Category Archives: Funds

Funds in Registration, July 2016

By David Snowball

Anchor Alternative Equity Fund

Anchor Alternative Equity Fund will pursue total with a secondary objective of limiting risk. It will be a long/short fund-of-funds investing in ETFs and mutual funds.  Here’s the key phrase: “The Fund primarily takes long and short positions in securities that are highly correlated to major US equity indices based on long, intermediate, and short term trends.” The fund will be managed by Garrett Waters of Anchor Capital Management. The initial expense ratio is 2.77%. The minimum initial investment is $2,500.

Anchor Tactical Real Estate Fund

Anchor Tactical Real Estate Fund will pursue above average total returns over a full market cycle with lower correlation and reduced risk when compared to traditional real estate indexes. It will be a long/short fund-of-funds investing in ETFs and mutual funds.  They’ll invest in real estate funds based on their analysis of trends, with the prospect of hedging against broad market declines with short ETFs. The fund will be managed by Garrett Waters of Anchor Capital Management. The initial expense ratio is 3.10%. The minimum initial investment is $2,500.

Cornerstone Core Plus Bond

Cornerstone Core Plus Bond will pursue total return, consisting of current income and capital appreciation.  The plan is to farm the work out to 12 people representings several different famous firms. The initial expense ratio is 0.49%. The minimum initial investment is $2,000 but it’s available only “to certain advisory clients of the Adviser.”

Low Beta Tactical 500 Fund

Low Beta Tactical 500 Fund will seek to outperform the S&P 500 with lower volatility than the Index.  The plan is to invest either in S&P 500 ETFs or cash based on “tactical research, analysis and evaluation regarding market trends.” The fund will be managed by Thomas Moring of LGM Capital Management. The initial expense ratio is 1.95%. The minimum initial investment hasn’t been disclosed.

Schwab Target 2060 Fund

Schwab Target 2060 Fund will pursue capital appreciation and income by investing in other Schwab and Laudus Funds.  Zifan Tang, Ph.D., CFA, a Managing Director and Head of Schwab’s Asset Allocation Strategies, is responsible for all the funds in the series. The expense ratios have not yet been released. Ironically, the funds do not carry 12b-1 fees, which are usually the price for getting carried on the Schwab platform. The funds are only open to institutional investors but for those investors the minimum investment is $100.

Schwab Target Date Index Funds

Schwab Target Date Index Fund will pursue “capital appreciation and income consistent with its current asset allocation.” These will be funds-of-ETFs which equity exposure ranging from 95% (2060) to about 40% (2010).  Zifan Tang, Ph.D., CFA, a Managing Director and Head of Schwab’s Asset Allocation Strategies, is responsible for all the funds in the series. The expense ratios have not yet been released. Ironically, the funds do not carry 12b-1 fees, which are usually the price for getting carried on the Schwab platform. The funds are only open to institutional investors but for those investors the minimum investment is $100.

Aston/River Road Independent Value (ARIVX)

By David Snowball

Update: This fund has been liquidated.

This fund was previously profiled in September 2012. You can find that profile here.

Objective

The fund seeks to provide long-term total return by investing in common and preferred stocks, convertibles and REITs. The manager attempts to invest in high quality, small- to mid-cap firms (those with market caps between $100 million and $5 billion). He thinks of himself as having an “absolute return” mandate, which means an exceptional degree of risk-consciousness. He’ll pursue the same style of investing as in his previous charges, but has more flexibility than before because this fund does not include the “small cap” name.

Adviser

Aston Asset Management, LP. It’s an interesting setup. Aston oversees 24 funds with $9.3 billion in assets, and is a subsidiary of the Affiliated Managers Group. River Road Asset Management LLC subadvises six Aston funds; i.e., provides the management teams. River Road, founded in 2005, oversees $6.1 billion and was acquired by AMG in 2014. River Road also manages seven separate account strategies, including the Independent Value strategy used here.

Manager

Eric Cinnamond. Mr. Cinnamond is a Vice President and Portfolio Manager of River Road’s independent value investment strategy. Mr. Cinnamond has 23 years of investment industry experience. Mr. Cinnamond managed the Intrepid Small Cap (ICMAX) fund from 2005-2010 and Intrepid’s small cap separate accounts from 1998-2010. He co-managed, with Nola Falcone, Evergreen Small Cap Equity Income from 1996-1998.

Management’s Stake in the Fund

Mr. Cinnamond has invested between $500,000 – $1,000,000 in the fund.

Strategy capacity

Mr. Cinnamond anticipates a soft close at about a billion. The strategy has $450 million in assets, which hot money drove close to a billion during the last market crisis.

Opening date

December 30, 2010.

Minimum investment

$2,000 for regular accounts, $1000 for various sorts of tax-advantaged products (IRAs, Coverdells, UTMAs).

Expense ratio

1.42%, after waivers, on $410 million in assets.

Comments

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

This fund’s first incarnation appeared in 1996, as the Evergreen Small Cap Equity Income fund. Mr. Cinnamond had been hired by First Union, Evergreen’s advisor, as an analyst and soon co-manager of their small cap separate account strategy and fund. The fund grew quickly, from $5 million in ’96 to $350 million in ’98. It earned a five-star designation from Morningstar and was twice recognized by Barron’s as a Top 100 mutual fund.

In 1998, Mr. Cinnamond became engaged to a Floridian, moved south and was hired by Intrepid (located in Jacksonville Beach, Florida) to replicate the Evergreen fund. For the next several years, he built and managed a successful separate accounts portfolio for Intrepid, which eventually aspired to a publicly available fund.

The fund’s second incarnation appeared in 2005, with the launch of Intrepid Small Cap (now called Intrepid Endurance, ICMAX). In his five years with the fund, Mr. Cinnamond built a remarkable record which attracted $700 million in assets and earned a five-star rating from Morningstar and a Lipper Leader for total returns and capital preservation. If you had invested $10,000 at inception, your account would have grown to $17,300 by the time he left. Over that same period, the average small cap value fund lost money.

The fund’s third incarnation appeared on the last day of 2010, with the launch of Aston / River Road Independent Value (ARIVX). While ARIVX is run using the same discipline as its predecessors, Mr. Cinnamond intentionally avoided the “small cap” name. While the new fund will maintain its historic small cap value focus, he wanted to avoid the SEC stricture which would have mandated him to keep 80% of assets in small caps.

Over an extended period, Mr. Cinnamond’s small cap composite (that is, the weighted average of the separately managed accounts under his charge over the past 20 years) has returned 10% per year to his investors. That figure understates his stock picking skills, since it includes the low returns he earned on his often-substantial cash holdings.

The key to Mr. Cinnamond’s performance (which, Morningstar observed, “trounced nearly all equity funds”) is achieved, in his words, “by not making mistakes.” He articulates a strong focus on absolute returns; that is, he’d rather position his portfolio to make some money, steadily, in all markets, rather than having it alternately soar and swoon. There seem to be three elements involved in investing without mistakes:

  • Buy the right firms.
  • At the right price.
  • Move decisively when circumstances demand.

All things being equal, his “right” firms are “steady-Eddy companies.” They’re firms with look for companies with strong cash flows and solid operating histories. Many of the firms in his portfolio are 50 or more years old, often market leaders, more mature firms with lower growth and little debt.

His judgment, as of early 2016, is that virtually any new investments in his universe – which requires both high business quality and low stock prices – would be a mistake. He writes:

As a result of extremely expensive small cap valuations, especially in higher quality small cap stocks, the Independent Value Portfolio maintains its very contrarian positioning. Cash is near record levels, while expensive, high quality small cap holdings have been sold. We expect our unique, but disciplined, positioning to cause the Portfolio to continue to look and perform very differently than the market and its peers.

… we do not believe the current market cycle will continue indefinitely. We feel we are positioned well for the end of the current cycle and the inevitable return to more rational and justifiable equity valuations. As disciplined value investors, we have not strayed from our valuation practices and investment discipline. We continue to require an adequate return for risk assumed on each stock we consider for purchase, and will not invest your (and our) capital simply for the sake of being invested.

He’s at 85% cash currently (late April 2016), but that does not mean he’s some sort of ultra-cautious perma-bear. He has moved decisively to pursue bargains when they arise. “I’m willing to be aggressive in undervalued markets,” he says. For example, his fund went from 0% energy and 20% cash in 2008 to 20% energy and no cash at the market trough in March, 2009. Similarly, his small cap composite moved from 40% cash to 5% in the same period. That quick move let the fund follow an excellent 2008 (when defense was the key) with an excellent 2009 (where he was paid for taking risks). The fund’s 40% return in 2009 beat his index by 20 percentage points for a second consecutive year. As the market began frothy in 2010 (“names you just can’t value are leading the market,” he noted), he began to let cash build. While he found a few pockets of value in 2015 (he surprised himself by buying gold miners, something he’d never done), prices rose so quickly that he needed to sell.

The argument against owning is captured in Cinnamond’s cheery declaration, “I like volatility.” Because he’s unwilling to overpay for a stock, or to expose his shareholders to risk in an overextended market, he sidelines more and more cash which means the fund lags in extended rallies. But when stocks begin cratering, he moves quickly in which means he increases his exposure as the market falls. Buying before the final bottom is, in the short term, painful and might be taken, by some, as a sign that the manager has lost his marbles. Again.

Bottom Line

Mr. Cinnamond’s view, informed by a quarter century of investing and a careful review of history, is that small cap stocks are in a bubble. More particularly, they might be in a historic bubble that exceeds those in 2000 and 2007. Each of those peaks was followed by 40% declines. The fragility of the small cap space is illustrated by the sudden decline in those stocks in the stock half of 2015. In eight months, from their peak in June 2015 to their bottom in February 2016, small cap indexes dropped 22%. Then, in 10 weeks, they shrugged it off, rose 19% and returned to historically high valuations. Investing in small cap stocks can be rational and rewarding. Reaping those rewards requires a manager who is willing to protect you from the market’s worst excesses and your own all-to-human impulses. You might check here if you’re in search of such a manager.

Fund website

Aston/River Road Independent Value

© Mutual Fund Observer, 2016. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.

Centaur Total Return Fund (TILDX)

By David Snowball

This profile is no longer valid and remains purely for historical reasons. The fund has a new manager and a new strategy.

Objective

The fund seeks “maximum total return” through a combination of capital appreciation and income. The fund invests in undervalued securities, mostly mid- to large-cap dividend paying stocks. The manager has the option of investing in REITs, master limited partnerships, royalty trusts, preferred shares, convertibles, bonds and cash. The manager invests in companies “that it understands well.” The managers also generate income by selling covered calls on some of their stocks. The portfolio currently consists of about 30 holdings, 16 of which are stocks.

Adviser

Centaur Capital Partners, L.P., headquartered in Southlake, TX, has been the investment advisor for the fund since September 3, 2013. Before that, T2 Partners Management, LP advised the fund with Centaur serving as the sub-advisor. The first “T” of T2 was Whitney Tilson and this fund was named Tilson Dividend Fund. Centaur is a three person shop with about $90 million in AUM. It also advises the Centaur Value Fund LP, a hedge fund.

Manager

Zeke Ashton, founder, managing partner, and a portfolio manager of Centaur Capital Partners L.P., has managed the fund since inception. Before founding Centaur in 2002, he spent three years working for The Motley Fool where he developed and produced investing seminars, subscription investing newsletters and stock research reports in addition to writing online investing articles. He graduated from Austin College, a good liberal arts college, in 1995 with degrees in Economics and German.

Management’s Stake in the Fund

Mr. Ashton has somewhere between $500,000 and $1,000,000 invested in the fund. One of the fund’s two trustees has a modest investment in it.

Strategy capacity

That’s dependent on market conditions. Mr. Ashton speculates that he could have quickly and profitably deployed $25 billion in March, 2009. In early 2016, he saw more reason to hold cash in anticipation of a significant market reset. He’s managed a couple hundred million before but has no aspiration to take it to a billion.

Opening date

March 16, 2005

Minimum investment

$1,500 for regular and tax-advantaged accounts, reduced to $1000 for accounts with an automatic investing plan.

Expense ratio

1.95% after waivers on an asset base of $27 million.

Comments

You’d think that a fund that had squashed the S&P 500 over the course of the current market cycle, and had done so with vastly less risk, would be swamped with potential investors. Indeed, you’d even hope so. And you’d be disappointed.

centaur

Here’s how to read that chart: over the course of the full market cycle that began in October 2007, Centaur has outperformed its peers and the S&P 500 by 2.6 and 1.7 percent annually, respectively. In normal times, it’s about 20% less volatile while in bear market months it’s about 25% less volatile. In the worst-case – the 2007-09 meltdown – it lost 17% less than the S&P and recovered 30 months sooner.

$10,000 invested in October 2007 would have grown to $18,700 in Centaur against $16,300 in Vanguard’s 500 Index Fund.

tildx

Centaur Total Return presents itself as an income-oriented fund. The argument for that orientation is simple: income stabilizes returns in bad times and adds to them in good. The manager imagines two sources of income: (1) dividends paid by the companies whose stock they own and (2) fees generated by selling covered calls on portfolio investments. The latter, of late, have been pretty minimal.

The core of the portfolio is a limited number (currently about 16) of high quality stocks. In bad markets, such stocks benefit from the dividend income – which helps support their share price – and from a sort of “flight to quality” effect, where investors prefer (and, to an extent, bid up) steady firms in preference to volatile ones. Almost all of those are domestic firms, though he’s had significant direct foreign exposure when market conditions permit. Mr. Ashton reports becoming “a bit less dogmatic” on valuations over time, but he remains one of the industry’s most disciplined managers.

The manager also sells covered calls on a portion of the portfolio. At base, he’s offering to sell a stock to another investor at a guaranteed price. “If GM hits $40 a share within the next six months, we’ll sell it to you at that price.” Investors buying those options pay a small upfront price, which generates income for the fund. As long as the agreed-to price is approximately the manager’s estimate of fair value, the fund doesn’t lose much upside (since they’d sell anyway) and gains a bit of income. The profitability of that strategy depends on market conditions; in a calm market, the manager might place only 0.5% of his assets in covered calls but, in volatile markets, it might be ten times as much.

Mr. Ashton brings a hedge fund manager’s ethos to this fund. That’s natural since he also runs a hedge fund in parallel to this. Long before he launched Centaur, he became convinced that a good hedge fund manager needs to have “an absolute value mentality,” in part because a fund’s decline hits the manager’s finances personally. The goal is to “avoid significant drawdowns which bring the prospect of catastrophic or permanent capital loss. That made so much sense. I asked myself, what if somebody tried to help the average investor out – took away the moments of deep fear and wild exuberance? They could engineer a relatively easy ride. And so I designed a fund for folks like my parents. Dad’s in his 70s, he can’t live on no-risk bonds but he’d be badly tempted to pull out of his stock investments at the bottom. And so I decided to try to create a home for those people.”

And he’s done precisely that: a big part of his assets are from family and friends, people who know him and whose fates are visible to him almost daily. He’s served them well.

This profile is no longer valid and remains purely for historical reasons. The fund has a new manager and a new strategy.

Bottom Line

You’re certain to least want funds like Centaur just when you most need them. As the US market reaches historic highs that might be today. For folks looking to maintain their stock exposure cautiously, and be ready when richer opportunities present themselves, this is an awfully compelling little fund.

Fund website

Centaur Total Return Fund

© Mutual Fund Observer, 2016. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.

Funds in Registration, May 2016

By David Snowball

AMG Multi-Asset Income Fund

AMG Multi-Asset Income Fund will seek a high level of current income. They intend to invest in many sorts of income-producing securities, using five sub-advisers with five different approaches, in order to generate “incrementally more yield” than a portfolio of government securities. That’s nice, except that their risk target is “lower than the S&P 500 Index over the long term.” On face, that’s not a compelling balance. The management teams haven’t been named. The initial expense ratio has not been set, nor has the expense cap that apparently will be in place. The minimum initial investment is $2,000, reduced to $1,000 for various tax-advantaged products.

AMG SouthernSun Global Opportunities Fund

AMG SouthernSun Global Opportunities Fund will seek long-term capital appreciation. The plan is to invest globally in 15-40 small to mid-cap companies. As with their US small cap fund, they’re looking for firms with financial flexibility, good management and niche dominance. The domestic small cap fund has suffered from “the girl with the curl” problem. The fund will be managed by Michael Cook, who also manages the other two SouthernSun funds. The initial expense ratio will be 1.70% and the minimum initial investment is $2,000, reduced to $1,000 for various tax-advantaged products.

Concorde Wealth Management Trust

Concorde Wealth Management Trust will seek total return and preservation of capital. The plan is to invest in all kinds of stuff – stocks, bonds, private placements – that is attractively valued, though the prospectus doesn’t mention how the managers will allocate between asset classes nor whether there are any limits on their discretion. For reasons unclear, they insist on shouting the world FUND over and over in the prospectus. The fund will be managed by Dr. Gary B. Wood, John Stetter, and Gregory B. Wood. The initial expense ratio will be 1.37% and the minimum initial investment is $500.

DoubleLine Ultra Short Bond Fund

DoubleLine Ultra Short Bond Fund will seek current income consistent with limited price volatility. They’ll target securities with a duration under one year and an average credit quality of AA- or higher. The fund will be managed by Bonnie Baha, who famously referred to her boss as “a freakin’ jerk” and still manages four funds for him, and Jeffrey Lee. The initial expense ratio has not been set, nor has the expense cap that apparently will be in place. The minimum initial investment is $2,000, reduced to $500 for various tax-advantaged products.

Toreador Select Fund

Toreador Select Fund will seek long-term capital appreciation. The plan is to deploy “a proprietary stock selection model” (aren’t they all proprietary?) to select 35-60 large cap stocks. The fund will be managed by Paul Blinn and Rafael Resendes of Toreador Research & Trading. The team also managed Toreador Core, a global all-cap fund with a modestly regrettable record since: total returns trail its peers while volatility is modestly higher. The initial expense ratio will be 1.21% and the minimum initial investment is $1,000.

Otter Creek Long Short Opportunity (OTCRX), April 2016

By David Snowball

Objective and strategy

The Otter Creek Long/Short Opportunity Fund seeks long-term capital appreciation. They take long positions in securities they believe to be undervalued and short positions in the overvalued. Their net market exposure will range between (-35%) and 80%. They can place up to 20% in MLPs, 30% in REITs, and 30% in fixed income securities, including junk bonds. They use a limited amount of leverage. The fund is unusually concentrated with about 30 long and 30 short positions.

Adviser

Otter Creek Advisors. Otter Creek Advisors was formed for the special purpose of managing this mutual fund and giving Messrs. Walling and Winter, the two primary managers, a substantial equity stake in the operation. That arrangement is part of a “succession plan to provide equity ownership to the next generation of portfolio managers: Mike Winter and Tyler Walling.” Otter Creek Advisers has about $280 million in assets under management.

Managers

R. Keith Long, Tyler Walling and Michael Winter. Mr. Long has a long and distinguished career in the financial services industry, dating back to 1973. Mr. Walling joins Otter Creek in 2011 after a five-year stint as an equity analyst for Goldman Sachs. Mr. Winter joined Otter Creek in 2007. Prior to Otter Creek, he worked for a long/short equity hedge fund and, before that, for Putnam Investment Management.

Strategy capacity and closure

Somewhere “north of a billion” the team would consider a soft close. They were pretty emphatic that they didn’t want to become an asset sponge and that they were putting an enormous amount of care into attracting compatible investors.

Management’s stake in the fund

Mr. Long has invested more than $1,000,000 in the fund, Mr. Winter and Mr. Walling each have $500,000-$1,000,000. Those are substantial commitments for 30-something managers to make. Sadly, as of December 30, 2015, no member of the fund’s board of trustees had chosen to invest in it.

Opening date

December 30, 2013.

Minimum investment

$2,500, reduced to $1,000 for accounts established with an automatic investment plan.

Expense ratio

2.63% for the Investor class, on assets of $153.3 million (as of July 2023). 

Comments

In its first two-plus years of operation, Otter Creek Opportunity has been a very, very good long/short fund. Three observations lie behind that judgment.

First, it has made much more money than its generally sad sack peer group. From inception from the end of February, 2016, OTCRX posted annual returns of 10.2%. Its average peer lost 1% annually in the same period. During that stretch, it bested the S&P 500 in 15 of 25 calendar months and beat its peers in 17 of 25 months.

Second, it has provided exceptional downside protection. It outperformed the S&P 500 in 10 of the 11 months in which the index declined and consistently stayed in the range of tiny losses to modest gains in periods when the S&P 500 was down 3% or more.

ottrx

It also outperformed its long/short peers in nine of the 11 months in which the S&P 500 dropped. Since launch, the fund’s downside deviation has been only 40% of its peers and its maximum drawdown has been barely one-fourth as great as theirs.

Third, it has negligible correlation to the market. To date, its correlation to the S&P 500 is 0.05. In practical terms, that means that there’s no evidence that a decline in the stock market will be consistently associated with a decline in Otter Creek.

What accounts for their very distinctive performance?

At base, the managers believe it’s because they focus. They focus, for example, on picking exceptional stocks. They are Graham and Dodd sorts of investors, looking for sustainably high return-on-equity, growing dividends, limited financial leverage and dominant market positions.  They use a “forensic accounting approach to financial statement analysis” to help identify not only attractive firms but also the places within the firm’s capital structure that holds the best opportunities. They tend to construct a focused portfolio around 30 or so long and short positions. On the flip side, they short firms that use aggressive accounting, weak balance sheets, wretched leadership and low quality earnings.

Which is to say, yes, they were shorting Valeant in 2015.

Their top ten long and short positions, taken together, account for about 70% of the portfolio. They’re both more concentrated and more patient, measured by turnover, than their peers.

They also focus on the portfolio, rather than just on individual names for the portfolio. They’ve created a series of rules, drawing on their prior work with their firm’s hedge fund, to limit mishaps in their short portfolio. If, for example, a short position begins to get “crowded,” that is, if other investors start shorting the same names they do, they’ll reduce their position size to avoid the risk of a short squeeze. Likewise they substantially reduce or eliminate any short that moves against the portfolio by 25% or more over the course of six months.

Bottom Line

Messrs. Walling and Winter bear watching. They’ve got a healthy attitude and have done a lot right in a short period. As of mid-February, they had a vast performance advantage over the S&P 500 and their peers. Even after the S&P’s furious six-week rally, they are still ahead – and vastly ahead if you take the effects of volatility into account. It’s clear that they see this fund as a long-term project, they’re excited by it and they’re looking for the right kind of investors to join in with them. If you’re looking to partner with investors who don’t like volatility and detest losing their shareholders money, you might reasonably add OTCRX to your short-list of funds to investigate.

Fund website

Otter Creek Long/Short

© Mutual Fund Observer, 2016. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.

AQR Equity Market Neutral (QMNIX), AQR Long-Short Equity (QLEIX), April 2016

By Samuel Lee

Objective and strategy

AQR offers its absolute return equity strategy in two mutual fund flavors: AQR Equity Market Neutral and AQR Long-Short Equity. Equity Market Neutral, or EMN, goes long global stocks that score well on proprietary composite measures and shorts global stocks that score poorly. AQR groups these measures into six broad “themes”:

  • Value is the strategy of buying stocks that are cheap on fundamental measures such as book value, earnings, dividends and cash flow.
  • Momentum is the strategy of buying stocks with strong recent relative performance according to measures such as price returns, abnormal returns after earnings announcements (earnings surprises), abnormal risk-adjusted returns (residual momentum), and returns of economically linked firms (indirect momentum).
  • Earnings quality is the strategy of buying stocks with reported earnings that are more reliable indicators of future earnings, according to measures such as accruals.
  • Stability is the strategy of buying stocks with defensive characteristics, such as low volatility, low beta, and low leverage.
  • Investor sentiment is the strategy of buying stocks with wide agreement by “smart money”, according to measures such as low short interest as a percentage of market capitalization and high commonality of holdings by elite hedge funds.
  • Management signaling is the strategy of buying stocks where management engages in actions that indicate financial strength or cheapness, such as debt retirement and share repurchases.

Stocks are ranked by these measures within each industry. The stocks with the highest composite scores are bought and the stocks with the lowest composite scores are shorted. Industry neutrality improves risk-adjusted returns on a wide variety of stock selection signals, perhaps because it removes persistent industry bets.

In addition, the strategy engages in country-industry pairs selection using the same six sets of signals and industry selection using only value and momentum. Because AQR dislikes concentrated bets, the country-industry pairs and industry selection strategies are allotted a smaller portion of the strategy’s overall risk than the stock-selection strategy.

The balance of the long and short sleeves is managed to produce returns uncorrelated with the MSCI World Index, a market-weighted benchmark of developed market stocks. This does not mean each sleeve has the same notional size. The long sleeve tends to exhibit lower volatility for each unit of notional exposure than the short sleeve. In order to balance them, the strategy must own more dollars of the long sleeve, creating the impression that it has net long equity exposure. The gross exposure for each sleeve has a floor of 100% NAV and a cap of 250% NAV, meaning the strategy’s gross exposure can range from 2x to 5x the net asset value of the fund. As of February end, AQR Equity Market Neutral had 190% notional long exposure and 173% notional short exposure, for a total gross notional exposure of 363%.

AQR takes steps to mitigate the risks of leverage. First, the strategy is well diversified, with over 1700 stock positions, most of them under 0.5% notional exposure and the biggest at a little under 1.7%. Single-stock concentration goes against every bone in AQR. Like most quant investors, AQR goes for seconds and thirds when it comes to the “free lunch” of diversification.

Second, AQR has a 6% annualized volatility target for the strategy, which means AQR will likely reduce gross leverage if its positions behave erratically. This is a trend-following strategy as periods of high volatility usually coincide with bad returns. For reference, the volatility target is about a third of the historical volatility of the U.S. stock market and roughly the same as the historical volatility of the Barclays Aggregate Bond Index (though in recent years the bond index’s volatility has dropped to about 3%).

Finally, the strategy applies what AQR calls a “drawdown control system”, a methodology for cutting risk when the strategy loses money and adding it back as it recoups its losses (or enough time lapses since a drawdown). The drawdown control system can cut the fund’s target volatility by up to half in the worst circumstances. AQR’s use of volatility targeting and drawdown control are common practices among quantitative investors. As a group these investors tend to cut and add risks at the same time. It is unclear whether they are influential enough to alter the nature of markets and perhaps render these methods obsolete or even harmful (think of portfolio insurance and its contribution to Black Monday in 1987, when the Dow Jones Industrial Average fell 22.6%). My guess is quantitative investors aren’t yet big enough because many more investors are counter-cyclical rebalancers over the short-run, particularly institutions. This is speculation, of course. The market is a big and wild herd that will sometimes stampede in a direction it had never gone before—a lesson AQR itself learned at least twice: during the madness of the dot-com bubble and during the great quant meltdown of 2007.

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Long-Short Equity, or LSE, takes the EMN strategy (though they’re not exact clones if we’re to judge by their holdings and position sizes) and overlays a tactical equity strategy that targets an average 50% exposure to the MSCI World Index, with the ability to adjust its exposure by +/- 20% based largely on valuation and momentum. The equity exposure is obtained through futures.

In a back-test of a simplified version of the strategy, the market-timing component did not add much to the strategy’s performance while it worsened the drawdown during the financial crisis.

Adviser

AQR Capital Management, LLC, was founded in 1998 by a team of ex-Goldman Sachs quant investors led by Clifford S. Asness, David G. Kabiller, Robert J. Krail, and John M. Liew. (Krail is no longer with the firm.) AQR stands for Applied Quantitative Research. Asness, Krail and Liew met each other at the University of Chicago’s finance PhD program. The firm’s bread and butter has long been trading value and momentum together, an idea Asness studied in his dissertation under Eugene Fama, father of modern finance and one of the co-formulators of the efficient market hypothesis.

AQR is mostly owned by AQR Group LP, which in turn is owned by employees of the firm. AMG, a publicly traded asset manager, has owned a stake in AQR since 2004 and in 2014 it increased it, but remains a minority shareholder (terms of both transactions have not been disclosed). AMG largely leaves its investees to run themselves, so I am not concerned about the firm pushing AQR to do stupid things to meet or beat a quarterly target. Though the implosion of Third Avenue, an investee, may spur AMG to more actively monitor its portfolio companies, I doubt Asness and his partners gave AMG much power to meddle in AQR’s affairs.

AQR’s mutual fund business has grown rapidly in size and sophistication since 2009, when it launched arbitrage and equity momentum funds. It competes with DFA for the mantle of academic “thought leadership” among advisors, its main clients. This has put Asness in the awkward position of competing with his former mentor Fama, who is a significant shareholder in DFA and the chief intellectual architect of its approach. Like DFA, AQR emphasizes the primacy of factors in managing portfolios.

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When AQR started up, it was hot. It had one of the biggest launches of any hedge-fund up to that point. Then the dot-com bubble inflated. The widening gap in valuations between value and growth stocks almost sunk AQR. According to Asness, had the bubble lasted six more months, he would have been out of business. When the bubble burst, the firm’s returns soared and so did its assets. The good times rolled on and the firm was on the verge of an IPO by late 2007. According to the New York Post, AQR had to shelve it as the subprime crisis began roiling the markets. The financial crisis shredded its returns, with its flagship Absolute Return fund falling more than 50 percent from the start of 2007 to the end of 2008. Firm-wide assets from peak-to-trough went from $39.1 billion to $17.2 billion. The good times are back: As of December-end, AQR had $142.2 billion in net assets under management.

The two near-death experiences have instilled in AQR a fear of concentrated business risks. In 2009, AQR began to diversify away from its flighty institutional clientele by launching mutual funds to entice stickier retail investors. The firm has also launched new strategies at a steady clip, including managed futures, risk parity, and global macro.

AQR has a strong academic bent. Its leadership is sprinkled with economics and finance PhDs from top universities, particularly the University of Chicago. The firm has poached academics with strong publishing records, including Andrea Frazzini, Lasse Pedersen, and Tobias Moskowitz. Its researchers and leaders are still active in publishing papers.

The firm’s principals are critical of hedge funds that charge high fees on strategies that are largely replicable. AQR’s business model is to offer up simplified quant versions of these strategies and charge relatively low fees.

Managers

Both the Equity Market Neutral and Long-Short Equity strategies are run by Jacques A. Friedman, Andrea Frazzini, and Michele L. Aghassi. Ronen Israel helps manage EMN. Hoon Kim helps manage LSE. All five are principals, or partners, in the firm.

Friedman heads AQR’s Global Stock Selection team. Prior to joining AQR at its inception in 1998, he developed quantitative stock selection strategies at Goldman Sachs. He is the principal portfolio manager and supervises Frazzini, Aghassi and Kim.

Israel heads AQR’s Global Alternative Premia Group. Prior to joining AQR in 1999, he was a senior analyst at Quantitative Financial Strategies, Inc.

Frazzini researches global stock-selection strategies. Prior to joining AQR in 2008 he was a star finance professor at the University of Chicago.

Aghassi is co-head of research of AQR’s Global Stock Selection team. Prior to joining AQR in 2005, she obtained her PhD in operations research at MIT.

Kim is the head of equity portfolio management in AQR’s Global Stock Selection team. Prior to joining AQR in 2005, he was head of quantitative equity research at Mellon Capital Management.

Israel and Friedman have master’s degrees in mathematics. Frazzini, Aghassi and Kim have PhDs.

Strategy capacity and closure

The EMN and LSE funds together have over $1.6 billion in assets. However, AQR runs hedge funds, institutional separate accounts, and foreign funds, and re-uses the same signals in different formats, such as long-only funds. The effective dollars dedicated to the signals use by the funds are almost certainly much higher than reported by the aggregate net asset values of the mutual funds.

Fortunately, AQR has a history of closing funds and ensuring its assets don’t overwhelm the capacity of its strategies. When the firm launched in 1998, it could have started with $2 billion but chose to manage only half that, according to founding partner David Kabiller. Of its mutual funds, AQR has already closed its Multi-Strategy Alternative, Diversified Arbitrage and Risk Parity mutual funds. Soon after I wrote about AQR Style Premia Alternative QSPIX and AQR Style Premia LV QSLIX in the September 2015 edition of MFO, AQR announced a soft close of the funds. It went into effect on March 31, 2016. AQR will meet additional demand by launching funds that are tweaked to have more capacity. 

Management’s stake in the funds

As of December 31, 2014, the funds’ managers had relatively low investments in the mutual funds.

  • Friedman had $50,001 to $100,000 in the EMN fund and $100,001 to $500,000 in the LSE fund.
  • Israel had no investment in the EMN fund.
  • Frazzini had $10,001 to $50,000 in both funds.
  • Aghassi had no investments in either fund.
  • Kim had no investment in the LSE fund.

The low levels of investment should not be held against the managers. It is cheaper and more tax efficient for them to invest in the strategies through AQR’s hedge funds. They also have a direct interest in the success of the firm. Unlike many other hedge funds, AQR does not compensate partners and employees largely based on the profits attributable to them. The team-based nature of AQR’s quantitative process means profits cannot be cleanly attributable to a given employee. Moreover, there is a huge element of luck in the performance of a given strategy and AQR rightly does not want to overwhelmingly tie compensation to it. All the portfolio managers of the funds are partners and so earn a payout based on the firm’s earnings and their relative ownership stakes. AQR grants ownership stakes based on “cumulative research, leadership and other contributions.”

I expect that over time the managers’ stakes will rise as a matter of window-dressing for consultants who take a check-the-box approach to due diligence (most of them). There is evidence that window-dressing has occurred: Some of AQR’s principals own both the low- and high-volatility versions of the same strategy, which is strange because it is costlier to own the low-volatility version per unit of exposure.

Opening date

AQR Long-Short Equity started on July 16, 2013. AQR Equity Market Neutral started on October 7, 2014. AQR has been running long-short stock-selection strategies since its 1998 founding.

Minimum investment

$1 million for the N shares, $5 million for the I shares. The minimums are waived at certain brokerages. Fidelity, for example, allows investments as small as $2500 in IRAs. Fee-only financial advisors have no investment minimums.

Expense ratio

QMNIX shares are 1.50% with $208 million in assets and QLEIX shares are 1.36% with $597 million in assets, as of June 2023. 

Comments

Both funds have been closed to new investors as of 2017. 

Since its October 2014 inception, AQR Equity Market Neutral Fund I QMNIX has returned 18.6% annualized with a standard deviation of 7.0%, for a Sharpe ratio of 2.66. Since its July 2013 inception, AQR Long-Short Equity Fund I QLEIX has returned 14.4% above its benchmark (a 50-50 blend of the MSCI World Index and cash) with a standard deviation of 5.8%, for a Sharpe ratio of 2.46. Almost all of the abnormal returns were driven by the market-neutral equity stock selection sleeve; AQR’s tactical market timing in the LSE strategy contributed zilch to the fund’s returns from inception to the end of 2015.

These are not sustainable numbers. A more reasonable, conservative long-run Sharpe ratio is 0.5. Translated to a raw return, that’s 3% above cash for a market-neutral strategy that runs at a 6% volatility.

While AQR’s absolute return global stock selection strategy has done well, its long-only funds have not. Since the LSE fund launched in 2013, its active returns (that is, returns above its benchmark) have far outstripped the active returns of the AQR Multi-Style funds. In the chart below I plotted the cumulative active returns of AQR Long-Short Equity (which has a longer live track record than AQR Equity Market Neutral) against a sum of the active returns of AQR Large Cap Multi-Style I QCELX and AQR International Multi-Style I QICLX. The long-only funds have stagnated, while the long-short fund has consistently made lots of money. While I doubt this divergence will remain big and persistent, I’m confident that it’s well worth paying up for AQR’s long-short strategy. 

chart

Bottom line

AQR’s long-short global stock-selection strategy is well worth the money and a better deal than its long-only stock funds.

Fund Website

AQR Equity Market Neutral

AQR Long-Short Equity

SamLeeSam Lee and Severian Asset Management

Sam is the founder of Severian Asset Management, Chicago. He is also former Morningstar analyst and editor of their ETF Investor newsletter. Sam has been celebrated as one of the country’s best financial writers (Morgan Housel: “Really smart takes on ETFs, with an occasional killer piece about general investment wisdom”) and as Morningstar’s best analyst and one of their best writers (John Coumarianos: “ Lee has written two excellent pieces [in the span of a month], and his showing himself to be Morningstar’s finest analyst”). He has been quoted by The Wall Street Journal, Financial Times, Financial Advisor, MarketWatch, Barron’s, and other financial publications.  

Severian works with high net-worth partners, but very selectively. “We are organized to minimize conflicts of interest; our only business is providing investment advice and our only source of income is our client fees. We deal with a select clientele we like and admire. Because of our unusual mode of operation, we work hard to figure out whether a potential client, like you, is a mutual fit. The adviser-client relationship we want demands a high level of mutual admiration and trust. We would never want to go into business with someone just for his money, just as we would never marry someone for money—the heartache isn’t worth it.” Sam works from an understanding of his partners’ needs to craft a series of recommendations that might range from the need for better cybersecurity or lower-rate credit cards to portfolio reconstruction. 

© Mutual Fund Observer, 2016. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.

Intrepid Endurance (ICMAX), April 2016

By David Snowball

Objective and strategy

The fund pursues long-term capital appreciation by investing in high quality small cap equities, which they’ll only buy and hold when they’re undervalued. “Small stocks” are stocks comparable in size to those in common indexes like the Russell 2000; currently, that means a maximum cap of $6.5 billion. The fund can hold domestic and international common stocks, preferred stocks, convertible preferred stocks, warrants, and options. They typically hold 15-50 securities. High quality businesses, typically, are “internally financed companies generating cash in excess of their business needs, with predictable revenue streams, and in industries with high barriers to entry.” The managers calculate the intrinsic value of a lot of small companies, though very few are currently selling at an acceptable discount to those values. As a result, the fund has about two-thirds of its portfolio in cash (as of March 2016). When opportunities present themselves, though, the managers deploy their cash quickly; in 2011, the fund moved from 40% cash down to 20% in the space of two weeks.  

Adviser

Intrepid Capital Management. Intrepid was founded in 1994 by the father and son team of Forrest and Mark Travis. It’s headquartered in Jacksonville, Florida; the location is part of a conscious strategy to distance themselves from Wall Street’s groupthink. Rather distinctively, their self-description stresses the importance of the fact that their managers have rich, active lives (“some of us surf … others spend weekends at kids’ football games”) outside of work. That focus “makes us a better company and better managers.” They are responsible for “approximately $800 million for individuals and institutional investors through a combination of separately managed accounts, no-load mutual funds, and a long/short hedge fund.” They advise six mutual funds.

Manager

Jayme Wiggins, Mark Travis and Greg Estes. Mr. Wiggins, whose first name is pronounced “Jay Mee,” is the lead manager and the guy responsible for the fund’s day-to-day operations. His career is just a bit complex: right after college, he joined Intrepid in 2002 where he worked as an analyst on the strategy before it even became a fund. In 2005 Jayme took over the high-yield bond strategy which, in 2007, was embodied in the new Intrepid Income Fund (ICMUX). In 2008, he left to pursue his MBA at Columbia. While he was away, Endurance’s lead manager Eric Cinnamond left to join River Road Asset Management. Upon his return in September 2010, Jayme became lead manager here. Mr. Travis is one of Intrepid’s founders and the lead manager on Intrepid Capital (ICMBX). Mr. Estes, who joined the firm in 2000, is lead manager of Intrepid Disciplined Value (ICMCX). Each member of the team contributes to each of the firm’s other funds.

Strategy capacity and closure

The managers would likely begin discussions about the fund’s assets when it approaches the $1 billion level, but there’s no firm trigger level. What they learned from the past was that too great a fraction of the fund’s assets represented “hot money,” people who got excited about the fund’s returns without ever becoming educated about the fund’s distinctive strategy. When the short-term returns didn’t thrill them, they fled. The managers are engaged now in discussions about how to attract more people who “get it.” Their assessment of the type of fund flows, as much as their amount, will influence their judgment of how and when to act.

Management’s stake in the fund

All of the fund’s managers have personal investments in it. Messrs. Travis and Wiggins have between $100,000 and $500,000 while Mr. Estes has between $10,000 and $50,000. The fund’s three independent directors also all have investments in the fund; it’s the only Intrepid fund where every director has a personal stake.

Opening date

The underlying small cap strategy launched in October, 1998; the mutual fund was opened on October 3, 2005.

Minimum investment

$2,500 for Investor shares, $250,000 for Institutional (ICMZX) shares.

Expense ratio

1.30%(Investor class) or 1.15%(Institutional class) on assets of approximately $53.3 million, as of July 2023.

Comments

Start with two investing premises that seem uncontroversial:

  1. You should not buy businesses that you’ll regret owning. At base, you wouldn’t want to own a mismanaged, debt-ridden firm in a dying industry.
  2. You should not pay prices that you’ll regret paying. If a company is making a million dollars a year, no matter how attractive it is, it would be unwise to pay $100 million for it.

If those strike you as sensible premises, then two conclusions flow from them:

  1. You should not buy funds that invest in businesses regardless of their quality or price. Don’t buy trash, don’t pay ridiculous amounts even for quality goods.
  2. You should buy funds that act responsibly in allocating money based on the availability of quality businesses at low prices. Identify high quality goods that you’d like to own, but keep your money in your wallet until they’re on a reasonable sale.

The average investor, individual and professional, consistently disregards those two principles. Cap-weighted index funds, by their very nature, are designed to throw your money at whatever’s been working recently, regardless of price or quality. If Stock A has doubled in value, its weighting in the index doubles and the amount of money subsequently devoted to it by index investors doubles. Conversely, if Stock B halves in value, its weighting is cut in half and so is the money devoted to it by index funds.

Most professional investors, scared to death of losing their jobs because they underperformed an index, position their “actively managed” funds as close to their index as they think they can get away with. Both the indexes and the closet indexers are playing a dangerous game.

How dangerous? The folks at Intrepid offer this breakdown of some of the hot stocks in the S&P 500:

Four S&P tech stocks—Facebook, Amazon, Netflix, and Google (the “FANGs”)—accounted for $450 billion of growth in market cap in 2015, while the 496 other stocks in the S&P collectively lost $938 billion in capitalization. Amazon’s market capitalization is $317 billion, which is bigger than the combined market values of Walmart, Target, and Costco. These three old economy retailers reported trailing twelve month GAAP net income of nearly $17 billion, while Amazon’s net income was $328 million.

As of late March, 2016, Amazon trades at 474 times earnings. The other FANG stocks sell for multiples of 77, 330 and 32. Why are people buying such crazy expensive stocks? Because everyone else is buying them.

That’s not going to end well.

The situation among small cap stocks is worse. As of April 1, 2016, the aggregate price/earnings ratio for stocks in the small cap Russell 2000 index is “nil.” It means, taken as a whole, those 2000 stocks had no earnings over the past 12 months. A year ago, the p/e was 68.4. In late 2015, the p/e ratios for the pharma, biotech, software, internet and energy sectors of the Russell 2000 were incalculable because those sectors – four of five are very popular sectors – have negative earnings.

“Small cap valuations,” Mr. Wiggins notes, “are pretty obscene. In historical terms, valuations are in the upper tier of lunacy. When that corrects, it’s going to get really bad for everybody and small caps are going to be ground zero.”

At the moment, just 50 of 2050 active U.S. equity mutual funds are holding significant cash (that is, 20% or more of total assets). Only nine small cap funds are holding out. That includes Intrepid Endurance whose portfolio is 67% cash.

Endurance looks for 30-40 high-quality companies, typically small cap names, whose prices are low enough to create a reasonable margin of safety. Mr. Wiggins is not willing to lower his standards – for example, he doesn’t want to buy debt-ridden companies just because they’re dirt cheap – just for the sake of buying something. You’ll see the challenge he faces as you consider the Observer’s diagram of the market’s current state and Endurance’s place in it.

venn

It wasn’t always that way. By his standards, “that small cap market was really cheap in ‘09 to fairly-priced in 2011 but since then it’s just become ridiculously expensive.”

For now, Mr. Wiggins is doing what he needs to do to protect his investors in the short term and enrich them in the longer term. He’s got 12 securities in the portfolio, in addition to the large cash reserve. He’s been looking further afield than usual because he’d prefer being invested to the alternative. Among his recent purchases are the common stock of Corus Entertainment, a small Canadian firm that’s Canada’s largest owner of women’s and children’s television networks, and convertible shares in EZcorp, an oddly-structured (hence mispriced) pawn shop operator in the US and Mexico.

While you might be skeptical of a fund that’s holding so much cash, it’s indisputable that Intrepid Endurance has been the single best steward of its shareholders’ money over the full market cycle that began in the fall of 2007. We track three sophisticated measures of a fund’s risk-return tradeoff: its Sharpe ratio, Sortino ratio and Martin ratio.

Endurance has the highest score on all three risk-return ratios among all small cap funds – domestic, global, and international, value, core and growth.  

We track short-term pain by looking at a fund’s maximum drawdown, its Ulcer index which measures the depth and duration of a drawdown, its standard deviation and downside deviation.

Endurance has the best or second best record, among all small cap funds, on all of those risk measures. It also has the best performance during bear market months.

And it has substantially outperformed its peers. Over the full cycle, Endurance has returned 3.6% more annually than the average small-value fund. Morningstar’s Katie Reichart, writing in December 2010, reported that “the fund’s annualized 12% gain during [the past five years] trounced nearly all equity funds, thanks to the fund’s stellar relative performance during the market downturn.”

Bottom Line

Endurance is not a fund for the impatient or impetuous. It’s not a fund for folks who love the thrill of a rushing, roaring bull market. It is a fund for people who know their limits, control their greed and ask questions like “if I wanted to find a fund that I could trust to handle the next seven to ten years while I’m trying to enjoy my life, which would it be?” Indeed, if your preferred holding period for a fund is measured in weeks or months, the Intrepid folks would suggest you go find some nice ETF to speculate with. If you’re looking for a way to get ahead of the inevitable crash and profit from the following rebound, you owe it to yourself to spend some time reading Mr. Wiggins’ essays and doing your due diligence on his fund.

Fund website

Intrepid Endurance Fund

© Mutual Fund Observer, 2016. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.

Funds in Registration, April 2016

By David Snowball

Boyd Watterson Short Duration Enhanced Income Fund

Boyd Watterson Short Duration Enhanced Income Fund will seek income, capital preservation and total return, in that order. The plan is to invest tactically in a wide variety of security types including junk bonds, bank loans, convertibles, preferred shares, CDOs and so on. They’ve got a bunch of proprietary strategies for sector, industry and tactical allocations. The fund will be managed by a team from Boyd Watterson Asset Management. The opening expense ratio has not been disclosed and the minimum initial investment is $5,000, reduced to $2,500 for various tax-advantaged accounts.

Moerus Worldwide Value Fund

Moerus Worldwide Value Fund will seek capital appreciation. The plan is to invest in a global portfolio of 25-40 undervalued stocks. Candidate companies would have solid balance sheets, high quality business models and shareholder-friendly management teams. In addition, they should have the capacity to thrive in “difficult periods” and “market downturns.” The fund will be managed by Amit Wadhwaney, formerly lead manager of Third Avenue International Value. He and two other former Third Avenue employees launched Moerus Capital in December 2015. And no, I have no idea of what a “moerus” is. The opening expense ratio is 1.65% and the minimum initial investment is $2,500.

Northern Active M U.S. Equity Fund

Northern Active M U.S. Equity Fund  will seek long-term capital appreciation through a diversified portfolio of primarily U.S. equity securities. Any income generation is purely incidental. It will be a multi-manager fund, so I’m guessing that explains the mysterious “M” in the name. The fund will be managed by Delaware Investments, Granite Investment Partners, The London Company of Virginia, and Polen Capital Management. The opening expense ratio is 0.67% and the minimum initial investment is $2,500, reduced to $500 for various tax-advantaged accounts and $250 for funds set up with an AIP.

Sit ESG Growth Fund

Sit ESG Growth Fund will seek long-term capital appreciation. The plan is to invest in fundamentally attractive businesses which also have “strong environmental, social and corporate governance (ESG) practices at the time of purchase.” The fund will be managed by Roger Sit and a team from SIT Associates. The opening expense ratio is 1.50% and the minimum initial investment is $5,000.

SPDR® SSGA U.S. Sector Rotation ETF

SPDR SSGA U.S. Sector Rotation ETF will seek a provide capital appreciation. The plan is to invest, using a tactical sector allocation strategy, in sector ETFs. They determine the attractiveness of sectors monthly, so you might reasonably expect a high-turnover strategy. The fund will be managed by John Gulino, Lorne Johnson and Michael Narkiewicz of the Investment Solutions Group. The opening expense ratio has not been disclosed and, being an ETF, there’s no regular investment minimum.  

Vest Armor S&P 500® Fund

Vest Armor S&P 500® Fund will track, before expenses, the performance of the CBOE S&P 500 Buffer Protect Index. These folks are actually launching about 14 related funds simultaneously. The underlying idea is that they can use options to tightly control the range of a fund’s gains or losses.  In a rising market, they’ll profit up to a preset cap. In a modestly declining market, they’ll keep returns at zero. In a sharply declining market, they’ll lose 10% less – that is, 1000 basis points less – that the S&P 500. Twelve of the funds are denominated by month: the January fund sets its 12-month return parameters at one level, the February fund at another, the March fund at a third and so on. The fund will be managed by Karan Sood and Johnathan Hale of Vest Financial. The opening expense ratio is 1.50% and the minimum initial investment is $1,000.

Royce Global Financial Services (RYFSX), March 2016

By David Snowball

Objective and strategy

The fund seeks long-term capital appreciation by investing in micro-, small- and mid-cap financial services stocks with market caps up to $5 billion. The financial services industry includes banks, savings & loans, insurance, investment managers, brokers, and the folks who support them. The managers anticipate having 40% of the portfolio in non-U.S. stocks with up to 10% in the developing markets. The fund holds about 100 stocks. The managers look for companies with excellent business strengths, high internal rates of return, and low leverage. They buy when the stocks are trading at a significant discount.

Adviser

Royce & Associates, LLC, is owned by Legg Mason, though it retains autonomy over its investment process and day-to-day operations. Royce is a small-company specialist with 18 open-end funds, three closed-end funds, two variable annuity accounts, and a several separately managed accounts. It was founded by Mr. Royce in 1972 and now employs more than 100 people, including 30 investment professionals. As of 12/31/2015, Royce had $18.5 billion in assets under management. $111 million of that amount was personal investments by their staff. When we published our 2008 profile, Royce had 27 funds and $30 billion and slightly-higher internal investment.

Managers

Charles Royce and Chris Flynn. Mr. Royce is the adviser’s founder, CEO and senior portfolio manager. He often wears a bowtie, and manages or co-manages six other Royce funds. Mr. Flynn serves as assistant portfolio manager and analyst here and on three other funds. They’ve overseen the fund since inception.

Strategy capacity and closure

Royce estimates the strategy could handle $2 billion or so, and notes that they haven’t been hesitant to close funds when asset flows become disruptive.

Management’s stake in the fund

Mr. Royce has over $1,000,000 directly invested in the fund. Mr. Flynn has invested between $50,000 – 100,000. All told, insiders owned 5.70% of the fund’s shares as of November 30, 2015.

Opening date

December 31, 2003

Minimum investment

$2,000 for regular accounts, $1000 for IRAs.

Expense ratio

1.53% on an asset base of $26 million, as of July 2023, with a 1% redemption fee on shares held less than 30 days.

Comments

Royce Global Financial Services Fund is a financial sector fund unlike any other. First, it invests in smaller firms. The fund’s average market cap is about $2 billion while its average peer’s is $27 billion. Over 20% of the portfolio is invested in microcap stocks, against a norm of 2%. Second, it invests internationally. About 32% of the portfolio is invested internationally, which that rising steadily toward the 40% threshold required by the “global” name. For the average financial services fund, it’s 5%. Third, it pursues value investing. That’s part of the Royce DNA. Financial services firmly are famously tricky to value but, measured by things like price/cash flow, price/sales or dividend yield, the portfolio trades at about half the price of its average peer. And fourth, it doesn’t focus on banks and REITs. Just 11% of the fund is invested in banks, mostly smaller and regional, and real estate is nearly invisible. By contrast, bank stocks constitute 34% of the S&P Financial Sector Index and REITs add 18% more.

In short: it’s way different. The question is, should you make room for it in your portfolio? The answer to that question is driven by your answer to two others: (1) should you overweight the financial sector? And (2) if so, are there better options available?

On investing in the financial services sector.

Two wise men make the case. Illegal withdrawals specialist Willie Sutton is supposed to have answered the question “why do you rob banks?” with “because that’s where the money is.” And remember all that advice from Baron Rothschild that you swore you were going to take next time? The stuff about buying “when there’s blood in the streets” and the advice to “buy on the sound of cannons and to sell on the sound of trumpets”? Well, here’s your chance, little bubba!

Over the 100 months of the latest market cycle, the financial services sector has returned less than zero. From November 2007 to January 2016, funds in this category have lost 0.3% annually while the Total Stock Market gained 5.0%. If you had to guess what sector had suffered the worst losses in the six months from last July to January, you’d probably guess energy. And you’d be wrong: financials lost more, though by just a bit. In the first two months of 2016, the sector dropped another 10%.

That stock stagnation has occurred at the same time that the underlying corporations have been getting fundamentally stronger. The analysts at Charles Schwab (2016) highlight a bunch of positive developments:

Growing financial strength: Most financial institutions have paid back government loans and some are increasing share buybacks and dividend payments, illustrating their growing health and stability.

Improving consumer finances: Recent delinquent loan estimates have decreased among credit card companies, indicating improving balance sheets.

… the pace at which new rules and restrictions have been imposed is leveling off. With balance sheets solidified, financial companies are now being freed from some regulatory restrictions. This should allow them to make better business decisions, as well as raise dividend payments and increase share-buyback programs, which could help bolster share prices.

The combination of falling prices and strengthening fundamentals means that the sector as a whole is selling at huge discount. In mid-February, the sector was priced at 72% of fair value by Morningstar’s calculation. That’s comparable to discounts at the end of the 2000-02 bear and during the summer 2011 panic; the only deeper discounts this century occurred for a few weeks in the depths of the 2007-09 meltdown. PwC, formerly Price Waterhouse Coopers, looks at different metrics and reaches the same general conclusion. Valuations are even lower in Europe. The cheapest quintile in the Euro Stoxx 50 are almost all financial firms. Luca Paolini, chief strategist for Pictet Asset Management in London, worried that “There is some exaggerated concern about the systemic risk in the banking sector. The valuations seem extreme. The gap must close at some point this year.”

Are valuations really low, here and abroad? Yes, definitely. Has the industry suffered carnage? Yes, definitely. Could things in the financial sector get worse? Yes, definitely. Does all of that raise the prospect of abnormal returns? Again yes, definitely.

On investing with Royce

There are two things to note here.

First, the Royce portfolio is structurally distinctive. Royce is a financial services firm and they believe they have an intimate understanding of their part of the industry. Rather than focusing on huge multinationals, they target the leaders in a whole series of niche markets, such as asset management, that they understand really well. They invest in WisdomTree (WETF), the only publicly-traded pure-play ETF firm. They own Morningstar (MORN), the folks who rate funds and ETFs, a half dozen stock exchanges and Charles Schwab (SCHW) where they’re traded, and MSCI (MSCI), the ones who provide investable indexes to them. When they do own banks, they’re more likely to own Umpqua Holdings (UMPQ) than Wells Fargo. Steve Lipper, a principal at Royce whose career also covers long stints with Lipper Analytics and Lord, Abbett, says, “Basically what we do is give capital to really bright people in good businesses that are undergoing temporary difficulties, and we do it in an area where we practice every day.”

These firms are far more attractive than most. They’re less capital-intense. They’re less reliant on leverage. They less closely regulated. And they’re more likely to have a distinct and defensible niche, which means they operate with higher returns on equity. Mr. Lipper describes them as “companies that could have 20% ROE perpetually but often overlooked.”

Second, Royce has done well. The data on the fund’s homepage makes a pretty compelling case for it. It’s beaten the Russell 2500 Financials index over the past decade and since inception. It’s earned more than 5% annually in 100% of the past rolling 10-year periods. It’s got below average volatility and has outperformed its benchmark in all 11 major (i.e., greater than 7.5%) drawdowns in its history. It’s got a lower standard deviation, smaller downside capture and higher Sharpe ratio than its peers.

Here are two ways of looking at Royce’s returns. First, the returns on $10,000 invested at the inception of RYFSX compared to its peers.

ryfsx since inception

Second, those same returns during the current market cycle which began in October 2007, just before the crash.

ryfsx current cycle

The wildcard here is Mr. Royce’s personal future. He’s the lead manager and he’s 74 years old. Mr. Lipper explains that the firm is well aware of the challenge and is midway through a still-evolving succession plan. He’s the CEO but he’s no longer than CIO, a role now split among several colleagues. In the foreseeable future, he’s step away from the CEO role to focus on investment management. And Royce has reduced, and will continue to reduce, the number of funds for which Mr. Royce is responsible. And, firm wide, there’s been “a major rationalization” of the fund lineup to eliminate funds that lacked distinct identities or missions.

Bottom Line

There’s little question that Royce Global Financial will be a profitable investment in time. The two questions that you’ll need to answer are (1) whether you want a dedicated financial specialist and (2) whether you want to begin accumulating shares during a weak-to-wretched market. If you do, Royce is one of a very small handful of financial services funds with the distinct profile, experienced management and long record which warrant your attention.

Fund website

Royce Global Financial Services Fund. The fund’s factsheet is exceptionally solid, in a wonky sort of way, and the fund’s homepage is one of the best out there for providing useful performance analytics.

© Mutual Fund Observer, 2016. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.

LS Opportunity Fund (LSOFX), March 2016

By David Snowball

Objective and strategy

LS Opportunity Fund pursues three goals: preserving capital, delivering above-market returns and managing volatility. “The secret,” says manager John Gillespie, “is to avoid large losses.” They invest, both long and short, in individual stocks; they do not short “the market,” they don’t use esoteric options and they don’t typically use ETFs. They normally will have 20-40 short positions and 50-70 long ones. The long portfolio is both all-cap and value-oriented, both of which are fairly rare. The short portfolio targets firms with weak or deteriorating fundamentals and unattractive valuations. They use pair-traded investments to reduce volatility and sector risk.

Adviser

Long Short Advisors, which was founded in 2010 as a way of making the ICAP hedge fund strategy available to retail investors. ICAP sub-advised this fund from 2010 until May, 2015. Prospector Partners LLC became the sub-advisor at the end of May, 2015. Prospector employs nine investment professionals and manages about $600 million through private partnerships, three funds and a couple of separately-managed accounts.

Manager

John Gillespie, Kevin O’Brien and Jason Kish. Mr. Gillespie worked for T. Rowe Price from 1986 – 1997, beginning as an analyst then managing Growth Stock (PRGFX) from 1994-1996 and New Age Media (a closed-end fund that morphed into Media & Telecommunications (PRMTX) from 1994-1997, after which he left to found Prospector Partners. Mr. Kish joined Prospector in 1997. Mr. O’Brien joined Prospector in 2003; prior to that he was an analyst and co-manager for Neuberger Berman Genesis Fund (NBGNX) and White Mountain Advisors. The team co-manages the Prospector Partners funds.

Strategy capacity and closure

$2 billion. The strategy currently holds $300 million.

Management’s stake in the fund

The managers just assumed responsibility for the fund in May 2015, shortly before the date of the Statement of Additional Information. At that point, two of the three managers had been $100,000 – $500,000 invested in the fund. Collectively they have “significant personal investments” in the strategy, beyond those in the mutual fund.

Opening date

The fund launched in September 2010, but with a different sub-adviser and strategy. The Prospector Partners took over on May 28, 2015; as a practical matter, this became a new fund on that date. Prospector has been managing the underlying strategy since 1997.

Minimum investment

$5,000.

Expense ratio

1.95% after waivers on assets of $25 million, as of February 2016.

Comments

In May 2015, circumstances forced Long-Short Advisors (LSA) to hit the reset button on their only mutual fund. The fund had been managed since inception by Independence Capital Asset Partners (ICAP), side by side with ICAP QP Absolute Return L.P., ICAP’s hedge fund. Unexpectedly, Jim Hillary, ICAP’s founder decided to retire from asset management, shutter the firm and liquidate his hedge fund. That left LSA with a hard decision: close the fund that was an extension of Mr. Hillary’s vision or find a new team to manage it.

They chose the latter and seem to have chosen well.

The phrase “long-short portfolio” covers a bunch of very diverse strategies. The purest form is this: find the most attractive stocks and reward them by buying them, then find the least attractive and punish them by shorting them. The hope is that, if the market falls, the attractive stocks will fall by a lot less than the whole market while the rotten ones fall by a lot more. If that happens, you might make more money on your short positions than you lose on your long ones and the portfolio prospers. Many funds labeled as “long-short” by Morningstar do not follow that script: some use ETFs to invest in or short entire market segments, some use futures contracts to achieve their short position, many hedge using buy-write options while some are simply misplaced “liquid alternatives” funds that get labeled “long short” for the lack of a better option. Here’s the takeaway: few funds in the “long-short” category actually invest, long and short, in individual stocks. By LSA’s estimation, there are about 30.

The argument for a long-short fund is simple. Most investors who want to reduce their portfolio’s volatility add bonds, in hopes that they’re lightly correlated to stocks and less volatile than them. The simplest manifestation of that strategy is a 60/40 balanced funds; 60% large cap stocks, 40% investment grade bonds. Such strategies are simple, cheap and have paid off historically.

Why complicate matters by introducing shorting? Research provided by Long Short Advisors and others makes two important points:

  • The bond market is a potential nightmare. Over the past 30 years, steadily falling interest rates have made bonds look like a risk-free option. They are not. Domestic interest rates have bottomed near zero; rising rates drive bond prices down. Structural changes in the bond markets, the side effect of well-intentioned government reforms, have made the bond market more fragile, less liquid and more subject to disruption than it’s been in any point in living memory. In early 2016, both GMO and Vanguard projected that the real returns from investment-grade bonds over the next five to ten years will be somewhere between zero and negative 1.5% annually.
  • Even assuming “normal” markets, long-short strategies are a better option than 60/40 ones. Between 1998 and 2014, an index of long/short equity hedge funds has outperformed a simple 60/40 allocation with no material change in risk.

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.

Prospector Partners, in contrast, has a long and excellent record of long-short investing. The firm was founded in 1997 by professionals who had first-rate experience as mutual fund managers. They have a clear, clearly-articulated investment discipline; they work from the bottom up, starting with measures of free cash flow yield. FCF is like earnings, in that it measures a firm’s economic health. It is unlike earnings in that it’s hard to rig; that is, the “earnings” that go into a stock’s P/E ratio are subject to an awful lot of gaming by management while the simpler free cash flow remains much cleaner. So, start with healthy firms, assess the health of their industries, look for evidence of management that uses capital wisely, then create a relatively concentrated portfolio of 50-70 stocks with the majority of the assets typically in the top 20 names. The fact that they’ve been developing deeper understanding of specific industries for 20 years while many competitors sort of fly-by using quant screens and quick trades, allows Prospector “to capitalize on informational vacuums in Insurance, Consumer, Utilities, and Banks.” They seem to have particular strength in property and casualty insurance, an arena “that’s consistently seen disruption and opportunity over time.”

The short portfolio is a smaller number of weak companies in crumbling industries. The fact that the management team is stable, risk-conscious and deeply invested in the strategy, helps strengthen the argument for their ability to repeat their accomplishments.

The LSOFX portfolio is built to parallel Prospector Partners’ hedge fund, whose historical returns are treated as prior related performance and disclosed in the prospectus of LSOFX. Here are the highlights:

  • From inception through mid-2015, a $1,000 investment in the Partner’s strategy grew to $5000 while an investing in the S&P 500 would have grown to $3000 and in the average long-short hedge fund (HFRI Equity Hedge), to $4000.
  • During the dot-com crash from 2000-02, their hedge fund made money each year while the S&P 500 lost 9, 12, and 22%. That reflects, in part, the managers’ preference for a value-oriented investment style during a period when anything linked with tech got eviscerated.
  • During the market panic from 2007-09, the S&P 500 fell by 3% or more in nine (of 18) months. The fund outperformed the market in every one of those months, by an average of 476 basis points per month.

Since taking responsibility for LSOFX, the managers have provided solid performance and consistent protection. The market has been flat or down in six of the eight months since the changeover. LSOFX has outperformed the market in five of those six months. And it has handily outperformed both the S&P 500 and its nominal long-short peers. From June 1, 2015 to the middle of February 2016, LSOFX lost 2.1% in value while the S&P 500 dropped 7.4% and the average long-short fund lost 9.0%.

Bottom Line

Even the best long-short funds aren’t magic. They don’t pretend to be market-neutral, so they’ll often decline as the stock market does. And they’re not designed to keep up with a rampaging bull, so they’ll lag when long-only investors are pocketing 20 or 30% a year. And that’s okay. At their best, these are funds designed to mute the market’s gyrations, making them bearable for you. That, in turn, allows you to become a better, more committed long-term investor. The evidence available to us suggests that LSA has found a good partner for you: value-oriented, time-tested, and consistently successful. As you imagine a post-60/40 world, this is a group you should learn more about.

Fund website

Long Short Advisors. The site remains pretty Spartan. Happily, the advisor is quite approachable so it’s easy to get information to help complete your due diligence.

© Mutual Fund Observer, 2016. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.

Funds in Registration, February and March, 2016

By David Snowball

361 Domestic Long/Short Equity Fund

361 Domestic Long/Short Equity Fund will seek long-term capital appreciation while preserving capital in down markets. The plan is sort of encapsulated in the fund’s name. The fund will be managed by Harindra de Silva, Dennis Bein, and Ryan Brown, all of Analytic Investors. Dr. de Silva is, just fyi, famous, renowned, well-respected and successful. The initial expense ratio will be 1.79% and the minimum initial investment is $2,500.

American Beacon Garcia Hamilton Quality Bond Fund

American Beacon Garcia Hamilton Quality Bond Fund will seek high current income consistent with preservation of capital. The plan is to buy 0-7 year investment grade bonds. That’s nice, though I don’t particularly see whether the fund’s competitive advantage might come from. In any case, the fund will be managed by Gilbert Andrew Garcia and Nancy Rodriguez of Garcia, Hamilton & Associates. The initial expense ratio will be 0.84% and the minimum initial investment is $2500.

American Beacon GLG Total Return Fund

American Beacon GLG Total Return Fund will seek high current income and capital appreciation. The plan is to invest in … uh, stuff located in or linked to the emerging markets. Investment decisions are driven by a top-down analysis of the state of the markets and “stuff” might include fixed income securities, equities, ETFs, derivatives, options (“non-deliverable forwards”), and STRIPs. The fund will be managed by Guillermo Ossés, head of emerging market debt strategies for GLC, LLC. The initial expense ratio will be 1.56% and the minimum initial investment is $2,500.

Aasgard Dividend Growth Small & Mid-Cap Fund

Aasgard Dividend Growth Small & Mid-Cap Fund will seek a combination of dividend income and capital appreciation, with a secondary focus on lower than market volatility. The plan is to buy dividend-paying common stocks of small- and medium-sized companies. The portfolio will be sector-neutral with strict limits on position size and industry exposure, though it’s not clear how that affects the “sector-neutral” mandate. The fund will be managed by James Walsh of Coldstream Capital Management. The initial expense ratio will be 1.25% and the minimum initial investment is $2,500. The fund will launch in March.

Chautauqua Global Growth Fund

Chautauqua Global Growth Fund will seek long-term capital appreciation. The plan is to create a portfolio of 35-45 mid- and large-cap growth stocks. The fund will be managed by Brian Beitner. Mr. Beitner is employed by Chautaqua Capital Management, a division of R.W. Baird. The initial expense ratio has not been disclosed and the minimum initial investment is $2,500, reduced to $1,000 for various tax-advantaged accounts. The fund will launch in April.

Chautauqua International Growth Fund

Chautauqua International Growth Fund will seek long-term capital appreciation. The plan is to create a portfolio of 25-35 mid- and large-cap growth stocks. The fund will be managed by Brian Beitner. Mr. Beitner is employed by Chautaqua Capital Management, a division of R.W. Baird. The initial expense ratio has not been disclosed and the minimum initial investment is $2,500, reduced to $1,000 for various tax-advantaged accounts. The fund will launch in April.

CMG Tactical All Asset Strategy Fund

CMG Tactical All Asset Strategy Fund will seek capital appreciation. The plan is to use a momentum-based strategy to invest in ETFs targeting alternative asset classes, stocks, bonds and commodities. The fund will be managed by Steven Blumenthal, PJ Grzywacz and Michael Hee, all of CMG Capital Management. The initial expense ratio for the institutional share class will be 1.40% and the minimum initial investment is $15,000.

Fasanara Capital Absolute Return Multi-Asset Fund

Fasanara Capital Absolute Return Multi-Asset Fund will seek positive absolute returns “over a reasonable period of time.” The plan is to stitch together a three-sleeved garment with a Value Sleeve, a Hedging and Cheap Optionality Sleeve and a Tactical Sleeve. Fans of the Hedging and Cheap Optionality Sleeve shouldn’t get too excited, given the caveat that “the specific strategies the Fund pursues and the manner in which the Fund pursues such strategies may change from time to time.” The fund will be managed by Fasanara’s Francesco Filia. The initial expense ratio will be 1.25% and the minimum initial investment is $1,000.

Matthews Asia Credit Opportunities Fund

Matthews Asia Credit Opportunities Fund will seek total return over the long term. The plan is to invest in Asian bonds, convertibles and derivatives. The language in the prospectus implies that this may be the high-yield/distressed-debt version of their Strategic Income fund. The fund will be managed by Teresa Kong and Satya Patel, who also manage Matthews Asia Strategic Income (MAINX). The initial expense ratio will be 1.10% and the minimum initial investment is $2,500, reduced to $500 for various tax-advantaged accounts.

RiverPark Commercial Real Estate Fund

RiverPark Commercial Real Estate Fund will seek to generate current income and capital appreciation consistent with the preservation of capital by investing in debt instruments that are secured, directly or indirectly, by income-producing commercial real estate assets. The plan is to capture their holdings’ monthly income distributions and to trade rarely but opportunistically. As with other RiverPark funds, this is a converted hedge fund. The hedge fund, GSREA CMBS Credit Opportunities, LLC, averaged 7.7% a year from 2010-2014, the last year for which we have data. Even in its worst quarter, the fund still made money. The fund will be managed by Ed Shugrue, who managed the hedge fund and has 25 years of experience as a commercial real estate investor. The initial expense ratio will be 1.25% and the minimum initial investment is $1,000.

Robinson Income Opportunities Fund

Robinson Income Opportunities Fund will seek total return with an emphasis on providing current income. The plan is to play the RiverNorth game: invest in income-producing closed-end funds when you can identify funds selling at unsustainable discounts to the their NAV. If you don’t find attractively-priced CEFs, they’ll default to low-cost ETFs instead. The fund will be managed by James Robinson. The initial expense ratio has not been released but the minimum initial investment is $2,500. There’s a front load, but it’s easy to find load-waived access.

Summit Global Investments Small Cap Low Volatility Fund

Summit Global Investments Small Cap Low Volatility Fund will try to outperform the Russell 2000 with less volatility. The plan is to find solid, growing companies with low volatility stock, then buy them. The fund will be managed by a team led by Summit’s CIO, David Harden. The initial expense ratio will be 1.48% and the minimum initial investment is $2500.

T. Rowe Price Global Consumer Fund

T. Rowe Price Global Consumer Fund will seek long-term growth of capital through investments in the stocks of companies in the consumer sector. That’s pretty much it, except for the note that “global” in the name means “normally 40% or more outside the U.S.” The fund will be managed by Jason Nogueira. The initial expense ratio will be 1.05% and the minimum initial investment is $2,500, reduced to $1,000 for various tax-advantaged accounts.

Touchstone International Growth Fund

Touchstone International Growth Fund will seek long-term capital growth. The plan is not particularly distinguished: top-down, bottom-up, mostly developed markets, mostly growth stocks. The fund will be managed by Nitin N. Kumbhani of Apex Capital Management. The initial expense ratio will be 1.07% and the minimum initial investment is $2,500, reduced to $1,000 for various tax-advantaged accounts and $100 for accounts established with an automatic investment plan.

Tree Ring Stock Fund

Tree Ring Stock Fund (no, I don’t make this stuff up) will seek capital appreciation. The plan is to buy 30 or so undervalued mid- to large-cap stocks. The fund will be managed by Yung Jer (“JJ”) Lin of Tree Ring Capital. Tree Ring seems to be a one-man operation with $5 million in AUM and no website, which means I can’t help explain the “tree ring” thing to you. The initial expense ratio will be 1.5% and the minimum initial investment is $5000.

Value Line Defensive Strategies Fund

Value Line Defensive Strategies Fund will seek capital preservation and positive returns with low volatility regardless of the market’s directions. It will be a fund of alternatives funds and ETFs. The fund will be managed by “[_____], the Chief Investment Officer and portfolio manager of the Adviser.” As far as I can tell, EULAV (why would you choose to name yourself for the opposite or reverse of “value”?) doesn’t currently have a CIO, hence the [ ]. The initial expense ratio will be and the minimum initial investment is $1,000.

Wilshire Income Fund

Wilshire Income Fund will seek to maximize current income. The plan is to invest in a “multi-sector portfolio of income producing securities of varying maturities.” The fund will be managed by a team led by B. Scott Minerd, Global Chief Investment Officer of Guggenheim. Eventually they’ll add a second sub-advisor. The initial expense ratio has not been disclosed and the minimum initial investment is $2,500.

AXS Market Neutral (formerly Cognios Market Neutral), (COGMX), February 2016

By David Snowball 

At the time of publication, this fund was named Cognios Market Neutral.

Objective and strategy

The fund seeks long-term growth of capital independent of stock market direction. The managers balance long and short positions in domestic large cap stocks within the S&P 500 universe. They calculate a company’s Return on Tangible Assets (ROTA) and Return on Market Value of Equity (ROME). The former is a measure of a firm’s value; the latter measures its stock valuation. They buy good businesses as measured by ROTA and significantly undervalued firms as measured by ROME. Their short positions are made up of poor businesses that are significantly overvalued. As a risk-management measure and to achieve beta neutrality, their individual short positions are generally a lower dollar amount, but constitute more names than the long portfolio.

Adviser

Cognios Capital LLC. Cognios, headquartered near Kansas City was founded in 2008. It’s an independent quantitative investment management firm that pursues both long-only and hedged strategies. As of December 31, 2015, they had $388 million in assets under management. They manage a hedge fund and accounts for individual and institutional clients as well as the mutual fund. The senior folks at Cognios are deeply involved with charitable organizations in the Kansas City area.

Manager

Jonathan Angrist, Brian Machtley and Francisco Bido. Mr. Angrist, Cognios’s cofounder, president and chief investment officer, has co-managed the fund since its inception. He co-owned and was a portfolio manager at Helzberg Angrist Capital, an alternative asset manager that was the predecessor firm to Cognios. He helped launch, and briefly managed, Buffalo Micro Cap fund. Mr. Machtley, Cognios’ chief operating officer, has co-managed the fund since its inception. Previously, Mr. Machtley served as an associate portfolio manager at a Chicago-based hedge fund manager focused on micro-capitalization equities. Mr. Bido is Cognios’ head of quantitative research. Prior to joining Cognios in 2013, Mr. Bido was a senior quantitative researcher with American Century Investments.

Strategy capacity and closure

At $3 billion, the managers would need to consider closing the fund. The strategy capacity is limited primarily by its short portfolio, which has more numerous but smaller positions than the long portfolio.

Management’s stake in the fund

Messrs. Angrist and Machtley have between $100,000 – 500,000 each in the fund. Mr. Bido has between $10,000 – 50,000.  One of the fund’s trustees has an investment of $10,000 – $50,000 in the fund. The vast majority of the fund’s shares – 98% of investor shares and 64% of institutional ones, as of the last Statement of Additional Information – were owned by the A. Joseph Brandmeyer Trust. Mr. Brandmeyer founded the medical supplies company Enturia and is the father of one of the Cognios founders.

Opening date

31 December 2012

Minimum investment

$1,000 for the investor shares (COGMX) and $100,000 for the institutional shares (COGIX).

Expense ratio

The net expense ratio is 3.88% which includes all the dividend expense on securities sold short, borrowing costs and brokerage expenses totaling 2.18%. The AUM is $20.6 million, as of June 2023. 

Comments

Market neutral funds, mostly, are a waste of time. In general, they invest $1 long in what they consider to be a great stock and $1 short in what they consider to be an awful one. Because there are equal long and short positions, the general movement of the stock market should be neutralized. At that point, the fund’s return is driven by the difference in performance between a great stock and an awful one: if the great stock goes up 10% and the awful one goes up 5%, the fund makes 5%. If the great stock drops 5% and the awful one drops 10%, the fund makes 5%.

Sadly, practice badly lags the theory. The average market neutral fund has made barely 1% annually over the past three and five year periods. On average, they lost money in the turbulent January 2016 with about 60% of the category in the red. Only two market neutral funds have managed to earn 5% or more over the past five years while two others have lost 5% or more. No matter how low you set the bar, the great majority of market neutral funds cannot clear it. In short, they charge hedge fund-like fees for the prospect of cash-like returns.

Why bother?

The short answer is, because we need risk mitigation and our traditional tool for it – investing in bonds – is likely to fail us. Bonds are generating very little income, with interest rates at or near zero there’s very little room for price appreciation (the price of bonds rise when interest rates fall), there are looming questions about liquidity in the bond market and central bankers have few resources left to boost markets.

Fortunately, a few market neutral funds seem to have gotten the discipline right. Cognios is one of them. The fund has returned 7.6% annually over the three years of its existence, while its peers made 1.2%. In January 2016, the fund returned 4.3% while the stock market dropped 5% and its peers lost a fraction of a percent. That record places it in the top 4% of its peer group in the company of two titans: BlackRock and Vanguard.

What has Cognios gotten right?

  1. Their portfolio is beta neutral, rather than dollar neutral. In a typical dollar-neutral portfolio, there’s $1 long for $1 short. That can be a serious problem if the beta characteristics of the short portfolio don’t match those of the long portfolio; a bunch of high beta shorts paired with low beta long positions is a recipe for instability and under-performance. Cognios focuses on keeping the portfolio beta-neutral: if the beta of the short portfolio is high relative to the long, they reduce the size of the short portfolio. That more completely cancels the effects of market movements on the fund’s return.
  2. Their long positions are in high-quality value stocks, rather than growth ones. They use a quantitative screen called ROTA/ROME ™. ROTA (Return on Tangible Assets) is a way of identifying high-quality businesses. At base, it measures a sort of capital efficiency: a company that generates $300 million in returns on a $1 billion in assets is doing better than a company that generates $150 million in returns on those same assets. Cognios research shows ROTA to be a stable identifier of high quality firms; that is, firms that use capital well in one period tend to continue doing so in the future. As Mr. Buffett has said, “A good business is one that earns high return on tangible assets. That’s pretty simple. The very best businesses are the ones that earn a high return on tangible assets and grow.” The combined quality and value screens skew the portfolio toward value. They also only invest in S&P 500 stocks – no use of derivatives, futures or swaps.
  3. They target equity-like returns. Most market neutral managers strive for returns in the low single-digits, to which Mr. Angrist echoes the question: “why bother?” He believes that with a more concentrated portfolio – perhaps 50 long positions and 100 short ones – he’s able to find and exploit enough mispriced securities to generate substantially better returns.
  4. They don’t second-guess their decisions. Their strategy is mechanical and repeatable. They don’t make top-down calls about what sectors are attractive, nor do they worry about the direction of the market, terrorism, interest rates, oil prices or the Chinese banking system. If they’ve managed to neutralize the effect of market movements on the portfolio, they’ve also made fretting about such things irrelevant. So they don’t.
  5. They focus. This is their flagship product and their only mutual fund.

Bottom Line

A market neutral strategy isn’t designed to thrive in a bull market, where even bad companies are assigned ever-rising prices. These funds are designed to serve you in uncertain or falling markets. It’s unclear, with the prospect that both stocks and bonds might be volatile and falling, that traditional strategies will fully protect you. GMO’s December 2015 asset class returns suggest that a traditional 60/40 hybrid fund will lose 1.4% annually in real terms over the next five to seven years. Of the three market neutral funds with the best records (Vanguard Market Neutral VMNFX with a $250,000 minimum and BlackRock Event Driven Equity BALPX with a 5.75% load are the other two), Cognios is by far the smallest, most accessible and most interesting. You might want to learn more about it.

Fund website

AXS Market Neutral Fund

© Mutual Fund Observer, 2016. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.

RiverNorth Opportunities Fund, Inc. (RIV), February 2016

By David Snowball

Objective and strategy

The Fund’s investment objective is total return consisting of capital appreciation and current income. Like the open-end RiverNorth Core Opportunity Fund (RNCOX), this fund invests opportunistically in a changing mix of closed-end funds including business development companies and ETFs. In the normal course of events, at least 65% of the fund’s assets will be in CEFs.  RiverNorth will implement an opportunistic strategy designed to capitalize on the inefficiencies in the CEF space while simultaneously providing diversified exposure to several asset classes. The prospectus articulates a long series of investment guidelines:

  • Up to 80% of the fund might be invested in equity funds
  • No more than 30% will be invested in global equity funds
  • No more than 15% will be in emerging markets equities
  • Up to 60% might be invested in fixed income funds
  • No more than 30% in high yield bonds or senior loans
  • No more than 15% in emerging market income
  • No more than 15% in real estate
  • No more than 15% in energy MLPs
  • No more than 10% in new CEFs
  • No investments in leveraged or inverse CEFs
  • Up to 30% of the portfolio can be short positions in ETFs, a strategy that will be used defensively.
  • Fund leverage is limited to 15% with look-through leverage (that is, factoring in leverage that might be use in the funds they invest in) limited to 33%.

Adviser

ALPS Advisors, Inc.

Sub-Adviser

RiverNorth Capital Management, LLC. RiverNorth is an investment managementfirm founded in 2000 that specializes in opportunistic strategies in niche markets where the potential to exploit inefficiencies is greatest. RiverNorth is the sub-adviser to RiverNorth Opportunities Fund, Inc. RiverNorth also advises three limited partnerships and the four RiverNorth Funds: RiverNorth Core Opportunity (RNCOX), RiverNorth/Oaktree High Income (RNOTX), Equity Opportunity (RNEOX), RiverNorth/DoubleLine Strategic Income (RNDLX) and this one. As of December 31, 2015, they managed $3.3 billion.

Managers

Patrick Galley and Stephen O’Neill. Mr. Galley is RiverNorth’s Chief Investment Officer and President and Chairman of RiverNorth Funds. He also manages all or parts of seven strategies with Mr. O’Neill. Before joining RiverNorth in 2004, he was a Vice President at Bank of America in the Global Investment Bank’s Portfolio Management group. Mr. O’Neill co-manages the firm’s closed-end fund strategies and helps to oversee the closed-end fund investment team. Prior to joining RiverNorth in 2007, he was an Assistant Vice President at Bank of America in the Global Investment Bank’s Portfolio Management group.

Strategy capacity and closure

The Fund is a fixed pool of assets now that the IPO is complete, which means there are no issues with capacity going forward.

Management’s stake in the fund

Messrs. Galley and O’Neill each have between $100,000 – 500,000 in the fund. Three of the four independent trustees have relatively modest ($10,000-100,000) investments in the open-end version of the fund while one has no investments with RiverNorth. RiverNorth, “its affiliates and employees anticipate beneficially owning, as a group, approximately $10 million in shares of the Fund.” Mr. Galley also owns more than 25% of RiverNorth Holding Company, the adviser’s parent company.

Opening date

December 23, 2015

Minimum investment

Like stocks and ETFs, there is no minimum purchase established by the fund though you will need to pay a brokerage fee.

Expense ratio

Total annual expense ratio as a percentage of net assets attributable to common shares as of July 31, 2022, is 1.58% (excluding dividend expense and line of credit expense). Including dividend expense and line of credit expense, the expense ratio is 1.91%. 

The total net assets are $262.1 million and the total managed assets are $359.9 million, according to the Q2 2023 fact sheet. 

Comments

The pricing of closed-end fund shares is famously irrational. Like a “normal” mutual fund, closed-end funds calculate daily net asset values by taking the value of all of the securities they own – an unambiguous figure based on the publicly-quoted prices for stocks – and divide it by the number of shares they’ve issued, another unambiguous figure. At the end of each day, a fund can say, with considerable confidence, “one share of our fund is worth $10.”

So, why can you buy that share for $9.60? Or $9.00 or $8.37? Or, as in the case of Boulder Growth & Income (BIF), $7.56?

The short answer is: people are nuts. CEFs trade like stocks throughout the day and, at any given moment, one share is worth precisely what you convince somebody to pay for that one share. When investors get panicked, people want to dump their shares. If they’re sufficiently panicked they’ll sell at a loss, accepting dimes on the dollar just to be free again. To be clear: during a panic, you can often buy $10 worth of securities for $8. If you simply hold those shares until the panic subsidies, you might reasonably expect to sell them for $9 or $9.50. Even if the market is falling, when the panic selling passes, the discounts contract and you might pocket market-neutral arbitrage gains of 10 or 20%.

It’s a fascinating game, but one which very few of us can successfully play. There are two reasons for that:

  1. You need to know a ridiculous lot about every potential CEF investment: not just current discount but its typical discount, its price movement history, its maximum discount but also the structural factors that might make its current discount continue or deepen.
  2. You need to know when to move and you need to be ready to: remember, these discounts are at their greatest during panics. Just as the market collapses and it appears the world really is ending this time, you need to reach for your checkbook. The discounts are evidence that normal investors do the exact opposite: the desire to escape leads us to sell for the sake of selling.

RiverNorth’s primary expertise is CEF investing; in particular, in investing opportunistically when things look their worst. That strategy is primarily manifested in RiverNorth Core Opportunity (RNCOX), an open-ended tactical allocation fund that uses this strategy. This long-awaited fund embodies the same strategy with a couple twists: it can make modest use of leverage and it’s more devoted to CEFs than is RNCOX. RIV will have at least 65% in CEFs while RNCOX might average 50-70%.

And, too, RIV itself can sell at a discount. A sophisticated investor might monitor the fund and find herself able to buy RIV at a 10% discount at the very moment that RIV is buying other funds at a 20% discount. That would translate to the opportunity to buy $10 worth of stock for $7.20.

Investing in RIV carries clearly demonstrable risks:

  1. It costs a lot. The fund invests in, and passes costs through from, an expensive asset class. The aforementioned Boulder Growth & Income fund charges 1.83%, if RiverNorth buys it, that expense gets passed through to its shareholders as a normal cost of the strategy. The adviser estimates that the fund’s current expenses, assuming they’re using the leverage available to them and including the acquired fund fees and expenses, is 3.72%.
  2. It’s apt to be extremely volatile at times. Put bluntly, the strategy here is to catch falling knives. Ideally you catch them when they don’t have much farther to fall but there’s no guarantee of that.
  3. Its Morningstar rating will periodically suck. If CEF discounts widen after the fund acquires shares, those widened discounts reduce RiverNorth’s return and increase its volatility. Persistently high discounts will make for persistently low Morningstar ratings, which is what we see with RNCOX right now.

That said, this fund is apt to deliver on its promises. The CEF structure, which frees the managers from needing to worry about redemptions or hot money flows, seems well-suited for the mission.

Bottom Line

CEF discounts are now the greatest they’ve been since the depth of the 2008 market meltdown. By RiverNorth’s calculation, discounts are greater now than they’ve been 99% of the time. If panic subsidies, that will provide a substantial tailwind to boost returns for RiverNorth’s shareholders. If the panic persists just long enough for investors to buy RIV at a discount, as the managers are apt to, then the potential gains are multiplied. Investors interested in a more-complete picture of the strategy might want to read our November 2015 profile of RiverNorth Core Opportunity.

Fund website

RiverNorth Opportunities Fund

Fact Sheet

© Mutual Fund Observer, 2016. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.

Leuthold Core Investment (LCORX), February 2016

By David Snowball

Objective and strategy

Leuthold Core pursues capital appreciation and income through the use of tactical asset allocation. Their objective is to avoid significant loss of capital and deliver positive absolute returns while assuming lower risk exposure and lower relative volatility than the S&P 500. Assets are allocated among stocks and ADRs, corporate and government bonds, REITs, commodities, an equity hedge and cash. At one time, the fund’s commodity exposure included direct ownership of physical commodities. Portfolio asset class weightings change as conditions do; exposure is driven by models that determine each asset class’s relative and absolute attractiveness. Equity and fixed-income exposure each range from 30-70% of the portfolio. At the end of 2013, equities comprised 67% of the portfolio. At the end of 2015, 55% of the portfolio was invested in “long” equity positions and 17% was short, for a net exposure under 40%.

Adviser

Leuthold Weeden Capital Management (LWCM). The Leuthold Group began in 1981 as an institutional investment research firm. Their quantitative analyses eventually came to track several hundred factors, some with data dating back to the Great Depression. In 1987, they founded LWCM to direct investment portfolios using the firm’s financial analyses. They manage $1.6 billion through five mutual funds, separate accounts and limited partnerships.

Manager

Doug Ramsey, Chun Wang, Jun Zhu and Greg Swenson. Mr. Ramsey joined Leuthold in 2005 and is their chief investment officer. Mr. Swenson joined Leuthold in 2006 from FactSet Research. Ms. Zhu came to Leuthold in 2008 after earning an MBA from the Applied Security Analysis Program at the University of Wisconsin-Madison. While there, she co-managed a $60 million university endowment fund run by students at the program. Mr. Wang joined in 2009 after a stint with a Hong Kong-based hedge fund and serving as director of research for Ned Davis Research. Collectively the team shares responsibility for testing and refining the firm’s quantitative models and for managing four of their five funds, Grizzly Short (GRZZX) excepted.

Strategy capacity and closure

About $5 billion. Core was hard-closed in 2006 when it reached $2 billion in assets. That decision was driven by limits imposed by the manager’s ability to take a meaningful position in the smallest of the 155 industry groups (e.g. industrial gases) that they then targeted. Following Steve Leuthold’s retirement to lovely Bar Harbor, Maine, the managers studied and implemented a couple refinements to the strategy (somewhat fewer but larger industry groups, somewhat less concentration) that gave the strategy a bit more capacity.

Management’s stake in the fund

Three of the fund’s four managers have investments in the fund, ranging from Mr. Swenson’s $50,000 – 100,000 on the low end to Mr. Ramsey at over $1 million on the high end. All four of the fund’s trustees have substantial investments either directly in the fund or in a separately-managed account whose strategy mirrors the fund’s.

Opening date

November 20, 1995.

Minimum investment

$10,000, reduced to $1,000 for IRAs. The minimum for the institutional share class (LCRIX) is $1,000,000.

Expense ratio

1.16% on assets of $871 million, as of January 2016.

Comments

Leuthold Core Investment was the original tactical asset allocation fund. While other, older funds changed their traditional investment strategies to become tactical allocation funds when they came in vogue three or four years ago, Leuthold Core has pursued the same discipline for two decades.

Core exemplifies their corporate philosophy: “Our definition of long-term investment success is making money . . . and keeping it.”

It does both of those things. Here’s how:

Leuthold’s asset allocation funds construct their portfolios in two steps: (1) asset allocation and (2) security selection. They start by establishing a risk/return profile for the bond market and establishing the probability that stocks will perform better. That judgment draws on Leuthold’s vast experience with statistical analysis of the market and the underlying economies. Their “Major Trends Index,” for example, tracks over 100 variables. This judgment leads them to set the extent of stock exposure. Security selection is then driven by one of two strategies: by an assessment of attractive industries or of individually attractive stocks.

Core focuses on industry selection and its equity portfolio is mirrored in Leuthold Select Industries. Leuthold uses its quantitative screens to run through over 115 industry-specific groups composed of narrow themes, such as Airlines, Health Care Facilities, and Semiconductors to establish the most attractive of them. Core and Select Industries then invest in the most attractive of the attractive sectors. Mr. Ramsey notes that they’ll only consider investing in the most attractive 20% of industries; currently they have positions in 16 or 17 of them. Within the groups, they target attractively priced, financially sound industry leaders. Mr. Ramsay’s description is that they function as “value investors within growth groups.” They short the least attractive stocks in the least attractive industries.

Why should you care? Leuthold believes that it adds value primarily through the strength of its asset allocation and industry selection decisions. By shifting between asset classes and shorting portions of the market, it has helped investors dodge the worst of the market’s downturns. Here’s a simple comparison of Core’s risk and return performance since inception, benchmarked against the all-equity S&P 500.

  APR MaxDD Months Recover Std Dev Downside Dev Ulcer Index Bear Dev Sharpe Ratio Sortino Ratio Martin Ratio
Good if … Higher Lower Lower Lower Lower Lower Lower Higher Higher Higher
Leuthold Core 8.4 -36.5 35 11.0 7.5 8.9 6.8 0.55 0.81 0.68
S&P 500 Monthly Reinvested Index 8.2 -50.9 53 15.3 10.7 17.5 10.3 0.38 0.55 0.34
Leuthold: check check check check check check check check check check

Over time, Core has had slightly higher returns and substantially lower volatility than has the stock market. Morningstar and Lipper have, of course, different peer groups (Tactical Allocation and Flexible Portfolio, respectively) for Core. It has handily beaten both. Core’s returns are in the top 10% of its Morningstar peer groups for the past 1, 3, 5, 10 and 15 year periods.

Our Lipper data does not allow us to establish Leuthold’s percentile rank against its peer group but does show a strikingly consistent picture of higher upside and lower downside than our “flexible portfolio” funds. In the table below, Cycle 4 is the period from the dot-com crash to the start of the ’08 market crisis while Cycle 5 is from the start of the market crisis to the end of 2015. The 20-year report is the same as the “since inception” would be.

  Time period Flexible Portfolio Leuthold Core Leuthold
Annualized Percent Return 20 Year 7.1 8.4 check
10 Year 4.9 5.3 check
5 Year 4.1 5.6 check
3 Year 3.3 8.6 check
1 Year -5.2 -1.0 check
Cycle 4 7.3 11.9 check
Cycle 5 2.8 3.1 check
Maximum Drawdown 20 Year -38.6 -36.5 check
10 Year -36.5 -36.5 check
5 Year -14.9 -15.4 check
3 Year -11.1 -3.7 check
1 Year -9.4 -3.2 check
Cycle 4 -23.8 -21.8 check
Cycle 5 -36.9 -36.5 check
Recovery Time, in months 20 Year 50 35 check
10 Year 43 35 check
5 Year 18 23 X
3 Year 12 4 check
1 Year 8 7 check
Cycle 4 39 26 check
Cycle 5 43 35 check
Standard Deviation 20 Year 11.9 11.0 check
10 Year 11.7 12.0 X
5 Year 9.3 8.5 check
3 Year 8.1 7.0 check
1 Year 8.7 4.9 check
Cycle 4 9.9 10.4 X
Cycle 5 12.7 12.9 X

Modestly higher short-term volatility is possible but, in general, more upside and less downside than other similarly active funds. And, too, Leuthold costs a lot less: 1.16% with Leuthold rather than 1.42% for its Morningstar peers.

Bottom Line

At the Observer, we’re always concerned about the state of the market because we know that investors are much less risk tolerant than they think they are. The years ahead seem particularly fraught to us. Lots of managers, some utterly untested, promise to help you adjust to quickly shifting conditions. Leuthold has delivered on such promises more consistently, with more discipline, for a longer period than virtually any competitor. Investors who perceive that storms are coming, but who don’t have the time or resources to make frequent adjustments to their portfolios, should add Leuthold Core to their due-diligence list.

Investors who are impressed with Core’s discipline but would like a higher degree of international exposure should investigate Leuthold Global (GLBLX). Global applies the same discipline as Core, but starts with a universe of 5000 global stocks rather than 3000 domestic-plus-ADRs one.

Fund website

Leuthold Core Investment Fund

© Mutual Fund Observer, 2016. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.

Funds in registration, January 2016

By David Snowball

American Century Global Small Cap Fund

American Century Global Small Cap Fund will seek capital growth. The plan is “to use a variety of analytical research tools and techniques to identify the stocks of companies that meet their investment criteria.” Not a word about what those criteria might be, though they espouse the same bottom-up, follow the revenue language as the other two AC funds listed below. The fund will be managed by Trevor Gurwich and Federico Laffan; they also manage American Century International Opportunities (AIOIX) together. The initial expense ratio will be 1.51% and the minimum initial investment is $2,500.

American Century Emerging Markets Small Cap Fund

American Century Emerging Markets Small Cap Fund will seek capital growth. The plan is to invest in small EM companies based on the conviction that “over the long term, stock price movements follow growth in earnings, revenues and/or cash flow.” The fund will be managed by Patricia Ribeiro who has been managing American Century Emerging Markets (TWMIX) since 2006. The initial expense ratio will be 1.61% and the minimum initial investment is $2,500.

American Century Focused International Growth Fund

American Century Focused International Growth Fund will seek capital growth. The plan is to construct a bottom-up portfolio of 35-50 firms whose revenues are growing at an accelerating pace. The fund will be managed by Rajesh Gandhi and James Gendelman. Mr. Gendelman is, dare I say, a refugee from The House of Marsico. The initial expense ratio will be 1.24% and the minimum initial investment is $2,500.

Canterbury Portfolio Thermostat Fund

Canterbury Portfolio Thermostat Fund will seek long-term risk-adjusted growth. The plan is to use ETFs to invest in all the right places given current market conditions. The strategy is executed through ETFs and is unrelated to the much simpler, highly successful Columbia Thermostat fund discipline. The fund will be managed by Thomas Hardin and Kimberly J. Custer. The initial expense ratio will be 2.18% and the minimum initial investment is $5,000 for Institutional shares and $2,500 for Investor ones.

DoubleLine Infrastructure Income Fund

DoubleLine Infrastructure Income Fund will seek current income and total return. The plan is to invest in fixed- and floating-rate instruments which are being used to finance or refinance infrastructure projects globally. In general, the portfolio will be dollar-denominated. The fund will be managed by a team of DoubleLine folks, none of whom is named Jeffrey. The initial expense ratio has not yet been set and the minimum initial investment is $2,000, reduced to $500 for IRAs.

Manning & Napier Managed Futures

Manning & Napier Managed Futures  will seek positive absolute returns. “Managed futures” is a brilliant strategy with a horrendous track record: divide the world up into a series of asset classes, then use futures to invest long in rising classes, short falling ones and use the bulk of your assets to buy short-term bonds to add a bit of income. The strategy has lost money steadily over the past five years as the market has refused to cooperate by providing predictable trends to exploit. Over much longer periods, managed futures indexes have provided near-equity returns with reduced volatility. The fund will be managed by a team from M&N. The initial expense ratio will be 1.40% and the minimum initial investment is $2,000.

Pax World Mid Cap Fund

Pax World Mid Cap Fund will seek long-term growth of capital. The plan is to follow “a sustainable investing approach, combining rigorous financial analysis with equally rigorous environmental, social and governance analysis in order to identify investments.” The fund will be managed by Nathan Moser who also manages Pax World Small Cap (PXSAX). That fund has been a pretty solid performer pretty consistently. The initial expense ratio will be 1.24% and the minimum initial investment is $1000.

Seafarer Overseas Value Fund

Seafarer Overseas Value Fund will seek long-term capital appreciation. The plan is to invest in an all-cap EM stock portfolio. Beyond the bland announcement that they’ll use a “value” approach (“investing in companies that currently have low or depressed valuations, but which also have the prospect of achieving improved valuations in the future”), there’s little guidance as to what the fund’s will be doing. The fund will be managed by Paul Espinosa. Mr. Espinosa had 15 years as an EM equity analyst with Legg Mason, Citigroup and J.P. Morgan before joining Seafarer in May, 2014. The initial expense ratio has not yet been set, though Seafarer is evangelical about providing their services at the lowest practicable cost to investors, and the minimum initial investment is $2,500.

T. Rowe Price QM Global Equity Fund

T. Rowe Price QM Global Equity Fund will seek long-term growth of capital through a broadly diversified portfolio of global stocks. The plan is to use quantitative models (the “QM”) to select mid- to large-cap stocks based on “valuation, profitability, stability, management capital allocation actions, and indicators of near term appreciation potential.” The fund will be managed by Sudhir Nanda, head of TRP’s Quantitative Equity group. Dr. Nanda, formerly Professor Nanda, joined Price in 2000 and has managed the five-star Diversified Small Cap Growth fund (PRDSX) for the past nine years. The initial expense ratio will be 0.79% and the minimum initial investment is $2,500, though that’s reduced to $1000 for various sorts of tax-advantaged accounts.

T. Rowe Price QM U.S. Small & Mid-Cap Core Equity Fund

T. Rowe Price QM U.S. Small & Mid-Cap Core Equity Fund will seek long-term growth of capital through a broadly diversified portfolio of small- and mid-cap U.S. stocks. The plan is to use quantitative models (the “QM”) to select small- to mid-cap stocks, comparable to those covered by the Russell 2500, based on “valuation, profitability, stability, management capital allocation actions, and indicators of near term appreciation potential.” Up to 20% might be international stocks, but that disclosure seems mostly a formality. The fund will be managed by Boyko Atanassov, a quantitative equity analyst with Price for the past five years. The initial expense ratio will be 0.89% and the minimum initial investment is $2,500, though that’s reduced to $1000 for various sorts of tax-advantaged accounts.

T. Rowe Price QM U.S. Value Equity Fund

T. Rowe Price QM U.S. Value Equity Fund will seek long-term growth of capital through a broadly diversified portfolio of U.S. stocks believed to be undervalued. The plan is to screen firms based on “valuation, profitability, stability, management capital allocation actions, and … near term appreciation potential,” then assess their valuations based on price-to-earnings, price-to-cash flows, and price-to-book ratios, and compares these ratios with others in the relevant investing universe. The fund will be managed by Farris Shuggi, a Price quantitative equity analyst with three master’s degrees. The initial expense ratio will be 0.74% and the minimum initial investment is $2,500, though that’s reduced to $1000 for various sorts of tax-advantaged accounts.

Templeton Dynamic Equity Fund

Templeton Dynamic Equity Fund will seek risk adjusted total return over the longer term. The whimsical plan is to use a “bottom-up, value-oriented, long-term approach” to select individual equities then use a long/short ETF portfolio to manage sector exposures and hedge its global market exposure with some combination of cash, ETFs and futures. The technical term for this strategy is “a lot of moving parts.” The fund will be managed by a Templeton team: James Harper, Norman J. Boersma, and Heather Arnold.  “A” shares have a 5.75% front load, a $1000 minimum and a 1.57% initial e.r. “Advisor” shares are no-load with a 1.32% e.r. “R” shares are no-load but impose a 0.50% 12(b)1 fee for a total e.r. of 1.82%.

Vanguard Core Bond

Vanguard Core Bond will seek to provide total return while generating a moderate level of current income. The plan is to invest in all different sorts of bonds with very little guidance in the prospectus about which or why, other than to target an average maturity of 4-12 years and to limit non-dollar-denominated bonds to 10% of the portfolio. At base, this looks like Vanguard’s attempt to generate an active fund that’s just slightly more attractive than a broad bond market index. The fund will be managed by Brian W. Quigley, Gemma Wright-Casparius, and Gregory S. Nassour, all of Vanguard. The initial expense ratio will be 0.25% on Investor shares and the minimum initial investment is $3000.

Vanguard Emerging Markets Bond

Vanguard Emerging Markets Bond will seek to provide total return while generating a moderate level of current income. The plan is to invest in all sorts of EM bonds, including high yield. For their purposes, the emerging markets are everybody except Australia, Canada, Japan, New Zealand, the United States, the United Kingdom, and most European Monetary Union countries.  In general, they’ll buy bonds which are “denominated in or hedged back to the U.S. dollar.” The fund will be managed by Daniel Shaykevich, who has been with Vanguard for three years and co-leads their Investment Grade Non-Corporate team. Before joining Vanguard he spent almost nine years as an EM bond manager for BlackRock. The initial expense ratio will be 0.60% and the minimum initial investment is $3000.

Fidelity Total Emerging Markets (FTEMX), December 2015

By David Snowball

Objective and strategy

FTEMX seeks income and capital growth by investing in both emerging markets equities and emerging markets debt. White their neutral weighting is 60/40 between stocks/bonds, the managers adjust the balance between equity and debt based on which universe is most attractively positioned. In practice, that has ranged between 55% – 75% in equities. Within equities, sector and regional exposure are driven by security selection; they go where they find the best opportunities. The debt portfolio is distinctive; it tends to hold US dollar-denominated debt (a conservative move) but overweight frontier and smaller emerging markets (an aggressive one).

Adviser

Fidelity Investments. Fidelity has a bewildering slug of subsidiaries spread across the globe. Collectively they manage 575 mutual funds, over half of those institutional, and $2.1 trillion in assets.

Managers

John Carlson and a five person team of EM equity folks. Mr. Carlson has managed Fidelity’s EM bond fund, New Markets Income (FNMIX), since 1995. He added Global High Income (FGHIX) in 2011. He was Morningstar’s Fixed-Income Manager of the Year in 2011. He manages $7.8 billion and is supported by a 15 person team. The equity managers are Timothy Gannon, Jim Hayes, Sam Polyak, Greg Lee and Xiaoting Zhao. Gannon, Hayes and Polyak have been with the fund since inception, Lee was added in 2012 and Zhao in 2015. These folks have been responsible since 2014 for Emerging Markets Discovery (FEDDX), a four star fund with a small- to mid-cap bias. They also help manage Fidelity Series Emerging Markets (FEMSX), a four star fund that is only available to the managers of Fidelity funds-of-funds. The equity managers are each responsible for investing in a set of industries: Hayes (financials, telecom, utilities), Polyak (consumer and materials), Lee (industrials), Gannon (health care) and Zhao (tech). They help manage between $2 – 12 billion each.

Management’s stake in the fund

Messrs. Carlson, Gannon and Hayes have each invested between $100,000 and $500,000. Mr. Lee and Mr. Polyak have no investment in the fund. None of the fund’s 10 trustees have an investment in it. While they oversee Fidelity’s entire suite of EM funds, five of the 10 have no investment in any of the EM funds.

Opening date

November 1, 2011

Minimum investment

$2,500

Expense ratio

1.12% on assets of $229.7 million (as of 7/6/2023). 

Comments

Simple, simple, simple.

The argument for considering an emerging markets fund is simple: they offer the prospect of being the world’s best performing asset class over the next 5 or 10 years. In October 2015, GMO estimated that EM stocks (4.0% real return) would be the highest returning asset class over the next 5-7 years, EM bonds (2.2%) would be second. Most other asset classes were projected to have negative real returns. At the same moment, Rob Arnott’s Research Affiliates was more optimistic, suggesting that EM stocks are priced to return 7.9% a year with high volatility compared with 1.1% in the US and 5.3% in the other developed markets. Given global demographics, it wouldn’t be surprising, give or take the wildcard effects of global warming, for them to be the best asset class over the next 50 or 100 years as well.

The argument against considering an emerging markets fund is simple: emerging markets are a mess. Their markets tend to be volatile. 30-60% drawdowns are not uncommon. National economies are overleveraged to commodity prices and their capital markets (banks, bond auctions, stock markets) can’t be relied upon; Andrew Foster, my favorite emerging markets manager and head of the Seafarer fund, argues that broken capital markets are almost a defining characteristic of the emerging markets. Investors yanked over a trillion dollars from emerging markets over the past 12 months.

The argument for investing in emerging markets through a balanced fund is simple: they combine higher returns and lower volatility than you can achieve through 100% equity exposure. The evidence here is a bit fragmentary (because the “e.m. balanced” approach is new and neither Morningstar nor Lipper have either a peer group or a benchmark) but consistent. The oldest EM balanced fund, the closed-end First Trust Aberdeen Emerging Opportunities Fund (FEO), reports that from 2006-2014 a blended benchmark returned 6.9% annually while the FTSE All World Emerging Market Equity Index returned 5.9%. From late 2011 to early 2015, Fidelity calculates that a balanced index returned 5.6% while the MSCI Emerging Markets Index returns 5.1%. Both funds have lower standard deviations and higher since-inception returns than an equity index. Simply rebalancing each year between Fidelity’s EM stock and bond funds so that you end up with a 60/40 weighting in a hypothetical balanced portfolio yields the same result for the past 10- and 15-year periods.

If balanced makes sense, does Fidelity make special sense?

Probably.

Two things stand out. First, the lead manager John Carlson is exceptionally talented and experienced. He’s been running Fidelity New Market Income (FNMIX), an emerging markets bond fund, since 1995. He’s the third longest-tenured EM bond manager and has navigated his fund through a series of crises initiated in Mexico, Asia and Russia. He earned Morningstar’s Fixed-Income Fund Manager of the Year in 2011. $10,000 entrusted to him when I took over FNMIX would have grown to $100,000 now while his average peer would be about $30,000 behind.

Second, it’s a sensible portfolio. Equity exposure has ranged from 55 – 73%. Currently it’s at the lowest in the fund’s history. Mr. Carlson says that “From an asset-allocation perspective, we believe shareholders can expect the sort of downside protection typically afforded by a balanced fund comprising both fixed-income and equity exposure.” He invests in dollar-denominated (so-called “hard currency”) EM bonds, which shields his investors from the effects of currency fluctuations. That makes the portfolio’s bond safety net extra safe. At the same time, he doesn’t hedge his stock exposure and is willing to venture into smaller emerging markets and frontier markets. At least in theory those are more likely to be mispriced than issues in larger markets, and they offer a bit more portfolio diversification. The manager says that “Based on about two decades of research, we found that frontier-markets debt performs much like EM equity.” In general the equity sub-portfolio’s returns are driven by individual security selection. It shows no unusual bias to any region, sector or market cap. “On the equity side, we take a sector-neutral approach that targets high active share, a measure of the percentage of holdings that differ from the index, which historically has offered greater potential for outperformance.”

Since inception in 2011, the strategy has worked. The fund has returned 2.9% a year in very rocky times while its all-equity peers lost money. Both measures of volatility, standard deviation and downside deviation, are noticeably lower than an EM equity fund’s.

ftemx

Bottom Line

I am biased in favor of EM investing. Despite substantial turmoil, it makes sense to me but only if you have a strategy for coping with volatility. Mr. Carlson has done a good job of it, making this the most attractive of the EM balanced funds on the market. There are other risk-conscious EM funds (most notable Seafarer Overseas Growth & Income SFGIX and the hedged Driehaus Emerging Markets Small Cap DRESX) but folks wanting even more of a buffer might reasonably start by looking here.

Fund website

Fidelity Total Emerging Markets

Disclosure: I own shares of FTEMX through my college’s 403b retirement plan and shares of SFGIX in my non-retirement portfolio.

Funds in registration, November 2015

By David Snowball

Frontier Silk Invest New Horizons Fund

Frontier Silk Invest New Horizons Fund will be seek capital appreciation. The plan is to invest in frontier market equities, either directly or through a form of derivative called a participation note. The fund will be managed by Zin El Abidin Bekkali, Olufunmilayo Akinluyi and Mohamed Bahaa Abdeen, all of Silk Invest Limited which is domiciled in London. The opening expense ratio will be 2.0% after waivers and the minimum initial investment is $10,000.

Harbor International Small Cap Fund

Harbor International Small Cap Fund will seek long-term growth of capital. The plan is to invest a diversified portfolio of 80-110 international small cap stocks. “Small” generally equates to “under $5 billion in market cap.” They’re looking for financial sound firms whose earnings have been growing lately and whose “reasonable company valuation indicat[es] a strong upside potential in the stock price over the next 9 to 12 months.” The fund will be managed by a team from Barings International Limited. The opening expense ratio will be 1.32% and the minimum initial investment is $2,500.

LDR Preferred Income Fund

LDR Preferred Income Fund will seek high current income and high risk-adjusted long-term returns. The plan is to invest in preferred shares of REITs, maybe with some interest rate hedges tossed in. Currently this portfolio is manifested in a hedge fund, LDR Preferred Income Fund, LLC, which will roll over and become a mutual fund. No word yet on the hedge fund’s performance. The fund will be managed by Lawrence D. Raiman (LDR) and Gregory Cox, both of LDR Capital Management. Neither the expense ratio nor the minimum initial investment has been revealed, though the existence of an archaic 5.75% front load has been.

Livian Equity Opportunity Fund

Livian Equity Opportunity Fund will seek long-term capital appreciation. The plan is to invest in a portfolio of 30-35 undervalued, mostly domestic, stocks. They’re looking for high quality businesses and some identifiable catalyst that will unlock value. Livian Equity Opportunity Fund already operates as a hedge fund, though its performance record has not yet been released. The fund will be managed by Michael Livian and Stephen Mulholland who currently run the hedge fund. The opening expense ratio has not been disclosed. The minimum initial investment will be $10,000.

TCW New America Premier Equities Fund

TCW New America Premier Equities will seek long-term capital appreciation. The plan is invest in “enduring, cash generating businesses whose leaders the portfolio manager believes prudently manage their environmental, social, and financial resources” and whose shares are relatively cheap. The fund will be managed by Joseph R. Shaposhnik, a senior vice president at TCW. The opening expense ratio not been determined and the minimum initial investment is $2000. That’s reduced to $500 for IRAs.

RiverNorth Core Opportunity (RNCOX/RNCIX), November 2015

By David Snowball

THIS IS AN UPDATE OF THE FUND PROFILE ORIGINALLY PUBLISHED IN June 2011. YOU CAN FIND THAT ORIGINAL PROFILE HERE.

Objective and strategy

The fund seeks long-term capital appreciation and income, while trying to maintain a sense of “prudent investment risk over the long-term.” RNCOX is a “balanced” fund with several twists. First, it adjusts its long-term asset allocation in order to take advantage of tactical allocation opportunities. Second, it invests primarily in a mix of closed-end mutual funds and ETFs. Lipper’s designation, as a Global Macro Allocation fund, provides a more realistic comparison than Morningstar’s Moderate Allocation assignment.

Adviser

RiverNorth Capital Management. RiverNorth is a Chicago-based firm, founded in 2000 with a distinctive focus on closed-end fund arbitrage. They have since expanded their competence into other “under-followed, niche markets where the potential to exploit inefficiencies is greatest.” RiverNorth advises three limited partnerships and the four RiverNorth funds: RiverNorth/Oaktree High Income (RNOTX), Equity Opportunity (RNEOX), RiverNorth/DoubleLine Strategic Income (RNDLX) and this one. They manage about $3.0 billion through limited partnerships, mutual funds and employee benefit plans.

Managers

Patrick Galley and Stephen O’Neill. Mr. Galley is RiverNorth’s President, Chairman and Chief Investment Officer. He also manages all or parts of three RiverNorth funds with Mr. O’Neill. Before joining RiverNorth Capital in 2004, he was a Vice President at Bank of America in the Global Investment Bank’s Portfolio Management group. Mr. O’Neill specializes in qualitative and quantitative analysis of closed-end funds and their respective asset classes. Prior to joining RiverNorth in 2007, he was an Assistant Vice President at Bank of America in the Global Investment Bank’s Portfolio Management group. Messrs Galley and O’Neill manage about $1.7 billion in other pooled assets.

Strategy capacity and closure

The fund holds almost as much money as it did when it closed to new investors. The managers describe themselves as “comfortable now” with the assets in the fund. Three factors would affect their decision to close it again. First, market volatility makes them predisposed to stay open. That volatility feeds the CEF discounts which help drive market neutral alpha. Second, strong relative performance will draw “hot money” again, which they’d prefer to avoid dealing with. Finally, they prefer a soft close which would leave “a runway” for advisors to allocate to their clients.

Active share

“Active share” measures the degree to which a fund’s portfolio differs from the holdings of its benchmark portfolio. High active share indicates management which is providing a portfolio that is substantially different from, and independent of, the index. An active share of zero indicates perfect overlap with the index, 100 indicates perfect independence. RiverNorth does not calculate active share, though the distinctiveness of its portfolio implies a very high level of activity.

Management’s stake in the fund

Messrs. Galley and O’Neill each have between $100,000 – 500,000 in the fund. Three of the four independent trustees have relatively modest ($10,000-100,000) investments in the fund while one has no investments with RiverNorth.

Opening date

December 27, 2006. The fund added an institutional share class (RNCIX) on August 11, 2014.

Minimum investment

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

Expense ratio

3.56% on assets of $45.2 million, as of July 2023. The expense ratio is heavily influenced by the pass-through expense from the closed-end funds in which it invests. 

Comments

Normally the phrase “balanced fund” causes investor’s eyes to grow heavy and their heads to nod. Traditional balanced funds make a good living by being deadly dull. They have a predictable asset allocation, 60% equities and 40% bonds. And they execute that allocation with predictable investments in blue-chip domestic companies and investment grade bonds. Their returns are driven more by expenses and avoiding mistakes than any great talent.

Morningstar places RiverNorth Core Opportunity there. They don’t belong. Benchmarking them against the “moderate allocation” group is far more likely to mislead than inform.

RiverNorth’s strategy involves pursuing both long- and short-term opportunities. They set an asset allocation then ask whether they see more opportunities in executing the strategy through closed-end funds (CEFs) or low-cost ETFs.  While both CEFs and ETFs trade like stocks, CEFs are more like active mutual funds. Because their price is set by investor demands, a share of a CEF might trade for more than the value of its holdings when greed seizes the market or far less than the value of its holdings when fear does. The managers’ implement their asset allocation with CEFs when they’re available at irrational discounts; otherwise, they use low-cost ETFs.

In general, the portfolio is 50-70% CEFs. Mr. Galley says that it’s rare to go over 70% but they did invest 98% in CEFs toward the end of during the market crisis. That move primed their rocket-like rise in 2009: their 49% gain more than doubled their peer group’s and was nearly double the S&P 500’s 26%. It’s particularly impressive that the fund’s loss in 2008 was no greater than its meek counterparts.

That illustrates an essential point: this isn’t your father’s Buick. It’s distinctive and more opportunistic. Over the fund’s life, it’s handsomely rewarded its investors with outsized returns and quick bounce backs from its declines. Here’s RiverNorth’s performance against the best passive and active options at Vanguard.

rivernorth vs vanguard

The comparison against Rivernorth’s more opportunistic peer group shows an even more stark advantage.

rivernorth

The fund is underwater by 3.4% in 2015, through October 30, after a ferocious October rally. That places them about 3.5% behind their Morningstar peer group. The short-term question for investors is whether that lag represents a failure of RiverNorth’s strategy or another example of the portfolio-as-compressed-spring? The managers observe that CEF discounts widen to levels not seen since the financial crisis. That’s led them to place 76% of the portfolio in CEFs, many that use leverage in their own portfolios. That’s well above their historic norms and implies a considerable confidence on their part.

Bottom Line

Core Opportunity offers unique opportunity, more suited to investors comfortable with an aggressive strategy than a passive one. Since inception, the fund has outperformed the S&P 500 with far less volatility (beta = 76) and has whomped similarly-aggressive funds. That long-term strength comes at the price of being out of step with, and more volatile than, traditional 60/40 funds. That’s making them look weak now. If history is any guide, that judgment is subject to a dramatic and sudden reversal. It’s well worth investigating.

Fund website

RiverNorth Core Opportunity.

© Mutual Fund Observer, 2015. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.

Funds in Registration, November 2015

By David Snowball

ASTON/Value Partners Asia Dividend Fund

ASTON/Value Partners Asia Dividend Fund will seek capital appreciation and current income. The plan is to pursue a value-oriented, buy-and-hold strategy to investing in dividend-paying Asian stocks. They might hold up to 20% in fixed income. The fund will be managed by Norman Ho and Philip Li of Value Partners Hong Kong Limited. They’ve got a separate account business with a six-year record but have not yet disclosed its performance. The initial expense ratio will be 1.41% and the minimum initial investment is $2,500, reduced to $500 for various tax-advantaged accounts.

Davenport Balanced Income Fund

Davenport Balanced Income Fund will seek current income and an opportunity for long term growth. The plan is to buy high-quality stocks and investment-grade bonds. They’ve got the freedom to invest globally, including in the emerging markets. The fund will be managed by a team from Davenport & Company. The initial expense ratio will be 1.25% and the minimum initial investment is $5,000, reduced to $2,000 for various tax-advantaged accounts.

Great Lakes Disciplined International Small Cap Fund

Great Lakes Disciplined International Small Cap Fund will seek total return. The plan is to invest in common and preferred stocks and convertible securities of non-U.S. small companies. The strategy is quant and pretty GARP-y. The fund will be managed by the Great Lakes Disciplined Equities Team. The initial expense ratio will be 1.71% and the minimum initial investment is $1,000, reduced to $500 for IRAs.

Homestead International Equity Fund II

Homestead International Equity Fund II will seek long-term capital appreciation. The plan is to invest in a diversified portfolio of well-managed, financially sound, fast growing and strongly competitive firms in the developed and developing markets. The fund will be managed by a team from Harding Loevner. The initial expense ratio has not been disclosed. The minimum initial investment is $500, reduced to $200 for IRAs and education accounts.

Huber Capital Mid Cap Value Fund

Huber Capital Mid Cap Value Fund will seek current income and capital appreciation, though there’s no particular explanation for where that income is coming from. The plan is to invest in a portfolio of undervalued mid-caps, which includes firms with market caps below $20 billion. Up to 20% might be non-US and up to 15% might be “restricted” securities. The fund will be managed by Joe Huber, the adviser’s CEO and CIO. The initial expense ratio will be 1.51% and the minimum initial investment is $5,000, reduced to $2,500 for IRAs and accounts with an AIP.

Infusive Happy Consumer Choices Fund

Infusive Happy Consumer Choices Fund will seek long-term capital appreciation (and the avoidance of years of derision). The plan is to buy the stocks of firms whose products make consumers happy and which, therefore, generate consumer loyalty and corporate pricing power. The fund will be managed by Adam Lippman of Ruby Capital Partners. The initial expense ratio will be 1.60% and the minimum initial investment is $10,000.

Marshfield Concentrated Opportunity Fund

Marshfield Concentrated Opportunity Fund will seek long-term capital growth. I’ll let them speak for themselves: “The Fund may hold out-of-favor stocks rather than popular ones. The Fund’s portfolio will be concentrated and therefore may at times hold stocks in only a few companies. The Adviser is willing to hold cash and will buy stocks opportunistically when prices are attractive …” The fund will be managed by Christopher M. Niemczewski and Elise J. Hoffmann of Marshfield Associates. The initial expense ratio will be 1.25% and the minimum initial investment is $10,000. That’s reduced to $1,000 for IRAs and UTMAs.

Miles Capital Alternatives Advantage Fund

Miles Capital Alternatives Advantage Fund will seek long-term total return with less volatility than U.S. equity markets. The plan is to invest in hedge-like and alternative strategy funds and ETFs. The fund will be managed by Steve Stotts and Alan Goody. The initial expense ratio will be 3.5% (after waivers!) and the minimum initial investment is $2,500.

Nuance Concentrated Value Long-Short Fund

Nuance Concentrated Value Long-Short Fund will pursue long term capital appreciation. The plan is to invest in 15-35 long positions and 50 short ones. When the prospectus is finished, they’ll add the six-month long track record of their separate accounts as an indication of the fund’s prospects. And then we pause to ask, why bother? It’s six months. The fund will be managed by Scott A. Moore, CFA, President and Chief Investment Officer of Nuance Investments. The initial expense ratio will be 1.87% and the minimum initial investment is $2,500.

Scharf Alpha Opportunity Fund

Scharf Alpha Opportunity Fund will seek long-term capital appreciation and to provide returns above inflation while exposing investors to less volatility than typical equity investments. The plan is to invest in a global portfolio of undervalued securities, short indexes using ETFs and possibly hold up to 30% in fixed income. The fund will be managed by Brian A. Krawez of Scharf Investments. The initial expense ratio will be 2.27%. The minimum initial investment is $10,000, reduced to $5,000 for IRAs.

USA Mutuals Beating Beta Fund

USA Mutuals Beating Beta Fund will seek capital appreciation. The plan is to invest in the top 15% of companies in each of the industry sectors represented in the S&P500. That will average 75 stocks, mostly domestic. “Best” is determined by a combination of book to market value, net stock issuance, earnings quality, asset growth, profitability, and momentum The fund will be managed by Gerald Sullivan and Charles Clarke of USA Mutuals. The initial expense ratio will be 1.39% and the minimum initial investment is .

USA Mutuals Dynamic Market Opportunity Fund

USA Mutuals Dynamic Market Opportunity Fund will seek capital appreciation and capital preservation with low volatility. The plan is to have long and short call and put options on the S&P 500 Index, long and short positions in S&P futures contracts, and cash. The fund will be managed by Albert L. and Alan T. Hu. The initial expense ratio will be 2.14% and the minimum initial investment is $2,000.

Winton European Equity Portfolio

Winton European Equity Portfolio will seek long-term investment growth. The plan is to use a big honkin’ computer program to select an all-cap portfolio of stocks, mostly from developed Europe. There might be some emerging markets exposure and a little cash, though they’ll normally be fully invested. The fund will be managed by David Winton Harding and Matthew David Beddall, the adviser’s CEO and CIO, respectively. The initial expense ratio will be 1.16% and the minimum initial investment is $2,500.

Winton International Equity Portfolio

Winton International Equity Portfolio will seek long-term investment growth. The plan is to use a big honkin’ computer program to select an all-cap portfolio of stocks, mostly from everywhere except the U.S. and Canada. There might be some emerging markets exposure and a little cash, though they’ll normally be fully invested. The fund will be managed by David Winton Harding and Matthew David Beddall, the adviser’s CEO and CIO, respectively. The initial expense ratio will be 1.16% and the minimum initial investment is $2,500.

Winton U.S. Equity Portfolio

Winton U.S. Equity Portfolio will seek long-term investment growth. The plan is to use a big honkin’ computer program to select an all-cap portfolio of stocks, mostly from the US with hints that the Canadians might worm their way in. They’ll normally be fully invested. The fund will be managed by David Winton Harding and Matthew David Beddall, the adviser’s CEO and CIO, respectively. The initial expense ratio will be 1.16% and the minimum initial investment is $2,500.

Funds in Registration, October 2015

By David Snowball

American Century Emerging Opportunities Total Return Fund

American Century Emerging Opportunities Total Return Fund will seek (wait for it!) total return.  The plan is to invest in EM bonds, corporate and sovereign, and floating rate debt. They have the right to buy convertible bonds, stocks, and exchange-traded funds but those seek to be a “why not toss them in the prospectus?” afterthought. The fund will be managed by an American Century team. The initial expense ratio hasn’t been released. The minimum initial investment will be $2,500.

Baird Small/Mid Cap Value Fund

Baird Small/Mid Cap Value Fund will seek long-term capital appreciation.  The plan is to invest in a diversified portfolio of undervalued small- to mid-cap stocks. Up to 15% might be non-US stocks trading on US exchanges. The fund will be managed by Michelle E. Stevens. The initial expense ratio is 1.20%. The minimum initial investment will be $1,000.

Cullen Enhanced Equity Income Fund

Cullen Enhanced Equity Income Fund will seek long-term capital appreciation and current income.  The plan is to buy dividend paying common stocks of medium- and large-capitalization companies, with about equal weighting for all of the stocks. They then write covered calls to generate income. The fund will be managed by James P. Cullen, Jennifer Chang and Tim Cordle. The initial expense ratio is 1.01%. The minimum initial investment will be $1,000.

DoubleLine Global Bond Fund

DoubleLine Global Bond Fund will seek long-term total return.  The plan is to pursue a global portfolio which might include US and foreign sovereign debt, quasi-sovereign debt, supra-national obligations, emerging market debt securities, high yield and defaulted debt securities, inflation-indexed securities, corporate debt securities, mortgage and asset backed securities, bank loans, and derivatives. The fund will be managed by The Gundlach alone. The initial expense ratio hasn’t been released. The minimum initial investment will be $2,000.

Matthews Asia Value Fund         

Matthews Asia Value Fund will seek long-term capital appreciation.  The plan is to buy undervalued common and preferred stocks. Firms are “Asian” if they’re “tied to” the region; for example, a European firm which derives more than 50% of its revenue from Asian markets is Asian. Firms are attractive to Matthews if they are “high quality, undervalued companies that have strong balance sheets, are focused on their shareholders, and are well-positioned to take advantage of Asia’s economic and financial evolution.” The fund will be managed by a team led by Beini Zhou. The initial expense ratio is 1.45%. The minimum initial investment will be $2,500.

Vanguard International Dividend Appreciation Index Fund

Vanguard International Dividend Appreciation Index Fund will seek to track the NASDAQ International Dividend Achievers Select Index, which focuses on high quality companies located in developed and emerging markets, excluding the United States, that have both the ability and the commitment to grow their dividends over time. The fund will be managed by Justin E. Hales and Michael Perre. The initial expense ratio is 0.35%. The minimum initial investment will be $3,000.

Vanguard International High Dividend Yield Index Fund

Vanguard International High Dividend Yield Index Fund will seek to track the FTSE All-World ex US High Dividend Yield Index, which focuses on companies located in developed and emerging markets, excluding the United States, that are forecasted to have above-average dividend yields.  The plan is to . The fund will be managed by Justin E. Hales and Michael Perre. The initial expense ratio will be 0.40%. The minimum initial investment will be $3,000.