Objective and Strategy
The fund seeks high income, with a secondary objective of capital preservation. They invest in a global, diversified portfolio of income-producing debt and equity securities. They manage risk at the level of individual security selection, but also through their ability to allocate between stocks and bonds, sectors, countries and currencies. Their portfolio may invest in up to 50% in equities, 50% in the U.S., 50% in investment grade bonds, and 33% in emerging markets. They won’t engage in hedging, leverage or credit default swaps.
Adviser
Saturna Capital Corporation, which was founded in 1989. Saturna has about $3.9 billion in assets under management and advises the Sextant, Idaho and Amana funds. Their funds are universally and continually solid, sensible and risk-conscious.
Manager
Bryce Fegley and John Scott. Mr. Fegley joined Saturna 2001, served as an analyst and then as director of research at their Malaysian subsidiary, Saturna Sdn Bhd. Mr. Scott joined Saturna 2009. He has worked with Morgan Stanley Smith Barney in California and Hyundai Securities in Seoul, S. Korea.
Strategy capacity and closure
They haven’t really discussed the matter formally. Mr. Fegley’s general sense is that the fund’s stake in preferred shares (currently 8% of the portfolio) would represent the largest constraint because the preferred market is small ($200 billion) compared to the common stock market ($14 trillion) and might well shrink by half over the next few years as new banking regulations kick in.
Management’s Stake in the Fund
As of November 30, 2012, Mr. Fegley had invested between $100,000 and 500,000 in the fund while Mr. Scott had between $50,000 and 100,000. As of the most recent SAI, their boss, Nick Kaiser, owned 30% of all of the fund’s shares which would be rather more than a million in the fund.
Opening date
March 30, 2012.
Minimum investment
$1,000 for regular accounts, $100 for IRAs.
Expense ratio
0.75% on assets of $9.4 million.
Comments
SGHIX, positioned as “a retirees’ fund,” responds to two undeniable realities: (1) investors need income and (2) the old stand-by – toss money into an aggregate bond index full of Treasuries – will, for a generation or more, no longer work. Grantham, Mayo, van Otterloo (a/k/a GMO) forecast “The Purgatory of Low Returns” (July 2013) for investors over the next seven years with a tradition 60/40 hybrid earning a real return under 1% per year and most classes of U.S. bonds posting negative real returns. Their recommendations for possible paths forward: concentrate on the highest return asset classes and rebalance frequently, seek alternatives, use leverage, and be patient.
With the exception of “use leverage,” Sextant does. SGHIX explicitly targets “high current income” and has broad flexibility to seek income almost anywhere, though they do so with a prudent concern for risk. John Scott describes himself as “the offensive manager,” the guy charged with finding the broadest possible array of reasonably-priced, income-producing securities. Bryce Fegley is “the defensive manager,” a self-described “asset allocation nerd” who aims to balance the effects of many sources of risk – country, valuation, interest rate, currency – while still pursuing a high-income mandate. Their strategy is to buy and hold for as long as possible: they hope to hold bonds to redemption and stocks as long as their dividends seem secure. With hard work, luck and skill, their ability to move between dividend-paying common stock, preferred shares (currently 8% of the portfolio) and relatively high-quality high yield bonds might allow them to achieve their goal of high income.
How high? The managers estimate that they might earn 300-400 bps more than a 10-year Treasury. In a “normal” world, a 10-year might earn 4.5%; this fund might earn 7.5 – 8.5%. In addition, the managers believe they might be able to add 2% per year in capital appreciation.
What concerns should prospective investors have? Three come immediately to mind:
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To date, execution of the strategy has been imperfect. From inception through mid-July 2013, a period of about 15 months, the fund posted a total return of 5.2%. Much of their portfolio was, for about six months, in cash which certainly depressed returns. The managers are very aware of the fact that many investments are not paying investors for the risk they’re taking and have, as a result, positioned the portfolio conservatively. In addition, it’s almost impossible to construct a true peer group for this fund since its combination of a high income mandate, equities and tactical asset allocation changes is unique. There are four other funds with “global high income” in their names (Aberdeen, DWS, Fidelity, and MainStay plus one closed-end fund), but all are essentially high-yield bond funds with 0-3% in equities.
That having been said, a 4% annual return – roughly equivalent to the fund’s yield – is pretty modest. Investors interested in high income derived from a globally diversified portfolio might consider Sextant in the company with any of a number of funds or ETFs that advertise themselves as providing “multi-asset income.” An incomplete roster of such options and their total return from the date of Sextant’s launch through 7/29/13 includes:
10K at SGHIX inception became
30-day SEC yield
Stock/bond allocation
Guggenheim Multi-Asset Income (CVY)
11,800
5.9
91 / 6
Arrow Dow Jones Global Yield ETF (GYLD)
11,300
5.8
60 / 40
BlackRock Multi-Asset Income (BAICX)
11,200
4.5
23 / 53
iShares Morningstar Multi-Asset Income (IYLD)
10,700
6.1
35 / 58
T. Rowe Price Spectrum Income (RPSIX)
10,700
2.9
13 / 77
SPDR SSgA Income Allocation (INKM)
10,600
4.2
50 / 40
Sextant
10,500
4.0
45 / 34
The portfolio composition stats illustrate the fact that none of these funds are pure peers. They are, however, plausible competitors: that is, they represent alternatives that potential SGHIX investors might consider. The other consideration, though, is that many of these funds are substantially more volatile than Sextant is. Below are the funds with launch dates near Sextant’s, along with their maximum draw down (that is, it measures the magnitude of a fund’s worst decline) and Ulcer Index (which factors-in both magnitude and duration of a decline). In both cases, “smaller” is “better.”
Maximum drawdown
Date
Ulcer Index
iShares Morningstar Multi-Asset Income (IYLD)
7.9
06/13
2.7
SPDR SSgA Income Allocation (INKM)
6.9
06/13
2.3
Arrow Dow Jones Global Yield ETF (GYLD)
6.8
06/13
2.3
Sextant
4.7
06/13
1.6
- The decision to provide a payout only once a year may not meet retirees’ needs for steady income. For investors who choose to receive their income in a check, rather than reinvesting it in fund shares, Sextant’s policy of paying out dividends and interest only once each year may be sub-optimal. The likeliest work-around would be to establish a systematic withdrawal plan, whereby an investor automatically redeems shares of the fund at regular intervals.
- The fund’s risk calculus is not clearly articulated. This is a relative, rather than absolute, value portfolio. The managers feel compelled to remain fully invested in something. They’re currently moving around, looking to find income-producing assets where the income is relatively high and steady and the risk of loss of principal is manageable. That’s led them to a relatively low-yielding portfolio. When we talked about what level of risk they targeted or were willing to accept, the answer was pretty close to “it depends on what’s available.” While some funds have target volatility levels or drawdowns, the Sextant team seems mostly to be feeling their way along, taking the best deals they can find. That strategy would be a bit more palatable if the managers had a longer record, here or elsewhere, of navigating markets with the strategy.
Bottom Line
Sextant Global High Income has a lot to recommend it. The fund’s price (0.90%) is low, especially for such a tiny fund, as is its minimum investment. Saturna has an excellent reputation for patient, profitable, risk-conscious investing. The ability to travel globally and to tap into multiple asset classes is distinctive and exceedingly attractive. The question is whether the two young managers will pull it off. They’re both bright and dedicated guys, we’re pulling for them and we’ll watch the fund closely to see how it matures.
