What they do

Osterweis starts with a strategic allocation that’s 50% equities and 50% bonds. In bull markets, they can increase the equity exposure to as high as 75%. In bear markets, they can drop it to as low as 25%. Their argument is that “Over long periods of time, we believe a static balanced allocation of 50% equities and 50% fixed income has the potential to provide investors with returns rivaling an equity-only portfolio but with less principal risk, lower volatility, and greater income.” Because they don’t like playing by other people’s rules, the Osterweis team does not automatically favor intermediate-term, investment-grade bonds in the portfolio. Since 2017, the fund’s equity exposure has ranged from about 60-70%.

How they’ve done

Over the past decade, the fund has averaged 9% annual returns which does match the “equity-like” promise, at least if you use the stock market’s long-term average of about 10% per year. In the past decade, the market’s return has been higher (13.7% for the Total Stock Market Index, 13.9% for the S&P 500) but both of those have recorded multiple 20% declines. It’s had substantially lower volatility than an all-equity portfolio, though its risk-adjusted returns are slightly lower.

OSTVX has higher returns, lower volatility, and higher risk-adjusted returns (Sharpe ratio, Sortino ratio, Martin ratio, Ulcer index) than its Lipper Flexible Portfolio peer group. It’s a top 10 fund over the past decade for both total returns and risk-adjusted returns.

The fund has earned a four-star rating from Morningstar, as well as the equivalent of a four-star rating from MFO.

What we liked

From our May 2011 profile: “Well done, [flexible] funds decrease a portfolio’s volatility, instill discipline in the allocation of assets between classes, and reduce the chance of self-destructive bipolar investing on our parts.  Given reasonable expenses, outstanding management, and a long, solid track record, Osterweis Strategic Investment warrants a place on any investor’s due-diligence shortlist.”

Then and now, we celebrate independent thinking, the ability to zig when the market zags, and an intense sensitivity to the risks they might expose their investors to.

What’s changed

The core of the management team remains from inception, but there’s but substantial turnover in the team with six of the original eight managers leaving. The most significant additions to the team are Jim Callinan, a phenomenal small-cap manager, and Larry Cordisco, formerly of the Meridian Funds.

According to their April 21, 2021 shareholder letter, they remain cautious … but cautiously optimistic. “We remain constructive on the market and are gradually increasing our equity exposure to cyclical businesses while maintaining positions in long-term secular winners. In fixed income, we continue to take a cautious approach. Rather than stretching for yield, we are focused on higher-quality companies within the non-investment grade space, and we favor shorter to medium maturities.”

The administrative stuff

Osterweis Strategic Investment has $165 million in assets and an expense ratio of 1.21%. The minimum initial investment is $5,000.

Other funds we’re reviewed in the category

Bruce (BRUFX, outstanding fund, sort of a black box, both managers have been on board for 38 years which implies the need for succession planning), KL Allocation (GAVAX, invests in “knowledge leaders,” lighter equity allocation but greater international exposure, 8% returns over the past decade with a Sharpe ratio higher than the S&P), FPA Crescent (FPACX, the celebrated “free-range chicken” of the investing world, lead manager Steve Romick can go anywhere in the capital structure – stocks, preferred, bonds, loans – in best of the best risk-adjusted returns, an absolute-value approach that will lead it into cash, 8.7% returns over the past decade, the largest holding in my non-retirement portfolio) and Leuthold Core Investment (LCORX, also available as an ETF, a rigorously quant-driven fund that starts with getting the asset allocation right, avoids emotion, and offers exposure to unconventional assets including equity hedges, commodities and MBS bonds, 6.3% returns over the past decade).