Dear friends,

Winter is coming.

I’m so thankful.

Traditionally, year’s end has been a slower time. The growing season has ended, and both the farm fields and the sports fields lie mostly empty in this part of the country. Going out at night is just a touch less attractive when “night” settled in at about 4:30. New projects and wild ambitions are set aside for the new year. Traditionally, it’s a season for festivals and celebrations, only occasionally draped in religious garb. In the northern hemisphere, every religion and every culture seems to have reached the same conclusion: it’s cold, it’s dark, it’s time to get together!

Too, it’s time to reflect on the year just past and all the things we have to be thankful for. (Yes, I was awake pretty much all year in 2018, but that doesn’t change my sense of gratitude for all the good the year bequeathed.)

What do I have to be grateful for?

1. The elections are over. You know, we could pretty much stop right there.

   I’m grateful for the tens of millions of American voters who spoke their minds, and for the millions who changed their minds.

   We have recently become convinced that America is divided between The Forces of Light (that would be “you”) and The Forces of Darkness (that would be “them”). We characterize The Forces of Darkness as self-blinded, uncaring ideologues desperate to retreat into some fantasy past.

   And then, oops. They screwed up the easy, apocalyptic story by changing their votes. Some millions of our fellow citizens who voted for one sort of change in 2016 appear to have reflected on how the changes were playing out, and voted for a correction. That’s reflected in the fact that Democrat candidates outpolled their Republican counterparts by 9,000,000 votes in November, in part driven by the votes of folks derided as RINOs. In short, they acted reasonably. They might act differently again in two years. The reassuring key is that our fellow citizens are not slaves of their social media feeds; they’re folks who think, and act, in pursuit of what they understand to be the common good.

   For that, we should all be grateful.

2. The market is cratering. Then not. Then it is and/or might be.

   As we’ve been reminding you for a couple years, the valuations in the stock market are detached from any reasonable grounding. Against all reason, markets have kept rising, leading investors to thoughtlessly pour money into market cap weighted stock index funds (at their core, momentum plays) and indebtedness weighted bond index funds (which automatically allocate to the most indebted issuer in a universe, not to the most creditable ones).

   The inevitable price of ridiculously high starting valuations is years, and perhaps a decade or more, of negligible returns. As recently as last month, GMO’s forecast was for negative real returns across most asset classes for the next five to seven years.

   Turbulence provides opportunities, both for individual investors to spend some time at year end thinking a bit about how they want to build and balance their portfolios, but also for professional investors to finally profit from some reasonably priced investments.

   It is possible that this is the prelude to a financial apocalypse fed by political obstinacy, policy misjudgments and bad luck (see Barbara Tuchman’s The March of Folly: From Troy to Vietnam (1985), a chronicle of governmental “woodenheadedness” for details) but it feels like an entirely necessary slap upside the head. We will work with you to get through it.

3. It’s easy to get smarter. It’s also easier to get dumber, but that’s a matter of choice.

   

   PEARLS BEFORE SWINE © Stephan Pastis. Reprinted by permission of ANDREWS MCMEEL SYNDICATION. All rights reserved.

   I’m endlessly amazed by the quality of work done by NPR and American Public Media, both on-air and through easily accessible podcasts. I listen to both daily, usually podcasts that I download to my phone and listen to as I walk. I would commend, especially, the Marketplace franchise to folks. Here’s how they describe themselves:

   “Marketplace is on a mission to raise the economic intelligence of the country. Its core programs — Marketplace, Marketplace Morning Report and Marketplace Tech — are broadcast on more than 800 public radio stations nationwide and heard by 14.6 million listeners every week. Marketplace podcasts including Make Me Smart with Kai and Molly, The Uncertain Hour and Corner Office can be found at marketplace.org or on your favorite podcast app.”

   Make Me Smart is a particular delight. The hosts have one central issue each week (“the curse of bigness” recently) surrounded by the sort of amiable give-and-take that you’d associate with really smart people who very much enjoy one another’s company. It’s definitely not an “eat your broccoli” (much less “eat your danged Brussels Sprouts”) sort of experience.

4. The FAANGs have lost a trillion dollars. In what, six weeks?

   I rather worry that we’ve allowed a few corporations to accumulate unprecedented power over us. Admittedly, John D. Rockefeller had a net worth (in 2018 dollars) of a quarter trillion (untaxed) dollars and his Standard Oil Company controlled roughly 90% of the US energy market. The difference between him and the new monopolists is that they control our personal information as well as our wallets. (See, e.g., the easy What Does Google Know About You? Infographic for a peek.)

   Mark Zuckerberg and Facebook are ham-handed in their manipulations, with the multi-billionaire Zuckerberg thinking he’s “all that and a bag of chips.” He brooks neither self-doubt nor opposition. It calls to mind a long ago science fiction novel, Kornbluth and Pohl’s The Space Merchants (1953). It’s about a vastly overcrowded world in which huge corporations have supplanted governments and nations exist only to help support those corporations. Two snippets have stuck with me over many years. One might be Mr. Zuckerberg’s mantra:

   “Mitch, you’re a youngster, only star class a short time. But you’ve got power. Five words from you, and in a matter of weeks or months half a million consumers will find their lives compleatly changed. That’s power, Mitch, absolute power. And you know the old saying. Power ennobles. Absolute power ennobles absolutely.”

   And the other might speak to his future:

   “He spoke of the trouble with the Senator from Du Pont Chemicals with his forty-five votes, and of an easy triumph over the Senator from Nash-Kelvinator with his six.”

   Where is Nash-Kelvinator, you might ask? Largely chewed up, along with virtually all of the original Dow stocks and all of the grand monopolies of a century ago. While capitalism will, eventually, eat Amazon and Facebook both, they have the potential for great mischief ere that happens. Tim Wu lays out the case for government intervention against modern monopolies, much as it intervened to break up Standard Oil, in his new book The Curse of Bigness (2018).

   I am, on whole, glad that the FAANGs have been a bit defanged and that questions about the legitimacy and consequences of their power are at least getting more of an airing than before.

5. We had George Herbert Walker Bush. Mr. Bush was the last American president who neither loathed his opponents, nor was loathed by them.

   Mr. Bush came from a patrician strain of Republicanism that believed America thrived on respect and service to others, not on self-aggrandizement and self-service. As with my dad and millions of others, his first act of public service was as a soldier in World War Two (dad was a submariner, Mr. Bush an airman) and, like dad, he devoted a portion of the rest of his life to public service: congressman, UN ambassador, head of the RNC, quasi-ambassador to China, director of central intelligence, director of the Council on Foreign Relations, vice-president, president, philanthropist.  

   He frequently liked his political opponents because he realized that, disagreements aside, he and they were devoting their lives to the same end. I’ve always been struck by a statement he made in one of the 1988 presidential debates against Massachusetts governor Michael Dukakis. The two men disagreed on the era’s most incendiary question, abortion. Here’s how Mr. Bush framed his beliefs and their disagreement:

   “I think human life is very, very precious. And, look, this hasn’t been an easy decision for me to make. I know others disagree with it. But when I was in that little church across the river from Washington and saw our grandchild christened in our faith, I was very pleased indeed that the mother had not aborted that child, and put the child up for adoption (his son, Marvin Bush, and his wife, Margaret Conway, adopted two children). And so I just feel this is where I’m coming from. And it is personal. And I don’t assail him on that issue, or others on that issue. But that’s the way I, George Bush, feel about it.”

   None of that serves to gloss over the fact that Mr. Bush did a bunch of dumb things, that he may have opened the door to a divisive role for religion in politics or that his behavior toward women was sometimes reprehensible.

   He was a deeply flawed human being who never doubted his homeland and never wavered in his commitment to make it “a kinder, gentler nation.”

6. I’ve got friends. Admittedly, rather more in low places than high, but that’s okay.

   David Brooks, a perennially anguished conservative-with-a-conscience, wrote a thoughtful piece in the New York Times entitled, “It’s Not the Economy, Stupid” (11/29/2018). Mr. Brooks asked a reasonable question, if we’re enjoying “one of the best economies of our lifetime,” why are Americans so glum? He allows that the usual suspects (student loan debt, unstable employment and Donald Trump) might account for some of the angst but, he argues, the greater part is

   “the crisis of connection. People, especially in the middle- and working-class slices of society, are less likely to volunteer in their community, less likely to go to church, less likely to know their neighbors, less likely to be married than they were at any time over the past several decades.”

   Driven by the effects of drug abuse and suicides, life expectancy in the US has fallen for a third consecutive year; the last time that happened, 1915-18, a world war and global flu pandemic killed 800,000 Americans. It is, he concluded, “a straight-up social catastrophe” that neither liberals nor conservatives grasp or address.

   Scholars have been raging about this problem for more than a generation, mostly famously in Robert Putnam’s Bowling Alone (2000, with the book just expanding his 1995 essay). And yet it is a curiously self-inflicted malady.

   Against that trend, I find myself with an embarrassment of riches. That is, in many ways, the result of a choice and of investments we’ve made. Chip and I each work with amazing people, but we also work hard to attract and support amazing people. We shared a joyful evening with some of my international students at Halloween and will open our house to one of hers for a couple weeks in February.

   Isolation is, for many of us, a choice. We choose screen time, we choose “me time,” we find reasons not to reach out.

   I pray you choose otherwise. I have. It’s an enormous, life-sustaining pain in the butt.

Among those friends are the many people who make MFO possible. While Charles, Chip and Ed are the most visible and central players. Less visible, but no less meaningful are the contributions of the estimable Bob Cochran, Dennis Baran, and The (crepuscular) Shadow.

We have also linked this part of our lives with tens of thousands of you. It was your letters, long ago, that convinced us to launch MFO as FundAlarm reached its last chapter. It’s your notes, in email and sometimes on Twitter, that monthly help allay self-doubt and answer the question, “is this still worth doing? Are we making a difference?”

A new adventure!

The folks at Fund Intelligence reached out in November to ask if I’d serve as a judge in their annual fund industry awards. Combining, as I do, amiability and cluelessness, I said “yes.”

I signed, and will certainly respect, a confidentiality / non-disclosure agreement concerning the individual submissions. Nonetheless, it seems like an interesting opportunity and a potentially rich learning experience. I’ll share what I can, as I can.

The Twitter thing

As those of you on Twitter might have noticed, I am not a master of social media. I sat with Daisy Maxey of The Wall Street Journal once, listening to Jack Bogle speak. Daisy’s Twitter output in 45 minutes modestly exceeded my lifetime total on MFO’s behalf.

Nonetheless, we recognize that social media has a potentially useful role to play in connecting with underserved populations. Young folks, who have the irreproducible advantage of a time horizon measured in multiple decades, tend to be uncertain and poorly connected to traditional sources of advice. They also tend to use social media rather more than their elders.

In hopes of better serving such groups, we’ve added a little “Tweet this” button to the end of each story. If you’re engaged on social media and it strikes you that some particular story might have merit for the folks who follow you, please consider pushing the button. It can’t hurt and might, we hope, help someone who would otherwise remain adrift. Thanks!

Matching grant / challenge grant offer.

The only two sources of support for MFO were Amazon, under a partnership they subsequently terminated, and reader contributions. Last December, in response to Amazon’s decision, three readers collectively offered up a matching grant: for every dollar donated in December 2017, they would match contributions on a 1:1 basis up to a total of $2,000. Within 48 hours, you folks responded with $7,000 in contributions, which was sort of stunning.

We were offered a similar, though modestly smaller matching grant this year: two members have offered, between them, to match dollar-for-dollar the first $1000 we receive in December 2018.

If it’s in your budget and in your best interest, we’d encourage you to make a tax-deductible year-end contribution to MFO. Contributions of $100 or more get you a year’s access to MFO Premium, home of the unique fund screener that we’ve built for folks who want information – sophisticated risk measures, rolling returns, correlations between funds – that are normally unavailable to regular folks. Whether you choose to give $1 or $10,000, we’re grateful and we’ll keep digging on your behalf.

Some folks have chosen to use our PayPal link to create regular monthly contributions, which we find almost freakishly cool. Thanks, as ever, to Deb and Greg, whose continued monthly support makes us smile. We’re so pleased that Brian, George, David, William and Doug have chosen to follow Deb and Greg’s lead in setting up recurring monthly contributions to MFO. Thanks, too, to Katrina, Doug, and Anne for your kind contributions in November.

Our challenges are great. We can face them better together. We are glad that you’re here. We hope you like the issue and hope, even more, to see you again in the New Year.

GMO monthly issues their “7‐Year Asset Class Real Return Forecasts” for 10 – and, beginning this month, 11 – asset classes. Their method is fairly simple: assume that things – P/E ratio, profit margin, sales growth and dividend yield – will revert to “normal” over the next 5-7 years and sketch the line from here to there. The “real” part is that you deduct the effect of inflation from the resulting “nominal” returns.

Several scholars have examined their predictive validity and found it to be pretty robust. One, examining projections from 2000-2010 then comparing them with Vanguard index funds concluded:

The correlation between the GMO predicted returns and the Vanguard realized returns for equities, bonds, and all assets taken together are 0.954, 0.959 and 0.677 respectively. (Tower, 2010)

Others found that even when the absolute values are off (i.e., GMO was too pessimistic during the frothier parts of bull markets), the relative values are right: GMO’s top-ranked asset class tends to outperform its second-ranked class, and so on. Ben Inker, their chief strategist, claimed a 94.5% accuracy (2012).

As recently as September, the real return projections were negative for every asset class except cash. They were least negative about the emerging markets. The newest projection, released on November 21, begins to factor-in the effect of the recent market turbulence. 

Bad news: cash remains the most promising US asset class, with US equities in the red over the next 5-7 years and US fixed income breaking even. 

Good news: there is one asset class now poised for historically exceptional returns, emerging market value equity. GMO projects a 7.7% annualized real return for EM value, well above the historic 6.5% real return in the US stock market. Emerging equity, as a whole, is the second-highest asset class (4.4% real) and emerging debt (2.8%) is third. The one caveat: these asset class return projections are not risk-adjusted; that is, there’s no suggestion about how much volatility you’ll need to accept in return for your hoped-for 7.7% real.

Robert Arnott and the folks at Research Affiliates reach the same, broad conclusion: over the coming decade, emerging markets are priced to offer dramatically higher returns than the US and developed international markets, though at the price of dramatically higher volatility as well.

By their calculation, EM returns will be 35 times greater than US returns (7.5% versus 0.25%) though volatility will be about 50% higher (SD of 21.9% versus 14.2%).

Traditionally value investing in the emerging markets has been painful and, mostly, unprofitable. Folks on MFO’s discussion board shared a thoughtful skepticism about their experience with EM investing and the future of EM value investing.

Nonetheless, managers at Seafarer and elsewhere argue that structural changes in the emerging markets – largely marked by local investor activism – have fundamentally changed that equation and that long-ignored value plays offer … well, exceptional value. Ben Inker, the head of GMO’s asset allocation team, pretty much pounded the table on the subject:

Emerging equities are more volatile than developed market equities. This owes little to the volatility of emerging stock markets in local terms and much more to the strong positive correlation between their local stock markets and movements in their currencies. The spring of 2018 was a classic example of this, with US dollar strength driving significant emerging weakness. Emerging markets do exhibit momentum, so it would not be odd for the weakness to persist for another quarter, although after transaction costs the momentum effect is probably not capturable. Our analysis of the underlying fundamentals for emerging markets, on the other hand, gives us confidence that the assumptions behind our forecasts are sound and emerging value stocks represent the most attractive asset we can find by a large margin, and in the longer term we believe valuation is much more predictive of returns for emerging than momentum is. Our models do not take into account the potential effects of a trade war, but while a trade war is presumably a negative for emerging assets, it should arguably be at least as negative for US assets and seems unlikely to change much about the relative attractiveness of emerging markets in global portfolios.

As a result, there are relatively few EM value funds though their ranks are growing. As a starter set for folks interesting in pulling together a due diligence list, below are the top 10 EM value funds based on 2018 YTD performance. We defined “EM value” as funds falling in Morningstar’s EM category whose equity style box is “value.”

All data current as of 11/29/2018

While MSCI publishes the MSCI Emerging Markets Value Index, they report “there are no active ETFs associated with this index.”

Beyond dedicated EM funds, some domestic value investors who have the freedom to invest globally have begun adding EM value stocks to their portfolios. David Hobbs, president of The Cook & Bynum Fund (COBYX) writes that “we are finding the opportunity set outside of the US (and particularly in emerging markets) much more interesting these days.” Their most recent shareholder letter reflects their judgment that the stocks of some good non-US firms are now so beaten down that they have been able to put a meaningful portion of fund’s cash to work this year:

Since their peaks on January 26, 2018 through late October, the MSCI ACWI excluding the U.S. is down 18%, and the MSCI Emerging Markets Index is down 25%…When political and macroeconomic risks in these countries emerge – say the election of a socialist-leaning leader or weakness in the prices of a country’s primary exports – capital will flow out of these markets, oftentimes chaotically. We like and carefully look for indiscriminate selling where speculators dump stakes in good businesses for non-fundamental reasons. Our efforts to buy undervalued businesses are easier when fear pervades, and international markets are increasingly riddled with trepidation. Indeed, we were able to build a position in a new investment and increase the size of our existing holdings in several existing holdings during the last six months.

Bottom line:  the whole EM apple cart might well be upset if the rising conflicts between the US and China are not successfully managed. Speaking to the Bloomberg New Economy Forum, former Treasury Secretary Henry Paulson described that conflict as “a systemic risk of monumental proportions” and warns of “a long winter in US-China relations” (WSJ, 11/8/2018). One EM manager, speaking off the record, worries that conflict between the US and China, stoked by dysfunctional jingoism and risk of escalating reciprocal retaliation, might eventually make the emerging markets uninvestable.

If you believe that both sides will somehow muddle through again, it would be prudent to begin now to deepen your understanding of what appears to be your best hope for reasonable returns in the decade ahead.

Zeke Ashton never met Brenda Barnes, so far as I can tell. That’s too bad. He had, sometime this fall, his Brenda Barnes Moment. I think he would have enjoyed talking with her about it.

Brenda Barnes was many things but, for the purpose of our story, she was one of the most powerful business leaders in America. She became COO of Pepsi-Cola in 1993 then president and CEO in 1996. Later, as president of Sara Lee, Forbes ranked her as the 8^th most powerful woman in the world, just ahead of Oprah Winfrey (2005). That same year, Fortune ranked her third.

But Brenda was not just the sum of her corporate accomplishments. She was a good and thoughtful person, complex, acute and still charitable. She was a spouse, a mother of three, an active mentor to young women and a respected voice in a dozen communities. She was also an Augustana alumna, guide and colleague.

Her professional career saw two pinnacles: she was one of the more powerful women in the middle 1990s and one of its most powerful a decade later. And in between those two, she walked away. At age 43, Brenda resigned from her post at Pepsi, then she and husband Randy packed up the family, sold the Connecticut estate and moved back to her home state, Illinois. Brenda was loath to let life be entirely consumed, as it was in the 1990s, by an endless series of 14-hour workdays. Her argument was simple: “It’s not that my children needed me. It’s that I needed them. If I didn’t spend more time now, I would not have that opportunity.” Two years into her sabbatical, she reported “I’ve had no boredom. Not a minute. Not a nanosecond.”

Brenda always understood that “to get to the highest levels, you have to commit your life, which was not the right choice right now. But I would never rule out going back.” She joined carefully selected boards of directors (“I wanted to go where I could learn something, and where I felt my skills would be an asset. You don’t want to just sit there. You want to be valuable. Otherwise, why waste the time?”) and eventually returned to a second, higher pinnacle as CEO of Sara Lee. In 2010, while lifting weights in a gym, Brenda suffered a massive stroke, was placed in a coma, then spent years ferociously rehabilitating herself. In 2013 she received the State of Illinois’ highest recognition, the Lincoln Laureate award.

A November SEC filing offered the first public word of what turned out to be Zeke Ashton’s Brenda Barnes Moment: “Centaur Capital Partners LP … has notified the Board that it intends to resign, and the Board, after careful consideration, determined that it was in the best interest of the Fund and its shareholders to appoint DCM as the new investment advisor to the Fund. It is expected that the Interim Advisory Agreement will become effective on or about November 15, 2018. DCM intends to manage the Fund using the current investment objective and strategies.”

The story: Centaur Total Return (formerly Tilson Dividend TILDX) is a remarkably good little fund. All-weather, great returns over time, absolute value orientation. It’s been managed since inception by Zeke Ashton, who wants to have a fully-invested equity portfolio but who has kept 40-60% in cash since the market became richly valued. It’s made 12% annually over the decade because his stock picks perform really well; last year he had a 13.5% return sitting on 50% cash, which means his stocks returned about 27%. We’ve profiled it several times. 

Nonetheless, money has been walking out the door at about a million a month. My rough estimate is that he’s seen outflows in, say, 70 of the past 72 months. The fund is down to $25 million, mostly friends and family now.

The easy assumption, which I erroneously made in first writing about his decision, is that Mr. Ashton concluded that the fund was not financially sustainable and that he couldn’t justify sticking with it.

I was wrong.

I had a wide-ranging conversation with Mr. Ashton at the end of November, 2018.

This was not really a business or investing decision, though both played a role. Centaur, with both a hedge fund and a mutual fund, is a family business run by a husband-wife team. That certainly makes us different from the usual hedge fund boutique and, I’d guess, from the usual small mutual fund, too.

Running a special kind of fund has been a dream of mine, and it’s nearly all-consuming. I felt like I had identified the core problem with mutual funds and investing in general; the problem is sometimes fees and performance, but it is primarily that investors behave poorly. We too often make bad decisions in response to dramatic but short-term developments. I wanted to create a vehicle that could provide a similar ride to the fully-invested indices without the risk or volatility. By giving my investors a smoother ride, I was kind of hoping that people would settle in for the long-term.

By and large, relative to the exposure that we take and relative to the market cycle, I think we did that.

That’s been my dream, but pursuing it has come with real costs. It takes so much effort that you can hardly imagine it. We work virtually every weekend and every night, and we’ve had no vacation in six years. That was my choice and it reflects my style, but I’ve become uncomfortable with the cost. Our parents are getting older, and need us more than before. That’s made me realize, the stock market is always going to be there but the people you love won’t always be.

It’s a good time for us to step away. We have decided to close our hedge fund and return capital to investors. We’ll have time for each other and for family. I think of it as a sabbatical from the business, not necessarily the end of our time in it.

I have great peace of mind about it all: we were on a worthwhile mission, and it was a worthwhile use of a third of my life.

Bottom line: The Board has decided to keep Centaur Total Return open with a new manager. They selected Vijay Chopra of DCM Advisors. I know next-to-nothing about him but here’s his bio from his Linked In profile:

Global equity portfolio manager managing global, international and emerging market portfolios utilizing a quantitative investment framework. Global equity strategy has an annualized alpha of over 200bp over the last eight years. The investment process combines a disciplined top-down global country-allocation strategy with a bottom-up quantitative stock-selection strategy to provide two complementary sources of alpha. Global macro-economic, valuation, growth and momentum indicators are used within a multi-factor framework to evaluate country attractiveness, and determine risk-managed country allocation.

He’s doubtless a good guy. I reached out, via Linked In, to Mr. Chopra but he has not chosen to respond. There is a strategy description on the DCM Mutual Funds website, for those interested. As a practical matter, Centaur remains in name only. We don’t know its future directions or prospects, both of which might conceivably be bright. Given that ignorance, we have removed our earlier profiles of Centaur and recommend that investors approach it as they would an entirely new fund.

We wish Mr. Ashton well. He’s done an exceptional job for his investors and surely has earned some time with family and with life. He might, in the fullness of time, choose to return. We would welcome that development and will remain watchful on your behalf.

Post script:  Brenda Czajka Barnes (November 11, 1953 – January 17, 2017)

Brenda’s reflections on the life’s evanescence and its preciousness were prescient. A second stroke ended her life two years ago, at age 63. In a 2013 interview at the Lincoln Academy, Brenda recognized the fragility of it all:

I tell people you have to really value life and view it with a positive attitude, because you never know when it could go away, or how quickly it could go away. It’s the old adage of living each day to the fullest. In the flick of a moment, everything changed for me. Everything.

I think, sometimes, about Amos Tversky whose early work with Dan Kahneman laid the groundwork for behavioral economics. Not long before his death from cancer, at age 59, Dr. Tversky reflected on life. “Life is a book,” he wrote. “The fact that it was a short book doesn’t mean it wasn’t a good book. It was a very good book.”

Brenda wrote a very good book, indeed.

It is exceedingly unlikely that your best options in the year and years ahead are going to look much like the winners of the past two years. That reflects, in part, the market’s unresolved turmoil and, in part, the fact that the market has been unmoored from reality of late. Commentators fear that “the sugar rush” provided by the Republicans’ indiscriminate tax cut will, at best, fade and, at worst, be followed by a “sugar crash” as the consequences of trillion dollar annual deficits, rising interest costs and global instability begin to hit home.

A quick snip from my most recent newsfeed:

Is Another Market Crash Coming?

The Latest Stock Market Crash Signal Is Blaring Out of Texas

A Market Crash Is Inevitable — Here’s What to Do

The stock market is flashing some terrifying parallels to the tech …

GOLDMAN SACHS: Hedge funds have plunged into a ‘vicious …

Is There A Possibility Of Another Stock Market Crash?

The stock market looks like it’s past the point of no return — and not …

Bitcoin Crash Escalates, Equity Crash Developing

Those are from halfway credible publications, not “head for the bunker” crazies!

And despite that, the market is still having 3.5% up days and has its share of “up 24% in 12 month” cheerleaders who might, for all I know, be right

We’ve been tracking funds whose strengths might serve you in markets that are greatly different from those we’ve lately seen. In advance of a series of 2019 profiles, we wanted to share the names of four funds that warrant a place on your year-end due diligence list.

The Fund for Uncertain Markets: Northern Global Tactical Asset Allocation (BBALX)

The ideal fund for uncertain times is not “conservative.” For uncertain times, you benefit from “a vigilant agnostic.” By that I mean a fund whose risk exposure can change as conditions evolve. Northern Global Tactic Asset Allocation qualifies.

Northern Trust Asset Management is institutionally averse to traders, speculators, flavors-of-the-month and trendy marketing. Northern Global Tactical Asset Allocation (BBALX) embodies the market assessment of Northern’s investment policy committee.

BBALX has an exceptionally solid core. It has a strategic asset allocation that’s more diversified than most, with structured exposure to global real estate, commodities and infrastructure as well as global equities and fixed income. It implements that allocation plan primarily through its FlexShare smart beta ETFs and iShares ETFs. The FlexShare ETFs are designed with strategic “tilts” in their asset class exposure: they “tilt” toward quality, dividends, value and size. Those tilts are all structural bets in the direction of factors which tend to outperform over the long term.

Northern can then apply a tactical overlay. If its calculation is that the market is favorable to a “risk-on” strategy, it can tactically increase its exposure to risk assets to gain a modest advantage over static portfolios.

I had a long talk in November with manager Jim McDonald, who is also the Chief Investment Strategist for Northern Trust. For the first time since the strategy’s inception, the tactical positioning is zero. That is, uncertainty in the market is so high that it’s prudent to neither embrace nor avoid risk. They’re a tiny bit heavy on corporates and a tiny bit light on TIPs. The most notable overweight in the portfolio is in high yield bonds: “our overweight is considerable, we view [HY] as a risk asset, and it is the least risky of our risk assets.” The net effect is being risk-neutral until they have a better view.

The most notable risk they see is that the fed will overshoot on interest rates, which is a “material risk” but not an element of their current base case. That is, they’re watching, they’ve wouldn’t be surprised, they’re ready to act … but haven’t yet.

On whole, the fund is performed admirablely across markets. The fund’s “tactical” mandate was first introduced ten years ago. Since that time, it’s delivered respectable returns with particular strength in managing failing markets.

Administrative details for Northern Global Tactical Asset Allocation

The fund is managed by Robert P. Browne, James D. McDonald, and Daniel J. Phillips. As of July 31, 2018, Robert Browne had over $1 million invested in the fund, James McDonald between $500,001 and $1 million, and Mr. Phillips had no investment in the fund.

Northern Global Tactical Asset Allocation website.

The Fund for Nearly-Normal Markets: RiverPark Long/Short Opportunity (RLSFX / RLSIX)

RiverPark Long/Short Opportunity is designed to crush things in normal markets. RiverPark started with the recognition that some industries are in terminal decline because of enduring, secular changes in society. By identifying what the most important enduring changes were, the managers thought they might have a template for identifying industries likely to rise over the coming decades and those most likely to decline. The word “decade” here is important: the managers are not trying to identify relatively short-term “macro” events (e.g., the failure of the next G20 summit) that might boost or depress stocks over the next six to 18 months. Their hope is to identify factors which are going to lift up or grind down entire industries, year after year, for as far as the eye could see. They normally hold 40-60 long positions in stocks with “above-average growth prospects” and 40-75 short positions in stocks representing firms with challenged business models operating in declining industries. They would typically be 50-60% net long.

Unlike many long/short funds, the strategy here is to always play offense. Their short book doesn’t function as a “hedge” for their long book, it’s designed to make money all on its own. The strength of the fund has been masked by the fact that we have not been in a “normal” market for a long time. Relaxed lending standards and near-zero interest rates have allowed a lot of zombie firms to shuffle along far longer than you’d imagine; as credit tightens and interest rates rise, a lot of these firms will lose their lifelines and their (borrowed) leases on life. If that plays out, RiverPark is ready.

Over the past five years, the fund has performed as you might predict: it has generated both higher returns and higher volatility than its timid peers. As volatility has returned and the credit cycle began to turn, the fund has begun to shine. Here are the one-year metrics for the fund, reflecting a positive asymmetry between returns and risks in a normalizing market.

The fund’s performance has been particularly strong in 2018, where its 2.4% return (through 11/30) leads its average peer by an astounding 4.25%, placing it in the top quarter of all long-short funds.

Administrative details for RiverPark Long/Short Opportunity.

Mitch Rubin has over $1 million invested in the fund.

Long/Short Opportunity website.

The Fund for the Next Market: JOHCM Global Income Builder (JOFIX / JOBIX)

This is a multi-asset fund but it is largely unconstrained: it targets US and international income-producing securities including common stock, high-yield and investment grade debt, preferred shares and convertibles, and a variety of hedges including gold, precious metals, currency forward contracts, and inflation-linked vehicles. Income-oriented yet wary of today’s low yields, interested in capital growth yet skeptical of overpriced assets, determined to minimize the risk of permanent loss of capital but agnostic about which asset classes are best suited to do that. It intends to pursue a sort of absolute value discipline, whose core tenet is that the best way to make money long term is first and foremost not to lose it. As a result, the managers intend to only buy assets which provide a sufficient margin of safety.

The advantage they hold over other absolute value investors is that cash is not their only refuge; being a multi-asset fund, they can, as their Team Head observes, “still provide clients with the service of income even while risk assets are not particularly attractively priced.”

The fund is new but the team is experienced and, in particular, highly experienced at managing this strategy. Team Head Giorgio Caputo and Robert Hordon co-managed First Eagle Global Income Builder (FEBIX) from inception through July 19 and October 20, 2016, respectively. Both served as analysts on First Eagle’s Global Value Team which oversees First Eagle Global (SGENX) and both had the opportunity to work with renowned investor Jean-Marie Eveillard. Under their watch, FEBIX earned a four-star rating from Morningstar.

Morningstar reports that the fund has lost 2.75% in 2018, through November 30. That places them in the top 20% of all world allocation funds.

Administrative details for JOHCM Global Income Builder.

Access has been steadily broadening and the fund is now available through Schwab, Fidelity/NFS, Ameritrade, Stifel, Oppenheimer & Co., LPL Financial, JP Morgan and Morgan Stanley, as well through direct purchase via the JOHCM website.

Messrs. Caputo and Hordon have each invested $1,000,000 or more in the fund, Ms. Topcuoglu has invested between $100,000 – 500,000.

The fund’s website required a few extra clicks to reach and is, as yet, thin on content.

The Fund for a Bond Bear Market: RiverPark Floating Rate CMBS (RCRFX / RCRIX)

Many investors believe that we have reached the end of a three-decade bull market in bonds, and that a long, grinding bond bear market (yes, there are such things) might be underway. The fact that the market is unhappy does not materially change investors’ needs for income, especially in retirement. RiverPark Floating Rate offers a fascinating alternative to traditional fixed-income funds.

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. 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.

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 and attractive yields.

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. MFO calculated the correlations between RiverPark and the aggregate bond market at only 0.30.

It has a highly experienced manager. The fund is managed by Edward L. Shugrue who 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 has, over the years, traded rather more than $30 billion in CMBS.

Morningstar reports that the fund has earned 3.2% in 2018, through November 30. That beats their Morningstar peer group by a full 5.0%.

Administrative details for RiverPark Floating Rate CMBS.

Edward L. Shugrue III has invested substantially more than $1,000,000 in his fund. The fund’s website is attractive, but content is growing at a modest rate.