Category Archives: Funds

September 2013, Funds in Registration

By David Snowball

AdvisorShares YieldPro ETF

AdvisorShares YieldPro ETF will be an actively-managed ETF that seeks to provide current income and capital appreciation primarily investing in both long and short positions in other ETFs that offer diversified exposure to income producing securities. They’ll mostly target securities that provide “competitive yield” but will add in “instruments which provide little or no yield for diversification or risk management purposes.” The fund will be managed by Joshua Emanuel, Chief Investment Officer of Elements Financial Group since 2010. Before that he was a Principal, Head of Strategy and co-chair of the Investment Management Committee at Wilshire Associates. The fund’s expense ratio has not yet been set.

American Century Emerging Markets Value Fund

American Century Emerging Markets Value Fund, Investor class shares, will pursue capital growth by investing in e.m. stocks. They target the 21 markets in the MSCI E.M. index. It’s a quant portfolio that starts by ranking stocks from most to least attractive based on value, momentum and quality. They then run a portfolio optimizer to balance risk and return. It will be managed by Vinod Chandrashekaran, Yulin Long, and Elizabeth Xie. All are members of the Quantitative Research team. The expense ratio will be capped at 1.46%. The minimum initial investment is $2,500. Launch is set for some time in October.

Brown Advisory Strategic European Equity Fund

Brown Advisory Strategic European Equity Fund, Investor shares, seeks to achieve total return by investing principally in equity securities issued by companies established or operating in Europe. They may invest directly or through a combination of derivatives. The fund will be managed by Dirk Enderlein of Wellington Management. Wellington is indisputably an “A-team” shop (they’ve got about three-quarters of a trillion in assets under management). Mr. Enderlein joined them in 2010 after serving as a manager for RCM – Allianz Global Investors in Frankfurt, Germany (1999-2009). Media reports described him as “one of Europe’s most highly regarded European growth managers.” The expense ratio will be capped at 1.35%. The minimum initial investment is $5,000. Launch is set for some time in October.

DoubleLine Shiller Enhanced CAPE

DoubleLine Shiller Enhanced CAPE, Class N shares, looks for “total return in excess of the Shiller Barclays CAPE® US Sector TR USD Index.” The Shiller CAPE (cyclically-adjusted price-earnings) index tracks the performance of the four (of ten) sectors which have the best combination of a low CAPE ratio and price momentum on their side. The fund will attempt to outdo the index by using leverage and by holding a fixed-income portfolio similar to DoubleLine Core Fixed Income’s. The fund will be managed by The Gundlach (given that he sees himself as super-heroic, an Enhanced Cape fits) and Jeffrey Sherman. The expense ratio will be capped at 0.80%. The minimum initial investment is $2,000. Launch is set for some time in October.

Driehaus Micro Cap Growth Fund

Driehaus Micro Cap Growth Fund (and, in truth, pretty much every Driehaus fund) seeks to maximize capital appreciation. They anticipate investing at least 80% in a non-diversified portfolio of micro-caps then then trading them actively; they anticipate a turnover of 100 – 275%. The managers will be Jeffrey James and Michael Buck. This is another instance of a limited partnership (or, in this case, two limited partnerships) being converted into mutual funds. Those were the Driehaus Micro Cap Fund, L.P. and the Driehaus Institutional Micro Cap Fund, L.P. Mr. James has been running the Micro Cap LP since 1998 and Mr. Buck has been assisting on that portfolio. The current draft of the prospectus does not include the LP’s track record. The expense ratio will be capped, but it has not yet been announced. The minimum initial investment is $10,000.

Even Keel Managed Risk Fund

Even Keel Managed Risk Fund will seek to provide total return consistent with long-term capital preservation, while seeking to manage volatility and reduce downside risk during severe, sustained market declines. It will be a hedged large cap equity portfolio. The managers will be Blake Graves and Zack Brown of Milliman Financial Risk Management LLC. The expense ratio will be capped at 0.97%. The minimum initial investment is $3,000.

Even Keel Opportunities Managed Risk Fund

Even Keel Opportunities Managed Risk Fund will seek to provide total return consistent with long-term capital preservation, while seeking to manage volatility and reduce downside risk during severe, sustained market declines. It will be a hedged SMID cap portfolio. The managers will be Blake Graves and Zack Brown of Milliman Financial Risk Management LLC. The expense ratio will be capped at 0.97%. The minimum initial investment is $3,000.

Even Keel Developed Markets Managed Risk Fund

Even Keel Developed Markets Managed Risk Fund will seek to provide total return consistent with long-term capital preservation, while seeking to manage volatility and reduce downside risk during severe, sustained market declines. It will be an international equity portfolio hedged with long/short exposure to index, Treasury and currency futures. The managers will be Blake Graves and Zack Brown of Milliman Financial Risk Management LLC. The expense ratio will be capped at 0.97%. The minimum initial investment is $3,000.

Even Keel Emerging Markets Managed Risk Fund

Even Keel Emerging Markets Managed Risk Fund will seek to provide total return consistent with long-term capital preservation, while seeking to manage volatility and reduce downside risk during severe, sustained market declines. It will be an emerging markets equity portfolio hedged with long/short exposure to index, Treasury and currency futures. . The managers will be Blake Graves and Zack Brown of Milliman Financial Risk Management LLC. The expense ratio will be capped at 0.97%. The minimum initial investment is $3,000.

Fidelity Short Duration High Income

Fidelity Short Duration High Income will pursue high current income and is willing to accept some capital appreciation. The prospectus is really kind of an ill-written jumble, they have an unnatural affinity for bullet-pointed lists. At base, they’ll invest mostly in BB or B-rated securities with a duration of three years or less but they might slip in defaulted securities, common stock and floating rate loans. It will be managed by Matthew Conti (lead portfolio manager) and Michael Plage. Mr. Conti also manages Fidelity Focused High Income (FHIFX) about which Morningstar is unimpressed, and bits of other bond funds. The expense ratio will be capped at 0.80%. The minimum initial investment is $2,500. Launch is set for some time in October.

Harbor Emerging Markets Equity Fund

Harbor Emerging Markets Equity Fund will seek long-term growth by investing at least 65% (?) of its portfolio in what the managers believe to be high-quality firms located in, or doing serious business in, the emerging markets. All Harbor funds are sub-advised. This one is managed by Frank Carroll and Tim Jensen of Oaktree Capital Management. Oaktree is a first-tier institutional manager which has agreed to sub-advise very few (uhh, two?) mutual funds. They have an emerging markets equity composite, representing their work for private clients, but the current prospectus does not reveal the composite’s age or performance. The fund is scheduled to go live on November 1. It would be prudent to check in then. The expense ratio will be capped at 1.62%. The minimum initial investment is $2,500.

Hull Tactical US ETF

Hull Tactical US ETF will be an actively-managed ETF that pursues long-term growth by playing with fire. It will invest in a combination of other ETFs that match the S&P, match the inverse of the S&P or are leveraged to returns of the S&P. The managers will position that fund somewhere between 200% long and 100% short, with the additional possibility of 100% cash. The fund will be managed by Blair Hull, Founder and Chairman of HTAA, and Brian von Dohlen, their Senior Financial Engineer. Expenses not yet set.

Manning & Napier Equity Income

Manning & Napier Equity Income, Class S shares, wants to provide “total return through a combination of current income, income growth, and long-term capital appreciation.” They’re going to target income-paying equity securities including common and preferred stocks, convertible securities, REITs, MLPs, ETFs and interests in business development companies. The fund will be managed by Michael J. Magiera, Managing Director of Equity Income Group, Christopher F. Petrosino, Managing Director of the Quantitative Strategies Group, Elizabeth Mallette and William Moore. The expense ratio will be capped, but it has not yet been announced. The minimum initial investment is $2,000.

Manning & Napier Emerging Opportunities

Manning & Napier Emerging Opportunities Series, Class S shares, will seek long-term growth by investing primarily in a domestic mid-cap growth portfolio. Their target is companies growing at least twice as fast as the overall economy. The fund will be managed by Ebrahim Busheri, Managing Director of Emerging Growth Group, Brian W. Lester and Ajay M. Sadarangani. The expense ratio will be capped, but it has not yet been announced. The minimum initial investment is $2,000.

Meridian Small Cap Growth

Meridian Small Cap Growth will pursue long-term growth of capital by investing primarily in equity securities of small capitalization companies. The bottom line is that this is the new platform for the two star managers, Chad Meade and Brian Schaub, who Meridian’s new owner hired away from Janus. Morningstar’s Greg Carlson described them as “superb managers” who were “consistently successful during their nearly seven years at the helm of this small-growth fund,” referring to Janus Triton. The expense ratio is not set. The minimum initial investment is $1,000.

Northern Multi-Manager Emerging Markets Debt Opportunity Fund

Northern Multi-Manager Emerging Markets Debt Opportunity Fund will seek both income and capital appreciation by investing in emerging and frontier market debt. That includes a wide variety of corporate and government bonds, preferred and convertible securities and derivatives. The sub-advisers include teams from a Northern Trust subsidiary, Bluebay Asset Management (a British firm with $56 billion in AUM) and Lazard. The expense ratio, after waivers, is capped at 0.93%. The prospectus covers only an institutional class, with a $1 million minimum.

PIMCO TRENDS Managed Futures Strategy Fund

PIMCO TRENDS Managed Futures Strategy Fund, “D” shares for retail, will seek “absolute risk-adjusted returns.” The plan is to invest in derivatives (and an unnamed off-shore fund run by PIMCO) linked to interest rates, currencies, mortgages, credit, commodities, equity indices and volatility-related instruments; they’ll invest in sectors trending higher and can short the ones trending lower. They plan on having a volatility target but haven’t yet announced it. In general, managed futures funds have been a raging disappointment (the group has losses over every trailing period from one day to five years). In general, PIMCO funds excel. It’ll be interested to see which precedent prevails. The manager is as-yet unnamed and the expense ratio is not set. The minimum initial investment is $2,500 for “D” shares purchased through a supermarket.

Redwood Managed Volatility Fund

Redwood Managed Volatility Fund, “N” class shares, will seek “a combination of total return and prudent management of portfolio downside volatility and downside loss.” The strategy is pretty distinctive: invest in high-yield bonds when the high-yield market is trending up and in short-term bonds whenever the high-yield market is trending down. The fund will be managed by Michael Messinger and Bruce DeLaurentis. Mr. Messinger seems to be a business/marketing guy while DeLaurentis is the investor. Mr. DeLaurentis’s separate accounts composite at Kensington Management, stretching back 20 years, seems fairly impressive. He’s returned about 10% over 20 years, 11% over 10 years, and 15% over five years. The expense ratio is not set. The minimum initial investment is $10,000.

Rx Fundamental Growth Fund

Rx Fundamental Growth Fund, Advisor shares, will seek capital appreciation by investing in stocks. The description is pretty generic. The highlight of this offering is their manager, Louis Navellier. Mr. Navellier is a famous growth-investing newsletter guy. He once had a line of mutual funds that merged with a couple Touchstone funds. The Touchstone fund Navellier subadvises is fairly mild-mannered though its performance in recent years has been weak. His separate account composites show mostly lackluster to abysmal performance over the past 7-10 years. The expense ratio is capped at 2.06%. The minimum initial investment is $250.

Steinberg Select Fund

Steinberg Select Fund, Investor class, will seek growth by investing in stocks of all sizes. It will likely invest in developed foreign stocks as well, but there’s not much of a discussion of asset class weighting. It seems like they’re looking for defensive names, but that’s not crystal clear. Michael Steinberg will head the investment team. Their all-cap concentrated value composite has a substantial lead over its benchmark since inception in 1990 and about a 150 bps annual lead in the past 10 years, but seems to have taken a dramatic dive in the 2007-09 crash. The expense ratio is capped at 1.0%. The minimum initial investment is $10,000.

Stone Toro Relative Value Fund

Stone Toro Relative Value Fund will seek capital appreciation with a secondary focus on current income. It invests in an all-cap portfolio, primarily of dividend-paying stock. Up to 40% might be invested in international stocks via ADRs. They warn that their strategy involves active and frequent trading. The manager will be Michael Jarzyna, Founding Partner and CIO of Stone Toro. The expense ratio is capped at 1.57%. The minimum initial investment is $1000.

T. Rowe Price Global Industrials Fund

T. Rowe Price Global Industrials Fund will pursue long-term capital growth by investing in a global, diversified portfolio of industrial sector stocks. The general rule seems to be, if it requires a large factory, it’s in. The fund will be managed by Peter Bates, an industrials analyst who joined Price in 2002 but who has no prior fund management record. The expense ratio is capped at 1.05%. The minimum initial investment is $2500, reduced to $1000 for IRAs.

Thomson Horstmann & Bryant Small Cap Value Fund

Thomson Horstmann & Bryant Small Cap Value Fund, Investor shares, is looking for capital appreciation. The plan is to invest in small-value stocks but there’s nothing in the prospectus that distinguishes their strategies from anyone else’s. The fund will be managed by Christopher N. Cuesta, who joined THB in 2002 and has managed micro-cap accounts for them since 2004 and small cap ones since 2005. He’d previously worked at Salomon Smith Barney and Van Eck. This private accounts composite shows persistently high beta, excellent upmarket performance and very weak downmarket performance. The expense ratio is capped at 1.5%. The minimum initial investment is $100.

WCM Focused Emerging Markets Fund

WCM Focused Emerging Markets Fund, Investor class, will seek long-term capital appreciation by investing in emerging and frontier markets stocks and corporate bonds. They can also invest in multinational corporations with large e.m. footprints. The fund will be non-diversified. Beyond being “bottom up” investors, details are a bit sketchy. The fund will be managed by a team from WCM Investment Management, led by Sanjay Ayer. Their emerging markets composite has a two year history. It appears to have substantially outperformed an e.m. equity index in 2011 and trailed it in 2012. The expense ratio is not yet set. The minimum initial investment is $1000.

WCM Focused Global Growth Fund

WCM Focused Global Growth Fund, Investor class, will seek long-term capital appreciation by investing in a non-diversified portfolio of global blue chip stocks. The fund will be managed by a team from WCM Investment Management, led by Sanjay Ayer. Their Quality Global Growth composite has a five year history. It appears to have substantially outperformed a global equity index over the past five years, though it trailed it in 2012. The expense ratio is not yet set. The minimum initial investment is $1000.

West Shore Real Asset Income Fund

West Shore Real Asset Income Fund, “N” class, will seek a combination of capital growth and current income. 30-50% will be in dividend-paying US equities, 30-50% in “foreign securities that the Adviser believes will provide returns that exceed the rate of inflation” and 20% in alternative investments, such as hedge funds. There’s no evidence (e.g., a track record) to suggest that this is a particularly good idea. The fund will be managed by Steve Cordasco, President of West Shore, Michael Shamosh, and James G. Rickards. The expense ratio is capped at 2.0%. The minimum initial investment is $2500.

FPA Paramount (FPRAX), September 2013

By David Snowball

Objective and Strategy

The FPA Global Value Strategy will seek to provide above-average capital appreciation over the long term while attempting to minimize the risk of capital losses by investing in well-run, financially robust, high-quality businesses around the world, in both developed and emerging markets.

Adviser

FPA, formerly First Pacific Advisors, which is located in Los Angeles. The firm is entirely owned by its management which, in a singularly cool move, bought FPA from its parent company in 2006 and became independent for the first time in its 50 year history. The firm has 28 investment professionals and 72 employees in total. Currently, FPA manages about $25 billion across four equity strategies and one fixed income strategy. Each strategy is manifested in a mutual fund and in separately managed accounts; for example, the Contrarian Value strategy is manifested in FPA Crescent (FPACX), in nine separate accounts and a half dozen hedge funds. On April 1, 2013, all FPA funds became no-loads.

Managers

Pierre O. Py and Greg Herr. Mr. Py joined FPA in September 2011. Prior to that, he was an International Research Analyst for Harris Associates, adviser to the Oakmark funds, from 2004 to 2010. Mr. Py has managed FPA International Value (FPIVX) since launch. Mr. Herr joined the firm in 2007, after stints at Vontobel Asset Management, Sanford Bernstein and Bankers Trust. He received a BA in Art History at Colgate University. Mr. Herr co-manages FPA Perennial (FPPFX) and the closed-end Source Capital (SOR) funds with the team that used to co-manage FPA Paramount. Py and Herr will be supported by the two research analysts, Jason Dempsey and Victor Liu, who also contribute to FPIVX.

Management’s Stake in the Fund

As of the last SAI (September 30, 2012), Mr. Herr had invested between $1 and $10,000 in the fund and Mr. Py had no investment in it. Mr. Py did have a very large investment in his other charge, FPA International Value.

Opening date

September 8, 1958.

Minimum investment

$1,500, reduced to $100 for IRAs or accounts with automatic investing plans.

Expense ratio

0.94% on $323 million in assets, as of August 2013.

Comments

We’ve never before designated a 55-year-old fund as a “most intriguing new fund,” but the leadership and focus changes at FPRAX warrant the label.

I’ve written elsewhere that “Few fund companies get it consistently right. By “right” I don’t mean “in step with current market passions” or “at the top of the charts every year.” By “right” I mean two things: they have an excellent investment discipline and they treat their shareholders with profound respect.

FPA gets it consistently right.

FPA has been getting it right with the two funds overseen by Eric Ende and Stephen Geist: FPA Paramount (since March 2000) and FPA Perennial (since 1995 and 1999, respectively). Morningstar designates Paramount as a five-star world stock fund and Perennial as a three-star domestic mid-cap growth fund (both as of August, 2013). That despite the fact that there’s a negligible difference in the fund’s asset allocation (cash/US stock/international stock) and no difference in their long-term performance. The chart below shows the two funds’ returns and volatility since Geist and Ende inherited Paramount.

To put it bluntly, both have consistently clubbed every plausible peer group (mid-cap growth, global stock) and benchmark (S&P 500, Total Stock Market, Morningstar US Growth composite) that I compared them to. By way of illustration, $10,000 invested in either of these funds in March 2000 would have grown to $35,000 by August 2013. The same amount in the Total Stock Market index would have hit $16,000 – and that’s the best of any of the comparison groups.

To be equally blunt, the funds mostly post distinctions without a difference. In theory Paramount has been more global than Perennial but, in practice, both remained mostly focused on high-quality U.S. stocks.

FPA has decided to change that. Geist and Ende will now focus on Perennial, while Py and Herr reshape Paramount. There are two immediately evident differences:

The new team is likely to transition toward a more global portfolio. We spoke with Mr. Py after the announcement and he downplayed the magnitude of any immediate shifts. He does believe that the most attractive valuations globally lie overseas and the most attractive ones domestically lie among large cap stocks. That said, it’s unlikely the case that FPA brought over a young and promising international fund manager with the expectation that he’ll continue to skipper a portfolio with only 10-15% international exposure.
The new team is certain to transition toward a more absolute value portfolio. Mr. Py’s investment approach, reflected in the FPIVX prospectus, stresses “Low Absolute Valuation. The Adviser only purchases shares when the Adviser believes they offer a significant margin of safety (i.e. when they trade at a significant discount to the Adviser’s estimate of their intrinsic value).” In consequence of that, “the limited number of holdings in the portfolio and the ability to hold cash are key aspects of the portfolio.” At the last portfolio report, International Value held 24 stocks and 38% cash while Paramount held 31 and 10%. Given that the investment universe here is broader than International’s, it’s unlikely to hold huge cash stakes but likely that it might drift well north of its current level at times.

Bottom Line

Paramount is apt to become a very solid, but very different fund under its new leadership. There will certainly be a portfolio restructuring and there will likely be some movement of assets as investors committed to Ende and Geist’s style migrate to Perennial. The pace of those changes will dictate the magnitude of the short-term tax burden that shareholders will bear.

Fund website

FPA Paramount Fund

2013 Q3 Report and Commentary

Fact Sheet

LS Opportunity Fund (LSOFX), August 2013

By David Snowball

Objective and Strategy

The Fund aims to preserve capital while delivering above-market returns and managing volatility. They invest, long and short, in a domestic equity portfolio. The portfolio is driven by intensive company research and risk management protocols. The long portfolio is typically 30-50 names, though as of mid-2013 it was closer to 70. The short portfolio is also 30-50 names. The average long position persists for 12-24 months while the average short position is closed after 3-6. The fund averages about 50% net long, though at any given point it might be 20-70% long. The fund’s target standard deviation is eight.

Adviser

Long Short Advisors, LLC. LSA launched the LS Opportunity Fund to offer access to Independence Capital Asset Partners’ long/short equity strategy. ICAP is a Denver-based long/short equity manager with approximately $500 million in assets under management.

Manager

James A. Hillary, Chief Executive Officer, Chief Investment Officer, and Portfolio Manager at ICAP. Mr. Hillary founded Independence Capital Asset Partners (ICAP) in 2004. From 1997-2004, Mr. Hillary was a founding partner and portfolio manager at Marsico Capital Management. While there he managed the 21^st Century Fund (MXXIX) and co-managed several other products. Morningstar noted that during Mr. Hillary’s tenure “the fund [MXXIX] has sailed past the peer-group norm by a huge margin.” Bank of America bought Marsico in 2000, at which time Mr. Hillary received a substantial payout. Before Marsico, he managed a long/short equity fund for W.H. Reaves. Effective June 1, 2013, Mr. Chris Hillary was added as a co-portfolio manager of the Fund. Messrs Hillary are supported by seven other investment professionals.

Strategy capacity and closure

The strategy, which is manifested in the mutual fund, a hedge fund (ICAP QP Absolute Return Fund), a European investment vehicle (Prosper Stars and Stripes, no less) and separate accounts, might accommodate as much as $2 billion in assets but the advisor will begin at about $1 billion to look at the prospect of soft closing the strategy.

Management’s Stake in the Fund

The senior Mr. Hillary has between $100,000 and 500,000 in the fund. Most of his investable net wealth is invested here and in other vehicles using this strategy. The firm’s principals and employees account for about 14% of ICAP’s AUM, though the fund’s trustees have no investment in the fund.

Opening date

September 9, 2010, though the hedge fund which runs side-by-side with it was launched in 2004.

Minimum investment

$5,000

Expense ratio

1.95% on fund assets of $40 million. The limit was reduced in early 2013 from 2.50%.

Comments

In 2004, Jim Hillary had a serious though delightful problem. As one of the co-founders of MCM, he had received a rich payout from the Bank of America when they purchased the firm. The problem was what to do with that payout.

He had, of course, several options. He might have allowed someone else to manage the money, though I suspect he would have found that option to be laughable. In managing it himself, he might reasonably have chosen a long-only equity portfolio, a long-short equity portfolio or a long equity portfolio supplemented by some sort of fixed-income position. He had success in managing both of the first two approaches and might easily have pursued the third.

The decision that Mr. Hillary made was to pursue a long-short equity strategy as the most prudent and sustainable way to manage his own and his family’s wealth. That strategy achieved substantial success, measured both by its ability to achieve sustainable long-term returns (about 9% annually from 2004) and to manage volatility (a standard deviation of about 12, both better than the Total Stock Market’s performance).

Mr. Hillary’s success became better known and he chose, bit by bit, to make the strategy available to others. One manifestation of the strategy is that ICAP QP Absolute Return L.P. hedge fund, a second is the European SICAV Prosper Star & Stripes, and a third are separately managed accounts. The fourth and newest manifestation, and the only one available to retail investors, is LS Opportunity Fund. Regardless of which vehicle you invest in, you are relying on the same strategy and the portfolio in which Mr. Hillary’s own fortune resides.

Mr. Hillary’s approach combines intensive fundamental research in individual equities, both long and short.

There are two questions for potential investors:

Does a long-short position make sense for me?
Does this particular long-short vehicle make the most sense for me?

The argument for long-short investing is complicated by the fact that there are multiple types of long-short funds which, despite having similar names or the same peer group assigned by a rating agency, have strikingly different portfolios and risk/return profiles. A fund which combines an ETF-based long portfolio and covered calls might, for example, offer far more income but far fewer opportunities for gain than a “pure” long/short strategy such as this one.

The argument for pure long/short is straightforward: investors cannot stomach the volatility generated by unhedged exposure to the stock market. That volatility has traditionally been high (the standard deviation for large cap stocks this century has been over 16 while the mean return has been 4; the translation is that you’ve been averaging a measly 4% per year while routinely encountering returns in the range of minus-12 to plus-20 with the occasional quarterly loss of 17% and annual loss of 40% thrown in) and there’s no reason to expect it to decline. The traditional hedge has been to hold a large bond position, which worked well during the 30-year bond bull market just ended. Going forward, asset allocation specialists expect the bond market to post negative real returns for years. Cash, which is also posting negative real returns, is hardly an attractive option.

The alternative is a portfolio which offsets exposure to the market’s most attractive stocks with bets against its least attractive ones. Research provided by Long Short Advisors makes two important points:

since 1998, an index of long/short equity hedge funds has outperformed a simple 60/40 allocation with no material change in risk and
when the market moves out of its panic mode, which are periods in which all stocks move in abnormal unison, both the upside and downside advantages of a hedged strategy rises in comparison to a long-only portfolio.

In short, a skilled long-short manager can offer more upside and less downside than either a pure stock portfolio or a stock/bond hybrid one.

The argument for LS Opportunity is simpler. Most long/short managers have limited experience either with shorting stocks or with mutual funds as an investment vehicle. More and more long/short funds are entering the market with managers whose ability is undocumented and whose prospects are speculative. Given the complexity and cost of the strategy, I’d avoid managers-with-training-wheels.

Mr. Hillary, in contrast, has a record worth noticing. He’s managed separate accounts and hedge funds, but also has a fine record as a mutual fund manager. He’s been working with long/short portfolios since his days at W.H. Reaves in the early 1990s. The hedge fund on which LS Opportunity is based has survived two jarring periods, including the most traumatic market since the Great Depression. The mutual fund itself has outperformed its peers since launch and has functioned with about half of the market’s volatility.

Bottom Line

This is not a risk-free strategy. The fund has posted losses in 15 of its first 34 months of operation. Eight of those losses have come in months when the S&P500 rose. The fund’s annualized return from inception through the end of June 2013 is 6.32% while the S&P moved relentlessly and, many fear, irrationally higher. In the longer term, the strategy has worked to both boost returns and mute volatility. And, with his personal fortune and professional reputation invested in the strategy, you’d be working with an experienced team which has committed “our lives, our fortunes, and our sacred honor” to making it work. It’s worth further investigation.

Fund website

LS Opportunity Fund

3Q 2013 Fact Sheet

Sextant Global High Income (SGHIX), August 2013

By David Snowball

Objective and Strategy

The fund seeks high income, with a secondary objective of capital preservation. They invest in a global, diversified portfolio of income-producing debt and equity securities. They manage risk at the level of individual security selection, but also through their ability to allocate between stocks and bonds, sectors, countries and currencies. Their portfolio may invest in up to 50% in equities, 50% in the U.S., 50% in investment grade bonds, and 33% in emerging markets. They won’t engage in hedging, leverage or credit default swaps.

Adviser

Saturna Capital Corporation, which was founded in 1989. Saturna has about $3.9 billion in assets under management and advises the Sextant, Idaho and Amana funds. Their funds are universally and continually solid, sensible and risk-conscious.

Manager

Bryce Fegley and John Scott. Mr. Fegley joined Saturna 2001, served as an analyst and then as director of research at their Malaysian subsidiary, Saturna Sdn Bhd. Mr. Scott joined Saturna 2009. He has worked with Morgan Stanley Smith Barney in California and Hyundai Securities in Seoul, S. Korea.

Strategy capacity and closure

They haven’t really discussed the matter formally. Mr. Fegley’s general sense is that the fund’s stake in preferred shares (currently 8% of the portfolio) would represent the largest constraint because the preferred market is small ($200 billion) compared to the common stock market ($14 trillion) and might well shrink by half over the next few years as new banking regulations kick in.

Management’s Stake in the Fund

As of November 30, 2012, Mr. Fegley had invested between $100,000 and 500,000 in the fund while Mr. Scott had between $50,000 and 100,000. As of the most recent SAI, their boss, Nick Kaiser, owned 30% of all of the fund’s shares which would be rather more than a million in the fund.

Opening date

March 30, 2012.

Minimum investment

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

Expense ratio

0.75% on assets of $9.4 million.

Comments

SGHIX, positioned as “a retirees’ fund,” responds to two undeniable realities: (1) investors need income and (2) the old stand-by – toss money into an aggregate bond index full of Treasuries – will, for a generation or more, no longer work. Grantham, Mayo, van Otterloo (a/k/a GMO) forecast “The Purgatory of Low Returns” (July 2013) for investors over the next seven years with a tradition 60/40 hybrid earning a real return under 1% per year and most classes of U.S. bonds posting negative real returns. Their recommendations for possible paths forward: concentrate on the highest return asset classes and rebalance frequently, seek alternatives, use leverage, and be patient.

With the exception of “use leverage,” Sextant does. SGHIX explicitly targets “high current income” and has broad flexibility to seek income almost anywhere, though they do so with a prudent concern for risk. John Scott describes himself as “the offensive manager,” the guy charged with finding the broadest possible array of reasonably-priced, income-producing securities. Bryce Fegley is “the defensive manager,” a self-described “asset allocation nerd” who aims to balance the effects of many sources of risk – country, valuation, interest rate, currency – while still pursuing a high-income mandate. Their strategy is to buy and hold for as long as possible: they hope to hold bonds to redemption and stocks as long as their dividends seem secure. With hard work, luck and skill, their ability to move between dividend-paying common stock, preferred shares (currently 8% of the portfolio) and relatively high-quality high yield bonds might allow them to achieve their goal of high income.

How high? The managers estimate that they might earn 300-400 bps more than a 10-year Treasury. In a “normal” world, a 10-year might earn 4.5%; this fund might earn 7.5 – 8.5%. In addition, the managers believe they might be able to add 2% per year in capital appreciation.

What concerns should prospective investors have? Three come immediately to mind:

To date, execution of the strategy has been imperfect. From inception through mid-July 2013, a period of about 15 months, the fund posted a total return of 5.2%. Much of their portfolio was, for about six months, in cash which certainly depressed returns. The managers are very aware of the fact that many investments are not paying investors for the risk they’re taking and have, as a result, positioned the portfolio conservatively. In addition, it’s almost impossible to construct a true peer group for this fund since its combination of a high income mandate, equities and tactical asset allocation changes is unique. There are four other funds with “global high income” in their names (Aberdeen, DWS, Fidelity, and MainStay plus one closed-end fund), but all are essentially high-yield bond funds with 0-3% in equities.

That having been said, a 4% annual return – roughly equivalent to the fund’s yield – is pretty modest. Investors interested in high income derived from a globally diversified portfolio might consider Sextant in the company with any of a number of funds or ETFs that advertise themselves as providing “multi-asset income.” An incomplete roster of such options and their total return from the date of Sextant’s launch through 7/29/13 includes:

	10K at SGHIX inception became	30-day SEC yield	Stock/bond allocation
Guggenheim Multi-Asset Income (CVY)	11,800	5.9	91 / 6
Arrow Dow Jones Global Yield ETF (GYLD)	11,300	5.8	60 / 40
BlackRock Multi-Asset Income (BAICX)	11,200	4.5	23 / 53
iShares Morningstar Multi-Asset Income (IYLD)	10,700	6.1	35 / 58
T. Rowe Price Spectrum Income (RPSIX)	10,700	2.9	13 / 77
SPDR SSgA Income Allocation (INKM)	10,600	4.2	50 / 40
Sextant	10,500	4.0	45 / 34

The portfolio composition stats illustrate the fact that none of these funds are pure peers. They are, however, plausible competitors: that is, they represent alternatives that potential SGHIX investors might consider. The other consideration, though, is that many of these funds are substantially more volatile than Sextant is. Below are the funds with launch dates near Sextant’s, along with their maximum draw down (that is, it measures the magnitude of a fund’s worst decline) and Ulcer Index (which factors-in both magnitude and duration of a decline). In both cases, “smaller” is “better.”

	Maximum drawdown	Date	Ulcer Index
iShares Morningstar Multi-Asset Income (IYLD)	7.9	06/13	2.7
SPDR SSgA Income Allocation (INKM)	6.9	06/13	2.3
Arrow Dow Jones Global Yield ETF (GYLD)	6.8	06/13	2.3
Sextant	4.7	06/13	1.6

The decision to provide a payout only once a year may not meet retirees’ needs for steady income. For investors who choose to receive their income in a check, rather than reinvesting it in fund shares, Sextant’s policy of paying out dividends and interest only once each year may be sub-optimal. The likeliest work-around would be to establish a systematic withdrawal plan, whereby an investor automatically redeems shares of the fund at regular intervals.
The fund’s risk calculus is not clearly articulated. This is a relative, rather than absolute, value portfolio. The managers feel compelled to remain fully invested in something. They’re currently moving around, looking to find income-producing assets where the income is relatively high and steady and the risk of loss of principal is manageable. That’s led them to a relatively low-yielding portfolio. When we talked about what level of risk they targeted or were willing to accept, the answer was pretty close to “it depends on what’s available.” While some funds have target volatility levels or drawdowns, the Sextant team seems mostly to be feeling their way along, taking the best deals they can find. That strategy would be a bit more palatable if the managers had a longer record, here or elsewhere, of navigating markets with the strategy.

Bottom Line

Sextant Global High Income has a lot to recommend it. The fund’s price (0.90%) is low, especially for such a tiny fund, as is its minimum investment. Saturna has an excellent reputation for patient, profitable, risk-conscious investing. The ability to travel globally and to tap into multiple asset classes is distinctive and exceedingly attractive. The question is whether the two young managers will pull it off. They’re both bright and dedicated guys, we’re pulling for them and we’ll watch the fund closely to see how it matures.

Fund website

Sextant Global High Income

Grandeur Peak Global Reach (GPROX), August 2013

By David Snowball

Objective and Strategy

Global Reach pursues long-term capital growth primarily by investing globally in a small and micro-cap portfolio. 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.

Grandeur Peak considers this “our flagship … strategy.” It is their most broadly diversified and team-based strategy. Global Reach will typically own 300-500 stocks, somewhere around 1-2% of their investible universe.

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 three Grandeur Peak funds and one “pooled investment vehicle.” The adviser passed $1 billion in assets under management in July, 2013.

Managers

Robert Gardiner and Blake Walker, assisted by three associate managers. Robert Gardiner is co-founder, CEO and Director of Research for Grandeur Peak Global. 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). In 2007, he took a sort of sabbatical from active management, but continued as Director of Research. During that sabbatical, he reached a couple conclusions: (1) global small/micro-cap investing was the world’s most interesting sector, and (2) he wanted to get back to managing a fund. He returned to active management with the launch of Wasatch Global Opportunities (WAGOX), a global small/micro-cap fund. From inception in late 2008 to July 2011 (the point of his departure), WAGOX turned a $10,000 investment into $23,500, while an investment in its average peer would have led to a $17,000 portfolio. Put another way, WAGOX earned $13,500 or 92% more than its average peer managed.

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).

The associate managers, all Wasatch alumni, are Amy Hu Sunderland, Randy Pearce, and Spencer Stewart.

Strategy capacity and closure

$400-500 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 tend to 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

June 19, 2013.

Minimum investment

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

Expense ratio

1.25% on assets of $252.3 (as of July 2023).

Comments

When Grandeur Peak opened shop in 2011, passion declared that this should be their first fund. Prudence dictated otherwise.

Prudence prevailed.

I approached this prevail with some combination of curiosity bordering on skepticism. The fact that Grandeur Peak closed two funds – presumably a signal that they had reached the limit of their ability to productively invest in this style – and then immediately launched a third, near-identical fund, raised questions about whether this was some variety of a marketing ploy. Some reflection and a long conversation with Eric Huefner, Grandeur Peak’s president, convinced me otherwise.

To understand my revised conclusion, and the conflict between passion and prudence, it’s important to understand the universe within which Grandeur Peak operates.

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. At the moment of launch, Grandeur Peak had six full-time investment professionals on staff. Fully covering all 30,000 would have been a Herculean task. Quite beyond that, Grandeur Peak faced the question: “How do we make our business model work?” Unlike many fund companies, Grandeur Peak chose to focus solely on its mutual funds and not on separately-managed accounts or private partnerships. Making that model work, especially with a fair amount of overhead, required that they be able to gather attention and assets. The conclusion that the Grandeur Peak executives reached was that it was more prudent to launch two more-focused, potentially more newsworthy funds as their opening gambit. Those two funds, Global Opportunities and International Opportunities, performed spectacularly in their two years of operations, having gathered a billion in assets and considerable press attention.

The success of Grandeur Peak’s first two funds allowed them to substantially increase their investment staff to fourteen, including seven senior investment professionals and seven junior ones. With the greater staff available, they felt now that prudence called them to launch the fund that Mr. Gardiner hoped would be the firm’s flagship and crown jewel.

The structure of the Grandeur Peak funds is intriguing and distinctive. 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 GPGOX and GPIOX 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. Of all of the global stock funds in existence, Grandeur Peak has the smallest market cap by far and, in its two years of existence, it has posted some of its category’s strongest returns.

The plan is to offer Global Reach as the flagship portfolio and, for many investors, the most logical place for them to invest with Grandeur Peak. It will offer the broadest and most diversified take on Gardiner and Walker’s investing skills. It will be part of an eventual constellation of seven funds. Global Reach will offer the most complete portfolio. Each of the remaining funds will offer a way for investors to “tilt” their portfolios. An investor who has a particular desire for exposure to frontier and emerging markets might choose to invest in Global Reach (which currently has 16% in emerging markets), but then to supplement it with a position in the eventual Emerging Markets Opportunities fund. But for the vast majority of investors who have no particular justification for tilting their portfolio toward any set of attributes (domestic, value, emerging), the logical core holding is Global Reach.

Are there reasons for concern? Two come to mind.

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 1.60%, below the 1.88% at GPGOX, but substantially above the 1.20% charged by the average no-load global fund. The management fee alone is 1.10%. 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 the fund that Grandeur Peak has wanted to launch from Day One, and it is understandably attracting considerable attention, drawing nearly $20 million in its first 30 days of operation. For investors interested in a portfolio of high-quality, growth-oriented stocks from around the globe, there are few more-attractive opportunities available to them.

Website

Grandeur Peak Global Reach

Grandeur Peak Global Opportunities (GPGOX), August 2013 update

By David Snowball

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

Objective and Strategy

Global Opportunities pursues long-term capital growth by investing in a portfolio of global equities with a strong bias towards small- and micro-cap companies. Investments may include companies based in the U.S., developed foreign countries, and emerging/frontier markets. The portfolio has flexibility to adjust its investment mix by market cap, country, and sector in order to invest where the best global opportunities exist. The managers expect to move towards 100-150 holdings (currently just over 200).

Adviser

Managers

Robert Gardiner and Blake Walker. Robert Gardiner is co-founder, CEO and Director of Research for Grandeur Peak Global. 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). In 2007, he took a sort of sabbatical from active management, but continued as Director of Research. During that sabbatical, he reached a couple conclusions: (1) global microcap investing was the world’s most interesting sector, and (2) he wanted to get back to managing a fund. He returned to active management with the launch of Wasatch Global Opportunities (WAGOX), a global small/micro-cap fund. From inception in late 2008 to July 2011 (the point of his departure), WAGOX turned a $10,000 investment into $23,500, while an investment in its average peer would have led to a $17,000 portfolio. Put another way, WAGOX earned $13,500 or 92% more than its average peer managed.

Strategy capacity and closure

Grandeur Peak specializes in global small and micro-cap investing. Their estimate, given current conditions, is that they could profitably manage about $3 billion in assets. They could imagine running seven distinct small- to micro-cap funds and tend to 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

As of 4/30/2012, Mr. Gardiner had invested over $1 million in each of his funds, Mr. Walker had between $100,000 and 500,000 in each. President Eric Huefner makes an argument that I find persuasive: “We are all highly vested in the success of the funds and the firm. Every person took a significant pay cut (or passed up a significantly higher paying opportunity) to be here.” The fund’s trustees are shared with 24 other funds; none of those trustees are invested with the fund.

Opening date

October 17, 2011.

Minimum investment

The fund closed to new investors on May 1, 2013. It remains open for additional investments by existing shareholders.

Expense ratio

1.34% on $674.2 million in assets (as of July 2023).

Comments

As part of a long-established plan, Global Opportunities closed to new investors in May, 2013. That’s great news for the fund’s investors and, with the near-simultaneous launch of Grandeur Peak Global Reach (GPROX/GPRIX), not terrible news for the rest of us.

There are three matters of particular note:

This is a choice, not an echo. Grandeur Peak Global Opportunities goes where virtually no one else does: tiny companies across the globe. Most “global” funds invest in huge, global corporations. Of roughly 280 global stock funds, 90% have average market caps over $10 billion with the average being $27 billion. Only eight, or just 3%, are small cap funds. GPGOX has the lowest average market capitalization of any global fund (as of July, 2013). While their peers’ large cap emphasis dampens risk, it also tends to dampen rewards and produces rather less diversification value for a portfolio.
This has been a tremendously rewarding choice. While these are intrinsically risky investments, they also offer the potential for huge rewards. The managers invest exclusively in what they deem to be high-quality companies, measured by factors such as the strength of the management team, the firm’s return on capital and debt burden, and the presence of a sustainable competitive advantage. Together the managers have 35 years of experience in small cap investing and have done consistently excellent work. From inception through June 30, 2013, GPGOX returned 23.5% per year while its peers have returned about 14.5%. In dollar terms, a $10,000 investment at inception would have grown to $14,300 here, but only $12,500 in their average peer.
The portfolio is evolving. While Global Opportunities is described in the prospectus as being non-diversified, the managers have never chosen to construct such a portfolio. The fund typically holds more than 200 names spread over a couple dozen countries. With the launch of its sibling Global Reach, the managers will begin slimming down the Global Opportunities portfolio. They imagine holding closer to 100-150 names in the future here versus 300 or more in Global Reach.

Eric Huefner, Grandeur Peak’s president, isn’t exactly sure how the evolution will change Global Opportunities long-term risk/return profile. “There will be a higher bar” for getting into the portfolio going forward, which means fewer but larger individual positions, in the stocks where the managers have the greatest confidence. A hundred or so 10-25 bps positions will be eliminated; after the transition period, the absolute minimum position size will be 35 bps and the targeted minimum will be 50 bps. That will eliminate a number of intriguing but higher risk stocks, the fund’s so-called “long tail.” While more-concentrated portfolios are generally perceived to be more volatile, here the concentration is achieved by eliminating a bunch of the portfolio’s most-volatile stocks.

Bottom Line

If you’re a shareholder here, you have reason to be smug and to stay put. If you’re not a shareholder here and you regret that fact, consider Global Reach as a more diversified application of the same strategy.

Website

Grandeur Peak Global Opportunities.

Grandeur Peak Funds Investment Process

Grandeur Peak Funds Annual Report

3/31/2023 Quarterly Fact Sheet

August 2013, Funds in Registration

By David Snowball

AQR Style Premia Alternative Fund

AQR Style Premia Alternative Fund will seek to provide absolute returns by magically combining four investing styles (value, momentum, carry and defensive), five asset classes (equities, bonds, interest rates – how did interest rates get to be an asset class? – commodities and cash), both long and short, in an ever-changing mix which targets an as-yet unspecified volatility target and volatility band. AQR famously manages such complex strategies which work except when they don’t (their Risk Parity fund, for example, dropped nearly 10% in the second quarter of 2013 while its Morningstar benchmark dropped a half percent). It will be managed by Ronen Israel, Jacques A. Friedman, Lars Nielsen, and Andrea Frazzini, all of whom advertise their academic degrees after their names. Expenses not yet disclosed. The minimum initial purchase is $1 – 5 million, though places like Schwab tend to offer AQR funds at $2500.

AT Mid Cap Equity Fund

AT Mid Cap Equity Fund will pursue long-term growth by investing in midcap stocks (those in the $2 – 18 billion range). Up to 25% might be invested overseas. The managers will look for companies that can deliver consistently strong earnings growth, free cash flow growth and above average return on equity, and which has a history of growth. They aspire to buy and hold for the long-term. The fund will be managed by Frederick L. Weiss and Jay Pearlstein. The minimum initial investment is $3,000. The expense ratio will be 1.39%

AT Income Opportunities Fund

AT Income Opportunities Fund seeks current income and long-term capital appreciation through a portfolio of common and preferred stocks and bonds. Up to 25% might be investing in foreign securities and another 25% might be in the sale of call or put options. They’ll start by trying to find attractive, well-positioned companies and then they look across the capital structure to find the most attractive way to invest in it. The fund will be managed by Gary Pzegeo and Brant Houston. The minimum initial investment is $3,000. The expense ratio will be 1.25%.

Baron Discovery Fund

Baron Discovery Fund will seek capital appreciation through investments in small growth companies with market capitalizations of less than $1.5 billion whose stock could increase in value 100% within four to five years. This market cap is below the upper limit set for BMO Micro Cap, below. In a singular, and singularly-bizarre development two analysts, Laird Bieger and Randolph Gwirtzman, has been given the title of “co-managers” but Baron seems unsure that they’re ready for the responsibility so they’ve appointed a “Portfolio Manager Adviser.” Here’s the text: “Cliff Greenberg has been the portfolio manager adviser of Baron Discovery Fund since its inception on [ ], 2013. In this role, he advises the co-managers of the Fund on stock selection and buy and sell decisions and is responsible for ensuring the execution of the Fund’s investment strategy. Mr. Greenberg has been the portfolio manager of Baron Small Cap Fund since its inception on September 30, 1997.” $2000 minimum initial investment, reduced to $500 for accounts set up with an AIP. Expenses not yet announced.

BFS Equity Fund

BFS Equity Fund (BFSAX) will pursue long-term appreciation through growth of principal and income. The plan is to buy quality companies which have experienced an “opportunistic event” which might increase their value or temporarily decrease their price. The managers can invest directly in stocks or in ETFs, which is hard to square with the desire to exploit opportunities which, presumably, affect individual firms. The managers will be Keith G. LaRose, Timothy H. Foster, and Thomas D. Sargent, all of whom have some combination of substantial management experience with private and institutional accounts or hedge funds. The firm has been managing private accounts in this style since the mid-1990s. Their returns minutely trail the S&P500 throughout, though they did substantially outperform the market in 2008. $1000 investment minimum. Expenses not yet set.

BMO Micro-Cap Fund

BMO Micro-Cap Fund will seek long-term capital appreciation by investing in a diversified portfolio of micro-cap (under $2.3B) stocks. No detail on stock selection processes, other to invoke normal “good companies at good prices” sorts of language. Thomas Lettenberger and Ernesto Ramos, Ph.D. will co-manage the Fund. The minimum initial investment will be $1000. Expenses are not yet set.

BMO Global Low Volatility Equity Fund

BMO Global Low Volatility Equity Fund will pursue capital appreciation by investing in a globally diversified portfolio of “low volatility, undervalued stocks [selected] using a unique, quantitative approach based on the Adviser’s multi-factor risk/return models. This approach seeks to provide the Fund with lower downside risk and meaningful upside protection relative to the MSCI All Country World Index.” David Corris, Jason Hans, and Ernesto Ramos, Ph.D. will co-manage the Fund. They also manage separate accounts using this strategy but (1) their composite dates back only 15 months and (2) they haven’t yet disclosed the composite’s performance. They’ve also run a domestic low volatility fund (BMO Low Volatility Equity, MLVYX) for rather less than a year and it’s not immediately apparent that the fund is less volatile than the market. The minimum initial investment will be $1000. Expenses are not yet set.

DFA Short-Duration Inflation Protected Securities Portfolio

DFA Short-Duration Inflation Protected Securities Portfolio will seek to provide inflation protection and maximize total returns by investing directly or through other DFA funds in a combination of debt securities, including inflation-protected securities. “At inception, the Portfolio will invest a substantial portion of its assets in the DFA Short-Term Extended Quality Portfolio, DFA Intermediate-Term Extended Quality Portfolio and DFA One-Year Fixed Income Portfolio, but it is contemplated that the Portfolio will also purchase securities, including inflation-protected securities and derivative instruments directly.” David A. Plecha and Joseph F. Kolerich will manage the fund. No minimum is specified. The expense ratio is 0.24%. You can’t have the fund, but it’s always good to know what the “A”-level teams are thinking and doing.

FlexShares Global Infrastructure Index Fund

FlexShares Global Infrastructure Index Fund will try to match the returns of an as-yet unnamed Global Infrastructure Index. They’ll invest in both developed and emerging markets. Infrastructure assets, the fund’s target, includes “physical structures and networks upon which the operation, growth and development of a community depends, and include water, sewer, and energy utilities; transportation, data and communication networks or facilities; health care facilities, government accommodations, and other public-service facilities; and shipping.” Also unnamed is the expense ratio.

Horizon Tactical Income Fund

Horizon Tactical Income Fund will seek “income” (they modestly avoid adjectives like “maximum” or “high”) by investing in ETFs, sovereign and corporate debt, preferred and convertible securities, REITs, MLPs and mortgage-backed securities. They propose to make tactical shifts into whatever segment offers “the highest expected return for a given amount of risk” (though it’s not clear whether there’s a risk or volatility target for the fund). It will be managed by Robbie Cannon, President and CEO of Horizon, Ronald Saba, Director of Equity Research, Kevin Blocker and Scott Ladner, Director of Alternative Strategies. The minimum initial investment is $2500. The expense ratio will be 1.44%.

Innealta Risk Based Opportunity Moderate Fund

Innealta Risk Based Opportunity Moderate Fund, “N” shares, will seek long-term capital appreciation and income by investing in a wide variety of ETFs. Which ETFs? The process appears to start by confusing tactics with strategies: “In the first stage, the Adviser defines its Secular Tactical Asset Allocation (STAA), which is a longer-term-oriented strategic decision that is steeped in classic portfolio construction approaches to asset allocation.” From there they add a Cyclical Tactical Asset Allocation (stage two) and top it off with “a third stage of tactical management in which the Adviser augments the portfolio with those exposures it believes can further enhance risk-relative returns.” That third stage might add “long/inverse and leveraged long/inverse equity, fixed income, commodity, currency, real estate and volatility asset classes.” The fund will be managed by Gerald W. Buetow, JR., Ph.D., CFA, CIO of AFAM (formerly Al Frank Asset Management). $5000 investment minimum. Expenses not yet disclosed.

Wavelength Interest Rate Neutral Fund

Wavelength Interest Rate Neutral Fund will seek total return through a global, fixed-income portfolio including “developed-market nominal government bonds, developed-market inflation-linked government bonds, emerging market local-currency fixed-income securities, emerging market USD-denominated fixed-income securities, sovereign debt, corporate debt, and convertible bonds.” The manager plans to invest in “securities that are fundamentally related to growth and inflation, and in doing so, seeks to systematically balance investment exposures across potential interest rate changes.” Andrew Dassori, Wavelenght’s CIO, will be the portfolio manager. The minimum initial investment is $100,000. Expenses have not yet been announced.

Smead Value Fund (SMVLX), July 2013

By David Snowball

Objective and Strategy:

The fund’s investment objective is long-term capital appreciation, which it pursues by investing in 25-30 U.S. large cap companies. Its intent is to find companies so excellent that they might be held for decades. Their criteria for such firms are ones that meet an economic need, have a long history of profitability, a strong competitive position, a lot of free cash flow and a stock selling at a discount. Shareholder-friendly management, strong insider ownership and a strong balance sheet are all positives but not requirements.

Adviser:

Smead Capital Management, whose motto is “Only the Lonely Can Play.” The firm advises Smead Value and $150 million in of separate accounts.

Managers:

William W. Smead and Tony Scherrer. Mr. Smead, founder and CEO of the adviser, has 33 years of experience in the investment industry and was previously the portfolio manager of the Smead Investment Group of Wachovia Securities. Mr. Scherrer joined the firm in 2008 and was previously the Vice President and Senior Portfolio Manager at U.S. Trust and Harris Private Bank. He has 18 years of professional investment experience.

Management’s Stake in the Fund:

Mr. Smead has over $1 million invested in the fund and Mr. Scherrer has between $100,000 and $500,000.

Opening date:

January 2, 2008

Minimum investment:

$3,000 initially, $500 subsequently.

Expense ratio:

1.25% on assets of about $4.7 Billion, as of July 2023.

Comments:

Well, there certainly aren’t a lot of moving parts here. In a world dominated by increasingly complex (multi-asset, multi-strategy, multi-cap, multi-manager) products, Smead Value stands out for a refreshingly straightforward approach: Research. Buy. Hold.

Mr. Smead believes that U.S. blue chip stocks are about the best investment you can make. Not just now or this decade or over the past 25 years. The best, pretty much ever. He realizes there are a lot of very smart guys who disagree with him; “the brilliant pessimists” he calls them. He seems to have three beliefs about them:

They might be right at a macro level, but that doesn’t mean that they’re offering good investment advice. He notes, for example, that the tech analysts were right in the late 1990s: the web was going to change everything. Unfortunately, that Big Picture insight did not convert to meaningful investing advice.
Their pessimism is profitable – to him. Anything scarce, he argues, goes up in value. As more and more Big Thinkers become pessimistic, optimism becomes more valuable. The old adage is “stocks climb a wall of worry” and the pessimists provide the wall.
Their pessimism is unprofitable to their investors. He notes, as a sort of empirical test, that few pessimist-driven strategies have actually made money.

Even managers who don’t buy pessimism are, he believes, twitchy. They buy and sell too quickly, eroding gains, driving up costs and erasing whatever analytic advantage they might have held. The investing world is, he claims, 35% passive, 5% active … and 60% too active.

He’s even more dismissive of many investing innovations. Commodities, he notes, are not more an “asset class” than blackjack is and futures contracts than a nine-month bet. Commodity investing is a simple bet on the future price of an inanimate object that such bets have, for over 200 years, turned out badly: sharp price spikes have inevitably been followed by price crashes and 20-year bear markets.

His view of China is scarcely more sanguine.

His alternative? Find excellent companies. Really excellent ones. Wait and wait and wait until their stock sells at a discount. Buy. Hold. (His preferred time frame is “10 years to forever”.) Profit.

That’s about it.

And it works. A $10,000 investment in Smead Value at inception would be worth $13,600 by the end of June 2013; a similar investment in its average peer would have grown to only $11,800. That places it in the top 1-2% of large cap core funds. It has managed that return with lower volatility (measured by beta, standard deviation and downside capture ratios) than its peers. It’s not surprising that the fund has earned five stars from Morningstar and a Lipper Leaders designation from Lipper.

Bottom Line:

Mr. Smead is pursuing much the same logic as the founders of the manager-less ING Corporate Leaders Fund (LEXCX). Buy great companies. Do not sell. Investors might reasonably complain about the expenses attached to such a low turnover strategy (though he anticipates dropping them by 15 basis points in 2013), but they don’t have much grounds for complaining about the results.

Fund website:

www.smeadfunds.com

2023 Q2 Shareholder Letter

Fact Sheet

Forward Income Builder Fund (AIAIX)

By David Snowball

This fund has been liquidated.

Objective and Strategy:

The fund seeks high current income and some stability of principal by investing in an array of other Forward Funds and cash. The portfolio has a target volatility designation (a standard deviation of 6.5%) and it is rebalanced monthly to generate as much income as possible consistent with that risk goal.

Adviser:

Forward Management, LLC. Forward specializes in alternative investment classes. As of March 2013, Forward had $6.1 billion in assets under management in their “alternative and niche” mutual funds and in separately managed accounts.

Managers:

All investment decisions are made jointly by the team of Nathan Rowader, Director of Investments and Senior Market Strategist; Paul Herber, Portfolio Manager; Paul Broughton, Assistant Portfolio Manager; and Jim O’Donnell, CIO. Between them, the team has over 70 years of investment experience.

Management’s Stake in the Fund:

As of May 1^st, Messrs. Rowader and Broughton had not invested in the fund. Messrs. Herber and O’Donnell each had a small stake, of less than $10,000, invested.

Opening date:

December 27, 2000. Prior to May 1, 2012, it was known as the Forward Income Allocation Fund.

Minimum investment:

There’s a $4,000 minimum initial investment, lowered to $2,000 for Coverdell and eDelivery accounts, further lowered to $500 for automatic investment plans.

Expense ratio:

1.96% on assets of $21.2 million.

Comments:

Forward Income Builder is different. It’s different than what it used to be. It’s different than other funds, income-oriented or not. So far, those differences have been quite positive for investors.

Income Builder has always been a fund-of-funds. From launch in 2000 to May 2012, it had an exceedingly conservative mandate: it “uses an asset allocation strategy designed to provide income to investors with a low risk tolerance and a 1-3 year investment time horizon.” In May 2012, it shifted gears. The corresponding passage now read: it “uses an asset allocation strategy designed to provide income to investors with a lower risk tolerance by allocating the Fund’s investments to income producing assets that are exhibiting a statistically higher yield relative to other income producing assets while also managing the volatility of the Fund.” The first change is easy to decode: it targets investors with a “lower” rather than “low risk tolerance” and no longer advertises a 1- 3 year investment time horizon.

The second half is a bit trickier. Many funds are managed with an eye to returns; Income Builder is managed with an eye to risk (measured by standard deviation) and yield. It’s goal is to combine asset classes in such a way that it generates the maximum possible return from a portfolio whose standard deviation is 6.5%. They calculate forward-looking standard deviations for 11 asset classes for the next 30 days. They then calculate which combination of asset classes will generate high yield with no more than 6.5% standard deviation. The rebalance the portfolio monthly to maintain that profile.

Why might this interest you? Forward is responding to the end of the 30 year bull market in bonds. They believe that income-oriented investors will need to broaden their opportunity set to include other assets (dividend-paying stocks, REITs, preferred shares, emerging markets corporate debt and so on). At the same time, they can’t afford wild swings in the value of their portfolios. So Forward builds backward from an acceptable level of volatility to the mix of assets which have the greatest excess return possibilities.

The evidence so far available is positive. A $10,000 investment in the fund on May 1, 2012, when its mandate changed, was worth $10,800 by the end of June, 2012. The same investment in its average peer was worth $10,500. The portfolio’s stocks are yielding a 6.1% dividend, their income is higher than their peers and their standard deviation has been lowered (4.1%) than their target. The portfolio yield is 4.69%. By comparison, T. Rowe Price Spectrum Income (RPSIX), another highly regarded fund-of-funds with about 15% equity exposure, has a yield of 3.65%.

There are three issues that prospective investors need to consider:

The fund is expensive. It charges 1.96%, including the expenses of its underlying funds.
During the late May – June market turbulence, it dropped substantially more than its multi-sector bond peers. The absolute drop was small – 2.2% – but still greater than the 1.2% suffered by its peers. Nonetheless, its YTD and TTM returns, through the end of June 2013, place it in the top tier of its peer group.
The managers have, by and large, opted not to make meaningful investments in the fund. On both symbolic and practical grounds, that’s a regrettable decision.

Bottom Line:

Forward Income Builder will for years drag the tepid record occasioned by its former strategy. That will likely deter many new investors. For income-oriented investors who accept the need to move beyond traditional bonds and are willing to look at the new strategy with fresh eyes, it has a lot to offer.

Fund website:

www.forwardinvesting.com

July 2013, Funds in Registration

By David Snowball

AdvisorShares Treesdale Rising Rates ETF

AdvisorShares Treesdale Rising Rates ETF will invest in “mortgage-related products with interest-only cash flows while managing duration risk with liquid interest rate products. To employ the Fund’s strategy, Treesdale Partners, LLC seeks to generate enhanced returns in an environment of rising interest rates by investing principally in agency interest-only mortgage-backed securities, interest-only swaps and certain other mortgage-related derivative instruments, while maintaining a negative portfolio duration with a generally positive current yield by investing in U.S. Treasury obligations and other liquid rate instruments.” Yung Lim, Managing Partner for Treesdale, will manage the fund. Expenses not yet set.

Ashmore Emerging Markets Frontier Equity Fund

Ashmore Emerging Markets Frontier Equity Fund will invest in “equity securities and equity-related investments of Frontier Market Issuers.” I mention it, primarily, as an example of the rising interest in frontier-targeted funds. The portfolio managers will be Felicia Morrow, CIO of Ashmore EMM, Peter Trofimenko, John DiTieri, Bryan D’Aguiar, and Johan de Bruijn. $1000 minimum. Expenses not yet set. Based on other Ashmore listings at Scottrade, this will be sold only to RIAs.

American Beacon Earnest Partners Emerging Markets Equity Fund

American Beacon Earnest Partners Emerging Markets Equity Fund will seek long-term growth by investing in the stock (common, preferred or convertible) of companies “economically tied to” the emerging markets. The subadviser appears to use a fundamental approach with special sensitivity to limiting the downside. Paul E. Viera of EARNEST Partners will manage the fund. EARNEST describes itself as a fundamental, bottom-up bunch with $20 billion in AUM. They sub-advise three other funds, though none of them is an e.m. fund and the prospectus does not cite a separate accounts record. The minimum initial investment in its no-load Investor shares is $2500 and the expense ratio is 1.74%.

AT Disciplined Equity Fund

AT Disciplined Equity Fund seek long-term capital appreciation and, secondarily, current income. This is actually a repackaged Invesco Disciplined Equity Fund (AWEIX) and itself was a repackaged Atlantic Whitehall Equity Income Fund. The adviser will be Stein Roe, a storied name in the no-load world. Patricia Bannan of Atlantic Trust (the “AT” in the name) has been managing the Invesco fund since 2010. Brant Houston became a co-manager in 2013. After conversion, the expenses rise from 0.78% to 1.19% and the minimum investment rises from $1000 to $3000.

Barrow SQV Hedged All Cap Fund

Barrow SQV Hedged All Cap Fund seeks to generate above-average returns through capital appreciation, while also attempting to reduce volatility and preserve capital during market downturns. The long portfolio mirrors the construction of their Long All Cap Funds (see below). The Hedged All Cap Fund’s short portfolio will generally be composed of: a) 150-250 companies identified as low quality and overpriced with the Adviser’s SQV ranking process; and b) 1,000-1,100 companies (assuming a “look through” to the underlying constituent companies of exchange traded funds) that represent the Adviser’s custom market index benchmark. The short portfolio is balanced across the same market capitalization segments and sectors as the long portfolio. The Adviser intends no individual short position to be greater than 1.5% of the portfolio, as measured at the time of purchase. Nicholas Chermayeff and Robert F. Greenhill, Jr. of Barrow Street Advisors LLC, will manage the mutual fund. Before founding Barrow Street, both guys with “acquisition professionals” (no, I have no clue and it sounds vaguely like a mob euphemism) for Morgan Stanley and Goldman Sachs, respectively. They have been investing money in long/short separate accounts since 2009. Their accounts outperform the average long/short hedge fund by about 100 bps year. The three-year record, for example, is 5.0% for them and 3.8% for hedged equity. Expenses and minimums not yet set, though they do plan to award themselves a rich 1.50% as their management fee.

Barrow SQV Long All Cap Fund

Barrow SQV Long All Cap Fund seeks to generate long-term capital appreciation. This is another former hedge fund (formerly Barrow Street Fund LP, which opened in 2009). They use their proprietary Systematic Quality Value (“SQV”) strategy to create “diversified sub-portfolios” of high quality stocks. It looks like each sub-portfolio will be a basket of stocks that will be traded as a group; they’re hopeful of holding each basket at least a year. Nicholas Chermayeff and Robert F. Greenhill, Jr. of Barrow Street Advisors LLC, the managers of the hedge fund, will manage the mutual fund. No word yet on the hedge fund’s performance. Expenses and minimums not yet set, though the management fee is .99% and there’s a 12(b)1 fee of .25%.

Coho Relative Value Equity Fund

Coho Relative Value Equity Fund will seek total return by investing in 20 to 35 mid- to large cap stocks that meet their stability, dividend and cash flow growth criteria. They anticipate dividends about 600 bps about the 5-10 year Treasury average. They describe their approach as “conservative, bottom-up and fundamental.” The fund will be managed by Brian Kramp and Peter Thompson, both of Coho Partners, Ltd. The minimum initial investment is $2000, reduced to $500 for an IRA. The expense ratio, after waivers, is an entirely-reasonable 1.30% with a 2% redemption fee for shares held under 60 days.

Gotham Neutral Fund

Gotham Neutral Fund will be about what you expect: a long/short equity fund that’s pretty much market neutral. They anticipate a net market exposure of 0-25%. One of the other Gotham funds has had a promising start and one of the managers wrote the wildly popular The Little Book that Beats the Market (2006). Joel Greenblatt and Robert Goldstein will co-manage the fund. They also co-manage two other Gotham funds and the Formula Investing funds, whose record of performance excellence is … uhh, mixed. Expenses, after waivers, will be 3.77% and the minimum investment will be $250,000.

Hilton Yield Plus Fund

Hilton Yield Plus Fund seeks total return consistent with the preservation of capital by investing in bonds and high-dividend equities. The portfolio might contain REITs, MLPs and ETNs. The managers start by making a macro-level assessment and then allocates to whatever’s going to work. They also might engage in opportunistic trading in the fixed-income market. Up to 30% of the portfolio might be in high yield debt. William J. Garvey, Craig O’Neill and Alexander D. Oxenham , all senior folks at Hilton Capital Management, will be the managers. The expense ratio is 1.6% for retail shares, 1.25% for institutional. The minimum initial investments will be $2500 for retail and $250,000 for institutional.

Probabilities Fund

Probabilities Fund seeks capital appreciation. The adviser uses an active trading strategy based on a proprietary rules-based trend-following methodology to determine the Fund’s allocation among Index ETFs, leveraged ETFs, and cash. It’s a market-timing operation: usually invest in ETFs, use leveraged ETFs if you expect a market run-up and go to cash if you anticipate a sharp decline. Joseph B. Childrey, founder and chief investment officer of the adviser, is the portfolio manager and ran this thing as a hedge fund from 2008 to the present. They haven’t yet disclosed how the hedge fund did. $1000 minimum. Expenses not yet set.

RiverPark Strategic Income Fund

RiverPark Strategic Income Fund seeks high current income and capital appreciation consistent with the preservation of capital. The manager has substantial freedom to invest across the income-producing universe: foreign and domestic, short- to long-term, investment and non-investment grade debt, preferred stock, convertible bonds, bank loans, high yield bonds and income producing equities. The manager intends to pursue an intentionally conservative strategy by investing only in those bonds that he deems “Money Good” and stocks whose dividends are secure. Up to 35% of the portfolio might be in foreign fixed-income and 35% in income-producing equities. He also can hedge the portfolio. The manager’s intention is to hold securities until maturity. David Sherman of Cohanzick Management, who also manages the splendid but closed RiverPark Short Term High Yield fund, will be the manager. The expense ratio is 1.25% for retail shares, 1.00% for institutional. The minimum initial investments will be $1000 for retail and $1M for institutional.

The Texas Fund

The Texas Fund. Buys the stock of Texas companies. Ahl bidness, mostly. Ever’thing is BIG in Texas, including the minimums and expenses. It joins the likes of the Virginia Equity Fund (see below), the Arkansas Equity Growth Fund, the Atlanta Growth Fund, the Blue State Fund and the Home State Pennsylvania Growth Fund (ooops – deadsters). They could aspire to Mairs & Power (MPGFX) but I’m not sure that folks in Texas are allowed to emulate Minnesotans.

Virginia Equity Fund

Virginia Equity Fund buys stocks of firms that have “a significant impact” on, or are located in, Virginia. “Significant impact on.” Uhhh … wouldn’t that be, say, Google, Microsoft and Exxon? It’s managed by J.C. Schweingrouber of Virginia Financial Innovations. 4.25% load, 1.95% expense ratio, $2500 investment minimum.

Scout Low Duration Bond Fund (SCLDX), June 2013

By David Snowball

This fund is now the Carillon Reams Low Duration Bond Fund.

Objective and Strategy

The fund seeks a high level of total return consistent with the preservation of capital. The managers may invest in a wide variety of income-producing securities, including bonds, debt securities, derivatives and mortgage- and asset-based securities. They may invest in U.S. and non-U.S. securities and in securities issued by both public and private entities. Up to 25% of the portfolio may be invested in high yield debt. The investment process combines top-down interest rate management (determining the likely course of interest rates and identifying the types of securities most likely to thrive in various environments) and bottom-up fixed income security selection, focusing on undervalued issues in the fixed income market.

Adviser

Scout Investments, Inc. Scout is a wholly-owned subsidiary of UMB Financial, both are located in Kansas City, Missouri. Scout advises the nine Scout funds. As of January 2013, they managed about $25 billion. Scout’s four fixed-income funds are managed by its Reams Asset Management division, including Low-Duration Bond (SCLDX), Unconstrained Bond (SUBYX), Core Bond (SCCYX, four stars) and Core Plus Bond (SCPZX, retail shares were rated four star and institutional shares five star/Silver by Morningstar, as of May, 2013).

Manager

Mark M. Egan is the lead portfolio manager for all their fixed income funds. His co-managers are Thomas Fink, Todd Thompson and Stephen Vincent. From 1990 to 2010, Mr. Egan was a portfolio manager for Reams Asset Management. In 2010, Reams became the fixed-income arm of Scout. His team worked together at Reams. In 2012, they were finalists for Morningstar’s Fixed-Income Manager of the Year honors.

Management’s Stake in the Fund

None yet reported. Messrs. Egan, Fink and Thompson have each invested over $1,000,000 in their Unconstrained Bond fund while Mr. Vincent has between $10,000 – 50,000 in it.

Opening date

August 29, 2012.

Minimum investment

$1,000 for regular accounts, reduced to $100 for IRAs or accounts with AIPs.

Expense ratio

0.40%, after waivers, on assets of $32 million (as of May 2013). The fund’s assets are growing briskly. The Low Duration Strategy on which this fund operates was launched July 1, 2002 and has $2.9 billion in it.

Comments

The simple act of saving money is not supposed to be a risky activity. Recent Federal Reserve policy has made it so. By driving interest rates relentlessly down in support of a feeble economy, the Fed has turned all forms of saving into a money losing proposition. Inflation in the past couple years has average 1.5%. That’s low but it’s also 35-times higher than the rate of return on the Vanguard Prime Money Market fund, which paid 0.04% in each of the past two years. The average bank interest rate sits at 0.21%. In effect, every dollar you place in a “safe” place loses value year after year.

Savers are understandable irate and have pushed their advisers to find alternate investments (called “funky bonds” by The Wall Street Journal) which will offer returns in excess of the rate of inflation. Technically, those are called “positive real returns.” Combining a willingness to consider unconventional fixed-income securities with a low duration portfolio offers the prospect of maintaining such returns in both low and rising interest rate environments.

That impulse makes sense and investors have poured hundreds of billions into such funds over the past three years. The problem is that the demand for flexible fixed-income management exceeds the supply of managers who have demonstrated an ability to execute the strategy well, across a variety of markets.

In short, a lot of people are handing money over to managers whose credentials in this field are paper thin. That is unwise.

We believe, contrarily, that investing with Mr. Egan and his team from Reams is exceptionally wise. There are four arguments to consider:

This strategy is quite flexible.
The fund can invest globally, in both public and private debt, in investment grade and non-investment grade, and in various derivatives. All of the Scout/Reams funds, according to Mr. Egan, use “the same proven philosophy and process.” While he concedes that “due to the duration restrictions the opportunity set is slightly smaller for a low duration fund … the ability to react to value when it is created in the capital markets is absolutely available in the low duration fund. This includes sector decisions, individual security selection, and duration/yield curve management.”
The managers are first-rate.
Reams was nominated as one of Morningstar’s fixed-income managers of the year in 2012. They were, at base, recognized as one of the five best teams in existence In explaining their nomination of Reams as fixed-asset manager of the year, Morningstar explained:

Mark Egan and crew [have delivered] excellent long-term returns here. Reams isn’t a penny-ante player, either: The firm has managed close to $10 billion in fixed-income assets, mainly for institutions, for much of the past decade.

Like some of its fellow nominees, the team followed up a stellar showing in 2011 with a strong 2012, owing much of the fund’s success this year to decisions made amid late 2011’s stormy climate, including adding exposure to battered U.S. bank bonds and high-yield. Unlike the other nominees, however, the managers have pulled in the fund’s horns substantially as credit has rallied this year. That’s emblematic of what they’ve done for more than a decade. When volatility rises, they pounce. When it falls, they protect. That approach has taken a few hits along the way, but the end result has been outstanding.

They’ve succeeded over time.

While the Low Duration fund is new, the Low Duration strategy has been used in separately managed accounts for 11 years. They currently manage nearly $3 billion in low duration investments for high net-worth individuals and institutions. For every trailing time period, Mr. Egan has beaten both his peer group. His ten year returns have been 51% higher than his peers:

	1 Yr.	3 Yrs.	5 Yrs.	10 Yrs.
Low Duration Composite (net of fees)	3.76%	3.72%	5.22%	4.73%
Vanguard Short-Term Bond Index fund (VBISX)	1.70	2.62	3.12	3.51
Average short-term bond fund	2.67	2.81	3.22	3.13
Reams performance advantage over peers	41%	32%	62%	51%

Annualized Performance as of March 31, 2013. The Low Duration Fixed Income Composite was created July 1, 2003.

The pattern repeats if you look year by year: he has outperformed his peers in six of the past six years and is doing so again in 2013, through May. While he trails the Vanguard fund above half the time, the magnitude of his “wins” over the index fund is far greater than the size of his losses.

	2007	2008	2009	2010	2011	2012
Low Duration Composite (net of fees)	7.02	1.48	13.93	5.02	2.62	5.06
Vanguard Short-Term Bond Index fund (VBISX)	7.22	5.43	4.28	3.92	2.96	1.95
Average short-term bond fund	4.29	(4.23)	9.30	4.11	1.66	3.67

Annualized Performance as of March 31, 2013. The Low Duration Fixed Income Composite was created July 1, 2003.

They’ve succeeded when you most needed them.
The fund made money during the market meltdown that devastated so many investors. Supposedly ultra-safe ultra-short bond funds imploded and the mild-mannered short-term bond group lost about 4.2% in 2008. When we asked Mr. Egan about why he managed to make money when so many others were losing it, his answer came down to a deep-seated aversion to suffering a loss of principle.

One primary reason we outperformed relative to many peers in 2008 was due to our investment philosophy that focuses on downside risk protection. Many short-term bond funds experienced negative returns in 2008 because they were willing to take on what we view as unacceptable risks in the quest for incremental yield or income. This manifested itself in many forms: a junior position in the capital structure, leveraged derivative credit instruments, or securities backed by loans of questionable underwriting and payer quality. Specifically, many were willing to purchase and hold subprime securities because the higher current yield was more important to them then downside protection. When the credit crisis occurred, the higher risks they were willing to accept produced significant losses, including permanent impairment. We were able to side-step this damage due to our focus on downside risk protection. We believe that true risk in fixed income should be defined as a permanent loss of principle. Focusing on securities that are designed to avoid this type of risk has served us well through the years.

Bottom Line

Mr. Egan’s team has been at this for a long time. Their discipline is clear, has worked under a wide variety of conditions, and has worked with great consistency. For investors who need to take one step out on the risk spectrum in order to escape the trap of virtually guaranteed real losses in money markets and savings accounts, there are few more compelling options.

Fund website

Scout Low Duration Bond

Commentary

Fact Sheet

Bretton Fund (BRTNX), Updated June 2013

By David Snowball

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

Objective and Strategy

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

Adviser

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

Manager

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

Management’s Stake in the Fund

Mr. Dodson has over a million dollars invested in the fund and a large fraction of the fund’s total assets come from the manager’s family.

Opening date

September 30, 2010.

Minimum investment

$2000 for regular accounts, $1000 for IRAs or accounts established with an automatic investment plan. The fund’s available for purchase through E*Trade and Pershing.

Expense ratio

1.35% on $67.7 million in assets.

Comments

We first profiled Bretton Fund in February, 2012. If you’re interested in our original analysis, it’s here.

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

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

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

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

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

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

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

He might well have launched a hedge fund, but decided he’d rather help average families do well than having the ultra-rich become ultra-richer. Too, he might have considered a venture capital capital of the kind he’s worked with before, but venture capitalist bank on having one investment out of ten becoming a huge winner while nine of 10 simply fail. “That’s not,” he reports, “what I want to do.”

What he wants to do is to combine a wide net (the manager reports spending most of his time reading), a small circle of competence (representing industries where he’s confident he understands the dynamic), a consistent discipline (target undervalued companies, defined by their ability to generate an attractive internal rate of return – currently he’s hoping for investments that have returns in the low double-digits) and patience (“five years to forever” are conceivable holding periods for his stocks). He’s currently leveraging to fund’s small size, which allows him to benefit from a stake in companies too small for larger funds to even notice.

This is a one-man operation. Economies of scale are few and the opportunity for a lower expense ratio is distant. It’s designed for careful compounding, which means that it will rarely be fully invested (imagine 10-20% cash as normal) and it will show weak relative returns in markets that are somewhat overvalued and still rising. Many will find that frustrating.

Bottom Line

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

Fund website

Bretton Fund

Fund Documents

June 2013, Funds in Registration

By David Snowball

Broadmark Tactical Fund

Broadmark Tactical Fund seeks to produce, in any market environment, above-average risk-adjusted returns and less downside volatility than the S&P 500 Index. They’ll invest globally, long and short, using ETFs. Mostly. They might invest directly in stocks, go to cash, invest in fixed income securities or write options against the portfolio. Christopher Guptill, CEO and CIO of Broadmark, will run the fund. He previously ran Forward Tactical Enhanced (FTEAX), which is also a long/short fund. Good news: he has somewhat above average returns during his 20 months on the fund. Bad news: the portfolio turnover is reported as 6000%. The expense ratio is 1.80%. The minimum initial investment is $4,000, reduced to $2,000 for IRAs.

Calamos Dividend Growth Fund

Calamos Dividend Growth Fund will seek income and capital appreciation primarily through investments in dividend paying equities. They may hold common and preferred stocks Master Limited Partnerships. MLPs and foreign stocks are both capped at 25% of the portfolio. Calamos the Elder and Black the Greater will lead the investment team. The expense ratio for “A” shares is 1.35% and the front-load is 4.75%. The minimum initial investment is $2,500, reduced to $500 for IRAs.

Calamos Mid Cap Growth Fund

Calamos Mid Cap Growth Fund will seek “excess returns relative to the benchmark over full market cycles.” They’ll invest mostly in domestic mid-cap growth stocks ($440m – $28b, which doesn’t feel all that mid-cappy), and may hold stocks after they grow out of that purchase range. They also have the option of holding ADRs “in furtherance of its investment strategy.” Calamos the Elder and Black the Greater will lead a nine-person investment team. The expense ratio for “A” shares is 1.25% and the front-load is 4.75%. The minimum initial investment is $2,500, reduced to $500 for IRAs.

Forward Dynamic Income Fund

Forward Dynamic Income Fund will seek total return, with dividend and interest income being an important component of that return, while exhibiting less downside volatility than the S&P 500 Index. The plan is to mix the portfolio between a dividend-capture strategy (buy a stock shortly before it distributes a dividend, then sell it) and a tactical allocation strategy (long/short investing best on technical indicators; if the technicals aren’t clear, they’ll hold fixed-income). To add to the jollies of it, the managers may leverage the portfolio by a third. The portfolio managers will be David McGanney, Forward’s Head Trader, Jim Welsh, and Jim O’Donnell, Forward’s CIO. The minimum initial investment is $4000 unless you select eDelivery (which reduces it to $2000) or an automatic investing plan (which reduces it to $500). The expense ratio will be 2.31%.

Forward Select Income Opportunity Fund

Forward Select Income Opportunity Fund seeks total return through current income and long-term capital appreciation. It will invest in a mix of value-oriented equities (including convertibles, MLPs, ADRs, ETFs, ABCs), corporate and government debt securities from around the world, and hybrids such as convertibles. The fund is managed by a team led by Joel Beam, whose has been with Forward since 2009. The other members of the team are Forward’s CIO, Jim O’Donnell, and a bunch of guys who joined Forward with Mr. Beam from Kensington Investment Management. The minimum initial investment is $4000 unless you select eDelivery (which reduces it to $2000) or an automatic investing plan (which reduces it to $500). The expense ratio will be 1.66%.

Gold Bullion Strategy Portfolio

Gold Bullion Strategy Portfolio wants to “reflect the performance of the price of Gold bullion.” It will do so by invest in bullion-related ETFs, ETNs and futures and in fixed-income funds and ETFs. I don’t really understand what these folks are up to. They promise to invest at least 25% of the portfolio in gold bullion securities (why doesn’t that violate the 80% rule) and the rest in fixed-income funds. How do those funds help them track the price of gold? It also plans to invest up to 25% in “a subsidiary,” which I’m guessing is an offshore fund. Jerry C. Wagner, President of Flexible Plan Investments, and Dr. George Yang, its Director of Research, will run the fund. It describes itself as a mutual fund but it’s only available through life insurance company accounts and some retirement plans. The expense ratio will be 1.80%.

T. Rowe Price Target Retirement 2005 – 2055 Funds

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


The new funds’ glidepath	The old fund’s glidepath

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

Turner Emerging Markets Fund

Turner Emerging Markets Fund will, as Turner does, invest in growth stocks. The managers plan a bottom-up, stock-by-stock portfolio that’s sector agnostic but “country aware.” They plan to hold 60-100 positions, either directly or through derivatives. Donald W. Smith and Rick Wetmore, both long-time Turner employees, will manage the fund. They’ve been investing in emerging markets through private accounts since mid-2010; the record, frankly, is undistinguished. The Fund’s minimum initial investment is $1,000,000 for Institutional Class Shares and $2,500 for Investor Shares, but is reduced to $100,000 and $1,000, respectively, for accounts set up with automatic investing plans. The opening expense ratio for Investor shares will be 1.30%.

Walden International Equity Fund

Walden International Equity Fund seeks long-term capital growth through an actively managed portfolio of mid- to large-cap international stocks. The portfolio will generally mirror the MSCI World (ex-US) index, except that the managers will apply environmental, social and governance screens in their portfolio construction. They also reserve the right to be activist shareholders. William Apfel, Executive Vice President and Director of Securities Research at Boston Trust Investment Management, will manage the fund. Mr. Apfel also manages Walden Equity (WSEFX, since 01/2012) and Walden Asset Management (WSBFX, since 08/2010) funds. Both tend to provide average returns with below-average volatility. The investment minimum is $1,000,000 but Walden funds are available through some supermarkets with a $2500 minimum. The launch should occur around the beginning of August, 2013.

Westfield Capital Dividend Growth Fund

Westfield Capital Dividend Growth Fund will pursue long-term growth by investing in 40-60 large cap stocks whose companies have “a history or prospect of paying stable or increasing dividends.” Mostly domestic common stocks, but it might invest in MLPs and ADRs as well. It appears that this fund is just absorbing an unnamed “predecessor fund,” but the predecessor was not a mutual fund The fund will be managed by William Muggia, President, CEO and CIO of the advisor. Mr. Muggia runs nine other mutual funds under the GuideMark, VantagePoint, Touchstone, Harbor, HSBC, Consulting Group and Westfield brands. The expense ratio will be 1.20%.

FPA International Value (FPIVX), May 2013 update

By David Snowball

This is an update of the fund profile originally published in August 2012. You can find that profile here.

FPA International Value Fund was reorganized as Phaeacian Accent International Value Fund after the close of the FPA Fund’s business on October 16, 2020.

As of May 26, 2022, the fund has been liquidated and terminated, according to the SEC.

Objective and Strategy

FPA International Value tries to provide above average capital appreciation over the long term while minimizing the risk of capital losses. Their strategy is to identify high-quality companies, invest in a quite limited number of them (say 25-30) and only when they’re selling at a substantial discount to FPA’s estimation of fair value, and then to hold on to them for the long-term. In the absence of stocks selling at compelling discounts, FPA is willing to hold a lot of cash for an extended period. They’re able to invest in both developed and developing markets, but recognize that the bulk of their exposure to the latter might be achieved indirectly through developed market firms with substantial emerging markets footprints.

Adviser

FPA, formerly First Pacific Advisors, which is located in Los Angeles. The firm is entirely owned by its management which, in a singularly cool move, bought FPA from its parent company in 2006 and became independent for the first time in its 50 year history. The firm has 27 investment professionals and 71 employees in total. Currently, FPA manages about $23 billion across four equity strategies and one fixed income strategy. Each strategy is manifested in a mutual fund and in separately managed accounts; for example, the Contrarian Value strategy is manifested in FPA Crescent (FPACX), in nine separate accounts and a half dozen hedge funds. On April 1, 2013, all of FPA’s fund became no-loads.

Managers

Pierre O. Py. Mr. Py joined FPA in September 2011. Prior to that, he was an International Research Analyst for Harris Associates, adviser to the Oakmark funds, from 2004 to 2010. In early 2013, FPA added two analysts to support Mr. Py. One, Victor Liu, was a Vice President and Research Analyst at Causeway Capital Management from 2005 until 2013. The other, Jason Dempsey, was a Research Analyst at Artisan Partners and Deccan Value Advisers. He’s also a California native who’s a specialist in French rhetorical theory and has taught on the subject in France. (Suddenly my own doctorate in rhetoric and public address feels trendy.)

Management’s Stake in the Fund

Mr. Py and FPA’s partners are some of the fund’s largest investors. Mr. Py has committed “all of my investible net worth” to the fund. That reflects FPA’s corporate commitment to “co-investment” in which “Partners invest alongside our clients and have a majority of their investable net worth committed to the firm’s products and investments. We encourage all other members of the firm to invest similarly.”

Opening date

December 1, 2011.

Minimum investment

$1,500, reduced to $100 for IRAs or accounts with automatic investing plans.

Expense ratio

1.32%, after waivers, on assets of $80 million. The waiver is in effect through 2015, and might be extended.

Comments

Few fund companies get it consistently right. By “right” I don’t mean “in step with current market passions” or “at the top of the charts every years.” By “right” I mean two things: they have an excellent investment discipline and they treat their shareholders with profound respect.

FPA gets it consistently right.

That alone is enough to warrant a place for FPA International Value on any reasonable investor’s due diligence list.

Like the other FPA funds, FPA International Value is looking to buy world-class companies at substantial discounts.

They demand that their investments meet four, non-negotiable criteria:

High quality businesses with long-term staying power.
Overall financial strength and ability to weather market dislocations.
Management teams that allocate capital in a value creative manner.
Significant discount to the intrinsic value of the business.

The managers will follow a good company for years if necessary, waiting for an opportunity to purchase its stock at a price they’re willing to pay. Mr. Py recounted the story of a long (and presumably frustrating) recent research trip to the Nordic countries. After weeks in northern Europe in January, Mr. Py came home with the conclusion that there was essential nothing that met their quality and valuation criteria. “The curse of absolute investors,” he called it. As the market continues to rally, “it [becomes] increasingly difficult for us to find new compelling investment opportunities.” And so he’s doing now what he knows he must: “We take the time to get to know the business, build our understanding . . . and wait patiently, sometimes multiple years” for all the stars to align.

The fund’s early performance (top 2% of its peer group in 2012 and returns since inception well better than their peer group’s, with muted volatility) is entirely encouraging. The manager’s decision to avoid the hot Japanese market (“weak financial discipline … insufficient discounts”) and cash reserves means that its performance so far in 2013 (decent absolute returns but weak relative returns) is predictable and largely unavoidable, given their discipline.

Bottom Line

This is not a fund that’s suited to everybody. Unless you share their passion for absolute value investing, hence their willingness to hold 30 or 40% of the portfolio in cash while a market roars ahead, you’re not well-matched with the FPA funds. FPA lends a fine pedigree to this fund, their first new offering in almost 20 years (they acquired Crescent in the early 1990s) and their first new fund launch in almost 30. While the FPIVX team has considerable autonomy, it’s clear that they also believe passionately in FPA’s absolute value orientation and are well-supported by their new colleagues. While FPIVX certainly will not spend every year in the top tier and will likely spend some years in the bottom one, there are few funds with brighter long-term prospects.

Fund website

FPAInternationalValue

2013 Q3 Report and Commentary

Fact Sheet

Artisan Global Value (ARTGX), May 2013 update

By David Snowball

This is an update of the fund profile originally published in 2008, and updated in May 2012. You can find that profile here.

Objective

The fund pursues long-term growth by investing in 30-50 undervalued global stocks. The managers look for four characteristics in their investments:

A high quality business
A strong balance sheet
Shareholder-focused management and
The stock selling for less than it’s worth.

Generally it avoids small cap caps. It can invest in emerging markets, but rarely does so though many of its multinational holdings derived significant earnings from emerging market operations. The managers can hedge their currency exposure, though they did not do so until the nuclear disaster in, and fiscal stance of, Japan forced them to hedge yen exposure in 2011.

Adviser

Artisan Partners, L.P. Artisan is a remarkable operation. They advise the twelve Artisan funds (the eleven retail funds plus an institutional emerging markets fund), as well as a number of separate accounts. The firm has managed to amass over $83 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. Five of the firm’s funds are closed to new investors, as of April 2013. Their management teams are stable and invest heavily in their own funds.

Managers

David Samra and Daniel O’Keefe. Both joined Artisan in 2002 after serving as analysts for the very successful Oakmark International, International Small Cap and Global funds. They co-manage the closed Artisan International Value (ARTKX) fund and oversee about $23.2 billion in total. Mr. O’Keefe was, for several years in the 90s, a Morningstar analyst. Morningstar designates Global Value as a five-star “Silver” fund and International Value as a five-star “Gold” fund, both as of March, 2013.

Management’s Stake in the Fund

Samra and O’Keefe each have more than $1 million invested in both funds, as is typical of the Artisan partners generally.

Opening date

December 10, 2007.

Minimum investment

$1,000 for regular and IRA accounts but the minimum is reduced to $50 for investors setting up an automatic investing plan. Artisan is one of a very few firms still willing to be so generous with small investors.

Expense ratio

1.30% for Investor shares. Under all the share classes, the fund manages $2 Billion. (As of June 2023).

Comments

I’m running out of reasons to worry about Artisan Global Value.

I have long been a fan of this fund. It was the first “new” fund to earn the “star in the shadows” designation. Its management team won Morningstar’s International-Stock Manager of the Year honors in 2008 and was a finalist for the award in 2011 and 2012. In announcing the 2011 nomination, Morningstar’s senior international fund analyst, William Samuel Rocco, observed:

Artisan Global Value has . . . outpaced more than 95% of its rivals since opening in December 2007. There’s a distinctive strategy behind these distinguished results. Samra and O’Keefe favor companies that are selling well below their estimates of intrinsic value, consider companies of all sizes, and let country and sector weightings fall where they may. They typically own just 40 to 50 names. Thus, both funds consistently stand out from their category peers and have what it takes to continue to outperform. And the fact that both managers have more than $1 million invested in each fund is another plus.

Since then, the story has just gotten better. Since inception, they’ve managed to capture virtually all of the market’s upside but only about two-thirds of its downside. It has a lower standard deviation over the past three and five years than does its peers. ARTGX has outperformed its peers in 75% of the months in which the global stock group lost money. Lipper designates it as a “Lipper Leader” in Total Return, Consistency and Preservation of Capital for every period they track. International Value and Global Value won three Lipper “best of” awards in 2013.

You might read all of their success in managing risk as an emblem of a fund willing to settle for second-tier returns. To the contrary, Global Value has crushed its competition: from inception through the end of April 2013, Global Value would have turned a $10,000 investment into $14,200. The average global stock fund would have turned $10,000 into … well, $10,000. They’ve posted above-average returns, sometimes dramatically above average, in every calendar year since launch and are doing it again in 2013 (at least through April).

We attribute that success to a handful of factors:

First, the managers are as interested in the quality of the business as in the cost of the stock. O’Keefe and Samra work to escape the typical value trap by looking at the future of the business – which also implies understanding the firm’s exposure to various currencies and national politics – and at the strength of its management team.

Second, the fund is sector agnostic. . . ARTGX is staffed by “research generalists,” able to look at options across a range of sectors (often within a particular geographic region) and come up with the best ideas regardless of industry. In designated ARTGX a “Star in the Shadows,” we concluded:

Third, they are consistently committed to their shareholder’s best interests. They chose to close the International Value fund before its assets base grew unmanageable. And they closed the Global Value strategy in early 2013 for the same reason. They have over $8 billion in separate accounts that rely on the same strategy as the mutual fund and those accounts are subject to what Mr. O’Keefe called “chunky inflows” (translation: the occasional check for $50, $100 or $200 million arrives). In order to preserve both the strategy’s strength and the ability of small investors to access it, they closed off the big money tap and left the fund open.

You might consider that a limited time offer and a durned fine one.

Bottom Line

We reiterate our conclusion from 2008, 2011 and 2012: “there are few better offerings in the global fund realm.”

Fund website

Artisan Global Value

Q3 Holdings (June 30, 2023)

Payden Global Low Duration Fund (PYGSX), May 2013

By David Snowball

Objective and Strategy

Payden Global Low Duration Fund seeks a high level of total return, consistent with preservation of capital, by investing in a wide variety of debt instruments and income-producing securities. Those include domestic and international sovereign and corporate debt, municipal bonds, mortgage- and asset-backed debt securities, convertible bonds and preferred stock. The maximum average maturity they envision is four years. Up to 35% of the portfolio might be investing in non-investment grade bonds (though the portfolio as a whole will remain investment grade) and up to 20% can be in equities. At least 40% will be non-US securities. The Fund generally hedges most of its foreign currency exposure to the U.S. dollar and is non-diversified.

Adviser

Payden & Rygel is a Los Angeles-based investment management firm which was established in 1983. The firm is owned by 20 senior executives. It has $85 billion in assets under management with $26 billion in “enhanced cash” products and $32 billion in low-duration ones as of March 31, 2013. In 2012, Institutional Investor magazine recognized them as a nation’s top cash-management and short-term fixed income investor. They advise 14 funds for non-U.S. investors (13 focused on cash or fixed income) and 18 U.S. funds (15 focused on cash or fixed income).

Managers

Mary Beth Syal, David Ballantine and Eric Hovey. As with the Manning & Napier or Northern Trust funds, the fund relies on the judgments of an institution-wide team with the named managers serving as the sort of “point people” for the fund. Ms. Syal is a managing principal, senior portfolio manager, and a member of the firm’s Investment Policy Committee. She directs the firm’s low duration strategies. Mr. Ballantine is a principal, a portfolio manager and develops investment strategies for short and intermediate-term fixed income portfolios. Both have been with the fund since inception. Mr. Hovey is a senior vice president and portfolio manager who specialty is in analyzing market opportunities and portfolio positioning.

Management’s Stake in the Fund

None. Two of the three managers said that their own asset allocation plans were heavily weighted toward equities.

Opening date

September 18, 1996.

Minimum investment

$5000, reduced to $2000 for tax-sheltered accounts and those set up with an AIP.

Expense ratio

0.53% after a waiver ending on February 28, 2024, on assets of $68 million.

Comments

Two things conspire against the widespread recognition of this fund’s long excellent record, and they’re both its name.

“Global” and “low duration” seems to create a tension in many investors’ minds. Traditionally, global has been a risk-on strategy and short-term bonds have represented a risk-off strategy. That mixed signal – is this a strategy to pursue when risk-taking is being rewarded or one to pursue when risk-aversion is called for – helps explain why so few investors have found their way here.

The larger problem caused by its name is Morningstar’s decision to assign the fund to the “world bond” group rather than the “short-term bond” group. The “world bond” group is dominated by intermediate-term bonds, which have a fundamentally different risk-return profile than does Payden. As a result of a demonstrably inappropriate peer group assignment, a very strong fund is made to look like a very mediocre one.

How mediocre? The fund’s overall star rating is two-stars and its rating has mostly ranged from one- to three-stars. That is, would be a very poor intermediate-term bond fund. How bad is the mismatch? The fact is that nothing about its portfolio’s sector composition, credit-quality profile or maturities is even close to the world bond group’s. More telling is the message from Morningstar’s calculation of the fund’s upside and downside capture ratios. They measure how the fund and its presumed act when their slice of the investing universe, in this case measured by the Barclays US Bond Aggregate Index, rises or falls. Here, by way of illustration, is the three-year number (as of 03/31/13):

	Upside capture	Downside capture
Payden Global Low	44	(28)
World bond group	100	134

When the U.S. bond market falls by 1%, the world bond group falls by 1.34% while Payden rises by 0.28%. At base, the Payden fund doesn’t belong in the world bond group – it is a fundamentally different creature, operating with a very different mission and profile.

What happens if you consider the fund as a short-term bond fund instead? It becomes one of the five best-performing funds in existence. Based solely on its five- and ten-year record, it’s one of the top ten no-load, retail funds in its class. If you extend the comparison from its inception to now, it’s one of the top five. The only funds with a record comparable or superior to Payden are:

Homestead Short-Term Bond (HOSBX)

Janus Short-Term Bond (JNSTX)

Vanguard Short Term Bond Index (VBISX)

Vanguard Short Term Investment-Grade (VFSTX)

There are a couple other intermediate-term bond funds that have recently shortened their interest rate exposures enough to be considered short-term, but since that’s a purely tactical move, we excluded them.

How might Payden be distinguished from other funds at the top of its class?

Its international stake is far higher. The fund invests at least 40% of its portfolio internationally, while it’s more distinguished competitors are in the 10-15% range. That becomes important if you assume, as many professionals do, that the long US bull market for bonds has reached its end. At that point, Payden’s ability to gain exposure to markets at different points in the interest rate cycle may give it a substantial advantage.
Its portfolio flexibility is more substantial. Payden has the freedom to invest in domestic, developed and emerging-markets debt, both corporate and sovereign, but also in high-yield bonds, asset- and mortgage-backed securities. Most of its peers are committed to the investment-grade portion of the market.
Its parent company specializes, and has specialized for decades, in low duration and international fixed-income investing. At $80 million, this fund represents 0.1% of the firm’s assets and barely 0.25% of its low-duration assets under management. Payden has a vast amount of experience in managing money in such strategies for institutions and other high net worth investors. Mary Beth Syal, the lead manager who has been with Payden since 1991, describes this as their “all-weather, global macro front-end (that is, short duration) portfolio.”

Are there reasons for caution? Because this is an assertive take on an inherently conservative strategy, there are a limited number of concerns worth flagging:

No one much at Payden and Rygel has been interested in investing in the fund. None of the managers have placed their money in the strategy nor has the firm’s founder, and only one trustee has a substantial investment in the fund. The research is pretty clear that funds with substantial manager and trustee investment are, on whole, better investments than those without. It’s both symbolically and practically a good thing to see managers tying their personal success directly to their investors’. That said, the fund has amassed an entirely admirable record.
The fund shifted focus somewhat in 2008. The managers describe the pre-2008 fund as much more “credit-focused” and the revised version as more global, perhaps more opportunistic and certainly more able to draw on a “full toolkit” of options and strategies.
The lack of a legitimate peer group will obligate investors to assess performance beyond the stars. With only a small handful of relatively global, relatively low duration competitors in existence and no closely-aligned Lipper or Morningstar peer group, the relative performance numbers and ratings in the media will continue to mislead. Investors will need to get comfortable with ignoring ill-fit ratings.

Bottom line

For a long time, fixed-income investing has been easy because every corner of the bond world has, with admirable consistency, gone up. Those days are past. In the years ahead, flexibility and opportunism coupled with experienced, disciplined management teams will be invaluable. Payden offers those advantages. The fund has a strong record, 4.5% annual returns over the past 17 years and a maximum drawdown of just 4.25% (during the 2008 market melt), a broad and stable management team and the resources of large analyst corps to draw upon. This surely belongs on the due-diligence list for any investor looking to take a step or two beyond the microscopic returns of cash-management funds.

Company website

Payden Global Low Duration

Fact Sheet

Oakseed Opportunity Fund (SEEDX), May 2013

By David Snowball

This fund has been liquidated.

Objective and Strategy

The fund will seek long term capital appreciation. While the prospectus notes that “the Fund will invest primarily in U.S. equity securities,” the managers view it as more of a go-anywhere operation, akin to the Oakmark Global and Acorn funds. They can invest in common and preferred stocks, warrants, ETFs and ADRs. The managers are looking for investments with three characteristics:

High quality businesses in healthy industries
Compelling valuations
Evidence that management’s interests are aligned with shareholders

They are hopeful of holding their investments for three to five years on average, and are intent on exploiting short-term market turbulence. The managers do have the option to using derivatives, primarily put options, to reduce volatility and strengthen returns.

Adviser

Jackson Park Capital, LLC was founded in late 2012 by Greg Jackson and John Park. The firm is based in Park City, Utah. The founders claim over 40 years of combined investment experience in managing mutual funds, hedge funds, and private equity funds.

Managers

Gregory L. Jackson and John H. Park. Mr. Jackson was a Partner at Harris Associates and co-manager of Oakmark Global (OAKGX) from 1999 – 2003. Prior to that, he works at Yacktman Asset Management and afterward he and Mr. Park were co-heads of the investment committee at the private equity firm Blum Capital. Mr. Park was Director of Research at Columbia Wanger Asset Management, portfolio manager of the Columbia Acorn Select Fund (LTFAX) from inception until 2004 and co-manager of the Columbia Acorn Fund (LACAX) from 2003 to 2004. Like Mr. Jackson, he subsequently joined Blum Capital. The Oakmark/Acorn nexus gave rise to the Oakseed moniker.

Management’s Stake in the Fund

Mr. Park estimates that the managers have $8-9 million in the fund, with plans to add more when they’re able to redeem their stake in Blum Capital. Much of the rest of the money comes from their friends, family, and long-time investors. In addition, Messrs. Jackson and Park own 100% of Jackson Park.

Opening date

December 31, 2012.

Minimum investment

$2500 for regular accounts, $1000 for various tax-deferred accounts and $100 for accounts set up with an AIP.

Expense ratio

1.41% after waivers on assets of $40 million (as of March, 2013). Morningstar inexplicably assigns the fund an expense ratio of 0.00%, which they correctly describe as “low.”

Comments

If you’re fairly sure that creeping corporatism – that is, the increasing power of marketers and folks more concerned with asset-gathering than with excellence – is a really bad thing, then you’re going to discover that Oakseed is a really good one.

Oakseed is designed to be an opportunistic equity fund. Its managers are expected to be able to look broadly and go boldly, wherever the greatest opportunities present themselves. It’s limited by neither geography, market cap nor stylebox. John Park laid out its mission succinctly: “we pursue the maximum returns in the safest way possible.”

It’s entirely plausible that Messrs. Park and Jackson will be able to accomplish that goal.

Why does that seem likely? Two reasons. First, they’ve done it before. Mr. Park managed Columbia Acorn Select from its inception through 2004. Morningstar analyst Emily Hall’s 2003 profile of the fund was effusive about the fund’s ability to thrive in hard times:

This fund proved its mettle in the bear market. On a relative basis (and often on an absolute basis), it was a stellar performer. Over the trailing three years through July 22 [2003], its 7.6% annualized gain ranks at the top of the mid-growth category.

Like all managers and analysts at Liberty Acorn, this fund’s skipper, John Park, is a stickler for reasonably priced stocks. As a result, Park eschews expensive, speculative fare in favor of steadier growth names. That practical strategy was a huge boon in the rough, turn-of-the-century environment, when investors abandoned racier technology and health-care stocks.

They were openly mournful of the fund’s prospects after his departure. Their 2004 analysis began, “Camel, meet straw.” Greg Jackson’s work with Oakmark Global was equally distinguished, but there Morningstar saw enough depth in the management ranks for the fund to continue to prosper. (In both cases they were right.) The strength of their performance led to an extended recruiting campaign, which took them from the mutual fund work and into the world of private equity funds, where they (and their investors) also prospered.

Second, they’re not all that concerned about attracting more money. They started this fund because they didn’t want to do marketing, which was an integral and time consuming element of working with a private equity fund. Private equity funds are cyclical: you raise money from investors, you put it to work for a set period, you liquidate the fund and return all the money, then begin again. The “then begin again” part held no attraction to them. “We love investing and we could be perfectly happy just managing the resources we have now for ourselves, our families and our friends – including folks like THOR Investment who have been investing with us for a really long time.” And so, they’ve structured their lives and their firm to allow them to do what they love and excel at. Mr. Park described it as “a virtual firm” where they’ve outsourced everything except the actual work of investing. And while they like the idea of engaging with prospective investors (perhaps through a summer conference call with the Observer’s readers), they won’t be making road trips to the East Coast to rub elbows and make pitches. They’ll allow for organic growth of the portfolio – a combination of capital appreciation and word-of-mouth marketing – until the fund reaches capacity, then they’ll close it to new investors and continue serving the old.

A quirk of timing makes the fund’s 2013 returns look tepid: my Morningstar’s calculation (as of April 30), they trail 95% of their peers. Look closer, friends. The entire performance deficit occurred on the first day of the year and the fund’s first day of existence. The market melted up that day but because the fund’s very first NAV was determined after the close of business, they didn’t benefit from the run-up. If you look at returns from Day Two – present, they’re very solid and exceptional if you account for the fund’s high cash stake and the managers’ slow, deliberate pace in deploying that cash.

Bottom Line

This is going to be good. Quite possibly really good. And, in all cases, focused on the needs of its investors and strengths of its managers. That’s a rare combination and one which surely warrants your attention.

Fund website

Oakseed Funds. Mr. Park mentioned that neither of them much liked marketing. Uhhh … it shows. I know the guys are just starting out and pinching pennies, but really these folks need to talk with Anya and Nina about a site that supports their operations and informs their (prospective) investors.

Update: In our original article, we noted that the Oakseed website was distressingly Spartan. After a round of good-natured sparring, the guys launched a highly functional, visually striking new site. Nicely done

Fact Sheet

May 2013, Funds in Registration

By David Snowball

AQR Long-Short Equity Fund

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

AQR Managed Futures Strategy HV Fund

AQR Managed Futures Strategy HV Fund will pursue positive absolute returns. They intend to execute a momentum-driven, long/short strategy that allows them to invest in “developed and emerging market equity index futures, swaps on equity index futures and equity swaps, global developed and emerging market currency forwards, commodity futures, swaps on commodity futures, global developed fixed income futures, bond futures and swaps on bond futures.” They thoughtfully note that the “HV” in the fund name stands for “higher volatility.” The fund will be managed by John M. Liew (Ph.D!), Brian K. Hurst and Yao Hua Ooi (what a cool name), who all co-manage other AQR funds. Expenses are not yet set. The minimum initial investment for “N” Class shares is $1,000,000 but several AQR funds have been available through fund supermarkets for a $2500 investment.

Barrow SQV Hedged All Cap Fund

Barrow SQV Hedged All Cap Fund will seek to generate above-average returns through capital appreciation, while reducing volatility and preserving capital during market downturns. The plan is to use their Systematic Quality Value discipline to identify 150-250 long and the same number of short positions. The fund will be managed by Nicholas Chermayeff and Robert F. Greenhill, who have been managing separate accounts using this strategy since 2009. The prospectus provides no evidence of their success with the strategy. Neither expenses nor the minimum initial investment are yet set.

Barrow SQV Long All Cap Fund

Barrow SQV Long All Cap Fund will seek long-term capital appreciation. The plan is to use their Systematic Quality Value discipline to identify 150-250 spiffy stocks. The fund will be managed by Nicholas Chermayeff and Robert F. Greenhill, who have been managing separate accounts using this strategy since 2009. The prospectus provides no evidence of their success with the strategy. Neither expenses nor the minimum initial investment are yet set.

Calamos Long /Short Fund

Calamos Long /Short Fund will pursue long term capital appreciation. Here’s the secret plan: the fund will take “long positions in companies that are expected to outperform the equity markets, while taking short positions in companies that are expected to underperform the equity markets.” They’ll focus on US what they describe as mid- to large-cap US stocks, though their definition of midcap encompasses most of the small cap space. And they might put up to 40% in international issues. The fund will be managed by John P. Calamos, Sr., Gary D. Black and Brendan Maher. While one can’t say for sure that this is Mr. Black’s fund, he did file for – but not launch – just such a fund in the period between being excused from Janus and being hired by Calamos. Expenses ranged from 2.90 – 3.65%, depending on share class. The minimum initial investment is $2500.

Gratry International Growth Fund

Gratry International Growth Fund will seek long-term capital appreciation by investing in an international, large cap stock portfolio. Nothing special about their discipline is apparent except that they seem intent on building the portfolio around ADRs and ETFs. The fund will be managed by a team headed by Jerome Gratry. Expenses are not yet set. The minimum initial investment is $2500.

M.D. Sass Equity Income Plus Fund

M.D. Sass Equity Income Plus Fund seeks to generate income as well as capital appreciation, while emphasizing downside protection. The plan is to buy 25-50 large cap, dividend-paying stocks and and then sell covered calls to generate income. The managers have the option of buying puts for downside protection and they claim an “absolute return” focus. Martin D. Sass, CIO and CEO of M.D. Sass, will manage the fund. The expense ratio for the Retail class is 1.25% and the minimum initial investment is $2500.

RiverPark Structural Alpha Fund

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

Schroder Emerging Markets Multi-Cap Equity Fund

Schroder Emerging Markets Multi-Cap Equity Fund seeks long-term capital growth by investing primarily in equity securities of companies in emerging market countries. They’re looking for companies which are high quality, cheap, or both. The fund will be managed by a team headed by Justin Abercrombie, Head of Quantitative Equity Products. Expenses are not yet set. The minimum initial investment for Advisor Class shares is $2500.

Schroder Emerging Markets Multi-Sector Bond Fund

Schroder Emerging Markets Multi-Sector Bond Fund seeks to provide “a return of capital growth and income.” After a half dozen readings that phrase still doesn’t make any sense: “a return of capital growth”?? They have the freedom to invent in a daunting array of securities: corporate and government bonds, asset- or mortgage-backed securities, zero-coupon securities, convertible securities, inflation-indexed bonds, structured notes, event-linked bonds, and loan participations, delayed funding loans and revolving credit facilities, and short-term investments. The fund will be managed by Jim Barrineau, Fernando Grisales, Alexander Moseley and Christopher Tackney. Expenses are not yet set. The minimum initial investment for Advisor Class shares is $2500.

Segall Bryant & Hamill All Cap Fund

Segall Bryant & Hamill All Cap Fund will seek long-term capital appreciation by investing in a small-cap stock portfolio. Nothing special about their discipline is apparent. The fund will be managed by Mark T. Dickherber. Expenses are not yet set. The minimum initial investment is $2500.

Segall Bryant & Hamill Small Cap Value Fund

Segall Bryant & Hamill Small Cap Value Fund will seek long-term capital appreciation by investing in an all-cap stock portfolio. Nothing special about their discipline is apparent. The fund will be managed by Mark T. Dickherber. Expenses are not yet set. The minimum initial investment is $2500.

SilverPepper Commodities-Based Global Macro Fund

SilverPepper Commodities-Based Global Macro Fund will seek “returns that are largely uncorrelated with the returns of the general stock, bond, currency and commodities markets.” The plan is to maintain a global, long-short, all-asset portfolio constructed around the sub-advisers determination of likely commodity prices. The fund will be managed by Renee Haugerud, Chief Investment Officer at Galtere Ltd, which specializes in managing commodities-based investment strategies, and Geoff Fila, an Associate Portfolio Manager. The expenses are not yet set (though they do stipulate a bunch of niggling little fees) and the minimum investment for the Advisor share class is $5,000.

SilverPepper Merger Arbitrage Fund

SilverPepper Merger Arbitrage Fund wants to “create returns that are largely uncorrelated with the returns of the general stock market” through a fairly conventional merger arbitrage strategy. The fund will be managed by Jeff O’Brien, Managing Member of Glenfinnen Capital, LLC, and Daniel Lancz, its Director of Research. Glenfinnen specializes in merger-arbitrage investing and their merger arbitrage hedge fund, managed by the same folks, seems to have been ridiculously successful. The expenses are not yet set and the minimum investment for the Advisor share class is $5,000.

TCW Emerging Markets Multi-Asset Opportunities Fund

TCW Emerging Markets Multi-Asset Opportunities Fund will pursue current income and long-term capital appreciation. The plan is to invest in emerging markets stocks and bonds, including up to 15% illiquid securities and possible defaulted securities. The fund will be managed by Penelope D. Foley and David I. Robbins, Group Managing Directors of TCW. Expenses are not yet set. The minimum initial investment is $2000, reduced to $500 for IRAs.

Toews Unconstrained Fixed Income Fund

Toews Unconstrained Fixed Income Fund will look for long-term growth of capital and, if possible, limiting risk during unfavorable market conditions. It’s another “trust me” fund: they’ll be exposed to somewhere between -100% and 125% of the global fixed-income and alternative fixed-income market. As a kicker, it will be non-diversified. The fund will be managed by Phillip Toews and Randall Schroeder. There’s no record available to me that suggests these folks have successfully executed this strategy, even in their private accounts. There only other public fixed-income offering (hedged high yield) is undistinguished. Expenses are not yet set. The minimum initial investment is $10,000, though the prospectus places [10,000] in square brackets as if they’re not quite sure of the matter yet. “Unconstrained” is an increasingly popular designation. This is the 13^th (lucky them!) unconstrained income fund to launch.

Visium Catalyst Event Driven Fund

Visium Catalyst Event Driven Fund will pursue capital growth while maintaining a low correlation to the U.S. equity markets. The plan is to pursue a sort of arbitrage strategy involved both long and short positions, in both equities and debt, both foreign and domestic, of companies that they believe will be impacted by pending or anticipated corporate events. “Corporate events” are things like mergers, acquisitions, spin-offs, bankruptcy restructurings, stock buybacks, industry consolidations, large capital expenditure programs, significant management changes, and self-liquidations (great, corporate suicides). The mutual fund is another converted hedge fund. The hedge fund, with the same managers, has been around since January 2001. Its annual return since inception is 3.48% while the S&P returned 2.6%. That’s a substantial advantage for a low correlation/low volatility strategy. The fund will be managed by Francis X. Gallagher and Peter A. Drippé. Expenses, after waivers, will be 2.04%. The minimum initial investment is $2500.

Whitebox Market Neutral Equity Fund, Investor Class (WBLSX), April 2013

By David Snowball

Update: This fund has been liquidated.

Objective and Strategy

The fund seeks to provide investors with a positive return regardless of the direction and fluctuations of the U.S. equity markets by creating a market neutral portfolio designed to exploit inefficiencies in the markets. While they can invest in stocks of any size, they anticipate a small- to mid-cap bias. The managers advertising three reasons to consider the fund:

Downside Management: they seek to limit exposure to downside risk by running a beta neutral portfolio (one with a target beta of 0.2 to minus 0.2 which implies a net equity exposure of 20% to minus 20%) designed to capitalize on arbitrage opportunities in the equity markets.

Portfolio Diversification: they seek to generate total return that is not correlated to traditional asset classes and offers portfolio diversification benefits.

Experienced, Talented Investment Team: The team possess[es] decades of experience investing in long short equity strategies for institutional investors.

Morningstar analysis of their portfolio bears no resemblance to the team’s description of it (one short position or 198? 65% cash or 5%?), so you’ll need to proceed with care and vigilance. Unlike many of its competitors, this is not a quant fund.

Adviser

Whitebox Advisors LLC, a multi-billion dollar alternative asset manager founded in 2000. Whitebox manages private investment funds (including Credit Arbitrage, Small Cap L/S Equity, Liquid L/S Equity, Special Opportunities and Asymmetric Opportunities), separately managed accounts and the two (soon to be three) Whitebox funds. As of January 2012, they had $2.3 billion in assets under management (though some advisor-search sites have undated $5.5 billion figures).

Manager

Andrew Redleaf, Jason E. Cross, Paul Karos and Kurt Winters. Mr. Redleaf founded the advisor, has deep hedge fund experience and also manages Whitebox Tactical Opportunities. Dr. Cross has a Ph.D. in Statistics, had a Nobel Laureate as an academic adviser and published his dissertation in the Journal of Mathematical Finance. Together they also manage a piece of Collins Alternative Solutions (CLLIX). Messrs. Karos and Winters are relative newcomers, but both have substantial portfolio management experience.

Management’s Stake in the Fund

Not yet reported but, as of 12/31/12, Whitebox and the managers owned 42% of fund shares and the Redleaf Family Foundation owned 6.5% Mr. Redleaf also owns 85% of the advisor.

Opening date

November 01, 2012 but The Fund is the successor to Whitebox Long Short Equity Partners, L.P., a private investment company managed by the Adviser from June, 2004 through October, 2012.

Minimum investment

$5000, reduced to $1000 for IRAs.

Expense ratio

1.95% after waivers on assets of $17 million (as of March, 2013). The “Investor” shares carry a 4.5% front-end sales load, the “Advisor” shares do not.

Comments

Here’s the story of the Whitebox Long Short Equity fund, in two pictures.

Picture One, what you see if you include the fund’s performance when it was a hedge fund:

Picture Two, what you see if you look only at its performance as a mutual fund:

The divergence between those two graphs is striking and common. There are lots of hedge funds – the progenitors of Nakoma Absolute Return, Baron Partners, RiverPark Long Short Opportunities – which offered mountainous chart performance as hedge funds but whose performance as a mutual fund was somewhere between “okay” and “time to turn out the lights and go home.” The same has been true of some funds – for example, Auer Growth and Utopia Core – whose credentials derive from the performance of privately-managed accounts. Similarly, as the Whitebox managers note, there are lots of markets in which their strategy will be undistinguished.

So, what do they do? They operate with an extremely high level of quantitative expertise, but they are not a quant fund (that’s the Whitebox versus “black box” distinction). We know that there are predictable patterns of investor irrationality (that’s the basis of behavioral finance) and that those investor preferences can shift substantially (for example, between obsessions with greed and fear). Whitebox believes that those irrationalities continually generate exploitable mispricings (some healthy firms or sound sectors priced as if bankruptcy is imminent, others priced as if consumers are locked into an insane spending binge). Whitebox’s models attempt to identify which factors are currently driving prices and they assign a factor score to stocks and sectors.

Whitebox does not, however, immediately act on those scores. Instead, they subject the stocks to extensive, fundamental analysis. They’re especially sensitive to the fact that quant outputs become unreliable in suddenly unstable markets, and so they’re especially vigilant in such markets are cast a skeptical eye on seemingly objective, once-reliable outputs.

They believe that the strengths of each approach (quant and fundamental, machine and human) can be complementary: they discount the models in times of instability but use it to force their attention on overlooked possibilities otherwise.

They tend assemble a “beta neutral” portfolio, one that acts as if it has no exposure to the stock market’s volatility. They argue that “risk management … is inseparable from position selection.” They believe that many investors mistakenly seek out risky assets, expecting that higher risk correlates with higher returns. They disagree, arguing that they generate alpha by limiting beta; that is, by not losing your money in the first place. They’re looking for investments with asymmetric risks: downside that’s “relatively contained” but “a potentially fat tailed” upside. Part of that risk management comes from limits on position size, sector exposure and leverage. Part from daily liquidity and performance monitoring.

Whitebox will, the managers believe, excel in two sorts of markets. Their discipline works well in “calm, stable markets” and in the recovery phase after “pronounced market turmoil,” where prices have gotten seriously out-of-whack. The experience of their hedge fund suggests that they have the ability to add serious alpha: from inception, the fund returned about 14% per year while the stock market managed 2.5%.

Are there reasons to be cautious? Yep. Two come to mind:

The fund is expensive. After waivers, retail investors are still paying nearly 2% plus a front load of 4.5%. While that was more than offset by the fund’s past returns, current investors can’t buy past returns.
Some hedge funds manage the transition well, others don’t. As I noted above, success as a hedge fund – even sustained success as a hedge fund – has not proven to be a fool-proof predictor of mutual fund success. The fund’s slightly older sibling, Whitebox Tactical Opportunities (WBMAX) has provided perfectly ordinary returns since inception (12/2011) and weak ones over the past 12 months. That’s not a criticism, it’s a caution.

Bottom Line

There’s no question that the managers are smart, successful and experienced hedge fund investors. Their writing is thoughtful and their arguments are well-made. They’ve been entrusted with billions of other people’s money and they’ve got a huge personal stake – financial and otherwise – in this strategy. Lacking a more sophisticated understanding of what they’re about and a bit concerned about expenses, I’m at best cautiously optimistic about the fund’s prospects.

Fund website

Whitebox Market Neutral Equity Fund. (The Whitebox homepage is just a bit grandiose, so it seems better to go straight to the fund’s page.)

Fact Sheet

The Cook & Bynum Fund (COBYX), April 2013

By David Snowball

This is an update of the fund profile originally published in August 2012. You can find that profile here.

Objective and Strategy

COBYX pursues the long-term growth of capital. They do that by assembling an exceedingly concentrated global stock portfolio. The stocks in the portfolio must meet four criteria.

Circle of Competence: they only invest in businesses “whose economics and future prospects” they can understand.
Business: they only invest in “wide moat” firms, those with sustainable competitive advantages.
People: they only invest when they believe the management team is highly competent (perhaps even crafty) and trustworthy.
Price: they only buy shares priced at a substantial discount – preferably 50% – to their estimate of the share’s true value.

Within those confines, they can invest pretty much anywhere and in any amount.

Adviser

Cook & Bynum Capital Management, LLC, an independent, employee-owned money management firm established in 2001. The firm is headquartered in Birmingham, Alabama. It manages COBYX and two other “pooled investment vehicles.” As of March 2013, the adviser had approximately $250 million in assets under management.

Manager

Richard Cook and Dowe Bynum. Messrs Cook and Bynum are the principals and founding partners of Cook & Bynum and have managed the fund since its inception. They have a combined 23 years of investment management experience. Mr. Cook previously managed individual accounts for Cook & Bynum Capital Management, which also served as a subadviser to Gullane Capital Partners. Prior to that, he worked for Tudor Investment Corp. in Greenwich, CT. Mr. Bynum also managed individual accounts for Cook & Bynum. Previously, he’d worked as an equity analyst at Goldman Sachs & Co. in New York. They work alone and also manage around $150 million in two other accounts.

Management’s Stake in the Fund

As of September 30, 2012, Mr. Cook had between $100,000 and $500,000 invested in the fund, and Mr. Bynum has between $500,000 and $1,000,000 invested. They also invest in their private account which has the same fee structure and approach as the mutual fund. They describe this as “substantially all of our liquid net worth.”

Opening date

July 1, 2009. The fund is modeled on a private fund which the team has run since August 2001.

Minimum investment

$5,000 for regular accounts and $1,000 for IRA accounts.

Expense ratio

1.49%, after waivers, on assets of $71 million, as of July 2023. There’s also a 2% redemption fee for shares held less than 60 days.

Comments

Messrs. Cook and Bynum are concentrated value investors in the tradition of Buffett and Munger. They’ve been investing since before they were teens and even tried to start a mutual fund with $200,000 in seed money while they were in college. Within a few years after graduating college, they began managing money professionally, Cook with a hedge fund and Bynum at Goldman Sachs. Now in their mid 30s, they’re managing a five star fund.

Their investment discipline seems straightforward: do what Warren would do. Focus on businesses and industries that you understand, invest only with world-class management teams, research intensely, wait for a good price, don’t over-diversify, and be willing to admit your mistakes.

Their discipline led to the construction of a very distinctive portfolio. They’ve invested in just seven stocks (as of 12/31/12) and hold about 34% in cash. There are simply no surprises in the list:

	Business	% of portfolio	Date first purchased – the fund opened in 2009
Microsoft	Largest software company	16.6	12/2010
Wal-Mart Stores	Largest retailer	15.8	06/2010
Berkshire Hathaway Cl B	Buffet’s machine	11.4	09/2011
Arca Continental, S.A.B. de C.V.	Mexico Coca-Cola bottler/distributor	8.7	12/2010
Tesco PLC	U.K. grocer	5.7	06/2012
Procter & Gamble	Consumer products	4.8	12/2010
Coca-Cola	Soft drink manufacturer and distributor	4.4	12/2009

Since our first profile of the fund, one stock (Kraft) departed and no one was added.

American investors might be a bit unfamiliar with the fund’s two international holdings (Arca is a large Coca-Cola bottler serving Latin America and Tesco is the world’s third-largest retailer) but neither is “an undiscovered gem.”

With so few stocks, there’s little diversification by sector (60% of the fund is “consumer defensive” stocks) or size (85% are mega-caps). Both are residues of bottom-up stock picking (that is, the stocks which best met C&B’s criteria were consumer-oriented multinationals) and are of no concern to the managers who remain agnostic about such external benchmarks. The fund’s turnover ratio, which might range around 10-25%, is low but not stunningly low.

The managers have five real distinctions.

The guys are willing to look stupid. There are times, as now, when they can’t find stocks that meet their quality and valuation standards. The rule for such situations is simply: “When compelling opportunities do not exist, it is our obligation not to put capital at risk.” They happily admit that other funds might well reap short-term gains by running with the pack, but you “have to be willing to look stupid.”
The guys are not willing to be stupid. Richard and Dowe grew up together and are comfortable challenging each other. Richard knows the limits of Dowe’s knowledge (and vice versa), “so we’re less likely to hold hands and go off the cliff together.” In order to avoid that outcome, they spend a lot of time figuring out how not to be stupid. They relegate some intriguing possibilities to the “too hard pile,” those businesses that might have a great story but whose business model or financials are simply too hard to forecast with sufficient confidence. They think about common errors (commitment bias, our ability to rationalize why we’re not going to stop doing something once we’ve started, chief among them) and have generated a set of really interesting tools to help contain them. They maintain, for example, a list all of the reasons why they we don’t like their current holdings. In advance of any purchase, they list all of the conditions under which they’d quickly sell (“if their star CEO leaves, we do too”) and keep that on top of their pile of papers concerning the stock.
They’re doing what they love. Before starting Cook & Bynum (the company), both of the guys had high-visibility, highly-compensated positions in financial centers. Richard worked for Tudor Investments in Stamford, CT, while Dowe was with Goldman, Sachs in New York. The guys believe in a fundamental, value- and research-driven, stock-by-stock process. What they were being paid to do (with Tudor’s macro event-driven hedge fund strategies for Richard) was about as far from what they most wanted as they could get. And so they quit, moved back to Alabama and set up their own shop to manage their own money and the investments of high net-worth individuals. They created Cook & Bynum (the fund) in response to an investor’s request for a product accessible to family and friends.
They do prodigious research without succumbing to the “gotta buy something” impulse. While they spend the majority of their time in their offices, they’re also comfortable with spending two or three weeks at a time on the road. Their argument is that they’ve got to understand the entire ecosystem in which a firm operates – from the quality of its distribution network to the feelings of its customers – which they can only do first-hand. Nonetheless, they’ve been pretty good at resisting “deal momentum.” They spent, for example, some three weeks traveling around Estonia, Poland and Hungary. Found nothing compelling. Traveled Greece and Turkey and learned a lot, including how deeply dysfunctional the Greek economy is, but bought nothing.
They’re willing to do what you won’t. Most of us profess a buy low / buy the unloved / break from the herd / embrace our inner contrarian ethos. And most of us are deluded. Cook and Bynum seem rather less so: they’re holding cash now while others buy stocks after the market has doubled and profits margins hit records but in the depth of the 2008 meltdown they were buyers. (They report having skipped Christmas presents in 2008 in order to have extra capital to invest.) As the market bottomed in March 2009, the fund was down to 2% cash.

The fund’s risk-return profile has been outstanding. At base, they have managed to produce almost all of the market’s upside with barely one-third of its downside. They will surely lag when the stock market turns exuberant, as they have in the first quarter of 2013. The fund returned 5.6% in the first quarter of 2013. That’s a remarkably good performance (a) in absolute terms, (b) in relation to Morningstar’s index of highest-quality companies, the Wide Moat Focus 20, and (c) given a 34% cash stake. It sucks relative to everything else.

Here’s the key question: why would you care? If the answer is, “I could have made more money elsewhere,” then I suppose you should go somewhere else. The managers seem to be looking for two elusive commodities. One is investments worth pursuing. They are currently finding none. The other is investing partners who share their passion for compelling investments and their willingness to let other investors charge off in a herd. If you’re shaken by one quarter, or two or three, of weak relative performance, you shouldn’t be here. You should join the herd; they’re easy to find and reassuring in their mediocrity.

Bottom Line

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

Fund website

The Cook & Bynum Fund. The C&B website was recently recognized as one of the two best small fund websites as part of the Observer’s “Best of the Web” feature.

2023 Semi-Annual Report