Monthly Archives: January 2012

February 1, 2012

By David Snowball

Dear friends,

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

Sort of the Gingrich of Lizards.

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

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

Morningstar’s Fund Manager of the Year Awards

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

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

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

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

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

His conclusions:

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

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

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

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

Fun with Numbers: The Difference One Month Makes

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

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

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

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

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

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

Looking Past the Numbers, Part Two: The Oceanstone Fund

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

Percentile rank,
Small Value Peers
2007 Top 1%
2008 Top 1%
2009 Top 1%
2010 Top 13%
2011 Top 8%
2012, through 1/31 Top 2%
Trailing 12 months Top 5%
Trailing 36 months Top 1%
Trailing 60 months Top 1%

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

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

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

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

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

Read that formula: IV = IV divided by E, times E.  No more than a high school grasp of algebra tells you that this formula tells you nothing.  I shared it with two professors of mathematics, who both gave it the technical term “vacuous.”  It works for any two numbers (4 = 4 divided by 2, times 2) but it doesn’t allow you to derive one value from the other.  If you know “the stock’s earnings” and are trying to determine it’s “investment value,” this formula can’t do it.

2. that the shareholder reports say nothing.  Here is the entire text of the fund’s 2010 Annual Report:

Oceanstone Fund (the Fund) started its 2011 fiscal year on 7/1/2010 at net asset value (NAV) of $28.76 per share. On 12/27/2010, the Fund distributed a short-term capital gain dividend of $2.7887 per share and a long-term capital gain dividend of $1.7636. On 6/30/2011, the Fund ended this fiscal year at NAV of $35.85 per share. Therefore, the Fund’s total return for this fiscal year ended 6/30/2011 is 42.15%. During the same period, the total return of S&P 500 index is 30.69%.

For portfolio investment, the Fund seeks undervalued stocks. To determine a stock’s intrinsic value (IV), the Fund uses the equation IV = IV/E x E, as stated in the Fund’s prospectus. To use this equation, the key is to determine a company’s future earnings prospects with reasonable accuracy and subsequently a reasonable range for its IV/E ratio. As a company’s future earnings prospects change, this range for its IV/E ratio is adjusted accordingly.

Short-term, stock market can be volatile and unpredictable. Long-term, the deciding factor of stock price, as always, is value. Going forward, the Fund strives to find at least some of the undervalued stocks when they become available in U.S. stock market, in an effort to achieve a good long-term return for the shareholders.

One paragraph reports NAV change, the second reproduces the vacuous formula in the prospectus and the third is equally-vacuous boilerplate about markets.  What, exactly, is the manager telling you?  And what does it say that he doesn’t think you deserve to know more?

3. that Oceanstone’s Board is chaired by Rajendra Prasad, manager of Prasad Growth (PRGRX).  Prasad Growth, with its frantic trading (1300% annual turnover), collapsing asset base and dismal record (bottom 1% of funds for the past 3-, 5- and 10-year period) is a solid candidate for our “Roll Call of the Wretched.”  How, then, does his presence benefit Oceanstone’s shareholders?

4. the fund’s portfolio turns over at triple the average rate, is exceedingly concentrated (20 names) and is sitting on a 30% cash stake.  Those are all unusual, and unexplained.

You need to look beyond the numbers.  In general, a first step is to read the managers’ own commentary.  In this case, there is none.  Second, look for coverage in reliable sources.  Except for this note and passing references to 2009’s blistering performance, none again.  Your final option is to contact the fund advisor.   The fund’s website has no email inquiry link or other means to facilitate contact, so I’ve left a request for an interview with the fund’s phone reps.  They seemed dubious.  I’ll report back, in March, on my success or failure.

And Those Who Can’t Teach, Teach Gym.

Those of us who write about the investment industry occasionally succumb to the delusion that that makes us good investment managers.  A bunch of funds have managers who at least wave in the direction of having been journalists:

  • Sierra Strategic Income Fund: Frank Barbera, CMT, was a columnist for Financial Sense from 2007 until 2009.
  • Roge Partners:  Ronald W. Rogé has been a guest personal finance columnist for ABCNews.com.
  • Auer Growth:  Robert C. Auer, founder of SBAuer Funds, LLC, was from 1996 to 2004, the lead stock market columnist for the Indianapolis Business Journal “Bulls & Bears” weekly column, authoring over 400 columns, which discussed a wide range of investment topics.
  • Astor Long/Short ETF Fund: Scott Martin, co-manager, is a contributor to FOX Business Network and a former columnist with TheStreet.com
  • Jones Villalta Opportunity Fund: Stephen M. Jones was financial columnist for Austin Magazine.
  • Free Enterprise Action Fund: The Fund’s investment team is headed by Steven J. Milloy, “lawyer, consultant, columnist, adjunct scholar.”

Only a handful of big-time financial journalists have succumbed to the fantasy of financial acumen.  Those include:

  • Ron Insana, who left CNBC in March 2006 to start a hedge fund, lost money for his investors, closed the fund in August 2008, joined SAC Capital for a few months then left.  Now he runs a website (RonInsanaShow.com) hawking his books and providing one minute market summaries, and gets on CNBC once a month.
  • Lou Dobbs bolted from hosting CNN’s highly-rated Moneyline show in 1999 in order to become CEO of Space.com.  By 2000 he was out of Space and, by 2001, back at CNN.
  • Jonathan Clements left a high visibility post at The Wall Street Journal to become Director of Financial Education, Citi Personal Wealth Management.  Sounds fancy.  Frankly, it looks like he’s been relegated to “blogger.”  As I poke around the site, he seems to write a couple distinctly mundane, 400-word essays a week.
  • Jim Cramer somehow got rich in the hedge fund world.  Since then he’s become a clown whose stock picks are, by pretty much every reckoning, high beta and zero alpha.   And value of his company, TheStreet.com’s, stock is down 94.3% since launch.
  • Jim Jubak, who writes the “Jubak’s Picks” column for MSN Money, launched Jubak Global Equity (JUBAX), which managed to turn $10,000 at inception into $9100 by the end of 2011 while his peers made $11,400.

You might notice a pattern here.

The latest victim of hubris and comeuppance is John Dorfman, former Bloomberg and Wall Street Journal columnist.  You get a sense of Dorfman’s marketing savvy when you look at his investment vehicles.

Dorfman founded Thunderstorm Capital in 1999, and then launched The Lobster Fund (a long-short hedge fund) in 2000.  He planned launch of The Oyster Fund (a long-only hedge fund) and The Crab Fund (short-only) shortly thereafter, but that never quite happened.  Phase One: name your investments after stuff that’s found at low tide, snatched up, boiled and eaten with butter.

He launched Dorfman Value Fund in 2008. Effective June 30, 2009, the fund’s Board approved changing the name from Dorfman Value Fund to Thunderstorm Value Fund.  The reason for the name change is that the parent firm of Thunderstorm Mutual Funds LLC “has decided the best way to promote a more coherent marketing message is to rebrand all of its products to begin with the word ‘Thunderstorm’.”

Marketers to mutual fund: “Well, duh!”

Earth to Dorfman: did you really think that naming your fund after a character in Animal House (Kent Dorfman, an overweight, clumsy legacy pledge), especially one whose nickname was “Flounder,” was sharp to begin with? Name recognition is all well and good . . . . as long as your name doesn’t cause sniggering. I can pretty much guarantee that when I launch my mutual fund, it isn’t going to be Snowball Special (DAVYX).

Then, to offset having a half-way cool name, they choose the ticker symbol THUNX.  THUNX?  As in “thunks.”  Yes, indeed, because nothing says “trust me” like a vehicle that goes “thunk.”

Having concluded that low returns, high expenses, a one-star rating, and poor marketing aren’t the road to riches, the advisor recommended that the Board close (on January 17, 2012) and liquidate (on February 29, 2012) the fund.

Does Anyone Look at this Stuff Before Running It?

They’re at it again.  I’ve noted, in earlier essays, the bizarre data that some websites report.  In November, I argued, “There’s no clearer example of egregious error without a single human question than in the portfolio reports for Manning & Napier Dividend Focus (MNDFX).”  The various standard services reported that the fund, which is fully invested in stocks, held between 60 – 101% of its portfolio in cash.

And now, there’s another nominee for the “what happens when humans no longer look at what they publish” award.  In the course of studying Bretton Fund (BRTNX), I looked at the portfolios of the other hyper-concentrated stock funds – portfolios with just 10-15 stocks.

One such fund is Biondo Focus (BFONX), an otherwise undistinguished fund that holds 15 stocks (and charges way too much).   One striking feature of the fund: Morningstar reports that the fund invested 30% of the portfolio in a bank in Jordan.  That big gray circle on the left represents BFONX’s stake in Union Bank.

There are, as it turns out, four problems with this report.

  1. There is no Union Bank in Jordan.  It was acquired by, and absorbed in, Bank Al Etihad of Amman.
  2. The link labeled Union Bank (Jordan) actually leads to a report for United Bankshares, Inc. (UBSI).  UBSI, according to Morningstar’s report, mostly does business in West Virginia and D.C.
  3. Biondo Focus does not own any shares of Union or United, and never has.
  4. Given the nature of data contracts, the mistaken report is now widespread.

Joe Biondo, one of the portfolio managers, notes that the fund has never had an investment in Union Bank of Jordan or in United Bankshares in the US.  They do, however, use Union Bank of California as a custodian for the fund’s assets.  The 30% share attributed to Union Bank is actually a loan run through Union Bank, not even a loan from Union Bank.

The managers used the money to achieve 130% equity exposure in January 2012.  That exposure powered the portfolio to a 21.4% gain in the first four weeks of January 2012, but didn’t offset the fund’s 24% loss in 2011.  From January 2011 – 2012, it finished in the bottom 1% of its peer group.

Google, drawing on Morningstar, repeats the error, as does MSN and USA Today while MarketWatch and Bloomberg get it right. Yahoo takes error in a whole new direction when provides this list of BFONX’s top ten holdings:

Uhhh, guys?  Even in daycare the kids managed to count past two on their way to ten.  For the record, these are holdings five and six.

Update from Morningstar, February 2

The folks at Biondo claimed that they were going to reach out to Morningstar about the error. On February 2, Alexa Auerbach of Morningstar’s Corporate Communications division sent us the following note:

We read your post about our display of inaccurate holdings for the Biondo Focus fund. We’ve looked into the matter and determined that the fund administrator sent us incomplete holdings information, which led us to categorize the Union Bank holding as a short-equity position instead of cash. We have corrected our database and the change should be reflected on Morningstar.com soon.

Morningstar processes about 50,000 fund portfolios worldwide per month, and we take great pride in providing some of the highest quality data in the industry.

Point well-taken. Morningstar faces an enormous task and, for the most part, pulls it off beautifully. That said, if they get it right 99% of the time, they’ll generate errors in 6,000 portfolios a year. 99.9% accuracy – which is unattested to, but surely the sort of high standard Morningstar aims for – is still 600 incorrect reports/year. Despite the importance of Morningstar to the industry and to investors, fund companies often don’t know that the errors exist and don’t seek to correct them. None of the half-dozen managers I spoke with in 2011 and early 2012 whose portfolios or other details were misstated, knew of the error until our conversation.

That puts a special burden on investors and their advisers to look carefully at any fund reports (certainly including the Observer’s). If you find that your fully-invested stock fund has between 58-103% in cash (as MNDFX did), a 30% stake in a Jordanian bank (BFONX) or no reported bonds in your international bond fund (PSAFX, as of 2/5/2012), you need to take the extra time to say “how odd” and look further.

Doesn’t Anyone at the SEC Look at their Stuff Before Posting It?

The Securities and Exchange Commission makes fund documents freely available through their EDGAR search engine.  In the relentless, occasionally mind-numbing pursuit of new funds, I review each day’s new filings.  The SEC posts all of that day’s filings together which means that all the filings should be from that day.  To find them, check “Daily Filings” then “Search Current Events: Most Recent Filings.”

Shouldn’t be difficult.  But it is.  The current filings for January 5, 2012 are actually dated:

      • January 5, 2012
      • October 14, 2011
      • September 2, 2011
      • August 15, 2011
      • August 8, 2011
      • July 27, 2011
      • July 15, 2011
      • July 1, 2011
      • June 15, 2011
      • June 6, 2011
      • May 26, 2011
      • May 23, 2011
      • January 10, 2011

For January 3rd, only 20 of 98 listings are correct.  Note to the SEC: This Isn’t That Hard!  Hire A Programmer!

Fund Update: HNP Growth and Preservation

We profiled HNP Growth and Preservation (HNPKX) in January 2012.  The fund’s portfolio is set by a strict, quantitative discipline: 70% is invested based on long-term price trends for each of seven asset classes and 30% is invested based on short-term price trends.  The basic logic is simple: try to avoid being invested in an asset that’s in the midst of a long, grinding bear market.  Don’t guess about whether it’s time to get in or out, just react to trend.  This is the same strategy employed by managed futures funds, which tend to suffer in directionless markets but prosper when markets show consistent long-term patterns.

Since we published our profile, the fund has done okay.  It returned 3.06% in January 2012, through 1/27.  That’s a healthy return, though it lagged its average peer by 90 bps.  It’s down about 5.5% since launch, and modestly trails its peer group.  I asked manager Chris Hobaica about how investors should respond to that weak initial performance.  His reply arrived too late to be incorporated in the original profile, but I wanted to share the highlights.

Coming into August the fund was fully invested on the long term trend side (fairly rare…) and overweight gold, Treasuries and real estate on the short term momentum side. . .  Even though the gold and Treasuries held up [during the autumn sell-off], they weren’t enough to offset the remaining assets that were being led down by the international and emerging assets.  Also, as is usually the case, assets class correlations moved pretty close to 1.

Generally though, this model isn’t designed to avoid short-term volatility, but rather a protracted bear market.  By the end of September, we had moved to gold, treasuries and cash.  So, the idea was that if that volatility continued into a bear market, the portfolio was highly defensive.

While we are never happy with negative returns, we explain to shareholders that the model was doing what it was supposed to do.  It became defensive when the trends reversed.  I am not worried by the short term drop (I don’t like it though), as there have been many other times over the backtest that the portfolio would have been down in the 8-10% range.

Three Funds, and why they’re worth your time

Really worth it.  Every month the Observer profiles two to four funds that we think you really need to know more about.  One category is the most intriguing new funds: good ideas, great managers. These are funds that do not yet have a long track record, but which have other virtues which warrant your attention.  They might come from a great boutique or be offered by a top-tier manager who has struck out on his own.  The “most intriguing new funds” aren’t all worthy of your “gotta buy” list, but all of them are going to be fundamentally intriguing possibilities that warrant some thought.  This month we’ll highlight three funds with outstanding heritages and fascinating prospects:

Bretton Fund (BRTNX): Bretton is an ultra-concentrated value fund managed by the former president of Parnassus Investments.  It has shown remarkable – and remarkably profitable – independence from style boxes, peers and indexes in its brief life.

Grandeur Peak Global Opportunities (GPGOX): here’s a happy thought.  Two brilliantly-successful managers who made their reputation running a fund just like this one have struck out on their own, worrying about a much smaller and more-nimble fund, charging less and having a great time doing it.

Matthews Asia Strategic Income (MAINX): Matthews, which already boasts the industry’s deepest corps of Asia specialists, has added a first-rate manager and made her responsible for the first Asian income fund available to U.S. retail investors.

Launch Alert: Seafarer Overseas Growth and Income

Seafarer Overseas Growth and Income (SFGIX) is set to launch in mid-February, 2012.  The fund’s final prospectus is available at SeafarerFunds.com. The fund will be managed by Andrew Foster, formerly manager of Matthews Asia Growth & Income (MACSX) and Matthews’ research director or acting chief investment officer.

The great debate surrounding MACSX was whether it was the best Asia-centered fund in existence or merely one of the two or three best funds in existence.  Here’s the broader truth within their disagreement: Mr. Foster’s fund was, consistently and indisputably one of the best Asian funds in existence.  That distinction was driven by two factors: the fund’s focus on high-quality, dividend-paying stocks plus its willingness to hold a variety of securities other than common stocks.  A signal of the importance of those other securities is embedded in the fund’s ticker symbol; MACSX reflects the original name, Matthews Asian Convertible Securities Fund.

Those two factors helped make MACSX one of the two least volatile and most profitable Asian funds.  Whether measured by beta, standard deviation or Morningstar’s “downside capture ratio,” it typically incurs around half of the risk of its peers. Over the past 15 years, the fund’s returns (almost 11% per year) are in the top 1% of its peer group.  The more important stat is the fund’s “investor returns.”  This is a Morningstar calculation that tries to take into account the average investor’s fickleness and inept market timing.  Folks tend to arrive after a fund has done spectacularly and then flee in the midst of it crashing.  While it’s an imperfect proxy, “investor returns” tries to estimate how much the average investor in a fund actually made.  With highly volatile funds, the average investor might have earned nothing in a fund that made 10%.

In the case of MACSX, the average investor has actually made more than the fund itself.  That occurs when investors are present for the long-haul and when they’re in the habit of buying more when the fund’s value is falling.  This is an exceedingly rare pattern and a sign that the fund “works” for its investors; it doesn’t scare them away, so they’re able to actually profit from their investment.

Seafarer will take the MACSX formula global.  The Seafarer prospectus explains the strategy:

The Fund attempts to offer investors a relatively stable means of participating in a portion of developing countries’ growth prospects, while providing some downside protection, in comparison to a portfolio that invests purely in the common stocks of developing countries. The strategy of owning convertible bonds and dividend-paying equities is intended to help the Fund meet its investment objective while reducing the volatility of the portfolio’s returns.

Mr. Foster writes: “I hope to marry Asia Pacific with other ‘emerging markets,’ a few carefully-selected ‘frontier’ markets, alongside a handful of ‘developed’ countries.  I am excited about the possibilities.”

The fund’s minimum investment is $2500 for regular accounts and $1000 for IRAs.  The initial expense ratio is 1.60%, an amount that Mr. Foster set after considerable deliberation.  He didn’t want to charge an unreasonable amount but he didn’t want to risk bankrupting himself by underwriting too much of the fund’s expenses (as is, he expects to absorb 0.77% in expenses to reach the 1.6% level).  While the fund could have launched on February 1, Mr. Foster wanted a couple extra weeks for finish arrangements with some of the fund supermarkets and other distributors.

Mr. Foster has kindly agreed to an extended conversation in February and we’ll have a full profile of the fund shortly thereafter.  In the meantime, feel free to visit Seafarer Funds and read some of Andrew’s thoughtful essays on investing.

Briefly Noted

Fidelity Low-Priced Stock (FLPSX) manager Joel Tillinghast has returned from his four-month sabbatical.  It looks suspiciously like a rehearsal for Mr. Tillinghast’s eventual departure.  The five acolytes who filled-in during his leave have remained with the fund, which he’d managed solo since 1989.  If you’d had the foresight to invest $10,000 in the fund at inception, you’d have $180,000 in the bank today.

Elizabeth Bramwell is retiring in March, 2012.  Bramwell is an iconic figure who started her investment career in the late 1960s.  Her Bramwell Growth Fund became Sentinel Capital Growth (SICGX) in 2006, when she also picked up responsibility for managing Sentinel Growth Leaders (SIGLX), and Sentinel Sustainable Growth Opportunities (CEGIX). Kelli Hill, her successor, seems to have lots of experience but relatively little with mutual funds per se.  She’s sometimes described as the person who “ran Old Mutual Large Cap Growth (OILLX),” but in reality she was just one of 11 co-managers.

Fidelity has agreed to pay $7.5 million to shareholders of Fidelity Ultra-Short Bond fund (FUSBX) (and their attorneys) in settlement of a class action suit.  The plaintiffs claimed that Fidelity did not exercise reasonable oversight of the fund’s risks.  Despite being marketed as a low volatility, conservative option, the fund invested heavily in mortgage-backed securities and lost 17% in value from June 2007 – May 2008.  Fidelity, as is traditional in such cases, “believes that all of the claims are entirely without merit.”  Why pay them then?  To avoid “the cost and distraction” of trial, they say.  (Court Approves a $7.5 Million Settlement, MFWire, 1/27/12).

Fidelity is changing the name of Fidelity Equity-Income II (FEQTX) to Fidelity Equity Dividend Income fund. Its new manager Scott Offen, who took over the fund in November 2011, has sought to increase the fund’s dividend yield relative to his predecessor Stephen Peterson.

Bridgeway Ultra-Small Company (BRUSX) is becoming just a little less “ultra.”  The fund has, since launch, invested in the tiniest U.S. stocks, those in the 10th decile by market cap.  As some of those firms thrived, their market caps have grown into the next-higher (those still smaller than microcap) decile.  Bridgeway has modified its prospectus to allow the fund to buy shares in these slightly-larger firms

Invesco has announced the merger of three more Van Kampen funds, which follows dozens of mergers made after they acquired Morgan Stanley’s funds in 2010.  The latest moves: Invesco High Income Muni (AHMAX) will merge into Invesco Van Kampen High Yield Municipal (ACTFX).  Invesco US Mid Cap Value (MMCAX) and Invesco Van Kampen American Value (MSAJX), run by the same team, are about to become the same fund.  And Invesco Commodities Strategy (COAIX) disappears into the more-active Invesco Balanced Risk Commodity Strategy (BRCNX). The funds share management teams and similar fees, but Invesco Commodities Strategy has closely tracked its Dow-Jones-UBS Commodity Total Return Index benchmark, while Invesco Van Kampen Balanced Risk Commodity Strategy is more actively managed.

DWS Dreman Small Cap Value (KDSAX), which is already too big, reopened to all investors on February 1, 2012.

Managers Emerging Markets Equity (MEMEX) will liquidate on March 9, 2012. The fund added a bunch of co-managers three years ago, but it’s lagged its peer group in each of the past five years.  It’s attracted $45 million in assets, apparently not enough to making it worth the advisor’s while.

On March 23, 2012, the $34 million ING International Capital Appreciation (IACAX) will also liquidate, done in by performance that was going steadily from bad to worse.

I’d missed the fact that back in mid-October, RiverPark Funds liquidated their RiverPark/Gravity Long-Biased Fund.  RiverPark has been pretty ruthless about getting rid of losing strategies (funds and active ETFs) after about a year of weakness.

The Observer: Milestones and Upgrades

The folks who bring you the Observer are delighted to announce two milestones and three new features, all for the same reasonable rate as before.  Which is to say, free.

On January 27, 2012, folks launched the 2000th discussion thread on the Observer’s lively community forum.  The thread in question focused on which of two Matthews Asia funds, Growth and Income (MACSX) or Asia Dividend (MAPIX), was the more compelling choice.  Sentiment seemed to lean slightly toward MAPIX, with the caveat that the performance comparison should be tempered by an understanding that MACSX was not a pure-equity play.  One thoughtful poster analogized it to T. Rowe Price’s stellar Capital Appreciation (PRWCX) fund, in that both used preferred and convertible shares to temper volatility without greatly sacrificing returns.  In my non-retirement account, I own shares of MACSX and have been durn happy with it.

Also on January 27, the Observer attracted its 50,000th reader.  Google’s Analytics program labels you as “unique visitors.”  We heartily agree.  While the vast majority of our readers are American, folks from 104 nations have dropped by.  I’m struck that we’re had several hundred visits from each of Saudi Arabia, Israel, France, India and Taiwan.  On whole, the BRICs have dispatched 458 visitors while the PIIGS account for 1,017.

In March the Observer will debut a new section devoted to providing short, thoughtful summaries and analyses of the web’s best investment and finance websites.  We’ve grown increasingly concerned that the din of a million cyber voices is making it increasingly hard for folks to find reliable information and good insights as they struggle to make important life choices.  We will, with your cooperation, try to help.

The project team responsible for the effort is led by Junior Yearwood.  Those of you who’ve read our primer on Miscommunication in the Workplace know of Junior as one of the folks who helped edit that volume.   Junior and I met some years ago through the good offices of a mutual friend, and he’s always proven to be a sharp, clear-eyed person and good writer.  Junior brings what we wanted: the perspectives of a writer and reader who was financially literate but not obsessed with the market’s twitches or Fidelity’s travails.  I’ll let him introduce himself and his project:

It’s rare that a 19-year-old YouTube sensation manages to sum up the feelings of millions of Americans and people the world over.  But Tay Zonday, whose richly-baritone opening line is “are you confused about the economy?” did.  “Mama, Economy;  Make me understand all the numbers” explains it all.

The fact is we all could use a little help figuring it all out.  “We” might be a grandmother who knows she needs better than a zero percent savings account, a financial adviser looking to build moats around her clients’ wealth, or even me, the former plant manager and current freelance journalist. We all have something in common; we don’t know everything and we’re a bit freaked out by the economy and by the clamor.

My project is to help us sort through it.  The idea originated with the estimable Chuck Jaffe MarketWatch.   I am not a savvy investor nor am I a financial expert. I am a guy with a sharp eye for detail and the ability to work well with others.   My job is to combine your suggestions and considered analysis with my own research, into a monthly collection of websites that we believe are worth your time.  David will oversee the technical aspects of the project.   I’ll be reaching out, in the months ahead, to both our professional readership (investment advisers, fund managers, financial planners, and others) and regular people like myself.

Each month we will highlight and profile around five websites in a particular category. The new section will be launching in March with a review of mutual fund rating sites.  In the following months we’ll look at macro-level blogs run by investment professionals, Asian investing and many of the categories that you folks feel most interested in.   I’d be pleased to hear your ideas and I can be reached at [email protected]

A special word of thanks goes out to Chuck. We hope we can do justice to your vision.

Finally, I remain stunned (and generally humbled) by the talent and commitment of the folks who daily help the Observer out.  I’m grateful, in particular, to Accipiter, our chief programmer who has been both creative and tireless in his efforts to improve the function of the Observer’s discussion board software.  The software has several virtues (among them, it was free) but isn’t easy to scan.  The discussion threads look like this:

MACSX yield 3.03 and MAPIX yield 2.93. Why go with either as opposed to the other?

14 comments MaxBialystock January 27| Recent Kenster1_GlobalValue3:54PM Fund Discussions

Can’t really see, at a glance, what’s up with the 14 comments.  Accipiter wrote a new discussion summary program that neatly gets around the problem.  Here’s that same discussion, viewed through the Summary program:

MACSX yield 3.03 and MAPIX yield 2.93. Why go with either as opposed to the other? By – MaxBialystock viewed (468)

    • 2012-01-28 – scott : I was going to say MACSX is ex-Japan, but I guess it isn’t – didn’t it used to …
    • 2012-01-28 – MaxBialys : Reply to @scott: Yes, it’s SUPPOSED to be…….
    • 2012-01-28 – scott : Reply to @MaxBialystock: Ah. I own a little bit left of it, but I haven’t looke…
    • 2012-01-28 – MikeM : If you go to their web, site, they have a compare option where you can put the…
    • 2012-01-28 – InformalE : Pacific Tigers, MAPTX, is ex-Japan. I don’t think MACSX was ever ex-Japan.In re…
    • 2012-01-28 – msf : You can’t put too much stock in the category or benchmark with these funds. M…
    • 2012-01-28 – MaxBialys : Lots of work, thought and information. And CLEARLY expressed. MACSX is still ab…
    • 2012-01-28 – catch22 : Hi Max, Per your post, it appears you are also attempting to compare the dividen…
    • 2012-01-28 – Investor : I recently sold all of MACSX and reinvested most in MAPIX. I just did not feel …
    • 2012-01-28 – fundalarm : Reply to @Investor: as mentioned before, i have done the same at the end of Dec…
    • . 07:27:27 . – msf : Reply to @fundalarm: Though figures show long term performance of MAPIX to be b…
    • 2012-01-28 – MaxBialys : Ya, well, I kinda hogtied myself. I got 11 X more in MAPIX than MACSX, and MACS…

The Summary is easy to use.  Simply go to the Discussions page and look at the gray bar across the top.  The menu options are Discussions – Activity – Summary – Sign In.  Signing up and signing in are easy, free and give you access to a bunch of special features, but they aren’t necessary for using the Summary.  Simply click “Summary”  and, in the upper right, the “comments on/off” button.  With “comments on,” you immediately see the first line of every reply to every post.  It’s a fantastic tool for scanning the discussions and targeting the most provocative comments.

In addition to the Summary view, Chip, our diligent and crafty technical director, constructed a quick index to all of the fund profiles posted at the Observer.  Simply click on the “Funds” button on the top of each page to go to the Fund’s homepage.  There you’ll see an alphabetized list of the fifty profiles (some inherited from FundAlarm) that are available on-site.  Profiles dated “April 2011” or later are new content while many of the others are lightly-updated versions of older profiles.

I’m deeply grateful to both Accipiter and Chip for the passion and superb technical expertise that they bring.  The Observer would be a far poorer place without.  Thanks to you both.

In closing . . .

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

In March, there’ll be a refreshed and expanded profile of Matthews Asia Strategic Income (MAINX), profiles of Andrew Foster’s new fund, Seafarer Overseas Growth and Income (SFGIX) and ASTON/River Road Long-Short Fund (ARLSX) and a new look at an old favorite, GRT Value (GRTVX).

 

As ever,

 

 

February 2012 Funds in Registration

By David Snowball

CONESTOGA MID CAP FUND

Conestoga Mid Cap Fund seeks to provide long-term growth of capital.  They will invest in mid-cap (under $10 billion) stocks, including ADRs, convertible securities, foreign and domestic common and preferred stocks, rights and warrants.  They don’t  expect investment in foreign securities to exceed 20% of the fund’s total assets.  William C. Martindale will be the lead manager.  He also manages the exceptionally solid Conestoga Small Cap (CCASX) fund.  The minimum initial investment is $2500, reduced to $500 for accounts with an automatic investment plan. The expense ratio is capped at 1.35%.

DRIEHAUS INTERNATIONAL CREDIT OPPORTUNITIES FUND

Driehaus International Credit Opportunities Fund seeks to provide positive returns under a variety of market conditions.   The fund will hold both long and short positions in debt securities (both sovereign and corporate), equity securities and currencies. The debt securities held in the Fund may be fixed income or floating rate securities.  The portfolio will be concentrated and relatively high turnover (100-300%).  The fund will be managed by Adam Weiner.   Expenses not yet set. $10,000 minimum initial purchase, reduced to $2000 for tax-deferred accounts and ones with an automatic investing plan.  The fund will launch February 23.

HAMLIN HIGH DIVIDEND EQUITY

Hamlin High Dividend Equity Fund will seek high current income and long-term capital appreciation.  They intend to invest in “sustainable, dividend-paying equity securities,” which might include REITs, royalty trusts and master limited partnerships.  UP to 25% might be invested overseas.  The managers will be Charles Garland and Christopher D’Agnes, both of Hamlin Capital.  The minimum initial purchase is $2500. The initial expense ratio is 1.50% after a very large (165 bps) expense waiver.

ROCKY PEAK SMALL CAP VALUE FUND

Rocky Peak Small Cap Value Fund seeks long-term capital appreciation with a focus on preservation of capital.  They’ll invest in stocks with a capitalization under $3 billion.   The fund is non-diversified and the managers expect a low-turnover, tax-efficient style. Tom Kerr of Rocky Peak Capital will manage the fund.  Expense ratio will be 1.50% with a 2% redemption fee on shares held fewer than 90 days.  The minimum investment is $10,000 but reduced to $1,000 for tax-deferred accounts and those with automatic investing plans.

SEXTANT GLOBAL HIGH INCOME FUND

Sextant Global High Income Fund (SGHIX) will seek high income and capital preservation.  The Global High Income Fund invests in a globally diversified portfolio of income-producing debt and equity securities.  They cap US securities, stocks and investment grade bonds at 50% of the portfolio, and emerging markets securities at 33%.  The fund is clearly risk-conscious but also warns that exploiting a market panic will involve high short-term volatility.  Bryce Fegley, Saturna’s chief investment officer, and John Scott will run the fun.  The minimum initial investment is $1000.  The expense ratio is capped at 0.90%.   The fund launches March 30, 2012.

U.S. EQUITY HIGH VOLATILITY PUT WRITE INDEX FUND (HVPW)

U.S. Equity High Volatility Put Write Index Fund will seek the match the NYSE Arca U.S. Equity High Volatility Put Write Index which measures the return of a hypothetical portfolio consisting of exchange traded put options which have been sold on each of the 20 largest, most volatile stocks available.  Kevin Rich and Jeff Klearman manage the fund. The expense ratio is 0.95%.

 

Manager changes, January 2012

By Chip

Because bond fund managers, traditionally, had made relatively modest impacts of their funds’ absolute returns, Manager Changes typically highlights changes in equity and hybrid funds.

Fund Out with the old In with the new Dt
American Beacon International Equity (AAIPX) Boston Company Asset Management “has been terminated.” Yikes. Causeway Capital Management, Lazard Asset Management, and Templeton Investment will remain. 01/12
Fidelity Low-Priced Stock (FLPSX) No one, but . . . Joel Tillinghast has returned from a four month leave-of-absence.  Sadly, Fido admits this is part of a succession plan. 01/12
Fidelity Overseas (FOSFX) Ian Hart, whose first three years hugged the index and whose last three sagged well beneath it Vincent Montemaggiore 01/12
Fidelity Stock Selector Small Cap (FDSCX) Charles Myers has left the team Five other managers remain. 01/12
Fidelity Series Small Cap Opportunities (FSOPX) Charles Myers has left the team The same five managers who’ve run this and Stock Selection Small Cap.  Odd that this fund, open only to other Fido funds and their managers, is so dramatically better than their other charge. 01/12
Fidelity Trend (FTRNX) Jeff Feingold, who was supposed to manage Magellan and four other funds, is now concentrating solely on Fidelity Magellan (FMAGX) Dan Kelley 01/12
Fidelity Large-Cap Growth (FSLGX) Jeff Feingold, latest lamb on the Magellan altar Dan Kelley 01/12
Fidelity Advisor Strategic Growth (FTQAX) Jeff Feingold Dan Kelley 01/12
Fidelity Value Discovery (FEQTX) Scott Offen, who now manages Fidelity Equity Income II (FEQTX) Sean Gavin 01/12
First Eagle Gold (FEGIX) Abhay Deshpande Lead manager Rachel Benepe and associate manager Chris Kwan will remain 01/12
INTECH International (JMIIX), U.S. Core (JIRMX),  U.S. Growth (JRMGX), and U.S. Value (JRSIX) Robert Fernholz, although he will remain at Intech in a consulting role. Vassilios Papathanakos 01/12
MFS International Growth (MGRAX) No one, but . . . Kevin Dwan will join David Antonelli as a comanager 01/12
Morgan Stanley Institutional Core Fixed Income (MDIAX), Core Plus Fixed Income (MFXAX), and Long Duration funds (MSFVX) W. David Armstrong and Sanjay Verma No one. The other comanagers will keep going. 01/12
Oakmark Equity & Income (OAKBX) Ed Studzinski retired at the end of 2011, for whatever reason Oakmark offered only one week’s notice of his departure after 12 years on the fund. Comanager Clyde McGregor, who has been with the fund since 1995, will continue and will receive some additional analytical support. 01/12
Oppenheimer International Small Company (OSMAX) No one. The previous manager, Rohit Sah left last year. Rezo Kanovich will be the new lead manager. 01/12
The Pax World Global Women’s Equality Fund (PXWIX) Sujatha R. Avutu, Senior Portfolio Manager since 2007 Ivka Kalus-Bystricky 01/12
Putnam Global Utilities (PUGIX) Long term manager Michael Yogg. George Gianarikas 01/12
Sentinel Capital Growth (SICGX),Sentinel Growth Leaders (SIGLX), and Sentinel Sustainable Growth Opportunities (CEGIX) Elizabeth Bramwell, lead portfolio manager and investing icon, retires in March 2012 Kelli Hill, who served three years as one of 11 co-managers of Old Mutual Large Cap Growth (OILLX) 01/21
Third Avenue International Value (TAVIX) No one, but . . . Matthew Fine will join Amit Wadhwaney as a comanager 01/12
Virtus Tactical Allocation (NAINX) No one, but . . . Christopher Kelleher will join as comanager of fixed income assets 01/12
Walden Balanced Fund (WSBFX) Long-time manager Stephen Moody Walter Apfel, like Moody a Boston Trust employee 01/12

 

Grandeur Peak Global Opportunities (GPGOX) – February 2012

By David Snowball

Objective and Strategy

The fund will pursue long-term capital growth by investing in a portfolio of global equities with a strong bias towards small- and micro-cap companies. Investments will include companies based in the U.S., developed foreign countries, and emerging/frontier markets. The portfolio has flexibility to adjust its investment mix by market cap, country, and sector in order to invest where the best global opportunities exist.  The managers expect to typically have 100-150 holdings, though they are well above that for the short-term.

Adviser

Grandeur Peak Global Advisors is a small- and micro-cap focused global equities investment firm, founded in mid-2011, and comprised of a very experienced and collaborative investment team that worked together for years managing some of the Wasatch funds.  Global Opportunities and International Opportunities are their only two investment vehicles.  The funds have over $85 million in assets after three months of operation.

Managers

Robert Gardiner and Blake Walker.   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 few conclusions: (1) he loved managing money and needed to get back on the front lines, (2) the best investors will be global investor, (3) global microcap investing is the world’s most interesting sector, (4) and he had an increasing desire to manage his own firm.  He returned to active management with the launch of Wasatch Global Opportunities (WAGOX), a global go anywhere fund, focused primarily on micro and small cap companies.  From inception in late 2008 to June 2011 (the point of his departure), 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, for the second year in a row, Lipper designated WAIOX as the top International Small/Mid-Cap Growth Fund based on consistent (risk-adjusted) return for the five years through 2010.

They both speak French.  Mais oui!

Management’s Stake in the Fund

As of 1/27/2012, Mr. Gardiner is the largest shareholder in both funds, Mr. Walker “has a nice position in both funds” (their phrase) and all nine members of the Grandeur Peak Team are fund shareholders.  Eric Huefner makes an argument that I find persuasive: “We are all highly vested in the success of the funds and the firm. Every person took a significant pay cut (or passed up a significantly higher paying opportunity) to be here.”

Opening date

October 17, 2011.

Minimum investment

$2000 for regular accounts, $1000 for IRAs.  The fund’s available for purchase through all of the big independent platforms: Schwab, Fidelity, TD Ameritrade, Vanguard, Scottrade and Pershing.

Expense ratio

1.75% on $65 million in assets (as of January 27, 2012).

Comments

This is a choice, not an echo.  Most “global” funds invest in huge, global corporations.  Of roughly 250 global stock funds, 80% have average market caps over $10 billion.  Only six qualify as small cap funds.   While that large cap emphasis dampens risk, it also tends to dampen rewards and produces rather less diversification value for a portfolio.

Grandeur Peak Global Opportunities goes where virtually no one else does: tiny companies across the globe.  While these are intrinsically risky investments, they also offer the potential for huge rewards.  The managers invest exclusively in what they deem to be high-quality companies, measured by factors such as the strength of the management team, the firm’s return on capital and debt burden, and the presence of a sustainable competitive advantage.  They look for a mix of three sorts of securities:

Best-In-Class Growth Companies: fast earnings growth, good management, strong financials.  The strategy is to “find them small & undiscovered; buy and hold” until the market catches on.  In the interim,  capture the compounded earnings growth.

Fallen Angels: good growth companies that hit “a bump in the road” and are priced as value stocks.  The strategy is to buy them low and hold through the recovery.

Stalwarts: basically, blue chip micro-cap stocks.  Decent but not great growth, great financials, and the prospect of dividends or stock buy-backs.  The strategy is to buy them at a fair price but be careful of overpaying since their growth may be decelerating.

The question is: can this team manage an acceptable risk / reward balance for their investors.  The answer is: yes, almost certainly.

The reason for my confidence is simple: they’ve done it before and they’ve done it splendidly.  As their manager bios note, Gardiner and Blake have a record of producing substantial rewards for mutual fund investors and the two Grandeur Peak funds follow the same discipline as their Wasatch predecessors.

The real question for investors interested in global micro/small-cap investing is “why here rather than Wasatch?”  I put that question to Eric Huefner, Grandeur Peak’s president, who himself was a Wasatch executive.  He made three points:

  1. We have structured our team differently. All six members of our research team are global analysts. At Wasatch we had an International Team and a Domestic Team. The two teams talked with each other, but we didn’t have global analysts. We believe that to pick the best companies in the world you have to be looking at companies from every corner of the world. Each of our analysts (which includes the PMs) has primary responsibility for 1-2 sectors globally. This ensures that we are covering all sectors, and developing sector expertise, but with a global view. Yet, our team is small enough that all six members are actively involved in vetting every idea that goes into the portfolios.
  2. We feel more nimble than we did at Wasatch. Today (01/29/12) we have $87 million under management, whereas Wasatch has billions in Global Small Caps (including both funds and other accounts). When you are trying to move in and out of micro cap stocks this nimbleness really pays off – small amounts that add up. We plan to keep our firm a small boutique so that we don’t lose our ability to buy the stocks we want to.
  3. We have great respect for the team at Wasatch and believe they are well positioned to continue their success. Running our own firm has simply been a long-time dream of ours. I would be kidding you to say that 2011 wasn’t a distracting year for Robert and Blake as we got our new firm up and running. We feel like we’re off to a good start, and the organizational tasks are now behind us. Robert and Blake are very much re-focused on research as we begin 2012, and we have committed to minimizing their marketing efforts in order to keep our priority on research/performance. The good news is that since it’s our own firm everyone is highly energized and having a great time.

The final point in Grandeur Peak’s favor is obvious and unstated: they have the guys that actually produced the record Wasatch now holds.

Bottom Line

Both the team and the strategy are distinctive and proven.  Few people pursue this strategy, and none pursue it more effectively than Messrs. Gardiner and Blake.  Folks looking for a way to add considerable diversity to the typical large/domestic/balanced portfolio really owe it to themselves to spend some time here.

Website

Grandeur Peak Global Opportunities

© Mutual Fund Observer, 2012. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.

Bretton Fund (BRTNX) – February 2012

By Editor

Objective and Strategy

The Bretton Fund seeks to achieve long-term capital appreciation by investing in a small number of undervalued securities. The fund invests in common stocks of companies of all sizes. It normally holds a core position of between 15 to 20 securities whose underlying firms combine a defensible competitive advantage, relevant products, competent and shareholder-oriented management, growth, and a low level of debt.  The manager wants to invest “in ethical businesses” but does not use any ESG screens; mostly he avoids tobacco and gaming companies.

Adviser

Bretton Capital Management, LLC.  Bretton was founded in 2010 to advise this fund, which is its only client.

Manager

Stephen Dodson.  From 2002 to 2008, Mr. Dodson worked at Parnassus Investments in San Francisco, California, where he held various positions including president, chief operating officer, chief compliance officer and was a co-portfolio manager of a $25 million California tax-exempt bond fund. Prior to joining Parnassus Investments, Mr. Dodson was a venture capital associate with Advent International and an investment banking analyst at Morgan Stanley. Mr. Dodson attended the University of California, Berkeley, and earned a B.S. in Business Administration from the Haas School of Business.

Management’s Stake in the Fund

Mr. Dodson has over a million dollars invested in the fund.  As of April 5, 2011, Mr. Dodson and his family owned about 75% of the fund’s shares.

Opening date

September 30, 2010.

Minimum investment

$5000 for regular accounts, $1000 for IRAs or accounts established with an automatic investment plan.  The fund’s available for purchase through E*Trade and Pershing.

Expense ratio

1.5% on $3 million in assets.

Comments

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

As of 9/30/11, the fund held just 15 stocks.  Of those, six were large caps, three mid-caps and six small- to micro-cap.  His micro-cap picks, where he often discerns the greatest degree of mispricing, are particularly striking.  Bretton is one of only a handful of funds that owns the smaller cap names and it generally commits ten or twenty times as much of the fund’s assets to them.

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

This is the essence of active management, and active management is about the only way to distinguish yourself from an overpriced index.  Bretton’s degree of concentration is not quite unprecedented, but it is remarkable.  Only six other funds invest with comparable confidence (that is, invests in such a compact portfolio), and five of them are unattractive options.

Biondo Focus (BFONX) holds 15 stocks and (as of January 2012) is using leverage to gain market exposure of 130%.  It sports a 3.1% e.r.  A $10,000 investment in the fund on the day it launched was worth $7800 at the end of 2011, while an investment in its average peer for the same period would have grown to $10,800.

Huntington Technical Opportunities (HTOAX) holds 12 stocks (briefly: it has a 440% portfolio turnover), 40% cash, and 10% S&P index fund.  The expense ratio is about 2%, which is coupled with a 4.75% load.  From inception, $10,000 became $7200 while its average peer would be at $9500.

Midas Magic (MISEX).  The former Midas Special Fund became Midas Magic on 4/29/2011.  Dear lord.  The ticker reads “My Sex” and the name cries out for Clara Peller to squawk “Where’s The Magic?”  The fund reports 0% turnover but found cause to charge 3.84% in expenses anyway.  Let’s see: since inception (1986), the fund has vastly underperformed the S&P500, its large cap peer group, short-term bond funds, gold, munis, currency . . . It has done better than the Chicago Cubs, but that’s about it.  It holds 12 stocks.

Monteagle Informed Investor Growth (MIIFX) holds 12 stocks (very briefly: it reports a 750% turnover ratio) and 20% cash.  The annual report’s lofty rhetoric (“The Fund’s goal is to invest in these common stocks with demonstrated informed investor interest and ownership, as well as, solid earnings fundamentals”) is undercut by an average holding period of six weeks.  The fund had one brilliant month, November 2008, when it soared 36% as the market lost 10%.  Since then, it’s been wildly inconsistent.

Rochdale Large Growth (RIMGX) holds 15 stocks and 40% cash.  From launch through the end of 2011, it turned $10,000 to $6300 while its large cap peer group went to $10,600.

The Cook & Bynum Fund (COBYX) is the most interesting of the lot.  It holds 10 stocks (two of which are Sears and Sears Canada) and 30% cash.  Since inception it has pretty much matched the returns of a large-value peer group, but has done so with far lower volatility.

And so fans of really focused investing have two plausible candidates, COBYX and BRTNX.  Of the two, Bretton has a far more impressive, though shorter, record.  From inception through the end of 2011, $10,000 invested in Bretton would have grown to $11,500.  Its peer group would have produced an average return of $10,900. For 2011 as a whole, BRTNX’s returns were in the top 2% of its peer group, by Morningstar’s calculus.   Lipper, which classifies it as “multi-cap value,” reports that it had the fourth best record of any comparable fund in 2011.  In particular, the fund outperformed its peers in every month when the market was declining.  That’s a particularly striking accomplishment given the fund’s concentration and micro-cap exposure.

Bottom Line

Bretton has the courage of its convictions.  Those convictions are grounded in an intelligent reading of the investment literature and backed by a huge financial commitment by the manager and his family.  It’s a fascinating vehicle and deserves careful attention.

Fund website

Bretton Fund

© Mutual Fund Observer, 2012. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.

Marathon Value (MVPFX), August 2011

By Editor

*On December 12, 2022, Green Owl Intrinsic Value Fund (GOWLX) and Marathon Value Portfolio (MVPFX)  were merged and converted into a new Kovitz Core Equity ETF (EQTY) along with over $500 million of assets from separately managed accounts. The ETF adopted the record and strategy of the Green Owl Fund. In consequence, the information for Marathon Value should be read for archival purposes only.*

Objective

To provide shareholders with long-term capital appreciation in a well-diversified portfolio.  They invest primarily in U.S. mid- to large caps, though the portfolio does offer some international exposure (about 10% in mid-2011) and some small company exposure (about 2%).   On average, 80% of the portfolio is in the stock market while the rest is in cash, short term bonds and other cash equivalents.  The manager looks to buy stocks that are “relatively undervalued,” though Morningstar generally describes the portfolio as a blend of styles.  The core of the portfolio is in “sound businesses [with] dedicated, talented leaders” though they “sometimes may invest opportunistically in companies that may lack one of these qualities.”  The portfolio contains about 80 stocks and turnover averages 30% per year.

Adviser

Spectrum Advisory Services, an Atlanta based investment counseling firm whose clients include high net worth individuals and pension and profit sharing plans.  In addition to advising this fund, Spectrum manages over $415 million in taxable, retirement and charitable accounts for high net worth individuals and institutions.

Manager

Marc S. Heilweil.  Mr. Heilweil is President of Spectrum.  He founded the firm in 1991 and has managed Marathon since early 2000.  He received both his B.A. and his J.D. from Yale.

Management’s Stake in the Fund

Mr. Heilweil has over $1 million invested, and is the fund’s largest shareholder.

Opening date

The original fund launched on March 12, 1998 but was reorganized and re-launched under new management in March 2000.

Minimum investment

$2,500 across the board.

Expense ratio

1.23% on assets of $41 million (as of 6/30/2011). Update – 1.25% on assets of nearly $42 million (as of 1/15/2012.)

Comments

It’s not hard to find funds with great returns.  Morningstar lists them daily, the few surviving financial magazines list them monthly and The Wall Street Journal lists them quarterly.  It’s considerably harder to find funds that will make a lot of money for you. The indisputable reality is that investors get greedy any time that the market hasn’t crashed in 12 months and are delusional about their ability to stick with a high-return investment.   Many funds with spectacular absolute returns have earned very little for their investors because the average investor shows up late (after the splendid three-year returns have been publicized) and leaves early (after the inevitable overshoot on the downside).

The challenge is to figure out what your portfolio needs to look like (that is, your mix of stocks, bonds and cash and how much you need to be adding) in order for you to have a good chance of achieving your goals, and then pick funds that will give you exposure to those assets without also giving you vertigo.

For investors who need core stock exposure, little-known Marathon Value offers a great vehicle to attempt to get there safely and in comfort.  The manager’s discipline is unremarkable.  He establishes a firm’s value by looking at management strength (determined by long-term success and the assessment of industry insiders) and fundamental profitability (based on a firm’s enduring competitive advantages, sometimes called its “economic moat”).  If a firm’s value exceeds, “by a material amount,” its current share price, the manager will look to buy.  He’ll generally buy common stock, but has the option to invest in a firm’s high-yield bonds (up to 10% of the portfolio) or preferred shares if those offer better value.   Occasionally he’ll buy a weaker firm whose share price is utterly irrational.

The fund’s April 2011 semi-annual report gives a sense of how the manager thinks about the stocks in his portfolio:

In addition to Campbell, we added substantially to our holdings of Colgate Palmolive in the period.  Concerns about profit margins drove it to a price where we felt risk was minimal. In the S&P 500, Colgate has the second highest percentage of its revenues overseas.  Colgate also is a highly profitable company with everyday products.  Colgate is insulated from private label competition, which makes up just 1% of the toothpaste market.  Together with Procter & Gamble and Glaxo Smithkline, our fund owns companies which sell over half the world’s toothpaste.  While we expect these consumer staples shares to increase in value, their defensive nature could also help the fund outperform in a down market.

Our holdings in the financial sector consist of what we consider the most careful insurance underwriters, Alleghany Corp., Berkshire Hathaway and White Mountain Insurance Group.  All three manage their investments with a value bias.  While Berkshire was purchased in the fund’s first year, we have not added to the position in the last five years.  One of our financials, U.S. Bancorp (+7%) is considered the most conservatively managed of the nation’s five largest banks.  The rest of our financial holdings are a mix of special situations.

There seems nothing special about the process, but the results place Marathon among the industry’s elite.  Remember: the goal isn’t sheer returns but strong returns with limited risk.  Based on those criteria, Marathon is about as good as a stock fund gets.  For “visual learners,” it’s useful to glance at a risk-return snapshot of domestic equity funds over the past three years.

Here’s how to read the chart: you want to be as close as possible to the upper-left corner (infinite returns, zero risk).  The closer you get, the better you’re being served by your manager.  Five funds define a line of ideal risk/return balance; those are the five dots in a row near the upper-left.  Who are they?  From lower return/lower risk, they are:

First Eagle US Value (FEVAX): five stars, $1.8 billion in assets, made famous by Jean-Marie Eveillard.

Marathon Value (MVPFX): five stars for the past three-, five- and ten-year periods, as well as since inception, but with exceedingly modest assets.

Sequoia (SEQUX): five stars, $4.4 billion in assets, made famous by Bill Ruane and Bob Goldfarb, closed to new investors for a quarter century.

Nicholas (NICSX): five stars for the past three years, $1.7 billion, low turnover, willing to hold cash, exceedingly cautious, with the same manager (Ab Nicholas) for 41 years.

Weitz Partners Value (WPVLX): five stars over the past three years, $710 million in assets, run by Wally Weitz for 28 years.

That’s a nice neighborhood, and the funds have striking similarities: a commitment to high quality investments, long-tenured managers, low turnover, and a willingness to hold cash when circumstances dictate.  Except for Marathon, they average $2 billion in assets.

Fans of data could search Morningstar’s database for domestic large cap stock funds that, like Marathon, have “low risk” but consistently better long-term returns than Marathon.  There are exactly three funds (of about 1300 possibles) that meet those criteria: the legendary Sequoia, Amana Income (AMANX) and Auxier Focus (AUXFX), both of which are also profiled as “stars in the shadows.”

Regardless of how you ask the question, you seem to get the same answer: over Mr. Heilweil’s decade with the fund, it has consistently taken on a fraction of the market’s volatility (its beta value is between 74 and 76 over the past 3 – 10 years and Morningstar calculates its “downside capture ratio” as 68%). Alan Conner from Spectrum reports that Marathon is the 11th least volatile large core fund of near 1800 that Morningstar tracks. At the same time, it produces decent if not spectacular returns in rising markets (it captures about 82% of the gains in a rising market).  That combination lets it post returns in the top 10% of its peer group over the past 3 – 10 years.

Because Mr. Heilweil is in his mid 60s and the fund depends on his skills, potential investors might reasonably ask about his future.  Mr. Conner says that Heilweil intends to be managing the fund a decade from now.  The fund represents a limited piece of Heilweil’s workload, which decreases the risk that he’ll become bored or discouraged with it.

Bottom Line

If you accept the arguments that (a) market volatility will remain a serious concern and (b) high-quality firms remain the one undervalued corner of the market, then a fund with a long record of managing risk and investing in high-quality firms makes great sense.  Among funds that fit that description, few have compiled a stronger record than Marathon Value.

Fund website

Marathon Value Portfolio, though the website has limited and often outdated content.

© Mutual Fund Observer, 2011.  All rights reserved.  The information here reflects publicly available information current at the time of publication.  For reprint/e-rights contact [email protected].

Tocqueville Select Fund (TSELX), January 2012

By Editor

*The fund has been liquidated.*

Objective and Strategy

Tocqueville Select Fund pursues long-term capital appreciation by investing in a focused group of primarily small and mid-sized U.S. stocks. The portfolio, as of 9/30/11, is at the high end of its target of 12 to 25 stocks.  The managers pursue a bottom-up value approach, with special delight in “special situations” (that is, companies left for dead by other investors).  The fund can hedge its market exposure, but cannot short.  It can invest in fixed-income instruments, but seems mostly to hold stocks and cash.   Cash holdings are substantial, often 10 – 30% of the portfolio.

Adviser

Tocqueville Asset Management, which “has been managing private fortunes for more than 30 years.”  They serve as advisor to six Tocqueville funds, including the two former Delafield funds. The Advisor has been in the public asset management business since 1990 and. as of January, 2011, had more than $10.8 billion in assets under management.

Managers

J. Dennis Delafield, Vincent Sellecchia, and Donald Wang.  Mr. Delafield founded Delafield Asset Management in 1980 which became affiliated with Reich & Tang Asset Management in 1991. He and his team joined Tocqueville in 2009.  Mr. Sellecchia worked with Delafield at Reich & Tang and Delafield.  He and Delafield have co-managed The Delafield Fund since 1993. Mr. Wang seems to be the junior partner (though likely a talented one), having served as an analyst on The Delafield Fund and with Lindner funds.  Mr. Sellechia was the first manager (1998) of the partnership on which this fund is based, Mr. Wang came on board in 2003 and Mr. Delafield in 2005.

Management’s Stake in the Fund

Messrs Delafield and Sellecchia have each invested between $100,000 – 500,000 in Select and over $1 million in Delafield.   As of last report, Mr. Wang hadn’t joined the party.  Half of the fund’s trustees (4 of 8) have investments in the fund.

Opening date

Good question!  Select is the mutual fund successor to a private partnership, the Reich & Tang Concentrated Portfolio L.P.  The partnership opened on July 31, 1998.  On September 28 2008, it became Delafield Select Fund (a series of Natixis Funds Trust II) and one year later, it became The Select Fund (a series of The Tocqueville Trust).  This is to say, it’s a 13-year-old portfolio with a three-year record.

Minimum investment

$1000 for regular accounts, $250 for IRAs

Expense ratio

1.4% on $102 million in assets.  Assets jumped from $60 million to $100 million in the months after Morningstar, in September 2011, released its first rating for the fund. There’s also a 2% redemption fee on shares held under 120 days.

Comments

Have you ever thought about how cool it would be if Will Danoff ran a small fund again, rather than the hauling around $80 billion in Contrafund assets?  Or if Joel Tillinghast were freed of the $33 billion that Low-Priced Stock carries?  In short, if you had a brilliant manager suddenly free to do bold things with manageable piles of cash?  If so, you grasp the argument for The Select Fund.

Tocqueville Select Fund is the down-sized, ramped-up version of The Delafield Fund (DEFIX).  The two funds have the same management team, the same discipline and portfolios with many similarities.  Both have very large cash stakes, about the same distribution of stocks by size and valuation, about the same international exposure, and so on.  Both value firms with good management teams and lots of free cash flow, but both make their money off “financially troubled” firms. The difference is that Select is (1) smaller, (2) more concentrated and (3) a bit more aggressive.

All of which is a very good thing for modestly aggressive equity investors.  Delafield is a great fund, which garners only a tiny fraction of the interest it warrants.  Morningstar analysis Michael Breen, in September 2010, compared Delafield to the best mid-cap value funds (Artisan, Perkins, Vanguard) and concluded that Delafield was decisively better.

Its 11.4% annual gain for the past decade is the best in its category by a wide margin, and its 15-year return is nearly as good. And a look at upside and downside capture ratios shows this fund is the only one in the group that greatly outperformed the Russell Mid Cap Value Index in up and down periods the past 10 years.

Delafield Select was ever better.  Over the ten years ending 12/29/2011, the Select Portfolio would have turned $10,000 into $27,800 returned 14.5% while an investment in its benchmark, the Russell 2000, would have grown to $17,200.  Note that 70% of that performance occurred as a limited partnership, though the partnership’s fees were adjusted to make the performance comparable to what Select might have charged over that period.

That strong performance, however, has continued since the fund’s launch.  $10,000 invested at the fund’s inception would now be worth $13,200; the benchmark return for the same period would be $11,100.

The fund has also substantially outperformed its $1.3 billion sibling Delafield Fund, both from the inception of the partnership and from inception of the mutual fund.

The red flag is volatility.  The fund has four distinctive characteristics which would make it challenging as a significant portion of your portfolio:

  1. It’s very concentrated for a small cap fund, it might hold as few as a dozen stocks and even its high end (25-30 stocks) is very, very low.
  2. It looks for companies which are in trouble but which the managers believe will right themselves.
  3. It invests a lot in microcap stocks: about 30% at its last portfolio report.
  4. It invests a lot in a few sectors: the portfolio is constructed company by company, so it’s possible for some sectors (materials, as of late 2011) to be overweighted by 600% while there’s no exposure at all to another six half sectors.

It’s not surprising that the fund is volatile: Morningstar ranks is as “above average” in risk.  What is surprising is that it’s not more volatile; by Morningstar’s measurement, its “downside capture” has been comparable to its average small-value peer while its upside has been substantially greater.

Bottom Line

This is not the only instance where a star manager converted a successful partnership into a mutual fund, and the process has not always been successful.   Baron Partners (BPTRX) started life as a private partnership and as the ramped-up version of Baron Growth (BGRFX), but has decisively trailed its milder sibling since its launch as a fund.  That said, the Delafield team seem to have successfully managed the transition and interest in the fund bounced in September 2011, when it earned its first Morningstar rating.  Investors drawn by the prospects of seeing what Delafield and company can do with a bit more freedom and only 5% of the assets might find this a compelling choice for a small slice of a diversified portfolio.

Fund website

Tocqueville Select Fund

Fact Sheet

© Mutual Fund Observer, 2012. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.

Northern Global Tactical Asset Allocation Fund (BBALX) – September 2011, Updated September 2012

By Editor

This profile has been updated since it was originally published. The updated profile can be found at http://www.mutualfundobserver.com/2012/09/northern-global-tactical-asset-allocation-fund-bbalx-september-2011-updated-september-2012/

Objective

The fund seeks a combination of growth and income. Northern’s Investment Policy Committee develops tactical asset allocation recommendations based on economic factors such as GDP and inflation; fixed-income market factors such as sovereign yields, credit spreads and currency trends; and stock market factors such as domestic and foreign earnings growth and valuations.  The managers execute that allocation by investing in other Northern funds and outside ETFs.  As of 6/30/2011, the fund holds 10 Northern funds and 3 ETFs.

Adviser

Northern Trust Investments.  Northern’s parent was founded in 1889 and provides investment management, asset and fund administration, fiduciary and banking solutions for corporations, institutions and affluent individuals worldwide.  As of June 30, 2011, Northern Trust Corporation had $97 billion in banking assets, $4.4 trillion in assets under custody and $680 billion in assets under management.  The Northern funds account for about $37 billion in assets.  When these folks say, “affluent individuals,” they really mean it.  Access to Northern Institutional Funds is limited to retirement plans with at least $30 million in assets, corporations and similar institutions, and “personal financial services clients having at least $500 million in total assets at Northern Trust.”  Yikes.  There are 51 Northern funds, seven sub-advised by multiple institutional managers.

Managers

Peter Flood and Daniel Phillips.  Mr. Flood has been managing the fund since April, 2008.  He is the head of Northern’s Fixed Income Risk Management and Fixed Income Strategy teams and has been with Northern since 1979.  Mr. Phillips joined Northern in 2005 and became co-manager in April, 2011.  He’s one of Northern’s lead asset-allocation specialists.

Management’s Stake in the Fund

None, zero, zip.   The research is pretty clear, that substantial manager ownership of a fund is associated with more prudent risk taking and modestly higher returns.  I checked 15 Northern managers listed in the 2010 Statement of Additional Information.  Not a single manager had a single dollar invested.  For both practical and symbolic reasons, that strikes me as regrettable.

Opening date

Northern Institutional Balanced, this fund’s initial incarnation, launched on July 1, 1993.  On April 1, 2008, this became an institutional fund of funds with a new name, manager and mission and offered four share classes.  On August 1, 2011, all four share classes were combined into a single no-load retail fund but is otherwise identical to its institutional predecessor.

Minimum investment

$2500, reduced to $500 for IRAs and $250 for accounts with an automatic investing plan.

Expense ratio

0.68%, after waivers, on assets of $18 million. While there’s no guarantee that the waiver will be renewed next year, Peter Jacob, a vice president for Northern Trust Global Investments, says that the board has never failed to renew a requested waiver. Since the new fund inherited the original fund’s shareholders, Northern and the board concluded that they could not in good conscience impose a fee increase on those folks. That decision that benefits all investors in the fund. Update – 0.68%, after waivers, on assets of nearly $28 million (as of 12/31/2012.)

UpdateOur original analysis, posted September, 2011, appears just below this update.  Depending on your familiarity with the research on behavioral finance, you might choose to read or review that analysis first. September, 2012
2011 returns: -0.01%.  Depending on which peer group you choose, that’s either a bit better (in the case of “moderate allocation” funds) or vastly better (in the case of “world allocation” funds).  2012 returns, through 8/29: 8.9%, top half of moderate allocation fund group and much better than world allocation funds.
Asset growth: about $25 million in twelve months, from $18 – $45 million.
This is a rare instance in which a close reading of a fund’s numbers are as likely to deceive as to inform.  As our original commentary notes:The fund’s mandate changed in April 2008, from a traditional stock/bond hybrid to a far more eclectic, flexible portfolio.  As a result, performance numbers prior to early 2008 are misleading.The fund’s Morningstar peer arguably should have changed as well (possibly to world allocation) but did not.  As a result, relative performance numbers are suspect.The fund’s strategic allocation includes US and international stocks (including international small caps and emerging markets), US bonds (including high yield and TIPs), gold, natural resources stocks, global real estate and cash.  Tactical allocation moves so far in 2012 include shifting 2% from investment grade to global real estate and 2% from investment grade to high-yield.Since its conversion, BBALX has had lower volatility by a variety of measures than either the world allocation or moderate allocation peer groups or than its closest counterpart, Vanguard’s $14 billion STAR (VGSTX) fund-of-funds.  It has, at the same time, produced strong absolute returns.  Here’s the comparison between $10,000 invested in BBALX at conversion versus the same amount on the same day in a number of benchmarks and first-rate balanced funds:

Northern GTAA

$12,050
PIMCO All-Asset “D” (PASDX)

12,950
Vanguard Balanced Index (VBINX)

12,400
Vanguard STAR (VGSTX)

12,050
T. Rowe Price Balanced (RPBAX)

11,950
Fidelity Global Balanced (FGBLX)

11,450
Dodge & Cox Balanced (DODBX)

11,300
Moderate Allocation peer group

11,300
World Allocation peer group

10,300
Leuthold Core (LCORX)

9,750

BBALX holds a lot more international exposure, both developed and developing, than its peers.   Its record of strong returns and muted volatility in the face of instability in many non-U.S. markets is very impressive.

BBALX has developed in a very strong alternative to Vanguard STAR (VGSTX).  If its greater exposure to hard assets and emerging markets pays off, it has the potential to be stronger still.

Comments

The case for this fund can be summarized easily.  It was a perfectly respectable institutional balanced fund which has become dramatically better as a result of two sets of recent changes.

Northern Institutional Balanced invested conservatively and conventionally.  It held about two-thirds in stocks (mostly mid- to large-sized US companies plus a few large foreign firms) and one-third in bonds (mostly investment grade domestic bonds).   Northern’s ethos is very risk sensitive which makes a world of sense given their traditional client base: the exceedingly affluent.  Those folks didn’t need Northern to make a ton of money for them (they already had that), they needed Northern to steward it carefully and not take silly risks.  Even today, Northern trumpets “active risk management and well-defined buy-sell criteria” and celebrates their ability to provide clients with “peace of mind.”  Northern continues to highlight “A conservative investment approach . . . strength and stability . . .  disciplined, risk-managed investment . . . “

As a reflection of that, Balanced tended to capture only 65-85% of its benchmark’s gains in years when the market was rising but much less of the loss when the market was falling.  In the long-term, the fund returned about 85% of its 65% stock – 35% bond benchmark’s gains but did so with low volatility.

That was perfectly respectable.

Since then, two sets of changes have made it dramatically better.  In April 2008, the fund morphed from conservative balanced to a global tactical fund of funds.  At a swoop, the fund underwent a series of useful changes.

The asset allocation became fluid, with an investment committee able to substantially shift asset class exposure as opportunities changed.

The basic asset allocation became more aggressive, with the addition of a high-yield bond fund and emerging markets equities.

The fund added exposure to alternative investments, including gold, commodities, global real estate and currencies.

Those changes resulted in a markedly stronger performer.  In the three years since the change, the fund has handily outperformed both its Morningstar benchmark and its peer group.  Its returns place it in the top 7% of balanced funds in the past three years (through 8/25/11).  Morningstar has awarded it five stars for the past three years, even as the fund maintained its “low risk” rating.  Over the same period, it’s been designated a Lipper Leader (5 out of 5 score) for Total Returns and Expenses, and 4 out of 5 for Consistency and Capital Preservation.

In the same period (04/01/2008 – 08/26/2011), it has outperformed its peer group and a host of first-rate balanced funds including Vanguard STAR (VGSTX), Vanguard Balanced Index (VBINX), Fidelity Global Balanced (FGBLX), Leuthold Core (LCORX), T. Rowe Price Balanced (RPBAX) and Dodge & Cox Balanced (DODBX).

In August 2011, the fund morphed again from an institutional fund to a retail one.   The investment minimum dropped from $5,000,000 to as low as $250.  The expense ratio, however, remained extremely low, thanks to an ongoing expense waiver from Northern.  The average for other retail funds advertising themselves as “tactical asset” or “tactical allocation” funds is about 1.80%.

Bottom Line

Northern GTA offers an intriguing opportunity for conservative investors.  This remains a cautious fund, but one which offers exposure to a diverse array of asset classes and a price unavailable in other retail offerings.  It has used its newfound flexibility and low expenses to outperform some very distinguished competition.  Folks looking for an interesting and affordable core fund owe it to themselves to add this one to their short-list.

Fund website

Northern Global Tactical Asset Allocation

Update – 3Q2011 Fact Sheet

Fund Profile, 2nd quarter, 2012

© Mutual Fund Observer, 2012. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.

Wedgewood (formerly RiverPark/Wedgewood), (RWGFX), September 2011

By Editor 

At the time of publication, this fund was named RiverPark/Wedgewood.

Objective

Wedgewood pursues long-term capital growth, but does so with an intelligent concern for short-term loss. The manager invests in 20-25 predominately large-cap market leaders.  In general, that means recognizable blue chip names (the top four, as of 08/11, are Google, Apple, Visa, and Berkshire Hathaway) with a market value of more than $5 billion.  They describe themselves as “contrarian growth investors.”  That translates to two principles: (1) target great businesses with sustainable, long-term advantages and (2) buy them when normal growth investors – often momentum-oriented managers – are panicking and running away.  They then tend to hold stocks for substantially longer than do most growth managers.  The combination of a wide economic moat and a purchase at a reasonable price gives the fund an unusual amount of downside protection, considering that it remains almost always fully-invested.

Adviser

RiverPark Advisors, LLC.   Executives from Baron Asset Management, including president Morty Schaja, formed RiverPark in July 2009.  RiverPark oversees the five RiverPark funds, though other firms manage three of the five.  Until recently, they also advised two actively-managed ETFs under the Grail RP banner.  A legally separate entity, RiverPark Capital Management, runs separate accounts and partnerships.  Collectively, they have $100 million in assets under management, as of August 2011.  Wedgewood Partners, Inc. manages $1.1 billion in separate accounts managed similarly to the fund and subadvises the fund and provides the management team and strategy.

Manager

David Rolfe.  Mr. Rolfe has managed the fund since its inception, and has managed separate accounts using the same strategy since 1993.  He joined Wedgewood that year and was charged with creating the firm’s focused growth strategy.  He holds a BA in Finance from the University of Missouri at St. Louis, a durn fine school.

Management’s Stake in the Fund

Mr. Rolfe and his associates clearly believe in eating their own cooking.   According to Matt Kelly of RiverPark, “not only has David had an SMA invested in this strategy for years, but he invested in the Fund on day 1”.   As of August 1, David and his immediate family’s stake in the Fund was approximately $400,000.  In addition, 50% of Wedgewood’s 401(k) money is invested in the fund.  Finally, Mr. Rolfe owns 45% of Wedgewood Partners.  “Of course, RiverPark executives are also big believers in the Fund, and currently have about $2 million in the Fund.”

Opening date

September 30, 2010

Minimum investment

$1,000 across the board.

Expense ratio

1.25% on assets, in the retail version of the fund, of $29 million (as of August 2023). The institutional shares are 1.00%. Both share classes have a waiver on the expense ratio. 

Comments

Americans are a fidgety bunch, and always have been.  Alexis de Tocqueville observed, in 1835 no less, that our relentless desire to move around and do new things ended only at our deaths.

A native of the United States clings to this world’s goods as if he were certain never to die; and he is so hasty in grasping at all within his reach that one would suppose he was constantly afraid of not living long enough to enjoy them. He clutches everything, he holds nothing fast, but soon loosens his grasp to pursue fresh gratifications.

Our national mantra seems to be “don’t just sit there, do something!”

That impulse affects individual and professional investors alike.  It manifests itself in the desire to buy into every neat story they hear, which leads to sprawling portfolios of stocks and funds each of which earns the title, “it seemed like a good idea at the time.”  And it leads investors to buy and sell incessantly.  We become stock collectors and traders, rather than business owners.

Large-cap funds, and especially large large-cap funds, suffer similarly.  On average, actively-manage large growth funds hold 70 stocks and turn over 100% per year.  The ten largest such funds hold 311 stocks on average and turn over 38% per year

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

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

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

They force themselves to own fewer stocks than they really want to.  After filtering a universe of 500-600 large growth companies, Wedgewood holds only “the top 20 of the 40 stocks we really want to own.”   Currently, 63% of the fund’s assets are in its top ten picks.

They buy when other growth managers are selling. Most growth managers are momentum investors, they buy when a stock’s price is rising.  If the company behind the stock meets the firm’s quantitative (“return on equity > 25%”) and qualitative (“a dominant product or service that is practically irreplaceable or lacks substitutes”) screens, Wedgewood would rather buy during panic than during euphoria.

They hold far longer once they buy.  The historical average for Wedgewood’s separate accounts which use this exact discipline is 15-20% turnover where, as I note, their peers sit around 100%.

And then they spend a lot of time watching those stocks.  “Thinking and acting like business owners reduces our interest to those few businesses which are superior,” Rolfe writes, and he maintains a thoughtful vigil over those businesses. For folks interested in looking over their managers’ shoulders, Wedgewood has posted a series of thoughtful analyses of Apple.  Mr. Rolfe had a new analysis out to his investors within a few hours of the announcement of Steve Jobs’ resignation:

Mr. Jobs is irreplaceable.  That said. . . [i]n the history of Apple, the company has never before had the depth, breadth, scale and scope of management, technological innovation and design, financial resources and market share strength as it possesses today.  Apple’s stock will take its inevitable lumps over the near-term.  If the Street’s reaction is too extreme we will buy more.  (With our expectation of earnings power of +$40 per share in F2012, plus $100 billion in balance sheet liquidity by year-end 2011, the stock is an extreme bargain – even before today’s news.)

Beyond individual stock selection, Mr. Rolfe understood that you can’t beat an index with a portfolio that mirrors an index and so, “we believe that our portfolios must be constructed as different from an index as possible.”   And they are strikingly different.  Of 11 industry sectors that Morningstar benchmarks, Wedgewood has zero exposure to six.  In four sectors, they are “overweight” or “underweight” by margins of 2:1 up to 7:1.  Technology is the only near normal weighting in the current portfolio.  The fund’s market cap is 40% larger than its benchmark and its average stock is far faster growing.

None of which would matter if the results weren’t great.  Fortunately, they are.

Returns are high. From inception (9/92) to the end of the most recent quarter (6/11), Wedgewood’s large growth accounts returned 11.5% annually while the Russell 1000 Growth index returned 7.4%.  Wedgewood substantially leads the index in every trailing period (3, 5, 7, 10 and 15 years).  It also has the highest alpha (a measure of risk-adjusted performance) over the past 15 years of any of the large-cap growth managers in its peer group.

Risk is moderate and well-rewarded. Over the past 15 years, Wedgewood has captured about 85% of the large-cap universe’s downside and 140% of its upside.  That is, they make 40% more in a rising market and lose 15% less in a falling market than their peers do.   The comparison with large cap mutual funds is striking.  Large growth funds as a whole capture 110% of the downside and 106% of the upside.  That is, Wedgewood falls far less in falling markets and rises much more in rising ones, than did the average large-growth fund over the past 15 years.

Statisticians attempt to standardize those returns by calculating various ratios.  The famous Sharpe ratio (for which William Sharpe won a Nobel Prize) tries to determine whether a portfolio’s returns are due to smart investment decisions or a result of excess risk.  Wedgewood has the 10th highest Sharpe ratio among the 112 managers in its peer group.  The “information ratio” attempts to measure the consistency with which a manager’s returns exceeds the risks s/he takes.  The higher the IR, the more consistent a manager is and Wedgewood has the highest information ratio of any of the 112 managers in its universe.

The portfolio is well-positioned.  According to a Morningstar analysis provided by the manager, the companies in Wedgewood Growth’s portfolio are growing earnings 50% faster than those in the S&P500, while selling at an 11% discount to it.  That disconnect serves as part of the “margin of safety” that Mr. Rolfe attempts to build into the fund.

Is there reason for caution?  Sure.  Two come to mind.  The first concern is that these results were generated by the firm’s focused large-growth separate accounts, not by a mutual fund.  The dynamics of those accounts are different (different fee structure and you might have only a dozen investors to reason with, as opposed to thousands of shareholders) and some managers have been challenged to translate their success from one realm to the other.  I brought the question to Mr. Rolfe, who makes two points.  First, the investment disciplines are identical, which is what persuaded the SEC to allow Wedgewood to include the separate account track record in the fund’s prospectus.  For the purpose of that track record, the fund is now figured-in as one of the firm’s separate accounts.  Second, internal data shows good tracking consistency between the fund and the separate account composite.  That is, the fund is acting pretty much the way the separate accounts act.

The other concern is Mr. Rolfe’s individual importance to the fund.  He’s the sole manager in a relatively small operation.  While he’s a young man (not yet 50) and passionate about his work, a lot of the fund’s success will ride on his shoulders.  That said, Mr. Rolfe is significantly supported by a small but cohesive and experienced investment management team.  The three other investment professionals are Tony Guerrerio (since 1992), Dana Webb (since 2002) and Michael Quigley (since 2005).

Bottom Line

RiverPark Wedgewood is off to an excellent start.  It has one of the best records so far in 2011 (top 6%, as of 8/25/11) as well as one of the best records during the summer market turmoil (top 3% in the preceding three months).  Mr. Rolfe writes, “We are different. We are unique in that we think and act unlike the vast majority of active managers. Our results speak to our process.”  Because those results, earned through 18 years of separate account management, are not well known, advisors may be slow to notice the fund’s strength.  RWGFX is a worthy addition to the RiverPark family and to any stock-fund investors’ due-diligence list.

Fund website

Wedgewood Fund

Ellis’s “Losers Game” offers good advice for folks determined to try to beat a passive scheme, much of which is embodied here.  I don’t know how long the article will remain posted there, but it’s well-worth reading.

© Mutual Fund Observer, 2011.  All rights reserved.  The information here reflects publicly available information current at the time of publication.  For reprint/e-rights contact [email protected].

Sextant Growth (SSGFX), January 2007

By Editor

. . . from the archives at FundAlarm

These profiles have not been updated. The information is only accurate as of the original date of publication.

January 1, 2007

FundAlarm Annex – Fund Report

Objective

The fund seeks long-term growth by investing in common stocks, as well as convertible and preferred shares. While Morningstar classifies it as a mid-cap growth fund, the firm claims to follow a “value approach to investing” in looking at stocks with favorable potential over the next one to four years. They list a variety of predictable factors (revenue growth, p/e and p/b ratios, industry position and so on) in their selection criteria. No more than 5% of the fund may be invested in foreign companies.

Adviser

Saturna Capital. Saturna oversees four Sextant funds, the Idaho Tax-Free fund and two Amana funds. The Amana funds invest in accord with Islamic investing principles and were recognized as the best Islamic fund manager for 2005.

Manager

Nicholas Kaiser. Mr. Kaiser is president and founder of Saturna Capital. He has degrees from Chicago and Yale. In the mid 1970s and 1980s, he ran a mid-sized investment management firm (Unified Management Company) in Indianapolis. In 1989 he sold Unified and subsequently bought control of Saturna. As an officer of the Investment Company Institute, the CFA Institute, the Financial Planning Association and the No-Load Mutual Fund Association, he has been a significant force in the money management world. He’s also a philanthropist and is deeply involved in his community. By all accounts, a good guy all around. Morningstar must think so, too, because he’s a finalist for its 2006 Domestic Manager of the Year award.

Inception

December 30, 1990, though its name was then Northwest Growth Fund. Morningstar insists that the Growth Fund was launched in 1987. Saturna claims 1990, either October or December, for its predecessor fund and 1995 for the fund under its current configuration.

Minimum investment

$1,000 for regular accounts, $100 for IRAs.

Expense ratio

1.01% for Investor class shares and 0.77% for Institutional class shares on an asset base of about $62 million, as of July 2023. There’s a considerable performance adjustment built into the fee: management fee will change by as much as 0.20% based on performance in the trailing year. There is no redemption fee. 

Comments

This seems like a wonderfully admirable little fund. It should, in principle, do well. Expenses are quite low for such a tiny fund and management has linked its compensation to a solid performance fee. Its base management fee is 0.60% and the performance fee of up to 0.30% can cut the manager’s profits by half if he screws up. The fund holds stocks across all market capitalizations and ranges from deep value to growth holdings. The portfolio is pretty compact at 55 names, the manager is tax-sensitive and turnover is virtually non-existent. Morningstar reports 4% turnover, Saturna reports 0% for the year ending in May 2006. The fund reports virtually no frictional loss to taxes; that is, the annual tax cost on unsold shares trims less than 0.20% from the fund’s pre-tax returns. Finally, the manager, his employees and their families own nearly 40% of all outstanding shares. Which is good, since Mr. Kaiser’s pay is remarkably modest: $81,360 in total compensation for calendar 2005.

Happily, principle is aligned with practice. Sextant Growth has compiled a remarkable record for consistent excellence. It is one of just a tiny handful of equity funds that seems always above average, at least as measured by Morningstar’s metrics. Sextant Growth currently qualifies as four-star fund, but has also earned four stars for the preceding three-year, five-year and ten-year periods. For every trailing period, Morningstar gives it “above average” returns and “below average” risk.

Sextant Growth ranks in the top 15% of mid-cap growth funds over the long term, but the comparison is not terribly meaningful since the fund does not particularly target mid-caps (or, for that matter, growth stocks). It has returned 11.6% annually over the past decade and has substantially led the S&P 500 for the preceding three, five and ten years. It does tend to lag, but perform well, in growth markets: for example, it had a bottom decile rank in 2003 but still racked up gains of 26% and a bottom third rank in ’99 with returns of 41%.

Bottom line

The “Growth” name and “value” claim notwithstanding, this strikes me as a really solid core holding. The manager is experienced, the fund has prospered in a wide variety of market conditions, and the management firm seems highly principled. Kind of like a tiny little version of T. Rowe Price. It’s well deserving of substantially greater attention.

Company link

Sextant Growth Fund

Fact Sheet

Manning and Napier Disciplined Value (formerly Dividend Focus), (MNDFX), November 2011

By Editor

Objective

The fund seeks returns which are competitive with the broad market, while at the same time providing some capital protection during “sustained” bear markets. Stocks are selected from a broad universe of mid- to large-cap stocks — including international and emerging markets — based on high free cash flow, high dividend yields, and low likelihood of, well, bankruptcy. This is a quant fund which rebalances only once each year, although the managers reserve the right to add or drop individual holdings at any time.  Their target audience is investors “[s]eeking a fundamentals-based alternative to indexing.”

Adviser

Manning & Napier Advisors, LLC.  Manning & Napier was founded in 1970, and they manage about $43 billion in assets for a wide spectrum of clients from endowments and state pension plans to individual investors. About $17 billion of that amount is in their mutual funds. The firm is entirely employee-owned and their 22 funds are entirely team-managed. The firm’s investment team currently consists of more than 50 analysts and economists. The senior analysts have an average tenure of nearly 22 years.  The firm reorganized on October 1, 2011.  That reorganization reflected succession planning, as the firm’s owner – William Manning – entered his mid-70s.  Under the reorganization, the other employees own more of the fund and outside investors own a bit of it.

Manager

Managed by a team of ten. They actually mean “the team does it.” Manning & Napier is so committed to the concept that they don’t even have a CEO; that’s handled by another team, the Executive Group. In any case, the Gang of Many is the same crew that manages all their other funds.

Management’s Stake in the Fund

Only one team member has an investment in this fund, as of 3/31/11.  All of the managers have over $100,000 invested in Manning & Napier funds, and three of the eight have over $500,000.

Opening date

November 7, 2008

Minimum investment

$2,000, which is waived for accounts established with an automatic investment plan (AIP).

Expense ratio

0.52% on assets of $363.5 million, as of July 2023. 

Comments

Dividend Focus invests in a diversified portfolio of large- and mega-cap stocks.  The managers select stocks based on three criteria:

  • “High free cash flow (i.e., cash generated by a company that is available to equity holders). Minimum free cash flow yield must exceed the yield of high quality corporate bonds.
  • Dividend yield equal to or exceeding the dividend yield of the broad equity market.
  • Not having a high probability of experiencing financial distress. This estimate is based on a credit scoring model that incorporates measures of corporate health such as liquidity, profitability, leverage, and solvency to assess the likelihood of a bankruptcy in the next one to two years.”

The portfolio currently (9/31/11) holds 130 stocks, about a quarter international including a 3% emerging markets stake.

Why consider it?  There are three really good reasons.

First, it’s managed by the best team you’ve never heard of.

Manning & Napier launched at the outset of “the lost decade” of the 1970s when the stock market failed to beat either inflation or the returns on cash. The “strategies and disciplines” they designed to survive that tough market allowed them to flourish in the lost decade of the 2000s: every M&N fund with a ten-year record has significant, sustained positive returns across the decade. Results like that led Morningstar, not a group enamored with small fund firms, to name Manning & Napier as a finalist for the title, Fund Manager of the Decade. In announcing the designation, Karen Dolan of Morningstar wrote:

The Manning & Napier team is the real hidden gem on this list. The team brings a unique and attractive focus on absolute returns to research companies of all sizes around the globe. The results speak for themselves, not only in World Opportunities, but across Manning & Napier’s entire lineup. (The Fund Manager of the Decade Finalists, 11/19/09)

More recently, Morningstar profiled the tiny handful of funds that have beaten their category averages every single year for the past decade (“Here Come the Category Killers,” 10/23/11). One of only three domestic stock funds to make the list was Manning & Napier Pro-Blend Maximum (EXHAX), which they praised for its “team of extremely long-tenured portfolio managers oversee the fund, employing a strategy that overlays bottom-up security selection with macroeconomic research.” MNDFX is run by the same team.

Second, it’s the cheapest possible way of accessing that team’s skill.

Manning & Napier charges 0.60% for the fund, about half of what their other (larger, more famous) funds charge.  It’s even lower than what they typically charge for institutional shares.  It’s competitive with the 0.40 – 0.50% charged by most of the dividend-focused ETFs.

Third, the fund is doing well and achieving its goals.

Manning was attempting to generate a compelling alternative to index investing.  So far, they’ve done so.  The fund returned 9% through the first ten months of 2011, placing it in the top 2% of comparable funds.  The fund has outperformed the most popular dividend-focused index funds and exchange-traded funds since its launch.

 

Since inception

Q3, 2011
Vanguard Total Stock Market (VTSMX)

15,200

-15.3%
M&N Dividend Focus (MNDFX)

14,700

-8.9
Vanguard Dividend Appreciation Index (VDAIX)

14,600

-12.5
SPDR S&P Dividend ETF (SDY)

14,500

-9.4
First Trust Morningstar Div Leaders Index (FDL)

14,200

-3.7
iShares Dow Jones Select Dividend Index (DVY)

13,400

-8.1
PowerShares HighYield Dividend Achievers (PEY)

12,000

-5.9

The fund’s focus on blue-chip companies have held it back during frothy markets when smaller and less stable firms flourish, but it also holds up better in rough periods such as the third quarter of 2011.

The fund has also earned a mention in the company of some of the most distinguished actively-managed, five-star high dividend/high quality funds.

 

Since inception

Q3, 2011
M&N Dividend Focus (MNDFX)

14,700

-8.9
Tweedy, Browne Worldwide High Dividend Yield Value (TBHDX)

14,600

-10.1
GMO Quality III (GQETX)

14,100

-5.4

In the long run, the evidence is unequivocal: a focus on high-quality, dividend-paying stocks are the closest thing the market offers to a free lunch. That is, you earn slightly higher-than-market returns with slightly lower-than-market risk. Dividends help in three ways:

  • They’ve always been an important contributor to a fund’s total returns (Eaton Vance and Standard & Poor’s separately calculated dividend’s long-term contribution at 33-50% of total returns);
  • The dividends provide an ongoing source of cash for reinvestment, especially during downturns when investors might otherwise be reluctant to add to their positions; and,
  • Dividends are often a useful signal of the underlying health of the company, and that helps investors decrease the prospect of having a position blow up.

Some cynics also observe that dividends, by taking money out of the hands of corporate executives and placing in investors’ hands, decreases the executives’ ability to engage in destructive empire-building acquisitions.

Bottom Line

After a virtually unprecedented period of junk outperforming quality, many commentators – from Jeremy Grantham to the Motley Fools – predict that high quality stocks will resume their historic role as the most attractive investments in the U.S. market, and quite possibly in the world. MNDFX offers investors their lowest-cost access to what is unquestionably one of the fund industry’s most disciplined and consistently successful management teams. Especially for taxable accounts, investors should seriously consider both Manning & Napier Tax-Managed (EXTAX) and Dividend Focus for core domestic exposure.

Fund website

Disciplined Value Fund

Fact Sheet

 

© Mutual Fund Observer, 2011.  All rights reserved.  The information here reflects publicly available information current at the time of publication.  For reprint/e-rights contact [email protected].

RiverPark Short Term High Yield Fund (RPHYX) – July 2011

By Editor

This profile has been updated since it was originally published. The updated profile can be found at http://www.mutualfundobserver.com/2012/09/riverpark-short-term-high-yield-fund-rphyx-july-2011-updated-october-2012/

Objective

The fund seeks high current income and capital appreciation consistent with the preservation of capital, and is looking for yields that are better than those available via traditional money market and short term bond funds.  They invest primarily in high yield bonds with an effective maturity of less than three years but can also have money in short term debt, preferred stock, convertible bonds, and fixed- or floating-rate bank loans.

Adviser

RiverPark Advisers.  Executives from Baron Asset Management, including president Morty Schaja, formed RiverPark in July 2009.  RiverPark oversees the five RiverPark funds, though other firms manage three of the five.  Until recently, they also advised two actively-managed ETFs under the Grail RP banner.  A legally separate entity, RiverPark Capital Management, runs separate accounts and partnerships.  Collectively, they have $90 million in assets under management, as of May 2011.

Manager

David Sherman, founder and owner of Cohanzick Management of Pleasantville (think Reader’s Digest), NY.  Cohanzick manages separate accounts and partnerships.  The firm has more than $320 million in assets under management.  Since 1997, Cohanzick has managed accounts for a variety of clients using substantially the same process that they’ll use with this fund. He currently invests about $100 million in this style, between the fund and his separate accounts.  Before founding Cohanzick, Mr. Sherman worked for Leucadia National Corporation and its subsidiaries.  From 1992 – 1996, he oversaw Leucadia’s insurance companies’ investment portfolios.  All told, he has over 23 years of experience investing in high yield and distressed securities.  He’s assisted by three other investment professionals.

Management’s Stake in the Fund

30% of the fund’s investments come from RiverPark or Cohanzick.  However, if you include friends and family in the equation, the percentage climbs to about 50%.

Opening date

September 30, 2010.

Minimum investment

$1,000.

Expense ratio

1.25% after waivers on $20.5 million in assets.  The prospectus reports that the actual cost of operation is 2.65% with RiverPark underwriting everything above 1.25%.  Mr. Schaja, RiverPark’s president, says that the fund is very near the break-even point. Update – 1.25%, after waivers, on $53.7 million in assets (as of 12/31/2011.)

Comments

The good folks at Cohanzick are looking to construct a profitable alternative to traditional money management funds.  The case for seeking an alternative is compelling.  Money market funds have negative real returns, and will continue to have them for years ahead.  As of June 28 2011, Vanguard Prime Money Market Fund (VMMXX) has an annualized yield of 0.04%.  Fidelity Money Market Fund (SPRXX) yields 0.01%.  TIAA-CREF Money Market (TIRXX) yields 0.00%.  If you had put $1 million in Vanguard a year ago, you’d have made $400 before taxes.  You might be tempted to say “that’s better than nothing,” but it isn’t.  The most recent estimate of year over year inflation (released by the Bureau of Labor Statistics, June 15 2011) is 3.6%, which means that your ultra-safe million dollar account lost $35,600 in purchasing power.  The “rush to safety” has kept the yield on short term T-bills at (or, egads, below) zero.  Unless the U.S. economy strengths enough to embolden the Fed to raise interest rates (likely by a quarter point at a time), those negative returns may last through the next presidential election.

That’s compounded by rising, largely undisclosed risks that those money market funds are taking.  The problem for money market managers is that their expense ratios often exceed the available yield from their portfolios; that is, they’re charging more in fees than they can make for investors – at least when they rely on safe, predictable, boring investments.  In consequence, money market managers are reaching (some say “groping”) for yield by buying unconventional debt.  In 2007 they were buying weird asset-backed derivatives, which turned poisonous very quickly.  In 2011 they’re buying the debt of European banks, banks which are often exposed to the risk of sovereign defaults from nations such as Portugal, Greece, Ireland and Spain.  On whole, European banks outside of those four countries have over $2 trillion of exposure to their debt. James Grant observed in the June 3 2011 edition of Grant’s Interest Rate Observer, that the nation’s five largest money market funds (three Fidelity funds, Vanguard and BlackRock) hold an average of 41% of their assets in European debt securities.

Enter Cohanzick and the RiverPark Short Term High Yield fund.  Cohanzick generally does not buy conventional short term, high yield bonds.  They do something far more interesting.  They buy several different types of orphaned securities; exceedingly short-term (think 30-90 day maturity) securities for which there are few other buyers.

One type of investment is redeemed debt, or called bonds.  A firm or government might have issued a high yielding ten-year bond.  Now, after seven years, they’d like to buy those bonds back in order to escape the high interest payments they’ve had to make.  That’s “calling” the bond, but the issuer must wait 30 days between announcing the call and actually buying back the bonds.  Let’s say you’re a mutual fund manager holding a million dollars worth of a called bond that’s been yielding 5%.  You’ve got a decision to make: hold on to the bond for the next 30 days – during which time it will earn you a whoppin’ $4166 – or try to sell the bond fast so you have the $1 million to redeploy.  The $4166 feels like chump change, so you’d like to sell but to whom?

In general, bond fund managers won’t buy such short-lived remnants and money market managers can’t buy them: these are still nominally “junk” and forbidden to them.  According to RiverPark’s president, Morty Schaja, these are “orphaned credit opportunities with no logical or active buyers.”  The buyers are a handful of hedge funds and this fund.  If Cohanzick’s research convinces them that the entity making the call will be able to survive for another 30 days, they can afford to negotiate purchase of the bond, hold it for a month, redeem it, and buy another.  The effect is that the fund has junk bond like yields (better than 4% currently) with negligible share price volatility.

Redeemed debt (which represents 33% of the June 2011 portfolio) is one of five sorts of investments typical of the fund.  The others include

  • Corporate event driven (18% of the portfolio) purchases, the vast majority of which mature in under 60 days. This might be where an already-public corporate event will trigger an imminent call, but hasn’t yet.  If, for example, one company is purchased by another, the acquired company’s bonds will all be called at the moment of the merger.
  • Strategic recapitalization (10% of the portfolio), which describes a situation in which there’s the announced intention to call, but the firm has not yet undertaken the legal formalities.  By way of example, Virgin Media has repeatedly announced its intention to call certain bonds in August 2011. The public announcements gave the manager enough comfort to purchase the bonds, which were subsequently called less than 2 weeks later.  Buying before call means that the fund has to post the original maturities (five years) despite knowing the bond will cash out in (say) 90 days.  This means that the portfolio will show some intermediate duration bonds.
  • Cushion bonds (14%), refers to a bond whose yield to maturity is greater than its current yield to call.  So as more time goes by (and the bond isn’t called), the yield grows. Because I have enormous trouble in understanding exactly what that means, Michael Dekler of Cohanzick offered this example:

A good example is the recent purchase of the Qwest (Centurylink) 7.5% bonds due 2014.  If the bonds had been called on the day we bought them (which would have resulted in them being redeemed 30 days from that day), our yield would only have been just over 1%.  But since no immediate refinancing event seemed to be in the works, we suspected the bonds would remain outstanding for longer.  If the bonds were called today (6/30) for a 7/30 redemption date, our yield on the original purchase would be 5.25%.  And because we are very comfortable with the near-term credit quality, we’re happy to hold them until the future redemption or maturity.

  • Short term maturities (25%), fixed and floating rate debt that the manager believes are “money good.”

What are the arguments in favor of RPHYX?

  • It’s currently yielding 100-400 times more than a money market.  While the disparity won’t always be that great, the manager believes that these sorts of assets might typically generate returns of 3.5 – 4.5% per year, which is exceedingly good.
  • It features low share price volatility.  The NAV is $10.01 (as of 6/29/11).  It’s never been higher than $10.03 or lower than $9.97.  Almost all of the share price fluctuation is due to their monthly dividend distributions.    A $0.04 cent distribution at the end of June will cause the NAV will go back down to about $9.97. Their five separately managed accounts have almost never shown a monthly decline in value.  The key risk in high-yield investing is the ability of the issuer to make payments for, say, the next decade.  Do you really want to bet on Eastman Kodak’s ability to survive to 2021?  With these securities, Mr. Sherman just needs to be sure that they’ll survive to next month.  If he’s not sure, he doesn’t bite.  And the odds are in his favor.  In the case of redeemed debt, for instance, there’s been only one bankruptcy among such firms since 1985.
  • It offers protection against rising interest rates.  Because most of the fund’s securities mature within 30-60 days, a rise in the Fed funds rate will have a negligible effect on the value of the portfolio.
  • It offers experienced, shareholder-friendly management.  The Cohanzick folks are deeply invested in the fund.  They run $100 million in this style currently and estimate that they could run up to $1 billion. Because they’re one of the few large purchasers, they’re “a logical first call for sellers.  We … know how to negotiate purchase terms.”  They’ve committed to closing both their separate accounts and the fund to new investors before they reach their capacity limit.

Bottom Line

This strikes me as a fascinating fund.  It is, in the mutual fund world, utterly unique.  It has competitive advantages (including “first mover” status) that later entrants won’t easily match.  And it makes sense.  That’s a rare and wonderful combination.  Conservative investors – folks saving up for a house or girding for upcoming tuition payments – need to put this on their short list of best cash management options.

Financial disclosure: I intend to shift $1000 from the TIAA-CREF money market to RPHYX about one week after this profile is posted (July 1 2011) and establish an automatic investment in the fund.  That commitment, made after I read an awful lot and interviewed the manager, might well color my assessment.  Caveat emptor.

Note to financial advisers: Messrs Sherman and Schaja seem committed to being singularly accessible and transparent.  They update the portfolio monthly, are willing to speak individually with major investors and plan – assuming the number of investors grows substantially – to offer monthly conference calls to allow folks to hear from, and interact with, management.

Fund website

RiverPark Short Term High Yield

Update: 3Q2011 Fact Sheet

© Mutual Fund Observer, 2011.  All rights reserved.  The information here reflects publicly available information current at the time of publication.  For reprint/e-rights contact [email protected].

Artisan Global Value Fund (ARTGX) – May 2011

By Editor

Objective

The fund pursues long-term growth by investing in 30-50 undervalued global stocks.  Generally it avoids small cap caps, but can invest up to 30% in emerging and less developed markets.   The managers look for four characteristics in their investments:

  1. A high quality business
  2. With a strong balance sheet
  3. Shareholder-focused management
  4. Selling for less than it’s worth.

The managers can hedge their currency exposure, though they did not do so until they confronted twin challenges to the Japanese yen: unattractive long-term fiscal position plus the tragedies of March 2011. The team then took the unusual step of hedging part of their exposure to the Japanese yen.

Adviser

Artisan Partners of Milwaukee, Wisconsin.   Artisan has five autonomous investment teams that oversee twelve distinct U.S., non-U.S. and global investment strategies. Artisan has been around since 1994.  As of 3/31/2011 Artisan Partners had approximately $63 billion in assets under management (March 2011).  That’s up from $10 billion in 2000. They advise the 12 Artisan funds, but only 6% of their assets come from retail investors. Update – Artisan Partners had approximately $57.1 billion in assets under management, as of 12/31/2011.

Manager

Daniel J. O’Keefe and David Samra, who have worked together since the late 1990s.  Mr. O’Keefe co-manages this fund, Artisan International Value (ARTKX) and Artisan’s global value separate account portfolios.  Before joining Artisan, he served as a research analyst for the Oakmark international funds and, earlier still, was a Morningstar analyst.  Mr. Samra has the same responsibilities as Mr. O’Keefe and also came from Oakmark.  Before Oakmark, he was a portfolio manager with Montgomery Asset Management, Global Equities Division (1993 – 1997).  Messrs O’Keefe, Samra and their five analysts are headquartered in San Francisco.  ARTKX earns Morningstar’s highest accolade: it’s an “analyst pick” (as of 04/11).

Management’s Stake in the Fund

Each of the managers has over $1 million here and over $1 million in Artisan International Value.

Opening date

December 10, 2007.

Minimum investment

$1000 for regular accounts, reduced to $50 for accounts with automatic investing plans.  Artisan is one of the few firms who trust their investors enough to keep their investment minimums low and to waive them for folks willing to commit to the discipline of regular monthly or quarterly investments.

Expense ratio

1.5%, after waivers, on assets of $57 million (as of March 2011). Update – 1.5%, after waivers, on assets of $91 million (as of December 2011).

Comments

Artisan Global Value is the first “new” fund to earn the “star in the shadows” designation.  My original new fund profile of it, written in February 2008, concluded: “Global is apt to be a fast starter, strong, disciplined but – as a result – streaky.”  I have, so far, been wrong only about the predicted streakiness.  The fund’s fast, strong and disciplined approach has translated into consistently superior returns from inception, both in absolute and risk-adjusted terms.  Its shareholders have clearly gotten their money’s worth, and more.

What are they doing right?

Two things strike me.  First, they are as interested in the quality of the business as in the cost of the stock.  O’Keefe and Samra work to escape the typical value trap (“buy it!  It’s incredibly cheap!”) by looking at the future of the business – which also implies understanding the firm’s exposure to various currencies and national politics – and at the strength of its management team.  One of the factors limiting the fund’s direct exposure to emerging markets stocks is the difficulty of finding sufficiently high quality firms and consistently shareholder-focused management teams.  If they have faith in the firm and its management, they’ll buy and patiently wait for other investors to catch up.

Second, the fund is sector agnostic.   Some funds, often closet indexes, formally attempt to maintain sector weights that mirror their benchmarks.  Others achieve the same effect by organizing their research and research teams by industry; that is, there’s a “tech analyst” or “an automotive analyst.”  Mr. O’Keefe argues that once you hire a financial industries analyst, you’ll always have someone advocating for inclusion of their particular sector despite the fact that even the best company in a bad sector might well be a bad investment.  ARTGX is staffed by “research generalists,” able to look at options across a range of sectors (often within a particular geographic region) and come up with the best ideas regardless of industry.  That independence is reflected in the fact that, in eight of ten industry sectors, ARTGX’s position is vastly different than its benchmark’s.  Too, it explains part of the fund’s excellent performance during the 2008 debacle. During the third quarter of 2008, the fund’s peers dropped 18% and the international benchmark plummeted 20%.  Artisan, in contrast, lost 3.5% because the fund avoided highly-leveraged companies, almost all banks among them.

Why, then, are there so few shareholders?

Manager Dan O’Keefe offered two answers.  First, advisors (and presumably many retail investors) seem uncomfortable with “global” funds.  Because they cannot control the fund’s asset allocation, such funds mess up their carefully constructed plans.  As a result, many prefer picking their international and domestic exposure separately.  O’Keefe argues that this concern is misplaced, since the meaningful question is neither “where is the firm’s headquarters” or “on which stock exchange does this stock trade” (the typical dividers for domestic/international stocks) but, instead, “where is this company making its money?”  Colgate-Palmolive (CL) is headquartered in the U.S. but generates less than a fifth of its sales here.  Over half of its sales come from its emerging markets operations, and those are growing at four times the rate of its domestic or developed international market shares.  (ARTGX does not hold CL as of 3/31/11.)  His hope is that opinion-leaders like Morningstar will eventually shift their classifications to reflect an earnings or revenue focus rather than a domicile one.

Second, the small size is misleading.  The vast majority of the assets invested in Artisan’s Global Value Strategy, roughly $3.5 billion, are institutional money in private accounts.  Those investors are more comfortable with giving the managers broad discretion and their presence is important to retail investors as well: the management team is configured for investing billions and even a tripling of the mutual fund’s assets will not particularly challenge their strategy’s capacity.

What are the reasons to be cautious?

There are three aspects of the fund worth pondering.  First, the expense ratio (1.50%) is above average even after expense waivers.  Even fully-grown, the fund’s expenses are likely to be in the 1.4% range (average for Artisan).  Second, the fund offers limited direct exposure to emerging markets.  While it could invest up to 30%, it has never invested more than 9% and, since late-2009, has had zero.  Many of the multinationals in its portfolio do give it exposure to those economies and consumers.  Third, the fund offers no exposure to small cap stocks.  Its minimum threshold for a stock purchase is a $2 billion market cap.  That said, the fund does have an unusually high number of mid-cap stocks.

Bottom Line

On whole, Artisan Global Value offers a management team that is as deep, disciplined and consistent as any around.  They bring an enormous amount of experience and an admirable track record stretching back to 1997.  Like all of the Artisan funds, it is risk-conscious and embedded in a shareholder-friendly culture.  There are few better offerings in the global fund realm.

Fund website

Artisan Global Value fund

Update – December 31, 2011 (4Q) – Fact Sheet (pdf)

© Mutual Fund Observer, 2011.  All rights reserved.  The information here reflects publicly available information current at the time of publication.  For reprint/e-rights contact [email protected].

Wasatch Global Opportunities (WAGOX), May 2010

By Editor

. . . from the archives at FundAlarm

These profiles have not been updated. The information is only accurate as of the original date of publication.

FundAlarm Annex – Fund Report
May 1, 2010

Objective

The Fund invests in small and micro cap foreign and domestic companies, though it reserves the right to put up to 35% in larger companies. Up to 90% of the portfolio may be in micro caps and up to 50% in emerging markets.  Currently the US is about 40% of the portfolio which, if I’ve read the prospectus rightly, is at the high end of the anticipated range.  The fund is technically non-diversified, but currently holds 330 stocks. They use quantitative screens to focus their attention, then “bottom up” analysis – including extensive, expensive company visits – to make the final selections.

Adviser

Wasatch Advisors of Salt Lake City, Utah.  Wasatch has been around since 1975.  It both advises the 18 Wasatch funds – including the recently acquired 1st Source funds – and manages money for high
net worth individuals and institutions. Across the board, the strength of the company lies in its ability to
invest profitably in smaller (micro- to mid-cap) companies.  As of January 2010, the firm had $7 billion
in assets under management, about $5 billion of which were in their funds.

Managers

Robert Gardiner and Blake Walker.  Mr. Gardiner had previously been Wasatch’s research director and managed three exceedingly strong Wasatch funds, Micro Cap, Micro Cap Value and Small Cap Value. With the launch of this fund, he gave up his other charges to focus here.  Mr. Walker co-managed Wasatch International Opportunities.  They both speak French.  Mais oui!

Management’s Stake in the Fund

Mr. Gardiner has over a million dollars in the fund.  Mr. Walker is in the $10,000 – $50,000 range, with a larger investment in his other fund.

Opening date

November 17, 2008. 

Minimum investment

$2,000 for regular accounts, $1,000 for IRAs and Coverdells.

Expense ratio

 

1.19% for Investor class shares and 1.05% for Institutional class shares, after a waiver, on assets of $195 million, as of August 2023. There’s also a 2% redemption fee for shares held fewer than 60 days.

Comments

There’s a lot to be said for investing with specialist firms. Firms that know what they’re after and foster a culture that focuses on their core competency, tend to succeed. It’s clear that Matthews is the place to go for Asia funds.  Royce is your single best bet for small cap value investing.  Bridgeway is better at quant work than pretty much anyone else.  And Wasatch is as close as we have to a small growth specialist.  They define themselves by their expertise in the area, though they’ve purchased funds with other mandates.  They promise incredibly thorough research, cross-team collaboration, and discipline in pursuit of “the World’s Best Growth Companies.”

They started with a couple very fine funds whose success drove them to quick closings.  While they’ve added more flavors of funds lately – Emerging Markets Small Cap, Microcap Value, and Global Tech – their focus on great, smaller companies has remained.

Mr. Gardiner is likely one of their best managers.  He ran, most famously, Wasatch Microcap from its inception through 2007.  His success there was stunning.  If you had invested $10,000 with Mr. Gardiner  on the day he opened Micro Cap and sold on the day he retired as manager, you would have made $129,000.  Put another way, your $10,000 investment would have grown by an additional $10,000 a year
for 12 years.  That is almost four times more than his peers managed in the same period. Microcap Value – in which both Roy and I have personal investments – did almost as well, both during the years in which he served as mentor to the fund’s managers and afterward.  His new charge is off to a similar performance: WAGOX has turned $10,000 into $20,000 from its launch at the end of 2008 to April 29, 2010.  Its world-stock peers have returned about half as much.

The managers recognize that such returns are unsustainable, and seem to expect turbulence ahead.  In their April 20th note to investors, Messrs. Gardiner and Walker sound a note of caution:

Given our view of the world, our main focus continues to be on quality. In each and every market, including emerging markets, we are trying to invest in what we consider to be the highest-quality
names. If the global economy ends up growing faster than we expect, stocks of high-quality companies may not lead the market, but they should do just fine. And if we see the type of subdued growth we envision, we believe high-quality stocks will do better than average.

Investing is never a sure thing.  Several of Wasatch’s star funds have faded.  Wasatch, here and in its
other funds, are purposefully targeting higher risk, higher return asset classes.  That tends to make for “lumpy” returns: a string of great years followed by a few intensely painful ones. And Wasatch charges a lot – over 2% on average for their international and global offerings – for its services.

That said, Wasatch tends to find and keep strong employees.  They’ve got a track record for “tight” closings to protect their funds.  Their communications are timely and informative and, in the long run, they reward
their investors confidence. 

Bottom Line

This is a choice, not an echo.  Most “global” funds invest in huge, global corporations.  While that dampens risk, it also tends to dampen rewards and produces rather less diversification value for a portfolio.  This bold newer fund goes where virtually no one else does: tiny companies across the globe.  Only Templeton Global Smaller Companies (TEMGX) – with a value bent and a hefty sales load – comes close. Folks looking for a way to add considerable diversity to the typical large/domestic/balanced portfolio really owe it to themselves to spend some time here.

Fund website

Wasatch Global Opportunities

Fact Sheet

 

FundAlarm © 2010

February, 2010

By Editor

. . . from the archives at FundAlarm

These profiles have not been updated. The information is only accurate as of the original date of publication.

FundAlarm – Highlights & Commentary – (Updated 1st of Each Month)

David Snowball’s
New-Fund Page for February, 2010
 

Dear friends,

You can’t imagine the sinking feeling I had at the beginning of January, when I read the headline “Stocks have best first week since 1987.” Great, start with parallels to a year that had one of the market’s greatest-ever traumas. I was somehow less disturbed to read three headlines in quick succession at the end of that same month: “January barometer forecasts a down 2010” and “Three crummy weeks for stocks” on the same day as “Growth hits 6-year high” and “Energy prices dip in January.” There’s such a sense of disconnect between Wall Street’s daily gyrations (and clueless excesses) and the real-world that there’s not much to do, other than settle back and work toward a sensible long-term plan.

Portfolio Peeking Season

As is our tradition, Roy and I take a few minutes each February to share our portfolios and the thinking that shapes them. Our hope is that our discussions might give you the courage to go look at the bigger picture of your own investments and might, too, give you some guidance on how to make sense out of what you see.

My portfolio lives in two chunks: retirement (which used to be 15 years away but now, who knows?) and not. My retirement portfolio is overseen by three entities: TIAA-CREF, T. Rowe Price, and Fidelity. Within each retirement portfolio, I have three allocation targets:

  • 80% equity / 20% income (which includes real estate)
  • 50% domestic / 50% international in the equity sleeve
  • 75% developed / 25% developing in the international sleeve

Inevitably things vary a bit from those weightings (TIAA-CREF is closer to 75% domestic / 25% international, for example), but I get pretty close. Over the past decade, that allocation and good managers have allowed me to pretty consistently outperform the Vanguard Total Stock Market (VTSMX) by 1 to 2% per year. In 2008, I lost about 36% — a percent better than Vanguard’s Total Stock Market but a percent worse than my benchmark composite. In 2009, I gained about 37% — eight percent better than Vanguard’s Total Stock Market, almost five percent better than either Vanguard’s Total World Stock Market ETF (VT) or my benchmark.

The same factors that drove the portfolio down in 2008 (a lot of international exposure and a lot of emerging markets exposure) drove it back up in 2009. Early in 2009 I rebalanced my account, which meant adding equity exposure and, in particular, emerging market equity exposure. None of my funds earned less than 20% and four of them – T. Rowe Price International Discovery (PRIDX), T. Rowe Price Emerging Market Stock (PRMSX), Fidelity Emerging Middle East and Africa (FEMEX) and Wasatch Microcap Value (WAMVX, in a Roth IRA) – returned more than 50%.

My non-retirement portfolio is considerably more conservative: it’s supposed to be about 25% US stocks, 25% foreign stocks, 25% bonds and 25% cash. It lost about 20% in 2008 and made about 30% in 2009.

Right now that’s accomplished with six funds:

  • TIAA-CREF Money Market, which generates income of $2.66 for every $1000 in my account. Sigh.
  • T. Rowe Price Spectrum Income (RPSIX): a fund of Price’s income-oriented funds. Technically a multi-sector bond fund, its relative performance is often controlled by what happens with the one stock fund that’s included in its portfolio. In general, it serves as a low-volatility way for me to keep ahead of inflation without losing much sleep. It’s pretty consistently churned out 5-6% returns and has lost money only during the 2008 meltdown. I could imagine being talked into a swap for Hussman Strategy Total Return (HSTRX), which didn’t lose money in 2008 and which also offers a low-volatility way to keep ahead of inflation. It has pretty consistently outperformed Price by 2-3% annually, but HSTRX’s fate lies in the performance of one guy – John Hussman, PhD – while Price is spread across eight or nine managers.
  • Artisan International Value (ARTKX): a very solid fund run by two Oakmark alumni. Made 33% in 2009, while lagging the vast majority of its peers. I’m fine with that, since leading in a frothy market is often a sign of an undisciplined portfolio. My only question is whether I’d be better in Artisan Global Value (ARTGX), which is smaller, more flexible and run by the same team.
  • Leuthold Global (GLBLX) is one manifestation of my uncertainty about the global economy and markets. It’s a go-anywhere (really: think “pallets of palladium in a London warehouse”) fund driven by a strict quantitative discipline. I bought it because of my admiration for the long-term success of Leuthold Core (LCORX), of which this is the “global” version. It made about 32% in 2009, well beyond its peers. I’d be substantially happier if it didn’t cost 1.82% but I’m willing to give Leuthold the chance to prove that they can add enough value to overcome the higher cost.
  • Finally, my portfolio by enlivened by the appearance of two new players: FPA Crescent (FPACX) and Matthews Asian Growth & Income (MACSX). I started 2009 with a pile of cash generated by my sale of Utopia Core (which was closed and liquidated, at a painful loss) and Baron Partners (which talked big about having the ability to take short positions – which I hoped would provide a hedge in turbulent markets – but then never got around to actually doing it). After much debate, I split the money between FPA and Matthews. FPA Crescent is a no-load fund from a mostly “loaded” family. Its manager, Steven Romick, has the flexibility to invest either in a company’s stock or its bonds, to short either, or to hold cash. This has long been a fixture of Roy’s portfolio and I finally succumbed to his peer pressure (or good common sense). The Matthews fund is about the coolest Asian fund I know of: strong absolute returns and the lowest risk of any fund in the region. Once it reopened to new investors, I began piling up my pennies. In 2009, it did what it always does in soaring markets: it made a lot of money in absolute terms (about 40%) but trailed almost all of its peers (97% of them). Which is just fine by me.

A more rational person might be drawn to MACSX’s sibling fund, Matthews Asia Dividend (MAPIX). Over its first three years, it has actually outperformed MACSX (by almost 2:1) with no greater risk. “Bob C.,” on the FundAlarm discussion board, mentioned that he’d been moving some of his clients’ assets into the fund. In retrospect, that looks like a great move but I’m reluctant to sell a fund that’s doing what I bought it to do, so I’ll probably watch and learn a bit longer.

What does the next year bring? Not much. Most of my investment success has been driven by two simple impulses: don’t take silly risks (which is different from “don’t take risks”) and save like mad. I continue to gravitate toward conservative managers who have a fair amount of portfolio flexibility and a great record for managing downside risks. And I continue saving as much as I can: about 13.5% of my annual income goes to retirement, my employer – Augustana College – contributes the equivalent of 10%, and about 10% of my take-home pay goes into the funds I’ve just mentioned. While college professors don’t make a huge amount of money, the fact that all of my investments are set on auto-pilot helps me keep with the program. Although I’ve profiled several incredibly intriguing funds over the past year, I’ll probably not add any new funds right now – I don’t have any really obvious holes and I’m not great at keeping control of large numbers of funds.

Roy writes:

Alas, I am quite a bit less systematic than David in designing my portfolio, not that there is anything wrong with David’s approach (in fact, it is quite good). Basically, I try to keep my portfolio roughly divided into broad capitalization “thirds” — one-third each large cap, mid-cap and small-cap funds — and within each third roughly divided into value, blend, and growth orientation. In other words, I try to fill each square of the venerable, nine-square Morningstar style box with a roughly equal percentage of my portfolio, with a further goal to have about 15% of my portfolio in foreign stocks, and an overweight in the health care, technology and fiancial services sectors (I’ll get back to you in about 10 years on that last one). To get an overview of my portfolio for this purpose, I use the Morningstar portfolio X-ray tool (which, by the way, is available free on the T. Rowe Price WSeb site).

Roy’s Mutual Fund Portfolio (as of December 31, 2009, in alphabetical order within each percentage category)

More than 15% by dollar value

  • Buffalo Small Cap (BUFSX)
  • iShares Russell 3000 Index ETF (IWV)

Less than 15% by dollar value

  • Allianz RCM Global Technology D (DGTNX)
  • Bridgeway Ultra-Small Company Market (BRSIX)
  • Cohen & Steers Realty Shares (CSRSX)
  • Fidelity Select Brokerage & Investment (FSLBX)
  • FPA Crescent (FPACX)
  • Vanguard 500 Index (VFINX)
  • Vanguard European Stock Index (VEURX)
  • Vanguard Health Care (VGHCX)
  • Vanguard Total Stock Market ETF (VTI)
  • Wasatch Global Technology (WAGTX)
  • Weitz Partners Value (WPVLX)

In early 2010, shortly after the snapshot above, I sold Bridgeway Ultra-Small Company Market, due to poor performance, and invested the proceeds in Wasatch Mid Cap Value (WAMVX). I also have arranged to invest this year’s retirement plan contributions in WAMVX.

To simplify things a bit, I probably should sell my shares of Vanguard 500 Index (VFINX) and invest the proceeds in iShares Russell 3000 Index ETF. But I hold the VFINX in a taxable acccount, and my desire not to pay capital gains tax outweighs my need to tidy up. Likewise, to reduce the number of my holdings, I should sell my shares of Vanguard Total Stock Market ETF (VTI) and invest the proceeds in iShares Russell 3000 Index ETF (IWV), which plays a very similar role in my portfolio (the shares of VTI are held in a retirement account so, in this case, such a sale would have no tax consequences). Here, I just don’t want to pay the transaction fees which, while minor, ultimately strike me as unnecessary.

[Back to David] Forward Long/Short Credit Analysis: a clarification and correction

In January, I profiled

Forward Long/Short Credit Analysis (FLSRX), a unique fund which takes long and short positions in the bond market. The fund’s appeal is due to (a) its prospects for extracting value in an area that most other mutual funds miss and (b) its pedigree as a hedge fund. Forward’s president was particularly proud of this latter point, and took some pains to dismiss the efforts of competitors who could come up with nothing more than hedge fund wannabes:

Unlike the “hedge fund light” mutual funds, this one is designed just like a hedge fund, but with daily pricing, daily liquidity, and mutual fund-like transparency.

Forward’s commitment to the fund’s hedge roots was so strong that it was initially available only to qualified investors: folks with a net worth over $1.5 million or at least $750,000 invested in the fund.

Since Forward says that FSLRX models a Cedar Ridge hedge fund, but doesn’t specify which hedge fund they mean, I guessed that it was Cedar Ridge Master Fund and highlighted Cedar Ridge’s performance as an illustration of FSRLX’s potential.

I was wrong on two counts. First, I had the wrong hedge fund. “Evan,” one of our readers, wrote to inform me that the correct fund was Cedar Ridge Investors Fund I, LP. Second, the Investors’ fund record raises serious questions about FSLRX. The Cedar Ridge Master Fund lost 6% in 2008, a respectable performance. Cedar Ridge Investors, however, lost 31% — which is far less reassuring. Worse, there was a cosmic gap between the 2009 performance of Cedar Ridge Investors (up 98%) and its doppelganger, FSLRX (up 47%). When I asked about the gap in performance, the folks at Forward passed along this explanation:

The Forward Long/Short Credit Analysis Fund is based on the Cedar Ridge Investors I. The performance difference in 2009 between the two is easily explained. Compared to the Cedar Ridge fund, FLSRX fund is more diversified and uses less leverage to be able to provide daily liquidity and operate as a fund for retail investors.

Somehow that 2:1 return difference is making the Forward fund look pretty durned “hedge fund light” about now. (Many thanks to Evan for pointing me, finally, in the right direction.)

Akre Focus: Maybe it is worth all the fuss and bother

In the January issue, I took exception to the uncritical celebration by financial journalists of the new Akre Focus (AKREX) fund. Manager Chuck Akre intends to manage AKREX using the same strategy he employed with the successful FBR Focus (FBRVX) fund, and Akre is the only only manager FBRVX has ever known. AKREX – for all intents and purposes – is FBRVX: same manager, same expenses, same investment requirement, same strategy. I was, however, still suspicious: FBRVX has a very streaky record, Mr. Akre’s entire analyst team resigned in order to stay with the FBR Fund and, in doing so, they were reported as making comments that suggested that Mr. Akre might have been something less than the be-all and end-all of the fund. I e-mailed Akre Capital Management in December, asking for a chance to talk but never heard back.

Victoria Odinotska, president of a public relations firm that represents Akre Focus, read the story and wrote to offer a chance to chat with Mr. Akre about his fund and his decision to start Akre Focus. I accepted her offer and gave our Discussion Board members a chance to suggest questions for Mr. Akre. I got a bunch, and spent an hour in January chatting with him.

Our conversation centered on three questions.

Question One: Why did you leave? Answer: Because, according to Mr. Akre, FBR decided to squeeze, if not kill, the goose that laid its golden eggs. As Mr. Akre, explained, FBR is deeply dependent on the revenue that he generated for them. He described his fund as contributing “80% of FBR’s assets and 100% of net income.” While I cannot confirm his exact numbers, there’s strong evidence that Focus is, indeed, the lynchpin of FBR’s economic model. At year’s end, FBR funds held $1.2 billion in assets. A somewhat shrunken Focus fund accounted for $750 million, which works out to about 63% of assets. By Mr. Akre’s calculation, he managed $1 billion for FBR, which represents about 80%. More importantly, most of FBR’s funds are run at a substantial loss, based on official expense ratios:


Expense ratio before waivers

Expense ratio after waivers

Loss on the fund
FBR Pegasus Small Cap Growth

3.9%

1.5%

2.4%
FBR Pegasus Mid-Cap

3.0%

1.4%

1.6%
FBR Pegasus Small Cap

2.8%

1.5%

1.3%
FBR Technology

3.0%

1.9%

1.1%
FBR Pegasus

2.2%

1.3%

0.9%
FBR Focus

1.4%

1.4%

–
FBR Large Cap Financial

1.8%

1.8%

–
FBR Small Cap Financial

1.5%

1.5%

–
FBR Gas Utilities Index

0.8%

0.8%

–

Source: FBR Annual Report, “Financial Highlights, Year Ending 10/31/09”

Based on these numbers, virtually all of FBR’s net income was generated by two guys (Mr. Akre, whose Focus fund generated $10.8 million, and David Ellison whose two Financial funds chipped in another $3.5 million), as well as one modestly over-priced index fund (which grossed $1.5 million)

FBR underwent a “change of control” in early 2009 and, as Mr. Akre describes it, they decided they needed to squeeze the goose that was laying their golden eggs. After a series of meetings, FBR announced their new terms to Akre, which he says consisted of the following:

  • He needed to take a 20% cut in compensation (from about 55 basis points on his fund to 45 basis points), a potential cash savings to management that he did not believe would be passed on to fund shareholders.
  • He would need to take on additional marketing responsibilities, presumably to plump the goose.
  • And he had eight days to make up his mind.

Mr. Akre said “no” and, after consulting with his team of three analysts who agreed to join him, decided to launch Akre Focus. The fund was approved by the SEC in short order and, while his analysts worked on research back at the home office, Mr. Akre took a road trip. Something like three days into that trip, he got a call. It was his senior analyst who announced that all three analysts had resigned from his new fund. The next day, FBR announced the hiring of the three analysts to run FBR Focus.

FBR has been taking a reasonably assertive tack in introducing their new portfolio managers. They don’t quite claim that they’ve been running the fund all this time, but they come pretty close. FBR Focus’s Annual Report, January 2010, says this: “Finally, we are pleased to be writing this letter to you in our expanded role as the Fund’s co-Portfolio Managers. We assumed this position on August 22, 2009, after working a cumulative 23 years as the analysts responsible for day to day research and management of the Fund’s investments (emphasis added).” Mr. Akre takes exception to these claims. He says that his analysts were just that — analysts — and not shadow managers, or co-managers, or anything similar. Mr. Akre notes, “My analysts haven’t run the fund. They have no day-to-day investment management experience. They were assigned to research companies and write very focused reports on them. As a professional development opportunity, they did have a chance to offer a recommendation on individual names. But the decision was always mine.”

Mr. Akre’s recollection is certainly consistent with the text of FBR’s annual and semi-annual reports, which make no mention of a role for the analysts, and don’t even hint at any sort of team or collegial decision-making.

Question Two: How serious is the loss of your entire staff ? Answer: not very. After a national search, he hired two analysts who he feels are more experienced than the folks they replaced:

  • Tom Saberhagen: Since 2002, a Senior Analyst with the Aegis Value Fund (AVALX), which I’ve profiled as a “star in the shadows”.
  • John Neff, who has been in the financial services industry for 15 years. He was a sell-side equity analyst for William Blair & Company and previously was in the First Scholar program at what was then First Chicago Corporation (now JP Morgan).

Question Three: What can investors expect from the new fund? Mr. Akre has some issues with how the size of FBR Focus was managed at the corporate level. It’s reasonable to assume that he will devote significant attention to properly managing the size of his own fund.

In general, Mr. Akre is very concerned about the state of the market and determined to invest cautiously, “gingerly” in his terms. He plans to invest using precisely the discipline that he’s always followed, and seems exceptionally motivated to make a success of the fund bearing his name. In recognition of that, I’ve profiled Akre Focus this month as a “star in the shadows.”

Thanks again to Mr. Akre for taking the time to talk with me, and for giving us some rare behind-the-scenes views of fund management. Of course, if there are credible viewpoints that differ from Mr. Akre’s, we’d like to hear them, and we’ll carefully consider printing them as well.

Noted briefly:

RiverNorth Core Opportunity(RNCOX), was recognized by Morningstar as the top-performing moderate allocation/hybrid fund over the past three years. My profile of RNCOX was also the subject of vigorous discussion on the FundAlarm Discussion Board, where some folks were concerned that the closed-end market was not currently ripe for investment. (Source: Marketwire.com, 1/12/10)

Manning & Napier, Matthews Asia and Van Eck were recognized by Strategic Insight (a research firm) as the fastest-growing active fund managers in 2009. I know little about Van Eck, but have profiled several funds from the other two firms and they do deserve a lot more attention than they’ve received. (Source: MutualFundWire.com, 1/14/10)

T. Rowe Pricewas the only pure no-load manager to make Lipper/Barron’s list of “best fund families, 2009.” The top three families overall were Putnam (#1 – who would have guessed?), Price and Aberdeen Asset Management. Top in U.S. equity was Morgan Stanley, Price topped the world equity category, and Franklin Templeton led in mixed stock/bond funds. Fidelity ranked 26/61 while Vanguard finished 40th. (Source: “The New Champs,” Barron’s, 2/01/10).

Raising the prospect that Forward Long/Short Credit Analysis (FSLRX, discussed above and profiled last month) might be onto something, Michael Singer, head of alternative investments for Third Avenue Management, claims that the best opportunities in 2010 will come distressed debt (a specialty for the new Third Avenue Focused Credit (TFCVX) fund), long-short credit (à la Forward) and emerging markets. Regarding long-short credit, he says, “Last year, making money in long-short credit was like shooting fish in a barrel. This year talented traders can make money on both the long and short side, but you better be in the right credits.” (Source: “Tricky Sailing for Hedge Funds,” Barron’s, 2/01/10).

In closing . . .

I’ve written often about the lively and informative debates that occur on FundAlarm’s discussion board. For folks wondering whether supporting FundAlarm is worth their time, you might consider some of the gems scattered up and down the Board as I write:

  • “MJG” linked to the latest revision of well-regarded Callan Periodic Table of Investment Returns, which provides – in a single, quilt-like visual – 20 years’ worth of investment returns for eight different asset classes. “Bob C” had reservations about the chart’s utility since it excludes many au currant asset classes, such as commodities. After just a bit of search, Ron (a distinct from rono) tracked down a link to the Modern Markets Scorecard which provides a decades’ worth of data on classes as standard as the S&P500 and as edgy as managed futures. You can find the Scorecard here: Link to Scorecard (once you get to this page, on the Rydex Web site, click on the appropriate PDF link).
  • After a January 28 market drop, “Fundmentals” offered up a nice piece of reporting and interpretation on the performance of variously “hedged” mutual funds.

Posted by Fundmentals
on January 28, 2010 at 20:02:18:

The long/short category in M* includes many different strategies which may not be correlated with each other but days like this expose the different strategies and how they behave.

I have divided the funds into several behavioral categories

Long huggers: These are the category equivalent of closet indexers in active long-only funds. Their short/hedging positions don’t prevent them from being close to the market movements (say upto -1% on a day like this). These should be avoided if they do this consistently. Examples include:

Astor Long/Short ETF I ASTIX -0.71% (try shorting for a change bud)
Old Mutual Analytic Z ANDEX -1.01% (need more analytics it seems)
Schwab Hedged Equity Select SWHEX -0.85% (hedged? try again)
Sound Mind Investing Managed Volatility SMIVX -0.90% (no one with sound mind will think this is managing volatility)
The Collar COLLX -0.67% (cute name but is the manager a dog?)
Threadneedle Global Extended Alpha R4 REYRX -0.94% (What alpha? Missing the needle)
Virtus AlphaSector Allocation I VAAIX -0.71% (Pick whether you want to be an alpha fund or a sector fund)
Wasatch-1st Source Long/Short FMLSX -0.95% (Perhaps time to try the 2nd Source for ideas?)
Wegener Adaptive Growth WAGFX -1.12% (Sorry bud, you ain’t adapting nor growing)

Long-biased: These hedge/short sufficiently to reduce downside but still manage to lose with some correlation to the market (say around -0.5% on a day like this. Examples include

AQR Managed Strategy Futures N AQMNX -0.51% (future ain’t looking bright with this)
Beta Hedged Strategies BETAX -0.41% (need more cowbells.. er.. hedging)
Glenmede Long/Short GTAPX -0.37% (a bit more short perhaps?)
Highland Long/Short Equity Z HEOZX -0.56% (High on long?)
ICON Long/Short Z IOLZX -0.58% (Not too long if you please?)
Janus Long/Short T JLSTX -0.51% (More like long T-shirt, try a short size)
Nakoma Absolute Return NARFX -0.55% (absolute loss?)

Market neutral: These funds are hedged/short sufficiently to provide a return largely unrelated to the market movement (say between -0.3% to 0.3% on a day like this). Most of them fall here and are what you need in this category

Alpha Hedged Strategies ALPHX -0.30%
Alternative Strategies I AASFX -0.16%
American Century Lg-Shrt Mkt Netrl Inv ALHIX +0.20
Arbitrage R ARBFX -0.08%
DWS Disciplined Market Neutral S DDMSX +0.22
First American Tactical Market Oppt Y FGTYX -0.1%
GMO Alpha Only III GGHEX 0.00%
Goldman Sachs Absolute Return Tracker IR GSRTX -0.11%
ING Alternative Beta W IABWX -0.18%
Merger MERFX +0.06%
MFS Diversified Target Return I DVRIX -0.22%
Robeco Long/Short Eq Inv BPLEX +0.12%
TFS Market Neutral TFSMX -0.33%
Turner Spectrum Inv TSPCX +0.18%
Vantagepoint Diversifying Strategies VPDAX -0.20%

Short biased: These are hedged/short sufficiently that they are mostly inverse correlated with the market but do have some upside in up markets (say around +0.5% on a day like this)

None I can find

Short huggers: This is the opposite of the long huggers who are so hedged/short that they are more correlated with inverse funds than being short biased and are likely to do poorly in up markets. Avoid if they do this consistently. Examples

Hussman Strategic Growth HSGFX +0.95% (The strategy is to grow only when everyone is shrinking?)
In addition to well-earned words of thanks, many of the 20 replies offered up other hedged and risk-diversifying funds worthy of consideration and suggestions for ways to interpret the inconsistent ability of managers to live up to the “market neutral” moniker.

Of the 20 funds with “absolute” in their names, precisely half have managed to break even so far in 2010. Only two “absolute return” funds actually managed to achieve their goal by staying above zero in both 2008 and 2009 — Eaton Vance Global Macro Absolute Return (EAGMX) and RiverSource Absolute Return Currency & Income (RARAX). Both also made money in January.

  • In common with many nervous investors, “Gandalf” was curious about how much investable cash other folks were holding in the face of the market’s (so far) minor correction. You might be interested to read why several respondents were at 75% cash – and what they intended to do next.

The joys of the board are varied, but fleeting – after a week to 10 days, each post passes into The Great Internet Beyond so that we can make room for the next generation. As we pass the 280,000 post mark, the members of the discussion community have offered up a lot of good sense and sharp observations. Roy and I invite you to join in the discussion, and to help provide the support that makes it all possible.

Please do let us know, via the board or e-mail, what you like, what makes you crazy and how we can make it better. We love reading this stuff!

With respect,

David

FundAlarm © 2010

American Century One Choice funds: Income (ARTOX), 2025 (ARWIX), 2035 (ARYIX), and 2045 (AROIX) (formerly American Century LIVESTRONG funds), June 2006

By Editor 

At the time of publication, this fund was named American Century LIVESTRONG funds.

. . . from the archives at FundAlarm

These profiles have not been updated. The information is only accurate as of the original date of publication.

June 1, 2006

FundAlarm Annex – Fund Report

Objective

These are “funds of funds” which grow increasingly conservative as the
retirement target date approaches.

Adviser

American Century Investment Management.  American Century is located in Kansas City and manages about $80 billion through 70 funds.  That slightly overstates the case since 10 of their offerings – the LIVESTRONG and One Choice groups – are “funds of funds.”

Manager

Richard Weiss, Vidya Rajappa, Radu Gabudean, Scott Wilson and Brian Garbe.

Mr. Weiss is the chief investment officer for multi-asset strategies and oversees the team that manages all of the firm’s multi-asset strategies, including the OneChoice, Strategic Allocation and college savings portfolios. Ms. Rajappa, formerly director of quantitative research at AllianceBernstein, is head of portfolio management. Mr. Gabudean is a portfolio manager who previously was the vice president for quantitative strategies at Barclays Capital. Mr. Wilson has been an American Century portfolio manager since 2011; prior to that he was an equity analyst for 20 years. Mr. Garbe is a senior portfolio manager. Prior to joining American Century in 2010, he was a portfolio manager for the investment wings at several banks and hedge funds.

Opening date

August 31, 2004.  Formerly called the “My Retirement” funds (another marketing gem), they were rebranded as LIVESTRONG funds on May 15, 2006. 

Minimum investment

$2500 for both regular and tax-sheltered accounts, and $2000 for a Coverdell Education Savings Account.  The IRA minimum is $500 if you establish a monthly automatic investing plan.

Expense ratio

0.75% for Investor class shares, as of June 2023. In general, Morningstar classifies this fund, and the other funds in the One Choice series, as having high expense ratios. The One Choice series of funds collectively hold $1.8 billion, as of June 2023.

Comments

The LIVESTRONG funds, like the MY RETIREMENT ones before them, invest in 14 other American Century funds.  The funds had very modest performance in their first year or so of operation and drew little interest from retail investors.  In rebranding the funds as  LIVESTRONG, American Century did four things:

  • It acquired Lance Armstrong as a spokesmodel.
  • It agreed to contribute at least $1 million of corporate – not investor – money to the Lance Armstrong Foundation in each of the next several years.
  • It eliminated tobacco companies from the investment mix.
  • And it latched on to a sort of goofy marketing slogan (“Get your Lance face on!”), accompanied by a very odd website.

All of which is unobjectionable, despite some snickering from the pundit gallery (“Tour de Funds”).  The Armstrong Foundation is
generally well-respected and highly-rated by the charity watchdog groups.  There’s a logical tie for the American Century funds, whose founder and founder’s wife are both cancer survivors.  The founder already supports a cancer research center. Fidelity has already led the way on celebrity spokesmodels (Sir Paul McCartney) and a number of other fund companies (Ariel and Bridgeway among them)  have charitable missions.

But none of that offers a reason to invest in the funds.  They seem a tiny bit more costly and noticeably less aggressive than the offerings from the Big Three.  Here, for example, is a comparison of American Century’s target-date 2025 fund to those of the Big Three:

 

American Cent.

Fidelity

Price

Vanguard*

 US stocks

50

58

60

71

Int’l stocks

15

15

19

11

Bonds

30

20

15

18

Cash

5

7

5

0

Expenses

.88

.75

.82

.20

*The Vanguard portfolio reflects changes that will occur early in June, 2006. We reported on those earlier.

The LIVESTRONG funds are distinguished by their annual asset mix adjustment, while the others wait for five years.  The LIVESTRONG funds also hold a few international bonds (something like a half percent for 2025), a little real estate (2%), some emerging markets equity exposure (3%), and the manager is meditating upon commodities.

Bottom line

It’s not clear that there’s any particular reason to choose these funds over their competitors. Retirement investors seeking a more-aggressive portfolio might consider T. Rowe Price and then make their own contribution (and receive their own tax deduction) to a worthy charity such as the Armstrong Foundation.  (While you’re at it, send a little to FundAlarm as well.)

Company website

https://www.americancentury.com/invest/funds/one-choice-in-retirement-portfolio/artox/

One Choice portfolio strategy outline:

https://www.americancentury.com/invest/accounts/one-choice-portfolios/

Al Frank Fund (VALUX), April 2008

By Editor

. . . from the archives at FundAlarm

These profiles have not been updated. The information is only accurate as of the original date of publication.

April 1, 2008

FundAlarm Annex – Fund Report

Objective

The objective of the Al Frank Fund is long-term capital appreciation. The manager selects equity securities that he believes are out of favor and undervalued, then purchases and holds them until it believes that the securities have reached a fair value. That tends to take a while, so portfolio turnover is quite low and the portfolio is quite diverse: just under 300 holdings, across all valuations and size ranges. Currently the portfolio is comprised mostly of U.S. names.

Adviser

Al Frank Asset Management. The adviser, named for its late founder, manages two mutual funds (Al Frank and Al Frank Dividend Value) and about 800 separate accounts. Altogether, it manages about $750 million in assets.

Managers

John Buckingham and Jessica Chiaverini. Mr. Buckingham is the Chief Investment Officer for Al Frank, which he joined in 1987. He’s responsible for the fund’s day-to-day management. He’s also the Director of Research and editor of both The Prudent Speculator and the TechValue Report newsletters. Ms. Chiaverini works mostly with the firm’s separate accounts and the analysts.

Management’s Stake in the Fund

Mr. Buckingham has between $100,000 and $500,000 in each of the funds and owns about 20% of the adviser. Ms. Chiaverini has a marginal investment in the fund, but does buy many of the individual stocks recommended by The Prudent Speculator and held in the fund. Because Al Frank is part of the Advisers Series Trust, which provides the fund’s administrative and legal services, their board is actually a group designated to oversee all of the Advisers Series funds. As a result, they generally have no investment in either of the Al Frank funds.

Opening date

January 2, 1998.

Minimum investment

$1,000 for regular and IRA/UGMA accounts.

Expense ratio

1.24% after a waiver on assets of $67 million, as of August 2023. There’s a 2.0% redemption fee on shares held fewer than sixty days.

Comments

Since I’m working on next week’s quizzes for my Advertising and Social Influence class at Augustana, I thought I’d toss in a short quiz for you folks, too. Here’s the set-up to the question:

Fund-tracker Morningstar provides an analysis in visual form of each mutual fund’s “ownership zone.” They define the “ownership zone” this way:

Ownership zones are the shaded areas of the style box intended to be a visual measure of a fund’s style scope–that is, the primary area of a fund’s ownership within the style box. Some key points to remember about the ownership zone are that it encompasses 75% of the stock holdings in the fund’s portfolio, and that it is centered around a centroid that is determined using an asset-weighted calculation.

Please match each fund with its corresponding ownership zone:

a. Al Frank Fund b. Fidelity Low-Priced Stock c. Vanguard Total Stock Market

 

1. 2. 3.

 

If you thought Fidelity’s Low-Priced is represented by image #1, you get a point. If you thought Vanguard’s Total Stock Market index is represented by index #3, you’re wrong. Terribly wrong. Image #3 represents a picture of the Al Frank Fund’s holdings.

For a fund whose ticker is VALUX, you might imagine . . . well, you know, “value” stocks in the portfolio. And while Mr. Buckingham thinks of himself as a value investor, he is wary of letting his portfolio get anchored merely to traditional value sectors like financials and utilities (the latter of which, by the way, he does not own). He argues that non-traditional realms, like tech, can offer good – and occasionally spectacular – values which are missed when you stick strictly to traditional valuation metrics. He argues that tech firms (the subject of his TechValue Report) might have no earnings but nonetheless represent legitimate “value” investments if the business shows evidence of substantial growth potential and the available valuations are at the low end of their historic ranges. He write:

In short, we seek bargains wherever they reside. If Blue-Chips seem cheap, we buy them. If technology stocks appear undervalued, we snap them up. We believe that limiting our investment universe by market-cap or value-versus-growth distinctions likely will serve only to limit our potential returns.

As new money comes (slowly, he grumps) into the fund, Mr. Buckingham rebalances the portfolio by investing in the new names with the most compelling valuations rather than adding to his existing positions. He argues that having a sprawling portfolio offers the best prospect for long-term success, in part because much of a portfolio’s gain is driven by a relative handful of wildly successful investments. Since it’s hard to predict which invest will be spectacular as opposed to merely “good” and since something like a third of any good investor’s choices “simply don’t work out,” he holds “200 or more stocks in our Funds, to improve our chances of owning those rare few stocks that everyone wishes they’d noticed earlier. This disciplined approach makes it possible for us to put patience – perhaps the most elusive of investment qualities – to work.” Skeptics might recall that Joel Tillinghast, on the short list of the best investment managers ever to work for Fidelity, consistently holds 700 or more stocks in his Fidelity Low-Priced Stock (FLPSX) portfolio. That’s complemented by the fact that Mr. Buckingham’s newsletter, “The Prudent Speculator has evolved to become the #1 newsletter as ranked by The Hulbert Financial Digest in its fifteen-, twenty- and twenty-five-year categories for total return performance through May 31, 2007.”

Over the decade of Al Frank fund’s existence, it’s landed in the top 2% of its peer group clocking in with annual returns of 12.7%, which tops the S&P500 and its mid-cap blend peer group by about 5% a year. Its absolute returns over the past five years – 19% annually – are stronger while its relative returns and about the same as for the longer period. The headache for investors comes in the pattern of year-to-year performance that leads to those strong, long-term numbers.

 


Year

Peer Group Ranking

2001

Top 10%

2002

Bottom 10%

2003

Top 10%

2004

Bottom 10%

2005

Top 10%

2006

Bottom 10%

2007

Just below average

 

On whole, that pattern doesn’t bother him. Citing Warren Buffett’s famous dictum, “At Berkshire, we would rather earn a lumpy 15% over time than a smooth 12%,” Mr. Buckingham takes lumpiness as an inevitable consequence of independent thinking.

Bottom Line

Al Frank definitely offers lumpy returns. The manager neither aspires to nor achieves smoothly mediocre results. He tends to make a lot of money for his investors, but punctuates periods of stout returns with periods where a good glass of stout might be called for. For folks willing to take the bad with the good, they’ve got access to a strong track record and devoutly original thinking.

Fund website

http://www.alfrankfunds.com/

FundAlarm © 2008

Akre Focus (AKREX), February 2010

By Editor

. . . from the archives at FundAlarm

These profiles have not been updated. The information is only accurate as of the original date of publication.

February 1, 2010

FundAlarm Annex – Fund Report

Objective

The fund seeks long-term capital appreciation by investing, mostly, in US stocks of various sizes, though it is likely to hold small and mid-cap stocks more frequently than large cap ones. The fund may also invest in “other equity-like instruments.”  The manager looks for companies with good management teams (those with “a history of treating public shareholders like partners”), little reliance on debt markets and above-average returns on equity.  Once they find such companies, they wait until the stock sells at a discount to “a conservative estimate of the company’s intrinsic value.”  The Fund is non-diversified, with both a compact portfolio (25 or so names) and a willingness to put a lot of money (often three or four times more than a “neutral weighting” would suggest) in a few sectors.

Adviser

Akre Capital Management, LLC, an independent Registered Investment Advisor located in Middleburg, VA. Mr. Akre, the founder of the firm, has been managing portfolios since 1986, and has worked in the industry for over 40 years. At 12/30/09, the firm had over $500 million in assets under management split between Akre Capital Management, which handles the firm’s separately managed accounts ($1 million minimum), a couple hedge funds, and Akre Focus Fund.  Mr. Akre founded ACM in 1989, while his business partners went on to form FBR.  As a business development move, it operated it as part of Friedman, Billings, Ramsey & Co. from 1993 – 1999 then, in 2000, ACM again became independent.

Manager

Charles Akre, who is also CEO of Akre Capital Management. Mr. Akre has been in the securities business since 1968 and was the sole manager of FBR Focus (FBRVX) from its inception in 1996 to mid-2009.  He holds a BA in English Literature from American University, which I mention as part of my ongoing plug for a liberal arts education.

Managements Stake in the Fund

Mr. Akre and his family have “a seven figure investment in Akre Focus, larger than my investment in the FBR fund had been.”

Opening date

August 31, 2009 though the FBR Focus fund, which Mr. Akre managed in the same style, launched on December 31, 1996.

Minimum investment

$2,000 for regular accounts, $1000 for IRAs and accounts set up with automatic investing plans.

Expense ratio

1.46% on assets of about $150 million.  There’s also a 1.00% redemption fee on shares held less than 30 days.

Comments

In 1997, Mr. Akre became of founding manager of FBR Small Cap Growth – Value fund, which became FBR Small Cap Value, the FBR Small Cap, and finally FBR Focus (FBRVX). Across the years and despite many names, he applied the same investment strategy that now drives Akre Focus.

Here’s his description of the process:

The process we employ for evaluating and identifying potential investments (compounding machines) consists of three key steps:

  1. We look for companies with a history of above average return on owner’s capital and, in our assessment, the ability to continue delivering above average returns going forward. Investors who want returns that are better than average need to invest in businesses that are better than average. This is the pond we seek to fish in.
  2. We insist on investing only with firms whose management has demonstrated an acute focus on acting in the best interest of all shareholders. Managers must demonstrate expertise in managing the business through various economic conditions, and we evaluate what they do, say and write for demonstrations of integrity and acting in the interest of shareholders.
  3. We strive to find businesses that, through the nature of the business or skill of the manager, present clear opportunities for reinvestment in the business that will deliver above average returns on those investments.

Whether looking at competitors, suppliers, industry specialists or management, we assess the future prospects for business growth and seek out firms that have clear paths to continued success.

Mr. Akre’s discipline leads to four distinguishing characteristics of his fund’s portfolio:

  1. It tends to be concentrated in (though not technically limited to) small- to mid-cap stocks.  His explanation of that bias is straightforward: “that’s where the growth is.”
  2. It tends to make concentrated bets.  He’s had as much as a third of the portfolio in just two industries (gaming and entertainment) and his sector weightings are dramatically different from those of his peers or the S&P500.
  3. It tends to stick with its investments.  Having chosen carefully, Mr. Akre tends to wait patiently for an investment to pay off.  In the past ten years, FBRVX never had a turnover ratio above 26% and often enough it was in the single digits.
  4. It tends to have huge cash reserves when the market is making Mr. Akre queasy.  From 2001 – 04, FBRVX’s portfolio averaged 33.5% cash – and crushed the competition. It was in the top 2% of its peer group in three of those four years and well above average in the fourth year.

Those same patterns seem to be playing out in Akre Focus.  At year’s end, he was 65% in cash.  Prompted by a reader’s question, I asked whether he had a goal for deploying the cash; that is, did he plan to be “fully invested” at some point?  His answer was,no.  He declared himself to be “very cautious about the market” because of the precarious state of the American consumer (overextended, uncertain, underemployed).  He allowed that he’d been moving “gingerly” into the market and had been making purchases weekly.  He’s trying to find investments that exploit sustained economic weakness.  While he has not released his complete year-end portfolio, three of his top ten holdings at year-end were added during the fourth quarter:

  • WMS Industries, a slot machine manufacturer. He’s been traditionally impressed by the economics of the gaming industry but with the number of casino visits and spending per visit both down dramatically, his attention has switched from domestic casino operators to game equipment manufacturers who serve a worldwide clientele.  By contrast, long-time FBRVX holding Penn National Gaming – which operates racetracks and casinos – is a “dramatically smaller” slice of AKREX’s portfolio.
  • optionsXpress, an online broker that allows retail investors to leverage or hedge their market exposure.
  • White River Capital, which securitizes and services retail car loans and which benefits from growth in the low-end, used car market

Potential investors need to be aware of two issues.

First, despite Morningstar’s “below average” to “low” risk grades, the fund is not likely to be mild-mannered. FBRVX has trailed its peer group – often substantially – in four of the past ten years.  If benchmarked against Vanguard’s Midcap Index fund (VIMSX), the same thing would be true of Mr. Akre’s private account composite.  Over longer periods, though, his returns have been very solid. Over the past decade returns for FBRVX (11% annually, as of 12/31/09)  more than doubled its average peer’s return while his separate accounts (8%) earned about a third more than VIMSX (6%) and trounced the S&P500 (-1.0%).

Second, Mr. Akre, at age 67, is probably . . . uhhh, in the second half of his investing career.  Marty Whitman, Third Avenue Value’s peerless 83-year-old star manager, spits in my general direction for mentioning it.  Ralph Wanger, who managed Acorn (ACRNX) to age 70 and won Morningstar’s first “fund manager lifetime achievement award” in the year of his retirement from the fund, might do the same – but less vehemently.  Mr. Akre was certainly full of piss and vinegar during our chat and the new challenge of building AKREX as an independent fund is sure to be invigorating.

Bottom Line:

Partnership is important to Mr. Akre.  He looks for it in his business relationships, in his personal life, and in his investments.  Folks who accept the challenge of being Mr. Akre’s partner – that is, investors who are going to stay with him – are apt to find themselves well-rewarded.

Fund website

Akre Focus Fund

FundAlarm © 2010

Driehaus International Small Cap Growth (DRIOX), November 2007

By Editor

. . . from the archives at FundAlarm

These profiles have not been updated. The information is only accurate as of the original date of publication.

November 1, 2007

FundAlarm Annex – Fund Report

Objective

The Driehaus International Small Cap Growth Fund seeks to maximize capital appreciation.  The Fund invests primarily in equity securities of smaller capitalization non-U.S. companies exhibiting strong growth characteristics. The fund invests at least 80% of its net assets in the equity securities of non-U.S. small capitalization companies, currently that is companies whose market capitalization is less than $2.5 billion at the time of investment.

Adviser

Driehaus Capital Management LLC, which was organized in 1982 to provide investment advice to high net worth individuals and institutions. As of July 31, 2007, it managed approximately $4.4 billion in assets. Driehaus runs three other mutual funds: Emerging Markets Growth (closed to new investors), International Discovery, and International Yield Opportunities (new in 2007).

Managers

Howard Schwab and David Mouser. Schwab is the lead manager here and was the lead manager for the Driehaus International Opportunities Fund, L.P., the predecessor limited partnership from its inception in August, 2002 until it transformed into this mutual fund. Schwab is also a co-manager of the Driehaus Emerging Markets Growth Fund and, for several months, helped manage the Driehaus International Equity Yield Fund. Mr. Mouser has “certain responsibilities” for investment decision-making on fund, “subject to Mr. Schwab’s approval,” just as he did with the limited partnership.

Management’s Stake in the Fund

Technically none, since the fund began operation after the date of the last SAI.

Opening date

September 17, 2007. If you don’t like that date, you could choose July 1, 2001 (the date on which Schwab began managing separate accounts using this strategy) or August 1, 2002 (the date that they launched the International Opportunities Fund, L.P., whose assets and strategies the mutual fund inherits). Technically you might also choose February 26, 2007, the date that the fund was “established as a series of Driehaus Mutual Funds” but apparently had no assets or investors. It’s a little confusing, but it does offer a certain richness of data.

Minimum investment

$10,000 for regular accounts, $2,000 for IRAs. The minimum subsequent investment for regular accounts is high, at $2,000, but it’s only $100 with an automatic investment plan. In any case, it’s a lot more affordable for most of us than the $20 million minimum required for a separate account that uses this same strategy.

Expense ratio

1.16% on assets of $205.8 million, as of July 2023. 

Comments

DRIOX represents an interesting case for investors. It’s a new fund but it’s directly derived from two predecessor entities. There are separately managed accounts with combined assets of $210 million and there was a Limited Partnership with assets of $100 million, both managed by the same guys with the same strategies. But they were also managed under very different legal structures (for example, the L.P.s don’t have to pay out distributions the way that funds are required to do) for very different sorts of clients (that is, folks with $20 million or more to invest). In addition, Driehaus runs two other mutual funds with different management teams but with the same investment discipline.

In general, all Driehaus managers are growth guys who look for companies which have:

  • Dominant products or market niches
  • Improved sales outlook or opportunities
  • Demonstrated sales and earnings growth
  • Cost restructuring programs which are expected to positively affect company earnings
  • Increased order backlogs, new product introductions, or industry developments which are expected to positively affect company earnings

They also consider macroeconomic and technical information in evaluating stocks and countries for investment.

What might we learn from all of that data? Driehaus makes gobs of money for its investors.

  • The International Small Cap Growth separate accounts have returned 36.9% annually since inception. Their benchmark has returned 13.5% over the same period.
  • The International Opportunities LP returned 36.75% annually since inception. Its benchmark returned 27.3% over the same period.
  • Emerging Markets Growth fund (DREGX) has returned 22.3% annually since inception. Its benchmark returned 13.6%. Over the past five years it has returned 44.2% annually, while its Morningstar peer group returned 36.7%.
  • International Discovery fund (DRIDX) has returned 22.2% annually since inception. Its benchmark returned 7.2%. Over the past five years it has returned 34.4% annually, while its Morningstar peer group returned 24.0%.

While I’m generally not impressed by big numbers, those are really big performance advantages, delivered through a variety of investment vehicles over a considerable set of time frames.

There are two risks which are especially relevant here. The first is that Driehaus is a very aggressive investor. Morningstar classifies Emerging Markets Growth and International Discovery as having Above Average risk. Both of the funds have turnover rates around 200%. That aggressiveness is reflected in considerable swings in performance. International Discovery, for example, has the following peer ranks:

Year Morningstar Peer Rank, Percentile
2003

22
2004

97
2005

1
2006

90
2007

1

Emerging Markets shows the same saw-tooth pattern, though in a tighter range:

Year Morningstar Peer Rank, Percentile
2002

66
2003

14
2004

48
2005

14
2006

4
2007

31

The performance data for the International Small Growth separate accounts makes the strategy’s strengths and limits pretty clear. They calculate “capture ratios,” which are essentially volatility estimates which measure performance in rising and falling markets separately. A score of 100 means you rise (or fall) in synch with the market. A score of 110 up and 130 down means that you rise 10% more than the market when it’s going up and fall 30% more when it’s going down. Here are the most recent capture ratios, as of 9/30/07:

 

3 Years

5 Years

Upside

179.28

179.66

Downside

139.51

110.01

Which is to say, it rises 80% more in good times and drops 40% more in bad than does the market. You don’t want to be here when the rain is falling.

The second risk is Driehaus’s penchant for closing and/or liquidating funds. Driehaus had a bunch of other funds that they seem to have liquidated: Driehaus International Growth (DRIGX), Driehaus European Opportunity (DREOX) and Driehaus Asia Pacific Growth (DRAGX), all of which died in 2003. The very successful Emerging Markets Growth fund just closed to new investors.

Bottom Line

For investors with $10,000 to spare and a high tolerance for risk, this might be as good as bet for sheer, pulse-pounding, gut-wrenching, adrenaline-pumping performance as you’re going to find.

Fund website

http://www.driehaus.com/DRIOX.php

 

Guinness Atkinson Alternative Energy (GAAEX), September 2007

By Editor

. . . from the archives at FundAlarm

These profiles have not been updated. The information is only accurate as of the original date of publication.

September 1, 2007

FundAlarm Annex – Fund Report

Objective

The fund seeks long-term capital appreciation by investing in US and overseas of companies involved in the alternative energy or energy technology sectors, which includes companies that increase energy efficiency but excludes nuclear.

Adviser

Guinness Atkinson Asset Management, headquartered in Woodland Hills CA but also has offices in London. The company was founded by a number of then and former managers for Investec, a multinational investment firm. The firm manages mutual funds whose net assets are about $340 million.

Manager

Tim Guinness, Ed Guinness and Matthew Page. Tim Guinness is the lead manager, the firm’s Chief Investment Officer and manager of the Global Energy and Global Innovators funds. Immediately prior to founding GA, he was joint chairman of Investec. Ed Guinness, Tim’s son, has engineering and management degrees from Cambridge. Before joining Guinness Atkinson, he worked on tech investing at HSBC and risk arbitrage for Tiedemann Investment Group in New York. Matthew Page has a Master’s degree in Physics from Oxford and worked briefly at Goldman Sachs before joining GA.

Opening date

March 31, 2006.

Minimum investment

$5000 for regular accounts, $2500 for regular accounts for individuals who own shares in other GA funds, $1000 for IRAs and $100 for accounts opened with an automatic investing plan.

Expense ratio

1.1% after waivers on $33.7 million in assets as of July 2023. 

Comments

More than is usually the case, I feel like I’m on a precipice over a gaping dark chasm of ignorance. There are two questions – is there a strong case now for alternative energy investing? and if so, is there a strong case for making that investment through an open-end mutual fund? Those are good questions for which good answers would take pages. Multiple, many, numerous pages. Little of which I’m competent to write. As a result, I’ll try to offer the second-grader’s version of the story and will ask the indulgence of folks who have profound professional knowledge of the subject.

Is there a case now for alternative energy investing? Well, there’s certainly a case for alternative energy so there’s likely a parallel case for investing in the field. What’s the case?

  • The world is running out of affordable oil and gas –

While there’s no question of imminent physical exhaustion, a number of economists project the future price of oil based on the notion of “peak oil.” At base, the peak oil theory says that once half of the oil in a particular reservoir is withdrawn, the price for removing the other half escalates sharply. There’s no single, definitive estimate for when a peak has been passed, since every oil field has its own life cycle. In general, though, experts seem to agree that the US peaked in the early 1970s and the North Sea peaked in the early 2000s. The most pessimistic estimates claim that global production is has already passed its peak (this is a subject, by the way, that causes Saudi oil ministers to sputter mightily), with 54 of the world’s 65 major producing nations in decline. A more cautious study commissioned by the US Department of Energy (Hirsch, et al, Peaking Of World Oil Production: Impacts, Mitigation, & Risk Management, 2005) predicted the peak would be “soon,” by which they meant within 20 years. Natural gas is not substantially better off.

That study made two other important claims: (1) “As peaking is approached, liquid fuel prices and price volatility will increase dramatically, and, without timely mitigation, the economic, social, and political costs will be unprecedented.” And (2) “Viable mitigation options exist on both the supply and demand sides, but to have substantial impact, they must be initiated more than a decade in advance of peaking.”

A point rarely recognized is that much of the oil that remains is not light sweet crude; it’s generally a heavy, sour oil that’s hard to refine and a relatively poor source of higher distillates such as gasoline.

  • Fossil fuel consumption is irreparably affecting the global climate

You don’t actually need to believe this argument, you mostly need to agree that it is moving into the area of “commonly accepted wisdom,” since that’s what motivates governments and other organizations to act.

I’ll note, in passing, that I’m not a climatologist and so I’m not competent to judge the technical merit of what appears to be an enormous and growing body of peer-reviewed research which substantiates this claim. I am, as it turns out, trained to assess arguments. From that perspective, I’m note that those arguing against the theory of human-induced climate change generally support their case through deceptive and misleading arguments – they mischaracterize their sources, suppress inconvenient conclusions found in the research they cite, over-claim their own qualifications, and shift argument grounds midway through. The vast majority of the skeptics’ discourse appears in blogs rather than in peer-reviewed journals and little of it is research per se but rather they focus on often-narrow methodological critiques (one recent controversial was over a quarter-degree difference in a calculation). With the possibility that the future of human civilization hangs in the balance, we deserve much more honest debate.

  • In anticipation of the two preceding arguments, governments are going to push hard for alternatives to fossil fuels

Whether through taxation, carbon emission caps, subsidies or legal protections (e.g., relaxed siting requirements), governments around the world are moving to support the production of alternative energy.

The tricky question is the “now” part – is it currently prudent to invest in this field? The Guinness Atkinson folks are refreshingly blunt, both in print and on the phone, about the undeniable risks in the field:

. . . a large percentage of alternative energy companies are thinly traded small cap stocks . . . many of these companies are loss making or just beginning to produce profits [and] many alternative energy stocks have appreciated significantly recently as a result of increased energy prices (Guinness Atkinson, The Alternative Energy Revolution, March 2006).

In a phone conversation, Jim Atkinson (GA’s president) stressed that these were voluntary caveats that GA included because they wanted well-informed investors who were willing to hold on through inevitable, short-term dislocations. The company does, indeed, support the goal of informed investors. Their monthly Alternative Energy Briefs provides a richness of information that I’ve rarely seen from a fund company.

Three factors specific to Guinness Atkinson cut against these concerns: (1) the elder Mr. Guinness has a lot of experience in the field of energy investing. The Alternative Energy fund is the offspring of a successful, offshore global energy fund of his. Both of the younger fund managers have graduate training in technical fields (engineering and physics) which bears on their ability to read and assess information about firms and their technologies. And (2) they’re reasonable conservative in their choice of companies. By Mr. Guinness’ calculation, about 82% of the portfolio companies have “positive earnings forecasts for 2007.” That number climbs to 90% by 2008. Finally (3) they build risk management into portfolio construction. They expect to have 30 or so stocks in the portfolio and, in a perfect world, they’d assign 1/30th of their assets to each stock. Lacking perfect confidence in all of their companies, they assign a full share only to companies in which they have the greatest confidence, a half share to those in which they have fair confidence and a “research share” – that is, a very small amount – to those whose prospects are most speculative but which they’d like to track. The managers note that their poorest performers are generally held in the “research” pool, which both vindicates their stock assessment and limits the damage.

Is there a strong case for making that investment through an open-end mutual fund? I’m rather more confident that the answer here is, yes. The alternative channel for alternative energy investing is one of about three exchange traded funds:

  • PowerShares WilderHill Clean Energy

(PBW) which invests in clean energy and conservation technologies. Its top holding is Echelon Corporation which provides “control networking technology for automation systems.” Echelon’s website highlights their work in improving McDonald’s kitchens. Net assets are $1.1 billion with expenses of 0.70%.

  • Market Vectors Global Alternatives

(GEX) which tracks the Ardour Global Index (Extra Liquid) of companies “engaged in the business of alternative energy.” Net assets are $61 million, expense ratio is not available.

  • First Trust NASDAQ Clean Edge US Liquid

(QCLN) tracks the NASDAQ Clean Edge U.S. Index of “clean energy” companies, which includes lots of semiconductor makers. The fund has $23 million in assets.

There are several “clean technology” ETFs, which invest in pollution control, networking, and efficiency-supporting companies. There are, in addition, a number of specialized “green” mutual funds (Spectra Green) and ETFs (Claymore/LGA Green) which don’t particularly focus on the energy sector. They like, for example, Starbuck’s because of its commitment to recycling and environmental causes.

So why not an ETF? At base, the only argument for them is low-cost: their expense ratios are about 0.7% and Guinness’ is about 1.7%. That cost advantage is overstated by three factors: (1) Guinness e.r. is declining, their’s isn’t. (2) Brokerage fees aren’t included – each purchase of an ETF goes through a broker for whose services you pay. And (3) ETFs don’t trade at their net asset value. When ETFs trade at a premium, you actually pay for less than you get. Premiums on the alternative energy ETFs have run lately from 33 to 260 basis points. By way of translation, a fund with a 70 basis point expense ratio and a 260 basis point premium to NAV is costing an investor 3.3% to buy.

The arguments against the ETFs are (1) that they’re limited to liquid investments. That’s why you’ll notice the “liquid” in the names of several. That generally excludes them from investing in private placements or very small companies. (2) You have to have a lot of confidence in the quality of the underlying index. A number of commentators don’t. Of PowerShares WilderHill Clean Energy, which has more assets than all of the other investment options combined, Morningstar recently opined:

. . . this fund lacks a well-reasoned strategy as well as a sensible, diversified benchmark. Instead, its index holds lots of companies with unproven business models and speculative stock prices. For example, the index’s average return on equity is actually negative, despite its rich average price/earnings multiple of 25 (Analyst Report, 3/5/07).

They concluded that investors “would be better off with an active manager,” though that was not a particular endorsement of Guinness Atkinson. In addition, (3) ETFs can be sold short and otherwise made part of the arbitrage games of hedge fund managers. Which isn’t a recipe for stable returns.

Perhaps as a result, Guinness Atkinson has consistently outperformed the ETFs. It benchmarks its performance against the WilderHill Clean Energy index. Here are the performance comparisons, as of 7/30/07:

  Guinness WilderHill
YTD 30.60% 25.01%
Trailing twelve months 34.35 22.39
Since fund inception 14.53 0.64

 

Bottom Line

If I were to invest in alternative energy, I think there’s a strong case to be made for investing with an active manager who has broad discretion and considerable experience. The ETF’s cost advantages are simply not sufficient to overcome their design limitations. Even if Guinness did not have a corner on the market for no-load alternative energy funds, their excellent work in a range of other funds, thoughtful portfolio construction and broad expertise makes them a strong candidate for the role.

(By way of full disclosure, my wife – who has degrees in environmental planning and law – reviewed a bunch of the literature I’ve been working through and chose to invest several thousand dollars of her retirement account in the Guinness Atkinson fund.)

Fund website

Alternative Energy Fund