Objective

The fund seeks long-term capital appreciation by investing, mostly, in US stocks of various sizes and in “other equity-like instruments.”  The manager looks for companies with good management teams (those with “a history of treating public shareholders like partners”), little reliance on debt markets and above-average returns on equity. Once they find such companies, they wait until the stock sells at a discount to “a conservative estimate of the company’s intrinsic value.” The Fund is non-diversified, with both a compact portfolio (30 or so names) and a willingness to put a lot of money (often three or four times more than a “neutral weighting” would suggest) in a few sectors.

Adviser

Akre Capital Management, LLC, an independent Registered Investment Advisor located in Middleburg, VA. Mr. Akre, the founder of the firm, has been managing portfolios since 1986. As of June 30, 2014, ACM had approximately $3.8 billion in client assets under management, split between Akre Capital Management, which handles the firm’s separately managed accounts ($1 million minimum), a couple hedge funds, and Akre Focus Fund.  

Managers

John Neff and Chris Cerrone. 

Mr. Neff is a Partner at Akre Capital Management and has served as portfolio manager of the fund since August 2014, initially with founder Chuck Akre. Before joining Akre, he served for 10 years as an equity analyst at William Blair & Company. Mr. Cerrone is a Partner at Akre Capital Management and has served as portfolio manager of the fund since January 2020. Before that he served as an equity analyst for Goldman Sachs for two years.

Strategy capacity and closure

Mr. Akre allows that there “might be” a strategy limit. The problem, he reports, is that “Every time I answer that question, I’ve been proven to be incorrect.  In 1986, I was running my private partnership and, if you’d asked me then, I would have said ‘a couple hundred million, tops.’”  As is, he and his team are “consumed with producing outcomes that are above average.  If no opportunities to do that, we will close the fund.”

Active share

96. “Active share” measures the degree to which a fund’s portfolio differs from the holdings of its benchmark portfolio. High active share indicates management which is providing a portfolio that is substantially different from, and independent of, the index. An active share of zero indicates perfect overlap with the index, 100 indicates perfect independence. The active share for the Akre Focus Fund is 96, which reflects a very high level of independence from its benchmark S&P 500.

Management’s Stake in the Fund

Mr. Neff and Mr. Cerrone have each invested over $1 million of their own money in Akre Focus.

Opening date

August 31, 2009 though the FBR Focus fund, which Mr. Akre managed in the same style, launched on December 31, 1996.

Minimum investment

$2,000 for regular accounts, $1000 for IRAs and accounts set up with automatic investing plans. The fund also has an institutional share (AKRIX) class with a $250,000 minimum.

Expense ratio

1.3% on assets of about $4.2 billion, as of June 2023. There’s also a 1.00% redemption fee on shares held less than 30 days. The institutional share class on assets of about $7.2 billion has an expense ratio of 1.04% with the difference being the absence of a 12(b)1 fee. 

Comments

In 1997, Mr. Akre became of founding manager of FBR Small Cap Growth – Value fund, which became FBR Small Cap Value, then FBR Small Cap, and finally FBR Focus (FBRVX). Across the years and despite many names, he applied the same investment strategy that now drives Akre Focus. Here’s his description of the process:

1. We look for companies with a history of above average return on owner’s capital and, in our assessment, the ability to continue delivering above average returns going forward.

   Investors who want returns that are better than average need to invest in businesses that are better than average. This is the pond we seek to fish in.

2. We insist on investing only with firms whose management has demonstrated an acute focus on acting in the best interest of all shareholders.

   Managers must demonstrate expertise in managing the business through various economic conditions, and we evaluate what they do, say and write for demonstrations of integrity and acting in the interest of shareholders.

3. We strive to find businesses that, through the nature of the business or skill of the manager, present clear opportunities for reinvestment in the business that will deliver above average returns on those investments.

   Whether looking at competitors, suppliers, industry specialists or management, we assess the future prospects for business growth and seek out firms that have clear paths to continued success.

The final stage of our investment selection process is to apply a valuation overlay…

Mr. Akre’s discipline leads to four distinguishing characteristics of his fund’s portfolio:

1. It tends to have a lot of exposure to smaller cap stocks. His explanation of that bias is straightforward: “that’s where the growth is.”
2. It tends to make concentrated bets. He’s had as much as a third of the portfolio in just two industries (gaming and entertainment) and his sector weightings are dramatically different from those of his peers or the S&P500. 
3. It tends to stick with its investments. Having chosen carefully, Mr. Akre tends to wait patiently for an investment to pay off. In the past 15 years his turnover rate never exceeded 25% and is sometimes in the single digits.
4. It tends to have huge cash reserves when the market is making Mr. Akre queasy. From 2001 – 04, FBRVX’s portfolio averaged 33.5% cash – and crushed the competition. It was in the top 2% of its peer group in three of those four years and well above average in the fourth year. At the end of 2009, AKREX was 65% in cash. By the end of 2010, it was still over 20% in cash. 

It’s been a very long time since anyone seriously wondered whether investing with Mr. Akre was a good idea. As a quick snapshot, here’s his record (blue) versus the S&P500 (green) from 1996 – 2009:

And again from 2009 – 2014:

Same pattern: while the fund lags the market from time to time – for as long as 18-24 months on these charts – it beats the market by wide margins in the long term and does so with muted volatility. Over the past three to five years AKREX has, by Morningstar’s calculation, captured only about half of the market’s downside and 80-90% of its upside.

There are two questions going forward: does the firm have a plausible succession plan and can the strategy accommodate its steadily growing asset base? The answers appear to be: yes and so far.

Messrs. Saberhagen and Neff have been promoted from “analyst” to “manager,” which Mr. Akre says just recognizes the responsibilities they’d already been entrusted with. While they were hired as analysts, one from a deep value shop and one from a growth shop, “their role has evolved over the five years. We operate as a group. Each member of the group is valued for their contributions to idea generation, position sizing and so on.” There are, on whole, “very modest distinctions” between the roles played by the three team members. Saberhagen and Neff can, on their own initiative, change the weights of stocks in the portfolio, though adding a new name or closing out a position remains Mr. Akre’s call. He describes himself as “first among equals” and spends a fair amount of his time trying to “minimize the distractions for the others” so they can focus on portfolio management. 

The continued success of his former fund, now called Hennessy Focus (HFCSX) and still managed by guys he trained, adds to the confidence one might have in the ultimate success of a post-Akre fund.

The stickier issue might be the fund’s considerable girth. Mr. Akre started as a small cap manager and much of his historic success was driven by his ability to ferret out excellent small cap growth names. A $3.3 billion portfolio concentrated in 30 names simply can’t afford to look at small cap names. He agrees that “at our size, small businesses can’t have a big impact.” Currently only about 3% of the portfolio is invested in four small cap stocks that he bought two to three years ago. 

Mr. Akre was, in our conversation, both slightly nostalgic and utterly pragmatic. He recalled cases where he made killings on an undervalued subprime lender or American Tower when it was selling for under $1 a share. It’s now trading near $100. But, “those can’t move the needle and so we’re finding mid and mid-to-large cap names that meet our criteria.” The portfolio is almost evenly split between mid-cap and large cap stocks and sits just at the border between a mid-cap and large cap designation in Morningstar’s system. So far, that’s working.

Bottom Line

This has been a remarkable fund, providing investors with a very reliable “win by not losing” machine that’s been compounding returns for decades. Mr. Akre remains in control and excited and is backed by a strong next generation of leadership. In an increasingly pricey market, it certainly warrants a sensible equity investor’s close attention.

Fund website

Akre Focus Fund

Objective and strategy

The fund seeks long term capital growth through investing in what they deem to be 30 of the world’s most innovative companies. They take an eclectic approach to identifying global innovators. They read widely (for example Fast Company and MIT’s Technology Review, as well as reports from the Boston Consulting Group and Thomson Reuters) and maintain ongoing conversations with folks in a variety of industries. At base, though, the list of truly innovative firms seems finite and relatively stable. Having identified a potential addition to the portfolio, they also have to convince themselves that it has more upside than anyone currently in the portfolio (since there’s a one-in-one-out discipline) and that it’s selling at a substantial discount to fair value (typically about one standard deviation below its 10 year average). They rebalance about quarterly to maintain roughly equally weighted positions in all thirty, but the rebalance is not purely mechanical. They try to keep the weights “reasonably in line” but are aware of the importance of minimizing trading costs and tax burdens. The fund stays fully invested.

Adviser

Guinness Atkinson Asset Management. The firm started in 1993 as the US arm of Guinness Flight Global Asset Management and their first American funds were Guinness Flight China and Hong Kong (1994) and Asia Focus(1996). Guinness Flight was acquired by Investec, then Tim Guinness and Jim Atkinson acquired Investec’s US funds business to form Guinness Atkinson. Their London-based sister company is Guinness Asset Management which runs European funds that parallel the U.S. ones. The U.S. operation has about $460 million in assets under management and advises the eight GA funds.

Manager

Matthew Page and Ian Mortimer. Mr. Page joined GA in 2005 after working for Goldman Sachs. He earned an M.A. from Oxford in 2004. Dr. Mortimer joined GA in 2006 and also co-manages the Global Innovators (IWIRX) fund. Prior to joining GA, he completed a doctorate in experimental physics at the University of Oxford. The guys also co-manage the Inflation-Managed Dividend Fund (GAINX) and its Dublin-based doppelganger Guinness Global Equity Income Fund.

Strategy capacity and closure

Approximately $1-2 billion. After years of running a $50 million portfolio, the managers admit that they haven’t had much occasion to consider how much money is too much or when they’ll start turning away investors. The current estimate of strategy capacity was generated by a simple calculation: 30 times the amount they might legally and prudently own of the smallest stock in their universe.

Active share

96. “Active share” measures the degree to which a fund’s portfolio differs from the holdings of its benchmark portfolio. High active share indicates management which is providing a portfolio that is substantially different from, and independent of, the index. An active share of zero indicates perfect overlap with the index, 100 indicates perfect independence. The active share for Global Innovators is 96, which reflects a very high level of independence from its benchmark MSCI World Index.

Management’s stake in the fund

The managers are not invested in the fund because it’s only open to U.S. residents.

Opening date

Good question! The fund launched as the Wired 40 Index on December 15, 1998. It performed splendidly. It became the actively managed Global Innovators Fund on April 1, 2003 under the direction of Edmund Harriss and Tim Guinness. It performed splendidly. The current team came onboard in May 2010 (Page) and May 2011 (Mortimer) and tweaked the process, after which it again performed splendidly.

Minimum investment

$5,000, reduced to $1,000 for IRAs and just $250 for accounts established with an automatic investment plan.

Expense ratio

1.45% on assets of about $100 million, as of August 1, 2014. The fund has been drawing about $500,000/day in new investments this year.  

Comments

Let’s start with the obvious and work backward from there.

The obvious: Global Innovators has outstanding (consistently outstanding, enduringly outstanding) returns. The hallmark is Lipper’s recognition of the fund’s rank within its Global Large Cap Growth group:

Morningstar, using a different peer group, places it in the top 1 – 6% of US Large Blend funds for the past 1, 3, 5 and 10 year periods (as of 07/31/14). Over the past decade, a $10,000 initial investment would have tripled in value here while merely doubling in value in its average peer.

But why?

Good academic research, stretching back more than a decade, shows that firms with a strong commitment to ongoing innovation outperform the market. Firms with a minimal commitment to innovation trail the market, at least over longer periods. 

The challenge is finding such firms and resisting the temptation to overpay for them. The fund initially (1998-2003) tracked an index of 40 stocks chosen by the editors of Wired magazine “to mirror the arc of the new economy as it emerges from the heart of the late industrial age.” In 2003, Guinness concluded that a more focused portfolio and more active selection process would do better, and they were right. In 2010, the new team inherited the fund. They maintained its historic philosophy and construction but broadened its investable universe. Ten years ago there were only about 80 stocks that qualified for consideration; today it’s closer to 350 than their “slightly more robust identification process” has them track. 

This is not a collection of “story stocks.” The managers note that whenever they travel to meet potential US investors, the first thing they hear is “Oh, you’re going to buy Facebook and Twitter.” (That would be “no” to both.) They look for firms that are continually reinventing themselves and looking for better ways to address the opportunities and challenges in their industry. While that might describe eBay, it might also describe a major petroleum firm (BP) or a firm that supplies backup power to data centers (Schneider Electric). The key is to find firms which will produce disproportionately high returns on invested capital in the decade ahead, not stocks that everyone is talking about.

Then they need to avoid overpaying for them. The managers note that many of their potential acquisitions sell at “extortionate valuations.” Their strategy is to wait the required 12 – 36 months until they finally disappoint the crowd’s manic expectations. There’s a stampede for the door, the stocks overshoot – sometimes dramatically – on the downside and the guys move in.

Their purchases are conditioned by two criteria. First, they look for valuations at least one standard deviation below a firm’s ten year average (which is to say, they wait for a margin of safety). Second, they maintain a one-in-one-out discipline. For any firm to enter the portfolio, they have to be willing to entirely eliminate their position in another stock. They turn the portfolio over about once every three years. They continue tracking the stocks they sell since they remain potential re-entrants to the portfolio. They note that “The switches to the portfolio over the past 3.5 – 4 years have, on average, done well. The additions have outperformed the dropped stocks, on a sales basis, by about 25% per stock.”

Bottom Line

While we need to mechanically and truthfully repeat the “past performance is not indicative of future results” mantra, Global Innovator’s premise and record might give us some pause. Its strategy is grounded in a serious and sustained line of academic research. Its discipline is pursued by few others. Its results have been consistent across 15 years and three sets of managers. For investors willing to tolerate the slightly-elevated volatility of a fully invested, modestly pricey equity portfolio, Global Innovators really does command careful attention.

Fund website

GA Global Innovators Fund. While you’re there, please do read the Innovation Matters (2014) whitepaper. It’s short, clear and does a nice job of walking you through both the academic research and the managers’ approach.

Objective and strategy

The fund tries to provide total return, rather than just income. The strategy is to divide the portfolio between two distinctive strategies. Oaktree Capital Management pursues a “barbell-shaped” strategy consisting of senior bank loans and high-yield debt. RiverNorth Capital Management pursues an opportunistic closed-end fund (CEF) strategy in which they buy income-producing CEFs when those funds are (1) in an attractive sector and (2) are selling at what the manager’s research estimates to be an unsustainable discount to NAV. In theory, the entire portfolio might be allocated to any one of the three strategies; in practice, RiverNorth anticipates a “neutral position” in which 25 – 33% of the portfolio is invested in CEFs.

Adviser

RiverNorth Capital Management. RiverNorth is a Chicago-based firm, founded in 2000 with a distinctive focus on closed-end fund arbitrage. They have since expanded their competence into other “under-followed, niche markets where the potential to exploit inefficiencies is greatest.” RiverNorth advises the five RiverNorth funds: Core (RNCOX, closed), Managed Volatility (RNBWX), Equity Opportunity (RNEOX), RiverNorth/DoubleLine Strategic Income (RNDLX) and this one. They manage about $1.9 billion through limited partnerships, mutual funds and employee benefit plans.

Manager

Patrick Galley and Stephen O’Neill of RiverNorth plus Desmund Shirazi, Sheldon M. Stone and Shannon Ward of Oaktree. Mr. Galley is RiverNorth’s founder, president and chief investment officer; Mr. O’Neill is the chief trader, a remarkably important position in a firm that makes arbitrage gains from trading on CEF discounts. Mr. Shirazi is one of Oaktree’s senior loan portfolio managers, former head of high-yield research and long-ago manager of TCW High Yield Bond. Ms. Ward, who joined this management team just a year ago, was a vice president for high-yield investments at AIG back when they were still identified with The Force. The RiverNorth portion of the team manages about $2 billion in assets. The Oaktree folks between them manage about $200 million in mutual fund assets and $25 billion in private accounts and funds.

Strategy capacity and closure

In the range of $1 billion, a number that the principals agree is pretty squishy. The major capacity limiter is the fund’s CEF strategy. When investors are complacent, CEF discounts shrink which leaves RiverNorth with few opportunities to add arbitrage gains. The managers believe, though, that two factors will help keep the strategy limit high. First, “fear is here to stay,” so investor irrationality will help create lots of mispricing. Second, on March 18 2014, RiverNorth received 12(d)1 exemptive relief from the SEC. That exemption allows the firm to own more than 3% of a CEF’s outstanding shares, which then expands the amount they might profitably invest.

Management’s stake in the fund

The RiverNorth Statement of Additional Information is slightly screwed-up on this point. It lists Mr. Galley as having either $0 (page 33) or “more than $100,000” (page 38). The former is incorrect and the latter doesn’t comply with the standard reporting requirement where the management stake is expressed in bands ($100,000-500,000, $500,000 – $1 million, over $1 million). Mr. O’Neill has between $10,000 and $50,000 in the fund. The Oaktree managers and, if the SAI is correct, the fund’s directors have no investment in the fund.

Opening date

December 28, 2012

Minimum investment

$5,000, reduced to $1,000 for IRAs.

Expense ratio

1.44% for “I” class shares and 1.69% for “R” class shares on assets of $54.9 million, as of July 2023. 

Comments

In good times, markets are reasonably rational. In bad times, they’re bat-poop crazy. The folks are RiverNorth and Oaktree understand you need income regardless of the market’s mood, and so they’ve attempted to create a portfolio which operates well in each. We’ll talk about the strategies and then the managers.

What are these people up to?

The managers will invest in a variable mix of senior loans, high yield bonds and closed-end funds.

High yield bonds are a reasonably well understood asset class. Firms with shaky credit have to pay up to get access to capital. Structurally they’re like other bonds (that is, they suffer in rising rate environments) but much of their attraction arises from the relatively high returns an investor can earn on them. As investors become more optimistic about the economy, the premium they demand from lower-credit firms rises; as their view darkens, the amount of premium they demand rises. Over the past decade, high yield bonds have earned 8.4% annually versus 7.4% for large cap stocks and 6.5% for investment–grade corporate bonds. Sadly, investors crazed for yield have flooded into high-yield bonds, driving up their prices and driving their yield down to 5.4% in late May.

Senior loans represent a $500 billion asset class, which is about the size of the high-yield bond market. They represent loans made to the same sorts of companies which issue high-yield bonds. While the individual loans are private, collections of loans can be bundled together and sold to investors (a process called “securitizing the loans”). These loans have two particularly attractive structural features: they have built-in protection against loss of principal because they’re “senior” in the firm’s capital structure, which means that there’s collateral behind them and their owners would receive preferential treatment in the case of a bankruptcy. Second, they have built-in protection against loss of interest because they’re floating rate loans; as interest rates rise, so does the amount paid to the loan’s owner. These loans have posted positive returns in 15 of the past 16 years (2008 excepted).

In general, these loans yield a lot more than conventional investment grade bonds and operate with a near-zero correlation to the broad bond market.

Higher income. Protection against loss of capital. Protection against rising rates. High diversification value. Got it?

Closed-end funds share characteristics of traditional mutual funds and of other exchange-traded securities, like stocks and ETFs. Like mutual funds, they represent pools of professionally managed securities. The amount that one share of a mutual fund is worth is determined solely by the value of the securities in its portfolio. Like stocks and ETFs, CEFs trade on exchanges throughout the day. The amount one share of a CEF is worth is not the value of the securities in its portfolio; it’s whatever someone is willing to pay you for the share at any particular moment in time. Your CEF share might be backed by $100 in stocks but if you need to sell it today and the most anyone will offer is $70, then that share is worth $70. The first value ($100) is called the CEF’s net asset value (NAV) price, the second ($70) is called its market price. Individual CEFs have trading histories that show consistent patterns of discounts (or premiums). A particular fund might always have a market price that’s 3% below its NAV price. If that fund is sudden available at a 30% discount, an investor might buy a share that’s backed by $100 in securities for $70 and sell it for $97 when panic abates. Even if the market declined 10% in the interim, the investor could still sell a share purchased as $70 for $87 (a 10% NAV decline and a 3% discount) when rationality returns. As a result, you might pocket gains both from picking a good investment and from arbitrage as the irrational discount narrows; that arbitrage gain is independent of the general direction of the market.

RiverNorth/Oaktree High Income combines these three high-income strategies: an interest-rate insensitive loan strategy and a rate-sensitive high-yield one plus an opportunistic market-independent CEF arbitrage strategy.

Who are these guys, and why should we trust them?

Oaktree Capital Management was founded in April 1995 by former TCW professionals. They specialize in specialized credit investing: high yield bonds, convertible securities, distressed debt, real estate and control investments (that is, buying entire firms). They manage about $80 billion for clients on five continents. Among their clients are 100 of the 300 largest global pension plans, 75 of the 100 largest U.S. pension plans, 300 endowments and foundations, 11 sovereign wealth funds and 38 state retirement plans in the United States. Oaktree is widely recognized as an extraordinarily high-quality firm with a high-quality investment discipline.

To be clear: these are not the sorts of clients who tolerate carelessness, unwarranted risk taking or inconsistent performance.

RiverNorth Capital Management pursues strategies in what they consider to be niche markets where inefficiencies abound. They’re the country’s pre-eminent practitioner of closed-end fund arbitrage. That’s most visible in the (closed) RiverNorth Core Opportunity Fund (RNCOX), which has $700 million in assets and five-year returns in the top 13% of all moderate allocation funds. A $10,000 investment made in RNCOX at inception would be worth $19,000 by May 2014 while its average competitor would have returned $14,200.

Their plan is to grow your money steadily and carefully.

Patrick Galley describes this as “a risk-managed, high-yield portfolio” that’s been “constructed to maximize risk-adjusted returns over time, rather than shooting for pure short-term returns.” He argues that this is, in his mind, the central characteristic of a good institutional portfolio: it relies on time and discipline to steadily compound returns, rather than luck and boldness which might cause eye-catching short term returns. As a result, their intention is “wealth preservation: hit plenty of singles and doubles, rely on steady compounding, don’t screw up and get comfortable with the fact that you’re not going to look like a hero in any one year.”

Part of “not screwing up” requires recognizing and responding to the fact that the fund is investing in risky sectors. The managers have the tactical freedom to change the allocation between the three sleeves, depending on evolving market conditions. In the fourth quarter of 2013, for example, the managers observed wide discounts in CEFs and had healthy new capital flows, so they quickly increased CEF allocation to over 40% from a 25-33% neutral position. They’re now harvesting gains, and the CEF allocation is back under 30%.

So far, they’ve quietly done exactly what they planned. The fund is yielding 4.6% over the past twelve months. It has outperformed its multi-sector bond benchmark every quarter so far. Below you can see the comparison of RNOTX (in blue) and its average peer (in orange) from inception through late May 2014.

Bottom Line

RNOTX is trying to be the most sensible take possible on investing in promising, risky assets. It combines two sets of extremely distinguished investors who understand the demands of conservative shareholders with an ongoing commitment to use opportunism in the service of careful compounding. While this is not a low-risk fund, it is both risk-managed and well worth the attention of folks who might otherwise lock themselves into a single set of high-yield assets.

Fund website

RiverNorth/Oaktree High Income. Interested in becoming a better investor while you’re browsing the web? You really owe it to yourself to read some of Howard Marks’ memos to Oaktree’s investors. They’re about as good as Buffett and Munger, but far less known by folks in the mutual fund world.

Fact Sheet

At the time of publication, this fund was named Huber Equity Income.
This fund was formerly named Huber Capital Equity Income.

Objective and strategy

The Fund is pursuing both current income and capital appreciation. They typically invest in 40 of the 1000 largest domestic large cap stocks. It normally invests in stocks with high cash dividends or payout yields relative to the market but can buy non-payers if they have growth potential unrecognized by the market or have undergone changes in business or management that indicate growth potential.

Adviser

Huber Capital Management, LLC, of Los Angeles. Huber has provided investment advisory services to individual and institutional accounts since 2007. The firm has about $4 billion in assets under management, including $450 million in its three mutual funds.

Manager

Joseph Huber. Mr. Huber was a portfolio manager in charge of security selection and Director of Research for Hotchkis and Wiley Capital Management from October 2001 through March 2007, where he helped oversee over $35 billion in U.S. value asset portfolios. He managed, or assisted with, a variety of successful funds across a range of market caps. He is assisted by seven other investment professionals.

Strategy capacity and closure

Approximately $10 billion. That’s based on their desire to allow each position to occupy about 2% of the fund’s portfolio while not owning a controlling position in any of their stocks. Currently they manage about $1.5 billion in their Select Large Value strategy.

Active share

Not calculated. “Active share” measures the degree to which a fund’s portfolio differs from the holdings of its benchmark portfolio. High active share indicates management which is providing a portfolio that is substantially different from, and independent of, the index. An active share of zero indicates perfect overlap with the index, 100 indicates perfect independence. Mr. Huber, independently enough, dismisses it as “This year’s new risk-control nomenclature. Next year it’ll be something else.” 

Management’s stake in the fund

Mr. Huber has over $1 million invested in each of his three funds. His analysts are all on track to become partners and equity owners of the advisor.

Opening date

June 29, 2007

Minimum investment

$5,000 for regular accounts and $2,500 for retirement accounts.

Expense ratio

1.39% on $85 million in assets, as of July 2023. 

Comments

There’s no question that it works.

None at all.

Morningstar thinks it works:

Lipper lavishly thinks so:

And the Observer mostly concurs, recognizing both of the established Huber funds as Great Owls based on their consistently excellent risk-adjusted performance:

In addition to generating top-tier absolute and risk-adjusted returns, the Huber funds also generate very light tax burdens. By consciously managing when to sells securities (preferably when they qualify for lower long-term rates) and tax-loss harvesting, his investors have lost almost nothing to taxes over the past five years.

It works.

There’s only one question: does it work for you?

Mr. Huber pursues a rigorous, research-driven, value-oriented style. He’s been refining it for 20 years but the core has remained unchanged since his Hotchkis & Wiley days. He has done a lot of reading in behavioral finance and has identified a series of utterly predictable mistakes that investors – his team as much as other folks – are prone to make over and over. His strategy is two-fold:

Exploit other investors’ mistakes. Value investors tend to buy too early and sell too early; growth investors do the opposite. Both sides tend to extrapolate too much from the present, assuming that companies with miserable financials (for example, extremely low return on capital) will continue to flounder. His research demonstrates the inevitability of mean reversion, the currently poorest companies will tend to rise over time and the currently-strongest will fall. By targeting low ROC firms, which most investors dismiss as terminal losers, he harvests over time a sort of arbitrage gain as ROC rises toward the mean on top of market gains.

Guard against his own tendency to make mistakes. He’s created a red flags list, a sort of encyclopedia of all the errors that he or other investors have made, and then subjects each holding to a red flag review. They also have a “negative first to negative second derivative” tool that keeps them from doubling down on a firm whose rate of decline is accelerating and a positive version that might slow down their impulse to sell early.

Beyond that, they do rigorous and distinctive research. While many investors believe that large caps occupy the most efficient part of the market, Mr. Huber strongly disagrees. His argument is that large caps have an enormous number of moving parts, divisions within the firm that have their own management, culture, internal dynamics and financials. Pfizer, a top holding, has divisions specializing in Primary Care; Specialty Care and Oncology; Established Products and Emerging Markets; Animal Health; and Consumer Healthcare. Pfizer need not report the divisions’ financials separately, so many investors are stuck with investing backs on aggregate free cash flow firm-wide and a generic metric about what that flow should be. The Huber folks approach it differently: they start by looking at smaller monoline firms (for example, a firm that just specializes in animal care) which allows them to see that area’s internal dynamics. They then adjust the smaller firm’s financials to reflect what they know of Pfizer’s operations (Pfizer might, for example, have lower cost of capital than the smaller firm). By modeling each unit or division that way and then assembling the parts, they end up with a surrogate for Pfizer as a whole. 

Huber’s success is illustrated when we compare HULIX to three similarly-vintaged large-value funds:

Artisan Value (ARTLX), mostly because Artisan represents consistent excellence and this four-star fund from the U.S. Value team is no exception.

LSV Conservative Core (LSVPX) because LSV’s namesake founders published some 200 papers on behavioral finance and incorporated their research into LSV’s genes.

Hotchkis and Wiley Diversified Value (HWCAX) because Mr. Huber was the guy who built, designed and implemented H&W’s state of the art research program.

Higher returns, competitive downside, and higher risk-adjusted returns (those are all the ratios on the right where higher is better).

The problem is those returns are accompanied by levels of volatility that many investors are unprepared to accept. It’s a problem that haunted two other Morningstar Manager of the Decade award winners. Here are the markers to keep in mind:

• • Morningstar risk: over the past five years is high.
  • Beta: over the past five years is 1.18, or 18% greater than average.
  • Standard deviation: over the past five years is 18% compared to 14.9 for its peers.
  • Investor returns: by Morningstar’s calculation, the average investor in the fund over the past five years has earned 23.9% while the fund returned 32.1%. That pattern usually reflects bad investor behavior: buying in greed, selling in fear. This pattern is generally associated with funds that are more volatile investors can bear. (There’s an irony in the prospect that investors in the fund might be undone by the very sorts of behavioral flaws that the manager so profitably exploits.)

He also remains fully invested at all times, since he assumes that his clients have made their own asset allocation decisions. His job is to buy the best stocks possible for them, not to decide whether they should be getting conservative or aggressive.

Mr. Huber’s position on the matter is two-fold. First, short-term volatility should have no place in an investor’s decision-making. For the 45 year old with a 40 year investment horizon, nothing that happens over the next 40 months is actually consequential. Second, he and his team try to inform, guide, educate and calm their investors through both written materials and conference calls.

Bottom Line

Huber Equity Income has all the hallmarks of a classic fund: it has a disciplined, distinctive and repeatable process. There’s a great degree of intention and thought in its design.  Its performance, like that of its small cap sibling, is outstanding. It is a discipline well-suited to Huber’s institutional and pension-plan accounts, which contribute 90% of the firm’s assets. Those institutions have long time horizons and, one hopes, the sort of professional detachment that allows them to understand what “investing for the long-term” really entails. The challenge is deciding whether, as a small investor or advisor, you will be able to maintain that same cool, unflustered demeanor. If so, this might be a very, very good move for you.

Fund website

Huber Capital Equity Income Fund

Objective and strategy

The Fund seeks to deliver superior, risk-adjusted returns over full market cycles by investing primarily in a compact portfolio of domestic mid- to large-cap stocks. They invest in between 25-35 stocks. They’re fundamental investors who assess the quality of the underlying business and then its valuation. Factors they consider in that assessment include expected future profits, sustainable revenue or asset growth, and capital requirements of the business which allows them to estimate normalized free cash flow and generate valuation estimates. Typical characteristics of the portfolio:

• 85% of the portfolio to be invested in investment grade companies
• 85% of the portfolio to be invested in dividend paying companies
• 85% of the portfolio to be invested in the 1,000 largest companies in the U.S.

Adviser

Poplar Forest Capital. Poplar Forest was founded in 2007. They launched a small hedge fund, Poplar Forest Fund LP, in October 2007 and their mutual fund in 2009. The firm has just over $1 billion in assets under management, as of March 2014, most of which is in separate accounts for high net worth individuals.

Manager

J. Dale Harvey. Mr. Harvey founded Poplar Forest and serves as their CEO, CIO and Investment Committee Chair. Before that, he spent 16 years at the Capital Group, the advisor to the American Funds. He was portfolio counselor for five different American Funds, accounting for over $20 billion of client funds. He started his career in the Mergers & Acquisitions department of Morgan Stanley. He’s a graduate of the University of Virginia and the business school at Harvard University. He’s been actively engaged in his community, with a special focus on issues surrounding children and families.

Management’s stake in the fund

Over $1 million. “Substantially all” of his personal investment portfolio and the assets of his family’s charitable foundation, along with part of his mom’s portfolio, are invested in the fund. One of the four independent members of his board of directors has an investment (between $50,000 – 100,000) in the fund. In addition, Mr. Harvey owns 82% of the advisor, his analysts own 14% and everyone at the firm is invested in the fund. While individuals can invest their own money elsewhere, “there’s damned little of it” since the firm’s credo is “If you’ve got a great idea, we should own it for our clients.”

Strategy capacity and closure

$6 billion, which is reasonable given his focus on larger stocks. He has approximately $1 billion invested in the strategy (as of March 2014). Given his decision to leave Capital Group out of frustration with their funds’ burgeoning size, it’s reasonable to believe he’ll be cautious about asset growth.

Active share

90.2. “Active share” measures the degree to which a fund’s portfolio differs from the holdings of its benchmark portfolio.  High active share indicates management which is providing a portfolio that is substantially different from, and independent of, the index. An active share of zero indicates perfect overlap with the index, 100 indicates perfect independence. The active share for Poplar Forest is 90.2, which reflects a very high level of independence from its benchmark, the S&P 500 index.

Opening date

12/31/2009

Minimum investment

$25,000, reduced to $5,000 for tax-advantaged accounts. Morningstar incorrectly reports a waiver of the minimum for accounts with automatic investment provisions.

Expense ratio

1.20% on about $319 million in assets. The “A” shares carry a 5% sales load but it is available without a load through Schwab, Vanguard and a few others. The institutional share class (IPFPX) has a 0.95% expense ratio and $1 million minimum.

(as of July 2023)

Comments

Dale Harvey is looking for a few good investors. Sensible people. Not the hot money crowd. Folks who take the time to understand what they’ve invested in, and why. He’s willing to work to find them and to keep them.

That explains a lot.

It explains why he left American Funds, where he had a secure and well-paid position managing funds that were swelling to unmanageable, or perhaps poorly manageable, size. “I wanted to hold 30 names but had to hold 80. We don’t want to be big. We’re not looking for hot money. I still remember the thank-you notes from investors we got when I was young man. Those meant a lot.”

It explains why he chose to have a sales load and a high minimum. He really believes that good advisors add immense value and he wants to support and encourage them. Part of that encouragement is through the availability of a load, part through carefully-crafted quarterly letters that try to be as transparent as possible.  His hope is that he’ll develop “investor-partners” who will stay around long enough for Poplar Forest to make a real difference in their lives.

So far he’s been very pleased with the folks drawn to his fund. He notes that the shareholder turnover rate, industry-wide, is something like 25% a year while Poplar Forest’s rate is in the high teens. That implies a six or seven year holding period. Even during an early rough patch (“we were a year too early buying the banks and our results deviated from the benchmark negatively but we still didn’t see big redemptions”), folks have hung on. 

And, in truth, Mr. Harvey has given them reason to. The fund’s 17.1% annualized return places it in the top 1% of its peer group over the past three years, through March 2014. It has substantially outperformed its peers in three of its first four years; because of his purchase of financial stocks he was, he says, “out of sync in one of four years. Investing is inherently cyclical. It’s worked well for 17 years but that doesn’t mean it works well every year.”

So, what’s he do?  He tries to figure out whether a firm is something he’d be willing to buy 100% of and hold for the next 30 years. If he wouldn’t want to own all of it, he’s unlikely to want to own part of it. There are three parts to the process:

Idea generation: they run screens, read, talk to people, ponder. In particular, “we look for distressed areas. There are places people have lost confidence, so we go in to look for the prospect of babies being tossed with the bathwater.” Energy and materials illustrate the process. A couple years ago he owned none of them, today they’re 20% of the portfolio. Why? “They tend to be highly capital intensive but as the bloom started coming off the rose in China and the emerging markets, we started looking at companies there. A lot are crappy, commodity businesses, but along the way we found interesting possibilities including U.S. natural gas and Alcoa after it got bounced from the Dow.” 

Modeling:  their “big focus is normalized earnings power for the business and its units.” They focus on sustainable earnings growth, a low degree of capital intensity – that is, businesses which don’t demand huge, repeated capital investments to stay competitive – and healthy margins.  They build the portfolio security by security. Because “bond surrogates” were so badly bid up, they own no utilities, no telecom, and only one consumer staple (Avon, which they bought after it cut its dividend).

Reality checks: Mr. Harvey believes that “thesis drift is one of the biggest problems people have.”  An investor buys a stock for a particular reason, the reasoning doesn’t pan out and then they invent a new reason to keep from needing to sell the stock. To prevent that, Poplar Forest conducts a “clean piece of paper review every six months” for every holding. The review starts with their original purchase thesis, the date and price they bought it, and price of the S&P.”  The strategy is designed to force them to admit to their errors and eliminate them.   

Bottom Line

So why might he continue to win?  Two factors stand out. The first is experience: “Pattern recognition is helpful, you know if you’ve seen this story before. It’s like the movies: you recognize a lot of plotlines if you watch a lot of movies.”  The second is independence. Mr. Harvey is one of several independent managers we’ve spoken with who believe that being away from the money centers and their insular culture is a powerful advantage. “There’s a great advantage in being outside the flow that people swim in, in the northeast. They all go to the same meetings, hear the same stuff. If you want to be better than average, you’ve got to see things they don’t.” Beyond that, he doesn’t need to worry about getting fired. 

One of the biggest travesties in the industry today is that everyone is so afraid of being fired that they never differentiate from their benchmarks …  Our business is profitable, guys are getting paid, doing it because I get to do it and not because I’ve got to do it. It’s about great investment results, not some payday.

Fund website

Poplar Forest Partners Fund. While the fund’s website is Spartan, it contains links to some really thoughtful analysis in Mr. Harvey’s quarterly commentaries.  The advisor’s main website is more visually appealing but contains less accessible information.  

Fact Sheet

Objective

The Fund pursues long-term capital appreciation by investing primarily in common stocks of small and mid-cap companies, those with market caps under $5 billion. The Fund typically invests in 40 to 50 companies. The manager reserves the right to go to cash as a temporary move but is generally 94-97% invested.

Adviser

Walthausen & Co., LLC, which is an employee-owned investment adviser located in Clifton Park, NY. Mr. Walthausen founded the firm in 2007. In September 2007, he was joined by the entire investment team that had worked previously with him at Paradigm Capital Management, including an assistant portfolio manager, two analysts and head trader. Subsequently this group was joined by Mark Hodge, as Chief Compliance Officer, bringing the total number of partners to six. It specializes in small- and mid-cap value investing through separate and institutional accounts, and its two mutual funds. They have about $1.4 billion in assets under management.

Manager

John B. Walthausen. Mr. Walthausen is the president of the Advisor and has managed the fund since its inception. Mr. Walthausen joined Paradigm Capital Management on its founding in 1994 and was the lead manager of the Paradigm Value Fund (PVFAX) from January 2003 until July 2007. He oversaw approximately $1.3 billion in assets. He’s got about 35 years of experience and is supported by four analysts. He’s a graduate of Kenyon College (a very fine liberal arts college in Ohio), the City College of New York (where he earned an architecture degree) and New York University (M.B.A. in finance).

Strategy capacity and closure

In the neighborhood of $2 billion. That number is generated by three constraints: he wants to own 40 stocks, he does not want to own more than 5% of the stock issued by any company, and he wants to invest in companies with market caps in the $500 million – $5 billion range. In the hypothetical instance that  market conditions led him to invest mostly in $1 billion stocks, the calculation is $50 million invested in each of 40 stocks = $2 billion. Right now the strategy holds about $200 million.

Active share

Not calculated. “Active share” measures the degree to which a fund’s portfolio differs from the holdings of its benchmark portfolio. High active share indicates management which is providing a portfolio that is substantially different from, and independent of, the index. An active share of zero indicates perfect overlap with the index, 100 indicates perfect independence. They’ve done the calculation for an investor in their separate accounts but haven’t seen demand for it with the mutual funds.

Management’s stake in the fund

Mr. Walthausen has between $500,000 and $1,000,000 in this fund, over $1 million invested in his flagship fund, and he also owns a majority stake in the fund’s adviser.

Opening date

December 27 2010.

Minimum investment

$2,500 for all accounts. There’s also an institutional share class with a $100,000 minimum and 1.22% expense ratio.

Expense ratio

1.47% on an asset base of about $40 million (as of 03/31/2014).

Comments

It’s hard to know whether to be surprised by Walthausen Select Value’s excellent performance. On the one hand, the fund has some fairly pedestrian elements. It invests primarily in small- to mid-cap domestic stocks. Together they represent more than 90% of the portfolio, which is about average for a small-blend fund. Likewise for the average market cap. The portfolio is compact – about 40 names – but not dramatically so. Their strategy is to pursue two sorts of investments:

Special situations (firms emerging from bankruptcy or recently spun-off from larger corporations), which average about 20% of the portfolio though there’s no set allocation to such stocks.

Good dull plodders – about 80% of the portfolio. These are solid businesses with good management teams that know how to add value. This second category seems widely pursued by other funds under a variety of monikers, mid-cap blue chips and steady compounders among them.

His top holdings are shared with 350-700 other funds.

And yet, the portfolio has produced top-tier results. Over the past three years, the fund’s 17.8% annualized returns places it in the top 3% of all small-blend funds. It has finished in the top half of its peer group each year. It has never trailed its peer group for more than two consecutive months.

Should we be surprised? Not really. He’s doing here what he’s been doing for decades. The case for Walthausen Select Value is Paradigm Value (PVFAX), Paradigm Select (PFSLX) and Walthausen Small Cap Value (WSCVX). Those three funds had two things in common: each holds a mix of small and mid-cap stocks and each has substantially outperformed its peers.

Paradigm Select turned $10,000 invested at inception into $16,000 at his departure. His average mid-blend peer would have returned $13,800.

Paradigm Value turned $10,000 invested at inception to $32,000 at his departure. His average small-blend peer would have returned $21,400. From inception until his departure, PVFAX earned 28.8% annually while its benchmark index (Russell 2000 Value) returned 18.9%.

Walthausen Small Cap Value turned $10,000 invested at inception to $26,500 (as of 03/28/2014). His average small-value peer would have returned $17,200. Since inception, WSCVX has out-performed every Morningstar Gold-rated fund in the small-value and small-blend groups. Every one. Want the list? Sure:

• Artisan Small Cap Value
• DFA US Microcap
• DFA US Small Cap
• DFA US Small Cap Value
• DFA US Targeted Value
• Diamond Hill Small Cap
• Fidelity Small Cap Discovery
• Royce Special Equity
• Vanguard Small Cap Index, and
• Vanguard Tax-Managed Small Cap

The most intriguing part? Since inception (through March 2014), Select Value has outperformed the stellar Small Cap Value.

There are, of course, reasons for caution. First, like Mr. Walthausen’s other funds, this has been a bit volatile. Beta (1.02) and standard deviation (17.2) are just a bit above the group norm. Investors here need to be looking for alpha (that is, high risk-adjusted returns), not downside protection. Because it will remain fully-invested, there’s no prospect of sidestepping a serious market correction. Second, this fund is more concentrated than any of his other charges. It currently holds 40 stocks, against 80 in Small Cap Value and 65 in his last year at Paradigm Select. Of necessity, a mistake with any one stock will have a greater effect on the fund’s returns. At the same time, Mr. Walthausen believes that 80% of the stocks will represent “good, unexciting companies” and that it will hold fewer “special situation” or “deeply troubled” firms than does the small cap fund. And these stocks are more liquid than are small or micro-caps. All that should help moderate the risk. Third, Mr. Walthausen, born in 1945, is likely in the later stages of his investing career. 

Bottom line

There’s reason to give Walthausen Select careful consideration. There’s a quintessentially Mairs & Power feel about the Walthausen funds. In conversation, Mr. Walthausen is quiet, comfortable, thoughtful and understated. In execution, the fund seems likewise. It offers no gimmicks – no leverage, no shorting, no convertibles, no emerging markets – and excels, Mr. Walthausen suggests, because of “a dogged insistence on doing our own work and reaching our own conclusions.” He’s one of a surprising number of independent managers who attribute part of their success to being “far from the madding crowd” (Malta, New York, in his case). Folks willing to deal with a bit of volatility in order to access Mr. Walthausen’s considerable skill at adding alpha should carefully consider this splendid little fund.

Website

Walthausen Funds homepage, which remains a pretty durn Spartan spot but there’s a fair amount of information if you click on the tiny text links across the top.

Objective and strategy

The fund is pursuing both high current income and capital appreciation. The fund primarily invests in shorter-term high-yield corporate bonds, bank debt, convertibles and U.S. government securities. They have the option of buying a wider array of income-producing securities, including investment-grade debt, dividend-paying common or preferred stock. It shifts between security types based on what the manager’s believe offers the best risk-adjusted prospective returns and is also willing to hold cash. The portfolio is generally very concentrated. 

Adviser

Intrepid Capital Management of Jacksonville Beach, Florida. Intrepid, founded in 1994, primarily serves high net worth individuals.  As of December 30, 2013, it had $1.4 billion in assets under management. Intrepid advises the four Intrepid funds (Capital, Small Cap, Disciplined Value and Income).

Manager

Jason Lazarus, with the help of Ben Franklin, and Mark Travis. Messrs. Franklin and Lazarus joined Intrepid in 2008 after having completed master’s degrees at the University of North Florida and Florida, respectively. Mr. Travis is a founding partner and has been at Intrepid Capital since 1994. Before that, he was Vice President of the Consulting Group of Smith Barney and its predecessor firms for ten years.

Strategy capacity and closure

The managers estimate they might be able to handle up to $1 billion in this strategy. Currently the strategy manifests itself here, in balanced separate accounts and in the fixed-income portion of Intrepid Capital Fund (ICMBX/ICMVX).  In total, they’re currently managing about $300 million.   

Management’s stake in the fund

All of the managers have investments in the fund. Mr. Lazarus has invested between $50,000 – 100,000; Mr. Franklin has invested between $10,000 – 50,000 and Mr. Travis has between $100,000 – 500,000. That strikes me as entirely reasonable for relatively young investors committing to a relatively conservative fund.

Opening date

You get your pick! The High-Yield Fixed Income strategy, originally open only to private clients, was launched on April 30, 1999.  The fund’s Investor class was launched on July 2, 2007 and the original Institutional class on August 16, 2010.

Minimum investment

$2,500.  On January 30, 2014, the Investor and Institutional share classes of the fund were merged. Technically the surviving fund is institutional, but it now carries the low minimum formerly associated with the Investor class.

Expense ratio

0.90% on assets of $106 million. With the January 2014 merger, retail investors saw a 25 bps reduction in their fees, which we celebrate.

Comments

There are some very honorable ways to end up with a one-star rating from Morningstar.  Being stubbornly out-of-step with the herd is one path, being assigned to an inappropriate peer group is another. 

There are a number of very good conservative managers running short-term high yield bond funds who’ve ended up with one star because their risk-return profiles are so dissimilar from their high-yield bond peer group.  Few approach the distinction with as much panache as Intrepid Income:

Why the apparent lack of concern for a stinging and costly badge? Two reasons, really. First, Intrepid was founded on the value of independence from the investment herd. Mr. Lazarus reports that “the firm is set up to avoid career risk which frequently leads to closet-indexing.  Mark and his dad [Forrest] started it, Mark believes in the long-term so managers are evaluated on process rather than on short-term outcomes. If the process is right but the returns don’t match the herd in the short term, he doesn’t care.”  Their goal, and expectation, is to outperform in the long-term. And so, doing the right thing seems to be a more important value than getting recognized.

In support of that observation, we’ll note that Intrepid once employed the famously independent Eric Cinnamond, now of Aston/River Road Independent Value (ARIVX), as a manager – including on this fund.

Second, they recognize that their Morningstar rating does not reflect the success of their strategy. Their intention was to provide reasonable return without taking unnecessary risks. In an environment where investment-grade bonds look to return next-to-nothing (by GMO’s most recent calculations, the aggregate US bond market is priced to provide a real – after inflation – yield of 0.4% annually for the remainder of the decade), generating a positive real return requires looking at non-investment-grade bonds (or, in some instances, dividend-paying equities). 

They control risk – which they define as “losing money” or “permanent loss of capital,” as opposed to short-term volatility – in a couple ways.

First, they need to adopt an absolute value discipline – that is, a willingness both to look hard for mispriced securities and to hold cash when there are no compelling options in the securities market – in order to avoid the risk of permanent impairment of capital. That generally leads them to issuers in healthy industries, with predictable free cash flow and tangible assets. It also leads to higher-quality bonds which yield a bit less but are much more reliable.

Second, they tend to invest in shorter-term bonds in order to minimize interest rate risk. 

If you put those pieces together well, you end up with a low volatility fund that might earn 3.5 to 4.5% in pricey markets and a multiple of that in attractively valued ones. Because they’ve never had a bond default and they rarely sell their bonds before they’re redeemed (Mr. Lazarus recalls that “I can count on two hands the number of core bond positions we’ve sold in the past five years,” though he also allows that they’ve sold some small “opportunistic” positions in things like convertibles), they can afford to ignore the day-to-day noise in the market. 

In short, you end up with Intrepid Income, a fund which might comfortably serve as “a big part of your mother’s retirement account” and which “lots of private clients use as their core fixed-income fund.”

In both the short- and long-term, their record is excellent.  The longest-term picture comes from looking at the nearly 15 year record of the High-Yield Fixed Income strategy which is manifested both in separate accounts and, for the past seven years, in this fund.

Since inception, the strategy has earned 7.25% annually, trailing the Merrill Lynch high-yield index by just 38 basis points.  That’s about 94% of the index’s total return with about 60% of its volatility.  Over most shorter periods (in the three to ten year range), annual returns have been closer to 5-6%.

In the shorter term, we can look at the risks and returns of the fund itself.  Here’s Intrepid Income charted against its high-yield peer group.

By every measure, that’s a picture of very responsible stewardship of their shareholders’ money.  The fund’s beta is around 0.25, meaning that it is about one-fourth as volatile as its peers. Its standard deviation from inception to January 2014 is just 5.52 while its peers are around nine. Its maximum drawdown – 14.6% – occurred over a period of just three months (September – November 2008) before the fund began rebounding. 

Bottom Line

The fund’s careful, absolute value focus – shorter term, higher quality high-yield bonds and the willingness to hold cash when no compelling values present themselves – means that it will rarely keep up with its longer-term, lower quality, fully invested peer group.

And that’s good. By the Observer’s calculation, Intrepid Income qualifies as a “Great Owl” fund. That’s determined by looking at the fund’s risk-adjusted returns (measured by the fund’s Martin Ratio) for every period longer than one year and then recognizing only funds which are in the top 20% for every period. Intrepid is one of the few high-yield funds that have earned that distinction. While this is not a cash management account, it seems entirely appropriate for conservative investors who are looking for real absolute returns and have a time horizon of at least three to five years. You owe it to yourself to look beyond the star rating to the considerable virtues the fund holds.

Fund website

We think it’s entirely worth looking at both the Intrepid Income Fund homepage and the homepage for the underlying High-Yield Fixed Income strategy. Because the strategy has a longer public record and a more sophisticated client base, the information presented there is a nice complement to the fund’s documentation.