Lewis Braham: The Safest Concentrated Funds

Ted

FYI: (Click On Article Title At Top Of Google Search)
Focused funds are riskier than those that own hundreds of stocks. But these great managers know how to balance risk and opportunity.
Regards,
Ted
https://www.google.com/#q=The+Safest+Concentrated+Funds+Barron's

(The Linkster disagrees that Concentrated Funds are risker than those owning hundreds of stocks. The problem is that volitality is confused with risk. I have always been a beliver in focused fund for their enhanced returns.)

LewisBraham

@Ted It's not volatility that is my concern with concentrated funds, but individual business risk, i.e., the risk of the permanent impairment of capital with a position in Sequoia's case that grew to 29% of the fund. That's not about volatility. The risk of some form of bankruptcy or permanent loss of any individual position is far greater with a concentrated fund. But my story also addresses the other risk--of being over-diversified. The question then becomes is it possible to find a low-risk concentrated fund investing in high quality companies with less individual business risk because they have things like low debt, strong franchises, economic moats, diversified business lines, etc.? That is the basis for this story.

Sven

it is not an easy call on the balance of risk and reward over long investment period. Question for most investors is getting the market return good enough?

davidrmoran

LB, do you have a general sense or opinion of Yackts going forward? How the kid is doing overall and in general?

Mona

Sven said:

it is not an easy call on the balance of risk and reward over long investment period. Question for most investors is getting the market return good enough?

Domestically, it's become an easy call for me. For the past 4 years or so I was in ARTLX, it seemed each year at distribution time that the IRS was the big winner. Along with other concentrated mutual funds I have owned over the years with high active share, I learned the hard way that many (most) times it does not translate into a fund that beats it's benchmark. Now, I mostly go the Index route and when I want to go to Las Vegas and play the concentrated active fund machine in my taxable account, the ER must be under 50 basis points and the turnover under 15%. Even then I limit my bets.

Mona

LewisBraham

@David, Stephen Yacktman has been listed as a manager of the Yacktman Focused Fund since 2002 so part of its record must be attributed to him, for better or for worse. He seems competent and intelligent whenever I speak to him, although my reading about this family indicates that there are some significant personality differences between father and son. In the press Don Yacktman has always been painted as more reserved and less flashy than his son. But I don't know if that's true. Back in the 1990s I used to interview Don Yacktman and Jean Marie Eveillard every week for a column called Dueling Portfolios and Don Yacktman seemed pretty passionate to me. It's hard to say if some of the skill one person possesses passes from parent to child in any field. I think fundamentally the Yacktman Focused Fund's strategy is a sound one for conservative investors who know what they're getting into. That conservatism and value orientation can lead to years of underperformance in the wrong kind of market. Returns by default will be lumpy, but the underperformance one would expect should be more on the upside than the down. Oddly enough, the 1990s was another really dry period for Yacktman's style so when I was interviewing him there was a lot of pressure from shareholders for managers like him and Eveillard to load up on tech stocks. Today his style is again out of favor. I expect that to change as the bull market ends.

Sven

For the past 4 years or so I was in ARTLX, it seemed each year at distribution time that the IRS was the big winner.

@Mona, over the years I had enough of paying IRS on distribution even in down markets. Since vast majority of active managed funds failed to out-perform their respective indexes, getting the boring index level return is good enough for us. So on taxable accounts, we use exclusively index funds and ETFs to minimize the tax consequences. Granted that dividends will be tax according to our tax bracket, but at least I can minimize short term and long term capital gains.

The other thing to watch for in international funds when currency hedging is used. All the contracts will pay out as short term capital gains.

davidrmoran

@LB, tyvm

Mona

@Mona, over the years I had enough of paying IRS on distribution even in down markets. Since vast majority of active managed funds failed to out-perform their respective indexes, getting the boring index level return is good enough for us. So on taxable accounts, we use exclusively index funds and ETFs to minimize the tax consequences. Granted that dividends will be tax according to our tax bracket, but at least I can minimize short term and long term capital gains. </blockquote


Sven,

If you are invested in Vanguard Index 500, 100% of the dividends were qualified. In Vanguard Total Stock Market Index, 95% were qualified. And for another example, if you are invested in Vanguard Mid-Cap Index, 86% were qualified.

https://personal.vanguard.com/us/insights/article/estimated-yearend-distributions-122015

Qualified dividends are taxed at 0%, 15% and 20%, the latter if you are in a 39.6% tax bracket. So unless you are making a lot of money putting you in 39.6% tax bracket, you are paying no higher tax rate on your qualified dividends than you would would pay on Long-term Capital Gains.

Mona

Crash

Why the distinction with "qualified" or not? And it means... what? Thanks.

heezsafe

@Crash https://www.fidelity.com/learning-center/investment-products/stocks/dividends-and-taxes

msf

Mona said:

Qualified dividends are taxed at 0%, 15% and 20%, the latter if you are in a 39.6% tax bracket.

From @heezsafe 's link:
"[Q]ualified dividends ... are taxable federally at the capital gains rate, which depends on the investor’s modified adjusted gross income (AGI) and taxable income (the current rates are 0%, 15%, 18.8%, and 23.8%.)."

This is due to the Medicare surtax of 3.8% which kicks in once your AGI (not taxable income) exceeds a certain level.

From http://truepointwealth.com/recent-tax-changes-and-how-they-affect-you/
"Note, the 20% bracket doesn’t truly 'exist.' By the time income reaches the top marginal tax bracket of 39.6%, one is already subject to the additional surtax."

In addition to the description of qualified divs in the Fidelity link, there's another gotcha for mutual fund owners. Even if your 1099 says that dividends are qualified (box 1b), they are not unless you hold those shares for at least 61 days around the ex-div date.

This is the same rule as stated in the Fidelity page, but that page wasn't too clear about pass through entities like mutual funds. That is, the fund itself must hold underlying stock for 61+ days for it to pass through the div as a qualified div, but in addition you must hold the mutual fund shares 61+ days around the fund's ex-div date.

Here's another Fidelity page that goes into this gory detail:
https://www.fidelity.com/taxes/tax-topics/qualified-dividends

Crash

heezsafe said:

@Crash https://www.fidelity.com/learning-center/investment-products/stocks/dividends-and-taxes

Quick, clean, and clear. Thanks very much. There's just a lot less individual control, then, with regard to investments in mutual funds. I see. And thanks, also, to msf.

Sven

@Mona, wish I have that much invested to bump ourselves into the highest tax bracket. Since we made the switch to index funds, distribution is well under control.