Dear friends,

I am not, in a monetary sense, rich.  Teaching at a small college pays rather less, and raising a multi-talented 12-year-old costs rather more, than you’d imagine.  I tend to invest cautiously in low-minimum, risk-conscious funds. I have good friends, drink good beer, laugh a lot and help coach Little League (an activity to which the beer and laughter both contribute).

This comes up only because I was moved to sudden and profound pity over the cruel ways in which the poor, innocent rich folks are being ruthlessly exploited.  Two new articles highlight their plight.

Mark Hulbert published a fairly relentless critique, “The Verdict Is In: Hedge Funds Aren’t Worth the Money”(WSJ, 06/01/2013), (While we can’t link directly to the article, you should be able to Google the title and get in) that looks at the performance –both risk and returns – of the average hedge fund since the last market top (October 2007) and from the last market bottom (March 2009).  The short version of his findings:

• The average hedge fund has trailed virtually every conceivable benchmark (gold, the total bond market, the total stock market, a 60/40 index, and the average open-end mutual fund) whether measured from the top or the bottom
• The downside protection offered by hedge funds during the meltdown was not greater than what a simple balanced fund would offer.
• At best, one hedge fund manager in five outperforms their mutual fund counterparts, and those winners are essentially impossible to identify in advance.

Apparently Norway figured this out before you.  While the Yale endowment, led by David Swensen, was making a mint investing in obscure and complex alternatives, Jason Zweig (“Norway: The New Yale,” WSJ, 03/07/2013) reported that Norway’s huge pension fund has outperformed the stock market and, recently, Yale, through the simple expedient of a globally diversified, long-only portfolio biased toward “small” and “value.”  Both Swensen and the brilliantly cranky Bill Bernstein agree that the day of outsized profits from “alternative investments” has passed.  Given that fact that the herd is now gorging on alternative investments:

“it’s somewhere between highly probable and certain that you will underperform [a stock portfolio] if you are being sold commodities, hedge funds and private equity right now.”

Think of it like this, he says: “The first person to the buffet table gets the lobster. The people who come a little later get the hamburger. And the ones who come at the end get whatever happens to be stuck to the tablecloth.”

That doesn’t deny the fact that there’s huge money to be made in hedge fund investing. Barry Ritholz published a remarkable essay, “A hedge fund for you and me? The best move is to take a pass” (Washington Post, 05/24/2013) that adds a lot of evidence about who actually profits from hedge funds.  He reports on research by Simon Lack, author of The Hedge Fund Mirage,” who concludes that the usual 2 and 20 “fee arrangement is effectively a wealth transference mechanism, moving dollars from investors to managers.” Lack used to allocate money to hedge funds on behalf of JPMorgan Chase.  Among Lack’s findings

• From 1998 to 2010, hedge fund managers earned $379 billion in fees. The investors of their funds earned only $70 billion in investing gains.
• Managers kept 84% of investment profits, while investors netted only 16%.
• As many as one-third of hedge funds are funded through feeder funds and/or fund of funds, which tack on yet another layer of fees. This brings the industry fee total to $440 billion — that’s 98 %of all the investing gains, leaving the people whose capital is at risk with only 2%, or $9 billion.

Oh, poor rich people.  At the same time, the SEC is looking to relax restrictions on hedge fund marketing and advertising which means that even more of them might become subject to the cruel exploitation of … well, the richer people. 

On whole, I think I’m happy to be living down here in 40-Act Land.

Introducing MFO Fund Ratings

One of the most frequent requests we receive is for the reconstruction of FundAlarm’s signature “most alarming funds” database.  Up until now, we haven’t done anything like it.  There are two reasons: (1) Snowball lacked both the time and the competence even to attempt it and (2) the ratings themselves lacked evidence of predictive validity.  That is, we couldn’t prove that an “Honor Roll” fund was any likelier to do well in the future than one not on the honor roll.

We have now budged on the matter.  In the spirit of those beloved fund ratings, MFO will maintain a new system to highlight funds that have delivered superior absolute returns while minimizing down side volatility.  We’re making the change for two reasons. (1) Associate editor Charles Boccadoro, a recently-retired aerospace engineer, does have the time and competence.  And, beyond that, a delight in making sense of data. And (2) there is some evidence that risk persists even if returns don’t. That is, managers who’ve taken silly, out-sized, improvident risks in the past will tend to do so in the future.  We think of it as a variant of the old adage, “beauty is just skin-deep, but ugly goes all the way to the bone.”

There are two ways of explaining what we’re up to.  We think of them as “the mom and pop explanation” and the “Dr. Mom and Ph.D. Pop explanation.”  We’ll start with the M&P version, which should be enough for most of us.

Dear Mom and Pop,

Many risk measures look at the volatility or bounciness of a portfolio, both on the upside and the downside.  As it turns out, investors don’t mind having funds that outperform their peers in rising markets; that is, they don’t immediately reject upside volatility.  What they (we!) dread are excessive drawdowns: that is, having their returns go down far and hard.  What Charles has done is to analyze the performance of more than 7000 funds for periods ranging back 20 years.  He’s calculated seven different measures of risk for each of those funds and has assigned every fund into one of five risk groups from “very conservative” funds which typically absorb no more than 20% of a stock market decline to “very aggressive” ones which absorb more than 125% of the fall.  We’ve assembled those in a large spreadsheet which is on its way to becoming a large, easily searchable database.

For now, we’ve got a preview.  It focuses on the funds with the most consistently excellent 20-year returns (the happy blue boxes on the right hand side, under “return group”), lets you see how much risk you had to absorb to achieve those returns (the blue to angry red boxes under risk group) and the various statistical measures of riskiness.  In general, you’d like to see low numbers in the columns to the left of the risk group and high numbers in the columns to the right.

I miss the dog.  My roommate is crazy.  The pizza has been good.  I think the rash is mostly gone but it’s hard to see back there.  I’m broke.  Say “hi” to gramma.  Send money soon.

Love, your son,

Dave

And now back to the data and the serious explanation from Charles:

The key rating metric in our system is Martin ratio, which measures excess return divided by the drawdown (a/k/a Ulcer) index. Excess return is how much a fund delivers above the 90-day Treasury bill rate. Ulcer index measures depth and duration of drawdowns from recent peaks – a very direct gauge of unpleasant performance. (More detailed descriptions can be found at Ulcer Index and A Look at Risk Adjusted Returns.)

The rating system hierarchy is first by evaluation period, then investment category, and then by relative return. The evaluation periods are 20, 10, 5, 3, and 1 years. The categories are by Morningstar investment style (e.g., large blend). Within each category, funds are ranked based on Martin ratio. Those in the top 20 percentile are placed in return group 5, while those in bottom 20 percentile are in return group 1. Fund ratings are tabulated along with attendant performance and risk metrics, by age group, then category, then return group, and finally by absolute return.

MFO “Great Owl” designations are assigned to consistent top performers within the 20 and 10 year groups, and “Aspiring Great Owl” designations are similarly assigned within the 5 and 3 year groups.

The following fund performance and risk metrics are tabulated over each evaluation period:

A risk group is also tabulated for each fund, based simply on its risk metrics relative to SP500. Funds less than 20% of market are placed in risk group 1, while those greater than 125% are placed in risk group 5. This table shows sample maximum drawdowns by risk group, depicting average to worst case levels. 

Some qualifications:

• The system includes oldest share class only and excludes the following categories: money market, bear market, trading inverse and leveraged, volatility, and specialized commodities.
• The system does not account for category drift.
• Returns reflect maximum front load, if applicable.
• Funds are presented only once based on age group, but the return rankings reflect all funds existing. For example, if a 3 year fund scores a 5 return, it did so against all existing funds over the 3 year period, not just the 3 year olds.
• All calculations are made with Microsoft’s Excel using monthly total returns from the Morningstar database provided in Steele Mutual Fund Expert.
• The ratings are based strictly on historical returns.
• The ratings will be updated quarterly.

We will roll-out the new system over the next month or two. Here’s a short preview showing the MFO 20-year Great Owl funds – there are only 48, or just about 3% of all funds 20 years and older. 

31 May 2013/Charles

(p.s., the term “Great Owl” funds is negotiable.  We’re looking for something snazzy and – for the bad funds – snarky.  “Owl Chow funds”?  If you’re a words person and have suggestions, we’d love to hear them.  Heck, we’d love to have an excuse to trick Barb into designing an MFO t-shirt and sending it to you.  David)

The Implosion of Professional Journalism will make you Poorer

You’ve surely noticed the headlines.  Those of us who teach News Literacy do.  The Chicago Sun-Times laid off all of its photo-journalists (28 staff members) on the morning of May 30, 2013, in hopes that folks with iPhone cameras would fill in.  Shortly before the New York Daily News laid off 20, the Village Voice fired a quarter of its remaining staff, Newsweek closed its print edition and has announced that it’s looking for another owner. Heck, ESPN just fired 400 and even the revered Columbia Journalism Review cut five senior staff. The New York Times, meanwhile, has agreed to “native advertising” (ads presented as content on mobile devices) and is investigating “sponsored content;” that is, news stories identified and funded by their advertisers.  All of that has occurred in under a month.

Since the rest of us remain intensely interested in receiving (if not paying for) news, two things happen simultaneously: (1) more news originates from non-professional sources and (2) fewer news organizations have the resources to check material before they publish it.

Here’s how that dynamic played out in a recent series of stories on the worst mutual funds.

Step One: NerdWallet sends out a news release heralding “the 12 most expensive and worst-performing mutual funds.”

Well, no.  What they sent was a list of fund names, ticker symbols (mostly) for specific share classes of the fund and (frequently) inaccurate expense ratio reports. They report the worst of the worst as

1. Oppenheimer Commodity Strat. Total Return (QRACX): 2.2% e.r.

Actually QRACX is the “C” class for the Oppenheimer fund. Morningstar reports the e.r. at 2.09%. The “A” shares have a 1.26% e.r.  And where did the mysterious 2.20% number come from?  One of the folks at NerdWallet wrote, “it seems it was an error on the part of our data provider.”  NerdWallet promised to clear up the fund versus share class distinction and to get the numbers right.

But that’s not the way things work, because NerdWallet sent their press release to other folks, too.

Step Two: Investment News mindlessly reproduces the flawed information.

Within hours, they have grafted on some random photographs and turned the press release into a slide show, now entitled “Expensive – and underperforming – funds.”  NerdWallet receives credit on just one of the slides.  Apparently no one at Investment News stopped to double-check any of the details before going public. But they did find pretty pictures.

Step Three: Mutual Fund Wire trumpets Investment News’s study.

MFWire’s story touting of the article, “Investment News Unveils Mutual Fund Losers List,” might be better-titled “Investment News Reproduces another Press Release”.  You’ll note, by the way, that the actual source of the story has disappeared.

Step Four:   CNBC makes things worse by playing with the data.

On Friday, May 17, CNBC’s Jeff Cox posts ‘Dirty Dozen’: 12 Worst Mutual Funds.  And they promptly make everything worse by changing the reported results.

Here’s the original: 1. Oppenheimer Commodity Strat. Total Return (QRACX): 2.2% e.r.

Here’s the CNBC version: 1.  Oppenheimer Commodity Strategy Total Return (NASDAQ:QRAAX-O), -14.61 percent, 2.12 percent.

Notice anything different?  CNBC changed the fund’s ticker symbol, so that it now pointed to Oppenheimer’s “A” share class. And those numbers are desperately wrong with regard to “A” shares, which charge barely half of the claimed rate (which is, remember, wrong even from the high cost “C” shares).  They also alter the ticker symbol of Federated Prudent Bear, which started as the high cost “C” shares (PBRCX) but for which CNBC substitutes the low-cost “A” shares (BEARX).  For the remaining 10 funds, CNBC simply disregards the tickers despite the fact that these are all high-cost “B” and “C” share classes.

Step Five: And then a bunch of people read and forward the danged thing.

Leading MFWire to celebrate it as one of the week’s “most read” stories.  Great.

Step Six: NerdWallet themselves then draw an invalid conclusion from the data.

In a blog post, NerdWallet’s Susan Lyon opines:

As you can see, all of the funds listed above are actively managed, besides the Rydex Inverse S&P 500 Strategy Fund. Do the returns generated by actively managed mutual funds usually outweigh their costs?  No, a recent NerdWallet Investing study found that though actively managed funds earned 0.12% higher annual returns than index funds on average, because they charged higher fees, investors were left with 0.80% lower returns.

No.  The problem here isn’t that these funds are actively managed.  It’s that NerdWallet tracked down the effects of the predatory pricing model behind “C” share classes.  And investors have pretty much figured out the “expense = bad” thing, which explains why the Oppenheimer “C” shares that NerdWallet indicts have $68M in assets while the lower-cost “A” shares have $228M.

Step Seven: Word spreads like cockroaches.

The story, in one of its several variants, now appears on a bunch of little independent finance sites and rarely with NerdWallet’s own discussion of their research protocol, much less a thoughtful dissection of the data.

NerdWallet (at least their “investing silo”) is a new operation, so you can understand their goof as a matter of a young staff, start-up stumbles and all that. It’s less clear how you explain Investment News‘s mindless reproduction of the results (what? verify stuff before we publish it? Edit for accuracy? Who do you think we are, journalists?) or MFWire’s touting of the article as if it represented Investment News’s own work.

Before the Observer publishes a fund profile, we give the advisor a chance to review the text for factual accuracy. My standard joke is “I’m used to making errors of judgment, but I loathe making errors of fact and so would you please let us know if there are any factual misstatements or other material misrepresentations?” I entirely agree with NerdWallet’s original judgment: these are pricey under-performers. I just wish that folks all around were a bit more attentive to and concerned about accuracy and detail.

Then Morningstar makes it All Worse

When I began working on the story above, I checked the expense reports at Morningstar.  Here’s what I found for QRACX:

Ooookay.  2.09% is “Below Average.” But below average for what?  Mob ransom demands?  Apparently, below average for US Open-End Commodities Broad Basket Funds, right?

Well, no, not so much.  Here’s Morningstar’s detailed expense report for the fund:

The average commodities fund – that is, the average fund in QRACX’s category – has a 1.32% expense ratio.  So how on earth could QRACX at 2.09% be below average?  Because it’s below the “fee level comparison group median.” 

There are 131 funds in the “broad commodity basket” group. Exactly one has an expense ratio about 2.40%.  If there’s one commodity fund above 2.40% and 130 below 2.40%, how could 2.40% be the group median?

Answer: Morningstar has, for the purpose of making expense comparisons, assigned QRACX to a group that has effectively nothing to do with commodity funds.

Mr. Rekenthaler, in response to an emailed query, explains, “‘Below average’ means that QRACX has below average expenses for a C share that is an Alternative fund.”

Morningstar is not comparing QRACX to other commodity funds when they make their expense judgment.  No, no.  They’re comparing it only to other “C” share classes of other types of “alternative investment” funds.  Here are some of the funds that Morningstar is actually judging QRACX against:

And so if you were choosing between the “C” class shares of this commodity fund and the “C” shares of a leveraged-inverse equity fund and a multicurrency fund, you’d know that you were probably getting a bargain for your money.

Why on earth you’d possibly benefit from the comparison of such of group of wildly incomparable funds remains unknown.

This affects every fund and every expense judgment in Morningstar’s database.  It’s not just a problem for the miserable backwater that QRACX occupies.

Want to compare Artisan International (ARTIX) to the fund that Morningstar says is “most similar” to it, American Funds EuroPacific Growth, “A” shares (AEPGX)?  Both are large, four-star funds in the Foreign Large Blend group.  But for the purposes of an expense judgment, they have different “fee level comparison groups.”  Artisan is judged as “foreign large cap no load,” which median is 1.14% while American is judged against “foreign large cap front load,” where the median is 1.44%.  If Artisan charged 1.24% and American charged 1.34%, Artisan would be labeled “above average” and American “below average.”  Meanwhile American’s “C” shares carry a 1.62% expense ratio and a celebratory “low” price label.

For investors who assume that Morningstar is comparing apples to apples (or foreign large blend to foreign large blend), this has the potential for being seriously misleading.  I am very sympathetic to the complexity of Morningstar’s task, but they really need to be much clearer that these expense labels are not linked to the category labels immediately adjacent to them.

We Made the Cover!

Okay, so it wasn’t the cover of Rolling Stone.  It was the cover of the BottomLine Personal newsletter (05/15/2013).  And there wasn’t a picture (they reserved those for their two “Great Sex, Naturally” articles).  And it was just 75 words long.

But at least they misrepresented my argument, so that’s something!  The “Heard by our editors” column led off with “Consider ‘bear market funds’” and us.  The bulk of the story is contained in the following two sentence fragments: “Consider ‘bear market funds’ as a kind of stock market disaster insurance . . . [they] should make up no more than 5% of your stock portfolio.”

Uhhh … what I said to the editors was “these funds are a disaster for almost everybody who holds them.  By their nature, they’re going to lose money for you year after year … probably the best will cost you 7% a year in the long run.  The only way they’ve work is if they represented a small fraction of your portfolio – say 5% – and you were absolutely disciplined about rebalancing so that you kept pouring money down this particular rat hole in order to maintain it as 5% of your portfolio.  If you did that, you would indeed have a psychologically useful tool – a fund that might well soar in the face of our sharp downturn and that would help you stay disciplined and stay invested, rather than cutting and running.  That said, we’re not wired that way and almost no one has that discipline.  That why I think you’d be far better off recommending an equity fund with an absolute-returns discipline, such as Aston/River Road Independent Value, Cook and Bynum or FPA Crescent, or a reasonably priced long-short fund, like Aston/River Road Long-Short or RiverPark Long/Short Opportunity.”

They nodded, and wondered which specific bear market funds I’d recommend.  They were trying hard to address their readers’ expressed interests, had 75 words to work with and so you got my recommendation of Federated Prudent Bear (BEARX, available at NAV) and PIMCO StocksPLUS AR Short Strategy (PSSDX).

Observer Fund Profiles

Each month the Observer provides in-depth profiles of between two and four funds.  Our “Most Intriguing New Funds” are funds launched within the past couple years that most frequently feature experienced managers leading innovative newer funds.  “Stars in the Shadows” are older funds that have attracted far less attention than they deserve. 

Bretton Fund (BRTNX): if you were a fund manager looking to manage just your own family’s finances for the next generation, this is probably what you’d be doing.

RiverPark/Gargoyle Hedged Value (RGHVX): RiverPark has a well-earned reputation for bringing brilliant managers from the high net worth world to us.  Gargoyle, whose discipline consistently and successfully marries stock selection and a substantial stake in call options, seems to be the latest addition to a fine stable of funds.

Scout Low Duration (SCLDX): there are very few fixed-income management teams that have earned the right to be trusted with a largely unconstrained mandate.  Scout is managed by one of them on behalf of folks who need a conservative fund but can’t afford the foolishness of 0.01% interest.

Conference Call Highlights: Stephen Dodson and Bretton Fund

Does it make sense to you that you could profit from following the real-life choices of the professionals in your life?  What hospital does your doctor use when her family needs one?  Where does the area’s best chef eat when he wants to go out for a weeknight dinner?  Which tablet computer gets Chip and her IT guys all shiny-eyed?

If that strategy makes sense to you, so will the Bretton Fund (BRTNX).

Bretton Fund (BRTNX) is managed by Stephen Dodson.  For a relatively young man, he’s had a fascinating array of experiences.  After graduating from Berkeley, he booked 80-100 hour weeks with Morgan Stanley, taking telecom firms public.  He worked in venture capital, with software and communications firms, before joining his father’s firm, Parnassus Investments.  At Parnassus he did everything from answering phones and doing equity research, to co-managing a fixed-income fund and presiding over the company.  He came to realize that “managing a family relationship and what I wanted in my career were incompatible at the time,” and so left to start his own firm.

In imagining that firm and its discipline, he was struck by a paradox: almost all investment professionals worshipped Warren Buffett, but almost none attempted to invest like him.  Stephen’s estimate is that there are “a ton” of concentrated long-term value hedge funds, but fewer than 20 mutual funds (most visibly The Cook and Bynum Fund COBYX) that follow Buffett’s discipline: he invests in “a small number of good business he believes that he understands and that are trading at a significant discount to what they believe they’re worth.”    He seemed particularly struck by his interviews of managers who run successful, conventional equity funds: 50-100 stocks and a portfolio sensitive to the sector-weightings in some index.

I asked each of them, “How would you invest if it was only your money and you never had to report to outside shareholders but you needed to sort of protect and grow this capital at an attractive rate for the rest of your life, how would you invest.  Would you invest in the same approach, 50-100 stocks across all sectors.”  And they said, “absolutely not.  I’d only invest in my 10-20 best ideas.” 

And that’s what Bretton does.  It  holds 15-20 stocks in industries that the manager feels he understands really well. “Understands really well” translates to “do I think I understand who’ll be making money five years from now and what the sources of those earnings will be?” In some industries (biotech, media, oil), his answer was “no.” “Some really smart guys say oil will be $50/bbl in a couple years. Other equally smart analysts say $150. I have no hope of knowing which is right, so I don’t invest in oil.” He does invest in industries such as retail, financial services and transportation, where he’s fairly comfortable with his ability to make sense of their dynamics.

When I say “he does invest,” I mean “him, personally.”  Mr. Dodson reports that “I’ve invested all my investible net-worth, all my family members are invested in the fund.  My mother is invested in the fund.  My mother-in-law is invested in the fund (and that definitely sharpens the mind).”   Because of that, he can imagine Bretton Fund functioning almost as a family office.  He’s gathering assets at a steady pace – the fund has doubled in size since last spring and will be able to cover all of its ‘hard’ expenses once it hits $7 million in assets – but even if he didn’t get a single additional outside dollar he’d continue running Bretton as a mechanism for his family’s wealth management.   He’s looking to the prospect of some day having $20-40 million, and he suspects the strategy could accommodate $500 million or more.

Bottom Line: The fund is doing well – it has handily outperformed its peers since inception, outperformed them in 11 of 11 down months and 18 of 32 months overall.  It’s posted solid double-digit returns in 2012 and 2013, through May, with a considerable cash buffer.  It will celebrate its three-year anniversary this fall, which is the minimum threshold for most advisors to consider the fund. While he’s doing no marketing now, he’s open to talking with folks and imagines some marketing effort once he’s got a three year record to talk about.  Frankly, I think he has a lot to talk about already.

For folks interested but unable to join us, here’s the complete audio of the hour-long conversation.

Launch Alert: T. Rowe and Vanguard

T. Rowe Price Global Allocation (RPGAX) launched on May 28, 2013.  Color me intrigued.  Price has always been good at asset allocation research and many of their funds allow for tactical tweaks to their allocations.  This is Price’s most ambitious offering to date.  The fund targets 60% stocks, 30% bonds and 10% hedge funds and other alternative investments and promises “an active asset allocation strategy” in pursuit of long-term capital appreciation and income.  The fund will be managed by Charles M. Shriver, who has been with Price since 1991. Mr. Shriver also manages Price Balanced (RPBAX) fund and its Spectrum and Personal Strategy line of funds.  The funds expenses are capped at 1.05% through 2016.  There’s a $2500 initial investment minimum, reduced to $1000 for IRAs.

Vanguard Emerging Markets Government Bond Index Fund (VGOVX) and its ETF clone (VWOB) will launch in early June.  The funds were open for subscription in May – investors could send Vanguard money but Vanguard wouldn’t invest it until the end of the subscription period. There are nearly 100 e.m. bond funds or ETFs already, though Vanguard’s will be the first index and the cheapest option (at 30-50 basis points).  Apparently the launch was delayed by more than a year because Vanguard didn’t like the indexes available for e.m. bonds, so they commissioned a new one: Barclays USD Emerging Markets Government RIC Capped Index.  The fund will invest only in bonds denominated in U.S. dollars.  Investor shares start at $3000 and 0.50% e.r.

Pre-launch Alerts: Artisan and Grandeur Peak, Globe-trotting Again

Artisan Global Small Cap Fund launches June 19. It will be run by Mark Yockey and team.  It’s been in registration for a while and its launch was delayed at least once.

Grandeur Peak Global Reach Fund (GPROX/GPRIX) will launch June 19, 2013 and will target owning 300-500 stocks, “with a strong bias” toward small and micro-caps in the American, developed, emerging and frontier markets.  There’s an intriguing tension here, since the opening of Global Reach follows just six weeks after the firm closed Global Opportunities to new investors.  At the time founder Robert Gardiner argued:

To be good small and micro cap investors it’s critical to limit your assets. Through my career I have seen time and again small cap managers who became a victim of their own success by taking in too many assets and seeing their performance languish.

Their claim is that they have six or seven potential funds in mind and they closed their first two funds early “in part to leave room for future funds that we intend to launch, like the Global Reach Fund.”

Funds in Registration

New mutual funds must be registered with the Securities and Exchange Commission before they can be offered for sale to the public. The SEC has a 75-day window during which to call for revisions of a prospectus; fund companies sometimes use that same time to tweak a fund’s fee structure or operating details. Every day we scour new SEC filings to see what opportunities might be about to present themselves. Many of the proposed funds offer nothing new, distinctive or interesting. Some are downright horrors of Dilbertesque babble (see “Synthetic Reverse Convertibles,” below).

Funds in registration this month won’t be available for sale until, typically, the beginning of August 2013. We found 10 – 20 no-load, retail funds in the pipeline, notably:

The 11 new T. Rowe Price Target Retirement 2005 – 2055 Funds will pursue that usual goal of offering a one-stop retirement investing solution.  Each fund invests in a mix of other T. Rowe Price funds.  Each mix becomes progressively more conservative as investors approach and move through retirement.  T. Rowe Price already has an outstanding collection of retirement-date funds, called “Retirement [date]” where these will be “Target Retirement [date].”  The key is that the new funds will have a more conservative asset allocation than their siblings, assuming “bonds” remain “conservative.”  At the target date, the new funds will have 42.5% in equities while the old funds have 55% in equities.  For visual learners, here are the two glidepaths:

The new funds’ glidepath	The old fund’s glidepath

The relative weights within the asset classes (international vs domestic, for example) are essentially the same. Each fund is managed by Jerome Clark and Wyatt Lee.  The opening expense ratios vary from 0.60% – 0.77%, with the longer-dated funds incrementally more expensive than the shorter-dated ones (that is, 2055 is more expensive than 2005).  These expenses are within a basis point or two of the older funds’.  The minimum initial investment is $2500, reduced to $1000 for various tax-advantaged accounts.

This is a very odd time to be rolling out a bond-heavy line-up.  On May 15^th, The Great Gross tweeteth:

Gross: The secular 30-yr bull market in bonds likely ended 4/29/2013. PIMCO can help you navigate a likely lower return 2 – 3% future.

At least he doesn’t ramble when he’s limited to 140 characters. 

The inclusion of hedge funds is fascinating, given the emerging sense (see this month’s intro) that they’re not worth a pitcher of warm bodily fluid (had I mentioned that the famous insult attributed to John Gardner, that the vice presidency “isn’t worth a bucket of warm spit” actually focused on a different bodily fluid but the newspaper editors of the day were reticent to use the word Gardner used?).  The decision to shift heavily toward bonds at this moment, perplexing.

Details and the list of all of the funds in registration are available at the Observer’s Funds in Registration page or by clicking “Funds” on the menu atop each page.

MANAGER CHANGES

On a related note, we also tracked down 37 fund manager changes. 

Updates …

Oakseed Opportunity (SEEDX) released their first portfolio report (on a lovely form N-Q on file with the SEC).  The fund has about $48 million in its portfolio.  Highlights include:

32 well-known stocks, one ETF, two individual shorts and a tiny call option

The largest five stock holdings are Teva Pharmaceuticals, Leucadia National, AbbVie (a 2013 spin-off of Abbott’s pharmaceutical division), Ross Stores, and Loews Corp.

15.8% of the fund is in cash

2.8% is in three short positions, mostly short ETF

The three largest sectors are pharmaceuticals (15.4%, four stocks), insurance (7%, two stocks) and retail (6.6%, two stocks).

(Thanks to Denny Baran of lovely Great Falls, MT, for the heads up on Oakseed’s filing.)

Three more honors for RiverPark/Wedgewood (RWGFX).  In May, Wedgewood became one of the Morningstar 500, “the top 500 funds that should be on your radar.”  That same month, Wedgewood’s David Rolfe was recognized as SMA Manager of the Year at the Envestnet’s 2013 Advisor Summit.  SMA’s are “separately managed accounts,” a tool for providing personalized portfolios for high net-worth investors.  Wedgewood runs a bunch using the strategy behind the RiverPark/Wedgewood fund and they were selected from among 1600 management teams.  Finally, Wedgewood received one of overall Large Cap awards from Envestnet, a repeat of a win in 2011, for its Large-Cap Focused Growth strategy.   Those who haven’t listened to David talk about investing, should.  Happily, we have a recorded hour-long conversation with David.

Valley Forge Fund (VAFGX) closes the gap, a bit.  We reported in May that Valley Forge’s manager died on November 3, but that the Board of Directors didn’t seem to have, well, hired a new one.  We stand corrected.  First, according to an April proxy statement, the Board had terminated the manager three days before his actual, well, you know, termination.

The Board determined to terminate the Prior Advisory Agreement because of, among other things, (i) the Prior Advisor’s demonstrated lack of understanding of the requirements set forth in the Fund’s prospectus, policies and procedures, (ii) the Prior Advisor’s demonstrated lack of knowledge of the terms of the Prior Advisory Agreement, (iii) the Prior Advisor’s failure to adhere to directives from the Board of Directors with respect to the Fund’s portfolio holdings; and (iv) the Fund’s poor performance. 

That pretty much covers it.  According to the newest prospectus (May 01, 2013), they did have a manager.  Up until December 31^st.

Investment Adviser Portfolio Managers: Boyle Capital Management, LLC (BCM) from November 01, 2012 to December 31, 2012.

And, for the months of April and May, the Board of Trustees ran the fund.  Here’s the “principal risks” statement from the Prospectus:

Management Risk: for the months of April and May of 2013, the Board of Directors has taken over all trading pending the Shareholders’ Approval to be obtained in May 2013.

Still a bit unclear on January, February and March.  Good news: under the Board’s leadership, the fund crushed the market in April and May based on a jump in NAV during the first week of May.  Also a bit unclear about what happens now that it’s June: most of the Valley Forge website now leads to blank pages.  Stay tuned!

Security Alert: A Word from our IT Folks

We know that many of you – fund managers, financial planners, restaurateurs and all – maintain your own websites.  If, like the Mutual Fund Observer and 72.4 million others, your site runs on the WordPress software, you’re under attack.  WordPress sites have been targeted for a relentless effort to gain access to your admin controls and, through them, to the resources of your web-host’s servers. 

You’ve doubtless heard of “zombie computers,” individual PCs that have been compromised and which fall under the control of The Forces of Evil.  In some cases zombie PCs serve spammers and phishers.  In other cases, they’re used as part of coordinated distributed denial of service (DDoS) attacks directed against high-profile targets including MasterCard, the Federal Reserve Bank, Google, and others.

There are three very, very bad aspects of these attacks:

1. They’re aiming to seize control of enormously powerful network servers, using your website as a tool for achieving that.  If you can imagine a zombie PCs potential output as equivalent to a garden hose set on full, then you could imagine a server as a fire hose set on full.
2. They’re designed to keep you from knowing that you’ve been compromised; it’s not like a virus that goofs with your ability to use your machine or your site, these hacks are designed to be invisible to you.
3. Once compromised, the hackers install secret backdoors into your system; that means that installing security patches or protocols after the fact does not work, you can close the main door but they’ve already built a separate entrance for themselves.

MFO has periodically been the object of as many at 400 break-in attempts an hour.  Either manually or through our security software we’ve “blacklisted” nearly a thousand IP addresses, including a vast number from China.

Here are three quick recommendations for anyone responsible for a small business or family website using WordPress (these tips might work for other platforms, too):

1. Do not use the default administrator account! Rename it or create a new account with administrative rights. About 99% of the break-in attempts have been using some version of “admin” or “administrator” as the username.
2. Use strong passwords. Yes, I know you hate them. They’re a pain in the butt. Use them anyway. This recent attack uses a brute force method, attempting to log in with the most commonly used passwords first. You can find some basic tips and passwords to avoid at “The 25 most common passwords of 2012.”
3. Use security plug-ins. In WordPress, two to consider are Limit Login Attempts and Better WP Security. Both will temporarily lock out an IP address from which repeated login attempts occur. Better WP Security will allow you to easily make the temporary ban permanent, which is . . . strangely satisfying. (If you decide to try one of these, follow the directions carefully. It’s all too easy to lock yourself out!)

Good luck!  Chip and the MFO IT crowd

Meanwhile, in Footloose Famous Guys Land …

On May 3, hedge fund (and former Fidelity Magellan fund) manager Jeffrey Vinik announced plans to shut down his hedge fund and return all assets to his fund’s investors.  Again.  He did the same thing at the end of 2000, when he announced a desire to focus on his own investments.  Now, he wants to focus on his sports investments (he owns the NHL’s Tampa Bay Lightning), his foundation, and his family.  Given that he recently moved his family to Tampa to be closer to his hockey team, the priorities above might be rank-ordered.

The speculation is that three of Vinik’s managers (Doug Gordon, Jon Hilsabeck and Don Jabro) will band together to launch a long/short hedge fund based in Boston.

The fourth, David Iben, plans to start his own investment management firm.  Up until Vinik recruited him in March 2012, Iben was CIO for Nuveen Investments’ Tradewinds affiliate.  His departure, followed by the swift migration of three of Iben’s managers to Vinik (Isabel Satra, Alberto Jimenez Crespo and Gregory Padilla) cost Tradewinds billions in assets with a few days.   

Vinik left Magellan in 1995 after getting grief for an ill-timed macro bet: be bailed on tech stocks and bought bonds about four years too early.  The same boldness (dumping US stocks and investing in gold) cost his hedge fund dearly this year.

Former Janus Triton and Venture managers Chad Meade and Brian Schaub have joined Arrowpoint Partners, which has $2.3 billion in assets and a lot Janus refugees on staff.  Their six portfolio managers (founders David Corkins and Karen Reidy, Tony Yao, Minyoung Sohn, Meade and Schaub) and two senior executives (COO Rick Grove and Managing Director Christopher Dunne) were Janus employees.  Too, they own 100,000 shares of Janus stock.  Arrowpoint runs Fundamental Opportunity, Income Opportunity, Structured Opportunity and Life Science funds.  

For those who missed the earlier announcement, former T. Rowe Price Health Sciences Fund manager Kris Jenner will launch the Rock Springs Capital hedge fund by later this year.  He’s raised more than $100 million for the health and bio-tech hedge fund and has two former T. Rowe analysts, Mark Bussard and Graham McPhail, on-board with him.

Briefly Noted . . .

Alan Abelson (October 12, 1925 – May 9, 2013), Barron’s columnist and former editor, passed away at age 87.  He joined Barron’s the year I was born, began his “Up & Down Wall Street” column during the Johnson Administration and continued it for 47 years. His crankiness made him, for a long while, one of the folks I actively sought out each week.  In recent years he seemed to have become a sort of parody of his former self, cranky on principle rather than for any particular cause.  I’ll remember him fondly and with respect. Randall Forsyth will continue the column.

Speaking of cranks, John Rekenthaler has resumed his Rekenthaler Report with a vengeance.  During the lunatic optimism and opportunism of the 1990s (who now remembers Alberto Vilar, the NetNet and Nothing-but-Net funds, or mutual funds that clocked 200-300% annual returns?), Mr. R and FundAlarm founder Roy Weitz spent a lot of time kicking over piles of trash – often piles that had attracted hundreds of millions of dollars from worshipful innocents.  John had better statistical analyses, Roy had better snarky graphics.  At the end of 2000, John shifted his attention from columnizing to Directing Research.  Beginning May 22, he returned to writing a daily column at Morningstar which he bills as an attempt to leverage his quarter century in the industry to “put today’s investment stories into perspective.”  It might take him a while to return to his full stride, but column titles like “Die, Horse, Die!” do give you something to look forward to.

Shareholders of Kinetics Alternative Income Fund (formerly, the Kinetics Water Infrastructure Fund) participated in a 10:1 reverse split on May 30, 2013.  Insert: “Snowball rolls eyes” about here.  Neither the radical mission change nor the silly repricing strike me as signs of a distinguished operation.

SMALL WINS FOR INVESTORS

The Berwyn Cornerstone Fund’s (BERCX) minimum initial investment requirement for taxable accounts has been dropped from $3,000 to $1,000. It’s a tiny large cap value fund of no particular distinction.

Vanguard continues to press down its expense ratios.  Vanguard Dividend Appreciation Index (VDAIX), Dividend Appreciation ETF (VIG), Dividend Growth (VDIGX), Energy (VGENX), and Precious Metals and Mining (VGPMX) dropped their expenses by two to five basis points.

CLOSINGS (and related inconveniences)

Effective May 31, 2013, Invesco closed a bunch of funds to new investors.  The funds involved are

Invesco Constellation Fund (CSTGX)
Invesco Dynamics Fund (IDYAX)
Invesco High Yield Securities Fund (ACTHX)
Invesco Leaders Fund (VLFAX)
Invesco Leisure Fund (ILSAX)
Invesco Municipal Bond Fund (AMBDX)

The four equity funds, three of which were once legitimate first-tier growth options, are all large underperformers that received new management teams in 2010 and 2011.  The High Yield fund is very large and very good, while Muni is fine but not spectacular.  No word on why any of the closures were made.

Effective July 1, 2013, Frontegra MFG Global Equity Fund (FMGEX) is bumping its Minimum Initial Investment Amount from $100k to $1 million.

Effective at market close on June 14, 2013, the Matthews Asia Dividend Fund (MAPIX) will be closed to most new investors.

Oppenheimer Discovery (OPOCX) will close to new investors on June 28, 2013. Top-tier returns over the past three years led to a doubling of the fund’s size and its closure. 

Templeton Frontier Markets Fund (TFMAX) will close to new investors effective June 28, 2013.  This is another “trendy niche, hot money” story: the fund has done really well and has attracted over a billion in assets in a fairly thinly-traded market niche.

Wasatch’s management continues trying to manage Wasatch Emerging Markets Small Cap (WAEMX) popularity.  The fund continues to see strong inflows, which led Wasatch to implement a soft close in February 2012.  They’ve now extended their purchase restrictions.   As of June 7, 2013, investors who own shares through third-party distributions, such as Schwab and Scottrade, will not be able to add to their accounts.  In addition, some financial advisors are also being locked out. 

OLD WINE, NEW BOTTLES

American Century continues to distance itself from Lance Armstrong and his LiveStrong Foundation.  All of the LiveStrong target date funds (e.g., LIVESTRONG® 2015 Portfolio) are now One Choice target date funds.  No other changes were announced.

The Artio Global Funds (née Julius Baer) have finally passed away.  The equity managers have been replaced, some of the funds (Emerging Markets Local Debt, for example) have been liquidated and the remaining funds rechristened: 

The International Equity Fund, International Equity Fund II and the Select Opportunities Fund, Inc. will be managed by Aberdeen’s Global Equity team, a dedicated team of 16 professionals based in Edinburgh, Scotland. The Total Return Bond Fund and the Global High Income Fund will continue to be managed by their current portfolio managers, Donald Quigley and Greg Hopper, respectively, along with their teams.

BlackRock Long Duration Bond Portfolio is changing its name on July 29, 2013, to BlackRock Investment Grade Bond Portfolio.  They’ll also shift the fund’s primary investment strategies to allow for a wider array of bonds.

Having failed as a multisector long/short bond fund, the Board of Trustees of the Direxion Funds thought it would be a good idea to give HCM Freedom Fund (HCMFX) something more challenging.  Effective July 29, 2013, HCMFX goes from long/short global fixed income to long/short global fixed income and equities.  There’s no immediate evidence that the Board added any competence to the management team to allow them to succeed.

Fidelity U.S. Treasury Money Market Fund has been renamed Fidelity Treasury Only Money Market Fund because otherwise you might think . . . well, actually, I have no idea of why this makes any sense on earth.

GAMCO Mathers (MATRX) is a dour little fund whose mission is “to achieve capital appreciation over the long term in various market conditions without excessive risk of capital loss.”  Here’s a picture of what that looks like:

Apparently operating under the assumption that Mathers didn’t have sufficient flexibility to be as negative as they’d like, the advisor has modified their primary investment strategies to allow the fund to place 75% of the portfolio in short positions on stocks.  That’s up from an allowance of 50% short.  

Effective June 28, 2013, Lazard US Municipal Portfolio (UMNOX) becomes Lazard US Short Duration Fixed Income Portfolio.  In addition to shortening its target duration, the revamped fund gets to choose among “US government securities, corporate securities, mortgage-related and asset-backed securities, convertible securities, municipal securities, structured products, preferred stocks and inflation-indexed-securities.”  I’m always baffled by the decision to take a fund that’s overwhelmed by one task (buying munis) and adding a dozen more options for it to fumble.

On August 1, 2013 Oppenheimer U.S. Government Trust (OUSGX) will change its name to Oppenheimer Limited-Term Bond Fund.  Apparently Trust in Government is wavering.  The rechristened fund will be able to add corporate bonds to its portfolio.  Despite being not very good, the fund has drawn nearly a billion in assets

Pinnacle Capital Management Balanced Fund (PINBX) is about to become Pinnacle Growth and Income Fund.  The word “Balanced” in the name imposed a requirement “to have a specified minimum mix of equity and fixed income securities in its portfolio at all times.” By becoming un-Balanced, the managers gain the freedom to make more dramatic asset allocation shifts.  It’s a tiny, expensive 30-month old fund whose manager seems to be trailing most reasonable benchmarks.  I’m always dubious of giving more tools to folks who haven’t yet succeeded with the ones they have.

Pioneer Absolute Credit Return Fund (RCRAX) will, effective June 17, 2013, be renamed Pioneer Dynamic Credit Fund.  Two years old, great record, over $300 million in assets … don’t get the need for the change.

Vanguard MSCI EAFE ETF has changed its name to Vanguard FTSE Developed Markets ETF.

OFF TO THE DUSTBIN OF HISTORY

AllianceBernstein U.S. Strategic Research Portfolio and AllianceBernstein International Focus 40 Portfolio will both be liquidated by June 27, 2013.

The CAMCO Investors Fund (CAMCX) has closed and will liquidate on June 27, 2013.  After nine years of operation, it had earned a one-star rating and had gathered just $7 million in assets.

Litman Gregory will merge Litman Gregory Masters Value (MSVFX) into Litman Gregory Masters Equity (MSEFX) in June.  Litman Gregory’s claim is that they’re expert at picking and monitoring the best outside management teams for its funds.  In practice, none of their remaining funds has earned more than three stars from Morningstar (as of May, 2013).  Value, in particular, substantially lagged its benchmark and saw a lot of shareholder redemptions.  Litman Gregory Masters Alternative Strategies (MASNX), which we’ve profiled, has gathered a half billion in assets and continues to perform solidly.

Having neither performed nor preserved, the PC&J Performance Fund and PC&J Preservation Fund have been closed and will be liquidated on or about June 24, 2013.

ProShares Ultra High Yield and ProShares Ultra Investment Grade Corporate have been disappeared by their Board.  The cold text reads: “Effective May 23, 2013, all information pertaining to the Funds is hereby removed from the Prospectus.”

I’m saddened to report that Scout International Discovery Fund (UMBDX) is being liquidated for failure to attract assets.  It will be gone by June 28, 2013.  This was a sort of smaller-cap version of Scout International (UMBWX) which has long distinguished itself for its careful risk management and competitive returns. Discovery followed the same discipline, excelled at risk management but gave up more in returns than it earned in risk-control. This is Scout’s second recent closure of an equity fund, following the elimination of Scout Stock.

Tatro Tactical Appreciation Fund (TCTNX ) has concluded that it can best serve its shareholders by ceasing operation, which will occur on June 21, 2013.

Tilson Focus Fund (TILFX) has closed and will be liquidated by June 21, 2013. The fund had been managed by Whitney Tilson and Glenn Tongue, founders of T2 Partners Management.  Mr. Tilson removed himself from management of the fund a year ago. We’ve also found the fund perplexing and unattractive. It had two great years (2006 and 2009) in its seven full years of operation, but also four utterly horrible ones (2007, 2008, 2011, 2012), which meant that it was able to be bad in all sorts of market conditions. Mr. Tilson is very good at promotion but curiously limited at management it seems. Tilson Dividend Fund (TILDX), which we’ve profiled and which has a different manager, continues to thrive.

In Closing . . .

I will be at the Morningstar Investment Conference on your behalf, 12 – 14 June 2013. Friends have helped arrange interviews with several high-visibility professionals and there are a bunch of media breakfasts, media lunches and media dinners (some starting at hours that Iowans more associate with bedtimes than with meals). I also have one dinner and one warm beverage scheduled with incredibly cool people. I’m very excited. If you have leads you’d like me to pursue or if you’re going to be there and have a burning desire to graze the afternoon snack table with me, just drop me a note.

We’ll look for you.

As part of our visual upgrade, Barb (she of the Owl) has designed new business cards (which I’ll have for Morningstar) and new thank-you cards. I mention that latter because I need to extend formal thanks for three readers who’ve sent checks. Sorry about the ungracious delay, but I was sort of hoping to send grateful words along via the cards that haven’t yet arrived.

But will, soon!  Keep an eye out in the mail.

In addition to our continuing work on visuals, the MFO folks will spend much of June putting together some wide-ranging improvements. Junior has been busily reviewing all of our “Best of the Web” features, and we’ll be incorporating new text throughout the month. Chip and Charles are working to create a friendly, easy-to-use screener for our new fund risk ratings database. Barb and Anya are conspiring to let the Owl perch in our top banner. And I’ll be learning as much as I can at the conference. We hope you like what we’ll be able to share in July.

Until then, take care and celebrate your friends and family!

 

Dear friends,

I know that for lots of you, this is the season of Big Questions:

• Is the Fed’s insistence on destroying the incentive to save (my credit union savings account is paying 0.05%) creating a disastrous incentive to move “safe” resources into risky asset classes?
• Has the recent passion for high quality, dividend-paying stocks already consumed most of their likely gains for the next decade?
• Should you Sell in May and Go Away?
• Perhaps, Stay for June and Endure the Swoon?

My set of questions is a bit different:

• Why haven’t those danged green beans sprouted yet?  It’s been a week.
• How should we handle the pitching rotation on my son’s Little League team?  We’ve got four games in the span of five days (two had been rained out and one was hailed out) and just three boys – Will included! – who can find the plate.
• If I put off returning my Propaganda students’ papers one more day, what’s the prospect that I’ll end up strung up like Mussolini?

Which is to say, summer is creeping upon us.  Enjoy the season and life while you can!

Of Acorns and Oaks

It’s human nature to make sense out of things.  Whether it’s imposing patterns on the stars in the sky (Hey look!  It’s a crab!) or generating rules of thumb for predicting stock market performances (It’s all about the first five days of the day), we’re relentless in insisting that there’s pattern and predictability to our world.

One of the patterns that I’ve either discerning or invented is this: the alumni of Oakmark International seem to have startlingly consistent success as portfolio managers.  The Oakmark International team is led by David Herro, Oakmark’s CIO for international equities and manager of Oakmark International (OAKIX) since 1992.  Among the folks whose Oakmark ties are most visible:

The Oakmark alumni certainly extend far beyond this list and far back in time.  Ralph Wanger, the brilliant and eccentric Imperial Squirrel who launched the Acorn Fund (ACRNX) and Wanger Asset Management started at Harris Associates.  So, too, did Morningstar founder Joe Mansueto.  Wanger frequently joked that if he’d only hired Mansueto when he had the chance, he would not have been haunted by questions for “stylebox purity” over the rest of his career.  The original manager of Oakmark Fund (OAKMX) was Robert Sanborn, who got seriously out of step with the market for a bit and left to help found Sanborn Kilcollin Partners.  He spent some fair amount of time thereafter comparing how Oakmark would have done if Bill Nygren had simply held Sanborn’s final portfolio, rather than replacing it.

In recent times, the attention centers on alumni of the international side of Oakmark’s operation, which is almost entirely divorced from its domestic investment operation.  It’s “not just on a different floor, but almost on a different world,” one alumnus suggested.  And so I set out to answer the questions: are they really that consistently excellent? And, if so, why?

The answers are satisfyingly unclear.  Are they really consistently excellent?  Maybe.  Pierre Py made a couple interesting notes.  One is that there’s a fair amount of turnover in Herro’s analyst team and we only notice the alumni who go on to bigger and better things.  The other note is that when you’ve been recognized as the International Fund Manager of the Decade and you can offer your analysts essentially unlimited resources and access, it’s remarkably easy to attract some of the brightest and most ambitious young minds in the business.

What, other than native brilliance, might explain their subsequent success?  Dan O’Keefe argues that Herro has been successful in creating a powerful culture that teaches people to think like investors and not just like analysts.  Analysts worry about finding the best opportunities within their assigned industry; investors need to examine the universe of all of the opportunities available, then decide how much money – if any – to commit to any of them.  “If you’re an auto industry analyst, there’s always a car company that you think deserves attention,” one said.  Herro’s team is comprised of generalists rather than industry specialists, so that they’re forced to look more broadly.  Mr. Py compared it to the mindset of a consultant: they learn to ask the big, broad questions about industry-wide practices and challenges, rising and declining competitors, and alternatives.  But Herro’s special genius, Pierre suggested, was in teaching young colleagues how to interview a management team; that is, how to get inside their heads, understand the quality of their thinking and anticipate their strengths and mistakes.   “There’s an art to it that can make your investment process much better.”  (As a guy with a doctorate in communication studies and a quarter century in competitive debate, I concur.)

The question for me is, if it works, why is it rare?  Why is it that other teams don’t replicate Herro’s method?  Or, for that matter, why don’t they replicate Artisan Partner’s structure – which is designed to be (and has been) attractive to the brightest managers and to guard (as it has) against creeping corporatism and groupthink?  It’s a question that goes far beyond the organization of mutual funds and might even creep toward the question, why are so many of us so anxious to be safely mediocre?

Three Messages from Rob Arnott

Robert D. Arnott manages PIMCO’s All Asset (PAAIX) and leveraged All Asset All Authority (PAUIX) funds. Morningstar gives each fund five stars for performance relative to moderate and world allocation peers, in addition to gold and silver analyst ratings, respectively, for process, performance, people, parent and price. On PAAIX’s performance during the 2008 financial crises, Mr. Arnott explains: “I was horrified when we ended the year down 15%.” Then, he learned his funds were among the very top performers for the calendar year, where average allocation funds lost nearly twice that amount. PAUIX, which uses modest leverage and short strategies making it a bit more market neutral, lost only 6%.

Of 30 or so lead portfolio managers responsible for 110 open-end funds and ETFs at PIMCO, only William H. Gross has a longer current tenure than Mr. Arnott. The All Asset Fund was launched in 2002, the same year Mr. Arnott founded Research Affiliates, LLC (RA), a firm that specializes in innovative indexing and asset allocation strategies. Today, RA estimates $142B is managed worldwide using its strategies, and RA is the only sub-advisor that PIMCO, which manages over $2T, credits on its website.

On April 15^th, CFA Society of Los Angeles hosted Mr. Arnott at the Montecito Country Club for a lunch-time talk, entitled “Real Return Investing.” About 40 people attended comprising advisors, academics, and PIMCO staff. The setting was elegant but casual, inside a California mission-style building with dark wooden floors, white stucco walls, and panoramic views of Santa Barbara’s coast. The speaker wore one of his signature purple-print ties. After his very frank and open talk, which he prefaced by stating that the research he would be presenting is “just facts…so don’t shoot the messenger,” he graciously answered every question asked.

Three takeaways: 1) fundamental indexing beats cap-weighed indexing, 2) investors should include vehicles other than core equities and bonds to help achieve attractive returns, and 3) US economy is headed for a 3-D hurricane of deficit, debt, and demographics. Here’s a closer look at each message:

Fundamental Indexation is the title of Mr. Arnott’s 2005 paper with Jason Hsu and Philip Moore. It argues that capital allocated to stocks based on weights of price-insensitive fundamentals, such as book value, dividends, cash flow, and sales, outperforms cap-weighted SP500 by an average of 2% a year with similar volatilities. The following chart compares Power Shares FTSE RAFI US 1000 ETF (symbol: PRF), which is based on RA Fundamental Index (RAFI) of the Russell 1000 companies, with ETFs IWB and IVE:

And here are the attendant risk-adjusted numbers, all over same time period:

RAFI wins, delivering higher absolute and risk-adjusted returns. Are the higher returns a consequence of holding higher risk? That debate continues. “We remain agnostic as to the true driver of the Fundamental indexes’ excess return over the cap-weighted indexes; we simply recognize that they outperformed significantly and with some consistency across diverse market and economic environments.” A series of RAFIs exist today for many markets and they consistently beat their cap-weighed analogs.

All Assets include commodity futures, emerging market local currency bonds, bank loans, TIPS, high yield bonds, and REITs, which typically enjoy minimal representation in conventional portfolios. “A cult of equities,” Mr. Arnott challenges, “no matter what the price?” He then presents research showing that while the last decade may have been lost on core equities and bonds, an equally weighted, more broadly diversified, 16-asset class portfolio yielded 7.3% annualized for the 12 years ending December 2012 versus 3.8% per year for the traditional 60/40 strategy. The non-traditional classes, which RA coins “the third pillar,” help investors “diversify away some of the mainstream stock and bond concentration risk, introduce a source of real returns in event of prospective inflation from monetizing debt, and seek higher yields and/or rates of growth in other markets.”

Mr. Arnott believes that “chasing past returns is likely the biggest mistake investors make.” He illustrates with periodic returns such as those depicted below, where best performing asset classes (blue) often flip in the next period, becoming worst performers (red)…and rarely if ever repeat.

Better instead to be allocated across all assets, but tactically adjust weightings based on a contrarian value-oriented process, assessing current valuation against opportunity for future growth…seeking assets out of favor, priced for better returns. PAAIX and PAUIX (each a fund of funds utilizing the PIMCO family) employ this approach. Here are their performance numbers, along with comparison against some competitors, all over same period:

The All Asset funds have performed very well against many notable allocation funds, like OAKBX and VWENX, protecting against drawdowns while delivering healthy returns, as evidenced by high Martin ratios. But static asset allocator PRPFX has actually delivered higher absolute and risk-adjusted returns. This outperformance is likely attributed its gold holding, which has detracted very recently. On gold, Mr. Arnott states: “When you need gold, you need gold…not GLD.” Newer competitors also employing all-asset strategies are ABRYX and AQRIX. Both have returned handsomely, but neither has yet weathered a 2008-like drawdown environment.

The 3-D Hurricane Force Headwind is caused by waves of deficit spending, which artificially props-up GDP, higher than published debt, and aging demographics. RA has published data showing debt-to-GDP is closer to 500% or even higher rather than 100% value oft-cited, after including state and local debt, Government Sponsored Enterprises (e.g., Fannie Mae, Freddie Mac), and unfunded entitlements. It warns that deficit spending may feel good now, but payback time will be difficult.

“Last year, the retired population grew faster than the population of working age adults, yet there was no mention in the press.” Mr. Arnott predicts this transition will manifest in a smaller labor force and lower productivity. It’s inevitable that Americans will need to “save more, spend less, and retire later.” By 2020, the baby boomers will be outnumbered 2:1 by votes, implying any “solemn vows” regarding future entitlements will be at risk. Many developed countries have similar challenges.

Expectations going forward? Instead of 7.6% return for the 60/40 portfolio, expect 4.5%, as evidenced by low bond and dividend yields. To do better, Mr. Arnott advises investing away from the 3-D hurricane toward emerging economies that have stable political systems, younger populations, and lower debt…where fastest GDP growth occurs. Plus, add in RAFI and all asset exposure.

Are they at least greasy high-yield bonds?

One of the things I most dislike about ETFs – in addition to the fact that 95% of them are wildly inappropriate for the portfolio of any investor who has a time horizon beyond this afternoon – is the callous willingness of their boards to transmute the funds.  The story is this: some marketing visionary decides that the time is right for a fund targeting, oh, corporations involved in private space flight ventures and launches an ETF on the (invented) sector.  Eight months later they notice that no one’s interested so, rather than being patient, tweaking, liquidating or merging the fund, they simply hijack the existing vehicle and create a new, entirely-unrelated fund.

Here’s news for the five or six people who actually invested in the Sustainable North American Oil Sands ETF (SNDS): you’re about to become shareholders in the YieldShares High Income ETF.  The deal goes through on June 21.  Do you have any say in the matter?  Nope.  Why not?  Because for the Sustainable North American Oil Sands fund, investing in oil sands companies was legally a non-fundamental policy so there was no need to check with shareholders before changing it. 

The change is a cost-saving shortcut for the fund sponsors.  An even better shortcut would be to avoid launching the sort of micro-focused funds (did you really think there was going to be huge investor interest in livestock or sugar – both the object of two separate exchange-traded products?) that end up festooning Ron Rowland’s ETF Deathwatch list.

Introducing the Owl

Over the past month chip and I have been working with a remarkably talented graphic designer and friend, Barb Bradac, to upgrade our visual identity.  Barb’s first task was to create our first-ever logo, and it debuts this month.

Cool, eh?

We started by thinking about the Observer’s mission and ethos, and how best to capture that visually.  The apparent dignity, quiet watchfulness and unexpected ferocity of the Great Horned Owl – they’re sometimes called “tigers with wings” and are quite willing to strike prey three times their own size – was immediately appealing.  Barb’s genius is in identifying the essence of an image, and stripping away everything else.  She admits, “I don’t know what to say about the wise old owl, except he lends himself soooo well to minimalist geometric treatment just naturally, doesn’t he? I wanted to trim off everything not essential, and he still looks like an owl.”

At first, we’ll use our owl in our print materials (business cards, thank-you notes, that sort of thing) and in the article reprints that funds occasionally commission.  For those interested, the folks at Cook and Bynum asked for a reprint of Charles’s excellent “Inoculated by Value”  essay and our new graphic identity debuted there.  With time we’ll work with Barb and Anya to incorporate the owl – who really needs a name – into our online presence as well.

The Observer resources that you’ve likely missed!

Each time we add a new resource, we try to highlight it for folks.  Since our readership has grown so dramatically in the past year – about 11,000 folks drop by each month – a lot of folks weren’t here for those announcements.  As a public service, I’d like to highlight three resources worth your time.

The Navigator is a custom-built mutual fund research tool, accessible under the Resources tab.  If you know the name of a fund, or part of the name or its ticker, enter it into The Navigator.  It will auto-complete the fund’s name, identify its ticker symbols and  immediately links you to reports or stories on that fund or ETF on 20 other sites (Yahoo Finance, MaxFunds, Morningstar).  If you’re sensibly using the Observer’s resources as a starting point for your own due diligence research, The Navigator gives you quick access to a host of free, public resources to allow you to pursue that goal.

Featured Funds is an outgrowth of our series of monthly conference calls.  We set up calls – free and accessible to all – with managers who strike us as being really interesting and successful.  This is not a “buy list” or anything like it.  It’s a collection of funds whose managers have convinced me that they’re a lot more interesting and thoughtful than their peers.  Our plan with these calls is to give every interested reader to chance to hear what I hear and to ask their own questions.  After we talk with a manager, the inestimably talented Chip creates a Featured Fund page that draws together all of the resources we can offer you on the fund.  That includes an mp3 of the conference call and my take on the call’s highlights, an updated profile of the fund and also a thousand word audio profile of the fund (presented by a very talented British friend, Emma Presley), direct links to the fund’s own resources and a shortcut to The Navigator’s output on the funds.

There are, so far, seven Featured Funds:

• ASTON/RiverRoad Long/Short (ARLSX)
• Cook and Bynum (COBYX)
• Matthews Asia Strategic Income (MAINX)
• RiverPark Long/Short Opportunity (RLSFX)
• RiverPark Short-Term High Yield (RPHYX)
• RiverPark/Wedgewood (RWGFX)
• Seafarer Overseas Growth and Income (SFGIX)

Manager Change Search Engine is a feature created by Accipiter, our lead programmer, primarily for use by our discussion board members.  Each month Chip and I scan hundreds of Form 497 filings at the SEC and other online reports to track down as many manager changes as we can.  Those are posted each month (they’re under the “Funds” tab) and arranged alphabetically by fund name.  Accipiter’s search engine allows you to enter the name of a fund company (Fidelity) and see all of the manager changes we have on record for them.  To access the search engine, you need to go to the discussion board and click on the MGR tab at top.  (I know it’s a little inconvenient, but the program was written as a plug-in for the Vanilla software that underlies the discussion board.  It will be a while before Accipiter is available to rewrite the program for us, so you’ll just have to be brave for a bit.)

Valley Forge Fund staggers about

For most folks, Valley Forge Fund (VAFGX) is understandably invisible.  It was iconic mostly because it so adamantly rejected the trappings of a normal fund.  It was run since the Nixon Administration by Bernard Klawans, a retired aerospace engineer.  He tended to own just a handful of stocks and cash.  For about 20 years he beat the market then for the next 20 he trailed it.  In the aftermath of the late 90s mania, he went back to modestly beating the market.  He didn’t waste money on marketing or even an 800-number and when someone talked him into having a website, it remained pretty much one page long.

Mr. Klawans passed away on December 22, 2011, at the age of 90.  Craig T. Aronhalt who had co-managed the fund since the beginning of 2009 died on November 3, 2012 of cancer.  Morningstar seems not to have noticed his death: six months after passing away, they continue listing him as manager. It’s not at all clear who is actually running the thing though, frankly, for a fund that’s 25% in cash it’s having an entirely respectable year with a gain of nearly 10% through the end of April.

The more-curious development is the Board’s notice, entitled “Important information about the Fund’s Lack of Investment Adviser”

For the period beginning April 1, 2013 through the date the Fund’s shareholders approve a new investment advisory agreement (estimated to be achieved by May 17, 2013), the Fund will not be managed by an investment adviser or a portfolio manager (the “Interim Period”).  During the Interim Period, the Fund’s portfolio is expected to remain largely unchanged, subject to the ability of the Board of Directors of the Fund to, as it deems appropriate under the circumstances, make such portfolio changes as are consistent with the Fund’s prospectus.  During the Interim Period, the Fund will not be subject to any advisory fees.

Because none of the members of Fund’s Board of Directors has any experience as portfolio managers, management risk will be heightened during the Interim Period, and you may lose money.

How does that work?  The manager died at the beginning of November but the board doesn’t notice until April 1?  If someone was running the portfolio since November, the law requires disclosure of that fact.  I know that Mr. Buffett has threatened to run Berkshire Hathaway for six months after his death, so perhaps … ? 

If that is the explanation, it could be a real cost-savings strategy since health care and retirement benefits for the deceased should be pretty minimal.

Observer Fund Profiles:

Each month the Observer provides in-depth profiles of between two and four funds.  Our “Most Intriguing New Funds” are funds launched within the past couple years that most frequently feature experienced managers leading innovative newer funds. 

FPA International Value (FPIVX): It’s not surprising that manager Pierre Py is an absolute return investor.  That is, after all, the bedrock of FPA’s investment culture.  What is surprising is that it has also be an excellent relative return vehicle: despite a substantial cash reserve and aversion to the market’s high valuations, it has also substantially outperformed its fully-invested peers since inception.

Oakseed Opportunity Fund (SEEDX): Finally!  Good news for all those investors disheartened by the fact that the asset-gatherers have taken over the fund industry.  Jackson Park has your back.

“Stars in the Shadows” are older funds that have attracted far less attention than they deserve. 

Artisan Global Value Fund (ARTGX): I keep looking for sensible caveats to share with you about this fund.  Messrs. Samra and O’Keefe keep making my concerns look silly, so I think I might give up and admit that they’re remarkable.

Payden Global Low Duration Fund (PYGSX): Short-term bond funds make a lot of sense as a conservative slice of your portfolio, most especially during the long bull market in US bonds.  The question is: what happens when the bull market here stalls out?  One good answer is: look for a fund that’s equally adept at investing “there” as well as “here.”  Over 17 years of operation, PYGSX has made a good case that they are that fund.

Elevator Talk #4: Jim Hillary, LS Opportunity Fund (LSOFX)

Since the number of funds we can cover in-depth is smaller than the number of funds worthy of in-depth coverage, we’ve decided to offer one or two managers each month the opportunity to make a 200 word pitch to you. That’s about the number of words a slightly-manic elevator companion could share in a minute and a half. In each case, I’ve promised to offer a quick capsule of the fund and a link back to the fund’s site. Other than that, they’ve got 200 words and precisely as much of your time and attention as you’re willing to share. These aren’t endorsements; they’re opportunities to learn more.

Mr. Hillary manages Independence Capital Asset Partners (ICAP), a long/short equity hedge fund he launched on November 1, 2004 that serves as the sub-advisor to the LS Opportunity Fund (LSOFX), which in turn launched on September 29, 2010. Prior to embarking on a hedge fund career, Mr. Hillary was a co-founder and director of research for Marsico Capital Management where he managed the Marsico 21^st Century Fund (MXXIX) until February 2003 and co-managed all large cap products with Tom Marsico. In addition to his US hedge fund and LSOFX in the mutual fund space, ICAP runs a UCITS for European investors. Jim offers these 200 words on why his mutual fund could be right for you:

In 2004, I believed that after 20 years of above average equity returns we would experience a period of below average returns. Since 2004, the equity market has been characterized by lower returns and heightened volatility, and given the structural imbalances in the world and the generationally low interest rates I expect this to continue.  Within such an environment, a long/short strategy provides exposure to the equity market with a degree of protection not provided by “long-only” funds.

In 2010, we agreed to offer investors the ICAP investment process in a mutual fund format through LSOFX. Our process aims to identify investment opportunities not limited to style or market capitalization. The quality of research on Wall Street continues to decline and investors are becoming increasingly concerned about short-term performance. Our in-depth research and long-term orientation in our high conviction ideas provide us with a considerable advantage. It is often during times of stress that ICAP uncovers unusual investment opportunities. A contrarian approach with a longer-term view is our method of generating value-added returns. If an investor is searching for a vehicle to diversify away from long-only, balanced or fixed income products, a hedge fund strategy like ours might be helpful.

The fund has a single share class with no load and no 12b-1 fees. The minimum initial investment is $5,000 and net expenses are capped at 1.95%. More information about the Advisor and Sub-Advisor can be found on the fund’s website, www.longshortadvisors.com. Jim’s most recent commentary can be found in the fund’s November 2012 Semi-Annual Report.

RiverPark/Wedgewood Fund: Conference Call Highlights

I had a chance to speak with David Rolfe of Wedgewood Partners and Morty Schaja, president of RiverPark Funds. A couple dozen listeners joined us, though most remained shy and quiet. Morty opened the call by noting the distinctiveness of RWGFX’s performance profile: even given a couple quarters of low relative returns, it substantially leads its peers since inception. Most folks would expect a very concentrated fund to lead in up markets. It does, beating peers by about 10%. Few would expect it to lead in down markets, but it does: it’s about 15% better in down markets than are its peers. Mr. Schaja is invested in the fund and planned on adding to his holdings in the week following the call.

The strategy: Rolfe invests in 20 or so high-quality, high-growth firms. He has another 15-20 on his watchlist, a combination of great mid-caps that are a bit too small to invest in and great large caps a bit too pricey to invest in. It’s a fairly low turnover strategy and his predilection is to let his winners run. He’s deeply skeptical of the condition of the market as a whole – he sees badly stretched valuations and a sort of mania for high-dividend stocks – but he neither invests in the market as a whole nor are his investment decisions driven by the state of the market. He’s sensitive to the state of individual stocks in the portfolio; he’s sold down four or five holdings in the last several months nut has only added four or five in the past two years. Rather than putting the proceeds of the sales into cash, he’s sort of rebalancing the portfolio by adding to the best-valued stocks he already owns.

His argument for Apple: For what interest it holds, that’s Apple. He argues that analysts are assigning irrationally low values to Apple, somewhere between those appropriate to a firm that will never see real topline growth again and one that which see a permanent decline in its sales. He argues that Apple has been able to construct a customer ecosystem that makes it likely that the purchase of one iProduct to lead to the purchase of others. Once you’ve got an iPod, you get an iTunes account and an iTunes library which makes it unlikely that you’ll switch to another brand of mp3 player and which increases the chance that you’ll pick up an iPhone or iPad which seamlessly integrates the experiences you’ve already built up. As of the call, Apple was selling at $400. Their sum-of-the-parts valuation is somewhere in the $600-650 range.

On the question of expenses: Finally, the strategy capacity is north of $10 billion and he’s currently managing about $4 billion in this strategy (between the fund and private accounts). With a 20 stock portfolio, that implies a $500 million in each stock when he’s at full capacity. The expense ratio is 1.25% and is not likely to decrease much, according to Mr. Schaja. He says that the fund’s operations were subsidized until about six months ago and are just in the black now. He suggested that there might be, at most, 20 or so basis points of flexibility in the expenses. I’m not sure where to come down on the expense issue. No other managed, concentrated retail fund is substantially cheaper – Baron Partners and Edgewood Growth are 15-20 basis points more, Oakmark Select and CGM Focus are 15-20 basis points less while a bunch of BlackRock funds charge almost the same.

Bottom Line: On whole, it strikes me as a remarkable strategy: simple, high return, low excitement, repeatable and sustained for near a quarter century.

For folks interested but unable to join us, here’s the complete audio of the hour-long conversation.

The RWGFX Conference Call

When you click on the link, the file will load in your browser and will begin playing after it’s partially loaded. If the file downloads, instead, you may have to double-click to play it.

Conference Call Upcoming: Bretton Fund (BRTNX), May 28, 7:00 – 8:00 Eastern

Manager Steve Dodson, former president of the Parnassus Funds, is an experienced investment professional, pursuing a simple discipline.  He wants to buy deeply discounted stocks, but not a lot of them.  Where some funds tout a “best ideas” focus and then own dozens of the same large cap stocks, Mr. Dodson seems to mean it when he says “just my best.”

As of 12/30/12, the fund held just 16 stocks.  Nearly as much is invested in microcaps as in megacaps. In addition to being agnostic about size, the fund is also unconstrained by style or sector.  Half of the fund’s holdings are characterized as “growth” stocks, half are not.   The fund offers no exposure at all in seven of Morningstar’s 11 industry sectors, but is over weighted by 4:1 in financials. 

In another of those “don’t judge it against the performance of groups to which it doesn’t belong” admonitions, it has been assigned to Morningstar’s midcap blend peer group though it owns only one midcap stock.

Our conference call will be Tuesday, May 28, from 7:00 – 8:00 Eastern.

How can you join in?  Just click

Members of our standing Conference Call Notification List will receive a reminder, notes from the manager and a registration link around the 20^th of May.  If you’d like to join about 150 of your peers in receiving a monthly notice (registration and the call are both free), feel free to drop me a note.

Launch Alert: ASTON/LMCG Emerging Markets (ALEMX)

This is Aston’s latest attempt to give the public – or at least “the mass affluent” – access to managers who normally employ distinctive strategies on behalf of high net worth individuals and institutions.  LMCG is the Lee Munder Capital Group (no, not the Munder of Munder NetNet and Munder Nothing-but-Net fame – that’s Munder Capital Management, a different group).  Over the five years ended December 30, 2012, the composite performance of LMCG’s emerging markets separate accounts was 2.8% while their average peer lost 0.9%.  In 2012, a good year for emerging markets overall, LMCG made 24% – about 50% better than their average peer.  The fund’s three managers, Gordon Johnson, Shannon Ericson and Vikram Srimurthy, all joined LMCG in 2006 after a stint at Evergreen Asset Management.  The minimum initial investment in the retail share class is $2500, reduced to $500 for IRAs.  The opening expense ratio will be 1.65% (with Aston absorbing an additional 4.7% of expenses).  The fund’s homepage is cleanly organized and contains links to a few supporting documents.

Launch Alert II: Matthews Asia Focus and Matthews Emerging Asia

On May 1, Matthews Asia launched two new funds. Matthews Asia Focus Fund (MAFSX and MIFSX) will invest in 25 to 35 mid- to large-cap stocks. By way of contrast, their Asian Growth and Income fund has 50 stocks and Asia Growth has 55. The manager wants to invest in high-quality companies and believes that they are emerging in Asia. “Asia now [offers] a growing pool of established companies with good corporate governance, strong management teams, medium to long operating histories and that are recognized as global or regional leaders in their industry.” The fund is managed by Kenneth Lowe, who has been co-managing Matthews Asian Growth and Income (MACSX) since 2011. The opening expense ratio, after waivers, is 1.91%. The minimum initial investment is $2500, reduced to $500 for an IRA.

Matthews Emerging Asia Fund (MEASX and MIASX) invests primarily in companies located in the emerging and frontier Asia equity markets, such as Bangladesh, Cambodia, Indonesia, Malaysia, Myanmar, Pakistan, Philippines, Sri Lanka, Thailand and Vietnam. It will be an all-cap portfolio with 60 to 100 names. The fund will be managed by Taizo Ishida, who also manages managing the Asia Growth (MPACX) and Japan (MJFOX) funds. The opening expense ratio, after waivers, is 2.16%. The minimum initial investment is $2500, reduced to $500 for an IRA.

Funds in Registration

New mutual funds must be registered with the Securities and Exchange Commission before they can be offered for sale to the public. The SEC has a 75-day window during which to call for revisions of a prospectus; fund companies sometimes use that same time to tweak a fund’s fee structure or operating details. Every day we scour new SEC filings to see what opportunities might be about to present themselves. Many of the proposed funds offer nothing new, distinctive or interesting. Some are downright horrors of Dilbertesque babble (see “Synthetic Reverse Convertibles,” below).

Funds in registration this month won’t be available for sale until, typically, the beginning of July 2013. We found fifteen no-load, retail funds (and Gary Black) in the pipeline, notably:

AQR Long-Short Equity Fund will seek capital appreciation through a global long/short portfolio, focusing on the developed world.  “The Fund seeks to provide investors with three different sources of return: 1) the potential gains from its long-short equity positions, 2) overall exposure to equity markets, and 3) the tactical variation of its net exposure to equity markets.”  They’re targeting a beta of 0.5.  The fund will be managed by Jacques A. Friedman, Lars Nielsen and Andrea Frazzini (Ph.D!), who all co-manage other AQR funds.  Expenses are not yet set.  The minimum initial investment for “N” Class shares is $1,000,000 but several AQR funds have been available through fund supermarkets for a $2500 investment.  AQR deserves thoughtful attention, but their record across all of their funds is more mixed than you might realize.  Risk Parity has been a fine fund while others range from pretty average to surprisingly weak.

RiverPark Structural Alpha Fund will seek long-term capital appreciation while exposing investors to less risk than broad stock market indices.  Because they believe that “options on market indices are generally overpriced,” their strategy will center on “selling index equity options [which] will structurally generate superior returns . . . [with] less volatility, more stable returns, and reduce[d] downside risk.”  This portfolio was a hedge fund run by Wavecrest Asset Management.  That fund launched on September 29, 2008 and will continue to operate under it transforms into the mutual fund, on June 30, 2013.  The fund made a profit in 2008 and returned an average of 10.7% annually through the end of 2012.  Over that same period, the S&P500 returned 6.2% with substantially greater volatility.  The Wavecrest management team, Justin Frankel and Jeremy Berman, has now joined RiverPark – which has done a really nice job of finding talent – and will continue to manage the fund.   The opening expense ratio with be 2.0% after waivers and the minimum initial investment is $1000.

Curiously, over half of the funds filed for registration on the same day.  Details on these funds and the list of all of the funds in registration are available at the Observer’s Funds in Registration page or by clicking “Funds” on the menu atop each page.

Manager Changes

On a related note, we also tracked down 37 fund manager changes. Those include Oakmark’s belated realization that they needed at least three guys to replace the inimitable Ed Studzinski on Oakmark Equity and Income (OAKBX), and a cascade of changes triggered by the departure of one of the many guys named Perkins at Perkins Investment Management.

Briefly Noted . . .

Seafarer visits Paris: Seafarer has been selected to manage a SICAV, Essor Asie (ESSRASI).  A SICAV (“sea cav” for the monolingual among us, Société d’Investissement À Capital Variable for the polyglot) is the European equivalent of an open-end mutual fund. Michele Foster reports that “It is sponsored by Martin Maurel Gestion, the fund advisory division of a French bank, Banque Martin Maurel.  Essor translates to roughly arising or emerging, and Asie is Asia.”  The fund, which launched in 1997, invests in Asia ex-Japan and can invest in both debt and equity.  Given both Mr. Foster’s skill and his schooling at INSEAD, it seems like a natural fit.

Out of exuberance over our new graphic design, we’ve poured our Seafarer Overseas Growth and Income (SFGIX) profile into our new reprint design template.  Please do let us know how we could tweak it to make it more visually effective and functional.

Nile spans the globe: Effective May 1, 2013, Nile Africa Fixed Income Fund became Nile Africa and Frontier Bond Fund.  The change allows the fund to add bonds from any frontier-market on the planet to its portfolio.

Nationwide is absorbing 17 HighMark Mutual Funds: The changeover will take place some time in the third quarter of 2013.  This includes most of the Highmark family and the plan is for the current sub-advisers to be retained.  Two HighMark funds, Tactical Growth & Income Allocation and Tactical Capital Growth, didn’t make the cut and are scheduled for liquidation.

USAA is planning to launch active ETFs: USAA has submitted paperwork with the SEC seeking permission to create 14 actively managed exchange-traded funds, mostly mimicking already-existing USAA mutual funds. 

Small Wins for Investors

On or before June 30, 2013, Artio International Equity, International Equity II and Select Opportunities funds will be given over to Aberdeen’s Global Equity team, which is based in Edinburgh, Scotland.  The decline of the Artio operation has been absolutely stunning and it was more than time for a change.  Artio Total Return Bond Fund and Artio Global High Income Fund will continue to be managed by their current portfolio teams.

ATAC Inflation Rotation Fund (ATACX) has reduced the minimum initial investment for its Investor Class Shares from $25,000 to $2,500 for regular accounts and from $10,000 to $2,500 for IRA accounts.

Longleaf Partners Global Fund (LLGLX) reopened to new investment on April 16, 2013.  I was baffled by its closing – it discovered, three weeks after launch, that there was nothing worth buying – and am a bit baffled by its opening, which occurred after the unattractive market had risen by another 3%.

Vanguard announced on April 3 that it is reopening the $9 billion Vanguard Capital Opportunity Fund (VHCOX) to individual investors and removing the $25,000 annual limit on additional purchases.  The fund has seen substantial outflows over the past three years.  In response, the board decided to make it available to individual investors while leaving it closed to all financial advisory and institutional clients, other than those who invest through a Vanguard brokerage account.  This is a pretty striking opportunity.  The fund is run by PRIMECAP Management, which has done a remarkable job over time.

Closings

DuPont Capital Emerging Markets Fund (DCMEX) initiated a “soft close” on April 30, 2013.

Effective June 30, 2013, the FMI Large Cap (FMIHX) Fund will be closed to new investors.

Eighteen months after launching the Grandeur Peak Funds, Grandeur Peak Global Advisors announced that it will soft close both the Grandeur Peak Global Opportunities Fund (GPGOX) and the Grandeur Peak International Opportunities (GPIOX) Fund on May 1, 2013.

After May 17, 2013 the SouthernSun Small Cap Fund (SSSFX) will be closed to new investors.  The fund has pretty consistently generated returns 50% greater than those of its peers.  The same manager, Michael Cook, also runs the smaller, newer, midcap-focused SouthernSun US Equity Fund (SSEFX).  The latter fund’s average market cap is low enough to suggest that it holds recent alumni of the small cap fund.  I’ll note that we profiled all four of those soon-to-be-closed funds when they were small, excellent and unknown.

Touchstone Merger Arbitrage Fund (TMGAX) closed to new accounts on April 8, 2013.   The fund raised a half billion in under two years and substantially outperformed its peers, so the closing is somewhere between “no surprise” and “reassuring.”

Old Wine, New Bottles

In one of those “what the huh?” announcements, the Board of Trustees of the Catalyst Large Cap Value Fund (LVXAX) voted “to change in the name of the Fund to the Catalyst Insider Buying Fund.” Uhh … there already is a Catalyst Insider Buying Fund (INSAX). 

Lazard U.S. High Yield Portfolio (LZHOX) is on its way to becoming Lazard U.S. Corporate Income Portfolio, effective June 28, 2013.  It will invest in bonds issued by corporations “and non-governmental issuers similar to corporations.”  They hope to focus on “better quality” (their term) junk bonds. 

Off to the Dustbin of History

Dreyfus Small Cap Equity Fund (DSEAX) will transfer all of its assets in a tax-free reorganization to Dreyfus/The Boston Company Small Cap Value Fund (STSVX).

Around June 21, 2013, Fidelity Large Cap Growth Fund (FSLGX) will disappear into Fidelity Stock Selector All Cap Fund (FDSSX). This is an enormously annoying move and an illustration of why one might avoid Fidelity.  FSLGX’s great flaw is that it has attracted only $170 million; FDSSX’s great virtue is that it has attracted over $3 billion.  FDSSX is an analyst-run fund with over 1100 stocks, 11 named managers and a track record inferior to FSLGX (which has one manager and 134 stocks).

Legg Mason Capital Management All Cap Fund (SPAAX) will be absorbed by ClearBridge Large Cap Value Fund (SINAX).  The Clearbridge fund is cheaper and better, so that’s a win of sorts.

In Closing …

If you haven’t already done so, please do consider bookmarking our Amazon link.  It generates a pretty consistent $500/month for us but I have to admit to a certain degree of trepidation over the imminent (and entirely sensible) change in law which will require online retailers with over a $1 million in sales to collect state sales tax.  I don’t know if the change will decrease Amazon’s attractiveness or if it might cause Amazon to limit compensation to the Associates program, but it could.

As always, the Amazon and PayPal links are just … uhh, over there —>

That’s all for now, folks!

Dear friends,

Welcome to the end of a long, odd month.  The market bounced.  The pope took a long victory lap around St. Peter’s Square in his Popemobile before giving up the red shoes for life. King Richard III was discovered after 500 years buried under a parking lot with evidence of an ignominious wound in his nether regions.  At about the same time, French scientists discovered the Richard the Lionheart’s heart had been embalmed with daisies, myrtle, mint and frankincense and stored in a lead box.  A series of named storms (Nemo?  Really?  Q?) wacked the Northeast.

And I, briefly, had fantasies of enormous wealth.  My family discovered a long forgotten stock certificate issued around the time of the First World War in my grandfather’s name.  After some poking about, it appeared that a chain of mergers and acquisitions led from a small Ohio bank to Fifth Third Bank, to whom I sent a scan of the stock certificate.  While I waited for them to marvel at its antiquity and authenticity, I reviewed my lessons in the power of compounding.  $100 in 1914, growing at 5% per year, would be worth $13,000 now.  Cool.  But, growing at 10% per year – the amount long-term stock investors are guaranteed, right? – it would have grown to $13,000,000.  In the midst of my reverie about Chateau Snowball, Fifth Third wrote back with modestly deflating news: there was no evidence that the stock hadn’t been redeemed. There was also no evidence that it had been, but after 90 years presumption appears to shift in the bank’s favor. (Who’d have guessed?)  

It looks like I better keep my day job.  (Which, happily enough, is an immensely fulfilling one.)

Longleaf Global and its brethren

Two bits of news lay behind this story.  First, Longleaf freakishly closed its new Longleaf Partners Global Fund (LLGFX) after just three weeks.  Given that Longleaf hadn’t launched a fund in 15 years, it seemed odd that this one was so poorly-planned that they’d need to immediately close the door.  

At around the same time, I received a cheerful note from Tom Pinto, a long-time correspondent of ours and vice president at Mount & Nadler. Mount & Nadler (presided over, these last 33 years, by the redoubtable Hedda Nadler) does public relations for mutual funds and other money management folks. They’ve arranged some really productive conversations (with, for example, David Winters and Bruce Berkowitz) over the years and I tend to take their notes seriously. This one celebrated an entirely remarkable achievement for Tweedy Browne Global Value (TBGVX):

Incredibly, when measured on a rolling 10-year basis since its inception through 11/30/12 using monthly returns, the fund is batting 1000, having outperformed its benchmark – MSCI EAFE — in 115 out of 115 possible 10-year holding periods over the last 19 plus years it has been in existence. It also outperformed its benchmark in 91% of the rolling five-year periods and 82% of the rolling three-year periods. 

That one note combined three of my favorite things: (1) consistency in performance, (2) Tweedy, Browne and (3) Hedda.

Why consistency? It helps investors fight their worst enemy: themselves.  Very streaky funds have very streaky investors, folks who buy and sell excessively and, in most cases, poorly.  Morningstar has documented a regrettably clear pattern of investors earning less –sometimes dramatically less – than their funds, because of their ill-time actions.  Steady funds tend to have steady investors; in Tweedy’s case, “investor returns” are close to and occasionally higher than the fund’s returns.

Why Tweedy? It’s one of those grand old firms – like Dodge & Cox and Northern – that started a century or more ago and that has been quietly serving “old wealth” for much of that time.  Tweedy, founded in 1920 as a brokerage, counts Benjamin Graham, Walter Schloss and Warren Buffett among its clients.  They’ve only got three funds (though one does come in two flavors: currency hedged and not) and they pour their own money into them.  The firm’s website notes:

 As of December 31, 2012, the current Managing Directors and retired principals and their families, as well as employees of Tweedy, Browne had more than $759.5 million in portfolios combined with or similar to client portfolios, including approximately $101.9 million in the Global Value Fund and $57.9 million in the Value Fund, $6.8 million in the Worldwide High Dividend Yield Value Fund and $3.7 million in the Global Value Fund II — Currency Unhedged.

Value (low risk, four stars) and Global Value (low risk, five stars) launched in 1993.  The one with the long name (low risk, five stars) launched 14 years later, in 2007.  Our profile of the fund, Tweedy Browne Worldwide High Dividend Yield Value (TBHDX), appeared as soon as it was launched.  At that point, Global Value was rated by Morningstar as a two-star fund. Nonetheless, I plowed in with the argument that it represented a compelling opportunity:

They are really good stock-pickers.  I know, I know: “gee, Dave, can’t you read?  Two blinkin’ stars.”  Three things to remember.  First, the validity of Morningstar’s peer ratings depend on the validity of their peer group assignment.  In the case of Global Value, they’re categorized as small-mid foreign value (which has been on something of a tear in recent years), despite the fact that 60% of their portfolio is in large cap stocks.

Second, much of the underperformance for Global Value is attributable to their currency hedging.

Third, they provide strong absolute returns even when they have weak relative ones.  In the case of Global Value they have churned out returns around 17-18% over the trailing three- and five-year periods.  Combine that with uniformly “low” Morningstar risk scores for both funds and you get an awfully compelling risk/return profile.

Bottom Line: there’s a lot to be said, especially in uncertain times, for picking cautious, experienced managers and giving them broad latitude.  Worldwide High Dividend Yield has both of those attributes and it’s likely to be a remarkably rewarding instrument for folks who like to sleep well at night.

Why Hedda? I’ve never had the pleasure of meeting Hedda in person, but our long phone conversations over the years make it clear that she’s smart, funny, and generous and has an incredible institutional memory.  When I think of Hedda, the picture that pops into mind is Edna Mode from The Incredibles, darling. 

The Observer’s specialty are new and small funds.  The problem in covering Tweedy is that the next new fund is apt to launch around about the time that you folks start receiving copies of the Observer by direct neural implants.  I had similar enthusiasm for other long-interval launches, including Dodge and Cox Global (“Let’s be blunt about this. If this fund fails, it’s pretty much time for us to admit that the efficient market folks are right and give up on active management.”) and Oakmark Global Select (“both of the managers are talented, experienced and disciplined. Investors willing to take the risk are getting access to a lot of talent and a unique vehicle”).

That led to the question: what happens when funds that never launch new funds, launch new funds?

With the help of the folks on the Observer’s discussion board and, most especially, Charles Boccadoro, we combed through hundreds of records and tracked down all of the long-interval launches that we could. “Long-interval launches” were those where a firm hadn’t launched in anew fund in 10 years or more.  (Dodge & Cox – with five fund launches in 81 years – was close enough, as was FMI with a launch after nine-and-a-fraction years.) We were able to identify 17 funds, either retail or nominally institutional but with low minimum shares, that qualified. 

We looked at two measures: how did they do, compared to their Morningstar peers, in their first full year (so, if they launched in October 2009, we looked at 2010) and how have they done since launch? 

While this isn’t a sure thing, there are good explanations for the success.  At base, these are firms that are not responding to market pressures and that have extremely coherent disciplines.  The fact that they choose to launch after a decade or more speaks to a combination of factors: they see something important and they’re willing to put their reputation on the line.  Those are powerful motivators driving highly talented folks.

What might be the next funds to track?  Two come to mind.  Longleaf Global launched 15 years after Longleaf International (LLINX) and would warrant serious consideration when it reopens.  And BBH Global Core Select will be opening in the next month, 15 years after BBH Core Select (BBTRX and BBTEX).  Core Select has been wildly successful and has just closed to new investors. Global Core Select will use the same team and the same strategy. 

(Thanks to my collaborators on this piece: Mike M, Andrei, Charles and MourningStars.)

The Phrase, “Oh, that can’t be good” comes to mind

I read a lot of fund reports – annual, semi-annual and monthly.  I read most of them to find up what’s going on with the fund.  I read a few because I want to find up what’s going on with the world.  One of the managers whose opinion I take seriously is Steven Romick, of FPA Crescent (FPACX). 

They wanted to make two points. One: you were exactly right to notice that one paragraph in the Annual Report. It was, they report, written with exceeding care and intention. They believe that it warrants re-reading, perhaps several times. For those who have not read the passage in question:

Opportunity: When thinking about closing, we also think about the investing environment —both the current opportunity set and our expectations for future opportunities. Currently, we find limited prospects. However, we believe the future opportunity set will be substantial. As we have oft discussed, we are managing capital in the face of Central Bankers’ “grand experiment” that we do not believe will end well, fomenting volatility and creating opportunity. We continue to maintain a more defensive posture until the fallout. Though underperformance might be the price we pay in the interim should the market continue to rise, we believe in focusing on the preservation of capital before considering the return on it. The imbalances that we see, coupled with the current positioning of our Fund, give us confidence that over the long term, we will be able to invest our increased asset base in compelling absolute value opportunities.

Fund flows: We are sensitive to the negative impact that substantial asset flows (in or out) can have on the management and performance of a portfolio. At present, asset flows are not material relative to the size of the Fund, so we believe that the portfolio is not harmed. However, while members of the Investment Committee will continue to be available to existing clients, we have restricted discussions with new relationships so that our attention can be on investment management rather than asset gathering.

For now, we are satisfied with the team’s capabilities, the Fund’s positioning, and the impact of asset flows. As fellow shareholders, should anything cause us to doubt the likelihood of meeting our stated objectives we will close the Fund as we did before, and/or return capital to our shareholders.

What might be the sound bites in that paragraph? “We think about future opportunities. They will be substantial. For now we’ll focus on the preservation of capital. Soon enough, there will be billions of dollars’ worth of compelling absolute value opportunities.” In the interim, they know that they’re both growing and underperforming. They’ve cut off talk with potential new clients to limit the first and are talking with the rest of us so that we understand the second.

Point two: they’ve closed Crescent before. They’ll do it again if they don’t anticipate the opportunity to find good uses for new cash.

Artisan goes public.  Now what?

Artisan Partners are one on my favorite investment management firms.  Their policies are consistently shareholder friendly, their management teams are stable and disciplined, and their funds are consistently top-notch.

And now you’ll be able to own a piece of the action.  Artisan will offer shares to the public, with the proceeds used to resolve some debt and make it possible for some of the younger partners to gain an equity stake in the firm.  Three questions arise:

• Is this good for the investors in Artisan’s funds?
• Should you consider buying the stock?
• And would it all work a bit better with Godiva chocolate?

What happens now with the Artisan funds?

The concern is that Artisan is gaining a fiduciary responsibility to a large set of outside shareholders.   Their obligation to those shareholders is to increase Artisan’s earnings which, with other fund companies, has translated to (1) gather assets and (2) gather attention.  There’s only been one academic study on the difference in performance between publicly-owned and privately-held fund companies, and that study looked only at Canadian firms.  That study found:

… publicly-traded management companies invest in riskier assets and charge higher management fees relative to the funds managed by private management companies. At the same time, however, the risk-adjusted returns of the mutual funds managed by publicly-traded management companies do not appear to outperform those of the mutual funds managed by private management companies. This finding is consistent with both the risk reduction and agency cost arguments that have been made in the literature.  (M K Berkowitz, Ownership, Risk and Performance of Mutual Fund Management Companies, 2001)

The only other serious investigation that I know of was undertaken by Bill Bernstein, and reported in his book The Investor’s Manifesto.  Bernstein’s opinion of the financial services industry in general and of actively-managed funds in particular is akin to his opinions on astrology and reading goat entrails.  Think I’m kidding?  Here’s Bill:

The prudent investor treats almost the entirety of the financial industrial landscape as an urban combat zone. This means any stock broker or full-service brokerage firm, any newsletter, any advisor who purchases individual securities, any hedge fund. Most mutual fund companies spew more toxic waste into the investment environment than a third-world refinery. Most financial advisors cannot invest their way out a paper bag. Who can you trust? Almost no one.

Bill looked at the performance of 18 fund companies, five of which were not publicly-traded.  In particular, he looked at the average star ratings for their funds (admittedly an imperfect measure, but among the best we’ve got).  The privately-held firms placed 1st, 2nd, 3rd, 6th and 9^th in performance.  The lowest positions were all public firms with a record of peddling bloated, undistinguished funds to an indolent public.  His recommendation is categorical: “Do not invest with any mutual fund family that is owned by a publicly traded parent company.”

While the conflicts between the interests of the firm’s stockholders and the funds’ shareholders are real and serious, it’s also true that a number of public firms – the Affiliated Managers Group and T. Rowe Price, notably – have continued offered solid funds and reasonable prices.  While it’s possible that Artisan will suddenly veer off the path that’s made them so admirable, that’s neither necessary nor immediately probable.

So, should you buy the stock instead of the funds?

In investor mythology, the fund companies’ stock always seems the better bet than the fund company’s funds.  That seems, broadly speaking, true.  Fund company stock has broadly outperformed the stock market and the financial sector stocks over time.  I’ve gathered a listing of all of the publicly-traded mutual fund companies that I can identify, excluding only those instances where the funds are a tiny slice of a huge financial empire.

Here’s the performance of the companies’ stock, for various periods through February, 2013.

Several of the largest fund companies – Capital Group Companies, Fidelity Management & Research, and Vanguard – are all private.  Vanguard alone is owned by its fund shareholders.

Several high visibility firms – Janus and U.S. Global Investors – have had miserable performance and several others are extremely volatile.  The chart for Hennessy Advisors, for example, shows a 90% decline in value during the financial crisis, flat performance for three years, then a freakish 90% rise in the past three months. 

On whole, you’d have to conclude that “buy the company, not the funds” is no path to easy money.

Have They Even Considered Using Godiva as a Sub-advisor? 

Artisan’s upcoming IPO has been priced at $27-29 a share, which would give Artisan a fully-diluted market value of about $1.8 billion.  That’s roughly the same as the market capitalizations for Cheesecake Factory, Inc. (CAKE) or for Janus Capital Group (JNS).  

So, for $1.8 billion you could buy all of Artisan or at least all of the publicly-available stock for CAKE or JNS.  The question for all of you with $1.8 billion burning a hole in your pockets is “which one?”  While an efficient market investor might shrug and suggest a screening process that begins with the words “Eenie” and “Meenie,” we know that you depend on us for better.

Herewith, our comprehensive comparison of Artisan, Cheesecake Factory and Janus:

Jeez, that’s a tough call.  Brilliant management or chocolate?  Brilliant management or chocolate?  Oh heck, who am I kidding: 

USA Today launches a new portfolio tracker

In February, USA Today announced a partnership with SigFig (whose logo is a living piggy bank) to create a new and powerful portfolio tracker.  Always game for a new experience, I signed up (it’s free, which helps).  I allowed it to import my Scottrade portfolio and then to run an analysis on it. 

Two pieces of good news.  First, it made one sensible fund recommendation: that I sell Northern Global Tactical Asset Allocation (BBALX) and replace it with Buffalo Flexible Income (BUFBX).  BBALX is a fund of index funds which represents a sort of “best ideas” approach from Northern’s investment policy committee.  It has low expenses and I like the fact that it’s using index funds, which decreases complexity and increases predictability.  That said, the Buffalo fund is very solid and has certainly outperformed Northern over the past several years.  A FundAlarm profile of the fund, then called Buffalo Balanced, concluded:

This is clearly not a mild-mannered fund in the mold of Mairs & Power or Bridgeway.  It takes more risks but is managed by an immensely experienced professional who has a pretty clearly-defined discipline.  That has paid off, and likely will continue to pay off.

So, that’s sensible. 

Second bit of good news, the outputs are pretty:

Now the bad news:  the recommendations completely missed the problem.  Scottrade holds five funds for me.  They are RiverPark Short-Term High Yield (RPHYX), one of two cash-management accounts, Northern and three emerging markets funds.  Any reasonable analyst would have said: “Snowball, what are you thinking?  You’ve got over two-thirds of your money in the emerging markets, virtually no U.S. stocks and a slug of very odd bonds.  This is wrong, wrong, wrong!” 

None of which USAToday/SigFig noticed. They were unable even to categorize 40% of the portfolio, saw only 2% cash (it’s actually about 10%), saw no dividends (Morningstar calculates it at 2.4%) and had no apparent concern about my wild asset allocation skew.

Bottom line: look if you like, but look very skeptically at these outputs.  This system might work for a very conventional portfolio, but even that isn’t yet proven.

Fidelity spirals (and not upward)

Investors pulled nearly $36 billion from Fidelity’s funds in 2012.  That’s from Fido’s recently-released 2012 annual report.  Their once-vaunted stock funds (a) had a really strong year in terms of performance and (b) bled $24 billion in assets regardless (Fidelity Sees More Fund Outflows, 02/15/13).  The company’s operating income of $2.3 billion fell 29% compared with 2011. 

The most troubling sign of Fidelity’s long-term malaise comes from a January announcement.  Reuters reported that Fido’s target-date retirement funds were steadily losing market share to Vanguard.  As a result, they needed to act to strengthen them. 

Fidelity Investments’ target-date funds will start 2013 with more stock-picking firepower, as star money managers Will Danoff and Joel Tillinghast pick up new assignments to protect a No. 1 position under fire from rival Vanguard Group.

Why is that bad?  Because Tillinghast and Danoff seem to be all that they have left.  Danoff has been running Contrafund since 1990 and was moved in Fidelity Advisor New Insights in 2003 to beef up the Fidelity Advisor funds and now Fidelity Series Opportunistic Insights in 2012 to beef up the funds used by the target-date series.  Even before the first dollar goes to Opportunistic Insights, Danoff was managing $107 billion in equity investments.  Tillinghast has been running Low-Priced Stock, a $35 billion former small cap fund, since 1989 and now adds Fidelity Series Intrinsic Opportunities Fund.  This feels a lot like a major league ball team staking their playoff chances on two 39-year-old power hitters; the old guys have a world of talent but you have to ask, what’s happened to the farm system?

One more slap at Morningstar’s new ratings

There was a long, healthy, and not altogether negative discussion of Morningstar’s analyst ratings on the Observer’s discussion board.  For those trying to think through the weight to give a “Gold” analyst rating, it’s a really worthwhile use of your time.  Three concerns emerge:

1. There may be a positivity bias in the ratings.  It’s clear that the ratings are vastly skewed, so that negative assessments are few and far between.  Some writers speculate that Morningstar’s corporate interests (drawing advertising, for example) might create pressure in that direction.
2. There’s no clear relationship between the five pillars and the ultimate rating.  Morningstar’s analysts look at five factors (people, price, process, parent, performance – side note, be skeptical of any system designed for alliteration) and assign a positive, neutral or negative judgment to each. Some writers express bewilderment that one fund with a single “positive” might be silver while another with two positives might be “neutral.”
3. There’s no evidence, yet, that the ratings have predictive validity.  The anonymous author of the Wall Street Rant blog produced a fairly close look at the 2012 performance of the newly-rated funds.  Here’s the visual summary of Ranter’s research:

In short, “Not much really stands out after the first year. While there was a slight positive result for Gold and Silver rated funds, Neutral rated funds did even better.”  The complete analysis is in a post entitled Performance of Morningstar’s New Analyst Ratings For Mutual Funds in 2012 (02/17/2013)

My own view is in accord with what Morningstar says about their ratings (use them as one element of your due diligence in assessing a fund) but, in practice, Morningstar’s functional monopoly in the fund ratings business means that these function as marketing tools far more than as analytic ones.

Five-star and Gold is surely a lot better than one-star and negative, but it’s not nearly as good as a careful, time-consuming inquiry into what the manager does, what the risks look like, and whether this makes even marginal sense in your own portfolio.

Introducing: The Elevator Talk

The Elevator Talk is a new feature which began in February.  Since the number of funds we can cover in-depth is smaller than the number of funds worthy of in-depth coverage, we’ve decided to offer one or two managers each month the opportunity to make a 200 word pitch to you.  That’s about the number of words a slightly-manic elevator companion could share in a minute and a half.   In each case, I’ve promised to offer a quick capsule of the fund and a link back to the fund’s site.  Other than that, they’ve got 200 words and precisely as much of your time and attention as you’re willing to share.  These aren’t endorsements; they’re opportunities to learn more.

Elevator Talk #2: Dale Harvey, Poplar Forest Partners (PFPFX and IPFPX)

Mr. Harvey manages the Poplar Forest Partners (PFPFX and IPFPX), which launched on December 31, 2009.  For 16 years, Dale co-managed several of the flagship American Funds including Investment Company of America (AIVSX), Washington Mutual (AWSHX) and American Mutual (AMRMX).  Some managers start their own firms in order to get rich.  Others because asset bloat was making them crazy.  A passage from an internal survey that Dale completed, quoted by Morningstar, gives you some idea of his motivation:

Counselor Dale Harvey remarked that Capital should “[c]lose all the funds. Don’t just close the biggest or fastest growing. Doing that would simply shift the burden on to other funds. Keep them shut until we figure out the new unit structure and relieve the pressure of PCs managing $20 billion.”

Many of his first investors were former colleagues at the American Funds.

Dale offers these 152 words on why folks should check in:

This is a once-in-a-generation opportunity to invest with a successful American Funds manager who went out on his own.  The last was the late Howard Schow, who left to launch the Primecap Funds.

The real reason to leave is about size, the funds just kept taking in money.  There came a point where it was a real impediment to performance.  That will never be the case at Poplar Forest.  Everyone here invests heavily in our funds, so our interests are directly aligned with yours.

From a process perspective, we’re defined by a contrarian value perspective with a long-term time horizon.  This is a high conviction portfolio with no second choices or fillers.  Because we’re contrarian, we’ll sometimes be out of step with the market as we were in 2011.  But we’ve always known that the best time to invest in a four- or five-star fund is when it only has two stars.

The fund’s minimum initial investment is $25,000 for retail shares, reduced to $5,000 for IRAs. They maintain a minimal website for the fund and a substantially more informative site for their investment firm, Poplar Forest LLC. Dale’s most-recent discussion of the fund appears in his 2012 Annual Review. 

Conference Call Highlights

On February 19^th, about 50 people phoned-in to listen to our conversation with Andrew Foster, manager of Seafarer Overseas Growth and Income Fund (SFGIX and SIGIX).   The fund has an exceptional first year: it gathered $35 million in asset and returned 18% while the MSCI emerging market index made 3.8%. The fund has about 70% of its assets in Asia, with the rest pretty much evenly split between Latin America and Emerging Europe.   Their growth has allowed them to institute two sets of expense ratio reductions, one formal and one voluntary.

For folks interested but unable to join us, here’s the complete audio of the hour-long conversation.

The SFGIX conference call

When you click on the link, the file will load in your browser and will begin playing after it’s partially loaded. If the file downloads, instead, you may have to double-click to play it.

Among the highlights of the call, for me:

1. China has changed.   Andrew offered a rich discussion about his decision to launch the fund. The short version: early in his career, he concluded that emergent China was “the world’s most under-rated opportunity” and he really wanted to be there. By late 2009, he noticed that China was structurally slowing. That is, it was slow because of features that had no “easy or obvious” solution, rather than just slowly as part of a cycle. He concluded that “China will never be the same.” Long reflection and investigation led him to begin focusing on other markets, many of which were new to him, that had many of the same characteristics that made China exciting and profitable a decade earlier. Given Matthews’ exclusive and principled focus on Asia, he concluded that the only way to pursue those opportunities was to leave Matthews and launch Seafarer.
2. It’s time to be a bit cautious. As markets have become a bit stretched – prices are up 30% since the recent trough but fundamentals have not much changed – he’s moved at the margins from smaller names to larger, steadier firms.
3. There are still better opportunities in equities than fixed income; hence he’s about 90% in equities.
4. Income has important roles to play in his portfolio.  (1) It serves as a check on the quality of a firm’s business model. At base, you can’t pay dividends if you’re not generating substantial, sustained free cash flow and generating that flow is a sign of a healthy business. (2) It serves as a common metric across various markets, each of which has its own accounting schemes and regimes. (3) It provides as least a bit of a buffer in rough markets. Andrew likened it to a sea anchor, which won’t immediately stop a ship caught in a gale but will slow it, steady it and eventually stop it.

Bottom-line: the valuations on emerging equities look good if you’ve got a three-to-five year time horizon, fixed-income globally strikes him as stretched, he expects to remain fully invested, reasonably cautious and reasonably concentrated.

Conference Call Upcoming: Cook and Bynum, March 5^th

Cook and Bynum (COBYX) is an intriguing fund.  COBYX holds only seven holdings and a 33% cash stake.  Since two-thirds of the fund is in the stock market, you might reasonably expect to harvest two-thirds of the market’s gains but suffer through just two-thirds of its volatility.  Cook and Bynum has done far better.  Since launch they’ve captured nearly 100% of the market’s gains with only one third of its volatility.  In the past twelve months, Morningstar estimates that they’ve captured just 7% of the market’s downside. 

We’ll have a chance to hear from Richard and Dowe (Cook and Bynum, respectively) about their approach to high-conviction investing and their amazing research efforts.  To help facilitate the discussion, they prepared a short document that walks through their strategy with you. You can download that document here.

Our conference call will be Tuesday, March 5, from 7:00 – 8:00 Eastern. 

How can you join in?

If you’d like to join in, just click on register and you’ll be taken to the Chorus Call site.  In exchange for your name and email, you’ll receive a toll-free number, a PIN and instructions on joining the call.  If you register, I’ll send you a reminder email on the morning of the call.

Remember: registering for one call does not automatically register you for another.  You need to click each separately.  Likewise, registering for the conference call mailing list doesn’t register you for a call; it just lets you know when an opportunity comes up. 

This will be the first of three conversations with distinguished managers who defy that trend through their commitment to a singular discipline: buy only the best.  In the months ahead, we plan to talk with David Rolfe of RiverPark/Wedgewood Fund (RWGFX) and Stephen Dodson of Bretton Fund (BRTNX).

Observer Fund Profiles

Each month the Observer provides in-depth profiles of between two and four funds.  Our “Most Intriguing New Funds” are funds launched within the past couple years that most frequently feature experienced managers leading innovative newer funds.  “Stars in the Shadows” are older funds that have attracted far less attention than they deserve. This month’s lineup features:

Seafarer Overseas Growth & Income (SFGIX/SIGIX): The evidence is clear and consistent.  It’s not just different.  It’s better.

Funds in Registration

New mutual funds must be registered with the Securities and Exchange Commission before they can be offered for sale to the public.  The SEC has a 75-day window during which to call for revisions of a prospectus; fund companies sometimes use that same time to tweak a fund’s fee structure or operating details.  Every day we scour new SEC filings to see what opportunities might be about to present themselves. Many of the proposed funds offer nothing new, distinctive or interesting.  Some are downright horrors of Dilbertesque babble (see “Synthetic Reverse Convertibles,” below).

Funds in registration this month won’t be available for sale until, typically, the beginning of May 2013. We found a dozen funds in the pipeline, notably:

Grandeur Peak Emerging Markets Opportunities Fund will seek long-term growth of capital by investing in small and micro-cap companies domiciled in emerging or frontier markets.  They’re willing to consider common stock, preferred and convertible shares.   The most reassuring thing about it is the Grandeur Peak’s founders, Robert Gardiner & Blake Walker, are running the fund and have been successfully navigating these waters since their days at Wasatch.  The minimum initial investment is $2,000, reduced to $1,000 for accounts with an automatic investing plan and $100 for UGMA/UTMA or a Coverdell Education Savings Accounts.  Expenses not yet set.

Matthews Emerging Asia Fund will pursue long-term capital appreciation by investing in common and preferred stock and convertible securities of companies that have “substantial ties” to the countries of Asia, except Japan.  Under normal conditions, you might expect to see companies from Bangladesh, Cambodia, China, India, Indonesia, Laos, Malaysia, Mongolia, Myanmar, Pakistan, Papua New Guinea, Philippines, Sri Lanka, Thailand and Vietnam.  They’ll run an all-cap portfolio which might invest in micro-cap stocks.   Taizo Ishida, who serves on the management team of two other funds (Growth and Japan), will be in charge. The minimum initial investment in the fund is $2500, reduced to $500 for IRAs and Coverdell accounts. Expenses for both Investor and Institutional shares are capped at 1.90%.

Details on these funds and the list of all of the funds in registration are available at the Observer’s Funds in Registration page or by clicking “Funds” on the menu atop each page.

Manager Changes

On a related note, we also tracked down 31 fund manager changes, including the blockbuster departure of Kris Jenner from T. Rowe Price Health Sciences (PRHSX) and the departure, after nearly 20 years, of Patrick Rogers from Gateway Fund (GATEX).  

There was also a change on a slew of Vanguard funds, though I see no explanation at Vanguard for most of them.  The affected funds are a dozen Target Retirement Date funds plus

• Diversified Equity
• Extended Duration Treasury Index
• FTSE All-World ex-US Small Index
• Global ex-US Real  Estate
• Long-Term Bond Index
• Long-Term Government Bond Index
• Short-Term Bond Index
• STAR
• Tax-Managed Growth & Income
• Tax-Managed International

Vanguard did note that five senior executives were being moved around (including to and from Australia) and, at the end of that announcement, nonchalantly mentioned that “Along with these leadership changes, 15 equity funds, 11 fixed income funds, two balanced funds, and Vanguard Target Retirement Funds will have new portfolio managers rotate onto their teams.”  The folks being moved did actually manage the funds affected so the cause is undetermined.

Snowball and the fine art of Jaffe-casting

Despite the suspicion that I have a face made for radio but a voice made for print, Chuck Jaffe invited me to appear as a guest on the February 28 broadcast of MoneyLife with Chuck Jaffe.  (Ted tells me that I appear at the 34:10 mark and that you can just move the slider there if you’d like.) We chatted amiably for a bit under 20 minutes, about what to look for and what to avoid in the fund world.  I ended up doing capsule critiques of five funds that his listeners had questions about:

WisdomTree Emerging Markets Equity Income (DDEM) for Rick in York, Pa.  Certainly more attractive than the Vanguard index, despite high expenses.   High dividend-yield stocks.  Broader market cap diversification, lower beta – 0.8

Fidelity Total Emerging Markets (FTEMX), also for Rick.  I own it.  Why?  Not because it’s good but because it looks better than the alternatives in my 403(b).  Broad and deep management team but, frankly, First Trust/Aberdeen Emerging Opportunity (FEO) is vastly better. 

Fidelity Emerging Markets (FEMKX) for Jim in Princeton, NJ.  Good news, Jim.  They don’t charge much.  Bad news: they haven’t really earned what they do charge.  Good news: they got a new manager in October.  Sammy Simnegar.  Bad news: he’s not been very consistent, trades a lot, and is likely to tank tax efficiency in repositioning.  Seafarer Overseas Growth & Income (SFGIX) is vastly better.

Nile Pan Africa (NAFAX) for Bruce in Easton, Pa.  This fund will be getting its first Morningstar star rating this year.  Ignore it!  It’s a narrow fund being compared to globally-diversified ones.  75% of its money is in two countries, Nigeria and South Africa.  If this were called the Nile Nigeria and South Africa Fund, would you even glance at it?

EP Asia Small Companies (EPASX), also for Bruce.  Two problems, putting aside the question of whether you want to be investing in small Asian companies.  First, the manager’s record at his China fund is mediocre.  Second, he doesn’t actually seem to be investing in small companies.  Morningstar places them at just 10% of the portfolio.  I’d be more prone to trust Matthews.

I was saddened to learn that Chuck has lost the sponsor for his show.    His listenership is large, engaged and growing.  And his expenses are really pretty modest (uhhh … rather more than the Observer’s, rather less than the Pennysaver paper that keeps getting tossed on your porch).   If any of you want to become even a part-sponsor of a fairly high-visibility show/podcast, you should drop Chuck a line. Heck, he could even help you launch your own line of podcasts.

Briefly Noted ….

Kris Jenner’s curious departure

Kris Jenner, long-time manager of T. Rowe Price Health Sciences (PRHSX) left rather abruptly on February 15^th.  The fund carries a Gold rating and five stars from Morningstar (but see the discussion, above, about what that might mean) and Jenner was a finalist for Morningstar’s Domestic Manager of the Year award in 2011.  A doctor by training, Price long touted Jenner’s special expertise as one source of the fund’s competitive advantage.

So, what’s up?  No one who’s talking knows, and no one who knows is talking. The best coverage of his departure comes from Bloomberg, which makes four notes that many others skip:

1. Jenner left with two of his (presumably) top analysts from his former team of eight,
2. he reached out to lots of his contacts in the industry after he left,
3. he’s being represented by a public relations firms, Burns McClennan, Inc. and
4. he’s being coy as part of his p.r. campaign: “We cannot share our plans with you at this time, in part due to regulatory and reporting requirements.”

Price seems a bit offended at the breach of collegiality.  “They are leaving to pursue other opportunities,” Price spokesman Brian Lewbart told The Baltimore Sun. “They didn’t share what they are.”

My guess would be that some combination of the desire to be fabulously rich and the desire to facilitate medical innovation might well lead him to found something like a biotech venture capital firm or business development company.  Regardless, it seems certain that the mutual fund world has seen the last of one of its brighter stars.

FPA announces conversion to a pure no-load fund family

Effective April 1, 2013, all of the FPA Funds will be available as no-load funds.  This change will affect FPA Capital (FPPTX), New Income (FPNIX), Paramount (FPRAX) and Perennial Funds (FPPFX), since these funds are currently structured as front-load mutual funds. FPA Capital Fund will remain closed to new investors.  This also means that shareholders of FPA Crescent Fund (FPACX) and International Value Fund (FPIVX) will now be able to exchange into the other FPA Funds without incurring a sales charge.

And apologies to FPA: in the first version of our February issue, we misidentified the role Victor Liu will play on FPA’s International Value team.  Mr. Liu, who spent eight years with Causeway Capital Management as Vice President and Research Analyst, will serve in a similar capacity as FPA and will report to Pierre Py, portfolio manager of FPA International Value Fund [FPIVX].

Morningstar tracks down experienced managers in new funds

Morningstar recently “gassed up the Premium Fund Screener tool and set it to find funds incepted since 2010 that have Analyst Ratings of Gold, Silver, or Bronze” (Young Funds, Old Pros, 02/20/2013).  Setting aside the unfortunate notion of “gassing up” one’s software and the voguish “incepted,” here are editor Adam Zoll’s picks for new funds headed by highly experienced managers.

Royce Special Equity Multi-Cap (RSMCX), managed by Charlie Dreifus.  Dreifus has a great long-term record with the small cap Royce Special Equity fund.  This would be an all-cap application of that same discipline.  I’ll note, in passing, the Special hasn’t been quite as special in the past decade as in the one preceding it and Dreifus, in his mid60s, is closer to the conclusion of his career than its launch.    

PIMCO Inflation Response Multi-Asset (PZRMX) , managed by  Mihir Worah who also manages PIMCO Real Return (PRTNX), Commodity Real Return Strategy (PCRAX) and Real Estate Real Return Strategy (PETAX).  The fund combines five inflation-linked assets (TIPS, commodities, emerging market currencies, REITs and gold) to preserve purchasing power in times of rising inflation.  PIMCO’s reputation is such that after six months of meager performance, the fund is moving toward a quarter billion in assets. 

Ariel Discovery (ARDFX), managed by David Maley.  As I’ve noted before, Morningstar really likes the Ariel family of funds.  Maley has no prior experience in managing a mutual fund, though he has been managing the Ariel Micro-Cap Value separate accounts for a decade.  So far ARDFX has pretty consistently trailed its small-value peer group as well as most of the micro-cap funds (Aegis, Bridgeway, Wasatch) that I follow.

Rebalancing matters. 

In investigating the closure of Vanguard Wellington, I came across an interesting argument that the simple act of annual rebalancing can substantially boost returns.  It’s reflected in the difference in the first two columns.  The first column is what you’d have earned with a 65/35 portfolio purchased in 2002 and never rebalanced.  Column 2 shows the effect of rebalancing.  (Column 3 is the ad for the mostly-closed Wellington fund.) 

How big is the difference?  A $10,000 investment in 2002, split 65/35 and never again touched, would have grown to $18,500.  A rebalanced portfolio, which would have triggered some additional taxes unless it was in an IRA, would end a bit over $19,000.  Not bad for 10 minutes a year.

On a completely unrelated note, here’s one really striking fund in registration: NYSE Arca U.S. Equity Synthetic Reverse Convertible Index Fund?  Really? Two questions: (1) what on earth is that?  And (2) why does it strike anyone as “just what the doctor ordered”? 

Small Wins for Investors

Vanguard has dropped the expense ratios on three funds, while boosting them on two. 

Not much else to celebrate this month.

Closings

Fidelity closed Fidelity Small Cap Value Fund (FCPVX) on March 1, 2013. This is the second of Charles L. Myers’ funds to close this year.  Just one month ago they closed Fidelity Small Cap Discovery (FSCRX).   Between them they have ten stars and $8 billion in assets.

Huber Small Cap Value (HUSIX and HUSEX) is getting close to closing.  Huber is about the best small cap value fund still open and available to retail investors.  Its returns are in the top 1% of its peer group for the past one, three and five years.  It has a five-star rating from Morningstar.  It’s a Lipper Leader for Total Returns, Consistency of Returns and Tax Efficiency. 

“Effectively managing capacity of our strategies is one of the core tenets at Huber Capital Management, and we believe it is important in both small and large cap. Our small cap strategy has a capacity of approximately $1 billion in assets and our large cap/equity income strategy has a capacity of between $10 – $15 billion. As of 2/22/13, small cap strategy assets were over $810 mm and large cap/equity income strategy assets were over $1 billion. We are committed to closing our strategies in such a way as to maintain our ability to effectuate our process on behalf of investors who have been with us the longest.”

Vanguard has partially closed to giant funds.  The $68 billion Vanguard Wellington Fund (VWELX, VWENX) and the $39 billion Vanguard Intermediate-Term Tax-Exempt Fund (VWITX) closed to new institutional and advisor accounts on February 28^th.  Reportedly individual investors will be able to buy-in, but I wasn’t able to confirm that with Vanguard. 

RS Global Natural Resources Fund (RSNRX) will close on March 15, 2013.  It’s been consistently near the top of the performance charts, has probably improved with age and is dragging about $4.5 billion around.

Old Wine in New Bottles

Effective February 20, 2013, Frontegra SAM Global Equity Fund (FSGLX) became Frontegra RobecoSAM Global Equity Fund.  That’s because the sub-adviser of this undistinguished institutional fund went from being SAM to RobecoSAM USA.

PL Growth LT Fund has been renamed PL Growth Fund and MFS took over as the sub-advisor.  PL is Pacific Life and these are likely sold through the firm’s agents.

A peculiarly odd announcement from the folks at New Path Tactical Allocation Fund (GTAAX): “During the period from February 28, 2013 to April 29, 2013, the investment objective of Fund will be to seek capital appreciation and income.”  With turnover well north of 400% and returns well south of “awful,” there are more sensible things for New Path to seek than a revised objective.

The board of the Touchstone funds apparently had a rollicking meeting in February, where they approved nine major changes.  They approved reorganizing Touchstone Focused Equity Fund into the Touchstone Focused Fund.  Touchstone Micro Cap Value Fund will, at the end of April, become Touchstone Small Cap Growth Fund.  Sensibly, the strategy changes from investing in micro-caps to investing in small caps.  Oddly, the objective changes from “capital appreciation” to “long-term capital growth.”   The difference is, to an outsider, indiscernible.

Effective May 1, 2013, Western Asset High Income Fund (SHIAX) will be renamed Western Asset Short Duration High Income Fund.  The fund’s mandate will be changed to allow investing in shorter duration high yield securities as well as adjustable-rate bank loans, among others.  The sales load has been reduced to 2.25% and, in May, the expense ratio will also drop.

Off to the Dustbin of History

Guggenheim, after growing briskly through acquisitions, seems to be cleaning out some clutter.  Between the end of March and beginning of May, the following funds are slated for execution:

• Guggenheim Large Cap Concentrated Growth  (GIQIX)
• Small Cap Growth (SSCAX)
• Large Cap Value Institutional  (SLCIX)
• Global Managed Futures Strategy  (GISQX)
• All-Asset Aggressive Strategy  (RYGGX)
• All-Asset Moderate Strategy  (RYMOX)
• All-Asset Conservative Strategy  (RYEOX)

Guggenheim is also bumping off nine of their ETFs.  They are the  ABC High Dividend, MSCI EAFE Equal Weight,  S&P MidCap 400 Equal Weight,  S&P SmallCap 600 Equal Weight,  Airline,  2x S&P 500, Inverse 2x S&P 500, Wilshire 5000 Total Market, and Wilshire 4500 Completion ETFs.

Legg Mason Capital Management All Cap (SPAAX) will merge with ClearBridge Large Cap Value (SINAX) in mid-July.  Good news there, since the ClearBridge fund is a lot cheaper.

Shelton California Insured Intermediate (CATFX) is expected to cease operations, liquidate its assets and distribute the proceeds by mid-March. The fund evolved from “mediocre” to “bad” over the years and had only $4 million in assets.

The Board of Trustees of Sterling Capital approved the liquidation of the $7 million Sterling Capital Strategic Allocation Equity (BCAAX) at the end of April.

Back to the aforementioned Touchstone board meeting.  The board approved one merger and a series of executions.  The merge occurs when Touchstone Short Duration Fixed Income (TSDYX), a no-load, will merge into Touchstone Ultra Short Duration Fixed Income (TSDAX), a low-load one.  The dead walking are:

• Touchstone Global Equity (TGEAX)
• Touchstone Large Cap Relative Value (TRVAX)
• Touchstone Market Neutral Equity  (TSEAX) – more “reverse” than “neutral”
• Touchstone International Equity  (TIEAX)
• Touchstone Emerging Growth  (TGFAX)
• Touchstone U.S. Long/Short (TUSAX).  This used to be the Old Mutual Analytic U.S. Long/Short which, prior to 2006, didn’t short stocks.

The “walking” part ends on or about March 26, 2013.

In Closing . . .

Here’s an unexpectedly important announcement: we are not spam!  You can tell because spam is pink, glisteny goodness.  We are not.  I mention that because there’s a good chance that if you signed up to be notified about our monthly update or our conference calls, and haven’t been receiving our mail, it’s because we’ve been trapped by your spam filter.  Please check your spam folder.  If you see us there, just click on the “not spam” icon and things will improve.

It’s also the case that if you want to stop receiving our monthly emails, you should use the “unsubscribe” button and we’ll go away.  If you click on the “that’s spam” button instead (two or three people a month do that, for reasons unclear to me), it makes Mail Chimp anxious.  Please don’t.

In April, the Observer celebrates its second anniversary.  It wouldn’t be worthwhile without your readership and your thoughtful feedback.  And it wouldn’t be possible without your support, either directly or by using our Amazon link.  The Amazon system is amazingly simple and painless.  If you set our link as your default bookmark for Amazon (or, as I do, use Amazon as your homepage), the Observer receives a rebate from Amazon equivalent to 6% or more of the amount of your purchase.  It doesn’t change your cost by a penny since the money comes from Amazon’s marketing budget.  While 6% of the $11 you’ll pay for Bill Bernstein’s The Investor’s Manifesto (or 6% of a pound of coffee beans or Little League bat) seems trivial, it adds up to about 75% of our income.  Thanks for both!

In April, we’re going to look at closed-end s (CEFs) as an alternative to “regular” (or open-ended) mutual s and ETFs.  We’ve had a chance to talk with some folks whose professional work centered on trading CEFs.  We’ll talk through Morningstar’s recent CEF studies, a bit of what the academic literature says and the insights of the folks we’ve interviewed, and we’ll provide a couple intriguing possibilities.   That will be on top of – not in place of – our regular features.

See you then!

Dear friends,

And now, we wait.  After the frenzy of recent months, that seems odd and unnatural.

Will and his minions wait for the holidays, anxious for the last few weeks of school to pass but secure in the knowledge that their folks are dutifully keeping the retail economy afloat.

Photo by Drew Barnes ’14, Augustana Photo Bureau

My colleagues at Augustana are waiting for winter and then for spring.  The seemingly endless string of warm, dry weeks has left much of our fall foliage intact as we enter December. As beautiful as it is, we’re sort of rooting for winter, or at least the hope of seasonal weather, to reassert itself. And we’re waiting for spring, when the $13 million renovation of Old Main will be complete and we escape our warren of temporary offices and ersatz classrooms. I’ve toured the half-complete renovation. It’s going to be so cool.

And investors wait. Most of us are waiting for a resolution of “the fiscal cliff” (alternately: fiscal slope, obstacle course, whatchamacallit or, my favorite, Fiscal Clifford the Big Red Dog), half fearful that they won’t find a compromise and half fearful that they will.

Then there are The Two Who Wouldn’t Wait. And they worry me. A lot. We’ve written for a year or so about our concerns that the bond market is increasingly unstable. That concern has driven our search for tools, other than Treasuries or a bond aggregate, that investors might use to manage volatility. In the past month, the urgency of that search has been highlighted by The Two. One of The Two is Jeffrey Gundlach, founder of the DoubleLine funds and widely acknowledged as one of the best fixed-income managers anyway. Gundlach believes that “[d]eeply indebted countries and companies, which Gundlach doesn’t name, will default sometime after 2013” (Bond Investor Gundlach Buys Stocks, Sees ‘Kaboom’ Ahead, 11/30/2012). Gundlach says, “I don’t believe you’re going to get some sort of an early warning. You should be moving now.”  Gundlach, apparently, is moving into fine art.

GMO, the other of The Two, has moved. GMO (Grantham, Mayo, van Otterloo) has an outstanding record for anticipating asset class crashes. They moved decisively in 2000 and again in 2007, knowing that they were likely early and knowing that leaving the party early would cost them billions (one quarter of the firm’s assets) as angry investors left. But when the evidence says “run,” they ran. In a late-November interview with the Financial Times, GMO’s head of asset allocation revealed that, firm-wide, GMO had sold off all of their bond holdings (GMO abandons bond market, 11/26/2012). “We’ve largely given up on traditional fixed income,” Inker says, including government and corporate debt in the same condemnation. They don’t have any great alternatives (high quality US stocks are about the best option), but would prefer to keep billions in cash to the alternatives.

I don’t know whether you should wait. But I do believe that you should acquaint yourself with those who didn’t.

The Last Ten: PIMCO in the Past Decade

In October we launched “The Last Ten,” a monthly series, running between now and February, looking at the strategies and funds launched by the Big Five fund companies (Fido, Vanguard, T Rowe, American and PIMCO) in the last decade.

Here are our findings so far:

Fidelity, once fabled for the predictable success of its new fund launches, has created no compelling new investment option and only one retail fund that has earned Morningstar’s five-star designation, Fidelity International Growth (FIGFX).  We suggested three causes: the need to grow assets, a cautious culture and a firm that’s too big to risk innovative funds.

T. Rowe Price continues to deliver on its promises.  Of the 22 funds launched, only Strategic Income (PRSNX) has been a consistent laggard; it has trailed its peer group in four consecutive years but trailed disastrously only once (2009).  Investing with Price is the equivalent of putting a strong singles-hitter on a baseball team; it’s a bet that you’ll win with consistency and effort, rather than the occasional spectacular play.

And just as you’re about to conclude that large fund companies will necessarily produce cautious funds that can aspire just to “pretty good,” along comes PIMCO.  PIMCO was once known as an almost purely fixed-income investor.  Its flagship PIMCO Total Return Fund has gathered over a quarter trillion dollars in assets and tends to finish in the top 10% of its peer group over most trailing time periods.

But PIMCO has become more.  This former separate accounts managers for Pacific Life Insurance Company now declares, “We continue to evolve. Throughout our four decades we have been pioneers and continue to evolve as a provider of investment solutions across all asset classes.”

Indeed they have.  PIMCO has spent more time thinking about, and talking about, the global economic future than any firm other, perhaps, than GMO.  More than talk about the changing sources of alpha and the changing shape of risk, PIMCO has launched a bunch of unique funds targeting emerging challenges and opportunities that other firms would prefer simply to ignore (or to eventually react to).

Perhaps as a result, PIMCO has created more five-star funds in the last decade than any other firm and, among larger firms, has a greater fraction of their funds earning four- or five-stars than anyone else.  Here’s the snapshot:

• PIMCO has 84 funds (which are sold in over 536 packages or share classes)
• 56 of their funds were launched in the past decade
• 61 of them are old enough to have earned Morningstar ratings
• 20 of them have five-star ratings (as of 11/14/12)
• 15 more earned four-star ratings.

How likely this that?  In each Morningstar category, the top 10 percent of funds receive five stars, the next 22.5 percent receive four stars, and the next 35 percent receive three.  In the table below, those are the “expected values.”  If PIMCO had just ordinary skill or luck, you’d expect to see the numbers in the expected values column.  But you don’t.

Only their RealRetirement funds move between bad and mediocre, and even those funds made yet be redeemed.  The RealRetirement funds, like PIMCO’s other “Real” funds, are designed to be especially sensitive to inflation.  That’s the factor that poses the greatest long-term risk to most of our portfolios, especially as they become more conservative.  Until we see a sustained uptick in inflation, we can’t be sure of how well the RealRetirement funds will meet their mandates.  But, frankly, PIMCO’s record counsels patience.

Here are all of the funds that PIMCO has launched in the last 10 years, which their Morningstar rating (as of mid-November, 2012), category and approximate assets under management.

In January, we’ll continue the series of a look at Vanguard.  We know that Vanguard inspires more passion among its core investors than pretty much any other firm.  Since we’re genial outsiders to the Vanguard culture, if you’ve got insights, concerns, tips, kudos or rants you’d like to share, dear Bogleheads, drop me a note.

RiverPark Long/Short Opportunity Conference Call

Volatility is tremendously exciting for many investment managers.  You’d be amazed by the number who get up every morning, hoping for a market panic.  For the rest of us, it’s simply terrifying.

For the past thirty years, the simple, all-purpose answer to unacceptable volatility has been “add Treasuries.”  The question we began debating last spring is, “where might investors look if Treasuries stop functioning as the universal answer?”  We started by looking at long/short equity funds as one possible answer.  Our research quickly led to one conclusion, and slowly to a second.

The quick conclusion: long/short funds, as a group, are a flop. They’re ridiculously expensive, with several dozen charging 2.75% or more plus another 1.5-2% in short interest charges.  They offered some protection in 2008, though several did manage to lose more that year than did the stock market.  But their longer term returns have been solidly dismal.  The group returned 0.15% over the past five years, which means they trailed far behind the stock market, a simple 60/40 hybrid, moderate allocation funds, very conservative short-term bond funds . . . about the only way to make this bunch look good is to compare them to “market neutral” funds (whose motto seems to be, “we can lose money in up markets and down!”).

The slower conclusion: some long-short funds have consistently, in a variety of markets, managed to treat their investors well and a couple more show the real promise of doing so. The indisputable gold standard among such funds, Robeco Long Short (BPLEX) returned 16% annually over the past five years.  The second-best performer, Marketfield (MFLDX) made 9% while funds #3 (Guggenheim Alpha) and #4 (Wasatch Long/Short) made 4%. Sadly, BPLEX is closed to new investors, Guggenheim has always had a sales load and Marketfield just acquired one. Wasatch Long-Short (FMLSX), which we first profiled three years ago, remains a strong, steady performer with reasonable expenses.

Ultimately we identified (and profiled) just three, newer long-short funds worthy of serious attention: Marketfield, RiverPark Long/Short Opportunity (RPLSX) and ASTON/River Road Long Short (ARLSX).

For about an hour on November 29th, Mitch Rubin, manager of RiverPark Long/Short Opportunity(RLSFX) fielded questions from Observer readers about his fund’s strategy and its risk-return profile.  Nearly 60 people signed up for the call.

For folks interested but unable to join us, here’s the complete audio of the hour-long conversation.  It starts with Morty Schaja, RiverPark’s president, talking about the fund’s genesis and Mr. Rubin talking about its strategy.  After that, I posed five questions of Rubin and callers chimed in with another half dozen.

If you’d like a preview before deciding whether you listen in, you might want to read our profile of RLSFX (there’s a printable .pdf of the profile on RiverPark’s website).  Here are some of the highlights of the conversation:

Rubin believes that many long/short mutual fund managers (as opposed to the hedge fund guys) are too timid about using the leverage allowed them.  As a result, they’re not able to harvest the full returns potential of their funds.  Schaja describes RLSFX’s leverage as “moderate,” which generally means having investments equal to 150-200% of assets.

The second problem with long/short managers as a group, he believes, is that they’re too skittish.  They obsess about short-term macro-events (the fiscal cliff) and dilute their insights by trying to bet for or against industry groups (by shorting ETFs, for example) rather than focusing on identifying the best firms in the best industries.

One source of RLSFX’s competitive advantage is the team’s long history of long investing.  They started following many of the firms in their portfolio nearly two decades ago, following their trajectory from promising growth stocks (in which they invested), stodgy mature firms (which they’d sold) and now old firms in challenged industries (which are appearing in the short portfolio).

A second source of advantage is the team’s longer time horizon.  Their aim is to find companies which might double their money over the next five years and then to buy them when their price is temporarily low.

I’d like to especially thank Bill Fuller, Jeff Mayer and Richard Falk for the half dozen really sharp, thoughtful questions that they posed during the closing segment.  If you catch no other part of the call, you might zoom in on those last 15 minutes to hear Mitch and the guys in conversation.

Mr. Rubin is an articulate advocate for the fund, as well as being a manager with a decades-long record of success.  In addition to listening to his conversation, there are two documents on the Long/Short fund’s homepage that interested parties should consult.  First, the fund profile has a lot of information about the fund’s performance back when it was a hedge fund which should give you a much better sense of its composition and performance over time.  Second, the manager’s commentary offers an intriguing list of industries which they believe to be ascendant or failing.  It’s sort of thought-provoking.

Conference Calls Upcoming: Great managers on-deck

As promised, we’re continuing our moderated conference calls through the winter.  You should consider joining in.  Here’s the story:

• Each call lasts about an hour
• About one third of the call is devoted to the manager’s explanation of their fund’s genesis and strategy, about one third is a Q&A that I lead, and about one third is Q&A between our callers and the manager.
• The call is, for you, free.  Your line is muted during the first two parts of the call (so you can feel free to shout at the danged cat or whatever) and you get to join the question queue during the last third by pressing the star key.

Our next conference call features Matt Moran and Dan Johnson, co-managers of ASTON / River Road Long Short (ARLSX).   I’ve had several conversations with the team and they strike me as singularly bright, articulate and disciplined.  When we profiled the fund in June, we noted:

The strategy’s risk-management measures are striking.  Through the end of Q1 2012, River Road’s Sharpe ratio (a measure of risk-adjusted returns) was 1.89 while its peers were at 0.49.  Its maximum drawdown (the drop from a previous high) was substantially smaller than its peers, it captured less of the market’s downside and more of its upside, in consequence of which its annualized return was nearly four times as great.

Among the crop of newer offerings, few are more sensibly-constructed or carefully managed that ARLSX seems to be.  It deserves attention.

If you’d like to share your attention with them, our call with ASTON / River Road Long  Short is Monday, December 17, from 7:00 – 8:00 Eastern.  To register for the call, just click on this link and follow the instructions.  I’ll send a reminder email on the day of the call to all of the registered parties.

As a service to our readers, we’ve constructed a mailing list that we’ll use to notify folks of upcoming conference call opportunities.  If you’d like to join but haven’t yet, feel free to drop me a note.

Fidelity’s Advice to Emerging Markets Investors: Avoid Us

Fidelity runs several distinct sets of funds, including Fidelity, Fidelity Advisor, Fidelity Select, and Fidelity Series.  In many ways, the most interesting are their Strategic Adviser funds which don’t even bear the Fidelity name.  The Strategic Adviser funds are “exclusive to clients of Portfolio Advisory Services. . . They allow Strategic Advisers to hire (and fire) sub-advisers as well as to buy, sell, and hold mutual funds and exchange-traded funds (ETFs) within the fund.”  In short, these are sort of “best ideas”  funds, two of which are funds of funds.

Which led to the question: would the smartest folks Fidelity could find, who could choose any funds around which to build a portfolio, choose Fidelity?

In the case of emerging markets, the answer is “uhh … no.”  Here’s the portfolio for Strategic Advisers Emerging Markets Fund of Funds (FLILX).

What should you notice?

1. The fund’s managers seem to find many funds more compelling than Fidelity Emerging Markets, and so it ends up sixth on the list.  Fidelity’s corporate folks seem to agree and they replaced the long-time manager of this one-star fund in mid October, 2012.
2. Measured against the March 2012 portfolio, Fidelity E.M. has seen the greatest decrease in its weighing (about 3.2%) of any fund in the portfolio.
3. Missing entirely from the list: Fidelity’s entire regional lineup including China Region, Emerging Asia, Emerging Middle East and Latin America.
4. For that matter, missing entirely from the list are anything but diversified large cap emerging markets stock funds.

Fidelity does noticeably better in the only other Strategic Advisers fund of funds, the Strategic Advisers^® Income Opportunities Fund of Funds (FSADX).

Why, exactly, the managers have invested in three different classes of the same Fidelity fund is a bit unclear but at least they are willing to invest with Fido.  It may also speak to the continuing decline of the Fidelity equity-investing side of the house while fixed-income becomes increasingly

A Site Worth Following: Learn Bonds

Junior Yearwood, our friend and contributing editor who has been responsible for our Best of the Web reviews, has been in conversation with Marc Prosser, a Forbes contributor and proprietor of the Learn Bonds website.  While the greatest part of Marc’s work focuses broadly on bond investing, he also offers ratings for a select group of bond mutual funds.  He has a sort of barbell approach, focusing on the largest bond fund companies and on the smallest.  His fund ratings, like Morningstar’s analyst ratings, are primarily qualitative and process-focused.

Marc doesn’t yet have data by which to assess the validity of his ratings (and, indeed, is articulately skeptical of that whole venture), so we can’t describe him as a Best of the Web site.  That said, Junior concluded that his site was clean, interesting, and worth investigating.  It was, he concluded, a new and notable site.

Launch Alert: Whitebox Long Short Equity (WBLSX,WBLRX,WBLFX)

On November 1, Whitebox Advisors converted their Whitebox Long Short Equity Partners hedge fund into the Whitebox Long Short Equity Fund which has three share classes.  As a hedge fund, Whitebox pretty much kicked butt.  From 2004 – 2012, it returned 15.8% annually while the S&P500 earned 5.2%.  At last report, the fund was just slightly net-long with a major short against the Russell 2000.

There’s great enthusiasm among the Observer’s discussion board members about Whitebox’s first mutual fund, Whitebox Tactical Opportunities (WBMAX) , which strongly suggests this one warrants some attention, if only from advisors who can buy it without a sales load. The Investor shares carry at 4.5% front load, 2.48% expense ratio and a $5000 minimum initial investment.  You might check the fund’s homepage for additional details.

Observer Fund Profiles

Had I mentioned that we visited RiverNorth?

Each month the Observer provides in-depth profiles of between two and four funds.  Our “Most Intriguing New Funds” are funds launched within the past couple years that most frequently feature experienced managers leading innovative newer funds.  “Stars in the Shadows” are older funds that have attracted far less attention than they deserve.  This month’s lineup features

Artisan Global Equity Fund (ARTHX):  you know a firm is in a good place when the most compelling alternatives to one of their funds are their other funds.  Global, run by Mark Yockey and his team, extends on the long-term success of Artisan International and International Small Cap.

RiverNorth Dynamic Buy Write (RNBWX): one of the most consistently successful (and rarely employed) strategies for managing portfolios in volatile markets is the use of covered calls.  After spending several hours with the RiverNorth team and several weeks reading the research, we may have an answer to a version of the old Ghostbusters question, “who you gonna (covered) call?”

Funds in Registration

New mutual funds must be registered with the Securities and Exchange Commission before they can be offered for sale to the public.  The SEC has a 75-day window during which to call for revisions of a prospectus; fund companies sometimes use that same time to tweak a fund’s fee structure or operating details.  Every day we scour new SEC filings to see what opportunities might be about to present themselves. Many of the proposed funds offer nothing new, distinctive or interesting.  Some are downright horrors of Dilbertesque babble.

Funds in registration this month won’t be available for sale until, typically, the beginning of February 2013. Since firms really like launching by December 31^st if they can, the number of funds in the pipeline is modest: seven this month, as compared to 29 last month.  That said, two of the largest fixed-income teams are among those preparing to launch:

DoubleLine Floating Rate Fund, the tenth fund advised or sub-advised by DoubleLine, will seek a high level of current income by investing in floating rate loans and “other floating rate investments.”  The fund will be managed by Bonnie Baha and Robert Cohen.  Ms. Baha was part of Mr. Gundlach’s original TCW team and co-manages Multi-Asset Growth, Low-Duration Bond and ASTON/DoubleLine Core Plus Fixed Income.

PIMCO Emerging Markets Full Spectrum Bond Fund will invest in “a broad range of emerging market fixed income asset classes, such as external debt obligations of sovereign, quasi-sovereign, and corporate entities; currencies, and local currency-denominated obligations of sovereigns, quasi-sovereigns, and corporate issuers.”  The manager has not yet been named but, as we noted in our lead story, the odds are that this is going to be a top-of-class performer.

Details on these funds and the list of all of the funds in registration are available at the Observer’s Funds in Registration page or by clicking “Funds” on the menu atop each page.

On a related note, we also tracked down 40 fund manager changes, down from last month’s bloodbath in which 70 funds changed management.

The Observer in the News

Last month, we ran our annual Honor Roll of Consistently Bearable Funds, which asks the simple question:  “which mutual funds are never terrible?”  Our basic premise is that funds that earn high returns but crash periodically are, by and large, impossible for investors to hold.  And so we offered up a list of funds that have avoided crashing in any of the past ten years.  As it turns out, by managing beta, those funds ended up with substantial alpha.  In English: they made good money by avoiding losing money.

Chuck Jaffe has been looking at a related strategy for years, which led him to talk about and elaborate on our article.  His story, “A fund-picking strategy for nervous investors,” ran on November 19^th, ended up briefly (very briefly: no one can afford fifteen minutes of fame any more) on the front page of Google News and caused a couple thousand new folks to poke their heads in at the Observer.

Briefly Noted . . .

Artisan Partners has again filed for an initial public offering.  They withdrew a 2011 filing in the face of adverse market conditions.  Should you care?  Investors can afford to ignore it since it doesn’t appear that the IPO will materially change operations or management; it mostly generates cash to buy back a portion of the firm from outsiders and to compensate some of the portfolio guys.  Competitors, frankly, should care.  Artisan is about the most successful, best run small firm fund that I know of: they’ve attracted nearly $70 billion in assets, have a suite of uniformly strong funds, stable management teams and a palpable commitment to serving their shareholders.  If I were in the business, I’d want to learn a lot – and think a lot – about how they’ve managed that feat.  Sudden access to a bunch more information would help.

One of The Wall Street Journal columnists surveyed “financial advisers, mutual-fund experts and academics” in search of the five best books for beginning investors.  Other than for the fact that they missed Andrew Tobias’s The Only Investment Guide You’ll Ever Need, it’s a pretty solid list with good works from the efficient market and behavioral finance folks.

SMALL WINS FOR INVESTORS

Clipper (CFIMX), Davis New York Venture (NYVTX), and Selected American Shares (SLASX) have waived their 30-day trading restriction for the rest of 2012, in case investors want to do some repositioning in anticipation of higher capital gains tax rates in 2013.

Dreyfus/The Boston Company Small Cap Growth (SSETX) reopened to new investors on Nov. 1.

Victoria 1522 (VMDIX/VMDAX), an emerging markets stock fund, is cutting its expense ratio by 40 basis points. That’s much better news than you think. Glance at Morningstar’s profile of the lower-minimum Advisor shares and you’ll see a two-star fund and move on.  That reading is, for two reasons, short-sighted.  First, the lower expense ratio would make a major difference; the institutional shares, at 25 bps below the Advisor shares, gain a star (as of 11/30/12) and this reduction gives you 40 bps.  Second, the three-year record masks an exceedingly strong four-plus year record.  From inception (10/08) through the end of 11/12, Victoria 1522 would have turned a $10,000 investment into $19,850.  Its peer over the same period would have returned $13,500. That’s partly attributable to good luck: the fund launched in October 2008 and made about 3% in the quarter while its peers dropped nearly 21%.  Even excluding that great performance (that is, looking at 1/09 – 11/12), the fund has modestly outperformed its peer group despite the drag of its soon-to-be-lowered expenses.  ManagerJosephine Jiménez has a long, distinguished record, including long stints running Montgomery Asset Management’s emerging markets division.  (Thanks to Jake Mortell of Candlewood Advisory for the heads up!)

Wells Fargo has reopened the Class A shares of its Wells Fargo Advantage Dow Jones Target funds: Target Today, 2010, 2020, 2030 and 2040.

CLOSINGS

AllianceBernstein Small Cap Growth (QUASX) will close to new investors on January 31, 2013. That’s all I noticed this month.

OLD WINE, NEW BOTTLES

Calvert Enhanced Equity (CMIFX) will be renamed Calvert Large Cap Core in January 2013.

Actually, this one is a little bit more like “old vinegar in new bottles.”  Dominion Insight Growth Fund was reorganized into the Shepherd Large Cap Growth Fund in 2002.  Shepherd LCG changed its name to the Shepherd Fund in 2008. Then Shepherd Fund became Foxhall Global Trends Fund in 2009, and now Foxhall Global Trends has become Fairfax Global Trends Fund (DOIGX). In all of the name changes, some things have remained constant: low assets, high expenses, wretched performance (they’ve finished in the 98^th -99^th percentile for the trailing one, three, five and ten year periods).

Forward Aggressive Growth Allocation Fund became Forward Multi-Strategy Fund on December 3, 2012, which is just a bit vanilla. The 50 other multi-strategy funds in Morningstar’s database include Dynamic, Ethical, Global, Hedged and Progressive flavors of the marketing flavor du jour.

In non-news, Marathon Value Portfolio (MVPFX) is moving from the Unified Series Trust to  Northern Lights Fund Trust III. That’s their third move and I mention it only because the change causes the SEC to flag MVPFX as a “new” fund.  It isn’t new, though it is a five-star, “Star in the Shadows” fund and worth knowing about.

Wells Fargo Advantage Total Return Bond (MBFAX) will be renamed Wells Fargo Advantage Core Bond sometime in December.

OFF TO THE DUSTBIN OF HISTORY

Geez, the dustbin of history is filling up fast . . .

BNY Mellon Intermediate U.S. Government (MOVIX) is merging into BNY Mellon Intermediate Bond (MIIDX) in February, though the manager is the same for both funds.

Buffalo plans to merge Buffalo China (BUFCX) into Buffalo International (BUFIX) in January, 2013. The fund was originally sub-advised by Jayhawk Capital and I long ago wrote a hopeful profile of the then-new fund. Jayhawk ran it for three years, making huge amounts twice (2007 and 2009), lost a huge amount once (2008), lived in the basement of a highly volatile category and were replaced in 2009 by an in-house management team. The fund has been better but never rose to “good” and never drew assets.

Dreman is killing off five of the six funds: Contrarian International Value (DRIVX), Contrarian Mid Cap Value (DRMVX), Contrarian Value Equity (DRVAX), High Opportunity (DRLVX), and Market Over-Reaction (DRQLX).  Mr. Dreman has a great reputation and had a great business sub-advising load-bearing funds.  Around 2003, Dreman launched a series of in-house, no-load funds.  That experiment, by and large, failed.  The funds were rebranded and repriced, but never earned their way.  The fate of their remaining fund, Dreman Contrarian Small Cap Value (DRSVX), is unknown.

Dreyfus/The Boston Company Small Cap Tax-Sensitive Equity (SDCEX) will liquidate on January 8, 2013 and Dreyfus Small Cap (DSVAX) disappears a week later. Dreyfus is also liquidating a bunch of money market and state bond funds.

Fidelity is pulling a rare 5:1 reverse split by merging Tax Managed Stock (FTXMX), Advisor Strategic Growth (FTQAX), Advisor 130/30 Large Cap (FOATX), and Large Cap Growth (FSLGX) into Fidelity Stock Selector All Cap (FSSKX).

Guggenheim Flexible Strategies (RYBSX) (formerly Guggenheim Long Short Interest Rate Strategies) is slated to merge into Guggenheim Macro Opportunities (GIOAX).

Henderson Global is liquidating their International All Cap Equity (HFNAX) and the Japan Focus (HFJAX) funds in December.

Legg Mason has decided to liquidate Legg Mason Capital Management Disciplined Equity Research (LGMIX), likely on the combination of weak performance and negligible assets.

Munder International Equity (MUIAX) will merge into Munder International Core Equity (MAICX) on Dec. 7.

The board of Northern Funds approved the liquidation of Northern Global Fixed Income (NOIFX) for January 2013.

Pear Tree Columbia Micro Cap (MICRX) just liquidated.  They gave the fund all of one year before declaring it to be a failed experiment.

RidgeWorth plans to merge RidgeWorth Large Cap Core Growth Stock (CRVAX) will be absorbed by RidgeWorth Large Cap Growth Stock (STCIX).

Turner is merging Turner Concentrated Growth (TTOPX) into Turner Large Growth (TCGFX) in early 2013.

Westwood has decided to liquidate Westwood Balanced (WHGBX) less than a year after the departure of longtime lead manager Susan Byrne.

In February, Wells Fargo Advantage Diversified Small Cap (NVDSX) disappears into Wells Fargo Advantage Small Company Growth (NVSCX), Advantage Equity Value (WLVAX) into Advantage Intrinsic Value (EIVAX) and Advantage Small/Mid Cap Core (ECOAX) into Advantage Common Stock (SCSAX).

Well Fargo is also liquidating its Wells Fargo Advantage Core builder Series (WFBGX) in early 2013.

Coming Attractions!

The Observer is trying to help two distinct but complementary groups of folks.  One group are investors who are trying to get past all the noise and hype.  (CNBC’s ratings are dropping like a rock, which should help.)  We’re hoping, in particular, to help folks examine evidence or possibilities that they wouldn’t normally see.  The other group are the managers and other folks associated with small funds and fund boutiques.  We believe in you.  We believe that, as the industry evolves, too much emphasis falls on asset-gathering and on funds launched just for the sake of dangling something new and shiny (uhh … the All Cap Insider Sentiment ETF).  We believe that small, independent funds run by smart, passionate investors deserve a lot more consideration than they receive.  And so we profile them, write about them and talk with other folks in the media about them.

As the Observer has become a bit more financially sustainable, we’re now looking at the prospect of launching two sister sites.  One of those sites will, we hope, be populated with the best commentaries gathered from the best small fund managers and teams that we can find.  Many of you folks write well and some write with grace that far exceeds mine.  The problem, managers tell me, is that fewer people than you’d like find their way to your sites and to your insights.

Our technical team, which Chip leads, thinks that they can create an attractive, fairly vibrant site that could engage readers and help them become more aware of some of the smaller fund families and their strategies.  We respect intellectual property, and so we’d only use content that was really good and whose sharing was supported by the adviser.

That’s still in development.  If you manage a fund or work in support of one and would like to participate in thinking about what would be most helpful, drop Chip a note and we’ll find a way to think through this together.  (Thanks!)

Small cap funds tend to have their best performance in the first six weeks of each year and so we’re planned a smallcapfest for our January issue, with new or revised profiles of the most sensible small cap funds as well as a couple outside perspectives on where you might look.

In Closing . . .

I wanted to share leads on three opportunities that you might want to look in on.  The Observer has no financial stake in any of this stuff but I like sharing word of things that strike me as really first-rate.

QuoteArts.com is a small shop that consistently offers a bunch of the most attractive, best written greeting cards (and refrigerator magnets) that I’ve seen.  Steve Metivier, who runs the site, gave us permission to reproduce one of their images (normally the online version is watermarked):

The text reads “A time to quiet our hearts… (inside) to soften our edges, clear our minds, enjoy our world, and to share best wishes for the season. May these days and all the new year be joyful and peaceful.”  It strikes me as an entirely-worthy aspiration.

The best book there is on the subject of practical persuasion is Robert Cialdini’s Influence: The Psychology of Persuasion (revised edition, 2006).  Even if you’re not impressed that I’ve used the book in teaching persuasion over the past 20 years, you might be impressed by Charlie Munger’s strong endorsement of it.  In a talk entitled “The Psychology of Human Misjudgment,” Munger reports being so impressed with Cialdini’s work that he read the book, gave copies of it to all his children and sent Cialdini (“chawl-dee-nee,” if you care) a share of Berkshire Hathaway in thanks.   Cialdini has since left academe, founded the consulting group Influence at Work and now offers Principles of Persuasion workshops for professionals and the public. While I have not researched the workshops in any depth, I suspect that if I were a small business owner, marketer or financial planner who needed to both attract clients and change their behavior for the better. I’d take a serious look.

Finally, at Amazon’s invitation, I contributed an essay that will be posted at their new “Money and Markets” store from December 5th until about the 12th.  Its original title was, “It’s time to go,” but Amazon’s project director and I ended up settling on the less alarming “Trees don’t grow to the sky.”  If you’ve shopped at, say, Macy’s, you’re familiar with the store-within-a-store notion: free-standing, branded specialty shops (Levenger’s, LUSH, FAO Schwarz) operating within a larger enterprise.  It looks like Amazon is trying an experiment in the same direction and, in November, we mentioned their “Money and Markets” store.  Apparently the Amazonians noticed the fact that some of you folks went to look around, they followed your footprints back here and did some reading of their own.  One feature of the Money and Markets store is a weekly guest column and the writers have included Jack Bogle and Tadas Viskanta, the founder of Abnormal Returns which is one of the web’s two best financial news aggregators.  In any case, they asked if I’d chip in a piece during the second week of December.   We’re not allowed to repost the content for a week or so, but I’ll include it in the January cover essay.  Feel free to drop by if you’re in the area.

In the meanwhile, I wanted to extend sincere thanks from all of the folks here (chip, Anya, Junior, Accipiter and me) for the year you’ve shared with us.  You really do make it all worthwhile and so blessings of the season on you and yours.

As ever,

Dear friends,

The trees have barely begun to change color here in Iowa. The days are warm, football is in the air (had I mentioned that my son Will had a running touchdown on offense and a nifty interception on defense this week?) and dentists everywhere are gearing up for Halloween. It’s an odd time, then, for investors to be concerned with Santa Claus.

The Quad at Augustana College in early autumn

And yet they are. The broad market indexes are up 2.5% in September (typically a rocky month), 16.2% year-to-date and 30% over the past 12 months. In a normal year, investors would hold their breaths through October and then look with happy anticipation to the arrival of “the Santa Claus rally.” In 80 of the past 100 years, stocks have risen in December, generally by a bit more than 2%.

The question folks are raising this year seems worth pondering: will the intersection of a bull run with a fiscal cliff make for a distinctly Grinchy end of the year? Will even the suspicion of such an outcome make enough folks lighten their stock exposure to trigger a rare year-end market sag?

I don’t know, but the prospect makes me especially grateful for the opportunity to enjoy the company of my students and the fading warmth of the harvest season.

The Last Ten: Fidelity’s New Fund Launches Since 2002

“The Last Ten” will be a monthly series, running between now and February, looking at the strategies and funds launched by the Big Five fund companies (Fido, Vanguard, T Rowe, American and PIMCO) in the last decade.  We start this month with Fidelity, the Beantown Behemoth.

There was, at one time, few safer bets than a new Fidelity fund.  New Fido funds had two things going from them: (1) Fidelity could afford to buy and support the brightest young managers around and (2) older Fidelity funds might, by happenstance, choose to buy a stock recently purchased by the new fund.  The size of those purchases could cause a stock’s price to spike, much to the profit of its early owners.  The effect was consistent enough that it became the subject of newsletters and academic studies.

Which leads us to the question: when was the last time that Fidelity launched a compelling fund?  You know, one-of-a-kind, innovative, must-have, that sort of thing?

Might it have been New Millenium (FMILX), 20 years ago?  If not, what?

Here’s an easier question: when was the last time that Fidelity launched a fund which now carries a five-star rating from Morningstar?

Answer: five years ago, with the launch of Fidelity International Growth (FIGFX) in November of 2007. It’s a fund so low-profile that it doesn’t appear in any of Fidelity’s advertising and is not covered by any of Morningstar’s analysts.  The only other five star fund launched by Fido in a decade is an institutional bond index fund, Spartan Intermediate Term Bond Index (FIBIX), December 2005.

That’s not to say that Fidelity hasn’t been launching funds.  They have.  Hundreds of them.  They’re just not very good.

It’s hard to generate an exact count of Fidelity’s new fund launches because some apparently new funds are just older funds being sold through new channels, such as the launch of a Fidelity Advisor fund that’s just a version of an older Fidelity one.

That said, here’s a rough 10 year total.  Fidelity has launched 154 new mutual funds in a decade.  Those appear as Fidelity, Fidelity Advisor, Fidelity Series and Strategic Adviser funds.  Taking the various share classes into account, Fido made 730 new packages available in the decade.

That includes:

26 Fidelity funds for retail investors

18 Fidelity Series funds – which are available for purchase only by other Fidelity funds.  The most amazing development there is the imminent launch of new funds for Joel Tillinghast and Will Danoff.  Mr. T has brilliantly managed the $35 billion Low Priced Stock (FLPSX) since 1989.  He recently completed a sabbatical, during which time the fund was run by a team.  The team has been retained as co-managers as part of what Fidelity admits is “succession planning.”  He’ll now also manage Intrinsic Opportunities.  Will Danoff, who manages the $85 billion Contrafund (FCNTX) and $20 billion Advisor News Insights (FNIAX) funds, is being asked to manage Opportunistic Insights.

20 Strategic Advisers funds (e.g. SMid Cap Multi-manager) – which rely on non-Fidelity managers.

9 Spartan index funds, some of which overlap Series index funds.

58 Fidelity Advisor funds – some (Advisor Small Cap Value) of which are near-duplicates of other Fidelity funds. But, it turns out that a fair number are either unique to the Advisor lineup or are distinct from their Fidelity sibling. The 14 “Income Replacement” series, for example, are distinct to the Advisor line. Will Danoff’s Advisor New Insights fund, for example, is not a clone of Contrafund.  Advisor Midcap II A is sort of a free agent. Advisor Value Leaders is bad, but unparalleled.

13 “W” class Freedom Index funds are another distinct adviser-only set, which have the same target dates as the Freedom series but which execute exclusively through index funds.

How good are those funds?  They’re definitely “not awful.”  Of the 730 new fund packages, 593 have earned Morningstar ratings.  Morningstar awards five stars to the top 10% of funds in a group and four stars to the next 22.5%.  By sheer coincidence, you’d expect Fido to have fielded 59 new five-star funds.  They only have 18.  And you’d expect 192 to have four or five star ratings.  They managed 118.  Which is to say, new Fidelity funds are far less likely to be excellent than either their storied past or pure chance would dictate.

The same pattern emerges if you look at Morningstar’s “gold” rating for funds, their highest accolade.  Fidelity has launched nine “Gold” funds in that period – all are either bond funds, or index funds, or bond index funds.  None is retail, and none is an actively-managed stock or hybrid fund.

Why the apparent mediocrity of their funds?  I suspect three factors are at work.  First, Fidelity is in the asset-gathering business now rather than the sheer performance business.  The last thing that institutional investors (or even most financial planners) want are high-risk, hard-to-categorize strategies.  They want predictable packages of services, and Fidelity is obliged to provide them.  Second, Fidelity’s culture has turned cautious.  Young managers are learning from early on that “safe is sane.”  If that’s the case, they’re not likely to be looking for the cutting edge of anything.  The fact that they’re turning to overworked 25-year veterans to handle new in-house funds might be a sign of how inspiring the Fidelity “bench” has become.  Third and finally, Fidelity’s too big to pursue interesting projects.  It’s hard for any reasonably successful Fidelity fund to stay below a billion in assets, which means that niche strategies and those requiring nimble funds are simply history.

Bottom line: the “Fidelity new-fund effect” seems history, as Fidelity turns more and more to index funds, repackaged products and outside managers.  But at least they’re unlikely to be wretched, which brings us to …

The Observer’s Annual “Roll Call of the Wretched”

It’s the time of year when we pause to enjoy two great German traditions: Oktoberfest and Schadenfreude.  While one of my favorites, Leinenkugel’s Oktoberfest, was shut out (Bent River Brewery won first, second and third places at the Quad City’s annual Brew Ha Ha festival), it was a great excuse to celebrate fall on the Mississippi.

And a glass of Bent River’s Mississippi Blonde might be just what you need to enjoy the Observer’s annual review of the industry’s Most Regrettable funds.  Just as last year, we looked at funds that have finished in the bottom one-fourth of their peer groups for the year so far.  And for the preceding 12 months, three years, five years and ten years.  These aren’t merely “below average.”  They’re so far below average they can hardly see “mediocre” from where they are.

When we ran the screen in October 2011, there are 151 consistently awful funds, the median size for which is $70 million.  In 2012 there were . . . 151 consistently awful funds, the median size for which is $77 million.

Since managers love to brag about the consistency of their performance, here are the most consistently awful funds that have over a billion in assets.  Funds repeating from last year are flagged in red.

Of these 13, two (DFA and Wells) deserve a pass because they’re very much unlike their peer group.  The others are just billions of bad.

What about funds that didn’t repeat from last year’s list?  Funds that moved off the list:

1. Liquidated – the case of Vanguard Asset Allocation.
2. Fired or demoted the manager and are seeing at least a short term performance bump – Fidelity Advisor Stock Selector Mid Cap (FMCBX ), Fidelity Magellan (FMAGX), Hartford US Government Securities (HAUSX), and Vantagepoint Growth (VPGRX) are examples.
3. They got lucky.  Legg Mason Opportunity “C”, for example, has less than a billion left in it and is doing great in 2012, while still dragging  a 100th percentile ranking for the past three and five years. Putnam Diversified Income (PINDX) is being buoyed by strong performance in 2009 but most of 2011 and 2012 have been the same old, sad story for the fund.

The most enjoyable aspect of the list is realizing that you don’t own any of these dogs – and that hundreds of thousands of poor saps are in them because of the considered advice of training financial professionals (remember: 11 of the 13 are loaded funds, which means you’re paying a professional to place you in these horrors).

Just When You Thought It Couldn’t Get Any Worse

I then refined the search with the Observer’s “insult to injury” criteria: funds that combined wretched performance with above-average to high risk and above average fees.  The good news: not many people trust Suresh Bhirud with their money.  His Apex Mid Cap Growth (BMCGX) had, at last record, $192,546 – $100,000 below last year’s level.  Two-thirds of that amount is Mr. Bhirud’s personal investment.  Mr. Bhirud has managed the fund since its inception in 1992 and, with annualized losses of 9.2% over the past 15 years, has mostly impoverished himself.

Likewise, with Prasad Growth (PRGRX) whose performance graph looks like this:

The complete Roll Call of Wretched:

I have a world of respect for the good folks at Morningstar.  And yet I sometimes wonder if they aren’t being a bit generous with funds they’ve covered for a really long time.  The list above represents funds which, absent wholesale changes, should receive zero – no – not any – zilch investor dollars.  They couple bad performance, high risk and high expenses.

And yet:

Thornburg Value (a “Bronze” fund): “This fund’s modified management team deserves more time.”  What?  The former lead manager retired in 2009.  The current managers have been on-board since 2006.  The fund has managed to finish in the bottom 1 – 10% of its peers every year since.  Why do they deserve more time?

Litman Gregory Masters Value: “This fund’s potential is stronger than its long-term returns suggest.”  What does that mean?  For every trailing time period, it trails more or less 90% of its peers.  Is the argument, “hey, this could easily become a bottom 85^th percentile fund”?

Two words: run away!  Two happier words: “drink beer!”

Chip, the Observer’s technical director, deserves a special word of thanks for her research and analysis on this piece.  Thanks, Chip!

RPHYX Conference Call

For about an hour on September 13^th, David Sherman of Cohanzick Management, LLC, manager of RiverPark Short Term High Yield (RPHYX) fielded questions from Observer readers about his fund’s strategy and its risk-return profile.  Somewhere between 40-50 people signed up for the RiverPark call but only about two-thirds of them signed-in.  For the benefit of folks interested in hearing David’s discussion of the fund, here’s a link to an mp3 version of Thursday night’s conference call. The RiverPark folks guess it will take between 10-30 seconds to load, depending on your connection.  At least on my system it loads in the same window that I’m using for my browser, so you might want to right-click and choose the “open in a new tab” option.

http://78449.choruscall.com/riverpark/riverpark120913.mp3

When you click on the link, the file will load in your browser and will begin playing after it’s partially loaded.

The conference call was a success for all involved.  Once I work out the economics, I’d like to offer folks the opportunity for a second moderated conference call in November and perhaps in alternate months thereafter.  Let me know what you think.

Observer Fund Profiles:

Each month the Observer provides in-depth profiles of between two and four funds.  Our “Most Intriguing New Funds” are funds launched within the past couple years that most frequently feature experienced managers leading innovative newer funds.  “Stars in the Shadows” are older funds that have attracted far less attention than they deserve.  This month’s lineup features

RiverPark Short Term High Yield (RPHYX): RPHYX has performed splendidly since inception, delivering what it promises, a cash management fund capable of generating 300 basis points more than a money market with minimal volatility.  This is an update of our September 2011 profile.

T. Rowe Price Real Assets (PRAFX): a Clark-Kentish sort of fund.  One moment quiet, unassuming, competent then – when inflation roars – it steps into a nearby phone booth and emerges as . . .

Funds in Registration

New mutual funds must be registered with the Securities and Exchange Commission before they can be offered for sale to the public.  The SEC has a 75-day window during which to call for revisions of a prospectus; fund companies sometimes use that same time to tweak a fund’s fee structure or operating details.  Every day we scour new SEC filings to see what opportunities might be about to present themselves.  Many of the proposed funds offer nothing new, distinctive or interesting.  Some are downright horrors of Dilbertesque babble.

Each month, though, there are interesting new no-load retail funds and, more recently, actively managed ETFs.  This month’s funds are due to be launched before the end of 2012.  Two, in particular, caught our attention:

Buffalo Dividend Focus Fund will try to generate “current income” as its primary goal, through reliance on dividends.  That’s a rare move and might reflect some pessimism about the prospects of using bonds for that goal.  GMO, for example, projects negative real returns for bonds over the next 5-7 years.  It’s particularly interesting that John Kornitzer will run the fund.  John has done a really solid job with Buffalo Flexible Income (BUFBX) over the years and is Buffalo’s founder.

RiverNorth/Oaktree High Income Fund is the latest collaboration between RiverNorth and another first-tier specialist.  RiverNorth’s unmatched strength is in using an asset allocation strategy that benefits from their ability to add arbitrage gains from pricing inefficiencies in closed-end funds.  They’re partnering with Oaktree Capital Management, which is best known in the mutual fund world for its find work on Vanguard Convertible Securities (VCVSX).   Oaktree’s principals have been working together since the mid-1980s on “high yield bonds, convertible securities, distressed debt and principal investments.”  They’re managing $78 billion of institutional and private money for folks on four continents.  Their founder, Howard Marks, still writes frequent shareholder letters (a la Jeremy Grantham) which are thoughtful and well-argued (despite the annoying watermark splashed across each page).

Details on these funds and the list of all of the funds in registration are available at the Observer’s Funds in Registration page or by clicking “Funds” on the menu atop each page.

On a related note, we also tracked down 40 fund manager changes, down from last month’s bloodbath in which 70 funds changed management.

WhiteBox, Still in the Box

A number of readers have urged me to look into Whitebox Tactical Opportunities (WBMAX), and I agreed to do a bit of poking around.

There are some funds, and some management teams, that I find immediately compelling.  Others not.

So far, this is a “not.”

Here’s the argument in favor of Whitebox: they have a Multi-Strategy hedge fund which uses some of the same strategies and which, per a vaguely fawning article in Barron’s, returned 15% annually over the past decade while the S&P returned 5%. I’ll note that the hedge fund’s record does not get reported in the mutual funds, which the SEC allows when it believes that the mutual fund replicates the hedge.  And, too, the graphics on their website are way cool.

Here’s the reservation: their writing makes them sound arrogant and obscure.  They advertise “a proprietary, multi-factor quantitative model to identify dislocations within and between equity and credit markets.”  At base, they’re looking for irrational price drops.  They also use broad investment themes (they like US blue chips, large cap financials and natural gas producers), are short both the Russell 2000 (which is up 14.2% through 9/28) and individual small cap stocks, and declare that “the dominant theories about how markets behave and the sources of investment success are untrue.”  They don’t believe in the efficient market hypothesis (join the club).

After nine months, the fund is doing well (up 13% through 9/28) though it’s trailed its peers in about a third of those months.

I’ll try to learn more in the month ahead, but I’ll first need to overcome a vague distaste.

Briefly Noted . . .

RiverPark/Wedgewood Fund (RWGFX) continues to rock.  It’s in the top 2% of all large-growth funds for the past 12 months and has attracted $450 million in assets.  Manager David Rolfe recently shared two analyses of the fund’s recent performance.  Based on Lipper data, it’s the fourth-best performing large growth fund over the past year.  Morningstar data placed it in the top 30 for the past three months.  The fund was also featured in a Forbes article, “Investors will starve on growth stocks alone.”  David is on the short-list of managers who we’d like to draw into a conference call with our readers.  A new Observer profile of the fund is scheduled for November.

Small Wins for Investors

As we noted last month, on Sept. 4, Aston Funds reopened ASTON/River Road Independent Value (ARIVX) to new investors after reallocating capacity to the mutual fund from the strategy’s separate accounts. The firm still intends to close the entire strategy at roughly $1 billion in assets, which should help preserve manager Eric Cinnamond’s ability to navigate the small-cap market.

In a “look before you leap” development, Sentinel Small Company Fund (SAGWX)  reopened to new investors on September 17, 2012.  Except for the fact that the fund’s entire management team resigned six weeks earlier, that would be solidly good news.

Brown Capital Management Small Company (BCSIX) reopened on Sept. 4, 2012.  Morningstar considers this one of the crème de la crème of small growth funds, with both five stars and a “Gold” rating.  It remained closed for less than one year.

CLOSINGS

Loomis Sayles Small Cap Growth (LCGRX) closed to new investors on Sept. 4, 2012.

AQR Risk Parity (AQRNX) will close to new investors on November 16. If you’ve got somewhere between $1 million and $5 million sitting around, unallocated, in your risk-parity investment pot, you might consider this high-minimum fund.

OLD WINE, NEW BOTTLES

American Century Inflation Protection Bond (APOAX) is now American Century Short Duration Inflation Protection Bond, which follows a strategy change that has the fund focusing on, well, short duration bonds.

The former BNY Mellon Mid Cap Stock Fund is now BNY Mellon Mid Cap Multi-Strategy Fund and its portfolio has been divided among several outside managers.

Federated Asset Allocation (FSTBX) will become Federated Global Allocation in December.  It will also be required to invest at least 30% outside the US, about 10% is non-US currently.  The fund’s bigger problem seem more related to a high turnover, high risk strategy than to a lack of exposure to the Eurozone.

Virtus Global Infrastructure (PGUAX) changed its name to Virtus Global Dividend (PGUAX) on September 28, 2012.

That same day, Loomis Sayles Absolute Strategies (LABAX) became Loomis Sayles Strategic Alpha Fund. Loomis had been sued by the advisors to the Absolute Strategies Fund (ASFAX), who thought Loomis might be trading on their good name and reputation.  While admitting nothing, Loomis agreed to a change.

OFF TO THE DUSTBIN OF HISTORY

Columbia has merged too many funds to list – 18 in the latest round and 67 since its merger with RiverSource.  Okay, fine, here’s the list:

• Connecticut Tax-Exempt Fund
• Diversified Bond Fund
• Emerging Markets Opportunity Fund
• Frontier Fund
• Government Money Market Fund
• High Yield Opportunity Fund
• Large Cap Value Fund
• LifeGoal Income Portfolio
• Massachusetts Tax-Exempt Fund
• Mid Cap Growth Opportunity Fund
• Multi-Advisor International Value Fund
• Portfolio Builder Moderate Aggressive Fund
• Portfolio Builder Moderate Conservative Fund
• Select Small Cap Fund
• Small Cap Growth Fund II
• Variable Portfolio – High Income Fund
• Variable Portfolio – Mid Cap Growth Fund
• Variable Portfolio – Money Market Fund

Dreyfus/Standish International Fixed Income Fund is slated to merge into Dreyfus/Standish Global Fixed Income Fund (DHGAX).

In an exceedingly rare move, Fidelity is moving to close three funds with an eye to liquidating them. The Dead Funds Walking are Fidelity Fifty (FFTYX), Fidelity Tax Managed Stock (FTXMX) and Fidelity 130/30 Large Cap (FOTTX). The largest is Fifty, with nearly $700 million in assets. Morningstar’s Janet Yang expressed her faith in Fifty’s manager and opined in April that this was a “persuasive option for investors.” Apparently Fidelity was not persuaded. The other two funds, both undistinguished one-star laggards, had about $100 million between them.

Janus Worldwide (JAWWX) is being merged into Janus Global Research (JARFX) at the start of 2013.  That seems like an almost epochal change: JAWWX was once a platform for displaying the sheer brilliance of its lead manager (Helen Young Hayes), then things crumbled.  Returns cratered, Hayes retired, assets dropped by 90% and now it’s being sucked into a fund run by Janus’s analyst team.

According to her LinkedIn page, Ms. Hayes is now an Advisor at Red Rocks Capital, LLC (their site doesn’t mention her),  Director at HEAF (a non-profit) and Advisor at Q Advisors, LLC (but only in the “advisory” sense, she’s not one of the actual Q Advisors).

Although it’s not mentioned on his LinkedIn page, George Maris – who managed JAWWX to a 5% loss during his tenure while his peers booked a 2% gain – will continue to manage Janus Global Select (JORNX), a desultory fund that he took over in August.

Chuck Jaffe used the Janus closing as a jumping-off point for a broader story about the excuses we make to justify keeping wretched funds.  Chuck does a nice job of categorizing and debunking our rationalizations.  It’s worth reading.

A bunch of small Pyxis funds have vanished: Short-Term Government (HSJAX) and  Government Securities (HGPBX) were both absorbed by Pyxis Fixed Income (HFBAX) which, itself, has a long-term losing record.  International Equity (HIQAX) merged into Pyxis Global Equity (HGMAX), and U.S. Equity (HUEAX) into Pyxis Core America Equity (HCOAX).  All of those funds, save Core America, have very weak long-term records.

Triex Tactical Long/Short Fund (TLSNX) closed on September 4, moved to cash and liquidated on September 27.  Not sure what to say.  It has just $2 million in assets, but it’s less than a year old and has substantially above-average performance (as of early September) relative to its “multialternative” peer group.

Turner Concentrated Growth Fund (yep – that stalwart from the “Roll Call of the Wretched,” above) is being merged into Turner Large Growth Fund (TCGFX).

In Closing . . .

For users of our discussion board, we’re pleased to announce the creation of a comprehensive Users Guide.  As with many of our resources, it’s a gift to the community from one of the members of the community.  In this case, Old Joe, who has many years of experience in technical writing, spent the better part of a month crafting the Guide even as chip and Accipiter kept tweaking the software and forcing rewrites.  OJ’s Guide is clear, visually engaging and starts with a sort of Quick Start section for casual users then an advanced section for folks who want to use the wealth of features that aren’t always immediately observable.

For which chip, Accipiter and I all say “thanks, big guy!  You did good.”

Since launch, the Observer has been read by 99,862 people and our monthly readership is pretty steadily around 8500.  Thanks to you all for your trust and for the insights you’ve shared.  Here’s the obligatory reminder: please do consider using (and sharing) the Observer’s link to Amazon.com.  While it’s easy to make a direct contribution to the Observer, only two or three folks have been doing so in recent months (thanks Gary, glad we could help! And thanks Carl, you’re an ace!) which makes the Amazon program really important.

We’ll look for you in November.  Find a nice harvest festival and enjoy some apples for us!

Dear friends,

Are you feeling better?  2011 saw enormous stock market volatility, ending with a total return of one-quarter of one percent in the total stock market.  Who then would have foreseen Q1 2012: the Dow and S&P500 posted their best quarter since 1998.  The Dow posted six consecutive months of gains, and ended the quarter up 8%.  The S&P finished up 12% and the NASDAQ up 18% (its best since 1991).

Strong performance is typical in the first quarter of any year, and especially of a presidential election year.  Investors, in response, pulled $9.4 billion out of domestic equity funds and – even with inflows into international funds – reduced their equity investments by $3.2 billion dollars.  They fled, by and large, into the safety of the increasingly bubbly bond market.

It’s odd how dumb things always seem so sensible when we’re in the midst of doing them.

Do You Need Something “Permanent” in your Portfolio?

The title derives from the Permanent Portfolio concept championed by the late Harry Browne.  Browne was an advertising executive in the 1960s who became active in the libertarian movement and was twice the Libertarian Party’s nominee for president of the United States.  In 1981, he and Terry Coxon wrote Inflation-Proofing Your Investments, which argued that your portfolio should be positioned to benefit from any of four systemic states: inflation, deflation, recession and prosperity.  As he envisioned it, a Permanent Portfolio invests:

25% in U.S. stocks, to provide a strong return during times of prosperity.

25% in long-term U.S. Treasury bonds, which should do well during deflation.

25% in cash, in order to hedge against periods of recession.

25% in precious metals (gold, specifically), in order to provide protection during periods of inflation.

The Global X Permanent ETF (PERM) is the latest attempt to implement the strategy.  It’s also the latest to try to steal business from Permanent Portfolio Fund (PRPFX) which has drawn $17.8 billion in assets (and, more importantly from a management firm’s perspective, $137 million in fees for an essentially passive strategy).  Those inflows reflect PRPFX’s sustained success: over the past 15 years, it has returned an average of 9.2% per year with only minimal stock market exposure.

PRPFX is surely an attractive target, since its success not attributable to Michael Cuggino’s skill as a manager.  His stock picking, on display at Permanent Portfolio Aggressive Growth (PAGRX) is distinctly mediocre; he’s had one splendid year and three above-average ones in a decade.  It’s a volatile fund whose performance is respectable mostly because of his top 2% finish in 2005.  His fixed income investing is substantially worse.  Permanent Portfolio Versatile Bond (PRVBX) and Permanent Portfolio Short Term Treasury (PRTBX) are flat-out dismal.  Over the past decade they trail 95% of their peer funds.  All of his funds charge above-average expenses.  Others might conclude that PRPFX has thrived despite, rather than because of, its manager.

Snowball’s annual rant: Despite having received $48 million as his investment advisory fee (Mr. Cuggino is the advisor’s “sole member,” president and CEO), he’s traditionally been shy about investing in his funds though that might be changing.  “As of April 30, 2010,” according to his Annual Report, “Mr. Cuggino owned shares in each of the Fund’s Portfolios through his ownership of Pacific Heights.” A year later, that investment is substantially higher but corporate and personal money (if any) remain comingled in the reports.  In any case, he “determines his own compensation.”  That includes some portion of the advisor’s profits and the $65,000 a year he pays himself to serve on his own board of trustees.  On the upside, the advisor has authorized a one basis point fee waiver, as of 12/31/11.  Okay, that’s over.  I promise I’ll keep quiet on the topic until the spring of 2013.

It’s understandable that others would be interested in getting a piece of that highly-profitable action.  It’s surprising that so few have made the attempt.  You might argue that Hussman Strategic Total Return (HSTRX) offers a wave in the same direction and the Midas Perpetual Portfolio (MPERX), which invests in a suspiciously similar mix of precious metals, Swiss francs, growth stocks and bonds, is a direct (though less successful) copy.  Prior to December 29, 2008, MPERX (then known as Midas Dollar Reserves) was a government money market fund.  That day it changed its name to Perpetual Portfolio and entered the Harry Browne business.

A simple portfolio comparison shows that neither PRPFX nor MPERX quite matches Browne’s simple vision, nor do their portfolios look like each other.

Should you invest in one, or any, of these vehicles?  If so, proceed with extreme care.  There are three factors that should give you pause.  First, two of the four underlying asset classes (gold and long-term bonds) are three decades into a bull market.  The projected future returns of gold are unfathomable, because its appeal is driven by psychology rather than economics, but its climb has been relentless for 20 years.  GMO’s most recent seven-year asset class projections show negative real returns for both bonds and cash.  Second, a permanent portfolio has a negative correlation with interest rates.  That is, when interest rates fall – as they have for 30 years – the funds return rises.  When interest rates rise, the returns fall.  Because PRPFX was launched after the Volcker-induced spike in rates, it has never had to function in a rising rate environment.  Third, even with favorable macro-economic conditions, this portfolio can have long, dismal stretches.  The fund posts its annual returns since inception on its website.  In the 14 years between 1988 and 2001, the fund returned an average of 4.1% annually.  During those same years inflation average 3% annually, which means PRPFX offered a real return of 1.1% per year.

And, frankly, you won’t make it to any longer-term goal with 1.1% real returns.

There are two really fine analyses of the Permanent Portfolio strategy.  Geoff Considine penned “What Investors Should Fear in the Permanent Portfolio” for Advisor Perspectives (2011) and Bill Bernstein wrote a short piece “Wild About Harry” for the Efficient Frontier (2010).

RiverPark Funds: Launch Alert and Fund Family Update

RiverPark Funds are making two more hedge funds available to retail investors, folks they describe as “the mass affluent.”  Given the success of their previous two ventures in that direction – RiverPark/Wedgewood Fund (RWGFX) and RiverPark Short Term High Yield (RPHYX, in which I have an investment) – these new offerings are worth a serious look.

RiverPark Long/Short Opportunity Fund is a long/short fund that has been managed by Mitch Rubin since its inception as a hedge fund in the fall of 2009.  The RiverPark folks believe, based on their conversation with “people who are pretty well versed on the current mutual funds that employ hedge fund strategies” that the fund has three characteristics that set it apart:

• it uses a fundamental, bottom-up approach
• it is truly shorting equities (rather than Index ETFs)
• it has a growth bias for its longs and tends to short value.

Since inception, the fund generated 94% of the stock market’s return (33.5% versus 35.8% for the S&P500 from 10/09 – 02/12) with only 50% of its downside risk (whether measured by worst month, worst quarter, down market performance or max drawdown).

While the hedge fund has strong performance, it has had trouble attracting assets.  Morty Schaja, RiverPark’s president, attributes that to two factors.  Hedge fund investors have an instinctive bias against firms that run mutual funds.  And RiverPark’s distribution network – it’s most loyal users – are advisors and others who are uninterested in hedge funds.  It’s managed by Mitch Rubin, one of RiverPark’s founders and a well-respected manager during his days with the Baron funds.  The expense ratio is 1.85% on the institutional shares and 2.00% on the retail shares and the minimum investment in the retail shares is $1000.  It will be available through Schwab and Fidelity starting April 2, 2012.

RiverPark/Gargoyle Hedged Value Fund pursued a covered call strategy.  Here’s how Gargoyle describes their investment strategy:

The Fund invests all of its assets in a portfolio of undervalued mid- to large-cap stocks using a quantitative value model, then conservatively hedges part of its stock market risk by selling a blend of overvalued index call options, all in a tax-efficient manner. Proprietary tools are used to maintain the Fund’s net long market exposure within a target range, allowing investors to participate as equities trend higher while offering partial protection as equities trend lower.

Since inception (January 2000), the fund has posted 900% of the S&P500’s returns (150% versus 16.4%, 01/00 – 02/12).  Much of that outperformance is attributable to crushing the S&P from 2000-2002 but the fund has still outperformed the S&P in 10 of 12 calendar years and has done so with noticeably lower volatility.  Because the strategy is neither risk-free nor strongly correlated to the movements of the stock market, it has twice lost a little money (2007 and 2011) in years in which the S&P posted single-digit gains.

Mr. Schaja has worked with this strategy since he “spearheaded a research effort for a similar strategy while at Donaldson Lufkin Jenrette 25 years ago.”  Given ongoing uncertainties about the stock market, he argues “a buy-write strategy, owning equities and writing or selling call options on the underlying portfolio offers a very attractive risk return profile for investors. . . investors are willing to give up some upside, for additional income and some downside protection.  By selling option premium of about 1 1/2% per month, the Gargoyle approach can generate attractive risk adjusted returns in most markets.”

The hedge fund has about $190 million in assets (as of 02/12).  It’s managed by Joshua Parker, President of Gargoyle, and Alan Salzbank, its Managing Partner – Risk Management.  The pair managed the hedge fund since inception (including of its predecessor partnership since its inception in January 1997).  The expense ratio is 1.25% on the institutional shares and 1.5% on the retail shares and the minimum investment in the retail shares is $1000.  The challenge of working out a few last-minute brokerage bugs means that Gargoyle will launch on May 1, 2012.

Other RiverPark notes:

RiverPark Large Growth (RPXFX) is coming along nicely after a slow start. It’s a domestic, mid- to large-cap growth fund with 44 stocks in the portfolio.  Mitch Rubin, who managed Baron Growth, iOpportunity and Fifth Avenue Growth as various points in his career, manages it. Its returns are in the top 3% of large-growth funds for the past year (through March 2012), though its asset base remains small at $4 million.

RiverPark Small Cap Growth (RPSFX) continues to have … uh, “modest success” in terms of both returns and asset growth.  It has outperformed its small growth peers in six of its first 17 months of operation and trails the pack modestly across most trailing time periods. It’s managed by Mr. Rubin and Conrad van Tienhoven.

RiverPark/Wedgewood Fund (RWGFX) is a concentrated large growth fund which aims to beat passive funds at their own game.  It’s been consistently at or near the top of the large-growth pack since inception.  David Rolfe, the manager, strikes me as bright, sensible and good-humored and the fund has drawn $200 million in assets in its first 18 months of operation.

RiverPark Short Term High Yield (RPHYX) pursues a distinctive, and distinctly attractive, strategy.  He buys a bunch of securities (called high yield bonds among them) which are low-risk and inefficiently priced because of a lack of buyers.  The key to appreciating the fund is to utterly ignore Morningstar’s peer rankings.  He’s classified as a “high yield bond fund” despite the fact that the fund’s objectives and portfolio are utterly unrelated to such funds.  It’s best to think of it as a sort of cash-management option.  The fund’s worst monthly loss was 0.24% and its worst quarter was 0.07%.   As of 3/28/12, the fund’s NAV ($10.00) is the same as at launch but its annual returns are around 4%.

Finally, a clarification.  I’ve fussed at RiverPark in the past for being too quick to shut down funds, including one mutual fund and several actively-managed ETFs.  Matt Kelly of RiverPark recently wrote to clear up my assumption that the closures were RiverPark’s idea:

Adam Seessel was the sub-adviser of the RiverPark/Gravity Long-Biased Fund. . . Adam became friendly with Frank Martin who is the founder of Martin Capital Management . . . a year ago, Frank offered Adam his CIO position and a piece of the company. Adam accepted and shortly thereafter, Frank decided that he did not want to sub-advise anyone else’s mutual fund so we were forced to close that fund.

Back in 2009, [RiverPark president Morty Schaja] teamed up with Grail Advisers to launch active ETFs. Ameriprise bought Grail last summer and immediately dismissed all of the sub-advisers of the grail ETFs in favor of their own managers.

Thanks to Matt for the insight.

FundReveal, Part 2: An Explanation and a Collaboration

For our “Best of the Web” feature, my colleague Junior Yearwood sorts through dozens of websites, tools and features to identify the handful that are most worth your while.  On March 1, he identified the low-profile FundReveal service as one of the three best mutual fund rating sites (along with Morningstar and Lipper).  The award was made based on the quality of evidence available to corroborate a ratings system and the site’s usability.

Within days, a vigorous and thoughtful debate broke out on the Observer’s discussion board about FundReveal’s assumptions.  Among the half dozen questions raised, two in particular seemed to resonate: (1) isn’t it unwise to benchmark everything – including gold and short-term bond funds – against the risk and return profile of the S&P 500?  And (2) you assume that past performance is not predictive, but isn’t your system dependent on exactly that?

I put both of those questions to the guys behind FundReveal, two former Fidelity executives who had an important role to play in changing the way trading decisions were made and employees rewarded.  Here’s the short version of their answers.  Fuller versions are available on their blog.

(1) Why does FundReveal benchmark all funds against the S&P? Does the analysis hold true if other benchmarks are used?

FundReveal uses the S&P 500 as a single, consistent reference for comparing performance between funds, for 4 of its 8 measures. The S&P also provides a “no-brainer” alternative to any other investments, including mutual funds. If an investor wishes to participate in the market, without selecting specific sectors or securities, an S&P 500 index fund or ETF provides that alternative.

Four of FundReveal’s eight measurements position funds relative to the index. Four others are independent of the S&P 500 index comparison.

An investor can compare a fund’s risk-return performance against any index fund by simply inserting the symbol of an index fund that mimics the index. Then the four absolute measures for a fund (average daily returns, volatility of daily returns, worst case return and number of better funds) can be compared against the chosen index fund.

ADR and Volatility are the most direct and closest indicators of a mutual fund’s daily investment and trading decisions. They show how well a fund is being managed. High ADR combined with low Volatility are indicators of good management. Low ADR with high Volatility indicates poor management.

(2) Why is it that FundReveal says that past total returns are not useful in deciding which funds to invest in for the future? Why do your measures, which are also calculated from past data, provide insight into future fund performance?

Past total returns cannot indicate future performance. All industry performance ratings contain warnings to this effect, but investors continue using them, leading to “return chasing investor behavior.”

[A conventional calculations of total return]  includes the beginning and ending NAV of a fund, irrespective of the NAVs of the fund during the intervening time period. For example, if a fund performed poorly during most of the days of a year, but its NAV shot up during the last week of the year, its total return would be high. The low day-to-day returns would be obscured. Total Return figures cannot indicate the effectiveness of investment decisions made by funds every day.

Mutual funds make daily portfolio and investment decisions of what and how much to hold, sell or buy. These decisions made by portfolio managers, supported by their analysts and implemented by their traders, produce daily returns: positive some days, and negative others. Measuring their average daily values and their variability (Volatility) gives direct quantitative information about the effectiveness of the daily investment decisions. Well managed funds have high ADR and low Volatility. Poorly managed funds behave in the opposite manner.

I removed a bunch of detail from the answers.  The complete versions of the S&P500 benchmark and past performance as predictor are available on their blog.

My take is two-fold: first, folks are right in criticizing the use of the S&P500 as a sole benchmark.  An investor looking for a conservative portfolio would likely find himself or herself discouraged by the lack of “A” funds.  Second, the system itself remains intriguing given the ability to make more-appropriate comparisons.  As they point out in the third paragraph, there are “make your own comparison” and “look only at comparable funds” options built into their system.

In order to test the ability of FundReveal to generate useful insights in fund selection, the Observer and FundReveal have entered into a collaborative arrangement.  They’ve agreed to run analyses of the funds we profile over the next several months.  We’ll share their reasoning and bottom line assessment of each fund, which might or might not perfectly reflect our own.  FundReveal will then post, free, their complete assessment of each fund on their blog.  After a trial of some months, we’re hoping to learn something from each other – and we’re hoping that all of our readers benefit from having a second set of eyes looking at each of these funds.

Both the Tributary and Litman Gregory profiles include their commentary, and the link to their blog appears at the end of each profile.  Please do let me know if you find the information helpful.

Lipper: Your Best Small Fund Company is . . .

GuideStone Funds.

GuideStone Funds?

Uhh … Lipper’s criterion for a “small” company is under $40 billion under management which is, by most standards, not small.  Back to GuideStone.

From their website: “GuideStone Funds, a controlled affiliate of GuideStone Financial Resources, provides a diversified family of Christian-based, socially screened mutual funds.”

Okay.  In truth, I had no prior awareness of the family.  What I’ve noticed since the Lipper awards is that the funds have durn odd names (they end in GS2 or GS4 designations), that the firm’s three-year record (on which Lipper made their selection) is dramatically better than either the firm’s one-year or five-year record.  That said, over the past five years, only one GuideStone fund has below-average returns.

Fidelity: Thinking Static

As of March 31, 2012, Fidelity’s Thinking Big viral marketing effort has two defining characteristics.  (1) it has remained unchanged from the day of its launch and (2) no one cares.  A Google search of the phrase Fidelity  +”Thinking Big” yields a total of six blog mentions in 30 days.

Morningstar: Thinking “Belt Tightening”

Crain’s Chicago Business reports that Morningstar lost a $12 million contact with its biggest investment management client.  TransAmerica Asset Management had relied on Morningstar to provide advisory services on its variable annuity and fund-of-funds products.  The newspaper reports that TransAmerica simplified things by hiring Tim Galbraith, Morningstar’s director of alternative investments, to handle the work in-house.  TransAmerica provided about 2% of Morningstar’s revenue last year.

Given the diversity of Morningstar’s global revenue streams, most reports suggest this is “unfortunate” rather than “terrible” news, and won’t result in job losses.  (source: “Morningstar loses TransAmerica work,” March 27 2012)

James Wang is not “the greatest investor you’ve never heard of”

Investment News gave that title to the reclusive manager of the Oceanstone Fund (OSFDX) who was the only manager to refuse to show up to receive a Lipper mutual fund award.  He’s also refused all media attempts to arrange an interview and even the chairman of his board of trustees sounds modestly intimidated by him.  Fortune has itself worked up into a tizzy about the guy.

Nonetheless, the combination of “reclusive” and an outstanding five-year record still don’t add up to “the greatest investor you’ve never heard of.”  Since you read the Observer, you’ve surely heard of him, repeatedly.  As I’ve noted in a February 2012 story:

1. the manager’s explanation of his investment strategy is nonsense.  He keeps repeating the magic formula: IV = IV divided by E, times E.  No more than a high school grasp of algebra tells you that this formula tells you nothing.  I shared it with two professors of mathematics, who both gave it the technical term “vacuous.”  It works for any two numbers (4 = 4 divided by 2, times 2) but it doesn’t allow you to derive one value from the other.
2. the shareholder reports say nothing. The entire text of the fund’s 2010 Annual Report, for example, is three paragraph.  One reports the NAV change over the year, the second repeats the formula (above) and the third is vacuous boilerplate about how the market’s unpredictable.
3. the fund’s portfolio turns over at triple the average rate, is exceedingly concentrated (20 names) and is sitting on a 30% cash stake.  Those are all unusual, and unexplained.

That’s not evidence of investing genius though it might bear on the old adage, “sometimes things other than cream rise to the top.”

Two Funds and Why They’re Really Worth Your While

Each month, the Observer profiles between two and four mutual funds that you likely have not heard about, but really should have.

Litman Gregory Masters Alternative Strategies (MASNX): Litman Gregory has assembled four really talented teams (order three really talented teams and “The Jeffrey”) to manage their new Alternative Strategies fund.  It has the prospect of being a bright spot in valuable arena filled with also-ran offerings.

Tributary Balanced, Institutional (FOBAX): Tributary, once identified with First of Omaha bank and once traditionally “institutional,” has posted consistently superb returns for years.  With a thoughtfully flexible strategy and low minimum, it deserves noticeably more attention than it receives.

The Best of the Web: A Week of Podcasts

Our second “Best of the Web” feature focuses on podcasts, portable radio for a continually-connected age.  While some podcasts are banal, irritating noise (Junior went through a month’s worth of Advil to screen for a week’s worth of podcasts), others offer a rare and wonderful commodity: thoughtful, useful analysis.

In “A Week of Podcasts,” Junior and I identified four podcasts to help power you through the week, three to help you unwind and (in an exclusive of sorts) news of Chuck Jaffe’s new daily radio show, MoneyLife with Chuck Jaffe.

We think we’ve done a good and honest job but Junior, especially, would like to hear back from readers about how the feature works for you and how to make it better, about sites we’ve missing and sites we really shouldn’t miss.  Drop us a line, we read and appreciate everything and respond to as much as we can.

Briefly noted . . .

Seafarer Overseas Growth and Income (SFGIX), managed by Andrew Foster, is up about 3% since its mid-February launch.  The average diversified emerging markets fund is flat over the same period.  The fund is now available no-load/NTF at Schwab and Scottrade.  For reasons unclear, the Schwab website (as of 3/31/12) keeps saying that it’s not available.  It is available and the Seafarer folks have been told that the problem lies in Schwab’s website, portions of which only update once a month. As a result, Seafarer’s availability may not be evident until April 11..

On the theme of a very good fund getting dramatically better, Villere Balanced Fund (VILLX) has reduced its capped expense ratio from 1.50% to 0.99%.  While the fund invests about 60% of the portfolio in stocks, its tendency to include a lot of mid- and small-cap names makes it a lot more volatile than its peers.  But it’s also a lot more rewarding: it has top 1% returns among moderate allocation funds for the past three-, five- and ten-year periods (as of 3/30/2012).  Lipper recently recognized it as the top “Mixed-Asset Target Allocation Growth Fund” of the past three and five years.

Arbitrage Fund (ARBFX) reopened to investors on March 15, 2012. The fund closed in mid-2010 was $2.3 billion in assets and reopened with nearly $3 billion.  The management team has also signed-on to subadvise Litman Gregory Masters Alternative Strategies (MASNX), a review of which appears this month.

Effective April 30, 2012, T. Rowe Price High Yield (PRHYX, and its advisor class) will close to new investors.  Morningstar rates it as a Four Star / Silver fund (as of 3/30/2012).

Neuberger Berman Regency (NBRAX) has been renamed Neuberger Berman Mid Cap Intrinsic Value and Neuberger Berman Partners (NPNAX) have been renamed Neuberger Berman Large Cap Value.  And, since there already was a Neuberger Berman Large Cap Value fund (NVAAX), the old Large Cap Value has now been renamed Neuberger Berman Value.  This started in December when Neuberger Berman fired Basu Mullick, who managed Regency and Partners.  He was, on whole, better than generating high volatility than high returns.  Partners, in particular, is being retooled to focus on mid-cap value stocks, where Mullick tended to roam.

American Beacon announced it will liquidate American Beacon Large Cap Growth (ALCGX) on May 18, 2012 in anticipation of “large redemptions”. American Beacon runs the pension plan for American Airlines.  Morningstar speculates that the termination of American’s pension plan might be the cause.

Aberdeen Emerging Markets (GEGAX) is merging into Aberdeen Emerging Markets Institutional (ABEMX). Same managers, same strategies.  The expense ratio will drop substantially for existing GEGAX shareholders (from 1.78% to 1.28% or so) but the investment minimum will tick up from $1000 to $1,000,000.

Schwab Premier Equity (SWPSX) closed at the end of March as part of the process of merging it into Schwab Core Equity (SWANX).

Forward is liquidating Forward International Equity Fund, effective at the end of April.  The combination of “small, expensive and mediocre” likely explains the decision.

Invesco has announced plans to merge Invesco Capital Development (ACDAX) into Invesco Van Kampen Mid Cap Growth (VGRAX) and Invesco Commodities Strategy (COAAX) Balanced-Risk Commodity Strategy (BRCAX).  In both mergers, the same management team runs both funds.

Allianz is merging Allianz AGIC Target (PTAAX) into Allianz RCM Mid-Cap (RMDAX), a move which will bury Target’s large asset base and modestly below-average returns into Mid-Cap’s record of modestly above-average returns.

ING Equity Dividend (IEDIX) will be rebranded as ING Large Cap Value.

Lord Abbett Mid-Cap Value (LAVLX) has changed its name to Lord Abbett Mid-Cap Stock Fund at the end of March.

With this month’s issue, we celebrate the first anniversary of the Observer’s launch.  I am delighted by our first year and delighted to still be here.  The Internet Archive places the lifespan of a website at 44-70 days.  It’s rather like “dog years.”  In “website lifespan years,” we are actually celebrating something between our fifth and eighth anniversary.  In truth, there’s no one we’d rather celebrate it with that you folks.

Highlights of a good year:

• We’ve seen 65,491 “Unique Visitors” from 103 countries. (Fond regards to Senegal!).
• Outside North America, Spain is far and away the source of our largest number of visits.  (Gracias!)
• Junior’s steady dedication to the site and to his “Best of the Web” project has single-handedly driven Trinidad and Tobago past Sweden to 24^th place on our visitor list.  His next target: China, currently in 23^rd.
• 84 folks have made financial contributions (some more than once) to the site and hundreds of others have used our Amazon link.   We have, in consequence, ended our first year debt-free, bills paid and spirits high.  (Thanks!)
• Four friends – Chip, Anya, Accipiter, and Junior – put in an enormous number of hours behind the scenes and under the hood, and mostly are compensated by a sense of having done something good. (Thank you, guys!)
• We are, for many funds, one of the top results in a Google search.  Check PIMCO All-Asset All-Authority (#2 behind PIMCO’s website), Seafarer Overseas Growth & Income (#4), RiverPark Short Term High Yield (#5), Matthews Asia Strategic Income (#6), Bretton Fund (#7) and so on.

That reflects the fact that we – you, me and all the folks here – are doing something unusual.  We’re examining funds and opportunities that are being ignored almost everywhere else.  The civility and sensibility of the conversation on our discussion board (where a couple hundred conversations begin each month) and the huge amount of insight that investors, fund managers, journalists and financial services professionals share with me each month (you folks write almost a hundred letters a month, almost none involving sales of “v1agre”) makes publishing the Observer joyful.

We have great plans for the months ahead and look forward to sharing them with you.

See you in a month!

Dear friends,

In the midst of the stock market’s recent generosity – 250 mutual funds booked returns of 20% or more in the first two months of 2012 – it’s easy to forget how bad 2011 was for the smart money crowd.  The average equity hedge fund, represented by the HFRX Equity Hedge Index, lost 19% for the year.  The value guys lost more than the growth guys. The Economist took some glee in reproducing a hypothetical letter from a hedge fund manager.  It reads, in part,

It is also time to move on from the concept of delivering “alpha”, the skill you’ve paid us such fat fees for. Upon reflection, we have decided that we’re actually much better at giving you “smart beta”. This term is already being touted at industry conferences and we hope shortly to be able to explain what it means. Like our peers we have also started talking a lot about how we are “multi-strategy” and “capital-structure agnostic”, and boasting about the benefits of our “unconstrained” investment approach. This is better than saying we don’t really understand what’s going on.

As an unofficial representative of the dumb money crowd, I’ll peel my eyes away from the spectacle of the Republican Party deciding which vital organ to stab next, just long enough to offer a cheery “nyah-nyah-nyah.”

The Observer in The Journal

As many of you know, The Wall Street Journal profiled the Observer in a February 6 article entitled “Professor’s Advice: It’s Best to Be Bored.” I talked a bit about the danger of “exciting” opportunities, offered leads on a dozen cool funds, and speculated about two emerging bubbles.  Neither should be a great surprise, but both carry potentially enormous consequences.

The bubbles in question are U.S. bonds and gold.  And those bubbles are scary because those assets have proven to be the last refuge for tens of millions of older investors (who, by the way, vote in huge numbers) whose portfolios were slammed by the stock market’s ferocious, pointless decade.  Tim Krochuk of GRT Capital Partners volunteers the same observation in a conversation this week.  “If rates return to normal – 4 or 5% – holders of long bonds are going to lose 40 – 50%.  If you thought that a 40% stock market fall led to blood in the streets, wait until you see what happens after a hit that big in retirees’ ‘safe’ portfolios.”  Folks from Roger Ibbotson to Teresa Kong have, this week, shared similar concerns.

For visual learners, here are the two graphs that seem best to reflect the grounds for my concern.

The first graph is the yield on benchmark 10-year Treasuries.  When the line is going up, Treasuries are in a bear market.  When the line is going down, they’re in a bull market.  Three things stand out, even to someone like me who’s not a financial professional:

• A bear market in bonds can last decades.
• The current bull market in bonds has proceeded, almost without interruption for 30 years.
• With current yields at 2% and inflation at 3% (i.e., there’s a negative real yield already), there’s nowhere much for the bull to go from here.

The second graph is the price of gold.  Since investing in gold is a matter of theology rather than economics, there’s not much to say beyond “gee, do you suppose it’ll rise forever?”

It might.  Thomas Sowell’s Basic Economics calculates that $1 investing in U.S. stocks in 1800 and held for about 200 years would be worth $500,000.   $1 in gold would be worth $0.78.  But this time’s different.  It always is.

In celebration of boring investments

In investing terms, “income” was once dismissed as the province of the elderly whose other eccentricities included reflection on the state of their bowel movements and strong convictions about Franklin Roosevelt.  Market strategies abjured dividend-paying firms, reasoning that dividends only arose when management was too timid or stupid to find useful things to do with their earnings.  And equity managers who were trapped by the word “income” in their fund name tried various dodges to avoid it.  In the mid-90s, for example, Fidelity Dividend Growth fund (FDGFX) invested in fast growing small caps, under the theory that  those firms had “the potential to increase (or begin paying) dividends in the future.”  Even today, it’s possible to find funds (Gabelli, Columbia, Huber, FAM) named “Equity Income” with yields below 0.6%.

The problem was compounded by organizational structures that isolated the equity and fixed-income teams from each other.  Even most stock/bond hybrid funds maintained the division: 60% of the portfolio was controlled by the equity manager, 40% by the fixed income manager.  Period.   Only a handful of managers – chief among them, David Winters at Wintergreen (WGRNX) and his forebears at the Mutual Series, Marty Whitman at Third Avenue Value (TAVFX), Steve Romick at FPA Crescent (FPACX) and Andrew Foster and Paul Matthews at Matthews Asian Growth and Income (MACSX) – had the freedom, the confidence and the competence to roam widely over a firm’s capital structure.

Today, some of the best analysis and most innovative product design is being done on income-sensitive funds.  That might reflect the simple fact that funds without income (alternately, gold exposure) have had a disastrous decade.  Jeremy Grantham observes in his latest quarterly letter

The U.S. market was terrible for the last 10 years, gaining a pathetic 0.5% per year overall, after inflation adjustments and even including dividends. Without dividends, the [S&P 500] index itself has not gone up a penny in real terms from mid-1997 to end-2011, or 14½ years. This is getting to be a long time!

Now dividend-stocks are (unwisely) declared as an alternative to bonds (“stock dividends, as an alternative or supplement to bonds, are shaping up to have better yields and less risk” notes a 2012 article in Investment News) and investors poured money into them in 2011.

The search for income is increasingly global.  Morningstar reports that “There now are 24 equity income funds that invest at least 25% of their assets outside of the U.S. and 30 funds that invest at least 75%, with the majority of those funds being launched in the last few years, according to Lipper.”

Among the cool options now available:

Calamos Evolving World Growth (CNWGX), which invests broadly in emerging market stocks, the stocks of developed market firms which derive at least 20% of sales in emerging markets, then adds convertibles or bonds to manage volatility. 4.75% front load, 1.68% e.r.

Global X Permanent ETF (PERM) which will pursue a Permanent Portfolio-like mix of 25% stocks, 25% gold and silver, 25% short-term bonds, and 25% long-term government bonds.  Leaving aside the fact that with Global X nothing is permanent, this strategy for inflation-proofing your portfolio has some merits.  We’ll look at PERM and its competitors in detail in our April issue.

Innovator Matrix Income Fund (IMIFX), which intends to rotate through a number of high-yielding surrogates for traditional asset classes.  Those include master limited partnerships, royalty trusts, REITs, closed end funds and business development companies.  In, for example, a low-inflation, low-growth environment, the manager would pursue debt REITs and closed-end bond funds to generate yield but might move to royalty trusts and equity REITs if both inflation and growth accelerated.  Hmmm.

iShares Morningstar Multi-Asset High Income Index Fund, still in registration, which will invest 20% in stocks, 60% in bonds (including high-yield corporates, emerging markets and international) and 20% in “alternative assets” (which means REITs and preferred shares).  Expenses not yet announced.

WisdomTree Emerging Markets Equity Income (DEM), which launched in 2007.  It holds the highest-paying 30% of stocks (about 300) in the WisdomTree Emerging Markets Dividend Index.  The fund has returned 28% annually over the past three years (through 1/31/12), beating the emerging markets average by 5% annually.  By Morningstar’s calculation, the fund outperforms its peers in both rising and falling markets. Expenses of 0.63%.

In September of 2010, I lamented “the best fund that doesn’t exist,” an emerging markets balanced fund.  Sophisticated readers searched and did find one closed-end fund that fit the bill, First Trust Aberdeen Emerging Opportunities (FEO), which I subsequently profiled as a “star in the shadows.”  A pack of emerging markets balanced funds have since comes to market:

AllianceBernstein Emerging Markets Multi Asset (ABAEX) will hold 0-65% bonds (currently 40%), with the rest in stocks and cash.  4.25% front load, 1.65% e.r.

Dreyfus Total Emerging Markets (DTMAX), which has an unconstrained allocation between stocks and bonds.  5.75% load, 1.65% e.r.

Fidelity Total Emerging Markets (FTEMX), launched in November and already approaching $100 million in assets, the fund has a pretty static 60/40 allocation.  No-load, 1.40% e.r.

First Trust/Aberdeen Emerging Opportunities (FEO), a closed-end fund and an Observer “Star in the Shadows” fund.  About 60% bonds, 40% stocks.  Exchange traded, 1.76% e.r.

Lazard Emerging Markets Multi-Strategy (EMMOX), which has a floating allocation between stocks, bonds (including convertibles) and currency contracts. No-load, 1.60% e.r.

PIMCO Emerging Multi-Asset (PEAAX), the most broadly constructed of the funds, is benchmarked against an index which invests 50/50 between stocks and bonds.  The fund itself can combine stocks, bonds, currencies and commodities. 5.5% load for the “A” shares, 1.74% expenses.

Templeton Emerging Markets Balanced (TAEMX), which must have at least 25% each in stocks and bonds but which is currently 65/30 in favor of stocks.  5.75% front load, 1.54% expenses.

While the options for no-load, low-cost investors remain modest, they’re growing – and growing in a useful direction.

Launch Alert (and an interview): Seafarer Overseas Growth and Income

In my February 2012 Commentary, I highlighted the impending launch of Seafarer Overseas Growth and Income (SFGIX and SIGIX).  I noted

The fund will be managed by Andrew Foster, formerly manager of Matthews Asia Growth & Income (MACSX) and Matthews’ research director and acting chief investment officer.

The great debate surrounding MACSX was whether it was the best Asia-centered fund in existence or merely one of the two or three best funds in existence.  Here’s the broader truth within their disagreement: Mr. Foster’s fund was, consistently and indisputably one of the best Asian funds in existence.

The launch provoked three long, thoughtful discussion threads about the prospects of the new fund, the Seafarer prospectus was our most downloaded document in the month of February and Chip, our sharp-eyed technical director, immediately began plotting to buy shares of the fund for her personal portfolio.

Mr. Foster and I agreed that the best way to agree potential investors’ questions was, well, to address potential investors’ questions.  He read through many of the comments on our discussion broad and we identified these seven as central, and often repeated.

Kenster1_GlobalValue:  Could he tell us more about his investment team? He will be lead manager but will there be a co-manager? If not, then an Assistant Manager? How about the Analysts – tell us more about them? Does he plan to add another analyst or two this year to beef up his team?

He’s currently got a team of four.  In addition to himself, he works with:

Michelle Foster, his wife, CFO, Chief Administrator and partner.  She has a remarkable investing resume.  She started as an analyst with JP Morgan, was a Principal at Barclay’s Global Investors (BGI) where she developed ETFs (including one that competed directly with Andrew’s India fund), and then joined investment advisory team at Litman/Gregory Asset Management.

William Maeck, his Associate Portfolio Manager and Head Trader.  William was actually Foster’s first boss at A. T. Kearney in Singapore where Andrew worked before joining Matthews.  Before joining Seafarer, he worked with Credit Suisse Securities as an investment advisor for high net worth individuals and family offices.  For now, William mostly monitors trading issues for the fund and has limited authority to execute trades at Foster’s direction.  With time, he should move toward more traditional co-manager responsibilities.

Kate Jaquet, Senior Research Analyst and Chief Compliance Officer.  Kate brings a lot of experience in fixed-income and high-yield investing and in Latin America.  She began her career in emerging markets in 1995 as an economic policy researcher for the international division of The Adam Smith Institute in London.  In 1997, she joined Credit Suisse First Boston as an investment banking and fixed-income analyst within their Latin America group. In 2000, she joined Seneca Capital Management in San Francisco as a senior research analyst in their high yield group.  She worked on high yield and distressed issuers, the metals & mining, oil & gas, and utilities industries, emerging market sovereigns and select emerging market corporate issuers.

AndyJ : I’m still mildly curious about the context of his leaving Matthews. Simply “pursuing other opportunities” might be the whole story, or it might not – even if perfectly true, there’s likely a context that would be interesting to know about.

Good and fair question.  Mr. Foster has a deep and abiding respect for Matthews and a palpable concern for his former shareholders.  When he joined Matthews in 1998, the firm managed $180 million.  It had grown a hundredfold by the time he left.  As a long-time member of the team, sometime chief investment officer, chief research officer and portfolio manager, he’d made a huge and rewarding commitment to the company.  About his leaving Mr. Foster made two points:

1. A fund like this has been on his mind for a decade.  It wasn’t clear, ten years ago, whether Matthews would remain purely Asia-focused or would broaden its geographic horizons.  As part of those deliberations, Paul Matthews asked Andrew to design a global version of MACSX.  He was very excited about the potential of such a fund.  After a long debate, Matthews concluded that it would remain an Asia specialist.  He respects their decision (indeed, as manager, helped make it pay off) but never gave up the dream of the broader fund and knew it would never fit at Matthews.
2. He did not leave until he was sure that his MACSX shareholders were in good hands.  He worked hard to build “an extremely capable team,” even celebrating the fact that he only hired “people smarter than me.”  He became convinced that the fund was in the hands of folks who’d put the shareholders first.  In order to keep it that way, he “made sure I didn’t do anything to advance [Seafarer] at the expense of Matthews.”  As a result, his current team is drawn from outside Matthews and he has not sought to aggressively recruit former shareholders out of the prior fund so as to drive growth in the new one.

Kenster1_GlobalValue: What does he see as potentially the top 3 countries in the fund if he were investing & managing the Seafarer fund right now? As an example – Indonesia looks great but what are his thoughts on this country? How would he rate it? Would he be lightly invested in Indonesia because he feels it might be too growthy at this time?

While he didn’t address Indonesia in particular, Mr. Foster did highlight six markets that were “particularly interesting.”  They are:

1. Vietnam
2. Brazil
3. Mexico
4. Turkey
5. Poland
6. South Africa

He argues that there are substantial political and cultural challenges in many of these countries, and that that turmoil obscures the fundamental strength of the underlying economy.  While it’s possible to conclude that you’d have to be nuts to sink your money in broken countries, Andrew notes that “broken can be good . . . the key is determining whether you’re experiencing chaos or progress, both raise a lot of dust.”  His general conclusion, having lived through generations of Asian crisis, “I’ve seen this story before.”

Maurice: I’d be interested in what Mr. Foster brings new to the table. Why would I not if invest new dollars with Matthews?

He thinks that two characteristics will distinguish Seafarer:

1. The Fund can provide exposure to multiple asset classes, as its strategy allows for investment in equities, convertible bonds, and fixed income.
2. The Fund has a broad geographical mandate. It’s not just broader than Asia, it’s also broader than “emerging markets.”   SFGIX / SIGIX  is pursuing exposure to emerging and frontier markets around the world, but Mr. Foster notes that in some instances the most effective way to gain such exposure is through the securities in neighboring countries.  For example, some of the best access to China is through securities listed in Singapore and Hong Kong; Australia plays a similar role for some Asian markets.

MikeM :  It seems to me that if you are looking for Asian exposure, this may not be your fund. This fund is not supposed to be an Asian concentrated fund like his previous fund at Matthews, MACSX.

Yes and no.  Mr. Foster can invest anywhere and is finding a lot of markets today that have the characteristics that Asia had ten years ago.  They’re fundamentally strong and under-recognized by investors used to looking elsewhere.  That said, he considers Asia to be “incredibly important” (a phrase he used four times during our conversation) and that “a large portion of the portfolio, particularly at the outset” will be invested in the Asian markets with which he’s intimately acquainted.

AndyJ: It’s danged expensive. There’s a closed-end fund, FEO, from the long-successful people at Aberdeen, which has a proven track record using a “balanced” EM strategy and costs the same as the investor shares of the Foster fund will. So, I’m not totally sure that Seafarer as a brand new entity is worthier of new $ at this point than FEO.

His response: “I hear you.”  His money, and his family’s, is in the fund and he wants it to be affordable. The fund’s opening expense ratio is comparable to what Matthews charged when they reached a billion in assets. He writes, “I view it as one of the firm’s central duties to ensure that expenses become more affordable with scale, and over time.” Currently, he can’t pass along the economies of scale, but he’s committed to do so as soon as it’s economically possible. His suspicion is that many funds get complacent with their expense structure, and don’t work to aggressively pursue savings.

fundalarm — it’s almost exclusively about pay. If you’re a star, and your name is enough to attract assets, why would you want to share the management fee with others when you can have your own shop. Really. Very. Simple.  Answer.

While Mr. Foster didn’t exactly chuckle when I raised this possibility, he did make two relevant observations.  First, if he were just interested in his own financial gain, he’d have stayed with Matthews. Second, his goal is to pursue asset growth only to the degree that it makes economic sense for his shareholders.  By his estimation, the fund is economically sustainable at $100-125 million in assets.  As it grows beyond that level, it begins accumulating economies of scale which will benefit shareholders.  At the point where additional assets begin impairing shareholder value, he’ll act to restrict them.

Seafarer represents a thoughtfully designed fund, with principled administration and one of the field’s most accomplished managers.  It’s distinctive, makes sense and has been under development for a decade.  It’s worthy of serious consideration and will be the subject of a fund profile after it has a few months of operation.

Launch Alert: Wasatch Frontier Emerging Small Countries Fund (WAFMX)

Just as one door closes, another opens. Wasatch closed their wildly successful Emerging Markets Small Cap Fund (WAEMX) to new investors on February 24, 2012.  The fund gathered $1.2 billion in assets and has returned 51% per year over the three years ending 2/29/2012. They immediately opened another fund in the same universe, run by the same manager.

Wasatch Frontier Emerging Small Countries Fund (WAFMX) became available to retail investors on March 1, 2012.  It has been open only to Wasatch employees for the preceding weeks.  It will be a non-diversified, all-cap fund with a bias toward small cap stocks.  The managers report:

In general, frontier markets and small emerging market countries, with the exception of the oil-producing Persian Gulf States, tend to have relatively low gross national product per capita compared to the larger traditionally-recognized emerging markets and the world’s major developed economies. Frontier and small emerging market countries include the least developed markets even by emerging market standards. We believe frontier markets and small emerging market countries offer investment opportunities that arise from long-term trends in demographics, deregulation, offshore outsourcing and improving corporate governance.

The Fund may invest in the equity securities of companies of any size, although we expect a significant portion of the Fund’s assets to be invested in the equity securities of companies under US$3 billion at the time of purchase.

We travel extensively outside the U.S. to visit companies and expect to meet with senior management. We use a process of quantitative screening followed by “bottom up” fundamental analysis with the objective of owning the highest quality growth companies tied economically to frontier markets and small emerging market countries.

The manager is Laura Geritz.  She has been a portfolio manager for the Wasatch Emerging Markets Small Cap Fund since 2009 and for the Wasatch International Opportunities Fund since 2011. The minimum investment is $2000, reduced to $1000 for accounts with an automatic investing plan.  The expense ratio will be 2.25%, after waivers.    We will, a bit after launch, try to speak with Ms. Geritz and will provide a full profile of the fund.

Fidelity is Thinking Big

(May God have mercy on our souls.)

Despite the ironic timing – they simultaneously announce a bunch of long overdue but still pretty vanilla bond funds at the same time they trumpet their big ideas – Fido has launched its first major ad campaign which doesn’t involve TV.  Fidelity is thinking big.

In one of those “did they have the gang at Mad Magazine write this?” press releases, Fido will be “showcasing thought-provoking insights” which “builds on Fidelity’s comprehensive thought leadership” “through an innovative new thought leadership initiative.”

Do you think so?

So what does “thinking big” look like?  At their “thinking big” microsite, it’s a ridiculous video that runs for under three minutes, links that direct you to publishers websites so that you can buy three to five year old books, and links to articles that are a year or two old.  The depth and quality of analysis in the video are on par with a one-page Time magazine essay.  It mixes fun facts (it takes 635 gallons of water to make one pound of hamburger), vacuous observations (water shortages “could further exacerbate regional water issues”) and empty exhortations (“think about it.  We do.”).

According to the Boston Business Journal, the campaign “was created by Fidelity’s internal ad agency, Fidelity Communications and Advertising. Arnold Worldwide, the mutual fund firm’s ad agency of record, did not work on the campaign.”  It shows.  While the VP for communications described this as “the first campaign where we’ve actually attempted to create a viral program without a large supporting TV effort,” he also adds that Fidelity isn’t taking a position on these issues, they’re just “stating the facts.”

Yep.  That’s the formula for going viral: corporate marketing footage, one talking head and a “just the facts” ethos.

A quick suggestion from the guy with a PhD in communication: perhaps if you stopped producing empty, boilerplate shareholder communications (have you read one of your annual reports?) and stopped focusing on marketing, you might actually educate investors.  A number of fund companies provide spectacularly good, current, insightful shareholder communications (T. Rowe Price and Matthews Asia come immediately to mind).  Perhaps you could, too?

The Best of the Web: A new Observer experiment

This month marks the debut of the Observer’s “best of the web” reviews.  The premise is simple: having a million choices leaves you with no choices at all.  When you’ve got 900 cable channels, you’ll almost always conclude “there’s nothing on” and default to watching the same two stations. It’s called “the paradox of choice.”  Too many options cause our brains to freeze and make us miserable.

The same thing is true on the web.  There are a million sites offering financial insight; faced with that daunting complexity, we end up sticking with the same one or two.  That’s comforting, but may deny you access to helpful perspectives.

One solution is to scan the Observer’s discussion board, where folks post and discuss a dozen or more interesting topics and articles each day.  Another might be our best of the web feature.  Each month, based on reader recommendations and his own evaluations, contributing editor Junior Yearwood will post reviews for three to five related sites.  Each is a page long and each highlights what you need know: what’s the site about, what does it do well, what’s our judgment?

The debut issue features fund rating sites.  Everyone knows Morningstar, but how many folks have considered the insights available from, and strengths or weaknesses of, its dozen smaller competitors?  Take the case of a single splendid fund, Artisan International Value (ARTKX).  Depending on who you ask, it’s seen as somewhere between incredibly excellent (for our money, it is) and utterly undistinguished.  Here’s the range of assessments from a variety of sites:

• BarCharts.com: 96% buy
• Morningstar: Five stars, Gold
• FundMojo: 89/100, a Master
• Lipper: 24 of 25 possible points, a Leader
• U.S. News: 8.1/100
• FundReveal: less risky, lower return
• MaxFunds 79/100, good
• TheStreet.com: C-, hold
• Zacks: 3/5, hold.

After a month of reading, Junior and I identified three sites that warranted your time, and named eight more that you probably won’t be bookmarking any time soon.

If you’re wondering “what do those mean?”  Or “does Zacks know something that Morningstar doesn’t?” – or even if you’re not – we’re hoping you’ll check out “the best of the web.”

Numbers that you really shouldn’t trust

Claymore/Mac Global Solar Energy Index ETF (XTANX) is up 1120% YTD!

(Source: BarCharts.com, YTD Leaders, as of 2/29/2012)

Or not.  First, it’s a Guggenheim ETF now.  Second, there was a 10:1 reverse split on February 15.  BarCharts has a “strong buy” rating on the shares.

GMO Domestic Bond III (GMBDX) is up 767%!

(Same source)

Uhh.  No.  9:1 reverse split on January 17.

There are 77 T. Rowe Price funds that waive the investment minimum for investors with an automatic investing plan!

(Source: Morningstar premium fund screener, 2/29/2012)

Uhh. No.  T. Rowe discontinued those waivers on August 1, 2011.

The “real” expense of running Manning & Napier Dividend Focus (MNDFX) is 5.6%.

(Source: Manning and Napier website, 2/29/2012)

Likewise: no.  An M&N representative said that the figures represented the fund’s start-up state (high expenses, no shareholders) but that they weren’t allowed to change them yet.  (???)  The actual e.r. without an expense waiver is 1.05%, but they have no intention of discontinuing the waiver.

NorthRoad International is a five-star fund that offers tiny beta and huge alpha

(Source: Morningstar profile, 2/29/2011)

Uhh.  No.  Not even a little.  Why not?  Because until June 30, 2011, this was the Madison Mosaic Small/Mid-Cap Fund.  Because US smaller stocks were bouncing back from the bloody meltdown from October 2007 – March 2009, this fund returns that were great by international large cap standards and those returns have been folded seamlessly into Morningstar’s assessment.

In NorthRoad’s defense: the fund’s own publicity material makes the change very clear and refuses to include any comparisons that precede the fund’s new mandate.  And, since the change, it has been a distinctly above-average international fund with reasonable fees.  It’s just not the fund that Morningstar describes.

Any three-year performance number.  The market reached its bottom in the first week of March, 2009 and began a ferocious rally.  We are now entering the point where the last remnants of a fund’s performance during the market downturn are being cycled-out of the three-year averages.  As of 3/01/2012, there are 18 funds which have returned more than 50% per year, on average for the past three years.  Half of all funds have three-year returns above 21% per year.  Forester Value (FVALX), the great hero of 2008 and the recipient of a ton of money in 2009, now has three-year returns that trail 99% of its peers.

Two funds and why they’re worth your time . . .

Really, really worth your time.

Each month we provide in-depth profiles of two funds that you should know more about, one new and one well-established.

Matthews Asia Strategic Income (MAINX): most US investors have little or no exposure to Asian fixed-income markets, which are robust, secure and growing. Matthews, which already boasts the industry’s deepest corps of Asia specialists, has added a first-rate manager and made her responsible for the first Asian income fund available to U.S. retail investors.

GRT Value (GRTVX): what do you get when you combine one of the best and most experienced small cap investors, a corps of highly professional and supportive partners, a time-tested, risk-conscious strategy and reasonable expenses? GRTVX investors are finding out.

Briefly noted:

T. Rowe Price Real Assets (PRAFX) opened to retail investors in December, 2011.  The fund invests in companies that own “stuff in the ground.”  The fund was launched in May 2011 but was only available for use in other T. Rowe Price funds.  A 5% allocation to real assets became standard in their target-date funds, and might represent a reasonable hedge in most long-term portfolios.  The fund’s opening to retail investors was largely unexplained and unnoticed.

Wasatch Microcap Value (WAMVX) has reopened to new investors through Schwab, Fidelity, TD Ameritrade, and other intermediaries.

Talented managers with good marketers attract cash!  What a great system.  The folks at Grandeur Peaks passed $100 million in assets after four months of operation.  The exceedingly fine River Park /Wedgewood Fund (RWGFX) just passed $200 million.   When I first profiled the fund, July 2011, it had $200,000 in assets.  Dave Rolfe, the manager, estimates that the fund’s strategy can accommodate $5 billion.

Vanguard finally put Vanguard Asset Allocation out of its misery by merging it into Vanguard Balanced Index fund (VBINX) on 2/10/2012.  Last fall the Observer identified Vanguard Asset Allocation as one of the fund universe’s 12 worst funds based on its size and its wretched consistency.  We described funds on the list this way:

These funds that have finished in the bottom one-fourth of their peer groups for the year so far.  And for the preceding 12 months, three years, five years and ten years.  These aren’t merely “below average.”  They’re so far below average they can hardly see “mediocre” from where they are.

RiverNorth DoubleLine Strategic Income (RNSIX) will close to new investors on March 30, 2012. The fund, comanaged by The Great Gundlach, gathered $800 million in its first 14 months.

Wells Fargo will liquidate Wells Fargo Advantage Social Sustainability (WSSAX) and Wells Fargo Advantage Global Health Care (EHABX) by the end of March, 2012.  It’s also merging Wells Fargo Advantage Strategic Large Cap Growth (ESGAX) into Wells Fargo Advantage Large Cap Growth (STAFX), likely in June.

Bridgeway is merging Bridgeway Aggressive Investors 2 (BRAIX) into Bridgeway Aggressive Investors 1 (BRAGX) and Bridgeway Micro-Cap Limited (BRMCX) into Bridgeway Ultra-Small Company (BRUSX).   Bridgeway had earlier announced a change in BRUSX’s investment mandate to allow for slightly larger (though still tiny) stocks in its portfolio.  In hindsight, that appears to have been the signal of the impending merger.  BRUSX, which closed when it reached just $22.5 million in assets, is a legendary sort of fund.  $10,000 invested at its 1994 launch would now be worth almost $120,000 against its peers $50,000.

Invesco Small Companies (ATIIX) will close to new investors on March 5, 2012.  That’s in response to an entirely-regrettable flood of hot money triggered by the fund’s great performance in 2011.  Meanwhile, Invesco also said it will reopen Invesco Real Estate (IARAX) to new investors on March 16.

Delaware Large Cap Value (DELDX) is merging into Delaware Value (DDVAX), itself an entirely-respectable large cap value fund with noticeably lower expenses.

Likewise Lord Abbett is merged Lord Abbett Large-Cap Value (LALAX) into Lord Abbett Fundamental Equity (LDFVX).

Proving the adage that nothing in life is certain but death and taxes, State Street Global Advisors will kill its Life Solutions funds on May 15.  Among the soon-to-be decedents are Balanced, Growth and Income & Growth.  Also going are SSgA Disciplined Equity (SSMTX) and Directional Core Equity (SDCQX).

Speaking of death, the year’s second mass execution of ETFs occurred on February 17 when Global X took out eight ETFs at once: Farming, Fishing, Mexico Small Caps, Oil, Russell Emerging Markets Growth, Russell Emerging Markets Value, and Waste Management.  The 17 HOLDRS Trusts, which promised to “revolutionize stock investing” were closed in December and liquidated on January 9, 2012.

Our chief programmer, Accipiter, was looking for a bit of non-investing reading this month and asked folks on the board for book recommendations. That resulting outpouring was so diverse and thoughtful that we wanted to make it available for other readers. As a result, our Amazon store (it’s under Books, on the main menu bar) now has a “great non-investing reads” department. You’ll be delighted by some of what you find there.

Oh, and Accipiter: there will be a quiz over the readings.

Amazon’s time limit

If you’re one of the many people who support the Observer, thank you!  Thank you, thank you, thank you!  A dozen readers contributed to the Observer this month (thank you!) by mail or via PayPal.  That’s allowed us to more than offset the rising costs caused by our rising popularity.  You not only make it all worthwhile, you make it all possible.

If you’re one of the many people who support the Observer by using our link to Amazon.com, thank you – but here’s a warning: the link you create expires or can be wiped out as you navigate.

If you enter Amazon using the Observer’s link (consider bookmarking it), or any other Associate’s link, and put an item in your Shopping Cart, the item carries a special code which serves to identify the referring site (roughly: “us”).  It appears the link expires about 24 hours after you set it, so if something’s been in your shopping cart for six weeks (as sometimes happens with me), you might want to re-add it.

Which I mention because Amazon just restated their policy.

A WORD OF WARNING BEFORE YOU GO:

We are going try to cull dead accounts from our email list in the next month, since the monthly charge for sending our notice climbs precipitously after we pass 2500 names.  Anyone who has subscribed to receive an email notice but who has never actually opened one of them (it looks like more than a hundred folks) will be dropped.  We’d feel bad if we inadvertently lost you, so please do be sure to open the email notice (don’t just look at it in a preview pane) at least once so we know you’re still there.

Take great care and I’ll write again, soon.

Dear friends,

Welcome to a new year.  Take a moment, peer back at 2011 and allow yourself a stunned “what the hell was that about?”  After one of the four most volatile years the stock market’s seen in decades, after defaults, denunciations, downgrades, histrionics and the wild seesaw of commodity prices, stocks are back where they began.  After all that, Vanguard’s Total Stock Market Index (VTSMX) had, as of 12/29/11, risen by one-quarter of one percent for the year.

I have no idea what the year ahead brings (except taxes).  I’m dubious that the world will follow the Mayans into extinction on December 21^st.    My plan for the new year, and my recommendation for it: continue to live sensibly, invest cautiously and regularly, enjoy good wine and better cheese, celebrate what I have and rejoice at the fact that we don’t need to allow the stock market to run our lives.

All of which introduces a slightly-heretic thought.

Consider Taking a Chill Pill: Implications of a Stock-Light Portfolio

T. Rowe Price is one of my favorite fund companies, in part because they treat their investors with unusual respect.  Price’s publications depart from the normal marketing fluff and generally provide useful, occasionally fascinating, information.  I found two Price studies, in 2004 and again in 2010, particularly provocative.  Price constructed a series of portfolios representing different levels of stock exposure and looked at how the various portfolios would have played out over the past 50-60 years.

The original study looked at portfolios with 20, 40, 60, 80 and 100% stocks.  The update dropped the 20% portfolio and looked at 0, 40, 60, 80, and 100%.

As you think about your portfolio’s shape for the year ahead, you might find the Price data useful.  Below I’ve reproduced partial results for three portfolios.  The original 2004 and 2010 studies are available at the T. Rowe Price website.

What does that mean for you?  Statisticians would run a Monte Carlo Analysis to guide the answer.  They’d simulate 10,000 various decades, with different patterns and sizes of losses and gains (you could lose money in 6 of 10 years which, though very unlikely, has to be accounted for), to estimate the probabilities of various outcomes.

Lacking that sophistication, we can still do a quick calculation to give a rough idea of how things might play out.  Here’s how the simple math plays out.

Assuming no losing years, $10,000 invested conservatively for 10 years might grow to $20,900.  You might or might not have experienced a loss (historically, the portfolio lost money one year in 16). If your loss occurred in Year 10, your $10,000 would still have grown to $20,000.

Assuming no losing years, $10,000 invested moderately for 10 years might grow to $25,000.  You’ll likely have lost money twice, about 6.5% each year.  If you suffered an average loss in Year Five and again at Year Ten, your $10,000 would still have grown to $17,600.

Assuming no losing years, $10,000 invested aggressively for 10 years might grow to $29,900.  You’ll likely have lost money twice, about 12.5% each year.  If you suffered an average loss in Year Five and again at Year Ten, your $10,000 would still have grown to $18,385.

Measured against a conservative portfolio, a pure stock portfolio increases the probability of losing money by 400% (from a 6% chance to 23%), increases the size of your average loss by 2500% (from 0.5% to 12.5%) and triples your volatility.  With extraordinary luck, it doubles the conservative portfolio’s gain.  With average luck, it trails it. This is not a prediction of how stocks will do, in the short term, or the long term, but  is simply a reminder of the consequence of investing in them.

We can’t blithely assume that future returns will be comparable to past ones.  As Bob Cochran and others point out, bonds enjoyed a 30 year bull market which has now ended.  GMO foresees negative “real” returns for bonds and cash over the next seven years and substandard ones for US stocks as a whole.   That said, the Price studies show how even fairly modest shifts in asset allocation can have major shifts in your risk/reward balance.  As with Tabasco sauce, dribbles and not dollops offer the greatest gain.  Adding only very modest amounts of stock exposure to otherwise very conservative portfolios might provide all the heat you need (and all the heat you can stand).

Launch Alert: TIAA-CREF Lifestyle Income

On December 9, 2011, TIAA-CREF launched a new series of Lifestyle funds-of-funds.  In light of the T. Rowe Price research, Lifestyle Income (TSILX) might be worth your attention.  TSILX invests 20% of its assets in stocks, 40% in Short-Term Bond Fund (TCTRX) and 40% in their Bond (TIORX) and Bond Plus (TCBPX) funds.  The bond funds are all low cost offerings with index-like returns.  The equities sleeve is needlessly complicated with 11 funds, the smallest allocation being 0.2% to Mid-Cap Value.  That said, TSILX has a bearable expense ratio for a new fund (0.85%).  It’s run by the same team that has achieved consistent mediocrity with TIAA-CREF Managed Allocation (TIMIX), another fund of too many TIAA-CREF funds.   In this case, “mediocrity” isn’t bad and “consistent” is good.   The minimum initial investment is $2500.

TSILX might, then, approximate T. Rowe Price’s conservative portfolio allocation.  They are, of course, not the only option.  Several of the “retirement income” funds offered by the major no-load families have the same general nature.  Here’s a rundown of them:

The Great Unanswered Question: “What Are Our Recommendations Worth?”

This is the time of year when every financial publication and most finance websites (not including the Observer), trumpet their “can’t miss” picks for the year ahead.  A search of the phrase “Where to Invest in 2012” produced 99,200 hits in Google (12/26/2011), which likely exceeds the number of sensible suggestions by about 99,100.

Before browsing, even briefly, such advice, you should ask “what are those recommendations worth?”  A partial answer lies in looking at how top publications did with their 2011 picks.  Here are The Big Four.

Morningstar, Where to Invest in 2011 was a report of about 30 pages, covering both general guidance and funds representing a variety of interests.  It no longer seems available on the various Morningstar websites, but copies have been posted on a variety of other sites.

Kiplinger, Where to Invest in 2011 began with the guess that “Despite tepid economic growth, U.S. stocks should produce respectable gains in the coming year.”  As long as you can respect 1.6% (Vanguard’s Total Stock Market Index through Christmas), they’re right. In a sidebar story, Steven Goldberg assured that “This Bull Market Has Room to Run.”  Again, if “into walls” and “off cliffs” count, they’re right.

The story focused on 11 stocks and, as a sort of afterthought, three funds.  In a particularly cruel move, the article quotes a half dozen fund managers in defense of its stock picks – then recommends none of their funds.

SmartMoney, Where to Invest in 2011, cheated a bit by not offering its recommendations until February.  Even then, it focused solely on a dozen individual stocks.  The worst of their picks, Oracle ORCL, was down 16% between the start of the year and the Christmas break.  The best, TJX Companies TJX, was up 49%. Six stocks lost money, six gained.  The portfolio gained 4.8%.  A rough conversion into fund terms would have you subtract 1.4% for operating expenses, leaving a return of 3.4%.  That would have it ranked in the top 14% of large cap core funds, through Christmas.  If you missed both the best and worst stock, your expense-adjusted returns would drop to 1.4%.

Money, Make Money in 2011: Your Investments discussed investing as a small part of their 2011 recommendations issue.  The offered a series of recommendations, generally a paragraph or two, followed by a fund or two from their Money 70 list.

Money’s strategic recommendations were: Favor stocks over bonds, favor large caps over small cap, good overseas carefully and don’t rush into emerging markets,  shorten up bond durations to hedge interest rate risks and add a few riskier bonds to boost yields

The Bottom Line: give or take the Fairholme implosion, Morningstar was mostly right on equities and mostly wrong on bonds and commodities, at least as measured by a single year’s return.  SmartMoney’s stock picks weren’t disastrous, but missing just one stock in the mix dramatically alters your results. Kiplinger’s got most of the forecasts wrong but chose funds with predictable, long term records.

Amateur Hour in Ratings Land, Part 1: TheStreet.com

How would you react to an article entitled “The Greatest Baseball Players You’ve Never Heard Of,” then lists guys named DiMaggio, Clemente and Kaline?  Unknown novelists: Herman Melville, Stephen King . . . ?

TheStreet.com, founded by frenetic Jim Cramer, is offering up mutual fund analysis.  In December, mutual fund analyst Frank Byrt offered up “10 Best Mutual Funds of 2011 You’ve Never Heard Of.”  The list made me wonder what funds the folks at TheStreet.com have heard of.  They start by limiting themselves to funds over $1 billion in assets, a threshold that suggests somebody has heard of them.  They then list, based on no clear criteria (they’ve been “leaders in their category”), some of  the industry’s better known funds:

Franklin Utilities (FKUTX) – $3.6 billion in assets under management

Fidelity Select Biotechnology (FBIOX) – $1.2 billion

Sequoia Fund (SEQUX) – $4.7 billion, the most storied, famously and consistently successful fund of the past four decades.

Federated Strategic Value Dividend Fund (SVAAX) – $4.9 billion

Delaware Smid Cap Growth (DFDIX) – $1 billion

GMO Quality (GQETX) – technically it’s GMO Quality III, and that number is important.  Investors wanting Quality III need only shell out $10 million to start while Quality IV requires $125 million, Quality V requires $250 million and Quality VI is $300 million.   In any case, $18 billion in assets has trickled in to this unknown fund.

Wells Fargo Advantage Growth (SGRNX) – the fund, blessed by a doubling of assets in 2011 and impending bloat, is closing to new investors. Mr. Byrt complains that “Ognar has wandered from the fund’s mandate,” which is proven solely by the fact that he owns more small and midcaps than his peers.  The prospectus notes, “We select equity securities of companies of all market capitalizations.”  As of 10/30/2011, he had 45% in large caps, 40% in mid caps and 15% in small names which sounds a lot like what they said they were going to do.  Mr Byrt’s ticker symbol, by the way, points investors to the $5 million minimum institutional share class of the $7.2 billion fund.  Po’ folks will need to pay a sales load.

Vanguard Health Care Admiral Fund (VGHAX) – a $20 billion “unknown,” with a modest $50,000 minimum and a splendid record.

SunAmerica Focused Dividend (FDSAX) – $1 billion

Cullen High Dividend Equity (CHDVX) – $1.3 billion.

Of the 10 funds on Mr. Byrt’s list, three have investment minimums of $50,000 or more, four carry sales loads, and none are even arguably “undiscovered.”  Even if we blame the mistake on an anonymous headline writer, we’re left with an unfocused collection of funds selected on unexplained criteria.

Suggestion from the peanut gallery: earn your opinion first (say, with serious study), express your opinion later.

Amateur Hour in Ratings Land, Part 2: Zacks Weighs In

Zacks Investment Research rates stocks.  It’s not clear to me how good they are at it.  Zacks’ self-description mixes an almost mystical air with the promise of hard numbers:

The guiding principle behind our work is that there must be a good reason for brokerage firms to spend billions of dollars a year on stock research. Obviously, these investment experts know something special that may be indicative of the future direction of stock prices. From day one, we were determined to unlock that secret knowledge and make it available to our clients to help them improve their investment results.

So they track earnings revisions.

Zacks Rank is completely mathematical. It”s cold. It”s objective.

(It’s poorly proofread.)

The Zacks Rank does not care what the hype on the street says. Or how many times the CEO appeared on TV. Or how this company could some day, maybe, if everything works perfectly, and the stars are aligned become the next Microsoft. The Zack Rank only cares about the math and whether the math predicts that the price will rise.

Momentum investing.  That’s nice.  The CXO Advisory service, in an old posting, is distinctly unimpressed with their performance.  Mark Hulbert discussed Zacks in a 2006 article devoted to “performance claims that bear little or no relationship with the truth.”

In a (poorly proofread) attempt to diversify their income stream, Zacks added a mutual fund rating service which draws upon the stock rating expertise to rank “nearly 19,000 mutual funds.”

There are three immediately evident problems with the Zacks approach.

There are only 8000 US stock funds, which is surely a problem for the 10,000 funds investing elsewhere.  Zacks expertise, remember, is focused on US equities.

The ratings for those other 10,000 funds are based “a number of key factors that will help find funds that will outperform.”  They offer no hint as to what those “key factors” might be.

The ratings are based on out-of-date information.  The SEC requires funds to disclose their holdings quarterly, but they don’t have to make that disclosure for 60 days after the end of the quarter.  If Zacks produces, in January, a forecast of the six-month performance of a fund based on a portfolio released in November of the fund’s holdings in September, you’ve got a problem.

Finally, the system doesn’t attend to trivial matters such as strategy, turnover, expenses, volatility . . .

All of which would be less important if there were reliable evidence that their system works.  But there isn’t.

Which brings us to Zack’s latest: a 12/20/11 projection of which aggressive growth funds will thrive in the first half of 2012 (“Top 5 Aggressive Growth Mutual Funds”).  Zacks has discovered that aggressive growth funds invest in “a larger number of” “undervalued stocks” to provide “a less risky route to investing in these instruments.”

Investors aiming to harness maximum gains from a surging market often select aggressive growth funds. This category of funds invests heavily in undervalued stocks, IPOs and relatively volatile securities in order to profit from them in a congenial economic climate. Securities are selected on the basis of their issuing company’s potential for growth and profitability. By holding a larger number of securities and adjusting portfolios keeping in mind market conditions, aggressive growth funds offer a less risky route to investing in these instruments.

Larger than what?  Less risky than what?  Have they ever met Ken Heebner?

Their five highest rated “strong buy” funds are:

Legg Mason ClearBridge Aggressive Growth A (SHRAX): ClearBridge is Legg Mason’s largest equity-focused fundamental investing unit.  SHRAX traditionally sports high expenses, below average returns (better lately), above average risk (ditto), a 5.75% sales load and a penchant for losing a lot in down markets.

Delaware Select Growth A (DVEAX): give or take high expenses and a 5.75% sales load, they’ve done well since the March 2009 market bottom (though were distinctly average before them).

Needham Aggressive Growth (NEAGX) which, they sharply note, is “a fund focused on capital appreciation.”  Note to ZIR: all aggressive growth funds focus on capital appreciation.  In any case, it’s a solid, very small no-load fund with egregious expenses (2.05%) and egregious YTD losses (down almost 15% through Christmas, in the bottom 2% of its peer group)

Sentinel Sustainable Growth Opportunities A (WAEGX): 5% sales load, above average expenses, consistently below average returns

American Century Ultra (TWCUX): a perfectly fine large-growth fund.  Though American Century has moved away from offering no-load funds, the no-load shares remain available through many brokerages.

So, if you like expensive, volatile and inconsistent . . . .  (Thanks to MFWire.com for reproducing, without so much as a raised eyebrow, Zacks list.  “Are These Funds Worth a Second Look?” 12/21/2011)

Two Funds, and Why They’re Worth your Time

Really worth it.  Every month the Observer profiles two to four funds that we think you really need to know more about.  They fall into two categories:

Most intriguing new funds: good ideas, great managers. These are funds that do not yet have a long track record, but which have other virtues which warrant your attention.  They might come from a great boutique or be offered by a top-tier manager who has struck out on his own.  The “most intriguing new funds” aren’t all worthy of your “gotta buy” list, but all of them are going to be fundamentally intriguing possibilities that warrant some thought.  This month’s new fund:

HNP Growth and Preservation (HNPKX): one of the strengths and joys of small funds is that they offer the opportunity to try new approaches, rather than offering the next bloated version of an old one.  The HNP managers, learning from the experience of managed futures funds, offer a rigorous, quantitative approach to investing actively and cautiously across several asset classes.

Stars in the shadows: Small funds of exceptional merit. There are thousands of tiny funds (2200 funds under $100 million in assets and many only one-tenth that size) that operate under the radar.  Some intentionally avoid notice because they’re offered by institutional managers as a favor to their customers (Prospector Capital Appreciation and all the FMC funds are examples).  Many simply can’t get their story told: they’re headquartered outside of the financial centers, they’re offered as part of a boutique or as a single stand-alone fund, they don’t have marketing budgets or they’re simply not flashy enough to draw journalists’ attention.  There are, by Morningstar’s count, 75 five-star funds with under $100 million in assets; Morningstar’s analysts cover only eight of them.

The stars are all time-tested funds, many of which have everything except shareholders.

Tocqueville Select (TSELX): Delafield Fund is good.  Top 5% of the past three years.  And five years.  And ten and fifteen years, for that matter.  Could Tocqueville Select be better?  It offers the same talented team that runs Delafield, but allows them to construct a concentrated portfolio that needs to invest only one-twentieth of Delafield’s assets.

Launch Alert:

Matthews Asia Strategic Income Fund (MAINX) launched on November 30, 2011.  The fund will invest in a wide variety of bonds and other debt securities of Asian corporate and sovereign issuers in both local and hard currencies. The fund will draw on both Matthews’ expertise in Asian fixed-income investing, which dates to the firm’s founding, and on the expertise of its new lead manager, Teresa Kong. Ms. Kong was Head of Emerging Market Investments at Barclays Global Investors / BlackRock, where she founded and led the Fixed Income Emerging Markets team. She was a Senior Portfolio Manager for them, a Senior Securities Analyst at Oppenheimer Funds, and an analyst for JP Morgan Securities.  Matthews argues that the Asian fixed income market is large, diverse, transparent and weakly-correlated to Western markets. Because Asian firms and governments have less debt than their Western counterparts, they are only a small portion of global bond indexes which makes them attractive for active managers. The Matthews fund will have the ability to invest across the capital structure, which means going beyond bonds into convertibles and other types of securities. The minimum initial investment is $2500 for regular accounts, $500 for IRAs.  Expenses are capped at 1.40%.

Prelaunch Alert: RiverNorth Tactical Opportunities

RiverNorth Core Opportunities (RNCOX) exemplifies what “active management” should be.  The central argument in favor of RNCOX is that it has a reason to exist, a claim that lamentably few mutual funds can seriously make.  RNCOX offers investors access to a strategy which makes sense and which is not available through – so far as I can tell – any other publicly accessible investment vehicle. The manager, Patrick Galley, starts with a strategic asset allocation model (in the neighborhood of 60/40), modifies it with a tactical asset allocation which tilts the fund in the direction of exceptional opportunities, and then implements the strategy either by investing in low-cost ETFs or higher-cost closed-end funds.  He chooses the latter path only when the CEFs are selling at irrational discounts to their net asset value.  He has, at times, purchased a dollar’s worth of assets for sixty cents.

Closed-end funds are investment vehicles very much like mutual funds.  One important difference is that they can make greater use of leverage to boost returns.  The other is that, like stocks and exchanged-traded funds, they trade throughout the day in secondary markets.  When you buy shares, it’s from another investor in the fund rather than from the fund company itself.  That insulates CEFs from many of the cash-flow issues that plague the managers of open-ended funds.

RNCOX, since inception, has outperformed its average peer by about two-to-one, though the manager consistently warns that his strategy will be volatile.  After reaching about a half billion in assets, the fund closed in the summer of 2011.

In the fall of 2011, RiverNorth filed to launch a closed-end fund of its own, RiverNorth Tactical Opportunities.  The fund will invest in other closed-end funds, just as its open-ended sibling does.  The closed-end fund will have the ability to use leverage, which will magnify its movements.  The theory says that they’ll deploy leverage to magnify the upside but it would be hard to avoid catching downdrafts as well.

Morningstar’s Mike Taggart agrees that the strategy is “compelling.”  Mr. Galley, legally constrained from discussing a fund in registration, says only that the timing of launch is still unknown but that he’d be happy to talk with us as soon as he’s able.  Folks anxious for a sneak peek can read the fund’s IPO filing at the Securities and Exchange Commission.

Pre- Pre-Launch Alert:

Andrew Foster announced on Seafarer’s website that he’s “exploring” a strategy named Seafarer Overseas Growth and Income.  At this point there is no vehicle for the strategy, that is, nothing in registration with the SEC, but tracking Mr. Foster’s thinking is likely to be a very wise move.

Mr. Foster managed Matthews Asian Growth and Income (MACSX), a FundAlarm “star in the shadows” fund, from 2005-2011.   As its manager, he first worked with and then succeeded Paul Matthews, the firm’s founder.  Saying that he did an excellent job substantially understates his success.  MACSX was one of the most consistent, least volatile and most rewarding Asia-focused funds during his tenure. Andrew also served as Matthews’ director of research and chief investment officer.

Andrew left to found his own firm in 2011, with the announced intention of one day launching a thoroughly modern mutual fund that drew on his experience.  While this is not yet that fund, it does illustrate the direction of his planning.   Andrew writes:

This strategy attempts to offer a stable means of participating in a portion of developing countries’ growth prospects, while providing some downside protection relative to a strategy that invests only in the common stocks of emerging markets. The strategy’s objective is to provide long-term capital appreciation along with some current income. In order to pursue that objective, the strategy incorporates dividend-paying equities, convertible bonds and fixed income securities. It may also invest in companies of any size or capitalization, including smaller companies.

We’ll do our best to monitor the strategy’s development.

Mining for Hidden Gems among Funds

Journalist Javier Espinoza’s pursuit of “hidden gems” – great funds with under $100 million in assets – led him to the Observer.  His article Mining for Hidden Gems Among Funds ran in the Wall Street Journal’s “Investing in Funds” report (12/05/2011).  The Journal highlighted five funds:

Pinnacle Value (recommended David Snowball and profiled as a “star in the shadows”)

Marathon Value (another “star in the shadows,” recommended by Johanna Turner of Milestones Financial Planning and a supporter of both FundAlarm and the Observer)

Artio US Smallcap (recommended by Bob Cochran of PDS Planning, one of the most thoughtful and articulate members of the community here and at FundAlarm)

Bogle Small Cap Growth (recommended by Russel Kinnel, Morningstar’s venerable director of fund research)

Government Street Equity (recommended by Todd Rosenblut, mutual fund analysis for S&P Capital IQ)

Fund Update

RiverPark Wedgewood (RWGFX), which the Observer profiled in September as one of the most intriguing new funds, has an experienced manager and a focused portfolio of exceptionally high-quality firms.  Manager Dave Rolfe aims to beat index funds at their own game, by providing a low turnover, tightly-focused portfolio that could never survive in a big fund firm.

The fund is approached the end of 2011 with returns in the top 2% of its large growth peer group.  Manager Dave Rolfe has earned two distinctions from Morningstar.  His fund has been recognized with the new Bronze designation, which means that Morningstar’s analysts weigh it as an above-average prospect going forward.  In addition, he was featured in a special Morningstar Advisor report, Wedgewood’s Lessons Pay Off.  After lamenting the pile of cookie-cutter sales pitches for firms promising to invest in high-quality, reasonably-priced firms, Dan Culloton happily observes, “self-awareness, humility and patience set Wedgewood apart.”  I agree.

Briefly Noted . . .

Matthews International Capita Management reopened Matthews Asian Growth and Income Fund (MACSX) and the Matthews Asia Small Companies Fund (MSMLX) on January 4, 2012. The funds have been closed for about a year, but both saw substantial asset outflows as Asian markets got pummeled in 2011.  MACSX was identified as an Observer “Star in the Shadows” fund.  As usual, it’s one of the best Asian funds during market turbulence (top 15% in 2011) though it seems to be a little less splendid than under former manager Andrew Foster.  The young Small Companies fund posted blistering returns in 2009 and 2010.  Its 2011 returns have modestly trailed its Asian peers.  That’s a really reassuring performance, given the fund’s unique focus on smaller companies.

The Wall Street Journal reports on a fascinating initiative by the SEC.  They’ve been using quantitative screens to identify hedge funds with “aberrational performance,” which might include spectacularly high returns or inexplicably low volatility. They then target such funds for closer inspection.  The system is been so productive that they’re now adding mutual funds to the scan (“SEC Ups its Game to Identify Rogue Firms,” 12/29/11).

Artisan Partners has withdrawn their planned IPO, citing unfavorable market conditions.  The cash raised in the IPO would have allowed the firm to restructure a bit so that it would be easier for young managers to hold a significant equity stake in the firm.

Ed Studzinski, long-time comanager of Oakmark Equity & Income (OAKBX) retired on January 1, 2012, at age 62.  Clyde McGregor will now manage the fund alone.

ETrade daily publishes the list of “most searched” mutual funds, as an aid to folks wondering where investors’ attention is wandering.  If you can find any pattern in the post-Christmas list, I’d be delighted to hear of it:

• Rydex Russell 2000 2x Strategy (RYRSX)
• Managers PIMCO Bond (MBDFX)
• T. Rowe Price Emerging Markets Stock (PRMSX)
• Vanguard Energy (VGENX)
• T. Rowe Price New Horizons (PRNHX)

Highland Funds Asset Management will spin-off from Highland Capital Management next month and switch its name to Pyxis Capital.  Highland’s 19 mutual funds will be rebranded with the Pyxis name effective January 9.  Pyxis is a constellation in the southern sky and Latin for a mariner’s compass.  Pixies?  Pick Six?  Pick sis?  What do you suppose was going on at the meeting where someone first suggested, “hey, let’s change our name to something that no one has ever heard of, which is hard to say and whose sole virtue is an obscure reference that will be grasped by three Latin astronomers?”

Anya Z. and the Observer’s New Look

In December we unveiled the Observer’s new visual design, which is easier to navigate, easier to maintain and infinitely more polished.  I’d like to take a moment to recognize, and thank, the designer.  Anya Zolotusky is a Seattle area web designer who specializes in elegant and highly useable websites for small businesses.  Anya’s resume has entries so cool that they make me laugh.  Uhhh . . . she pioneered “cybercasts from uncomfortable places.”   One presumably uncomfortable place was a Mt Everest Basecamp, 18,000’ up from which she handled all communications, including live audio and video interviews with CNN and their ilk).

We talked a while about what I imagined the Observer should look like and Anya took it from there.  She describes her goal:

Primarily I wanted a more polished look that would better suit the spirit of the MFO and make using the site a more pleasant experience for visitors. I liked incorporating the energy of the exchange floor, but faded way back, because the MFO is a source of calm and reason in the midst of investment world chaos. The colors, the clean layout and clear navigation are all intended to create a calm backdrop for a topic that is anything but. And the iconic Wall Street bull is just a natural totem for the MFO. I’m happy to have contributed a little to what I hope is a long, bullish future for the MFO and all the Snowball Groupies (especially my mom)!

Anya’s mom is a Soviet émigré and long-time fan of FundAlarm.  Her encouragement, in a note entitled “Come on, Snowball.  Do it for mom!” helped convince me to launch the Observer in the first place.

And so, thanks to Anya and all the remarkably talented folks whose skill and dedication allows me to focus on listening and writing.  Anyone interested in seeing the rest of Anya’s work should check out her Darn Good Web Design.

Two New Observer Resources

The Observer continues to add new features which reflect the talents and passions of the folks who make up our corps of volunteer professionals.  I’m deeply grateful for their support, and pleased to announce two site additions.

The Navigator

Accipiter, our chief programmer and creator of the Falcon’s Eye, has been hard at work again. This time he’s turned his programming expertise to The Navigator, a valuable new tool for looking up fund and ETF information. Similar to the Falcon’s Eye, you can enter a ticker and receive links to major sources of information, 27 at last count. In added functionality, you can also enter a partial ticker symbol and see a dropdown list of all funds that begin with those characters. Additionally, you can search for funds by entering only part of a fund name and again seeing a dropdown list of all funds containing the string you entered. Choosing a fund from the dropdown then returns links to all 27 information sources. This all strikes me as borderline magical.  Please join me in thanking Accipiter for all he does.

Miscommunication in the Workplace

This ten-page guide, which I wrote as a Thanksgiving gift for the Observer’s readers, has been downloaded hundreds of times.  It has now found a permanent home in the Observer’s Resources section.  If you’ve got questions or comments about the guide, feel free to pass them along.  If we can make the guide more useful, we’ll incorporate your ideas and release a revised edition.

In Closing . . .

Augustana College bell tower panorama, photo by Drew Barnes, class of 2014.

Winter will eventually settle in to the Midwest.  The days are short and there are lots of reasons to stay inside, making it a perfect time to catch up on some reading and research.  I’ve begun a conversation with Steve Dodson, former president of Parnassus Investments and now manager of Bretton Fund (BRTNX) and I’m trying to track down James Wang, manager of the curious Oceanstone Fund (OSFDX).  Five years, five finishes at the top of the fund world, cash heavy, few assets and virtually no website.  Hmmm. Our plan is to review two interesting new funds, one primarily domestic and one primarily international, in each of the next several months. We’ll profile the new Grandeur Peak Global Opportunities (GPGOX) and Matthews Asia Strategic Income (MAINX) funds in February and March, respectively.

Observer readers have asked for consideration of a half dozen funds, including Conestoga Small Cap (CCASX) and Aston/Cornerstone Large Cap Value (RVALX).  I don’t know what I’ll find, but I’m delighted by the opportunity to learn a bit and to help assuage folk’s curiosity.

In addition, Junior Yearwood, who helped in editing the Miscommunication in the Workplace guide, has agreed to take on the task of bringing a long-stalled project to life.  Chuck Jaffe long ago suggested that it would be useful to have a launch pad from which to reach the highest-quality information sources on the web; a sort of one-stop shop for fund and investing insights.  While the Observer’s readers had a wealth of suggestions (and I’ll be soliciting more), I’ve never had the time to do them justice.  With luck, Junior’s assistance will make it happen.

We’re healthy, in good spirits, the discussion board is populated by a bunch of good and wise people, and I’m teaching two of my favorite classes, Propaganda and Advertising and Social Influence.  Life doesn’t get much better.

I’ll see you soon,

David

Dear friends,

Welcome to the Observer 2.0.  We worked hard over the past month to create a new look for the Observer: more professional, easier to read, easier to navigate and easier to maintain.  We hope you like it.

It’s hard to believe that, all the screaming aside, the stock market finished November at virtually the same point that it began.  Despite wild volatility and a ferocious month-end rally, Vanguard’s Total Stock Market Index Fund (VTSMX) ended the month with just a tiny loss.

Finding Funds that Lose at Just the Right Time

The best investors are folks who are able to think differently than do their peers: to find opportunities where others find only despair.  In our ongoing attempt to get you to think differently about how you find a good investment, we decided to ask: do you ever want funds that aren’t top performers?

The answer, for long term investors, is “yes.”  In general, you do not want to own the high-beta funds that have the best performance in “junk rallies.”  Junk rallies are periods where the least attractive investment options outperform everything else.  Those rallies push the riskiest, least prudent funds (temporarily) to the top.

One way to identify junk rallies is to look for markets where the performance of solid, high-quality companies dramatically lags the performance of far more speculative ones.  We did that by comparing the returns of index funds tracking the boring Dow Jones Industrial Average (blue chips) with the performance of funds tracking the endlessly exciting NASDAQ.  It turns out that there are three years where the Nazz outperformed the Dow by more than 1000 basis points (i.e., by 10 percentage points).  Those years are 2003 (Dow trails by 2100 bps), 2007 (1040 bps) and 2009 (3200 bps).

This month’s screen looks at funds that, over the past 10 years, are above average performers except during junk rallies.  In junk rally years, we looked for absolute returns of 10% or more.

As one reads the Morningstar coverage of these funds, the words that keep recurring are “disciplined,” “patient” and “concentrated.”  These are folks with a carefully articulated strategy who focus on executing it year after year, with little regard to what’s in vogue.

While this is not a “buy” list, it does point out the value of funds like Matthews Asian Growth & Income (MACSX), in which I’ve been invested for a good while.  MACSX puts up terribly relative performance numbers (bottom 10-15%) every time the Asian market goes wild and brilliant ones (top 5%) when the markets are in a funk.  If you’re willing to accept bad relative performance every now and then, you end up with excellent absolute and relative returns in the long-run.

Updating “The Observer’s Honor Roll, Unlike Any Other”

In November 2011, we generated an Honor Roll of funds.  Our criterion was simple: we looked for funds that were never abysmal.   We ignored questions of the upside entirely and focused exclusively on never finishing in a peer group’s bottom third.  That led us to two dozen no-load funds, including the Price and Permanent Portfolio funds highlighted above.

One sharp member of the discussion board community, claimu, noticed the lack of index funds in the list.  S/he’s right: I filtered them out, mostly because I got multiple hits for the same index. Eleven index funds would have made the list:

• four S&P 500 funds (California Investment, Dreyfus, Price, Vanguard)
• four more-or-less total market funds (Price, Schwab, Schwab 1000, Vanguard)
• one international (Price), one growth (Vanguard) and one small growth (Vanguard).

The story here might be the 67 S&P500 index funds that have a ten-year record but didn’t make the list. That is, 95% of S&P500 funds were screened-out because of some combination of high expenses and tracking error.

Those differences in expenses and trading efficiency add up.  An investment a decade ago in the Vanguard 500 Index Admiral Class (VFIAX) would have returned 2.45% annually over the decade while the PNC S&P 500 “C” shares (PPICX) earned only 1.14% – less than half as much.  $10,000 invested in Vanguard a decade ago would now (11/30/11) be worth $13,300 while a PNC investor would have $11,700 – for having taken on precisely the same risks at precisely the same time.

Press Release Journalism: CNBC and the End of the Western World

Does anyone else find it disturbing that CNBC, our premier financial news and analysis network, has decided to simply air press releases as news?   Case in point: the end of the world as we know it.  On 11/30/11, CNBC decided to share David Murrin’s fervent announcement that there’s nowhere worth investing except the emerging economies:

The Western world has run out of ideas and is “finished financially” while emerging economies across the world will continue to grow, David Murrin, CIO at Emergent Asset Management told CNBC on the tenth anniversary of coining of the so-called BRIC nations of Brazil, Russia, India and China, by Goldman Sachs’ Jim O’Neill.

“I still subscribe and I’ve spoken about it regularly on this show that this is the moment when the Western world realizes it is finished financially and the implications are huge, whereas the emerging BRIC countries are at the beginning of their continuation cycle,” Murrin told CNBC. (The Western World Is ‘Finished Financially’)

One outraged reader phrased it this way: “So why do reasonably respectable news outlets take as news the ravings of someone who has so obvious a financial stake in what is being said … News flash, “The CEO of Walmart declares the death of main street businesses . . . ” Good God!”

While Mr. Murrin is clearly doing his job by “talking his book,” that is, by promoting interest in the investment products he sells, is CNBC doing theirs?  If their job is either (a) providing marketing support for hedge funds or (b) providing inflammatory fodder, the answer is “yes.”  If, on the other hand, their job is . . .oh, to act like professional journalists, the answer is “no.”

What might they have done?  Perhaps examine Mr. Murrin’s credibility.  Ask even a few questions about his glib argument (here’s one: “the Chinese markets are at the mercy of the world’s largest and least accountable bureaucracy, one which forces the private markets to act as proxies for a political party.  To what extent should investors stake their financial futures on their faith in the continued alignment of that bureaucracy’s interests and theirs?”).  Perhaps interview someone who suspects that the expertise of companies domiciled in the Western world will allow them to out-compete firms domiciled elsewhere?  (Many thanks to Nick Burnett of CSU-Sacramento, both for pointing out the story and for supplying appropriate outrage.)

A Gift Freely Given

We’re deeply grateful for the support, financial, intellectual and moral, that you folks have offered during this first year of the Observer’s life.  It seemed fitting, in this season of thanksgiving and holidays, to say thanks to you all.  As a token of our gratitude, we wanted to share a small gift with each of you.  Chocolate was my first choice, but it works poorly as an email attachment.  After much deliberation, I decided to provide some practical, profitable advice from a field in which I have both academic credentials and lots of experience: communication.

Many of you know that I am, by profession and calling, a Professor of Communication Studies at Augustana College.  Over the years, the college has allowed me to explore a wide variety of topics in my work, from classical rhetoric and persuasion theory, to propaganda, persuasion and business communication practices.  Spurred by a young friend’s difficulties at work and informed by a huge body of research, I wrote a short, practical guide that I’d like to share with each of you.

Miscommunication in the Workplace: Sources, Prevention, Response is a 12-page guide written for bright adults who don’t study communication for a living.  It starts by talking about the two factors that make miscommunication so widespread.   It then outlines four practical strategies which will reduce the chance of being misunderstood and two ways of responding if it occurs anyway.  There’s a slightly-classy color version, but also a version optimized for print.  Both are .pdf files.

In the theme of thanksgiving, I should recognize the three people who most helped bring focus and clarity to my argument.  They are

Junior Yearwood, a friend and resident of Trinidad, brought a plant manager’s perspective, an editor’s sensibility and a sharp eye to several drafts of the guide.  Junior helped both clarify the document’s structure and articulate its conclusion.

Nicholas Burnett, an Associate Dean at Cal State – Sacramento, brought a quarter century’s experience in teaching and analyzing business and professional communication.  Nick pointed me to several lines of research that I’d missed and helped me soften claims that probably went beyond what the research supports.

Cheryl Welsch, a/k/a Chip, the Observer’s Technical Director and Director of Information Technology at SUNY-Sullivan, brought years of experience as a copy editor (as Hagrid would have it, she’s “a thumpin’ good one”).  She also helped me understand the sorts of topics that might be most pressing in helping folks like her staff.

The Harvard Business Review published Communicating Effectively (2011), which is a lot more expensive (well, this is free so pretty much everything is), longer (at 250 pages) and windier but covers much of the same ground.

If you have reactions, questions or suggested revisions, please drop a note to share them with me.  I’m more than willing to update the document.  If you really need guidance to the underlying research, it’s available.

Two other holiday leads for you.  QuoteArts.com offers a bunch of the most attractive, best written greeting cards (and refrigerator magnets) that I’ve seen.  The Duluth Trading Company offers some of the best made, best fitting men’s work clothing I’ve bought in years.  The Observer has no financial link to either of these firms and I know they have nothing to do with funds, but I’m really pleased with them and wanted to give you a quick heads-up about them.

Two Funds, and why they’re worth your time

Really worth it.  Every month the Observer profiles two to four funds that we think you really need to know more about.  They fall into two categories:

Most intriguing new funds: good ideas, great managers. These are funds that do not yet have a long track record, but which have other virtues which warrant your attention.  They might come from a great boutique or be offered by a top-tier manager who has struck out on his own.  The “most intriguing new funds” aren’t all worthy of your “gotta buy” list, but all of them are going to be fundamentally intriguing possibilities that warrant some thought.  This month’s new fund:

Lockwell Small Cap Value (LOCSX): a product of The Great Morgan Stanley Diaspora, Lockwell is a new incarnation of a very solid institutional fund.  The manager, who has successfully run billions of dollars using this same discipline, is starting over with just a million or two.  While technically a high-minimum institutional fund, there might be room to talk.

Stars in the shadows: Small funds of exceptional merit. There are thousands of tiny funds (2200 funds under $100 million in assets and many only one-tenth that size) that operate under the radar.  Some intentionally avoid notice because they’re offered by institutional managers as a favor to their customers (Prospector Capital Appreciation and all the FMC funds are examples).  Many simply can’t get their story told: they’re headquartered outside of the financial centers, they’re offered as part of a boutique or as a single stand-alone fund, they don’t have marketing budgets or they’re simply not flashy enough to draw journalists’ attention.  There are, by Morningstar’s count, 75 five-star funds with under $100 million in assets; Morningstar’s analysts cover only eight of them.

The stars are all time-tested funds, many of which have everything except shareholders.

Artisan Small Cap (ARTSX): they’re baaaaaack!   ARTSX is the fund that launched Artisan had a blazing start in 1996: a chart-topping 35% gain, $300 million in assets, and a principled close within 11 months.  What followed were nearly 15 years of uninspiring performance.  In 2009, the management team that has brilliantly guided Artisan Mid Cap took over here and the results have been first rate.  Time for another look!

Fund Update: RiverPark Short-Term High Yield and RiverPark/Wedgewood

Two of the RiverPark funds that we’ve profiled are having banner years.

RiverPark/Wedgewood (RWGFX) offers a concentrated portfolio of exceedingly high-quality stocks.  They’ve got a great track record with this strategy, though mostly through separately-managed accounts.  I have some questions about whether the SMA success would translate to similar performance in their fund.  The answer appears to be “yes,” at least so far.  For 2011 (through 11/29), they’re in the top 2% of large growth funds. Their 2.2% gain places them about 750 basis points ahead of their average peer.  The fund has gathered $70 million in assets.

RiverPark Short Term High Yield (RPHYX) continues to be a model of stability.  Its unique portfolio of called high yield bonds and other orphan investments is yielding 4.2% and has returned 3.25% YTD (through 11/29/11).  Judged as a high-yield bond fund, that’s great: top 4% YTD with minimal share price volatility.  Viewed as a cash management tool, it’s even better.  Latest word is that assets are up to $35 million as more advisors come onboard.

In mid-November, Barron’s ran a nice profile, “Enjoying Their Freedom,” of RiverPark and of these two funds.

Closure alert: Aston/River Road Independent Value

In a November 18 filing with the SEC, Aston announced that ARVIX will close to new investors “if the net assets of the Fund reach a certain level in combination with other assets managed in the same investment strategy by … River Road Asset Management.  Currently, the Fund expects its Soft Close Level to be between $500 million and $600 million in net assets.”  Eric Cinnamond, the manager suggests that “given our sales pipeline,” the fund will likely close before December is over.  Existing investors will be permitted to add to their accounts but (with a few exceptions) no new investors will be allowed in.

In general, folks interested in a low volatility strategy crafted for high volatility markets really should look, and look quickly, to see whether ARVIX makes sense for their portfolios.  The Observer’s April 2011 profile of ARVIX makes clear that this is a strategy with a long, consistently and hugely successful trade record.  So far in 2011, it’s in the top 1% of small value funds.  Mr. Cinnamond is both modest and thoughtful, and tries to balance a celebration of the fund’s success with realism about the years ahead:

This year has set up nicely for the portfolio — ideal market for a flexible and opportunistic strategy.  Every year won’t be like this (the product has high tracking error) and if small caps go lot higher from here, the strategy will most likely lag as I continue to be positioned defensively with below average risk in the equity portfolio and above average cash levels.  That said, as you know, this can change quickly — hopefully recent volatility in the small cap market continues into 2012.

Right, “hopefully recent volatility … continues.”  Volatile markets create outsized opportunities that Mr. Cinnamond has, over the course of years, profitably exploited.  Two other takes on the fund are the fund’s most recent profile of itself and a new Morningstar essay which looks at the two best small-value funds in 2011: The Top Performing Funds in 2011’s Toughest Category.

Launch alert:

Forward Management introduced a new investor share class for the $1.2 billion, Forward Select Income Fund (FFSLX) at the end of November, 2011. The fund focuses on the preferred securities of REITs, rather than their common stock.  The fund’s yielding over 9% currently, and has pretty consistently finished near the top of the real estate fund stack by combining above average returns with low volatility.

This is the fifth Forward real estate fund to be offered directly (i.e., without a load) to retail investors.  The others are Forward International Real Estate (FFIRX), the Forward Real Estate Long/Short (FFSRX), Forward Real Estate and the Forward Global Infrastructure (FGLRX).  In each case, there’s a $4000 minimum which is reduced to $500 if you set up an account with an automatic investing plan.

Fidelity launched Fidelity Total Emerging Markets (FTEMX) on November 1^st.   FTEMX represents a really good idea: an emerging markets balanced fund.  The fund will invest about 60% of its assets in stocks and 40% in bonds, which should over time provide stock-like returns with greatly reduced volatility.  That might translate to higher shareholder returns, as folks encounter fewer dramatic declines and are less likely to be tempted to sell low.  The fund is managed by a team led by John Carlson.  Mr. Carlson has been doing really good work for years on Fidelity’s emerging markets bond fund, Fidelity New Market Income (FNMIX).  There’s a $2500 minimum investment and an expense ratio of 1.40%.

One landmine to avoid: don’t pay attention to the fund’s performance against its Morningstar peer group.  Morningstar doesn’t have an E.M. balanced group, and so assigned this fund to E.M. stock.

I’ve also profiled the closed-end First Trust/Aberdeen Emerging Opportunities (FEO) fund.  FEO has a higher expense ratio (1.80%) but can often be bought at a discounted price.

Alpine: A slight change in elevation

The good folks at the Alpine Funds have taken inspiration for their namesake mountain range.  Effective January 12, they’re increasing their minimum initial investment for stock funds by a thousand fold:  “For new shareholders after January 3, 2012, the minimum initial investment of the Institutional Class has increased from $1,000 to $1,000,000.” The minimum for bond rises will rise only a hundredfold: “For new shareholders after January 3, 2012, the minimum initial investment of the Institutional Class (formerly the Investor Class) has increased from $2,500 to $250,000.”

At the same time they’re renaming a bunch of funds and imposing a 5.5% front load.

Of the funds involved, Dynamic Transformations (ADTRX) is most worth a look before the no-load door closes.  It’s a relatively low turnover, relatively tax efficient mid-cap growth fund that invests in companies undergoing, well, dynamic transformations.  (After January, I guess the transformations can be rather less dynamic.)  That discipline parallels the discipline successfully applied at Artisan’s Mid Cap (ARTMX) fund.  As with Alpine’s other funds, risk management is not a particular strength and so it tends to be a high volatility / high return strategy; that is, it captures more of both the upside and the downside in any market movement.

(Thanks to the members of the Observer’s discussion board community, who read SEC filings even more closely – and with more enthusiasm, if you can imagine that – than I do.  Special thanks to TheShadow for triggering the discussion.)

Briefly Noted . . .

Normally “leaving” is followed by “coming back.”  Not so, at Fidelity.  Andy Sassine, manager of Fidelity Small Cap Stock (FSCLX) is taking a six-month year, but the firm made clear that it’s a one-way trip.  He might work at Fidelity again, but won’t work as a manager.  His fund is being taken over by Lionel Harris of Fidelity Small Cap Growth (FCPGX). Small Cap Growth will be taken over by Pat Venanzi, who manages two small slices of Fidelity Stock Selector Small Cap (FDSCX) and Fidelity Series Small Cap Opportunities (FSOPX).

In the 2012 first quarter, American Beacon will merge the Bridgeway Large Cap Value (BRLVX) fund into the newly created American Beacon Bridgeway Large Cap Value and retain Bridgeway as subadviser.   Bridgeway Social Responsibility, a previous Bridgeway offering, was acquired by Calvert Large Cap Growth. This past May, that fund merged into Calvert Equity (CSIEX), which is not subadvised by Bridgeway.

Allianz RCM Disciplined International Equity (ARDAX) will liquidate on Dec. 20, 2011.

American Beacon Evercore Small Cap Equity  (ASEAX) is closing ahead of its liquidation on or about Dec. 15, 2011.

Dreyfus has closed and plans to liquidate the Dreyfus Select Managers Large Cap Growth (DSLAX) as of Dec. 13, 2011.

In one of those “laws of unintended consequences moves,” Schwab gave in to advisors’ demands and changed the benchmark for the Schwab International Index Fund (SWISX).  Investors claimed that it was too hard to compare SWISX’s performance because it was the only fund using Schwab’s internally-generated benchmark.  In an entirely Pyrrhic victory, Schwab moved to the standard benchmark (MSCI EAFE) and thereby lost any reason for existence.  The move will require the fund to divest itself of a substantial, and entirely sensible, stake in Canadian stocks and make substantial investments in mid-cap stocks.

American Century International Value Fund (ACVUX) is being rebuilt: new management team, new discipline (quant rather than fundamental), new benchmark (MSCI EAFE Value)

In closing . . .

Many thanks to all of the folks who have used the Observer’s Amazon link.  It’s remarkable easy to use (click on it, set it as your default Amazon bookmark and you’re done) and helps a lot.

I’ve been working through three books that might be worth your year-end attention.

Robert Frank, wealth reporter for the WSJ, The High-Beta Rich: How the Manic Wealthy Will Take Us to the Next Boom, Bubble, and Bust. In some ways it’s a logical follow-up to his book Richistan: A Journey Through the American Wealth Boom and the Lives of the New Rich (2008).  The 8.5 million Richistanis, Frank discovered, own things like “shadow yachts,” which are the yachts which follow the rich guys’ yacht and carry their helicopters.  In The High-Beta Rich, Frank looks at the ugly implications of financial instability among the very wealthy.  Generally speaking, their worth is highly volatile and market dependent.  A falling market decreases the wealth of the very rich about three times more than it does for the rest of us.  Frank writes:

Suddenly, in 1982, the year I call the magic year for wealth, the 1 percent, which used to be like the teetotalers of our economy, became the binge drinkers.

And when times were good, they did two or three times better than everyone else. When times were bad, they did two or three times worse. So if you look at the last three recessions, the top 1 percent lost two to three times in income what the rest of America lost. And, you know, part of it has to do with more and more of today’s wealth is tied to the stock market, whether it’s executives who are paid in stock or somebody who’s starting a company and takes it public with an IPO.

And the stock market is more than 20 times as volatile as the real economy.

And, as it turns out, slamming the rich around has real implications for the financial welfare of the rest of us.  Frank appeared on NPR’s Talk of the Nation program on November 16.  There’s a copy of the program and excerpts from the book available on Talk of the Nation’s website.

Folks who find their faith useful in guiding their consumption and investments might enjoy a new book by a singularly bright, articulate younger colleague of mine, Laura Hartman.  Laura is an assistant professor of religion and author of The Christian Consumer: Living Faithfully in a Fragile World.  The fact that it’s published by Oxford University Press tells you something about the quality of its argument.  She argues:

At base, consumerism arises from a distorted view of human nature.  This ethos teaches that our wants are insatiable (and the provocations of advertising help make this so), that buying the new article of clothing or fancy gadget will answer our deepest longings.  That we are what we own.  Humans, then, are seen as greedy and lacking and shallow.  (192)

While this isn’t a “how-to” guide, Laura does offer new (or freshened) ways of thinking about how to consume what you need with celebration, and how to leave what others need untouched.

The most influential book I’ve read in years is Alan Jacobs’ Pleasures of Reading in an Age of Distraction.  Jacobs is a professor of English at Wheaton College in Illinois.  Despite that, he writes and thinks very well.  Jacobs takes on all of the wretched scolds who tell us we need to be reading “better” stuff and argues, instead, that we need to rediscover the joy of reading for the joy of reading.

One of Jacobs’ most compelling sections discussed the widespread feeling, even among hard-reading academics, that we’ve lost the ability to read anything for more than about five minutes.  It made me feel good to know that I wasn’t alone in that observation.  He has convinced me to try a Kindle which, he argues, has renewed in him the habit of reading which such passion that you sink into the book and time fades away.  The Kindle’s design makes it possible, he believes, to feel like we’re connected while at the same time disconnecting.

Regardless of what you buy or who you share our link with, thanks and thanks again!

In January, we’ll look at two interesting funds, the new HNP Growth & Preservation (HNPKX) which brings a “managed futures” ethos to other asset classes and Value Line Asset Allocation (VLAAX) which has one of the most intriguing performance patterns I’ve seen.  In addition, we’ll ring in the New Year by looking at the implication of following the “Where to Invest 2011” articles that were circulating a year ago.

Wishing you great joy in the upcoming holiday season,

David

Dear friends,

Almost all of the poems about the end of summer and beginning of fall are sad, wistful things.  They’re full of regrets about the end of the season of growth and crammed with metaphors for decline, decay, death and despair.

It’s clear that poets don’t have investment portfolios.

The fact that benchmarks such as the Dow Jones Industrial average and Vanguard Total Bond Market are both showing gains for the year masks the trauma that has led investors to pull money out of long-term funds for six consecutive weeks.  Whether having the greatest outflows since the market bottom in March 2009 is a good thing remains to be seen.

Roller coasters are funny things.  They’re designed to scare the daylights out of you, and then deposit you back exactly where you started.  It might be a sign of age (or, less likely, wisdom) that I’d really prefer a winding garden path or moving walkway to the thrills now on offer.

The Latest Endangered Species: Funds for Small Investors

Beginning in the mid-1990s, I maintained “The List of Funds for Small Investors” at the old Brill/Mutual Funds Interactive website.  I screened for no-load funds with minimums of $500 or less and for no-load funds that waived their investment minimums for investors who were willing to start small but invest regularly.  That commitment was made through an Automatic Investing Plan, or AIP.

At the time, the greatest challenge was dealing with the sheer mass of such funds (600 in all) and trying to identify the couple dozen that were best suited to new investors trying to build a solid foundation.

Over the years, almost all of those funds ceased to be “funds for small investors.”  Some closed and a fair number added sales loads but the great majority simply raised their investment minimums.  In the end, only one major firm, T. Rowe Price, persevered in maintaining that option.

And now they’re done with it.

Effective on August 1, Price eliminated several policies which were particularly friendly to small investors.  The waiver of the minimum investment for accounts with an Automatic Asset Builder (their name for the AIP) has been eliminated. Rather than requiring a $50 minimum and $50/month thereafter, AAB accounts now require $2500 minimum and $100/thereafter.

The minimum subsequent investment on retail accounts was raised from $50 to $100.

The small account fee has been raised to $20 per account under $10,000. The fee will be assessed in September. You can dodge the fee by signing up for electronic document delivery.

Price changed the policies in response to poor behavior on the part of investors. Too many investors started with $50, built the account to $300 and then turned off the asset builder. Price then had custody of a bunch of orphaned accounts which were generating $3/year to cover management and administrative expenses.  It’s not clear how many such accounts exist. Bill Benintende, one of Price’s public relations specialists, explains “that’s considered proprietary information so it isn’t something we’d discuss publicly.”  This is the same problem that long-ago forced a bunch of firms to raise their investment minimums from $250- 500 to $2500.

Two groups escaped the requirement for larger subsequent investments.  Mr. Benintende says that 529 college savings plans remain at $50 and individuals who already have operating AAB accounts with $50 investments are grandfathered-in unless they make a change (for example, switching funds or even the day of the month on which an investment occurs).

That’s a real loss, even if a self-inflicted one, for small investors.  Nonetheless, there remain about 130 funds accessible to folks with modest budgets and the willingness to make a serious commitment to improving their finances.  By my best reading, there are thirteen smaller fund families and a half dozen individual funds still taking the risk of getting stiffed by undisciplined investors.  The families willing to waive their normal investment minimums are:

There are, in addition, a number of individual funds with minimums reduced or waived for folks willing to commit to an automatic investment.  Those include Barrett  Opportunity (SAOPX), Cullen High Dividend Equity (CHDEX), Giordano (GIORX), Primary Trend (PTFDX), Sector Rotation (NAVFX), and Stonebridge Small Cap Growth (SBAGX).

On a related note: Fidelity would like a little extra next year

Fidelity will begin charging an “annual index fund fee” of $10.00 per fund position to offset shareholder service costs if your fund balance falls below $10,000, effective December 2011.  They’re using the same logic: small accounts don’t generate enough revenue to cover their maintenance costs.

The Quiet Comeback of Artisan Small Cap (ARTSX)

The second fund in which I ever invested (AIM Constellation was the first) was Artisan Small Cap (ARTSX). Carlene Murphy Ziegler had been a star manager at Stein, Roe and at Strong.  With the support of her husband, Andrew, she left to start her own fund company and to launch her own fund.  Artisan Small Cap was a solid, mild-manned growth-at-a-reasonable price creature that drew a lot of media attention, attracted a lot of money, helped launch a stellar investment boutique, and quickly closed to new investors.

But, somewhere in there, the fund got out of step with the market.  Rather than being stellar, it slipped to okay and then “not too bad.”  It had some good years and was never terrible, but it also never managed to have two really good years back-to-back.  The firm added co-managers including Marina Carlson, who had worked so successful with Ziegler at the Strong Funds.  Ziegler stepped aside in 2008 and Carlson in 2009.

At that point, manager responsibilities were given to Andrew Stephens and the team that runs Artisan Mid Cap Fund (ARTMX).  ARTMX has posted remarkably strong, consistent results for over a decade.  It’s been in the top 10-15% of midcap growth funds for the past 1, 3, 5 and 10 year periods.  It has earned four or five star ratings from Morningstar for the past 3, 5, and 10 year periods.

Since taking over in October 2009, ARTSX has outperformed its peers.  $10,000 invested on the day the new team arrived would have gain to $13,900, compared to $13,100 at its peers.   Both year to date and for the three, turbulent summer months, it’s in the top 2% of small growth funds.  It has a top 5% record over the past year and top 15% over the past three.

Artisan has a very good record of allowing successful teams to expand their horizons. Scott Satterwhite’s team from Artisan Small Cap Value (ARTVX) inherited Artisan Mid Cap Value (ARTQX) and the large cap Artisan Value (ARTLX) funds, and has reproduced their success in each.  The same occurred with the Artisan International Value team running Artisan Global Value and Artisan International running Artisan International Small Cap.

Given that track record and the fund’s resurgence under the Stephen’s team, it might be time to put Artisan Small Cap back on the radar.

Fund Update: RiverPark Short-Term High Yield

We profiled RPHYX in July as one of the year’s most intriguing new funds. It’s core strategy – buying, for example, called high yield bonds – struck me “as a fascinating fund.  It is, in the mutual fund world, utterly unique . . .  And it makes sense.  That’s a rare and wonderful combination.”

The manager, David Sherman of Cohanzick Management, has been in remarkably good spirits, if not quite giddy, because market volatility plays into the fund’s strengths.  There are two developments of note.

The manager purchased a huge number of additional shares of RPHYX after the market rout on Monday, August 8.  (An earlier version of this note, on the Observer’s discussion board, specified an amount and he seemed a bit embarrassed by the public disclosure so I’ve shifted to the demure but accurate ‘huge number’ construction.)

The fund’s down about 0.4% since making its monthly distribution (which accounts for most of its NAV changes). For those keeping score, since August 1, Fidelity Floating Rate High Income (FFHRX, a floating-rate loan fund that some funds here guessed would parallel RiverPark) is down 4%, their new Global High-Income fund (FGHNX) is down 5% and Fidelity High Income (SPHIX) is down 4.5%.

Fortunately, the fund generates huge amounts of cash internally. Because durations are so short, he’s always got cash from the bonds which are being redeemed. When we spoke on August 10^th, he calculated that if he did nothing at all with the portfolio, he’d get a 6% cash infusion on August 16, a 10% infusion on August 26th, and cash overall would reach 41% of the portfolio in the next 30 days. While he’s holding more cash than usual as a matter of prudent caution, he’s also got a lot to buy with.

And the market has been offering a number of exceptional bargains. He pointed to called HCA bonds which he first bought on July 27 at a 3.75% annualized yield. This week he was able to buy more at a 17% yield. Since the bonds would be redeemed at the end of August by a solidly-profitable company, he saw very little risk in the position. Several other positions (Las Vegas Sands public preferred and Chart Industries convertibles) have gone from yielding 3-3.5% to 5-6% available yields in the last two weeks.

He was also shortening up the portfolio to take advantage of emerging opportunities. He’s selling some longer-dated bonds which likely won’t be called in order to have more cash to act on irrational bargains as they present themselves. Despite an ultra-short duration, the fund is now yielding over 5%. The Fed, meanwhile, promises “near zero” interest rates for the next two years.

Mr. Sherman was at pains to stress that he’s not shilling for the fund. He doesn’t want to over-promise (this is not the equivalent of a savings account paying 5%) and he doesn’t want to encourage investors to join based on unrealistic hopes of a “magic” fund, but he does seem quite comfortable with the fund and the opportunity set available to him.

Note to the Securities and Exchange Commission: Hire a programmer!

Every day, the SEC posts all of its just-received filings online and every day I read them.  (Yep.  Really gotta get a life.) Here is a list of all of today’s prospectus filings.  In theory, if you visit on September 1^st and click on “most recent,” you’ll get a screen full of filings dated September 1^st.

Except when you don’t.  Here, for example, is a screen cap of the SEC new filings for August 22, 2011:

Notice how very far down this list you have to go before finding even one filing from August 22^nd (it’s the ING Mutual Funds listing).  On July 25th, 43 of 89 entries were wrong (including one originally filed in 2004).

Two-thirds of all Wall Street trades emanate from high-frequency traders, whose computers execute trades in 250 microseconds (“Not So Fast,” The Economist, 08/06/11).  Those trades increase market volatility and asset correlations, to the detriment of most investors.  The SEC’s difficulty in merely getting the date right on their form postings doesn’t give me much confidence in their ability to take on the problems posed by technology.

Four Funds, and why they’re worth your time

Really worth it.  Every month the Observer profiles two to four funds that we think you really need to know more about.  They fall into two categories:

Most intriguing new funds: good ideas, great managers. These are funds that do not yet have a long track record, but which have other virtues which warrant your attention.  They might come from a great boutique or be offered by a top-tier manager who has struck out on his own.  The “most intriguing new funds” aren’t all worthy of your “gotta buy” list, but all of them are going to be fundamentally intriguing possibilities that warrant some thought.  This month’s two new funds:

RiverPark/Wedgewood (RWGFX): David Rolfe makes it seem so simple.  Identify great companies, buy only the best of them, buy only when they’ve on sale, and hold on.  For almost 19 years he’s been doing to same, simple thing – and doing it with unparalleled consistency and success.  His strategy is now available to retail investors.

Walthausen Select Value (WSVRX): the case for this focused small- to mid-cap fund is simple.  Manager John Walthausen has performed brilliantly with the last three funds he’s run and his latest fund seeks to build on one of those earlier models.

Stars in the shadows: Small funds of exceptional merit. There are thousands of tiny funds (2200 funds under $100 million in assets and many only one-tenth that size) that operate under the radar.  Some intentionally avoid notice because they’re offered by institutional managers as a favor to their customers (Prospector Capital Appreciation and all the FMC funds are examples).  Many simply can’t get their story told: they’re headquartered outside of the financial centers, they’re offered as part of a boutique or as a single stand-alone fund, they don’t have marketing budgets or they’re simply not flashy enough to draw journalists’ attention.  There are, by Morningstar’s count, 75 five-star funds with under $100 million in assets; Morningstar’s analysts cover only eight of them.

The stars are all time-tested funds, many of which have everything except shareholders.

Northern Global Tactical Asset Allocation (BBALX): up until August 1^st, you could access to the best ideas of Northern Investment Policy Committee only if you had $5 million to meet this fund’s minimum or $500 million in assets at Northern.  And then it became a retail fund ($2500) with an institutional pedigree and expenses (0.68%).  Folks looking for a conservative core fund just stumbled onto a really solid option.

Walthausen Small Cap Value (WSCVX): we profiled this fund shortly after launch as one of the year’s best new funds.  Three years on, it’s running rings around its competition and starting to ask about when it will be necessary to close to new investors.  A somewhat volatile choice, it has produced remarkable results.

Briefly noted . . .

Berwyn Income (BERIX) will reopen to new investors on Sept. 19. The $1.3 billion fund closed in November 2010, but says the board, “recent volatility in the market has led to new investment opportunities for the Fund.”  BERIX makes a lot of sense in turbulent markets: modest stake in dividend-paying stocks and REITs, plus corporate bonds, preferred shares, convertibles and a slug of cash.  Lots of income with some prospect for capital growth.  The fund more than doubled in size between 2008 and 2009, then doubled in size again between 2009 and 2010.  At the end of 2008, it was under $240 million.  Today it carries a billion more in heft.  Relative performance has drifted down a bit as the fund has grown, but it remains really solid.

Fidelity is bringing out two emerging market funds in mid-October. The less interesting, Emerging Markets Discovery, will be their small- to mid-cap fund. Total Emerging Markets will be a 60/40 balanced fund. The most promising aspect of the balanced fund is the presence of John Carlson, who runs New Markets Income (FNMIX) at the head of the management team.  FNMIX has a splendid long-term record (Carlson’s been there for 16 years) but it’s currently lagging because it focuses on dollar-denominated debt rather than the raging local currency variety.  Carlson argues that local currencies aren’t quite the safe haven that newbies believe and that, in any case, they’re getting way overvalued.  He’ll have a team of co-managers who, I believe, run some of Fidelity’s non-U.S. funds.  Fido’s emerging markets equity products have not been consistently great, so investors here might hope for index-like returns and a much more tolerable ride than a pure equity exposure would offer. The opening expense ratio will be 1.4% and the minimum investment will be $2500.

Northern Funds are reducing the operating expenses on all of their index funds, effective January 1, 2012.  The seven funds involved are:

Nicely done!

Forward Management introduced a new no-load “investor” share class for Forward International Real Estate Fund (FFIRX), the Forward Real Estate Long/Short Fund (FFSRX), and the Forward Global Infrastructure Fund (FGLRX). Forward Real Estate (FFREX) already had a no-load share class.  The funds are, on whole, respectable but not demonstrably great. The minimum investment is $4,000.

DWS Strategic Income (KSTAX) becomes DWS Unconstrained Income on Sept. 22, 2011. At that point, Philip Condon will join the management team of the fund.  “Unconstrained” is the current vogue term for income funds, with PIMCO leading the pack by offering unconstrained Bond (also packaged as Harbor Unconstrained Bond), Tax-Managed Bond and Fixed Income funds.  All of them have been underperformers in their short lives, suggesting that the ability to go anywhere doesn’t immediately translate into the wisdom to go somewhere sensible.

Litman Gregory Asset Management has renamed its entire line of Masters’ Select funds as Litman Gregory Masters Funds name.

PIMCO Developing Local Markets (PLMIX) has changed its name to PIMCO Emerging Markets Local Currency, presumably to gain from the “local currency debt” craze.

Dreyfus S&P Stars Opportunities (BSOBX) will change its name to Dreyfus MidCap Core on Nov. 1, 2011.

DWS RREEF Real Estate Securities (RRRRX) will close Sept. 30, 2011.

JPMorgan U.S. Large Cap Core Plus (JLCAX) closed to new investors on Sept. 2, 2011.

Scout TrendStar Small Cap (TRESX) is merging into Scout Small Cap (UMBHX).

MFS Core Growth (MFCAX) merged into MFS Growth (MFEGX) in August.

Effective Sept. 15, 2011, GMO Global Balanced Asset Allocation Fund (GMWAX) will be renamed GMO Global Asset Allocation Fund and it will no longer be bound to keep at least 25% each in stocks and bonds.

Forward Funds is changing Forward Large Cap Equity (FFLAX), a mild-mannered fund with a slight value bias, into Forward Large Cap Dividend Fund.  After November 1, at least 80% of the portfolio will be in . . . well, large cap, dividend-paying stocks.   Not to rain on anybody’s parade, but all of its top 25 holdings are already dividend-paying stocks which implies marketing rather than management drove the change.

Likewise, Satuit Capital Micro Cap has been changed to the Satuit Capital U.S. Emerging Companies Fund (SATMX).   The Board hastened to assure shareholders that the change was purely cosmetic: “there are no other changes to the Fund being contemplated as a result of this name change.”  Regardless, it’s been a splendid performer (top 1% over the past decade) with an elevated price tag (1.75%)

DWS Climate Change (WRMAX) becomes DWS Clean Technology on October 1, 2011.

A few closing notes . . .

We’re very pleased to announce the launch of The Falcon’s Eye.  Originally written by a FundAlarm board member, Falcon, the Eye provides a quick and convenient link to each of the major profiles for any particular fund.  Simply click on “The Falcon’s Eye” link on the main menu bar atop this page and enter one or more ticker symbols.  A new windows pops up, giving the fund name and direct links to ten major source of information:

And, of course, the Observer itself.

Mark whichever sources interest you, click, and the Eye will generate direct links to that site’s profile of or reporting on your fund.  Thanks to Accipiter for his tireless work on the project, and to Chip, Investor, Catch22 and others for their support and beta testing of it.  It is, we think, a really useful tool for folks who are serious about understanding their investments.

Thanks to all of you for using or sharing the Observer’s link to Amazon.com, which is providing a modest but very steady revenue stream.  Special thanks for the folks who’ve chosen to contribute to the Observer this month and, especially, to the good folks at Milestones Financial Planning in Kentucky for their ongoing support.  We’re hoping for a major upgrade in the site’s appearance, in addition to the functionality upgrades that Chip and Accipiter have worked so faithfully on.

Looking for the archive? There is an archive of all Observer and later FundAlarm commentaries, links to which usually appear at the top of this page. This month we encountered a software glitch that was scrambling the list, so we’ve temporarily hidden it. Once out tech folks have a chance to play with the code, it’ll be back where it belongs. Thanks for your patience!

Keep those cards and letters, electronic or otherwise, coming.  I love reading your thoughts.

See you in October!

David