attributes the decline to Bridgeway’s historic aversion to marketing.  “We had,” he reports, “the ‘if you build a better mousetrap’ mindset.  We’ve now hired a business development team to help with marketing.”  That might explain why they weren’t drawing new assets, but hardly explains have 80% of assets walking out the door.

If you’ve got a guess or an insight, I’d love to hear of it.  (Dick might, too.)  Drop me a note.

As a side note, Bridgeway probably offers the single best Annual Report in the industry.  You get a startling degree of honesty, thoughtfulness and clarity about both the funds and their take on broader issues which impact them and their investors.  I was particularly struck by a discussion of the rising tide of correlations of stocks within the major indices.  Here’s the graphic they shared:

What does it mean?  Roughly, a generation ago you could explain 20% of the movement of the average stock’s price by broader movements in the market.   As a greater and greater fraction of the stock market’s trades are made in baskets of stocks (index funds, ETFs, and so on) rather than individual names, more and more of the fate of each stock is controlled by sentiments surrounding its industry, sector, peers or market cap.  That’s the steady rise of the line overall.  And during a crisis, almost 80% of a stock’s movement is controlled by the market rather than by a firm’s individual merits.  Bridgeway talks through the significance of that for their funds and encourages investors to factor it into their investment decisions.

The report offers several interesting, insightful discussions, making it the exact opposite of – for example – Fidelity’s dismal, plodding, cookie cutter reports.

Here’s our recommendation: if you run a fund, write such like Bridgeway’s 2012 Annual Report.  If you’re trying to become a better investor, read it!

Launch Alert: RiverNorth/Oaktree High Income (RNHIX, RNOTX)

RiverNorth/Oaktree High Income Fund launched on December 28.  This is a collaboration between RiverNorth, whose specialty has been tactical asset allocation and investing in closed-end funds (CEFs), and Oaktree.  Oaktree is a major institutional bond investor with about $80 billion under management.  Oaktree’s clientele includes “75 of the 100 largest U.S. pension plans, 300 endowments and foundations, 10 sovereign wealth funds and 40 of the 50 primary state retirement plans in the United States.”  Their specialties include high yield and distressed debt and convertible securities.  Until now, the only way for retail investors to access them was through Vanguard Convertible Securities (VCVSX), a four-star Gold rated fund.

Patrick Galley, RiverNorth’s CIO, stresses that this is “a core credit fund (managed by Oaktree) with a high income opportunistic CEF strategy managed by RiverNorth.”  The fund has three investment strategies, two managed by Oaktree.  While, in theory, Oaktree’s share of the portfolio could range from 0 – 100%, as a normal matter they’ll manage the considerable bulk of the portfolio.  Oaktree will have the freedom to allocate between their high-yield and senior loan strategies.  RiverNorth will focus on income-producing CEFs.

For those already invested in RiverNorth funds, Mr. Galley explained the relationship of RNHIX to its siblings:

We are staying true to the name and focusing on income producing closed-end funds, but unlike RNSIX (which focuses on income producing fixed income) and RNDIX (which focuses on income producing equities) and RNCOX (which doesn’t have an income mandate and only distributes once a year), RNHIX will invest across the CEF spectrum (i.e. all asset classes) but with a focus on income without sacrificing/risking total return.

The argument for considering this fund is similar to the argument for considering RiverNorth/DoubleLine Strategic Income.  You’re hiring world-class experts who work in inefficient segments of the fixed-income universe. 

RiverNorth had the risk and return characteristics for a bunch of asset classes charted.

You might read the chart as saying something like: this is a strategy that could offer equity-like returns with more nearly bond-like volatility.  In a world where mainstream, investment-grade bonds are priced to return roughly nothing, that’s an option a reasonable person would want to explore.

The retail expense ratio is capped at 1.60% and the minimum initial investment is $5000.

Funds in Registration

New mutual funds must be registered with the Securities and Exchange Commission before they can be offered for sale to the public.  The SEC has a 75-day window during which to call for revisions of a prospectus; fund companies sometimes use that same time to tweak a fund’s fee structure or operating details.  Every day we scour new SEC filings to see what opportunities might be about to present themselves. Many of the proposed funds offer nothing new, distinctive or interesting.  Some are downright horrors of Dilbertesque babble.

Funds in registration this month won’t be available for sale until, typically, the beginning of March 2013. We found 15 funds in the pipeline, notably:

Investors Variable NAV Money Market Fund, one of a series of four money markets managed by Northern Trust, all of which will feature variable NAVs.  This may be a first step in addressing a serious problem: the prohibition against “breaking the buck” is forcing a lot of firms to choose between underwriting the cost of running their money funds or (increasingly) shutting them down.

LSV Small Cap Value Fund is especially notable for its management team, led by Josef Lakonishok is a reasonably famous academic who did some of the groundbreaking work on behavioral finance, then translated that research into actual investment strategies through private accounts, hedge funds, and his LSV Value Equity Fund (LSVEX) fund.

Details on these funds and the list of all of the funds in registration are available at the Observer’s Funds in Registration page or by clicking “Funds” on the menu atop each page.

On a related note, we also tracked down 31 fund manager changes, including a fair number of folks booted from ING funds.

Briefly Noted

According to a recent SEC filing, Washington Mutual Investors Fund and its Tax-Exempt Fund of Maryland and Tax-Exempt Fund of Virginia “make available a Spanish translation of the above prospectus supplement in connection with the public offering and sale of its shares. The English language prospectus supplement above is a fair and accurate representation of the Spanish equivalent.”  I’m sure there are other Spanish-language prospectuses out there, but I’ve never before seen a notice about one.  It’s especially interesting given that tax-exempt bond funds target high income investors. 

Effective January 1, DWS is imposing a $20/year small account service fee for shareholders in all 49 of their funds.  The fee comes on top of their sales loads.  The fee applies to any account with under $10,000 which is regrettable for a firm with a $1,000 minimum initial investment.  (Thanks to chip for having spotted this filing in the SEC’s database.  Regrets for having gotten friends into the habit of scanning the SEC database.)

Closings

Eaton Vance Atlanta Capital SMID-Cap (EAASX) is closing to new investors on Jan. 15.  More has been pouring in (on the order of $1.5 billion in a year); at least in part driven by a top-notch five-year rating.

Walthausen Small Cap Value (WSCVX) closed to new investors at the end of the year.  At the same time, the minimum initial investment for the $1.7 million Walthausen Select Value Investor Class (WSVIX) went from $10,000 to $100,000.  WSCVX closed on January 1 at $560 million which might explain was they’re making the other fund’s institutional share class harder to access.

William Blair International Growth (WBIGX) closed to new investors, effective Dec. 31.

Old Wine in New Bottles

American Century Inflation Protection Bond (APOIX) has been renamed American Century Short Duration Inflation Protection Bond. The fund has operated as a short-duration offering since August 2011, when its benchmark changed to the Barclays U.S. 1-5 Year Treasury Inflation Protected Securities Index.

Federated Prudent Absolute Return (FMAAX) is about to become less Prudent.  They’re changing their name to Federated Absolute Return and removed the manager of the Prudent Bear fund from the management team.

Prudential Target Moderate Allocation (PAMGX) is about to get a new name (Prudential Defensive Equity), mandate (growth rather than growth and income) and management structure (one manager team rather than multiple).  It is, otherwise, virtually unchanged. 

Prudential Target Growth Allocation (PHGAX) is merging into Prudential Jenison Equity Income (SPQAX).

U.S. Global Investors Global MegaTrends (MEGAX) is now U.S. Global Investors MegaTrends and no longer needs to invest outside the U.S. 

William Blair Global Growth (WGGNX) will change its name to William Blair Global, and William Blair Emerging Leaders Growth (WELNX) will change its name to William Blair Emerging Markets Leaders.

Small wins for investors

Cook & Bynum Fund (COBYX), a wildly successful, super-concentrated value fund, has decided to substantially reduce their expense ratio.  President David Hobbs reports:

… given our earlier dialogue about fees, I wanted to let you know that as of 1/1/13 the all-in expense ratio for the fund will be capped at 1.49% (down from 1.88%).  This is a decision that we have been wrestling with for some time internally, and we finally decided that we should make the move to broaden the potential appeal of the fund. . . .  With the fund’s performance (and on-going 5-star ratings with Morningstar and S&P Capital IQ), we decided to take a calculated risk that this new fee level will help us grow the fund.

Our 2012 profile of the fund concluded, “Cook and Bynum might well be among the best.  They’re young.  The fund is small and nimble.  Their discipline makes great sense.  It’s not magic, but it has been very, very good and offers an intriguing alternative for investors concerned by lockstep correlations and watered-down portfolios.”  That makes the decreased cost especially welcome.  (They also have a particularly good website.)

Effective January 2, 2013, Calamos Growth and Income and Global Growth and Income Funds re-opened to new investors. (Thanks to The Shadow for catching this SEC filing.)

ING Small Company (AESAX) has reopened.  It’s reasonably large and not very good, really.

JPMorgan (JPM) launched Total Emerging Markets (TMGGX), an emerging-markets allocation fund.

Fund firms have been cutting expenses of late as they pressure to gather and hold assets builds. 

Fidelity has reduced the minimum investment on its Advantage share class from $100,000 to $10,000.  The Advantage class has lower expense ratios (which is good) and investors who own more than $10,000 in a fund’s retail Investor class will be moved automatically to the less-expensive Advantage class.

Fido also dropped the minimums on nearly two dozen index and enhanced index products from $10,000 to $2,500, which gives a lot more folks access to low-cost passive (or nearly-passive) shares. 

Fido also cut fees on eight Spartan index funds, between one to eight basis points.  The Spartan funds had very low expenses to begin with (10 basis points in some cases), so those cuts are substantial.

GMO Benchmark-Free Allocation (GBMFX) has decreased its expense ratio from 87 basis points down to 81 bps by increasing its fee waiver.  The fund is interesting and important not because I intend to invest in in soon (the minimum is $10 million) but because it represents where GMO thinks that an investor who didn’t give a hoot about other people’s opinions (that’s the “benchmark-free” part) should invest.

Effective January 1, Tocqueville Asset Management L.P. capped expenses for Tocqueville International Value at 1.25% of the fund’s average daily net assets.  Until now investors have been paying 1.56%. 

Also effective January 1, TCW Investment Management Company reduced the management fees for the TCW High Yield Bond Fund from 0.75% to 0.45%.

Vanguard has cut fees on 47 products, which include both ETFs and funds. Some of the cuts went into effect on Dec. 21, while others went into effect on Dec. 27th.  The reductions on eleven ETFs — four stock and seven bond — on December 21. Those cuts range from one to two basis points. That translates to reductions of 3 – 15%.

Off to the Dustbin of History

The board of trustees of Altrius Small Cap Value (ALTSX) has closed the fund and will likely have liquidated it by the time you read this.  On the one hand, the fund only drew $180,000 in assets.  On the other, the members of the board of trustees receive $86,000/year for their services, claim to be overseeing between 97 – 100 funds and apparently have been doing so poorly, since they received a Wells Notice from the SEC in May 2012.  They were bright even not to place a penny of their own money in the fund.  One of the two managers was not so fortunate: he ate a fair portion of his own cooking and likely ended up with a stomach cramp.

American Century will liquidate American Century Equity Index (ACIVX) in March 2013. The fund has lost 75% of its assets in recent years, a victim of investor disillusionment with stocks and high expenses.  ACIVX charged 0.49%, which seems tiny until you recall that identical funds can be had for as little as 0.05% (Vanguard, naturally).

Aston Asset Management has fired the Veredus of Aston/Veredus Small Cap Growth (VERDX) and will merge the fund in Aston Small Cap Growth (ACWDX).  Until the merger, it will go by the name Aston Small Cap.

The much-smaller Aston/Veredus Select Growth (AVSGX) will simply be liquidated.  But were struggling.

Federated Capital Appreciation, a bottom 10% kind of fund, is merging Federated Equity-Income (LEIFX).  LEIFX has been quite solid, so that’s a win.

GMO is liquidating GMO Inflation Indexed Plus Bond (GMIPX).  Uhh, good move.  Floyd Norris, in The New York Times, points out that recently-auctioned inflation-protected bonds have been priced to lock in a loss of about 1.4% per year over their lifetimes.   If inflation spikes, you might at best hope to break even.

HSBC will liquidate two money-market funds, Tax-Tree and New York Tax-Free in mid-January.

ING Index Plus International Equity (IFIAX) has closed and is liquidating around Feb. 22, 2013.  No, I don’t know what the “Plus” was.

Invesco is killing off, in April, some long-storied names in its most recent round of mergers.  Invesco Constellation (CSTGX) and Invesco Leisure (ILSAX) are merging into American Franchise (VAFAX).  Invesco Dynamics (IDYAX) goes into Mid Cap Growth (VGRAX), Invesco High-Yield Securities (HYLAX) into High Yield (AMHYX), Invesco Leaders (VLFAX) into Growth Allocation (AADAX), and Invesco Municipal Bond (AMBDX) will merge into Municipal Income (VKMMX).   Any investors in the 1990s who owned AIM Constellation (I did), Invesco Dynamics and Invesco Leisure would have been incredibly well-off.

Leuthold Global Clean Technology (LGCTX) liquidated on Christmas Eve Day. Steve Leuthold described this fund, at its 2009 launch, as “the investment opportunity of a generation.”  Their final letter to shareholders lamented the fund’s tiny, unsustainable asset base despite “strong performance relative to its comparable benchmark index” and noted that “the Fund operates in a market sector that has had challenging.”  Losses of 20% per year are common for green/clean/alternative funds, so one can understand the limited allure of “strong relative performance.”

Lord Abbett plan to merge Lord Abbett Stock Appreciation (LALCX) into Lord Abbett Growth Leaders (LGLAX) in late spring, 2013.

Munder International Equity (MUIAX) is merging into Munder International Core Equity (MAICX).

Natixis Absolute Asia Dynamic Equity (DEFAX) liquidated in December.  (No one noticed.)

TCW Global Flexible Allocation Fund (TGPLX) and TCW Global Moderate Allocation Fund (TGPOX) will be liquidated on or about February 15, 2013.  Effective the close of business on February 8, 2013, the Funds will no longer sell shares to new investors or existing shareholders.  These consistent laggards, managed by the same team, had only $10 million between them.  Durn few of those $10 million came from the managers.  Only one member of the management team had as much as a dollar at risk in any of TCW’s global allocation funds.  That was Tad Rivelle who had a minimal investment in Flexible.

In Closing …

Thank you all for your support in 2012. There are a bunch of numerical measures we could use. The Observer hosted 78,645 visitors and we averaged about 11,000 readers a month.  Sixty folks made direct contributions to the Observer and many others picked up $88,315.15 worth of cool loot (3502 items) at Amazon.  And a thousand folks viewed something like 1.6 million discussion topics. 

But, in many ways, the note that reads “coming here feels like sitting down with an old friend and talking about something important” is as valuable as anything we could point to. 

So thanks for it all.

If you get a chance and have a suggestion about how to make the Observer better in the year ahead, drop me a note and let me know.  For now, we’ll continue offering (and archiving) our monthly conference calls.  During January we’ll be updating our small cap profiles and February will see new profiles for Whitebox Long Short Equity (WBLSX) and PIMCO Short Asset Investment (PAIUX).

Until then, take care.

With hopes for a blessed New Year,

Dear friends,

And now, we wait.  After the frenzy of recent months, that seems odd and unnatural.

Will and his minions wait for the holidays, anxious for the last few weeks of school to pass but secure in the knowledge that their folks are dutifully keeping the retail economy afloat.

Photo by Drew Barnes ’14, Augustana Photo Bureau

My colleagues at Augustana are waiting for winter and then for spring.  The seemingly endless string of warm, dry weeks has left much of our fall foliage intact as we enter December. As beautiful as it is, we’re sort of rooting for winter, or at least the hope of seasonal weather, to reassert itself. And we’re waiting for spring, when the $13 million renovation of Old Main will be complete and we escape our warren of temporary offices and ersatz classrooms. I’ve toured the half-complete renovation. It’s going to be so cool.

And investors wait. Most of us are waiting for a resolution of “the fiscal cliff” (alternately: fiscal slope, obstacle course, whatchamacallit or, my favorite, Fiscal Clifford the Big Red Dog), half fearful that they won’t find a compromise and half fearful that they will.

Then there are The Two Who Wouldn’t Wait. And they worry me. A lot. We’ve written for a year or so about our concerns that the bond market is increasingly unstable. That concern has driven our search for tools, other than Treasuries or a bond aggregate, that investors might use to manage volatility. In the past month, the urgency of that search has been highlighted by The Two. One of The Two is Jeffrey Gundlach, founder of the DoubleLine funds and widely acknowledged as one of the best fixed-income managers anyway. Gundlach believes that “[d]eeply indebted countries and companies, which Gundlach doesn’t name, will default sometime after 2013” (Bond Investor Gundlach Buys Stocks, Sees ‘Kaboom’ Ahead, 11/30/2012). Gundlach says, “I don’t believe you’re going to get some sort of an early warning. You should be moving now.”  Gundlach, apparently, is moving into fine art.

GMO, the other of The Two, has moved. GMO (Grantham, Mayo, van Otterloo) has an outstanding record for anticipating asset class crashes. They moved decisively in 2000 and again in 2007, knowing that they were likely early and knowing that leaving the party early would cost them billions (one quarter of the firm’s assets) as angry investors left. But when the evidence says “run,” they ran. In a late-November interview with the Financial Times, GMO’s head of asset allocation revealed that, firm-wide, GMO had sold off all of their bond holdings (GMO abandons bond market, 11/26/2012). “We’ve largely given up on traditional fixed income,” Inker says, including government and corporate debt in the same condemnation. They don’t have any great alternatives (high quality US stocks are about the best option), but would prefer to keep billions in cash to the alternatives.

I don’t know whether you should wait. But I do believe that you should acquaint yourself with those who didn’t.

The Last Ten: PIMCO in the Past Decade

In October we launched “The Last Ten,” a monthly series, running between now and February, looking at the strategies and funds launched by the Big Five fund companies (Fido, Vanguard, T Rowe, American and PIMCO) in the last decade.

Here are our findings so far:

Fidelity, once fabled for the predictable success of its new fund launches, has created no compelling new investment option and only one retail fund that has earned Morningstar’s five-star designation, Fidelity International Growth (FIGFX).  We suggested three causes: the need to grow assets, a cautious culture and a firm that’s too big to risk innovative funds.

T. Rowe Price continues to deliver on its promises.  Of the 22 funds launched, only Strategic Income (PRSNX) has been a consistent laggard; it has trailed its peer group in four consecutive years but trailed disastrously only once (2009).  Investing with Price is the equivalent of putting a strong singles-hitter on a baseball team; it’s a bet that you’ll win with consistency and effort, rather than the occasional spectacular play.

And just as you’re about to conclude that large fund companies will necessarily produce cautious funds that can aspire just to “pretty good,” along comes PIMCO.  PIMCO was once known as an almost purely fixed-income investor.  Its flagship PIMCO Total Return Fund has gathered over a quarter trillion dollars in assets and tends to finish in the top 10% of its peer group over most trailing time periods.

But PIMCO has become more.  This former separate accounts managers for Pacific Life Insurance Company now declares, “We continue to evolve. Throughout our four decades we have been pioneers and continue to evolve as a provider of investment solutions across all asset classes.”

Indeed they have.  PIMCO has spent more time thinking about, and talking about, the global economic future than any firm other, perhaps, than GMO.  More than talk about the changing sources of alpha and the changing shape of risk, PIMCO has launched a bunch of unique funds targeting emerging challenges and opportunities that other firms would prefer simply to ignore (or to eventually react to).

Perhaps as a result, PIMCO has created more five-star funds in the last decade than any other firm and, among larger firms, has a greater fraction of their funds earning four- or five-stars than anyone else.  Here’s the snapshot:

• PIMCO has 84 funds (which are sold in over 536 packages or share classes)
• 56 of their funds were launched in the past decade
• 61 of them are old enough to have earned Morningstar ratings
• 20 of them have five-star ratings (as of 11/14/12)
• 15 more earned four-star ratings.

How likely this that?  In each Morningstar category, the top 10 percent of funds receive five stars, the next 22.5 percent receive four stars, and the next 35 percent receive three.  In the table below, those are the “expected values.”  If PIMCO had just ordinary skill or luck, you’d expect to see the numbers in the expected values column.  But you don’t.

Only their RealRetirement funds move between bad and mediocre, and even those funds made yet be redeemed.  The RealRetirement funds, like PIMCO’s other “Real” funds, are designed to be especially sensitive to inflation.  That’s the factor that poses the greatest long-term risk to most of our portfolios, especially as they become more conservative.  Until we see a sustained uptick in inflation, we can’t be sure of how well the RealRetirement funds will meet their mandates.  But, frankly, PIMCO’s record counsels patience.

Here are all of the funds that PIMCO has launched in the last 10 years, which their Morningstar rating (as of mid-November, 2012), category and approximate assets under management.

In January, we’ll continue the series of a look at Vanguard.  We know that Vanguard inspires more passion among its core investors than pretty much any other firm.  Since we’re genial outsiders to the Vanguard culture, if you’ve got insights, concerns, tips, kudos or rants you’d like to share, dear Bogleheads, drop me a note.

RiverPark Long/Short Opportunity Conference Call

Volatility is tremendously exciting for many investment managers.  You’d be amazed by the number who get up every morning, hoping for a market panic.  For the rest of us, it’s simply terrifying.

For the past thirty years, the simple, all-purpose answer to unacceptable volatility has been “add Treasuries.”  The question we began debating last spring is, “where might investors look if Treasuries stop functioning as the universal answer?”  We started by looking at long/short equity funds as one possible answer.  Our research quickly led to one conclusion, and slowly to a second.

The quick conclusion: long/short funds, as a group, are a flop. They’re ridiculously expensive, with several dozen charging 2.75% or more plus another 1.5-2% in short interest charges.  They offered some protection in 2008, though several did manage to lose more that year than did the stock market.  But their longer term returns have been solidly dismal.  The group returned 0.15% over the past five years, which means they trailed far behind the stock market, a simple 60/40 hybrid, moderate allocation funds, very conservative short-term bond funds . . . about the only way to make this bunch look good is to compare them to “market neutral” funds (whose motto seems to be, “we can lose money in up markets and down!”).

The slower conclusion: some long-short funds have consistently, in a variety of markets, managed to treat their investors well and a couple more show the real promise of doing so. The indisputable gold standard among such funds, Robeco Long Short (BPLEX) returned 16% annually over the past five years.  The second-best performer, Marketfield (MFLDX) made 9% while funds #3 (Guggenheim Alpha) and #4 (Wasatch Long/Short) made 4%. Sadly, BPLEX is closed to new investors, Guggenheim has always had a sales load and Marketfield just acquired one. Wasatch Long-Short (FMLSX), which we first profiled three years ago, remains a strong, steady performer with reasonable expenses.

Ultimately we identified (and profiled) just three, newer long-short funds worthy of serious attention: Marketfield, RiverPark Long/Short Opportunity (RPLSX) and ASTON/River Road Long Short (ARLSX).

For about an hour on November 29th, Mitch Rubin, manager of RiverPark Long/Short Opportunity(RLSFX) fielded questions from Observer readers about his fund’s strategy and its risk-return profile.  Nearly 60 people signed up for the call.

For folks interested but unable to join us, here’s the complete audio of the hour-long conversation.  It starts with Morty Schaja, RiverPark’s president, talking about the fund’s genesis and Mr. Rubin talking about its strategy.  After that, I posed five questions of Rubin and callers chimed in with another half dozen.

If you’d like a preview before deciding whether you listen in, you might want to read our profile of RLSFX (there’s a printable .pdf of the profile on RiverPark’s website).  Here are some of the highlights of the conversation:

Rubin believes that many long/short mutual fund managers (as opposed to the hedge fund guys) are too timid about using the leverage allowed them.  As a result, they’re not able to harvest the full returns potential of their funds.  Schaja describes RLSFX’s leverage as “moderate,” which generally means having investments equal to 150-200% of assets.

The second problem with long/short managers as a group, he believes, is that they’re too skittish.  They obsess about short-term macro-events (the fiscal cliff) and dilute their insights by trying to bet for or against industry groups (by shorting ETFs, for example) rather than focusing on identifying the best firms in the best industries.

One source of RLSFX’s competitive advantage is the team’s long history of long investing.  They started following many of the firms in their portfolio nearly two decades ago, following their trajectory from promising growth stocks (in which they invested), stodgy mature firms (which they’d sold) and now old firms in challenged industries (which are appearing in the short portfolio).

A second source of advantage is the team’s longer time horizon.  Their aim is to find companies which might double their money over the next five years and then to buy them when their price is temporarily low.

I’d like to especially thank Bill Fuller, Jeff Mayer and Richard Falk for the half dozen really sharp, thoughtful questions that they posed during the closing segment.  If you catch no other part of the call, you might zoom in on those last 15 minutes to hear Mitch and the guys in conversation.

Mr. Rubin is an articulate advocate for the fund, as well as being a manager with a decades-long record of success.  In addition to listening to his conversation, there are two documents on the Long/Short fund’s homepage that interested parties should consult.  First, the fund profile has a lot of information about the fund’s performance back when it was a hedge fund which should give you a much better sense of its composition and performance over time.  Second, the manager’s commentary offers an intriguing list of industries which they believe to be ascendant or failing.  It’s sort of thought-provoking.

Conference Calls Upcoming: Great managers on-deck

As promised, we’re continuing our moderated conference calls through the winter.  You should consider joining in.  Here’s the story:

• Each call lasts about an hour
• About one third of the call is devoted to the manager’s explanation of their fund’s genesis and strategy, about one third is a Q&A that I lead, and about one third is Q&A between our callers and the manager.
• The call is, for you, free.  Your line is muted during the first two parts of the call (so you can feel free to shout at the danged cat or whatever) and you get to join the question queue during the last third by pressing the star key.

Our next conference call features Matt Moran and Dan Johnson, co-managers of ASTON / River Road Long Short (ARLSX).   I’ve had several conversations with the team and they strike me as singularly bright, articulate and disciplined.  When we profiled the fund in June, we noted:

The strategy’s risk-management measures are striking.  Through the end of Q1 2012, River Road’s Sharpe ratio (a measure of risk-adjusted returns) was 1.89 while its peers were at 0.49.  Its maximum drawdown (the drop from a previous high) was substantially smaller than its peers, it captured less of the market’s downside and more of its upside, in consequence of which its annualized return was nearly four times as great.

Among the crop of newer offerings, few are more sensibly-constructed or carefully managed that ARLSX seems to be.  It deserves attention.

If you’d like to share your attention with them, our call with ASTON / River Road Long  Short is Monday, December 17, from 7:00 – 8:00 Eastern.  To register for the call, just click on this link and follow the instructions.  I’ll send a reminder email on the day of the call to all of the registered parties.

As a service to our readers, we’ve constructed a mailing list that we’ll use to notify folks of upcoming conference call opportunities.  If you’d like to join but haven’t yet, feel free to drop me a note.

Fidelity’s Advice to Emerging Markets Investors: Avoid Us

Fidelity runs several distinct sets of funds, including Fidelity, Fidelity Advisor, Fidelity Select, and Fidelity Series.  In many ways, the most interesting are their Strategic Adviser funds which don’t even bear the Fidelity name.  The Strategic Adviser funds are “exclusive to clients of Portfolio Advisory Services. . . They allow Strategic Advisers to hire (and fire) sub-advisers as well as to buy, sell, and hold mutual funds and exchange-traded funds (ETFs) within the fund.”  In short, these are sort of “best ideas”  funds, two of which are funds of funds.

Which led to the question: would the smartest folks Fidelity could find, who could choose any funds around which to build a portfolio, choose Fidelity?

In the case of emerging markets, the answer is “uhh … no.”  Here’s the portfolio for Strategic Advisers Emerging Markets Fund of Funds (FLILX).

What should you notice?

1. The fund’s managers seem to find many funds more compelling than Fidelity Emerging Markets, and so it ends up sixth on the list.  Fidelity’s corporate folks seem to agree and they replaced the long-time manager of this one-star fund in mid October, 2012.
2. Measured against the March 2012 portfolio, Fidelity E.M. has seen the greatest decrease in its weighing (about 3.2%) of any fund in the portfolio.
3. Missing entirely from the list: Fidelity’s entire regional lineup including China Region, Emerging Asia, Emerging Middle East and Latin America.
4. For that matter, missing entirely from the list are anything but diversified large cap emerging markets stock funds.

Fidelity does noticeably better in the only other Strategic Advisers fund of funds, the Strategic Advisers^® Income Opportunities Fund of Funds (FSADX).

Why, exactly, the managers have invested in three different classes of the same Fidelity fund is a bit unclear but at least they are willing to invest with Fido.  It may also speak to the continuing decline of the Fidelity equity-investing side of the house while fixed-income becomes increasingly

A Site Worth Following: Learn Bonds

Junior Yearwood, our friend and contributing editor who has been responsible for our Best of the Web reviews, has been in conversation with Marc Prosser, a Forbes contributor and proprietor of the Learn Bonds website.  While the greatest part of Marc’s work focuses broadly on bond investing, he also offers ratings for a select group of bond mutual funds.  He has a sort of barbell approach, focusing on the largest bond fund companies and on the smallest.  His fund ratings, like Morningstar’s analyst ratings, are primarily qualitative and process-focused.

Marc doesn’t yet have data by which to assess the validity of his ratings (and, indeed, is articulately skeptical of that whole venture), so we can’t describe him as a Best of the Web site.  That said, Junior concluded that his site was clean, interesting, and worth investigating.  It was, he concluded, a new and notable site.

Launch Alert: Whitebox Long Short Equity (WBLSX,WBLRX,WBLFX)

On November 1, Whitebox Advisors converted their Whitebox Long Short Equity Partners hedge fund into the Whitebox Long Short Equity Fund which has three share classes.  As a hedge fund, Whitebox pretty much kicked butt.  From 2004 – 2012, it returned 15.8% annually while the S&P500 earned 5.2%.  At last report, the fund was just slightly net-long with a major short against the Russell 2000.

There’s great enthusiasm among the Observer’s discussion board members about Whitebox’s first mutual fund, Whitebox Tactical Opportunities (WBMAX) , which strongly suggests this one warrants some attention, if only from advisors who can buy it without a sales load. The Investor shares carry at 4.5% front load, 2.48% expense ratio and a $5000 minimum initial investment.  You might check the fund’s homepage for additional details.

Observer Fund Profiles

Had I mentioned that we visited RiverNorth?

Each month the Observer provides in-depth profiles of between two and four funds.  Our “Most Intriguing New Funds” are funds launched within the past couple years that most frequently feature experienced managers leading innovative newer funds.  “Stars in the Shadows” are older funds that have attracted far less attention than they deserve.  This month’s lineup features

Artisan Global Equity Fund (ARTHX):  you know a firm is in a good place when the most compelling alternatives to one of their funds are their other funds.  Global, run by Mark Yockey and his team, extends on the long-term success of Artisan International and International Small Cap.

RiverNorth Dynamic Buy Write (RNBWX): one of the most consistently successful (and rarely employed) strategies for managing portfolios in volatile markets is the use of covered calls.  After spending several hours with the RiverNorth team and several weeks reading the research, we may have an answer to a version of the old Ghostbusters question, “who you gonna (covered) call?”

Funds in Registration

New mutual funds must be registered with the Securities and Exchange Commission before they can be offered for sale to the public.  The SEC has a 75-day window during which to call for revisions of a prospectus; fund companies sometimes use that same time to tweak a fund’s fee structure or operating details.  Every day we scour new SEC filings to see what opportunities might be about to present themselves. Many of the proposed funds offer nothing new, distinctive or interesting.  Some are downright horrors of Dilbertesque babble.

Funds in registration this month won’t be available for sale until, typically, the beginning of February 2013. Since firms really like launching by December 31^st if they can, the number of funds in the pipeline is modest: seven this month, as compared to 29 last month.  That said, two of the largest fixed-income teams are among those preparing to launch:

DoubleLine Floating Rate Fund, the tenth fund advised or sub-advised by DoubleLine, will seek a high level of current income by investing in floating rate loans and “other floating rate investments.”  The fund will be managed by Bonnie Baha and Robert Cohen.  Ms. Baha was part of Mr. Gundlach’s original TCW team and co-manages Multi-Asset Growth, Low-Duration Bond and ASTON/DoubleLine Core Plus Fixed Income.

PIMCO Emerging Markets Full Spectrum Bond Fund will invest in “a broad range of emerging market fixed income asset classes, such as external debt obligations of sovereign, quasi-sovereign, and corporate entities; currencies, and local currency-denominated obligations of sovereigns, quasi-sovereigns, and corporate issuers.”  The manager has not yet been named but, as we noted in our lead story, the odds are that this is going to be a top-of-class performer.

Details on these funds and the list of all of the funds in registration are available at the Observer’s Funds in Registration page or by clicking “Funds” on the menu atop each page.

On a related note, we also tracked down 40 fund manager changes, down from last month’s bloodbath in which 70 funds changed management.

The Observer in the News

Last month, we ran our annual Honor Roll of Consistently Bearable Funds, which asks the simple question:  “which mutual funds are never terrible?”  Our basic premise is that funds that earn high returns but crash periodically are, by and large, impossible for investors to hold.  And so we offered up a list of funds that have avoided crashing in any of the past ten years.  As it turns out, by managing beta, those funds ended up with substantial alpha.  In English: they made good money by avoiding losing money.

Chuck Jaffe has been looking at a related strategy for years, which led him to talk about and elaborate on our article.  His story, “A fund-picking strategy for nervous investors,” ran on November 19^th, ended up briefly (very briefly: no one can afford fifteen minutes of fame any more) on the front page of Google News and caused a couple thousand new folks to poke their heads in at the Observer.

Briefly Noted . . .

Artisan Partners has again filed for an initial public offering.  They withdrew a 2011 filing in the face of adverse market conditions.  Should you care?  Investors can afford to ignore it since it doesn’t appear that the IPO will materially change operations or management; it mostly generates cash to buy back a portion of the firm from outsiders and to compensate some of the portfolio guys.  Competitors, frankly, should care.  Artisan is about the most successful, best run small firm fund that I know of: they’ve attracted nearly $70 billion in assets, have a suite of uniformly strong funds, stable management teams and a palpable commitment to serving their shareholders.  If I were in the business, I’d want to learn a lot – and think a lot – about how they’ve managed that feat.  Sudden access to a bunch more information would help.

One of The Wall Street Journal columnists surveyed “financial advisers, mutual-fund experts and academics” in search of the five best books for beginning investors.  Other than for the fact that they missed Andrew Tobias’s The Only Investment Guide You’ll Ever Need, it’s a pretty solid list with good works from the efficient market and behavioral finance folks.

SMALL WINS FOR INVESTORS

Clipper (CFIMX), Davis New York Venture (NYVTX), and Selected American Shares (SLASX) have waived their 30-day trading restriction for the rest of 2012, in case investors want to do some repositioning in anticipation of higher capital gains tax rates in 2013.

Dreyfus/The Boston Company Small Cap Growth (SSETX) reopened to new investors on Nov. 1.

Victoria 1522 (VMDIX/VMDAX), an emerging markets stock fund, is cutting its expense ratio by 40 basis points. That’s much better news than you think. Glance at Morningstar’s profile of the lower-minimum Advisor shares and you’ll see a two-star fund and move on.  That reading is, for two reasons, short-sighted.  First, the lower expense ratio would make a major difference; the institutional shares, at 25 bps below the Advisor shares, gain a star (as of 11/30/12) and this reduction gives you 40 bps.  Second, the three-year record masks an exceedingly strong four-plus year record.  From inception (10/08) through the end of 11/12, Victoria 1522 would have turned a $10,000 investment into $19,850.  Its peer over the same period would have returned $13,500. That’s partly attributable to good luck: the fund launched in October 2008 and made about 3% in the quarter while its peers dropped nearly 21%.  Even excluding that great performance (that is, looking at 1/09 – 11/12), the fund has modestly outperformed its peer group despite the drag of its soon-to-be-lowered expenses.  ManagerJosephine Jiménez has a long, distinguished record, including long stints running Montgomery Asset Management’s emerging markets division.  (Thanks to Jake Mortell of Candlewood Advisory for the heads up!)

Wells Fargo has reopened the Class A shares of its Wells Fargo Advantage Dow Jones Target funds: Target Today, 2010, 2020, 2030 and 2040.

CLOSINGS

AllianceBernstein Small Cap Growth (QUASX) will close to new investors on January 31, 2013. That’s all I noticed this month.

OLD WINE, NEW BOTTLES

Calvert Enhanced Equity (CMIFX) will be renamed Calvert Large Cap Core in January 2013.

Actually, this one is a little bit more like “old vinegar in new bottles.”  Dominion Insight Growth Fund was reorganized into the Shepherd Large Cap Growth Fund in 2002.  Shepherd LCG changed its name to the Shepherd Fund in 2008. Then Shepherd Fund became Foxhall Global Trends Fund in 2009, and now Foxhall Global Trends has become Fairfax Global Trends Fund (DOIGX). In all of the name changes, some things have remained constant: low assets, high expenses, wretched performance (they’ve finished in the 98^th -99^th percentile for the trailing one, three, five and ten year periods).

Forward Aggressive Growth Allocation Fund became Forward Multi-Strategy Fund on December 3, 2012, which is just a bit vanilla. The 50 other multi-strategy funds in Morningstar’s database include Dynamic, Ethical, Global, Hedged and Progressive flavors of the marketing flavor du jour.

In non-news, Marathon Value Portfolio (MVPFX) is moving from the Unified Series Trust to  Northern Lights Fund Trust III. That’s their third move and I mention it only because the change causes the SEC to flag MVPFX as a “new” fund.  It isn’t new, though it is a five-star, “Star in the Shadows” fund and worth knowing about.

Wells Fargo Advantage Total Return Bond (MBFAX) will be renamed Wells Fargo Advantage Core Bond sometime in December.

OFF TO THE DUSTBIN OF HISTORY

Geez, the dustbin of history is filling up fast . . .

BNY Mellon Intermediate U.S. Government (MOVIX) is merging into BNY Mellon Intermediate Bond (MIIDX) in February, though the manager is the same for both funds.

Buffalo plans to merge Buffalo China (BUFCX) into Buffalo International (BUFIX) in January, 2013. The fund was originally sub-advised by Jayhawk Capital and I long ago wrote a hopeful profile of the then-new fund. Jayhawk ran it for three years, making huge amounts twice (2007 and 2009), lost a huge amount once (2008), lived in the basement of a highly volatile category and were replaced in 2009 by an in-house management team. The fund has been better but never rose to “good” and never drew assets.

Dreman is killing off five of the six funds: Contrarian International Value (DRIVX), Contrarian Mid Cap Value (DRMVX), Contrarian Value Equity (DRVAX), High Opportunity (DRLVX), and Market Over-Reaction (DRQLX).  Mr. Dreman has a great reputation and had a great business sub-advising load-bearing funds.  Around 2003, Dreman launched a series of in-house, no-load funds.  That experiment, by and large, failed.  The funds were rebranded and repriced, but never earned their way.  The fate of their remaining fund, Dreman Contrarian Small Cap Value (DRSVX), is unknown.

Dreyfus/The Boston Company Small Cap Tax-Sensitive Equity (SDCEX) will liquidate on January 8, 2013 and Dreyfus Small Cap (DSVAX) disappears a week later. Dreyfus is also liquidating a bunch of money market and state bond funds.

Fidelity is pulling a rare 5:1 reverse split by merging Tax Managed Stock (FTXMX), Advisor Strategic Growth (FTQAX), Advisor 130/30 Large Cap (FOATX), and Large Cap Growth (FSLGX) into Fidelity Stock Selector All Cap (FSSKX).

Guggenheim Flexible Strategies (RYBSX) (formerly Guggenheim Long Short Interest Rate Strategies) is slated to merge into Guggenheim Macro Opportunities (GIOAX).

Henderson Global is liquidating their International All Cap Equity (HFNAX) and the Japan Focus (HFJAX) funds in December.

Legg Mason has decided to liquidate Legg Mason Capital Management Disciplined Equity Research (LGMIX), likely on the combination of weak performance and negligible assets.

Munder International Equity (MUIAX) will merge into Munder International Core Equity (MAICX) on Dec. 7.

The board of Northern Funds approved the liquidation of Northern Global Fixed Income (NOIFX) for January 2013.

Pear Tree Columbia Micro Cap (MICRX) just liquidated.  They gave the fund all of one year before declaring it to be a failed experiment.

RidgeWorth plans to merge RidgeWorth Large Cap Core Growth Stock (CRVAX) will be absorbed by RidgeWorth Large Cap Growth Stock (STCIX).

Turner is merging Turner Concentrated Growth (TTOPX) into Turner Large Growth (TCGFX) in early 2013.

Westwood has decided to liquidate Westwood Balanced (WHGBX) less than a year after the departure of longtime lead manager Susan Byrne.

In February, Wells Fargo Advantage Diversified Small Cap (NVDSX) disappears into Wells Fargo Advantage Small Company Growth (NVSCX), Advantage Equity Value (WLVAX) into Advantage Intrinsic Value (EIVAX) and Advantage Small/Mid Cap Core (ECOAX) into Advantage Common Stock (SCSAX).

Well Fargo is also liquidating its Wells Fargo Advantage Core builder Series (WFBGX) in early 2013.

Coming Attractions!

The Observer is trying to help two distinct but complementary groups of folks.  One group are investors who are trying to get past all the noise and hype.  (CNBC’s ratings are dropping like a rock, which should help.)  We’re hoping, in particular, to help folks examine evidence or possibilities that they wouldn’t normally see.  The other group are the managers and other folks associated with small funds and fund boutiques.  We believe in you.  We believe that, as the industry evolves, too much emphasis falls on asset-gathering and on funds launched just for the sake of dangling something new and shiny (uhh … the All Cap Insider Sentiment ETF).  We believe that small, independent funds run by smart, passionate investors deserve a lot more consideration than they receive.  And so we profile them, write about them and talk with other folks in the media about them.

As the Observer has become a bit more financially sustainable, we’re now looking at the prospect of launching two sister sites.  One of those sites will, we hope, be populated with the best commentaries gathered from the best small fund managers and teams that we can find.  Many of you folks write well and some write with grace that far exceeds mine.  The problem, managers tell me, is that fewer people than you’d like find their way to your sites and to your insights.

Our technical team, which Chip leads, thinks that they can create an attractive, fairly vibrant site that could engage readers and help them become more aware of some of the smaller fund families and their strategies.  We respect intellectual property, and so we’d only use content that was really good and whose sharing was supported by the adviser.

That’s still in development.  If you manage a fund or work in support of one and would like to participate in thinking about what would be most helpful, drop Chip a note and we’ll find a way to think through this together.  (Thanks!)

Small cap funds tend to have their best performance in the first six weeks of each year and so we’re planned a smallcapfest for our January issue, with new or revised profiles of the most sensible small cap funds as well as a couple outside perspectives on where you might look.

In Closing . . .

I wanted to share leads on three opportunities that you might want to look in on.  The Observer has no financial stake in any of this stuff but I like sharing word of things that strike me as really first-rate.

QuoteArts.com is a small shop that consistently offers a bunch of the most attractive, best written greeting cards (and refrigerator magnets) that I’ve seen.  Steve Metivier, who runs the site, gave us permission to reproduce one of their images (normally the online version is watermarked):

The text reads “A time to quiet our hearts… (inside) to soften our edges, clear our minds, enjoy our world, and to share best wishes for the season. May these days and all the new year be joyful and peaceful.”  It strikes me as an entirely-worthy aspiration.

The best book there is on the subject of practical persuasion is Robert Cialdini’s Influence: The Psychology of Persuasion (revised edition, 2006).  Even if you’re not impressed that I’ve used the book in teaching persuasion over the past 20 years, you might be impressed by Charlie Munger’s strong endorsement of it.  In a talk entitled “The Psychology of Human Misjudgment,” Munger reports being so impressed with Cialdini’s work that he read the book, gave copies of it to all his children and sent Cialdini (“chawl-dee-nee,” if you care) a share of Berkshire Hathaway in thanks.   Cialdini has since left academe, founded the consulting group Influence at Work and now offers Principles of Persuasion workshops for professionals and the public. While I have not researched the workshops in any depth, I suspect that if I were a small business owner, marketer or financial planner who needed to both attract clients and change their behavior for the better. I’d take a serious look.

Finally, at Amazon’s invitation, I contributed an essay that will be posted at their new “Money and Markets” store from December 5th until about the 12th.  Its original title was, “It’s time to go,” but Amazon’s project director and I ended up settling on the less alarming “Trees don’t grow to the sky.”  If you’ve shopped at, say, Macy’s, you’re familiar with the store-within-a-store notion: free-standing, branded specialty shops (Levenger’s, LUSH, FAO Schwarz) operating within a larger enterprise.  It looks like Amazon is trying an experiment in the same direction and, in November, we mentioned their “Money and Markets” store.  Apparently the Amazonians noticed the fact that some of you folks went to look around, they followed your footprints back here and did some reading of their own.  One feature of the Money and Markets store is a weekly guest column and the writers have included Jack Bogle and Tadas Viskanta, the founder of Abnormal Returns which is one of the web’s two best financial news aggregators.  In any case, they asked if I’d chip in a piece during the second week of December.   We’re not allowed to repost the content for a week or so, but I’ll include it in the January cover essay.  Feel free to drop by if you’re in the area.

In the meanwhile, I wanted to extend sincere thanks from all of the folks here (chip, Anya, Junior, Accipiter and me) for the year you’ve shared with us.  You really do make it all worthwhile and so blessings of the season on you and yours.

As ever,

photo by rcbodden on Flickr.

Dear friends,

“Summertime and the livin’ is easy”?

“Roll out those lazy, hazy, crazy days of summer,
Those days of soda and pretzels and beer”

“That’s when I had most of my fun back …
Hot fun in the summertime.”

“In summer, the song sings itself.”

What a crock.  I’m struck by the intensity of the summer storms, physical and financial.  As I write, millions are without power along the Eastern seaboard after a ferocious storm that pounded the Midwest, roared east and killed a dozen.  Wildfires continue unchecked in the west and the heat and drought in Iowa have left the soil in my yard fissured and hard.  Conditions in the financial markets are neither better nor more settled.  The ferocious last day rally in June created the illusion of a decent month, when in fact it was marked by a series of sharp, panicky dislocations.

I’m struck, too, by the ways in which our political leaders have responded, which is to say, idiotically.  Republicans continue to deny the overwhelming weight of climate science.  Democrats acknowledge it, then freeze for fear of losing their jobs.  And both sides’ approach to the post-election fiscal cliff is the same: “let’s get through the election first.”

It’s striking, finally, how rarely the thought “let’s justify being elected” seems to get any further than “let’s convince voters that the other side is worse.”

Snippets from MIC

I had the pleasure of attending the Morningstar Investment Conference in late June.  The following stories are derived from my observations there.  I also had an opportunity to interview two international value managers, David Marcus of Evermore and Eric Bokota of FPA, there.  Those interviews will serve as elements of an update of the Evermore Global Value profile and a new FPA International Value profile, both in August.

David Snowball at MIC, courtesy of eventtoons.com

BlackRock and the Graybeards

On Day One of the conference, Morningstar hosted a keynote panel titled “A Quarter-Century Club” in which a trio of quarter-centenarians (Susan Byrne, Will Danof and Brian Rogers) reflected in their years in the business.  All three seemed to offer the same cautionary observation: “the industry has lost its moral compass.”  All three referred to the pressure, especially on publicly traded firms, to “grow assets” as the first priority and “serve shareholders” somewhere thereafter.

Susan Byrne, chairman and founder of Westwood Management Corp., the investment advisor to the Westwood Funds, notes that, as a young manager, it was drilled into her head that “this is not our money.” It was money held in trust, “there are people who trust you (the manager) individually to take care for them.” That’s a tremendously important value to her but, she believes, many younger professionals don’t hear the lesson.

Will Danoff, manager of Fidelity Contrafund (FCNTX), made a thoughtful, light-hearted reference to one of his early co-workers, George.  “George didn’t manage money and he didn’t manage the business.  His job, so far as I can tell, was to walk up to the president every morning, look him in the eye and ask ‘how are you going to make money today for our shareholders?’ You don’t hear that much anymore.”

Brian Rogers, CIO of T Rowe Price made a similar, differently nuanced point: “when we were hired, it was by far smaller firms with a sense of fiduciary obligation, not a publicly-traded company with an obligation to shareholders. Back then we learned this order of priorities: (1) your investors first, (2) your employees and then (3) your shareholders.” In an age of large, publicly-traded firms, “new folks haven’t learned that as deeply.”

As I talk with managers of small funds, I often get a clear sense of personal connection with their shareholders and a deep concern for doing right by them. In a large, revenue-driven firm, that focus might be lost.

The extent of that loss has been highlighted by some very solid reporting by Aaron Pressman and Jessica Toonkel of Reuters.   Pressman and Toonkel document what looks like the unraveling of BlackRock, the world’s largest private investment manager. In short order:

• Robert Capaldi, senior client strategist for Chief Executive Laurence Fink, left.
• Susan Wagner, a founding partner and vice chairman, announced her immediate retirement.  Wagner had overseen much of BlackRock’s growth-through-acquisition strategy which included purchase of Barclay’s Global Investors and Merrill Lynch’s funds, a total of $2.4 trillion in assets.
• Chief equity strategist Boll Doll announced his retirement (at 57) as evidence began to surface that his and BlackRock’s long-time claim of “proprietary” investment models was false.
• Star energy fund manager Daniel Rice resigned in the wake of criticism of his decision to invest substantial amounts of his shareholders’ money into a firm in which he had a personal, if indirect, stake.  He did so without notifying anyone outside of the firm.  BlackRock, reportedly, had no explanation for investors.

Insiders report to Reuters that “further senior-level changes” are imminent.

BlackRock’s plans to double its mutual fund business in the next 18 months by targeting RIAs remain in place.  Why double the business?  Whose interests does it serve?  BlackRock has demonstrated neither any great surplus of investment talent nor of innovative investment ideas, nor can they plausibly appeal (at $4 trillion of AUM) to “economies of scale.”

No, doubling their business is in the best interests of BlackRock executives (bonuses get tied to such things) and, likely, to BlackRock shareholders.  There’s no evidence for why RIAs or fundholders are anything more than tools in BlackRock’s incessant drive from growth.  The American essayist and critic Edward Abbey observed, “Growth for the sake of growth is the ideology of the cancer cell.”  And, apparently, of the publicly traded megacorp.

Advice from a Conservative Domestic Equity Manager: Go Elsewhere

The Quarter Century panel of senior started talking about the equity market going forward. They were uniformly, if cautiously, optimistic. Rogers drew some parallels to the economy and market of 1982. I liked Susan Byrne’s comments rather more: “It feels like 1982 when you believed that any rally was a trap, designed to fool me, humiliate me and keep me poor.” Mr. Danoff argued that global blue chips “have absolutely flat-lined for years,” and represent substantial embedded value. They argued for pursuing stocks with growing dividends, a strategy that will consistently beat fixed income or inflation.

In closing, Don Phillips asked each for one bit of closing advice or insight. Brian Rogers, T. Rowe Price’s CIO and manager of their Equity Income fund (PRFDX) offered these two:

1. it’s time to remember Buffett’s adage, “be fearful when others are greedy, and greedy when others are fearful.”

and

2. “take a look at the emerging markets again.”

That’s striking advice, given Mr. Rogers’ style: he’s famously cautious and consistent, invests in large dividend-paying companies and rarely ventures abroad (5% international, 0.25% emerging markets). He didn’t elaborate but his observation is consistent with the recurring theme, “emerging markets are beginning to look interesting again.”

Note to the Scout Funds: “See Grammarian”

The marketing slogan for the Scout Funds is “See Further.”  Uhhh .. no.  “Farther.”  In this usage, “further” would be “additional,” as in “see further references in the footnotes.”  Farther refers to distance (“dad, how much farther is it?”) which is presumably what would concern a scout.

Scout’s explanation for the odd choice: “One of our executives wanted ‘See Farther’ but discovered that some other fund company already used it and so he went with ‘See Further’ instead.”

I see.

No, I don’t.  First, I can’t find a record for the “see farther” motto (though it is plausible) and, second, that still doesn’t justify an imprecise and ungrammatical slogan.

Kudos to Morningstar: They Get It Right, and Make It Right, Quickly

In June I complained about inconsistencies in Morningstar’s data reports on expense ratios and turnover, and the miserable state of the Securities and Exchange Commission database.

The folks at Morningstar looked into the problems quite quickly. The short version is this: fund filings often contain multiple versions of what’s apparently the same data point. There are, for example, a couple different turnover ratios and up to four expense ratios. Different functions, developed by different folks at different times, might inadvertently choose to pull stats from different places. Mr. Rekenthaler described them as “these funny little quirks where a product somewhere sometime decided to do something different.” Both stats are correct but also inconsistent. If they aren’t flagged so that readers can understand the differences, they can also be misleading.

Morningstar is interested in providing consistent, system-wide data.  Both John Rekenthaler, vice president of research, and Alexa Auerbach in corporate communications were in touch with us within a week. Once they recognized the inconsistency, they moved quickly to reconcile it.  Rekenthaler reports that their data-improvement effort is ongoing: “senior management is on a push for Morningstar-wide consistency in what data we publish and how we label the data, so we should be ferreting out the remaining oddities.”  As of June 19, the data had been reconciled. Thanks to the Wizards on West Wacker for their quick work.

FBR Funds Get Sold, Quickly

On June 26 2012, FBR announced the sale of their mutual fund unit to Hennessy Advisors.   Of the 10 FBR funds, seven will retain their current management teams. The managers of FBR’s Large Cap, Mid Cap and Small Cap funds are getting dumped and their funds are merging into Hennessy funds. One of the mergers (Large Cap) is likely a win for the investors. One of the mergers (Mid Cap) is a loss and the third (Small Cap) has the appearance of a disaster.

FBR Large Cap (FBRPX, 1.25% e.r., 9.2% over three years) merges into Hennessy Cornerstone Large Growth (HFLGX), three year old large value fund, 1.3% e.r., 13.8% over 3 years. Win for the FBR shareholders.

FBR Mid Cap (FBRMX, 1.35% e.r., five year return of 3.0%) merges into Hennessy Focus 30 (HFTFX), midcap fund, 1.36% e.r., five year return of 1.25%. Higher minimum, same e.r., lower returns – loss for FBR shareholders.

FBR Small Cap (FBRYX, 1.45% e.r., five year return of 4.25%) merges into Hennessy Cornerstone Growth (HGCGX), small growth fund, 1.33% e.r., five year return of (8.2). Huh? Slightly lower expenses but a huge loss in performance. The 1250 basis point difference is 5-year performance does not appear to be a fluke. The Hennessy fund is consistently at the bottom of its peer group, going back a decade.   The fact that founder and CIO Neil Hennessy runs Cornerstone Growth might explain the decision to preserve the weaker fund and its strategy. This is a clear “run away!” for the FBR shareholders.

One alternative for FBRYX investors is into FBR’s own Small Cap Financial fund (FBRSX), run by Dave Ellison, FBR’s CIO. Ellison’s funds used to bear the FBR Pegasus brand. The fund only invests in the finance industry, but does it really well. That said, it’s more expensive than FBRYX with weaker returns, reflecting the sector’s disastrous decade.

The fate of FBR’s Gas Utility Index fund (GASFX) is unclear.  The key question is whether Hennessy will increase fees.  An FBR representative at Morningstar expressed doubt that they’d do any such thing.

The Long-Short Summer Series: Trying to Know if You’re Winning

As part of our summer series on long-short funds, we look this month at the performance of the premier long-short funds, of interesting newcomers, and of two benchmarks.

The challenge is to know when you’re winning if your goal is not the easily measurable “maximum total return.”  With long-short funds, you’re shooting for something more amorphous, akin to “pretty solid returns without the volatility that makes me crazy.”  In pursuit of funds that meet those criteria, we looked at the performance of long-short funds on one terrible day (June 1) and one great day (June 29), as well as during one terrible month (May 2012) and one really profitable period (January – June, 2012).

We looked at the return of Vanguard’s Total Stock Market Index fund for each period, and highlighted (in green) those funds which managed to lose half as much as the market in the two down periods (May and June 1) but gain at least two-thirds of the market in the two up periods.  Here are the results, sorted by 2012 returns.

As we noted last month, in comparing the long-term performance of long-short funds to a very conservative bond index, consistent winners are hard to find.  Interesting possibilities from this list:

RiverPark Long Short Opportunity (RLSFX), which converted from an in-house hedge fund in March and which we’ll profile in August.

Marketfield (MFLDX), the mutual fund version of a global macro hedge fund, which we’re profiling this month.

ASTON/River Road Long Short (ARLSX), a disciplined little fund that we profiled last month.

New on our radar is Robeco Boston Partners Long/Short Research (BPRRX), sibling to the one indisputable gold-standard fund in the group, Robeco Long Short (BPLEX).  While the two follow the same investment discipline, BPLEX has a singular focus on small and micro stocks while BPRRX has a more traditional mid- to large-cap portfolio.

The chart below tracks BPPRX against its peer group average (orange) and the group’s top funds, including BPLEX (green), Marketfield (burgundy), and Wasatch (gold).  BPPRX itself is the blue line.

Since inception, BPRRX has been (1) well above average and (2) well below BPLEX.  It’s worth further research.

FundReveal perspective on Long-Short funds

Nearly all of the Long-Short funds examined exhibit consistently low risk.  Many of them also beat the S&P 500’s Average Daily Returns.  Of the six funds analyzed by David (see bullets below) those rated as “A-Best” in one year most often beat the S&P in total returns the next year, a finding consistent with the out-of-sample forward testing that we have conducted for the entire market.

One thing that remains surprising is that the Long-Short funds great idea hasn’t really panned out.  It makes such sense to use all positive and negative information about companies and securities available when investing.   Doesn’t only investing long leave “money [information] on the table.”  But, in general, these funds have not delivered on that perceived potential.

BPLSX, Robeco Boston Partners Long/Short Fund has been delivering.  We agree with David that it can be seen as the gold standard.  From FundReveal’s perspective, the fund has persistently delivered “A-Best” performance, beating the S&P on both risk and return measures. Since 2005 the fund has been rated A-Best six times and C twice.  This includes a whopping 82% total return in 2009.  In 2009, 2010, and 2011 positive total returns followed A Best risk return rating in the preceding year.  Don’t get too excited:  the fund is closed.

David has commented or will comment on the following funds in the Mutual Fund Observer.

• ARLSX  – Aston/River Road Long/Short
• FMLSX – Wasatch 1st Source Long/Short
• MFLDX – Marketfield Fund
• AMBEX – Aston/River Long/Short
• JAZZX – James Advantage Long/Short
• GRTHX – GRT Absolute Return Fund

Good:

The two funds with positive investment decision-making attributes based on the FundReveal model are FMLSX and MFLDX.  Both persistently deliver A-Best risk-return performance, and relatively high Persistence Ratings, a measurement of the likelihood of A performance in the future: FMLSX: 40%, and MFLDX: 44%.

Not so Good:

JAZZX has demonstrated high Volatility and low Average Daily Return relative to its peers and the S&P.   It has only been in existence a short time; we have data from 2011 and 2012 YTD, but it is not faring well.   A wait and see position is probably justified.

Some additional candidates for consideration garnered from the FundReveal “Best Funds List” (free the FundReveal site).

VMNFX Vanguard Market Neutral Fund.  A solid low risk fund with 45% Persistence.  It has not hit the ball out of the park, but the team is demonstrating good decision- making as inferred from FundReveal measurements.

ALHIX American Century Equity Market Neutral Fund.  A solid fund with 4% volatility, market beating Average Daily Return in 2011, and Persistence of 44%.

FLSRX Forward Long/Short Credit Analysis Fund.  This fund may not even belong in this discussion since the others are stock funds.  Morningstar classifies this as an alternative bond fund.  Its portfolio is nearly exclusively Muni Bonds.  It is 34% Short and 132% Long in the Muni Bonds that make up 99% of its portfolio.  It has low Volatility, high Average Daily Return, Persistence Rating of 44%, and extraordinary performance in down markets (32% above the S&P).

A complete version of this analysis with tables and graphics is available on the FundReveal blog.

Best of the Web: Our Summer Doldrums Edition

Our contributing editor, Junior Yearwood, in collaboration with financial planner Johanna Fox-Turner have fine-tuned their analysis of retirement income calculators, a discussion they initiated last month.  In addition, Junior added a review of Chuck Jaffe’s new MoneyLife podcast.  Drop by Best of the Web to sample both!

Two Funds and Why They’re Really Worth Your While

Each month, the Observer profiles between two and four mutual funds that you likely have not heard about, but really should have.  Our “Most intriguing new funds: good ideas, great managers” do not yet have a long track record, but have other virtues which warrant your attention.  They might come from a great boutique or be offered by a top-tier manager who has struck out on his own.  The “stars in the shadows” aren’t all worthy of your “gotta buy” list, but all of them are going to be fundamentally intriguing possibilities that warrant some thought. Two intriguing  funds are:

Seafarer Overseas Growth & Income (SFGIX): Andrew Foster, who performed brilliantly as a risk-conscious emerging Asia manager for Matthews, is now leading this Asia-centric diversified emerging markets fund.  It builds on his years of experience and maintains its cautiousness, while adding substantial flexibility.

Marketfield (MFLDX): there are two reasons to read, now and closely, about Marketfield.  One, it’s about the most successful alternative-investment fund available to retail investors.  Two, it’s just been bought by New York Life and will be slapped with a front-end load come October.  Investors wanting to maintain access to no-load shares need to think, now, about their options.

Rest in Peace: Industry Leaders Fund (ILFIX)

I note with sadness the closing of Industry Leaders fund, a small sensible fund run by Gerry Sullivan, a remarkably principled investor.  The fund identified industries in which there was either one or two dominant players, invested equally in them and rebalanced periodically.  The idea (patented) was to systematically exclude sectors where leaders never emerged or were quickly overthrown.  The fund did brilliantly for the first half of its existence and passably in the second half, weighed down by exposure to global financial firms, but never managed any marketing track.

Sullivan continues as the (relatively new) manager of Vice Fund (VICEX), which has a long and oddly-distinguished record.

Briefly noted …

Several months ago we reported on the Zacks fund rating service, noting that it was sloppy, poorly explained, unclear, and possibly illogical.  Doubtless emboldened by our praise, Mitch and Ben Zacks have launched two ETFs: Zacks Sustainable Dividend ETF and Zacks MLP ETF.  There’s no evident need for either, an observation quite irrelevant in the world of ETFs.

Small Wins for Investors

Schwab reduced the expense ratio on Laudus Small-Cap MarketMasters (SWOSX) by 10 basis points and Laudus International MarketMasters (SWOIX) by 19 basis points.

Forward Frontier Strategy (FRNMX) has capped the fund’s expenses at 1.09 – 1.49%, depending on share class.

The three Primecap Odyssey funds (Stock POSKX, Growth POGRX and Aggressive Growth POAGX) have all dropped their 2% redemption fees.  That’s not really much of a win for investors since the redemption fees are designed to discourage rapid trading of fund shares (which is a bad thing), but I take what small gains I can find.

Touchstone Emerging Markets Equity (TEMAX) has reopened to new investors after 16 months.

Former Seligman Manager in Insider-Trading Case

The SEC announced that former Seligman Communications and Information comanager Reema Shah pled guilty to securities fraud and is barred permanently from the securities industry. The SEC says that Shah and a Yahoo (YHOO) executive swapped insider tips and that the Seligman fund she comanaged and others at the firm netted a $389,000 profit from trading based on insider information on Yahoo.

Farewells

Gary Motyl, chief investment officer for the Franklin, Templeton, and Mutual Series fund families, passed away.  Motyl was one of Sir John Templeton’s first hires and he’s been Franklin’s CIO for 12 years.  Pending the appointment of a new CIO later this summer, his duties are being covered by three other members of Franklin’s staff.

Closings

Delaware Select Growth (DVEAX) closed to new month on June 8th.

Franklin Double Tax-Free Income (FPRTX) initiated a soft close on June 15^th and will switch to a hard close on August 1^st.

Prudential Jennison Health Sciences (PHLAX) closed on June 29^th after siphoning up $300 million in 18 months.

For those interested, The Wall Street Journal publishes a complete closed fund list each month.  It’s available online with the almost-poetic name, Table of Mutual Funds Closed to New Investors.

Old Wine, New Bottles

JPMorgan Asia Pacific Focus has changed its name to JPMorgan Asia Pacific (JASPX). The management of the team will be Mark Davids and Geoff Hoare.

Columbia Strategic Investor (CSVAX) will be renamed Columbia Global Dividend Opportunity. Actually it will become an entirely different fund under the guise of being “tweaked.”  I love it when they do that.  The former small cap and convertibles fund gets reborn as an all-cap global stock fund benchmarked against the MSCI All World Country Index. CSVAX’s managers have been fired and replaced by a team of guys who already run six other Columbia funds.

Ivy International Balanced (IVBAX) is being renamed Ivy Global Income Allocation.  It also picked up a second manager.

Off to the Dustbin of History

September will be the last issue of SmartMoney, a magazine once head-and-shoulders sharper and more data-driven than its peers.  According to a phone rep for SmartMoney, Dow is likely to convert SmartMoney.com into a pay site.  Dow will, they promise, “beef up” the online version and add editorial staff.  Plans have not yet been made final, but it sounds like SmartMoney subscribers will get free access to the site and might get downloadable versions of the articles.

It was a busy month for Acadia Principal Conservation Fund (APCVX).  On June one, the board cut its offensively high 12(b)1 fee in half (to an industry-standard 0.25%) and dropped its expense ratio by 10 basis points.  On June 25^th, they closed and liquidated the fund.  On the upside, the fund (mostly) preserved principal in its two years of existence.  On the downside, it made no money for its investors and had a negative real return.  Still, that doesn’t speak to the coherence of their planning.

Effective June 1, Bridgeway Aggressive Investors 2 (which I once dubbed “Bridgeway Not Quite So Aggressive Investors”) and Micro-Cap Limited both ceased to exist, having merged into Aggressive Investors 1 (BRAGX) and Ultra-Small Company (BRUSX).  Both of the remaining funds had long, brilliant runs before getting nailed in recent years by the apparent implosion of Bridgeway’s quant models.

Fido plans to merge Fidelity Advisor Stock Selector All Cap (FARAX) into Fidelity Stock Selector All Cap (FDSSX), which would lead to an expense reduction for the Advisor shareholders.  By year’s end, Fidelity will merge Mid Cap Growth (FSMGX) into Stock Selector Mid Cap Fund (FSSMX). They’ve already closed Mid Cap Growth in preparation for the move.

JPMorgan Asia Equity (JAEAX) is being liquidated on July 20, 2012.  It’s a bad fund that has seen massive outflows.  The managers, nonetheless, will remain with JPMorgan.

Nuveen Large Cap Value (FASKX) merges into Nuveen Dividend Value (FFEIX), also in October.  That’s a win for Large Cap shareholders: they get the same management team and a comparable strategy with lower expenses.

Oppenheimer Fixed Income Active Allocation (OAFAX) will merge into Oppenheimer Global Strategic Income (OPSIX) in early October, 2012.

Victory Value (SVLSX), which spiraled from mediocre to awful in the last two years, will liquidate at the end of August.  Friends and mourners still have access to Victory Special Value (SSVSX, a weak mid-cap growth fund) and Victory Established Value (VETAX, actually very solid mid-cap value fund).

I’m off to Washington for the Fourth of July week with family.  Preparation for that trip and ten days of often-hectic travel in June kept me from properly thanking several contributors (thanks!  A formal acknowledgement is coming!) and from completing profiles of a couple fascinating funds: Cook and Bynum (COBYX) and FPA International (FPIVX), one of which will be part of a major set of new profiles in August.

Until then, take care, keep cool and celebrate family!

Dear friends,

I’m intrigued by the number of times that really experienced managers have made one of two rueful observations to me:

“I make all my money in bear markets, I just don’t know it at the time”

 “I add most of my value when the market’s in panic.”

With the market down 6.2% in May, Morningstar’s surrogate for high-quality domestic companies down by nearly 9% and only one equity sector posting a gain (utilities were up by 0.1%), presumably a lot of investment managers are gleefully earning much of the $10 billion in fees that the industry will collect this year.

Long-Short Funds and the Long, Hot Summer

The investment industry seems to think you need a long-short fund, given the number of long-short equity funds that they’ve rolled-out in recent years.  They are now 70 long-short funds (a category distinct from market neutral and bear market funds, and from funds that occasionally short as a hedging strategy).  With impeccable timing, 36 were launched after we passed the last bear market bottom in March 2009.

Long-short fund launches, by year

The idea of a long-short fund is unambiguously appealing and is actually modeled after the very first hedge fund, A. W. Jones’s 1949 hedged fund.  Much is made of the fact that hedge funds have lost both their final “d” and their original rationale.  Mr. Jones reasoned that we could not reliably predict short-term market movements, but we could position ourselves to take advantage of them (or at least to minimize their damage).  He called for investing in net-long in the stock market, since it was our most reliable engine of “real” returns, but of hedging that exposure by betting against the least rational slices of the market.  If the market rose, your fund rose because it was net-long and invested in unusually attractive firms.  If the market wandered sideways, your fund might drift upward as individual instances of irrational pricing (the folks you shorted) corrected.  And if the market fell, ideally the stocks you shorted would fall the most and would offer a disproportionately large cushion.  A 30% short exposure in really mispriced stocks might, hypothetically, buffer 50% of a market slide.

Unfortunately, most long-short funds aren’t able to clear even the simplest performance hurdle, the returns of a conservative short-term bond index fund.  Here are the numbers:

In general, over the past five years, you’d have been much better off buying the Vanguard Short-Term Bond Index (VBISX), pocketing your 4.6% and going to bed rather than surrendering to the seductive logic and the industry’s most-sophisticated strategies.

Indeed, there is only one long-short fund that’s unambiguously worth owning: Robeco Long/Short Equity (BPLSX).  But it had a $100,000 investment minimum.  And it closed to new investors in July, 2010.

Nonetheless, the idea behind long/short investing makes sense.  In consequence of that, the Observer has begun a summer-long series of profiles of long-short funds that hold promise, some few that have substantial track records as mutual funds and rather more with short fund records but longer pedigrees as separate accounts or hedge funds.  Our hope is to identify one or two interesting options for you that might help you weather the turbulence that’s inevitably ahead for us all.

This month we begin by renewing the 2009 profile of a distinguished fund, Wasatch Long/ Short (FMLSX) and bringing a really promising newcomer, Aston / River Road Long- Short (ARLSX) onto your radar.

Our plans for the months ahead include profiles of Aston/MD Sass Enhanced Equity (AMBEX), RiverPark Long/Short Opportunity (RLSFX), RiverPark/Gargoyle Hedged Value (RGHVX), James Long-Short (JAZZX), and Paladin Long Short (PALFX).  If we’ve missed someone that you think of a crazy-great, drop me a line.  I’m open to new ideas.

FBR reaps what it sowed

FBR & Co. filed an interesting Regulation FD Disclosure with the SEC on May 30, 2012.  Here’s the text of the filing:

FBR & Co. (the “Company”) disclosed today that it has been working with outside advisors who are assisting the Company in its evaluation of strategic alternatives for its asset management business, including the sale of all or a portion of the business.

There can be no assurance that this process will result in any specific action or transaction. The Company does not intend to further publicly comment on this initiative unless the Company executes definitive deal documentation providing for a specific transaction approved by its Board of Directors.

FBR has been financially troubled for years, a fact highlighted by their decision in 2009 to squeeze out their most successful portfolio manager, Chuck Akre and his team.  In 1997, Mr. Akre became of founding manager of FBR Small Cap Growth – Value fund, which became FBR Small Cap Value, the FBR Small Cap, and finally FBR Focus (FBRVX). Merely saying that he was “brilliant” underestimates his stewardship of the fund.  Under his watch (December 1996 – August 2009), Mr. Akre turned $10,000 invested in the fund at inception to $44,000.  His average peer would have yielded $18,000.  Put another way: he added $34,000 to the value of your opening portfolio while the average midcap manager added $8,000.  Uhh: he added four times as much?

In recognition of which, FBR through the Board of Trustees whose sole responsibility is safeguarding the interests of the fund’s shareholders, offered to renew his management contract in 2009 – as long as he accepted a 50% pay cut. Mr. Akre predictably left with his analyst team and launched his own fund, Akre Focus (AKREX).  In a singularly classy move, FBR waited until Mr. Akre was out of town on a research trip and made his analysts an offer they couldn’t refuse.  Akre got a phone call from his analysts, letting him know that they’d resigned so that they could return to run FBR Focus.

Why?  At base, FBR was in financial trouble and almost all of their funds were running at a loss.  The question became how to maximize the revenue produced by their most viable asset, FBR Focus and the associated separate accounts which accounted for more than a billion of assets under management.  FBR seems to have made a calculated bet that by slashing the portion of fund fees going to Mr. Akre’s firm would increase their own revenues dramatically.  Even if a few hundred million followed Mr. Akre out the door, they’d still make money on the deal.

Why, exactly, the Board of Trustees found this in the best interests of the Focus shareholders (as opposed to FBR’s corporate interests) has never been explained.

How did FBR’s bet play out?  Here’s your clue: they’re trying to sell their mutual fund unit (see above).  FBR Focus’s assets have dropped by a hundred million or so, while Akre Focus has drawn nearly a billion in new assets.  FBR & Co’s first quarter revenues were $39 million in 2012, down from $50 million in 2011.  Ironically, FBR’s 10 funds – in particular, David Ellison’s duo – are uniformly solid performers which have simply not caught investors’ attention.  (Credit Bryan Switzky of the Washington Business Journal for first writing about the FD filing, “FBR & Co. exploring sale of its asset management business,” and MFWire for highlighting his story.)

Speaking of Fund Trustees

An entirely unremarkable little fund, Autopilot Managed Growth Fund (AUTOX), gave up the ghost in May.  Why?  Same as always:

The Board of Trustees of the Autopilot Managed Growth Fund (the “Fund”), a separate series of the Northern Lights Fund Trust, has concluded that it is in the best interests of the Fund and its shareholders that the Fund cease operations.  The Board has determined to close the Fund, and redeem all outstanding shares, on June 15, 2012.

Wow.  That’s a solemn responsibility, weighing the fate of an entire enterprise and acting selflessly to protect your fellow shareholders.

Sure would be nice if Trustees actually did all that stuff, but the evidence suggests that it’s damned unlikely.  Here’s the profile for Autopilot’s Board, from the fund’s most recent Statement of Additional Information.

A footnote adds that each Trustee oversees between two and 14 other funds.

How is it that Autopilot became 1% of a Trustee’s responsibilities?  Simple: funds buy access to prepackaged Boards of Trustees as part of the same arrangement  that provides the rest of their “back office” services.  The ability of a fund to bundle all of those services can dramatically reduce the cost of operation and dramatically increase the feasibility of launching an interesting new product.

So, “LMB” is overseeing the interests of the shareholders in 109 mutual funds, for which he’s paid $65,000.  Frankly, for LMB and his brethren, as with the FBR Board of Trustees (see above), this is a well-paid, part-time job.  His commitment to the funds and their shareholders might be reflected by the fact that he’s willing to pretend to have time to understand 100 funds or by the fact that not one of those hundred has received a dollar of his own money.

It is, in either case, evidence of a broken system.

Trust But Verify . . .

Over and over again.

Large databases are tricky creatures, and few are larger or trickier than Morningstar’s.  I’ve been wondering, lately, whether there are better choices than Leuthold Global (GLBLX) for part of my non-retirement portfolio.  Leuthold’s fees tend to be high, Mr. Leuthold is stepping away from active management and the fund might be a bit stock-heavy for my purposes.  I set up a watchlist of plausible alternatives through Morningstar to see what I might find.

What I expected to find was the same data on each page, as was the case with Leuthold Global itself.

What I found was that Morningstar inconsistently reports the expense ratios for five of seven funds, with different parts of the site offering different expenses for the same fund.  Below is the comparison of the expense ratio reported on a fund’s profile page at Morningstar and at Morningstar’s Fund Spy page.

I called and asked about the discrepancy.  The best explanation that Morningstar’s rep had was that Fund Spy updated monthly and the profile daily.  When I asked how that might explain a 50% discrepancy in expenses, which don’t vary month-to-month, the answer was an honest: “I don’t know.”

The same problem appeared when I began looking at portfolio turnover data, occasioned by the question “does any SCV fund have a lower turnover than Huber Small Cap?”   Morningstar’s database reported 15 such funds, but when I clicked on the linked profile for each fund, I noticed errors in almost half of the reports.

Just to be clear: these sorts of errors, while annoying, might well be entirely unavoidable.  Morningstar’s database is enormous – they track 375,000 investment products each day – and incredibly complex.  Even if they get 99.99% accuracy, they’re going to create thousands of errors.

One responsibility lies with Morningstar to clear up, as soon as is practical, the errors that they’ve learned of.  A greater responsibility lies with data users to double-check the accuracy of the data upon which they’re basing their decisions or forming their judgments.  It’s a hassle but until data providers become perfectly reliable, it’s an essential discipline.

Proof that Time Travel is Possible: The SEC’s Current Filings

Each day, the Securities and Exchange Commission posts all of their current filings on their website.  For example, when a fund company files a new prospectus or a quarterly portfolio list, it appears at the SEC.  Each filing contains a date.  In theory, the page for May 22 will contain filings all of which are dated May 22.

How hard could that be?

Here’s a clue: of 187 entries for May 22, 25 were actually documents filed on May 22^nd.  That’s 13.3%.  What are the other 86.7% of postings?  137 of them are filings originally made on other days or in other years.  25 of them are duplicate filings that are dated May 22.

I’ve regularly noted the agency’s whimsical programming.  This month I filed two written inquiries with them, asking why this happens.  The first query provoked no response for about 10 days, so I filed the second.  That provoked a voicemail message from an SEC attorney.  The essence of her answer:

1. I don’t know
2. Other parts of the agency aren’t returning our phone calls
3. But maybe they’ll contact you?

Uhh … no, not so far.  Which leads me to the only possible conclusion: time vortex centered on the SEC headquarters.  To those of us outside the SEC, it was May 22, 2012.  To those inside the agency, all the dates in recent history had actually converged and so it was possible that all 15 dates recorded on the May 22 page were occurring simultaneously. 

And now a word from Chip, MFO’s technical director: “dear God, guys, hire a programmer.  It’s not that blinkin’ hard.”

Launch Alert 1: Rocky Peak Small Cap Value

On April 2, Rocky Peak Capital Management launched Rocky Peak Small Cap Value (RPCSX).  Rocky Peak was founded in 2011 by Tom Kerr, a Partner at Reed Conner Birdwell and long-time co-manager of CNI Charter RCB Small Cap Value fund.  He did well enough with that fund that Litman Gregory selected him as one of the managers of their Masters Smaller Companies fund (MSSFX).

While RPCSX doesn’t have enough of a track record to yet warrant a full profile, the manager’s experience and track record warrant adding it to a watch-list.  His plan is to hold 35-40 small cap stocks, many that pay dividends, and to keep risk-management in the forefront of his discipline.  Among the more interesting notes that came out of our hour-long conversation was (1) his interest in monitoring the quality of the boards of directors which should be reflected in both capital allocation and management compensation decisions and (2) his contention that there are three distinct sub-sets of the small cap universe which require different valuation strategies.  “Quality value” companies often have decades of profitable operating history and would be attractive at a modest discount to fair value.  “Contrarian value” companies, which he describes as “Third Avenue-type companies” are often great companies undergoing “corporate events” and might require a considerably greater discount.  “Smaller unknown value” stocks are microcap stocks with no more than one analyst covering them, but also really good companies (e.g. Federated Investors or Duff & Phelps).  I’ll follow it for a bit.

The fund has a $10,000 investment minimum and 1.50% expense ratio, after waivers.

Launch Alert 2: T. Rowe Price Emerging-Markets Corporate Bond Fund

On May 24, T. Rowe Price launched Emerging Markets Corporate Bond (TRECX), which will be managed by Michael Conelius, who also manages T. Rowe Price Emerging Markets Bond (PREMX).  PREMX has a substantial EM corporate bond stake, so it’s not a new area for him.  The argument is that, in a low-yield world, these bonds offer a relatively low-risk way to gain exposure to financially sound, quickly growing firms.  The manager will mostly invest in dollar-denominated bonds as a way to hedge currency risks and will pursue theme-based investing (“rise of the Brazilian middle class”) in the same way many e.m. stock funds do.  The fund has a $2500 investment minimum, reduced to $1000 for IRAs and will charge a 1.15% expense ratio, after waivers.  That’s just above the emerging-markets bond category average of 1.11%, which is a great deal on a fund with no assets yet.

Launch Alert 3: PIMCO Short Asset Investment Fund

On May 31, PIMCO launched this fund has an alternative to a money-market fund.  PIMCO presents the fund as “a choice for conservative investors” which will offer “higher income potential than traditional cash investments.”  Here’s their argument:

Yields remain compressed, making it difficult for investors to obtain high-quality income without taking on excess risk. PIMCO Short Asset Investment Fund offers higher income potential than traditional cash investments by drawing on multiple high-quality fixed income opportunity sets and PIMCO’s expertise.

The manager, Jerome Schneider, has access to a variety of higher-quality fixed-income products as well as limited access to derivatives.  He’s “head of [their] short-term funding desk and is responsible for supervising all of PIMCO’s short-term investment strategies.”  The “D” class shares trade under the symbol PAIUX, have a $1000 minimum, and expenses of 0.59% after waivers.  “D” shares are generally available no-load/NTF at a variety of brokerages.

Four Funds and Why They’re Really Worth Your While

Each month, the Observer profiles between two and four mutual funds that you likely have not heard about, but really should have.  Our “Most intriguing new funds: good ideas, great managers” do not yet have a long track record, but which have other virtues which warrant your attention.  They might come from a great boutique or be offered by a top-tier manager who has struck out on his own.  The “most intriguing new funds” aren’t all worthy of your “gotta buy” list, but all of them are going to be fundamentally intriguing possibilities that warrant some thought. Two intriguing newer funds are:

Aston / River Road Long-Short (ARLSX). There are few successful, time-tested long-short funds available to retail investors.  Among the crop of newer offerings, few are more sensibly-constructed, less expensive or more carefully managed that ARLSX seems to be.  It deserves attention.

Osterweis Strategic Investment (OSTVX). For folks who remain anxious about the prospects of a static allocation in a dynamic world, OSTVX combines the virtues of two highly-flexible Osterweis funds in a single package.  The fund remains a very credible choice along with stalwarts such as PIMCO All-Asset (PASDX) and FPA Crescent (FPACX).  This is an update to our May 2011 profile.  We’ve changed styles in presenting our updates.  We’ve placed the new commentary in a text box but we’ve also preserved all of the original commentary, which often provides a fuller discussion of strategies and the fund’s competitive universe.  Feel free to weigh-in on whether this style works for you.

The “stars in the shadows” are all time-tested funds, many of which have everything except shareholders.

Huber Small Cap Value (HUSIX). Huber Small Cap is not only the best small-cap value fund of the past three years, it’s the extension of a long-practice, intensive and successful discipline with a documented public record.  For investors who understand that even great funds have scary stretches and are able to tolerate “being early” as a condition of long-term outperformance, HUSIX justifies as close a look as any fund launched in the past several years.

Wasatch Long Short (FMLSX).  For folks interested in access to a volatility-controlled equity fund, the case for FMLSX was – and is – remarkably compelling.  There’s only one demonstrably better fund in its class (BPLSX) and you can’t get into it.  FMLSX is near the top of the “A” list for those you can consider. This is an update to our 2009 profile.

The Best of the Web: Retirement Income Calculators

Our fourth “Best of the Web” feature focuses on retirement income calculators.  These are software programs, some quite primitive and a couple that are really smooth, that help answer two questions that most of us have been afraid to ask:

1. How much income will a continuation of my current efforts generate?

and

1. Will it be enough?

The ugly reality is that for most Americans, the answers are “not much” and “no.”  Tom Ashbrook, host of NPR’s On Point, describes most of us as “flying naked” toward retirement.  His May 29 program entitled “Is the 401(k) Working?” featured Teresa Ghilarducci, an economics professor at The New School of Social Research, nationally-recognized expert in retirement security and author of When I’m Sixty-Four: The Plot against Pensions and the Plan to Save Them (Princeton UP, 2008).  Based on her analysis of the most recent data, it “doesn’t look good at all” with “a lot of middle-class working Americans [becoming] ‘poor’ or ‘near-poor’ at retirement.”

Her data looks at the investments of folks from 50-64 and finds that most, 52%, have nothing (as in: zero, zip, zilch, nada, the piggy bank is empty).   In the top quarter of wage earners, folks with incomes above $75,000, one quarter of those in their 50s and 60s have no retirement savings.  Among the bottom quarter, 77% have nothing and the average account value for those who have been saving is $10,000.

The best strategy is neither playing the lottery nor pretending that it won’t happen.  The best strategy is a realistic assessment now, when you still have the opportunity to change your habits or your plans. The challenge is finding a guide that you can rely upon.  Certainly a good fee-only financial planner would be an excellent choice but many folks would prefer to turn to the web answers.  And so this month we trying to ferret out the best free, freely-available retirement income calculators on the web.

MFO at MIC

I’m pleased to report that I’ll be attending The Morningstar Investment Conference on behalf of the Observer.  This will be my first time in attendance.  I’ve got a couple meetings already scheduled and am looking forward to meeting some of the folks who I’ve only known through years of phone conversations and emails.

I’m hopeful of meeting Joan Rivers – I presume she’ll be doing commentary on the arrival of fashionistas Steve Romick, Will Danoff & Brian Rogers – and am very much looking forward to hearing from Jeremy Grantham in Friday’s keynote.  If folks have other suggestions for really good uses of my time, I’d like to hear from you.  Too, if you’d like to talk with me about the Observer and potential story leads, I’d be pleased to spend the time with you.

There’s a cheerful internal debate here about what I should wear.  Junior favors an old-school image for me: gray fedora with a press card in the hatband, flash camera and spiral notebook.   (Imagine a sort of balding Clark Kent.)  Chip, whose PhotoShop skills are so refined that she once made George W. look downright studious, just smiles and assures me that it doesn’t matter what I wear.  (Why does a smile and the phrase “Wear what you like and I’ll take care of everything” make me so apprehensive? Hmmm…)

Perhaps the better course is just to drop me a quick note if you’re going to be around and would like to chat.

Briefly noted . . .

Dreyfus has added Vulcan Value Partners as a sixth subadvisor for Dreyfus Select Managers Small Cap Value (DMVAX).  Good move!  Our profile described Vulcan Value Partners Small Cap fund as “a solid, sensible, profitable vehicle.”  Manager C.T. Fitzpatrick spent 17 years managing with Longleaf Partners before founding the Vulcan Value Partners.

First Eagle has launched First Eagle Global Income Builder (FEBAX) in hopes that it will provide “a meaningful but sustainable income stream across all market environments.”  Like me, they’re hopeful of avoiding “permanent impairment of capital.”  The management team overlaps their four-star High Yield Fund team.  The fund had $11 million on opening day and charges 1.3%, after waivers, for its “A” shares.

Vanguard Gets Busy

In the past four weeks, Vanguard:

Closed Vanguard High-Yield Corporate (VWEHX), closed to new investors.  The fund, subadvised by Wellington, sucked in $1.5 billion in new assets this year.  T. Rowe Price closed its High Yield (PRHYX) fund in April after a similar in-rush.

Eliminated the redemption fee on 33 mutual funds

Cut the expense ratios for 15 fixed-income, diversified-equity, and sector funds and ETFs.

Invented a calorie-free chocolate fudge brownie.

Osterweis, too

Osterweis Strategic Income (OSTIX) has added another fee breakpoint.  The fund will charge 0.65% on assets over $2.5 billion.  Given that the fund is a $2.3 billion, that’s worthwhile.  It’s a distinctly untraditional bond fund and well-managed.  Because its portfolio is so distinctive (lots of short-term, higher-yielding debt), its peer rankings are largely irrelevant.

At Least They’re Not in Jail

Former Seligman Communications and Information comanager Reema Shah pled guilty to securities fraud and is barred from the securities industry for life. She traded inside information with a Yahoo executive, which netted a few hundred thousand for her fund.

Authorities in Hong Kong have declined to pursue prosecution of George Stairs, former Fidelity International Value (FIVLX) manager.  Even Fido agrees that Mr. Stairs “did knowingly trade on non-public sensitive information.” Stairs ran the fund, largely into the ground, from 2006-11.

Farewells

Henry Berghoef, long-time co-manager of Oakmark Select (OAKLX), plans to retire at the end of July.

Andrew Engel, who helped manage Leuthold’s flagship Core Investment(LCORX) and Asset Allocation(LAALX) funds, died on May 9, at the age of 52.  He left behind a wife, four children and many friends.

David Williams, who managed Columbia Value & Restructuring (EVRAX, which started life as Excelsior Value & Restructuring), has retired after 20 years at the helm. The fund was one of the first to look beyond simple “value” and “growth” categories and into other structural elements in constructing its portfolio.

Closings

Delaware Select Growth (DVEAX) will close to new investors at the beginning of June, 2012.

Franklin Double Tax-Free Income (FPRTX) will soft-close in mid-June then hard-close at the beginning of August.

Goldman Sachs Mid Cap Value (GCMAX) will close to new investors at the end of July. Over the past five years the fund has been solidly . .. uh, “okay.”  You could do worse.  It doesn’t suck often. Not clear why, exactly, that justifies $8 billion in assets.

Old Wine, New Bottles

Artisan Growth Opportunities (ARTRX) is being renamed Artisan Global Opportunities.  The fund is also pretty global and the management team is talented and remaining, so it’s mostly a branding issue.

BlackRock Multi-Sector Bond Portfolio (BMSAX) becomes BlackRock Secured Credit Portfolio in June.  It also gets a new mandate (investing in “secured” instruments such as bank loans) and a new management team.  Presumably BlackRock is annoyed that the fund isn’t drawing enough assets (just $55 million after two years).  Its performance has been solid and it’s relatively new, so the problem mostly comes down to avarice.

Likewise BlackRock Mid-Cap Value Equity (BMCAX) will be revamped into BlackRock Flexible Equity at the end of July.  After its rebirth, the fund will become all-cap, able to invest across the valuation spectrum and able to invest large chunks into bonds, commodities and cash.  The current version of the fund has been consistently bad at everything except gathering assets, so it makes sense to change managers.  The eclectic new portfolio may reflect its new manager’s background in the hedge fund world.

Buffalo Science & Technology (BUFTX) will be renamed Buffalo Discovery, effective June 29, 2012.

Goldman Sachs Ultra-Short Duration Government (GSARX) is about to become Goldman Sachs High Quality Floating Rate and its mandate has been rewritten to focus on foreign and domestic floating-rate government debt.

Invesco Small Companies (ATIAX) will be renamed Invesco Select Companies at the beginning of August.

Nuveen is reorganizing Nuveen Large Cap Value (FASKX) into Dividend Value (FFEIX), pending shareholder approval of course, next autumn.  The recently-despatched management team managed to parlay high risk and low returns into a consistently dismal record so shareholders are apt to agree.

Perritt Emerging Opportunities (PREOX) has been renamed Perritt Ultra MicroCap.  The fund’s greatest distinction is that it invests in smaller stocks, on whole, than any other fund and their original name didn’t capture that reality.  The fund is a poster child for “erratic,” finishing either in the top 10% or the bottom 10% of small cap funds almost every year. Its performance roughly parallels that of Bridgeway’s two “ultra-small company” funds.

Nuveen Tradewinds Global All-Cap (NWGAX) and Nuveen Tradewinds Value Opportunities (NVOAX) have reopened to new investors after the fund’s manager and a third of assets left.

Off to the Dustbin of History

AllianceBernstein Greater China ’97 (GCHAX) will be liquidated in early June. It’s the old story: high expenses, low returns, no assets.

Leuthold Hedged Equity will liquidate in June 2012, just short of its third anniversary.  The fund drew $4.7 million between two share clases and the Board of Trustees determined it was in the best interests of shareholders to liquidate.  Given the fund’s consistent losses – it turned $10,000 into $7900 – and high expenses, they’re likely right.  The most interesting feature of the fund is that the Institutional share class investors were asked to pony up $1 million to get in, and were then charged higher fees than were retail class investors.

Lord Abbett Large Cap (LALAX) mergers into Lord Abbett Fundamental Equity (LDFVX) on June 15.

Oppenheimer plans to merge Oppenheimer Champion Income (OPCHX) and Oppenheimer Fixed Income Active Allocation (OAFAX) funds will merge into Oppenheimer Global Strategic Income (OPSIX) later this year.  That’s the final chapter in the saga of two funds that imploded (think: down 80%) in 2008, then saw their management teams canned in 2009. The decision still seems odd: OPCHX has a half-billion in assets and OAFAX is a small, entirely solid fund-of-funds.

In closing . . .

Thanks to all the folks who’ve provided financial support for the Observer this month.  In addition to a handful of friends who provided cash contributions, either via PayPal or by check, readers purchased almost 210 items through the Observer’s Amazon link.  Thanks!  If you have questions about how to use or share the link, or if you’re just not sure that you’re doing it right, drop me a line.

It’s been a tough month, but it could be worse.  You could have made a leveraged bet on the rise of Latin American markets (down 25% in May).  For folks looking for sanity and stability, though, we’ll continue in July our summer-long series of long-short funds, but we’ll also update the profiles of RiverPark Short-Term High Yield (RPHYX), a fund in which both Chip and I invest, and ING Corporate Leaders (LEXCX), the ghost ship of the fund world.  It’s a fund whose motto is “No manager? No problem!”  We’re hoping to have a first profile of Seafarer Overseas Growth & Income (SFGIX) and Conestoga Small Cap (CCASX).

Until then, take care and keep cool!

Dear friends,

April started well, with the super-rich losing more money in a week than I can even conceive of.  Bloomberg reports that the 20 wealthiest people on Earth lost a combined $9.1 billion in the first week of April as renewed concerns that Europe’s debt crisis might worsen drove the Standard & Poor’s 500 Index to its largest decline of 2012.  Bill Gates, a year older than me, lost $558.1 million on the week. (World’s Richest Lose $9 Billion as Global Markets Decline).

I wonder if he even noticed?

Return of the Giants

Mark Jewell, writing for the AP, celebrated the resurgence of the superstar managers (Star Fund Managers Recover Quickly from Tough 2011).  He writes, “A half dozen renowned managers are again beating their peers by big margins, after trailing the vast majority last year. Each is a past winner of Morningstar’s manager of the year award in his fund category, and four have been honored as top manager of the decade.”  Quick snapshots of Berkowitz, Miller and Bill Gross follow, along with passing mention of Brent Lynn of Janus Overseas Fund (JDIAX), Michael Hasenstab of Templeton Global Bond (TPINX) and David Herro of Oakmark International (OAKIX).

A number of funds with very good long-term records were either out-of-step with the market or made bad calls in 2011, ending them in the basement.  There are 54 four- or five-star rated funds that tanked in 2011; that is, that trailed at least 90% of their peers.  Of those, 23 – 43% of the group – rebounded sharply this year and ended up with 10% returns for the year, through 4/30/11.  The rest of the worst-to-first roster:

American Century Zero Coupon 2015 and 2020

Fairholme

Federated International Leader

Jones Villalta Opportunity

SEI Tax-Exempt Tax-Advantaged

Fidelity Advisor Income Replacement 2038, 2040 and 2042

JHancock3 Leveraged Companies

Templeton Global Total Return CRM International Opportunity

Fidelity Capital & Income

REMS Real Estate Value Opportu

Templeton Global Bond and Maxim Templeton Global Bond

Catalyst/SMH Total Return Income

Fidelity Leveraged Company Stock

ING Pioneer High Yield

Templeton International Bond

API Efficient Frontier Income

Hartford Capital Appreciation

PIMCO Total Return III

Before we become too comfortable with the implied “return to normal, we really can trust The Great Men again,” we might also look at the roster of great funds that got hammered in 2011 and are getting hammered again in 2012.  Brian Barash at Cambiar Aggressive Value, Leupp and Ronco (no, not the TV gadgets guy) at Lazard U.S. Realty Income Open, The “A” team at Manning & Napier Pro-Blend Maximum Term and Whitney George & company at Royce Micro-Cap range from the bottom 2 – 25% of their peer groups.

Other former titans – Ariel (ARGFX), Clipper (CFIMX, a rare two-star “Gold” fund), Muhlenkamp Fund (MUHLX), White Oak Growth (WOGSX) – seem merely stuck in the mud.

“A Giant Sucking Sound,” Investor Interest in Mutual Funds . . .

and a lackadaisical response from the mutual fund community.

Apropos my recent (and ongoing) bout with the flu, we’re returning to the odd confluence of the Google Flu tracker and the fate of the fund industry.  In October 2011, we posted our first story using the Google Trends data, the same data that allows Google to track incidence of the flu by looking at the frequency and location of flu-related Google searches.  In that article, we included a graph, much like the one below, of public interest in mutual funds.  Here was our original explanation:

That trend line reflects an industry that has lost the public’s attention.  If you’ve wondered how alienated the public is, you could look at fund flows – much of which is captive money – or you could look at a direct measure of public engagement.   The combination of scandal, cupidity, ineptitude and turmoil – some abetted by the industry – may have punched an irreparable hole in industry’s prospects.

This is a static image of searches in the U.S. for “mutual funds,” from January 2004 to April 2012.

And it isn’t just a retreat from investing and concerns about money.  We can separately track the frequency of “mutual funds” against all finance-related searches, which is shown on this live chart:

In brief, the industry seems to have lost about 75% of its mindshare (sorry, it’s an ugly marketing neologism for “how frequently potential buyers think about you”).

That strikes me as “regrettable” for Fidelity and “potentially fatal” for small firms whose assets haven’t yet reached a sustainable level.

I visit a lot of small fund websites every month, read more shareholder communications than I care to recall and interview a fair number of managers.  Here’s my quick take: a lot of firms materially impair their prospects for survival by making their relationship with their shareholders an afterthought.  These are the folks who take “my returns speak for themselves” as a modern version of “Build a better mousetrap, and the world will beat a path to your door” (looks like Emerson actually did say it, but in a San Francisco speech rather than one of his published works).

In reality, your returns mumble.  You’re one of 20,000 datapoints and if you’re not a household name, folks aren’t listening all that closely.

According to Google, the most popular mutual-fund searches invoke “best, Vanguard (three variants), Fidelity (three variants), top, American.”

On whole, how many equity managers do you suppose would invest in a company that had no articulated marketing strategy or, at best, mumbled about the quality of their mousetraps?

And yet, this month alone, in the course of my normal research, I dealt with four fund companies that don’t even have working email links on their websites and several more whose websites are akin to a bunch of handouts left on a table (one or two pages, links to mandatory documents and a four-year-old press release).  And it’s regrettably common for a fund’s annual report to devote no more than a paragraph or two to the fund itself.

There are small operations which have spectacularly rich and well-designed sites.  I like the Observer’s design, all credit for which goes to Anya Zolotusky of Darn Good Web Design.  (Anya’s more interesting than you or me; you should read her bio highlights on the “about us” page.)  I’ve been especially taken by Seafarer Funds new site.  Three factors stand out:

• The design itself is clear, intuitive and easily navigated;
• There’s fresh, thoughtful content including manager Andrew Foster’s responses to investor questions; and,
• Their portfolio data is incredibly rich, which implies a respect for the active intelligence and interest of their readers.

Increasingly, there are folks who are trying to make life easier for small to mid-sized firms.  In addition to long established media relations firms like Nadler & Mounts or Kanter & Company, there are some small firms that seem to be seeking out small funds.  I’ve had a nice exchange with Nina Eisenman of FundSites about her experience at the Mutual Fund Education Alliance’s eCommerce show.  Apparently some of the big companies are designing intriguing iPad apps and other mobile manifestations of their web presence while representatives of some of the smaller companies expressed frustration at knowing they needed to do better but lacking the resources.

“What we’re trying to do with FundSites is level the playing field so that a small or mid-sized fund company with limited resources can produce a website that provides investors and advisors with the kind of relevant, timely, compliant information the big firms publish. Seems like there is a need for that out there.”

I agree but it really has to start at the top, with managers who are passionate about what they’re doing and about sharing what they’ve discovered.

Barron’s on FundReveal: Meh

Speaking of mousetraps, Barron’s e-investing writer Theresa Carey dismissed FundReveal as “a lesser mousetrap” (04/21/12). She made two arguments: that the site is clunky and that she didn’t locate any commodity funds that she couldn’t locate elsewhere.  Her passage on one of the commodity funds simultaneously revealed both the weakness in her own research and the challenge of using the FundReveal system.  She writes:

The top-ranked fund from Fidelity over the past three years is the Direxion Monthly Commodity Bull 2X (DXCLX). While it gets only two Morningstar stars, FundReveal generally likes it, awarding a “B” risk-return rating, second only to “A.” Scouring its 20,000-fund database, FundReveal finds just 61 funds that performed better than the Fidelity pick. (emphasis mine)

Here’s the problem with Theresa’s research: FundReveal does not rank funds on a descending scale of A, B, C, and D. Each of the four quadrants in their system gets a letter designation: “A” is “higher return, lower risk” and “B” is higher return, higher risk.”  Plotted in the “B” quadrant are many funds, some noticeably riskier than the others.  Treating “B” as if it were a grade on a junior high report card is careless and misleading.

And I’m not even sure what she means by “just 61 funds … performed better” since she’s looking at simple absolute returns over three years or FundReveal’s competing ADR calculation.  In either case, we’d need to know why that’s a criticism.  Okay, they found 61 superior funds.  And so … ?

Her article does simultaneously highlight a challenge in using the FundReveal system.  For whatever its analytic merits, the site is more designed for folks who love spreadsheets than for the average investor and the decision to label the quadrants with A through D does carry the risk of misleading casual users.

The Greatest Fund that’s not quite a Fund Anymore

In researching the impending merger of two Firsthand Technology funds (recounted in our “In Brief” section), I came across something that had to be a typo: a fund that had returned over 170% through early April.  As in, 14 weeks, 170% returns.

No typo, just a familiar name on a new product.  Firsthand Technology Value Fund, despite having 75% of their portfolio in cash (only $15.5 of $68.4 million was invested), peaked at a 175% gain.

What gives?  At base, irrational exuberance.  Firsthand Technology Value was famous in the 1990s for its premise – hire the guys who work in Silicon Valley and who have firsthand knowledge of it to manage your investments – and its performance.  In long-ago portfolio contests, the winner routinely was whoever had the most stashed in Tech Value.

The fund ran into performance problems in the 2000s (duh) and legal problems in recent years (related to the presence of too many illiquid securities in the portfolio).  As a result, it transformed into a closed-end fund investing solely in private securities in early 2011.  It’s now a publicly-traded venture capital fund that invests in technology and cleantech companies that just completed a follow-on stock offering. The fund, at last report, held stakes in just six companies.  But when one of those companies turned out to be Facebook, a bidding frenzy ensued and SVVC’s market price lost all relationship to the fund’s own estimated net asset value.  The fund is only required to disclose its NAV quarterly.  At the end of 2011, it was $23.92.  At the end of the first quarter of 2012, it was $24.56 per share.

Right: NAV up 3%, market price up 175%.

In April, the fund dropped from $46.50 to its May 1 market price, $26.27.  Anyone who held on pocketed a gain of less than 10% on the year, while folks shorting the stock in April report gains of 70% (and folks who sold and ran away, even more).

It’s a fascinating story of mutual fund managers returning to their roots and investors following their instincts; which is to say, to rush off another cliff.

Four Funds and Why They’re Really Worth Your While

Each month, the Observer profiles between two and four mutual funds that you likely have not heard about, but really should have.  Our “Most intriguing new funds: good ideas, great managers” do not yet have a long track record, but have other virtues which warrant your attention.  They might come from a great boutique or be offered by a top-tier manager who has struck out on his own.  The “most intriguing new funds” aren’t all worthy of your “gotta buy” list, but all of them are going to be fundamentally intriguing possibilities that warrant some thought. Two intriguing newer funds are:

Amana Developing World Fund (AMDWX): Amana, which everyone knew was going to be cautious, strikes some as near-comatose.  We’ve talked with manager Nick Kaiser about his huge cash stake and his recent decision to begin deploying it.  This is an update on our May 2011 profile.

FMI International (FMIJX): For 30 years, FMI has been getting domestic stock investing right.  With the launch of FMI International, they’ve attempted to “extend their brand” to international stocks.  So far it’s been performing about as expected, which is to say, excellently

The “stars in the shadows” are all time-tested funds, many of which have everything except shareholders.

Artisan Global Value (ARTGX): can you say, “it’s about time”?  While institutional money has long been attracted to this successful, disciplined value strategy, retail investors began to take notice just in the past year. Happily, the strategy has plenty of capacity remaining.  This is an update on our May 2011 profile.

LKCM Balanced (LKBAX): LKCM Balanced (with Tributary Balanced, Vanguard Balanced Index and Villere Balanced) is one of a small handful of consistently, reliably excellent balanced funds.  The good news for prospective shareholders is that LKCM slashed the minimum investment this year, from $10,000 to $2,000, while continuing its record of great, risk-conscious performance.

The Best of the Web: Curated Financial News Aggregators

Our third “Best of the Web” feature focuses on human-curated financial news aggregators.  News aggregators such as Yahoo! News and Google News are wildly popular.  About a third of news users turn to them and Google reports about 100,000 clicks per minute at the Google News site.

The problem with aggregators such as Google is that they’re purely mechanical; the page content is generated by search algorithms driven by popularity more than the significance of the story or the seriousness of the analysis.

In this month’s “Best of the Web,” Junior and I test drove a dozen financial news aggregators, but identified only two that had consistently excellent, diverse and current content.  They are:

Abnormal Returns: Tadas Viskanta’s six year old venture, with its daily linkfests and frequent blog posts, is for good reason the web’s most widely-celebrated financial news aggregator.

Counterparties: curated by Felix Salman and Ryan McCarthy, this young Reuter’s experiment offers an even more eclectic mix than AR and does so with an exceptionally polished presentation.

As a sort of mental snack, we also identified two cites that couldn’t quite qualify here but that offered distinctive, fascinating resources: Smart Briefs, a sort of curated newsletter aggregator and Fark, an irreverent and occasionally scatological collection of “real news, real funny.”  You can access Junior’s column from “The Best” tab or here.  Columns in the offing include coolest fund-related tools, periodic tables (a surprising number), and blogs run by private investors.

We think we’ve done a good and honest job but Junior, especially, would like to hear back from readers about how the feature works for you and how to make it better, about sites we’re missing and sites we really shouldn’t miss.  Drop us a line. We read and appreciate everything and respond to as much as we can.

A “Best of” Update: MoneyLife with Chuck Jaffe Launches

Chuck Jaffe’s first episode of the new MoneyLife show aired April 30^th. The good news: it was a fine debut, including a cheesy theme song and interviews with Bill O’Neil, founder of Investor’s Business Daily and originator of the CAN-SLIM investing system, and Tom McIntyre.  The bad news: “our Twitter account was hijacked within the 48 hours leading up to the show, which is one of many adventures you don’t plan for as you start something like this.”  Assuming that Chuck survives the excitement of his show’s first month, Junior will offer a more-complete update on June 1.  For now, Chuck’s show can be found here.

Briefly noted …

Steward Capital Mid-Cap Fund (SCMFX), in a nod to fee-only financial planners, dropped its sales load on April 2.  Morningstar rates it as a five-star fund (as of 4/30/12) and its returns over the past 1-, 3- and 5-year periods are among the best of any mid-cap core fund.  The investment minimum is $1000 and the expense ratio is 1.5% on $35 million in assets.

Grandeur Peak Global Advisors recently passed $200 million in assets under management.  Roughly $140M is in Global Opportunities (GPGOX/GPGIX) and $60M is in International Opportunities (GPIOX/GPIIX).  That’s a remarkable start for funds that launched just six months ago.

Calamos is changing the name of its high-yield fixed-income fund to Calamos High Income from Calamos High Yield (CHYDX) on May 15, 2012 because, without “income” in the name investors might think the fund focused on high-yielding corn hybrids (popular here in Iowa).

T. Rowe Price High Yield (PRHYX) and its various doppelgangers closed to new investors on April 30, 2012.

Old Mutual Heitman REIT is in the process of becoming the Heitman REIT Fund, but I’m not sure why I’d care.

ING’s board of directors approved merging ING Index Plus SmallCap (AISAX) into ING Index Plus MidCap (AIMAX) on or about July 21, 2012. The combined funds will be renamed ING SMID Cap Equity. In addition, ING Index Plus LargeCap (AELAX) was approved to merge into ING Corporate Leaders 100 (IACLX) on or about June 28, 2012.  Let’s note that ING Corporate Leaders 100 is a different, and distinctly inferior fund, than ING Corporate Leaders Trust “B”.

Huntington New Economy Fund (HNEAX), which spent most of the last decade in the bottom 5-10% of mid cap growth funds, is being merged into Huntington Mid Corp America Fund (HUMIX) in May 2012.  HUMIX is less expensive than HNEAX, though still grievously overpriced (1.57%) for its size ($139 million in assets) and performance (pretty consistently below average).

The Firsthand Funds are moving to merge Firsthand Technology Leaders Fund (TLFQX) into Firsthand Technology Opportunities Fund TEFQX). The investment objective of TLF is identical to that of TOF and the investment risks of TLF are substantially similar to those of TOF.  TLF is currently managed solely by Kevin Landis (TLF was co-managed by Kevin Landis and Nick Schwartzman from April 30, 2010 to December 13, 2011).

The $750 million Delaware Large Cap Value Fund is being merged into the $750 million Delaware Value® Fund, which “does not require shareholder approval, and you are not being asked to vote.”

The reorganization has been carefully reviewed by the Trust’s Board of Trustees. The Trustees, most of whom are not affiliated with Delaware Investments®, are responsible for protecting your interests as a shareholder. The Trustees believe the reorganization is in the best interests of the Funds based upon, among other things, the following factors:

Shareholders of both Funds could benefit from the combination of the Funds through a larger pool of assets, including realizing possible economies of scale . . .

Uhhh . . . notes to the “Board of Trustees [who] are responsible for protecting [my] interests”: (1) it’s “who,” not “whom.”  (2) If Delaware Value’s asset base is doubling and you’re anticipating “possible economies of scale,” why didn’t you negotiate a decrease in the fund’s expense ratio?

Snow Capital All Cap Value Fund (SNVAX) is being closed and liquidated as of the close of business on May 14, 2012.  The fund, plagued by high expenses and weak performance, had attracted only $3.7 million despite the fact that the lead manager (Richard Snow) oversees $2.6 billion.

Likewise,  Dreyfus Dynamic Alternatives Fund and Dreyfus Global Sustainability Fund were both liquidated in mid-April.

Forward seems to be actively repositioning itself away from “vanilla” products and into more-esoteric, higher cost funds.  In March, Forward Banking and Finance Fund and Forward Growth Fund were sold to Emerald Advisers, who had been running the funds for Forward, rebranded as Emerald funds.  Forward’s board added International Equity to the dustbin of history on April 30, 2012 and Mortgage Securities in early 2011.  Balancing off those departures, Forward also launched four new funds in the past 12 months: Global Credit Long/Short, Select Emerging Markets Dividend, Endurance Long/Short, Managed Futures and Commodity Long/Long.

On April 17, 2012, the Board of Trustees of the ALPS ETF Trust authorized an orderly liquidation of the Jefferies|TR/J CRB Wildcatters Exploration & Production Equity Fund (WCAT), which will be completed by mid-May.  The fund drew fewer than $10 million in assets and managed, since inception, to lose a modest amount for its (few) investors.

Effective on June 5, 2012, the equity mix in Manning & Napier Pro-Blend Conservative Term will include a greater emphasis on dividend-paying common stocks and a larger allocation to REITs and REOCs. Their other target date funds are shifting to a modestly more conservative asset allocation.

Nice work if you can get it.  Emily Alejos and Andrew Thelen were promoted to become the managers of Nuveen Tradewinds Global All-Cap Plus Fund of April 13.  The fund,  after the close of business on May 23, 2012, is being liquidated with the proceeds sent to the remaining shareholders.  Nice resume line and nothing they can do to goof up the fund’s performance.

News Flash: on April 27, 2012 Wilmington Multi-Manager International Fund (GVIEX), a fund typified by above average risks and expenses married with below average returns, trimmed its management team from 27 managers down to a lean and mean 26 with the departure of Amanda Cogar.

In closing . . .

Thanks to all the folks who supported the Observer in the months just passed.  While the bulk of our income is generated by our (stunningly convenient!) link to Amazon, two or three people each month have made direct financial contributions to the site.  They are, regardless of the amount, exceedingly generous.  We’re deeply grateful, as much as anything, for the affirmation those gestures represent.  It’s good to know that we’re worth your time.

In June we’ll continuing updating profiles including Osterweis Strategic Investment (OSTVX – gone from “quietly confident” to “thoughtful”) and Fidelity Global Strategies (FDYSX – skeptical then, skeptical now).  We’ll profile a new “star in the shadows,” Huber Small Cap Value (HUSIX) and greet the turbulent summer months by beginning a series of profiles on long/short funds that might be worth the money.  June’s profile will be ASTON/River Road Long-Short Fund (ARLSX).

As ever,

Dear friends,

Welcome to the Year of the Dragon.  The Chinese zodiac has been the source of both enthusiasm (“Year of the Dragon and the scaly beast’s unmatched potency as a symbol for prosperity and success – as part of China’s own zodiac – promises an extra special 12 months”) and merriment (check the CLSA Asia-Pacific Market’s Feng Shui Report)  in the investing community.  The Dragon itself is characterized as “magnanimous, stately, vigorous, strong, self-assured, proud, noble, direct, dignified, eccentric, intellectual, fiery, passionate, decisive, pioneering, artistic, generous, and loyal. Can be tactless, arrogant, imperious, tyrannical, demanding, intolerant, dogmatic, violent, impetuous, and brash.”

Sort of the Gingrich of Lizards.

The Wall Street Journal reports (1/30/12) that Chinese investors have developed a passion for packing portfolios with “fungus harvested from dead caterpillars . . . homegrown liquors, mahogany furniture and jade, among other decidedly non-Western asset classes.”

Given that the last Year of the Dragon (2000) was a disappointment and a prelude to a disaster, I think I’ll keep my day job and look for really good sales on cases of peanut butter (nothing soothes the savaged investor quite like a PB&J . . . and maybe a sprinkle of caterpillar fungus).

Morningstar’s Fund Manager of the Year Awards

I’m not sure if the fund industry would be better off if John Rekenthaler had stayed closer to his bully pulpit, but I know the rest of us would have been.  Mr. Rekenthaler (JR to the cognoscenti) is Morningstar’s vice president of research but, in the 1990s and early part of the past decade, played the role of bold and witty curmudgeon and research-rich gadfly.   I’d long imagined a meeting of JR and FundAlarm’s publisher Roy Weitz as going something like this: 

The ugly reality is that age and gentility might have reduced it to something closer to: 

For now, I think I’ll maintain my youthful illusions.

Each year Morningstar awards “Fund Manager of the Year” honors in three categories: domestic equity, international equity and fixed-income.  While the recognition is nice for the manager and his or her marketers, the question is: does it do us as investors any good.  Is last year’s Manager of the Year, next year’s Dud of the Day?

One of the things I most respect about Morningstar is their willingness to provide sophisticated research on (and criticisms of) their own systems.  In that spirit, Rekenthaler reviewed the performance of Managers of the Year in the years following their awards.

His conclusions:

Domestic Fund Manager of the Year: “meh.”  On whole, awardees were just slightly above average with only three disasters, Bill Miller (1998), Jim Callinan (1999 – if you’re asking “Jim Who?” you’ve got a clue about how disastrous), and Mason Hawkins (2006).  Bruce Berkowitz will appear in due course, I fear.   JR’s conclusion: “beware of funds posting high returns because of financials and/or technology stocks.”

Fixed-Income Manager of the Year: “good” and “improving.”  On whole, these funds lead their peers by 50-80 basis points/year which, in the fixed income world, is a major advantage.  The only disaster has been a repeated disaster: Bob Rodriquez of FPA New Income earned the award three times and has been mediocre to poor in the years following each of those awards.  Rekenthaler resists the impulse to conclude that Morningstar should “quit picking Bob Rodriguez!” (he’s more disciplined than I’d be).  JR notes that Rodriquez is streaky (“two or three truly outstanding years” followed by mediocrity and disappointment before taking off again) and that “it’s a tough fund to own.”

International Fund Manager of the Year:  Ding! Ding! Ding!  Got it right in a major way.  As Rekenthaler puts it, “the Morningstar team selecting the International-Stock winners should open a hotline on NFL games.”  Twelve of the 13 international honorees posted strong returns in the years after selection, while the final honoree Dodge & Cox International (DODFX) has beaten its peer group but just by a bit.

Rekenthaler’s study, Do the Morningstar Fund Manager of the Year Awards Have Staying Power? is available at Morningstar.com, but seems to require a free log-in to access it.

Fun with Numbers: The Difference One Month Makes

Investors often look at three-year returns to assess a fund’s performance.  They reason, correctly, that they shouldn’t be swayed by very short term performance.  It turns out that short term performance has a huge effect on a fund’s long-term record.

The case in point is Matthews Asian Growth and Income (MACSX), a FundAlarm “Star in the Shadows” fund, awarded five stars and a “Silver” rating by Morningstar.  It’s in my portfolio and is splendid.  Unless you look at the numbers.  As of January 27 2011, it ranked dead last – the 100th percentile – in its Morningstar peer group for the preceding three years.  Less than one month earlier, it was placed in the 67^th percentile, a huge drop in 20 trading days.

Or not, since its trailing three-year record as of January 27 showed it returning 18.08% annually.  At the beginning of the month, its three-year return was 14.64%.

How much difference does that really make?  $10,000 invested on January 1 2009 would have grown to $15,065 in three years.  The same amount invested on January 27 2009 and left for three years would have grown to $16,482.  Right: the delay of less than a month turned a $5100 gain into a $6500 one.

What happened?   The January 27 calculation excludes most of January 2009, when MACSX lost 3.3% while its peers dropped 7.8% and it includes most of January 2012, when MACSX gained 4.8% but its peers rallied 10.2%.  That pattern is absolutely typically for MACSX: it performs brilliantly in falling markets and solidly in rising ones.  If you look at a period with sharp rises – even in a single month – this remarkably solid performer seems purely dreadful.

Here’s the lesson: you’ve got to look past the numbers.  The story of any fund can’t be grasped by looking at any one number or any one period.  Unless you understand why the fund has done what it has and what it supposed to be doing for your portfolio, you’re doomed to an endless cycle of hope, panic and missteps.  (From which we’re trying to save you, by the way.)

Looking Past the Numbers, Part Two: The Oceanstone Fund

Sometimes a look past the numbers will answer questions about a fund that looking dowdy. That’s certainly the case with MACSX. In order instances, it should raise them about a fund that’s looking spectacular. The Oceanstone Fund (OSFDX) is a case in point. Oceanstone invests in a diversified portfolio of undervalued stocks from micro- to mega-cap. Though it does not reflect the fund’s current or recent portfolio, Morningstar classifies it as a “small value” fund.  And I’ve rarely seen a fund with a more-impressive set of performance numbers:

In the approximately five years from launch through 1/30/2011, Oceanstone’s manager turned $10,000 into $59,000.  In 2009, powered by gains in Avis Budget Group and Dollar Thrifty Automotive (1,775 percent and 2,250 percent respectively), the fund made 264%.  And still, the fund has only $17 million in assets.

Time to jump in?  Send the big check, and wait to receive the big money?

I don’t know.  But you do owe it to yourself to look beyond the numbers first.  When you do that, you might notice:

1. that the manager’s explanation of his investment strategy is nonsense.  Here’s the prospectus description of what he’s doing:

In deciding which common stocks to purchase, the Fund seeks the undervalued stocks as compared to their intrinsic values. To determine a stock’s intrinsic value (IV), the Fund uses the equation: IV = IV/E x E. In this equation, E is the stock’s earnings per share for its trailing 4 quarters, and a reasonable range of its IV/E ratio is determined by a rational and objective evaluation of the current available information of its future earnings prospects.

Read that formula: IV = IV divided by E, times E.  No more than a high school grasp of algebra tells you that this formula tells you nothing.  I shared it with two professors of mathematics, who both gave it the technical term “vacuous.”  It works for any two numbers (4 = 4 divided by 2, times 2) but it doesn’t allow you to derive one value from the other.  If you know “the stock’s earnings” and are trying to determine it’s “investment value,” this formula can’t do it.

2. that the shareholder reports say nothing.  Here is the entire text of the fund’s 2010 Annual Report:

Oceanstone Fund (the Fund) started its 2011 fiscal year on 7/1/2010 at net asset value (NAV) of $28.76 per share. On 12/27/2010, the Fund distributed a short-term capital gain dividend of $2.7887 per share and a long-term capital gain dividend of $1.7636. On 6/30/2011, the Fund ended this fiscal year at NAV of $35.85 per share. Therefore, the Fund’s total return for this fiscal year ended 6/30/2011 is 42.15%. During the same period, the total return of S&P 500 index is 30.69%.

For portfolio investment, the Fund seeks undervalued stocks. To determine a stock’s intrinsic value (IV), the Fund uses the equation IV = IV/E x E, as stated in the Fund’s prospectus. To use this equation, the key is to determine a company’s future earnings prospects with reasonable accuracy and subsequently a reasonable range for its IV/E ratio. As a company’s future earnings prospects change, this range for its IV/E ratio is adjusted accordingly.

Short-term, stock market can be volatile and unpredictable. Long-term, the deciding factor of stock price, as always, is value. Going forward, the Fund strives to find at least some of the undervalued stocks when they become available in U.S. stock market, in an effort to achieve a good long-term return for the shareholders.

One paragraph reports NAV change, the second reproduces the vacuous formula in the prospectus and the third is equally-vacuous boilerplate about markets.  What, exactly, is the manager telling you?  And what does it say that he doesn’t think you deserve to know more?

3. that Oceanstone’s Board is chaired by Rajendra Prasad, manager of Prasad Growth (PRGRX).  Prasad Growth, with its frantic trading (1300% annual turnover), collapsing asset base and dismal record (bottom 1% of funds for the past 3-, 5- and 10-year period) is a solid candidate for our “Roll Call of the Wretched.”  How, then, does his presence benefit Oceanstone’s shareholders?

4. the fund’s portfolio turns over at triple the average rate, is exceedingly concentrated (20 names) and is sitting on a 30% cash stake.  Those are all unusual, and unexplained.

You need to look beyond the numbers.  In general, a first step is to read the managers’ own commentary.  In this case, there is none.  Second, look for coverage in reliable sources.  Except for this note and passing references to 2009’s blistering performance, none again.  Your final option is to contact the fund advisor.   The fund’s website has no email inquiry link or other means to facilitate contact, so I’ve left a request for an interview with the fund’s phone reps.  They seemed dubious.  I’ll report back, in March, on my success or failure.

And Those Who Can’t Teach, Teach Gym.

Those of us who write about the investment industry occasionally succumb to the delusion that that makes us good investment managers.  A bunch of funds have managers who at least wave in the direction of having been journalists:

• Sierra Strategic Income Fund: Frank Barbera, CMT, was a columnist for Financial Sense from 2007 until 2009.
• Roge Partners:  Ronald W. Rogé has been a guest personal finance columnist for ABCNews.com.
• Auer Growth:  Robert C. Auer, founder of SBAuer Funds, LLC, was from 1996 to 2004, the lead stock market columnist for the Indianapolis Business Journal “Bulls & Bears” weekly column, authoring over 400 columns, which discussed a wide range of investment topics.
• Astor Long/Short ETF Fund: Scott Martin, co-manager, is a contributor to FOX Business Network and a former columnist with TheStreet.com
• Jones Villalta Opportunity Fund: Stephen M. Jones was financial columnist for Austin Magazine.
• Free Enterprise Action Fund: The Fund’s investment team is headed by Steven J. Milloy, “lawyer, consultant, columnist, adjunct scholar.”

Only a handful of big-time financial journalists have succumbed to the fantasy of financial acumen.  Those include:

• Ron Insana, who left CNBC in March 2006 to start a hedge fund, lost money for his investors, closed the fund in August 2008, joined SAC Capital for a few months then left.  Now he runs a website (RonInsanaShow.com) hawking his books and providing one minute market summaries, and gets on CNBC once a month.
• Lou Dobbs bolted from hosting CNN’s highly-rated Moneyline show in 1999 in order to become CEO of Space.com.  By 2000 he was out of Space and, by 2001, back at CNN.
• Jonathan Clements left a high visibility post at The Wall Street Journal to become Director of Financial Education, Citi Personal Wealth Management.  Sounds fancy.  Frankly, it looks like he’s been relegated to “blogger.”  As I poke around the site, he seems to write a couple distinctly mundane, 400-word essays a week.
• Jim Cramer somehow got rich in the hedge fund world.  Since then he’s become a clown whose stock picks are, by pretty much every reckoning, high beta and zero alpha.   And value of his company, TheStreet.com’s, stock is down 94.3% since launch.
• Jim Jubak, who writes the “Jubak’s Picks” column for MSN Money, launched Jubak Global Equity (JUBAX), which managed to turn $10,000 at inception into $9100 by the end of 2011 while his peers made $11,400.

You might notice a pattern here.

The latest victim of hubris and comeuppance is John Dorfman, former Bloomberg and Wall Street Journal columnist.  You get a sense of Dorfman’s marketing savvy when you look at his investment vehicles.

Dorfman founded Thunderstorm Capital in 1999, and then launched The Lobster Fund (a long-short hedge fund) in 2000.  He planned launch of The Oyster Fund (a long-only hedge fund) and The Crab Fund (short-only) shortly thereafter, but that never quite happened.  Phase One: name your investments after stuff that’s found at low tide, snatched up, boiled and eaten with butter.

He launched Dorfman Value Fund in 2008. Effective June 30, 2009, the fund’s Board approved changing the name from Dorfman Value Fund to Thunderstorm Value Fund.  The reason for the name change is that the parent firm of Thunderstorm Mutual Funds LLC “has decided the best way to promote a more coherent marketing message is to rebrand all of its products to begin with the word ‘Thunderstorm’.”

Marketers to mutual fund: “Well, duh!”

Earth to Dorfman: did you really think that naming your fund after a character in Animal House (Kent Dorfman, an overweight, clumsy legacy pledge), especially one whose nickname was “Flounder,” was sharp to begin with? Name recognition is all well and good . . . . as long as your name doesn’t cause sniggering. I can pretty much guarantee that when I launch my mutual fund, it isn’t going to be Snowball Special (DAVYX).

Then, to offset having a half-way cool name, they choose the ticker symbol THUNX.  THUNX?  As in “thunks.”  Yes, indeed, because nothing says “trust me” like a vehicle that goes “thunk.”

Having concluded that low returns, high expenses, a one-star rating, and poor marketing aren’t the road to riches, the advisor recommended that the Board close (on January 17, 2012) and liquidate (on February 29, 2012) the fund.

Does Anyone Look at this Stuff Before Running It?

They’re at it again.  I’ve noted, in earlier essays, the bizarre data that some websites report.  In November, I argued, “There’s no clearer example of egregious error without a single human question than in the portfolio reports for Manning & Napier Dividend Focus (MNDFX).”  The various standard services reported that the fund, which is fully invested in stocks, held between 60 – 101% of its portfolio in cash.

And now, there’s another nominee for the “what happens when humans no longer look at what they publish” award.  In the course of studying Bretton Fund (BRTNX), I looked at the portfolios of the other hyper-concentrated stock funds – portfolios with just 10-15 stocks.

One such fund is Biondo Focus (BFONX), an otherwise undistinguished fund that holds 15 stocks (and charges way too much).   One striking feature of the fund: Morningstar reports that the fund invested 30% of the portfolio in a bank in Jordan.  That big gray circle on the left represents BFONX’s stake in Union Bank.

There are, as it turns out, four problems with this report.

1. There is no Union Bank in Jordan.  It was acquired by, and absorbed in, Bank Al Etihad of Amman.
2. The link labeled Union Bank (Jordan) actually leads to a report for United Bankshares, Inc. (UBSI).  UBSI, according to Morningstar’s report, mostly does business in West Virginia and D.C.
3. Biondo Focus does not own any shares of Union or United, and never has.
4. Given the nature of data contracts, the mistaken report is now widespread.

Joe Biondo, one of the portfolio managers, notes that the fund has never had an investment in Union Bank of Jordan or in United Bankshares in the US.  They do, however, use Union Bank of California as a custodian for the fund’s assets.  The 30% share attributed to Union Bank is actually a loan run through Union Bank, not even a loan from Union Bank.

The managers used the money to achieve 130% equity exposure in January 2012.  That exposure powered the portfolio to a 21.4% gain in the first four weeks of January 2012, but didn’t offset the fund’s 24% loss in 2011.  From January 2011 – 2012, it finished in the bottom 1% of its peer group.

Google, drawing on Morningstar, repeats the error, as does MSN and USA Today while MarketWatch and Bloomberg get it right. Yahoo takes error in a whole new direction when provides this list of BFONX’s top ten holdings:

Uhhh, guys?  Even in daycare the kids managed to count past two on their way to ten.  For the record, these are holdings five and six.

Doesn’t Anyone at the SEC Look at their Stuff Before Posting It?

The Securities and Exchange Commission makes fund documents freely available through their EDGAR search engine.  In the relentless, occasionally mind-numbing pursuit of new funds, I review each day’s new filings.  The SEC posts all of that day’s filings together which means that all the filings should be from that day.  To find them, check “Daily Filings” then “Search Current Events: Most Recent Filings.”

Shouldn’t be difficult.  But it is.  The current filings for January 5, 2012 are actually dated:

• January 5, 2012
• October 14, 2011
• September 2, 2011
• August 15, 2011
• August 8, 2011
• July 27, 2011
• July 15, 2011
• July 1, 2011
• June 15, 2011
• June 6, 2011
• May 26, 2011
• May 23, 2011
• January 10, 2011

For January 3^rd, only 20 of 98 listings are correct.  Note to the SEC: This Isn’t That Hard!  Hire A Programmer!

Fund Update: HNP Growth and Preservation

We profiled HNP Growth and Preservation (HNPKX) in January 2012.  The fund’s portfolio is set by a strict, quantitative discipline: 70% is invested based on long-term price trends for each of seven asset classes and 30% is invested based on short-term price trends.  The basic logic is simple: try to avoid being invested in an asset that’s in the midst of a long, grinding bear market.  Don’t guess about whether it’s time to get in or out, just react to trend.  This is the same strategy employed by managed futures funds, which tend to suffer in directionless markets but prosper when markets show consistent long-term patterns.

Since we published our profile, the fund has done okay.  It returned 3.06% in January 2012, through 1/27.  That’s a healthy return, though it lagged its average peer by 90 bps.  It’s down about 5.5% since launch, and modestly trails its peer group.  I asked manager Chris Hobaica about how investors should respond to that weak initial performance.  His reply arrived too late to be incorporated in the original profile, but I wanted to share the highlights.

Coming into August the fund was fully invested on the long term trend side (fairly rare…) and overweight gold, Treasuries and real estate on the short term momentum side. . .  Even though the gold and Treasuries held up [during the autumn sell-off], they weren’t enough to offset the remaining assets that were being led down by the international and emerging assets.  Also, as is usually the case, assets class correlations moved pretty close to 1.

Generally though, this model isn’t designed to avoid short-term volatility, but rather a protracted bear market.  By the end of September, we had moved to gold, treasuries and cash.  So, the idea was that if that volatility continued into a bear market, the portfolio was highly defensive.

While we are never happy with negative returns, we explain to shareholders that the model was doing what it was supposed to do.  It became defensive when the trends reversed.  I am not worried by the short term drop (I don’t like it though), as there have been many other times over the backtest that the portfolio would have been down in the 8-10% range.

Three Funds, and why they’re worth your time

Really worth it.  Every month the Observer profiles two to four funds that we think you really need to know more about.  One category is the most intriguing new funds: good ideas, great managers. These are funds that do not yet have a long track record, but which have other virtues which warrant your attention.  They might come from a great boutique or be offered by a top-tier manager who has struck out on his own.  The “most intriguing new funds” aren’t all worthy of your “gotta buy” list, but all of them are going to be fundamentally intriguing possibilities that warrant some thought.  This month we’ll highlight three funds with outstanding heritages and fascinating prospects:

Bretton Fund (BRTNX): Bretton is an ultra-concentrated value fund managed by the former president of Parnassus Investments.  It has shown remarkable – and remarkably profitable – independence from style boxes, peers and indexes in its brief life.

Grandeur Peak Global Opportunities (GPGOX): here’s a happy thought.  Two brilliantly-successful managers who made their reputation running a fund just like this one have struck out on their own, worrying about a much smaller and more-nimble fund, charging less and having a great time doing it.

Matthews Asia Strategic Income (MAINX): Matthews, which already boasts the industry’s deepest corps of Asia specialists, has added a first-rate manager and made her responsible for the first Asian income fund available to U.S. retail investors.

Launch Alert: Seafarer Overseas Growth and Income

Seafarer Overseas Growth and Income (SFGIX) is set to launch in mid-February, 2012.  The fund’s final prospectus is available at SeafarerFunds.com. The fund will be managed by Andrew Foster, formerly manager of Matthews Asia Growth & Income (MACSX) and Matthews’ research director or acting chief investment officer.

The great debate surrounding MACSX was whether it was the best Asia-centered fund in existence or merely one of the two or three best funds in existence.  Here’s the broader truth within their disagreement: Mr. Foster’s fund was, consistently and indisputably one of the best Asian funds in existence.  That distinction was driven by two factors: the fund’s focus on high-quality, dividend-paying stocks plus its willingness to hold a variety of securities other than common stocks.  A signal of the importance of those other securities is embedded in the fund’s ticker symbol; MACSX reflects the original name, Matthews Asian Convertible Securities Fund.

Those two factors helped make MACSX one of the two least volatile and most profitable Asian funds.  Whether measured by beta, standard deviation or Morningstar’s “downside capture ratio,” it typically incurs around half of the risk of its peers. Over the past 15 years, the fund’s returns (almost 11% per year) are in the top 1% of its peer group.  The more important stat is the fund’s “investor returns.”  This is a Morningstar calculation that tries to take into account the average investor’s fickleness and inept market timing.  Folks tend to arrive after a fund has done spectacularly and then flee in the midst of it crashing.  While it’s an imperfect proxy, “investor returns” tries to estimate how much the average investor in a fund actually made.  With highly volatile funds, the average investor might have earned nothing in a fund that made 10%.

In the case of MACSX, the average investor has actually made more than the fund itself.  That occurs when investors are present for the long-haul and when they’re in the habit of buying more when the fund’s value is falling.  This is an exceedingly rare pattern and a sign that the fund “works” for its investors; it doesn’t scare them away, so they’re able to actually profit from their investment.

Seafarer will take the MACSX formula global.  The Seafarer prospectus explains the strategy:

The Fund attempts to offer investors a relatively stable means of participating in a portion of developing countries’ growth prospects, while providing some downside protection, in comparison to a portfolio that invests purely in the common stocks of developing countries. The strategy of owning convertible bonds and dividend-paying equities is intended to help the Fund meet its investment objective while reducing the volatility of the portfolio’s returns.

Mr. Foster writes: “I hope to marry Asia Pacific with other ‘emerging markets,’ a few carefully-selected ‘frontier’ markets, alongside a handful of ‘developed’ countries.  I am excited about the possibilities.”

The fund’s minimum investment is $2500 for regular accounts and $1000 for IRAs.  The initial expense ratio is 1.60%, an amount that Mr. Foster set after considerable deliberation.  He didn’t want to charge an unreasonable amount but he didn’t want to risk bankrupting himself by underwriting too much of the fund’s expenses (as is, he expects to absorb 0.77% in expenses to reach the 1.6% level).  While the fund could have launched on February 1, Mr. Foster wanted a couple extra weeks for finish arrangements with some of the fund supermarkets and other distributors.

Mr. Foster has kindly agreed to an extended conversation in February and we’ll have a full profile of the fund shortly thereafter.  In the meantime, feel free to visit Seafarer Funds and read some of Andrew’s thoughtful essays on investing.

Briefly Noted

Fidelity Low-Priced Stock (FLPSX) manager Joel Tillinghast has returned from his four-month sabbatical.  It looks suspiciously like a rehearsal for Mr. Tillinghast’s eventual departure.  The five acolytes who filled-in during his leave have remained with the fund, which he’d managed solo since 1989.  If you’d had the foresight to invest $10,000 in the fund at inception, you’d have $180,000 in the bank today.

Elizabeth Bramwell is retiring in March, 2012.  Bramwell is an iconic figure who started her investment career in the late 1960s.  Her Bramwell Growth Fund became Sentinel Capital Growth (SICGX) in 2006, when she also picked up responsibility for managing Sentinel Growth Leaders (SIGLX), and Sentinel Sustainable Growth Opportunities (CEGIX). Kelli Hill, her successor, seems to have lots of experience but relatively little with mutual funds per se.  She’s sometimes described as the person who “ran Old Mutual Large Cap Growth (OILLX),” but in reality she was just one of 11 co-managers.

Fidelity has agreed to pay $7.5 million to shareholders of Fidelity Ultra-Short Bond fund (FUSBX) (and their attorneys) in settlement of a class action suit.  The plaintiffs claimed that Fidelity did not exercise reasonable oversight of the fund’s risks.  Despite being marketed as a low volatility, conservative option, the fund invested heavily in mortgage-backed securities and lost 17% in value from June 2007 – May 2008.  Fidelity, as is traditional in such cases, “believes that all of the claims are entirely without merit.”  Why pay them then?  To avoid “the cost and distraction” of trial, they say.  (Court Approves a $7.5 Million Settlement, MFWire, 1/27/12).

Fidelity is changing the name of Fidelity Equity-Income II (FEQTX) to Fidelity Equity Dividend Income fund. Its new manager Scott Offen, who took over the fund in November 2011, has sought to increase the fund’s dividend yield relative to his predecessor Stephen Peterson.

Bridgeway Ultra-Small Company (BRUSX) is becoming just a little less “ultra.”  The fund has, since launch, invested in the tiniest U.S. stocks, those in the 10^th decile by market cap.  As some of those firms thrived, their market caps have grown into the next-higher (those still smaller than microcap) decile.  Bridgeway has modified its prospectus to allow the fund to buy shares in these slightly-larger firms

Invesco has announced the merger of three more Van Kampen funds, which follows dozens of mergers made after they acquired Morgan Stanley’s funds in 2010.  The latest moves: Invesco High Income Muni (AHMAX) will merge into Invesco Van Kampen High Yield Municipal (ACTFX).  Invesco US Mid Cap Value (MMCAX) and Invesco Van Kampen American Value (MSAJX), run by the same team, are about to become the same fund.  And Invesco Commodities Strategy (COAIX) disappears into the more-active Invesco Balanced Risk Commodity Strategy (BRCNX). The funds share management teams and similar fees, but Invesco Commodities Strategy has closely tracked its Dow-Jones-UBS Commodity Total Return Index benchmark, while Invesco Van Kampen Balanced Risk Commodity Strategy is more actively managed.

DWS Dreman Small Cap Value (KDSAX), which is already too big, reopened to all investors on February 1, 2012.

Managers Emerging Markets Equity (MEMEX) will liquidate on March 9, 2012. The fund added a bunch of co-managers three years ago, but it’s lagged its peer group in each of the past five years.  It’s attracted $45 million in assets, apparently not enough to making it worth the advisor’s while.

On March 23, 2012, the $34 million ING International Capital Appreciation (IACAX) will also liquidate, done in by performance that was going steadily from bad to worse.

I’d missed the fact that back in mid-October, RiverPark Funds liquidated their RiverPark/Gravity Long-Biased Fund.  RiverPark has been pretty ruthless about getting rid of losing strategies (funds and active ETFs) after about a year of weakness.

The Observer: Milestones and Upgrades

The folks who bring you the Observer are delighted to announce two milestones and three new features, all for the same reasonable rate as before.  Which is to say, free.

On January 27, 2012, folks launched the 2000^th discussion thread on the Observer’s lively community forum.  The thread in question focused on which of two Matthews Asia funds, Growth and Income (MACSX) or Asia Dividend (MAPIX), was the more compelling choice.  Sentiment seemed to lean slightly toward MAPIX, with the caveat that the performance comparison should be tempered by an understanding that MACSX was not a pure-equity play.  One thoughtful poster analogized it to T. Rowe Price’s stellar Capital Appreciation (PRWCX) fund, in that both used preferred and convertible shares to temper volatility without greatly sacrificing returns.  In my non-retirement account, I own shares of MACSX and have been durn happy with it.

Also on January 27, the Observer attracted its 50,000^th reader.  Google’s Analytics program labels you as “unique visitors.”  We heartily agree.  While the vast majority of our readers are American, folks from 104 nations have dropped by.  I’m struck that we’re had several hundred visits from each of Saudi Arabia, Israel, France, India and Taiwan.  On whole, the BRICs have dispatched 458 visitors while the PIIGS account for 1,017.

In March the Observer will debut a new section devoted to providing short, thoughtful summaries and analyses of the web’s best investment and finance websites.  We’ve grown increasingly concerned that the din of a million cyber voices is making it increasingly hard for folks to find reliable information and good insights as they struggle to make important life choices.  We will, with your cooperation, try to help.

The project team responsible for the effort is led by Junior Yearwood.  Those of you who’ve read our primer on Miscommunication in the Workplace know of Junior as one of the folks who helped edit that volume.   Junior and I met some years ago through the good offices of a mutual friend, and he’s always proven to be a sharp, clear-eyed person and good writer.  Junior brings what we wanted: the perspectives of a writer and reader who was financially literate but not obsessed with the market’s twitches or Fidelity’s travails.  I’ll let him introduce himself and his project:

It’s rare that a 19-year-old YouTube sensation manages to sum up the feelings of millions of Americans and people the world over.  But Tay Zonday, whose richly-baritone opening line is “are you confused about the economy?” did.  “Mama, Economy;  Make me understand all the numbers” explains it all.

The fact is we all could use a little help figuring it all out.  “We” might be a grandmother who knows she needs better than a zero percent savings account, a financial adviser looking to build moats around her clients’ wealth, or even me, the former plant manager and current freelance journalist. We all have something in common; we don’t know everything and we’re a bit freaked out by the economy and by the clamor.

My project is to help us sort through it.  The idea originated with the estimable Chuck Jaffe MarketWatch.   I am not a savvy investor nor am I a financial expert. I am a guy with a sharp eye for detail and the ability to work well with others.   My job is to combine your suggestions and considered analysis with my own research, into a monthly collection of websites that we believe are worth your time.  David will oversee the technical aspects of the project.   I’ll be reaching out, in the months ahead, to both our professional readership (investment advisers, fund managers, financial planners, and others) and regular people like myself.

Each month we will highlight and profile around five websites in a particular category. The new section will be launching in March with a review of mutual fund rating sites.  In the following months we’ll look at macro-level blogs run by investment professionals, Asian investing and many of the categories that you folks feel most interested in.   I’d be pleased to hear your ideas and I can be reached at [email protected]

A special word of thanks goes out to Chuck. We hope we can do justice to your vision.

Finally, I remain stunned (and generally humbled) by the talent and commitment of the folks who daily help the Observer out.  I’m grateful, in particular, to Accipiter, our chief programmer who has been both creative and tireless in his efforts to improve the function of the Observer’s discussion board software.  The software has several virtues (among them, it was free) but isn’t easy to scan.  The discussion threads look like this:

MACSX yield 3.03 and MAPIX yield 2.93. Why go with either as opposed to the other?

14 comments MaxBialystock January 27| Recent Kenster1_GlobalValue3:54PM Fund Discussions

Can’t really see, at a glance, what’s up with the 14 comments.  Accipiter wrote a new discussion summary program that neatly gets around the problem.  Here’s that same discussion, viewed through the Summary program:

MACSX yield 3.03 and MAPIX yield 2.93. Why go with either as opposed to the other? By – MaxBialystock viewed (468)

• 2012-01-28 – scott : I was going to say MACSX is ex-Japan, but I guess it isn’t – didn’t it used to …
• 2012-01-28 – MaxBialys : Reply to @scott: Yes, it’s SUPPOSED to be…….
• 2012-01-28 – scott : Reply to @MaxBialystock: Ah. I own a little bit left of it, but I haven’t looke…
• 2012-01-28 – MikeM : If you go to their web, site, they have a compare option where you can put the…
• 2012-01-28 – InformalE : Pacific Tigers, MAPTX, is ex-Japan. I don’t think MACSX was ever ex-Japan.In re…
• 2012-01-28 – msf : You can’t put too much stock in the category or benchmark with these funds. M…
• 2012-01-28 – MaxBialys : Lots of work, thought and information. And CLEARLY expressed. MACSX is still ab…
• 2012-01-28 – catch22 : Hi Max, Per your post, it appears you are also attempting to compare the dividen…
• 2012-01-28 – Investor : I recently sold all of MACSX and reinvested most in MAPIX. I just did not feel …
• 2012-01-28 – fundalarm : Reply to @Investor: as mentioned before, i have done the same at the end of Dec…
• . 07:27:27 . – msf : Reply to @fundalarm: Though figures show long term performance of MAPIX to be b…
• 2012-01-28 – MaxBialys : Ya, well, I kinda hogtied myself. I got 11 X more in MAPIX than MACSX, and MACS…

The Summary is easy to use.  Simply go to the Discussions page and look at the gray bar across the top.  The menu options are Discussions – Activity – Summary – Sign In.  Signing up and signing in are easy, free and give you access to a bunch of special features, but they aren’t necessary for using the Summary.  Simply click “Summary”  and, in the upper right, the “comments on/off” button.  With “comments on,” you immediately see the first line of every reply to every post.  It’s a fantastic tool for scanning the discussions and targeting the most provocative comments.

In addition to the Summary view, Chip, our diligent and crafty technical director, constructed a quick index to all of the fund profiles posted at the Observer.  Simply click on the “Funds” button on the top of each page to go to the Fund’s homepage.  There you’ll see an alphabetized list of the fifty profiles (some inherited from FundAlarm) that are available on-site.  Profiles dated “April 2011” or later are new content while many of the others are lightly-updated versions of older profiles.

I’m deeply grateful to both Accipiter and Chip for the passion and superb technical expertise that they bring.  The Observer would be a far poorer place without.  Thanks to you both.

In closing . . .

Thanks to all the folks who supported the Observer in the months just passed.  While the bulk of our income is generated by our (stunningly convenient!) link to Amazon, two or three people each month have made direct financial contributions to the site.  They are, regardless of the amount, exceedingly generous.  We’re deeply grateful, as much as anything, for the affirmation those gestures represent.  It’s good to know that we’re worth your time.

In March, there’ll be a refreshed and expanded profile of Matthews Asia Strategic Income (MAINX), profiles of Andrew Foster’s new fund, Seafarer Overseas Growth and Income (SFGIX) and ASTON/River Road Long-Short Fund (ARLSX) and a new look at an old favorite, GRT Value (GRTVX).

As ever,