Monthly Archives: August 2016

August 1, 2016

By David Snowball

Dear friends,

aAugust, famously “summer’s last messenger of misery,” is upon us. It’s a month mostly celebrated by NFL fans (for the start of training camp and the endless delusion that this might be the year) and wiccans (who apparently have a major to-do in the stinkin’ heat). All of us whose lives and livelihoods are tied to the education system feel sympathy for the poet Elizabeth M. Taylor:

August rushes by like desert rainfall,
A flood of frenzied upheaval,
Expected,
But still catching me unprepared.
Like a match flame
Bursting on the scene,
Heat and haze of crimson sunsets.
Like a dream
Of moon and dark barely recalled,
A moment,
Shadows caught in a blink.
Like a quick kiss;
One wishes for more
But it suddenly turns to leave,
Dragging summer away.

I could, I suppose, grumble again about the obvious (the combination of repeated stock market records with withering corporate fundamentals isn’t good), but Ed bade me keep silent on the topic. So we’ll try to offer up a bunch of lighter pieces, suitable to summer.

And I’ll return to keeping company with heirloom tomatoes, oddly-stunted potatoes and cold beer. I hope you do likewise.

Now on with the show!

Observer Fund Profiles: Ariel Global and Catalyst MAP Global TRI

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

Ariel Global (AGLOX): over a two decade career, Rupal Bhansali has clung to a simple observation: “if you don’t swim in shark-infested waters, you can’t get bitten by a shark.” That insistence on ruthlessly weeding out the bad idea first has served, and is serving, her investors well.

Catalyst MAP Global Total Return Income (TRXAX/TRXIX): some funds thrive through flash, some through discipline. The managers at MAP have been practicing outstanding discipline and focus for the past 15 years, first in their separate accounts and now in their two funds. TRXAX, a sort of global balanced fund, is proving to be a worthy extension of their long investing tradition.

Launch Alert: AMG SouthernSun Global Opportunities (SSOLX)

On July 11, SouthernSun Asset Management launched their Global Opportunities fund. SouthernSun’s flagship is a long-established small cap fund, and this seems to be a global version of that strategy. The fund seeks long-term capital appreciation. The plan is to invest in 15-40 companies SouthernSun believes are “niche dominant, attractively valued with financial flexibility and uniquely fitted management teams.” It’s nominally all-cap ($100 million and up) but the manager intends to target small- to mid-cap stocks. They have the option of hedging their currency exposure, but don’t currently intend to do so. The fund will be managed by Michael W. Cook, SouthernSun’s CEO and CIO.

Mr. Cook founded SouthernSun in 1989 and the firm manages $4.4 billion, as of May 31, 2016. He and his team manage two other funds: AMG SouthernSun Small Cap (SSSFX) and Equity (SSEFX). Small Cap has dramatically outperformed its small-core peers since inception but pretty much stunk in 2014 and 2015, trailing more than 95% of its peers both years. Those two years now dominate the fund’s statistical profile, both at Morningstar and at MFO. The manager attributes much of that pounding to the fact that “the market has punished several of our holdings for low levels of exposure to commodities, the Emerging Markets and foreign exchange.”

When we profiled SouthernSun Small Cap in 2011, we highlighted two risks.

There are two concerns worth considering as you look at the fund:

It is highly concentrated, especially for a smaller cap fund. Only nine of the 75 SMid-cap core funds place a greater fraction of their assets in their top ten holdings than does SouthernSun (47%). That said, most of those concentrated funds have posted strong risk-adjusted returns.

It is volatile, though not gut-wrenchingly so. The fund’s five-year standard deviation (a measure of volatility) is 29. By comparison, FPA Capital is 22, Longleaf is 24, and Vanguard Extended Market Index (WEXMX, which has a similar market cap though far lower concentration) is 27. Morningstar rates is as having above-average risk and Lipper rates it as “low” in capital preservation. Both services agree, though, that the risk has been well-rewarded: Morningstar gives it “high” returns and Lipper makes it a “Lipper Leader” in the category.

History seems to have born our concerns out. The question for investors approaching the new Global fund is whether Mr. Cook simply got ahead of the market, positioning the fund for long term success at the price of another run of short-term disruption. Given the 2016 performance of the recently reopened Small Cap Fund (up 15% through the end of July, in the top 2% of its peer group) and Mr. Cook’s longer-term record, it would be imprudent simply to glance at a two-star rating or a dismal three-year performance and walk away.

The initial expense ratio is capped at 1.70% for Investor shares, including a 1.0% management fee. The minimum initial investment is $2,000, reduced to $1,000 for IRAs. There’s not a lot of content yet on the AMG SouthernSun Global page. You might get more insight by reviewing AMG SouthernSun Small Cap’s, since the strategies are the same. Southern Sun’s own website walks you through their story without much additional substance.

Updates

The recently launched Centerstone Investors (CETAX) and Centerstone International (CSIAX) funds are now available through the Schwab and Pershing platforms. Both are managed by Abhay Despande, formerly of First Eagle Funds.

At the same time, they published their Q2 shareholder letter: Setting Up Shop & the Art of Ignoring Headlines (06/30/2016). Mr. Deshpande recognizes the current challenges: “global long-term interest rates at close to zero, stock prices at historically high levels and increased uncertainty across the globe.” He acknowledges that some investors might be tempted to allow a top-down call (“it’s too scary right now”) to shape their portfolios. He rejects that strategy in favor of one that starts with the premise that “we will continue to have major challenges to overcome. In the case of the latter, which is our own approach, our portfolios will tend to be diversified among well capitalized and reasonably priced businesses, along with some reserves. This long-term, global, bottom-up approach has served us well over time and we believe will continue to do so.” The letter offers a thoughtful, gracefully-written intro to Mr. Deshpande’s approach. It’s quick and well worth reading.

Briefly noted

West Shore “elected not to renew its investment advisory agreement” with the West Shore fund and has been replaced with Satuit Capital Management. I never warmed up to West Shore, which started as West Shore Real Return Income Fund (NWSFX) then became West Shore Real Return Fund after 18 months. At that point, they changed their objective from “capital growth and current income” to “preserving purchasing power.” And they pretty much completely rewrote their “principal strategies” text so that it’s hard to know how exactly the portfolio will change, though the addition of a risk statement concerning the use of futures and other derivatives does offer a partial answer. I’ve been genially skeptical of the fund for a long while.

At a reader’s behest, I spoke at length two years ago with one of the managers whose answers seemed mostly circular and who was reluctant to share information about the fund. His basic argument was: “we don’t intend to make information about the fund, our strategies or insights available on the web.” At the end of the call, he announced that he and co-manager James Rickards were mostly the public faces of the fund and that the actual work of managing it fell to the third member of the trio. Mr. Rickards has since left to resume his career as doomsayer.

The question is, what qualifications does a small cap specialist like Satuit have for running a sort of quasi-hedge fund?

Celebrating David Snowball’s heroism

I really liked the first line of the story: “David Snowball was the all-round hero.”

I have no earthly idea of what he’s doing, but apparently he’s doing it brilliantly.

Sadly, the rest appeared to be British rather than English:

Scarborough won the toss in the Pavilion Cup final at Flixton and elected to bat first with Snowball getting the innings off to an excellent start retiring on 30. When Snowball retired Tom Pratt hit 24 and Kieran Rutter added 26 as they moved the score onto 101 for 3 after 15 overs.

At this stage Pickering were still in a position where the runs could be chased down, which was mainly due to tight bowling from James Boyes and Tom Dawson, but a quickfire 30 retired (off 13 balls) from Arthur Ashton took the final score to 151-7 which proved to be a total too difficult for Pickering to chase down.

Pickering in reply were soon in trouble being reduced to 2-2 after two overs with Snowball taking both wickets… The man of the match award, adjudicated by the umpires, was awarded to Snowball for his excellent all-round performance.

Congratulations to the young Snowball a/k/a SnowyLadd. And no, I have no idea of how I might be related to the ferocious bowler.

Farewell to Burnham

The erstwhile Burnham funds (Burnham Fund, Financial Services RMBKX, and Financial Services Long/Short) are now RMB or RMB Mendon funds, as in RMB Fund RMBHX, RMB Mendon Financial Services RMBKX and RMB Mendon Financial Services Long/Short RMBFX. Burnham Financial was replaced as adviser to the funds on July 1, Jon Burnham was replaced at Burnham Fund but Anton Schutz remains at the helm of the financial services funds. The original Mr. Burnham (I.W.) managed the growth-and-income Burnham Fund from 1975-1995 while the younger Mr. Burnham (Jon) ran it from 1995-2016.

Greetings to Gabelli

74-year-old billionaire Mario Gabelli, famous for paying himself $60-70 million a year, has decided he needs more to do so he’s launching The Gabelli Go Anywhere Trust, “a non-diversified, closed-end management investment company with no operating history.” This will be the 16^th fund in his management portfolio. Going There will cost you 3.12% a year, which pops to 8.45% a year once you factor-in “Distributions on Series A Preferred Shares” (though I’m not sure quite what that means).

Who does this guy think he is, a presidential nominee?

David Blaine Welliver, former manager of the long-defunct Dblaine fund, has pled guilty (again) to securities fraud charges and has the prospect of having the feds provide secure housing for him for the next five years. As Chuck Jaffe noted in 2011, the Dblaine fund itself was an act of criminal mischief but it represented a tiny sliver of Mr. Welliver’s activities according to the Minneapolis Star-Tribune. He pled guilty this month to a single charge of securities fraud arising from his 2010 attempt to bolster his fund empire. At a time when his firm has $200 in cash, he borrowed $4 million to buy two other mutual funds, spent $100,000 on the acquisition and $500,000 on himself. Five years later the feds got around to filing charges.

At the same time, Visium Asset Management, former adviser to the defunct Visium Event-Driven Fund VIDVX, announced that it was firing 33 people and closing its hedge funds. Bloomberg links the closures to revelations of fraudulent activities by three former managers, one of whom subsequently committed suicide.

SMALL WINS FOR INVESTORS

The Oakmark Global Fund (OAKGX), Oakmark International Fund (OAKIX) and Oakmark International Small Cap Fund (OAKEX) all reopened to all investors effective July 29, 2016. Special thanks to David Shepard of Callahan Capital for the timely heads-up!

CLOSINGS (and related inconveniences)

The adviser of the Iron Horse Fund (IRHAX/IRHIX) has announced that it does not intend to renew the contractual management fee waiver agreement upon its termination on July 29, 2016. Expenses will then pop from 1.86% to 2.37%. That particular move will net the adviser ridicule and $8,500 a year, and will keep it ranked as the third most expensive fund in its peer group (option writing funds with front loads). That said it has been a consistently strong performer though it’s drawn only $17 million in assets.

Effective July 29, 2016, Matthews Japan Fund (MJFOX) closed to most new investors. It’s a very solid fund and we debated whether to send a mid-month alert to our subscribers about the impending closure. Ultimately we decided against doing so, mostly because they are two stronger, small options available to interested investors: the four-star Hennessy Japan (HJPNX) with $120 million in assets and five-star Hennessy Japan Small Cap (HJPSX) at just $30 million. The SPARX Asset Management, a Japanese firm specializing in Asia-Pacific asset management, subadvises both funds. They’re very much worth your attention if you think the Japan story has legs.

Vanguard Dividend Growth Fund (VDIGX) closed to all new investors in late July, with the fascinating “exception of investors who are added and invest in the Fund only through technology-driven model portfolios.”

OLD WINE, NEW BOTTLES

American Century Veedot Fund (AMVIX) is renamed the Adaptive Equity Fund effective as of September 7, 2016. American Century Legacy Multi Cap Fund (ACMNX) is renamed the Adaptive All Cap Fund effective as of September 7, 2016.

At some point, probably soon but no one is saying, DSM Large Cap Growth Fund (DSMLX) will be reorganized to become the Touchstone Large Company Growth Fund. Despite its dismal ticker symbol, it’s a really solid fund with $200 million in assets. The management team expects to remain in place after the change.

GMO is being removed as sub-advisor to John Hancock U.S. Equity Fund (JHUAX). Once that occurs, it will be renamed U.S. Growth Fund and its investment objective will be tweaked.

Rothschild Larch Lane Alternatives Fund (RLLBX) is being renamed Fiera Capital Diversified Alternatives Fund.

Effective October 1, 2016 TETON Westwood Income Fund (WEIAX) is changing its name to TETON Convertible Securities Fund. Understandably, its “principal strategies” will now include investing at least 80% in convertibles.

I’m into it!

USA Mutuals Barrier Fund (VICEX), formerly the Vice Fund (VICEX), has been renamed again as … wait for it! the USA Mutual Vice Fund (VICEX). At the same time, the description of the strategy went from focusing on industries with high barriers to entry (which includes “the alcoholic beverages, tobacco, gaming and defense/aerospace industries”) to focusing on vice industries (which is “the alcoholic beverages, tobacco, gaming and defense/aerospace industries”).

OFF TO THE DUSTBIN OF HISTORY

American Century Legacy Large Cap Fund (ACGOX) and Focused Growth Fund (AFSIX) have both closed and will liquidate on October 21, 2016.

“[B]ased upon the Fund’s current small asset size and small shareholder base,” its board has decided to liquidate Brown Advisory Multi-Strategy Fund (BAFRX). That will occur on August 12, 2016.

Calamos Focus Growth ETF will be liquidated on or about August 8, 2016. At the beginning of October, Calamos Discovery Growth Fund (CDGAX) and Calamos Mid Cap Growth Fund (CMXAX) will both be liquidated. And somewhere in there, Calamos Focus Growth (CBCAX) will be absorbed by Calamos Growth (CVGRX) while Calamos Long/Short (CALSX) vanishes into Calamos Phineus Long/Short (CPLSX). CALSX was Gary Black’s fund, which Calamos adopted when they hired Mr. Black. By some accounts, Mr. Black’s team was being squeezed out and left Calamos a bit before he did. Mr. Calamos then took the reins and transformed a so-so fund into a bad one. CPLSX is a recently converted hedge fund, Phineus Partners LP, with $20 million in assets and a fine record as a hedge fund.

City National Rochdale Multi-Asset Fund (CNIIX/CNIAX) will be liquidated “in an orderly manner” (sounds very British of them) on or about 29 September 2016.

Discretionary Managed Futures Strategy Fund (FUTEX) becomes (PASTX) on or before July 29, 2016.

E Fund China A Enhanced Equity Fund (EFAAX) bows out August 12, 2016.

The Board of Directors of The Lazard Funds has approved the liquidation of Lazard US Mid Cap Equity Portfolio (LZMOX), effective August 30, 2016.

Neuberger Berman All Cap Core Fund (NBEAX), Neuberger Berman Large Cap Disciplined Growth Fund (NLDAX) and Neuberger Berman World Equity Fund (NWTAX) are all scheduled to liquidate on August 4, 2016. Neuberger Berman Inflation Managed Fund (NDRAX) goes the way of the dodo on October 14, 2016.

Madison NorthRoad International Fund (NRIEX) will discontinue operations, liquidate, terminate, vanish and/or be assigned to the LowRoad on September 30, 2016.

On July 7, 2016, its board decided to liquidate Oakhurst Defined Risk Fund (OAKDX). Two weeks later it was gone. It’s another case of an adviser abandoning a fund shortly after launch. In this case, it put in about 18 months and the adviser pulled the plug.

The closing of the merger of Putnam Voyager Fund into Putnam Growth Opportunities Fund was originally scheduled to occur on or about July 15, 2016, subject to “certain closing conditions.” Since those conditions haven’t been met, the merger remains on hold.

Schneider Value Fund (SCMLX) has closed in advance of its liquidation.

USA Mutuals Generation Wave Growth Fund (GWGFX) and USA Mutuals/WaveFront Hedged Emerging Markets Fund (WAVNX) will both liquidate on September 29, 2016. USA Mutuals stuck with the latter fund, a converted limited partnership, for less than one year before giving up.

In Closing . . .

A quick word of thanks and encouragement for folks who support the Observer through our Amazon link. As many of you know, we receive an amount equivalent to about 7.5% of whatever you buy – from used books to Halloween candy or home appliances – through our link. It’s invisible and costs you nothing (it’s part of Amazon’s marketing budget), but provides us a pretty steady $20-25/day.

Despite the craziness of summer, folks have been very faithful about using the link and we’re thankful. If you’ve been meaning to use it but haven’t yet, take a moment, click our Amazon link and set it as a bookmark on your browser’s bookmark bar (the one you see across the top of your screen with your most-used bookmarks.

If you’re more inclined to browse for unique, hand-crafted goods, you might want to take a look at Amazon Homemade, where we found this really cool lamp. And if you love tormenting your children (or yourself) you could certainly use Amazon for some back-to-school shopping. If the dinner table gets rowdy, dropping the line “oh, yeah. I was just at Amazon and found some really nice notebooks for your Trig class this month” will really quiet them down.

Thanks too, to those who continue to support us through direct PayPal donations Adrian, Larry, and stalwart subscribers Deb and Greg. We really appreciate you.

Between now and our next issue, I’ll be working on a course I haven’t taught in ten years (Business and Professional Communication) as well as an old favorite with new relevance (Propaganda). And, too, we’ve got interviews lined up with three managers, a new Elevator Talk and two new profiles. It’ll be good.

Take care and we’ll see you soon,

Morningstar’s “undiscovered” funds

By David Snowball

In case you’re wondering, here is the Observer’s mission:

The Mutual Fund Observer writes for the benefit of intellectually curious, serious investors— managers, advisers, and individuals—who need to go beyond marketing fluff, beyond computer- generated recommendations and beyond Morningstar’s coverage universe … Our special focus is on innovative, independent new and smaller funds. MFO’s mission is to provide readers with calm, intelligent arguments and to provide independent fund companies with an opportunity to receive thoughtful attention even though they might not yet have drawn billions in assets. Its coverage universe has been described as “the thousands of funds off Morningstar’s radar,” a description one fund manager echoes as “a Morningstar for the rest of us.”

Morningstar is in the business of helping investors. Since most investors have most of their money in large funds, that’s where Morningstar spends their time and energy. By way of illustration, Morningstar has published reviews of 530 funds in 2016. Of those, 450, or 85%, have assets under management of more than a billion. The median size for all reviewed funds, including those that haven’t been reviewed in the past five or ten years, is about $1.5 billion. The median size for all funds, not just those reviewed, is about $220 million. To be clear: there are 3400 funds with less than $220 million in assets, of which 24 (0.7%) have received analyst coverage in the past 12 months.

That’s not a criticism, it’s a business model. Morningstar needs to follow the money because that’s where the vast bulk of the paying customers are. The Observer, both noncommercial and nonprofit, has the freedom to go where Morningstar cannot; a complement rather than a competitor, mostly yin to their mostly yang.

At the same time, the folks at Morningstar maintain some level of vigilance toward smaller, newer funds. That’s embodied in the Morningstar Prospects list and in an annual “undiscovered managers” panel at the Morningstar Investor Conference. This year’s undiscovered managers were:

Rupal Bhansali of Ariel Funds. Rupal’s two Ariel funds (Global AGLOX and International AINTX) have five year records and about a quarter billion in AUM but Ms. Bhansali herself has been managing for 21 years and overseas hundreds of millions more in separate accounts.

Jonathan Bloom, representing the team-managed FMI Funds. FMI International (FMIJX), for which he was being recognized, holds $4.4 billion and has a six-year record.

Andrew Foster of Seafarer Funds. Andrew’s Seafarer Overseas Growth & Income Fund (SFGIX) has $1.4 billion in assets and a four year record which builds on his decade of work at Matthews International.

In this case, on average, you can become “undiscovered” after you have $2 billion in assets and a five year record as a fund and a ten or fifteen year record as a manager. They all richly deserve the recognition. We profile Ariel Global below and have written repeatedly about Seafarer. In truth we should have begun coverage of FMI around the time we launched, but I screwed up and the fund is outside of our coverage universe (roughly defined as “funds off Morningstar’s radar”) now.

Morningstar also published two articles this month on the subject of undiscovered funds; the sort of “not ready for prime-time” crew that Morningstar’s keeping an eye on for you. After torching the strawman argument that most new funds aren’t worth much attention (uhhh … (a) we agree and (b) we think that’s true of most old funds, too. The Observer’s argument from the moment we launched is that 80% of all mutual funds could be shuttered with no loss to anyone except the folks drawing fees from them), Morningstar offered some off-the-radar possibilities for you.

In “These Mutual Funds Are New but Still Worthy” (07/27/2016), Christine Benz identifies three from the handful “worthwhile mutual funds” launched recently. They are:

	Launch date
Mairs & Power Small Cap MSCFX	August 2011	Our 2011 profile, drawing on my remarkably low-key conversation with the manager, concludes “There’s simply no reason to be excited about this fund. Which is exactly what Mairs & Power wants. Small Cap will, almost certainly, grow into a solidly above-average performer that lags a bit in frothy markets, leads in soft ones and avoids making silly mistakes. It’s the way Mairs & Power has been winning for 80 years and it’s unlikely to change now.”
Meridian Small Cap Growth MSGGX	December 2013	Our 2014 profile looked at Mr. Schaub and Meade’s long record at Janus Triton and argued “While the track record of the fund is short, the record of its managers is long and impressive. Investors looking for intelligent, risk-managed exposure to this important slice of the market owe it to themselves to look closely here.”
Seafarer Overseas Growth & Income SFGIX	February 2012	Our original 2012 profile, twice updated, concluded “Mr. Foster is remarkably bright, thoughtful, experienced and concerned about the welfare of his shareholders … He’s a good manager of risk, which has made him a great manager of returns. The fund offers him more flexibility than he’s ever had and he’s using it well. There are few more-attractive emerging markets options available.”

It turns out that if you have a highly accomplished manager who leaves a large fund to launch a small one, you’ve got an awfully good prospect for success. Likewise, if you’ve got a firm that never launches new funds and then they launch a new fund, you’ve got an awfully good prospect for success. It’s never been clear to us why you’d approach such managers as if they were amiable bumpkins recently tumbled from the turnip truck, waiting for years before acknowledging that they were even off-the-radar (but close).

Dan Culloton, associate director of equity manager research, offers a larger list 10 Under-the-Radar and Up-and-Coming Funds (7/26/2016) which strike the Morningstar analysts as “intriguing, little-known or new.”

Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (GSLC)	The funds low vol plus price momentum strategy earned an incredibly tepid endorsement: “The ETF’s 0.09% expense ratio is less likely to erode whatever modest performance advantage it might offer.” Uhhh… if that’s it, why bother?
AQR Long-Short Equity (QLEIX)	Three years old, top 1% since launch plus $1.4 billion in assets. It’s your basic AQR black box. Frankly, if I had fund radar and funds with a billion in assets were under it, I’d invest in new radar.
LoCorr Market Trend (LOTIX)	Two-year-old fund based on a 10-year-old hedge fund, $1.4 billion in assets. It’s a managed futures fund that benefits from the fact that most of its peers are rolling wrecks. NAV peaked in April 2015, down about 7% since.
AC Alternatives Market Neutral Value (ACVKX)	Five years old market-neutral fund with $715 million and a manager who oversees $25 billion. It uses a pair-trading strategy where it would, for example, balance a long position in one carmaker with a short position in another. The goal is 300-400 bps above cash with zero market correlation. With annual returns of 2-4%, they’re right in the range. If you find the strategy attractive, consider acting now. The manager expects to close at below $1 billion.
Columbia Acorn Emerging Markets (CATIX)	This five-year-old fund closed in July 2014 with $575 million in assets and reopened in February 2016 at about one-third of that amount. Over that same period, it lost about 30%. Because Morningstar doesn’t break out small- to mid-cap EM funds (or EM balanced funds) separately, CATIX looks worse than it is. It’s a solid, risk-sensitive fund in a very volatile niche.
Rainier International Discovery (RAIIX)	Nice fund, $215 million, three year record but the load-waived shares are a bit scarce. It’s managed by Henrik Strabo who ran American Century International Discovery for about 20 years, then bounced around a bit: Touchstone, GuideMark, Clough, Rogge, but never for more than a year or two. Odd.
Queens Road Small Cap Value (QRSVX)	Our profile concludes, “Based on his record over the past 13 years, Mr. Scruggs has earned the designations patient, disciplined, successful. If you aspire to the same, the two Queens Road funds should surely be on your due-diligence list.” Yep.
JPMorgan Global Allocation (GAOSX)	$1.4 billion and 5 years old. That seems to be some sort of sweet spot for “under the radar but not too far under.” Morningstar defaults to sharing the institutional class ticker which, in several cases, as here, adds a star or two to the rating.
T. Rowe Price Global Allocation (RPGAX)	We might have misunderestimated RPGAX. When we profiled it in 2013, we concluded “Investors who have traditionally favored a simple 60/40 hybrid approach and long-term investors who are simply baffled by where to move next should look carefully at RPGAX. It doesn’t pretend to be a magic bullet, but it offers incredibly broad asset exposure, a modest degree of opportunism and a fair dose of risk hedging in a single, affordable package. In a fund category marked by high expenses, opaque strategies and untested management teams, it’s apt to stand modestly out.” Oops. I forgot how dismal the average world allocation fund is. RPGAX is substantially stronger than its peers, though it consistently trails other plausible comparisons such as Vanguard STAR (VGSTX) and Leuthold Core (LCORX).
CRA Qualified Investment (CRANX)	$2 billion and nine years old. In late 2013 we noted “Virtue has its price: The Community Reinvestment Act requires banks make capital available to the low- and moderate-income communities in which they operate. That’s entirely admirable but the fund’s investors pay a price: it trails 90% of its intermediate-bond peers.” Through the magic of standard reporting periods (1, 3, 5 years) plus a couple okay years of late, the bad years have vanished from the ratings and its 3- and 5-year returns are 20-40 bps above average. Supporting community redevelopment is a very good thing, just do it with your eyes open.

Bottom line: not all investors have the freedom to consider truly new funds. For many investors, policy or principle requires them to wait three to five years, to hold off until a fund crosses an asset threshold (e.g., $250 million minimum) or demonstrates high liquidity or a capacity-unconstrained strategy (i.e., the ability to quickly absorb and return huge amounts of money without disrupting the market or strategy). The Morningstar Prospects list is a valuable tool for helping such investors find relatively small, relatively new opportunities that might otherwise be lost in the noise. If you’re in that camp, you should try to track down a subscription.

Investors who are unconstrained by such arbitrary rules might find useful leads here three years and a billion dollars sooner.

Bill Gross goes commando again

By David Snowball

Janus has announced the departure of Kumar Palghat from Janus Unconstrained Global Bond Fund (JUCAX). Mr. Palghat, a very accomplished investor with a long record of success at PIMCO and elsewhere, will become the manager of Janus Short Duration Income ETF. Mr. Palghat worked with the fund for just over one year. In his absence, Bill Gross returns to complete control.

Let’s make two observations about JUCAX. One, before Mr. Palghat’s arrival, JUCAX was a ridiculously volatile fund that underperformed its peers.

Two, after Mr. Palghat’s arrival, JUCAX became a very stable fund that substantially outperformed its peers.

Coincidence? Maybe. Then again:

At the same time, the fund’s Board of Trustees broadened Mr. Gross’s toolkit by expanding the fund’s ability to invest in commodity-linked investments. By Bloomberg’s estimation, over half of the money in the $1.5 billion fund comes from Mr. Gross’s own $2 billion fortune.

Mr. Palghat’s new fund will target beating the LIBOR for 200-300 bps. This will put him in direct competition with PIMCO Enhanced Short Maturity Active ETF (MINT), the largest of the actively-managed ETFs. He’ll be joined in the venture by former colleagues at Kapstream Capital, which he founded after leaving PIMCO in 2006 and which Janus bought in 2015.

As the world reaches a 5,000 year low in global interest rates, value in the bond world continues to deteriorate. Today, more than a third of global government bonds trade at negative yields and almost two thirds yield less than 1%. This month, German 10-year government bonds joined Switzerland and Japan in trading at negative yields, guaranteeing investors 10 years of losses! Kapstream, “I wouldn’t buy a bond with your money,” May 2016

Third Avenue seeks a buyer

By David Snowball

The disaster of Third Avenue Focused Credit (TFCVX) rolls on. For those not following December’s drama, TFCVX offered the impossible: it would invest in illiquid securities (that is, stuff that couldn’t be sold at the drop of a hat) but provide investors with daily liquidity (that is, act as if portions of the portfolio could be sold at the drop of a hat). That worked fine as long as the market was rising and no one actually wanted their money back, but when the tide began to go out and investors wanted their money, the poop hit the propeller.

Third Avenue couldn’t raise the cash to meet investor withdrawal demands. Instead, they froze withdrawals from the fund (an unprecedented development) and had their irascible president David Barse escorted from the building by security. Since then, they’ve been trying to sell off the portfolio piecemeal, passing along dribs and drabs to shareholders as funds become available. The frozen shareholders have so far received two distributions, $0.59/ share on December 16 and $0.54/share on June 14, 2016. That’s $1.13/share against a last pre-freeze NAV of $6.48.

Third Avenue is now looking to off-load the fund on someone else, either through outright sale or through some sort of co-management agreement (“Third Avenue weights sale of high-yield fund,” Wall Street Journal, 07/28/2016). That report immediately raises two questions:

Who would want it? And,
What would they be buying?

Third Avenue is paying the investment bank Houlihan Lokey Inc.to find an answer to the first question. The Journal’s two speculations are distressed securities investors or firms “who want to get into the mutual-fund business” (though that seems a bit like trying to sell the Titanic to firms “who want to get into the shipping business”).

The nominal answer to the second question is a fund “which had assets of $592 million.” Sadly, that answer is arrant nonsense. A security is worth precisely what a buyer will pay for it and the evidence at hand is that Third Avenue can’t find anyone to pay anything like that amount. If they could, they wouldn’t be trying to sell the fund, they’d simply sell the securities in the fund.

So where does the $592M come from? The explanation comes in Third Avenue’s latest shareholder report. They dutifully report that the fund has “Total Investments #” of $585,734,004. At the bottom of the table, the hashtag gets explained: “# Total cost.” Translation: the fund is holding pieces of paper for which they paid $585 million.

Morningstar offers up one silver lining. Their estimate of shareholders’ Potential Cap Gains Exposure is -201.68. Translation: for $1 you have invested, you might reap $2 in tax losses.

Have We Been Here Before?

By Edward A. Studzinski

“The past is never dead. It’s not even past.”

William Faulkner

I recently had coffee with one of my former colleagues in the investment management world. He asked me if our readers understood that, in the world of mutual fund managements, it was all about assets under management and profitability to the various stakeholders in the business. Thoughts about the returns for the investor were generally secondary, or put differently, whether the investors actually got any yachts (or vacations in the Caribbean or second homes on Hilton Head Island) did not matter. Having recently reviewed some posts on our Bulletin Board, I told him that no, many of our readers were still operating under the belief that there was, somewhere in that room full of manure, a pony.

Our desire for hope and change (at least in terms of investment returns) often leads us to ignore the evidence of simple mathematics working against us. I have been as guilty of this as anyone. How else to explain a continued investment in the Sequoia Fund which, based on Morningstar’s reported numbers as of 7/29/2016, gave me a 744 basis point annualized return for five years while charging me 100 basis points a year as expenses. So the expense ratio as a percentage of returns was 13.4%.

Had I been as smart as I thought I was, I would have listened to those who suggested putting money into the Vanguard Dividend Growth Fund,. For a similar five-year period charged 33 basis points a year in expenses and had an annualized return of 1332 basis points. This translates to expenses as a percentage of returns per year on the order of 2.5%.

The numbers become more instructive when you look at a category where active management actually should add value, given market inefficiencies. Namely, that is the area of global funds.

Let’s look at six global funds with those five year records through 7/29/2016:

	expenses	annualized returns	exp/annualized returns
Artisan Global Value	128 bp	1031 bp	12.4%
Dodge & Cox Global	63 bp	814 bp	7.7%
Oakmark Global Select	113 bp	899 bp	12.6%
Polaris Global Value	99 bp	990 bp	10.0%
T Rowe Price Global	89 bp	981 bp	9.1%
Vanguard Global Equity	57 bp	784 bp	7.3%

Some comments are appropriate. By way of disclosure, my wife has had an IRA account with Polaris for more than ten years. That is a function of a portfolio that does not look like other portfolios, with extremely low turnover, and a manager in Bernie Horn who learned his craft while in the same office space as the legendary Hakan Castegren (Harbor International) when Castegren had his office in Boston before relocating to Bermuda. Dodge & Cox is extremely reasonable in terms of fees and returns. It should do better, as it has a strong research department whose analysts do real independent research. If the organization has a flaw, it is that they let their funds get too large before closing them, and end up diluting their investor returns (you either buy more of the same stock at less undervalued prices or you expand the portfolio with ideas that are increasingly not the best ideas). Vanguard’s Global Equity Fund is the sub-par performer with lowest expenses but the least attractive performance. That is a function of Vanguard’s tendency to shoot itself in the foot.

When Vanguard Global was launched, it had one fund management firm – Marathon out of London. The performance was superb, as one might expect, since Marathon is one of the best global and international managers out there (and I say that because I sit on an endowment investment committee that has them managing an international account, so I see their long-term returns) When assets ballooned, Vanguard closed Global Equity. It subsequently reopened it, but with three management firms, diluting both accountability and performance. While Vanguard seems to believe its own pr about multi-manager teams on its active-managed funds, benefits seem to accrue more to growth in assets under management than in investor returns. We will have an opportunity to see how this might have played out. Harbor has retained Marathon to be sole manager of a new international fund, the Harbor Diversified International All-Cap Fund, whose institutional shares have an 85 bp expense ratio (after reimbursements).

I suggest investors think about what is important to them. I agree with David that global funds are not favored by investment consultants and asset allocators (you are cutting into the possible number of recommendations and potential fees). For many investors, all-in, they end up being a better choice than having multiple international and domestic funds. Alternatively, they can prove to be as much if not more expensive than having a domestic fund and an international fund in its place. Global would seem to be one of those areas where the higher fees of active management over indexation can be justified.

But you have to know what you are getting. If 20 or 30 bp a year are being skimmed off the top by a parent for its distribution platform, well …… And if the lead manager is taking 100 days off a year, spending his or her time on a not-for-profit board, or refuses to do any travel but for marketing purposes, then you may be better served elsewhere.

What Goes On In Las Vegas, Stays In Las Vegas

One of the reasons I have showed a bias towards passive management in recent years, aside from the lower fees impact on compounding of investment returns, has been the difficulty of knowing where the value-added came or comes from in active management. Is it the portfolio manager(s)or the investment analysts or both?. Of the many funds his name was on at PIMCO as portfolio manager, what was Bill Gross really doing in each of them on a daily basis that contributed to the returns? When is a portfolio manager named on a fund just as window dressing to make the trustees think there is succession planning and sustainability? I am thinking of another situation where a young, extraordinarily articulate analyst allegedly convinced his colleagues that the Affordable Care Act was going to be a disaster, the extent of which was unknowable, for the broad health care industry. As a result of his arguments, the firm apparently pared its exposures substantially in pharmaceuticals and medical technology, missing one of the great merger and acquisition booms of the last five years.

The point here is that internally and externally, we do not live in a static world. Peter Lynch, for the point in time he was running his fund, achieved extraordinary returns for his investors. If Peter Lynch returned to run a 1940’s Act mutual fund today, should we expect that he would be able to achieve the same kind of performance? Probably that would not be the case. For one, the investable universe that he had then, and the one he would find himself with today are very different animals. Two, the competitors he would have and the resources available to them would also be very different. Three, the time horizons and patience of the retail investor is very different than it was back then. In many respects, his investors were very loyal (helped by a 3% load), so his capital was if not permanent, pretty close to it. Today, Buffett has permanent capital (and a competitive advantage) but most 1940’s Act mutual funds definitively do not.

This question fascinates me – would they come back today? If so, why? If not, why not? Over the next several months, I am going to endeavor to track down some former well-known fund managers, and ask them why or if, when presented with an opportunity, they have elected NOT to return to this side of the business to run a fund again.

Outside the Box

This weekend in Barron’s on page 30, James Grant of Grant’s Interest Rate Observer is interviewed. I have been a reader of Grant’s for more than twenty-five years. And when wherever I have been working did not subscribe, I either talked them into subscribing or purchased my own subscription out of my own pocket. While I do not agree with everything said or the views of everyone interviewed, it is a publication that does not reflect consensus views or thinking. And I should say, given my own pessimistic views of the world, humanity, and motivation, Jim Grant makes me look a raving optimist. I commend the interview to you, not necessarily for what it says but for raising questions which are worthy of discussion. They are questions which you certainly won’t hear being talked about by either party in the current political climate. Particularly chilling is his reference to the Ph.D standard, where former tenured economics faculty members try things out on the real economy because they were good theoretical blackboard ideas. Apropos of which, we have “Helicopter” Ben Bernanke, jetting and boating his consulting practice around the world now that the Federal Reserve is in the hands of Janet Yellin. After reading the interview, one is left wondering, to paraphrase Churchill, whether we are at “the end of the beginning or the beginning of the end.” In any event, read the article and keep in mind the dangers inherent in making leveraged investments that try to create something out of nothing.

Lingering Questions

Last month, I raised the question of how much it costs a fund company to be on a no-transaction fee platform with a discount broker. The old answer is 40 basis points. And if you think it is the fund investment management companies that are solely bearing that cost, I have some beachfront property in the hurricane zone in Florida for you, complete with alligators. The new answer is 10 basis points, but then a lot of other costs and expenses become non-transparent, buried in custodial and transaction fees of varying amounts. If you want a real eye-opener, go sometime to the Prospectus or Statement of Additional Information, where fund ownership of large owners is disclosed. For many funds you will see that it is through Schwab, Fidelity, TD Ameritrade, etc., that 80 to 90 per cent of the ownership of a fund is held. Rarely does direct ownership of a fund through the fund company count for a majority of its ownership positions. Hmmmm. What happens when the economics of distribution change? That is a little bit like the question as to what the value of an ounce of gold becomes if rather than as a passive store of value, it starts being used as a medium of exchange to settle transactions.

By:

Edward Studzinski

Fund Facts

By Charles Boccadoro

At the recent Chicago conference, Morningstar’s Gregg Warren stated that asset management remains an attractive business because of steady fees, high operating margins, low start-up costs, and because “investment inertia is its best friend.”

Through June there were 281 funds with assets over $10B, including 8 that have trailed their peers in absolute return by at least 1.7% per year during the current market cycle since November 2007, or about 14% or more in underperformance. (See table below, click on image to enlarge.) Most are bottom quintile performers, trail nearly 90% of their peers, and four are Three Alarm funds. They include Templeton Growth (TEPLX), Thornburg Investment Income Builder (TIBAX), Davis New York Venture (NYVTX), Fidelity Magellan (FMAGX), and American Funds’ Bond Fund of America (ABNDX) and Intermediate Bond Fund of America (AIBAX). The folks invested in these funds certainly can’t be accused of chasing returns.
Speaking of inertia, for the June commentary I wrote of a “Certified Financial Planner” who placed a family friend in 34 American Funds across five tax deferred accounts. My friend has since decided to transfer his accounts to Vanguard. The actual transfer remains excruciatingly long, say to say. Although Vanguard makes it easy enough to start the process on-line, actual transfers between fund houses can take weeks and involve printed forms, snail mail, and even paper checks. (Much longer than my experience when transferring from say Schwab to Fidelity, which was just a day or two.)

In my friend’s case, the transfers can only be done “in-kind,” so unless the 34 funds are liquidated at American Funds (transferred actually to an AF money market fund), Vanguard will charge $35 per fund or $1,200 to sell the 34 funds prior to reinvesting in Vanguard funds. Good grief! On the other hand, liquidating before transfer means being out of the market for some uncertain period of time, which comes with its own attendant risk. In any case, the word “entrenched” comes to mind.

Speaking of AUM, what is the top fund by AUM in each category? We’ve recently added this screen and others to the MultiSearch tool on the Premium site. Below are results month ending June, for large-, mid-, multi-, and small-cap US equity funds (click image to enlarge). Performance metrics are for current market cycle.

Below are top 10 funds by AUM of all 9,371 rated funds through June (click image to enlarge). Vanguard holds 5 stops, American Funds holds 3.

Meb Faber has now posted 9 podcasts. I’ve enjoyed the first three so far, especially the one with Patrick O’Shaughnessy. Wes Gray is next up. One can learn a lot in short period listening in on these conversations.

In one episode, Meb speaks of the 521 Rule. He explains, “Stocks around the world average 5% a year, bonds around 2% a year. I’m averaging up and T-Bills about 1%.” He’s talking real returns after inflation and notes US equities have done a little better.

The numbers remind me of excess returns, which is the difference between total return and risk-free rate (90-day TBill). In the piece Timing Method Performance Over Ten Decades, we find US equities, US bonds, and US TBill dating back to 1926 have returned 10, 6, and 4% annually, round numbers, respectively. So, annualized percent excess return (APER) equates to 6% for stocks and 2% for bonds.

Zero interest rate monetary policy has resulted in APER and annualized percent return (APR) being nearly identical the past several years. Nonetheless, we’ve added APER to the MultiSearch screening metrics … rates have to start going up, right? (Eric Cinnamond suggests not. In his new blog Absolute Return Investing, he wonders if nomalization is impossible given current level of global debt.)

Below please find a sample output (click image to enlarge) showing several reference indices and stalwart funds, each since inception, which varies from about 30 years to almost 60 years (the extent of our Lipper database). For the past 30-40 years, bonds have delivered excess returns better than the much longer-term norms, while international stocks have remained an enduring disappointment.

Finally, to help address Where In The World Is Your Fund Adviser?, we’ve added screens for fund company Management Location (city and state). It turns out there are fund companies in more than 300 cities across 46 states … who would have guessed? They include:

First Security Fund Advisers Inc of Little Rock, Arkansas,
Viking Fund Management LLC of Minot, North Dakota,
Thornburg Investment Management Inc of Santa Fe, New Mexico,
Reynolds Capital Management of Las Vegas, Neveda, and
WesBanco Bank Inc of Wheeling, West Virgina.

States not represented? Alaska, Idaho, Mississippi, and Wyoming.

When to be Scared of the Stock Market

By Samuel Lee

Sometimes it is sensible to be scared of being in the stock market. Those times are rare. I want to describe them from the perspective of a value investor, who only cares about the future cash flows of his investments; I am not offering a method of short-term market timing.

The key fact to grasp is just how resilient corporate earnings are in a big, developed country with strong institutions. The chart below shows the per-share inflation-adjusted earnings of the S&P 500 as well as its 10-year moving average. Though there are violent swings in the per-share earnings series, the moving average shows that the normalized earnings power of U.S. publicly traded corporations grew right through them, rarely reversing for long. Over this period, the U.S. experienced the Great Depression, two world wars, the Cold War, massive corporate tax hikes, oil crises, stagflation, corrupt and incompetent leaders, the 9/11 attacks, countless scandals in leading corporations, the financial crisis and so on.

To the long-term value investor, there are really only a handful of circumstances that warrant a retreat from the stock market:

Prices are so high that the return on stocks over the long run cannot plausibly be much higher than that of other assets such as bonds. During the dot-com bubble, the cyclically-adjusted earnings yield of the market fell to a little over 2% while 30-year Treasury Inflation-Protected Securities yielded over 4%. For a value-oriented investor to have justified owning the stock market as a whole, he had to assume—dream of, really—fantastically high earnings growth.

The future earnings power of the market is severely impaired or destroyed and this fact is not reflected in prices. This scenario is apocalyptic and has never occurred in the U.S. For a large, developed country’s corporate sector to be permanently maimed, it would either have to be bombed to rubble as Germany and Japan were during World War II or property rights would have to disappear as in Russia during the Russian Revolution. Severe recessions do not noticeably dent the stock market’s future earnings power. A rule of thumb in determining whether a market’s earnings power is at risk of permanent impairment is if significant numbers of citizens are fleeing or want to flee the country for their personal safety.

Discount rates will rise a lot and stay high for a long time. In other words, investors for whatever reason will demand a much lower valuation in stocks, requiring current prices to fall a lot. During the 1970s and early 1980s, rising inflation and nominal interest rates caused investors to demand absurdly low valuations to own stocks. As inflation and interest rates ratcheted up, stock valuations kept ratcheting down. (With the benefit of hindsight, many analysts think that investors were suffering from the money illusion, using the era’s high nominal rates to discount real earnings.) This is a blessing for some. Current dollars invested in the market will take a big, permanent hit, but any future dollars invested in the market will earn a higher rate of return. A secular rise in discount rates is a massive transfer of wealth from the old, who have much of their net worth in financial assets, to the young, who have decades of earnings ahead of them that they can plow into cheap financial assets.

How does this apply to the current market outlook? Valuations are high, but not implausibly high given real yields on bonds. The U.S. stock market’s cyclically-adjusted earnings yield is around 4% while the 30-year TIPS yields less than 1%. Moreover, today’s problems are trivial compared to the existential threats that have loomed in the past. Even if the Eurozone and China blew up at the same time and threw the world into another depression, the long-run underlying earnings power of the rich world’s corporate sector will very likely not be permanently devastated. Valuations would cheapen, for sure, but that would indicate a buying opportunity. (Investors in developing markets, on the other hand, would probably take a permanent hit.)

What concerns me most is that interest rates—real and nominal—are so low everywhere. If the world were to enter an era of rising interest rates as we experienced in the 70s and early 80s, the mighty tailwind that’s boosted valuations over the past 30-plus years would turn into a long-lived headwind. This is a truly frightening scenario that implies years or even decades of puny returns in virtually all financial assets.

Contrast these considerations with media chatter. Everyone talks about and focuses on things that do not truly affect the intrinsic value of the market. The times to be scared are when 1) everyone is euphoric and realistic appraisals of future earnings cannot justify current prices, 2) people are fleeing the country or want to flee the country due to fears over personal safety, or 3) real rates enter a period of secular increases.

Graphic of the Month

By David Snowball

Tailwind? What tailwind?

David Sherman shared this with his investors in his Q2 Shareholder letter.

Graphic from RiverPark-Cohanzick 2Q16 Shareholder Letter. http://www.riverparkfunds.com/downloads/News/RiverPark-Cohanzick%202Q16%20Shareholder%20Letter.pdf

Keeping A Watchful Eye on Your Manager

By Leigh Walzer

It’s summertime. You are reading this from the vacation house. Or perhaps you are at the ballgame like Professor Snowball, rooting for the Quad City River Bandits. There is no event risk on the horizon. You trust your fund managers. The portfolios can stay on autopilot until Labor Day.

As advisors struggle with the new fiduciary rules, they may wonder how frequently manager selection decisions need to be reviewed. We set out to answer the question: What is the likelihood that a portfolio left on autopilot will go bad over time.

We compared the ratings on 7000 mutual funds to see how much the probability metrics changed over time. Trapezoid’s data and models (which can be trialled at www.fundattribution.com) tell us the probability a given fund class will deliver skill over the next 12 months. For most funds, skill is a function of value-added from security or sector selection. Skill takes into account a manager’s returns each period adjusted for factor exposures and other attributes.

If you have crossed off anything mathematical from your summer reading list, you can skip the next few paragraphs. Otherwise, bear with me. Investment professionals might hope that probabilities are fairly stable, because it would imply the manager selection decisions you made years ago are still valid. And you could fulfill your fiduciary duty while working on your tan.

Actually, the probability for a typical equity or liquid alts fund today equals the probability from 9 months ago plus or minus a standard deviation of .14. (This study is based on return data through April 2016. There are a few things going on with the data and the natural rate may a bit lower.) The median fund on the Trapezoid Honor Roll has a probability of .68. In nine months’ time, roughly 9% of these funds will see the probability deteriorate to below 50%. At that level, we adjudge (taking into account the availability of lower-cost passive alternatives) you are better off dumping the fund.

If you own a fund which just barely qualified for the Honor Roll 9 months ago with a probability rating of .6, the odds we will want to dump it is 23%. On an annualized basis, you may need to change out 25% of your managers.

Confidence in portfolio managers is hard to earn and easy to lose.

Some professional managers review the managers more frequently for the riskiest asset classes. But the standard deviation is just as high for long only equities as for liquid alts, suggesting you need to be just as vigilant reviewing equity managers.

Funds Upgraded or Downgraded

We present here a subset of notable funds whose outlook, as measured by FundAttribution, has changed materially over the past 9 months. We include here the institutional ticker. Our confidence in the worthiness of a fund can vary greatly by share class: very few funds in our experience are good enough to justify paying a large upfront load. However, when we re-rate a fund, the metrics for all fund classes tend to rise. The FundAttribution.com site indicates whether a particular class is good enough to make the Trapezoid Honor Roll.

Upgrades:

Category	Fund		AUM ($bn)
All-Cap Growth	MFS Growth Fund	MFEIX	12.7
Large Blend	Columbia Contrarian Core Fund	CCCIX	9.8
Large Blend	Fidelity All-Sector Equity Fund	FSAEX	9.6
Large Value	Federated Strategic Value Dividend Fund	SVAIX	14.7
Large Value	Invesco Diversified Dividend Fund	LCEIX	17.7
Large Value	JPMorgan Value Advantage Fund	JVAIX	10.3
Large Value	Nuance Concentrated Value Fund	NCVLX	0.5
Mid-Cap Growth	Janus Enterprise Fund	JMGRX	8.3
Mid-Cap Growth	Pioneer Growth Opportunities Fund	PSMKX	1.3
Mid-Cap Value	American Century Mid-Cap Value Fund	AVUAX	8.0
Mid-Cap Value	T. Rowe Price Mid-Cap Value Fund	TRMIX	11.8
Foreign All-Cap Value	Franklin Mutual Global Discovery Fund	FMDRX	21.7
Foreign Large Blend	American Beacon International Equity Fund	AAIEX	2.7
Foreign Large Blend	First Eagle Overseas Fund	SGOIX	15.0

The Fidelity All-Sector Equity Fund (FSAEX) and T. Rowe Price Mid-Cap Value Fund (TRMIX) funds are closed to new investors and some other funds/strategies have experienced AUM growth.

Some of these funds have been upgraded by Morningstar in recent months. Funds which have risen in our estimation but have not been upgraded by Morningstar include JPMorgan Value Advantage (JVAIX), Pioneer Growth Opportunities Fund (PSMKX), and Franklin Mutual Global Discovery Fund (FMDRX).

Funds whose metrics have been downgraded included:

Category	Fund		AUM ($bn)
Large Growth	Sequoia Fund	SEQUX	4.9
Large Growth	Touchstone Sands Capital Select Growth Fund	CFSIX	3.4
Foreign Large Blend	Dodge & Cox International Stock Fund	DODFX	51.6
Foreign Large Blend	Templeton World Fund	FTWRX	4.4
Foreign SMID Blend	GMO Foreign Small Companies Fund	GMFSX	1.0
Pacific Region	Matthews Asian Growth and Income Fund	MICSX	3.1
Eq/Bond Global	GMO Benchmark-Free Allocation Fund	GBMFX	15.6
Eq/Bond Global	GMO Global Asset Allocation Fund	GMWAX	2.7
Eq/Bond Global	Wells Fargo Absolute Return Fund	WABIX	7.4
Eq/Bond Global	Wells Fargo Asset Allocation Fund	EAAIX	4.0
Dynamic Alloc	PIMCO All Asset All Authority Fund	PAUIX	8.4
Dynamic Alloc	PIMCO All Asset Fund	PAAIX	19.2

Confidence in portfolio managers is hard to earn and easy to lose. The woes of Sequoia Fund (SEQUX) have been documented at length by my colleagues over the past few months. Sequoia and Touchstone Sands Capital Select Growth Fund (CFSIX) both had steep falls from grace. Both Dodge & Cox International Stock Fund (DODFX) and Templeton World Fund (FTWRX) fell off the honor roll. The three GMO funds on this list the and two Wells Fargo funds are managed by the same personnel. GMO’s poor performance has shaken management’s faith in its managers so much that it is in the process of replacing the stock pickers with a quantitative approach. Quantitative investing seems to be coming more in vogue, but it was not the salve at two PIMCO funds managed by Rob Arnott

I was a bit surprised to find Matthews Asian Growth and Income Fund (MICSX) on the downgrade list. Several Matthews funds including Matthews Pacific Tiger Fund (MIPTX) are fixtures on our Honor Roll. Matthews manages several funds with similar names which take rather different investment approaches to the Pacific Region. We observe MICTX missed out on on India in recent years and carried too much exposure to Industrials.

Our conclusion:

Good managers go through bad patches or long stretches with merely average performance. Even after a careful manager selection process, the data next year won’t always validate the original decision. Fiduciaries should review all managers annually and be prepared to change up to one quarter of mandates. Generally, you should look for returns which justify expenses, taking into account risk, factor exposures, consistency, and fluctuations in expense ratios. FundAttribution monitors all funds, making it easy to identify whether other active funds in the same space who may have earned their laurels since your last review.

Ariel Global (AGLOX), August 2016

By David Snowball

Objective and strategy

Ariel Global Fund’s fundamental objective is long-term capital appreciation. The manager pursues an all-cap global portfolio. The fund is, in general, currency hedged so that the returns you see are driven by stock selection rather than currency fluctuation. The manager pursues a “bottom up” discipline which starts by weeding out as much trash as humanly possible before proceeding to a meticulous investment in both the fundamentals of the remaining businesses and their intrinsic value. The fund is diversified and will generally hold 50-150 positions. As of July 2016, there are 84.

Adviser

Ariel Investments LLC of Chicago. Founded in 1983, Ariel manages $10 billion in assets spread between nine separate account strategies and six mutual funds. Ariel provides a great model of a socially-responsible management team: the firm helps run a Chicago public charter school, is deeply involved in the community, has an intriguing and diverse Board of Trustees, is employee-owned, and its managers are heavily invested in their own funds. One gets a clear sense that these folks aren’t going to play fast and loose either with your money or with the rules.

Manager

Rupal Bhansali. Ms. Bhansali joined Ariel in 2011 and has served as portfolio manager for the International and Global Funds since their inception in 2011. She and her team are based in New York City which substantially eases the burden of meeting representatives of the non-U.S. firms in which they might invest. She has more than 20 years of industry experience, most recently spending 10 years at MacKay Shields as Head of International Equities, managing MainStay International (MSEAX). Before that, she was a portfolio manager and co-head of international equities at Oppenheimer Capital.

Strategy capacity and closure

Vast. The combined global and international strategies hold about $3.5 billion now but could accommodate $50 billion.

Management’s stake in the fund

A lot more than is obvious at first glance. Ms. Bhansali’s reported investment in the fund is between $50,000 – $100,000 as of September 30, 2015. She has two layers of additional investment. First, Ariel is owned by its employees and directors so when she joined the firm, she devoted a fair amount of her wealth to investing in it. Second, her portfolios were originally marketed as separately-managed accounts; she made a substantial investment in such an account to visibly align herself with her investors. As a result, the reported investment in the fund is a fraction of her total financial commitment.

I am a bit perplexed that Ariel president John Rogers hasn’t invested in the fund, though he does have a noticeable investment in its sibling, Ariel International (AINTX). Six of Ariel’s seven independent trustees have chosen to invest in the fund, as have four of her six fellow managers.

Opening date

December 30, 2011.

Minimum investment

$1,000 for Investor shares, $1 million for Institutional (AGLYX) ones.

Expense ratio

1.25%, after waivers, for Investor shares on assets of $88 million, as of July 29, 2016. The Institutional shares charge 1.0%.

Comments

I have twice had the opportunity to speak with Ms. Bhansali and have come away impressed from each encounter. She’s had a long career in international and global investing. She’s very smart and articulate; she really gives the impression of thinking about questions rather than rattling off talking points. She’s made a series of principled and thoughtful career moves, and she’s served her investors well. I hope you have the opportunity to engage with her as well.

Three things worth knowing:

She and her team think of themselves as business analysts, not financial analysts. There are a lot of businesses out there which are poorly run, vulnerable to predation or in a dying industry. She wants no part of any of them. “When we look at these fundamental business risks, we eliminate 60% of all firms. Those are stocks that we would not own, ever, regardless of price.” To be clear: they are sensitive to price and valuation, but only if the underlying business is sound. Of the sound businesses, about 50% are fully valued. They focus their 360-degree analysis on the remaining 20%.
She and her team are very risk conscious. “We start with the question, ‘what can go wrong? How bad could it get?’ and if we don’t like the answer, we walk away. No amount of theoretical upside is worth some of these risks.”
She and her team build the portfolio stock-by-stock. They’re not benchmarking themselves against an index or peer group; the culture at Ariel favors independent thinking even when it means being out of step. Similarly, they don’t make thematic bets. They allow ideas to compete for space in the portfolio. The more misunderstood a firm is, the more it’s likely mispriced. An example she cites frequently is the choice between Microsoft (which she does own) and Apple (which she doesn’t). Everyone knows that these are two tech giants and everyone knows that tech companies post flashy growth numbers, everyone knows that Microsoft’s best days are behind it. In consequence, everyone bought Apple. As it turns out, “everyone” was wrong. Over the past five years, an investment in Microsoft – a steady cash machine with predictable, recurrent cash flows – was far more profitable than an investment in Apple. “Everyone is ‘contrarian’ but it’s not enough to be contrarian. You must be contrary and correct. Very few are.” The most mispriced firms earn the largest spots in the portfolio. As of August 2016, Microsoft is the fund’s largest holding.

We should note, finally, that the fund’s performance is better than it looks. Both of her funds lagged their peers during their first two quarters of operation (Q1 and Q2, 2012). They have substantially outperformed since then. Ms. Bhansali identifies four factors behind the lag:

The fund launched one day too late. A fund’s first NAV is published at the end of its first day. The markets rose by 200 bps that day but the fund recorded zero change.
The fund was still deploying cash during a very buoyant quarter. Q1 saw the average fully-invested global fund rise by 12%.
The fund was contrarian on the emerging markets, which everybody “had to” own. The EMs rose 14% in that quarter. (Now that everyone hates the emerging markets, the fund is overweight in them.)
Five stocks in the portfolio had unrelated profit warnings in Q2, each got hammered. After reassessment, they liquidated two of the five positions (both of which continued falling) and added to the other three, all of which have been strong performers since then. Having so many stocks pop up with warnings in such a short period was, she reports, “an aberration.”

Bottom Line

Ariel International and Global follow the same discipline. Purists might prefer to look more closely at the larger, five-star International (AINTX) fund. Both because it’s smaller and it affords its manager greater flexibility, we chose to profile Global. In either case, patient, risk-sensitive investors interested in expanding (or upgrading) their international exposure should add the funds to their due-diligence list.

Fund website

Ariel Global.

Catalyst/MAP Global Balanced (TRXAX, TRXIX), August 2016

By David Snowball

At the time of publication, this fund was named Catalyst/MAP Global Total Return Income.

Objective and strategy

The manager attempts to preserve capital while generating a combination of current income and moderate long-term capital gains. The portfolio has four sleeves:

40-65 global equity positions constituting 30-70% of the portfolio depending on market conditions. Over the past five years, the range has been 54-62%.
Income-generating covered calls which might be sold on 0-30% of the portfolio. Of late option premiums have not justified writing.
Short/intermediate-term bonds, generally rated B+ or better and generally with an average maturity of approximately a year.
Cash, which has traditionally been 5-15% of the portfolio.

The portfolio is unconstrained by geography, credit quality or market cap. The manager is risk conscious, looking for securities that combine undervaluation with a definable catalyst which will lead the market to recognize its intrinsic value.

Adviser

Catalyst Capital Advisors LLC. Founded in 2006, Catalyst specializes in bringing alternative managers, folks with distinctive strategies which focus on risk and volatility management, to retail investors and advisors. Catalyst advised one fund in 2006 and 27 in 2015. It works with ten investment management firms and has more than $2.5 billion in assets under management.

Manager

Michael S. Dzialo, Peter J. Swan and Karen M. Culver. Mr. Dzialo is the founder and president of Managed Asset Portfolios, LLC (MAP). Mr. Swan and Ms. Culver are portfolio managers at MAP. The trio has worked together for nearly 20 years and average nearly 27 years of industry experience. They currently manage over $450 million in assets in two mutual funds and over a thousand separate accounts. Their work is supported by two research analysts.

Strategy capacity and closure

Mr. Dzialo puts the firm-wide capacity at between $3-4 billion with current assets under half a billion. He’s committed to closing the fund at any point that asset growth, either the total level of assets or the rate of inflow, impedes their ability to execute the strategy.

Management’s stake in the fund

The managers are lightly-invested in their two funds. While that’s not ideal, it is understandable. They presented these strategies in separately-managed accounts a decade before the funds launched. As a result, their investment in the strategy appears primarily through such accounts.

Opening date

July 29, 2011

Minimum investment

$2,500 for either the A or the institutional share class, reduced to $100 for accounts established with an automatic investing plan.

Expense ratio

1.23% after waivers on “A” class shares, 0.98% after waivers on “I” class shares. All on assets of $15 million, as of July 2023. “A” shares also carry a 5.75% sales load. Institutional shares, of course, do not.

Comments

Some firms are all about flash and headlines. Other firms are all about carefully, repeatedly executing their strategies. MAP appears to represent the latter group.

Since 1991, Mr. Dzialo and team have offered three strategies: U.S. equity, global equity and global balanced. The mantra behind all of those strategies is the same: the process must be transparent, disciplined and repeatable.

Portfolio construction begins by winnowing down the 15,000 securities available to the 40-65 in the portfolio. They run quantitative screens to immediately eliminate overvalued securities. That drops them to about 5000. They then target securities that will benefit from one of a handful of global themes they’ve identified; for example, they’ve been convinced since 2007 that excessive public and private debt will constrain growth. That drops them to about 1000. They next look at business quality (down to 200) and then for identifiable catalysts which will unlock the value in these well-run, well-positioned, undervalued securities. That leaves them with a portfolio of 40-65 names.

That element of the portfolio is complemented by short-term bonds, selective use of covered calls and cash. As with stocks, they tend to look for misunderstood bond issuers; by way of example, while JC Penney’s intermediate term bonds might reasonably be rated as “junk,” they have sufficient capital and cash flow to cover their short-term bonds. The fact that Penney is “a junk bond issuer” can then lead to mispricing of their short-term debt. In periods of high volatility, the managers can sell covered calls on up to 30% of the portfolio. That strategy generates consistent income. In steadier markets, the strategy is scarcely worth the effort and its role in the portfolio dwindles. Finally, they hold 5-15% cash depending on whether there’s an attractive opportunity set now or the prospect of a more attractive set in the near future.

On whole, it’s not very complicated which helps explain why it works.

And it does work. The Global TRI fund is one manifestation of MAP’s Balanced strategy. That strategy dates to 2001. Since then it has returned 6% per year compared to 3.9% for its global benchmark. Over time, that compounds to a significant advantage: $1000 invested in the Balanced Composite at inception would be worth $2400 as of June 30, 2016. A similar investment in its passive benchmark would have grown to $1700.

Similarly, $10,000 invested at the inception of the mutual fund would have grown to $13,100 by June 30 while its average world allocation peer would have returned $11,200.

More importantly, the Global TRI strategy has produced higher returns while exposing its investors to less volatility. Over the long term, the MAP Balanced Composite has a beta of just 0.69 compared to its benchmark and captures just 53% of the benchmark’s downside. The Composite has been around for 144 rolling 36-month periods (July 31, 2004 – June 30, 2016). It has never lost money over any 36-month period while its passive benchmark has had 22 negative periods.

Though we don’t have precisely the same calculation for the mutual fund, all of the measures of risk and risk-adjusted returns we track show the Global TRI fund beating its peers.

	APR %/yr	MAXDD %	Recvry mo	STDEV %/yr	DSDEV %/yr	Ulcer Index	BMDEV %/yr	Bear Rating	Sharpe Ratio	Sortino Ratio	Martin Ratio
TRXAX	4.4	-5.5	12	6.9	4.1	1.9	3.4	3	0.63	1.05	2.32
Flexible Portfolio	3.9	-13.3	15	9.3	6.1	4.7	4.8	6	0.43	0.72	1.21

Translation: TRXAX has higher annual returns, a lower maximum drawdown, lower standard deviation, lower bear deviation, smaller Ulcer Index (a measure of the factors in both size and duration of a loss), higher bear market rating, and higher Sharpe, Sortino and Martin ratios. The actual numbers on the no-load TRXIX shares would actually be better because of its lower expense structure. Since those shares only launched in 2014, we chose to give the stats for the oldest share class.

That’s really good.

Bottom Line

MAP has been doing their work, and doing it very well, for 15 years. I’m impressed by their consistent performance and even more impressed by their focus; they’ve added no new managers, branched off into no new strategies, undertaken no splashy asset-gathering gambits. They seem proud to serve their over 500 clients – family offices, institutions, and others, many of whom have been with them for the long haul. It’s a disciplined process rather than a flashy strategy which is, we believe, an enormous strength. Folks interested in maintaining some equity exposure but anxious about the distortions imposed by giddy central bank policies and corporate managers obsessed about the short term, should spend some serious time learning about these folks.

Fund website

Catalyst doesn’t provide pages dedicated to their individual funds. Instead there’s sort of a pick-up spot where you can grab literature on all of the Catalyst products. MAP’s website, while not primarily dedicated to fund investors, is infinitely more interesting. Go there.

Fund Documents

Manager changes, July 2016

By Chip

Wow. Barely three dozen managers were subjected to the walk of shame (or, perhaps, the happy dance out the door) this month. There were two high profile changes.

Rob Taylor is retiring from management of Oakmark Global and Oakmark International, both of which are reopening to new investors. David Herro is being added as co-manager of the former and becomes sole manager of the latter. Since Mr. Herro is already managing $20 billion, the additional assignments either suggest that Oakmark is running out of talent or that Mr. Herro is feeling a bit megalomaniacal.

At we noted above, for reasons unexplained, Kumar Palghat has left Janus Unconstrained Global Bond (JUCAX) after one year.

In iconic changes, as we note below, West Shore is out at West Shore and Burnham is out at Burnham.

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
AZBAX	AllianzGI Small-Cap Blend Fund	John McCraw is no longer listed as a portfolio manager for the fund.	Stephen Lyford joins Kunal Ghosh, Robert Marren and Mark Roemer on the management.	7/16
ELSAX	Altegris Equity Long Short Fund	Convector Capital Management will no longer serve as a subadvisor to the fund, and Emmanuel Ferreira will be removed as a portfolio manager.	Kelly Wiesbrock, Richard Chilton, Eric Bundonis, Edgardo Goldaracena, and Jay Abramson will continue to manage the fund.	7/16
TLSVX	AMG Trilogy International Small Cap Fund	David Runkle is no longer listed as a portfolio manager for the fund.	Gregory Gigliotti, Jessica Reuss and William Sterling will continue to manage the fund.	7/16
EFEAX	Ashmore Emerging Markets Frontier Equity Fund	Alejandro Garza is no longer listed as a portfolio manager for the fund.	Felicia Morrow, Bryan D’Aguiar and Andrew Brudenell will continue to manage the fund.	7/16
ESSAX	Ashmore Emerging Markets Small-Cap Equity Fund	Alejandro Garza is no longer listed as a portfolio manager for the fund.	Felicia Morrow will continue to manage the fund.	7/16
EMEAX	Ashmore Emerging Markets Value Fund	Alejandro Garza is no longer listed as a portfolio manager for the fund.	Felicia Morrow will continue to manage the fund.	7/16
BDERX	Bradesco Latin American Equity Fund	Roberto Sadao, Arai Shinkai and Pedro Angeli Villani are no longer listed as portfolio managers for the fund.	Aline de Souza Cardoso and Natalia Kerkis will be the prinicpal portfolio managers.	7/16
CSIEX	Calvert Equity Portfolio	Richard England will retire on October 31, 2016. Enjoy life, sir!	Joseph Hudepohl, Lance Garrison, Jeffrey Miller and Robert Walton will remain on the management team.	7/16
EVCGX	Eaton Vance Greater China Growth Fund	Stephen Ma is no longer listed as a portfolio manager for the fund.	Christopher Darling joins June Lui, lead portfolio manager, in managing the fund.	7/16
ETHSX	Eaton Vance Worldwide Health Sciences Fund	Sven Borho, Geoffrey Hsu, Richard Klemm, Trevor Polischuk and Samuel Isaly are no longer listed as portfolio managers for the fund.	Jason Kritzer and Samantha Pandolfi will manage the fund.	7/16
FMCDX	Fidelity Advisor Stock Selector Mid Cap Fund	Rayna Lesser	Christopher Lin has replaced her as a co-manager, joining Edward Yoon, Samuel Wald, Pierre Sorel, Douglas Simmons, Gordon Scott, Shadman Riaz and Monty Kori.	7/16
FCVSX	Fidelity Convertible Securities Fund	Thomas Soviero, who is likely being charged with closer attention to his primary fund, Fidelity Leveraged Company Stock	Adam Kramer has replaced him as the portfolio manager	7/16
FSLVX	Fidelity Stock Selector Large Cap Value Fund	No one, but …	John Sheehy joins the management team of John Mirshekari, Katherine Buck, Laurie Bertner, Justin Bennett, Stephen Barwikowski and Matthew Friedman.	7/16
FCARX	Fiera Capital Diversified Alternatives Fund (formerly Rothschild Larch Lane Alternatives Fund)	Rothschild Asset Management Inc. generally and Ki Akrami, Nicolas de Croisset, and Shakil Riaz specifically	As yet unnamed person or persons from Fiera Capital	7/16
FEBAX	First Eagle Global Income Builder Fund	Giorgio Caputo will no longer serve as a portfolio manager for the fund.	Kimball Brooker joins Robert Hordon, Edward Meigs and Sean Slein on the management team.	7/16
FADVX	Frost Value Equity Fund	Michael Brell will no longer serve as a portfolio manager for the fund.	Craig Leighton, Tom Stringfellow and Tom Bergeron will continue to manage the fund.	7/16
GMAMX	Goldman Sachs Multi-Manager Alternatives Fund	Effective August 19, 2016, Jason Gottlieb will no longer serve as a portfolio manager for the fund.	Ryan Roderick, Betsy Gorton and Kent Clark will continue to manage the fund.	7/16
HSFAX	HSBC Frontier Markets Fund	No one, but …	Christopher Turner is joined by Ramzi Sidani in managing the fund.	7/16
GTSAX	Invesco Small Cap Growth Fund	Juliet Ellis will no longer manage the fund, but will remain as Chief Investment Officer overseeing Invesco’s U.S. Growth Equity Group.	Juan Hartsfield will stup up to become lead portfolio manager and Clay Manley will continue on as assistant portfolio manager.	7/16
SIZAX	Invesco Strategic Income Fund	Ivan Bakrac will no longer serve as a portfolio manager for the fund.	Robert Waldner and Ken Hill will continue to manage the fund.	7/16
IUBAX	Invesco Unconstrained Bond Fund	Ivan Bakrac will no longer serve as a portfolio manager for the fund.	Robert Waldner and Ken Hill will continue to manage the fund.	7/16
JUCAX	Janus Global Unconstrained Bond	Kumar Palghat is moving on after one year in the same room with Bill Gross	William Gross will continue to manage the fund on his own.	7/16
JASOX	John Hancock New Opportunities Fund	Juliet Ellis will no longer serve as a portfolio manager of the fund.	Juan Hartsfield will become the fund’s lead portfolio manager. David Paddock, Justin Bennitt, Gregory Manley, Joseph Chi, Jed Fogdall, Henry Gray, Joseph Craigen and Daniel Miller will all continue on the management team.	7/16
JHUAX	John Hancock U.S. Equity	Boston-based subadvisor GMO is out. This happens a lot near the peak of bull markets.	Boston-based subadvisor Wellington Managements is in. That’s generally a very safe choice.	7/16
OAKGX	Oakmark Global	Robert Taylor is retiring on September 30, 2016.	David Herro will join Clyde McGregor as comanager of the fund.	7/16
OAKIX	Oakmark International	Robert Taylor is retiring on September 30, 2016.	David Herro will become the sole manager of the fund.	7/16
JPPAX	Perkins Global Value	Tadd H. Chessen, the second of two co-managers added in 2013. The other 2013 hire left in 2015.	George Maglares joins founding manager Gregory Kolb	7/16
JIFAX	Perkins International Value	Tadd H. Chessen	George Maglares joins founding manager Gregory Kolb	7/16
PMHAX	PIMCO EqS Long/Short Fund	Geoffrey Johnson is no longer listed as a portfolio manager for the fund.	John Devir and Benjamin Strom will now manage the fund.	7/16
PQDAX	PIMCO Global Dividend Fund	Brad Kinkelaar is no longer listed as a portfolio manager for the fund.	Marc Seidner will now be running the fund.	7/16
PVIAX	PIMCO International Dividend Fund	Brad Kinkelaar and Adam Muller are out.	Marc Seidner will now be running the fund.	7/16
PVDAX	PIMCO U.S. Dividend Fund	Brad Kinkelaar and Adam Muller are out.	Marc Seidner will now be running the fund, likely a sign of PIMCO’s ongoing retrenchment of their equities operation.	7/16
LRRAX	QS Strategic Real Return Fund	Y. Wayne Lin is no longer listed as a portfolio manager for the fund.	Fredrick Marki joins S. Kenneth Leach, Paul Wynn, Stephen Lanzendorf, Dennis McNamara, Joseph Giroux, Thomas Picciochi, Ellen Tesler and Adam Petryk in managing the fund.	7/16
RMBHX	RMB Fund, formerly Burnham Fund BURHX	Jon Burnham is out, ending a 41 year run by Burnham pere et fils	Todd Griesbach, president of RMB Capital Management , is in.	6/1
SANAX	Sandalwood Opportunity Fund	Acuity Capital Management will no longer serve as a subadvisor for the fund.	Shelton Capital Management will subadvise the fund. Two portfolio managers, David Harris and John Harnisch, previously with Acuity are now with Shelton and will continue to manage the fund.	7/16
SAFAX	Seeyond Multi-Asset Allocation Fund	Effective immediately, Jonathan Birtwell no longer serves as associate portfolio manager of the fund.	Frédéric Babu, Stéphanie Bigou, Didier Jauneaux, Frank Trividic, Simon Aninat and Yufeng Xie remain as portfolio managers of the fund.	7/16
TVOAX	Touchstone Small Cap Value Fund	Russell Implementation Services subadvised the fund for a short period, while the transition to LMCG Investments, LLC was completed. That transition is now done.	R. Todd Vingers will be the portfolio manager of the fund.	7/16
USEMX	USAA Emerging Markets	Greg Rippel is no longer managing the portion of the Fund subadvised by Brandes	Mauricio Abadia, Senior Analyst at Brandes, is going solo.	7/16
USAAX	USAA Growth Fund	Effective immediately, Eric Strange is no longer a portfolio manager with the fund	Aziz Hamzaogullari, Paul Radomski and Michael Schroer remain with the fund.	7/16
VCVLX	Vanguard Capital Value Fund	Peter Higgins is no longer listed as a portfolio manager for the fund.	David Palmer will continue to manage the fund.	7/16
AWSFX	West Shore Real Return Fund	West Shore will no longer serve as a subadvisor to the fund and Steve Cordasco is no longer listed as a portfolio manager for the fund.	Robert Sullivan, of Satuit CM, joins Michael Shamosh in managing the fund.	7/16

Funds in registration, August 2016

By David Snowball

Newly-proposed funds need to sit quietly for 75 days. During that time the Securities and Exchange Commission staff reviews their prospectuses and has the right to demand changes. If the SEC doesn’t object, the advisor earns the right – but not the obligation, oddly enough – to release the fund to the public. Funds currently in registration are apt to launch at the end of September so that they will be able to report complete results for the fourth quarter of 2016.

Setting aside whacko ideas (The Wearable Technology ETF? Did we learn nothing from the adventures of the 3D Printing ETF? Or the Obesity ETF?), there were 13 new no-load retail funds or active ETFs in registration this month. Two stand out:

Janus Short Duration Income ETF will take on PIMCO Enhanced Short Maturity Active ETF (MINT) as an option for investors who can’t afford to earn zero (or less than zero) on their cash holdings. The new fund benefits from the presence of Nick Maroutsos and Kumar Palghat. Both are former PIMCO managers who co-founded Kapstream Capital, which was purchased by Janus in 2015.

JOHCM International Opportunities Fund combines an absolute value orientation (“we won’t buy things just for the sake of buying things”), a very concentrated portfolio and the skills of a very well-respected British investment house, J O Hambro Capital Management. The expenses are reasonable though the share class structure is a bit opaque; in addition to a high-minimum institutional class, there are two classes with no defined minimum at all. Those appear aimed at giving brokerages the opportunity to set the ground rules for their investors.

And, too, Joel Greenblatt and the Gotham guys are launching four more institutional funds: Gotham Absolute Core, Enhanced Core, Hedged Core and Index Core funds. You’re welcome to read about them if you like.

Active Alts Contrarian ETF (SQZZ)

Active Alts Contrarian ETF (SQZZ) seeks current income and capital appreciation. The plan is to invest in foreign and domestic stocks where the manager expects a “short squeeze” might occur. That is, they’ll look for stocks that lots of people have unjustifiably shorted and try to ride the short-covering rally up. Bon chance! The fund will be managed by Brad Lamensdorf, founder and President of the Active Alts. He’s a hedge fund guy and a newsletter writer. The initial expense ratio hasn’t been released, but the management fee is an unsustainable 1.55%. Given that it’s an active ETF, there’s no minimum investment.

AdvisorShares Focused Equity ETF

AdvisorShares Focused Equity ETF seeks long term capital appreciation. The plan is to buy US-listed stocks using “use a variety of methods.” They expect “low turnover,” which they suggest means “no more than 100% a year.” (Uhhh … the average turnover rate for US large cap funds is 65% while folks like LEXCX (0%) and DGAGX (6%) set the standard for what “low turnover” means.) The fund will be managed by Edward Elfenbein of AdvisorShares. Mr. Elfenbein has been following this discipline since 2006 and publishes it annually as the Crossing Wall Street “Buy List.”The initial expense ratio is 0.75%, after waivers. Given that it’s an active ETF, there’s no minimum investment.

Centre Global Infrastructure Fund

Centre Global Infrastructure Fund seeks long-term growth of capital. The plan is to invest in the stock of firms that derive the majority of their earnings from infrastructure, a term that they define very, very broadly: railroads, toll roads, bridges, tunnels, airports, parking facilities, seaports, electric transmission and distribution lines, power generation facilities, oil, gas and water distribution facilities, communications networks and satellites, sewage treatment plants, critical internet networks, hospitals, courts, schools, correctional facilities and subsidized housing). The fund will be managed by Xavier Smith. The initial expense ratio is 1.40% for Investor shares. The minimum initial investment is $5,000.

FundX Sustainable Investor

FundX Sustainable Investor will seek long-term capital appreciation without regard to income. The plan is to be a fund of SRI funds and then to apply the same momentum-based Upgrader strategy (buy funds will strong recent performance, sell the others). The fund will be managed by a team from FundX Investment Group. The initial expense ratio is 1.91% including a 1.0% management fee. The minimum initial investment is $1,000.

Green Century MSCI International Index Fund

Green Century MSCI International Index Fund seeks to match the long-term total return of an ESG-screened international index. The plan is to track the MSCI World ex USA SRI ex Fossil Fuels Index; at base, it’s a custom index that starts with an international SRI index then removes anyone who smells of hydrocarbons. The fund will be managed by Steven Santiccioli and Michael O’Connor of Northern Trust. The initial expense ratio is 1.28% for Investor shares. The minimum initial investment is $2500, reduced to $1000 for various tax-advantaged accounts or those set up with an automatic investing plan.

Janus Short Duration Income ETF

Janus Short Duration Income ETF seeks a steady income stream with capital preservation across various market cycles. The plan is to invest in a global portfolio of short duration securities and cash, so that the portfolio’s overall duration will sit in the 0-2 year range. The fund will be managed by Nick Maroutsos and Kumar Palghat. Both are former PIMCO managers who co-founded Kapstream Capital, which was purchased by Janus in 2015. Mr. Palghat has spent the last year co-managed Janus Unconstrained Global Bond with The Former Bond King. The initial expense ratio has not been disclosed. Given that it’s an active ETF, there’s no minimum investment.

JOHCM International Opportunities Fund

JOHCM International Opportunities Fund seeks long-term total return by investing in a concentrated portfolio of international equity securities. The plan is to follow an absolute value discipline in managing the portfolio. Here’s their discussion: “A key risk to any investor is permanent impairment of capital. This is usually a result of holding overvalued assets. Therefore, the Adviser maintains a strict valuation discipline to make sure assets are only bought when they are attractively valued, in absolute terms, with reference to their intrinsic value. At the same time, overvalued shares in the portfolio are identified and sold. This requires an ability to sell to cash, without necessarily having anything to buy with the proceeds.” The fund will be managed by Ben Leyland and Robert Lancastle of J O Hambro Capital Management. There are three share classes with expenses ranging from 0.89% – 1.14%. The minimum initial investment is $1 million for institutional shares, but it looks like Class II shares will be available through brokerages with minimums set by those brokers.

Leader Floating Rate Fund

Leader Floating Rate Fund seeks a high level of current income with maybe a bit of growth. The plan is to invest in a global portfolio of floating rate debt securities rated A or better by Standard & Poors. They can invest in other fixed income stuff, but it must be dollar-denominated. The fund will be managed by John E. Lekas, founder of Leader Capital. The initial expense ratio for Investor shares is 1.43%, 50 bps above the Institutional share charge. The minimum initial investment is $2,500.

SGA International Equity Fund

SGA International Equity Fund seeks both current income and long-term capital appreciation. In this case, “international” means “global,” at least 40% non-U.S . The investment strategy is a sort of mish-mash of top-down, bottom-up and occasionally through the side door (with derivatives). The fund will be managed by a Strategic Global Advisors team lead by CIO Cynthia Tusan. The initial expense ratio is 1.45%. The minimum initial investment is $10,000.

SGA International Equity Plus Fund

SGA International Equity Plus Fund seeks both current income and long-term capital appreciation. The strategy text looks about the same as their International (i.e. Global) Equity fund, so I’m not sure what the “Plus” is. The fund will be managed by a Strategic Global Advisors team lead by CIO Cynthia Tusan. The initial expense ratio is 1.60%. The minimum initial investment is $10,000.

SGA International Small Cap Equity Fund

SGA International Small Cap Equity Fund seeks both current income and long-term capital appreciation. The plan is to invest in a global portfolio of small cap stocks. The fund will be managed by a Strategic Global Advisors team lead by CIO Cynthia Tusan. The initial expense ratio is 1.65%. The minimum initial investment is $10,000.

SGA Global Equity Fund

SGA Global Equity Fund seeks both current income and long-term capital appreciation. The strategy section is pretty much identical to the comparable section in their International fund prospectus, so I’m wondering if there was a copy-and-paste error. The fund will be managed by a Strategic Global Advisors team lead by CIO Cynthia Tusan. The initial expense ratio is 1.45%. The minimum initial investment is $10,000.

Yieldshares CWP Dividend & Option Income ETF

Yieldshares CWP Dividend & Option Income ETF seeks to provide current income with maybe a bit of growth. The plan is to invest in U.S. stocks and then sell covered call options on at least some of them. The fund will be managed by Kevin Simpson and Josh Smith of Capital Wealth Planning and Dustin Lewellyn, Chief Investment Officer of Penserra Capital Management. Presumably one crew handles the equities and the other handles the options. The initial expense ratio has not been disclosed. Given that it’s an active ETF, there’s no minimum investment.