This fund has been liquidated.

Objective and Strategy:

The fund seeks high current income and some stability of principal by investing in an array of other Forward Funds and cash.  The portfolio has a target volatility designation (a standard deviation of 6.5%) and it is rebalanced monthly to generate as much income as possible consistent with that risk goal. 

Adviser:

Forward Management, LLC.  Forward specializes in alternative investment classes.  As of March 2013, Forward had $6.1 billion in assets under management in their “alternative and niche” mutual funds and in separately managed accounts.

Managers:

All investment decisions are made jointly by the team of Nathan Rowader, Director of Investments and Senior Market Strategist; Paul Herber, Portfolio Manager; Paul Broughton, Assistant Portfolio Manager; and Jim O’Donnell, CIO. Between them, the team has over 70 years of investment experience.

Management’s Stake in the Fund:

As of May 1^st, Messrs. Rowader and Broughton had not invested in the fund. Messrs. Herber and O’Donnell each had a small stake, of less than $10,000, invested.

Opening date:

December 27, 2000.  Prior to May 1, 2012, it was known as the Forward Income Allocation Fund.

Minimum investment:

There’s a $4,000 minimum initial investment, lowered to $2,000 for Coverdell and eDelivery accounts, further lowered to $500 for automatic investment plans.

Expense ratio:

1.96% on assets of $21.2 million.

Comments:

Forward Income Builder is different.  It’s different than what it used to be.  It’s different than other funds, income-oriented or not.  So far, those differences have been quite positive for investors.

Income Builder has always been a fund-of-funds.  From launch in 2000 to May 2012, it had an exceedingly conservative mandate: it “uses an asset allocation strategy designed to provide income to investors with a low risk tolerance and a 1-3 year investment time horizon.”  In May 2012, it shifted gears.  The corresponding passage now read: it “uses an asset allocation strategy designed to provide income to investors with a lower risk tolerance by allocating the Fund’s investments to income producing assets that are exhibiting a statistically higher yield relative to other income producing assets while also managing the volatility of the Fund.” The first change is easy to decode: it targets investors with a “lower” rather than “low risk tolerance” and no longer advertises a 1- 3 year investment time horizon.

The second half is a bit trickier.  Many funds are managed with an eye to returns; Income Builder is managed with an eye to risk (measured by standard deviation) and yield.  It’s goal is to combine asset classes in such a way that it generates the maximum possible return from a portfolio whose standard deviation is 6.5%.  They calculate forward-looking standard deviations for 11 asset classes for the next 30 days.  They then calculate which combination of asset classes will generate high yield with no more than 6.5% standard deviation.  The rebalance the portfolio monthly to maintain that profile.

Why might this interest you?  Forward is responding to the end of the 30 year bull market in bonds.  They believe that income-oriented investors will need to broaden their opportunity set to include other assets (dividend-paying stocks, REITs, preferred shares, emerging markets corporate debt and so on).  At the same time, they can’t afford wild swings in the value of their portfolios.  So Forward builds backward from an acceptable level of volatility to the mix of assets which have the greatest excess return possibilities.

The evidence so far available is positive.  A $10,000 investment in the fund on May 1, 2012, when its mandate changed, was worth $10,800 by the end of June, 2012.  The same investment in its average peer was worth $10,500.  The portfolio’s stocks are yielding a 6.1% dividend, their income is higher than their peers and their standard deviation has been lowered (4.1%) than their target.  The portfolio yield is 4.69%.  By comparison, T. Rowe Price Spectrum Income (RPSIX), another highly regarded fund-of-funds with about 15% equity exposure, has a yield of 3.65%.

There are three issues that prospective investors need to consider:

1. The fund is expensive. It charges 1.96%, including the expenses of its underlying funds.
2. During the late May – June market turbulence, it dropped substantially more than its multi-sector bond peers.  The absolute drop was small – 2.2% – but still greater than the 1.2% suffered by its peers.  Nonetheless, its YTD and TTM returns, through the end of June 2013, place it in the top tier of its peer group.
3. The managers have, by and large, opted not to make meaningful investments in the fund.  On both symbolic and practical grounds, that’s a regrettable decision.

Bottom Line:

Forward Income Builder will for years drag the tepid record occasioned by its former strategy.  That will likely deter many new investors.  For income-oriented investors who accept the need to move beyond traditional bonds and are willing to look at the new strategy with fresh eyes, it has a lot to offer.

Fund website:

www.forwardinvesting.com