Monthly Archives: November 2012

A Look Back at Dodge & Cox Stock Fund (DODGX)

By Charles Boccadoro

From the Mutual Fund Observer discussion board, November 2012

Several recent posts prompted me to take a closer look at DODGX historical performance. Ted posted the most recent: Dodge & Cox: The San Francisco Treat. Basically, an article from Morningstar defending why D&C has been a top pick for years, based on a strong corporate fiduciary culture and long term record, despite its struggle in 2008 and poor stock selections since, like HPQ, a DODGX heavy for years. hank and Shostakovich made good comments about AUM, definition of value, intrinsic risk management, and debated whether a better approach for a value shop is to be all-in or have some assets in cash at times.

An earlier post: 3 Former Star Funds to Avoid, a stunner by Steve Goldberg, which challenged DODGX exalted status, pointing to “deep flaws in the fund’s stock picking” in 2008 and mediocre performance since. The article took its share of lashings from most, but not all, MFO readers.

I lamented a bit on an earlier related post: Dodge & Cox Balanced Regains Its Stride, Finally? A look back at my decision to buy DODBX over VWELX in 2002. This post includes more recent entries describing HPQ’s 13% plunge on Oct 3. scott weighed in on transient nature of defining value for technology companies. (This week HPQ had another 12% downer-day on suspected fraud disclosure over recent acquisition. Can you believe? This is Hewlett Packard for crying out loud. Good grief.) And fundalarm noted how Dodge & Cox doesn’t appear to “have price targets at which point to book profits or cut losses,” which again brings into question D&C’s risk management philosophy.

OK, stage set. I was very interested in looking at DODGX from a perspective both before and after the real estate collapse in 2008. With David’s assertion that folks are more concerned about loses than gains, and VintageFreaks’ comment about it’s “WHEN you buy, not WHAT you buy,” I looked at worst-case rolling performance, initiated every month over the periods noted, from DODGX’s inception in Feb 65.

The figure below illustrates one reason why everybody was clamoring to own shares in DODGX before 2008. Basically, its worst-case return beat SP500’s worst-case return consistently over just about any period:

Note also that DODGX lost virtually no money for any 8-year or longer period, whereas an unlucky investor in SP500 could still be looking at nearly 20% loss, even after 9 years.

Even longer term, depicted below, DODGX trounced SP500. Basically, the worst period for DODGX was substantially better than the worst period for SP500.

After 2007, however, an investor could have worse return in near-term with DODGX than with SP500:

But despite this near-term under-performance, an investor with DODGX for periods of about 9 years or more has still never lost money, even periods including 2008, whereas SP500 investors must have invested for periods of 12 years or more to avoid loss.

OK, so that is worst-case DODGX versus worst-case SP500.

Next, I compared DODGX relative to SP500 for same rolling periods. Basically, wanting to see, depending on WHEN, whether it was better to be in DODGX or SP500. So, below are comparisons of DODGX best and worst total returns relative to SP500 for rolling periods dating back to Feb 65 through to present Oct 12:

Clearly, there are periods when DODGX has under-performed the SP500, especially over the short-term. But then its periods of over-performance tend to be more impressive. Over its life, DODGX has bested the SP500 hands-down.

Taking a closer look at WHEN, data from above two charts are tabulated below, along with ending month/year of the corresponding best and worst periods. At a glance, most of the best over-performance were during periods leading up to the real estate bubble in 2008, while most of the worst under-performance actually occurred in the years leading up the tech bubble in 2000.

Going still further, the chart below shows growth comparison from DODGX inception through 1987 market crash. Basically, for first 20 plus years of DODGX existence, it beat SP500 handsomely overall. Perhaps more important is that DODGX performed comparable to the market, within 2-4%, during the five or so significant down-markets during this time.

Then, during the next 20 years, shown below, DODGX had its most extraordinary performance, which surely helped establish the many recommendations for DODGX, by M*, Kiplinger, and others.

Leading up to late ’90s, DODGX actually lagged the SP500 somewhat; in fact, that’s where its worst total returns relative to SP500 actually occurred. But when the tech bubble popped in 2000, DODGX sailed-on through. While the SP500 lost 45% in the down-market from Sep 00 through Sep 02, DODGX lost nothing. In the five years after the bubble, it continued to handsomely beat the SP500. No doubt, DODGX’s stellar reputation was born during this extraordinary period of performance. Everybody clamored to get in, AUM grew, and the fund closed. It had become the perfect equity fund, avoiding down-side losses, while over-performing in up-markets. Until, of course, 2007. The funny thing here is that DODGX lost only 9% more than the SP500 during the great recession, but its reputation–that of being the perfect equity fund–was tarnished, if not shattered.

Just a few more comparisons, and I will stop, promise.

The tabulation below shows a “batting average,” basically number of times DODGX beat SP500 in rolling periods considered since Feb 65. On any given year, it has beaten SP500 more than 50% of time. More than 60% in any 2-year period. More than 70% any 7-year period. More than 80% in any 10-year period.

The tabulation also shows the number of these periods that DODGX and SP500 have lost money. Since Feb 1965, SP500 has never lost money over any 12 year period or longer. DODGX has never lost money over any 10-year period. A closer look shows that it only lost 2% in its worst case 9-year period. In fact, there were only two 8-year periods out of 478 considered that DODGX lost money: the period ending Feb 09 when its total return was -13.2% and Mar 09 when it was -4.2%.

Here is link to original thread.

November 1, 2012

By David Snowball

Dear friends,

I had imagined this as the “post-storm, pre-cliff” edition of the Observer but it appears that “post-storm” would be a very premature characterization. For four million of our friends who are still without power, especially those along the coast or in outlying areas, the simple pleasures of electric lighting and running water remain a distant hope. And anything that looks like “normal” might be months in their future. Our thoughts, prayers, good wishes and spare utility crews go out to them.

I thought, instead, I’d say something about the U.S. presidential election. This is going to sting, but here it is:

It’s going to be okay.

Hard to believe, isn’t it? We’re acculturated into viewing the election if as it were some apocalyptic video game whose tagline reads: “America can’t survive .” The reality is, we can and we will. The reality is that both Obama and Romney are good guys: smart, patriotic, obsessively hard-working, politically moderate, fact-driven, given to compromise and occasionally funny. The reality is that they’re both trapped by the demands of electoral politics and polarized bases.

But, frankly, freed of the constraints of those bases, these guys would agree on rather more than they disagree on. In a less-polarized world, they could run together as a ticket (Obomney 2020!) and do so with a great deal of camaraderie and mutual respect. (Biden-Ryan, on the other hand, would be more than a little bit scary.) Neither strikes me as a great politician or polished communicator; that’s going to end up constraining – and perhaps crippling – whoever wins.

Why are we so negative? Because negative (“fear and loathing on the campaign trail”) raises money (likely $6 billion by the time it’s all done) and draws viewers. While it’s easy to blame PACs, super PACs and other dark forces for that state, the truth is that the news media – mainstream and otherwise – paint good men as evil. A startling analysis conducted by the Project for Excellence in Journalism found that 72% of all character references to Messrs. Obama and Romney are negative, one of the most negative set of press portrayals on record.

I live in Iowa, labeled a “battleground state,” and I receive four to six (largely poisonous) robo-calls a day. And so here’s the final reality: Iowa is not a battleground and we’d all be better off if folks stopped using the term. It’s a place where a bunch of folks are worried, a bunch of folks (often the same ones) are hopeful and we’re trying to pick as best we can.

The Last Ten: T. Rowe Price in the Past Decade

In October we launched “The Last Ten,” a monthly series, running between now and February, looking at the strategies and funds launched by the Big Five fund companies (Fido, Vanguard, T Rowe, American and PIMCO) in the last decade. We started with Fidelity, once fabled for the predictable success of its new fund launches. Sadly, the pattern of the last decade is clear and clearly worse: despite 154 fund launches since 2002, Fidelity has created no compelling new investment option and only one retail fund that has earned Morningstar’s five-star designation, Fidelity International Growth (FIGFX). We suggested three causes: the need to grow assets, a cautious culture and a firm that’s too big to risk innovative funds.

T. Rowe Price is a far smaller firm. Where Fidelity has $1.4 trillion in assets under management, Price is under $600 billion. Fidelity manages 340 funds. Price has 110. Fidelity launched 154 funds in a decade, Price launched 22.

	Morningstar Rating	Category	Size (millions, slightly rounded)
Africa & Middle	★★★	Emerging Markets Stock	150
Diversified Mid Cap Growth	★★★	Mid-Cap Growth	200
Emerging Markets Corporate Bond	—	Emerging Markets Bond	30
Emerging Markets Local Currency	—	Emerging Markets Bond	50
Floating Rate	—	Bank Loan	80
Global Infrastructure	—	Global Stock	40
Global Large-Cap	★★★	Global Stock	70
Global Real Estate	★★★★★	Global Real Estate	100
Inflation Protected Bond	★★★	Inflation-Protected Bond	570
Overseas Stock	★★★	Foreign Large Blend	5,000
Real Assets	—	World Stock	2,760
Retirement 2005	★★★★	Target Date	1,330
Retirement 2010	★★★	Target Date	5,850
Retirement 2015	★★★★	Target Date	7,340
Retirement 2025	★★★	Target Date	9,150
Retirement 2035	★★★★	Target Date	6,220
Retirement 2045	★★★★	Target Date	3,410
Retirement 2050	★★★★	Target Date	2,100
Retirement 2055	★★★★★	Target-Date	490
Retirement Income	★★★	Retirement Income	2,870
Strategic Income	★★	Multisector Bond	270
US Large-Cap Core	★★★	Large Blend	50

What are the patterns?

Most Price funds reflect the firm’s strength in asset allocation and emerging asset classes. Price does really first-rate work in thinking about which assets classes make sense and in what configuration. They’ve done a good job of communicating that research to their investors, making things clear without making them childish.
Most Price funds succeed. Of the funds launched, only Strategic Income (PRSNX) has been a consistent laggard; it has trailed its peer group in four consecutive years but trailed disastrously only once (2009).
Most Price funds remain reasonably nimble. While Fido funds quickly swell into the multi-billion range, a lot of the Price funds have remaining under $200 million which gives them both room to grow and to maneuver. The really large funds are the retirement-date series, which are actually funds of other funds.
Price continues to buck prevailing wisdom. There’s no sign of blossoming index fund business or the launch of a series of superfluous ETFs. There’s a lot to be said for knowing your strengths and continuing to develop them.

Finally, Price continues to deliver on its promises. Investing with Price is the equivalent of putting a strong singles-hitter on a baseball team; it’s a bet that you’ll win with consistency and effort, rather than the occasional spectacular play. The success of that strategy is evident in Price’s domination of . . .

The Observer’s Honor Roll, Unlike Any Other

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

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

Wrong!

While high returns can be a good thing, the practical question is how those returns are obtained. If they’re the product of alternately sizzling and stone cold performances, the high returns are worse than meaningless: they’re a deadly lure to hapless investors and advisors. Investors hate losing money much more than they love making it.

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

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

U.S. stock funds

	Strategy	Assets (millions)	2011 Honoree or the reason why not
Fidelity Growth Company (FDGRX)	Large Growth	44,100	Rotten 2002
Laudus Growth Investors US Large Cap Growth (LGILX)	Large Growth	1,400	2011 Honoree
Merger (MERFX)	Market Neutral	4,700	Rotten 2002
Robeco All Cap Value (BPAVX)	Large Value	400	Not around in 2002
T. Rowe Price Capital Opportunities (PRCOX)	Large Blend	400	2011 Honoree
T. Rowe Price Mid-Cap Growth (RPMGX)	Mid-Cap Growth	18,300	2011 Honoree
TIAA-CREF Growth & Income (TIIRX)	Large Blend	2,900	Not around in 2002
TIAA-CREF Mid-Cap Growth (TCMGX)	Mid-Cap Growth	1,300	Not around in 2002
Vanguard Explorer (VEXPX)	Small Growth	9,000	2011 Honoree
Vanguard Mid Cap Growth (VMGRX)	Mid-Cap Growth	2,200	2011 Honoree
Vanguard Morgan Growth (VMRGX)	Large Growth	9,000	2011 Honoree

International stock funds

American Century Global Growth (TWGGX)	Global	400	2011 Honoree
Driehaus Emerging Markets Growth (DREGX)	Emerging Markets	900	2011 Honoree
Thomas White International (TWWDX)	Large Value	600	2011 Honoree
Vanguard International Growth (VWIGX)	Large Growth	17,200	2011 Honoree

Blended asset funds

Buffalo Flexible Income (BUFBX)	Moderate Hybrid	600	2011 Honoree
Fidelity Freedom 2020 (FFFDX)	Target Date	14,300	2011 Honoree
Fidelity Freedom 2030 (FFFEX)	Target Date	11,000	Rotten 2002
Fidelity Puritan (FPURX)	Moderate Hybrid	20,000	2011 Honoree
Manning & Napier Pro-Blend Extended Term (MNBAX)	Moderate Hybrid	1,300	2011 Honoree
T. Rowe Price Balanced (RPBAX)	Moderate Hybrid	3,400	2011 Honoree
T. Rowe Price Personal Strategy Balanced (TRPBX)	Moderate Hybrid	1,700	2011 Honoree
T. Rowe Price Personal Strategy Income (PRSIX)	Conservative Hybrid	1,100	2011 Honoree
T. Rowe Price Retirement 2030 (TRRCX)	Target Date	13,700	Not around in 2002
T. Rowe Price Retirement 2040 (TRRDX)	Target Date	9,200	Not around in 2002
T. Rowe Price Retirement Income (TRRIX)	Retirement Income	2,900	Not around in 2002
Vanguard STAR (VGSTX)	Moderate Hybrid	14,800	2011 Honoree
Vanguard Tax-Managed Balanced (VTMFX)	Conservative Hybrid	1,000	Rotten 2002

Specialty funds

Fidelity Select Industrials (FCYIX)	Industrial	600	Weak 2002
Fidelity Select Retailing (FSRPX)	Consumer Cyclical	600	Weak 2002
Schwab Health Care (SWHFX)	Health	500	2011 Honoree
T. Rowe Price Global Technology (PRGTX)	Technology	700	2011 Honoree
T. Rowe Price Media & Telecomm (PRMTX)	Communications	2,400	2011 Honoree

Reflections on the Honor Roll

These funds earn serious money. Twenty-nine of the 33 funds earn four or five stars from Morningstar. Four earn three stars, and none earn less. By screening for good risk management, you end up with strong returns.

This is consistent with the recent glut of research on low-volatility investing. Here’s the basic story: a portfolio of low-volatility stocks returns one to two percent more than the stock market while taking on 25% less risk.

That’s suspiciously close to the free lunch we’re not supposed to get.

There’s a very fine, short article on low-volatility investing in the New York Times: “In Search of Funds that Don’t Rock the Boat” (October 6, 2012). PIMCO published some of the global data, showing (at slightly numbing length) that the same pattern holds in both developed and developing markets: “Stock Volatility: Not What You Might Think” (January 2012). There are a slug of ETFs that target low-volatility stocks but I’d be hesitant to commit to one until we’d looked at other risk factors such as turnover, market cap and sector concentration.

The roster is pretty stable. Only four funds that qualified under these screens at the end of 2011 dropped out in 2012. They are:

FPA Crescent (FPACX) – a 33% cash stake isn’t (yet) helping. That said, this has been such a continually excellent fund that I worry more about the state of the market than about the state of Crescent.

New Century Capital (NCCPX) – a small, reasonably expensive fund-of funds that’s trailing 77% of its peers this year. It’s been hurt, mostly, by being overweight in energy and underweight in resurgent financials.

New Century International (NCFPX) – another fund-of-funds that’s trailing about 80% of its peers, hurt by a huge overweight in emerging markets (primarily Latin), energy, and Canada (which is sort of an energy play).

Permanent Portfolio (PRPFX) – it hasn’t been a good year to hold a lot of Treasuries, and PRPFX by mandate does.

The list shows less than half of the turnover you’d expect if funds were there by chance.

One fund deserves honorable mention. T. Rowe Price Capital Appreciation (PRCWX) has only had one relatively weak year in this century; in 2007, it finished in the 69^th percentile which made it (barely) miss inclusion.

What you’ve heard about T. Rowe Price is true. You know all that boring “discipline, consistency, risk-awareness” stuff. Apparently so. There are 10 Price funds on the list, nearly one-third of the total. Second place: Fidelity and Vanguard, far larger firms, with six funds.

Sure bets? Nope. Must have? Dear God, no. A potentially useful insight into picking winners by dodging a penchant for the occasional disaster? We think so.

In dullness there is strength.

“TrimTabs ETF Outperforms Hedge Funds”

And underperforms pretty much everybody else. The nice folks at FINAlternatives (“Hedge Fund and Private Equity News”) seem to have reproduced (or condensed) a press release celebrating the first-year performance of TrimTabs Float Shrink ETF (TTFS).

(Sorry – you can get to the original by Googling the title but a direct-link always takes you to a log-in screen.)

Why is this journalism? They don’t offer the slightest hint about what the fund does. And, not to rain on anybody’s ETF, but their trailing 12-month return (21.46% at NAV, as of 10/18) places them 2050th in Morningstar’s database. That list includes a lot of funds which have been consistently excellent (Akre Focus, BBH Core Select (closing soon – see below), ING Corporate Leaders, Mairs & Power Growth and Sequoia) for decades, so it’s not immediately clear what warrants mention.

Seafarer Rolls On

Andrew Foster’s Seafarer Overseas Growth & Income Fund (SFGIX) continues its steady gains.

The fund is outperforming every reasonable benchmark: $10,000 invested at the fund’s inception has grown to $10,865 (as of 10/26/12). The same amount invested in the S&P’s diversified emerging markets, emerging Asia and emerging Latin America ETFs would have declined by 5-10%.

Assets are steadily rolling in: the fund is now at $17 million after six months of operation and has been gaining nearly two million a month since summer.

Opinion-makers are noticing: Andrew and David Nadel of Royce Global Value (and five other funds ‘cause that’s what Royce managers do) were the guests on October 26th edition of Wealth Track with Consuelo Mack. It was good to hear ostensible “growth” and “value” investors agree on so much about what to look for in emerging market stocks and which countries they were assiduously avoiding. The complete interview on video is available here. (Thanks to our endlessly vigilant Ted for both the heads-up and the video link.)

Legg Mason Rolls Over

Legg Mason seems to be struggling. On the one hand we have the high visibility struggles of its former star manager, Bill Miller, who’s now in the position of losing more money for more people than almost any manager. Their most recent financial statement, released July 27, shows that assets, operating revenue, operating income, and earnings are all down from the year before. Beside that, there’s a more fundamental struggle to figure out what Legg Mason is and who wants to bear the name.

On October 5 2009 Legg announced a new naming strategy for its funds:

Most funds that were formerly named Legg Mason or Legg Mason Partners will now include the Legg Mason name, the name of the investment affiliate and the Fund’s strategy (such as the Legg Mason ClearBridge Appreciation Fund or the Legg Mason Western Asset Managed Municipals Fund).

The announced rationale was to “leverage the Legg Mason brand awareness.”

Welcome to the age of deleveraging: This year those same funds are moving to hide the Legg Mason taint. Western Asset dropped the Legg Mason number this summer. Clearbridge is now following suit, so that the Legg Mason ClearBridge Appreciation Fund is about to become just Clearbridge Appreciation.

Royce, another Legg Mason affiliate, has never advertised that association. Royce has always had a great small-value discipline. Since being acquired by Legg Mason in 2001, the firm acquired two other, troubling distinctions.

Managers who are covering too many funds. By way of a quick snapshot, here are the funds managed by 72-year-old Chuck Royce (and this is after he dropped several):

Since …	He’s managed …
12/2010	Royce Global Dividend Value
08/2010	Royce Micro-Cap Discovery
04/2009	Royce Partners
06/2008	Royce International Smaller-Companies
09/2007	Royce Enterprise Select
12/2006	Royce European Smaller Companies
06/2005	Royce Select II
05/2004	Royce Dividend Value
12/2003	Royce Financial Services
06/2003	Royce 100
11/1998	Royce Select I
12/1995	Royce Heritage
12/1993	Royce Total Return
12/1991	Royce Premier
11/1972	Royce Pennsylvania Mutual

Their other senior manager, Whitney George, manages 11 funds. David Nadel works on nine, Lauren Romeo helps manage eight.

A wild expansion out of their traditional domestic small-value strength. Between 1962 and 2001, Royce launched nine funds – all domestic small caps. Between 2001 and the present, they launched 21 mutual funds and three closed-end funds in a striking array of flavors (Global Select Long/Short, International Micro-Cap, European Smaller Companies). While many of those later launches have performed well, many have found no traction in the market. Fifteen of their post-2001 launches have under $100 million in assets, 10 have under $10 million. That translates into higher expenses in some already-expensive niches and a higher hurdle for the managers to overcome.Legg reports progressively weaker performance among the Royce funds in recent years:

Three out of 30 funds managed by Royce outperformed their benchmarks for the 1-year period; 4 out of 24 for the 3-year period; 12 out of 19 for the 5-year period; and all 11 outperformed for the 10-year period.

That might be a sign of a fundamentally unhealthy market or the accumulated toll of expenses and expansion. Shostakovich, one of our discussion board’s most experienced correspondents, pretty much cut to the chase on the day Royce reopened its $1.1 billion micro-cap fund to additional investors: “Chuck sold his soul. He kept his cashmere sweaters and his bow ties, but he sold his soul. And the devil’s name is Legg Mason.” Interesting speculation.

Observer Fund Profiles

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

Scout Unconstrained Bond (SUBFX): If these guys have a better track record than the one held by any bond mutual fund (and they do), why haven’t you heard of it? Worse yet, why hadn’t I?

Stewart Capital Mid-Cap (SCMFX): If this is one of the top two or three or ten mid-cap funds in operation (and it is), why haven’t you heard of it? Worse yet, why hadn’t I?

Launch Alert: RiverNorth Dynamic Buy-Write Fund (RNBWX)

On October 12, 2012, RiverNorth launched their fourth fund, RiverNorth Dynamic Buy-Write Fund. “Buy-write” describes a sort of “covered call” strategy in which an investor might own a security and then sell to another investor the option to buy the security at a preset price in a preset time frame. It is, in general, a defensive strategy which generates a bit of income and some downside protection for the investor who owns the security and writes the option.

As with any defensive strategy, you end up surrendering some upside in order to avoid some of the downside. RiverNorth’s launch announcement contained a depiction of the risk-return profiles for a common buy-write index (the BXM) and three classes of stock:

A quick read is that the BXM offered 90% of the upside of the stock market with only 70% of the downside, which seems the very definition of a good tradeoff.

RiverNorth believes they can do better through active management of the portfolio. The fund will be managed by Eric Metz, who joined RiverNorth in 2012 and serves as their Derivatives Strategist. He’s been a partner at Bengal Capital, a senior trader at Ronin Capital and worked at the Chicago Mercantile Exchange (CME) and Chicago Board Options Exchange (CBOE). The investment minimum is $5000. Expenses are capped at 1.80%.

Because the strategy is complex, the good folks at RiverNorth have agreed to an extended interview at their offices in Chicago on November 8^th. With luck and diligence, we’ll provide a full profile of the fund in our December issue.

Funds in Registration

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

Twenty-nine new no-load funds were placed in registration this month. Those include three load-bearing funds becoming no-loads, two hedge funds merging to become one mutual fund, one institutional fund becoming retail and two dozen new offerings. An unusually large number of the new funds feature very experienced managers. Four, in particular, caught our attention:

BBH Global Core Select is opening just as the five-star BBH Core Select closes. Core Select invests about 15% of its money outside the U.S., while the global version will place at least 40% there. One of Core Select’s managers will co-manage the new fund with a BBH analyst.

First Trust Global Tactical Asset Allocation and Income Fund will be an actively-managed ETF that “seek[s] total return and provide income [and] a relatively stable risk profile.” The managers, John Gambla and Rob A. Guttschow, had been managing five closed-end funds for Nuveen.

Huber Capital Diversified Large Cap Value Fund, which will invest in 40-80 large caps that trade “at a significant discount to the present value of future cash flows,” will be run by Joseph Huber, who also manages the five-star Huber Small Cap Value (HUSIX) and Huber Equity Income (HULIX) funds.

Oakseed Opportunity Fund is a new global fund, managed by Greg L. Jackson and John H. Park. These guys managed or co-managed some “A” tier funds (Oakmark Global, Acorn, Acorn Select and Yacktman) before moving to Blum Capital, a private equity firm, from about 2004-2012.

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

On a related note, we also tracked down about 50 fund manager changes, including the blockbuster announcement of Karen Gaffney’s departure from Loomis Sayles.

RiverPark Long/Short Opportunity conference call

Based on the success of our September conference call with David Sherman of Cohanzick Asset Management and RiverPark’s president, Morty Schaja, we have decided to try to provide our readers with one new opportunity each month to speak with an “A” tier fund manager.

The folks at RiverPark generously agreed to participate in a second conference call with Observer readers. It will feature Mitch Rubin, lead manager of RiverPark Long/Short Opportunity (RLSFX), a fund that we profiled in August as distinctive and distinctly promising. This former hedge fund crushed its peers.

I’ll moderate the call. Mitch will open by talking a bit about the fund’s strategy and then will field questions (yours and mine) on the fund’s strategies and prospects. The call is November 29 at 7:00 p.m., Eastern. Participants can register for the conference by navigating to http://services.choruscall.com/diamondpass/registration?confirmationNumber=10020992

We’ll have the winter schedule in our December issue. For now, I’ll note that managers of several really good funds have indicated a willingness to spend serious time with you.

Small Funds Communicating Smartly

The Mutual Fund Education Alliance announced their 2012 STAR Awards, which recognize fund companies that do a particularly good job of communicating with their investors. As is common with such awards, there’s an impulse to make sure lots of folks get to celebrate so there are 17 sub-categories in each of three channels (retail, advisor, plan participant) plus eleven overall winners, for 62 awards in total.

US Global Investors was recognized as the best small firm overall, for “consistency of messaging and excellent use of the various distribution outlets.” Matthews Asia was celebrated as the outstanding mid-sized fund firm. Judges recognized them for “modern, effective design [and] unbelievable branding consistency.”

Ironically, MFEA’s own awards page is danged annoying with an automatic slide presentation that makes it hard to read about any of the individual winners.

Congratulations to both firms. We’d also like to point you to our own Best of the Web winners for most effective site design: Seafarer Funds and Cook & Bynum Fund, with honorable mentions to Wintergreen, Auxier Focus and the Tilson Funds.

Briefly Noted . . .

Artio meltdown continues. The Wall Street Journal reports that Richard Pell, Artio’s CEO, has stepped down. Artio is bleeding assets, having lost nearly 50% of their assets under management in the past 12 months. Their stock price is down 90% since its IPO and we’d already reported the closure of their domestic-equity funds. This amounts to a management reshuffle, with Artio’s president becoming CEO and Pell remaining at CIO. He’ll also continue to co-manage the once-great (top 5% over 15 years, bottom 5% over the past five years) Artio International Equity Fund (BJBIX) with Rudolph-Riad Younes.

SMALL WINS FOR INVESTORS

Dreyfus/The Boston Company Small Cap Growth Fund (SSETX) reopened to new investors on November 1, 2012. It’s a decent little fund with below average expenses. Both risk and return tend to be below average as well, with risk further below average than returns.

Fidelity announced the launch of a dozen new target-date funds in its Strategic Advisers Multi-Manager Series, 2020 through 2055 and Retirement Income. The Multi-Manager series allows Fidelity to sell the skills of non-Fidelity managers (and their funds) to selected retirement plans. Christopher Sharpe and Andrew Dierdorf co-manage all of the funds.

CLOSINGS

The board of BBH Core Select (BBTEX) has announced its imminent closure. The five-star large cap fund has $3.2 billion in assets and will close at $3.5 billion. Given its stellar performance and compact 30-stock portfolio, that’s certainly in its shareholders’ best interests. At the same time, BBH has filed to launched a Global Core fund by year’s end. It will be managed by one of BBTEX’s co-managers. For details, see our Funds in Registration feature.

Invesco Balanced-Risk Commodity Strategy (BRCAX) will close to new investors effective November 15, 2012.

Investment News reports that 86 ETFs ceased operations in the first 10 months of 2012. Wisdom Tree announced three more in late October (LargeCap Growth ROI, South African Rand SZR and Japanese Yen JYF). Up until 2012, the greatest number of closures in a single calendar year was 58 during the 2008 meltdown. 400 more (Indonesian Small Caps, anyone?) reside on the ETF Deathwatch for October 2012; ETFs with tiny investor bases and little trading activity. The hidden dimension of the challenge provided by small ETFs is the ability of their boards to dramatically change their investment mandates in search of new assets. Investors in Global X S&P/TSX Venture 30 Canada ETF (think “Canadian NASDAQ”) suddenly found themselves instead in Global X Junior Miners ETF (oooo … exposure to global, small-cap nickel mining!).

OLD WINE, NEW BOTTLES

Under the assumption that indecipherable is good, Allianz announced three name changes: Allianz AGIC Structured Alpha Fund is becoming AllianzGI Structured Alpha Fund. Allianz AGIC U.S. Equity Hedged Fund becomes AllianzGI U.S. Equity Hedged Fund and Allianz NFJ Emerging Markets Value Fund becomes AllianzGI NFJ Emerging Markets Value Fund.

BBH Broad Market (BBBIX) has changed its name to BBH Limited Duration Fund.

Effective December 3, 2012, the expensive, small and underperforming Forward Aggressive Growth Allocation Fund (ACAIX) will be changed to the Forward Multi-Strategy Fund. Along with the new name, this fund of funds gets to add “long/short, tactical and other alternative investment strategies” to its armamentarium. Presumably that’s driven by the fact that the fund does quite poorly in falling markets: it has trailed its benchmark in nine of the past nine declining quarters. Sadly, adding hedge-like funds to the portfolio will only drive up expenses and serve as another drag on performance.

Schwab Premier Income (SWIIX) will soon become Schwab Intermediate-Term Bond, with lower expenses but a much more restrictive mandate. At the moment the fund can go anywhere (domestic, international and emerging market debt, income- and non-income-producing equities, floating rate securities, REITs, ETFs) but didn’t, while the new fund will invest only in domestic intermediate term bonds.

Moving in the opposite direction, Alger Large Cap Growth Institutional (ALGRX) becomes Alger Capital Appreciation Focus at the end of the year. The fund will adopt an all-cap mandate, but will shrink the target portfolio size from around 100 stocks to 50.

OFF TO THE DUSTBIN OF HISTORY

The Board of Directors of Bhirud Funds Inc. has approved the liquidation of Apex Mid Cap Growth Fund (BMCGX) effective on or about November 14, 2012. In announcing Apex’s place on our 2012 “Roll Call of the Wretched,” we noted:

The good news: not many people trust Suresh Bhirud with their money. His Apex Mid Cap Growth (BMCGX) had, at last record, $192,546 – $100,000 below last year’s level. Two-thirds of that amount is Mr. Bhirud’s personal investment. Mr. Bhirud has managed the fund since its inception in 1992 and, with annualized losses of 9.2% over the past 15 years, has mostly impoverished himself.

We’re hopeful he puts his remaining assets in a nice, low-risk index fund.

The Board of Trustees of Dreyfus Investment Funds approved the liquidation of Dreyfus/The Boston Company Small Cap Tax-Sensitive Equity Fund (SDCEX) on January 8, 2013. Ironically, this fund has outperformed the larger, newly-reopened SSETX. And, while they were at it, the Board also approved the liquidation of Dreyfus Small Cap Fund (the “Fund”), effective on January 16, 2013

ING will liquidate ING Alternative Beta (IABAX) on December 7, 2012. In addition to an obscure mandate (what is alternative beta?), the fund has managed to lose money over the past three years while drawing only $18 million in assets.

Munder International Equity Fund (MUIAX) is slated to be merged in Munder International Fund — Core Equity (MAICX), on December 7, 2012.

Uhhh . . .

Don’t get me wrong. MUIAX is a bad fund (down 18% in five years) and deserves to go. But MAICX is a worse fund by far (it’s down 29% in the same period). And much smaller. And newer.

This probably explains why I could never serve on a fund’s board of directors. Their logic is simply too subtle for me.

Royce Mid-Cap (RMIDX) is set to be liquidated on November 19, 2012. It’s less than three years old, has performed poorly and managed to draw just a few million in assets. The management team is being dispersed among Royce’s other funds.

It was named Third Millennium Russia Fund (TMRFX) and its charge was to invest “in securities of companies located in Russia.” This is a fund that managed to gain or lose more than 70% in three of the past 10 years. Investors have largely fled and so, effective October 10, 2012, the board of trustees tweaked things. It’s now called Toreador International Fund and its mandate is to invest “outside of the United States.” As of this writing, Morningstar had not yet noticed.

In Closing . . .

We’ve added an unusual bit of commercial presence, over to your right. Amazon created a mini-site dedicated to the interests of investors. In addition to the inevitable links to popular investing books, it features a weekly blog post, a little blog aggregator at the bottom (a lot of content from Bloomberg, some from Abnormal Returns and Seeking Alpha), and some sort of dead, dead, dead discussion group. We thought you might find some of it useful or at least browseable, so we decided to include it for you.

And yes, it does carry MFO’s embedded link. Thanks for asking!

Thanks, too, to all the folks (Gary, Martha, Dean, Richard, two Jacks, and one Turtle) who contributed to the Observer in October.

We’ll look for you in December.

Scout Unconstrained Bond Fund (SUBFX), November 2012

By David Snowball

This fund is now the Carillon Reams Unconstrained Bond Fund.

Objective and Strategy

The fund seeks to maximize total return consistent with the preservation of capital. The fund can invest in almost any sort of fixed-income instrument, though as a practical matter their international investments are quite limited. The fund’s maturity will not normally exceed eight years, but they maintain the option of going longer in some markets and even achieving a negative duration (effectively shorting the bond market) in others. They can use derivative instruments, such as options, futures contracts (including interest rate futures contracts), currency forwards or swap agreements (including credit default swaps) to enhance returns, increase liquidity and/or gain exposure to particular areas of the market. Because they sell a security when it approaches fair market value, this may be a relatively high turnover fund.

Adviser

Scout Investments, Inc. Scout is a wholly-owned subsidiary of UMB Financial, both are located in Kansas City, Missouri. Scout advises the eleven Scout funds. As of June 30, 2012, assets under the management of the Advisor were approximately $22.37 billion. Scout’s four fixed-income funds are managed by its Reams Asset Management division, including Low-Duration Bond (SCLDX), Core Bond (SCCYX, four stars) and Core Plus Bond (SCPZX, rated five star/Silver by Morningstar, as of October 2012).

Manager

Mark M. Egan is the lead portfolio manager of the Fixed Income Funds. Thomas M. Fink, Todd C. Thompson and Stephen T. Vincent are co-portfolio managers of the Fixed Income Funds. Mr. Egan joined the Advisor on November 30, 2010. He oversees the entire fixed income division of the Advisor, Reams Asset Management, and retains oversight over all investment decisions. Mr. Egan was a portfolio manager of Reams Asset Management Company, LLC (“Reams”) from April 1994 until November 2010 and was a portfolio manager of Reams Asset Management Company, Inc. from June 1990 until March 1994. Mr. Egan was a portfolio manager of National Investment Services until May 1990.

Management’s Stake in the Fund

Messrs. Egan, Fink and Thompson have each invested over $1,000,000 in the fund. Mr. Vincent has between $10,000 – 50,000 in it.

Opening date

September 29, 2011.

Minimum investment

$1,000 for regular accounts, reduced to $100 for IRAs or accounts with AIPs.

Expense ratio

0.99%, after waivers, on assets of $45 million (as of October 2012).

Comments

There are 6850 funds of all kinds in Morningstar’s database. Of those, precisely 117 have a better one-year record than Scout Unconstrained Bond.

There are 1134 fixed-income funds in Morningstar’s database. Of those, precisely five have a better one-year record.

98.3% of all funds trail Scout Unconstrained between November 1, 2011 and October 30, 2012. 99.6% of all fixed-income funds trailed Scout for the same period.

Surprised? You might not be if you knew the record of the management team that runs Scout Unconstrained. Mark Egan and his team from Reams Asset Management have been investing money using this strategy since 1998. Their audited performance for the private accounts (about $231 million worth of them) is stunningly better than the records of the most renowned bond fund managers. The funds below represent the work of the three best-known bond managers (Jeff Gundlach at DoubleLine, Bill Gross at PIMCO, Dan Fuss at Loomis) plus the performance of the Gold-rated funds in Morningstar’s two most-flexible categories: multi-sector and world.

	1 Yr.	3 Yrs.	5 Yrs.	10 Yrs.
Unconstrained Composite	33.98%	20.78	17.45	15.67
SUBFX	25.37	–	–	–
DoubleLine Core Fixed Income	8.62	–	–	–
Loomis Sayles Bond	14.25	10.83	7.08	10.41
Loomis Sayles Strategic Income	14.02	10.63	6.89	11.14
PIMCO Total Return	9.08	11.51	8.92	6.95
Templeton Global Bond	12.92	8.03	9.47	10.95
ML 3 Month LIBOR	0.48	0.37	1.44	2.26

Annualized Performance Ending September 30, 2012

You’ll notice that the performance of Scout Unconstrained does not equal the performance of the Unconstrained Composite. The difference is that the team bought, in the private accounts, deeply distressed securities in the 2008 panic and they’re now harvesting the rewards of those purchases. Since the fund didn’t exist, its investors don’t have the benefit of that exposure. Clark Holland, a Portfolio Analyst on the Fund, reports that, “We strive to invest the separate accounts and the mutual fund as closely as possible so returns should be similar going forward.”

Just because I’m a cautious person, I also screened all bond funds against the trailing record of the Unconstrained Bond composite, looking for close competitors. There were none.

But I’m not sure why. The team’s strategy is deceptively simple. Find where the best values are, then buy them. The Reams website posits this process:

STEP 1: Determine whether the bond market is cheap or expensive by comparing the current real interest rate to historical rates.

STEP 2: Focus on sectors offering relative value and select securities offering the highest risk‐adjusted return.

STEP 3: Continually measure and control exposure to security‐ and portfolio‐level risks.

It looks like the fund benefits from the combination of two factors: boldness and caution.

It’s clear that the managers have sufficient confidence in their judgment to act when other hesitate. Their 2012 Annual Report cites one such instance:

A contribution to performance in the asset-backed securities (ABS) sector can be traced to our second lien or home equity holdings, which strongly outperformed. We purchased these securities at an extreme discount after the 2008-2009 financial crisis, when defaults on home equity loans were high. Since then, default rates declined, the perceived risk of owning these securities lessened, and the prices of the securities have risen sharply.

As you comb through the fund’s reports, you find discussions of “airline enhanced equipment trust certificates” and the successful exploitation of mispricing in the derivatives market:

High-yield index swaps (CDX) such as those we own, which represent groups of credit default swaps (CDS), usually are priced similarly to high-yield cash bonds. Due to somewhat technical reasons, a price gap opened, in the second quarter of this year, between the price of high-yield CDX index swaps and high-yield cash bonds .We took advantage of the price gap to buy the CDX index swap at an attractive price and captured a nice return when pricing trended back toward a more normal level.

One simple and bold decision was to have zero long exposure to Treasuries; their peers average 35%. As with RiverPark Short Term High Yield, the fact that their strategy (separate accounts plus the fund) has attracted a relatively small amount of investment, they’re able to drive performance with a series of relatively small, profitable trades that larger funds might need to skip over.

At the same time, you get a sense of intense risk-consciousness. Cautious about rising interest rates, the managers expect to maintain a shorter average duration as they look for potential investments. In his October 3, 2012 letter to investors, Mr. Egan lays out his sense of how the market is evolving and how his team will respond:

What to do? Recognize the reality of a challenging environment, focus on your realistic goals as an investor, and be ready to seize opportunities as they arise. A well-known investor recently opined as to the death of equity as an asset class. Our take is the death of static risk allocations, or even what constitutes risk, along with buy and hold investing. The successful investor will be aware of the challenges we face as a society, understand the efficacy or lack of it in the various (mostly political) solutions prescribed, and allow volatility, and the inevitable mispricing that will result, to be your guide. Flexibility and nimbleness will be required. For our part, we have positioned accounts in a cautious, conservative stance as the cost of doing so has rapidly declined. We may be early and we may forgo some modest gains in risk assets, but it is both appropriate and in keeping with the style that has generated returns well in excess of our peers over most time periods.

Bottom Line

You need to approach any “too good to be true” investment with care and diligence. The track record behind SUBFX, which is splendid and carefully documented, was earned in a different sort of investment vehicle. As assets grow, the fund’s opportunity set will change and, possibly, narrow. That said, the managers have successfully invested substantial sums via this strategy for nearly 15 years; the fact that they’ve placed millions of their own dollars at risk represents a very serious endorsement.

Fund website

Scout Unconstrained Bond. Mr. Egan also wrote a very good white paper entitled “Fixed Income: The Search for Total Returns in Volatile Markets” (March 2012). If you’re intrigued by the fund, you’ll get a better sense of the managers’ approach. Even if you’re not, you might well benefit from their discussion of “the growing risks of not taking risks.”

Fact Sheet

Stewart Capital Mid Cap Fund (SCMFX), November 2012

By David Snowball

This fund has been liquidated.

Objective and Strategy

Stewart Capital Mid Cap Fund seeks long-term capital appreciation. It invests, primarily, in domestic midcap stocks. While it is technically a “diversified” fund, the managers warn that they prefer to invest in “a relatively small number of intensively researched companies.” They operationalize “relatively small” as 30-60. They target firms that don’t need “large amounts of leverage to execute their business plan” and firms with sustainable business advantages (favorable demographics and long-term trends, high barriers to entry, good management teams, and high returns on invested capital).

Adviser

Stewart Capital Advisors, LLC, was founded in August 2005. It is a wholly-owned subsidiary of S&T Bank, headquartered in Indiana, PA. As of December 31, 2011, Stewart had $965 million in assets under management.

Managers

Matthew A. Di Filippo, Charles G. Frank, Jonathan V. Pavlik, Malcolm E. Polley, Helena Rados-Derr and Nicholas Westric. Mr. Di Filippo is the senior manager and the adviser’s investment strategist. Mr. Polley is president and CIO. His investing career started on Black Monday, 1987 and includes 25 years of primarily-midcap investing. Except for Ms. Rados-Derr and Mr. Westric, the managers have all been with the fund since inception. Each of the managers also handles something like 100-300 private accounts.

Management’s Stake in the Fund

Modest. Three of the managers have invested between $10,001-50,000 in the fund: Polley, Di Filippo and Pavlik. The others have invested under $10,000. I expressed my concern about such modest commitments to President Polley. He writes:

I could require that staff invest solely in the fund, but realize that a portfolio that is solely mid-cap oriented for some folks does not meet their risk parameters. Also, I want staff to invest in the fund on its merits. That said, I have exactly two investments: S&T Bank stock and the Stewart Capital Mid Cap Fund. I also have two children in college and have been using some of my investment in that fund to pay for that expense. So, I believe I put my money where my mouth is.

Opening date

December 29, 2006. The fund converted to no-load on April 1, 2012.

Minimum investment

$1,000 or $100 for accounts with an automatic investment plan.

Expense ratio

1.50%, after waivers, on assets of $37.0 million.

Comments

I wandered by the Stewart Capital booth at Morningstar Investment Conference in June, picked up the fund’s factsheet and reports, and then stood there for a long time. Have you ever had one of those “how on earth did I manage to miss this?” moments? As I looked at the fund’s record, that’s precisely what went through my mind: small, no-load, independent fund, great returns, low risk, low minimum investments. Heck, they’re even in Steeler Country. How on earth did I manage to miss this?

Part of the answer is that Stewart was not always a no-load fund, so they weren’t traditionally in my coverage universe, and their marketing efforts are very low-key.

There’s a lot to like here. The two reliable fund rating services, Morningstar and Lipper, agree that SCMFX is at the top of the midcap pack in both risk management and returns. Here’s the Morningstar snapshot:

	Returns	Risk	Rating
3-year	High	Below Average	Five Stars
5-year	High	Below Average	Five Stars
Overall	High	Below Average	Five Stars

(Morningstar ratings, as of 10/30/12)

Morningstar’s estimate of tax-adjusted returns places Stewart in the top 1% of mid-cap funds over the past five years.

Lipper supports a similar conclusion:

	Total Return	Consistent Return	Preservation	Tax Efficiency
3-year	5	5	5	4
5-year	5	5	5	5
Overall	5	5	5	5

(Lipper Leaders ratings, as of 10/30/12)

The fund has a striking pattern of performance over time. Normally good funds make their money either on the upside or the downside; that is, they consistently outperform in either rising or falling markets. Stewart seems to do both. It has outperformed its peer group in eight of eight down quarters in the past five years (2008 – Q3 2012) but in only four of 11 rising quarters. But it still wins in rising markets. In quarters when the market has been rising, SCMFX gains an average of 10.65% versus 10.58% for its peer group, reflecting the fact that its “up” quarters rarely trail the market by much and sometimes lead it by a lot.

When I asked the simple question, “which mid-cap funds have been as successful? And screened for folks who could match or better Stewart over the past one, three and five year periods, I could find only four funds in a universe of 300 midcaps. Of those, only one fund, the $1.6 billion Nicholas Fund (NICSX), was less volatile.

That’s a distinguished record in a notably volatile market: 10 of the past 23 quarters have seen double-digit gains (six) or losses (four) for midcap stocks.

The fund is distinguished by effective active management. They buy the stocks they expect to outperform, regardless of the broader market’s preferences. They target stocks where they anticipate a 15% annual rate of return and which are selling at a discount to fair-value of at least 15%. Their question seems to be, “would we want to own this whole company?” That leads them to buy businesses where the industry is favorably positioned (they mostly avoid financials, for example, because the industry only thrives when assets are growing and Stewart suspects that growth is going to be limited for years and years) and the individual firm has exceptional management. An analysis of the portfolio shows the result. They own high quality companies, ones which are growing much more quickly (whether measured by long-term earnings, cash flow, or book value) than their peers. And they are buying those companies at a good price; their high-quality portfolio is selling at a slight discount (in price/earnings, price/sales, price/cash flow) to their peers.

Bottom Line

This is arguably one of the top two midcap funds on the market, based on its ability to perform in volatile rising and falling markets. Their strategy seems disciplined, sensible and repeatable. Management has an entirely-admirable urge “to guard against … making foolish decisions” based on any desire to buy what’s popular at the moment. They deserve a spot on the due diligence list for anyone looking to add actively-managed, risk-conscious equity exposure.

Fund website

Stewart Capital

Fact Sheet

November 2012, Funds in Registration

By David Snowball

Advisory Research Value Income Fund

Advisory Research Value Income Fund will seek high current income and long term capital appreciation. Interesting plan: they intend to invest primarily in preferred securities, but retain the option of buying “other income producing securities including convertible securities, debt securities, common stocks, and securities of other investment companies.” No more than 20% of the portfolio will be non-U.S. This fund represents a conversion of two hedge funds (Advisory Research Value Income Fund, L.P. and Advisory Research Value Income Fund II, L.P.) into one mutual fund. The hedge fund returned an average of 4.7% per year from 2003 to 2011, vastly better than the 1.2% registered by its benchmark (Merrill Lynch US Preferred Fixed Rate Index). Brien M. O’Brien, James M. Langer and Bruce M. Zessar will manage the portfolio. The minimum initial investment is $2,500. The expense ratio is not yet set.

BBH Global Core Select

BBH Global Core Select will seek to provide investors with long-term growth of capital by investing in mid- and large-cap stocks around the world. They describe themselves as “buy and own” investors. They intend to invest mostly in developed markets, but can invest without limit in emerging markets as well. At least 40% of the portfolio will be non-US and they can hedge their currency exposure. Regina Lombardi and Timothy E. Hartch will manage the portfolio. BBH recently described Lombardi as part of their team of media and consumer analysts. Hartch comanages the excellent, recently closed BBH Core Select (BBTRX) fund. The minimum initial investment is $10,000. The expense ratio is not yet set.

BRC Large Cap Focus Equity Fund

BRC Large Cap Focus Equity Fund (Advisor Class Shares) wants to achieve long-term capital appreciation that will exceed the S&P 500 Index over a three- to five-year time horizon. They’ll invest in 30-35 large cap stocks. BRC stands for “Bounded Rationality Concepts.” These guys believe in behavioral economics and think that they can anticipate events like positive earnings surprises and upgrades. John R. Riddle will head the portfolio team. The three managers previously worked for Duff & Phelps which, like Leuthold, is known for its investment research and analysis. The minimum initial investment is $2,500. The expense ratio, after waivers, will be 1.24%.

Drexel Hamilton Multi-Asset Real Return Fund

Drexel Hamilton Multi-Asset Real Return Fund will seek (duh) real return which they define as “total return that exceeds U.S. inflation over a full [five-year] inflation cycle.” They plan to invest, mostly, in other Drexel Hamilton funds, in TIPs and in commodity-linked ETFs and ETNs. The other two Drexel funds in which it will invest have been around less than a year. Andrew Bang, a West Point grad and the firm’s founder, is the portfolio manager. Before founding Drexel, he was a Senior Vice President at Shinhan Investment America, a Vice President at AIG Global Investments, and a Portfolio Manager for GE Asset Management (GEAM). In that latter role he managed $2.5 billion or so. The minimum initial investment is $10,000. The expense ratio is 1.81% after waivers.

First Trust High Yield Long/Short ETF

First Trust High Yield Long/Short ETF will be an actively-managed ETF which will invest most of its portfolio (long and short) in high yield U.S. and non-U.S. corporate debt obligations, bank loans and convertible bonds. It may invest in “special situations” including defaulted securities and common stocks; companies whose financial condition is troubled or uncertain and that may be involved in bankruptcy proceedings, reorganizations or financial restructurings. Finally, the manager expects routinely to short U.S. Treasuries and some investment grade U.S. corporate debt; the fund “intends to use the proceeds from the Fund’s short positions to purchase high yield debt securities, thereby creating a form of financial leverage.” William Housey, Scott D. Fries, Peter Fasone, Todd Larson and Eric Maisel will manage the fund. All of them seem to have extensive high yield experience at other firms (Morgan Stanley/Van Kampen, BNP Paribas, ABN AMBR)). Expenses are not yet set.

First Trust Global Tactical Asset Allocation and Income Fund

First Trust Global Tactical Asset Allocation and Income Fund will be an actively-managed ETF that “seek[s] total return and provide income [and] a relatively stable risk profile.” It will invest in other ETFs, plus some ETNs and sovereign debt. They’ll also try to sell calls on a portion of the portfolio to supplement their yield. The description of the fund’s underlying asset allocation strategy isn’t terribly informative; they’ll have a neutral allocation (which isn’t spelled out) and will move from it as conditions call for. John Gambla and Rob A. Guttschow will manage the fund. Up until 2011, they managed five closed-end funds for Nuveen: Dow 30 Premium and Dividend Income (DPD), Dow 30 Enhanced Premium & Income (NYSE: DPO), NASDAQ Premium Income & Growth (QQQX), Nuveen Core Equity Alpha Fund (JCE) and Nuveen Tax-Advantaged Dividend Growth Fund (JTD). Expenses not yet set.

Hotchkis & Wiley Global Value Fund

Hotchkis & Wiley Global Value Fund seeks capital appreciation by investing, primarily, in stocks of companies located in developed markets. At least 40% will be non-US and up to 20% might be in emerging markets. They plan a bottom-up, fundamentals-driven strategy. Scott McBride and Judd Peters will manage the fund. They have managed private accounts using this strategy since 2011 but the firm hasn’t released performance information yet. Their public record is mixed: they’re on the management teams for two sad sack domestic funds, Diversified Value (HWCAX) and Large Cap Value (HWLAX). Since joining the teams, the funds have gone from dreadful to mediocre, so that’s sort of an endorsement. The minimum investment is $2500. Expenses are not yet set. There is a 5.75% front-load but H&W funds are generally available no-load at Schwab.

Huber Capital Diversified Large Cap Value Fund

Huber Capital Diversified Large Cap Value Fund seeks to achieve current income and capital appreciation by investing in 40-80 large caps that trade “at a significant discount to the present value of future cash flows.” The fund is benchmarked against the Russell 1000 Value, whose smallest firm has a $230 million market cap, but the managers expect to invest mostly in U.S. stocks above $5 billion. It may invest up to 20% in ADRs. Joseph Huber, who also manages the five-star Huber Small Cap Value (HUSIX) and Huber Equity Income (HULIX) funds, will manage the portfolio. The minimum initial investment is $5000, reduced to $2500 for IRAs. The opening expense ratio will be 1.25%.

Janus Diversified Alternatives Fund

Janus Diversified Alternatives Fund will seek absolute return with low correlation to stocks and bonds. Their description of investment strategies is mostly self-important babble about “risk premia opportunities.” It looks like they use a risk-parity model to set their neutral asset allocation across equity, fixed income, commodity, and currency asset classes. That is, they adjust allocations so that the risk generated by stocks is the same as that generated by bonds or commodities. They then look for the sources of the aforementioned “risk premia opportunities,” which is to say, mis-priced securities. They can invest both long and short. They can invest directly or through mutual funds, ETFs or ETNs. Andrew B. Weisman and John S. Fujiwara will manage the fund. Both are hedge fund guys who joined Janus in 2012. “S” shares are available no-load and NTF. The minimum initial investment is $2500. The expense ratio is not yet set.

Kellner Event Fund

Kellner Event Fund seeks to achieve positive risk-adjusted returns independent of the returns generated by the overall equity markets. The plan is to invest, long and short, “using various strategies” in order to “seek to profit from securities experiencing catalyst driven change.” Such events might include mergers, bankruptcies, financial or operational stress, restructurings, asset sales, recapitalizations, spin-offs, litigation, regulatory and legislative changes “as well as other types of events.” It can invest in pretty much any asset class. George A. Kellner, the adviser’s founder & Chief Executive Officer, will lead the management team. The public record for the team is awfully thin. They launched a merger-arbitrage fund in July 2012 and it’s been pretty average. Several of the managers have experience with event-driven hedge funds, but of course there’s no record available. The minimum initial investment is $2500, reduced to $2000 for various tax-advantaged plans and $100 for accounts set up with an AIP. The opening expense ratio will be 2.75% (yikes) in addition to a 2% redemption fee.

Managers AMG Chicago Equity Partners Balanced Fund

Managers AMG Chicago Equity Partners Balanced Fund, yet another convert from the world of loaded funds, will pursue “a high total investment return, consistent with the preservation of capital and prudent economic risk.” The fund will ordinarily invest 50-65% in stocks and the rest in bonds and cash. It will invest mostly in mid- to large-cap stocks, selected on the basis of “momentum, value, and quality factors.” The predecessor fund, the same except for a sales load, has been quite consistently above-average. David C. Coughenour of CEP leads the management team. The minimum initial investment is $2,000. The expense ratio, after waiver, is 1.10%. The “service class,” sold through financial intermediaries, is 0.25% cheaper.

Oakseed Opportunity Fund

Oakseed Opportunity Fund will seek long term capital appreciation by investing, mostly, in the stocks of high quality US companies. They do have the right to invest overseas and they may also invest up to 10% short. Greg L. Jackson and John H. Park will manage the fund. These guys managed or co-managed some “A” tier funds (Oakmark Global, Acorn, Acorn Select and Yacktman) around the turn of the century. Both worked at Blum Capital, a private equity firm, from about 2004-2012. The minimum initial investment is $2500, reduced to $1000 for various tax-advantaged plans and $100 for accounts set up with an AIP. The opening expense ratio will be 1.4% in addition to a 2% redemption fee for shares held fewer than 90 days.

Pacific Financial Alternative Strategies, Flexible Growth & Income, Balanced, Foundational Asset Allocation, Faith & Values Based Moderate, Conservative and Aggressive Funds

Pacific Financial Alternative Strategies, Flexible Growth & Income, Balanced, Foundational Asset Allocation, Faith & Values Based Moderate, Conservative and Aggressive Funds. You’re welcome to read about them if you’d like, but I’m not going to spend time on them. Here’s the story: Pacific Financial’s three-person management team already runs five funds with diverse focuses. The “investor” class for every one of those funds is one-star (as of 10/26/2012). They’re now proposing to add seven more funds, requiring yet more expertise that they have not demonstrated that they possess. The expense ratios aren’t yet set. The minimum purchase is $5000.

Riverbridge Growth Fund

Riverbridge Growth Fund will pursue to seek long term capital appreciation by investing in small- to mid-cap US stocks (and some ADRs). The managers intend to focus on “companies that it views as building their earnings power and building their intrinsic … values over long periods of time. The advisor uses a bottom-up approach that seeks to identify high quality growth companies that demonstrate the ability to sustain strong secular earnings growth, regardless of overall economic conditions.” Mark A. Thompson, Rick D. Moulton and Dana L. Feick will manage the fund. Over the last decade, the composite performance of the private accounts using this strategy has been pretty good: up 8.2% per year versus 6.1% for the Russell 3000 over the same period. The minimum initial investment is $2,500. The expense ratio, which will include a waiver, is not yet set. There’s a 1% redemption fee on shares held fewer than 90 days.

Riverbridge Eco Leaders Fund

Riverbridge Eco Leaders Fund will pursue to seek long term capital appreciation by investing in “companies that use strategic technologies, materials and services to: (1) increase productivity by improving quality, efficiency and performance or (2) lower costs by reducing raw materials usage, scrap, and the amount and toxicity of waste as companies having a net positive impact on the environment.” The managers intend to focus on “companies that it views as building their earnings power and building their intrinsic … values over long periods of time. The advisor uses a bottom-up approach that seeks to identify high quality growth companies that demonstrate the ability to sustain strong secular earnings growth, regardless of overall economic conditions.” Mark A. Thompson, Rick D. Moulton and Dana L. Feick will manage the fund. Over the last decade, the composite performance of the private accounts using this strategy has been pretty good: up 7.5% per year versus 5.3% for the S&P500 over the same period. The minimum initial investment is $2,500. The expense ratio, which will include a waiver, is not yet set. There’s a 1% redemption fee on shares held fewer than 90 days.

Schwab Target 2045, 2050 and 2055 Funds

Schwab Target 2045, 2050 and 2055 Funds are all funds-of-Schwab-funds. It appears that they’re only available to “eligible investors,” which appears to translate as “institutions.” Not sure of why. Zifan Tang (cool name) manages them all. Expenses not yet set.

Stonebridge Small-Cap Growth Fund

Stonebridge Small-Cap Growth Fund appears in the SEC filings of October 5, 2012 as a new fund with an N-1A filing. It is, in reality, an old, expensive and underperforming institutional fund that is becoming a retail one. This is odd, since there already was a retail version. It claims to seek long-term growth of capital. “Short-term income is a secondary objective.” I’m not entirely sure what “short term income” is. In any case, they invest in domestic small cap stocks, those between $100 million and $3 billion. And they look for “companies with strong balance sheets, high/growing return on invested capital, positive free cash flow, and earnings growth in excess of 20%.” Up to 10% may be invested overseas. Richard C. Barrett and Matthew W. Markatos have managed it for about 30 years. The minimum initial investment is $2500. The opening expense ratio will be 1.97% and there’s a 2% redemption fee on shares held under 30 days.

Scharf Balanced Opportunity Fund

Scharf Balanced Opportunity Fund seeks long-term capital appreciation and income. They’ll invest 50-75% in global equities and the rest in global fixed income. Brian A. Krawez, president of Scharf, is the portfolio manager. Scharf manages a bunch of private accounts using this same strategy and they’ve done quite well over time. In the five years since Mr. Krawez has been around, the separate accounts outperformed a 60/40 benchmark by between 150 – 300 basis points per year. The minimum initial investment is $10,000. The expense ratio, after waiver, is 1.20%.

Sit Quality Income Fund

Sit Quality Income Fund will seek high current income and safety of principal. The fund invests at least 50% of its assets in U.S. government debt securities and the remainder in investment grade debt securities issued by corporations and municipalities, and mortgage and other asset backed securities. They’re targeting an average effective duration for the portfolio of approximately 0 to 2 years. Michael C. Brilley, Bryce A. Doty, Mark H. Book, and Chris M. Rasmussen constitute the management team and also manage the five-star Sit US Government Securities fund (SNGVX). The minimum initial investment is $5,000, reduced to $2000 for IRAs. The expense ratio, after waiver, is 0.90%.

Systematic Mid Cap Value Fund

Systematic Mid Cap Value Fund (SYAMX), which is being converted from a front-loaded fund to a no-load one, will pursue long-term capital appreciation by investing in 60-80 mid-cap stocks. The manager “[s]eeks out value companies with a confirmed catalyst for sustained fundamental improvement that should eventually lead to either revised earnings estimates or earnings surprises in the future.” Despite an uninspired track record, the earlier version of the fund did accumulate $300 million in assets. Ron Mushock and D. Kevin McCreesh have managed the fund since launch. The minimum initial investment is $2,000. The expense ratio, after a generous one basis-point waiver, is 1.13%. The “service class,” sold through financial intermediaries, is 0.25% cheaper.

WisdomTree Global Corporate Bond Fund

WisdomTree Global Corporate Bond Fund will be an actively-managed ETF that will pursue a high level of total return consisting of both income and capital appreciation. They plan to invest in debt issues by public, private, and state-owned or sponsored corporations. They’ll limit emerging market debt to 25% of the portfolio, they can invest 25% in derivatives and expect to hedge their currency exposure. It looks as if there will be four managers, but their names have not been published and the expenses not yet set.

Manager changes, October 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.

Ticker	Fund	Out with the old	In with the new	Dt
PGWCX	Allianz RCM Focused Growth, formerly Allianz AGIC Growth Fund	The entire AGI Capital team.	The RMC team of Scott T. Migliori, Karen Hiatt, and David Jedlicka	11/12
ARMAX	Allianz RCM Global Commodity Equity	Alec Patterson	Paul Strand becomes the lone manager	11/12
APHMX	Artisan Mid Cap	No one, but . . .	Matthew Kamm has stepped up to a named manager role	11/12
BIAOX	Brown Advisory Opportunity Fund	Darryl R. Oliver	Paul Li, Maneesh Bajaj and Eric Gordon	11/12
APFAX	Cohen & Steers Emerging Markets Real Estate	No one, but . . .	William Leung has joined as comanager. Leung had 12 years at Deutsche Bank/RREEF Real Estate. Presumably Deutsche Bank’s ongoing efforts to sell its RREEF unit weighed on him.	11/12
CSFAX	Cohen & Steers Global Realty	No one, but . . .	William Leung has joined as comanager	11/12
IRFAX	Cohen & Steers International Realty	No one, but . . .	William Leung has joined as comanager	11/12
CALFX	Cutler Income Fund	Michael Cheung	Xavier J. Urpi	11/12
SEMGX	DWS Emerging Markets Equity	Jason Inzer	Comanager, Thomas Voecking, will remain, joined by Anna Wallentin, Juergen Foerster, and Johannes Prix	11/12
SZEAX	DWS Enhanced Emerging Markets Fixed Income	No one, but . . .	Kumar Vemuri was added. Given that the “Enhanced” fund typically resides in the bottom 10% of its peer group, his addition can’t hurt.	11/12
KDHAX	DWS Equity Dividend	Jason Inzer	Comanager, Thomas Voecking, will remain, joined by Anna Wallentin, Juergen Foerster, and Johannes Prix	11/12
GGGGX	DWS GNMA	John Ryan has been removed as portfolio comanager	Lead manager, Bill Chepolis, remains with the other comanagers	11/12
SCINX	DWS International	Jason Inzer	Comanager, Thomas Voecking, will remain, joined by Anna Wallentin, Juergen Foerster, and Johannes Prix	11/12
KUSAX	DWS Strategic Government Securities	John Ryan has been removed as portfolio comanager	Lead manager, Bill Chepolis, remains with the other comanagers	11/12
FDMAX	Fidelity Advisor Communications Equipment	Charlie Chai has stepped down	Ali Khan will remain as the sole manager	11/12
FAMKX	Fidelity Advisor Emerging Markets	Robert von Rekowsky no longer serves as portfolio manager	Sammy Simnegar	11/12
FAGAX	Fidelity Advisor Growth Opportunities	No one, but . . .	Gopal Reddy will join Steven Wymer	11/12
FGVAX	Fidelity Advisor Growth Strategies	Patrick Venanzi	Eddie Yoon joins the team	11/12
FGCAX	Fidelity Advisor Mid Cap Growth	No one, but . . .	Edward Yoon was added as a comanager	11/12
FMCDX	Fidelity Advisor Stock Selector Mid Cap	Patrick Venanzi	Eddie Yoon joins the team	11/12
FSMGX	Fidelity Mid Cap Growth	Patrick Venanzi	Eddie Yoon joins the team	11/12
FSDCX	Fidelity Select Communications Equipment	Charlie Chai has stepped down	Ali Khan will remain as the sole manager	11/12
FSHOX	Fidelity Select Construction & Housing	Dan Kelley has stepped down as comanager	Holger Boerner will remain.	11/12
FSDAX	Fidelity Select Defense & Aerospace	John Sheehy has stepped down	Douglas Scott will remain as sole manager	11/12
FSAEX	Fidelity Series All Sector Equity	John Avery and Adam Hetnarski	Monty Kori and Brian Lempel	11/12
FMSVX	FMC Strategic Value	No one, but . . .	Paul E. Patrick, joins Edward I. Lefferman, as a comanager. Lefferman has managed the fund since its inception in 1998. The fund has sort of fallen off the rails since 2010 after a long, strong run.	11/12
GARTX	Goldman Sachs Absolute Return Tracker	Jonathan Sheridan	Matthew Hoehn and Don Mulvihill remain, presumably trying to find the “absolute” in a fund that’s down 11% since launch.	11/12
IFCAX	ING Greater China, soon to be called ING Emerging Markets Equity Dividend	The entire team is leaving as the strategy and name are changed.	Nicolas Simar, Manu Vandenbulck, and Robert Davis	11/12
JMIGX	Jacob Micro Cap Growth Fund	Jamie Cuellar	Darren Chervitz and Ryan Jacob
SBLGX	Legg Mason ClearBridge Large Cap Growth	Comanager Scott Glasser will be stepping down, but not until March 2013	Margaret Vitrano was added. The “Legg Mason” moniker will soon disappear.	11/12
LSBRX	Loomis Sayles Bond	Kathleen Gaffney leaves for a position with Eaton Vance after three decades with Loomis Sayles.	Founder, Daniel Fuss, remains along with comanagers Matthew Eagan and Elaine Stokes	11/12
EPIPX	MainStay Epoch International Small Cap	Emily Baker will leave as of Dec 31	Eric Citerne, Michael Welhoelter, and William Priest will continue	11/12
ICAUX	Mainstay ICAP Equity	No one, but . . .	Thomas Cole joined the team	11/12
ICGLX	Mainstay ICAP Global	No one, but . . .	Thomas Cole joined the team	11/12
ICEVX	Mainstay ICAP International	No one, but . . .	Thomas Cole joined the team	11/12
ICSRX	Mainstay ICAP Select Equity	No one, but . . .	Thomas Cole joined the team	11/12
MAPAX	Mainstay MAP	No one, but . . .	Thomas Cole joined the team	11/12
EXTCX	Manning & Napier Technology	Tariq Siddiqi	Jacob Boak	11/12
PWEAX	PACE International Emerging Markets Equity	Subadvisors, Delaware Management Company and Pzena Investment Management	Lee Munder is a new subadvisor	11/12
PGMDX	PIMCO Global Multi-Asset	No one, but . . .	Saumil Parikh is now a comanager	11/12
POLIX	Polen Growth	No one, but . . .	Damon Ficklin has joined Dan Davidowitz. The fund is up to $355 million after two years, which might explain the added staff.	11/12
USGRX	USAA Growth & Income	John Leonard	Ian McIntosh	11/12
USISX	USAA Income Stock	Sam Wilderman	David Cowan	11/12
VMMSX	Vanguard Emerging Markets Select Stock	Michael Godfrey, who comanaged for subadvisor M&G	Matthew Vaight will continue for M&G	11/12
WTMGX	Westcore MIDCO Growth	William Chester is retiring.	Comanagers Mitch Begun and F. Wiley Reed will remain	11/12
WTSLX	Westcore Select	William Chester is retiring.	Comanagers Mitch Begun and F. Wiley Reed will remain	11/12