Dear friends,

January 1, 2019. Welcome to a New Year!

Or not.

January 1.

The whole question of why we designate January 1 as the start of a new year is a bit unsettled. As you think about it, January 1 aligns with nothing. No major historical event. No astronomical occurrence. No grand moment in any of the world religions.

Much of the world goes its own way on the matter. The Iranian New Year, called Nowruz, sensibly enough begins at the moment of the spring equinox, March 20 or 21. Al-Hijra, the Islamic New Year, begins August 30. The Jewish New Year will be celebrated during Rosh Hashanah, beginning September 29. The Chinese (Korean and Vietnamese) New Year, preceded by a week of celebration, rolls in on February 5 with the inauguration of The Year of the Pig. In Chinese culture, pigs are the symbol of wealth. (I’ll admit that’s a thin hope, but I’m willing to go with it!)

The ancient Romans were sensibly political about the matter. The New Year started on Inauguration Day, whatever day the new consul took office which was usually in late spring, and the year was named for the leader. (January 20, 2017, if you want to play with that notion in your head.) The exact date was set by Rome’s chief priest, the pontifex, who often had strong opinions about the incoming administration. As a result, years could start sooner when the pontifex liked you and substantially later when he didn’t.

Upon ascending to power, Julius Caesar put a stop to the practice and set January 1 as the first day of the New Year, 45 BCE. The idea quickly caught on.

Okay, it didn’t unless you meant “about 1500 years later.” Here are the dates for when various states first recognized the civil year as beginning on January 1:

And still, we need a New Year. It represents a symbolic and psychological break from the messiness of the preceding twelve months, and it offers us the opportunity to gather, celebrate, plan and commemorate. Those are all very good things.

2019

The designation of “centuries” as somehow important strikes me as equally silly. We can’t even keep straight whether a new century begins with the year numbered -00 or the one number -01; the latter makes more sense, though it’s less visually satisfying. Why, exactly, “the 21^st century” is a meaningful phrase is unclear, since this epoch did not begin with any defining event.

The challenge to that easy orthodoxy was posed long ago by William Klingaman, in his 1987 book, 1919, The Year Our World Began. 1919 marks, he argues, the end of “the long 19^th century” which was defined by a set of political structures (dynastic and imperial) and social structures (rigid and stratified) that were ripped apart by The Great War and the global plague that sickened one-third of the world’s population and killed 50,000,000. As the world spun out of control, its leaders were locked in vindictive, self-aggrandizing bickering.

We wish you better on this centennial of our world. We look forward to the year, fully cognizant of the wildness we face and of our own ignorance (I’ve got not the slightest clue about what the market will do nor how it’ll do it) but also cheered by your wisdom, your companionship and our children’s unbounded potential. We’ll make a good year of it, because we have no other option worth pursuing.

Thanks!

We were blessed both by challenge grants from two anonymous friends of MFO, and by your willingness to step up and help us meet them. You contributed enough in December for us to cover rather more than half of our (modest) fixed costs for the year ahead. Thank you for that.

Thank you to the dozens of you who renewed your MFO Premium accounts. In addition to Charles’s regular enrichments of the site’s function, we’re moving toward several grander changes including the creation of an investor advisory council to help us fine tune the system’s capabilities and a professional “user experience designer” to help us make it even friendlier and easier to use.

Speaking of MFO Premium, be sure to read Charles’s short announcement entitled “MFO Premium webinar.” Charles is co-hosting the webinar with Brad Ferguson of Halter Ferguson Financial, one of the financial planners who uses the site regularly in his practice and whose custom metrics are now incorporated in it.

Quite beyond those, special thanks to December’s contributors, including Sharon A., the K. Family, Greg (one of our stalwarts), Marvin from Montana, Brett A., Sunil (howdy, sir!) of sunny California, William M., Robert M., Lee of San Antonio, Irv H., Carl from Cambridge, Francis of Minnesota, Van S., Brian T., Deb (the ever awesome), Kevin P., Altaf of Illinois, Richard from Raleigh, Ben from Virginia, Ed G., Joseph S., Richard of Phoenix, Ronald from Rhode Island, David C., Victoria O., Leah from Massachusetts, Mike H. (your note meant a lot), Paul of Cincinnati, Charles R., Francis from Rogue River, Doug E., Paul from Virginia, Joseph A., and several anonymous friends.

A special shout-out to Richard from Orchard Beach and other fans of Money Life with Chuck Jaffe. I was Chuck’s guest on about December 20^th and offered quick takes on a half dozen funds:

Provident Trust Strategy (PROVX) for Rich in Orchard Beach, MD. and Dale in London, OH. PROVX was profiled in our December issue, but also in our first issue ever. They’ve done a better job than just about anyone in managing the risks posed by a focused portfolio. It’s an exceptional little fund.

RiverPark Strategic Income (RSIVX) also for Rich. I like it a lot. David Sherman manages a flexible portfolio that aspires to returns in the 7-8% range but he will not “reach for returns.” I own it in my personal portfolio and we hold it as part of MFO’s tiny endowment. That said, two other RiverPark funds are modestly more compelling RiverPark Short Term High Income (RPHIX/RPHYX, which Chip and I also own in our portfolios) and RiverPark Floating Rate CMBS Fund (RCRIX/RCRFX).

Bruce Fund (BRUFX) for Dave in Beaver Dams, NY. Run by Robert & Jeffrey Bruce since 1983. The senior Mr. Bruce is 87 and was the mastermind behind one of the great funds of the 1960s and early 1970s, the Mathers Fund. They won’t permit themselves to be photographed and won’t talk with journalists or analysts. It’s a go-anywhere fund, with rock star / rock steady performance. It lost only 1% during September and October. #2 ranked flexible portfolio by Sharpe ratio. Industry’s worst website apparently designed by an accountant who resented the whole idea of the web. Morningstar disdains the fund and ended coverage in 2010; since then it’s been a top 5% performer.

Ariel International (AINTX) for Richard in Chula Vista, Calif. Rupal Bhansali has managed the fund since 2011. We’ve spoken at length, and she’s really impressive. I like the fact that her portfolio construction starts with a phase she called “throwing out the trash.” The general pattern is that performance sucks in boisterous markets, thrives in sucky ones. General rule: if the international markets are in the red, this fund will be a top 10% performer, if the international markets are making north of 20%, this fund will be in the bottom 10% with solid absolute returns. My impulse is to look at her Global Fund (AGLOX), with about twice the returns and slightly lower volatility.

Vanguard Dividend Appreciation (VIG) for Richard in Chula Vista, CA. Dividend worship has gotten entirely out of hand, as zero –and occasionally negative –interest rates triggered a desperate search for income-at-any-price. That’s had two effects on dividend paying stocks. First, they’re often no-growth companies whose stocks are now priced as if they’re high growth companies. Second, corporate management has engaged in some desperate financial engineering so they can continue to pay those dividends. Some companies have turned to issuing high yield bonds to fund dividends (and stock buybacks, which were averaging $75 billion a month over the first three quarters of 2018) and nearly 500 firms have dividend payouts that exceed their earnings. These are not your father’s blue chip Steady Eddie stocks, Richard. That said, Vanguard is sensible, disciplined (they look for 10 consecutive years of rising dividends) and cheap.

We were delighted to receive a boatload of books over the holiday season. These arrived throughout the month of December, and we smiled as we opened each one:

These Truths: A History of the United States, by Jill Lepore, an award-winning historian and writer for the New Yorker. Heralded as, “the most ambitious one-volume American history in decades,” These Truths explores our history through the lens of Jefferson’s “three truths” – political equity, natural rights, and the sovereignty of people.

Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts, by Annie Duke. The author, “poker champion turned decision strategist,” tells us how to become comfortable with uncertainty, avoid knee-jerk reactions, and make good decisions – mostly without math!

Washington Black, a novel by award-winning author Esi Edugyan. This is the story of George Washington Black, or “Wash”, as life takes him from Barbados field slave, to manservant, to fugitive; from the Caribbean, to the Arctic, London, and Morocco. It’s a story of “love and redemption.”

Beginnings: How the Party Started, by Marc Weber. A truly beautiful cookbook presenting “purposefully unadulterated, commercial kitchen recipes” designed to inspire “bringing out your inner pro chef.” Chip promptly turned to page 202, the Jack and Ginger Julep.

Factfulness: Ten Reasons We’re Wrong About the World – and Why Things Are Better Than You Think, by Hans Rosling. A book designed to “change the way you see the world and empower you to respond to the crises and opportunities of the future.” If you liked Optimism is not always the answer, you might want to check out this book.

Thanks to the folks at Cohanzick, Cook & Bynum, Long/Short Advisors and others – optimists one and all – for their generous attempts to deepen my clue supply and help me while away the long winter evenings!

Cheers!

But, it is, in general, the best place to begin the search for the answer. Optimists, who assume things will work out, tend to see more paths forward, more options worth considering, than pessimists (often dubbing themselves “realists”) who know that it’s eternally time to duck-and-cover.

The word “optimism” entered the English language (1759, in French 1737) several generations before pessimism (1794) did. 

The psychological research on the effects of optimism is stunning. The champion of such research is Dr. Martin E.P. Seligman, a Professor of Psychology at the University of Pennsylvania and Director of their Positive Psychology Center. His focuses on notions like “learned helplessness” and has racked up rather more than 325 journal articles and books. His most widely-cited work, Learned Optimism: How to Change Your Mind and Your Life (Vintage Books, 2006) has been cited by other scholars on 7,998 occasions. In it he argues:

The defining characteristic of pessimists is that they tend to believe bad events will last a long time, will undermine everything they do, and are their own fault. The optimists, who are confronted with the same hard knocks of this world, think about misfortune in the opposite way. They tend to believe that defeat is just a temporary setback, that its causes are confined to this one case. Optimists believe that defeat is not their own fault: Circumstances, bad luck, or other people brought it about. Such people are unfazed by defeat. Confronted by a bad situation, they perceive it as a challenge and try harder.

These two habits of thinking about causes have consequences. Literally hundreds of studies show that pessimists give up more easily and get depressed more often. These experiments also show that optimists do much better in school and college, at work and on the playing field. They regularly exceed the predictions of aptitude tests. When optimists run for office, they are more apt to be elected than pessimists are. Their health is unusually good. They age well, much freer than most of us from the usual physical ills of middle age. Evidence suggests they may even live longer.

There are important parallels here to “the placebo effect.” For a long time, medical researchers considered the placebo effect to be a nuisance and a sign of failure; that is, if taking “a sugar pill” was about as useful as taking an experimental drug, they concluded that the drug was a failure. Newer research, embodied at Harvard’s Program in Placebo Studies, reaches the opposite – and more optimistic – interpretation: it’s not that the drug failed, it’s that the placebo worked. Our minds are able to have powerful effects on our bodies which aren’t limited to the rainbows-and-unicorns fluff associated with Pollyanna. We can will physiological changes into existence if we believe that those changes are due.

Vox published a nice summary of the placebo research, Brian Resnick’s “The Weird Power of the Placebo Effect, Explained,” in 2017. There’s a conspiracy afoot to trick you into getting smarter; it involves a number of smart people making learning seem fascinating and whimsical. They came together on the Christmas Eve edition of the Make Me Smart podcast in which Kai and Molly reprise an interview with Adam Conover, of the Adam Ruins Everything TruTV show. Conover is both a comedian and a really smart guy who tries to bring serious research comically to bear on various cultural myths and misunderstandings. Kai and Molly’s piece ends with a nice reflection by Adam on the power of placebos.

Why does it matter?

Good question! It matters because the world feeds your impulse toward pessimism and starves the prospects for optimism. Still, in ways small and large, there’s an objective case for optimism.

Many of us know the tragic story of the death of Mollie Tibbetts, an Iowa college student murdered in July 2018 by a young man who’d worked quietly in town for years, but who also was in the US illegally. His arrest in August led to threats against other migrant workers in Iowa, many of whom left in fear. Fewer of us know that Ms. Tibbetts’ mother took in the child of a migrant family that had fled; Ulises Felix had grown up in town, was a high school senior intent on graduating and faced the prospect of spending a year alone in the one still-furnished room of a trailer home. At her son’s behest, she invited Ulises to live in their spare bedroom. It was a quiet gesture without great political significance, but also an important and good one.

Many of us know that greenhouse gas levels in the atmosphere continue to rise, which raises the prospect of catastrophe. Fewer have reason to note the dozen or so global trends, social and environmental, that reflect the fact that many people are working passionately to make the world a better place. Elijah Wolfson, writing for Quartz, detailed How the world got better in 2018, in 15 charts.

The Gates Foundation’s 2018 “Year in Review” report similarly detailed the many things that are going right in the world. Some are huge (a billion people were vaccinated in tropical countries), many were small (toilet tech improved) and all were threatened by pessimism. Sue Desmond-Hellmann, the president of the Gates Foundation warned, “the biggest threat is a sense of despair and pessimism … youth who feel like they don’t have an opportunity to have a better life … to have a happy, productive, fulfilled life and to achieve something. That’s the biggest threat.”

Traditional media has always followed the maxim, “if it bleeds, it leads.” Editors and publishers know that we’re transfixed by horror (Stephen King has sold over 350,000,000 copies of his horrifying stories), so they feed it to us. Social media, an addictive vortex of horrifying fiction posing as secret truths, makes fear and loathing into virtues.

The markets likewise: the five FAANG stocks lost a trillion dollars this fall, the US markets evaporated a trillion in value in a single week, the Chinese market misplaced nearly $3 trillion this year, global markets vaporized $3 trillion in just two days … and worse, worse, worse! is yet to come.

Or not.

Stock market valuations, the key driver of future investment returns, are historically high but becoming more reasonable daily. Interest rates, the key driver of corporate capital decisions and income-investor returns, are low but becoming more nearly normal. Volatility, a key tool for restraining irrational exuberance and investment bubbles, has become a top-of-mind phenomenon.

To be clear: those are all good things as long as we’re willing to make them into good things.

For investors in their 20s-40s: you’ve been blessed with a series of incomparable gifts. You’re young. (We forgive you.) The current repricing of the markets is utterly inconsequential to your long-term gains. Here’s the Dow Jones average over the past 100 years on a “log scale” so that a 1% gain in 1920 (a rise of less than one point in the DJIA) is the same as a 1% gain in 2010 (which would require a rise of over 100 points). The 18 gray bars are economic downturns.

In general, pick any point in the past century, move 25 years forward and look up – generally way up – at the new value of your portfolio. Unless you have reason to anticipate a return to the Dark Ages, the current thrashing about is precisely as important to your long-term prospects as the frenzied yapping of a small dog.

You’ve got access to more investing tools, more affordably priced, than any generation in history. Asset valuations are slowly returning toward rational levels (umm, not there yet but …) and rising interest rates should impose some discipline on the stock market (it’s harder to borrow more to do silly things when the money’s a bit expensive). There are, in particular, a number of really well-designed multi-asset funds – from target-date funds to “income builder” strategies – that come awfully close to fire-and-forget investments.

For investors in the latter stages of their careers: the current noise is precisely as consequential as you allow it to be. Your returns and volatility are driven more by the asset allocation you’ve chosen than by the individual investments – active or passive, ETF or fund, boutique or behemoth – you’ve selected to implement that allocation.

The mantra “stocks for the long-term” is double-edged. First, stocks are your portfolio’s best friend over the next quarter century and its worst enemy over any “next decade.” Stocks are highly volatile, seductive during their long, relentless “it really is different this time” bull runs and destructive in the inevitable aftermath if you haven’t planned for profiting from the price collapse.

Here’s the magnitude of the losses you might face. I searched MFO Premium’s database for the five largest equity funds, balanced funds and bond funds then pulled up their maximum drawdowns (i.e., largest-ever declines) and how long it took them to get back to break even. It turns out that all of the largest equity funds are passive, four Vanguard index funds and a State Street ETF that hold two trillion in assets, so I added a separate line for the largest actively-managed equity funds (four American and one Fidelity).

With both the pure equity and pure bond lines, one of the top five funds was a significant outlier which a much longer drawdown and much slower recovery than the others, so your results might be a little better.

Here’s the translation: if you own an equity fund, you might reasonably anticipate losing half of your investment at some point. If you don’t sell in a panic, but also don’t deploy your “dry powder” during the worst of the bear, you will not break even for five long years; a bit more for index funds, a bit less for active ones. Those aren’t worst-case numbers, those are the performances of the largest funds which got to be large by being abnormally steady. The worst case numbers, among funds with $10 billion or more in assets:

(Still not the worst-case; remember this screen only examines the performance of very large funds. For complete details, folks who are members of MFO Premium can screen the records of 17,000 funds, ETFs, CEFs and insurance products to see how they compare over any of dozens of different time periods.)

We have argued, and will continue to argue, that the Cult of Equity is overblown. For most folks over 40, a smaller stock allocation than you might imagine will serve you best, especially in your non-retirement portfolio. 

For the managers of active mutual funds: the day you’ve been praying for has come! It’s no longer the up-and-away market that favors whoever offers the purest equity exposure all the time at the lowest cost. The arguments for active management are that (1) managers have the flexibility – through holding cash or dodging the priciest issues – to moderate the effects of a downturn and position investors for a rebound and (2) managers can communicate clearly and frequently, allowing their investors to avoid the worst of their impulses. It’s time to put up or shut up.

For the advocates of liquid-alt strategies: likewise. The average 60/40 balanced fund, for which liquid alts often claim themselves a successor, dropped 9.3% during the last three months of 2018. Every single liquid alts category outperformed that, with market neutral funds clocking in a -0.6%. The rub is that no category of alts earned as much as 3% annually over the past three years. The excuse has been “hostile market conditions,” with zero interest rates and a massive tax cut underwriting all sorts of excess. That’s past now. It’s time to step up, or step aside.

Bottom line. Here’s what I know about 2019: it will be 365 days long. Pretty much everything beyond that is conjecture.

Here’s what I conjecture: it will be a year of great adventures, in the markets and otherwise. It is likely to be marked by great volatility, in the markets and otherwise. Folks who want to sleep well at night they might reasonably act on the recommendations of Vanguard founder Jack Bogle:

Trees don’t grow to the sky, and I see clouds on the horizon. I don’t know if and when they’ll arrive. A little extra caution should be the watchword. If you were comfortable at a 70 percent to 30 percent [allocation of stocks to bonds], under these circumstances you’d like to go back to 60 percent to 40 percent, or something like that.

The Observer’s special passion is for investors with exceptional risk management disciplines and records. We will continue to highlight for you the folks with the wherewithal to keep you safe and to invest responsibly beside you. Seek them out.

Having done that, you might reasonably turn to Warren Buffett’s recent recommendation:

The one easy way to become worth 50 percent more than you are now — at least — is to hone your communication skills — both written and verbal. If you can’t communicate, it’s like winking at a girl in the dark — nothing happens. You can have all the brainpower in the world, but you have to be able to transmit it.

Most funds don’t show up on investors’ radar until they have at least a three year record, which is also the point at which they receive their inaugural Morningstar rating. That’s a generally sensible, sometimes silly constraint since many funds that have been operating for fewer than three years are actually long-tested strategies managed by highly experienced professionals which are just coming to market in a new form. Relatively recent examples of such funds include Andrew Foster’s Seafarer Overseas Growth & Income (SFGIX), Rajiv Jain’s GQG Partners Emerging Markets Equity (GQGPX), Abhay Deshpande’s Centerstone Investors (CETAX), and Amit Wadhwaney’s Moerus Worldwide (MOWNX). Collectively, those four managers had overseen more than $100 billion using strategies later embodied in their “too new to be on the radar” funds.

As a result, MFO Premium has a preset screen to allow us to identify funds which will receive their three-year recognition within the next 12 months. While many of those are undistinguished and we’ve looking closely at just a handful, our performance and risk screens highlighted a handful of funds that are intriguing.

The big picture is that there were 568 funds, CEFs and ETFs, as of 11/30/2018, which have passed their second birthdays but haven’t yet reached their third. About 200 ETFs and 330 mutual funds. Because we prefer investing to speculating, we filtered out the trading funds. Likewise, because we prefer investing to saving, we filtered out the money market funds. Finally, because we prefer things you can actually buy, we filtered out insurance products. That still left us with 490 newer funds, CEFs and ETFs. We then sorted everyone by Lipper category and by Sharpe ratio.

Some highlights:

Out-of-favor areas were hot. Our list includes 51 diversified international equity funds and 51 liquid alts funds of various hues and denominations. Five categories logged in with 20-some funds each: 29 global equity (29), US large cap (28), flexible portfolios (24),US small cap (23) and emerging markets (21).

BlackRock and State Street have the greatest number of funds in the pipeline, each with 22 entrants likely to receive their three-year rating in 2019. Fidelity has 18, First Trust has 17, Invesco and WisdomTree each clock in with 14.

Most of the newer funds are being launched by smaller, independent advisers. Fidelity accounts for only 10 of the 330 newer mutual funds, and they’re the most active large firm. Vanguard launched just a couple, T. Rowe Price had five, BlackRock has eight and American Funds has a single entrant.

Only one-third of the funds have enough assets to be financially sustainable. The cutoff number we use, based on conversations with several independent fund managers, is $75 million in AUM. You can certainly run a fund with a smaller asset base, run it well and run it for a long time, but you’re not likely to generate enough in fees to pay yourself. (Apply a management fee of 0.75% to a $50 million base and you’ve got $375,000 to cover all the expenses of the management firm.)

Best advice for crossing the $1 billion in assets mark: have “Fidelity” as the first word in your fund’s name. Of the 26 fund with $1 billion or more in assets, eight are Fidelity funds (an 80% success rate for Fido, in the sense of having eight of 10 funds cross the threshold).

The biggest laggard among the ultra-large cohort is the Global X Robotics & Artificial Intelligence ETF (BOTZ) which trails its science & tech peer group by 4.9% annually; it also has the greatest maximum drawdown and highest volatility in the group. The biggest leader is UBS AG FI Enhanced Global High Yield ETN due March 3 2026 (FIHD), an exchange-traded note that’s outpacing the average high-yield fund by 12.5% annually.

The highest Sharpe ratio, which roughly translates to the best risk-adjusted returns, were posted by the RiverPark CMBS Floating Rate Fund (RCRIX) at 5.26. The fund averaged 4.3% a year without a single losing month. We wrote about the fund at its latest launch, since it’s been offered as a private fund, a sort of closed-end interval fund and now an open-end mutual fund. The second-highest Sharpe ratio was earned by another closed-end fund, PREDEX (PRDEX), which invests “up to 95% of its net assets … in privately offered securities of non-traded institutional real estate funds.” The third-best Sharpe ratio was another former hedge fund with a focus on mortgage-linked securities, Braddock Multi-Strategy Income (BDKAX).

In the area of long-short equity, the right answer was almost always “Gotham.” In the top tier of long-short funds, six were from Joel Greenblatt’s Gotham operation.

Two notes: that means (1) Gotham has launched six new funds in under three years and, at least in the last stages of a bull market, (2) they work.

Three of the funds are options-based, rather than conventionally investing long in some equities and short in others. The two more-traditional long/short funds in the top tier are:

WisdomTree Dynamic Long/Short US Equity (DYLS), a passive fund that tracks an active index which rather muddies the whole active-passive debate. They invest long in 100 large cap stocks then short the S&P 500 index. The fund can range from 100% long to 100% short. The expense ratio is 0.48%.

Catalyst/Millburn Hedge Strategy (MBXIX) is a converted hedge fund with a strong track record. The hedge fund was reorganized into a mutual fund on December 28, 2015. The portfolio is 30-70% equities; this long portfolio is a passive, buy-and-hold operation to generate market exposure. The remainder of the portfolio is in long and short contracts on equity, fixed income, commodities and currency futures. The combined funds’ returns seem consistent and creditable.

The minimum initial invest is $2500 minimum and the expense ratio is 2.0%.

Other funds that caught our eye

Ladder Select Bond (LSBIX), which has a Sharpe ratio that’s laughably higher than any other core bond fund, 2.27 against runner-up Invesco Total Return ETF at 1.03. Ladder is an institutional real estate investor with $6 billion in AUM and this is an institutional fund with a $100,000 minimum. Like the three funds with the highest Sharpe ratios, this invests in the world of real estate securities. Ladder describes themselves as “inherently conservative … favoring strong downside protected positions with attractive credit metrics.”

BlackRock Emerging Markets Equity Strategies Fund (BEFAX), which had the highest Sharpe ratio of any emerging markets fund (1.33), well ahead of runner-up Ashmore EM Active Equity (0.88) and the rest of the EM pack (0.50).  It had a top 1% performance among all EM funds in 2018. It’s a long/short EM equity fund with an experienced manager. Sam Vecht, CFA, and portfolio manager, is head of BlackRock’s Emerging Europe equity team. Mr. Vecht’s service with the firm dates back to 2000, including his years with Merrill Lynch Investment Managers (MLIM), which merged with BlackRock in 2006. Mr. Vecht began his career with MLIM in 2000 as a member of the Global Emerging Markets team. I’m not surprised, given his background, that the fund is substantially overweight in Europe (28% of assets) and in developed markets generally (34% of assets). It’s available no-load at TDAmeritrade, with an e.r. of 1.56%.  on $16M in assets.

Holbrook Income (HOBEX/HOBIX) is either a short-term bond fund (Morningstar) or a flexible portfolio fund (Lipper/MFO). Its mandate allows it great flexibility within the fixed-income arena, including investments in closed-end funds and ETFs, with the proviso that it positions itself to deal with a rising-rate environment. As a practical matter, that means that it’s currently acting a lot like a short-term bond fund. If it’s a flexible portfolio, it’s way at the top of the risk-adjusted returns pack and had the group’s smallest drawdown. As a short-term bond fund, it has top 10% returns. The manager is the former president of Leader Capital where he helped manage the Leader Total Return and Leader Short Duration Bond funds. The expense ratio on the Investor shares is high (1.80%) but the initial minimum is low at $2,500.

Guggenheim Diversified Income Fund (GUDPX) elicits more agreement from Morningstar (30-50% equity allocation fund, though it currently holds 22% in global equities) and Lipper (flexible portfolio). It’s a fund-of-funds that’s seeking “high current income with consideration for capital appreciation.” The “diversified” in the name means that it looks for exposure to “different geographic regions, different positions in issuers’ capital structures and different investment styles.” In general, it targets equities and high yield bonds. Performance has been competitive and volatility management has been exceptional. It has a Sharpe ratio of 1.62, while the average for the other 21 flexible funds was 0.48. The “P” shares are available through online brokerages without a load or a transaction fee and without a minimum investment. I’m a bit fretful of the gross expense ratio (5.0%) as well as the capped expense ratio that you actually pay (1.62%). Still the underlying idea seems sensible and the early performance is promising.

State Street Disciplined Global Equity (SSGMX) and SEI Global Managed Volatility (SGMAX) are the two best-performing global funds, but their institutional minimums seem pretty inflexible. No other young global fund has performance that’s immediately crying out for attention. State Street Disciplined US Equity (SSJIX) is similarly top-rated and mostly inaccessible. Pity all around.

Columbia Sustainable International Equity Income ETF (ESGN) takes “sustainability” in two directions; it’s looking for income that’s sustainable in the sense of consistency and for corporations that are sustainable in the sense of ESG practices. The ETF earns Morningstar’s highest sustainability rating, five. It tracks a custom-built index. The fund’s attractiveness depends, in part, on its peer group. Lipper tracks “international equity income” as a separate peer group, Morningstar does not and places it in the “foreign large value” box. Taken as an equity income fund, it’s at the top of the pack with a Sharpe of 0.79 and peer-beating returns. Within the foreign large value group, it’s just slightly above-average. The key attraction would be its low cost (0.45%) and commitment to sustainability.

Cognios Large Cap Growth (COGEX) and Cognios Large Cap Value (COGVX) sit atop the domestic large-cap heap, both handily outperforming their peers with below-market risk. They’re the younger siblings to Cognios Large Cap Market Neutral (COGMX), about the best market-neutral fund out there.

Bottom line

We’ll keep watch for you. Several of these funds are promising in both conception and execution, and we always try to focus on managers who intensely dislike losing your money.  In the months ahead, as we become more knowledgeable about them, we’ll begin building out our coverage of them. If there are any that particularly intrigue you, drop me a note!