Monthly Archives: October 2016

October 1, 2016

By David Snowball

Dear friends,

Welcome to autumn. It’s a season of such russet-gold glory that even Albert Camus (remember him from The Stranger and The Plague?) was forced to surrender: “Autumn is a second spring when every leaf is a flower.” It’s the time of apples and cinnamon, of drives through the Wisconsin countryside, and of gardens turning slowly to their rest.

Open the windows, unpack the flannel, raise high the cup of cider. Summon the children, light the bonfires, deploy the marshmallows!

Welcome to the redesigned Observer. When I first started writing this column as the FundAlarm Annex nearly 12 years ago, our monthly issue represented one voice and was barely two pages long. The Observer today speaks through many voices and our combined offering to you sometimes runs to 40 pages. (Uhh … gratis.) Our traditional format, a single scrolling screen over 1000 lines long, was no longer able to serve you as well as you deserve.

And so, we changed. A year ago, we decided to create a distinct magazine feel for the Observer to allow for much easier reading downloads and tracking. Chip, working with her stalwart chief programmer Andrew Beck, has been devoting nights and weekends to perfecting the layout you see now.

Well, okay, to “imperfecting the layout,” since we know you’ll discover glitches just as we have. When you do, for goodness sake, let us know. We’ll fix it if we can. I am, in any case, grateful to them both.

Here’s what you need to know:

The overview of each month’s issue appears on what we’re called “the issue page.” That will give you snippets from every feature, a table of contents (in the far left column) and easy access to past issues (in the far right column). The design is responsive, so it will try to accommodate itself to whatever technology (desktop, laptop, tablet, phablet, phone or parchment) that you use to read us.
This essay now serves as a sort of “letter from the publisher,” sharing reflections, plans and bits of information that don’t fit elsewhere. My longer articles, like this month’s story about emerging market returns, will appear separately. You’ll see them in our table of contents and on the first page of each issue.
Each of my colleagues will be identified more easily now, since each story by Ed, Charles, Sam or Leigh will be standing alone. Within the next month, we hope to have an Author’s Page for each of them, which will share a bit of biography, links to their other sites and a compendium of everything they’re written.
Fans of the long scroll haven’t been abandoned! We are also presenting each issue as a single long page. Here, for example, is the scroll for this issue. In general, just look on the
right-hand side of any page and select the “long scroll” option.
The table of contents will follow you wherever you go. No matter which article you click on, you’ll still see a table of contents on the left-hand side of your screen. If you want to go back to the issue page, just look to the right side for the “Issues: Magazine Layout” menu.

Updates

Grandeur Peak does cool stuff.

Earlier this year, Seafarer established a policy that equalized the investment minimums for their Investor and Institutional share classes. If a small investor (a) invested directly through Seafarer and (b) established an automatic investing plan with the intention of one day reaching the normal institutional minimum, Seafarer would grant them access to the lower-cost institutional shares for just the normal Investor minimum.

Grandeur Peak has followed suit, establishing the policy that the Investor and Institutional class minimums are identical ($2000) for individuals investing directly through Grandeur Peak.

The Fund offers two classes of shares, Investor Class and Institutional Class shares. The minimum initial investment for both share classes is $2,000 for each account, or $1,000 if an Automatic Investment Program is established; except that the minimum to open an UGMA/UTMA or a Coverdell Education Savings Account is $100. There is no subsequent minimum investment amount for either share class.

Existing Grandeur Peak direct shareholders just need to call the firm and they’ll move your investment into Institutional shares. Several folks on our discussion board found the process quick and pleasant.

Except for Global Stalwarts (GGSOX) and International Stalwarts (GISOX), their two “alumni” funds, the Grandeur Peak funds are closed to new investors. The latest prospectuses contain the reminder to Global Micro Cap investors that the fund will become somewhat more closed in the proximate future:

As of the close of business on December 31, 2016, the Fund is closed to both new and existing investors seeking to purchase shares of the Fund either directly or through third party intermediaries, subject to certain exceptions for participants in certain qualified retirement plans with an existing position in the Fund and direct shareholders with existing accounts who may purchase up to $6500 per year in additional shares.

They also promoted Mark Madsen and Brad Barth to the role of Industry Portfolio Manager on the Grandeur Peak Global Reach Fund (GPROX).

Royce Funds does cool research

Royce recently released a white paper entitled, “The Undiscovered Connection: Value-Led Periods and Active Management” (2016). They begin with the surprising revelation that active management works in the small cap stocks:

Contrary to some investors’ perceptions, active small-cap managers actually have a strong relative performance record. Comparing Morningstar’s Small Blend category average (our proxy for active small-cap management) to the Russell 2000 Index over rolling five-year periods reveals that the Small Blend average beats the index 66% of the time.

As they delved deeper into the data, it appeared that active managers had their strongest performance in markets were value led growth. Active management outperformed in 83% of value-led periods. That makes a world of sense since market cap-weighted indexes are primarily growth and momentum driven.

This follows the Leuthold Group’s intricate but still preliminary analysis, published in August 2016, of the characteristics of markets in which active managers succeed.

It’s also consistent with MFO’s own research findings. We looked at the equity categories where passive strategies should have their greatest advantage: domestic, global and international large-cap core funds. Unlike the ETF pundits, we chose to look at the funds’ risk-adjusted performance over the entire market cycle. That is, we asked “since markets go up and down, and funds make and lose money, doesn’t it make sense to look directly at periods that capture both up and down and measures that balance both gains and losses?”

We identified the 50 large core funds with the highest Sharpe ratios over the course of the entire market cycle. Of those, 42 were actively-managed funds. Only six were traditional cap-weighted index funds while two were smart beta products. Several of the actively-managed funds, e.g., DFA, had index-like properties.

More evidence that “the smart money,” ain’t.

If a guy had recently, oh, say, jammed his foot on the gas and driven his car off a cliff, I might hesitate to hire him as my chauffeur. You know, I might give him a while to establish a subsequent good driving record before hopping in the back seat and waving him on. Which, I guess, separates me from “the smart money.”

The Wall Street Journal reports that Rory Priday, the analyst whose work was behind the decision by Sequoia Fund (SEQUX) to stake its future on Valeant, has launched a new hedge fund and promptly received $75 million from rich people. We wish them, and him, only the best.

In Closing . . .

We’re always grateful for your support, verbal and financial, direct and indirect. It makes the many hundreds of hours that go into the Observer both possible and meaningful.

We’d like to thank, especially, Dan Wiener (he of the Independent Advisor for Vanguard Investors) for his generous gift and Jonathan Best (who, literally, is The …), who joins us as our third PayPal subscriber. Jonathan, with Deb (see ya in Albuquerque!) and Greg (hi, guy!), has chosen to express his support for MFO by setting up an automatic monthly contribution from his PayPal account. We’re grateful for the vote of confidence that it represents. Many thanks also to Gary, Thomas and Kent. We couldn’t do it without you.

We’d like to recognize a signal gift from Andrew and Michelle Foster of Seafarer Capital Partners. It will allow us to launch two long-anticipated projects, including making each month’s Observer available as a Kindle e-book on the Amazon marketplace. We’re hopeful that will extend our reach and serve our mission of helping investors and advisors think more calmly about the opportunities they might otherwise skip over. With SFGIX growing beyond our coverage universe and closing, the Fosters concluded that conditions that a contribution to the Observer would not pose a material conflict-of-interest. That leaves only the question of the Value fund (SFVLX), which we plan to approach carefully and with clear disclosure.

Thank you all, go raibh míle maith agat!

Emerging markets deserve reconsideration: the case for lollipops

By David Snowball

“I’m not saying it’s lollipops and marshmallows in emerging markets but …”

Andrew Foster, 9/5/2016

Twelve months ago, the headlines were apocalyptic:

“Investors pull $1 trillion from emerging markets in a year” (CNN, 8/24/2105)

“Emerging Market rout gathers speed” (Which Investment Trust, 8/25/2015)

“Investors Race to Escape Risk in Once-Booming Emerging-Market Bonds” (New York Times , 8/22/2015)

“The Bubble of Emerging Markets Pops” (History News Network, 8/27/2015)

“Why emerging market currencies are collapsing” (CNBC, 8/21/2015)

“Lost Decade in Emerging Markets: Investors Already Halfway There” (Bloomberg, 8/5/2015)

China Crushes Emerging Markets — Get Out Now! (TheStreet.com, 8/27/2015 – you don’t hear as much from, or about, Jim “Screaming Boy” Cramer as you once did)

As usual, we suggested that people execute The Observer Stop Loss. Here were the steps:

On any day in which the market falls by enough to make you go “sweet Jee Zus!”
Step Away from the Media
Put Down your Phone
Unhand that Mouse
And Do Nothing for seven days.

Actually it’s “do nothing with your portfolio for seven days.” We’re not advocating fasting or neglecting the kids or anything.

Predictably enough, in the 12 months following the media howling and the investor panic, the emerging markets beat the tar out of all of the “safe” alternatives:

Latin American stocks, up 28%
Emerging Asia, up 17%
Diversified Asia, up 15%
Diversified emerging markets, up 15%
Emerging markets bonds, up 14.4%
U.S. large cap core, up 12%
US long-term bonds, up 13%
Developed markets large cap core, up 7%
Long/short funds, up 1.5%
Multi-alternative hedged funds, up 1%
Market neutral funds, up 0.3%

The question of what to do now is answered, in part, by looking backward: try to plan now to avoid repeating the mistakes you made before. If you bought and held gold and gold-related stocks, good. You’re up 90%. If you bought and sold your funds weekly, based on whimsy or some half-conceived timing scheme, you might want to check your personal rate of return (most brokerages calculate it for you). If it’s much under 9% (the returns on a 60/40 balanced fund), you really need to slow down and simplify.

Part of the answer, though, must be forward-looking. What is priced now to perform well in the future?

If the future returns to “normal,” the investments that worked in the past five years are likely to suffer most in the years ahead. The panic about weakness in the global economy has driven central bankers to pursue an unprecedented course: driving interest rates worldwide below zero for the first time in 5,000 years. “Fitch Ratings released a report calculating that there are $11.7 trillion worth of bonds carrying negative interest rates. That represents almost half of all sovereign bonds in developed countries” (“The Weird New Normal of Negative Interest Rates,” Foreign Policy, 9/7/2016).

That distorts behavior: neither pension managers nor savers can meet their goals with fixed-income securities paying zero or less, so they begin migrating to “bond-like” stocks, generally mature, low-growth companies with stable cash streams and healthy dividends. The unprecedented demand for such stocks drives their prices up and, in consequence, their dividend yield down. That, in turn, drives investors further afield.

When interest rates begin to climb, there’s apt to be a noticeable correction in prices.

Where should you be when that particular tide goes out? A surprising number of serious researchers have concluded that your best choices lie in the emerging markets. The most detailed chart of likely risks and returns in the decade ahead comes from Rob Arnott and the researchers at Research Affiliates.

You might notice the no domestic asset class is priced today to return more than 2.3% annually in the years ahead. U.S. stocks are projected to earn under 1% and long-term Treasuries less than zero. Every asset class that might earn 2.5% or more is international and, primarily, emerging.

GMO’s most recent asset class projection is a bit gloomier but has the same preference for emerging markets: EM equities are poised for 3.3% real returns over the next seven years while US large caps are priced for 3% losses. EM is barely positive, US debt is noticeably negative.

That’s led the Leuthold Group to conclude that “our EM Allocation Model triggered a BUY at the end of August after 5.5 years in bear mode. This upgrade is consistent with a cyclical leadership run of one to four years relative to Developed Markets.”

Bottom line

Long-term investors likely need to reconsider their exposure to the emerging markets. If you were part of the trillion-dollar outflow, you might need to re-establish a position. With Seafarer Overseas Growth & Income (SIGIX) now closed to new investors, we suggest that you:

Not overvalue the recent performance of dividend-oriented funds, domestic, international or emerging. Like low-vol funds, dividend-oriented ones have been unnaturally popular because of the low interest rates available on bonds, which means that many such stocks have very stretched valuations.
Consider a hedged version of an EM fund. We’ve profiled Driehaus Emerging Markets Small Cap (DRESX) which combines a small-growth portfolio with a variable market hedge to dampen volatility.
Consider an EM balanced fund, which uses a bond portfolio to help offset volatility. Over the past three years, Fidelity Total Emerging Markets (FTEMX) has been the top-performing balanced fund. Its modest 3.4% annual gain outpaces 93% of all equity-only EM funds and its 18.7% return over the past 12 months is really solid.
Begin following the emergence of EM value funds. Carolyn Cui at the Wall Street Journal recently concluded “Value Investing Reigns in the Emerging Markets” (9/26/2016, you may have to Google the title for access), a conclusion consistent with Seafarer’s. We’re watching the fledgling Seafarer Overseas Value Fund (SFVLX) with interest, but it’s too early to say much yet.

The timid might look at Amana Developing World (AMDWX), which has managed a four-star rating primarily through risk aversion. Mainstream investors should consider either T. Rowe Price Emerging Market Stock (PRMSX) or Fidelity Emerging Markets (FEMKX) which has become steadily stronger.

In last month’s issue, we looked at the top-ranked funds in light of their correlation with Seafarer Overseas Growth & Income (SIGIX). One of our readers, Dennis Baran, was intrigued by the five-star City National Rochdale Emerging Markets (RIMIX) and privately shared an extensive analysis of it with us. We asked Dennis if he would consider refining the analysis and sharing it with our other readers. He very generously agreed. We’ve published the result as our fund profile for RIMIX this month.

What Price Integrity?

By Edward A. Studzinski

“Question in a Field” by Louise Bogan

Pasture, stone wall, and steeple,
What most perturbs the mind:
The heart-rending homely people,
Or the horrible beautiful kind?

From: The Maine Poets

So we watch now the public flogging of senior officials of Wells Fargo by our esteemed members of Congress, which is not to say that the flogging is not deserved. It is well deserved. But it does call to mind the New Testament, “Let he who is without sin …. “ Given that the mutual funds at Wells’ were the old Strong funds, it begs the question as to whether the culture of the Strong funds influenced the Wells culture?

In any event, the Board of Directors for Wells Fargo finally seems to have found some backbone, or perhaps it is the fear of being next under the klieg lights. They took the action of clawing back substantial amounts of compensation from some of the executives at Wells, especially the CEO. He of course should have no problem with this, since he has several times indicated he was taking responsibility for the things that occurred. Of course, that was perhaps before he understood that “taking responsibility” was going to cost him in excess of $40M but hey, it’s better than some of the alternatives.

So at this point, many of you are saying well, that’s the banking industry, or that’s the investment banking industry, both of which are riddled with conflicts of interest that lead to questionable behavior. That can’t happen in the highly regulated mutual fund industry. I must remind you of the market-timing scandals of a few years ago, where with the tacit cooperation of the mutual fund companies involved, financial advisers, taking advantage of different market openings and closings relative to the valuation of a mutual fund at the end of our trading day, would time the purchase and sale of international or emerging market funds. And yes, people were caught, fines were paid, and some people went to jail. And some mutual fund executives, having good lawyers, were barred from the securities business for a year or two. And then things returned to the status quo.

Sure, there was more compliance regulation and people, with lots of paper to show that form was being exalted over substance. But when it came back to the basic question of knowing right from wrong, I don’t think anything changed then or has changed now. In fact, looking at two of the major East Coast cities where some of these shenanigans took place, I have the distinct impression that polite society (all the fashionable people) was more upset that the individuals involved had been caught, rather than wanting to deal with the question of whether anything wrong had been done.

Gretchen Morgenson, obviously descended from Viking stock, wrote a piece for the September 25, 2016 New York Times about how the proxy voting of mutual fund managers is “infected by conflicts of interest.” She quoted Erik Gordon, a professor at the Ross School of Business at the University of Michigan who said, “Funds often avoid challenging management on executive pay and corporate governance because they want to be included in corporate defined-contribution benefit plans.” The conclusion – fund companies would not put at risk gathering assets if they irritated people in the corporate world. I will add one observed fillip to that. If the fund companies are subsidiaries of foreign asset gathering/financial management firms, there is a second level of conflicts. You see that in the UK when the fund managers and corporate managements all attended the same public schools and Oxbridge. In France you see it where they all attended together or are graduates of L’Ecole Polytechnique. And in Switzerland, as a friend of mine explained once to me, it comes as a result of their time spent together in their period of mandatory service in the Swiss Army.

So how does it all work? Many years ago, I saw that a fund manager that I respected had filed a 13(d) notice with the SEC with regards to a holding in his fund. A 13(d) filing would disclose that the fund had more than a 5% ownership position of a company’s securities, and would be the equivalent of telling the world that you were seeking discussions with management about possible change of control events, among other things, and allow you to approach other like-minded shareholders. Some months later I saw him and asked how it had turned out.

While he had achieved what he wanted to achieve in terms of making the company’s management more shareholder-friendly, he said that he would never do it again. When I asked why, he said it was like going out on a tree branch and having it sawed off behind you. The chief investment officer of his firm had made a point at all management committee meetings of criticizing the filing, saying that it would antagonize the corporations that they were doing business with and keep the firm from getting additional corporate business. To this day, I don’t believe that manager ever filed another 13(d). And the message was not lost on the firm, with the culture changing definitively to a do not make waves approach. The chief investment officer meanwhile has taken out tens of millions of dollars in compensation, spends at least fifty or more days outside the firm a year, and the uniqueness/performance of his clients’ funds has moderated over time. Is this is a function of the firm’s analysts learning the danger of being too curious?

So assuming there is a problem in the investment industry, how do we fix it? I don’t think sending people off to sit for a year or two in Danbury to consider the error of their ways does it. Some years ago I worked in banking and served on an asset/liability committee. I would listen to the discussions of non-performing loans, which were usually real-estate related and often not the loans of what I will call the “little people” but rather commercial loans to real estate developer/golfing buddies of senior management. Tiring of listening to these ongoing tirades against loan officers who had merely been meeting their quotas (sound familiar?), I opined one day that most of these loans had personal guarantees, so we could probably send a serious message by filing suit against the delinquent borrowers. We would then send the sheriff to serve process on a Friday night at the country club when all of the right people were sitting there having dinner. Suffice it to say that my suggestion was not appreciated.

We need regulation and the ability for compensation to be clawed back from investment management and mutual fund executives. Draconian? Yes, but I think it is the only thing that will change certain kinds of behavior. That is why I favor the new fiduciary standard rules that go into effect next March. In anticipation of those rules, we are already seeing change. State Farm has announced that its ten thousand agents will no longer be selling mutual funds, come next March. Some funds have already started eliminating multiple classes of shares, with differing levels of fees (which you would need a translator to decipher). I look for the 12(b)1 fee to disappear. I also look for the platform availability of mutual funds to change dramatically (but how no one knows), as well as the business models of the Schwabs and TD Ameritrades of the world.

Two Book Recommendations

A book I have read, and would commend to all of you, is The Outsiders, by Will Thorndike, a Boston-based private equity manager. It talks about those eight Chief Executive Officers in years gone by who excelled at capital allocation. And it is capital allocation that drives shareholder returns over the long-term. What these people understood to a fault was that in the long run, the increase in per share value of a business was what was important (and hence our focus in the old days at Harris Associates upon ascertaining the business value of an enterprise per share, its relation to the current share price, and the sustainability of growing that business value per share over time). Other points to keep in mind – cash flow rather than reported “accounting” earnings drives value growth and the lack of a corporate bureaucracy can be liberating in terms of stimulating entrepreneurial creativity and minimizing costs. Independent thinking is essential to success as opposed to group grope. Anyone familiar with the hedge fund community in New York in recent years knows of breakfasts, lunches, and forums, where many of them would gather to exchange ideas with each other about the next trading sardine. Share repurchase can make sense when it is justified by the mathematics. It does not make sense when it is done to eliminate the dilution from executive option compensation packages which are in effect transferring ownership of the corporation from the public shareholders to management in a creeping takeover. And trying to please Wall Street or the investment banking community is for the most part, a loser’s game.

Of the eight CEO’s mentioned, along with their companies (and to a lesser extent the CEO’s next act companies), at Harris I was the equity analyst who recommended and followed General Dynamics, RALCORP (the successor Bill Stiritz act), and General Cinema (an investment failure but an education in its own right). Ralston Purina I got to see as it was folded into Nestle, which I also recommended and followed. Berkshire Hathaway I have owned as a direct investment personally since 1982 and little more need be said about that. And I take my hat off to my former colleague Bill Nygren, whose analysis of TCI and its many succeeding iterations coming out of the brain of John Malone has created more value for Bill’s investors than many portfolio managers achieve in an entire lifetime of investment management. So, read the book. Creating wealth is NOT about picking stocks. It is about understanding how business value is created and sustained. And I salute Mr. Thorndike for surviving an environment in Boston where most investment managers focus on illusory expectations of growth.

My other book recommendation is a book I have on my list to read, entitled A Gentleman In Moscow by Amor Towles. Back in the late 1980’s, I was managing and researching equities (yes Charles, I was always an equity analyst first) for a bank trust department in Indiana. I had come to the conclusion that most sell-side (Wall Street firm originated) research was drek, and conflicted to boot, given the investment banking relationships that seemed to drive most stock purchase recommendations. So I tried to find research that was independent and original, and could also be purchased with commission dollars in lieu of the Wall Street crap. One of the independent brokers I was dealing with called me up one day to suggest that I should talk to a gentleman from a new research boutique called Select Equity. Being a curious person I said why not, and not too long after that, a gentleman named Amor Towles showed up in my office in Hammond, Indiana. And I ended up becoming a subscriber to Select Equity’s research pretty much until I moved from the bank to Harris Associates. Until that time, Amor was my contact with Select. The theme here is that Select Equity’s focus was quality businesses with HIGH RETURNS ON INVESTED CAPITAL where management excelled at capital allocation. Pretty much around the time I joined Harris, Select made a business decision and shifted from selling their investment research to running money themselves. They have been extraordinarily successful at it, and have continued in the same vein as always, not letting asset growth morph into style drift which corrupted returns.

I had lost touch with Amor, until a month or so ago, I started seeing blockbuster reviews of A Gentleman In Moscow. I learned that a few years ago, Amor had retired from Select, and started to do what he had apparently always wanted to do, which was be a writer of literature. I am pleased that he has succeeded. And I look forward to sitting down with A Gentleman In Moscow on one of those occasions when I can shut out the distractions of internet, the election campaign, etc., etc., and just enjoy a well-written story. I am happy to say that I have known Amor Towles, and can say unabashedly, he is a true scholar and gentleman.

Morningstar’s ETF Conference – Chicago 2016

By Charles Boccadoro

The good folks at Morningstar hosted the seventh annual ETF conference in Chicago, its global headquarters, this past month. More than 650 total attendees, including more than 500 registered attendees (mostly advisors), more than 80 sponsor attendees, nearly 40 speakers, and more than 30 members of the press. An increase from last year.

Venue changed to Hyatt Regency Chicago on East Wacker Drive … “the heart of downtown Chicago.” Actually, Morningstar describes this town, which by absolute numbers is the murder capital of the US, as the “a business and financial hub, with a diverse, powerhouse economy … world-class dining and entertainment … and its popular destinations like the Field Museum, Millennium Park, the Shedd Aquarium, Water Tower Place and the Merchandise Mart.”

And, in fact, that is the Chicago I’ve always seen, even as a freshmen attending University of Chicago in South Hyde Park and in all the return visits. Walking its magnificent streets, vibrancy and diversity abound … restaurants, bars, parks, museums. Its skyline breathtaking. Renovation everywhere. Its support for new businesses with the Chicagoland Entrepreneurial Center (CEC) flagship 1871 Project. The south side was also recently selected for the location of the new Obama Presidential Center.

Chicago is particularly beautiful in September. This year did not disappoint.

And so, on Thursday night after Day 2 of the conference, I happily joined friends for dinner at a stylish, sprawling, yet full restaurant called Sienna Tavern. During the dinner, our colleague Sam Lee explained, “Chicago is two cities. There is the affluent part. And then everybody else.”

Sam is right, of course. Maybe because of the divisiveness of this presidential campaign, or our polarized and gridlocked congress, or the sensationalized and all-too-common shootings by police of apparently unarmed citizens, but it all seemed out-of-step and dare I say a complete juxtaposition with the pledge recited by millions of children every school day: “… indivisible, with liberty and justice for all.”

OK, on to some data …

A quick review of statistics on ETFs from our Lipper Data Feed Service for US exchange traded funds (ETFs) and traditional open-ended funds (OEFs), reveals the following: through August 2016, there are 1838 ETFs with $2.4T AUM versus 7495 OEFs with $13.4T AUM, excluding money market. (Please see figure below.)

Nearly all ETFs remain index based or “passive.” While, despite the heavy outflows from active to passive this cycle, most AUM remains in actively managed or “active” OEFs, ignoring closet indexers. I suspect OEF AUM is more sticky, which has its pluses and minuses.

The ETF AUM, however, is heavily concentrated in relatively few names, typically pure index funds, like SPY and AGG. The table below shows an elite group … the top ETFs by AUM. These 15 funds, or less than 1% of the ETF universe, represent nearly one third of all ETF AUM. In fact, three-fourths of all ETF AUM is managed by just three fund families: Blackrock (iShares), Vanguard, and State Street (SPDR).

It is interesting to note that the median ETF AUM is only $79M, which is probably unsustainable and helps explain ETF mortality rate.

A prominent announcement during the conference was that Morningstar will soon start giving medal ratings to ETFs, like they do with OEFs. The Gold, Silver, Bronze, Neutral, and Negative ratings attempt to be forward looking or “aptitude based,” says Morningstar’s Ben Johnson, head of Passive Strategies. It will use same “five Ps” (short for Pillars – Process, Performance, People, Parent, and Price) methodology. About 300 will be rated along with OEFs in same category.

While no plans yet to merge conferences, it seems inevitable for June and September Morningstar Chicago conferences to become one.

Given migration of assets from active to passive funds and other themes touched on during the conference, it occurred to me that the quants seem to be winning, especially if you consider index funds a form of quant products, perhaps the first.

Market cap index investing certainly making a lot of smart money managers look not so smart these past several years. Everyone would have been wise to simply invested in SPY or VFINX or VBINX back in 2009 and forgotten about it, as can be seen in performance table below (click image to enlarge).

Quants believe that most, if not all, of a money manager’s alpha can be decomposed into a series of factor tilts, like value, small, or momentum. As AUM continues to move out of traditional active into more passive alternatives, I suspect the battle will be between “tilt premia” instead of between market cap index and bottom-up investors.

John Ameriks, head of Vanguard’s Quantitative Equity Group, believes that a big reason “quants are winning” is that they provide “rules-based methodologies so investors better know what to expect.” Unlike, say, the sometimes surprising behavior of active investors, like Fairholme’s Bruce Berkowitz. John’s group has 25 analysts and has been in existence for 25 years and currently manages $30B in AUM.

Vanguard offers 70 ETFs with AUM totaling $525B. So, with just 4% of products, Vanguard has captured more than 20% of the AUM. Can you believe that? Our fund family data on the MFO Premium site shows that 60 of their 70 ETFs have beaten their peers since inception. That’s simply amazing. Rich Powers, head of Vanguard’s ETF Products, had a quick response: “The power of low fees.” Vanguard is the only company to offer some ETFs as simply another share class of its open-ended sibling. “Economies of scale,” Rich explains.

Morningstar always does a good job reporting on the presentations, which can be found here, so I will offer just a few other observations.

Liz Ann Sonders, Schwab’s Chief Investment Strategist

She gave the opening keynote. She is neutral on all markets … US, Foreign, and yes even EM. “Neutral” means hold current allocations based on risk tolerance and re-balance on volatility, like last February with the Brexit over-reaction. Re-balancing creates a built-in value premium.

The biggest threat to market stability is global debt. While private sector has deleveraged after 2008, the public debt has never been larger. But she believes 2008 was the “big quake” … going forward has been and will likely continue to be a series of tremors until the monetary policy experiment plays out.

Most politicians don’t understand difference between deficit and debt. US deficit (yearly debt interest payment to GDP) is quite low. But overall debt is very high. That doesn’t even recognize entitlements. Inevitable for our entitlements to be addressed … “politicians just don’t want to discuss it.”

Chance of recession in foreseeable future is low, based on Schwab’s multi-factor analysis. For example, leading economic indicators remain below 2007 levels, so still room to run. Recessions are normally the result of excesses. US equity valuation is somewhat elevated (based on forward P/E), but this bull market has never been embraced. So, echo John Templeton …

“Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria,” he said. “The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”

She thinks we are stuck in a “skeptical” environment, perhaps leaning toward optimism.

Part of the skepticism is due to the two 50% drawdowns (an equity and debt bubble) since 2000. Most of the private investor money remains dubious on the market. Like sentiment during Great Recession. Not a single net dollar has flowed into US equity combined OEF/ETF market since 2007.

Presidential race remains too early to affect markets, at least that was Schwab’s view in early September. Being an “8-year” election where an incumbent can’t run, likely more uncertainty. She believes the higher a polling margin of victory, the more stable the markets. (She personally thinks the choice of two of the most disliked candidates is disappointing.) More important than the president on economy, is the impact of election on a gridlocked congress.

Fundamentally, she believes, for better or worse (take note absolute investors), current markets are driven by relative performance metrics, say expected earnings as opposed to say absolute (good or bad) earnings.

And, similarly, for better or worse, more than active versus passive or quantitative versus fundamental, current markets are driven by macro-economic assessments versus business fundamentals of individual companies. So much for guidance of Peter Lynch and Warren Buffett and Eric Cinnamond. For time being anyway.

Finally, she believes that there are more savers than debtors in country so if savers are not making any money, they can’t fuel the consumption economy. Ditto for negative interest rates globally … having opposite effect of intended. Time to get back to normalization of interest rates to help economy.

Panel on “Best Idea”

Rich Bernstein, John West of Research Affiliates and Mark Yusko of Morgan Creek Capital Management seemed mostly conflicted. Bernstein believes cyclical equities and perhaps equities as a whole, will continue their bullish run. Expects excess returns the next two years for industrial’s. But, the catastrophe will be bonds.

Yusko, the most vocal, believes US stocks will crash in next year or so. Doomed based on valuations and demographics. He thinks that the only thing investors do well is invest in the last thing that worked. So, investing in index funds going forward will be catastrophic. While he dropped names like Seth Klarman of Baupost, Yusko’s positions seemed to contain a lot of … hmm, what’s a good word … hyperbole.

West was most tempered of the trio, touting Research Affiliates benefits of all asset diversification, which always takes the ten year view.

Patrick O’Shaughnessy

He gave the closing keynote. An industry stand out. His presentation was about the inherent conflicted nature of delivering alpha and accumulating assets. Basically, the more AUM, the more holdings a portfolio must maintain, the more it then looks like an index, the less likely its performance will deviate from the index. “Scale eats returns.”

He sees active share as a measure of the potential to be better (or worse) than index. “Dare to be great.” He thinks both Wes Gray and Meb Faber are offering ETFs closest to the strategies he recommends. That said, he admits there are only a few money managers he would trust with his money. (He would not say which ones.)

Here’s link to Patrick O’Shaughnessy’s Commentary page. He’s a true student of the markets. And, here is link to the paper he briefed in Chicago, Alpha or Assets?

Turning Over the Data

By Leigh Walzer

This month the index fund turned 40. Bloomberg wrote a story suggesting this remarkable bit of financial engineering has benefited investors by close to a trillion dollars. While we think there is an important role for active managers, we noted in this column last month that investors continue to overpay by at least $70 billion per year.

But we take exception to one facet of this otherwise excellent story. The author notes that apart from the difference in stated expense ratios, passive investors benefit investors due to the lower trading costs incurred in index funds and ETF’s. He believes that each point of turnover is equivalent to 1 basis point of hidden expenses. The story credits Vanguard founder Jack Bogle and the industry he spawned for saving investors nearly as much through trading efficiency as through lower expenses.

Turnover’s Not Your Problem

Without a doubt investors owe Jack Bogle a ticker tape parade. But the benefit of trading efficiency is much exaggerated. We suggest institutions and fiduciaries evaluating an active manager should pay close attention to the expense ratio but give little heed to the turnover ratio. For taxable accounts, turnover might matter a little.

Artwork: GoBrandGo

Observation #1: The difference in turnover between an index tracking the S&P 500 and an active large blend is significant. But for other ETFs, especially the newer ones, the difference is smaller.

Turnover is a ratio the SEC requires funds to disclose. To compute it, divide the value of securities purchased (or sold, whichever is smaller) over the past year by average total assets.

The median passive fund (by AUM) has 5% turnover; the average fund has 10%. But, surprisingly, a few passive funds have turnover over 100%. The average active fund has turnover of 42%. There are funds which are managed as “active” with turnovers of 3% or less. These funds are either lazy or exceptionally patient. Examples of “lazy” funds are Cook and Bynum Fund (COBYX) and Gabelli Value 25 Fund (GVCIX.) But there is nothing passive about their expense ratios which exceed 100 basis points.

Observation #2: The impact of turnover on stated returns is quite small. To assess the impact, we reviewed approximately 5000 funds in the Trapezoid database for which turnover and data was available. We looked at the relationship between turnover and skill from security selection (sS.) MFO readers who have visited the FundAttribution.com site will recall that sS is a measure of fund manager skill which takes gross return before stated expenses and adjusts for the fund’s asset mix, factor exposure, and other choices which might explain variations in return between funds. Qualified readers unfamiliar with the site may register for a free demo at www.fundattribution.com.

Trading costs are borne by the fund but are not captured in a fund’s expense ratio. So we might expect high turnover to be inversely correlated with sS. A regression based on those 5000 funds over the past 3 years shows that relationship does exist, but it is very weak. The regression predicts that if we compared two hypothetical funds whose turnover differed by 32%, sS would differ by just 0.04%. And indeed, when we compare active and passive funds as a whole (Exhibit I) that is precisely what we find.

Our study considers only pre-tax returns. Taxable investors should bear in mind that high turnover funds may not look as good after-taxes.

There are a number of studies which suggest trading costs for a typical mutual fund are roughly 100 basis points per year. Trading costs include not just commissions but spread (differences in bid/ask) and market depth (how much a mutual fund moves the market while entering or exiting a position.) Based on that, it seems surprising the difference in return between active and passive funds is so small.

source: Trapezoid LLC data

Some researchers think that trading costs are much higher for smallcap strategies than for large cap companies. That makes sense because the portfolio investments are less liquid, so it is harder for funds to trade in an out. But this is not a function of how managers run those portfolios. Turnover ratios for active funds in small and mid-cap are similar to those found in large blend. (Exhibit II)

We spoke to one of the leading researchers in the area, Professor Richard Evans of the University of Virginia – Darden School of Business. “Turnover is the wrong measure. Outflows are the most expensive component of trading cost,” he observes.

If turnover is a bad metric, there is a limit to how much we can adduce from a study which compares skill (sS) with turnover. But it doesn’t explain why the average active fund returns about the same as the average passive fund. If trading costs are really a handicap, there should be a noticeable differential.

Something else is going on. Our best explanation is that the more active funds spend only marginally more on trading than the passive funds. Because active funds don’t have to mechanically track an index, they may have a little more trading flexibility. It is also possible that

There are hundreds of skilled, high-turnover funds

trading costs have fallen across the board or are overestimated in the literature. Also, some studies suggest the funds with high turnover are more skilled, so the skill nearly offsets any trading disadvantage. Finally, there is survivorship bias: the active group woud look worse if we included funds which were shuttered over the past three years;

this would make the impact of trading costs more evident.

There are hundreds of skilled high-turnover funds in our database. We present one example here.

A Nuanced Approach to Investing

The five year old Nuance Concentrated Value Fund (NCVLX), has demonstrated sufficent skill to merit inclusion in Trapezoid’s Honor Roll while sustaining annual turnover of roughly 100% since inception. (Disclosure: I have an investment in this fund.) Co-manager Chad Baumler notes Nuance frequently rebalances the portfolio based on risk-reward metrics. The managers use a combination of qualitative and quantitative analysis to assess normalized earning power of companies they regard as industry leaders weighed down by cyclical or transitory factors. They pay close attention to Sharpe Ratio. The fund is currently very overweight energy and financial stocks, but Baumler notes they are not wedded to any sectors. The turnover comes equally from new names and from adjustments to position size.

The institutional class (NCVLX) made it to the Honor Roll in just 5 years, an impressive feat. This means we are at least 60% confident next year’s skill exceeds expenses. Trapezoid’s evaluation is based on data since 2011. Exhibit III indicates skill from both stock selection and sector rotation. As Exhibit IV illustrates, the firm easily outperformed its peers and benchmarks. It did this despite a Beta of only .83; at times the funds hold a lot of cash. It excels during down markets. Nuance notes that if returns for the Concentrated Value strategy from 2008 (the strategy’s inception) are included, the risk-adjusted performance tops its peer group.

Nuance is a Kansas City-based investment manager focused on midcap and all-cap value. The firm manages over $1 billion, the majority of which is mutual funds. Nuance is controlled by Montage Investments. The fund managers came from American Century. Lead manager Scott Moore led the American Century Mid-Cap Value Fund (AVUAX) and another fund from 2004-08. AVUAX reflected similar on his watch; the fund has continued to thrive since his departure. AVUAX’s turnover is also elevated and on our Honor Roll but it is currently closed.

NCVLX is managed mainly to generate pre-tax returns. However, the fund does consider issues of short term capital gains and tax loss swap techniques.

We worry that skill will degrade if AUMs continue to grow; some of the companies in their universe are not especially large and liquid. However, management seems committed to limiting growth of the Concentrated Value strategy; Baumler expects future AUM growth to come more from the Midcap Value strategy. We don’t rate Nuance MidCap Value Fund (NMVLX) due to its short history, but it is managed by the same team with considerable portfolio overlap and similar expense structure. NMVLX will adhere more closely to the midcap value style box with a somewhat less concentrated portfolio.

Note: Registered demo users of FundAttribution.com have access this month to the All-Cap Value category which includes NCVLX.

Bottom Line:

When assessing an active fund, reported expense ratios don’t tell the whole story. In theory turnover ratio should give investors insight into “hidden” drag from trading costs. But investors selecting a manager shouldn’t dwell on turnover ratio. Empirically, turnover barely moves the needle and it may not be a good proxy for trading costs. In many cases high turnover is associated with exceptional performance.

Sunbridge Capital Emerging Markets (formerly Fiera Capital Emerging Markets Fund), (RIMIX, CNRYX), October 2016

By Dennis Baran

At the time of publication, this fund was named City National Rochdale Emerging Markets Fund.
This fund was formerly named Fiera Capital Emerging Markets Fund.

This fund has been liquidated as of February 10, 2023.

Objective and strategy

The fund seeks to provide long-term capital appreciation primarily by investing in locally listed large, medium, and small quality companies broadly accessible to U.S. investors within Asian Emerging Markets. The Adviser conducts on-the-ground research to provide direct insight into these companies using its domain expertise in the region, and while it may invest in companies from any emerging market country, it expects to focus its investments in Asia.

The fund is intended for long-term investors who have a time horizon of at least 5 years but preferably 7-10. It was first mentioned in the April 2015 edition of MFO as “Emerging markets funds that might be worth your attention.”

Reason for Launching the Fund

Before its manager, Anindya Chatterjee, joined City National Rochdale, he was working for Rochdale Investment Management, a boutique firm that wanted to launch an emerging market strategy. He met with a group of investment professionals, traveled with them to India for more than six months, and in the process convinced the board of his investment thesis for EM. Because of his sell side research, domain knowledge of Asia, and always wanting to manage money, he accepted the challenge of running the fund, the N class RIMIX, which CNR launched December 14, 2011.

Creation of the new share class CNRYX

After Morningstar gave RIMIX its 5-star rating in January 2015, CNR began offering RIMIX in March 2015 to those outside its HNW clients, who, having managed accounts with financial advisers, were already fully allocated to emerging markets. That was the only way the fund could grow. Also in March, the firm decided to offer a new share class without the 12-b1 fee, but because it takes some time to launch a new product, the fund first opened in June 2016. Currently, all assets are being moved into CNRYX, which now has $853M, and RIMIX $143M. The remaining assets of RIMIX will be moved in the next six months. All shareholders will then have a class without a 12b-1 fee and a lower expense ratio.

Adviser

City National Rochdale. A subsidiary of City National Bank (CNB), the firm currently offers 13 mutual funds and has provided investment management services to individuals and businesses for over 25 years. As of June 30, 2016, CNR had approximately $29.9 billion in AUM.

Manager

Anindya Chatterjee He has managed the fund since inception in 2011. Prior to joining Rochdale Investment Management (the predecessor to CNR), he was President at India Infoline (IIFL) in Mumbai working with U.S. institutional investors, earlier as Managing Director and Head of Emerging Markets Asia Equities Research at Jefferies, and as Asia Equities Strategist at Bear Stearns. With 20 years of research experience covering Asian financial markets, he is assisted by senior equity analysts in Hong Kong, Arun Narayanan and Jocelyn Nga-Man, CFA; by Joseph Block, an emerging markets trader in New York; and the On the Ground Research Channel Check Team in Hangzhou, China and Mumbai, India.

Strategy capacity and closure

The fund, currently at $1B AUM, plans to close to new investors at an AUM of between $3.5-4B. Because the fund has a mid cap bias and values liquidity, it is size restricted and not a strategy scalable into a large mega cap offering. While not easy to put a hard number on future capacity today, if the companies the fund holds now should increase in the next four years in size, profits, equity base, and liquidity, then closing at $3.5 – 4B would be necessary. The manager has no intention of letting the fund become a benchmark-hugging behemoth unable to seek alpha or consider high growth mid caps often flying under the radar.

Management’s stake in the fund

Mr. Chatterjee has between $50,001-100,000 invested in the fund. Of the five trustees, one has more than $100,000 in the fund and another trustee $50-001-100,000.

Opening date

RIMIX commenced operations December 14, 2011. Its historical information is synthetically linked to CNRYX, the new share class, which began June 1, 2016.

Minimum investment

One can buy the fund directly from the Fund’s Transfer Agent, U.S. Bank (866-209-1967) with no minimum. CNR is in the process of putting application forms for purchase on its site. Other options: TDA: NTF, no minimum for a basic or IRA account; Scottrade: $100 in a basic and an IRA but with a $17 transaction fee. Fidelity and Schwab have the fund available with higher minimums and much higher transaction fees. The fund is unavailable at Vanguard.

Expense ratio

As of June 1, 2016, the fund offers two classes of shares, the N class RIMIX at 1.60 and the new Y Class, CNRYX at 1.40, reflecting no 12-b1 fee.

Comments

Investing in Asian Emerging Markets

Source: International Labor Organization (ILO). Data 2015.

Based on U.N. data, EM Asia has 4.2 billion people with 60% of global youth (age 15-25) and is the region with most favorable demography bell curve. Demographic dividends would come from a steady supply of young people entering the workforce, helping to sustain high economic growth rates; resources for investment and consumption momentum concentrated in its growing number of mega cities; and competitive wages. The region is characterized by rising real incomes, productivity, and a high savings rate. Growth appears sustainable long-term as investments are funded by this high domestic savings rate, and coupled with high investments, should support future economic and EPS growth.

According to the fund, characteristics like these make emerging Asia the “sweet spot” for investment and those that will produce superior returns.

Also, Asian EM exposure adds greater diversification potential to a portfolio.

Finally, recent EM performance has been disappointing, but its long-term attractiveness remains unchanged and its EPS growth and valuations keep EM equities attractive.

Portfolio Construction

The fund determines country allocations in each of the Asian EM markets by assessing multiple macro variables and market valuation measure, for example, the liquidity environment, interest, and inflation rates. Second, it determines sector allocations by assessing variables such as growth prospects, domestic demand scenarios, and valuation. Last, the fund chooses companies by a detailed analysis of company management, the quality of its earnings, and valuation. Based on this bottom-up process, the fund then chooses its investments, trying to pick its potential outperformers from its “Investible Superset” of eligible companies through a boots-on-the ground analysis.

Having evolved over time, the process allows the team to find approximately 250 stocks in countries it should invest in and then build its own financial models. Most of these companies, followed by just a few analysts, need additional proprietary work before buying them. Very disciplined and bottom-up, the process focuses on finding companies that the fund wants to own for 3-5 years without having to research all of the stocks in the region.

The challenge is finding the best companies at the right time, what value to invest, and for how long. For example, the fund did not buy Alibaba at its IPO price of $130 but at $68-$69; on the other hand, it bought Tencent, currently its top holding, at the IPO price.

Boots on the Ground

The term describes the funds due diligence, bottom-up approach, and domain experience. For example, in 2015, the research team undertook 262 analyst calls, 370 management calls, (an effective time of 645 hours); 63 conference/roadshow/reverse roadshows (an interaction with 449 corporate managements, policy makers, and industry experts); and conducted several direct and proprietary checks in each of its invested markets and sectors.

When China and the emerging markets were selling off during the first quarter, Mr. Chatterjee made two visits to Asia, visiting 44 of the fund’s companies on his first trip and 10-15 on his second. He found that the earnings of these companies were pretty robust and his investment thesis intact.

Before investing, the fund builds detailed company financial models and determines the “true intrinsic value” of the company.

Portfolio Characteristics

Active Share

The fund does not keep an active share statistic; however, the portfolio is significantly different than its benchmark, the MSCI EM Asia Index. For example, Korea and Taiwan comprise 38% of the index, two countries where the fund does not invest because they do not have the long-term growth potential or the quality diversification that investors want. They are not emerging. Investing in them will not help the fund outperform its benchmark.

Focus on Mid Caps

The company market cap of the fund is 38% > 10B, 37% > 2B-10B, and 25% < 2B with an average market cap of 3.2B. It seeks to identify mid cap companies that are often less followed, reasonably valued, have growth potential within its domain, with credible managements and business strategies that will succeed.

As of June 30, 2016, the fund was invested in just six countries: China/HK 42.3%; India 23.69 %; the Philippines 8.79%; Indonesia 6.81%; Thailand 5.36%; Malaysia 4.15%; 8.9% in cash and with 70% in three sectors – consumer discretionary, financials, and informational technology – where companies can take advantage of Asian consumer saving and spending.

Risk and Performance

The fund defines risk as not knowing the outcome of earnings visibility, revenue, profitability, and all of the other variables in between – interest rates, raw material prices, and everything else. Furthermore, liquidity risk is an element the fund seeks to minimize trying to have a risk adjusted return relative to its benchmark, the MSCI EM Asia Index.

The MFO Premium slice of RIMIX/CNRYX shows a distinct high return-low risk profile against its peers since inception especially when looking at its Sharpe, Sortino, and Martin ratios.

The capture ratios are for the three-year period ending June 30, 2016.

Mr. Chatterjee points out that the risk-adjusted performance of the fund is relative to a benchmark that is obsolete in terms of how the fund invests. For example, if one used an index that included China, internet companies, e-commerce, China consumer staples, China consumer discretionary, India software companies, southeast Asia consumer holdings, then the fund would perhaps be seen as hugging that benchmark with parameters like sharp ratios and others redefined.

While the fund invests in only six countries of the 23 that comprise the MSCI EM Index, the same six countries of the eight in the MSCI EM Asia Index, it has shown the manager’s skill in executing his thesis about the region with its focus on its macro trends. While everyone knows about these trends, his process is bottom-up, disciplined, and focused on the pure consumption space within emerging Asia. He is not invested in Old China, manufacturing, or cyclical companies. Domain knowledge is important because what works in one market will not work in another.

While the fund was down 2.62% in 2015, it still outperformed 90% of emerging market funds for the fourth straight year from inception to December 14, 2015 because of allocation and stock selection, avoiding weak emerging markets such as Brazil and significant underweights in energy and commodities.

Although the EM Asia Index has risen more than the broad EM Index since the fund’s inception on December 14, 2011 to September 13, 2016 and benefited the fund’s exposure there, it has also outperformed when these markets have been weak.

Source: MSCI. The MSCI data contained herein is the property of MSCI Inc. (MSCI). MSCI, its affiliates and information providers make no warranties with respect to any such data. The MSCI data contained herein is used under license and may not be further used, distributed, or disseminated without the express written consent of MSCI.

EM Asia has outperformed EM during the fund’s history (12-14-11 to 9-13-16).

The fund has lagged the MSCI EM and Asia EM Indices YTD mostly because countries like Brazil and others have risen but where the fund does not invest.

For example, based on their price returns, the MSCI EM ex-Asia Index returned 19.5% through September 15, 2016; the EM 11.9%; the EM Asia 9%; and the EM Latin America 27.3% (ex-Brazil 3.62%). The manager knows that under-performance will occur at times but also believes that his focus in emerging Asia will produce superior returns long term.

Bottom Line

CNRYX offers an investor exposure to emerging markets by its concentrated strategy in Asia. Since inception, the fund has adhered to its six-country Asian allocation and not included other EM Asian countries or EM countries outside of that region in any meaningful way. The manager believes that the long-term positives of the region discussed here can become a virtuous cycle that could last for decades and lead to fund outperformance. The results thus far support that thesis: the fund has earned a five-star designation from Morningstar, is ranked highest by Lipper in total return, consistent return, tax efficiency, expense, and is a MFO Great Owl.

Because of its concentration, the fund may underperform at times. However, its historical performance has shown consistent strong stock selection when its allocation has been out of step but also been absent in markets going down.

The fund uses a disciplined research process and its domain knowledge with boots on the ground to choose companies, many under-followed, based on its bottom-up research. To maintain its flexibility, the manager will close the fund at a specified AUM.

Despite the fund’s almost five-year existence, it is not widely known by retail investors. The funds were not marketed to retail clients but created as an asset allocation tool for their managed client accounts with financial advisors. Most of the AUM in these accounts is held at various custodians.

Finally, the issuance of the new institutional class CNRYX as of June 1 gives every investor – managed account, institutional, and retail – the option of owning a product with many engaging attributes and a deep dive into Asia emerging EM.

Fund website

CNR

Launch Alert 1: RiverNorth Marketplace Lending Corporation (RMPLX)

By David Snowball

RiverNorth Capital Management launched RiverNorth Marketplace Lending Corporation (RMPLX), a closed-end interval fund dedicated to marketplace lending (a/k/a “online lending”) asset class. They’re in pursuit of high current income.

“Marketplace lending” are all of those companies that allow small borrowers to get quick access to loans for unconventional (that is, non-bank) lenders. Lending Club would be a familiar example for most of us. The volume of lending has increased 700% in four years to about $17 billion a year.

The U.S. Department of the Treasury published a long report in May on the state of the market. Here’s there description of its key characteristics:

Online marketplace lenders share key similarities. First, companies operating in this space typically provide borrowers with faster access to credit than the traditional face-to-face credit application process, often providing funding decisions within 48 to 72 hours. Second, most online marketplace lenders are able to offer small loans with short-term maturities, often with daily remittances of funds processed directly from linked bank accounts. Third, they use automated online loan applications and have no retail branches. Fourth, they rely on a variety of funding sources, including institutional investors, hedge funds, individual investors, venture capital, and depository institutions. Finally, online marketplace lenders use electronic data sources and technology-enabled underwriting models to automate processes such as determining a borrower’s identity or credit risk. (Opportunities and challenges in online marketplace lending, 05/10/2016)

The fund will invest in a mix of marketplace lending sectors, including unsecured consumer, small business, and specialty finance loan segments.

The fund will be managed by Philip Bartow and RiverNorth’s CIO, Patrick Galley. Mr. Bartow joined RiverNorth in 2015 and has 12 years of work in investment manager and capital markets. Before RiverNorth he was a Principal at Spring Hill Capital where he focused on the analysis and trading of structured credit, commercial mortgage and asset-backed fixed income investments.

As a closed-end interval fund, you’ll be able to purchase shares daily but redeem them only quarterly. The minimum amount that they’ll redeem is 5% per quarter but the Board of Trustees has the right to limit the extent of redemptions beyond that. As a practical matter, that allows the manager to sidestep the pressure of day-to-day liquidity and the risk of needing to liquidate illiquid positions in the face of some transitory investor panic. In theory, that allows stronger long-term returns and a more rational portfolio.

The decision to adopt an interval fund structure is an implicit recognition of the exceptional risks posed by this asset class. Steve Eisman, the hero of The Big Short for his prescient bet against the housing market in 2007, warns that Silicon Valley, which has helped launch 160 online lenders since 2009, “is clueless.” The rewards of the strategy may well substantially outweigh the risks, but that shouldn’t be taken for granted. Proceed with care and vigilance.

The minimum initial investment is $1 million and the initial expense ratio after waivers is 2.40%. There’s a substantial amount of detail at the fund’s homepage.

Launch Alert 2: RiverPark Commercial Real Estate Fund (RCRIX)

By David Snowball

On Monday, October 3, RiverPark Funds launched RiverPark Commercial Real Estate Fund (RCRIX). Like several of RiverPark’s funds, RCRIX began life as a hedge fund. Unlike any of its predecessors, though, it is being structured as an interval fund.

What does that mean? Morty Schaja explains the investment case:

The Fund’s objective is to seek current income and capital appreciation consistent with the preservation of capital by investing predominantly in the approximately $600 billion commercial mortgage backed securities (“CMBS”) market that is secured by income-producing commercial real estate assets predominantly in the United States.

RiverPark believes that the Fund provides a unique opportunity to generate mid-single digit income yields (based upon current coupons and purchase discounts) with both limited credit and interest rate risk and with a proven and experienced manager.

With negligible interest rate sensitivity, limited credit risk and single-digit returns, the fund might be an alternative to those attracted to David Sherman’s closed RiverPark Short-Term High Yield Fund (RPHYX).

The fund will begin life with $50 million in assets from its private predecessor, of which $10 million is the manager’s own money. The fund will be managed by Edward L. Shugrue III, CEO of Tallmadge LLC.

The closed-end interval structure is interesting. It means that you can buy shares whenever you want, but you can only redeem shares quarterly. The manager will have the option of redeeming between 5% and 25% of the fund’s shares quarterly, at NAV and without any additional fees. As a practical matter, that allows the manager to sidestep the pressure of day-to-day liquidity and the risk of needing to liquidate illiquid positions in the face of some transitory investor panic. In theory, that allows stronger long-term returns and a more rational portfolio.

The decision to adopt an interval fund structure is an implicit recognition of the exceptional risks posed by this asset class. Commercial real estate has experienced an extended boom, valuations are high and the chair of the Boston Federal Reserve has warned that banks may be pursuing the market too vigorously. The rewards of the strategy may well substantially outweigh the risks, but that shouldn’t be taken for granted. Proceed with care and vigilance.

Investors purchasing directly from RiverPark face a $2,500 minimum initial investment. The fund’s opening expense ratio is 1%. Because of the predecessor fund’s long track record, the RiverPark folks have a pretty detailed factsheet in draft. It will likely be available at the RiverPark Funds site at the official launch.

Funds in Registration

By David Snowball

Ten new funds are in the queue, ready to launch somewhere between Thanksgiving and New Years. Several high-profile firms are launching new funds, including DoubleLine, Northern, Osterweis and TIAA-CREF. (We also snuck in a small handful of institutional launches from AMG and AQR.)

U.S. Quality ESG strikes me as particularly interesting. Northern Trust has made a major commitment to responsible investing. This fund will be the latest in a series of launches by Northern Trust, which has offered a global ESG index fund, Global Sustainability Index Fund (NSRIX) and added FlexShares STOXX US ESG Impact Index Fund (ESG) and FlexShares STOXX Global ESG Impact Index Fund (ESGG) on July 14, 2016. Northern’s passive products are consistently factor-tilted; that is, they tend to follow the research that favors value over growth, smaller over larger, and so on. In a momentum-driven market which rewards larger and pricier, that’s a painful decision. Their argument is that’s why you need quantitative discipline: it’s simply too painful for most humans to do the right thing when the market is rewarding “the wrong thing.” Their research, graphed below, shows that good corporate citizens tend to inch out average citizens most years (that’s shown in the third column, ESG Excess which can be negative some years) and good citizens that are also exceptionally well-managed corporations tends to lead the pack by a bit more (column five).

A low minimum and an e.r. lower than many ESG index funds and ETFs help, too.

In truth, the fate of the world hangs in the balance. Where doubt about the human role in climate change was once the province of thoughtful skeptics (I was, 20 years ago, among them), it’s increasingly the demesne of a coterie of fanatics who have surrendered any passing concern for the truth. Their conscious, reckless distortion of the evidence appalls me.

We can neither precisely predict, nor reverse, over the next century anyway, the damage we are doing to our planet’s life-support system. We can only seek now to minimize, anticipate and mitigate it. MFO’s commitment to using a “green” server won’t save the world nor will your decision to invest in an ESG index. But we each make dozens of decisions each day about what we value and what we will bequeath to our children’s children. This might represent one of them.

AMG TimesSquare Emerging Markets Small Cap Fund

AMG TimesSquare Emerging Markets Small Cap Fund will seek long-term capital appreciation. The plan is to invest in between 40-100 small cap stocks. The fund will be managed by Caglar Somek and Magnus Larsson. The initial expense ratio is 1.50%. The minimum initial investment will be between $1,000,000 and $5,000,000.

AQR Large Cap Relaxed Constraint Equity Fund

AQR Large Cap Relaxed Constraint Equity Fund will seek long-term capital appreciation. The plan is to beat the Russell 1000 by taking both long and short positions in equities; in AQR’s mind, short positions are “relaxed” because it relaxes the (mythical, non-existent) constraint to invest long-only. The fund, and its siblings, will attempt to revive the moribund 130/30 approach which was once at the vogue but is now consigned to a couple ETFs. They anticipate a tracking error relative to the index of 3-4%. The fund will be managed by Michele L. Aghassi, Andrea Frazzini, Jacques A. Friedman, and Hoon Kim, three of whom have PhD’s from major universities. The initial expense ratio has not yet been announced. The minimum initial investment will be somewhat between $100,000 and $5,000,000, depending on which of their eligibility criteria you meet. AQR is simultaneously launching small cap, international and emerging markets versions of the fund with the same team and constraints.

DoubleLine Shiller Enhanced European CAPE

DoubleLine Shiller Enhanced European CAPE will seek total returns in excess of its benchmark, the MSCI Europe Net Return USD Index. The plan is to use derivatives to produce index-like returns then a bond portfolio to add a bit of alpha. The fund will be managed by The Jeffreys, Gundlach and Sherman. The initial expense ratio has not been disclosed. The minimum initial investment will be $2,000, reduced to $500 for IRAs.

Harding Loevner Global Equity Research Portfolio

Harding Loevner Global Equity Research Portfolio will seek long-term capital appreciation. “Research” in a fund’s name often means that it’s being used as a way of rewarding and highlighting the work of its research analysts. In this case, “The investment adviser expects that a majority of the stocks that its analysts have rated for purchase that meet the Portfolio’s investment characteristics and guidelines will be held in the Portfolio.” At base, an all-cap global equity portfolio that will use broad diversification for risk management.The fund will be managed by Andrew West and Moon Surana. The initial expense ratio has not been released. The minimum initial investment is $5,000.

Harding Loevner Emerging Markets Research Portfolio

Harding Loevner Emerging Markets Research Portfolio will seek long-term capital appreciation through investments in equity securities of companies based in emerging (and frontier) markets. “Research” in a fund’s name often means that it’s being used as a way of rewarding and highlighting the work of its research analysts. In this case, “The investment adviser expects that a majority of the stocks that its analysts have rated for purchase that meet the Portfolio’s investment characteristics and guidelines will be held in the Portfolio.” At base, an all-cap global equity portfolio that will use broad diversification for risk management. The fund will be managed by Andrew West and Moon Surana. The initial expense ratio has not been released. The minimum initial investment is $5,000.

Osterweis Emerging Opportunity Fund

Osterweis Emerging Opportunity Fund will seek long-term capital appreciation. The plan is to buy “high quality companies within emerging industries and market niches with significant revenue and earnings growth potential before they are widely discovered.” The managers hope, in particular, to exploit the misplaced skepticism of other investors. The fund is a converted hedge fund and will be managed by James L. Callinan, who has been running the hedge fund since 2012. The record, since inception, has been unremarkable. The initial expense ratio is 1.50%. The minimum initial investment will be $5,000, reduced to $1,500 for various tax-advantaged accounts.

RVX Emerging Market Equities Opportunities Fund

RVX Emerging Market Equities Opportunities Fund will seek long-term capital appreciation. The plan is to buy the stocks of emerging markets companies, which includes preferred shares, REITs, convertibles and various derivatives. Up to 20% might be invested in frontier markets. The fund will be managed by Cindy New and Robin Kollannur. The initial expense ratio has not yet been disclosed. The minimum initial investment will be $2,500 for the no-load shares.

TIAA-CREF International Small-Cap Equity Fund

TIAA-CREF International Small-Cap Equity Fund will seek “favorable long-term total returns.” The plan is to deploy “proprietary quantitative models” in pursuit of just the right balance of risk and reward. The fund will be managed by Antonio Ramos and Steve Rossiello. The initial expense ratio is 1.21% for the retail shares, lower for retirement ones. The minimum initial investment will be $2,500, reduced to $2000 for various tax-advantaged accounts.

U.S. Quality ESG Fund

U.S. Quality ESG Fund will seek provide long-term capital appreciation. The plan is to invest in U.S. based firms which are “highly rated environmental, social and governance (ESG) companies that exhibit strong business fundamentals, solid management and reliable cash flows.” The fund will be managed by Jeff Sampson and Peter Zymali, both of Northern Trust. The initial expense ratio is 0.44%. The minimum initial investment will be $2,500, $500 for an IRA or $250 under the Automatic Investment Plan.

Manager Changes

By Chip

DoubleLine picks up the pieces after Bonnie Baha’s tragic death, Scott Satterwhite retires at Artisan, some turnover at Osterweis, Miller/Howard resigns for the Miller/Howard fund, Giralda steps away from the Giralda Fund and 60 other changes.

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
ACEVX	American Century Disciplined Growth	Yulin Long will no longer serve as a portfolio manager for the fund.	Elizabeth Xie and Vinod Chandrashekaran continue to manage the fund.	9/16
ARTQX	Artisan Mid Cap Value Fund	Scott Satterwhite retires on October 14, 2016.	James Kieffer, George Sertl and Daniel Kane will continue to manage the fund.	9/16
ARTLX	Artisan Value Fund	Scott Satterwhite retires on October 14, 2016.	James Kieffer, George Sertl and Daniel Kane will continue to manage the fund.	9/16
AMMCX	ASTON/Montag & Caldwell Mid Cap Growth Fund	Jeffrey Wilson no longer serves as a portfolio manager of the fund.	M. Scott Thompson will continue to manage the fund.	9/16
ATVAX	Athena Value Fund	Greg Anderson and John Sabre are no longer listed as portfolio managers for the fund.	Andrew Howard and C. Thomas Howard will now manage the fund	9/16
BGIOX	Baillie Gifford International Equity Fund	No one, but …	Jenny Davis joins Andrew Strathdee, Gerald Smith, Angus Franklin, Donald Farquharson and Jonathan Bates in managing the fund.	9/16
BDSYX	BMO Aggressive Allocation Fund	Alan Schwartz intends to retire at the end of the year.	Lowell Yura and Jon Adams will continue to manage the fund.	9/16
BGRYX	BMO Balanced Allocation Fund	Alan Schwartz intends to retire at the end of the year.	Lowell Yura and Jon Adams will continue to manage the fund.	9/16
BDVYX	BMO Conservative Allocation Fund	Alan Schwartz intends to retire at the end of the year.	Lowell Yura and Jon Adams will continue to manage the fund.	9/16
BABYX	BMO Growth Allocation Fund	Alan Schwartz intends to retire at the end of the year.	Lowell Yura and Jon Adams will continue to manage the fund.	9/16
BTRYX	BMO In-Retirement Fund	Alan Schwartz intends to retire at the end of the year.	Lowell Yura and Jon Adams will continue to manage the fund.	9/16
BMBYX	BMO Moderate Allocation Fund	Alan Schwartz intends to retire at the end of the year.	Lowell Yura and Jon Adams will continue to manage the fund.	9/16
Various	BMO Target Retirement Series	Alan Schwartz intends to retire at the end of the year.	Lowell Yura and Jon Adams will continue to manage the fund.	9/16
BGLAX	Brookfield Global Listed Infrastructure Fund	Sam Arnold will no longer serve as a portfolio manager for the fund.	Craig Noble will be joined by Leonardo Anguiano in managing the fund.	9/16
RASAX	Brookfield Real Assets Securities Fund	Sam Arnold will no longer serve as a portfolio manager for the fund.	Leonardo Anguiano will join the rest of the team, Larry Antonatos, Mark Shipley, Nicholas Pope, Craig Noble, Bernhard Krieg, Stavros Koutsantonis, Dana Erikson and Jason Baine.	9/16
CISMX	Clarkston Partners Fund	Jeremy Modell is no longer listed as a portfolio manager for the fund.	Gerald Hakala and Jeffrey Hakala will continue to manage the fund.	9/16
QWVPX	Clearwater Core Equity Fund	Matthew Berler and Alexander Kovriga will no longer serve as a portfolio managers for the fund.	Fifteen other managers remain.	9/16
CTFAX	Columbia Thermostat Fund	Christopher Olson will retire at the end of the year.	David Frank will continue to run the fund as the sole portfolio manager.	9/16
FTICX	Deutsche Communications Fund	Brendan O’Neill will no longer serve as a portfolio manager, effective October 29, 2016. Owen Fitzpatrick and Thomas Hynes will no longer serve, effective November 29, 2016	Pankaj Bhatnagar will continue to manage the fund.	9/16
DURAX	Deutsche European Equity Fund	No one, but …	Dirk Aufderheide has been added as portfolio manager of the fund and will join Britta Weidenbach, Mark Schumann, Gerd Kirsten, and Christian Reuter in the day-to-day management of the fund.	9/16
DBISX	Deutsche Global Equity Fund	Brendan O’Neill will no longer serve as a portfolio manager, effective October 29, 2016.	Mark Schumann and Sebastian Werner will continue to manage the fund.	9/16
KTRAX	Deutsche Global Income Builder Fund	Walter Holman will no longer serve as a portfolio manager, effective October 29, 2016.	Gary Russell, John Ryan, Darwei Kung and Fabian Degen will continue to run the fund.	9/16
SUHAX	Deutsche Health and Wellness Fund	Brendan O’Neill will no longer serve as a portfolio manager, effective October 29, 2016.	Leefin Lai, Thomas Hynes, Peter Barsa and Michael Sesser will continue to manage the fund.	9/16
SGGAX	Deutsche Large Cap Focus Growth Fund	Brendan O’Neill will no longer serve as a portfolio manager, effective October 29, 2016. Owen Fitzpatrick and Thomas Hynes will no longer serve, effective November 29, 2016	Not sure who’s left.	9/16
KDCAX	Deutsche Large Cap Value Fund	Brendan O’Neill and Walter Holman will no longer manage the fund, effective October 29, 2016.	Not sure who’s left.	9/16
KTCAX	Deutsche Science and Technology Fund	Nicholas Daft will no longer manage the fund, effective October 29, 2016.	Nataly Yackanich will continue to manage the fund.	9/16
SERAX	Deutsche World Dividend Fund	Walter Holman will no longer serve as a portfolio manager, effective October 29, 2016.	Fabian Degen and Sebastian Werner will continue to run the fund.	9/16
DBLFX	DoubleLine Core Fixed Income Fund	No one, but …	Jeffrey Sherman joins Jeffrey Gundlach in managing the fund.	9/16
DFLEX	DoubleLine Flexible Income Fund	No one, but …	Jeffrey Sherman joins Jeffrey Gundlach in managing the fund.	9/16
DBFRX	DoubleLine Floating Rate Fund	Bonnie Baha	Robert Cohen	9/16
DBLSX	DoubleLine Low Duration Bond Fund	Bonnie Baha	Robert Cohen joins Philip Barach and Luz Padilla on the management team.	9/16
DMLAX	DoubleLine Multi-Asset Growth Fund	Bonnie Baha and Luz Padilla	Samuel Garza, Jeffrey Sherman and Jeffrey Gundlach will continue to manage the fund.	9/16
DBULX	DoubleLine Ultra Short Bond Fund	Bonnie Baha	Monica Erikson joins Jeffrey Lee in managing the fund.	9/16
ETGIX	Eaton Vance Greater India Fund	Rishikesh Patel is no longer listed as a portfolio manager for the fund.	Prashant Khemka will now run the fund.	9/16
FNCMX	Fidelity Nasdaq Composite Index Fund	No one, but …	Thomas Brussard joins Peter Matthew, Louis Bottari, Patrick Waddell and Deane Gyllenhaal in running the fund.	9/16
FSHOX	Fidelity Select Construction and Housing Portfolio	Holger Boerner is no longer listed as a portfolio manager for the fund.	Neil Nabar will manage the fund.	9/16
FFIOX	FormulaFolios US Equity Fund	Aaron Johnson will no longer serve as a portfolio manager for the fund.	Jason Wenk, Ryan Wheless and Keith Springer are joined by Brandon Graetz on the management team.	9/16
FCIVX	Frontier MFG Core Infrastructure Fund	Stephen Mentzines is no longer a portfolio manager of the fund.	Dennis Eager and Gerald Stack continue to serve as portfolio managers to the fund.	9/16
GDAMX	Giralda Fund, whose name will become AlphaCore Absolute Fund on October 3rd.	Jerry Miccolis and Gladys Chow will no longer serve as portfolio managers for the fund.	Jonathan Belanger and Richard Pfister will manage the renamed fund.	9/16
GSCZX	Guidestone Small Cap Equity Fund	Columbus Circle Investors is no longer an advisor to the fund. Katerina Wasserman and Clifford Fox are no longer listed as portfolio managers	The rest of the team remains	9/16
HIIDX	Harbor Diversified International All Cap Fund	No one, but …	Effective September 22, 2016, Simon Somerville joined Neil Ostrer, William Arah, Charles Carter, Nick Longhurst, Michael Godfrey, David Cull and Robert Anstey as portfolio manager for the fund.	9/16
FLRUX	Infrastructure Fund, formerly Miller/Howard Infrastructure fund.	The subadvisor, Miller/Howard Investments, Inc., has resigned from the fund. As a result, Lowell Miller and Bryan Spratt are out.	The fund will be managed by the team of Robert Meeder, Dale Smith, Clinton Brewer, Jonathan Tremmel and Angelo Manzo.	9/16
ANTVX	NT American Century Disciplined Growth	Yulin Long will no longer serve as a portfolio manager for the fund.	Elizabeth Xie and Vinod Chandrashekaran continue to manage the fund.	9/16
OWSOX	Old Westbury Strategic Opportunities Fund	Effective on October 15, 2016, Franklin Advisers, Inc. will no longer be a sub-adviser for the fund.	The other subadvisor will remain.	9/16
OALVX	Optimum Large Cap Value Fund	It’s anticipated that Herndon Capital Management will no longer subadvise the fund, effective early October.	Rothschild Asset Management has been added as a subadvisor to the fund.	9/16
OSTFX	Osterweis Fund	Matthew Berler and Alexander Kovriga will no longer serve as portfolio managers to the fund.	Nael Fakhry, Gregory Hermanski and John Osterweis will continue to manage the fund.	9/16
OSTEX	Osterweis Institutional Equity Fund	Matthew Berler and Alexander Kovriga will no longer serve as portfolio managers to the fund.	Nael Fakhry, Gregory Hermanski and John Osterweis will continue to manage the fund.	9/16
OSTVX	Osterweis Strategic Investment Fund	Matthew Berler and Alexander Kovriga will no longer serve as portfolio managers to the fund.	Simon Lee, Bradley Kane, Carl Kaufman, Nael Fakhry, Gregory Hermanski and John Osterweis will continue to manage the fund.	9/16
ENIAX	SEI Opportunistic Income Fund	Brookfield Asset Management is no longer listed as an advisor to the fund.	Schroder Investment Management and Michelle Russell-Dowe join the rest of the team.	9/16
SNOAX	Snow Capital Opportunity Fund	Nathan Snyder has resigned from Snow Capital Management and will no longer serve as a portfolio manager for the fund.	Anne Wickland will join Richard Snow and Jessica Bemer in managing the fund.	9/16
TELCX	TIAA-CREF Enhanced Large-Cap Value Index Fund	Michael Shing is no longer a portfolio manager of the fund.	James Johnson joins Max Kozlov in managing the fund.	9/16
TNRLX	TIAA-CREF Global Natural Resources Fund	Navaneel Ray is no longer listed as a portfolio manager for the fund.	Jeff Bellman and Dhaval Patel will now run the fund.	9/16
TEQAX	Touchstone Sustainability and Impact Equity Fund	Farha-Joyce Haboucha will no longer serve as a portfolio manager for the fund.	David Harris and Jimmy Chang will continue to serve as portfolio managers of the fund.	9/16
USCAX	USAA Small Cap Stock Fund	Maria Mendelsberg will no longer serve as a portfolio manager for the fund.	The rest of the team remains	9/16
PDPAX	Virtus Alternatives Diversifier Fund	Euclid Advisors LLC has been removed as subadviser. David Dickerson, Carlton Neel and Amy Robinson will no longer serve as portfolio managers for the fund.	Warun Kumar will manage the fund.	9/16
PHBLX	Virtus Balanced Fund	Euclid Advisors LLC has been removed as subadviser. David Dickerson and Carlton Neel will no longer serve as portfolio managers for the fund.	Douglas Foreman joins Frederick Brimberg, Christopher Kelleher and David Albrycht in running the fund.	9/16
VAPAX	Virtus Equity Trend Fund	Euclid Advisors LLC has been removed as subadviser. Amy Robinson will no longer serve as portfolio manager for the fund.	Warun Kumar, Brendan Finneran, Robert Hofeman and Michael Davis will manage the fund.	9/16
VGPAX	Virtus Global Equity Trend Fund	Euclid Advisors LLC has been removed as subadviser. Amy Robinson will no longer serve as portfolio manager for the fund.	Warun Kumar, Brendan Finneran, Robert Hofeman and Michael Davis will manage the fund.	9/16
VIEAX	Virtus International Equity Fund	Euclid Advisors LLC has been removed as subadviser.	Duff & Phelps Investment Management Co. is the new subadvisor to the fund. Frederick Brimberg, who is a portfolio manager for both the previous and the current subadvisor, will remain as portfolio manager for the fund.	9/16
VLVAX	Virtus Low Volatility Equity Fund	No one, but …	Michael Davis and Warun Kumar are added as portfolio managers of the fund, joining Brendan Finneran and Robert Hofeman.	9/16
VAAAX	Virtus Multi-Asset Trend Fund	Euclid Advisors LLC has been removed as subadviser. Amy Robinson will no longer serve as portfolio manager for the fund.	Warun Kumar, Brendan Finneran, Robert Hofeman and Michael Davis will manage the fund.	9/16
PWBAX	Virtus Sector Trend Fund	Euclid Advisors LLC has been removed as subadviser. Amy Robinson will no longer serve as portfolio manager for the fund.	Warun Kumar, Brendan Finneran, Robert Hofeman and Michael Davis will manage the fund.	9/16
NAINX	Virtus Tactical Allocation Fund	Euclid Advisors LLC has been removed as subadviser. David Dickerson and Carlton Neel will no longer serve as portfolio managers for the fund.	Douglas Foreman joins Frederick Brimberg and David Albrycht in running the fund.	9/16
WFSMX	Wells Fargo Intrinsic Small Cap Value Fund	Effective immediately, Samir Sikka and Alex Alvarez are removed as portfolio managers to the fund.	Ann Miletti will now manage the fund.	9/16

Briefly Noted . . .

By David Snowball

Herewith are notes about the month’s announced changes in the fund industry: closings, openings, name changes, liquidations and more.

Thanks, as ever, to the anonymous and indefatigable Shadow for his yeoman’s work in keeping me, and the members of MFO’s discussion board, current on a swarm of comings and goings.

Effective mid-January, 2017, the AB Wealth Appreciation Strategy (AWAAX) and AB Balanced Wealth Strategy (ABWAX) will no longer invest in other AllianceBernstein funds. Instead, they’ll invest directly in equities. Color me “confused.” The funds currently seem to hold shares of just one AB fund (Multi-manager Alternative Strategies) along with a ton of individual equities.

Right around the end of October or beginning of November, shareholders (uhhh … traders and speculators) owning a dozen different Rydex funds will see a collapse in the number of shares they own as Rydex institutes a reverse share split. The funds affected and magnitude of the reverse split are below.

	Split Ratio (New to Old Shares)
Commodities Strategy Fund	1:12
Emerging Markets Bond Strategy Fund	1:4
Energy Fund	1:4
Europe 1.25x Strategy Fund	1:6
Inverse Emerging Markets 2x Strategy Fund	1:6
Inverse High Yield Strategy Fund	1:4
Inverse NASDAQ-100^® Strategy Fund	1:4
Inverse NASDAQ-100® 2x Strategy Fund	1:6
Inverse S&P 500^® Strategy Fund	1:6
Inverse S&P 500® 2x Strategy Fund	1:4
Japan 2x Strategy Fund	1:4
Inverse Russell 2000® 2x Strategy Fund and	1:4
Weakening Dollar 2x Strategy Fund	1:6

The Board of Directors of iShares, sensing that they were missing the party, then authorized their own set of reverse splits to take effect on October 28 (with the note that the new split-adjusted shares begin trading on Halloween):

	Ticker	Split Ratio
iShares Mortgage Real Estate Capped ETF	REM	1 for 4
iShares MSCI Global Gold Miners ETF	RING	1 for 2
iShares MSCI Global Metals & Mining Producers ETF	PICK	1 for 2
iShares MSCI Italy Capped ETF	EWI	1 for 2
iShares MSCI Malaysia ETF	EWM	1 for 4
iShares MSCI Russia Capped ETF	ERUS	1 for 2
iShares MSCI United Kingdom ETF	EWU	1 for 2

The folks at Direxion decided to go a different route. Rather than merely renaming funds, they’d also tweak the funds’ leverage ratios then rename them:


Current Fund Name	New Fund Name
Direxion Monthly 25+ Year Treasury Bull 1.2X Fund	Direxion Monthly 25+ Year Treasury Bull 1.35X Fund
Direxion Monthly 25+ Year Treasury Bear 1X Fund	Direxion Monthly 25+ Year Treasury Bear 1.35X Fund

SMALL WINS FOR INVESTORS

Frontier Silk Invest New Horizons Fund (FNHSX) reopened to new investments in late September. Before the party gets entirely out of hand, I’ll note that the fund launched in late May, closed in late August, underwent some sort of internal discussion about the adviser’s contract, then reopened in late September. Investors who have stuck with the fund through thick and thin (i.e., since May 27) are down 6% while investors in the average E.M. fund are up about 12%.

Effective September 30, 2016, the redemption fee for Gavekal KL Allocation Fund (GAVAX/GAVIX) will be removed.

CLOSINGS (and related inconveniences)

As of the close of business on October 24, 2016, American Century Equity Income Fund (TWEIX) will be generally closed to new investors other than those who invest directly with American Century or through “certain financial intermediaries.” The fund is worth a close look: $11.5 billion, five stars, with good performance in up-markets and excellent performance in down-markets.

Hatteras Alpha Hedged Strategies Fund (ALPHX) is liquidating its No Load share class on October 14, 2016. Current No Load investors will be moved into “A” shares, but will be able to buy load-waived shares. New investors will need to pay a sales load.

Loomis Sayles Growth Fund (LGRNX) closes to new investors …

In order to preserve the investment team’s ability to efficiently manage future cash flow, Loomis, Sayles & Company, L.P. (“Loomis Sayles”), in consultation with NGAM Distribution, L.P., has concluded that it is in the best interest of current shareholders to close the Loomis Sayles Growth Fund (the “Fund”) to new investors effective at the close of business March 31, 2017.

From November 1, 2016 through March 31, 2017, new investors coming through established intermediary programs or model relationships will be able to invest in the Fund. However, after March 31, 2017, the Fund will remain open only to advisor discretionary programs/platforms and pre-existing end investors.

Employee benefit plans may be permitted to invest in the Fund if they are approved by Loomis Sayles prior to November 1, 2016, and if the Fund is added as an investment option or funded by May 1, 2017.

Does that make more sense to you than it does to us? The timing of the decision seems to reflect the industry’s profound anxiety about turning away new money or disappointing the advisory community. It’s a $4.5 billion, five-star fund that’s decided to telegraph its decision to close six months in advance. Sort of.

On September 29, 2016, Wasatch International Opportunities Fund (WAIOX) closed to new purchases, except for existing shareholders and purchases by new shareholders purchasing directly from Wasatch Funds. I tried contacting Wasatch to ask about whether the closure reflected, in part, caution in the aftermath of Laura Geritz’s departure. They never responded, which makes me (or them) 0-3 in recent years.

OLD WINE, NEW BOTTLES

Effective October 1, 2016, AMG Managers Bond Fund (MGFIX) changes names to become AMG Managers Loomis Sayles Bond Fund. Given that Loomis Sayles already sub-advises the fund, the change seems cosmetic.

Invesco International Total Return Fund (AUBAX) becomes Invesco World Bond on December 1, 2016. At that point, its investment strategies, restrictions and dividend distribution policies all change.

In mid-September, Miller/Howard resigned from the management of Miller/Howard Infrastructure Fund (FLRUX). Aaaaawkward! In parsimonious response, the Board simply removed the words “Miller/Howard,” leaving us with Infrastructure Fund (FLRUX). It’s now managed by a team from Meeder Investment Management.

Effective December 28, 2016, the billion-dollar Oppenheimer International Value Fund (QIVAX) will change its name to Oppenheimer International Equity Fund.

Effective September 30, 2016, RBC BlueBay Total Return Credit Fund (RBTRX) became RBC BlueBay Diversified Credit Fund.

TCW Concentrated Value Fund (TGFVX) changed its name to TCW Focused Equities Fund on September 30, 2016.

OFF TO THE DUSTBIN OF HISTORY

AB Tax-Managed Conservative Wealth Strategy (ACIAX) will be liquidated on January 30, 2017. It remains open only through a few distribution channels and is waiving its sales charges for them.

The Aberdeen board just reminded us that something bad is going to happen to Aberdeen Global Natural Resources Fund. Either it’s going to be merged out of existence and into Aberdeen Global Equity (GLLAX) or, failing shareholder approval for that, it’s going to be liquidated. But “[t]he Reorganization or Liquidation of the Fund may be terminated and/or abandoned at any time before the closing date by action of the Board of Trustees of the Trust.” Stay tuned.

All Terrain Opportunity Fund (TERIX) … uhh, let’s see. They’re liquidating the fund’s “I” shares which used to be the fund’s “C” shares. They had been planning on liquidating the fund’s “A” shares but now they’re going to keep “A” but redesignate them as “Institutional.” But “institutional” in the “retail” sense of the word, since they carry a $2,500 minimum.

ASTON/Cornerstone Large Cap Value Fund (RVALX) will liquidate on October 28, 2016, a victim of tepid performance and minuscule assets.

BRC Large Cap Focus Equity Fund (BRCIX) will liquidate on October 20, 2016, because “it no longer is economically feasible to continue managing the Large Cap Fund because of [its] small size, and the difficulty encountered in attracting and maintaining assets.” As of July 2015, the fund had trounced the S&P 500 and its peers since inception, but it’s trailed its peers by 900 bps since then. BRC Mid Cap Diversified Equity Fund (BRCMX) was liquidated in September which you might not have noticed because the fund never launched in the first place.

Brown Advisory Value Equity Fund (BIAVX) will merge into Brown Advisory Flexible Equity Fund (BIAFX) on or about December 2, 2016. That’s a pretty clear win for the Value Equity investors; they’re moving into a vaguely comparable fund with a greater asset base, lower expenses and better performance.

Century Growth Opportunities Fund (CGOIX) liquidates on October 21, 2016 after five quietly undistinguished years of operation.

CrowdInvest Wisdom ETF (WIZE) sought to capitalize on a “wisdom of the crowd” investing theory. That was, to put it gently, unwise. The decision to liquidate was made “after careful consideration, at the recommendation of … the Fund’s investment adviser.” Apparently the decision to launch did not benefit from equal care, since the fund was terminated after five months of operation.

Davlin Philanthropic Fund (DPFDX) disappeared on September 30, 2016. The fund performed brilliantly in 2008 but had pretty consistently trailed its all-cap value periods over the succeeding seven years.

Direxion Daily FTSE Developed Markets Bull 1.25X Shares, Direxion Daily FTSE Emerging Markets Bull 1.25X Shares and the Direxion S&P 500^® Volatility Response Shares are all liquidating, but I can’t quite tell when.

Dunham Alternative Strategy Fund (DNASX) will be liquidated on or about October 28, 2016. It’s a managed futures fund and I know those aren’t “normal” investments, but still at 4800% turnover is eye-catching. 4800% turnover and a net loss since inception even more so.

ETFS Diversified-Factor Developed Europe Index Fund (SBEU) and ETFS Diversified-Factor U.S. Large Cap Index Fund (SBUS) will find little to be thankful for this Thanksgiving. They’ve been in operation about a year and a half.

The Board of Trustees of Epiphany has determined that it is in the best interests of the Fund and its shareholders to close the Epiphany FFV Latin America Fund (ELAAX) effective November 29, 2016.

Effective September 30, the Galapagos Partners Select Fund (GPSIX) has closed and will liquidate on November 10, 2016. The fund isn’t yet two years old, is long-only equity, has $3 million and Morningstar reports a 1240% annual turnover. Curious.

The name of the Giralda Fund (GDAMX – G. dam?) has changed to AlphaCore Absolute Fund and its Manager Class shares are now Institutional Class shares. That wouldn’t normally land the fund in the dustbin of history, except for the fact that the management team was just replaced (Jonathan Belanger and Richard Pfister of AlphaCore are in, effective October 3, 2016), the fund has under a million in assets despite low fees and a strong, long-term record. At the same time, other parts of the Giralda empire are crumbling:

Giralda Risk-Managed Growth Fund (GRGIX) liquidates on October 21, 2016. That’s after two years of operation. It’s a very volatile long/short fund which still has vastly above-average returns since inception.

Gripman Absolute Value Balanced Fund (GAVBX) will be terminated, liquidated and dissolved on October 17, 2016. The adviser has chosen to shutter the fund after less than one year of operation.

Investment Partners Absolute Return Fund (IPOFX) liquidates on October 12, 2016. That “absolute return” part has proven elusive; the fund has lost money in four of its five full calendar years of operation.

Invesco Strategic Income Fund (SIZAX) and Invesco Unconstrained Bond Fund (IUBAX) will both be liquidated on October 28, 2016. Again, both just passed their second anniversaries, both had very solid 2015s, both lagged in Q1 2016 and now both are slated for elimination.

A bunch of Morgan Stanley Active Assets income funds were liquidated in September. Those included California Tax-Free Trust, Government Securities Trust, Money Trust and Tax-Free Trust.

Lee Financial Tactical Fund (LOVIX) liquidated on September 29, 2016. The “Financial” in the name referred to the name of the advisor, not to a sector in which they invested. Pretty solid little fund, $44 million, top 10% of the past five years although in a very troubled peer group.

Loomis Sayles Emerging Markets Opportunities Fund (LEOAX) submerges one last time, on November 10, 2016. The fund has just over two years of operation, during which time it’s posted slightly above average returns driven by vastly below-average risk. Investors yawned and avoided the fund in droves.

MFS Institutional Large Cap Value Fund (ILVAX) will shut down on November 29, 2016. This is a five-star fund with managers who’ve posted top 10% returns over the past 3, 5, and 10-year periods. It’s drawn only $51 million in assets, so …

At the recommendation of RiskX Investments, RX MAR Tactical Moderate Growth Fund (MGZAX) and RX MAR Tactical Growth Fund (MGMAX) will be liquidated on October 28, 2016, just short of their third anniversaries. Both funds were generally competitive with their peers up until July 2016, at which point both missed major market moves.

Effective immediately, Snow Capital Inflation Advantaged Equities Fund, Snow Capital Mid Cap Value Fund and Snow Capital Hedged Equity Fund were liquidated on September 20, 2016.

Stewart Capital Mid Cap Fund (SCMFX) will close and redeem all outstanding shares on or before December 31, 2016. It’s not entirely clear when. Over the fund’s first five years of existence, it led its peers by about 350 bps/year but over the last five it has trailed them by about 200.

Stone Ridge Reinsurance Risk Premium Fund (SREMX) will be absorbed by Stone Ridge High Yield Reinsurance Risk Premium Fund (SHRIX) on or about December 5, 2016.

The Board of Trustees of Transamerica Funds has approved the liquidation of Transamerica Global Bond (ATGBX) effective on or about December 2, 2016. The fund is just two years old, had a terrible 2015 and a great 2016. It attracted $50 million in assets which apparently isn’t enough to warrant a third year.

Also on December 2, the one-star Transamerica Income & Growth (TAIGX) fund, which only owns stocks, will be acquired by newer, smaller Transamerica Strategic High Income (TASHX) which owns very few stocks.

TCW SMID Cap Growth Fund (TGMDX) will be liquidated on or about October 27, 2016. The fund has trailed its peers, typically by 500-700 bps, in five of its six years of operation.

VanEck Vectors Gulf States Index ETF (MES) and VanEck Vectors Indonesia Small-Cap ETF (IDXJ) will be winding down on or about October 14, 2016. They have $12 million in assets between them. The former returned 1% annually over the past three years; the latter books an annualized loss of 11%.

The Victory Select Fund (VFSAX), which saw durn few victories in its two years of operation, will liquidate on October 28, 2016.