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I am not sure if everyone has read David's November Commentary. I did not see any discussion that normally follows. If not just follow the following link.
I looked at Pinnacle Value (PVFIX) several years back. I can't remember why, but I skipped it in favor of Perritt Emerging Opportunities (PREOX). PVFIX still looks like an interesting fund -- very few holdings, lots of cash, Royce pedigree. Has anybody else compared it with PREOX (or other micro-cap funds) and have some thoughts?
I have some issues with this month's "Honor Roll." First, it is true that volatile funds can scare off investors even faster than they can attract them. But wait, does that make it a bad fund for *me* (or more specifically, for a particular place in my portfolio)? Should any person invest in a fund based on what the average fund investor thinks?
I think the answer is obviously no. Funds that are volatile can be either bad or good, depending on your investment outlook, risk tolerance and ability to invest during down cycles. And there can be a place for volatile funds even in an overall conservative portfolio.
Of course we need to have some awareness of what the average fund investor thinks, because unpredictable and excessive fund inflows/outflows is not a good thing for a fund. But that is a different issue and not directly related to returns.
Also, the criteria for the honor roll is: "We looked for no-load, retail funds which, over the past ten years, have never finished in the bottom third of their peer groups."
I don't see any index funds here -- I guess they were filtered out. But isn't this exactly what index funds are designed to do? After all, index funds are intended to be low-cost, easily accessible funds that will never significantly underperform the market.
I'm not saying the list isn't interesting or helpful. I'm just saying that if you are looking for funds that are "never terrible," you should probably be looking for something else.
Reply to @claimui: My rambling thoughts: I definitely see what you're saying and agree with you. I have a very volatile stock, but it's part of an otherwise fairly low-key portfolio and I *get* that it's a volatile stock; I'm not going to dump it because the volatility comes as a surprise. I believe Cliff Asness of AQR has talked about balancing momentum investing with value investing.
That said, I think the "never finished in the bottom third" is an interesting (although the only issue with it is that past performance does not indicate future results) list, given that investors (both large and small - hedge funds also saw massive redemptions this year) are - I think - becoming increasingly short-term in their thinking. I don't think that's entirely new (again, while I hate to reference Cramer, his "Confessions of a Street Addict" has a good section about running his fund and having to supply increasingly shorter and shorter-term performance numbers to his clients), but it's becoming worse.
Additionally, risk tolerance (again, I think) has never really recovered from a few years ago (and actions of financial companies that have eroded trust in the financial system aren't helping, either.) Anything that - I think - can demonstrate a relative degree of consistency - is not a flawless option, but it may not be a bad place to start for some people. It's definitely not a solution, but maybe there will be some people who will find a more consistent fund a more comfortable hold. Yacktman is a good example of this, and I think probably the best example of a comfortably consistent fund for those who are looking for a fund that's easier to not get whipsawed out of.
I don't think buy and hold as a sole strategy is a good idea in this environment, but I do think that devoting a portion of the portfolio to that while giving the remainder some degree of greater flexibility (it's going to be different for everyone) is what I think will work better over the next decade - viewing the portfolio as different buckets. I have some investments that I view as 5-10 year investments and I don't really care about the day-to-day; some are VERY short-term in nature and many more mid-term in nature.
Also, I do believe that it's easier to buy and hold specific stocks/themes versus funds, for the obvious reason that if an individual investor has a strong/specific long-term view on something, it's easier for them to not sell through the ups/downs. People are still going to often sell at the wrong time, but I do think if someone has a strong view on a company/larger theme, it is somewhat easier to buy and hold for a long-term view. If you're leaving it up to a manager, it's a matter of having a high degree of faith in the manager and I don't know if the majority of investors can have a long-term belief in a particular manager. John Paulson made the biggest trade in history with subprime, but if the hedge fund tanks shortly after, there's going to be people who leave, and more than a few.
Time and time again, you see investors fleeing from a particular manager having a bad year, even if they have been successful over the longer-term, whether it be Cramer (and there's a great portion of "Confessions" where Cramer believed that people who had done very well with him wouldn't leave during a bad year - soon after, the fund nearly had to shut down) or Berkowitz or Heebner or whoever. Some will do well coming into a particular fund after a bad year, but that's not always a successful strategy, either.
Lastly, I think that funds with a greater degree of flexibility can be easier long-term holds and will fare better over the next 5-10 years. The flexibility has to be combined with skilled management that can use those tools to their full effect, but I do think that funds (and there aren't that many - Ivy Asset and Marketfield are examples) that have the ability to invest across a number of different asset classes and use different strategies can be somewhat easier long-term holds.
Or you can have something like Merger (MERFX), which is never going to hit a home run (given the strategy, no one should expect one), but is likely to just keep knocking out single digit returns in good times and bad. Someone might skip it because of what they believe to be lackluster returns without really researching the strategy, but would those people have been pleased with it in 2008 and might that - as a portion of the portfolio - taken away a bit of the sting from other portions of the portfolio? Maybe. Or when everything's going great, people don't want a Merger, but things aren't going to always be sunshine.
Merger will never hit a home run, but might its ability to hold up better over good times and bad be a nice way for the average person to bring overall portfolio volatility (especially since I don't think the volatility that's currently seen in the market is going away any time soon) down? I think so. Arbitrage Event Driven (AEDNX) is another option, although more complex (using merger arbitrage and other arbitrage strategies.)
Thanks for the note and the careful read. Thoughts about your two issues:
1. volatile funds can be profitable ones: yes, for Vulcans. In theory, your best portfolio might actually be two incredibly volatile, negatively correlated funds where you'd be guaranteed that one was always making obscene profits at the same moment that the other was selling at a lunatic discount. Constantly take the undeserved profits and pour them into the undeserved discount, and you get rich.
On whole, that's the exact opposite of what we're wired to do. We do invest on a greed/fear cycle, but we tend to get it backwards. While I'm sympathetic to the notion that some folks, Vulcan-like, do the right thing consistently, the evidence suggests that they are few and far between. If you look, for example, at redemptions at institutional and hedge funds, you found our most sophisticated investors running about with the cool, calculated rationality of your brother-in-law Bernie after one beer too many.
The honor roll was just an attempt to address what appears to be a pretty deep-seated impulse, and to encourage a bit of reflection among readers.
2. on the lack of index funds: I filtered them, mostly because I got multiple hits for the same index. Eleven index funds would have made the list:
* four S&P 500 funds (California Investment, Dreyfus, Price, Vanguard) * four more-or-less total market funds (Price, Schwab, Schwab 1000, Vanguard) * one international (Price), one growth (Vanguard) and one small growth (Vanguard).
The story here might be that 67 S&P500 index funds that have a ten-year record but didn't make the list. That is, 95% of S&P500 funds were screened-out because of some combination of high expenses and tracking error.
I think of "never in the bottom third" as a risk surrogate, rather than a pure returns measure. And risk does tend to have some predictive value. The place it breaks down are with funds that are fundamentally unlike those in their assigned category. A number of the funds I've written about are almost entirely distinct from their nominal peers, and so their relative performance numbers strike me as unreliable.
Pinnacle Value (PVFIX) and Matthews Asian Growth & Income (MACSX), for example, tend to be a top of the heap or bottom of the heap funds, not because their performance is erratic but because their peer group's is. For visually learners: imagine a sine curve overlaid with a straight line with a gentle upward slope. The sine curve is the group, the straighter line is the low volatility fund. Unfortunately, I haven't figured out how to systematically identify those folks.
David, I think you should have compared MNDFX to VDIGX and VDAIX. In particular, MNDFX seems close to VDIGX in performance despite holding more international.
A few years back I was looking for microcap funds. I purchased Pinnacle Value for my wife's IRA, and Perrit Emerging Opportunities for my own. It was good until the crash. After a couple years, I moved my Perrit fund to Royce Microcap (ryotx). Ryoce lost much less than PREOX during the crash.
Although PREOX has gained more than the Royce fund since the bottom, as of April/May of this year the Royce fund nearly regained everything it lost. PREOX was still some 20% below its peak. I am happy to be with Royce over PREOX. Had I stayed in, I would be ahead because PREOX has been beating RYOTX the past 2 years,but I don't worry as much. As I am 60, I prefer to avoid the wilder swings.
Pinnacle Value has shown steady gains in the same period, gaining ~ 11% since Sept. 2007. What I expect of it is that it will beat inflation and money market returns, with relatively little risk.
Comments
I have some issues with this month's "Honor Roll." First, it is true that volatile funds can scare off investors even faster than they can attract them. But wait, does that make it a bad fund for *me* (or more specifically, for a particular place in my portfolio)? Should any person invest in a fund based on what the average fund investor thinks?
I think the answer is obviously no. Funds that are volatile can be either bad or good, depending on your investment outlook, risk tolerance and ability to invest during down cycles. And there can be a place for volatile funds even in an overall conservative portfolio.
Of course we need to have some awareness of what the average fund investor thinks, because unpredictable and excessive fund inflows/outflows is not a good thing for a fund. But that is a different issue and not directly related to returns.
Also, the criteria for the honor roll is: "We looked for no-load, retail funds which, over the past ten years, have never finished in the bottom third of their peer groups."
I don't see any index funds here -- I guess they were filtered out. But isn't this exactly what index funds are designed to do? After all, index funds are intended to be low-cost, easily accessible funds that will never significantly underperform the market.
I'm not saying the list isn't interesting or helpful. I'm just saying that if you are looking for funds that are "never terrible," you should probably be looking for something else.
That said, I think the "never finished in the bottom third" is an interesting (although the only issue with it is that past performance does not indicate future results) list, given that investors (both large and small - hedge funds also saw massive redemptions this year) are - I think - becoming increasingly short-term in their thinking. I don't think that's entirely new (again, while I hate to reference Cramer, his "Confessions of a Street Addict" has a good section about running his fund and having to supply increasingly shorter and shorter-term performance numbers to his clients), but it's becoming worse.
Additionally, risk tolerance (again, I think) has never really recovered from a few years ago (and actions of financial companies that have eroded trust in the financial system aren't helping, either.) Anything that - I think - can demonstrate a relative degree of consistency - is not a flawless option, but it may not be a bad place to start for some people. It's definitely not a solution, but maybe there will be some people who will find a more consistent fund a more comfortable hold. Yacktman is a good example of this, and I think probably the best example of a comfortably consistent fund for those who are looking for a fund that's easier to not get whipsawed out of.
I don't think buy and hold as a sole strategy is a good idea in this environment, but I do think that devoting a portion of the portfolio to that while giving the remainder some degree of greater flexibility (it's going to be different for everyone) is what I think will work better over the next decade - viewing the portfolio as different buckets. I have some investments that I view as 5-10 year investments and I don't really care about the day-to-day; some are VERY short-term in nature and many more mid-term in nature.
Also, I do believe that it's easier to buy and hold specific stocks/themes versus funds, for the obvious reason that if an individual investor has a strong/specific long-term view on something, it's easier for them to not sell through the ups/downs. People are still going to often sell at the wrong time, but I do think if someone has a strong view on a company/larger theme, it is somewhat easier to buy and hold for a long-term view. If you're leaving it up to a manager, it's a matter of having a high degree of faith in the manager and I don't know if the majority of investors can have a long-term belief in a particular manager. John Paulson made the biggest trade in history with subprime, but if the hedge fund tanks shortly after, there's going to be people who leave, and more than a few.
Time and time again, you see investors fleeing from a particular manager having a bad year, even if they have been successful over the longer-term, whether it be Cramer (and there's a great portion of "Confessions" where Cramer believed that people who had done very well with him wouldn't leave during a bad year - soon after, the fund nearly had to shut down) or Berkowitz or Heebner or whoever. Some will do well coming into a particular fund after a bad year, but that's not always a successful strategy, either.
Lastly, I think that funds with a greater degree of flexibility can be easier long-term holds and will fare better over the next 5-10 years. The flexibility has to be combined with skilled management that can use those tools to their full effect, but I do think that funds (and there aren't that many - Ivy Asset and Marketfield are examples) that have the ability to invest across a number of different asset classes and use different strategies can be somewhat easier long-term holds.
Or you can have something like Merger (MERFX), which is never going to hit a home run (given the strategy, no one should expect one), but is likely to just keep knocking out single digit returns in good times and bad. Someone might skip it because of what they believe to be lackluster returns without really researching the strategy, but would those people have been pleased with it in 2008 and might that - as a portion of the portfolio - taken away a bit of the sting from other portions of the portfolio? Maybe. Or when everything's going great, people don't want a Merger, but things aren't going to always be sunshine.
Merger will never hit a home run, but might its ability to hold up better over good times and bad be a nice way for the average person to bring overall portfolio volatility (especially since I don't think the volatility that's currently seen in the market is going away any time soon) down? I think so. Arbitrage Event Driven (AEDNX) is another option, although more complex (using merger arbitrage and other arbitrage strategies.)
Thanks for the note and the careful read. Thoughts about your two issues:
1. volatile funds can be profitable ones: yes, for Vulcans. In theory, your best portfolio might actually be two incredibly volatile, negatively correlated funds where you'd be guaranteed that one was always making obscene profits at the same moment that the other was selling at a lunatic discount. Constantly take the undeserved profits and pour them into the undeserved discount, and you get rich.
On whole, that's the exact opposite of what we're wired to do. We do invest on a greed/fear cycle, but we tend to get it backwards. While I'm sympathetic to the notion that some folks, Vulcan-like, do the right thing consistently, the evidence suggests that they are few and far between. If you look, for example, at redemptions at institutional and hedge funds, you found our most sophisticated investors running about with the cool, calculated rationality of your brother-in-law Bernie after one beer too many.
The honor roll was just an attempt to address what appears to be a pretty deep-seated impulse, and to encourage a bit of reflection among readers.
2. on the lack of index funds: I filtered them, mostly because I got multiple hits for the same index. Eleven index funds would have made the list:
* four S&P 500 funds (California Investment, Dreyfus, Price, Vanguard)
* four more-or-less total market funds (Price, Schwab, Schwab 1000, Vanguard)
* one international (Price), one growth (Vanguard) and one small growth (Vanguard).
The story here might be that 67 S&P500 index funds that have a ten-year record but didn't make the list. That is, 95% of S&P500 funds were screened-out because of some combination of high expenses and tracking error.
For what it's worth,
David
I think of "never in the bottom third" as a risk surrogate, rather than a pure returns measure. And risk does tend to have some predictive value. The place it breaks down are with funds that are fundamentally unlike those in their assigned category. A number of the funds I've written about are almost entirely distinct from their nominal peers, and so their relative performance numbers strike me as unreliable.
Pinnacle Value (PVFIX) and Matthews Asian Growth & Income (MACSX), for example, tend to be a top of the heap or bottom of the heap funds, not because their performance is erratic but because their peer group's is. For visually learners: imagine a sine curve overlaid with a straight line with a gentle upward slope. The sine curve is the group, the straighter line is the low volatility fund. Unfortunately, I haven't figured out how to systematically identify those folks.
As ever,
David
Thanks!
David
David
Although PREOX has gained more than the Royce fund since the bottom, as of April/May of this year the Royce fund nearly regained everything it lost. PREOX was still some 20% below its peak. I am happy to be with Royce over PREOX. Had I stayed in, I would be ahead because PREOX has been beating RYOTX the past 2 years,but I don't worry as much. As I am 60, I prefer to avoid the wilder swings.
Pinnacle Value has shown steady gains in the same period, gaining ~ 11% since Sept. 2007. What I expect of it is that it will beat inflation and money market returns, with relatively little risk.