Monthly Archives: November 2018

November 1, 2018

By David Snowball

Dear friends,

It’s fall.

By the oddity of scheduling, Augustana’s fall trimester ended just as it felt that fall had descended. My students decamped on November 1, numbed from long nights of study and challenging finals, anxious to get home for “some real food.” They leave behind a campus preparing itself, at long last, for the sere and snowy season to come.

Several of my Vietnamese students, for whom Chip and I hosted dinner recently, are anxiously awaiting their first real snow. They’ve seen it, they’ve read about it and they’ve clearly thought about it but, other than an impromptu experiment involving sticking their hands in a chest freezer, they’ve got no experience with it.

My one Pakistani student, who owns just one jacket and has been wearing it to class daily since the beginning of September, is considerably less optimistic about what the winter holds.

And I, mostly, tell them what I tell you: yep, it’s going to be different. You may not like some parts of it, but that’s not a reason to lose sleep now or to panic in December. Plan a bit, talk things through a bit, have faith in yourself, don’t be afraid to reach out. It will be a challenge, but we’ll do just fine if we work through it together.

Whereupon we settled into warm, freshly baked apples and a half hour watching It’s the Great Pumpkin, Charlie Brown!

Thanks, especially in this month of Thanksgiving, to our faithful readers and supporters.

I argued, last month, that one of the easiest ways to support the Observer was to set up a small recurring monthly payment through PayPal. That would free you both from guilt (you should be at least a little guilty anytime you premise your day on getting something but giving nothing) and the need to get your act together to commit the $100 or $200 you’d been planning to commit pretty much every month.

That’s the model that two long-time supporters of the Observer have followed for years and, to Deb and Greg, thanks for all you do and the model you set. And thanks, now, to three new monthly contributors who signed-on in October: David (great name!), Brian, and George. Thanks, too, to the folks who’ve generously made a gift in to help us keep the lights on and the coffee brewing: Michael from Illinois and Michael from Las Vegas (I’m pretty sure those are two separate people) and Rae, Bruce, and Giovanni (where I’m nearly 100% that those are three separate people!).

Thanks, finally, to all the folks who read and respond to us each month and who’ve continued to share concerned words about Chip’s health. Things are coming well; she has one more CAT scan at the end of November to confirm her progress. Thanks for asking. You make it worthwhile to be pecking away now at 2:15 a.m.

As ever,

The Market at Ebb Tide

By Edward A. Studzinski

“In three words I can tell you everything I have learned about life. It goes on.”

Robert Frost

Golden Stacks Again

One of the more entertaining stories of September, reflecting just how far we have fallen, was to be found in the Business Section of the New York Times on September 12, 2018. A senior investment banker and partner at Goldman Sachs made a call to Goldman’s whistle-blower hotline in 2014 to complain about a range of unethical practices. The banker expected the outside law firm monitoring the hotline to investigate the allegations and share the results with the independent directors on Goldman’s board. Instead, Goldman’s general counsel took on the investigation and other senior executives at the firm, including the incoming CEO, urged the complaining banker to move past his complaints, which internally were considered “overblown.” The nature of these concerns dealt with a culture where senior bankers allegedly sought confidential client information from the complaining banker, which was intended to be shared with other Goldman customers or in other ways used to benefit the firm. Perhaps most intriguing, even though the allegations reflected a culture and ethics that supposedly had been purged and reformed after 2008, the complaining banker was apparently told by Goldman’s new CEO, that his concerns simply reflected “the way Wall Street worked.”

I wish I could say I was shocked by all of this, but I am not. My sense is that where people make a whistle-blower complaint, they often end up being the ones penalized. And if the complaint is anonymous, I can say with almost absolute certainty that more resources will be dedicated to trying to unmask the anonymous complainant than will be spent on investigating the allegations. And often, in perverse fashion those responsible for the behavior complained about are handsomely rewarded for their “creativity.” Talk about a chilling effect upon those who remain, especially when one now throws the potential for #hashtag me too complaints into the mix.

Paul Volcker, in a recent interview in the New York Times on October 23, 2018, indicated that he thought the problem was that we have developed a plutocracy, consisting of an enormous number of very rich people who think they got that way by being smart and constructive. Volcker’s issue is that he thinks the educational system has been perverted by money (somewhat like Congress has become perverted by the permanent campaign, where dialing for dollars is ongoing). Rather than the schools teaching about governing, the elite universities focus on policy. Volcker fumes that “when you go to a school of public policy, you’re not learning how to run the goddamn government. You’re learning how to debate political issues.” And the idea, which Volcker supports, that we need stronger regulators in anticipation of the next crisis (and make no mistake, there will be a next crisis) is not high on anyone’s list of most needed issues to be addressed by Congress.

Who Did the Work?

When I joined Harris Associates in 1995, the domestic research department prided itself on sourcing its own investment ideas. The Assistant Director of Research, shortly after my arrival, congratulated me because the institutional salespeople in Chicago and New York were complaining to him that I was regularly hanging up on them. Fast forward ten years or so, and the internal dynamics began to change as a younger generation, some coming out of the “Sell Side” of the Street started to look at Wall Street research in a slightly different fashion. To take a phrase regularly in use by the Russian intelligence services, the institutional sales people and institutional research analysts were “useful idiots.” And I will distinguish between the investment analysts who supported the institutional research being pedaled for commission dollars as opposed to the investment banking analysts, who were and are an entirely different kettle of fish. Getting access to those people was next to impossible, but not impossible. Fast forward again to the present day.

My former partner Clyde McGregor in his Q3 letter spoke of hiring new investment analysts regularly who are value oriented in their approach, but looked at or defined value differently, expanding the way the firm thought about things. I wonder to what extent that approach is colored by the existence of clubs or organizations like “Scorched Earth.” A friend of mine, in his own investment firm in Chicago, indicated that Scorched Earth, somewhat akin to the hedge fund lunches and dinners often held in New York, is a group that gets together a few times a year, to present and discuss investment ideas. The group is composed of investment professionals, primarily analysts, at Chicago investment management firms. Apparently one of the research partners at a Chicago firm, in the September time frame, presented Facebook as an idea. One assumes that this was after his firm either rejected the idea, or, had already taken their position in the security. It still begs the question as to what the due diligence is after an idea is sourced out of one of those presentations.

Different people in the investment world have reacted differently to this subject. Some think an idea, if good, can be sourced from anywhere, as long as you do the ultimate due diligence work. Myself, I think there is a danger of group think, which is a strong possibility when you have people investing in the same large cap universe. And it can be a problem, even when it is not. Around the dot com craze, many value managers had similar portfolios, so even if only one was being hit by redemptions, everyone was hurt. At this point, I am in the Buffett camp. Good ideas are hard to come by. We only need a few of them to have a good year. So why share them when illiquidity makes it so difficult to establish a meaningful position.

Future Question

Should mutual funds be owned in anything other than tax-free accounts? We will know at the end of this year whether redemptions have triggered portfolio manager selling to raise cash to meet those redemptions. Will there be large capital gains distributions passed on to individual shareholders in taxable accounts? Stay tuned. More and more, I am of a mind that almost all fund investments should be in tax-exempt accounts.

Who won October?

By David Snowball

October was an exciting month for investors. By various reckonings, it was the worst month since September, 2011. US stocks declined by $2 trillion in value, with Amazon alone dropping $250 billion. It was so bad that Jeff Bezos reportedly had to postpone plans to buy several small countries. Global markets, equity and fixed-income together, shrank by $5 trillion. Unless you ask The Guardian, which tallies the global equity loss at $8 trillion. That seems unnecessarily depressing (and unattributed), so I resolved not to ask The Guardian.

I felt badly that Mr. Market had somehow lost so much and checked dutifully under the couch cushions just in case it had dropped out of his pockets when he was over for dinner and Parcheesi Thursday night. No such luck.

He seemed quite depressed but that seems part of his nature. The other part is his natural mania which bubbled up a bit on Halloween. That might explain how he managed to lose a different $5 trillion back in February of this year, but promptly forgot all about it.

Headline writers have dutifully assured us that it’s “a bloodbath” that reaches into the bond, currency, emerging equity and cryptocurrency markets.

Ummm … it wasn’t. Let’s agree, on principle, to reserve horrified language for actual horrific events. Tossing terms like “massacre” and “bloodbath” into the air when we merely mean “noticeable decline in the tallies on my portfolio spreadsheet” cheapens the term and impoverishes us when it comes time to describe, decry and remedy actual acts of horror.

My own portfolio dropped about 4% during the month, with RiverPark Short Term High Yield (RPHIX) gaining a few cents and funds with global equity exposure off 5.5-8.5%. Several of those same funds returned over 30% last year, so I’m reluctant to whine.

Excluding bear market funds and trading funds that are structurally short (for example, an inverse S&P 500 fund), about 300 funds made money in October out of a universe of over 7000. A few dozen more broke even.

So, what won in October?

Cash won.

Sixty-two ultra-short bond funds were in the black in October. Only seven lost money, and six of those were long-term under-performers. In contrast, half of all short term bond funds lost money in October.

Similarly, cash-rich funds won. The impact of cash on a portfolio is best illustrated in the small cap value category where a number of experienced value investors have been adamantly holding cash in the face of irrational valuations. The categories four best performing funds, three of which we’ve profiled, held double-digit cash stakes. Those are Intrepid Endurance (ICMAX), Aegis Value (AVALX), Pinnacle Value (PVFIX) and Royce Special Equity (RYSEX).

One sad illustration of the power of cash is that several liquidating funds had chart-topping performances because, in the process of liquidating, their portfolios are transitioning to cash. The best traditional balanced fund? AMG Montag & Caldwell Balanced (MOBAX), which disappeared at the end of October. The best large value fund? Snow Capital Focused Value (SFOAX), now deceased.

Market neutral won.

As a category, the average fund exactly broke even on the month. Twenty-five of the 49 funds made money and three more simply broke even. As we warned last month, a number of market neutral funds have been cheating: they’ve maintained substantial positive correlations with the US stock market, which undercut their ability to hedge. Based on their success in October and their ability to produce respectable longer-term returns, Causeway Global Absolute Return (CGAVX) and Cognios Market Neutral Large Cap (COGMX) continue to recommend themselves to cautious investors.

Low-vol won.

There was a cluster of low beta or low vol portfolios near the top of the large cap core category, with almost none in the lower tiers. In general, though, for both low vol and low beta, active funds tended to perform better than passive.

Portfolio diversification won.

When you look at the list of funds that won in October, you’re struck by the number of categories that might have helped you weather the squall: 13 floating rate bond funds, five emerging markets bond funds, a couple of my favorite short-term high-yield funds (RiverPark and Zeo Short Duration Income ZEOIX), a handful of long-short equity funds (including the young Balter Invenomics BIVIX), a bunch of multi-alternative, nontraditional and multi-sector bond funds, and about 20 world bond funds.

Latin American stocks went wild during the month, up 16.3% on average, but that’s a whole other story.

You won.

At the very least, you won if you spent October celebrating (or lamenting) the Red Sox baseball championship, or if you finally put your garden to bed and got some canning done (I did), or listened to your child’s impassioned, if slightly odd, rant about the theology of St. Thomas Aquinas (did that, too).

In short, you won if you resisted the temptation to make long-term decisions based on short-term anxiety. There are two ways to maximize your chances for more wins in the future: (1) don’t take on more risk than you can accommodate, which might mean recalibrating your equity exposure and monthly investments and (2) develop healthy passions that take you away from the incessant yammer that threatens to overwhelm us all.

Bottom line: the US stock market was, and is, substantially and broadly overvalued. Profound political, environmental and economic changes continue to play out. Regulators have fewer tools to curtail excesses or intervene as circuit-breakers. As Paul Volcker recently commented, “We’re in a hell of a mess in every direction.”

All of that is bad, but none of that predicts whether the next market move will be sharply higher or sharply lower. It does not predict whether the markets six months hence are mired in despair or swept by mania. It does suggest two things: (1) on whole, down is likelier than up in the years ahead and (2) sharp is likelier than smooth.

That’s a problem, but that’s not the end of the world. Your challenge is to begin thoughtful problem-solving now. We’re here. We’ll help if we can.

Headache Predictions

By Mark Wilson

by Mark Wilson, APA, CFP®, publisher of Cap Gains Valet

It’s that exciting time of year again – mutual fund companies are letting us know how much of a tax headache they will be giving us! Or, others call this mutual fund capital gains distribution season.

The question of the day is: Are funds are going to have large capital gain distributions this year?

On my website, CapGainsValet.com, I have kept count of funds that expect large distributions. I’ve defined “large” to be funds with distributions higher than 10% of their net asset value. The average number of “headache” funds has been 340 per year, but you can see the variance in the annual numbers below.

I’m guessing 2018’s number is going to be higher for three primary reasons:

There are gains on the books – We’ve had a decade of solid returns from the stock markets, so funds have lots of gains to be realized and few losses available to offset these gains.
Funds are seeing outflows – We continue to see flows out of mutual funds and into ETFs; these trades create additional realized gains for mutual fund shareholders.
Early numbers are in – About 25% of fund firms have already provided their distribution estimates, and these numbers are ahead of last year. (Admittedly, this is a little like predicting the winner of a running race after the first lap.) I’ve already found nearly 250 funds with large distributions. (For my list of very large distributions, have a look at this year’s Doghouse List.)

The questions nobody is asking: How many funds are going to have large capital gain distributions this year?

I’ll play TV pundit and predict that this year is going to be a year with plenty of headaches and some migraine-producers as well. In fact, I’m going to predict that we’ll see 478 funds with capital gains distributions higher than 10%.

Of course, (also like the pundits) I’ll have any number of reasons to explain why my prediction is off when all is said and done.

Either way, I think it makes sense to be watching your funds for large distributions. This way you’ll use less aspirin and save some tax dollars.

Largest Upgrade Yet To MFO Premium

By Charles Boccadoro

“In God we trust,

all others bring data.”

William Edwards Deming

Beginning with our October monthly data update to MFO Premium, we will incorporate one of largest improvements to the site since launching our beta version in November 2015, three years ago.

The improvements began, like most of the features on the site, by user requests … this time, for more evaluation periods. All risk and performance metrics will now be provided for 1, 2, 3, 6, 9, and 10-month periods, as well as year-to-date (YTD); 1, 2, 3, 5, 7, 10, 12, 15, 20, 25, 30, 40, 50-year periods; lifetime (or at least back to January 1960); and the current five up, down, and full-market cycles, again since January 1960. All searchable by over 70 parameters, even simultaneously.

The past month performance will also facilitate visibility into fund flows as well as assess short-term damage, especially each October.

Year-to-date provides a naturally curious benchmark.

The 10-mo period is frequently used by strategies involving trend-following, like those referenced in our September commentary.

The evaluation period expansion represents one of a series of upgrades we’ve been incorporating since our adoption of Lipper’s Global Data Feed (LGDF) last May, as described in Premium Site Upgrade – Much Expanded Data Feed.

These upgrades include the addition of trend metrics, batting averages, Ferguson metrics, and calendar year performance.

Behind the scenes, the expanded evaluation periods prompted a reconstruction of the entire process used to create our MFO ratings, which includes:

Extraction of basic data from LGDF
Assignment of unique search symbols and “friendly” fundnames
Calculation of dozens of risk and performance metrics across the various evaluation periods, including negative Sharpe, Sortino, and Martin handling
Calculation of category averages and deviations, including outlier handling
Calculation of MFO Ratings and assignment of designations, like Great Owls and Three Alarm
Output and upload to site supporting the various search and analysis tools

All this means there’s increased transparency and more opportunity to expand and tailor the site and its myriad of tools to user needs.

If you’ve not had a chance to visit the MFO Premium site recently, please do so. As always, any feedback, recommendation, and especially special requests, please drop us a line.

Brown Advisory Sustainable Growth Fund (BAFWX/BIAWX/BAWAX), November 2018

By Dennis Baran

Objective and strategy

The managers seek long-term capital appreciation by investing in a concentrated portfolio of 30-40 mid and large capitalization companies over $2.0B that use sustainable business strategies (SBA) to drive future earnings growth.

They focus on finding companies whose sustainability strategies are generating tangible business results such as revenue growth, cost improvement, or enhanced franchise value. Such companies may enjoy competitive advantages from environmentally efficient design or manufacturing or offer products or services that address sustainability challenges.

Sustainable business advantage analysis complements thorough fundamental research and a strict valuation discipline. Only companies with strong fundamental, sustainable, and valuation characteristics are considered for investment.

Adviser

Brown Advisory, a private independent investment management firm founded in 1993 in Baltimore within Alex Brown & Sons. The firm employs 600 people in eight offices, manages 15 mutual funds, is a sub-adviser on four others, and runs 29 additional investment strategies. Total firm AUM as of September 30, 2018: $68.4B.

Managers

Ms. Funk, CFA joined Brown Advisory in 2009 from Winslow Management Company where she was a Portfolio Manager and Equity Research Analyst running an ESG- focused equity mutual fund. She has investment experience since 2003. Brown acquired Winslow in 2012. At a young age, she developed an environmental awareness that led to corporate, consulting, and engineering jobs, i.e., “applied sustainability,” and eventually into asset management with a vitae par excellence:

S. Chemical Engineering Purdue University
S. Civil and Environmental Engineering MIT
Another M.S. Technology and Policy MIT
Post-Graduate Diploma École Polytechnique France in Environmental Engineering

Mr. Powell joined Brown Advisory in 1999 as an equity research analyst with responsibility for identifying and recommending companies in the industrials, materials, and energy sectors, particularly those that helped them save on energy, water, and raw materials. Companies making money from using sustainability to power growth motivated his interest in managing an ESG strategy.

Prior to joining the firm, David held a position in investor relations at T. Rowe Price. He has investment experience since 1997.

A “right-sized number of analysts” support the PMs as members of the Sustainability Team.

Strategy capacity and closure

Total AUM in the strategy (mutual funds, a UCITS European mutual fund, and separate accounts) was approximately $1.8B as of September 30, 2018. The firm generally starts looking at capacity issues around $15B in their large cap funds before being concerned about their ability to manage portfolio liquidity.

Active share

The average for the past two quarters is 75%.

Active share measures the degree to which a fund’s portfolio differs from the holdings of its benchmark portfolio. The fund’s active share reflects a high level of independence from the Russell 1000 Growth Index.

Management’s stake in the fund

As of June 30, 2017, Ms. Funk owns between $100,000-500,000 of the fund and Mr. Powell over $1,000,000. As of December 31, 2016, two of the six trustees has invested in the fund, one owns over $100,000 of the fund and another between $10,000-$50,000. We will update those estimates once we receive the latest Statement of Additional Information, which will be released in the near future.

Opening date

June 29, 2012 and an SMA from December 31, 2009. The PMs manage these products exclusively.

Minimum investment

BAFWX Institutional Shares $1,000,000; BIAWX Investor and BAWAX Advisor Shares $100

Expense ratio

Institutional 0.74%; Investor 0.89%; Advisor 1.14%

Comments

The environmental and business cases for incorporating ESG factors into your portfolio are unassailable. It is very clear that the behavior of corporations contributes directly, for good or ill, to the habitability of the planet. It’s equally clear that investing in sustainable enterprises does not harm your harms, and might well bolster them. Larry Fink, president of BlackRock, the world’s largest investment firm, argues that within five years “all investors will be using ESG (environmental, social, governance) metrics to determine the value of a company.” That’s perfectly rational. An October 2018 review of the research by the Boston Consulting Group concludes that “ESG-driven decisions implemented well go far beyond good marketing, and actually boost the bottom line because they are more sustainable than decisions made to boost stock price in the short term” (Business Insider, 11/1/2018). That aligns well with both the research done by the Brown Advisory managers and with their performance.

The way to make money on companies with great ESG characteristics is to invest first in fundamentally strong companies that will outperform over time. So they look at their return on equity, earnings variability, historical earnings per share growth plus other factors.

Once they identify these companies, they can begin looking more deeply into whether a company’s management team understands its long-term sustainability risks and opportunities and is investing in them materially.

They use the term “sustainable business advantage,” or SBA, to describe the characteristics in a company’s business strategy that can add shareholder value through sustainability. Companies with great fundamentals and the potential to propel those outcomes through SBA are the companies they want to own.

It’s this intersection of company performance and ESG focus that defines sustainable investing for these managers.

It’s not a process that results from doing screens.

No screening approach is very helpful for bottom-up investors. While their research team obtains ESG data from many sources, including directly from companies, they don’t take reported data and metrics at face value: They corroborate what companies say and independently evaluate what they do.

As for using corporate or third party ESG ratings in their work, the managers say to take them with a grain of salt.

Why?

Whether you’re looking at mutual fund rankings, credit ratings or ESG grades, they should not be viewed as an endpoint but as the start of a research journey that spurs subsequent questions and more digging for information.

No amount of raw ESG data can tell an investor whether a company is a sound fundamental investment. Primary research is the only way to make well-informed investment decisions consistently, e.g., sustainability data and reports, public filings, and management interviews.

The managers do not build portfolios based on ESG factors alone. They are not in a “feel-good-business.” ESG factors are their means to an end, not an end in itself.

In summary:

Information about a company’s sustainability strategies and practices can be used to improve fundamental investment decisions. While ESG research does not by itself ensure investment gains or losses, when combined with additional due diligence, it can inform better investment decisions.

Risk Management and Performance

The managers emphasize that the fund’s focus is on generating performance or alpha, i.e., market independent returns better than what can be explained by beta, i.e., market risk or systematic risk. Their conviction that investors can use ESG information to produce alpha comes from their experience in managing idiosyncratic risk, i.e., risk to a particular stock rather than to an entire investment portfolio.

Even so, as active managers focused on these ideas, they openly admit that even “well-defined, statistically valid, and perfectly clairvoyant ESG metrics” would not help much with their primary task of a deep examination into individual companies and finding the select few that are poised to produce exceptional long-term business results.

The fund does exceptionally well, against any plausible benchmark, over time. We first screened Lipper’s Socially Conscious (SC) category for U.S., global, and international multicap growth.

	BAWFX (Inst.)	BIAWX (Inv.)
One year	27.5%, 1^st	27.4%, 2^nd
Three year	19.8%, 2^nd	19.6%, 3^rd
Five year	16.1%, 1^st	16.0%, 2^nd
Since inception	18.0%, 2^nd	17.8%, 3^rd

Our second screen broadened the search to include all multicap growth funds, domestic, global or international, socially conscious or not. The results remain impressive.

Second, outside of the SC category, how do the funds’ APR compare to the most competitive subset of U.S., global, and international, multicap growth funds? We used the fund screener at MFO Premium to identify the multicap growth funds in the top 20% based on Least Drawdown; Best Sharpe, Sortino, and Martin Ratios; and Shortest Recovery.

	BAWFX (Inst.)	BIAWX (Inv.)
One year	27.5%, 7^th	27.4%, 8^th
Three year	19.8%, 3^rd	19.6%, 6^th
Five year	16.1%, 8^th	16.0%, 9^th
Since inception	18.0%, 5^th	17.8%, 6^th

Third, we looked at the fund’s performance relative to the S&P 500. It’s a flawed comparison because the investment styles are substantially different, but a relevant one because so many investors use the S&P as their implicit benchmark for any equity investment. Here’s the extent of outperformance of BAWFX against the S&P 500:

	BAWFX (Inst.) beat the S&P 500 by …
One year	9.6%
Three year	2.5%
Five year	2.2%
Since inception	2.7%

A fairer, but less common, comparison is with its Russell 1000 Growth Index benchmark. The fund has been consistently competitive against one of the hottest benchmarks since its inception.

The managers admit that they will underperform the market at times. The Russell 1000 Growth Index has been red hot for nine years at nearly an 18% compounded rate. The PMs looks for steady, not rapid growth. Now in the ninth year of a bull market, they are careful to avoid chasing momentum-led stories. That’s produced a nice asymmetry in which they capture most of their benchmark’s upside but much less of its downside.

Any time you capture more of an index’s upside than you capture of the downside, you’re producing a positive risk-return profile. For visual learners, we’ve marked all of BIAWX’s positive cells in blue.

		Since inception	5 year	3 year	1 year
Russell 1000 Growth	%age of the upside captured	99.4	94.2	93.1	n/a
	&age of the downside captured	99.0	88.0	82.6
S&P 500	%age of the upside captured	104.0	103.0	108.0	121.0
	&age of the downside captured	82.3	85.5	93.7	51.6

All data as of September 30, 2018

Yep. They’re all blue.

On September 30, 2018, its average portfolio turnover is 36.2%, annualized alpha is 0.29, and average beta is 1.0 since inception.

Bottom Line

The mangers make money.

Their fund returns in the Lipper Multicap Growth U.S., Global, and International Category; the Russell 1000 Growth Index; and the S&P 500 Index show that the team has outperformed the market whether in the ESG category or not.

With an 18.0% lifetime APR, BAFWX is an MFO Great Owl in the multicap growth category. That means it has consistently received a return rank of 5 (Best) for all periods three years and longer. It joins only nine other GO funds in that category.

BIAWX, with a 17.8% lifetime return, has also been a top performer.

Investors have not sacrificed returns or experienced a tradeoff from using ESG characteristics in the portfolio.
The managers are smart, careful, and even cynical. Just because a company issues a sustainability report, doesn’t mean that it’s added value. They’re only interested in companies that make an ESG impact.

Their legacy and reputation is based on repeatedly finding companies that hinge on sustainable growth drivers well before the rest of the market catches up.
The managers’ strategy is different.

They don’t use ESG to find companies that they believe are less harmful than others.

They don’t invest passively though a best-in-class approach aiming to find the best “scorers” in each industry trying to match the risks and returns of the broad market and therefore unlikely to outperform their benchmark.
The managers like David Snowball’s August 2018 MFO ESG article. They said,

“We strongly believe that the two important elements besides positive ESG profiles that can drive performance are good investments and good investors.”

They then added two paragraphs explaining their approach.

So if the question is, “Can investment managers who incorporate ESG attributes in their strategies deliver better performance?”

The answer: A loud clarion call of “Yes.”

Sustainability is not an obstacle to making money. Investors can have it both ways:

They can earn a profit and help the planet — as has the fund — while ESG continues to move consistently to the center of corporate thinking on strategy, risk, reputation, operations, efficiency, and long-term performance.

Fund Website

BAFWX/BIAWX

Karina Funk Sustainability TED Talk

Launch Alert: Seven Canyons World Innovators

By David Snowball

It is rare that we issue a Launch Alert for a seventeen year old fund. Then again, it is rare that we find a 17 year old fund as remarkable as Seven Canyons World Innovators (WAGTX / WIGTX). World Innovators was launched on December 19, 2000 as Wasatch World Innovators. The fund, with its sibling Strategic Income Fund (WASIX), was rechristened with the new Seven Canyons identity on September 10, 2018.

Seven Canyons Advisors was formed in September 2017 with Wasatch founder Sam Stewart, his sons and their colleagues. He characterized the move as “the opportunity to have a new adventure in my life after the 42 years I spent at Wasatch.” The firm began life with six professionals and about $200 million in assets under management of which about $159 million is in World Innovators.

The portfolio has two distinctive characteristics. First, the managers target companies that they call “World Innovators”. These are companies that sell innovative products and services dramatically superior to legacy offerings. These rapid market share gains enable revenue growth through the economic cycle, so even in an industry downturn or a broader recession they report sales growth That means there’s room both for traditional tech & telecom names (for example, video game publisher Take Two Interactive) and firms in lower-tech areas (e.g., The New York Times, one of the fund’s top 5 holdings). In explaining the latter, manager Joshua Stewart notes, “NYT has been the gold standard for old media companies adapting to the digital age – increasing the quality of reporting, adding video content and podcasts and delivering news the way people want it in the 21st century.” There’s a consistent line of research that shows that an innovative culture creates an enduring structural advantage for such firms.

Second, the portfolio is typically global and oriented toward smaller capitalization firms. Both are part of its Wasatch heritage, where the senior Mr. Stewart created an unparalleled focus on such firms. While they are not limited to small firms (Sony, Disney and Nintendo are three of the top four holdings), there’s a consistent bias in that direction.

In all cases, firms need to exhibit above average growth potential, a market leading position, strong management teams, strong financials and “rational” prices.

The fund’s charms are substantial and varied:

The fund has earned a Five Star ranking from Morningstar, which is grounded in its long-term risk-return profile

The fund has earned a Silver rating from Morningstar’s machine-learning algorithms, which seek to identify the funds with the greatest prospects for future success

Over the past decade, it has the second highest returns (13.5% APR) and highest Sharpe ratio (0.82) of any fund in Lipper’s global small-mid cap category. Over the same period, it has the second highest returns in its Morningstar world small/mid stock category.

Over the past 3, 5, 10 and 15 year measurement periods, Morningstar assigns it “above average” to “high” return scores with “average” to “below average” risk scores.

The management team is experienced and stable, with the senior Mr. Stewart having managed it for a decade and the younger Mr. Steward coming up on his seventh year co-managing it.

The fund’s sole drawback is its expense ratio, which Morningstar categorizes as “high” and which Lipper places as second-highest among global small-mid cap funds. The managers might reasonably respond that this is an expensive niche and that they’ve more than earned back their fees, but the concern is likely to remain pressing in many potential investors’ minds.

The fund’s Investor share class carries a $2000 minimum initial investment and expenses of 1.75%. The Institutional class is $100,000 and 1.55%, respectively. The firm’s website is attractive, but content is growing at a modest rate.

Launch Alert 2A: RiverPark Floating Rate CMBS Fund

By David Snowball

On November 12, 2018, RiverPark Funds launches RiverPark Floating Rate CMBS Fund (RCRFX/RCRIX). Like several of RiverPark’s funds, RCRIX began life as a hedge fund (2010-2016). Unlike any of its predecessors, it originally converted into an interval fund, a sort of closed-end fund under which structure it operated for two years (RiverPark Commercial Real Estate Fund, 2016-2018) where investors only had quarterly liquidity. That fund began begin life with $50 million in assets from its private predecessor, of which $10 million is the manager’s own money. The newest package presents the fund as a traditional open-end mutual fund with daily liquidity and both retail (RCRFX) and institutional (RCRIX) share classes.

(Why “2A”? This is not only the second Launch Alert in this month’s issue, it’s also the second Launch Alert for this fund. Our first was in October, 2016. It’s a rare repeat.)

The fund’s objective is to provide its investors with a steady income stream which is generated by the monthly current cash coupon of its investments. In general, the manager invests in high-quality commercial real estate debt which includes commercial mortgage backed securities (the “CMBS” in the fund’s name), commercial real estates secured bank loans, mezzanine loans and collateralized debt and loan obligations. The key is that the debt is all backed, directly or indirectly, by real estate assets. There are a couple other contributors to the fund’s performance (buying assets below par and opportunistic trading), but they’re relatively minor factors.

The primary attractiveness of the fund is its success in very steadily generating income. In its 24 months as a closed-end fund, the fund has never had a losing month while its benchmark Bloomberg Barclays U.S. Investment-Grade CMBS Index and the Bloomberg Barclays U.S. Aggregate Bond Index both lost money on 11 occasions. While the fund’s monthly returns are modest (6-75 basis points monthly since October 2016, the steady compounding and lack of negative months has given the fund is substantial performance edge: it has averaged 4.44% annually over the period while both the CMBS and Aggregate Bond indexes are in the red.

While 24 months is too brief to offer meaningful comparisons, they do align to the fund’s longer term performance which includes both its hedge fund and CEF incarnations. Since inception in June 2010, the fund has never had a negative year. In monthly terms, it has had 95 positive months and six negative ones, with an average drawdown of 0.70% in its negative months. The fund’s standard deviation over this longer period is 0.58%, 200 points lower than either of its two benchmarks. Its beta (0.06) is nearly negligible.

Three other factors make the fund particularly attractive for income-seeking investors:

It targets only high-quality investments. The manager targets securities back by high quality real estate and sponsored by blue-chip firms such as Vornado and Blackstone. From among those securities, they target ones with strong credit metrics (measured by loan-to-value and debt service coverage ratios) and attractive yields (typically LIBOR +3%).

It provides income independent of the traditional fixed-income market. Because the real estate market has different fundamental drivers than does the bond market and because most of the portfolio investments are floating rate with yields that reset monthly as interest rates rise, RiverPark believes the fund will allow investors to decrease their exposure to the risk of rising interest rates in their fixed income portfolios while also providing an attractive fund to investors seeking non-correlated alternative investments that generate current income.” That seems borne out by the low correlation MFO found between RCRIX and a variety of plausible comparison funds over the past 24 months.

It has a highly experienced manager. The fund is managed by Edward L. Shugrue III, CEO of Talmage LLC who will be joining RiverPark as an employee with the re-launch. Mr. Shugrue has more than 30 years of commercial real estate investing experience, beginning with Bear Stearns & Co. in 1988 and including a stint as CFO for Sam Zell’s Capital Trust. He founded his current firm in 2003 and has, over the years, traded rather more than $30 billion in CMBS.

RiverPark believes that the Fund provides a unique opportunity to generate mid-single digit income yields (based upon current coupons and purchase discounts) with both limited credit and interest rate risk. Based on Libor today the Fund is generating a current coupon of 3.6%, and RiverPark believes based on where one year Libor is trading the coupon should increase to 4.3% over the next year. Investors concerned with the projections that the U.S. bond market is positioned to post real returns of essential zero between now and 2025 (GMO, 9/2018), it might be prudent to look for alternate sources of income. This likely belongs on your shortlist for such investigations.

The fund’s Investor share class carries a $1000 minimum initial investment and expenses of 1.25%. The Institutional class is $50,000 and 1.00%, respectively. The fund’s website is attractive, but content is growing at a modest rate. Investors purchasing directly from RiverPark face a $2,500 minimum initial investment. The fund’s opening expense ratio is 1%. The fund will become available for purchase on a variety of platforms (Schwab, Fidelity and so on) over the next month.

Funds in registration

By David Snowball

Before funds can be offered to the public, they’ve got to be submitted to the SEC which has 70 days to review the application. That means that funds hopeful of launching by December 30^th needed to be filed by October 15^th. We’re looking for funds that might be accessible to the average investor or advisor; we include active ETFs but not passive ones. That last restriction allows me to pretend that neither ProShares Pet Care ETF nor the US Vegan Climate ETF is about to be inflicted on us.

There are 22 retail funds and active ETFs in registration below. It’s reassuring to me that I immediately reacted to a couple by scanning my portfolio for space: 361 Global Equity Absolute Return (great manager and proven discipline but that be tripped up by expenses), Aperture New World Opportunities (intriguing manager), Fuller & Thaler Behavioral Unconstrained Equity Fund (good record for exploiting others’ behavioral biases), Polen ISG (the other Polen funds are very solid), Westwood Multi-Asset High Income Fund (a really good manager who’d been treated really poorly returns) … and one fund that invests in catastrophe bonds. Fascinating.

361 Global Equity Absolute Return Fund

361 Global Equity Absolute Return Fund will seek absolute (positive) returns. The plan is to create a global long/short equity portfolio that remains just 0-30% net long. The fund will be managed by Harindra de Silva, Dennis Bein and David Krider, all of Analytic Investors. Its opening expense ratio has not been disclosed, and the minimum initial investment will be $2,500.

ACM Tactical Income Fund

ACM Tactical Income Fund will seek to generate income, with capital preservation as a secondary objective. The plan is to toggle back and forth between high-yield securities (including those in the emerging markets), US treasuries and cash. They’ve got a bunch of trigger levels which will cause them to move incrementally toward or away from risk. The fund will be managed by Jordan Kahn. Its opening expense ratio has not been announced, and the minimum initial investment for the no-load institutional shares will be $10,000.

Alphacentric/16th Amendment Municipal Opportunities Fund

Alphacentric/16th Amendment Municipal Opportunities Fund will seek to provide income exempt from federal income tax with capital appreciation as a secondary objective. The plan is to complicate a simple proposition by investing in muni bonds, up to 75% of which can be high-yield, closed-end funds and a bunch of derivatives. The fund will be managed by a team from 16th Amendment Advisors LLC. Its opening expense ratio is 1.80%, and the minimum initial investment will be $2,500.

Alta Quality Growth Fund

Alta Quality Growth Fund will seek long-term growth of capital with lower than market volatility. The plan is to buy 35-50 mid- to large-cap US growth stocks. The fund will be managed by Melanie Peche and Michael O. Tempest. (You have to ask, if it wants to be a low-vol fund, can Tempest tame the storm?) Its opening expense ratio is 0.79%, and the minimum initial investment will be $10,000.

American Beacon AHL TargetRisk Fund

American Beacon AHL TargetRisk Fund will seek capital growth. The plan is to invest in stocks, bonds and commodities through derivatives, then vary derivative exposure to generate a stable level of volatility. The volatility target is 10%, so the asset class exposure would be varied in order to generate the highest available returns that you can get with 10% volatility. The fund will be managed by Russell Korgaonkar and Matthew Sargaison of AHL Partners, LLP. Its opening expense ratio is 1.43%, and the minimum initial investment will be $2,500.

Amplify Growth Opportunities ETF

Amplify Growth Opportunities ETF, an actively-managed ETF, seeks capital appreciation. The plan is to find securities (ready for this?) that “will experience outsized future growth.” The prospectus is largely uninformative on how they will achieve that objective. It likewise does not name the individuals who will be responsible for pulling it off. And, too, its opening expense ratio has not been released.

Anchor Tactical World Strategies Fund

Anchor Tactical World Strategies Fund will seek above average total returns over a full market cycle with lower correlation and reduced risk when compared to traditional world indices. The plan is to “allocate assets among various strategies based on the adviser’s research and analysis regarding market trends.” The fund will be managed by Garrett Waters. Its opening expense ratio has not been disclosed though a really high management fee has been, and the minimum initial investment will be $2,500.

Aperture New World Opportunities Fund

Aperture New World Opportunities Fund will seek total return, consisting of current income and capital appreciation. The plan is to invest in emerging markets fixed income and equity securities, and currencies. The fund will be managed by Peter N. Marber, PhD. Over his 30 year career, he’s worked in EM investing in a bunch of top tier firms and has taught at fancy Eastern universities. Its opening expense ratio is 1.33%, and the minimum initial investment will be $1,000.

City National Rochdale Short Term Emerging Markets Debt Fund

City National Rochdale Short Term Emerging Markets Debt Fund seeks to generate interest income and preserve capital in order to achieve positive total returns. The plan is to buy short term (under two year), investment grade EM debt. The fund will be managed by Garrett R. D’Alessandro, Matthew Peron and Thomas H. Ehrlein. Its opening expense ratio has not been announced. Retail shares are only available through third parties, and CNR lets those agents set their own minimums. The most interesting twist: “The Adviser and sub-adviser intend to accept investments for a subscription period of approximately six months after the Fund’s inception, after which the Fund intends to close to additional investment.”

First Trust Long Duration Opportunities ETF

First Trust Long Duration Opportunities ETF, an actively-managed ETF, seeks to generate current income with a focus on preservation of capital. The plan is to invest in mortgage-related securities, including mortgage dollar rolls. (Nope, not a clue.) The fund will be managed by Jim Snyder and Jeremiah Charles of First Trust Advisers. Its opening expense ratio has not been disclosed.

Frontier MFG Global Sustainable Fund

Frontier MFG Global Sustainable Fund will seek attractive risk-adjusted returns over the medium- to long-term while reducing the risk of permanent capital loss. The plan is to create a non-diversified portfolio of 20-50 high-quality companies which both pass ESG screens and are market leaders. The fund will be managed by Domenico Giuliano. Its opening expense ratio is 0.95%, and the minimum initial investment will be $10,000.

Fuller & Thaler Behavioral Unconstrained Equity Fund

Fuller & Thaler Behavioral Unconstrained Equity Fund will seek long-term capital appreciation. The plan is to use F&T unparalleled depth of knowledge on behavioral finance – basically, the patterns of predictable irrationality on the part of other investors – to build a non-diversified portfolio of U.S. stocks. The fund will be managed by Raymond Lin and Raife Giovinazzo. Its opening expense ratio is 1.25%, and the minimum initial investment will be $1,000. F&T are simultaneously launching two other funds which use the same discipline, and the same managers, to target “small-mid core” and micro-cap stocks.

Goldman Sachs Access Ultra Short Bond ETF

Goldman Sachs Access Ultra Short Bond ETF, an actively-managed ETF, seeks to provide current income with preservation of capital. The plan is to invest globally in investment grade government and non-government bonds, with the caveat that it “will concentrate its investments in the financial services group of industries.” Ultra short is “under three years.” The fund will be managed by David Fishman, Matthew Kaiser, Jason Singer, and David Westbrook of GSAM. Its opening expense ratio, which is a really important matter in a low-return asset class, has not been released.

Lazard International Compounders Portfolio

Lazard International Compounders Portfolio will seek long-term capital appreciation. The plan is to invest in “Compounders,” high quality businesses that can generate, and sustain, high levels of financial productivity (i.e., return on equity, return on capital and cash flow return on investment). One idea is that these firms produce cash that they can re-invest in the business without resorting to capital markets. The fund will be managed by a Lazard team. Its opening expense ratio is 1.10%, and the minimum initial investment will be $2,500.

Mirova International Sustainable Equity Fund

Mirova International Sustainable Equity Fund will seek long-term capital appreciation. The plan is to invest in equity securities of companies that it expects will benefit from major global transitions and which also meet “the Adviser’s minimum ESG standards.” The fund will be managed by Jens Peers and Hua Cheng of Ostrum Asset Management, formerly Natixis Asset Management. Its opening expense ratio has not been disclosed, and the minimum initial investment will be $2,500.

Polen International Small Company Growth Fund

Polen International Small Company Growth Fund will seek long-term growth of capital. The plan is to invest in non-US small cap stocks which have four characteristics: (i) consistent and sustainable high return on capital, (ii) strong earnings growth and free cash flow generation, (iii) strong balance sheets typically with low or no net debt to total capital and (iv) competent and shareholder-oriented management teams. Polen’s large cap International Growth and Global Growth funds have been exceptional. The fund will be managed by Rob Forker. Its opening expense ratio has not been released, and the minimum initial investment will be $3,000, reduced to $2,000 for IRAs and accounts established with an automatic investing plan.

Rational Insurance Linked Income Fund

Rational Insurance Linked Income Fund will seek total return. The plan is to invest in a combination of event-linked bonds and securities issued by insurance companies. At base, businesses buy insurance against natural disasters and that insurance gets securitized as event-linked bonds. If a disaster doesn’t occur, the bondholder makes money. “[Name of Sub-Advisor] is the Fund’s investment sub-advisor (the “Sub-Advisor”).’ Great. Its opening expense ratio is 1.8%, and the minimum initial investment will be $1,000.

Sierra Tactical Municipal Fund

Sierra Tactical Municipal Fund will seek total return, including tax-free income from the dividends of underlying municipal bond funds, while seeking to limit downside risk. It will be a fund of muni bond funds and ETFs; its fundamental impulse is to limit downside risk. The fund will be managed by “Dr. Sleeper and Mr. Wright.” Its opening expense ratio for class N shares is 1.65% , and the minimum initial investment will be $10,000.

Virtus WMC Risk-Managed Alternative Equity ETF

Virtus WMC Risk-Managed Alternative Equity ETF, an actively-managed ETF, will seek superior risk-adjusted total returns over the long term. The plan is for Wellington Management to set a target beta, then to use equities and an equity option overlay to achieve that market beta. The hope is to mostly keep up in rising markets and count on substantial protection in falling ones. The fund will be managed by Gregg R. Thomas, and Thomas S. Simon, of Wellington Management. Its opening expense ratio has not been disclosed.

Westwood Multi-Asset High Income Fund

Westwood Multi-Asset High Income Fund will seek to provide a high level of current income. The plan is to invest in income-producing fixed income and equity securities with the prospect of a defensive covered-call overlay. In general, about a third of the portfolio will be invested in equities. The fund will be managed by Michael J. Carne. That’s a promising development, since Mr. Carne managed a really first-rate fund, Nuveen NWQ Flexible Income Fund (NWQAX). He built a very good, conservative allocation fund that held stocks, bonds and convertibles. We wrote about the fund a while ago: three years after launch it received a five-star rating from Morningstar (celebration!!), followed a couple weeks later by Morningstar’s decision to reclassify it as a “convertibles” fund (it wasn’t) whence it plunged to one-star. The adviser appealed the ruling, it was reclassified, regained its stars and did splendidly. Then corporate restructuring occurred and Mike was off “in search of other opportunities.” Now he’s back, and I’m glad. Its opening expense ratio is 1.25%, and the minimum initial investment will be $5,000.

Manager changes, October 2018

By Chip

In the course of a normal month we’ll highlight 60-70 manager changes in equity and allocation funds. We mostly skip bond funds because, frankly, it’s a danged rare fixed income team that’s materially affected by the departure of a single individual. In a really quiet month, 38 funds saws partial or complete team changes. That’s not only half the long-term average but only about a third of the changes reported last month.

By far the most significant, if only symbolically, was the announced retirement of David Poppe at Sequoia Fund (SEQUX). Mr. Poppe was famously a champion of the Valeant investment that broke Sequoia. The magnitude of the misstep was reported by Chuck Jaffe in 2016:

Indeed, when Morningstar first started evaluating funds in the mid-1980s, analysts there privately used a “Sequoia-Steadman” standard, effectively comparing other funds to what they considered the best fund in the industry — Sequoia — or the worst, the now-defunct Steadman Funds.

Today, however, Sequoia itself has been acting more like Steadman. It posted a dismal 7.3% loss in 2015, which has been followed up with a decline of 11.6% so far this year, both returns near the bottom of the fund’s large-growth peer group.

But the real problem has been Sequoia’s management stubbornness, infighting, and governance issues, all centered around the fund’s investment in controversial Valeant Pharmaceuticals International US:VRX which at one point last year accounted for 30% of the $5.6 billion fund’s assets (it’s closer to 20% recently).

Now the question is whether Harris, Gokgol-Kline, Magyar and Sheridan can restore the legacy created by Ruane, Cunniff and Goldfarb.

By far the most consequential change was the departure of Mark Yockey and Charles-Henri Hamker from Artisan International Small Cap. Their successor, Rezo Kanovich, is another phenomenally successful manager with a very different portfolio in mind. The fund’s evolution will be signaled in the month ahead by being renamed Artisan International Small-Mid Fund. There are some details in this month’s “Briefly Noted” and we’ll share additional information in a Launch Alert as soon as the name change is official.

Ticker	Fund	Out with the old	In with the new	Dt
ASFIX	Absolute Strategies Fund	Harvest Capital Strategies LLC is no longer listed as a subadvisor to the fund.	St. James Investment Company, LLC and Tortoise Capital Advisors, L.L.C. will continue to subadvise the fund.	10/18
ARTJX	Artisan International Small Cap Fund	Mark Yockey and Charles-Henri Hamker are no longer listed as portfolio managers for the fund.	Rezo Kanovich will now manage the fund.	10/18
CAMOX	Cambiar Opportunity Fund	Timothy Beranek and Jeffrey Susman no longer serve as members of the domestic investment team managing the fund.	Brian Barish, Anna Aldrich, Andrew Baumbusch, and Colin Dunn will continue to manage the fund.	10/18
CAMSX	Cambiar Small Cap Fund	Timothy Beranek and Jeffrey Susman no longer serve as members of the domestic investment team managing the fund.	Brian Barish, Anna Aldrich, Andrew Baumbusch, and Colin Dunn will continue to manage the fund.	10/18
CAMMX	Cambiar SMID Fund	Timothy Beranek and Jeffrey Susman no longer serve as members of the domestic investment team managing the fund.	Brian Barish, Anna Aldrich, Andrew Baumbusch, and Colin Dunn will continue to manage the fund.	10/18
CAGLX	Cornerstone Advisors Global Public Equity Fund	No one, but . . .	Brandon Geisler and Robert Susman join the extensive management team. Really Cecil B DeMille hired smaller casts.	10/18
FDCAX	Fidelity Capital Appreciation Fund	Fergus Shiel, who’s done an exceptional job, is expected to retire effective March 29, 2019.	Asher Anolic and Jason Weiner have joined Mssr. Shiel on the management team and will continue managing upon his retirement.	10/18
FFGCX	Fidelity Global Commodity Stock Fund	Joe Wickwire will no longer serve as a portfolio manager for the fund after March 29, 2019.	Jody Simes will continue to manage the fund.	10/18
FPURX	Fidelity Puritan	No one, but . . .	Daniel Kelley joins Harley Lank, Ramin Arani, and Michael Plage on the management team.	10/18
GSFAX	Goldman Sachs Bond Fund	Jonathan Beinner will be retiring from Goldman Sachs on March 31, 2019.	Michael Swell will continue to manage the fund and will be joined by Ashish Shah upon Mssr. Beinner’s departure.	10/18
GCFIX	Goldman Sachs Core Fixed Income Fund	Jonathan Beinner will be retiring from Goldman Sachs on March 31, 2019.	Michael Swell will continue to manage the fund and will be joined by Ashish Shah upon Mssr. Beinner’s departure.	10/18
GGOAX	Goldman Sachs Growth Opportunities Fund	Ashley Woodruff will no longer serve as a portfolio manager for the fund.	Steven Barry will continue to manage the fund.	10/18
GSZAX	Goldman Sachs Strategic Income Fund	Jonathan Beinner will be retiring from Goldman Sachs on March 31, 2019.	Michael Swell will continue to manage the fund and will be joined by Ashish Shah upon Mssr. Beinner’s departure.	10/18
HIIDX	Harbor Diversified International All Cap Fund	Effective October 4, 2018, William MacLeod no longer serves as a portfolio manager for the fund.	Neil Ostrer, William Arah, Charles Carter, Nick Longhurst, Michael Godfrey, Robert Antsey, David Cull, Simon Somerville, Michael Nickson, and Simon Todd continue to serve as co-portfolio managers.	10/18
HIINX	Harbor International Fund	Effective October 4, 2018, William MacLeod no longer serves as a portfolio manager for the fund.	Neil Ostrer, William Arah, Charles Carter, Nick Longhurst, Michael Godfrey, David Cull, Simon Somerville, Michael Nickson, and Simon Todd continue to serve as co-portfolio managers.	10/18
DAX	Horizons DAX Germany ETF	No one, but . . .	Chang Kim, James Ong, and Nam To will join Jonathan Molchan in managing the fund.	10/18
QYLD	Horizons NASDAQ 100 Covered Call ETF	No one, but . . .	Chang Kim, James Ong, and Nam To will join Jonathan Molchan in managing the fund.	10/18
HSPX	Horizons S&P 500 Covered Call ETF	No one, but . . .	Chang Kim, James Ong, and Nam To will join Jonathan Molchan in managing the fund.	10/18
HWCAX	Hotchkis & Wiley Diversified Value Fund	Sheldon Lieberman will retire on December 31, 2018.	Patricia McKenna, George Davis, Scott McBride, and Judd Peters will continue to manage the fund.	10/18
HWLAX	Hotchkis & Wiley Large Cap Value Fund	Sheldon Lieberman will retire on December 31, 2018.	Patricia McKenna, George Davis, Scott McBride, and Judd Peters will continue to manage the fund.	10/18
BIBL	Inspire 100 ETF	Carlos Lopez, Jr. will no longer serve as a portfolio manager for the fund.	Robert Netzly and Darrell Jayroe will continue to manage the fund.	10/18
IBD	Inspire Corporate Bond Impact ETF	Carlos Lopez, Jr. will no longer serve as a portfolio manager for the fund.	Robert Netzly and Darrell Jayroe will continue to manage the fund.	10/18
BLES	Inspire Global Hope ETF	Carlos Lopez, Jr. will no longer serve as a portfolio manager for the fund.	Robert Netzly and Darrell Jayroe will continue to manage the fund.	10/18
ISMD	Inspire Small/Mid Cap Impact ETF	Carlos Lopez, Jr. will no longer serve as a portfolio manager for the fund.	Robert Netzly and Darrell Jayroe will continue to manage the fund.	10/18
JATAX	Janus Henderson Global Technology Fund	Effective December 1, 2018, all references to J. Bradley Slingerlend are deleted from the fund’s prospectuses.	Garth Yettick will join Denny Fish in managing the fund, effective December 2018.	10/18
LSHNX	Loomis Sayles High Income Fund	No one, but . . .	Brian Kennedy and Todd Vandam join Matthew Eagan and Elaine Stokes on the management team.	10/18
LMVYX	Lord Abbett Micro Cap Value Fund	Justin Maurer and Thomas Maher will no longer serve as a portfolio manager for the fund.	Eli Rabinowich and John Hardy will now manage the fund.	10/18
LRSCX	Lord Abbett Small Cap Value Fund	Justin Maurer and Thomas Maher will no longer serve as a portfolio manager for the fund.	Eli Rabinowich and John Hardy will now manage the fund.	10/18
LVOYX	Lord Abbett Value Opportunities Fund	Justin Maurer and Thomas Maher will no longer serve as a portfolio manager for the fund.	Eli Rabinowich and John Hardy will now manage the fund.	10/18
MGGNX	Mirova Global Green Bond Fund	No one, but . . .	Charles Portier joins Chris Wigley and Marc Briand in managing the fund.	10/18
Various	Natixis Sustainable Future Target Date Funds	No one, but . . .	Effective October 15, 2018 David Belloc has joined the portfolio management team of each fund.	10/18
NCOAX	Nuveen Symphony Credit Opportunities Fund	Gunther Stein will no longer serve as a portfolio manager for the fund.	Jenny Rhee will continue to manage the fund.	10/18
NFRAX	Nuveen Symphony Floating Rate Income Fund	Gunther Stein will no longer serve as a portfolio manager for the fund.	Scott Caraher will continue to manage the fund.	10/18
SEQUX	Sequoia Fund	David Poppe has announced that he plans to retire from Ruane, Cunniff & Goldfarb L.P., the fund’s investment adviser, effective December 31, 2018. As a result, Mr. Poppe will no longer serve as a co-portfolio manager of the fund.	John Harris, Arman Gokgol-Kline, Trevor Magyar and D. Chase Sheridan will continue to manage the fund. With luck, this closes a disastrous chapter in the storied history of this fund.	10/18
FPIOX	Strategic Advisers Income Opportunities Fund	No one, but . . .	Charles Sterling joins Michael Weaver, Matthew Conti, and Gregory Pappas on the management team.	10/18
FSIEX	Touchstone International Value Fund	Charles Radtke will no longer serve as a portfolio manager for the fund.	T.J. Carter and Randolph Wrighton will continue to manage the fund.	10/18
ESIYX	Wells Fargo International Bond Fund	Christopher Wightman will no longer serve as a portfolio manager for the fund.	Lauren van Biljon joins Michael Lee, Alex Perrin, and Peter Wilson on the management team.	10/18
WSIAX	Wells Fargo Strategic Income Fund	No one, but . . .	Lauren van Biljon joins Alex Perrin, Niklas Nordenfelt, Thomas Price, Scott Smith and Noah Wise on the management team.	10/18

Briefly Noted

By David Snowball

Each month we round up the bits and pieces of industry news, from name changes to fund liquidations, that strike us as consequential but not consequential enough to warrant a stand-alone story. Perhaps distracted by the market’s recent turmoil, advisers have authorized far fewer changes this month than in most over the past five years.

Updates

On October 18, 2018, the HFM US Hedge Fund Performance Awards conference presented its ’40 Act Equity Fund of the Year award to Cognios Market Neutral Large Cap Fund (COGMX). Cognios reports:

The HFM U.S. Performance Awards are judged by a panel of leading institutional and private investors and investment consultants who make their decisions based on both quantitative and qualitative factors. Quantitative measures include returns and risk-adjusted performance of the fund over the last 12 months ending June 2018, potentially reviewing performance over a longer time period as well. Manager pedigree and firm reputation with investors was also a consideration of the judges. Cost was not a factor in the selection process.

The award is warranted. MFO has both profiled the fund and recognized that it’s virtually the only market neutral fund worth considering if your two criteria are (1) actually being market neutral and (2) outperforming 60/40 funds over time (“Nowhere to Run To,” 10/2018).

The Cook and Bynum Fund (COBYX) is, for the first time in a decade, fully invested. They announced the position in the Q3 investor letter. That reflects their ability to finally find investors with an acceptable, if not immense, margin of safety.

While some of the individual positions have a larger margin of safety than others, the Fund’s portfolio is in aggregate more attractively priced than it has been in several years. Since the Fund is almost fully invested, we now compare our expected return from a new investment with the opportunity cost of our expected return from one of our existing positions – rather than comparing it to holding cash. We are delighted to face this higher hurdle.

The fund, which has had a 30-50% cash stake for the past five years as equities priced themselves outside the managers’ comfort zone (and, they’d argued, outside the bounds of rationality), has paid dearly for its absolute value discipline. Its equity holdings have performed quite well and its investors have largely remained loyal, but its relative performance ranking is now in the 100^th percentile for the past 1, 3, and 5 year periods (per Morningstar, 11/1/18). It might well be that the return of volatility is a prelude to the return of more normal valuations, in which case we’d expect a dramatic pickup in performance.

David M. Poppe has announced that he plans to retire from Ruane, Cunniff & Goldfarb L.P., effective December 31, 2018. That removes him from a position of responsibility for the one-star Sequoia Fund (SEQUX). Who ever would have imagined seeing these performance numbers for Sequoia?

Three year	Five year	Ten year	Fifteen year
99^th percentile	99^th percentile	96^th percentile	87^th percentile

Hmmm … maybe Magellan investors in the Age of Stansky?

Briefly Noted . . .

For folks interested in learning more about ways to profitably use the MFO Premium screener, Charles Bolin wrote a nice piece in Seeking Alpha entitled “The Great Owl Portfolio” (10/21/2018). He combined our Great Owl funds list, which have by definition been bear-resistant funds, with the Portfolio Visualizer to create what he believes to be an optimized portfolio. (You may need to register for Seeking Alpha to read past the first screen.)

Trump wins: In this month’s SEC filings, I came across a bunch of nearly-identical announcements. “All references to Class T shares in each statement of additional information are hereby deleted.” “Class T shares” were the so-called “clean shares,” championed as part of the former Obama administration’s fiduciary rule governing retirement plans. Mr. Trump’s administration opposed the rule on principle and revoked it.

SMALL WINS FOR INVESTORS

On October 15, 2018, Artisan International Small Cap Fund (ARTJXX) re-opened to new investors under new management with a new name. Mark Yockey has managed the fund since inception (2001) while Charles-Henri Hamker has co-managed since 2002. They will be replaced by Rezo Kanovich. Mr. Kanovich and his analyst team, all of whom resigned on rather short notice, have guided Oppenheimer International Small-Mid Company (OSMAX) since early 2012. In parallel, the fund will be rechristened Artisan International Small-Mid Fund. OSMAX is a closed, five-star fund. Shareholders should expect substantial portfolio turnover, with a potentially large tax hit. The OSMAX portfolio is substantially more Asia-focused than Artisan’s current one, it has a substantially higher stake in large cap stocks and higher overall market cap, and it typically holds about three times as many names in its portfolio.

There was a spirited discussion about the change on our discussion board. Some expressed the opinion that the Artisan brand is not so sterling as it once was, while others noted the steadily rising charge for Mr. Kanovich’s services. “msf,” for example, pondered a question that Ed Studzinski raises frequently.

Unfortunately, Kanovich’s fund keeps getting more expensive. OSMAX charged 1.2% in 2015. Oppenheimer then closed the fund in 2016 and raised its ER to 1.3% (the increase came entirely from a higher management fee). Then in 2017 the ER went up to 1.4%.

Now in 2018 Kanovich is moving to a fund with an ER approaching 1.6%. His returns have been great, but at what point does one say “enough”?

Effective October 1, 2018, the Loomis Sayles Small Cap Growth Fund reopened to new investors.

CLOSINGS (and related inconveniences)

Great-West SecureFoundation Balanced ETF Fund (SFBPX) will close to new investors on December 14, 2018. With $38 million in assets and a securely middling record, I suspect that the closing isn’t to protect existing investors from the flood of new money.

Effective as of the close of business on October 5, 2018, Service Class shares of Royce Micro-Cap Opportunity Fund (RMCFX) are closed to all purchases and exchanges. On that same date, the W Class shares of Royce Premier Fund and Royce Total Return Fund closed

OLD WINE, NEW BOTTLES

On December 16, 2018, Angel Oak Flexible Income Fund (ANFLX) becomes Angel Oak Financials Income Fund. The fund’s principal investment strategy will be to invest in “debt issued by financial institutions.”

Okay, here’s the text direct from a recent SEC filing: “Columbia Select Large-Cap Value Fund and Columbia Select Smaller Cap Value Fund changed their names to Columbia Select Large Cap Value and Columbia Select Small Cap Value Fund, respectively, and all references to Columbia Select Large-Cap Value Fund and Columbia Select Smaller Cap Value Fund are hereby changed accordingly. In addition, all references to Columbia Mid Cap Value Fund are changed to Columbia Select Mid Cap Value Fund.” I got the “small” to “smaller” change and the not-so-select to “select” change. I can’t discern any change in the Select LCV name and if, indeed, “all references” to it have been changed to an identical name, would I know?

On or around December 24, 2018 (fa-la-la-la-la), iShares North American Tech ETF (IGM) becomes iShares Expanded Tech Sector ETF. The expansion is not “beyond North America,” by the way. The expansion is that the fund will also invest in “select North American equities from communication services and consumer discretionary sectors.”

Effective November 8, 2018, the name of Neuberger Berman Risk Balanced Commodity Strategy Fund (NRBAX) will change to Neuberger Berman Commodity Strategy Fund.

The Oak Ridge Funds are in the process of becoming the North Square Funds, pending shareholder approval. In an act of, I don’t know, corporate whimsy, “Oak Ridge” disappears from the names of half the funds and remains buried in the names of the other half.

Oak Ridge Disciplined Growth	North Square Oak Ridge Disciplined Growth
Oak Ridge Dividend Growth	North Square Oak Ridge Dividend Growth
Oak Ridge Dynamic Small Cap	North Square Dynamic Small Cap
Oak Ridge International Small Cap	North Square International Small Cap
Oak Ridge Multi Strategy	North Square Multi Strategy
Oak Ridge Small Cap Growth	North Square Oak Ridge Small Cap Growth
Oak Ridge Global Resources & Infrastructure	North Square Global Resources & Infrastructure

On March 1, 2019, RQSI Small Cap Hedged Equity Fund (RQSAX) becomes RQSI Small/Mid Cap Hedged Equity Fund.

Spouting Rock/Convex Global Dynamic Risk Fund (CVXAX) is being rechristened with the less portentious name Spouting Rock Small Cap Growth Fund. It goes from a tactical allocation fund seeking “positive absolute returns” to a small cap growth fund seeking long-term capital appreciation. Since 90% of the current portfolio is held in mid- to mega-cap stocks, its few investors might anticipate almighty turnover between now and year’s end.

OFF TO THE DUSTBIN OF HISTORY

We know that investors, over time and especially in times of crisis, have shown consistently poor and remarkably poor judgment in which funds they choose to abandon, and when. It turns out that fund advisors fall victim to the same bad habit: they liquidate funds just before the category is poised for a rebound. John Rekenthaler reviewed the academic research on the question (“3 Academics Take Active Managers’ Side,” 10/23/2018), concluding:

Not only do fund investors mistime their purchases and sales, but fund sponsors also do. They launch funds when those investment styles are fashionable, then shut them down when they are unpopular and due to rebound. That pleases me; stupidity likes company.

That ought to give readers pause, as they note the rampant liquidations among absolute return, hedged and value funds in the past year. Tick, tick, tick.

Northern’s Active M U.S. Equity Fund was liquidated and terminated on October 19, 2018.

ALPS/Metis Global Micro Cap Value Fund (METAX) left this vale of tears on October 30, 2018.

American Beacon Flexible Bond Fund is merging into American Beacon TwentyFour Strategic Income (TFGPX) on November 16, 2018. Since the change does not require shareholder approval, American Beacon gave the TGFPX management team responsibility for the Flexible Bond portfolio starting in August.

Anchor Tactical Real Estate Fund (ARESX) will close, cease operations and redeem all outstanding shares on November 7, 2018.

Catalyst Insider Long/Short Fund (CIAAX) will liquidate on November 30, 2018.

Cboe Vest Alternative Income Fund (VDDLX) slipped into the crypt on Halloween.

Columbia Absolute Return Currency and Income Fund and Columbia Diversified Absolute Return Fund were both liquidated in October.

The Heartland International Value Fund (HINVX) was liquidated effective October 26, 2018.

Manning & Napier Global Fixed Income Series (MNGSX) and Ohio Tax Exempt Series will close on November 16, 2018 as part of the process of unwinding their portfolios and liquidating.

Rational Risk Managed Emerging Markets Fund (HGSAX) has been closed to new investments and will be liquidated on November 30, 2018.

Redwood AlphaFactor Core Equity Fund (RWANX) was liquidated and dissolved on October 30, 2018.

Snow Capital Focused Value Fund (SFOAX) and Snow Capital Equity Income Fund (SDPAX) both melt away on October 26, 2018.

Virtus Conservative Allocation Strategy Fund (SVCAX) and Virtus Growth Allocation Strategy Fund (SGIAX) will become dis-allocated on November 13, 2018.