By David Snowball

Dear friends,

They’ve done it again. After 32 years at Augustana, I’m still amazed and delighted each spring. For all that I grumble about their cell phone-addled intellects and inexplicable willingness to drift along sometimes, their energy, bravery and insistence on wanting to do good continue to inspire me. I wish them well and will soon begin to prepare for the challenges posed by my 33^rd set of first-year students.

But not right now. Right now, Chip and I are enjoying being in Scotland, being in each other’s company and being without cell service. Grand and languorous adventure awaits on islands and Highlands. While she and I are away, we’ve turned most of this month’s issue over to our colleagues though I did have time to write just a bit. And so…

Funds without fillers

Here are two simple truths:

1. Owning stocks makes sense because, over the long run, returns on stocks far outstrip returns on other liquid, publicly-accessible asset classes. Over the past 90 years, large cap stocks have returned 10% a year while government bonds have made 5-6%.

Sadly, that simple observation leads to this sort of silliness:

See? As long as your retirement is at least 87 years off, it’s silly to put your money anywhere other than common stocks. (The article’s author, a pharmacist and active investor, concludes that you shouldn’t trust mutual funds or ETFs but should, instead, be a do-it-yourself value investor. Uhhh … no thanks.) For those of us with a time horizon shorter than 87 years though, there’s a second truth to cope with.

2. Owning stocks doesn’t always make sense because the price of higher long-term returns is higher immediate volatility. That’s because stocks are more exciting than bonds. Frankly, no normal human ever said “yup, I got me some 30-year Ginnie Mae jumbos with a coupon of 3.5%” with nearly the same visceral delight as “yup, I got into Google at the IPO.” Maaaagic! That desire to own magic often enough leads investors to spend hundreds of dollars to buy shares which are earning just pennies a year. Good news leads to excitement, excitement leads to a desire to own more, that desire leads to a bidding war for shares, which leads to a soaring stock price, which leads to more bidding … and, eventually, a head-first tumble into a black hole.

GMO’s Ben Inker quantified the magnitude of the hysteria: “the volatility of U.S. since 1881 has been a little over 17% per year. The volatility of the underlying fair value of the market has been a little over 1%. Well over 90% of the volatility of the stock market cannot be explained as a rational response to the changing value of the stream of dividends it embodies” (“Keeping the Faith,” Quarterly Letter, 1Q 2016).

One reasonable conclusion, if you accept the two arguments above, is you should rely on stock managers who are not wedded to stocks. When we enter a period when owning stocks makes less sense, then your manager should be free to … well, own less stock. There are at least three ways of doing that: making bets that the market or particular sectors or securities will fall (long/short equity), shifting assets from overvalued asset classes to undervalued ones (flexible portfolios) or selling stocks as they become overvalued and holding the proceeds in cash until stocks become undervalued again (absolute value investing). Any of the three strategies can work though the first two tend to be expensive and complicated.

So why are long/short and flexible portfolios vastly more popular with investors than straightforward value investing? Two reasons:

1. They’re sexy. It’s almost like being invested in a hedge fund which, despite outrageous expenses, illiquidity, frequent closures and deplorable performance, is where all the Cool Kids hang out.
2. You demand managers that do something! (Even if it’s something stupid.) Batters who swing at the first pitch, and every pitch thereafter, are exciting. They may go down, but they go down in glory. Batters who wait for a fat pitch, watching balls and marginal strikes go by, are boring. They may get solid hits but fans become impatient and begin screaming “we’re not paying you to stand there, swing!” As the season goes on, batters feel the pressure to produce and end up swinging at more and more bad pitches.

In The Dry Powder Gang, Revisited (May 2016), we concluded:

[B]eing fully invested in stocks all the time is a bad idea. Allowing greed and fear, alternately, to set your market exposure is a worse idea. Believing that you, personally, are magically immune from those first two observations is the worst idea of all.

You should invest in stocks only when you’ll be richly repaid for the astronomical volatility you might be exposed to. Timing in and out of “the market” is, for most of us, far less reliable and far less rewarding than finding a manager who is disciplined and who is willing to sacrifice assets rather than sacrifice you. The dozen teams listed above have demonstrated that they deserve your attention, especially now.

One of those managers, Eric Cinnamond of ASTON River Road Absolute Value (ARIVX) wrote to take issue with our claim that cash necessarily serves as a drag on a portfolio. He writes:

This is another misconception about not being fully invested. If you have large discounts you can still generate attractive returns without being invested in what I call “fillers.” Just like with processed food, investment fillers are often there just to fill up the portfolio, but often provide little value and in some cases can be hazardous to your health! Open the hood of most fully invested small cap funds and you’ll find plenty of fillers these days, especially in sectors like consumer and health care. The stocks are clearly overvalued but managers think because they’re in lower risk sectors they won’t get destroyed. Good example WD-40 (WDFC) at 30x earnings! Great company but you could lose half your capital if it ever reverted to a more justifiable 7% free cash flow yield. 

That led us to the question, “so, how good are absolute value guys as stock-pickers.” That is, if you don’t feel compelling to buy “fillers” just for the optical value of a full-invested portfolio, how well do the stocks you find compelling perform?

Answer: really quite well. In the chart below, we look at the YTD performance of cash-heavy funds through early May. We then calculate how the stock portion of the portfolio performed, assuming that the cash portion was returning zero. For example, if a fund was 10% invested in stocks and had returned 1% YTD, we impute a stock return of 10% for that period.

	Style	Cash	2016 return, as of 5/6/16	Imputed active return
ASTON / River Road Independent Value ARIVX	Small-cap value	85	8.5	56.7
Intrepid Endurance ICMAX	Small-cap value	67	4.2	12.7
Hennessy Total Return HDOGX	Large-cap value, Dogs of the Dow	49	5.3	10.4
Intrepid Disciplined Value ICMCX	Mid-cap value	48	4.8	9.2
Castle Focus MOATX	Global multi-cap core	34	6.0	9.1
Pinnacle Value PVFIX	Small-cap core	47	4.2	8.9
Frank Value FRNKX	Mid-cap core	60	2.8	7.0
Cook & Bynum COBYX	Global large-cap core	37	4.3	6.8
Centaur Total Return TILDX	Equity-income	45	3.6	6.6
Bruce BRUFX	Flexible	26	2.5	3.4
Bread & Butter BABFX	Multi-cap value	42	1.3	2.2
FPA Crescent FPACX	Flexible	36	0.2	0.3
Chou Opportunity CHOEX	Flexible	22	(16.6)	(21.3)
Two plausible benchmarks
Vanguard Total Stock Market VTSMX	Multi-cap core	0	1	1
Vanguard Balanced Index VBINX	Hybrid	2	2.3	2.3

Two things stand out: first, the absolute value guys have, almost without exception, outperformed a fully invested portfolio during the year’s violent ups and downs. Second, the stocks in their portfolios have dramatically outperformed the stocks in a broad market index. Excluding the freakish Chou Opportunity fund, the stocks in the remaining twelve portfolio returned 10.6% on average while the Total Stock Market Index made 1%.

Bottom line: the demand for a fully-invested portfolio forces managers to buy stocks they don’t want to own. Judged by reasonable measures (risk-adjusted returns measured by the Sharpe ratio) over reasonable periods (entire market cycles rather than arbitrary 1/3/5 year snippets), you are better served by portfolios without fillers and by the sorts of managers we characterized as the “we’ve got your back” guys. Go check them out. The clock is ticking and you really don’t do your best work in the midst of a panic.

Wait! You can’t start a new bear market. We’re not done with the last one yet!

Many thoughtful people believe that the bull market that began in March 2009, the second oldest in 70 years, is in its final months. The S&P 500, despite periods of startling volatility, has gone nowhere in the year since reaching its all-time high on May 21, 2015; as I write on May 21, 2016, it sits 1% below that peak. It looks like this:

That’s bad: Randall Forsyth reports that no bull market in 30 years has gone so long without a new high (“Stocks Are Stuck in the Twilight Zone,” Barrons, 5/21/16). Of 13 bull markets since 1946 that have gone a year without a high, ten have ended in bear markets (“Clock ticks on bull market,” 5/20/16).

Meanwhile earnings have declined for a fourth consecutive quarter (and are well on their way to a fifth quarter). FactSet (5/20/16) notes we haven’t seen a streak that long or a quarterly drop so great since the financial crisis. The stock market is, in consequence, somewhere between “pricey” and “ridiculously pricey.” A new bear market may not be imminent (check with the Fed), but it will arrive sooner rather than later.

“But wait!” cries one cadre of managers, “we can’t have a new bear market yet. The old one hasn’t finished with us yet.”

That’s right. There are funds that still haven’t recovered their October 2007 levels. We screened the MFO Premium database, looking for funds that have spent the past 101 months still mauled by the bear.

We’ve found 263 funds, collectively holding $507 billion in assets, that haven’t recovered from the financial crisis. Put another way, $10,000 invested in one of these funds 3,150 days ago in October 2007 still isn’t worth $10,000.

Highlights of the list:

• Thirteen funds have managed double-digit annual losses since the start of the crisis. These are ranked from the greatest annualized loss down.

Direxion Monthly Emerging Markets Bull 2x (DXELX)
UltraEmerging Markets ProFund (UUPIX)
Guinness Atkinson Alternative Energy (GAAEX)
Midas (MIDSX)
Direxion Monthly 7-10 Year Treasury Bear 2x (DXKSX)
Mobile Telecommunications UltraSector ProFund (WCPIX)
ProShares Ultra Financials(UYG)
Rising Rates Opportunity ProFund (RRPIX)
Banks UltraSector ProFund (BKPIX)
UltraInt’l ProFund (UNPIX)
UltraJapan ProFund (UJPIX)
Calvert Global Energy Solutions (CAEIX)
Rydex Inverse Government Long Bond Strategy (RYJUX)

Ten of those funds could reasonably claim that they’re simple, mechanical trading vehicles which are designed for sophisticated (hah!) investors to hold for hours or a few days, not years. Three of the funds have no such excuse.

• Sixteen of the funds are double-dippers; they crashed in 2007-09 and then crashed even worse between 2009 and 2016. Technically we’re measuring a fund’s maximum drawdown, the greatest decline registered after it had begun to recover. Most of the double-dippers were leveraged equity, income or currency funds. Four funds managed the feat on (tremendously bad) luck and skill alone. Funds whose maximum drawdowns occurred after March 2009 include
  • Midas, down 88%, bottoming in December 2015
  • Calvert Global Energy Solutions, down 75% and Guinness Atkinson Alternative Energy, down 85%, both as of July 2012
  • Nysa, down 55% as of February 2016.
• One hundred ninety of the funds, around 72%, are international vehicles: 114 diversified international, 47 are emerging markets funds, 13 Europe-centered and 16 variously Asia-centered. There are no Latin American funds on the list.
• 78 of the funds are passive, quasi-passive or smart beta sorts of funds, including ETFs, ETNs, mechanical leveraged equity and enhanced index funds. The advisor that appears most frequently is iShares.
• Five simple domestic equity funds must take the Walk of Shame

AMG Managers Brandywine Advisors Mid Cap Growth (BWAFX), a mid-cap growth fund that’s lost 3.7% annually over the full market cycle.

Schneider Value (SCMLX) is a concentrated $20 million deep value fund that’s lost 1.2% annually, buoyed by a 15% return so far in 2016. It has a maddening tendency to finish way above average one year then crash for the next two.

Stonebridge Small Cap Growth (SBSGX) has lost 2.9% annually over the full market cycle but wins points for consistency: by Morningstar’s assessment, it has trailed at least 99% of its peers for the trailing 3, 5, 10 and 15 year periods.

Nysa (NYSAX), a small cap fund that would appall even Steadman. The fund’s not only lost 7.6% per year over the current market cycle, it’s lost over 50% in the 19 years since inception. In a hopeful move, the fund installed a new manager in February, 2013. He’s down 28% since then.

Jacobs Small Cap Growth (JSCGX) is the product of a bizarre marketing decision. In 2010, Jacob Investment Management decided to acquire Rockland Small Cap Growth Fund, a dying small cap fund with a terrible record and rechristen it as their own. The hybrid product is down 4.7% annually over the full market cycle. Since conversion, the fund has trailed its peers every year and appears to trail, well, all of them.

• 55 are multi-billion dollar funds. The Biggest Losers, all with over $10 billion in assets, are
  • Vanguard Total International Stock Index (VGTSX)
  • Vanguard Emerging Markets Stock Index (VEIEX)
  • iShares MSCI Emerging Markets ETF (EEM)
  • Vanguard FTSE All-World ex US Index ETF (VEU)
  • Financial Select Sector SPDR (XLF)
  • iShares MSCI Eurozone ETF (EZU)

The most famous funds on the list include Janus Overseas (JNSOX), T. Rowe Price Emerging Markets Stock (PRMSX) and Fidelity Overseas (FSOFX), one of 12 Fido funds to earn this sad distinction.

The complete list of Bear Chow Funds is here.

One bit of good news for investors in these funds; others have suffered more. Three funds have waited more than 20 years to recover their previous highs:

Bottom line: if you own one of these funds, you need to actively pursue an answer to the question “why?” First why: why did I choose to invest in this fund in the first place? Was it something I carefully researched, something pushed on me by a broker, an impulse or what? That’s a question only you can answer. Second why: why does this fund appear to be so bad? There might be a perfectly legitimate reason for its apparent misery. If so, either a fund’s representative or your adviser owes you a damned straight, clear explanation. Do not accept the answer “everyone was down” any more than you’d accept “everyone cheats.” Not everyone was down this much and not everyone stayed down. And if, after listening to them bloviate a bit you start to feel the waft of smoke up your … uhh, nethers, you need to fire them.

Smart people saying interesting stuff

Josh Brown, “The Repudiation Phase of the Bubble,” 05/09/2016:

One of the common threads of every financial or asset bubble throughout human history is that they all have a repudiation phase – a moment where all the lies that had been built up alongside the excess are aired in public. Every reputation companies and players get caught up in it… We’re there now. New shit is coming to light every five minutes. Every reputation you thought was untouchable and every omission you’d accepted because it was already accepted by the crowd – all back on the table for discussion (dissection?).

Snowball’s note: for some reason, an old aphorism popped into my head as I read this. “The function of liberal Republicans (yes, there were such once) is to shoot the wounded after the battle.”

Cullen Roche, “A catastrophe looms over high-fee mutual funds and investment advisers,” 04/28/2016:

Back in 2009 I wrote a very critical piece on mutual funds basically calling them antiquated products that do the American public a disservice. I was generalizing, of course, as there are some fine mutual funds out there. However, as a generalization I think it’s pretty fair to say that the vast majority of mutual funds are closet-indexing leaches that do no one any good (except for the management companies who charge the high fees). But there are smart ways to be active and very silly ways to be active. Mutual funds are usually a silly way to be active as they sell the low probability of market-beating returns in exchange for the guarantee of high fees and taxes.

Dan Loeb is right. A catastrophe is coming. The end of an era is here. And the American public is going to be better off because of it.

Snowball’s note: “the vast majority are …” is absolutely correct. The question for me is whether really worthwhile funds will stubbornly insist on self-destructing because (1) the managers are obsessed about talking about raw performance numbers and (2) firms would rather die on their own terms rather than looking for ways to collaborate with other innovators to redefine the grounds of the debate.

Had I mentioned my impending encounter with Cullen Skink (no relation), a sort of Scottish fish chowder?

Meb Faber, “Which Institution Has the Best Asset Allocation Model?” 05/18/2016. After analyzing the recommended asset allocations of the country’s 40 top brokerages and comparing their results over time, Faber fumes:

Bob Cochran’s Thinking beyond funds

We were delighted to announce last month that Bob Cochran joined MFO’s Board of Directors. Bob is the lead portfolio manager, Chief Compliance Officer, and a principal of PDS Planning in Columbus, Ohio, and a long-time contributor to the FundAlarm and MFO discussion boards.

The Observer strives to help two underserved groups: small independent investors and small independent managers. In an experiment in outreach to the former group, and most especially to younger, less confident investors, Bob has agreed to write a series of short articles that help people think beyond funds. That aligns nicely with Meg Faber’s recommendation, above, and with both Bob and Sam Lee’s approach to their clients. All agree that your investments are an important part of your financial life, but they don’t drive your success on their own. Here’s Bob’s first reminder of stuff worth knowing but often overlooked.

They Are Just Documents. How Important Can They Be?

Take a moment and think about what could happen if you were to suddenly become physically or mentally unable to handle your affairs. Young, old, single, married, in a committed relationship or not: the fact is unless you have certain documents in place, your financial and health well being could be in limbo. Everyone should have the following documents created, executed, and ready should they be needed.

• Durable Power of Attorney, sometimes called a financial power of attorney. This designates someone to act on your behalf should you be unable to pay bills and make other financial decisions. This allows your designee access to bank accounts, brokerage accounts, and retirement accounts (the latter only if specifically stated in the document), and the authority to make deposits, withdrawals, and pay bills, and allow access to any safe deposit boxes.
• Health Care Power of Attorney, also called a Health Care Directive or Medical Power of Attorney. This document allows your designee the authority to make health care decisions. In some states, this can be what is called a Springing Power of Attorney that takes effect only after your incapacity.

If you do not have these two documents, think of the problems that could arise should you become unable to handle your financial affairs or make health care decisions by yourself. How will your ongoing bills be paid? Who will respond to doctors and health care providers on your behalf? The time and money to have the courts make a ruling could be significant, and that does not ensure it is consistent with your wishes.

Both documents are easily created by your attorney, or you may find them online, specifically for the state in which you live. Generally, your spouse would be named as POA if you are married. If you are single, a parent, relative, or close friend are often selected. Remember the person you name will have broad powers, so be sure it is someone you trust. And be sure you provide a copy of the documents to the person you have named as POA.

Tragedies happen all the time. They are seldom anticipated. We have had clients who have spent money getting these documents created, but have never signed them. This is a huge mistake! Take action today to make sure you live your life on your own terms. After all, it’s your life, plan for it.

On Financial Planners

A family friend recently asked me to look at his mutual fund investments. He contributes to these investments periodically through his colleague, a Certified Financial Planner at a long-time neighborhood firm that provides investment services. The firm advertises it’s likely more affordable than other firms thanks to changes in how clients are billed, so it does not “charge hefty annual advisor fees of 1% or more.”

I queried the firm and planner on FINRA’s BrokerCheck site and fortunately found nothing of concern. FINRA stands for Financial Industry Regulatory Authority and is a “not-for-profit organization authorized by Congress to protect America’s investors by making sure the securities industry operates fairly and honestly.”

A couple recent examples of its influence: FINRA Fines Raymond James $17 Million for Systemic Anti-Money Laundering Compliance Failures and FINRA Sanctions Barclays Capital, Inc. $13.75 Million for Unsuitable Mutual Fund Transactions and Related Supervisory Failures.

The BrokerCheck site should be part of the due-diligence for all investors. Here for example is the type of allegations and settlements disclosed against the firm Edward Jones in 2015: “The firm was censured and agreed to pay $13.5 million including interest in restitution to eligible customers … that had not received available sales charge waivers … since 2009, approximately 18,000 accounts purchased mutual fund shares for which an available sales charge waiver was not applied.”

And, here an example of experience listed for an “Investment Adviser Representative” …

But I’m getting sidetracked, so back to my friend’s portfolio review.  Here’s what I found:

• He has 5 separate accounts – 2 Traditional IRAs, 2 Roth IRAs, and one 529.
• All mutual funds are American Funds, accessed directly through American Funds website.
• He owns 34 funds, across the 5 accounts.
• Adjusting for different share classes (both front-loaded A, and back-loaded B … no longer offered), he owns 8 unique funds.
• The 8 “unique” funds are not all that unique. Many hold the very same stocks. Amazon was held in 6 different funds. Ditto for Phillip Morris, Amgen, UnitedHealth Group, Home Depot, Broadcom, Microsoft, etc.
• The 8 funds are, in order of largest allocation (A class symbols for reference): Growth Fund of America (AGTHX), Capital World Growth & Income (CWGIX), Capital Income Builder (CAIBX), American Balanced (ABALX), AMCAP (AMCPX), EuroPacific Growth (AEPGX), New Perspective (ANWPX), and New Economy (CNGAX).

After scratching my head a bit at the sheer number of funds and attendant loads, annual expense ratios, and maintenance fees, I went through the exercise of establishing a comparable portfolio using only Vanguard index funds.

I used Morningstar’s asset allocation tool to set allocations, as depicted below. Not exact, but similar, while exercising a desire to minimize number of funds and maintain simple allocations, like 60/40 or 80/20. I found three Vanguard funds would do the trick: Total Stock Market Index 60%, Total International Market Index 20%, and Total Bond Index 20%.

The following table and corresponding plot shows performance since November 2007, start of current market cycle, through April 2016 (click on image to enlarge):

As Mr. Buffet would be quick to point out, those who simply invested in the Total Stock Market Index fund received the largest reward, if suffering gut-wrenching drawdown in 2009. The Total Bond Index rose rather steadily, except for brief period in 2013. The 60/40 Balanced Index performed almost as well as the Total stock index, with about 2/3 the volatility. Suspect such a fund is all most investors ever need and believe Mr. Bogle would agree. Similarly, the Vanguard founder would not invest explicitly in the Total International Stock fund, since US S&P 500 companies generate nearly half their revenue aboard. Over this period anyway, underperformance of international stocks detracted from each portfolio.

The result appears quite satisfying, since returns and volatility between the two portfolios are similar. And while past performance is no guarantee of future performance, the Vanguard portfolio is 66 basis points per year cheaper, representing a 5.8% drag to the American Funds’ portfolio over an 8.5 year period … one of few things an investor can control. And that difference does not include the loads American Funds charges, which in my friend’s case is about 3% on A shares.

My fear, of course, is that while this Certified Financial Planner may not directly “charge hefty annual advisor fees,” my friend is being directed toward fee-heavy funds with attendant loads and 12b-1 expenses that indirectly compensate the planner.

Inspired by David’s 2015 review of Vanguard’s younger Global Minimum Volatility Fund (VMVFX/VMNVX) I made one more attempt to simplify the portfolio even more and reduce volatility, while keeping global exposure similar. This fund’s 50/50 US/international stock split combined with the 60/40 stock/bond split of the Vanguard Balanced Fund, produces an even more satisfying allocation match with the American Funds portfolio. So, just two funds, each held at 50% allocation.

Here is updated allocation comparison: 

And here are the performance comparison summary table and plot from January 2014 through April 2016, or 2.33 years (click image to enlarge):

I should note that the Global Volatiliy Fund is not an index fund, but actively managed by Vanguard’s Quantitative Equity Group, so this portfolio is also 50/50 passive/active. While the over-performance may temper, lower volatility will persist, as will the substantially lower fees.

Other satisfying aspects of the two comparable Vanguard portfolios are truly unique underlying holdings in each fund and somewhat broader exposure to value and mid/small cap stocks. Both these characteristics have shown over time to deliver premiums versus growth and large cap stocks.

Given the ease at which average investors can obtain and maintain mutual fund portfolios at Vanguard, like those examined here, it’s hard to see how people like my friend will not migrate away from fee-driven financial planners that direct clients to fee-heavy families like American Funds.

Every Active Fund is a Long-Short Fund: A Simple Framework for Assessing the Quality, Quantity and Cost of Active Management

By Sam Lee

Here’s a chart of the 15-year cumulative excess return (that is, return above cash) of a long-short fund. Over this period, the fund generated an annualized excess return of 0.82% with an annualized standard deviation of 4.35%. The fund charges 0.66% and many advisors who sell it take a 5.75% commission off the top.

Though its best returns came during the financial crisis, making it a good diversifier, I suspect few would rush out to buy this fund. Its performance is inconsistent, its reward-to-risk ratio of 0.19 is mediocre, and its effective performance fee of 44% is comparable to that of a hedge fund. There are plenty of better-performing market-neutral or long-short funds with lower effective fees.

Despite the unremarkable record, about $140 billion is invested in a version of this strategy under the name of American Funds Growth Fund of America AGTHX. I simply subtracted the Standard & Poor’s 500 Index’s monthly total return from AGTHX’s monthly total return to create the long-short excess return track record (total return would include the return of cash).

This is an unconventional way of viewing a fund’s performance. But I think it is the right way, because, in a real sense, every active fund is a long-short strategy plus its benchmark.

Ignoring regulatory or legal hurdles, a fund manager can convert any long-only fund into a long-short fund by shorting the fund’s benchmark. He can also convert a long-short fund into a long-only fund by buying benchmark exposure on top of it (and closing out any residuals shorts). I could do the same thing to any fund I own through a futures account by overlaying or subtracting benchmark exposure.

Viewing funds this way has three major benefits. First, it allows you to visualize the timing and magnitude of a fund’s excess returns, which can alter your perception of a fund’s returns in major ways versus looking at a total return table or eyeballing a total return chart. Looking at a fund’s three-, five- and ten-year trailing returns tells you precious little about a fund’s consistency and the timing of its returns. The ten-year return contains the five-year return which contains the three-year return which contains the one-year return. (If someone says a fund’s returns are consistent, citing 3-, 5-, and 10-year returns, watch out!) Rolling period returns are a step up, but neither technique has the fidelity and elegance of simply cumulating a fund’s excess returns.

Second, it makes clear the price, historical quantity and historical quality of a fund’s active management. The “quantity” of a fund’s active management is its tracking error, or the volatility of the fund’s returns in excess of its benchmark. The “quality” of a fund’s management is its information ratio, or excess return divided by tracking error. Taking these two factors into consideration, it becomes clearer whether a fund has offered a good value or not. A fund shouldn’t automatically be branded expensive based on its expense ratio observed in isolation. I would happily give up my left pinky for the privilege of investing in Renaissance Technologies’ Medallion fund, which charges up to 5% of assets and 44% of net profits, and I would consider myself lucky.

Finally, it allows you to coherently assess alternative investments such as market-neutral funds on the same footing as long-only active managers. A depressingly common error in assessing long-short or market neutral funds is to compare their returns against the raw returns of long-only funds or benchmarks. A market neutral fund should be compared against the active component of a long-only manager’s returns.

To make these lessons concrete, let’s perform a simple case study with two funds: Vulcan Value Partners Small Cap VVPSX and Vanguard Market Neutral VMNFX. Here’s a total return chart for both funds since the Vulcan fund’s inception on December 30, 2009. (Note that Vanguard Market Neutral was co-managed by AXA Rosenberg until late 2010, after which Vanguard’s Quantitative Equity Group took full control.)

Given the choice between the two funds, which would you include in your portfolio? Over this period the Vanguard fund returned a paltry 3.7% annually and the Vulcan fund a blistering 14.2%. If you could only own one fund in your portfolio, the Vulcan fund is probably the better choice as it benefits from exposure to market risk and therefore has a much higher expected return. However, if you are looking for the fund that enhances the risk-adjusted return of portfolio, there isn’t enough information to say at this point; it is meaningless to compare a fund with market exposure with a market neutral fund on a total return basis.

A good alternative fund usually neutralizes benchmark-like exposure and leave only active, or skilled-based, returns. A fairer comparison of the two funds would strip out market exposure from Vulcan Small Cap (or, equivalently, add benchmark exposure to Vanguard Market Neutral). In the chart below, I subtracted the returns of the Vanguard Small Cap Value ETF VBR, which tracks the CRSP US Small Cap Value Index, from the Vulcan fund’s returns. While the Vulcan fund benchmarks itself against the Russell 2000 Value index, the Russell 2000 is terribly flawed and has historically lost about 1% to 2% a year to index reconstitution costs. Small-cap managers love the Russell 2000 and its variations because it is a much easier benchmark to beat. Technically, I’m also supposed to subtract the cash return (something like the 3-month T-bill or LIBOR rate) from Vanguard Market Neutral, but cash yields have effectively remained 0% over this period.

When comparing both funds simply based on their active returns, Vanguard Market Neutral Fund looks outstanding. Investors have paid a remarkably low management fee (0.25%) for strong and consistent outperformance. Even better, the fund’s outperformance was not correlated with broad market movements.

This is not to say that Vanguard has the better fund simply based on past performance. Historical quantitative analysis should supplement, not supplant, qualitative judgment. The quality of the managers and the process have to be taken into account when making a forecast of future outperformance as a fund’s past excess return is very loosely related to its future excess return. There is a short-term correlation, where high recent excess return predicts high future near-term excess return due to a momentum effect, but over longer horizons there is little evidence that high past return predicts high future return. Confusingly, low long-run excess returns predict low future returns, suggesting evidence of persistent negative skill. If a fund has historically displayed a long-term pattern of low active exposure and negative excess returns, its fees should either be extremely low or you shouldn’t own it at all.

—–

There’s a puzzle here. Imagine if Vanguard Market Neutral’s managers simply overlaid static market exposure on their fund. Here’s how their fund would have performed. A long-only fund that has beaten the market by 3.7% a year with minimal downside tracking error over five years would easily attract billions of dollars. But here Vanguard is, wallowing is relative obscurity, despite having remarkably low absolute and relative costs.

Why is this? In theory, the price of active management—in whatever form—should tend to equalize in a competitive market. However, what we see is that long-only active management tends to dominate and is often wildly expensive relative to the true exposures offered, and long-short active management tends to often repackage market beta and overcharge for it, creating pockets of outstanding value among strategies that are truly market neutral and highly active.

I think three forces are at work:

• Investors do not adjust a fund’s returns for its beta exposures. A high return fund, even if it’s almost from beta, tends to attract assets despite extremely high fees for the actively managed portion.
• Investors focus on absolute expense ratios, often ignoring the level of active exposure obtained.
• Investors are uncomfortable with unconventional strategies that use leverage and derivatives and incur high tracking error.

Given these facts, a profit-maximizing fund company will be most rewarded by offering up closet index funds. Alternative managers will offer up market beta in a different form. Active managers that offer truly market neutral exposure will be punished due to their unconventionality and comparisons against forms of active management where beta exposures are baked into the track record.

Investment Implications

When choosing among active strategies, all sources of excess return should be on a level playing field. There is no reason to compare long-only active managers against other long-only active managers. Your portfolio doesn’t care where it gets its excess returns from and neither should you.

However, because investors tend to anchor heavily on absolute expense ratios, the price of active management offered in a long-only format tends to be much more expensive per unit of exposure than in a long-short format. An efficient way to obtain active management while keeping tracking error in check is to construct a barbell of low-cost benchmark-like funds and higher-cost alternative funds.

The Education of a Portfolio Manager

By Leigh Walzer

Like 3 million of his peers, my son will graduate college this spring. In the technology space many of the innovative companies seem to care less about which elite institution is named on his piece of sheepskin and more about the skillset he brings to the role.

Asset management companies and investors entrusting their money to fund managers might wonder if the guys with fancy degrees actually do better than the rest of the pack.

There is an old adage that that the A students work for the C students. I remember working for Michael Price many years ago. Michael was a proud graduate and benefactor of the University of Oklahoma. He sometimes referred to my group (which did primarily distressed debt) as “the Ivy Leaguers.”

Graduates of Stanford and Harvard outperformed their peers by 1% per year for the past three years.

Thanks to the Trapezoid database, we were able to compile information to see if the Ivy Leaguers (like my son) actually perform better. Our laboratory is the mutual fund universe. We looked at 4000 funds managed by graduates of 400 universities around the world. We focused for this study on results for the three years ending April 30, 2016.

A few caveats: We concede to purists and academics that our study lacks rigor. The mutual fund database does not capture separate accounts, hedge funds, etc. We excluded many funds (comprising 25% of the AUM in our universe) where we lacked biographical data on the manager. Successful active funds rely on a team so it may be unfair to ascribe success to a single individual; in some cases we arbitrarily chose the first named manager. We used the institution associated with the manager’s MBA or highest degree. Some schools are represented by just 1 or 2 graduates. We combined funds from disparate sectors. Active and rules-based funds are sometimes strewn together. We haven’t yet crunched the numbers on the value of CFA certification. And we draw comparisons without testing for statistical validity.

I was a little surprised at the mix of colleges managing the nation’s mutual funds. Villanova has an excellent basketball program. But I didn’t expect it to lead the money manager tables. However, nearly all the funds managed by Villanova were Vanguard index funds. The same is true for Shippensburg, St. Joseph’s, Lehigh, and Drexel.

When we concentrated on active funds, the leading schools were Harvard, Wharton, Columbia University, University of Chicago, and Stanford. Note that Queens College cracks the top 10 – this is attributable almost entirely to one illustrious grad: Dina Perry, a money manager at Capital Re.

Who performed the best over the last 3 years? By one measure, Stanford graduates did the best followed by Harvard, Queens College, Dartmouth, and University of Wisconsin. Trapezoid looks mainly at each manager’s skill from security selection. Institutions managing fewer assets have a higher bar to clear to make the list. Managers from these top five schools ranked, on average, in the 77th percentile (100 being best) in their respective categories in skill as measured by Trapezoid.

Exhibit III: Fund Analysis Report for TRAIX

If size and sample size were disregarded, some other colleges would score well. Notably, Hillsdale College benefitted from very strong performance by David Giroux, manager of the T Rowe Price Capital Appreciation Fund (TRAIX – closed to new investors). Wellington’s Jean Hynes lifted Wellesley College to the top echelon. Strong international programs include University of Queensland and CUNEF.

I searched in vain for an alum of Professor Snowball’s Augustana College in our database. Bear in mind though that any Viking who went on to earn a post-graduate degree elsewhere will show up under that school. (Snowball’s note: Augie is a purely undergraduate college and most managers accumulate a grad degree or three, so we’d be invisible. And the only fund manager on our Board of Trustees, Ken Abrams at Vanguard Explorer VEXPX, earned both his degrees at that upstart institution in Palo Alto.)

By and large it doesn’t cost investors more to “hire” graduates of the leading schools. The average fee for active managers at these five schools is 69 bps compared with 87 bps for the overall universe.

It seems remarkable that graduates of Stanford and Harvard outperformed their peers by 1% per year for the past three years. If we add Chicago and Wharton (the next two highest ranked MBA institutions), the advantage for the elite graduates falls to 0.47%. If we expand it to include the 10 universities (as ranked by US News & World Report) the advantage falls to 30bps.

We confess we are a bit surprised by these findings. We wonder how efficient market proponents like Burton Malkiel and Jack Bogle would explain this. (Graduates of their institution, Princeton University, also outperformed the market by 1%.)

If we were recruiting for a mutual fund complex, we would focus on the leading MBA programs. Judging by the numbers many asset managers do precisely that; Over 20% of all active mutual fund managers come from these schools

Does it mean that investors should select managers on the basis of academic credentials? If the choice were between two active funds, the answer is yes. If the choice is between a fund managed actively managed by a Stanford MBA and a passive fund, the answer is less clear. We know for the past 3 years the return produced by a typical Stanford MBA adjusted for the portfolio’s characteristics exceeds expense. But we would need to be fairly confident our stable of well-educated managers would repeat their success over the long haul by a sufficient margin.

Trapezoid’s fundattribution.com website allows registered users to review funds to see whether skill is likely to justify expense for a given fund class. We do this based on a probabilistic analysis which looks at the manager’s entire track record, not just the three-year skill rating. MFO readers may register at www.fundattribution.com for a demo and see the probability for funds in certain investment categories.

Interestingly the school whose fund managers gave us the highest confidence is Dartmouth. But we wouldn’t draw too strong conclusion unless Dartmouth has figured out how to clone its star, Jeff Gundlach of DoubleLine.

Bottom Line:

Graduates of top schools seem to invest better than their peers. Our finding may not be surprising, but it contradicts the precept of efficient market theorists. Knowing the fund manager graduated a top school or MBA program is helpful at the margin but probably not sufficient to choose the fund over a low-cost passive alternative.

Elevator Talk: Goodwood SMid Cap Discovery (GAMAX/GAMIX)

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

Goodwood SMid Cap isn’t your typical small-to-mid cap fund. In 2013, the manager of Caritas All-Cap Growth Fund (CTSAX) decided he’d had enough and left, leading the Board to order the fund’s closure and liquidation. I paraphrased their logic this way: “our fund is tiny, expensive, bad, and pursues a flawed investment strategy (long stocks, short ETFs). We’ll be going now.” Then, after liquidating all of the fund’s holdings, the Board put a stop to the action, appointed a transition manager and two months later sold the fund (and its record) to Goodwood.

The new manager moved it from all-cap growth with shorting via ETFs to small-to-mid cap value. According to one recent interview, the fund was originally a long-only product which has only recently added several hedging options. Managers Ryan Thibodeaux and Josh Pesses have a portfolio of 50-70 stocks with distinct biases toward smaller cap companies and value rather than growth. They’re able to hedge that portfolio with up to 20 short positions, cash, and a mix of puts and call options. Currently the fund’s net market exposure is 75%, which about 40% of the portfolio invested in small- to micro-cap stocks.

Mr. Thibodeaux founded Goodwood in 2012 after a nine year stint with Maple Leaf LP, a hedge fund that received a “seed” investment from Julian Robertson’s famous Tiger Management, leading to the informal designation of Maple Leaf as a “Tiger Seed.” Maple Leaf, like Goodwood, was a fundamental, value-biased long/short fund. Mr. Pesses joined Goodwood about a year later. Like Mr. Thibodeaux he was at Maple Leaf, served as a Partner and Senior Equity Research Analyst from 2007 to 2012. Their first products at Goodwood were long/short separate accounts which have done remarkably well. From January 1, 2008 – March 31, 2016, their long/short composite returned 8.6% annually after fees. The average Morningstar peer made 0.7%. That seems like a hopeful sign since those same strategies should help buoy GAMAX.

That said, performance has still been rocky. From the day Goodwood took over the fund (10/01/13) to 05/21/16, GAMAX has lost a bit over 6% while Morningstar’s small-blend category is up 7.3%. In 2015, the fund trailed 100% of its peers but so far in 2016, it’s returned 14.2% and is in the top 1% of its peer group. That sort of divergence led us to ask Messrs. Thibodeaux and Pesses to talk a bit more about what’s up. Here are their 200 (well, okay, 261 but that’s still only 130.5 per manager) words on why you need Goodwood:

There is not much about our firm and the Goodwood SMID Cap Discovery Fund that one would call conventional. From our background, to a geographic location that puts us well off the beaten path, to our atypical entree into the 40 Act world, to our investment strategy – we don’t fit neatly into any one box, Morningstar or otherwise.

When we took an over as manager to an existing mutual fund in October 2013, it was our first foray into the open-end side of the investment business. Up to that point, we’d spent the bulk our careers as analysts at a long/short hedge fund. That experience influences the way we approach stock selection and portfolio construction today and is a differentiator in the 40 Act space.

Our investment process is driven by a fundamental value-based approach, but that is not what sets our work apart. We see flexibility as a hallmark of our more “opportunistic” approach to investing. We invest in the sectors, both long and short, that we have covered for our entire careers – Consumer, Healthcare, Industrials and Technology. We are agnostic to benchmark weightings and when opportunities are scarce, we are comfortable with high cash balances. The Fund is and will always be long-biased, but we actively hedge our exposure using options and look at add alpha where possible through short selling individual securities.

Ultimately, our goal is to achieve superior risk adjusted returns over the intermediate to long term and we believe the Fund can serve as a valuable complement to core or passive Small and Mid cap positions.

The minimum initial investment for GAMAX is $2,500 with an expense ratio of 1.95%. The minimum investment for the institutional shares is $100,000; those shares carry a 1.7% E.R. Here’s the Goodwood website, it’s one of those fancy modern ones that doesn’t facilitate links to individual pages so you’ll have to go and click around a bit. If you’re interested in the strategy, you might choose to read through some of the many articles linked on their homepage.

Launch Alert: Centerstone Investors Fund (CETAX/CENTX)

Centerstone Investors and its sibling Centerstone International (CSIAX/CINTX) launched on May 3, 2016. The Investors fund will be a 60/40-ish global hybrid fund. Their target allocation ranges are 50-80% equity, 20-40% fixed income and 5-20% cash. Up to 20% of the fund might be in high-yield bonds. They anticipate that at least 15% of the total portfolio and at least 30% of their stocks will be non-U.S.

The argument for being excited about Centerstone Investors is pretty straightforward: it’s managed by Abhay Deshpande who worked on the singularly-splendid First Eagle Global (SGENX) fund for 14 years, the last six of them as co-manager. He spent a chunk of that time working alongside the fund’s legendary manager, Jean-Marie Eveillard and eventually oversaw “the vast majority” of First Eagle’s $100 billion. SGENX has a five star rating from Morningstar. Morningstar downgraded the fund from Silver to Bronze as a result of Mr. Deshpande’s departure. Before First Eagle, he was an analyst for Oakmark International and Oakmark International Small Cap and an acquaintance of Ed Studzinski’s. During his callow youth, he was also an analyst for Morningstar.

Here’s the goal: “we hope to address a significant need for investment strategies that effectively seek to manage risk and utilize active reserve management in an effort to preserve value for investors,” says Mr. Deshpande. “It’s our intention to manage Centerstone’s multi-asset strategies in such a way that they can serve as core holdings for patient investors concerned with managing risk.”

Given that he’s running this fund as a near-clone of SGENX, is there any reason to invest here rather than there? I could imagine three:

1. Deshpande was seen as the driver of SGENX’s success in the years after Mr. Eveillard’s departure, which is reflected in the Morningstar downgrade when he left. So there’s talent on Centerstone’s side.
2. SGENX has $47 billion in assets and is still open, which limits the fund’s investable universe and largely precludes many of the small issues that drove its early success. Centerstone, with $15 million in assets, should be far more maneuverable for far longer.
3. First Eagle is in the process of being taken over by two private equity firms after generations as a family-owned business. Centerstone is entirely owned by its founder and employees, so its culture is less at-risk.

The opening expense ratio for “A” shares is 1.36% after waivers and the minimum initial investment is $5000. The “A” shares have a 5% front load but Mr. Deshpande expects that load-waived shares will be widely available. The investment minimum for institutional shares is $100,000 but the e.r. does drop to 1.11%. In lieu of a conventional factsheet, Centerstone provides a thoughtful overview that works through the fund’s strategy and risk-return profile. Centerstone’s homepage is regrettably twitchy but there’s a thoughtful letter from Mr. Deshpande that’s well worth tracking down.

Launch Alert: Matthews Asia Credit Opportunities (MCRDX)

Matthews Asia Credit Opportunities (MCRDX/MICPX) launched on April 29, 2016.

Matthews International Capital Management, LLC, the Investment Advisor to the Matthews Asia Funds, was founded in 1991 by Paul Matthews. Since then they’ve been the only U.S. fund complex devoted to Asia. They have about $21 billion in fund assets and advise18 funds. Of those, two focus on Asian credit markets: Strategic Income (MAINX) and Credit Opportunities.

Both of the credit-oriented funds are managed by Teresa Kong and Satya Patel. Ms. Kong joined Matthews in 2010 after serving as Head of E.M. Investments for BlackRock, then called Barclays Global. She founded their Emerging Markets Fixed Income Group and managed a bunch of portfolios. Her degrees are both from Stanford, she’s fluent in Cantonese and okay at Mandarin. Mr. Patel joined Matthews in 2011 from Concerto Asset Management where he was an investment analyst. He’s also earned degrees from Georgia (B.A.), the London School of Economics (M.A. in accounting and finance) and the University of Chicago (M.B.A. ). The state of his Mandarin is undisclosed.

The fund invests primarily in dollar-denominated Asian credit securities. The fund’s managers want their returns driven by security selection rather than the vagaries of the international currency market. And so “credit” excludes all local currency bonds. At least 80% of the portfolio will be invested in traditional sorts of credit securities – mostly “sub-investment grade securities” – while up to 20% might be placed in convertibles or hybrid securities.

Four things stand out about the fund:

The manager is really good. In our conversations, Ms. Kong has been consistently sharp, clear and thoughtful. Her Strategic Income fund has returned 4.2% annually since inception, in line with its EM Hard Currency Debt peer group, but it has done it with substantially less volatility.

The fund’s targets are reasonable and clearly expressed. “The objective of the strategy,” Ms. Kong reports, “is to deliver 6-9% return with 6-9% volatility over the long term.”

Their opportunity set is substantial and attractive. The Asia credit market is over $600 billion and the sub-investment grade slice which they’ll target is $130 billion. For a variety of reasons, “about a quarter of Asian bonds are not rated by one of the Big Three US rating agencies anymore,” which limits competition for the bonds since many U.S. investors can only invest in rated bonds. That also increases the prospect for mispricing, which adds the Matthews’ advantage. “Over the past 15 years,” they report, “Asia high yield has a cumulative return double that of European, LATAM and US high yield, with less risk than Europe and LATAM.” Here’s the picture of it all:

You might draw a line between Asia Credit and Asia HY then assume that the fund will fall on that line rather nearer to Asia HY.

The fund’s returns are independent of the Fed. U.S. investors are rightly concerned about the effect of the Fed’s next couple tightening moves. The correlation between the Asia HY market and the Barclays US Aggregate is only 0.39. Beyond that, the managers have the ability to use U.S. interest rate futures to hedge U.S. interest rate risk.

The opening expense ratio for Investor shares is 1.1% and the minimum initial investment is $2500, reduced to $500 for IRAs. The investment minimum for institutional shares is $3 million but the e.r. does drop to 0.90%. Matthews has provide a thoughtful introduction that works through the fund’s strategy and risk-return profile. The fund’s homepage is understandably thin on content but Matthews, institutionally, is a pretty content-rich site.

Manager Changes

It’s been a singularly quiet month so far, with changes in the management teams at just 32 funds (tabulated below). In truth, none of the additions or subtractions appears to be game-changers.

Because bond fund managers, traditionally, had made relatively modest impacts of their funds’ absolute returns, Manager Changes typically highlights changes in equity and hybrid funds.

Ticker	Fund	Out with the old	In with the new	Date
ARDWX	Aberdeen Multi-Manager Alternative Strategies Fund II	Santa Fe Partners LLC no longer serves as a sub-adviser to the fund, and Henry Davis is no longer listed as a portfolio manager for the fund.	Ian McDonald, Averell Mortimer, Darren Wolf, Russell Barlow, Vicky Hudson, Peter Wasko and Kevin Lyons remain on the management team	5/16
ASTYX	AllianzGI Best Styles International Equity	No one, but …	Erik Mulder joined Michael Heldmann and Karsten Niemann in managing the fund.	5/16
AZDAX	AllianzGI Global Fundamental Strategy Fund	Andreas Utermann is no longer listed as a portfolio manager for the fund.	Neil Dwane joins the management team of Armin Kayser, Karl Happe, Eric Boess, and Steven Berexa.	5/16
BGEIX	American Century Global Gold Fund	William Martin and Lynette Pang are no longer listed as portfolio managers for the fund.	Yulin Long and Elizabeth Xie are now managing the fund.	5/16
BDMAX	BlackRock Global Long/Short Equity Fund	Paul Ebner is no longer listed as a portfolio manager for the fund.	Richard Mathieson joins Raffaele Savi and Kevin Franklin in managing the fund.	5/16
BMSAX	BlackRock Secured Credit Portfolio	Carly Wilson and C. Adrian Marshall are gone.	Mitchell Garfin remains and is joined by James Keenan, Jeff Cucunato, Jose Aguilar and Artur Piasecki.	5/16
BIALX	Brown Advisory Global Leaders Fund	No one, but …	Bertie Thomson joins Michael Dillon in managing the fund.	5/16
CSIBX	Calvert Bond Portfolio	Matthew Duch will no longer serve as a portfolio manager for the fund.	Vishal Khanduja and Brian  Ellis will remain on the portfolio management team.	5/16
CGAFX	Calvert Green Bond Fund	Matthew Duch will no longer serve as a portfolio manager for the fund.	Vishal Khanduja and Brian  Ellis will remain on the portfolio management team.	5/16
CYBAX	Calvert High Yield Bond Fund	Matthew Duch will no longer serve as a portfolio manager for the fund.	Vishal Khanduja and Brian  Ellis will remain on the portfolio management team and will be joined by Patrick Faul.	5/16
CFICX	Calvert Income Fund	Matthew Duch will no longer serve as a portfolio manager for the fund.	Vishal Khanduja and Brian  Ellis will remain on the portfolio management team.	5/16
CLDAX	Calvert Long-Term Income Fund	Matthew Duch will no longer serve as a portfolio manager for the fund.	Vishal Khanduja and Brian  Ellis will remain on the portfolio management team.	5/16
CSDAX	Calvert Short Duration Income Fund	Matthew Duch will no longer serve as a portfolio manager for the fund.	Vishal Khanduja and Brian  Ellis will remain on the portfolio management team.	5/16
CULAX	Calvert Ultra-Short Income Fund	Matthew Duch will no longer serve as a portfolio manager for the fund.	Vishal Khanduja and Brian  Ellis will remain on the portfolio management team.	5/16
SDUAX	Deutsche Ultra Short Duration Bond Fund, soon to be the Deutsche Fixed Income Opportunities Fund	As of August 31, Eric Meyer will no longer serve as a portfolio manager for the fund.	John Ryan is joined by Roger Douglas and Rahmila Nadi in managing the fund.	5/16
DGANX	Dreyfus Global Infrastructure Fund	Joshua Kohn is no longer listed as a portfolio manager for the fund.	Maneesh Chhabria is joined by Theodore Brooks on the management team.	5/16
ETMGX	Eaton Vance Tax-Managed Small-Cap Fund	Nancy Took, lead portfolio manager, announced her intention to retire at the end of October, 2016.	Michael McLean and J. Griffith Noble will continue with the fund.	5/16
GSBFX	Goldman Sachs Income Builder Fund	Effective immediately, Lale Topcuoglu no longer serves as a portfolio manager for the fund.	Daniel Lochner, Charles Dane, Colin Bell, Ronald Arons, Andrew Braun and David Beers will continue to manage the fund.	5/16
HBIAX	HSBC Global High Income Bond Fund	Lisa Chua is no longer listed as a portfolio manager for the fund.	Nishant Upadhyay joins Rick Liu and Jerry Samet in managing the fund.	5/16
HBYAX	HSBC Global High Yield Bond Fund	Lisa Chua is no longer listed as a portfolio manager for the fund.	Nishant Upadhyay joins Rick Liu and Mary Gottshall Bowers in managing the fund.	5/16
WASAX	Ivy Asset Strategy Fund	Mike Avery will no longer manage the fund, effective June 30, 2016.	F. Chace Brundige and Cynthia Prince-Fox will continue to co-manager the fund.	5/16
IVTAX	Ivy Managed International Opportunities Fund	Mike Avery will no longer manage the fund, effective June 30, 2016.	At that time, F. Chace Brundige and Cynthia Prince-Fox will become co-managers of the fund.	5/16
JMMAX	JPMorgan Multi-Manager Alternatives Fund	No one, but …	P/E Global LLC has been added as an eleventh subadvisor to the fund.	5/16
SCGLX	Scout Global Equity Fund	James Moffett and founding manager James Reed are no longer listed as portfolio managers for the fund.	Charles John is joined by John Indellicate and Derek Smashey. Somehow the combination of “indelicate” and “smashy” seems like fodder for a bunch of in-jokes.	5/16
UMBWX	Scout International Fund	Michael P. Fogarty no longer serves as a portfolio manager of the fund.	Michael Stack and Angel Luperico will continue to manage the fund.	5/16
SEQUX	Sequoia Fund	No one, but …	John Harris, Arman Gokgol-Kline, Trevor Magyar, and David Sheridan join David Poppe as co-managers.	5/16
TVOAX	Touchstone Small Cap Value Fund	DePrince Race & Zollo, Inc. will no longer subadvise the fund. Gregory Ramsby and Randy Renfrow will no longer serve as portfolio managers for the fund.	Russell Implementation Services will subadvise the fund, with Wayne Holister as portfolio manager, until June 30, 2016. After June 30, LMCG Investments will become the subadvisor to the fund.	5/16
USIFX	USAA International Fund	No one, but …	Filipe Benzinho is joining Susanne Willumsen, James Shakin, Craig Scholl, Paul Moghtader, Ciprian Marin, Taras Ivanenko, Andrew Corry, Daniel Ling and Marcus Smith to manage the fund.	5/16
HEMZX	Virtus Emerging Markets Opportunities Fund	No one, but …	Brian Bandsma and Jin Zhang join Matthew Benkendorf in managing the fund	5/16
JVIAX	Virtus Foreign Opportunities Fund	No one, but …	Daniel Kranson and David Souccar will join Matthew Benkendorf in managing the fund	5/16
NWWOX	Virtus Global Opportunities Fund	No one, but …	Ramiz Chelat will join Matthew Benkendorf in managing the fund	5/16
UNASX	Waddell & Reed Advisors Asset Strategy Fund	Mike Avery will no longer manage the fund, effective June 30, 2016.	F. Chace Brundige and Cynthia Prince-Fox will continue to co-manager the fund.	5/16

A Road Trip to Seafarer

Ben Peters, a CFP and chief compliance officer for Burton Enright Welch in the Bay Area, reported on his field trip to Seafarer in his Q1 shareholder letter. Ben had first learned of Seafarer through the Observer and was kind enough to share these reflections on his trip to Larkspur.

The more we communicated with Seafarer the more confidence we gained. Seafarer’s managers are undeniably, overwhelmingly smart. They have a deep understanding of EM investing and are serious and forthright about the risks. And as with most upper echelon managers, they leave you so impressed as to be uneasy: your impulse is to hand over your last dime.

Our visit to Seafarer’s Larkspur headquarters hammered home our conviction. Many fund managers want to be seen as the masters of the universe. Their offices usually have the downtown location, sweeping views, and fancy artwork to match.

Seafarer’s HQ is refreshing. Seafarer resides in a 3-story, non-descript office park in a quaint Bay-side town. There was no receptionist, flat screen TVs, or abstract paintings … the grand tour didn’t require any walking because the whole office is visible from the middle of the room …

The humble setting is symbolic. Seafarer is one of the lowest fee active emerging markets managers available even though it is relatively small.

Updates

Execution postponed: back in February 2016, the Board of $95 million ASTON Small Cap Fund (ATASX) moved to appoint GW&K Investment Management, LLC as subadviser to the fund in anticipation merging it into the year-old, $1.5 million AMG GW&K Small Cap Growth Fund (GWGIX). In May the board reversed course on the merger, though it still hopes to have GW&K run the fund permanently.

With the same enthusiasm that Republican leaders bring to their belated embrace of Donald Trump, mutual fund advisers are buying active/smart/tilted ETFs to stanch the bleeding. Garth Freisen, a principal at III Capital Management, reports:

[Contining movement of assets from funds to ETFs] helps explain recent moves by traditional asset management companies to acquire ETF-focused firms specializing in the construction of low-cost, active indexing portfolios:

• Hartford Funds bought Lattice Strategies
• Columbia Threadneedle purchased Emerging Global Advisors
• JP Morgan Asset Management made a minority investment in Global X Funds
• New York Life Investment Management acquired IndexIQ
• Oppenheimer Funds purchased RevenueShares
• Janus Capital Group bought VS Holdings (Velocity Shares)
• Legg Mason bought QS Investors

In addition, he notes that Goldman Sachs and Fido are launching their own quant-driven ETFs (“Active Management Is Worth It When The Price Is Right,” 5/23/2016).

Briefly Noted . . .

Boston Partners Emerging Markets Long/Short Fund (BDMAX) has announced that “the Adviser expects that the Fund’s long positions will not exceed approximately 50% of the Fund’s net assets with an average of 30% to 70% net long.” Heretofore the extent of the fund’s market exposure wasn’t constrained in the prospectus.

Stonebridge Capital Management has announced they no longer intend to advise the Stonebridge Small-Cap Growth Fund (SBSGX). “The Board is considering alternative plans with respect to the Fund, which may include closure and liquidation of the Fund.” Here’s what the Board has to wrestle with: an utterly dismal track record that will haunt any future manager, $12 million in assets and expenses north of 2.1% per year. One of the two managers has been with the fund for 16 years and still has not invested a penny in it. The only bright side is that the fund has a substantial embedded tax loss (Morningstar estimates about 17%) so liquidation would partially offset taxable gains elsewhere in an investor’s portfolio.

From the file labeled “I learn something new every month.” Touchstone Small Cap Value Fund (TVOAX) is switching managers. On May 20, 2016, DePrince, Race & Zollo, Inc. are out. On June 30, 2016, LMCG steps in. And what happens during the six week interregnum? Russell happens. Russell Implementation Services provides caretaker management in the window between the departure of one manager or team and the arrival of the next. Touchstone’s SEC filing reports:

Russell will make investment decisions for the Fund and also ensure compliance with the Fund’s investment policies and guidelines. Russell has been providing transition management services to clients since 1992. Russell has transitioned nearly $2.3 trillion in assets for clients in over 2,300 transition events in the last three calendar years. As of December 2015, Russell was managing 17 mandates with $1.7 billion in assets across a broad range of asset classes.

That implies $800 billion/year in assets temporarily managed by a caretaker. Who knew?

SMALL WINS FOR INVESTORS

All eight share classes of AB Small Cap Growth (QUASX) re-opened to new investors on June 1, 2016.

Effective June 3, 2016, Dreyfus International Stock Fund (DISAX) will be re-opened to new investors.

Touchstone Sands Capital Select Growth Fund (TSNAX) closed to new accounts, with certain exceptions, on April 8, 2013. With due consideration, the Advisor has determined to re-open the Fund for sales to investors making purchases in an account or relationship related to a fee-based, advisory platform.

CLOSINGS (and related inconveniences)

Undiscovered Managers Behavioral Value Fund (UBVAX) appears to be closing a bit more tightly. The fund is currently closed to new investors which eight classes of exceptions. As of June 27, 2016, the number of exceptions decreases to six and the wording on some of those six seems a bit more restrictive. It appears from the filing that the two lost exceptions will be:

• Approved brokerage platforms where the Fund is on a recommended list compiled by a Financial Intermediary’s research department as of the Closing Date may continue to utilize the Fund for new and existing accounts.
• Approved Section 529 college savings plans utilizing the Fund as of the Closing Date may do so for new and existing accounts.

OLD WINE, NEW BOTTLES

On July 1, 2016, BlackRock Managed Volatility Portfolio (PBAIX) will be renamed BlackRock Tactical Opportunities Fund. The revised statement of investment strategy doesn’t mention volatility but, instead, talks about “an appropriate return-to-risk trade-off” and warns of the prospect of frequent trading.

Also on July 1, BlackRock Secured Credit Portfolio (BMSAX) gets renamed BlackRock Credit Strategies Income Fund. Up until now it has invested, quite successfully, in “secured instruments, including bank loans and bonds, issued primarily, but not exclusively, by below investment grade issuers.” Going forward it will have one of those “invest in any danged thing we want to” strategies. Pursuant thereunto, two of the three current managers get sacked and four new managers get added. After the dust settles, four of the fund’s five managers will bear the rank “Managing Director.” The fifth, poor Artur Piasecki, is merely “Director.”

That same exhausting day, BlackRock Managed Volatility Portfolio (PCBAX) becomes BlackRock Tactical Opportunities Fund. The new investment strategy highlights frequent trading and the use of derivatives. It also abandons the old 50% global stocks / 50% global bonds benchmark.

As of August 1, 2016, Deutsche Ultra-Short Duration Fund (SDUAX) will be renamed Deutsche Fixed Income Opportunities Fund. Following the fund’s name change, its amorphous investment goal (“current income consistent with total return”) remains but its strategy changes from allowing up to 50% non-investment grade plus up to 20% cash to 30% non-investment grade with no reference to cash. Its principal benchmark becomes a 3-month LIBOR index.

Effective June 14, 2016, “Fidelity” will replace “Spartan” in the fund name for each Spartan Index Fund a/k/a each Fidelity Index fund.

On July 5, 2016, Victory CEMP Multi-Asset Growth Fund (LTGCX) will be renamed the Victory CEMP Global High Dividend Defensive Fund and its investment objective will change to reflect a dividend income component. This will be the fund’s second name in a year; up until November it was Compass EMP Multi-Asset Growth Fund. It’s a fund of Victory CEMP’s volatility-weighted ETFs. At 2.12% in expenses for 1.46% in long-term annual returns, one might suspect that it’s overpriced.

The sub-adviser to SilverPepper Merger Arbitrage Fund (SPABX/SPAIX) has changed its name from Brown Trout Management, LLC to Chicago Capital Management, LLC.

OFF TO THE DUSTBIN OF HISTORY

AAM/HIMCO Unconstrained Bond Fund (AHUAX) will undergo “termination, liquidation and dissolution” on June 28, 2016.

Eaton Vance Richard Bernstein Market Opportunities Fund (ERMAX) has closed and will liquidate on June 29, 2016. This is another “well, we gave it almost two years (!) before pulling the plug” fund.

Eaton Vance Currency Income Advantage Fund (ECIAX) will return its $1 million in assets to investors and vanish, after almost three years of operation, on June 29, 2016.

Goldman Sachs Financial Square Tax-Exempt California Fund (ITCXX) and Goldman Sachs Financial Square Tax-Exempt New York Fund (IYAXX) were slated for liquidation on August 31, 2016 but the Board and advisor got twitchy. Each fund now faces execution on June 10, 2016.

Harbor Funds’ Board of Trustees has determined to liquidate and dissolve the Harbor Unconstrained Bond Fund (HRUBX), which is roughly but not perfectly a clone of PIMCO Unconstrained Bond (PUBDX). The liquidation of the Fund is expected to occur on July 29, 2016.

Little Harbor Multi-Strategy Composite Fund (LHMSX), which you didn’t know existed, now no longer exists.

The Board of Trustees of Northern Funds has decreed that Multi-Manager Large Cap Fund (NMMLX), Multi-Manager Small Cap Fund (NMMSX), and Multi-Manager Mid Cap Fund (NMMCX) be liquidated on July 22, 2016. About that “multi-manager” thing: each of the funds is run by same two Northern Trust managers. They haven’t been noticeably “multi” since about 2012. They have about $900 million in assets between them with the smallest, Small Cap, posted the best relative returns.

Oppenheimer Commodity Strategy Total Return Fund (QRAAX) will liquidate on July 15, 2016. Why, you ask? Uhhhh …

The Board of Trustees of The Purisima Funds has determined that it is advisable “to liquidate, dissolve and terminate the legal existence” of The Purisima Total Return Fund (PURIX) and The Purisima All-Purpose Fund (PURLX). Their departure is notable primarily because of their manager, Kenneth Fisher, America’s largest investment advisor and source of, oh, I don’t know, one-third of all of the pop-up ads on the internet.

As of May 9, PURLX had $46,374 and PURIX has $257 million. Whether you judge PURIX as “unimpressive” or “almost freakishly bad” depends on whether you ask Lipper or Morningstar. Lipper benchmarks it against the Flexible Portfolio group, which it trails only modestly since inception. Morningstar categorizes it as domestic large-blend, and it trails the vast majority of such funds over every period from one-year to fifteen. In reality, Lipper is probably a truer fit. The fund is about 65% US large caps, 20% international large caps and 10% “other,” which includes two exchange-traded notes in its top 10 holdings. Regardless of the rater, the funds’ record suggests that Mr. Fisher – son of Phil Fisher (author of Common Stocks and Uncommon Profits, 1958, and “one of the great investors of all time,” according to Morningstar) – seems better suited to marketing than managing.

The month’s oddest closure announcement: “On May 6, 2016, at the recommendation of SF Advisors, LLC, the investment adviser to the Trust, the Trust’s Board of Trustees approved the closing and subsequent liquidation of the Funds. Accordingly, the Funds are expected to cease operations, liquidate any assets, and distribute the liquidation proceeds to shareholders of record on June 6, 2016.” Uhhh … no such funds were ever launched. This raises the same philosophical question as the speculation that near black holes, particles could be destroyed the moment before they’re created. Can funds that have never commenced operations cease them?

Pending shareholder approval (which is a lot like saying “pending the rising of the sun”), Stratus Government Securities (STGSX) and Stratus Growth (STWAX) will liquidate on June 10, 2016. How much suspense is there about the outcome of the vote? Well, the vote is Tuesday, June 7and liquidation is scheduled (tentatively, of course) for Friday of that same week.

Thomson Horstmann & Bryant Small Cap Value Fund (THBSX) will liquidate on June 24, 2016.

Effective May 6, 2016, Virtus Alternative Income Solution Fund, Virtus Alternative Inflation Solution Fund and Virtus Alternative Total Solution Fund were liquidated. Lest that phrase confuse us, the adviser clarifies: “The funds have ceased to exist.”

In Closing . . .

If you own an Android smart phone, you should go download and use the Ampere app. As you’re reading this, Chip and I will be in Scotland, likely in the vicinity of Inverness. One of the great annoyances of modern travel is the phenomenal rate at which phones drain their batteries and the subsequent need to search for charging options in airports and rail stations. What I didn’t know is how much of a different your charging cable makes in how much time it will take to regain a reasonable charge. Ampere is an app which measures, among other useful things, how quickly your phone is recharging.

It turns out that the quality of charging cable makes a huge difference. Below are two screencaps. I started with same charger and the phone then worked my way through a set of four different charging cables. The charge rates varied greatly from cable to cable.

In the instance above, it would take nearly four times as long to recharge my phone using the cable on the left. Every cable I tested produced a different charge rate, from a low of 300 mA to a high of 1200 mA.

My suggestion for travelers: download Ampere, use it to identify your best-performing cables then ditch the rest, and remember to switch to “airplane mode” for faster charging.

You’re welcome.

As ever, we want to take a moment to offer a sincere xei xei to all the folks who’ve supported us this month in thought, word and deed. To our faithful friends, Deb (still hoping to make it to Albuquerque) and Greg, thank you. Thanks, too, to Andrew, William, Robert, and Jason (all the way from Surrey, UK). We appreciate your generosity. 

We’ll look for you at Morningstar! We’re hopeful of catching up with a number of folks at the conference including folks from Centerstone, Evermore, FPA, Intrepid, Matthews and Seafarer … with maybe just a hint of Poplar Forest, a glimpse of Polaris and the teasing possibility of ride down Queens Road. We’ll post synopses to our discussion board each day and we’ll offer some more-refined prose when you come by for our July issue.

Remember, as you’re reading this, Chip and I are chillin’ in Scotland. If you’ve got questions or concerns about this month’s issue and you’d like them addressed before my return on June 7^th, please drop a note to our colleague and data wizard, Charles Boccadoro. He’s got the keys to the back door.

As ever,

By David Snowball

These 263 funds had not, as of 4/30/2016, yet regained the NAV they had at the start of the current market cycle in October, 2007. They’re arranged alphabetically but don’t include share class designations. Funds on a roller coaster – those that crashed in the financial crisis then crashed again afterward are highlighted in orange. Diversified domestic funds are highlighted in blue.

APR is a fund’s annualized percent return from 11/07 under 04/16. Max DD is the fund’s maximum drawdown or greatest percentage decline, during that period. MAX date is the month in which the fund bottomed. Bear rating is the fund’s performance during all bear market months from 11/07 to now, not just during extended market declines. The worst bear market performers are in the 10^th decile.

All data is derived from the Lipper database, as of 4/30/16.

	Symbol	Categor	APR	MAX DD	MAX Date	Bear
AB Int’l Growth	AWPAX	Int’l Multi-Cap Growth	-1.8	-58.5	200902	7
AB Int’l Value	ABIYX	Int’l Multi-Cap Value	-3.4	-62.7	200902	5
Aberdeen China Opportunities I	GOPIX	China Region	-3.4	-59.6	200902	4
Aberdeen Select Int’l Equity	BJBIX	Int’l Large-Cap Core	-1.5	-58.3	200902	7
Aberdeen Select Int’l Equity II	JETIX	Int’l Large-Cap Core	-2.3	-76.4	200902	9
Acadian Emerging Markets Portfolio	AEMGX	Emerging Markets	-3.5	-61.4	200902	8
Alger Global Growth	CHUSX	Global Multi-Cap Growth	-5	-65.2	200902	6
AllianzGI Emerging Markets Opportunities	AOTIX	Emerging Markets	-1.1	-60.2	200902	8
Alpine Dynamic Dividend	ADVDX	Global Equity Income	-6.3	-63.9	200902	9
Alpine Int’l Real Estate Equity	EGLRX	Int’l Real Estate	-1.5	-61.3	200902	9
American Century Emerging Markets	TWMIX	Emerging Markets	-2.5	-68.7	200902	10
American Century Int’l Core Equity	ACIUX	Int’l Multi-Cap Core	-1.5	-57.4	200902	6
American Century Int’l Discovery	TWEGX	Int’l Small/Mid-Cap Growth	-1.7	-57.6	200902	7
American Century Int’l Value	MEQAX	Int’l Multi-Cap Value	-4.6	-62.7	200902	8
American Century NT Emerging Markets	ACLKX	Emerging Markets	-1.5	-62.9	200902	8
American Independence Navellier Int’l	IMSSX	Int’l Large-Cap Growth	-4.4	-68.1	200902	8
AMG Managers Brandywine Advisors Mid Cap Growth	BWAFX	Mid-Cap Growth	-1.1	-59.2	200902	6
API Efficient Frontier Core Income	APIMX	Short Investment Grade Debt	-3.8	-59.6	200902	8
Artisan Emerging Markets	APHEX	Emerging Markets	-2.5	-61.2	200902	9
Banks UltraSector ProFund	BKPIX	Equity Leverage	-3.7	-63.9	200902	9
BlackRock Emerging Markets	MADCX	Emerging Markets	-2.5	-58.8	200902	6
BlackRock Int’l Index	MAIIX	Int’l Large-Cap Core	-1.8	-58.9	200902	4
BLDRS Asia 50 ADR Index	ADRA	Pacific Region	-3	-60.4	200902	7
BLDRS Developed Markets 100 ADR Index	ADRD	Int’l Large-Cap Core	-1.8	-58	200902	6
BLDRS Emerging Markets 50 ADR Index	ADRE	Emerging Markets	-3.3	-75	200902	10
BLDRS Europe Select ADR Index	ADRU	European Region	-2.4	-58.2	200902	3
BNY Mellon Int’l Appreciation	MPPMX	Int’l Large-Cap Core	-2.7	-58.6	200902	8
Calvert Int’l Equity	CWVGX	Int’l Multi-Cap Growth	-3.6	-60.6	200902	8
ClearBridge Int’l Growth	LMGTX	Int’l Multi-Cap Growth	-4.3	-62.2	200902	10
Cohen & Steers Int’l Realty	IRFIX	Int’l Real Estate	-3.9	-62.8	200902	5
Columbia Emerging Markets	UMEMX	Emerging Markets	-2.9	-55	200902	2
Columbia Int’l Opportunities	NMOAX	Int’l Multi-Cap Growth	-4.7	-62.5	200902	8
Columbia Int’l Value	EMIEX	Int’l Multi-Cap Value	-4.2	-62.1	200902	5
Columbia Select Int’l Equity	NIEQX	Int’l Multi-Cap Growth	-3.7	-82.3	201006	4
Commonwealth Japan	CNJFX	Japanese	-2	-52.2	200902	3
Consulting Group Capital Markets Emerging Markets Equity	TEMUX	Emerging Markets	-4.4	-67.5	200902	8
Consulting Group Capital Markets Int’l Equity	TIEUX	Int’l Multi-Cap Core	-2.4	-57.7	200902	8
Cullen Int’l High Dividend	CIHIX	Int’l Equity Income	-1.7	-58.2	200902	7
Davis Int’l	DILAX	Int’l Multi-Cap Growth	-1.5	-57.2	200902	7
Deutsche CROCI Int’l	SCINX	Int’l Multi-Cap Value	-4.2	-64.7	200902	7
Deutsche EAFE Equity Index	BTAEX	Int’l Multi-Cap Core	-3	-60.5	200902	4
Deutsche Emerging Markets Equity	SEMGX	Emerging Markets	-1.9	-58	200902	8
Deutsche Global Equity	MGINX	Global Multi-Cap Growth	-0.7	-72	200902	8
Deutsche World Dividend	SCGEX	Global Equity Income	-0.4	-70.2	200902	9
DFA Tax-Managed Int’l Value Portfolio	DTMIX	Int’l Multi-Cap Value	-2.8	-61.4	200902	9
Direxion Monthly 7-10 Year Treasury Bear 2x	DXKSX	Specialty Fixed Income	-3	-63.6	200902	6
Direxion Monthly Emerging Markets Bull 2x	DXELX	Equity Leverage	-5.8	-63.1	200902	6
Direxion Monthly S&P 500 Bull 2x	DXSLX	Equity Leverage	-1.5	-53.9	200902	2
Direxion Monthly Small Cap Bull 2x	DXRLX	Equity Leverage	-2	-68	200902	6
Dreyfus Int’l Equity	DIERX	Int’l Multi-Cap Core	-4.7	-63.8	200902	5
Dreyfus Int’l Stock Index	DIISX	Int’l Multi-Cap Core	-3.7	-67.8	200902	7
Dreyfus/Newton Int’l Equity	SNIEX	Int’l Multi-Cap Growth	-3.6	-68.7	200902	8
Dunham Emerging Markets Stock	DNEMX	Emerging Markets	-2.2	-58.1	200902	4
Eaton Vance Greater China Growth	EVCGX	China Region	-4.8	-58.8	201205	8
Elfun Int’l Equity	EGLBX	Int’l Large-Cap Growth	-4.4	-60.3	200902	5
Europe 30 ProFund	UEPIX	European Region	-3.3	-63.9	200902	3
Federated InterContinental	RIMAX	Int’l Multi-Cap Growth	-2.7	-59.9	200902	8
Fidelity Advisor Emerging Markets	FIMKX	Emerging Markets	0	-67	200902	8
Fidelity Advisor Financial Services	FFSIX	Financial Services	-4.1	-66	200902	5
Fidelity Advisor Int’l Small Cap Opportunities	FOPIX	Int’l Small/Mid-Cap Growth	-3.6	-73.5	200902	10
Fidelity Emerging Asia	FSEAX	Emerging Markets	-8.5	-66.1	201205	9
Fidelity Emerging Markets	FEMKX	Emerging Markets	-5.5	-63.1	200902	4
Fidelity Int’l Real Estate	FIREX	Int’l Real Estate	-2.4	-64.5	200902	7
Fidelity Int’l Value	FIVLX	Int’l Large-Cap Value	-1.3	-57.6	200902	6
Fidelity Japan	FJPNX	Japanese	-1	-65.2	200902	4
Fidelity Overseas	FOSFX	Int’l Multi-Cap Growth	-14.6	-96	200902	10
Fidelity Select Consumer Finance	FSVLX	Financial Services	-2.4	-57.3	200902	4
Fidelity Select Financial Services	FIDSX	Financial Services	-2.4	-56.4	200902	5
Financial Select Sector SPDR	XLF	Financial Services	-0.8	-63.4	200902	2
Financials UltraSector ProFund	FNPIX	Equity Leverage	-1.7	-57	200902	6
First Trust STOXX European Select Dividend Index	FDD	Int’l Equity Income	-1.9	-60.7	200902	8
GE  Int’l Equity	GIEIX	Int’l Large-Cap Growth	-2	-63.9	200902	9
Glenmede Int’l Portfolio	GTCIX	Int’l Multi-Cap Value	-3.6	-60.2	200902	6
GMO Emerging Countries III	GMCEX	Emerging Markets	-3.1	-58.4	200902	8
GMO Emerging Markets III	GMOEX	Emerging Markets	-0.9	-67.5	200902	4
GMO Foreign III	GMOFX	Int’l Multi-Cap Value	-3.1	-64.4	200902	5
Goldman Sachs Asia Equity	GSAGX	Pacific Ex Japan	-3.6	-63.8	200902	5
Goldman Sachs Emerging Markets Equity	GEMIX	Emerging Markets	-2	-53.2	200902	9
Goldman Sachs Emerging Markets Equity Insights	GERIX	Emerging Markets	-4.1	-67.5	200902	8
Goldman Sachs Focused Int’l Equity	GSIFX	Int’l Multi-Cap Core	-2.9	-55.4	200902	5
Goldman Sachs Int’l Equity Insights	GCIIX	Int’l Multi-Cap Core	-4	-66.8	200902	8
Goldman Sachs Int’l Real Estate	GIRIX	Int’l Real Estate	-2.5	-59.4	200902	7
Goldman Sachs Strategic Int’l Equity	GSIKX	Int’l Multi-Cap Core	-2.5	-59.7	200902	10
Great-West MFS Int’l Value	MXIVX	Int’l Multi-Cap Growth	-2.5	-57.4	200902	7
Guggenheim BRIC ETF	EEB	Emerging Markets	-1.5	-57.5	200902	6
Guggenheim Investments CurrencyShares British Pound Sterling Trust	FXB	Alternative Currency Strategies	-4.3	-61.7	200902	4
Guggenheim S&P Global Dividend Opportunities Index ETF	LVL	Global Equity Income	-6.2	-58.8	200902	10
GuideMark World ex-US	GMWEX	Int’l Multi-Cap Growth	-1.6	-57.4	200902	6
GuideStone Funds: Int’l Equity	GIEYX	Int’l Multi-Cap Core	-1.9	-55.8	200902	4
Guinness Atkinson Funds: Alternative Energy	GAAEX	Global Natural Resources	-3.8	-60.2	200902	7
Guinness Atkinson Funds: Asia Focus	IASMX	Pacific Ex Japan	-1	-58	200902	7
Guinness Atkinson Funds: China & Hong Kong	ICHKX	China Region	-1.5	-58.2	200902	4
Harbor Int’l Growth	HAIGX	Int’l Multi-Cap Growth	-4.7	-62.5	200902	8
Hartford Int’l Growth	HNCYX	Int’l Multi-Cap Growth	-4.4	-63.8	200902	5
Hatteras Alpha Hedged Strategies	ALPHX	Absolute Return	-3.4	-60.6	200902	9
Horizon Spin-off and Corporate Restructuring	LSHAX	Global Small-/Mid-Cap	-1.2	-40.8	200902	1
ICON Emerging Markets	ICARX	Emerging Markets	-1.6	-57.3	200902	8
ICON Financial	ICFSX	Financial Services	-2.6	-67.7	200902	5
ICON Int’l Equity	ICNEX	Int’l Multi-Cap Growth	-4.2	-79.5	200902	10
INTECH Int’l Managed Volatility	JMIIX	Int’l Multi-Cap Growth	-2.8	-57.9	200902	4
Invesco Greater China	IACFX	China Region	-3.7	-68.2	200902	8
Invesco Intl Core Equity	IIBCX	Int’l Large-Cap Core	-2.7	-62.8	200902	10
Invesco Pacific Growth	TGRBX	Pacific Region	-1.8	-59.7	200902	6
iPath Exchange Traded Notes Bloomberg Livestock Subindex Total Return ETN	COW	Commodities Agriculture	-2.6	-61.9	200902	9
iPath Exchange Traded Notes Bloomberg Nickel Subindex Total Return ETN	JJN	Commodities Base Metals	-2.1	-57.6	200902	5
iPath Exchange Traded Notes iPath GBP/USD Exchange Rate ETN Medium-Term Notes	GBB	Alternative Currency Strategies	-5.2	-66.7	200902	10
iShares China Large-Cap ETF	FXI	China Region	-2.2	-59.3	200902	8
iShares Europe ETF	IEV	European Region	-3.1	-61.9	200902	9
iShares Global Financials ETF	IXG	Global Financial Services	-2.2	-58.8	200902	5
iShares Global Utilities ETF	JXI	Utility	-2.6	-58	200902	6
iShares MSCI Austria Capped ETF	EWO	European Region	-1.7	-54.8	200902	6
iShares MSCI Belgium Capped ETF	EWK	European Region	-1.2	-61.6	200902	8
iShares MSCI EAFE Value ETF	EFV	Int’l Large-Cap Value	-5.9	-57	200902	7
iShares MSCI Emerging Markets ETF	EEM	Emerging Markets	-2.5	-60.5	200902	6
iShares MSCI Eurozone ETF	EZU	European Region	-4.4	-67.3	200902	8
iShares MSCI France ETF	EWQ	European Region	-2	-56.1	200902	3
iShares MSCI Italy Capped ETF	EWI	European Region	-3.9	-72.8	200902	8
iShares MSCI South Korea Capped ETF	EWY	Pacific Ex Japan	-2.3	-57.7	200902	8
iShares MSCI Spain Capped ETF	EWP	European Region	-3.5	-60.6	200902	5
iShares US Broker-Dealers ETF	IAI	Financial Services	-3.1	-58.2	200902	6
iShares US Financial Services ETF	IYG	Financial Services	-10.9	-63.3	201501	6
iShares US Financials ETF	IYF	Financial Services	-2.3	-69.7	200902	7
Ivy Emerging Markets Equity	IPOAX	Emerging Markets	-0.6	-30.4	200903	4
Ivy European Opportunities	IEOAX	European Region	-7.2	-94.4	200903	10
Jacob Small Cap Growth	JSCGX	Small-Cap Growth	-2.6	-66	200902	9
Janus Overseas	JNOSX	Int’l Multi-Cap Growth	-4.7	-64.2	200902	7
John Hancock Greater China Opportunities	JCOIX	China Region	-0.3	-43.3	200902	7
John Hancock Int’l Core	GIDEX	Int’l Multi-Cap Value	-4.6	-63.3	200902	9
JPMorgan Emerging Markets Equity	JMIEX	Emerging Markets	-1.2	-42.8	200903	6
JPMorgan Int’l Research Enhanced Equity	OIEAX	Int’l Multi-Cap Core	-5.2	-60.2	200902	7
JPMorgan Int’l Value	JNUSX	Int’l Large-Cap Value	-0.9	-50.1	200902	1
JPMorgan Intrepid Int’l	JFTAX	Int’l Multi-Cap Core	-3.6	-64.5	200902	8
Lord Abbett Int’l Core Equity	LICYX	Int’l Multi-Cap Core	-2.7	-58.9	200902	9
LWAS/DFA Int’l High Book to Market	DFHBX	Int’l Multi-Cap Value	-4	-61.8	200902	9
Madison Hansberger Int’l Growth	HITGX	Int’l Multi-Cap Growth	-3.6	-59	200902	5
MainStay Int’l Equity	MINEX	Int’l Multi-Cap Growth	-1.4	-69.6	200902	10
Marketocracy Masters 100	MOFQX	Global Multi-Cap Growth	-1.5	-26.5	200902	3
Marsico Int’l Opportunities	MIOFX	Int’l Multi-Cap Growth	-2.5	-59.3	200902	9
MassMutual Select Diversified Int’l	MMZSX	Int’l Large-Cap Value	-3.7	-51.4	200902	8
MFS Emerging Markets Equity	MEMAX	Emerging Markets	-2.3	-35.7	200902	10
Midas	MIDSX	Precious Metals Equity	-5.1	-58	200902	4
Mobile Telecommunications UltraSector ProFund	WCPIX	Equity Leverage	-8.9	-67.5	200902	9
MSIF Active Int’l Allocation	MSACX	Int’l Large-Cap Core	-2.1	-69	200902	10
MSIF Emerging Markets Portfolio	MGEMX	Emerging Markets	-5.1	-67.9	200902	8
MSIF Int’l Real Estate Portfolio	MSUAX	Int’l Real Estate	-6.9	-79.6	200902	10
Nationwide Bailard Int’l Equities	NWHLX	Int’l Multi-Cap Core	-3.7	-57.3	200902	7
Nationwide Int’l Index	GIXIX	Int’l Multi-Cap Core	-4.6	-53.9	200902	6
New Century Int’l	NCFPX	Int’l Multi-Cap Core	-5.9	-65.5	200902	6
Northern Emerging Markets Equity Index	NOEMX	Emerging Markets	-2.6	-59.2	200902	7
Northern Int’l Equity Index	NOINX	Int’l Large-Cap Core	-9	-66.2	200902	9
Northern Multi-Manager Int’l Equity	NMIEX	Int’l Multi-Cap Growth	-2.9	-68.4	200902	7
Nysa	NYSAX	Small-Cap Growth	-2.3	-53.8	200902	6
Oppenheimer Int’l Value	QIVAX	Int’l Multi-Cap Core	-8.3	-60.7	200902	7
Optimum Int’l	OIIEX	Int’l Multi-Cap Growth	-2.8	-60.4	200902	9
PACE Int’l Emerging Markets Equity	PCEMX	Emerging Markets	-1.8	-69	200902	7
PACE Int’l Equity Investments	PCIEX	Int’l Multi-Cap Growth	-4.7	-69.1	200902	8
Pacific Financial Int’l	PFGIX	Int’l Multi-Cap Core	-2.7	-62.7	200902	8
Parametric Tax-Managed Int’l Equity	ETIGX	Int’l Multi-Cap Core	-2.1	-62.4	200902	9
Pear Tree PanAgora Emerging Markets	QFFOX	Emerging Markets	-4.8	-74.8	200902	7
Pioneer Emerging Markets	PEMFX	Emerging Markets	-1.7	-67.2	200902	8
Pioneer Int’l Equity	PIIFX	Int’l Multi-Cap Core	-7.6	-73.1	200902	10
PowerShares DB G10 Currency Harvest	DBV	Alternative Currency Strategies	-4.7	-63.4	200902	4
PowerShares Global Listed Private Equity	PSP	Global Financial Services	-1.6	-56.9	200902	7
PowerShares Golden Dragon China	PGJ	China Region	-3.2	-55	200902	7
PowerShares S&P Int’l Developed Quality	IDHQ	Int’l Small/Mid-Cap Growth	-0.5	-56.2	200902	4
Principal Diversified Int’l	PINPX	Int’l Multi-Cap Growth	-2.2	-57.9	200902	5
Principal Int’l Emerging Markets	PEPSX	Emerging Markets	-5	-66	200902	10
ProShares Ultra Financials	UYG	Equity Leverage	-6.2	-61.6	200902	8
ProShares Ultra Real Estate	URE	Equity Leverage	-1.3	-59.6	200902	9
ProShares Ultra S&P500	SSO	Equity Leverage	-3	-57.2	200902	6
Prudential QMA Int’l Equity	PJIZX	Int’l Multi-Cap Core	-1.9	-58.3	200902	6
Putnam Global Utilities	PUGIX	Utility	-3.6	-66	200902	7
Putnam Int’l Equity	POVSX	Int’l Multi-Cap Core	-4.8	-62.2	200902	8
Putnam Int’l Value	PNGAX	Int’l Large-Cap Value	-4.8	-65	200902	10
QS Emerging Markets	LMEMX	Emerging Markets	-6.2	-71.3	200902	8
QS Int’l Equity	LMGEX	Int’l Multi-Cap Core	-1.9	-54.6	200902	2
Schneider Value	SCMLX	Multi-Cap Value	-2.4	-64.5	200902	6
Real Estate UltraSector ProFund	REPIX	Equity Leverage	-2.5	-60.3	200902	9
RidgeWorth Int’l Equity	STITX	Int’l Large-Cap Growth	-7.7	-63.3	200903	5
Rising Rates Opportunity 10 ProFund	RTPIX	Dedicated Short Bias	-6.3	-65.6	200902	7
Rising Rates Opportunity ProFund	RRPIX	Dedicated Short Bias	-1.8	-59.5	200902	5
RS Emerging Markets	GBEMX	Emerging Markets	-2.2	-57.2	200902	6
Russell Int’l Developed Markets	RINYX	Int’l Multi-Cap Core	-4	-63.1	200902	5
Rydex  Banking	RYKIX	Financial Services	-5.3	-66.8	200902	8
Rydex Financial Services	RYFIX	Financial Services	-1.5	-57.4	200902	6
Rydex Inverse Government Long Bond Strategy	RYJUX	Specialty Fixed Income	-5.2	-68.3	200902	7
Rydex Long Short Equity	RYSRX	Alternative Long/Short Equity	-6.2	-65	200902	7
Rydex Multi-Hedge Strategies	RYMQX	Alternative Multi-Strategy	-4.8	-71.8	200902	8
Rydex Telecommunications	RYMIX	Telecommunication	-1.1	-51.1	200902	10
Rydex: Europe 1.25x Strategy	RYEUX	Equity Leverage	-3.7	-63.2	200902	10
SA Int’l Value	SAHMX	Int’l Multi-Cap Value	-4	-32.5	201602	3
Salient EM Dividend Signal Inst	PTEMX	Emerging Markets	-3.7	-60.9	200902	6
Salient Int’l Dividend Signal Inv	FFINX	Int’l Equity Income	-4.2	-68.1	200902	8
Salient Int’l Real Estate Inst	KIRYX	Int’l Real Estate	-2	-56.1	200902	5
Sanford C Bernstein Emerging Markets	SNEMX	Emerging Markets	-2.2	-59.2	200902	7
Sanford C Bernstein Int’l	SIMTX	Int’l Multi-Cap Growth	-1.9	-51.6	200902	3
Sanford C Bernstein Tax-Managed Int’l	SNIVX	Int’l Multi-Cap Growth	-4	-65.3	200902	6
Saratoga Advantage Financial Services	SFPAX	Financial Services	-1.9	-55.4	200902	5
Saratoga Advantage Int’l Equity	SIEPX	Int’l Multi-Cap Core	-1	-89.4	200902	7
Schroder Emerging Market Equity	SEMNX	Emerging Markets	-4.4	-59.9	200902	6
SEI  Emerging Markets Equity	SIEMX	Emerging Markets	-2	-34.1	200901	10
SEI Enhanced Income A	SEEAX	Multi-Sector Income	-2.3	-64.9	200902	2
SEI Int’l Equity	SEITX	Int’l Multi-Cap Core	-1.2	-62.6	200902	10
SEI World Equity Ex-US A	WEUSX	Int’l Multi-Cap Growth	-7.5	-61.1	200902	4
Shelton European Growth & Income	EUGIX	European Region	-14.1	-72.9	201501	3
Shelton Greater China	SGCFX	China Region	-1	-66	200902	3
Sit Developing Markets Growth	SDMGX	Emerging Markets	-3.6	-66.6	200902	8
Sit Int’l Growth	SNGRX	Int’l Multi-Cap Growth	-3.4	-59.4	200902	9
SPDR EURO STOXX 50 ETF	FEZ	European Region	-2.9	-55.9	200902	6
SPDR S&P Bank ETF	KBE	Financial Services	-3.3	-64	200902	10
SPDR S&P BRIC 40 ETF	BIK	Emerging Markets	-1.9	-59.9	200902	7
SPDR S&P Capital Markets ETF	KCE	Financial Services	-2	-63.3	200902	10
SPDR STOXX Europe 50 ETF	FEU	European Region	-1.5	-85.4	200902	7
SSgA Int’l Stock Selection	SSAIX	Int’l Multi-Cap Value	-3.6	-61	200902	9
STAAR Int’l	SITIX	Int’l Multi-Cap Core	-1.4	-66.1	200902	10
State Farm Int’l Equity	SFFAX	Int’l Large-Cap Growth	-2.6	-61.1	200902	10
State Farm Int’l Index	SIIAX	Int’l Multi-Cap Core	-3.7	-91	200902	10
State Street Disciplined Emerging Markets Equity	SSEMX	Emerging Markets	-4.4	-62.6	200902	6
Steward Int’l Enhanced Index	SNTCX	Int’l Large-Cap Core	-5.1	-65	200902	6
Stonebridge Small-Cap Growth	SBSGX	Small-Cap Core	-2.5	-74.4	200902	9
Strategic Advisers Int’l II	FUSIX	Int’l Multi-Cap Growth	-3.6	-62.7	200902	10
SunAmerica Int’l Dividend Strategy	SIEAX	Int’l Equity Income	-1.6	-60.2	200902	7
T Rowe Price Emerging Markets Stock	PRMSX	Emerging Markets	-12.7	-86.9	201205	8
T Rowe Price Institutional Emerging Markets Equity	IEMFX	Emerging Markets	-1.2	-66.8	200902	10
Target Int’l Equity Portfolio	TAIEX	Int’l Multi-Cap Core	-1.7	-57.7	200902	7
Templeton BRIC	TABRX	Emerging Markets	-2.1	-55.6	200902	5
Templeton Developing Markets	TEDMX	Emerging Markets	-3.4	-58.5	200902	4
Templeton Emerging Markets	TEEMX	Emerging Markets	-1	-68.7	200902	6
Thomas White Int’l	TWWDX	Int’l Multi-Cap Growth	-1.7	-67	200902	9
TIAA-CREF Int’l Equity	TIIEX	Int’l Multi-Cap Growth	-16.2	-88	201512	10
Timothy Plan Int’l	TPIAX	Int’l Large-Cap Core	-20.4	-89.5	200902	9
Touchstone Int’l Value	FSIEX	Int’l Multi-Cap Value	-2.3	-58.9	200902	4
Transamerica Global Equity	IMNAX	Global Multi-Cap Core	-2	-60.3	200902	6
Transamerica Partners Int’l Equity	DVIEX	Int’l Multi-Cap Core	-4.3	-46.3	200903	10
UltraEmerging Markets ProFund	UUPIX	Equity Leverage	-4.6	-67.1	200902	5
UltraInt’l ProFund	UNPIX	Equity Leverage	-6.2	-68.5	200902	10
UltraJapan ProFund	UJPIX	Equity Leverage	-8.4	-67.4	200902	3
US Global Investors China Region	USCOX	China Region	-4.3	-69.1	200902	9
USAA Emerging Markets	USEMX	Emerging Markets	-2.9	-64.1	200902	10
Van Eck Emerging Markets	GBFAX	Emerging Markets	-17.9	-85.2	201207	10
VanEck Vectors Uranium+Nuclear Energy ETF	NLR	Global Natural Resources	-4.8	-64.6	200902	6
Vanguard Emerging Markets Stock Index	VEIEX	Emerging Markets	-7.7	-88.8	200902	7
Vanguard FTSE All-World ex US Index ETF	VEU	Int’l Multi-Cap Core	-4.7	-65.1	200902	10
Vanguard Total Int’l Stock Index	VGTSX	Int’l Multi-Cap Core	-8.3	-52.6	201511	1
Vantagepoint Funds: Overseas Equity Index	VPOIX	Int’l Multi-Cap Core	-7.6	-49	201602	1
Victory Trivalent Int’l-Core Equity	MICIX	Int’l Multi-Cap Core	-2.4	-54.5	200902	3
Voya Diversified Int’l	IFFIX	Int’l Multi-Cap Core	-14	-91.8	200902	10
Voya Int’l Real Estate	IIRIX	Int’l Real Estate	-16	-79.9	201603	8
Wells Fargo Diversified Int’l	SILAX	Int’l Multi-Cap Core	-15.2	-75.3	201603	6
Wells Fargo Int’l Equity	WFEBX	Int’l Multi-Cap Core	-3.4	-63	200901	7
Wells Fargo Int’l Value	WFFAX	Int’l Multi-Cap Value	-5.8	-63.3	200902	5
William Blair Emerging Markets Growth	BIEMX	Emerging Markets	-5	-57.9	200902	8
William Blair Funds Int’l Equity	WIIEX	Int’l Multi-Cap Growth	-8	-72.1	200902	2
William Blair Int’l Equity I	WIEIX	Int’l Multi-Cap Growth	-1.8	-43.5	200902	3
William Blair Int’l Growth	WBIGX	Int’l Multi-Cap Growth	-20.5	-91.8	200902	10
Wilmington Multi-Manager Int’l	MVIEX	Int’l Multi-Cap Growth	-12.8	-87.1	200902	8
WisdomTree Global ex-US Real Estate	DRW	Int’l Real Estate	-14.9	-92	200910	9
WisdomTree Global ex-US Utilities	DBU	Utility	-4.3	-53	200902	6
WisdomTree Global High Dividend	DEW	Global Equity Income	-7.6	-54.6	201602	1
WisdomTree Int’l Dividend ex-Financials	DOO	Int’l Equity Income	-5.1	-51.3	200902	2
WisdomTree Int’l High Dividend	DTH	Int’l Equity Income	-5	-66	200902	6
WisdomTree Int’l LargeCap Dividend	DOL	Int’l Equity Income	-3.6	-30.8	201602	4
Wright Int’l Blue Chip Equities	WIBCX	Int’l Large-Cap Core	-2.6	-62.1	200902	8

By David Snowball

Dear friends,

There are days in spring when I’m not sure whether what I’m hearing is ticking or dripping. My students know that the end of the school year is nigh. If they glance up from their phones, it’s to glance out the window and across Augustana’s campus. It’s always pretty here, even in November, but there are about four to six weeks when it’s absolutely stunning. For three weeks in spring, the central campus is festooned with blossoms as serviceberry, cherry, apple, and lilac erupt. Again in October the maples dominate, painting the campus crimson and gold.

It’s glorious!

Unless you’re trying to get students to learn about Nazi rhetorical strategies and the parallel strategies of demonization used across cultures. If you do that, then you hear the rhythmic tick, tick, tick as they count down the final weeks of the year.

Or is it the slower drip, drip, drip as their brains leak out of their ears and their IQs puddle on the classroom floor?

And still we find joy in the occasional glimpses of the tremendous growth they’ve already experienced and in the prospect that, come fall, they’ll be back, cheerful and recharged.

At least, until those durn maples take over.

The Dry Powder Gang, revisited

“Put your trust in God but keep your powder dry.”

Oliver Cromwell, 1650, to the soldiers of the New Model Army as they prepared to forge an Irish river and head into battle.

Cromwell was a dour, humorless (or “humourless”) religious fanatic charged with squashing every Catholic and every independent thought in the British Isles because, well, that’s what God demanded. Famine, plague, deportations, mass death and deportations followed.

But even Cromwell knew that the key to victory was prudent preparation; faith did not win battles in the absence of the carefully stocked dry gunpowder that powered the army. There were times to charge ahead and there were times to gather powder.

With investing likewise: there are times to be charge ahead and times to withdraw. Most investors struggle with that decision. Why?

1. Most investment products feed our worst impulses. The investment industry has come to be dominated by passive, fully-invested products over the past five years; not coincidentally, that period has seen just one break in the upward rush. In cap-based funds, more money goes to the best performing stocks in the index so markets get driven by the momentum of fewer and fewer stocks. In 2015, for instance, just four stocks accounted for the S&P 500’s entire gain.
2. Most professional investors worry more about accumulating assets than about serving investors. By most measures, the U.S. stock market is substantially overpriced but the cash reserves at mutual funds are at their lowest levels in history. Why? Because, as Jason Zweig writes, “cash is now a sin.” Cash is a drag on short-term returns and investors fixated on 1/3/5 year returns have poured their money into funds that are fully invested all the time, both index products and the cowardly “active” managers who merely shadow them. The technical term for “skilled investors who do not attract assets to the firm” is “unemployed.”
3. Most of us are too optimistic. Most guys think of themselves as “good investors” or “above average” investors, mostly because “good” is such a vague term and almost none of us actually know how or what we’ve done. Quick quiz: what’s your personal rate of return over the last five years? How much of your portfolio was invested cautiously as the market approached its top in October 2007 and how much was invested aggressively at its bottom in March 2009? The honest answers for most of us are “dunno, dunno, dunno.”

It’s not just about investing. 95% of us think we’re above average drivers. One 1965 study of drivers responsible for car accidents that put people in the hospital found the same: the majority of those drivers rated themselves as “really good.” Jason Zweig talked through a lot of the research and its implications in chapter four of his book Your Money and Your Brain (2007). We originally linked to what turned out to be a plagiarized version of Jason’s work, masquerading as an advisor’s newsletter. (Thanks to Jason for letting us know of the goof.)

The result is that we’re tempted to take on too much risk, sublimely confident that it will all work out.

But it won’t. It never does. You need a manager who’s got your back, and you need him now. Here are three arguments in three pictures.

Argument one: stock prices are too danged high.

This chart shows valuation of the US stock market back to 1880; numbers get really sketchy before that. Valuation, on the left axis, is the CAPE P/E ratio which tries to adjust for the fact that earnings tend to be “lumpy” so it averages them over time. The “mean” line is the average value over 140 years. The adjacent red lines mark the boundaries of one standard deviation from the normal. That reflects the prices you’d expect to see in two years out of three. If you get above the two S.D. line, those are once in 20 years prices. Three standard deviation prices should occur once in 300 years.

The U.S. market went over a CAPE P/E of 24 just three times in the 20^th century; it’s lived there in the 21^st. The market’s P/E at its February 2016 bottom was still higher than the P/E at its October 2007 top.

Argument two: Price matters.

If you overpay for something, whether it’s $72 million for a “franchise quarterback” who’s only started seven NFL games ever, or 115 years’ worth of earnings for a share of Netflix stock, you’re going to be disappointed.

The chart above reflects the stock market’s valuation (measured by the value of the stock market as a percentage of the value of the “real economy,” so when the blue line is high, stocks are relatively inexpensive) overlaid with its returns over the following 12 years. With considerable consistency, price predicts future returns. By this measure, U.S. stocks are priced to return 2% a year. The only ways for that number to go up is for the U.S. economy to grow at an eye-watering rate or for prices to come down. A lot. Based on the market’s performance over the past 60 years, the folks at the Leuthold Group find that a return to the valuations seen in the average bear market would require a fall of 30-40% from where we were at the end of March. Given that earnings have deteriorated and prices have risen in the 30 days since then, you might need to add a point or two to the decline.

Argument three: Market collapses are scary

I think of this as “the icicle chart.” Ben Carlson, one of the Ritholtz managers, wrote a really thoughtful essay, rich in visuals, in April. He posted it on his Wealth of Commonsense blog under the name “180 years of market drawdowns.” He provided this graph as an antidote to those relentlessly cheerful logarithmic “mountain charts.” Those are the ones that show the stock market’s relentless climb with just niggling little “oopsies” from time to time. Losing half your portfolio is, viewed from the perspective of a few decades or a century, just a minor annoyance. Losing half your portfolio is, viewed from the perspective of a guy who needs to meet a mortgage, fund a college education and plan for the end of a teaching career, rather a bigger deal. Mr. Carlson concludes:

…stocks are constantly playing mind games with us. They generally go up but not every day, week, month or year. No one can predict what the future returns will be in the market … But predicting future risk is fairly easy — markets will continue to fluctuate and experience losses on a regular basis.

Market losses are the one constant that don’t change over time — get used to it.

Managers who’ve got your back

There are only a handful of managers left who take all of that seriously. The rest have been driven to unemployment or retirement by the relentless demand: fully invested, price be damned. They typically follow a simple model: stock by stock, determine a reasonable price for everyone in our investable universe. Recognize that stocks are risky, so buy them only when they’re selling at a healthy discount to that price. Hold them until they’re around full value, then move on regardless of whether their prices are still rising. Get out while the getting is good. If you can’t find anything worth buying today, hold cash, keep your powder dry and know that the next battle awaits.

They bear a terrible price for hewing to the discipline. Large firms won’t employ them since large firms, necessarily, value “sticky assets” above all else. 99.7% of the investment community views them as relics and their investors steadily drift away in favor of “hot hands.”

They are, in a real sense, the individual investor’s best friends. They’re the people who are willing to obsess over stocks when you’d rather obsess over the NFL draft or the Cubs’ resurgence. And they’re willing, on your behalf, to walk away from the party, to turn away from the cliff, to say “no” and go. They are the professionals who might reasonably claim …

This chart reflects every equity-oriented mutual fund that currently has somewhere between “a lot” and “the vast majority” of their portfolio in cash, awaiting the return of good values. Here’s how to read it. The first two columns are self-explanatory. The third represents how their portfolios have been repositioned between 2011 (when there are still reasonable valuations) and now. Endurance, for example, had two-thirds of its money in stocks in 2011 but only a quarter invested now. The fourth column is fund’s annual return for the period noted (full market cycle or since inception). The fifth shows the fund’s Sharpe ratio, a measure of risk-adjusted returns, against its peers. The sixth column shows you how its performed, again relative to its peer group, in bear market months. The last column is the comparison time frame. I’ve marked decisive superiority in blue, comparable performance in amber and underperformance in red. All data is month end, March 2016.

	Style	Change in equity exposure from 2011 – 2016	Annual return	Sharpe ratio, compared to peers	Bear market rating, compared to peers	Comparison period
Intrepid Endurance ICMAX	Small-cap value	64%->24%	8.0%	0.64 vs 0.23	1 vs 6	FMC
Bruce BRUFX	Flexible	41 -> 46	7.2	0.56 vs 0.22	4 vs 6	FMC
FPA Crescent FPACX	Flexible	57 -> 52	6.0	0.54 vs 0.22	4 vs 6	FMC
Centaur Total Return TILDX	Equity-income	89 -> 40	7.4	0.51 vs 0.30	1 vs 5	FMC
Pinnacle Value PVFIX	Small-cap core	51 -> 52	3.9	0.41 vs 0.24	1 vs 6	FMC
Intrepid Disciplined Value ICMCX	Mid-cap value	81 -> 51	5.4	0.37 vs 0.29	1 vs 6	FMC
Frank Value FRNKX	Mid-cap core	83 -> 40	5.4	0.25 vs 0.27	1 vs 6	FMC
Hennessy Total Return HDOGX	Large-cap value, Dogs of the Dow	73 -> 51	3.4	0.24 vs 0.20	4 vs 4	FMC
Bread & Butter BABFX	Multi-cap value	69 -> 58	2.8	0.18 vs 0.21	1 vs 6	FMC
Funds with records >5 years but less than the full market cycle
Cook & Bynum COBYX	Global large-cap core	67% -> 54%	9.6%	1.21 vs 0.61	1 vs 6	08/2009
Castle Focus MOATX	Global multi-cap core	67 -> 66	7.5	1.02 vs 0.63	1 vs 6	08/2010
ASTON / River Road Independent  Value ARIVX	Small-cap value	49 -> 18	4.1	0.61 vs 0.50	1 vs 6	01/2011
Chou Opportunity CHOEX	Flexible	74 -> 51	1.4	0.07 vs 0.62	10 vs 6	08/2010
Two plausible benchmarks
Vanguard Total Stock Market VTSMX	Multi-cap core	100 -> 100	5.8%	0.32	4	FMC
Vanguard Balanced Index VBINX	Hybrid	60 -> 60	5.6%	0.52	1	FMC

There are four funds just beyond the pale: the funds have shorter records (though the managers often have long ones in other vehicles) but have disciplined investors at the helm and lots of cash on the books. They are:

Goodhaven GOODX

Hussman Strategic Dividend Value HSDVX

Linde Hansen Contrarian Value LHVAX

Poplar Forest Outlier PFOFX

No single measure is perfect and no strategy, however sensible, thrives in the absence of a sufficiently talented, disciplined manager. This is not a “best funds” list, much less a “you must buy it now, now, now!” list.

Bottom Line: being fully invested in stocks all the time is a bad idea. Allowing greed and fear, alternately, to set your market exposure is a worse idea.  Believing that you, personally, are magically immune from those first two observations is the worst idea of all.

You should invest in stocks only when you’ll be richly repaid for the astronomical volatility you might be exposed to.  Timing in and out of “the market” is, for most of us, far less reliable and far less rewarding than finding a manager who is disciplined and who is willing to sacrifice assets rather than sacrifice you. The dozen teams listed above have demonstrated that they deserve your attention, especially now.

 

Garbage in, garbage out: The 1/3/5/10 follies

On whole, we are not fans of reporting a fund’s one, three, five or even ten year records. In a dyspeptic moment I might suggest that the worship of standard reporting periods is universal, lunatic, destructive, obligatory, deluding, crippling, deranged, lazy, unwise, illogical and mayhap phantasmagoric.

On whole, I’d prefer that you not do it.

The easiest analogy might be to baseball. Here’s a quick quiz. Which of these statements is most meaningful to a baseball fan?

(a) My team won the last one, three and five innings!
(b) My team won the game.

We think it’s more useful to assess how a manager has performed over a full market cycle; that is, in good time and bad. The current market cycle began in October 2007, the day that the previous cycle reached its final peak and the market began its historic tumble. This cycle has included both a 51% loss for US large caps and a 223% rise. Folks who held on through both are up about 58% since the cycle began. That’s punky compared to the cycle that dominated the 1990s (up 533%) but durned fine compared to the cycle that ended in 2007 with a tiny 14% gain over seven years.

If you don’t judge your investments by meaningful measures, you cannot make meaningful decisions. Here’s a simple illustration.

If you look at the past 12 months, the Vanguard 500 Index is up 1.8% (through the end of March) and FPA Crescent is down 2.4%. Conclusion: Crescent sucks, buy the index!

Over the past three years, the 500 is up 39% and Crescent is up 18.6%. More sucking.

Over the past five years, the 500 is up 71% and Crescent is up 38%. Maximum suckage! But so far, we’re measuring only raw performance in the good times.

Over the course of the full market cycle, including the 2007-09 crash, Crescent is up 64% to the 500’s gain of 58%. More importantly, the index subjected its investors to a 51% decline compared to Crescent’s 29% drop. In bear market months, Crescent’s investors have slipped 7%, while the index investors dropped 11%.

We weigh the balance of your risks and returns by computing measures of risk-adjusted performance, such as the Sharpe and Martin ratios. Taking both halves of the equation (risk and return) into account and measuring performance over a meaningful period (the full market cycle), Crescent clubs the index.

	Sharpe	Martin	Ulcer Index
Crescent	0.54	0.72	7.9
Vanguard 500	0.32	0.30	17.6

Three quick points:

1. It’s easy to disastrously misjudge a fund when you rely on the wrong metrics; we think that arbitrary time periods and returns without consideration of risks are the disastrously wrong metrics.
2. It’s not just that funds like Crescent serve their investors better, it’s that funds such as Crescent serve long-term investors decisively better. Over time, they allow their investors to both eat well and sleep well.
3. The key is a manager’s willingness to let money walk out the door rather than betray his investors and his standards. In the late 1990s, GMO – a staunchly contrarian bunch who would not bend to the demands of investors blinded by the market’s 50-60% annual gains – lost over half of its assets. Crescent has lost $5 billion. Centaur, Intrepid, Pinnacle – all down by 50% or more all because they’ve refused to sell out to an increasingly narrow, extraordinarily overpriced bull market that’s approaching its eighth year.

Eight years of gains. Wow.

Had I mentioned, per Leuthold, that the only other bull market to reach its eight year anniversary ended in 1929?

Who has served their investors best?

Using Charles’s fund data screener at MFO Premium, I searched among the funds that predominately invest in U.S. equities for those with the highest risk-adjusted returns over the full market cycle.

This table shows the funds with the highest Sharpe ratios, along with supplemental risk-return measures. It’s sorted by Sharpe but I’ve also highlighted the top five funds (more in the case of a tie) in each measure with Vanguard’s Total Stock Market Index added as a sort of universal benchmark.

		Category	Ulcer Index	Sharpe Ratio	Sortino Ratio	Martin Ratio
			Lower is better	Higher	Higher	Higher
Reynolds Blue Chip Growth	RBCGX	Multi-C Growth	5.9	0.68	1.15	1.76
Intrepid Endurance	ICMAX	SC Value	4.6	0.64	1.13	1.68
Monetta Young	MYIFX	Multi-C Core	10.6	0.6	0.97	0.91
AMG Yacktman Focused	YAFFX	LC Core	8.4	0.58	0.97	1.16
AMG Yacktman	YACKX	LC Core	9.2	0.57	0.94	1.01
Parnassus Core Equity	PRBLX	Equity Income	9.2	0.57	0.82	0.88
Bruce	BRUFX	Flexible Portfolio	12	0.56	0.81	0.57
First Trust Value Line Dividend Index	FVD	Multi-C Value	12.3	0.56	0.8	0.64
American Century NT Mid Cap Value	ACLMX	Multi-C Value	11.2	0.55	0.8	0.77
Intrepid Capital	ICMBX	Flexible Portfolio	6.3	0.55	0.82	0.94
Parnassus Endeavor	PARWX	Multi-C Core	10.9	0.55	0.86	0.94
Prospector Opportunity	POPFX	Mid-Cap Core	8.6	0.55	0.83	0.86
FPA Crescent	FPACX	Flexible Portfolio	7.9	0.54	0.77	0.72
Vanguard Dividend Growth	VDIGX	Equity Income	11	0.54	0.78	0.66
American Century Mid Cap Value	ACMVX	Multi-C Value	11.4	0.53	0.77	0.73
BBH Core Select	BBTEX	LC Core	9.4	0.53	0.77	0.76
Marsico Flexible Capital	MFCFX	Flexible Portfolio	13.5	0.52	0.8	0.65
Nicholas Equity Income	NSEIX	Equity Income	10.8	0.52	0.77	0.73
Centaur Total Return	TILDX	Equity Income	9	0.51	0.8	0.79
PRIMECAP Odyssey Aggressive Growth	POAGX	Mid-Cap Growth	15.8	0.51	0.79	0.66
Principal MidCap	PMBPX	Multi-C Growth	13.6	0.51	0.73	0.62
Fidelity Small Cap Discovery	FSCRX	SC Core	11.5	0.5	0.76	0.94
Nicholas	NICSX	Multi-C Growth	13	0.5	0.73	0.65
Pioneer Fundamental Growth	PIGFX	LC Growth	11.6	0.5	0.75	0.62
American Century Equity Income	TWEIX	Equity Income	11.1	0.48	0.68	0.5
For comparison
Vanguard Total Stock Market	VTSMX		17	0.32	0.46	0.32

Things that stand out:

1. Small, independent firms dominate the list. The ten largest fund complexes account for about two-thirds of the industry’s $18 trillion in assets. And yet, between them, they managed to produce two or three funds (depending on how you think about Primecap) on the list. American Century, a mid-sized firm, managed three. Intrepid, Nicholas, Parnassus and Yacktman each appeared twice and most appeared frequently on our top 50 list.
2. Active managers dominate the list. Only one index fund finished among the top 25. Only seven of the top 50 funds are passive products. If you sort by our most risk-sensitive measure, the Ulcer Index, only three passive products place in the top 50. Apparently “fully invested all the time” costs more than low fees save.
3. At most this is a place to start, not a place to end your inquiries. There are some truly excellent funds on the list and some whose presence might well be seriously misleading. Reynolds Blue Chip Growth, for instance, benefits a great deal by its decision to go entirely to cash before the market crashed in 2007. It outperformed its peers by 36% in the downturn but, other than for that one fortuitous move, has mostly trailed them in measures of both risk and return before and since.

Bottom line: The stock market, like war, is famous for “Months of boredom punctuated by moments of terror.” It’s those “moments of terror” that you’ve got to watch out for. That means you must look at how a manager serves you in both periods rather than limiting yourself to the “what have you done for me lately?” mindset.

My colleague Charles Boccadoro has been poring over oceans of data available through our premium fund screener. In the following story, he looks beyond the realm of individual funds to look for which fund families, including some fascinating smaller entrants, get it right most consistently.

Fund Family Scorecard

We started looking at fund family performance two years ago, first in June 2014 commentary with How Good Is Your Fund Family?, and then An Update in May 2015.

Below please find our MFO Family Fund Scorecard for May 2016, which reflects fund performance through 1st quarter. As a reminder, the card measures how well each fund in a family has performed against its peers since inception (or at least back to January 1960, which starts our Lipper database). Performance is absolute total return, reflecting reinvested dividends, but inclusive of fees and maximum front load, if applicable. The card groups families by quintile. (Download pdf version here.)

Some changes to methodology since last year:

• Categories now reflect those used by Lipper versus Morningstar, as discussed in Comparing Lipper Ratings. Similarly, all categories except money market are included, even so-called trading categories.
• Reduced from five to three the number of funds required to comprise a “fund family.” These changes respond to reader feedback from last year’s score card (eg., Where’s PRIMECAP?).
• Reduced from three years to just three months the minimum age for evaluation. Reasoning here being the desire to get heads-up of which young families are beating their peers out of the gate (eg., Grandeur Peak).

The result is about 400 “fund families,” or more precisely fund management companies; distilled from the 9,350 funds overall, oldest share class only.

We recognize the card is flawed from the start. Results can be skewed by multiple factors, including survivorship-bias, share class differences, “improper” categorization, adviser and fund ownership changes, multiple sub-advisers, and inconsistent time frames … three months is too short to matter, lifetime is too long to care.  Flaws notwithstanding, there is value in highlighting families that, for example, have not had a single fund beat its category average since inception. Like our legacy Three Alarm designation, prospective investors should ask: Why is that?

Take Saratoga Capital Management who is celebrating 20 years and offers a line-up of mutual funds as “The Portfolios of the Saratoga Advantage Trust.” From its brochure: “There are over 22,000 investment management firms in the United States. How do you choose the right one? Research, research and more research.” Fourteen of the funds offered in its line-up are managed by Saratoga itself. Average age: 15.6 years. How many have beaten average return in their respective categories? None. Zero. 0.

Fact is all seventeen funds in the Saratoga Advantage line-up have underperformed category average since inception. Why is that?

On a more positive note, a closer look at a couple groupings …

Good to see: Vanguard heads list of Top Families with Largest Assets Under Management (AUM), along with other shareholder friendly firms, like Dodge & Cox.

And, a nod to the young and unbeaten … a short list of top families where every fund beats its category average.

Gotham is led by renowned investor Joel Greenblatt. As for Grandeur Peak, David has been an outspoken champion since its inception. Below are its MFO Ratings (click image to enlarge):

MFO Fund Family Scorecard will soon be a regular feature on our Premium site, updated monthly, with downloadable tables showing performance and fund information for all families, like average ER, AUM, load, and shares classes.

All That Glitters …

By Edward Studzinski

One should forgive one’s enemies, but not before they are hanged.

Heinrich Heine

So, we are one-third through another year, and things still continue to be not as they should be, at least to the prognosticators of the central banks, the Masters of the Universe on Wall Street, and those who make their livings reporting on same, at Bubblevision Cable and elsewhere. I am less convinced than I used to be that, for media commentators, especially on cable, the correct comparison is to The Gong Show. More often than not, I think a more appropriate comparison is to the skit performed by the late, great, and underappreciated Ernie Kovacs, “The Song of the Nairobi Trio.”

And lest I forget, this is the day after another of Uncle Warren’s Circuses, held in Omaha to capacity crowds. An interesting question there is whether, down the road some fifty years, students of financial and investing history discover after doing the appropriate first order original source research, that what Uncle Warren said he did in terms of his investment research methodology and what he in reality did, were perhaps two different things. Of course, if that were the case, one might wonder how all those who have made almost as good a living selling the teaching of the methodology, either through writing or university programs, failed to observe same before that. But what the heck, in a week where the NY Times prints an article entitled “Obama Lobbies for His Legacy” and the irony is not picked up on, it is a statement of the times.

The best performing asset class in this quarter has been – gold. Actually the best performing asset class has been the gold miners, with silver not too far behind. We have had gold with a mid-teen’s total return. And depending on which previous metals vehicle you have invested in, you may have seen as much as a 60%+ total return (looking at the germane Vanguard fund). Probably the second best area generically has been energy, but again, you had to choose your spots, and also distinguish between levered and unlevered investments, as well as proven reserves versus hopes and prayers.

I think gold is worth commenting on, since it is often reviled as a “barbarous relic.” The usual argument against it that it is just a hunk of something, with a value that goes up and down according to market prices, and it throws off no cash flow.

That argument changes of course in a world of negative interest rates, with central banks in Europe and one may expect shortly, parts of Asia, penalizing the holding of cash by putting a surcharge on it (the negative rate).

A second argument against it is that is often subject to governmental intervention and political manipulation. A wonderful book that I still recommend, and the subjects of whom I met when I was involved with The Santa Fe Institute in New Mexico, is The Predictors by Thomas A. Bass. A group of physicists used chaos theory in developing a quantitative approach to investing with extensive modeling. One of the comments from that book that I have long remembered is that, as they were going through various asset and commodity classes, doing their research and modeling, they came to the conclusion that they could not apply their approach to gold. Why? Because looking at its history of price movements, they became convinced that the movements reflected almost always at some point, the hand of government intervention. An exercise of interest would be to ponder how, over the last ten years, at various points it had been in the political interests of the United States and/or its allies, that the price of gold in relation to the price of the dollar, and those commodities pegged to it, such as petroleum, had moved in such a fashion that did not make sense in terms of supply and demand, but made perfect sense in terms of economic power and the stability of the dollar. I would suggest, among other things, one follow the cases in London involving the European banks that were involved in price fixing of the gold price in London. I would also suggest following the timetable involving the mandated exit of banks such as J.P. Morgan from commodity trading and warehousing of various commodities.

Exeunt, stage left. New scenario, enter our heroes, the Chinese. Now you have to give China credit, because they really do think in terms of centuries, as opposed to when the next presidential or other election cycle begins in a country like the U.S. Faced with events around 2011 and 2012 that perhaps may have seemed to be more about keeping the price of gold and other financial metrics in synch to not impact the 2012 elections here, they moved on. We of course see that they moved on in a “fool me once fashion.” We now have a Shanghai metals exchange with, as of this May, a gold price fixing twice a day. In fact, I suspect very quickly we will see whole set of unintended consequences. China is the largest miner of gold in the world, and all of its domestic supply each year, stays there. As I have said previously in these columns, China is thought to have the largest gold reserves in the world, at in excess of 30,000 tons. Russia is thought to be second, not close, but not exactly a slouch either.

So, does the U.S. dollar continue as the single reserve currency (fiat only, tied solely to our promise to pay) in the world? Or, at some point, does the Chinese currency become its equal as a reserve currency? What happens to the U.S. economy should that come to pass? Interesting question, is it not? On the one hand, we have the view in the U.S. financial press of instability in the Chinese stock market (at least on the Shanghai stock exchange), with extreme volatility. And on the other hand, we have Chinese companies, with some degree of state involvement or ownership, with the financial resources to acquire or make bids on large pieces of arable land or natural resources companies, in Africa, Australia, and Canada. How do we reconcile these events? Actually, the better question is, do we even try and reconcile these events? If you watch the nightly network news, we are so self-centered upon what is not important or critical to our national survival, that we miss the big picture.

Which brings me to the question most of you are asking at this point – what does he really think about gold? Some years ago, at a Grant’s Interest Rate Observer conference, Seth Klarman was one of the speakers and was asked about gold. And his answer was that, at the price it was at, they wanted to have some representation, not in the physical metal itself, but in some of the gold miners as a call option. It would not be more than 5% of a portfolio so that in the event it proved a mistake, the portfolio would not be hurt too badly (the opposite of a Valeant position). If the price of gold went up accordingly, the mine stocks would perhaps achieve a 5X or 10X return, which would help the overall returns of the portfolio (given the nature of events that would trigger those kinds of price movements). Remember, Klarman above all is focused on preserving capital.

And that is how I pretty much view gold, as I view flood insurance or earthquake insurance. Which, when you study flood insurance contracts you learn does not just cover flooding but also cases of extreme rain where, the house you built on the hill or mountain goes sliding down the hill in a massive mudslide. So when the catastrophic event can be covered for a reasonable price, you cover it (everyone forgets that in southern Illinois we have the New Madrid fault, which the last time it caused a major quake, made recent California or Japanese events seem like minor things). And when the prices to cover those events become extreme, recognizing the extreme overvaluation of the underlying asset, you should reconsider the ownership (something most people with coastal property should start to think about).

Twenty-odd years ago, when I first joined Harris Associates, I was assigned to cover DeBeers, the diamond company, since we were the largest shareholders in North America. I knew nothing about mining, and I knew nothing about diamonds, but I set out to learn. I soon found myself in London and Antwerp studying the businesses and meeting managements and engineers. And one thing I learned about the extractive industries is you have to differentiate the managements. There are some for whom there is always another project to consume capital. You either must expand a mine or find another vein, regardless of what the price of the underlying commodity may be (we see this same tendency with managements in the petroleum business). And there are other managements who understand that if you know the mineral is there sitting in the ground, and you have a pretty good idea of how much of it is there, you can let it sit, assuming a politically and legally stable environment, until the return on invested capital justifies bringing it out. For those who want to develop this theme more, I suggest subscribing to Grant’s Interest Rate Observer and reading not just its current issues but its library of back issues. Just remember to always apply your own circumstances rather than accept what you read or are told.

Drafting a Fixed Income Team

By Leigh Walzer

It is May 1. The time of flowers, maypoles and labor solidarity.

For football fans it is also time for that annual tradition, the NFL draft.  Representatives of every professional football team assemble in Chicago and conspire to divide up the rights to the 250 best college players.  The draft is preceded by an extensive period of due diligence.

Some teams are known to stockpile the best available talent. Other teams focus on the positions where they have the greatest need; if there are more skilled players available at other positions they try to trade up or down to get the most value out of their picks. Others focus on the players who offer the best fit, emphasizing size, speed, precision, character, or other traits.

The highly competitive world of professional sports offers a laboratory for investors selecting managers. Usually at Trapezoid we focus on finding the most skillful asset managers, particularly those with active styles who are likely to give investors their money’s worth. In the equity world, identifying skill is three quarters of the recipe for investment success.

But when we apply our principles to fixed income investing, the story is a little different.  The difference in skill between the top 10% and bottom 10% is only half as great as for the equity world. In other words, time spent looking for the next Jeff Gundlach is only half as productive as time spent looking for the next Bill Miller.

Exhibit I

That assumes you can identify the good fixed income managers.  Allocators report the tools at their disposal to analyze fixed income managers are not as good as in equities.

Some people argue that in sports, as in investing, the efficient market hypothesis rules. The blog Five-thirty-eight argues that  No Team Can Beat the Draft. General managers who were seen as geniuses at one point in their career either reverted to the mean or strayed from their discipline.

Readers might at this point be tempted to simply buy a bond ETF or passive mutual fund like VTBXX. Our preliminary view is that investors can do better. Many fixed income products are hard to reproduce in indices; and the expense difference for active management is not as great. We measure skill (see below) and estimate funds in the top ten percentile add approximately 80 basis points over the long haul; this is more than sufficient to justify the added expense.

However, investors need to think about the topic a little differently. In fixed income, skillful funds exist but they are associated with a fund which may concentrate in a specific sector, duration, and other attributes.  It is often not practical to hedge those attributes – you have to take the bundle.  Below, we identify n emerging market debt fund which shows strong skill relative to its peers; but the sector has historically been high-risk and low return which might dampen your enthusiasm. It is not unlike the highly regarded quarterback prospect with off-the-field character issues.

When selecting managers, skill has to be balanced against not only the skill and the attractiveness of the sector but also the fit within a larger portfolio. We are not football experts. But we are sympathetic to the view that the long term success of franchises like the New England Patriots is based on a similar principle: finding players who are more valuable to them than the rest of the league because the players fit well with a particular system.

To illustrate this point, we constructed an idealized fixed income portfolio. We identified 22 skilled bond managers and let our optimizer choose the best fund allocation. Instead of settling upon the manager with the best track record or highest skill, the model allocated to 8 different funds. Some of those were themselves multi-sector funds. So we ended up fairly diversified across fixed income sectors.

Exhibit  I
Sector Diversification in one Optimized Portfolio

Characteristics of a Good Bond Portfolio

We repeated this exercise a number of times, varying the choice of funds, the way we thought of skill, and other inputs. We are mindful that not every investor has access to institutional classes and tax-rates vary. While the specific fund allocations varied considerably with each iteration, we observed many similarities throughout.:

BUSINESS CREDIT: Corporate bonds received the largest allocation; the majority of that went to high yield and bank loans rather than investment grade bonds

DON’T OVERLOAD ON MUNIs. Even for taxable investors, municipal funds comprised only a minority of the portfolio.

STAY SHORT: Shorter duration funds were favored. The example above had a duration of 5.1 years, but some iterations were much shorter

DIVERSIFY, UP TO A POINT:  Five to eight funds may be enough.

Bond funds are more susceptible than equity funds to “black swan” events. Funds churn out reliable yield and NAV holds steady through most of the credit cycle until a wave of defaults or credit loss pops up in an unexpected place.  It is tough for any quantitative due diligence system to ferret out this risk, but long track records help. In the equity space five years of history may be sufficient to gauge the manager’s skill. But in fixed income we may be reluctant to trust a strategy which hasn’t weathered a credit crunch. It may help to filter out managers and funds which weren’t around in 2008. Even then, we might be preparing our portfolio to fight the last war.

Identifying Skilled Managers

The recipe for a good fixed income portfolio is to find good funds covering a number of bond sectors and mix them just right. We showed earlier that fixed income manager skill is distributed along a classic bell curve. What do we mean by skill and how do we identify the top 10%? 

The principles we apply in fixed income are the same as for equities but the methodology is the same. While the fixed income model is not yet available on our website, readers of Mutual Fund Observer may sample the equity model by registering at www.fundattribution.com.  We value strong performance relative to risk. While absolute return is important, we see value in funds which achieve good results while sitting on large cash balances – or with low correlation to their sectors. And we look for managers who have outperformed their peer group -or relevant indices – preferably over a long period of time.  We also consider the trend in skill.

For fixed income we currently rely on a fitted regression model do determine skill. A few caveats are in order. This approach isn’t quite as sophisticated as what we do with equity funds. We don’t use the holdings data to directly measure what the manager is up to, we simply infer it. We don’t break skill down into a series of components. We rely on gross performance of subsectors rather than passive indices.  We haven’t back-tested this approach to see whether it makes relevant predictions for future periods.  And we don’t try to assess the likelihood that future skill will exceed expenses.  Essentially, the funds which show up well in this screen outperformed a composite peer group chosen by an algorithm over a considerable period of time. While we call them skillful, we haven’t ruled out that some were simply lucky. Or, worse, they could be generating good performance through a strategy which back to bite them in the long term. For all the reasons noted earlier, quantitative due diligence of portfolio managers has limitations. Ultimately, it pays to know what is inside the credit “black box”

Exhibit II lists some of the top-ranking funds in some of the major fixed income categories. We culled these from a list of 2500 fixed income funds, generally seeking top-decile performance, AUM of at least $200mm, and sufficient history with the fund and manager. 

We haven’t reviewed these funds in detail. Readers with feedback on the list are welcome to contact me at [email protected]

From time to time, the media likes to anoint a single manager as the “bond king.” But we suggest that different shops seem to excel in different sectors. Four High Yield funds are included in the list led by Osterweis Strategic Income Fund (OSTIX).  In the Bank Loan Category several funds show better but Columbia Floating-Rate Fund (RFRIX) is the only fund with the requisite tenure. The multi-sector funds listed here invest in corporate, mortgage, and government obligations.  We are not familiar with Wasatch-Hoisington US Treasury Fund (WHOSX), but it seems to have outperformed its category by extending its duration.

FPA New Income Fund (FPNIX) is categorized with the Mortgage Funds, but 40% of its portfolio is in asset-backed securities including subprime auto.  Some mortgage-weighted funds with excellent five year records who show up as skillful but weren’t tested in the financial crisis or had a management change were excluded. Notable among those is TCW Total Return Bond Fund (TGLMX).

Skilled managers in the municipal area include Nuveen (at the short to intermediate end), Delaware, Franklin, and Blackrock (for High Yield Munis).

Equity

Style diversification seems less important in the equity area. We tried constructing a portfolio using 42 “best of breed” equity funds from the Trapezoid Honor Roll.  Our optimizer proposed investing 80% of the portfolio in the fund with the highest Sharpe Ratio. While this seems extreme, it does suggest equity allocators can in general look for the “best available athlete” and worry less about portfolio fit.

Bottom Line

Even though fixed income returns fall in a narrower range than their equity counterparts, funds whose skill justify their expense structure are more abundant. Portfolio fit and sector timeliness sometimes trumps skill; diversification among fixed income sectors seems to be very important; and the right portfolio can vary from client to client. If in doubt, stay short. Quantitative models are important but strive to understand what you are investing in.

The Alt Perspective: Commentary and news from DailyAlts.

April has come to a close and another Fed meeting has passed without a rate rise. At the same time, markets have continued to rally with the equity market, as measured by the S&P 500 Index, gaining another 0.39% in April, bringing the 3-month total return to 7.05%. Bonds also rallied as the Barclays U.S. Aggregated Bond Index gained 0.38% in April, and 2.02% over the past 3-months. Not bad for traditional asset classes.

Strong rallies are periods when alternative strategies lag the broad markets given that they are often hedged in their exposure to traditional asset classes. And this is what we saw in April, with managed futures funds dropping 1.76%, bear market funds losing 1.36% and market neutral funds shedding 0.40%. At the same time, long/short equity funds eked out a gain of 0.06%, multi-alternative funds gained 0.29%, non-traditional bond funds gained 1.54% and multi-currency funds added 1.57%. Not a stellar month for alternative funds, but investors can’t always make money in all areas of their portfolio – diversification has its benefits as well as its drawbacks.

News Highlights from April

• Highland Capital, who had originally filed to launch a series of 17 alternative ETFs, decided to take a different course of action and shut down the 3 hedge fund replication ETFs it launched less than a year ago. It’s unlikely any of the remaining 14 funds will see the bid or ask of a trade.
• Morningstar has made some modifications to its alternative fund classifications, creating two new alternative fund categories: Long/Short Credit and Option Writing. The changes went into effect on April 29.
• Alternative fund (mutual funds and ETFs) inflows continued to be positive in March, with nearly $2.1 billion of new assets going into the category. Managed futures funds gained just over $1 billion in assets and multi-alternative funds picked up nearly $500 million, but the big gainer was volatility based funds which added $1.5 billion as a category.
• Both Calamos and Catalyst hit the market this month with new alternative mutual funds what were converted from hedge funds. Calamos launched a global long/short equity fund managed by Phineus Partners, a firm they acquired in 2015, while Catalyst launched a hedged equity (with an alpha overlay) fund (this one is a bit more complicated on the surface) that is sub-advised by Millburn Ridgefield.
• Fidelity Investments did an about face on more than $2 billion of assets allocated to two multi-alternative mutual funds that were set up specifically, and exclusively, for their clients. One fund was managed by Blackstone, while the other by Arden Asset Management (which was recently acquired by Aberdeen).

Potential Regulatory Changes

One of the more serious issues currently on the table is a proposal by the Securities and Exchange Commission (SEC) to limit the use of derivatives and leverage in mutual funds. Keith Black, Managing Director of Curriculum and Exams for the CAIA Association, wrote a good piece for Pensions & Investments that covers some of the key issues. In the article, Black states that if the regulations are passes as is, it will “substantially alter the universe of alternative strategy funds available to investors.” While not expected to be implemented in its current form, fund managers are nevertheless concerned. The limitations proposed by the SEC would severely constrain some fund managers in their ability to implement the investment strategies they use today, and that would not be limited just to managers of alternative funds.

Greater levels of transparency and more sensible reporting are certainly needed for many funds. This is an initiative that funds should undertake themselves, rather than wait for the regulators to force their hand. But greater limits on the use of derivatives and leverage would, in many cases, go against the grain of benefiting investors.

Observer Fund Profiles: ARIVX and TILDX

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

Aston River Road Independent Value (ARIVX). If James Brown is the godfather of soul, then Eric Cinnamond might be thought the godfather of small cap, absolute value investing. He’s been at it since 1996 and he suspects that folks who own lots of small cap stocks today are going to want to sell them to him, for a lot less than they paid, sooner rather than later.

Centaur Total Return (TILDX). If Steppenwolf (“I like smoke and lightnin’ / Heavy metal thunder”) was born to be wild, then Zeke Ashton was born to be mild (“thoughtless risk now damages future performance”). While Steppenwolf’s name is cool, Mr. Ashton’s combination of blue chips, cash and calls has been far more profitable (and, of course, prudent).

Launch Alert: LMCG International Small Cap

LMCG International Small Cap (ISMRX/ISMIX) launched on April 1, 2016 but it’s actually a new platform for an institutional “collective trust” that’s been in operation since August 26, 2010.

LMCG Investments is a Boston-based adviser with about $7 billion of mostly institutional and high net worth individual assets. They were once “Lee Munder Capital Group” and they do subadvise some retail funds but they are not linked to the old Munder family of funds.

The fund invests primarily in international small cap stocks from developed markets, though they can invest small slices in both the US and the emerging markets. “Small cap” translates to market caps between $50 million and $7 billion with the current weighted capitalization in the portfolio at $2.9 billion. They target companies with “good growth prospects and high quality of earnings,” then buy them when they’re attractively valued. They position themselves as a quant fund with a fundamentalist’s bias; that is, they’ve constructed screens to help them identify the same attributes that other good fundamental, bottoms-up guys look for. They screen 2,500 stocks daily and are hopeful that the quantitative discipline helps them avoid a lot of human errors such as style drift and overcommittment to particular stocks. Eventually the portfolio will hold between 90-125 more-or-less equally weighted stocks.

Four things stand out about the fund:

1.   It’s cheap.

Morningstar’s benchmarking data is too cute by half since they provide separate group benchmarks for load and no-load funds, institutional and non-institutional funds and both category average and “Fee Level Comparison Group Median” numbers. In general, you’d expect to pay somewhere between 1.35% and 1.50% for a fund in this category. With an opening e.r. of 1.10%, LMCG will be one of the four cheapest options for retail investors.

2.   It’s in an arena where active managers thrive.

Standard & Poor’s SPIVA scorecards track the prospect that an active manager will outperform his benchmark. In domestic small cap core funds, the chance is about 1 in 7 over a five year period. For international small cap core, though, the chance is 1 in 2 and that’s despite the generally high expenses that the average fund carries. More to the point, funds like Vanguard FTSE All-World ex-US Small Cap Index (VFSVX) are distinctly poor performers, trailing 90% of their peers over the past three- and five-year periods.

3.   It’s got an experienced management team.

The fund is managed by Gordon Johnson, who has 23 years of experience managing global portfolios and developing quantitative investment models. Before joining LMCG in 2006 he had six years at Evergreen Investments and, before that, managed the Colonial Fund. (And, like me, he has a PhD from UMass.) Co-manager Shannon Ericson joined LMCG at the same time, also from Evergreen, and has had stints at Independence International Associates and Mellon Trust. Together they also co-manage LMCG Global Market Neutral Fund, ASTON/LMCG Emerging Markets and PACE International Emerging Markets.  They’re assisted by Daniel Getler, CFA.

4.   It’s got a strong track record.

The predecessor fund has been around since 2010 and it has outperformed its peer group and its benchmark index in each of the five calendar years of its existence.

It’s particularly interesting that the fund has been more than competitive in both up- and down-market years.

The fund’s initial expense ratio is 1.10%, after waivers, on Investor class shares and 0.85% on Institutional ones.  The minimum initial investment is $2500 for Investor shares and $100,000 for the others. 

The ISMRX homepage is, understandably, thin on the content right now. The other funds’ homepages (Global Multicap and Global Market Neutral) aren’t exactly founts of information, but they do offer the prospect for a factsheet, manager Q&A and such as forthcoming. The LMCG homepage does offer access to their monthly commentary, LMCG Unfiltered. It’s short, clear and interesting. There was an note in their March 2016 issue that over the past eight years, US corporations have accounted for a slightly higher percentage of global corporate earnings (up from 36% in 2007 and 41% in 2015) but a substantially higher percentage of global stock market capitalization (from 47% to 59%). That suggests that the US market has been underwritten by the willingness of international investors to overpay for the safe haven of US markets and raises intriguing questions about what happens when there’s no longer a safe haven premium.

Funds in Registration

Before mutual funds can offered for sale to the public, their prospectuses and related documents need to be subject to SEC review for 75 days. During the so-called “silent period,” the prospectus is available for public (and regulator) review, but the advisers are not permitted to discuss them. We try to track down no-load retail funds and actively-managed ETFs in registration that you might want to put on your radar.

There are only five funds in registration now, most set to launch by the end of June.

While it’s not likely to lead to scintillating cocktail party conversation, DoubleLine Ultra Short Bond Fund is apt to be really solid and useful. And it is run by Bonnie Baha, who once asked The Jeffrey why he was such a jerk.

AMG SouthernSun Global Opportunities Fund is a sort of global version of SouthernSun Small Cap (SSSFX). Okay, it’s a sort of smid-cap global version of Small Cap. SSSFX tends to be a high-beta fund that captures a lot more of the upside than its peers; that boldness has hurt it lately but is has serious charms.

Manager Changes

We’ve track down rather more than 55 manager changes this month, including maternity leaves, sabbaticals, retirements and quietly unexplained departures. The most noteworthy might be the departure of Daniel Martino from T. Rowe Price New America Growth Fund (PRWAX).

Updates

Welcoming Bob Cochran

It is with undisguised, and largely unrestrained, glee that we announce the addition of Robert Cochran to the Mutual Fund Observer, Inc. Board of Directors. Bob is the lead portfolio manager, Chief Compliance Officer, and a principal of PDS Planning in Columbus, Ohio.

We’ve been following Bob’s posts for the past 10 or 15 years where, as BobC, he’s been one of the most respected, thoughtful and generous contributors to our discussion board and the FundAlarm’s before that. The Observer aspires to serve two communities: the small, independent managers who are willing to stray from the herd and who are passionate about what they do (rather than about how much they can make) and the individual investors who deserve better than the timid, marketing-driven pap they’re so often fed. As we begin our sixth year, we thought that finding someone who is both active in the industry and broad in mind and spirit would allow us to serve folks better.

We believe that Bob is a great fit there. He’s been a financial professional for the past 31 years (he earned his CFP the same year I earned my PhD), writes thoughtfully and well, and had a stint teaching at Humboldt State in Arcata, a lovely town in northern California. He also serves on the Board for the Columbus Symphony (and was formerly their principal bassoonist) and Neighborhood Services, Inc., one of Ohio’s oldest food banks. Had I mentioned he’s prepping a national display garden? Me, I mostly buy extra bags of shredded hardwood mulch to bury my mistakes.

We are delighted that Bob agreed to join us, hopeful that we’ll be able to chart a useful course together, and grateful to him, and to you all, for your faith in us.

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On being your own worst enemy

Chuck Jaffe, in “This is why mutual fund managers can’t beat a stock index more often” (April 14, 2016), meditated a bit upon the question of whether index funds and sliced bread belong in the same pantheon. He notes that while the easy comparisons favor index funds, there’s a strongly countervailing flow that starts with the simple recognition that 50% of funds must, by definition, underperform the group average. The question is, can you find the other 50%. Research by several large firms points in that direction. Fidelity reports that low-cost funds from large fund complexes are grrrrrrreat! American Funds reports that low cost funds with high levels of manager ownership are at least as great. My take was simpler: you need to worry less about whether your active fund is going to trail some index by 0.9% annually and worry more about whether you will, yet again, insist on being your own worst enemy:

“Your biggest risk isn’t that your manager will underperform, it’s that you’ll panic and do something stupid and self-destructive,” said David Snowball, founder of MutualFundObserver.com. “With luck, if you know what your manager is doing and why she’s doing it and if she communicates clearly and frequently, there’s at least the prospect that you’ll suppress the urge to self-immolation.”

On April 29, 2016, Morningstar added eight new fund categories, bringing their total is 122.The eight are:

They renamed 10 other categories. The most noticeable will be the replacement of conservative, moderate and aggressive allocation categories with stipulations of the degree of market exposure. The moderate allocation category, once called “balanced,” is now the “Allocation 50-70% Equity” category.

Briefly Noted . . .

With unassailable logic that Aristotle himself would affirm, we learn from a recent SEC filing that “The Aristotle Value Equity Fund has not commenced operations and therefore is currently not available for purchase.”

Effective April 1, 2016, QS Batterymarch Financial Management, Inc. merged with QS Investors, LLC, to form QS Investors, LLC. QS was an independent quant firm purchased, in 2014, by Legg Mason to run their QS Batterymarch funds.

SMALL WINS FOR INVESTORS

AMG SouthernSun Small Cap Fund (SSSFX) reopened to new investors in the first week of April.

On April 7, 2016, the Board of Trustees of Crow Point Defined Risk Global Equity Income Fund (CGHAX/CGHIX) voted to abandon the plan of liquidation for the Fund and continue the Fund’s operations.

The Board of Trustees voted to reduce the expense cap on Dean Mid Cap Value Fund (DALCX) by 1.50% to 1.10%. That includes a small drop in the management fee.

Franklin Biotechnology Discovery Fund (FBDIX) will re-open to new investors May 16, 2016. The fund’s 23% loss in the first four months of 2016 might have created some room for (well, need for) new investors.

RS Partners Fund (RSPFX) reopened to new investors on March 1, 2016, just in case you’d missed it. RS, once Robertson Stephens, has been acquired by Victory Capital, so the fund may be soon renamed Victory RS Partners.

Sequoia Fund (SEQUX) has reopened in hopes of finding new investors. I won’t be one of them. There’s the prospect of a really substantial tax hit this year. In addition, we still don’t know what happened, whether it’s been fixed and whether the folks who left – including the last of the original managers – were the cause of the mess or the scapegoats for it. Until there’s some clarity, I’d be unwilling to invest for the sake of just owning a legendary name.

WCM Investment Management has voluntarily agreed to waive all of its fees and pay all of the operating expenses for WCM Focused Global Growth Fund (WFGGX) and WCM Focused Emerging Markets Fund (WFEMX) from May 1, 2016, through April 30, 2017. “The Advisor will not seek recoupment of any advisory fees it waived or Fund expenses it paid during such period.”

CLOSINGS (and related inconveniences)

AC Alternatives® Market Neutral Value Fund (ACVQX) will close to new investors on May 25, 2016 except those who invest directly with American Century or through “certain financial intermediaries selected by American Century.” In an exceedingly odd twist, Morningstar describes it as having “average” returns, a fact belied by, well, all available evidence. In addition to beating their peers in every calendar year, the performance gap since inception is pretty substantial:

Folks closed out here and willing to consider an even more explosive take on market-neutral investing might want to look at Cognios Market Neutral Large Cap (COGIX).

Effective April 30, 2016, the Diamond Hill Small-Mid Cap Fund (DHMAX), with $1.8 billion in assets, closed to most new investors. 

OLD WINE, NEW BOTTLES

On or about May 31, 2016, each Strategic Advisers^® Multi-Manager Target Date Fund becomes a Fidelity Multi-Manager Target Date Fund.

The Primary Trend Fund has become Sims Total Return Fund (SIMFX). Sims Capital Management has been managing the fund since 2003 and just became the adviser, rather than just the sub-adviser. I wish them well, but the fact that they’ve trailed their peers in eight of the past 10 calendar years is going to make it a hard slog.

OFF TO THE DUSTBIN OF HISTORY

Appleton Group Risk Managed Growth Fund (AGPLX) has closed and will be liquidated at the close of business on June 27, 2016.

Aurora Horizons Fund (AHFAX) closed to new purchases on April 22, 2016 and will be liquidating its assets as of the close of business on May 31, 2016. As this alts fund passed its three-year mark, it was trailing 80% of its peers.

BPV Low Volatility Fund (BPLVX) has closed but “will continue to operate until on or about May 31, 2016, when it will be liquidated.” The fund is liquidating just as Morningstar is creating a category to track such option-writing strategies.

The Braver Tactical Opportunity Fund (BRAVX) has closed to new investors and will discontinue its operations effective May 27, 2016. It’s not at all a bad fund, it’s just not magical. Increasingly, it seems like that’s what it takes.

Stepping back from the edge of the grave: On March 30, 2016, the Board of Trustees of Two Roads Trust voted to abandon the plan of liquidation for the Breithorn Long/Short Fund (BRHIX) that was scheduled to occur on or about April 8, 2016. 

Fidelity Advisor Short Fixed-Income Fund (FSFAX) is merging into Fidelity Short-Term Bond Fund (FSHBX) on or about July 15, 2016. Their performance over any reasonable time frame is nearly identical and FSHBX is cheaper, so it’s a clear winner for shareholders.

Nuveen Global Growth (NGGAX) and Nuveen Tradewinds Emerging Markets (NTEAX) funds will both be liquidated after the close of business on June 24, 2016.

Oppenheimer Commodity Strategy Total Return Fund (QRAAX) will liquidate on June 29, 2016. While the fund has almost $300 million in assets, its watershed moment might have happened in 2008:

Driven by the adviser’s “its inability to market the Fund and [fact] that it does not desire to continue to support the Fund,” Outfitter Fund (OTFTX) and its fly-fishing logo will liquidate on or about May 26, 2016.

Panther Small Cap Fund (PCGSX) will be liquidated on or about May 16, 2016. Cool name, no assets, quickly deteriorating performance.

Putnam Voyager Fund (PVOYX) is merging into Putnam Growth Opportunities (POGAX) on July 15, 2016. Voyager’s performance was rightly described as “dismal” by Morningstar. Voyager’s manager was replaced in February by Growth Opportunities, after a string of bad bets: in the past six years, he mixed one brilliant year with two dismal ones and three pretty bad ones. He was appointed in late 2008 just before the market blasted off, rewarding all things risky. As soon as that phase passed, Voyager sank in the mud. To their credit, Voyager’s investors stayed with the fund and assets, still north of $3 billion, have only recently begun to slip. The new combined fund’s manager is no Peter Lynch, but he’s earning his keep.

Rivington Diversified International Equity Fund By WHV and Rivington Diversified Global Equity Fund By WHV have been closed and liquidated. “By WHV” sounds like a bad couture brand.

Stratus Government Securities (STGAX) and Growth Portfolio (STWAX) are both moving toward liquidation. Shareholders will rubberstamp the proposal on June 7, 2016.

The Board of Trustees, citing in light of “the ever-present goal of continuing to make all decisions and actions in the Best Interests of the Shareholders,” has decided to liquidate Valley Forge Fund (VAFGX). 

A queer and wonderful ride. Bernie Klawans – an aerospace engineer – ran it for decades, from 1971-2011, likely out of his garage. One-page website, no 800-number, no reports or newsletters or commentaries. Also an incredibly blurry logo that might well have been run through a mimeograph machine once or twice. Mr. Klawans brought on a successor when he was in his late 80s, worked with him for a couple years, retired in April and passed away within about six months. Then his chosen successor, Craig Arnholt, died unexpectedly within a year. The Board of Trustees actually managed the fund for six months (quite successful – they beat both their LV peers and the S&P) before finding a manager who’d run the fund for a pittance. The new guy was doing fine then … kapow! He lost 22% in September and October of 2014, when the rest of the market was essentially flat. That was a combination of a big stake in Fannie and Freddie – adverse court ruling cut their market value by half in a month – and energy exposure. He’s been staggering toward the cliff ever since.

Tocqueville Alternative Strategies Fund (TALSX) will “liquidate, dissolve and terminate [its] legal existence,” all on May 17, 2016. The fund is better than its three year record looks: it’s had two bad quarters in the last three, but often moved in the opposite direction of other alt funds and had a solid record up until Q3 2015.

William Blair Directional Multialternative Fund closed and liquidated on April 21, 2016.

William Blair Large Cap Value Fund (WLVNX) has closed and will liquidate on or about June 15, 2016. Soft performance, $3 million in assets, muerte.

In Closing . . .

Mutual Fund Observer celebrates its fifth anniversary with this issue. Our official launch was May 1, 2011 and since then we’ve enjoyed the company of nearly 800,000 readers (well, 795,688 seems like it’s near 800,000). Each month now we draw between 22,000 and 28,000 readers.

Thanks and thanks and more thanks to… David, Michael, William, and Richard. Many thanks, also, to John from California who sent a note with his donation that really brightened our day. As always, Gregory and Deb, your ongoing support is so appreciated.

If you’re grateful at the absence of ads or fees and would like to help support the Observer, there are two popular options. Simple: make a tax-deductible contribution to the Observer. Folks contributing $100 or more in a year receive access to MFO Premium, the site that houses our custom fund screener and all of the data behind our stories.

Simplest: use our link to Amazon.com. We received about 6-7% of the value of anything you purchase through that link. It costs you nothing extra and is pretty much invisible. For those of you interested in knowing a bit more about the Observer’s history, scope and mission, we’ve linked our factsheet to the thumbnail on the left.

As usual, we’ll be at the Morningstar Conference, 13-15 June. Let us know if we might see you there.

Our June issue will be just a wee bit odd for the Observer. At the end of May I’m having one of those annoying round-number birthdays. I decided that, on whole, it would be substantially less annoying if I celebrated it somewhere even nicer than the Iowa-Illinois Quad Cities. The Isle of Skye, off the west coast of Scotland, in particular. Chip saw it as an opportunity to refine her palate by trying regional varieties of haggis (and scotch), so she agreed to join me for the adventure.

That means we’ll have to finish the June issue by May 20^th, just about the time that some hundreds of students insist on graduating from our respective colleges. We’ll have the issue staged before we leave the country and will count on her IT staff to launch it. That means we’ll be out of contact for about two weeks, so we’ll have to ask for forbearance for unanswered email.

As ever,

By David Snowball

Dear friends,

Sorry about the late launch of the Observer, but we’ve been consumed by the need to deal with a campus crime.

Someone stole the dome off my academic home, Old Main, early on the morning of April 1st.

The barstids!

If you play the accompanying video (probably best with the sound muted), there are some way cool images of the pre-theft dome which occur around the: 45 second mark. It’s accompanied by some commentary by a couple of my students and my colleague, Wendy, who, like Anakin, has heard the song of the Dark Side.

Requiem for a heavyweight

The sad tale of Sequoia’s (SEQUX) unwinding continues.

Here’s the brief version of recent events:

• Investors have pulled more than a half billion from the fund, including $230 million just in the first three weeks of March. March will be the sixth consecutive month of net withdrawals.
• The fund trails 98-100% of its peers for 2015 and 2016, as well as for the past one- and three-year periods.
• Manager Bob Goldfarb, whose name is on the door at Ruane, Cunniff & Goldfarb, resigned and an unnamed analyst who was one of the cheerleaders for Valeant left.
• The remaining guys have had a period of reflection and propose a more collaborative decision-making model and less risk-taking for the years ahead.

Senator Arthur Vandenberg (served 1928-1951), a Republican committed to the critical importance of a united front when it came to foreign policy, famously declared “politics stops at the water’s edge.” The fear is that the Sequoia version might have been “independence stops at the boss’s door.”

The dark version of the Sequoia narrative would be this: Goldfarb, abetted by an analyst, became obsessed about Valeant and crushed any internal dissent. Mr. Poppe, nominally Mr. Goldfarb’s peer, wouldn’t or couldn’t stop the disaster. “All the directors had repeatedly expressed concern” over the size of the Valeant stake and the decision to double-down on it. Mr. Poppe dismissed their concerns: “recent events frustrated them.” The subsequent resignations by 40% of the board, with another apparently threatening to go, were inconsequential annoyances. Sequoia, rather snippily, noted that board members don’t control the portfolio, the managers do. Foot firmly on the gas, they turned the bus toward the cliff.

If the dark version is right, Jaffe is wrong. The headline on a recent Chuck Jaffe piece trumpeted “How a big bet on one bad stock broke a legendary mutual fund” (3/28/2016). If the dark narrative is right, “One bad stock” did not break Sequoia; an arrogant and profoundly dysfunctional management culture did.

Do you seriously think that you’d be braver? In the wake of Josef Stalin’s death, Nicolas Khrushchev gave a secret speech denouncing the horrors of Stalin’s reign and his betrayal of the nation. Daniel Schorr picks up the narrative: It was said that at one point a delegate shouted, “And Nikita Sergeyevich, where were you while all this was happening?” Khrushchev had looked up and snapped, “Who said that? Stand up!” When no one rose, Khrushchev said, “That’s where I was, comrade” (from Daniel Schorr, Stay Tuned (2001), 75-76).

Another version, though, starts with this question: “did Goldfarb fall on his sword?” His entire professional life has been entwined with Sequoia, the last living heir to the (Bill) Ruane, (Richard) Cunniff and Goldfarb legacy. Ruane and Cunniff started the firm in 1970, Goldfarb joined the next year and has spent 45 years at it. And now it was all threatening to come apart. Regardless of “who” or “why,” some dramatic gesture was called for. If the choice came down to Goldfarb, age 71, or Poppe, at 51 or 52, it was fairly clear who needed to draw his gladius.

Meanwhile, the usual suspects rushed to close the barn door.

• Morningstar reduced the fund’s Analyst Rating from Gold to Bronze. Why? In the same way that a chef might be embarrassed to celebrate the tender delights of a fish flopping around on the ground, Morningstar’s analysts might have been embarrassed to look at an operation whose wheels were coming off and declaring it “the best of the best.”

  Oddly, they also placed it “under review” on October 30, 2015. At that point, Valeant was over 30% of the fund, investors had been pulling money and the management team conducted their second, slightly-freakish public defense of their Valeant stake. Following the review, the analysts reaffirmed their traditional judgment: Gold! The described it as “compelling” in the week before the review and “a top choice” in the week afterward.

  There’s no evidence in the reaffirmation statement that the analysts actually talked to Sequoia management. If they didn’t, they were irresponsible. If they did and asked about risk management, they were either deceived by management (“don’t worry, we’re clear-eyed value investors and we’re acting to control risk”) or management was honest (“we’re riding out the storm”) and the analysts thought “good enough for us!” I don’t find any of that reassuring.

  Doubts have only set in now that the guys presumably responsible for the mess are gone and the management strategy is becoming collaborative and risk-conscious.

  Similarly, up until quite recently Morningstar’s stock analyst assigned to Valeant recognized “near-term pain” while praising the firms “flawless execution” of its acquisition strategy and the “opportunities [that] exist for Valeant long term.”

• Steve Goldberg, an investment advisor who writes for Kiplinger’s, “still had faith in the fund” back in October after the board members resigned and the extent of the Valeant malignancy was clear. But “What I didn’t know: Valeant was no Berkshire Hathaway.” (stunned silence) Uh, Steve, maybe you should let someone else hold the debit card, just to be safe? Mr. Goldberg correctly points out that Bill Nygren, manager of Oakmark Select (OAKLX), stubbornly rode his vast holdings in Washington Mutual all the way to zero. The lesson he’s learned, curiously late in his professional investing career, “I need to make sure a fund isn’t taking excessively large positions in one or two stocks or engaging in some other dicey strategy. Dramatically outsize returns almost never come without outsize risks.”

The excuse “we couldn’t have known” simply does not hold water. A pseudonymous contributor to Seeking Alpha, who describes himself only as “an engineer in Silicon Valley” wrote a remarkably prescient, widely ignored critique of Sequoia two years ago. After attending Sequoia’s Investor Day, he came away with the eerie sense that Rory Priday and Bob Goldfarb spoke most. The essay makes three prescient claims: that Valeant hadn’t demonstrated any organic growth in years, that they’d been cooking the books for years, and that Goldfarb and Priday were careless in their statements, inexperienced in pharma investing and already hostage to their Valeant stake.

Valeant’s largest shareholder, [Sequoia’s] fate has become inextricably intertwined with Valeant. Valeant is 23% of their portfolio and they own 10% of Valeant. They can’t exit without ruining their returns. This led to a highly desperate defense at the Ruane, Cunniff, Goldfarb annual meeting.

If an amateur investor could smell the rot, why was it so hard for professionals to? The answer is, we blind ourselves by knowing our answers in advance. If I start with the conclusion, “you can’t do much better than the legendary Sequoia,” then I’ll be blind, deaf and dumb on their behalf for as long as I possibly can be.

The bottom line: start by understanding the risks you’re subjecting yourself to. We ignore risks when times are good, overreact when times are bad and end up burned at both ends. If you can’t find your manager’s discussion of risk anywhere except in the SEC-mandated disclosure, run away! If you do find your manager’s discussion of risk and it feels flippant or jaded (“all investing entails risk”), run away! If it feels incomplete, call and ask questions of the advisors. (Yes, people will answer your questions. Trust me on this one.) If, at the end of it all, you’re thinking, “yeah, that makes sense” then double-check your understanding by explaining the risks you’re taking to someone else. Really. Another human being. One who isn’t you. In my academic department, our mantra is “you haven’t really learned something until you’ve proven you can teach it to someone else.” So give yourself that challenge.

Quick note to Fortune: Help staff get the basics right

In Jen Wieczner’s March 18, 2016 story for Fortune, she warns “Sequoia Fund, a mutual fund once renowned for its stock-picking prowess, has been placed under review by Morningstar.” The stakes are high:

Uhh, no. Morningstar is not Michelin. Their stars are awarded based on a mathematical model, not an analyst’s opinions (“This Valeant investor is in even bigger trouble than Bill Ackman,” Fortune.com. The error was corrected eventually).

The Honorable Thing

“Advertising is the modern substitute for argument; its function is to make the worse appear the better.”

               George Santayana

So we find one chapter at Sequoia Fund coming to a close, and the next one about to begin.  On this subject my colleague David has more to offer. I will limit myself to saying that it was appropriate, and, the right thing to do, for Bob Goldfarb to elect to retire. After all, it happened on his watch. Whether or not he was solely to blame for Valeant, we will leave to the others to sort out in the future. Given the litigation which is sure to follow, there will be more disclosures down the road.

A different question but in line with Mr. Santayana’s observations above, is, do those responsible for portfolio miscues, always do the honorable thing? When one looks at some of the investment debacles in recent years – Fannie and Freddie, Sears, St. Joe, Valeant (and not just at Sequoia), Tyco, and of course, Washington Mutual (a serial mistake by multiple firms)  – have the right people taken responsibility? Or, do the spin doctors and public relations mavens come in to do damage control? Absent litigation and/or whistle blower complaints, one suspects that there are fall guys and girls, and the perpetrators live on for another day. Simply put, it is all about protecting the franchise (or the goose that is laying the golden eggs) on both the sell side and the buy side. Probably the right analogy is the athlete who denies using performance enhancing drugs, protected, until confronted with irrefutable evidence (like pictures and test results).

Lessons Learned

Can the example of the Sequoia Fund be a teaching moment? Yes, painfully. I have long felt that the best way to invest for the long-term was with a concentrated equity portfolio (fewer than twenty securities) and some overweight positions within that concentration. Looking at the impact Sequoia has had on the retirement and pension funds invested in it, I have to revisit that assumption. I still believe that the best way to accumulate personal wealth is to invest for the long-term in a concentrated portfolio. But as one approaches or enters retirement, it would seem the prudent thing to do is to move retirement moneys into a very diverse portfolio or fund.  That way you minimize the damage that a “torpedo” stock such as Valeant can do to one’s retirement investments, and thus to one’s standard of living, while still reaping the greater compounding effects of equities. There will still be of course, market risk. But one wants to lessen the impact of adverse security selection in a limited portfolio. 

Remember, we tend to underestimate our life expectancy in retirement, and thus underweight our equity allocations relative to cash and bonds. And in a period such as we are in, the risk free rate of return from U.S. Treasuries is not 12% or 16% as it was in the early 1980’s (although it is perhaps higher than we think it is). And for that retirement equity position, what are the choices?  Probably the easiest again, is something like the Vanguard Total Stock Market or the Vanguard S&P 500 index funds, with minimal expense ratios. We have been talking about this for some time now, but Sequoia provides a real life example of the adverse possibilities.  And, it is worth noting that almost every concentrated investment fund has underperformed dramatically in recent years (although the reasons may have more to do with too much money chasing too few and the same good ideas). Is it really worth a hundred basis points to pay someone to own Bank of America, Wells Fargo, Microsoft, Johnson & Johnson, Merck, as their top twenty holdings? Take a look sometime at the top twenty holdings of the largest actively managed funds in the respective categories of growth, growth and income, etc., and see what conclusions you draw.

The more difficult issue going forward will be deflation versus inflation. We have been in a deflationary world for some time now. It is increasingly apparent that the global central banks are in the process (desperately one suspects) to reflate their respective economies out of stagnant or no growth. Thus we see a variety of quantitative easing measures which tend to favor investors at the expense of savers. Should they succeed, it is unlikely that the inflation will stop at their targets (2% here), and the next crisis will be one of currency debasement. The more things change.

Gretchen Morgenson, Take Two

As should be obvious by now, I am a fan of Ms. Morgenson’s investigative reporting and her take no prisoners approach. I don’t know her from Adam, and could be standing next to her in the line for a bagel and coffee in New York and would not know it. But, she has a wonderful knack for goring many of the oxen that need to be gored.

In this Sunday’s New York Times Business Section, she raised the question of the effectiveness of share buybacks. Now, the dirty little secret for some time has been that growth of a business is not impacted by share repurchases. Yet, if you listened to many portfolio managers wax poetic about how they only invest with shareholder friendly managements (which in retrospect turn out to have not been not so shareholder friendly after they have been indicted by a grand jury). Share repurchase does increase per share metrics, such as book value and earnings.  While the pie stays the same size, the size of the pieces changes. But often in recent years, one wonders why the number of shares outstanding does not change after a repurchase of what looked to have been 5% or so of shares outstanding during the year. 

Well, that’s because management keeps awarding themselves options, which are approved by the board. And the options have the effect of selling the business incrementally to the managers over time, unless share purchases eliminate the dilution from issuing the options.  Why approve the options packages? Well, the option packages are marketed to the share owners as critical to attracting and retaining good managers, AND, aligning the interests of management with the interests of shareholders. Which is where Mr. Santayana comes in  –  the bad (for shareholders) is made to look good with the right buzzwords.

However, I think there is another reason. Obviously growing a business is one of the most important things a management can do with shareholder capital. But today, every capital allocation move of reinvesting in a business for growth and expansion directly or by acquisition, faces a barrage of criticism. The comparison is always against the choices of dividends or share repurchase. I think the real reason is somewhat more mundane. 

The quality of analysts on both the buy and sell side has been dumbed down to the point that they no longer know how to go out and evaluate the impact of an acquisition or other growth strategy. They are limited to running their spread sheet models against industry statistics that they pull off of their Bloomberg terminals. I remember the horror with which I was greeted when I suggested to an analyst that perhaps his understanding of a company and its business would improve if he would find out what bars near a company’s plants and headquarters were favorites of the company’s employees on a Friday after work and go sit there. Now actually I wasn’t serious about that (most of the analysts I knew lacked the social graces and skills to pull it off). I was serious about getting tickets to industry tradeshows and talking to the competitor salespeople at their booths.  You would be amazed about how much you can learn about a company and its products that way. And people love to talk about what they do and how it stands up against their competition. That was a stratagem that fell on deaf ears because you actually had to spend real dollars (rather than commission dollars), and you had to spend time out of the office. Horrors!  You might have to miss a few softball games.

The other part of this is managements and the boards, which also have become deficient at understanding the paths of growing and reinvesting in a business that was entrusted to them.

Sadly, what we have today is a mercenary class of professional managers who can and will flit from opportunity to opportunity, never really understanding (or loving) the business. And we also have a mercenary class of professional board members, who spend their post-management days running their own little business – a board portfolio. And if you doubt all of this, take a look again at Valeant and the people on the board and running the business. It was and is a world of consultants and financial engineers, reapplying the same case study or stratagem they had used many times before. The end result is often a hollowed-out shell of a company, looking good to appearances but rotting away on the inside.

By Edward Studzinski.

Steve Romick: A bit more faith is warranted

In our March issue, I reflected on developments surrounding three of the funds in which I’m invested: FPA Crescent (FPACX), my largest holding, Artisan Small Cap Value (ARTVX), my oldest holding, and Seafarer Overseas Growth & Income (SFGIX), my largest international holding. I wrote that two things worried me about FPA Crescent:

First, the fund has ballooned in size with no apparent effort at gatekeeping … Second, Romick blinked.

That is, the intro to his 2015 Annual Report appeared to duck responsibility for poor performance last year. My bottom line on FPA was “I’ve lost faith. I’m not sure whether FPA is now being driven by investment discipline, demands for ideological purity or a rising interest in gathering assets. Regardless, I’m going.”

Ryan Leggio, now a senior vice president and product specialist for FPA but also a guy who many of you would recall as a former Morningstar analyst, reached out on Mr. Romick’s behalf. There were, they believed, factors that my analysis hadn’t taken into account. The hope was that in talking through some of their decision-making, a fuller, fairer picture might emerge. That seemed both generous and thoughtful, so we agreed to talk.

On the question of Crescent’s size, Mr. Romick noted that he’d closed the fund before (from 2005-08) and would do so again if he thought that was necessary to protect his shareholders and preserve the ability to achieve their stated goal of equity-like rates of return with less risk than the market over the long-term. He does not believe that’s the case now. He made three points:

1. His investable universe has grown. That plays out in two ways: he’s now investing in securities that weren’t traditionally central to him and some of his core areas have grown dramatically. To illustrate the first point, historically, Mr. Romick purchased a security only if its potential upside was at least three times greater than its potential downside. He’s added to that an interest in compounders, stocks with the prospect of exceedingly consistent if unremarkable growth over time. Similarly, they continue to invest in mid-cap stocks, which are more liquid than small caps but respond to many of the same forces. Indeed, the correlation between the Vanguard Small Cap (NAESX) and Mid Cap (VIMSX) index funds soared after the late 1990s and is currently .96. At the same time, the number of securities in some asset classes has skyrocketed. In 2000, there was $330 billion in high-yield bonds; today that’s grown to $1.5 trillion. In an economic downturn, those securities can be very attractively priced very quickly.

2. His analytic and management resources have grown. For his first 15 years, Mr. Romick basically managed the fund alone. In recent years, as some of the long-time partners came toward the ends of their careers, FPA “reinvested in people in a very big way which has given me a very large, high capability team.” That culminated in the June 2013 appointment of two co-managers, Mark Landecker and Brian Selmo. Mr. Landecker was previously a portfolio Manager at Kinney Asset Management in Chicago and Arrow Investments. Mr. Selmo founded and managed portfolios for Eagle Lake Capital, LLC, and was an analyst at Third Avenue and Rothschild, Inc. They’re supported by six, soon to be seven analysts, a group that he calls “a tremendously strong team.”

3. Managing a closed fund is not as straightforward as it might appear. Funds are in a constant state of redemption, even if it’s not net Investors regularly want some of their money back to meet life’s other needs or to pursue other opportunities. When a fund is successful and open to new investors, those redemptions can be met – in whole or in large part – from new cash coming in. When a fund is closed, redemptions are met either from a fund’s cash reserves (or, more rarely, a secured line of credit) or from selective liquidation of securities in the portfolio. In bad times, the latter is almost always needed and plays havoc with both tax efficiency and portfolio positioning.

So, on whole, he argues that Crescent is quite manageable at its current size. While many fund managers have chosen to partially close their funds to manage inflows, Mr. Romick’s strategy is simply not to market it and allow any growth to be organic. That is, if investors show up, then fine, they show up. FPA has only two full-time marketers on payroll supporting six open-end mutual funds. While Romick speaks a lot to existing shareholders, his main outreach to potential shareholders is limited to stuff like speaking at the Morningstar conference.

While he agreed that Crescent was holding a lot of cash, reflecting a dearth of compelling investment opportunities, he’s willing to take in more money and let the fund grow. In explaining this rationale, he reflected on the maxim, “Winter is coming,” a favorite line from his daughter’s favorite television show. “The problem,” he said, “is that they never tell you when winter is coming. Just that it is. That’s the way I feel about the bond market today.” He made a point that resonated with Edward Studzinski’s repeated warnings over the past year: liquidity has been drained from the corporate bond market, making it incredibly fragile in the face of a panic. In 2007, for example, the market-makers had almost $300 billion in cash to oil the workings of the bond market; today, thanks to Dodd-Frank, that’s dwindled to less than $30 billion even as the high-yield and distressed securities markets – the trades that would most require the intervention of the market-makers – have ballooned.  Much more market, much less grease; that’s a bad combination.

On the question of dodging responsibility, Mr. Romick’s response is simple. “We didn’t try to duck. We just wrote a paragraph that didn’t effectively communicate our meaning.” They wrote:

At first glance, it appears that we’ve declined as much as the market — down 11.71% since May 2015’s market peak against the S&P 500’s 11.30% decline — but that’s looking at the market only through the lens of the S&P 500. However, roughly half of our equity holdings (totaling almost a third of the Fund’s equity exposure) are not included in the S&P 500 index. Our quest for value has increasingly taken us overseas and our portfolio is more global than it has been in the past. We therefore consider the MSCI ACWI a pertinent alternative benchmark.

My observation was that you didn’t “appear to decline” as much as the stock market; you in actual fact did decline by that much, and a bit more. Mr. Romick’s first reflection was to suggest substituting “additional” for “alternative” benchmark. As the conversation unfolded, he and Mr. Leggio seemed to move toward imagining a more substantial rewrite that better caught their meaning. I might suggest:

We declined as much as the S&P 500 – down 11.71% from the May 2015 market peak to year’s end, compared to the S&P’s 11.30% decline. That might seem especially surprising given our high cash levels which should buffer returns. One factor that especially weighed against us in the short term is the fund’s significant exposure to international securities. Those markets had suffered substantially; from the May market peak, the S&P500 dropped 11.3% but international stocks (measured by the Vanguard FTSE All-World ex-US Index Fund) declined 23.5%. We are continuing to find interesting opportunities overseas and may add the global MSCI ACWI index as an additional benchmark to help you judge our performance.

So where does that leave us? Three things seem indisputable:

1. Crescent is still a large fund. As I write this (3/10/16), Morningstar reports that Crescent has $16.6 billion in assets, well down from its $20.5 billion 2015 peak. A year ago it was larger and still growing. Now, it’s both smaller and FPA expects “modest outflows” in the year ahead. This still makes it one of the hundred largest actively managed funds, the ninth largest “moderate allocation” fund (Morningstar) and the third-largest “flexible portfolio” fund (Lipper). The larger funds tend to be multi-manager beasts from huge complexes such as American Funds, BlackRock, Fidelity, Price and Vanguard.

   On the upside, its equity positions have still managed to beat the S&P 500 in five of the past seven calendar years.

2. Crescent is led by a very talented manager. His recognition as Morningstar’s 2013 Asset Allocation Fund Manager of the Year is one of those “scratch the surface” sorts of statements. He’s beaten his Morningstar peers in eight of the past 10 years; the fund leads 99% of its peers over the past 15 years. Morningstar describes him as “one of the most accomplished” managers in the field and he routinely ends up on lists of stars, masters and gurus. He’s managed Crescent for just under a quarter century which creates a well-documented record of independence and success. While we have no independent record for his co-managers, we also have no reason to doubt their ability.

3. Crescent is not the fund it once was. It’s no longer a small fund driven by one guy’s ability to find and exploit opportunities in small and mid-cap stocks or other small issues. In the course of reflecting on the general failure of flexible funds, a rule to which Crescent is the exception, John Rekenthaler offered a graphic representation of the fund’s evolution over the past decade:

   The size of the dot reflects the size of the fund. The position of the dot reflects the positioning of the stock portion of the portfolio. Tiny dot with the black circle was Crescent a decade ago; big dot with the black circle is today. Currently, 82% of the fund’s stocks are characterized by Morningstar as “large” or “giant,” with more giants than merely large caps. The average market cap is just north of $50 billion. According to Mr. Romick, these securities are more reflective of the opportunity set based on valuations, than a byproduct of the Fund’s size.

   The unanswered question is whether the new Crescent remains a peer of the old Crescent. Over the past 15 years, Crescent has beaten 99% of its peers and it’s beaten them by a huge margin.

I don’t think the fund will be capable of reprising that dominance; conditions are too different with both the fund and the market. The question, I suppose, is whether that’s a fair standard? Likely not.

The better question is, can the fund consistently and honorably deliver on its promise to its investors; that is, to provide equity-like returns with less risk over reasonable time periods? Given that the management team is deeper, the investment process is unimpaired and its size is has become more modest, I think the answer is “yes.” Even if it can’t be “the old Crescent,” we can have some fair confidence that it’s going to be “the very good new Crescent.”

Share Classes

Last month, David Offered Without Comment: Your American Funds Share Class Options. The simple table showing 18 share classes offered for one of AF’s fixed income funds generated considerable comment via Twitter and other media, including good discussion on the MFO Discussion Board.

We first called attention to excessive share classes in June 2014 with How Good Is Your Fund Family?  (A partial update was May 2015.) American Funds topped the list then and it remains on top today … by far. It averages more than 13 share classes per unique fund offering.

The following table summarizes share class stats for the largest 20 fund management companies by assets under management (AUM) … through February 2016, excluding money market and funds less than 3 months old.

At the end of the day, share classes represent inequitable treatment of shareholders for investing in the same fund. Typically, different share classes reflect different expense ratios depending on initial investment amount, load or transaction fee, or association of some form, like certain 401K plans. Here’s a link to AF’s web page explaining Share Class Pricing Details. PIMCO’s site puts share class distinction front and center, as seen in its Products/Share Class navigator below, a bit like levels of airline frequent flyer programs:

We’ve recently added share class info to MFO Premium’s Risk Profile page. Here’s an example for Dan Ivascyn’s popular Income Fund (click on image to enlarge):

In addition to the various differences in 12b-1 fee, expense ratio (ER), maximum front load, and initial purchase amount, notice the difference in dividend yield. The higher ER of the no-load Class C shares, for example, comes with an attendant reduction in yield. And, another example, from AF, its balanced fund:

Even Vanguard, known for low fees and equitable share holder treatment, provides even lower fees to its larger investors, via so-called Admiral Shares, and institutional customers. Of course, the basic fees are so low at Vanguard that the “discount” may be viewed more as a gesture.

The one fund company in the top 20 that charges same expenses to all its investors, regardless of investment amount or association? Dodge & Cox Funds.

We will update the MFO Fund House Score Card in next month’s commentary, and it will be updated monthly on the MFO Premium site.

Shake Your Money Market

By Leigh Walzer

Reports of the death of the money market fund (“MMF”) are greatly exaggerated. Seven years of financial repression and 7-day yields you can only spot under a microscope have made surprisingly little dent in the popularity of MMF’s. According to data from the Investment Company Institute, MMF flows have been flat the past few years. The share of corporate short term assets deposited in MMFs has remained steady.

However, new regulations will be implemented this October, forcing MMFs holding anything other than government instruments to adopt a floating Net Asset Value. These restrictions will also allow fund managers to put up gates during periods of heavy outflows.

MMFs were foundational to the success of firms like Fidelity, but today they appear to be marginally profitable for most sponsors. Of note, Fidelity is taking advantage of the regulatory change to move client assets from less remunerative municipal MMFs to government money market funds carrying higher fees (management fees net of waived amounts.)

While MMFs offer liquidity and convenience, the looming changes may give investors and advisors an impetus to redeploy their assets. In a choppy market, are there safe places to park cash?  A popular strategy over the past year has been high-dividend / low-volatility funds. We discussed this in March edition of MFO. This strategy has been in vogue recently but with a beta of 0.7 it still has significant exposure to market corrections.

Short Duration Funds:  Investors who wish to pocket some extra yield with a lower risk profile have a number of mutual fund and ETF options. This month we highlight fixed income portfolios with durations of 4.3 years or under.

We count roughly 300 funds with short or ultraShort Duration from approximately 125 managers. Combined assets exceed 500 billion dollars.  Approximately one quarter of those are tax-exempt.  For investors willing to risk a little more duration, illiquidity, credit exposure, or global exposure there are roughly 1500 funds monitored by Trapezoid.

Duration is a measure of the effective average life of the portfolio. Estimates are computed by managers and reported either on Morningstar.com or on the manager’s website. There is some discretion in measuring duration, especially for instruments subject to prepayment.  While duration is a useful way to segment the universe, it is not the only factor which determines a fund’s volatility.

Reallocating from a MMF to a Short Duration fund entails cost. Expenses average 49 basis points for Short Term funds compared with 13 basis points for the average MMF.  Returns usually justify those added costs. But how should investors weigh the added risk. How should investors distinguish among strategies and track records? How helpful is diversification?

To answer these questions, we applied two computer models, one to measure skill and another to select an optimal portfolio.

We have discussed in these pages Trapezoid’s Orthogonal Attribution Engine which measures skill of actively managed equity portfolio managers. MFO readers can learn more and register for a demo at www.fundattribution.com. Our fixed income attribution model is a streamlined adaptation of that model and has some important differences. Among them, the model does not incorporate the forward looking probabilistic analysis of our equity model. Readers who want to learn more are invited to visit our methodology page. The fixed income model is relatively new and will evolve over time.

We narrowed the universe of 1500 funds to exclude not only unskilled managers but fund classes with AUM too small, duration too long, tenure too short (<3 years), or expenses too great (skill had to exceed expenses, adjusted for loads, by roughly 1%). We generally assumed investors could meet institutional thresholds and are not tax sensitive. For a variety of reasons, our model portfolio might not be right for every investor and should not be construed as investment advice.

DoubleLine Total Return Bond (DBLTX), MassMutual Premier High Yield Fund (MPHZX), and PIMCO Mortgage Opportunities Fund (PMZIX) all receive full marks from Morningstar and Lipper (except in the area of tax efficiency.)  Diversifying among credit classes and durations is a benefit – but the model suggests these three funds are all you need.

Honorable Mentions: The model finds Guggenheim Total Return Bond Fund (GIBIX) is a good substitute for DBLTX and Shenkman Short Duration High Income Fund (SCFIX) is a serviceable substitute for MPHZX. We ran some permutations in which other funds received allocations. These included: Victory INCORE Fund for Income (VFFIX), Nuveen Limited term Municipal Bond (FLTRX), First Trust Short Duration High Income Fund (FDHIX), Guggenheim Floating Rate Strategies (GIFIX), and Eaton Vance High Income Opportunities Fund (EIHIX). 

The Trapezoid Model Portfolio generated positive returns over a 12 and 36-month time frame. (Our data runs through January 2016.) The PIMCO Mortgage fund wasn’t around 5 years ago, but it looks like the five-year yield would have been close to 6%.

The portfolio has an expense ratio of 53 basis points. Our algorithms reflect Trapezoid’s skeptical attitude to high cost managers.  There are alternative funds in the same asset classes with expense ratios of 25 basis points of better. But superb performance more than justifies the added costs. Our analysis suggests the rationale for passive managers like Vanguard is much weaker in this space than in equities. However, investors in the retail classes may see higher expenses and loads which could change the analysis.

No Return Without Risk: How much risk are we taking to get this extra return? The duration of this portfolio is just under 3.5 years.  There is some corporate credit risk: MPHZX sustained a loss in the twelve months ending January. It is mostly invested in BB and B rated corporate bonds. To do well the fund needs to keep credit loss under 3%/yr.  Although energy exposure is light, we see dicey credits including Valeant, Citgo, and second lien term loans. The market rarely gives away big yields without attaching strings.

The duration of this portfolio hurt returns over the past year. What advice can we give to investors unable to take 3.5 years of duration risk? We haven’t yet run a model but we have a few suggestions.

1. For investors who can tolerate corporate credit risk, Guggenheim Floating Rate Strategies (GIFIX) did very well over the past 5 years and weathered last year with only a slight loss.
2. A former fixed income portfolio manager who now advises clients at Merrill Lynch champions Pioneer Short Term Income Fund (PSHYX). Five-year net return is only 2.2%, but the fund has a duration of only 0.7 years and steers clear of corporate credit risk.
3. A broker at Fidelity suggested Touchstone UltraShort Duration Fixed Income Fund (TSDOX) which has reasonable fees and no load.

Short Duration funds took a hit during the subprime crisis.  At the trough bond fund indices were down 7 to 10% from peak, depending on duration. Funds with concentrations in corporate credit and mortgage paper were down harder while funds like VFFIX which stuck to government or municipal bonds held up best. MassMutual High Yield was around during that period and fell 21% (before recovering over the next 9 months.) The other two funds were not yet incepted; judging from comparable funds the price decline during the crisis was in the mid-single digits. Our model portfolio is set up to earn 2.5% to 3% when rates and credit losses are stable. Considering that their alternative is to earn nothing, investors deploying cash in Short Duration funds appear well compensated, even weighing the risk of a once-in-a-generation 10% drawdown.

Bottom Line: The impact of new money market fund regulations is not clear. Investors with big cash holdings have good alternatives.  Expenses matter but there is a strong rationale for selecting active managers with good records, even when costs are above average.  Investors get paid to take risk but must understand their exposure and downside. A moderate amount of diversification among asset classes seems to be beneficial. Our model portfolio is a good starting point but should be tailored to the needs of particular investors.

The Alt Perspective: Commentary and news from DailyAlts.

For anyone who enjoys roller coasters, Q1 2016 was for you. While it seemed a bit wild at times, it was really just a trip down to the bottom of a trough, and a consistent tick back up to where we started. Thanks to a coordinated plan of attack on part of global sovereign bankers, and reiterated by new policy actions from the European Central Bank, the markets shrugged off early losses in the year with a very solid recovery in March. As they say, don’t fight the Fed. And in this case, don’t fight the globally coordinated Fed.

Let’s first take a look at how alternative funds faired in the bull month of March.

Performance

The returns for the month of March were positive, except for managed futures and bear market funds. Commodities led the way over the month, while bear market funds got hammered with the strong rally in equities. Managed futures struggled to add value as markets tended to be one directional in March.

Commodities Broad Basket        4.32%

Long/Short Equity  2.53%

Multicurrency         2.52%

Nontraditional Bond         1.65%

Multialternative      1.27%

Market Neutral       0.46%

Managed Futures    -2.79%

Bear Market  -10.86%

Cleary, equity based alternative strategies, such as long/short equity, struggled to keep up with the strong rally in March, however, nontraditional bond funds performed well relative to their long-only counterpart (Intermediate Term Bonds). Below are a few traditional mutual fund categories:

Large Blend (US Equity)    6.37%

Foreign Large Blend         6.86%

Intermediate Term Bond  1.30%

Moderate Allocation        4.72%

Data Source: Morningstar

Research

Two interesting pieces of research emerged over the month. The first is from an investment advisor in La Jolla, California, called AlphaCore Capital. In a piece written by their director of research, they highlight the importance of research and due diligence when choosing alternative investment managers (or funds) – not because the strategies are more complex (which is also a reason), but because the range of returns for funds in each category is so wide. This is called “dispersion,” and it is a result of the investment strategies and the resulting returns of funds in the same category being so different. Understanding these differences is where the expertise is needed.

The second piece of research comes from Goldman Sachs. In their new research report, they note that liquid alternatives outperformed the pricier hedge funds across all five of the major categories of funds they track. While the comparative results in some categories were close, the two categories that stood out with significant differences were Relative Value and Event Driven. In both cases, alternative mutual funds outperformed their hedge fund counterparts by a wide margin.

Fund Liquidations

Nineteen alternative mutual funds were liquidated over the quarter, with seven of those in March. Most notably, Aberdeen (the new owner of the fund-of-hedge fund firm Arden Asset Management) closed down the larger of the two Arden multi-alternative funds, the Arden Alternative Strategies Fund (ARDNX). The fund had reached a peak of $1.2 billion in assets back in November 2014, but lackluster performance in 2015 put the fund on the chopping block.

In addition to the Arden fund, Gottex Fund Management (another institutional fund-of-hedge funds, as is Arden) liquidated their only alternative mutual fund, the Gottex Endowment Strategy Fund (GTEAX), after losing nearly 6% in 2015. Both of these closures create concerns about the staying power and commitment by institutional alternative asset management firms. And both come on the back of other similar firms, such as Collins Capital and Whitebox (the latter being a hedge fund manager), who both liquidated funds in February.

Where to from here?

Challenging performance periods always serve to clean out the underperformers. In many ways, Q1 served as a housecleaning quarter whereby funds that wrapped up 2015 with few assets and/or below average (or well-below average) performance took the opportunity to shut things down. A little housecleaning is always good. Looking forward, there is significant opportunity for managers with strong track records, compelling diversification, and consistent management teams.

Alternative investment strategies, and alternative asset classes, both have a role to play in a well-diversified portfolio. That fact hasn’t changed, and as more financial advisors and individual investors grow accustom to how these strategies and asset classes behave, the greater the uptake will be in their portfolios.

Be well, stay diversified and do your due diligence.

Observer Fund Profiles:

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

AQR Equity Market Neutral (QMNIX) and AQR Long-Short Equity (QLEIX): our colleague Sam Lee, principal of Severian Asset Management, offers a close assessment of two institutional AQR funds. The bottom line is: “AQR does long-short investing right. Check these out.”

Intrepid Endurance (ICMAX): at 70% cash, what’s to like? Well, the highest Sharpe ratio of any small cap fund – domestic, global, or international – of the course of the full market cycle. Also the lower Ulcer Index. And peer-beating returns. Heck, what’s not to like?

Otter Creek Long/Short Opportunity (OTCRX): we’d describe the young Otter Creek fund as “pure alpha” – it has outperformed its peers by 11% a year since inception – except that it’s also done it was lower volatility and a near-zero correlation to the market. We’ll leave it to you to sort out.

Funds in Registration

Whether it’s the time of year or the sense of an industry-wide death spiral, the number of new funds in registration has been steadily declining. This month saw either six or 20 filings, depending on how you could a weird series of options funds from a group called Vest Financial. Two funds start out:

Moerus Worldwide Value Fund marks the return of Amit Wadhwaney, who managed Third Avenue International Value (TAVIX) from 2001-2013. Morningstar described Mr. Wadhwaney as “skilled and thoughtful.” His fund was distinguished by somewhat better than average returns with “markedly lower” volatility and strong down-market performance.  The fund’s performance since his departure has been disastrous.

Sit ESG Growth Fund which targets financially sound firms with good ESG records. The success of the other funds in the Sit family suggests that values-driven investors might find it worth investigating.

Manager Changes

We’ve track down rather more than 70 manager changes this month plus, of course, the one MANAGER CHANGE! Which is to say, Mr. Goldfarb’s departure from Sequoia.

Updates

Congratulations to the good folks at Seafarer. Seafarer Overseas Growth & Income (SFGIX), topped $1.1 billion in assets in March, a singular achievement. In just over four years of operation, the fund has returned 24.8% while its average peer has lost 9.75%. Seafarer seems to have SEC clearance to launch their Seafarer Overseas Value fund, but has not yet done so.

Briefly Noted . . .

GlobalX and Janus are locked in a struggle to see who can release the greatest number of pointless ETFs in a month. The Global X entries are Health & Wellness Thematic ETF (BFIT), Longevity Thematic ETF (LNGR) and Millennials Thematic ETF (MILN). The latter focuses, like a laser, on those uniquely Millennial passions: “social and entertainment, clothing and apparel, travel and mobility, food/restaurants and consumer staples, financial services and investments, housing and home goods, education and employment, and health and fitness.” Janus weighed in with The Health and Fitness ETF, The Long Term Care ETF, The Obesity ETF and The Organics ETF. None have symbols but all will be available on May 31.

Upon further consideration of tax and other stuff, the Board of Trustees of Midas Series Trust has determined not to proceed with the merger of Midas Magic (MISEX) into the Midas Fund (MIDSX). This was an almost incalculably stupid plan from the get-go. MISEX is a diversified domestic equity fund whose top holdings include Berkshire-Hathaway, Google and Johnson & Johnson. Midas invests in gold miners. Over the last decade, Magic shares are up 74% while Midas lost 70%. And no, that’s not just because gold was down over the period; from 2006-2015, the spot price of gold rose from around $560 to about $1060. Here would be your investment options: Midas in blue, the average gold fund in, well, gold or Magic in yellow.

It’s easy to see why liquidating both funds makes sense. They’ve got $12-14 million in assets, weak to horrible long-term records and expenses pushing 4.0%. It’s hard to see how the Trustees managed to declare that “it’s in the best interest of the shareholders” to place them in Midas.

Effective March 31, 2016, the Templeton Foreign (TEMFX), Global Opportunities (TEGOZ) and World (TEMWX) funds gained the flexibility to “to hedge (protect) against currency risks using certain derivative instruments including currency and cross currency forwards and currency futures contracts.”

Tobin Smith, a financial tout for Fox News from 2000-2013, was nailed by the SEC for nearly $258,000 on charges that he fraudulently promoted a penny stock, IceWEB, to investors. Apparently the firm’s CEO wanted to pump its trading volume and price and, for a price, Mr. Smith and his firm was happy to oblige. The IceWEB scam occurred in 2012. He was terminated in 2013 over the on-air promotion of yet another stock.

SMALL WINS FOR INVESTORS

As of April 11, 2016, AllianzGI Ultra Micro Cap Fund (GUCAX) will reopen.

Effective April 1, 2016, the Boston Trust Small Cap Fund (BOSOX) and the Walden Small Cap Innovations Fund (WASOX) will no longer be closed to new investors.

The Gotham Index Plus Fund (GINDX) is reducing their administrative fee by 2 basis points, from 1.17% to 1.15%. Woo hoo! Including the “acquired fund fees and expenses,” the fund continues to cost institutional investors 3.28% per year. The reduction came on the $15 million fund’s first anniversary. The fund posted returns in the top 2% of its large-core peer group.

Invesco International Growth Fund (AIIEX) reopened to all investors on March 18, 2016. Class B shares are closed and will not re-open.

J.P. Morgan U.S. Large Cap Core Plus Fund (JLCAX) has reopened to new investors

Effective April 1, 2016, Kaizen Advisory, LLC (the “Advisor”) has lowered its annual advisory fee on Kaizen Hedged Premium Spreads Fund (KZSAX) from 1.45% to 1.10% and agreed to reduce the limit on total annual fund operating expenses by 0.35% to 1.75% for “A” shares.

CLOSINGS (and related inconveniences)

Effective April 30, 2016, the Diamond Hill Small-Mid Cap Fund (DHSCX) will close to most new investors. 

On the general topic of “related inconveniences,” several fund advisors have decided that they need more of your money. The shareholders of LoCorr Managed Futures Strategy Fund (LFMAX) agreed, and voted to raise their fees management fees to 1.85%. To be clear: that’s not the fund’s expense ratio, that’s just the part of the fee that goes to pay the managers for their services. Similarly, shareholders at Monte Chesapeake Macro Strategies Fund (MHBAX) have voted to bump their managers’ comp to 1.70% of assets. In each case, the explanation is that the advisor needs the more to hire more sub-advisers.

OLD WINE, NEW BOTTLES

On May 2, American Century Strategic Inflation Opportunities Fund (ADSIX) will be renamed the Multi-Asset Real Return Fund. The plan is to invest primarily in TIPs with “a portion” in commodities-related securities and REITs.

As of April 1, 2016, Cavanal Hill Balanced Fund became Cavanal Hill Active Core Fund (APBAX). The big accompanying change: The percentage of equity securities that the Fund normally invest in shall change from “between 40% and 75%” to “between 40% and 75%.” If you’re thinking to yourself, “but Dave, those are identical ranges,” I concur.

Effective April 18, 2016, Columbia Small Cap Core (LSMAX) will change its name to Columbia Disciplined Small Core Fund.

Liquidation of JPMorgan Asia Pacific Fund (JAPFX). The Board of Trustees of the JPMorgan Asia Pacific Fund has approved the liquidation and dissolution of the fund on or about April 29, 2016. 

Matthews Asia Science and Technology (MATFX) has been rechristened as Matthews Asia Innovators Fund. They formerly were constrained to invest at least 80% of their assets in firms that “derive more than 50% of their revenues from the sale of products or services in science- and technology-related industries and services.” That threshold now drops to 25%.

Pear Tree PanAgora Dynamic Emerging Markets Fund has been renamed Pear Tree PanAgora Emerging Markets Fund (QFFOX). At the same time, expenses have been bumped up from 1.37% (per Morningstar) to 1.66% (in the amendment on file). Why, you ask? The old version of the fund “allocate[d] its assets between two proprietary strategies: an alpha modeling strategy and a risk-parity strategy.” The new version relies on “two proprietary risk-parity sub-strategies: an alternative beta risk-parity sub-strategy and a “smart beta” risk-parity sub-strategy.” So there’s your answer: beta costs more than alpha.

The PENN Capital High Yield Fund has changed its name to the PENN Capital Opportunistic High Yield Fund (PHYNX).

The managers of the Rainier High Yield Fund (RIMYX), Matthew Kennedy and James Hentges, have announced their intention to resign from Rainier Investment Management and join Angel Oak Capital Advisors. Subject to shareholder approval (baaaaaa!), the fund will follow them and become Angel Oak High Yield. Shareholders are slated to vote in mid-April.

Effective on or about May 1, 2016, the name of each Fund set forth below will be changed to correspond with the following table:

Current Fund Name	Fund Name Effective May 1, 2016
Salient Risk Parity Fund	Salient Adaptive Growth Fund
Salient MLP & Energy Infrastructure Fund II	Salient MLP & Energy Infrastructure Fund
Salient Broadmark Tactical Plus Fund	Salient Tactical Plus Fund

The Board of Trustees of Franklin Templeton Global Trust recently approved a proposal to reposition the Templeton Hard Currency Fund (ICPHX) as a global currency fund named Templeton Global Currency Fund. That will involve changing the investment goal of the fund and modifying the fund’s principal investment strategies.

Seeing not advantage in value, Voya is making the fourth name change in two years to one of its funds. Effective May 1, we’ll be introduced to Voya Global Equity Fund (NAWGX) which has been Voya Global Value Advantage since May 23, 2014. For three weeks it has been called Voya International Value Equity (May 1 – 23, 2014). Prior to that, it was just International Value Equity. The prospectus will remove “value investing” as a risk factor.

Thirty days later, Voya Mid Cap Value Advantage Fund (AIMAX) becomes Voya Mid Cap Research Enhanced Index Fund. The expense ratio does not change as it moves from “active” to “enhanced index,” though both the strategy and management do.

OFF TO THE DUSTBIN OF HISTORY

Breithorn Long/Short Fund (BRHAX) has closed and will liquidate on April 8, 2016.

Crow Point Defined Risk Global Equity Income Fund (CGHAX) has closed and will liquidate on April 25, 2016.

The Board of Trustees of Dreyfus Opportunity Funds has approved the liquidation of Dreyfus Strategic Beta U.S. Equity Fund (DOUAX), effective on or about April 15, 2016

DoubleLine just liquidated the last of three equity funds launched in 2013: DoubleLine Equities Growth Fund (DDEGX), which put most of its puddle of assets in high-growth mid- and large cap stocks. Based on its performance chart, you could summarize its history as: “things went from bad to worse.”

Dunham Alternative Income Fund (DAALX) will be exterminated (!) on April 25, 2016. (See, ‘cause the ticker reads like “Daleks” and the Daleks’ catchphrase was not “Liquidate!”)

On August 26, 2016, Franklin Flex Cap Growth Fund (FKCGX) will be devoured. Franklin Growth Opportunities Fund (FGRAX) will burp, but look appropriately mournful for its vanished sibling.

Frost Natural Resources Fund (FNATX) liquidated on March 31, 2016. Old story: seemed like a good idea when oil was $140/barrel, not so much at $40. In consequence, the fund declined 36% from inception to close.

Hodges Equity Income Fund (HDPEX) merged into the Hodges Blue Chip Equity Income Fund (HDPBX) on March 31, 2016. At $13 million each, neither is economically viable, really. $26 million will be tough but the fund’s record is okay, so we’ll be hopeful for them.

The Board of Trustees of LKCM Funds, upon the recommendation of Luther King Capital Management Corporation, the investment adviser to each fund, has approved a Plan of Reorganization and Dissolution pursuant to which the LKCM Aquinas Small Cap Fund (AQBLX) and the LKCM Aquinas Growth Fund (AQEGX), would be reorganized into the LKCM Aquinas Value Fund (AQEIX).

The Board of Trustees of the MassMutual Premier Funds has approved a Plan of Liquidation and Termination pursuant to which it is expected that the MassMutual Barings Dynamic Allocation Fund (MLBAX) will be dissolved. Effective on or about June 29, 2016 (the “Termination Date”), shareholders of the various classes of shares of the fund will receive proceeds in proportion to the number of shares of such class held by each of them on the Termination Date.

Oberweis Asia Opportunities Fund (OBAOX), a series of The Oberweis Funds (the “Trust”), scheduled for April 22, 2016, you will be asked to vote upon an important change affecting your fund. The purpose of the special meeting is to allow you to vote on a reorganization of your fund into Oberweis China Opportunities Fund (OBCHX).

On March 21, the Board of RX Traditional Allocation Fund (FMSQX) decided to close and liquidate it. Ten days later it was gone.

Satuit Capital U.S. Small Cap Fund (SATSX) will be liquidating its portfolio, winding up its affairs, and will distribute its assets to fund shareholders as soon as is practicable, but in no event later than April 15, 2016.

SignalPoint Global Alpha Fund (SPGAX) will liquidate on April 29, 2016.

Toroso Newfound Tactical Allocation Fund was liquidated on March 30, 2016.

On March 17, 2016, the Virtus Board of Trustees voted to liquidate the Virtus Alternative Income Solution (VAIAX), Virtus Alternative Inflation Solution (VSAIX), and Virtus Alternative Total Solution (VATAX) funds. They’ll liquidate around April 29, 2016.

In Closing . . .

May’s a big month for us as we celebrate our fifth anniversary. When we launched, Chip reported that the average life expectancy for a site like ours is … oh, six weeks. Even I’m a bit stunned as we begin a sixth year.

It goes without saying that you make it possible but, heck, I thought I’d say it anyway. Thanks and thanks and thanks again to you all!

Each month about 24,000 people read the Observer but about 6,000 of them are reading it for the first time. For their benefit, I need to repeat the explanation for the “hey, if you’re not charging and there aren’t any ads, how do you stay in business?” question.

Here’s the answer: good question! There are two parts to the answer. First, the Observer reflects the passions of a bunch of folks who are working on your behalf because they want to help, not because they’re looking for money.  And so all of us work for somewhere between nothing (Brian, Charles, Ed, Sam, Leigh – bless you all!) and next-to-nothing (Chip and me). That’s not sustainable in the long term but, for now, it’s what we got and it works. So, part one: low overhead.

Second, we’re voluntarily supported by our readers. Some folks make tax-deductible contributions now and then (Thanks, Gary, Edward, and Mr. West!), some contribute monthly through an automatic PayPal setup (waves to Deb and Greg!) and many more use of Amazon link. The Amazon story is simple: Amazon rebates to us and amount equal to about 7% of the value of any purchase you make using our Amazon Associates link. It’s invisible, seamless and costs you nothing. The easiest way is set it and forget it: bookmark our Amazon link or copy it and paste it into your web browser of choice as a homepage. After that, it’s all automatic. A few hundred readers used our link in March; if we could get everybody who reads us to use the system, it would make a dramatic difference.

In May we’re also hoping to provide new profiles of two old friends: Aston River Road Independent Value and Matthews Asian Growth & Income. And, with luck, we’ll have a couple other happy birthday surprises to share.

Until then, keep an eye out in case you spot a huge dome wandering by. If so, let me know since we seem to be missing one!