By David Snowball

Dear friends,

The Tenth Year … and the Ninth Inning

Ten years ago this month, we launched the first issue of the Mutual Fund Observer, “a site in the tradition of FundAlarm.” As the antiquated text below notes, FundAlarm was one of the industry’s most independent, critical voices for 15 years, from 1996-2011. I had the privilege of writing for FundAlarm over its last five years. While the publisher and curmudgeon-in-chief Roy Weitz knew that his time was drawing to a close, he and over 100 readers were sure that the mission of FundAlarm – to be a thoughtful voice and unabashed champion of “the little guy” – was not.

And so the Mutual Fund Observer was born.

Our graphic design skills were … uhh, modest. Sort of “good junior high project” level.

By year’s end, designer Anya Zolotusky had taken pity on us …

Four years later, Chip, designer Barb Bradac, and programmer Andrew conspired to reconfigure the entire publication into the look (we hope) you enjoy today.

What do ten years look like? Sort of like this:

Across the time, the steady heartbeat caused by your coming and going. Below that, the summary of your time with us. Most spectacularly, 1,998,497 people have come by to read the Observer at least once; two-thirds of you have found enough value to become repeat offenders.

We’re still pretty proud of that first issue. Its highlights:

• an analysis of why the best fund of the past 10 years (Fidelity Leverage Company Stock Fund) isn’t quite as good as the marketers (and journalists) say. Apparently “wildly and erratically volatile” is not a great recipe for a long-term holding; Morningstar’s old “investor returns” calculation showed that the fund made a mint and its investors made almost nothing. As in, zero gains in 10 years. People rushed in after a huge run-up and rushed out after a huge collapse … On whole, it’s the same decision-making shown by squirrels in traffic.
• the last Embarcadero (aka Van Wagoner) story, ever. Who, you ask, is Van Wagoner? In the late 1990s, he was Cathie Wood. The guy who could do no wrong (think five funds and 293% annual returns), who harbored no doubts and whose every word was carved into the walls of the New York Stock Exchange. Shortly thereafter, the bubble popped, his investors lost 90%, his funds became zombies, and eventually ended up with wooden stakes through their hearts. This is certainly not to criticize the folks who chucked $37 billion at Ms. Wood and her bevy of high vol ETFs in 2020. Really, 1,100% asset growth in 12 months (including $700 million in the Space Exploration ETF) for a family of funds whose success is almost entirely dependent on the continued flawlessness of a single person … what could possibly go wrong?
• leads on great managers (Andrew Foster, Eric Cinnamond, Chuck Akre) who have quietly left their old funds.
• profiles of four outstanding funds, including Amana Developing World, Artisan Global Value, LKCM Balanced, and Osterweis Strategic Investment.

Three of those four funds have had great 10-year runs since then. The fourth, Amana Developing World, was for “small investors looking for an affordable, conservative fund.” While the fund did indeed post the lowest risks of any in its peer group (in the table above, blue is best, then green and you see nothing but blue in the risk metrics), its returns have trailed about 80% of its peers. The fund has rallied over the past three years following the return of one of its founding managers, Monem Salam, and is sitting in the top third of its peer group.

We would recommend any of the four again today.

Sometime in the next 24 hours, the Observer will host its 2,000,000^th reader. We hope we serve them well, as we’ve tried to serve you.

… and the Ninth Inning

The longest year of my teaching career will close in three weeks. My students are careworn, with some not quite able to push themselves across the finish line. And yet, we persist. We persist in trying to learn from the mistakes of the past (we’ve been looking at the rise of Hitler’s empire and a cold, racist fury that gripped more than one nation), support one another in the present, and plan for a better future.

It’s hard to ask for more.

(Though it would be nice if you could convince your family to get their danged vaccine. We can’t afford to let the virus we can control have the time and space to mutate into one we can’t. Nearly one-quarter of Americans – mostly all guys – say they “will never get a vaccine if they can avoid it.” Please nag them into being sensible, if only briefly. Offering to actually listen to their insights on the NFL draft in exchange for a quick poke might help.)

I will also turn 65 this month. Apparently, I need to figure out Medicare? Which is not nearly so frightening as the prospect that my son Will is going to turn 21 shortly thereafter.

He’s been asking about whether it would be safe to fly to Las Vegas with a friend to catch a show or two in celebration. Will who, in my mind, is evergreen.

All of which feeds into my decision to step aside as publisher of the Mutual Fund Observer by year’s end. After 25 years of writing about funds and ten years of being the defining presence at MFO, it’s time to give a new colleague the chance that Roy Weitz long ago gave me.

Starting this month, we’ll be reaching out to our friends and associates in the industry to see if we can craft a new arrangement and a new leadership team. With luck, we can and, with still more luck, they’ll invite me to keep contributing. In any case, we will know by September what the future might hold for an odd site whose “mission is to provide readers with calm, intelligent arguments and to provide independent fund companies with an opportunity to receive thoughtful attention even though they might not yet have drawn billions in assets.”

It will be a grand adventure, and we’ll keep you informed!

Just for fun

In working to answer a statistical question on Ed’s behalf, I came across a website apt to delight the geeks in your life: https://dqydj.com/. It stands for “Don’t quit your day job,” a finance and investing website that’s older than we are. How did I not notice?

In any case, they offer a remarkable array of rabbit holes for those of us prone to plunging down such places. Want to know how tall you are, relative to other people your age? Wonder how you’d stack up against today’s college-aged young ‘uns? Interested in knowing how your income stacks up … against other people of your age, in your state?

Thanks, and thanks, and a decade of thanks …

Our very first month saw contributions from ten good souls.

Bill Kisha	Debra Kerl
Paul Edlund	Marva Loeb
Mark Phipps	Greg Estey
Anna Stukenborg	Cathy Grimes
Pat(ricia) White	Theo Oshirak

It’s more than a little heartwarming to have cause to thank Greg again this month for his support of the Observer. Thanks to William and the other William, Matthew, Brian, David, and Doug. To James (we’re thankful for you, too!), Wilson, Silina (it helps a lot! I hope we got the email update right), and the good folks at S&F Investments.

To our two millionth reader, whoever you might be: welcome.

Cheers!

By David Snowball

It’s become increasingly clear that the global climate is becoming dangerous. Google Earth now has a time-lapse feature that allows us to watch changes in the planet – from the disappearance of glaciers to the drying of the Aral sea to the disappearance of Brazilian rainforests – over the past 37 years. The West and Southwest are locked in drought with record-low reservoir levels. Atmospheric CO2 is at its highest level in 650,000 years with the 20 hottest years in recorded history all occurring since 1998.

But you knew that already. Increasingly we (young and old, liberal and conservative, individual and corporation) accept that we’re in trouble … and in deep trouble, if we don’t get our acts together quickly. Two pieces of evidence support that conclusion. First, President Biden’s infrastructure proposals – which embed a bunch of climate management investment – garner a lot of support, even from folks who wouldn’t ordinarily support Democrats or multi-trillion dollar government plans. Second, investors – professional and individual – are rushing toward sustainable / ESG-screened investments. Morningstar reports that the number of ESG funds has risen 400% in a decade, with 400 options for investors at the end of 2020. Depending on what counts, ESG-centered investments range from the hundreds of billions to tens of trillions of dollars.

Four hundred options! That’s a paralyzing amount of stuff to sort through. The challenge is made greater by the fact that many of them stink, a fair number are marketing scams, and few will make sense in your portfolio.

Sensing critical opportunities, marketers have been pasting bright green ESG stickers on the front of any prospectus they can grab. The WisdomTree Cybersecurity Fund (WCBR) suddenly avers “The Index also excludes companies based on environmental, social and governance criteria.” In April 2021, the SoFi 50 ETF (SFYF) became the SoFi Social 50 ETF with “no changes to the Fund’s investment objective, principal investment strategy or portfolio management as a result of the name change.” On July 21, 2021, JPMorgan Small Cap Core Fund becomes JPMorgan Small Cap Sustainable Leaders Fund. On December 1, 2020, Aberdeen Focused U.S. Equity Fund (GGUIX), a bad large growth fund, found a new passion as Aberdeen U.S. Sustainable Leaders Smaller Companies Fund. Effective November 1, 2020, the tiny, one-star Dana Small Cap Equity Fund (DSCIX) became the Dana Epiphany ESG Small Cap Equity Fund. Effective October 1, 2020, the USAA World Growth Fund (USWGX) changed its name to the USAA Sustainable World Fund. Eight more green (or green-ish, green-lite, or greenwashed) funds, including Viridi ESG Crypto Mining ETF, are currently in registration with the SEC. Often the word “sustainable” is defined as “business that will continue to make a profit” rather than “green,” which is misleading but not illegal.

By the way, the SEC is pissed off with the behavior and their Division of Examinations just issued a Risk Alert (4/9/2021) which complained,

The staff noted, despite claims to have formal processes in place for ESG investing, a lack of policies and procedures related to ESG investing; policies and procedures that did not appear to be reasonably designed to prevent violations of law, or that were not implemented; documentation of ESG-related investment decisions that was weak or unclear; and compliance programs that did not appear to be reasonably designed to guard against inaccurate ESG-related disclosures and marketing materials.

Without naming names, the SEC staff complained that they found “portfolio management practices [which] were inconsistent with disclosures about ESG approaches” and ESG funds filled with distinctly non-ESG investments.

How can an investor find their way to reasonable, sustainable choices?

1. Start by understanding your portfolio. What’s your time horizon? How much risk can you tolerate? How much equity exposure do you need to meet your goals?
2. Assess any fund in light of the portfolio. Ask if, setting ESG factors aside, a particular fund would make sense in your portfolio. Do you have any earthly need for a crypto-mining fund, green or otherwise? What would real estate or health care innovators add to the quality of your life?
3. Understand what “socially responsible” means to them. Some managers care about the physical environment but don’t much worry about corporate governance. Some want to work with companies whose practices advance gender equity. Others pursue the goals of the US Council of Bishops or the UN Development Goals. Some embrace traditional families, others would empower diverse ones. None of those stances is right or wrong, they’re just more or less aligned with what you want. So do spend time in the “Investment Strategies” section of the prospectus.
4. Favor funds that get the basics right. Check to see if the managers eat their own cooking; that is, are they investing alongside you. Morningstar discloses that information and it’s found in each fund’s Statement of Additional information on their website. With few exceptions, I wouldn’t consider a fund that the manager won’t risk their own money in. (The most compelling exception is for managers domiciled in other countries, where investing in a US fund or ETF would be a major hassle.) Check to see if the expenses align with the value a manager offers. There are still people charging over 2% per year for their products, which is a nearly insurmountable barrier for even the best manager. Read the prospectus, annual report and shareholder letter to understand the managers’ perspectives on risk. In general, if there’s no clear and satisfying discussion of the matter, stay away!
5. Favor managers who don’t need training wheels. If they’re new to running a mutual fund or new to implementing ESG screens, let them learn with someone else’s money. In particular, I would not seek out a fund that has only recently discovered the faith. If you own a fund, are happy with it and it slaps on a prospectus sticker, that’s one thing. Feel free to stay and watch. But if you don’t yet own a fund and it’s a recent convert, stay away until they’ve proven themselves.
6. Favor “impact” funds, when possible. Broadly speaking, ESG funds come in two flavors. One sort of fund merely avoids bad actors: “we’ll buy anything except coal.” The other sort actively seeks out corporations whose success might benefit everyone and channels capital in their direction. Those are called “impact” funds and,if you’re investing in part based on your principles, they probably offer more bang for the buck.

Morningstar and MFO Premium both embody formidable strengths. Our screeners offer far more detailed insights into risks and rewards than their website does. Conversely, their screeners have some cool and detailed portfolio analyses that we don’t offer. In particular, Morningstar has launched a screener for ESG funds. It allows folks to toggle on a series of values to quickly generate a short list of ESG candidates.

By way of illustration, I searched for funds with a low-carbon profile, an “impact” mandate written into their prospectus, and a current Morningstar rating of four stars or above. That led to 95 candidates, many of which were just multiple share classes of the same portfolio. To winnow the list, I selected the investor share class of each fund with special concern for funds from firms that have long-standing specialties in ESG / SRI / green / socially responsible investing.

I ended up with a list of about 20 funds, which looked like this:

Each fund name is clickable to its profile and each of the six tabs (“ESG Metrics” or “Long Term Performance” is also clickable to show additional information. Finally, the entire screen can be exported to a spreadsheet.

Name	Ticker	Sustainability Rating	Yield	Morningstar Rating™	Morningstar Category
Amana Growth	AMAGX	5	0.2%	4	US Large Cap Growth
American Century Sustainable Equity	AFDIX	5	0.36	4	US Large Cap Blend
Ariel Fund	ARAIX	5	0.44	4	US Mid Cap
Boston Common ESG Impact Intl	BCAIX	5	0.62	4	Global Large Cap
Brown Advisory Sustainable Growth	BIAWX	4	0	4	US Large Cap Growth
Calvert Balanced	CSIFX	4	0.83	4	Moderate Allocation
Calvert Emerging Markets Equity	CVMAX	4	0.26	4	Global Emerging Markets
Calvert Growth Allocation	CAAAX	4	0.44	4	Aggressive Allocation
Calvert International Equity	CWVGX	4	0.18	5	Global Large Cap
Domini Impact International Equity	DOMIX	4	0.48	4	Global Large Cap
Green Century Balanced	GCBLX	5	0.21	4	Moderate Allocation
Mirova Global Sustainable Equity	ESGNX	4	0.05	5	Global Large Cap
New Alternatives	NAEFX	4	4.8	5	Global Mid/Small Cap
Northern US Quality ESG	NUESX	5	0.89	5	US Large Cap Blend
Parnassus Core Equity	PRBLX	5	0.4	5	US Large Cap Blend
Parnassus Endeavor	PARWX	5	0.57	5	US Large Cap Blend
Parnassus Mid-Cap	PARMX	5	0.18	5	US Mid Cap
Pax Global Environmental Markets	PGRNX	4	0.36	4	Global Large Cap
Praxis Genesis Growth	MGAFX	4	2.05	4	Aggressive Allocation
Saturna Sustainable Equity	SEEFX	5	0.33	4	Global Large Cap
Thornburg Better World International	TBWAX	4	0	5	Global Large Cap
TIAA-CREF Social Choice LowCarbon Eq	TLWCX	4	0.59	5	US Large Cap Blend
Trillium ESG Global Equity Fund	PORTX	5	0.1	4	Global Large Cap

The spreadsheet offers 36 columns of data on everything from “social” ratings to fund size (Saturna is the smallest) and median market cap (Ariel is the only small-cap in the bunch). It’s worth exploring.  Go!

In our June issue, we’ll profile two of the funds that have been on our radar for a long time: New Alternatives (NALFX) which has been plying these waters since 1982, and Northern Quality ESG (NUESX) which combines several desirable sets of traits.

By Charles Lynn Bolin

One Stop Mutual Funds with Good Multi-Year Metrics (CTFAX, FMSDX, JABAX, PRSIX, RBBAX, TRRIX, VTINX, VWINX)

As I imagine retirement in a few years here, my personal investing goals have been to simplify. I built my Ranking System around MFO Metrics to determine the best funds for a conservative investor nearing retirement considering long-term performance, momentum, consistency, downside volatility, risk-adjusted returns, quality, and income. These funds are in line with my preference to have diversified low-risk funds where the manager has the discretion to change allocations to reduce risk.

I was inspired by the new Mutual Fund Observer Multi-Search features to search for funds with five-year risk-adjusted returns (Martin Ratio) greater than 2.5, a maximum drawdown of 11 or less, Ulcer Index less than 3, downside deviation less than 6, annualized returns higher than 6%, positive ten-month trend, Fund Family Rating of 3 or more, and bond quality of investment-grade BBB or higher. There are surprisingly few funds meeting these criteria. The article took a twist when a Reader despaired of finding “One Stop Shop Mutual Fund Options with Good Multi-Year Metrics” and a turn after comments on the Mutual Fund Observer Discussion Board about the risks of derivatives and hard to value assets.

This article looks at the performance of Lipper Categories over five and fifteen year periods. Thirteen funds are identified with lower risk and higher risk-adjusted-performance. The Final One Stop Shop List contains eight funds. The hidden risk or benefits of derivatives and assets with lower confidence in value is examined.

This article is divided into sections for those who wish to skip to particular topics of interest. Those only interested in the Final List of One Stop Shop Funds may skip to Section 6. Key Points are added at the top of each section for those who have limited time.

1. 1. Best One Stop Lipper Categories
   2. Known Unknowns – The Case for Risk Management
   3. The Twist – The One Stop Contenders
   4. The Turn – Level 3, Derivatives and “Other Assets”
   5. Evaluating the Funds
   6. Final List of One Stop Shop Mutual Funds
   7. Summarized Fund Strategies

1. Best One Stop Lipper Categories

Key Point: New funds are being introduced, but most of the consistent, low risk funds with higher risk adjusted returns have been in existence for more than 15 years.

Table #1 contains all funds in eight Lipper Categories with expense ratios less than 1.5% that were in existence five years ago and fifteen years ago. These 248 funds in existence for the past 15 years had $1.4 trillion in assets. For the funds between five and fifteen years of age, the assets have $281 billion (21%) but the number of funds grew to 400 for a 61% increase in the number of funds. Part of this large increase in the number of funds is known as survivor bias, where less successful funds are closed or merged with others and new funds spring up in their place. More than 30% of the increase in assets and number of funds came in the Flexible Portfolio category.

Table #1: Lipper Category Risk and Risk-Adjusted Returns – Five and Fifteen Years

Figure #1 shows the relationship of Return vs Risk is almost linear over 15 years with the exception of the Alternative Multi-Strategy Funds which have significantly lower returns for the level of risk. There are only nine of these funds. The Mixed-Asset Allocation Conservative and Today are shaded green because they have higher risk-adjusted returns (Martin Ratio).

Figure #1: Risk Vs Return – Fifteen Years

Depending upon market conditions, conservative funds such as the Vanguard Wellesley Income Fund (VWINX) can outperform more aggressive funds such as the case in Figure #2 because of high starting valuations. Market valuations are very high, but with infrastructure and more stimulus being considered, the markets may continue to be elevated for years. I show this example as I believe we are approaching a similarly extended time period where a conservative approach will outperform.

Figure #2: The Tortoise (Conservative VWINX) and the Hare (S&P 500) Performance

2. Known Unknowns – The Case for Risk Management

Key Point: Valuations are high, the risk of inflation is rising, taxes are likely to increase to pay for massive stimulus.

Although market risk remains, it’s true that by focusing on acceptable downside first, those portfolios are likely to weather downturns better even if they do surrender some upside as an offset. And while none of these approaches is perfect, they can work as a component to offset a portion of the market risk retirees probably need to endure for decades to come.

The Perfect Storm for Retirees, Kiplinger, George Terlizzi

In Best No-Load Mutual Funds Available At Fidelity, I showed a chart by Jill Mislinksi from Advisor Perspectives revealing that markets are highly valued, and a chart by Christine Benz from Morningstar compiling estimates of some major financial institutions showing that returns in the next ten years may be in the low single digits, and foreign equities are expected to have higher returns than domestic.

Ed Easterling, founder of Crestmont Research and author of Probable Outcomes: Secular Stock Market Insights and Unexpected Returns: Understanding Secular Stock Market Cycles, recently updated the P/E Summary shown in Table #2 which supports the cited examples. The chart shows that if valuations fall to a normal or low level then annualized returns may be negative over the next ten years.

Table #2:  Annualized Return by Years and Valuations (CAPE 10 Year)

In the first quarter, the stock market gained 5.8%. As a result, normalized P/E increased to 39.4—significantly above the level justified by low inflation and low interest rates. Although the market appears to remain “irrationally overvalued,” there could be factors justifying such high valuation and commensurately low expected return. As a result, the current status of the stock market is positioned for “substantially below-average long term returns.”

– Ed Easterling, Crestmont Research

Mr. Easterling makes the connection between valuations and inflation. Historically, valuations fall when inflation rises. Measures of price increases compared to a year ago are distorted because they are against the trough of the recession. Figure #3 shows the trends in consumer, producer, home, and global commodity prices as well as stock market level and inflation expectation and breakeven rates since August 2020. Inflation is increasing and is a trend worth following.

-The potential that inflation reaches a level higher than expected and persists at that level for longer than is expected is our opinion.

-The outperformance of cyclicals and interest-sensitive stocks seems to validate the expectation that inflation will be higher for longer. The increase in fed funds future yields also suggests that the market expects inflation to force the Fed to begin raising rates sooner than they are currently articulating.

–Reflation and Rotation by Steven Vannelli of Knowledge Leaders Capital

Figure #3: Various Measures of Price Increases (Inflation)

Lance Roberts describes Savita Subramanian’s view from Bank of America that the S&P 500 is overbought and there is a risk of a correction:

“Amid increasingly euphoric sentiment, lofty valuations, and peak stimulus, we continue to believe the market has overly priced in the good news. We remain bullish the economy but not the S&P 500. Our technical model, 12-Price Momentum, has recently turned bearish amid extreme returns over the past year.”

Mr. Roberts says that he is making profits and increasing cash levels. He suggests selling winners and what isn’t working and reviewing your allocation relative to your risk tolerance. Indeed, Tom Roseen, of Refinitiv Lipper, points out that money market funds had the largest absolute increase in assets under management increasing $179 billion (4%) for the first quarter while commodity funds increased $6 billion (28%) in assets.

And with improvements in the economic environment, Central Banks are more likely to taper back on accommodative policy:

The Bank of Canada (BoC) garnered headlines by becoming the first major central bank this year to make reductions to its accommodative monetary policy.

Taper Time: Bank Of Canada Scales Back Asset-Purchasing Program, Russell Investments

3. The Twist – The One Stop Contenders

Key Point: The Best One Stop Funds are actively managed funds with longer histories.

A Reader lamented finding “One Stop Shop Mutual Fund Options with Good Multi-Year Metrics” while my original article was based on fund performance over the past five years. I modified (twisted) this article to include funds meeting similar criteria over the past 15 years. Both mutual funds and exchange-traded funds were considered, but no exchange-traded funds made the list which is shown in Table #3. “Other Class” refers to a different share class of the same fund which may have different expenses, transaction fees, loads, inception dates, availability, and/or minimum investment requirements at different brokers. The funds are intended to be available to small investors without a front-end load with at least one of Charles Schwab, Fidelity, or Vanguard.

The funds are categorized by their stated objectives and yield as Risk Managed and/or Capital Preservation and Capital Appreciation separated by high and low yields. The Capital Preservation Funds are sorted from least risky, as measured by the Ulcer Index, over the past five years. The Capital Appreciation Funds with high yields are sort by risk adjusted yields (Yield/Ulcer Index) from highest to lowest. Capital Appreciation with low yields are sorted from the highest to lowest annualized returns.

All funds are classified as “Active Management Approach” although AOCIX, COTZX, RBBAX, TRRIX, and VTINX are “funds of funds”. Note that of the thirteen funds listed as “One Stop Contenders” all but four have histories going back to the 2008 recession and financial crisis.

The Symbols shaded dark green (CRAZX/CRAAX and FAYZX/FMSDX) are classified as “Great Owl” funds, those shaded light green (DODLX, RBBAX, PRSIX, TRRIX) are on the “Honor Roll”. Those with a red tint have had higher Ulcer Index (risk) and/or maximum drawdown relative to the other funds in the table over either the past 5 or 15 years. Those shaded yellow have higher allocations to “Other” asset classification or assets that are more subjective estimating the value (Level 2 & 3).  

Table #3: The One Stop Shop Contenders

4. The Turn – Level 3, Derivatives and “Other Assets”

Key Point: Most One Stop Shop Fund Contenders have no exposure to Level 3 assets, but some have exposure to Level 2 assets and use derivatives. All but one fund (FMSDX) with a history of less than 15 years are excluded from being Contenders.

I read comments on the Mutual Fund Discussion Board expressing concern about risks associated with “Level 3” assets and derivatives. The Turn in this article is to research the composition of the “One Stop Shop Contenders” with respect to these assets. One of the criteria that I used to select the “One Stop Shop Contenders” was to preview an order at Fidelity to see if I get the following message:

You are placing an order for a security that requires you to execute Fidelity’s Designated Investments Agreement and also requires an Investment Objective of Most Aggressive for this account.

Two funds were excluded from making the list of Contenders because of this test. For this article, I looked into the confidence that is placed on valuing assets. In Fidelity -> Composition -> Prospectus & Reports -> Portfolio Holdings you may search for “Level 3” to find the confidence that is placed on valuing assets:

The availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example, the type of security, whether the security is new and not yet established in the marketplace, the liquidity of markets, and other characteristics particular to the security. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3…

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

The Funds utilize various methods to measure the fair value of most of their investments on a recurring basis. GAAP establishes a hierarchy that prioritizes inputs to valuation methods. The three levels of input are:

■ Level 1: Quoted prices in active markets for identical securities

■ Level 2: Other significant observable inputs (including quoted prices for similar securities, market indices, interest rates, credit risk, forward exchange rates, etc.)

■ Level 3: Significant unobservable inputs (including Fund management’s assumptions in determining the fair value of investments)

From Charles Schwab, I obtained the amount the “Contenders” are short Equity (none), bonds, other and Derivatives. In Table #4, I list “Other”:

But other asset categories – including real estate, precious metals and other commodities, and private equity – also exist, and some investors may include these asset categories within a portfolio. Investments in these asset categories typically have category-specific risks.

–Beginners’ Guide to Asset Allocation, Diversification, and Rebalancing

None of the “Contenders” have a significant amount of “Level 3” assets. Table #4 looks at whether the amount of “Other”, Derivatives, and Level 2 assets is associated with risk as measured by the Ulcer Index. RBBAX went through the financial crisis with a moderately low Ulcer Index and currently has more than 10% in derivatives, but no Level 2 assets. CRAZX/CRAAX has a low Ulcer Index for the past five years, and a large number of derivatives and Level 2 assets, but was not in existence during the financial crisis. Both of the multi-asset funds, FAYZX/FMSDX and ETIMX/ETNMX have low Ulcer Indexes over five years, large amounts of “Other” assets. I prefer FMSDX over ETNMX because of the lower Ulcer Index, among other reasons. That FAYZX/FMSDX invests in “Other Assets” is an attraction to me as a potential inclusion of commodities and real estate, among others.

Table #4: Derivatives and Valuations Confidence

Based on this review, I excluded CRAZX/CRAAX because of its relatively short history even though I like Columbia.

5. Evaluating the Funds

Key Point: Table #5 shows how the funds have performed during past conditions and the Reader is free to select the funds that are believed to match their own crystal ball about future conditions.

For this article, I chose to ignore Lipper Category because fund strategies and objectives vary. The only metrics that I show based on Lipper Category are the Ferguson Metrics for Outperformance and Consistency. Consistency is defined below. I show Consistency for the life of the fund which covers three to fourteen years.

[Ferguson Consistency] Measures fund consistency based on how a fund performs each calendar year relative to its peers and hurdle rate. If a fund’s absolute return beats its peers by its hurdle rate, the fund scores a win. If it underperforms its hurdle rate, it scores a loss. Anything in-between is a push. An FCI of 1.00 is the best possible value and means the fund beat its peers by at least its hurdle rate each calendar year across the evaluation period, while an FCI of -1.00 is the worst possible value.

Table #5 contains the Multi-Year Metrics for the remaining Contenders. The reddish shade highlights the performance of concern while the green shade highlights a more desirable performance.

Table #5: Returns, Risk, Risk-Adjusted Return and Consistency

Table #6 contains how the funds performed during different market conditions. I expect higher rates, quantitative tapering, inflation, and higher taxes for the wealthy and corporations. My crystal ball is murky on the extent and timing.

Table #6: Fund Performance in Different Environments

Figure #4 is the Efficient Frontier showing Return versus volatility for fifteen years with a small insert for the past five years. The relationship is consistent for five years, but is more erratic for the past fifteen years due to the impact of the Financial Crisis. Some assets may perform well during orderly markets, but risks become more evident during bear markets.

Figure #4: Efficient Frontier of Contenders – Five (small insert) and Fifteen Years

Based on this review, I excluded ETIMX/ETNMX, MNBAX, and AOICX.

6. Final One Stop Shop Funds

Key Point: The Final One Stop Shop Funds have good multi-year metrics, and have withstood the test of time.

Table #7 is my final One Stop Shop List of Funds. These funds have good long-term track records, with the exception of FAYZX/FMSDX which is five years old, from good Fund Families. The reddish cells highlight metrics that give clues to future performance. However, as pointed out in the next section, fund strategies may have a tactical approach and allocations will change to match market conditions. The green shaded risk-adjusted returns show which funds have the highest risk-adjusted returns over the past five years.

Table #7: Final One Stop Shop Funds – Five Years

Columbia Thermostat (COTZX/CTFAX) is the last fund listed even though it has the lowest Ulcer Index. Its performance during the 2020 bear market was exceptional. It has changed the target allocation levels and does not offer as much downside protection. COTZX lost more in 2008 than I like. Time will tell if their strategy is right for this market.

VWINX, RBBAX, TRRIX, and PRSIX have similar returns, Ulcer Index, and risk-adjusted returns, but they are very different. VWINX takes less of a tactical approach. PRSIX has a high P/E value. RBBAX invests more in high yield bonds and less in equity. The next section may help an investor decide which is the best for their needs.

7. Summarized Fund Strategies

Key Point: The Strategies of the Final Funds are summarized below with links to the Prospectus. The use of tactical adjustments, derivatives, and alternatives are highlighted.

I have summarized the strategies from the Prospectus of Final One Stop Shop Funds. This is as important of a step as looking at historical performance to gain a glimpse of how the fund may perform in the future. I favor diversified funds that manage risk and invest in international markets. The Prospectus may be viewed in the link associated with the fund symbol.

Vanguard Retirement Income (VTINX, Target Today)

The Fund invests in other Vanguard mutual funds (underlying funds) according to an asset allocation strategy designed for investors currently in retirement. As of September 30, 2020, the Fund’s asset allocation among the underlying funds was as follows:

• • Vanguard Total Bond Market II Index Fund 37.4%
  • Vanguard Total Stock Market Index Fund 17.6%
  • Vanguard Short-Term Inflation-Protected Securities Index Fund 17.0%
  • Vanguard Total International Bond Index Fund 15.8%
  • Vanguard Total International Stock Index Fund 12.2%

Vanguard Wellesley Income (VWIAX, Conservative Allocation)

The Fund invests approximately 60% to 65% of its assets in investment-grade fixed-income securities that the advisor believes will generate a reasonable level of current income, including corporate, U.S. Treasury, and government agency bonds, as well as mortgage-backed securities. The remaining 35% to 40% of Fund assets are invested in common stocks of companies that have a history of above-average dividends or expectations of increasing dividends.

Columbia Income Builder (RBBAX, Conservative Allocation)

The Fund invests in a combination of mutual funds and exchange-traded funds (ETFs), representing different asset classes, potentially including an allocation to alternative investment strategies to achieve a high level of current income and growth of capital. Typically, asset allocation changes will be made monthly. Investments are made by exposure to sectors, industries, issuers, and securities relative to the Fund’s indices; factors such as credit quality, interest rate outlook, and price; and Targeting certain Underlying Funds that invest in lower-quality (junk) bonds and foreign investments as attractive opportunities arise.

T Rowe Price Retirement Balanced (TRRIX, Mixed-Asset Target Today)

The fund is intended for retired investors who seek income and relative stability from bonds along with some capital appreciation potential from stocks. The fund’s “neutral allocations,” which are what T. Rowe Price considers broadly appropriate for investors during their retirement years, are 40% stock funds and 60% bond funds… These allocations are intended to reflect the need for reduced market risks, lower portfolio volatility, and an income stream throughout retirement. While the overall asset mix generally remains consistent over time, tactical decisions may be made by T. Rowe Price to overweight or underweight a particular asset class or sector based on its market outlook… The fund’s overall allocation to stocks is represented by a diversified mix of U.S. and international stock funds that employ both growth and value investment approaches and consist of large-cap, mid-cap, and small-cap stocks. The fund’s overall allocation to bonds is represented by a “core” fixed income component designed to have lower overall volatility and a “diversifying” fixed income component designed to respond to a variety of market conditions and improve risk-adjusted returns.

T Rowe Price Spectrum Conservative Allocation (PRSIX, Conservative Allocation)

The fund pursues its objective(s) by investing in a diversified portfolio typically consisting of approximately 40% domestic and international stocks; 55% bonds, money market securities, and cash reserves; and 5% alternative investments, including through hedge funds. The fund may invest up to 40% of its total assets in foreign stocks and non-U.S. dollar-denominated bonds. Bonds, which may be issued by U.S. or foreign issuers and issued with fixed or floating interest rates, are primarily investment grade (i.e., assigned one of the four highest credit ratings by established credit rating agencies) and are chosen across the entire government, corporate, and mortgage-backed securities markets. Maturities generally reflect the manager’s outlook for interest rates. The fund’s investments in alternative investments may include unregistered hedge funds or other private or registered investment companies. The fund may also gain exposure to specific asset classes through the use of options or by investing in other T. Rowe Price Funds that focus their investments in a given asset class.

T. Rowe Price may decide to overweight or underweight a particular asset class based on its outlook for the economy and financial markets. Under normal conditions, the fund’s allocation to the broad asset classes will be within the following ranges, each as a percentage of the fund’s net assets: stocks (30-50%), bonds, money markets securities, and cash reserves (45-65%), and alternative investments (0-10%). When deciding upon allocations within these prescribed limits, T. Rowe Price may favor fixed income securities if the economy is expected to slow sufficiently to hurt corporate profit growth. When strong economic growth is expected, T. Rowe Price may favor stocks. T. Rowe Price may adjust the fund’s portfolio and overall risk profile by making tactical decisions to overweight or underweight particular asset classes or sectors based on its outlook for the global economy and securities markets, as well as by adjusting the fund’s use of options and allocations to alternative investments, including through hedge funds.

Fidelity Advisor Multi-Asset Income (FMSDX, Flexible Portfolio)

Fidelity Multi-Asset Income Fund is a flexible income-oriented strategy that invests tactically across a broad spectrum of income-producing securities, ranging from investment-grade bonds to dividend-paying equities. Unconstrained by target asset allocation profiles or benchmark weights, the fund dynamically pursues attractive income and value opportunities across asset classes, while closely monitoring interest rate, equity and credit risk. This flexibility helps the fund adapt to market conditions, with the goal of generating capital appreciation in rising markets and mitigating losses in declining markets. The fund brings Fidelity’s specialists in income investing together in a single portfolio. The lead manager and co-managers work collaboratively to identify the optimal combination of securities, reflective of market conditions, in seeking to balance income potential versus risk. Each manager leverages specialized research teams to find the most compelling investment ideas within their respective areas of expertise. The managers adjust allocation among asset classes to take advantage of short-term market opportunities and strategic, longer-term opportunities.

Janus Henderson Balanced Fund (JABAX)

The Fund pursues its investment objective by normally investing 35-65% of its assets in equity securities and the remaining assets in fixed-income securities and cash equivalents. The Fund normally invests at least 25% of its assets in fixed-income senior securities. The Fund’s equity investments include, but are not limited to, common stocks, preferred stocks, and other securities with equity characteristics. A “bottom up” approach is used to select companies to invest in one at a time to determine if a company is an attractive investment opportunity and if it is consistent with the Fund’s investment policies. The Fund’s fixed-income investments include, but are not limited to, government notes and bonds, corporate bonds, commercial and residential mortgage-backed securities, and asset-backed securities. The Fund may also invest in money market instruments and commercial loans (such as bank loans). The Fund may invest in fixed and floating rate obligations with varying durations. The Fund will limit its investments in high-yield/high-risk bonds (also known as “junk” bonds) to 35% of the fixed-income portion of its net assets…

The Fund may also invest its assets in derivatives to offset risks associated with an investment, currency exposure, or market conditions and may use futures, including Treasury bond futures and interest rate swaps, to manage interest rate risk, yield curve positioning, and country exposure. The Fund may also use index credit default swaps for hedging purposes (to offset risks associated with an investment exposure, or market conditions) …

Columbia Thermostat (COTZX/CTFAX), Flexible Portfolio)

The Fund is primarily managed as a fund that invests in other funds (i.e., a “fund-of-funds”) that seeks to achieve its investment objective by investing its assets among a selected group of underlying stock and bond mutual funds and exchange-traded funds (ETFs) for which Columbia Wanger Asset Management, LLC, the Fund’s investment adviser (the Investment Manager) or its affiliates, including Columbia Management Investment Advisers, LLC (Columbia Management), serves as an investment adviser or principal underwriter (the Portfolio Funds)… Generally, the Fund’s allocation to stock funds increases as the S&P 500 Index declines and decreases as the S&P 500 Index rises. When the S&P 500 Index goes up in relation to trading range bands that are predetermined by the Investment Manager, the Fund sells a portion of its stock Portfolio Funds and invests more in the bond Portfolio Funds, and when the S&P 500 Index goes down in relation to the predetermined bands, the Fund increases its investment in the stock Portfolio Funds.

From the Fund’s inception in 2002 through April 2020, the asset allocation table in place reflected the Investment Manager’s determination that the equity market was “expensive.” The Fund’s current asset allocation table, which is set forth below, reflects the Investment Manager’s determination that the equity market is currently “normal.” The structure of the Fund’s current allocation table reflects the form that has been in place since May 1, 2020.

Closing

I like the following quote by T. Rowe Price about the TRRIX Fund. By One Stop Shop Mutual Fund Options, I narrowed the list to eight final funds that have lower risk with respectable returns, but investors should be invested with more than one fund. Investors should match risk in funds to their withdrawal needs and their expectations for the market environment over the next decade or so.

Although the fund is designed for investors already in retirement, you should be aware that it does not decrease its equity holdings and become increasingly conservative over time. As such, you may want to consider a more conservative or more aggressive approach depending on your age and specific stage of retirement. The fund is designed to be part of an investor’s overall retirement strategy, but is not intended as a complete solution to an investor’s retirement needs.

T Rowe Price Retirement Balanced (TRRIX, Mixed-Asset Target Today): 

My personal investing goals have been to simplify and spend more time analyzing funds than searching for funds. These One Stop Shop Funds are added to my watchlist, and I will look at their performance each month. These funds are in line with my preference to have diversified low-risk funds where the manager has the discretion change allocations to reduce risk.

I built my Ranking System around MFO Metrics to determine the best funds for me as a conservative investor nearing retirement considering long-term performance, momentum, consistency, downside volatility, risk-adjusted returns, quality, and income. All of the One Stop Shop Funds rank in the top 20% of the approximately one thousand funds that I track. I own FMSDX, CTFAX, and VWIAX. FBALX is used as a baseline fund and is not a One Stop Shop Fund because of its higher risk. Over the past 5 years, TRRIX earns an MFO Rank of 2 which is below average. As pointed out earlier, the P/E of TRRIX is more value-oriented than PRSIX. My preference is on the value side at this time. The Composite MFO Rank is the long-term performance of the fund on a risk-adjusted basis. MFO Rank is the same metric for the past five years.

Table #8: Ratings by Author, Mutual Fund Observer, and Morningstar

Figure #5 shows four of the lower risk funds since 2007 with a small subset showing that the same funds performed in a very similar manner over the past five years. This is an illustration that how funds perform in different environments accumulate having a large impact on long term performance. Vanguard Wellesley has a great history and is a “Steady Eddy” Fund in my portfolio. As a result of writing this article, I will be looking more closely at TRRIX, and to lesser extent PRSIX and RBBAX with a skeptical eye as we may be reaching an inflection point.

Figure #5:  Final One Stop Shop Low Risk Funds

Best Wishes and Stay Safe!

 

By David Snowball

What they do

The fund invests in emerging markets equities, following the principles of Islamic finance. As a practical matter, that means that AMDWX functions as an ESG-screened EM fund. The fund diversifies its investments across the countries of the developing world, industries, and companies, and generally follows a value investment style.

How they’ve done

Over the past decade, the fund has averaged 2.3% annual returns which trails its Lipper peer group by 1.4%.

The fund has earned a three-star rating from Morningstar, as well as the equivalent of a two-star, 10-year rating from MFO.

What we liked

From our May 2011 profile: “Islamic investing principles, sometimes called sharia-compliant investing, have three distinctive features. First, there’s the equivalent of a socially responsible investment screen that eliminates companies profiting from sin. Second, there’s a prohibition on investing in interest-bearing securities, which effectively eliminates both bonds and financial sector equities. Third, sharia precludes investment in deeply debt-ridden companies. Between those three prohibitions, about two-thirds of developing market companies are removed from Amana’s investable universe. This, Mr. Kaiser argues, is a good thing. The combination of sharia-compliant investing and his own discipline, which stresses buying high-quality companies with considerable free cash flow (that is, companies that can finance operations and growth without resort to the credit markets) and then holding them for the long haul, generates a portfolio that’s built like a tank. That substantial conservatism offers great downside protection but still benefits from the growth of market leaders on the upside.”

AMDWX has two great strengths. First, it’s the least volatile EM option. It had the second-smallest maximum drawdown over the past decade, it has the lowest standard deviation, the lowest downside deviation, the lowest bear market deviation, and the lowest downside capture ratio of any EM fund. Second, it’s the “greenest” EM option among long-standing funds. It has the highest ESG scores on the Lipper/MFO Premium metrics and the equivalent of a five-star ESG rating from Morningstar.

Performance has substantially strengthened in recent years. It leads its peers by 2.4% annually over the past three years with the second-lowest maximum drawdown.

In an unusual vote of confidence, the Amana board of directors has invested $33 million of their own money into Amana’s four funds.

What’s changed

Founding managers Nick Kaiser and Monem Salam stepped aside in 2016 and 2012, respectively. Mr. Kaiser is now enjoying, we hope, a well-deserved retirement after a long career full of thoughtfulness and honors. Mr. Salam returned to the fund in 2017 and now serves on a three-person team.

The administrative stuff

Amana Developing World has $62 million in assets and an expense ratio of 1.34%. The minimum initial investment is $250.

Other funds we’re reviewed in the category

		Age/yrs	Returns since launch, vs peer group	Yield
American Beacon Continuous Capital Emerging Markets	CCEYX	2.3	-0.9	0.46
Grandeur Peak Emerging Markets Opportunities, a modest part of Snowball’s Roth IRA	GPEIX	7.3	+3.1	0.15
Seafarer Overseas Growth and Income, the second-largest holding in my non-retirement portfolio	SIGIX	9.1	+3.0	1.20
Driehaus Emerging Markets Small Cap Growth	DRESX	9.6	+2.4	0.64
Fiera Capital Emerging Markets	RIMIX	9.3	+4.2	0.00
Touchstone Sands Capital Emerging Markets Growth	TSEGX	6.8	+6.0	0.00

 

By David Snowball

What they do

The managers pursue long-term growth by investing in 30-50 undervalued global stocks.  Generally, they avoid small-cap stocks but can invest up to 30% in emerging and less developed markets. The managers look for four characteristics in their investments:

1. A high-quality business
2. With a strong balance sheet
3. Shareholder-focused management
4. Selling for less than it’s worth.

The managers can hedge their currency exposure.

How they’ve done

Over the past decade, the fund has averaged 10.1% annual returns.

ARTGX has higher returns, lower volatility, and higher risk-adjusted returns (Sharpe ratio, Sortino ratio, Martin ratio, Ulcer index) than its Lipper Global Multi-Cap Value peer group. Over the past decade, it has posted the highest total return and second-highest return risk-adjusted returns in its 31-fund peer group.

The fund has earned a three-stars and a Silver analyst rating from Morningstar, as well as the equivalent of a five-star rating from MFO. The difference reflects the greater granularity of the Lipper category system that we use; they categorize ARTGX as a Global Multi-Cap Value fund while Morningstar uses World Large Cap. That’s important because the average global large-cap fund has a growth orientation and growth had been substantially outperforming value until 2020.

What we liked

From our May 2011 profile: “on whole, Artisan Global Value offers a management team that is as deep, disciplined and consistent as any around. They bring an enormous amount of experience and an admirable track record stretching back to 1997. Like all of the Artisan funds, it is risk-conscious and embedded in a shareholder-friendly culture. There are few better offerings in the global fund realm.”

The fund has steadily outperformed its global value peers, primarily by excelling during rocky markets. That’s an entirely admirable attribute from a shareholder’s perspective.

It’s a pretty concentrated fund, with a portfolio of about 35 names and an average holding period of three years. The managers are benchmark agnostic, which is reflected in a far lower-than-normal weighting in US equities at a time when US stock market prices are at all-time highs. The managers “incorporate ESG considerations in its search for sustainable growth and the compelling investment opportunities in the areas of energy efficiency, clean energy, and emissions reduction.” Morningstar gives them just middle-of-the-road grades in sustainability.

Then and now, Artisan is one of the premier advisors in the industry. They’re very good at communication, at selecting category-crushing teams, and at adapting to new challenges.

What’s changed

The fund was launched in 2007 under the leadership of David Samra and Daniel O’Keefe. Mr. Samra was the lead dog who had launched Artisan International Value in 2002 with Mr. O’Keefe as an analyst on the fund. Messrs. Samra and O’Keefe chose to divide responsibilities for the two portfolios, with Mr. Samra leaving Global in 2018. One of the two co-managers brought on in the wake of Mr. Samra’s departure resigned in January 2021.

The fund has seen pretty steady outflows since the middle of 2018, which complicates both the managers’ work and the investor’s tax bill.

The administrative stuff

Artisan Global Value has $2.3 billion in assets and an expense ratio of 1.29%. The minimum initial investment is $1,000.

Other funds we’re reviewed in the category

		Age/yrs	Returns since launch, vs peer group	Yield
Castle Focus	MOATX	10.7	-0.9	0.40
Cook & Bynum	COBYX	11.7	-3.2	0.31
Polaris Global Value	PGVFX	22.8	+1.8	1.06

 

By David Snowball

What they do

The managers invest in a combination of US blue-chip stocks, investment-grade intermediate-term bonds, convertible securities, and cash. There’s a bit more mid-cap exposure than their peers offer but noticeably less direct international exposure. In general, at least 25% of the portfolio will be bonds. In practice, the fund is generally 70% equities. The portfolio turnover rate is modest, typically 25% or below.

How they’ve done

Over the past decade, the fund has averaged 9.9% annual returns which does about match the stock market’s long-term average of 10% per year. It’s had substantially lower volatility than an all-equity portfolio, and its risk-adjusted returns are comparable.

LKBAX has substantially higher returns, lower volatility, and higher risk-adjusted returns (Sharpe ratio, Sortino ratio, Martin ratio, Ulcer index) than its Growth Allocation peer group. It’s a top 15 fund over the past decade for both total returns and risk-adjusted returns. Its greatest distinction is its consistency; measured by the fund’s MFO Premium “batting average,” it’s a top-five (of 100) fund that outperforms its peers in 63% of all months in the past decade.

The fund has earned a four-star rating from Morningstar, as well as the equivalent of a five-star rating from MFO. They have earned the Great Owl designation for consistently top-tier risk-adjusted returns.

What we liked

From our May 2011 profile: “Quiet discipline, it seems. Portfolio turnover is quite low, in the mid-teens to mid-20s each year. Expenses, at 0.8%, are low, period, and remarkably low for such a small fund. The portfolio is filled with well-run global corporations (U.S. based multinationals) and shorter-duration, investment-grade bonds. This is a singularly fine fund for investors seeking equity exposure without the thrills and chills of a stock fund. The management team has been stable, both in tenure and in discipline. Their objective remains absolutely sensible.”

The advisor’s first quarter 2021 review reflects their sense of changing market leadership. “Capital markets have entered a ‘reflationary’ period which is characterized by accelerating economic growth and rising inflation. When economies are in a reflation regime, there are often significant implications for capital market leadership. In general, reflation is good for commodities and equity values at the expense of bond prices and, in certain circumstances, the U.S. dollar. Equity markets typically tilt in favor of small companies over large, and investors seek shares of companies in the Energy, Financials, Materials, and Industrial sectors because they benefit from rising inflation and/or higher interest rates.”

Then and now, we celebrate a commitment to investing in high-quality corporations (63% of their holdings possess defensive economic moats, per Morningstar, compared to just 43% for their peers), a long-term perspective (turnover remains at 18%), and quiet, consistent performance.

Then and now, from the perspective of mutual fund investors, the folks at LCKM remain among the industry’s poorest communicators. Their website is sparse and rarely updated (the “news” features are 3-8 years old), they don’t write shareholder letters, they don’t speak to the press, and their annual reports offer limited insights. You’re better off visiting the advisor’s main site, though little there helps you understand the fund. As with the Bruce Fund (BRUFX), you’ve got an outstanding fund whose performance must speak for itself.

What’s changed

Not much on the mutual fund side, so far as we can tell. LKCM manages $20 billion, primarily for high net worth investors. They’ve added international and private equity strategies on that side of the house, but the mutual fund remains in “slow and steady” mode.

The administrative stuff

LKCM Balanced has $135 million in assets and an expense ratio of 0.80%. The minimum initial investment is $2,000.

Other funds we’re reviewed in the category

Tributary Balanced (FOBAX, a singularly improbable star whose adviser is owned by the First National of Nebraska that’s also earned the Great Owl designation)

By David Snowball

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).