Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
The folks at Smead were kind enough to permit posting their recent presentation on our board. The call was refreshing, as ever, but especially these days in the face of ubiquitous skepticism about the future of US Equities.
Subtitle of presentation is: 2016 The Year of The Foolish Critic with BRKB Rundown
I find no compelling reason to invest in this fund even if it was open.
I hope this post is not a faux pas as it might be construed as a criticism of the fund profiling and metrics done on this site. But that is not the intent. I have been frustrated quite often by selecting funds based on the usual Lipper, MorningStar, etc as they looked great on paper and came highly recommended but never delivered for my investment.. So this applies to all of such fund evaluation techniques.
I am thinking that by looking at the metrics above and the fund profiling linked above, that this is a fund that would be seen favorably here. I realize that "past performance is no predictor of future performance" is the explanation when that does not work as expected but I think that is just CYA. One could say the same thing about any metric including those that had zero correlation with anything that happened in the future. So one has to look at the performance/validity of the metric itself.
I have never considered this fund before but would never have chosen this fund looking at the performance a little more carefully than what is blindly captured by metrics and the accompanying presentation.
It looks great on paper with a positive 5yr alpha over S&P 500. But I am sure everyone has had experience with funds that looked great and yet their returns when invested were very disappointing. People chalk it up to that "past performance ..." thing but I would believe that a fund like this one could be positively predicted to disappoint more investors than not in the future compared to say just a S&P 500 fund/etf by underperforming relative to that benchmark.
First, I would be turned off by the lead manager. He seems to have a habit of badmouthing. Foolish this and that. But the showstopper would have been the way he tore into Bill Miller in this presentation. I don't know Bill Miller personally nor have I invested in his fund. In my career where I have to evaluate the future performance of people very often and with not a lot of information, people who use a lot of time to badmouth others very seldom deliver. It shows a lack of class here which some people might not care about but to me it also shows a lack of judgment because that whole section looks personal. A manager that gets that personal or emotional will make judgment mistakes. It was highly unnecessary to do so against a peer/competitor and moreover does not imply he can do better himself in his own style. I expect the culture he will set in his company with that attitude will also be toxic. Even in the brief profile done on this site, he cannot help himself criticizing to toot his own horn.
The presentation goes on and on about Brk.B. Why would that make the fund look good? There are any number of funds you can buy to get Brk.B exposure. Or is it to make the fund look good by association?
Then I took a look at the fund performance. It is a classic index hugger with high 1.25% ER and a poor one at that and would have done poorly if it wasn't for one period between June 2012 and August 2013. That time frame with a reasonably well defined start and end suggests the fund had one or two positions that overperformed. Typical stock momentum for high flying stocks last about that much time. If the fund didn't have that, it would look bad relative to S&P 500. In fact, almost all of the good metrics for the fund can be traced to that period.
If you had bought into that fund after that period, for most such buys you might have experienced index hugging or worse performance. For the 4.5 years before that period, the fund had lagged the S&P. Now you can see why such blind metrics can be really misleading. Not because of "past performance..." caveat but the actual past performance characteristics of the fund that might hint at a high probability of underperformance gets hidden in the statistical measures and ratings.
What exactly is fhe reason to invest in a fund like this rather than the index itself or some other large blend style fund that didn't have such a one-hit wonder quality to it and didn't risk underperformance with a huge ER?
"Then I took a look at the fund performance. It is a classic index hugger.....and a poor one at that and would have done poorly if it wasn't for one period between June 2012 and August 2013. That time frame with a reasonably well defined start and end suggests the fund had one or two positions that over performed. Typical stock momentum for high flying stocks last about that much time. If the fund didn't have that, it would look bad relative to S&P 500. In fact, almost all of the good metrics for the fund can be traced to that period.
If you had bought into that fund after that period, for most such buys you might have experienced index hugging or worse performance. For the 4.5 years before that period, the fund had lagged the S&P. Now you can see why such blind metrics can be really misleading
"fund that didn't have such a one-hit wonder quality to it"
take a look at the calendar year performance since inception. It beat the market and its category in 6 out of the 7 years. A pretty consistent outperformance rather than just a single period of 14 months
@rjb112, the quick-glance metric you have pointed out is a good example of why the performance metrics as published can be misleading (and why managers try to game the numbers each calendar year). Investors don't always invest by calendar years. And barely beating the index one year isn't much of a comfort to an investor if you have lost much more the previous period.
For example, The 11 month performance in 2008 is missing in that table and was a bad one for the fund losing about 42%+ of its value compared to the approx 36%+ loss for S&P 500 in the same period. It is the bounce back from this deep loss that it managed to recover some in 2009 so 2009 by itself looks as if it beat the market but investors who invested with the fund in 2008 were still under water relative to S&P 500. Trailed index again in 2010 and didn't even make back all of that trailing deficit in 2011 although it looks like it beat the index that calendar year in your table. In fact, the people who started with the fund or soon after didn't see anything over the S&P 500 up until that one good run in 2012-2013 more than 4 years later.
The one continuous period I mentioned from mid 2012 to mid 2013 is what makes the 2012 and 2013 calendar years look good. 2014 and 2015 are index hugging years for all practical purposes. If you look closer at 2014 unless you were invested in the first three months of 2014, your portfolio would have trailed the index even in that year.
If you had invested in 2013 after its one good run ended (still in a rising bull market) you would be trailing the S&P 500 again todate.
All this shows is that except for that one good run, the fund is just more volatile than the index and when you have such a fund, real investor returns suffer unless you were lucky to time the few entry and exit points correctly. It seems to give back all the advantage in down markets. I do not want to confuse this with the IRR values computed by M* and blaming it on bad trading by investors. The point I am trying to make applies to all investors that just invest and hold but aren't lucky in when they enter/exit this fund to make the fund worth it. Even holding for a long period may not help in such a fund if you weren't in it for its one good relatively short run.
My point is that this is why many investors think they have chosen a good fund because all published metrics look good and yet may see that their returns are nothing to justify the high fees such funds charge. This has certainly been my experience in selecting funds based only on such easy to digest tables and metrics ratings even when it has a boatload of numbers as available on this site.
Better metrics can perhaps be designed that try to make the performance metrics as insensitive as possible to when the investment began or ended perhaps by aggregating over a large number of random periods or some model of typical disciplined investor behavior such as monthly deposits/withdrawals each month. Also perhaps metrics that try to detect such continuous good runs and compare relative to other periods to see whether the fund is a one hit wonder or is regularly outperforming even if it has down years. I would chose a fund to buy and hold that did well in the latter even if it didn't beat the index in every calendar year which is a very artificial construct that fund managers try to game to look good to gather assets.
First, I would be turned off by the lead manager. He seems to have a habit of badmouthing. Foolish this and that. But the showstopper would have been the way he tore into Bill Miller in this presentation.
Maybe I missed the point during the call so I'm sorry if that's the case, but I didn't hear him tear into Bill Miller at all. My take on what he was saying was that Miller was an incredible guy, outperforming for 15 straight years and as soon as he didn't all the critics came out of the woodwork. But he showed Miller's performance after the criticism and he was back at the top, hence I took his comments to suggest those who criticized were "Foolish Critics", the title of the presentation. He was making the same argument about Buffett- that people are criticizing him for recent performance but Smead thinks they have it wrong.
Just for the sake of transparency I don't own Smead's fund but I do pay attention to him and his fund because I think he has some reasonably good ideas about the future, mostly related to the impact millennials will have.
@lljb, you are right. My first reading of those slides was wrong. He was badmouthing the critics not Bill Miller by quoting the badmouthing of Bill Miller by the critics. So, I take that part back and apologies to Mr. Smead for that mischaracterization.
The critics weren't doing anything other than echoing the sentiments of the passive indexing over active indexing crowd that saw the fall of Bill Miller as validation of their long-held views. I don't see this is necessarily foolish because there are good reasons for criticizing the performance of active managers as a whole.
Ironically, his argument against the criticism relies on the same calendar year metric that I show above can hide the performance real investors may see in the funds relative to the index.
Just to note, I am not doing an indexing vs active argument here. My point is that bad metrics make it difficult to select good active funds that may exist from bad/lucky ones.
Here is an idea for the site owners since they seem to have the data and the computing capability.
What if you computed a metric that calculated the 1yr, 3yr, 5yr returns as an average and variance to the index over multiple runs of the fund each with a single purchase at the beginning of each month since inception and held for that period of time? Right now, the metrics say what happens if investors purchase only at the beginning of the year which is very artificial and subject to gaming by fund managers.
Wouldn't this be a more valid indicator of what an investor coming across a fund and purchasing without paying attention to the calendar can expect from the fund? This would make explicit any destructive effect of the fund's volatility if they tend to be volatile and can burn investors. Would the great owls be still be great owls using this metric? If a fund had a long and distributed poor performance periods with some lucky short spikes then this would expose the destructive power of such underperformance even if the fund managed a tiny gain in enough years from such spikes to look great in current metrics.
The second metric would be adding a fixed investment every month for each run above as might happen in a retirement fund or a disciplined investing plan. This is for investors in the accumulation phase. The complement would be withdrawing a fixed amount each month during that run.
Isn't it worth doing this experiment if the current metrics have the potential of misleading investors setting false expectations of what a fund is likely to do even when future performance mimics past performance? Is it feasible or such metrics already available?
This site has been mentioned here at least the handful of times that I've taken notice and it will do some of what you were talking about with a bit more flexibility than I've found elsewhere (admitting that I'm generally comfortable with the arbitrary nature of calendar returns even recognizing that your comments are valid). For instance, you could back test a portfolio made up only of Smead's fund with monthly additions to the portfolio and compare the monthly balances to those you would have earned if you could invest directly in the S&P 500, or a handful of other indices, with no expense ratio. You could also choose any starting month you wanted along the way, recognizing that it would be a manual process, and do the same for a variety of different starting points. It's not going to give you category comparisons or total flexibility but hopefully something closer to what you would like to see.
I remember reading some opinion pieces Smead posted (on Seeking Alpha, I think) soon after he opened the fund in 2008, and he made what at the time was a bold call: commodities were a poor investment and the U.S. consumer was going to bounce back. He invested appropriately (consumer cyclical, finance, and health are over 90% of his portfolio) and outperformed as a result, though it took a couple of years for him to be proven right.
Whether or not he was brilliant or lucky in making that big call I don't know (and I don't own the fund) but that big call explains both his early underperformance and subsequent recovery.
Which makes me think that there's no metric out there which can substitute paying attention to a manager's strategy. You all know what Mark Twain said about statistics, I'm sure...
@lljb, thanks for the site suggestion. I explored it and the manual process on M* as well where you can enter start and end dates. But it is too laborious for the number of runs needed. If I had the raw data, I could probably write a script in less than an hour to do it but don't have any access to raw pricing data from multiple years and with corrections for distributions.
@expatsp, given that all market sectors go through cycles, one could have pretty much have an opinion on any combination of sectors as the place to be and they will be proved right some time. But what does that do to the investor portfolios meanwhile? Hussman is still waiting for his bear market to make money he has been losing. How can a retail investor evaluate whether a strategy will pay off or not? If they did, they wouldn't need a professional manager!
In baseball terms, it is the difference between a hitter that looks for a specific ball to hit and strikes out if he doesn't get it and one who takes the balls as they come and manufactures hits. I would much prefer my fund manager to be of the latter type even though the former might hit one out of the ball park much more dramatically when he gets the ball he is looking for and prepared for. The team might lose while he is waiting for it.
Comments
SMVLX is a dual MFO Great Owl and Honor Roll fund, at least through December 2015.
Here is link to David's Positive Profile of the fund from July 2013.
I hope this post is not a faux pas as it might be construed as a criticism of the fund profiling and metrics done on this site. But that is not the intent. I have been frustrated quite often by selecting funds based on the usual Lipper, MorningStar, etc as they looked great on paper and came highly recommended but never delivered for my investment.. So this applies to all of such fund evaluation techniques.
I am thinking that by looking at the metrics above and the fund profiling linked above, that this is a fund that would be seen favorably here. I realize that "past performance is no predictor of future performance" is the explanation when that does not work as expected but I think that is just CYA. One could say the same thing about any metric including those that had zero correlation with anything that happened in the future. So one has to look at the performance/validity of the metric itself.
I have never considered this fund before but would never have chosen this fund looking at the performance a little more carefully than what is blindly captured by metrics and the accompanying presentation.
It looks great on paper with a positive 5yr alpha over S&P 500. But I am sure everyone has had experience with funds that looked great and yet their returns when invested were very disappointing. People chalk it up to that "past performance ..." thing but I would believe that a fund like this one could be positively predicted to disappoint more investors than not in the future compared to say just a S&P 500 fund/etf by underperforming relative to that benchmark.
First, I would be turned off by the lead manager. He seems to have a habit of badmouthing. Foolish this and that. But the showstopper would have been the way he tore into Bill Miller in this presentation. I don't know Bill Miller personally nor have I invested in his fund. In my career where I have to evaluate the future performance of people very often and with not a lot of information, people who use a lot of time to badmouth others very seldom deliver. It shows a lack of class here which some people might not care about but to me it also shows a lack of judgment because that whole section looks personal. A manager that gets that personal or emotional will make judgment mistakes. It was highly unnecessary to do so against a peer/competitor and moreover does not imply he can do better himself in his own style. I expect the culture he will set in his company with that attitude will also be toxic. Even in the brief profile done on this site, he cannot help himself criticizing to toot his own horn.
The presentation goes on and on about Brk.B. Why would that make the fund look good? There are any number of funds you can buy to get Brk.B exposure. Or is it to make the fund look good by association?
Then I took a look at the fund performance. It is a classic index hugger with high 1.25% ER and a poor one at that and would have done poorly if it wasn't for one period between June 2012 and August 2013. That time frame with a reasonably well defined start and end suggests the fund had one or two positions that overperformed. Typical stock momentum for high flying stocks last about that much time. If the fund didn't have that, it would look bad relative to S&P 500. In fact, almost all of the good metrics for the fund can be traced to that period.
If you had bought into that fund after that period, for most such buys you might have experienced index hugging or worse performance. For the 4.5 years before that period, the fund had lagged the S&P. Now you can see why such blind metrics can be really misleading. Not because of "past performance..." caveat but the actual past performance characteristics of the fund that might hint at a high probability of underperformance gets hidden in the statistical measures and ratings.
What exactly is fhe reason to invest in a fund like this rather than the index itself or some other large blend style fund that didn't have such a one-hit wonder quality to it and didn't risk underperformance with a huge ER?
If you had bought into that fund after that period, for most such buys you might have experienced index hugging or worse performance. For the 4.5 years before that period, the fund had lagged the S&P. Now you can see why such blind metrics can be really misleading
"fund that didn't have such a one-hit wonder quality to it"
take a look at the calendar year performance since inception.
It beat the market and its category in 6 out of the 7 years.
A pretty consistent outperformance rather than just a single period of 14 months
Cheers
For example,
The 11 month performance in 2008 is missing in that table and was a bad one for the fund losing about 42%+ of its value compared to the approx 36%+ loss for S&P 500 in the same period. It is the bounce back from this deep loss that it managed to recover some in 2009 so 2009 by itself looks as if it beat the market but investors who invested with the fund in 2008 were still under water relative to S&P 500. Trailed index again in 2010 and didn't even make back all of that trailing deficit in 2011 although it looks like it beat the index that calendar year in your table. In fact, the people who started with the fund or soon after didn't see anything over the S&P 500 up until that one good run in 2012-2013 more than 4 years later.
The one continuous period I mentioned from mid 2012 to mid 2013 is what makes the 2012 and 2013 calendar years look good. 2014 and 2015 are index hugging years for all practical purposes. If you look closer at 2014 unless you were invested in the first three months of 2014, your portfolio would have trailed the index even in that year.
If you had invested in 2013 after its one good run ended (still in a rising bull market) you would be trailing the S&P 500 again todate.
All this shows is that except for that one good run, the fund is just more volatile than the index and when you have such a fund, real investor returns suffer unless you were lucky to time the few entry and exit points correctly. It seems to give back all the advantage in down markets. I do not want to confuse this with the IRR values computed by M* and blaming it on bad trading by investors. The point I am trying to make applies to all investors that just invest and hold but aren't lucky in when they enter/exit this fund to make the fund worth it. Even holding for a long period may not help in such a fund if you weren't in it for its one good relatively short run.
My point is that this is why many investors think they have chosen a good fund because all published metrics look good and yet may see that their returns are nothing to justify the high fees such funds charge. This has certainly been my experience in selecting funds based only on such easy to digest tables and metrics ratings even when it has a boatload of numbers as available on this site.
Better metrics can perhaps be designed that try to make the performance metrics as insensitive as possible to when the investment began or ended perhaps by aggregating over a large number of random periods or some model of typical disciplined investor behavior such as monthly deposits/withdrawals each month. Also perhaps metrics that try to detect such continuous good runs and compare relative to other periods to see whether the fund is a one hit wonder or is regularly outperforming even if it has down years. I would chose a fund to buy and hold that did well in the latter even if it didn't beat the index in every calendar year which is a very artificial construct that fund managers try to game to look good to gather assets.
Just for the sake of transparency I don't own Smead's fund but I do pay attention to him and his fund because I think he has some reasonably good ideas about the future, mostly related to the impact millennials will have.
The critics weren't doing anything other than echoing the sentiments of the passive indexing over active indexing crowd that saw the fall of Bill Miller as validation of their long-held views. I don't see this is necessarily foolish because there are good reasons for criticizing the performance of active managers as a whole.
Ironically, his argument against the criticism relies on the same calendar year metric that I show above can hide the performance real investors may see in the funds relative to the index.
Just to note, I am not doing an indexing vs active argument here. My point is that bad metrics make it difficult to select good active funds that may exist from bad/lucky ones.
Here is an idea for the site owners since they seem to have the data and the computing capability.
What if you computed a metric that calculated the 1yr, 3yr, 5yr returns as an average and variance to the index over multiple runs of the fund each with a single purchase at the beginning of each month since inception and held for that period of time? Right now, the metrics say what happens if investors purchase only at the beginning of the year which is very artificial and subject to gaming by fund managers.
Wouldn't this be a more valid indicator of what an investor coming across a fund and purchasing without paying attention to the calendar can expect from the fund? This would make explicit any destructive effect of the fund's volatility if they tend to be volatile and can burn investors. Would the great owls be still be great owls using this metric? If a fund had a long and distributed poor performance periods with some lucky short spikes then this would expose the destructive power of such underperformance even if the fund managed a tiny gain in enough years from such spikes to look great in current metrics.
The second metric would be adding a fixed investment every month for each run above as might happen in a retirement fund or a disciplined investing plan. This is for investors in the accumulation phase. The complement would be withdrawing a fixed amount each month during that run.
Isn't it worth doing this experiment if the current metrics have the potential of misleading investors setting false expectations of what a fund is likely to do even when future performance mimics past performance? Is it feasible or such metrics already available?
https://portfoliovisualizer.com/
This site has been mentioned here at least the handful of times that I've taken notice and it will do some of what you were talking about with a bit more flexibility than I've found elsewhere (admitting that I'm generally comfortable with the arbitrary nature of calendar returns even recognizing that your comments are valid). For instance, you could back test a portfolio made up only of Smead's fund with monthly additions to the portfolio and compare the monthly balances to those you would have earned if you could invest directly in the S&P 500, or a handful of other indices, with no expense ratio. You could also choose any starting month you wanted along the way, recognizing that it would be a manual process, and do the same for a variety of different starting points. It's not going to give you category comparisons or total flexibility but hopefully something closer to what you would like to see.
Whether or not he was brilliant or lucky in making that big call I don't know (and I don't own the fund) but that big call explains both his early underperformance and subsequent recovery.
Which makes me think that there's no metric out there which can substitute paying attention to a manager's strategy. You all know what Mark Twain said about statistics, I'm sure...
@expatsp, given that all market sectors go through cycles, one could have pretty much have an opinion on any combination of sectors as the place to be and they will be proved right some time. But what does that do to the investor portfolios meanwhile? Hussman is still waiting for his bear market to make money he has been losing. How can a retail investor evaluate whether a strategy will pay off or not? If they did, they wouldn't need a professional manager!
In baseball terms, it is the difference between a hitter that looks for a specific ball to hit and strikes out if he doesn't get it and one who takes the balls as they come and manufactures hits. I would much prefer my fund manager to be of the latter type even though the former might hit one out of the ball park much more dramatically when he gets the ball he is looking for and prepared for. The team might lose while he is waiting for it.