Dear friends,

Welcome to the Observer 2.0.  We worked hard over the past month to create a new look for the Observer: more professional, easier to read, easier to navigate and easier to maintain.  We hope you like it.

It’s hard to believe that, all the screaming aside, the stock market finished November at virtually the same point that it began.  Despite wild volatility and a ferocious month-end rally, Vanguard’s Total Stock Market Index Fund (VTSMX) ended the month with just a tiny loss.

Finding Funds that Lose at Just the Right Time

The best investors are folks who are able to think differently than do their peers: to find opportunities where others find only despair.  In our ongoing attempt to get you to think differently about how you find a good investment, we decided to ask: do you ever want funds that aren’t top performers?

The answer, for long term investors, is “yes.”  In general, you do not want to own the high-beta funds that have the best performance in “junk rallies.”  Junk rallies are periods where the least attractive investment options outperform everything else.  Those rallies push the riskiest, least prudent funds (temporarily) to the top.

One way to identify junk rallies is to look for markets where the performance of solid, high-quality companies dramatically lags the performance of far more speculative ones.  We did that by comparing the returns of index funds tracking the boring Dow Jones Industrial Average (blue chips) with the performance of funds tracking the endlessly exciting NASDAQ.  It turns out that there are three years where the Nazz outperformed the Dow by more than 1000 basis points (i.e., by 10 percentage points).  Those years are 2003 (Dow trails by 2100 bps), 2007 (1040 bps) and 2009 (3200 bps).

This month’s screen looks at funds that, over the past 10 years, are above average performers except during junk rallies.  In junk rally years, we looked for absolute returns of 10% or more.

As one reads the Morningstar coverage of these funds, the words that keep recurring are “disciplined,” “patient” and “concentrated.”  These are folks with a carefully articulated strategy who focus on executing it year after year, with little regard to what’s in vogue.

While this is not a “buy” list, it does point out the value of funds like Matthews Asian Growth & Income (MACSX), in which I’ve been invested for a good while.  MACSX puts up terribly relative performance numbers (bottom 10-15%) every time the Asian market goes wild and brilliant ones (top 5%) when the markets are in a funk.  If you’re willing to accept bad relative performance every now and then, you end up with excellent absolute and relative returns in the long-run.

Updating “The Observer’s Honor Roll, Unlike Any Other”

In November 2011, we generated an Honor Roll of funds.  Our criterion was simple: we looked for funds that were never abysmal.   We ignored questions of the upside entirely and focused exclusively on never finishing in a peer group’s bottom third.  That led us to two dozen no-load funds, including the Price and Permanent Portfolio funds highlighted above.

One sharp member of the discussion board community, claimu, noticed the lack of index funds in the list.  S/he’s right: I filtered them out, mostly because I got multiple hits for the same index. Eleven index funds would have made the list:

• four S&P 500 funds (California Investment, Dreyfus, Price, Vanguard)
• four more-or-less total market funds (Price, Schwab, Schwab 1000, Vanguard)
• one international (Price), one growth (Vanguard) and one small growth (Vanguard).

The story here might be the 67 S&P500 index funds that have a ten-year record but didn’t make the list. That is, 95% of S&P500 funds were screened-out because of some combination of high expenses and tracking error.

Those differences in expenses and trading efficiency add up.  An investment a decade ago in the Vanguard 500 Index Admiral Class (VFIAX) would have returned 2.45% annually over the decade while the PNC S&P 500 “C” shares (PPICX) earned only 1.14% – less than half as much.  $10,000 invested in Vanguard a decade ago would now (11/30/11) be worth $13,300 while a PNC investor would have $11,700 – for having taken on precisely the same risks at precisely the same time.

Press Release Journalism: CNBC and the End of the Western World

Does anyone else find it disturbing that CNBC, our premier financial news and analysis network, has decided to simply air press releases as news?   Case in point: the end of the world as we know it.  On 11/30/11, CNBC decided to share David Murrin’s fervent announcement that there’s nowhere worth investing except the emerging economies:

The Western world has run out of ideas and is “finished financially” while emerging economies across the world will continue to grow, David Murrin, CIO at Emergent Asset Management told CNBC on the tenth anniversary of coining of the so-called BRIC nations of Brazil, Russia, India and China, by Goldman Sachs’ Jim O’Neill.

“I still subscribe and I’ve spoken about it regularly on this show that this is the moment when the Western world realizes it is finished financially and the implications are huge, whereas the emerging BRIC countries are at the beginning of their continuation cycle,” Murrin told CNBC. (The Western World Is ‘Finished Financially’)

One outraged reader phrased it this way: “So why do reasonably respectable news outlets take as news the ravings of someone who has so obvious a financial stake in what is being said … News flash, “The CEO of Walmart declares the death of main street businesses . . . ” Good God!”

While Mr. Murrin is clearly doing his job by “talking his book,” that is, by promoting interest in the investment products he sells, is CNBC doing theirs?  If their job is either (a) providing marketing support for hedge funds or (b) providing inflammatory fodder, the answer is “yes.”  If, on the other hand, their job is . . .oh, to act like professional journalists, the answer is “no.”

What might they have done?  Perhaps examine Mr. Murrin’s credibility.  Ask even a few questions about his glib argument (here’s one: “the Chinese markets are at the mercy of the world’s largest and least accountable bureaucracy, one which forces the private markets to act as proxies for a political party.  To what extent should investors stake their financial futures on their faith in the continued alignment of that bureaucracy’s interests and theirs?”).  Perhaps interview someone who suspects that the expertise of companies domiciled in the Western world will allow them to out-compete firms domiciled elsewhere?  (Many thanks to Nick Burnett of CSU-Sacramento, both for pointing out the story and for supplying appropriate outrage.)

A Gift Freely Given

We’re deeply grateful for the support, financial, intellectual and moral, that you folks have offered during this first year of the Observer’s life.  It seemed fitting, in this season of thanksgiving and holidays, to say thanks to you all.  As a token of our gratitude, we wanted to share a small gift with each of you.  Chocolate was my first choice, but it works poorly as an email attachment.  After much deliberation, I decided to provide some practical, profitable advice from a field in which I have both academic credentials and lots of experience: communication.

Many of you know that I am, by profession and calling, a Professor of Communication Studies at Augustana College.  Over the years, the college has allowed me to explore a wide variety of topics in my work, from classical rhetoric and persuasion theory, to propaganda, persuasion and business communication practices.  Spurred by a young friend’s difficulties at work and informed by a huge body of research, I wrote a short, practical guide that I’d like to share with each of you.

Miscommunication in the Workplace: Sources, Prevention, Response is a 12-page guide written for bright adults who don’t study communication for a living.  It starts by talking about the two factors that make miscommunication so widespread.   It then outlines four practical strategies which will reduce the chance of being misunderstood and two ways of responding if it occurs anyway.  There’s a slightly-classy color version, but also a version optimized for print.  Both are .pdf files.

In the theme of thanksgiving, I should recognize the three people who most helped bring focus and clarity to my argument.  They are

Junior Yearwood, a friend and resident of Trinidad, brought a plant manager’s perspective, an editor’s sensibility and a sharp eye to several drafts of the guide.  Junior helped both clarify the document’s structure and articulate its conclusion.

Nicholas Burnett, an Associate Dean at Cal State – Sacramento, brought a quarter century’s experience in teaching and analyzing business and professional communication.  Nick pointed me to several lines of research that I’d missed and helped me soften claims that probably went beyond what the research supports.

Cheryl Welsch, a/k/a Chip, the Observer’s Technical Director and Director of Information Technology at SUNY-Sullivan, brought years of experience as a copy editor (as Hagrid would have it, she’s “a thumpin’ good one”).  She also helped me understand the sorts of topics that might be most pressing in helping folks like her staff.

The Harvard Business Review published Communicating Effectively (2011), which is a lot more expensive (well, this is free so pretty much everything is), longer (at 250 pages) and windier but covers much of the same ground.

If you have reactions, questions or suggested revisions, please drop a note to share them with me.  I’m more than willing to update the document.  If you really need guidance to the underlying research, it’s available.

Two other holiday leads for you.  QuoteArts.com offers a bunch of the most attractive, best written greeting cards (and refrigerator magnets) that I’ve seen.  The Duluth Trading Company offers some of the best made, best fitting men’s work clothing I’ve bought in years.  The Observer has no financial link to either of these firms and I know they have nothing to do with funds, but I’m really pleased with them and wanted to give you a quick heads-up about them.

Two Funds, and why they’re worth your time

Really worth it.  Every month the Observer profiles two to four funds that we think you really need to know more about.  They fall into two categories:

Most intriguing new funds: good ideas, great managers. These are funds that do not yet have a long track record, but which have other virtues which warrant your attention.  They might come from a great boutique or be offered by a top-tier manager who has struck out on his own.  The “most intriguing new funds” aren’t all worthy of your “gotta buy” list, but all of them are going to be fundamentally intriguing possibilities that warrant some thought.  This month’s new fund:

Lockwell Small Cap Value (LOCSX): a product of The Great Morgan Stanley Diaspora, Lockwell is a new incarnation of a very solid institutional fund.  The manager, who has successfully run billions of dollars using this same discipline, is starting over with just a million or two.  While technically a high-minimum institutional fund, there might be room to talk.

Stars in the shadows: Small funds of exceptional merit. There are thousands of tiny funds (2200 funds under $100 million in assets and many only one-tenth that size) that operate under the radar.  Some intentionally avoid notice because they’re offered by institutional managers as a favor to their customers (Prospector Capital Appreciation and all the FMC funds are examples).  Many simply can’t get their story told: they’re headquartered outside of the financial centers, they’re offered as part of a boutique or as a single stand-alone fund, they don’t have marketing budgets or they’re simply not flashy enough to draw journalists’ attention.  There are, by Morningstar’s count, 75 five-star funds with under $100 million in assets; Morningstar’s analysts cover only eight of them.

The stars are all time-tested funds, many of which have everything except shareholders.

Artisan Small Cap (ARTSX): they’re baaaaaack!   ARTSX is the fund that launched Artisan had a blazing start in 1996: a chart-topping 35% gain, $300 million in assets, and a principled close within 11 months.  What followed were nearly 15 years of uninspiring performance.  In 2009, the management team that has brilliantly guided Artisan Mid Cap took over here and the results have been first rate.  Time for another look!

Fund Update: RiverPark Short-Term High Yield and RiverPark/Wedgewood

Two of the RiverPark funds that we’ve profiled are having banner years.

RiverPark/Wedgewood (RWGFX) offers a concentrated portfolio of exceedingly high-quality stocks.  They’ve got a great track record with this strategy, though mostly through separately-managed accounts.  I have some questions about whether the SMA success would translate to similar performance in their fund.  The answer appears to be “yes,” at least so far.  For 2011 (through 11/29), they’re in the top 2% of large growth funds. Their 2.2% gain places them about 750 basis points ahead of their average peer.  The fund has gathered $70 million in assets.

RiverPark Short Term High Yield (RPHYX) continues to be a model of stability.  Its unique portfolio of called high yield bonds and other orphan investments is yielding 4.2% and has returned 3.25% YTD (through 11/29/11).  Judged as a high-yield bond fund, that’s great: top 4% YTD with minimal share price volatility.  Viewed as a cash management tool, it’s even better.  Latest word is that assets are up to $35 million as more advisors come onboard.

In mid-November, Barron’s ran a nice profile, “Enjoying Their Freedom,” of RiverPark and of these two funds.

Closure alert: Aston/River Road Independent Value

In a November 18 filing with the SEC, Aston announced that ARVIX will close to new investors “if the net assets of the Fund reach a certain level in combination with other assets managed in the same investment strategy by … River Road Asset Management.  Currently, the Fund expects its Soft Close Level to be between $500 million and $600 million in net assets.”  Eric Cinnamond, the manager suggests that “given our sales pipeline,” the fund will likely close before December is over.  Existing investors will be permitted to add to their accounts but (with a few exceptions) no new investors will be allowed in.

In general, folks interested in a low volatility strategy crafted for high volatility markets really should look, and look quickly, to see whether ARVIX makes sense for their portfolios.  The Observer’s April 2011 profile of ARVIX makes clear that this is a strategy with a long, consistently and hugely successful trade record.  So far in 2011, it’s in the top 1% of small value funds.  Mr. Cinnamond is both modest and thoughtful, and tries to balance a celebration of the fund’s success with realism about the years ahead:

This year has set up nicely for the portfolio — ideal market for a flexible and opportunistic strategy.  Every year won’t be like this (the product has high tracking error) and if small caps go lot higher from here, the strategy will most likely lag as I continue to be positioned defensively with below average risk in the equity portfolio and above average cash levels.  That said, as you know, this can change quickly — hopefully recent volatility in the small cap market continues into 2012.

Right, “hopefully recent volatility … continues.”  Volatile markets create outsized opportunities that Mr. Cinnamond has, over the course of years, profitably exploited.  Two other takes on the fund are the fund’s most recent profile of itself and a new Morningstar essay which looks at the two best small-value funds in 2011: The Top Performing Funds in 2011’s Toughest Category.

Launch alert:

Forward Management introduced a new investor share class for the $1.2 billion, Forward Select Income Fund (FFSLX) at the end of November, 2011. The fund focuses on the preferred securities of REITs, rather than their common stock.  The fund’s yielding over 9% currently, and has pretty consistently finished near the top of the real estate fund stack by combining above average returns with low volatility.

This is the fifth Forward real estate fund to be offered directly (i.e., without a load) to retail investors.  The others are Forward International Real Estate (FFIRX), the Forward Real Estate Long/Short (FFSRX), Forward Real Estate and the Forward Global Infrastructure (FGLRX).  In each case, there’s a $4000 minimum which is reduced to $500 if you set up an account with an automatic investing plan.

Fidelity launched Fidelity Total Emerging Markets (FTEMX) on November 1^st.   FTEMX represents a really good idea: an emerging markets balanced fund.  The fund will invest about 60% of its assets in stocks and 40% in bonds, which should over time provide stock-like returns with greatly reduced volatility.  That might translate to higher shareholder returns, as folks encounter fewer dramatic declines and are less likely to be tempted to sell low.  The fund is managed by a team led by John Carlson.  Mr. Carlson has been doing really good work for years on Fidelity’s emerging markets bond fund, Fidelity New Market Income (FNMIX).  There’s a $2500 minimum investment and an expense ratio of 1.40%.

One landmine to avoid: don’t pay attention to the fund’s performance against its Morningstar peer group.  Morningstar doesn’t have an E.M. balanced group, and so assigned this fund to E.M. stock.

I’ve also profiled the closed-end First Trust/Aberdeen Emerging Opportunities (FEO) fund.  FEO has a higher expense ratio (1.80%) but can often be bought at a discounted price.

Alpine: A slight change in elevation

The good folks at the Alpine Funds have taken inspiration for their namesake mountain range.  Effective January 12, they’re increasing their minimum initial investment for stock funds by a thousand fold:  “For new shareholders after January 3, 2012, the minimum initial investment of the Institutional Class has increased from $1,000 to $1,000,000.” The minimum for bond rises will rise only a hundredfold: “For new shareholders after January 3, 2012, the minimum initial investment of the Institutional Class (formerly the Investor Class) has increased from $2,500 to $250,000.”

At the same time they’re renaming a bunch of funds and imposing a 5.5% front load.

Of the funds involved, Dynamic Transformations (ADTRX) is most worth a look before the no-load door closes.  It’s a relatively low turnover, relatively tax efficient mid-cap growth fund that invests in companies undergoing, well, dynamic transformations.  (After January, I guess the transformations can be rather less dynamic.)  That discipline parallels the discipline successfully applied at Artisan’s Mid Cap (ARTMX) fund.  As with Alpine’s other funds, risk management is not a particular strength and so it tends to be a high volatility / high return strategy; that is, it captures more of both the upside and the downside in any market movement.

(Thanks to the members of the Observer’s discussion board community, who read SEC filings even more closely – and with more enthusiasm, if you can imagine that – than I do.  Special thanks to TheShadow for triggering the discussion.)

Briefly Noted . . .

Normally “leaving” is followed by “coming back.”  Not so, at Fidelity.  Andy Sassine, manager of Fidelity Small Cap Stock (FSCLX) is taking a six-month year, but the firm made clear that it’s a one-way trip.  He might work at Fidelity again, but won’t work as a manager.  His fund is being taken over by Lionel Harris of Fidelity Small Cap Growth (FCPGX). Small Cap Growth will be taken over by Pat Venanzi, who manages two small slices of Fidelity Stock Selector Small Cap (FDSCX) and Fidelity Series Small Cap Opportunities (FSOPX).

In the 2012 first quarter, American Beacon will merge the Bridgeway Large Cap Value (BRLVX) fund into the newly created American Beacon Bridgeway Large Cap Value and retain Bridgeway as subadviser.   Bridgeway Social Responsibility, a previous Bridgeway offering, was acquired by Calvert Large Cap Growth. This past May, that fund merged into Calvert Equity (CSIEX), which is not subadvised by Bridgeway.

Allianz RCM Disciplined International Equity (ARDAX) will liquidate on Dec. 20, 2011.

American Beacon Evercore Small Cap Equity  (ASEAX) is closing ahead of its liquidation on or about Dec. 15, 2011.

Dreyfus has closed and plans to liquidate the Dreyfus Select Managers Large Cap Growth (DSLAX) as of Dec. 13, 2011.

In one of those “laws of unintended consequences moves,” Schwab gave in to advisors’ demands and changed the benchmark for the Schwab International Index Fund (SWISX).  Investors claimed that it was too hard to compare SWISX’s performance because it was the only fund using Schwab’s internally-generated benchmark.  In an entirely Pyrrhic victory, Schwab moved to the standard benchmark (MSCI EAFE) and thereby lost any reason for existence.  The move will require the fund to divest itself of a substantial, and entirely sensible, stake in Canadian stocks and make substantial investments in mid-cap stocks.

American Century International Value Fund (ACVUX) is being rebuilt: new management team, new discipline (quant rather than fundamental), new benchmark (MSCI EAFE Value)

In closing . . .

Many thanks to all of the folks who have used the Observer’s Amazon link.  It’s remarkable easy to use (click on it, set it as your default Amazon bookmark and you’re done) and helps a lot.

I’ve been working through three books that might be worth your year-end attention.

Robert Frank, wealth reporter for the WSJ, The High-Beta Rich: How the Manic Wealthy Will Take Us to the Next Boom, Bubble, and Bust. In some ways it’s a logical follow-up to his book Richistan: A Journey Through the American Wealth Boom and the Lives of the New Rich (2008).  The 8.5 million Richistanis, Frank discovered, own things like “shadow yachts,” which are the yachts which follow the rich guys’ yacht and carry their helicopters.  In The High-Beta Rich, Frank looks at the ugly implications of financial instability among the very wealthy.  Generally speaking, their worth is highly volatile and market dependent.  A falling market decreases the wealth of the very rich about three times more than it does for the rest of us.  Frank writes:

Suddenly, in 1982, the year I call the magic year for wealth, the 1 percent, which used to be like the teetotalers of our economy, became the binge drinkers.

And when times were good, they did two or three times better than everyone else. When times were bad, they did two or three times worse. So if you look at the last three recessions, the top 1 percent lost two to three times in income what the rest of America lost. And, you know, part of it has to do with more and more of today’s wealth is tied to the stock market, whether it’s executives who are paid in stock or somebody who’s starting a company and takes it public with an IPO.

And the stock market is more than 20 times as volatile as the real economy.

And, as it turns out, slamming the rich around has real implications for the financial welfare of the rest of us.  Frank appeared on NPR’s Talk of the Nation program on November 16.  There’s a copy of the program and excerpts from the book available on Talk of the Nation’s website.

Folks who find their faith useful in guiding their consumption and investments might enjoy a new book by a singularly bright, articulate younger colleague of mine, Laura Hartman.  Laura is an assistant professor of religion and author of The Christian Consumer: Living Faithfully in a Fragile World.  The fact that it’s published by Oxford University Press tells you something about the quality of its argument.  She argues:

At base, consumerism arises from a distorted view of human nature.  This ethos teaches that our wants are insatiable (and the provocations of advertising help make this so), that buying the new article of clothing or fancy gadget will answer our deepest longings.  That we are what we own.  Humans, then, are seen as greedy and lacking and shallow.  (192)

While this isn’t a “how-to” guide, Laura does offer new (or freshened) ways of thinking about how to consume what you need with celebration, and how to leave what others need untouched.

The most influential book I’ve read in years is Alan Jacobs’ Pleasures of Reading in an Age of Distraction.  Jacobs is a professor of English at Wheaton College in Illinois.  Despite that, he writes and thinks very well.  Jacobs takes on all of the wretched scolds who tell us we need to be reading “better” stuff and argues, instead, that we need to rediscover the joy of reading for the joy of reading.

One of Jacobs’ most compelling sections discussed the widespread feeling, even among hard-reading academics, that we’ve lost the ability to read anything for more than about five minutes.  It made me feel good to know that I wasn’t alone in that observation.  He has convinced me to try a Kindle which, he argues, has renewed in him the habit of reading which such passion that you sink into the book and time fades away.  The Kindle’s design makes it possible, he believes, to feel like we’re connected while at the same time disconnecting.

Regardless of what you buy or who you share our link with, thanks and thanks again!

In January, we’ll look at two interesting funds, the new HNP Growth & Preservation (HNPKX) which brings a “managed futures” ethos to other asset classes and Value Line Asset Allocation (VLAAX) which has one of the most intriguing performance patterns I’ve seen.  In addition, we’ll ring in the New Year by looking at the implication of following the “Where to Invest 2011” articles that were circulating a year ago.

Wishing you great joy in the upcoming holiday season,

David

Dear friends,

Welcome to David’s Market Timing Newsletter!  You’ll remember that, at the beginning of October, I pointed out that (1) you hated stocks and (2) you should be buying them.  One month and one large rally – small caps are up 17% for the month through 10/27 while large caps added 12% – later, I celebrate the fact that I’ve now tied Abby Joseph Cohen for great market timing calls (one each).  Unlike AJC, I promise never to do it again.

October brought more than a sizzling rally.  It brought record breaking heat to the U.K. and record-breaking snowfalls to New York and New England.  To my students and colleagues at Augustana College, it brought a blaze of color, cool mornings, warm afternoons, the end of fall trimester and a chance to slow down and savor the dance of the leaves.

Between the oppression of summer and the ferocity of winter, it’s good to have a few days in which to remember to breathe and celebrate life.  One of the pleasures of working at a small college is the opportunity to engage in that celebration with really bright, inquisitive kids.

The Observer’s Honor Roll, Unlike Any Other

Last month, in the spirit of FundAlarm’s “three-alarm” fund list, we presented the Observer’s first Roll Call of the Wretched.  Those were funds that managed to trail their peers for the past one-, three-, five- and ten-year periods, with special commendation for the funds that added high expenses and high volatility to the mix.

This month, I’d like to share the Observer’s Honor Roll of consistently bearable funds.  Most such lists start with a faulty assumption: that high returns are intrinsically good.

Wrong!

While high returns can be a good thing, the practical question is how those returns are obtained.  If they’re the product of alternately sizzling and stone cold performances, the high returns are worse than meaningless: they’re a deadly lure to hapless investors and advisors.  Investors hate losing money much more than they love making it.  One of Morningstar’s most intriguing statistics are its “investor return” numbers, which attempt to see how the average investor in a fund did (rather than how the hypothetical buy-and-hold-for-ten-years investor did).  The numbers are daunting: Fidelity Leverage Company (FLVCX) made nearly 13% a year for the past decade while its average investor lost money over that same period.

In light of that, the Observer asked a simple question: which mutual funds are never terrible?  In constructing the Honor Roll, we did not look at whether a fund ever made a lot of money.  We looked only at whether a fund could consistently avoid being rotten.  Our logic is this: investors are willing to forgive the occasional sub-par year, but they’ll flee in terror in the face of a horrible one.  That “sell low” – occasionally “sell low and stuff the proceeds in a zero-return money fund for five years” – is our most disastrous response.

We looked for no-load, retail funds which, over the past ten years, have never finished in the bottom third of their peer groups.   And while we weren’t screening for strong returns, we ended up with a list of funds that consistently provided them anyway.

U.S. stock funds

International stock funds

Blended asset funds

Specialty funds

All of these funds were rated as three stars, or better, by Morningstar (10/31/11).  Almost all took on average levels of risk, and almost all were above average performers in bear markets.  All of them had positive Sharpe ratios; that is, all of them more than rewarded investors for the risks they bore.  While we don’t offer this as a “buy” list, much less a “must have” list, investors looking for solid, long-term performance without huge risks might start their due diligence here.

Trust, But Verify

My first-year students have a child-like faith in The Internet.  They’re quite sure that the existence of the ‘net means that they can access all human knowledge and achieve unparalleled wisdom. One percipient freshman wrote that,

“As technology becomes more sophisticated, developing the capacity to help us make moral and ethical choices as well as more pragmatic decisions, what we call human wisdom will reach new levels” (quoting Marc Prensky, Digital Wisdom, 2009 – I’ll note that the term “claptrap” comes to mind whenever I read the Prensky essay) . . . our mind limits our wisdom, meaning that our daily distractions are holding us back from how intelligent we can really be. Technology however, fills those gaps with its vast memory. Technology is helping us advance our memory, helping us advance our creativity and imagination, and it is fixing our flaws . . . our digital wisdom is doing nothing but getting vaster.  Prensky makes a lot of good arguments as to why we are not in fact the stupidest generation to have walked this Earth, and I couldn’t agree more.

“Digital wisdom” remains a bit elusive, if only because of flaws in the digits that originally enter the . . . well, digits, into the databases.

There’s no clearer example of egregious error without a single human question than in the portfolio reports for Manning & Napier Dividend Focus (MNDFX).  Focus remains almost fully-invested in common stocks, with 2-4% in a money market.  I used the Observer’s incredibly helpful Falcon’s Eye fund search to track down all the major reports of MNDFX’s portfolio.  I discovered that, as of July 31 2011:

$65 million was held in a money market, and $47 million was in stocks.  That would be a 58% cash stake.  Source: Manning & Napier month-end holdings, July 31 2011.

That 61% of the fund’s assets were shorting cash and that 94% was long cash, for a net cash stake of 33%.  Source: Morningstar.

That 100.28% of the fund’s assets were invested in two Dreyfus Money Market funds.  The top ten holdings combined contributed 127% of the fund’s assets.  Good news: the money market funds had returned 10.5% each in the first seven months of 2011.  Source: Yahoo Finance.

That the fund’s top holding was one Dreyfus money market (94% of assets), the fund’s cash Hybrid must be 33%. Source: USA Today.  U.S. News and MSN both agree.

SmartMoney’s undated portfolio report shows 3.9% cash.  The Wall Street Journal’s 8/31/11 portfolio lists the Dreyfus fund at 3.02% of the portfolio.

The most striking thing is the invisibility of the error.  No editor caught it, no data specialist questioned it, no writer looked further.  It seems inevitable that given the sheer volume of information out there, you owe it to yourselves to check – and check again – on the reliability of the information you’ve received before putting your money down.

Two Funds, and why they’re worth your time

Really worth it.  Every month the Observer profiles two to four funds that we think you really need to know more about.  They fall into two categories:

Most intriguing new funds: good ideas, great managers. These are funds that do not yet have a long track record, but which have other virtues which warrant your attention.  They might come from a great boutique or be offered by a top-tier manager who has struck out on his own.  The “most intriguing new funds” aren’t all worthy of your “gotta buy” list, but all of them are going to be fundamentally intriguing possibilities that warrant some thought.  This month’s new fund:

Manning & Napier Dividend Focus (MNDFX): Manning & Napier is likely the best management team you’ve never heard of.  Focusing on dividends is likely the best strategy to follow.  And this fund gives you the lowest cost way to combine the two.

Stars in the shadows: Small funds of exceptional merit. There are thousands of tiny funds (2200 funds under $100 million in assets and many only one-tenth that size) that operate under the radar.  Some intentionally avoid notice because they’re offered by institutional managers as a favor to their customers (Prospector Capital Appreciation and all the FMC funds are examples).  Many simply can’t get their story told: they’re headquartered outside of the financial centers, they’re offered as part of a boutique or as a single stand-alone fund, they don’t have marketing budgets or they’re simply not flashy enough to draw journalists’ attention.  There are, by Morningstar’s count, 75 five-star funds with under $100 million in assets; Morningstar’s analysts cover only eight of them.

The stars are all time-tested funds, many of which have everything except shareholders.

Pinnacle Value (PVFIX): John Deysher does micro-caps right.  Sensible, skeptical, and cash-heavy, Pinnacle Value offers a remarkably smooth version of the micro-cap ride.

Small Funds Doing Well, and Doing Good

Saturna Capital has been recognized by the Mutual Fund Education Alliance for its philanthropic efforts.  On October 27^th, they (and American Century Investments) received MFEA’s Community Investment Award for 2011.  Saturna, which advises the Sextant and Amana funds, pledged over $2.5 million toward construction of the St. Paul’s Academy Upper School.  Saturna’s leadership galvanized other constituencies in the Bellingham, Washington, community to support the project.  Their efforts played a key role in securing $6 million in bank financing and over $1 million in private donations.

The past two winners were Aberdeen Asset Management (2010) and Calvert Investments (2009).

Matthews Asia shared the award for best retail communications with Saturna.  Both Saturna’s Market Navigator newsletter and Matthews’ collection of Asia-focused newsletters, including the flagship Asia Insight, were recognized for their excellent design and content.   This is Saturna’s 15^th communication award since 2008.

Northern Funds made a series of often dramatic reductions in the fees it charges to retail investors.  They accomplished that by raising the expense waivers on three dozen funds, effective January 1, 2012. The most striking reductions include lopping 45 basis points of the expenses charged by their Emerging Markets Equity Index fund – a drop of more than half, making it less expensive than Vanguard’s offering – and 35 basis points on the Global Sustainability Index.  None of the Northern indexes will charge more than 0.30% after the changes.  Expenses on Northern’s money market funds will be cut by 10 basis points, from 0.45% to 0.35%.

Morningstar’s Halloween Tricks and Treats

Russel Kinnel, Morningstar’s director of stuff, offered up a set of “portfolio-eating zombie funds” as part of his annual Halloween review (“Yikes … These Funds Have Been Bludgeoned….” 10/31/11). He focused simply on the greatest year-to-date losses, excluding leveraged index funds.  The most ghoulish of the creatures:

1. YieldQuest Core Equity (YQCEX), down 56%.  YieldQuest, with whose adviser I had a cranky exchange when I first profiled these funds, earns a Special Dishonorable Mention for fielding three funds, in three different asset classes, each of which has lost 40% or more this year.  The other funds place 4^th and 5^th on the list of losers: 4. YieldQuest Total Return Bond (YQTRX) and 5. YieldQuest Tax Exempt Bond (YQTEX).
2. Birmiwal Oasis (BIRMX), down 55%.  Feeling a bit playful, Mr. Kinnel offers “Lesson one: Don’t invest in a fund that sounds like a tiki bar.”
3. The USX China (HPCCX), down 54% in 2011 and 14% annually for the past five years.

At #6 on Kinnel’s list is Apex Mid Cap Growth (BMCGX), down 35%, “aided” in part by a 7% expense ratio.  Apex also qualified for the Observer’s Rollcall of the Wretched (October 2011) for finishing in the bottom 25% of its peer group for the past 1, 3, 5 and 10 years plus having above average risk and high expenses.  Our happiest note about Apex:

The good news: not many people trust Suresh Bhirud with their money.  His Apex Mid Cap Growth (BMCGX) had, at last record, $293,225.  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 8% over the past 15 years, has mostly impoverished himself.

Tenth on the list is Legg Mason Capital Management Opportunity (LMOPX), down 29%.  Another Roll Call of the Wretched honoree, I noted of LMOPX, “You know you’ve got problems when trailing 91% of your peers represents one of your better recent performances.”  Alarmed at the accusation, the fund promptly settled down and now trails all of its peers (through 10/27/2011).

At the end of September, though, he offered up a basket of autumn treats: his nominees for the best funds launched in the past three years.  Kinnel highlighted 19 funds, the five which are “most ready to buy” are:

Dodge & Cox Global Stock (DODWX), “a fine bet right now.”  Low expenses, great family.

PIMCO EqS Pathfinder (PTHDX), headed by Mutual Series veterans Anne Gudefin and Chuck Lahr.

DoubleLine Total Return Bond (DBLTX).  His court trial is over and he won, but might still need to pay millions.  The one thing that the trial does make clear is that the very talented Mr. Gundlach is not a good person.  The evidence at trial paints him as an egomaniac (“I am the “A” team”), anxious to be sure no one else detracted from his glory (he had TCW meticulously remove all references to his co-manager from press mentions of his Morningstar Manager of the Year award).  Evidence not permitted at trial dealt with sexual liaisons with co-workers, drugs and porn.  I’m sure he’s as talented as he thinks he is (as for that matter is Mr. Berkowitz), but it’s hard to imagine a world in which I’d trust him with my money.

American Funds International Growth and Income (IGAAX) is “a similar story to Dodge & Cox Global.”

Hotchkis and Wiley High Yield (HWHAX) offers two former PIMCO managers running a small, good fund.

Among the funds that made both Mr. Kinnel’s list and were profiled at the Observer or at FundAlarm: Akre Focus (AKREX), Tweedy Browne Global Value II Currency Unhedged (TBCUX) and Evermore Global Value (EVGBX).

Launch alert:

Motley Fool Epic Voyage Fund launched on November 1, 2011.  It’s an international small-cap value offering, managed by the same folks who run Motley Fool Independence (FOOLX) and Great America (TMFGX) funds.  FOOLX is a global equities fund, Great America is smaller-cap domestic.  Both are above-average performers and both tend to invest broadly between market caps and styles.  $3000 investment minimum and 1.35% expenses, after waivers.

Grandeur Peak Global Opportunities (GPGOX) and Grandeur Peak International Opportunities (GPIOX) both launched October 17, 2011.  The funds are currently available directly from Grandeur Peak (http://www.grandeurpeakglobal.com or 1.855.377.PEAK), or through Schwab or Scottrade. President Eric Huefner reports that, “We expect to be available at Fidelity, Pershing, E*Trade, and various other platforms within the next few weeks.”  They’re also working with TD Ameritrade, but apparently that’s going really slow.

Former Wasatch managers Robert Gardiner and Blake Walker are attempting to build on their past success at Wasatch Global Opportunities (WAGOX) and Wasatch International Opportunities (WAIOX).  My August story, Grandeur Peaks and the road less traveled, details the magnitude (hint: considerable) of those successes.

Both funds launched with $2.00 per share prices, while the industry standard is $10.00.  Folks on the Observer’s discussion board noted the anomaly and speculated that it might be a strategy for masking volatility.  At $2.00, another change under 0.5% gets reported as “zero.”  Mr. Huefner offered a more benign explanation: “that’s what we always did at Wasatch and since we’re all from Wasatch, we decided to do it again.”

Wasatch’s rationale was symbolic: since their original offerings were all micro- to small-cap funds which would need to close with still-small asset bases, they thought the $2.00 NAV nicely reinforced the message “we’re different, we’re the small fund guys.”

Briefly Noted . . .

RiverPark Short-Term High-Yield (RPHYX) was the subject of a very positive Forbes article, entitled “For fixed-income investors, another way to beat Treasurys” (October 21 2011).  Forbes was struck by the same risk minimization that we were: “the principal, and interest payments, are virtually guaranteed.  It might not always work. But investors who can sleep at night knowing they’re holding junk bonds might be better off than investors who are barely beating inflation in the Treasury and money markets.”  The fund’s assets under management are around $25 million, up from $20 million in summer.  Almost three-quarters of that money comes from institutional investors.

T. Rowe Price Emerging Europe and Mediterranean is trying to become T. Rowe Price Emerging Europe.  Two factors are driving the change.  First, Israel was been reclassified as a “developed” market which meant that the fund eliminated its investments there.  Second, it had only limited exposure to Turkey and Egypt, which made the “and Mediterranean” designation somewhat misleading.  If shareholders (the sheep) approve, the change will become effective in March, 2012.  The fund’s manager and wretched recent record (up 15.5% annually over the past 10 years, but down 4% annually over the past five) both remain.

Meet “the New Charlie.”  Having dispatched “my Charlie” Fernandez, Bruce Berkowitz found a Fred, instead.  Fred Fraenkel joins the firm as Chief Research Officer for whom Job Number One is . . . research?  Not so much.  “As our Chief Research Officer, Fred’s first task is to find ways to better communicate with clients as to which Fairholme’s best is yet to come,” says Berkowitz.

Effective on October 18, nine Old Mutual funds disappeared into a bunch of Touchstone funds.  These include Old Mutual Analytic U.S. Long/Short Fund which melted into Touchstone U.S. Long/Short and Old Mutual Barrow Hanley Value disappeared into Touchstone Value.

Eaton Vance Global Macro Absolute Return (EAGMX) reopened to new investors on Oct. 19, 2011.  The Morningstar analyst, perhaps bewilderingly, says: “Eaton Vance Global Macro Absolute Return is like the duck on smooth water whose hidden legs are pedaling furiously under the surface.”  The data says: steadily deteriorating performance and in the basement, overall.

Eaton Vance Equity Asset Hybrid (EEAAX) will liquidate at the end of December, 2011.

Harbor Funds’ Board of Trustees announced on Halloween Day that Harbor Small Company Value Fund (HISMX) will be liquidated (and dissolved!  What a Halloween-ish image) by year’s end.  HISMX was a perfectly solid little fund (top 10% of its peer group over the past three years) that never managed to become economically sustainable.  Harbor’s ongoing need to underwrite the expenses of a $10 million fund made its death inevitable.  The Board’s assertion that this was in the best interests of the fund’s shareholders, who were holding a good investment for which Harbor offers no obvious alternative, is polite drivel.  (Thanks to TheShadow for quickly noticing, and posting, the announcement.)

In closing . . .

A million thanks to the folks who have been supporting the Observer, whether through direct contributions or by using our Amazon link.  Special thanks for the ongoing support of our Informal Economist and John S, and to the new contributors this month.  I’ve been a putz about getting out thank-you notes, but they’re coming!

As you begin planning holiday shopping, please do use – and share – the link.  It costs nothing and takes no effort, but does make a real difference.

We’re hoping that by December you’ll actually see that difference.  The Observer actually has a secret identity.  Buried beneath our quiet exterior is a really attractive, highly-functional WordPress site waiting to get out.  We haven’t had the resources before to exploit those capabilities.  But now, with the combined efforts of Anya Z., a friend of the Observer who has redesigned the site, and Chip and her dedicated staff, we’re close to rolling out a new look.  Clean, functional, and easier to use: all made possible by your moral, intellectual and financial support.

And so, as we approach the season of Thanksgiving, here’s a sincere thanks and “see ya!” to one and all.

David

Dear friends,

Almost all of the poems about the end of summer and beginning of fall are sad, wistful things.  They’re full of regrets about the end of the season of growth and crammed with metaphors for decline, decay, death and despair.

It’s clear that poets don’t have investment portfolios.

The fact that benchmarks such as the Dow Jones Industrial average and Vanguard Total Bond Market are both showing gains for the year masks the trauma that has led investors to pull money out of long-term funds for six consecutive weeks.  Whether having the greatest outflows since the market bottom in March 2009 is a good thing remains to be seen.

Roller coasters are funny things.  They’re designed to scare the daylights out of you, and then deposit you back exactly where you started.  It might be a sign of age (or, less likely, wisdom) that I’d really prefer a winding garden path or moving walkway to the thrills now on offer.

The Latest Endangered Species: Funds for Small Investors

Beginning in the mid-1990s, I maintained “The List of Funds for Small Investors” at the old Brill/Mutual Funds Interactive website.  I screened for no-load funds with minimums of $500 or less and for no-load funds that waived their investment minimums for investors who were willing to start small but invest regularly.  That commitment was made through an Automatic Investing Plan, or AIP.

At the time, the greatest challenge was dealing with the sheer mass of such funds (600 in all) and trying to identify the couple dozen that were best suited to new investors trying to build a solid foundation.

Over the years, almost all of those funds ceased to be “funds for small investors.”  Some closed and a fair number added sales loads but the great majority simply raised their investment minimums.  In the end, only one major firm, T. Rowe Price, persevered in maintaining that option.

And now they’re done with it.

Effective on August 1, Price eliminated several policies which were particularly friendly to small investors.  The waiver of the minimum investment for accounts with an Automatic Asset Builder (their name for the AIP) has been eliminated. Rather than requiring a $50 minimum and $50/month thereafter, AAB accounts now require $2500 minimum and $100/thereafter.

The minimum subsequent investment on retail accounts was raised from $50 to $100.

The small account fee has been raised to $20 per account under $10,000. The fee will be assessed in September. You can dodge the fee by signing up for electronic document delivery.

Price changed the policies in response to poor behavior on the part of investors. Too many investors started with $50, built the account to $300 and then turned off the asset builder. Price then had custody of a bunch of orphaned accounts which were generating $3/year to cover management and administrative expenses.  It’s not clear how many such accounts exist. Bill Benintende, one of Price’s public relations specialists, explains “that’s considered proprietary information so it isn’t something we’d discuss publicly.”  This is the same problem that long-ago forced a bunch of firms to raise their investment minimums from $250- 500 to $2500.

Two groups escaped the requirement for larger subsequent investments.  Mr. Benintende says that 529 college savings plans remain at $50 and individuals who already have operating AAB accounts with $50 investments are grandfathered-in unless they make a change (for example, switching funds or even the day of the month on which an investment occurs).

That’s a real loss, even if a self-inflicted one, for small investors.  Nonetheless, there remain about 130 funds accessible to folks with modest budgets and the willingness to make a serious commitment to improving their finances.  By my best reading, there are thirteen smaller fund families and a half dozen individual funds still taking the risk of getting stiffed by undisciplined investors.  The families willing to waive their normal investment minimums are:

There are, in addition, a number of individual funds with minimums reduced or waived for folks willing to commit to an automatic investment.  Those include Barrett  Opportunity (SAOPX), Cullen High Dividend Equity (CHDEX), Giordano (GIORX), Primary Trend (PTFDX), Sector Rotation (NAVFX), and Stonebridge Small Cap Growth (SBAGX).

On a related note: Fidelity would like a little extra next year

Fidelity will begin charging an “annual index fund fee” of $10.00 per fund position to offset shareholder service costs if your fund balance falls below $10,000, effective December 2011.  They’re using the same logic: small accounts don’t generate enough revenue to cover their maintenance costs.

The Quiet Comeback of Artisan Small Cap (ARTSX)

The second fund in which I ever invested (AIM Constellation was the first) was Artisan Small Cap (ARTSX). Carlene Murphy Ziegler had been a star manager at Stein, Roe and at Strong.  With the support of her husband, Andrew, she left to start her own fund company and to launch her own fund.  Artisan Small Cap was a solid, mild-manned growth-at-a-reasonable price creature that drew a lot of media attention, attracted a lot of money, helped launch a stellar investment boutique, and quickly closed to new investors.

But, somewhere in there, the fund got out of step with the market.  Rather than being stellar, it slipped to okay and then “not too bad.”  It had some good years and was never terrible, but it also never managed to have two really good years back-to-back.  The firm added co-managers including Marina Carlson, who had worked so successful with Ziegler at the Strong Funds.  Ziegler stepped aside in 2008 and Carlson in 2009.

At that point, manager responsibilities were given to Andrew Stephens and the team that runs Artisan Mid Cap Fund (ARTMX).  ARTMX has posted remarkably strong, consistent results for over a decade.  It’s been in the top 10-15% of midcap growth funds for the past 1, 3, 5 and 10 year periods.  It has earned four or five star ratings from Morningstar for the past 3, 5, and 10 year periods.

Since taking over in October 2009, ARTSX has outperformed its peers.  $10,000 invested on the day the new team arrived would have gain to $13,900, compared to $13,100 at its peers.   Both year to date and for the three, turbulent summer months, it’s in the top 2% of small growth funds.  It has a top 5% record over the past year and top 15% over the past three.

Artisan has a very good record of allowing successful teams to expand their horizons. Scott Satterwhite’s team from Artisan Small Cap Value (ARTVX) inherited Artisan Mid Cap Value (ARTQX) and the large cap Artisan Value (ARTLX) funds, and has reproduced their success in each.  The same occurred with the Artisan International Value team running Artisan Global Value and Artisan International running Artisan International Small Cap.

Given that track record and the fund’s resurgence under the Stephen’s team, it might be time to put Artisan Small Cap back on the radar.

Fund Update: RiverPark Short-Term High Yield

We profiled RPHYX in July as one of the year’s most intriguing new funds. It’s core strategy – buying, for example, called high yield bonds – struck me “as a fascinating fund.  It is, in the mutual fund world, utterly unique . . .  And it makes sense.  That’s a rare and wonderful combination.”

The manager, David Sherman of Cohanzick Management, has been in remarkably good spirits, if not quite giddy, because market volatility plays into the fund’s strengths.  There are two developments of note.

The manager purchased a huge number of additional shares of RPHYX after the market rout on Monday, August 8.  (An earlier version of this note, on the Observer’s discussion board, specified an amount and he seemed a bit embarrassed by the public disclosure so I’ve shifted to the demure but accurate ‘huge number’ construction.)

The fund’s down about 0.4% since making its monthly distribution (which accounts for most of its NAV changes). For those keeping score, since August 1, Fidelity Floating Rate High Income (FFHRX, a floating-rate loan fund that some funds here guessed would parallel RiverPark) is down 4%, their new Global High-Income fund (FGHNX) is down 5% and Fidelity High Income (SPHIX) is down 4.5%.

Fortunately, the fund generates huge amounts of cash internally. Because durations are so short, he’s always got cash from the bonds which are being redeemed. When we spoke on August 10^th, he calculated that if he did nothing at all with the portfolio, he’d get a 6% cash infusion on August 16, a 10% infusion on August 26th, and cash overall would reach 41% of the portfolio in the next 30 days. While he’s holding more cash than usual as a matter of prudent caution, he’s also got a lot to buy with.

And the market has been offering a number of exceptional bargains. He pointed to called HCA bonds which he first bought on July 27 at a 3.75% annualized yield. This week he was able to buy more at a 17% yield. Since the bonds would be redeemed at the end of August by a solidly-profitable company, he saw very little risk in the position. Several other positions (Las Vegas Sands public preferred and Chart Industries convertibles) have gone from yielding 3-3.5% to 5-6% available yields in the last two weeks.

He was also shortening up the portfolio to take advantage of emerging opportunities. He’s selling some longer-dated bonds which likely won’t be called in order to have more cash to act on irrational bargains as they present themselves. Despite an ultra-short duration, the fund is now yielding over 5%. The Fed, meanwhile, promises “near zero” interest rates for the next two years.

Mr. Sherman was at pains to stress that he’s not shilling for the fund. He doesn’t want to over-promise (this is not the equivalent of a savings account paying 5%) and he doesn’t want to encourage investors to join based on unrealistic hopes of a “magic” fund, but he does seem quite comfortable with the fund and the opportunity set available to him.

Note to the Securities and Exchange Commission: Hire a programmer!

Every day, the SEC posts all of its just-received filings online and every day I read them.  (Yep.  Really gotta get a life.) Here is a list of all of today’s prospectus filings.  In theory, if you visit on September 1^st and click on “most recent,” you’ll get a screen full of filings dated September 1^st.

Except when you don’t.  Here, for example, is a screen cap of the SEC new filings for August 22, 2011:

Notice how very far down this list you have to go before finding even one filing from August 22^nd (it’s the ING Mutual Funds listing).  On July 25th, 43 of 89 entries were wrong (including one originally filed in 2004).

Two-thirds of all Wall Street trades emanate from high-frequency traders, whose computers execute trades in 250 microseconds (“Not So Fast,” The Economist, 08/06/11).  Those trades increase market volatility and asset correlations, to the detriment of most investors.  The SEC’s difficulty in merely getting the date right on their form postings doesn’t give me much confidence in their ability to take on the problems posed by technology.

Four Funds, and why they’re worth your time

Really worth it.  Every month the Observer profiles two to four funds that we think you really need to know more about.  They fall into two categories:

Most intriguing new funds: good ideas, great managers. These are funds that do not yet have a long track record, but which have other virtues which warrant your attention.  They might come from a great boutique or be offered by a top-tier manager who has struck out on his own.  The “most intriguing new funds” aren’t all worthy of your “gotta buy” list, but all of them are going to be fundamentally intriguing possibilities that warrant some thought.  This month’s two new funds:

RiverPark/Wedgewood (RWGFX): David Rolfe makes it seem so simple.  Identify great companies, buy only the best of them, buy only when they’ve on sale, and hold on.  For almost 19 years he’s been doing to same, simple thing – and doing it with unparalleled consistency and success.  His strategy is now available to retail investors.

Walthausen Select Value (WSVRX): the case for this focused small- to mid-cap fund is simple.  Manager John Walthausen has performed brilliantly with the last three funds he’s run and his latest fund seeks to build on one of those earlier models.

Stars in the shadows: Small funds of exceptional merit. There are thousands of tiny funds (2200 funds under $100 million in assets and many only one-tenth that size) that operate under the radar.  Some intentionally avoid notice because they’re offered by institutional managers as a favor to their customers (Prospector Capital Appreciation and all the FMC funds are examples).  Many simply can’t get their story told: they’re headquartered outside of the financial centers, they’re offered as part of a boutique or as a single stand-alone fund, they don’t have marketing budgets or they’re simply not flashy enough to draw journalists’ attention.  There are, by Morningstar’s count, 75 five-star funds with under $100 million in assets; Morningstar’s analysts cover only eight of them.

The stars are all time-tested funds, many of which have everything except shareholders.

Northern Global Tactical Asset Allocation (BBALX): up until August 1^st, you could access to the best ideas of Northern Investment Policy Committee only if you had $5 million to meet this fund’s minimum or $500 million in assets at Northern.  And then it became a retail fund ($2500) with an institutional pedigree and expenses (0.68%).  Folks looking for a conservative core fund just stumbled onto a really solid option.

Walthausen Small Cap Value (WSCVX): we profiled this fund shortly after launch as one of the year’s best new funds.  Three years on, it’s running rings around its competition and starting to ask about when it will be necessary to close to new investors.  A somewhat volatile choice, it has produced remarkable results.

Briefly noted . . .

Berwyn Income (BERIX) will reopen to new investors on Sept. 19. The $1.3 billion fund closed in November 2010, but says the board, “recent volatility in the market has led to new investment opportunities for the Fund.”  BERIX makes a lot of sense in turbulent markets: modest stake in dividend-paying stocks and REITs, plus corporate bonds, preferred shares, convertibles and a slug of cash.  Lots of income with some prospect for capital growth.  The fund more than doubled in size between 2008 and 2009, then doubled in size again between 2009 and 2010.  At the end of 2008, it was under $240 million.  Today it carries a billion more in heft.  Relative performance has drifted down a bit as the fund has grown, but it remains really solid.

Fidelity is bringing out two emerging market funds in mid-October. The less interesting, Emerging Markets Discovery, will be their small- to mid-cap fund. Total Emerging Markets will be a 60/40 balanced fund. The most promising aspect of the balanced fund is the presence of John Carlson, who runs New Markets Income (FNMIX) at the head of the management team.  FNMIX has a splendid long-term record (Carlson’s been there for 16 years) but it’s currently lagging because it focuses on dollar-denominated debt rather than the raging local currency variety.  Carlson argues that local currencies aren’t quite the safe haven that newbies believe and that, in any case, they’re getting way overvalued.  He’ll have a team of co-managers who, I believe, run some of Fidelity’s non-U.S. funds.  Fido’s emerging markets equity products have not been consistently great, so investors here might hope for index-like returns and a much more tolerable ride than a pure equity exposure would offer. The opening expense ratio will be 1.4% and the minimum investment will be $2500.

Northern Funds are reducing the operating expenses on all of their index funds, effective January 1, 2012.  The seven funds involved are:

Nicely done!

Forward Management introduced a new no-load “investor” share class for Forward International Real Estate Fund (FFIRX), the Forward Real Estate Long/Short Fund (FFSRX), and the Forward Global Infrastructure Fund (FGLRX). Forward Real Estate (FFREX) already had a no-load share class.  The funds are, on whole, respectable but not demonstrably great. The minimum investment is $4,000.

DWS Strategic Income (KSTAX) becomes DWS Unconstrained Income on Sept. 22, 2011. At that point, Philip Condon will join the management team of the fund.  “Unconstrained” is the current vogue term for income funds, with PIMCO leading the pack by offering unconstrained Bond (also packaged as Harbor Unconstrained Bond), Tax-Managed Bond and Fixed Income funds.  All of them have been underperformers in their short lives, suggesting that the ability to go anywhere doesn’t immediately translate into the wisdom to go somewhere sensible.

Litman Gregory Asset Management has renamed its entire line of Masters’ Select funds as Litman Gregory Masters Funds name.

PIMCO Developing Local Markets (PLMIX) has changed its name to PIMCO Emerging Markets Local Currency, presumably to gain from the “local currency debt” craze.

Dreyfus S&P Stars Opportunities (BSOBX) will change its name to Dreyfus MidCap Core on Nov. 1, 2011.

DWS RREEF Real Estate Securities (RRRRX) will close Sept. 30, 2011.

JPMorgan U.S. Large Cap Core Plus (JLCAX) closed to new investors on Sept. 2, 2011.

Scout TrendStar Small Cap (TRESX) is merging into Scout Small Cap (UMBHX).

MFS Core Growth (MFCAX) merged into MFS Growth (MFEGX) in August.

Effective Sept. 15, 2011, GMO Global Balanced Asset Allocation Fund (GMWAX) will be renamed GMO Global Asset Allocation Fund and it will no longer be bound to keep at least 25% each in stocks and bonds.

Forward Funds is changing Forward Large Cap Equity (FFLAX), a mild-mannered fund with a slight value bias, into Forward Large Cap Dividend Fund.  After November 1, at least 80% of the portfolio will be in . . . well, large cap, dividend-paying stocks.   Not to rain on anybody’s parade, but all of its top 25 holdings are already dividend-paying stocks which implies marketing rather than management drove the change.

Likewise, Satuit Capital Micro Cap has been changed to the Satuit Capital U.S. Emerging Companies Fund (SATMX).   The Board hastened to assure shareholders that the change was purely cosmetic: “there are no other changes to the Fund being contemplated as a result of this name change.”  Regardless, it’s been a splendid performer (top 1% over the past decade) with an elevated price tag (1.75%)

DWS Climate Change (WRMAX) becomes DWS Clean Technology on October 1, 2011.

A few closing notes . . .

We’re very pleased to announce the launch of The Falcon’s Eye.  Originally written by a FundAlarm board member, Falcon, the Eye provides a quick and convenient link to each of the major profiles for any particular fund.  Simply click on “The Falcon’s Eye” link on the main menu bar atop this page and enter one or more ticker symbols.  A new windows pops up, giving the fund name and direct links to ten major source of information:

And, of course, the Observer itself.

Mark whichever sources interest you, click, and the Eye will generate direct links to that site’s profile of or reporting on your fund.  Thanks to Accipiter for his tireless work on the project, and to Chip, Investor, Catch22 and others for their support and beta testing of it.  It is, we think, a really useful tool for folks who are serious about understanding their investments.

Thanks to all of you for using or sharing the Observer’s link to Amazon.com, which is providing a modest but very steady revenue stream.  Special thanks for the folks who’ve chosen to contribute to the Observer this month and, especially, to the good folks at Milestones Financial Planning in Kentucky for their ongoing support.  We’re hoping for a major upgrade in the site’s appearance, in addition to the functionality upgrades that Chip and Accipiter have worked so faithfully on.

Looking for the archive? There is an archive of all Observer and later FundAlarm commentaries, links to which usually appear at the top of this page. This month we encountered a software glitch that was scrambling the list, so we’ve temporarily hidden it. Once out tech folks have a chance to play with the code, it’ll be back where it belongs. Thanks for your patience!

Keep those cards and letters, electronic or otherwise, coming.  I love reading your thoughts.

See you in October!

David

Dear friends,

The folks in Washington are, for the most part, acting like six-year-olds who missed their nap times.  The New York Fed is quietly warning money market managers to reduce their exposure to European debt.  A downgrade of the federal government’s bond rating seems nearly inevitable. The stock market managed only one three-day set of gains in a month.

In short, it’s summer again.

Grandeur Peak and the road less traveled

A team of managers, led by Robert Gardiner, and executives left Wasatch Advisors at the end of June 2011 to strike out on their own.  In mid July they announced the formation of Grandeur Peak Global Advisors and they filed to launch two mutual funds.  The new company is immediately credible because of the success that Mr. Gardiner and colleague Blake Walker had as Wasatch managers.

Robert Gardiner managed or co-managed Wasatch Microcap (WMICX), Small Cap Value (WMCVX) and Microcap Value (WAMVX, in which I own shares).  In 2007, he took a sort of sabbatical from active management but continued as Director of Research.  During that sabbatical, he reached a couple conclusions: (1) global microcap investing was the world’s most interesting sector and (2) he’d like to manage his own firm.  He returned to active management with the launch of Wasatch Global Opportunities (WAGOX), a global micro-to small-cap fund.  From inception in late 2008 to July 2011, WAGOX turned a $10,000 investment into $23,500 while an investment in its average peer would have led to a $17,000 portfolio.  Put another way, WAGOX earned $13,500 or 92% more than its average peer managed.

Blake Walker co-managed Wasatch International Opportunities (WAIOX) from 2005-2011.  The fund was distinguished by outsized returns (top 10% of its peer group over the past five years, top 1% over the past three), and outsized stakes in emerging markets (nearly 50% of assets) and micro- to small-cap stocks (66% of assets, roughly twice what peer funds have).  In March 2011, Lipper designated WAIOX as the top International Small/Mid-Cap Growth Fund based on consistent (risk-adjusted) return for the five years through 2010. In March 2009, it had received Lipper’s award for best three-year performance.

Wasatch published an interesting paper on the ongoing case for global small and micro-cap investing, “Think International, Think Small” (January 2011).

Gardiner had talked with Wasatch about starting his own firm for a number of years. At age 46, he decided that it was time to pursue that dream. Grandeur Peak’s president, Eric Huefner described the eventual departure of Gardiner & co. as “very friendly,” and he stressed the ongoing ties between the firms.  The fact that Grandeur Peak is one of the most visible mountains in the Wasatch Range, one does get a sense of amity.

According to SEC filings and pending SEC approval, Grandeur Peaks will launch two funds at the beginning of October: Global Opportunities and International Opportunities.  Both will be managed jointed by Messrs. Gardiner and Walker. The short version:

Grandeur Peak Global Opportunities will seek long-term growth by investing, primarily, in a small- and micro-cap global portfolio.  The target universe is stocks valued under $5 billion, though up to one-third of the portfolio might be invested in worthy, larger firms.  Emerging markets exposure will range from 5-50%.   The minimum investment will be $2000, reduced to $1000 for funds with an automatic investment plan.  Expenses will be capped at 1.75% with a 2% redemption fee on shares held for 60 days or less.

Grandeur Peak International Opportunities will seek long-term growth by investing, primarily, in a small- and micro-cap international portfolio.  The target universe is stocks valued under $2.5 billion.  Emerging markets exposure will range from 10-60%.   As with Global, the minimum investment will $2000, reduced to $1000 for funds with an automatic investment plan, and expenses will be capped at 1.75% with a 2% redemption fee on shares held for 60 days or less.

Global’s investment strategies closely parallel Wasatch Global’s.  International differs from its Wasatch counterpart in a couple ways: its target universe has a higher cap ($1 billion for Wasatch, $2.5 billion for Grandeur) and it has a bit more wiggle room on emerging markets exposure (20-50% for Wasatch, 10 – 60% for Grandeur).

A key difference is that Grandeur intends to charge substantially less for their funds.  Both of the new funds will have expenses capped at 1.75%, while the Wasatch funds charge 1.88 and 2.26% for International and Global, respectively. That expense cap represents a substantial and, I’m sure, well considered risk for Grandeur.  Small global funds cost a lot to run.  A fund’s actual expenses are listed in its annual report to shareholders.  There are a couple dozen no-load, retail global funds with small asset bases.  Here are the asset bases and actual expenses for a representative sample of them:

Advisory Research Global Value (ADVWX), $13 million in assets, 5.29% in expenses

Artisan Global Equity (ARTHX), $15 million, 1.5%

Alpine Global Infrastructure (AIFRX ), $12 million , 3.03%

Chou Equity Opportunity (CHOEX), $24 million, 28.6%

Commonwealth Global (CNGLX), $15 million, 3.02%

Encompass (ENCPX), $25 million, 1.45%

Jubak Global Equity (JUBAX), $35 million, 5.43%

Roge Partners (ROGEX), $13.5 million, 2.46%

Unlike many start-ups, Grandeur has chosen to focus initially on the mutual fund market, rather than managing separate accounts or partnerships for high net worth individuals and institutions.

Mr. Gardiner is surely familiar with Robert Frost’s The Road Not Taken, from which we get the endlessly quoted couplet, “Two roads diverged in a wood, and I— I took the one less traveled by.”  From microcap growth investing to international microcaps to launching his own firm, he’s traveled many “paths less traveled by.” And he’s done it with consistent success.  I wish him well with the launch of Grandeur Peaks and hope to speak with one or another of the managers after their funds launch in October.

And yet I’m struck by Frost’s warning that his poem was “tricky, very tricky that one.”  Americans uniformly read the poem to say “I took the road less traveled and won as a result.”  In truth, the poem says no such thing and recounts a tale told, many years later, “with a sigh.”

Fund Update: RiverPark Short Term High Yield (RPHYX)

Like Grandeur Peak, RiverPark Advisors grew from the decision of high-profile executives and managers to leave a well-respected mid-sized fund company.  Morty Schaja, president of Baron Asset Management, left with an investment team in 2009 to found RiverPark.  The firm runs two small funds (RiverPark Small Cap Growth RPSFX and Large Cap Growth RPXFX) and advises three other, sub-advised funds.

I profiled (and invested in) RiverPark Short Term High Yield, one of the sub-advised funds, in July.  The short version of the profile is this: RPHYX has the unique and fascinating strategy (investing in called high yield bonds, among other things) that allows it to function as a cash management fund with a yield 400-times greater than the typical money market.  That profile engendered considerable discussion and a number of reader questions.  The key question is whether Cohanzick, the adviser, had the strategy in place during the 2008 meltdown and, if so, how it did.

Mr. Schaja was kind enough to explain that while there wasn’t a stand-alone strategy in 2008, these investments did quite well as part of Cohanzick’s broader portfolios during the turmoil.  He writes?

Unfortunately, the pure separate accounts using this strategy only began in 2009, so we have to look at investments in this strategy that were part of larger accounts (investing the excess cash).   While we can’t predict how the fund may perform in the hypothetical next crisis, we take comfort that in 2008 the securities performed exceedingly well.  As best as we can tell there were some short term negative marks as liquidity dried up, but no defaults.  Therefore, for those investors that were not forced to sell, within weeks and months the securities matured at par.   Therefore, under this hypothetical scenario, even if the Fund’s NAV fell substantially over a few days because markets became illiquid and pricing difficult, we would expect the Fund’s NAV would rebound quickly (over a few months) as securities matured.  If we were lucky enough to receive positive flows into the Fund in such an environment, the Fund could take advantage of short term volatility to realize unusually and unsustainable significantly higher returns.

One reader wondered with RPHYX would act rather like a floating-rate fund, which Mr. Schaja rather doubted:

In an environment where default risk is of primary concern, we would expect the Fund to compare favorably to a floating rate high income fund.   While floating rate funds protect investors from increasing interest rates they are typically invested in securities with longer maturities and therefore inherently greater default risk.   Additionally, the Fund is focused not only on securities with limited duration but where Cohanzick believes there is limited risk of default in the short period until the time in which it believes the securities will either mature or be redeemed.

It is striking to me that during the debt-related turmoil of the last weeks of August, RPHYX’s net asset value never moved: it sold for $9.98 – 10.01 with most of the change accounted for by the fund’s monthly income distribution.  It remains, in my mind, a fascinating option for folks distraught by money market funds taking unseen risks and returning nothing.

Fund Update: Aston/River Road Independent Value

One of my last FundAlarm profiles celebrated the launch of Aston/River Road Independent Value (ARIVX) was “the third incarnation of a splendid, 15-year-old fund.”  Eric Cinnamond, the manager here and formerly of Intrepid Small Cap (ICMAX), has an outstanding record for investing in small and midcap stocks while pursuing an “absolute return” strategy.  He hates losing money and does it rarely.  The bottom line was, and is, this:

Aston / River Road Independent Value is the classic case of getting something for nothing. Investors impressed with Mr. Cinnamond’s 15 year record – high returns with low risk investing in smaller companies – have the opportunity to access his skills with no higher expenses and no higher minimum than they’d pay at Intrepid Small Cap. The far smaller asset base and lack of legacy positions makes ARIVX the more attractive of the two options. And attractive, period.

Mr. Cinnamond wrote at the end of July with a series of updates on his fund.

Performance is outstanding.  The fund is up 8% YTD, through the end of July 2011.  In the same period, his average peer is up 1.3% and ICMAX (his former fund) is up 0.73%. Eric notes that, “The key to performance YTD has been our equity performance and limiting mistakes. Although this is too short of a period to judge a Fund, it’s ideally our ultimate goal in this absolute return strategy — limit mistakes and require an adequate return given the risk of each small cap equity investment.”

The portfolio is half cash, 48% at the end of the second quarter.  Assuming that the return on cash is near-zero, that means that his stocks have returned around 16% so far this year.

Money is steadily flowing in.  He notes, “We are now at $265 million after seven months with good flows and a healthy institutional pipeline.”  He plans to partially close the fund at around $800 million in assets.

The fund is more attractive to advisors than to institutions, though it should be quite attractive to bright individual investors as well.  The problem with institutions, he believes, is that they’re more style-box bound than are individual advisors.  “The absolute return strategy requires flexibility so it doesn’t fit perfectly in the traditional institutional consultant style box.  For most consultants, the Independent Value strategy would not be used as their core small cap allocation as it has above average tracking error.  For the most part, advisors seem to be less concerned about the risk of looking different than a benchmark and are more concerned about protecting their private clients’ capital…so it’s a nice fit.”

On the bigger picture issues, Eric is “hopeful volatility increases in the near future — ultimately creating opportunity.”  He notes that the government’s “printing party” has inflated the earnings of a lot of firms, many of them quite marginal.  He’s concerned with valuation distortions, but comfortable that patience and discipline will, now as ever, see him through.

Cash Isn’t Trash (but it’s also not enough)

ARIVX is not alone in holding huge cash reserves this year, but it is alone in profiting from it. There are 75 retail, no-load funds which were holding at least 40% in cash this year.  ARIVX has the best YTD returns (7.92%) followed by Merk Hard Currency (MERKX) at 7.46% with several dozen cash-heavy funds under water so far this year.  The great bulk of those funds have returned between 1-3% while the (volatile) Total U.S. Market index is up 4% (as of July 29, 2011). Notable cash-heavy funds include

Hussman Strategic Total Return (HSTRX), an always-defensive mix of bonds, foreign currencies, cash and precious-metals exposure.   Five stars, up 2.3% YTD.

Intrepid Small Cap (ICMAX), Mr. Cinnamond’s previous fund, now run by the very competent team that almost handles Intrepid Capital (ICMBX). Five stars, up 0.73%.

Pinnacle Value (PVFIX), John Deysher’s perennially cash-heavy microcap value fund.  Five stars, down 1.7%.

Forester Discovery (INTLX), international sibling to the only equity fund to have made money in 2008.   Four stars, up 2.3%.

Congressional Effect Fund (CEFFX), a three-star freak that goes entirely to cash whenever Congress is in session.  800% portfolio turnover, 2.3% returns.

Harbor Bond (HABDX), a clone of the titanic PIMCO Total Return (PTTRX) fund.  Bill Gross is nervous, having raised cash and cut risk.  Five stars, up 4%.

Morningstar’s Hot on My Heels!

Morningstar ran a couple essays this month that reflect issues that the Observer took up earlier.

Russel Kinnel, Morningstar’s director of mutual fund research, felt the urge to “get really contrarian” and look at four of the smallest funds in the Morningstar 500 (“Four Tiny but Potent Mutual Funds,” 08/01/2011).  They’re described as “being ignored by fund investors, but they’ve really got a lot to like.”  Three of the four have been profiled here, while (WHG Balanced) the fourth has a $100,000 minimum investment.   That’s a bit rich for my budget.

The funds, with links to the Observer’s profiles, are:

Queens Road Small Cap Value (QRSVX):  “Manager Steve Scruggs has done a great job of deep value investing . . . Its return on $10,000 since that time is $25,500 versus $20,100 for the average small-value fund.”

Ariel Focus (ARFFX): “Can Ariel’s emphasis on stable, low-valuation companies work in a focused large-cap fund? I think so. The emphasis on stability has kept volatility roughly in line with other large-blend funds despite the concentration.”

Masters Select Focused Opportunities (MSFOX): “Now, this fund really counts as contrarian. It has a Morningstar rating of 1 star, and its 20-stock portfolio has added up to high risk . . . [They have several excellent sub-advisers who have had a long stretch of poor performance.] That’s not likely to continue, and this fund could well have a bright future.”  My concern when MSFOX launched was that taking six ideas from each of three teams might not get you the same results that you’d get if any of the sub-advisers had the option to construct the whole portfolio.  That still seems about right.

WHG Balanced (WHGBX): “. . . a virtual clone, GAMCO Westwood Balanced (WEBAX), dates back to 1991, and Mark Freeman and Susan Byrne have a strong record over that period. Moreover, it’s conservatively positioned with high-quality stocks and high-quality bonds.”

In Investors Behaving Badly, analyst Shannon Zimmerman fretted about the inability of investors to profit from the “wildly volatile yet in some ways utterly predictable performance” performance of Fidelity Leveraged Company Stock fund (FLVCX). Manager Tom Soviero buys the stock of the kinds of companies which have been forced to issue junk bonds.  Zimmerman notes that the fund has some of the industry’s strongest returns over the decade, but that it’s so wildly volatile that very few investors have held on long enough to benefit: “in all trailing periods of three or more years, [the fund’s investor returns] rank among the peer group’s worst.”  In closing, Zimmerman struck a cautious, balanced note:

As an analyst, I try to square the vicious circle outlined above by giving Soviero credit where it’s due but encouraging prospective buyers, not to beware, but to be aware of the fund’s mandate and its penchant for wild performance swings.

The Observer highlighted the same fund in May 2011, in “Successor to ‘The Worst Best Fund Ever’.”  We were growling about a bunch of fawning articles about “The Decade’s Best Stock Picker,” almost none of which confronted the truth of the matter: wildly volatile funds are a disaster.  Period.  Their excellent returns don’t matter because (1) 90% of their investors flee at the worst possible moment and (2) the remainder eat the resulting tax bill and performance distortions.  We concluded:

People like the idea of high-risk, high-return funds a lot more than they like the reality of them. Almost all behavioral finance research finds the same dang thing about us: we are drawn to shiny, high-return funds just about as powerfully as a mosquito is drawn to a bug-zapper.

And we end up doing just about as well as the mosquito does.

Two Funds and why they’re worth your time

Really worth it.  Every month the Observer profiles two to four funds that we think you really need to know more about.  They fall into two categories:

Most intriguing new funds: good ideas, great managers. These are funds that do not yet have a long track record, but which have other virtues which warrant your attention.  They might come from a great boutique or be offered by a top-tier manager who has struck out on his own.  The “most intriguing new funds” aren’t all worthy of your “gotta buy” list, but all of them are going to be fundamentally intriguing possibilities that warrant some thought.  This month’s two new funds:

T. Rowe Price Global Infrastructure (TRGFX): governments around the world are likely to spend several trillion dollars a year on building or repairing transportation, power and water systems.  Over the past decade, owning either the real assets (that is, owning a pipeline) or stock in the asset’s owners has been consistently profitable.  Price has joined the dozen or so firms which have launched funds to capitalize on those large, predictable investments.  It’s not clear that rushing in, here or in its peers, is called for.

Stars in the shadows: Small funds of exceptional merit. There are thousands of tiny funds (2200 funds under $100 million in assets and many only one-tenth that size) that operate under the radar.  Some intentionally avoid notice because they’re offered by institutional managers as a favor to their customers (Prospector Capital Appreciation and all the FMC funds are examples).  Many simply can’t get their story told: they’re headquartered outside of the financial centers, they’re offered as part of a boutique or as a single stand-alone fund, they don’t have marketing budgets or they’re simply not flashy enough to draw journalists’ attention.  There are, by Morningstar’s count, 75 five-star funds with under $100 million in assets; Morningstar’s analysts cover only eight of them.

The stars are all time-tested funds, many of which have everything except shareholders.

Marathon Value (MVPFX): Marathon is the very archetype of a “star in the shadows.”  It’s an unmarketed, friends-and-family fund that exists to give smaller stakeholders access to the adviser’s stock picking.  The fund has a nearly unparalleled record for excellent risk-managed returns over the decade and it’s certainly worth the attention of folks who know they need stock exposure but who get a bit queasy at the thought. Thanks to the wise and wily Ira Artman for recommending a profile of the fund.

And ten other funds that our readers think are really worth your time

One intriguing thread on the Observer’s discussion board asked, “what fund do you to love more and more over the years“?  While several folks made the obvious point (“don’t love an investment, it can’t love you back”), a number of readers contributed thoughtful and well-argued choices.  The most popular, all-weather funds:

Permanent Portfolio (PRPFX), endorsed by ron, MikeM, rono.  “I’m not sure there has been a better “low risk – great return” fund then PRPFX.”

FPA Crescent (FPACX), Scott, MikeM, “one fund with a terrific long-term track record.”

Oakmark Equity & Income (OAKBX), from ron, cee (The fund just does great year after year and even in the 2008 bear market it only lost 16%. This will be a long-term relationship :)

Matthews Asian Growth & Income (MACSX), DavidS, Scott, PatShuff, “our oldest fund for lower volatility Asian exposure.”  Andrew Foster just left this fund in order to found Seafarer Capital

I’m not sure that it’s just a sign of the times that the common characteristic of these longest-term holdings is the flexibility they accord their managers, their low risk and long-tenured management.

Other interesting nominees included two Fidelity funds (the hybrids Capital & Income FAGIX and Global Balanced FGBLX), Franklin Income (FKINX), Metropolitan West Total Return Bond (MWTRX), Matthews Asia Dividend (MAPIX) and T. Rowe Price Spectrum Income (RPSIX), my own favorite fund-of-Price funds.

Briefly Noted . . .

Joseph Rohm is no longer manager of the T. Rowe Price Africa & Middle East (TRAMX) after leaving T. Rowe on June 30 to relocate to his hometown, Cape Town, South Africa.  It’s hard to know what to make of the move or the fund.  Two reasons:

The management team has shifted several times already.  Rohm was the founding manager, but his stint lasted only ten weeks.  Alderson then stepped in for 18 months, followed by 27 months of Rohm again, and now Alderson.  That’s awfully unusual, especially for Price which values management stability and smooth transitions.

The fund lacks a meaningful peer group or public benchmark.  Measured against diversified emerging markets funds, TRAMX stinks with deep losses in 2011 (through July 29) and a bottom of the heap peer ranking since inception.  The problem is that it’s not a diversified emerging markets fund.   While it would be tempting to measure it against one of the existing Africa ETFs – SPDR S&P Emerging Middle East and Africa (GAF), for instance – those funds invest almost exclusively in a single country, South Africa.  GAF has 90% of its assets in South Africa and virtually 100% in just three countries (South Africa, Egypt and Morocco).

Ed Giltanen, a Price representative, expects a new management team to be in-place within a few months.  Morningstar recommends that folks avoid the fund.  While the long-term case for investing in Africa is undamaged, it’s hard to justify much short term movement in the direction of TRAMX.

On June 30, Guinness Atkinson launched its Renminbi Yuan & Bond Fund.  It invests in Renminbi Yuan-denominated bonds issued by corporations and by the Chinese government.  It may also hold cash, bank deposits, CDs and short-term commercial paper denominated in Renminbi or Yuan. Edmund Harriss will manage the fund.  He also manages three other GA funds: China & Hong Kong Fund, the Asia Focus Fund, and the Asia Pacific Dividend Fund. The China & Hong Kong fund has been around a long time and it’s been a solid but not outstanding performer.  The two newer funds have been modestly unfortunate.  The expense ratio will be 0.90% and there’s a $10,000 minimum investment for regular accounts.  That is reduced to $5000 if you’re already a GA shareholder, or are buying for a retirement or gift account.

I’ve long argued that an emerging-markets balanced fund makes a huge amount of investment sense, but the only option so far has been the closed-end First Trust/Aberdeen Emerging Opportunities (FEO).  I’m pleased to report that Franklin Templeton will launch Templeton Emerging Markets Balanced, likely by October 1.  The fund will been managed by famous guys including Michael Hasenstab and Mark Mobius. “A” shares of the fund will cost 1.53%.

The rush to launch emerging markets bond funds continues with MFS’s planned launch of MFS Emerging Markets Debt Local Currency in September 2011.  The industry has launched, or filed to launch, more than a dozen such funds this year.

Aston closed and liquidated the Aston/New Century Absolute Return ETF (ANENX) in late July.  The three-year-old was a fund of ETFs while its parent, New Century Alternative Strategies (NCHPX) is a very solid, high expense fund of hedge-like mutual funds.

Aston also canned Fortis Investment Management as the subadvisor to Aston/Fortis Real Estate (AARIX). Harrison Street Securities replaced them on the renamed Aston/Harrison Street Real Estate fund.

TCW is in the process of killing off two losing funds.  TCW Large Cap Growth (TGLFX) will merge into TCW Select Equities (TGCNX) and TCW Relative Value Small Cap (TGOIX) merges into TCW Value Opportunities (TGVOX).  In an additional swipe, the Large Cap Growth managers will be dismissed from the team managing TCW Growth (TGGIX).  Owie.

Wells Fargo Advantage Strategic Large Cap Growth (ESGAX) has a new manager: Tom Ognar and his team.  The change is worth noting just because I’ve always liked the manager’s name: it has that “Norse warrior” ring to it.  “I am Ognar the Fierce and I am here to optimize your portfolio.”

New names and new missions

Janus Dynamic Allocation (JAMPX), a consistently mediocre three-year-old, will become more global in fall.  Its name changes to Janus World Allocation and it will switch from a domestic benchmark to the MSCI All Country World index.

Janus Long/Short (JALSX) will become Janus Global Market Neutral on September 30, and will change its benchmark from the S&P500 to a 3-month T-Bill index.

ING Janus Contrarian (IJCAX) fired Janus Capital Management as subadvisor and changed its name to ING Core Growth and Income Portfolio. The fund is currently managed by ING Investment Management, and will merge into ING Growth and Income in early 2012.

Effective Sept. 1, 2011, Invesco Select Real Estate Income (ASRAX) will change its name to Invesco Global Real Estate Income.  The name change is accompanying by prospectus changes allowing a more-global portfolio and a global benchmark.

MFS Sector Rotational (SRFAX) changed its name to MFS Equity Opportunities on August 1, 2011.

DWS Strategic Income (KSTAX) will change its name to DWS Unconstrained Income at the end of September.  “Strategic” is so 2010 . . . this season, everyone is wearing “unconstrained.”

Dreyfus S&P Stars Opportunities (BSOBX) becomes Dreyfus MidCap Core on November 1st.

The FaithShares folks will close and liquidate their entire line of ETFs (the Baptist, Catholic, Christian, Lutheran and Methodist Values ETFs).  The ETFs in question were fine investment vehicles except for two small flaws: (1) poor returns and (2) utterly no investor interest.  FaithShares will then change their name to Exchange Traded Concepts, LLC.  And what will ETC, LLC do?   Invoking the “those who can’t do, consult” dictum, they propose to sell their expertise as ETF providers to other aspiring investment managers.   Their motto: “Launch your own ETF without lifting a finger.”  Yep, that’s the level of commitment I’d like to see in an adviser.

In closing . . .

Special thanks to “Accipter,” a long-time contributor to the FundAlarm and Observer discussion boards and Chip, the Observer’s Technical Director, for putting dozens of hours into programming and testing The Falcon’s Eye.  Currently, when you enter a fund’s ticker symbol into a discussion board comment, our software automatically generates a link to a new window, in which you find the fund’s name and links to a half dozen fund reports.  Falcon’s Eye will provide direct access through a search box; it’ll cover ETFs as well and will include links to the Observer’s own fund profiles.  This has been a monumental project and I’m deeply grateful for their work.  Expect the Eye to debut in the next two weeks.

Thanks, too, to the folks who have used the Observer’s Amazon link.  If you haven’t done so yet, visit the “Support Us” page where you’ll see the Amazon link.  From there, you can bookmark it, set it as your homepage, right-click and play it on your desktop or copy it and share it with your deranged brother-in-law.  In addition, we’ve created the Observer’s Amazon store to replace our book recommendations page.  Click on “Books” to visit it.  The Amazon store brings together our readers’ best ideas for places to learn more about investing and personal finance in general.  We’ll add steadily to the collection, as you find and recommend new “must read” works.

With respect,

David

Dear friends,

The craziness of summer always amazes me.  People, who should be out watching their kids play Little League, or lounging in the shade with a cold drink, instead fret like mad about the end of the (investing) world as we know it.  Who would have guessed, despite all of the screaming, that it’s been a pretty decent year in the market so far?  Vanguard’s Total Stock Market Index fund (VTSMX) returned 6.3% in the first six months of 2011.  The market turbulence in May and June still constituted a drop of less than 3% from the market’s late April highs.

In short, more heat than light, so far.

Justice Thomas to investors: “Sue the Easter Bunny!”

On June 13^th, the Supreme Court issued another ruling (Janus Capital Group vs. First Derivative Traders)  that seemed to embrace political ideology rather more than the facts of the case. The facts are simple: Janus’s prospectuses said they did not tolerate market-timing of the funds.  In fact, they actively colluded in it.  When the news came out, Janus stock dropped 25%.  Shareholders sued, claiming that the prospectus statements were material and misleading.  The Court’s conservative bloc, led by Skippy Thomas, said that stockholders could sue the business trust in which the funds are organized, but not Janus.  Since the trust has neither employees nor assets, it seems to offer an impregnable legal defense against any lies embedded in a prospectus.
The decision strikes me as asinine and Thomas’s writing as worse.  The only people cheerleading for the decision are Janus’s lawyers (who were active in the post-decision press release business) and the editorial page writers for The Wall Street Journal:

In Janus Capital Group Inc. v. First Derivative Traders, investors claimed to have been misled into buying shares of stock at a premium by prospectuses that misrepresented Janus Investment Fund’s use of so-called market timing. . .

The Court’s ruling continues a string of recent cases that put limits on trial-bar marauding, but the dissent by the four liberal Justices all but invites further attempts. As in so many legal areas, this Supreme Court is only a single vote away from implementing through the courts a political agenda that Congress has consistently refused to pass.

The editorial can sustain its conclusion only by dodging the fact (the business trust is a shell) and quoting Thomas’s thoughtless speechwriter/speechmaker analogy (which fails to consider the implication of having the writer and maker being the same person).   The Journal‘s news coverage recognized the problem with the ruling:

William Birdthistle, a professor at the Chicago-Kent College of Law, said the ruling disregarded the practical reality that mutual funds are dominated by their investment advisers, who manage the business and appoint the funds’ boards of directors.

“Everyone knows the fund is an empty marionette. It doesn’t do anything,” said Prof. Birdthistle, who filed a brief supporting the Janus investors. “You’re left with a circumstance where no one is responsible for this.”

The New York Times gets closer:

With Justice Clarence Thomas writing for a 5-to-4 majority, the Supreme Court has made it much harder for private lawsuits to succeed against mutual fund malefactors, even when they have admitted to lying and cheating.

The court ruled that the only entity that can be held liable in a private lawsuit for “any untrue statement of a material fact” is the one whose name the statement is presented under. That’s so even if the entity presenting the statement is a business trust — basically a dummy corporation — with no assets, while its owner has the cash.

Justice Thomas’s opinion is short and, from the mutual fund industry’s perspective, very sweet: Janus Capital Group and Janus Capital Management were heavily involved in preparing the prospectuses, but they didn’t “make” the statements so they can’t be held liable. . . Which means that there is no one to sue for the misleading prospectuses.

The ICI was publicly silent (too busy preparing their latest “fund expenses have too plummeted” and “America, apple pie and 12(b)1 fee” press releases,) though you have to imagine silent high-fives in the hallway.  I’m not sure of what to make of Morningstar’s reaction.  They certainly expressed no concern about, displeasure with or, alternately, support for the decision.  Mostly they conclude that there’s no threat in the future:

The ruling should not have a material impact on Janus mutual fund shareholders, according to Morningstar’s lead Janus fund analyst, Kathryn Young. Janus has had procedures in place since 2003 to prevent market-timing . . .

Uhhh . . .  Uhhh . . .  if those procedures are expressed as a sort of contract – communicated to investors – in the prospectus . . .  uhhh . . . hello?

The more pressing question is whether the decision also guts the SEC’s enforcement power, since the decision seems to insulate a firm’s decision-makers from the legal consequences of their acts.  It’s unclear why that insulation wouldn’t protect them from regulators quite as thoroughly as from litigators.

In short, you’ll have about as much prospect of winning a suit against the Easter Bunny as you will of winning against a fund’s fictitious structure.

The Odd Couple: Manager Gerry Sullivan and the Vice Fund (VICEX)

One of the fund industry’s nicest guys, Gerry Sullivan, has been appointed to run an awfully unlikely fund: VICEX.  Gerry has managed the Industry Leaders fund (ILFIX) since its launch.  The fund uses a quantitative approach to identify industries in which there are clear leaders and then looks to invest in the one or two leading firms.  The fund has a fine long-term record, though it’s been stuck in the mud for the past couple years.  The problem is the fund’s structural commitment to financial stocks, which have been the downfall of many good managers (think: Bruce Berkowitz, 90% financials, bottom 1% of large cap funds through the first half of 2011).  Since financial services match the criteria for inclusion, Sullivan has stuck with them – and has been stuck with them.  The rest of the portfolio is performing well, and he’s waiting for the inevitable rebound in U.S. financials.

In the interim, he’s been appointed manager of two very distinctive, sector-limited funds:

Generation Wave Growth Fund (GWGF), a sort of “megatrends” fund targeting the health care, financial services and technology sectors, and

Vice Fund (VICEX), which invests in “sin stocks.”  It defines those as stocks involved with aerospace/defense, gaming, tobacco and alcoholic beverages.

I’m sure there are managers with less personal engagement in sin industries than Gerry (maybe John Montgomery, he of the church flute choir, at Bridgeway), but not many.

Almost all of the research on sin stocks reaches the same conclusion: investing here is vastly more profitable than investing in the market as a whole.  Sin stocks tend to have high barriers to entry (can you imagine anyone starting a new tobacco company?  or a new supersonic fighter manufacturer?) and are often mispriced because of investor uneasiness with them.  Over the medium- to long-term, they consistently outperform both the market and socially-responsible indexes.  One recent study found a global portfolio of sin stocks outperforming the broad market indexes in 35 of 37 years, with “an annual excess return between 11.15% and 13.70%”  (Fabozzi, et al, “Sin Stock Returns,” Journal of Portfolio Management, Fall 2008).

About two-thirds of the portfolio will be selected using quantitative models and one-third with greater qualitative input.  He’s begun reshaping the portfolio, and I expect to profile the fund once he’s had a couple quarters managing it.

Who You Callin’ a “Perma-bear”?

Kiplinger’s columnist Andrew Feinberg wrote an interesting column on the odd thought patterns of most perma-bears (“Permanent Pessimists,” May 2011).  My only objection is his assignment of Jeremy Grantham to the perma-bear den.  Grantham is one of the founders of the institutional money manager GMO (for Grantham, Mayo, and van Otterloo).  He writes singularly careful, thoughtful analyses – often poking fun at himself and his own errors (“I have a long and ignoble history of being early on market calls and, on two occasions, damaged the financial well-being of two separate companies – Batterymarch and GMO”) – which are accessible through the GMO website.

Feinberg notes that Grantham has been bearish on the US stock market for 20 years.  That’s a half-truth.  Grantham has been frequently bearish about whatever asset class has been most in vogue recently.  The bigger questions are, is he wrong and is he dangerous?  In general, the answers are “sometimes” and “not so much.”

One way of testing Grantham’s insights is to look at the performance of GMO funds that have the flexibility to actually act on his recommendations.  Those funds have consistently validated Grantham’s insights.  GMO Global Balanced, Global Equity Allocation and U.S. Equity Allocation are all value-conscious funds whose great long-term records seem to validate the conclusion that Grantham, skeptical and grumpy or not, is right quite often enough.

Who You Callin’ “Mr. Charge Higher Prices”?

This is painful, but an anonymous friend in the financial services industry sent along really disturbing ad for a webinar (a really ugly new word).  The title of the June 8^th webinar was “How to Influence Clients to Select Premium-Priced Financial Products and Services! (While Reinforcing Your Valuable Advice).”    The seminar leader “is known as Mr. Charge Higher Prices because he specializes in teaching how to get to the top of your customer’s price . . . and stay there!”

Sound sleazy?  Not at all, since the ad quotes a PhD, Professor of Ethics saying that the seminar leader shows you how to sell high-priced products which are also “higher-value products that more closely align with their goals and objectives.  [He] teaches them how to do so with integrity and professionalism.”  Of course, a quick internet search of the professor’s name and credentials turns up the fact that his doctorate is from an online diploma mill and not a university near London. It’s striking that seven years after public disclosure of his bought-and-paid-for PhD, both the ethicist and Mr. Higher Prices continue to rely on the faux credential in their advertising.

And so, one simple ad offers two answers to the question, “why don’t investors trust me more?”

Two Funds, and why they’re worth your time

Really worth it.  Every month the Observer profiles two to four funds that we think you really need to know more about.  They fall into two categories:

Most intriguing new funds: good ideas, great managers. These are funds that do not yet have a long track record, but which have other virtues which warrant your attention.  They might come from a great boutique or be offered by a top-tier manager who has struck out on his own.  The “most intriguing new funds” aren’t all worthy of your “gotta buy” list, but all of them are going to be fundamentally intriguing possibilities that warrant some thought.  This month’s two new funds:

RiverPark Short Term High Yield (RPHYX): put your preconceptions aside and pick up your copy of Graham and Dodd’s Security Analysis (1940).  Benjamin Graham was the genius who trained the geniuses and one of his favorite investments was “cigar butt stocks.”  Graham said of cigar butts found on the street, they might only have two or three good puffs left in them but since they were so cheap, you should still pick them up and enjoy them.  Cigar butt stocks, likewise: troubled companies in dying industries that could be bought for cheap and that might still have a few quarters of good returns.

You could think of RiverPark as a specialist in “cigar butt bonds.” They specialize in buying high-yield securities that have been, or soon will be, called.  Effectively, they’re buying bonds that yield 4% or more, but which mature in the next month or two.  The result is a unique, extremely low volatility cash management fund that’s earning several hundred times more than a money market.

Stars in the shadows: Small funds of exceptional merit. There are thousands of tiny funds (2200 funds under $100 million in assets and many only one-tenth that size) that operate under the radar.  Some intentionally avoid notice because they’re offered by institutional managers as a favor to their customers (Prospector Capital Appreciation and all the FMC funds are examples).  Many simply can’t get their story told: they’re headquartered outside of the financial centers, they’re offered as part of a boutique or as a single stand-alone fund, they don’t have marketing budgets or they’re simply not flashy enough to draw journalists’ attention.  There are, by Morningstar’s count, 75 five-star funds with under $100 million in assets; Morningstar’s analysts cover only eight gf them.

The stars are all time-tested funds, many of which have everything except shareholders.

The selection of this month’s star was inspired by a spate of new fund launches.  As a result of some combination of anxiety about a “new normal” investing world dominated by low returns and high volatility, fund companies have become almost obsessive about launching complex, expensive funds, whose managers have an unprecedented range of investment options.  Eight of the nine no-load funds on July’s funds in registration page represent that sort of complex strategy:

• Litman Gregory Masters Alternative Strategies
• PIMCO Credit Absolute Return Fund
• PIMCO Inflation Response Multi-Asset
• PIMCO Real Income 2019 and 2029
• PIMCO Tax Managed Real Return Fund
• Schooner Global Absolute Return Fund
• Toews Hedged Commodities Fund

The same thing’s true of the May and June lists: 75% “alternative strategy” funds.

We don’t list load-bearing funds, in general, but recent registrations and launches there show the same pattern:

• Franklin Templeton Global Allocation
• BlackRock Credit Opportunities
• BlackRock Emerging Market Long/Short Equity
• Parametric Structured Commodity Strategy Fund
• Neuberger Berman Global Allocation

The question is: if managers asked to execute a simple strategy (say, buying domestic stocks) couldn’t beat a simple index (the S&P 500), what’s the prospect that they’re going to soar when charged with executing hugely complex strategies?

This month’s star tests the hypothesis, “simpler really is better”:

ING Corporate Leaders Trust Series B (LEXCX): at $500 million in assets, you might think LEXCX a bit large to qualify as “in the shadows.”  This 76 year old fund is almost never in the news.  There’s never been an interview with its manager, because it has no manager.  There’s never been a shift in portfolio strategy, because it has no portfolio strategy.  Born in the depths of the Great Depression, LEXCX has the industry’s simplest, more stable portfolio.  It bought an equal number of shares of America’s 30 leading companies in 1935, and held them.  Period.  No change.  No turnover.  No manager.

The amazing thing?  This quiet antique has crushed not only its domestic stock peers for decades now, it’s also outperforming the high-concept funds in the very sort of market that should give them their greatest advantage.  Read on, Macduff!

Nassim Taleb is launching a Black Swan ETF!

Or not. Actually just “not.”

Nassim Taleb, a polymath academic, is the author of Fooled by Randomness (2001) and The Black Swan: The Impact of the Highly Improbable (2007).  The latter book, described by the Times of London as one of the “Books that helped to change the world,” argues that improbable events happen rather frequently, are effectively unpredictable, and have enormous consequences.  He seems to have predicted the 2007-09 meltdown, and his advice lends itself to specific portfolio actions.

Word that “Taleb is launching a black swan ETF” is rippling through various blogs, discussion boards (both here and Morningstar) and websites.  There are three small problems with the story:

1. Taleb isn’t launching anything.  The original story, “Protect Your Tail,” from Forbes magazine, points to Taleb’s former investment partner and hedge fund manager, Mark Spitznagel.  The article notes, “After Taleb became seriously ill the duo shut the fund. Taleb has since given up money management . . .”
2. It’s not clear that Spitznagel is launching anything.  Forbes says, “In July Universa intends to tap the financial adviser market by offering its own black swan ETF. The fund will mimic some of the strategies employed by its institutional-only hedge fund and will have an expense ratio of 1.5%.”  Unfortunately, as of late June, there’s no such fund in registration with the SEC.
3. And you wouldn’t need it if there was such a fund.  Spitznagel himself calls for allocating “about 1% of an investment portfolio to fund such a ‘black swan protection protocol.'”  (Hmmm… in my portfolio that’d be about $12.50.)  If you wanted to have some such protection without a fund with a trendy name, you could adopt Taleb’s recommendation for a “barbell strategy,” in which you place 80% into stable investments, like government bonds and cash, and 20% into risky ones, such stocks and commodities.

Oddly enough, that comes close to describing the sort of strategy already pursued by funds like Permanent Portfolio (PRPFX) and Fidelity Strategic Income (FSICX) and those funds charge half of the reported “black swan” expenses.

Briefly noted:

Long-time SmartMoney columnist, James B. Stewart has moved to The New York Times.  Stewart helped found the publication and has been writing the “Common Sense” column for it for 19 years, yet the letter from the editor in that issue made no mention of him and his own final column offered his departure as an afterthought. On June 24^th, his first column, also entitled “Common Sense,” appeared in the Times.  Stewart’s first story detailed the bribery of Mexican veterinarians by Tyson Foods.  He’ll be a Saturday columnist for the Business Day section of the paper, but they’re no word on what focus – if any – the feature might have.

For those interested in hiking their risk profiles, Matthews Asia launched its new Matthews China Small Companies Fund (MCSMX) on May 31, 2011.  As with most Matthews funds, there’s a lead manager (Richard Gao, who also manages Matthews China MCHFX) and a guy who’s there in case the manager gets hit by a bus (Henry Zhang, also the back-up guy on Matthews China).

Possible investors will want to read Andrew Foster’s new commentary for Seafarer Capital.  Andrew managed Matthews Asia Growth & Income (2005-2011) before leaving to found Seafarer.  While he has not yet filed to launch a mutual fund, Andrew has been posting a series of thoughtful essays on Asian investing, including several that focus on odd numbers and Chinese finance.  He promises in the next essay to look at BRICS in general but will also “touch upon China’s elevated (some would say breakneck) pace of investment, and what it means for the future of that country.”

Investors will also want to look at the prevalence of financial fraud in Chinese companies.  A recent Barron’s article provides a list of 20 Chinese firms that had a stop trading on the NASDAQ recently, a sign that their American accountants wouldn’t sign-off on the books.  While Matthews has a fine record and Gao promises extensive face-to-face meetings and fundamental research, these seem to be investments treacherous even for major firms.

Vanguard’s new actively managed emerging-markets fund, Vanguard Emerging Markets Select Stock (VMMSX) launched at the end of June.  It will complement their existing emerging markets index fund (VEIEX), the largest e.m. fund in existence.  Vanguard has four high-quality sub-advisors (M&G Investment Management, Oaktree Capital Management, Pzena Investment Management, and Wellington Management) none of whom have yet run an emerging markets funds.  Minimum investment is $3000 and the expense ratio is 0.95%, far below the category average.Rejoice!  AllianceBernstein is liquidating AllianceBernstein Global Growth (ABZBX). It’s no surprise, given the fund’s terrible performance of late.

Schwab plans to liquidate Schwab YieldPlus (SWYSX), a fund which once had $12 billion in assets.  Marketed as a higher-yield alternative to money markets, it blew apart in 2008 – down 47% – and Schwab has spent hundreds of millions on federal and state claims related to the fund, and faced charges filed by the SEC. Schwab will liquidate Schwab Tax-Free YieldPlus (SWYTX) and Schwab California Tax-Free YieldPlus (SWYCX) at the same time.

Vanguard Structured Large-Cap Growth liquidated on May 31, 2011.

John Hancock Classic Value Mega Cap (JMEAX) will liquidate on Aug. 19, 2011.

Calvert Large Cap Growth (CLGAX) will merge into Calvert Equity (CSIEX), assuming that shareholders (baaaa!) approve.  They’ve got the same management team and Calvert will lower CSIEX’s expenses a bit.

Morgan Stanley Special Growth (SMPAX) will soon merge into Morgan Stanley Institutional Small Company Growth (MSSGX).

ING Value Choice (PAVAX) and ING Global Value Choice (NAWGX) will close to most new investors on July 29, 2011.

Nuveen Tradewinds Value Opportunities (NVOAX) and Nuveen Tradewinds Global All-Cap (NWGAX) will close to most new investors on August 1, 2011.

Fidelity Advisor Mid Cap (FMCDX) will change its name to Fidelity Advisor Stock Selector Mid Cap on August 1, 2011.

JPMorgan Dynamic Small Cap Growth (VSCOX) and JPMorgan Small Cap Growth (PGSGX) will close to most new investors on August 12, 2011.

The MFO Mailbag . . .

I receive a couple dozen letters a month.  By far, the most common is a notice that someone goofed up their email address when signing up our e-mail notification service or registering for the site.  Regrets to Wolfgang and fjujv1.  The system generated a flood of mail reporting on its daily failure to reach you.  For other folks, please double-check the email you register with and, if you have a spam blocker, put the Mutual Fund Observer on your “white list” or our mail won’t get through.

Is there a Commentary archive (Les S)?  Yes, Les, there is.  You just can’t see it yet.  Chip is adjusting the site navigation and, within a week, the April through June commentaries will be available through links on the main commentary page.

Will the Observer post lists of Alarming, Three-Alarm and Most Alarming Three-Alarm funds (Joe B, Judy S, Ed S)?  Sorry, but no.  Those were Roy’s brainchild and I lack the time, expertise and passion needed to maintain them.  Morningstar’s free fund screener will allow you to generate lists of one-star funds, but I’m not familiar with other free screening tools aimed at finding the stinkers.

Is it still possible to access stuff you’d written at FundAlarm (Charles C)?  Not directly now that FundAlarm has gone dark.  I’d be happy to share copies of anything that I’ve retained (drop an email note), though that’s a small fraction of FundAlarm’s material.  There’s an interesting back door.  Google allows you to search for cached material by site.  That is, for example, you can ask The Google if it could provide a list of all references to Fidelity Canada that appeared at FundAlarm.com.  To do that, simple add the word site, a colon, and a web address to your search.

Fidelity Canada site:fundalarm.com

If the word “cached” appears next to a result, it means that Google has saved a copy of that page for you.

Shouldn’t Marathon Value be considered a Star in the Shadows (Ira A)?  Yes, quite possibly. Ira has recommended several other find small funds in the past and Marathon Value (MVPFX) seems to be another with a lot going for it.  I’ll check it out.  Thanks, Ira.  If you’ve got a fund you think we should look at more closely, drop a line to [email protected], and I’ll do a bit of reading.

In closing . . .

Thanks to all the folks who’ve provided financial support for the Observer this month.  In addition to a half dozen friends who provided cash contributions, either via PayPal or by check, readers purchased almost 250 items through the Observer’s Amazon link.  We have, as a result, paid off almost all of our start-up expenses.  Thanks!

For July, we’ll role out three new features: our Amazon store (which will make it easier to find highly-recommended books on investing, personal finance and more), our readers’ guide to the best commentary on the web, and The Falcon’s Eye.  (Cool, eh?)  Currently, if you enter a fund’s ticker symbol in a discussion board post, it generates a pop-up window linking you to the best web-based resources for researching and assessing that fund.  In July we’ll roll that out as a free-standing tool: a little box leading you to a wealth of information, including the Observer’s own fund profiles.

Speaking of which, there are a number of fund profiles in the works for August and September.  Those include Goodhaven Fund, T. Rowe Price Global Infrastructure and Emerging Markets Local Currency Bond funds, RiverPark Wedgewood Fund and, yes, even Marathon Value.

Until then, take care and keep cool!

David