Yesterday, all fund risk and return metrics, ratings, and analytics were uploaded to MFO Premium
, reflecting performance through December 2019 … end of the decade.
To mark the decade's end, we're bringing attention to a short list of funds that delivered exceptional returns while protecting downside, which has been at the heart of MFO's Rating System
since it began in 2013.
We'll call them MFO Premium's Best Funds of the Decade
. There are just seven. You can find them here
on the blog page. (Hint: If Morningstar still selects Manager of the Decade, I suspect Dan Ivascyn and Charles Akre will be among the top contenders.)
There’s some interesting funds to investigate there that have flown under the radar for quite a while.
Wells Fargo CoreBuilder Shares
Is this only for Colorado residents?
M* says most of the holdings are "Not Rated". Isn't that a problem?
When to Choose Munis From Outside Your Home State
That MFO thread wound up in the bullpen. Here's a M* discussion community thread on the paper.
One fact I got out of the paper was that M* treats nonrated bonds as junk. In contrast, funds themselves use their internal ratings for those bonds when calculating average credit quality. So while M* doesn't even give a style box value for this fund, if it did the credit rating would be low quality (junk), regardless of whether that made sense for the unrated portfolio.
You are correct that M* equates risk with volatility (giving more weight to downside volatility) and disregards the underlying portfolio. Its rationale, according to its methodology, is that such attributes are implicitly accounted for when it classifies the fund: That's certainly suspect with junk munis. My "classic" example is BCHYX, a California junk bond fund that M* lumps together with California longs.
This is more than a random example. M* classifies HICOX as a single state intermediate muni. The manager describes its peers as being "in the High Yield Municipal Debt Fund category." (Annual statement).
Most people seem to take "risk" (really volatility) adjusted returns at face value. You're going further - questioning not only whether volatility is a good metric for risk, but why aren't obvious risk attributes like credit quality explicitly incorporated? Good question!
Just looking superficially at the fund, I can offer a good news/bad news reason for buying/not buying it. It's been managed by the same manager for three decades. One's got to figure that if it hasn't had a major blowup in that period of time (I haven't checked), then he knows what he's doing with all these bonds. (Though as you point out, they're very narrowly focused and the landscape may be changing.)
But any fund, not just this one, with a single manager for that period of time has significant management risk, especially when virtually its whole portfolio consists of unrated securities. In the Annual Statement, he describes himself as "new to Medicare", i.e. mid-to-late 60s.
Since you asked about pricing, see Note 2 in the Annual Statement. It's pretty much boilerplate but goes to describe how bonds are priced. The fund has no level 1 bonds, meaning bonds that trade frequently (so that you can quote the market price directly). Most of the bonds are level 2, meaning that while these particular bonds may not be trading frequently, there are enough "comps" to get a good estimate. Level 3 is divining prices from unobservable data.
"Securities for which there is no last sales price are valued by an independent pricing service based on evaluated prices which considers such factors as transactions in bonds, quotations from bond dealers, market transactions in comparable securities and various relationships between securities, or are fair valued by management. "
I started my investment in AKREX in 2019 when it became NTF at Schwab. My 2 large cap funds are AKREX and DSENX. I still think that's a great pairing going forward.