January 1, 2014

Dear friends,

Welcome to the New Year. At least as we calculate it. The Year of the Horse begins January 31, a date the Vietnamese share. The Iranians, like the ancient Romans, sensibly celebrate the New Year at the beginning of spring. A bunch of cultures in South Asia pick mid-April. Rosh Hashanah (“head of the year”) rolls around in September. My Celtic ancestors (and a bunch of modern Druidic wannabees) preferred Samhain, at the start of November.

Whatever your culture, the New Year is bittersweet. We seem obsessed with looking back in regret at all the stuff we didn’t do, as much as we look forward to all of the stuff we might yet do.

My suggestion: can the regrets, get off yer butt, and do the stuff now that you know you need to do. One small start: get rid of that mutual fund. You know the one. You’ve been regretting it for years. You keep thinking “maybe I’ll wait to let it come back a bit.” The one that you tend to forget to mention whenever you talk about investments.

Good gravy. Dump it! It takes about 30 seconds on the phone and no one is going to hassle you about it; it’s not like the manager is going to grab the line and begin pleading for a bit more time. Pick up a lower cost replacement. Maybe look into a nice ETF or index fund. Track down a really good fund whose manager is willing to put his own fortune and honor at risk along with yours.

You’ll feel a lot better once you do.

We can talk about your gym membership later.

Voices from the bottom of the well

THESE are the times that try men’s souls. The summer soldier and the sunshine patriot will, in this crisis, shrink from the service of their country; but he that stands by it now, deserves the love and thanks of man and woman. Tyranny, like hell, is not easily conquered; yet we have this consolation with us, that the harder the conflict, the more glorious the triumph. What we obtain too cheap, we esteem too lightly: it is dearness only that gives every thing its value. Heaven knows how to put a proper price upon its goods; and it would be strange indeed if so celestial an article as FREEDOM should not be highly rated.

Thos. Paine, The Crisis, 23 December 1776

Investors highly value managers who are principled, decisive, independent, active and contrarian. Right up to the moment that they have one.

Then they’re appalled.

There are two honorable approaches to investing: relative value and absolute value. Relative value investors tend to buy the best-priced securities available, even if the price quoted isn’t very good. They tend to remain fully invested even when the market is pricey and have, as their mantra, “there’s always a bull market in something.” They’re optimistic by nature, enjoy fruity wines and rarely wear bowties.

Absolute value investors tend to buy equities only when they’re selling for cheap. Schooled in the works of Graham and Dodd, they’re adamant about having “a margin of safety” when investing in an inherently risk asset class like stocks. They tend to calculate the fair value of a company and they tend to use cautious assumptions in making those calculations. They tend to look for investments selling at a 30% discount to fair value, or to firms likely to produce 10% internal returns of return even if things turn ugly. They’re often found sniffing around the piles that trendier investors have fled. And when they find no compelling values, they raise cash. Sometimes lots of cash, sometimes for quite a while. Their mantra is, “it’s not ‘different this time’.” They’re slightly-mournful by nature, contemplate Scotch, and rather enjoyed Andy Rooney’s commentaries on “60 Minutes.”

If you’re looking for a shortcut to finding absolute value investors today, it’s a safe bet you’ll find them atop the “%age portfolio cash” list. And at the bottom of the “YTD relative return” list. They are, in short, the guys you’re now railing against.

But should you be?

I spent a chunk of December talking with guys who’ve managed five-star funds and who were loved by the crowds but who are now suspected of having doubled-up on their intake of Stupid Pills. They are, on whole, stoic.

Take-aways from those conversations:

They hate cash. As a matter of fact, it’s second on their most-hated list behind only “risking permanent impairment of capital”.
They’re not perma-bears. They love owning stocks. These are, by and large, guys who sat around reading The Intelligent Investor during recess and get tingly at the thought of visiting Omaha. But they love them for the prospect of the substantial, compounded returns they might generate. The price of those outsized returns, though, is waiting for one of the market’s periodic mad sales.
They bought stocks like mad in early 2009, around the time that the rest of us were becoming nauseated at the thought of opening our 401(k) statements. Richard Cook and Dowe Bynum, for example, were at 2% cash in March 2009. Eric Cinnamond was, likewise, fully invested then.
They’ve been through this before though, as Mr. Cinnamond notes, “it isn’t very fun.” The market moves in multi-year cycles, generally five years long more or less. While each cycle is different in composition, they all have similar features: the macro environment turns accommodative, stocks rise, the fearful finally rush in, stocks overshoot fair value by a lot, there’s an “oops” and a mass exit for the door. Typically, the folks who arrived late inherit the bulk of the pain.
And they know you’re disgusted with them. Mr. Cinnamond, whose fund has compounded at 12% annually for the past 15 years, allows “we get those long-term returns by looking very stupid.” Richard Cook agrees, “we’re going to look silly, sometimes for three to five years at a stretch.” Zac Wydra admits that he sometimes looks at himself in the mirror and asks “how can you be so stupid?”

And to those investors who declare, “but the market is reasonably priced,” they reply: “we don’t buy ‘the market.’ We buy stocks. Find the individual stocks that meet the criteria that you hired us to apply, and we’ll buy them.”

What do they think you should do now? In general, be patient. Mr. Cook points to Charlie Munger’s observation:

I think the [Berkshire Hathaway’s] record shows the advantage of a peculiar mind-set – not seeking action for its own sake, but instead combining extreme patience with extreme decisiveness. It takes character to sit there with all that cash and do nothing. I didn’t get to where I am by going after mediocre opportunities.

Which is hard. Several of the guys pointed to Seth Klarman’s decision to return $4 billion in capital to his hedge fund investors this month. Klarman made the decision in principle back in September, arguing that if there were no compelling investment opportunities, he’d start mailing out checks. Two things are worth noting about Klarman: (1) his hedge funds have posted returns in the high teens for over 30 years and (2) he’s willing to sit at 33-50% cash for a long time if that’s what it takes to generate big long-term returns.

Few managers have Klarman’s record or ability to wait out markets. Mr. Cinnamond noted, “there aren’t many fund managers with a long track record doing this because you’re so apt to get fired.” Jeremy Grantham of GMO nods, declaring that “career risk” is often a greater driver of a manager’s decisions than market risk is.

In general, the absolute value guys suggest you think differently about their funds than you think about fully-invested relative value ones. Cook and Bynum’s institutional partners think of them as “alternative asset managers,” rather than equity guys and they regard value-leaning hedge funds as their natural peer group. John Deysher, manager of Pinnacle Value (PVFIX), recommends considering “cash-adjusted returns” as a viable measure, though Mr. Cinnamond disagrees since a manager investing in unpopular, undervalued sectors in a momentum driven market is still going to look inept.

Our bottom line: investors need to take a lot more responsibility if they’re going to thrive. That means we’ve got to look beyond simple return numbers and ask, instead, about what decisions led to those returns. That means actually reading your managers’ commentaries, contacting the fund reps with specific questions (if your questions are thoughtful rather more than knee-jerk, you’d be surprised at the quality of answers you receive) and asking the all-important question, “is my manager doing precisely what I hired him to do: to be stubbornly independent, fearful when others are greedy and greedy when others are fearful?”

Alternately: buy a suite of broadly diversified, low-cost index funds. There are several really solid funds-of-index-funds that give you broad exposure to market risk with no exposure to manager risk. The only thing that you need to avoid at all costs is the herd: do not pay active management prices for the services of managers whose only goal is to be no different than every other timid soul out there.

The Absolute Value Guys

	Cash	Absolute 2013 return	Relative 2013 return
ASTON River Road Independent Value ARIVX	67%	7%	bottom 1%
Beck, Mack & Oliver Partners BMPEX	18	20	bottom 3%
Cook & Bynum COBYX	44	11	bottom 1%
FPA Crescent FPACX *	35	22	top 5%
FPA International Value FPIVX	40	18	bottom 20%
Longleaf Partners Small-Cap LLSCX	45	30	bottom 23%
Oakseed SEEDX	21	24	bottom 8%
Pinnacle Value PVFIX	44	17	bottom 2%
Yacktman YACKX	22	28	bottom 17%

* FPACX’s “moderate allocation” competitors were caught holding bonds this year, dumber even than holding cash.

Don’t worry, relative value guys. Morningstar’s got your back.

Earnings at S&P500 companies grew by 11% in 2013, through late December, and they paid out a couple percent in dividends. Arguably, then, stocks are worth about 13% more than they were in January. Unfortunately, the prices paid for those stocks rose by more than twice that amount. Stocks rose by 32.4% in 2013, with the Dow setting 50 all-time record highs in the process. One might imagine that if prices started at around fair value and then rose 2.5 times as much as earnings did, valuations would be getting stretched. Perhaps overvalued by 19% (simple subtraction of the earnings + dividend rise from the price + dividend rise)?

Not to worry, Morningstar’s got you covered. By their estimation, valuations are up only 5% on the year – from fully valued in January to 5% high at year’s end. They concluded that it’s certainly not time to reconsider your mad rush into US equities. (Our outlook for the stock market, 12/27/2013.) While the author, Matthew Coffina, did approvingly quote Warren Buffett on market timing:

Charlie and I believe it’s a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of “experts,” or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it.

He didn’t, however, invoke what Warren Buffett terms “the three most important words in all of investing,” margin of safety. Because you can’t be sure of a firm’s exact value, you always need to pay less than you think it’s worth – ideally 30 or 40% less – in order to protect your investors against your own fallible judgment.

Quo Vadis Japan

I go out of the darkness

Onto a road of darkness

Lit only by the far off

Moon on the edge of the mountains.

Izumi

One of the benefits of having had multiple careers and a plethora of interests is that friends and associates always stand ready with suggestions for you to occupy your time. In January of 2012, a former colleague and good friend from my days with the Navy’s long-range strategic planning group suggested that I might find it interesting to attend the Second China Defense and Security Conference at the Jamestown Foundation. That is how I found myself seated in a conference room in February with roughly a hundred other people. My fellow attendees were primarily from the various alphabet soup governmental agencies and mid-level military officers.

The morning’s presentations might best be summed up as grudging praise about the transformation of the Chinese military, especially their navy, from a regional force to one increasingly able to project power throughout Asia and beyond to carry out China’s national interests. When I finally could not stand it any longer, after a presentation during Q&A, I stuck my hand up and asked why there was absolutely no mention of the 600 pound gorilla in the corner of the room, namely Japan and the Japanese Maritime Self-Defense Force. The JMSDF was and is either the second or third largest navy in the world. It is considered by many professional observers to be extraordinarily capable. The silence that greeted my question was akin to what one would observe if I had brought in a dog that had peed on the floor. The moderator muttered a few comments about the JMSDF having fine capabilities. We then went on with no mention of Japan again. At that point I realized I had just learned the most important thing that I was going to take from the conference, that Japan (and its military) had become the invisible country of Asia.

The New Year is when as an investor you reflect back on successes and mistakes. And if one is especially introspective, one can ponder why. For most of 2013, I was banging the drum on two investment themes that made sense to me: (a) the Japanese equity market and (b) the Japanese currency – the yen – hedged back into U.S. dollars. The broad Japanese market touched highs this month not seen before this century. The dollar – yen exchange rate moved from 89.5 at the beginning of the year to 105.5. In tandem, the themes have proven to be quite profitable. Had an investment been made solely in the Wisdom Tree: Japan Hedged Equity ETF, a total return of 41.8% would have been achieved by the U.S. dollar investor. So, is this another false start for both the Japanese stock market and economy? Or is Japan on the cusp of an economic and political transformation?

merry men When I mention to institutional investors that I think the change in Japan is real, the most common response I get is a concern about “Abenomics.” This is usually expressed as “They are printing an awful lot of money.” Give me a break. Ben Bernanke and his little band of merry Fed governors have effectively been printing money with their various QE efforts. Who thinks that money will be repaid or the devaluation of the U.S. dollar will be reversed? The same can be said of the EU central bankers. If anything, the U.S. has been pursuing a policy of beggar thy creditor, since much of our debt is owed to others. At least in Japan, they owe the money to themselves. They have also gone through years of deflation without the social order and fabric of society breaking down. One wonders how the U.S. would fare in a similar long-term deflationary environment.

I think the more important distinction is to emphasize what “Abenomics” is not. It is not a one-off program of purchasing government bonds with a view towards going from a multi-year deflationary spiral to generating a few points of inflation. It is a comprehensive program aimed at reversing Japan’s economic, political, and strategic slide of the past twenty years. Subsumed under the rubric of “Abenomics” are efforts to increase and widen the acceptance of child care facilities to enable more of Japan’s female talent pool to actively participate in the workforce, a shift in policy for the investments permitted in pension funds to dramatically increase domestic equity exposure, and incentives to transform the Japanese universities into research and resource engines. Similarly, the Japanese economy is beginning to open from a closed economy to one of free trade, especially in agriculture, as Japan has joined the Trans Pacific Partnership. Finally, public opinion has shifted dramatically to a willingness to contemplate revision of Japan’s American-drafted post-war Constitution. This would permit a standing military and a more active military posture. It would normalize Japan as a global nation, and restore a balance of interests and power in East Asia. The ultimate goal then is to restore the self-confidence of the Japanese nation. So, what awakened Japan and the Japanese?

Strangely enough, the Chinese did it. I have been in Japan four times in the last twenty-two months, which does not make me an expert on anything. But it has allowed me to discern a shift in the mood of the country. Long-time Japan hands had told me that when public opinion in Japan shifts, it shifts all at once and moves together in the same direction. Several months ago, I asked a friend and investment manager who is a long-time resident of Tokyo what had caused that shift in opinion. His response was that most individuals, he as well, traced it to the arrest and detention by the Japanese Coast Guard, of a Chinese fishing vessel and its captain who had strayed into Japanese waters. China responded aggressively, embargoing rare earth materials that the Japanese electronics and automobile industries needed, and made other public bellicose noises. Riots and torching of Japanese plants in China followed, with what seemed to be the tacit approval of the Chinese government. Japan released the ship and its captain, and in Asian parlance, lost face. As my friend explained it, the Japanese public came to the conclusion that the Chinese government was composed of bad people whose behavior was unacceptable. Concurrently, Japan Inc. began to relocate its overseas investment away from China and into countries such as Vietnam, Indonesia, Thailand, and Singapore.

From an investment point of view, what does it all mean? First, one should not look at Prime Minister Abe, Act II (remember that he was briefly in office for 12 months in 2006-2007) in a vacuum. Like Reagan and Churchill, he used his time in the “wilderness years” to rethink what he wanted to achieve for Japan and how he would set about doing it. Second, one of the things one learns about Japan and the Japanese is that they believe in their country and generally trust their government, and are prepared to invest in Japan. This is in stark contrast to China, where if the rumors of capital flows are to be believed, vast sums of money are flowing out of the country through Hong Kong and Singapore. So, after the above events involving China, Abe’s timing in return to office was timely.

While Japanese equities have surged this year, that surge has been primarily in the large cap liquid issues that are easily studied and invested in by global firms. Most U.S. firms follow the fly-by approach. Go to Tokyo for a week of company meetings, and invest accordingly. Few firms make the commitment of having resources on the ground. That is why if you look at most U.S.-based Japan specialist mutual funds, they all own pretty much the same large cap liquid names, with only the percentages and sector weightings varying. There are tiers of small and mid-cap companies that are under-researched and under-invested in. If this is the beginning of a secular bull market, as we saw start in the U.S. in 1982, Japan will just be at the beginnings of eliminating the value gap between intrinsic value and the market price of securities, especially in the more inefficiently-traded and under-researched companies.

So, as Lenin once famously asked, “What is to be done?” For most individuals, individual stock investments are out of the question, given the currency, custody, language, trading, and tax issues. For exposure to the asset class, there is a lot to be said for a passive approach through an index fund or exchange-traded fund, of which there are a number with relatively low expense ratios. Finally, there are the fifteen or so Japan-only mutual funds. I am only aware of three that are small-cap vehicles – DFA, Fidelity, and Hennessy. There are also two actively-managed closed end funds. I will look to others to put together performance numbers and information that will allow you to research the area and draw your own conclusions.

Finally, it should be obvious that Japan does not lend itself to simple explanations. As Americans, we are often in a time-warp, thinking that with the atomic bombs, American Occupation and force-fed Constitution, we successfully transformed Japan into a pacifist democratically-styled Asian theme park. My conclusion is rather that what you see in Japan is not reality (whatever that is) but what they are comfortable with you seeing. I think for instance of the cultural differences with China in a business sense. With the Chinese businessman, a signed contract is in effect the beginning of the negotiation. For the Japanese businessman, a signed contract is a commitment to be honored to the letter.

I will leave you with one thing to ponder shared with me by a Japanese friend. She told me that the samurai have been gone for a long time in Japan. But, everyone in Japan still knows who the samurai families are and everyone knows who is of those families and who is not. And she said, everyone from those families still tends to marry into other samurai families. So I thought, perhaps they are not gone after all.

Edward Studzinski

From Day One …

… the Observer’s readers were anxious to have us publish lists of Great Funds, as FundAlarm did with its Honor Roll funds. For a long time I demurred because I was afraid folks would take such a list too seriously. That is, rather than viewing it as a collection of historical observations, they’d see it as a shopping list.

After two years and unrelenting inquires, I prevailed upon my colleague Charles to look at whether we could produce a list of funds that had great track records but, at the same time, highlight the often-hidden data concerning those funds’ risks. With that request and Charles’s initiative, the Great Owl Funds were launched.

And now Charles returns to that troubling original question: what can we actually learn about the future from a fund’s past?

In Search of Persistence

It’s 1993. Ten moderate allocation funds are available that have existed for 20 years or more. A diligent, well intended investor wants to purchase one of them based on persistent superior performance. The investor examines rolling 3-year risk-adjusted returns every month during the preceding 20 years, which amounts to 205 evaluation periods, and delightfully discovers Virtus Tactical Allocation (NAINX).

It outperformed nearly 3/4ths of the time, while it under-performed only 5%. NAINX essentially equaled or beat its peers 194 out of 205 periods. Encouraged, the investor purchases the fund making a long-term commitment to buy-and-hold.

It’s now 2013, twenty years later. How has NAINX performed? To the investor’s horror, Virtus Tactical Allocation underperformed 3/4ths of the time since purchased! And the fund that outperformed most persistently? Mairs & Power Balanced (MAPOX), of course.

Back to 1993. This time a more aggressive investor applies the same methodology to the large growth category and finds an extraordinary fund, named Fidelity Magellan (FMAGX). This fund outperformed nearly 100% of the time across 205 rolling 3-year periods over 20 years versus 31 other long-time peers. But during the next 20 years…? Not well, unfortunately. This investor would have done better choosing Fidelity Contrafund (FCNTX). How can this be? Most industry experts would attribute the colossal shift in FMAGX performance to the resignation of legendary fund manager Peter Lynch in 1990.

virtus fidelity

MJG, one of the heavy contributors to MFO’s discussion board, posts regularly about the difficulty of staying on top of one’s peer group, often citing results from Standard & Poor’s Index Versus Active Indexing (SPIVA) reports. Here is the top lesson-learned from ten years of these reports:

“Over a five-year horizon…a majority of active funds in most categories fail to outperform indexes. If an investing horizon is five years or longer, a passive approach may be preferable.”

The December 2013 SPIVA “Persistence Scorecard” has just been published, which Joshua Brown writes insightfully about in “Persistence is a Killer.” The scorecard once again shows that only a small fraction of top performing domestic equity mutual funds remain on top across any 2, 3, or 5 year period.

What does mutual fund non-persistence look like across 40 years? Here’s one depiction:

The image (or “mural”) represents monthly rank by color-coded quintiles of risk-adjusted returns, specifically Martin Ratio, for 101 funds across five categories. The funds have existed for 40 years through September 2013. The calculations use total monthly returns of oldest share class only, ignoring any load, survivor bias, and category drift. Within each category, the funds are listed alphabetically.

There are no long blue/green horizontal streaks. If anything, there seem to be more extended orange/red streaks, suggesting that if mutual fund persistence does exist, it’s in the wrong quintiles! (SPIVA actually finds similar result and such bottom funds tend to end-up merged or liquated.)

Looking across the 40 years of 3-year rolling risk-adjusted returns, some observations:

98% of funds spent some periods in every rank level…top, bottom, and all in-between
35% landed in the bottom two quintiles most of the time…that’s more than 1/3^rd of all funds
13% were in the top two bottom quintiles…apparently harder to be persistently good than bad
Sequoia (SEQUX) was the most persistent top performer…one of greatest mutual funds ever
Wall Street (WALLX) was the most persistent cellar dweller…how can it still exist?

sequoia v wall street

The difference in overall return between the most persistent winner and loser is breathtaking: SEQUX delivered 5.5 times more than SP500 and 16 times more than WALLX. Put another way, $10K invested in SEQUX in October 1973 is worth nearly $3M today. Here’s how the comparison looks:

So, while attaining persistence may be elusive, the motivation to achieve it is clear and present.

The implication of a lack of persistence strikes at the core of all fund rating methodologies that investors try to use to predict future returns, at least those based only on historical returns. It is, of course, why Kiplinger, Money, and Morningstar all try to incorporate additional factors, like shareholder friendliness, experience, and strategy, when compiling their Best Funds lists. An attempt, as Morningstar well states, to identify “funds with the highest potential of success.”

The MFO rating system was introduced in June 2013. The current 20-year Great Owls, shown below for moderate allocation and large growth categories, include funds that have achieved top performance rank over the past 20, 10, 5, and 3 year evaluation periods. (See Rating Definitions.)

But will they be Great Owls next year? The system is strictly quantitative based on past returns, which means, alas, a gentle and all too ubiquitous reminder that past performance is not a guarantee of future results. (More qualitative assessments of fund strategy, stewardship, and promise are provided monthly in David’s fund profiles.) In any case and in the spirit of SPIVA, we will plan to publish periodically a Great Owl “Persistence Scorecard.”

31Dec2013/Charles

It’s not exciting just because the marketers say it is

Most mutual funds don’t really have any investment reason to exist: they’re mostly asset gathering tools that some advisor created in support of its business model. Even the funds that do have a compelling case to make often have trouble receiving a fair hearing, so I’m sympathetic to the need to find new angles and new pitches to try to get journalists’ and investors’ attention.

But the fact that a marketer announces it doesn’t mean that journalists need to validate it through repetition. And it doesn’t mean that you should just take in what we’ve written.

Case in point: BlackRock Emerging Markets Long/Short Fund (BLSAX). Here’s the combination of reasonable and silly statements offered in a BlackRock article justifying long/short investing:

For example, our access to information relies on cutting edge infrastructure to compile vast amounts of obvious and less-obvious sources of publicly available information. In fact, we consume a massive amount of data from more than 25 countries, with a storage capacity 4 times the Library of Congress and 8 times the size of Wikipedia. We take that vast quantity of publicly available information and filter and identify relevant pieces.

Reasonable statement: we do lots of research. Silly statement: we have a really big hard drive on our computer (“a storage capacity of…”). Why on earth would we care? And what on earth does it mean? “4 times the Library of Congress”? The LoC digital collection – a small fraction of its total collection – holds three petabytes of data, a statement that folks immediately recognize as nonsensical. 3,000,000 gigabytes. So the BlackRock team has a 12 petabyte hard drive? 12 petabytes of data? How’s it used? How much is reliable, consistent, contradictory or outdated? How much value do you get from data so vast that you’ll never comprehend it?

NSA’s biggest “data farm” consumes 65 megawatts of power, has melted down 10 times, and – by the fed’s own reckoning – still hasn’t produced demonstrable security gains. Data ≠ knowledge.

The Google, by the way, processes 20 petabytes of user-generated content per day.

Nonetheless, Investment News promptly and uncritically gloms onto the factoid, and then gets it twice wrong:

The Scientific Active Equity team takes quantitative investing to a whole new level. In fact, the team has amassed so much data on publicly traded companies that its database is now four times the size of Wikipedia and eight times the size of the Library of Congress (Jason Kephart, Beyond black box investing: Fund uses database four times the size of Wikipedia, 12/26/13).

Error 1: reversing the LoC and the Wikipedia. Error 2: conflating “storage capacity” with “data.” (And, of course, confusing “pile o’ data” with “something meaningful.”)

MFWire promptly grabs the bullhorn to share the errors and the credulity:

This Fund Uses the Data of Eight Libraries of Congress (12/26/13, Boxing Day for our British friends)

The team managing the fund uses gigantic amounts of data — four times the size of Wikipedia and eight times the size of the Library of Congress — on public company earnings, analyst calls, news releases, what have you, to gain on insights into different stocks, according to Kephart.

Our second, perhaps larger, point of disagreement with Jason (who, in fairness, generally does exceptionally solid work) comes in his enthusiasm for one particular statistic:

That brings us to perhaps the fund’s most impressive stat, and the one advisers really need to keep their eyes on: its correlation to global equities.

Based on weekly returns through the third quarter, the most recent data available, the fund has a correlation of just 0.38 to the MSCI World Index and a correlation of 0.36 to the S&P 500. Correlations lower than 0.5 lead to better diversification and can lead to better risk-adjusted returns for the entire portfolio.

Uhhh. No?

Why, exactly, is correlation The Golden Number? And why is BlackRock’s correlation enough to make you tingle? The BlackRock fund has been around just one year, so we don’t know its long-term correlation. In December, it had a net market exposure of just 9% which actually makes a .36 correlation seem oddly high. BlackRock’s correlation is not distinctively low (Whitebox Long/Short WBLSX has a three-year correlation of 0.33, for instance).

Nor is low correlation the hallmark of the best long-term funds in the group. By almost any measure, the best long/short fund in existence is the closed Robeco Boston Partners L/S Equity Fund (BPLEX). BPLEX is a five-star fund, a Lipper Leader, a Great Owl fund, with returns in the top 4% of its peer group over the past decade. And its long term correlation to the market: 75. Wasatch Long/Short (FMLSX), another great fund with a long track record: 90. Marketfield (MFLDX), four-star, Great Owl: 67.

The case for BlackRock EM L/S is it’s open. It’s got a good record, though a short one. In comparison to other, more-established funds, it substantially trails Long-Short Opportunity (LSOFX) since inception, is comparable to ASTON River Road (ARLSX) and Wasatch Long Short (FMLSX), while it leads Whitebox Long-Short (WBLSX), Robeco Boston Partners (BPLEX) and RiverPark Long/Short Opportunity (RLSFX). The fund has nearly $400 million in assets after one year and charges 2% expenses plus a 5.25% front load. That’s more than ARLSX, WBLSX or FMLSX, though cheaper than LSOFX.

Bottom Line: as writers, we need to guard against the pressures created by deadlines and the desire for “clicks.” As readers, you need to realize we have good days and bad and you need to keep asking the questions we should be asking: what’s the context of this number? What does it mean? Why am I being given it? How does it compare? And, as investors, we all need to remember that magic is more common in the world of Harry Potter than in the world we’re stuck with.

Wells Fargo and the Roll Call of the Wretched

Our Annual Roll Call of the Wretched highlights those funds which consistently, over a period of many years, trail their benchmark. We noted that inclusion on the list signaled one of two problems:

Bad fund or
Bad benchmark.

The former problem is obvious. The latter takes a word of explanation. There are 7055 distinct mutual funds, each claiming – more or less legitimately – to be different from all of the others. For the purpose of comparison, Morningstar and Lipper assign them to one of 108 categories. Some funds fit easily and well, others are laughably misfit. One example is RiverPark Short-Term High Yield Fund (RPHYX), which is a splendid cash management fund whose performance is being compared to the High-Yield group which is dominated by longer-duration bonds that carry equity-like risks and returns.

You get a sense of the mismatch – and of the reason that RPHYX was assigned one-star – when you compare the movements of the fund to the high-yield group.

rphyx

That same problem afflicts Wells Fargo Advantage Short-Term High Yield Bond (SSTHX), an entirely admirable fund that returns around 4% per year over the long term in a category that delivers 50% greater returns with 150% greater volatility. In Morningstar’s eyes, one star.

Joel Talish, one of the managing directors at Wells Fargo Advisors, raised the entirely reasonable objection that SSTHX isn’t wretched – it’s misclassified – and it shouldn’t be in the Roll Call at all. He might well be right. Our strategy has been to report all of the funds that pass the statistical screen, then to highlight those whose performance is better than the peer data suggest. We don’t tend to remove funds from the list just because we believe that the ratings agencies are wrong. We’ve made that decision consciously: investors need to read these ubiquitous statistical screens more closely and more skeptically. A pattern of results arises from a series of actions, and they’re meaningful only if you take the time to understand what’s going on. By highlighting solid funds that look bad because of a rater’s unexplained assignments, we’re trying to help folks learn how to look past the stars.

It might well be the case that highlighting and explaining SSTHX’s consistently one-star performance did a substantial disservice to the management team. It was a judgment call on our part and we’ll revisit it as we prepare future features. For now, we’re hopeful that the point we highlighted at the start of the list:

Use lists like the Roll Call of the Wretched or the Three Alarm Funds as a first step, not a final answer. If you see a fund of yours on either list, find out why. Call the adviser, read the prospectus, try the manager’s letter, post a question on our board. There might be a perfectly good reason for their performance, there might be a perfectly awful one. In either case, you need to know.

Observer Fund Profile

Each month the Observer provides in-depth profiles of notable funds that you’d otherwise not hear of. 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.

RiverPark Strategic Income (RSIVX): RSIVX sits at the core of Cohanzick’s competence, a conservative yet opportunistic strategy that they’ve pursued for two decades and that offers the prospect of doubling the returns of its very fine Short-Term High Yield Fund.

Elevator Talk: Oliver Pursche, GMG Defensive Beta Fund (MPDAX)

elevator buttons 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.

The traditional approach to buffering the stock market’s volatility without entirely surrendering the prospect of adequate returns was to divide the portfolio between (domestic, large cap) stocks and (domestic, investment grade) bonds, at a ratio of roughly 60/40. That strategy worked passably well as long as stocks could be counted on to produce robust returns and bonds could be counted on to post solid though smaller gains without fail. As the wheels began falling off that strategy, advisors began casting about for alternative strategies.

Some, like the folks at Montebello Partners, began drawing lessons from the experience of hedge funds and institutional alternatives managers. Their conclusion was that each asset class had one or two vital contributions to make to the health of the portfolio, but that exposure to those assets had to be actively managed if they were going to have a chance of producing equity-like (perhaps “equity-lite”) returns with substantial downside protection.

Their strategy is manifested in GMG Defensive Beta, which launched in the summer of 2009. Its returns have generally overwhelmed those of its multi-alternative peers (top 3% over the past three years, substantially higher returns since inception) though at the cost of substantially higher volatility. Morningstar rates it as a five-star fund, while Lipper gives it four stars for both Total Return and Consistency of Return and five stars for Capital Preservation.

Oliver Pursche is the president of Gary M Goldberg Financial Services (hence GMG) one of the four founding co-managers of MPDAX. Here are his 218 words (on whole, durn close to target) on why you should consider a multi alternative strategy:

Markets are up, and as a result, so are the risks of a correction. I don’t think that a 2008-like crash is in the cards, but we could certainly see a 20% correction at some point. If you agree with me, protecting your hard fought gains makes all the sense in the world, which is why I believe low-volatility and multi-alternative funds like our GMG Defensive Beta Fund will continue to gain favor with investors. The problem is that most of these new funds have no, or only a short track-record, so it’s difficult to know how they will actually perform in a prolonged downturn. One thing is certain, in the absence of a longer-term track record, low fees and low turnover tend to be advantageous to investors. This is why our fund is a no-load fund and we cap our fees at 1.49%, well below most of our peers, and our cap gain distributions have been minimal.

From my perspective, if you’re looking to continue to have market exposure, but don’t want all of the risks associated with investing in the S&P 500, our fund is ideally suited. We’re strategic and tactical at the same time and have demonstrated our ability to remain disciplined, which is (I think) why Morningstar has awarded us a 5 Star ranking.

MPDAX is a no-load fund with a single share class. The minimum initial investment is $1,000. Expenses are 1.49% on about $27 million in assets.

The fund’s website is functional but spare. You get the essential information, but there’s no particular wealth of insight or commentary on this strategy. There’s a Morningstar reprint available but you should be aware that the file contains one page of data reporting and five pages of definitions and disclaimers.

Our earlier Elevator Talks were:

Conference Call Highlights

On December 9^th, about 50 of us spent a rollicking hour with David Sherman of Cohanzick Asset Management, discussing his new fund: RiverPark Strategic Income Fund (RSIVX). I’m always amazed at how excited folks can get about short-term bonds and dented credits. It’s sort of contagious.

David’s first fund with RiverPark, the now-closed Short Term High Yield (RPHYX), was built around Cohanzick’s strategy for managing its excess cash. Strategic Income represents their seminal, and core, strategy to fixed-income investing. Before launching Cohanzick in 1996, David was a Vice President of Leucadia National Corporation, a holding company that might be thought of as a mini-Berkshire Hathaway. His responsibilities there included helping to manage a $3 billion investment portfolio which had an opportunistic distressed securities flair. When he founded Cohanzick, Leucadia was his first client. They entrusted him with $150 million, this was the strategy he used to invest it.

Rather than review the fund’s portfolio, which we cover in this month’s profile of it (below), we’ll highlight strategy and his response to listener questions.

The fund focuses on “money good” securities. Those are securities where, if held to maturity, he’s confident that he’ll get his entire principal and all of the interest due to him. They’re the sorts of securities where, if the issuer files for bankruptcy, he still anticipates eventually receiving his principal and interest plus interest on his interest. Because he expects to be able to hold securities to maturity, he doesn’t care about “the taper” and its effects – he’ll simply hold on through any kerfuffle and benefit from regular payments that flow in much like an annuity stream. These are, he says, bonds that he’d have his mother hold.

Given that David’s mother was one of the early investors in the fund, these are bonds his mother holds. He joked that he serves as a sort of financial guarantor for her standard of living (if her portfolio doesn’t produce sufficient returns to cover her expenses, he has to reach for his checkbook), he’s very motivated to get this right.

While the fund might hold a variety of securities, they hold little international exposure and no emerging markets debt. They’re primarily invested in North American (77%) and European(14%) corporate debt, in firms where the accounting is clear and nations where the laws are. The fund’s investment mandate is very flexible, so they can actively hedge portfolio positions (and might) and they can buy income-producing equities (but won’t).

The portfolio focuses on non-investment grade securities, mostly in the B – BB range, but that’s consistent with his intention not to lose his investors’ money. He values liquidity in his investments; that is to say, he doesn’t get into investments that he can’t quickly get out of. The fund has been letting cash build, and it’s now about 30% of the portfolio. David’s general preference is to get out too early and lose some potential returns, rather than linger too long and suffer the risk of permanent impairment.

There were rather more questions from callers than we had time to field. Some of the points we did get to talk about:

David is not impressed with the values available in one- to three-year bonds, they’ve been subject to too much buying by the anxious herd. He’s currently finding better values in three- to five-year bonds, especially those which are not included in the major bond indexes. There is, he says, “a lot of high yield value outside of indexed issues.”

About 50% of the corporate bond market qualifies as “high yield,” which gives him lots of opportunities.

This could function as one’s core bond portfolio. While there will be more NAV volatility because of mark-to-market rules (that is, you have to ask “what would I get if I stupidly decided to sell my entire portfolio in the midst of a particular day’s market panic”), the risk of permanent impairment of capital occurs only if he’s made a mistake.

Munis are a possibility, but they’re not currently cheap enough to be attractive.

If there’s a limited supply of a security that would be appropriate for both Short-Term and here, Short-Term gets dibs.

Cohanzick is really good at pricing their portfolio securities. At one level, they use an independent pricing service. At another, getting the price right has been a central discipline since the firm’s founding and he’s comfortable with his ability to do so even with relatively illiquid names.

At base, David believes the fund can generate returns in the 7-8% range with minimal risk of capital loss. Given his record with Cohanzick and RPHYX, we are confident that he’s capable of delivering on that promise. By way of full disclosure: In aligning our mouths and our money, both Chip and I added RSIVX to our personal portfolios this fall. Once we work out all of the Observer’s year-end finances, we also intend to transfer a portion of the money now in MFO’s credit union savings account into an investment in this fund.

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

The RSIVX conference call

As with all of these funds, we’ve created a new featured funds page for the RiverPark Strategic Income Fund, pulling together all of the best resources we have for the fund.

January Conference Call: Matt Moran, ASTON River Road Long/Short

Last winter we spent time talking with the managers of really promising hedged funds, including a couple who joined us on conference calls. The fund that best matched my own predilections was ASTON River Road Long/Short (ARLSX), extensive details on which appear on our ARLSX Featured Fund Page. In our December 2012 call, manager Matt Moran argued that:

The fund might outperform the stock market by 200 bps/year over a full, 3-5 year market cycle.
The fund can maintain a beta at 0.3 to 0.5, in part because of their systematic Drawdown Plan.
Risk management is more important than return management, so all three of their disciplines are risk-tuned.

I was sufficiently impressed that I chose to invest in the fund. That does not say that we believe this is “the best” long/short fund (an entirely pointless designation), just that it’s the fund that best matched my own concerns and interests. The fund returned 18% in 2013, placing it in the top third of all long/short funds.

Matt and co-manager Dan Johnson have agreed to join us for a second conversation. That call is scheduled for Wednesday, January 15, from 7:00 – 8:00 Eastern. Please note that this is one day later than our original announcement. Matt has been kicking around ideas for what he’d like to talk about. His short-list includes:

How we think about our performance in 2013 and, in particular, why we’re satisfied with it given our three mandates (equity-like returns, reduced volatility, capital preservation)
Where we are finding value on the long side. It’s a struggle…
How we’re surviving on the short side. It’s a huge challenge. Really, how many marginal businesses can keep hanging on because of the Fed’s historic generosity? Stocks must ultimately earn what underlying business earns and a slug of these firms are earning …
But, too, our desire not to be carried out in body bags on short side.
The fact that we sleep better at night with Drawdown Plan in place.

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.

For those of you new to our conference calls, here’s the short version: we set up an audio-only phone conversation, you register and receive an 800-number and a PIN, our guest talks for about 20 minutes on his fund’s genesis and strategy, I ask questions for about 20, and then our listeners get to chime in with questions of their own. A couple days later we post an .mp3 of the call and highlights of the conversation.

WOULD AN ADDITIONAL HEADS UP HELP?

Over two 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.

February Conference Call: Joshua B. Parker and Alan Salzbank, RiverPark / Gargoyle Hedged Value

We extend our conversation with hedged fund managers in a conversation with Messrs. Parker and Salzbank, whose RiverPark / Gargoyle Hedged Value (RGHVX) we profiled last June, but with whom we’ve never spoken.

insight

Gargoyle is a converted hedge fund. The hedge fund launched in 1999 and the strategy was converted to a mutual fund on April 30, 2012. Rather than shorting stocks, the strategy is to hold a diversified portfolio mid- to large-cap value stocks, mostly domestic, and to hedge part of the stock market risk by selling a blend of index call options. That value focus is both distinctive and sensible; the strategy’s stock portfolio has outperformed the S&P500 by 4.5% per year over the past 23 years. The options overlay generates 1.5 – 2% in premium income per month. The fund ended 2013 with a 29% gain, which beat 88% of its long/short peers.

That call is scheduled for Wednesday, February 12, from 7:00 – 8:00 Eastern. We’ll provide additional details in our February issue.

HOW CAN YOU JOIN IN?

Launch Alert: Vanguard Global Minimum Volatility Fund (VMVFX)

Vanguard Global Minimum Volatility Fund (VMVFX) launched on December 12, 2013. It’s Vanguard’s answer to the craze for “smart beta,” a strategy that seemingly promises both higher returns and lower risk over time. Vanguard dismisses the possibility with terms like “new-age investment alchemy,” and promise instead to provide reasonable returns with lower risk than an equity investor would otherwise be subject to. They are, they say, “trying to deliver broadly diversified exposure to the equity asset class, with lower average volatility over time than the market. We will use quantitative models to assess the expected volatility of stocks and correlation to one another.” They also intend to hedge currency risk in order to further dampen volatility.

Most portfolios are constructed with an eye to maximizing returns within a set of secondary constraints (for example, market cap). Volatility is then a sort of fallout from the system. Vanguard reverses the process here by working to minimize the volatility of an all-equity portfolio within a set of secondary constraints dealing with diversification and liquidity. Returns are then a sort of fallout from the design. Vanguard recently explained the fund’s distinctiveness in Our new fund offering: What it is and what it isn’t.

The fund will be managed by James D. Troyer, James P. Stetler, and Michael R. Roach. They are members of the management teams for about a dozen other Vanguard funds.

The Investor share class has a $3,000 minimum initial investment. The opening expense ratio is 0.30%.

MFS made its first foray into low-volatility investing this month, launching MFS Low Volatility Equity (MLVAX) and MFS Low Volatility Global Equity (MVGAX) just one week before Vanguard. The former will target a volatility level that is 20% lower than that of the S&P 500 Index over a full market cycle, while the latter will target 30% less volatility than the MSCI All Country World Index. The MFS funds charge about four times what Vanguard does.

Launch Alert II: Meridian Small Cap Growth Advisor (MSGAX)

Meridian Small Cap Growth Fund launched on December 16^th. The prospectus says very little about what the managers will be doing: “The portfolio managers apply a ‘bottom up’ fundamental research process in selecting investments. In other words, the portfolio managers analyze individual companies to determine if a company presents an attractive investment opportunity and if it is consistent with the Fund’s investment strategies and policies.”

Nevertheless, the fund warrants – and will receive – considerable attention because of the pedigree of its managers. Chad Meade and Brian Schaub managed Janus Triton (JATTX) together from 2006 – May 2013. During their tenure, they managed to turn an initial $10,000 investment into $21,400 by the time they departed; their peers would have parlayed $10,000 into just over $14,000. The more remarkable fact is that the managed it with a low turnover (39%, half the group average), relatively low risk (beta = .80, S.D. about 3 points below their peers) strategy. Understandably, the fund’s assets soared to $6 billion and it morphed from focused on small caps to slightly larger names. Regrettably, Janus decided that wasn’t grounds for closing the fund.

Messrs Meade and Schaub joined Arrowpoint Partners in May 2013. Arrowpoint famously is the home of a cadre of Janus alumni (or escapees, depending): David Corkins, Karen Reidy, Tony Yao, Minyoung Sohn and Rick Grove. Together they managed over $2 billion. In June, they purchased Aster Investment Management, advisor to the Meridian funds, adding nearly $3 billion more in assets. We’ll reach out to the Arrowpoint folks early in the new year.

The Advisor share class is available no-load and NTF through brokerages like Scottrade, with a $2,500 minimum initial investment. The opening expense ratio is 1.60%.

Funds in Registration

Funds in registration this month are eligible to launch in March, 2014 and some of the prospectuses do highlight that date.

And there were a lot of funds targeting a year-end launch. Every day David Welsch, firefighter/EMT/fund researcher, scours new SEC filings to see what opportunities might be about to present themselves. This month he tracked down 15 no-load retail funds in registration, which represents our core interest. That number is down from what we’d normally see because these funds won’t launch until February 2014; whenever possible, firms prefer to launch by December 30^th and so force a lot of funds into the pipeline in October.

Interesting entries this month include:

Artisan High Income Fund will invest in high yield corporate bonds and debt. There are two major distinctions here. First, it is Artisan’s first fixed-income fund. Second, Artisan has always claimed that they’re only willing to hire managers who will be “category-killers.” If you look at Artisan’s returns, you’ll get a sense of how very good they are at that task. Their new high-yield manager, and eventual head of a new, autonomous high-yield team, is Bryan C. Krug who ran the $10 billion, five star Ivy High Income Fund (WHIYX) for the past seven years. The minimum initial investment will be $1000 for Investor shares and $250,000 for Advisor shares. The initial expense ratio will be 1.25% for both Investor and Advisor shares.

Brown Advisory Japan Alpha Opportunities Fund will pursue total return by investing principally in Japanese stocks. The fund will be constructed around a series of distinct “sleeves,” each with its own distinct risk profile but they don’t explain what they might be. They may invest in common and preferred stock, futures, convertibles, options, ADRs and GDR, REITs and ETFs. While they advertise an all-cap portfolio, they do flag small cap and EM risks. The fund will be managed by a team from Wellington Management. The minimum initial investment will be $5000. The initial expense ratio will be 1.36%.

Perritt Low Priced Stock Fund will pursue long-term capital appreciation by investing in small cap stocks priced at $15 or less. I’m a bit ambivalent but could be talked into liking it. The lead manager also runs Perritt Microcap (PRCGX) and Ultra MicroCap (PREOX), both of which are very solid funds with good risk profiles. Doubtless he can do it here. That said, the whole “under $15” thing strikes me as a marketing ploy and a modestly regrettable one. What benefit does that stipulation really offer the investors? The minimum initial investment will be $1000, reduced to $250 for all sorts of good reasons, and the initial expense ratio will be 1.5%.

Manager Changes

On a related note, we also tracked down 40 fund manager changes. The most intriguing of those include what appears to be the abrupt dismissal of Ken Feinberg, one of the longest-serving managers in the Davis/Selected Funds, and PIMCO’s decision to add to Bill Gross’s workload by having him fill in for a manager on sabbatical.

Updates

There are really very few emerging markets investors which whom I’d trust my money. Robert Gardiner and Andrew Foster are at the top of the list. There are notable updates on both this month.

Grandeur Peak Emerging Opportunities (GPEOX) launched two weeks ago, hasn’t released a word about its portfolio, has earned one half of one percent for its investors . . . and has drawn nearly $100 million in assets. Mr. Gardiner and company have a long-established plan to close the fund at $200 million. I’d encourage interested parties to (quickly!) read our review of Grandeur Peak’s flagship Global Reach fund. If you’re interested in a reasonably assertive, small- to mid-cap fund, you may have just a few weeks to establish your account before the fund closes. The advisor does not intend to market the fund to the general public until February 1, by which time it might well be at capacity.

Investors understandably assume that an e.m. small cap fund is necessarily, and probably substantially, riskier than a more-diversified e.m. fund. That assumption might be faulty. By most measures (standard deviation and beta, for example) it’s about 15% more volatile than the average e.m. fund, but part of that volatility is on the upside. In the past five years, emerging markets equities have fallen in six of 20 quarters. We can look at the performance of DFA’s semi-passive Emerging Markets Small Cap Fund (DEMSX) to gauge the downside of these funds.

DFA E.M. Small Cap …	No. of quarters
Falls more	2
Fall equally (+/- 25 bps)	1
Falls less	2
Rises	1

The same pattern is demonstrated by Templeton E.M. Small Cap (TEMMX): higher beta but surprising resilience in declining quarters. For aggressive investors, a $2,000 foot-in-the-door position might well represent a rational balance between the need for more information and the desire to maintain their options.

Happily, there’s an entirely-excellent alternative to GPEOX and it’s not (yet) near closing to new investors.

Seafarer Overseas Growth & Income (SFGIX and SIGIX) is beginning to draw well-earned attention. Seafarer offers a particularly risk-conscious approach to emerging markets investing. It offers a compact (40 names), all-cap portfolio (20% in small- and microcap names and 28% in mid-caps, both vastly higher than its peers) that includes both firms domiciled in the emerging markets (about 70%) and those headquartered in the developing world but profiting from the emerging one (30%). It finished 2013 up 5.5%, which puts it in the top tier of all emerging markets funds.

That’s consistent with both manager Andrew Foster’s record at his former charge (Matthews Asian Growth & Income MACSX which was one of the two top Asian funds in existence through his time there) and Seafarer’s record since launch (it has returned 20% since February 2012 while its average peer made less than 4%). Assets had been growing briskly through the fund’s first full year, plateaued for much of 2013 then popped in December: the fund moved from about $40 million in AUM to $55 million in a very short period. That presumably signals a rising recognition of Seafarer’s strength among larger investors, which strikes me as a very good thing for both Seafarer and the investors.

On an unrelated note, Oakseed Opportunity (SEEDX) has added master limited partnerships to its list of investable securities. The guys continue negotiating distribution arrangements; the fund became available on the Fidelity platform in the second week of December, 2013. They were already available through Schwab, Scottrade, TDAmeritrade and Vanguard.

Briefly Noted . . .

The Gold Bullion Strategy Fund (QGLDX) has added a redemption fee of 2.00% for shares sold within seven days of purchase because, really, how could you consider yourself a long-term investor if you’re not willing to hold for at least eight days?

Legg Mason Capital Management Special Investment Trust (LMSAX) will transition from being a small- and mid-cap fund to a small cap and special situations fund. The advisor warns that this will involve an abnormal turnover in the portfolio and higher-than-usual capital gains distributions. The fund has beaten its peers precisely twice in the past decade, cratered in 2007-09, got a new manager in 2011 and has ascended to … uh, mediocrity since then. Apparently “unstable” and “mediocre” is sufficient to justify someone’s decision to keep $750 million in the fund.

PIMCO’s RealRetirement funds just got a bit more aggressive. In an SEC filing on December 30, PIMCO shifted the target asset allocations to increase equity exposure and decrease real estate, commodities and fixed income. Here’s the allocation for an individual with 40 years until retirement

	New allocation	Old allocation
Stocks	62.5%, with a range of 40-70%	55%, same range
Commodities & real estate	20, range 10-40%	25, same range
Fixed income	17.5, range 10-60%	20, same range

Real estate and commodities are an inflation hedge (that’s the “real” part of RealRetirement) and PIMCO’s commitment to them has been (1) unusually high and (2) unusually detrimental to performance.

SMALL WINS FOR INVESTORS

Effective January 2, 2014, BlackRock U.S. Opportunities Portfolio (BMEAX) reopened to new investors. Skeptics might note that the fund is large ($1.6 billion), overpriced (1.47%) and under-performing (having trailed its peers in four of the past five years), which makes its renewed availability a distinctly small win.

Speaking of “small wins,” the Board of Trustees of Buffalo Funds has approved a series of management fees breakpoints for the very solid Buffalo Small Cap Fund (BUFSX). The fund, with remains open to new investors despite having nearly $4 billion in assets, currently pays a 1.0% management fee to its advisor. Under the new arrangement, the fee drops by five basis points for assets from $6 to $7 billion, another five for assets from $7-8 and $8-9 then it levels out at 80 bps for assets over $9 billion. Those gains are fairly minor (the net fee on the fund at $7 billion is $69.5 million under the new arrangement versus $70 million under the old) and the implication that the fund might remain open as it swells is worrisome.

Effective January 1, 2014, Polaris Global Value Fund (PGVFX) has agreed to cap operating expenses at 0.99%. Polaris, a four-star fund with a quarter billion in assets, currently charges 1.39% so the drop will be substantial.

The investment minimum for Institutional Class shares of Yacktman Focused Fund (YAFFX) has dropped from $1,000,000 to $100,000.

Vanguard High-Yield Corporate Fund (VWEHX) has reopened to new investors. Wellington Management, the fund’s advisor, reports that “Cash flow to the fund has subsided, which, along with a change in market conditions, has enabled us to reopen the fund.”

CLOSINGS (and related inconveniences)

Driehaus Select Credit Fund (DRSLX) will close to most new investors on January 31, 2014. The strategy capacity is about $1.5 billion and the fund already holds $1 billion, with more flowing in, so they decided to close it just as they closed its sibling, Driehaus Active Income (LCMAX). You might think of it as a high-conviction, high-volatility fixed income hedge fund.

Hotchkis & Wiley Mid-Cap Value (HWMIX) is slated to close to new investors on March 1, 2014. Ted, our board’s most senior member, opines “Top notch MCV fund, 2.8 Billion in assets, and superior returns.” I nod.

Sequoia (SEQUX) closed to new investors on December 10^th. Their last closure lasted 25 years.

Vanguard Capital Opportunity Fund (VHCOX), managed by PRIMECAP Management Company, has closed again. It closed in 2004, opened the door a crack in 2007 and fully reopened in 2009. Apparently the $2 billion in new assets generated a sense of concern, prompting the reclosure.

OLD WINE, NEW BOTTLES

Aberdeen Diversified Income Fund (GMAAX), a tiny fund distinguished more for volatility than for great returns, can now invest in closed-end funds. Two other Aberdeen funds, Dynamic Allocation (GMMAX) and Diversified Alternatives (GASAX), are also now permitted to invest, to a limited extent, in “certain direct investments” and so if you’ve always wanted exposure to certain direct investments (as opposed to uncertain ones), they’ve got the funds for you.

American Independence Core Plus Fund (IBFSX) has changed its name to the American Independence Boyd Watterson Core Plus Fund, presumably in the hope that the Boyd Watterson name will work marketing magic. Not entirely sure why that would be the case, but there it is.

Effective December 31, 2013, FAMCO MLP & Energy Income Fund became Advisory Research MLP & Energy Income Fund. Oddly, the announcement lists two separate “A” shares with two separate ticker symbols (INFIX and INFRX).

In February Compass EMP Long/Short Fixed Income Fund (CBHAX) gets rechristened Compass EMP Market Neutral Income Fund and it will no longer be required to invest at least 80% in fixed income securities. The change likely reflects the fact that the fund is underwater since its November 2013 inception (its late December NAV was $9.67) and no one cares (AUM is $28 million).

In yet another test of my assertion that giving yourself an obscure and nonsensical name is a bad way to build a following (think “Artio”), ING reiterated its plan to rebrand itself as Voya Financial. The name change will roll out over the first half of 2014.

As of early December, Gabelli Value Fund became Gabelli Value 25 Fund (GABVX). And no, it does not hold 25 stocks (the portfolio has nearly 200 names). Here’s their explanation: “The name change highlights the Fund’s overweighting of its core 25 equity positions and underscores the upcoming 25^th anniversary of the Fund’s inception.” And yes, that does strike me as something that The Mario came up with and no one dared contradict.

GMO, as part of a far larger fund shakeup (see below), has renamed and repurposed four of its institutional funds. GMO International Core Equity Fund becomes GMO International Large/Mid Cap Equity Fund, GMO International Intrinsic Value Fund becomes GMO International Equity Fund, GMO International Opportunities Equity Allocation Fund becomes GMO International Developed Equity Allocation Fund, and GMO World Opportunities Equity Allocation Fund morphs (slightly) into GMO Global Developed Equity Allocation Fund, all on February 12, 2014. Most of the funds tweaked their investment strategy statements to comply with the SEC’s naming rules which say that if you have a distinct asset class in your name (large/midcap equity), you need to have at least 80% of your portfolio in that class.

Effective February 28, MainStay Intermediate Term Bond Fund (MTMAX) becomes MainStay Total Return Bond Fund.

Nuveen NWQ Flexible Income Fund (NWQIX), formerly Nuveen NWQ Equity Income Fund has been rechristened as Nuveen NWQ Global Equity Income Fund, with James Stephenson serving as its sole manager. If you’d like to get a sense of what “survivorship bias” looks like, you might check out Nuveen’s SEC distributions filing and count the number of funds with lines through their names.

Old Westbury Global Small & Mid Cap Fund (OWSMX) has been rechristened as Old Westbury Small & Mid Cap Fund. It’s no longer required to have a global portfolio, but might. It’s been very solid, with about 20% of its portfolio in ETFs and the rest in individual securities.

At the meeting on December 3, 2013, the Board approved a change in Old Westbury Global Opportunities Fund’s (OWGOX) name to Old Westbury Strategic Opportunities Fund. Let’s see: 13 managers, $6 billion in assets, and a long-term record that trails 70% of its peers. Yep, a name change is just what’s needed!

OFF TO THE DUSTBIN OF HISTORY

Jeez, The Shadow is just a wild man here.

On December 6, 2013, the Board of the Conestoga Funds decided to close and liquidate the Conestoga Mid Cap Fund (CCMGX), effective February 28, 2014. At the same time, they’re launched a SMid cap fund with the same management team. I wrote the advisor to ask why this isn’t just a scam to bury a bad track record and get a re-do; they could, more easily, just have amended Mid Cap’s principal investment strategy to encompass small caps and called it SMid Cap. They volunteered to talk then reconsidered, suggesting that they’d be freer to walk me through their decision once the new fund is up and running. I’m looking forward to the opportunity.

Dynamic Energy Income Fund (DWEIS), one of the suite of former DundeeWealth funds, was liquidated on December 31, 2013.

Fidelity has finalized plans for the merger of Fidelity Europe Capital Appreciation Fund (FECAX) into Fidelity Europe Fund (FIEUX), which occurs on March 21.

The institutional firm Grantham, Mayo, van Otterloo (GMO) is not known for precipitous action, so their December announcement of a dozen fund closures is striking. One set of funds is simply slated to disappear:

Liquidating Fund	Liquidation Date
GMO Real Estate Fund	January 17, 2014
GMO U.S. Growth Fund	January 17, 2014
GMO U.S. Intrinsic Value Fund	January 17, 2014
GMO U.S. Small/Mid Cap Fund	January 17, 2014
GMO U.S. Equity Allocation Fund	January 28, 2014
GMO International Growth Equity Fund	February 3, 2014
GMO Short-Duration Collateral Share Fund	February 10, 2014
GMO Domestic Bond Fund	February 10, 2014

In addition, the Board has approved the termination of GMO Asset Allocation International Small Companies Fund and GMO International Large/Mid Cap Value Fund, neither of which had commenced operations.

They then added two sets of fund mergers: GMO Debt Opportunities Fund into GMO Short-Duration Collateral Fund (with the freakish coda that “GMO Short-Duration Collateral Fund is not pursuing an active investment program and is gradually liquidating its portfolio” but absorbing Debt Opportunities gives it reason to live) and GMO U.S. Flexible Equities Fund into GMO U.S. Core Equity Fund, which is expected to occur on or about January 24, 2014.

Not to be outdone, The Hartford Mutual Funds announced ten fund mergers and closures themselves. Hartford Growth Fund (HGWAX) is merging with Hartford Growth Opportunities Fund (HGOAX), Hartford Global Growth (HALAX) merges with Hartford Capital Appreciation II (HCTAX) and Hartford Value (HVFAX) goes into Hartford Value Opportunities (HV)AX), all effective April 7, 2014. None of which, they note, requires shareholder approval. I have real trouble seeing any upside for the funds’ investors, since most going from one sub-par fund into another and will see expenses drop by just a few basis points. The exceptions are the value funds, both of which are solid and economically viable on their own. In addition, Hartford is pulling the plug on its entire target-date retirement line-up. The funds slated for liquidation are Hartford Target Retirement 2010 through 2050. That dirty deed will be done on June 30, 2014.

Highbridge Dynamic Commodities Strategy Fund (HDSAX) is slated to be liquidated and dissolved (an interesting visual image) on February 7, 2014. In the interim, it’s going to cash.

John Hancock Sovereign Investors Fund (SOVIX) will merge into John Hancock Large Cap Equity Fund (TAGRX), on or about April 30, 2014.

Principal SmallCap Growth Fund II (PPMIX) will be absorbed by SmallCap Growth Fund I (PGRTX) on or about April 25, 2014.

It’s with some sadness that we bid adieu to Tom Kerr and his Rocky Peak Small Cap Value Fund (RPCSX), which liquidated on December 30. The fund sagged from “tiny” to “microscopic” by the end of its run, with under a million in assets. Its performance in 2013 was pretty much calamitous, which was both curious and fatal. Tom was an experienced manager and sensible guy who will, we hope, find a satisfying path forward.

In a sort of three-for-one swap, Pax World International Fund (PXIRX) and Pax MSCI EAFE ESG Index ETF (EAPS) are merging to form the Pax World International ESG Index Fund.

On October 21, 2013, the Board of Directors of the T. Rowe Price Summit GNMA Fund (PRSUX) approved a proposed merger with, and into, T. Rowe Price GNMA Fund (PRGMX).

The Vanguard Managed Payout Growth Focus Fund (VPGFX) and Vanguard Managed Payout Distribution Focus Fund (VPDFX) are each to be reorganized into the Vanguard Managed Payout Growth and Distribution Fund (VPGDX) on or about January 17, 2014.

W.P. Stewart & Co. Growth Fund (WPSGX) is merging into the AllianceBernstein Concentrated Growth Fund (WPCSX), which has the same manager, investment discipline and expenses of the WPS fund. Alliance acquired WPS in December, so the merger was a sort of foregone conclusion.

Wegener Adaptive Growth Fund (WAGFX) decided, on about three days’ notice, to close and liquidate at the end of December, 2013. It had a couple very solid years (2008 and 2009) then went into the dumper, ending with a portfolio smaller than my retirement account.

A small change

Our navigation menu is growing. If you look along the top of our page, you’ll likely notice that “Featured Funds” is no longer a top-level menu item. Instead the “Featured Funds” category can now be found under the “Fund” or “The Best” menus. Replacing it as a new top-level menu is “Search Tools”, which is the easiest way to directly access new search functionality that Accipiter, Charles, and Chip have been working on for the past few months.

Under Search Tools, you’ll find:

Risk Profile – designed to help you understand the different measures of a fund’s risk profile. No one measure of risk captures the full picture and most measures of risk are not self-explanatory. Our Risk Profile reporter allows you to enter a single ticker symbol for any fund and it will generate a short, clear report, in simple, conversational English, that walks you through the various means of risk and returns and will provide you with the profiles for a whole range of possible benchmarks. Alternatively, entering multiple ticker symbols will return a tabular results page, making side-by-side comparisons more convenient.
Great Owls – allows you to screen our Great Owl Funds – those which have top tier performance in every trailing period of three years or more – by category or profile. We know that past performance should never be the primary driver of your decision-making, but working from a pool of consistently superior performers and learning more about their risk-return profile strikes us as a sensible place to start.
Fund Dashboard – a snapshot of all of the funds we’ve profiled, is updated monthly and is available both as a .pdf and as a searchable and sortable search.
Miraculous Multi-Search – Accipiter’s newest screening tool helps us search Charles’ database of risk elements. Searches are available by fund name, category, risk group and age group. There’s even an option to restrict the results to GreatOwl funds. Better yet, you can search on multiple criteria and further refine your results list by choosing to hide certain results.

In Closing . . .

Thank you, dear friends. It’s been a remarkable year. In December of 2012, we served 9000 readers. A year later, 24,500 readers made 57,000 visits to the Observer in December – a gain of 150%. The amount of time readers spend on site is up, too, by about 50% over last year. The percentage of new visitors is up 57%. But almost 70% of visits are by returning readers.

It’s all the more striking because we’re the antithesis of a modern news site: our pieces tend to be long, appear once a month and try to be reflective and intelligent. NPR had a nice piece that lamented the pressure to be “first, loud and sensational” (This is (not) the most important story of the year, 12/29/2013). The “reflective and intelligent” part sort of reflects our mental image of who you are.

We’ve often reminded folks of their ability to help the Observer financially, either through our partnership with Amazon (they rebate us about 7% of the value of items purchased through our link) or direct contributions. Those are both essential and we’re deeply grateful to the dozens of folks who’ve acted on our behalf. This month we’d like to ask for a different sort of support, one which might help us make the Observer better in the months ahead.

Would you tell us a bit about who you are and why you’re here? We do not collect any information about you when you visit. The cosmically-talented Chip found a way to embed an anonymous survey directly in this essay, so that you could answer a few questions without ever leaving the comfort of your chair. What follows are six quick questions. We’re setting aside questions about our discussion board for now, since it’s been pretty easy to keep in touch with the folks there. Complete as many as you’re comfortable with.

Create your free online surveys with SurveyMonkey , the world’s leading questionnaire tool.

We’ll share as soon as we hear back from you.

Thanks to Deb (the first person ever to set up an automatic monthly contribution to the site, which was really startling when we found out), to David and the other contributors scattered (mostly) in warm states (and Indianapolis), and to friends who’ve shared books, cookies, well-wishes and holiday cheer.

Finally, thanks to the folks whose constant presence makes the Observer happen: the folks who’ve spent this entire century supporting the discussion board (BobC, glampig, rono, Slick, the indefatigable Ted, and Whakamole among them) and the hundred or so folks regularly on the board; The Shadow, who can sense the presence of interesting SEC filings from a mile away; Accipiter, whose programming skills – generally self-taught – lie behind our fund searches; Ed, who puzzles and grumbles; Charles, who makes data sing; and the irreplaceable Chip, friend, partner and magician. I’m grateful to you all and look forward to the adventures of the year ahead.

As ever,

David

RiverPark Strategic Income Fund (RSIVX), January 2014

Objective and strategy

The fund is seeking high current income and capital appreciation consistent with the preservation of capital. The manager does not seek the highest available return. He’s pursuing 7-8% annual returns but he will not “reach for returns” at the risk of loss of capital. The portfolio will generally contain 30-40 fixed income securities, all designated as “money good” but the majority also categorized as high-yield. There will be limited exposure to corporate debt in other developed nations and no direct exposure to emerging markets. While the manager has the freedom to invest in equities, they are unlikely ever to occupy a noticeable slice of the portfolio.

Adviser

RiverPark Advisors, LLC. RiverPark was formed in 2009 by former executives of Baron Asset Management. The firm is privately owned, with 84% of the company being owned by its employees. They advise, directly or through the selection of sub-advisers, the seven RiverPark funds.

Manager

David K. Sherman, president and founder of the subadvisor, Cohanzick Management, LLC. Mr. Sherman founded Cohanzick in 1996 after a decade spent in various director and executive positions with Leucadia National Corporation. Mr. Sherman has a B.S. in Business Administration from Washington University and an odd affection for the Philadelphia Eagles. He is also the manager of the recently soft-closed RiverPark Short Term High Yield Fund (RPHYX).

Strategy capacity and closure

The strategy has a capacity of about $2 billion but its execution requires that the fund remain “nimble and small.” As a result, management will consider asset levels and fund flows carefully as they move in the vicinity of their cap.

Management’s stake in the fund

Collectively the professionals at RiverPark and Cohanzick have invested more than $3 million in the fund, including $2.5 million in “seed money” from Mr. Sherman and RiverPark’s president, Morty Schaja. Both men are increasing their investment in the fund with a combination of “new money” and funds rebalanced from other investments.

Opening date

September 30, 2013

Minimum investment

$1,000 minimum initial investment for retail shares. There is no minimum for subsequent investments if payment is mailed by check; otherwise the minimum is $100.

Expense ratio

1.25% after waivers of 0.40% on assets of $116 million (as of December, 2013).

Comments

RiverPark Strategic Income has a simple philosophy, an understandable strategy and a hard-to-explain portfolio. The combination is, frankly, pretty compelling.

The philosophy: don’t get greedy. After a quarter century of researching and investing in distressed, high-yield and special situations fixed income securities, Mr. Sherman has concluded that he can either make 7% with minimal risk of permanent loss, or he could shoot for substantially higher returns at the risk of losing your money. He has consistently and adamantly chosen the former.

The strategy: invest in “money good” fixed-income securities. “Money good” securities are where the manager is very sure (very, very sure) that he’s going to get 100% of his principal and interest back, no matter what happens. That means 100% if the market tanks. And it means a bit more than 100% if the issuer goes bankrupt, since he’ll invest in companies whose assets are sufficient that, even in bankruptcy, creditors will eventually receive their principal plus their interest plus their interest on their interest.

Such securities take a fair amount of time to ferret out and might occur in relatively limited quantities, so that some of the biggest funds simply cannot pursue them. But, once found, they generate an annuity-like stream of income for the fund regardless of market conditions.

The portfolio: in general, the fund is apt to dwell somewhere near the border of short- and intermediate-term bonds. The fact that shorter duration bonds became the investment du jour for many anxious investors in 2013 meant that they were bid up to unreasonable levels, and Mr. Sherman found greater value in 3- to 5-year issues.

The manager has a great deal of flexibility in investing the fund’s assets and often finds “orphaned” issues or other special situations which are difficult to classify. As he and RiverPark’s president, Morty Schaja, reflected on the composition of the portfolio, they imagined six broad categories that might help investors better understand what the fund owns. They are:

Short Term High Yield overlap – securities that are also holdings in the RiverPark Short Term High Yield Fund.
Buy and hold – securities that hold limited credit risk, provide above market yields and might reasonably be held to redemption.
Priority-based – securities from issuers who are in distress, but which would be paid off in full even if the issue were to go bankrupt. Most investors would instinctively avoid such issues but Mr. Sherman argues that they’re often priced at a discount and are sufficiently senior in the capital structure that they’re safe so long as an investor is willing to wait out the bankruptcy process in exchange for receiving full recompense. An investor can, he says, “get paid a lot of money for your willingness to go through the process.” Cohanzick calls these investments “above-the-fray securities of dented credits”.
Off the beaten path – securities that are not widely-followed and/or are less liquid. These might well be issues too small or too inconvenient for a manager responsible for billions or tens of billions of assets, but attractive to a smaller fund.
Rate expectations – securities that present opportunities because of rising or falling interest rates. This category would include traditional floating rate securities and opportunities that present themselves because of a difference between a security’s yield to maturity and yield to worst.
Other – which is all of the … other stuff.

Fixed-income investing shouldn’t be exciting. It should allow you to sleep at night, knowing that your principal is safe and that you’re earning a real return – something greater than the rate of inflation. Few fixed-income funds lately have met those two expectations and the next few years are not likely to be kind to traditional fixed-income funds. RiverPark’s combination of opportunism and conservatism, illustrated in the return graph below, offer a rare and appealing combination.

rsivx

Bottom Line

In all honesty, about 80% of all mutual funds could shut their doors today and not be missed. They thrive by never being bad enough to dump, nominally active funds whose strategy and portfolio are barely distinguishable from an index. The mission of the Observer is to help identify the small, thoughtful, disciplined, active funds whose existence actually matters.

David Sherman runs such funds. His strategies are labor-intensive, consistent, thoughtful, disciplined and profitable. He has a clear commitment to performance over asset gathering, and to caution over impulse. Folks navigating the question “what makes sense in fixed-income investing these days?” owe it to themselves to learn more about RSIVX.

Fund website

RiverPark Funds

RiverPark Strategic Income Fund

Fact Sheet

Disclosure

While the Observer has neither a stake in nor a business relationship with either RiverPark or Cohanzick, both individual members of the Observer staff and the Observer collectively have invested in RPHYX and/or RSIVX.

RiverPark Strategic Income Fund (RSIVX)

The fund:	RiverPark Strategic Income Fund (RSIVX)
Manager:	David Sherman, Cohanzick Management
The call:	On Monday, December 9th, Morty Schaja, RiverPark president, and David Sherman, fund manager, joined me and about 50 Observer readers for an hour-long conversation about the fund and their approach to it. Highlights of the call include: The fund focuses on “money good” securities. Those are securities where, if held to maturity, he’s confident that he’ll get his entire principal and all of the interest due to him. They’re the sorts of securities where, if the issuer files for bankruptcy, he still anticipates eventually receiving his principal and interest plus interest on his interest. Because he expects to be able to hold securities to maturity, he doesn’t care about “the taper” and its effects – he’ll simply hold on through any kerfuffle and benefit from regular payments that flow in much like an annuity stream. These are, he says, bonds that he’d have his mother hold. While the fund might hold a variety of securities, they hold little international exposure and no emerging markets debt. They’re primarily invested in North American (77%) and European(14%) corporate debt, in firms where the accounting is clear and nations where the laws are. The portfolio focuses on non-investment grade securities, mostly in the B – BB range, but that’s consistent with his intention not to lose his investors’ money. He values liquidity in his investments; that is to say, he doesn’t get into investments that he can’t quickly get out of. The fund has been letting cash build, and it’s now about 30% of the portfolio. David’s general preference is to get out too early and lose some potential returns, rather than linger too long and suffer the risk of permanent impairment. There were rather more questions from callers than we had time to field. Some of the points we did get to talk about: David is not impressed with the values available in one- to three-year bonds, they’ve been subject to too much buying by the anxious herd. He’s currently finding better values in three- to five-year bonds, especially those which are not included in the major bond indexes. There is, he says, “a lot of high yield value outside of indexed issues.” About 50% of the corporate bond market qualifies as “high yield,” which gives him lots of opportunities. This could function as one’s core bond portfolio. While there will be more NAV volatility because of mark-to-market rules (that is, you have to ask “what would I get if I stupidly decided to sell my entire portfolio in the midst of a particular day’s market panic”), the risk of permanent impairment of capital occurs only if he’s made a mistake. Munis are a possibility, but they’re not currently cheap enough to be attractive. If there’s a limited supply of a security that would be appropriate for both Short-Term and here, Short-Term gets dibs. Cohanzick is really good at pricing their portfolio securities. At one level, they use an independent pricing service. At another, getting the price right has been a central discipline since the firm’s founding and he’s comfortable with his ability to do so even with relatively illiquid names. At base, David believes the fund can generate returns in the 7-8% range with minimal risk of capital loss. Given his record with Cohanzick and RPHYX, we are confident that he’s capable of delivering on that promise. By way of full disclosure: In aligning our mouths and our money, both Chip and I added RSIVX to our personal portfolios this fall. Once we work out all of the Observer’s year-end finances, we also intend to transfer a portion of the money now in MFO’s credit union savings account into an investment in this fund. The conference call (When you click on the link, the file will load in your browser and will begin playing after it’s partially loaded.)
The profile:	The Mutual Fund Observer profile of RSIVX, December 2013.
Web:	RiverPark Funds website Fund Focus: Resources from other trusted sources

December 1, 2013

Dear friends,

Welcome. Do you think it a coincidence that the holiday season occurs at the least promising time of the year? The days are getting shorter and, for our none-too-distant ancestors, winter represented a period of virtual house arrest. Night was a time of brigands and beasts. Even in the largest cities, respectable folks traveled abroad after dark only with armed guard. In villages and on farms, travel on a clouded night risked disappearance and death. The homes of all but the richest citizens were, contrary to your mental fantasy of roaring hearths and plentiful candles, often a single room that could boast a single flickering rushlight. The hungry months of late winter were ahead.

Yule And so they did what any sensible group would do. They partied. One day’s worth of oil became eight nights’ worth of light; Jewish friends gathered, ate and gifted. Bacchus reigned from our Thanksgiving to the Winter Solstice, and the Romans drank straight through it. The Kalash people of Pakistan sang, danced, lit bonfires and feasted on goat tripe “and other delicacies” (oh, yum!). Chinese and Korean families gathered and celebrated with balls of glutinous rice (more yum!). Welsh friends dressed up like wrens (yuh), and marched from home to home, singing and snacking. Romans in the third century CE celebrated Dies Natalis Solis Invicti (festival of the birth of the Unconquered Sun) on December 25^th, a date later borrowed by Christians for their own mid-winter celebration. Some enterprising soul, having consumed most of the brandy, inexplicably mashed together figs, stale bread and the rest of the brandy. Figgy pudding was born and revelers refused to go until they got some (along with a glass of good cheer).

Few of these celebrations recognized a single day, they brought instead Seasons Greetings. Fewer still celebrated individual success or personal enrichment, they instead brought to the surface the simple truth that we often bury through the rest of the year: we are infinitely poorer alone in our palaces than we are together in our villages.

Season’s greetings, dear friends.

But curb yer enthusiasm

Small investors and great institutions alike are partaking in one of the market’s perennial ceremonies: placing your investments atop an ever-taller pile of dried kindling and split logs. All of the folks who hated stocks when they were cheap are desperate to buy them now that they’re expensive.

We have one word for you: Don’t.

Or, at the very least, don’t buy them until you’re clear why they weren’t attractive to you five years ago but are calling so loudly to you now. We’re not financial planners, much like market visionaries, but some very careful folks forecast disappointment for starry-eyed stock investors in the years ahead.

Sam Lee, editor of Morningstar ETFInvestor, warned investors to “Expect Below-Average Stock Returns Ahead” based on his reading of the market’s cyclically-adjusted price/earnings ratio. He wrote, on November 21, that:

The Shiller P/E recently hit 25. When you invert that you get is another measure that I like: the cyclically adjusted earnings yield. The inverse of the Shiller P/E, 1 divided by 25 is about 0.04, or 4%. And this is the smooth earnings yield of the market. This is actually, I think, a reasonable forecast for what the market can be expected to return during the next 10, 20 years. And a 4% real expected return is well below the historical average of 6.5%.

The Shiller P/E is saying that the market is overvalued relative to history, that you can expect about 2 percentage points less per year over a long period of time. .. if you believe that the market is mean reverting to its historical Shiller P/E, and that the past is a reasonable guide to the future, then you can expect lower returns than the naive 4% forecast return that I provided.

The institutional investors at Grantham, Mayo, van Otterloo (GMO) believe in the same tendency of markets to revert to their mean valuations and profits to revert to their mean levels (that is, firms can’t achieve record profit levels forever – some combination of worker demands to share the wealth and predatory competitors drawn by the prospect of huge profits, will drive them back down). After three years of research on their market projection models, GMO added some factors that slightly increased their estimate of the market’s fair value and still came away from the projection that US stocks are poised to trail inflation for the rest of this decade. Ben Inker writes:

In a number of ways it is a “clean sheet of paper” look at forecasting equities, and we have broadened our valuation approach from looking at valuations through the lens of sales to incorporating several other methods. It results in about a 0.7%/year increase in our forecast for the S&P 500 relative to the old model. On the old model, fair value for the S&P 500 was about 1020 and the expected return for the next seven years was -2.0% after inflation.

On the new model, fair value for the S&P 500 is about 1100 and the expected return is -1.3% per year for the next seven years after inflation. For those interested in the broader U.S. stock market, our forecast for the Wilshire 5000 is a bit worse, at -2.0%, due to the fact that small cap valuations are even more elevated than those for large caps.

In 2013, the average equity investor made inflation plus about 28%. Through the remainder of the decade, optimists might give you inflation plus 2, 3 or 4%. Bearish realists are thinking inflation minus 1 or 2%.

The Leuthold Group, looking at the market’s current valuation, is at most masochistically optimistic: they project that a “normal” bear market, starting now, would probably not trim much more than 25% off your portfolio.

What to do? Diversify, keep expenses aligned with the value added by your managers, seek some income from equities and take time now – before you forget and before some market event makes you want to look away forever – to review your portfolio for balance and performance. As an essential first step, remember the motto:

Off with their heads!

turkey

As the Thanksgiving holiday passes and you begin year-end financial planning, we say it’s time to toss out the turkeys. There are some funds that we’re not impressed with but which have the sole virtue that they’re not rolling disasters. You know: the overpriced, bloated index-huggers that seemed like the “safe” choice long ago. And now, like mold or lichen, they’ve sort of grown on you.

Fine. Keep ‘em if you must. But at least get rid of the rolling disasters you’ve inherited. There are a bunch of funds whose occasional flashes of adequacy and earnest talk of new paradigms, great rotations, sea changes, and contrarian independence simply can’t mask the fact that they suck. A lot. For a long time.

It’s time to work through your portfolio, fund by fund, and answer the simple question: “if I didn’t already own this fund, is there any chance on earth I’d buy it?” If the answer is “no,” sell.

Mutual Fund Observer is an outgrowth of FundAlarm, whose iconic Three Alarm Funds list continually identified the worst of the worst in the fund industry. For the last several years we’ve published our own Roll Call of the Wretched, an elite list of funds whose ineptitude stretches over a decade or more. In response to requests that arrive every month, we’re happy to announce the re-introduction of the Three Alarm Funds list which will remain an ongoing service of the Observer. So here we go!

danger

It’s easy to create lists of “best” and “worst” funds. It’s easier still to screw them up. The two ways that happens is the inclusion of silly criteria and the use of invalid peer groups. As funds become more distinctive and less like the rest of the herd, the risk of such invalid comparisons grows.

Every failing fund manager (or his anxious marketing maven) has an explanation for why they’re not nearly as bad as the evidence suggests. Sometimes they’re right, mostly they’re just sad and confused.

Use lists like the Roll Call of the Wretched or the Three Alarm Funds as a first step, not a final answer. If you see a fund of yours on either list, find out why. Call the adviser, read the prospectus, try the manager’s letter, post a question on our board. There might be a perfectly good reason for their performance, there might be a perfectly awful one. In either case, you need to know.

The Observer’s Annual “Roll Call of the Wretched”

If you’re resident in one of the two dozen states served by Amazon’s wine delivery service, you might want to buck up your courage with a nice 2007 Domaine Gerard Charvin Chateauneuf du Pape Rhône Valley Red before you settle in to enjoy the Observer’s annual review of the industry’s Most Regrettable funds. Just as last year, we looked at funds that have finished in the bottom one-fourth of their peer groups for the year so far. And for the preceding 12 months, three years, five years and ten years. These aren’t merely “below average.” They’re so far below average they can hardly see “mediocre” from where they are.

When we ran the screen in 2011, there were 151 consistently awful funds, the median size for which is $70 million. In 2012 there were . . . 151 consistently awful funds, the median size for which is $77 million. And now? 152 consistently awful funds (I love consistency), the median size of which is $91 million.

Since managers love to brag about the consistency of their performance, here are the most consistently awful funds that have over a billion in assets. Funds repeating from last year are flagged in red.


AllianceBernstein Wealth Appreciation Strategy (AWAAX)	Large blend	1,524	Like many of the Wretched, 2008 was pivotal: decent before, then year after year of bad afterward
CRA Qualified Investment (CRAIX)	Intermediate bond	1,572	Virtue has its price: The Community Reinvestment Act requires banks make capital available to the low- and moderate-income communities in which they operate. That’s entirely admirable but the fund’s investors pay a price: it trails 90% of its intermediate-bond peers.
DWS Equity Dividend A (KDHAX)	Large value	1,234	2012 brought a new team but the same results: its trailed 90% of its peers. The current crew is the 9^th, 10^th and 11^th managers to try to make it work.
Eaton Vance Short Duration Strategy (EVSGX)	Multi-sector bond	2,248	A pricey, closed fund-of-funds whose below-average risk does compensate for much below average returns.
Hussman Strategic Growth (HSGFX)	Long/short equity	1,579	Dr. Hussman is brilliant. Dr. Hussman has booked negative annual returns for the past 1, 3, 5 and 10 years. Both statements are true, you just need to decide which is relevant.
MainStay High Yield Corporate (MKHCX)	High-yield bond	8,811	Morningstar likes it because, despite trailing 80% of its peers pretty much permanently, it does so with little risk.
Pax World Balanced (PAXWX)	Aggressive allocation	1,982	Morningstar analysts cheered for the fund (“worth a look, good option, don’t give up, check this fund out”) right up to the point when they started pretending it didn’t exist. Their last (upbeat) analysis was July 2011.
Pioneer A (PIODX)	Large blend	5,245	The fund was launched in 1928. The lead manager joined in 1986. The fund has sucked since 2007.
Pioneer Mid-Cap Value A (PCGRX)	Mid-cap value	1,107	Five bad years in a row (and a lead manager whose held the job of six years). Coincidence?
Putnam Global Health Care A (PHSTX)	Health	1,257	About 30% international, compared to 10-20% for its peers. That’s a pretty poor excuse for its performance, since it’s not required to maintain an exposure that high.
Royce Low Priced Stock (RYLPX)	Small growth	1,688	A once-fine fund that’s managed three consecutive years in the bottom 5% of its peer group. Morningstar is unconcerned.
Russell LifePoints Equity Growth (RELEX)	World stock	1,041	Has trailed its global peers in 10 of the past 11 years which shows why the ticker isn’t RELAX
State Farm LifePath 2040 (SAUAX)	Target-date	1,144	A fund of BlackRock funds, it manages to trail its peers two years in three
Thrivent Large Cap Stock (AALGX)	Large blend.	1,784	The AAL in the ticker stands for Aid Association for Lutherans. Let me offer even more aid to my Lutheran brethren: buy an index fund.
Wells Fargo Advantage S/T High Yield (STHBX)	High yield	1,537	A really bad benchmark category for a short-term fund. Judged as a short-term bond fund, it pretty consistently clubs the competition.

Some funds did manage to escape this year’s Largest Wretched Funds list, though the strategies vary: some went extinct, some took on new names, one simply shrank below our threshold and a few rose all the way to mediocrity. Let’s look:

BBH Broad Market (BBBMX)	An intermediate bond fund that got a new name, BBH Limited Duration (think of it as entering the witness protection program) and a newfound aversion to intermediate-term bonds, which accounts for its minuscule (under 1%) but peer-beating returns.
Bernstein International (SIMTX)	A new management team guided it to mediocrity in 2013. Even Morningstar recommends that you avoid it.
Bernstein Tax-Managed International (SNIVX)	The same new team as at SIMTX and results just barely north of mediocre.
DFA Two-Year Global Fixed Income (DFGFX)	Fundamentally misclassified to begin with, Morningstar now admits it’s “better as an ultrashort bond fund than a global diversifier.” Which makes you wonder why Morningstar adamantly keeps it as a global bond fund rather than as …
Eaton Vance Strategic Income (ETSIX)	As of November 1, 2013, a new name, a new team and a record about as bad as always.
Federated Municipal Ultrashort (FMUUX)	Another bad year but not quite as awful as usual!
Invesco Constellation	Gone! Merged into Invesco American Franchise (VAFAX). Constellation was, in the early 90s, an esteemed aggressive growth fund and it was the first fund I ever owned. But then it got very, very bad.
Invesco Global Core Equity (AWSAX)	“This fund isn’t headed in the right direction,” quoth Morningstar. Uh, guys? It hasn’t been headed in the right direction for a decade. Why bring it up now? In any case, it escaped our list by posting mediocre but not wretched results in 2013.
Oppenheimer Flexible Strategies (QVOPX)	As bad as ever, maybe worse, but it’s (finally) slipped below the billion dollar threshold.
Thornburg Value A (TVAFX)	Thornburg is having one of its periodic brilliant performances: up 38% over the past 12 months, better than 94% of its peers. Over the past decade it’s had three years in the top 10% of its category and has still managed to trail 75% of its peers over the long haul.

While most Roll Call funds are small enough that they’re unlikely to trouble you, there are 50 more funds with assets between $100 million and a billion. Check to see if any of these wee beasties are lurking around your portfolio:

Aberdeen Select International

AllianceBern Tx-Mgd Wlth Appr

AllianzGI NFJ Mid-Cap Value C

Alpine Dynamic Dividend

BlackRock Intl Bond

BlackRock Natural Resources

Brandywine

Brandywine Advisors Midcap Growth

Brown Advisory Intermediate

ClearBridge Tactical Dividend

CM Advisors

Columbia Multi-Advisor Intl Eq

Davis Government Bond B

Davis Real Estate A

Diamond Hill Strategic Income

Dreyfus Core Equity A

Dreyfus Tax-Managed Growth A

Fidelity Freedom 2000

Franklin Double Tax-Free Income

Gabelli ABC AAA

Gabelli Entpr Mergers & Acquis

GAMCO Global Telecommunication

Guggenheim StylePlus – Lg Core

GuideMark World ex-US Service

GuideStone Funds Cnsrv Allocat

ICON Bond C

Invesco Intl Core Equity

Ivy Small Cap Value A

JHancock Sovereign Investors A

Laudus Small-Cap MarketMasters

Legg Mason Batterymarch Emerging

Madison Core Bond A

Madison Large Cap Growth A

MainStay Government B

MainStay International Equity

Managers Cadence Capital Appre

Nationwide Inv Dest Cnsrv A

Neuberger Berman LgCp Discp Gr

Oppenheimer Flexible Strategie

PACE International Fixed Income

Pioneer Classic Balanced A

PNC Bond A

Putnam Global Utilities A

REMS Real Estate Income 50/50

SEI Conservative Strategy A (S

Sentinel Capital Growth A

Sterling Capital Large Cap Val

SunAmerica GNMA B

SunAmerica Intl Div Strat A

SunAmerica US Govt Securities

Thrivent Small Cap Stock A

Touchstone International Value

Waddell & Reed Government Secs

Wells Fargo Advantage Sm/Md Cap

Morningstar maintains a favorable analyst opinion on three Wretched funds, is Neutral on three (Brandywine BRWIX, Fidelity Freedom 2000 FFFMX and Pioneer PIODX) and Negative on just four (Hussman Strategic Growth HSGFX, Oppenheimer Flexible Strategies QVOPX and two State Farm LifePath funds). The medalist trio are:

Royce Low-Priced Stock RYLPX	Silver: “it’s still a good long-term bet.” Uhh, no. By Morningstar’s own assessment, it has consistently above average risk, below average returns, nearly $2 billion in assets and high expenses. There are 24 larger small growth funds, all higher five year returns and all but one have lower expenses.
AllianzGI NFJ Mid-Cap Value PQNAX	Bronze: “a sensible strategy that should win out over time.” But it hasn’t. NFJ took over management of the fund in 2009 and it continues to trail about 80% of its mid-cap value peers. Morningstar argues that the market has been frothy so of course sensible, dividend-oriented funds trail though the amount of “froth” in the mid-cap value space is undocumented.
MainStay High Yield Corporate MKHCX	Bronze: “a sensible option in a risky category.” We’re okay with that: it captures about 70% of its peers downside and 92% of their upside. Over the long term it trails about 80% of them, banking about 6-7% per year. Because it’s highly consistent and has had the same manager since 2000, investors can at least made an informed judgment about whether that’s a profile they like.

And now (drum roll, please), it’s the return of a much-loved classic …

Three Alarm Funds Redux

alarm bells Roy Weitz first published the legacy Three Alarm fund list in 1996. He wanted to help investors decide when to sell mutual funds. Being on the list was not an automatic sell, but a warning signal to look further and see why.

“I liken the list to the tired old analogy of the smoke detector. If it goes off, your house could be on fire. But it could also be cobwebs in the smoke detector, in which case you just change the batteries and go back to sleep,” he explained in a 2002 interview.

Funds made the list if they trailed their benchmarks for the past 1, 3, and 5 year periods. At the time, he grouped funds into only five equity (large-cap, mid-cap, small-cap, balanced, and international) and six specialty “benchmark categories.” Instead of pure indices, he used actual funds, like Vanguard 500 Index Fund VFINX, as benchmarks. Occasionally, the list would catch some heat because “mis-categorization” resulted in an “unfair” rating. Some things never change.

At the end of the day, however, Mr. Weitz wanted “to highlight the most serious underperformers.” In that spirit, MFO will resurrect the Three Alarm fund list, which will be updated quarterly along with the Great Owl ratings. Like the original methodology, inclusion on the list will be based entirely on absolute, not risk-adjusted, returns over the past 1, 3, and 5 year periods.

Since 1996, many more fund categories exist. Today Morningstar assigns over 90 categories across more than 7500 unique funds, excluding money market, bear, trading, volatility, and specialized commodity. MFO will rate the new Three Alarm funds using the Morningstar categories. We acknowledge that “mis-categorization” may occasionally skew the ratings, but probably much less than if we tried to distill all rated funds into just 11 or so categories.

For more than two-thirds of the categories, one can easily identify a reasonable “benchmark” or reference fund, thanks in part to the proliferation of ETFs. Below is a sample of these funds, sorted first by broad investment Type (FI – Fixed Income, AA – Asset Allocation, EQ – Equity), then Category:

benchmarks

Values in the table include the 3-year annualized standard deviation percentage (STDEV), as well as annualized return percentages (APR) for the past 1, 3, and 5 year periods.

A Return Rating is assigned based how well a fund performs against other funds in the same category during the same time periods. Following the original Three Alarm nomenclature, best performing funds rate a “2” (highlighted in blue) and the worst rate a “-2” (red).

As expected, most of the reference funds rate mid range “0” or slightly better. None produce top or bottom tier returns across all evaluation periods. The same is true for all 60 plus category reference funds. Selecting reference funds in the other 30 categories remains difficult because of their diversity.

To “keep it simple” MFO will include funds on the Three Alarm list if they have the worst returns in their categories across all three evaluation periods. More precisely, Three Alarm Funds have absolute returns in the bottom quintile of their categories during the past 1, 3, and 5 years. Most likely, these funds have also under-performed their “benchmarks” over the same three periods.

There are currently 316 funds on the list, or fewer than 6% of all funds rated. Here are the Three Alarm Funds in the balanced category, sorted by 3 year annualized return:

balanced

Like in the original Three Alarm list, a fund’s Risk Rating is assigned based a “potential bad year” relative to other funds in the same category. A Risk Rating of “2” (highlighted in red) goes to the highest risk funds, while “-2” (blue) goes to the lowest risk funds. (Caution: This rating measures a fund’s risk relative to other funds in same category, so a fund in a high volatility category like energy can have high absolute risk relative to market, even if it has a low risk rating in its category.)

“Risk” in this case is based on the 3 year standard deviation and return values. Specifically, two standard deviations are subtracted from the return value. The result is then compared with other funds in the category to assign a rating. The rating is a little more sensitive to downside than the original measure as investors have experienced two 50% drawdowns since the Three Alarm system was first published.

While never quite as popular as the Three Alarm list, Mr. Weitz also published an Honor Roll list. In the redux system, Honor Roll funds have returns in the top quintile of their categories in the past 1, 3, and 5 years. There are currently 339 such funds.

The Three Alarm, Honor Roll, and Reference funds can all be found in a down-loadable *.pdf version.

06Nov2013/Charles

Funds that are hard to love

Not all regrettable funds are defined by incompetent management. Far from it. Some have records good enough that we really, really wish that they weren’t so hard to love (or easy to despise). High on our list:

Oceanstone Fund (OSFDX)

Why would we like to love it? Five-star rating from Morningstar. Small asset base. Flexible mandate. Same manager since launch. Top 1% returns over the past five years.

What makes it hard to love? The fund is entirely opaque and the manager entirely autocratic. Take, for example, this sentence from the Statement of Additional Information:

Ownership of Securities: As of June 30, 2013, the dollar range of shares in the Fund beneficially owned by James J. Wang and Yajun Zheng is $500,001-$1,000,000.

Mr. Wang manages the fund. Ms. Zheng does not. Nor is she a director or board member; she is listed nowhere else in the prospectus or the SAI as having a role in the fund. Except this: she’s married to Mr. Wang. Which is grand. But why is she appearing in the section of the manager’s share ownership?

Mr. Wang was the only manager to refuse to show up to receive a Lipper mutual fund award. He’s also refused all media attempts to arrange an interview and even the chairman of his board of trustees sounds modestly intimidated by him. His explanation of his investment strategy is nonsense. He keeps repeating the magic 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.

The fund’s portfolio turns over at triple the average rate, consists of just five stocks and a 70% cash stake.

Value Line Asset Allocation Fund (VLAAX)

Why would we like to love it? Five-star rating from Morningstar. Consistency below-average to low risk. Small asset base. Same manager for 20 years. Top tier returns over the past decade.

What makes it hard to love? Putting aside the fact that the advisory firm’s name is “value” spelled backward (“Eulav”? Really guys?), it’s this sentence:

Ownership of Securities. None of the portfolio managers of the Value Line Asset Allocation Fund own shares of the Fund. The portfolio manager of the Value Line Small Cap Opportunities Fund similarly does not own shares of that Fund.

It’s also the fact that I’ve tried, on three occasions, to reach out to the fund’s advisor to ask why no manager ever puts a penny alongside his shareholders but they’ve never responded to any of the queries.

But wait! There’s

goodnews

Four things strike us as quite good:

You probably aren’t invested in any of the really rotten funds!
Even if you are, you know they’re rotten and you can easily get out.
There are better funds – ones more appropriate to your needs and personality – available.
We can help you find them!

Accipiter, Charles and Chip have been working hard to make it easier for you to find funds you’ll be comfortable with. We’d like to share two and have a third almost ready, but we need to be sure that our server can handle the load (we might a tiny bit have precipitated a server crash in November and so we’re being cautious until we can arrange a server upgrade).

The Risk Profile Search is designed to help you understand the different measures of a fund’s risk profile. Most fund profiles reduce a fund’s risks to a single label (“above average”) or a single stat (standard deviation = 17.63). Unfortunately, no one measure of risk captures the full picture and most measures of risk are not self-explanatory (how would you do on a pop quiz over the Martin Ratio?). Our Risk Profile Reporter allows you to enter a single ticker symbol for any fund and it will generate a short, clear report, in simple, conversational English, that walks you through the various means of risk and returns and will provide you with the profiles for a whole range of possible benchmarks. Alternatively, entering multiple ticker symbols will return a tabular results page, making side-by-side comparisons more convenient.

The Great Owl Search Engine allows you to screen our Great Owl Funds – those which have top tier performance in every trailing period of three years or more – by category or profile. We know that past performance should never be the primary driver of your decision-making, but working from a pool of consistently superior performers and learning more about their risk-return profile strikes us as a sensible place to start.

Our Fund Dashboard. a snapshot of all of the funds we’ve profiled, is updated quarterly and is available both as a .pdf and searchable, sortable search.

Accipiter’s Miraculous Multi-Search will, God and server willing, launch by mid-December and we’ll highlight its functions for you in our New Year’s edition.

Touchstone Funds: Setting a high standard on analysis

On November 13, Morningstar published an essay entitled “A Measure of Active Management.” Authored by Touchstone Investments, it’s entirely worth your consideration as one of the most readable walk-throughs available of the literature on active management and portfolio outperformance.

We all know that most actively managed funds underperform their benchmarks, often by more than the amount of their expense ratios. That is, even accounting for an index fund’s low-expense advantage, the average manager seems to actively detract value. Literally, many investors would be better off if their managers were turned to stone (“calling Madam Medusa, fund manager in Aisle Four”), the portfolio frozen and the manager never replaced.

Some managers, however, do consistently earn their keep. While they might or might not produce raw returns greater than those in an index fund, they can fine-tune strategies, moderate risks and keep investors calm and focused.

Touchstone’s essay at Morningstar makes two powerful contributions. First, the Touchstone folks make the criteria for success – small funds, active and focused portfolios, aligned interests – really accessible. Second, they document the horrifying reality of the fund industry: that a greater and greater fraction of all investments are going into funds that profess active management but are barely distinguishable from their benchmarks.

Here’s a piece of their essay:

A surprising take away from the Active Share studies was the clear trend away from higher Active Share (Exhibit 5). The percentage of assets in U.S. equity funds with Active Share less than 60% went from 1.5% in 1980 to 50.2% in 2009. Clearly indexing has had an impact on these results.

Yet mutual funds with assets under management with an Active Share between 20% and 60% (the closet indexers) saw their assets grow from 1.1% in 1980 to 31% in 2009, meaning that closet index funds have seen the greatest proportion of asset growth. Assets in funds managed with a high Active Share, (over 80%), have dropped precipitously from 60% in 1980 to just 19% in 2009.

While the 2009 data is likely exaggerated — as Active Share tends to come down in periods of high market volatility —the longer term trend is away from high Active Share.

Cremers and Petajisto speculate that asset growth of many funds may be one of the reasons for the trend toward lower Active Share. They note that the data reveals an inverse relationship between assets in a fund and Active Share. As assets grow, managers may have a tougher time maintaining high Active Share. As the saying goes “nothing fails like success,” and quite often asset growth can lead to a more narrow opportunity set due to liquidity constraints that prevent managers from allocating new assets to their best ideas, they then add more liquid benchmark holdings. Cremers states in his study: “What I say is, if you have skill, why not apply that skill to your whole portfolio? And if your fund is too large to do that, why not close your portfolio?”

In an essentially unprecedented disclosure, Touchstone then published the concentration and Active Share statistics for their entire lineup of funds:

touchstone_active

While it’s clear that Touchstone has some great funds and some modest ones, they really deserve attention and praise for sharing important, rarely-disclosed information with all of their investors and with the public at large. We’d be much better served if other fund companies had the same degree of confidence and transparency.

Touchstone is also consolidating four funds into two, effective March 2014. Steve Owen, one of their Managing Directors and head of International Business Development, explains:

With regard to small value, we are consolidating two funds, both subadvised by the same subadvisor, DePrince, Race & Zollo. Touchstone Small Cap Value Fund (TVOAX) was a legacy fund and that will be the receiving fund. Touchstone Small Company Value Fund (FTVAX), the one that is going away, is a fund that was adopted last year when we bought the Fifth Third Fund Family and we replaced the subadvisor at that time with DePrince Race & Zollo. Same investment mandate, same subadvisor, so it was time to consolidate the two funds.

The Mid Value Opportunities Fund (TMOAX)was adopted last year from the Old Mutual Fund Family and will be merged into Touchstone Mid Cap Value Fund (TCVAX). Consolidating the lineup, eliminating the adopted fund in favor of our incumbent from four years ago.

In preparation for the merger, Lee Munder Capital Group has been given manager responsibilities for both mid-cap funds. Neither of the surviving funds is a stand-out performer but bear watching.

Observer Fund Profiles:

Aegis Value (AVALX): There are a few funds that promise to pursue the most inefficient, potentially most profitable corner of the domestic equity mark, ultra-small deep value stocks. Of the handful that pursue it, only one other microcap value fund even comes close to Aegis’s long-term record.

T. Rowe Price Global Allocation (RPGAX): T. Rowe is getting bold, cautiously. Their newest and most innovative fund offers a changing mix of global assets, including structural exposure to a single hedge fund, is also broadly diversified, low-cost and run by the team responsible for their Spectrum and Personal Strategy Funds. So far, so good!

Elevator Talk

Elevator Talks are a short feature which offer the opportunity for the managers of interesting funds which we are not yet ready to profile, to speak directly to you. The basic strategy is for the Observer to lay out three paragraphs of introduction and then to give the manager 200 unedited words – about what he’d have time for in an elevator ride with a prospective investors – to lay out his case for the fund.

Our planned Elevator Talk for December didn’t come to fruition, but we’ll keep working with the managers to see if we can get things lined up for January.

Our earlier Elevator Talks were:

Conference Call Highlights: John Park and Greg Jackson, Oakseed Opportunity

If I had to suggest what characteristics gave an investor the greater prospects for success, I suggest looking for demonstrably successful managers who viscerally disliked the prospect of careless risk and whose interests were visibly, substantially and consistently aligned with yours.

The evidence increasingly suggests that Oakseed Opportunity matches those criteria. On November 18^th, Messrs Jackson and Park joined me and three dozen Observer readers for an hour-long conversation about the fund and their approach to it.

I was struck, particularly, that their singular focus in talking about the fund is “complete alignment of interests.” A few claims particularly stood out:

their every investable penny in is in the fund.
they intend their personal gains to be driven by the fund’s performance and not by the acquisition of assets and fees
they’ll never manage separate accounts or a second fund
they created an “Institutional” class as a way of giving shareholders a choice between buying the fund NTF with a marketing fee or paying a transaction fee but not having the ongoing expense; originally they had a $1 million institutional minimum because they thought institutional shares had to be that pricey. Having discovered that there’s no logical requirement for that, they dropped the institutional minimum by 99%.
they’ll close on the day they come across an idea they love but can’t invest in
they’ll close if the fund becomes big enough that they have to hire somebody to help with it (no analysts, no marketers, no administrators – just the two of them)

Highlights on the investing front were two-fold:

first, they don’t intend to be “active investors” in the sense of buying into companies with defective managements and then trying to force management to act responsibly. Their time in the private equity/venture capital world taught them that that’s neither their particular strength nor their passion.

second, they have the ability to short stocks but they’ll only do so for offensive – rather than defensive – purposes. They imagine shorting as an alpha-generating tool, rather than a beta-managing one. But it sounds a lot like they’ll not short, given the magnitude of the losses that a mistaken short might trigger, unless there’s evidence of near-criminal negligence (or near-Congressional idiocy) on the part of a firm’s management. They do maintain a small short position on the Russell 2000 because the Russell is trading at an unprecedented high relative to the S&P and attempts to justify its valuations require what is, to their minds, laughable contortions (e.g., that the growth rate of Russell stocks will rise 33% in 2014 relative to where they are now.

Their reflections of 2013 performance were both wry and relevant. The fund is up 21% YTD, which trails the S&P500 by about 6.5%. Greg started by imagining what John’s reaction might have been if Greg said, a year ago, “hey, JP, our fund will finish its first year up more than 20%.” His guess was “gleeful” because neither of them could imagine the S&P500 up 27%. While trailing their benchmark is substantially annoying, they made these points about performance:

beating an index during a sharp market rally is not their goal, outperforming across a complete cycle is.
the fund’s cash stake – about 16% – and the small short position on the Russell 2000 doubtless hurt returns.
nonetheless, they’re very satisfied with the portfolio and its positioning – they believe they offer “substantial downside protection,” that they’ve crafted a “sleep well at night” portfolio, and that they’ve especially cognizant of the fact that they’ve put their friends’, families’ and former investors’ money at risk – and they want to be sure that they’re being well-rewarded for the risks they’re taking.

John described their approach as “inherently conservative” and Greg invoked advice given to him by a former employer and brilliant manager, Don Yacktman: “always practice defense, Greg.”

When, at the close, I asked them what one thing they thought a potential investor in the fund most needed to understand in order to know whether they were a good “fit” for the fund, Greg Jackson volunteered the observation “we’re the most competitive people alive, we want great returns but we want them in the most risk-responsible way we can generate them.” John Park allowed “we’re not easy to categorize, we don’t adhere to stylebox purity and so we’re not going to fit into the plans of investors who invest by type.”

They announced that they should be NTF at Fidelity within a week. Their contracts with distributors such as Schwab give those platforms latitude to set the minimums, and so some platforms reflect the $10,000 institutional minimum, some picked $100,000 and others maintain the original $1M. It’s beyond the guys’ control.

Finally, they anticipate a small distribution this year, perhaps $0.04-0.05/share. That reflects two factors. They manage their positions to minimize tax burdens whenever that’s possible and the steadily growing number of investors in the fund diminishes the taxable gain attributed to any of them.

If you’re interested in the fund, you might benefit from reviewing the vigorous debate on the discussion board that followed the call. Our colleague Charles, who joined in on the call, looked at the managers’ previous funds. He writes: “OK, quick look back at LTFAX and OAKGX from circa 2000 through 2004. Ted, even you should be impressed…mitigated drawdown, superior absolute returns, and high risk adjusted returns.”

acorn and oakmark

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

The SEEDX Conference Call

As with all of these funds, we’ve created a new featured funds page for Oakseed Opportunity Fund, pulling together all of the best resources we have for the fund.

December Conference Call: David Sherman, RiverPark Strategic Income

David Sherman

We’d be delighted if you’d join us on Monday, December 9^th, for a conversation with David Sherman of Cohanzick Asset Management and Morty Schaja, president of the RiverPark funds. On September 30, 2013, Cohanzick and Riverpark collaborated on the launch of their second fund together, RiverPark Strategic Income (RSIVX). Two months later, the fund has drawn nearly $90 million into a limited capacity strategy that sort of straddles the short- to intermediate-term border.

David describes this as a conservatively managed fund that focuses on reasonable returns with maximum downside protection. With both this fund and RiverPark Short-Term High-Yield (RPHYX, closed to new investors), David was comfortable having his mom invest in the fund and is also comfortable that if he gets, say, abducted by aliens, the fund could simply and profitably hold all of its bonds to redemption without putting her security as risk. Indeed, one hallmark of his strategy is its willingness to buy and hold to redemption rather than trading on the secondary market.

President Schaja writes, “In terms of a teaser….

Sherman and his team are hoping for returns in the 6-8% range while managing a portfolio of “Money Good” securities with an average duration of less than 5 years. Thereby, getting paid handsomely for the risk of rising rates.
By being small and nimble Sherman and his team believe they can purchase “Money Good” securities with above average market yields with limited risk if held to maturity.
The fund will be able to take advantage of some of the same securities in the 1-3 year maturity range that are in the short term high yield fund.
There are “dented Credits” where credit stress is likely, however because of the seniority of the security the Fund will purchase, capital loss is deemed unlikely.

David has the fund positioned as the next step out from RPHYX on the risk-return spectrum and he thinks the new fund will about double the returns on its sibling. So far, so good:

rsivx

Since I’m not a fan of wild rivers in a fixed-income portfolio, I really appreciate the total return line for the two RiverPark funds. Here’s Strategic Income against its multisector bond peer group:

rsivx v bond

Well, yes, I know that’s just two months. By way of context, here’s the three year comparison of RPHYX with its wildly-inappropriate Morningstar peer group (high yield bonds, orange), its plausible peer group (short-term bonds, green) and its functional peer, Vanguard’s Prime Money Market (VMMXX, hmmm…goldenrod?):

rphyx

Our conference call will be Monday, December 9, from 7:00 – 8:00 Eastern. It’s free. It’s a phone call.

How can you join in?

WOULD AN ADDITIONAL HEADS UP HELP?

Launch Alert: Kopernik Global All-Cap Fund (KGGAX and KGGIX)

It’s rare that the departure of a manager triggers that collapse of an empire, but that’s pretty much what happened when David Iben left his Nuveen Tradewinds Global All-Cap Fund (NWGAX) in June 2012. From inception through his departure, a $10,000 investment in NWGAX would have grown by $3750. An investment made in his average peer would have grown by $90.

Iben was hired away from Tradewinds by Jeff Vinik, the former Fidelity Magellan manager who’d left that fund in 1996 to establish his hedge fund firm, Vinik Asset Management. Iben moved with four analysts to Vinik and became head of a 20-person value investing team.

In the six months following his announced intention to depart, Tradewinds lost nearly 75% of its total assets under management. Not 75% of his funds’ assets. 75% of the entire firm’s assets, about $28 billion between investor exits and market declines.

In May 2013, Vinik announced the closure of his firm “citing poor performance over a 10-month period” (Tampa Bay Business Journal, May 3 2013). You’ll have to give me a second to let my eyes return to normal; the thought of closing a firm because of a ten month bad stretch made them roll. Mr. Iben promptly launched his own firm, backed by a $20 million investment (a/k/a pocket change) by Mr. Vinik.

On November 1, 2013, Kopernik Global Investors launched launched Kopernik Global All-Cap Fund (Class A: KGGAX; Class I: KGGIX) which they hope will become their flagship. By month’s end, the fund had nearly $120 million in assets.

If we base an estimate of Kopernik Global on the biases evident in Nuveen Tradewinds Global, you might expect:

A frequently out-of-step portfolio, which reflects Mr. Iben’s value orientation, disdain for most investors’ moves and affinity for market volatility. They describe the outcome this way:

This investment philosophy implies ongoing contrarian asset positioning, which in turn implies that the performance of Kopernik holdings are less reliant on the prevailing sentiment of market investors. As one would expect with such asset positioning, the performance of Kopernik strategies tend to have little correlation to common benchmarks.

A substantial overweight in energy and basic materials, which Mr. Iben overweighted almost 2:1 relative to his peers. He had a particular affinity for gold-miners.

The potential for a substantial overweight in emerging markets, which Mr. Iben overweighted almost 2:1 relative to his peers.

A slight overweight in international stocks, which were 60% of the Tradewinds’ portfolio but a bit more than 50% of its peers.

The themes of independence, lack of correlation with other investments, and the exploitation of market anomalies recur throughout Kopernik’s website. If you’re even vaguely interested in exploring this fund, you’d better take those disclosures very seriously. Mr. Iben had brilliant performance in his first four years at Tradewinds, and then badly trailed his peers in five of his last six quarters. While we do not know how his strategy performed at Vinik, we do know that 10 months after his arrival, the firm closed for poor performance.

Extended periods of poor performance are one of the hallmarks of independent, contrarian, visionary investors. It’s also one of the hallmarks of self-prepossessed monomaniacs. Sometimes the latter look like the former. Often enough, the former are the latter.

The first month of Kopernik’s performance (in blue) looks like this:

kopernik

Mr. Iben is clearly not following the pack. You’d want to be comfortable with where he is leading the caravan before joining.

“A” shares carry a 5.75% load, capped 1.35% expenses and $3000 minimum. Institutional shares are no-load with expenses of 1.10% and a $1 million minimum. The fund is not (yet) available for sale at Schwab or the other major platforms and a Schwab rep says he does not see any evidence of active negotiation with Kopernik but recommends that interested parties check in occasionally at the Kopernik Global All-Cap page at Schwab. The “availability” tab will let you know if it has become available.

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. Any fund that wanted to launch before the end of the year needed to be in registration by mid- to late October.

Interesting entries this month include:

American Beacon Global Evolution Frontier Markets Income Fund will be the first frontier market bond fund, focusing on sovereign debt. It will be managed by a team from Global Evolution USA, LLC, a subsidiary of Global Evolution Fondsmæglerselskab A/S. But you already knew that, right?

PIMCO Balanced Income Fund primarily pursues income and will invest globally, both very much unlike the average balanced fund. They’ll invest globally in dividend-paying common and preferred stocks and all flavors of fixed- and floating-rate instruments. The prospectus is still in the early stages of development, so there’s no named manager or expense ratio. This might be good news for Sextant Global High Income (SGHIX), which tries to pursue the same distinctive strategy but has had trouble explaining itself to investors.

SPDR Floating Rate Treasury ETF and WisdomTree Floating Rate Treasury Fund will track index of the as-yet unissued floating rate Treasury notes, the first small auction of which will occur January 29, 2014.

Manager Changes

On a related note, we also tracked down 58 fund manager changes.

Updates: the reorganization of Aegis Value, take two

aegis Last month we noted, with unwarranted snarkiness, the reorganization of Aegis Value Fund (AVALX). We have now had a chance to further review the preliminary prospectus and a 73-page proxy filing. The reorganization had two aspects, one of which would be immediately visible to investors and the other of which may be significant behind the scenes.

The visible change: before reorganization AVALX operates as a no-load retail fund with one share class and a $10,000 investment minimum. According to the filings, after reorganization, Aegis is expected to have two share classes. In the reorganization, a new, front-loaded, retail A-share class would be introduced with a maximum 3.75% sales load but also a series of breakpoint reductions. There would also be a two-year, 1% redemption fee on some A-share purchases with value in excess of $1 million. There would also be a no-load institutional share class with a published $1,000,000 minimum. However, current AVALX shareholders would become holders of grandfathered institutional shares not subject to the $1 million investment minimum.

Does this mean that new retail investors get stuck paying a sales load? No, not necessarily. While the institutional class of Aegis High Yield has the same nominal million dollar minimum as Aegis Value will, it’s currently available through many fund supermarkets with the same $10,000 minimum investment as the retail shares of Aegis Value now have. We suspect that Aegis Value shareholders may benefit from the same sort of arrangement.

Does this mean that retail investors get stuck paying a 1% redemption fee on shares sold early? Again, not necessarily. As best I understand it, the redemption fee applies only to broker-sold A-shares sold in denominations greater than $1 million where the advisor pays a commission to the broker if the shares are then redeemed within two years of purchase. So folks buying no-load institutional shares or buying “A” shares and actually paying the sales load are expected to be exempt.

The visible changes appear designed to make the fund more attractive in the market and especially to the advisor market, though it remains an open question whether “A” shares are the package most attractive to such folks. Despite competitive returns over the past five years, the fund’s AUM remains far below its peak so we believe there’s room and management ability for substantially more assets.

The invisible change: two existing legal structures interfere with the advisor’s smooth and efficient organization. They have two funds (Aegis High Yield AHYAX/AHYFX is the other) with different legal structures (one Delaware Trust, one Maryland Corporation) and different fiscal year ends. That means two sets of bookkeeping and two sets of reports; the reorganization is expected to consolidate the two and streamline the process. We estimate the clean-up might save the advisor a little bit in administrative expenses. In the reorganization, AVALX is also eliminating some legacy investment restrictions. For example, AVALX is currently restricted from holding more than 10% of the publicly-available shares of any company. The reorganization would lift these restrictions. While the Fund has in the past only rarely held positions approaching the 10 percent ownership threshold, lifting these kinds of restrictions may provide management with more investment flexibility in the future.

Briefly Noted . . .

forwardfunds In a surprising announcement, Forward Funds removed a four-person team from Cedar Ridge Partners as the sub-advisers responsible for Forward Credit Analysis Long/Short Fund (FLSLX). The fund was built around Cedar Ridge’s expertise in muni bond investing and the team had managed the fund from inception. Considered as a “non-traditional bond” fund by Morningstar, FLSLX absolutely clubbed their peers in 2009, 2011, and 2012 while trailing a bit in 2010. Then this in 2013:

flslx

Over the past six months, FLSLX dropped about 14% in value while its peers drifted down less than 2%.

We spoke with CEO Alan Reid in mid-November about the change. While he praised the Cedar Ridge team for their work, he noted that their strategy seemed to work best when credit spreads were compressed and poorly when they widened. Bernanke’s May 22 Congressional testimony concerning “tapering” roiled the credit markets, but appears to have gobsmacked the Cedar Ridge team: that’s the cliff you see them falling off. Forward asked them to “de-risk” the portfolio and shortly afterward asked them to do it again. As he monitored the fund’s evolution, Mr. Reid faced the question “would I put my money in this fund for the next three to five years?” When he realized the answer was “no,” he moved to change management.

The new management team, Joseph Deane and David Hammer, comes from PIMCO. Both are muni bond managers, though neither has run a fund or – so far as I can tell – a long/short portfolio. Nonetheless they’re back by an enormous analyst corps. That means they’re likely to have access to stronger research which would lead to better security selection. Mr. Reid points to three other distinctions:

There is likely to be less exposure to low-quality issues, but more exposure to other parts of the fixed-income market. The revised prospectus points to “municipal bonds, corporate bonds, notes and other debentures, U.S. Treasury and Agency securities, sovereign debt, emerging markets debt, variable rate demand notes, floating rate or zero coupon securities and nonconvertible preferred securities.”

There is likely to be a more conservative hedging strategy, focused on the use of credit default swaps and futures rather than shorting Treasury bonds.

The fund’s expenses have been materially reduced. Cedar Ridge’s management fee had already been cut from 1.5% to 1.2% and the new PIMCO team is under contract for 1.0%.

It would be wise to approach with care, since the team is promising but untested and the strategy is new. That said, Forward has been acting quickly and decisively in their shareholders’ interests and they have arranged an awfully attractive partnership with PIMCO.

Wow. In mid-November T. Rowe Price’s board decided to merge the T. Rowe Price Global Infrastructure Fund (TRGFX) into T. Rowe Price Real Assets Fund (PRAFX). Equity CIO John Linehan talked with us in late November about the move. The short version is this: Global Infrastructure found very little market appeal because the vogue for infrastructure investing is in private equity rather than stocks. That is, investors would rather own the lease on a toll road than own stock in a company which owns, among other things, the lease on a toll road. Since the fund’s investment rationale – providing a hedge against inflation – can be addressed well in the Real Assets funds, it made business sense to merge Infrastructure away.

Taken as a global stock fund, Infrastructure was small and mediocre. (We warned that “[t]he case for a dedicated infrastructure fund, and this fund in particular, is still unproven.”) Taken as a global stock fund, Real Assets is large and rotten. The key is that “real assets” funds are largely an inflation-hedge, investing in firms that control “stuff in the ground.” With inflation dauntingly low, all funds with this focus (AllianceBernstein, Cohen & Steers, Cornerstone, Harford, Principal and others offer them) has looked somewhere between “punky” and “putrid.” In the interim, Price has replaced Infrastructure’s manager (Kes Visuvalingam has replaced Susanta Mazumdar) and suspended its redemption fee, for the convenience of those who would like out early.

Our Real Assets profile highlights the fact that this portfolio might be used as a small hedge in a diversified portfolio; perhaps 3-5%, which reflects its weight in Price’s asset allocation portfolios. Mr. Lee warns that the fund, with its huge sector bets on energy and real estate, will underperform in a low-inflation environment and would have no structural advantage even in a moderate rate one. Investors should probably celebrate PRAFX’s underperformance as a sign that the chief scourge of their savings and investments – inflation – is so thoroughly suppressed.

FundX Tactical Total Return Fund (TOTLX) Effective January 31, 2014, the investment objective of the FundX Tactical Total Return Fund is revised to read: “The Fund seeks long term capital appreciation with less volatility than the broad equity market; capital preservation is a secondary consideration.”

SMALL WINS FOR INVESTORS

CAN SLIM® Select Growth Fund (CANGX) On Monday, November 11, 2013, the Board of Trustees of Professionally Managed Portfolios approved the following change to the Fund’s Summary Prospectus, Prospectus and Statement of Additional Information: The Fund’s Expense Cap has been reduced from 1.70% to 1.39%.

The expense ratio on nine of Guggenheim’s S&P500 Equal Weight sector ETFS (Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Materials, Technology and Utilities) have dropped from 0.50% to 0.40%.

Effective November 15^th, REMS Real Estate Income 50/50 (RREFX) eliminated its sales load and reduced its 12(b)1 fee from 0.35% to 0.25%. The new investment minimum is $2,500, up from its previous $1,000. The 50/50 refers to the fund’s target allocation: 50% in the common stock of REITs, 50% in their preferred securities.

Effective mid-November, the Meridian Funds activated Advisor and Institutional share classes.

CLOSINGS (and related inconveniences)

Effective November 18, 2013, the Buffalo Emerging Opportunities Fund (BUFOX), a series of Buffalo Funds, will be closed to all new accounts, including new employer sponsored retirement plans (“ESRPs”). The Fund will remain open to additional investments by all existing accounts

Invesco European Small Company Fund (ESMAX) will close to all investors effective the open of business on December 4, 2013. The fund has $560 million in AUM, a low turnover style and a splendid record. The long-time lead manager, Jason Holzer, manages 13 other funds, most for Invesco and most in the European and international small cap realms. That means he’s responsible for over $16 billion in assets. He has over a million invested both here and in his International Small Company Fund (IEGAX).

Effective December 31, 2013, T. Rowe Price New Horizons Fund (PRHNX) will be closed to new investors. This used to be one of Price’s best small cap growth funds until the weight of $14 billion in assets moved it up the scale. Morningstar still categorizes it as “small growth” and it still has a fair chunk of its assets in small cap names, but a majority of its holdings are now mid- to large-cap stocks.

Also on December 31, 2013, the T. Rowe Price Small-Cap Stock Fund (OTCFX) will be closed to new investors. Small Cap is smaller than New Horizons – $9 billion versus $14 billion – and maintains a far higher exposure to small cap stocks (about 70% of the portfolio). Nonetheless it faces serious headwinds from the inevitable pressure of a rising asset base – up by $2 billion in 12 months. There’s an interesting hint buried in the fund’s ticker symbol: it was once the Over the Counter Securities Fund.

Too late: Vulcan Value Partners Small Cap Fund (VVPSX), which we profiled as “a solid, sensible, profitable vehicle” shortly after launch, vindicated our judgment when it closed to new investors at the end of November. The closure came with about one week’s notice, which strikes me as a responsible decision if you’re actually looking to close off new flows rather than trigger a last minute rush for the door. The fund’s current AUM, $750 million, still gives it plenty of room to maneuver in the small cap realm.

Effective December 31, 2013, Wells Fargo Advantage Emerging Markets Equity Fund (EMGAX) will be closed to most new investors. Curious timing: four years in a row (2009-2012) of top decile returns, and it stayed open. Utterly mediocre returns in 2013 (50^th percentile, slightly underwater) and it closes.

OLD WINE, NEW BOTTLES

BlackRock Emerging Market Local Debt Portfolio (BAEDX) is changing its name and oh so much more. On New Year’s 2014, shareholders will find themselves invested in BlackRock Emerging Markets Flexible Dynamic Bond Portfolio which certainly sounds a lot more … uhh, flexible. And dynamic! I sometimes wonder if fund marketers have an app on their iPhones, rather like UrbanSpoon, where you hit “shake” and slot machine-like wheels start spinning. When they stop you get some combination of Flexible, Strategic, Multi-, Asset, Manager, Strategy, Dynamic, Flexible and Tactical.

Oh, right. Back to the fund. The Flexible Dynamic fund will flexibly and dynamically invest in what it invests in now except they are no longer bound to keep 65% or more in local-currency bonds.

Effective March 1, 2014, BMO Government Income Fund (MRGIX) beomes BMO Mortgage Income Fund. There will be no change in strategy reflecting the fact that the government gets its income from . . . uh, mortgages?

Effective December 11, 2013 Columbia Large Cap Core Fund (NSGAX) will change to Columbia Select Large Cap Equity Fund. The prospectus for the new version of the fund warns that it might concentrate on a single sector (they name technology) and will likely hold 45-65 stocks, which is about where they already are. At that same time, Columbia Active Portfolios® – Diversified Equity Income Fund (INDZX) becomes Active Portfolios® Multi-Manager Value Fund and Columbia Recovery and Infrastructure (RRIAX) becomes Columbia Global Infrastructure Fund. Morningstar rates it as a one-star fund despite high relative returns since inception, which suggests that the fund’s volatility is higher still.

Dreyfus will ask shareholders to approve a set of as-yet undescribed strategy changes which, if approved, will cause them to change the Dreyfus/Standish Intermediate Tax Exempt Bond Fund to Dreyfus Tax Sensitive Total Return Bond Fund

On February 21, 20414, Dreyfus/The Boston Company Emerging Markets Core Equity Fund will change its name to Dreyfus Diversified Emerging Markets Fund.

Effective December 23, 2013, Forward Select Income Opportunity Fund (FSONX) becomes Forward Select Opportunity Fund. The fact that neither the fund’s webpage nor its fact sheet report any income (i.e., there’s not even a spot for 30-day SEC yield or anything like it) might be telling us why “income” is leaving the name.

Ivy Pacific Opportunities Fund (IPOAX) seems to have become Ivy Emerging Markets Equity Fund. The new fund’s prospectus shifts it from a mid-to-large cap fund to an all-cap portfolio, adds the proviso that up to 20% of the portfolio might be invested in precious metals. There’s an unclear provision about investing in a Cayman Islands subsidiary to gain commodities exposure but it’s not clear whether that’s in addition to the gold. And, finally, Ivy Asset Strategy New Opportunities Fund (INOAX) will merge into the new fund in early 2014. That might come as a surprise to INOAX shareholders, since their current fund is not primarily an emerging markets vehicle.

OFF TO THE DUSTBIN OF HISTORY

Corporate America CU Short Duration Fund (CASDX) liquidated at the end of November. That’s apparently more evidence of Corporate America’s shortened time horizon. The fund was open a bit more than a year and pulled in a bit more than $60 million in assets before the advisor thought … what? “Oh, we’re not very good at this”? “Oh, we’re not apt to get very good at this”? “Oh, look! There’s a butterfly”?

Delaware International Bond Fund (DPIFX) will be liquidated and dissolved on New Year’s Eve. I knew several grad students who suffered a similar fate that evening.

The Equinox funds plan a wholesale liquidation: Equinox Abraham Strategy Fund (EABIX), Absolute Return Plus Strategy (EMEIX), Eclipse Strategy (EECIX), John Locke Strategy (EJILX), QCM Strategy (EQQCX) and Tiverton Strategy (EQTVX) all meet their maker on December 9^th. The smallest of these funds has about $8500 in AUM. Right: not enough to buy a used 2010 Toyota Corolla. The largest has about $600,000 and, in total, they don’t reach $750,000. All are classified as “managed futures” funds and no, I have no earthly idea why Equinox has seven such funds: the six dead funds walking and the surviving Equinox Crabel Strategy (EQCRX) which has about $15,000 in AUM.

Given that these funds have $25,000 minimums and half of them have under $25,000 in assets, the clear implications is that several of these funds have one shareholder. In no instance, however, is that one shareholder a manager of the fund since none of the five managers was silly enough to invest.

FundX ETF Upgrader Fund (REMIX) is merging into the FundX Upgrader Fund (FUNDX) and the FundX ETF Aggressive Upgrader Fund (UNBOX) goes into the FundX Aggressive Upgrader Fund (HOTFX), effective January 24, 2014. My colleague Charles’s thoughtful and extensive analysis of their flagship FundX Upgrader Fund offers them as “a cautionary tale” for folks whose strategy is to churn their portfolios, always seeking hot funds.

An ING fund disappears: ING has designated ING Bond Portfolio (IABPX) as a “disappearing portfolio.” They craftily plan to ask shareholders in late February to authorize the disappearance. The largely-inoffensive ING Intermediate Bond Portfolio (IIABX) has been designated as “the Surviving Portfolio.”

But nothing will survive of ING American Funds International Growth and Income Portfolio (IAIPX) or ING American Funds Global Growth and Income Portfolio (IAGPX), both of which will be liquidated on February 7, 2014.

ING PIMCO High Yield Portfolio (IPHYX) disappears on February 14 and is replaced by ING High Yield Portfolio. See ING decided to replace the world’s most renowned fixed income shop, which was running a four-star $900 million portfolio for them, with themselves with Rick Cumberledge and team, nice people who haven’t previously managed a mutual fund. The investors get to celebrate a two (count ‘em: 2!) basis point fee reduction as a result.

The Board of Trustees of the JPMorgan India Fund (JIDAX) has approved the liquidation and dissolution of the Fund on or about January 10, 2014. The fund has a six-year record that’s a bit above average but that comes out as a 17% loss since inception. The $9.5 million there would have been, and would still be, better used in Matthews India (MINDX).

We’d already announced the closure and impending liquidation of BlackRock India Fund (BAINX). The closure occurred October 28 and the liquidation occurs on December 10, 2013. BAINX – the bane of your portfolio? due to be bain-ished from it? – is down 14% since launch, its peers are down 21% from the same date.

The Board of Trustees of the JPMorgan U.S. Real Estate Fund (SUSIX) has approved the liquidation and dissolution of the Fund on or about December 20, 2013. Color me clueless: it’s an unimpressive fund, but it’s not wretched and it does have $380 million dollars.

Litman Gregory Masters Focused Opportunities Fund (MSFOX) is merging into Litman Gregory Masters Equity Fund (MSENX) because, they explain, MSFOX

… has had net shareholder redemptions over the past five years, causing the asset level of the Focused Opportunities Fund to decline almost 50% over that time period. The decline in assets has resulted in a corresponding increase in the Focused Opportunities Fund’s expense ratio, and … it is unlikely that the Focused Opportunities Fund will increase in size significantly in the foreseeable future.

The first part of that statement is a bit disingenuous. MSFOX has $67 million at the moment. The only time it exceeded that level was in 2007 when, at year end, it had $118 million. It lost 60% between October 2007 and March 2009 (much more than its peers) and has never regained its place in the market. The Observer has a favorable opinion of the fund, which has earned four stars from Morningstar and five for Returns, Consistency and Preservation from Lipper but its fall does point to the fragility of survival once investors have been burned. This is the second fund to merge into MSENX, Litman Gregory Masters Value was the first, in May 2013.

The Lord hath left the building: the shareholders of Lord Abbett Classic Stock Fund (LRLCX) convened on November 7^th to ponder the future of their fund. Fifteen days later it was gone, absorbed by Lord Abbett Calibrated Dividend Growth Fund (LAMAX). Not to suggest that Lord Abbett was going through the motions, but they did put the LAMAX managers in charge of LRLCX back on June 11^th.

Mercer Investment Management decided to liquidate the Mercer US Short Maturity Fixed Income Fund (MUSMX) on or about December 16, 2013

Monetta has decided to liquidate Monetta Mid-Cap Equity Fund (MMCEX), effective as of the close of business on December 20, 2013. Robert Baccarella has been running the fund for 20 years, the last four with his son, Robert. Despite a couple good years, the fund has resided in the 98^th or 99^th percentiles for performance for long ago.

Effective December 9, 2013, the name of the MutualHedge Frontier Legends Fund (MHFAX) changes to Equinox MutualHedge Futures Strategy Fund. Morningstar has a Neutral rating on the fund and describes it as “good but not great yet” because of some management instability and high expenses.

Paladin Long Short Fund (PALFX) will discontinue operations on December 20, 2013. Given the fund’s wild churning, this closure might well threaten the profitability of three or four systemically important institutions:

palfx

Why, yes, the liquidation is a taxable event for you. Not so much for the fund’s manager, who has under $50,000 invested. Given that the fund has, from inception in 2011 to mid-November 2013 lost money for its investors, taxes generated by churn will be particularly galling.

As noted above, T. Rowe Price Global Infrastructure Fund (TRGFX) is slated to merge into T. Rowe Price Real Assets Fund (PRAFX) in the spring of 2014.

Quaker Funds closed Quaker Akros Absolute Return Fund (AARFX) and the Quaker Small-Cap Growth Tactical Allocation Fund (QGASX) on November 5^th in anticipation of liquidating them (an action which requires shareholder approval). I have no idea of why they’re ditching AARFX. The fund promises “absolute returns.” $10,000 invested at inception in 2005 would be worth $10,040 today. Mission accomplished!

Roosevelt Strategic Income Fund (RSTIX) was liquidated on November 27, 2013. That’s presumably a low-assets/bad marketing sort of call since the fund had top tier returns compared to its global bond peers over the two-plus years of its existence. The manager, Arthur Sheer, continues managing Roosevelt Multi-Cap (BULLX).

The Royce Fund’s Board of Trustees approved a plan of liquidation for Royce Global Select Long/Short Fund (RSTFX), to be effective on December 2, 2013. The Fund is being liquidated primarily because it has not attracted and maintained assets at a sufficient level for it to be viable. The decision elicited several disgusted comments on the board, directed at Royce Funds. The tenor of the comments was this: “Royce, a Legg Mason subsidiary, has morphed from an investment manager to an asset gatherer. It’s the Legg Mason mantra: “assets (hence revenues) über alles.” It’s indisputably the case that Royce rolled out a bunch of funds once it became part of Mason; they ran 11 funds when they were independent, 29 today plus some Legg Mason branded funds (such as Legg Mason Royce Smaller Companies Premier, £ denominated “A” shares in Ireland) and some sub-advised ones. And the senior Royce managers presume to oversee more funds than almost any serious peer: Charles Royce – 13 funds, Whitney George – 10 funds, David Nadel – 10 funds.

Then, too, it’s not very good. At least over the past three years, it’s badly trailed a whole variety of benchmarks.

Symetra funds has decided, for no immediately evident reason, to liquidate several successful funds (Symetra DoubleLine Total Return, Symetra DoubleLine Emerging Markets Income and Symetra Yacktman Focused).

TEAM Asset Strategy Fund (TEAMX) is liquidating, but it’s doing so with refreshing honesty: it’s “because of a decline in assets due to continued poor performance and significant redemptions.”

teamx

Yep. You’re reading it right: $10,000 becomes $1904. 75% YTD loss. To which I can only response: “Go, TEAM, go! Quickly! Go now!”

The Board of Directors of Tributary Funds has approved liquidation of Tributary Large Cap Growth Fund (FOLCX) on or about January 29, 2014. Since David Jordan, manager of the five-star Tributary Balanced (FOBAX) and flagship four-star Growth Opportunities (FOGRX) funds, took over in 2011, the fund has had very competitive returns but not enough to draw serious assets and move the fund toward economic viability.

Vanguard Tax-Managed International Fund (VTMGX) merges into the Vanguard Developed Markets Index Fund, which is expected to occur on or about April 4, 2014. Finally, a $20 billion closet index fund (the r-squared against the MSCI EAFE Index was nearly 99) that just surrenders to being an index! In a final dose of irony, VTMGX tracked its index better than does the index fund into which it’s merging. Indeed, there are seven international large-blend index funds which track their indexes less faithfully than the supposedly-active VTMGX did.

In Closing . . .

Thanks to all of the folks who join us each month, and thanks especially to those who support the Observer by joining our remarkably thoughtful discussion board, by sharing tips and leads with me by email, and by contributing through PayPal or via our Amazon partnership. Your interest and engagements helps make up for a lot of late nights and the occasional withering glare as we duck away from family gatherings to write a bit more.

Our partnership with Amazon provides our steadiest income stream: if you buy a $14 book, we get about a buck. If you buy a Cuisinart Brew Central coffeemaker at $78, we get five or six. Buy an iPad and we get bumpkus (Apple refuses to play along), but that’s okay, they’re cool anyway. There are, nonetheless, way cool smaller retailers that we’ve come across but that you might not have heard of. 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.

duluth Some guys wear ties rarely enough that they need to keep that little “how to tie a tie” diagram taped to their bathroom mirrors. Other guys really wish that they had a job where they wore ties rarely enough that they needed to keep that little “how to tie a tie” diagram taped up.

Duluth sells clothes, and accessories, for them. I own rather a lot of it. Their stuff is remarkably well-made if moderately pricey. Their sweatshirts, by way of example, are $45-50 when they’re not on sale. JCPenney claims that their sweatshirts are $48 but on perma-sale for $20 or so. The difference is that Duluth’s are substantially better: thicker fabric, longer cut, with thoughtful touches like expandable/stretchy side panels.

sweatshirt

VoiceBase offers cools, affordable transcription services. We’re working with the folks at Beck, Mack & Oliver to generate a FINRA-compliant transcript of our October conference call with Zac Wydra. Step One was to generate a raw transcript with which the compliance folks at Beck, Mack might work. Chip, our estimable technical director, sorted through a variety of sites before settling on VoiceBase.

It strikes us that their service is cool, reliable and affordable. Here’s the process. Set up a free account. Upload an audio file to their site. About 24 hours later, they’ve generate a free machine-based transcription for you. If you need greater accuracy than the machine produces – having multiple speakers and variable audio quality wreaks havoc with the poor beastie’s circuits – they provide human transcription within two or three days.

The cool part is that they host the audio on their website in a searchable format. Go to the audio, type “emerging markets” and the system automatically flags any uses of that phrase and allows you to listen directly to them. If you’d like to play, here is the MFO Conference Call with Zac Wydra.

quotearts

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):

card

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.

We hope it’s a joyful holiday season for you all, and we look forward to seeing you in the New Year.

David

November 1, 2013

Dear friends,

Occasionally Facebook produces finds that I’m at a loss to explain. Ecce:

hedge-fund-myth

(Thanks to Nina K., a really first-rate writer and first-rate property/insurance lawyer in the Bay State for sharing Mr. Takei’s post with us. Now if I could just get her to restrain the impulse to blurt out, incredulous, “you really find this stuff interesting?”)

Let’s see. Should I be more curious about the fact that Mr. Takei (iconically Ensign Sulu on Star Trek) manages just a basso profundo “oh myyy” on his post or the fact that he was recently lounging in a waiting room at the University of Iowa Hospitals, a bit west of here? Perhaps it would be better to let his friends weigh in?

comments

Chip’s vote was to simply swipe her favorite image from the thread, one labeled “a real hedge fund.”

hedge-fund

Which is to say, a market that tacks on 29% in a year makes it easy to think of investing as fun and funny again.

Now if only that popular sentiment could be reconciled with the fact that a bunch of very disciplined, very successful managers are quietly selling down their stocks and building their cash reserves again.

Here’s today’s “know your Morningstar!” quiz.

Here are the total return charts for two short-term bond funds. One is the sole Morningstar Gold Medalist in the group, representing “one of the industry’s best managers, and one of the category’s best funds.” The other is a lowly one-star fund unworthy of Morningstar’s notice

golden-child

Question: do you …know your Morningstar!? Which is the golden child? Is it blue or orange?

Would it help to know that one of these funds is managed by a multi-trillion dollar titan and the other by a small, distinctive boutique? Or that one of the funds invests quite conventionally and fits neatly into a style-box while the other is one-of-a-kind?

If you know your Morningstar, you’ll know that “small, distinctive and hard to pigeonhole” is pretty much the kiss of death. The orange (or gold) line represents PIMCO Low Duration, “D” shares (PLDDX). It’s a $24 billion “juggernaut” (Morningstar’s term) that’s earned four stars and a Gold designation. It tends to be in the top quarter of the short-term bond group, though not at its top, and is a bit riskier than average.

The blue line represents RiverPark Short Term High Yield (RPHYX), an absolutely first-rate cash management fund about which we’ve written a lot. And which Morningstar just designated as a one-star fund. Why so? Because Morningstar classifies it as a “high yield bond” fund and benchmarks it against an investment class that has outperformed the stock market over the past 15 years but with the highest volatility in the fixed-income universe. To be clear: there is essentially no overlap between RiverPark’s portfolio and the average high-yield bond funds and they have entirely different strategies, objectives and risk profiles. Which is to say, Morningstar has managed a classic “walnuts to lug nuts” comparison.

Here’s the defense Morningstar might reasonably make: “we had to put it somewhere. It says ‘high yield.’ We put it there.”

Here’s our response: “that’s a sad and self-damning answer. Yes, you had to put it somewhere. But having put it in a place that you know is wildly inappropriate, you also need to accept the responsibility – to your readers, to RiverPark’s investors and to yourselves – to address your decision. You’ve got the world’s biggest and best supported corps of analysts in the world. Use them! Don’t ignore the funds that do well outside of the comfortable framework of style boxes, categories and corporate investing! If the algorithms produce palpably misleading ratings, speak up.”

But, of course, they didn’t.

The problem is straightforward: Morningstar’s ratings are most reliable when you least need them. For funds with conventional, straightforward, style-pure disciplines – index funds and closet index funds – the star ratings probably produce a fair snapshot across the funds. But really, how hard is it – even absent Morningstar’s imprimatur – to find the most solid offering among a gaggle of long-only, domestic large cap, growth-at-a-reasonable price funds? You’ll get 90% of the way there with three numbers: five year returns, five year volatility and expense ratio. Look for ones where the first is higher and the second two are lower.

When funds try not to follow the herd, when the manager appears to have a brain and to be using it to pursue different possibilities, is when the ratings system is most prone to misleading readers. That’s when you need to hear an expert’s analysis.

So why, then, deploy your analysts to write endless prose about domestic large cap funds? Because that’s where the money is.

Morningstar ETF Invest: Rather less useful content than I’d imagined

Morningstar hosted their ETF-focused conference in Chicago at the beginning of October. The folks report that the gathering has tripled in size over the last couple years, turned away potential registrants and will soon need to move to a new space. After three days there, though, I came away with few strong reactions. I was struck by the decision of one keynote speaker to refer to active fixed-income managers as “the enemy” (no, dude, check the mirror) and the apparent anxiety around Fidelity’s decision to enter the ETF market (“Fidelity is coming. We know they’re coming. It’s only a matter of time,” warned one).

My greatest bewilderment was at the industry’s apparent insistence on damaging themselves as quickly and thoroughly as possible. ETFs really have, at most, three advantages: they’re cheap, transparent and liquid. The vogue seems to be for frittering that away. More and more advisors are being persuaded to purchase the services of managed portfolio advisors who, for a fee, promise to custom-package (and trade) dozens of ETFs. I spoke with representatives of a couple index providers, including FTSE, who corroborated Morningstar’s assertion that there are likely two million separate security indexes in operation with more being created daily. And many of the exchange-traded products rely in derivatives to try to capture the movements of those 2,000,000. On whole, it feels like a systematic attempt to capture the most troubling features of the mutual fund industry – all while preening about your Olympian superiority to the mutual fund industry.

Odd.

The most interesting presentation at the conference was made by Austan Goolsbee, a University of Chicago economist and former chief of the President’s Council of Economic Advisers, who addressed a luncheon crowd. It was a thoroughly unexpected performance: there’s a strong overtone of Jon Stewart from The Daily Show, an almost antic energy. The presentation was one-third Goolsbee family anecdotes (“when I’d complain about a problem, gramma would say ‘80% of us don’t care. . . and the other 20% are glad about it'”), one-third White House anecdotes and one-third economic arguments.

The short version:

The next 12-18 months will be tough because the old drivers of recovery aren’t available this time. Over the last century, house prices appreciated by 40 basis points annually for the first 90 years. From 2000-08, it appreciated 1350 bps annually. In the future, 40 bps is likely about right which means that a recovery in the housing industry won’t be lifting all boats any time soon.
We’ll know the economy is recovering when 25 year olds start moving out of their parents’ basements, renting little apartments, buying futons and cheap pots and pans. (Technically, an uptick in household formation. Since the beginning of the recession, the US population has grown by 10 million but the number of households has remained flat.) One optimistic measure that Goolsbee did not mention but which seems comparable: the number of Americans choosing to quit their jobs (presumably for something better) is rising.
The shutdown is probably a good thing, since it will derail efforts to create an unnecessary crisis around the debt ceiling.
In the longer term, the US will recover and grow at 3.5% annually, driven by a population that’s growing (we’ll likely peak around 400 million while Japan, Western Europe and Russia contract), the world’s most productive workforce and relatively light taxation. While Social Security faces challenges, they’re manageable. Given the slow rolling crisis in higher education and the near collapse of new business launches over the past decade, I’m actually somewhere between skeptical and queasy on this one.
The Chinese economic numbers can’t be trusted at all. The US reports quarterly economic data after a 30 day lag and frequently revises the numbers 30 days after that. China reports their quarterly numbers one day after the end of the quarter and has never revised any of the numbers. A better measure of Chinese activity is derivable from FedEx volume (it’s way down) since China is so export driven.

One highlight was his report of a headline from The Onion: “recession-plagued nation demands a new bubble to invest in … so we can get the economy going again. We need a concrete way to create illusory wealth in the near future.”

One of the great things about having Messrs Studzinski and Boccadoro contributing to the Observer is that they’re keen, experienced observers and very good writers. The other great thing about it is that I no longer have to bear the label, “the cranky one.” In the following essay, Ed Studzinkski takes on one of the beloved touchstones of shareholder-friendly management: “skin in the game.” Further down, Charles Boccadoro casts a skeptical eye, in a data-rich piece, on the likelihood that an investor’s going to avoid permanent loss of capital.

Skin in the Game, Part Two

The trouble with our times is that the future is not what it used to be.

Paul Valery

Nassim Nicholas Taleb, the author of The Black Swan as well as Antifragile: Things That Gain from Disorder, has recently been giving a series of interviews in which he argues that current investment industry compensation practices lead to subtle conflicts of interest, that end up inuring to the disadvantage of individual investors. Nowhere is this more apparent than when one looks at the mutual fund complexes that have become asset gatherers rather than investment managers.

By way of full disclosure I have to tell you that I am an admirer of Mr. Taleb’s. I was not always the most popular boy in the classroom as I was always worrying about the need to consider the potential for “Black Swan” or outlier events. Unfortunately all one has to have is one investment massacre like the 2008-2009 period. This gave investors a lost decade of investment returns and a potentially permanent loss of capital if they panicked and liquidated their investments. To have a more in-depth appreciation of the concept and its implications, I commend those of you with the time to a careful study of the data that the Mutual Fund Observer has compiled and begun releasing regularly. You should pay particular attention to a number called the “Maximum Drawdown.” There you will see that as a result of that dark period, looking back five years it is a rarity to find a domestic fund manager who did not lose 35-50% of his or her investors’ money. The same is to be said for global and international fund managers who likewise did not distinguish themselves, losing 50-65% of investors’ capital, assuming the investors panicked and liquidated their investments, and many did.

A number of investment managers that I know are not fans of Mr. Taleb’s work, primarily because he has a habit of bringing attention to inconvenient truths. In Fooled by Randomness, he made the case that given the large number of people who had come into the investment management business in recent years, there were a number who had to have generated good records randomly. They were what he calls “spurious winners.” I would argue that the maximum drawdown numbers referred to above confirm that thesis.

How then to avoid the spurious winner? Taleb argues that the hedge fund industry serves as a model, by truly having managers with “skin in the game.” In his experience a hedge fund manager typically has twenty to fifty times the exposure of his next biggest client. That of necessity makes them both more careful and as well as aware of the consequences if they have underinvested in the necessary talent to remain competitive. Taleb quite definitively states, “You don’t get that with fund managers.”

I suspect the counterargument I am going to hear is that fund managers are now required to disclose, by means of reporting within various ranges, the amount of money they have invested in the fund they are managing. Just go to the Statement of Additional Information, which is usually found on a fund website. And if the SAI shows that the manager has more than $1 million invested in his or her fund, then that is supposed to be a good sign concerning alignment of interests. Like the old Hertz commercial, the real rather than apparent answer is “not exactly.”

The gold standard in this regard has been set by Longleaf Partners with their funds. Their employees are required to limit their publicly offered equity investments to funds advised by Southeastern Asset Management, Longleaf’s advisor, unless granted a compliance exception. Their trustees also must obtain permission before making a publicly offered equity investment. That is rather unique in the fund industry, since what you usually see in the marketing brochures or periodic fund reports is something like “the employees and families of blah-blah have more than $X million invested in our funds.” If you are lucky this may work out to be one percent of assets under management in the firm, hardly hedge-fund like metrics. At the same time, you often find trustees of the fund with de minimis investments.

The comparison becomes worse when you look at a fund with $9 billion in assets and the “normal” one percent investment management fee, which generates $90 million in revenue. The fund manager may tell you that his largest equity investment is in the fund and is more than $1 million. But if his annual compensation runs somewhere between $1million and $10 million, and this is Taleb’s strongest point, the fund manager does not have a true disincentive for losing money. The situation becomes even more blurred where compliance policy allows investment in ETF’s or open-ended mutual funds, which in today’s world will often allow a fund manager to construct his own personal market neutral or hedged portfolio, to offset his investment in the fund he is managing.

Is there a solution? Yes, a fairly easy one – adopt as an industry standard through government regulation the requirement that all employees in the investment firm are required to limit their publicly offered equity investments to the funds in the complex. To give credit where credit is due, just as we have a Volcker rule, we can call it the “Southeastern Asset Management” rule. If that should prove too restrictive, I would suggest as an alternative that the SEC add another band of investment ranges above the current $1 million limit, at perhaps $5 million. That at least would give a truer picture for the investor, especially given the money flows now gushing into a number of firms, which often make a $1 million investment not material to the fund manager. Such disclosure will do a better job of attuning investment professionals to what should be their real concern – managing risk with a view towards the potential downside, rather than ignoring risk with other people’s money.

Postscript:

What does it say when such well known value managers as Tweedy, Browne and First Pacific Advisors are letting cash positions rise in their portfolios as they sell and don’t replace securities that have reached their target valuations? Probably the same thing as when one of the people I consider to be one of the outstanding money managers of our time, Seth Klarman at Baupost Partners, announces that he will be returning some capital to his partnership investors at year end. Stay tuned.

So, if it’s “the best,” why can’t people just agree on what it is?

Last month David pointed out how little overlap he found between three popular mutual fund lists: Kiplinger 25, Money 70, and Morningstar’s Fantastic 51. David mused: “You’d think that if all of these publications shared the same sensible goal – good risk-adjusted returns and shareholder-friendly practices – they’d also be stumbling across the same funds. You’d be wrong.”

He found only one fund, Dodge & Cox International Fund DODFX, on all three lists. Just one! Although just one is a statistically better outcome than randomly picking three such lists from the 6600 or so mutual funds and 1000 ETFs, it does seem surprisingly small.

Opening up the field a little, by replacing the Fantastic 51 with a list of 232 funds formed from Morningstar’s current “Gold-Rated Funds” and “Favorite ETFs,” the overlap does not improve much. Just two funds appear in all three publications: DODFX and Habor Bond Institutional HABDX. Just two!

While perhaps not directly comparable, the table below provides a quick summary of the criteria used by each publication. Money 70 criteria actually include Morningstar’s so-called stewardship grade, which must be one of the least maintained measures. For example, Morningstar awarded Bruce Berkowitz Fund Manager of the Decade, but it never published a stewardship grade for Fairholme.

comparison

Overall, however, the criteria seem quite similar, or as David described “good risk-adjusted returns and shareholder-friendly practices.” Add in experienced managers for good measure and one would expect the lists to overlap pretty well. But again, they don’t.

How do the “forward-looking” recommendations in each of these lists fare against Morningstar’s purely quantitative “backward-looking” performance rating system? Not as well as you might think. There are just seven 5-star funds on Money’s list, or 1-in-10. Kiplinger does the best with six, from a percentage perspective, or almost 1-in-4. (They must have peeked.) Morningstar’s own list includes 44 5-star funds, or about 1-in-5. So, as well intentioned and “forward looking” as these analysts certainly try to be, only a small minority of their “best funds” have delivered top-tier returns.

On the other hand, they each do better than picking funds arbitrarily, if not unwittingly, since Morningstar assigns 5 stars to only about 1-in-17 funds. Neither of the two over-lapping funds that appear on all three lists, DODFX and HABDX, have 5 stars. But both have a commendable 4 stars, and certainly, that’s good enough.

Lowering expectations a bit, how many funds appear on at least two of these lists? The answer: 38, excluding the two trifectas. Vanguard dominates with 14. T. Rowe Price and American Funds each have 4. Fidelity has just one. Most have 4 stars, a few have 3, like SLASX, probably the scariest.

But there is no Artisan. There is no Tweedy. There is no Matthews. There is no TCW or Doubleline. There are no PIMCO bond funds. (Can you believe?) There is no Yacktman. Or Arke. Or Sequoia. There are no funds less than five years old. In short, there’s a lot missing.

There are, however, nine 5-star funds among the 38, or just about 1-in-4. That’s not bad. Interestingly, not one is a fixed income fund, which is probably a sign of the times. Here’s how they stack-up in MFO’s own “backward looking” ratings system, updated through September:

Four are moderate allocation funds: FPACX, PRWCX, VWELX, and TRRBX. Three are Vanguard funds: VWELX, VDIGX, and VASVX. One FMI fund FMIHX and one Oakmark fund OAKIX. Hard to argue with any of these funds, especially the three Great Owls: PRWCX, VWELX, and OAKIX.

These lists of “best funds” are probably not a bad place to start, especially for those new to mutual funds. They tend to expose investors to many perfectly acceptable, if more mainstream, funds with desirable characteristics: lower fees, experienced teams, defensible, if not superior, past performance.

They probably do not stress downside potential enough, so any selection needs to also take risk tolerance and investment time-frame into account. And, incredulously, Morningstar continues to give Gold ratings to loaded funds, about 1-in-7 actually.

The lists produce surprisingly little overlap, perhaps simply because there are a lot of funds available that satisfy the broad screening criteria. But within the little bit of overlap, one can find some very satisfying funds.

Money 70 and Kiplinger 25 are free and online. Morningstar’s rated funds are available for a premium subscription. (Cheapest path may be to subscribe for just one month each year at $22 while performing an annual portfolio review.)

As for a list of smaller, less well known mutual funds with great managers and intriguing strategies? Well, of course, that’s the niche MFO aspires to cover.

23Oct2013/Charles

The Great Owl search engine has arrived

Great Owls are the designation that my colleague Charles Boccadoro gives to those funds which are first in the top 20% of their peer group for every trailing period of three years or more. Because we know that “risk” is often more durable and a better predictor of investor actions than “return” is, we’ve compiled a wide variety of risk measures for each of the Great Owl funds.

Up until now, we’ve been limited to publishing the Great Owls as a .pdf while working on a search engine for them. We’re pleased to announce the launch of the Great Owl Search, 1.0. We expect in the months ahead to widen the engine’s function and to better integrate it into the site. We hope you like it.

For JJ and other fans of FundAlarm’s Three-Alarm and Most Alarming fund lists, we’re working to create a predefined search that will allow you to quickly and reliable identify the most gruesome investments in the fund world. More soon!

Who do you trust for fund information?

The short answer is: not fund companies. On October 22, the WSJ’s Karen Damato hosted an online poll entitled Poll: The Best Source of Mutual-Fund Information?

poll

Representing, as I do, Column Three, I should be cheered. Teaching, as I do, Journalism 215: News Literacy, I felt compelled to admit that the results were somewhere between empty (the margin of error is 10.89, so it’s “somewhere between 16% and 38% think it’s the fund company’s website and marketing materials”) and discouraging (the country’s leading financial newspaper managed to engage the interest of precisely 81 of its readers on this question).

Nina Eisenman, President of Eisenman Associates which oversees strategic communications for corporations, and sometime contributor to the Observer

Asking which of the 3 choices individual investors find “most useful” generates data that creates an impression that they don’t use the other two at all when, in fact, they may use all 3 to varying degrees. It’s also a broad question. Are investors responding based on what’s most useful to them in conducting their initial research or due diligence? For example, I may read about a fund in the Mutual Fund Observer (“other website”) and decide to check it out but I would (hopefully) look at the fund’s website, read the manager’s letters and the fund prospectus before I actually put money in.

When I surveyed financial advisors and RIAs on the same topic, but gave them an option to rate the importance of various sources of information they use, the vast majority used mutual funds’ own websites to some extent as part of their due diligence research. [especially for] fund-specific information (including the fund prospectus which is generally available on the website) that can help investors make educated investment decisions.

Both Nina’s own research and the results of a comparable Advisor Perspectives poll can be found at FundSites, her portal for addressing the challenges and practices of small- to medium sizes fund company websites.

The difference between “departures” and “succession planning”

Three firms this month announced the decisions of superb managers to move on. Happily for their investors, the departures are long-dated and seem to be surrounded by a careful succession planning process.

Mitch Milias will be retiring at the end of 2013

Primecap Management was founded by three American Funds veterans. That generation is passing. Howard Schow has passed away at age 84 in April 2012. Vanguard observer Dan Weiner wrote at the time that “To say that he was one of the best, and least-known investors would be a vast understatement.” The second of the triumvirate, Mitch Milias, retires in two months at 71. That leaves Theo Kolokotrones who, at 68, is likely in the latter half of his investing career. Milias has served as comanager of four Gold-rated funds: Vanguard Primecap (VPMCX) Vanguard Primecap Core (VPCCX), Primecap Odyssey Growth (POGRX), and Primecap Odyssey Stock (POSKX).

Neil Woodford will depart Invesco in April, 2014

British fund manager Neil Woodford is leaving after 25 years of managing Invesco Perpetual High Income Fund and the Invesco Perpetual Income Fund. Mr. Woodford apparently is the best known manager in England and described as a “hero” in the media for his resolute style. He’s decided to set up his own English fund company. In making the move he reports:

My decision to leave is a personal one based on my views about where I see long-term opportunities in the fund management industry. My intention is to establish a new fund management business serving institutional and retail clients as soon as possible after 29th April 2014.

His investors seem somehow less sanguine: they pulled over £1 billion in the two weeks after his announcement. Invesco’s British president describes that reaction as “calm.”

Given Mr. Woodford’s reputation and the global nature of the securities market, I would surely flag 1 May 2014 as a day to peer across the Atlantic to see what “long-term opportunities” he’s pursuing.

Scott Satterwhite will be retiring at the end of September, 2016

Scott Satterwhite joined Artisan from Wachovia Securities in 1997 and was the sole manager of Artisan Small Cap Value (ARTVX) from its launch. ARTVX is also the longest-tenured fund in my non-retirement portfolio; I moved my Artisan Small Cap (ARTSX) investment into Satterwhite’s fund almost as soon as it launched and I’ve never had reason to question that decision. Mr. Satterwhite then extended his discipline into Artisan Mid Cap Value (ARTQX) and the large cap Artisan Value (ARTLX). All are, as is typical of Artisan, superb.

Artisan has a really strong internal culture and focus on creating coherent, self-sustaining investment teams. Three years after launch, Satterwhite’s long-time analyst Jim Kieffer became a co-manager. George Sertl was added six years after that and Dan Kane six years later. Mr. Kane is now described as “the informal lead manager” with Satterwhite on ARTVX. This is probably one of the two most significant manager changes in Artisan’s history (the retirement of its founder was the other) but the firm seems exceptionally well-positioned both to attract additional talent and to manage the required three year transition.

Observer Fund Profiles:

T. Rowe Price Global Allocation (RPGAX): T. Rowe is getting bold, cautiously. Their newest and most innovative fund offers a changing mix of global assets, including structural exposure to a single hedge fund, is also broadly diversified, low-cost and run by the team responsible for their Spectrum and Personal Strategy Funds. So far, so good!

Oops! The fund profile is slightly delayed. Please check back tomorrow.

Elevator Talk: Jeffrey K. Ringdahl of American Beacon Flexible Bond (AFXAX)

Ringdahl-color In a fundamentally hostile environment, investors need to have a flexible approach to income investing. Some funds express that flexibility by investing in emerging market bonds, financial derivatives such as options, or illiquid securities (think: “lease payments from the apartment complex we just bought”).

American Beacon’s decision was to target “positive total return regardless of market conditions” in their version. Beacon, like Harbor, positions itself as “a manager of managers” and assembles teams of institutional sub-advisors to manage the actual portfolio. In this case, they’ve paired Brandywine Global, GAM and PIMCO and have given the managers extraordinarily leeway in pursuing the fund’s objective. One measure of that flexibility is the fund’s duration, a measure of interest rate sensitivity. They project a duration of anything from negative five years (effectively shorting the market) to plus eight years (generally the preferred spot for long-term owners of bond funds). Since inception the fund has noticeably outrun its “nontraditional bond” peers with reasonable volatility.

Jeff Ringdahl is American Beacon’s Chief Operating Officer and one of the primary architects of the Flexible Bond Strategy. He’s worked with a bunch of “A” tier management firms including Touchstone Investments, Fidelity and State Street Global Advisors. Here are his 245 words (I know, he overshot) on why you should consider a flexible bond strategy:

In building an alternative to a traditional bond fund, our goal was to stay true to what we consider the three tenets of traditional bond investing: current income, principal preservation and equity diversification. However, we also sought to protect against unstable interest rates and credit spreads.

The word “unconstrained” is often used to describe similar strategies, but we believe “flexible” is a better descriptor for our approach. Many investors associate the word “unconstrained” with higher risk. We implemented important risk constraints which help to create a lower risk profile. Our multi-manager structure is a key distinguishing characteristic because of its built-in risk management. Unconstrained or flexible bond funds feature a great degree of investment flexibility. While investment managers may deliver compelling risk-adjusted performance by using this enhanced flexibility, there may be an increased possibility of underperformance because there are fewer risk controls imposed by many of our peer funds. In our opinion, if you would ever want to diversify your managers you would do so where the manager had the greatest latitude. We think that this product style is uniquely designed for multi-manager diversification.

Flexible bond investing allows asset managers the ability to invest long and short across the global bond and currency markets to capitalize on opportunities in the broad areas of credit, currencies and yield curve strategies. We think focusing on the three Cs: Credit, Currency and Curve gives us an advantage in seeking to deliver positive returns over a complete market cycle.

The fund has five share classes. The minimum initial investment for the no-load Investor class is $2,500. Expenses are 1.27% on about $300 million in assets.

The fund’s website is functional but spare. You get the essential information, but there’s no particular wealth of insight or commentary on this strategy (and there is one odd picture of a bunch of sailboats barely able to get out of one another’s way).

Our earlier Elevator Talks were:

Conference Call Highlights: Zac Wydra of Beck, Mack & Oliver Partners

We looked for a picture of Zac Wydra on the web but found Wydra the Otter instead. We decided that Zac is cute but Wydra is cuter, so… If we can find a t-shirt with Wydra’s picture on it, we might send it along to Zac with our best wishes.

In mid-October we spoke for about an hour with Zac Wydra of Beck, Mack & Oliver Partners Fund (BMPEX). There were about 30 other participants on the call. I’ve elsewhere analogized Beck, Mack to Dodge & Cox: an old money, white shoe firm whose core business is helping the rich stay rich. In general, you need a $3 million minimum investment to engage with them. Partners was created in 1991 as a limited partnership to accommodate the grandkids or staff of their clients, folks who might only have a few hundred thousand to commit. (Insert about here: “Snowball gulps”) The “limited” in limited partnership signals a maximum number of investors, 100. The partnership filled up and prospered. When the managing partner retired, Zac made a pitch to convert the partnership to a ’40 fund and make it more widely available. He argued that he thought there was a wider audience for a disciplined, concentrated fund.

He was made the fund’s inaugural manager. He’s 41 and anticipates running BMPEX for about the next quarter century, at which point he’ll be required – as all partners are – to move into retirement and undertake a phased five year divestment of his economic stake in the firm. His then-former ownership stake will be available to help attract and retain the best cadre of younger professionals that they can find. Between now and retirement he will (1) not run any other pooled investment vehicle, (2) not allow BMPEX to get noticeably bigger than $1.5 billion – he’ll return capital to investors first – and (3) will, over a period of years, train and oversee a potential successor.

In the interim, the discipline is simple:

never hold more than 30 securities – he can hold bonds but hasn’t found any that offer a better risk/return profile than the stocks he’s found.
only invest in firms with great management teams, a criterion that’s met when the team demonstrates superior capital allocation decisions over a period of years
invest only in firms whose cash flows are consistent and predictable. Some fine firms come with high variable flows and some are in industries whose drivers are particularly hard to decipher; he avoids those altogether.
only buy when stocks sell at a sufficient discount to fair value that you’ve got a margin of safety, a patience that was illustrated by his decision to watch Bed, Bath & Beyond for over two and a half years before a short-term stumble triggered a panicky price drop and he could move in. In general, he is targeting stocks which have the prospect of gaining at least 50% over the next three years and which will not lose value over that time.
ignore the question of whether it’s a “high turnover” or “low turnover” strategy. His argument is that the market determines the turnover rate. If his holdings become overpriced, he’ll sell them quickly. If the market collapses, he’ll look for stocks with even better risk/return profiles than those currently in the portfolio. In general, it would be common for him to turn over three to five names in the portfolio each year, though occasionally that’s just recycling: he’ll sell a good firm whose stock becomes overvalued then buy it back again once it becomes undervalued.

Two listener questions, in particular, stood out:

Kevin asked what Zac’s “edge” was. A focus on cash, rather than earnings, seemed to be the core of it. Businesses exist to generate cash, not earnings, and so BM&O’s valuations were driven by discounted cash flow models. Those models were meaningful only if it were possible to calculate the durability of cash flows over 5 years. In industries where cash flows have volatile, it’s hard to assign a meaningful multiple and so he avoids them.

Seth asked what mistakes have you made and what did you learn from them? Zac hearkened back to the days when the fund was still a private partnership. They’d invested in AIG which subsequently turned into a bloody mess. Ummm, “not an enjoyable experience” was his phrase. He learned from that that “independent” was not always the same as “contrary.” AIG was selling at what appeared to be a lunatic discount, so BM&O bought in a contrarian move. Out of the resulting debacle, Zac learned a bit more respect for the market’s occasionally unexplainable pricings of an asset. At base, if the market says a stock is worth twenty cents a share, you’d better than remarkably strong evidence in order to act on an internal valuation of twenty dollars a share.

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

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

The BMPEX Conference Call

As with all of these funds, we’ve created a new featured funds page for Beck, Mack & Oliver Partners Fund, pulling together all of the best resources we have for the fund, including a brand new audio profile in .mp3 format.

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.

As promised, my colleague Charles Boccadoro weighs in on your almost-magical ability to turn a temporary loss of principal into a …

Permanent Loss of Capital

The father of value investing, Benjamin Graham, employed the concept of “Margin of Safety” to minimize risk of permanent loss. His great student, Warren Buffett, puts it like this: “Rule No. 1: never lose money; rule No. 2: don’t forget rule No. 1.”

Zachary Wydra, portfolio manager of the 5-star Beck Mack & Oliver Partners (BMPEX) fund, actually cited Mr. Buffett’s quote during the recent MFO conference call.

But a look at Berkshire Hathaway, one of the great stocks of all time, shows it dropped 46% between December 2007 and February of 2009. And, further back, it dropped about the same between June 1998 and February 2002. So, is Mr. Buffett not following his own rule? Similarly, a look at BMPEX shows an even steeper decline in 2009 at -54%, slightly worse than the SP500.

The distinction, of course, is that drawdown does not necessarily mean loss, unless one sells at what is only a temporary loss in valuation – as opposed to an unrecoverable loss, like experienced by Enron shareholders. Since its 2009 drawdown, BMPEX is in fact up an enviable 161%, beating the SP500 by 9%.

Robert Arnott, founder of Research Associates, summarizes as follows: “Temporary losses of value are frequent; at times they can become so frightening that they become permanent—for those that sell.” Distinguishing between temporary drawdown and permanent loss of capital (aka “the ultimate risk”) is singularly the most important, if unnerving, aspect of successful value investing.

Mr. Wydra explains his strategy is to target stocks that have an upside potential over the next three years of at least 50% and will not lose value over that time. Translation: “loss,” as far as BMPEX is concerned, equates to no drawdown over a three year period. A very practical goal indeed, since any longer period would likely not be tolerated by risk averse investors.

And yet, it is very, very hard to do, perhaps even impossible for any fund that is primarily long equities.

Here is downside SP500 total return performance looking back about 52 years:

sp5003yr

It says that 3-year returns fall below zero over nearly 30% of the time and the SP500 shows a loss of 20% or more in 15% of 3-year returns. If we compare returns against consumer price index (CPI), the result is even worse. But for simplicity (and Pete’s) sake, we will not. Fact is, over this time frame, one would need to have invested in the SP500 for nearly 12 years continuously to guarantee a positive return. 12 years!

How many equity or asset allocation funds have not experienced a drawdown over any three year period? Very few. In the last 20 years, only four, or about 1-in-1000. Gabelli ABC (GABCX) and Merger (MERFX), both in the market neutral category and both focused on merger arbitrage strategies. Along with Permanent Portfolio (PRPFX) and Midas Perpetual Portfolio (MPREX), both in the conservative allocation category and both with large a percentage of their portfolios in gold. None of these four beat the SP500. (Although three beat bonds and GABCX did so with especially low volatility.)

nodrawdown
So, while delivering equity-like returns without incurring a “loss” over a three year period may simply prove too high a goal to come true, it is what we wish was true.

29Oct2013/Charles

Conference Call Upcoming: John Park and Greg Jackson, Oakseed Opportunity, November 18, 7:00 – 8:00 Eastern

oakseed On November 18, Observer readers will have the opportunity to hear from, and speak to John Park and Greg Jackson, co-managers of Oakseed Opportunity Fund (SEEDX and SEDEX). John managed Columbia Acorn Select for five and a half years and, at his 2004 departure, Morningstar announced “we are troubled by his departure: Park had run this fund since its inception and was a big driver behind its great long-term record. He was also the firm’s primary health-care analyst.” Greg co-managed Oakmark Global (OAKGX) for over four years and his departure in 2003 prompted an Eeyore-ish, “It’s never good news when a talented manager leaves.”

The guys moved to Blum Capital, a venture capital firm. They did well, made money but had less fun than they’d like so they decided to return to managing a distinctly low-profile mutual fund.

Oakseed is designed to be an opportunistic equity fund. Its managers are expected to be able to look broadly and go boldly, wherever the greatest opportunities present themselves. It’s limited by neither geography, market cap nor stylebox. John Park laid out its mission succinctly: “we pursue the maximum returns in the safest way possible.”

I asked John where he thought they’d focus their opening comments. Here’s his reply:

We would like to talk about the structure of our firm and how it relates to the fund at the outset of the call. I think people should know we’re not the usual fund management company most people think of when investing in a fund. We discussed this in our first letter to shareholders, but I think it’s worthwhile for our prospective and current investors to know that Oakseed is the only client we have, primarily because we want complete alignment with our clients from not only a mutual investment perspective (“skin in the game”), but also that all of our time is spent on this one entity. In addition, being founders of our firm and this fund, with no intentions of ever starting and managing a new fund, there is much less risk to our investors that one or both of us would ever leave. I think having that assurance is important.

Our conference call will be Monday, November 18, from 7:00 – 8:00 Eastern. It’s free. It’s a phone call.

How can you join in?

WOULD AN ADDITIONAL HEADS UP HELP?

Nearly two 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.

Conference Call Queue: David Sherman, RiverPark Strategic Income, December 9, 7:00 – 8:00 Eastern

On Monday, December 9, from 7:00 – 8:00 Eastern, you’ll have a chance to meet David Sherman, manager of RiverPark Short Term High Yield (RPHYX) and the newly-launched RiverPark Strategic Income Fund (RSIVX). David positions RSIVX as the next step out on the risk-return ladder from RPHYX: capable of doubling its sibling’s returns with entirely manageable risk. If you’d like to get ahead of the curve, you can register for the call with David though I will highlight his call in next month’s issue.

Launch Alert: DoubleLine Shiller Enhanced CAPE

On October 29, DoubleLine Shiller Enhanced CAPE (DSEEX and DSENX) launched. The fund will use derivatives to try to outperform the Shiller Barclays CAPE US Sector Total Return Index. CAPE is an acronym for “cyclically-adjusted price/earnings.” The measure was propounded by Nobel Prize winning economist Robert Shiller as a way of taking some of the hocus-pocus out of the calculation of price/earnings ratios. At base, it divides today’s stock price by the average, inflation-adjusted earnings from the past decade. Shiller argues that current earnings are often deceptive since profit margins tend over time to regress to the mean and many firms earnings run on three to five year cycles. As a result, the market might look dirt cheap (high profit margins plus high cyclical earnings = low conventional P/E) when it’s actually poised for a fall. Looking at prices relative to longer-term earnings gives you a better chance of getting sucked into a value trap.

The fund will be managed by The Gundlach and Jeffrey Sherman. Messrs Gundlach and Sherman also work together on the distinctly disappointing Multi-Asset Growth fund (DMLAX), so the combination of these guys and an interesting idea doesn’t translate immediately into a desirable product. The fact that it, like many PIMCO funds, is complicated and derivatives-driven counsels for due caution in one’s due diligence. The “N” share class has a $2000 minimum initial investment and 0.91% expense ratio. The institutional shares are about one-third cheaper.

Those interested in a nice introduction to the CAPE research might look at Samuel Lee’s 2012 CAPE Crusader essay at Morningstar. There’s a fact sheet and a little other information on the fund’s homepage.

Funds in Registration (The New Year’s Edition)

And there were a lot of funds targeting a year-end launch. Every day David Welsch, firefighter/EMT/fund researcher, scours new SEC filings to see what opportunities might be about to present themselves. This month he tracked down 24 no-load retail funds in registration, which represents our core interest. But if you expand that to include ETFs, institutional funds, reorganized funds and load-bearing funds, you find nearly 120 new vehicles scheduled for Christmas delivery.

Close readers might find the answers to four funds in reg quiz questions:

Which manager of a newly-registered fund had the schmanciest high society wedding this year?
Which fund in registration gave Snowball, by far, the biggest headache as he tried to translate their prose to English?
Which hedge fund manager decided that the perfect time to launch a mutual fund was after getting bludgeoned on returns for two consecutive years?
Which managers seem most attuned to young investors, skippering craft that might be described as Clifford the Big Red Mutual Fund and the Spongebob Fund?

Manager Changes

On a related note, we also tracked down 51 fund manager changes.

Updates

One of the characteristics of good managers is their ability to think clearly and one of the best clues to the existence of clear thinking is clear writing. Here’s a decent rule: if they can’t write a grocery list without babbling, you should avoid them. Contrarily, clear, graceful writing often reflects clear thinking.

Many managers update their commentaries and fund materials quarterly and we want to guide you to the most recent discussions and data possible for the funds we’ve written about. The indefatigable Mr. Welsch has checked (and updated) every link and linked document for every fund we’ve profiled in 2013 and for most of 2012. Here’s David’s summary table, which will allow you to click through to a variety of updated documents.

Advisory Research Strategic Income	Q3 Report Manager Commentary Fact Sheet
Artisan Global Equity Fund	Q3 Report
Artisan Global Value Fund	Q3 Report
Beck, Mack & Oliver Partners Fund	Fact Sheet
Bretton Fund	Q3 Report Fund Fact Page
Bridgeway Managed Volatility	Q3 Report Fact Sheet
FPA International Value	Q3 Report and Commentary Fact Sheet
FPA Paramount	Q3 Report and Commentary Fact Sheet
Frank Value	Fact Sheet Q3 Report and Commentary
FundX Upgrader Fund	Fact Sheet
Grandeur Peak Global Opportunities	Q3 Report Commentary
Grandeur Peak Global Reach	Q3 Report Commentary
LS Opportunity Fund	Q3 Report
Matthews Asia Strategic Income	Commentary Q3 Report
Oakseed Opportunity Fund	Fact Sheet
Oberweis International Opportunities	Q3 Report
Payden Global Low Duration Fund	Q3 Report Commentary
PIMCO Short Asset Investment Fund “D” shares	Q3 Report
RiverPark/Gargoyle Hedge Value	Q3 Report
Scout Low Duration Bond Fund	Q3 Report Commentary
Sextant Global High Income	Q3 Report
Smead Value Fund	Q3 Report Fact Sheet
The Cook and Bynum Fund	Fact Sheet
Tributary Balanced	Q3 Report Fact Sheet
Whitebox Long Short Equity Investor Class	Fact Sheet

Briefly Noted

A big ol’ “uhhh” to Advisory Research Emerging Markets All Cap Value Fund (the “Fund”) which has changed both manager (“Effective immediately, Brien M. O’Brien is no longer a portfolio manager of the Fund”) and name (it will be Advisory Research Emerging Markets Opportunities Fund), both before the fund even launched. A few days after that announcement, AR also decided that Matthew Dougherty would be removed as a manager of the still-unlaunched fund. On the bright side, it didn’t close to new investors before launch, so that’s good. Launch date is November 1, 2013.

In a singularly dark day, Mr. O’Brien was also removed as manager of Advisory Research Small Micro Cap Value Fund, which has also not launched and has changed its name: Advisory Research Small Company Opportunities Fund.”

A Centaur arises! The Tilson funds used to be a two-fund family: the one that Mr. Tilson ran and the one that was really good. After years of returns that never quite matched the hype, Mr. Tilson liquidated his Tilson Focus (TILFX) fund in June 2013. That left behind the Tilson-less Tilson Dividend Fund (TILDX) which we described as “an awfully compelling little fund.”

Effective November 1, Tilson Dividend became Centaur Total Return Fund (TILDX), named after its long-time sub-adviser, Centaur Capital Partners. Rick Schumacher, the operations guy at the Centaur funds, elaborates:

Since Tilson is no longer involved in the mutual fund whatsoever, and since the Dividend Fund has historically generated as much (if not more) income from covered call premiums rather than pure dividends, we felt that it was a good time to rebrand the fund. So, effective today, our fund is now named the Centaur Total Return Fund. We have kept the ticker (TILDX), as nothing’s really changed as far as the investment objective or strategy of the fund, and besides, we like our track record. But, we’re very excited about our new Centaur Mutual Funds brand, as it will provide us with potential opportunities to launch other strategies under this platform in the future.

They’ve just launched a clean and appropriate dignified website that both represents the new fund and archives the analytic materials relevant to its old designation. The fund sits at $65 million in assets with cash occupying about a quarter of its portfolio. All cap, four stars, low risk. It’s worth considering, which we’ll do again in our December issue.

Laudus Growth Investors U.S. Large Cap Growth Fund is having almost as much fun. On September 24, its Board booted UBS Global Asset Management as the managers of the fund in favor of BlackRock. They then changed the name (to Laudus U.S. Large Cap Growth Fund) and, generously, slashed the fund’s expense ratio by an entire basis point from 0.78% to 0.77%.

But no joy in Mudville: the shareholder meeting being held to vote on the merger of Lord Abbett Classic Stock Fund (LRLCX) into Lord Abbett Calibrated Dividend Growth Fund (LAMAX) has been adjourned until November 7, 2013 for lack of a quorum.

Scout Funds are sporting a redesigned website. Despite the fact that our profiles of Scout Unconstrained Bond and Scout Low Duration don’t qualify as “news” for the purposes of their media list (sniffles), I agree with reader Dennis Green’s celebration of the fact the new site is “thoughtful, with a classy layout, and—are you sitting down?— their data are no longer stale and are readily accessible!” Thanks to Dennis for the heads-up.

Snowball’s portfolio: in September, I noted that two funds were on the watchlist for my own, non-retirement portfolio. They were Aston River Road Long Short (ARLSX) and RiverPark Strategic Income (RSIVX). I’ve now opened a small exploratory position in Aston (I pay much more attention to a fund when I have actual money at risk) as I continue to explore the possibility of transferring my Northern Global Tactical Asset Allocation (BBALX) investment there. The Strategic Income position is small but permanent and linked to a monthly automatic investment plan.

For those interested, John Waggoner of USA Today talked with me for a long while about the industry and interesting new funds. Part of that conversation contributed to his October 17 article, “New Funds Worth Mentioning.”

SMALL WINS FOR INVESTORS

Eaton Vance Asian Small Companies Fund (EVASX) will eliminate its danged annoying “B” share class on November 4, 2013. It’s still trying to catch up from having lost 70% in the 2007-09 meltdown.

Green Owl Intrinsic Value Fund (GOWLX) substantially reduced its expense cap from 1.40% to 1.10%. It’s been a very solid little large cap fund since its launch in early 2012.

Invesco Balanced-Risk Commodity Strategy Fund (BRCAX) will reopen to new investors on November 8, 2013. The fund has three quarters of a billion in assets despite trailing its peers and losing money in two of its first three years of existence.

As of December, Vanguard Dividend Appreciation Index (VDAIX) will have new Admiral shares with a 0.10% expense ratio and a $10,000 minimum investment. That’s a welcome savings on a fund currently charging 0.20% for the Investor share class.

At eight funds, Vanguard will rename Signal shares as Admiral shares and will lower the minimum investment to $10,000 from $100,000.

Zeo Strategic Income Fund (ZEOIX) dropped its “institutional” minimum to $5,000. I will say this for Zeo: it’s very steady.

CLOSINGS (and related inconveniences)

The Brown Capital Management Small Company Fund (BCSIX) closed to new investors on October 18, 2013.

Buffalo Emerging Opportunities Fund (BUFOX) formally announced its intention to close to new investors when the fund’s assets under management reach $475 million. At last check, they’re at $420 million. Five star fund with consistently top 1% returns. If you’re curious, check quick!

GW&K Small Cap Equity Fund (GWETX) is slated to close to new investors on November 1, 2013.

Matthews Pacific Tiger Fund (MAPTX) closed to new investors on October 25, 2013.

Oakmark International (OAKIX) closed to most new investors as of the close of business on October 4, 2013

Templeton Foreign Smaller Companies (FINEX) will close to new investors on December 10^th. I have no idea of why: it’s a small fund with an undistinguished but not awful record. Liquidation seems unlikely but I can’t imagine that much hot money has been burning a hole in the managers’ pockets.

Touchstone Merger Arbitrage Fund (TMGAX), already mostly closed, will limit access a bit more on November 11, 2013. That means closing the fund to new financial advisors.

OLD WINE, NEW BOTTLES

Advisory Research Emerging Markets All Cap Value Fund has renamed itself, before launch, as Advisory Research Emerging Markets Opportunities Fund.

Aegis Value Fund (AVALX) has been reorganized as … Aegis Value Fund (AVALX), except with a sales load (see story above).

DundeeWealth US, LP (the “Adviser”) has also changed its name to “Scotia Institutional Investments US, LP” effective November 1, 2013.

The Hatteras suite of alternative strategy funds (Hatteras Alpha Hedged Strategies, Hedged Strategies Fund, Long/Short Debt Fund, Long/Short Equity Fund and Managed Futures Strategies Fund) have been sold to RCS Capital Corporation and Scotland Acquisition, LLC. We know this because the SEC filing avers the “Purchaser will purchase from the Sellers and the Sellers will sell to the Purchaser, substantially all the assets related to the business and operations of the Sellers and … the “Hatteras Funds Group.” Morningstar has a “negative” analyst rating on the group but I cannot find a discussion of that judgment.

Ladenburg Thalmann Alternative Strategies Fund (LTAFX) have been boldly renamed (wait for it) Alternative Strategies Fund. It appears to be another in the expanding array of “interval” funds, whose shares are illiquid and partially redeemable just once a quarter. Its performance since October 2010 launch has been substantially better than its open-ended peers.

Effective October 7, 2013, the WisdomTree Global ex-US Growth Fund (DNL) became WisdomTree Global ex-US Dividend Growth Fund.

U.S. Global Investors MegaTrends Fund (MEGAX) will, on December 20, become Holmes Growth Fund

OFF TO THE DUSTBIN OF HISTORY

shadow On-going thanks to The Shadow for help in tracking the consequences of “the perennial gale of creative destruction” blowing through the industry. Shadow, a member of the Observer’s discussion community, has an uncanny talent for identifying and posting fund liquidations (and occasionally) launches to our discussion board about, oh, 30 seconds after the SEC first learns of the change. Rather more than three dozen of the changes noted here and elsewhere in Briefly Noted were flagged by The Shadow. While my daily reading of SEC 497 filings identified most of the them, his work really does contribute a lot.

And so, thanks, big guy!

On October 16, 2013, the Board of Trustees of the Trust approved a Plan of Liquidation, which authorizes the termination, liquidation and dissolution of the 361 Absolute Alpha Fund. In order to effect such liquidation, the Fund is closed to all new investment. Shareholders may redeem their shares until the date of liquidation. The Fund will be liquidated on or about October 30, 2013.

City National Rochdale Diversified Equity Fund (the “Diversified Fund”) has merged into City National Rochdale U.S. Core Equity Fund while City National Rochdale Full Maturity Fixed Income Fund was absorbed by City National Rochdale Intermediate Fixed Income Fund

Great-West Ariel Small Cap Value Fund (MXSCX) will merge into Great-West Ariel Mid Cap Value Fund (MXMCX) around Christmas, 2013. That’s probably a win for shareholders, since SCV has been mired in the muck while MCV has posted top 1% returns over the past five years.

As we suspected, Fidelity Europe Capital Appreciation Fund (FECAX) is merging into Fidelity Europe Fund (FIEUX). FECAX was supposed to be the aggressive growth version of FIEUX but the funds have operated as virtually clones for the past five years. And neither has particularly justified its existence: average risk, average return, high r-squared despite the advantages of low expenses and a large analyst pool.

The Board of the Hansberger funds seems concerned that you don’t quite understand the implications of having a fund liquidated. And so, in the announcement of the October 18 liquidation of Hansberger International Fund they helpfully explain: “The Fund no longer exists, and as a result, shares of the Fund are no longer available for purchase.”

Highland Alpha Trend Strategies Fund (HATAX), formerly Pyxis Alpha Trend Strategies Fund, will close on November 20, 2013. With assets not much greater than my retirement account (and performance vastly below it), I’m not sure that even the manager will notice the disappearance.

Huntington Income Equity (HUINX) will merge into Huntington Dividend Capture Fund (HDCAX) at the end of the first week of December. It’s never a good sign when the winning fund – the more attractive of the two – trails 80% of its peers.

The JPMorgan Global Opportunities Fund was liquidated and dissolved on or about October 25, 2013. Given that they’re speaking in the past tense, don’t you think that they’d know whether it was “on” or “about”?

Update on the JPMorgan Value Opportunities Fund: an attempt to merge the fund out of existence in September failed because the Board couldn’t get enough shareholders to vote one way or the other. On October 10, though, they reached a critical mass and folded the fund into JPMorgan Large Cap Value Fund (OLVAX) on October 18^th.

So long to LONGX! Longview Tactical Allocation Fund (LONGX) has closed and will liquidate on November 15, 2013. 700% turnover which might well have led to a joke about their ability to take the long view except for the fact that they’ve joined the zombie legion of walking dead funds.

In a determinedly “WTF?” move, the Mitchell Capital’s Board of Trustees has determined to liquidate the Mitchell Capital All-Cap Growth Fund (MCAEX) “due to the adviser’s business decision that it no longer is economically viable to continue managing the Fund because of the Fund’s small size, the increasing costs associated with managing the Fund, and the difficulty encountered in distributing the Fund’s shares.” Huh? “No longer economically viable”? They only launched this sucker on March 1, 2013. Seven months, guys? You hung on seven months and that’s it? What sort of analytic abilities are on display here, do you suppose?

On October 15, Nomura Partners Funds closed all of its remaining five mutual funds to purchases and exchanges. They are The Japan Fund (NPJAX), Nomura Partners High Yield (NPHAX), Nomura Partners Asia Pacific Ex Japan (NPAAX), Nomura Partners Global Equity Income (NPWAX), and Nomura Partners Global Emerging Markets (NPEAX). Here’s a sentence you should take seriously: “The Board will consider the best interests of the investors in each of the Funds and may decide to liquidate, merge, assign the advisory contract or to take another course of action for one or more of the Funds.” The NPJAX board has acted boldly in the past. In 2002, it fired the fund’s long-standing adviser, Scudder,Stevens, and turned the fund over to Fidelity to manage. Then, in 2008, they moved it again from Fidelity to Nomura. No telling what they might do next.

The firm also announced that it, like DundeeWealth, is planning to get out of the US retail fund business.

The liquidations of Nuveen Tradewinds Global Resources Fund and Nuveen Tradewinds Small-Cap Opportunities Fund are complete. It’s an ill wind that blows …

Oppenheimer SteelPath MLP and Infrastructure Debt Fund went the way of the wild goose on October 4.

Transamerica is bumping off two sub-advised funds in mid-December: Transamerica International Bond (TABAX), subadvised by J.P. Morgan, and Transamerica International Value Opportunities Fund, subadvised by Thornburg but only available to other Transamerica fund managers.

UBS Global Frontier Fund became UBS Asset Growth Fund (BGFAX) on October 28. Uhhh … doesn’t “Asset Growth” strike you as pretty much “Asset Gathering”? Under the assumption that “incredibly complicated” is the magic strategy, the fund will adopt a managed volatility objective that tries to capture all of the upside of the MSCI World Free Index with a standard deviation of no more than 15. On the portfolio’s horizon: indirect real estate securities, index funds, options and derivatives with leverage of up to 75%. They lose a couple managers and gain a couple in the process.

U.S. Global Investors Global Emerging Markets Fund closed on October 1 and liquidated on Halloween. If you were an investor in the fund, I’m hopeful that you’d already noticed. And considered Seafarer as an alternative.

Vanguard plans to merge two of its tax-managed funds into very similar index funds. Vanguard Tax-Managed International (VTMNX) is merging into Vanguard Developed Markets Index (VDMIX) and Vanguard Tax-Managed Growth & Income (VTMIX) will merge into Vanguard 500 Index (VFINX). Since these were closet index funds to begin with – they have R-squared values of 98.5 and 100(!) – the merger mostly serves to raise the expenses borne by VTMNX investors from 10 basis points to 20 for the index fund.

Vanguard Growth Equity (VGEQX) is being absorbed by Vanguard US Growth (VWUSX). Baillie Gifford, managers of Growth Equity, will be added as another team for US Growth.

Vanguard Managed Payout Distribution Focus (VPDFX) and Vanguard Managed Payout Growth Focus (VPGFX) are slated to merge to create a new fund, Vanguard Managed Payout Fund. At that time, the payout in question will decrease to 4% from 5%.

WHV Emerging Markets Equity Fund (WHEAX) is suffering “final liquidation” on or about December 20, 2013. Okay returns, $5 million in assets.

In Closing . . .

As Chip reviewed how folks use our email notification (do they open it? Do they click through to MFO?), she discovered 33 clicks from folks in Toyko (youkoso!), 21 in the U.K. (uhhh … pip pip?), 13 in the United Arab Emirates (keep cool, guys!) and 10 scattered about India (Namaste!). Welcome to all.

Thanks to the kind folks who contributed to the Observer this month. I never second guess folks’ decision to contribute, directly or through PayPal, but I am sometimes humbled by their generosity and years of support. And so thanks, especially, to the Right Reverend Rick – a friend of many years – and to Andrew, Bradford, Matt, James (uhh… Jimmy?) and you all. You make it all possible.

Thanks to all of the folks who bookmarked or clicked on our Amazon link. Here’s the reminder of the easiest way to support the Observer: just use our Amazon link whenever you’d normally be doing your shopping, holiday or other, on Amazon anyway. They contribute an amount equal to about 7% of the value of all stuff purchased through the link. It costs you nothing (the cost is already built into their marketing budget) and is invisible. If you’re interested in the details, feel free to look at the Amazon section under “Support.”

Remember to join us, if you can, for our upcoming conversations with John, Greg and David. Regardless, enjoy the quiet descent of fall and its seasonal reminder to slow down a bit and remember all the things you have to be grateful for rather than fretting about the ones you don’t have (and, really, likely don’t need and wouldn’t enjoy).

Cheers!

David

October 1, 2013

Welcome to October, the time of pumpkins.

augie football October’s a month of surprises, from the first morning that you see frost on the grass to the appearance of ghosts and ghouls at month’s end. It’s a month famous of market crashes – 1929, 1987, 2008 – and for being the least hospitable to stocks. And now it promises to be a month famous for government showdowns and shutdowns, when the sales of scary Halloween masks (Barackula, anyone?) take off.

It’s the month of golden leaves, apple cider, backyard fires and weekend football. (Except possibly back home in Pittsburgh, where some suspect a zombie takeover of the beloved Steelers backfield.) It’s the month that the danged lawnmower gets put away but the snowblower doesn’t need to be dragged out.

It’s the month where we discover the Octoberfest actually takes place in September, and we’ve missed it.

In short, it’s a good month to be alive and to share with you.

Better make that “The Fantastic 48,” Russ

51funds

Russel Kinnel, Morningstar’s chief fund guy, sent out an email on September 16^th, touting his “Fantastic 51,” described as “51 Funds You Should Know About.” And if you’ll just pony up the $125 for a Fund Investor subscription, it’s yours!

Uhhh … might have to pare that back to the Fantastic 48, Russ. It turns out that a couple of the funds hyped in the email underwent critical changes between the time Mr. Kinnel published that article in May and the time Morningstar’s marketers began pushing it in September.

Let’s start by looking at Mr. K’s criteria, then talking about the flubbed funds and finish by figuring out what we might learn from the list as a whole.

Here are the criteria for being Fantastic this year:

Last year I shared the “Fantastic 46” with you. This year I raised the bar on my tests and still reached 51 funds. Here’s what I want:

A fund with expenses in the cheapest quintile
Returns that beat the benchmark over the course of the manager’s tenure (minimum five years)
Manager investment of at least $500,000
A Positive Parent rating
A medalist Morningstar Analyst Rating

Sub-text: Fantastic funds are large or come from large fund complexes. Of the 1150 medalist funds, only 53 have assets under $100 million. Of those 53, only five or six are the products of independent or boutique firms. The others are from Fido, MFS, PIMCO or another large firm. Typically an entire target-date series gets medalized, including the Retirement 2075 fund with $500,003 in it. By way of comparison, there are 2433 funds with under $100 million in assets.

And it’s certainly the case that the Fantastic 51 is The Corporate Collection: 10 American Funds, 10 Price and nine Vanguard. Russel holds out the LKCM funds as examples of off-the-radar families, which would be more credible if LKCM Small Cap Equity (LKSCX) didn’t already have $1.1 billion in assets.

And what about the funds touted in the promotional email. Two stand out: FPA Paramount and Janus Triton.

Morningstar’s take on FPA Paramount

fprax text

The Mutual Fund Observer’s reply:

Great recommendation, except that the managers you’re touting left the fund and its strategy has substantially changed. Eric and Steve’s unnamed and unrecognized co-managers are now in charge of the fund and are working to transition it from a quality-growth to an absolute-value portfolio. Both of those took place in August 2013.

The MFO recommendation: if you like Eric and Steve’s work, invest in FPA Perennial (FPPFX) which is a fund they actually run, using the strategy that Mr. Kinnel celebrates.

Morningstar’s take on Janus Triton

jattx

The Observer’s reply:

Uhhh … a bigger worry here is that Chad and Brian left in early May, 2013. The new manager’s tenure is 14 weeks. Morningstar’s analysts promptly downgraded the fund to “neutral.” And Greg Carlson fretted that the “manager change leaves Janus Triton with uncertain prospects” because Mr. Coleman has not done a consistently excellent job in his other charges. That would be four months before the distribution of this email promo.

The MFO recommendation: if you’re impressed by Chad and Brian’s work (an entirely reasonable conclusion) check Meridian Growth Legacy Fund (MERDX), or wait until November and invest in their new Meridian Small Cap Growth Fund.

The email did not highlight, but the Fantastic 51 does include, T. Rowe Price New America Growth (PRWAX), whose manager resigned in May 2013. Presumably these funds ended up in the letter because, contrary to appearances, Mr. Kinnel neither wrote, read nor approved its content (his smiling face and first-personal singular style notwithstanding). That work was likely all done by a marketer who wouldn’t know Triton from Trident.

The bigger picture should give you pause about the value of such lists. Twenty-six percent of the funds that were “fantastic” last year are absent this year, including the entire contingent of Fidelity funds. Thirty-three percent of the currently fantastic funds were not so distinguished twelve months ago. If you systematically exclude large chunks of the fund universe from consideration (those not medalized) and have a list that’s both prosaic (“tape the names of all of the Price funds to the wall, throw a dart, find your fantasy fund!”) and unstable, you wonder how much insight you’re being offered.

Interested parties might choose to compare last year’s Fantastic 46 list with 2013’s new and improved Fantastic 51.

About the lack of index funds in the Fantastic 51

Good index funds – ones with little tracking error – can’t beat their benchmarks over time because their return is the benchmark minus expenses. A few bad index funds – ones with high tracking error, so they’re sometimes out of step with their benchmark – might beat it from time to time, and Gus Sauter was pretty sure that microscopic expenses and canny trade execution might allow him to eke out the occasional win. But the current 51 has no passive funds.

The authors of S&P Indices Versus Active Funds (SPIVA®) Scorecard would argue that’s a foolish bias. They track the percentage of funds in each equity category which manage to outperform their benchmark, controlling for survivorship bias. The results aren’t pretty. In 17 of 17 domestic equity categories they analyzed, active funds trailed passive. Not just “most active funds.” No, no. The vast majority of active funds. Over the past five years, 64.08% of large value funds trailed their benchmark and that’s the best performance by any of the 17 groups. Overall, 72.01% trailed. Your poorest odds came in the large cap growth, midcap growth and multicap growth categories, where 88% of funds lagged.

In general, active funds lag passive ones by 150-200 basis points year. That’s a problem, since that loss is greater than what the fund’s expense ratios could explain. Put another way: even if actively managed funds had an expense ratio of zero, they’d still modestly trail their passive peers.

There is one and only one bright spot in the picture for active managers: international small cap funds, nearly 90% of which outperform a comparable index. Which international small caps qualify as Fantastic you might ask? That would be, none.

If you were looking for great prospects in the international small cap arena, the Observer recommends that you check Grandeur Peak Global Reach (GPROX) or wait for the launch of one of their next generation of purely international funds. Oberweis International Opportunities (OBIOX), profiled this month, would surely be on the list. Fans of thrill rides might consider Driehaus International Small Cap Growth (DRIOX). Those more interested in restrained, high-probability bets might look at the new Artisan Global Small Cap Fund (ARTWX), a profile of which is forthcoming.

How much can you actually gain by picking a good manager?

It’s hard to find a good manager. It takes time and effort and it would be nice to believe that you might receive a reward commensurate with all your hard work. That is, spending dozens of hours in research makes a lot more sense if a good pick actually has a noticeably pay-off. One way of measuring that pay-off is by looking at the performance difference between purely average managers and those who are well above average.

The chart below, derived from data in the S&P 2013 SPIVA analysis shows how much additional reward a manager in the top 25% of funds provides compared to a purely average manager.

Category	Average five-year return	Excess return earned by a top quartile manager, In basis points per year
Small-Cap Growth	8.16	231
Small-Cap Value	10.89	228
Small-Cap Core	8.23	210
Mid-Cap Value	7.89	198
Multi-Cap Core	5.22	185
Emerging Market Equity	(0.81)	173
Mid-Cap Growth	6.37	166
Multi-Cap Growth	5.37	153
Real Estate	5.74	151
Global Equity	3.57	151
Diversified International	(0.43)	135
Mid-Cap Core	7.01	129
International Small-Cap	3.10	129
Large-Cap Core	5.67	128
Large-Cap Growth Funds	5.66	125
Multi-Cap Value	6.23	120
Large-Cap Value	6.47	102

What might this suggest about where to put your energy? First and foremost, a good emerging markets manager makes a real difference – the average manager lost money for you, the top tier of guys kept you in the black. Likewise with diversified international funds. The poorest investment of your time might be in looking for a large cap and especially large cap value manager. Not only do they rarely beat an index fund when they do, the margin of victory is slim.

The group where good active manager appears to have the biggest payoff – small caps across the board – is muddied a bit by the fact that the average return was so high to begin with. The seemingly huge 231 bps advantage held by top managers represents just a 28% premium over the work of mediocre managers. In international small caps, the good-manager premium is far higher at 41%. Likewise, top global managers returned about 42% more than average ones.

The bottom line: invest your intellectual resources where your likeliest to see the greatest reward. In particular, managers who invest largely or exclusively overseas seem to have the prospect of making a substantial difference in your returns and probably warrant the most careful selection. Managers in what’s traditionally the safest corner of the equity style box – large core, large value, midcap value – don’t have a huge capacity to outperform either indexes or peers. In those areas, cheap and simple might be your mantra.

The one consensus pick: Dodge & Cox International (DODFX)

There are three lists of “best funds” in wide circulation now: the Kiplinger 25, the Fantastic 51, and the Money 70. You’d think that if all of these publications shared the same sensible goal – good risk-adjusted returns and shareholder-friendly practices – they’d also be stumbling across the same funds.

You’d be wrong. There’s actually just one fund that they all agree on: Dodge & Cox International (DODFX). The fund is managed by the same team that handles all of Dodge & Cox. It’s dragging around $45 billion in assets but, despite consistently elevated volatility, it’s done beautifully. It has trailed its peers only twice in the past decade, including 2008 when all of the D&C funds made a mistimed bet that the market couldn’t get much cheaper. They were wrong, by about six months and 25% of their assets.

The fund has 94% of its assets in large cap stocks, but a surprisingly high exposure to the emerging markets – 17% to its peers 7%.

My colleague Charles is, even as you read this, analyzing the overlap – and lack of overlap – between such “best funds” lists. He’ll share his findings with us in November.

Tealeaf Long/Short Deep Value Fund?

sybill

Really guys?

Really?

You’ve got a business model that’s predicated upon being ridiculed before you even launch?

The fate of the Palantir (“mystical far-seeing eye”) Fund (PALIX) didn’t raise a red flag? Nor the Oracle Fund (ORGAX – the jokes there were too dangerous), or the Eye of Zohar Fund (okay, I made that one up)? It’s hard to imagine investment advisors wanting to deal with their clients’ incredulity at being placed in a fund that sounds like a parody, and it’s harder to imagine that folks like Chuck Jaffe (and, well, me) won’t be waiting for you to do something ridiculous.

In any case, the fund’s in registration now and will eventually ask you for 2.62 – 3.62% of your money each year.

The art of reading tea leaves is referred to as tasseography. Thought you’d like to know.

A new Fidelity fund is doing okay!

Yeah, I’m surprised to hear me saying that, too. It’s a rarity. Still FidelityTotal Emerging Markets (FTEMX) has made a really solid start. FTEMX is one of the new generation of emerging markets balanced or hybrid funds. It launched on November 1, 2011 and is managed by a seven-person team. The team is led by John Carlson, who has been running Fidelity New Markets Income (FNMIX), an emerging markets bond fund, since 1995. Mr. Carlson’s co-managers in general are young managers with only one other fund responsibility (for most, Fidelity Series Emerging Markets, a fund open only to other Fidelity funds).

The fund has allocated between 60-73% of its portfolio to equities and its equity allocation is currently at a historic high.

Since there’s no “emerging markets balanced” peer group or benchmark, the best we can do is compare it to the handful of other comparable funds we could find. Below we report the fund’s expense ratios and the amount of money you’d have in September 2013 if you’d invested $10,000 in each on the day that FTEMX launched.

	Growth of $10k	Expense ratio
Fidelity Total Emerging Markets	$11,067	1.38%
First Trust Aberdeen Emerging Opp (FEO)	11,163	1.70 adj.
Lazard E.M. Multi-Strategy (EMMOX)	10,363	1.60
PIMCO Emerging Multi-Asset (PEAAX)	10,140	1.71
Templeton E.M. Balanced (TAEMX)	10,110	1.44
AllianceBernstein E.M. Multi-Asset (ABAEX)	9,929	1.65

The only fund with even modestly better returns is the closed-end First Trust Aberdeen Emerging Opportunities, about which we wrote a short, positive profile. That fund’s shares are selling, as of October 1, at a 9.2% discount to its actual net asset value which is a bit more than its 8.9% average discount over the past five years and substantially more than its 7.4% discount over the past three.

Microscopic by Fidelity standard, the fund has just $80 million in assets. The minimum initial investment is $2500, reduced to $500 for IRAs.

Observer Fund Profiles:

Frank Value Fund (FRNKX) is not “that other Frank Fund” (John Buckingham’s Al Frank fund VALUX). It’s a concentrated, all-cap value fund that’s approaching its 10^th anniversary. It’s entirely plausible that it will celebrate its 10^thanniversary with returns in the top 10% of its peer group.

Oberweis International Opportunities (OBIOX) brings a unique strategy grounded in the tenets of behavioral finance to the world of international small- and mid-cap growth investing. The results (top decile returns in three of the past four years) and the firm’s increasingly sophisticated approach to risk management are both striking.

Elevator Talk #9: Bashar Qasem of Wise Capital (WISEX)

Wise Capital (WISEX) provides investors with an opportunity for diversification in a fund category (short term bonds) mostly distinguished by bland uniformity: 10% cash, one equity security thrown in for its thrill-value, about 90% of the bond portfolio would be US with a dribble of Canadian and British issues, 90% A-AAA rated and little distance between the fund and its peers.

We began searching, late last year, from short-term income funds that offered some prospect of offering atypical returns in a bad environment: negative real short-term rates for now and the prospect of a market overreaction when US rates finally began to rise. Our touchstones were stable management, a distinctive strategy, and a record of success. A tiny handful of funds survived the cull. Among them, PIMCO Short Asset (PAUIX ), Payden Global Low Duration (PYGSX), RiverPark Short Term High Yield (RPHYX), Scout Low Duration (SCLDX) … and Azzad Wise Capital.

WISEX draws on a fundamentally different asset set than any other US fixed-income fund. Much of the fund’s portfolio is invested in the Islamic world, in a special class of bank deposits and bond-equivalents called Sukuks. The fund is not constrained to invest solely in either asset class, but its investments are ethically-screened, Shariah-compliant and offers ethical exposure to emerging markets such as Turkey, Indonesia, Malaysia and the Gulf.

Azzad was founded in 1997 by Bashar Qasem, a computer engineer who immigrated to the United States from Jordan at the age of 23. Here’s Mr. Qasem’s 200 words making his case:

I started Azzad Asset Management back 1997 because I was disappointed with the lack of investment options that aligned with my socially responsible worldview. For similar reasons, I traveled across the globe to consult with scholars and earned licenses to teach and consult on compliance with Islamic finance. I later trained and became licensed to work in the investment industry.

We launched the Azzad Wise Capital Fund in 2010 as a response to calls from clients asking for a fund that respects the Islamic prohibition on interest but still offers a revenue stream and risk/return profile similar to a short-term bond fund. WISEX invests in a variety of Sukuk (Islamic bonds) and Islamic bank deposits involved in overseas development projects. Of course, it’s SEC-registered and governed by the Investment Company Act of 1940. Although it doesn’t deal with debt instruments created from interest-based lending, WISEX shares in the profits from its ventures.

And I’m particularly pleased that it appeals to conservative, income-oriented investors of all backgrounds, Muslim or not. We hear from financial advisors and individual shareholders of all stripes who own WISEX for exposure to countries like Turkey, Malaysia, and Indonesia, as well as access to an alternative asset class like Sukuk.

The fund has a single share class. The minimum initial investment is $4,000, reduced to $300 for accounts established with an automatic investing plan (always a good idea with cash management accounts). Expenses are capped at 1.49% through December, 2018.

For those unfamiliar with the risk/return profile of these sorts of investments, Azzad offers two resources. First, on the Azzad Funds website, they’ve got an okay (not but great) white paper on Sukuks. It’s under Investor Education, then White Papers. Second, on October 23^rd, Mr. Quesam and portfolio manager Jamal Elbarmil will host a free webinar on Fed Tapering and Sukuk Investing. Azzad shared the announcement with us but I can’t, for the life of me, find it on either of their websites so here’s a .pdf explaining the call.

Our earlier Elevator Talks were:

During the summer hiatus on Observer conference calls, my colleague Charles Boccadoro and I have been listening-in on calls sponsored by some of the more interesting fund companies. We report this month on the highlights of the calls concerning the reopening of RiverNorth/DoubleLine Strategic Income (David) and the evolution of the intriguing Whitebox Tactical Opportunities (Charles) funds.

Conference Call Highlights: RiverNorth/DoubleLine Strategic Income (RNDLX)

Strategic Income was launched on December 30, 2010 and our profile of the fund described it as “compelling.” We speculated that if an investor were planning to hold only three funds over the long haul, “given its reasonable expenses, the managers’ sustained successes, innovative design and risk-consciousness, this might well be one of those three.” Both popular ($1.1 billion in the portfolio) and successful (it has outperformed its “multisector bond” peers since inception and in seven of 10 quarters), the fund closed to new investors at the end of March. 2012. Faced with a substantial expansion in their opportunity set, RiverNorth decided to reopen the fund to new investors 17 months later, at the end of August 2013, with the understanding that it was subject to re-closure if there was a pressing mismatch between the fund’s resources and the opportunities available.

On September 18, 2013, co-managers Jeffrey Gundlach of DoubleLine and Patrick Galley of RiverNorth spoke with interested parties about their decision to re-open the fund and its likely evolution.

By happenstance, the call coincided with the fed’s announcement that they’d put plans to reduce stimulus on hold, an event which led Mr. Gundlach to describe it as “a pivotal day for investor attitudes.” The call addressed three issues:

The fund’s strategy and positioning. The fund was launched as an answer to the question, how do income-oriented investors manage in a zero-rate environment? The answer was, by taking an eclectic and opportunistic approach to exploiting income-producing investments. The portfolio has three sleeves: core income, modeled after Doubleline’s Core Income Fund, opportunistic income, a mortgage-backed securities strategy which is Doubleline’s signature strength, and RiverNorth’s tactical closed-end income sleeve which seeks to profit from both tactical asset choices and the opportunities for arbitrage gains when the discounts on CEFs become unsustainably large.

The original allocation was 50% core, 25% opportunistic and 25% tactical CEF. RiverNorth’s strategy is to change weightings between the sleeves to help the portfolio manage changes in interest rates and volatility; in a highly volatile market, they might reallocate toward the more conservative core strategy while a rising interest rate regime might move them toward their opportunistic and tactical sleeves. Before closing, much of the tactical CEF money was held in cash because opportunities were so few.
The rationale for reopening. Asset prices often bear some vague relation to reality. But not always. Opportunistic investors look to exploit other investors’ irrationality. In 2009, people loathed many asset classes and in 2010 they loathed them more selectively. As the memory of the crash faded, greed began to supplant fear and CEFs began selling at historic premiums to their NAVs. That is, investors were willing to pay $110 for the privilege of owning $100 in equities. Mr. Galley reported that 60% of CEFs sold at a premium to their NAVs in 2012. 2013 brought renewed anxiety, an anxious departure from the bond market by many and the replacement of historic premiums on CEFs with substantial discounts. As of mid-September, 60% of CEFs were selling at discounts of 5% or more. That is, investors were willing to sell $100 worth of securities for $95.

As a whole, CEFs were selling at a 6.5% discount to NAV. That compared to a premium the year before, an average 1% discount over the preceding three years and an average 3% discount over the preceding decade.

The lack of opportunities in the fixed-income CEF space, a relatively small place, forced the fund’s closure. The dramatic expansion of those opportunities justified its reopening. The strategy might be able to accommodate as much as $1.5 billion in assets, but the question of re-closing the fund would arise well before then.
Listener concerns. Listeners were able to submit questions electronically to a RiverNorth moderator, an approach rather more cautious than the Observer’s strategy of having callers speak directly to the managers. Some of the questions submitted were categorized as “repetitive or not worth answering” (yikes), but three issues did make it through. CEFs are traded using an algorithmic trading system developed by RiverNorth. It is not a black box, but rather a proprietary execution system used to efficiently trade closed-end funds based off of discount, instead of price. The size of the fund’s investable CEF universe is about 300 funds, out of 400 extant closed-end fixed-income funds. The extent of leverage in the portfolio’s CEFs was about 20%.

Bottom Line: the record of the managers and the fund deserves considerable respect, as does the advisor’s clear commitment to closing funds when doing so is in their investors’ best interest. The available data clearly supports the conclusion that, even with dislocations in the CEF space in 2013, active management has added considerable value here.

rnsix

The data-rich slides are already available by contacting RiverNorth. A transcript of the broadcast will be available on the RiverNorthFunds.com website sometime in October.

Update: The webcast is now available at https://event.webcasts.com/viewer/event.jsp?ei=1021309 You will be required to register, but you’ll gain access immediately.

Conference Call Highlights: Whitebox Tactical Opportunities Fund (WBMAX and WBMIX)

Portfolio managers Andrew Redleaf and Dr. Jason Cross, along with Whitebox Funds’ President Bruce Nordin, hosted the 2^nd quarter conference call for their Tactical Opportunities Fund (WBMIX) on September 10. Robert Vogel, the fund’s third manager, did not participate. The call provided an opportunity to take a closer look at the fund, which is becoming hard to ignore.

Background

WBMIX is the more directionally oriented sibling of Whitebox’s market-neutral Long Short Equity Fund (WBLFX), which David profiled in April. Whitebox is preparing to launch a third mutual fund, named Enhanced Convertible Fund (WBNIX), although no target date has been established.

Whitebox Advisors, founded by Mr. Redleaf in 1999, manages its mutual funds with similar staff and strategies as its hedge funds. Mr. Redleaf is a deep contrarian of efficient market theory. He works to exploit market irrationalities and inefficiencies, like “mispriced securities that have a relationship to each other.” He received considerable attention for successfully betting against mortgages in 2008.

The Tactical Opportunities Fund seeks to provide “a combination of capital appreciation and income that is consistent with prudent investment management.” It employs the full spectrum of security classes, including stocks, bonds, and options. Its managers reject the notion that investors are rewarded for accepting more risk. “We believe risk does not create wealth, it destroys wealth.” Instead, they identify salient risks and adjust their portfolio “to perform at least tolerably well in multiple likely scenarios.”

The fund has attracted $205M AUM since its inception in December 2011 – on the day of the conference call, Morningstar showed AUM at $171M, an increase of $34M in less than three weeks. All three managers are also partners and owners in the firm, which manages about $2.4B in various types of investment accounts, but the SAI filed February 2013 showed none invested in the fund proper. Since this filing, Whitebox reports Mr. Redleaf has become a “significant owner” and that most of its partners and employees are invested in its funds through the company’s 401k program.

Morningstar recently re-categorized WBMIX from aggressive allocation to long-short after Whitebox management successfully appealed to the editorial board. While long-short is currently more appropriate, the fund’s versatility makes it an awkward fit in any category. It maintains two disparate benchmarks, S&P 500 Price Index SPX (excludes dividends) and Barclay’s Aggregate U.S. Bond Total Return Index. Going forward, Whitebox reports it will add S&P 500 Total Return Index as a benchmark.

Ideally, Mr. Redleaf would prefer the fund’s performance be measured against the nation’s best endowment funds, like Yale’s or Havard’s. He received multiple degrees from Yale in 1978. Dr. Cross holds an MBA from University of Chicago and a Ph.D. in Statistics from Yale.

Call Highlights

Most of its portfolio themes were positive or flat for the quarter, resulting in a 1.3% gain versus 2.9% for SP500 Total Return, 2.4% SP500 Price Return, 0.7% for Vanguard’s Balanced Index , and -2.3% for US Aggregate Bonds. In short, WBMIX had a good quarter.

Short Bonds. Whitebox has been sounding warning bells for sometime about overbought fixed income markets. Consequently, it has been shorting 20+ year Treasuries and high-yield bond ETFs, while being long blue-chip equities. If 1Q was “status quo” for investors, 2Q saw more of an orderly rotation out of low yielding bonds and into quality stocks. WBMIX was positioned to take advantage.

Worst-Case Hedge. It continues to hold out-of-money option straddles, which hedge against sudden moves up or down, in addition to its bond shorts. Both plays help in the less probable scenario that “credit markets crack” due to total loss of confidence in bonds, rapid rate increase and mass exodus, taking equities down with them.

Bullish Industrials. Dr. Cross explained that in 2Q they remained bullish on industrials and automakers. After healthy appreciation, they pared back on airlines and large financials, focusing instead on smaller banks, life insurers, and specialty financials. They’ve also been shorting lower yielding apartment REITS, but are beginning to see dislocations in higher yielding REITs and CEFs.

Gold Miner Value. Their one misstep was gold miners, at just under 5% of portfolio; it detracted 150 basis points from 2Q returns. Long a proxy for gold, miners have been displaced by gold ETFs and will no longer be able to mask poor business performance with commodity pricing. Mr. Redleaf believes increased scrutiny on these miners will lead to improved operations and a closure in the spread, reaping significant upside. He cited that six CEOs have retired or been replaced recently. This play is signature Whitebox. The portfolio managers do not see similar inefficiencies in base metal miners.

Large vs Small. Like its miss with gold miners, its large cap versus small cap play has yet to pan-out. It believes small caps are systematically overpriced, so they have been long on large caps while short on small caps. Again, “value arbitrage” Whitebox. The market agreed last quarter, but this theme has worked against the fund since 2Q12.

Heading into 3Q, Whitebox believes equities are becoming overbought, if temporarily, given their extended ascent since 2009. Consequently, WBMIX beta was cut to 0.35 from 0.70. This move appears more tactical than strategic, as they remain bullish on industrials longer term. Mr. Redleaf explains that this is a “game with no called strikes…you never have to swing.” Better instead to wait for your pitch, like winners of baseball’s Home Run Derby invariably do.

Whitebox has been considering an increase to European exposure, if it can find special situations, but during the call Mr. Redleaf stated that “emerging markets is a bit out of our comfort zone.”

Performance To-Date

The table below summaries WBMIX’s return/risk metrics over its 20-month lifetime. The comparative funds were suggested by MFO reader and prolific board contributor “Scott.” (He also brought WBMIX to community attention with his post back in August 2012, entitled “Somewhat Interesting Tiny Fund.”) Most if not all of the funds listed here, at some point and level (except VBINX), tout the ability to deliver balanced-like returns with less risk than the 60/40 fixed balanced portfolio.

whitebox

While Whitebox has delivered superior returns (besting VBINX, Mr. Aronstein’s Marketfield and Mr. Romick’s Crescent, while trouncing Mr. Arnott’s All Asset and AQR’s Risk Parity), it’s generally done so with higher volatility. But the S&P 500 has had few drawdowns and low downside over this period, so it’s difficult to conclude if the fund is managing risk more effectively. That said, it has certainly played bonds correctly.

Other Considerations

When asked about the fund’s quickly increasing AUM, Dr. Cross stated that their portfolio contains large sector plays, so liquidity is not an issue. He believes that the fund’s capacity is “immense.”

Whitebox provides timely and thoughtful quarterly commentaries, both macro and security specific, both qualitative and quantitative. These commentaries reflect well on the firm, whose very name was selected to highlight a “culture of transparency and integrity.” Whitebox also sponsors an annual award for best financial research. The $25K prize this year went to authors of the paper “Time Series Momentum,” published in the Journal of Financial Economics.

Whitebox Mutual Funds offers Tactical Opportunities in three share classes. (This unfortunate practice is embraced by some houses, like American Funds and PIMCO, but not others, like Dodge & Cox and FPA.) Investor shares carry an indefensible front-load for purchases below $1M. Both Investor and Advisor shares carry a 12b-1 fee. Some brokerages, like Fidelity and Schwab, offer Advisor shares with No Transaction Fee. (As is common in the fund industry, but not well publicized, Whitebox pays these brokerages to do so – an expensive borne by the Advisor and not fund shareholders.) Its Institutional shares WBMIX are competitive currently at 1.35 ER, if not inexpensive, and are available at some brokerages for accounts with $100,000 minimum.

During the call, Mr. Redleaf stated that its mutual funds are cheaper than its hedge funds, but the latter “can hold illiquid and obscure securities, so it kind of balances out.” Perhaps so, but as Whitebox Mutual Funds continues to grow through thoughtful risk and portfolio management, it should adopt a simpler and less expensive fee structure: single share class, no loads or 12b-1 fees, reasonable minimums, and lowest ER possible. That would make this already promising fund impossible to ignore.

Bottom Line

At the end of the day, continued success with the fund will depend on whether investors believe its portfolio managers “have behaved reasonably in preparing for the good and bad possibilities in the current environment.” The fund proper is still young and yet to be truly tested, but it has the potential to be one of an elite group of funds that moderate investors could consider holding singularly – on the short list, if you will, for those who simply want to hold one all-weather fund.

A transcript of the 2Q call should be posted shortly at Whitebox Tactical Opportunities Fund.

27Sept2013/Charles

Conference Call Upcoming: Zachary Wydra, Beck, Mack & Oliver Partners (BMPEX), October 16, 7:00 – 8:00 Eastern

On October 16, Observer readers will have the opportunity to hear from, and speak to Zachary Wydra, manager of Beck, Mack & Oliver Partners (BMPEX). After review of a lot of written materials on the fund and its investment discipline, we were impressed and intrigued. After a long conversation with Zac, we were delighted. Not to put pressure on the poor guy, but he came across as smart, insightful, reflective, animated and funny, often in a self-deprecating way. We were more delighted when he agreed to spend an hour talking with our readers and other folks interested in the fund.

Mr. Wydra will celebrate having survived both the sojourn to Nebraska and participation in The Last Blast Triathlon by opening with a discussion of the structure, portfolio management approach and stock selection criteria that distinguish BMPEX from the run-of-the-mill large cap fund, and then we’ll settle in to questions (yours and mine).

Our conference call will be Wednesday, October 16, from 7:00 – 8:00 Eastern. It’s free. It’s a phone call.

How can you join in?

WOULD AN ADDITIONAL HEADS UP HELP?

The Conference Call Queue

We have two other calls on tap. On Monday, November 18, from 7:00 – 8:00 Eastern, you’ll have a chance to meet John Park and Greg Jackson, co-managers of Oakseed Opportunity (SEEDX and SEDEX). John and Greg have really first-rate experience as mutual fund managers and in private equity, as well. Oakseed is a focused equity fund that invests in high quality businesses whose managers interests are aligned with their shareholders. As we note in the Updates section below, they’re beginning to draw both high-quality investors and a greater range of media attention. If you’d like to get ahead of the curve, you can register for the call with John and Greg though I will highlight their call in next month’s issue.

In early December we’ll give you a chance to speak with the inimitable duo of Sherman and Schaja on the genesis and early performance of RiverPark Strategic Income, the focus of this month’s Launch Alert.

Launch Alert: RiverPark Strategic Income (RSIVX, RSIIX)

There are two things particularly worth knowing about RiverPark Short-Term High Yield (RPHYX): (1) it’s splendid and (2) it’s closed. Tragically mischaracterized as a high-yield bond fund by Morningstar, it’s actually a cash management fund that has posted 3-4% annual returns and negligible volatility, which eventually drew almost a billion to the fund and triggered its soft close in June. Two weeks later, RiverPark placed its sibling in registration. That fund went live on September 30, 2013.

Strategic Income will be managed by David Sherman of Cohanzick Management, LLC. David spent ten years at Leucadia National Corporation where he was actively involved high yield and distressed securities and rose to the rank of vice president. He founded Cohanzick in 1996 and Leucadia became his first client. Cohanzick is now a $1.3 billion dollar investment adviser to high net worth individuals and corporations.

Ed Studzinski and I had a chance to talk with Mr. Sherman and Morty Schaja, RiverPark’s president, for an hour on September 18^th. We wanted to pursue three topics: the relation of the new fund to the older one, his portfolio strategy, and how much risk he was willing to court.

RPHYX represented the strategies that Cohanzick uses for dealing with in-house cash. It targets returns of 3-4% with negligible volatility. RSIVX represents the next step out on the risk-return continuum. David believes that this strategy might be reasonably expected to double the returns of RPHYX. While volatility will be higher, David is absolutely adamant about risk-management. He intends this to be a “sleep well at night” fund in which his mother will be invested. He refuses to be driven by the temptation to shoot for “the best” total returns; he would far rather sacrifice returns to protect against loss of principal. Morty Schaja affirms the commitment to “a very conservative credit posture.”

The strategy snapshot is this. He will use the same security selection discipline here that he uses at RPHYX, but will apply that discipline to a wider opportunity set. Broadly speaking, the fund’s investments fall into a half dozen categories:

RPHYX overlap holdings – some of the longer-dated securities (1-3 year maturities) in the RPHYX portfolio will appear here and might make up 20-40% of the portfolio.
Buy and hold securities – money good bonds that he’s prepared to hold to maturity.
Priority-based debt – which he describes as “above the fray securities of [firms with] dented credit.” These are firms that “have issue” but are unlikely to file for bankruptcy any time soon. David will buy higher-order debt “if it’s cheap enough,” confident that even in bankruptcy or reorganization the margin of safety provided by buying debt at the right price at the peak of the creditor priority pyramid should be money good.
Off-the-beaten-path debt – issues with limited markets and limited liquidity, possibly small issues of high quality credits or the debt of firms that has solid business prospects but only modestly-talented management teams. As raters like S&P contract their coverage universe, it’s likely that more folks are off the major firm’s radar.
Interest rate resets – uhhh … my ears started ringing during this part of the interview; I had one of those “Charlie Brown’s teacher” moments. I’m confident that the “cushion bonds” of the RPHYX portfolio, where the coupon rate is greater than the yield-to maturity, would fall into this category. Beyond that, you’re going to need to call and see if you’re better at following the explanation than I was.
And other stuff – always my favorite category. He’s found some interesting asset-backed securities, fixed income issues with equity-like characteristics and distressed securities, which end up in the “miscellaneous” basket.

Mr. Sherman reiterates that he’s not looking for the highest possible return here; he wants a reasonable, safe return. As such, he anticipates underperforming in silly markets and outperforming in normal ones.

The minimum initial investment in the retail class is $1,000. The expense ratio is capped at 1.25%. The fund is available today at TD and Fidelity and is expected to be available within the next few days at Schwab. More information is available at RiverPark’s website. As I noted in September’s review of my portfolio, this is one of two funds that I’m almost certain to purchase before year’s end.

Funds in Registration

Every day David Welsch, firefighter/EMT/fund researcher, scours new SEC filings to see what opportunities might be about to present themselves. This month he tracked down 10 no-load funds in registration, one of the lowest levels in a year (compare it to 26 last month), but it does contain three offerings from first-rate, veteran teams:

361 Multi-Strategy Fund, 361’s fourth alternatives fund, guided by Brian Cunningham (a hedge fund guy), Thomas Florence (ex-Morningstar Investment Management), Blaine Rollins (ex-Janus) and Jeremy Frank.

Croft Focus, which transplants the discipline that’s guided Croft Value for 18 years into a far more concentrated global portfolio.

RSQ International Equity, which marks the re-emergence of Rudolph Riad-Younes and Richard Pell from the ashes of the Artio International crash.

In addition, two first-tier firms (Brookfield and First Eagle) have new funds managed by experienced teams.

Funds in registration this month won’t be available for sale until, typically, the end of November or early December 2013.

Manager Changes

On a related note, we also tracked down 39 fund manager changes.

Updates

oakseed The good folks at Oakseed Opportunity (SEEDX and SEDEX) are getting their share of favorable notice. The folks at Bloomberg featured them in A Fund’s Value: Having Skin in the Game (Sept 6, 2013) while, something called Institutional Imperative made them one of Two Funds on which to Build a Portfolio (Sept 10, 2013). At last report, they were holding more cash, more international exposure and smaller firms than their peers, none of which has been positive in this year’s market. Somehow the fact that the managers have $10 million of their own money in the fund, and that two phenomenally talented international investors (David Herro of Oakmark and David Samra of Artisan) are also invested in the fund does rather make “weak relative returns in 2013” sound rather like background noise. Thanks to the indefatigable Denny Baran for sharing both of those links and do consider the opportunity to speak with the Oakseed managers during our November conference call.

Morningstar declared Poplar Forest Partners Fund (PFPFX and IPFPX) to be an Undiscovered Manager (uhhh … okay) and featured them in a Morningstar Advisor Magazine article, “Greener Pastures” (August/September, 2013). Rob Wherry makes the argument that manager Dale Harvey walked away from managing a $20 billion fund because it was – for reasons he couldn’t control – a $20 billion fund. “I had to put the money to work. I was managing $20 billion, but I didn’t have $20 billion [worth of] good ideas . . . I had 80 investments, but I only wanted 30.” It’s a good piece.

Briefly Noted . . .

Since DundeeWealth US, LP, has opted to get out of the US mutual fund business they’re looking for a buyer for their Dynamic Energy Income Fund (DWEIX/DWEJX/DWEKX), Dynamic U.S. Growth Fund (DWUGX/DWUHX/DWUIX) and Mount Lucas U.S. Focused Equity Fund (BMLEX) funds. Failing that, they’re likely to liquidate them. My suggestion for eBaying them was not received warmly (hey, it worked for William Shatner’s $25,000 kidney stone!). If you’re looking for a handful of $50 million funds – one of which, US Growth, is remarkably good – you might give them a call.

Fidelity Global Balanced Fund (FGBLX) manager Ruben Calderon has taken a leave of absence for an unspecified reason. His co-manager, Geoff Stein, will take sole control. A chunk of my retirement accounts are, and have for a long time been, invested in the fund and I wish Mr. Calderon all the best with whatever has called him away.

JPMorgan Value Opportunities Fund (JVOAX) isn’t dead yet. The Board is appalled. The Board convened a meeting on September 10, 2013, for the purpose of merged Value Opps into JPMorgan Large Cap Value. Unfortunately, they have not received enough ballots to meet their quorum requirement and the meeting dissolved. They’ve resolved to try again with the following stern warning to non-voting shareholders:

However, recognizing that it is neither feasible nor legally permitted for the Value Opportunities Fund to conduct a proxy solicitation indefinitely, the Board approved in principle the liquidation of the Value Opportunities Fund if shareholders do not approve the merger when the Meeting is reconvened on October 10, 2013. If the Value Opportunities Fund is liquidated, the Fund’s liquidation may be taxable to a shareholder depending on the shareholder’s tax situation; as a result, the tax-free nature of the merger may be more beneficial to shareholders.

Translation: (a) vote (b) the way we want you to, or we’ll liquidate your fund and jack up your taxes.

Litman Gregory giveth and Litman Gregory taketh away. The firm has eliminated the redemption fee on its Institutional Class shares, but then increased the minimum investment for Institutional shares of their Equity (MSEFX) and International (MSILX) funds from $10,000 to $100,000.

Vanguard 500 Index Fund ETF Shares (VOO) has announced an odd reverse share split. As of October 24, 2013, the fund will issue one new share for every two current ones. Good news: Vanguard expects somewhat lower transaction costs as a result, savings which they’ll pass along to investors. Bad news: “As a result of the split, VOO shareholders could potentially hold fractional shares. These will be redeemed for cash and sent to the broker of record, which may result in the realization of modest taxable gains or deductible losses for some shareholders.”

Virtus Dynamic AlphaSector Fund (EMNAX), on the other hand, mostly taketh away. Virtus discontinued the voluntary limit on “Other Expenses” of the fund. The fund, categorized as a long/short fund though it currently has no reported short positions, charges a lot for modest achievement: Class A Shares, 2.56%; Class B Shares, 3.31%; Class C Shares, 3.31%; and Class I Shares, 2.31%. Virtus may also recapture fees previously waived.

SMALL WINS FOR INVESTORS

The Board for Altegris Equity Long Short Fund (ELSAX) voted to reduce Altegris’s management fee from 2.75% to 2.25% of assets. This qualifies as a small win since that’s still about 50% higher than reasonable. Aston River Road Long/Short (ARLSX) investors, for example, pays a management fee of 1.20% for considerably stronger performance. Wasatch Long/Short (FMLSX) investors pay 1.10%.

Altegris Futures Evolution Strategy Fund (EVOAX) has capped its management fee at 1.50%.

Calamos Convertible Fund (CCVIX) reopened to new investors on September 6^th.

CSC Small Cap Value Fund (CSCSX) has been renamed Cove Street Capital Small Cap Value Fund. They’ve eliminated their sales loads and reduced the minimum initial investment to $1,000 for Investor class shares and $10,000 for Institutional class shares. The manager here was part of the team that had fair success at the former CNI Charter RCB Small Cap Value Fund.

CLOSINGS (and related inconveniences)

ASTON/Fairpointe Mid Cap Fund (ABMIX) is set to close on October 18, 2013. About $5 billion in assets. Consistently solid performance. I’m still not a fan of announcing a closing four weeks ahead of the actual event, as happened here.

BMO Small-Cap Growth Fund (MRSCX) is closing effective November 1, 2013. The closure represents an interesting reminder of the role of invisible assets in capacity limits. The fund has $795 million in it, but the advisor reports that assets in the small-cap growth strategy as a whole are approaching approximately $1.5 billion.

Invesco European Small Company Fund (ESMAX) closes to new investors on October 4, 2013. Invesco’s to be complimented on their decision to close the fund while it was still small, under a half billion in assets.

Touchstone Sands Capital Select Growth Fund (TSNAX) instituted a soft-close on April 8, 2013. That barely slowed the inrush of money and the fund is now up to $5.5 billion in assets. In response, the advisor will institute additional restrictions on October 21, 2013. In particular, existing RIA’s already using the fund can continue to use the fund for both new and existing clients. They will not be able to accept any new RIA’s after that date.

Virtus Emerging Markets Opportunities Fund (HEMZX), a four-star medalist run by Morningstar’s International Stock Fund Manager of the Year Rajiv Jain, has closed to new investors.

OLD WINE, NEW BOTTLES

FMI Focus (FMIOX) will reorganize itself into Broadview Opportunity Fund in November. It’s an exceedingly solid small-cap fund (four stars, “silver” rated, nearly a billion in assets) that’s being sold to its managers.

Invesco Disciplined Equity Fund (AWEIX) will, pending shareholder approval on October 17, become AT Disciplined Equity Fund.

Meridian Value (MVALX) is Meridian Contrarian Fund. Same investment objective, policies, strategies and team.

Oppenheimer Capital Income Fund (OPPEX) has gained a little flexibility; it can now invest 40% in junk bonds rather than 25%. The fund was crushed during the meltdown in 2007-09. Immediately thereafter its managers were discharged and it has been pretty solid since then.

Effective October 1, 2013, Reaves Select Research Fund (RSRAX) became Reaves Utilities and Energy Infrastructure Fund, with all of the predictable fallout in its listed investment strategies and risks.

Smith Group Large Cap Core Growth Fund (BSLGX) will, pending shareholder approval, be reorganized into an identical fund of the same name in early 2014.

Tilson Dividend Fund (TILDX) has been sold to its long-time subadviser, Centaur Capital Partners, LP, presumably as part of the unwinding of the other Tilson fund.

U.S. Global Investors Government Securities Savings Fund (UGSCX) is being converted from a money market fund to an ultra-short bond fund, right around Christmas.

OFF TO THE DUSTBIN OF HISTORY

American Century announced that it will merge American Century Vista Fund (TWVAX) into American Century Heritage (ATHAX). Both are multibillion dollar midcap growth funds, with Heritage being far the stronger. The merger will take place Dec. 6, 2013.

EGA Emerging Global ordered the liquidation of a dozen of emerging markets sector funds, all effective October 4, 2013. The dearly departed:

EGShares GEMS Composite ETF (AGEM)
EGShares Basic Materials GEMS ETF (LGEM)
EGShares Consumer Goods GEMS ETF (GGEM)
EGShares Consumer Services GEMS ETF (VGEM)
EGShares Energy GEMS ETF (OGEM)
EGShares Financials GEMS ETF (FGEM)
EGShares Health Care GEMS ETF (HGEM)
EGShares Industrials GEMS ETF (IGEM)
EGShares Technology GEMS ETF (QGEM)
EGShares Telecom GEMS ETF (TGEM)
EGShares Utilities GEMS ETF (UGEM)
EGShares Emerging Markets Metals & Mining ETF (EMT)

FCI Value Equity Fund (FCIEX) closed September 27, on its way to liquidation. The Board cited “the Fund’s small size and the increasing costs associated with advising a registered investment company” but might have cited, too, the fact that it trails 97% of its peers over the past five years and tended to post two awful years for every decent one.

Natixis Hansberger International Fund (NEFDX) will liquidate on October 18, 2013, a victim of bad returns, high risk, high expenses, wretched tax efficiency … all your basic causes.

Loomis Sayles Multi-Asset Real Return Fund (MARAX) liquidates at the end of October, 2013. The fund drew about $25 million in assets and was in existence for fewer than three years. “Real return” funds are designed to thrive in a relatively high or rising inflation rate environment. Pretty much any fund bearing the name has been thwarted by the consistent economic weakness that’s been suppressing prices.

I really like Manning & Napier. They are killing off three funds that were never a good match for the firm’s core strengths. Manning & Napier Small Cap (MNSMX), Life Sciences (EXLSX), and Technology (EXTCX) will all cease to exist on or about January 24, 2014. My affection for them comes to mind because these funds, unlike the vast majority that end up in the trash heap, were all economically viable. Between them they have over $600 million in assets and were producing $7 million/year in revenue for M&N. The firm’s great strength is risk-conscious, low-cost, team-managed diversified funds. Other than a real estate fund, they offer almost no niche products really. Heck, the tech fund even had a great 10-year record and was no worse than mediocre in shorter time periods. But, it seems, they didn’t make sense given M&N’s focus.

Metzler/Payden European Emerging Markets Fund (MPYMX) closed on September 30, 2013. It actually outperformed the average European equity fund over the past decade but suffered two cataclysm losses – 74% from June 2008 to March 2009 and 33% in 2011 – that surely sealed its fate. We reviewed the fund favorably as a fascinating Eurozone play about seven years ago.

Nuveen International (FAIAX) is slated to merge into Nuveen International Select (ISACX), which is a case of a poor fund with few assets joining an almost-as-poor fund with more assets (and, not coincidentally, the same managers).

PIA Moderate Duration Bond Fund (PIATX) “will be liquidating its assets on October 31, 2013. You are welcome, however, to redeem your shares before that date.” As $30 million in assets, it appears that most investors didn’t require the board’s urging before getting out.

U.S. Global Investors Tax Free Fund (USUTX) will merge with a far better fund, Near-Term Tax Free (NEARX) on or about December 13, 2013.

U.S. Global Investors Treasury Securities Cash (USTXX) vanishes on December 27, 2013.

Victoria 1522 Fund (VMDAX) has closed and will liquidate on October 10, 2013. Nice people, high fees, weak performance, no assets.

Westcore Small-Cap Opportunity Fund (WTSCX) merges into the Westcore Small-Cap Value Dividend Fund (WTSVX) on or about November 14, 2013. It’s hard to make a case for the surviving fund (it pays almost no dividend and trails 90% of its peers) except to say it’s better than WTSCX. Vanguard has an undistinguished SCV index fund that would be a better choice than either.

In Closing . . .

At the beginning of October, we’ll be attending Morningstar’s ETF Invest Conference in Chicago, our first tentative inquiry, made in hopes of understanding better the prospects of actively-managed ETFs. I don’t tweet (I will never tweet) but I will try to share daily updates and insights on our discussion board. We’ll offer highlights of the conference presentations in our November issue.

Thanks to all of the folks who bookmarked or clicked on our Amazon link. There was a gratifyingly sustained uptick in credit from Amazon, on the order of a 7-8% rise from our 2013 average. Thanks especially to those who’ve supported the Observer directly (Hi, Joe! It’s a tough balance each month: we try to be enjoyable without being fluffy, informative without being plodding. Glad you think we make it.) or via our PayPal link (Thanks, Ken! Thanks, Michelle. Sorry I didn’t extend thanks sooner. And thanks, especially, to Deb. You make a difference). It does make a difference.

We’ll see you just after Halloween. If you have little kids who enjoy playing on line, one of Chip’s staff made a little free website that lets kids decorate jack-o-lanterns. It’s been very popular with the seven-and-under set.

Take care!

David

September 1, 2013

Dear friends,

richard My colleagues in the English department are forever yammering on about this Shakespeare guy.I’m skeptical. First, he didn’t even know how to spell his own name (“Wm Shakspē”? Really?). Second, he clearly didn’t understand seasonality of the markets. If you listen to Gloucester’s famous declamation in Richard III, you’ll see what I mean:

Now is the winter of our discontent
Made glorious summer by this sun of York;
And all the clouds that lour’d upon our house
In the deep bosom of the ocean buried.
Now are our brows bound with victorious wreaths;
Our bruised arms hung up for monuments;
Our stern alarums changed to merry meetings,
Our dreadful marches to delightful measures.

It’s pretty danged clear that we haven’t had anything “made glorious summer by the sun of [New] York.” By Morningstar’s report, every single category of bond and hybrid fund has lost money over the course of the allegedly “glorious summer.” Seven of the nine domestic equity boxes have flopped around, neither noticeably rising nor falling.

And now, the glorious summer passed, we enter what historically are the two worst months for the stock market. To which I can only reply with three observations (The Pirates are on the verge of their first winning season since 1992! The Steelers have no serious injuries looming over them. And Will’s fall baseball practices are upon us.) and one question:

Is it time to loathe the emerging markets? Again?

Yuh, apparently. A quick search in Google News for “emerging markets panic” turns up 3300 stories during the month of August. They look pretty much like this:

panic1

With our preeminent journalists contributing:

panic2

Many investors have responded as they usually do, by applying a short-term perspective to a long-term decision. Which is to say, they’re fleeing. Emerging market bond funds saw a $2 billion outflow in the last week of August and $24 billion since late May (Emerging Markets Fund Flows Investors Are Dumping Emerging Markets at an Accelerating Pace, Business Insider, 8/30/13). The withdrawals were indiscriminate, affecting all regions and both local currency and hard currency securities. Equity funds saw $4 billion outflows for the week, with ETFs leading the way down (Emerging markets rout has investors saying one word: sell, Marketwatch, 8/30/13).

In a peculiar counterpoint, Jason Kepler of Investment News claims – using slightly older data – that Mom and pop can’t quit emerging-market stocks. And that’s good (8/27/13). He finds “uncharacteristic resiliency” in retail investors’ behavior. I’d like to believe him. (The News allows a limited number of free article views; if you’d exceeded your limit and hit a paywall, you might try Googling the article title. Or subscribing, I guess.)

We’d like to make three points.

Emerging markets securities are deeply undervalued
Those securities certainly could become much more deeply undervalued.
It’s not the time to be running away.

Emerging markets securities are deeply undervalued

Wall Street Ranter, an anonymous blogger from the financial services industry and sometime contributor to the Observer’s discussion board, shared two really striking bits of valuation data from his blog.

The first, “Valuations of Emerging Markets vs US Stocks” (7/20/13) looks at a PIMCO presentation of the Shiller PE for the emerging markets and U.S., then at how such p/e ratios have correlated to future returns. Shiller adjusts the market’s price/earnings ratio to eliminate the effect of atypical profit margins, since those margins relentlessly regress to the mean over time. There’s a fair amount of research that suggests that the Shiller PE has fair predictive validity; that is, abnormally low Shiller PEs are followed by abnormally high market returns and vice versa.

Here, with Ranter’s kind permission, is one of the graphics from that piece:

USvsEmergingMarketsShiller

At June 30, 2013 valuations, this suggests that US equities were priced for 4% nominal returns (2-3% real), on average, over the next five years while e.m. equities were priced to return 19% nominal (17% or so real) over the same period. GMO, at month’s end, reached about the same figure for high quality US equities (3.1% real) but a much lower estimate (6.8%) for emerging equities. By GMO’s calculation, emerging equities were priced to return more than twice as much as any other publicly traded asset class.

Based on recent conversations with the folks at GMO, Ranter concludes that GMO suspects that changes in the structure of the Chinese economy might be leading them to overstate likely emerging equity returns. Even accounting for those changes, they remain the world’s most attractive asset class:

While emerging markets are the highest on their 7 year forecast (approx. 7%/year) they are treating it more like 4%/year in their allocations . . . because they believe they need to account for a longer-term shift in the pace of China’s growth. They believe the last 10 years or so have skewed the mean too far upwards. While this reduces slightly their allocation, it still leaves Emerging Markets has one of their highest forecasts (but very close to International Value … which includes a lot of developed European companies).

Ranter offered a second, equally striking graphic in “Emerging Markets Price-to-Book Ratio and Forward Returns (8/9/13).”

EmergingPB

At these levels, he reports, you’d typically expect returns over the following year of around 55%. That data is available in his original article.

In a singularly unpopular observation, Andrew Foster, manager of Seafarer Overseas Growth & Income (SFGIX/SIGIX), one of the most successful and risk-alert e.m. managers (those two attributes are intimately connected), notes that the most-loathed emerging markets are also the most compelling values:

The BRICs have underperformed to such an extent that their aggregate valuation, when compared to the emerging markets as a whole, is as low as it has been in eight years. In other words, based on a variety of valuation metrics (price-to-book value, price-to-prospective-earnings, and dividend yield), the BRICs are as cheap relative to the rest of the emerging markets as they have been in a long time. I find this interesting. . . for the (rare?) subset of investors contemplating a long-term (10-year) allocation to EM, just as they were better off to avoid the BRICs over the past 5 years when they were “hot,” they are likely to be better off over the next 10 years emphasizing the BRICs now they are “not.”

Those securities certainly could become much more deeply undervalued.

The graphic above illustrates the ugly reality that sometimes (late ’98, all of ’08), but not always (’02, ’03, mid ’11), very cheap markets become sickeningly cheap markets before rebounding. Likewise, Shiller PE for the emerging markets occasionally slip from cheap (10-15PE) to “I don’t want to talk about it” (7 PE). GMO mildly notes, “economic reality and investor behavior cause securities and markets to overshoot their fair value.”

Andrew Foster gently dismisses his own predictive powers (“my record on predicting short-term outcomes is very poor”). At the same time, he finds additional cause for short-term concern:

[M]y thinking on the big picture has changed since [early July] because currencies have gotten into the act. I have been worried about this for two years now — and yet even with some sense it could get ugly, it has been hard to avoid mistakes. In my opinion, currency movements are impossible to predict over the short or long term. The only thing that is predictable is that when currency volatility picks up, is likely to overshoot (to the downside) in the short run.

It’s not the time to be running away.

There are two reasons driving that conclusion. First, you’ve already gotten the timing wrong and you’re apt to double your error. The broad emerging markets index has been bumping along without material gain for five years now. If you were actually good at actively allocating your portfolio, you’d have gotten out in the summer of 2007 instead of thinking that five consecutive years of 25%+ gains would go on forever. And you, like the guys at Cook and Bynum, would have foregone Christmas presents in 2008 in order to plow every penny you had into an irrationally, shockingly cheap market. If you didn’t pull it off then, you’re not going to pull it off this time, either.

Second, there are better options here than elsewhere. These remain, even after you adjust down their earnings and adjust them down again, about the best values you’ll find. Ranter grumbles about the thoughtless domestic dash:

Bottom line is I fail to see, on a relative basis, how the US is more tempting looking 5 years out. People can be scared all they want of catching a falling knife…but it’s a lot easier to catch something which is only 5 feet in the air than something that is 10 feet in the air.

If you’re thinking of your emerging markets stake as something that you’ll be holding or building over the next 10-15 years (as I do), it doesn’t matter whether you buy now or in three months, at this level or 7% up or down from here. It will matter if you panic, leave and then refuse to return until the emerging markets feel “safe” to you – typically around the top of the next market cycle.

It’s certainly possible that you’re systemically over-allocated to equities or emerging equities. The current turbulence might well provide an opportunity to revisit your long-term plan, and I’d salute you for it. My argument here is against actions driven by your gut.

Happily, there are a number of first rate options available for folks seeking risk-conscious exposure to the emerging markets. My own choice, discussed more fully below, is Seafarer. I’ve added to my (small investor-sized) account twice since the market began turning south in late spring. I have no idea of whether those dollars with be worth a dollar or eighty cents or a plugged nickel six months from now. My suspicion is that those dollars will be worth more a decade from now having been invested with a smart manager in the emerging markets than they would have been had I invested them in domestic equities (or hidden them away in a 0.01% bank account). But Seafarer isn’t the only “A” level choice. There are some managers sitting on large war chests (Amana Developing World AMDWX), others with the freedom to invest across asset classes (First Trust/Aberdeen Emerging Opportunities FEO) and even some with both (Lazard Emerging Markets Multi-Strategy EMMOX).

To which Morningstar says, “If you’ve got $50 million to spend, we’ve got a fund for you!”

On August 22^nd, Morningstar’s Fund Spy trumpeted “Medalist Emerging-Markets Funds Open for Business,” in which they reviewed their list of the crème de la crème emerging markets funds. It is, from the average investor’s perspective, a curious list studded with funds you couldn’t get into or wouldn’t want to pay for. Here’s the Big Picture:

morningstar-table

Our take on those funds follows.

The medalist …	Is perfect for the investor who …
Acadian EM (AEMGX)	Has $2500 and an appreciation of quant funds
American Funds New World (NEWFX)	Wants to pay 5.75% upfront
Delaware E.M. (DEMAX)	Wants to pay 5.75% upfront for a fund whose performance has been inexplicably slipping, year by year, in each of the past five calendar years.
GMO E.M. III (GMOEX)	Has $50,000,000 to open an account
Harding Loevner E.M. Advisor (HLEMX)	Is an advisor with $5000 to start.
Harding Loevner Inst E.M. (HLMEX)	Has $500,000 to start
ING JPMorgan E.M. Equity (IJPIX)	Is not the public, since “shares of the Portfolio are not offered to the public.”
Parametric E.M. (EAEMX)	Has $1000 and somewhat modest performance expectations
Parametric Tax-Mgd E.M. Inst (EITEX)	Has $50,000 and tax-issues best addressed in his e.m. allocation
Strategic Advisers E.M. (FSAMX)	Is likewise not the general public since “the fund is not available for sale to the general public.”
T. Rowe Price E.M. Stock (PRMSX)	Has $2500 and really, really modest performance expectations.
Thornburg Developing World A (THDAX)	Doesn’t mind paying a 4.50% load

Our recommendations differ from theirs, given our preference for smaller funds that are actually available to the public. Our shortlist:

Amana Developing World (AMDWX): offers an exceedingly cautious take on an exceedingly risky slice of the world. Readers were openly derisive of Amana’s refusal to buy at any cost, which led the managers to sit on a 50% cash stake while the market’s roared ahead. As those markets began their swoon in 2011, Amana began moving in and disposing of more than half of its cash reserves. Still cash-rich, the fund’s relative performance is picking up and its risks remain very muted.

First Trust/Aberdeen Emerging Opportunity (FEO): one of the first emerging markets balanced funds, it’s performed very well over the long-term and is currently selling at a substantial discount to NAV: 12.6%, about 50% greater than its long-term average. That implies that investors might see something like a 5% arbitrage gain once the current panic abates, above and beyond whatever the market provides.

Grandeur Peak Emerging Markets Opportunities (GPEOX): the Grandeur Peak team has been brilliantly successful both here and at Wasatch. Their intention is to create a single master fund (Global Reach) and six subsidiary funds whose portfolios represent slices of the master profile. Emerging Markets has already cleared the SEC registration procedures but hasn’t launched. The Grandeur Peak folks say two factors are driving the delay. First, the managers want to be able to invest directly in Indian equities which requires registration with that country’s equity regulators. They couldn’t begin the registration until the fund itself was registered in the US. So they’re working through the process. Second, they wanted to be comfortable with the launch of Global Reach before adding another set of tasks. Give or take the market’s current tantrum (one manager describes it as “a taper tantrum”), that’s going well. With luck, but without any guarantees, the fund might be live sometime in Q4.

Seafarer Overseas Growth & Income (SFGIX): hugely talented manager, global portfolio, risk conscious, shareholder-centered and successful.

Wasatch Frontier Emerging Small Countries (WAFMX): one of the very few no-load, retail funds that targets the smaller, more dynamic markets rather than markets with billions of people (India and China) or plausible claim to be developed markets (e.g., Korea). The manager, Laura Geritz, has been exceedingly successful. Frontier markets effectively diversify emerging markets portfolios and the fund has drawn nearly $700 million. The key is that Wasatch is apt to close the fund sooner rather than later.

Snowball’s portfolio

Some number of folks have, reasonably enough, asked whether I invest in all of the funds I profile (uhhh … there have been over 150 of them, so no) or whether I have found The Secret Formula (presumably whatever Nicholas Cage has been looking for in all those movies). The answer is less interesting than the question.

I guess my portfolio construction is driven by three dictums:

Don’t pretend to be smarter than you are
Don’t pretend to be braver than you are
There’s a lot of virtue in doing nothing

Don’t pretend to be smarter than you are. If I knew which asset classes were going to soar and which were going to tank in the next six months or year or two, two things would happen. First, I’d invest in the winners. Second, I’d sell my services to ridiculously rich people and sock them with huge and abusive fees that they’d happily pay. But, I don’t.

As a result, I tend to invest in funds whose managers have a reasonable degree of autonomy about investing across asset classes, rather than ones pigeonholed into a small (style) box. That’s a problem: it makes benchmarking hard, it makes maintaining an asset allocation plan hard and it requires abnormally skilled managers. My focus has been on establishing a strategic objective (“increasing exposure to fast growing economies”) and then spending a lot of time trying to find managers whose strategies I trust, respect and understand.

Don’t pretend to be braver than you are. Stocks have a lot in common with chili peppers. In each case, you get a surprising amount of benefit from a relatively small amount of exposure. In each case, increasing exposure quickly shifts the pleasure/pain balance from pleasantly piquant to moronically painful. Some readers think of my non-retirement asset allocation is surprisingly timid: about 50% stocks, 30% bonds, 20% cash equivalents. They’re not much happier about my 70% equity stake in retirement funds. But, they’re wrong.

T. Rowe Price is one of my favorite fund companies, in part because they treat their investors with unusual respect. I found two Price studies, in 2004 and again in 2010, particularly provocative. Price constructed a series of portfolios representing different levels of stock exposure and looked at how the various portfolios would have played out over the past 50-60 years.

The original study looked at portfolios with 20/40/60/80/100% stocks. The update dropped the 20% portfolio and looked at 0/40/60/80/100%. Below I’ve reproduced partial results for three portfolios. The original 2004 and 2010 studies are available at the T. Rowe Price website.

	20% stocks	60% stocks	100% stocks
	Conservative mix, 50% bonds, 30% cash	The typical “hybrid”	S&P 500 index
Years studied	1955-03	1949-2009	1949-2009
Average annual return (before inflation)	7.4	9.2	11.0
Number of down years	3	12	14
Average loss in a down year	-0.5	-6.4	-12.5
Standard deviation	5.2	10.6	17.0
Loss in 2008	-0.2*	-22.2	-37.0
* based on 20% S&P500, 30% one-year CDs, 50% total bond index

Over a 10 year period – reasonable for a non-retirement account – a portfolio that’s 20% stocks would grow from $10,000 to $21,000. A 100% stock portfolio would grow to $28,000. Roughly speaking, the conservative portfolio ends up at 75% of the size of the aggressive one but a pure stock portfolio increases the probability of losing money by 400% (from a 6% chance to 23%), increases the size of your average loss by 2500% (from 0.5% to 12.5%) and triples your volatility. Somewhere in there, it will face the real prospect of a 51% loss, which is the average maximum drawdown for large core stock funds that have been around 20 years or more. Sadly, there’s no way of knowing whether the 51% loss will occur in Year One (where you might have some recovery time) or Year Ten (where you’d be toast).

At 50% equities, I might capture 80% of the market’s gain with 50% of its volatility. If domestic bonds weren’t in such dismal straits, a smaller stock exposure might be justifiable. But they suck so I’m stuck.

There’s a lot of virtue in doing nothing. Our action tends to be a lot more costly than our inaction, so I change my target allocation slowly and change my fund line-up slowly. I’ve held a few retirement plan funds (e.g., Fidelity Low Priced Stock FLPSX) for decades and a number of non-retirement funds since their inception. In general, I’ll only add a fund if it represents an entirely new opportunity set or if it’s replacing an existing fund. On average, I might change out one fund every year or two.

My retirement portfolio is dominated by the providers in Augustana’s 403(b) plan: Fidelity, T. Rowe Price and TIAA-CREF. The college contribution to retirement goes exclusively into TIAA-CREF. CREF Stock accounts for 68%, TIAA Real Estate holds 22% and the rest is in a target-date fund. The Fidelity and Price allocations mirror one another: 33% domestic stock (with a value bias), 33% international stock (with an emerging markets bias) and 33% income (of the eclectic Spectrum Income/Global High Income sort).

My non-retirement portfolio is nine funds and some cash waiting to be deployed.

		Portfolio weight	What was I, or am I, thinking?
Artisan Int’l Value	ARTKX	10%	I bought Artisan Int’l (ARTIX) in January 1996 because of my respect for Artisan and Mr. Yockey’s record. I traded-in my ARTIX shares and bought Int’l Value as soon as it launched because of my respect for Artisan, Mr. Samra and O’Keefe’s pedigree and my preference for value investing. Right so far: the fund is top 1% returns for the year-to-date and the trailing 1-, 3-, 5- and 10-year periods. I meditated upon switching to the team’s Global Value Fund (ARTGX) which has comparable returns, more flexibility and fewer assets.
Artisan Small Value	ARTVX	8	I bought Artisan Small Cap (ARTSX) in the weeks before it closed, also January 1996, for the same reasons I bought ARTIX. And I traded it for Small Cap Value in late 1997 for the same reasons I traded International. That original stake, to which I added regularly, has more than quadrupled in value. The team has been out-of-step with the market lately which, frankly, is what I pay them for. I regret only the need to sell some of my shares about seven years ago.
FPA Crescent	FPACX	17	Crescent is my surrogate for a hedge fund: Mr. Romick has a strong contrarian streak, the ability to invest in almost anything and a phenomenal record of having done so. If you really wanted to control your asset allocation, this would make it about impossible. I don’t.
Matthews Asia Strategic Income	MAINX	6	I bought MAINX in the month after the Observer profiled the fund. Matthews is first rate, the arguments for reallocating a portion of my fixed-income exposure from developed to developing markets struck me as sound and Ms. Kong is really sharp. And it’s working. My holding is still up about 3% while both the world bond group and Aberdeen Asia Bond trail badly. She’s hopeful that pressure of Asian currencies will provoke economic reform and, in the meantime, has the freedom to invest in dollar-denominated bonds.
Matthews Asian Growth & Income	MACSX	10	I originally bought MACSX while Andrew Foster was manager, impressed by its eclectic portfolio, independent style and excellent risk management. It’s continued to do well after his departure. I sold half of my stake here to invest in Seafarer and haven’t been adding to it in a while because I’m already heavily overweight in Asia. That said, I’m unlikely to reduce this holding either.
Northern Global Tactical Asset Allocation	BBALX	13	I bought BBALX shortly after profiling it. It’s a fund-of-index-funds whose allocation is set by Northern’s investment policy committee. The combination of very low expenses (0.64%), very low turnover portfolios, wide diversification and the ability to make tactical tilts is very attractive. It’s been substantially above average – higher returns, lower volatility – than its peers since its 2008 conversion.
RiverPark Short Term High Yield	RPHYX	11	Misplaced in Morningstar’s “high yield” box, this has been a superb cash management option for me: it’s making 3-4% annually with negligible volatility.
Seafarer Overseas Growth & Income	SFGIX	10	I’m impressed by Mr. Foster’s argument that many other portions of the developing world are, in 2013, where Asia was in 2003. He believes there are rich opportunities outside Asia and that his experience as an Asia investor will serve him in good stead as the new story rolls out. I’m convinced that having an Asia-savvy manager who has the ability to recognize and make investments beyond the region is prudent.
T. Rowe Price Spectrum Income	RPSIX	12	This is a fund of income-oriented funds and it serves as the second piece of the cash-management plan for me. I count on it for about 6% returns a year and recognize that it might lose money on rare occasion. Price is steadfastly sensible and investor-centered and I’m quite comfortable with the trade-off.
Cash		2	This is the holding pool in my Scottrade account.

Is anyone likely to make it into my portfolio in 2013-14? There are two candidates:

ASTON/River Road Long-Short (ARLSX). We’ve both profiled the fund and had a conference call with its manager, both of which are available on the Observer’s ARLSX page. I’m very impressed with the quality and clarity of their risk-management disciplines; they’ve left little to chance and have created a system that forces them to act when it’s time. They’ve performed well since inception and have the prospect of outperforming the stock market with a fraction of its risk. If this enters the portfolio, it would likely be as a substitute for Northern Global Tactical since the two serve the same risk-dampening function.

RiverPark Strategic Income (not yet launched). This fund will come to market in October and represents the next step out on the risk-return spectrum from the very successful RiverPark Short Term High Yield (RPHYX). I’ve been impressed with David Sherman’s intelligence and judgment and with RPHYX’s ability to deliver on its promises. We’ll be doing fairly serious inquiries in the next couple months, but the new fund might become a success to T. Rowe Price Spectrum Income.

Sterling Capital hits Ctrl+Alt+Delete

Sterling Capital Select Equity (BBTGX) has been a determinedly bad fund for years. It’s had three managers since 1993 and it has badly trailed its benchmark under each of them. The strategy is determinedly nondescript. They’ve managed to return 3.2% annually over the past 15 years. That’s better – by about 50 bps – than Vanguard’s money market fund, but not by much. Effective September 3, 2013, they’re hitting “reformat.”

The fund’s name changes, to Sterling Capital Large Cap Value Diversified Fund.

The strategy changes, to a “behavioral financed” based system targeting large cap value stocks.

The benchmark changes, to the Russell 1000 Value

And the management team changes, to Robert W. Bridges and Robert O. Weller. Bridges joined the firm in 2008 and runs the Sterling Behavioral Finance Small Cap Diversified Alpha. Mr. Weller joined in 2012 after 15 years at JPMorgan, much of it with their behavioral finance team.

None of which required shareholders’ agreement since, presumably, all aspects of the fund are “non-fundamental.”

One change that they should pursue but haven’t: get the manager to put his own money at risk. The departing manager was responsible for five funds since 2009 and managed to find nary a penny to invest in any of them. As a group, Sterling’s bond and asset allocation team seems utterly uninterested in risking their own money in a lineup of mostly one- and two-star funds. Here’s the snapshot of those managers’ holdings in their own funds:

stategic allocation

You’ll notice the word “none” appears 32 times. Let’s agree that it would be silly to expect a manager to own tax-free bonds anywhere but in his home jurisdiction. That leaves 26 decisions to avoid their own funds out of a total of 27 opportunities. Most of the equity managers, by contrast, have made substantial personal investments.

Warren Buffett thinks you’ve come to the right place

Fortune recently published a short article which highlighted a letter that Warren Buffett wrote to the publisher of the Washington Post in 1975. Buffett’s an investor in the Post and was concerned about the long-term consequences of the Post’s defined-benefit pension. The letter covers two topics: the economics of pension obligations in general and the challenge of finding competent investment management. There’s also a nice swipe at the financial services industry, which most folks should keep posted somewhere near their phone or monitor to review as you reflect on the inevitable marketing pitch for the next great financial product.

warren

I particularly enjoy the “initially.” Large money managers, whose performance records were generally parlous, “felt obliged to seek improvement or at least the approach of improvement” by hiring groups “with impressive organizational charts, lots of young talent … and a record of recent performance (pg 8).” Unfortunately, he notes, they found it.

The pressure to look like you were earning your keep led to high portfolio turnover (Buffett warns against what would now be laughably low turnover: 25% per annum). By definition, most professionals cannot be above average but “a few will succeed – in a modest way – because of skill” (pg 10). If you’re going to find them, it won’t be by picking past winners though it might be by understanding what they’re doing and why:

warren2

The key: abandon all hope ye who invest in behemoths:

warren3

For those interested in Buffett’s entire reflection, Chip’s embedded the following:

Warren Buffett Katharine Graham Letter

And now for something completely different …

We can be certain of some things about Ed Studzinski. As an investor and co-manager of Oakmark Equity & Income (OAKBX), he was consistently successful in caring for other people’s money (as much as $17 billion of it), in part because he remained keenly aware that he was also caring for their futures. $10,000 entrusted to Ed and co-manager Clyde McGregor on the day Ed joined the fund (01 March 2000) would have grown to $27,750 on the day of his departure (31 December 2011). His average competitor (I’m purposefully avoiding “peer” as a misnomer) would have managed $13,900.

As a writer and thinker, he minced no words.

The Equity and Income Fund’s managers have both worked in the investment industry for many decades, so we both should be at the point in our careers where dubious financial-industry innovations no longer surprise us. Such an assumption, however, would be incorrect.

For the past few quarters we have repeatedly read that the daily outcomes in the securities markets are the result of the “Risk On/Risk Off” trade, wherein investors (sic?) react to the most recent news by buying equities/selling bonds (Risk On) or the reverse (Risk Off). As value investors we think this is pure nonsense.

Over the past two years, Ed and I have engaged in monthly conversations that I’ve found consistently provocative and information-rich. It’s clear that he’s been paying active attention for many years to contortions of his industry which he views with equal measures of disdain and alarm.

I’ve prevailed upon Ed to share a manager’s fuss and fulminations with us, as whim, wife and other obligations permit. His first installment, which might also be phrased as the question “Whose skin in the game?” follows.

“Skin in the Game, Part One”

“Virtue has never been as respectable as money.” Mark Twain

One of the more favored sayings of fund managers is that they like to invest with managements with “skin in the game.” This is another instance where the early Buffett (as opposed to the later Buffett) had it right. Managements can and should own stock in their firms. But they should purchase it with their own money. That, like the prospect of hanging as Dr. Johnson said, would truly clarify the mind. In hind sight a major error in judgment was made by investment professionals who bought into the argument that awarding stock options would beneficially serve to align the interests of managements and shareholders. Never mind that the corporate officers should have already understood their fiduciary obligations. What resulted, not in all instances but often enough in the largest capitalization companies, was a class of condottieri such as one saw in Renaissance Italy, heading armies that spent their days marching around avoiding each other, all the while being lavishly paid for the risks they were NOT facing. This sub-set of managers became a new entitled class that achieved great personal wealth, often just by being present and fitting in to the culture. Rather than thinking about truly long-term strategic implications and questions raised in running a business, they acted with a short-duration focus, and an ever-present image of the current share price in the background. Creating sustainable long-term business value rarely entered into the equation, often because they had never seen it practiced.

I understood how much of a Frankenstein’s monster had been created when executive compensation proposals ended up often being the greater part of a proxy filing. A particularly bothersome practice was “reloading” options annually. Over time, with much dilution, these programs transferred significant share ownership to management. You knew you were on to something when these compensation proposals started attracting negative vote recommendations. The calls would initially start with the investor relations person inquiring about the proxy voting process. Once it was obvious that best practices governance indicated a “no” vote, the CFO would call and ask for reconsideration.

How do you determine whether a CEO or CFO actually walks the walk of good capital allocation, which is really what this is all about? One tip-off usually comes from discussions about business strategy and what the company will look like in five to ten years. You will have covered metrics and standards for acquisitions, dividends, debt, share repurchase, and other corporate action. Following that, if the CEO or CFO says, “Why do you think our share price is so low?” I would know I was in the wrong place. My usual response was, “Why do you care if you know what the business value of the company is per share? You wouldn’t sell the company for that price. You aren’t going to liquidate the business. If you did, you know it is worth substantially more than the current share price.” Another “tell” is when you see management taking actions that don’t make sense if building long-term value is the goal. Other hints also raise questions – a CFO leaves “because he wants to enjoy more time with his family.” Selling a position contemporaneously with the departure of a CFO that you respected would usually leave your investors better off than doing nothing. And if you see the CEO or CFO selling stock – “our investment bankers have suggested that I need to diversify my portfolio, since all my wealth is tied up in the company.” That usually should raise red flags that indicate something is going on not obvious to the non-insider.

Are things improving? Options have gone out of favor as a compensation vehicle for executives, increasingly replaced by the use of restricted stock. More investors are aware of the potential conflicts that options awards can create and have a greater appreciation of governance. That said, one simple law or regulation would eliminate many of the potential abuses caused by stock options. “All stock acquired by reason of stock option awards to senior corporate officers as part of their compensation MAY NOT BE SOLD OR OTHERWISE DISPOSED OF UNTIL AFTER THE EXPIRATION OF A PERIOD OF THREE YEARS FROM THE INDIVIDUAL’S LAST DATE OF SERVICE.” Then you might actually see the investors having a better chance of getting their own yachts.

Edward A. Studzinski

If you’d like to reach Ed, click here. An artist’s rendering of Messrs. Boccadoro and Studzinski appears below.

Introducing Charles’ Balcony

balconey Since his debut in February 2012, my colleague Charles Boccadoro has produced some exceedingly solid, data-rich analyses for us, including this month’s review of the risk/return profiles of the FundX family of funds. One of his signature contributions was “Timing Method Performance Over Ten Decades,” which was widely reproduced and debated around the web.

We’re pleased to announce that we’ve collected his essays in a single, easy-to-access location. We’ve dubbed it “Charles’ Balcony” and we even stumbled upon this striking likeness of Charles and the shadowy Ed Studzinski in situ. I’m deeply hopeful that from their airy (aerie or eery) perch, they’ll share their sharp-eyed insights with us for years to come.

Observer fund profiles

Advisory Research Strategic Income (ADVNX): you’ve got to love a 10 month old fund with a 10 year track record and a portfolio that Morningstar can only describe as 60% “other.” AR converted a successful limited partnership into the only no-load mutual fund offering investors substantial access to preferred securities.

Beck, Mack and Oliver Partners (BMPEX): we think of it as “Dodge and Cox without the $50 billion in baggage.” This is an admirably disciplined, focused equity fund with a remarkable array of safeguards against self-inflicted injuries.

FPA Paramount (FPRAX): some see Paramount as a 60-year-old fund that seeks out only the highest-quality mid-cap growth stocks. With a just-announced change of management and philosophy, it might be moving to become a first-rate global value fund (with enough assets under management to start life as one of the group’s most affordable entries).

FundX Upgrader (FUNDX): all investors struggle with the need to refine their portfolios, dumping losers and adding winners. In a follow-up to his data-rich analysis on the possibility of using a simple moving average as a portfolio signal, associate editor Charles Boccadoro investigated the flagship fund of the Upgrader fleet.

Tributary Balanced (FOBAX): it’s remarkable that a fund this consistently good – in the top tier of all balanced funds over the past five-, ten-, and fifteen-year periods and a Great Owl by my colleague Charles’ risk/return calculations – hasn’t drawn more attention. It will be more remarkable if that neglect continues despite the recent return of the long-time manager who beat pretty much everyone in sight.

Elevator Talk #8: Steven Vannelli of GaveKal Knowledge Leaders (GAVAX)

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.

Steven Vannelli, Manager

GaveKal Knowledge Leaders (GAVAX) believes in investing only in firms that are committed to being smart, so where did the dumb name come from? GaveKal is a portmanteau formed from the names of the firm’s founders: Charles Gave, Anatole Kaletsky and Louis-Vincent Gave. Happily it changed the fund’s original name from GaveKal Platform Company Fund (named after its European counterpart) to Knowledge Leaders.

GaveKal, headquartered in Hong Kong, started in 2001 as a global economics and asset allocation research firm. Their other investment products (the Asian Balanced Fund – a cool idea which was rechristened Asian Absolute Return – and Greater China Fund) are available to non-U.S. investors as, originally, was Knowledge Leaders. They opened a U.S. office in 2006. In 2010 they deepened their Asia expertise by acquiring Dragonomics, a China-focused research and advisory firm.

Knowledge Leaders has generated a remarkable record in its two-plus years of U.S. operation. They look to invest in “the best among global companies that are tapping a deep reservoir of intangible capital to generate earnings growth,” where “R&D, design, brand and channel” are markers of robust intangible capital. From launch through the end of June, 2013, the fund modestly outperformed the MSCI World Index and did so with two-thirds less volatility. Currently, approximately 30% of the portfolio is in cash, down from 40% earlier in summer.

Manager Steven Vannelli researches intangible capital and corporate performance and leads the fund’s investment team. Before joining GaveKal, he spent a decade at Alexander Capital, a Denver-based investment advisor. Here’s Mr. Vannelli’s 200 words making his case:

We invest in the world’s most innovative companies. Decades of academic research show that companies that invest heavily in innovation are structurally undervalued due to lack of information on innovative activities. Our strategy capitalizes on this market inefficiency.

To find investment opportunities, we identify Knowledge Leaders, or companies with large stores of intangible assets. These companies often operate globally across an array of industries from health care to technology, from consumer to capital goods. We have developed a proprietary method to capitalize a company’s intangible investments, revealing an important, invisible layer of value inherent to intangible-rich companies.

The Knowledge Leaders Strategy employs an active strategy that offers equity-like returns with bond-like risk. Superior risk-adjusted returns with low correlation to market indices make the GaveKal Knowledge Leaders Strategy a good vehicle for investors who seek to maximize their risk and return objectives.

The genesis of the strategy has its origin in the 2005 book, Our Brave New World, by GaveKal Research, which highlights knowledge as a scare asset.

As a validation of our intellectual foundation, in July, the US Bureau of Economic Analysis began to capitalize R&D to measure the contribution of innovation spending on growth of the US economy.

The minimum initial investment on the fund’s retail shares is $2,500. There are also institutional shares (GAVIX) with a $100,000 minimum (though they do let financial advisors aggregate accounts in order to reach that threshold). The fund’s website is clean and easily navigated. It would make a fair amount of sense for you to visit to “Fund Documents” page, which hosts the fund’s factsheet and a thoughtful presentation on intangible capital.

Our earlier Elevator Talks were:

February 2013: Tom Kerr, Rocky Peak Small Cap Value (RPCSX), whose manager has a 14 year track record in small cap investing and a passion for discovering “value” in the intersection of many measures: discounted cash flows, LBO models, M&A valuations and traditional relative valuation metrics.
March 2013: Dale Harvey, Poplar Forest Partners (PFPFX and IPFPX), a concentrated, contrarian value stock fund that offers “a once-in-a-generation opportunity to invest with a successful American Funds manager who went out on his own.”
April 2013: Bayard Closser, Vertical Capital Income Fund (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.”
May 2013: Jim Hillary, LS Opportunity Fund (LSOFX), a co-founder of Marsico Capital Management whose worry that “the quality of research on Wall Street continues to decline and investors are becoming increasingly concerned about short-term performance” led to his faith in “in-depth research and long-term orientation in our high conviction ideas.”
July 2013: Casey Frazier, Versus Capital Multi-Manager Real Estate Income Fund (VCMRX), a second closed-end interval fund whose portfolio “includes real estate private equity and debt, public equity and debt, and broad exposure across asset types and geographies. We target a mix of 70% private real estate with 30% public real estate to enhance liquidity, and our objective is to produce total returns in the 7 – 9% range net of fees.”
August 2013: Brian Frank, Frank Value Fund (FRNKX), a truly all-cap value fund with a simple, successful discipline: if one part of the market is overpriced, shop elsewhere.
August 2013: Ian Mortimer and Matthew Page of Guinness Atkinson Inflation Managed Dividend (GAINX), a global equity fund that pursues firms with “sustainable and potentially rising dividends,” which also translates to firms with robust business models and consistently high return on capital.

Upcoming conference call: A discussion of the reopening of RiverNorth Strategy Income (RNDLX)

The folks at RiverNorth will host a conference call between the fund’s two lead managers, Patrick Galley of RiverNorth and Jeffrey Gundlach of DoubleLine, to discuss their decision to reopen the fund to new investors at the end of August and what they see going forward (the phrase “fear and loathing” keeps coming up).

The call will be: Wednesday, September 18, 3:15pm – 4:15pm CDT

To register, go to www.rivernorthfunds.com/events/

The webcast will feature a Q&A with Messrs. Galley and Gundlach.

RNDLX (RNSIX for the institutional class), which the Observer profiled shortly after launch, has been a very solid fund with a distinctive strategy. Mr. Gundlach manages part of his sleeve of the portfolio in a manner akin to DoubleLine Core Fixed Income (DLFNX) and part with a more opportunistic income strategy. Mr. Galley pursues a tactical fixed-income allocation and an utterly unique closed-end fund arbitrage strategy in his slice. The lack of attractive opportunities in the CEF universe prompted the fund’s initial closure. Emily Deter of RiverNorth reports that the opening “is primarily driven by the current market opportunity in the closed-end fund space. Fixed-income closed-end funds are trading at attractive discounts to their NAVs, which is an opportunity we have not seen in years.” Investment News reported that fixed-income CEFs moved quickly from selling at a 2% premium to selling at a 7% discount.

That’s led Mr. Galley’s move from CEFs from occupying 17% of the portfolio a year ago to 30% today and, it seems, he believes he could pursue more opportunities if he had more cash on hand.

Given RiverNorth’s ongoing success and clear commitment to closing funds well before they become unmanageable, it’s apt to be a good use of your time.

The Observer’s own series of conference calls with managers who’ve proven to be interesting, sharp, occasionally wry and successful, will resume in October. We’ll share details in our October issue.

Funds in Registration

Every day David Welsch, an exceedingly diligent research assistant at the Observer, scours new SEC filings to see what opportunities might be about to present themselves. David tracked down nearly 100 new funds and ETFs. Many of the proposed funds offer nothing new, distinctive or interesting. Some were downright mystifying. (Puerto Rico Shares? Colombia Capped ETF? The Target Duration 2-month ETF?) There were 26 no-load funds or actively-managed ETFs in registration with the SEC this month.

Funds in registration this month won’t be available for sale until, typically, the end of October or early November 2013.

There are probably more interesting products in registration this month than at any time in the seven years we’ve been tracking them. Among the standouts:

Brown Advisory Strategic European Equity Fund which will be managed by Dirk Enderlein of Wellington Management. Wellington is indisputably an “A-team” shop (they’ve got about three-quarters of a trillion in assets under management). Mr. Enderlein joined them in 2010 after serving as a manager for RCM – Allianz Global Investors in Frankfurt, Germany (1999-2009). Media reports described him as “one of Europe’s most highly regarded European growth managers.”

DoubleLine Shiller Enhanced CAPE will attempt to beat an index, Shiller Barclays CAPE® US Sector TR USD Index, which was designed based on decades of research by the renowned Robert Shiller. The fund will be managed by Jeffrey Gundlach and Jeffrey Sherman.

Driehaus Micro Cap Growth Fund, a converted 15 year old hedge fund

Harbor Emerging Markets Equity Fund, which will be sub-advised by the emerging markets team at Oaktree Capital Management. Oaktree’s a first-tier institutional manager with a very limited number of advisory relationships (primarily with Vanguard and RiverNorth) in the mutual fund world.

Meridian Small Cap Growth, which will be the star vehicle for Chad Meade and Brian Schaub, who Meridian’s new owner hired away from Janus. Morningstar’s Greg Carlson described them as “superb managers” who were “consistently successful during their nearly seven years at the helm” of Janus Triton.

Plus some innovative offerings from Northern, PIMCO and T. Rowe Price. Details 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 a record 85 fund manager changes. Investors should take particular note of Eric Ende and Stephen Geist’s exit from FPA Paramount after a 13 year run. The change is big enough that we’ve got a profile of Paramount as one of the month’s Most Intriguing New Funds.

Updates

Bretton Fund (BRTNX) is now available through Vanguard. Manager Stephen Dodson writes that after our conference call, several listeners asked about the fund’s availability and Stephen encouraged them to speak directly with Vanguard. Mirabile dictu, the Big V was receptive to the idea.

Stephen recently posted his most recent letter to his shareholders. He does a nice job of walking folks through the core of his investing discipline with some current illustrations. The short version is that he’s looking for firms with durable competitive advantages in healthy industries whose stocks are selling at a substantial discount. He writes:

There are a number of relevant and defensible companies out there that are easily identifiable; the hard part is finding the rare ones that are undervalued. The sweet spot for us continues to be relevant, defensible businesses at low prices (“cheap compounders”). I continue to spend my waking hours looking for them.

Q2 2013 presented slim pickin’s for absolute value investors (Bretton “neither initiated nor eliminated any investments during the quarter”). For all of the market’s disconcerting gyrations this summer, Morningstar calculates that valuations for its Wide Moat and Low Business Uncertainty groups (surrogates for “high quality stocks”) remains just about where they were in June: undervalued by about 4% while junkier stocks remain modestly overvalued.

Patience is hard.

Briefly Noted . . .

Calamos loses another president

James Boyne is resigning as president and chief operating officer of Calamos Investments effective Sept. 30, just eight months after being promoted to president. The firm has decided that they need neither a president nor a chief operating officer. Those responsibilities will be assumed “by other senior leaders” at the firm (see: Black, Gary, below). The preceding president, Nick P. Calamos, decided to “step back” from his responsibilities in August 2012 when, by coincidence, Calamos hired former Janus CEO Gary Black. To describe Black as controversial is a bit like described Rush Limbaugh as opinionated.

They’re not dead yet!

not-dead-yet Back in July, the Board of Caritas All-Cap Growth (CTSAX): “our fund is tiny, expensive, bad, and pursues a flawed investment strategy (long stocks, short ETFs).” Thereupon they reached a sensible conclusion: euthanasia. Shortly after the fund had liquidated all of its securities, “the Board was presented with and reviewed possible alternatives to the liquidation of the Fund that had arisen since the meeting on July 25, 2013.”

The alternative? Hire Brenda A. Smith, founder of CV Investment Advisors, LLC, to manage the fund. A quick scan of SEC ADV filings shows that Ms. Smith is the principal in a two person firm with 10 or fewer clients and $5,000 in regulated AUM.

aum

(I don’t know more about the firm because they have a one page website.)

At almost the same moment, the same Board gave Ms. Smith charge of the failing Presidio Multi-Strategy Fund (PMSFX), an overpriced long/short fund that executes its strategy through ETFs.

I wish Ms. Smith and her new investors all the luck in the world, but it’s hard to see how a Board of Trustees could, with a straight face, decide to hand over one fund and resuscitate another with huge structural impediments on the promise of handing it off to a rookie manager and declare that both moves are in the best interests of long-suffering shareholders.

Diamond Hill goes overseas, a bit

Effective September 1, 2013, Diamond Hill Research Opportunities Fund (DHROX) gains the flexibility to invest internationally (the new prospectus allows that it “may also invest in non-U.S. equity securities, including equity securities in emerging market countries”) and the SEC filing avers that they “will commence investing in foreign securities.” The fund has 15 managers; I’m guessing they got bored. As a hedge fund (2009-2011), it had a reasonably mediocre record which might have spurred the conversion to a ’40 fund. Which has also had a reasonably mediocre lesson, so points to the management for consistency!

Janus gets more bad news

Janus investors pulled $2.2 billion from the firm’s funds in July, the worst outflows in more than three years. A single investor accounted for $1.3 billion of the leakage. The star managers of Triton and Venture left in May. And now this: they’re losing business to Legg Mason.

The Board of Trustees of Met Investors Series Trust has approved a change of subadviser for the Janus Forty Portfolio from Janus Capital Management to ClearBridge Investments to be effective November 1, 2013 . . . Effective November 1, 2013, the name of the Portfolio will change to ClearBridge Aggressive Growth Portfolio II.

Matthews chucks Taiwan

Matthews Asia China (MCHFX), China Dividend (MCDFX) and Matthews and China Small Companies (MCSMX) have changed their Principal Investment Strategy to delete Taiwan. The text for China Dividend shows the template:

Under normal market conditions, the Matthews China Dividend Fund seeks to achieve its investment objective by investing at least 80% of its net assets, which include borrowings for investment purposes, in dividend-paying equity securities of companies located in China and Taiwan.

To:

Under normal market conditions, the Matthews China Dividend Fund seeks to achieve its investment objective by investing at least 80% of its nets assets, which include borrowings for investment purposes, in dividend-paying equity securities of companies located in China.

A reader in the financial services industry, Anonymous Dude, checked with Matthews about the decision. AD reports

The reason was that the SEC requires that if you list Taiwan in the Principal Investment Strategies portion of the prospectus you have to include the word “Greater” in the name of the fund. They didn’t want to change the name of the fund and since they could still invest up to 20% they dropped Taiwan from the principal investment strategies. He said if the limitation ever became an issue they would revisit potentially changing the name. Mystery solved.

The China Fund currently has nothing investing in Taiwan, China Small is 14% and China Dividend is 15%. And gracious, AD!

T. Rowe tweaks

Long ago, as a college administrator, I was worried about whether the text in a proposed policy statement might one day get us in trouble. I still remember college counsel shaking his head confidently, smiling and saying “Not to worry. We’re going to fuzz it up real good.” One wonders if he works for T. Rowe Price now? Up until now, many of Price’s funds have had relatively detailed and descriptive investment objectives. No more! At least five of Price’s funds propose new language that reduces the statement of investment objectives to an indistinct mumble. T. Rowe Price Growth Stock Fund (PRGFX) goes from

The fund seeks to provide long-term capital growth and, secondarily, increasing dividend income through investments in the common stocks of well-established growth companies.

The fund seeks long-term capital growth through investments in stocks.

Similar blandifications are proposed for Dividend Growth, Equity Income, Growth & Income and International Growth & Income.

Wasatch redefines “small cap”

A series of Wasatch funds, Small Growth, Small Value and Emerging Markets Small Cap are upping the size of stocks in their universe from $2.5 billion or less to $3.0 billion or less. The change is effective in November.

Can you say whoa!? Or WOA?

The Board of Trustees of an admittedly obscure little institutional fund, WOA All Asset (WOAIX), has decided that the best way to solve what ails the yearling fund is to get it more aggressive.

The Board approved certain changes to the Fund’s principal investment strategies. The changes will be effective on or about September 3, 2013. . . the changes in the Fund’s strategy will alter the Fund’s risk level from balanced strategy with a moderate risk level to an aggressive risk level.

Here’s the chart of the fund’s performance since inception against conservative and moderate benchmarks. While that might show that the managers just need to fire up the risk machine, I’d also imagine that addressing the ridiculously high expenses (1.75% for an institutional balanced fund) and consistent ability to lag in both up and down months (11 of 16 and counting) might actually be a better move.

woa

WOA’s Trustees, by the way, are charged with overseeing 24 funds. No Trustee has a dollar invested in any of those funds.

SMALL WINS FOR INVESTORS

The Board of Trustees of the Direxion Funds and Rafferty Asset Management have decided to make it cheaper for you to own a bunch of funds that you really shouldn’t own. They’re removed the 25 bps Shareholder Servicing Fee from

Direxion Monthly S&P 500® Bull 2X Fund
Direxion Monthly S&P 500® Bear 2X Fund
Direxion Monthly NASDAQ-100® Bull 2X Fund
Direxion Monthly Small Cap Bull 2X Fund
Direxion Monthly Small Cap Bear 2X Fund
Direxion Monthly Emerging Markets Bull 2X Fund
Direxion Monthly Latin America Bull 2X Fund
Direxion Monthly China Bull 2X Fund
Direxion Monthly Commodity Bull 2X Fund
Direxion Monthly 7-10 Year Treasury Bull 2X Fund
Direxion Monthly 7-10 Year Treasury Bear 2X Fund
Dynamic HY Bond Fund and
U.S. Government Money Market Fund.

Because Eaton Vance loves you, they’ve decided to create the opportunity for investors to buy high expense “C” class shares of Eaton Vance Bond (EVBCX). The new shares will add a 1.00% back load for sales held less than a year and a 1.70% expense ratio (compared to 0.7 and 0.95 for Institutional and A, respectively).

The Fairholme Fund (FAIRX) reopened to new investors on August 19, 2013. The other Fairholme family funds, not so much.

The Advisor Class shares of Forward Select Income Fund (FSIMX) reopened to new investors at the end of August.

The Board of Directors of the Leuthold Global Industries Fund (LGINX) has agreed to reduce the Fund’s expense cap from 1.85% to 1.60%.

JacksonPark Capital reduced the minimum initial investment on Oakseed Opportunity Institutional shares (SEDEX) from $1 million to $10,000. Given the 18% lower fees on the institutional class (capped at 1.15% versus 1.40% for retail shares), reasonably affluent retail investors ought to seriously consider pursuing the institutional share class. That said, Oakseed’s minimum investment for the retail shares, as low as $100 for accounts set up with an AIP, are awfully reasonable.

RiverNorth DoubleLine Strategic Income (RNDLX/RNSIX) reopened to new investors at the end of August. Check the “upcoming conference calls” feature, above, for more details.

Westcore Blue Chip Dividend Fund (WTMVX ) lowered the expense ratio on its no-load retail shares from 1.15% to 0.99%, effective September 1. They also changed from paying distributions annually to paying them quarterly. It’s a perfectly agreeable, mild-mannered little fund: stable management, global diversified, reasonable expenses and very consistently muted volatility. You do give up a fair amount of upside for the opportunity to sleep a bit more quietly at night.

CLOSINGS (and related inconveniences)

American Beacon Stephens Small Cap Growth Fund (STSGX) will close to new investors, effective as of September 16, 2013. The no-class share class has returned 11.8% while its peers made 9.3% and it did so with lower volatility. The fund is closing at a still small $500 million.

Neither high fees nor mediocre performance can dim the appeal of AQR Multi-Strategy Alternative Fund (ASANX/ASAIX). The fund has drawn $1.5 billion and has advertised the opportunity for rich investors (the minimum runs between $1 million and $5 million) to rush in before the doors swing shut at the end of September. It’s almost always a bad sign that a fund feels the need to close and the need to put up a flashing neon sign six weeks ahead.

Morgan Stanley Institutional Global Franchise (MSFAX) will close to new investors on Nov. 29, 2013. The current management team came on board four years ago (June 2009) and have posted very good risk-adjusted returns since then. Investors might wonder why a large cap global fund with a small asset base needs to close. The answer is that the mutual fund represents just the tip of the iceberg; this team actually manages almost $17 billion in this strategy, so the size of the separate accounts is what’s driving the decision.

OLD WINE, NEW BOTTLES

At the end of September Ariel International Equity Fund (AINTX) becomes Ariel International Fund and will no longer be required to invest at least 80% of its assets in equities. At the same time, Ariel Global Equity Fund (AGLOX) becomes Ariel Global Fund. The advisor avers that it’s not planning on changing the funds’ investment strategies, just that it would be nice to have the option to move into other asset classes if conditions dictate.

Effective October 30, Guggenheim U.S. Long Short Momentum Fund (RYAMX) will become plain ol’ Guggenheim Long-Short Fund. In one of those “why bother” changes, the prospectus adds a new first sentence to the Strategy section (“invest, under normal circumstances, at least 80% of its assets in long and short equity or equity-like securities”) but maintains the old “momentum” language in the second and third sentences. They’ll still “respond to the dynamically changing economy by moving its investments among different industries and styles” and “allocates investments to industries and styles according to several measures of momentum. “ Over the past five years, the fund has been modestly more volatile and less profitable than its peers. As a result, they’ve attracted few assets and might have decided, as a marketing matter, that highlighting a momentum approach isn’t winning them friends.

As of October 28, the SCA Absolute Return Fund (SCARX) will become the Granite Harbor Alternative Fund and it will no longer aim to provide “positive absolute returns with less volatility than traditional equity markets.” Instead, it’s going for the wimpier “long-term capital appreciation and income with low correlation” to the markets. SCA Directional Fund (SCADX) will become Granite Harbor Tactical Fund but will no longer seek “returns similar to equities with less volatility.” Instead, it will aspire to “long term capital appreciation with moderate correlation to traditional equity markets.”

Have you ever heard someone say, “You know, what I’m really looking for is a change for a moderate correlation to the equity markets”? No, me neither.

Thomas Rowe Price, Jr. (the man, 1898-1983) has been called “the father of growth investing.” It’s perhaps then fitting that T. Rowe Price (the company) has decided to graft the word “Growth” into the names of many of its funds effective November 1.

T. Rowe Price Institutional Global Equity Fund becomes T. Rowe Price Institutional Global Focused Growth Equity Fund. Institutional Global Large-Cap Equity Fund will change its name to the T. Rowe Price Institutional Global Growth Equity Fund. T. Rowe Price Global Large-Cap Stock Fund will change its name to the T. Rowe Price Global Growth Stock Fund.

Effective October 28, 2013, USB International Equity Fund (BNIEX) gets a new name (UBS Global Sustainable Equity Fund), new mandate (invest globally in firms that pass a series of ESG screens) and new managers (Bruno Bertocci and Shari Gilfillan). The fund’s been a bit better under the five years of Nick Irish’s leadership than its two-star rating suggests, but not by a lot.

Off to the dustbin of history

There were an exceptionally large number of funds giving up the ghost this month. We’ve tracked 26, the same as the number of new no-load funds in registration and well below the hundred or so new portfolios of all sorts being launched. I’m deeply grateful to The Shadow, one of the longest-tenured members of our discussion board, for helping me to keep ahead of the flood.

American Independence Dynamic Conservative Plus Fund (TBBIX, AABBX) will liquidate on or about September 27, 2012.

Dynamic Canadian Equity Income Fund (DWGIX) and Dynamic Gold & Precious Metals Fund (DWGOX), both series of the DundeeWealth Funds, are slated for liquidation on September 23, 2013. Dundee bumped off Dynamic Contrarian Advantage Fund (DWGVX) and announced that it was divesting itself of three other funds (JOHCM Emerging Markets Opportunities Fund JOEIX, JOHCM International Select Fund JOHIX and JOHCM Global Equity Fund JOGEX), which are being transferred to new owners.

Equinox Commodity Strategy Fund (EQCAX) closed to new investors in mid-August and will liquidate on September 27^th.

dinosaur The Evolution Funds face extinction! Oh, the cruel irony of it.

Evolution Managed Bond (PEMVX) Evolution All-Cap Equity (PEVEX), Evolution Market Leaders (PEVSX) and Evolution Alternative Investment (PETRX) have closed to all new investment and were scheduled to liquidate by the end of September. Given their disappearance from Morningstar, one suspects the end came more quickly than we knew.

Frontegra HEXAM Emerging Markets Fund (FHEMX) liquidates at the end of September.

The Northern Lights Board of Trustees has concluded that “based on, among other factors, the current and projected level of assets in the Fund and the belief that it would be in the best interests of the Fund and its shareholders to discontinue the Hundredfold Select Global Fund (SFGPX).”

Perhaps the “other factors” would be the fact that Hundredfold trailed 100% of its peers over the past three- and five-year periods? The manager was unpaid and quite possibly the fund’s largest shareholder ($50-100k in a $2M fund). His Hundredfold Select Equity (SFEOX) is almost as woeful as the decedent, but Hundredfold Select Alternative (SFHYX) is in the top 1% of its peer group for the same period that the others are bottom 1%. That raises the spectre that luck, rather than skill, might be involved.

JPMorgan is cleaning house: JPMorgan Credit Opportunities Fund (JOCAX), JPMorgan Global Opportunities Fund (JGFAX) and JPMorgan Russia Fund (JRUAX) are all gone as of October 4.

John Hancock intends to merge John Hancock High Income (JHAQX) into John Hancock High Yield (JHHBX). I’m guessing at the fund tickers because the names in the SEC filing don’t quite line up with the Morningstar ones.

Legg Mason Esemplia Emerging Markets Long-Short Fund (SMKAX) will be terminated on October 1, 2013. Let’s see: hard-to-manage strategy, high risk, high expenses, high front load, no assets . . . sounds like Legg.

Leuthold Asset Allocation Fund (LAALX) is merging into Leuthold Core Investment Fund (LCORX). The Board of Directors approved a proposal for the Leuthold Asset Allocation to be acquired by the Leuthold Core, sometime in October 2013. Curious. LAALX, with a quarter billion in assets, modestly lags LCORX which has about $600 million. Both lag more mild-mannered funds such as Northern Global Tactical Asset Allocation (BBALX) and Vanguard STAR (VGSTX) over the course of LAALX’s lifetime. This might be less a story about LAALX than about the once-legendary Leuthold Core. Leuthold’s funds are all quant-driven, based on an unparalleled dataset. For years Core seemed unstoppable: between 2003 and 2008, it finished in the top 5% of its peer group four times. But for 2009 to now, it has trailed its peers every year and has bled $1 billion in assets. In merging the two, LAALX investors get a modestly less expensive fund with modestly better performance. Leuthold gets a simpler administrative structure.

I halfway admire the willingness of Leuthold to close products that can’t distinguish themselves in the market. Clean Tech, Hedged Equity, Undervalued & Unloved, Select Equities and now Asset Allocation have been liquidated.

MassMutual Premier Capital Appreciation Fund (MCALX) will be liquidated, but not until January 24, 2014. Why?

New Frontiers KC India Fund (NFIFX) has closed and began the process of liquidating their portfolio on August 26^th. They point to “difficult market conditions in India.” The fund’s returns were comparable to its India-focused peers, which is to say it lost about 30% in 18 months.

Nomura Partners India Fund (NPIAX), Greater China Fund (NPCAX) and International Equity Fund (NPQAX) will all be liquidated by month’s end.

Nuveen Quantitative Enhanced Core Equity (FQCAX) is slated, pending inevitable shareholder approval, to disappear into Nuveen Symphony Low Volatility Equity Fund (NOPAX, formerly Nuveen Symphony Optimized Alpha Fund)

Oracle Mutual Fund (ORGAX) has “due to the relatively small size of the fund” underwent the process of “orderly dissolution.” Due to the relatively small size? How about, “due to losing 49.5% of our investors’ money over the past 30 months, despite an ongoing bull market in our investment universe”? To his credit, the advisor’s president and portfolio manager went down with the ship: he had something between $500,000 – $1,000,000 left in the fund as of the last SAI.

Quantitative Managed Futures Strategy Fund (QMFAX) will “in the best interests of the Fund and its shareholders” redeem all outstanding shares on September 15^th.

The directors of the United Association S&P 500 Index Fund (UASPX/UAIIX) have determined that it’s in their shareholders’ best interest to liquidate. Uhhh … I don’t know why. $140 million in assets, low expenses, four-star rating …

Okay, so the Oracle Fund didn’t seem particularly oracular but what about the Steadfast Fund? Let’s see: “steadfast: firmly loyal or constant, unswerving, not subject to change.” VFM Steadfast Fund (VFMSX) launched less than one year ago and gone before its first birthday.

In Closing . . .

Interesting stuff’s afoot. We’ve spoken with the folks behind the surprising Oberweis International Opportunities Fund (OBIOX), which was much different and much more interesting that we’d anticipated. Thanks to “Investor” for poking us about a profile. In October we’ll have one. RiverPark Strategic Income is set to launch at the end of the month, which is exciting both because of the success of the other fund (the now-closed RiverPark Short Term High Yield Fund RPHYX) managed by David Sherman and Cohanzick Asset Management and because Sherman comes across as such a consistently sharp and engaging guy. With luck, I’ll lure him into an extended interview with me and a co-conspirator (the gruff but lovable Ed Studzinski, cast in the role of a gruff but lovable curmudgeon who formerly managed a really first-rate mutual fund, which he did).

etf_conf MFO returns to Morningstar! Morningstar is hosting their annual ETF Invest Conference in Chicago, from October 2 – 4. While, on whole, we’d rather drop by their November conference in Milan, Italy it was a bit pricey and I couldn’t get a dinner reservation at D’O before early February 2014 so we decided to pass it up. While the ETF industry seems to be home to more loony ideas and regrettable business practices than most, it’s clear that the industry’s maturing and a number of ETF products offer low cost access to sensible strategies, some in areas where there are no tested active managers. The slow emergence of active ETFs blurs the distinction with funds and Morningstar does seem do have arranged both interesting panels (skeptical though I am, I’ll go listen to some gold-talk on your behalf) and flashy speakers (Austan Goolsbee among them). With luck, I’ll be able to arrange a couple of face-to-face meetings with Chicago-based fund management teams while I’m in town. If you’re going to be at the conference, feel free to wave. If you’d like to chat, let me know.

If you shop Amazon, please do remember to click on the Observer’s link and use it. If you click on it right now, you can bookmark it or set it as a homepage and then you won’t forget. The partnership with Amazon generates about $20/day which, while modest, allows us to reliably cover all of our “hard” expenses and underwrites the occasional conference coverage. If you’d prefer to consider other support options, that’s great. Just click on “support us” on the top menu bar. But the Amazon thing is utterly painless for you.

The Sufi poet Attar records the fable of a powerful king who asks assembled wise men to create a ring that will make him happy when he is sad, and vice versa. After deliberation the sages hand him a simple ring with the words “This too will pass.” That’s also true of whatever happens to the market and your portfolio in September and October.

Be brave and we’ll be with you in a month!

David

July 1, 2013

Dear friends,

Welcome to summer, a time of year when heat records are rather more common than market records.

temp_map

What’s in your long/short fund?

viking Everybody’s talking about long/short funds. Google chronicles 273,000 pages that use the phrase. Bloomberg promises “a comprehensive list of long/short funds worldwide.” Morningstar, Lipper and U.S. News plunk nearly a hundred funds into a box with that label. (Not the same hundred funds, by the way. Not nearly.) Seeking Alpha offers up the “best and less long/short funds 2013.”

Here’s the Observer’s position: Talking about “long/short funds” is dangerous and delusional because it leads you to believe that there are such things. Using the phrase validates the existence of a category, that is, a group of things where we perceive shared characteristics. As soon as we announce a category, we start judging things in the category based on how well they conform to our expectations of the category. If we assign a piece of fruit (or a hard-boiled egg) to the category “upscale dessert,” we start judging it based on how upscale-dessert-y it seems. The fact that the assignment is random, silly and unfair doesn’t stop us from making judgments anyway. The renowned linguist George Lakoff writes, “there is nothing more basic than categorization to our thought, perception, action and speech.”

Do categories automatically make sense? Try this one out: Dyirbal, an Australian aboriginal language, has a category balan which contains women, fire, dangerous things, non-threatening birds and platypuses.

When Morningstar groups 83 funds together in the category “long/short equity,” they’re telling us “hey, all of these things have essential similarities. Feel free to judge them against each other.” We sympathize with the analysts’ need to organize funds. Nonetheless, this particular category is seriously misleading. It contains funds that have only superficial – not essential – similarities with each other. In extended conversations with managers and executives representing a half dozen long/short funds, it’s become clear that investors need to give up entirely on this simple category if they want to make meaningful comparisons and choices.

Each of the folks we spoke to have their own preferred way of organizing these sorts of “alternative investment” funds. After two weeks of conversation, though, useful commonalities began to emerge. Here’s a manager-inspired schema:

Start with the role of the short portfolio. What are the managers attempting to do with their short book and how are they doing it? The RiverNorth folks, and most of the others, agree that this should be “the first and perhaps most important” criterion. Alan Salzbank of the Gargoyle Group warns that “the character of the short positions varies from fund to fund, and is not necessarily designed to hedge market exposure as the category title would suggest.” Based on our discussions, we think there are three distinct roles that short books play and three ways those strategies get reflected in the fund.

Role	Portfolio tool	Translation
Add alpha	Individual stock shorts	These funds want to increase returns by identifying the market’s least attractive stocks and betting against them
Reduce beta	Shorting indexes or sectors, generally by using ETFs	These funds want to tamp market volatility by placing larger or smaller bets against the entire market, or large subsets of it, with no concern for the value of individual issues
Structural	Various option strategies such as selling calls	These funds believe they can generate considerable income – as much as 1.5-2% per month – by selling options. Those options become more valuable as the market becomes more volatile, so they serve as a cushion for the portfolio; they are “by their very nature negatively correlated to the market” (AS).

Determine the degree of market exposure. Net exposure (% long minus % short) varies dramatically, from 100% (from what ARLSX manager Matt Moran laments as “the faddish 130/30 funds from a few years ago”) to under 25%. An analysis by the Gargoyle Group showed three-year betas for funds in Morningstar’s long/short category ranging from 1.40 to (-0.43), which gives you an idea of how dramatically market exposure varies. For some funds the net market exposure is held in a tight band (40-60% with a target of 50% is pretty common). Some of the more aggressive funds will shift exposure dramatically, based on their market experience and projections. It doesn’t make sense to compare a fund that’s consistently 60% exposure to the market with one that swings from 25% – 100%.

Ideally, that information should be prominently displayed on a fund’s fact sheet, especially if the manager has the freedom to move by more than a few percent. A nice example comes from Aberdeen Equity Long/Short Fund’s (GLSRX) factsheet:

Greg Parcella of Long/Short Advisors maintains an internal database of all of long/short funds and expressed some considerable frustration in discovering that many don’t make that information available or require investors to do their own portfolio analyses to discover it. Even with the help of Morningstar, such self-generated calculations can be a bit daunting. Here, for example, is how Morningstar reports the portfolio of Robeco Boston Partners Long/Short Equity BPLEX in comparison to its (entirely-irrelevant) long-short benchmark and (wildly incomparable) long/short equity peers:

So, look for managers who offer this information in a clear way and who keep it current. Morty Schaja, president of RiverPark Advisors which offers two very distinctive long/short funds (RiverPark Long/Short Opportunity RLSFX and RiverPark/Gargoyle Hedged Value RGHVX) suggest that such a lack of transparency would immediately raise concerns for him as an investor; he did not offer a flat “avoid them” but was surely leaning in that direction.
Look at the risk/return metrics for the fund over time. Once you’ve completed the first two steps, you’ve stopped comparing apples to rutabagas and mopeds (step one) or even cooking apples to snacking apples (step two). Now that you’ve got a stack of closely comparable funds, many of the managers call for you to look at specific risk measures. Matt Moran suggests that “the best measure to employ are … the Sharpe, the Sortino and the Ulcer Index [which help you determine] how much return an investor is getting for the risk that they are taking.”

As part of the Observer’s new risk profiles of 7600 funds, we’ve pulled all of the funds that Morningstar categorizes as “long/short equity” into a single table for you. It will measure both returns and seven different flavors of risk. If you’re unfamiliar with the varied risk metrics, check our definitions page. Remember that each bit of data must be read carefully since the fund’s longevity can dramatically affect their profile. Funds that were around in the 2008 will have much greater maximum drawdowns than funds launched since then. Those numbers do not immediately make a fund “bad,” it means that something happened that you want to understand before trusting these folks with your money.

As a preview, we’d like to share the profiles for five of the six funds whose advisors have been helping us understand these issues. The sixth, RiverNorth Dynamic Buy-Write (RNBWX), is too new to appear. These are all funds that we’ve profiled as among their categories’ best and that we’ll be profiling in August.

long-short-table

Long/short managers aren’t the only folks concerned with managing risk. For the sake of perspective, we calculated the returns on a bunch of the risk-conscious funds that we’ve profiled. We looked, in particular, at the recent turmoil since it affected both global and domestic, equity and bond markets.

Downside protection in one ugly stretch, 05/28/2013 – 06/24/2013

Strategy	Represented by	Returned
Traditional balanced	Vanguard Balanced Index Fund (VBINX)	(3.97)
Global equity	Vanguard Total World Stock Index (VTWSX)	(6.99)
Absolute value equity a/k/a cash-heavy funds	ASTON/River Road Independent Value (ARIVX) Bretton (BRTNX) Cook and Bynum (COBYX) FPA International Value (FPIVX) Pinnacle Value (PVFIX)	(1.71) (2.51) (3.20) (3.30) (1.75)
Pure long-short	ASTON/River Road Long-Short (ARLSX) Long/Short Opportunity (LSOFX) RiverPark Long Short Opportunity (RLSFX) Wasatch Long/Short (FMLSX)	(3.34) (4.93) (5.08) (3.84)
Long with covered calls	Bridgeway Managed Volatility (BRBPX) RiverNorth Dynamic Buy-Write (RNBWX) RiverPark Gargoyle Hedged Value (RGHVX)	(1.18) (2.64) (4.39)
Market neutral	Whitebox Long/Short Equity (WBLSX)	(1.75)
Multi-alternative	MainStay Marketfield (MFLDX)	(1.11)

Charles, widely-read and occasionally whimsical, thought it useful to share two stories and a bit of data that lead him to suspect that successful long/short investments are, like Babe Ruth’s “called home run,” more legend than history.

Notes from the Morningstar Conference

If you ever wonder what we do with contributions to the Observer or with income from our Amazon partnership, the short answer is, we try to get better. Three ongoing projects reflect those efforts. One is our ongoing visual upgrade, the results of which will be evident online during July. More than window-dressing, we think of a more graphically sophisticated image as a tool for getting more folks to notice and benefit from our content. A second our own risk profiles for more than 7500 funds. We’ll discuss those more below. The third was our recent presence at the Morningstar Investment Conference. None of them would be possible without your support, and so thanks!

I spent about 48 hours at Morningstar and was listening to folks for about 30 hours. I posted my impressions to our discussion board and several stirred vigorous discussions. For your benefit, here’s a sort of Top Ten list of things I learned at Morningstar and links to the ensuing debates on our discussion board.

Day One: Northern Trust on emerging and frontier investing

Attended a small lunch with Northern managers. Northern primarily caters to the rich but has retail share class funds, FlexShare ETFs and multi-manager funds for the rest of us. They are the world’s 5th largest investor in frontier markets. Frontier markets are currently 1% of global market cap, emerging markets are 12% and both have GDP growth 350% greater than the developed world’s. EM/F stocks sell at a 20% discount to developed stocks. Northern’s research shows that the same factors that increase equity returns in the developed world (small, value, wide moat, dividend paying) also predict excess returns in emerging and frontier markets. In September 2012 they launched the FlexShares Emerging Markets Factor Tilt Index Fund (TLTE) that tilts toward Fama-French factors, which is to say it holds more small and more value than a standard e.m. index.

Day One: Smead Value (SMVLX)

Interviewed Bill Smead, an interesting guy, who positions himself against the “brilliant pessimists” like Grantham and Hussman. Smead argues their clients have now missed four years of phenomenal gains. Their thesis is correct (as were most of the tech investor theses in 1999) but optimism has been in such short supply that it became valuable. He launched Smead Value in 2007 with a simple strategy: buy and hold (for 10 to, say, 100 years) excellent companies. Pretty radical, eh? He argues that the fund universe is 35% passive, 5% active and 60% overly active. Turns out that he’s managed it to top 1-2% returns over most trailing periods. Much the top performing LCB fund around. There’s a complete profile of the fund below.

Day One: Morningstar’s expert recommendations on emerging managers

Consuelo Mack ran a panel discussion with Russ Kinnel, Laura Lallos, Scott Burns and John Rekenthaler. One question: “What are your recommendations for boutique firms that investors should know about, but don’t? Who are the smaller, emerging managers who are really standing out?”

Dead silence. Glances back and forth. After a long silence: FPA, Primecap and TFS.

There are two possible explanations: (1) Morningstar really has lost touch with anyone other than the top 20 (or 40 or whatever) fund complexes or (2) Morningstar charged dozens of smaller fund companies to be exhibitors at their conference and was afraid to offend any of them by naming someone else.

Since we notice small funds and fund boutiques, we’d like to offer the following answers that folks could have given:

Well, Consuelo, a number of advisors are searching for management teams that have outstanding records with private accounts and/or hedge funds, and are making those teams and their strategies available to the retail fund world. First rate examples include ASTON, RiverNorth and RiverPark.

Or

That’s a great question, Consuelo. Individual investors aren’t the only folks tired of dealing with oversized, underperforming funds. A number of first-tier investors have walked away from large fund complexes to launch their own boutiques and to pursue a focused investing vision. Some great places to start would be with the funds from Grandeur Peak, Oakseed, and Seafarer.

Mr. Mansueto did mention, in his opening remarks, an upcoming Morningstar initiative to identify and track “emerging managers.” If so, that’s a really good sign for all involved.

Day One: Michael Mauboussin on luck and skill in investing

Mauboussin works for Credit Suisse, Legg Mason before that and has written The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing (2012). Here’s his Paradox of Skill: as the aggregate level of skill rises, luck becomes a more important factor in separating average from way above average. Since you can’t count on luck, it becomes harder for anyone to remain way above average. Ted Williams hit .406 in 1941. No one has been over .400 since. Why? Because everyone has gotten better: pitchers, fielders and hitters. In 1941, Williams’ average was four standard deviations above the norm. In 2012, a hitter up by four s.d. would be hitting “just” .380. The same thing in investing: the dispersion of returns (the gap between 50th percentile funds and 90th percentile funds) has been falling for 50 years. Any outsized performance is now likely luck and unlikely to persist.

This spurred a particularly rich discussion on the board.

Day Two: Matt Eagan on where to run now

Day Two started with a 7:00 a.m. breakfast sponsored by Litman Gregory. (I’ll spare you the culinary commentary.) Litman runs the Masters series funds and bills itself as “a manager of managers.” The presenters were two of the guys who subadvise for them, Matt Eagan of Loomis Sayles and David Herro of Oakmark. Eagan helps manage the strategic income, strategic alpha, multi-sector bond, corporate bond and high-yield funds for LS. He’s part of a team named as Morningstar’s Fixed-Income Managers of the Year in 2009.

Eagan argues that fixed income is influenced by multiple cyclical risks, including market, interest rate and reinvestment risk. He’s concerned with a rising need to protect principal, which leads him to a neutral duration, selective shorting and some currency hedges (about 8% of his portfolios).

He’s concerned that the Fed has underwritten a hot-money move into the emerging markets. The fundamentals there “are very, very good and we see their currencies strengthening” but he’s made a tactical withdrawal because of some technical reasons (I have “because of a fund-out window” but have no idea of what that means) which might foretell a drop “which might be violent; when those come, you’ve just got to get out of the way.”

He finds Mexico to be “compelling long-term story.” It’s near the US, it’s capturing market share from China because of the “inshoring” phenomenon and, if they manage to break up Pemex, “you’re going to see a lot of growth there.”

Europe, contrarily, “is moribund at best. Our big hope is that it’s less bad than most people expect.” He suspects that the Europeans have more reason to stay together than to disappear, so they likely will, and an investor’s challenge is “to find good corporations in bad Zip codes.”

In the end:

avoid indexing – almost all of the fixed income indexes are configured to produce “negative real yields for the foreseeable future” and most passive products are useful mostly as “just liquidity vehicles.”
you can make money in the face of rising rates, something like a 3-4% yield with no correlation to the markets.
avoid Treasuries and agencies
build a yield advantage by broadening your opportunity set
look at convertible securities and be willing to move within a firm’s capital structure
invest overseas, in particular try to get away from the three reserve currencies.

Eagan manages a sleeve of Litman Gregory Masters Alternative Strategies (MASNX), which we’ve profiled and which has had pretty solid performance.

Day Two: David Herro on emerging markets and systemic risk

The other breakfast speaker was David Herro of Oakmark International. He was celebrated in our May 2013 essay, “Of Oaks and Acorns,” that looked at the success of Oakmark international analysts as fund managers.

Herro was asked about frothy markets and high valuations. He argues that “the #1 risk to protect against is the inability of companies to generate profits – macro-level events impact price but rarely impact long-term value. These macro-disturbances allow long-term investors to take advantage of the market’s short-termism.” The ’08-early ’09 events were “dismal but temporary.”

Herro notes that he had 20% of his flagship in the emerging markets in the late 90s, then backed down to zero as those markets were hit by “a wave of indiscriminate inflows.” He agrees that emerging markets will “be the propellant of global economic growth for the next 20 years” but, being a bright guy, warns that you still need to find “good businesses at good prices.” He hasn’t seen any in several years but, at this rate, “maybe in a year we’ll be back in.”

His current stance is that a stock needs to have 40-50% upside to get into his portfolio today and “some of the better quality e.m. firms are within 10-15% of getting in.” (Since then the e.m. indexes briefly dropped 7% but had regained most of that decline by June 30.) He seemed impressed, in particular, with the quality of management teams in Latin America (“those guys are really experienced with handling adversity”) but skeptical of the Chinese newbies (“they’re still a little dodgy”).

He also announced a bias “against reserve currencies.” That is, he thinks you’re better off buying earnings which are not denominated in dollars, Euros or … perhaps, yen. His co-presenter, Matt Eagan of Loomis Sayles, has the same bias. He’s been short the yen but long the Nikkei.

In terms of asset allocation, he thinks that global stocks, especially blue chips “are pretty attractively priced” since values have been rising faster than prices have. Global equities, he says, “haven’t come out of their funk.” There’s not much of a valuation difference between the US and the rest of the developed world (the US “is a little richer” but might deserve it), so he doesn’t see overweighting one over the other.

Day Two: Jack Bogle ‘s inconvenient truths

Don Phillips had a conversation with Bogle in a huge auditorium that, frankly, should dang well have had more people in it. I think the general excuse is, “we know what Bogle’s going to say, so why listen?” Uhhh … because Bogle’s still thinking clearly, which distinguishes him from a fair number of his industry brethren? He weighed in on why money market funds cost more than indexed stock funds (the cost of check cashing) and argued that our retirement system is facing three train wrecks: (1) underfunding of the Social Security system – which is manageable if politicians chose to manage it, (2) “grotesquely underfunded” defined benefit plans (a/k/a pension plans) whose managers still plan to earn 8% with a balanced portfolio – Bogle thinks they’ll be lucky to get 5% before expenses – and who are planning “to bring in some hedge fund guys” to magically solve their problem, and (3) defined contribution plans (401k’s and such) which allow folks to wreck their long-term prospects by cashing out for very little cause.

Bogle thinks that most target-date funds are ill-designed because they ignore Social Security, described by Bogle as “the best fixed-income position you’ll ever have.” The average lifetime SS benefit is something like $300,000. If your 401(k) contains $300,000 in stocks, you’ll have a 50/50 hybrid at retirement. If your 401(k) target-date fund is 40% in bonds, you’ll retire with a portfolio that’s 70% bonds (SS + target date fund) and 30% stocks. He’s skeptical of the bond market to begin with (he recommends that you look for a serious part of your income stream from dividend growth) and more skeptical of a product that buries you in bonds.

Finally, he has a strained relationship with his successors at Vanguard. On the one hand he exults that Vanguard’s structural advantage on expenses is so great “that nobody can match us – too bad for them, good for us.” And the other, he disagrees with most industry executives, including Vanguard’s, on regulations of the money market industry and the fund industry’s unwillingness – as owners of 35% of all stock – to stand up to cultures in which corporations have become “the private fiefdom of their chief executives.” (An issue addressed by The New York Times on June 29, “The Unstoppable Climb in CEO Pay.”) At base, “I don’t disagree with Vanguard. They disagree with me.”

Day Three: Sextant Global High Income

This is an interesting one and we’ll have a full profile of the fund in August. The managers target a portfolio yield of 8% (currently they manage 6.5% – the lower reported trailing 12 month yield reflects the fact that the fund launched 12 months ago and took six months to become fully invested). There are six other “global high income” funds – Aberdeen, DWS, Fidelity, JohnHancock, Mainstay, Western Asset. Here’s the key distinction: Sextant pursues high income through a combination of high dividend stocks (European utilities among them), preferred shares and high yield bonds. Right now about 50% of the portfolio is in stocks, 30% bonds, 10% preferreds and 10% cash. No other “high income” fund seems to hold more than 3% equities. That gives them both the potential for capital appreciation and interest rate insulation. They could imagine 8% from income and 2% from cap app. They made about 9.5% over the trailing twelve months through 5/31.

Day Three: Off-the-record worries

I’ve had the pleasure of speaking with some managers frequently over months or years, and occasionally we have conversations where I’m unsure that statements were made for attribution. Here are four sets of comments attributable to “managers” who I think are bright enough to be worth listening to.

More than one manager is worried about “a credit event” in China this year. That is, the central government might precipitate a crisis in the financial system (a bond default or a bank run) in order to begin cleansing a nearly insolvent banking system. (Umm … I think we’ve been having it and I’m not sure whether to be impressed or spooked that folks know this stuff.) The central government is concerned about disarray in the provinces and a propensity for banks and industries to accept unsecured IOUs. They are acting to pursue gradual institutional reforms (e.g., stricter capital requirements) but might conclude that a sharp correction now would be useful. One manager thought such an event might be 30% likely. Another was closer to “near inevitable.”

More than one manager suspects that there might be a commodity price implosion, gold included. A 200 year chart of commodity prices shows four spikes – each followed by a retracement of more than 100% – and a fifth spike that we’ve been in recently.

More than one manager offered some version of the following statement: “there’s hardly a bond out there worth buying. They’re essentially all priced for a negative real return.”

More than one manager suggested that the term “emerging markets” was essentially a linguistic fiction. About 25% of the emerging markets index (Korea and Taiwan) could be declared “developed markets” (though, on June 11, they were not) while Saudi Arabia could become an emerging market by virtue of a decision to make shares available to non-Middle Eastern investors. “It’s not meaningful except to the marketers,” quoth one.

Day Three: Reflecting on tchotchkes

Dozens of fund companies paid for exhibits at Morningstar – little booths inside the McCormick Convention Center where fund reps could chat with passing advisors (and the occasional Observer guy). One time honored conversation starter is the tchotchke: the neat little giveaway with your name on it. Firms embraced a stunning array of stuff: barbeque sauce (Scout Funds, from Kansas City), church-cooked peanuts (Queens Road), golf tees, hand sanitizers (inexplicably popular), InvestMints (Wasatch), micro-fiber cloths (Payden), flashlights, pens, multi-color pens, pens with styluses, pens that signal Bernanke to resume tossing money from a circling helicopter . . .

Ideally, you still need to think of any giveaway as an expression of your corporate identity. You want the properties of the object to reflect your sense of self and to remind folks of you. From that standard, the best tchotchke by a mile were Vanguard’s totebags. You wish you had one. Made of soft, heavy-weight canvas with a bottom that could be flattened for maximum capacity, they were unadorned except for the word “Vanguard.” No gimmicks, no flash, utter functionality in a product that your grandkids will fondly remember you carrying for years. That really says Vanguard. Good job, guys!

vangard bag 2

The second-best tchotchke (an exceedingly comfortable navy baseball cap with a sailboat logo) and single best location (directly across from the open bar and beside Vanguard) was Seafarer’s.

It’s Charles in Charge!

My colleague Charles Boccadoro has spearheaded one of our recent initiatives: extended risk profiles of over 7500 funds. Some of his work is reflected in the tables in our long/short fund story. Last month we promised to roll out his data in a searchable form for this month. As it turns out, the programmer we’re working with is still a few days away from a “search by ticker” engine. Once that’s been tested, chip will be able to quickly add other search fields.

As an interim move, we’re making all of Charles’ risk analyses available to you as a .pdf. (It might be paranoia, but I’m a bit concerned about the prospect of misappropriation of the file if we post it as a spreadsheet.) It runs well over 100 pages, so I’d be a bit cautious about hitting the “print” button.

Charles’ contributions have been so thoughtful and extensive that, in August, we’ll set aside a portion of the Observer that will hold an archive of all of his data-driven pieces. Our current plan is to introduce each of the longer pieces in this cover essay then take readers to Charles’ Balcony where complete story and all of his essays dwell. We’re following that model in …

Timing method performance over ten decades

The Healthy Debate. In Professor David Aronson’s 2006 book, entitled “Evidence-Based Technical Analysis,” he argues that subjective technical analysis, which is any analysis that cannot be reduced to a computer algorithm and back tested, is “not a legitimate body of knowledge but a collection of folklore resting on a flimsy foundation of anecdote and intuition.”

He further warns that falsehoods accumulate even with objective analysis and rules developed after-the-fact can lead to overblown extrapolations – fool’s gold biased by data-mining, more luck than legitimate prediction, in same category as “literate monkeys, Bible Codes, and lottery players.”

Read the full story here.

Announcing Mutual Fund Contacts, our new sister-site

I mentioned some months ago a plan to launch an affiliate site, Mutual Fund Contacts. June 28 marked the “soft launch” of MFC. MFC’s mission is to serve as a guide and resource for folks who are new at all this and feeling a bit unsteady about how to proceed. We imagine a young couple in their late 20s planning an eventual home purchase, a single mom in her 30s who’s trying to organize stuff that she’s not had to pay attention to, or a young college graduate trying to lay a good foundation.

Most sites dedicated to small investors are raucous places with poor focus, too many features and a desperate need to grab attention. Feh. MFC will try to provide content and resources that don’t quite fit here but that we think are still valuable. Each month we’ll provide a 1000-word story on the theme “the one-fund portfolio.” If you were looking for one fund that might yield a bit more than a savings account without a lot of downside, what should you consider? Each “one fund” article will recommend three options: two low-minimum mutual funds and one commission-free ETF. We’ll also have a monthly recommendation on three resources you should be familiar with (this month, the three books that any financially savvy person needs to start with) and ongoing resources (this month: the updated “List of Funds for Small Investors” that highlights all of the no-load funds available for $100 or less – plus a couple that are close enough to consider).

The nature of a soft launch is that we’re still working on the site’s visuals and some functionality. That said, it does offer a series of resources that, oh, say, your kids really should be looking at. Feel free to drop by Mutual Fund Contacts and then let us know how we can make it better.

Everyone loves a crisis

Larry Swedroe wrote a widely quoted, widely redistributed essay for CBS MoneyWatch warning that bond funds were covertly transforming themselves into stock funds in pursuit of additional yield. His essay opens with:

It may surprise you that, as of its last reporting date, there were 352 mutual funds that are classified by Morningstar as bond funds that actually held stocks in their portfolio. (I know I was surprised, and given my 40 years of experience in the investment banking and financial advisory business, it takes quite a bit to surprise me.) At the end of 2012, it was 312, up from 283 nine months earlier.

The chase for higher yields has led many actively managed bond funds to load up on riskier investments, such as preferred stocks. (Emphasis added)

Many actively managed bond funds have loaded up?

Let’s look at the data. There are 1177 bond funds, excluding munis. Only 104 hold more than 1% in stocks, and most of those hold barely more than a percent. The most striking aspect of those funds is that they don’t call themselves “bond” funds. Precisely 11 funds with the word “Bond” in their name have stocks in excess of 1%. The others advertise themselves as “income” funds and, quite often, “strategic income,” “high income” or “income opportunities” funds. Such funds have, traditionally, used other income sources to supplement their bond-heavy core portfolios.

How about Larry’s claim that they’ve been “bulking up”? I looked at the 25 stockiest funds to see whether their equity stake should be news to their investors. I did that by comparing their current exposure to the bond market with the range of exposures they’ve experienced over the past five years. Here’s the picture, ranked based on US stock exposure, starting with the stockiest fund:

		Bond category	Current bond exposure	Range of bond exposure, 2009-2013
Ave Maria Bond	AVEFX	Intermediate	61	61-71
Pacific Advisors Government Securities	PADGX	Short Gov’t	82	82-87
Advisory Research Strategic Income	ADVNX	Long-Term	16	n/a – new
Northeast Investors	NTHEX	High Yield	54	54-88
Loomis Sayles Strategic Income	NEFZX	Multisector	65	60-80
JHFunds2 Spectrum Income	JHSTX	Multisector	77	75-79
T. Rowe Price Spectrum Income	RPSIX	Multisector	76	76-78
Azzad Wise Capital	WISEX	Short-Term	42	20-42 *
Franklin Real Return	FRRAX	Inflation-Prot’d	47	47-69
Huntington Mortgage Securities	HUMSX	Intermediate	85	83-91
Eaton Vance Bond	EVBAX	Multisector	63	n/a – new
Federated High Yield Trust	FHYTX	High Yield	81	81-87
Pioneer High Yield	TAHYX	High Yield	57	55-60
Chou Income	CHOIX	World	33	16-48
Forward Income Builder	AIAAX	Multisector	35	35-97
ING Pioneer High Yield Portfolio	IPHIX	High Yield	60	50-60
Loomis Sayles High Income	LSHIX	High Yield	61	61-70
Highland Floating Rate Opportunities	HFRAX	Bank Loan	81	73-88
Epiphany FFV Strategic Income	EPINX	Intermediate	61	61-69
RiverNorth/Oaktree High Income	RNHIX	Multisector	56	n/a – new
Astor Active Income ETF	AXAIX	Intermediate	74	68-88
Fidelity Capital & Income	FAGIX	High Yield	84	75-84
Transamerica Asset Allc Short Horizon	DVCSX	Intermediate	85	79-87
Spirit of America Income	SOAIX	Long-term	74	74-90

*WISEX invests within the constraints of Islamic principles. As a result, most traditional interest-paying, fixed-income vehicles are forbidden to it.

From this most stock-heavy group, 10 funds now hold fewer bonds than at any other point in the past five years. In many cases (see T Rowe Price Spectrum Income), their bond exposure varies by only a few percentage points from year to year so being light on bonds is, for them, not much different than being heavy on bonds.

The SEC’s naming rule says that if you have an investment class in your name (e.g. “Bond”) then at least 80% of your portfolio must reside in that class. Ave Maria Bond runs right up to the line: 19.88% US stocks, but warns you of that: “The Fund may invest up to 20% of its net assets in equity securities, which include preferred stocks, common stocks paying dividends and securities convertible into common stock.” Eaton Vance Bond is 12% and makes the same declaration: “The Fund may invest up to 20% of its net assets in common stocks and other equity securities, including real estate investment trusts.”

Bottom line: the “loading up” has been pretty durn minimal. The funds which have a substantial equity stake now have had a substantial equity stake for years, they market that fact and they name themselves to permit it.

Fidelity cries out: Run away!

Several sites have noted the fact that Fidelity Europe Cap App Fund (FECAX) has closed to new investors. Most skip the fact that it looks like the $400 million FECAX is about to get eaten, presumably by Fidelity Europe (FIEUX): “The Board has approved closing Fidelity Europe Capital Appreciation Fund effective after the close of business on July 19, 2013, as the Board and FMR are considering merging the fund.” (emphasis added)

Fascinating. Fidelity’s signaling the fact that they can no longer afford two Euro-centered funds. Why would that be the case?

I can only imagine three possibilities:

Fidelity no longer finds with a mere $400 million in AUM viable, so the Cap App fund has to go.
Fidelity doesn’t think there’s room for (or need for) more than one European stock strategy. There are 83 distinct U.S.-focused strategies in the Fidelity family, but who’d need more than one for Europe?

Fidelity can no longer find managers capable of performing well enough to be worth the effort.

	Expenses	Returns TTM	Returns 5 yr	Compared to peers – 5 yr
Fidelity European funds for British investors
Fidelity European Fund A-Accumulation	1.72% on $4.1B	22%	1.86	3.31
Fidelity Europe Long-Term Growth Fund	1.73 on $732M	29	n/a	n/a
Fidelity European Opportunities	1.73 on $723M	21	1.48	3.31
Fidelity European funds for American investors
Fidelity European Capital Appreciation	0.92% on $331M	24	(1.57)	(.81)
Fidelity Europe	0.80 on $724M	23	(1.21)	(0.40)
Fidelity Nordic	1.04% on $340M	32	(0.40)	The Morningstar peer group is “miscellaneous regions” – ignore it

Converted at ₤1 = $1.54, 25 June 2013.

In April of 2007, Fidelity tried to merge Nordic into Europe, but its shareholders refused to allow it. At the time Nordic was one of Fidelity’s best-performing international funds and had $600 million in assets. The announced rationale: “The Nordic region is more volatile than developed Europe as a whole, and Fidelity believes the region’s characteristics have changed sufficiently to no longer warrant a separate fund focused on the region.” The nature of those “changes” was not clear and shareholders were unimpressed.

It is clear that Fidelity has a personnel problem. When, for example, they wanted to bolster their asset allocation funds-of-funds, they added two new Fidelity Series funds for them to choose from. One is run by Will Danoff, whose Contrafund already has $95 billion in assets, and the other by Joel Tillinghast, whose Low-Priced Stock Fund lugs $40 billion. Presumably they would have turned to a young star with less on their plate … if they had a young star with less on their plate. Likewise, Fidelity Strategic Adviser Multi-Manager funds advertise themselves as being run by the best of the best; these funds have the option of using Fidelity talent or going outside when the options elsewhere are better. What conclusions might we draw from the fact that Strategic Advisers Core Multi-Manager (FLAUX) draws one of its 11 managers from Fido or that Strategic Advisers International Multi-Manager (FMJDX) has one Fido manager in 17? Both of the managers for Strategic Advisers Core Income Multi-Manager (FWHBX) are Fidelity employees, so it’s not simply that the SAMM funds are designed to showcase non-Fido talent.

I’ve had trouble finding attractive new funds from Fidelity for years now. It might well be that the contemplated retrenchment in their Europe line-up reflects the fact that Fido’s been having the same trouble.

Observer Fund Profiles:

Forward Income Builder (IAIAX): “income,” not “bonds.” This is another instance of a fund that has been reshaped in recent years into an interesting offering. Perception just hasn’t yet caught up with the reality.

Smead Value (SMVLX): call it “Triumph of the Optimists.” Mr. Smead dismisses most of what his peers are doing as poorly conceived or disastrously poorly-conceived. He thinks that pessimism is overbought, optimism in short supply and a portfolio of top-tier U.S. stocks held forever as your best friend.

Elevator Talk #5: Casey Frazier of Versus Capital Multi-Manager Real Estate Income Fund

Versus Capital Multi-Manager Real Estate Income Fund is a closed-end interval fund. That means that you can buy Versus shares any day that the market is open, but you only have the opportunity to sell those shares once each quarter. The advisor has the option of meeting some, all or none of a particular quarter’s redemption requests, based on cash available and the start of the market.

The argument for such a restrictive structure is that it allows managers to invest in illiquid asset classes; that is, to buy and profit from things that cannot be reasonably bought or sold on a moment’s notice. Those sorts of investments have been traditionally available only to exceedingly high net-worth investors either through limited partnerships or direct ownership (e.g., buying a forest). Several mutual funds have lately begun creating into this space, mostly structured as interval funds. Vertical Capital Income Fund (VCAPX), the subject of our April Elevator Talk, was one such. KKR Alternative Corporate Opportunities Fund, from private equity specialist Kohlberg Kravis Roberts, is another.

Casey Frazieris Chief Investment Officer for Versus, a position he’s held since 2011. From 2005-2010, he was the Chief Investment Officer for Welton Street Investments, LLC and Welton Street Advisors LLC. Here’s Mr. Frazier’s 200 (and 16!) words making the Versus case:

We think the best way to maximize the investment attributes of real estate – income, diversification, and inflation hedge – is through a blended portfolio of private and public real estate investments. Private real estate investments, and in particular the “core” and “core plus” segments of private real estate, have historically offered steady income, low volatility, low correlation, good diversification, and a hedge against inflation. Unfortunately institutional private real estate has been out of reach of many investors due to the large size of the real estate assets themselves and the high minimums on the private funds institutional investors use to gain exposure to these areas. With the help of institutional consultant Callan Associates, we’ve built a multi-manager portfolio in a 40 Act interval structure we feel covers the spectrum of a core real estate allocation. The allocation includes real estate private equity and debt, public equity and debt, and broad exposure across asset types and geographies. We target a mix of 70% private real estate with 30% public real estate to enhance liquidity, and our objective is to produce total returns in the 7% – 9% range net of fees with 5% – 6% of that coming from income. Operationally, the fund has daily pricing, quarterly liquidity at NAV, quarterly income, 1099 reporting and no subscription paperwork.

Versus offers a lot of information about private real estate investing on their website. Check the “fund documents” page. The fund’s retail, F-class shares carry an annual expense of 3.30% and a 2.00% redemption fee on shares held less than one year. The minimum initial investment is $10,000.

Conference Call Upcoming: RiverNorth/Oaktree High Income, July 11, 3:15 CT

confcall

While the Observer’s conference call series is on hiatus for the summer (the challenge of coordinating schedules went from “hard” to “ridiculous”), we’re pleased to highlight similar opportunities offered by folks we’ve interviewed and whose work we respect.

In that vein, we’d like to invite you to join in on a conference call hosted by RiverNorth to highlight the early experience of RiverNorth/Oaktree High Income Fund. The fund is looking for high total return, rather than income per se. As of May 31, 25% of the portfolio was allocated to RiverNorth’s tactical closed-end fund strategy and 75% to Oaktree. Oaktree has two strategies (high yield bond and senior loan) and it allocates more or less to each depending on the available opportunity set.

Why might you want to listen in? At base, both RiverNorth and Oaktree are exceedingly successful at what they do. Oaktree’s services are generally not available to retail investors. RiverNorth’s other strategic alliances have ranged from solid (with Manning & Napier) to splendid (with DoubleLine). On the surface the Oaktree alliance is producing solid results, relative to their Morningstar peer group, but the fund’s strategies are so distinctive that I’m dubious of the peer comparison.

If you’re interested, the RiverNorth call will be Thursday, July 11, from 3:15 – 4:15 Central. The call is web-based, so you’ll be able to read supporting visuals while the guys talk. Callers will have the opportunity to ask questions of Mr. Marks and Mr. Galley. Because RiverNorth anticipates a large crowd, you’ll submit your questions by typing them rather than speaking directly to the managers.

How can you join in? Just click

You can also get there by visiting RiverNorthFunds.com and clicking on the Events tab.

Launch Alert

Artisan Global Small Cap (ARTWX) launched on June 25, after several delays. It’s managed by Mark Yockey and his new co-managers/former analysts, Charles-Henri Hamker and Dave Geisler. They’ll apply the same investment discipline used in Artisan Global Equity (ARTHX) with a few additional constraints. Global Small will only invest in firms with a market cap of under $4 billion at the time of purchase and might invest up to 50% of the portfolio in emerging markets. Global Equity has only 7% of its money in small caps and can invest no more than 30% in emerging markets (right now it’s about 14%). Just to be clear: this team runs one five-star fund (Global), two four-star ones (International ARTIX and International Small Cap ARTJX), Mr. Yockey was Morningstar’s International Fund Manager of the Year in 1998 and he and his team were finalists again in 2012. It really doesn’t get much more promising than that. The expenses are capped at 1.50%. The minimum initial investment is $1000.

RiverPark Structural Alpha (RSAFX and RSAIX) launched on Friday, June 28. The fund will employ a variety of options investment strategies, including short-selling index options that the managers believe are overpriced. A half dozen managers and two fund presidents have tried to explain options-based strategies to me. I mostly glaze over and nod knowingly. I have become convinced that these represent fairly low-volatility tools for capturing most of the stock market’s upside. The fund will be comanaged by Justin Frankel and Jeremy Berman. This portfolio was run as a private partnership for five years (September 2008 – June 2013) by the same managers, with the same strategy. Over that time they managed to return 10.7% per year while the S&P 500 made 6.2%. The fund launched at the end of September, 2008, and gained 3.55% through year’s end. The S&P500 dropped 17.7% in that same quarter. While the huge victory over those three months explains some of the fund’s long-term outperformance, its absolute returns from 2009 – 2012 are still over 10% a year. You might choose to sneeze at a low-volatility, uncorrelated strategy that makes 10% annually. I wouldn’t. The fund’s expenses are hefty (retail shares retain the 2% part of the “2 and 20” world while institutional shares come in at 1.75%). The minimum initial investment will be $1000.

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.

Funds in registration this month won’t be available for sale until, typically, the end of August 2013. There were 13 funds in registration with the SEC this month, through June 25^th. The most interesting, by far, is:

RiverPark Strategic Income Fund. David Sherman of Cohanzick Management, who also manages the splendid but closed RiverPark Short Term High Yield Fund (RPHYX, see below) will be the manager. This represents one step out on the risk/return spectrum for Mr. Sherman and his investors. He’s giving himself the freedom to invest across the income-producing universe (foreign and domestic, short- to long-term, investment and non-investment grade debt, preferred stock, convertible bonds, bank loans, high yield bonds and up to 35% income producing equities) while maintaining a very conservative discipline. In repeated conversations, it’s been very clear that Mr. Sherman has an intense dislike of losing his investors’ money. His plan is to pursue an intentionally conservative strategy by investing only in those bonds that he deems “Money Good” and stocks whose dividends are secure. He also can hedge the portfolio and, as with RPHYX, he intends to hold securities until maturity which will make much of the fund’s volatility more apparent than real. The expense ratio is 1.25% for retail shares, 1.00% for institutional. The minimum initial investments will be $1000 for retail and $1M for institutional.

Details 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 a near-record 64 fund manager changes.

Briefly Noted . . .

If you own a Russell equity fund, there’s a good chance that your management team just changed. Phillip Hoffman took over the lead for a couple funds but also began swapping out managers on some of their multi-manager funds. Matthew Beardsley was been removed from management of the funds and relocated into client service.

SMALL WINS FOR INVESTORS

Seventeen BMO Funds dropped their 2.00% redemption fees this month.

BRC Large Cap Focus Equity Fund (BRCIX)has dropped its management fee from 0.75% to 0.47% and capped its total expenses at 0.55%. It’s an institutional fund that launched at the end of 2012 and has been doing okay.

LK Balanced Fund (LKBLX) reduced its minimum initial investment for its Institutional Class Shares from $50,000 to $5,000 for IRA accounts. Tiny fund, very fine long-term record but a new management team as of June 2012.

Schwab Fundamental International Small Company Index Fund (SFILX) and Schwab Fundamental Emerging Markets Large Company Index Fund (SFENX) have capped their expenses at 0.49%. That’s a drop of 6 and 11 basis points, respectively.

CLOSINGS (and related inconveniences)

Good news for RPHYX investors, bad news for the rest of you. RiverPark Short Term High Yield (RPHYX) has closed to new investors. The manager has been clear that this really distinctive cash-management fund had a limited capacity, somewhere between $600 million and $1 billion. I’ve mentioned several times that the closure was nigh. Below is the chart of RPHYX (blue) against Vanguard’s short-term bond index (orange) and prime money market (green).

rphyx

OLD WINE, NEW BOTTLES

For all of the excitement over China as an investment opportunity, China-centered funds have returned a whoppin’ 1.40% over the past five years. BlackRock seems to have noticed and they’ve hit the Reset button on BlackRock China Fund (BACHX). As of August 16, it will become BlackRock Emerging Markets Dividend Fund. One wonders if the term “chasing last year’s hot idea” is new to them?

On or about August 5, 2013, Columbia Energy and Natural Resources Fund (EENAX, with other tickers for its seven other share classes) will be renamed Columbia Global Energy and Natural Resources Fund. There’s no change to the strategy and the fund is already 35% non-U.S., so it’s just marketing fluff.

“Beginning on or about July 1, 2013, all references to ING International Growth Fund (IIGIX) are hereby deleted and replaced with ING Multi-Manager International Equity Fund.” Note to ING: the multi-manager mish-mash doesn’t appear to be a winning strategy.

Effective May 22, ING International Small Cap Fund (NTKLX) may invest up to 25% of its portfolio in REITs.

Effective June 28, PNC Mid Cap Value Fund became PNC Mid Cap Fund (PMCAX).

Effective June 1, Payden Value Leaders Fund became Payden Equity Income Fund (PYVLX). With only two good years in the past 11, you’d imagine that more than the name ought to be rethought.

OFF TO THE DUSTBIN OF HISTORY

Geez, the dustbin is filling quickly.

The Alternative Strategies Mutual Fund (AASFX) closed to new investors in June and will liquidate by July 26, 2013. It’s a microscopic fund-of-funds that, in its best year, trailed 75% of its peers. A 2.5% expense ratio didn’t help.

Hansberger International Value Fund (HINTX) will be liquidated on or about July 19, 2013. It’s moved to cash pending dissolution.

ING International Value Fund (IIVWX) is merging into ING International Value Equity (IGVWX ), formerly ING Global Value Choice. This would be a really opportune moment for ING investors to consider their options. ING is merging the larger fund into the smaller, a sign that the marketers are anxious to bury the worst of the ineptitude. Both funds have been run by the same team since December 2012. This is the sixth management team to run the fund in 10 years and the new team’s record is no better than mediocre.

In case you hadn’t noticed, Litman Gregory Masters Value Fund (MSVFX) was absorbed by Litman Gregory Masters Equity Fund (MSENX) in late June, 2013. Litman Gregory’s struggles should give us all pause. You have a firm whose only business is picking winning fund managers and assembling them into a coherent portfolio. Nonetheless, Value managed consistently disappointing returns and high volatility. How disappointing? Uhh … they thought it was better to keep a two-star fund that’s consistently had higher volatility and lower returns than its peers for the past decade. We’re going to look at the question, “what’s the chance that professionals can assemble a team of consistently winning mutual fund managers?” when we examine the record (generally parlous) of multi-manager funds in an upcoming issue.

Driehaus Large Cap Growth Fund (DRLGX) was closed on June 11 and, as of July 19, the Fund will begin the process of liquidating its portfolio securities.

The Board of Fairfax Gold and Precious Metals Fund (GOLMX and GOLLX) “has concluded that it is in the best interests of the Fund and its shareholders that the Fund cease operations,” which they did on June 29, 2013

Forward Global Credit Long/Short Fund (FGCRX) will be liquidated on or around July 26, 2013. I’m sure this fund seemed like a good idea at the time. Forward’s domestic version of the fund (Forward Credit Analysis Long/Short, FLSRX) has drawn $800 million into a high risk/high expense/high return portfolio. The global fund, open less than two years, managed the “high expense” part (2.39%) but pretty much flubbed on the “attract investors and reward them” piece. The light green line is the original and dark blue is Global, since launch.

flsrx

Henderson World Select Fund (HFPAX) will be liquidated on or about August 30, 2013.

The $13 million ING DFA Global Allocation Portfolio (IDFAX) is slated for liquidation, pending shareholder approval, likely in September.

ING has such a way with words. They announced that ING Pioneer Mid Cap Value Portfolio (IPMVX, a/k/a “Disappearing Portfolio”) will be reorganized “with and into the following ‘Surviving Portfolio’ (the ‘Reorganization’):

Disappearing Portfolio	Surviving Portfolio
ING Pioneer Mid Cap Value Portfolio	ING Large Cap Value Portfolio

So, in the best case, a shareholder is The Survivor? What sort of goal is that? “Hi, gramma! I just invested in a mutual fund that I hope will survive?” Suddenly the Bee Gees erupt in the background with “stayin’ alive, stayin’ alive, ah, ah, ah … “ Guys, guys, guys. The disappearance is scheduled to occur just after Labor Day.

Stephen Leeb wrote The Coming Economic Collapse (2008). The economy didn’t, his fund did. Leeb Focus Fund (LCMFX) closed at the end of June, having parlayed Mr. Leeb’s insights into returns that trailed 98% of its peers since launch.

On June 20, 2013, the board of directors of the Frontegra Funds approved the liquidation of the Lockwell Small Cap Value Fund (LOCSX). Lockwell had a talented manager who was a sort of refugee from a series of fund mergers, acquisitions and liquidations in the industry. We profiled LOCSX and were reasonably positive about its prospects. The fund performed well but never managed to attract assets, partly because small cap investing has been out of favor and partly because of an advertised $100,000 minimum. In addition to liquidating the fund, the advisor is closing his firm.

Tributary Core Equity Fund (FOEQX) will liquidate around July 26, 2013. Tributary Balanced (FOBAX), which we’ve profiled, remains small, open and quite attractive.

I’ve mentioned before that I believe Morningstar misleads investors with their descriptions of a fund’s fee level (“high,” “above average” and so on) because they often use a comparison group that investors would never imagine. Both Tributary Balanced and Oakmark Equity & Income (OAKBX) have $1000 minimum investments. In each case, Morningstar insists on comparing them to their Moderate Allocation Institutional group. Why?

In Closing . . .

We have a lot going on in the month ahead: Charles is working to create a master listing of all the funds we’ve profiled, organized by strategy and risk. Andrew and Chip are working to bring our risk data to you in an easily searchable form. Anya and Barb continue playing with graphics. I’ve got four profiles underway, based on conversations I had at Morningstar.

And … I get to have a vacation! When you next hear from me, I’ll be lounging on the patio of LeRoy’s Water Street Coffee Shop in lovely Ephraim, Wisconsin, on the Door County peninsula. I’ll send pictures, but I promise I won’t be gloating when I’m doing it.

May 1, 2013

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:

	Current assignment	Since	Snapshot
David Herro	Oakmark International (OAKIX), Oakmark International Small Cap (OAKEX)	09/1992	Five stars for 3, 5, 10 and overall for OAKIX; International Fund Manager of the Decade
Dan O’Keefe and David Samra	Artisan International Value (ARTKX), Artisan Global Value (ARTGX)	09/2002 and 12/2007	International Fund Manager of the Year nominees, two five star funds
Abhay Deshpande	First Eagle Overseas A (SGOVX)	Joined First Eagle in 2000, became co-manager in 09/2007	Longest-serving members of the management team on this five-star fund
Chad Clark	Select Equity Group, a private investment firm in New York City	06/2009	“extraordinarily successful” at “quality value” investing for the rich
Pierre Py (and, originally, Eric Bokota)	FPA International Value (FPIVX)	12/2011	Top 2% in their first full year, despite a 30% cash stake
Greg Jackson	Oakseed Opportunity (SEEDX)	12/2012	A really solid start entirely masked by the events of a single day
Robert Sanborn
Ralph Wanger	Acorn Fund
Joe Mansueto	Morningstar		Wonderfully creative in identifying stock themes

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

Courtesy of Charles Boccadoro, Associate Editor, 27 April 2013.

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:

chart

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

table

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.

returns

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:

comparison

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.

MFO Owl, final

Cool, eh?

Great-Horned-Owl-flat-best- 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:

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)

elevator

M Jim Hillary r. 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

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

Stephen Dodson 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)

aston 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!

David

The Cook and Bynum Fund

The fund:	The Cook and Bynum Fund (COBYX)
Manager:	Richard P. Cook and J. Dowe Bynum, managers and founding partners.
The call:	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 to 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: *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. 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. 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. 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. 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. The conference call (When you click on the link, the file will load in your browser and will begin playing after it’s partially loaded.)
The profile:	It’s working. 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. The Mutual Fund Observer profile of COBYX, April 2013. The COBYX audio profile
Web:	The Cook & Bynum Fund website The Cook and Bynum Fact Sheet Fund Focus: Resources from other trusted sources

March 1, 2013

Dear friends,

Welcome to the end of a long, odd month. The market bounced. The pope took a long victory lap around St. Peter’s Square in his Popemobile before giving up the red shoes for life. King Richard III was discovered after 500 years buried under a parking lot with evidence of an ignominious wound in his nether regions. At about the same time, French scientists discovered the Richard the Lionheart’s heart had been embalmed with daisies, myrtle, mint and frankincense and stored in a lead box. A series of named storms (Nemo? Really? Q?) wacked the Northeast.

And I, briefly, had fantasies of enormous wealth. My family discovered a long forgotten stock certificate issued around the time of the First World War in my grandfather’s name. After some poking about, it appeared that a chain of mergers and acquisitions led from a small Ohio bank to Fifth Third Bank, to whom I sent a scan of the stock certificate. While I waited for them to marvel at its antiquity and authenticity, I reviewed my lessons in the power of compounding. $100 in 1914, growing at 5% per year, would be worth $13,000 now. Cool. But, growing at 10% per year – the amount long-term stock investors are guaranteed, right? – it would have grown to $13,000,000. In the midst of my reverie about Chateau Snowball, Fifth Third wrote back with modestly deflating news: there was no evidence that the stock hadn’t been redeemed. There was also no evidence that it had been, but after 90 years presumption appears to shift in the bank’s favor. (Who’d have guessed?)

It looks like I better keep my day job. (Which, happily enough, is an immensely fulfilling one.)

Longleaf Global and its brethren

Two bits of news lay behind this story. First, Longleaf freakishly closed its new Longleaf Partners Global Fund (LLGFX) after just three weeks. Given that Longleaf hadn’t launched a fund in 15 years, it seemed odd that this one was so poorly-planned that they’d need to immediately close the door.

At around the same time, I received a cheerful note from Tom Pinto, a long-time correspondent of ours and vice president at Mount & Nadler. Mount & Nadler (presided over, these last 33 years, by the redoubtable Hedda Nadler) does public relations for mutual funds and other money management folks. They’ve arranged some really productive conversations (with, for example, David Winters and Bruce Berkowitz) over the years and I tend to take their notes seriously. This one celebrated an entirely remarkable achievement for Tweedy Browne Global Value (TBGVX):

Incredibly, when measured on a rolling 10-year basis since its inception through 11/30/12 using monthly returns, the fund is batting 1000, having outperformed its benchmark – MSCI EAFE — in 115 out of 115 possible 10-year holding periods over the last 19 plus years it has been in existence. It also outperformed its benchmark in 91% of the rolling five-year periods and 82% of the rolling three-year periods.

That one note combined three of my favorite things: (1) consistency in performance, (2) Tweedy, Browne and (3) Hedda.

Why consistency? It helps investors fight their worst enemy: themselves. Very streaky funds have very streaky investors, folks who buy and sell excessively and, in most cases, poorly. Morningstar has documented a regrettably clear pattern of investors earning less –sometimes dramatically less – than their funds, because of their ill-time actions. Steady funds tend to have steady investors; in Tweedy’s case, “investor returns” are close to and occasionally higher than the fund’s returns.

Why Tweedy? It’s one of those grand old firms – like Dodge & Cox and Northern – that started a century or more ago and that has been quietly serving “old wealth” for much of that time. Tweedy, founded in 1920 as a brokerage, counts Benjamin Graham, Walter Schloss and Warren Buffett among its clients. They’ve only got three funds (though one does come in two flavors: currency hedged and not) and they pour their own money into them. The firm’s website notes:

As of December 31, 2012, the current Managing Directors and retired principals and their families, as well as employees of Tweedy, Browne had more than $759.5 million in portfolios combined with or similar to client portfolios, including approximately $101.9 million in the Global Value Fund and $57.9 million in the Value Fund, $6.8 million in the Worldwide High Dividend Yield Value Fund and $3.7 million in the Global Value Fund II — Currency Unhedged.

Value (low risk, four stars) and Global Value (low risk, five stars) launched in 1993. The one with the long name (low risk, five stars) launched 14 years later, in 2007. Our profile of the fund, Tweedy Browne Worldwide High Dividend Yield Value (TBHDX), appeared as soon as it was launched. At that point, Global Value was rated by Morningstar as a two-star fund. Nonetheless, I plowed in with the argument that it represented a compelling opportunity:

They are really good stock-pickers. I know, I know: “gee, Dave, can’t you read? Two blinkin’ stars.” Three things to remember. First, the validity of Morningstar’s peer ratings depend on the validity of their peer group assignment. In the case of Global Value, they’re categorized as small-mid foreign value (which has been on something of a tear in recent years), despite the fact that 60% of their portfolio is in large cap stocks.

Second, much of the underperformance for Global Value is attributable to their currency hedging.

Third, they provide strong absolute returns even when they have weak relative ones. In the case of Global Value they have churned out returns around 17-18% over the trailing three- and five-year periods. Combine that with uniformly “low” Morningstar risk scores for both funds and you get an awfully compelling risk/return profile.

Bottom Line: there’s a lot to be said, especially in uncertain times, for picking cautious, experienced managers and giving them broad latitude. Worldwide High Dividend Yield has both of those attributes and it’s likely to be a remarkably rewarding instrument for folks who like to sleep well at night.

Why Hedda? I’ve never had the pleasure of meeting Hedda in person, but our long phone conversations over the years make it clear that she’s smart, funny, and generous and has an incredible institutional memory. When I think of Hedda, the picture that pops into mind is Edna Mode from The Incredibles, darling.

The Observer’s specialty are new and small funds. The problem in covering Tweedy is that the next new fund is apt to launch around about the time that you folks start receiving copies of the Observer by direct neural implants. I had similar enthusiasm for other long-interval launches, including Dodge and Cox Global (“Let’s be blunt about this. If this fund fails, it’s pretty much time for us to admit that the efficient market folks are right and give up on active management.”) and Oakmark Global Select (“both of the managers are talented, experienced and disciplined. Investors willing to take the risk are getting access to a lot of talent and a unique vehicle”).

That led to the question: what happens when funds that never launch new funds, launch new funds?

With the help of the folks on the Observer’s discussion board and, most especially, Charles Boccadoro, we combed through hundreds of records and tracked down all of the long-interval launches that we could. “Long-interval launches” were those where a firm hadn’t launched in anew fund in 10 years or more. (Dodge & Cox – with five fund launches in 81 years – was close enough, as was FMI with a launch after nine-and-a-fraction years.) We were able to identify 17 funds, either retail or nominally institutional but with low minimum shares, that qualified.

We looked at two measures: how did they do, compared to their Morningstar peers, in their first full year (so, if they launched in October 2009, we looked at 2010) and how have they done since launch?

Fund	Ticker	Launch	Years since the last launch	First full year vs peers	Cumulative (not annual!) return since inception vs peers
Acadian Emerging Markets Debt	AEMDX	12/10	17	(2.1) vs 2.0	22.7 vs 20.0
Advance Capital I Core Equity	ADCEX	01/08	15	33.2 vs 24.1	17.8 vs 9.7
API Master Allocation A	APIFX	03/09	12	19.9 vs 4.1	103.1 vs 89.1
Assad Wise Capital	WISEX	04/10	10	0.9 vs 1.7	7.4 vs 8.4
Dodge & Cox Global	DODWX	05/08	7	(44.5) vs (38.3)	85.5 v 68.4
Fairholme Allocation	FAAFX	12/10	11	(14.0) vs (4.0)	5.0 vs 21.1
FMI International	FMIJX	12/10	9	(1.8) vs (14.0)	23.8 vs 4.6
FPA International Value	FPIVX	12/11	18	20.6 vs 10.3	27.8 vs 18.8
Heartland International Value	HINVX	10/10	14	(22.0) vs (16.0)	9.3 vs 16.3
Jensen Quality Value	JNVIX	03/10	18	2.4 vs (3.8)	23.7 vs 36.4
LKCM Small-Mid Cap	LKSMX	04/11	14	9.3 vs 14.1	0.8 vs 5.0
Mairs & Power Small Cap	MSCFX	08/11	50	34.9 vs 13.7	59.4 vs 31.1
Oakmark Global Select	OAKWX	10/06	11	11.7 vs 12.5	54.8 vs 20.5
Pear Tree Polaris Foreign Value Small Cap	QUSIX	05/08	10	83.4 vs 44.1	26.3 vs 0.8
Thomas White Emerging Markets	TWEMX	06/10	11	(17.9) vs (19.9)	26.1 vs 16.5
Torray Resolute	TOREX	12/10	20	2.2 vs (2.5)	29.0 vs 18.4
Tweedy, Browne Worldwide High Dividend Yield Value	TBHDX	09/07	14	(13) vs (17.7)	18.2 vs 1.5

	Ticker	First full year	Since launch
Acadian	AEMDX	L	W
Advance Capital	ADCEX	W	W
API	APIFX	W	W
Assad	WISEX	L	L
Dodge & Cox	DODWX	L	W
Fairholme	FAAFX	L	L
FMI	FMIJX	W	W
FPA	FPIVX	W	W
Heartland	HINVX	W	L
Jensen	JNVIX	W	L
LKCM	LKSMX	L	L
Mairs & Power	MSCFX	W	W
Oakmark	OAKWX	L	W
Pear Tree	QUSIX	W	W
Thomas White	TWEMX	W	W
Torray	TOREX	W	W
Tweedy, Browne	TBHDX	W	W
Batting average		.647	.705

While this isn’t a sure thing, there are good explanations for the success. At base, these are firms that are not responding to market pressures and that have extremely coherent disciplines. The fact that they choose to launch after a decade or more speaks to a combination of factors: they see something important and they’re willing to put their reputation on the line. Those are powerful motivators driving highly talented folks.

What might be the next funds to track? Two come to mind. Longleaf Global launched 15 years after Longleaf International (LLINX) and would warrant serious consideration when it reopens. And BBH Global Core Select will be opening in the next month, 15 years after BBH Core Select (BBTRX and BBTEX). Core Select has been wildly successful and has just closed to new investors. Global Core Select will use the same team and the same strategy.

(Thanks to my collaborators on this piece: Mike M, Andrei, Charles and MourningStars.)

The Phrase, “Oh, that can’t be good” comes to mind

I read a lot of fund reports – annual, semi-annual and monthly. I read most of them to find up what’s going on with the fund. I read a few because I want to find up what’s going on with the world. One of the managers whose opinion I take seriously is Steven Romick, of FPA Crescent (FPACX).

They wanted to make two points. One: you were exactly right to notice that one paragraph in the Annual Report. It was, they report, written with exceeding care and intention. They believe that it warrants re-reading, perhaps several times. For those who have not read the passage in question:

Opportunity: When thinking about closing, we also think about the investing environment —both the current opportunity set and our expectations for future opportunities. Currently, we find limited prospects. However, we believe the future opportunity set will be substantial. As we have oft discussed, we are managing capital in the face of Central Bankers’ “grand experiment” that we do not believe will end well, fomenting volatility and creating opportunity. We continue to maintain a more defensive posture until the fallout. Though underperformance might be the price we pay in the interim should the market continue to rise, we believe in focusing on the preservation of capital before considering the return on it. The imbalances that we see, coupled with the current positioning of our Fund, give us confidence that over the long term, we will be able to invest our increased asset base in compelling absolute value opportunities.

Fund flows: We are sensitive to the negative impact that substantial asset flows (in or out) can have on the management and performance of a portfolio. At present, asset flows are not material relative to the size of the Fund, so we believe that the portfolio is not harmed. However, while members of the Investment Committee will continue to be available to existing clients, we have restricted discussions with new relationships so that our attention can be on investment management rather than asset gathering.

For now, we are satisfied with the team’s capabilities, the Fund’s positioning, and the impact of asset flows. As fellow shareholders, should anything cause us to doubt the likelihood of meeting our stated objectives we will close the Fund as we did before, and/or return capital to our shareholders.

What might be the sound bites in that paragraph? “We think about future opportunities. They will be substantial. For now we’ll focus on the preservation of capital. Soon enough, there will be billions of dollars’ worth of compelling absolute value opportunities.” In the interim, they know that they’re both growing and underperforming. They’ve cut off talk with potential new clients to limit the first and are talking with the rest of us so that we understand the second.

Point two: they’ve closed Crescent before. They’ll do it again if they don’t anticipate the opportunity to find good uses for new cash.

Artisan goes public. Now what?

Artisan Partners are one on my favorite investment management firms. Their policies are consistently shareholder friendly, their management teams are stable and disciplined, and their funds are consistently top-notch.

And now you’ll be able to own a piece of the action. Artisan will offer shares to the public, with the proceeds used to resolve some debt and make it possible for some of the younger partners to gain an equity stake in the firm. Three questions arise:

Is this good for the investors in Artisan’s funds?
Should you consider buying the stock?
And would it all work a bit better with Godiva chocolate?

What happens now with the Artisan funds?

The concern is that Artisan is gaining a fiduciary responsibility to a large set of outside shareholders. Their obligation to those shareholders is to increase Artisan’s earnings which, with other fund companies, has translated to (1) gather assets and (2) gather attention. There’s only been one academic study on the difference in performance between publicly-owned and privately-held fund companies, and that study looked only at Canadian firms. That study found:

… publicly-traded management companies invest in riskier assets and charge higher management fees relative to the funds managed by private management companies. At the same time, however, the risk-adjusted returns of the mutual funds managed by publicly-traded management companies do not appear to outperform those of the mutual funds managed by private management companies. This finding is consistent with both the risk reduction and agency cost arguments that have been made in the literature. (M K Berkowitz, Ownership, Risk and Performance of Mutual Fund Management Companies, 2001)

The only other serious investigation that I know of was undertaken by Bill Bernstein, and reported in his book The Investor’s Manifesto. Bernstein’s opinion of the financial services industry in general and of actively-managed funds in particular is akin to his opinions on astrology and reading goat entrails. Think I’m kidding? Here’s Bill:

The prudent investor treats almost the entirety of the financial industrial landscape as an urban combat zone. This means any stock broker or full-service brokerage firm, any newsletter, any advisor who purchases individual securities, any hedge fund. Most mutual fund companies spew more toxic waste into the investment environment than a third-world refinery. Most financial advisors cannot invest their way out a paper bag. Who can you trust? Almost no one.

Bill looked at the performance of 18 fund companies, five of which were not publicly-traded. In particular, he looked at the average star ratings for their funds (admittedly an imperfect measure, but among the best we’ve got). The privately-held firms placed 1st, 2nd, 3rd, 6th and 9^th in performance. The lowest positions were all public firms with a record of peddling bloated, undistinguished funds to an indolent public. His recommendation is categorical: “Do not invest with any mutual fund family that is owned by a publicly traded parent company.”

While the conflicts between the interests of the firm’s stockholders and the funds’ shareholders are real and serious, it’s also true that a number of public firms – the Affiliated Managers Group and T. Rowe Price, notably – have continued offered solid funds and reasonable prices. While it’s possible that Artisan will suddenly veer off the path that’s made them so admirable, that’s neither necessary nor immediately probable.

So, should you buy the stock instead of the funds?

In investor mythology, the fund companies’ stock always seems the better bet than the fund company’s funds. That seems, broadly speaking, true. Fund company stock has broadly outperformed the stock market and the financial sector stocks over time. I’ve gathered a listing of all of the publicly-traded mutual fund companies that I can identify, excluding only those instances where the funds are a tiny slice of a huge financial empire.

Here’s the performance of the companies’ stock, for various periods through February, 2013.

		3 year	5 year	10 year
Affiliated Managers Group	AMG	27.1	7.8	17.7
AllianceBernstein	AB	-1.6	-14.6	4.9
BlackRock	BLK	5.5	5.5	20.6
Calamos	CLMS	-2.7	-8.7	—
Cohen & Steers	CNS	21.7	9.0	—
Diamond Hill	DHIL	16.4	9.1	39.3
Eaton Vance	EV	11.3	4.3	13.2
Federated Investors	FII	3.4	-5.0	3.8
Franklin Resources	BEN	13.8	8.6	17.2
GAMCO Investors	GBL	10.6	1.5	8.8
Hennessy Advisors	HNNA	41.5	3.0	9.8
Invesco	IVZ	12.7	1.4	13.3
Janus Capital Group	JNS	-8.0	-17.8	-1.6
Legg Mason	LM	4.3	-15.4	0.4
Manning & Napier	MN	—	—	—
Northern Trust	NTRS	2.1	-3.8	7.2
State Street Corp	STT	9.3	-6.4	5.7
T. Rowe Price Group	TROW	14.7	7.6	20.3
US Global Investors	GROW	-22.2	-21.8	15.9
Waddell & Reed	WDR	10.9	6.1	11.4
Westwood Holdings	WHG	7.1	7.0	15.3
	Average:	8.9	-1.1	12.4
Vanguard Total Stock		13.8	4.8	9.1
Financials		6.6	6.8	5.4
Morningstar (just for fun)		16.3	1.1	—

Several of the largest fund companies – Capital Group Companies, Fidelity Management & Research, and Vanguard – are all private. Vanguard alone is owned by its fund shareholders.

Several high visibility firms – Janus and U.S. Global Investors – have had miserable performance and several others are extremely volatile. The chart for Hennessy Advisors, for example, shows a 90% decline in value during the financial crisis, flat performance for three years, then a freakish 90% rise in the past three months.

On whole, you’d have to conclude that “buy the company, not the funds” is no path to easy money.

Have They Even Considered Using Godiva as a Sub-advisor?

Artisan’s upcoming IPO has been priced at $27-29 a share, which would give Artisan a fully-diluted market value of about $1.8 billion. That’s roughly the same as the market capitalizations for Cheesecake Factory, Inc. (CAKE) or for Janus Capital Group (JNS).

So, for $1.8 billion you could buy all of Artisan or at least all of the publicly-available stock for CAKE or JNS. The question for all of you with $1.8 billion burning a hole in your pockets is “which one?” While an efficient market investor might shrug and suggest a screening process that begins with the words “Eenie” and “Meenie,” we know that you depend on us for better.

Herewith, our comprehensive comparison of Artisan, Cheesecake Factory and Janus:

	Artisan Partners	Cheesecake Factory	Janus Capital
No. of four- and five-star funds or cheesecake flavors	7 (of 11)	33	17 (of 41)
No. of one- and two-star funds or number of restaurants in Iowa	1	1	8
Number of closed funds or entrees with over 3000 calories and four days’ worth of saturated fat	5 (Intl Small Cap, Intl Value, Mid Cap, Mid Cap Value, Small Cap Value)	1 (Bistro Shrimp Pasta, 3,120 calories, 89 grams of saturated fat)	1 (Perkins Small Cap Value)
Assets under management or calories in a child’s portion of pasta with Alfredo sauce	$75 billion	1,810	$157 billion
Average assets under management per fund or number of Facebook likes	$3 billion	3.4 million	$1.9 billion

Jeez, that’s a tough call. Brilliant management or chocolate? Brilliant management or chocolate? Oh heck, who am I kidding:

USA Today launches a new portfolio tracker

In February, USA Today announced a partnership with SigFig (whose logo is a living piggy bank) to create a new and powerful portfolio tracker. Always game for a new experience, I signed up (it’s free, which helps). I allowed it to import my Scottrade portfolio and then to run an analysis on it.

Two pieces of good news. First, it made one sensible fund recommendation: that I sell Northern Global Tactical Asset Allocation (BBALX) and replace it with Buffalo Flexible Income (BUFBX). BBALX is a fund of index funds which represents a sort of “best ideas” approach from Northern’s investment policy committee. It has low expenses and I like the fact that it’s using index funds, which decreases complexity and increases predictability. That said, the Buffalo fund is very solid and has certainly outperformed Northern over the past several years. A FundAlarm profile of the fund, then called Buffalo Balanced, concluded:

This is clearly not a mild-mannered fund in the mold of Mairs & Power or Bridgeway. It takes more risks but is managed by an immensely experienced professional who has a pretty clearly-defined discipline. That has paid off, and likely will continue to pay off.

So, that’s sensible.

Second bit of good news, the outputs are pretty:

Now the bad news: the recommendations completely missed the problem. Scottrade holds five funds for me. They are RiverPark Short-Term High Yield (RPHYX), one of two cash-management accounts, Northern and three emerging markets funds. Any reasonable analyst would have said: “Snowball, what are you thinking? You’ve got over two-thirds of your money in the emerging markets, virtually no U.S. stocks and a slug of very odd bonds. This is wrong, wrong, wrong!”

None of which USAToday/SigFig noticed. They were unable even to categorize 40% of the portfolio, saw only 2% cash (it’s actually about 10%), saw no dividends (Morningstar calculates it at 2.4%) and had no apparent concern about my wild asset allocation skew.

Bottom line: look if you like, but look very skeptically at these outputs. This system might work for a very conventional portfolio, but even that isn’t yet proven.

Fidelity spirals (and not upward)

Investors pulled nearly $36 billion from Fidelity’s funds in 2012. That’s from Fido’s recently-released 2012 annual report. Their once-vaunted stock funds (a) had a really strong year in terms of performance and (b) bled $24 billion in assets regardless (Fidelity Sees More Fund Outflows, 02/15/13). The company’s operating income of $2.3 billion fell 29% compared with 2011.

The most troubling sign of Fidelity’s long-term malaise comes from a January announcement. Reuters reported that Fido’s target-date retirement funds were steadily losing market share to Vanguard. As a result, they needed to act to strengthen them.

Fidelity Investments’ target-date funds will start 2013 with more stock-picking firepower, as star money managers Will Danoff and Joel Tillinghast pick up new assignments to protect a No. 1 position under fire from rival Vanguard Group.

Why is that bad? Because Tillinghast and Danoff seem to be all that they have left. Danoff has been running Contrafund since 1990 and was moved in Fidelity Advisor New Insights in 2003 to beef up the Fidelity Advisor funds and now Fidelity Series Opportunistic Insights in 2012 to beef up the funds used by the target-date series. Even before the first dollar goes to Opportunistic Insights, Danoff was managing $107 billion in equity investments. Tillinghast has been running Low-Priced Stock, a $35 billion former small cap fund, since 1989 and now adds Fidelity Series Intrinsic Opportunities Fund. This feels a lot like a major league ball team staking their playoff chances on two 39-year-old power hitters; the old guys have a world of talent but you have to ask, what’s happened to the farm system?

One more slap at Morningstar’s new ratings

There was a long, healthy, and not altogether negative discussion of Morningstar’s analyst ratings on the Observer’s discussion board. For those trying to think through the weight to give a “Gold” analyst rating, it’s a really worthwhile use of your time. Three concerns emerge:

There may be a positivity bias in the ratings. It’s clear that the ratings are vastly skewed, so that negative assessments are few and far between. Some writers speculate that Morningstar’s corporate interests (drawing advertising, for example) might create pressure in that direction.
There’s no clear relationship between the five pillars and the ultimate rating. Morningstar’s analysts look at five factors (people, price, process, parent, performance – side note, be skeptical of any system designed for alliteration) and assign a positive, neutral or negative judgment to each. Some writers express bewilderment that one fund with a single “positive” might be silver while another with two positives might be “neutral.”
There’s no evidence, yet, that the ratings have predictive validity. The anonymous author of the Wall Street Rant blog produced a fairly close look at the 2012 performance of the newly-rated funds. Here’s the visual summary of Ranter’s research:

In short, “Not much really stands out after the first year. While there was a slight positive result for Gold and Silver rated funds, Neutral rated funds did even better.” The complete analysis is in a post entitled Performance of Morningstar’s New Analyst Ratings For Mutual Funds in 2012 (02/17/2013)

My own view is in accord with what Morningstar says about their ratings (use them as one element of your due diligence in assessing a fund) but, in practice, Morningstar’s functional monopoly in the fund ratings business means that these function as marketing tools far more than as analytic ones.

Five-star and Gold is surely a lot better than one-star and negative, but it’s not nearly as good as a careful, time-consuming inquiry into what the manager does, what the risks look like, and whether this makes even marginal sense in your own portfolio.

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 #2: Dale Harvey, Poplar Forest Partners (PFPFX and IPFPX)

Mr. Harvey manages the Poplar Forest Partners (PFPFX and IPFPX), which launched on December 31, 2009. For 16 years, Dale co-managed several of the flagship American Funds including Investment Company of America (AIVSX), Washington Mutual (AWSHX) and American Mutual (AMRMX). Some managers start their own firms in order to get rich. Others because asset bloat was making them crazy. A passage from an internal survey that Dale completed, quoted by Morningstar, gives you some idea of his motivation:

Counselor Dale Harvey remarked that Capital should “[c]lose all the funds. Don’t just close the biggest or fastest growing. Doing that would simply shift the burden on to other funds. Keep them shut until we figure out the new unit structure and relieve the pressure of PCs managing $20 billion.”

Many of his first investors were former colleagues at the American Funds.

Dale offers these 152 words on why folks should check in:

This is a once-in-a-generation opportunity to invest with a successful American Funds manager who went out on his own. The last was the late Howard Schow, who left to launch the Primecap Funds.

The real reason to leave is about size, the funds just kept taking in money. There came a point where it was a real impediment to performance. That will never be the case at Poplar Forest. Everyone here invests heavily in our funds, so our interests are directly aligned with yours.

From a process perspective, we’re defined by a contrarian value perspective with a long-term time horizon. This is a high conviction portfolio with no second choices or fillers. Because we’re contrarian, we’ll sometimes be out of step with the market as we were in 2011. But we’ve always known that the best time to invest in a four- or five-star fund is when it only has two stars.

The fund’s minimum initial investment is $25,000 for retail shares, reduced to $5,000 for IRAs. They maintain a minimal website for the fund and a substantially more informative site for their investment firm, Poplar Forest LLC. Dale’s most-recent discussion of the fund appears in his 2012 Annual Review.

Conference Call Highlights

On February 19^th, about 50 people phoned-in to listen to our conversation with Andrew Foster, manager of Seafarer Overseas Growth and Income Fund (SFGIX and SIGIX). The fund has an exceptional first year: it gathered $35 million in asset and returned 18% while the MSCI emerging market index made 3.8%. The fund has about 70% of its assets in Asia, with the rest pretty much evenly split between Latin America and Emerging Europe. Their growth has allowed them to institute two sets of expense ratio reductions, one formal and one voluntary.

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

The SFGIX 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.

Among the highlights of the call, for me:

China has changed. Andrew offered a rich discussion about his decision to launch the fund. The short version: early in his career, he concluded that emergent China was “the world’s most under-rated opportunity” and he really wanted to be there. By late 2009, he noticed that China was structurally slowing. That is, it was slow because of features that had no “easy or obvious” solution, rather than just slowly as part of a cycle. He concluded that “China will never be the same.” Long reflection and investigation led him to begin focusing on other markets, many of which were new to him, that had many of the same characteristics that made China exciting and profitable a decade earlier. Given Matthews’ exclusive and principled focus on Asia, he concluded that the only way to pursue those opportunities was to leave Matthews and launch Seafarer.
It’s time to be a bit cautious. As markets have become a bit stretched – prices are up 30% since the recent trough but fundamentals have not much changed – he’s moved at the margins from smaller names to larger, steadier firms.
There are still better opportunities in equities than fixed income; hence he’s about 90% in equities.
Income has important roles to play in his portfolio. (1) It serves as a check on the quality of a firm’s business model. At base, you can’t pay dividends if you’re not generating substantial, sustained free cash flow and generating that flow is a sign of a healthy business. (2) It serves as a common metric across various markets, each of which has its own accounting schemes and regimes. (3) It provides as least a bit of a buffer in rough markets. Andrew likened it to a sea anchor, which won’t immediately stop a ship caught in a gale but will slow it, steady it and eventually stop it.

Bottom-line: the valuations on emerging equities look good if you’ve got a three-to-five year time horizon, fixed-income globally strikes him as stretched, he expects to remain fully invested, reasonably cautious and reasonably concentrated.

Conference Call Upcoming: Cook and Bynum, March 5^th

Cook and Bynum (COBYX) is an intriguing fund. COBYX holds only seven holdings and a 33% cash stake. Since two-thirds of the fund is in the stock market, you might reasonably expect to harvest two-thirds of the market’s gains but suffer through just two-thirds of its volatility. Cook and Bynum has done far better. Since launch they’ve captured nearly 100% of the market’s gains with only one third of its volatility. In the past twelve months, Morningstar estimates that they’ve captured just 7% of the market’s downside.

We’ll have a chance to hear from Richard and Dowe (Cook and Bynum, respectively) about their approach to high-conviction investing and their amazing research efforts. To help facilitate the discussion, they prepared a short document that walks through their strategy with you. You can download that document here.

Our conference call will be Tuesday, March 5, from 7:00 – 8:00 Eastern.

How can you join in?

This will be the first of three conversations with distinguished managers who defy that trend through their commitment to a singular discipline: buy only the best. In the months ahead, we plan to talk with David Rolfe of RiverPark/Wedgewood Fund (RWGFX) and Stephen Dodson of Bretton Fund (BRTNX).

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:

Seafarer Overseas Growth & Income (SFGIX/SIGIX): The evidence is clear and consistent. It’s not just different. It’s better.

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 May 2013. We found a dozen funds in the pipeline, notably:

Grandeur Peak Emerging Markets Opportunities Fund will seek long-term growth of capital by investing in small and micro-cap companies domiciled in emerging or frontier markets. They’re willing to consider common stock, preferred and convertible shares. The most reassuring thing about it is the Grandeur Peak’s founders, Robert Gardiner & Blake Walker, are running the fund and have been successfully navigating these waters since their days at Wasatch. The minimum initial investment is $2,000, reduced to $1,000 for accounts with an automatic investing plan and $100 for UGMA/UTMA or a Coverdell Education Savings Accounts. Expenses not yet set.

Matthews Emerging Asia Fund will pursue long-term capital appreciation by investing in common and preferred stock and convertible securities of companies that have “substantial ties” to the countries of Asia, except Japan. Under normal conditions, you might expect to see companies from Bangladesh, Cambodia, China, India, Indonesia, Laos, Malaysia, Mongolia, Myanmar, Pakistan, Papua New Guinea, Philippines, Sri Lanka, Thailand and Vietnam. They’ll run an all-cap portfolio which might invest in micro-cap stocks. Taizo Ishida, who serves on the management team of two other funds (Growth and Japan), will be in charge. The minimum initial investment in the fund is $2500, reduced to $500 for IRAs and Coverdell accounts. Expenses for both Investor and Institutional shares are capped at 1.90%.

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 31 fund manager changes, including the blockbuster departure of Kris Jenner from T. Rowe Price Health Sciences (PRHSX) and the departure, after nearly 20 years, of Patrick Rogers from Gateway Fund (GATEX).

There was also a change on a slew of Vanguard funds, though I see no explanation at Vanguard for most of them. The affected funds are a dozen Target Retirement Date funds plus

Diversified Equity
Extended Duration Treasury Index
FTSE All-World ex-US Small Index
Global ex-US Real Estate
Long-Term Bond Index
Long-Term Government Bond Index
Short-Term Bond Index
STAR
Tax-Managed Growth & Income
Tax-Managed International

Vanguard did note that five senior executives were being moved around (including to and from Australia) and, at the end of that announcement, nonchalantly mentioned that “Along with these leadership changes, 15 equity funds, 11 fixed income funds, two balanced funds, and Vanguard Target Retirement Funds will have new portfolio managers rotate onto their teams.” The folks being moved did actually manage the funds affected so the cause is undetermined.

Snowball and the fine art of Jaffe-casting

Despite the suspicion that I have a face made for radio but a voice made for print, Chuck Jaffe invited me to appear as a guest on the February 28 broadcast of MoneyLife with Chuck Jaffe. (Ted tells me that I appear at the 34:10 mark and that you can just move the slider there if you’d like.) We chatted amiably for a bit under 20 minutes, about what to look for and what to avoid in the fund world. I ended up doing capsule critiques of five funds that his listeners had questions about:

WisdomTree Emerging Markets Equity Income (DDEM) for Rick in York, Pa. Certainly more attractive than the Vanguard index, despite high expenses. High dividend-yield stocks. Broader market cap diversification, lower beta – 0.8

Fidelity Total Emerging Markets (FTEMX), also for Rick. I own it. Why? Not because it’s good but because it looks better than the alternatives in my 403(b). Broad and deep management team but, frankly, First Trust/Aberdeen Emerging Opportunity (FEO) is vastly better.

Fidelity Emerging Markets (FEMKX) for Jim in Princeton, NJ. Good news, Jim. They don’t charge much. Bad news: they haven’t really earned what they do charge. Good news: they got a new manager in October. Sammy Simnegar. Bad news: he’s not been very consistent, trades a lot, and is likely to tank tax efficiency in repositioning. Seafarer Overseas Growth & Income (SFGIX) is vastly better.

Nile Pan Africa (NAFAX) for Bruce in Easton, Pa. This fund will be getting its first Morningstar star rating this year. Ignore it! It’s a narrow fund being compared to globally-diversified ones. 75% of its money is in two countries, Nigeria and South Africa. If this were called the Nile Nigeria and South Africa Fund, would you even glance at it?

EP Asia Small Companies (EPASX), also for Bruce. Two problems, putting aside the question of whether you want to be investing in small Asian companies. First, the manager’s record at his China fund is mediocre. Second, he doesn’t actually seem to be investing in small companies. Morningstar places them at just 10% of the portfolio. I’d be more prone to trust Matthews.

I was saddened to learn that Chuck has lost the sponsor for his show. His listenership is large, engaged and growing. And his expenses are really pretty modest (uhhh … rather more than the Observer’s, rather less than the Pennysaver paper that keeps getting tossed on your porch). If any of you want to become even a part-sponsor of a fairly high-visibility show/podcast, you should drop Chuck a line. Heck, he could even help you launch your own line of podcasts.

Briefly Noted ….

Kris Jenner’s curious departure

Kris Jenner, long-time manager of T. Rowe Price Health Sciences (PRHSX) left rather abruptly on February 15^th. The fund carries a Gold rating and five stars from Morningstar (but see the discussion, above, about what that might mean) and Jenner was a finalist for Morningstar’s Domestic Manager of the Year award in 2011. A doctor by training, Price long touted Jenner’s special expertise as one source of the fund’s competitive advantage.

So, what’s up? No one who’s talking knows, and no one who knows is talking. The best coverage of his departure comes from Bloomberg, which makes four notes that many others skip:

Jenner left with two of his (presumably) top analysts from his former team of eight,
he reached out to lots of his contacts in the industry after he left,
he’s being represented by a public relations firms, Burns McClennan, Inc. and
he’s being coy as part of his p.r. campaign: “We cannot share our plans with you at this time, in part due to regulatory and reporting requirements.”

Price seems a bit offended at the breach of collegiality. “They are leaving to pursue other opportunities,” Price spokesman Brian Lewbart told The Baltimore Sun. “They didn’t share what they are.”

My guess would be that some combination of the desire to be fabulously rich and the desire to facilitate medical innovation might well lead him to found something like a biotech venture capital firm or business development company. Regardless, it seems certain that the mutual fund world has seen the last of one of its brighter stars.

FPA announces conversion to a pure no-load fund family

Effective April 1, 2013, all of the FPA Funds will be available as no-load funds. This change will affect FPA Capital (FPPTX), New Income (FPNIX), Paramount (FPRAX) and Perennial Funds (FPPFX), since these funds are currently structured as front-load mutual funds. FPA Capital Fund will remain closed to new investors. This also means that shareholders of FPA Crescent Fund (FPACX) and International Value Fund (FPIVX) will now be able to exchange into the other FPA Funds without incurring a sales charge.

And apologies to FPA: in the first version of our February issue, we misidentified the role Victor Liu will play on FPA’s International Value team. Mr. Liu, who spent eight years with Causeway Capital Management as Vice President and Research Analyst, will serve in a similar capacity as FPA and will report to Pierre Py, portfolio manager of FPA International Value Fund [FPIVX].

Morningstar tracks down experienced managers in new funds

Morningstar recently “gassed up the Premium Fund Screener tool and set it to find funds incepted since 2010 that have Analyst Ratings of Gold, Silver, or Bronze” (Young Funds, Old Pros, 02/20/2013). Setting aside the unfortunate notion of “gassing up” one’s software and the voguish “incepted,” here are editor Adam Zoll’s picks for new funds headed by highly experienced managers.

Royce Special Equity Multi-Cap (RSMCX), managed by Charlie Dreifus. Dreifus has a great long-term record with the small cap Royce Special Equity fund. This would be an all-cap application of that same discipline. I’ll note, in passing, the Special hasn’t been quite as special in the past decade as in the one preceding it and Dreifus, in his mid60s, is closer to the conclusion of his career than its launch.

PIMCO Inflation Response Multi-Asset (PZRMX) , managed by Mihir Worah who also manages PIMCO Real Return (PRTNX), Commodity Real Return Strategy (PCRAX) and Real Estate Real Return Strategy (PETAX). The fund combines five inflation-linked assets (TIPS, commodities, emerging market currencies, REITs and gold) to preserve purchasing power in times of rising inflation. PIMCO’s reputation is such that after six months of meager performance, the fund is moving toward a quarter billion in assets.

Ariel Discovery (ARDFX), managed by David Maley. As I’ve noted before, Morningstar really likes the Ariel family of funds. Maley has no prior experience in managing a mutual fund, though he has been managing the Ariel Micro-Cap Value separate accounts for a decade. So far ARDFX has pretty consistently trailed its small-value peer group as well as most of the micro-cap funds (Aegis, Bridgeway, Wasatch) that I follow.

Rebalancing matters.

In investigating the closure of Vanguard Wellington, I came across an interesting argument that the simple act of annual rebalancing can substantially boost returns. It’s reflected in the difference in the first two columns. The first column is what you’d have earned with a 65/35 portfolio purchased in 2002 and never rebalanced. Column 2 shows the effect of rebalancing. (Column 3 is the ad for the mostly-closed Wellington fund.)

How big is the difference? A $10,000 investment in 2002, split 65/35 and never again touched, would have grown to $18,500. A rebalanced portfolio, which would have triggered some additional taxes unless it was in an IRA, would end a bit over $19,000. Not bad for 10 minutes a year.

On a completely unrelated note, here’s one really striking fund in registration: NYSE Arca U.S. Equity Synthetic Reverse Convertible Index Fund? Really? Two questions: (1) what on earth is that? And (2) why does it strike anyone as “just what the doctor ordered”?

Small Wins for Investors

Vanguard has dropped the expense ratios on three funds, while boosting them on two.

Vanguard fund	Share class	Former expense ratio	Current expense ratio*
High Dividend Yield Index Fund	ETF	0.13%	0.10%
High Dividend Yield Index Fund	Investor	0.25%	0.20%
International Explorer™ Fund	Investor	0.42%	0.43%
Mid-Cap Growth Fund	Investor	0.53%	0.54%
Selected Value Fund	Investor	0.45%	0.38%

Not much else to celebrate this month.

Closings

Fidelity closed Fidelity Small Cap Value Fund (FCPVX) on March 1, 2013. This is the second of Charles L. Myers’ funds to close this year. Just one month ago they closed Fidelity Small Cap Discovery (FSCRX). Between them they have ten stars and $8 billion in assets.

Huber Small Cap Value (HUSIX and HUSEX) is getting close to closing. Huber is about the best small cap value fund still open and available to retail investors. Its returns are in the top 1% of its peer group for the past one, three and five years. It has a five-star rating from Morningstar. It’s a Lipper Leader for Total Returns, Consistency of Returns and Tax Efficiency.

“Effectively managing capacity of our strategies is one of the core tenets at Huber Capital Management, and we believe it is important in both small and large cap. Our small cap strategy has a capacity of approximately $1 billion in assets and our large cap/equity income strategy has a capacity of between $10 – $15 billion. As of 2/22/13, small cap strategy assets were over $810 mm and large cap/equity income strategy assets were over $1 billion. We are committed to closing our strategies in such a way as to maintain our ability to effectuate our process on behalf of investors who have been with us the longest.”

Vanguard has partially closed to giant funds. The $68 billion Vanguard Wellington Fund (VWELX, VWENX) and the $39 billion Vanguard Intermediate-Term Tax-Exempt Fund (VWITX) closed to new institutional and advisor accounts on February 28^th. Reportedly individual investors will be able to buy-in, but I wasn’t able to confirm that with Vanguard.

RS Global Natural Resources Fund (RSNRX) will close on March 15, 2013. It’s been consistently near the top of the performance charts, has probably improved with age and is dragging about $4.5 billion around.

Old Wine in New Bottles

Effective February 20, 2013, Frontegra SAM Global Equity Fund (FSGLX) became Frontegra RobecoSAM Global Equity Fund. That’s because the sub-adviser of this undistinguished institutional fund went from being SAM to RobecoSAM USA.

PL Growth LT Fund has been renamed PL Growth Fund and MFS took over as the sub-advisor. PL is Pacific Life and these are likely sold through the firm’s agents.

A peculiarly odd announcement from the folks at New Path Tactical Allocation Fund (GTAAX): “During the period from February 28, 2013 to April 29, 2013, the investment objective of Fund will be to seek capital appreciation and income.” With turnover well north of 400% and returns well south of “awful,” there are more sensible things for New Path to seek than a revised objective.

The board of the Touchstone funds apparently had a rollicking meeting in February, where they approved nine major changes. They approved reorganizing Touchstone Focused Equity Fund into the Touchstone Focused Fund. Touchstone Micro Cap Value Fund will, at the end of April, become Touchstone Small Cap Growth Fund. Sensibly, the strategy changes from investing in micro-caps to investing in small caps. Oddly, the objective changes from “capital appreciation” to “long-term capital growth.” The difference is, to an outsider, indiscernible.

Effective May 1, 2013, Western Asset High Income Fund (SHIAX) will be renamed Western Asset Short Duration High Income Fund. The fund’s mandate will be changed to allow investing in shorter duration high yield securities as well as adjustable-rate bank loans, among others. The sales load has been reduced to 2.25% and, in May, the expense ratio will also drop.

Off to the Dustbin of History

Guggenheim, after growing briskly through acquisitions, seems to be cleaning out some clutter. Between the end of March and beginning of May, the following funds are slated for execution:

Guggenheim Large Cap Concentrated Growth (GIQIX)
Small Cap Growth (SSCAX)
Large Cap Value Institutional (SLCIX)
Global Managed Futures Strategy (GISQX)
All-Asset Aggressive Strategy (RYGGX)
All-Asset Moderate Strategy (RYMOX)
All-Asset Conservative Strategy (RYEOX)

Guggenheim is also bumping off nine of their ETFs. They are the ABC High Dividend, MSCI EAFE Equal Weight, S&P MidCap 400 Equal Weight, S&P SmallCap 600 Equal Weight, Airline, 2x S&P 500, Inverse 2x S&P 500, Wilshire 5000 Total Market, and Wilshire 4500 Completion ETFs.

Legg Mason Capital Management All Cap (SPAAX) will merge with ClearBridge Large Cap Value (SINAX) in mid-July. Good news there, since the ClearBridge fund is a lot cheaper.

Shelton California Insured Intermediate (CATFX) is expected to cease operations, liquidate its assets and distribute the proceeds by mid-March. The fund evolved from “mediocre” to “bad” over the years and had only $4 million in assets.

The Board of Trustees of Sterling Capital approved the liquidation of the $7 million Sterling Capital Strategic Allocation Equity (BCAAX) at the end of April.

Back to the aforementioned Touchstone board meeting. The board approved one merger and a series of executions. The merge occurs when Touchstone Short Duration Fixed Income (TSDYX), a no-load, will merge into Touchstone Ultra Short Duration Fixed Income (TSDAX), a low-load one. The dead walking are:

Touchstone Global Equity (TGEAX)
Touchstone Large Cap Relative Value (TRVAX)
Touchstone Market Neutral Equity (TSEAX) – more “reverse” than “neutral”
Touchstone International Equity (TIEAX)
Touchstone Emerging Growth (TGFAX)
Touchstone U.S. Long/Short (TUSAX). This used to be the Old Mutual Analytic U.S. Long/Short which, prior to 2006, didn’t short stocks.

The “walking” part ends on or about March 26, 2013.

In Closing . . .

Here’s an unexpectedly important announcement: we are not spam! You can tell because spam is pink, glisteny goodness. We are not. I mention that because there’s a good chance that if you signed up to be notified about our monthly update or our conference calls, and haven’t been receiving our mail, it’s because we’ve been trapped by your spam filter. Please check your spam folder. If you see us there, just click on the “not spam” icon and things will improve.

It’s also the case that if you want to stop receiving our monthly emails, you should use the “unsubscribe” button and we’ll go away. If you click on the “that’s spam” button instead (two or three people a month do that, for reasons unclear to me), it makes Mail Chimp anxious. Please don’t.

In April, the Observer celebrates its second anniversary. It wouldn’t be worthwhile without your readership and your thoughtful feedback. And it wouldn’t be possible without your support, either directly or by using our Amazon link. The Amazon system is amazingly simple and painless. If you set our link as your default bookmark for Amazon (or, as I do, use Amazon as your homepage), the Observer receives a rebate from Amazon equivalent to 6% or more of the amount of your purchase. It doesn’t change your cost by a penny since the money comes from Amazon’s marketing budget. While 6% of the $11 you’ll pay for Bill Bernstein’s The Investor’s Manifesto (or 6% of a pound of coffee beans or Little League bat) seems trivial, it adds up to about 75% of our income. Thanks for both!

In April, we’re going to look at closed-end s (CEFs) as an alternative to “regular” (or open-ended) mutual s and ETFs. We’ve had a chance to talk with some folks whose professional work centered on trading CEFs. We’ll talk through Morningstar’s recent CEF studies, a bit of what the academic literature says and the insights of the folks we’ve interviewed, and we’ll provide a couple intriguing possibilities. That will be on top of – not in place of – our regular features.

See you then!

Seafarer Overseas Growth & Income (SFGIX)

The fund:	Seafarer Overseas Growth and Income Fund (SFGIX and SIGIX)
Manager:	Andrew Foster, Founder, Chief Investment Officer, and Portfolio Manager
The call:	On February 19^th, about 50 people phoned-in to listen to our conversation with Andrew Foster, manager of *Seafarer Overseas Growth Income Fund (SFGIX and SIGIX). The fund has an exceptional first year: it gathered $35 million in asset and returned 18% while the MSCI emerging market index made 3.8%. The fund has about 70% of its assets in Asia, with the rest pretty much evenly split between Latin America and Emerging Europe. Their growth has allowed them to institute two sets of expense ratio reductions, one formal and one voluntary. Among the highlights of the call, for me: China has changed. Andrew offered a rich discussion about his decision to launch the fund. The short version: early in his career, he concluded that emergent China was “the world’s most under-rated opportunity” and he really wanted to be there. By late 2009, he noticed that China was structurally slowing. That is, it was slow because of features that had no “easy or obvious” solution, rather than just slowly as part of a cycle. He concluded that “China will never be the same.” Long reflection and investigation led him to begin focusing on other markets, many of which were new to him, that had many of the same characteristics that made China exciting and profitable a decade earlier. Given Matthews’ exclusive and principled focus on Asia, he concluded that the only way to pursue those opportunities was to leave Matthews and launch Seafarer. It’s time to be a bit cautious. As markets have become a bit stretched – prices are up 30% since the recent trough but fundamentals have not much changed – he’s moved at the margins from smaller names to larger, steadier firms. There are still better opportunities in equities than fixed income; hence he’s about 90% in equities. Income has important roles to play in his portfolio.** (1) It serves as a check on the quality of a firm’s business model. At base, you can’t pay dividends if you’re not generating substantial, sustained free cash flow and generating that flow is a sign of a healthy business. (2) It serves as a common metric across various markets, each of which has its own accounting schemes and regimes. (3) It provides as least a bit of a buffer in rough markets. Andrew likened it to a sea anchor, which won’t immediately stop a ship caught in a gale but will slow it, steady it and eventually stop it. The conference call (When you click on the link, the file will load in your browser and will begin playing after it’s partially loaded.)
The profile:	The case for Seafarer is straightforward: it’s going to be one of your best options for sustaining exposure to an important but challenging asset class. The Mutual Fund Observer profile of SFGIX, Updated March 2013. The SFGIX audio profile
Web:	Seafarer Overseas Growth and Income Fund website Shareholder Conference Call 2013 Q3 Report Fund Focus: Resources from other trusted sources

PIMCO Short Asset Investment Fund, “A” shares (PAIAX), February 2013

The “D” share class originally profiled here was converted to “A” shares in 2018. Retail investors now pay a 2.25% front load for the shares

Objective and Strategy

The fund seeks to provide “maximum current income, consistent with daily liquidity.” The fund invests, primarily, in short-term investment grade debt. The average duration varies according to PIMCO’s assessment of market conditions, but will not normally exceed 18 months. The fund can invest in dollar-denominated debt from foreign issuers, with as much as 10% from the emerging markets, but it cannot invest in securities denominated in foreign currencies. The manager also has the freedom to use derivatives and, at a limited extent, to use credit default swaps and short sales.

Adviser

PIMCO. Famous for its fixed-income expertise and its $280 billion PIMCO Total Return Fund, PIMCO has emerged as one of the industry’s most innovative and successful firms across a wide array of asset classes and strategies. They advise the 84 PIMCO funds as well as a global array of private and institutional clients. As of December 31, 2012 they had $2 trillion in assets under management, $1.6 trillion in third party assets and 695 investment professionals.

Manager

Jerome Schneider. Mr. Schneider is an executive vice president in the Newport Beach office and head of the short-term and funding desk. Mr. Schneider also manages four other cash management funds for PIMCO and a variety of other accounts, with combined assets exceeding $74 billion. Prior to joining PIMCO in 2008, Mr. Schneider was a senior managing director with Bear Stearns.

Management’s Stake in the Fund

None. Mr. Schneider manages five cash management funds and has not invested a penny in any of them (as of the latest SAI, 7/31/12).

Opening date

May 31, 2012

Minimum investment

$1,000 for “D” shares, which is the class generally available no-load and NTF through various fund supermarkets.

Expense ratio

0.65%, after waivers, on assets of $3 Billion, as of July 2023.

Comments

You need to know about two guys in order to understand the case for PIMCO Short Asset. The first is E.O. Wilson, the world’s leading authority in myrmecology, the study of ants. His publications include the Pulitzer Prize winning The Ants (1990), which weighs in at nearly 800 pages as well as Journey to the Ants (1998), Leafcutter Ants (2010), Anthill: A Novel (2010) and 433 scientific papers.

Wilson wondered, as I’m sure so many of us do, what characteristics distinguish very successful ant colonies from less successful or failed ones. It’s this: the most successful colonies are organized so that they thoroughly gather all the small crumbs of food around them but they’re also capable of exploiting the occasional large windfall. Failed colonies aren’t good about efficiently and consistently gathering their crumbs or can’t jump on the unexpected opportunities that present themselves.

The second is Bill Gross, who is on the short list for the title “best fixed-income investor, ever.” He currently manages well more than $300 billion in PIMCO funds and another hundred billion or so in other accounts. Morningstar named Mr. Gross and his investment team Fixed Income Manager of the Decade for 2000-2009 and Fixed Income Manager of the Year for 1998, 2000, and 2007 (the first three-time recipient). Forbes ranks him as 51^st on their list of the world’s most powerful people.

Why is that important?

Jerome Schneider is the guy that Bill Gross turns to managing the “cash” portion of his mutual funds. Schneider is the guy responsible for directing all of PIMCO’s cash-management strategies and PIMCO Short Asset embodies the portfolio strategy used for all of those funds. They refer to it as an “enhanced cash strategy” that combines high quality money market investments with a flexible array of other investment grade, short-term debt. The goal is to produce lower volatility than short-term bonds and higher returns than cash. Mr. Schneider is backed by an incredible array of analytic resources, from analysts tracking individual issues to high level strategists like Mr. Gross and Mohamed El-Erian, the firm’s co-CIOs.

From inception through 1/31/13, PAIUX turned a $10,000 investment into $10,150. In the average money market, you’d have $10,005. Over that same period, PAIUX outperformed both the broad bond market and the average market-neutral fund.

So here’s the question: if Bill Gross couldn’t find a better cash manager, what’s the prospect that you will?

Bottom Line

This fund will not make you rich but it may be integral to a strategy that does. Your success, like the ants, may be driven by two different strategies: never leaving a crumb behind and being ready to hop on the occasional compelling opportunity. PAIUX has a role to play in both. It does give you a strong prospect of picking up every little crumb every day, leaving you with the more of the resources you’ll need to exploit the occasional compelling opportunity.

More venturesome investors might look at RiverPark Short Term High Yield Fund (RPHYX) for the cash management sleeve of their portfolios but conservative investors are unlikely to find any better option than this.

Fund website

PIMCO Short Asset Investment “A”

Fact Sheet

(2023)

Matthews Asia Strategic Income (MAINX)

The fund:	Matthews Asia Strategic Income (MAINX)
Manager:	Teresa Kong, Manager
The call:	We spent an hour on Tuesday, January 22, talking with Teresa Kong of Matthews Asia Strategic Income. The fund is about 14 months old, has about $40 million in assets, returned 13.6% in 2012 and 11.95% since launch (through Dec. 31, 2012). Highlights include: this is designed to offer the highest risk-adjusted returns of any of the Matthews funds. the manager describes the US bond market, and most especially Treasuries, as offering “asymmetric risk” over the intermediate term. Translation: more downside risk than upside opportunity. given some value in having a fixed income component of one’s portfolio, Asian fixed-income offers two unique advantages in uncertain times. First, the fundamentals of the Asian fixed-income market are very strong. Second, Asian markets have a low beta relative to US intermediate-term Treasuries. MAINX is one of the few funds to have positions in both dollar-denominated and local currency Asian debt (and, of course, equities as well). in equities, Matthews looks for stocks with “bond-like characteristics.” most competitors don’t have the depth of expertise necessary to maximize their returns in Asia. TK said explicitly that they have no neutral position or target bands of allocation for anything, i.e., currency exposure, sovereign vs. corporate, or geography. They try to get the biggest bang for the level of risk across the portfolio as a whole, with as much “price stability” (she said that a couple of times) as they can muster. The conference call (When you click on the link, the file will load in your browser and will begin playing after it’s partially loaded.)
The profile:	MAINX offers rare and sensible access to an important, under-followed asset class. The long track record of Matthews’ funds suggests that this is going to be a solid, risk-conscious and rewarding vehicle for gaining access to that class. The Mutual Fund Observer profile of MAINX, updated March, 2012 The MAINX audio profile
Web:	Matthews Asia Strategic Income Fund Fact Sheet 2013 Q3 Report Fund Commentary Fund Focus: Resources from other trusted sources

RiverPark Long/Short Opportunity Fund (RLSFX)

The fund:	RiverPark Long/Short Opportunity Fund (RLSFX)
Manager:	Mitch Rubin, a Managing Partner at RiverPark and their CIO.
The call:	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. The call 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. 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. 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 leverage. He believes long/short managers as a group are 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. RiverPark benefits from having followed many of their holdings for nearly two decades, 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 they short). The conference call (When you click on the link, the file will load in your browser and will begin playing after it’s partially loaded.)
The profile:	All long-short funds have about the same goal: to provide a relatively large fraction of the stock market’s long-term gains with a relatively small fraction of its short-term volatility. They all invest long in what they believe to be the most attractively valued stocks and invest short, that is bet against, the least attractively valued ones. Many managers imagine their long portfolios as “offense” and their short portfolio as “defense.” That’s the first place where RiverPark stands apart. Mr. Rubin intends to “always play offense.” He believes that RiverPark’s discipline will allow him to make money, “on average and over time,” on both his long and short portfolios. The Mutual Fund Observer profile of RLSFX, dated August, 2012 The audio profile
Web:	RiverPark Funds Website 2013 Q3 Report RLSFX Fact Sheet Fund Focus: Resources from other trusted sources

October 1, 2012

Dear friends,

The trees have barely begun to change color here in Iowa. The days are warm, football is in the air (had I mentioned that my son Will had a running touchdown on offense and a nifty interception on defense this week?) and dentists everywhere are gearing up for Halloween. It’s an odd time, then, for investors to be concerned with Santa Claus.

The Quad at Augustana College in early autumn

And yet they are. The broad market indexes are up 2.5% in September (typically a rocky month), 16.2% year-to-date and 30% over the past 12 months. In a normal year, investors would hold their breaths through October and then look with happy anticipation to the arrival of “the Santa Claus rally.” In 80 of the past 100 years, stocks have risen in December, generally by a bit more than 2%.

The question folks are raising this year seems worth pondering: will the intersection of a bull run with a fiscal cliff make for a distinctly Grinchy end of the year? Will even the suspicion of such an outcome make enough folks lighten their stock exposure to trigger a rare year-end market sag?

I don’t know, but the prospect makes me especially grateful for the opportunity to enjoy the company of my students and the fading warmth of the harvest season.

The Last Ten: Fidelity’s New Fund Launches Since 2002

“The Last Ten” will be 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. We start this month with Fidelity, the Beantown Behemoth.

There was, at one time, few safer bets than a new Fidelity fund. New Fido funds had two things going from them: (1) Fidelity could afford to buy and support the brightest young managers around and (2) older Fidelity funds might, by happenstance, choose to buy a stock recently purchased by the new fund. The size of those purchases could cause a stock’s price to spike, much to the profit of its early owners. The effect was consistent enough that it became the subject of newsletters and academic studies.

Which leads us to the question: when was the last time that Fidelity launched a compelling fund? You know, one-of-a-kind, innovative, must-have, that sort of thing?

Might it have been New Millenium (FMILX), 20 years ago? If not, what?

Here’s an easier question: when was the last time that Fidelity launched a fund which now carries a five-star rating from Morningstar?

Answer: five years ago, with the launch of Fidelity International Growth (FIGFX) in November of 2007. It’s a fund so low-profile that it doesn’t appear in any of Fidelity’s advertising and is not covered by any of Morningstar’s analysts. The only other five star fund launched by Fido in a decade is an institutional bond index fund, Spartan Intermediate Term Bond Index (FIBIX), December 2005.

That’s not to say that Fidelity hasn’t been launching funds. They have. Hundreds of them. They’re just not very good.

It’s hard to generate an exact count of Fidelity’s new fund launches because some apparently new funds are just older funds being sold through new channels, such as the launch of a Fidelity Advisor fund that’s just a version of an older Fidelity one.

That said, here’s a rough 10 year total. Fidelity has launched 154 new mutual funds in a decade. Those appear as Fidelity, Fidelity Advisor, Fidelity Series and Strategic Adviser funds. Taking the various share classes into account, Fido made 730 new packages available in the decade.

That includes:

26 Fidelity funds for retail investors

18 Fidelity Series funds – which are available for purchase only by other Fidelity funds. The most amazing development there is the imminent launch of new funds for Joel Tillinghast and Will Danoff. Mr. T has brilliantly managed the $35 billion Low Priced Stock (FLPSX) since 1989. He recently completed a sabbatical, during which time the fund was run by a team. The team has been retained as co-managers as part of what Fidelity admits is “succession planning.” He’ll now also manage Intrinsic Opportunities. Will Danoff, who manages the $85 billion Contrafund (FCNTX) and $20 billion Advisor News Insights (FNIAX) funds, is being asked to manage Opportunistic Insights.

20 Strategic Advisers funds (e.g. SMid Cap Multi-manager) – which rely on non-Fidelity managers.

9 Spartan index funds, some of which overlap Series index funds.

58 Fidelity Advisor funds – some (Advisor Small Cap Value) of which are near-duplicates of other Fidelity funds. But, it turns out that a fair number are either unique to the Advisor lineup or are distinct from their Fidelity sibling. The 14 “Income Replacement” series, for example, are distinct to the Advisor line. Will Danoff’s Advisor New Insights fund, for example, is not a clone of Contrafund. Advisor Midcap II A is sort of a free agent. Advisor Value Leaders is bad, but unparalleled.

13 “W” class Freedom Index funds are another distinct adviser-only set, which have the same target dates as the Freedom series but which execute exclusively through index funds.

How good are those funds? They’re definitely “not awful.” Of the 730 new fund packages, 593 have earned Morningstar ratings. Morningstar awards five stars to the top 10% of funds in a group and four stars to the next 22.5%. By sheer coincidence, you’d expect Fido to have fielded 59 new five-star funds. They only have 18. And you’d expect 192 to have four or five star ratings. They managed 118. Which is to say, new Fidelity funds are far less likely to be excellent than either their storied past or pure chance would dictate.

The same pattern emerges if you look at Morningstar’s “gold” rating for funds, their highest accolade. Fidelity has launched nine “Gold” funds in that period – all are either bond funds, or index funds, or bond index funds. None is retail, and none is an actively-managed stock or hybrid fund.

Why the apparent mediocrity of their funds? I suspect three factors are at work. First, Fidelity is in the asset-gathering business now rather than the sheer performance business. The last thing that institutional investors (or even most financial planners) want are high-risk, hard-to-categorize strategies. They want predictable packages of services, and Fidelity is obliged to provide them. Second, Fidelity’s culture has turned cautious. Young managers are learning from early on that “safe is sane.” If that’s the case, they’re not likely to be looking for the cutting edge of anything. The fact that they’re turning to overworked 25-year veterans to handle new in-house funds might be a sign of how inspiring the Fidelity “bench” has become. Third and finally, Fidelity’s too big to pursue interesting projects. It’s hard for any reasonably successful Fidelity fund to stay below a billion in assets, which means that niche strategies and those requiring nimble funds are simply history.

Bottom line: the “Fidelity new-fund effect” seems history, as Fidelity turns more and more to index funds, repackaged products and outside managers. But at least they’re unlikely to be wretched, which brings us to …

The Observer’s Annual “Roll Call of the Wretched”

It’s the time of year when we pause to enjoy two great German traditions: Oktoberfest and Schadenfreude. While one of my favorites, Leinenkugel’s Oktoberfest, was shut out (Bent River Brewery won first, second and third places at the Quad City’s annual Brew Ha Ha festival), it was a great excuse to celebrate fall on the Mississippi.

And a glass of Bent River’s Mississippi Blonde might be just what you need to enjoy the Observer’s annual review of the industry’s Most Regrettable funds. Just as last year, we looked at funds that have finished in the bottom one-fourth of their peer groups for the year so far. And for the preceding 12 months, three years, five years and ten years. These aren’t merely “below average.” They’re so far below average they can hardly see “mediocre” from where they are.

When we ran the screen in October 2011, there are 151 consistently awful funds, the median size for which is $70 million. In 2012 there were . . . 151 consistently awful funds, the median size for which is $77 million.

	Morningstar Category	Total Assets ($ mil)
BBH Broad Market	Intermediate Bond	2,900
Bernstein International	Foreign Large Blend	1,497
Bernstein Tax-Managed Intl	Foreign Large Blend	3,456
CRA Qualified Investment CRA	Intermediate Bond	1,488
DFA Two-Year Global Fixed-Income	World Bond	4,665
Eaton Vance Strategic Income B	Multisector Bond	2,932
Federated Municipal Ultrashort	Muni National Short	4,022
Hussman Strategic Growth	Long/Short Equity	3,930
Invesco Constellation A	Large Growth	2,515
Invesco Global Core Equity A	World Stock	1,279
Oppenheimer Flexible Strategies	Moderate Allocation	1,030
Pioneer Mid-Cap Value A	Mid-Cap Value	1,106
Thornburg Value A	Large Blend	2,083
Vanguard Precious Metals and M	Equity Precious Metals	3,042
Wells Fargo Advantage S/T Hi-Y	High Yield Bond	1,102
		37,047

Of these 13, two (DFA and Wells) deserve a pass because they’re very much unlike their peer group. The others are just billions of bad.

What about funds that didn’t repeat from last year’s list? Funds that moved off the list:

Liquidated – the case of Vanguard Asset Allocation.
Fired or demoted the manager and are seeing at least a short term performance bump – Fidelity Advisor Stock Selector Mid Cap (FMCBX ), Fidelity Magellan (FMAGX), Hartford US Government Securities (HAUSX), and Vantagepoint Growth (VPGRX) are examples.
They got lucky. Legg Mason Opportunity “C”, for example, has less than a billion left in it and is doing great in 2012, while still dragging a 100th percentile ranking for the past three and five years. Putnam Diversified Income (PINDX) is being buoyed by strong performance in 2009 but most of 2011 and 2012 have been the same old, sad story for the fund.

The most enjoyable aspect of the list is realizing that you don’t own any of these dogs – and that hundreds of thousands of poor saps are in them because of the considered advice of training financial professionals (remember: 11 of the 13 are loaded funds, which means you’re paying a professional to place you in these horrors).

Just When You Thought It Couldn’t Get Any Worse

I then refined the search with the Observer’s “insult to injury” criteria: funds that combined wretched performance with above-average to high risk and above average fees. The good news: not many people trust Suresh Bhirud with their money. His Apex Mid Cap Growth (BMCGX) had, at last record, $192,546 – $100,000 below last year’s level. Two-thirds of that amount is Mr. Bhirud’s personal investment. Mr. Bhirud has managed the fund since its inception in 1992 and, with annualized losses of 9.2% over the past 15 years, has mostly impoverished himself.

Likewise, with Prasad Growth (PRGRX) whose performance graph looks like this:

The complete Roll Call of Wretched:

	Morningstar Category	Total Assets ($ mil)
AllianceBern Global Value A	World Stock	44
Apex Mid Cap Growth	Small Growth	<1
API Efficient Frontier Value	Mid-Cap Blend	22
CornerCap Balanced	Moderate Allocation	18
Eaton Vance AMT-Free Ltd Maturity	Muni National Interm	67
Eaton Vance CT Municipal Income	Muni Single State Long	120
Eaton Vance KY Municipal Income	Muni Single State Long	55
Eaton Vance NY Ltd Maturity Muni	Muni New York Intermediate	91
Eaton Vance TN Municipal Income	Muni Single State Long	53
Legg Mason WA Global Inflation	Inflation-Protected Bond	41
Litman Gregory Masters Value	Large Blend	81
Midas	Equity Precious Metals	55
Pacific Advisors Mid Cap Value	Mid-Cap Blend	5
Pioneer Emerging Markets A	Diversified Emerging Mkts	316
Prasad Growth	World Stock	<1
ProFunds Precious Metals Ultra	Equity Precious Metals	51
ProFunds Semiconductor UltraSe	Technology	4
Pyxis Government Securities B	Intermediate Government	83
Rochdale Large Value	Large Blend	20
SunAmerica Focused Small-Cap Value	Small Blend	101
SunAmerica Intl Div Strat A	Foreign Large Blend	70
SunAmerica US Govt Securities	Intermediate Government	137
Tanaka Growth	Mid-Cap Growth	11
Thornburg Value A	Large Blend	2,083
Timothy Plan Strategic Growth	Aggressive Allocation	39
Turner Concentrated Growth Investor	Large Growth	35
Wilmington Large Cap Growth A	Large Growth	89
		3,691

I have a world of respect for the good folks at Morningstar. And yet I sometimes wonder if they aren’t being a bit generous with funds they’ve covered for a really long time. The list above represents funds which, absent wholesale changes, should receive zero – no – not any – zilch investor dollars. They couple bad performance, high risk and high expenses.

And yet:

Thornburg Value (a “Bronze” fund): “This fund’s modified management team deserves more time.” What? The former lead manager retired in 2009. The current managers have been on-board since 2006. The fund has managed to finish in the bottom 1 – 10% of its peers every year since. Why do they deserve more time?

Litman Gregory Masters Value: “This fund’s potential is stronger than its long-term returns suggest.” What does that mean? For every trailing time period, it trails more or less 90% of its peers. Is the argument, “hey, this could easily become a bottom 85^th percentile fund”?

Two words: run away! Two happier words: “drink beer!”

Chip, the Observer’s technical director, deserves a special word of thanks for her research and analysis on this piece. Thanks, Chip!

RPHYX Conference Call

For about an hour on September 13^th, David Sherman of Cohanzick Management, LLC, manager of RiverPark Short Term High Yield (RPHYX) fielded questions from Observer readers about his fund’s strategy and its risk-return profile. Somewhere between 40-50 people signed up for the RiverPark call but only about two-thirds of them signed-in. For the benefit of folks interested in hearing David’s discussion of the fund, here’s a link to an mp3 version of Thursday night’s conference call. The RiverPark folks guess it will take between 10-30 seconds to load, depending on your connection. At least on my system it loads in the same window that I’m using for my browser, so you might want to right-click and choose the “open in a new tab” option.

http://78449.choruscall.com/riverpark/riverpark120913.mp3

When you click on the link, the file will load in your browser and will begin playing after it’s partially loaded.

The conference call was a success for all involved. Once I work out the economics, I’d like to offer folks the opportunity for a second moderated conference call in November and perhaps in alternate months thereafter. Let me know what you think.

Observer Fund Profiles:

RiverPark Short Term High Yield (RPHYX): RPHYX has performed splendidly since inception, delivering what it promises, a cash management fund capable of generating 300 basis points more than a money market with minimal volatility. This is an update of our September 2011 profile.

T. Rowe Price Real Assets (PRAFX): a Clark-Kentish sort of fund. One moment quiet, unassuming, competent then – when inflation roars – it steps into a nearby phone booth and emerges as . . .

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.

Each month, though, there are interesting new no-load retail funds and, more recently, actively managed ETFs. This month’s funds are due to be launched before the end of 2012. Two, in particular, caught our attention:

Buffalo Dividend Focus Fund will try to generate “current income” as its primary goal, through reliance on dividends. That’s a rare move and might reflect some pessimism about the prospects of using bonds for that goal. GMO, for example, projects negative real returns for bonds over the next 5-7 years. It’s particularly interesting that John Kornitzer will run the fund. John has done a really solid job with Buffalo Flexible Income (BUFBX) over the years and is Buffalo’s founder.

RiverNorth/Oaktree High Income Fund is the latest collaboration between RiverNorth and another first-tier specialist. RiverNorth’s unmatched strength is in using an asset allocation strategy that benefits from their ability to add arbitrage gains from pricing inefficiencies in closed-end funds. They’re partnering with Oaktree Capital Management, which is best known in the mutual fund world for its find work on Vanguard Convertible Securities (VCVSX). Oaktree’s principals have been working together since the mid-1980s on “high yield bonds, convertible securities, distressed debt and principal investments.” They’re managing $78 billion of institutional and private money for folks on four continents. Their founder, Howard Marks, still writes frequent shareholder letters (a la Jeremy Grantham) which are thoughtful and well-argued (despite the annoying watermark splashed across each page).

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.

WhiteBox, Still in the Box

A number of readers have urged me to look into Whitebox Tactical Opportunities (WBMAX), and I agreed to do a bit of poking around.

There are some funds, and some management teams, that I find immediately compelling. Others not.

So far, this is a “not.”

Here’s the argument in favor of Whitebox: they have a Multi-Strategy hedge fund which uses some of the same strategies and which, per a vaguely fawning article in Barron’s, returned 15% annually over the past decade while the S&P returned 5%. I’ll note that the hedge fund’s record does not get reported in the mutual funds, which the SEC allows when it believes that the mutual fund replicates the hedge. And, too, the graphics on their website are way cool.

Here’s the reservation: their writing makes them sound arrogant and obscure. They advertise “a proprietary, multi-factor quantitative model to identify dislocations within and between equity and credit markets.” At base, they’re looking for irrational price drops. They also use broad investment themes (they like US blue chips, large cap financials and natural gas producers), are short both the Russell 2000 (which is up 14.2% through 9/28) and individual small cap stocks, and declare that “the dominant theories about how markets behave and the sources of investment success are untrue.” They don’t believe in the efficient market hypothesis (join the club).

After nine months, the fund is doing well (up 13% through 9/28) though it’s trailed its peers in about a third of those months.

I’ll try to learn more in the month ahead, but I’ll first need to overcome a vague distaste.

Briefly Noted . . .

RiverPark/Wedgewood Fund (RWGFX) continues to rock. It’s in the top 2% of all large-growth funds for the past 12 months and has attracted $450 million in assets. Manager David Rolfe recently shared two analyses of the fund’s recent performance. Based on Lipper data, it’s the fourth-best performing large growth fund over the past year. Morningstar data placed it in the top 30 for the past three months. The fund was also featured in a Forbes article, “Investors will starve on growth stocks alone.” David is on the short-list of managers who we’d like to draw into a conference call with our readers. A new Observer profile of the fund is scheduled for November.

Small Wins for Investors

As we noted last month, on Sept. 4, Aston Funds reopened ASTON/River Road Independent Value (ARIVX) to new investors after reallocating capacity to the mutual fund from the strategy’s separate accounts. The firm still intends to close the entire strategy at roughly $1 billion in assets, which should help preserve manager Eric Cinnamond’s ability to navigate the small-cap market.

In a “look before you leap” development, Sentinel Small Company Fund (SAGWX) reopened to new investors on September 17, 2012. Except for the fact that the fund’s entire management team resigned six weeks earlier, that would be solidly good news.

Brown Capital Management Small Company (BCSIX) reopened on Sept. 4, 2012. Morningstar considers this one of the crème de la crème of small growth funds, with both five stars and a “Gold” rating. It remained closed for less than one year.

CLOSINGS

Loomis Sayles Small Cap Growth (LCGRX) closed to new investors on Sept. 4, 2012.

AQR Risk Parity (AQRNX) will close to new investors on November 16. If you’ve got somewhere between $1 million and $5 million sitting around, unallocated, in your risk-parity investment pot, you might consider this high-minimum fund.

OLD WINE, NEW BOTTLES

American Century Inflation Protection Bond (APOAX) is now American Century Short Duration Inflation Protection Bond, which follows a strategy change that has the fund focusing on, well, short duration bonds.

The former BNY Mellon Mid Cap Stock Fund is now BNY Mellon Mid Cap Multi-Strategy Fund and its portfolio has been divided among several outside managers.

Federated Asset Allocation (FSTBX) will become Federated Global Allocation in December. It will also be required to invest at least 30% outside the US, about 10% is non-US currently. The fund’s bigger problem seem more related to a high turnover, high risk strategy than to a lack of exposure to the Eurozone.

Virtus Global Infrastructure (PGUAX) changed its name to Virtus Global Dividend (PGUAX) on September 28, 2012.

That same day, Loomis Sayles Absolute Strategies (LABAX) became Loomis Sayles Strategic Alpha Fund. Loomis had been sued by the advisors to the Absolute Strategies Fund (ASFAX), who thought Loomis might be trading on their good name and reputation. While admitting nothing, Loomis agreed to a change.

OFF TO THE DUSTBIN OF HISTORY

Columbia has merged too many funds to list – 18 in the latest round and 67 since its merger with RiverSource. Okay, fine, here’s the list:

Connecticut Tax-Exempt Fund
Diversified Bond Fund
Emerging Markets Opportunity Fund
Frontier Fund
Government Money Market Fund
High Yield Opportunity Fund
Large Cap Value Fund
LifeGoal Income Portfolio
Massachusetts Tax-Exempt Fund
Mid Cap Growth Opportunity Fund
Multi-Advisor International Value Fund
Portfolio Builder Moderate Aggressive Fund
Portfolio Builder Moderate Conservative Fund
Select Small Cap Fund
Small Cap Growth Fund II
Variable Portfolio – High Income Fund
Variable Portfolio – Mid Cap Growth Fund
Variable Portfolio – Money Market Fund

Dreyfus/Standish International Fixed Income Fund is slated to merge into Dreyfus/Standish Global Fixed Income Fund (DHGAX).

In an exceedingly rare move, Fidelity is moving to close three funds with an eye to liquidating them. The Dead Funds Walking are Fidelity Fifty (FFTYX), Fidelity Tax Managed Stock (FTXMX) and Fidelity 130/30 Large Cap (FOTTX). The largest is Fifty, with nearly $700 million in assets. Morningstar’s Janet Yang expressed her faith in Fifty’s manager and opined in April that this was a “persuasive option for investors.” Apparently Fidelity was not persuaded. The other two funds, both undistinguished one-star laggards, had about $100 million between them.

Janus Worldwide (JAWWX) is being merged into Janus Global Research (JARFX) at the start of 2013. That seems like an almost epochal change: JAWWX was once a platform for displaying the sheer brilliance of its lead manager (Helen Young Hayes), then things crumbled. Returns cratered, Hayes retired, assets dropped by 90% and now it’s being sucked into a fund run by Janus’s analyst team.

According to her LinkedIn page, Ms. Hayes is now an Advisor at Red Rocks Capital, LLC (their site doesn’t mention her), Director at HEAF (a non-profit) and Advisor at Q Advisors, LLC (but only in the “advisory” sense, she’s not one of the actual Q Advisors).

Although it’s not mentioned on his LinkedIn page, George Maris – who managed JAWWX to a 5% loss during his tenure while his peers booked a 2% gain – will continue to manage Janus Global Select (JORNX), a desultory fund that he took over in August.

Chuck Jaffe used the Janus closing as a jumping-off point for a broader story about the excuses we make to justify keeping wretched funds. Chuck does a nice job of categorizing and debunking our rationalizations. It’s worth reading.

A bunch of small Pyxis funds have vanished: Short-Term Government (HSJAX) and Government Securities (HGPBX) were both absorbed by Pyxis Fixed Income (HFBAX) which, itself, has a long-term losing record. International Equity (HIQAX) merged into Pyxis Global Equity (HGMAX), and U.S. Equity (HUEAX) into Pyxis Core America Equity (HCOAX). All of those funds, save Core America, have very weak long-term records.

Triex Tactical Long/Short Fund (TLSNX) closed on September 4, moved to cash and liquidated on September 27. Not sure what to say. It has just $2 million in assets, but it’s less than a year old and has substantially above-average performance (as of early September) relative to its “multialternative” peer group.

Turner Concentrated Growth Fund (yep – that stalwart from the “Roll Call of the Wretched,” above) is being merged into Turner Large Growth Fund (TCGFX).

In Closing . . .

For users of our discussion board, we’re pleased to announce the creation of a comprehensive Users Guide. As with many of our resources, it’s a gift to the community from one of the members of the community. In this case, Old Joe, who has many years of experience in technical writing, spent the better part of a month crafting the Guide even as chip and Accipiter kept tweaking the software and forcing rewrites. OJ’s Guide is clear, visually engaging and starts with a sort of Quick Start section for casual users then an advanced section for folks who want to use the wealth of features that aren’t always immediately observable.

For which chip, Accipiter and I all say “thanks, big guy! You did good.”

Since launch, the Observer has been read by 99,862 people and our monthly readership is pretty steadily around 8500. Thanks to you all for your trust and for the insights you’ve shared. Here’s the obligatory reminder: please do consider using (and sharing) the Observer’s link to Amazon.com. While it’s easy to make a direct contribution to the Observer, only two or three folks have been doing so in recent months (thanks Gary, glad we could help! And thanks Carl, you’re an ace!) which makes the Amazon program really important.

We’ll look for you in November. Find a nice harvest festival and enjoy some apples for us!

September 1, 2012

Dear friends,

Welcome to what are, historically, the two most turbulent months in the market. Eight of the Dow’s 20 biggest one-day gains ever have occurred in September or October but so have 12 of the 20 biggest one-day losses.

And that might be a good thing. Some exceedingly talented investors, like Eric “I Like Volatility” Cinnamond (see below), visibly perk up at the opportunities that panic presents. And it will help distract us from the fact that, of all the things the two major political parties are about to launch (and they’re gonna launch a lot), the nicest is mud.

I wonder if this explains why the Germans have Octoberfest, but launch it in September?

Gary Black as savior? Really?

Calamos Investments announced August 23 that they had appointed Gary Black as their new “global co-CIO.” That was coincident with the departure of Nick Calamos from the co-CIO role. Mr. Calamos had a sudden urge “to pursue personal interests.”

Gary Black?

That Gary Black?

Gary Black

Black is most famous for serving for three years as CEO of Janus Investments. During his watch, at least 15 equity managers left Janus and one won a $7.5 million lawsuit. At the time of his dismissal (“amicable,” of course), he was reportedly trying to sell Janus to a larger firm. The board disapproved, though we don’t know whether they disapproved of selling the firm or of Black’s inability to get an appropriate price for it.

A snapshot of Janus Capital Group’s balance sheet doesn’t exactly represent a ringing endorsement of Black’s tenure.

	Black comes (12/05)	Black goes (12/09)
Revenue	$953 million	$849 million
Operating expenses	712M	1526M
Operating income	240M	(678)M
Earnings per share	0.40	(4.55)
Long-term debt	262 M	792M
Book value per share	$11.97	$5.50
Assets under management	$135 billion	$135 billion

(source: Morningstar and the 2009 Janus annual report)

Some might summarize it as: “huge expense, huge controversy, rising debt, falling value.”

Do you suppose, in light of all of that, that the deposed Nick Calamos’s endorsement of Black might have had a tinge of “I hope you like what you get?” He says, “The Calamos investment team is in good hands given Gary’s significant experience in leading investment teams on a global basis.”

Calamos, of course, is not hiring him as CEO. Nope. That role is held by the firm’s 72-year-old founder. They’re hiring him on the basis of his ability as chief investment officer.

How does he do as CIO? Well, a lot of his retooled Janus funds absolutely cratered in the 2008 meltdown. And his own investment firm doesn’t seem poised to appear on the cover of Barron’s quite yet. Part of the agreement includes acquisition of Black’s investment firm, Black Capital Management. Black Capital has a trivial asset base ($70 million) and a bunch of small separate accounts (average value: $370,000). Black filed in March to launch his own long-short mutual fund, but it never got off the ground.

Aston / River Road Independent Value reopens

Aston/River Road Independent Value (ARIVX) is an exceptionally good young fund from Eric Cinnamond, a manager who has a great 16 year record as a small cap, absolute return investor. The fund opened in December 2010, we profiled it with some enthusiasm in February 2011. The fund quickly established its bona fides, drew a lot of assets and, in a move of singular prudence, was closed while still small and maneuverable.

On September 4, it reopens to new investors. While that’s good news, it also raises a serious question: “you’re bigger than you were when you closed and you’re sitting at 50% cash, so why on earth is this time to reopen?”

Mr. Cinnamond’s answer comes in two parts. First, the fund reserved $200 million in capacity for anticipated institutional inflows which never materialized. At the same time, lots of advisors have been disappointed at getting shut off. Eric writes:

Yes, the Independent Value Fund is opening again. The rationale was simple. The $200 million we set aside for possible institutional investors was not allocated. In other words, institutional consultants (there are a few exceptions), remain committed to the relative world of investing — a world that has never made sense to me. Meanwhile, we’ve had like-minded advisors who want to purchase the Fund. So our capacity target of the Portfolio has not changed, but we have changed our expectation of mix between advisor (the fund) vs. institutional assets (separate accounts). More advisor assets and fewer institutional assets.

Second, the fund’s cash level and capacity are separate issues. Right now companies are achieving utterly unsustainable profit margins, which makes them look cheap and attractive. He shares Jeremy Grantham’s belief (or Jeremy shares Eric’s) that this is a bubble and it will inevitably (and painfully) end when profit margins regress to the mean. In a non-bubbled world, he would have use for several hundred million dollars more than the fund holds. Again, Mr. Cinnamond:

The other obvious question is, “If you have so much cash, why would you want to grow assets?” The size of the fund doesn’t impact our cash levels. Our opportunity set drives cash. If the fund is $1 million or $1 billion, cash would be the same percentage of the portfolio. We are simply reopening the fund to fill remaining capacity that was not taken by institutions.

In order to get the get the fund fully invested, I’m going to need higher volatility and improved valuations. With what appears to be an experiment in unlimited balance sheet expansion at the Federal Reserve, the timing of the return of free markets and volatility remains unknown. However, as with the mortgage credit boom and the tech bubble before, what is not sustainable will not be sustained. I am confident of that and I am confident the current profit cycle will revert as all others before it (there has never been a linear profit cycle). As peak corporate margins and profits revert, I believe the fund is position well to take advantage of the eventual return of the risk premium and volatility.

To those who suspect that he or River Road or Aston is simply making an asset grab, he notes that they are not going to market the reopened fund and that they even suspect that they may lose assets as skeptics pull their accounts.

We may actually lose assets initially due to the reopening (it may be frowned upon by some), I really don’t know and have never been too concerned about AUM. One of my favorite investment quotes of all time is “I would rather lose half of my shareholders than half of their money” (I think this was Jean-Marie Eveillard). I strongly believe in this. Also, we do not plan on actively marketing the fund and my focus will remain on small cap research/analysis and portfolio management. As far as portfolio management goes, I remain committed to not violating our investment discipline of only allocating capital when getting adequately compensated relative to risk assumed.

As he waits for those bigger opportunities, he’s reallocating money toward some attractively priced small cap exploration and production and energy service companies.

We’ve updated our profile of the fund for folks interested in learning more.

Writing about real asset investing: stuff in the ground versus stuff on the page

We’re currently working on an essay about “real asset” investing and the quickly growing pool of real asset investment vehicles. Real assets are things that have physical properties: precious metals, commodities, residential or commercial real estate, farmland, oil and gas fields, power generation plants, pipelines and other distribution systems, forestland and timber.

Advocates of real asset investing tend to justify inclusion of real assets on either (or both) of two grounds: normal and apocalyptic.

The “normal” argument observes that inflation is deadly to long-term returns, silently eroding the value of all gains. If inflation were to accelerate, that erosion might be dramatic. Neither stocks nor (especially) bonds generate real returns in periods of high and rising inflation. Real assets do.

The “apocalyptic” argument observes that we might be entering a period of increasingly unmanageable imbalances between the supply of everything from food and fertilizer to energy and metals, and the demand for them. The market’s way of addressing that imbalance is to raise the price of the items demanded. That should stimulate production and decrease consumption. Some pessimists, GMO’s Jeremy Grantham prime among them, believe that the imbalance might well be irreparable which will make the owners of resources very rich at the expense of others.

Regardless of which justification you use, you end up with inflation. Investors have the option of addressing inflation through a combination of two strategies: investing in real or tangible assets or investing in inflation-linked derivations. In the first case, you’d buy oil or the stocks of oil producing companies. In the second, you might buy TIPs or commodity index futures. The first strategy is called “real asset” investing. The second is “real return” investing.

Gaining the advantages of real asset investing requires devoting a noticeable but modest portion of your portfolio (5% at the low end and 25% at the high end) to such assets, but doing so with the knowledge that they’ll lag other investments as long as inflation stays low.

While there is a huge discussion of this issue in the institutional investment community, there’s very little directed to the rest of us. There’s only one no-load real assets fund, T. Rowe Price Real Assets (PRAFX). The fund was launched for exclusive use in Price’s asset allocation products, such as their Retirement Date funds. It has only recently been made available to the public. There are a half dozen load-bearing funds, two with quite reasonable performance, one diversified real assets ETF and a thousand ETFs representing individual slices of the real asset universe.

I’d planned on profiling both real asset investing and PRAFX this month, but the research is surprisingly complex and occasionally at odds. Rather than rush to print with a second-rate essay, we’ll keep working on it for our October issue.

Note to Paul Ryan, Investor: Focus!

For someone professing great economic knowledge, Paul Ryan’s portfolio reflects the careful discipline of a teenager at the mall. That, at least, is one reading of his 2012 financial disclosure statements on file with the Clerk of the U.S. House of Representatives. (The statement was amended a week later to add a million or so held by his wife in a trust.)

Highlights of his financials:

Ryan is a real assets investor. Woo-hoo! Among his largest investments are shares of a mining partnership (Ava O Limited), gravel rights to a quarry in Oklahoma (Blondie & Brownie, LLC – I’m sure Obama’s people are sniffing around that one), IPath Dow Jones UBS Commodity fund, Nuveen Real Estate Securities, and a bunch of assets (time, mineral rights, a cabin?, and land) through the Little Land Company LP.
In 2011, he was adding to his real asset holdings. He bought shares of a commodity ETF (and sold part four months later), Pioneer Natural Resources Co, a TIPS fund and (on three occasions) a real estate fund.
Directly or through family trusts, Ryan owns about three dozen mutual funds, mostly solid and unexceptional (think Artisan, Fido, Hartford, T Rowe).
He’s neither a fan of The Great Man theory of investing nor of passively managed investments. While he owns shares of Berkshire-Hathaway and PIMCO Total Return (PTTRX), the Berkshire holding is trivial ($1-15,000). The PIMCO one, mediated through two trusts, is under $50,000. Bill Gross tweeted approval (“Thanks Paul Ryan @RepPaulRyan @PaulRyanVP for investing in a PIMCO fund. Your reputation as a numbers guy is validated”), conceivably before he noticed that Ryan had been selling his shares in the fund. Other than the ETFs in his partnerships, he has no passive investments and he made 35 portfolio transactions in the year.
He hasn’t, for reasons political or economic, bought into the notion of emerging markets. While he has several global or international funds (Artisan, Hartford, Oakmark, Scout, Vanguard), he has just one small sliver of an emerging markets ETF inside a partnership.
He’s got a lot of economically inefficiently little investments. Footnotes to the financials reveal a fair number of holdings just above or just below the $1000 reporting threshold.
He’s taking care of his three children’s education through two fairly substantial accounts (on in the $50-100,000 range and the other in $100-250,000) in Wisconsin’s 529 plan. That warrants a second woo-hoo.

If you’d like to find out whether your Representative should be trusted with any amount greater than a $20 weekly allowance, all of the member reports are available at the House of Representatives’ financial disclosure page.

Another take on Ryan’s finances comes in a story by Stan Luxenberg at TheStreet.com. There’s a certain irony to the fact that Luxenberg decries Ryan’s jumbled portfolio in a muddled mess of an article. Ryan owns shares of four partnerships (CMR, Little Land Co., Ryan-Hutter Investment and Ryan Limited Partnership) and an IRA. Dramatically simplifying his fund holdings would likely require merging or liquidating those partnerships. Whether the partnerships themselves make sense or are just a tax dodge is a separate question.

Artio implodes?

Artio, formerly Julius Baer, is closing their domestic equity funds. On August 30, 2012, the Artio board voted to shut down Artio US Multicap, US Midcap, US Smallcap and US Microcap funds.

While the closures may have come as a surprise to many, BobC warned members of the Observer discussion board on August 8 of the impending decision. In following up on the lead, he discovered a more ominous problem: that Artio’s famous flagship fund is taking on water fast.

This caused us to probe a bit, and we discovered that Artio’s so-called flagship international funds (BJBIX, JETAX, JETIX, JIEIX) have been bleeding assets like a proverbial stuck pig, if not worse. For the oldest fund BJBIX, which was originally marketed as Julius Baer International Equity Fund in 1993, and where current managers Pell and Younes came aboard in 1995, fund assets peaked in 2007 at just under $11 billion. We started using the fund in the late 1990’s. Today, assets are under $1 billion. A similar disaster has occurred in the other international fund ticker symbols, but they do not have the long, storied history of BJBIX. This fund was once the best-performing international fund, but it never recovered from 2008, following that year’s average numbers by really awful relative performance in 2009-2011. And year to-date it is in the bottom 10%. We exited the fund several years ago when Pell and Younes would no longer take our calls. That’s usually a pretty big red flag that something is amiss.

But based on this, it would appear that Pell and Younes’ purchase of Bank Julius Baer’s U.S. fund management company was the beginning of the end.

Unfortunately, we are now concerned about Artio’s Total Return Bond Fund (JBGIX, BJBGX), which has a tremendous history and great management. If the asset bleed should occur there, for no other reason than perception of the future of Artio as a company, this would be a big problem for investors.

A lively discussion of the company’s future, alternatives and implications followed. If you haven’t visited the board in a while, you owe it to yourself to drop by. There’s a remarkable depth of information available there.

Observer Fund Profiles

Aston/River Road Independent Value (ARIVX), update: stubborn short-sightedness on the part of institutional account managers translates to a big win for small investors. When ARIVX closed, they reserved $200 million in capacity for institutional investors who didn’t show up. That’s give you $200 million in room to add one of the industry’s most profitable and stable small cap value funds to your portfolio.

Northern Global Tactical Asset Allocation (BBALX), update: this formerly mild-mannered balanced fund is maturing into a fascinating competitor to Vanguard’s splendid STAR (VGSTX) fund. The difference may come down to Northern’s greater flexibility and reliance on (gasp!) index funds.

The Best of the Web

Our friend and collaborator, Junior Yearwood, is working to manage a chronic medical condition. He won’t, for just a bit, we hope, be able to contribute to the Observer. While he’s gone we’ll keep his “Best of” feature on hiatus. I wish Junior a swift recovery and encourage folks who haven’t done so to find our picks for best retirement income calculator, best financial news site, best small fund website and more at Best of the Web.

Launch Alert: Manning & Napier Strategic Income funds

Manning & Napier launched Strategic Income Conservative (MSCBX) and Strategic Income Moderate (MSMSX) on August 2, 2012. They both combine shares of four other Manning & Napier funds (Core Bond (EXCRX), Dividend Focus (MNDFX), High Yield Bond (MNHYX) and Real Estate (MNRIX) in pursuit of income, growth, and risk management. Conservative will hold 15-45% in Dividend Focus and Real Estate while Moderate will hold 45-75%. Both have low investment minimums, reasonable fees and Manning’s very steady management team.

Launch Alert: William Blair International Leaders

William Blair & Company launched William Blair International Leaders Fund (WILNX) on August 16. The fund is managed by George Greig, who has an outstanding 25 year record and two very solid funds (International Growth WBIGX and Global Growth WGGNX) and Ken McAtamney, who is being elevated from the analyst ranks. The new fund will invest in “foreign companies with above-average returns on equity, strong balance sheets, and consistent, above-average earnings growth, resulting in a focused portfolio of leading companies.” That’s an admirably Granthamite goal. $5000 investment minimum, reduced to $1000 for accounts with an automatic investing provision. The expense ratio will be 1.45% after waivers. Grieg’s record is very strong and his main fund closed to new investors in June, so we’re putting WILNX on the Observer’s watch-list for a profile.

RiverPark Short-Term High Yield conference call

There are few funds to have stirred more conversation, or engendered more misunderstanding, than RiverPark Short-Term High Yield (RPHYX). It’s a remarkably stable, profitable cash management fund whose name throws off lots of folks.

Manager David Sherman of Cohanzick Asset Management and RiverPark’s president, Morty Schaja, have generously agreed to participate in a conference call with Observer readers. I’ll moderate the call and David will field questions on the fund’s strategies and prospects. The call is September 13 at 7:00 p.m., Eastern.

You can register for the conference by navigating to http://services.choruscall.com/diamondpass/registration?confirmationNumber=10017662 and following the prompts. If you’ve got questions, feel free to write me or post a query on the discussion board.

The Observer in the News

I briefly interrupted my August vacation to answer a polite question from the investing editor of U.S. News with a rant.

The question: “what should an investor do when his or her fund manager quits?”

The rant: “in 90% of the cases, nothing.”

Why? Because, in most instances, your fund manager simply doesn’t much matter. Some very fine funds are led by management teams (Manning & Napier, Dodge & Cox) and some fund firms have such strong and intentional corporate cultures (T. Rowe Price) that new managers mostly repeat the success of their predecessors. Most funds, and most larger funds in particular, are managed with an eye to unobjectionable mediocrity. The firm’s incentive is to gather and keep assets, not to be bold. As a result, managers are expected to avoid the sorts of strategies that risk landing them outside of the pack.

There are, however, some funds where the manager makes a huge difference. Those are often smaller, newer, boutique funds where management decisions are driven by ideas more compelling than “keep our institutional clients quiet.” You can read the whole story in “What to Do When Your Fund Manager Quits,” US News, August 6, 2012.

If you’ve ever read the Observer and (understandably) wondered “who is this loon and what is he up to?” there’s a reasonable article written by a young local reporter about the Observer and me. It’s a fairly wide-ranging discussion and includes pictures that led my departmental colleagues to begin a picture captioning contest. Anya and Chip both weigh in. “Augustana professor attracts international attention with investment site,” Rock Island Argus and Moline Dispatch, August 20, 2012.

Briefly Noted . . .

SMALL WINS FOR INVESTORS

Effective September 4, 2012, The Brown Capital Management Small Company Fund (BCSIX) will re-open for investment to all investors. Morningstar designates this as one of the Gold small-growth funds. Its returns are in the top 10% of its peer group for the past 5, 10 and 15 years. It strikes me as a bit bulky at $1.4 billion but it continues to perform. Average expenses, $5000 minimum, low turnover. (Special thanks to “The Shadow” for posting to the discussion board word of the Brown and ARIVX re-openings. S/he is so quick at finding this stuff that it’s scary.)

Jake Mortell of Candlewood Advisory writes to say that “One of the funds I am working with, The Versus Capital Multimanager Real Estate Income Fund (VCMRX) is reducing fees on the first $25 million in assets into the fund as a risk offset to early adopters. The waiver reduces fees from 95 bps to 50 bps on the first $25 million in assets to the fund for a period of 12 months.” It’s a closed-end fund managed by Callan Associates, famed for the Callan Periodic Table of Investment Returns.

CLOSINGS

Invesco Van Kampen High Yield Municipal (ACTHX) will close on September 4, 2012. The fund is huge ($7 billion), good (pretty consistently in the top 25% of its peer group over longer periods) and has been closed before.

Touchstone Small Cap Core Fund (TSFAX) will close to new investments on September 21, 2012. It’s an entirely decent fund that has drawn almost $500 million in under three years.

OLD WINE, NEW BOTTLES

In November, two perfectly respectable AllianceBernstein funds get rechristened. AllianceBernstein Small/Mid Cap Growth (CHCLX) becomes AllianceBernstein Discovery Growth while AllianceBernstein Small/Mid Cap Value (ABASX) will change to AllianceBernstein Discovery Value. Same managers, same mandate, different marketing.

AllianceBernstein Balanced Shares (CABNX) becomes AllianceBernstein Global Risk Allocation on Oct. 8, 2012. New managers and a new mandate (more global allocating will go on) follow.

Artio is changing Artio Global Equity’s (BJGQX) name to Artio Select Opportunities.

BlackRock Emerging Market Debt (BEDIX) will change its name to BlackRock Emerging Market Local Debt on Sept. 3, 2012. The fund also picked up a new management team (Sergio Trigo Paz, Raphael Marechal, and Laurent Develay), all of whom are new to BlackRock. .

In mid-August, Pax World Global Green Fund became Pax World Global Environmental Markets Fund (PGRNX, “pea green”? Hmmm…). It also became almost impossible to find at Morningstar. Search “Pax World” and you find nothing. The necessary abbreviation is “Pax Wld Glbl.” While it might be a nice idea, the fund has yet to generate the returns needed to validate its focus.

I failed to mention that PineBridge US Micro Cap Growth Fund became the Jacob Micro Cap Growth Fund (JMCGX). With the same management in place, it seems likely that the fund will continue to pursue the same high expense, high risk strategy that’s handicapped it for the past decade.

WisdomTree International Hedged Equity ETF became WisdomTree Europe Hedged Equity Fund (HEDJ – “hedge,” get it?) at the end of August. The argument is that if you hedge out the effects of the collapsing euro, there are some “export-driven European-based firms that pay dividends” which are great businesses selling at compelling valuations. The valuations are compelling, in part, because so many investors are (rightly) spooked by the euro and euro-zone financial stocks. Hedge one, avoid the other, et voila!

OFF TO THE DUSTBIN OF HISTORY

John Houseman, Smith Barney spokesperson.

Smith Barney passed away at age 75. Morgan Stanley is dropping the name from its brokerage unit in favor of Morgan Stanley Wealth Management. The Smith (1892) and Barney (1873) brokerages merged in 1938, with the resulting firm operating under a half dozen different monikers over the years. Investors of a certain age associate Smith Barney primarily with John Houseman, the actor who served as their spokesman (“They make money the old-fashioned way. They earn it”) in the late 1970s and 1980s. The change is effective this month.

SmartMoney, the magazine, is no more. Originally (1992) a joint venture between Hearst and Dow-Jones, Dow bought Heart’s take in the magazine in 2010. The final print issue, September 2012, went on newsstands on August 14. In one of those fine bits of bloodless corporate rhetoric, Dow-Jones admitted that “[a]pproximately 25 staff positions for the print edition are being impacted.” “Impacted.” Uh… eliminated. Subscribers have the option of picking up The Wall Street Journal or, in my case, Barron’s.

American Independence is liquidating its Nestegg series of target-date funds. The five funds will close at the end of August and cease operations at the end of September 2012. They’re the fourth firm (after Columbia, Goldman Sachs and Oppenheimer) to abandon the niche this summer.

BMO plans to liquidate BMO Large-Cap Focus (MLIFX).

In what surely qualifies as a “small win” for investors, Direxion is liquidating its nine triple-leveraged ETFs (for example, Direxion Daily BRIC Bear 3X Shares BRIS) by mid-September.

Dreyfus plans to merge Dreyfus/Standish Fixed Income (SDFIX) into Dreyfus Intermediate-Term Income (DRITX) in January 2013. Same manager on both.

DWS Clean Technology (WRMAX) is liquidating in September 2012.

FocusShares announced plans to close and liquidate its entire lineup of 15 exchange-traded funds, all of which have minimal asset levels. The Scottrade subsidiary, which launched its ETFs last year, cited current market conditions, the funds’ inability to draw assets and their future viability, as well as prospects for growth in the ETFs’ assets, for the closing.

Guggenheim Long Short Equity (RYJJX) and Guggenheim All Cap Value (SESAX) are both slated for liquidation. Apparently the Long-Short managers screwed up:

Due to unfavorable market conditions, the Long Short Equity Strategy Fund (the “Fund”) has assumed a defensive investment position in an effort to protect the current value of the Fund. While the Fund is invested in this manner, it does not invest in accordance with certain of its investment policies, including its investment policy to invest, under normal circumstances, at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities, and/or derivatives thereof.

With no assets, terrible returns and a portfolio turnover rate approaching 1000%, one hardly needed additional reasons to close the fund. All Cap Value is going just because it was tiny and bad.

Jones Villalta Opportunity Fund (JVOFX), managed by Messrs Jones and Villalta, is being liquidated on September 21. The fund had a great 2009 and a really good 2010, followed by miserable performance in 2011 and 2012. It never gained any market traction and the management finally gave up.

Marsico Emerging Markets (MERGX) will be liquidated on September 21, 2012. The fund, less than two years old, had a rotten 2011 and a mediocre 2012. One of its two managers, Joshua Rubin, resigned in July. Frankly, the larger factor might be that Marsico is in crisis and they simply couldn’t afford to deal with this dud in the midst of their other struggles. Star managers Doug Rao and Cory Gilchrist have both left in the past 12 months, leaving an awfully thin bench.

Nuveen Large Cap Value (FASKX) will likely merge into Nuveen Dividend Value (FFEIX) in October 2012. Nuveen Large Cap Value’s assets have dwindled to less than $140 million after several years of steady outflows. The move also makes sense as both funds are run by the same management team. Owners of Nuveen Large Cap Value should expect to see fees drop by 5 basis points as a result of the merger.

The Profit Opportunity (PROFX) fund has closed and will be liquidated by the end of September. It was minuscule (around $300,000), young (under two years) and inexplicably bad. PROFX is a small cap fund run by Eugene Profit, whose other small cap fund (Profit PVALX) is small but entirely first-rate. Odd disconnect.

Russell Investments is shutting down all 25 of its passively managed funds, with a combined total of over $310 million. The one ETF that will remain in operation is the Russell Equity ETF (ONEF) with $4.2 million in AUM. The shutdown will take place over the middle two weeks of October.

About the same time, Russell U.S. Value Fund (RSVIX) is merging in Russell U.S. Defensive Equity Fund (REQAX). They’re both closet index funds (R-squared of about 99) with mediocre records. The key difference is that REQAX is a large and reasonably profitable mediocre, closet-index fund. RSVIX was not.

Sterling Capital Management has filed to liquidate the Sterling Capital National Tax-Free Money Market, Sterling Capital Prime Money Market Fund, and Sterling Capital U.S. Treasury Money Market Fund. The funds will be liquidated on December 14, 2012.

Touchstone Intermediate Fixed Income (TCFIX) has been liquidated after poor performance led to the departure of a major shareholder.

In Closing . . .

Each month we highlight changes in the fund world that you might not otherwise notice. This month we’ve found a near-record 69 fund manager changes. In addition, there are 10 new funds in registration with the SEC. They are not yet available for sale but knowing about them (say, for example, Wasatch’s new focused Emerging Markets fund) might help your planning. Most will come on the market by Thanksgiving.

In about a week the discussion board is undergoing a major software upgrade. Chip and Accipiter have built some cool new functions into the latest version of Vanilla. Chip highlights these:

There’s an add-on that will let folks more easily format their posts: a hyperlink function (much requested) and easy images are part of it;
A polling add-on that will allow us to quickly survey members;
Enhancements to the administration of the discussion board;
Pop up alerts, that you can choose to enable or disable, to notify you when certain content is updated or posts are responded to; and most importantly
We’ll be able to take advantage of some of cool add-ons that Accipiter’s been working over the past months.

We might be offline for a couple hours, but we’ll post a notice of the exact time well in advance.

I’m often amazed at what goes on over there, by the way. There have been over 2.5 million pageviews and 3300 discussions launched. That’s made possible by a combination of the wit and generosity of the posters and the amazing work that Chip and Accipiter have done in programming and reprogramming the board to make it ever more responsive to folks’ needs (and now to Old Joe’s willingness to turn his considerable talents as a technical writer to the production of a User’s Guide for newcomers). Quiet thanks to you all.

Following from the enthusiasm of the folks on our discussion board, we’re scheduled to profile T. Rowe Price Real Assets PRAFX (waves to Polina! It’s sort of a “meh” fund but is looking like our best no-load option), Artisan Global Equity ARTHX (“hey, Investor. I’ve been putting this one off because I was starting to feel like a shill for Artisan. They’ve earned the respect, but still …”) and the Whitebox funds (subject of a Barron’s profile and three separate discussion threads. Following our conversation with David Sherman at Cohanzick, we have an update of RiverPark Short Term High Yield (RPHYX) in the works and owe one for the splendid, rapidly growing RiverPark Wedgewood Growth (RPGFX) fund.

The following announcement is brought to you by Investor, a senior member of the Observer’s discussion community:

And speaking of fall, it’s back-to-school shopping time! If you’re planning to do some or all of your b-t-s shopping online, please remember to Use the Observer’s link to Amazon.com. It’s quick, painless and generates the revenue (equal to about 6% of the value of your purchases) that helps keep the Observer going.

My theory is that if I keep busy enough, I won’t notice either the daily insanity of the market or what happens next to the Steelers’ increasingly fragile O-line.

We’ll look for you then,

August 1, 2012

Dear friends,

Welcome to the Summer Break edition of the Mutual Fund Observer. I’m writing from idyllic Ephraim, Wisconsin, a beautiful little village in Door County on the shores of Green Bay. Here’s a quick visual representation of how things are going:

Thanks to Kathy Glasnap, a very talented artist who has done some beautiful watercolors of Door County, for permission to use part of one of her paintings (“All in a Row”). Whether or not you’ve (yet) visited the area, you should visit her gallery online at http://www.glasnapgallery.com/

Chip, Anya, Junior and I bestirred ourselves just long enough to get up, hit <send>, refill our glasses with sangria and settle back into a stack of beach reading and a long round of “Mutual Fund Truth or Dare.” (Don’t ask.)

In celebration of the proper activities of summer (see above), we offer an abbreviated Observer.

MFO in Other Media: David on Chuck Jaffe’s MoneyLife Radio Show

I’ll be the first to admit it: I have a face made for radio and a voice made for print. Nonetheless, I was pleased to make an appearance on Chuck Jaffe’s MoneyLife radio show (which is also available as a podcast). I spoke about three of the funds that we profiled this month, and then participated in a sort of “stump the chump” round in which I was asked to offer quick-hit opinions in response to listener questions.

Dodge & Cox Global Stock (DODWX) for Rick in York, Pa. It’s easy to dismiss DODWX if you’ve give a superficial glance at its performance. The fund cratered immediately after launch in 2008 when the managers bought financial stocks that were selling at a once-in-a-generation price only to see them fall to a once-in-a-half-century price. But those purchases set up a ferocious run in 2009. It was hurt in 2011 by an oversized emerging markets stake which paid off handsomely in the first quarter of 2012. It’s got a great management team and an entirely sensible investment discipline. It’ll be out-of-step often enough but will, in the long run, be a really good investment.

Fidelity Emerging Markets (FEMKX) for Brad in Cazenovia, NY. My bottom line was “it’s not as bad as it used to be, but there’s still no compelling reason to own it.” If you’re investing with Fido, their new Fidelity Total Emerging Markets (FTEMX) is a more much intriguing option.

Leuthold Core Investment (LCORX) for Scott in Redmond, Ore. This was the original go-anywhere fund, born of Leuthold’s sophisticated market analysis service. Quant driven, quite capable of owning pallets of lead or palladium. Brilliant for years but, like many computer-driven funds, largely hamstrung lately by the market’s irrational jerks and twitches. If you anticipate a return to a more-or-less “normal” market where returns aren’t driven by fears of the Greeks, it’s likely to resume being an awfully attractive, conservative holding.

Matthews Asia Dividend Fund (MAPIX) for Robert in Steubenville, Ohio. With Matthews Asian Growth & Income (MACSX), this fund has the best risk-return profile of any Asian-focused fund. The manager invests in strong companies with lots of free cash flow and a public commitment to their dividend. What it lacks in MACSX’s bond and convertibles holdings, it makes up for in good country selection and stock picking. If you want to invest in Asia, Matthews is the place to start.

T. Rowe Price Capital Appreciation (PRWCX) for Dennis in Strongsville, Ohio. PRWCX usually holds about 65% of the portfolio in large, domestic dividend-paying stocks and a third in other income-producing securities. Traditionally the fund held a lot of convertible securities though David Giroux, manager since 2006, has held a bit more stock and fewer converts. The fund has lost money once in a quarter century and a former manager chuckled over the recollection that Price’s internal allocation models kept coming to the same conclusion: “invest 100% in PRWCX.”

MFO in Other Media: David on “The Best Fund for the Next Six Months … and Beyond”

Early in July, John Waggoner wrote to ask for recommendations for “the remainder of 2012.” Answers from three “mutual fund experts” (I shudder) appear in John’s July 5^th column. Dan Wiener tabbed PrimeCap Odyssey Aggressive Growth (POAGX) and Jim Lowell picked Fidelity Total Emerging Markets (FTEMX). I highlighted the two most recent additions to my non-retirement portfolio:

RiverPark Short Term High Yield (RPHYX), which I described as “one of the most misunderstood funds I cover. It functions as a cash management fund for me — 3% to 4% returns with (so far) negligible volatility. Its greatest problem is its name, which suggests that it invests in short-term, high-yield bonds (which, in general, it doesn’t) or that it has the risk profile of a high-yield fund (ditto).”

David Sherman, the manager, stresses that RPHYX “is not an ATM machine.” That said, the fund returned 2.6% in the first seven months of 2012 with negligible volatility (the NAV mostly just drops with the month-end payouts). That’s led to a Sharpe ratio above 3, which is simply great. Mr. Sherman says that he thinks of it as a superior alternative to, say, laddered bonds or CDs. While in a “normal” bond market this will underperform a diversified fund with longer durations, in a volatile market it might well outperform the vast majority.

Seafarer Overseas Growth & Income (SFGIX), driven by the fact that Mr. Foster “performed brilliantly at Matthews Asian Growth & Income (MACSX), which was the least volatile (hence most profitable) Asian fund for years. With Seafarer, he’s able to sort of hedge a MACSX-like portfolio with limited exposure to non-Asian emerging markets. The strategy makes sense, and Mr. Foster has proven able to consistently execute it.”

SFGIX has substantially outperformed the average emerging-Asia, Latin America and diversified emerging markets fund in the months since its launch, though it trails MACSX. The folks on our discussion board mostly maintain a “deserves to be on the watch-list” stance, based mostly on MACSX’s continued excellence. I’m persuaded by Mr. Foster’s argument on behalf of a portfolio that’s still Asia-centered but not Asia exclusively.

Seafarer Overseas Piques Morningstar’s Interest

One of Morningstar’s most senior analysts, Gregg Wolper, examined the struggles of two funds that should be attracting more investor interest than they are, in “Two Young Funds Struggle to Get Noticed” (July 31, 2012).

One is TCW International Small Cap (TGICX) which launched in March 2011. It’s an international small-growth fund managed by Rohit Sah. Sah had “an impressive if volatile record” in seven years at Oppenheimer International Small Company (OSMAX). The problem is that Sah has a high-volatility strategy even by the standards of a high-volatility niche, which isn’t really in-tune with current investor sentiment. Its early record is mostly negative which isn’t entirely surprising. No load, $2000 investment minimum, 1.44% expense ratio.

The other is Seafarer Overseas Growth and Income (SFGIX). Wolper recognizes Mr. Foster’s “impressive record” at Matthews and his risk-conscious approach to emerging markets investing. “His fund tries to cushion the risks of emerging-markets investing by owning less-volatile, dividend-paying stocks and through other means, and in fact over the past three months it has suffered a much more moderate loss than the average diversified emerging-markets fund.” Actually, from inception through July 31 2012, Seafarer was up by 0.4% while the average emerging markets fund had lost 7.4%.

Mr. Wolper concludes that when investors’ appetite for risk returns, these will both be funds to watch:

At some point, though, certain investors will be looking for a bold fund to fill a small slot in their portfolio. Funds with modest asset bases have more flexibility than their more-popular rivals to own smaller, less-liquid stocks in less-traveled markets should they so choose. For that reason, it’s worth keeping these offerings in mind. Their managers are accomplished, and though there are caveats with each, including their cost, they feature strategies that are not easy to find at rival choices.

It’s What Makes Yahoo, Yahoo

Archaic, on the Observer’s discussion board, complained, “When I use Yahoo Finance to look at a particular fund … [its] Annual Total Return History, the history is complete through 2010 but ends there. No 2011. Anyone know why?”

The short answer is: because it’s Yahool. This is a problem that Yahoo has known about for months, but has been either unable or unmotivated to correct. Here’s their “Help” page on the problem:

I added a large arrow only because I don’t know how to add either a flashing one or an animated GIF of a guy slapping himself on the forehead. Yahoo has known about this problem for at least three months without correcting it.

Note to Marissa Mayer, Yahoo’s new CEO: Yahoo describes itself as “a company that helps consumers find what they are looking for and discover wonders they didn’t expect.” In this case, we’re looking for 2011 data and the thing we wonder about is what it says about Yahoo’s corporate culture and competence. Perhaps you might check with the folks at Morningstar for an example of how quickly and effectively a first-rate organization identifies, addresses and corrects problems like this.

Too Soon Gone: Eric Bokota and FPA International Value (FPIVX)

I had the pleasure of a long conversation with Eric Bokota at the Morningstar Investment Conference in June. I was saddened to hear that events in his private life have obliged him to resign from FPA. The FPA folks seemed both deeply saddened and hopeful that one day he’ll return. I wish him Godspeed.

Four Funds That Are Really Worth Your Time (even in summer!)

FPA International Value (FPIVX): led by Oakmark alumnus Pierre Py, FPA’s first new fund in almost 30 years has the orientation, focus, discipline and values to match FPA’s distinguished brand.

ING Corporate Leaders Trust (LEXCX): the ghost ship of the fund world sails into its 78^th year, skipperless and peerless.

RiverPark Long/Short Opportunity Fund (RLSFX): RiverPark’s successful hedge, now led by a guy who’s been getting it consistently right for almost two decades, is now available for the rest of us.

The Cook and Bynum Fund (COBYX): you think your fund is focused? Feh! You don’t know focused until you’ve met Messrs. Cook and Bynum.

The Best Small Fund Websites: Seafarer and Cook & Bynum

The folks at the Observer visit scores of fund company websites each month and it’s hard to avoid the recognition that most of them are pretty mediocre. The worst of them post as little content as possible, updated as rarely as possible, signaling the manager’s complete disdain for the needs and concerns of his (and very rarely, her) investors.

Small fund companies can’t afford such carelessness; their prime distinction from the industry’s bloated household names is their claim to a different and better relationship with their investors. If investors are going to win the struggle against the overwhelming urge to buy high and leave in a panic, they need a rich website and need to use it. If they can build a relationship of trust and understanding with their managers, they’ve got a much better chance of holding through rough stretches and profiting from rich ones.

This month, Junior and I enlisted the aid of two immensely talented web designers to help us analyze three dozen small fund websites in order to find and explain the best of them. One expert is Anya Zolotusky, designer of the Observer’s site and likely star of a series of “Most Interesting Woman in the World” sangria commercials. The other is Nina Eisenman, president of Eisenman Associates and founder of FundSites, a firm which helps small to mid-sized fund companies design distinctive and effective websites.

If you’re interested in why Seafarer and Cook & Bynum are the web’s best small company sites, and which twelve earned “honorable mention” or “best of the rest” recognition, the entrance is here!

Launch Alert: RiverNorth and Manning & Napier, P. B. and Chocolate

Two really good fund managers are combining forces. RiverNorth/Manning & Napier Dividend Income (RNMNX) launched on July 18^th. The fund is a hybrid of two highly-successful strategies: RiverNorth’s tactical allocation strategy based, in part, on closed-end fund arbitrage, and Manning & Napier’s largely-passive dividend focus strategy. Both are embedded in freestanding funds, though the RiverNorth fund is closed to new investors. There’s a lively discussion of the fund and, in particular, whether it offers any distinct value, on our discussion board. The minimum investment is $5000 and we’re likely to profile the fund in October.

Briefly Noted . . .

As a matter of ongoing disclosure about such things, I want to report several changes in my personal portfolio that touch on funds we’ve profiled or will soon profile. In my non-retirement portfolio, I sold off part of my holdings of Matthews Asian Growth and Income (MACSX) and invested the proceeds in Seafarer Overseas Growth & Income (SFGIX). As with all my non-retirement funds, I’ve established an automatic investment plan in Seafarer. In my retirement accounts, I sold my entire position in Fidelity Diversified International (FDIVX) and Canada (FICDX) and invested the proceeds in a combination of Global Balanced (FGBLX) and Total Emerging Markets (FTEMX). FDIVX has gotten too big and too index-like to justify inclusion and Canada’s new-ish manager is staggering around, and I’m hopeful that the e.m. exposure in the other two funds will be a significant driver while the fixed-income components offer some cushion. Finally, also in my retirement accounts, I sold T. Rowe Price New Era (PRENX) and portions of two other funds to buy Real Assets Fund (PRAFX). What can I say? Jeremy Grantham is very persuasive.

SMALL WINS FOR INVESTORS

A bunch of funds have tried to boost their competitiveness by cutting expenses or at least waiving a portion of them.

Cohen & Steers Dividend Value (DVFAX) will limit fund expenses to 1.00% for A shares through June 2014.

J.P. Morgan announced 9 basis point cuts for JP Morgan US Dynamic Plus (JPSAX) and JP Morgan US Large Cap Core Plus (JLCAX).

Legg Mason capped expenses on Legg Mason BW Diversified Large Cap Value (LBWAX) at between 0.85% – 1.85%, depending on share class.

Madison Investment Advisors cuts fees on Madison Mosaic Investors (MINVX) by 4 bps, Madison Mosaic Mid Cap (GTSGX) by 10, and Madison Mosaic Dividend Income (BHBFX, formerly Balanced) by 30.

Managers is dropping fees for Managers Global Income Opportunity (MGGBX), Managers Real Estate Securities (MRESX), and Managers AMG Chicago Equity Partners Balanced (MBEAX) by 11 – 16 bps.

Alger Small Cap Growth (ALSAX) and its institutional brother reopened to new investors on Aug. 1, 2012. It was once a really solid fund but it’s been sagging in recent years so your ability to get into it really does qualify as a “small win.”

CLOSINGS

Columbia Small Cap Value (CSMIX) has closed to new investors. 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

Just as a reminder, the distinguished no-load Marketfield (MFLDX) will become the load-bearing MainStay Marketfield Fund on Oct. 5, 2012. The Observer profile of Marketfield appeared in July.

At the end of September, Lord Abbett Capital Structure (LAMAX), a billion dollar hybrid fund, will be relaunched as Lord Abbett Calibrated Dividend Growth, with a focus on dividend-paying stocks and new managers: Walter Prahl and Rick Ruvkun. No word about why.

Invesco announced it will cease using the Van Kampen name on its funds in September. By way of example, Invesco Van Kampen American Franchise “A” (VAFAX) will simply be Invesco American Franchise “A”.

Oppenheimer Funds is buying and renaming the five SteelPath funds, all of which invest in master limited partnerships and all of which have sales loads. There was a back door into the fund, which allowed investors to buy them without a load, but that’s likely to close.

OFF TO THE DUSTBIN OF HISTORY

BlackRock is merging its S&P 500 Index (MDSRX) and Index Equity (PNIEX) funds into BlackRock S&P 500 Stock (WFSPX). And no, I have no idea of what sense it made to run all three funds in the first place.

DWS Clean Technology (WRMAX) will be liquidated in October 2012.

Several MassMutual funds (Strategic Balanced, Value Equity, Core Opportunities, and Large Cap Growth) were killed-off in June 2012.

Oppenheimer is killing off their entry into the retirement-date fund universe by merging their regrettable Transition Target-Date into their regrettable static allocation hybrid funds. Oppenheimer Transition 2030 (OTHAX), 2040 (OTIAX), and 2050 (OTKAX) will merge into Active Allocation (OAAAX). The shorter time-frame Transition 2015 (OTFAX), 2020 (OTWAX), and 2025 (OTDAX) will merge into Moderate Investor (OAMIX). Transition 2010 (OTTAX) will, uhhh … transition into Conservative Investor (OACIX). The same management team oversaw or oversees the whole bunch.

Goldman Sachs took the easier way out and announced the simple liquidation of its entire Retirement Strategy lineup. The funds have already closed to new investors but Goldman hasn’t yet set a date for the liquidation. It’s devilishly difficult to compete with Fidelity, Price and Vanguard in this space – they’ve got good, low-cost products backed up by sophisticated allocation modeling. As a result they control about three-quarters of the retirement/target-date fund universe. If you start with that hurdle and add mediocre funds to the mix, as Oppenheimer and Goldman did, you’re somewhere between “corpse” and “zombie.”

Touchstone Emerging Markets Equity II (TFEMX), a perfectly respectable performer with few assets, is merging into Touchstone Emerging Markets Equity (TEMAX). Same management team, similar strategies.

In a “scraping their name off the door” move, ASTON has removed M.D. Sass Investors Services as a subadvisor to ASTON/MD Sass Enhanced Equity (AMBEX). Anchor Capital Advisors, which was the other subadvisor all along, now gets its name on the door at ASTON/Anchor Capital Enhanced Equity.

Destra seems already to have killed off Destra Next Dimension (DLGSX), a tiny global stock fund managed by Roger Ibbotson.

YieldQuest Total Return Bond (YQTRX), one of the first funds I profiled as an analyst for FundAlarm, has finally ceased operations. (P.S., it was regrettable even six years ago.)

In Closing . . .

Some small celebrations and reminders. This month the Observer passed its millionth pageview on the main site with well over two million additional pageviews on our endlessly engaging discussion board (hi, guys!). We’re hopeful of seeing our 100,000^th new reader this fall.

Speaking of the discussion board, please remember that registration for participating in the board is entirely separate from registering to receive our monthly email reminder. Signing up for board membership, a necessary safeguard against increasingly agile spambots, does not automatically get you on the email list and vice versa.

And speaking of fall, it’s back-to-school shopping time! If you’re planning to do some or all of your b-t-s shopping online, please remember to Use the Observer’s link to Amazon.com. It’s quick, painless and generates the revenue (equal to about 6% of the value of your purchases) that helps keep the Observer going. Once you click on the link, you may want to bookmark it so that your future Amazon purchases are automatically and invisibly credited to the Observer. Heck, you can even share the link with your brother-in-law.

A shopping lead for the compulsive-obsessive among you: How to Sharpen Pencils: A Practical & Theoretical Treatise on the Artisanal Craft of Pencil Sharpening for Writers, Artists, Contractors, Flange Turners, Anglesmiths, & Civil Servants (2012). The book isn’t yet on the Times’ bestseller lists, though I don’t know why.

A shopping lead for folks who thought they’d never read poems about hedge funds: Katy Lederer’s The Heaven-Sent Leaf (2008). Lederer’s an acclaimed poet who spent time working at, and poetrifying about, a New York hedge fund.

In September, we’ll begin looking at the question “do you really need to buy a dedicated ‘real assets’ fund?” T. Rowe Price has incorporated one into all of their retirement funds and Jeremy Grantham is increasingly emphatic on the matter. There’s an increasing area of fund and ETF options, including Price’s own fund which was, for years, only available to the managers of Price funds-of-funds.

We’ll look for you.

June 1, 2012

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

2011 – 12	13 funds
2010	16 funds
2009	7 funds
Pre-2009	34 funds

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:

Number that outperformed a short-term bond index fund (up 3%) in 2011	11 of 59
Number that outperformed a short-term bond index fund from May 2011 – May 2012	6 of 62
Number that outperformed a short-term bond index over three years, May 2010 – May 2012	21 of 32
Number that outperformed a short-term bond index over five years, May 2008 – May 2012	1 of 22
Number in the red over the past five years	13 of 22
Number that outperformed a short-term bond index fund in 2008	0 of 25

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.

Name of Trustee (names in the original, just initials here)	Number of Portfolios in Fund Complex Overseen by Trustee	Total Compensation Paid to Directors	Aggregate Dollar Range of Equity Securities in All Registered Investment Companies Overseen by Trustee in Family of Investment Companies
LMB	95	$65,000	None
AJH	95	$77,500	None
GL	95	$65,000	None
MT	95	$65,000	None
MM	95	none	None

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.

	Profiled e.r.	Fund Spy e.r.
Leuthold Global	1.55%	1.55%
PIMCO All Asset, A	1.38	0.76
PIMCO All Asset, D	1.28	0.56
Northern Global Tact Alloc	0.68	0.25
Vanguard STAR	0.34	0.00
FPA Crescent	1.18	1.18
Price Spectrum Income	0.69	0.00

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.

	Profiled turnover	Fund Screener turnover
Allianz NFJ Small Cap Value (PCVAX)	26	9
Consulting Group SCV (TSVUX)	38	9
Hotchkis and Wiley SCV (HWSIX)	54	11
JHFunds 2 SCV (JSCNX)	15	9
Northern Small Cap Value (NOSGX)	21	6
Queens Road Small Cal (QRSVX)	38	9
Robeco SCV I (BPSCX)	38	6
Bridgeway Omni SCV (BOSVX)	n/a	Registers as <12%

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.

A mid-month update:

The folks at Morningstar looked into these 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. 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. Once they recognized the inconsistency, they moved quickly to reconcile it. As of June 19, the data had been reconciled. Thanks to the Wizards on West Wacker for their quick work. We’ll have a slightly more complete update in our July issue.

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:

I don’t know
Other parts of the agency aren’t returning our phone calls
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:

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

and

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!

April 1, 2012

Dear friends,

Are you feeling better? 2011 saw enormous stock market volatility, ending with a total return of one-quarter of one percent in the total stock market. Who then would have foreseen Q1 2012: the Dow and S&P500 posted their best quarter since 1998. The Dow posted six consecutive months of gains, and ended the quarter up 8%. The S&P finished up 12% and the NASDAQ up 18% (its best since 1991).

Strong performance is typical in the first quarter of any year, and especially of a presidential election year. Investors, in response, pulled $9.4 billion out of domestic equity funds and – even with inflows into international funds – reduced their equity investments by $3.2 billion dollars. They fled, by and large, into the safety of the increasingly bubbly bond market.

It’s odd how dumb things always seem so sensible when we’re in the midst of doing them.

Do You Need Something “Permanent” in your Portfolio?

The title derives from the Permanent Portfolio concept championed by the late Harry Browne. Browne was an advertising executive in the 1960s who became active in the libertarian movement and was twice the Libertarian Party’s nominee for president of the United States. In 1981, he and Terry Coxon wrote Inflation-Proofing Your Investments, which argued that your portfolio should be positioned to benefit from any of four systemic states: inflation, deflation, recession and prosperity. As he envisioned it, a Permanent Portfolio invests:

25% in U.S. stocks, to provide a strong return during times of prosperity.

25% in long-term U.S. Treasury bonds, which should do well during deflation.

25% in cash, in order to hedge against periods of recession.

25% in precious metals (gold, specifically), in order to provide protection during periods of inflation.

The Global X Permanent ETF (PERM) is the latest attempt to implement the strategy. It’s also the latest to try to steal business from Permanent Portfolio Fund (PRPFX) which has drawn $17.8 billion in assets (and, more importantly from a management firm’s perspective, $137 million in fees for an essentially passive strategy). Those inflows reflect PRPFX’s sustained success: over the past 15 years, it has returned an average of 9.2% per year with only minimal stock market exposure.

PRPFX is surely an attractive target, since its success not attributable to Michael Cuggino’s skill as a manager. His stock picking, on display at Permanent Portfolio Aggressive Growth (PAGRX) is distinctly mediocre; he’s had one splendid year and three above-average ones in a decade. It’s a volatile fund whose performance is respectable mostly because of his top 2% finish in 2005. His fixed income investing is substantially worse. Permanent Portfolio Versatile Bond (PRVBX) and Permanent Portfolio Short Term Treasury (PRTBX) are flat-out dismal. Over the past decade they trail 95% of their peer funds. All of his funds charge above-average expenses. Others might conclude that PRPFX has thrived despite, rather than because of, its manager.

Snowball’s annual rant: Despite having received $48 million as his investment advisory fee (Mr. Cuggino is the advisor’s “sole member,” president and CEO), he’s traditionally been shy about investing in his funds though that might be changing. “As of April 30, 2010,” according to his Annual Report, “Mr. Cuggino owned shares in each of the Fund’s Portfolios through his ownership of Pacific Heights.” A year later, that investment is substantially higher but corporate and personal money (if any) remain comingled in the reports. In any case, he “determines his own compensation.” That includes some portion of the advisor’s profits and the $65,000 a year he pays himself to serve on his own board of trustees. On the upside, the advisor has authorized a one basis point fee waiver, as of 12/31/11. Okay, that’s over. I promise I’ll keep quiet on the topic until the spring of 2013.

It’s understandable that others would be interested in getting a piece of that highly-profitable action. It’s surprising that so few have made the attempt. You might argue that Hussman Strategic Total Return (HSTRX) offers a wave in the same direction and the Midas Perpetual Portfolio (MPERX), which invests in a suspiciously similar mix of precious metals, Swiss francs, growth stocks and bonds, is a direct (though less successful) copy. Prior to December 29, 2008, MPERX (then known as Midas Dollar Reserves) was a government money market fund. That day it changed its name to Perpetual Portfolio and entered the Harry Browne business.

A simple portfolio comparison shows that neither PRPFX nor MPERX quite matches Browne’s simple vision, nor do their portfolios look like each other.

	Permanent Portfolio	Permanent ETF	Perpetual Portfolio targets
Gold and silver	24%	25%	25
Swiss francs	10%	–	10
Stocks	25%	25%	30
Aggressive growth	16.5	15	15
Natural resource companies	8	5	15
REITs	8	5
Bonds	34%	50%	35
Treasuries, long term	~8	25
Treasuries, short-term	~16	25
Corporate, short-term	6.5	–

Expense ratio for the fund	0.77%	0.49%	1.35%

Should you invest in one, or any, of these vehicles? If so, proceed with extreme care. There are three factors that should give you pause. First, two of the four underlying asset classes (gold and long-term bonds) are three decades into a bull market. The projected future returns of gold are unfathomable, because its appeal is driven by psychology rather than economics, but its climb has been relentless for 20 years. GMO’s most recent seven-year asset class projections show negative real returns for both bonds and cash. Second, a permanent portfolio has a negative correlation with interest rates. That is, when interest rates fall – as they have for 30 years – the funds return rises. When interest rates rise, the returns fall. Because PRPFX was launched after the Volcker-induced spike in rates, it has never had to function in a rising rate environment. Third, even with favorable macro-economic conditions, this portfolio can have long, dismal stretches. The fund posts its annual returns since inception on its website. In the 14 years between 1988 and 2001, the fund returned an average of 4.1% annually. During those same years inflation average 3% annually, which means PRPFX offered a real return of 1.1% per year.

And, frankly, you won’t make it to any longer-term goal with 1.1% real returns.

There are two really fine analyses of the Permanent Portfolio strategy. Geoff Considine penned “What Investors Should Fear in the Permanent Portfolio” for Advisor Perspectives (2011) and Bill Bernstein wrote a short piece “Wild About Harry” for the Efficient Frontier (2010).

RiverPark Funds: Launch Alert and Fund Family Update

RiverPark Funds are making two more hedge funds available to retail investors, folks they describe as “the mass affluent.” Given the success of their previous two ventures in that direction – RiverPark/Wedgewood Fund (RWGFX) and RiverPark Short Term High Yield (RPHYX, in which I have an investment) – these new offerings are worth a serious look.

RiverPark Long/Short Opportunity Fund is a long/short fund that has been managed by Mitch Rubin since its inception as a hedge fund in the fall of 2009. The RiverPark folks believe, based on their conversation with “people who are pretty well versed on the current mutual funds that employ hedge fund strategies” that the fund has three characteristics that set it apart:

it uses a fundamental, bottom-up approach
it is truly shorting equities (rather than Index ETFs)
it has a growth bias for its longs and tends to short value.

Since inception, the fund generated 94% of the stock market’s return (33.5% versus 35.8% for the S&P500 from 10/09 – 02/12) with only 50% of its downside risk (whether measured by worst month, worst quarter, down market performance or max drawdown).

While the hedge fund has strong performance, it has had trouble attracting assets. Morty Schaja, RiverPark’s president, attributes that to two factors. Hedge fund investors have an instinctive bias against firms that run mutual funds. And RiverPark’s distribution network – it’s most loyal users – are advisors and others who are uninterested in hedge funds. It’s managed by Mitch Rubin, one of RiverPark’s founders and a well-respected manager during his days with the Baron funds. The expense ratio is 1.85% on the institutional shares and 2.00% on the retail shares and the minimum investment in the retail shares is $1000. It will be available through Schwab and Fidelity starting April 2, 2012.

RiverPark/Gargoyle Hedged Value Fund pursued a covered call strategy. Here’s how Gargoyle describes their investment strategy:

The Fund invests all of its assets in a portfolio of undervalued mid- to large-cap stocks using a quantitative value model, then conservatively hedges part of its stock market risk by selling a blend of overvalued index call options, all in a tax-efficient manner. Proprietary tools are used to maintain the Fund’s net long market exposure within a target range, allowing investors to participate as equities trend higher while offering partial protection as equities trend lower.

Since inception (January 2000), the fund has posted 900% of the S&P500’s returns (150% versus 16.4%, 01/00 – 02/12). Much of that outperformance is attributable to crushing the S&P from 2000-2002 but the fund has still outperformed the S&P in 10 of 12 calendar years and has done so with noticeably lower volatility. Because the strategy is neither risk-free nor strongly correlated to the movements of the stock market, it has twice lost a little money (2007 and 2011) in years in which the S&P posted single-digit gains.

Mr. Schaja has worked with this strategy since he “spearheaded a research effort for a similar strategy while at Donaldson Lufkin Jenrette 25 years ago.” Given ongoing uncertainties about the stock market, he argues “a buy-write strategy, owning equities and writing or selling call options on the underlying portfolio offers a very attractive risk return profile for investors. . . investors are willing to give up some upside, for additional income and some downside protection. By selling option premium of about 1 1/2% per month, the Gargoyle approach can generate attractive risk adjusted returns in most markets.”

The hedge fund has about $190 million in assets (as of 02/12). It’s managed by Joshua Parker, President of Gargoyle, and Alan Salzbank, its Managing Partner – Risk Management. The pair managed the hedge fund since inception (including of its predecessor partnership since its inception in January 1997). The expense ratio is 1.25% on the institutional shares and 1.5% on the retail shares and the minimum investment in the retail shares is $1000. The challenge of working out a few last-minute brokerage bugs means that Gargoyle will launch on May 1, 2012.

Other RiverPark notes:

RiverPark Large Growth (RPXFX) is coming along nicely after a slow start. It’s a domestic, mid- to large-cap growth fund with 44 stocks in the portfolio. Mitch Rubin, who managed Baron Growth, iOpportunity and Fifth Avenue Growth as various points in his career, manages it. Its returns are in the top 3% of large-growth funds for the past year (through March 2012), though its asset base remains small at $4 million.

RiverPark Small Cap Growth (RPSFX) continues to have … uh, “modest success” in terms of both returns and asset growth. It has outperformed its small growth peers in six of its first 17 months of operation and trails the pack modestly across most trailing time periods. It’s managed by Mr. Rubin and Conrad van Tienhoven.

RiverPark/Wedgewood Fund (RWGFX) is a concentrated large growth fund which aims to beat passive funds at their own game. It’s been consistently at or near the top of the large-growth pack since inception. David Rolfe, the manager, strikes me as bright, sensible and good-humored and the fund has drawn $200 million in assets in its first 18 months of operation.

RiverPark Short Term High Yield (RPHYX) pursues a distinctive, and distinctly attractive, strategy. He buys a bunch of securities (called high yield bonds among them) which are low-risk and inefficiently priced because of a lack of buyers. The key to appreciating the fund is to utterly ignore Morningstar’s peer rankings. He’s classified as a “high yield bond fund” despite the fact that the fund’s objectives and portfolio are utterly unrelated to such funds. It’s best to think of it as a sort of cash-management option. The fund’s worst monthly loss was 0.24% and its worst quarter was 0.07%. As of 3/28/12, the fund’s NAV ($10.00) is the same as at launch but its annual returns are around 4%.

Finally, a clarification. I’ve fussed at RiverPark in the past for being too quick to shut down funds, including one mutual fund and several actively-managed ETFs. Matt Kelly of RiverPark recently wrote to clear up my assumption that the closures were RiverPark’s idea:

Adam Seessel was the sub-adviser of the RiverPark/Gravity Long-Biased Fund. . . Adam became friendly with Frank Martin who is the founder of Martin Capital Management . . . a year ago, Frank offered Adam his CIO position and a piece of the company. Adam accepted and shortly thereafter, Frank decided that he did not want to sub-advise anyone else’s mutual fund so we were forced to close that fund.

Back in 2009, [RiverPark president Morty Schaja] teamed up with Grail Advisers to launch active ETFs. Ameriprise bought Grail last summer and immediately dismissed all of the sub-advisers of the grail ETFs in favor of their own managers.

Thanks to Matt for the insight.

FundReveal, Part 2: An Explanation and a Collaboration

For our “Best of the Web” feature, my colleague Junior Yearwood sorts through dozens of websites, tools and features to identify the handful that are most worth your while. On March 1, he identified the low-profile FundReveal service as one of the three best mutual fund rating sites (along with Morningstar and Lipper). The award was made based on the quality of evidence available to corroborate a ratings system and the site’s usability.

Within days, a vigorous and thoughtful debate broke out on the Observer’s discussion board about FundReveal’s assumptions. Among the half dozen questions raised, two in particular seemed to resonate: (1) isn’t it unwise to benchmark everything – including gold and short-term bond funds – against the risk and return profile of the S&P 500? And (2) you assume that past performance is not predictive, but isn’t your system dependent on exactly that?

I put both of those questions to the guys behind FundReveal, two former Fidelity executives who had an important role to play in changing the way trading decisions were made and employees rewarded. Here’s the short version of their answers. Fuller versions are available on their blog.

(1) Why does FundReveal benchmark all funds against the S&P? Does the analysis hold true if other benchmarks are used?

FundReveal uses the S&P 500 as a single, consistent reference for comparing performance between funds, for 4 of its 8 measures. The S&P also provides a “no-brainer” alternative to any other investments, including mutual funds. If an investor wishes to participate in the market, without selecting specific sectors or securities, an S&P 500 index fund or ETF provides that alternative.

Four of FundReveal’s eight measurements position funds relative to the index. Four others are independent of the S&P 500 index comparison.

An investor can compare a fund’s risk-return performance against any index fund by simply inserting the symbol of an index fund that mimics the index. Then the four absolute measures for a fund (average daily returns, volatility of daily returns, worst case return and number of better funds) can be compared against the chosen index fund.

ADR and Volatility are the most direct and closest indicators of a mutual fund’s daily investment and trading decisions. They show how well a fund is being managed. High ADR combined with low Volatility are indicators of good management. Low ADR with high Volatility indicates poor management.

(2) Why is it that FundReveal says that past total returns are not useful in deciding which funds to invest in for the future? Why do your measures, which are also calculated from past data, provide insight into future fund performance?

Past total returns cannot indicate future performance. All industry performance ratings contain warnings to this effect, but investors continue using them, leading to “return chasing investor behavior.”

[A conventional calculations of total return] includes the beginning and ending NAV of a fund, irrespective of the NAVs of the fund during the intervening time period. For example, if a fund performed poorly during most of the days of a year, but its NAV shot up during the last week of the year, its total return would be high. The low day-to-day returns would be obscured. Total Return figures cannot indicate the effectiveness of investment decisions made by funds every day.

Mutual funds make daily portfolio and investment decisions of what and how much to hold, sell or buy. These decisions made by portfolio managers, supported by their analysts and implemented by their traders, produce daily returns: positive some days, and negative others. Measuring their average daily values and their variability (Volatility) gives direct quantitative information about the effectiveness of the daily investment decisions. Well managed funds have high ADR and low Volatility. Poorly managed funds behave in the opposite manner.

I removed a bunch of detail from the answers. The complete versions of the S&P500 benchmark and past performance as predictor are available on their blog.

My take is two-fold: first, folks are right in criticizing the use of the S&P500 as a sole benchmark. An investor looking for a conservative portfolio would likely find himself or herself discouraged by the lack of “A” funds. Second, the system itself remains intriguing given the ability to make more-appropriate comparisons. As they point out in the third paragraph, there are “make your own comparison” and “look only at comparable funds” options built into their system.

In order to test the ability of FundReveal to generate useful insights in fund selection, the Observer and FundReveal have entered into a collaborative arrangement. They’ve agreed to run analyses of the funds we profile over the next several months. We’ll share their reasoning and bottom line assessment of each fund, which might or might not perfectly reflect our own. FundReveal will then post, free, their complete assessment of each fund on their blog. After a trial of some months, we’re hoping to learn something from each other – and we’re hoping that all of our readers benefit from having a second set of eyes looking at each of these funds.

Both the Tributary and Litman Gregory profiles include their commentary, and the link to their blog appears at the end of each profile. Please do let me know if you find the information helpful.

Lipper: Your Best Small Fund Company is . . .

GuideStone Funds.

GuideStone Funds?

Uhh … Lipper’s criterion for a “small” company is under $40 billion under management which is, by most standards, not small. Back to GuideStone.

From their website: “GuideStone Funds, a controlled affiliate of GuideStone Financial Resources, provides a diversified family of Christian-based, socially screened mutual funds.”

Okay. In truth, I had no prior awareness of the family. What I’ve noticed since the Lipper awards is that the funds have durn odd names (they end in GS2 or GS4 designations), that the firm’s three-year record (on which Lipper made their selection) is dramatically better than either the firm’s one-year or five-year record. That said, over the past five years, only one GuideStone fund has below-average returns.

Fidelity: Thinking Static

As of March 31, 2012, Fidelity’s Thinking Big viral marketing effort has two defining characteristics. (1) it has remained unchanged from the day of its launch and (2) no one cares. A Google search of the phrase Fidelity +”Thinking Big” yields a total of six blog mentions in 30 days.

Morningstar: Thinking “Belt Tightening”

Crain’s Chicago Business reports that Morningstar lost a $12 million contact with its biggest investment management client. TransAmerica Asset Management had relied on Morningstar to provide advisory services on its variable annuity and fund-of-funds products. The newspaper reports that TransAmerica simplified things by hiring Tim Galbraith, Morningstar’s director of alternative investments, to handle the work in-house. TransAmerica provided about 2% of Morningstar’s revenue last year.

Given the diversity of Morningstar’s global revenue streams, most reports suggest this is “unfortunate” rather than “terrible” news, and won’t result in job losses. (source: “Morningstar loses TransAmerica work,” March 27 2012)

James Wang is not “the greatest investor you’ve never heard of”

Investment News gave that title to the reclusive manager of the Oceanstone Fund (OSFDX) who was the only manager to refuse to show up to receive a Lipper mutual fund award. He’s also refused all media attempts to arrange an interview and even the chairman of his board of trustees sounds modestly intimidated by him. Fortune has itself worked up into a tizzy about the guy.

Nonetheless, the combination of “reclusive” and an outstanding five-year record still don’t add up to “the greatest investor you’ve never heard of.” Since you read the Observer, you’ve surely heard of him, repeatedly. As I’ve noted in a February 2012 story:

the manager’s explanation of his investment strategy is nonsense. He keeps repeating the magic 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.
the shareholder reports say nothing. The entire text of the fund’s 2010 Annual Report, for example, is three paragraph. One reports the NAV change over the year, the second repeats the formula (above) and the third is vacuous boilerplate about how the market’s unpredictable.
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.

That’s not evidence of investing genius though it might bear on the old adage, “sometimes things other than cream rise to the top.”

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.

Litman Gregory Masters Alternative Strategies (MASNX): Litman Gregory has assembled four really talented teams (order three really talented teams and “The Jeffrey”) to manage their new Alternative Strategies fund. It has the prospect of being a bright spot in valuable arena filled with also-ran offerings.

Tributary Balanced, Institutional (FOBAX): Tributary, once identified with First of Omaha bank and once traditionally “institutional,” has posted consistently superb returns for years. With a thoughtfully flexible strategy and low minimum, it deserves noticeably more attention than it receives.

The Best of the Web: A Week of Podcasts

Our second “Best of the Web” feature focuses on podcasts, portable radio for a continually-connected age. While some podcasts are banal, irritating noise (Junior went through a month’s worth of Advil to screen for a week’s worth of podcasts), others offer a rare and wonderful commodity: thoughtful, useful analysis.

In “A Week of Podcasts,” Junior and I identified four podcasts to help power you through the week, three to help you unwind and (in an exclusive of sorts) news of Chuck Jaffe’s new daily radio show, MoneyLife with Chuck Jaffe.

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’ve 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.

Briefly noted . . .

Seafarer Overseas Growth and Income (SFGIX), managed by Andrew Foster, is up about 3% since its mid-February launch. The average diversified emerging markets fund is flat over the same period. The fund is now available no-load/NTF at Schwab and Scottrade. For reasons unclear, the Schwab website (as of 3/31/12) keeps saying that it’s not available. It is available and the Seafarer folks have been told that the problem lies in Schwab’s website, portions of which only update once a month. As a result, Seafarer’s availability may not be evident until April 11..

On the theme of a very good fund getting dramatically better, Villere Balanced Fund (VILLX) has reduced its capped expense ratio from 1.50% to 0.99%. While the fund invests about 60% of the portfolio in stocks, its tendency to include a lot of mid- and small-cap names makes it a lot more volatile than its peers. But it’s also a lot more rewarding: it has top 1% returns among moderate allocation funds for the past three-, five- and ten-year periods (as of 3/30/2012). Lipper recently recognized it as the top “Mixed-Asset Target Allocation Growth Fund” of the past three and five years.

Arbitrage Fund (ARBFX) reopened to investors on March 15, 2012. The fund closed in mid-2010 was $2.3 billion in assets and reopened with nearly $3 billion. The management team has also signed-on to subadvise Litman Gregory Masters Alternative Strategies (MASNX), a review of which appears this month.

Effective April 30, 2012, T. Rowe Price High Yield (PRHYX, and its advisor class) will close to new investors. Morningstar rates it as a Four Star / Silver fund (as of 3/30/2012).

Neuberger Berman Regency (NBRAX) has been renamed Neuberger Berman Mid Cap Intrinsic Value and Neuberger Berman Partners (NPNAX) have been renamed Neuberger Berman Large Cap Value. And, since there already was a Neuberger Berman Large Cap Value fund (NVAAX), the old Large Cap Value has now been renamed Neuberger Berman Value. This started in December when Neuberger Berman fired Basu Mullick, who managed Regency and Partners. He was, on whole, better than generating high volatility than high returns. Partners, in particular, is being retooled to focus on mid-cap value stocks, where Mullick tended to roam.

American Beacon announced it will liquidate American Beacon Large Cap Growth (ALCGX) on May 18, 2012 in anticipation of “large redemptions”. American Beacon runs the pension plan for American Airlines. Morningstar speculates that the termination of American’s pension plan might be the cause.

Aberdeen Emerging Markets (GEGAX) is merging into Aberdeen Emerging Markets Institutional (ABEMX). Same managers, same strategies. The expense ratio will drop substantially for existing GEGAX shareholders (from 1.78% to 1.28% or so) but the investment minimum will tick up from $1000 to $1,000,000.

Schwab Premier Equity (SWPSX) closed at the end of March as part of the process of merging it into Schwab Core Equity (SWANX).

Forward is liquidating Forward International Equity Fund, effective at the end of April. The combination of “small, expensive and mediocre” likely explains the decision.

Invesco has announced plans to merge Invesco Capital Development (ACDAX) into Invesco Van Kampen Mid Cap Growth (VGRAX) and Invesco Commodities Strategy (COAAX) Balanced-Risk Commodity Strategy (BRCAX). In both mergers, the same management team runs both funds.

Allianz is merging Allianz AGIC Target (PTAAX) into Allianz RCM Mid-Cap (RMDAX), a move which will bury Target’s large asset base and modestly below-average returns into Mid-Cap’s record of modestly above-average returns.

ING Equity Dividend (IEDIX) will be rebranded as ING Large Cap Value.

Lord Abbett Mid-Cap Value (LAVLX) has changed its name to Lord Abbett Mid-Cap Stock Fund at the end of March.

Year One, An Anniversary Celebration

With this month’s issue, we celebrate the first anniversary of the Observer’s launch. I am delighted by our first year and delighted to still be here. The Internet Archive places the lifespan of a website at 44-70 days. It’s rather like “dog years.” In “website lifespan years,” we are actually celebrating something between our fifth and eighth anniversary. In truth, there’s no one we’d rather celebrate it with that you folks.

Highlights of a good year:

We’ve seen 65,491 “Unique Visitors” from 103 countries. (Fond regards to Senegal!).
Outside North America, Spain is far and away the source of our largest number of visits. (Gracias!)
Junior’s steady dedication to the site and to his “Best of the Web” project has single-handedly driven Trinidad and Tobago past Sweden to 24^th place on our visitor list. His next target: China, currently in 23^rd.
84 folks have made financial contributions (some more than once) to the site and hundreds of others have used our Amazon link. We have, in consequence, ended our first year debt-free, bills paid and spirits high. (Thanks!)
Four friends – Chip, Anya, Accipiter, and Junior – put in an enormous number of hours behind the scenes and under the hood, and mostly are compensated by a sense of having done something good. (Thank you, guys!)
We are, for many funds, one of the top results in a Google search. Check PIMCO All-Asset All-Authority (#2 behind PIMCO’s website), Seafarer Overseas Growth & Income (#4), RiverPark Short Term High Yield (#5), Matthews Asia Strategic Income (#6), Bretton Fund (#7) and so on.

That reflects the fact that we – you, me and all the folks here – are doing something unusual. We’re examining funds and opportunities that are being ignored almost everywhere else. The civility and sensibility of the conversation on our discussion board (where a couple hundred conversations begin each month) and the huge amount of insight that investors, fund managers, journalists and financial services professionals share with me each month (you folks write almost a hundred letters a month, almost none involving sales of “v1agre”) makes publishing the Observer joyful.

We have great plans for the months ahead and look forward to sharing them with you.

See you in a month!

Voices from the bottom of the well

The Absolute Value Guys

Don’t worry, relative value guys. Morningstar’s got your back.

Quo Vadis Japan

From Day One …

In Search of Persistence

It’s not exciting just because the marketers say it is

Wells Fargo and the Roll Call of the Wretched

Observer Fund Profile

Elevator Talk: Oliver Pursche, GMG Defensive Beta Fund (MPDAX)

Our earlier Elevator Talks were:

Conference Call Highlights

January Conference Call: Matt Moran, ASTON River Road Long/Short

WOULD AN ADDITIONAL HEADS UP HELP?

February Conference Call: Joshua B. Parker and Alan Salzbank, RiverPark / Gargoyle Hedged Value

Launch Alert: Vanguard Global Minimum Volatility Fund (VMVFX)

Launch Alert II: Meridian Small Cap Growth Advisor (MSGAX)

Funds in Registration

Manager Changes

Updates

Briefly Noted . . .

SMALL WINS FOR INVESTORS

CLOSINGS (and related inconveniences)

OLD WINE, NEW BOTTLES

OFF TO THE DUSTBIN OF HISTORY

A small change

In Closing . . .

Objective and strategy

Adviser

Manager

Strategy capacity and closure

Management’s stake in the fund

Opening date

Minimum investment

Expense ratio

Comments

Bottom Line

Fund website

Disclosure

The fund:

Manager:

The call:

The profile:

Web:

But curb yer enthusiasm

Off with their heads!

The Observer’s Annual “Roll Call of the Wretched”

Three Alarm Funds Redux

Funds that are hard to love

But wait! There’s

Touchstone Funds: Setting a high standard on analysis

Observer Fund Profiles:

Elevator Talk

Conference Call Highlights: John Park and Greg Jackson, Oakseed Opportunity

December Conference Call: David Sherman, RiverPark Strategic Income

How can you join in?

WOULD AN ADDITIONAL HEADS UP HELP?

Launch Alert: Kopernik Global All-Cap Fund (KGGAX and KGGIX)

Funds in Registration

Manager Changes

Updates: the reorganization of Aegis Value, take two

Briefly Noted . . .

SMALL WINS FOR INVESTORS

CLOSINGS (and related inconveniences)

OLD WINE, NEW BOTTLES

OFF TO THE DUSTBIN OF HISTORY

In Closing . . .

Here’s today’s “know your Morningstar!” quiz.

Morningstar ETF Invest: Rather less useful content than I’d imagined

Skin in the Game, Part Two

So, if it’s “the best,” why can’t people just agree on what it is?

The Great Owl search engine has arrived

Who do you trust for fund information?

The difference between “departures” and “succession planning”

Mitch Milias will be retiring at the end of 2013

Neil Woodford will depart Invesco in April, 2014

Scott Satterwhite will be retiring at the end of September, 2016

Observer Fund Profiles:

Elevator Talk: Jeffrey K. Ringdahl of American Beacon Flexible Bond (AFXAX)

Conference Call Highlights: Zac Wydra of Beck, Mack & Oliver Partners