Monthly Archives: January 2017

January 1, 2017

By David Snowball

Dear friends,

Welcome to the New Year.

If you think contemporary politics are crazy, ask yourself “why is January 1 the start of the year?” Ancient cultures tended to align their calendars with the rhythm of the natural world: solstices, equinoxes, the waxing and waning of the moon, planting seasons and harvests. January 1 aligns with, well, nothing.

Which was the point. The ancient Roman had two calendars running simultaneously. The joint rulers, called consuls, took office around January 1 after the week of solstice celebrations. That began “the consular year.” The religious calendar recognized spring as the beginning of the new year, so New Year’s Day fell in late March. In an odd bit of anarchy, their calendar contained 10 months (hence “December” is “10^th month”) and 304 days; the remaining days of the year were recognized but weren’t assigned to any month. They were just days.

Weeks tended to last eight days.

And the months? They varied in length, based on how many days the chief priest thought that month needed. Every couple years they’d toss in an extra month (an intercalary month) to realign the civil and solar years. But they didn’t always announce those events in advance; on the first day of the month (the kalend of the month), typically on a new moon, the pontifex maximus would share word of that month’s shape and length. If the pontifex didn’t like what the government was up to, he might trim a few days off the month or declare a couple extra religious holidays when the government couldn’t be in session. Politics screwed up the calendar so badly that, according to Suetonius, harvest festivals occurred months before havest.

All of which only applied in Rome. The outlying pieces of the empire could follow whatever calendar suited them.

Then Julius Caesar put an end to (almost) all that foolishness. In 46 BCE (they would have called it 708 AUC, “after the founding of Rome”), he stripped the priests of their ability to control the year, aligned the new year with the start of the January 1 consular year and imposed a 12-month, 365-day calendar. That all made 45 BCE a tough year because, to get everything lined up again, he had to add three extra months; an old-style intercalary month at the end of February and two newbies between October and November. (But just once, so don’t get used to it.) Then he announced that all the world had to surrender their native calendars, showing that the power of Rome was so great that even the year bent to its will.

Politics and pragmatism, religion and dogma: they’ve very old games, which we’ve played, lamented and survived for a very long time. In the meanwhile, life goes on, driven by the relationships we build, the attention we pay and the joy we share.

There is much to be joyful for.

It’s deceptively easy to believe that our world is going to hell in a handbasket because the only thing we hear each day is that day’s horrors. Someone got shot. Somewhere got poisoned. Something blew up. Why all the bad news? Two reasons:

News media report on what’s new; that is, they tell us what happened today that was different from what happened yesterday. They’re looking at individual occurrences, especially if they come with striking visual images. We’re not asked to think about the big picture, because the big picture didn’t happen today. And so we fixate on all the little things that did transpire.
Bad news sells; more particular, bad news delivered in a howling tone generates outrage and clicks. If you’re looking for evidence, look no further than any headline which also contains the words “Obama” or “Trump.” As in “Obama’s final, most shameful legacy moment.” Or “Trump and the ‘hideous monstrosity’ that was 2016.”

Bad news for fans of bad news. We share the planet with 7.4 billion people, almost all of whom are warm, caring and funny. And almost all of whom are working like dogs to make their lives and their neighbors’ lives and their children’s lives better. Andrew Foster, manager of Seafarer Overseas Growth & Income (SFGIX), travels to some of the world’s poorest nations. “These are deeply dysfunctional economies with unreliable capital markets, but we all knew that ahead of time. What really strikes me,” he said, “is how incredibly hard even the poorest people will work to give their children hope for a better life. What they’re willing to do is incredible and humbling.”

And it’s working. Oxford economist Max Roser, founder of the Our World in Data project, provides compelling evidence for that claim. Rather than focusing on today’s noise, he and his team look at data to pursue the question. “how are things changing?” One of his most striking displays concerns extreme poverty. “Extreme poverty” is defined as living on the equivalent of $1.90/day or less, an amount that’s adjusted to account for non-monetary income (trading for carrots), cost of living across time and so on. Here’s the picture:

Dr. Roser offers this explanation of the picture.

In 1820 only a tiny elite enjoyed higher standards of living, while the vast majority of people lived in conditions that we would call extreme poverty today. Since then the share of extremely poor people fell continuously. More and more world regions industrialised and thereby increased productivity which made it possible to lift more people out of poverty: In 1950 three-quarters of the world were living in extreme poverty; in 1981 it was still 44%. For last year … the share in extreme poverty has fallen below 10%.

That is a huge achievement, maybe the biggest achievement of all in the last two centuries. It is particularly remarkable if we consider that the world population has increased 7-fold over the last two centuries … In a world without economic growth, such an increase in the population would have resulted in less and less income for everyone; a 7-fold increase in the world population would have been enough to drive everyone into extreme poverty. Yet, the exact opposite happened. In a time of unprecedented population growth our world managed to give more prosperity to more people and to continuously lift more people out of poverty.

I’m struck less by the fact that things are getting better, more by the fact that they’re getting better faster which is marked by inflection points around 1950 and 1970. The same pattern holds for global literacy, child mortality, education, fertility and even respect for human rights.

Dr. Roser is struck by the question, “why don’t we know this?” That is, why do so few of us see what Mr. Foster and Dr. Roser see, billions of people succeeding?

Things are getting better.

Not every thing. Not every day. But the important things are, year after year, decade after decade, century after century, getting better. They’re getting better because it’s in our nature to seek better, rather than to surrender to worse.

Our challenges are very real (and, in the case of global warming, terrifying). But they’ve been very real (and terrifying) for centuries. The question is not “will things get better?” so much as “what’s your plan to make your slice better in 2017?” Will you plant a rain garden or volunteer in your schools? Will you walk more, smile more, notice others more? Will you spend less time with your portfolio and more with your neighbors? Will you fuss less about this quarter’s returns and more about the pattern of intentional consumption and serious saving that will support your most important goals?

I have faith in you.

The 2% challenge

2016 was a good year for the Observer. We upgraded our servers to give you faster, more reliable access. Chip and Andrew redesigned the site into our new magazine-like format. Charles has done amazing work in making MFO Premium more sophisticated and more responsive to our readers’ needs. We continue to attract about 25,000 readers each month and came very close to cracking the 30,000 reader threshold in December.

We manage that with the financial support of about 1% of our readers, counting all of the folks who’ve contributed online or by check (though not the uncounted number who’ve used our Amazon link). Some of those folks have been wildly generous and stalwart through the years. We are endlessly grateful to them.

We offer three rewards for folks who contribute $100 or more to MFO in any year: our thanks, the satisfaction of knowing that you’re supporting other readers’ attempts to learn and grow, and access to MFO Premium. MFO Premium is MFO’s other site; it consists primarily of a remarkable set of data (from Lipper) and a suite of tools (designed by our colleague Charles Boccadoro) to allow you to make sense of the data.

MFO Premium is distinguished from other suites in two ways. First, it takes you miles beyond the simple-minded “who’s up the most in the past 3 years?” screeners that are generally available. It allows you to screen for significant time periods (for example, to look at performance in downmarket cycles or bear market months), to look at risk (maximum drawdowns, for example) and risk-return measures (Sortino and Martin ratios) that you rarely get to see, and to examine the correlations between funds. Second, it is constantly evolving. Charles is in almost-constant conversation with readers who are seeking clarifications, improvements or new features. He’s added several (including the correlation matrix) in 2016 and has more planned (including performance over rolling time periods) for 2017. Despite all that, it’s drawn only a couple hundred users.

Charles is, frankly, baffled.

We’d like to raise that to 2%, which would translate to around 500 people, including new and renewing members of MFO Premium, all told. It’s a simple, painless, satisfying process: contributions to MFO are mostly tax-deductible (our attorney says I must repeat the phrase, “consult your tax adviser”) because we’re incorporated as a 501(3)c charity. We’re also an efficient 501(c)3 since our fund-raising costs are, well, zero. If you contribute $100 or more, Charles gives you immediate access to MFO Premium with all the attendant data and support.

Please do. In support of our 2% goal, I’ll update folks monthly on our progress. (In technical terms, it falls somewhere between “guilting” and “nagging,” edging, I fear, toward “annoying.”)

MFO Premium portal

Could you help a child?

We received an interesting query from Doug, a reader in Florida who once worked in the broker-dealer end of the fund world. Doug’s son is autistic and has received profound delight and peace in playing, for the last decade, with a conference giveaway from the Munder Funds.

Lots of flashing blue lights but it’s now stopped working. New batteries didn’t fix it and Doug’s son is inconsolable. Doug knows nothing about the name or manufacturer, except for the Munder Funds name on the side.

If you have any idea of where he might find another or who made it, would you drop me a note? If I hear anything promising, I’ll surely pass it along to Doug.

And thanks!

Speaking of thanks …

Our supporters have been extra generous over the past month. We give thanks to all of you: Victoria, Nancy, Ben, Laurie and Leah – who renewed her MFO Premium subscription and added some extra support. We’re grateful to you all and we really enjoy the notes (Joe waves to Ed!) and cards you include. Thanks too, to Fitz, Kevin, Paul, Ed, Mary, Charles, Altaf and Rick. We couldn’t do this without your support. As always many, many thanks to our now four (!) regular subscribers, Greg, Deb, Jonathan, and Brian. If I’ve failed to recognize you, blame it on New Year’s Eve and a 650 mile drive home from Pittsburgh. I’m a bit tired, but still heartened by your support.

As ever,

“What Goes Around ……”

By Edward A. Studzinski

Democracy – “The substitution of election by the incompetent many for the appointment of the corrupt few.”

George Bernard Shaw

So, another calendar year has gone by, and fund managers everywhere are dissecting their relative performance in comparison to some benchmark index. To put things into perspective for a real-world comparison (at least in terms of the performance numbers), the Admiral shares of the Vanguard S&P 500 Index Fund, which charges a five basis point fee, had a one-year total return of 11.9%, a five-year total return of 14.6% and a ten-year total return of 6.9%. These are all annualized numbers. It is also worth looking at the calendar year 2016 return for the Vanguard Value Index Fund, which has an expense ratio of eight basis points. It achieved a one-year total return of 16.9%, a five-year total return of 15.0%, and a ten-year return of 6.0% (again, annualized numbers).

I have been saying for some time that I think in this kind of world, there will be a place where active managers will outperform index funds. This is why however, that looking at fees AND performance numbers over longer periods of time is so important. There is a wonderful Dilbert cartoon in which in the first frame, Dogbert says, “The best way to evaluate an investment fund is to look at its misleading claims of past performance.” The second frame says, “The Dogbert Hedge Fund beat the market average for a three-week period ….. that one time.”

When you look at performance numbers over at least a five-year period, you generally find two things. One, performance differences tend to smooth out over time, giving one a real opportunity to understand whether the active manager is truly adding anything to performance (again relative to a benchmark). Two, rarely do any of you reading this make investments on the basis of having the money go into the market at the beginning of the performance measurement period, and then come out at the end of the performance measurement period. But you do tend to get impatient. That impatience, used to be reflected to me in emails “Why did you underperform the index last week on Wednesday, when it was up half a per cent and your fund was down.” This is one of the things that has happened – there are no, especially in the retail area, long-term investors. And the idea that a value approach will be lumpy, that is under-perform often for years before having the opportunity to show its true nature. Of course the other issue becomes whether the manager has the patience to not try and “fix” things when there is the double whammy of underperformance leading to negative fund flows (anathema to the asset gathering organizations). And for an example of lumpy performance in value funds, take a look at Fairholme Focused Income Fund, with its one-year total return of 32.3% and its five-year total return of 11.5% (annualized).

To make the comparisons a little easier to the three large cap Vanguard index funds I referred to above, let’s look at two large-cap actively-managed Vanguard funds. Vanguard Admiral Equity Income Fund has an expense ratio of seventeen basis points, and achieved a one-year total return of 14.7%, a five-year total return of 14.6%, and a ten-year total return of 7.4% (again, annualized). Vanguard PrimeCap Core, with an expense ratio of forty-seven basis points, had a one-year total return of 12.4%, a five-year total return of 16.1%, and a ten-year total return of 9.2% (again, annualized). Both of those funds would warrant a look for investment, given the five-year and ten-year numbers I would also suggest the less common index fund, the Vanguard Value Index Admiral Fund shares would also be worth a serious look. Look at performance over a longer period than just one-year or three-years.

Fees Redux

“Skimming” is the term used when a casino management takes some profits off the total funds running through the books without having to account for it. I have spent a lot of time in this column railing against excessive fees. Where like-kind active funds are available, and the same period annualized total returns are available from the cheaper fund, the choice should be an easy choice. And it should be easy because the excess fees from your money are being skimmed off the top by the fund management controlling company. In the case of a corporate parent such as Affiliated Managers or PIMCO, anywhere from thirty to fifty basis points is being skimmed off the top and going into the corporate coffers, contributing little if anything to the investment decision-making and management process.

Hope and Change

An active manager I know mentioned last week that his fund flows, and those of his firm, which had been bleeding out all year, turned slightly positive in December. And while we have concerned ourselves with the competition that passive products present for active managers in the mutual fund arena, the competition is even greater in the hedge fund area. Think of it this way – the usual fee schedule for equity hedge funds is “two and twenty” meaning a two percent fee with a twenty percent performance fee (talk about skimming). A wonderful little article in The Financial Times on December 21^st pointed out that analysts and quantitative managers have “reverse-engineered” the returns of many common hedge fund strategies such as long-short, and are replicating them in an ETF format. And for that matter, why pay a two percent expense ratio for one of the Gotham Funds, when Goldman Sachs has Smart Beta (multi-factor) ETF’s available at expense ratios of nine to forty-five basis points.

So let’s end this with a semi-real example to think about. Harold retires at age sixty with a $200,000 balance in his 401(k) account which he rolls over to an IRA at the beginning of the year. He doesn’t plan to file for Social Security payments until age seventy, when he will have maximized the annuity payout he can get from Social Security. For those ten years, he does not need to work or tap into his savings, as he receives a pension check for a vested defined benefit pension plan he had at another employer. Invested in the Vanguard Value Index Fund, Admiral shares, the investment would have grown to $358,170 when he would have had to start taking minimum distributions.

Alternatively, Harold rolls his $200,000 over at age sixty into the Vanguard PrimeCap Core Fund (assuming he can get into a closed fund), the initial amount has grown to $482,232 when he needs to start taking his required minimum distributions at age seventy. And if you don’t think the example is real since you can’t get into the Vanguard fund mentioned, the numbers work almost as well if you were to use the PrimeCap Odyssey Growth Fund, run by the same team as the Vanguard fund but available directly from the PrimeCap firm.

End of an Era

Another piece in the Financial Times (hint: I consider this to be the best financial newspaper in the English-speaking world) on December 30^th spoke of the anger of investors with actively-managed funds.

They have pulled $30B a month out of actively-managed funds in 2016. What’s different is that in the past, those negative flows were usually tied to large stock market debacles. This year, what finally appears to have sunk in is the years of data showing that most active managers fail to keep up passive index funds’ performance over long periods of time. That said, another factor appears to be an increasing awareness by the investors of the “lifestyles of the rich” which many fund managers have adopted with multiple homes, Net Jets cards, and minimal working hours. As a result, in 2016 a full 301 funds had shut down and returned their investors’ funds. Another 97 were merged into better performing funds in the same fund family. (The article David Snowball and I have talked about writing is “Mutual Funds that Do Not Deserve to Exist.”). So what is the solution? Well, I can tell you from my vantage point, it appears that costs are being cut, but more to sustain margins so that the payouts can continue to the highly compensated (here I think of the fund manager whom one of his peers referred to as the “$30M a year” man). Often, as support staff and analysts are cut, it is the investment performance that continues to suffer as the investment research process becomes gutted. The other thing that happens is the quality of the personnel hired is ratcheted down (good enough) rather than the best available talent.

We have seen this in a number of situations where the industry was not understood (off-balance sheet assets and liabilities) but the income forecast model looked good. In that regard, investment analysis has become like much of American medicine today, with an overreliance on laboratory tests rather than the art of physical diagnosis. And in investment analysis, the similar paradigm has been an overreliance on models and “Investor Day” presentations which have been religiously scrubbed, often attended by not curious people to begin with.

A Final Comment

Whole forests are being destroyed for the paper being used in stories about this year’s Presidential election, not to mention the blizzard of stories on the internet. I am going to offer only one comment to ponder. Years ago, growing up in eastern Massachusetts (where politics are part of the air and water), I asked my grandmother, who had immigrated from what would have been then Russian Poland, why people voted for the Kennedy family. Her answer was simple but elegant. She said, “because they have too much money to steal.”

Happy New Year!

For fund managers, a lesson from a failed squatter toilet

By David Snowball

People are weird. They doggedly do things that are stupid and self-destructive. If you ask them “why?” the answer is often “because that’s what I’m comfortable doing.”

Investors are people.

Fund managers are people.

People are people.

People are weird.

Our story begins with smoldering dung. Nearly half of the world’s population cooks their food in stoves, often unvented, that burns solid fuel, often dung. In some parts of Africa it’s 98% while folks in rural India burn 60,000,000 tons of cow dung each year to cook their meals. The result is a disaster: homes and lungs are coated with black soot, indoor air pollutant levels are often 100x safe limits, 80% of children become nauseated and over 4 million people die each year from the fumes.

Clean-burning enclosed stoves are available. Heck, they’re often given away free and they’d vastly reduce the problem but they often end up in the trash heap out behind the house, or serving as bowls or in some other decorative role. A major story in the Financial Times reports:

For decades, researchers, charities and non-governmental organisations have looked for ways of persuading people in India and around the world to switch to more efficient cooking methods, which use less fuel per unit of heat and often cost relatively little. But time and again, people in rural areas return to their traditional stoves … (“India: Cooking up a recipe for clean air,” 12/21/2016)

Until now, nobody seems to have taken the time to figure out why, instead well-meaning organizations have proceeded to try to fix these people without understanding them. That is, they assumed that folks in India were dim and unable to understand the consequences of their actions.

It turns out that the villagers in question were perfectly rational. The stoves were designed by people who weren’t actually cooking traditional meals, in traditional settings, on them. If designers had only taken the time to talk with folks and to study and understand their behavior, they’d have discovered that the stoves simply didn’t work. Their heat was no adjustable, their fuel holes were too small, their vents shoot streams of smoke directly at the cook and more.

In short, they were ill-adapted and rejected. Stove designers aren’t used to talking with people and watching them cook; “it’s not,” they might say, “what I love doing.”

FT tracked the success of a new NGO, Nexleaf, which took the radical step of taking its clients seriously. They equipped each test stove with a small remote unit. As soon as a family stopped using the stove, Nexleaf was notified, sent a researcher to discover what went wrong, then improved their product. The combination of thoughtful attention and careful redesign seems to have made a world of difference; in one village studied, use of the improved stove reached 100% … and stayed there.

In short: listening matters and a willingness to get past “what we’ve always done” matters.

There’s a lot of academic research that documents a simple point: relationships matter and they’re created by open, ongoing communication. Dr. Leonard Kostovetsky of the University of Rochester points to the long research thread which shows that the economics of the fund industry are entirely dependent on investors’ perceptions that they’re in a meaningful partnership with their fund companies:

Gennaioli, Shleifer, and Vishny (2012) propose that the well-documented empirical finding that average active mutual fund alphas are negative (e.g., Jensen, 1968) is due to a “trust” premium, which allows asset management firms to charge investors additional fees if there is a trusting relationship between them. They write that trust can be established through “personal relationships, familiarity, persuasive advertising, connections to friends and colleagues, communication, and schmoozing.” (“Whom do you trust?” Investor-advisor relationships and mutual fund flows,” 2015)

Kostovetsky goes on to ask, what happens when a fund company violates that trust? He looks at the consequences of a change in ownership; for example, when a firm sells itself to AMG or Natixis. The short answer is, significant amounts of money starts flowing out the door. That’s particularly true of investors who had been willing to accept higher expenses in exchange for a better relationship:

Retail investors and investors in funds with higher expense ratios are more responsive to ownership changes, consistent with the notion that such investors place a higher value on trust and are more likely to respond to a relationship disruption by withdrawing their assets.

If you are dismissive of their need for a respectful relationship, they will be dismissive of your need to stay in business. (Does the phrase “giant sucking sound” resonate with anyone?)

Based on our reading of the research, we’ve proposed a series of best practices that might serve to rebuild the trust that keeps the best portion of the industry alive. Those include:

Changing the role of your board of trustees. These are your shareholders’ direct representatives and advocates, yet you keep them insulated and invisible. They’re not on your website. They have no email addresses. They don’t speak in your letters and reports. The vast majority don’t invest in your funds despite evidence that such alignment powerfully improves fund performance. One manager after another tells me that their boards, often rent-a-boards, know next to nothing about their funds.

Expressing interest in your investors needs and concerns. No fund company has ever expressed interest in why I chose to invest with them, except now in my role as a public scold. No fund company has ever reached out after I’ve invested, except for the formulaic documents that now arrive via pdf. And no fund company has ever asked why I chose to liquidate my holdings with them. You are the only industry in the world that has made incuriosity into such an art. If we approached one of your equity managers and said “hi, we have a mature industry with few barriers to entry, the firms in which know nothing about their customers and have no strategy for retaining them, would you like to invest there?” the answer would be “only if I could short those losers.”

Putting away the convenient excuses. Managers, the folks who actually dominate most independent firms, offer the same three excuses every time this topic comes up. (1) Schwab doesn’t give us that information. (2) FINRA won’t let us. (3) I just want to build the portfolio; the rest is our distributor’s problem. To which we say: (1) make them, (2) that’s simply not true, (3) okay, as long as you’re comfortable with failure.

One villager took the FT out to show them, with pride, that she’d thrown her old dirty stove onto the trash heap where the reporter inquired about another discarded object.

Outside Jhunu Pradhan’s house, partly obscured by the undergrowth, is a ceramic squatter toilet, filled with sand. “An NGO built this here 10 years ago, but nobody ever wanted to use it,” her husband explains. Asked whether the organisation that built it knows it is not being used, he replies: “I don’t know, they never came back to check.”

Note to fund advisors: you’re in imminent danger of becoming the abandoned, sand-filled squatter toilets of the financial services world. If you aspire to better, you need to listen to your investors, to let them know that you’re listening, and to rebuild the relationships that you severed when you became hostage to third-party distributors like Schwab and Fidelity.

Whose Fund Is It, Anyway?

By Leigh Walzer

The Closed End Fund (CEF) industry, with $200 billion in assets, is dwarfed in size by the open-ended mutual fund industry. CEFs generally get little attention in Mutual Fund Observer and sites like Bogleheads. Trapezoid monitors most of the closed-end fund universe for manager skill in relation to expense ratio, using the same methodology and database as for open-end mutual funds. (MFO readers are invited to register for a free no-obligation demo which covers several mutual fund sectors)

There are many closed end funds trading at discounts to Net Asset Value (NAV). The average fund trades today at a 7% discount. This is not as big as it was a year ago, but still above the historic average. Exhibit I shows the average closed fund discount for all US CEFs (based on equal weighting) We are aware of 100 CEFs trading at discounts of 12% or greater. Sometimes those discounts persist so long they become more or less permanent.

Some people attribute the discount to poor investment performance (we will comment on that later). High fees, lack of liquidity, and dividend yields are also factors. Rising short term rates make CEFs which rely on leverage less attractive.

Phil Goldstein

Whatever the reason, a persistent discount is a source of tension between fund holders and advisors. Many holders would like to see their investments trade at NAV, even if this necessitates opening the redemption window or liquidating the fund completely. The management company ordinarily wants to receive its stream of fees as long as possible.

Since 2014 activism has been heating up in the closed end fund (CEF) space. CEF activism was pioneered by a handful of players including Philip Goldstein of Bulldog Fund. A decade ago Elliot Associates forced Salomon Brothers Fund to open.

Recently, a number of hedge fund players have piled in. Activists have scored successes. As Exhibit II shows, several CEFs were forced to convert to open end funds, others agreed to liquidate or merge. A number of other funds agreed to do large buybacks, often coupled with a standstill agreement which would keep the activist at bay for several years.

Exhibit II – Recent CEF and BDC Activist Plays

	Fund	Activist	Outcome
ACAS	American Capital, Ltd*	Elliott	Ares acquired
ACG	AB Income Fund	Karpus	merged into open end fund
AYN	Alliance NY Municipal Income Fund	Bulldog	liquidated
CMK	MFS InterMarket Income Trust	Karpus, Bulldog	liquidated
FTT	Federated Enhanced Treasury Income Fund	Karpus	converted to open end fund
FAV	First Trust Dividend and Income Fund	Bulldog	converted to ETF
FDI	Fort Dearborn Income Securities (UBS)	Karpus, 1607	converted to open end
FULL	Full Circle Capital Corp*	Bulldog, Sims	Great Elm acquired
GHI	Global High Income Fund	Bulldog, Saba	liquidated
HYF	Managed High Yield Plus Fund (UBS)	Saba	liquidated
JGV	Nuveen Global Equity Income Fund	Bulldog	merged into open end fund
KHI	Deutsche High Income Trust	Saba	liquidated
XRDC	Crossroads Capital, Inc. (BDCA Venture)*	Bulldog	Bulldog granted BOD seat; proposing liquidation
RIT	LMP Real Estate Income Fund	Bulldog	converted to open end fund
AVK	Advent Claymore Convertible Securities & Income Fund	Saba, Western	tender, standstill
DCA	Virtus Total Return Fund	Bulldog	tender, standstill
ERC	Wells Fargo Multi-Sector Income Fund	Saba	tender, standstill
FSC	Fifth Street Finance Corp. *	RiverNorth	tender, standstill, side deal
FSFR	Fifth Street Senior Floating Rate Corp.*	Ironsides	tender, standstill, side deal
GFY	Western Asset Variable Rate Strategic Fund	Relative Value	tender, standstill
IRL	New Ireland Fund	Karpus	tender, standstill
LCM	Advent/Claymore Enhanced Growth & Income Fund	Bulldog, Western, Saba	tender, standstill

*Business Development Corporation

But in a minority of cases, the management company has resisted. Some have used delaying tactics. Others made tactical use of dilutive rights offers.

While there are several good examples of what happens when a fund resists activist pressure, we will consider Deutsche Bank as a case in point.

When shareholders and fund directors clash

Art Lipson

Western Investment, a hedge fund manager based in Utah, has been battling funds managed by DIMA (Deutsche Investment Management Americas) since 2009. The manager, Art Lipson, cut his teeth on the fixed income desk at Kuhn Loeb in the 1970s and 80s. A few years ago, Lipson disclosed that 90% of Western’s portfolio was allocated to closed end funds trading at a discount.

DIMA was previously controlled by Zurich (which bought Kemper Insurance) and before that it was known as Scudder.

In 2010, after a protracted battle, Western struck a settlement with DIMA under which they agreed to liquidate two funds and effect partial tenders at several others. As part of the agreement Western agreed to a five-year standstill with Deutsche.

Boaz Weinstein

In April 2015, around the time his standstill was expiring, Saba (a hedge fund managed by Boaz Weinstein) filed a 13D against Deutsche High Income Trust (KHI) with a 12% stake. KHI was another CEF managed by DIMA with assets of $140mm. By February 2016 Deutsche and Saba agreed to a deal which led to the liquidation of KHI late in 2016. By capturing the discount, Saba generated an extra 10-12% over and above what the underlying assets generated; because Saba scaled into and out of the position, the bulk of the capital was tied up for 18-24 months.

Perhaps spurred by Saba’s success, Lipson decided to tangle with Deutsche again. His targets were Deutsche’s two remaining taxable CEF bond funds, Deutsche Multi-Market Income Fund (KMM) and Deutsche Strategic Income Trust (KST). At the time the two funds were trading at discounts to NAV of 15%. The combined net assets of these funds are approximately $250 million. The investment agreement (renewed annually) paid DIMA roughly 1% per year. The board of each fund was identical to KHI

In the run-up to the October 2016 shareholder meeting, Lipson and his partner Benchmark Plus prepared to launch a proxy seeking four board seats and declassification of the board. The board opposed the motion but agreed to ultimately terminate the trust. But, unlike KHI, they asked to preserve the current structure for 2.5 years. Their rationale was that the current CEF structure conferred certain benefits on shareholders including the ability to use leverage.

Lipson’s proxy questioned whether the directors were truly disinterested, since they received considerable fees from 103 Deutsche funds. He also noted the funds have consistently traded at a discount and that Deutsche Bank was financially unstable. The proxy also criticizes the funds’ performance but doesn’t offer much evidence. And it notes that the directors’ business judgement was inconsistent: it moved to liquidate KHI quickly but wants to be much more patient with KMM and KST. The fund’s lawyers sought (and were denied by the SEC) permission to exclude the declassification proposal as well as many of Western’s arguments.

In the October 2016 shareholder vote, Lipson’s slate won a majority of the votes cast for each fund – but only 54% of the shareholders actually bothered to vote. As a result, the board refused to unseat the current directors or declassify the board. In 2009, during Deutsche’s first skirmish with Lipson, the fund amended its by-laws to raise the voting threshold from a plurality of those voting to an absolute majority.

We understand why Deutsche would take this position. DIMA manages $1.6 billion of other CEFs, some of which have attracted attention from other activists. By agreeing to liquidate at the end of 2018, they preserve their fee stream for a couple of years, a time frame they probably believed was short enough to dissuade most activists from litigating; but also, long enough to undermine the economics of future activists.

However, the independent directors are the real decision makers. Their perspective is murkier. Fifty six percent of shareholders who cast a vote supported the activists (blending the two funds.) This seems to evidence a strong desire by shareholders for change.

We spoke to two attorneys who handled similar cases in the past. Rarely are these cases tried in court. The facts and legal venues may differ from case to case. But there is general agreement that without the directive of an absolute majority the directors are obliged to apply their independent judgement to do what is in the best interest of shareholders. The fund might take the position that the activists’ objectives diverge from those of retail shareholders. The two sides would presumably differ over how to interpret a persistent discount and whether shareholders’ interest is well served by following the strategy from the original prospectus. The shareholder base may include many holders with low tax-basis.

We also spoke to Lipson. While some activists are willing to cut deals with managers involving a partial buyback, he has a philosophical tilt toward fund liquidation. “Given the choice, if a fund agrees to terminate in reasonable timeframe, I will support that over a quick fix solution…. Even if it means a slightly lower IRR.”

Currently Western is suing KMM, KST and the two boards. We are not legal analysts. We suspect the business judgment rule gives the directors a lot of latitude. But we would want to better understand why the board (with identical composition) terminated KHI so much more quickly than KMM and KST.

Current Activist Opportunity

Investors have been rattling the cage at a number of other CEFs, trading at a discount. Here is a partial list:

	Fund Name	Discount	Activist	Comment
ADX	Adams Diversified Equity Fund	16.8	Gramercy	shareholder proposal defeated
AGC	Advent Claymore Convertible Securities & Income Fund II	14.4	Saba
BGX	Blackstone/GSO LS Credit Inc	8.4	Saba
BIT	BlackRock Multi-Sector Income Trust	11.0	Saba
CEE	Central Europe, Russia and Turkey Fund	12.9	City of London	Discount Mgmt Program
CIF	MFS Intermediate High Income Fund	9.6	Saba
CSI	Cutwater Select Income Fund	6.8	Karpus
DHG	Deutsche High Income Opportunities Fund	4.4	Bulldog, Saba
DNI	Dividend and Income Fund	17.3	Karpus, BlueBell, Saba	rights offer as defensive tactic
DSU	BlackRock Debt Strategy Fund	10.0	Saba
EEA	European Equity Fund	12.8	1607 Capital Partners, Karpus
EMD	Western Asset Emerging Markets Income Fund	13.7	Saba
FAM	First Trust/Aberdeen Global Opportunity Income Fund	8.3	Karpus	shareholder proposal
FPT	Federated Premier Intermediate Municipal Income Fund	7.4	Karpus
FSD	First Trust High Income Long/Short Fund	10.3	Saba	shareholder proposal to declassify board
FTF	Franklin Templeton Duration Income Trust	9.2	Saba
GDO	Western Asset Global Corporate Defined Opportunity Fund	9.5	Saba
GLO	Clough Global Opportunities Fund	13.6	Bulldog
GLQ	Clough Global Equity Fund	11.5	Bulldog
GLV	Clough Global Allocation Fund	11.6	Bulldog
HYI	Western Asset High Yield Defined Opportunity Fund	9.1	Saba
HYT	Blackrock Corp HY Fund	10.8	Saba
JFC	JPMorgan China Region Fund	5.7	Ancora, City of London
JLS	Nuveen Mortgage Opportunity Term Fund	4.4	Saba
KEF	Korean Equity Fund	8.4	Bulldog, City of London
KF	Korea Fund	12.2	City of London
LBF	Deutsche Global High Income Fund	3.9	Bulldog
LGI	Lazard Global Total Return	12.2	Bulldog
MCR	MFS Charter Income Trust	9.8	Relative Value Partners
MSP	Madison Strategic Sector Premium Fund	6.7	Ancora
NRO	Neuberger Berman Real Estate Securities Income Fund	8.7	Bulldog
PHF	Pacholder High Yield Fund	7.9	Bulldog/Full Value
SWZ	Swiss Helvetia Fund	13.0	Karpus, Bulldog
TWN	Taiwan Fund	13.4	City of London
ZF	Zweig Fund	10.7	Bulldog, Karpus
ZTR	Zweig Total Return	7.1	Bulldog, Karpus

There are also several Business Development Corporations (BDC’s) which have drawn activist interest including

Ticker	BDC	Activists
KCAP	KCAP Financial	DG
MVC	MVC Capital	Wynnefield
SVVC	Firsthand Technology	Bulldog

Investors desiring to follow on are advised to do their homework. Many of the smaller CEFs have been taken out; the remaining ones require deeper pockets, more expensive proxy fights, and more patience. Larger hedge funds won’t necessarily join the fray for a variety of reasons. Gramercy stubbed its toe taking on Adams Express Diversified Fund (ADX.) Once an activist files his 13D prices tend to rise and big positions are harder to accumulate. Also note that a few settlements have been crafted narrowly which are more beneficial to the activists than to the shareholders as a class. Sometimes settlements struck by one fund bring standstill relief to sister funds.

In the case of the two Deutsche funds, KMM and KST, we do expect the trusts to liquidate within two years. Even if the expense structure of these funds is a bit rich, investors in these funds should outperform comparable open end short-term bond funds by roughly 3% per year by closing the discount. That will improve if the activists persuade the boards to terminate earlier.

A CEF trading at discount may not be enticing if you dislike the underlying assets. We noted last month that the economic policies of President-elect Trump may not be friendly to the bond market. KMM and KST hold fixed-rate bonds with an effective duration of 4.4 years.

How do CEFs perform?

Do closed end funds trade at a discount because, as the activists say, they are weak performers? Or does the discount reflect structure and illiquidity?

We reviewed the skill of 40 closed end bond funds which were included in our most recent fixed income model. This is not the same as the model featured on fundattribution.com which evaluates equity funds for skill. The fixed income model relies entirely on regression data and has not been tested for predictive validity. But it does control for factors like allocation to fixed income strategies, duration , expense ratio, and reliance on leverage to generate yield. We were surprised to see the performance of CEF bond managers was worse, on average, by roughly 1 standard deviation. Many bond CEFs borrow short term at a spread over LIBOR to invest in longer duration instruments; while that activity may boost current income, we view the spread over LIBOR as a deduction to skill.

Among the 40 CEFs, higher skill correlates with smaller discount as one would expect. But the relationship is weak and there are clearly other factors driving CEF discounts.

We did a similar study of 70 equity CEFs. For this group we used Trapezoid’s sS metric, which measures fund manager skill from security selection for every period after controlling for asset allocations, factor exposures, leverage, systemic risk, and of course expense ratios. More about the methodology behind this metric can be found here. The CEF managers once again underperformed their open-end active manager peers. However, the difference was much less pronounced, only one third of a standard deviation. The equity CEFs include a heavy concentration of foreign funds and infrastructure so it is hard to draw strong conclusions.

Bottom Line

Closed end funds trading at a discount are a traditional value play. Those discounts are explained in part by lousy performance and high expense ratios, by sentiment, by timeliness of the asset class, and by illiquidity. The presence of activist investors could indicate there is a catalyst who will narrow the discount. Following the lead of activists might be a good strategy but patience is required.

Disclosure: the author has investments in certain CEF’s and BDC’s mentioned in this article

What’s the Trapezoid story? Leigh Walzer has over 25 years of experience in the investment management industry as a portfolio manager and investment analyst. He’s worked with and for some frighteningly good folks. He holds an A.B. in Statistics from Princeton University and an M.B.A. from Harvard University. Leigh is the CEO and founder of Trapezoid, LLC, as well as the creator of the Orthogonal Attribution Engine. The Orthogonal Attribution Engine isolates the skill delivered by fund managers in excess of what is available through investable passive alternatives and other indices. The system aspires to, and already shows encouraging signs of, a fair degree of predictive validity.

The stuff Leigh shares here reflects the richness of the analytics available on his site and through Trapezoid’s services. If you’re an independent RIA or an individual investor who need serious data to make serious decisions, Leigh offers something no one else comes close to. More complete information can be found at www.fundattribution.com. MFO readers can sign up for a free demo.

Expect More of the Same in 2017

By Robert Cochran

2016 was the year of surprises. Conventional wisdom and expectations were mostly proven wrong. Think about the following events. It was common knowledge that the Britain vote to leave the European Union would fail. Common knowledge was wrong. At the beginning of 2016, all major investment firms suggested loading up on European stocks and reducing domestic exposure. They were proven wrong. Many of the same firms recommended investing in large U.S. companies over small companies. They were wrong. The polls and broadcast media told us the U.S. presidential election options were two: whether Clinton would win by a small amount or by a landslide. The polls and media were totally wrong, and they are still blaming everything and everyone else but themselves.

Economists, investment experts, and the media agreed that a Trump victory would mean a market crash. We may indeed see a crash, but almost two months since the election, the experts have missed it again. At the beginning of the year, most expectations were for the Fed to increase interest rates at least twice, perhaps three times. Expectations were wrong. Despite less than stellar economic readings, the Fed raised rates in December, some believe more to save face than anything else.

My own ability to predict the future is no better than anyone else’s. One of my study groups does annual predictions of key economic items. For 2016, I thought the S&P 500 would rise 4%, gold would end the year at $1,200 and oil at $50. The 10-year Treasury would be at 2.75%, the CPI would be up 1.80%, unemployment at 5%. And, worst of all, I thought EAFE would gain 10%. I may win one of those seven categories. Our clients frequently ask if they should buy into a sector or get out of an asset class. The assumption is that since I and my colleagues are career advisors, we have the ability to see what others do not. Fortunately, we use globally diversified mixes of stocks, bonds, and alternatives for our clients, and we don’t base allocations on our annual predictions.

2017 will bring another batch of common knowledge, broadcast media predictions, and sure things from economic and investment gurus. We are already inundated with Top 10 Predictions, and we will like those that match our biases, just as we dismiss those that are not in line with our biases. If history is any guide, most predictions will be wrong, again. The problem with investment predictions is that what ought to happen (because of valuations, economic outlook, politics, and theory) seldom does happen. Take international stocks, for example. Domestic has out-performed international for a near record number of months and years, valuations are mostly low to cheap, so surely the EAFE will beat the S&P 500! I have been expecting this for many months and am still waiting. The MFO Discussion Board always has a good number of threads attempting to anticipate “where to invest now”, just like the retail magazines.

At the end of 2015 and into early 2016, many pundits and investors had pulled most of their dollars out of emerging market stocks. After all, EM stocks as a whole had a lousy 3-year record compared to the S&P 500. And, of course, emerging market stocks had a rip-roaring 2016, beating the S&P 500 during the first three quarters of the year 16.5% to 7.5%. Then everyone jumped on the bandwagon, saying EM was where investors should move their money. As usual, the experts were late to the party.

Expectations of higher interest rates have hurt values of long-maturity bonds, especially long-term Treasuries, which lost almost 13% in the last three months. But only recently have pundits glommed onto this reality. We have favored short-duration bonds for some time, and this hurt performance numbers a bit in the last couple of years, but we have never liked taking much risk with fixed-income. Common knowledge, and our hope, is that the December Fed rate increase of 0.25% is followed by other 0.25% increases and not bigger jumps.

There is very little we can control with investments. Expenses are certainly one thing, and this is especially true now with bonds. And we have some ability to control the amount of risk we have in our portfolios. But we certainly have no control over economics, global politics, interest rates, and current events. A diversified investment allocation remains a solid strategy for most investors. Domestic and global events will happen, and some changes to portfolios will be needed. But chasing performance and investing based on prediction are almost always losing games. Remember one thing above all else when it comes to investing: There is risk in everything. Be sure your portfolio’s allocation matches your goals, your cash flow needs, and gives you some measure of assurance.

And remember that today’s headlines and tomorrow’s reality are seldom the same.

No Load MFO Ratings

By Charles Boccadoro

We’ve eliminated load from our MFO Ratings methodology, following Morningstar’s lead, effective immediately on our premium site and starting with 4^th quarter update on our main site. Previously annualized return calculations included any maximum front load specified in the prospectus, which is what an investor may pay when purchasing shares of a fund, expressed as percentage of the purchase amount.

Morningstar’s Director of Global ETF Research, Ben Johnson, was quoted recently that “fewer investors are paying commissions or sales charges, which is why we’re removing the load adjustment from the calculation. When we established the Morningstar Rating methodology, these charges were much more common and we saw a need to highlight the cost for investors.”

In its press release, Morningstar explains:

Increasingly, Morningstar finds that investors pay for distribution and advice in different ways, but the current calculation only captures the payment for load classes. Incorporating the load into the Morningstar Rating is therefore penalizing load share classes because of choices investors make about how to pay for advice.

Morningstar is removing the load adjustment from the Morningstar Rating calculation to better reflect the current state of the industry. In the United States, approximately half of A share class investors don’t pay the full load, and the Morningstar Rating previously assumed the maximum fee for load investors and the minimum fee for no-load investors.

They also retired so-called load-waived “virtual” share classes.

Loaded funds typically do have a graduated fee scale, something like: 5.75% on amounts up to $25K, 3.5% up to $250K, and 0% above $1M.

MFO discussion board member and beta tester extraordinaire teapot argues “Lots of brokerage firm now offer load waived A shares. I think performance comparison on load mutual fund without load adjustment will be more frequent.”

To his point, nearly half of Fidelity’s 3,621 No Transaction Fee (NTF) fund offerings comprise loaded funds, including those by Templeton, Putnam, Ivy, Cohen & Steers, Calamos, Hotchkins & Wiley, and Principal. Ditto for Schwab’s 3,981 One Source Load Load/No Fee offerings and USAA’s 2,285 No Load/No Fee offerings.

The fine print of such offerings also notes that short-term redemption fees may apply and the brokerage houses may receive other compensation in the form of 12b-1 fees or additional compensation paid by the fund, its investment adviser or an affiliate, as described in the prospectus.

David Swenson, Chief Investment Officer at Yale University since 1985 and author of Unconventional Success: A Fundamental Approach to Personal Investment, has long articulated that the practice of loaded fund is indefensible.

Intrepid International Fund (ICMIX),(Liquidated), January 2017

By Dennis Baran

This fund has been liquidated.

Objective and strategy

The fund seeks long-term capital appreciation by investing in an international, all-cap portfolio. The fund is non-diversified and its primary focus is on developed markets. Its strategy is benchmark-agnostic, so its country, industry and sector weightings may differ substantially from those in its benchmark index or peer group. Its process capitalizes on market disruptions, fear, and volatility to generate bargains. The fund plans to hold between 15-50 different companies, may hold substantial cash and is typically hedges its currency exposure when cost effective.

The fund is intended for long-term investors wishing to own a concentrated international value fund, who understand its value-driven philosophy focused on absolute results rather than relative performance, and its flexibility to hold cash when the risks present in the market are more beneficial to shareholders than investments in additional securities.

Adviser

Intrepid Capital Management in Jacksonville, Florida was founded in 1994 by Forrest Travis and his son Mark. Intrepid chose to separate its investment strategy both geographically and philosophically from Wall Street by executing an independent and contrarian approach to money management. The name of the firms identifies what it calls its constant pursuit of absolute value in a fearless and enduring way through the application of rigorous analysis to understand a business, identify when it is selling by at least a 20% discount to fair value, and then waiting patiently for this value to be recognized. The process is applied “without fail” in the effort to make money in up markets and protect capital in down markets. The firm will not buy a company that any of its managers would not own themselves, invests its own money “shoulder to shoulder” with its clients, and holds cash when buying opportunities are not identified. As of 11/30/16, the firm manages $909 million in its six mutual funds, separate accounts, and a hedge fund with most of the assets in its funds.

David Snowball, publisher of MFO, has previously profiled two of its offerings, Intrepid Income (ICMUX) and Intrepid Endurance (ICMAX). Intrepid Funds

Reason for Launching the Fund

Following its previous success in finding undervalued domestic companies – what the firm has done for years – Intrepid started the fund to gain access to a larger investable universe through an international product and one that had been planned for a long time.

The Manager: Chronology and Development

Nominally the fund is managed by a team which is led by Ben Franklin, CFA. As a practical matter, Mr. Franklin now has sole responsibility for the fund’s day-to-day operations. That will be formalized in the next prospectus, which will remove the names of the other team members.

While in high school, Franklin participated in a magnet program called “The Academy of Finance” but had mixed feelings about investments as an area he wanted to pursue. However, while in college, his father gave him a copy of The Richest Man in Babylon by George S. Clason, which changed his future plans significantly. The book had simple financial advice, but what he concluded most of all was the basic idea of having money do the work for you, and the more you know about doing that, the safer your future will be. This belief has guided his strategy in his fund.

While getting his MBA, Franklin fell in love with the value philosophy when he was in a student-managed investment fund allowing participants to apply their knowledge in picking stocks. Benjamin Graham’s The Intelligent Investor resonated with him because it made sense not only practically but also temperamentally. He recalls that his professors – too ingrained with efficient market theory – didn’t give any importance to value investing in response to his questions, and so he continued to embrace the value philosophy by “going down the rabbit hole” on his own.

After finishing his MBA, Franklin’s main goal was to get an equity analyst position and work eventually into a shop that shared his value philosophy. However, he was lucky enough to be hired at Intrepid Capital in January 2008, a firm that already shared his value tilt and contrarian views. He then began as a research analyst before beginning his duties as a portfolio manager of ICMIX.

He received his BBA in Management and MBA in Finance from the University of North Florida.

When Franklin started working at Intrepid Capital, Mr. Jayme Wiggins, current manager of the Intrepid Endurance fund (ICMAX), was working at Intrepid, running the high yield strategy. When he left within a year of Franklin’s hiring for business school and before the crash, Franklin joined Mr. Jason Lazarus, now the manager of Intrepid Income (ICMUX) to manage the high yield strategy, which was still early in their careers. Everyone at Intrepid, he says, handled that time period with impressive poise, and working together with Mr. Lazarus helped with his growth. They both started about the same time and would challenge each other frequently, candidly, but respectfully.

Besides Mr. Lazarus, Mr. Wiggins has also been instrumental in his development as a smart, independent investor who can quickly find the faults in any investment idea and someone willing to help others. Franklin seeks his advice frequently and is a person who makes everyone that much better.

Franklin credits his experience working on junk bonds as helping him to evaluate stocks. That’s because Intrepid’s bond strategy typically includes holding bonds until the company calls them or they mature, and in many cases these are illiquid holdings they couldn’t sell quickly if they wanted to. For this reason, they have always been very diligent in focusing on the downside by knowing what the upside is (yield-to-worst). By doing so, their work is done in finding out what could go wrong and why it is called a negative art.

When investing in cheap and illiquid stocks, Franklin applies the same diligent approach because it’s important to know as many things as possible that could go wrong before purchasing a stock and what he would do in the event this happens. While some people are very capable of remaining calm in turbulent times, he believes it’s even better to be prepared ahead of time. He adds, however, that not all outcomes can be foreseen, and when too many external factors can affect a security, he tries to avoid it altogether.

Concerning the launch of the fund, Franklin says that at first his ultimate goal was to be a portfolio manager of domestic small caps or even micro caps because he believed that this category would offer the best opportunities for finding undervalued stocks, including domestic small cap stocks. However, when the opportunity arose to be a portfolio manager of a small cap international stock fund, he was beyond delighted because it was so close to what he wanted to do.

So how did he handle the complexities of international markets compared to domestic ones?

He spent a lot of time learning the International Financial Reporting Standards (IFRS) and looking for simple, easy ways to understand businesses that can be valued with a high degree of confidence – much as he does with domestic companies. Using this process, he has discovered many international companies for potential investment. Also, because his portfolio has few restraints, he can buy undervalued domestic companies as well. If the world is his market, why would he limit himself only to domestic stocks?

Mr. Franklin is the sole portfolio manager of ICMIX. He is joined by Matt Parker, an analyst. They do work together with other managers and analysts across the firm as well. Franklin is responsible for all buy and sell decisions in the fund.

Strategy capacity and closure

Approximately $1 billion, firm wide. While some of the other Intrepid funds occasionally buy its international names, Mr. Franklin has a good feel for their liquidity and investability across the $900 million held at the firm.

Active Share

The fund does not keep an active share statistic; however, it will not look like an index dominated by larger companies because its all cap strategy allows Franklin to look anywhere. At the same time, he points out, suitable international investments are also limited, and so he searches for the best of these, indicating that many value companies are cheap for a reason and “have some hair on them.” Another factor impacting active share is the level of concentration in the fund vs. the index.

Management’s stake in the fund

As of September 30, 2015, Mr. Franklin has between $100,001-500,000 invested in the fund. Of the other two nominal team managers, Mr. Travis has $100,001 – 500,000, and Mr. Wiggins has none. As of December 31, 2015, only one of the fund’s three independent trustees has chosen to invest in it.

Opening date

ICMIX began operations December 30, 2014.

Minimum investment

$2,500 for Investor Class shares and $250,000 for Institutional Class shares, except that Institutional Class shares of the Fund are not currently available for sale.

Expense ratio

1.40% on assets of $17M as of 12/22/16

Comments

Proprietary Research

Mark Travis, CEO of Intrepid, has said, “We use in-house research, refined over 20 years of practice and perfected during some of the most challenging markets of the century, to determine if a company is our criteria for investment. It’s simple, but not easy.” In other words, this is hard-nosed, homegrown research.

Mr. Franklin adds that most managers’ reliance on outside opinions – whether from the sellside, other managers, or some other content generator – is from the human condition needing reinforcement from others and, as such, is a liability and an error in the process. Intrepid’s research begins by reading a company’s annual report and then forming an investment thesis. Because outside opinions are everywhere, he says, it’s very easy to let those seep in after initial exposure, and so they try to avoid any influence until their research is done and their thesis is complete. Also, subjectivity and difference of opinion can easily differ no matter how quantitative investors get.

The criterion for purchasing companies is at least a 20% discount to FV regardless of market cap. The manager also cites research showing that investing in one’s best ideas and in illiquid and unpopular securities, where larger funds are unable to invest, outperform most of all.

Portfolio Construction: Focus on Small Cap Value

As of 11/30/16, with a median market cap of $396 million, ICMIX is a micro/small deep value fund as shown in the Morningstar style box. However, Franklin doesn’t expect the fund to consistently remain deep value but rather consistently as an all cap fund as is its mandate. While deep value has a place, he personally enjoys buying quality businesses that will compound over time rather than focusing on buying what he calls “cigar butts.” Ideally, he will shift more towards the former but never totally ignore the latter.

Franklin touts the fund’s small size as an advantage because it allows him to purchase smaller securities that would not make sense to a larger fund, as they would not “move the needle.” He has attempted to use this to his advantage and “think outside the box.” Morningstar’s Style Map software agrees because ICMIX literally doesn’t fit inside. Many of his holdings are trading at multiples much lower than what is available in larger securities, resulting in the fund being labeled appropriately. Although some would suggest that posturing a fund in these types of companies is riskier than buying large, well-known companies, Franklin disagrees with this view in the current market environment.

The problem is, he says, that Intrepid requires a margin of safety and that prevents it from investing in good businesses at expensive prices. If a significant market dislocation occurs, then many good businesses he follows may become cheap enough to buy.

Finding Statistically Cheap Companies

Everything Franklin does is based on bottom up analysis. His screening process includes many typical value screens – low multiple of earnings, cash flows, book value, new 52 week lows, and searching for companies below certain EV/EBITDA multiples to find the number of companies that fall within their parameters as being cheap. While this process reveals plenty of potentially investment ideas, the real value added is putting in the hard work going through each name and understanding what’s going on. This can be frustrating because almost every name that looks good at first eventually becomes a pass as more is learned.

Also, he may have to become creative in that process to identify companies that others have overlooked. For example, a company may be trading at a high multiple of current earnings due to the current year’s earnings being depressed but may be cheap if he values it based on normalized earnings. Most important is that finding these companies is only the beginning. Determining their value is completed through fundamental analysis.

Franklin follows over 150 companies on a regular basis for potential purchase and reviews them to see if any have fallen in price significantly and thereby become candidates for purchase. Although he does not have a thorough understanding of all of these companies’ intricacies, he does have a good starting point. Within that list is a smaller one that he knows better, one that is growing, and in which he would invest at short notice if prices fell.

Cash Flows

Most investments that Franklin makes are in companies he expects to be going concerns; therefore, he analyzes earnings and cash flows, valuing these businesses based on discounted cash flows but with some important distinctions.

While more complex, the three basic inputs of DCF are cash flows, the discount rate, and the growth rate. When estimating the cash flow, he attempts to use a normalized cash flow for a business over the business cycle, not forecasting the next five years, and not using the cyclical peak or trough cash flows. Nor does he look at the discount rate in an academic fashion, that is, he does not subscribe to a capital asset pricing model (CAPM) or weighted cost of capital (WACC). Instead, he uses a rate of return that he expects a business to produce on an unlevered basis, typically between 10 and 15%. He knows that he is not going to be right about the growth rate, and for this reason, is typically looking at mature, slow growth companies that are growing at, or near their country’s GDP, and in that way is making an assumption about the country’s long term growth rate relative to a company’s growth rate to it.

The Process at Work: Undervalued Companies, Acquirers, Higher Quality Companies, and Spin-offs

Dundee Series 3 preferred is a significantly undervalued example. While the company is burning some cash, it has significant asset coverage (over 7x), including multiple publicly listed stocks, which he says, they could easily sell to satisfy the principal if needed. Yet, the preferreds are selling at half of their par value and have a 9% current yield and are also floating rate based on the Bank of Canada’s 3-month rate. Duration is not an issue – and their rates are already low – about 50 bps for the 3 month.

Toxfree (TOX AU) is a recent purchase of a serial acquirer. The company is in the waste management industry in Australia but focuses on the treatment of waste rather than stuffing it in some old landfill. Franklin points out that governments continue to push for better waste management practices and that in Australia only about100 hazardous treatment facility licenses exist and are hard to obtain. Because TOX has been acquiring small mom and pop firms that already have these licenses, they have about one-fourth of all licenses in use themselves. Furthermore, the waste management industry has a history of borrowing too much and getting into trouble, but TOX has been prudent in their use of debt and has historically issued equity as part of the deal. These are the types of acquisitions that he believes can add value, that a larger competitor will require these licenses, and that a buyout of the company is likely.

Ipsos (IPS FP) is a higher quality, global market research and consulting firm in France. It has performed well and is trading close to their valuation. Franklin says that while the stock could take off from here because its closest competitor was just bought out, he doesn’t think it would be due to the intrinsic value and purchasing here is more speculative – that is, betting that others will bid it up to a higher multiple as opposed to getting a satisfactory yield over time.

Last, Franklin says that he likes spin-offs and actively investigates them for potential investment. For example, he has made one investment in a spin-off, DeLClima, that was a large success but was unfortunately included only in his seed account prior to the launch of the fund. He says that not all spin-offs are great investments. In general, he believes that most mergers and acquisitions end up destroying capital but also that this view is not a hard and fast rule. He prefers companies that do bolt-on acquisitions that are easier to have things go right.

On average, he tends to own shares in businesses with more stable end markets
and without highly leveraged balance sheets, ones where management has a
substantial stake, there is little debt, and the products are indispensable. These
can usually be valued with a higher degree of confidence.

So is his philosophy more like Warren Buffet’s or Benjamin Graham’s? That depends, he says, on his estimated margin of safety. At times he would take a significantly undervalued security over a higher quality business trading at only a minor discount, adding that keeping an open mind and not discriminating can produce better investment results.

Evaluating Risk

Intrepid defines risk as losing money. It controls risk by understanding a business’s operating characteristics, cash flows, balance sheet, and the motivations of management while avoiding companies with both operational and financial risk. Then the firm waits patiently to buy shares when there is at least a 20% discount to their fair value estimate.

Franklin uses various methods to include risk in his valuation. The end result is that the valuation is already accounting for the additional risks, and if the stock is still trading at a 20% discount then it is a potential buy. To require a larger discount from here would be double counting. If he thinks a company is on the riskier end, then he uses a higher discount rate to account for it. He accounts for capital intensity via our cash flows, which will be lower due to the required reinvestment. Again, he does not subscribe to WACC. This results in excluding many levered firms because he won’t give them the benefit from accessing capital at lower, tax advantaged rates. While this can be overly punishing at times, it’s better than having company blow-ups. He tries to account for cyclicality with his normalized cash flow and higher discount rate. This results in typically ignoring cyclicals in all but the worst environments.

A broader explanation is that he can value some risks so long as the risk is not too large, but other risks can be too difficult to value, for example, political risk. Another important distinction is not taking on too many external variables. If a company is reliant on multiple factors (e.g. interest rates, oil prices, and global shipping) it becomes too difficult to value with a high degree of confidence.

The one area where he tends to lean towards requiring a higher discount than 20% is on asset valuations. Companies that are generating cash flow will continue to accrue value, even if the stock price is not reflecting it. However, companies with little to no cash flow are not accruing that value, and the longer it takes for the price to represent the value, the lower the return is.

The fund also controls risk by limiting the size of its positions in the portfolio.

Although the fund has no minimum, Franklin doesn’t want to spend time researching a company unless it could be at least a 2% weight in the fund – its typical initial size. He considers 4% a “full weight” for most securities but is willing to go above that for companies that offer the proper type of risk/reward tradeoffs he likes, for example, in Clere AG, a German company that focuses on investments in environmental and energy solutions in Europe.

Fund Performance and Relevant Data

The table below is as of 11/30/16. The fund’s inception date is 12/30/14.

Source: Intrepid Capital

The fund has outperformed its bogey by a wide margin.

What does an MFO Premium Multi-Search show for the fund?

Currently at 1.9 years, ICMIX falls just short of a two-year history and is classified as a rookie fund (1-2 years old). As of 11/30/16, the short answer is that its lifetime performance and risk metrics are very promising.

While its peer comparisons are interesting, they are also problematic with such a young fund. After sorting through a lot of Morningstar and MFO data, we decided to screen for “rookie funds” in any of the international styles with the MFO Premium Multi-Search tool – small value, small core, and small growth. That gives us a comparison group of 19 funds. Within that group, ICMIX ranks at or near the top.

ICMIX Performance and Risk Metrics against other rookies

Performance	Sharpe Ratio	Sortino Ratio	Martin Ratio	Ulcer Index	Bear Market
5^thof 19	3^rd	2^nd	4^th	1^st	1 (Best)

The fund ranks highly after its nearly two-year history against these competing styles by performance and on a risk adjusted basis. Also, its MAXDD at -6.9 ranks second among the group. Its short-term performance based on all of the metrics presented so far is encouraging.

As of mid-December, Morningstar shows the fund having a top decile rank of 5 for one-year and 7 YTD. Its one-year upside-downside capture ratio is 100.77 and 32.17 as of 11/30/16.

But investors need to be mindful of a much larger perspective – namely, what Franklin says himself.

While he may welcome and be pleased with the fund’s short history, he would point out that it is not a complete market cycle; that its upside is limited in certain markets, especially during a bubble; that when the whole market begins to be overvalued, it won’t participate; and that if this continues for some time, it will continue to underperform.

That is because Franklin views his performance based on the research he conducts, adherence to the process, and emotional discipline. He believes in the process, and if he doesn’t perform well, he will have to look back and see if it was because he made mistakes, is the result of bad luck, or some other external factor. The most important idea is to constantly improve and produce salubrious risk-adjusted returns. So far- so good.

At 38%, most of the fund is in Europe; however, 8.7% is from its holding in Clere AG.

Cash has averaged 34% since the inception of the fund, measured on a quarterly basis. It has ranged from 12% to 62%, again measured on a quarterly basis. Cash is about 20% as of mid-December. The fund’s portfolio turnover is 32%/Yr.

Franklin presently avoids investments in China and Russia because of their special risks; however, this view is not permanent. In many cases, he cannot trust that the cash on Chinese balance sheets is really there. Concerning Russia, he does not want to take the appropriation risk at this time. Besides, other potential ideas have more easily defined risks compared to those in China and Russia.

Application of Behavioral Finance

One component of Intrepid’s and Franklin’s investment process is the emphasis on behavioral finance to avoid their own mistakes rather than bet on the emotions of others for some sort of positive event. He says that checking his biases and emotions is a constant, especially before and after taking action. For example, one particular emphasis is determining what could go wrong with a position ex-ante and how he wants to react if in fact something bad happens. This only works with the “known unknowns,” but it is helpful with managing emotions.

Another example of how he and the firm implement behavioral finance includes avoiding sellside research, sometimes entirely, but always after they have formed their own thesis in order to avoid biases. Additionally, trying to speak only with management about objective facts is important because it is easy to be led astray by promotional management.

Also, understanding the human condition to avoid mistakes motivates him and is an evolving process. He says that Charlie Munger’s 25 cognitive biases is as good of a quick summary as anything in the psychological literature about human misjudgment and an even better guide than the traditional concepts written about the subject, for example, the house money effect, hindsight bias, anchoring, etc.)

Neither he nor the firm evaluates markets as many of their competitors do. They try to treat it as Benjamin Graham has done – as a manic-depressive business partner. It is far too easy to get caught up in the vicissitudes of the market if that is the focus rather than on the bottom-up investing that they do themselves.

As someone who applies an awareness of behavioral principles, cognitive biases, human misjudgment, and decision making, Franklin recommends that investors do the same – even the most intelligent of them – by picking up a psychology book, not another investment book. Doing so, he says, may lead them to have better investing results. Human thinking is filled with “psychological hazards and pitfalls” as he calls them. Being aware of our own psychological limits helps us recognize them and thereby evaluate decisions before and after we make them.

Bottom Line

ICMIX offers investors the opportunity to own an all cap international value fund having a distinct strategy for buying undervalued companies throughout the globe. Its process is distinctive, based on principles used for years by the Adviser, and now currently applied as a unique investment product compared to others in its category. Franklin points out that not much money exists from other firms in small cap international value because they may not see these offerings as scalable.

Franklin emphasizes a long-term approach focused on producing superior performance during full market cycles by participating to the extent possible in favorable up markets complemented by caution in overvalued ones. As such, the fund warrants consideration by investors as a promising new offering and additional discussion here.

Franklin’s taking a long-term view when investing in stocks means it could take quite some time for the thesis to play out. Potential investors need to understand that and should be taking the same approach. He adds, however, that sometimes things happen faster or slower than expected. While he can’t say what the future will be, he can discuss what the portfolio looks like today and his thoughts about it.

Does investing in the fund require extraordinary patience? Clients who take a long-term approach, he says, do not feel that they are being patient. The only pressure they would feel, he states, would be self-inflicted, and if they believe in the process, they won’t feel that pressure.

While the portfolio is currently deep value, Franklin says that he isn’t sure that patience needs to be greater than it is for Intrepid’s traditional products. Many managers avoid deep value because it’s not as easy of a sell. While it’s easier to talk about the benefits of investing in a company like Nestle, it’s not as easy for buying a small unknown company in Australia. But this is what opens up opportunity for him, is the right thing, and that over time investors will realize it.

With these ideas in mind, he says that the fund is not right for everyone.

As someone who frequently uses quotations to highlight his quarterly commentaries, Franklin alludes to the Greek Stoic Epictetus (55 A.D. – 135 A.D) who spoke of living life as if “wealth consists not in having great possessions but in having few wants.” If someone agrees, then short term movements in prices are palatable. On the other hand, if one lives like Mae West who said, “I generally avoid temptation unless I can’t resist it,” then a person is probably speculating to earn enough to offset some other financial error, and negative moves in prices will be unbearable.

Those at Intrepid spend time talking to clients, attending conferences, and giving presentations. Education, not promotional management, is their goal. The fund communicates with shareholders through semiannual webinars featuring manager Q&A and detailed quarterly reports focused on their holdings and current thinking. Their website clearly explains the firm’s philosophy, strategies, and risks for each of their funds. Franklin adds, ““We welcome clients and prospects of the Fund wishing to get a better understanding, and who want to get in the weeds with us regarding our thinking, to email or call.” The door is open.

Fund website

Intrepid International

Funds in registration

By David Snowball

The SEC requires managers to submit plans for their new funds 75 days before they’re offered for sale to the public. This month finds 16 new funds in the pipeline. The most intriguing are the two Rondure funds, launched by a partnership between former Wasatch star manager Laura Geritz and the folks at Grandeur Peak. We wrote in December about the partnership. One of pure EM, the other global and both are positioned to hold stocks that are somewhat larger and more seasoned than we associate with Grandeur Peak. Artisan, which rarely launches a bad fund, has registered plans for its niche-est fund, Artisan Thematic, led by an experienced hedge fund guy.

Artisan Thematic Fund

Artisan Thematic Fund will seek long-term capital appreciation. The plan is to invest in securities which stand to benefit from “thematic trends” that might drive above-market rates of growth for the next 3-5 years. The portfolio will be all-cap, global and focused. The fund will be managed by Christopher Smith who had previously worked for a series of private partnerships, most recently Kingdon Capital. The minimum initial expense ratio will be 1.50%. The minimum initial purchase will be

BNP Paribas AM Emerging Markets Equity Fund

BNP Paribas AM Emerging Markets Equity Fund will pursue long-term capital appreciation. The plan is to invest in EM stocks, specifically “quality growth companies with strong management, corporate governance and financial health.” The fund will be managed by Don Smith, Rick Wetmore, and Quang Nguyen. The initial expense ratio will be 1.15%. The minimum initial investment for retail shares will be $2,500. This is one of a suite of six unrelated BNP Paribas funds launching simultaneously. The others focus on mortgage-backed securities, US small cap stocks, EM debt, inflation-linked bonds and absolute return fixed-income. They’re all covered in the same prospectus.

GMO Climate Change Fund

GMO Climate Change Fund will pursue “high total return,” a phrase I haven’t seen before. The plan is to invest in the stock of firms which stand to benefit from efforts to “curb or mitigate the long-term effects of global climate change, to address the environmental challenges presented by global climate change, or to improve the efficiency of resource consumption.” As with infrastructure funds, that represents a pretty diverse group. The fund may have a lot of industry or sector concentration and may also hold significant amounts in cash or Treasury bonds. The fund will be managed by two members of GMO’s Focused Equity team, Thomas Hancock and Lucas White. The initial expense ratio has not yet been disclosed.The minimum initial investment will be between $125 million and $300 million, depending on share class.

Harbor Strategic Growth Fund

Harbor Strategic Growth Fund will pursue long-term capital gains. Harbor is setting this up as a shell for the sole purpose of having a fund into which they’ll merge Mar Vista Growth in March 2017, an entirely-reputable little fund. The fund will be managed by Mar Vista’s existing team. The initial expense ratio for Investor shares will be 1.08%. The minimum initial investment will be $2,500, reduced to $1,000 for various tax-advantaged accounts.

Mirova Global Green Bond Fund

Mirova Global Green Bond Fund will pursue total return, through a combination of capital appreciation and current income, by investing in green bonds. The fund will be managed by Christopher Wigley and Marc Briand of Natixis. The initial expense ratio has not been disclosed; there will be a sales load but load-waived shares are available. The minimum initial investment will be $2,500.

Redwood AlphaFactor Core Equity Fund

Redwood AlphaFactor Core Equity Fund will pursue long-term total return. The plan is to replicate the performance of their AlphaFactor Focused Index, which ranks stocks at least in part on “net share count reduction, free cash flow growth, dividend yield, volatility and debt/asset ratios.” The fund will be managed by the senior folks at Redwood, Michael Messinger, Michael Cheung, and Richard Duff. The initial expense ratio has not been disclosed. The minimum initial investment will be $10,000.

Rondure New World Fund

Rondure New World Fund will pursue long-term capital appreciation. The plan is to find “great companies at good prices and good companies at great prices” with ties to the emerging markets. Those might include both firms domiciled in emerging or frontier markets, or those whose earnings are tied to the EMs. The fund will invest primarily in stocks with market caps of $1.5 billion an up, though the occasional IPO might slip in. The fund will be managed by Laura Geritz who, from 2006-2016, managed or co-managed a variety of Wasatch funds, including Wasatch Frontier Emerging Small Countries Fund (WAFMX, 2012-16), Wasatch International Opportunities Fund (WAIOX, 2011-16) and Wasatch Emerging Markets Small Cap Fund (WAEMX, 2009-15). The initial expense ratio has not yet been disclosed. The minimum initial investment will be $2,000 for both Institutional and Investor class shares, with the minimum reduced to $1,000 for accounts established with an automatic investing plan.

Rondure Overseas Fund

Rondure Overseas Fund will pursue long-term capital appreciation. The plan is to find “great companies at good prices and good companies at great prices” from countries, developed and developing, around the world. The fund will invest primarily in stocks with market caps of $1.5 billion an up, though the occasional IPO might slip in. The fund will be managed by Laura Geritz who, from 2006-2016, managed or co-managed a variety of Wasatch funds, including Wasatch Frontier Emerging Small Countries Fund (WAFMX, 2012-16), Wasatch International Opportunities Fund (WAIOX, 2011-16) and Wasatch Emerging Markets Small Cap Fund (WAEMX, 2009-15). The initial expense ratio has not yet been disclosed. The minimum initial investment will be $2,000 for both Institutional and Investor class shares, with the minimum reduced to $1,000 for accounts established with an automatic investing plan.

TCW/Gargoyle Dynamic 500 Collar Fund

TCW/Gargoyle Dynamic 500 Collar Fund will pursue long-term capital appreciation “with limited and defined risk of significant loss compared to the S&P 500 Index.” The plan is to buy exposure to the S&P 500, buy put options to hedge their SPX exposure and sell call options to hedge their puts. The fund will be managed by Joshua Parker and Alan Salzbank, Gargoyle’s founders. The initial expense ratio has not yet been disclosed. The minimum initial investment will be $5,000.

TCW/Gargoyle Dynamic Market Neutral Fund

TCW/Gargoyle Dynamic Market Neutral Fund will pursue long-term capital appreciation regardless whether the level of the general [U.S.] stock market increases or decreases. The plan is to buy exposure to the S&P 500 and hedge it with short-term out-of-the-money SPX call options. The fund will be managed by Joshua Parker and Alan Salzbank, Gargoyle’s founders. The initial expense ratio has not yet been disclosed. The minimum initial investment will be $5,000.

TCW Long/Short Fundamental Value Fund

TCW Long/Short Fundamental Value Fund will pursue long-term capital appreciation. The plan is to build your basic long-short portfolio but to incorporate in it this advisor’s particular magic. (No, it’s not immediately clear what that might be.) The fund will be managed by Jeremy Zhu, Vincent Staunton, and Marty Lane of TCW. The initial expense ratio has not yet been disclosed. The minimum initial investment will be $5,000.

Manager changes

By Chip

Each month, dozens of funds undergo changes to their management teams; sometimes those changes are minor (one of 13 co-managers has stepped aside) and sometimes they fundamentally change a fund’s prospects (Rajiv Jain’s departure from Virtus EM Opportunities triggered billions in outflows). Among this month’s three dozen changes is the baffling dismissal of two successful teams from BBH International Equity (BBHEX), the arrival of a co-manager for David Herro at Oakmark International (OAKIX) and the removal of the co-manager at two of Tom Marsico’s funds.

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
NRFAX	AEW Real Estate Fund	No one, but …	Gina Szymanski will join the portfolio management team of Matthew Troxell, J. Hall Jones and John Garofalo.	12/16
AGCAX	Arbitrage Credit Opportunities Fund	James Powers will no longer serve as a portfolio manager to the fund.	Gregory Loprete and Robert Ryon will continue to manage the fund.	12/16
BEQRX	Balter L/S Small Cap Equity Fund	Apis Capital Advisors will no longer serve as a subadvisor to the fund.	The fund’s assets will be managed by the adviser or the remaining subadvisors.	12/16
BBHEX	BBH International Equity Fund	Walter Scott & Partners Limited and Mondrian Investment Partners Limited will no longer serve as subadvisors to the fund. Odd decision with such a strong fund and long-tenured team.	Select Equity Group will subadvise the fund.	12/16
CLPAX	Catalyst Exceed Defined Risk Fund, formerly Catalyst/Lyons Hedged Premium Return Fund	In lieu of the planned liquidation, the fund instead undergoes a change in name, objective, and management team. Lyons Wealth Management, LLC will no longer serve as subadvisor of the fund. Alexander Read, Matthew Ferratusco and Brandon Burns will no longer be portfolio managers of the fund.	Joseph Halpern joins Michael Schoonover in managing the fund.	12/16
DGDAX	Dreyfus Global Dynamic Bond Fund	Jonathan Day is no longer listed as a portfolio manager for the fund.	Parmeshwar Chadha joins Howard Cunningham and Paul Brain in managing the fund.	12/16
GPGAX	Dreyfus GNMA Fund	Robert Bayston is no longer managing the fund.	Eric Seasholtz and Karen Gemmett have taken over management of the fund.	12/16
FSRBX	Fidelity Select Banking Portfolio	No one, but …	Matt Reed joins John Sheehy in managing the fund.	12/16
FSCHX	Fidelity Select Chemicals Portfolio	Mahmoud Sharaf no longer manages the fund	Richard Malnight now manages the fund.	12/16
FSHOX	Fidelity Select Housing Portfolio	Holger Boerner is no longer listed as a portfolio manager for the fund.	Neil Nabar will manage the fund.	12/16
FWRLX	Fidelity Select Wireless Portfolio	Kyle Weaver no longer manages the fund	Matthew Drukker and Harlan Carere co-manage the fund.	12/16
FMSVX	FMC Strategic Value Fund	Edward Lefferman will cease serving as a co-portfolio manager of the fund after 18 years. A strange fund, blinding performance for years but they refused to apply for a ticker symbol.	Paul Patrick will continue to manage the fund.	12/16
ITHAX	Hartford Capital Appreciation	Effective immediately, David Palmer, W. Michael Reckmeyer, III and Peter Higgins will no longer serve as additional portfolio managers to the fund.	Greg Pool and Tom Simon will serve as additional portfolio managers.	12/16
HGAAX	Henderson All Asset Fund	Effective January 31, 2017, Chris Paine will no longer serve as a portfolio manager of the fund.	Paul O’Connor will continue to serve.	12/16
KGSCX	Kalmar “Growth-with-Value” Small Cap Fund	No one, but …	James Gowen joins Ford Draper and Dana Walker in managing the fund.	12/16
SWOSX	Laudus Small-Cap MarketMasters Fund	No one, but …	Voya Investment Management is added as a new investment manager with Joseph Basset and James Hasso added to the management team.	12/16
MFOCX	Marsico Focus Fund	Coralie Witter is no longer a portfolio manager for the fund.	Thomas Marsico will continue as the sole manager of the fund.	12/16
MGRIX	Marsico Growth Fund	Coralie Witter is no longer a portfolio manager for the fund.	Thomas Marsico will continue as the sole manager of the fund.	12/16
TMFEX	Motley Fool Epic Voyage Fund	William Mann, III is leaving Motley Fool Asset Management to join The Motley Fool, LLC	The rest of the team remains with Bryan Hinmon stepping up to Chief Investment Officer and Senior Portfolio Manager roles.	12/16
TMFGX	Motley Fool Great America Fund	William Mann, III is leaving Motley Fool Asset Management to join The Motley Fool, LLC	The rest of the team remains with Bryan Hinmon stepping up to Chief Investment Officer and Senior Portfolio Manager roles.	12/16
FOOLX	Motley Fool Independence Fund	William Mann, III is leaving Motley Fool Asset Management to join The Motley Fool, LLC	The rest of the team remains with Bryan Hinmon stepping up to Chief Investment Officer and Senior Portfolio Manager roles.	12/16
NOIAX	Natixis Oakmark International Fund	No one, but …	Michael Manelli joins David Herro in managing the fund	12/16
NTBAX	Navigator Tactical Fixed Income	No one, but …	Jonathan Fiebach joins Robert Bennett, Mason Wev, David Rights and K. Sean Clark in managing the fund.	12/16
NMFIX	Northern Multi-Manager Global Listed Infrastructure Fund	Brookfield Asset Management is no longer listed as an advisor to the fund.	Maple-Brown Abbott Limited will subadvise a portion of the fund.	12/16
OAKIX	Oakmark International Fund	No one, but …	Michael Manelli joins David Herro in managing the fund	12/16
OARDX	Oppenheimer Rising Dividends Fund	No one, but …	Josh Peters joins Manind Govil in managing the fund.	12/16
PECZX	PIMCO Emerging Markets Corporate Bond	Said Saffari is no longer managing the fund.	The fund is jointly managed by Kofi Bentsi, Mohit Mittal, Yacov Arnopolin and Luke Spajic	12/16
PECZX	PIMCO Emerging Markets Corporate Bond Fund	Said Saffari is no longer managing the fund.	Kofi Bentsi, Mohit Mittal, Yacov Arnopolin and Luke Spajic will manage the fund.	12/16
PGMMX	Principal Multi-Manager Equity Long/Short Fund	Columbus Circle Investors is no longer an advisor to the fund.	There’s no change listed to the management team. Not sure what’s up.	12/16
PPGAX	Putnam Global Sector Fund	The following are no longer managing the fund: Walter Scully, Ferat Ongoren, David Morgan, Vivek Gandhi, Kelsey Chen, Jacquelyne Cavenaugh, Christopher Eitzmann, Greg Kelly, Sheba Alexander, Isabel Buccellati, Di Yao, Neil Desai, Ryan Kauppila, Daniel Schiff and Michael Maguire.	Kathryn Lakin joins Samuel Cox and Aaron Cooper on the management team.	12/16
LQISX	QS Global Market Neutral Fund	Austin Kairnes is no longer listed as a manager for the fund.	Jacqueline Hurley joins Russell Shtern, Stephen Lanzendorf and Joseph Giroux on the management team.	12/16
LMISX	QS U.S. Large Cap Equity Fund	Austin Kairnes is no longer listed as a manager for the fund.	Jacqueline Hurley and Russell Shtern join Stephen Lanzendorf on the management team.	12/16
SANAX	Sandalwood Opportunity Fund	Shelton Capital Management is no longer a subadvisor to the fund.	The management will be handled by the fund’s other subadvisors.	12/16
SHAAX	Schooner Hedged Alternative Income Fund	Morgan Avitabile will no longer manage the fund.	Anthony Fusco and Gregory Levinson will continue to manage the fund.	12/16
SCORX	Sextant Core Fund	Bryce Fegley and long-time manager Peter Nielsen will no longer manage this small disappointing fund	Phelps McIlvaine and Christopher Paul were added in December to co-manage the fund.	12/16
TGLDX	The Tocqueville Gold Fund	No one, but …	Ryan McIntyre joins John Hathaway and Douglas Groh in managing the fund.	12/16
IMUAX	Transamerica Multi-Manager Alternative Strategies Portfolio	Prat Patel is no longer listed as a portfolio manager for the fund.	Timothy Galbraith is joined by Rishi Goel and James Schaeffer.	12/16

Launch Alert: GQG Partners Emerging Markets Equity Fund GQGPX

By David Snowball

On December 28, 2016, GQG Partners LLC launched their Emerging Markets Equity Fund which will be managed by Rajiv Jain.

The fund pursues an eminently sensible strategy. They are looking for companies that they believe are “reasonably priced, and have strong fundamental business characteristics, sustainable earnings growth and the ability to outperform peers over a full market cycle and sustain the value of their securities in a market downturn, while [trying to] avoid investments in companies that it believes have low profit margins or unwarranted leverage, and companies that it believes are particularly cyclical, unpredictable or susceptible to rapid earnings declines.” That will tilt the portfolio toward high quality growth stocks.

Without question, the fund’s primary draw is Mr. Jain. Mr. Jain is GQG’s Chairman and CIO and he’s the fund’s sole portfolio manager. Before that, he was Co-CEO, CIO and Head of Equities at Vontobel Asset Management, an arm of a major Swiss bank. He joined Vontobel in 1994 as an analyst and rose to become the manager or co-manager for 17 funds available to American or European investors. By far the most famous of them is Virtus Emerging Markets Opportunities Fund (HEMZX) which he managed from 2006-2016. Over the five years prior to Mr. Jain’s departure, HEMZX outperformed 99% of its peers (per Bloomberg) and grew to $9.4 billion. The fund was particularly adept at minimizing the damage caused by major market declines, though that same discipline caused it to lag when markets got frothy. When word of Mr. Jain’s departure was released, Vontobel’s stock dropped 11%. Morningstar downgraded HEMZX from Silver to Bronze and the fund saw billions in outflows by year’s end. That seems to substantiate the judgment by Axel Schwarzer, the head of Vontobel, that Mr. Jain was “the bedrock for the firm’s success over the past 22 years.”

Ultimately, Mr. Jain was responsible for managing $48 billion in assets. We know that he was concerned by the ballooning size of his fund and managed to close other avenues into the strategy, though the fund remained open. His discussion of GQG’s principles, which focus on aligning the advisor’s interests with the investors’, raise the prospect that he was not uniformly delighted with the bank’s business decisions.

GQG is contractually waiving fees and reimbursing expenses to keep Investor Class expense ratio from exceeding 1.33%, and the Institutional and Retirement classes from exceeding 1.08%, through November, 2018.

The fund offers three share classes; the Investor Class (GQGPX) has a $2,500 minimum initial investment, the Institutional Class (GQGIX) has a $500,000 minimum and the R6 Retirement Class (GQGRX) has no minimum.

The fund’s website is http://gqgpartners.com/products/us-mutual-funds/; there’s a three minute introductory video from Mr. Jain and his partners that’s really worth listening to.

Launch Alert: Cognios Large Cap Value Fund (COGLX & COGVX)

By David Snowball

On October 3, 2016, Cognios Capital launched Cognios Large Cap Value Fund, which represents the “long” sleeve of its long-short flagship fund, Cognios Market Neutral Large Cap Fund (COGMX/COGIX). They launched the fund in response to requests from existing clients, mostly investment advisors, who wanted easy access to the long-only option. Cognios waited until mid-December to publicize the fund’s launch.

They target high-quality value stocks, rather than growth ones. They use a quantitative screen called ROTA/ROME. ROTA (Return on Tangible Assets) is a way of identifying high-quality businesses. At base, it measures a sort of capital efficiency: a company that generates $300 million in returns on a $1 billion in assets is doing better than a company that generates $150 million in returns on those same assets. Cognios research shows ROTA to be a stable identifier of high quality firms; that is, firms that use capital well in one period tend to continue doing so in the future. As Mr. Buffett has said, “A good business is one that earns high return on tangible assets. That’s pretty simple. The very best businesses are the ones that earn a high return on tangible assets and grow.” ROMA (Return on Market Value of Equity) is a valuation screen that divides a company’s profits by its current stock price to calculate a “profit yield.” It looks a lot like the inverse of the stock’s p/e, so that a high profit yield signals a low valuation for the stock .The combined quality and value screens skew the portfolio toward value.

In general and over time, the strategy works. The Market Neutral fund, which incorporates the large cap value strategy, has earned five stars from Morningstar and its returns since inception (through December 30, 2016) have more than tripled those of its market-neutral peers. Close observers will note that Market Neutral posted a small loss for 2016, which was largely attributable to losses in the fund’s short book. And, too, the market seemed intent on rewarding bad companies. Mr. Angrist commented in November that

… the worst quality businesses …that were trading at the highest prices and have the highest amount of debt significantly outperformed companies that have much better business models that are trading at cheaper prices and have far less debt. Over time we make money by the market doing just the opposite, essentially, and this is one of those unusual periods of time when the market rewarded essentially everything that we were short and penalized everything that we were long.

And, indeed, over time the strategy has made money. The Large Cap Value separate account composite has returned 18.13% annually over the past five years, far ahead of the Russell 1000 Value’s 16.15%.

The fund is managed by a team led by Jonathan Angrist, Cognios’ president and chief investment officer, supported by Brian Machtley and Francisco Bido. The team also manages the Market Neutral Fund and all three managers have substantial personal investment in the fund. In addition the new funds received $40 million in seed capital from Cognios.

Investor shares of the Value Fund carry 1.10% expense ratio, after waivers. Institutional shares are 25 basis points lower.

The Value Fund offers two share classes; the Investor Class (COGLX) has a $1,000 minimum initial investment and the Institutional Class (COGVX) has a $100,000 mininum. At the same time they launched Cognios Large Cap Growth Fund (COGGX/COGEX) which parallels a successful strategy which had been offered only through separate accounts. Over the past five years, Cognios LCG has outperformed the Russell 1000 Growth by 359 basis points a year.

The fund’s website is http://www.cogniosfunds.com/; you might be tempted to visit the advisor’s own site, but the information on the two sites is largely the same.

Updates

By David Snowball

PIMCO pays up

PIMCO has agreed to write to $19.8 million check to resolve a long-running enforcement action initiated by the SEC. The short version: PIMCO launched PIMCO Total Return ETF (BOND), one of the earliest actively-managed ETFs, in 2012. Early performance was eye-opening, since the ETF outperformed PIMCO’s $175 billion flagship Total Return Fund (PTTRX). It turns out that the outperformance was achieved by mispricing 43 of the fund’s 156 holdings and was supported by “other, misleading reasons” offered for the fund’s success. PIMCO’s description speaks of “43 smaller-sized positions of non-agency mortgage-backed securities using third-party vendor prices, as well as PIMCO’s policies and procedures related to these matters.”

Jaffe on the move

Chuck Jaffe has announced his imminent departure from MarketWatch. He wrote last week that “I will be leaving MarketWatch at some point in January, although I expect the site to continue originating my column for the foreseeable future. It’s all about the state of journalism and Dow Jones … but it is also a good time for me to consider my options. My radio show (MoneyLife with Chuck Jaffe) will continue.”

Chuck is assuredly the most widely-read mutual fund reporter left standing. His departure is part of the larger unwinding of professional journalism triggered by the moronic insistence that people should receive their news for free, as if serious reporting simply appeared, without cost or effort. In consequence, paid readership is down and advertising revenue is down, so news organizations go into a period of managed decline. MarketWatch had already laid off all of their other senior correspondents and the Wall Street Journal, the most prestigious Dow-Jones brand, “as part of the cost cutting, offered all of its news employees the option to take a buyout.”

Every journalist at the country’s premier financial publication was deemed expendable.

We’ll follow Chuck as best we can!

Morningstar on the move

For those who missed the announcement, the 2017 Morningstar Investment Conference has been forced to surrender its traditional June date. The conference remains at the vast McCormick Place but will now take place Wednesday, April 26 through Friday, April 28. The explanation from one of the folks at Morningstar was “we’re a big conference by mutual fund industry standards, but we’re simply not big enough to command premier dates and premium space at the McCormick Place.”

We’ll try to be there for you.

Briefly Noted

By David Snowball

SMALL WINS FOR INVESTORS

Effective January 1, 2017, the management fee for AMG River Road Long-Short Fund (ARLSX, formerly ASTON/River Road Long-Short Fund) will be reduced from 1.10% to 0.85% . At the same time AMG River Road Select Value Fund (ARSMX, formerly ASTON/River Road Select Value Fund) drops from 0.9 to 0.75%. In both cases, the total e.r. then falls as well.

AQR Global (AQGNX) and International Equity Funds (AQINX) have reduced their expense ratios by 10 and 5 basis points, respectively.

Ariel has lowered fees on both International (AINTX) and Global (AGLOX) by 12 bps. The new e.r. for each is 1.13% on Investor shares and 0.88% on Institutional ones.

Effective February 24, 2017, BBH International Equity Fund (BBHEX) will eliminate its “N” class shares but lower the investment minimum for “I” class (BBHLX) down to $10,000 from $5 million. It will also lower the expense ratio for BBHLX from 0.89% to 0.70%. That’s all to the good. At the same time, though, BBH boots Walter Scott & Partners of Edinburgh after a successful 12 year run managing the fund and Mondrian Investment Partners after five years. They’re succeeded by Select Equity Group. No word on why, though the 20% reduction in their compensation might have contributed to it.

BNY Mellon Municipal Opportunities Fund (MOTIX) reopened to new investors on December 15, 2016.

Matthews Asia reduced the institutional share class minimums on all its funds from $3,000,000 to $100,000 on December 30, 2016.

CLOSINGS (and related inconveniences)

Balter Event-Driven (BEVRX) has closed to all investors. Technically, the Board “approved the indefinite suspension of all sales of Fund shares.” It’s a former hedge fund that hasn’t exactly caught fire since conversion to a ’40 Act fund, which suggests that this closure might be the fund’s first step into the darkness.

Effective at the close of business on January 27, 2017 Janus Enterprise Fund will close to new investors. The fund has more than doubled in size in a year, from $5 billion to $10 billion. The underlying strategy now holds more than $13 billion. Only two of 192 mid-cap growth funds are larger than Enterprise. I would be cautious about approaching it since it’s rare for funds that have closed after ballooning to thrive. That said, there is some reason for a final look. First, it has been a splendid midcap fund. With the exception of the 2000-2002 bear market, it has matched or outperformed its mid-cap growth peers. It has an experienced manager and a very low turnover strategy. Second, the two larger mid-cap growth funds, T. Rowe Price Mid Cap Growth (RPMGX) and Principal Midcap (PEMGX), are themselves excellent vehicles. Both are closed and both have continued doing well since closure. Closing a few billion ago would have been a nice touch. Contrarily, telegraphing the closure a month or more in advance is an open invitation for a final surge of performance chasers. Be cautious.

OLD WINE, NEW BOTTLES

Effective on or about February 15, 2017, BlackRock Disciplined Small Cap Core Fund (BDSAX) will be renamed BlackRock Advantage Small Cap Core Fund.

Good news for fans of Catalyst/Lyons Hedged Premium Return Fund (CLPAX): the fund was not liquidated on December 28, 2016. Woohoo! Instead, it rebooted as Catalyst Exceed Defined Risk Fund with the objective of pursuing capital appreciation and preserving of capital.

Good Harbor Tactical Equity Income Fund (GHTAX) is changing its name to the Leland Real Asset Opportunities Fund. No explanation for the “Leland” part since no one seems to be coming or going. My best guess is that it’s a change-of-distribution arrangement, since some of the other Good Harbor funds already trade under the Leland name.

Horizon Dynamic Dividend Fund (HNDDX) has become the Horizon Active Dividend Fund. The name change took place on December 28, the day the fund (now with almost $50,000 in assets) launched.

On February 28, 2017, MainStay Global High Income Fund (MGHAX) becomes MainStay Emerging Markets Debt fund with the predictable changes to its investment strategy. On the same day, MainStay Emerging Markets Opportunities Fund (MEOAX) will become MainStay Emerging Markets Equity Fund.

Pending shareholder approval, late in the first quarter of 2017, Mar Vista Strategic Growth Fund (MVSGX) will become Harbor Strategic Growth Fund.

On January 1, 2017, the T. Rowe Price International Growth & Income Fund (TRIGX) will change its name to the T. Rowe Price International Value Equity Fund.

At the end of December 2017, three Westcore funds were renamed. Westcore Growth Fund (WTMGX) became Westcore Large-Cap Dividend Fund, MIDCO Growth (WTEIX) became Mid Cap Value Dividend and Select (WTSLX) became Small Cap Growth Fund II.

OFF TO THE DUSTBIN OF HISTORY

The $3 million AllianzGI China Equity Fund (ALQAX) will liquidate on January 30, 2017. By design or not, the fund has been wildly volatile, even by the standards of China funds, which means that its modestly above-average returns have not won it many fans.

AMG Managers Anchor Capital Enhanced Equity Fund (AMBEX, formerly ASTON/Anchor Capital Enhanced Equity Fund) will pass into The Great Beyond on January 31, 2017.

American Independence Navellier Defensive Alpha Fund (IFCSX), a RiskX fund, will liquidate on January 31, 2017. Mr. Navellier was appointed co-manager in May 2016, presumably in a last-ditch attempt to salvage the long-time laggard. Things got marginally better (it went from a major laggard to a minor laggard) but not good, so it’s gone.

The folks behind ASG Global Macro Fund helpfully reported in December 27, 2016, that “The Fund no longer exists, and as a result, shares of the Fund are no longer available for purchase or exchange.”

Brown Advisory Value Equity Fund (BIAVX) merged into Brown Advisory Flexible Equity Fund on December 2, 2016.

Catalyst Hedged Insider Buying Fund (STVAX) merged into Catalyst Insider Long/Short Fund (CIAAX) on December 28, 2016. It’s not automatically a good sign when your fund is seen as less attractive than a volatile, $3 million, one-star fund.

Champlain Focused Large Cap Value Fund (CIPYX) will liquidate on January 27, 2017, shortly after its third anniversary.

Given “the unlikelihood that the Fund would experience any meaningful growth in the near future,” the $10 million FundX Flexible Total Return Fund (TOTLX) will liquidate on January 6, 2017. “Unlikelihood”? Who writes “unlikelihood”? Regardless, or “irregardless” if I’m following their lead, it might be that the unlikelihood was raised by the combination of an undistinguished strategy, high expenses and mediocre returns.

Hennessy Core Bond Fund (HCBFX), which has been consistently weak and expensive for the past decade, will liquidate on or about Friday, February 17, 2017.

Kimberlite Floating Rate Financial Services Capital Fund (CEFFX) liquidated on December 16. 2016.

Hancock Horizon Value Fund (HHGAX) will merge into Federated MDT Stock Trust (FSTRX) at the beginning of February. Likewise, Hancock Horizon Core Bond Fund (HHBAX) is slated to merge into Federated Total Return Bond Fund (TLRAX). That’s a clear win for existing HHGAX shareholders but less so for HHBAX where the expense reduction is smaller and the performance of the acquiring fund is less distinguished.

MassMutual Select Diversified International Fund (MMAAX) will be dissolved on or about April 28, 2017.

MFS Institutional Large Cap Value Fund has been liquidated. They shared a reminder rather after the event.

Mirae Asset Asia (MALAX) and Emerging Markets (MALGX) funds will liquidate on February 28, 2017. Both are solid performers that haven’t found a market niche.

PNC High Yield Bond Fund (PAHBX) will liquidate on January 31, 2017.

RX Tactical Rotation Fund (RXTAX) took its last spin on December 30, 2016. The advisor pulled the plug after 17 months of operation.

The flagship Schooner Fund (SCNAX) liquidated on December 30, 2016. The same team continues to manage Schooner Hedged Alternative Income (SHAAX).

On March 24, 2017, Victory CEMP Commodity Enhanced Volatility-Weighted Index Strategy Fund (CCNAX) will merge into Victory CEMP Commodity Volatility-Weighted Index Strategy Fund (CCOAX).

Thanks, as ever, to The Shadow for his yeoman’s work in reviewing SEC filings daily.