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May commentary - Martin Capital not that impressive
Per their 2013 annual letter, Martin Capital Management has returned 5.3% annualized net of fees from 2000-2013 vs 3.6% for the S&P 500. From 2003-2013, they lagged the S&P in every single calendar year, except 2008.
To quote from the commentary: "There are some investors for whom this strategy is a very good fit"
Apparently, it would be those who wish to outperform the SP500 by being better at playing defense than offense ('better relative performance 2000-2002, 2008). There's more than one way to skin a cat.
why do you think everyone compares their performance with S&P? have you heard about balanced investing, or liability driven investing? believe it or not, but RISK adjusted return matters a lot to many who manage corporate balance sheet. S&P chasing works great for many -- on a way up.
Because the S&P is what he's chosen to compare himself to in his letters.
But if you want to discuss balanced investing, let's compare him to Vanguard Wellington. Martin badly underperformed Wellington every year from 2003-2013 except 2008. And Martin charges a 1.4% ER, compared to Wellington's 0.26%.
@jaba: I agree with you, this fund is one and a half drumsticks away from being a turkey. Here are the returns from the funds website. Regards, Ted Martin Focused Value Fund (MFVRX) 3-Mo. -0.20% 6Mo. .50% 1-Year 2.22% Since Inception .82% S&P 500 Index 3Mo. 1.81% 6Mo. 12.51% 1Yeae 21.86% Since Inception 21.16% + 1.39% expense ratio
Ted, will all due respect, 1-year returns don't matter to me at all. As Buffett says, "I buy on the assumption that they could close the market the next day and not reopen it for five years."
Funds like this have a role. If you are a Mo-Mo guy, a fund switcher, or want to outperform in up markets and in down markets, you will not want to invest in this fund. David understands careful portfolio construction. That's why he said what he did.
I'm none of these things. I want to outperform, period. If you want to hold cash, hold cash. But don't pay a guy a 1.4% ER to hold 80% T-bills and expect that you're going to do well long-term.
Funds/strategies like this are so outside the needs/experiences of typical retail investors as may be represented here that a discussion can only be generic as posted so far in which everybody is right but all miss the point.
There are a number of "opportunistic capital preservation" money managers like Frank Martin running boutique funds primarily for high net worth (HNW) individuals via word of mouth and networking. Some of them try to create retail funds for reasons I will cover later on. I, personally, know a manager like this, so some of the following is not necessarily what you might hear from such managers in public.
In private money management, the typical investor in such funds is a HNW individual with a few millions that may be needed in 2-3 years for some investment like real estate or a new business, money that they do not want to lose or be tied up without liquidity. They definitely do not NEED the growth from that money for their retirement but wouldn't mind if somebody opportunistically made some money on it.
You can see this as an extreme capital preservation strategy where the drawdown is at or close to zero under any scenario. They are definitely not for the kind of capital growth needed by the 99% to make their retirement.
The strategies vary using different asset classes from equities to bonds but the math is usually similar. The managers choose the allocation of capital to the opportunistic classes calculating Value At Risk so that the worst case scenario drawdown even in the short term (and hopefully the expenses as well) is balanced by guaranteed returns in the safest asset classes such as holding treasuries to maturity. In other words, they have fully "hedged" the potential downside.
The upside of the opportunistic class can vary but it is typically more like high yield or equity like returns in 5-15% range in the best case scenario. Dumb bell return asset classes like venture capital can also be used but very little of the capital can be put to work to be able to fully hedge it and picking almost guaranteed winners opportunistically is not easy.
In most cases, the asset picking ability of such managers is overrated. They have the luxury of waiting with nothing invested and growing nothing unless the asset meets the draconian investment criterion they set up for themselves. They just have to wait for a deep correction in the asset class or some other event that creates massive pricing anomalies.
The upside is usually a function more of the type of market condition (like a crash) they encounter and the frequency of such events than the asset picking.
This is very different from the funds that stay at 60-80% invested with an eye towards capital protection but cannot afford to flatline their returns waiting for opportunities.
Is a money management strategy like this relevant for typical retail investors? In theory, yes. But not for typical portfolios designed for growth overall that is of necessity. Not even to reduce volatility or adjust risk or benefit from bear markets. The reason is that there is no allocation to such funds that makes mathematical sense If you allocate a large amount, the potential opportunity costs in the flat line scenarios put your needed growth at risk. If you just put in a small amount, the opportunistic upside won't make much difference. It is relevant only for money (or a bucket) that you do not want to lose under any circumstance - down payment for a house, cash buffer beyond the emergency requirements, etc.
In practice, most retail investors either put such money in FDIC insured assets or put it in some short term bond funds and forgo the potential for opportunistic upside.
So why do these managers create retail mutual funds? Because they need the money to grow the asset base and their revenues and it is easier to raise money from mutual funds especially if it becomes popular. They all look at funds like PRPFX (easiest money ever made by fund managers) and salivate and wonder why they are working so hard for just a few million.
Raising money from a few HNW individuals has many disadvantages. It is very labor intensive and pretty much like getting political contributions. So, it is difficult to scale. It is also very lumpy as a few individuals coming in or getting out changes asset base substantially. On average, you need about $20M in AUM for every person you want to hire. Most private managers plateau out with less than $50M in AUM and always under a threat to lose chunks of it quickly from withdrawals.
So, retail and institutional funds are the next step for anybody who is tired of private money management and has built up a record they can advertise. With increased assets, they can hire people and take a much less active role in day to day management. Most go the advisor route because marketing directly to investors is expensive and difficult for specialty funds like this whose purpose is never understood enough.
The success rate in raising assets is not very high but people like Hussman give them hope. Tom Forester of Forester funds is probably the one big success story (relatively speaking in the ability to raise AUM) with an approach similar to Frank Martin early on.
I guess the idea of investing in such funds would be: You think a bear market is coming, you think this will provide investment opportunities, you don't think that you're able (for whatever reason) to discover these opportunities when they occur, and you have confidence that Frank Martin (or whoever runs the fund) can and will discover and act upon these future opportunities. There's a whole array of funds as regards to their defensiveness. I guess MFVRX would be an extreme case and you could move through the list, coming across FPACX and, I don't know, YACKX, BMPEX, VDIGX, whatever, until you found the match for your confidence level in predicting the future and assessing a manager's competence.
You can see this as an extreme capital preservation strategy where the drawdown is at or close to zero under any scenario. They are definitely not for the kind of capital growth needed by the 99% to make their retirement.
So why do these managers create retail mutual funds? Because they need the money to grow the asset base and their revenues and it is easier to raise money from mutual funds especially if it becomes popular. They all look at funds like PRPFX (easiest money ever made by fund managers) and salivate and wonder why they are working so hard for just a few million.
Perhaps, Ted, its because as funds go this one is very different. You can dismiss it because its not to your taste, doesn't suit your purposes, or just because you want to be contrary and clever, but that doesn't mean its strategy doesn't have a purpose and or isnt worthy of discussion. In this respect, I appreciate cman taking the time to think it through and to share his thoughts.
Comments
I'd attach the annual report so you can see for yourself but I don't see that there's any way to do that here.
But if you want to discuss balanced investing, let's compare him to Vanguard Wellington. Martin badly underperformed Wellington every year from 2003-2013 except 2008. And Martin charges a 1.4% ER, compared to Wellington's 0.26%.
Regards,
Ted
Martin Focused Value Fund (MFVRX) 3-Mo. -0.20% 6Mo. .50% 1-Year 2.22% Since Inception .82%
S&P 500 Index 3Mo. 1.81% 6Mo. 12.51% 1Yeae 21.86% Since Inception 21.16%
+ 1.39% expense ratio
Regards,
Ted
There are a number of "opportunistic capital preservation" money managers like Frank Martin running boutique funds primarily for high net worth (HNW) individuals via word of mouth and networking. Some of them try to create retail funds for reasons I will cover later on. I, personally, know a manager like this, so some of the following is not necessarily what you might hear from such managers in public.
In private money management, the typical investor in such funds is a HNW individual with a few millions that may be needed in 2-3 years for some investment like real estate or a new business, money that they do not want to lose or be tied up without liquidity. They definitely do not NEED the growth from that money for their retirement but wouldn't mind if somebody opportunistically made some money on it.
You can see this as an extreme capital preservation strategy where the drawdown is at or close to zero under any scenario. They are definitely not for the kind of capital growth needed by the 99% to make their retirement.
The strategies vary using different asset classes from equities to bonds but the math is usually similar. The managers choose the allocation of capital to the opportunistic classes calculating Value At Risk so that the worst case scenario drawdown even in the short term (and hopefully the expenses as well) is balanced by guaranteed returns in the safest asset classes such as holding treasuries to maturity. In other words, they have fully "hedged" the potential downside.
The upside of the opportunistic class can vary but it is typically more like high yield or equity like returns in 5-15% range in the best case scenario. Dumb bell return asset classes like venture capital can also be used but very little of the capital can be put to work to be able to fully hedge it and picking almost guaranteed winners opportunistically is not easy.
In most cases, the asset picking ability of such managers is overrated. They have the luxury of waiting with nothing invested and growing nothing unless the asset meets the draconian investment criterion they set up for themselves. They just have to wait for a deep correction in the asset class or some other event that creates massive pricing anomalies.
The upside is usually a function more of the type of market condition (like a crash) they encounter and the frequency of such events than the asset picking.
This is very different from the funds that stay at 60-80% invested with an eye towards capital protection but cannot afford to flatline their returns waiting for opportunities.
Is a money management strategy like this relevant for typical retail investors? In theory, yes. But not for typical portfolios designed for growth overall that is of necessity. Not even to reduce volatility or adjust risk or benefit from bear markets. The reason is that there is no allocation to such funds that makes mathematical sense If you allocate a large amount, the potential opportunity costs in the flat line scenarios put your needed growth at risk. If you just put in a small amount, the opportunistic upside won't make much difference. It is relevant only for money (or a bucket) that you do not want to lose under any circumstance - down payment for a house, cash buffer beyond the emergency requirements, etc.
In practice, most retail investors either put such money in FDIC insured assets or put it in some short term bond funds and forgo the potential for opportunistic upside.
So why do these managers create retail mutual funds? Because they need the money to grow the asset base and their revenues and it is easier to raise money from mutual funds especially if it becomes popular. They all look at funds like PRPFX (easiest money ever made by fund managers) and salivate and wonder why they are working so hard for just a few million.
Raising money from a few HNW individuals has many disadvantages. It is very labor intensive and pretty much like getting political contributions. So, it is difficult to scale. It is also very lumpy as a few individuals coming in or getting out changes asset base substantially. On average, you need about $20M in AUM for every person you want to hire. Most private managers plateau out with less than $50M in AUM and always under a threat to lose chunks of it quickly from withdrawals.
So, retail and institutional funds are the next step for anybody who is tired of private money management and has built up a record they can advertise. With increased assets, they can hire people and take a much less active role in day to day management. Most go the advisor route because marketing directly to investors is expensive and difficult for specialty funds like this whose purpose is never understood enough.
The success rate in raising assets is not very high but people like Hussman give them hope. Tom Forester of Forester funds is probably the one big success story (relatively speaking in the ability to raise AUM) with an approach similar to Frank Martin early on.
Regards,
Ted
Regards,
MarkM