Yearly Archives: 2017

October 1, 2017

By David Snowball

Dear friends,

It’s finally fall, my favorite season of the year. The heat abates, the garden quiets, the apples ripen.  Chip and I will soon venture north to Wisconsin for leaf peeking and visits to orchards. You’d be amazed at the variety of flavors found in apples; there are about 200 varieties grown in the US, with the average grocery store stocking just a half dozen (including that flavorless favorite, Red Delicious). You’ve still got time to do better. In the Midwest, anyway, October is the month for Haralson and King David, Golden Russet and Creston, Enterprise and Voyager. Heck, you might find a few Lura Red or Wolf Rivers left, if you’re lucky.

And Augustana is beginning to look like Augustana in Autumn.

It feels like a time to breathe again.

Once more into the breach!

When last we wrote, the Gulf Coast had been swept by a huge hurricane and we talked about strategies for reaching out. It feels slightly freakish to note two more major hurricanes hitting the US in the weeks that followed, Irma and Maria. While many areas of the mainland US were devastated, reports coming out of the Caribbean talk about an apocalypse where entire islands had their homes and infrastructure disappear. Even now, only one Puerto Rican in 20 has electricity, fewer than half have access to safe drinking water and … horror of modern horrors … only 14% of the cell phone network is functioning.

For those wishing to reach out, the best resource I’ve found is Charity Navigator, a non-profit that rates charities by the efficiency of their efforts. Charity Navigator has a page devoted to agencies providing support to hurricane victims. We can’t fix it all, but that seems a poor argument for choosing to do nothing. And so, we try.

Driving the porcelain … uhh, portfolio

Many of us have reached the same miserable moment. It’s 2:00 a.m. We’ve got a stomach virus. We’re miserable and we know what’s coming. But, perhaps after a false alarm or two, it hasn’t come … yet.

And so you sit. And you think, “oh, god. Let’s just get this over with and get on with life.”

That’s about where I am now. The stock market is historically overpriced, and becoming more so by the day.

Index averages generally reflect the performance of a few huge, hot stocks (the FANGs). To eliminate that bias, investors sometimes look at the performance and pricing of the median stock in an index; that is, the S&P 500 stock ranked 250th in costliness. By such measures, GMO notes: “the average US stock has never been more expensive than it is currently, even at the height of the insanity that was the TMT bubble of the late 1990s. We have never seen such broad-based overvaluation of US equities.”

With a special tip of the hat to Eric Cinnamond and the folks at the Towle Deep Value Fund (TDVFX, closed to new investors), GMO ran a valuation screen suggested by Benjamin Graham, designed to identify “deep value” stocks. The screen looks at earnings yield relative to bonds, dividend yield relative to bonds, total corporate debt and 10-year price/earnings ratio. Using that test, “in the US not a single stock passes the screen. Not one single solitary stock can be called deep value.”

Jason Zweig, more perma-brain than perma-bear, is writing a series of stories this month to commemorate the October 16, 1987 crash in which the Dow lost nearly a quarter of its value in eight hours. It had been a banner year in the market, it was up 30% by October, despite rising interest rates, international bickering, skirmishes with Iran and concern over tax policy. It was a banner year … right up to the moment it wasn’t.

History does offer a few clear lessons.

Stocks have been overvalued, by long-term standards, for most of the past three decades. So, on average, you were more likely to have missed consistent gains than to have dodged a crash if you got out of the market entirely.

Investors today who hold large positions in the hottest stocks … should consider trimming their positions, however. In 1987, as in 1929, the stocks that had previously gone up the most tended to fall the farthest.

Above all, says Staley Cates, vice chairman of Southeastern Asset Management in Memphis, Tenn., “don’t be afraid to hold cash.” On Oct. 19, 1987, he and his young colleagues clustered around a Quotron machine putting in buy orders as they watched the market crash, “and the ultimate comfort we had that day was holding 25% to 30% of our portfolios in cash.”

Without it, “we couldn’t have bought stocks,” he says. Having the cash to buy when others are selling is the surest source of courage in a crash.

Mr. Graham’s advice for such moments was about the same: “When such opportunities have virtually disappeared, past experience indicates that investors should have taken themselves out of the stock market and plunged up to their necks in US Treasury bills.” Matt Kadnar and James Montier of GMO might secretly agree, but their public position is “anywhere but here.”

The cruel reality of today’s investment opportunity set is that we believe there are no good choices from an absolute viewpoint … you are reduced to trying to pick the least potent poison… For a relative investor (following the edicts of value investing), we believe the choice is clear: Own as much international and emerging market equity as you can, and as little US equity as you can. If you must own US equities, we believe Quality is very attractive relative to the market.

None of which means that a crash impends. Both the Leuthold Group and Birinyi Associates report that we’re not seeing the usual pattern of behavior that signals a “final top” to the market. The market strategists at Bank of America Merrill Lynch argue for a final “melt up” preceding a crash, which they’ve dubbed “the Icarus trade.”

Bearish commentators concede that the market has been overpriced by historical measures for nearly 30 years, so maybe it’s time to toss history out as being old-fashioned and out-of-date. On the other hand, on the last 20 years we’ve also experienced two of the three worst crashes in modern history bracketed by “the lost decade” in which the S&P 500, including dividends, ended the decade 9.1% lower than where it began.

Which leaves us where, exactly? In general, our advice is the same:

  1. Don’t put more money at risk than you can afford to lose. If your portfolio’s allocation is already attuned to your willingness to lose money, you’re golden! As we’ve noted before, my non-retirement portfolio is about 50% equities and 50% income. The equities are split between “here” and “there,” the income is split between foreign and domestic bonds and cash-like securities. When Icarus tumbles, I’d likely lose 18% or 20%. I can live with that. You might want to have the same sense.
  2. Prefer active over passive. At the very least, market cap-weighted funds have a momentum bias on the upside (as Amazon soars, so does its p/e ratio – 240x – and its weight in the S&P 500) and no way of protecting on the downside.
  3. Prefer independence over the herd. There are managers out there who aren’t blindly following the path of least resistance. David Marcus at Evermore Global Value (EVGBX), John Deysher at Pinnacle Value (PVFIX), Jaymie Wiggins at Intrepid Endurance (ICMAX), Steve Romick at FPA Crescent (FPACX), Zeke Ashton at Centaur Total Return (TILDX) and many of the folks in the Dry Powder Gang are doing the hard and painful work now to be sure their investors are intact come what may.
  4. Prefer experience over inexperience. Mike Tyson famously observed, “everyone has a plan until they get punched in the mouth.” It would be awfully reassuring to trust your fortune to someone who’s already survived a few bouts. While investors like Ryan Caldwell at Chiron Capital Allocation (CCAPX), Amit Wadhwaney at Moerus Worldwide Value (MOWVX) or Abhay Desphande at Centerstone Investors (CENTX) have a lot of experience, though the fact that their current funds are young masks that fact.

And then, we wait.

All of which leaves me feeling like a guy with a stomach virus.

Shukran, gràcies, dank u, mahalo, grazie, arigatô, tack … and thanks!

Thanks to Deb, Greg, and Brian. And, also, to Gregory (not to be confused with Greg). Your continued support keeps us going each month.

Thanks, most especially, to an anonymous donor for her kind gift. Charles happily reports that it “buys us time to implement continued enhancements that folks have asked for, like rolling averages and portfolio analysis, as well as purchasing expert support with our DataTables interface and our Encodable front-end user management/login/re-subscription software.” I’m a little fuzzy on what that means; Chip assures me that it translates to a more powerful, more responsive suite of tools for folks using MFO Premium.

A more secure MFO

Late in September, Chip added a new security certification for MFO. Now when you come to MFO, your browser bar should have a little green lock icon and an “https” designation that indicates it’s a secure site.

Since we don’t collect personal information, or even track our readers, that’s mostly a matter of symbolic affirmation and keeping up with the best practices recommended by internet security professionals. Just thought you’d like to know.

The Story without a title

By David Snowball

In journalism, the headlines you read are generally an afterthought, crafted by a headline writer – not the story’s author – to fit the available space and grab attention. For us, story titles function differently: they’re “framing devices,” which we write early and which help us figure out how to explain the entire story.

This is “the story without a title,” because I’ve got no clue about what’s going on.

On September 19th, Third Avenue announced a series of dramatic changes which mostly undo the dramatic changes they’d made in the prior four years. In particular:

  • Chip Rewey is out. Robert “Chip” Rewey, who was brought in on June 14, 2014 to help the firm get past “the cult of Marty,” is out. That’s a reference to the firm’s founder and most powerful investment manager, Marty Whitman. At the time, it struck us as somewhere between “odd” and “bad.” We wrote:

    The most prominent change was the arrival, in 2014, of Robert Rewey, the new head of the “value equity team” and formerly a portfolio manager at Cramer Rosenthal McGlynn, LLC, where his funds’ performance trailed their benchmark (CRM Mid Cap Value CRMMX, CRM All Cap Value CRMEX and CRM Large Cap Opportunity CRMGX) or exceeded it modestly (CRM Small/Mid Cap Value CRMAX). Industry professionals we talked with spoke of “a rolling coup,” the intentional marginalization of Mr. Whitman within the firm he created and the influx of outsiders.

     

    Shortly thereafter, the managers of Third Avenue Small-Cap Value departed. We noted, in Manager Changes, that:

    Curtis Jensen and Charles Page are no longer listed as portfolio managers.  The debate centers on whether to use “purge,” “cleansing” or “rolling coup” to describe the continuing departure of almost all the old guard Third Avenue managers.

     

  • Tim Bui and Yang Lie are out. Both served as Mr. Rewey’s co-managers, with Mr. Bui brought in from the outside for the task.
  • Victor Cunningham is in. Mr. Cunningham had co-managed Third Avenue Small Cap from 2013-2016, left and has now returned.
  • Michael Fineman is in. Mr. Fineman managed a hedge fund for eight years, before leaving the firm in 2014. He’s now a co-manager of Third Avenue Value.
  • Third Avenue International Value is out. The fund has struggled since the serial departures of Amit Wahdwaney and his analysts in 2014. Now saddled with a bad track record and sorely diminished assets, the fund is merging into Third Avenue Value.
  • The cult of Marty is in, Marty is not. The 93-year-old remains as the firm’s chairman emeritus and is presumably the architect here, but is not going to be driving the firm’s investments.
  • Third Avenue Real Estate Value (TVRVX/TAREX) remains, distant from the mess and highly functional.

Almost all of the firm’s dramatis personae are now off the stage: founder Whitman, the polarizing president David Barse, Whitman’s lead managers Amit Wadhwaney and Ian Lapey, and some (but apparently not all) of Mr. Barse’s hires. At this point, the firm seems to be banking on the viability of Mr. Whitman’s “safe and cheap” perspective and the ability of several second-tier professionals to step up.

Can they? Don’t know. Was the “cult of Marty” extinguished in the Barse years? Don’t know. Has the “cult of Barse” been extinguished now? Don’t know. Do two sets of purges, in 2014 and 2017, likely linked to two periods of miserable days at work, leave behind the foundations on which to build a healthy culture? Don’t know.  Is it possible to revive a “cult brand” in the absence of any cult leader? Don’t know.

Friends of Third Avenue seem stunned but modestly optimistic. Time will tell if they’re right. For now, I’d limit my attention to the distinctive, stable and excellent Real Estate Value team.

Morningstar ETF Conference – Chicago 2017

By Charles Boccadoro

“If someone invented levitation tomorrow, it would still take five years to catch on.”

             Alan H. Epstein

The last panel, entitled “Meet the Pundits,” enjoyed a winner’s circle atmosphere this year. It included Barron’s Crystal Kim, Morningstar’s Ben Johnson, Matt Hougan of Inside ETFs , Tom Lydon of ETF Trends , and Dave Nadig of ETF.com. As reported in our July Commentary, ETFs recorded another banner year of inflows, twice those of last year, and seem poised to overtake assets of traditional open-ended mutual funds in the not-to-distant future.

“Fundamentally better tech,” argued Mr. Hougan. The panel re-iterated benefits of ETFs: reduced costs, eliminated loads and 12b-1 fees, winnowed share classes, more transparency, access to hedge-fund like investments and strategies, higher liquidity, better tax benefits thanks to in-kind redemption, and externalized costs of ownership providing “huge economies of scale.” (A solid reference is CFA’s “A Comprehensive Guide to Exchange-Traded Funds.”)

As anticipated, Morningstar announced that this would be the last stand-alone ETF conference. Next years’ Investment Conference will include an “ETF Track.” Except for the fact that it will be in muggy June versus glorious September, combining the conferences is welcomed news. There were 714 attendees at this year’s event held September 6-8 at the Hyatt Regency Chicago.

Barry Ritholtz gave a thoughtful presentation, entitled “Crashes & Terrorists & Sharks, Oh, My! Why investors FEAR the wrong things, and what you can do about it.” He was kind enough to share a clear pdf version, here.

Barry reminded us of our fear of sharks after Steven Spielberg’s Jaws and our fear of flying after 9/11. I personally remember walking through an empty airport at LAX on 9/11/2002 in route to a conference in Toronto. Besides the crew and air marshal, I was the only person onboard. Barry cited a statistic that estimates 15,000 more people died in car crashes as a result of their fear and avoidance of flying after 9/11. Similarly, there are more deaths around the world each year from selfies than sharks … and humans continue to obliterate the shark population. As you can guess, he sees many of the same fears and ironies with investing.

Morningstar’s Daniel Sotiroff, AlphaArchitect’s Wesley Gray, Vanguard’s John Ameriks, and Research Affiliates’ John West conducted an excellent panel discussion, entitled “Shades of Value.” I’ve never seen Wes more comfortable discussing and articulate with his subject matter. AlphaArchitect now manages $238M in its five quant ETFs, all less than 3 years old.

The elephant in the room, however, was John Ameriks, or more accurately the group he represents. He heads Vanguard’s Quantitative Equity Group (QEG), which we profiled last November. QEG currently does not manage any ETFs, but on last day of conference, Bloomberg’s Eric Balchunas tweeted a Barron’s news report that the SEC plans to approve Vanguard’s application to offer actively managed ETFs, which many suspect would be led by QEG.

Ben Johnson, Alex Bryan, and Adam McCullough presented a series of briefings on Morningstar’s latest research, ETF due diligence, and assessing stewardship practices. Here is link to their briefings and below is one of my favorite charts. Ben, who still prefers the term “Strategic Beta” over “Smart Beta,” says the colors were inspired by one of his children’s books!

All three briefings are worth reviewing. You will learn why Alex prefers Vanguard’s Small Cap ETF (VB) over iShares Russell 2000 ETF (IWM), that “a handful of the largest fund companies have controlled passive U.S. fund assets for at least the past 15 years,” and why Adam thinks “fund closures are not a victimless crime.”

Vanguard’s Joe Davis gave the opening keynote, captivatingly entitled “The Trend That Will Define Our Lifetime.” He believes the changing nature of work driven by technological advances is the seminal issue of our time, and that traditional measures, like GDP, are missing forces driving the economy, especially productivity and prosperity. This situation has created three paradoxes: 1) low inflation, but full employment, 2) low growth, but high valuations, and 3) low volatility, but high uncertainty.

He explains that historically, work has shifted from “Basic” to “Repetitive” and in the future it will shift from “Repetitive” to “Advanced,” as depicted below:

He argues that automation threatens tasks, not jobs: “Tasks of any job change over time.” But he acknowledges that if a task is repetitive, “get out of the way!” “Advanced” work, like jobs involving creative thinking and “emotional IQ,” is more immune to automation. In fact, he predicts automation will bring new paradoxes, including labor shortages.

BlackRock’s Andrew Ang provided another keynote address, entitled “Frontier of Factor Investing.” It was my first exposure to Andrew, but he attracted a large crowd at the conference with many champions about his former teachings at Columbia and his book, Asset Management: A Systematic Approach to Factor Investing. Nathan Vardi of Forbes recently profiled him in “The New Face of Active Investing” and Morningstar’s Adam McCullough interviewed him at the conference in “BlackRock: Factors With Economic Rationale Should Endure.”

Andrew started his talk with this statement: “Investing is harder than ever.” But as he presented, I could not help but think, especially given the other presentations from Wes and Joe, that traditional forms of active management … no, more precisely, any form of active management that can be distilled into a formula based on publicly available information is being commoditized. Those tasks are now automated by quants developing and implementing systematic strategies more pragmatically, more consistently, and more efficiently than ever before.

Quickly noted:

  • USAA will be entering ETF space with six core offerings, four equity and two fixed income, expected to launch this quarter.
  • With the traditional market index ETFs dominated by Vanguard, BlackRock, and State Street, players like First Trust offer more niche ETFs, like First Trust Dow Jones Internet Index Fund (FDN) or First Trust North American Energy Infrastructure Fund (EMLP).
  • Pacer offers simple trend-following strategies, like Pacer Trendpilot 750 ETF (PTLC).
  • The 10 ETFs offered by Columbia Threadneedle 10 ETFs came from its 2016 acquisition of Emerging Global Advisors. They do indeed focus on emerging markets, global consumer, and sustainability.
  • Then there is the nonprofit startup called Impact Shares, which plans to offer ETFs endorsed by and in support of other non-profits, like NAACP, PBS, The Salvation Army, Red Cross and UNICEF. (Ha! That’s brilliant!)
  • Less novel, but seemingly well intended, the fledgling SerenityShares Impact ETF (ICAN): “…your investments should target solving the world’s problems and making it a better place to live…”

Indeed.

“One for the Gipper”

By Edward A. Studzinski

“There is much to be said in favor of modern journalism. By giving us the opinions of the uneducated, it keeps us in touch with the ignorance of the community.” Oscar Wilde

A recurring theme in investment letters, usually when one suspects that performance or personnel issues (often directly related) need to be glossed over, is a discussion about the need to have “team players” in the investment management and research process. Now there were hedge funds, such as Tiger Management in its heyday and Maverick Capital which used to make a virtue of recruiting former athletes in high school or college who had played team sports such as football or basketball (no fencers or gymnasts need apply).

I must confess to being befuddled by all of this. I am not an athlete, having lacked the requisite physical skills, and never participated in team sports, other than on a pickup level. Probably the closest I came to that kind of activity was to play in a seventeen piece jazz band, which required a different kind of cohesion. But by the luck of the draw in my freshman college year I ended up living on a floor of scholarship football and basketball players. And I generally found them to be among the most thoughtful, low key individuals I have spent time with, not usually feeling the need as my former roommate put it, to “throw their jocks on the floor whenever they entered a room.”

I had a similar experience in all of my years in the military. The real heroes, the ones who had won the Air Medal or Navy Cross, never seemed to need to thump their chests. So it is always entertaining to me when people who were not the “star quarterback” but rather were the “star equipment manager” begin pontificating about team players. As my friend David Marcus puts it, we are placing our bet on the jockey, not the horse. The best investment managers – the Warren Buffetts, the Charlie Mungers, the Joel Tillinghasts, the Tom Russos, the Bill Millers – achieved their greatest success either without a team or despite what was foisted upon them as a supporting cast.

As is so often the case, Dilbert by Scott Adams says it all. Scott Adams started drawing Dilbert when he was working at what was then Pacific Bell. Much of what he drew was based on what he saw in that corporate culture. Many of you look at that cartoon strip or calendar today and find it cute but not especially believable. To which I say, having seen many of the same things over and over again in the last forty years in the environments I have been in, “you can’t make this stuff up.” So in that vein, let me close out this section with a Dilbert comic strip. In the first box, the boss says, “I dislike the words Boss and Employee. From now on, we are all Team Members.” The second panel the boss goes on to say “I’ll be the team member that makes the decisions and gets paid the most. You’ll be the team members I punish when things go wrong.” Finally in the third panel, Dilbert says “But otherwise we are all equal?” And the boss says, “Whoa! Calm down Spartacus.”

Expenses and Retirement Income

There is a timely and well-written article in the September 2017 issue of the AAII Journal entitled “The Impact of Expense Ratios on Retirement Income.” Somewhat differently than the issues we have been raising about expenses and their impact on investment returns, the author, Craig L. Israelsen, Ph.D., is concerned about the extent to which increased costs eat into the potential annual withdrawals in retirement. The article has a number of interesting tables. The point of it is that “For each additional 25 basis points of cost, the average ending balance of the retirement portfolio declines by roughly 5.9% and the average annual withdrawal from the portfolio declines by 3.7%.”

I would suggest this is an exercise that many of us should consider going through in terms of whether we need to ratchet down to lower cost vehicles as retirement appears on the horizon. Even at age 60 or 65, life expectancies are easily another fifteen plus years, based on the IRS longevity tables. Now you do need to make sure that the asset allocation mixes you are comparing are equal, that is, that the mix of mutual funds and ETF’s takes in the same asset classes, with the mandated Required Minimum Distribution being equal. The only difference should occur with one group of funds having lower expense ratios – namely the retiree controls the cost.

So why am I exercised about this? If you look at the examples and apply them, you see that a retirement portfolio that started with a $1 million balance, allocated over the same asset classes over a 25 year period, and without adjusting for inflation, an account with a 25 basis point expense ratio ends up with a roughly $2.9M account balance and a 100 basis point expense ratio ends up with an account balance of roughly $2.4M. The 25 basis point expense ratio account ends up with an average annual withdrawal of $164,500 over a 25 year period while the 100 basis point account ends up with an average annual withdrawal of $146,800 over the same 25 year period. That’s $18,000 less a year, or $1,500 less a month in retirement income. Expenses on retirement accounts matter! Whether you want active management or passive management, pay attention to the expenses! Because over periods longer than 10 years, the returns smooth out, and it is the expenses that you can control, that put the most money in your pocket in retirement.

Indexation – the New Nifty Fifty?

Is indexation investment management’s Frankenstein monster, a new Nifty Fifty equivalent? I don’t know the answer to that. I do know a tendency of investors, both sophisticated and unsophisticated, is to buy at the top of a market and sell at the bottom. Maximum draw-down numbers are helpful, but should be used more by investors in assessing what degree of market risk they are prepared to tolerate in their investments, not whether an investment with a greater maximum draw-down rate is necessarily a bad investment. One of the things Charles and I have been kicking around is the usefulness of rolling return numbers in making investment and allocation decisions. The problem with looking at return numbers tied to a specific time period is they are just that, tied to a specific time period. It is the problem I used to have with managements who would fixate on their quarterly and annual earnings (although the honest ones would admit that they really couldn’t see out often more than twelve months, if that). I used to remind them that they were not going to wind up the business and liquidate the company based on a 12/31 earnings number, as it was just a snapshot in time of what should be a going concern. Investment portfolios should be reviewed and looked at the same way.

Things to Watch

As a follow-up to my recommendation of Joel Tillinghast’s book, I saw a half-hour interview with him on Bloomberg, which reinforced my opinion of him as an extremely gifted manager of a fund that more people should be looking at it if they like active managers. As I said, look at the jockey, not the horse.

You can find the interview on YouTube.

Rolling Averages, Finally!

By Charles Boccadoro

“Maybe the mind’s best trick of all was to lead its owner to a feeling of certainty about inherently uncertain things.”

        Michael Lewis’ The Undoing Project

Took a while, but we’ve finally added rolling average analysis to the MFO Premium site.

The new Rolling Averages tool provides insight into how returns vary for selected rolling periods of interest. Each period overlaps the next, separated by one month, across the life of the fund. This insight is especially important when establishing expectations based on an investor’s risk tolerance and time-line, as it reveals best and worst performance history. 

For example, the venerable Dodge & Cox Stock Fund (DODGX) has an outstanding long-term annualized return of more than 11%/yr from its inception more than 50 years ago through August 2017. But it’s incurred stretches of 3-year periods where the annualized return was a gut-wrenching -20%/yr (that’s per year!) and even 5-year periods where the annualized return was a discouraging -8%/yr. That said, the fund has never returned less than 1.2%/yr in any 10-year period. (For more insight on DODGX and rolling average analysis in general, see A Look Back at Dodge & Cox Stock Fund).

The rolling periods are 1, 3, 5, 10 and 20 years, as applicable, based on age of fund and selected display period.

For each rolling period, the table provides:

  • cnt – short for “Count”, which is number of rolling periods evaluated for display period selected.
  • min – short for “Minimum”, which is lowest annualized percent return (APR, %/yr) of all rolling periods evaluated.
  • max – short for “Maximum”, which is highest APR of all rolling periods evaluated.
  • avg – short for “Average”, which is average APR of all rolling periods evaluated.
  • std – short for “Standard Deviation”, which is the typical variation in rolling average APR.

Display period defaults to Life (ie., performance since fund inception, or at least back to January 1960 … the limit of our Lipper database), but can also be selected for the past 20, 10, 5, or 3 years. The latter options are helpful when making direct fund-to-fund comparisons. 

Using MultiSearch to screen for equity funds that are older than 10 years and never incurred a negative return over any 3 year period, only five of nearly 5,400 funds in our database pop-up: First Trust NYSE Arca Biotechnology Index Fund (FBT), First Trust Health Care AlphaDEX Fund (FXH), Matthews Asia Dividend Fund Inv (MAPIX), Monetta Young Investor Fund (MYIFX) and Guggenheim S&P 500 Equal Weight Consumer Staples ETF (RHS).

Here are their 10-year risk and return metrics (click table to enlarge):

Then, performing rolling analysis results in the following (click table to enlarge):

What does that tell us? Using RHS as the focus of our discussion:

  • 1-Year APR Metrics: RHS has lost as much as 25.6% in a single year, and has also gained as much as 48%. It has averaged about 13.5% annually.
  • 3-Year APR Metrics: If you look at all the three-year periods in RHS’s history (there are 85 such periods since we start 12 measurement periods annually, Jan 2014 – Jan 2017, Feb 2014 – Feb 2017 and so on), the worst three-year period in the fund’s history saw an annualized gain of 2.5% while the best saw 24.5%. Since ups and downs tend to cancel out over time, its standard deviation for three-year periods, at 4.9%, is much lower than its one-year deviation.
  • 5-Year APR Metrics: Finally, it you were to have a five-year holding period, your worst experience would have been an annual gain of 7.5% while the best could have hoped for is 23.2%.

Do these calculations say that one of these funds is better for you than another? Definitely not, since they invest in very different universes and they all represent “best of class” offerings by this measure. If these were all, say, small-cap value funds of a similar vintage, you would get a far better sense of the consistency of a fund’s performance and of how to understand the experience you might have had with it in the last three years by comparing those three to all three year periods and even to the longer term.

Ideally, all fund performance should be presented in rolling analysis format, along with maximum drawdown, since that is only way can investors get a realistic assessment of how volatile a fund has returned historically.

The wise reader’s two most important words. “Uh, no.”

By David Snowball

Having concluded that we’re not willing to pay for the services of professional journalists and editors, we’re increasingly getting what we paid for: stories written by robots, amateurs, dilettantes and self-interested parties posing as journalists. Here’s my monthly roundup of stories that made my head hurt, plus one opening note on the future of funds.

Namaste, fund advisors. 

I use the news aggregator Flipboard to track cover of issues that interest me, from the Pittsburgh Steeler and gardening to statistics and mutual funds. Which mutual funds, you might ask, are in the news? Vanguard, Fidelity, DoubleLine? Active, passive, hedged?

Uh, no. The answer is “Indian mutual funds.” Here’s the breakdown of the top 10 stories on the mutual fund (9/29/2017, 10:oo a.m., anyway):

  • Stories about mutual funds in India: 5
  • Stories about mutual funds in Sweden: 1
  • Stories about mutual funds in Canada: 1
  • Stories about mutual funds in the US: 3

Thesis: “Robert ‘Chip’ Rewey was hired to turn around the Third Avenue Value Fund in 2014 after years of underperformance …The mutual fund rebounded last year after posting a loss in 2015.”

MFO’s take: uh, no. At the flagship Third Avenue Value Fund (TAVFX), Mr. Rewey had bad performance in 2015, his first year with the fund (down by 8%, trailed 90% of his peers), good performance in the second (up by 13%, top 6% among his peers), bad performance in the third (up 7.6% through the beginning of September, trailing 97% of his peers), another billion in assets left (from $2.1 billion AUM on 10/31/14 to $1.1 billion on 10/31/16) … and now he’s “pursuing other opportunities.” It’s not clear how one year’s good performance matched with steady outflows qualifies as a turnaround.

Thesis: oh, for the good old days when sales charges and wise brokers discouraged investors from frequent trading and other self-destructive behaviors.

MFO’s take: uh, no. The essay is strangely devoid of, well, evidence to support the nostalgic speculations. Against that, the research on broker-sold funds is fairly consistent. Brokers added expenses without improving a portfolio’s risk-return profile, in part because the brokers themselves had incentives to trade even when their clients did not.

One of the most widely cited studies (it’s been cited nearly 400 times by other scholars) is Daniel Bergstresser , John M. R. Chalmers  and Peter Tufano, “Assessing the Costs and Benefits of Brokers in the Mutual Fund Industry,” The Review of Financial Studies, Volume 22, Issue 10, 1 October 2009, pages 4129–4156. Here’s their bottom line:

Many investors purchase mutual funds through intermediated channels, paying brokers or financial advisors for fund selection and advice. This article attempts to quantify the benefits that investors enjoy in exchange for the costs of these services. We study broker-sold and direct-sold funds from 1996 to 2004, and fail to find that brokers deliver substantial tangible benefits. Relative to direct-sold funds, broker-sold funds deliver lower risk-adjusted returns, even before subtracting distribution costs. These results hold across fund objectives, with the exception of foreign equity funds. Further, broker-sold funds exhibit no more skill at aggregate-level asset allocation than do funds sold through the direct channel. Our results are consistent with two hypotheses: that brokers deliver substantial intangible benefits that we do not observe and that there are material conflicts of interest between brokers and their clients.

The “substantial intangible benefit” is sometimes labeled “hand-holding,” and it really does contribute to an investor’s quality-of-life.

Bottom line: defending high sales charges (and high expenses) because they enforced good investor behavior is like defending obesity because it keeps us from going outside and breathing polluted air; weird on face and unsupported by any serious evidence.

Thesis: “there are plenty [of mutual funds] out there that have earned their fees, crushing these index funds for years—and they’re still far outperforming the market.” Gloating about Columbia Global Technology Growth R4 (CMTFX), ProFunds UltraSector Health Care Fund (HCPIX) and JPMorgan Growth Advantage Fund (VHIAX) follows.

MFO’s take: uh, no. First, that’s not a “portfolio,” that’s just a pile. A portfolio is an interactive structure, where each addition it made in order to complement the remainder. Second, they appear to have been selected solely because they beat the S&P 500 in the past, not because there’s any reason to believe that they’ll beat it in the future. Heck, if you’re going to play that game, at least play it well and announce THE ONE FUND portfolio: ProFunds UltraSector Biotech (BIPIX), which has booked over 20% annually for the past decade. Third, they appear to have been selected without consideration of the risks involved. ProFunds, for example, is a leveraged fund that produces 150% of the daily movement of its index. The prospectus warns:

The Health Care UltraSector ProFund seeks investment results for a single day only, not for longer periods. The return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from one and one-half times (1.5x) the return of the Dow Jones U.S. Health Care SM Index (the “Index”) for that period. For periods longer than a single day, the Fund will lose money when the level of the Index is flat, and it is possible that the Fund will lose money even if the level of the Index rises. (emphasis in the original).

The fund’s prospectus calculates the risk of buying and holding this beast. In a market where the underlying index returns 0% for 12 months, a buy-and-hold index will lose between 0.4% and 31.3%, depending on how volatile the market is. Heck, the index could rise 10% and this fund could lose 20% if the market’s volatile and you foolishly buy and hold it. Fourth, there’s no reason to believe that they’ll continue to outperform, especially when the market reverses. How bad could they get? The maximum lifetime drawdowns for these funds (that is, the largest losses they’ve inflicted on their investors) is between 62-82%.

I wonder which one is supposed to be Fed chair Janet Yellen? The one yellin’, perhaps?

Elevator Talk: Ryan Caldwell, Chiron Capital Allocation Fund (CCAPX)

By David Snowball

Since the number of funds we can cover in-depth is smaller than the number of funds worthy of in-depth coverage, we’ve decided to offer one or two managers each month the opportunity to make a 200 word pitch to you. That’s about the number of words a slightly manic elevator companion could share in a minute and a half. In each case, I’ve promised to offer a quick capsule of the fund and a link back to the fund’s site. Other than that, they’ve got 200 words and precisely as much of your time and attention as you’re willing to share. These aren’t endorsements; they’re opportunities to learn more.

The good news is that, as a concept, “world allocation funds” makes sense. The term describes funds that generally have some sort of “total return” mandate (that is, they consciously seek gains from both growth and income), authorization to pursue a variety of asset classes and a global purview.

Chiron Capital Allocation’s prospectus gives a snapshot of that flexibility:

The Fund seeks ….total return [from] capital growth and income.

The Fund … allocat[es] its assets among equity, debt and cash investments in markets around the globe … the combination of the Fund’s investments will vary from time to time both with respect to the types of securities and markets, in response to changing market and economic trends.

Under normal market conditions, the Fund intends to allocate

  • Equity: 25-70% of net exposure
  • Fixed Income: 20-50% of net exposure
  • Cash and Cash Equivalents: 0-50% of net exposure

The Fund has no geographic limits on where its investments may be located.

Equity securities … include common stock issued by companies of any market capitalization, ADRs, ETFs [and] preferred stocks.

The Fund may invest in any type of debt security, REITs, and derivatives.

The bad news is that the category quickly became dominated by a handful of behemoths. Here are the category’s top five funds by AUM:

$107 billion American Funds Capital Income Builder (17 share classes)

$56 billion First Eagle Global (4 share classes)

$39 billion Black Rock Global Allocation (6 share classes)

$16 billion Thornburg Income Builder (7 share classes)

$14 billion American Funds Global Balanced (17 share classes)

There are 110 funds in the Morningstar world allocation category. The single largest fund has assets roughly equal to the combined assets of the 100 smallest funds in group. We’ve indicated the number of share classes per fund because each share class as an asset gathering ploy; funds cut special deals with special sub-sets of investors (e.g., retirement plans with over $1 billion in assets might get lower cost shares than retirement plans with assets under $1 billion) in order to attract and retain their business.

Good for the advisor. Not as good for their investors. As assets grow, opportunity sets contract and internal pressure grows to avoid doing anything that might “spook” the investment committees. As a result, none of the largest funds are (a) closed to new investors or (2) top tier performers anymore. None of these funds places in the category’s top-tier over the past three years, only one finishes in the top 25 while the rest fall in the comfortable middle of the pack.

Several very talented managers have reacted in frustration to the constraints imposed by huge asset bases, choosing to leave their secure perch for the interesting and risky world of investor-driven boutique startup funds. At about the same time, Abhay Deshpande walked away from an $80 billion charge to launch Centerstone Investors (CENTX) and Mr. Caldwell walked away from $40 billion charge to found Chiron.

From 2000 – mid-2014,Mr. Caldwell managed several funds for Waddell &Reed, including Ivy Asset Strategy, W&R Asset Strategy, and Ivy Funds/VIP. Morningstar made him a manager of the Year finalist in 2007 and Institutional Investor tagged him as one of the “Rising Stars of Mutual Funds” in 2009. He’s made the best of the opportunity since Chiron attracting $1.3 billion in assets in its first couple years. CCAPX’s one year return through September 2017 placed it as 2nd of 137 “growth allocation” funds (Lipper), behind only CGM Mutual Fund (LOMMX), or 1st of 105 “world allocation” funds (Morningstar).

Herewith are Mr. Caldwell’s 200 words on what led him to conclude that the world needed a 140th “growth allocation” (Lipper) fund or a hundredth “world allocation” fund (Morningstar) just now:

I think there are a couple of seminal moments for me.

There are always decision points in your career where you think “this doesn’t feel right anymore.” One of mine came when I looked at fund size. Global allocation funds didn’t exist 15 years ago, then the category grew like a weed with four (or four-and-a-half) funds sopping up almost all of the assets for about a decade. I was on one of those funds.  The problem with that if you really are flexible, looking for upside participation and downside capture, size is not a benefit. Your asset base gets unwieldy and you’re set up for your worst risk-adjusted returns. I didn’t want that.

The other thing that was seminal for us was the buzz wordy “quantamental” thing that gets thrown around. A lot of corporate cultures are either fully quant or fully fundamental; that makes things precarious for investors who believe that quant screens and human analysis are both essential parts of the same process. There’s just so much information now; it’s not the business I entered into in the late 90s and early 2000s.

I concluded that we needed a stand-alone entity where we could embrace a capacity-constrained strategy and a quantamental discipline. We love the “global allocation” focus because it signals high degrees of freedom. We’ve got no style dogma to plague us. We’ve got a return set that’s still interesting, at least if you think in terms of market cycles rather than months. We’ve managed to attract world-class people, guys like Grant and Brian, each with a quarter century of success in the industry. We think we can add value by being small and staying (relatively) small. Big funds and public firms have goals that are misaligned with their investors, and we won’t go down that path. Chiron is, and always will be, niche-y, size constrained, a boutique. It’s a good place to be, for us and for our investors.

Chiron Capital Allocation Fund nominally has a $100,000 minimum initial investment, but as a practical matter it’s available at Schwab for $2,500. Expenses are capped at 1.15%; with the fund now at $1.3 billion, it’s turned profitable and  it becomes possible for the managers to talk about fee reductions.

Here’s the fund’s homepage. It’s basically a pick-up spot for fund documents, and so it’s a bit thin on content. Happily, clicking on almost any of the tabs at the top of the page will take you to Chiron’s homepage which has a reasonable explanation of their process and some videos (under the “news” tab) that gives you a decent sense of what they’re up to.

Launch Alert: Artisan Global Discovery Fund (APFDX)

By David Snowball

On August 21, 2017, Artisan Partners launched a near-clone of their very successful Artisan Global Opportunities Fund (ARTRX). Artisan organizes their managers into eight autonomous teams, with each team supported by an analyst corps and responsible for one or more funds. Global Discovery will be managed by the Growth team, which is also responsible for Global Opportunities, Mid Cap (ARTMX) and Small Cap (ARTSX).

Jason White, James Hamel, Craigh Cepukenas, Matthew Kamm

A different member of the team is designated the Lead Manager for each fund. The lead manager for Global Discovery is Jason White, who joined Artisan in 2000 after working as a fire control officer on the USS Lake Erie. He has a history degree from the U.S. Naval Academy, a credential I entirely approve of. The team is supported by seven analysts.

The principal investment strategy for each fund is identical, word for word:

The Fund’s investment team employs a fundamental investment process to construct a diversified portfolio of U.S. and non-U.S. growth companies across a broad capitalization range. The team seeks to invest in companies that it believes possess franchise characteristics, are benefiting from an accelerating profit cycle and are trading at a discount to its estimate of private market value. The Fund’s investment process focuses on two distinct elements –security selection and capital allocation. The team overlays its investment process with broad knowledge of the global economy.

The distinction between the funds appears in the past paragraph of the strategy section.

Global Opportunities Global Discovery
The U.S. companies in which the Fund invests generally have market capitalizations of at least $3 billion at the time of initial purchase, although the Fund may invest in a U.S. company with a lower market capitalization if it already holds a position in that company. There is no restriction on the size of the non-U.S. companies in which the Fund may invest. The Fund also may invest to a limited extent in equity-linked securities that provide economic exposure to a security of one or more non-U.S. companies without direct investment in the underlying securities (called “participation certificates “in the Fund’s prospectus, but may be called different names by issuers). The U.S. companies in which the Fund invests generally have market capitalizations of at least $1 billion at the time of initial purchase, although the Fund may invest in a U.S. company with a lower market capitalization if it already holds a position in that company. There is no restriction on the size of the non-U.S. companies in which the Fund may invest. The Fund expects to participate in the initial public offering (“IPO”) market. The Fund also may invest to a limited extent in equity-linked securities that provide economic exposure to a security of one or more non-U.S. companies without direct investment in the underlying securities (called “participation certificates” in the Fund’s prospectus, but may be called different names by issuers).

Discovery has the ability to invest in somewhat smaller firms and expects to invest in IPOs. Artisan allows that the IPOs are likely to make an effect when a fund is small. “When a Fund is small, IPOs may be a significant contributor to the Fund’s total return. As a Fund grows larger, however, the effect of investments in IPOs on a Fund’s performance will generally decrease.” Because all of the Artisan funds, except High Income, have the ability to participate in IPOs and the firm will be allocated a limited number of IPO shares, it’s not immediately clear how much impact to expect here.

The launch of this fund is consistent with Artisan’s broader strategy: hire a good team, let them prove themselves on one fund, then let them launch a second fund that’s a variation on the first. Artisan Partners CEO Eric Colson said, “Since the founding of our firm … we have steadily expanded the investment flexibility of existing strategies and launched new strategies with greater degrees of freedom. This increases our investment teams’ ability to generate alpha and manage risk within the constraints required by clients. The launch of Artisan Global Discovery Fund is consistent with this evolutionary process.”

Since Global Opportunities is still open and still relatively small at $2.3 billion, should you care? At least in their first version of the portfolio, the team has installed a distinct small-cap tilt compared to their larger charge’s.

Portfolio data, 8/31/2017 Global Discovery Global Opportunities
Median Market Cap (Billions) $9.3 $25.7
Weighted Avg. Market Cap (Billions) $17.4 96.2
Weighted Harmonic Avg. P/E (FY1) 27.1X 25.6x
Weighted Harmonic Avg. P/E (FY2) 23.3X 22.0x
Weighted Avg. LT EPS Growth Rate (3-5 Yr) 16.1% 17.4
Weighted Avg. LT Debt/Capital 33.5% 31.4
Active Share 98.8% 93.5
Number of Securities 46 47
Number of Countries 12 15
U.S. stocks 60.8 54.0
Emerging markets stocks 10.5 6.9
Largest sector (technology) weight 29.0 29.6
Cash (% of total portfolio) 7.0% 4.6%

Beyond that, it’s a game of inches: the stocks in Discovery are a little pricier, US exposure is a little higher which is offset by e.m. exposure also being a little higher, active share is a little higher but is “high” in both cases. Understandably Discovery’s e.r. is higher; 1.5% on $21 million in assets, compared to 1.18% on $2.6 billion.

To be clear: Global Opportunities has been a splendid fund. It has a very stable management team, top tier performance, a five-star/Silver rating from Morningstar, and a “Great Owl” designation from MFO which signals the fact that it has decisively better risk-return performance than its peers over every trailing time period. Discovery is positioned to be a slightly racier version of a GARP-y, risk-aware discipline. Folks already in Global Opportunities probably don’t need to change. Folks intrigued by the Global Opps record and tolerant of a bit more risk might consider Global Discovery.

The fund’s homepage: Artisan Global Discovery.

Manager changes, September 2017

By Chip

Thirty funds saw complete or partial manager changes, which is a very modest talent. Most months see between 50-70 changes. The most consequential are the changes coming to the Third Avenue funds. The best description we have is that a bunch of the guys hired by founder Marty Whitman were purged during the Barse years. With Mr. Barse’s unceremonious departure, a number of his acolytes have now been shown the door, including “Chip” Rewey, the amiable soul hired to right the ship three years ago. In place of the recent departees, some of the previously purged folks have returned. No word from Mr. Whitman, now 93 and described by Forbes as “an obstinate and cantankerous cuss,” on any of it.

Ticker Fund Out with the old In with the new Dt
AZDAX AllianzGI Global Fundamental Strategy Fund Armin Kayser is no longer listed as a portfolio manager for the fund. Georgios Costa Georgiou has joined Neil Dwane, Eric Boess, Karl Happe, and Steven Berexa in managing the fund. 9/17
LHGFX American Beacon Holland Large Cap Growth Fund, renamed as American Beacon Bridgeway Large Cap Growth II Fund‌ Holland Capital Management is no longer a subadvisor. Accordingly, the managers of that portion of the portfolio are out. Bridgeway Capital will remain as the subadvisor with John Montgomery, Elena Khoziaeva, and Michael Whipple managing the fund. 9/17
QWVOX Clearwater Small Companies Keeley-Teton Advisors is out as a subadvisor. Kevin Chin and Brian Keeley are no longer listed as portfolio managers for the fund. Cooke & Bieler and Pzena Investment Management are new subadvisors, joining KCM. Donald Cobin and Timothy Hasara are joined on the management team by Andrew Armstrong, Steve Lyons, Michael Meyer, Edward O’Connor, R. James O’Neil, Mehul Trivedi, William Weber, John Flynn, Evan Fox, and Benjamin Silver. 9/17
CPATX Counterpoint Tactical Income Fund John Koudsi will no longer serve as a portfolio manager for the fund. Michael Krause is joined by Joseph Engelberg in managing the fund. 9/17
DURAX Deutsche European Equity Fund Dirk Aufderheide is no longer listed as a portfolio manager for the fund. Britta Weidenbach, Mark Schumann, Gerd Kirsten, and Christian Reuter will continue to manage the fund. 9/17
FADAX Fidelity Advisor Dividend Growth Fund No one, but . . . Gordon Scott joins Ramona Persaud as a co-manager to the fund. 9/17
FWATX Fidelity Advisor Multi-Asset Income Fund Matthew Fruhan is no longer listed as a portfolio manager for the fund. Ramona Persaud joins Adam Kramer and James Morrow to manage the fund. 9/17
FLPSX Fidelity Low-Priced Stock Fund James Harmon no longer serves as a co-manager of the fund. Sam Chamovitz and Salim Hart  have joined Joel Tillinghast, Justin Bennett, Katherine Buck, John Mirshekari, Shadman Riaz, and Morgan Peck on the management team. 9/17
FOCPX Fidelity OTC Portfolio Gavin Baker is no longer listed as a portfolio manager for the fund. Sonu Kalra and Christopher Lin now manage the fund. 9/17
FSDIX Fidelity Strategic Dividend & Income Fund Joanna Bewick is leaving Fido and so will no longer serve as a portfolio manager for the fund. Brian Chang has joined Andrew Kramer, Ford O’Neil, Samuel Wald, Scott Offen (who plans to retire at the end of the year), and Ramona Persaud on the management team. 9/17
FSICX Fidelity Strategic Income Fund Joanna Bewick will no longer serve as a portfolio manager for the fund. Adam Kramer joins Ford O’Neil, Franco Castagliuolo, William Irving, Johnathan Kelly, Mark Notkin, and David Simner on the management team. 9/17
INCAX James Alpha Hedged High Income Portfolio No one, but . . . Coherence Capital Partners was added as a subadvisor. Sal Naro, Vincent Mistretta, and Michael Cannon join Kevin Greene, James Vitalie, Michael Montague, Akos Beleznay, Glenn Koach, Tom Krasner, and Jon Duensing. 9/17
LMGAX Lord Abbett Growth Opportunities Fund Paul Volovich and Anthony Hipple are no longer listed as portfolio managers for the fund. Jeffrey Rabinowitz will now manage the fund. 9/17
MFGIX Monteagle Quality Growth Fund  Curt Rohrman will no longer serve as a portfolio manager for the fund. Robert Prorok, Thomas Sauer, Stefan Astheimer, Brett Winnefeld, and Craig Cairns will now manage the fund. 9/17
OWSMX Old Westbury Small & Mid Cap Strategies Fund No one, but . . . Douglas Brodie and Douglas Polunin join the management team, representing new subadvisors of Baillie Gifford Overseas Limited and Polunin Capital Partners Limited. 9/17
OALGX Optimum Large Cap Growth Fund Fred Alger Management is no longer a subadvisor to the fund. Therefore, Ankur Crawford and Patrick Kelly will no longer serve as portfolio managers for the fund. ClearBridge Investments joined the subadvisory team, with Peter Bourbeau and Margaret Vitrano added as portfolio managers. They join Joseph Fath, who’s been managing the fund since 2014. 9/17
PAXWX Pax Balanced Fund Not immediately, but Christopher Brown has stated his intention to retire at the end of the year. Mssr. Brown, Anthony Trzcinka, and Nathan Moser are joined by Andrew Braun and Peter Schwab on the management team. 9/17
PAXLX Pax Large Cap Fund Not immediately, but Christopher Brown has stated his intention to retire at the end of the year. Andrew Braun and Barbara Browning joins Mssr. Brown in managing the fund. 9/17
PXNIX Pax MSCI EAFE ESG Leaders Index Fund Not immediately, but Christopher Brown has stated his intention to retire at the end of the year. Mssr. Brown, Scott LaBreche, and Greg Hasevlat are joined by Steve Falci on the management team. 9/17
SLSAX Sterling Capital Long/Short Equity Fund Ward Davis and Brian Agnew are no longer listed as portfolio managers for the fund. L. Joshua Wein, James Willis, Ashton Lee, Charles Frumberg, Michael Gregory, and Derek Pilecki will continue to manage the fund. 9/17
TEMFX Templeton Foreign Fund No one, but . . . Christopher Peel and Herbert Arnett Jr join Tucker Scott, Norman Boersma, James Harper and Heather Arnold 9/17
WEAIX Teton Westwood Intermediate Bond Fund  Mark Freeman has resigned as portfolio manager and Westwood Management will no longer sub-advise the fund. Teton, the advisor to the fund, will assume portfolio management duties, with Wayne Plewniak becoming the new portfolio manager. 9/17
  Third Avenue Small-Cap Value Fund Robert “Chip” Rewey and Tim Bui are out. Victor Cunningham will again manage the fund 9/17
TVFVX Third Avenue Value Fund Robert Rewey and Yang Lie are out. Matthew Fine and Michael Fineman, who was sort of purged in 2014, will now manage the fund. 9/17
TPYAX Touchstone Premium Yield Equity Fund Roger Yound will no longer serve as a portfolio manager for the fund. Lowell Miller, Bryan Spratt, John Leslie, and Deepak Ahuja will continue to serve as portfolio managers of the fund. 9/17
VICAX USA Mutuals Vice Fund Gerald Sullivan no longer serves as portfolio manager of the fund. Gerry was never really a natural fit for anything associated with vice. Jordan Waldrep will now manage the fund. 9/17
WAIGX Wasatch International Growth Fund Effective October 10, 2017, Kabir Goyal will no longer be a manager for the fund. Roger Edgley, Ken Applegate, and Linda Lasater will continue to manage the fund. 9/17
WAAEX Wasatch Small Cap Growth Fund Effective December 31, 2017, Jeff Cardon will no longer be a manager for the fund. That makes sense, he’s been with the fund since 1986 and was once the Wasatch CEO. “Pulling back” is about right. JB Taylor, Ken Korngeibel, and Ryan Snow will continue to manage the fund. 9/17
WVCAX Wells Fargo Alternative Strategies Fund Effective September 13, 2017, William Tuebo will no longer serve as a portfolio manager of the fund. Kyle Mowery will continue to serve as portfolio manager of the fund. 9/17
WDISX Wells Fargo Strategic Income Fund David Germany has announced his intention to retire. Niklas Nordenfelt, Anthony Norris, Thomas Price, Scott Smith, Alex Perrin, and Noah Wise will continue to manage the fund. 9/17

 

Funds in registration

By David Snowball

It’s been a quiet month in the land of new fund registrations. There are ten new (mostly) no-load retail funds in the pipeline, as well as a half dozen loaded funds (which I’m mostly ignoring) and a slew of ETFs. The most intriguing development is the question, who’s offering the most pointless ETF? Candidates are the ProShares Decline of Bricks and Mortar Retail ETF which will surely compete with the ProShares Long Clicks/Short Bricks Retail ETF while the USCF Contango-Killer Natural Gas Fund (No K-1) takes on USCF Contango-Killer Oil Fund (No K-1).

AAM/HIMCO Global Enhanced Dividend Fund

AAM/HIMCO Global Enhanced Dividend Fund will seek a high level of current income and, just maybe, some capital appreciation. The plan is to invest long and short positions in domestic and foreign equity securities. They’ll be long dividend-payers and short stocks “with below average dividends and less attractive returns.” They’ll also leverage up the portfolio so that they’re 140% long and 40% short. The fund will be managed by a small team from Hartford Investment Management Company. The initial expense ratio has not been released, and the minimum initial investment is $2,500. “A” shares have a 5.5% sales load. The no-load “I” shares have a $25,000 minimum initial investment.

AT Equity Income Fund

AT Equity Income Fund will seek current income, and, secondarily, modest capital appreciation. The plan is to invest mostly in US income-producing equities, common and preferred stocks, REITs, MLPs and convertible securities, with up to 30% international and up to 25% emerging markets. They advertise a bottom-up, fundamental approach to finding quality growth companies. This represents the conversion of an earlier fund, apparently institutional, into a retail platform. The fund will be managed by Robert C. Bridges and John Huber, who’ve co-managed the predecessor fund since its launch in 2010, and Gordon C. Scott who joined more recently. The initial expense ratio will be 1.45%, and the minimum initial investment is $3000.

AT All Cap Growth

AT All Cap Growth will seek long-term capital appreciation. The plan is to invest mostly in US stocks, with up to 30% international and up to 25% emerging markets. They advertise a bottom-up, fundamental approach to finding quality growth companies. This represents the conversion of an earlier fund, apparently institutional, into a retail platform. The fund will be managed by Robert C. Bridges and John Huber, who’ve co-managed the predecessor fund since its launch in 2007. The initial expense ratio will be 1.45%, and the minimum initial investment is $3000.

Brandes Small Cap Value Fund

Brandes Small Cap Value Fund will seek long term capital appreciation. The plan is to invest, mostly, in US small cap stocks. Up to 10% of the portfolio might be invested in fixed income securities and 10% in foreign stocks. This fund represents the conversion of a “private investment fund” which has a (mixed) 15 year record. The fund will be managed by the same team that ran its predecessor, Ralph Birchmeier, Luiz Sauerbronn, Yingbin Chen, and Mark Costa. The initial expense ratio is 1.15% and the minimum investment is $2,500. There’s a 5.75% sales charge on “A” shares.

Elevation U.S. Small Cap Value Fund

Elevation U.S. Small Cap Value Fund will seek long-term capital appreciation. The plan is to “employ a multi-factor investment strategy to invest in a broad and well diversified basket” of US small cap value stocks. The fund will be managed by Dr. Vito Sciaraffia. The manager has a PhD from Cal-Berkeley and has had three short faculty stints, which sort of explains his claim to employ “a set of academically-driven factors.” We’ll set aside, for the nonce, the fact that “academically-driven” is a nonsense phrase. The initial expense ratio will be 0.92%, and the minimum initial investment is $10,000.

Elevation U.S. Large Cap Value Fund

Elevation U.S. Large Cap Value Fund will seek long-term capital appreciation. The plan is to “employ a multi-factor investment strategy to invest in a broad and well diversified basket” of US large cap value stocks. The fund will be managed by Dr. Vito Sciaraffia. The manager has a PhD from Cal-Berkeley and has had three short faculty stints, which sort of explains his claim to employ “a set of academically-driven factors.” We’ll set aside, for the nonce, the fact that “academically-driven” is a nonsense phrase. The initial expense ratio will be 0.75%, and the minimum initial investment is $10,000.

Elevation U.S. Large Cap Growth Fund

Elevation U.S. Large Cap Growth Fund will seek long-term capital appreciation. The plan is to “employ a multi-factor investment strategy to invest in a broad and well diversified basket” of US large cap growth stocks. The fund will be managed by Dr. Vito Sciaraffia. The manager has a PhD from Cal-Berkeley and has had three short faculty stints, which sort of explains his claim to employ “a set of academically-driven factors.” We’ll set aside, for the nonce, the fact that “academically-driven” is a nonsense phrase. The initial expense ratio will be 0.75%, and the minimum initial investment is $10,000.

Orange Structured Credit Value Fund

Orange Structured Credit Value Fund will seek a high level of risk-adjusted current income and capital appreciation while preserving capital. The plan is to invest in structured credit securities including non-agency residential mortgage-backed securities (RMBS), agency mortgage-backed securities (MBS), commercial mortgage-backed securities (CMBS), asset-backed securities (ABS), collateralized mortgage obligation securities (CMO) and collateralized loan obligations (CLO). They may occasionally short such securities. The fund will be managed by Jay Menozzi and Boris Peresechensky of Orange Investment Advisers. Neither the initial expense ratio nor the minimum initial investment has been disclosed yet.

Powell Alternative Income Strategies Fund

Powell Alternative Income Strategies Fund will seek to generate income and capital appreciation with lower volatility as compared to the S&P 500 Index.. The plan is to combine esoteric strategies (dividends plus puts, long/short pair trades, hedged global dividends and “additional and new strategies from time to time”). The fund will be managed by David D. Wrench of Powell Capital LLC. He spent five years at Russell Investments, including a stint as Global Director of Asset Allocation and Model Strategies. The initial expense ratio will be 2.25%, and the minimum initial investment is not yet disclosed.

VanEck Vectors Real Asset Allocation ETF

VanEck Vectors Real Asset Allocation ETF will seek long-term total return. In pursuing long-term total return, the Fund seeks to maximize “real returns” in inflationary environments while seeking to reduce downside risk during sustained market declines. The plan is to invest in real asset ETFs and cash. The fund will be managed by David Schassler and Barak Laks of VanEck Absolute Return Advisers. The initial expense ratio has not been disclosed.

Briefly noted

By David Snowball

I’ve lost track of many of the funds that we profiled back in the FundAlarm days. This month one surfaced, Capital Advisors Growth Fund (CIAOX), and it was awfully nice to see that (a) they’re still providing exactly what they promised long ago – cautious equity exposure with no glitz – and (b) we were right, nine years ago, in assessing it as an exceptionally solid citizen for equity investors interested in sleeping well at night.

Briefly the number of mutual funds liquidating matched the number of ETFs liquidating, then September 29th came around and a bunch of fund advisers officially admitted that they’d reached the end of the road. About 40 funds became historical footnotes by month’s end.

Updates

Frontier Netols Small Cap Value Fund (FNSVX) was set to merge into Frontier Phocas Small Cap Value Fund, then the board decided they should check with the Frontier Phocas shareholders first. As a result, the execution – scheduled for October 27, 2017 – has been indefinitely postponed.

Briefly Noted . . .

American Beacon ARK Transformational Innovation Fund (ADNPX), which launched in January 2017, has formally added Bitcoins to its investable universe. Apparently it already invested in the Bitcoin Investment Trust which, conceivably, fell in a grey area for permissible investments. In any case “The Fund has contributed its holdings in the Bitcoin Investment Trust (accounting for less than 10% of the value of its total assets) to a wholly owned subsidiary organized under Delaware law (the “Delaware Subsidiary”).  In the future, the Fund will seek to gain additional exposure to the Bitcoin Investment Trust by investing up to 25% of the value of its total assets (less the percentage of that value invested in the Delaware Subsidiary) in a wholly owned subsidiary organized under the laws of the Cayman Islands.” No idea of why it’s only Bitcoin (our colleague, Sam Lee, finds Ethereum to be a more interesting vehicle and there are lots of other blockchain-based crypocurrencies on the loose).

The three AMG SouthernSun Funds have added REITs to the list of securities in which they might invest.

SMALL WINS FOR INVESTORS

Capital Advisors Growth Fund (CIAOX) has eliminated its 12(b)1 fee and has lowered its expense cap from 1.25% to 1.00%. I like both the fund and its ticker symbol (our eldest cat is Ciao, when she was feral we tamed her with plates of Kitty Chow and she heard the call “Kitty Chow! Chow!” so much that she took it to be her name). Back in Ye Olde FundAlarme days, in mid-2008, we profiled CIAOX as an excellent choice for stunned equity investors. The fund finished 2008 in the top 2% of its peer group and we noted:

Despite its excellence and prudence, it has a minute asset base. Why so? CIAOX remains true to its origins…  the fund was launched as a service offering; it was a way for friends, employees or relatives of Capital Advisor’s affluent investors to access Capital’s expertise even though they couldn’t meet the separate account minimum. As a result, the firm has no marketing for the fund. Perhaps as a result, assets and expenses before waivers have been extremely stable over the past five years.

[For investors shaken by the market collapse] the alternative to running and hiding is to seek out folks who are intensely risk-aware but also committed to balancing that risk with the prospect of returns. And it makes sense, too, to seek out folks who have actually managed to accomplish those goals rather than just talking about them as the marketing ploy du jour. Capital Advisors Growth has managed to accomplish just that. Investors looking to creep back into the market might reasonably seek them out.

Over the course of the entire market cycle, from its start 10 years ago, through the collapse and subsequent bull market, CIAOX has done exactly what we would have expected: entirely reasonable returns, very modest risk and very stable assets.

  Annual Return MAX Drawdown Std Deviation Downside Dev Ulcer Index Bear market deviation Bear Rating
CIAOX 6.0 -40.0% 13.5 9.2 13.4 8.7 1
Large-Cap Core Average 6.4 -49.4 15.5 10.9 16.0 10.6 5

The $50 million fund’s new expense ratio is 1.03% with an odd redemption fee applicable only to shares held for one week or less. Such idiosyncratic restrictions are usually a sign that someone tried misusing the fund (akin to the local “escape room” that now requires visitors to sign a promise to remain clothed) and the adviser imposed a gate.

Goldman Sachs Small Cap Value Fund (GSSMX) has reopened to new investors, but “for approximately three months” according to their SEC filing.

Hmmm … Snow Capital Opportunity Fund (SNOAX) and Snow Capital Small Cap Value Fund (SNWAX) each reduced their management fee by 20 bps, effective October 1, 2017.

CLOSINGS (and related inconveniences)

Effective October 1, 2017, Champlain Mid Cap (CIPMX) will be closed to new investors.

Driehaus Micro Cap Growth Fund (DMCRX) soft-closed on September 29, 2017.

In what’s an increasingly common move for asset-challenged funds, KKM Enhanced U.S. Equity Fund has closed its “A” share class (KKMAX), kept over the institutional shares (KKMIX) and dropped its management fee from 0.85% to 0.50%.

Neuberger Berman Greater China Equity Fund (NCEAX) closed to new investors on September 20, 2017.

Effective on October 13, 2017, the Adviser Share Class of all of the Payden funds will be closed.

OLD WINE, NEW BOTTLES

On November 15, 2017, Aberdeen Equity Long-Short Fund will become Aberdeen Focused U.S. Equity. The plan is for it to transition from a long/short fund to an all-cap US equity fund with 20-30 names in the portfolio. As always, these sorts of transitions trigger lots of short-term portfolio turnover and higher than average tax bills.

Alpha Risk Hedged Dividend Equity Fund (CANTX) has become Alpha Risk Tactical Rotation Fund.

“Effective as of the Effective Date” (I love lawyers), American Beacon Holland Large Cap Growth Fund becomes American Beacon Bridgeway Large Cap Growth II Fund.  The effective date in question was September 27, 2017. That’s all pursuant to the decision by the folks at Holland Capital Management to get out of asset management and shutter their business.

Effective October 1, 2017, AMG Managers Fairpointe Focused Equity Fund (AFPTX, formerly ASTON/Fairpointe Focused Equity Fund) became AMG Managers Fairpointe ESG Equity Fund.  Mary L. Pierson and Brian M. Washkowiak will serve as portfolio managers of the Fund though, oddly enough, “Ms. Pierson, Mr. Washkowiak and Thyra E. Zerhusen will be jointly and primarily responsible for the day-to-day management of the Fund.”

Kaizen Hedged Premium Spreads Fund (KZSIX) becomes Raise Core Tactical Fund on November 17, 2017. “Kaizen” is the Japanese term for “continuous improvement.”

I’m still processing this one. Lebenthal Lisanti Small Cap Growth Fund has become Dinosaur Lisanti Small Cap Growth Fund (ASCGX) for no reason I can discern. There’s been some turmoil at Lebenthal Lisanti, the adviser, with “change of control” announcements coming and going. Pursuant to the latest, the fund has changed its name. Why Dinosaur? No clue (yet). There’s no “Dinosaur” elsewhere in the documents, so I can only guess that it’s a bit of bitter sarcasm from manager Mary Lisanti who’s been managing mutual funds since 1996.

 

Around Thanksgiving, Kempner Multi-Cap Deep Value Equity Fund (FAKDX) becomes Kempner Multi-Cap Deep Value Fund, thereby eliminating the need to keep 80% of the portfolio in equities.

Effective November 1, 2017, RBC BlueBay Emerging Market Select Bond Fund (RESAX) will be renamed RBC BlueBay Emerging Market Debt Fund and RBC BlueBay Global High Yield Bond Fund (RHYAX) will become RBC BlueBay High Yield Bond Fund.

Plans to have the Sentinel funds be adopted by Touchstone are proceeding apace. Absent last minute surprises, the change is expected to be completed October 27, 2017. A couple of the Sentinel funds have been consistently solid (and left behind by Morningstar); in recognition of that, we’ll offer a profile of at least one in our November issue. 

On October 31, 2017, Wasatch Large Cap Value Fund (FMIEX) becomes Wasatch Global Value Fund. The new name signals two changes: from domestic to global and from large cap to all-cap. Normally 40% of the portfolio will be international but in the extreme, up to 50% might be in the emerging markets. Morningstar has decided to jump the gun; their site has changed to Global while Wasatch legally remains Large Cap.

OFF TO THE DUSTBIN OF HISTORY

AI International Fund (IMSSX) and AI Large Cap Growth Fund (LGNIX) will both liquidate on October 19, 2017. Their board urges them to be prompt in their unwinding.

Alger Mid Cap Focus Fund (SPEAX) will liquidate on or about October 25, 2017. Sad summary: 10 years, $10 million, bottom tenth.

AMG Systematic Large Cap Value Fund (MSYAX) is expected to liquidate on or about October 31, 2017.

Baird LargeCap Fund (BHGSX) seems to be on the path to extinction, but we’re not sure of that yet. For now, Baird terminated the fund’s sub-adviser and closed it to new purchases. The board will decide in November whether to liquidate the fund, merge the fund or do something else. The fund’s been sort of a study in mediocrity, with a 17 year history and $42 million in assets, which doesn’t really cry out “save me!”

Catalyst/Princeton Unconstrained Hedged Income Fund (HIFAX) has closed, and will dissolve and liquidate on October 27, 2017. One sign of its distress:

The other:

Destra Focused Equity Fund has closed and will liquidate by October 31, 2017.

Direxion Indexed Managed Futures Strategy Fund (DMXAX) will pursue “an orderly liquidation,” set for October 27, 2017.

Shareholders of Dreyfus Small Cap Equity Fund (DSEAX) are being asked to agree on merging their fund into Dreyfus/The Boston Company Small Cap Value Fund (RUDAX). Meanwhile, Dreyfus MLP Fund (DMFAX) is being liquidated on or about November 15, 2017. DMFAX is small and has produced index-like returns over its 30 months of existence, which is to say it’s lost a lot of money for its shareholders.

The Fidelity Multi-Manager Target Date Funds are expected (expected by who?) to liquidate on or about December 8, 2017.

Hatteras Disciplined Opportunity Fund (HDOIX) will “return the Fund’s investor capital … to the Fund’s shareholders,” a particularly delicate phrase most commonly associated with hedge fund closures, on October 30, 2017. HDOIX is actually one of the top performing option-strategy funds whose three-year average return is more than double its average peer’s. Presumably the adviser found the $54 million asset base to be financially unsustainable.

On or about October 13, 2017, Global X Junior MLP ETF (MLPJ), Global X Permanent ETF (PERM), Global X Guru International Index ETF (GURI), Global X Guru Activist Index ETF (ACTX), Global X FTSE Andean 40 ETF (AND), Global X Brazil Mid Cap ETF (BRAZ) and Global X Brazil Consumer ETF (BRAQ) will liquidate.

JPMorgan Diversified Real Return Fund (JRNAX) will become an unreal fund around December 8, 2017.

JPMorgan International Opportunities Fund will liquidate and dissolve (may I watch?) on October 2, 2017.

Manning & Napier Emerging Markets Series (MNEMX) has closed and will soon liquidate.

MassMutual Premier Value Fund (MCEAX) will be dissolved on March 23, 2018.

MassMutual Select Large Cap Value Fund (MMLAX) will merge into the MassMutual Select Diversified Value Fund (MDVYX) sometime in January 2018. 

Mirae Asset Asia Great Consumer Fund (MCGEX) will merge into Mirae Asset Asia Fund (MALAX), “later this year.”

ProShares liquidated a slew of ETFs in September. Those were ProShares Short S&P Regional Banking, Ultra S&P Regional Banking, Ultra Oil & Gas Exploration & Production, UltraShort Oil & Gas Exploration & Production,Ultra MSCI Mexico Capped IMI, UltraShort MSCI Mexico Capped IMI, Ultra Junior Miners, UltraShort TIPS, UltraShort 3-7 Year Treasury, German Sovereign/Sub-Sovereign, USD Covered Bond, Hedged FTSE Europe and Hedged FTSE Japan ETFs.

Roosevelt Multi-Cap Fund (BULLX, originally the Bull Moose Growth Fund and briefly the Abacus Bull Moose Growth Fund) is no longer accepting purchase orders for its shares and it will close effective November 15, 2017. 

SSGA Enhanced Small Cap Fund (SSESX) will be liquidated and terminated on or about November 20, 2017

Tactical Asset Allocation Fund (GVTAX) ceased to allocate anything on or about September 28, 2017.

TFS Market Neutral Fund (TFSMX), TFS Small Cap Fund (TFSSX) and TFS Hedged Futures Fund have terminated the public offering of their shares and will discontinue each Fund’s operations on or about October 27, 2017.

Third Avenue International Value (TVIVX), a shell of its former self, has closed to new investors and will merge into Third Avenue Value Fund (TAVFX) as soon as the board permits. Those who remember it fondly should check Moerus Worldwide Value (MOWNX) run by Amit Wadhwaney, the former manager.

 “As a result of lack of demand in the marketplace for the Funds and difficulty in attracting and retaining assets,” which actually strike me as the exact same thing, TD Short-Term Bond Fund (TDSHX), TD Core Bond Fund (TDBFX), TD High Yield Bond Fund (TDHBX), Epoch U.S. Equity Shareholder Yield Fund (TDUEX), Epoch Global Equity Shareholder Yield Fund (TDGIX) and TD Target Return Fund (TDTFX) will be liquidated on or about January 17, 2018. The “TD” here is Toronto Dominion bank, whose funds seem to have limited availability in the US, which is sad because several of their funds are quite good. (TDAM Global Low Volatility Equity TDLVX, which is not being liquidated, earned MFO’s “Great Owl” designation for outperforming its peers on a risk-adjusted basis in every applicable trailing time period.) TD helpfully recommends that shareholders redeem quickly since “shareholders remaining in a Fund just prior to the Liquidation Date may bear increased transaction fees incurred in connection with the disposition of the Fund’s portfolio holdings.” Less helpfully, they note that this isn’t a taxable event for the fund, but it is a taxable event for the fund’s shareholders.

Turner liquidations: on, off, on. Turner Midcap Growth Fund, Turner Small Cap Growth Fund and Turner Titan Long/Short funds had been slated to liquidate, then received a reprieve from the governor (or the Board) but the reprieve has now been eliminated. The new Liquidation Date will be on or about September 25, 2017. That will officially take the count of Turner Funds down to zero, for now.

VanEck Long/Short Equity Index Fund (LSNAX) will liquidate on November 20, 2017. Rather earlier, four other VanEck ETFs (AMT-Free 6-8 Year Muni Index, Solar Energy, Treasury-Hedged High Yield Bond and AMT-Free 12-17 Year Muni Index) will undergo “termination and winding down” on or about October 6, 2017.

Another two silly ETFs are biting the dust. USCF Restaurant Leaders Fund (MENU) and Stock Split Index Fund (TOFR … get it? Two-fer) will liquidate on October 20, 2017. Fortunately USCF will provide us with two worthy replacements: USCF SummerHaven Private Equity Strategy Index Fund (BUY) and USCF SummerHaven Private Equity Natural Resources Strategy Index Fund (BUYN) are both now in registration with the SEC.

September 1, 2017

By David Snowball

Dear friends,

Our thoughts and prayers go out to the people in Houston and the surrounding Gulf Coast. The receding flood waters end one phase of the disaster and exposes the next.

Several mutual fund families have headquarters, or significant presence, in the Houston area. Those include Ascendant, Bridgeway, Crossmark Global (formerly Capstone), Invesco, Kerns Capital, Salient, Sarofim and USCA. (The MFO Premium mutual fund screener allows you screen funds based on their headquarters city; that originally flowed from research that shows the fund managers who live and work near each other seem to inadvertently share investing ideas and errors.)

Of those, only Bridgeway and Salient used their websites to speak directly to the effects of Hurricane Harvey, their own status and the ways in which we might help. Both firms stressed that their first priority was to the safety of their employees; both had reopened their offices by August 30 but were still counseling employees to place safety first. Both said that their business continuity plans were allowing them to continue operations, largely uninterrupted. David Rentfrow, a managing director at Crossmark, says his firm plans to reopen Tuesday, September 5:

We have kept the office closed to encourage employees to get out and volunteer. We can’t be actively serving our community if we are sitting behind our desks, and candidly, supporting those in need is much more important right now.  This is part of our firm’s culture. We’ve identified Convoy of Hope and West Houston Assistance Ministries as charitable organizations to consider.

Morningstar reports that, generally, Houston area firms are “soldiering through the storm.” And both offered a list of ways that you can help. Both groups urged you to consider providing support through the Houston Mayor’s Relief Fund and the Houston Food Bank. They offered several different possibilities beyond those two, with Salient providing a word of explanation on each group’s mission.

The hyperlinks above will take you to their hurricane updates and recommendations.

For now, we’d suggest four appropriate actions:

  1. Give now.

I just did, to the Animal Defense League of Texas and the Houston Food Bank. Both are well-rated by Charity Navigator, are recommendation by Bridgeway and/or Salient, and match my own sense of where I might make a difference. Don’t wait to find the perfect charity or the perfect time or a worthy contribution. Do good now. That said …

  1. Give cautiously.

The infuriating reality is that scam aid organizations always spring up in the wake of great tragedy.  Crowd-funding sites, such as GoFundMe, are particularly hard to vet. Even the iconic American Red Cross has been rocked by journalistic and congressional criticism of its huge overhead expenses, emphasis on public relations and poor responses in other hurricane relief. The Consumer Union offers some cautions but also offers links and recommendations for those who want to act thoughtfully.

  1. Give again at year’s end.

The pattern is painful: disaster strikes, money and attention pour in, the immediate crisis abates, we move on … and a region is left with few resources as they begin the long slog to rebuild homes, re-open schools and find meaningful employment for folks who always lived with limited financial resources.

I’ve added a reminder in my phone’s calendar to check in again at Thanksgiving with the ADL, the Food Bank and Donor’s Choose (a classroom support organization). You might do likewise, while the thought is at the top of your mind.

  1. Put aside “the big picture” discussion for a bit, and focus on doing actual good for actual people.

There are really important questions that these events raise, about urban development, climate change, the federal response and so on. Those are, I think, questions for another day.

The immenseness of the challenge residents face in overcoming the storm and re-assembling good lives for themselves, their families and their communities needs to be matched by the strength and unity of our own response to the disaster. We need to act together to make a difference.

It’s something we’re surprisingly good at. Alexis de Tocqueville, the first great European observer of American culture, wrote in 1835 about a peculiarly American virtue.

The political associations that exist in the United States form only a detail in the midst of the immense picture that the sum of associations presents there.

Americans of all ages, all conditions, all minds constantly unite. Not only do they have commercial and industrial associations in which all take part, but they also have a thousand other kinds: religious, moral, grave, futile, very general and very particular, immense and very small; Americans use associations to give fêtes, to found seminaries, to build inns, to raise churches, to distribute books, to send missionaries to the antipodes; in this manner they create hospitals, prisons, schools. Finally, if it is a question of bringing to light a truth or developing a sentiment with the support of a great example, they associate.

As soon as several of the inhabitants of the United States have conceived a sentiment or an idea that they want to produce in the world, they seek each other out; and when they have found each other, they unite. From then on, they are no longer isolated men, but a power one sees from afar, whose actions serve as an example; a power that speaks, and to which one listens.

Tony Ledergerber, one of the Bridgeway folks, echoes Tocqueville:

It has been absolutely devastating to many parts of the Houston area.  So many people are struggling.  Having said that, the show of support from people on the ground and from folks like you has been amazing!  In my neighborhood the sense of community has always been fairly strong.  When the storm hit, our boundaries of community quickly expanded to all of Houston.  As the nation responded and friends from all over started asking how to help, our sense of community has become the entire country.  It’s a good feeling.

It is, indeed.

“The Dow closed the day down by 1,245 points.”

That’s nice, dear. Would you pass the baked squash, please?

The Dow is going to drop by over a thousand points. That’s not a prediction of some imminent disaster; it’s just a report of a statistical near-certainty. We have already had fourteen days with percentage declines large enough to equate to drop of more than 1,000 points with the Dow at 22,000. Eleven of those 1,000 point days have occurred since the year 2000.

Date One day loss, in percentage Today that would be a loss on the Dow of …
1987-10-19 – 22.61 4840
2008-10-15 −7.87 1731
2008-12-01 −7.70 1694
2008-10-09 −7.33 1612
1997-10-27 −7.18 1580
2001-09-17 −7.13 1569
2008-09-29 −6.98 1536
1998-08-31 −6.37 1401
2008-10-22 −5.69 1252
2000-04-14 −5.66 1245
2011-08-08 −5.55 1221
2008-10-07 −5.11 1124
2008-11-05 −5.05 1111
2011-08-10 -4.62 1016

We’re certainly not the first to point this out. Dan Wiener (whose name I finally spelled correctly, sorry about the persistent “ei” goofs, Dan) wrote to his readers in August, “At last night’s close, a mere 5% correction for the Dow would see the index drop no fewer than 1,101 points! … Are you prepared for this, because a 10% correction would be totally normal in the course of market events?”

Mr. Wiener’s suspicion is that folks are not prepared, both because large round numbers are intrinsically scary (there are 25,000,000 tons of spiders on earth! Watch out for the creepy gifs if you click that link.) and because the extended market calm has anesthetized us. Mr. Wiener’s notes

So far [through early August]  2017, we’ve only seen 8 days when the Dow swung 200 points or more intraday. Last year, when the Dow was much lower, there were 70 days when we saw 200-point or better intraday swings and 106 such days in 2015.

One statistically stunning representation comes from the one-year Martin ratios for the fund universe. Martin ratios, which are a key metric in the MFO rating system, measures a fund’s risk-return balance. Martin ratios differ from the more-famous Sharpe ratio because Sharpe uses volatility as its risk measure (so it doesn’t matter to Sharpe, from a risk perspective, whether a fund has lots of sharp up-spikes or lots of sharp down-spikes). Martin uses drawdown volatility in its risk calculation, which normally makes it much more sensitive to the kind of risk the matters to us: the risk that our fund will drop sharply. If there’s no drawdown to measure, an incredibly rare state, Martin ratios soar.

As of July 30, there are 18 equity funds, mostly global and international, with a one-year Martin ratio of infinity, like Dodge & Cox Global DODWX, T Rowe Price Frontier PRFFX, and Oakmark International OAKIX. They are infinite because there was simply no drawdown for twelve consective months … zero! Historically, the average Martin ratio for the S&P500 is 0.4. For the past 12 months, the average Martin ratio is 29.

Add two calendar issues to the equation:

  1. September is the worst month for the stock market, historically. That doesn’t say anything about this particular September, except “don’t be surprised.”
  2. We are approaching the 10th anniversary of the last market peak. Stock markets began “topping” just about ten years ago, just ahead of the stunning declines that commenced in October 2007 and continued for 18 months. One likely effect is that 10-year returns are going to look suddenly worse as the last months of the old bull market are replaced by the first months of the new bear market.

You cannot reliably avoid a market crash. You can prudently prepare for it.

  1. Know your portfolio’s downside risk. Earlier this year we offered a fairly simple method for calculating how much you might lose in a bear market. In the case of my portfolio, which is always about 25% US equity, 25% international equity, 25% fixed-income and 25% cash equivalents, it might expect to lose 23%. (I made a math error in the original article, which made the loss look larger.) At base, multiply your fund’s maximum drawdown percentage over the current market cycle (we calculate that for all funds at MFO Premium) by their weight in your portfolio. If your portfolio is equally weighted between two funds, one with a 50% maximum drawdown and one with a 30% maximum drawdown, you shouldn’t be surprised if your portfolio suffers a 40% loss. You might also use the guide provided in our follow-up piece How Bad Can It Get?
  2. Do not put more money at risk than you can afford to lose. Absent the presence of unicorns and magic wands, it’s very hard to come up with a scenario where US stocks and bonds are going to make much money for the next five years. Everything’s expensive and overpaying now is the surest predictor of poor returns ahead. Charles Stein and John Gittelsohn did a really nice job for Bloomberg (Pimco and T. Rowe Price Warn Investors It’s Time to Reduce Risk, 8/9/2017) of compiling the recommendations of some of the world’s top investment advisers. PIMCO, T. Rowe Price, DoubleLine and BlackRock all share the same message: “it’s time to take some money off the table.”

Our advice doesn’t change: plan thoughtfully for the inevitable hard times, knowing that they will come but not knowing when, then be sure to make enough baked squash to share. It’s an autumn tradition and a reminder that sharing with others is the heart of the good life!

Thanks upon thanks!

We noted, last month, that we could use your help in extending the reach of the Observer. We continue to benefit from the company of 30,000 readers each month, but only about 1% of those folks are involved with the tools and screeners at MFO Premium and we’re not sure that we’re reaching many of the folks who might most benefit. A number of professionals responded with offers of assistance and intriguing ideas. I’d like to thank, especially, Hedda Nadler, Graham Thomas, Barry Portugal, Diane Hettwer and others for spending time talking and thinking with us. As the start-of-year craziness at the college recedes, we’ll try to move forward with some of the ideas.

We also offered folks to meet with Charles to learn more about MFO, the MFO Premium screeners and his careful and rigorous approach to portfolios. We’re pleased that dozens of people joined in one of his web-based discussions (I hate the word “webinar”). We’re delighted to let you know that you still have an opportunity to learn from him. He’s attending the Morningstar ETF Conference on our behalf and he’s willing to host another online exchange with readers as we integrate even more tools to the site. If you’re interested in either opportunity, drop Charles a note and let him know.

Finally, thanks to the folks who provide financial support for our remarkably low-key operations; We’re looking at you, Brian, Deb, and Greg!

As ever,

 

Ruminations at Summer’s End

By Edward A. Studzinski

Silence is the most perfect expression of scorn.

                                 George Bernard Shaw

Book Review

David Snowball recently asked if I would have any interest in reading Joel Tillinghast’s (Fidelity Low-Priced Stock Fund) new book entitled Big Money Thinks Small. While I am usually reluctant to read what often end up being collections of anecdotes about how smart someone was, the fact that it had been published by Columbia Business School Publishing overcame my initial reluctance. Much to my surprise, I enjoyed the book immensely, and found it to be a very thoughtful work. Let me first say that I do not know Mr. Tillinghast, other than by reputation. However, I have served on committees with people who do know Mr. Tillinghast and have worked with him. They are uniform in their praise of him both as an investor and as an individual. He is a true polymath with almost total recall. And unlike many who content themselves with a formulaic approach to investing, e.g. mean reversion, he seeks to understand the quality of a business, the numbers supporting the business, and the character, intelligence, and integrity of management. Two chapters in particular I would recommend to all are “Gamblers, Speculators, and Investors” and the last chapter entitled “Two Paradigms” which speaks of the convergence of the philosophies of John Bogle and Warren Buffett. Given my view that the investment management business, especially at the top, is increasingly populated by narcissistic sociopaths, it is refreshing to find someone like Joel Tillinghast who is thought of as a genuinely nice man who happens to be an outstanding investor. I highly recommend the book.

Meltdown of the Managers

As August ended, we had the juxtaposition of two events in Chicago. One was the announced closing of Holland Capital Management by year-end, an investment firm with a long history and still $2.5B of assets under management. The second was the story that ran in Bloomberg News this week quoting John Rogers of Ariel Capital Management as saying that in response to pressure from his fund trustees, the fees on several of the firm’s mutual funds would be reduced. The trustees wanted the fees to be at the industry average or lower for the fund category. Rogers indicated that the fee cuts were critical in an environment where institutional clients were moving their assets to either passive indexed products or exchange traded funds.

We have spoken a lot in the past about fees, perhaps ad nauseam. The response we have seen to the fee pressure, from a number of firms such as Fidelity, has been to hatchet costs so as to maintain profit margins on the investment products. A side issue is that over the years, there have been a lot of hidden levers providing an additional kick to the profit margins. Research for years could be purchased with commission dollars, known as soft dollars. And before that, many firms had their own brokerage operations where they were running trades, representing that they were meeting their fiduciary responsibilities for best execution, but in reality, juicing up their own profits. It was not unusual, as a fiscal year drew to a close, to see a chief executive officer in the trading room, flogging the traders to run more business through the owned brokerage operation before fiscal year-end. Those practices have been regulated away. And now of course, we have the unbundling of commissions and research, with brokerage firms charging hard dollars for their research (we will leave aside for the moment the question of whether institutional research is worth anything these days, recognizing that the sell side firms have gone through their own cost-cutting exercises, getting rid of years of institutional memories in their analyst resources to replace them with kids with computers and spreadsheets). All that notwithstanding, the money management business is still a very good business, perhaps almost as good as the tobacco or spirits businesses in terms of margins. It begs the question though as to whether like tobacco, the 1940’s Act mutual fund is outdated AND harmful to the user. I suspect my colleague Charles might say it is, and the exchange-traded fund is the better next generational product. I don’t know myself. I think there are interesting questions and arguments on both sides.

What I do know is that, whether we are talking about money management firms in Boston, Chicago, or New York, I hear a lot about toxic working environments, where analysts and portfolio managers spend much of their time at work being afraid and worrying about internal politics. One marketing executive I spoke to talked about the annual review process where she related the constant fee pressure from the clients (as John Rogers has now publicly confirmed), only to be told that the responsibility of the marketer was to bring in the assets regardless of the environment. So while I am a fan of active management and think it will have its day, unfortunately I think too many active managers are faced with the job security question which requires them to be fully invested to the last penny. And woe unto them if they question the valuation of the investments they are putting client money into (at the same time as they are restricting their own equity investments).

Regenerative Virginity

When you look at the groupings of mutual fund trustees, you find a category of insider trustees (connected to the management firm) and another category of outside independent trustees. One of the most magical processes is that by which an insider management trustee becomes independent under the rules, merely with the passage of time, to wit, three years. Think of it – you have an insider who was a senior executive at the parent fund company, where he has made millions of dollars for himself. He has acquired many of the firms under the umbrella of the parent company, so he knows a lot about valuing fund companies and the vagaries of dealing with investment personnel. He knows how profitable the business is, and how long the payback on the original purchase prices of firms tends to have been. He has set up share plans, which provide for the transfer of equity interests from senior personnel to junior personnel through the repatriation of share units at retirement. He is aware of the compensation processes and abilities of all of the key personnel at the fund company whose funds of which he is now a trustee. After three years, he gets to be declared an independent trustee and say that he knows nothing about the business at any level. For that he gets paid hundreds of thousands of dollars a year, paid for by the shareholders of the funds. Is this a great country or what?

On another note, no wonder that Brian Winterflood, who founded Winterflood Securities in London, feels that most “managers just want your money upfront for a fee.” And he would say that many managers at this juncture are overhyped investors whose results don’t justify the fees being charged.

To circle back to Mr. Tillinghast, more often than not, under the pressure of keeping assets, we are increasingly finding money management firms committing other people’s money on the basis of sloppy research, which leads to “reckless speculation” and “risky investments.”

Historically Low Volatility

By Charles Boccadoro

“Experts often possess more data than judgment.”

Colin Powell

The S&P 500 closed August yesterday with an annualized standard deviation below 6%. Typically, since about 1940, which marked the end of The Great Depression, annualized standard deviation runs between 13 and 14%. It was the second consecutive month to break the 6% threshold; in fact, only five times has volatility remained this low for consecutive months: 1964, 1993, 1995, 2006 and 2017.

Another depiction highlighting just how infrequent these low volatility periods have been is presented in the following histogram, which shows percent occurrence (or frequency) of this volatility measure. The occurrence of S&P 500 annualized standard deviation below 6% is 2.7%, or just 25 times out of the 921 rolling 12 month periods analyzed. That is substantially less than high volatility occurrences of say above 24%, which investors experienced circa 1974, 1987, and 2008.

Such low volatility can skew fund performance ratings based on risk adjusted returns, like Sharpe ratio, which is defined as excess return divided by standard deviation. When the denominator approaches zero, Sharpe values explode (the mathematical term is “behaves hyperbolically”) and small differences can drive big changes in ratings. Morningstar avoids this situation with their “expected utility theory” ratings methodology, as we described previously in Morningstar’s Risk Adjusted Return Measure. The downside in its approach is the methodology generally penalizes funds with high volatility more so than it rewards funds with low volatility.

The current low volatility environment has had an even greater impact on downside volatility measures, like downside deviation, maximum drawdown, and ulcer index. (For definitions, please reference: A Look at Risk Adjusted Returns.)

Month ending August 2017, the S&P 500’s downside deviation dropped below 2% for the second consecutive month. The last time we experienced multiple months below 2% were in 1959, 1964 and 1996.

Investors became extremely sensitive to measures like maximum drawdown after experiencing massive retractions in 2002 and 2009, which resulted in many monthly retirement statements showing 50% or less life savings than just a couple years earlier. Maximum drawdown levels today? Once again, they are historically low based on 12-month evaluation periods, month ending August, across 77 years, from September 1939 through August 2017.

The current 12-month value is just -1.8%. Only five times does this metric get above -2% (zero being highest possible … no drawdown): 1955, 1959, 1964, 1985 and 2017. It’s never repeated the following year.

The Land of the Investment Dervishes

By David Snowball

America’s best-selling poet is a Muslim theologian who died 750 years ago. Jalal ad-Din Muhammad Rumi (alternately, Mevlana Jalaluddin Rumi) is not only namesake to Beyonce’s new child, but also founder of Sufism, a branch of Islam. Sufism is both mystical and ecstatic. Rumi was given to a whirling dance that reflects the boundless joy and energy that overwhelms a believer; it helped believers express and achieve ecstasy, was codified by his son and practiced by dervishes, literally “poor monks.” They became famous as whirling dervishes, who spun with an almost unhuman grace, energy and tenacity.

I thought of them as I read of Turner Investment Partners recent announcement of the closure of their last three actively-managed mutual funds. Turner was founded in 1990 was renowned for their aggressive style of growth investing, primarily in smaller U.S. firms. But those haven’t been the only arrows in the Turner quiver. Here’s a quick quiz: which of the following is a fund that Turner hadn’t already launched and liquidated?

  • Turner Core Growth 130/30: 130/30 funds were all the rage in the mid2000s despite being a dumb idea. Turner closed theirs in 2008.
  • Turner Global TMT: only half-credit here. Global TMT was one of Turner’s hedge funds. It builds on the tradition of Turner Wireless & Comm which dropped 81% in its last year of existence, 2001, and was merged into their B2B internet fund. Remember those?
  • Turner Market Neutral: nope, they ran a decent market neutral fund through 2014 but drew only $3 million in assets.
  • Turner Shariah-compliant Growth: ding, ding, ding! Two outside investors, including “His Excellency Abdul Jabbar Al Sayegh of Abu Dhabi, Chairman and Chief Executive of Al Sayegh Brothers Group of Companies,” praised Turner’s global growth strategy for both its high quality and compatibility with a Sharia-compliant portfolio, but the firm never launched a fund dedicated to the strategy.
  • Turner Core High Quality Fixed Income Fund: nope, they had a series of sub-advised conservative fixed-income funds, including this one and several short-term bond funds, around the turn of the century.

Turner was founded at a time when a number of very smart, very ambitious managers all looked to become The Next Ned Johnson. Dick Strong aspired to the role. Tom Marsico, Bill Nasgovitz, Jim Oberweis and Garrett van Wagoner likely did.

And, most plausibly, so did Rob Turner. You get a sense of Turner’s drive and ambition not by looking at the funds they’re liquidating, but at all of the Turner funds that have preceded them. After a long slog through the SEC Edgar database, I think this is a nearly-comprehensive roster.

Turner All Cap Growth Fund

Turner B2b-Ecommerce Fund

Turner Concentrated Growth Fund

Turner Core Growth 130/30 Fund

Turner Core High Quality Fixed Income Fund

Turner Emerging Growth Fund

Turner Emerging Markets Fund

Turner Future Financial Services

Turner Global Opportunities Fund

Turner Global Top 40 Fund

Turner International Growth Fund

Turner Large Cap Growth Fund

Turner Large Growth Fund

Turner Market Neutral Fund

Turner Medical Sciences Long/Short

Turner Micro Cap Growth Fund

Turner Midcap Equity Fund

Turner Midcap Growth Fund

Turner New Enterprise Fund

Turner Quantitative Broad Market Equity Fund

Turner Quantitative Large Cap Value Fund

Turner Short Duration Government Funds: – Three Year Portfolio

Turner Short Duration Government Funds: – One Year Portfolio

Turner Small Cap Equity Fund

Turner Small Cap Growth Fund

Turner Spectrum Fund

Turner Strategic Growth Fund

Turner Tax Managed Us Equity

Turner Technology Fund

Turner Titan Fund

Turner Titan Long/Short

Turner Top 20 Fund

Turner Ultra Large Cap Fund

And now, we turn turn turn to the next Turner: in the past 10 years, Turner lost 99% of its assets under management (“Two Fallen Fund Firms Merge,” Barron’s); dozens of funds have come and gone; active funds are out, ETFs are in; “quantitative” is out, “multifactor” is in. They added European funds and Middle Eastern investors, filed for an IPO, withdrew the filing for the IPO, cut bonuses, sued departed employees, merged with one firm and acquired two more.

Turner acquired Elkhorn Capital Group in August, 2017. Elkhorn’s founder drove a major move into ETFs at his previous employer, the Invesco Powershares, but has had minimal market success with Elkhorn’s ETFs. Elkhorn gives Turner quick entre into ETFs, Turner gives Elkhorn is brand name and marketing muscle. “Turner was introduced to us as they were going through a metamorphosis,” according to Elkhorn’s Ben Fulton.

It will be fascinating and instructive. Joseph Schumpeter celebrated capital’s “gale of creative destruction,” it’s penchant for blowing away what used to work in order to clear space for what might work next. It’s clear that Turner’s previous reinventions availed little; perhaps this one will finally give the industry an example of their future.

Or, perhaps, the whirling dancers will finally fall. Stay tuned.

Centerstone Investors (CETAX/CENTX), September 2017

By David Snowball

Objective and strategy

Investors Fund seeks long-term growth by investing, primarily, in an all-cap global equity value portfolio though there’s no formal limit on its ability to hold fixed-income securities, including private placements. The manager’s value discipline leads him to higher-quality firms whose stocks are selling at a discount to his assessment of their intrinsic value. As the stresses on the firm rise, so does the size of the discount he demands. The goal is to also invest with a margin of safety, which might also lead the fund to hold substantial amounts of cash when attractive and attractively-priced opportunities are not available. As of June 30, 2017, cash and cash surrogates comprise 26% of the portfolio. The manager expects to keep at least 15% of the portfolio in international stocks and typically 30% there; currently it’s 45%. Up to 20% of the portfolio may be invested in high-yield bonds and up to 10% in precious metals. Currently those comprise 1.5% and 3% of the portfolio, respectively. The manager can hedge his currency exposure but is not required to do so; currently, about 20% of currency exposure is hedged.

Adviser

Centerstone Investors Trust, which is headquartered in New York. Centerstone advises only the two Centerstone funds (Investor and International). That’s reasonably distinctive but most advisers divide their time and attention between public vehicles and private accounts. As of June 30, 2017, they had approximately $220 million assets under management.

Manager

Abhay Deshpande. Mr. Deshpande is Centerstone’s founder & CIO. He is best known for his work at First Eagle Investment Management, where he helped successfully manage most of $100 billion. He joined First Eagle in 2000, first as an analyst, then as a manager for private accounts and finally as manager on a number of high-profile funds. From September 2007 through October 2014, his charges included First Eagle Global, First Eagle Overseas and First Eagle US Value. Prior to First Eagle, he worked as a research analyst with Harris Associates, adviser to the Oakmark Finds, and as a Morningstar fund analyst. He is supported by a three person analyst team.

Strategy capacity and closure

Mr. Desphande estimates total firm capacity of less than $10 billion, but that’s not isolated to one particular strategy.

Management’s stake in the fund

Mr. Desphande has invested more than $1 million in each of the Centerstone funds. As of July 15, 2017, the trustees and officers, as a group, beneficially owned 8.0% of the Investors Fund’s outstanding shares and Mr. Deshpande, personally, owned 7.8%. All three of Centerstone’s independent directors have substantial investments in the fund, which is both rare and important.

Opening date

May 3, 2016.

Minimum investment

The minimum initial investment for Class A shares, Class C shares and Class I shares is $2,500, $2,500 and $100,000, respectively ($1,000, $1,000 and $100,000 for IRAs and other retirement plans, respectively).

Expense ratio

1.41% for “A” shares and 1.16% for “I” shares on assets of $194.1 million. 

Comments

Centerstone Investors first thirteen months of operation were perfectly respectable. Here’s the snapshot for the period from June 2016 through July 2017.

  Annual return Max drawdown Recovery, in months Standard deviation Downside deviation Ulcer Index Sharpe ratio
CENTX 11.0 -2.6 4 4.1 1.9 0.9 2.57
Flexible portfolio peers 10.6 -2.7 5 4.8 2.3 1.0 2.21

You could summarize that chart with the phrase, “modestly higher returns, modestly lower volatility, perfectly respectable profile.” Mr. Deshpande’s own summary (6/302017) was “respectable absolute returns while holding up reasonably well in those admittedly few moments of market weakness.”

“It’s our intention,” says Mr. Deshpande, “to manage Centerstone’s multi-asset strategies in such a way that they can serve as core holdings for patient investors concerned with managing risk.” The core of that risk management strategy is the pursuit of a margin of safety, which is manifested both in his demand that a stock’s discount to intrinsic value be more than proportionate to its potential challenges and in his willingness to hold a lot of cash in the absence of compelling opportunities in the market. His current 25% cash stake and substantial underweight of US equities speaks to his sense of a market that needs to be approached with special care.

You might reasonably ask yourself, “How did ‘respectable’ turn into $175 million in inflows during a time when almost every other active manager saw money flowing out?”

The short answer is that sophisticated investors have come to have faith in manager Abhay Desphande and his absolute value discipline. Mr. Deshpande worked on the singularly-splendid First Eagle Global (SGENX) fund for 14 years, the last six of them as co-manager. He spent a chunk of that time working alongside the fund’s legendary manager, Jean-Marie Eveillard and eventually oversaw “the vast majority” of First Eagle’s $100 billion. SGENX has a five star rating from Morningstar but was downgraded from Silver to Bronze as a result of Mr. Deshpande’s departure. Given that he is applying the same discipline here as he did there, the faith of investors is understandable.

The only troubling aspect of the fund is its archaic share class structure. “C” shares were a bad idea from inception, now they’re a bad idea and a fossil. Load-waived versions of the “A” shares do not seem widely available; presumably smaller advisors need to seek out waivers for the fund’s institutional minimum. There’s neither Investor nor Advisor share classes. For no clear reason, Scottrade offers CENTX, the institutional shares, for just $100 while Schwab has the same shares for $100,000. That’s potentially significant, not just for the hassle is represents, but also because it raises the possibility of a business model not as expertly crafted as the firm’s investment model.

Bottom Line

We are, Mr. Deshpande notes, “business analysts, not equity analysts” and “investors,” not speculators. That speaks to an important orientation: a focus on the real economy and the real companies that comprise it, not just on the vagaries of tradable paper. It’s reflected in Mr. Deshpande’s calm and studied demeanor and in his fund’s patient insistence on real value rather than relative value. Those elements explain both his long-term success and the hard-earned faith of his investors. If, as an investor, you prefer substance and constancy over flash and show, you would be well-advised to place Centerstone Investors on your due diligence list.

Fund website

Centerstone Investors

Launch Alert: Driehaus Small Cap Growth (DVSMX)

By David Snowball

On August 21, 2017, Driehaus Capital launched Driehaus Small Cap Growth (DVSMX/DNSMX). There’s reason to pay attention.

The fund will target U.S. small cap (sub $6 billion market cap) growth stocks. The “name rule” obliges them to keep at least 80% in small caps; they allow that the other 20% might be in international stocks that trade on U.S. exchanges or larger cap equities. As is common with Driehaus, it’s a growth-centered fund likely with a fairly high portfolio turnover rate.

They’re attempting to find “fundamentally strong companies,” which obliges them to evaluate the company’s competitive position, industry dynamics, potential growth catalysts and its financial strength. They also account for comparative stock valuations and external factors (behavioral and macro-economic) likely to impact the firm’s stock price.

Driehaus Small Cap Growth Fund was created by the merger the Driehaus Institutional Small Cap, L.P., Driehaus Small Cap Investors, L.P., Driehaus Institutional Small Cap Recovery Fund, L.P. and Driehaus Small Cap Recovery Fund, L.P., which were managed by the same investment team using about the same strategy. Like the new fund, the limited partnerships were just some of the vehicles for the strategy. Overall, Driehaus manages more than $200 million in the small group growth strategy. The record of that strategy composite, the combined performance of all of the vehicles following it, points to a couple conclusions.

First, the strategy has been successful.

Second, the strategy has been independent. The three-year active share calculation against the Russell 2000 Growth Index is 85.42. As I scan the active share graph from 2008-2015, it appears that active share is never below 80, which indicates a high degree of independence from its benchmark.

The strategy has volatility that’s modestly higher than its benchmarks (beta of 1.05) but returns with was substantially higher (alpha of 3.22), which means it’s got a strong risk-return profile. Driehaus’s analysis of rolling five-year returns shows that the outperformance is “fairly consistent throughout the strategy’s history.” While the strategy is not the fund per se, the strategy’s performance should give you a good insight into what the fund brings to the table.

The fund is managed by Jeffrey James and Michael Buck. Mr. James is the portfolio manager for the Micro Cap Growth, Small Cap Growth and Small/Mid Cap Growth strategies. He began his career with Lehman Brothers, had a six year stint at the Federal Reserve Bank of Chicago and joined Driehaus in 1997. Mr. Buck, the assistant portfolio manager, is also a senior micro- and small-cap analyst with responsibility for the consumer discretionary, consumer staples and financials sectors. The portfolio team includes six analysts and a dedicated risk manager.

The fund begins life with about $37 million in assets, of which $36 million are in the institutional shares. The minimum initial investment in the Investor share class is $10,000, Institutional is $500,000.  The opening expense ratios are 1.20% and 0.95%, respectively.

The Driehaus Small Cap Growth homepage is, as yet, thin on content but it does offer the essential information. Readers interested in understanding the underlying strategy will find a lot of useful information linked to the Driehaus Small Cap Growth strategy page.

Funds in Registration

By David Snowball

Wow. Finally, a lot of intriguing new investment opportunities. David Sherman, whose RiverPark Short-Term High Yield (RPHYX) fund has both a one-star rating and the universe’s best Sharpe ratio (by a lot) over the past five years, is launching a CrossingBridge Low Duration. Polen Capital, which runs three splendid funds – large growth, global and international – is adding a small cap offering. Thrivent, which has very solid, low-profile funds, offers up a no-load, no-minimum international fund with 0.09% expenses. And Mark Wynegar, whose Tributary Small Company Fund (FOSCX) has a great record for low risk, low turnover, low drama performance, adds a small-to-midcap fund to his portfolio.

And, oh yeah, you can also track price changes in bitcoin now without actually buying a bitcoin.

CrossingBridge Low Duration High Yield Fund

CrossingBridge Low Duration High Yield Fund will seek high current income and capital appreciation consistent with the preservation of capital. The plan is to invest in corporate bonds, zero-coupon bonds, commercial paper, ETNs, distressed debt securities, bank loan assignments, private placements, mortgage- and asset-backed securities, government bonds, and corporate bank loans. They’ll target a duration of three years or less, depending on conditions. They can invest, without limit, in 144A private placements. The fund will be managed by David K. Sherman, President of CrossingBridge Advisors, and Michael DeKler. That’s the same winsome David K. Sherman who serves as president of Cohanzick and manages two very fine fixed-income funds for RiverPark. Investor shares, with an initial expense ratio of 1.75% and $2500 minimum are authorized by the prospectus but will not be immediately available. Institutional shares will carry a 1.47% e.r. and $250,000 minimum.

CrossingBridge Tactical Credit Fund

CrossingBridge Tactical Credit Fund will seek absolute total returns over a complete market cycle. The plan is to invest long and short in a global fixed-income portfolio. The fund will be subadvised by Pinebank Asset Management, with day-to-day management by Oren M. Cohen. Mr. Cohen is also a principal at, and portfolio manager for, Cohanzick. Investor shares, with an initial expense ratio of 1.27% and $2500 minimum are authorized by the prospectus but will not be immediately available. Institutional shares will carry a 0.99% e.r. and $250,000 minimum.

Harbor High-Yield Opportunities Fund

Harbor High-Yield Opportunities Fund will seek total return. The plan is to buy junk bonds issued by high-quality corporations. The selection process is risk-sensitive, credit-sensitive, rigorous and comprehensive, with a dash of “flexible and opportunistic.” The fund will be managed by John A. Fekete of Crescent Capital Group who, the prospectus helpfully informs us, “began his career in 19XX at Philadelphia-based CoreStates Bank.” What a coincidence! I began my career at Augustana College in 19XX, too! The initial expense ratio is 1.10% for Investor shares and 0.66% for Retirement shares. The minimum initial investment will be$2,500.

JOHCM Global Income Builder Fund

JOHCM Global Income Builder Fund will seek a level of current income that is consistent with the preservation and long-term growth of capital in inflation-adjusted terms. The plan is to build a flexible, global, multi-asset portfolio. The portfolio manager hasn’t been named. The initial expense ratio is 0.89% for Institutional shares whose minimum initial investment will be $1,000,000. I mention the fund for two reasons: (1) JOHCM does good work and (2) two other share classes, with higher expenses and presumably lower minimums, are authorized by the portfolio even though they might not be initially offered.

PhaseCapital Dynamic Multi-Asset Growth Fund

PhaseCapital Dynamic Multi-Asset Growth Fund will seek long-term capital growth. The plan is to manage a global, unconstrained, multi-asset portfolio guided by “a disciplined, risk-based tactical risk management allocation methodology.” I guess I’m reassured that their risk management allocation methodology is risk-based. The fund will be managed by Michael DePalma and Michael Ning of PhaseCapital LP. The initial expense ratio hasn’t been disclosed and the minimum initial investment will be $1,000.

Polen U.S. Small Company Growth Fund

Polen U.S. Small Company Growth Fund will seek long-term growth of capital. The plan is to identify high quality small companies (“consistent and sustainable high return on capital, vibrant earnings growth, robust free cash flow generation, strong balance sheets and competent and shareholder-oriented management teams”) then buy their stock. The fund will be non-diversified. The fund will be managed by Tucker Walsh, the Head of the Small Company Growth Team at Polen. The initial expense ratio is 1.50% and the minimum initial investment will be $3,000, reduced to $2,000 for IRAs and accounts established with an AIP.

REX Bitcoin Strategy Fund

REX Bitcoin Strategy Fund will seek provide investors with long exposure to the price movements of bitcoin. The plan is “to directly or indirectly in an actively managed portfolio of financial instruments providing long exposure to movements in the value of bitcoin, together with an actively managed portfolio of fixed income instruments.” (sigh) The fund will be managed by Denise M. Krisko of Vident Investment Advisory. Neither the initial expense ratio nor the minimum initial investment have been disclosed.

Thrivent Core International Equity Fund

Thrivent Core International Equity Fund will seek long-term capital appreciation. The plan is to invest, primarily, in international mid- to large-cap stocks. The fund will be managed by Noah J. Monsen, and Brian W. Bomgren of Thrivent Financial. The initial expense ratio is 0.09% and the minimum initial investment will be $50.

Tributary Small /Mid Cap Fund

Tributary Small /Mid Cap Fund will seek long-term capital appreciation. The plan is to ask you to trust the managers; the disclosed strategy is to buy small- and mid-cap stocks that are selling for less than what they’re worth. The fund will be managed by Mark Wynegar and Donald Radtke. Mr. Wynegar also co-manages the very fine Tributary Small Company fund. In our profile, we described it as a fund “that gets the job done, quietly and well, year after year.” For the “Institutional” shares, the initial expense ratio is 1.24% and the minimum initial investment will be $1,000. Why call retail class “institutional”?  My recollection is that it’s a corporate legacy: they had another “institutional” fund and found cause to reduce its minimum is $1,000. Now, by default, the $1,000 share class is “Institutional” and the $5 million share class is “Institutional Plus.”

VanEck Morningstar Wide Moat Fund

VanEck Morningstar Wide Moat Fund will seek track the Morningstar Wide Moat Index. Van Eck already runs an ETF (MOAT) that tracks the same index. The fund will be managed by Peter Liao. The initial expense ratio has not been disclosed (the ETF’s is 0.49%) and the minimum initial investment will be set by the intermediary rather than the adviser.

WCM Alternatives: Credit Event Fund

WCM Alternatives: Credit Event Fund will seek attractive risk-adjusted returns, through a combination of current income and capital growth, independent of market cycles. The plan is to build a fixed-income portfolio around “special situations” securities: capital structure arbitrage, merger and acquisitions, spin-offs, credit restructurings, IPOs of debt, re-financings, debt maturities, asset monetizations, and other restructurings. The fund will be managed by Roy Behren, Michael Shannon, and Steven Tan of Westchester Capital Management. The initial expense ratio hasn’t been disclosed and the minimum initial investment for “Investor” shares will be $1,000.

Manager changes, August 2017

By Chip

This month saw partial or complete manager changes at 57 funds. The most consequential occurred at American Beacon Holland Large Cap Growth Fund, following the decision by Holland Capital Management to close after a long and honorable run. That team’s departure occasions a change in the fund’s strategy as well as in its management.

As to the other 56 funds … meh. In the case of Cornerstone Advisors Global Public Equity, which saw the departure of one of 47 managers from one of 14 sub-advisers, the change doesn’t even rise to the level of “meh.” (Nice fund, though.)

Ticker Fund Out with the old In with the new Dt
REPOX AAAMCO Ultrashort Financing Fund Robert McDonough will no longer serve as a portfolio manager for the fund. The fund is not even three months old. Sean Kelleher and Yung Lim will continue to manage the fund. 8/17
GOPAX Aberdeen China Opportunities Fund Frank Tian is no longer listed as a portfolio manager for the fund. Hugh Young, Nicholas Yeo, Flavia Cheong, Kathy Xu, and Nicholas Chui will continue to manage the fund. 8/17
ACDJX AC Alternatives Disciplined Long Short Fund No one, but . . . Tsuyoshi Ozaki has joined Yulin Long in managing the fund. 8/17
ACOIX AC ONE China Fund Institutional Class Wonmyoung Lee is no longer serving as a portfolio manager of the fund. Woon Sang Baik, Patrick Pascal, Frederick Ruopp, Sr., and Frederick Ruopp, Jr. will continute to manage the fund. 8/17
ABFAX American Beacon Balanced Fund Effective February 28, 2018, John Williams will retire from his position as a portfolio manager. The rest of the extensive team remains. 8/17
LHGFX American Beacon Holland Large Cap Growth Fund, which will renamed as the American Beacon HSMP Quality Growth Fund As a result of the closing of Holland Capital, Monica Walker and Carl Bhathena are out. Harry Segalas will manage the renamed fund. 8/17
ABMAX American Beacon Mid-Cap Value Fund Eli Rabinowich will no longer serve as a portfolio manager for the fund. Ben Silver will join Richard Pzena and John Flynn in managing the fund. 8/17
ADSIX American Century Disciplined Growth Fund Lynette Pang has not managed the fund since May. Tsuyoshi Ozaki has joined Yulin Long in managing the fund. 8/17
MECIX AMG Managers Cadence Emerging Companies Fund Stephen Demirjian will no longer serve as a portfolio manager for the fund. Robert Fitzpatrick, Michael Skillman, and Robert Ginsberg will continue to manage the fund. 8/17
MCMAX AMG Managers Cadence Mid Cap Fund Stephen Demirjian will no longer serve as a portfolio manager for the fund. Robert Fitzpatrick, Michael Skillman, and Robert Ginsberg will continue to manage the fund. 8/17
BDFFX Baron Discovery Fund Cliff Greenberg, who used to be listed as the “portfolio manager advisor,” will no longer serve in that role. Laird Bieger and Randolph Gwirtzman will continue to manage the fund. 8/17
BGCAX BlackRock Global Long/Short Credit Fund Michael Phelps announced his plans to leave BlackRock, Inc. on December 31, 2017. Jose Aguilar, Stephen Gough and Carly Wilson have been added as portfolio managers of the fund, joining Mssr. Phelps and Joshua Tarnow. 8/17
CCBAX City National Rochdale Corporate Bond Fund Effective immediately, William Miller is no longer a portfolio manager of the fund David Krouth will continue to manage the fund. 8/17
RIMOX City National Rochdale Fixed Income Opportunities Fund Effective immediately, William Miller is no longer a portfolio manager of the fund The other 14, or so, managers remain. 8/17
RIMCX City National Rochdale Intermediate Fixed Income Fund Effective immediately, William Miller is no longer a portfolio manager of the fund David Krouth will continue to manage the fund. 8/17
CAGLX Cornerstone Advisors Global Public Equity Fund Mark Wilkerson no longer serves as a portfolio manager of the fund. The other 46(!!!!) managers remain. They are joined by Justin Kass. 8/17
CAIOX Cornerstone Advisors Income Opportunities Fund Mark Wilkerson no longer serves as a portfolio manager of the fund. The other 10 managers remain. They are joined by Justin Kass. 8/17
CAALX Cornerstone Advisors Public Alternatives Fund Mark Wilkerson no longer serves as a portfolio manager of the fund. The other 17 managers remain. They are joined by Justin Kass. 8/17
CAREX Cornerstone Advisors Real Assets Fund Mark Wilkerson no longer serves as a portfolio manager of the fund. The other 8 managers remain. They are joined by Justin Kass. 8/17
DFDSX DF Dent Small Cap Growth Fund Austin Root is no longer a portfolio manager of the fund.  Matthew Dent and Gary Wu will continue to manage the fund. 8/17
FCNIX Fidelity Advisor Consumer Discretionary Fund Peter Dixon no longer serves as manager of the fund. Katherine Shaw has taken over management of the fund. 8/17
FDYIX Fidelity Advisor Global Strategies Fund Chris Sharpe will no longer serve as a portfolio manager for the fund. Geoffrey Stein will now manage the fund. 8/17
FBALX Fidelity Balanced Fund Peter Dixon no longer serves as co-manager of the fund. The rest of the team remains. 8/17
FCUTX Fidelity Flex Small Cap Fund Eirene Kontopoulos, Morgen Peck, and Shadman Riaz no longer serve as co-managers of the fund, after less than six months of service. Clint Lawrence joins Richard Thompson and Patrick Venanzi on the management team. 8/17
FIGFX Fidelity International Growth Fund No one. But, current manager Jed Weiss is on a leave of absence. Vincent Montemaggiore will serve as an interim portfolio manager during Mssr. Weiss’ leave. 8/17
FSCOX Fidelity International Small Cap Opportunities Fund No one. But, current manager Jed Weiss is on a leave of absence. Patrick Buchanan and Patrick Drouot have been named interim co-managers of the fund. 8/17
FSCPX Fidelity Select Consumer Discretionary Sector Peter Dixon no longer serves as portfolio manager of the fund. Katherine Shaw has taken over management of the fund. 8/17
FDLSX Fidelity Select Leisure Portfolio No one, but . . . Becky Painter has joined Katherine Shaw in managing the fund. 8/17
FTIEX Fidelity Total International Equity Fund No one. But, current manager Jed Weiss is on a leave of absence. Vincent Montemaggiore will serve as an interim co-portfolio manager during Mssr. Weiss’ leave, joining Alexander Zavratsky and Sammy Simnegar. 8/17
FPPTX FPA Capital Fund Dennis Bryan is out after 10 years.  Effective October 1, 2017, Arik Ahitov will be the sole portfolio manager of the fund. 8/17
HVOAX Hartford Value Opportunities David Palmer and James Mordy will no longer serve as portfolio managers for the fund. The fund’s new portfolio manager will be Matthew  Baker 8/17
IAUTX Invesco Dividend Income Fund No one, but . . . Meggan Walsh and Robert Botard have been joined by Kristina Bradshaw and Christopher McMeans on the management team. 8/17
JXBAX JPMorgan Access Balanced Fund Stephanie Sigler Gdula will be on leave from her portfolio management duties until January 2018. The remaining members of the team will manage the fund in Ms. Sigler Gdula’s absence. 8/17
JSGAX JPMorgan Access Growth Fund Stephanie Sigler Gdula will be on leave from her portfolio management duties until January 2018. The remaining members of the team will manage the fund in Ms. Sigler Gdula’s absence. 8/17
JFUAX JPMorgan Global Unconstrained Equity Fund Timothy Woodhouse will no longer serve as a portfolio manager for the fund. Alexander Stanic joins Sam Witherow in managing the fund. 8/17
OEIAX JPMorgan International Research Enhanced Equity Fund No one, at the moment. James Cook, who previously served as portfolio manager from September ’14 to March ’17, has returned to manage the fund with Demetris Georghiou and Piera Elisa Grassi. 8/17
LGCAX Lord Abbett Global Core Equity Fund Didier Rosenfeld and Frederick Ruvkun who’d co-managed the fund since its launch all the way back in January 2017, have moved on. Yarek Aranowicz will manage the fund. 8/17
LMGAX Lord Abbett Growth Opportunities Fund Anthony Hipple will no longer serve as a portfolio manager for the fund. David Linsen, who stepped in as an interim manager (for seven days!) will also no longer serve. Jeffrey Rabinowitz will now manage the fund. 8/17
LICAX Lord Abbett International Core Equity Fund Didier Rosenfeld and Frederick Ruvkun who’d co-managed the fund since March 2016, have moved on. Todd Jacobson will manage the fund. 8/17
LYRHX Lyrical US Hedged Value Fund Caroline Ritter and David Roeske will no longer serve as portfolio managers for the fund. Andrew Wellington will now manage the fund. 8/17
LYRIX Lyrical US Value Equity Fund Caroline Ritter and David Roeske will no longer serve as portfolio managers for the fund. Andrew Wellington will now manage the fund. 8/17
EPSIX MainStay Epoch Global Equity Yield Fund Effective October 31, 2017, Eric Sappenfield will no longer serve as a portfolio manager of the fund. Michael Welhoelter, William Priest, Kera Van Valen, and John M. Tobin will continue to serve as portfolio managers of the fund. 8/17
EPLIX MainStay Epoch U.S. Equity Yield Fund Effective October 31, 2017, Eric Sappenfield will no longer serve as a portfolio manager of the fund. Michael Welhoelter, William Priest, Kera Van Valen, and John M. Tobin will continue to serve as portfolio managers of the fund. 8/17
MTRAX MainStay Income Builder Fund Effective October 31, 2017, Eric Sappenfield will no longer serve as a portfolio manager of the fund. Michael Welhoelter, William Priest, Kera Van Valen, and John M. Tobin will continue to serve as portfolio managers of the fund. Dan Roberts, Michael Kimble, and LouisCohen will also continue to serve as portfolio managers for the portion of the Fund subadvised by MacKay Shields LLC. 8/17
LSEIX Persimmon Long/Short Fund Ward Davis and Brian Agnew are no longer listed as portfolio managers for the fund. Joshua Bennett, Daniel Brazeau, H. George Dai, Gregory Horn, Matthew Shefler, Arthur Holly, Ken Cavazzi, and Timothy Melly will now manage the fund. 8/17
PGSAX PIMCO Global Advantage Strategy Bond Fund Lupin Rahman is no longer listed as a portfolio manager for the fund. Andrew Balls and Sachin Gupta are joined by Pramol Dhawan in managing the fund. 8/17
POGAX Putnam Growth Opportunities Fund No one, but . . . Richard Bodzy joined Robert Brookby as an assistant portfolio manager. 8/17
PNOPX Putnam Multi-Cap Growth Fund No one, but . . . Richard Bodzy joined Robert Brookby as an assistant portfolio manager. 8/17
EUGIX Shelton Capital Management European Growth & Income Fund Stephen Rogers is no longer listed as a portfolio manager for the fund. Matthias Knerr and Andrew Manton will now manage the fund. 8/17
SIVIX State Street Institutional Small-Cap Equity Fund Effective immediately, Mike Cervi will no longer serve as a portfolio manager for the fund. Dennis Santos joins Robert Anslow, Scott Brayman, Michael Cook, Frank Latuda, David Wiederecht and Marc Shapiro in managing the fund. 8/17
DVIBX Transamerica Partners Balanced Matthew Buchanan is no longer listed as a portfolio manager for the fund. Sivakumar Rajan joins Brian Westhoff, Doug Weih, Bradley Doyle, and Tyler Knight on the management team. 8/17
USAUX USAA Aggressive Growth Fund Justin Kelly, Paul Marrkand, and Patrick Burton are out. John Jares, Craig Behnke, and John Toohey are in. 8/17
VINEX Vanguard International Explorer Fund No one, but . . . Magnus Larsson joins Matthew Dobbs and Simon Thomas in managing the fund. 8/17
VAESX Virtus KAR Emerging Markets Small-Cap Fund Hyung Kim is no longer listed as a portfolio manager for the fund. Craig Thrasher will continue to manage the fund. 8/17
VISAX Virtus KAR International Small-Cap Fund Craig Stone will no longer serve as a portfolio manager for the fund. Craig Thrasher will continue to manage the fund. 8/17
WGROX Wasatch Core Growth Fund No one, but . . . Michael Valentine joins J.B. Taylor and Paul Lambert in managing the fund. 8/17
WAAEX Wasatch Small Cap Growth Fund No one, but . . . Ryan Snow and Kenneth Korngeibel join Jeff Cardon and JB Taylor on the management team. 8/17

 

Briefly Noted

By David Snowball

Updates

PIMCO fee roulette. PIMCO is changing the advisory fees on a bunch of their funds, some up, some down, and some both. Here’s the snapshot:

PIMCO All Asset Fund (PASAX), management fees go up 0.05% for D shares.

PIMCO All Asset All Authority Fund (PAUAX) up 0.05% for D shares

PIMCO Total Return Fund (PTTAX) up 0.05% for D shares, down 0.05% for A shares.

PIMCO Unconstrained Bond Fund (PUBAX), down 0.11% for all asset classes.

PIMCO Income Fund (PIMIX) up 0.05% for Institutional, P, Administrative, A, C and R shares of the Fund and by 0.11% for D shares.

PIMCO Emerging Markets Corporate Bond Fund (PECZX), down by 0.05%

PIMCO Emerging Markets Full Spectrum Bond Fund (PFSIX), down by 0.05%.

I assume that net expenses will follow the advisory fee changes, since nothing in the filings said otherwise.

Briefly Noted . . .

Holland Capital Management is closing its doors. The firm, one of the industry’s few African American-owned and female-owned advisers, is winding down its affairs over the next six weeks. Holland Capital bears the name of Lou Holland, who co-founded the firm with Monica Walker in 1971 and led it until 2008. He retired after receiving an Alzheimer’s diagnosis, and succumbed to effects of the disease in March, 2016. Readers of a certain age will remember Mr. Holland for the two decades he spent as a regular on Louis Rukeyser’s Wall $treet Week. He was a quiet, plain-spoken, very smart guy.

The firm still manages $2.5 billion in assets, with just $95 million left in their flagship mutual fund, now called American Beacon Holland Large Cap Growth Fund (LHGFX), though its ticker reminds you that it was Lou Holland’s Growth Fund. In the years following Mr. Holland’s retirement, the fund continued to post entirely respectable returns, more than respectable if you take its risk-sensitivity into account.

My impression is that the fund simply saw the writing on the wall; small boutique managers are at a serious and worsening disadvantage when it comes to marketing their services. The unending bull market, which has convinced many institutional investment committees that “risk” is a largely outdated and overblown concern, compounds that challenge.

SMALL WINS FOR INVESTORS

The advisers for Alambic Small Growth Plus Fund (ALGSX) have lowered the fund’s capped expense ratio from 1.20% to 0.95%. Alambic is a tiny, new microcap fund with really solid returns; it’s up about 30% since launch while its small-growth peers are up about 23%. I mention them not just because they’ve reduced their fees by a quarter, but also to highlight the cost that the managers of such funds bear. At its current size, Alambic costs nearly 9% per year to run. The managers charge one-tenth of that amount and write checks out of their own accounts to cover the rest.

American Beacon Holland Large Cap Growth Fund (LHGFX) is becoming American Beacon HSMP Quality Growth Fund, subsequent to which American Beacon will lower the fund’s sub-advisory fee.

Ariel Investments might be thinking about maybe beginning to roll back the fees it charges its investors, somewhat. According to a report at Bloomberg, founder John Rogers, is acceding to demands from his board to lower fees. He evinces no enthusiasm for the prospect and discussed neither magnitude nor timing.

Effective September 1, 2017, Causeway Capital Management lowered the management fee for Causeway Global Absolute Return (CGAVX) from 1.50% to 1.10%. The fund’s goal is “long-term growth of capital with low or no correlation to the MSCI World Index,” and Morningstar categorizes it as a market neutral fund. The fund has not achieved its first objective; over the past five years it has lost 0.39% annually, per Morningstar, 8/30/17) while its peer group has gained a largely-irrelevant 0.79%.

It has overachieved on the second objective. The fund actually sports a negative three- and five-year correlation with the ACI exUS global index. I’m not sure that a lower management fee will address the fund’s central challenge, but it’s certainly a good faith gesture.

Needham Growth (NEEGX), Needham Aggressive Growth (NEAGX) and Needham Small Cap Growth (NESGX) have all shed their redemption fees, as of August 25, 2017.

Effective August 25, 2017, the minimum initial investment for Class I shares of the RBC Diversified Credit (RBTRX), Global Opportunities (RGOIX), International Opportunities (RIOIX) and Small Cap Value (RSVIX) funds were lowered from $250,000 to $100,000.

Toreador International Fund (TMRFX) has converted its “C” class shares into “Investor” shares. “C” shares are a relic of the days when the primary challenge to funds with front-end sales loads was the rising tide of no-load mutual funds. In an attempt to have their cake and eat it too, fund companies began offering “C” shares which had no sales load but carried exorbitant expense ratios. I’m glad to see them go.

Effective September 11, 2017, Victory RS Small Cap Growth Fund (RSEGX) will reopen to all investors.

Wells Fargo Emerging Growth Fund (WEMAX) reopened to new investors in mid-August. Our database shows 127 small-growth funds that have been around for the entire market cycle; of those, Wells notched the 100th highest Sharpe ratio. I’d probably look at the 99 higher-rated funds first.

CLOSINGS (and related inconveniences)

Effective September 29, 2017, the Nationwide Small Company Growth Fund (NWSAX) will close to new investors. The fund carries a five-star rating but has only $217 million in assets.

Effective at the close of business, Friday, September 29, 2017, T. Rowe Price Global Technology Fund (PRGTX) will be closed to new investors and new accounts. Ummm … $5.3 billion in assets, top 1% returns over the past 3-, 5- and 10-year periods. It’s an MFO “Great Owl” fund, which means it has outperformed the vast majority of its peers in every trailing measurement period back to 2000. To be clear: it’s outperformed in rising markets, in falling markets, and across the entire market cycle.

Effective at the close of business on September 29, 2017, the TIAA-CREF Small-Cap Equity Fund (TCSEX) will close to new investors. It’s a fine fund (0.70% expenses, $2,500 minimum, stable management, good downside record), but there’s no real case for rushing in to it. Traditionally it has run a little ahead of its pack then, after four years ago, the lead began to widen. Much of its current three- and five-year performance advantage seem attributable to Q4/2016, when it rose by about 10% and its peers rose 3%.

OLD WINE, NEW BOTTLES

On Halloween, 2017, the BlackRock Pacific Fund (MDPCX) will become Blackrock Asian Dragon. Not to cause unnecessary worry for the managers, but the adviser will make “certain changes to the Fund’s portfolio management team.” At the same time, BlackRock Global SmallCap Fund (MDGCX) becomes BlackRock Advantage Global Fund. And, again, certain changes are coming to the management team. Yup, there gonna be certain changes ‘round here.

Catalyst Intelligent Alternative Fund (ATRAX) becomes Catalyst Systematic Alpha Fund on November 1, 2017.

In one of the year’s oddest transformations, on September 15, 2017, Cavalier Dividend Income Fund (CDVDX) will become (wait for it!) the Nebraska Fund.

Morningstar, in one of a series of increasingly troubling glitches, apparently changed the fund’s name and ticker weeks before the change legally occurred, immediately and substituted a new name and ticker symbol, NEBIX. Any attempt to search “Cavalier Dividend Income” at Morningstar leads you to the warning, “The request could not be satisfied. Bad request.” (Indeed. Bad request. Bad, bad request!) If you Google the name, you can find the fund’s ticker. Enter the symbol in Morningstar’s search and you go to “page isn’t working” before it resolves to the Nebraska Fund.

And the Nebraska Fund? It will “invest primarily in common stocks of publicly-traded companies that either are domiciled in Nebraska or that have a significant local interest in Nebraska.”

Why? Oh, why not? It’s a fund with under $2 million in assets that’s recently appointed its 10th manager in five years. We wish them good luck finding a successful niche.

On September 17, 2017 Century Shares Trust (CENSX) and Century Small Cap Select Fund (CSMVX) will become Congress Large Cap Growth Fund and Congress Small Cap Growth Fund, respectively.

Shareholders of Cozad Small Cap Value Fund (COZAD) has been asked to approve reorganization of their fund into Oberweis Small-Cap Value Fund, likely during the fourth quarter of this year. The fund started life, in 2010, as a hedge fund and, in 2014, before a load-bearing mutual fund. This transaction, if approved, will turn it into a no-load mutual fund.

On or around October 23, 2017, Eaton Vance Short Duration Real Return Fund (EARRX) will rechristened Eaton Vance Short Duration Inflation-Protected Income Fund.

Around November 1, 2017, the Hartford Value Opportunities Fund (HVOAX) will be reborn as Hartford Quality Value Fund. In the process it will acquire a new name, new mandate and new management team; shareholders will acquire a new tax bill as the managers liquidate the old portfolio and build the new.

Horizon Spin-off and Corporate Restructuring Fund (LSHAX) has closed temporarily. The fund is metamorphosing into Kinetics Spin-Off and Corporate Restructuring Fund. Around September 18, 2017, a beautiful new butterfly will emerge from its chrysalis.

Effective November 1, 2017, JPMorgan Disciplined Equity Fund (JUEAX) becomes JPMorgan U.S. Research Enhanced Equity Fund.

The Rainier International Discovery Fund (RISAX) has been adopted by the Manning & Napier funds. From a shareholder’s perspective, nothing is changing except, perhaps, the address for correspondence. The fund is managed by Henrik Strabo, who began his fund career managing American Century International Discovery in 1994.

On or about October 27, 2017, UBS U.S. Large Cap Equity Fund (BNEQX) switches to UBS U.S. Sustainable Equity Fund because the advisor “believes the new strategy will provide the Fund with a stronger market appeal than the Fund’s current strategy, differentiate the Fund from other passive and generic active large cap core products, and will be beneficial for current shareholders and future clients.”

As of November 9, 2017, Fidelity Core Dividend ETF (FDVV) will be renamed Fidelity High Dividend ETF.

On October 16, 2017, the Waddell & Reed funds become, en masse, Ivy funds. Here are the new names:

Equity Funds    
Waddell & Reed Advisors Core Investment Fund   Ivy Core Equity Fund
Waddell & Reed Advisors Dividend Opportunities Fund   Ivy Dividend Opportunities
Waddell & Reed Advisors Energy Fund   Ivy Energy Fund
Waddell & Reed Advisors Tax-Managed Equity Fund   Ivy Tax-Managed Equity Fund
Waddell & Reed Advisors Value Fund   Ivy Value Fund
Fixed Income Funds    
Waddell & Reed Advisors Bond Fund   Ivy Bond Fund
Waddell & Reed Advisors Global Bond Fund   Ivy Global Bond Fund
Waddell & Reed Advisors Government Securities Fund   Ivy Government Securities
Waddell & Reed Advisors Municipal Bond Fund   Ivy Municipal Bond Fund

OFF TO THE DUSTBIN OF HISTORY

On September 28, 2017, AllianzGI Global Megatrends Fund, AllianzGI NFJ Global Dividend Value Fund and AllianzGI Multi-Asset Real Return Fund will be liquidated and dissolved.

Cavanal Hill Multi Cap Equity Income Fund (APEQX) will liquidate on October 10, 2017. For reasons unclear to me, the board also voted to change its tax year end date from August 31 to July 31.

Delaware Asia Select Fund (DMAAX) will disappear in mid-October, 2017.

ETFMG ETFx HealthTech ETF (IMED, formerly the PureFunds ETFx HealthTech ETF) is now formerly ETFMG ETFx HealthTech ETF, having dissolved on August 31, 2017.

Frontier Netols Small Cap Value Fund (FNVSX) will merge into Frontier Phocas Small Cap Value Fund (FPVSX) on or about October 27, 2017.

Grant Park Managed Futures Strategy Fund (GPFAX) has closed to new investors and will merge into Grant Park Multi Alternative Strategies Fund (GPAAX) on or about September 22, 2017.

The Guggenheim Large Cap Optimized Diversification ETF (OPD) is teetering at the threshold between “irrelevant fund” and “former fund” (technically, it’s in “a liminal state”). The NYSE has notified the Trust that they’re in violation of Rule 5.5(g)(2)(a)(1) of NYSE Arca Equities, Inc. At base, fewer than 50 people are invested in the fund and they’re scrambling to outline a plan which will increase the number of shareholders. Ummm … you have a million in assets, virtually no shareholders and poor performance. I’d declare victory and shut off the lights.

On August 2, 2017, the Board of approved a Plan of Liquidation for the Hartford Schroders Income Builder Fund (SARVX), effective October 20, 2017.

Effective as of August 25, 2017, the Hays Tactical Multi-Asset Fund (HAZNX) closed, in anticipation of being liquidated on September 29, 2017.

The Health and Fitness ETF (FITS), a Janus fund, launched in June 2016, was a dumb idea, accumulated under $3 million in assets, accomplished little and will liquidate on October 2, 2017. The Obesity ETF (SLIM), launched the same day, was a dumb idea, has accumulated under $3 million in assets, and has returned10% since inception while its health care peers have returned 19%. The star of the show is The Organics ETF (ORG) which has ballooned to $9 million in assets and is modestly outperforming its benchmark. All three appear on the latest ETF Deathwatch.

Horizons USA Managed Risk ETF (USMR) manages its final risk on September 13, 2017.

JPMORGAN Ohio Municipal Bond Fund (ONOHX) will liquidate on December 8, 2017. Yes, I know, not even people in the Buckeye State really care.

Of greater import, JPMorgan is shutting down five of their international funds. JPMorgan International Opportunities Fund (JIOAX) and JPMorgan Latin America Fund (JLTAX) go first, on October 13, 2017 then JPMorgan China Region Fund (JCHAX), JPMorgan Emerging Markets Equity Income Fund (JEMEX) and the JPMorgan International Discovery Fund (DSCAX) follow a week later. International Opportunities is inexplicable, at least at first glance. The fund has $3 billion in assets and a decent track record. Advisors are rarely willing to let that much money go out the door, but the SEC filing gives no explanation.

The Marketocracy Funds has decided to shut down (technically “liquidate, dissolve and terminate the legal existence of”) The Marketocracy Masters 100 Fund (MOFQX). We’ve written about the fund in the past, an interesting but unsuccessful attempt to build a crowd-sourced portfolio by investing in the stocks that occur in the best 100 investor fantasy portfolios. The LDT will occur in mid-September.

The Osterweis Institutional Equity Fund (OSTEX) “has been operating at a low asset size for some time. Given recent redemptions, Osterweis Capital Management … has recommended, and the Board of Trustees has approved, the liquidation and termination of the Fund on September 7, 2017.” The fund ends its run with well under $1 million in assets.

The RBC funds have initiated a widespread liquidation. On September 28, 2017, RBC Mid Cap Value Fund (RBMAX), RBC BlueBay Absolute Return Fund (RABAX), RBC BlueBay Emerging Market Corporate Bond Fund (RECAX), RBC BlueBay Global Convertible Bond Fund (RGCBX) and RBC BlueBay Emerging Market Unconstrained Fixed Income Fund (RUFIX) all vanish. The Shadow, who tracks launches and liquidations for MFO’s discussion board, adds this note about the firm’s history.

They purchased and owned what was at one time the Babson Funds which later became the Tamarack Funds. I had both the Babson Enterprise (TETSX) and the Babson Shadow Stock Fund later known as the Microcap Value Fund (TMVSX). Lance James was the manager of the Enterprise Fund.

As part of an old and oft-repeated tale, Turner Midcap Growth Fund (TMGFX), Turner Small Cap Growth Fund (TSCEX) and Turner Titan Long/Short Fund (TSPCX) have all closed and will all liquidate on September 8, 2017. Turner issues one distinctive warning about the liquidations: “Each Fund may distribute a portion of its assets in cash pro rata to shareholders to avoid being subject to federal income or excise taxes.”

Value Line Defensive Strategies Fund (VLDSX) will liquidate on September 30, 2017.

Virtus Contrarian Value Fund (FMIVX) is set to merge into Virtus Ceredex Mid-Cap Value Equity Fund (SAMVX), formerly Ridgeworth Ceredex, sometime in the fourth quarter of 2017.

Wakefield Managed Futures Strategy Fund (WKFAX) settles in for The Big Sleep on September 15, 2017.

Wells Fargo Global Long-Short Fund (WGLAX) has closed and will liquidate on October 27, 2017. The fund was a little more volatile than its peers with about the same returns. Few investors seemed compelled by the combination.