Author Archives: Editor

New Coke, the Ford Edsel, Cheetos Lip Balm and Morningstar Investor

By Editor

By Don Glickstein, the author of this article, which we’ve posted for him.

(Editor’s note: Glickstein worked for a decade as a reporter and editor on daily newspapers, and he won a National Press Club award for consumer journalism. He dipped his toes into politics as a campaign press secretary for the late Washington Gov. Booth Gardner. He later worked for nearly three decades in communications for what was then the nation’s largest consumer healthcare cooperative, now part of Kaiser Permanente. While there, he served as an intranet webmaster reaching 10,000 employees. His book, After Yorktown, was named one of the 100 best books ever written about the Revolution by the Journal of the American Revolution.) Continue reading →

Capital Gains Distributions – Not Looking Too Spooky

By Editor

Halloween is the time of year to start thinking about the impact of capital gains distributions from your mutual funds and ETFs. At CapGainsValet.com, we’ve spent the last month updating our site and building our Free and Pro databases. We’ve already made two passes through over 250 fund firm websites looking for 2016 distribution estimates.

As I think about how this year compares to previous years, I have a house full of high schoolers dressed up for a Halloween party. Some of their costumes match my Continue reading →

The Cook and Bynum Fund

By Editor

The fund:

 The Cook and Bynum Fund
(COBYX)

Manager:

 Richard P. Cook and J. Dowe Bynum, managers and founding partners.

The call:

Recently published research laments the fact that actively-managed funds have become steadily less active and more index-like over time.

The changing imperatives of the fund industry have led many managers to become mediocre by design. Their response is driven by the anxious desire for so-called “sticky” assets. The strategy is simple: design a product to minimize the risk that it will ever spectacularly trail its peer group. If you make your fund very much like its benchmark, you will never be a singular disaster and so investors (retirement plan investors, particularly) will never to motivated to find something better The fact that you never excel is irrelevant. The result is a legion of large, expensive, undistinguished funds who seek safety in the herd.

The Cook and Bynum Fund (COBYX) strikes me as the antithesis of those. Carefully constructed, tightly focused, and intentionally distinct. On Tuesday, March 5, we spoke with Richard Cook and Dowe Bynum in the first of three conversations with distinguished managers who defy that trend through their commitment to a singular discipline: buy only the best. For Richard and Dowe, that translates to a portfolio with only seven holdings and a 34% cash stake. Since inception (through early March, 2013), they managed to capture 83% of the market’s gains with only 50% of its volatility; in the past twelve months, Morningstar estimates that they captured just 7% of the market’s downside.

Among the highlights of the call for me:

  1. The guys are willing to look stupid. There are times, as now, when they can’t find stocks that meet their quality and valuation standards. The rule for such situations is simply: “When compelling opportunities do not exist, it is our obligation not to put capital at risk.” They happily admit that other funds might well reap short-term gains by running with the pack, but you “have to be willing to look stupid.” Their current cash stake is about 34%, “the highest cash level ever in the fund.” That’s not driven by a market call; it’s a simple residue of their inability to find great opportunities.
  2. The guys are not willing to be stupid. Richard and Dowe grew up together and are comfortable challenging each other. Richard knows the limits of Dowe’s knowledge (and vice versa), “so we’re less likely to hold hands and go off the cliff together.” In order to avoid that outcome, they spend a lot of time figuring out how not to be stupid. They relegate some intriguing possibilities to the “too hard pile,” those businesses that might have a great story but whose business model or financials are simply too hard to forecast with sufficient confidence. They think about common errors (commitment bias, our ability to rationalize why we’re not going to stop doing something once we’ve started, chief among them) and have generated a set of really interesting tools to help contain them. They maintain, for example, a list all of the reasons why they don’t like their current holdings. In advance of any purchase, they list all of the conditions under which they’d quickly sell (“if their star CEO leaves, we do too”) and keep that on top of their pile of papers concerning the stock.
  3. They’re doing what they love. Before starting Cook & Bynum (the company), both of the guys had high-visibility, highly-compensated positions in financial centers. Richard worked for Tudor Investments in Stamford, CT, while Dowe was with Goldman, Sachs in New York. The guys believe in a fundamental, value- and research-driven, stock-by-stock process. What they were being paid to do (with Tudor’s macro event-driven hedge fund strategies for Richard) was about as far from what they most wanted as they could get. And so they quit, moved back to Alabama and set up their own shop to manage their own money and the investments of high net-worth individuals. They created Cook & Bynum (the fund) in response to an investor’s request for a product accessible to family and friends. The $250 million invested with them (about $100 million in the fund) includes 100% of their own liquid net worth, with their investment split between the fund and the partnerships. Since both sets of vehicles use the same fees and structure, there’s no conflict between the two.
  4. They do prodigious research without succumbing to the “gotta buy something” impulse. While they spend the majority of their time in their offices, they’re also comfortable with spending two or three weeks at a time on the road. Their argument is that they’ve got to understand the entire ecosystem in which a firm operates – from the quality of its distribution network to the feelings of its customers – which they can only do first-hand. Nonetheless, they’ve been pretty good at resisting “deal momentum.” They spent, for example, some three weeks traveling around Estonia, Poland and Hungary. Found nothing compelling. Traveled Greece and Turkey and learned a lot, including how deeply dysfunctional the Greek economy, is but bought nothing.
  5. They’re willing to do what you won’t. Most of us profess a buy low / buy the unloved / break from the herd / embrace our inner contrarian ethos. And most of us are deluded. Cook and Bynum seem rather less so: they’re holding cash now while others buy stocks after the market has doubled and profits margins hit records but in the depth of the 2008 meltdown they were buyers. (They report having skipped Christmas presents in 2008 in order to have extra capital to invest.) As the market bottomed in March 2009, the fund was down to 2% cash.

Bottom Line: the guys seem to be looking for two elusive commodities. One is investments worth pursuing. The other is investing partners who share their passion for compelling investments and their willingness to let other investors charge off in a herd. Neither is as common as you might hope. 

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

The profile:

It’s working.  Cook and Bynum might well be among the best.  They’re young.  The fund is small and nimble.  Their discipline makes great sense.  It’s not magic, but it has been very, very good and offers an intriguing alternative for investors concerned by lockstep correlations and watered-down portfolios.

The Mutual Fund Observer profile of COBYX, April 2013.

podcast

 The COBYX audio profile

Web:

The Cook & Bynum Fund website

The Cook and Bynum Fact Sheet

Fund Focus: Resources from other trusted sources

Seafarer Overseas Growth & Income (SFGIX)

By Editor

The fund:

 Seafarer Overseas Growth and Income Fund
(SFGIX and SIGIX)

Manager:

 Andrew Foster, Founder, Chief Investment Officer, and Portfolio Manager

The call:

On February 19th, about 50 people phoned-in to listen to our conversation with Andrew Foster, manager of Seafarer Overseas Growth * 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. 

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.

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

The profile:

The case for Seafarer is straightforward: it’s going to be one of your best options for sustaining exposure to an important but challenging asset class.

The Mutual Fund Observer profile of SFGIX, Updated March 2013.

podcast

 The SFGIX audio profile

Web:

Seafarer Overseas Growth and Income Fund website

Shareholder Conference Call

2013 Q3 Report

Fund Focus: Resources from other trusted sources

Matthews Asia Strategic Income (MAINX)

By Editor

The fund:

 Matthews Asia Strategic Income (MAINX)

Manager:

 Teresa Kong, Manager

The call:

We spent an hour on Tuesday, January 22, talking with Teresa Kong of Matthews Asia Strategic Income. The fund is about 14 months old, has about $40 million in assets, returned 13.6% in 2012 and 11.95% since launch (through Dec. 31, 2012).

Highlights include:

  1. this is designed to offer the highest risk-adjusted returns of any of the Matthews funds. 
  2. the manager describes the US bond market, and most especially Treasuries, as offering “asymmetric risk” over the intermediate term. Translation: more downside risk than upside opportunity. 
  3. given some value in having a fixed income component of one’s portfolio, Asian fixed-income offers two unique advantages in uncertain times. First, the fundamentals of the Asian fixed-income market are very strong. Second, Asian markets have a low beta relative to US intermediate-term Treasuries. 
  4. MAINX is one of the few funds to have positions in both dollar-denominated and local currency Asian debt (and, of course, equities as well). 
  5. in equities, Matthews looks for stocks with “bond-like characteristics.” 
  6. most competitors don’t have the depth of expertise necessary to maximize their returns in Asia. 
  7. TK said explicitly that they have no neutral position or target bands of allocation for anything, i.e., currency exposure, sovereign vs. corporate, or geography. They try to get the biggest bang for the level of risk across the portfolio as a whole, with as much “price stability” (she said that a couple of times) as they can muster.

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

The profile:

MAINX offers rare and sensible access to an important, under-followed asset class. The long track record of Matthews’ funds suggests that this is going to be a solid, risk-conscious and rewarding vehicle for gaining access to that class.

The Mutual Fund Observer profile of MAINX, updated March, 2012

podcastThe MAINX audio profile

Web:

Matthews Asia Strategic Income Fund

Fact Sheet

2013 Q3 Report

Fund Commentary

Fund Focus: Resources from other trusted sources

ASTON / River Road Long Short (ARLSX)

By Editor

The fund:

 ASTON / River Road Long Short (ARLSX)

Manager:

 Matt Moran and Dan Johnson

The call:

Highlights of the call:

In December 2012, we spoke with Matt and Dan about the River Road Long Short Strategy, which is also used in this fund. With regard to the strategy, they noted:

  • they believe they can outperform the stock market by 200 bps/year over a full market cycle. 
  • they believe they can keep beta at 0.3 to 0.5. They have a discipline for reducing market exposure when their long portfolio exceeds 80% of fair value. 
  • risk management is more important than return management, so all three of their disciplines are risk-tuned. 
  • River Road is committed to keeping the strategy open for at least 8 years.
  • The fund might be considered an equity substitute. Their research suggests that a 30/30/40 allocation (long, long/short, bonds) has much higher alpha than a 60/40 portfolio.

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

The profile:

Long/short investing makes great sense in theory but, far too often, it’s dreadful in practice.  After a year, ARLSX seems to be getting it right and its managers have a pretty cogent explanation for why that will continue to be the case.

The Mutual Fund Observer profile of ARLSX, dated June 2012.

podcastThe ARLSX audio profile

Web:

For information about the Aston mutual fund, subadvised by River Road, please see the following:

Aston Asset Management

2013 Q3 Report

Fact Sheet

ARLSX Profile Sheet

Fund Focus: Resources from other trusted sources

RiverPark Long/Short Opportunity Fund (RLSFX)

By Editor

The fund:

 RiverPark Long/Short Opportunity Fund (RLSFX)RiverPark Logo

Manager:

 Mitch Rubin, a Managing Partner at RiverPark and their CIO.

The call:

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.

The call 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. 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.

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 leverage.
  • He believes long/short managers as a group are 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.
  • RiverPark benefits from having followed many of their holdings for nearly two decades, 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 they short).

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

The profile:

All long-short funds have about the same goal: to provide a relatively large fraction of the stock market’s long-term gains with a relatively small fraction of its short-term volatility.  They all invest long in what they believe to be the most attractively valued stocks and invest short, that is bet against, the least attractively valued ones.  Many managers imagine their long portfolios as “offense” and their short portfolio as “defense.”

That’s the first place where RiverPark stands apart.  Mr. Rubin intends to “always play offense.”  He believes that RiverPark’s discipline will allow him to make money, “on average and over time,” on both his long and short portfolios.

The Mutual Fund Observer profile of RLSFX, dated August, 2012

podcastThe audio profile

Web:

RiverPark Funds Website

2013 Q3 Report

RLSFX Fact Sheet

Fund Focus: Resources from other trusted sources

RiverPark Short Term High Yield (RPHYX)

By Editor

The fund:

 RiverPark Short Term High Yield (RPHYX)RiverPark Logo

Manager:

 David Sherman of Cohanzick Management, LLC

The call:

For about an hour on September 13th, 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.

Highlights include:

  1. they expect to be able to return 300 – 400 basis points more than a money market fund
  2. they manage to minimize risk, not maximize return
  3. they do not anticipate significant competition for these assets
  4. expenses are unlikely to move much
  5. NAV volatility is more apparent than real – by any measure other than a money market, it’s a very steady NAV. 

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

The profile:

People are starting to catch on to RPHYX’s discrete and substantial charms.  Both the fund’s name and Morningstar’s assignment of it to the “high yield” peer group threw off some potential investors.  To be clear: this is not a high yield bond fund in any sense that you’d recognize.

The Mutual Fund Observer profile of RPHYX, updated October, 2012

podcastThe audio profile

Web:

RiverPark Funds Website

2013 Q3 Report

RPHYX Fact Sheet

Fund Focus: Resources from other trusted sources

New and Noteworthy Site

By Editor

LearnBonds Mutual Fund & ETF Ratings

History and Focus

LearnBonds (LB) Mutual Fund & ETF Ratings was launched in December 2011 by its co-founders Marc Prosser and David Waring. Marc Prosser is currently a Forbes contributor; previously he was the Chief Marketing Officer at Forex Capital Markets (FXCM). David Waring was formerly the Managing Director, business development and strategy, at Market Simplified Inc.

Unlike industry heavyweights such as Morningstar and Lipper, LB Ratings focuses on a relatively small number of bond funds in a limited number of categories. They divide funds into categories based on purpose. The categories currently listed are core bond funds, municipal bond funds, short term/low-duration bond funds, high credit risk bond funds and long duration funds. Their belief is that no individual or family should have more than 5 purpose driven funds in their portfolio. This is how David Waring describes their approach:

We have tremendous respect for Morningstar and Lipper’s mutual fund and ETF ratings. LB Ratings will not replace these great tools. However, we recognize many investors find these tools overwhelming and complicated to apply to making investment choices. We are addressing the need for a simplified product which expresses strong views as to which funds an investor should own.

Methodology

LB Ratings does not use a mathematical formula to identify or rate individual funds. Every fund listed on LB ratings was personally chosen and rated by the co-founders.  Instead of mechanical, number-based, quantitative analysis, they use a specific set of criteria to personally select and rate individual funds. Factors include fund performance both long and short term, risk levels, associated fees and quality and tenure of management. Funds are given a rating level between 1 and 5 stars, 1 being the lowest and 5 the highest. The website describes this method as “opinionated ratings.”  They are clear and upfront about their methods and their belief that all fund rating agencies and websites are inherently subjective.   This makes LB’s ratings akin to Morningstar’s Analyst Ratings (the Gold, Silver … designations).

LearnBonds screenshot

Extras

Every fund listed is accompanied by a compact but comprehensive report that outlines its strengths and weaknesses, as well as the rationale behind its rating. In addition to their bond fund and ETF lists, LB Ratings also offers links to bond and fund related articles. Additionally, website visitors can sign up for a daily newsletter, or download the free e-book “How to Invest in Bonds.”

Pros

The website is simple and straightforward, providing shortlists of funds that were hand chosen by experts in the field.  The rating report that accompanies each fund is clear and concise, giving readers information that can be useful to them independent of the rating. Fewer categories and shorter lists may be less stressful to some investors and help to reduce confusion.

Cons

The limited number of categories and funds means that inevitably many strong candidates will be missing. The subjective nature of the ratings will be too abstract for many. The lack of comparative tools – and tools in general – will limit the site’s appeal to investors who need more in-depth coverage. One practical concern we have is that there’s no evidence of predictive validity for the LB ratings; that is, they don’t have proof that their five star funds will perform better in the future than their three star ones.  Here’s Mr. Prosser’s response:

As far as predictive analysis , I would make the argument that at least for actively traded bonds funds we are in a period of time where quantitative analysis is difficult to employ:

Funds have radically changed the profile of the assets they hold and significantly drifted away from their benchmarks. Here are two easy examples; the Templeton World Bond Fund is now a short-duration fund, with a duration two years shorter than its peers. The PIMCO Total Return Fund now is a large holder of munis. which are neither included in its benchmark nor have they ever been a major part of its holdings.  In both cases, these are radical departures from the past . . . and at the same time [might be] temporary positions . . .  As a result, more than ever you’re “betting” on the skill of the fund’s manager.  Or put another way, historically the best performing bond mutual funds had most their returns generated from beta and now they are generating it from alpha. In short, I don’t think the quant models being employed really capture this shift.  [Assessing these funds] requires more qualitative analysis.

Bottom Line

Although the website’s offerings are limited, many investors may prefer a human chosen shortlist of choices over one generated by a computer.  For those who don’t need or likely will not use tools such as screeners and comparative charts, the simple straightforward nature of LB Ratings will be welcome. As the website itself acknowledges though, a fund rating website is built on trust.  Trust is earned over time, and ultimately only time will tell how the “opinionated ratings” approach fares against the tried and tested methods of the industry’s heavyweights in terms of performance.  For now, we conclude that LB has a sensible niche, that it’s interesting, worth watching and potentially useful, so long as you use their ratings as a starting point rather than a final word.

Website

http://www.learnbonds.com/lb-rated-funds/

May 1, 2012, A brief note

By Editor

Dear Gentle Reader,

There will be a slight delay in publishing the May 2012 issue of the Observer.  In the past 24 hours I’ve been laid low by a particularly unattractive virus.  While our monthly essay is pretty much done, I haven’t been able to complete the final pre-publication quality review.  With luck (and a lot of medicine), we’re hopeful of having the May issue available on the evening of May 1st.

Highlights of some of the stories we’re pursuing this month include:

The Greatest Fund that Isn’t.  As of mid-April 2012, data services reported one fund with 180% year-to-date returns.  It turns out to be an old and occasionally troubled friend that’s not quite a fund any longer.

The Return of the Giants, a review of the cheerful notion that the “star managers” have regained their footing in 2012.

“A Giant Sucking Sound” and Investor Interest in Mutual Funds. We’ve updated our link to Google’s analysis of interest in mutual funds and the picture isn’t getting brighter.  We suspect that fund companies, in too many instances, abet the decline through insensitive, desultory communications with their shareholders, so we talk about really good shareholder communication and a new service designed to help smaller fund companies get better.

The Best of the Web: Curated News Aggregators.  Google News manages to draw 100,000 clicks a minute with its collection of mechanically assembled and arranged content.  News aggregators offer a useful service, and it’s possible for you to do a lot better than robo-edited content.   Junior highlights two first rate, human curated aggregators (Abnormal Returns and Counterparties).

As always, we offered new or updated profiles of four cool funds (Amana Developing World, Artisan Global Value, FMI International and LKCM Balanced).

There’s important news from a half dozen fund companies, including a new fund in registration that represents a collaboration of two fine firms, RiverNorth and Manning & Napier.

Except for our monthly highlights and commentary, all of the new content is available now using the navigation tabs along the top of this page.

Thanks for your patience and regrets for the delay,

Bretton Fund (BRTNX) – February 2012

By Editor

Objective and Strategy

The Bretton Fund seeks to achieve long-term capital appreciation by investing in a small number of undervalued securities. The fund invests in common stocks of companies of all sizes. It normally holds a core position of between 15 to 20 securities whose underlying firms combine a defensible competitive advantage, relevant products, competent and shareholder-oriented management, growth, and a low level of debt.  The manager wants to invest “in ethical businesses” but does not use any ESG screens; mostly he avoids tobacco and gaming companies.

Adviser

Bretton Capital Management, LLC.  Bretton was founded in 2010 to advise this fund, which is its only client.

Manager

Stephen Dodson.  From 2002 to 2008, Mr. Dodson worked at Parnassus Investments in San Francisco, California, where he held various positions including president, chief operating officer, chief compliance officer and was a co-portfolio manager of a $25 million California tax-exempt bond fund. Prior to joining Parnassus Investments, Mr. Dodson was a venture capital associate with Advent International and an investment banking analyst at Morgan Stanley. Mr. Dodson attended the University of California, Berkeley, and earned a B.S. in Business Administration from the Haas School of Business.

Management’s Stake in the Fund

Mr. Dodson has over a million dollars invested in the fund.  As of April 5, 2011, Mr. Dodson and his family owned about 75% of the fund’s shares.

Opening date

September 30, 2010.

Minimum investment

$5000 for regular accounts, $1000 for IRAs or accounts established with an automatic investment plan.  The fund’s available for purchase through E*Trade and Pershing.

Expense ratio

1.5% on $3 million in assets.

Comments

Mr. Dodson 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, Bretton seems to mean it when he says “just my best.”

As of 9/30/11, the fund held just 15 stocks.  Of those, six were large caps, three mid-caps and six small- to micro-cap.  His micro-cap picks, where he often discerns the greatest degree of mispricing, are particularly striking.  Bretton is one of only a handful of funds that owns the smaller cap names and it generally commits ten or twenty times as much of the fund’s assets to them.

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.

This is the essence of active management, and active management is about the only way to distinguish yourself from an overpriced index.  Bretton’s degree of concentration is not quite unprecedented, but it is remarkable.  Only six other funds invest with comparable confidence (that is, invests in such a compact portfolio), and five of them are unattractive options.

Biondo Focus (BFONX) holds 15 stocks and (as of January 2012) is using leverage to gain market exposure of 130%.  It sports a 3.1% e.r.  A $10,000 investment in the fund on the day it launched was worth $7800 at the end of 2011, while an investment in its average peer for the same period would have grown to $10,800.

Huntington Technical Opportunities (HTOAX) holds 12 stocks (briefly: it has a 440% portfolio turnover), 40% cash, and 10% S&P index fund.  The expense ratio is about 2%, which is coupled with a 4.75% load.  From inception, $10,000 became $7200 while its average peer would be at $9500.

Midas Magic (MISEX).  The former Midas Special Fund became Midas Magic on 4/29/2011.  Dear lord.  The ticker reads “My Sex” and the name cries out for Clara Peller to squawk “Where’s The Magic?”  The fund reports 0% turnover but found cause to charge 3.84% in expenses anyway.  Let’s see: since inception (1986), the fund has vastly underperformed the S&P500, its large cap peer group, short-term bond funds, gold, munis, currency . . . It has done better than the Chicago Cubs, but that’s about it.  It holds 12 stocks.

Monteagle Informed Investor Growth (MIIFX) holds 12 stocks (very briefly: it reports a 750% turnover ratio) and 20% cash.  The annual report’s lofty rhetoric (“The Fund’s goal is to invest in these common stocks with demonstrated informed investor interest and ownership, as well as, solid earnings fundamentals”) is undercut by an average holding period of six weeks.  The fund had one brilliant month, November 2008, when it soared 36% as the market lost 10%.  Since then, it’s been wildly inconsistent.

Rochdale Large Growth (RIMGX) holds 15 stocks and 40% cash.  From launch through the end of 2011, it turned $10,000 to $6300 while its large cap peer group went to $10,600.

The Cook & Bynum Fund (COBYX) is the most interesting of the lot.  It holds 10 stocks (two of which are Sears and Sears Canada) and 30% cash.  Since inception it has pretty much matched the returns of a large-value peer group, but has done so with far lower volatility.

And so fans of really focused investing have two plausible candidates, COBYX and BRTNX.  Of the two, Bretton has a far more impressive, though shorter, record.  From inception through the end of 2011, $10,000 invested in Bretton would have grown to $11,500.  Its peer group would have produced an average return of $10,900. For 2011 as a whole, BRTNX’s returns were in the top 2% of its peer group, by Morningstar’s calculus.   Lipper, which classifies it as “multi-cap value,” reports that it had the fourth best record of any comparable fund in 2011.  In particular, the fund outperformed its peers in every month when the market was declining.  That’s a particularly striking accomplishment given the fund’s concentration and micro-cap exposure.

Bottom Line

Bretton has the courage of its convictions.  Those convictions are grounded in an intelligent reading of the investment literature and backed by a huge financial commitment by the manager and his family.  It’s a fascinating vehicle and deserves careful attention.

Fund website

Bretton Fund

© Mutual Fund Observer, 2012. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.

Marathon Value (MVPFX), August 2011

By Editor

*On December 12, 2022, Green Owl Intrinsic Value Fund (GOWLX) and Marathon Value Portfolio (MVPFX)  were merged and converted into a new Kovitz Core Equity ETF (EQTY) along with over $500 million of assets from separately managed accounts. The ETF adopted the record and strategy of the Green Owl Fund. In consequence, the information for Marathon Value should be read for archival purposes only.*

Objective

To provide shareholders with long-term capital appreciation in a well-diversified portfolio.  They invest primarily in U.S. mid- to large caps, though the portfolio does offer some international exposure (about 10% in mid-2011) and some small company exposure (about 2%).   On average, 80% of the portfolio is in the stock market while the rest is in cash, short term bonds and other cash equivalents.  The manager looks to buy stocks that are “relatively undervalued,” though Morningstar generally describes the portfolio as a blend of styles.  The core of the portfolio is in “sound businesses [with] dedicated, talented leaders” though they “sometimes may invest opportunistically in companies that may lack one of these qualities.”  The portfolio contains about 80 stocks and turnover averages 30% per year.

Adviser

Spectrum Advisory Services, an Atlanta based investment counseling firm whose clients include high net worth individuals and pension and profit sharing plans.  In addition to advising this fund, Spectrum manages over $415 million in taxable, retirement and charitable accounts for high net worth individuals and institutions.

Manager

Marc S. Heilweil.  Mr. Heilweil is President of Spectrum.  He founded the firm in 1991 and has managed Marathon since early 2000.  He received both his B.A. and his J.D. from Yale.

Management’s Stake in the Fund

Mr. Heilweil has over $1 million invested, and is the fund’s largest shareholder.

Opening date

The original fund launched on March 12, 1998 but was reorganized and re-launched under new management in March 2000.

Minimum investment

$2,500 across the board.

Expense ratio

1.23% on assets of $41 million (as of 6/30/2011). Update – 1.25% on assets of nearly $42 million (as of 1/15/2012.)

Comments

It’s not hard to find funds with great returns.  Morningstar lists them daily, the few surviving financial magazines list them monthly and The Wall Street Journal lists them quarterly.  It’s considerably harder to find funds that will make a lot of money for you. The indisputable reality is that investors get greedy any time that the market hasn’t crashed in 12 months and are delusional about their ability to stick with a high-return investment.   Many funds with spectacular absolute returns have earned very little for their investors because the average investor shows up late (after the splendid three-year returns have been publicized) and leaves early (after the inevitable overshoot on the downside).

The challenge is to figure out what your portfolio needs to look like (that is, your mix of stocks, bonds and cash and how much you need to be adding) in order for you to have a good chance of achieving your goals, and then pick funds that will give you exposure to those assets without also giving you vertigo.

For investors who need core stock exposure, little-known Marathon Value offers a great vehicle to attempt to get there safely and in comfort.  The manager’s discipline is unremarkable.  He establishes a firm’s value by looking at management strength (determined by long-term success and the assessment of industry insiders) and fundamental profitability (based on a firm’s enduring competitive advantages, sometimes called its “economic moat”).  If a firm’s value exceeds, “by a material amount,” its current share price, the manager will look to buy.  He’ll generally buy common stock, but has the option to invest in a firm’s high-yield bonds (up to 10% of the portfolio) or preferred shares if those offer better value.   Occasionally he’ll buy a weaker firm whose share price is utterly irrational.

The fund’s April 2011 semi-annual report gives a sense of how the manager thinks about the stocks in his portfolio:

In addition to Campbell, we added substantially to our holdings of Colgate Palmolive in the period.  Concerns about profit margins drove it to a price where we felt risk was minimal. In the S&P 500, Colgate has the second highest percentage of its revenues overseas.  Colgate also is a highly profitable company with everyday products.  Colgate is insulated from private label competition, which makes up just 1% of the toothpaste market.  Together with Procter & Gamble and Glaxo Smithkline, our fund owns companies which sell over half the world’s toothpaste.  While we expect these consumer staples shares to increase in value, their defensive nature could also help the fund outperform in a down market.

Our holdings in the financial sector consist of what we consider the most careful insurance underwriters, Alleghany Corp., Berkshire Hathaway and White Mountain Insurance Group.  All three manage their investments with a value bias.  While Berkshire was purchased in the fund’s first year, we have not added to the position in the last five years.  One of our financials, U.S. Bancorp (+7%) is considered the most conservatively managed of the nation’s five largest banks.  The rest of our financial holdings are a mix of special situations.

There seems nothing special about the process, but the results place Marathon among the industry’s elite.  Remember: the goal isn’t sheer returns but strong returns with limited risk.  Based on those criteria, Marathon is about as good as a stock fund gets.  For “visual learners,” it’s useful to glance at a risk-return snapshot of domestic equity funds over the past three years.

Here’s how to read the chart: you want to be as close as possible to the upper-left corner (infinite returns, zero risk).  The closer you get, the better you’re being served by your manager.  Five funds define a line of ideal risk/return balance; those are the five dots in a row near the upper-left.  Who are they?  From lower return/lower risk, they are:

First Eagle US Value (FEVAX): five stars, $1.8 billion in assets, made famous by Jean-Marie Eveillard.

Marathon Value (MVPFX): five stars for the past three-, five- and ten-year periods, as well as since inception, but with exceedingly modest assets.

Sequoia (SEQUX): five stars, $4.4 billion in assets, made famous by Bill Ruane and Bob Goldfarb, closed to new investors for a quarter century.

Nicholas (NICSX): five stars for the past three years, $1.7 billion, low turnover, willing to hold cash, exceedingly cautious, with the same manager (Ab Nicholas) for 41 years.

Weitz Partners Value (WPVLX): five stars over the past three years, $710 million in assets, run by Wally Weitz for 28 years.

That’s a nice neighborhood, and the funds have striking similarities: a commitment to high quality investments, long-tenured managers, low turnover, and a willingness to hold cash when circumstances dictate.  Except for Marathon, they average $2 billion in assets.

Fans of data could search Morningstar’s database for domestic large cap stock funds that, like Marathon, have “low risk” but consistently better long-term returns than Marathon.  There are exactly three funds (of about 1300 possibles) that meet those criteria: the legendary Sequoia, Amana Income (AMANX) and Auxier Focus (AUXFX), both of which are also profiled as “stars in the shadows.”

Regardless of how you ask the question, you seem to get the same answer: over Mr. Heilweil’s decade with the fund, it has consistently taken on a fraction of the market’s volatility (its beta value is between 74 and 76 over the past 3 – 10 years and Morningstar calculates its “downside capture ratio” as 68%). Alan Conner from Spectrum reports that Marathon is the 11th least volatile large core fund of near 1800 that Morningstar tracks. At the same time, it produces decent if not spectacular returns in rising markets (it captures about 82% of the gains in a rising market).  That combination lets it post returns in the top 10% of its peer group over the past 3 – 10 years.

Because Mr. Heilweil is in his mid 60s and the fund depends on his skills, potential investors might reasonably ask about his future.  Mr. Conner says that Heilweil intends to be managing the fund a decade from now.  The fund represents a limited piece of Heilweil’s workload, which decreases the risk that he’ll become bored or discouraged with it.

Bottom Line

If you accept the arguments that (a) market volatility will remain a serious concern and (b) high-quality firms remain the one undervalued corner of the market, then a fund with a long record of managing risk and investing in high-quality firms makes great sense.  Among funds that fit that description, few have compiled a stronger record than Marathon Value.

Fund website

Marathon Value Portfolio, though the website has limited and often outdated content.

© Mutual Fund Observer, 2011.  All rights reserved.  The information here reflects publicly available information current at the time of publication.  For reprint/e-rights contact [email protected].

Tocqueville Select Fund (TSELX), January 2012

By Editor

*The fund has been liquidated.*

Objective and Strategy

Tocqueville Select Fund pursues long-term capital appreciation by investing in a focused group of primarily small and mid-sized U.S. stocks. The portfolio, as of 9/30/11, is at the high end of its target of 12 to 25 stocks.  The managers pursue a bottom-up value approach, with special delight in “special situations” (that is, companies left for dead by other investors).  The fund can hedge its market exposure, but cannot short.  It can invest in fixed-income instruments, but seems mostly to hold stocks and cash.   Cash holdings are substantial, often 10 – 30% of the portfolio.

Adviser

Tocqueville Asset Management, which “has been managing private fortunes for more than 30 years.”  They serve as advisor to six Tocqueville funds, including the two former Delafield funds. The Advisor has been in the public asset management business since 1990 and. as of January, 2011, had more than $10.8 billion in assets under management.

Managers

J. Dennis Delafield, Vincent Sellecchia, and Donald Wang.  Mr. Delafield founded Delafield Asset Management in 1980 which became affiliated with Reich & Tang Asset Management in 1991. He and his team joined Tocqueville in 2009.  Mr. Sellecchia worked with Delafield at Reich & Tang and Delafield.  He and Delafield have co-managed The Delafield Fund since 1993. Mr. Wang seems to be the junior partner (though likely a talented one), having served as an analyst on The Delafield Fund and with Lindner funds.  Mr. Sellechia was the first manager (1998) of the partnership on which this fund is based, Mr. Wang came on board in 2003 and Mr. Delafield in 2005.

Management’s Stake in the Fund

Messrs Delafield and Sellecchia have each invested between $100,000 – 500,000 in Select and over $1 million in Delafield.   As of last report, Mr. Wang hadn’t joined the party.  Half of the fund’s trustees (4 of 8) have investments in the fund.

Opening date

Good question!  Select is the mutual fund successor to a private partnership, the Reich & Tang Concentrated Portfolio L.P.  The partnership opened on July 31, 1998.  On September 28 2008, it became Delafield Select Fund (a series of Natixis Funds Trust II) and one year later, it became The Select Fund (a series of The Tocqueville Trust).  This is to say, it’s a 13-year-old portfolio with a three-year record.

Minimum investment

$1000 for regular accounts, $250 for IRAs

Expense ratio

1.4% on $102 million in assets.  Assets jumped from $60 million to $100 million in the months after Morningstar, in September 2011, released its first rating for the fund. There’s also a 2% redemption fee on shares held under 120 days.

Comments

Have you ever thought about how cool it would be if Will Danoff ran a small fund again, rather than the hauling around $80 billion in Contrafund assets?  Or if Joel Tillinghast were freed of the $33 billion that Low-Priced Stock carries?  In short, if you had a brilliant manager suddenly free to do bold things with manageable piles of cash?  If so, you grasp the argument for The Select Fund.

Tocqueville Select Fund is the down-sized, ramped-up version of The Delafield Fund (DEFIX).  The two funds have the same management team, the same discipline and portfolios with many similarities.  Both have very large cash stakes, about the same distribution of stocks by size and valuation, about the same international exposure, and so on.  Both value firms with good management teams and lots of free cash flow, but both make their money off “financially troubled” firms. The difference is that Select is (1) smaller, (2) more concentrated and (3) a bit more aggressive.

All of which is a very good thing for modestly aggressive equity investors.  Delafield is a great fund, which garners only a tiny fraction of the interest it warrants.  Morningstar analysis Michael Breen, in September 2010, compared Delafield to the best mid-cap value funds (Artisan, Perkins, Vanguard) and concluded that Delafield was decisively better.

Its 11.4% annual gain for the past decade is the best in its category by a wide margin, and its 15-year return is nearly as good. And a look at upside and downside capture ratios shows this fund is the only one in the group that greatly outperformed the Russell Mid Cap Value Index in up and down periods the past 10 years.

Delafield Select was ever better.  Over the ten years ending 12/29/2011, the Select Portfolio would have turned $10,000 into $27,800 returned 14.5% while an investment in its benchmark, the Russell 2000, would have grown to $17,200.  Note that 70% of that performance occurred as a limited partnership, though the partnership’s fees were adjusted to make the performance comparable to what Select might have charged over that period.

That strong performance, however, has continued since the fund’s launch.  $10,000 invested at the fund’s inception would now be worth $13,200; the benchmark return for the same period would be $11,100.

The fund has also substantially outperformed its $1.3 billion sibling Delafield Fund, both from the inception of the partnership and from inception of the mutual fund.

The red flag is volatility.  The fund has four distinctive characteristics which would make it challenging as a significant portion of your portfolio:

  1. It’s very concentrated for a small cap fund, it might hold as few as a dozen stocks and even its high end (25-30 stocks) is very, very low.
  2. It looks for companies which are in trouble but which the managers believe will right themselves.
  3. It invests a lot in microcap stocks: about 30% at its last portfolio report.
  4. It invests a lot in a few sectors: the portfolio is constructed company by company, so it’s possible for some sectors (materials, as of late 2011) to be overweighted by 600% while there’s no exposure at all to another six half sectors.

It’s not surprising that the fund is volatile: Morningstar ranks is as “above average” in risk.  What is surprising is that it’s not more volatile; by Morningstar’s measurement, its “downside capture” has been comparable to its average small-value peer while its upside has been substantially greater.

Bottom Line

This is not the only instance where a star manager converted a successful partnership into a mutual fund, and the process has not always been successful.   Baron Partners (BPTRX) started life as a private partnership and as the ramped-up version of Baron Growth (BGRFX), but has decisively trailed its milder sibling since its launch as a fund.  That said, the Delafield team seem to have successfully managed the transition and interest in the fund bounced in September 2011, when it earned its first Morningstar rating.  Investors drawn by the prospects of seeing what Delafield and company can do with a bit more freedom and only 5% of the assets might find this a compelling choice for a small slice of a diversified portfolio.

Fund website

Tocqueville Select Fund

Fact Sheet

© Mutual Fund Observer, 2012. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.

Northern Global Tactical Asset Allocation Fund (BBALX) – September 2011, Updated September 2012

By Editor

This profile has been updated since it was originally published. The updated profile can be found at http://www.mutualfundobserver.com/2012/09/northern-global-tactical-asset-allocation-fund-bbalx-september-2011-updated-september-2012/

Objective

The fund seeks a combination of growth and income. Northern’s Investment Policy Committee develops tactical asset allocation recommendations based on economic factors such as GDP and inflation; fixed-income market factors such as sovereign yields, credit spreads and currency trends; and stock market factors such as domestic and foreign earnings growth and valuations.  The managers execute that allocation by investing in other Northern funds and outside ETFs.  As of 6/30/2011, the fund holds 10 Northern funds and 3 ETFs.

Adviser

Northern Trust Investments.  Northern’s parent was founded in 1889 and provides investment management, asset and fund administration, fiduciary and banking solutions for corporations, institutions and affluent individuals worldwide.  As of June 30, 2011, Northern Trust Corporation had $97 billion in banking assets, $4.4 trillion in assets under custody and $680 billion in assets under management.  The Northern funds account for about $37 billion in assets.  When these folks say, “affluent individuals,” they really mean it.  Access to Northern Institutional Funds is limited to retirement plans with at least $30 million in assets, corporations and similar institutions, and “personal financial services clients having at least $500 million in total assets at Northern Trust.”  Yikes.  There are 51 Northern funds, seven sub-advised by multiple institutional managers.

Managers

Peter Flood and Daniel Phillips.  Mr. Flood has been managing the fund since April, 2008.  He is the head of Northern’s Fixed Income Risk Management and Fixed Income Strategy teams and has been with Northern since 1979.  Mr. Phillips joined Northern in 2005 and became co-manager in April, 2011.  He’s one of Northern’s lead asset-allocation specialists.

Management’s Stake in the Fund

None, zero, zip.   The research is pretty clear, that substantial manager ownership of a fund is associated with more prudent risk taking and modestly higher returns.  I checked 15 Northern managers listed in the 2010 Statement of Additional Information.  Not a single manager had a single dollar invested.  For both practical and symbolic reasons, that strikes me as regrettable.

Opening date

Northern Institutional Balanced, this fund’s initial incarnation, launched on July 1, 1993.  On April 1, 2008, this became an institutional fund of funds with a new name, manager and mission and offered four share classes.  On August 1, 2011, all four share classes were combined into a single no-load retail fund but is otherwise identical to its institutional predecessor.

Minimum investment

$2500, reduced to $500 for IRAs and $250 for accounts with an automatic investing plan.

Expense ratio

0.68%, after waivers, on assets of $18 million. While there’s no guarantee that the waiver will be renewed next year, Peter Jacob, a vice president for Northern Trust Global Investments, says that the board has never failed to renew a requested waiver. Since the new fund inherited the original fund’s shareholders, Northern and the board concluded that they could not in good conscience impose a fee increase on those folks. That decision that benefits all investors in the fund. Update – 0.68%, after waivers, on assets of nearly $28 million (as of 12/31/2012.)

UpdateOur original analysis, posted September, 2011, appears just below this update.  Depending on your familiarity with the research on behavioral finance, you might choose to read or review that analysis first. September, 2012
2011 returns: -0.01%.  Depending on which peer group you choose, that’s either a bit better (in the case of “moderate allocation” funds) or vastly better (in the case of “world allocation” funds).  2012 returns, through 8/29: 8.9%, top half of moderate allocation fund group and much better than world allocation funds.
Asset growth: about $25 million in twelve months, from $18 – $45 million.
This is a rare instance in which a close reading of a fund’s numbers are as likely to deceive as to inform.  As our original commentary notes:The fund’s mandate changed in April 2008, from a traditional stock/bond hybrid to a far more eclectic, flexible portfolio.  As a result, performance numbers prior to early 2008 are misleading.The fund’s Morningstar peer arguably should have changed as well (possibly to world allocation) but did not.  As a result, relative performance numbers are suspect.The fund’s strategic allocation includes US and international stocks (including international small caps and emerging markets), US bonds (including high yield and TIPs), gold, natural resources stocks, global real estate and cash.  Tactical allocation moves so far in 2012 include shifting 2% from investment grade to global real estate and 2% from investment grade to high-yield.Since its conversion, BBALX has had lower volatility by a variety of measures than either the world allocation or moderate allocation peer groups or than its closest counterpart, Vanguard’s $14 billion STAR (VGSTX) fund-of-funds.  It has, at the same time, produced strong absolute returns.  Here’s the comparison between $10,000 invested in BBALX at conversion versus the same amount on the same day in a number of benchmarks and first-rate balanced funds:

Northern GTAA

$12,050
PIMCO All-Asset “D” (PASDX)

12,950
Vanguard Balanced Index (VBINX)

12,400
Vanguard STAR (VGSTX)

12,050
T. Rowe Price Balanced (RPBAX)

11,950
Fidelity Global Balanced (FGBLX)

11,450
Dodge & Cox Balanced (DODBX)

11,300
Moderate Allocation peer group

11,300
World Allocation peer group

10,300
Leuthold Core (LCORX)

9,750

BBALX holds a lot more international exposure, both developed and developing, than its peers.   Its record of strong returns and muted volatility in the face of instability in many non-U.S. markets is very impressive.

BBALX has developed in a very strong alternative to Vanguard STAR (VGSTX).  If its greater exposure to hard assets and emerging markets pays off, it has the potential to be stronger still.

Comments

The case for this fund can be summarized easily.  It was a perfectly respectable institutional balanced fund which has become dramatically better as a result of two sets of recent changes.

Northern Institutional Balanced invested conservatively and conventionally.  It held about two-thirds in stocks (mostly mid- to large-sized US companies plus a few large foreign firms) and one-third in bonds (mostly investment grade domestic bonds).   Northern’s ethos is very risk sensitive which makes a world of sense given their traditional client base: the exceedingly affluent.  Those folks didn’t need Northern to make a ton of money for them (they already had that), they needed Northern to steward it carefully and not take silly risks.  Even today, Northern trumpets “active risk management and well-defined buy-sell criteria” and celebrates their ability to provide clients with “peace of mind.”  Northern continues to highlight “A conservative investment approach . . . strength and stability . . .  disciplined, risk-managed investment . . . “

As a reflection of that, Balanced tended to capture only 65-85% of its benchmark’s gains in years when the market was rising but much less of the loss when the market was falling.  In the long-term, the fund returned about 85% of its 65% stock – 35% bond benchmark’s gains but did so with low volatility.

That was perfectly respectable.

Since then, two sets of changes have made it dramatically better.  In April 2008, the fund morphed from conservative balanced to a global tactical fund of funds.  At a swoop, the fund underwent a series of useful changes.

The asset allocation became fluid, with an investment committee able to substantially shift asset class exposure as opportunities changed.

The basic asset allocation became more aggressive, with the addition of a high-yield bond fund and emerging markets equities.

The fund added exposure to alternative investments, including gold, commodities, global real estate and currencies.

Those changes resulted in a markedly stronger performer.  In the three years since the change, the fund has handily outperformed both its Morningstar benchmark and its peer group.  Its returns place it in the top 7% of balanced funds in the past three years (through 8/25/11).  Morningstar has awarded it five stars for the past three years, even as the fund maintained its “low risk” rating.  Over the same period, it’s been designated a Lipper Leader (5 out of 5 score) for Total Returns and Expenses, and 4 out of 5 for Consistency and Capital Preservation.

In the same period (04/01/2008 – 08/26/2011), it has outperformed its peer group and a host of first-rate balanced funds including Vanguard STAR (VGSTX), Vanguard Balanced Index (VBINX), Fidelity Global Balanced (FGBLX), Leuthold Core (LCORX), T. Rowe Price Balanced (RPBAX) and Dodge & Cox Balanced (DODBX).

In August 2011, the fund morphed again from an institutional fund to a retail one.   The investment minimum dropped from $5,000,000 to as low as $250.  The expense ratio, however, remained extremely low, thanks to an ongoing expense waiver from Northern.  The average for other retail funds advertising themselves as “tactical asset” or “tactical allocation” funds is about 1.80%.

Bottom Line

Northern GTA offers an intriguing opportunity for conservative investors.  This remains a cautious fund, but one which offers exposure to a diverse array of asset classes and a price unavailable in other retail offerings.  It has used its newfound flexibility and low expenses to outperform some very distinguished competition.  Folks looking for an interesting and affordable core fund owe it to themselves to add this one to their short-list.

Fund website

Northern Global Tactical Asset Allocation

Update – 3Q2011 Fact Sheet

Fund Profile, 2nd quarter, 2012

© Mutual Fund Observer, 2012. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.

Wedgewood (formerly RiverPark/Wedgewood), (RWGFX), September 2011

By Editor 

At the time of publication, this fund was named RiverPark/Wedgewood.

Objective

Wedgewood pursues long-term capital growth, but does so with an intelligent concern for short-term loss. The manager invests in 20-25 predominately large-cap market leaders.  In general, that means recognizable blue chip names (the top four, as of 08/11, are Google, Apple, Visa, and Berkshire Hathaway) with a market value of more than $5 billion.  They describe themselves as “contrarian growth investors.”  That translates to two principles: (1) target great businesses with sustainable, long-term advantages and (2) buy them when normal growth investors – often momentum-oriented managers – are panicking and running away.  They then tend to hold stocks for substantially longer than do most growth managers.  The combination of a wide economic moat and a purchase at a reasonable price gives the fund an unusual amount of downside protection, considering that it remains almost always fully-invested.

Adviser

RiverPark Advisors, LLC.   Executives from Baron Asset Management, including president Morty Schaja, formed RiverPark in July 2009.  RiverPark oversees the five RiverPark funds, though other firms manage three of the five.  Until recently, they also advised two actively-managed ETFs under the Grail RP banner.  A legally separate entity, RiverPark Capital Management, runs separate accounts and partnerships.  Collectively, they have $100 million in assets under management, as of August 2011.  Wedgewood Partners, Inc. manages $1.1 billion in separate accounts managed similarly to the fund and subadvises the fund and provides the management team and strategy.

Manager

David Rolfe.  Mr. Rolfe has managed the fund since its inception, and has managed separate accounts using the same strategy since 1993.  He joined Wedgewood that year and was charged with creating the firm’s focused growth strategy.  He holds a BA in Finance from the University of Missouri at St. Louis, a durn fine school.

Management’s Stake in the Fund

Mr. Rolfe and his associates clearly believe in eating their own cooking.   According to Matt Kelly of RiverPark, “not only has David had an SMA invested in this strategy for years, but he invested in the Fund on day 1”.   As of August 1, David and his immediate family’s stake in the Fund was approximately $400,000.  In addition, 50% of Wedgewood’s 401(k) money is invested in the fund.  Finally, Mr. Rolfe owns 45% of Wedgewood Partners.  “Of course, RiverPark executives are also big believers in the Fund, and currently have about $2 million in the Fund.”

Opening date

September 30, 2010

Minimum investment

$1,000 across the board.

Expense ratio

1.25% on assets, in the retail version of the fund, of $29 million (as of August 2023). The institutional shares are 1.00%. Both share classes have a waiver on the expense ratio. 

Comments

Americans are a fidgety bunch, and always have been.  Alexis de Tocqueville observed, in 1835 no less, that our relentless desire to move around and do new things ended only at our deaths.

A native of the United States clings to this world’s goods as if he were certain never to die; and he is so hasty in grasping at all within his reach that one would suppose he was constantly afraid of not living long enough to enjoy them. He clutches everything, he holds nothing fast, but soon loosens his grasp to pursue fresh gratifications.

Our national mantra seems to be “don’t just sit there, do something!”

That impulse affects individual and professional investors alike.  It manifests itself in the desire to buy into every neat story they hear, which leads to sprawling portfolios of stocks and funds each of which earns the title, “it seemed like a good idea at the time.”  And it leads investors to buy and sell incessantly.  We become stock collectors and traders, rather than business owners.

Large-cap funds, and especially large large-cap funds, suffer similarly.  On average, actively-manage large growth funds hold 70 stocks and turn over 100% per year.  The ten largest such funds hold 311 stocks on average and turn over 38% per year

The well-read folks at Wedgewood see it differently.  Manager David Rolfe endorses Charles Ellis’s classic essay, “The Losers Game” (Financial Analysts Journal, July 1975). Reasoning from war and sports to investing, Ellis argues that losers games are those where, as in amateur tennis,

The amateur duffer seldom beats his opponent, but he beats himself all the time. The victor in this game of tennis gets a higher score than the opponent, but he gets that higher score because his opponent is losing even more points.

Ellis argues that professional investors, in the main, play a losers game by becoming distracted, unfocused and undistinguished.  Mr. Rolfe and his associates are determined not to play that game.  They position themselves as “contrarian growth investors.”  In practical terms, that means:

They force themselves to own fewer stocks than they really want to.  After filtering a universe of 500-600 large growth companies, Wedgewood holds only “the top 20 of the 40 stocks we really want to own.”   Currently, 63% of the fund’s assets are in its top ten picks.

They buy when other growth managers are selling. Most growth managers are momentum investors, they buy when a stock’s price is rising.  If the company behind the stock meets the firm’s quantitative (“return on equity > 25%”) and qualitative (“a dominant product or service that is practically irreplaceable or lacks substitutes”) screens, Wedgewood would rather buy during panic than during euphoria.

They hold far longer once they buy.  The historical average for Wedgewood’s separate accounts which use this exact discipline is 15-20% turnover where, as I note, their peers sit around 100%.

And then they spend a lot of time watching those stocks.  “Thinking and acting like business owners reduces our interest to those few businesses which are superior,” Rolfe writes, and he maintains a thoughtful vigil over those businesses. For folks interested in looking over their managers’ shoulders, Wedgewood has posted a series of thoughtful analyses of Apple.  Mr. Rolfe had a new analysis out to his investors within a few hours of the announcement of Steve Jobs’ resignation:

Mr. Jobs is irreplaceable.  That said. . . [i]n the history of Apple, the company has never before had the depth, breadth, scale and scope of management, technological innovation and design, financial resources and market share strength as it possesses today.  Apple’s stock will take its inevitable lumps over the near-term.  If the Street’s reaction is too extreme we will buy more.  (With our expectation of earnings power of +$40 per share in F2012, plus $100 billion in balance sheet liquidity by year-end 2011, the stock is an extreme bargain – even before today’s news.)

Beyond individual stock selection, Mr. Rolfe understood that you can’t beat an index with a portfolio that mirrors an index and so, “we believe that our portfolios must be constructed as different from an index as possible.”   And they are strikingly different.  Of 11 industry sectors that Morningstar benchmarks, Wedgewood has zero exposure to six.  In four sectors, they are “overweight” or “underweight” by margins of 2:1 up to 7:1.  Technology is the only near normal weighting in the current portfolio.  The fund’s market cap is 40% larger than its benchmark and its average stock is far faster growing.

None of which would matter if the results weren’t great.  Fortunately, they are.

Returns are high. From inception (9/92) to the end of the most recent quarter (6/11), Wedgewood’s large growth accounts returned 11.5% annually while the Russell 1000 Growth index returned 7.4%.  Wedgewood substantially leads the index in every trailing period (3, 5, 7, 10 and 15 years).  It also has the highest alpha (a measure of risk-adjusted performance) over the past 15 years of any of the large-cap growth managers in its peer group.

Risk is moderate and well-rewarded. Over the past 15 years, Wedgewood has captured about 85% of the large-cap universe’s downside and 140% of its upside.  That is, they make 40% more in a rising market and lose 15% less in a falling market than their peers do.   The comparison with large cap mutual funds is striking.  Large growth funds as a whole capture 110% of the downside and 106% of the upside.  That is, Wedgewood falls far less in falling markets and rises much more in rising ones, than did the average large-growth fund over the past 15 years.

Statisticians attempt to standardize those returns by calculating various ratios.  The famous Sharpe ratio (for which William Sharpe won a Nobel Prize) tries to determine whether a portfolio’s returns are due to smart investment decisions or a result of excess risk.  Wedgewood has the 10th highest Sharpe ratio among the 112 managers in its peer group.  The “information ratio” attempts to measure the consistency with which a manager’s returns exceeds the risks s/he takes.  The higher the IR, the more consistent a manager is and Wedgewood has the highest information ratio of any of the 112 managers in its universe.

The portfolio is well-positioned.  According to a Morningstar analysis provided by the manager, the companies in Wedgewood Growth’s portfolio are growing earnings 50% faster than those in the S&P500, while selling at an 11% discount to it.  That disconnect serves as part of the “margin of safety” that Mr. Rolfe attempts to build into the fund.

Is there reason for caution?  Sure.  Two come to mind.  The first concern is that these results were generated by the firm’s focused large-growth separate accounts, not by a mutual fund.  The dynamics of those accounts are different (different fee structure and you might have only a dozen investors to reason with, as opposed to thousands of shareholders) and some managers have been challenged to translate their success from one realm to the other.  I brought the question to Mr. Rolfe, who makes two points.  First, the investment disciplines are identical, which is what persuaded the SEC to allow Wedgewood to include the separate account track record in the fund’s prospectus.  For the purpose of that track record, the fund is now figured-in as one of the firm’s separate accounts.  Second, internal data shows good tracking consistency between the fund and the separate account composite.  That is, the fund is acting pretty much the way the separate accounts act.

The other concern is Mr. Rolfe’s individual importance to the fund.  He’s the sole manager in a relatively small operation.  While he’s a young man (not yet 50) and passionate about his work, a lot of the fund’s success will ride on his shoulders.  That said, Mr. Rolfe is significantly supported by a small but cohesive and experienced investment management team.  The three other investment professionals are Tony Guerrerio (since 1992), Dana Webb (since 2002) and Michael Quigley (since 2005).

Bottom Line

RiverPark Wedgewood is off to an excellent start.  It has one of the best records so far in 2011 (top 6%, as of 8/25/11) as well as one of the best records during the summer market turmoil (top 3% in the preceding three months).  Mr. Rolfe writes, “We are different. We are unique in that we think and act unlike the vast majority of active managers. Our results speak to our process.”  Because those results, earned through 18 years of separate account management, are not well known, advisors may be slow to notice the fund’s strength.  RWGFX is a worthy addition to the RiverPark family and to any stock-fund investors’ due-diligence list.

Fund website

Wedgewood Fund

Ellis’s “Losers Game” offers good advice for folks determined to try to beat a passive scheme, much of which is embodied here.  I don’t know how long the article will remain posted there, but it’s well-worth reading.

© Mutual Fund Observer, 2011.  All rights reserved.  The information here reflects publicly available information current at the time of publication.  For reprint/e-rights contact [email protected].

Sextant Growth (SSGFX), January 2007

By Editor

. . . from the archives at FundAlarm

These profiles have not been updated. The information is only accurate as of the original date of publication.

January 1, 2007

FundAlarm Annex – Fund Report

Objective

The fund seeks long-term growth by investing in common stocks, as well as convertible and preferred shares. While Morningstar classifies it as a mid-cap growth fund, the firm claims to follow a “value approach to investing” in looking at stocks with favorable potential over the next one to four years. They list a variety of predictable factors (revenue growth, p/e and p/b ratios, industry position and so on) in their selection criteria. No more than 5% of the fund may be invested in foreign companies.

Adviser

Saturna Capital. Saturna oversees four Sextant funds, the Idaho Tax-Free fund and two Amana funds. The Amana funds invest in accord with Islamic investing principles and were recognized as the best Islamic fund manager for 2005.

Manager

Nicholas Kaiser. Mr. Kaiser is president and founder of Saturna Capital. He has degrees from Chicago and Yale. In the mid 1970s and 1980s, he ran a mid-sized investment management firm (Unified Management Company) in Indianapolis. In 1989 he sold Unified and subsequently bought control of Saturna. As an officer of the Investment Company Institute, the CFA Institute, the Financial Planning Association and the No-Load Mutual Fund Association, he has been a significant force in the money management world. He’s also a philanthropist and is deeply involved in his community. By all accounts, a good guy all around. Morningstar must think so, too, because he’s a finalist for its 2006 Domestic Manager of the Year award.

Inception

December 30, 1990, though its name was then Northwest Growth Fund. Morningstar insists that the Growth Fund was launched in 1987. Saturna claims 1990, either October or December, for its predecessor fund and 1995 for the fund under its current configuration.

Minimum investment

$1,000 for regular accounts, $100 for IRAs.

Expense ratio

1.01% for Investor class shares and 0.77% for Institutional class shares on an asset base of about $62 million, as of July 2023. There’s a considerable performance adjustment built into the fee: management fee will change by as much as 0.20% based on performance in the trailing year. There is no redemption fee. 

Comments

This seems like a wonderfully admirable little fund. It should, in principle, do well. Expenses are quite low for such a tiny fund and management has linked its compensation to a solid performance fee. Its base management fee is 0.60% and the performance fee of up to 0.30% can cut the manager’s profits by half if he screws up. The fund holds stocks across all market capitalizations and ranges from deep value to growth holdings. The portfolio is pretty compact at 55 names, the manager is tax-sensitive and turnover is virtually non-existent. Morningstar reports 4% turnover, Saturna reports 0% for the year ending in May 2006. The fund reports virtually no frictional loss to taxes; that is, the annual tax cost on unsold shares trims less than 0.20% from the fund’s pre-tax returns. Finally, the manager, his employees and their families own nearly 40% of all outstanding shares. Which is good, since Mr. Kaiser’s pay is remarkably modest: $81,360 in total compensation for calendar 2005.

Happily, principle is aligned with practice. Sextant Growth has compiled a remarkable record for consistent excellence. It is one of just a tiny handful of equity funds that seems always above average, at least as measured by Morningstar’s metrics. Sextant Growth currently qualifies as four-star fund, but has also earned four stars for the preceding three-year, five-year and ten-year periods. For every trailing period, Morningstar gives it “above average” returns and “below average” risk.

Sextant Growth ranks in the top 15% of mid-cap growth funds over the long term, but the comparison is not terribly meaningful since the fund does not particularly target mid-caps (or, for that matter, growth stocks). It has returned 11.6% annually over the past decade and has substantially led the S&P 500 for the preceding three, five and ten years. It does tend to lag, but perform well, in growth markets: for example, it had a bottom decile rank in 2003 but still racked up gains of 26% and a bottom third rank in ’99 with returns of 41%.

Bottom line

The “Growth” name and “value” claim notwithstanding, this strikes me as a really solid core holding. The manager is experienced, the fund has prospered in a wide variety of market conditions, and the management firm seems highly principled. Kind of like a tiny little version of T. Rowe Price. It’s well deserving of substantially greater attention.

Company link

Sextant Growth Fund

Fact Sheet

Manning and Napier Disciplined Value (formerly Dividend Focus), (MNDFX), November 2011

By Editor

Objective

The fund seeks returns which are competitive with the broad market, while at the same time providing some capital protection during “sustained” bear markets. Stocks are selected from a broad universe of mid- to large-cap stocks — including international and emerging markets — based on high free cash flow, high dividend yields, and low likelihood of, well, bankruptcy. This is a quant fund which rebalances only once each year, although the managers reserve the right to add or drop individual holdings at any time.  Their target audience is investors “[s]eeking a fundamentals-based alternative to indexing.”

Adviser

Manning & Napier Advisors, LLC.  Manning & Napier was founded in 1970, and they manage about $43 billion in assets for a wide spectrum of clients from endowments and state pension plans to individual investors. About $17 billion of that amount is in their mutual funds. The firm is entirely employee-owned and their 22 funds are entirely team-managed. The firm’s investment team currently consists of more than 50 analysts and economists. The senior analysts have an average tenure of nearly 22 years.  The firm reorganized on October 1, 2011.  That reorganization reflected succession planning, as the firm’s owner – William Manning – entered his mid-70s.  Under the reorganization, the other employees own more of the fund and outside investors own a bit of it.

Manager

Managed by a team of ten. They actually mean “the team does it.” Manning & Napier is so committed to the concept that they don’t even have a CEO; that’s handled by another team, the Executive Group. In any case, the Gang of Many is the same crew that manages all their other funds.

Management’s Stake in the Fund

Only one team member has an investment in this fund, as of 3/31/11.  All of the managers have over $100,000 invested in Manning & Napier funds, and three of the eight have over $500,000.

Opening date

November 7, 2008

Minimum investment

$2,000, which is waived for accounts established with an automatic investment plan (AIP).

Expense ratio

0.52% on assets of $363.5 million, as of July 2023. 

Comments

Dividend Focus invests in a diversified portfolio of large- and mega-cap stocks.  The managers select stocks based on three criteria:

  • “High free cash flow (i.e., cash generated by a company that is available to equity holders). Minimum free cash flow yield must exceed the yield of high quality corporate bonds.
  • Dividend yield equal to or exceeding the dividend yield of the broad equity market.
  • Not having a high probability of experiencing financial distress. This estimate is based on a credit scoring model that incorporates measures of corporate health such as liquidity, profitability, leverage, and solvency to assess the likelihood of a bankruptcy in the next one to two years.”

The portfolio currently (9/31/11) holds 130 stocks, about a quarter international including a 3% emerging markets stake.

Why consider it?  There are three really good reasons.

First, it’s managed by the best team you’ve never heard of.

Manning & Napier launched at the outset of “the lost decade” of the 1970s when the stock market failed to beat either inflation or the returns on cash. The “strategies and disciplines” they designed to survive that tough market allowed them to flourish in the lost decade of the 2000s: every M&N fund with a ten-year record has significant, sustained positive returns across the decade. Results like that led Morningstar, not a group enamored with small fund firms, to name Manning & Napier as a finalist for the title, Fund Manager of the Decade. In announcing the designation, Karen Dolan of Morningstar wrote:

The Manning & Napier team is the real hidden gem on this list. The team brings a unique and attractive focus on absolute returns to research companies of all sizes around the globe. The results speak for themselves, not only in World Opportunities, but across Manning & Napier’s entire lineup. (The Fund Manager of the Decade Finalists, 11/19/09)

More recently, Morningstar profiled the tiny handful of funds that have beaten their category averages every single year for the past decade (“Here Come the Category Killers,” 10/23/11). One of only three domestic stock funds to make the list was Manning & Napier Pro-Blend Maximum (EXHAX), which they praised for its “team of extremely long-tenured portfolio managers oversee the fund, employing a strategy that overlays bottom-up security selection with macroeconomic research.” MNDFX is run by the same team.

Second, it’s the cheapest possible way of accessing that team’s skill.

Manning & Napier charges 0.60% for the fund, about half of what their other (larger, more famous) funds charge.  It’s even lower than what they typically charge for institutional shares.  It’s competitive with the 0.40 – 0.50% charged by most of the dividend-focused ETFs.

Third, the fund is doing well and achieving its goals.

Manning was attempting to generate a compelling alternative to index investing.  So far, they’ve done so.  The fund returned 9% through the first ten months of 2011, placing it in the top 2% of comparable funds.  The fund has outperformed the most popular dividend-focused index funds and exchange-traded funds since its launch.

 

Since inception

Q3, 2011
Vanguard Total Stock Market (VTSMX)

15,200

-15.3%
M&N Dividend Focus (MNDFX)

14,700

-8.9
Vanguard Dividend Appreciation Index (VDAIX)

14,600

-12.5
SPDR S&P Dividend ETF (SDY)

14,500

-9.4
First Trust Morningstar Div Leaders Index (FDL)

14,200

-3.7
iShares Dow Jones Select Dividend Index (DVY)

13,400

-8.1
PowerShares HighYield Dividend Achievers (PEY)

12,000

-5.9

The fund’s focus on blue-chip companies have held it back during frothy markets when smaller and less stable firms flourish, but it also holds up better in rough periods such as the third quarter of 2011.

The fund has also earned a mention in the company of some of the most distinguished actively-managed, five-star high dividend/high quality funds.

 

Since inception

Q3, 2011
M&N Dividend Focus (MNDFX)

14,700

-8.9
Tweedy, Browne Worldwide High Dividend Yield Value (TBHDX)

14,600

-10.1
GMO Quality III (GQETX)

14,100

-5.4

In the long run, the evidence is unequivocal: a focus on high-quality, dividend-paying stocks are the closest thing the market offers to a free lunch. That is, you earn slightly higher-than-market returns with slightly lower-than-market risk. Dividends help in three ways:

  • They’ve always been an important contributor to a fund’s total returns (Eaton Vance and Standard & Poor’s separately calculated dividend’s long-term contribution at 33-50% of total returns);
  • The dividends provide an ongoing source of cash for reinvestment, especially during downturns when investors might otherwise be reluctant to add to their positions; and,
  • Dividends are often a useful signal of the underlying health of the company, and that helps investors decrease the prospect of having a position blow up.

Some cynics also observe that dividends, by taking money out of the hands of corporate executives and placing in investors’ hands, decreases the executives’ ability to engage in destructive empire-building acquisitions.

Bottom Line

After a virtually unprecedented period of junk outperforming quality, many commentators – from Jeremy Grantham to the Motley Fools – predict that high quality stocks will resume their historic role as the most attractive investments in the U.S. market, and quite possibly in the world. MNDFX offers investors their lowest-cost access to what is unquestionably one of the fund industry’s most disciplined and consistently successful management teams. Especially for taxable accounts, investors should seriously consider both Manning & Napier Tax-Managed (EXTAX) and Dividend Focus for core domestic exposure.

Fund website

Disciplined Value Fund

Fact Sheet

 

© Mutual Fund Observer, 2011.  All rights reserved.  The information here reflects publicly available information current at the time of publication.  For reprint/e-rights contact [email protected].

RiverPark Short Term High Yield Fund (RPHYX) – July 2011

By Editor

This profile has been updated since it was originally published. The updated profile can be found at http://www.mutualfundobserver.com/2012/09/riverpark-short-term-high-yield-fund-rphyx-july-2011-updated-october-2012/

Objective

The fund seeks high current income and capital appreciation consistent with the preservation of capital, and is looking for yields that are better than those available via traditional money market and short term bond funds.  They invest primarily in high yield bonds with an effective maturity of less than three years but can also have money in short term debt, preferred stock, convertible bonds, and fixed- or floating-rate bank loans.

Adviser

RiverPark Advisers.  Executives from Baron Asset Management, including president Morty Schaja, formed RiverPark in July 2009.  RiverPark oversees the five RiverPark funds, though other firms manage three of the five.  Until recently, they also advised two actively-managed ETFs under the Grail RP banner.  A legally separate entity, RiverPark Capital Management, runs separate accounts and partnerships.  Collectively, they have $90 million in assets under management, as of May 2011.

Manager

David Sherman, founder and owner of Cohanzick Management of Pleasantville (think Reader’s Digest), NY.  Cohanzick manages separate accounts and partnerships.  The firm has more than $320 million in assets under management.  Since 1997, Cohanzick has managed accounts for a variety of clients using substantially the same process that they’ll use with this fund. He currently invests about $100 million in this style, between the fund and his separate accounts.  Before founding Cohanzick, Mr. Sherman worked for Leucadia National Corporation and its subsidiaries.  From 1992 – 1996, he oversaw Leucadia’s insurance companies’ investment portfolios.  All told, he has over 23 years of experience investing in high yield and distressed securities.  He’s assisted by three other investment professionals.

Management’s Stake in the Fund

30% of the fund’s investments come from RiverPark or Cohanzick.  However, if you include friends and family in the equation, the percentage climbs to about 50%.

Opening date

September 30, 2010.

Minimum investment

$1,000.

Expense ratio

1.25% after waivers on $20.5 million in assets.  The prospectus reports that the actual cost of operation is 2.65% with RiverPark underwriting everything above 1.25%.  Mr. Schaja, RiverPark’s president, says that the fund is very near the break-even point. Update – 1.25%, after waivers, on $53.7 million in assets (as of 12/31/2011.)

Comments

The good folks at Cohanzick are looking to construct a profitable alternative to traditional money management funds.  The case for seeking an alternative is compelling.  Money market funds have negative real returns, and will continue to have them for years ahead.  As of June 28 2011, Vanguard Prime Money Market Fund (VMMXX) has an annualized yield of 0.04%.  Fidelity Money Market Fund (SPRXX) yields 0.01%.  TIAA-CREF Money Market (TIRXX) yields 0.00%.  If you had put $1 million in Vanguard a year ago, you’d have made $400 before taxes.  You might be tempted to say “that’s better than nothing,” but it isn’t.  The most recent estimate of year over year inflation (released by the Bureau of Labor Statistics, June 15 2011) is 3.6%, which means that your ultra-safe million dollar account lost $35,600 in purchasing power.  The “rush to safety” has kept the yield on short term T-bills at (or, egads, below) zero.  Unless the U.S. economy strengths enough to embolden the Fed to raise interest rates (likely by a quarter point at a time), those negative returns may last through the next presidential election.

That’s compounded by rising, largely undisclosed risks that those money market funds are taking.  The problem for money market managers is that their expense ratios often exceed the available yield from their portfolios; that is, they’re charging more in fees than they can make for investors – at least when they rely on safe, predictable, boring investments.  In consequence, money market managers are reaching (some say “groping”) for yield by buying unconventional debt.  In 2007 they were buying weird asset-backed derivatives, which turned poisonous very quickly.  In 2011 they’re buying the debt of European banks, banks which are often exposed to the risk of sovereign defaults from nations such as Portugal, Greece, Ireland and Spain.  On whole, European banks outside of those four countries have over $2 trillion of exposure to their debt. James Grant observed in the June 3 2011 edition of Grant’s Interest Rate Observer, that the nation’s five largest money market funds (three Fidelity funds, Vanguard and BlackRock) hold an average of 41% of their assets in European debt securities.

Enter Cohanzick and the RiverPark Short Term High Yield fund.  Cohanzick generally does not buy conventional short term, high yield bonds.  They do something far more interesting.  They buy several different types of orphaned securities; exceedingly short-term (think 30-90 day maturity) securities for which there are few other buyers.

One type of investment is redeemed debt, or called bonds.  A firm or government might have issued a high yielding ten-year bond.  Now, after seven years, they’d like to buy those bonds back in order to escape the high interest payments they’ve had to make.  That’s “calling” the bond, but the issuer must wait 30 days between announcing the call and actually buying back the bonds.  Let’s say you’re a mutual fund manager holding a million dollars worth of a called bond that’s been yielding 5%.  You’ve got a decision to make: hold on to the bond for the next 30 days – during which time it will earn you a whoppin’ $4166 – or try to sell the bond fast so you have the $1 million to redeploy.  The $4166 feels like chump change, so you’d like to sell but to whom?

In general, bond fund managers won’t buy such short-lived remnants and money market managers can’t buy them: these are still nominally “junk” and forbidden to them.  According to RiverPark’s president, Morty Schaja, these are “orphaned credit opportunities with no logical or active buyers.”  The buyers are a handful of hedge funds and this fund.  If Cohanzick’s research convinces them that the entity making the call will be able to survive for another 30 days, they can afford to negotiate purchase of the bond, hold it for a month, redeem it, and buy another.  The effect is that the fund has junk bond like yields (better than 4% currently) with negligible share price volatility.

Redeemed debt (which represents 33% of the June 2011 portfolio) is one of five sorts of investments typical of the fund.  The others include

  • Corporate event driven (18% of the portfolio) purchases, the vast majority of which mature in under 60 days. This might be where an already-public corporate event will trigger an imminent call, but hasn’t yet.  If, for example, one company is purchased by another, the acquired company’s bonds will all be called at the moment of the merger.
  • Strategic recapitalization (10% of the portfolio), which describes a situation in which there’s the announced intention to call, but the firm has not yet undertaken the legal formalities.  By way of example, Virgin Media has repeatedly announced its intention to call certain bonds in August 2011. The public announcements gave the manager enough comfort to purchase the bonds, which were subsequently called less than 2 weeks later.  Buying before call means that the fund has to post the original maturities (five years) despite knowing the bond will cash out in (say) 90 days.  This means that the portfolio will show some intermediate duration bonds.
  • Cushion bonds (14%), refers to a bond whose yield to maturity is greater than its current yield to call.  So as more time goes by (and the bond isn’t called), the yield grows. Because I have enormous trouble in understanding exactly what that means, Michael Dekler of Cohanzick offered this example:

A good example is the recent purchase of the Qwest (Centurylink) 7.5% bonds due 2014.  If the bonds had been called on the day we bought them (which would have resulted in them being redeemed 30 days from that day), our yield would only have been just over 1%.  But since no immediate refinancing event seemed to be in the works, we suspected the bonds would remain outstanding for longer.  If the bonds were called today (6/30) for a 7/30 redemption date, our yield on the original purchase would be 5.25%.  And because we are very comfortable with the near-term credit quality, we’re happy to hold them until the future redemption or maturity.

  • Short term maturities (25%), fixed and floating rate debt that the manager believes are “money good.”

What are the arguments in favor of RPHYX?

  • It’s currently yielding 100-400 times more than a money market.  While the disparity won’t always be that great, the manager believes that these sorts of assets might typically generate returns of 3.5 – 4.5% per year, which is exceedingly good.
  • It features low share price volatility.  The NAV is $10.01 (as of 6/29/11).  It’s never been higher than $10.03 or lower than $9.97.  Almost all of the share price fluctuation is due to their monthly dividend distributions.    A $0.04 cent distribution at the end of June will cause the NAV will go back down to about $9.97. Their five separately managed accounts have almost never shown a monthly decline in value.  The key risk in high-yield investing is the ability of the issuer to make payments for, say, the next decade.  Do you really want to bet on Eastman Kodak’s ability to survive to 2021?  With these securities, Mr. Sherman just needs to be sure that they’ll survive to next month.  If he’s not sure, he doesn’t bite.  And the odds are in his favor.  In the case of redeemed debt, for instance, there’s been only one bankruptcy among such firms since 1985.
  • It offers protection against rising interest rates.  Because most of the fund’s securities mature within 30-60 days, a rise in the Fed funds rate will have a negligible effect on the value of the portfolio.
  • It offers experienced, shareholder-friendly management.  The Cohanzick folks are deeply invested in the fund.  They run $100 million in this style currently and estimate that they could run up to $1 billion. Because they’re one of the few large purchasers, they’re “a logical first call for sellers.  We … know how to negotiate purchase terms.”  They’ve committed to closing both their separate accounts and the fund to new investors before they reach their capacity limit.

Bottom Line

This strikes me as a fascinating fund.  It is, in the mutual fund world, utterly unique.  It has competitive advantages (including “first mover” status) that later entrants won’t easily match.  And it makes sense.  That’s a rare and wonderful combination.  Conservative investors – folks saving up for a house or girding for upcoming tuition payments – need to put this on their short list of best cash management options.

Financial disclosure: I intend to shift $1000 from the TIAA-CREF money market to RPHYX about one week after this profile is posted (July 1 2011) and establish an automatic investment in the fund.  That commitment, made after I read an awful lot and interviewed the manager, might well color my assessment.  Caveat emptor.

Note to financial advisers: Messrs Sherman and Schaja seem committed to being singularly accessible and transparent.  They update the portfolio monthly, are willing to speak individually with major investors and plan – assuming the number of investors grows substantially – to offer monthly conference calls to allow folks to hear from, and interact with, management.

Fund website

RiverPark Short Term High Yield

Update: 3Q2011 Fact Sheet

© Mutual Fund Observer, 2011.  All rights reserved.  The information here reflects publicly available information current at the time of publication.  For reprint/e-rights contact [email protected].

Artisan Global Value Fund (ARTGX) – May 2011

By Editor

Objective

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

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

The managers can hedge their currency exposure, though they did not do so until they confronted twin challenges to the Japanese yen: unattractive long-term fiscal position plus the tragedies of March 2011. The team then took the unusual step of hedging part of their exposure to the Japanese yen.

Adviser

Artisan Partners of Milwaukee, Wisconsin.   Artisan has five autonomous investment teams that oversee twelve distinct U.S., non-U.S. and global investment strategies. Artisan has been around since 1994.  As of 3/31/2011 Artisan Partners had approximately $63 billion in assets under management (March 2011).  That’s up from $10 billion in 2000. They advise the 12 Artisan funds, but only 6% of their assets come from retail investors. Update – Artisan Partners had approximately $57.1 billion in assets under management, as of 12/31/2011.

Manager

Daniel J. O’Keefe and David Samra, who have worked together since the late 1990s.  Mr. O’Keefe co-manages this fund, Artisan International Value (ARTKX) and Artisan’s global value separate account portfolios.  Before joining Artisan, he served as a research analyst for the Oakmark international funds and, earlier still, was a Morningstar analyst.  Mr. Samra has the same responsibilities as Mr. O’Keefe and also came from Oakmark.  Before Oakmark, he was a portfolio manager with Montgomery Asset Management, Global Equities Division (1993 – 1997).  Messrs O’Keefe, Samra and their five analysts are headquartered in San Francisco.  ARTKX earns Morningstar’s highest accolade: it’s an “analyst pick” (as of 04/11).

Management’s Stake in the Fund

Each of the managers has over $1 million here and over $1 million in Artisan International Value.

Opening date

December 10, 2007.

Minimum investment

$1000 for regular accounts, reduced to $50 for accounts with automatic investing plans.  Artisan is one of the few firms who trust their investors enough to keep their investment minimums low and to waive them for folks willing to commit to the discipline of regular monthly or quarterly investments.

Expense ratio

1.5%, after waivers, on assets of $57 million (as of March 2011). Update – 1.5%, after waivers, on assets of $91 million (as of December 2011).

Comments

Artisan Global Value is the first “new” fund to earn the “star in the shadows” designation.  My original new fund profile of it, written in February 2008, concluded: “Global is apt to be a fast starter, strong, disciplined but – as a result – streaky.”  I have, so far, been wrong only about the predicted streakiness.  The fund’s fast, strong and disciplined approach has translated into consistently superior returns from inception, both in absolute and risk-adjusted terms.  Its shareholders have clearly gotten their money’s worth, and more.

What are they doing right?

Two things strike me.  First, they are as interested in the quality of the business as in the cost of the stock.  O’Keefe and Samra work to escape the typical value trap (“buy it!  It’s incredibly cheap!”) by looking at the future of the business – which also implies understanding the firm’s exposure to various currencies and national politics – and at the strength of its management team.  One of the factors limiting the fund’s direct exposure to emerging markets stocks is the difficulty of finding sufficiently high quality firms and consistently shareholder-focused management teams.  If they have faith in the firm and its management, they’ll buy and patiently wait for other investors to catch up.

Second, the fund is sector agnostic.   Some funds, often closet indexes, formally attempt to maintain sector weights that mirror their benchmarks.  Others achieve the same effect by organizing their research and research teams by industry; that is, there’s a “tech analyst” or “an automotive analyst.”  Mr. O’Keefe argues that once you hire a financial industries analyst, you’ll always have someone advocating for inclusion of their particular sector despite the fact that even the best company in a bad sector might well be a bad investment.  ARTGX is staffed by “research generalists,” able to look at options across a range of sectors (often within a particular geographic region) and come up with the best ideas regardless of industry.  That independence is reflected in the fact that, in eight of ten industry sectors, ARTGX’s position is vastly different than its benchmark’s.  Too, it explains part of the fund’s excellent performance during the 2008 debacle. During the third quarter of 2008, the fund’s peers dropped 18% and the international benchmark plummeted 20%.  Artisan, in contrast, lost 3.5% because the fund avoided highly-leveraged companies, almost all banks among them.

Why, then, are there so few shareholders?

Manager Dan O’Keefe offered two answers.  First, advisors (and presumably many retail investors) seem uncomfortable with “global” funds.  Because they cannot control the fund’s asset allocation, such funds mess up their carefully constructed plans.  As a result, many prefer picking their international and domestic exposure separately.  O’Keefe argues that this concern is misplaced, since the meaningful question is neither “where is the firm’s headquarters” or “on which stock exchange does this stock trade” (the typical dividers for domestic/international stocks) but, instead, “where is this company making its money?”  Colgate-Palmolive (CL) is headquartered in the U.S. but generates less than a fifth of its sales here.  Over half of its sales come from its emerging markets operations, and those are growing at four times the rate of its domestic or developed international market shares.  (ARTGX does not hold CL as of 3/31/11.)  His hope is that opinion-leaders like Morningstar will eventually shift their classifications to reflect an earnings or revenue focus rather than a domicile one.

Second, the small size is misleading.  The vast majority of the assets invested in Artisan’s Global Value Strategy, roughly $3.5 billion, are institutional money in private accounts.  Those investors are more comfortable with giving the managers broad discretion and their presence is important to retail investors as well: the management team is configured for investing billions and even a tripling of the mutual fund’s assets will not particularly challenge their strategy’s capacity.

What are the reasons to be cautious?

There are three aspects of the fund worth pondering.  First, the expense ratio (1.50%) is above average even after expense waivers.  Even fully-grown, the fund’s expenses are likely to be in the 1.4% range (average for Artisan).  Second, the fund offers limited direct exposure to emerging markets.  While it could invest up to 30%, it has never invested more than 9% and, since late-2009, has had zero.  Many of the multinationals in its portfolio do give it exposure to those economies and consumers.  Third, the fund offers no exposure to small cap stocks.  Its minimum threshold for a stock purchase is a $2 billion market cap.  That said, the fund does have an unusually high number of mid-cap stocks.

Bottom Line

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

Fund website

Artisan Global Value fund

Update – December 31, 2011 (4Q) – Fact Sheet (pdf)

© Mutual Fund Observer, 2011.  All rights reserved.  The information here reflects publicly available information current at the time of publication.  For reprint/e-rights contact [email protected].

Wasatch Global Opportunities (WAGOX), May 2010

By Editor

. . . from the archives at FundAlarm

These profiles have not been updated. The information is only accurate as of the original date of publication.

FundAlarm Annex – Fund Report
May 1, 2010

Objective

The Fund invests in small and micro cap foreign and domestic companies, though it reserves the right to put up to 35% in larger companies. Up to 90% of the portfolio may be in micro caps and up to 50% in emerging markets.  Currently the US is about 40% of the portfolio which, if I’ve read the prospectus rightly, is at the high end of the anticipated range.  The fund is technically non-diversified, but currently holds 330 stocks. They use quantitative screens to focus their attention, then “bottom up” analysis – including extensive, expensive company visits – to make the final selections.

Adviser

Wasatch Advisors of Salt Lake City, Utah.  Wasatch has been around since 1975.  It both advises the 18 Wasatch funds – including the recently acquired 1st Source funds – and manages money for high
net worth individuals and institutions. Across the board, the strength of the company lies in its ability to
invest profitably in smaller (micro- to mid-cap) companies.  As of January 2010, the firm had $7 billion
in assets under management, about $5 billion of which were in their funds.

Managers

Robert Gardiner and Blake Walker.  Mr. Gardiner had previously been Wasatch’s research director and managed three exceedingly strong Wasatch funds, Micro Cap, Micro Cap Value and Small Cap Value. With the launch of this fund, he gave up his other charges to focus here.  Mr. Walker co-managed Wasatch International Opportunities.  They both speak French.  Mais oui!

Management’s Stake in the Fund

Mr. Gardiner has over a million dollars in the fund.  Mr. Walker is in the $10,000 – $50,000 range, with a larger investment in his other fund.

Opening date

November 17, 2008. 

Minimum investment

$2,000 for regular accounts, $1,000 for IRAs and Coverdells.

Expense ratio

 

1.19% for Investor class shares and 1.05% for Institutional class shares, after a waiver, on assets of $195 million, as of August 2023. There’s also a 2% redemption fee for shares held fewer than 60 days.

Comments

There’s a lot to be said for investing with specialist firms. Firms that know what they’re after and foster a culture that focuses on their core competency, tend to succeed. It’s clear that Matthews is the place to go for Asia funds.  Royce is your single best bet for small cap value investing.  Bridgeway is better at quant work than pretty much anyone else.  And Wasatch is as close as we have to a small growth specialist.  They define themselves by their expertise in the area, though they’ve purchased funds with other mandates.  They promise incredibly thorough research, cross-team collaboration, and discipline in pursuit of “the World’s Best Growth Companies.”

They started with a couple very fine funds whose success drove them to quick closings.  While they’ve added more flavors of funds lately – Emerging Markets Small Cap, Microcap Value, and Global Tech – their focus on great, smaller companies has remained.

Mr. Gardiner is likely one of their best managers.  He ran, most famously, Wasatch Microcap from its inception through 2007.  His success there was stunning.  If you had invested $10,000 with Mr. Gardiner  on the day he opened Micro Cap and sold on the day he retired as manager, you would have made $129,000.  Put another way, your $10,000 investment would have grown by an additional $10,000 a year
for 12 years.  That is almost four times more than his peers managed in the same period. Microcap Value – in which both Roy and I have personal investments – did almost as well, both during the years in which he served as mentor to the fund’s managers and afterward.  His new charge is off to a similar performance: WAGOX has turned $10,000 into $20,000 from its launch at the end of 2008 to April 29, 2010.  Its world-stock peers have returned about half as much.

The managers recognize that such returns are unsustainable, and seem to expect turbulence ahead.  In their April 20th note to investors, Messrs. Gardiner and Walker sound a note of caution:

Given our view of the world, our main focus continues to be on quality. In each and every market, including emerging markets, we are trying to invest in what we consider to be the highest-quality
names. If the global economy ends up growing faster than we expect, stocks of high-quality companies may not lead the market, but they should do just fine. And if we see the type of subdued growth we envision, we believe high-quality stocks will do better than average.

Investing is never a sure thing.  Several of Wasatch’s star funds have faded.  Wasatch, here and in its
other funds, are purposefully targeting higher risk, higher return asset classes.  That tends to make for “lumpy” returns: a string of great years followed by a few intensely painful ones. And Wasatch charges a lot – over 2% on average for their international and global offerings – for its services.

That said, Wasatch tends to find and keep strong employees.  They’ve got a track record for “tight” closings to protect their funds.  Their communications are timely and informative and, in the long run, they reward
their investors confidence. 

Bottom Line

This is a choice, not an echo.  Most “global” funds invest in huge, global corporations.  While that dampens risk, it also tends to dampen rewards and produces rather less diversification value for a portfolio.  This bold newer fund goes where virtually no one else does: tiny companies across the globe.  Only Templeton Global Smaller Companies (TEMGX) – with a value bent and a hefty sales load – comes close. Folks looking for a way to add considerable diversity to the typical large/domestic/balanced portfolio really owe it to themselves to spend some time here.

Fund website

Wasatch Global Opportunities

Fact Sheet

 

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