Category Archives: Funds

Driehaus Emerging Markets Small Cap Growth Fund (DRESX), March, 2014

By David Snowball

Objective and strategy

Driehaus Emerging Markets Small Cap Growth Fund seeks superior risk-adjusted returns over full market cycles relative to those of the MSCI Emerging Markets Small Cap Index. The managers combine about 100 small cap names with an actively-managed portfolio hedge. They create the hedge by purchasing sector, country, or broad market index options, generally.

Adviser

Driehaus Capital Management is a privately-held investment management firm based in Chicago. They have about $12 billion in assets under management as of January 31, 2014. The firm manages five broad sets of strategies (global, emerging markets, and U.S. growth equity, hedged equity, and alternative investment) for a global collection of institutional investors, family offices, and financial advisors. Driehaus also advises the 10 Driehaus funds which have about $8 billion in assets between them, more than half of that in Driehaus Active Income (LCMAX, closed) and 90% in three funds (LCMAX, Driehaus Select Credit DRSLX, also closed and Driehaus Emerging Markets Growth DREGX).

Managers

Chad Cleaver and Howard Schwab. Mr. Cleaver is the lead manager on this fund and co-manager for the Emerging Markets Growth strategy. He’s responsible for the strategy’s portfolio construction and buy/sell decisions. He began his career with the Board of Governors of the Federal Reserve System and joined Driehaus Capital Management in 2004. Mr. Schwab is the lead portfolio manager for the Emerging Markets Growth strategy and co-manager here and with the International Small Cap Growth strategy. In his role as lead portfolio manager, Mr. Schwab is responsible for the strategy’s portfolio construction. As co-manager he oversees the research team and evaluates investment ideas. He is also involved in analyzing macro-level trends and associated market risks. Mr. Schwab joined Driehaus Capital Management in 2001. Both of the managers have undergraduate degrees from strong liberal arts colleges, as well as the requisite graduate degrees and certifications.

Strategy capacity and closure

Between $600 – 800 million, at which point the firm would soft-close the fund as they’ve done to several others. DRESX is the only manifestation of the strategy.

Active Share

Active share is a measure of a portfolio’s independence, the degree to which is differs from its benchmark. The combination of agnosticism about their benchmark, fundamental security selection that often identifies out-of-index names and their calls typically results in a high active share. The most recent calculation (February 2014) places it at 96.4.

Management’s stake in the fund

Each of the managers has invested between $100,000 and $500,000 in the fund. They have a comparable amount invested in the Emerging Markets Growth Fund (DREGX), which they also co-manage. As of March 2013, insiders own 23% of the fund shares, including 8.4% held by the Driehaus Family Partnership.

Opening date

The fund began life on December 1, 2008 as Driehaus Emerging Markets Small Cap Growth Fund, L.P. It converted to a mutual fund on August 22, 2011.

Minimum investment

$10,000, reduced to $2000 for IRAs.

Expense ratio

1.25%, after waivers, on assets of $109.5 million (as of July 2023).

Comments

Emerging markets small cap stocks are underappreciated. The common stereotype is just like other emerging markets stocks, only more so: more growth, more volatility, more thrills, more chills.

That stereotype is wrong. Stock ownership derives value from the call it gives you on a firm’s earnings, and the characteristic of EM small cap earnings are fundamentally and substantially different from those of larger EM firms. In particular, EM small caps represent, or offer:

Different countries: not all countries are equally amenable to entrepreneurship. In Russia, for instance, 60% of the market capitalization is in just five large firms. In Brazil, it’s closer to 25%.

Different sectors: small caps are generally not in sectors that require huge capital outlays or provide large economies of scale. They’re substantially underrepresented in the energy and telecom sectors but overrepresented in manufacturing, consumer stocks and health care.

More local exposure: the small cap sectors tend to be driven by relatively local demand and conditions, rather than global macro-factors. On whole EM small caps derive about 24% of their earnings from international markets (including their immediate neighbors) while EM large caps have a 50% greater exposure. As a result, about 20% of the volatility in global cap small stocks is explained by macro factors, compared to 33% for all global stocks.

Higher dividends: EM small caps, as a group, pay about 3.2% while large caps pay 3.0%.

Greater insider ownership: about 44% of the stock for EM small caps is held by corporate insiders against 34% for larger EM stocks. The more important question might be who doesn’t own EM small caps. “State-owned enterprises” are more commonly larger firms whose financial decisions may be driven more by the government’s needs than the private investors’. Only 2% of the stock of EM small caps is owned by local governments.

Historically higher returns: from 2001-2013, EM small caps returned 12.7% annually versus 11.1% for EM large caps and 3.7% for US large caps.

But, oddly, slower growth (11.2% EPS growth versus 12.2% for all EM) and comparable volatility (26.1 SD versus 24.4 for large caps).

The data understates the magnitude of those differences because of biases built into EM indexes. Those indexes are created to support exchange-traded and other passive investment products (no one builds indexes just for the heck of it). In order to be useful, they have to be built to support massive, rapid trades so that if a hedge fund wants to plunk a couple hundred million into EM small caps this morning and get back out in the afternoon, it can. To accommodate that, indexes build in liquidity, scalability and tradeability screens. That means indexes (hence ETFs) exclude about 600 publicly-traded EM small caps – about 25% of that universe – and those microcap names are among the firms least like the larger-cap indexes.

The downfall of EM small caps comes as a result of liquidity crises: street protests in Turkey, a corporate failure in Mexico, a somber statement by a bank in Malaysia and suddenly institutional investors are dumping baskets of stocks, driving down the good with the bad and driving small stocks down most of all. Templeton Emerging Markets Small Cap (TEMMX), for example, lost 66% of its value during the 2007-09 crash.

Driehaus thinks it has a way to harness the substantial and intriguing potential of EM small caps while buffering a chunk of the downside risk. Their strategy has two elements.

They construct a long portfolio of about 100 stocks. In general they’re looking for firms at “growth inflection points.” The translation is stocks where a change in the price trend is foreseeable. They often draw on insights from behavioral finance to identify securities mispriced because of investor biases in reacting to changes in the magnitude, acceleration or duration of growth prospects.

They hedge the portfolio with options. They call purchase or write options on ETFs, or short ETFs when no option is available. The extent of the hedge varies with market conditions; a 10-40% hedge would be in the normal range. In general they attempt to hedge country, sector and market risk. They can use options strategies offensively but mostly they’re for defense.

The available evidence suggests their strategy works well. Really well. Really, really well. Over the past three years (through 12/30/13), the fund has excelled in all of the standard risk metrics when benchmarked against the MSCI Emerging Markets Small Cap Index.

	Driehaus	MSCI EM Small Cap
Beta	0.73	1.00
Standard deviation	16.2	19.1
Downside deviation	11.9	15.0
Downside capture	56.4%	100%
# negative months	11	18

The strategy of winning-by-not-losing has been vastly profitable over the past three, volatile years. Between January 2011 – December 2013, DRESX returned 7.4% annually while its EM small cap peers lost 3.2% and EM stocks overall dropped 1.7% annually.

The universal question is, “but aren’t there cheaper, passive alternatives?” There are four or five EM small cap ETFs. They are, on whole, inferior to Driehaus. While they boast lower expenses, they’re marred by inferior portfolios designed for tradeability rather than value, and inferior performance. Here’s the past three years of DRESX (the blue line) and the SPDR, WisdomTree and iShares ETFs:

dresx chart

Bottom Line

For long-term investors, substantial emerging markets exposure makes sense. Actively managing that investment to avoid the substantial, inherent biases which afflict EM indexes, and the passive products built around them, makes sense. In general, that means that the most attractive corner of the EM universe – measured by both fundamentals and diversification value – are smaller cap stocks. There are only 18 funds oriented to small- and mid-cap EM stocks and just seven true small caps. Driehaus’s careful portfolio construction and effective hedging should put them high on any EM investor’s due diligence list. They’ve done really first-rate work.

Fund website

The Driehaus Emerging Markets Small Cap Growth homepage links to an embarrassing richness of information on the fund, its portfolio and its performance. The country-by-country attribution tables are, for the average investor, probably a bit much but the statistical information is unmatched.

Much of the information on EM small caps as a group was presented in two MSCI research papers, “Adding Global Small Caps: The New Investable Equity Opportunity Set?” (October 2012) and “Small Caps – No Small Oversight: Institutional Investors and Global Small Cap Equities” (March 2012). Both are available from MSCI but require free registration and I felt it unfair to link directly to them. In addition, Advisory Research has a nice summary of the EM small cap distinctions in a short marketing piece entitled “Investing in value oriented emerging market small cap and mid cap equities” (October 2013).

March 2014, Funds in Registration

By David Snowball

Cozad Small Cap Value Fund

Cozad Small Cap Value Fund will seek long term capital appreciation by investing domestic small cap stocks, with an anticipated holding period of 12-18 months. The underlying strategy calls for portfolio rebalancing every three or four months and, if the signals are right, it might “liquidate investment positions and hold the proceeds in money market funds, other highly liquid obligations or the electronically-traded iShares Russell 2000 Value Index Fund.” The manager will be David Wetherell of Cozad Asset Management. This represents the conversion of a hedge fund of the same name but they have not yet released that fund’s track record. The initial expense ratio is 1.55%and the minimum initial investment is $2,500.

Dodge & Cox Global Bond Fund

Dodge & Cox Global Bond Fund will seek a high rate of total return consistent with long-term preservation of capital. They target a diversified portfolio of investment grade bonds and have the power to hedge the portfolio. The fund will be managed by Dodge & Cox’s seven-person Global Bond Investment Policy Committee. This portfolio operated as a hedge fund (their term: “a private fund”) from December 2012 until its conversion in May 2014. In 2013 the fund made 2.6% while its benchmark, the Barclays Global Aggregate Bond index, lost 2.6%. The initial expense ratio is 0.60% and the minimum initial investment is $2,500, reduced to $1,000 for IRAs.

Lazard Emerging Markets Income Portfolio

Lazard Emerging Markets Income Portfolio will seek total return consistent with the preservation of capital by investing in currencies, debt securities, and derivative instruments and other investments that are economically tied to emerging market countries. A key driver of performance will be the intention to invest in very short term securities and higher-yield debt. The managers will be Ardra Belitz and Ganesh Ramachandran. Both have been managers on Lazard’s EM income team for more than a decade. The initial expense ratio is 1.20 %and the minimum initial investment is $2,500.

Lazard Fundamental Long/Short Portfolio

Lazard Fundamental Long/Short Portfolio will seek capital appreciation with a hope for principal preservation by investing, long and short, in a mostly domestic equity portfolio. They describe themselves as “relative value” investors looking to invest in “companies with strong and/or improving financial productivity that have attractive valuations.” They will at the same time short the stock of firms with “deteriorating fundamentals, unattractive valuations or other qualities warranting a short position.” The fund might be anywhere from 100% long to 25% net short. The managers will be a team led by Dmitri Batsev. The initial expense ratio is 1.95%and the minimum initial investment is $2,500.

Payden Strategic Income Fund

Payden Strategic Income Fund will seek total return combined with income generation that is consistent with preservation of capital by investing globally in pretty much anything that might generate income, from US dividend-paying stocks to EM bonds and convertibles. They anticipate investing in both developed and developing markets and in both investment grade and high-yield debt. The manager will be Michael Salvay, CFA, a Managing Principal at Payden. The initial expense ratio is 0.80%and the minimum initial investment is $100,000, though it’s likely that lower minimum shares will become available through the various fund supermarkets.

Vertical Capital Innovations MLP Fund

Vertical Capital Innovations MLP Fund will seek long-term capital appreciation and current income through a diversified portfolio of investments in infrastructure and master limited partnerships. They intend to pay out a regular, consistent dividend at a range approximating what they receive from the MLPs. One red flag is that the fund, like many MLP funds, will not be organized as a typical open-end mutual fund; but instead will be organized as and taxed as a corporation. The managers will be Michael D. Underhill and Susan L. Dambekaln of Capital Innovations, LLC. The initial expense ratio is 1.75%for Advisor class shares and the minimum initial investment is $1,000.

Vertical Capital Lido Managed Volatility Fund

Vertical Capital Lido Managed Volatility Fund will seek capital appreciation while seeking to limit short term risk. It will be a fund of funds, investing in 8-12 funds that give it the best risk-adjusted performance. They’ll target volatility of 30-70% of the S&P 500s. Stocks, bonds, domestic, global, emerging, options, futures, long, short. The manager will be Jason Ozur of Lido Advisors. The prospectus doesn’t offer any documentation of Mr. Ozur’s success in executing this strategy. The initial expense ratio is 1.75%and the minimum initial investment is $1,000 for Advisor class shares which carry a sales load.

Whitebox Unconstrained Income Fund

Whitebox Unconstrained Income Fund will seek a high level of total return and low portfolio volatility. Their universe is anything that produces income. Their plan is to use three broad strategies: (1) dynamically allocating between asset classes; (2) seeking the best investments in each class through bottom-up research; and (3) from time to time, hedge the portfolio. The fund will be managed by the usual gang. The initial expense ratio is 1.67%and the minimum initial investment is $5,000, reduced to $1,000 for tax-deferred accounts.

RiverNorth Equity Opportunity (RNEOX), February 2014

By David Snowball

This fund has been liquidated.

Objective and Strategy

The Fund’s investment objective is overall total return consisting of long-term capital appreciation and income. They pursue their objective by investing in equities. The managers start with a tactical asset allocation plan that lets them know what sectors they’d like to have exposure to. They can gain that exposure directly, by purchasing common or preferred shares, but their core strategy is to gain the exposure through owning shares of closed-end funds and ETFs. Their specialty is in trading CEFs when those funds’ are selling at historically unsustainable discounts. The inevitable closure of those discounts provides a market-neutral arbitrage gain on top of any market gains the fund posts.

Adviser

RiverNorth Capital Management, LLC. RiverNorth, founded in 2000, specializes in quantitative and qualitative closed-end fund trading strategies and advises the RiverNorth Core Opportunity (RNCOX), RiverNorth/DoubleLine Strategic Income (RNDLX), RiverNorth Managed Volatility (RNBWX), and RiverNorth/OakTree High Income (RNHIX). As of January 2014, they managed $1.9 billion through limited partnerships, mutual funds and employee benefit plans.

Manager

Patrick W. Galley and Stephen O’Neill. Mr. Galley is RiverNorth’s President, Chairman and Chief Investment Officer. He also manages all or parts of four RiverNorth funds. Before joining RiverNorth Capital in 2004, he was a Vice President at Bank of America in the Global Investment Bank’s Portfolio Management group. Mr. O’Neill specializes in qualitative and quantitative analysis of closed-end funds and their respective asset classes. Prior to joining RiverNorth in 2007, he was an Assistant Vice President at Bank of America in the Global Investment Bank’s Portfolio Management group. Messrs Galley and O’Neill manage about $2 billion in other pooled assets.

Strategy capacity and closure

Not yet determined, but the broader RiverNorth Core Opportunity (RNCOX) fund using the same strategy closed at under $500 million.

Management’s Stake in the Fund

Mr. Galley has over $100,000 invested in the fund and owns 25% of the parent, RiverNorth Holdings Company. Mr. O’Neill has invested between $10,000 – $50,000 in the fund. One of the four independent directors has a small investment (under $10,000) in the fund.

Opening date

The original fund opened on July 18, 2012. The rechristened version opened on January 1, 2014.

Minimum investment

$5000

Expense ratio

Operating expenses are capped at1.60%, on assets of $13 million, as of January 2014. Like RiverNorth Core Opportunity, the fund also incurs additional expenses in the form of the operating costs of the funds it buys for the portfolio. Those expenses vary based on the managers’ ability to find attractively discounted closed-end funds; as the number of CEFs in the portfolio goes up, so does the expense ratio. RiverNorth estimates the all-in expense ratio to be about 2.17%.

Comments

Polonius, in his death scene, famously puts it this way:

Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.
This above all- to thine own self be true,
And it must follow, as the night the day,
Thou canst not then be false to any man.

Gramma Snowball reduced it to, “stick to your knitting, boy.”

It’s good advice. RiverNorth is following it.

RiverNorth’s distinctive strength is their ability to exploit the pricing dislocations caused by short-term irrationality and panic in the market. Their investment process has two basic elements:

Determine where to invest
Determine how to invest.

RiverNorth uses a number of quantitative models to determine what asset allocation to pursue. In the case of RNEOX, that comes down to determining things like size and sector.

They implement that allocation by investing either through low cost ETFs or through closed-end funds. Closed-end funds can trade at a discount or premium to the value of their holdings. Most funds trade consistently within a narrow band (Adams Express ADX, for example, pretty consistently trades at a discount of 14 – 15.5% so you pay $86 to buy $100 worth of stock). In times of panic, investors anxious to get out of the market have foolishly sold shares of the CEFs for discounts of greater than 40%. RiverNorth has better data on the trading patterns of CEFs than anyone else so they know that ADX at a 14.5% discount is nothing to write home about but ADX at a 22% discount might be a major opportunity because that discount will revert back to its normal range. So, whether the market goes up or down, the ADX discount will narrow.

If RiverNorth gets it right, investors have two sources of gain: investing in rising sectors because of the asset allocation and in CEFs whose returns are super-charged by the contracting discount. They are, for all practical purposes, the sole experienced player in this game.

In December 2012, RiverNorth launched RiverNorth/Manning & Napier Dividend Income Fund. The fund struck us as a curious hybrid: one half of the portfolio with RiverNorth’s opportunistic, higher-turnover closed-end fund strategy while the other half was Manning & Napier’s low-key, enhanced index strategy which rebalances its holdings just once a year. It was a sort of attempt to marry spumoni and vanilla. While we have great respect for each of the managers, the fund didn’t strike us as offering a compelling option and so we chose not to profile it.

Three things became clear in the succeeding twelve months:

The fund’s performance was not outstanding. The fund posted very respectable absolute returns in 2013 (25.6%) but managed to trail 90% of its peers. Manning and Napier Dividend Focus (MNDFX) whose strategy was replicated here, trailed 90% of its peers in 2013 and in three of the past four years.

Investors were not intrigued. At the end of November, 2013, the fund’s assets stood at $14 million.

RiverNorth noticed. In November, RiverNorth’s Board of Trustees voted not to renew the sub-advisory contract with Manning & Napier.

The reborn fund will stick to RiverNorth’s knitting: a tactical asset allocation plan implemented through CEFs when possible. It’s a strategy that they’ve put to good use in their (closed) RiverNorth Core Opportunity Fund (RNCOX), a stock/bond hybrid fund that uses this same discipline.

Here’s the story of RiverNorth Core in two pictures.

From inception, Core Opportunity turned $10,000 into $17,700. Its average balanced competitor generated $13,500. You might note that Core made two supercharged moves upward in late 2008 and early 2009, which strongly affected the cumulative return.

From inception, Core Opportunity has had noticeably greater short-term volatility than has its average competitor, but also noticeably higher returns. And, in comparison to the S&P 500, it has offered both higher returns and lower volatility.

Investors do need to be aware of some of the implications of RiverNorth’s approach. Three things will happen when market volatility rises sharply:

The opportunities for excess returns rise. When people panic, mispricing becomes abundant and the managers have the opportunity to deploy cash in a rich collection of funds.

The fund’s short-term volatility rises. Moving into a market panic is profitable in the long-term, but can be hair-raising in the short term. 30% discounts can go to 40% before returning to 5%. The managers know that and are accustomed to sharp, short-term moves. The standard deviation, above, both reflects and misrepresents that volatility. It correctly notes the fund’s greater price movement, but fails to note that some of the volatility is to the upside as the discounts contract.

The fund’s expense ratio rises. The managers have the option of using inexpensive ETFs to implement their asset allocation, which they do when they are not compelling opportunities in the CEF arena. CEFs are noticeably costlier than ETFs, so as the move toward the prospect of excess return, they also incur higher expenses.

And, subsequently, portfolio turnover rises. An arbitrage strategy dictates selling the CEF when its discount has closed, which can happen quite suddenly. That may make the fund less tax-efficient than some of its vanilla peers.

Bottom Line

RiverNorth has a distinctive strategy that has served its investors well. The rechristened fund deserves serious consideration from investors who understand its unique characteristics and are willing to ride out short-term bumps in pursuit of the funds extra layer of long-term returns.

Fund website

RiverNorth Equity Opportunity

Fact Sheet

Artisan Global Small Cap (ARTWX), February 2014

By David Snowball

This fund has been liquidated.

Objective and Strategy

The fund seeks maximum long-term capital growth by investing in a compact portfolio of global small cap stocks. In general they pursue “high-quality companies that typically have a sustainable competitive advantage, a superior business model and a high-quality management team.” “Small caps” are stocks with a capitalization under $4 billion at time of purchase. The fund holds about 40 stocks. No more than 50% of the portfolio will be investing in emerging markets and the managers do not expect to hold more than 10%.

Adviser

Artisan Partners, L.P. Artisan is a remarkable operation. They advise the 13 Artisan funds (the 12 funds with a retail share class plus an institutional emerging markets fund), as well as a number of separate accounts. The firm has managed to amass over $105 billion in assets under management, of which approximately $45 billion are in their mutual funds. Despite that, they have a very good track record for closing their funds and, less visibly, their separate account strategies while they’re still nimble. Seven of the firm’s funds are closed to new investors, as of February 2014. Their management teams are stable, autonomous and invest heavily in their own funds.

Manager

Mark Yockey, Charles-Henri Hamker and David Geisler. Mr. Yockey joined Artisan in 1995 and has been repeatedly recognized as one of the industry’s premier international stock investors. He is a portfolio manager for Artisan International, Artisan International Small Cap and Artisan Global Equity Funds. He is, Artisan notes, fluent in French. Charles-Henri Hamker is an associate portfolio manager on Artisan International Fund, and a portfolio manager with Artisan International Small Cap and Artisan Global Equity Funds. He is fluent in French and German. (Take that, Yockey.) Messrs Yockey and Hamker manage rather more than $10 billion in other assets and were nominated as Morningstar’s international-stock fund managers of the year in both 2012 and 2013. Mr. Yockey won the honor in 1998. Mr. Geisler joined Artisan as an analyst in 2007 after working for Cowen and Company. This is his first portfolio management assignment.

Strategy capacity and closure

Between $1 – 2 billion, depending on how quickly money is flowing in and the state of the market. Artisan has an exceptional record for closing funds before they become overly large – seven of their 12 retail funds are, or imminently will be, closed to new investors and Artisan International Small Cap closed in 2003 with about $500 million in assets. As a result, closing the fund well before it hits the $2 billion cap seems likely.

Management’s Stake in the Fund

Mr. Yockey has over $1 million in the fund, Mr. Geisler has between $50,000 – 100,000 and Mr. Hamker has no investment in it. Only one of the funds five independent directors has an investment in the fund; in general, the Artisan directors have invested between hundreds of thousands to millions of their own dollars in the Artisan complex.

Opening date

June 23, 2013

Minimum investment

$1,000

Expense ratio

1.50% after waivers on assets of $53 million, as of January 2014.

Comments

There is a real question about whether early 2014 is a good time to begin investing in small cap stocks. The Leuthold Group reports that small cap stocks are selling at record or near-record premiums to large caps and manager David Geisler concurs that “U.S. small caps are close to peak valuations.” The managers have added just one or two names to the portfolio in recent months; they are not, Mr. Geisler reports, “on a buying strike but we try to be thoughtful.” Perhaps in recognition of those factors, Mike Roos, a vice president and managing director at Artisan (also a consistently thoughtful, articulate guy), reports that Artisan will do no marketing of the fund. “We look forward to organic growth of the fund, but we’re simply not pushing it.”

If you decide that you want to increase your exposure to global small caps, though, there are few safer bets than Artisan. Artisan’s managers are organized into six autonomous teams, each with responsibility for its own portfolios and personnel. The teams are united by four characteristics:

pervasive alignment of interests with their shareholders – managers, analysts and directors are all deeply invested in their funds, the managers have and have frequently exercised the right to close funds and other manifestations of their strategies, the partners own the firm and the teams are exceedingly stable.
price sensitivity – while it’s not exclusively a GARP shop, it’s clear that neither the value guys nor the growth guys pursue stocks with extreme valuations.
a careful, articulate strategy for portfolio weightings – the funds generally have clear criteria for the size of initial positions in the portfolio, the upsizing of those positions with time and their eventual elimination, and
uniformly high levels of talent. Artisan interviews a lot of potential managers each year, but only hires managers who they believe will be “category killers.”

Those factors have created a tradition of consistent excellence across the Artisan family. By way of illustration:

Eleven of Artisan’s 12 retail funds are old enough to have Morningstar ratings. Ten of those 11 funds have earned four- or five-stars.
Ten of the 11 have been recognized as “Silver” or “Gold” funds by Morningstar’s analysts.
Nine of the 11, including all of the international and global funds, are Lipper Leaders for Total Return.
Six are MFO Great Owl funds, as well.
Artisan teams have been nominated for Morningstar’s “manager of the year” award nine times in the past 15 years; they’ve won four times.

And none are weak funds, though some do get out of step with the market from time to time. The managers are finding far better values outside of the US than in it: about 12% of the most recent portfolio are US-domiciled firms, about the same as its UK and China exposure. Despite popular panic about the emerging markets, E.M. stocks are 33% of the portfolio. The average global fund is 50% US, 80% large caps and just 7% EM. That independence is reflected in the fund’s active share: 99.6%.

Bottom Line

You might imagine Global Small Cap as representing the subset of stocks which lies at the intersection of the team’s International Fund (which has had one sub-par year in a decade), it’s International Small Cap fund (which has had two sub-par years in a decade) and its Global Equity fund (which has not yet had a below-average year, though it’s just a bit over three). On face, that’s a very good place to be.

Fund website

Artisan Global Small Cap

By way of disclosure: while the Observer has no financial relationship with or interest in Artisan, I do own shares of two of the Artisan funds (Small Cap Value ARTVX and International Value ARTKX) and have done so since the funds’ inception.

AMG River Road International Value Equity Fund (formerly AMG / River Road Long-Short), (ARLSX), February 2014

By David Snowball

At the time of publication, this fund was named ASTON / River Road Long-Short.
This fund was previously profiled in June 2012. You can find that profile here.
This fund was formerly named AMG River Road Long-Short Fund.

On August 16, 2021 AMG River Road Long-Short Fund became 
AMG River Road International Value Equity Fund. At that point,
everything changed except the fund's ticker symbol: new strategies, 
new management team, new risks, new benchmark. As a result,
the analysis below is for archival purposes only. Do not rely
on it as a guide to the current fund's prospects or practices.

Objective and Strategy

ARLSX seeks to provide absolute returns (“equity-like returns,” they say) while minimizing volatility over a full market cycle. The fund invests, long and short, mostly in US common stocks but can also take positions in foreign stock, preferred stock, convertible securities, REITs, ETFs, MLPs and various derivatives. The fund is not “market neutral” and will generally be “net long,” which is to say it will have more long exposure than short exposure. The managers have a strict, quantitative risk-management discipline that will force them to reduce equity exposure under certain market conditions.

Adviser

Aston Asset Management, LP, which is based in Chicago. Aston’s primary task is designing funds, then selecting and monitoring outside management teams for those funds. As of December 31, 2013, Aston is the adviser to 23 mutual funds with total net assets of approximately $15.9 billion. Affiliated Managers Group (AMG) has owned a “substantial majority” of Aston for years. In January 2014 they exercised their right to purchase the remainder of the company. AMG’s funds will be reorganized under Aston, but Aston’s funds will maintain their own identity. AMG, including Aston, has approximately $73 billion in assets across 62 mutual funds and sub-advised products.

Managers

Matt Moran and Daniel Johnson. Both work for River Road Asset Management, which is based in Louisville. They manage $10 billion for a variety of private clients (cities, unions, corporations and foundations) and sub-advise six funds for Aston, including the splendid (and closed) Aston/River Road Independent Value (ARIVX). River Road employs 19 investment professionals. Mr. Moran, the lead manager, joined River Road in 2007, has about a decade’s worth of experience and is a CFA. Before joining River Road, he was an equity analyst for Morningstar (2005-06), an associate at Citigroup (2001-05), and an analyst at Goldman Sachs (2000-2001). His MBA is from the University of Chicago. Mr. Johnson is a CPA and a CFA. Before joining River Road in 2006, he worked at PricewaterhouseCoopers.

Strategy capacity and closure

Between $1 and $1.5 billion.

Management’s Stake in the Fund

Mr. Moran and Mr. Johnson had between $100,000 and $500,000 as of the last-filed Statement of Additional Information (October 30, 2012). Those investments represent a significant portion of the managers’ liquid net worth.

Opening date

May 4, 2011.

Minimum investment

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

Expense ratio

1.70%, after waivers, on assets of $220 million. The fund’s operating expenses are capped at 1.70%, but expenses related to shorting add another 1.46%. Expenses of operating the fund, before waivers, are 5.08%.

Comments

When we first wrote about ARLSX eighteen months ago, it had a short public record and just $5.5 million in assets. Nonetheless, after a careful review of the managers’ strategy and a long conversation with them, we concluded:

[F]ew long-short funds are more sensibly-constructed or carefully managed than ARLSX seems to be. It deserves attention.

We were right.

River Road’s long-short equity strategy is manifested both in ARLSX and in a variety of institutional accounts. Here are the key metrics of that strategy’s performance, from inception through December 30, 2013.

	River Road	Long-short category
Annualized return	13.96	5.88
% of positive months	74	64
Upside capture	58	39
Downside capture	32	52
Maximum one-month drawdown	(3.5)	(4.2)
Maximum drawdown	(7.6)	(11.8)
Sharpe ratio	2.3	1.0
Sortino ratio	3.9	0.9

How do you read that chart? Easy. The first three measure how the managers perform on the upside; higher values are better. The second three reveal how they perform on the downside; lower values are better. The final two ratios reflect an assessment of the balance of risks and returns; again, higher is better.

Uhhh … more upside, less downside, far better overall.

The Sharpe and Sortino ratios bear special attention. The Sharpe ratio is the standard measure of a risk/return profile and its design helped William Sharpe win a Nobel Prize for economics. As of December 31, 2013, River Road had the highest Sharpe ratio of any long-short strategy. The Sortino ratio refines Sharpe, to put less emphasis on overall volatility and more on downside volatility. The higher the Sortino ratio, the lower the prospects for a substantial loss.

After nearly three years, ARLSX seems to be getting it right and its managers have a pretty cogent explanation for why that will continue to be the case.

In long stock selection, their mantra is “excellent companies trading at compelling prices.” Between 50% and 100% of the portfolio is invested long in 15-30 stocks. They look for fundamentally attractive companies (those with understandable businesses, good management, clean balance sheets and so on) priced at a discount to their absolute value.

In short stock selection, they target “challenged business models with high valuations and low momentum.” In this, they differ sharply from many of their competitors. They are looking to bet against fundamentally bad companies, not against good companies whose stock is temporarily overpriced. They can be short with 10-90% of the portfolio and typically have 20-40 short positions.

Their short universe is the mirror of the long universe: lousy businesses (unattractive business models, dunderheaded management, a history of poor capital allocation, and favorites of Wall Street analysts) priced at a premium to absolute value.

Finally, they control net market exposure, that is, the extent to which they are exposed to the stock market’s gyrations. Normally the fund is 50-70% net long, though exposure could range from 10-90%. The extent of their exposure is determined by their drawdown plan, which forces them to react to reduce exposure by preset amounts based on the portfolio’s performance; for example, a 4% decline requires them to reduce exposure to no more than 50. They cannot increase their exposure again until the Russell 3000’s 50 day moving average is positive.

This sort of portfolio strategy is expensive. A long-short fund’s expenses come in the form of those it can control (fees paid to management) and those it cannot (expenses such as repayment of dividends generated by its short positions). At 3.1%, the fund is not cheap but the controllable fee, 1.7% after waivers, is well below the charges set by its average peer. With changing market conditions, it’s possible for the cost of shorting to drop well below 1% (and perhaps even become an income generator). With the adviser absorbing another 2% in expenses as a result of waivers, it’s probably unreasonable to ask for lower.

Bottom Line

Messrs. Moran and Johnson embrace Benjamin Graham’s argument that “The essence of investment management is the management of risks, not the management of returns.” With the stock market up 280% from its March 2009 lows, there’s rarely been a better time to hedge your gains and there’s rarely been a better team to hedge them with.

Fund website

ASTON / River Road Long-Short Fund.

Disclosure

By way of disclosure, while the Observer has no financial relationship with or interest in Aston or River Road, I do own shares of ARLSX in my own accounts.

Grandeur Peak Emerging Markets Opportunities (formerly Grandeur Peak Emerging Opportunities), (GPEOX), February 2014

By David Snowball

At the time of publication, this fund was named Grandeur Peak Emerging Opportunities.

Objective and Strategy

Emerging Opportunities pursues long-term capital growth primarily by investing in a small and micro-cap portfolio of emerging and, to a lesser extent, frontier market stocks. Up to 90% of the fund might normally be invested in microcaps (stocks with market cap under $1 billion at the time of purchase), but they’re also allowed to invest up to 35% in stocks over $5 billion. The managers seek high quality companies that they place in one of three classifications:

Best-In-Class Growth Companies: fast earnings growth, good management, strong financials. The strategy is to “find them small and undiscovered; buy and hold” until the market catches on. In the interim, capture the compounded earnings growth.

Fallen Angels: good growth companies that hit “a bump in the road” and are priced as value stocks. The strategy is to buy them low and hold through the recovery.

Stalwarts: basically, blue chip mid-cap stocks. Decent but not great growth, great financials, and the prospect of dividends or stock buy-backs. The strategy is to buy them at a fair price, but be careful of overpaying since their growth may be decelerating.

The stocks in GPEOX represent the emerging and frontier stocks in the flagship Grandeur Peak Global Reach (GPROX) portfolio.

Adviser

Grandeur Peak Global Advisors is a small- and micro-cap focused global equities investment firm, founded in mid-2011, and comprised of a very experienced and collaborative investment team that worked together for years managing some of the Wasatch funds. They advise four Grandeur Peak funds and one “pooled investment vehicle.” The adviser passed $1 billion in assets under management in July, 2013.

Managers

Blake Walker and Spencer Stewart, benignly overseen by Robert Gardiner. Blake Walker is co-founder of and Chief Investment Officer for Grandeur Peak. Mr. Walker was a portfolio manager for two funds at Wasatch Advisors. Mr. Walker joined the research team at Wasatch Advisors in 2001 and launched his first fund, the Wasatch International Opportunities Fund (WAIOX) in 2005. He teamed up with Mr. Gardiner in 2008 to launch the Wasatch Global Opportunities (WAGOX). Mr. Stewart has been a senior research analyst at Grandeur Peak Global Advisors since 2011. He joined Grandeur Peak from Sidoti & Company, a small-cap boutique in New York and had previously worked at Wasatch, which his father founded. Mr. Gardiner is designated as an “Advising Manager,” which positions him to offer oversight and strategy without being the day-to-day guy. Prior to founding Grandeur Peak, he managed or co-managed Wasatch Microcap (WMICX), Small Cap Value (WMCVX) and Microcap Value (WAMVX, in which I own shares). They’re supported by four Senior Research Associates.

Strategy capacity and closure

$200 million. Grandeur Peak specializes in global small and micro-cap investing. Their estimate, given current conditions, is that they could effectively manage about $3 billion in assets. They could imagine running seven distinct small- to micro-cap funds and close all of them (likely a soft close) when the firm’s assets under management reach about $2 billion. The adviser has target closure levels for each current and planned fund.

Management’s stake in the fund

None yet disclosed, but the Grandeur Peak folks tend to invest heavily in their funds.

Opening date

December 16, 2013.

Minimum investment

$2,000, reduced to $1,000 for an account established with an automatic investment plan.

Expense ratio

1.78% for Investor class shares on assets of $452 million, as of July 2023.

Comments

There’s little to be said about Emerging Opportunities but much to be said for it.

Grandeur Peak operates a single master profile, which is offered to the public through their Global Reach fund. The other current and pending Grandeur Peak funds are essentially just subsets of that portfolio. Emerging Opportunities are the EM and frontier stocks from that portfolio. While there are 178 diversified emerging markets funds, only 18 invest primarily in small- and mid-cap stocks. Of the 18 smid-cap funds, only two end up in Morningstar’s “small cap” style box (Templeton Emerging Markets Small Cap TEMMX is the other). Of the two true EM small caps, only one will give you significant exposure to both small and micro-cap stocks (TEMMX, still open with a half billion in assets, higher expenses and a front-load, is 14% microcap while GPEOX is 44% microcap).

That’s what we can say about GPEOX. What we can say for it is this: the fund is managed by one of the most experienced, distinguished and consistently successful small cap teams around. The general picture of investing with Grandeur Peak looks rather like this:

GPGOX snip

In general, past performance is a rotten way of selecting an investment. When that performance is generated consistently, across decades, categories and funds, by the same team, it strikes me as rather more important.

Their investable universe is about 30,000 publicly-traded stocks, most particularly small and microcap, from around the globe, many with little external analyst coverage. The plan is for Global Reach to function as a sort of master portfolio, holding all of the stocks that the firm finds, at any given point, to be compelling. They estimate that that will be somewhere between 300 and 500 names. Those stocks will be selected based on the same criteria that drove portfolio construction at Global Opportunities and International Opportunities and at the Wasatch funds before them. Those selection criteria drive Grandeur Peak to seek out high quality small companies with a strong bias toward microcap stocks. This has traditionally been a distinctive niche and a highly rewarding one. Each of their three earlier funds boasts their categories’ the smallest market caps by far and, in first 30 months of existence, some of their category’s strongest returns. The pattern seems likely to repeat.

Are there reasons for concern? Three come to mind.

The characteristics of the market are largely unknown. In general, EM small caps offer greater growth prospects, less efficient pricing and greater diversification benefits than do other EM stocks. The companies’ prospects are often more tied to local economies and less dependent on commodity exports to the developed world. The three ETFs investing in such stocks have had solid to spectacular relative performance. That said, there’s a very limited public track record for portfolios of such stocks, with the oldest ETF being just five years old and the only active fund being seven years old. Investing here represents an act of faith as much as a rational calculation.

Managing seven funds could, eventually, stretch the managers’ resources. Cutting against this is the unique relationship of Global Reach to its sister portfolios. The great bulk of the research effort will manifest itself in the Global Reach portfolio; the remaining funds will remain subsidiary to it. That is, they will represent slices of the larger portfolio, not distinct burdens in addition to it.

The fund’s expense ratios are structurally, persistently high. The fund will charge 1.95%, below the fees for many EM smid caps, but substantially above the 1.60% charged by the average no-load EM fund. The management fee alone is 1.35%. Cutting against that, of course, is the fact that Mr. Gardiner has for nearly three decades now, more than earned the fees assessed to his investors. It appears that you’re getting more than what you are paying for; while the fee is substantial, it seems to be well-earned.

Bottom Line

This is a very young, but very promising fund. It is also tightly capacity constrained, so that it is likely to close early in 2014 despite Grandeur Peak’s decision not to publicize the fund at launch. For investors interested in a portfolio of high-quality, growth-oriented stocks from the fastest growing markets, there are few more-attractive opportunities available.

Fund website

Grandeur Peak Emerging Opportunities

Disclosure

By way of disclosure, while the Observer has no financial relationship with or interest in Grandeur Peak, I do own shares of GPEOX in my Roth IRA, along with shares of Wasatch Microcap Value (WAMVX) which Mr. Gardiner once managed.

February 2014, Funds in Registration

By David Snowball

ActiveShares Large-Cap, Mid-Cap and Multi-Cap Funds

ActiveShares Large-Cap, Mid-Cap and Multi-Cap Funds will be a series of actively-managed ETFs advised by the Precidian Funds. At the moment, their prospectuses are missing information about both expenses and management.

AR Capital BDC Income Fund

AR Capital BDC Income Fund seeks to provide a high level of income, with the potential for capital appreciation. The strategy is to invest in the equities of business development corporations. They’ll target BDCs which are paying attractive rates of distribution and appear capable of sustaining that distribution level over time. A secondary consideration is the potential for capital appreciation. The managers are employees of BDCA Adviser, LLC but are otherwise unidentified. The initial expense ratio has not been released and the minimum initial investment is $2500, raised to $100,000 if you’re silly enough to try and buy shares directly from the fund company.

AR Capital Dividend and Value Fund

AR Capital Dividend and Value Fund (Advisor shares) seeks to provide a high level of dividend income, with the potential for capital appreciation. The strategy is to invest in dividend-paying stocks, with special emphasis on energy infrastructure MLPs and REITs. Up to 15% of the portfolio may be placed in illiquid investments and 20% in fixed-income. The managers are Brad Stanley and Mark Painter, portfolio managers at Carnegie Asset Management. Since February 2010, they’ve used this strategy in separate accounts which have trailed the S&P 500 by 150-250 basis points a year. That said, we have neither income nor volatility data for the separate accounts so they might be much more attractive than the raw return numbers imply. The initial expense ratio has not been released and the minimum initial investment is $2500, raised to $100,000 if you’re silly enough to try and buy shares directly from the fund company.

ASTON/Guardian Capital Global Dividend Fund

ASTON/Guardian Capital Global Dividend Fund will seek long-term capital appreciation and current income by investing in a global portfolio of dividend-paying stocks whose firms have the ability to grow earnings and a willingness to increase dividends. They will not hedge their currency exposure. The manager will be Srikanth Iyer, Managing Director and Head of Systematic Strategies for Guardian Capital LP. Guardian has been using this strategy in separate accounts since 2007, with mixed results as far as total return goes. The initial expense ratio is 1.31% and the minimum initial investment is $2500, reduced to $500 for IRAs, ESAs and UTMAs.

ASTON/Pictet International Fund

ASTON/Pictet International Fund will seek capital appreciation by investing in developed market stocks which demonstrate growth at a reasonable price. They will not hedge their currency exposure. The manager will be Fabio Paolini, Head of EAFE Equities at Pictet. Pictet has been around since 1805 and has been running this strategy in other accounts since 1995. Those accounts have outperformed the EAFE by 200-250 basis points/year over the long-term. The initial expense ratio is 1.51% and the minimum initial investment is $2500, reduced to $500 for IRAs, ESAs and UTMAs.

ATAC Beta Rotation Fund

ATAC Beta Rotation Fund will seek capital appreciation by investing in ETFs (and occasionally ETNs) based on the managers’ inflation expectations. At base, high beta sectors thrive in rising inflation environments and low beta sectors in falling inflation environments. Their plan is to rotate in the sectors best positioned for gains. They warn of turnover rates exceeding 1000% per year. The managers will be Edward Dempsey, founder and Chief Investment Officer of Pension Partners, and Michael Gayed. The pair also runs ATAC Inflation Rotation Fund (ATACX) which uses the same strategy to rotate between bond sectors and cash. The minimum initial investment is $2500.

BPV Large Cap Value Fund

BPV Large Cap Value Fund (Advisor shares) seeks to outperform the Russell Value index. Their sub-advisor has a quant-driven strategy for investing in large cap value stocks that have an attractive combination of value, management and momentum. The managers are a team from AJO Partners. (Nope, I’ve never heard of it either.) AJO’s website describes them as “an institutional investment manager established in 1984 [who] manage tax-exempt portfolios of value-oriented U.S. and international equities.” They’ve got $24B in AUM, $19B in their large cap strategy (not clear how they make that tax-exempt) and a really, really annoying website. They’ve decided that all of their menu items need to start with the letter “P”. Clicking on the Performance tab starts with a cartoon (“We didn’t underperform, you overexpected”) and leads to a blank page with a 404 error. The initial expense ratio hasn’t been announced and the minimum initial investment is $1000.

Catalyst Macro Strategy Fund

Catalyst Macro Strategy Fund (I shares) seeks to “positive returns in all market environments” and to “participate in the upside of the equity markets while seeking to minimize the impact of the market’s downside during periods of extreme market stress.” They can invest, long and short, in a global portfolio of stocks and bonds. The lead manager is Al Procaccino of Castle Financial & Retirement Planning Associates Inc. Castle’s website provides evidence of offices that look like a resort, but not of success with this (or any other) strategy. The initial expense ratio will be 1.75% after waivers and the minimum initial investment is $2500.

DoubleLine Flexible Income Fund

DoubleLine Flexible Income Fund will seek current income and capital appreciation by active asset allocation among market sectors in the fixed income universe. It can invest anywhere and can short; you might profit by thinking of it as a sort of fixed-income hedge fund. The manager will be The Gundlach. The initial expense ratio is not yet set; the minimum initial investment is $2000, reduced to $500 for IRAs.

DoubleLine Low Duration Emerging Markets Fixed Income Fund

DoubleLine Low Duration Emerging Markets Fixed Income Fund will seek long-term total return by investing in governmental, quasi-governmental and private emerging markets bonds. “Although the Fund may invest in individual securities of any maturity or duration, the Adviser will normally seek to construct an investment portfolio for the Fund with a dollar-weighted average effective duration of three years or less.” The managers will be Mark W. Christensen, Su Fei Koo and Luz M. Padilla. The initial expense ratio is not yet set; the minimum initial investment is $2000, reduced to $500 for IRAs.

Innealta Fixed Income Fund

Innealta Fixed Income Fund (Class N) seeks “to maximize expected total return in the context of various risks across a wide spectrum of fixed income sectors” by investing in fixed-income ETFs. The manager is Gerald W. Buetow, Jr. (Ph.D.), Innealta’s Chief Investment Officer. The initial expense ratio will be capped at 0.98% and the minimum initial investment is $5,000.

Liquid 8 Fund

Liquid 8 Fund seeks to generate current income with a low correlation to the risks and returns of major market indices. (“Liquidate”? Really? Do managers have a “it’s better to be ridiculed than ignored” ethos? Are you seeing funds with cutesy names – Giant 5, Bread & Butter, Palantir – drawing serious investor attention?) The strategy is to sell listed weekly put options on stocks, stock indices and ETFs with the goal of an annual shareholder yield of 8%. The manager is C. Shawn Gibson of Liquid Alternatives (“a newly-formed investment advisor”), assisted by “co-decision makers … G. Bradley Ball and Adam C. Stewart.” The decision-makers, co- and otherwise, have worked for institutional investment advisers but have not established a public track record. The initial expense ratio will be capped at 1.50% and the minimum initial investment is $1000.

McKinley Non-U.S. Core Growth Fund

McKinley Non-U.S. Core Growth Fund will seek long-term capital appreciation by investing in 40-70 non-U.S. stocks. There’s not much detail in the prospectus, except to note that they’re “bottom-up” guys, emerging markets are capped at 40% and they don’t hedge. The managers will be a team from McKinley Capital Management. The initial expense ratio is 1.45% and the minimum initial investment is $2500, reduced to $1000 for IRAs.

Pzena Mid Cap Focused Value Fund

Pzena Mid Cap Focused Value Fund seeks to provide long-term capital appreciation. The strategy is invest in 30-40 stocks, ranging from about $1.5 – 25 billion in market cap, “sell at a substantial discount to their intrinsic value but have solid long-term prospects.” The managers are a team led by founder Richard Pzena. Morningstar describes the publicly-traded Pzena as having “a strong franchise [built] around its long-term, deep-value-oriented investing philosophy” but fretted that their strategies got hammered in 2008. The firm has about $25 billion in AUM, up 50% in a year. The initial expense ratio will be 1.35% and the minimum initial investment is $5000, reduced to $1000 for IRAs.

Pzena Emerging Markets Focused Value Fund

Pzena Emerging Markets Focused Value Fund seeks to provide long-term capital appreciation. The strategy is to use “a classic value strategy” to identify the 40-80 most attractive stocks from a universe of 1500 frontier and emerging markets securities. The managers are John Goetz, Pzena’s president and co-CIO, Allison Fisch and Caroline Cai. While Pzena does have an international strategy, their website doesn’t suggest the existence of an EM one. The initial expense ratio will be 1.75% and the minimum initial investment is $5000, reduced to $1000 for IRAs.

Pzena Long/Short Focused Value Fund

Pzena Long/Short Focused Value Fund seeks to provide long-term capital appreciation by investing long in “classic value” shorts and shorting “a broadly diversified basket of stocks that the Adviser believes to be expensive relative to their earnings history.” The managers are Antonio DeSpirito, III, TVR Murti and Eli Rabinowich. The initial expense ratio will be 2.73% and the minimum initial investment is $5000, reduced to $1000 for IRAs.

Scout Equity Opportunity Fund

Scout Equity Opportunity Fund seeks to provide long-term capital gains by investing in a largely-domestic, all-cap portfolio. Direct foreign investment is limited to 20% of the portfolio. The manager is Brent Olson, who just joined Scout from Three Peaks. From 2010-13, he co-managed Aquila Three Peaks Opportunity Growth Fund (ATGAX). While I can’t prove a cause-and-effect relationship, ATGAX vastly underperformed its mid-cap growth peers for the decade prior to Mr. Olson’s arrival and substantially outperformed them during his tenure. The fund provides Scout with a successor to its mild-mannered Scout Stock Fund, which is liquidated in March 2013. The initial expense ratio has not been announced; the minimum initial investment is $1000, reduced to $100 for IRAs and accounts with an AIP provision.

Victory Emerging Markets Small Cap Fund

Victory Emerging Markets Small Cap Fund ( I shares) seeks to provide long-term capital appreciation by investing in, well, emerging markets small cap stocks. They claim “a ‘bottom-up’ approach to identify companies that it believes have long-term growth prospects, are proven franchises, have sustainable margins and are financially stable.” The managers are Margaret Lindsay, Victory’s CIO for non-U.S. small cap equity, Tiffany Kuo and Joshua Lindland. Their EM small cap separate accounts have substantially outperformed their benchmark with relatively low volatility over the past five years. The initial expense ratio will be 1.50% and the minimum initial investment is $2500, reduced to $1000 for IRAs.

RiverPark Strategic Income Fund (RSIVX), January 2014

By David Snowball

Objective and strategy

The fund is seeking high current income and capital appreciation consistent with the preservation of capital. The manager does not seek the highest available return. He’s pursuing 7-8% annual returns but he will not “reach for returns” at the risk of loss of capital. The portfolio will generally contain 30-40 fixed income securities, all designated as “money good” but the majority also categorized as high-yield. There will be limited exposure to corporate debt in other developed nations and no direct exposure to emerging markets. While the manager has the freedom to invest in equities, they are unlikely ever to occupy a noticeable slice of the portfolio.

Adviser

RiverPark Advisors, LLC. RiverPark was formed in 2009 by former executives of Baron Asset Management. The firm is privately owned, with 84% of the company being owned by its employees. They advise, directly or through the selection of sub-advisers, the seven RiverPark funds.

Manager

David K. Sherman, president and founder of the subadvisor, Cohanzick Management, LLC. Mr. Sherman founded Cohanzick in 1996 after a decade spent in various director and executive positions with Leucadia National Corporation. Mr. Sherman has a B.S. in Business Administration from Washington University and an odd affection for the Philadelphia Eagles. He is also the manager of the recently soft-closed RiverPark Short Term High Yield Fund (RPHYX).

Strategy capacity and closure

The strategy has a capacity of about $2 billion but its execution requires that the fund remain “nimble and small.” As a result, management will consider asset levels and fund flows carefully as they move in the vicinity of their cap.

Management’s stake in the fund

Collectively the professionals at RiverPark and Cohanzick have invested more than $3 million in the fund, including $2.5 million in “seed money” from Mr. Sherman and RiverPark’s president, Morty Schaja. Both men are increasing their investment in the fund with a combination of “new money” and funds rebalanced from other investments.

Opening date

September 30, 2013

Minimum investment

$1,000 minimum initial investment for retail shares. There is no minimum for subsequent investments if payment is mailed by check; otherwise the minimum is $100.

Expense ratio

1.25% after waivers of 0.40% on assets of $116 million (as of December, 2013).

Comments

RiverPark Strategic Income has a simple philosophy, an understandable strategy and a hard-to-explain portfolio. The combination is, frankly, pretty compelling.

The philosophy: don’t get greedy. After a quarter century of researching and investing in distressed, high-yield and special situations fixed income securities, Mr. Sherman has concluded that he can either make 7% with minimal risk of permanent loss, or he could shoot for substantially higher returns at the risk of losing your money. He has consistently and adamantly chosen the former.

The strategy: invest in “money good” fixed-income securities. “Money good” securities are where the manager is very sure (very, very sure) that he’s going to get 100% of his principal and interest back, no matter what happens. That means 100% if the market tanks. And it means a bit more than 100% if the issuer goes bankrupt, since he’ll invest in companies whose assets are sufficient that, even in bankruptcy, creditors will eventually receive their principal plus their interest plus their interest on their interest.

Such securities take a fair amount of time to ferret out and might occur in relatively limited quantities, so that some of the biggest funds simply cannot pursue them. But, once found, they generate an annuity-like stream of income for the fund regardless of market conditions.

The portfolio: in general, the fund is apt to dwell somewhere near the border of short- and intermediate-term bonds. The fact that shorter duration bonds became the investment du jour for many anxious investors in 2013 meant that they were bid up to unreasonable levels, and Mr. Sherman found greater value in 3- to 5-year issues.

The manager has a great deal of flexibility in investing the fund’s assets and often finds “orphaned” issues or other special situations which are difficult to classify. As he and RiverPark’s president, Morty Schaja, reflected on the composition of the portfolio, they imagined six broad categories that might help investors better understand what the fund owns. They are:

Short Term High Yield overlap – securities that are also holdings in the RiverPark Short Term High Yield Fund.
Buy and hold – securities that hold limited credit risk, provide above market yields and might reasonably be held to redemption.
Priority-based – securities from issuers who are in distress, but which would be paid off in full even if the issue were to go bankrupt. Most investors would instinctively avoid such issues but Mr. Sherman argues that they’re often priced at a discount and are sufficiently senior in the capital structure that they’re safe so long as an investor is willing to wait out the bankruptcy process in exchange for receiving full recompense. An investor can, he says, “get paid a lot of money for your willingness to go through the process.” Cohanzick calls these investments “above-the-fray securities of dented credits”.
Off the beaten path – securities that are not widely-followed and/or are less liquid. These might well be issues too small or too inconvenient for a manager responsible for billions or tens of billions of assets, but attractive to a smaller fund.
Rate expectations – securities that present opportunities because of rising or falling interest rates. This category would include traditional floating rate securities and opportunities that present themselves because of a difference between a security’s yield to maturity and yield to worst.
Other – which is all of the … other stuff.

Fixed-income investing shouldn’t be exciting. It should allow you to sleep at night, knowing that your principal is safe and that you’re earning a real return – something greater than the rate of inflation. Few fixed-income funds lately have met those two expectations and the next few years are not likely to be kind to traditional fixed-income funds. RiverPark’s combination of opportunism and conservatism, illustrated in the return graph below, offer a rare and appealing combination.

rsivx

Bottom Line

In all honesty, about 80% of all mutual funds could shut their doors today and not be missed. They thrive by never being bad enough to dump, nominally active funds whose strategy and portfolio are barely distinguishable from an index. The mission of the Observer is to help identify the small, thoughtful, disciplined, active funds whose existence actually matters.

David Sherman runs such funds. His strategies are labor-intensive, consistent, thoughtful, disciplined and profitable. He has a clear commitment to performance over asset gathering, and to caution over impulse. Folks navigating the question “what makes sense in fixed-income investing these days?” owe it to themselves to learn more about RSIVX.

Fund website

RiverPark Funds

RiverPark Strategic Income Fund

Fact Sheet

Disclosure

While the Observer has neither a stake in nor a business relationship with either RiverPark or Cohanzick, both individual members of the Observer staff and the Observer collectively have invested in RPHYX and/or RSIVX.

January 2014, Funds in Registration

By David Snowball

AR Capital BDC Income Fund

AR Capital BDC Income Fund will pursue a high level of income, with the potential for capital appreciation. The plan is to invest in the common and preferred stock or warrants of business development companies that, in its view, are paying attractive rates of distribution and appear capable of sustaining that distribution level over time. The fund will be managed by unnamed individuals affiliated with BDCA Adviser, LLC . The minimum initial investment will be $2500 and the initial expense ratio has not yet been released. There are Advisor shares but also curiously-priced “A” shares: they intend to charge 1.5% up front and a deferred charge of 1% if you’re redeeming a million or more at a time.

AR Capital Dividend and Value Fund

AR Capital Dividend and Value Fund, Advisor Share class, will pursue is to provide a high level of dividend income, with the potential for capital appreciation.. The plan is to invest in dividend-paying stocks, potentially including master limited partnerships and REITs. Up to 15% of the fund might be in illiquid securities. The fund will be managed by Brad Stanley and Mark Painter, portfolio managers at Carnegie Asset Management. (The managers both graduated from Carnegie-Mellon University, in Pittsburgh.) The guys run about $168 million in this strategy and have modestly trailed the S&P500 since inception in early 2010). The minimum initial investment will be $2500 for financial intermediaries, $100,000 for other scoundrels trying to purchase directly from the firm and the initial expense ratio has not yet been announced.

Artisan High Income Fund

Artisan High Income Fund will pursue total return through a combination of current income and capital appreciation. The plan is to invest primarily in the high-yield bonds and loans of “issuers with high quality business models that have compelling risk-adjusted return characteristics.” The fund will be managed by Bryan C. Krug who was a fixed income portfolio manager at Waddell & Reed Investment who ran the $10 billion, five star Ivy High Income Fund (WHIYX) for the past seven years. He’s empowered to create his own independent team within Artisan. The minimum initial investment will be $1000 for Investor shares and $250,000 for Advisor shares, but Artisan will waive the Investor minimum if you set up an account with an AIP. The initial expense ratio will be 1.25% for both Investor and Advisor shares.

Brown Advisory Japan Alpha Opportunities Fund

Brown Advisory Japan Alpha Opportunities Fund will pursue total return by investing principally in equity securities of companies which are domiciled in or exercise the predominant part of their economic activity in Japan. They intend to construct a series of “sleeves,” each with its own distinct risk profile but they don’t explain what they might be. They may invest in common and preferred stock, futures, convertibles, options, ADRs and GDR, REITs and ETFs. While they advertise an all-cap portfolio, they do flag small cap and EM risks. The fund will be managed by a team from Wellington Management. The minimum initial investment will be $5000, reduced to $1000 for IRAs and $250 for accounts set up with an AIP. The initial expense ratio will be 1.36%. The fund will launch in March 2014.

Catalyst Macro Strategy Fund

Catalyst Macro Strategy Fund, I shares, will pursue capital appreciation with positive returns in all market conditions. The plan is to invest in securities (foreign or domestic, equity or debt, long or short) which offer “a high probability of return or, alternatively, that provides a high degree of safety during uncertain market conditions.” There is no evidence in the prospectus which demonstrates the probability that the managers will hit that lofty mark. The fund will be managed Al Procaccino, II, President, and Korey Bauer, Vice President, Analyst and Market Technician of Castle Financial & Retirement Planning Associates. The minimum initial investment in all share classes of the Fund is $2,500 for regular and IRA accounts, and $100 for an automatic investment plan account. The initial expense ratio will be 1.75%.

Kalmar “Growth-with-Value” Small/Mid Cap Fund

Kalmar “Growth-with-Value” Small/Mid Cap Fund will pursue long-term capital appreciation. The plan is to buy and hold high quality smaller companies (those with market caps between $1 – 10 billion) when their stock can be acquired for a value price. The fund will be managed by Ford Draper and Dana Walker. The same team has done a nice job with the strategy in their small cap fund (KGSCX) which now has nearly $900 million and a four-star rating. This might serve as a tool for diverting cash flows from that still-open fund. The minimum initial investment will be $2500 and the initial expense ratio will be 1.40%.

Loeb King Asia Fund

Loeb King Asia Fund will pursue “attractive risk adjusted returns in the Asian capital markets.” The plan is to invest “long or short in value-oriented and/or event-driven equity securities in Asian countries, including countries that may be considered emerging markets.” They also have the option of hedging the portfolio against macro events. The fund will be managed by Blaine Marder of Carl M. Loeb Advisory Partners L.P., also known as Loeb King Capital Management. This fund is a converted hedge fund, which Mr. Marder has managed since 2008. The hedge fund offered substantial downside protection (it dropped 0.25% in 2011 when most Asia funds were down by double-digits) but still managed to return 18% through the first three quarters of 2013. The minimum initial investment will be $10,000, reduced to $2500 for IRAs, but the initial expense ratio has not yet been announced.

Miller Income Opportunity Trust

Miller Income Opportunity Trust will pursue “a high level of income while maintaining the potential for growth.” The plan is to invest in let Bill Miller and his son invest in anything they want, with a focus on things which produce income. The prospectus reads like an overpriced version of FPA Crescent (FPACX). The fund will be managed by Bill Miller and Bill Miller IV. It’s a Legg Mason fund, so there is a slug of share classes. The minimum initial investment will be $1000 or a million and the initial expense ratio will be between 1 – 2%, depending on class. The whole enterprise leaves me feeling a little queasy since it looks either like Miller’s late-career attempt to prove that he’s not a dinosaur or Legg’s post-divorce sop to him.

Navigator Fixed Income Total Return Fund

Navigator Fixed Income Total Return Fund, I Shares, will pursue “excess alpha over a full market cycle measured against the Barclays Capital U.S. Corporate High Yield Index and the Barclays Capital U.S. Aggregate Bond Index” by investing, long and short, in fixed income securities. The fund will be managed by a team from Clark Capital Management, including its founder. The minimum initial investment will be $5000 but the initial expense ratio has not been announced.

NWM Momentum Fund

NWM Momentum Fund will pursue long-term capital appreciation. The plan is to invest in a variety of exchange-traded products using their “risk on / risk off proprietary screening model.” The fund will be managed by Momentum Fund Group. The minimum initial investment will be $5000, reduced to $1000 if you somehow conclude this is a good idea for your retirement account or if you establish an AIP account. The initial expense ratio will be 1.65%.

Parametric Dividend Income Fund

Parametric Dividend Income Fund will pursue total return and current income. (Curious, “total return” usually subsumes the notion “current income” ‘cause that’s what “total” means.) The plan is to invest in a diversified portfolio of quality companies that have historically demonstrated high current income and lower levels of stock price volatility on a sector relative basis. The fund will be managed by Thomas Seto and David Stein of Parametric, on behalf of Eaton Vance. They’re run a tiny account using this strategy for less than a year and it has modestly trailed the market. No word on its income production. The minimum initial investment will be $1000 and the initial expense ratio will be 0.95%.

Pax World International ESG Index Fund

Pax World International ESG Index Fund will come online soon to absorb the assets of two existing Pax funds, Pax World International (PXINX) and Pax MSCI EAFE ESG Index ETF (EAPS). Details are maddeningly scarce but the ETF has about $57 million in assets and charges 0.55%, and Pax generally has a $1,000 minimum on their funds.

Perritt Low Priced Stock Fund

Perritt Low Priced Stock Fund will pursue long-term capital appreciation by investing in small cap stocks priced at $15 or less. The fund will be managed by Michael Corbett and Brian Gillespie. Mr. Corbett also runs Perritt Microcap (PRCGX) and Ultra MicroCap (PREOX), both of which are very solid funds with good risk profiles. The minimum initial investment will be $1000, reduced to $250 for all sorts of good reasons, and the initial expense ratio will be 1.5%. It feels a lot like a good fund about to be handicapped by a marketing gimmick.

Riverside Frontier Markets Fund

Riverside Frontier Markets Fund will pursue capital appreciation, mostly. The plan is to “use proprietary algorithms and models employing a ‘top-down’ analysis of global equity markets and economic conditions, ‘bottom-up’ analysis of individual securities, momentum and market factors and any other methods determined to be appropriate.” The fund will be managed by Ana Kolar of Riverside Advisors. The minimum initial investment will be $2500, reduced to $2000 for IRAs; the initial expense ratio has not been disclosed.

SkyBridge Dividend Value Fund

SkyBridge Dividend Value Fund, I Shares, will pursue total return by investing in dividend-producing securities. They’ll typically hold 20-40 stocks, equally-weighted at the time of purchase. “The first ten stocks will represent the ten highest yielding stocks within the Dow Jones Industrial Average. The other stocks will be selected from across the market capitalization spectrum, generally excluding financial and utility stocks.” The fund will be managed by Brendan Voege, formerly of SunAmerica, but he will do do “under the supervision of SkyBridge Chief Investment Officer Raymond Nolte.” The minimum initial investment will be $1000 and the initial expense ratio will be $1000.

T. Rowe Price Global Allocation (RPGAX), December 2013

By David Snowball

Objective and Strategy

The fund’s objective is to seek long-term capital appreciation and income by investing in a broadly diversified global portfolio of investments, including U.S. and international stocks, bonds, and alternative investments. The plan is to add alpha through a combination of active asset allocation and individual security selection. Under normal conditions, the fund’s portfolio will consist of approximately 60% stocks; 30% bonds and cash; and 10% alternative investments. Both the equity and fixed-income sleeves will have significant non-U.S. exposure.

Adviser

T. Rowe Price. Price was founded in 1937 by Thomas Rowe Price, widely acknowledged as “the father of growth investing.” The firm now serves retail and institutional clients through more than 450 separate and commingled institutional accounts and more than 90 stock, bond, and money market funds. As of September 2013, the firm managed approximately $650 billion for more than 11 million individual and institutional investor accounts.

Manager

Charles M. Shriver, who technically heads the fund’s Investment Advisory Committee. As the chair he has day-to-day responsibility for managing the fund’s portfolio and works with the other fund managers on the committee to develop the fund’s investment program. Mr. Shriver joined Price in 1991 and began working as an investment professional in 1999. In May 2011 he became the lead manager for Price’s Balanced, Personal Strategy and Spectrum Funds (except for Spectrum International, which he picked up in May 2012). Stefan Hubrich, Price’s director of asset allocation research, will act as the associate manager.

Strategy capacity and closure

Given the breadth of the fund’s investment universe (all publicly-traded securities worldwide plus a multi-strategy hedge), Price believes there’s no set limit. They do emphasize their documented willingness to close funds when either the size of the fund or the rate of inflows makes the strategy unmanageable.

Management’s Stake in the Fund

Not yet available. Mr. Schriver has a total investment of between $500,000 and $1,000,000 in the other funds he helps manage.

Opening date

May 28, 2013.

Minimum investment

$2,500, reduced to $1,000 for IRAs.

Expense ratio

0.87% on assets of $1 Billion, as of July 2023.

Comments

It’s no secret that the investing world is unstable, now more than usual. Governments, corporations and individuals in the developed world are deeply and systemically in debt. There’s anxiety about the consequences of the Fed’s inevitable end of their easy-money policy; one estimate suggests that a one percentage point rise in the interest rate could cost investors nearly $2.5 trillion. Analysts foresee the end of the 30 year bull market in bonds, with some predicting 20 lean years and others forecasting The Great Rotation into income-producing equity. The great drivers of economic growth in the developed world seem to be lagging, China might be restructuring and the global climate is destabilizing with, literally, incalculable results.

Where, in the midst of all that, does opportunity lie?

One answer to the question, “what should you do when you don’t know what to do?” is “do nothing.” The other answer is “try a bit of everything!” RPGAX represents an attempt at the latter.

This is designed to be Price’s most flexible, broadly diversified fund. Its strategic design incorporates nearly 20 asset classes and strategies. Those will include, including:

both large and small-cap domestic and developed international equities
both value and growth global equities
emerging market equities
international bonds
short-duration TIPS
high yield, floating rate
emerging market local currency bonds
a multi-strategy hedge fund or two.

Beyond that, they can engage in currency hedging and index call writing to manage risk and generate income that’s uncorrelated to the stock and bond markets.

In short: a bit of everything with a side of hedging, please.

This fund is expected to have a risk profile akin to a balanced portfolio made up of 60% stocks and 40% bonds.

It’s entirely likely that the fund will succeed. Price has a very good record in assembling asset allocation products. T. Rowe Price Retirement series, for instance, is recognized as one of the industry’s best, most thoughtful options. Where other firms started with off-the-cuff estimations of appropriation asset mixes, Price started by actually researching how people lived in retirement and built their funds backward from there.

Their research suggested we spent more in retirement than we anticipate and risk outliving their savings. As a result, they increased both the amount of equity exposure at each turning point and also the exposure to risky sub-classes. So it wasn’t just “more equity,” it will “more international small cap.” Both that careful design and the fund’s subsequent performance earned the series of “Gold” rating from Morningstar.

In 2013 they realized that some investors weren’t comfortable with the extent of equity exposure, and created an entirely separate set of retirement funds with a milder risk profile. That sort of research and vigilance permeates Price’s culture.

It’s also reflected in the performance of the other funds that Mr. Shriver manages. They share three characteristics: they are carefully designed, that are uniformly solid and dependable, but they are not designed as low risk funds.

Morningstar’s current star ratings illustrate the second point:

Star rating:	3 Year	5 Year	10 Year	Overall
Balanced RPBAX	4	4	4	4
Personal Strategy Balanced TRPBX	4	4	4	4
Personal Strategy Growth TRSGX	5	5	4	5
Personal Strategy Income PRSIX	4	4	4	4
Spectrum Growth PRSGX	3	3	4	3
Spectrum Income RPSIX	3	3	3	3
Spectrum International PSILX	3	4	4	4

At the same time, the funds’10 year risks are sometimes just average (Spectrum Income) but mostly above average (Balanced, Personal Strategy Balanced, Personal Strategy Income, Spectrum Growth, Spectrum International). But never “high.” That’s not the Price way.

Bottom Line

Investors who have traditionally favored a simple 60/40 hybrid approach and long-term investors who are simply baffled by where to move next should look carefully at RPGAX. It doesn’t pretend to be a magic bullet, but it offers incredibly broad asset exposure, a modest degree of opportunism and a fair dose of risk hedging in a single, affordable package. In a fund category marked by high expenses, opaque strategies and untested management teams, it’s apt to stand modestly out.

Fund website

T. Rowe Price Global Allocation

Aegis Value (AVALX), December 2013

By David Snowball

THIS IS AN UPDATE OF THE FUND PROFILE ORIGINALLY PUBLISHED BY Fund Alarm IN May 2009. YOU CAN FIND THAT ORIGINAL PROFILE HERE.

Objective and strategy

The fund seeks long-term capital appreciation by investing in a diversified portfolio of very, very small North American companies. They look for stocks that are “significantly undervalued” given fundamental accounting measures including book value, revenues, or cash flow. They define themselves as “deep value investors.” While the fund invests predominantly in microcap stocks, it does have the authority to invest in an all-cap portfolio if that ever seems prudent. The portfolio is distinctive. It holds about 70 stocks and trades them half as often as its peers. Its market cap is one-quarter that of its small-value peers. 89% of the portfolio is invested in US firms, with about 8% in Canadian and 3% in British firms.

Adviser

Aegis Financial Corporation of McLean, Virginia, is the Fund’s investment advisor. Aegis has been in operation since 1994 and has advised the fund since inception in 1998. It also manages more than 100 private accounts and Aegis High Yield (AHYFX).

Manager

Scott L. Barbee, CFA, is portfolio manager of the fund and a Managing Director of AFC. He was a founding director and officer of the fund and has been its manager since inception. He’s also a portfolio manager for Aegis High Yield and approximately 110 equity account portfolios of other AFC clients managed in an investment strategy similar to the Fund with a total value of approximately $100 million. Mr. Barbee received an MBA degree from the Wharton School at the University of Pennsylvania.

Strategy capacity and closure

Aegis Value closed to new investors in late 2004, when assets in the fund reached $750 million. The manager estimates that, under current conditions, the strategy could accommodate nearly $1 billion. It is currently about $410 million when separate accounts are included.

Management’s stake in the fund

As of September 30, 2013, Aegis employees owned more than $20 million of Fund shares. The vast majority of that investment is held by Mr. Barbee and his family. Each of the fund’s directors, though very modestly compensated, has a large stake in the fund.

Opening date

May 15, 1998

Minimum investment

$10,000 for regular accounts and $5,000 for retirement accounts.

Expense ratio

1.50% on assets of $332 million, as of June 2023.

Comments

Aegis Value must surely give the folks at Morningstar a headache. It’s been a one-star fund, it’s been a five-star fund and it’s been everything in-between. Its assets in 2009 were a tenth of what they were in 2004 but its assets now are nearly six times what they were in 2009.

That is, on face, a very odd pattern for a very consistent fund. It’s had the same manager, Scott Barbee, since launch. He’s pursued the same investing discipline and he’s applied to it the same small universe of stocks.

What might you need to know about Aegis Value as you undertake your due diligence? Three things come immediately to mind.

First, the fund has the potential to make a great deal of money for its investors. A $10,000 investment made at the fund’s 1998 launch would have grown to $59,800 by late November 2013. That same investment in its small value peers would have grown to $34,900. That translates to an annualized return of 12.2% since inception here, 8.0% at the average small-value fund. That’s not a perfectly fair comparison, ultra-small companies are different: benchmarking them against either small- or micro-cap companies leads to spurious conclusions. By way of simple example, Aegis completely ignored the bear market for value stocks in the late 1990s and the bear market for everybody else at the beginning of this century. Since inception, it has handsomely outperformed other ultra-small funds, such as Franklin Microcap Value (FRMCX) and Bridgeway Ultra-Small Company Market (BRSIX). In the past five years, its total return has been almost 2:1 greater than theirs.

Second, ultra-small companies are explosive. Over the past five years, the fund has booked double-digit quarterly returns on 11 occasions. It has risen by as much as 48% in three months and has fallen by as much as 20%. During the October 2007 – March 2009 meltdown, AVALX lost 68.9%. That did not reflect the fundamental values of the underlying stocks as much as fallout from Then, in the six months following the March 2009 low, AVALX returned 230%. That sort of return is entirely predictable for tiny, deep-value companies following a recession. For the first years ending November 2013, the fund earned an annualized 31.6% per year.

Third, there’s reason to approach – but to approach with caution – now. There’s a universal recognition that valuations in the small cap space are exceedingly rich right now. Mr. Barbee’s last letter to shareholders (Q3 2013) warns that Fed policy is “starting to form asset bubbles.” For a deep value investor, a rising market is never a friend and he frets that “the third quarter saw a significant decline in watch-list candidates, from 270 at the end of just to 224 at the end of September. There is now significantly more competition for the opportunities that do exist and our job is clearly becoming more challenging.”

Microcaps represent a large and diverse universe whose members are frequently mispriced. Given his skepticism about the consequences of fed policy and a surging market, like other deep value/absolute return managers, he is gravitating toward “hard asset enterprises” and – reluctantly – cash. In general, he would prefer not to hold cash since it doesn’t hold value when inflation rises. He avers that “to date, our experienced team has been able to find a sufficient number of investment candidates offering what we believe are attractive risk/reward characteristics.” Nonetheless he’s cautious enough about seeking “deeply” undervalued stocks that the portfolio is up to about 16% cash.

Bottom Line

With Aegis’s pending reorganization, this might be an opportune time for investors to look again at one of the most distinctive, successful microcap value funds around. Mr. Barbee is one of the field’s longest tenured managers and Aegis sports one of its longest records. Both testify to the fact that steadfast investors here have had their patience more than adequately rewarded.

Fund website

Aegis Value fund. It’s largely a one-page site, so you’ll have to scroll down to see the links to the various fund documents and reports. The Annual and Semi-Annual Reports are pretty formulaic, but the quarterly manager letters are worth some time and attention.

December 2013, Funds in Registration

By David Snowball

American Beacon Global Evolution Frontier Markets Income Fund

American Beacon Global Evolution Frontier Markets Income Fund (oh, dear God) will seek income, with capital appreciation as a secondary objective, by investing primarily frontier and emerging market sovereign and quasi-sovereign debt. The fund will be managed by a team from Global Evolution USA, LLC, a subsidiary of Global Evolution Fondsmæglerselskab A/S. But you already knew that, right? The Global Evolution people have been running this strategy for about 30 months but the draft prospectus leaves the performance numbers blank. The minimum initial investment is $2,500 the opening expense ratio is 1.54%.

B. Riley Diversified Equity Fund

B. Riley Diversified Equity Fund will seek capital appreciation by investing in (here’s their text) “the equity securities of U.S. companies within a range of the market capitalizations of the issuers selected by the B. Riley & Co. Research Group (the “Research Group”) as “Buy” rated equity securities in its coverage universe.” If one of my students had written that sentence, I would have scribbled “huh?” next to it. Charles P. Hastings has managed the Fund since its inception in February 2014. The firm benchmark’s its equity composite against the small-cap Russell 2000; the composite has had some dismal years and some great ones. The minimum initial investment is $5,000. The opening expense ratio has not yet been revealed.

Conestoga SMid Cap Fund

Conestoga SMid Cap Fund will seek long-term growth by investing in mid- to large-cap common stocks. The managers look to buy growth-at-a-reasonable-price. The fund will be managed by Robert M. Mitchell and David M. Lawson, members of the firm’s four person investment management team. I hope to talk with the managers in the month after launch. The story is that Conestoga has a very good small cap fund and a very weak mid-cap fund. They asked, some months ago, if the Observer might hold off writing anything about the mid-cap fund, presumably because they had this one in the works. I still don’t have much of an explanation for the weakness of the mid-cap fund and no idea of whether the launch here signals imminent closure of the other. They won’t be able to talk until after launch, but I’d certainly counsel having a long conversation with them before proceeding. The minimum initial investment is $2500 and the opening expense ratio is 1.35%.

Centre Active U.S. Treasury Fund

Centre Active U.S. Treasury Fund will seek maximize investors’ total return through capital appreciation and current income. The plan is to actively manage a portfolio of 0-12 year Treasury bonds, which an eye to profiting from, or minimizing the hit from, interest rate changes. The fund will be managed by T. Kirkham Barneby of Hudson Canyon Investment Counselors. The minimum initial investment is $5000 and the opening expense ratio is 0.85%.

Foundry Micro Cap Value Fund

Foundry Micro Cap Value Fund will seek capital appreciation by investing in microcap value stocks. The fund will be managed by Eric J. Holmes of Foundry Partners, who managed this strategy in separate Fifth-Third Bank accounts from 2004. The separate accounts seemed, on whole, to offer pretty good downside protection relative to their microcap benchmark. The minimum initial investment will be $10,000 and the opening expense ratio is 1.62%.

Foundry Small Cap Value Fund

Foundry Small Cap Value Fund The fund will be managed by Eric J. Holmes of Foundry Partners, who managed this strategy in separate Fifth-Third Bank accounts from 2004. They published performance numbers for their separate accounts but then benchmarked the small cap value accounts against a microcap value index, so I’m not entirely sure about what conclusion to draw. The minimum initial investment will be $10,000 and the opening expense ratio is 1.42%.

Giralda Risk-Managed Growth Fund

Giralda Risk-Managed Growth Fund will seek to do something, somehow. You may buy their “I” shares for $2500. That’s all I know because the first 17 pages of the prospectus appear to be missing.

Harbor Small Cap Growth Opportunities Fund

Harbor Small Cap Growth Opportunities Fund will seek long-term growth by investing in common and preferred stocks of small cap companies. They will focus on rapidly growing small cap companies that are in an early or transitional stage of their development. The fund will be managed by a team from Elk Creek Partners. Harbor has a rep for hiring very good sub-advisors, often folks who offer a clone of an existing fund at a price discount. The Elk Creek team appears to have started at Montgomery Asset Management, which was bought by Wells Capital Management just after the turn of the century, and has been managing money for Wells (as in “Fargo”) since then. The minimum initial investment is $2500, reduced to $1,000 for tax-advantaged accounts and the opening expense ratio is 1.27%.

KF Griffin Blue Chip Covered Call Fund

KF Griffin Blue Chip Covered Call Fund will seek to provide total return with lower volatility than equity markets in general. They will invest in 25-35 dividend-paying, large-capitalization foreign and domestic stocks of domestic and will write covered call options on 50-100% of the portfolio. They’re looking for generating an equal percent of return from capital appreciation, dividends and call premiums. The fund will be managed by Douglas M. Famigletti, President and Chief Investment Officer of Griffin Assets Management. The manager’s separate account composite averaged 13.8% from 2009 – mid 2013, while the benchmark S&P 500 Buy-Write Index clocked in at 10.3%. The minimum initial investment is $2500 and the opening expense ratio is capped at 1.50%.

PIMCO Balanced Income Fund

PIMCO Balanced Income Fund will seek to maximize current income while providing long-term capital appreciation by investing globally in dividend-paying common and preferred stocks and all flavors of fixed- and floating-rate instruments across all global fixed income sectors. They might achieve sector exposure through derivatives and might invest up to 50% in high yield bonds. The manager has not yet been named. The minimum initial investment for “D” shares is $1000 and the opening expense ratio is not yet set.

QCI Balanced Fund

QCI Balanced Fund will seek to balance current income and principal conservation with the opportunity for long-term growth. In pursuit of that entirely honorable objective they’ll invest in mid- to large-cap stocks and investment-grade bonds, with the potential for a smattering of high yield debt. The fund will be managed by Edward Shill, who has been with QCI since the early 1990s and is now their CIO. The prospectus offers no immediate evidence of his distinction in executing this strategy. The minimum initial investment is $1,000 and the opening expense ratio is 1.25%.

SPDR Floating Rate Treasury ETF

SPDR Floating Rate Treasury ETF will track an as-yet unnamed index of the as-yet unissued floating rate Treasuries. The fund will be managed by Todd Bean and Jeff St. Peters of State Street Global Advisors. The opening expense ratio is not yet set.

WisdomTree Floating Rate Treasury Fund

WisdomTree Floating Rate Treasury Fund will track the WisdomTree Floating Rate Treasury Index which will, more or less faithfully, track the value of floating rate securities which are set to be issued by the Treasury in January 2014. The fund will be managed by a team from WisdomTree. The opening expense ratio is not yet set.

World Energy Fund

World Energy Fund will seek growth and income by investing, long and short, in a wide range of energy-related financial instruments issued in the U.S. and markets around the world. The fund will be managed by a team from Cavanal Hill Investment Management. Why yes, I do think that’s a potentially explosive undertaking. Why no, the prospectus does not offer any evidence of the team’s experience with, or competence at, such investing. Why do you ask? The minimum initial investment is $1000 the opening expense ratio is 1.17%.

Zacks Dividend Strategy Fund

Zacks Dividend Strategy Fund will seek capital appreciation and dividend income by investing, mostly, in dividend-paying large cap stocks. The fund will be managed by Benjamin L. Zacks and Mitch E. Zacks. The duo runs a bad market-neutral fund, mediocre all-cap one and entirely reasonable, newer small cap fund – all under the Zacks banner. Zacks runs a stock-rating service whose ratings might contribute the portfolio construction but that’s not exactly spelled out. The minimum initial investment is $2500, reduced to $1000 for tax-advantaged accounts and $500 for accounts set up with an automatic investing plan. The opening expense ratio is not yet available.

November 2013, Funds in Registration

By David Snowball

Baird Ultra Short Bond Fund

Baird Ultra Short Bond Fund will seek current income consistent with preservation of capital. . They intend to invest in US and international government and corporate bonds, asset-backed and mortgage-backed securities and money market instruments. No more than 10% of the portfolio may be invested in high-yield debt. They’re willing to make sector and interest rate bets but will keep the duration under one year. The fund will be managed by a team led by Mary Ellen Stanek, Baird’s CIO. The investment minimum will be $2500 for Investor class classes, reduced to $1000 for IRAs, and the initial expense ratio, after waivers, is 0.40%.

Balter Long/Short Equity Fund

Balter Long/Short Equity Fund will seek long-term capital appreciation. They intend to invest in all of the predictable long/short stuff. The fund will be managed by Apis Capital Advisors and Midwoods Capital Management. Apis uses a fundamental bottom-up, research-driven process with a small/midcap bias. Midwoods invests predominantly long and short in U.S. small-cap equities based on lots of on-site/in-the-field research. Both are small advisors (under $100 million AUM) that have very successful nine-to-ten year old private partnerships based on these strategies. The investment minimum will be $5000 and the initial expense ratio, after waivers, is a daunting 3.22%. While I know that you’ve got to pay to attract talent, I’d still disparage the fund for its expenses except for the managers’ record and their smaller-cap focus which is rare and can be quite profitable.

Bradesco Latin American Equity Fund

Bradesco Latin American Equity Fund will seek long-term capital appreciation by investing in the stocks of firms located in, or doing a majority of their business in, Latin America. For their purposes, Belize, French Guyana, Guyana, and Suriname are not Latin. (Nuts. Do you know how hard it is to get appropriate Belizian exposure?) They anticipate a 30-40 stock portfolio but might also buy or sell derivatives. The fund will be managed by Herculano Anibal Alves, the Equities Chief Investment Officer of BRAM Brazil, and his team. The investment minimum is not yet set and the initial expense ratio, after waivers, is 2.0%.

Bradesco Brazilian Hard Currency Bond Fund

Bradesco Brazilian Hard Currency Bond Fund will seek to achieve total return through income and capital appreciation. They intend to invest in fixed-income and floating rate debt instruments of the Brazilian government, Brazilian governmental entities, agencies, and other issuers the obligations of which are guaranteed by Brazil and Brazilian companies, each of which are denominated in U.S. dollars and foreign hard currencies. The fund will be managed by Reinaldo Le Grazie, is the Chief Investment Officer of Fixed Income and Multi Strategies of BRAM Brazil, and his team. The investment minimum is not yet set and the initial expense ratio, after waivers, is 1.75%.

Brown Advisory Mortgage Securities Fund

Brown Advisory Mortgage Securities Fund will seek to maximize total return consistent with preservation of capital. They intend to invest in mortgage-backed securities such as residential mortgage-backed, commercial mortgage-backed, and stripped mortgage-backed securities, as well as collateralized mortgage and inverse floating rate obligations. The fund will be managed by Thomas D.D. Graff, manager of Brown Advisory Tactical Bond Fund. The investment minimum will be $5000, reduced to $2000 for IRAs and AIPs, and the initial expense ratio, after waivers, is 0.54%.

Catalyst/Equity Compass Share Buyback Fund

Catalyst/Equity Compass Share Buyback Fund will seek long-term capital appreciation by investing primarily in the stocks of companies in the Russell 3000 that have announced their intention to repurchase a portion of the company’s outstanding shares. Michael Schoonover will be the portfolio manager and Timothy M. McCann will be the Portfolio Management Consultant. Apparently the consultant will be the fund’s risk-management specialist. The investment minimum for the no-load institutional shares will be $2,500 for a regular account, $2,500 for an IRA or $100 for an account established with an automatic investment plan. The initial expense ratio, after waivers, is 1.25%.

Champlain All Cap Fund

Champlain All Cap Fund will seek capital appreciation. They intend to invest in US and foreign firms with strong long-term fundamentals, superior capital appreciation potential and attractive stock valuations. The fund will be managed by Van Harissis and Scott Brayman. These are the same folks who run Champlain Small Cap and Champlain Mid Cap, both of which are Silver-rated by Morningstar. The investment minimum will be $10,000, reduced to $3,000 for IRAs and the initial expense ratio, after waivers, is 1.15% .

Clifford Capital Partners Fund

Clifford Capital Partners Fund will seek capital appreciation by investing in 25-35 stocks whose price reflects “a margin of safety.” The portfolio will be divided into three sleeves: Core, high-quality, wide-moat companies (50-75% of the portfolio), Contrarian, lower quality but higher return firms (0-50%) and cash (0-25%). The fund will be managed by Ryan P. Batchelor. Mr. Batchelor founded the advisor. Before that he was a strategist at Wells Capital and a Morningstar equity analyst. The investment minimum will be $2500 and the initial expense ratio, after waivers, is 1.10%.

Consilium Emerging Market Small Cap Fund

Consilium Emerging Market Small Cap Fund will seek long-term capital appreciation. They intend to invest in common and preferred stocks of firms with market caps below $3 billion. The fund will be managed by Jonathan Binder, Chief Investment Officer of Consilium Investment Management. Consilium is actually a sub-adviser and it’s possible that the adviser will add other teams in the future. Mr. Binder is a former hedge fund guy but the prospectus does not mention anything about his past performance. The investment minimum will be $2500 and the initial expense ratio is 2.05%.

CVR Dynamic Allocation Fund

CVR Dynamic Allocation Fund will seek “to preserve and increase the purchasing power value of its shares over the long term.” The investment strategies section of their prospectus is quite poorly written; it appears that they have some mix of direct equity exposure, tactical equity exposure through ETFs and a managed futures strategy. I have no idea of how they’re allocating between the strategies. The fund will be managed by Peter Higgins and William Monaghan, both CAIAs. What, you might ask, is that? Chartered Alternative Investment Analyst, a designation which, according to the CAIA website, “gives you professional credibility, access, and connections.” The investment minimum will be $2500 and the initial expense ratio is not yet set.

EuroPac International Dividend Income Fund

EuroPac International Dividend Income Fund, Institutional Shares, will seek income and maximize growth of income. (Me, too.) They intend to invest in dividend-paying stocks of equity securities of companies located in Europe and the Pacific Rim. They’re looking for “sustainably high dividends that grow over time.” The fund is based on a limited partnership, Spongebob Ventures II LLC (apparently Viacom doesn’t mind if hedge funds infringe on their trademarks), which commenced operations February 28, 2010. From inception the partnership returned 11.3% annually while its benchmark index made 3.75%. The fund will be managed by James Nelson and Patrick B. Rien, both of Euro Pacific Asset Management. The investment minimum will be $15,000 and the initial expense ratio, after waivers, is 1.25%.

Fidelity Event Driven Opportunities Fund

Fidelity Event Driven Opportunities Fund will seek capital appreciation. They intend to invest in the stocks of firms involved in a “special situation event,” which may include corporate reorganizations, changes in beneficial ownership, deletion from a market index, material changes in management structure or corporate strategy, or changes to capital structure. They might also buy bonds. Being Fidelity, they don’t feel compelled to offer much more than a series of bullet-pointed options. The fund will be managed by Arvind Navaratnam, a Fidelity analyst whose 2012 wedding was covered by ModernLuxury.com. (sigh) The investment minimum will be $2500, reduced to $200 for IRAs. Expenses not yet set.

Geneva Advisors Mid Cap Growth Fund

Geneva Advisors Mid Cap Growth Fund, “R” shares, will seek capital appreciation by investing in US midcap stocks. They’re looking for “quality growth companies.” The fund will be managed by Robert C. Bridges, John P. Huber and Daniel P. Delany. These are all former William Blair managers whose private accounts have consistently, and in some cases substantially, trailed their benchmark over the past 1, 3 and 5 year periods, and since inception.The investment minimum will be $1000 and the initial expense ratio, after waivers, is 1.45%.

Geneva Advisors Small Cap Opportunities Fund

Geneva Advisors Small Cap Opportunities Fund, “R” shares, will seek capital appreciation by investing in the stock of “smaller, quality companies with above average growth or emerging growth opportunities.” “Smaller” translates to “under $2.5 billion.”. The fund will be managed by Robert C. Bridges and Daniel P. Delany. The investment minimum will be $1000 and the initial expense ratio, after waivers, is 1.45%.

Grant Park Multi Alternative Strategies Fund

Grant Park Multi Alternative Strategies Fund, “N” shares, will seek positive absolute returns which sets them squarely at odds with all those funds seeking negative absolute returns. (Perhaps The Kelvin Fund, which seeks absolute zero?) Their strategy, like many relationships, is complicated. They intend to invest in four different strategies to give themselves exposure to 40-60 markets (though they don’t quite define what qualifies as “a market”). The strategies are Long/Short Global Financial, Dynamic Commodities, Upside Capture (“a permanent allocation to a basket of investments across multiple asset classes”) and Unconstrained Interest Rate Strategy (long/short investments in short- to intermediate term fixed income securities). The fund will be managed by John Krautsack of EMC Capital Advisors. There’s an entry in the prospectus’s Table of Contents entitled “Prior Performance of Sub-Adviser” but there is no such section in the document. The investment minimum will be $2500 and the initial expense ratio, after waivers, is 1.98%.

Hodges Small Intrinsic Value Fund

Hodges Small Intrinsic Value Fund (HDSVX) will seek long-term capital appreciation. They intend to invest at least 80% in small cap (under $3.2 billion) stocks which have “a high amount of intrinsic asset value, low price to book ratios, above average dividend yields, low PE multiples, or the potential for a turnaround in the underlying fundamentals.” The other 20% might go to larger cap stocks, bonds, or ETFs. Up to 25% of the portfolio might be invested overseas. The fund will be managed by a team led by Eric J. Marshall, Hodge’s president. Mr. Marshall is part of the team which runs the five-star Hodges Small Cap Fund. The investment minimum will be $1000 and the initial expense ratio, after waivers, is 1.29%.

Hodges Small-Mid Cap Fund

Hodges Small-Mid Cap Fund will seek long-term capital appreciation through investments in the common stock of small and mid cap companies. . They intend to invest in stocks “likely to have above-average growth or holds unrecognized relative value that can result in the potential for above-average capital appreciation.” The market cap range is $1 – 8 billion, though they’re not required to sell stocks which appreciate belong that level. They might invest up to 10% in microcaps or large caps. The fund will be managed by Don Hodges, Craig Hodges, their CIO and CEO, Eric J. Marshall, their president, and Gary M. Bradshaw. These are all pretty experienced guys, with the elder Mr. Hodges claiming 53 years in the industry. The investment minimum will be $1000 and the initial expense ratio, after waivers, is 1.40%.

Lazard Global Equity Select Portfolio

Lazard Global Equity Select Portfolio will seek long-term capital appreciation through an all-cap global portfolio, about which they disclose little. The fund will be managed by a team of folks led by Andrew Lacey. All of the team members are identified as working “on various” Lazard teams. (Well, huzzah.) The investment minimum will be $2500 and the initial expense ratio, after waivers, is 1.40%.

Otter Creek Long/Short Opportunity Fund

Otter Creek Long/Short Opportunity Fund will seek long-term capital appreciation with below-market volatility through a long/short portfolio. They’ll be positioned somewhere between 35% net short and 80% net long. They can also invest in high yield bonds or go to cash. The fund will be managed by a team from Otter Creek Capital Management. The team also runs an offshore fund and a hedge fund. The latter has been around since 1991 and uses the same discipline as the mutual fund will. From inception to the end of 2012, the hedge fund returned 11.3% annually while the S&P500 returned 8.5%. The bad news is that the fund was bludgeoned in 2012 (down 2% while the market was up 16%) and 2013 through August (up 4.5% versus 16.5% for the benchmark). The investment minimum will be $2500 and the initial expense ratio, after waivers, is 2.38%.

SilverPepper Merger Arbitrage Fund

SilverPepper Merger Arbitrage Fund will seek “to create returns that are largely uncorrelated with the returns of the general stock market. Regardless of whether the stock market is declining or rising, the Merger Arbitrage Fund also seeks capital appreciation.” They hope to make a series of small gains in relatively short time periods on the difference between a stock’s current price and the price offered by an acquiring firm. In general those deals close within a few months and, in general, the arbitrage gain can be realized regardless of the market’s general direction. The fund will be managed by Jeff O’Brien and Daniel Lancz of Glenfinnen Capital, LLC, a merger arbitrage specialist. The investment minimum will be $5000 and the expense is not yet set.

SilverPepper Commodity Strategies Global Macro Fund

SilverPepper Commodity Strategies Global Macro Fund, Advisor Shares, will seek “to create returns that are largely uncorrelated with the returns of the general stock, bond, currency and commodities markets. Regardless of whether these markets are rising or declining” it will also seek capital appreciation. . They intend to invest in both long and short positions in an array of asset classes based primarily on its views of commodity prices.” The fund will be managed by Renee Haugerud, Chief Investment Officer, and Geoff Fila, both of Galtere Ltd. Galtere is an advisor to institutional and high net worth investors and this is their flagship strategy. The investment minimum will be $5000 and the expense is not yet set.

Sirios Focus Fund

Sirios Focus Fund, Retail Class, will seek long-term capital appreciation by investing in 25-50 mid- to large-cap stocks. The portfolio will be global. The fund will be managed by John F. Brennan, Jr. Mr. Brennan used to be a portfolio manager for MFS. His separate account composite was up 2.5% annually for the five years ending in December 2012, while the S&P 500 was up 1.7%. The investment minimum will be $10,000 and the initial expense ratio, after waivers, is 1.75% .

Vanguard Global Minimum Volatility Fund

Vanguard Global Minimum Volatility Fund will seek to provide long-term capital appreciation with low volatility relative to the global equity market. They intend to use a quantitative strategy to invest in a bunch of low-volatility stocks. They’ll hedge their currency exposure. The fund will be managed by James D. Troyer, James P. Stetler, and Michael R. Roach. The investment minimum will be $3000 and the initial expense ratio, after waivers, is 0.30%.

Westcore Small-Cap Growth Fund

Westcore Small-Cap Growth Fund will seek to achieve long-term capital appreciation by investing primarily in small-capitalization growth companies. They intend to invest in stocks comparable in size to those in the Russell 2000 which have attractive growth prospects for earnings and/or cash flows. The fund will be managed by Mitch Begun and a team from Denver Investments. The investment minimum will be $2500 and the initial expense ratio, after waivers, is 1.30%.

Frank Value (FRNKX), October 2013

By David Snowball

Objective and Strategy

The fund pursues long-term capital appreciation. They define themselves as conservative value investors whose first strategy is “do not lose money.” As a result, they spend substantial time analyzing and minimizing the downside risks of their investments. They generally invest in a fairly compact portfolio (around 30 names) of U.S. common stocks. They start with a series of quantitative screens (including the acquisition value of similar companies and the firms’ liquidation value), then examine the ones that pass for evidence of fiscal responsibility (balance sheets without significant debt), excellent management, a quality business, and a cheap stock price. They believe themselves to have three competitive advantages: (1) they are willing to invest in firms of all sizes. (2) They’re vigilant for factors which the market systematically misprices, such as firms whose balance sheets are stronger than their income statements and special situations, such as spin-offs. And (3) they’re small enough to pursue opportunities unattractive to managers who are moving billions around.

Adviser

Frank Capital Partners, LLC. Monique M. Weiss and Brian J. Frank each own 50% of the adviser.

Manager

Brian Frank is Frank Capital Partners’ co-founder, president and chief investment officer. He’s been interested in stock investing since he was a teenager and, like many entrepreneurial managers, was a voracious reader. At 19, his grandfather gave him $100,000 with the injunction, “buy me the best stocks.” In pursuit of that goal, he founded a family office in 2002, an investment adviser in 2003 and a mutual fund in 2004. He was portfolio co-manager from 2004 – 2009 and has been sole manager since November, 2009. He earned degrees in accounting and finance from New York University’s Stern School of Business. As of the latest SAI, Mr. Frank manages one other investment account, valued at around $8 million.

The Frank Value Fund has seven times been awarded as a Wall Street Journal Category King in the Multi-cap Core Category.

Strategy capacity and closure

Mr. Frank reports “This strategy has a capacity max of around $5 billion in assets. We will seriously examine our effect on our smallest market cap position as early as $1 billion of assets. We will close the fund before we are forced out of smaller or less liquid names. We are committed to maintaining superior returns for shareholders.”

Management’s Stake in the Fund

Mr. Frank has between $100,000 and 500,000 invested in the fund. All of the fund’s trustees have substantial investments (between $10,000 and 50,000) in the fund, especially given the modest compensation ($400/year) they receive for their service.

Opening date

July 21, 2004

Minimum investment

$1500. The fund is available through Schwab, NFS, Pershing, Commonwealth, JP Morgan, Matrix, SEI, Legent, TD Ameritrade, E-Trade, and Scottrade.

Expense ratio

1.37% on assets of $18.9 million (as of July 2023)

Comments

If a fund manager approached you with the following description of his investment discipline, how would you react?

We generally ignore two out of every three opportunities to make gains for our investors. Our discipline calls for us to periodically pour money into the most egregiously overpriced corner of the market, often enough into ideas that would be pretty damned marginal in the best of circumstances. ‘cause that’s what we’re paid to do.

Yuh.

Brian Frank reacts in about the same way you did: admiration for their painful honesty and stupefaction at their strategy. As inexplicably dumb as this passage might sound, it’s descriptive of what you’ve already agreed to when you buy any of hundreds of large mainstream domestic equity funds.

Mr. Frank believes that a manager can’t afford to ignore compelling opportunities in the name of style-box purity. The best opportunities, the market’s “fat pitches,” arise in value and growth, large and small, blue-chip and spinoff. He’s intent on pursuing each.

Most funds that claim to be “all cap” are sorting of spoofing you; most mean “a lot of easily-researched large companies with the occasional SMID-cap tossed in.” To get an idea of how seriously Mr. Frank means “go anywhere” when he says “go anywhere,” here’s his Morningstar portfolio map in comparison to that of the Vanguard Total Stock Market Index Fund (VTSMX):


Vanguard Total Stock Market Index	Frank Value

Nor is that distribution static; the current style map is modestly more focused on growth than last quarter’s was and there have been years with a greater bulge toward small- and micro-caps. But all versions show an incredibly diverse coverage.

Those shifts are driven by quantitative analyses of where the market’s opportunities lie. Mr. Frank writes:

What does the large-cap growth or small-cap value manager do when there are no good opportunities in their style box? They hold cash, which lowers your exposure to the equity markets and acts as a lead-weight in bull markets, or they invest in companies that do not fit their criteria and end up taking excess risk in bear markets. Neither one of these options made any sense when I was managing family-only money, and neither one made sense as we opened the strategy to the public … Our strategy is quantitative, meaning we go where we can numerically prove to ourselves there is opportunity. If there is no opportunity, we leave the space.

That breadth does not suggest that FRNKX is a closet indexer. Far from it. Morningstar categorizes equity portfolios into eleven sectors (e.g., tech or energy). At its last portfolio report, Mr. Frank had zero investing in four of the sectors (materials, real estate, energy, utilities) and diverged from the index weighting by 50% or more in three others (overweighting financial services and tech, underweighting consumer stocks).

Because the fund is small and the portfolio is focused, it can also derive substantial benefit from opportunities that wouldn’t be considered in a huge fund. He’s found considerable value when small firms are spun-off from larger ones. Two of three recent purchases were spinoffs. New Newscorp was spun-off from Rupert Murdoch’s Newscorp and, while little noticed, the “mishmash of global assets in New Newscorp, represent[s] one of the best upside/downside scenarios we have seen in a long time.” Likewise with CST Brands, a gas station and convenience store operator spun off from Valero Energy.

At the same time, Mr. Frank has a knack for identifying the sorts of small firms with unrecognized assets and low prices that eventually attract deep-pocket buyers. He reports that “About 1 out of every 4 companies we sell is to a private equity or strategic buyer. So yes, our turnover is significantly influenced by take-outs. YTD take-outs have been DELL, BMC, and TRLG (True Religion Jeans.)”

All of this would qualify as empty talk if the manager couldn’t produce strong results, and produce them consistently. Happily for its investors – including Mr. Frank and his family – the fund has produced remarkably strong, remarkably consistent returns. It’s in the top tier of its peer group for trailing periods reaching back almost a decade. The manager tracks his fund’s returns over a series of rolling five-year periods (08/2004-08/2009, 09/04-09/10 and so on). They’ve beaten their benchmark in 45 of 45 rolling periods and have never had a negative five year span, while the S&P500 has had seven of them in the same period. FRNKX has also outperformed in 80% of rolling three-year periods and from inception to September 2013. That led Lipper to designate the fund as a Lipper Leader for both Total Return and Capital Preservation for every reported period.

Bottom Line

Winning is hard. Winning consistently is incredibly hard. Winning consistently while handicapping yourself by systematically, structurally excluding opportunities approaches impossible. Frank Value has, for almost a decade, won quietly and consistently While there are no guarantees in life or investing, the manager has worked hard to tilt the odds in his investors’ favor.

Fund website

Frank Funds

Fact Sheet

Oberweis International Opportunities (OBIOX), October 2013

By David Snowball

Objective and Strategy

The fund pursues long-term capital appreciation by investing in international stocks, which might include companies headquartered in the US but having more than half of their business outside of the US. The vast bulk of the portfolio – 85% or so – are in small- to mid-cap stocks and about 5% is in cash. They will generally invest fewer than 25% of their assets in emerging markets.

Adviser

Oberweis Asset Management Inc. Established in 1989, OAM is headquartered in suburban Chicago. Oberweis is an independent investment management firm that invests in growth companies around the world. It specializes in small and mid-cap growth strategies globally for institutional investors and its six mutual funds. They have about $700 million in assets under management.

Manager

Ralf A. Scherschmidt, who has managed the fund since its inception. He joined Oberweis in late 2006. Before that, he served as an equities analyst at Jetstream Capital, LLC, a global hedge fund, Aragon Global Management LLC, Bricoleur Capital Management LLC and NM Rothschild & Sons Limited. His MBA is from Harvard, while his undergrad work (Finance, Accounting and Chinese) was completed at Georgetown. Ralf grew up and has work experience in Europe and the UK, and has also lived in South Africa, China and Taiwan. Mr. Scherschmidt oversees nearly $200 million in five other accounts. He’s supported by three analysts who have been with Oberweis for an average of six years.

Strategy capacity and closure

Oberweis manages between $300-400 million dollars using this strategy, about 25% of which is in the fund. The remainder is in institutional separate accounts. The total strategy capacity might be $3 billion, but the advisor is contractually obligated to soft-close at $2.5 billion. They have the option of soft closing earlier, depending on their asset growth rate. Oberweis does have a track record for closing their funds early.

Management’s Stake in the Fund

As of December 31, 2012, Mr. Scherschmidt had between $100,000-500,000 invested in the fund. Three of the fund’s four trustees have some investment in the fund, with two of them being over $10,000. As of March 31, 2013, the officers and Trustees as a group owned 5.07% of the fund’s shares.

Opening date

February 1, 2007.

Minimum investment

$1000, reduced to $500 for IRAs and $100 for accounts established with an automatic investing plan. The fund is available through all major supermarkets (E Trade, Fidelity, Price, Schwab, Scottrade, TD Ameritrade and Vanguard, among others).

Expense ratio

1.6% on assets of $133.6 million (as of July 2023).

Comments

This is not what you imagine an Oberweis fund to be. And that’s good.

Investors familiar with the Oberweis brand see the name and immediately think: tiny companies, high growth, high valuations, high volatility, high beta … pure run-and-gun offense. The 76% drawdown suffered by flagship Oberweis Emerging Opportunities (OBEGX) and 74% drop at Oberweis Microcap (OBMCX) during the 2007-2009 meltdown is emblematic of that style.

OBIOX isn’t them. Indeed, OBIOX in 2013 isn’t even the OBIOX of 2009. During the 2007-09 market trauma, OBIOX suffered a 69.7% drop, well worse than their peers’ 57.7% decline. The manager was deeply dissatisfied with that performance and took concrete steps to strengthen his risk management disciplines. OBIOX is a distinctive fund and seems to have grown stronger.

The basic portfolio construction discipline is driven by the behavioral finance research. That research demonstrates that people, across a range of settings, make very consistent, predictable errors. The management team is particularly taken by the research synthesized by Dan Ariely, in Predictably Irrational (2010):

We are not only irrational, but predictably irrational … our irrationality happens the same way, again and again … In conventional economics, the assumption that we are all rational implies that, in everyday life, we compute the value of all the options we face and then follow the best possible path of action … But we are really far less rational than standard economic theory assumes. Moreover, these irrational behaviors of ours are neither random nor senseless. They are systematic and, since we repeat them again and again, predictable.

This fund seeks to identify and exploit just a few of them.

The phenomenon that most interests the manager is “post-earnings announcement drift.” At base, investors are slow to incorporate new information which contradicts what they already “know” to be true. If they “know” that company X is on a downward spiral, the mere fact that the company reports rising sales and rising profits won’t quickly change their beliefs. Academic research indicates, it often takes investors between three and nine months to incorporate the new information into their conclusions. That presents an opportunity for a more agile investor, one more adept at adapting to new facts, to engage in a sort of arbitrage: establish a position ahead of the crowd and hold until their revised estimations close the gap between the stock’s historic and current value.

This exercise is obviously fraught with danger. The bet works only if four things are all true:

The stock is substantially mispriced
You can establish a position in it
Other investors revise their estimations and bid the stock up
You can get out before anything bad happens.

The process of portfolio construction begins when a firm reports unexpected financial results. At that point, the manager and his team try to determine whether the stock is a value trap (that is, a stock that actually deserves its ridiculously low price) or if it’s fundamentally mispriced. Because most investors react so slowly, they actually have months to make that determination and establish a position in the stock. They work through 18 investment criteria and sixteen analytic steps in the process. From a 4500 stock universe, the fund holds 50-90 funds. They have clear limits on country, sector and individual security exposure in the portfolio. As the stock approaches 90% of Oberweis’s estimate of fair value, they sell. That automatic sell discipline forces them to lock in gains (rather than making the all-too-human mistake of falling in love with a stock and holding it too long) but also explains the fund’s occasionally very high turnover ratio: if lots of ideas are working, then they end up selling lots of appreciated stock.

There are some risk factors that the fund’s original discipline did not account for. While it was good on individual stock risks, it was weak on accounting for the possibility that there might be exposure to unrecognized risks that affects many portfolio positions at once. Oberweis’s John Collins offered this illustration:

If we own a Canadian chemical company, a German tech company and a Japanese consumer electronics firm, it sounds very diversified. However, if the Canadian company gets 60% of their revenue from an additive for rubber used in tires, the German firm makes a lot of sensors for engines and the Japanese firm makes a lot of car audio and navigation systems, there may be a “blind bet” in the auto sector we were unaware of.

As a result, a sudden change in the value of the euro or of a barrel of crude oil might send a shockwave rippling through the portfolio.

In January 2009, after encountering unexpectedly large losses in the meltdown, the fund added a risk optimizer program from Empirical Research Partners that performs “a monthly MRI of the portfolio” to be sure the manager understands and mitigates the sources of risk. Since that time, the fund’s downside capture performance improved dramatically. It used to be in the worst 25% of its peer group in down markets; it’s now in the best 25%.

Bottom Line

This remains, by all standard measures, a volatile fund even by the standards of a volatile corner of the investment universe. While its returns are enviable – since revising its risk management in January 2009, a $10,000 investment here would have grown to $35,000 while its average peer would have grown to $24,000 – the right question isn’t “have they done well?” The right questions are (1) do they have a sustainable advantage over their peers and (2) is the volatility too high for you to comfortably hold it? The answer to the first question is likely, yes. The answer to the second might be, only if you understand the strategy and overcome your own behavioral biases. It warrants further investigation for risk-tolerant investors.

Fund website

Oberweis International Opportunities.

2022 Semi-Annual Report

October 2013, Funds in Registration

By David Snowball

361 Multi-Strategy Fund

361 Multi-Strategy Fund pursues capital appreciation with low volatility and low correlation relative to the broad domestic and foreign equity markets by establishing long positions in individual equities and short positions in individual securities or indexes. The strategy is quantitatively driven and non-diversified. The fund will be managed by an interesting team: Brian P. Cunningham, Thomas I. Florence, Blaine Rollins and Jeremy Frank. Mr. Cunningham had a long career in the hedge fund world. Mr. Florence worked at Fidelity and was president of Morningstar’s Investment Management subsidiary. Mr. Rollins famously managed Janus Fund, among others, for 16 years. Mr. Frank appears to be the team’s preeminent techno-geek. This is 361’s fourth fund, and all occupy the “alternatives” space. The first three have had mixed success, though all seem to have low share-price volatility. The minimum investment in the “Investor” share class is $2500. Expenses not yet disclosed. There’s a 5.75% front load, but it will be available without a load at places like Schwab.

Brookfield U.S. Listed Real Estate Fund

Brookfield U.S. Listed Real Estate Fund (“Y” shares) will pursue total return through growth of capital and current income. The strategy is to invest in some combination of REITs; real estate operating companies; brokers, developers, and builders; property management firms; finance, mortgage, and mortgage servicing firms; construction supply and equipment manufacturing companies; and firms dependent on real estate holdings (e.g., timber, ag, mining, resorts). They can use derivatives for hedging, leverage or as a substitute for direct investment. Up to 20% can be in fixed income and 15% overseas. The fund will be managed by Jason Baine and Bernhard Krieg, both portfolio managers at Brookfield Investment Management. Brookfield’s composite performance for separate accounts using this strategy is 14.8% over the past decade. MSCI Total Return REIT index made 10.8% in the same period. The minimum initial investment is $1000. The e.r. will be 0.95%.

Baywood SKBA ValuePlus Fund

Baywood SKBA ValuePlus Fund will shoot for long-term growth by investing “primarily in securities that it deems to be undervalued and which exhibit the likelihood of exceeding market returns.” (A bold and innovative notion.) They’ll hold 40-60 stocks. The fund will be the successor to a private fund in operation since June, 2008. That fund returned an average of 7.2% annually over five years. Its benchmark (Russell 1000 Value) returned 4% in the same period. The fund will be managed by a team from SKBA Capital, led by its chairman Kenneth J. Kaplan. The minimum initial investment is $2500. The expense ratio will be 0.95% after waivers. The fund expects to launch on or about December 1, 2013.

Convergence Opportunities Fund

Convergence Opportunities Fund will pursue long-term growth through a global long/short portfolio, primarily of small- to mid-cap stocks. They’ll be 120-150% long and 20-50% short. The fund will be managed by David Arbitz of Convergence Partners. Convergence, which has had several names over the years, operates separate accounts using the strategy but has not disclosed the performance of those accounts. The minimum initial investment is $2500 and expenses are capped at 1.50%. They expect to launch by the end of November.

Croft Focus

Croft Focus will seek long-term capital appreciation by investing in a global, all-cap value portfolio. The fund will be managed by Kent G. Croft and G. Russell Croft. Croft Value (CLVFX) uses the same discipline but holds more stocks (75 versus 25 at Focus) and is less global (Value is 95% domestic). Value had a long string of great years, punctuated by a few really bad ones lately. It is undoubtedly better than its current retrospective return numbers show but its volatility might give prospective investors here pause. The minimum initial investment will be $2,000. Expenses are capped at 1.30%.

First Eagle Flexible Risk Allocation Fund

First Eagle Flexible Risk Allocation Fund (“A” shares) will seek “long-term absolute returns” by investing, long and short, in equities, fixed income, currencies and commodities. They’ll pursue “a flexible risk factor allocation strategy and, to a lesser extent, a tail risk hedging strategy.” There is a bracing list of 36 investment risks enumerated in the prospectus. The fund will be managed by JJ McKoan and Michael Ning, who joined First Eagle in April 2013. Before that, they managed the Enhanced Alpha Global Macro, Tail Hedge and Unconstrained Bond strategies at AllianceBernstein. Mr. McKoan has a B.A. from Yale and Mr. Ning has a doctorate from Oxford. The minimum initial investment is $2500. Neither the sales load nor the expense ratio has yet been announced.

FlexShares® Global Quality Real Estate Index Fund

FlexShares® Global Quality Real Estate Index Fund will invest in a global portfolio of high-quality real estate securities. They expect to hold equities issued by mortgage REITs, real estate finance companies, mortgage brokers and bankers, commercial and residential real estate brokers and real estate agents and home builders. The managers will try to minimize turnover and tax inefficiency, but the prospectus says nothing about what qualifies a firm as a “quality” firm or how far a passive strategy can be tweaked to control for churn. It will be managed by a Northern Trust team. Expenses not yet set.

Gator Opportunities Fund

Gator Opportunities Fund will pursue capital appreciation by investing in high-quality domestic SMID-cap stocks. It will be non-diversified, but there’s no discussion of how small the portfolio will be. The fund will be managed by Liron “Lee” Kronzon, who has managed investments but has not managed a mutual fund. Its microscopically small sibling, Gator Focus, launched in May with pretty modest success. The advisor’s headquartered in Tampa, hence the Gator reference. The minimum initial investment is $5000. The expense ratio will be 1.50%.

Spectrum Low Volatility Fund

Spectrum Low Volatility Fund will be a fund of fixed-income funds and ETFs. The goal is to capture no more than 40% of the stock market’s downside. Color me clueless: why would a fixed-income fund benchmark to an equity index? The fund will be managed by Ralph Doudera. Mr. Doudera has degrees in engineering, finance and Biblical studies and has been managing separate accounts (successfully) since the mid1990s. The minimum initial investment is $1000. The expense ratio is capped at 3.20%, a breathtaking hurdle to surmount in a fixed-income fund.

RSQ International Equity Fund

RSQ International Equity Fund will seek long-term growth. It seems to be more “global” than “international,” since it commits only to investing at least 65% outside the US. Security selection in the developed markets is largely bottom-up, starting with industry analysis and then security selection. In the emerging markets, it’s primarily top-down. The fund is managed by a team that famously managed Julius Baer International and infamously crashed Artio International: Rudolph-Riad Younes, Richard Pell and Michael Testorf, all of R-Squared Capital Management L.P. The minimum initial investment is $2500. The expense ratio is capped at 1.35% for Investor shares. Frankly, I’m incredibly curious about this development.

FundX Upgrader Fund (FUNDX), September 2013

By Charles Boccadoro

FundX Upgrader Fund(FUNDX) is now FundX ETF(XCOR) – January 24, 2023

Objective and Strategy

The FUNDX Upgrader Fund seeks to maximize capital appreciation. It is a fund of active or passive funds and ETFs. 70% of the portfolio is in “core funds” which pursue mainstream investments (e.g., Oakmark Global OAKGX), 30% are more aggressive and concentrated funds (e.g., Wasatch Intl Growth WAIGX and SPDR S&P Homebuilders XHB). FUNDX employs an “Upgrading” strategy in which it buys market leaders of the last several months and sells laggards. The fund seems to get a lot of press about “chasing winners,” which at one level it does. But more perhaps accurately, it methodically attempts to capitalize on trends within the market and not be left on the sidelines holding, for example, an all-domestic portfolio when international is experiencing sustained gains.

The advisor’s motto: “We’re active, flexible, and strategic because markets CHANGE.”

Advisor

FundX Investment Group (formerly DAL Investment Company, named after its founder’s children, Douglas and Linda) is the investment advisor, based in San Francisco. It has been providing investment advisory services to individual and institutional investors since 1969. Today, it invests in and provides advice on mutual fund performance through individual accounts, its family of eight upgrader funds, and publication of the NoLoad FundX newsletter.

As of December 31, 2012, the advisor had nearly $900M AUM. About half is in several hundred individual accounts. The remaining AUM is held in the eight funds. All share similar upgrading strategies, but focused on different asset classes and objectives (e.g., fixed income bonds, moderate allocation, aggressive). The figure below summarizes top-level portfolio construction of each upgrader fund, as of June 30, 2013. Two are ETFs. Two others employ more tactical authority, like holding substantial cash or hedging to reduce volatility. FUNDX is the flagship equity fund with assets of $245M.

2013-08-30_1615 (1)

Managers

All FundX funds are managed by the same team, led by FundX’s president Janet Brown and its CIO Jason Browne. Ms. Brown joined the firm in 1978, became immersed with its founder’s methodology of ranking funds, assumed increasing money management responsibilities, became editor of their popular newsletter, then purchased the firm in 1997. Ms. Brown graduated from San Diego State with a degree in art and architecture. Mr. Browne joined the firm in 2000. He is a San Francisco State graduate who received his MBA from St Mary’s College. The other managers are Martin DeVault, Sean McKeon, and Bernard Burke. They too are seasoned in the study of mutual fund performance. That’s what these folks do.

Strategy Capacity and Closure

FUNDX would likely soft close between $1-1.5B and hard close at $2B, since the other funds and client portfolios use similar strategies. Mr. Browne estimates that the strategy itself has an overall capacity of $3B. In 2007, FUNDX reached $941M AUM. The portfolio today holds 26 underlying funds, with about 50% of assets in just seven funds, which means that the funds selected must have adequate liquidity.

Management Stake in the Fund

Ms. Brown has over $1M in FUNDX and between $100K and $1M in nearly all the firm’s funds. Mr. Browne too invests in all the funds, his largest investment is in tactically oriented TACTX where he has between $100K and $500K. The remaining team members hold as much as $500K in FUNDX and the fixed income INCMX, with smaller amounts in the other funds. None of the firm’s Independent Trustees, which include former President of Value Line, Inc. and former CEO of Rockefeller Trust Co., invest directly in any of the funds, but some hold individual accounts with the firm.

Opening Date

FUNDX was launched November 1, 2001. Its strategy is rooted in the NoLoad FundX Newsletter first published in 1976.

Minimum Investment

$1,000, reduced to $500 for accounts with an automatic investment plan.

Expense Ratio

1.70% as assets of $242 million (as of August 2013).

Comments

“Through bull and bear markets, Hulbert has emerged as the respected third-party authority on investment newsletters that consistently make the grade…for more than three decades, NoLoad FundX has emerged as a top performer in the Hulbert Financial Digest,” which is praise often quoted when researching FundX.

In a recent WSJ article, entitled “Chasing Hot Mutual-Fund Returns,” Mr. Hulbert summarizes results from a FundX study on fund selection, which considered over 300 funds at least two decades old. The study shows that since 1999, a portfolio based on top performing funds of the past year, like that used in the upgrader strategy, well outperforms against SP500 and a portfolio based of top performing funds of the last 10 years.

Hulbert Financial Digest does show the NoLoad FundX newsletter performance ranks among top of all newsletters tracked during the past 15 years and longer, but actually ranks it in lower half of those tracked for the last 10 years and shorter.

A look at FUNDX performance proper shows the flagship fund does indeed best SP500 total return. But a closer look shows its over-performance occurred only through 2007 and it has trailed every year since.

2013-08-27_0554

2013-09-01_0544

Comparisons against S&P 500 may be a bit unfair, since by design FUNDX can be more of an all-cap, global equity fund. The fund can incrementally shift from all domestic to all foreign and back again, with the attendant change in Morningstar categorization. But Ms. Brown acknowledged the challenge head-on in a 2011 NYT interview: “As much as people in the fund industry may want to measure their performance against a very narrowly defined index, the reality is that most people judge their funds against the SP500, for better or worse.”

Asked about the fall-off, Mr. Browne explained that the recent market advance is dominated by S&P 500. Indeed, many all-cap funds with flexible mandate, like FUNDX, have actually underperformed the last few years. So while the fund attempts to capture momentum of market leaders, it also maintains a level of diversification, at least from a risk perspective, that may cause it to underperform at times. Ideally, the strategy thrives when its more speculative underlying funds experience extended advances of 10 months and more, in alignment with similar momentum in its core funds.

Crucial to their process is maintaining the universe of quality no-load/load-waived funds on which to apply its upgrading strategy. “We used to think it was all about finding the next Yacktman, and while that is still partially true, it’s just as important to align with investment style leaders, whether it is value versus growth, foreign versus domestic, or large versus small.”

Today, “the universe” comprises about 1200 funds that offer appropriate levels of diversification in both investment style and downside risk. He adds that they are very protective when adding new funds to the mix in order to avoid excessive duplication, volatility, or illiquidity. With the universe properly established, the upgrading strategy is applied monthly. The 1200 candidate funds get ranked based on performance of the past 1, 3, 6, and 12 months. Any holding that is no longer in the top 30% of its risk class gets replaced with the current leaders.

Both Ms. Brown and Mr. Browne make to clear that FUNDX is not immune to significant drawdown when the broad market declines, like in 2008-2009. In that way, it is not a timing strategy. That technique, however, can be used in the two more tactical upgrader funds TACTX and TOTLX.

The table below summarizes lifetime risk and return numbers for FUNDX, as well as the other upgrader funds. Reference indices over same periods are included for comparison. Over longer term the four upgrader funds established by 2002 have held-up quite well, if with somewhat higher volatility and maximum drawdown than the indices. Both ETFs have struggled since inception, as has TACTX.

2013-08-31_0939

I suspect that few understand more about mutual fund performance and trends than the folks at FundX. Like many MFO readers, they fully appreciate most funds do not lead persistently and that hot managers do not stay on-top. Long ago, in fact, FundX went on record that chronic underperformance of Morningstar’s 5-star funds is because time frames considered for its ratings “are much too long to draw relevant conclusions of how a fund will do in the near future.” Better instead to “invest based on what you can observe today.” And yet, somewhat ironically, while the upgrading strategy has done well in the long term, FUNDX too can have its time in the barrel with periods of extended underperformance.

While the advisor campaigns against penalizing funds for high expenses, citing that low fees do not guarantee top performance, it’s difficult to get past the high fees of FUNDX and the upgrader funds. The extra expense layer is typical with fund-of-funds, although funds which invest solely in their own firm’s products (e.g., the T. Rowe Price Spectrum Funds and Vanguard STAR VGSTX) are often exceptions.

Bottom Line

It is maddeningly hard, as Value Line and FundX have certainly discovered, to translate portfolios which look brilliant in newsletter systems into actual mutual funds with distinguished records. The psychological quirks which affect all investors, high operating expenses, and the pressure to gain and retain substantial AUM all erode even the best-designed system.

It might well be that FUNDX’s weak performance in the past half-decade is a statistical anomaly driven by the failure of its system to react quickly enough to the market’s bottoming in the first quarter of 2009 and its enormous surge in the second. Those sorts of slips are endemic to quant funds. Nonetheless, the fund has not outperformed a global equity benchmark two years in a row for more than a decade and trails that benchmark by about 1% per year for the decade. The fact that the FundX team faces those challenges despite access to an enormous amount of data, a clear investment discipline and access to a vast array of funds serves as a cautionary tale to all of us who attempt to actively manage our fund portfolios.

Website

The FundX Investment Group, which links to its investment services, newsletter, and upgrader funds. The newsletter, which can be subscribed on-line for $89 annual, is chock full of good information.

FundX Upgrader Website, this also lists the 2013 Q3 report under the Performance tab.

Fact Sheet

Charles/31Aug2013

Beck, Mack & Oliver Partners Fund (BMPEX), September 2013

By David Snowball

Objective and Strategy

Beck, Mack & Oliver Partners Fund seeks long term capital appreciation consistent with the preservation of capital. It is an all-cap fund that invests primarily in common stock, but has the ability to purchase convertible securities, preferred stocks and a wide variety of fixed-income instruments. In general, it is a concentrated portfolio of foreign and domestic equities that focuses on finding well-managed businesses with durable competitive advantages in healthy industries and purchasing them when the risk / reward profile is asymmetric to the upside.

Adviser

Beck, Mack & Oliver LLC, founded in 1931. The firm has remained small, with 25 professionals, just seven partners and $4.8 billion under management, and has maintained a multi-generation relationship with many of its clients. They’re entirely owned by their employees and have a phased, mandatory divestiture for retiring partners: partners retire at 65 and transition 20% of their ownership stake to their younger partners each year. When they reach 70, they no longer have an economic interest in the firm. That careful, predictable transition makes financial management of the firm easier and, they believe, allows them to attract talent that might otherwise be drawn to the hedge fund world. The management team is exceptionally stable, which seems to validate their claim. In addition to the two BM&O funds, the firm maintains 670 “client relationships” with high net worth individuals and families, trusts, tax-exempt institutions and corporations.

Manager

Zachary Wydra. Mr. Wydra joined Beck, Mack & Oliver in 2005. He has sole responsibility for the day-to-day management of the portfolio. Prior to joining BM&O, Mr. Wydra served as an analyst at Water Street Capital and as an associate at Graham Partners, a private equity firm. In addition to the fund, he manages the equity sleeve for one annuity and about $750 million in separate accounts. He has degrees from a bunch of first-rate private universities: Brown, Columbia and the University of Pennsylvania.

Strategy capacity and closure

The strategy can accommodate about $1.5 billion in assets. The plan is to return capital once assets grow beyond the optimal size and limit investment to existing investors prior to that time. Mr. Wydra feels strongly that this is a compounding strategy, not an asset aggregation strategy and that ballooning AUM will reduce the probability of generating exceptional investment results. Between the fund and separate accounts using the strategy, assets were approaching $500 million in August 2013.

Management’s Stake in the Fund

Over $1 million. The fund is, he comments, “a wealth-creation vehicle for me and my family.”

Opening date

December 1, 2009 for the mutual fund but 1991 for the limited partnership.

Minimum investment

$2500, reduced to $2000 for an IRA and $250 for an account established with an automatic investment plan

Expense ratio

1.0%, after waivers on assets of $50.7 million, as of June 2023.

Comments

One of the most important, most approachable and least read essays on investing is Charles Ellis, The Loser’s Game (1977). It’s funny and provocative and you should read it in its entirety. Here’s the two sentence capsule of Ellis’s argument:

In an industry dominated by highly skilled investors all equipped with excellent technology, winners are no longer defined as “the guys who perform acts of brilliance.” Winners are defined as “the guys who make the fewest stupid, unnecessary, self-defeating mistakes.”

There are very few funds with a greater number or variety of safeguards to protect the manager from himself than Beck, Mack & Oliver Partners. Among more than a dozen articulated safeguards:

The advisor announced early, publicly and repeatedly that the strategy has a limited capacity (approximately $1.5 billion) and that they are willing to begin returning capital to shareholders when size becomes an impediment to exceptional investment performance.
A single manager has sole responsibility for the portfolio, which means that the research is all done (in-house) by the most senior professionals and there is no diffusion of responsibility. The decisions are Mr. Wydra’s and he knows he personally bears the consequences of those decisions.
The manager may not buy any stock without the endorsement of the other BM&O partners. In a unique requirement, a majority of the other partners must buy the stock for their own clients in order for it to be available to the fund. (“Money, meet mouth.”)
The manager will likely never own more than 30 securities in the portfolio and the firm as a whole pursues a single equity discipline. In a year, the typical turnover will be 3-5 positions.
Portfolio position sizes are strictly controlled by the Kelly Criterion (securities with the best risk-reward comprise a larger slice of the portfolio than others) and are regularly adjusted (as a security’s price rises toward fair value, the position is reduced and finally eliminated; capital is redeployed to the most attractive existing positions or a new position).
When the market does not provide the opportunity to buy high quality companies at a substantial discount to fair value, the fund holds cash. The portfolio’s equity exposure has ranged between 70-90%, with most of the rest in cash (though the manager has the option of purchasing some fixed-income securities if they represent compelling values).

Mr. Wydra puts it plainly: “My job is to manage risk.” The fund’s exceedingly deliberate, careful portfolio construction reflects the firm’s long heritage. As with other ‘old money’ advisors like Tweedy, Browne and Dodge & Cox, Beck, Mack & Oliver’s core business is managing the wealth of those who have already accumulated a fortune. Those investors wouldn’t tolerate a manager whose reliance on hunches or oversized bets on narrow fields, place their wealth at risk. They want to grow their wealth over time, are generally intelligent about the need to take prudent risk but unwilling to reach for returns at the price of unmanaged risk.

That discipline has served the firm’s, and the fund’s, investors quite well. Their investment discipline seeks out areas of risk/reward asymmetries: places where the prospect of permanent loss of capital is minimal and substantial growth of capital is plausible. They’ve demonstrably and consistently found those asymmetries: from inception through the end of June 2013, the fund captured 101% of the market’s upside but endured less than 91% of its downside. To the uninitiated, that might not seem like a huge advantage. To others, it’s the emblem of a wealth-compounding machine: if you consistently lose a bit less in bad times and keep a little ahead in good, you will in the long term far outpace your rivals.

From inception through the end of June, 2013, the strategy outpaced the S&P 500 by about 60 basis points annually (9.46% to 8.88%). Since its reorganization as a fund, the advantage has been 190 basis points (15.18% to 13.28%). It’s outperformed the market in a majority of rolling three-month periods and in a majority of three-month periods when the market declined.

So what about 2013? Through late August, the fund posted respectable absolute returns (about 10% YTD) but wretched relative ones (it trailed 94% of its peers). Why so? Three factors contributed. In a truly defensive move, the manager avoided the “defensive” sectors that were getting madly bid up by anxious investors. In a contrarian move, he was buying energy stocks, many of which were priced as if their industry was dying. And about 20% of the fund’s portfolio was in cash. Should you care? Only if your investment time horizon is measured in months rather than years.

Bottom Line

Successful investing does not require either a magic wand or a magic formula. No fund or strategy will win in each year or every market. The best we can do is to get all of the little things right: don’t overpay for stocks and don’t over-diversify, limit the size of the fund and limit turnover, keep expenses low and keep the management team stable, avoid “hot” investments and avoid unforced errors, remember it isn’t a game and it isn’t a sprint. Beck, Mack & Oliver gets an exceptional number of the little things very right. It has served its shareholders very well and deserves close examination.

Fund website

Beck Mack & Oliver Partners

Fact Sheet

Tributary Balanced (FOBAX), September 2013 update

By David Snowball

THIS IS AN UPDATE OF THE FUND PROFILE ORIGINALLY PUBLISHED IN April 2012. YOU CAN FIND THAT PROFILE HERE.

Objective and strategy

Tributary Balanced Fund seeks capital appreciation and current income. They allocate assets among the three major asset groups: common stocks, bonds and cash equivalents. Based on their assessment of market conditions, they will invest 25% to 75% of the portfolio in stocks and convertible securities, and at least 25% in bonds. The portfolio is typically 70-75 stocks from small- to mega-cap and turnover is well under half of the category average. They currently hold about 60 bonds.

Adviser

Tributary Capital Management. At base, Tributary is a subsidiary of First National Bank of Omaha and the Tributary Funds were originally branded as the bank’s funds. Tributary advises six mutual funds, as well as serving high net worth individuals and institutions. As of June 30, 2013, they had about $1.3 billion under management.

Manager

David C. Jordan, since July 2013. Mr. Jordan is the Managing Partner of Growth Equities for Tributary and has been managing portfolios since 1982. He managed this fund from 05/2001 to 07/2010. He has managed four-star Growth Opportunities (FOGRX) since 1998 and two-star Large Cap Growth (FOLCX) since 2011. Before joining Tributary, he managed investments at the predecessors to Bank One Investment Advisors, Key Trust of the Northwest, and Wells Fargo Denver.

Management’s stake in the fund

Mr. Jordan’s investments are primarily in equities (he reports having “more than half of my financial assets invested in the Tributary Growth Opportunities Fund which I manage”), but he recently invested over $100,000 in the Balanced fund.

Strategy capacity and closure

The advisor has “not formally discussed strategy capacities for the Balanced Fund, believing that we will not have to seriously consider capacity constraints until the fund is much larger than it is today.”

Opening date

August 6, 1996

Minimum investment

$1000, reduced to $100 for accounts opened with an automatic investing plan.

Expense ratio

0.99%, after a waiver, on $78 million in assets (as of July 2023). Morningstar describes the expenses as “high,” which is misleading. Morningstar continues benchmarking FOBAX against “true” institutional functions with minimums north of $100,000.

Comments

The long-time manager of Tributary Balanced has returned. In what appears to be a modest cost-saving move, Mr. Jordan returned to the helm of this fund after a three year absence.

If his last stint with the fund, from 2001 – 2010, is any indication, that’s a really promising development. Over the three years of his absence, Tributary was a very solid fund. The fund’s three-year returns of 13.1% (through 6/30/2013) place it in the top tier of all moderate allocation funds. Over the period, it captured more of the upside and a lot less of the downside than did its average peer. Our original profile concluded with the observation, “Almost no fund offers a consistently better risk-return profile.”

One of the few funds better than Tributary Balanced 2010-2013 might have been Tributary Balanced 2001-2010. The fund posted better returns than the most highly-regarded, multi-billion dollar balanced funds. If you compare the returns on an investment in FOBAX and its top-tier peers during the period of Mr. Jordan’s last tenure here (7/30/2001 – 5/10/2010), the results are striking.

Tributary versus Vanguard Balanced Index (VBINX)? Tributary’s better.

Tributary versus Vanguard STAR (VGSTX)? Tributary.

Tributary versus Vanguard Wellington (VWELX)? Tributary.

Tributary versus Dodge and Cox Balanced (DODBX)? Tributary.

Tributary versus Mairs & Power Balanced (MAPOX)? Tributary.

Tributary versus T. Rowe Price Capital Appreciation (PRWCX)? Price, by a mile. Ehh. Nobody’s perfect and Tributary did lose substantially less than Cap App during the 10/2007-03/2009 market collapse.

Libby Nelson of Tributary Capital Management reports that “During that time period, David outperformed the benchmark in 7 out of 9 of the calendar years and the five and ten-year performance was in the 10th percentile of its Morningstar Peer Group.” In 2008, the fund finished in the top 14% of its peer group with a loss of 22.5% while its average peer dropped 28%. During the 18-month span of the market collapse, Tributary lost 34.7% in value while the average moderate allocation fund dropped 37.3%.

To what could we attribute Tributary’s success? Mr. Jordan’s answer is, “we think a great deal about our investors. We know that they’re seeking a lower volatility fund and that they’re concerned with downside protection. We build the portfolio from there.”

Mr. Jordan provided stock picks for the fund’s portfolio even when he was not one of the portfolio managers. He’s very disciplined about valuations and prefers to pursue less volatile, lower beta, lower-priced growth stocks. In addition, he invests a greater portion of the portfolio in less-efficient slices of the market (smaller large caps and mid-caps) which results in a median market cap that’s $8 billion lower than his peers.

Responding to the growing weakness in the bond market, he’s been rotating assets into stocks (now about 70% of the portfolio) and shortening the duration of the bond portfolio (from 4.5 years down to 3.8 years). He reports, “Our outlook is for returns from bonds in the period ahead to be both volatile, and negative, so we will move further toward an emphasis on stocks, which also may be volatile, but we believe will be positive over the next twelve months.”

Bottom Line

The empirical record is pretty clear. Almost no fund offers a consistently better risk-return profile. That commitment to consistency is central to Mr. Jordan’s style: “We are more focused on delivering consistent returns than keeping up with momentum driven markets and securities.” Tributary has clearly earned a spot on the “due diligence” list for any investor interested in a hybrid fund.

Fund website

Tributary Balanced

Fact Sheet

North Square Strategic Income (formerly Advisory Research Strategic Income), (ADVNX), September 2013

By David Snowball

At the time of publication, this fund was named Advisory Research Strategic Income.

Objective and Strategy

The fund seeks high current income and, as a secondary objective, long term capital appreciation. It invests primarily in straight, convertible and hybrid preferred securities but has the freedom to invest in other income-producing assets including common stock. The advisor wants to achieve “significantly higher yields” than available through Treasury securities while maintaining an investment-grade portfolio. That said, the fund may invest “to a limited extent” in high-yield bonds, may invest up to 20% in foreign issues and may write covered call options against its holdings. Morningstar categorizes it as a Long-Term Bond fund, which is sure to generate misleading peer group performance stats since it’s not a long-term bond fund.

Adviser

Advisory Research (ARI). AR is a Chicago-based advisor for some of the nation’s wealthiest individuals, as well as privately-held companies, endowments, foundations, pensions and profit-sharing plans. They manage over $10.0 billion in total assets and advise the five AR funds.

Manager

Brien O’Brien, James Langer and Bruce Zessar. Mr. O’Brien is ARI’s CEO. He has 34 years of investment experience including stints with Marquette Capital, Bear Stearns and Oppenheimer. He graduated with honors from Boston College with a B.S. in finance and theology. He oversees four other AR funds. Mr. Langer is a Managing Director and helps oversee two other AR funds. Like Mr. O’Brien, he worked for Marquette Associates. His career started at the well-respected Center for Research in Security Prices at the University of Chicago. Mr. Zessar has a J.D. from Stanford Law and 11 years of investing experience. Mr. Zessar also co-manages All-Cap Value (ADVGX). The team manages about $6 billion in other accounts.

Management’s Stake in the Fund

Mr. O’Brien provided a seed investment when the strategy was launched in 2003, and today has over $1 million in the fund. Mr. Langer has around a half million in the fund and Mr. Zessar had between $10,000 and $50,000 in the fund.

Strategy capacity and closure

They estimate a strategy capacity of about $1 billion; since they do invest heavily in preferred shares but have the ability to invest elsewhere, they view the cap as flexible. Mr. Zessar notes that the few others open-end funds specializing in preferred shares have asset bases of $1 – 5 billion.

Opening date

December 31, 2012 after the conversion of one limited partnership account, Advisory Research Value Income Fund, L.P., which commenced operations on June 30, 2003 and the merger of another.

Minimum investment

$2500.

Expense ratio

0.90%, after waivers, on assets of $167.9 million, as of July 2023. 1.15%, after waivers, for “A” class shares.

Comments

Preferred stocks are odd creatures, at least in the eyes of many investors. To just say “they are securities with some characteristics of a bond and some of a stock” is correct, but woefully inadequate. In general, preferred stock carries a ticker symbol and trades on an exchange, like common stock does. In general, preferred stockholders have a greater claim on a firm’s dividend stream than do common stockholders: preferred dividends are paid before a company decides whether it can pay its common shareholders, tend to be higher and are often fixed, like the coupon on a bond.

But preferred shares have little potential for capital appreciation; they’re generally issued at $25 and improving fortunes of the issuing firm don’t translate to a rising share price. A preferred stock may or may not have maturity like a bond; some are “perpetual” and many have 30-40 year maturities. It can either pay a dividend or interest, usually quarterly or semi-annually. Its payments might be taxed at the dividend rate or at your marginal income rate, depending. Some preferred shares start with a fixed coupon payment for, say, ten years and then exchange it for a floating payment fixed to some benchmark. Some are callable, some are not. Some are convertible, some are not.

As a result of this complexity, preferred shares tend to be underfollowed and lightly used in open-end funds. Of the 7500 extant open-end mutual funds, only four specialize in preferred securities: ADVNX and three load-bearing funds. A far larger number of closed-end funds invest in these securities, often with an overlay of leverage.

What’s the case for investing in preferred stocks?

Steady income. Strategic Income’s portfolio has a yield of 4.69%. By comparison, Vanguard Intermediate-Term Treasury Fund (VFITX) has a 30-day yield of 1.38% and its broader Intermediate-Term Bond Index Fund (VBIIX) yields 2.64%.

The yield spread between the fed funds rate and the 10-year Treasury is abnormally large at the moment (about 280 bps in late August); when that spread reverts to its normal level (about 150 bps), there’s also the potential for a little capital appreciation in the Strategic Income fund.

In the long term, the managers believe that they will be able to offer a yield of about 200-250 basis points above what you could get from the benchmark 10-year Treasury. At the same time, they believe that they can do so with less interest rate sensitivity; the fund has, in the past, shown the interest rate sensitivity associated with a bond portfolio that has a six or seven year maturity.

In addition, preferred stocks have traditionally had low correlations to other asset classes. A 2012 report from State Street Global Advisors, The Case for Preferred Stocks, likes the correlation between preferred shares and bonds, international stocks, emerging markets stocks, real estate, commodities and domestic common stocks for the 10 years from 2003 to 2012:

ssga

As a result, adding preferred stock to a portfolio might both decrease its volatility and its interest rate sensitivity while boosting its income.

What’s the case for investing with Advisory Research?

They have a lot of experience in actively managing this portfolio.

Advisory Research launched this fund’s predecessor in 2003. They converted it to a mutual fund at the end of 2012 in response to investor demands for daily liquidity and corrosive skepticism of LPs in the wake of the Madoff scandal. The existing partners voted unanimously for conversion to a mutual fund.

From inception through its conversion to a mutual fund, the L.P. returned 4.24% annually while its benchmark returned 2.44%, an exceptionally wide gap for a fixed-income fund. Because it’s weakly correlated to the overall stock market, it has held up relatively well in downturns, losing 25.8% in 2008 when the S&P 500 dropped 37%. The fund’s 28.1% gain in 2009 exceeded the S&P’s 26.5% rebound. It’s also worth noting that the same management team has been in place since 2003.

The team actively manages the portfolio for both sector allocation and duration. They have considerable autonomy in allocating the portfolio, and look to shift resources in the direction of finding “safe spread.” That is, for those investments whose higher yield is not swamped by higher risk. In mid-2012, 60% of the portfolio was allocated to fixed preferred shares. In mid-2013, they were half that. The portfolio instead has 50% in short-term corporate bonds and fixed-to-floating rate securities. At the same time, they moved aggressively to limit interest-rate risk by dramatically shortening the portfolio’s duration.

Bottom Line

This is not a riskless strategy. Market panics can drive even fundamentally sound securities lower. But panics are short-term events. The challenge facing conservative investors, especially, is long-term: they need to ask the question, “where, in the next decade or so, am I going to find a reasonable stream of income?” With the end of the 30-year bond bull market, the answer has to be “in strategies that you’ve not considered before, led by managers whose record is solid and whose interests are aligned with yours.” With long-term volatility akin to an intermediate-term corporate bond fund’s, substantial yield, and a stable, talented management team, Advisory Research Strategic Income offers the prospect of a valuable complement to a traditional bond-centered portfolio.

Fund website

North Square Strategic Income. SSgA’s The Case for Preferred Stock (2012) is also worth reading, recalling that ADVNX’s portfolio is neither all-preferred nor locked into its current preferred allocation.

SSgA’s Preferred Securities 101

2023 Semi-Annual Report

Fact Sheet