Monthly Archives: October 2024

October 1, 2024

By David Snowball

Dear friends,

Welcome to the Samhain / the coming of the dark edition of the Mutual Fund Observer!

October is an interesting month. Traditionally perilous for the financial markets. It begins with the sullen remnants of summer and ends with festivals of the harvest (even for those of us in cities) and of the coming season when nature slips into dormancy. Halloween, whose sales now begin in August and whose iconic ghouls now glower at Santa Claus in Costco, is rooted in Samhain, a pagan Celtic festival welcoming the coming of “the dark half” of the year.

So, celebrate, while we can, “Autumn…the year’s last, loveliest smile.”

(The phrase is often attributed to the poet William Cullen Bryant (1794-1898) though I can’t for the life of me find it in the original.)

In this month’s issue …

My colleague Devesh had the rare opportunity to speak with Mohnish Pabrai, a renowned Indian investor who embraces many of Warren Buffett’s principles and had a long acquaintance with Charlie Munger. Mr. Pabrai brought his concentrated style of investing in the US market a year ago with the launch of his Wagons Fund. Wagons, as in “it’s time to circle the wagons, boys!” wagons. Devesh talks with him in special depth about the six buckets into which almost all of his assets flow.

We share a Launch Alert for a fascinating new fund from CrossingBridge, CrossingBridge Nordic High Income Bond Fund, which went live on October 1. It’s a high-income strategy from a singularly successful adviser in a distinctive market niche that no other fund touches. At base, the Nordic market is large, transparent, quickly growing … and a venue for smaller European and American issuers to raise capital when other avenues are foreclosed.

Our colleague Lynn Bolin shares two essays this month. In the first, Lynn notes that “we are at an inflection point with short-term interest rates falling and the yield curve” normalizing. He hopes to offer some insight into the next six to twelve months in the market by looking at momentum measures in the 800 funds and ETFs he tracks. In the second, he examined options for pursuing “Underconsumption Core,” a sort of “cottagecore for your budget” financial movement that seems to be taking hold on TikTok. With something like 65% to 75% of Americans living paycheck to paycheck, he reflects on some useful ideas on how to cut spending and save more.

The Shadow, vigilant as ever, chronicles SEC actions against two famous firms, a half dozen interesting options in the pipeline, bits of good news for investors … and about a dozen death notices.

Finally, I came very close to finishing a fund profile for this issue, a process derailed by:

For you city folks, that’s the back of our gardens. And that’s a possum. Most particularly, that’s a possum firmly wedged under the fence, halfway between our yard and Colin’s. In lieu of finishing edits on the fund profile, I worked on excavating Peter (or Petra) Possum. Failing at that, I introduced myself to my new neighbor Colin, who borrowed a shovel and worked on undercutting P’s hindquarters. (That was about as popular as you might imagine.)

At last sighting, P was finally free of the fence but unable, or disinclined, to extricate itself from its hole. And so, as Chip publishes this issue, I’m going to go offer it a paw-paw.

No, that’s not a cute way of saying “high-fiving a possum.” It’s a non-commercial (tasty) fruit native to the Midwest. Just the thing to take the sting out of a day-long confinement. I hope. Anyway, we’ll share the profile in November!  Thanks for your patience.

Smart people say “hi!”

I had the opportunity to chat this week with three sets of smart people. The always-engaging David Sherman chatted about the peculiar delights of the Nordic high-yield bond market. The results of that chat are chronicled in the Launch Alert for CrossingBridge Nordic High Income Bond.

I had occasion to be in the Twin Cities to help my son, Will, move to a new apartment. I took the opportunity to drop by The Leuthold Group where I got to chat with long-time confidant Paula Mikl, CIO Doug Ramsay, and portfolio manager Chun Wang. We discussed market valuations (stupid high, again), the investment management business (things are pretty stable for them, their ETF isn’t cannibalizing assets, and they’re partnered with a Texas firm to extend their distribution network), and Leuthold Core (both the fund and the ETF). The ETF charges 60 bps less than the fund and has a slightly higher yield with minor divergences in performance. Both funds have the same tactical allocation, the difference is that the ETF implements it by buying about 24 ETFs. That makes the strategy cheap but “less granular on the industry level” than the fund. Since inception, both the returns (45.79% vs 45.61%) and volatility are remarkably close. Some of the firm insiders own the fund, others are buying the ETF. Being Minnesota, we had coffee … and I got a really cool cell phone-enabled coffee mug out of the visit!

Finally, I had a chance to talk a bit with Minyoung Sohn and John Fenley. Min managed the $8 billion Janus Growth and Income Fund from 2004-07, left Janus to found ArrowMark Partners where he managed Meridian Enhanced Equity and grew the company to a $24 billion firm, and then left ArrowMark to found Blue Room Investing.

John’s career is marked by excellence in international small-cap investing, a strategy that he pursued at Hansberger and Denver Investments where he managed Westcore International Small Cap which eventually became part of Segal, Bryant & Hamill. While there, John became their Director of Fundamental International Strategies. He joined Blue Room in 2023. Between them, Min and John have a shelf full of performance awards and accolades. The firm is successful and committed to doing good, as much as doing well. Part of that process includes discussions, still in their infancy, about returning to the ’40 Act world, either with their own fund(s) or as sub-advisers on an international small-cap or long/short equity strategy. Given their record and good sense, either development would be a major win for investors. We’ll keep you apprised.

Lost decades

GMO offered an interesting and sobering reminder to the “the market is my friend” crowd. If you were born in 1900 and lived until your 85th year, you would have spent more than half of your entire life experiencing “lost decades” in the financial markets.

More than half your life. Yikes.

This, in a nutshell, is the argument for diversification – those numbers would look far different with a slice of Japanese equities, for instance – and for focusing on reasonable goals (my retirement portfolio needs to earn 6% a year for me to have a reasonable prospect of security when I stop full-time work), reasonable time frames (three years isn’t it), and a reasonable set of life choices (never buy a new car, live in the space you need rather than the space you want, find joy in people rather than possessions, cook).

What a difference a box makes

In our Launch Alert for CrossingBridge Nordic Bond, we include a table of the risk-adjusted performance since the inception of all the CrossingBridge Funds. (Short version: top tier across the board.) Each is compared to its Lipper peer average.

CrossingBridge founder David Sherman notes that Morningstar and Lipper assign the funds to dramatically different peer groups and has some reservations about Lipper’s assignments.

CrossingBridge Pre-Merger SPAC ETF (Financial Stock, but formerly Small Cap Growth, at Morningstar, Alternative Event-Driven at Lipper)

I think the CrossingBridge Pre Merger SPAC ETF should be categorized in the ultra-short duration bond category since it meets the duration definition backed by US Treasuries in SPAC escrows and the Fund always redeems or sells but never rolls into deals.

RiverPark Strategic Income (High Yield Bond at Morningstar, Flexible Portfolio at Lipper)

RiverPark Strategic Income is a flexible conservative high-yield fund. It has the flexibility to reduce high-yield exposure and move into investment grade when spreads seem overvalued or other conditions exist from a bottom-up, value investor standpoint. Flexible category funds are typically top-down funds making calls on interest rates, term structure, and economic views.

CrossingBridge Low Duration High Yield (Multisector bond at Morningstar, High Yield at Lipper)

CrossingBridge Low Duration High Yield (CBLDX) has historically been a max of 65% high yield and a duration mandate of typically 2 or less … so different than the traditional high yield category. These differences are the reason behind changing the name and refiling a prospectus with SEC for review (still awaiting comments) to High Income.

All of which is worth knowing because the easy judgments – “it’s a five-star fund! Buy!” – are driven by those sometimes-questionable peer group assignments. The reason that MFO focuses less on ratings and more on a manager’s strategy and impulses is to keep you from acting based on “peer-adjusted performance” when, well, they aren’t actually peers.

The four questions you need to ask yourself

  1. Do I know what the manager is doing?
  2. Does my portfolio need what he’s doing?
  3. Have they managed to do it consistently, amid changing markets?
  4. Am I comfortable with the short-term risks, including volatility and peer underperformance, that I’m likely to experience?

Anything less than four “yeses” means “not for me!”

The World Goes Round

We note with sadness the closing of Rondure Global Advisors, a woman-owned investment adviser founded in 2016 and headquartered in Salt Lake City, Utah. Laura Geritz, CFA is Rondure’s founder, co-CIO, and CEO. She began her career at American Century as a bilingual investor relations representative, a position that continues to shape her thinking about her investors, their needs, and her obligations to them. She moved to the investing side in 1999 at American Century and eventually joined Wasatch Funds in 2006. She has been phenomenally successful as a professional investor. Lewis Braham, writing in Barron’s about her work at Wasatch International Opportunities, concluded that she “crushed” her peers (“Should You Follow a Star Money Manager?” Barron’s, 9/10/2016). Her signal charge, Wasatch Frontier Emerging Small Countries, returned 15 times what her competitors did. But as she traveled to those challenged and striving countries, she came to a poignant and powerful conclusion:

Somewhere along the path of making money, I got too busy to do as much good as I aspired to.

Founding Rondure was a way to return to that desire. The firm has three core principles: make money for our clients, Do Good, and be great partners.

In the last week of September 2024, Ms. Geritz penned the “Final Shareholder Letter,” which is both somber and modestly mysterious:

It is with heavy hearts and thoughtful consideration that we inform you that the Rondure New World Fund will be liquidated on October 18, 2024, and with this closure, we will also be closing Rondure Global Advisors.

The economic landscape of our emerging markets-focused strategies has been challenging for some time. Our entire team has been dedicated to facing those challenges with the constant objective to achieve long-term positive returns for our clients and investors. Unfortunately, recent unforeseen developments within our business have forced us to reevaluate our ability to continue. It is a painful outcome and certainly not a decision we anticipated ever having to make, particularly when we think emerging markets remain such an interesting and compelling long-term investment. We did not make this decision lightly, but ultimately, consideration of the economic and operational realities of continuing the firm have led us to realize closing is the best outcome for our clients.

In a subsequent conversation, Laura pointed to the sudden and unexpected confluence of factors, unmanageably rising costs and health challenges, as conspiring to make it impossible for Rondure to continue. Her two priorities now are caring for her staff and her investors. She is working to make it possible for her shareholders to gain access to the soft-closed Grandeur Peak Emerging Markets Opportunities Fund if they want to maintain exposure to the style and assets. That’s a rare and thoughtful gesture but hardly surprising given her character.

We wish all involved godspeed.

Thanks, as ever . . .

To The Few, The Proud, The Ongoing Contributors: Wilson, S&F Investment Advisors, Gregory, William, the other William, Stephen, Brian, David, and Doug! Legitimately, thanks, guys.

An exceptional number of folks, and a number of exceptional folks, made contributions this month which will dramatically expand the opportunities we can pursue. So thanks to the Suranjan Fund, Dr. Mary of Atlanta Financial Psychology (thanks for the kind words! We try hard to convince regular folks that they can make sense of the system if they just have faith and keep it simple.), Mitchell of Washington, Leah from Cambridge, Frederic of Wisconsin, Rad of California, Andrew from Orefield, Sunny of California, Martin from Columbus, and Mark of Michigan.

And my dear departed friend Nick Burnett, through the generous intermediation of his wife, Debbi. Of all the people I’ve known, Nick is the one who most earned the accolade, “larger than life.” Cheers, buddy. Thanks, Debs!

You Matter

Act like it.

The children are watching.

And waiting, to inherit what we leave them.

The devastation in places that were supposed to be idyllic and iconic – places like Asheville, North Carolina, where friends have been celebrating retirement – has been much on my mind.  “We have biblical devastation through the county,” said Ryan Cole, the assistant director of Buncombe County Emergency Services. And yet Asheville was often enough described as “a climate haven,” insulated from the worst effects of global warming.

Death threats against a company owner in Springfield, Ohio – “family-built, American-owned, making metal work in America since 1965 … some say American manufacturing isn’t what it used to be. Apparently, they haven’t spent time in Springfield” – who had the temerity to say publicly that his Haitian employees were good workers, has been on my mind. “They come to work every day. They don’t cause drama. They’re on time. I wish I had 30 more.” That led to a voicemail on the company answering machine: “The owner of McGregor Metal can take a bullet to the skull and that would be 100 percent justified.” His children and 80-year-old mother have also been threatened.

Jimmy Carter, who improbably celebrated his 100th birthday, on 30 September 2024, has been on my mind. Mr. Carter was diagnosed with brain cancer in 2015. He entered hospice in 2023 and lost the love of his life that same year. They had been married for 77 years. His family usually frames his future in terms of weeks. And still, he persists. He was not a great president, his skills and temperament did not align with the challenges of the job, but he was arguably the best person to hold that office in the 20th century. I still remember Mr. Carter’s bulky sweaters in winter, and his decision to install solar panels on the roof of the White House. Mr. Reagan had them ripped out. The younger President Bush quietly installed solar on a maintenance building on the White House grounds and President Obama restored them to the White House roof.

Nazi propaganda has been on my mind, too. The National Socialist propaganda had two fairly distinct phases, the “make Germany great again” phase from about 1932 – 1937 and the “eradicate the enemy within” phase from about 1938 – 1945. Some fascinating new work by scholars at Cambridge on a recently uncovered British intelligence analysis from April 1942, apparently unread for 80 years, focuses on Hitler’s growing obsession with “the enemy within,” which the British speculate was driven by a growing realization that his cause was lost. As his desperation grew, his underlings accelerated the Final Solution, a phase so virulent that concentration camp commanders were continuing genocide even when they knew the war had been lost and that Allied forces would seize their camps within days.

The use of such rhetoric – “the threat from outside forces is far less sinister, dangerous and grave than the threat from within,” descriptions of domestic opponents as “vermin” and immigrants as “poisoning the blood of the country,” all at a single Veteran’s Day speech – by an American aspiring to lead the nation, has been on my mind. A lot.

That fact that folks cheered, likewise.

The hardest act of faith, sometimes, is recalling that even in perilous times, you matter. We are, each of us, teachers. We are teaching our neighbors what we think of them. We are teaching children who they should become. And we are teaching ourselves, in small daily actions taken and not taken, who we will become.

Really, do you want to be the people you see on TV? If not, then don’t act like them. Be a good steward of the world gifted to us. Respect those who most loudly disagree with you, knowing that a good heart still lies beneath many fevered words. Be gentle with your flaws. Be stalwart in your willingness to do good: to vote, to encourage others, to stop the doom-scrolling, to speak in terms of policies rather than merely personalities, to push those who lead to take the devastation wrought by a warming planet seriously, to support those whose lives have been shredded. Channel Jimmy.

Know that touching one life is better than touching none. Planting one tree is better than leaving the field barren.

Know that the children are watching.

As ever,

david's signature

 

MFO Premium Introduces Quarterly Metrics

By Charles Boccadoro

Our friends and long-time MFO Premium subscribers at S & F Investment Advisors of Encino, CA asked recently if we could replicate metrics based on Lipper’s Global Data Feed that Barron’s stopped publishing; specifically: Lipper Mutual Fund Investment Performance Averages – Specialized Quarterly Summary Report.

We then coordinated with the folks at Lipper to ensure we used all the same funds, share classes, and categories to match their averages, which we did.

S & F uses these averages, specifically the General Equity Average, for its quarterly reports and benchmarks. General Equity includes 16 of the more common US Equity categories, including Small-, Mid-, Large- and Multi-Cap Value, Core, and Growth funds. (The specific definition can be found on our Definitions page, under Averages.

As is typical with subscriber suggestions, we took the opportunity to expand the tool set for all users. The new Quarterly metrics, which include returns and peer ratings for the past 8 quarters, plus attendant quarter-ending annual returns and peer ratings, can be accessed in several ways, the quickest via the Analytics link on the Navigation Bar in the top of any page, as seen in the screenshot below:

Quarterly Tool on MFO Analytics Panel

Users can enter the ticker symbols of particular funds, or use the short-cut links to get quarterlies of say StateStreet Sector ETFs (SPDRs), Morningstar’s Barometer ETFs (3×3 cap/style), or category averages, which come from the Pre-Set Screens in MultiSearch, the site’s main search tool.

 

Another way to access the Quarterly Metrics is through MultiSearch. Once search criteria is selected, users can open the Quarterly Metrics via the Group Button, shown here:

Quarterly Group Selection in MultiSearch

And, finally, here are the new quarterlies, using the Dodge & Cox family funds, for the last four quarters, beginning with the good one that just ended.

Quarterly Metrics Dodge & Cox Fund Family

The Pabrai Wagon Fund Overview and Interview with Mohnish Pabrai

By Devesh Shah

On September 29, 2023, Mr. Pabrai started the Pabrai Wagons Fund (WAGNX/WGNIX), a ‘40 Act mutual fund, offering retail investors a vehicle to invest in his stock ideas.

Mohnish Pabrai, quoting ChatGPT, is a value investor heavily inspired by Warren Buffett and Charlie Munger, with a focus on long-term, concentrated bets on undervalued companies. He founded Pabrai Investment Funds, where he manages private partnerships that mirror Buffett’s approach, often emphasizing the importance of patience and low-risk, high-return opportunities.

He has written two notable books:

  1. The Dhandho Investor: The Low-Risk Value Method to High Returns (2007)
    This book outlines his investment philosophy. The term “Dhandho” refers to the concept of business in Gujarati, and Pabrai presents a simple, low-risk method to achieving high returns through value investing.
  2. Mosaic: Perspectives on Investing (2004, out-of-print)
    This book is a collection of Pabrai’s writings, where he shares his thoughts on investing, including lessons learned from successful investors like Warren Buffett and Charlie Munger. It offers insights into his personal investment philosophy and strategies.

I had read one of his books, The Dhando Investor, and was aware of his friendship with Charlie Munger. I had heard him on value investing podcasts, listened to some of his stock investments, and admired his philanthropy work in India.

Mr. Pabrai has quite a following in the investment community and his Pabraisms are often quoted. One I heard recently was “Always invest when the market is closed”, followed by “Take a nap every day”.

I first learnt about the Wagon fund through Twitter, where a targeted advertisement told me:

  1. The S&P 500 Index of US equities presently trades at a trailing P/E of about 27.5x earnings, identical to 2000 and significantly about the S&P’s 16x long-term average earnings multiple.
  2. When the P/E was this high in 2000, for the next 11+ years, dividends included, investors made no money in the S&P 500. The current valuations could be a problem going forward.
  3. In juxtaposition, the Wagon Fund carries a portfolio of exceptional global businesses, which currently trade at an average P/E of 7.5x
  4. Thus, the Wagon Fund is well-suited to outperform the S&P 500 going forward.

Intrigued by the pitch, I researched the fund’s website, following which, I reached out to Mr. Pabrai.  David Snowball and I met with Mr. Pabrai over Zoom in the middle of September 2024 to learn more about the Wagon Fund. What follows is part analysis, part Q&A, paraphrased for print.

In this article, we will first hear from Mr. Pabrai about his reasons for starting a mutual fund, and we will dive into the stock portfolio of the fund. Next, we will look at the fund structure and some of the challenges in this situation. I conclude with my take on the fund’s merit for potential investors.

A “Devesh Q and Mohnish A” exchange

Q: Why did you start the Wagon Fund?

MP: I operate multiple private investment partnerships, but the maximum number of investors that we can have in these partnerships is between one hundred to five hundred. Many individual retail investors have reached out to invest in my strategies. The private funds have a high minimum investment in the millions of dollars. To meet the lower minimums suitable for small investors, I started the Wagon Fund, a democratic product.

Q: What are the assets under management?

The private funds have over one billion in assets managed by me. The Wagon fund is just getting started and has around 39 million dollars in Assets (as of Sep ’24, 2024).

Q: Are the returns of the Private funds available to investors so we can learn more about your investing history?

(Mr. Pabrai did not offer specific numbers since the funds are private but let on that the funds have outperformed the S&P 500 over the long run, albeit with higher volatility).

Q: What comparisons can you draw between the Private funds and the Wagon fund?

MP: The private funds are highly concentrated holding 10 positions. The Wagon Fund holds about 27-28 positions. Mutual Fund regulations about diversification require us to run it differently than the privates. I have a limited number of good ideas and thus many of the stocks overlap between the funds.

Q: How have you applied Buffett-Munger learnings to stock concentrations in your own investing?

MP: We did a deep dive on every decision made by Berkshire Hathaway since 1965. If we count Buffett’s private investments, the public company stocks he bought, and important personnel hires, Berkshire Hathaway has made about 300 significant decisions over six decades. In his 2022 Annual Letter, Mr. Buffett wrote that only about a dozen decisions have been responsible for almost all the returns of Berkshire.

We are talking about a dozen great decisions out of three hundred significant investments. That is a 4% hit rate.

And we are talking about GOD here (referring to Mr. Buffett).

What chance do we mortals have to outperform the market? It’s tough. The important lesson is when opportunity knocks, we want to have high conviction, bet big, and then hold the investment forever.

Q: Looking at the allocation of the stock portfolio in the Wagon Fund, it appears that the fund holds 35% Turkish stocks and 60% US stocks. Is your mandate to be (1) a Global Fund (like Moerus Global MOWIX) (2) an EM fund with US exposure (like Artisan Developing APDYX) or (3) a deep value fund?

MP: None of the above. Our only mandate in the Wagon Fund is to make money.

(On the topic of Turkey), the fund has investments in certain stocks. They happen to be in Turkey. But I didn’t start with the idea of buying something in Turkey.

Q: How would you best categorize the Wagon fund?

Think of the Wagon fund (and the private partnerships) as an Anomalies Fund – my strongest views on where Mr. Market is wrong and created a big anomaly, allowing me to invest.

Broadly speaking, the Wagon fund’s investments consist of 6 buckets:

    1. Coal stocks (Arch Resources, Alpha Metallurgical Resource, CONSOL Energy, Warrior Met Coal), represent about 20% of the portfolio.
    2. US Homebuilders (Pulte, Toll Brothers, Tri Point homes) about 10% of the portfolio
    3. US Car Dealers (including Asbury Automotive, Penske, Lithia) are about 19% of the portfolio. Here’s the rationale for our investment in this bucket:
      • Markets expected Electric Vehicles (EVs) to become a large portion of the car fleet, that these EVs would be sold directly, and these cars would not require servicing.
      • We are not seeing that level of migration to EVs. The OEMs (the car manufacturers) are not going to bypass the dealer network and many of them are locked into those contracts. In any case, dealers don’t make that much on car sales.
      • What the market got wrong is that the lifetime servicing of an EV is similar to Internal Combustion Engine (ICE) vehicles.
      • We concluded that Car dealers, which were trading at 5-7x Earnings were too cheap. We built a position in the best names we could find.
      • Car dealerships are an example of a contrarian, deep-value bet.
    4. Our 4th bucket is TAV Havalimanlari Holding: This is the Turkey Airport Holdings Company, a 12% holding for the Wagon Fund. Thesis:
      • Start with just one airport.
      • During COVID, TAV bought the Almaty airport in Kazakhstan when the passenger traffic was zero for $400mm. They put in another $250mm to build a new terminal. The $650mm investment was financed at 4% for 30 years and with a $150mm Equity investment.
      • 95% of the airports around the world are owned and operated by Governments.
      • Even when airports are private, they operate on BOT (Build, Operate, Transfer), that is, the airport goes back to the Government after 20-30 years.
      • In contrast, the Almaty airport license is permanent (he said, 10,000 years).
      • Fast forward to 2024: Cash Flow from Almaty will be $150-200 mm growing at 15-20% per year.
      • TAV operates 15 airports across 8 countries. It provides a wide range of services in addition to airport management, including duty-free operations, ground handling, and other aviation-related services.
      • The stock’s Equity Market Cap was $800mm when we invested and is $2.8Bn currently.
      • Why would I ever want to sell TAV Holdings when it pays for itself many times over? I can’t find businesses like these on the NYSE.
    5. Bucket number 5 is the Turkish Coca Cola Bottling Company, Coca Cola Icecek. We own stock in Icecek (the bottling company), in Anadolu Grubu Holding (the parent company), and Anadolu Efes Biracilik ve Malt Sanayii AS ORD (the holding company) for a total allocation of 25%. Through the parent and holding company, the fund also has exposure to various businesses in that region. The exposure gives us ownership of the largest beverage and beer distributor in Ukraine and Russia. The business trades at a very reasonable valuation.
    6. Mongolian Mining (which Pabrai talked about in depth) represents a high cash flow business trading at low Free Cash Flow multiples. Along with Occidental Petroleum, and a smidgen of Amazon and Microsoft, the portfolio is mostly spoken for.

These are my great ideas for now. My two analysts and I will spend months diving deep into each company before investing.

Q: Do you expect the Wagon Fund to beat the S&P 500? What about Berkshire Hathaway?

MP: First, let’s talk about why the S&P 500 Index is unbeatable.

The index is a thing of beauty because it is so DUMB.

Take, for example, NVIDIA. The Index has been long NVIDIA since 2001 and luckily by design is too dumb to have sold the stock. Meanwhile, active managers have bought and sold NVIDIA from their portfolio numerous times.

Remember the lesson from Berkshire is not the buying of great companies which creates investment greatness. It is the part one remains invested in that allows for compounding.

Both Buffett and Munger have publicly disclosed they do not expect Berkshire to outperform the S&P 500. The size of the balance sheet is simply too large to invest and gain an edge versus the S&P.

For the Wagon fund, I like to underpromise and overdeliver. I hope the fund will beat the S&P by 1% to 3% over the long run. And since I don’t think Berkshire can outperform the S&P anymore, it follows I expect the fund to outperform Berkshire too.  

At the end of the call …

In the ninety-minute Zoom call, Mr. Pabrai delved deep into his analysis of Mongolian Mining and some of his Canadian Steel investments around 2005. He was making the point that he has a history of finding stocks that Mr. Market has mispriced. He finds them, invests big, and sits on those companies.

I believe Mr. Pabrai is a high-quality investor, has a knack for finding areas where Mr. Market offers anomalies, and can identify solid businesses. The Wagon fund looks promising.

But this fund is not for everybody.

There are several challenges on the Business side.

Issues/Challenges for Wagon Fund investors:

      1. Key man risk. This is the Pabrai Wagon Fund.

        If Mr. Pabrai gets hit by the proverbial bus, the fund has no future. There are two analysts, but this is not a team, where another Portfolio Manager with Mr. Pabrai’s gravitas can take over.

      2. Trading priority between privates and Wagon Fund.

        Q. Since Mr. Pabrai operates private funds and this mutual fund, which funds get priority to trade? Is there a conflict of interest?

        MP:

        • We have worked on a solution whereby each fund gets a priority one day a week. Monday would be Private Fund 1, Tuesday Private Fund 2, Wednesday Wagon Fund, and so on and so forth. The idea is that each day one fund gets first dibs to invest in the market.
        • There isn’t much trading going on day to day. We invest and sit on stocks for a long time.
        • The Private fund investors can only redeem once a year at the end of the year. Whereas Public funds provide daily liquidity by regulation. By design, the public funds win in liquidity on the exit.
        • It takes 6-9 months to invest slowly in some business. Remember it took Berkshire eighteen months to invest in the Japanese trading houses.

        Analysis: The idea of rotating liquidity first dibs is pragmatic, but I don’t know how comfortable many investors will be with such a mechanism.  

      3. Size limits to investments?

      4. Suppose the Wagon fund would become a Billion-dollar fund. Do Turkish stocks have that kind of daily trading volume and liquidity? Suppose there is a market crash and there are redemptions in the Wagon Fund, will you be able to sell these same stocks to match outflows (if it took 6-9 months to get into these stocks).

        MP: Firstly, this is a theoretical, not a real problem. The Wagon Fund only has $39 million in assets. Second, can establish Lines of Credit with Banks, so we could use that liquidity to meet Outflows if needed. Third, we own other stocks in the US. We can sell those first to raise the money to meet outflows.

        Analysis: Neither Berkshire Hathaway nor the private funds are forced to sell stocks in a crash. Their capital is permanent and locked respectively.

        On the other hand, the Wagon Fund is a daily liquidity product. concentrated investing is a dual-edged sword. When the market is going in your favor, the fund will mint money and compound at extraordinary rates. When the market goes against you, the bottom falls out. The Wagon Fund will suffer from illiquidity as a nature of its bets.

        As a case in point, Mr. Pabrai mentioned that Private funds were down as much as 60-70% in the Great Financial Crisis of 2008-2009. They did bounce back and were up approximately 20% by the end of 2009. Ergo, investors should be buckled up when investing in this fund when the market is in rough waters.

      5. Potential risk of sharper drawdowns than the market

        Said Mr. Pabrai, “When you hold 10 stocks in the Private funds’ portfolio, it is bound to be more volatile than the S&P 500, which has 500 stocks. One of our funds in 2008 was a sub-prime investment, which went to zero. When that’s 10% of the portfolio, you get hit.”

        Mr. Pabrai added, “Ted Weschler (one of the two Berkshire Teds) was also down 70% in the GFC and Buffett still hired him.”

    For retail investors considering the Wagon fund, it’s important to keep in mind that even the great investors have large drawdowns and have stocks that go to zero. Their greatness is not because they are good at controlling drawdowns. Rather, it’s because they find businesses that will survive the economic cycles, and they buy such businesses at great valuations (and hold them forever).

    Striking the Balance between Reasons to Buy and Reasons to Avoid

    Investors are being presented with access to a high-quality, deep-value, storied investor, in the form of Mr. Pabrai. The fund’s portfolio is different than the Mag 7, not ridiculously diversified like some index funds, and not invested for the sake of filling buckets. It’s constructed meticulously.

    But this access comes with caveats on the business side.

    Pabrai hasn’t run a mutual fund before. He is the Keyman for the fund. Conflicts between private and public funds, liquidity in international markets, and the correlation between concentrated portfolios and drawdown measures are all on the table.

    Mr. Pabrai would argue my concerns are theoretical. I agree. But it’s my duty to point out concerns for potential investors.

    I am going to invest in the Wagon fund because I like a differentiated portfolio, and I think Mr. Pabrai has tremendous investment acumen.

    But it cannot be a big position.

    I would like the fund to season and fine-tune on the business side – build a bigger team with a seasoned number two. I want to see how the fund performs in a market correction – how it handles outflows and manages liquidity in Turkish stocks. And I’d like to see if the public vs private funds create conflicts.

    It’s not a fund for everyone, but for those with extra investment capacity, and a desire to overlook the teething problems of the mutual fund, it might be a good idea to circle the wagons.

Trending Funds at the Inflection of Falling Rates

By Charles Lynn Bolin

Investors waited impatiently as the Federal Reserve considered cutting interest rates. Will it be 0.25% or 0.5%? They finally cut rates by 0.5% on September 18th. The S&P 500 is up 20% year to date as investors contemplated whether we would have a recession or manage the elusive soft landing. There have been three periods this year where the market fell 5% or more. The S&P 500 has been relatively flat for the past three months but spiked over 1% after the Fed made the cut.

My survival instinct tells me to sell stocks and buy bonds, but my self-control tells me to stick to the plan worked out over the past three years with the assistance of financial advisors. The economy is strong, and I hope for a soft landing.  It’s 4 am in the morning so I will get another cup of coffee and chill. I prepared for the rate cuts by evaluating if I had enough in safe bonds, certificates of deposit, and money markets to cover three years of expenses. I sold a small amount of my more volatile funds and bought bond funds.

We are at an inflection point with short-term interest rates falling and the yield curve uninverting. I hope to gain some insight into the next six to twelve months by looking at short-term trends in this article. I track over eight hundred mutual and exchange-traded funds from approximately 125 Lipper Categories available at Fidelity and/or Vanguard without transaction fees or loads. For this article, I downloaded the latest data as of September 21st using the Mutual Fund Observer MultiScreen tool. I created a momentum indicator based on an equal weight of 1) August and September returns, 2) three-month exponential moving averages, and 3) fund flows.

This article is divided into the following sections:

TRENDING LIPPER CATERGORIES

I calculated the trending Lipper Categories from the average of the momentum indicator for individual funds. As a casual observation, there are six Mixed Assets, six Global, six Equity, four Bond Categories, and four Sector categories trending the most now. A globally diversified stock and bond portfolio is trending upwards very well. Bond funds have performed well because bond values rise as interest rates fall. As bonds in my bond ladders mature, this table contains the Lipper categories and funds that I may be interested in buying.

Table #1: Top Funds from Trending Lipper Categories (One-Year Metrics)

Source: Author Using Mutual Fund Observer

DEFINITIONS:

  • Ulcer Index measures both the magnitude and duration of drawdowns in value.
  • Martin Ratio is a measure of excess return above a risk-free investment divided by the risk. It is calculated as (Total return – Risk-free return) / Ulcer Index.
  • return, but relative to its typical drawdown.
  • Great Owl funds have “delivered top quintile risk-adjusted returns, based on Martin Ratio, in its category for evaluation periods of 3, 5, 10, and 20 years as applicable”.

TRENDING GREAT OWL FUNDS

Table #2 contains Great Owl Funds that are trending strongly within the trending Lipper Categories in Table #1. I own a diversified global portfolio resembling a traditional 60% stock /40% bond balanced allocation. When the yield curve uninverts, a recession usually begins within a few months, but the economy currently looks resilient. I prefer to underweight growth funds that have done so well over the past year.

On the equity side, Vanguard Consumer Staples (VDC) has some appeal as valuations of the S&P 500 remain high. With interest rates likely to fall over the twelve months or so, American Beacon SiM High Yield Opportunities (SHOYX), Dodge & Cox Income (DODIX), and American Century Diversified Corporate Income (Korp) also interest me. I look at these further in Section #4.

Table #2: Trending Great Owl Funds (One-Year Metrics)

Source: Author Using Mutual Fund Observer

Figure #1 reveals that Vanguard Consumer Staples (VDC) and American Beacon SiM High Yield Opportunities (SHOYX) have had relatively steady returns over the past several months. In a market downturn, they may perform better than diversified equity funds.

Figure #1: Trending Great Owl Funds

Source: Author Using Mutual Fund Observer

TOP FUNDS FROM THE TRENDING LIPPER CATEGORIES

The funds in Table #3 are trending in Lipper Categories where the majority of the funds are trending regardless of whether they are Great Owl Funds. It includes some Mixed Assets, utility, and sector funds.

Table #3: Top Combined Funds from Trending Lipper Categories (One-Year Metrics)

Source: Author Using Mutual Fund Observer

Among equity, American Funds Capital Group Dividend Value (CGDV) stands out for consistent performance. For those who want a one-stop fund, the Vanguard Target Retirement 2055 (VFFVX) fund has done well, but interested investors should look at the appropriate target date. Finally, State Street Real Estate Select Sector (XLRE) responded strongly to the rate cut.

Figure #2: Top Combined Funds from Trending Lipper Categories

Source: Author Using Mutual Fund Observer

TRENDING BOND FUNDS

In a falling rate environment, I favor being overweight in bonds. The first seven funds in Table #4 were identified as top-performing funds in the trending Lipper Categories. The remaining five are included for comparison purposes.

Table #4: Top Bond Funds from Trending Lipper Categories (One-Year Metrics)

Source: Author Using Mutual Fund Observer

Figure #3 shows that long-term corporate bonds have increased the most in value as the interest rates fall. Fidelity Intermediate Bond (FTHRX) contains more treasuries and has not climbed at much as the others. Dodge & Cox Income has been a top performer in the pack of other bond funds. One last observation is that low-cost bond ETF funds are also at the top of the pack for performance.

Figure #3: Top Bond Funds from Trending Lipper Categories

Source: Author Using Mutual Fund Observer

CLOSING THOUGHTS

I maintain a list of over a thousand funds that I have previously vetted. Which fund is best for an investor depends mostly on their current and desired portfolio. I was not surprised that bond funds are trending favorably. I will be making small changes next year taking into account the impact of taxes and the economy. Tax efficiency was not a consideration in identifying these trending funds. Less tax-efficient equity funds should be held in Roth IRAs and less efficient bond funds like the ones in this article should be held in Traditional IRAs if possible.

Underconsumption Core and Financial Counselors

By Charles Lynn Bolin

In addition to volunteering at Habitat For Humanity, I also volunteer at Neighbor To Neighbor which offers programs in eviction avoidance, utility shut-off avoidance, affordable housing, housing search, foreclosure prevention, and counseling including Financial Coaching, Debt Consolidation, and reverse mortgages, among other services. My role is to prescreen people to get assistance within Neighbor To Neighbor and direct them to external sources of assistance.

As a housing opportunity resource for Northern Colorado, Neighbor to Neighbor (N2N) services are designed to meet each individual where they are now – from homeless and low-income individuals seeking a place to live; to families needing assistance to secure their existing homes; to prospective buyers ready to explore the homebuying process. Our trained housing professionals assist clients through obstacles and develop personalized solutions to help them achieve their housing goals.

Neighbor To Neighbor’s Financial Coaching includes 1) Personal Credit Score Analysis & Loan Options, 2) Personalized Budgeting Plan, and 3) Referrals for lenders, agents & other housing professionals. As part of the coaching, the manager helps clients analyze their spending habits to understand where they are spending their money.

Underconsumption Core is a “personal finance” trend on TikTok with millions of followers. It advocates buying only what you need, not being influenced by social media marketing, and shopping for value. Underconsumption core can be found on TikTok here.

Somewhere around 65% to 75% of Americans are living paycheck to paycheck. I hope this article offers some useful ideas on how to cut spending and save more. It is divided into the following sections:

AMERICANS’ FINANCIAL STRESS

Living paycheck to paycheck is not limited to people with lower incomes. “Inside the Psychology of Overspending and How to Stop” by Jessica Walrack in U.S. News and World Report describes why some people overspend. She lists five common reasons experts say Americans are overspending:

  1. Social Pressure: Buying what you see others buying as a way to signal that you can afford it, too.
  2. Lifestyle Creep: When your expenses unintentionally creep up as your income increases.
  3. Emotional Impulse Spending: A study reports that shopping enhances feelings of personal control, which suggests it’s likely to alleviate sadness.
  4. Not Accounting for Inflation: If you don’t adjust your budget to account for cost increases, you’ll likely find yourself overspending each month.
  5. Credit Misconceptions: The truth is that you have to pay back every dollar, plus interest and fees.

Gili Malinsky at CNBC wrote about people living paycheck to paycheck in “More Americans say they are living paycheck to paycheck this year than in 2023—here’s why” where a survey found that 65% of Americans are living paycheck to paycheck. The reasons cited are:

  • 69% cite inflation
  • 59% cite lack of savings
  • 28% cite rising interest rates
  • 33% cite credit card debt
  • 28% cite medical or health-care bills
  • 21% cite layoffs or loss of income
  • 15% cite student loans

I believe that it is critical to have emergency savings because they allow a person to overcome many obstacles such as temporary loss of employment and unforeseen expenses. Three of the above reasons are related to the cost of having debt. If people can eliminate debt, shift to more favorable debt, or consolidate it under more favorable terms, they can reduce interest payments.

Emily Batdorf wrote “Living Paycheck To Paycheck Statistics 2024” in Forbes Advisor, that a “2023 survey conducted by Payroll.org highlighted that 78% of Americans live paycheck to paycheck, a 6% increase from the previous year.” When asked how they plan to save money, respondents cited three major strategies.

  1. Nearly 63% of respondents say making food at home and packing food when going out is their primary way of saving money.
  2. The second most common way to save was cutting back on nonessential expenses (57%).
  3. The third is shopping secondhand (50%).

It can be convenient for dual-income families to buy takeaway meals, but it is costly. I have used the example of drinking my favorite cup of Peet’s coffee at home for twenty-five cents a cup instead of buying a cup for five dollars or more at Starbucks as a non-essential expense. People donate clothing and household goods to Habitat For Humanity Restore and Goodwill stores which are good resources for those wanting to shop for quality second-hand items.

Khristopher J. Brooks wrote “Americans continue to rack up credit card debt, hitting a record $1.14 trillion” for CBS News Money Watch. He described that U.S. consumers collectively owe a record $1.14 trillion in credit card debt which is up over 2% from the previous quarter. He adds, “About 7.18% of cardholders fell into delinquency in the second quarter, up from 5% in the previous quarter…” The average credit card interest rate is now over 24%.

FINANCIAL COUNSELING VERSUS FINANCIAL ADVISORS

Financial advisors usually help to determine investments, asset location, asset allocation, and produce a financial plan. Financial counselors provide a different service. People living paycheck to paycheck often have low savings so a financial counselor will probably be of more benefit than a financial advisor. John Egan describes the services and accreditation of a financial counselor as well as where to locate one in “What Is A Financial Counselor?” for Forbes Advisor.

Jean Folger provides a “Guide to Hiring a Financial Counselor“ in Investopedia. She lists typical support and guidance provided as:

  • Build savings
  • Create (and stick to) a budget
  • Create a plan to pay down debt
  • Deal with an immediate financial crisis
  • Determine if you’re eligible for tax credits
  • Improve your credit score
  • Manage lines of credit
  • Manage student loans
  • Modify ineffective money habits
  • Navigate available public benefits and community resources
  • Set and realize financial goals
  • Understand basic financial principles
  • Improve your overall financial health
  • Refer you to an investment advisor or financial planner when you’re ready
  • Some financial counselors have extra training in other areas

Ms. Folger says that the price charged by a financial counselor is usually lower than working with a financial advisor or certified financial planner. “Financial counselors who work in private practice may offer a free initial session and then charge a flat fee for any subsequent meetings. Others may charge an hourly rate or a monthly subscription,” she adds. 

The National Foundation for Credit Counseling (NFCC) is a nonprofit organization founded in 1951 that works with consumers through one-on-one financial reviews. The press release, National Foundation for Credit Counseling Warns of Skyrocketing Consumer Financial Stress, describes “critical level of financial strain where households are cutting back on food expenses and personal savings”.

To stop living paycheck to paycheck on your own, Julia Kagan suggests in “Living Paycheck to Paycheck: Definition, Statistics, How to Stop” at Investopedia that you can:

  • Review your budget. Budgeting relies on tracking your expenses against your income… Look at every dollar you spend over a month to see if you can find out what may have increased your spending.
  • Make sure you are saving. Living paycheck to paycheck often precludes saving. If you have little to no savings, start small—set aside 1% of each paycheck ($10 for every $1,000 you earn). And automate it so that you aren’t tempted to spend it.
  • Pay off your debt. One downside of having no financial cushion is relying on credit cards with high APRs to cover emergencies of varying sizes. Depending on your situation, there are numerous ways to pay down credit card debt, including using a debt snowball strategy to pay off the smallest debt first, using a balance transfer on a credit card with 0% interest for a year or more, or getting a personal loan or a debt consolidation loan.
  • Increase your income. Whether that means starting a side hustle, asking for a raise or a promotion, or finding a better-paying job, the extra cash can help you start setting aside more savings and/or pay of your debt faster.

From my experience volunteering, there are also public and non-profit organizations that provide Resource Navigation which assist with programs such as qualifying for affordable housing, utility credits for low-income people, and food assistance. The waiting lists can be long though.

UNDERCONSUMPTION CORE

“About half of TikTok users under 30 say they use it to keep up with politics, news” by Colleen McClain at the Pew Research Center is informative in many ways on how younger people get their news through social media. Underconsumption Core is embraced by Gen Z (ages 12 to 27) along with other age groups to a lesser extent and fits within several aspects of financial counseling.

Omar H. Fares, Lecturer at the Ted Rogers School of Retail Management Toronto Metropolitan University and Seung Hwan (Mark) Lee, Professor and Associate Dean of Engagement & Inclusion, at Ted Rogers School of Management, Toronto Metropolitan University wrote “Understanding ‘underconsumption core’: How a new trend is challenging consumer culture” in The Conversation. They say that underconsumption core “champions minimalism and frugality, and encourages people to maximize the utility of their purchases and buy only what they truly need, challenging the culture of consumerism.”

The rise of this trend can be linked to several challenges facing young people today, including increasing economic pressures, environmental concerns and social pressures, all of which are particularly affecting Gen Z and younger Millennials. If you’re also feeling financially squeezed, this trend might resonate with you.

 Similar to the deinfluencing trend, underconsumption also appears to be a reaction to overconsumption — especially the way influencers have normalized it by posting haul videos. By promoting underconsumption, online users are rejecting and pushing back against this aspect of “influencer culture.”

The authors advocate to have a balanced approach to budgeting material purchases and experiences and improving your financial literacy. They suggest that one start “by creating a budget that ensures basic needs and baseline expenses are met.” 

CONSUMER SPENDING AND THE ECONOMY

The Federal Reserve raises interest rates to make borrowing more expensive and to slow down the economy to fight inflation. Vicky Nguyen describes the underconsumption core movement in this NBC News video and that if it persists, it could contribute to an economic slowdown.

According to Lucia Mutikani at Reuters in “US consumer spending solid in July; inflation rises moderately”, “U.S. consumer spending increased solidly in July, suggesting the economy remained on firmer ground early in the third quarter…” Gross domestic product rose to 3.0% annualized in the second quarter. The unemployment rate jumped to 4.3% in July and inflation as measured by the Personal Consumption Price Index has fallen to 2.5%. Ms. Mutikani says “Consumers are also saving less and tapping savings to fund their spending.”

Michael Rainey writes “Powell Says ‘Time Has Come’ to Cut Rates” in The Fiscal Times. Federal Reserve Chair Jerome Powell signaled that the central bank plans to start cutting its key interest rate soon.

The probability of a recession starting in the next year is low but significant. The New York Federal Reserve estimates that the probability of the US economy being in a recession, based on the yield curve, in July 2025 to be 56%. J.P. Morgan Research estimates the probability of a U.S. and global recession starting before the end of 2024 to be 35%. Goldman Sachs analysts estimate the odds for a U.S. recession next year to be 25%.

I suspect that the trend to become more cost-conscious will gain momentum with time and increase savings rates. A recession, if and when it occurs could devastate those without savings.

Closing

I stopped living paycheck to paycheck somewhere in the 1980s as I graduated from college and obtained stable employment. My parents were raised during the Depression, and I grew up during the stagflation of the 1970s so saving and living beneath my means came naturally. Still, dual-income families like mine in the 1990s face challenges, time constraints, and financial stresses. The empty nest years were a period of playing catch up. I have been fortunate but could have done better.

Volunteering at Neighbor To Neighbor highlights to me the financial struggles that people are going through. Pandemic-era assistance is declining and services are evolving. Some are interested in the Financial Counselling and debt consolidation.

Launch Alert: CrossingBridge Nordic High Income Bond Fund

By David Snowball

On October 1, 2024, CrossingBridge Advisors launched CrossingBridge Nordic High Income Bond Fund (NRDCX). The fund will invest in high-income bonds issued, originated, or underwritten out of Denmark, Finland, Norway, and Sweden. Those might be fixed or floating rate bonds, zero-coupon bonds and convertible bonds, and bonds issued by corporations and governments. It will be solely managed by CrossingBridge Advisors.

The managers will seek high current income, and the prospect of some capital growth, within the Nordic bond universe. Within that space, they operate with few externally imposed constraints beyond a commitment to avoid real estate and financials. The firm’s internally imposed constraint is an intense dislike of losing their investors’ money. The fund will hedge its currency exposure with one- to three-month forward currency swaps.

David Sherman in his capacity as CIO and Spencer Rolfe as portfolio manager of the fund with assistant portfolio manager Chen Ling. Mr. Sherman founded CrossingBridge, its predecessor Cohanzick (1996), and is the firm’s Chief Investment Officer. Mr. Rolfe joined in 2017 as a distressed credit and special opportunities analyst, spent a stretch as Managing Director at Corvid Peak Credit Management, and returned to CrossingBridge in 2023. They are assisted by Chen Ling, who has been with the firm since 2021. As of 8/31/2024, the firm manages over $3.2 billion in assets.

Two-plus reasons why the fund is worth your consideration

Nordic Bonds as an asset class are intriguing.

The Nordic bond market is large and mature. Terje Monsen of DNB Asset Management, a Nordic investment manager with about 100 funds and $90 billion in AUM, describes the market this way:

The Nordic bond market has decades of history with the first credit funds established in Norway in the 1980s. Over the years the market has grown and developed into a well-diversified and quite liquid market, total size estimated at around EUR 1500 bn.

The prime driver for the market’s growth is a change in the willingness or ability of commercial lending by banks. Once upon a time, corporations looking to borrow large sums of money for relatively short periods could arrange a leveraged or floating rate loan from market markets such as Donaldson, Lufkin, Jenrette (DLJ), or Credit Suisse which no longer exist. European UCITS are not permitted to own floating-rate loans, which locked away another source of capital. A workaround was repackaging the loan as a sort of floating rate bond issued, primarily, in Norway. David Sherman reports that the market is growing by 30% per year. That is consistent with reports from Nordic Trustee, a provider of European bond market data and services.

“Nordic bonds” can refer to both bonds issued by Nordic entities and bonds issued in Nordic markets by non-Nordic entities. Because the Nordic markets are more amenable to smaller-sized issues – those in the $50 – 450 million range – than the US market which better accommodates huge issues, many smaller US and European borrowers work through the Nordics. About one-quarter of the €60 billion Nordic high-yield market, in particular, are non-Nordic issuers.

CrossingBridge, understandably, did considerable research before committing to a fund dedicated to this market. Key characteristics of the Nordic market uncovered in their research:

  1. Nordic bonds currently earn 200-400bps more than comparable US HY bonds / leveraged loans with better credit quality and less leverage.
  2. Total returns on Nordic HY bonds are higher than on US bonds, 6.1% versus 5.5% when measured over rolling 12-month periods
  3. Nordic HY bonds are modestly more volatile than their US peers but much less volatile than global floating rate high yield bonds; that latter comparison is meaningful because Nordic bonds function for some issuers as a substitute for a floating rate leveraged loan. Much of the argument for an actively managed fixed-income fund is that managers are cognizant of and capable of mitigating such volatility.
  4. More than 80% of Nordic bonds have strong covenants covering financial maintenance, debt issuances, and other creditor protections. In the US, only about 10% of loans have such covenants. That’s relevant because many of these bonds are stand-ins for leveraged loans.
  5. 49% of Nordic HY bonds feature floating rates, 64% have maturities within the next three years

The market is highly transparent and well-regulated. Because the market is dominated by smaller deals and newer issuers, yields tend to be higher than for comparable US issues. David Sherman, in conversation, believes that default rates (excluding energy, real estate, and financials) tend to be comparable with those in the US but recovery rates are higher in the Nordic market. That is, if an issuer defaults, bondholders get more of their investment back there as opposed to here.

Finally, the fund is likely to be lightly correlated with US fixed-income markets. Credit-oriented funds generally move independent of investment grade ones anyway, and the unique characteristics of a Nordic high-yield focus, including the distinctive nature of the issuers, is likely to heighten that independence.

David Sherman and CrossingBridge are exceptional stewards of your money.

CrossingBridge advises, or sub-advises, five open-ended mutual funds, and one exchange-traded fund. All are income-oriented, active, and capacity-constrained. In addition, all have top-tier risk-adjusted returns since inception.

MFO Premium allows us to track funds, including ETFs, on an unusual array of measures of risk awareness, consistency, and risk-adjusted performance. For the sake of those not willing to obsess over whether an Ulcer Index of 1.3 is good, we almost present color-coded rankings. Blue, in various shades, is always the top tier, followed by green, yellow, orange, and red. Below are all of the risk and risk-return rankings for all of the funds advised or sub-advised by Cohanzick/CrossingBridge since inception.

Total and risk-adjusted performance since inception, all CrossingBridge funds (through 8/30/2024)

Source: MFO Premium fund screener and Lipper global dataset. The category assignments are Lipper’s; their validity is, of course, open to discussion.

Here’s the short version: every fund, by virtually every measure, has been a top-tier performer since launch. That reflects, in our judgment, the virtues of both an intense dislike of losing investors’ money and a willingness to go where larger firms cannot.

According to Mr. Sherman’s testimony, he has been investing in Nordic bonds since the early years of the century, and CrossingBridge funds currently hold $300 million in Nordic paper already, “some cash alternatives, some credit opportunities but about 80% in the Core Value or buy-and-hold category.” That Core Value portfolio has substantially less leverage than its US peers, an estimated yield-to-worst of 10.28% (again, much higher than in the US HY market), and an option-adjusted spread of 707 bps, which was calculated by applying August 31, 2024 prices to the firm’s publicly disclosed holdings of June 30, 2024. on the June 30th holdings publicly available applying August 31st pricing. They also have limited oil-and-gas exposure including service companies.

NCI Advisory is an interesting resource.

(That qualifies as point five of a reason.)

CrossingBridge has a business relationship with NCI and is a minority owner of the firm, but NCI has no role in managing the fund. As we noted above, Mr. Sherman has both an extensive history in, and extensive holdings of, Nordic bonds – some ultra-short cash alternatives and some credit opportunities, but the vast majority are core value or buy-and-hold issues – in its other portfolios.

While English is the lingua franca of European investing, and trading can be done from New York, CrossingBridge concluded that there was a compelling case for having “ears on the ground.” There’s a six-hour time difference between New York and Copenhagen so important developments might occur when markets first open in Europe but managers are still sleeping in New York. There are nuances in corporate communications that might be caught by native speakers but missed in translation. And there’s the potential for local developments and cultural differences that simply may not be apparent or understood by foreigners. In those and other instances, NCI’s insights are invaluable. CrossingBridge felt a strategic relationship would create an alignment of interest and source to channel insights it might otherwise not receive.

Administrative detail

The fund’s minimum initial investment is $5,000. The net expense ratio is 0.95%.

Briefly Noted

By TheShadow

Updates

SEC slaps GQG: The US Securities and Exchange Commission levied a $500,000 fine against GQG Partners and Rajiv Jain for violations of whistleblower protection laws and issued a cease-and-desist order against the illegal practices. At base, GQG required (some?) new hires and one former employee to sign agreements which would make it difficult for them to disclose wrongdoing on GQG’s part. “Whether through agreements or otherwise, firms cannot impose barriers to persons providing evidence about possible securities law violations to the SEC, as GQG did,” said Corey Schuster, Co-Chief of the Division of Enforcement’s Asset Management Unit.

As of 27 September 2024, GQG’s website did not reflect any discussion of the action. Reports in other media note that GQG “acknowledged the SEC’s jurisdiction in the case …without admitting or denying the findings.” The settlement stops the matter from going to more formal proceedings, the outcome of which might have been more visible and more embarrassing. For a $150 billion firm, the fine is trivial except for the public relations bruise it represents.

SEC pats Oaktree: Oaktree Capital, similarly, was found to have violated securities law by failing to report that they owned more than 5% of the stock of several portfolio companies. There is a purely mechanical rule (13d, if you care) that says if you own more than 5% of the shares outstanding of any company, you need to report that fact because your stake is large enough to cause conflicts. Oaktree did not. Because of strong remedial action and cooperation of the Commission’s staff, the sanctions on Oaktree came to a $375,000 fine and a promise never to do it again.

Briefly Noted . . .

abrdn Focused U.S. Small Cap Equity and abrdn Emerging Markets Dividend Funds are being converted into ETFs. The investment adviser for the Funds believes shareholders in the funds could benefit from lower overall net expenses, additional trading flexibility, increased portfolio holdings transparency, and enhanced tax efficiency. Each new ETF will be managed in a substantially similar manner as the corresponding mutual fund, with identical investment objectives, investment strategies, and fundamental investment policies. If approved by the Board, it is anticipated that the conversions will occur in the first quarter of 2025.

First Eagle Global Equity ETF and First Eagle Overseas Equity ETF are in registration. Both ETFs will be actively managed by Matthew McLennan and Kimball Brooker, Jr., who will be the co-heads of both ETFs and assisted by members of the First Eagle Global Value Team.

Vanguard today announced that it will reduce the minimum asset requirement from $3,000 to $1001 for its robo-advisor service, Digital Advisor, significantly increasing accessibility for investors interested in utilizing a digital advice service to manage short- and long-term financial goals. Vanguard Digital Advisor launched in 2020 and provides an all-digital financial planning and investment advisory service that delivers highly personalized, convenient, low-cost advice. The digital advice platform helps clients identify their retirement and non-retirement goals, and then crafts and manages customized, diversified, and tax-efficient investment portfolios to achieve them.

Enrollments in Vanguard Digital Advisor require at least $100 in each Vanguard Brokerage Account. For each taxable account or traditional, Roth, rollover, or inherited IRA you wish to enroll, the entire balance must be in certain investment types (based on eligibility screening by Digital Advisor at the time of enrollment) and/or the brokerage account’s settlement fund.

Green flight in the oddest corners of the market: the Wahed Dow Jones Islamic World ETF (UMMA) “will no longer consider applying environmental, social, and governance criteria when selecting the Fund’s investments.” Similarly, effective December 10, 2024, the American Century Sustainable Equity Fund and its corresponding ETF will both be renamed Large Cap Equity and will abandon concerns for … you know, the end of the world.

Wasatch International Value Fund is in registration. The Fund invests primarily in the equity securities of foreign companies of any size though they expect a significant portion of the Fund’s assets to be invested in companies with market capitalizations of over $5 billion at the time of purchase. David Powers will be the portfolio manager. Expenses have not been stated.

Small Wins for Investors

Effective October 7, 2024, FullerThaler Behavioral Small-Mid Core Equity Fund will begin sales of C Shares (TICKER: FTWCX) and R6 Shares (TICKER: FTSFX). I’ve never understood why on earth anyone would buy “C” shares (which typically carry an astronomical expense ratio) but “R6” means the fund will be available to some retirement investors, so that’s nice.

On September 25, 2024, the Board of Trustees approved a change to the dividend payment frequency of the Osterweis Strategic Income Fund from a quarterly basis to a monthly basis. Generally, it focuses on high-grade, short-term high-yield securities. Its downside capture over the past decade is 10% while its upside capture is 70%, for an astonishing capture ratio of 700. It’s a good, conservative fund with experienced management.

Shareholders of Unusual Whales Subversive Democratic Trading ETF and the Unusual Whales Subversive Republican Trading ETF have been invited to a proxy vote which would allow each fund to lower its expense ratio. That seems nice. The adviser is very clear about the function of the funds: it is to highlight the trading behavior of members of Congress in order to catalyze reform, rather than maximizing shareholder returns. That said, since inception trades by Democratic members of Congress have vastly outperformed those by Republican members.

And, in case you’re wondering, Republican members of Congress aren’t buying Trump. Or, at the very least, they’re not willing to buy Trump Media stock. The Republican fund once owned a big 36 shares of DJT but seems to have dumped them in spring, 2024.

Closings (and related inconveniences)

Old Wine, New Bottles

BlackRock High Yield Municipal Fund will be reorganized into the iShares High Yield Muni Active ETF. The reorganization is anticipated to close as of the close of trading on February 7, 2025.

The Essential 40 Stock Fund will be converted into an exchange-traded fund, the Essential 40 Stock ETF on October 17, 2024. The portfolio is composed of “forty stocks believed to represent the companies that are believed to be essential to the American way of life.” The fund has landed at or below the 50th percentile for six of its past seven years.

Effective November 26, 2024, the passive ETF known as MUSQ Global Music Industry ETF will become the passive ETF known as MUSQ Global Music Industry Index ETF. The fund has only $22 million in assets and has lost 4.5% since inception, so we hope that the impending tweaks to the underlying index does some good. And if that doesn’t work, perhaps they might adopt the strategy used by the (deceased) Artist Formerly Known as Prince.

TCW MetWest Corporate Bond Fund is being reorganized into the TCW Corporate Bond ETF, Class M shares will be reorganized into Class I shares prior to the reorganization on or about November 4.

Off to the Dustbin of History

The AMG TimesSquare Global Small Cap and AMG TimesSquare Emerging Markets Small Cap Funds will be liquidated on or about December 11, 2024.

AXS Alternative Value Fund will be liquidated on or about September 27.

BCM Focus Small/Micro-Cap Focus Fund will be liquidated on or about October 11, 2024. Hmmm … “micro-cap” and “focus” go together like “bran flakes” and “ketchup,” for what that’s worth. The portfolio holds 20 microcap growth stocks, of which eight have declined by 25-80% in the past years. The result is illustrated by Morningstar’s performance graph where the blue line is below 99% of its peers for the past … well, most periods.

Innovator Hedged TSLA Strategy ETF will be liquidated effective as of the close of business on October 4, 2024.

John Hancock Government Income Fund is being reorganized into the John Hancock Investment Grade Bond Fund. If shareholders approve the reorganization during the January 2025 meeting, then the reorganization will occur on or about February 14, 2025.

Per CityWire (9/30/2024), Morgan Stanley Investment Management is closing down its listed real estate and infrastructure business, liquidating all the funds it offers that invest in this asset class. The move will impact funds offered in the US, as well as in Asia and Europe.” That affects over $700 million in assets. The case for exiting real estate is rather clearer to us than the case for existing infrastructure.

Natixis Loomis Sayles Short Duration Income ETF will be liquidated on or about September 30.

Nuveen Social Choice Low Carbon Equity Fund will be reorganized into the Nuveen Large Cap Responsible Equity Fund. The reorganization is not subject to approval by the shareholders of the Target fund or the Acquiring fund. It is anticipated that the reorganization will be consummated in late 2024.

Rondure New World Fund will be liquidated on or about October 18. The trigger for the liquidation of the fund, and subsequent closure of the firm, understandably, was not spelled out in the SEC filing. We discuss it, and wish Ms Geritz godspeed, in this month’s Publisher’s Letter.

SmartETFs Advertising & Marketing Technology ETF will be canceled on or about October 30.

TCW Enhanced Commodity Strategy Fund, TCW MetWest AlphaTrak 500 Fund (M class), and TCW Short Term Bond Fund (I class) will all be liquidated on or about October 31, 

TCW MetWest Corporate Bond Fund will merge with and into TCW Corporate Bond ETF on or about October 11, 2024.

As of Halloween, the strategy for the USCF Aluminum Strategy Fund will be “to cease operations, liquidate its assets, and distribute proceeds to shareholders.”

VanEck Dynamic High Income ETF will be liquidated, wound down, and terminated on or about Tuesday, October 15, 2024.

The Western Asset Total Return ETF will be merged with Western Asset Bond ETF sometime in the first quarter of 2025. While Western’s CIO has “gone on leave” because of an SEC investigation about 17,000 suspicious trades, that scandal seems to have no bearing here. This is just a bad fund going away.