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David Snowball's October Commentary (with RSIVX and RGHVX updates, in answer to your questions)
"Fidelity Global Balanced Fund (FGBLX) manager Ruben Calderon has taken a leave of absence for an unspecified person."
Any guesses on who she is?
Whitebox " Investor and Advisor shares carry a 12b-1 fee. Some brokerages, like Fidelity and Schwab, offer Advisor shares with No Transaction Fee. (As is common in the fund industry, but not well publicized, Whitebox pays these brokerages to do so – an expensive borne by the Advisor and not fund shareholders.)"
I think that's a bit disingenuous. As M* (and others) note, "fund supermarkets such as Schwab and Fidelity add to the fee layers because they charge fund companies between 30 and 40 basis points to be included on their no-transaction fee platforms. Some funds pay part of this cost with a 12b-1 fee, and others pay it from their management fee."
One cannot complain about a 12b-1 fee on the one hand, and then suggest that the management is paying for the platform out of the goodness of their hearts. Even funds without a 12b-1 fee simply charge higher management fees to cover their platform expenses. The fund shareholders bear the costs.
"Interest rate resets – uhhh [...] I’m confident that the “cushion bonds” of the RPHYX portfolio, where the coupon rate is greater than the yield-to maturity, would fall into this category."
I'm inclined to think the opposite - these are not cushion bonds (though I'll have to check the transcript when it's available). Reset bonds are just floating rate bonds - their interest rate is changed ("reset") periodically. Think ARMs, where there may be no cap on maximum interest or rate change per period. Each time they reset, their market value should be brought back to par (since they reset to market rate interest), barring increased credit risk (due to the borrower's inability to pay the higher rate).
That would be the opposite of a cushion bond, which is a bond that sells at a premium (because its coupon is higher than market rate), and thus expected to be called early. The "cushion" comes into play not because of a reset, but rather because it is priced to call (worst), but carries a risk (and hence an interest premium or cushion) of not getting called (and thus paying a lower rate for a longer time, i.e. to maturity or a later call date).
Reply to @msf: You can't imagine how much of a headache this one point has caused. Here's the explanation for the resets that Schaja and Sherman offer:
Interest rate resets – uhhh … my ears started ringing during this part of the interview; I had one of those “Charlie Brown’s teacher” moments. >>> These are bonds where the yield-to-maturity is significantly different than the yield-to- worse. As interest rates rise or fall issuers will either have a greater or lesser desire to call a bond, thereby creating the opportunity. The “cushion bonds,” of the RPHYX portfolio, where the coupon rate is greater than the yield-to maturity, would fall into this category. In this case investors benefit from any delay in the call where they can clip the higher coupon for a longer period than was priced into the market. <<<
The same point from their press release:
Interest Rate Resets - Securities that present opportunities because of rising or falling interest rates. These resets would include traditional floating rate securities and opportunities that present themselves because of a difference between a security’s yield to maturity and yield to worst.
Reply to @msf: Ha! I suspect we will never find the expression "goodness of heart" applied to the fund industry. By "disingenuous" I think you're pointing out that there is nothing free about No Transaction Fee transactions. NTFs are an industry falsehood. Somebody is paying that fee. Either the fund shareholders, as you fear, or the fund company. I took Whitebox's response that it was absorbing the hidden NTF fee (somewhere within) its published ER. I trust their response is accurate.
Personally, I'd be happy to see NTFs, like loads and 12b-1 fees, gone from the industry. Recommending instead that if investors want NTFs, they should deposit directly with their fund companies. I do that with D&C, Fairholme, and Seafarer...it's great.
Don't understand WhiteBox comment. If it charges 12b-1 fee then shareholders ARE paying for NTF availability at brokerages. This is normal and not surprising. Advisor certainly not paying for it from revenues it is collecting off the management expense ratio.
Reply to @VintageFreak: Nope. The link msf provided states:
...fund supermarkets such as Schwab and Fidelity add to the fee layers because they charge fund companies between 30 and 40 basis points to be included on their no-transaction fee platforms. Some funds pay part of this cost with a 12b-1 fee, and others pay it from their management fee.
Implication here is that the hidden NTF fee is not necessarily covered by the 12b-1 fee.
It's certainly not just WB. Here's extract from FUNDX SAI, which we profiled last month:
The Funds’ Advisor, out of its own resources and without additional cost to the Funds or their shareholders, may provide additional cash payments or other compensation to certain financial intermediaries who sell shares of the Funds.
The practice is widespread. It was actually the interview David did with Steven Dodson, where I started becoming aware of it. Mr. Dodson's reluctance to embrace such practices is one reason BRTNX does not have widespread availability at the "fund supermarkets."
Reply to @David_Snowball: IMHO they're using the wrong terminology, and to me that's at least a yellow flag. The only way (or at least the only common way I know of) for YTW to differ from YTM is if the bond is callable. (One can have sinking fund bonds, but to me that's just a variation on the "callable" theme.)
This concept (YTW) is only tangentially related to interest rate resets. A bond can have an interest rate reset regardless of whether it is callable (i.e. whether there even exists a YTW as distinct from a YTM).
Where they do interact (and where there could be an investment opportunity) is in the time to reset. We saw this 20 years ago, when ARM funds were all the rage. Most of them failed. They lost value because, as interest rates rose, the resets on the mortgage bonds didn't happen fast enough (and/or were capped). So the portfolio bonds' interest rates lagged the market. That's not a discrepancy between YTW and YTM, it's a simple discrepancy between YTW and market rate.
Reply to @Charles: The key word is "additional". The Funds' Advisor isn't charging any additional fees - the marketing costs are already baked in to the management fees.
Back when American Century was still 20th Century, they charged a flat 1% for many of their funds - no 12b-1 fees, no other fees. The funds' advisor, out of its own resources and without additional costs to the funds or their shareholders, covered all the distribution and marketing expenses. That's not to say the shareholders didn't pay for these expenses. Just that it was included in the all-encompassing management fee.
The prospectus said as much; it called it a "single unified management fee" (that covered these services). It went on to say that Institutional shares were "made available to institutional shareholders ... that do not require the same level of shareholder and administrative services from the advisor as Investor class shareholders. As a result, the advisor is able to charge ... a lower total management fee."
Here's the 1999 prospectus I'm quoting from. Growth, Ultra, Select, Vista, Heritage - all with 1.00% unified management fees, no 12b-1, no "other" expenses (i.e. under 0.005%).
These days, when you look at institutional shares, you typically see the same management fee as investor shares, but higher expenses on other line items. That's because these expenses have been broken out. The point is just because you don't see them as separate line items doesn't mean they haven't been added in to the management fees. It's not the advisor funding these costs, it's still you, the shareholder paying for the NTF listing.
Reply to @David_Snowball: Incidentally, I opened a starter position with RSIVX for tomorrow's close. Thanks for the info about this fund. It doesn't show up on the Fidelity website yet, but when I called, a trader did say the fund is available for purchase and sure enough, it was available when I placed a trade tonight.
Reply to @msf: Good stuff msf. I trust we can agree on this: shareholders are indeed paying the published ER, but I think that still means after 12b-1 and the "hidden marketing NTF fees," the portion left over for the Advisor is smaller.
Hey, I like the "single unified management fee" practice you mention - let's insist that from here on out it sets the standard for "shareholder-first" shops.
I think D&C for long-time now and FPA today are essentially applying this fee structure. As is young Bretton. And doesn't Fairholme also apply a one-fee-fits-all structure? The more, the better!
Comment to Charles; I agree WBMIX is an interesting, tactical new fund. But David had a nice, positive write up about RGHVX a while back and that fund seems to be doing better than WBMIX. The RGHVX fund never seems to get brougt up much. I started buying RGHVX back in June and have worked up to a 5% stake in it. I've been very happy with the results and how it's performed - so far.
RGHVX has only been a mutual fund for about a year and a half. M* gives back data as a hedge fund, but I'm not sure that is apples to apples to the fund. Fund inception date is about the same time as WBMIX (the whitebox bund is about 5 months older), so the two investment approaches would make a nice comparison.
I actually hope RGHVX can stay under the radar. It only has about 29m in assets which makes it pretty nimble.
Reply to @msf: Thanx for the heads-up msf - gotta love these Freudian slips. (Classic one - an old news story once inadvertently credited: "a high white horse souse .....".)
Reply to @msf: The fees are paid one way or another. Ultimately I look the total expense ratio. How that total expense ratio is broken down is much less important.
Reply to @MikeM: I like small funds as much as the next reader here, but at $29 million I'd be worried that it is a bit *too* small for what is likely a relatively expensive strategy. RiverPark liquidated their small cap fund earlier this year, although that had terrible performance and even fewer assets. Hopefully the good performance of RGHVX will help it avoid a similar fate.
It depends on the asset class, but I think there's a sweet spot around $100m-$500m AUM where I'm more comfortable that the fund will be both nimble and sustainable.
David: The commentary is missing links to the fund profiles for FRNKX and OBIOX. I thought perhaps the profiles weren't ready yet, until I noticed the updates in the sidebar.
I love the Riverpark shortterm income fund; thanks for that recommendation. However, is there really a point in their new fund? Seems like any great intermediate bond fund like Gundlach or PONDX would be similar right?
Reply to @Investor: In principal I agree with you. Higher ER is bigger hurdle for manager to overcome to outperform, but as long as he/she can do it, one could care less. However, there are common sense exceptions. Not to sound like broken record about Bill Miller, and it is more Legg Mason issue, but LMVTX used to charge 12b-1 fee of 0.95%. Dunno how much it does now. We as investors can make judgement calls for the funds we own how much ER is okay, but clearly we need to pay attention to what components make up the ER.
Reply to @MikeM: Hi again Mike. The Steele/Moringstar fund data through 3Q just dropped, so will have MFO ratings updated shortly and will do comparison you requested through Sept 13. Hope all is well.
Reply to @MikeM: Below is comparison of RiverPark/Gargoyle Hedged Value RGHIX and Whitebox Tactical Opportunties WBMIX. Looks like RGHIX stumbled a bit in 2012, took about a year to recover, but has been doing great ever since. Over the same period, since WBMIX inception, RGHIX outperforms in absolute return, although so far anyway, WBMIX is more of a Steady Eddy.
Here are the numbers:
Going back a little further, here's comparison of RGHIX with one of Scott's favorites MFLDX:
And, all the way back to RGHIX inception, a comparison with one of David's favorites FPACX:
Reply to @Charles: Thank you Charles for taking the time to make the comparisons. I have been happy with RGHIX since I bought in. To be truthful, the Marketfield fund would have been my first choice but it isn't available in my 401k options and FPACX is already my largest holding.
Question, what are you correlating the funds to for the R squared value? The S&P500 or their category?
I asked the folks at RiverPark about assets levels and sustainability. They reply:
... there was concern regarding the asset level not being viable. That is not a worry. The Fund is profitable at these levels, and more importantly, Gargoyle runs hundreds of millions of dollars alongside the fund in investment partnerships.
We are very patient. The Fund’s performance has been stellar and it will just take time for investors to get comfortable with more sophisticated strategies that use derivatives. We are believers that the Liquid Alternative Universe will become a meaningful allocation for most investors.
Reply to @kallerid: I asked for you. The manager says that he thinks of it as a hybrid between short- and intermediate-term, with a lot of flexibility and a strong commitment to capital preservation.
Right now, he's about 30% in cash. Within the fixed-income investment there's 35% overlap with RPHYX, 28% money good / buy and hold bonds, 23% dented debt, and 14% other. The duration is about 2.25 years and the yield is in the neighborhood of 7.5%. Believing, as he does, that the number of "interesting opportunities" might be climbing rather shortly, he's accumulating cash day by day.
I think RSIVX would make a good pick for a conference call. bought small just now; want to see what happens. He definitely can manage cash. What I liked David was he said basically "you will not lose any money over any 90 day period" with original fund. If he can say the same thing IN A RISING RATE environment over a 1yr period, I'm in larger.
Reply to @David_Snowball: Hi David, I just want to make sure you can confirm the yield for the new RSIVX - the manager said in the neighborhood of 7.5% ?
Reply to @kallerid: We're working out a date in the second or third week of December for a call with David. October (Zac Wydra of BMPEX) and November (John Park and Greg Jackson of SEEDX) were already taken.
Thanks. If these guys were smart, they'd pay for a transcript and put it on their website. This site is getting some of these up and coming fund cos tons of assets.
RPHYX filled a great niche. Hopefully he can do the same to the short bond fund as well.
Reply to @kallerid: Oddly, they can't post a transcript without having it censored by their compliance group. I've spoken with two managers who run their own conference calls with investors. Their compliance groups have told them they can answer an investor's question on the call but can't necessarily then reproduce that answer. Seafarer, for example, has to do a line-by-line transcript review.
This is one reason why we do the Featured Fund pages; they give funds a way to aim folks at a bunch of resources that they might not be able to host themselves. (I'd love to charge them a bucketload of money for the service but as soon as they pay, they become bound by the same FINRA regs that we're trying to work around in the first place.)
Comments
Any guesses on who she is?
Whitebox " Investor and Advisor shares carry a 12b-1 fee. Some brokerages, like Fidelity and Schwab, offer Advisor shares with No Transaction Fee. (As is common in the fund industry, but not well publicized, Whitebox pays these brokerages to do so – an expensive borne by the Advisor and not fund shareholders.)"
I think that's a bit disingenuous. As M* (and others) note, "fund supermarkets such as Schwab and Fidelity add to the fee layers because they charge fund companies between 30 and 40 basis points to be included on their no-transaction fee platforms. Some funds pay part of this cost with a 12b-1 fee, and others pay it from their management fee."
One cannot complain about a 12b-1 fee on the one hand, and then suggest that the management is paying for the platform out of the goodness of their hearts. Even funds without a 12b-1 fee simply charge higher management fees to cover their platform expenses. The fund shareholders bear the costs.
"Interest rate resets – uhhh [...] I’m confident that the “cushion bonds” of the RPHYX portfolio, where the coupon rate is greater than the yield-to maturity, would fall into this category."
I'm inclined to think the opposite - these are not cushion bonds (though I'll have to check the transcript when it's available). Reset bonds are just floating rate bonds - their interest rate is changed ("reset") periodically. Think ARMs, where there may be no cap on maximum interest or rate change per period. Each time they reset, their market value should be brought back to par (since they reset to market rate interest), barring increased credit risk (due to the borrower's inability to pay the higher rate).
That would be the opposite of a cushion bond, which is a bond that sells at a premium (because its coupon is higher than market rate), and thus expected to be called early. The "cushion" comes into play not because of a reset, but rather because it is priced to call (worst), but carries a risk (and hence an interest premium or cushion) of not getting called (and thus paying a lower rate for a longer time, i.e. to maturity or a later call date).
Interest rate resets – uhhh … my ears started ringing during this part of the interview; I had one of those “Charlie Brown’s teacher” moments. >>> These are bonds where the yield-to-maturity is significantly different than the yield-to- worse. As interest rates rise or fall issuers will either have a greater or lesser desire to call a bond, thereby creating the opportunity. The “cushion bonds,” of the RPHYX portfolio, where the coupon rate is greater than the yield-to maturity, would fall into this category. In this case investors benefit from any delay in the call where they can clip the higher coupon for a longer period than was priced into the market. <<<
The same point from their press release:
Interest Rate Resets - Securities that present opportunities because of rising or falling interest rates. These resets would include traditional floating rate securities and opportunities that present themselves because of a difference between a security’s yield to maturity and yield to worst.
Personally, I'd be happy to see NTFs, like loads and 12b-1 fees, gone from the industry. Recommending instead that if investors want NTFs, they should deposit directly with their fund companies. I do that with D&C, Fairholme, and Seafarer...it's great.
It's certainly not just WB. Here's extract from FUNDX SAI, which we profiled last month: The practice is widespread. It was actually the interview David did with Steven Dodson, where I started becoming aware of it. Mr. Dodson's reluctance to embrace such practices is one reason BRTNX does not have widespread availability at the "fund supermarkets."
IMHO they're using the wrong terminology, and to me that's at least a yellow flag. The only way (or at least the only common way I know of) for YTW to differ from YTM is if the bond is callable. (One can have sinking fund bonds, but to me that's just a variation on the "callable" theme.)
This concept (YTW) is only tangentially related to interest rate resets. A bond can have an interest rate reset regardless of whether it is callable (i.e. whether there even exists a YTW as distinct from a YTM).
Where they do interact (and where there could be an investment opportunity) is in the time to reset. We saw this 20 years ago, when ARM funds were all the rage. Most of them failed. They lost value because, as interest rates rose, the resets on the mortgage bonds didn't happen fast enough (and/or were capped). So the portfolio bonds' interest rates lagged the market. That's not a discrepancy between YTW and YTM, it's a simple discrepancy between YTW and market rate.
The key word is "additional". The Funds' Advisor isn't charging any additional fees - the marketing costs are already baked in to the management fees.
Back when American Century was still 20th Century, they charged a flat 1% for many of their funds - no 12b-1 fees, no other fees. The funds' advisor, out of its own resources and without additional costs to the funds or their shareholders, covered all the distribution and marketing expenses. That's not to say the shareholders didn't pay for these expenses. Just that it was included in the all-encompassing management fee.
The prospectus said as much; it called it a "single unified management fee" (that covered these services). It went on to say that Institutional shares were "made available to institutional shareholders ... that do not require the same level of shareholder and administrative services from the advisor as Investor class shareholders. As a result, the advisor is able to charge ... a lower total management fee."
Here's the 1999 prospectus I'm quoting from. Growth, Ultra, Select, Vista, Heritage - all with 1.00% unified management fees, no 12b-1, no "other" expenses (i.e. under 0.005%).
These days, when you look at institutional shares, you typically see the same management fee as investor shares, but higher expenses on other line items. That's because these expenses have been broken out. The point is just because you don't see them as separate line items doesn't mean they haven't been added in to the management fees. It's not the advisor funding these costs, it's still you, the shareholder paying for the NTF listing.
Hey, I like the "single unified management fee" practice you mention - let's insist that from here on out it sets the standard for "shareholder-first" shops.
I think D&C for long-time now and FPA today are essentially applying this fee structure. As is young Bretton. And doesn't Fairholme also apply a one-fee-fits-all structure? The more, the better!
Thanks again, very much appreciate your insight.
RGHVX has only been a mutual fund for about a year and a half. M* gives back data as a hedge fund, but I'm not sure that is apples to apples to the fund. Fund inception date is about the same time as WBMIX (the whitebox bund is about 5 months older), so the two investment approaches would make a nice comparison.
I actually hope RGHVX can stay under the radar. It only has about 29m in assets which makes it pretty nimble.
It depends on the asset class, but I think there's a sweet spot around $100m-$500m AUM where I'm more comfortable that the fund will be both nimble and sustainable.
That's the consequence of the mad rush to post, pack and get to Chicago for the ETF conference.
Nuts, nuts, nuts. Chip's embedded the links now. Thanks for the heads-up!
Back to listening to people gush about alternate measures of beta.
David
Here are the numbers:
Going back a little further, here's comparison of RGHIX with one of Scott's favorites MFLDX:
And, all the way back to RGHIX inception, a comparison with one of David's favorites FPACX:
Hope this helps Mike.
Question, what are you correlating the funds to for the R squared value? The S&P500 or their category?
The R-squared value here is against S&P 500 Total Return. In Excel, the equation for these values is:
100*CORREL(Monthly_Ratios_Array_Fund, Monthly_Ratios_Array_SP500)^2
I asked the folks at RiverPark about assets levels and sustainability. They reply: Thought you'd be interested,
David
Right now, he's about 30% in cash. Within the fixed-income investment there's 35% overlap with RPHYX, 28% money good / buy and hold bonds, 23% dented debt, and 14% other. The duration is about 2.25 years and the yield is in the neighborhood of 7.5%. Believing, as he does, that the number of "interesting opportunities" might be climbing rather shortly, he's accumulating cash day by day.
For what interest it holds,
David
David
RPHYX filled a great niche. Hopefully he can do the same to the short bond fund as well.
This is one reason why we do the Featured Fund pages; they give funds a way to aim folks at a bunch of resources that they might not be able to host themselves. (I'd love to charge them a bucketload of money for the service but as soon as they pay, they become bound by the same FINRA regs that we're trying to work around in the first place.)
David