Yearly Archives: 2017

Nothing Personal, It’s Just Business

By Edward A. Studzinski

“This is the business we’ve chosen. I didn’t ask who gave the order, because it had nothing to do with business.”

Hyman Roth speaking to Michael Corleone in the movie “Godfather II”

Another month has gone by, and the current period of disruption has not only continued, but accelerated in the mutual fund management business. For all but the true believers (or perhaps those holding stock in the publicly-traded fund managers), it should be apparent that we are witnessing not just a cyclical decline, but a secular one.

Let’s start with the settlement between Bill Gross and his prior employer, PIMCO. If public accounts are accepted, Gross is receiving a settlement payment in the vicinity of $80M. Since it is hard to believe that PIMCO, and their owners, Allianz, the German insurer, are in the habit of throwing money around for no good reason, it appears that Mr. Gross may have had a more than colorable case. At the least, the discovery process would have provided some fascinating insights in terms of emails and phone records, into the PIMCO culture. Myself, I have always believed that the issues were centered on greed. A younger group of managers resented the amount of phantom equity or bonus pool units that Mr. Gross had, making their slices of the pool too small in their opinion. Get rid of Gross, and you can reallocate his units. Just raise a group of issues that allow you to move in that direction.

Mr. Gross was lucky in one regard. This was all taking place in California, which as a matter of public policy considers non-compete and other restrictive employment constraints to be null and void. So Mr. Gross was able to go out the door, move to Janus, keep his following, AND be in a position to litigate the issues. Had we been talking about Illinois, Massachusetts, or New York this debate would never have seen the light of day. Another case of at the least blatant age discrimination would have vanished.

Next, we have Cambridge Associates, one of the original investment consulting firms, restructuring its business by cutting professional staff, and indicating that they wanted to focus on a business model of being an outsourced chief investment officer for endowments. Big surprise of course, the primary shareholders of the privately–held firm were trying to figure a way to monetize their investment. Reminds me of the primary shareholder of a closely-held bank I know who had many chances to sell his bank at 2.5X tangible book value. He thought he could get 3X book ultimately so did not sell. Five years later, he ended up selling for about 1.8X tangible book, as in a period of economic stress, the book value (the primary metric for valuing banks and p&c insurance companies) first flattened and then began to regress backwards. Sometimes if you wait too long, you can miss the market.

We next have the curious case of Morningstar. My friend and colleague David Snowball is writing extensively in this issue about the Morningstar decision to launch their own group of proprietary mutual funds for their investment advisory clients. They will displace fifty existing funds from their Managed Portfolio program. So, is this a conflict of interest? Well, that depends on where you are sitting, and whether you want to believe in things like Chinese walls and management assurances. There is a certain amount of humor to be found in the fact that Morningstar’s equity research business took off when the Wall Street firms such as Morgan Stanley, caught by the SEC with having their analysts write reports at the behest of and to some extent scripted by the investment bankers, had to hire Morningstar to produce independent research for those firms’ brokerage clients. I have also listened to Morningstar executives tell me over the years that mutual funds were basically a bad business model for the INVESTOR, and that the coming of very low cost passive funds and exchange-traded funds would change the nature of the business forever. While that appears to be happening, this move to bring in hedge fund talent to run private label mutual funds seems to be an effort to go against the tide.

This then brings us to ponder the thought processes of Chairman of the Board $2.2 Billion net worth Joe Mansueto, and new CEO Kunal Kapoor in making this move now. I have no insights to offer other than to say that neither one of them appears to have the makings of a Jeff Bezos. David and I and the rest of the MFO family are grateful to them however, for the business opportunity they have presented us with, in being about the only ones who will be able to write objective evaluations of their new funds.

Lest you think that was a sufficient amount of disruption, BlackRock, the world’s largest asset manager, announced that it will be closing or rearranging its active fund lineup, laying off a number of professional staff – analysts and fund managers, and shifting to a group of quantitatively managed funds selectively.

They have the benefit of being actively managed, but can be offered at a much lower fee break point than fundamentally managed active funds, and still be extremely profitable.

I have always been a fan of blending a quantitative approach with fundamental analysis and active portfolio management. Indeed, while still at the Mercantile National Bank of Indiana, I used the investment research of both Chicago Investment Analytics, a quantitative multi-factor model shop, and Select Equity, which at the time was making available its individual stock research (which was attuned to high return on invested capital businesses). This allowed my bank’s common trust funds to compete quite handily against the industry Goliaths, even though we lacked a team of in-house analysts.

One benefit of that approach is that it serves as a check on the integrity of the analyst’s numbers. For example, I heard third-hand a while back the story of a young equity analyst who was frustrated that he could not get his new stock ideas approved and purchased. A senior equity analyst allegedly told him, “What’s the problem, just make up some numbers that make your idea look better.” The young analyst is still frustrated while the senior analyst has since been promoted into executive management. Now you might think that rather fanciful, but I will tell you that a number of the quant/fundamental firms have teams of analysts scrubbing the numbers that go into their quantitative multi-factor models just to make sure that the fundamental side is not gaming the system.

R-E-S-P-E-C-T

I had two conversations this past month which were, I think, indicative of where we are now.

One was with David Marcus at Evermore Global, for whom I have a tremendous amount of respect (which started back before I personally knew him as I do now, but knew of him when he was running Mutual European Fund at Mutual Shares under Michael Price). I asked David whom he respected who was running money today. The universe he cited was very small, probably less than ten, which shrunk even more when you factored in the question of whether they were still investors or had been swept up by “the business” of running a mutual fund or an investment management firm. The number of names I had was equally small, well under ten. The sad part about this was that often asset bloat was the triggering factor of change, which shifted priorities away from finding good ideas and investing in them.

The other conversation I had was with my friend and former colleague, Robert Sanborn. We were discussing investing for endowments, since he sits on three endowment committees, as well as changes in the mutual fund world. I reminded him of one of our other former colleagues, who used to obsess about finding the best investments until he became a mutual fund portfolio manager. The obsession changed to finding the best investments given the business he was in (scalability, liquidity, etc.). Robert, off the top of his head quoted the words from “Godfather II” with which I opened this piece.

So my readers, I leave you with this. Should you attend the Morningstar Conference at the end of this month, or should you be watching either Bloomberg TV or MSNBC, and there is a speaker being interviewed or a speaker making a pitch presentation, I want you to visualize the scene with Hyman Roth and Michael Corleone again in your mind. Ask yourself if that is not what you are really seeing, over and over again.

Planning a Rewarding Retirement, Part 3: When Should I Start Retirement Plan Withdrawals?

By Robert Cochran

This is the third in a series of articles. 

My original intent was to retire when I turned 70.  However, as I noted in Part 2 of this series, the realization that “it’s time” bumped up my retirement to this fall, when I turn 67.  Thus the mental switch was flipped, then the “Can I afford to retire?” review and decision was made.  A large number of people find that their retirement plan (IRA, 401k, 403b, company pension, profit sharing, or other) account is the biggest part of their financial picture, often bigger than any Social Security benefits for which they qualify.  My own picture is probably not that much different.

Social Security retirement benefits are much more modest than many people realize, according to the Center on Budget and Policy Priorities. Benefits represent 90% or more of income for 41% of those receiving benefits.  My wife and I are most fortunate to not be in this situation.  The Social Security retirement benefits my wife and I will receive, along with other sources of income, and with realistic expected reduced spending (no mortgage or credit card debt), help make possible the expected delay of our retirement account withdrawals.

Folks who have a pension account, such as public employees or state teachers, will already have received an estimate of their benefits, based on when they retire. Regardless of the kind of retirement account, tax planning is important, since there is a good chance it will be necessary to file quarterly estimated tax payments. Tax planning allows me to know what I must set aside for taxes and what net, after-tax dollars I will have available for cash flow.

My own situation should allow me to not touch my retirement account (currently in a 401k plan) until I am 70 ½, when I must begin taking Required Minimum Distributions each year. The rule is that the initial RMD must take place by April 30th of the year following the year in which I turn 70 ½. For me, that means my first distribution must take place by April 30, 2021. But since this distribution is for the previous calendar year, I will also need to take a distribution by December 31st of the same year for 2021. To avoid being forced to take two distributions in the same year, I will move up my first RMD to 2020. Yes, it sounds complicated, but once you get the first one out of the way, the rest simply have to be done by December 31st of each year. Whether I need dollars from my retirement account or not, once I turn 70 ½, I must start annual distributions. The percentage required increases each year, but starts at around 3.6% of the value of the account as of December 31st of the previous year.

If I want to make any large charitable contributions prior to my RMDs, I can make a distribution from my retirement plan, no taxes withheld, and the charitable gift will offset the distribution, with no tax consequence. Once I am in the RMD phase, I can designate part or all of my RMD be sent directly to my charities of choice, with no taxes withheld. However, I do not get to also claim the gift as a deduction.

The next question is how to transition my retirement account from one of accumulating assets to one of planned distributions. I know for sure I do not want to convert my account to an annuity of any kind. Interest rates for fixed annuities are abysmal now, and the equity-indexed annuities being pushed by commissioned salespeople are very expensive and extremely complicated. The only ones who benefit from them are the insurance companies.

In fact, I can structure my account to send money directly to my bank account each month. This is especially attractive to people (my wife included) who like knowing that on the 30th day of each month, a specific dollar amount will be deposited to their bank account. And the ability to withhold federal and state taxes (or not) is also a plus. Thus, I can establish my own “annuity”, but keep expenses low and retain control of the dollars and the income I receive.

I like to have 4-6 years of cash flow needs from an account invested in short-term bonds, CDs or cash for clients taking distributions. The rest of the retirement account can be invested in line with long-term goals, time horizon, and risk tolerance. This protects cash flow needs so that we don’t need to sell equities when the market is down. The 4 to 6-year timeframe will likely cover most bear markets. In good years, we might sell equities and leave the fixed assets alone. This strategy allows flexibility, something true annuities cannot do.

In summary, there can be a lot of moving parts to calculating what retirement cash flow will be. Retirement accounts like 401k, IRA, profit sharing and others may be the biggest piece for many retirees. It’s important not only to plan when distributions will start, but also to plan how they will happen and to create a flexible investment allocation that reflects a well-thought out strategy.

Now that I have my income stream plotted, I will take a look at health care planning in the next chapter.

Northern Global Tactical Asset Allocation (BBALX), April 2017

By David Snowball

Objective

The fund seeks a combination of growth and income. Northern Trust’s Investment Policy Committee develops tactical asset allocation recommendations based on economic factors such as GDP and inflation; fixed-income market factors such as sovereign yields, credit spreads and currency trends; and stock market factors such as domestic and foreign earnings growth and valuations. The managers execute that allocation by investing in other Northern funds and ETFs. As of 12/31/2016, the fund held two Northern funds and nine ETFs.

Adviser

Northern Trust Investments is part of Northern Trust Corp., a bank founded in 1889. The parent company provides investment management, asset and fund administration, fiduciary and banking solutions for corporations, institutions and affluent individuals worldwide. As of December 30, 2016, Northern Trust Corporation, through its affiliates, had assets under custody of $6.7 trillion, and assets under investment management of $942 billion (both noticeably up over the past two years). About half of Northern’s assets are actively managed and about half are passive. The Northern funds account for about $51 billion in assets. When these folks say, “affluent individuals,” they really mean it. Access to Northern Institutional Funds is limited to retirement plans with at least $30 million in assets, corporations and similar institutions, and “personal financial services clients having at least $500 million in total assets at Northern Trust.” Yikes. There are 40 Northern funds, seven sub-advised by multiple institutional managers.

Managers

Daniel Phillips, Robert Browne and James McDonald. Mr. Phillips joined Northern in 2005 and became co-manager in April, 2011. He’s one of Northern’s lead asset-allocation specialists. Mr. Browne joined as Chief Investment Officer of Northern Trust in 2009 after serving as ING’s chief investment officer for fixed income. Mr. McDonald, Northern Trust’s chief investment strategist, joined the firm in 2001. This is the only mutual fund they manage.

Management’s Stake in the Fund

As of March 30, 2016, two of the fund’s three managers who investments in the fund in the range of $100,000 – 500,000. Only one of the fund’s eight trustees has invested in it, though most have substantial investments across the fund complex. The research is pretty clear, that substantial manager and trustee ownership of a fund is associated with more prudent risk taking and modestly higher returns and is a visible symbol of the alignment of the managers’ interests with their investors.

Opening date

Northern Institutional Balanced, this fund’s initial incarnation, launched in July 1, 1993. On April 1, 2008, this became an institutional fund of funds with a new name, manager and mission and offered four share classes. On August 1, 2011, all four share classes were combined into a single no-load retail fund.

Minimum investment

$2500, reduced to $500 for IRAs and $250 for accounts with an automatic investing plan.

Expense ratio

0.57% on assets of $105.9 million, as of July 2023.

Comments

When we reviewed BBALX in 2011 and 2012, Morningstar classified it as a five-star moderate allocation fund. We made two points:

  1. It’s a really intriguing fund
  2. But it’s not a moderate allocation fund; you’ll be misled if you judge it against that group.

We followed up in 2015. Morningstar then classified it as a two star moderate allocation fund. We made two points:

  1. It’s a really intriguing fund.
  2. But it’s not a moderate allocation fund; you’ll be misled if you judge it against that group.

We’re pleased to note that, somewhere in there, Morningstar concurred. It’s now recognized as a four-star fund in Morningstar’s World Allocation group. Lipper places it in their Flexible Portfolio group and rates it as a four out of five for total return, consistency of return and capital preservation. It qualifies as a Lipper Leader for its low expenses.

It’s a really intriguing fund. As the ticker implies, BBALX began life is a bland, perfectly respectable balanced fund that invests in larger US firms and investment grade US bonds. Northern’s core clientele are very affluent people who’d like to remain affluent, so Northern tends toward “A conservative investment approach . . . strength and stability . . . disciplined, risk-managed investment . . .” which promises “peace of mind.” The fund was mild-mannered and respectable, but not particularly interesting, much less compelling.

In April 2008, the fund morphed from conservative balanced to a global tactical fundof-funds. At a swoop, the fund underwent a series of useful changes.

The strategic or “neutral” asset allocation became more aggressive, with the shift to a global portfolio and the addition of a wide range of asset classes.

Tactical asset allocation shifts became possible, with an investment committee able to substantially shift asset class exposure as opportunities changed.

Execution of the portfolio plan was through index funds and, increasingly, factor-tilted ETFs, mostly Northern’s FlexShare products. For any given asset class, the FlexShare ETFs modestly overweight factors such as dividends, quality and size which predict long-term outperformance. The decision to use those “smart beta” style ETFs has two virtues: it minimizes the costs and risks associated with individual active managers and it minimizes the momentum bias and volatility associated with market capitalization-weighted indexes and ETFs.

Each year, Northern’s investment policy committee sets a “strategic asset allocation” annually then tweaks the recommendations monthly to create a “tactical asset allocation.” Moderate allocation funds tend to be 60% US stocks and 40% US bonds. World allocation funds right now sit around 25% US stocks, 25% international stocks, 25% bonds, 25% cash and other. Northern’s allocations are more granular and sophisticated.

Here’s the current game plan. The first column is an asset class, the second column are the vehicles used to gain exposure (all are Northern’s FlexShares ETFs, unless noted) and the third column is the tactical positioning.

  Vehicle Tactical allocation
(compared to strategic)
U.S. stocks Morningstar US Market Factor TILT Index ETF (15%) US Quality Dividend Index ETF (13%) 28% (substantial tactical overweight)
High yield and EM debt Northern High Yield Fixed Income Fund (10%) 10 (over)
Investment grade bonds Northern Bond Index Fund (25%) 25 (under)
Developed international Morningstar Dev Markets Ex-US Factor TILT Index ETF (3%) International Quality Dividend Index ETF (10%) 13 (under)
Emerging markets Morningstar Emerging Market Factor TILT Index ETF (6%) 6
Global real estate and infrastructure (a/k/a “real assets”) Global Quality Real Estate Index ETF (3%) STOXX Global Broad Infrastructure Index ETF (3%) 6
Natural resources Morningstar Global Upstream Natural Resources Index ETF (7%) 2 (over)
Gold n/a 0
Inflation-protected securities iBoxx 5-Year Target Duration TIPS Index ETF (4%) 4
Cash Northern Government Assets Portfolio (1%) 0

Both the broadened strategic allocation and the flexibility of the tactical shifts have increased shareholder returns and reduced their risk.

    1 year returns 3 year returns 5 year returns
BBALX The fund 9.12 2.90 6.75
Asset allocation blend A 60/40 blend 5.92 3.27 6.64
Internal benchmark Northern’s strategic allocation 7.75 3.10 6.08
World Allocation fund average Morningstar peer group 6.04 1.0 5.30

All data as of 12/31/2016

Compared to the average world allocation fund, BBALX is adding between 150 – 300 basis points in returns each year. In most cases, Northern’s strategic allocation outperforms a simple 60/40 global allocation and, in most cases, Northern’s tactical allocation – that is, the performance of the fund, is better than its strategic allocation. In short, the underlying “tilt” in Northern’s ETFs add value and the possibility of monthly tweaks in the tactical allocation add more.

That’s also true when you compare BBALX to the strongest offerings in the category, Morningstar’s “Gold” and “Silver” medalists.

    Full market cycle annual returns Full market cycle downside deviation Full market cycle Sharpe ratio
Northern GTAA BBALX 4.1% 6.6% 0.39

Gold medalist

        
BlackRock Global Allocation Fund, “A” MDLOX 3.5 7.3 0.30

Silver medalists

        
Capital Income Builder, “A” CAIBX 3.1 8.4 0.24
Franklin Mutual Quest, “A” TEQIX 4.6 7.5 0.41

All data as of 02/28/2017. Two other Silver medalists have track records too short to be included.

These are all very good funds. In Morningstar’s judgment, the best there are. And Northern is just as good. Its returns have been higher than most across the full market cycle, its downside risk has been the lowest in the group and its Sharpe ratio – a measure of risk-adjusted returns – is second highest in the group.

The key difference between Northern and the medalists? It has $80 million in assets, they have between $5 billion and $103 billion in assets and all, except the $103 billion CAIBX, charge more (in one case, 100% more) than BBALX.

When we repeat the screen for just the period of the current bull market (March 2009 – present), the same pattern emerges. Over both the full market cycle and the upmarket cycle, BBALX is competitive with the best global allocation funds in existence.

Bottom Line

There is a very strong case to be made that BBALX might be a core holding for two groups of investors. Conservative equity investors will be well-served by its uncommonly broad diversification, risk-consciousness and team management. Young families or investors looking for their first equity fund would find it one of the most affordable options, no-load with low expenses and a $250 minimum initial investment for folks willing to establish an automatic investment plan. Frankly, we know of no comparable options. This remains a cautious fund, but one which offers exposure to a diverse array of asset classes. It has used its flexibility and low expenses to outperform some very distinguished competition. Folks looking for an interesting and affordable core fund owe it to themselves to add this one to their short-list.

Fund website

Northern Global Tactical Asset Allocation. Northern has an exceptional commitment to transparency and education; they provide a lot of detailed, current information about what they’re up to in managing the fund. 

© Mutual Fund Observer, 2017. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.

iMGP Alternative Strategies Fund (formerly Litman Gregory Masters Alternative Strategies), (MASFX/MASNX), April 2017

By Charles Boccadoro 

At the time of publication, this fund was named Litman Gregory Masters Alternative Strategies.

Objective and Strategy

The Litman Gregory Masters Alternative Strategies Fund seeks to provide attractive “all-weather” returns relative to conservative benchmarks, but with lower volatility than the stock market. It seeks this objective through a combination of skilled active managers, high conviction “best ideas,” hedge fund strategies, low beta, and low correlation to stock and bond market indices.

The fund’s risk-averse managers, asset allocations, and hedging strategies position it as an alternative to traditional 80/20% or 60/40% bond/stock portfolios for conservative or moderately conservative investors. The advisor’s strategy is to divide the fund’s assets up between five sub-advisor teams, up from the original four, each pursuing distinct but complementary strategies. The chart below depicts the five teams, strategic title, allocation, firm and lead.

A summary of the five strategies: 

  • Opportunistic Income will often focus on mortgage related securities;
  • Strategic Alpha focuses on the tactical allocation of long and short global fixed income opportunities and currencies;
  • Contrarian Opportunity allows tactical investments throughout the capital structure (stocks and bonds), asset classes, market capitalization, industries and geographies;
  • Arbitrage & Event Driven focuses on mergers and other “special situations” (restructuring and refinancing); and, 
  • Long-Short Equity focuses on liquid global equities based on macroeconomic analysis, fundamental research, and quantitative tools for portfolio construction.

Advisor

Litman Gregory Fund Advisors, LLC, Walnut Creek, California, moving from Orinda in fall of 2016. As profiled originally and with all its “Masters Funds,” Litman Gregory 1) conceives of the fund, 2) selects the outside sub-advisors who will manage portions of the portfolio, and 3) determines how much of the portfolio each team gets.

The other three Masters Funds are Equity (MSEFX/MSENX), International (MSILX/MNILX), and Smaller Companies (MSSFX). Collectively, the funds hold about $2.7 billion in assets, with the lion’s share in Alternative Strategies (MASFX/MASNX). Two previous Masters Funds, Focused Opportunity and Value, were merged into Equity in 2013 due to some overlap in sub-advisors and low assets under management. A new Alternative High Income Masters Fund is in registration.

The firm was co-founded in 1987 by Ken Gregory and Craig Litman with a newsletter called No-Load Fund Analyst. The newsletter was retired and rolled into the firm’s AdvisorIntelligence offering. Today the firm formally advises its Masters Funds series, provides investment management services for separate accounts, publishes investment research for financial advisors (aka AdvisorIntelligence), and maintains portfolio strategies on selected platforms. Ken Gregory remains active with the firm, while Craig Litman recently retired.

The premise behind its Masters Funds? Litman Gregory believes over the long term:

  • Experienced, world class investment managers are likely to outperform passive benchmarks, and
  • Portfolios comprised by these skilled managers’ highest-conviction ideas are likely to outperform their more diversified, lower active-share portfolios.

The firm emphasizes that the distinctive portfolios created by the investment managers who run the individualized sleeves in each Master Fund are not fund of funds and cannot be replicated by “building” comparable mix of existing funds normally available to most investors.

Litman Gregory believes it can identify such skilled managers based on years of due diligence, it combines them to provide diversification at the fund level, and creates an environment of minimal constraints but with enough oversight to ensure commitment to its Masters Funds concept.

In the alternative fund space, Litman Gregory found few compelling options back in 2011. What it did find was high costs, lack of liquidity, lack of track record, no clear investment edge, lack of transparency and questionable quality.

So, it launched its own.

Managers

Jeremy DeGroot, Litman Gregory’s Chief Investment Officer and a Principal. He’s ultimately responsible for sub-advisor due diligence and selection, day-to-day coordination with the sub-advisors, monitoring the individual performance and capabilities of the investment managers, and fund administration. He joined Litman Gregory in 1999. He holds the CFA designation, a BS in Economics from University of Wisconsin, and an MS in Economics from Berkeley.

Jason Steuerwalt, a Senior Research Analyst at Litman Gregory appears to be DeGroot’s lieutenant. He too holds the CFA designation and a BA in Economics from Brown. He joined Litman Gregory in 2013.

The daily investments of the fund, however, are determined by its five teams, led by Jeff Gundlach of DoubleLine, Steve Romick of FPA, Matt Eagan of Loomis Sayles, John Orrico of Water Island Capital, and John Burbank III of Passport Capital. All leads except one have been with the fund since inception; Mr. Burbank, the newcomer, started October 24, 2014.

All highly respected managers whom Litman Gregory believes are among the best in their strategies. Google any of them and one would be hard-pressed to disagree. A characteristic of Masters Funds is a long-term relationship between Litman Gregory and the sub-advisors, often predating their tenure on the fund.

Strategy Capacity and Closure

Litman Gregory believes the fund’s capacity as it stands now is approximately $3B, at which point, we would likely “soft close.” The main constraint appears to be with Gundlach’s sleeve due to availability and selection in his preferred spaces of the mortgage market. Romick too “isn’t finding a whole lot to like right now …” As of December 2016, Romick’s Contrarian Opportunity sleeve held 37% cash.

The fund currently stands at $1.7B and has grown steadily since inception, as depicted below. The preponderance is in institutional shares.

Management’s Stake in the Fund

Per last April’s SAI filing, Jeremy DeGroot maintained $100 – 500K in the fund. Water Island’s Gregg Loprete has between $50 – 100K and Todd Munn has between $10 – 50K. Four of the funds’ six directors, including co-founder Ken Gregory, have more than $100K in the fund.

A company spokesman stresses that each sub-advisor also invests directly in their own internal strategies. “Gundlach has publicly stated that his largest personal holding is the Opportunistic Income strategy, which is the hedge fund he runs at DoubleLine and is essentially the same sleeve he runs for this fund.” Similar expectations apply to Romick, Eagan, Orrico, and Burbank.

The spokesman adds Jason Steuerwalt has 10% of his personal assets in the fund. And, Litman Gregory employees and associates buy the same institutional shares and pay the same fees as everybody else.

An updated SAI is expected to be published shortly.

Opening Date

September 30, 2011 for both share classes, making it one of the earlier so-called alternative funds.

Lipper shows only 19 funds as old as Litman Gregory Alternative Strategies in the Multi-Strategy Alternative fund category, which it defines as follows:

Funds that, by prospectus language, seek total returns through the management of several different hedge-like strategies. These funds are typically quantitatively driven to measure the existing relationship between instruments and in some cases to identify positions in which the risk-adjusted spread between these instruments represents an opportunity for the investment manager.

Today, 75 such funds exist.

Minimum Investment

Institutional shares impose a $100,000 minimum initial investment for regular accounts, but a very reasonable $5,000 level for retirement accounts, and only $2,500 for automatic investment accounts. The investor shares minimum seems to range from $500 to $2,500, depending on platform and account type.

Expense Ratio

July 2023: The institutional class share is 1.44% and the investor class share is 1.69% on assets under management of $903 million. The investor net expense ratio includes a 0.25% 12b-1 fee. 

The fund’s annual net expense ratio is 1.47% on institutional shares (MASFX) and 1.72% on investor shares (MASNX). The latter reflects industry’s ubiquitous 12b-1 0.25% fee to facilitate “no fee” transactions on platforms like Fidelity and Schwab.

While not published previously, Litman Gregory’s COO reports: “We signed a fee waiver agreement effective 1/1/17 that contractually caps our retained fees on the Alt Strats fund at 50 bps on the first $2 billion, 40 bps on the next billion, 35 bps on the next …” These limits will be published in the April 2017 prospectus.

The prospectus has previously published the fund’s aggregate sub-advisor fee of 0.82%. And, for 2016, operating expenses to independent service providers (eg., the trust’s custodian State Street, Boston Financial Data Services, legal, audit, etc.) were 0.15%. So, net expense ratio = 0.50 + 0.82 + 0.15 = 1.47%.

Like with most hedged strategies, the fund typically incurs an additional annual expense for short sales and borrowing costs on leverage. It runs 0.36% or gross expense ratios of 1.83% and 2.12%, respectively, for the two share classes.

There is no load, thankfully, and Schwab for one charges no short-term redemption fee on institutional shares.     

The net expenses to investors appear to be higher than the broader versions of these strategies run at the sub-advisors’ shops for three of the five sleeves: FPA Crescent Fund (FPACX) with er = 1.09%, Water Island’s Arbitrage Fund (ARBNX) with er = 1.22%, and Loomis Sayles Strategic Alpha Fund (LASYX) with er = 0.85%. The other two sleeves (DoubleLine and Passport) appear both cheaper to investors and are simply not available to regular investors, since they are so strongly rooted in their hedge funds. The hedge fund industry typically charges 2% annually and 20% on any profit earned.

For the record, Gundlach’s Opportunistic Income sleeve does not compare well with DoubleLine’s flagship Total Return Bond Fund (DBLTX) or any other DoubleLine fixed income fund for that matter; in fact, the Opportunistic Income sleeve crushes DBLTX with 59% return versus 23% over past 21 quarters through December 2016.

Comments

David Snowball originally profiled the fund in April 2012, shortly after it launched. Here are a couple excerpts:

  • Alternative Strategies is likely to fare better than its siblings because of the weakness of its peer group … most of the “multi-alternative” funds are profoundly unattractive and there are no low-cost, high-performance competitors in the space as there is in domestic equities.
  • In a Wall Street Journal article, I nominated MASNX as one of the three most-promising new funds released in 2011. In normal times, investors might be looking at a moderate stock/bond hybrid for the core of their portfolio. In extraordinary times, there’s a strong argument for looking here as they consider the central building blocks for their strategy.

Since inception, the fund has indeed delivered as promised: A top three absolute return performer in its category for each of the past 5, 3, and 1 year evaluation periods with concurrent top quintile risk adjusted returns.

As of month ending February, it holds both the MFO Great Owl (GO) and Honor Roll (HR) designations. The former recognizes consistent top quintile risk adjusted returns, while the latter recognizes consistent top quintile absolute returns. It is the only fund in its category of 75 funds to do so. The fund also receives Morningstar’s Five-Star designation. It has consistently maintained low volatility, coming in on the low end of its target range of 4 to 8%.

Here are some five-year metrics from our MFO Premium site for the top performing funds in the Alternative Multi-Strategy category of 19 (click on graphic to enlarge):

Here are three-year metrics for the top funds in the category of 34:

Finally, here are past year metrics of top funds within the category of 72:

The two next charts breakout performance by sub-advisor, first aggregate growth and then quarterly return. Note that the sub-advisor breakouts do not include Litman Gregory’s fee, which is reflected in the dark blue lines for institutional share performance (MASFX).

The fund managed healthy positive or only slightly negative returns in just about every quarter except the fall of 2014, when the S&P 500 dropped 8.3% in yet another dark October. The Alternative Strategies fund also weathered well the “taper tantrum” of 2013 when US aggregate bonds dropped 3.7%.

The five sleeves appear fairly uncorrelated over the past five years, but ironically and perhaps fortunately this time MASFX remained largely correlated with the S&P 500 but negatively correlated with US aggregate bonds. Litman Gregory explains the alignment was a bit of a surprise, since stock market beta remains low, but it expects the correlation to vary over time given its managers’ “opportunistic approaches.”

It notes the fund’s correlation to stocks was lower during drawdowns; indeed, the fund’s Bear Market Deviation (BMDEV) remained well below that of the S&P 500 over the past five years. Litman Gregory summarizes: “The fund’s volatility more closely matches that of aggregate bonds than of equities, so far anyway, yet it is negatively correlated to aggregate bonds and delivered a meaningfully higher return with a very similar net yield.”

The final chart below shows net asset allocation shifts at the fund level by quarter. Short exposure ran about -30% in 2016, up from previous -20% nominally. Long exposure also increased in 2016 to about 110% and higher (132% in 3rd quarter), up from previous 105% and under.

Alternative funds proliferated after investors experienced two extreme drawdowns in equities the past fifteen years, one bottoming out in August 2002 with the S&P 500 down 45% and another in February 2009 down 50%. Many have called the current up cycle, now more than 8 years old, the most hated bull market in history. Several well know fund managers who weathered 2009 just fine, have well underperformed in the intervening years.

Respected shops like GMO, Research Affiliates, and Leuthold warn that US equities remain overvalued with attendant low expected returns (premiums) going forward, if not heavy retractions. While others warn of the end of our decades long bond bull market, suggesting the performance of traditionally conservative bond-heavy allocations, like the Vanguard’s stellar Wellesley Fund (VWINX/VWAIX), may not fare so well in future. To pile on, risk-free returns are at historic lows.

What’s an investor to do? Enter alt funds! In the space, there is no question Litman Gregory has delivered an outstanding fund in the first five years since inception, with just about everything promised … hats-off to them. Other shops, like short-lived Whitebox Funds, with experienced and highly respected managers failed to make the conversion from hedge fund to mutual fund success.

On the other hand, quant shops like AQR Funds, are finding success similar to Litman Gregory’s, although they would likely attribute it to their portfolio constructions being based on “factor premia.” (Disclaimer: While personally I’m a Cliff Asness fan, I’ve experienced a chronic lack of transparency from AQR Funds, which makes it hard for me to recommend it.)

In their new book, “Your Complete Guide To Factor-Based Investing,” Andrew Berkin and Larry Swedroe argue that if a factor is to be deemed worthy of investment (as distinguished from the “factor zoo”) it must be persistent, pervasive, robust, investable, and intuitive. So, is Litman Gregory’s Masters Funds approach worthy of investment? Does its strategy persistent across different fund categories for example? Fact is performance as yet of its long-time Equity and Smaller Cap Masters Funds is undistinguished, unlike that of its Alternative Strategies and International Masters Funds.

Our colleague Ed Studsinski remains skeptical: “You are paying a higher than average fee for the benefit of the vendor’s due diligence, which can be very thorough but … are you really getting the five best ideas from each of the sub-advisors?” He adds: “The other thing we have seen with Vanguard is that a multiple manager situation can often result in the cancelling each other out.”

Indeed, at the simply outstanding Litman Gregory Masters Funds Due Diligence Forum for the Alternative Strategies Fund held recently in San Francisco, Jeffery Gundlach’s outlook could not have been more different than that of John Burbank’s. Here are some examples:

  • Gundlach stated he’s “completely out of financials,” while Burbank stated he’s “never been more bullish on financials.”
  • Gundlach thinks “oil is in a perpetual bear market.” Basically, while tech can bring down cost of extraction, OPEC can drop prices to where profits remain nil for any competition. Burbank is bullish on oil.
  • Gundlach thinks EM is one of few undervalued markets. Burbank thinks EM will get crushed as republicans push through their America First agenda, including the border tax.
  • Gundlach is skeptical on China, but bullish on India. Burbank is bullish on China.

The irony is that access to the hedge fund strategies run by both these money managers represents one of the more compelling reasons to own Alternative Strategies.

Bottom Line

Will Litman Gregory’s Alternative Strategies Fund protect investors during the next significant equity drawdown? Will it protect investors from raising interest rates? Will it deliver attractive returns relative to conservative and moderately-conservative benchmarks, like 3-Month LIPOR, Barclay’s US Aggregate Bond Index, and traditional 80/20% or 60/40% bond/equity allocations … across “all weather” markets with volatility below equities?

Answer: Many indications suggest it will.

Fund Website

Litman Gregory continues to maintain a good website filled with background and updates on its Master Funds. I remain impressed with the firm’s openness, transparency with shareholders, and responsiveness to our many inquiries.

Grandeur Peak Global Stalwarts/Grandeur Peak International Stalwarts (GGSYX/GISYX), April 2017

By Samuel Lee

Objective and strategy

Grandeur Peak calls fast-growing, high-quality stocks with market capitalizations above $1.5 billion “stalwarts”. They are too big for Grandeur Peak’s small- and micro-cap funds, but too good to let go, so Grandeur Peak rolled out two funds to hold them.

It is a little appreciated fact that most of the gains in the stock market are driven by a handful of runaway winners; most stocks earn sub-par returns. Grandeur Peak’s strategy is to try to find them when they’re small—the tinier, the better—and ride them up. Founder Robert T. Gardiner made an ungodly sum of money applying this strategy for the lucky shareholders of Wasatch Micro Cap (WMICX) from 1995 to 2006.

Here’s how a 2000 New York Times article described Gardiner’s strategy:

“To choose the 80 or so stocks in the fund, he first looks at companies with annual earnings and revenue growth of at least 15 percent. … Next, he screens the stocks for stable or increasing operating return on assets, or earnings before interest and taxes, divided by company assets other than cash and intangibles. …To help make his final choices, he visits more than 100 companies a year.”

Grandeur Peak builds on this very successful formula. The firm’s analysts screen the global market for quality stocks, which usually have high margins, low earnings/revenue volatility, high (and increasing) returns on capital, minimal debt and restrained share issuance. Once promising stocks have been found, the analysts look to see if they have good business models, competent and honest leadership, and room for more growth.

Analysts travel the world to investigate particularly interesting companies. (Grandeur Peak has a public “touch tracker” showing how many companies their analysts have visited.) The sheer amount of legwork they put into visiting obscure stocks in remote locales creates an informational edge; many of the firms they’ve visited are rarely if ever contacted by analysts. This due diligence is important because screening for attractive statistical traits in emerging-markets micro-cap stocks will also surface some (perhaps many) companies engaging in accounting fraud.

Stocks that pass this gantlet get an extensive earnings model built. The decision to buy is determined by a “quality/value/momentum” matrix, where the stocks with the highest quality, cheapest valuations, and strongest business momentum get the biggest weights (with a cap of around 3%). High quality stocks that are too expensive are put on a watch list. Positions are frequently monitored and revised, leading to turnover that has ranged from 20% to 50% across all their funds.

The process has worked well. Most of Grandeur Peak’s funds have beaten their peers and benchmarks, some by crushing margins.

Adviser

Grandeur Peak Global Advisors, LLC, located in Salt Lake City, Utah, was founded in 2011 by Robert Gardiner, Blake Walker and Eric Huefner. All three worked together at Wasatch Advisors and many key hires also came from Wasatch. The firm managed $2.9 billion as of 2016 end and employs about 32 people, most of whom are in research or investment roles. Thankfully, the firm doesn’t have a chief marketing officer.

The firm’s principals have shown admirable restraint. Grandeur Peak could easily quadruple assets by monetizing its track record but has held true to their promise to keep assets in their small- and micro-capped strategies capped at $2 billion to $3 billion. All the firm’s micro- and small-cap funds are hard closed.

Recently Grandeur Peak announced a partnership with Rondure Global Advisors, taking a minority stake in the firm. Rondure and Grandeur Peak share office space, research analysts, and operations. Rondure is launching international funds that may overlap with Grandeur Peak’s funds. I am not concerned about potential conflicts of interest yet because Rondure likely won’t reach a size where it matters for at least a couple of years. Rondure is also pursuing a “core” strategy, which should reduce its overlap with Grandeur Peak’s growth-oriented approach.

Managers

Randy Pearce and Blake Walker are the portfolio managers. Robert Gardiner is “guardian” portfolio manager, where his role is to act as a consultant to Pearce and Walker.

Pearce is lead portfolio manager of the Stalwarts funds. He was the firm’s first hire in 2011 and his ascent has been swift. He became co-director of research in 2015 and chief investment officer this year. Pearce is guardian portfolio manager of Grandeur Peak Global Reach (GPRIX) and had stints helping run Grandeur Peak International Opportunities (GPGIX) and Grandeur Peak Emerging Markets Opportunities (GPEIX).

He has a CFA and an MBA from UC Berkeley’s Haas School of Business. Prior to business school, he worked at Wasatch as a research analyst from 2005 to 2009. Gardiner has singled out Pearce for praise in his letters. Pearce picked the firm’s first 20-bagger, Australian asset manager Magellan Financial Group.

Walker is chief executive officer and co-founder. In addition to the Stalwarts funds, Walker manages Grandeur Peak Emerging Markets Opportunities (GPEIX), Grandeur Peak Global Opportunities (GPGIX), and Grandeur Peak International Opportunities (GPIIX). He had stints managing Grandeur Peak Global Reach (GPRIX) and Grandeur Peak Global Micro Cap (GPMCX).

At Wasatch, he co-managed Wasatch Global Opportunities (WIGOX) with Gardiner and Wasatch International Opportunities (WIIOX). He had a brief stint managing Wasatch Emerging Markets Small Cap (WIEMX).

Gardiner is chairman and co-founder. In addition to the Stalwarts funds, he’s guardian portfolio manager of Grandeur Peak Global Micro Cap (GPMCX). With Walker he co-manages Grandeur Peak Global Opportunities (GPGIX) and Grandeur Peak International Opportunities (GPIIX).

He was a long-time employee (and later partner) of Wasatch Advisors, where he managed Wasatch Micro Cap (WMICX), Wasatch Micro Cap Value (WAMVX), and Wasatch Global Opportunities (WIGOX).

The criss-crossing of portfolio management responsibilities reflects Grandeur Peak’s team-oriented process. While Gardiner and Walker are still relatively young, the widespread delegation of responsibilities helps cultivate future talent and mitigates worries about succession. That said, I can’t rule out the possibility that Grandeur Peak’s fantastic results are driven by the principals’ non-replicable abilities. Daniel Chace, who co-managed Wasatch Micro Cap with Gardiner for three years, produced mediocre returns for over a decade after Gardiner left the fund, despite having years to observe and learn from Gardiner.

Strategy capacity and closure

Grandeur Peak estimates its Stalwarts strategy can roughly handle $5 billion to $7 billion. The Stalwarts mutual funds have about $386 million as of March-end but there are also separate accounts and other vehicles that run the strategy.

Manager incentives

Portfolio managers are given relatively small base salaries and paid bonuses only when their funds beat the median fund manager in the relevant Morningstar category or the primary benchmark over 1- or 3-year periods. Anything below median peer performance or benchmark performance results in no bonus; the full bonus is only paid for top-quartile peer performance or more than 400 basis points versus the primary benchmark.

This compensation structure is sensible. It penalizes below-benchmark performance and pays out linearly as performance surpasses peers or the benchmark.

Gardiner and Walker have equity ownership of the firm; Pearce likely has synthetic equity ownership. For Gardiner and Walker, their incentives are tied much more strongly to the overall financial success of the firm than to the performance of the Stalwarts funds.

As of April-end 2016, Walker had $100,001-$500,000 in each of Global Stalwarts International Stalwarts; Pearce had $100,001-$500,000 in Global Stalwarts and $50,001-$100,000 in International Stalwarts; and Gardiner had $500,001-$1,000,000 in Global Stalwarts and $100,001-$500,000 in International Stalwarts. The managers’ personal allocations suggest that they like Global Stalwarts version over International Stalwarts, but I suspect it’s driven by diversification considerations as Grandeur Peak has no U.S.-only funds.

Overall, the portfolio managers’ incentives are well-aligned with shareholders’. The firm’s principals have consistently behaved in a way that indicates they care about producing superior risk-adjusted returns more than maximizing fee income.

Expense ratio

The Global Stalwarts Fund charges 1.17% for its Investor class shares and 0.93% for its Institutional class shares on assets of $191.3 million. 

The International Stalwarts Fund charges 1.14% for its Investor class shares and 0.89% for its Institutional class shares on assets of $1.7 Billion. 

(July 2023)

Website

Grandeur Peak Global Stalwarts Fund

Grandeur Peak International Stalwarts Fund

SamLeeSam Lee and Severian Asset Management

Sam is the founder of Severian Asset Management, Chicago. He is also former Morningstar analyst and editor of their ETF Investor newsletter. Sam has been celebrated as one of the country’s best financial writers (Morgan Housel: “Really smart takes on ETFs, with an occasional killer piece about general investment wisdom”) and as Morningstar’s best analyst and one of their best writers (John Coumarianos: “ Lee has written two excellent pieces [in the span of a month], and his showing himself to be Morningstar’s finest analyst”). He has been quoted by The Wall Street Journal, Financial Times, Financial Advisor, MarketWatch, Barron’s, and other financial publications.  

Severian works with high net-worth partners, but very selectively. “We are organized to minimize conflicts of interest; our only business is providing investment advice and our only source of income is our client fees. We deal with a select clientele we like and admire. Because of our unusual mode of operation, we work hard to figure out whether a potential client, like you, is a mutual fit. The adviser-client relationship we want demands a high level of mutual admiration and trust. We would never want to go into business with someone just for his money, just as we would never marry someone for money—the heartache isn’t worth it.” Sam works from an understanding of his partners’ needs to craft a series of recommendations that might range from the need for better cybersecurity or lower-rate credit cards to portfolio reconstruction. 

Launch Alert: 361 US Small Cap Equity ASFQX

By David Snowball

On December 30, 2016, 361 Capital Management launched 361 US Small Cap Equity (ASFQX). This fund is the newest embodiment of an investment strategy initiated by John Riddle and Mark Jaeger of BRC Investment Management. Messrs. Riddle and Jaeger co-founded BRC in 2005, then merged with 361 Capital in October 2016. BRC was managing about $800 million in assets at the time of the merger, 361 had about $1.3 billion.

What do you need to know?

The strategy is thoughtful and distinctive.

The portfolio is driven the predictable and irrational behavior of other investors. The boom in passive investing was spurred on by efficient market theorists, who labored under the delusion that investors were rational and fully-informed, hence that prices were always “right.” Since every security was, they argued, valued more-or-less correctly, there was no reason to use active managers to pursue “price discovery,” that is, to determine the fair market value of a security.

A bunch of smart people, in and outside of finance, rolled their eyes at this nonsense. The most rudimentary reading of financial history repeatedly, unequivocally, demonstrated that prices were frequently, laughably wrong. Investors would pay the equivalent of 200 years’ worth of earnings for shares of one stock while refusing to pay five years’ worth for another, stock prices jumped around two- to four-times more than a firm’s earnings did, single tulip bulbs fetched the price of an entire house and the value of the land under Japan’s Imperial Palace was once greater than the value of all the land in California. And then it wasn’t.

The task was to identify the drivers and predictable patterns of irrationality. Riddle and Jaeger are among those who believe they did. In particular, they found exploitable patterns of irrationality surrounding favorable earnings announcements or upward earnings revisions.

The managers use two sets of screens: first, a behavioral screen surrounding earnings events and, second, a valuation screen since they found that low-priced stocks are subject to even greater mispricing than most. They then create an evenly weighted, sector neutral, 75-125 stock portfolio.

The managers are richly experienced.

Mr. Riddle was one of the earliest researchers to publish in behavioral finance, with his first article appearing in 1991. In the years between that early research and the founding of BRC, he was President and CIO of Duff & Phelps Investment Management and CEO and CIO of Capital West Asset Management LLC, among other things. Mr. Jaeger was a managing director at Duff & Phelps and a financial executive at Comcast, AT&T Broadband and Arthur Andersen. They describe their investment team as having “over 96 years combined experience utilizing proprietary techniques to identify attractive securities [and] to maximize alpha capture.”

The strategy has performed exceptionally well.

They’ve accomplished those consistently solid returns while capturing over about 85% of the market’s downside. While these results reflect the performance of the strategy in a different vehicle (that is, separate accounts), those accounts were quite large and the results were generated consistently over time. Investors intrigued by the prospect of small-cap exposure that’s capable of generating independent alpha might well want to put 361 Small Cap on their due diligence list.

The “I” class shares of the fund carry 1.26% expense ratio, with a $2,500 minimum initial purchase. “Investor” shares have the same minimum but carry a 12(b)1 fee of 0.25%.

The fund’s website is 361 U.S. Small Cap Equity. It’s a decent site, but there’s substantially more depth of information available around the homepage for BRC’s Small Cap Equity Strategy.

Funds in Registration

By David Snowball

Some months, fund registrations are just weird. Perhaps that’s “the new normal,” a phrase that we’re allowed to use again now that former PIMCO chief Bill Gross and current PIMCO management have hugged, made up and announced that they can’t even remember what the silly fight was all about. PIMCO wrote a check of $81 million to Mr. Gross, which Mr. Gross rounded up to $100 million … and gave it to his own charitable foundation.  Beyond that, a fund about childhood, one with a $350 million minimum investment, nine Morningstar funds that you can’t have (and might not want), three inexplicable ones and a couple that are reasonably promising.

AlphaCentric Global Innovations Fund

AlphaCentric Global Innovations Fund will seek long-term growth. The plan is to buy “a diversified portfolio” of U.S. and foreign common stock of companies involved in innovative and breakthrough technologies across multiple sectors. The fund is non-diversified, which does rather raise questions about the preceding sentence. The managers can also hedge by holding inverse ETFs, volatility-linked ETFs or cash. The fund will be managed by Brian Gahsman, Chief Investment Officer for the sub-advisor, Pacific View Asset Management.  The opening expense ratio on no-load “I” shares is 1.75%.. The minimum initial investment will be $2,500.

American Beacon IPM Systematic Macro Fund

American Beacon IPM Systematic Macro Fund will seek long-term growth through a managed futures strategy; at base, a sort of trend-following strategy implemented, long and short, through futures contracts. The fund will be managed by two Swedish guys from IPM Informed Portfolio Management AB . Good news: the e.r. is just 1.8%. Bad news: the minimum initial investment is $350 million. Good news: you should get pretty good customer service, since the firm will earn $6.3 million in fees from you each year. Bad news: there’s no publicly-available evidence that they’re worth it.

Balter Invenomic Fund

Balter Invenomic Fund will seek long term capital appreciation. A spectacularly vague description of the fund’s investment strategy comes down to “it’s a long/short fund that might hold 25% in high yield bonds.” (They invest long in things that are “both undervalued and timely.” That’s the secret sauce recipe!) The fund will be managed by Ali Motamed. Mr. Motamed , now an Invenomic Capital Management, LP manager but formerly a manager with Boston Partners Long/Short Equity Fund, indisputably the best long/short fund on the market. The opening expense ratio has not yet been disclosed. The minimum initial investment will be.$5,000, reduced to $1,000 for various tax-advantaged accounts and accounts with an AIP.

Childhood Essentials Growth Fund

Childhood Essentials Growth Fund will seek long-term capital appreciation. The plan is to invest in “companies that derive a majority of their revenues from products and services related to raising children from newborn to age 18, such as pharmacies, national superstores, family restaurants, and children’s retail stores.” I wish them luck. The fund will be managed by Kevin Bush and Bahavana Khanna of KBK Capital Management. The opening expense ratio is 1.25% for “A” shares. The minimum initial investment will be $5,000.

Friess Small Cap Growth Fund

Friess Small Cap Growth Fund will seek capital appreciation. The plan is to invest in small growth companies (though not for long: the prospectus warns of a 250% annual turnover). This fund is the successor to the Friess Small Cap Trust, a private fund in operation since 2002. The prospectus shows only the record for the last three years of the Trust’s existence; during that period, it substantially outperformed the Russell 2000.The fund will be managed by Scott Gates, CIO of Friess Associates. Prior to that, he was co-CIO of Friess and Friess. The opening expense ratio for Investor shares will be 1.45%. The minimum initial investment will be $2,000.

Morningstar (nine funds)

Morningstar is launching a suite of nine funds for use in their managed portfolios; they will launch by late 2017 but will only be available through the Morningstar Managed Portfolio program. The prospectus is silent, so far, about both expenses and managers. The fund’s names and (utterly bland) missions are:

  • US Core Equity –an all-cap domestic portfolio that still might be 20% international.
  • International Equity – an all-cap foreign portfolio that might also invest through ETFs, other mutual funds, closed-end funds and options.
  • Global Income – oddly, it invests “primarily” in income-producing equities, with “the balance” in bonds and cash.
  • Total Return Bond – a “diversified portfolio of fixed-income instruments of varying maturity and duration”
  • Municipal Bond – munis!
  • Defensive Bond – will seek capital preservation by investing in a diversified, global bond portfolio
  • Multi-Sector Bond – presumably more of the same (since the language describing the portfolio investments is the same as the above funds), but different.
  • Unconstrained Allocation – stocks and bonds, with no note about what’s “unconstrained” here
  • Alternatives – up to eight liquid alts strategies.

OFI Pictet Global Environmental Solutions Fund

OFI Pictet Global Environmental Solutions Fund will seek capital appreciation by investing in a global portfolio of companies whose business it is to address environmental challenges. OFI Global Asset Management, Inc. is the manager, OppenheimerFunds, Inc. is the investment sub-adviser and Pictet Asset Management SA is the Fund’s investment sub-sub-adviser. (That’s actually the first sub-sub-adviser I’ve encountered; I could imagine some spoilsport warning of extra layers of expenses.) The opening expense ratio has not been announced. The minimum initial investment will be $1,000.

T. Rowe Price Retirement Income 2020 Fund

T. Rowe Price Retirement Income 2020 Fund will seek to provide monthly income. It’s a fund of funds that will make monthly payouts to generate income for those in retirement, though non-retirees are welcome, too. The fund will be managed by Jerome Clark and Wyatt Lee. The opening expense ratio will be 0.74%. The minimum initial investment will be $25,000.

Upright Assets Allocation Plus Fund

Upright Assets Allocation Plus Fund will seek total return. The plan is to keep 60-80% in a core portfolio and invest 20-30% in an opportunistic tactical portfolio (or, if “economic and market conditions [are] suitable for such,” they might switch to some poorly-explained options-based strategy). The fund will be managed by David Y.S. Chiueh, president of Upright Financial Corp. The opening expense ratio will be 1.75%. The minimum initial investment will be $2,000.

Upright Growth & Income Fund

Upright Growth & Income Fund will seek current income consistent with growth of capital. The plan is to invest in stocks (50-80%), bonds (10-40%) and options. Up to 30% might be invested overseas. The fund will be managed by . The opening expense ratio will be 1.95%. The minimum initial investment will be. And no, I have no idea of why that strategy warrants a 1.95% fee especially when the Upright Growth Fund (UPUPX) has managed to trail 90% of its peers over the past 15 years and sports an even higher e.r.

Manager changes, March 2017

By Chip

It’s really rare that the world’s largest investment firm stages a full-scale revolution, but the scope of BlackRock’s changes this month – including the dismissal of 30 investment professionals including seven lead managers and the shift of billions in assets to new quant-based disciplines – seems to have that feel. Not quite a whiff of desperation but certainly determination. And, oh yes, investing legend Mark Mobius has moved into the shadows and 70 other funds underwent less changes.

Because bond fund managers, traditionally, had made relatively modest impacts of their funds’ absolute returns, Manager Changes typically highlights changes in equity and hybrid funds.

Ticker Fund Out with the old In with the new Dt
MQRAX ACR Multi-Strategy Quality Return (MQR) Fund No one, but . . . Neel Shah and Mark Unferth have joined Tim Piechowski, Willem Schilpzand and Nicholas Tompras in managing the fund. 3/17
NRFAX AEW Real Estate Fund John Garofalo will no longer serve as a manage to the fund Matthew Troxell, Gina Szymanski and J. Hall Jones, Jr. will continue to manage the fund. 3/17
ALMAX Alger SMid Cap Growth Fund Daniel Chung is no longer listed as a portfolio manager for the fund. Joshua Bennett, H. George Dai, and Matthew Weatherbie will now manage the fund. 3/17
BDSAX BlackRock Advantage Small Cap Core Fund No one, but . . . Travis Cooke is joined by Raffaele Savi and Richard Mathieson in managing the fund. 3/17
CSGEX BlackRock Advantage Small Cap Growth Fund No one, but . . . Travis Cooke is joined by Raffaele Savi and Richard Mathieson in managing the fund. 3/17
MDCPX Blackrock Balanced Capital Fund No one, but . . . David Rogal and Todd Burnside join Philip Green, Rick Rieder, Bob Miller and Peter Stournaras 3/17
MDBAX BlackRock Basic Value Fund Bartlett Geer is no longer listed as a portfolio manager for the fund. Carrie King is joined by Joseph Wolfe in managing the fund. 3/17
BACHX BlackRock Emerging Markets Dividend Luiz Soares is no longer listed as a portfolio manager for the fund. Erin Xie will continue to manage the fund. 3/17
BLSAX BlackRock Emerging Markets Long/Short Equity Fund Dan Blumhardt and Clint Newman are no longer listed as portfolio managers for the fund. Jeff Shen is joined by David Piazza, Gerardo Rodgriuez, and Richard Mathieson in managing the fund. 3/17
BMCAX BlackRock Flexible Equity Fund No one, but . . . Todd Burnside joins Peter Stournaras in managing the fund 3/17
BMCAX BlackRock Flexible Equity Fund Peter Stournaris will no longer serve as a portfolio manager for the fund. Travis Cooke, Raffaele Savi and Richard Mathieson will manage the fund. 3/17
BROAX BlackRock Global Opportunities Thomas Callan, Ian Jamieson, and Simon McGeough are no longer listed as portfolio managers for the fund. Raffaele Savi, Kevin Franklin and Richard Mathieson will manage the fund. 3/17
MDGCX BlackRock Global Small Cap Murali Balaraman and John Coyle are no longer listed as portfolio managers for the fund. Raffaele Savi, Kevin Franklin and Richard Mathieson will manage the fund. 3/17
BREAX BlackRock International Opportunities Thomas Callan, Ian Jamieson, and Simon McGeough are no longer listed as portfolio managers for the fund. Raffaele Savi, Kevin Franklin and Richard Mathieson will manage the fund. 3/17
MDLRX BlackRock Large Cap Core Fund No one, but . . . Peter Stournaras is joined by Todd Burnside in managing the fund. 3/17
MDLHX BlackRock Large Cap Growth Fund No one, but . . . Peter Stournaras is joined by Todd Burnside and Lawrence Kemp in managing the fund. 3/17
MRLVX BlackRock Large Cap Value Fund No one, but . . . Peter Stournaras is joined by Todd Burnside in managing the fund. 3/17
BDRFX BlackRock Mid Cap Value Opportunities Fund Murali Balaraman and John Coyle are no longer listed as portfolio managers for the fund. Tony DeSprito, Franco Tapia, and David Zhao will manage the fund. 3/17
MDPCX BlackRock Pacific Oisin Crawley will no longer serve as a portfolio manager for the fund. Andrew Swan will continue to manage the fund. 3/17
BGSAX BlackRock Science & Technology Opportunities Portfolio Thomas Callan is no longer listed as a portfolio manager for the fund. Tony Kim will continue to manage the fund. 3/17
MDSWX BlackRock Small Cap Growth Fund II No one, but . . . Travis Cooke is joined by Raffaele Savi and Richard Mathieson in managing the fund. 3/17
BMEAX BlackRock U.S. Opportunities Portfolio No one, but . . . Simon McGeough joins Thomas Callan and Ian Jamieson on the management team. 3/17
MILCX BNY Mellon Large Cap Stock Fund No one, but . . . Syen Zamil joins C. Wesley Boggs, William Cazalet, Ronald  Gala, Peter  Goslin in managing the fund. 3/17
MIMSX BNY Mellon Mid Cap Multi-Strategy Fund No one, but . . . John Porter joined the management team of Todd Wakefield, Robert Zeuthen, David Daglio, James Boyd, Dale Dutile, Joseph Feeney, Thomas Murphy, Steven Pollack, Amy Croen, Michelle Picard, William Scott Priebe, William A. Priebe, and Caroline Lee Tsao. 3/17
MISCX BNY Mellon Small Cap Multi-Strategy Fund No one, but . . . John Porter joined the management team of Todd Wakefield, Robert Zeuthen, David Daglio, James Boyd, Stephanie Brandaleone, Joseph Corrado, Dale Dutile, and Caroline Lee Tsao. 3/17
MMCIX BNY Mellon Small/Mid Cap Multi-Strategy Fund No one, but . . . John Porter joined the management team of Todd Wakefield, Robert Zeuthen, David Daglio, James Boyd, Edward Walter, Stephanie Brandaleone, Joseph Corrado, Dale Dutile, and Caroline Lee Tsao. 3/17
CTRAX Calamos Total Return Bond Jeremy Hughes is no longer listed as a portfolio manager for the fund. John P. Calamos, R. Matthew Freund, John Hillenbrand, Eli Pars, Jon Vacko, and Chuck Carmody continue to manage the fund. 3/17
BUYAX Catalyst Buyback Strategy Fund Choice Financial Partners, Inc. no longer serves as the adviser of the fund and Timothy McCann is no longer is the portfolio manager. Michael Schoonover will continue to manage the fund. 3/17
SOPAX Clearbridge Dividend Strategy Fund No one, but . . . Scott Glasser joins Michael Clarfeld, Harry Cohen and Peter Vanderlee in managing the fund. 3/17
CHNAX Clough China Fund Francoise Vappereau is no longer serving as a co-manager Brian Chen, who arrived 8/16, remains 3/17
GEFIX CMG Mauldin Solutions Fund Andrew Lo, Alexander Healy, Michael Hee, and Przemyslaw Grzywacz are no longer listed as portfolio managers for the fund. Stephen Blumenthal and John Mauldin will now manage the fund. 3/17
CAGAX Columbia Acorn Emerging Markets Fund Fritz Kaegi will no longer serve as a portfolio manager for the fund. Stephen Kusmierczak, Louis Mendes, and Satoshi Matsunaga will continue to manage the fund. 3/17
ACRNX Columbia Acorn Fund Fritz Kaegi will no longer serve as a portfolio manager for the fund. P. Zachary Egan  and Matthew Litfin will continue to manage the fund. 3/17
FSEAX Fidelity Emerging Asia Colin Chickles will no longer serve as a portfolio manager for the fund. John Dance will continue to manage the fund. 3/17
FCAAX Frost Aggressive Allocation Messrs. Thompson, Hopkins, Telling, Tarver, Bergeron, Mendez, Bambace and Duncan Thomas Stringfellow with “appropriately trained analysts” is in charge 3/17
FDSFX Frost Conservative Allocation Messrs. Thompson, Hopkins, Telling, Tarver, Bergeron, Mendez, Bambace and Duncan Thomas Stringfellow with “appropriately trained analysts” is in charge 3/17
FACEX Frost Growth Equity Fund AB Mendez and Tom Stringellow will no longer serve as a portfolio manager for the fund. John Lutz will continue to manage the fund. 3/17
FAKDX Frost KempnerMulti-cap Deep Value  Equity Messrs. Thompson, Hopkins, Telling, Tarver, Bergeron, Mendez, Bambace and Duncan Harris L. Kempner and M. Shawn Gault remain 3/17
FAKSX Frost MidCap Equity Messrs. Thompson, Hopkins, Telling, Tarver, Bergeron, Mendez, Bambace and Duncan Thomas Stringfellow with “appropriately trained analysts” is in charge 3/17
FASTX Frost Moderate Allocation Messrs. Thompson, Hopkins, Telling, Tarver, Bergeron, Mendez, Bambace and Duncan Thomas Stringfellow with “appropriately trained analysts” is in charge 3/17
FADVX Frost Value Equity Fund Tom Bergeron and Tom Stringfellow are no longer listed as portfolio managers for the fund. Craig Leighton will continue to manage the fund. 3/17
HGGIX Harbor Global Growth Fund, which is changing its name to Harbor Global Leaders Fund Marsico Capital Management is no longer a subadvisor to the fund and Thomas Marsico is no longer listed as a portfolio manager for the fund. Sunil Thakor will manage the fund and Sands Capital Management will be the subadvisor to the fund. 3/17
HTECX Hennessy Technology Fund Winsor Aylesworth and David Ellison will no longer serve as portfolio managers for the fund. Daniel Hennessy, Ryan Kelley, and Brian Peery will now manage the fund. 3/17
JEVAX John Hancock Emerging Markets Fund No one, but . . . Mary Phillips joins the team of Joseph Chi, Jed Fogdall, Allen Pu and Bhanu Singh in managing the fund. 3/17
JISAX John Hancock International Small Company Fund Henry Gray will no longer serve as a portfolio manager for the fund. Mary Phillips joins the team of Joseph Chi, Jed Fogdall, Arun Keswani and Bhanu Singh in managing the fund. 3/17
JASOX John Hancock New Opportunities Fund Henry Gray will no longer serve as a portfolio manager for the fund. Juliet Ellis, Juan Hartsfield, Joseph Chi, Jed Fogdall, Joseph Craigen, Daniel Miller, Joel Schneider, Justin Bennitt, Gregory Manley, and Davis Paddock will continue to manage the fund. 3/17
JGIAX JPMorgan Income Andrew Headley joins the fray Andrew Norelli remains as co-manager 3/17
KACVX Keeley All Cap Value Fund Edwin Ciskowski will no longer serve as a portfolio manager for the fund. Brian Keeley will continue to manage the fund. 3/17
GHCAX Leland Currency Strategy Fund FDO Partners, LLC is no longer managing any portion of the fund’s assets. The changes to the management team are not yet clear. 3/17
MNILX Litman Gregory Masters International No one, but . . . David Marcus, and Evermore Global Advisors, joins the management team of David Herro, Jeremy DeGroot, Howard Appleby, Jean-Francois Ducrest, James LaTorre, W. Vinson Walden, Mark Little, Rajat Jain, Benjamin Beneche, and Fabio Paolini. 3/17
LSBAX Loomis Sayles Core Disciplined Alpha Bond On June 1, 2017, William Stephens plans to retire. We wish him well. Lynne Royers, heretofore co-manager, takes over 3/17
MYITX Mainstay International Opportunities Fund Gaurav Gupta is no longer listed as a portfolio manager for the fund. Ping Wang joins Andrew Ver Planck and Jeremy Roethel on the management team for the fund. 3/17
EXITX Manning & Napier International No one, but . . . Kasey Wopperer has joined Scott Shattuck and Jeffrey Donlon on the management team. 3/17
MFVAX MassMutual Select Equity Opportunities Messrs. Bierig, Coniaris and Hudson are out after two years Scott Linehan of T. Rowe Price and Donald Kilbride of Wellington Management take the helm. 3/17
DVRAX MFS Global Alternative Strategy Jose Andres and Nathan Shetty are onboard Ben Nastou and Natalie Shapiro remain, so the team moves to four 3/17
MNDAX MFS New Discovery Fund Effective October 1, 2017, Paul Gordon will no longer be listed as a portfolio manager to the fund. Michael Grossman will continue to manage the fund. 3/17
NMEDX Northern Multi-Manager Emerging Markets Debt Opportunity Fund Lazard Asset Management will no longer subadvise the fund. Ashmore Investment Management joins BlueBay Asset Management in subadvising the fund. 3/17
PLOWX Perritt Low-Priced Stock Brian Gillespie steps down after five years Founding co-manager Michael Corbett becomes the sole manager 3/17
PNVAX Putnam International Capital Opportunities Fund Brett Risser and Robert Shoen are no longer listed as portfolio managers for the fund. Karan Sodhi, Spencer Morgan and Andrew Yoon will now manage the fund. 3/17
PNSAX Putnam Small Cap Growth Fund Pam Gao is no longer listed as a portfolio manager for the fund. William Monroe will now manage the fund. 3/17
PSLAX Putnam Small Cap Value Fund No one, but . . . Eric Harthun has been joined by David Diamond in managing the fund. 3/17
QTRAX Quaker Global Tactical Allocation Fund Robert Andres is no longer listed as a portfolio manager for the fund. Paul Hoffmeister and Thomas Kirchner will now manage the fund. 3/17
RQSIX RQSI Small Cap Hedged Equity Fund Benjamin McMillan is no longer listed as a portfolio manager for the fund. Jaideep Karnawat is now running the fund. 3/17
TDTFX TD Target Return Fund Anish Chopra and Jonathan Shui will no longer serve as managers to the fund. Geoff Wilson and Anna Castro will now run the fund. 3/17
TCWAX Templeton China World Fund Mark Mobius is no longer listed as a portfolio manager for the fund. Eddie Chow continues to manage the fund. 3/17
TEDMX Templeton Developing Markets Trust Mark Mobius, Tom Wu, Dennis Lin, and Allan Lam are no longer listed as portfolio managers for the fund. Chetan Sehgal will now manage the fund. 3/17
TAEMX Templeton Emerging Markets Balanced Fund Mark Mobius, Allan Lam, Dennis Lim, and Tom Wu are no longer listed as portfolio managers for the fund. Michael Hasentab and Laura Burakreis remain and are joined by Chetan Sehgal. 3/17
TEMMX Templeton Emerging Markets Small Cap Fund Mark Mobius, Tom Wu, Dennis Lin, and Allan Lam are no longer listed as portfolio managers for the fund. Chetan Sehgal will now manage the fund. 3/17
TFMAX Templeton Frontier Markets Fund Allan Lam and Dennis Lim are no longer listed as portfolio managers for the fund. Mark Mobius and Tom Wu will remain as portfolio managers to the fund. 3/17
DVIBX Transamerica Partners Balanced Rick Perry is no longer listed as a portfolio manager for the fund. Brian Westhoff, Doug Weih, Matthew Buchanan, Bradley Doyle, Tyler Knight, Steven Lee, Tim Snyder, and Raffaele Zingone will continue to manage the fund. 3/17
IIVAX Transamerica Small/Mid Cap Value Short-termers Brett Hawkins and Kevin McCreesh move on Kenneth Burgess continues in a role his assumed in since 2011 3/17
BNAAX UBS Dynamic Alpha Fund Andreas Koester and Jonathan Davies no longer serve as portfolio managers. Nathan Shetty and José Ignacio Andrés will now manage the fund. 3/17
BNGLX UBS Global Allocation Fund Andreas Koester and Jonathan Davies no longer serve as portfolio managers. Philip Brides will be joined by Gian Plebani on the management team. 3/17
PWTAX UBS U.S. Allocation Fund Andreas Koester is no longer a portfolio manager of the fund. Gregor Hirt and Paul Lang will assume portfolio management responsibilities for the fund. 3/17
VEXPX Vanguard Explorer Fund Dana Walker and Jennifer Pawloski are no longer listed as portfolio managers for the fund. Brian Angerame, Derek Deutsch, Aram Green and Jeffrey Russell join the team of Binbin Guo, Brian Schaub, Chad Meade, Daniel Fitzpatrick, Ryan Edward Crane, James Stetler, Michael Roach, and Kenneth Abrams. 3/17
SRVEX Victory Diversified Stock Fund No one, immediately. However, effective May 12th, the existing team of Lawrence Babin, Paul Danes, Carolyn Rains, Martin Shagrin, and Thomas Uutala, will no longer manage the fund. Michael Gura will manage the fund, effective May 12, 2017 3/17
SAVAX Virtus Bond Fund Christopher Kelleher will retire, effective April 30, 2017 Stephen Hooker will join David Albrycht in managing the fund. 3/17
VCOAX Virtus Credit Opportunities Fund Edwin Tai is no longer listed as a portfolio manager for the fund. Eric Hess joins the team of David Albrycht, Timothy Dias, and Patrick Fleming in managing the fund. 3/17
HIMZX Virtus Low Duration Income Fund Christopher Kelleher will retire, effective April 30, 2018 Lisa Baribault will join David Albrycht and Benjamin Caron in managing the fund. 3/17
IIBPX Voya Balanced Portfolio Christine Hurtsellers will no longer serve as portfolio manager for the fund. Matthew Toms is being added as a portfolio manager, joining Chrostopher Corapi and Paul Zemsky. 3/17
INGBX Voya Global Bond Fund Christine Hurtsellers will no longer serve as portfolio manager for the fund. Mustafa Chowdhury and Brian Timberlake will continue to manage the fund. 3/17

Briefly Noted

By David Snowball

Updates

Third Avenue Management, Marty Whitman and former president David Barse have agreed to a $14.25 million cash settlement of a lawsuit brought on behalf of investors in Third Avenue Focused Credit. The fund, if you recall, made headlines first through huge losses in the completely illiquid positions that dominated the portfolio, then by moving all of its assets into a locked trust which kept investors from reclaiming their money. The plan was to liquidate the illiquid when “rational” prices prevailed; after about 18 months, that process is still not complete. The whole mess has cost Third Avenue over $3 billion in assets and threatened its survival. (Reuters)

Naturally, none of the parties involved admit to having done anything wrong. The payment is just to … ummm, eliminate distractions or help us focus on the future or some such.

—

Steven C. Vannelli, whose Gavekal KL Allocation Fund we profiled back in 2014 when it was named the GaveKal Knowledge Leaders Fund (GAVAX/GAVIX), has purchased a majority stake in his firm which allows it be become independent of their long-time partners at GaveKal Research (Hong Kong). In consequence, he’s dropping the GaveKal part of the name. The firm is now Knowledge Leaders Capital and they’re in the process of removing the GaveKal name from both their mutual fund and their ETF. Morningstar has changed the fund’s peer group three times in six years (from world stock to large growth to aggressive allocation), which makes assessments of relative performance a bit iffy. It had a weak 2016 against its Lipper flexible portfolio peers but has historically produced substantially better returns for substantially less risk than they.

—

Mark Mobius is finally stepping back. Franklin Templeton has announced that Mr. Mobius, now 80 years old, is stepping away from management of 12 strategies including four funds available to U.S. investors. He’s stepping aside from his flagship Developing Market Trust (TEDMX), which he and Tom Wu began managing in 1991. In all that time, TEDMX had only one other person on the management team, Allan Lam (1991-2004, 2011 – present). For now, he remains co-manager, with Mr. Wu, of Templeton Frontier Markets Fund (TFMAX). It’s curious that he’s been retained only on the weakest of all his funds.

This is part of a larger set of management changes at Franklin-Templeton, which are substantial enough for Morningstar to lower their assessment of the firm from “Positive” to “Neutral.” The complex has seen huge outflows over the past three years; in response, they cut 300 staff worldwide and began reorganizing their investment management structures. A year ago, they rolled Mr. Mobius’s EM Group into another unit and moved the Chief Investment Officer title to Stephen Dover, who then became responsible for combined operations.

Mr. Mobius, meanwhile, has been relegated to a series of what seem to be largely symbolic roles. Citywire reports that he’ll be “sharing ideas and engaging with clients and media to share his insights” (“Mobius drops 12 funds as ‘next gen’ of PMs step up,” 03/21/2017).

Briefly Noted . . .

SMALL WINS FOR INVESTORS

AMG Managers Cadence Emerging Companies Fund (MECAX) announced an unusually large reduction in their management fee, from 1.25% to 0.69% as of June 1, 2017. At the same time, the expense ratio cap will fall from 1.42% to 0.89%. To be clear, that’s a remarkable offer from a five-star fund that’s beaten its peers, by our calculation, for the past 1-, 3-, 5-, 10- and 20-year periods.

CLOSINGS (and related inconveniences)

Fidelity Inflation-Protected Bond Fund (FPINX) closed to new investors on March 31, 2017. Over the last three years, the fund has operated with a perfect correlation (100) to its sibling Fidelity Inflation-Protected Bond Index (FSIQX). The so-called “active” fund charges 0.25% more than the index and, not surprisingly, returns about 0.25% less. One might reasonably imagine a liquidation in its future.

Effective April 30, 2017, FMI International Fund (FMIJX) will be closed to new investors. When we profiled the fund in 2012, we suggested “all the evidence available suggests that FMI International is a star in the making.” Four years and $4.5 billion later, Morningstar initiated coverage with a “Silver” rating and the observation that the fund offered “a superb record with strong downside protection.”

Effective March 1, 2017, the Principal Global Opportunities Equity Hedged Fund (PGOHX) closed to new investors. Ummm … $7 million in AUM, trails 96% of its peers over the past year. I suspect it won’t stay closed for long.

RMB Mendon Financial Services Fund (RMBKX) “soft closed” on March 15, 2017.

OLD WINE, NEW BOTTLES

On March 31, 2017, the adviser to the Meridian Funds, Arrowpoint Asset Management, changed its name to “ArrowMark Colorado Holdings, LLC, d/b/a ArrowMark Partners.” No idea of why and no evidence of other changes underway.

The Berwyn Funds (Berwyn, Cornerstone and Income) will pass into history at the end of June, 2017, to be reborn as the Chartwell Funds. Each Chartwell Fund will have the same investment objective and principal investment strategy as the corresponding Berwyn Fund, except that Berwyn Cornerstone Fund (BERCX) will become Chartwell Mid Cap Value Fund with “similar, but not identical, investment objectives, as well as different investment strategies and risks.” There are, as yet, no details on those differences. The star of this show is clearly the $1.7 billion Berwyn Income (BERIX), so the continuity there is wise and reassuring.

There’s a load of BlackRock name changes working through, as BlackRock moves assets from human-driven portfolios to computer-driven ones; the latter are its “Advantage” funds. BlackRock Global SmallCap Fund has been renamed BlackRock Advantage Global Fund (MDGCX), BlackRock Mid Cap Value Opportunities Fund is renamed BlackRock Mid Cap Dividend Fund (BDRFX) and. BlackRock Pacific Fund has become (here’s the sexy one!) BlackRock Asian Dragon Fund (MDPCX).

On May 1, 2017 Brown Advisory Emerging Markets Small-Cap Fund (BIANX) is rechristened as Brown Advisory – Macquarie Asia New Stars Fund, at which point it will focus its portfolio on small and medium cap companies in Asia (excluding Japan.

Subsequent to the removal of EquityCompass as the fund’s managers, Catalyst/EquityCompass Buyback Strategy Fund (BUYAX) became Catalyst Buyback Strategy Fund.

Century Capital Management, advisor to Century Shares Trust (CENSX) and Century Small Cap Select Fund (CSMVX), has agreed to be acquired by Congress Asset Management in the second half of 2017. Expect the fund names to change but the fund manager, Alexander Thorndike, to remain the same under the new regime. We’ll share details when we can.

Effective March 24, 2017, Class T shares of all Fidelity funds were renamed Class M. I tingle.

Harbor Global Growth Fund has been reborn as Harbor Global Leaders Fund (HGGIX), subsequent to installing Sands Capital as the fund’s new adviser.

Effective April 3, 2017, Ivy Emerging Markets Local Currency Debt Fund (IECIX) becomes Ivy Pictet Emerging Markets Local Currency Debt Fund and Ivy Targeted Return Bond Fund (IRBIX) is renamed Ivy Pictet Targeted Return Bond Fund.

On March 28, 2017, MassMutual Select Mid Cap Growth Equity II Fund was changed to the MassMutual Select Mid Cap Growth Fund (MEFZX).  They assure us that “The investment objective, investment strategies, management, and all other aspects of the Fund remain unchanged.” Hmmm … it’s a five-star fund with low expenses that has outperformed 90% of its peers over time, so that “remain unchanged” part is okay with us, I guess. (I know MassMutual was just waiting for that approval.)

As on March 28, 2017, MassMutual Select Focused Value Fund became MassMutual Select Equity Opportunities Fund (MFVAX); Harris Associates (a/k/a Oakmark) was excused from managing the fund and T. Rowe Price and Wellington took the reins. It’s been high beta (1.3 or so) with negative alpha, so the move seems sensible on face.

Effective as of March 10, 2017, RiverPark Commercial Real Estate Fund became RiverPark Floating Rate CMBS Fund (RCRIX). Morningstar’s site seems not to recognize either fund name or the ticker symbol.

Virtus Asset is adopting the Ridgeworth family of funds. In consequence of that move, the word “Virtus” has been substituted for “Ridgeworth” in the names of the 28 funds. So, for example, RidgeWorth Ceredex Mid-Cap Value Equity Fund (SMVTX) became Virtus Ceredex Mid-Cap Value Equity Fund. In two cases, the name change also includes naming the fund’s subadviser.

RidgeWorth Innovative Growth Stock Fund became …

Virtus Zevenbergen Innovative Growth Stock Fund

RidgeWorth International Equity Fund is now …

Virtus WCM International Equity Fund

Effective May 8, 2017, the other 35 Virtus Funds will change their names to highlight the funds’ subadvisers. For example

Virtus Credit Opportunities Fund will become …

Virtus Newfleet Credit Opportunities Fund

Virtus Multi-Strategy Target Return Fund is rebranded…

Virtus Aviva Multi-Strategy Target Return Fund

Virtus Select MLP and Energy Fund …

Virtus Duff & Phelps Select MLP and Energy Fund, and so on.

OFF TO THE DUSTBIN OF HISTORY

The AdvisorOne CLS Global Growth Fund (CLBLX) has closed and will “discontinue its operations” on April 28, 2017.

Advisory Research International All Cap Value Fund (ADVEX) is subject to termination, liquidation and dissolution on April 24, 2017.

AlphaCentric/IMFC Managed Futures Strategy Fund (IMXAX) liquidated on March 30, 2017. In 16 months of operation, the fund booked a loss of 26% for its investors and trailed virtually all of its peers in a troubled category.

AMG Managers Cadence Capital Appreciation Fund (MPAFX) is merging into AMG Renaissance Large Cap Growth Fund (MRLTX), subject to the approval of shareholders, on or about July 31, 2017. The Renaissance fund is smaller, younger and better-performing.

At the end of December, 2016, Balter Event-Driven Fund (BEVRX/BEVIX) “indefinitely suspended all sales of fund shares.” On March 6, 2017, they issued a supplement to their prospectus to reiterate that fact. The fund converted from a hedge fund at the start of 2016, trailed 80% of its peers over the course of 2016, raised no assets and suspended sales at the end of 2016. On March 28, they announced their decision to liquidate the fund on April 28, 2017.

Bishop Street Strategic Growth Fund (BSRIX) is expected to cease operations and liquidate on or about April 7, 2017.

BlackRock Advantage International Fund (BDNAX) has closed and, by May 5, 2017, “assets of the Fund will have been liquidated completely.”

BMO’s board announced that BMO Mortgage Income Fund (BMTAX) has been renamed BMO Strategic Income and its investment strategy has changed to become identical to the strategy at BMO TCH Intermediate Income Fund (BAAIX); that is, from “provide current income” to “maximize total return consistent with current income.” Then, once it had become a clone of BAAIX, it would absorb that fund into itself. So, Mortgage Income + Intermediate Income = Strategic Income.

On January 18, 2017, the Board of Trustees approved a plan of liquidation for Fidelity Municipal Income 2017 Fund (FAVIX). The fund is expected to liquidate on or about June 30, 2017.

Franklin Global Government Bond Fund (FGGAX) will terminate and liquidate the fund on or about June 16, 2017. Something seems to have gone just a bit awry for them in early November:

The $13 million Geneva Advisors Emerging Markets Fund (GNLRX) will be closed and liquidated as of the close of business on April 28, 2017.

Effective immediately, Hatteras Long/Short Equity Fund (HLSAX), Long/Short Debt Fund (HFIAX) and Managed Futures Strategies (HMFIX) funds have closed and will“ return each Fund’s investor capital” on April 26,2017. Between them, the three funds have $48 million in investor capital (and a total of five Morningstar stars) to distribute.

IronBridge Global Fund (IBGFX) will be liquidated on or around March 31, 2017.

Janus Capital recommended, and the Board approved, a proposal to merge Janus Fund (JANSX) into Janus Research Fund (JAMRX) as a way “to streamline its large cap offerings in order to better position these offerings within the marketplace.” The firm launched Janus Fund in February 1970 under the leadership of Thomas Bailey, who guided it for 16 years. James Craig followed for 13, Blaine Rollins for six, then a bunch of people for three or four years each. Janus Fund’s current managers will not have a role in managing the merged fund.

John Hancock Global Real Estate Fund (JHGRX) will close at the end of April and will liquidate on or about May 25, 2017.

Leland International Advantage Fund (LDAAX) liquidated on March 31, 2017.

Effective March 17, 2017, Lyons Small Cap Fund (LFSAX) closed to new investors; it liquidated two weeks later. I like the turn of phrase they used: “the Board of Trustees has determined to close the Fund and wind up its affairs.” The fund has been in operation for 16 months.

The $170 million Manning & Napier Dynamic Opportunities (MDOSX) becomes a Former Fund on April 18, 2017.

Mirae Asset Global Great Consumer Fund (MGUAX), having discovered that investors aren’t particularly interested in Global Great Consumers, will liquidate on or about April 28, 2017.

MN Rainier Intermediate Fixed Income Fund (RIMFX) will liquidate at the close of business on May 1, 2017.

Neuberger Berman Long Short Multi-Manager Fund (NLMIX) will liquidate on or about April 20, 2017.

I really respect folks who choose to speak clearly, even in bad times: “The Royce Fund’s Board of Trustees approved a plan of liquidation for Royce International Small-Cap Fund (RISNX), to be effective on May 1, 2017. The Fund is being liquidated primarily because it has not attracted and maintained assets at a sufficient level for it to be viable.”

Schooner Hedged Alternative Income Fund (SHAAX) sailed off into the sunset on March 31, 2017. It never quite played the normal “market neutral” game:

USA Mutuals/Carbon Beach Deep Value Fund (DEEPX) liquidated at the close of business on March 30, 2017. The fund was launched four months ago and not marketed, so most of its assets were held by insiders. No word on why the firm decided to reverse course so quickly.

On or about May 10, 2017, Virtus Strategic Income Fund (VASBX) and Virtus Emerging Markets Debt Fund (VEDAX) will terminate, liquidate and evaporate.

Wilmington Strategic Allocation Aggressive Fund (WAAAX) and Wilmington Strategic Allocation Conservative Fund (WCAAX) will liquidate on April 27, 2017. Both were small, mild-mannered funds-of-funds with low expenses and good risk management; in a booming market, I suspect that potential investors were worrying more about booking short-term gains than managing long-term risks.

March 1, 2017

By David Snowball

Dear friends,

 It’s spring! Could you tell the difference where you are? March 1 is the beginning of “meteorological spring” and I’m indisputably in the middle of Augustana’s Spring Break. (It always looked better on MTV.) Spring training has begun for major leaguers while Augie’s baseball team is currently 5-1 on their swing through Florida. I’ve just placed my order for a flat of native prairie plants (the “Happy Hummer” collection plus a few extra Jack in the Pulpit, Chip’s favorites) and have been paging through the Burpee’s catalog.

The announcement of spring does seem a bit tardy. Our February saw more 70 degree days than days with snow. Coming into this month, the Quad Cities had seen three 70 degree February days ever. We had five 70 degree days in the last 10 days of February, including the warmest February day in the city’s history. Also the second warmest, the third warmest and the fourth warmest. Nationwide, we set 3,146 new record highs in February, against only 27 record lows. The instability wrought by a warming planet seems regrettably hard to ignore.

On the upside, there’s fascinating research that suggests that soil bacteria act as anti-depressants and anti-anxiety agents. The evidence has been building there for about a decade, but recent studies are pointing to brain chemical changes and enduring effects on mood and sociability.

Grab some humus (or hummus) and read on!

Scam alarm: hidden subscription price changes

Professional journalism is (a) invaluable, both at the local and national levels, especially at a time when more and more people have concluded that “fact” are whatever pop out of their mouths, (b) in deep financial distress and (c) entirely deserving of your financial support. We need good fact-gathering and checking which means that we need to be willing to pay for it. In my case, that’s reflected in my decision to subscribe to four newspapers (the Quad Cities Times and Wall Street Journal in print, the Financial Times and New York Times online), public broadcasting (National Public Radio and Iowa Public TV) and two important magazines (The Economist and Consumer Reports). If you think you’re entitled to “free” news, you’ll discover that you get exactly what you paid for.

That’s all a prelude to a warning about a scam that a number of newspapers have resorted to. In order to extract extra money from people who have already paid for, say, a year’s subscription, the newspapers are cutting weeks off the end of your subscription.

In my case, the Quad City Times sent a subscription rate increase notice that contained the cryptic warning, “this increase may accelerate the end of your current subscription period.” That struck me as impossible, since I paid for 52 weeks in advance. When I called the Times they confirmed their plan to cut six weeks off the end of my subscription; rather than ending in late September, my subscription would end in early August. I inquired about whether the phrase “breach of contract” was new to them; they offered 52 weeks for a set amount, I paid the amount, they owe me 52 weeks. Period. The operator offered to extend my subscription by four weeks in early September, “so you’re subscription started in September and now it will end in September so that works, right?” No, it doesn’t. I reminded her that I paid for 52 weeks, not 46 nor 50. Next she offered a $25 gift card. And again, no. The contract said 52 weeks, I expect 52 weeks. She’s promised to have a supervisor call. None has. The QCT is published by Lee Enterprises, which publishes about 100 newspapers in the Midwest and West.

When I mentioned this to Chip, she reported a similar problem with her mom’s local paper, the Times Herald Record (Middletown, NY). The paper is now collecting its monthly charge every three weeks. Why? Because they’ve designated some of their issues as “premium editions” and those cost you extra, which they accommodate by shortening your subscription period. The THR is part of the Local Media Group, which publishes two dozen newspapers.

If you subscribe to a local paper, we suggest you check the text of any renewal or rate increase notices very carefully. It appears that in their desperation, some publications are acting dishonorably toward their subscribers. As much as it will pain me to do so, if the Times cannot act with honor, I’ll ask for a refund of my remaining subscription.

Thanks, as ever, to the folks who help support the Observer

We mentioned, in January, our need for the 2% solution. Not counting their support via Amazon, about 1% of our readers provide financial support (some generously and many yearly since we launched) for the Observer. Amazon has now announced a “simplification” of their program which will, almost certainly, reduce its contribution to us. So, we’d like to raise more-active support to 2%, which would translate to around 500 people, including new and renewing members of MFO Premium, all told.

It’s a simple, painless, satisfying process: contributions to MFO are mostly tax-deductible (our attorney says I must repeat the phrase, “consult your tax adviser”) because we’re incorporated as a 501(3)c charity. We’re also an efficient 501(c)3 since our fund-raising costs are, well, zero. If you contribute $100 or more, Charles gives you immediate access to MFO Premium with all the attendant data and support.

By Charles’s best estimate, we added 21 new subscribers in January (on target!) and seven in February (off-target but that’s my fault; I was so embarrassed by our need to publish several days late that I didn’t raise the topic). I promised folks monthly updates on our progress so here ‘tis: we’re hoping to add 20 supporters (out of 25,000 readers) a month, so 40 by the end of February would have been nice. We’re a bit under 30.

MFO Premium portal

Thanks to David Moran, the good folks at Gardey Financial for their years of support, Gary Habbersett, Frank Nobles and Richard Weeks.  As always, we thank our regular PayPal subscribers: Deb, Greg, Jonathan and Brian. We really appreciate you.

And special regards to Mary Kappagoda whose email address we temporarily misplaced. Sorry ‘bout that, ma’am!

What we’re up to this month

At the same of each year, I walk folks through the shape of, logic behind, and changes in my portfolio. That’s not because it’s a singularly brilliant piece of investing; it isn’t and, frankly, it doesn’t have to be. Instead, it’s a way of understanding what sorts of factors you might consider in planning and monitoring your own investments.

We’re hopeful of an April follow-up to that piece. Our colleague Ed Studzinski has long grumbled (actually, I could stop the sentence right there and it would be correct and complete) that I own too many funds for the modest size of my portfolio. He’s quite likely correct, so I’ve invited our data wizard Charles Boccadoro to disassemble and reassemble it for me. Charles has walked us through the strategies for focusing and rationalizing a couple other portfolios, and he kindly accepted the challenge. We’ll hear his “Plan B” for me next month.

Ed, meanwhile, shares his reflections after the annual Graham and Dodd conference at Columbia University. He starts with an unsurprising observation (the number of great investment opportunities is invisibly small) and offers two actionable suggestions. The first is to consider your own “pivot to Asia.” The other is to figure out who’s reading the balance sheet for your investment manager; if the answer is “some guy down in accounting,” if might be time to run away.

Bob C., who enjoys gardening rather more than running, continues his conversation of retirement planning from the perspective of someone for whom it’s now immediately relevant: himself.

And, as always, we’ve been talking with managers, screening data and reading shareholder letters on your behalf. That’s led us to five specific investments that rather deserve attention:

  • Pin Oak Equity (POGSX) is a remarkably successful all-cap fund that does what people claim they want, it beats the indexes, the ETFs and the pants off its peers. Oddly, Morningstar left the fund behind. We didn’t.
  • Homestead Growth (HNASX), like Reese’s Peanut Butter Cups, combines two great tastes that taste great together. The fund is advised by a mission-oriented organization whose purpose was to help the members of America’s rural electric coops (!) and sub-advised by T. Rowe Price, a fund family with an absolutely sterling reputation which just placed one of its best young managers on the fund.
  • Polen International Growth (POIRX/POIIX) launched in December as a sort of international extension of a very disciplined, very successful Polen Growth (POLRX) fund. In our Launch Alert, we talk through both the discipline and the success.
  • Paul Espinosa, lead manager of Seafarer Overseas Value (SFVLX/SIVILX) talks with us about value investing in emerging markets and what makes SFVLX “a Seafarer Fund.”
  • T. Rowe Price is about to adopt and rechristen a very promising young high-yield bond fund. They’ll bring T. Rowe Price U.S. High Yield Fund (née Henderson High Yield Opportunities Fund HYOAX/HYOIX) to market at the end of May. We profile the change in a PreLaunch Alert.

Off we go!

Ed recently attended the annual Graham and Dodd conference at Columbia University. His reflections on those talks appear in his essay, “Half a league, half a league, half a league onward” this month.

Charles will be representing MFO at the Litman Gregory Alternative Strategies Fund Due Diligence Forum, March 16, in San Francisco. He’ll get a chance to hear from and chat with some of the folks who sub-advise the exceptionally find Litman Gregory Masters Alternative Strategies Fund (MASNX). He’ll share his findings with you in our April issue.

And with any luck at all, we’ll all convene in Chicago during the Morningstar Investment Conference, April 26-28. The lineup of keynote speakers – the founder of Wikipedia, the author of Flash Boys and The Big Short, and Larry Fink – seems to signal a different approach to the gathering. We’ll incorporate what we can into our May issue, with some pieces likely held until June.

In the meanwhile, I’ll be speaking in Sacramento (“American nativist rhetoric at the centenary of the Asian Exclusion Act”) on March 13 and with the AAII chapter (“How not to be stupid in a world that makes it easy”) in Albuquerque (March 15).

Seriously, we’d be pleased by the opportunity to meet and chat with any of our readers. If you’re going to be around any of those gatherings, let us know.

Wishing you a great start to the season,

Snowball’s potato portfolio

By David Snowball

I like gardening rather more than I like investing. I garden because it’s joyful, healthy and engaging. Most recently, I planted my first potato patch with four artisanal varieties of tubers, one each of russet, gold, red and blue. That meant adding a considerable quantity of organics and a bit of sand to a 4×4 south-facing patch that had been mostly weeds. You’re also supposed to “hill up” potatoes as they grow but I couldn’t, for the life of me, figure out quite what that meant in the context of an open patch of earth. Instead, I collected grass clippings (a safe practice since I don’t chem my lawn) and kept everything but the leaves buried.  I’m stunned and delighted to report that it actually worked. I dug around in October and there was, like, food in the ground!

That led to a spate of roasted root veggie meals, since I’d also planted onions, carrots and herbs. The results were delicious and edible even by the standards of my 16-year-old son.

The upcoming challenge is to figure out whether and, if so, where to plant potatoes this year. Any particular plot of ground should be used for potatoes only one year in three, otherwise you risk crop failure from soil-borne pathogens. Complicating the problem is that fact that tomatoes are in the same family as potatoes (who knew?), which means they can’t be one of the fill-in crops. This will take some planning.

Which is where my portfolio comes in. I count on my portfolio to make potatoes possible. It has two roles to play in my potato patch. First, it needs to give me the confidence to focus on the things I care about: family, friends, gardens, books, students, my community, and you folks. That confidence comes from the fact that I know that I have the resources to deal with…. well, stuff. Because stuff happens. And, sadly, most of our fellow citizens can’t have the confidence that they can deal with it.   About two-thirds of Americans report that they would struggle to quickly come up with $1,000 to address some small but imminent crisis. That leads to an awful lot of anxiety and anxiety feeds bad decision-making.

In 2016, “stuff” came in the form of my son’s request for a car. Will turned 16, has a wonderful girlfriend and the ambition to get a job while taking community college classes through his high school. A car seemed like a perfectly reasonable request. I hate the idea of more debt or car payments so, after finding a clean ’09 Kia Spectra, I sold down portions of three mutual funds and simply wrote a check for it. Two weeks later the transmission failed and a second check followed (we split the cost 50/50 with the dealer.)

Thanks go to Steve Romick, David Sherman and the team at T. Rowe Price for helping to make that possible.

In the longer-term, my portfolio is also part of the plan which will allow me to step back one day from full-time teaching and to explore other passions.

Remember, I said that my portfolio contributed in two ways to my potato patch. Its second contribution is made by not distracting me. The last thing I need is a portfolio that requires – or demands – constant attention. I don’t like trading and don’t want the temptation to trade; I will never buy an ETF and will never again buy an individual stock. I don’t want to try to outguess the new administration’s effects or respond to the next crisis. I want a portfolio that will benefit from benign neglect. That’s reflected in the fact that I liquidate a fund position about once every seven years.

Those two imperatives led me, long ago, to four steps:

  • Make a good plan, which meant calculating how much I need to made each year, then finding the combination of asset allocation and monthly contributions that
  • Execute the plan, which meant finding the funds that best fit within the plan and then funding them monthly.
  • Live modestly, which strikes me as both a personal and financial good. Frankly, I don’t judge myself based on my ability to impress someone with my stuff. I’ve owned one new car in my lifetime, and most of my used cars have made it easily past the quarter-million mile mark. My mortgage and taxes are far under $1,000/month which reflects the fact that my house is comfortably full when there are three of us in it; I rather aspire to the Danish virtue of hygge (maybe “hue-guh,” the translation of which is “an immediate sense of coziness”) than to the American virtue of “wow!”.
  • Enjoy life: check!

Here’s the plan.

My retirement account targets 70% growth / 30% income. By my best calculation, making 6% annually – through a combination of capital appreciation, income and monthly contributions – will achieve my goal.  Those numbers are not simply made up. Several retirement providers have retirement planning calculators. In my case, I used tools offered by T. Rowe Price, Fidelity and TIAA-CREF. Of those, Price, which does a Monte Carlo simulation, struck me as the most useful and reliable but all of them had me in about the same range.

Within the broad category of growth, I’m about two-thirds domestic and one-third international. Within domestic, I tilt toward “small” and “value.” Within international, I’m about two-thirds developed markets and one-third emerging markets. Within the broad category of income, about half of my investments are investment-grade domestic debt and about half are real estate income, higher-yield debt or international (mostly EM) bonds.

My non-retirement account starts with a simple asset allocation:

  • 50% growth / 50% income
  • Within growth, 50% domestic equities, 50% foreign
  • Within domestic, 50% smaller companies, 50% larger
  • Within foreign, 50% developed, 50% emerging
  • Within income, 50% conservative, 50% venturesome.

One thing to remember is that I do not have a large savings balance and never have. My non-retirement portfolio, then, is positioned to function as both my savings and emergency account. With a low equity exposure and experienced managers, it offers the opportunity for capital growth, limited downside and far higher returns than the 0.1% inflicted on savers by central bank policies. No, it’s not guaranteed. I know that. But the maximum projected downside for this allocation is small enough that, even in crisis, I’ll have the resources to meet any plausible challenge.

Here’s the execution of it.

My retirement portfolio is largely hostage to Augustana College. I helped lead a dramatic program redesign several years ago, which greatly simplified the system, limited investment options and created an employer match rather than a simple employer contribution. It worked really well to boost savings college-wide but it cost me access to Fidelity and T. Rowe Price. Those two pots of retirement money are now sort of locked away, I can’t add to them and, as a practical matter, I can’t move money between them. Our “live” options are mostly TIAA-CREF annuities and funds.

Fair enough.

My TIAA-CREF holdings are about 60% CREF Stock, 20% TIAA Real Estate and 20% Lifecycle Index 2025. Morningstar rates Stock as a below-average domestic large-cap annuity, which isn’t surprising since Stock is 30% international. Real Estate is unique because it actually owns real estate and participates in real estate partnerships, rather than passively investing in REITs or REOCs. It tanked in 2008 when the real estate bubble burst, but has otherwise generated a steady 8% annually. My personal rate of return last year was 7.3%. I don’t anticipate any changes here.

My largest of my 10 Fidelity holdings are Low-Priced Stock (FLPSX), Growth Discovery (FDSVX) and Global Balanced (FGBLX). I’ve never made money betting against Mr. Tillinghast at Low-Priced, Mr. Wiener just finished his 10th year at Growth Discovery and has top quartile returns over the period, Global Balanced is a good idea that’s been struggling for several years. I may well shuffle that allocation toward Total Emerging Markets (FTEMX), in which I already have a smaller holding.

On the T. Rowe side, my largest (of nine) holdings are Blue Chip Growth (TRBCX), Spectrum Income (RPSIX) and Mid-Cap Growth (RPMGX). Blue Chip had a sucky year (under 1%), Spectrum Income had a great one (over 8%) and Mid-Cap Growth rolled along (6.5%). My best short-term performers here were value-oriented funds, the worst had high international stakes. No surprises. The biggest question here, which Charles might answer next month, is whether to simplify all of this into a target-date 2025 fund. The key is that I can no longer add to the account so perhaps auto-pilot now makes sense. I’ll ponder.

My non-retirement portfolio is comprised of actively-managed funds whose managers have earned my trust. Since I do not trade my funds, I try to find vehicles where the managers have some flexibility to bob-and-weave on my behalf.

Here’s the current roster, ranked from my largest position to my smallest.

  My reflections
FPA Crescent

I started 2016 skeptical of Crescent’s future in my portfolio; the fund was large and the firm (though not the fund) was undergoing considerable management turnover. After I expressed that skepticism in print, I had the opportunity to talk a bit with Mr. Romick who came across as direct and thoughtful. He pointed out that the fund was far below its peak size and still finding opportunities.

Our follow-up piece concluded: “can Crescent consistently and honorably deliver on its promise to its investors; that is, to provide equity-like returns with less risk over reasonable time periods? Given that the management team is deeper, the investment process is unimpaired and its size is has become more modest, I think the answer is ‘yes.’ Even if it can’t be ‘the old Crescent,’ we can have some fair confidence that it’s going to be ‘the very good new Crescent.’” That faith was validated by Morningstar’s decision to nominate Mr. Romick as manager-of-the-year recognition.
Intrepid Endurance Endurance is a domestic equity fund which was profiled in 2016; it is one of the tiny handful of absolute value funds left in existence. Those funds follow a simple discipline: if there’s nothing worth buying, buy nothing! That aligns entirely with my beliefs and, over time, it has produced an outstanding risk-return profile. I added the fund in 2016 after publishing its profile and I’m entirely amazed by its 8% returns on a portfolio that’s 70% cash and short-term bonds.
Seafarer Overseas Gr and Income (Institutional) Andrew Foster is a remarkably talented, thoughtful and risk-conscious guy. He’s seen a lot over 15 years and is determined to do right by his investors. One example of that commitment is his willingness to waive the institutional minimum for retail investors who invest directly through Seafarer and who have an automatic investment plan in place. It’s among the best EM options out there, though now closed to new investors.
T. Rowe Price Spectrum Income This fund-of-income-oriented-funds continues to do precisely what I want: it generates very steady returns in the range of 5-6% with low expenses.
Artisan International Value One of my first mutual funds was Artisan International, which I traded for Artisan International Value as soon as it became available. It remains unequalled.
RiverPark Strategic Income RSIVX is the riskier of David Sherman’s two funds. He had two or three mis-steps in security analysis in 2015 which cost the fund a lot. I remain confident in Mr. Sherman’s ability to find interesting high-yield opportunities, with the goal of hitting the high single-digits.
RiverPark Short Term High Yield RPHYX continues to sport a one-star rating (because it has nothing in common with its Morningstar high-yield peer group) and the highest Sharpe ratio of any fund in existence. It returns about 3% a year with virtually non-existent volatility and is almost closed to new investors.
Matthews Asian Growth & Income MACSX is a legacy holding from the days that Andrew Foster managed it.
Matthews Asia Strategic Income If you believe that Asia will drive the global economy this century, as it likely will, then it makes sense to participate in the Asia debt markets – which are almost entirely absent from most bond funds. Ms. Kong strikes me as brilliant, experienced, disciplined and talented. It’s curious that so few have been drawn to the fund.
Grandeur Peak Global Micro Cap (Institutional) The short version is that I think Grandeur Peak does global small- and micro-cap investing better than anyone. These strike me as very distinctive funds with very good, tested management and the potential for substantially higher-than-market returns.
Grandeur Peak Global Reach

My portfolio normally changes at a glacial pace. By historic standards, 2016 saw a blizzard of change. In particular:

I eliminated three funds from my portfolio.

Artisan Small Cap Value was liquidated by Artisan and I moved the procedures to Intrepid.

Northern Global Tactical Asset Allocation and ASTON/River Road Long Short are both exemplary funds, and we’ll soon refresh our Northern profile. That said, both of the accounts were too small to contribute much to my portfolio, so I sold them without prejudice and added the procedures to Intrepid. That made Intrepid my second-largest holding behind Crescent.

I sold shares in three funds.

Crescent, T. Rowe Price Spectrum Income and RiverPark Short-Term High Yield contributed about equally to the purchase of my son’s car. (Thanks!) And to the subsequent rebuilt transmission. (Nuts. It happens.)

I added one new fund: Intrepid Endurance, now my second-largest position.

And I continued funding most, but not all, of them.

What does the future hold? 

Stuff, mostly, but I have no firm idea of what sort of stuff.

On the investment front, we know that stocks are at the high end of their historic valuations and that they’ve been on a speculative tear since the election. It’s not clear whether the classic sign of investor frenzy is present, nor is it clear than investor frenzy is any longer needed prior to a collapse.

Commentators are torn about the degree to which we should worry. Most sensible (in my reading) people say that it’s not time to increase your risk profile, though the market is singing a siren song. Some commentators try to justify the market’s valuations with silly arguments (“if fossil fuel companies weren’t so depressed, valuations market wide would look pretty normal?) and others make intriguing ones (one analyst suggests that investors are now reconciled to permanently low returns, which are manageable even at current valuations).

I simply don’t know and don’t intend to twist my life in knots fretting about the question. After all, the garden beckons.

Half a league, half a league, half a league onward —–

By Edward A. Studzinski

“Frost on grass: a fleeting form, that is and is not!”

  Zaishiki

This is the time of the month when I am usually wrestling with what to say and trying to avoid repeating myself, which can be pretty difficult after several years of columns. This month, I have something of a surfeit of material, so I will apologize in advance for the rambling.

A few weeks ago, I attended the annual Graham and Dodd Conference at Columbia University’s Graduate School of Business in New York. As always, the speakers were outstanding. Since the conference follows Chatham House rules (anonymity to the speakers, as well as their respective comments), I will limit myself to two generalized observations. One, for the second year running, none of the speakers were from the mutual fund asset-gathering complexes. Rather, they were from relatively small hedge fund or private equity firms, generally running limited partnerships. Two, for a conference run by value investors for value investors, and attended by same, no one seemed to be having an easy time coming up with great investment ideas given the valuation levels now to be found in most markets.

I also not too long ago had lunch with a well-known balanced fund manager, whose fund and firm had enjoyed a strong fourth quarter as a result of what we may perhaps label the Trump bull-market effect. He attributed the strong performance to the analysts’ work on keeping their models fresh and the portfolio managers’ focus on the predicted expected returns of securities on their “Buy” list. Notwithstanding their marketing, the portfolio management style is for the most part a “regression to the mean” approach. In the nature of, “what do we do now” he also pointed out that they now had, after the market’s run, a smaller number of issues to invest in than they had ever had in his memory. This of course always presents a dilemma – do you stop taking in moneys from your clients? Or, do you average in to existing positions? Or do you have the analysts go over their models with a fine tooth comb? Will optimism with regard to what President Trump might do to improve the economy justify higher expected returns and “Sell” targets on existing holdings? Indeed, he indicated that many investment committee meetings now consisted of analysts and portfolio managers challenging presenting analyst’s models. “Gee Heathcliff, do you really think Doofus Corporation can improve their operating margins in that division by another fifteen basis points?”

My associate’s ongoing challenge: there are fewer attractive investment options that ever in his memory.

Which brings me to the investor’s fundamental concern, what is undervalued now? An interesting presentation made its way over the transom recently. I found several of the charts particularly provocative. If you look at the annualized total returns for U.S. large cap stocks for the period running from 1926 – 2015, you end up with a mean of 12.1%, a standard deviation of 20.1%, and a Sharpe ratio of 0.60 (if I accept the numbers). But if you look at the S&P 500 from the end of 12/2011 to the end of 12/2016, you find an annualized return of 14.7%, an annualized standard deviation of 10.3%, and a Sharpe ratio of 1.43.

Who really thinks that we can continue to extrapolate that set of trends? Or, have we all gone down the rabbit hole gleefully to the world of “greater fool” investing?

A lot of this comes back to what I again say will be a discussion of the appropriateness of indexing. Indexing, while low cost (or at least it should be), favors the stocks of yesteryear that outperformed. Which begs the question of how one should think about things now? If you are trying to macro forecast what effect a Trumpian economic plan (and taxation) will have, you need to be right about what is going to be done, and how the market will react. And it does present certain temptations, for who would not want to catch the wave they know is coming.

So where should one look to invest? Technology and distribution have been the great disruptors. Amazon has pretty much destroyed the retail space (as well as the retail real estate space), and that probably does not turn around unless one of the state Attorneys General or the Justice Department decides to start enforcing the antitrust laws again. Cyclicals aren’t compelling; growth is temporary and often illusory. What one should be looking for are franchises with moats. The number of those has been shrinking. Look at the branded consumer goods space, where companies such as Nestle have had to ratchet down organic growth expectations. Even better, do what I do and go into a grocery store and pick so many of the brands that you used to see your parents swear by and look carefully at the label. What you will very often note is a phrase “distributed by” and the name of what used to be the company that invented the products and then made them. Now it is all financial engineering with outsourced manufacturing. So where do you still see opportunities and a valuation opportunity? Healthcare of course is one area where U.S. companies are still innovators.

What else looks interesting and undervalued? Well, even with a recent run, emerging markets. Today I heard one of the Bloomberg talking heads mentioning China’s “One Belt, One Road” policy, a phrase I have started to hear with increasing regularity. China is the world’s major trading partner, and at this point, is building new “silk roads” to bind other regions and countries closer to it. The Belt and the Road as they were, link China, Russia, Central Asia, the Baltic States in Europe through Central Asia and West Asia, and South Asia, running through the Persian Gulf, Indian Ocean, the South China Sea, as well as the South Pacific. China has founded the Asian Infrastructure Investment Bank, and approved fifty-seven countries to become founding members. At the end of 2016, the relative p/e ratios were 22.4X for the MSCI World ex Japan and 14.2X for the MSCI Emerging Markets.

The point is that China (and its economy) will not go away. Whether this will finally be the Asian century remains to be seen, but assuming it will not be is foolish. Many of those fifty-seven countries will align their strategic and economic interests with China. And since political and military power derives from economic power, that should be remembered. Concurrently, change is also taking place in Japan, although few are paying attention to it. Those who are are not quite sure what if anything to do about it. My suggestion for what may be actionable – pay attention to Charles’ Great Owl Rankings when looking at your portfolio allocations. In particular, pay attention to investments that stress dividend paying companies in China, frontier emerging markets as well as emerging markets, and on the margin, Japanese opportunities.

Final thoughts … I had a long conversation last week with a consultant friend of mine that I respect greatly. One of the questions I asked her was, given valuation levels, how does one protect against a general decline again like 2008? What are the advance warning signs? Consultants among other things spend their days interviewing investment managers and firms, making sure that there is a process or methodology in place which is more than someone looking at sheep entrails and making an investment decision for a portfolio. They also spend a lot of time making sure that the process as represented is being followed. There also needs to be a succession plan in place so that the process survives the departure of a star manager or analyst. And finally, given a relationship that builds up over time, they become experienced in reading “tells” to know when they are being lied to, for whatever reason.

We then drilled down into specific firms. I asked if she was convinced that one famous California firm had learned anything from its mistakes in 2007-2009. Her answer was that yes, they had learned that they needed to pay more attention to the fixed income side of the house. The problems that we saw in the great meltdown were telegraphed well ahead of time and increasingly apparent to fixed income analysts and portfolio managers. It was then that the light went off in my head and I understood something. Most of the equity analysts I knew (and know) paid little if any attention to the balance sheet of a corporation. They were almost totally focused on the income statement as well as the statement of cash flows.

Because leverage matters, the quality and role of the fixed income team matters. If they’re the red-headed stepchildren of the firm, you’re looking for trouble.

Surprise – leverage matters. And if you are a financial institution with a need for liquidity and funding, leverage matters. The balance sheet matters. So my other actionable suggestion for you if you are looking at balanced funds as well as equity funds, pay attention to what kind, if any, fixed income team they have in place, and what role they play in the investment decision making process. Too often, especially for equity-driven firms, spending money on fixed income research and personnel is not viewed as critical to the process. So when you are looking at making an investment in a particular firm and fund, pay attention to how serious they are or aren’t about the world of fixed income. And that applies even more if they do not have a fixed income product. They need to pay more than lip service to the corporate balance sheet.

Planning a Rewarding Retirement, Part 2: Can I Afford to Retire?

By Robert Cochran

This is the second in a series of articles. 

Over 36 years of providing a financial advice, I have heard a number of clients tell me, “You will know when it’s time to retire.” My original plan was to work until I turn 70, since I truly love what I do. Over the last couple of years, however, a number of friends, relatives, and colleagues have passed away rather suddenly, or they developed chronic health issues that will greatly limit their quality of life. This caused me to re-consider my retirement timeline, especially in light of what my wife and I would like to do over the next ten years. I will be 67 in September of this year. It’s time.

As an owner of a small business, it’s easy to think the company I helped create cannot function without me. The truth is that my younger colleagues are more than capable, certainly more tech savvy than I, and probably relate to newer, younger clients better than I. And, as the person responsible for regulatory compliance oversight of our company, I am finding this role to be more and more cumbersome. Multiple layers of federal and state regulations take a steadily increasing number of hours the last few years, despite retaining an outside law firm to assist us. It’s time. 

Now that I have flipped the mental switch for retirement, there are other areas to address. The first for most people, and this column’s focus, is cash flow. For me, the question was “Can I afford to retire?” Figuring what income you will have is the easy part. Calculating what you will spend is more difficult. I believe rules of thumb are flawed and should be tossed because there are so many variables that go into retirement cash flow. Here are a few items to consider:

  • What kind of part-time work will I do? After 30 years of retail banking, my wife loves her retirement:  two days a week at her “fun retirement job”, one-half day volunteering at a local food pantry, a leadership role in a women’s arts organization, and time to spend with her father who lives in a seniors’ community. It is clear that she and I will be staying active and involved. I have an interest in wine, so perhaps some kind of employment will come from that. We have a national display garden at our home, so that keeps me physically active and fulfilled much of the year. So…no clear decisions yet, but I am working on this. 
  • When should I start receiving Social Security benefits? Some people have no option and must begin receiving benefits as soon as they are able. Others have the option to delay. Remember that every year beyond full retirement age means an annual 8% increase in benefits to age 70.
  • When should I start withdrawals from my retirement plan account(s)? This item deserves a full discussion, and I will devote my next article to it. For some retirees, income from part-time jobs, Social Security, and other sources allows them to delay retirement account withdrawals until the mandatory age 70 ½ RMD (required minimum distribution). Others may not have this option. How is a retirement account converted to accommodate cash flow needs? Don’t forget taxes!
  • What will health care costs be in future years? It’s a given that this will continue to be a rising expense. A separate column in this series will focus on health insurance and expense considerations. My wife and I have long-term care policies, and we believe benefits from them will be enough to supplement our cash flow should one of us need that care level. 
  • If I have learned one thing over 30 years of helping clients, it’s that heading into retirement with no mortgage is a huge, positive impact on cash flow needs.
  • Some expenses will continue: utility bills, cable/satellite, phone, real estate taxes, insurance, and income taxes. Others are more flexible: food, charitable giving, and travel, just for starters. Be sure to make your own list. Quicken software is a great way to track expenses, since it can pull data from bank accounts and credit cards to give you a complete picture and may give you an Aha!
  • There may be reduced or even no spending on some things, such as clothing, eating out, retirement plan contributions, and daily commuting expenses.
  • How much spending is based on need as opposed to want? A rewarding retirement does not mean eliminating wants, but it might mean being more thoughtful about how we spend our money. 

Surely there are other important cash flow considerations, some of them perhaps unique to each of us. My experience with hundreds of clients is that being realistic with your expense projections is crucial. But at the same time, don’t think of your current earnings as cash flow. Use the final deposited to your bank account number that is net of all deductions. You may be surprised to find that you are living on less than you thought, unless you have large credit card balances that you carry forward from month to month, and that could be an OMG! moment.

Has your fund been left behind by Morningstar?

By David Snowball

If so, you’re not alone.

There are hundreds of funds which Morningstar once covered that they can no longer afford to follow.  Morningstar started as seven guys working out of Joe Mansueto’s apartment. They’re now a publicly-traded global corporation with 3900 employees and $130 billion in assets under management (or advisement). More importantly, they’re a corporation with $600 million in annual expenses.

If you’ve got $600 million in bills, you really need more than $600 million in income and you don’t get that by worrying about small funds that aren’t on most advisors’ radar, especially when the entire universe of active funds is contracting.  Morningstar explains the rules this way, “We’re committed to covering those investments that are most relevant to investors and that hold a significant portion of industry assets.” In this case, “relevant” is pretty much the same as “pretty large.”

As an empirical matter, if your fund has under a billion in assets, you have one chance in 30 of getting coverage. That is, excluding life-cycle or target-date funds, 195 of 5700 (3.4%) of funds under $1 billion have coverage.

In addition to the relatively few smaller funds with current coverage, there are hundreds of others which once received coverage but do not now. Sometimes that’s because they suck and deserve to wither in the shadows. But sometimes it’s a simple resource decision where very promising funds are consigned to the shadows. Morningstar again,  “Investments with suspended coverage or that have never been covered are often those that are both smaller in size and are less widely held.”

Out of curiosity, we constructed a reasonable surrogate for funds that Morningstar might find worth writing about: funds that have a rating of four or five stars for the past three, five and ten year periods, as well as an overall rating of four or five stars.

Excluding muni bond funds, which sometimes live in a category with only two competitors, there are 599 distinct funds that meet those criteria. Of those, fewer than 40% (237 of 599) have analyst coverage. As we searched the Morningstar database we found many more in that elite coverage that once had coverage but haven’t been covered in five or more years.

I wish I could be more precise, but sometime after we first mentioned this phenomenon last month, Morningstar tidied up their search results so that analyst reports older than 24 months no longer appear in the search list.  You might reasonably think that the funds with “–” might never have received coverage.

list of funds

In reality, on this list, Northern Stock Index and Pink Oak Equity were both the subject of multiple reports before being dropped in 2009.

Charles has posted a list of more than 70 excellent domestic and international equity funds that have lost coverage at our MFO Premium site. Premium members can find them by clicking on the pre-set screen, “Morningstar’s forgotten funds” in the multi-search screener. We’ll add allocation funds when time and workloads permit.

Each month we’ll profile one of the funds that once interested Morningstar and which, though small, still interests us. We started the effort last month with our profile of T. Rowe Price Global Multi-Sector Bond (originally named T. Rowe Price Strategic Income, PRSNX). The analyst in 2009 wondered if Mr. Huber could sustain his success. He could.

This month’s focus is Pin Oak Equity (POGSX), a $200 million fund that’s both highly disciplined and consistently excellent. The analyst in 2009 asked if he could manage risks well enough to maintain consistently high returns; the manager thinks so and the record is very strong.

In the months ahead we’ll try to bring one fund each issue back into the light. If you manage a fund that’s lost analyst coverage but think you since have a story to tell, let us know. We’ll do our best.

Homestead Growth (HNASX), March 2017

By David Snowball

Objective and strategy

The fund seeks long-term capital appreciation by investing, primarily, in domestic large cap growth stocks. The portfolio is diversified (typically 60-75 names) but not sprawling. Direct foreign investment is currently about 5.6%, which is modest but also above-average for its Morningstar peer group.

In general, the fund’s subadvisor T. Rowe Price targets:

  • companies with characteristics that support sustainable double-digit earnings growth and
  • high-quality earnings, strong free cash flow growth, shareholder-oriented management, and rational competitive environments

Their preference is for firms with a lucrative and defensible niche which allows them to sustain their earnings growth even when the economy slows. They’re valuation conscious, and look to buy stocks when there’s a disconnect between long-term prospects and short-term price.

Adviser

RE Advisers of Arlington, Virginia. REA is an extension of the National Rural Electric Cooperative Association, a non-profit that serves America’s rural electric coops. REA was originally chartered to provide investment services for electric coop employees, though their funds are open to all US investors. REA launched in 1990, oversees the eight Homestead mutual funds and has, as of December 31, 2016, $3.4 billion in assets under management.

The Homestead Growth Fund has been sub-advised since 2008 by T. Rowe Price Associates, a famously risk-conscious bunch with over $800 billion in assets.

Manager

Taymour R. Tamaddon. Mr. Tamaddon began phasing-in as manager of the strategy during his predecessor’s last six months at the helm and became the manager in January 2017. Mr. Tamaddon joined T. Rowe Price in 2004 as an equity analyst and became a portfolio manager in 2013. He managed T. Rowe Price Health Sciences (PRHSX) from February 2013-July 2016 when he began to transition to managing this strategy. He succeeded Mr. Sharps at the $13 billion T Rowe Price Institutional Large Cap Growth Fund (TRLGX), which is part of their $30 billion large cap growth equity strategy. Mr. Tamaddon holds a B.S. in applied physics cum laude from Cornell University and an M.B.A. from the Tuck School of Business at Dartmouth University.

Strategy capacity and closure

Exceedingly large and quite unlikely, respectively. The T. Rowe Price large cap growth strategy, of which Homestead is one manifestation, has $30 billion in assets. Steve Kaszynski, president and CEO of the Homestead funds, argues that this strategy invests in “very large, very liquid companies.” Our estimate is that the U.S. large cap universe is valued around $16 trillion. As a result, there’s no immediate capacity constraint imposed by the investable universe.

Active share

  1. “Active share” measures the degree to which a fund’s portfolio differs from the holdings of its benchmark portfolio. High active share indicates management which is providing a portfolio that is substantially different from, and independent of, the index. An active share of zero indicates perfect overlap with the index, 100 indicates perfect independence. HNASX has an active share of 69 which reflects a modest degree of independence from its benchmark Russell 1000 Growth Index. Because HNASX replicates T. Rowe Price’s institutional large cap growth strategy, which has $30 billion in assets, we compared it to the active share of the eight large cap growth funds with at least $25 billion in assets. The average active share for those funds was 68, so HNASX has an active share that is typical of very large, successful large cap growth strategies.

Management’s stake in the fund

None yet reported. I do not anticipate that Mr. Tamaddon, as an employee of T. Rowe Price, will invest in this fund. His predecessor as manager here, Robert Sharps, also did not invest in it though both likely had investments in the corresponding Price product. Similarly only one of the fund’s eight directors has invested in the fund.

Opening date

1/22/2001. For its first seven years, HNASX was managed in-house. On 12/01/2008, the fund became solely managed by T. Rowe Price.

Minimum investment

$500, reduced to $200 for an IRA.

Expense ratio

0.84% on assets of $296.5 million (expenses and assets as of July 2023).

Comments

Do you remember “Two great tastes that taste great together”? It was Reese’s celebration of what happens when milk chocolate and peanut butter intersect. It’s also a slogan they haven’t used in more than a quarter century; the fact that we so easily remember it is a testament to the staying power of a good line.

RE Advisers is on a mission. To understand it, you need to understand a little bit of the history behind it.

Rural electric cooperatives originated in the 1930s when less than 10% of America’s farms had electricity. The result was brutal. If you wanted light, you lit an oil lamp. If you wanted water, you pumped it and hauled it. If you wanted a bit of hot water, you heated it in a bucket over a wood-burning stove. If you wanted clean clothes, you dumped them in a basin with some soap then dragged them back and forth, by hand, over a corrugated metal board, wrung the excess water out by hand and hung them on a line to dry. If you wanted ironed clean clothing, you sat a flatiron on your stove until it was hot (or tossed live coals inside a box iron). It was a miserable existence. While Karl Marx did not decry “the idiocy of rural life” (it’s a widely-quoted mistranslation, the closer translation would have been “the isolation of rural life”), you could certainly be sympathetic to the judgment.

All of that changed with the Rural Electrification Act of 1936 which made federal loans to farmers’ co-ops (rural electric coops) to help them finance the delivery of electric. Within 2 years it helped bring electricity to some 1.5 million farms through 350 rural cooperatives in 45 of the 48 states. Almost half of all farms were wired by the onset of World War Two and virtually all of them by the 1950s.

Much of this work was coordinated by the National Rural Electric Cooperative Association, which still represents 900 rural electric coops. RE Advisors was launched as a tool to help provide “a greater measure of confidence in their financial future” for the folks working at those co-ops. The Homestead Funds, which have unusually low fees for small funds, were one of the tools they used to pursue that mission.  REA manages the funds themselves whenever they have confidence in their in-house abilities; otherwise they negotiate sub-advisory contracts with “best of class” outsiders such as T. Rowe Price. And they offer some of the industry’s lowest purchase requirements: $500 for a regular account and $200 for a tax-advantaged one.

T. Rowe Price is the exact right partner for them. To state the obvious, Price is one of the industry’s most-respected firms. Morningstar’s Katie Reichart described them this way:

T. Rowe Price is an industry leader, with a strong lineup of funds across asset classes. The firm’s disciplined, risk-conscious investment process has consistently produced successful results across its fund lineup, often with less volatility than peers … the firm is in a strong financial position and remains amply resourced. T. Rowe Price has acted in fundholders’ interests by closing funds with surging asset bases and avoiding trendy fund launches. Reasonable fees and a manager compensation plan focused on long-term performance are other pluses. (11/24/2015).

Price’s equity managers average 19 years of experience. As of December, 2016, 86% of T. Rowe Price’s funds had beaten their Lipper peer group average for the past decade. Fortune magazine annually celebrates them as one of “the world’s most admired companies,” most recently ranking them third in their industry. In February 2017, Price’s CEO was invited to join the board overseeing Harvard’s endowment.

Even when Price gets it wrong, they get it right. In 2016, they inadvertently voted “yes” on a proxy vote involving Dell when they’d meant to vote “no.” The mistake cost fund investors $200 million; Price immediately reached out to the boards of the funds involved and promised to make the shareholders whole. Shortly thereafter they wrote the nine-figure check. Barron’s described it as “a booster shot to maintain the firm’s stellar reputation” (6/11/2016).

To recap: Homestead Growth is supported by two exceedingly solid, exceedingly reputable teams. The most important elements for a fund’s long-term success are the clear alignment of the interests of the advisers with the interests of their shareholders and the presence of a talented, disciplined management team. Homestead Growth sports both.

None of which would mean much if the fund didn’t perform well. Happily, it does. Largely under Mr. Sharps’ management, the fund has outperformed its Lipper large-growth peer group for the past one-, three-, five- and ten-year periods, as well as over the course of the current market cycle that begin in October 2007 and the current up-market cycle that began in March 2009. The fund’s annual return over the full market cycle is 170 basis points over its peers. It’s recognized as a Lipper Leader for Total Return and Consistent Returns while Morningstar rates it as a five-star fund overall, as well as a five-star fund for the past five- and ten-year periods. By the Observer’s calculation, the fund has been modestly more volatile than its peers over the past decade but also substantially more rewarding. As a result, its risk-return calculus (reflected in the Sharpe, Sortino and Martin ratios) are all above its Lipper peer group’s.

The question is what to make of the new management that took the helm in January 2017. Four thoughts on that front:

  1. Mr. Tamaddon did exceedingly well at his last charge, T. Rowe Price Health Sciences (PRHSX). Morningstar analyst Robert Goldsborough reports that Mr. Tamaddon “led the fund to a 21.1% annualized gain during the three years ending Feb. 29, 2016. That bested 98% of peers in the healthcare Morningstar Category over that timeframe” (03/24/2016).
  2. Price and Morningstar have both expressed confidence in him. Price just handed him a $13 billion fund within a $30 billion strategy. He’s been with Price for 13 years and performed brilliantly when star manager Kris Jenner resigned from PRHSX. They’ve had time to observe, train and assess him, and he seems to have earned their confidence. Likewise, Morningstar upgraded their analyst rating on T. Rowe Price Institutional Large Cap Growth (TRLGX) from “neutral” to “bronze” in February 2017.
  3. Price handles manager changes well. New managers typically join as part of a long-planned transition and typically work alongside the departing manager for half a year or more. Each manager works with a management committee that includes peer managers and analysts to make sure that they have appropriate support and guidance. On whole, it has worked very well.
  4. Mr. Tamaddon has been doing his due diligence. Homestead’s CEO reports that Mr. Tamaddon visited with the management team for every firm in the portfolio during his six-month transition. Price knows that most top management people have a set “script” they speak from. The key, Mr. Tamaddon says, is “to get the CEO or CFO off script—it gives you a better nuance as to what’s going on.”

The single red-flag is Mr. Tamaddon’s staunch defense of Valeant Pharmaceuticals. He was the stock’s first champion at Price, helped make Price the stock’s third-largest owner and then rigidly defended it as the whole sordid mess came crashing down. As recently as March 2016, just before he left Health Sciences, he wrote that “We have been long-term believers in the company’s business strategy.” By May 2016, Price had liquidated 90% of its Valeant position. By August 2016, Price had filed suit against Valeant, alleging “Defendants’ fraud was so vast in execution and so devastating to investors, patients, physicians and insurers, that media and commentators have dubbed it the ‘Pharmaceutical Enron’.” Mr. Tamaddon was far from the only sophisticated investor taken in by Valeant and Price is not the only major investment firm suing Valeant. Beyond that, he made a whole series of other investments that richly rewarded his investors and his fund’s losses as Valeant imploded were smaller than his average peer’s. It seems unlikely that Price would allow him to repeat the mistake with a huge core portfolio, but it bears keeping in mind.

Bottom Line

Homestead Growth has been, and is apt to remain, an entirely admirable fund, especially for smaller or younger investors who don’t want to tie their fortunes to a passive product. It’s got a very talented management team, a lot of analyst support and an adviser whose mission is shareholder-friendly. The T. Rowe Price version of the fund requires a million dollar initial purchase; here investors can get access to the same skills for just $500. It really should be on more due-diligence lists.

Fund website

Homestead Growth

Pin Oak Equity (POGSX), March 2017

By David Snowball

Objective and strategy

Pin Oak is a concentrated, all-cap fund. The portfolio currently holds 35 securities with much more exposure to small- and mid-cap stocks than its peers Portfolio construction begins with macro-level assessments of the economy, proceeds to analyses of industries and sectors, and then ends by buying and holding the most attractive stocks in the most attractive sectors. Oak Associates has a long and adamant tradition in favor of buying-and-holding just a few best-of-class stocks, so turnover is generally below 20%. Half of the portfolio’s 35 current stocks have been there for between five and 15 years.

Adviser

Oak Associates, ltd. Founded in 1985 and headquartered in Akron, Ohio, Oak Associates has managed quality portfolios for individual investors, endowments, public pension plans and private clients. The firm has 14 employees and manages seven no-load funds and around a hundred separate accounts. Total assets under management are about $1.4 billion. Employees, friends and family of Oak Associates are among the largest shareholders in the Funds.

Manager

Mark Oelschlager. Mr. Oelschlager has managed this fund since 2005, initially as a co-manager with James Oelschlager. Since June 2006, he’s had sole responsibility for the fund. Mr. Oelschlager also manages or co-manages five other funds (three Oak Associates and two as a sub-advisor to Saratoga Capital Management) and is part of the team responsible for about $400 million dollars in separately-managed accounts.

Strategy capacity and closure

Given the size and liquidity of the firms in his investable universe, the manager foresees no practical constraints for many years.

Active share

89.6, calculated by K.J. Martijn Cremers of the University of Notre Dame, at activeshare.info. “Active share” measures the degree to which a fund’s portfolio differs from the holdings of its benchmark portfolio. High active share indicates management which is providing a portfolio that is substantially different from, and independent of, the index. An active share of zero indicates perfect overlap with the index, 100 indicates perfect independence. POGSX has an active share of 90 which reflects a very high degree of independence from its benchmark Russell 3000 Index.

Management’s stake in the fund

Insider ownership of the fund is exceedingly high. Mr. Oelschlager has over $1 million invested in the fund, and six of the fund’s seven trustees are invested in it. As of January 31, 2016, officers and trustees, in the aggregate, owned 9.4% of Pin Oak shares. The research is pretty clear that substantial manager and trustee ownership of a fund is associated with more prudent risk taking and modestly higher returns and is a visible symbol of the alignment of the managers’ interests with their investors’.

Opening date

August 3, 1992

Minimum investment

$2,000

Expense ratio

0.95% on assets of $123.8 million, as of 6/18/23.

Comments

Pin Oak has been left behind by Morningstar. It’s not clear that you should make the same decision.

Pin Oak is a fully-invested, reasonably-concentrated domestic equity fund. Many years ago, it would be fairly described as a very aggressive fund; in its decade under manager Mark Oelschlager, it’s better described as a reasonably aggressive fund. At a macro-level, Mr. Oelschlager assesses the state of the economy but, more importantly, the state of other investors’ minds. His goal is to position the fund defensively when he believes others are complacent and to reposition it aggressively when others panic. At the level of individual stocks, they seem to be pursuing a pretty conventional mix of strong businesses at reasonable prices. The less conventional part is their willingness to hold stocks for eight, 10 or 15 years; their conviction is that as other investors shorten their time horizons, the premium on a buy-and-hold portfolio rises.

Morningstar covered this fund extensively since 1999. In 2000, it was “very compelling.” Eighteen months later, its appeal was “limited” and, by 2006 it was “a bad idea.” Morningstar’s last comment on the fund came in late 2009. Courtney Goethals Dobrow wrote:

The fund has posted outsized losses in several periods, but has so far offset that on the upside. Its return is more than double the category average and index’s in a handful of periods. Long-term investors have been stung by the fund’s dreadful 10-year record, but most of the damage was done before Oelschlager’s watch.

This fund is still not for the faint of heart. It has been on a good run lately but needs to extend its winning streak to prove that it has permanently tempered some of its risks. (10/27/2009)

If the question is simply “can the fund continue to dominate its category,” the answer is “yes.” Here’s Morningstar’s annualized total return calculations against their large-blend benchmark group.

Total Return 1-Year 3-Year 5-Year 10-Year 15-Year
Pin Oak Equity 35.19 12.37 15.68 10.94 8.38
+/- Category (LB) 11.30 3.66 3.32 4.61 1.43
Rank in Category 2 1 1 1 7
POGSX and LB return as of 02/24/2017

That second row measures Pin Oak’s margin of victory over its peers; over the past decade, they’ve outperformed the average large-blend fund by 461 basis points annually.

The Observer relies on Lipper peer groups and data from Thomson Reuters for our analyses. Since Mr. Oelschlager has been the sole manager for between ten and eleven years (6/2006 – 3/2017) we’ll present the 10-year data on his work. Here the fund is compared to its Lipper peer group, the S&P 500 against which Morningstar benchmarks it and the broader Vanguard Total Stock Market Index Fund (VTSMX) which Lipper places in the same peer group as Pin Oak.

  Cumulative 10-year Return% Annual return POGSX ahead by
Pin Oak Equity 192.0% 11.3% –
Multi-cap core average 84.4 6.2 +5.1
Vanguard Total Stock Market Index 98.8 7.1 +4.2
S&P 500 Monthly Reinvested Index 96.4 7.0 +4.3
Data from February 2007 – January 30, 2017. All data and peer group calculations are from Thomson Reuters and reflect the fund’s Lipper Peer Group, multi-cap core.

Just for the fun of it, here are Lipper’s own ratings of the fund, where “5” is the highest possible rating.

  Total Return Consistent Return Preservation Tax Efficiency
3 Year 5 5 4 4
5 Year 5 5 4 4
10 Year 5 5 3 5
Overall 4 4 4 5
Data and ratings effective as of 1/31/2017

To answer Morningstar’s question: yes, he appears to have kept the winning streak alive over the seven-plus years since you asked.

The other half of the question is, has the manager learned to keep the fund’s risks bearable? There is no undebatable answer to that question because the answer depends on the degree to which each investor understands the strategy and is comfortable with the possibility of sharp, short-term reversals in the pursuit of long-term gain.

The fund’s 10-year risk-return data offers a partial answer. The maximum drawdown measures a fund’s greatest losses in a particular period while downside deviation represents the severity of “bad” (or downside) volatility. Bear market deviation looks at volatility in months where the stock market declines sharply.

Measures such as the Ulcer Index plus Sharpe, Sortino and Martin ratios were designed to calculate whether investors were being adequately rewarded for an investment’s risks. The Ulcer Index factors together the depth and duration of an investment’s worst declines; smaller Indexes are better. The three ratios measure whether excess risk is greater, or lesser, than excess reward. In these cases, higher values are better. Here is Pin Oak’s performance against the benchmarks we discussed above.

  Max Draw DS Dev BM Dev Recovery Ulcer Index Sharpe Ratio Sortino Ratio Martin Ratio
Pin Oak Equity -54.7 13.8 13.4 38 15.2 0.51 0.78 0.70
Multi-cap core average -51.4 11.9 11.3 55 17.2 0.34 0.48 0.36
Vanguard Total Stock Market Index -50.9 11.1 10.8 53 15.6 0.41 0.59 0.42
S&P 500 Monthly Reinvested Index -50.9 10.7 10.4 53 16.1 0.42 0.59 0.40

How might you read that? In volatile markets, Pin Oak does indeed drop more than its peers but it also rebounds faster and more vigorously. The “recovery” stat measures how long, in months, it took an index or fund to recover from its worst drawdown. For the decade shown above, Pin Oak recovered all of its losses in 38 months; its various benchmarks remained in the red for 15 -17 months longer. That explains why all of its risk-return ratios are strongly positive.

Likewise, manager Mark Oelschlager offers a partial answer. He suggests that, in the ‘90s, the fund was a more consistently aggressive, more pedal-to-the-metal vehicle. In a rational response to an evolving market, that’s now changed.

We manage the fund differently than we did a long time ago and with each cycle, we get a little bit better at limiting downside risk. I’m constantly thinking about how other people are behaving.   I get more nervous when things are going well and I’m more nervous now than I was a year ago… My instinct right now is to move incrementally in the direction of stability and defensiveness.

We recognize that we’re not infallible; we have to protect ourselves and protect our shareholders from the possibility that we might be wrong.

The Oak managers are contrarians of a sort. When they see evidence of rising market complacency, which is currently signaled, among other things, by a narrow dispersion of stock valuations (that is, the market is valuing companies similarly), they become defensive. “Moving in the direction of stability and defensiveness” translates to shifting some of the portfolio’s assets toward more defensive names. He allows that such repositioning is exceptionally tricky now because traditional defensive sectors remain richly valued. Contrarily, when they see evidence of rising panic and despair, they begin allocating toward their more aggressive names.

Bottom Line

“Beating the benchmark,” Mr. Oelschlager notes, “is not an easy endeavor, but there are managers who do so.” He and his colleagues at Oak Associates are among that small crowd. The question for investors is, are you actually prepared for a fund that beats the market? In a world bereft of wizards, wands and unicorns, higher long term gains will be accompanied by higher short-term volatility. If you’re the twitchy sort, who checks his portfolio daily and stays awake at night if the Dow drops 300 points, you shouldn’t be here. If you check your portfolio rarely and see today’s market declines as an excellent source of tomorrow’s market gains, you owe it to yourself to take Pin Oak seriously.

Fund website

Pin Oak Equity. They’re working with a design firm to refresh their site, so you’ll need to consider a bit of a work in progress.

[cr_2017]

Elevator Talk: Paul Espinosa, Seafarer Overseas Value (SFVLX/SIVLX)

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.

Paul Espinosa is the Lead Portfolio Manager of the Seafarer Overseas Value Fund and a co-manager of the Seafarer Overseas Growth and Income Fund (SFGIX/SIGIX). Paul joined Seafarer Capital Partners in 2014. Before that, he spent seven years in London as an equity analyst for Legg Mason and, before that, as a New York-based equity analyst for Citigroup and J.P. Morgan. Andrew Foster, Seafarer’s founder, co-manages the fund with Paul. Mr. Espinosa explains that Mr. Foster isn’t the “if Paul get hits by a bus” guy but, rather, someone with whom he explores both security and portfolio positioning ideas.

See the .pdf of the article reprint.

Value trumps growth. That is, over the long run, value investing yields far better returns than growth investing. Over a 90 year span from 1926-2016, value stocks returned 17% annually while growth stocks made 12.6% (Your best bet is…). Over a decade, that would be the difference between earning a 3:1 return (growth) versus a nearly 5:1 return (value). That same pattern has been documented across various decades, across various holding periods, across market capitalizations and across countries.

Why, exactly, is that? There seem to be two reasons: people hate buying value stocks and value investing is hard.

People hate buying value stocks. Value investing has never been as popular as growth investing. Growth investing pursues the “gee whiz” companies of tomorrow; value investors are often relegated to apparently-broken companies in boring niches. Odd as it seems, the simple fact that people love owning “story stocks” explains why value outperforms growth over the long-term; people find it ridiculously easy to talk themselves into overpaying for a company that makes “killer apps” but not one that dominates in bagged concrete. Sadly, paying too much at the outset always depresses your future returns. Value investors get away with paying too little because most investors aren’t interested in such stocks.

Nonetheless, the preference for growth investing has been particularly strong in the emerging markets. By Seafarer’s calculation, corroborated by Morningstar, only about 3-4% of EM stock funds are value-focused. In the U.S. market, it’s about 28%. No emerging markets ETF has “value” in its name; the only ETF ever to claim a value focus (iShares MSCI EM Value EVAL) liquidated in August 2015. A few dividend-oriented ETFs buy low-valuation stocks almost by accident, but mostly $1.4 trillion in EM value stocks get ignored.

Value investing is hard.  The simpleton’s approach to value investing is this: pick one or two or three quantitative measures (low p/e, low p/b, low p/ev), buy 10 stocks that share those characteristics and wait for the magic. As it turns out, that approach fails, which is why deep-value ETFs haven’t worked. Some firms that are priced as if they’re going out of business are actually going out of business. Some firms priced as if they have permanently brain-impaired leadership turn out to have, well … you get it. Tweedy, Browne’s classic review of the research (What has worked in investing, 2009 ed.) identifies at least six separate drivers at play, concluding that while no single factor is independently useful, “Each characteristic seems somewhat analogous to one piece of a mosaic. When several of the pieces are arranged together, the picture can be clearly seen: an undervalued stock.”

Value investing in emerging markets was especially hard. Value traps abounded, legal and regulatory protections were scant, and much of the value locked up in EM companies remained permanently locked away. Mr. Espinosa’s research and Mr. Foster’s experience suggest that emerging markets are evolving in ways that make it possible to now realize more of that traditionally inaccessible value. In On Value in the Emerging Markets, Paul identifies seven possible catalysts which might (or, in any isolated instance, might not) serve to unlock value. One factor, as an example, is that many EM companies are still owned by their founding families; as the founders pass the firm along to the next generation, more and more second-generation owners are hiring professional managers and are open to the possibility of selling, liquidating or divesting underperforming assets. Another is the maturation of local capital markets, which make it increasingly possible for local investors to borrow enough money to simply buy (and reform) an underachieving company.

We asked Mr. Espinosa to talk about what he’s up to, what makes this a Seafarer fund and what makes it not Andrew Foster’s Seafarer fund. Here are Mr. Espinosa’s 400 words on why you should add SFVLX to your due-diligence list:

I’m managing this fund for the reader you talked about, the guy who manages a diner in Montana and who’s thinking about his retirement and his family’s security. This is the core, my personal crusade, for why I want to lead this fund. Government and central bank policies penalize thrift; they’re trying to encourage price inflation through low interest rates but this means purchasing power is declining and many of us are having trouble retiring with dignity. What I’m truly truly trying to do here is to increase the purchasing power of a saver.

The vogue today is for relative return investing. It asks “how did you do relative to a benchmark,” not “has your manager been helping you meet your goals?” I think of myself as a sort of absolute return investor; we’re benchmark-agnostic, our aim is to produce a minimum rate of return that allows our investors to increase their purchasing power.

Andrew and I follow the same process in evaluating companies. What we do within that process is different. I have a much greater focus on capital appreciation driven by changes within my firms, and those are often separate drivers. A growth fund, such as Andrew’s, will mostly follow the trajectory of emerging markets economic growth, buoyed by income and dividends. The Value fund is more likely to grow in a step function; one of our stocks might do nothing for quite a while, then pop when a catalyst takes hold even though its home market isn’t particularly growing. That’s when we might sell and look to redeploy capital in another firm that hasn’t yet appreciated.

The need to find that places where change is just taking hold may lead us into markets where Growth & Income wouldn’t go, including frontier markets, and it might take risks that Growth & Income is not quite ready for, such as leverage risk.

Like Andrew, I’m a bottom-up investor. I’ve worked at large institutional firms where the organization is very structured, very rigid. At Seafarer, the portfolio managers do stock analysis, analysts involved in portfolio construction. I work with the growth investments and he works with the value investments, which helps mentally and allows us to avoid being one-trick ponies.  And we’re patient. Demand for the Value product might not take off for ten years, but that’s okay. We’ll do our work, hone our skills, build our record and be there when investors come looking.

A very Seafarer thing.

Seafarer Overseas Value has a $2500 minimum initial investment which is reduced to $1500 for accounts established with an automatic investing plan or $1000 for IRAs and other types of tax-advantaged accounts. Expenses are capped at 1.15% through August 2017. The institutional share class has a $25,000 minimum and expenses capped at 1.05%. The fund has assets of $6.7 million (1/30/17). Seafarer will waive the institutional share class minimum for investors who (1) establish an account with an automatic investing plan, (2) invest directly through Seafarer rather than through a platform, and (3) testify in good faith that they hope to continue investing until they reach the fund’s normal institutional minimum. Here’s the fund’s homepage. Mr. Espinosa has laid out the case for EM value investing in a 2016 white paper, “On Value in the Emerging Markets.” It’s a bit dense for non-technical readers but, with a bit of time, it’s also entirely manageable.

Launch Alert: Polen International Growth Fund (POIRX/POIIX)

By David Snowball

On December 30, 2016, Polen Capital Management launched Polen International Growth Fund (POIIX). The fund is an international extension of the high-conviction strategy behind Polen Growth (POLRX/POLIX) and Polen Global Growth (PGIRX/PGIIX). Polen has over $9 billion in assets under management and is located in Boca Raton, Florida, “far away from the short-term pressures of Wall Street.”

The fund will typically invest in 25 to 35 large cap international stocks, including those domiciled in both developed and developing markets. It might, from time to time, dabble in a few mid-cap names. The manager will focus on firms that have a sustainable competitive advantage which can deliver sustainable, above-average earnings growth in industries where there are high barriers to entry. Their research attempts to identity firms which:

  • consistent and sustainable high return on capital
  • strong earnings growth and free cash flow generation,
  • strong balance sheets and
  • competent and shareholder-oriented management teams.

They have a five-year investment horizon, which has translated to single-digit portfolio turnover rates at their other two funds.

There are a couple reasons that investors seeking international growth exposure might want to take this new fund seriously.

Polen Growth, whose discipline it follows, has been remarkably successful. Morningstar rates the fund as four-star overall and five-star over the past three years; Morningstar’s analysts have awarded it a Bronze designation and have named it a Morningstar Prospect.

Its performance numbers reflect a fund that knows how to lose at the right time. In 2012 it trailed 90% of its peers, but offered its investors double-digit (11%) returns. In 2013 it trailed 90% of them, and offered its investors double-digit (22%) returns. In 2014 it beat 97% of them, and offered its investors double-digit (16%) returns. In 2015 it beat 99% of them, and offered its investors double-digit (14%) returns. In 2016 it made less than a percent while its peers made 3%, which was “meh” for both. In general, it has offered strong, steady returns.

Polen Global Growth, which we hope to profile in the month’s ahead, is off to a similarly impressive start.

Polen thinks interesting thoughts. Their “10,000 portfolios” paper, which we link to below, is way cool. It started with an investor’s question, “how do you know you’ve put together the best portfolio you could?” Their CIO was intrigued and commissioned FactSet to run an experiment on their behalf. Polen has been running a growth portfolio since 1989; the outline is always the same: about 20 large cap US stocks, more or less equally weighted, held for about five years. They have FactSet construct 10,000 portfolios of randomly-selected US large cap stocks, each of which turned over once every five years.

Here’s a picture of the results:

chart of polen returns vs volatility

The further north-west (high returns, low vol) you go, the better. Very few potential portfolios were further north-west then Polen, while the S&P500 was distinctly south and east. That led to a nice discussion, under “What We Learned,” about the effects of concentration, quality and conviction. Their reflections then dovetailed nicely with the most recent research on active share, which concludes that concentration and conviction far trumps expenses as a predictor of investment success.

The investor shares of the fund carry 1.35% expense ratio, after minimal waivers, with a $3,000 minimum initial purchase. The initial minimum for IRAs is $2,000. The institutional shares are 1.10% and $100,000, respectively.

The fund’s website is Polen Capital. You might, in particular, spend a moment with their white paper “Could We Have Done Better? The 10,000 Portfolios Project” (2016), which struck me as both well-written and unusually thoughtful.

Prelaunch Alert: T. Rowe Price U.S. High Yield Fund

By David Snowball

On February 27, 2017, T. Rowe Price announced their plans to acquire and rebrand a very solid young high-yield bond fund. The rechristened offering will be available by the end of May, 2017.

The adopted fund is Henderson High Yield Opportunities Fund (HYOAX/HYOIX). The Henderson fund has just $61 million in assets and a four-year track record. It’s managed by Kevin Loome, who spent 11 years as a high-yield analyst at Price before leaving to become Head of High Yield Investment at Delaware Investments (which has $167 billion in assets under management) then Head of U.S. Credit at Henderson Global Investors NA, the U.S. subsidiary of Henderson Global (with $125 billion in AUM).

T. Rowe Price already has an exceptionally strong high-yield team headed by Mark Vaselkiv. Mr. Vasilkiv has been running the flagship Price High Yield Fund (PRHYX) since 1996. Over those 20 years, PRHYX has beaten its average peer by 90 basis points annually, which compounds to a huge advantage, and has done so with lower volatility. The $10 billion fund is part of the larger T. Rowe Price Global High Yield strategy, which had $29.4 billion in assets as of December 31, 2016. and led by industry veteran Mark Vaselkiv, has been closed to new investors since 2012.

The new fund will be “substantially similar” to the current Henderson fund and will “complement our strong, existing high yield strategy.” When I asked, the folks from T. Rowe agreed that, in this usage, “complementing” the T. Rowe fund might be translated as “offers potential investors unable to access Mark Vaselkiv’s fund a very fine, but mostly comparable option.” In order to maintain their independence, Mr. Loome and his team will remain in Philadelphia instead of joining the Price folks in Baltimore.

A side-by-side comparison of the two funds is reassuring. By our calculation, the three-year correlation between the two is exceedingly high: 97. In terms of performance, Mr. Loome’s fund has actually outperformed Mr. Vaselkiv’s.

  Annual return Maximum drawdown Standard deviation Sharpe ratio Beats peer group by…
T. Rowe Price High Yield Fund 4.4 -8.9 5.4 0.78 +0.8
Henderson High Yield Opportunities Fund, “A “ shares 5.7 -7.2 5.3 1.06 +2.1
Lipper high yield peer group 3.6 -9.1 5.5 0.67 –

I would certainly not concluded on the basis of three years that Mr. Loome’s fund is superior to Mr. Vaselkiv’s, but there seems abundant evidence that it’s going to be a very strong addition to the T. Rowe lineup.

Expenses for the fund’s Investor share class will be 0.79% which is substantially below their current level, far below the HY category average and nearly in-line with PRHYX. The minimum initial investment will be $2500 for regular accounts and $1000 for various tax-advantaged accounts.

Manager changes, February 2017

By Chip

It’s a quiet month on the manager change front. While nominally there’s a greater deal of management turnover in a given year, practically most of it is insignificant because the 27th member of a team leaves and is replaced by an equally adept newbie. This is one of those months. We’ve identified 35 manager changes this month, few involving the installation of an entire new team and only two or three affecting “household names.”

Because bond fund managers, traditionally, had made relatively modest impacts of their funds’ absolute returns, Manager Changes typically highlights changes in equity and hybrid funds.

Ticker Fund Out with the old In with the new Dt
ATHAX American Century  Heritage As of March 1, 2017, David Hollond will no longer be listed as a manager for the fund. Nalin Yogasundram will join Greg Walsh in managing the fund. 2/17
ACAQX American Century All Cap Growth As of March 1, 2017, David Hollond will no longer be listed as a manager for the fund. Michael Orndorff and Marcus Scott will continue to manage the fund. 2/17
BBHLX BBH International Equity Fund Nigel Bliss and Andrew Porter are no longer listed as portfolio managers for the fund. Jonathan Allen, Chad Clark, Loren Lewallen, Matthew Pickering and Brian Vollmer will now manage the fund. 2/17
BACAX BlackRock All-Cap Energy & Resources Portfolio Poppy Allonby is no longer listed as a portfolio manager for the fund. Alastair Bishop will continue to manage the fund. 2/17
SSGRX BlackRock Energy & Resources Portfolio Poppy Allonby is no longer listed as a portfolio manager for the fund. Alastair Bishop will continue to manage the fund. 2/17
CADVX Calamos Dividend Growth Fund David Kalis will no longer serve as a portfolio manager for the fund. John Calamos, John Hillenbrand and Jon Vacko will continue to manage the fund. 2/17
CAGEX Calamos Global Equity Fund David Kalis will no longer serve as a portfolio manager for the fund. John Calamos, John Hillenbrand, Nick Niziolek, Eli Pars, Jon Vacko and Dennis Cogan will continue to manage the fund. 2/17
CVLOX Calamos Global Growth and Income David Kalis will no longer serve as a portfolio manager for the fund. John Calamos, R. Matthew Freund, John Hillenbrand, Nick Niziolek, Eli Pars, Jon Vacko, Dennis Cogan and Joe Wysocki will continue to manage the fund. 2/17
CVTRX Calamos Growth and Income Fund David Kalis will no longer serve as a portfolio manager for the fund. John Calamos, R. Matthew Freund, John Hillenbrand, Eli Pars, Jon Vacko and Joe Wysocki will continue to manage the fund. 2/17
CVGRX Calamos Growth Fund Michael Roesler and David Kalis are no longer listed as portfolio managers for the fund. Michael Grant joins John Hillenbrand, Jon Vacko and John Calamos in managing the fund. 2/17
CMSFX Cavalier Multi Strategist Fund Parasol Investment Management will no longer subadvise the fund. Cavalier Investment LLC will directly manage the portfolio sleeve previously allocated to Parasol. The rest of the team remains. 2/17
FJACX Fidelity Series Small Cap Discovery Fund No one, yet, but Charles Myers will no longer serve as a portfolio manager, effective December 31, 2017 Derek Janssen will continue to manage the fund. 2/17
FCARX Fiera Capital Diversified Alternatives Fund Charles Korchinski is no longer listed as a portfolio manager for the fund. Geoffrey Doyle, Mark Jurish, Rasheed Sabar, Kazuhiro Shimbo, Rajiv Sobti and Alexandre Voitenok continue to manage the fund 2/17
FCIVX Frontier MFG Core Infrastructure Fund Dennis Eagar stepped down from his portfolio management responsibilities. Ben McVicar joins Gerald Stack as a portfolio manager of the fund. 2/17
HSCSX Homestead Small Company Stock Fund Gregory Halter is no longer listed as a portfolio manager for the fund. Mark Ashton and Prabha Carpenter will continue to manage the fund. 2/17
HOVLX Homestead Value Fund Gregory Halter is no longer listed as a portfolio manager for the fund. Mark Ashton and Prabha Carpenter will continue to manage the fund. 2/17
GTNDX Invesco Global Low Volatility Equity Yield Fund Andrew Waisburd will no longer serve as a portfolio manager for the fund. Donna Chapman Wilson, Michael Abata, Charles Ko,  Nils Huter, Jenz Langewand and Uwe Draeger continue to manage the fund. 2/17
JDEAX JPMorgan Disciplined Equity Fund Aryeh Glatter is no longer listed as a portfolio manager for the fund. Raffaele Zingone, Steven Lee and Tim Snyder will continue to manage the fund. 2/17
LCAOX Lazard Capital Allocator Opportunistic Strategies Portfolio David Cleary and Christopher Komosa are no longer listed as portfolio managers for the fund. Jai Jacob, Stephen Marra, Tom McManus and Kim Tilley will now manage the fund. 2/17
GOBAX Legg Mason BW Global Opportunities Bond Fund No one, but . . . Anujeet Sareen joins David Hoffman, Stephen Smith and John McIntyre on the management team. 2/17
MMYAX MassMutual Select Small Company Value Fund Andrew Waisburd will no longer serve as a portfolio manager for the fund. Donna Chapman Wilson and Michael Abata join Stephen Gutch, J. David Wagner, Charles Ko, Glen Murphy and Martin Jarzebowski on the management team. 2/17
MSIBX Morgan Stanley Institutional Fund (MSIF) Active International Allocation Portfolio No one yet, but effective June 30, 2017, Ann Thivierge will depart as a portfolio manager. Ben Rozin, Munib Madni and Jitania Kandhari join the management team. 2/17
NWHVX Nationwide Geneva Mid Cap Growth Fund Michelle Picard will no longer serve as a portfolio manager for the fund. Amy Croen, William A. Priebe and William Scott Priebe will continue to manage the fund. 2/17
NWHZX Nationwide Geneva Small Cap Growth Fund Michelle Picard will no longer serve as a portfolio manager for the fund. Amy Croen, William A. Priebe and William Scott Priebe will continue to manage the fund. 2/17
WAYEX Navian Waycross Long/Short Equity Fund No one, but . . . Benjamin Thomas is joined by John Ferreby in managing the fund. 2/17
NGDAX Neuberger Berman Guardian Fund No one, but . . . Marc Regenbaum joins Charles Kantor (“a regular commentator on CNBC” we’re assured) in managing the fund. 2/17
NTHFX Northeast Investors Growth Fund William Oates, Jr. is now deceased, and thus will no longer serve as a portfolio manager of the fund. John Francini and Nancy Milligan will continue to manage the fund. 2/17
OPPAX Oppenheimer Global Fund No one, but . . . Rajeev Bhaman is joined by John Delano in managing the fund. 2/17
OSTIX Osterweis Strategic Income Fund No one yet, but effective May 15, 2017, Simon Lee will be retiring from Osterweis. Craig Manchuck joins Bradley Kane and Carl Kaufman on the management team. 2/17
OSTVX Osterweis Strategic Investment Fund No one yet, but effective May 15, 2017, Simon Lee will be retiring from Osterweis. Craig Manchuck joins Bradley Kane and Carl Kaufman on the management team. 2/17
PDVAX PIMCO Diversified Income Fund No one, but . . . Sonali Pier joins Eve Tournier, Daniel Ivascyn and Alfred Murata on the management team. 2/17
REQAX Russell U.S. Defensive Equity Fund Richard Johnson and David Hintz are no longer listed as portfolio managers for the fund. James Barber and Megan Roach will now manage the fund. 2/17
SILCX State Street Institutional U.S. Large-Cap Core Equity Fund Paul Reinhardt and Stephen Gelhaus are no longer listed as portfolio managers for the fund. David Carlson and Chris Sierakowski are now running the fund. 2/17
VWINX Vanguard Wellesley Income Fund No one, but . . . Michael Stack and Loren Moran join John Keogh and W. Michael Reckmeyer in managing the fund. 2/17