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Eric Cinnamond is off to a poor 2013 with ARIVX, which now has $750M AUM. In his most recent commentary, he like Andrew Redleaf and Steven Romick, is positioning for a downturn:
...we believe the boom in government spending and growth in government debt is benefiting the current profit cycle. We continue to question the current cycle’s sustainability without the assistance of trillion dollar fiscal deficits.
In our opinion, the belief that future adverse developments in the economy or asset prices will be met with further government intervention has increased investors’ willingness to assume risk. Although we acknowledge that future government intervention is possible, we do not view it as an adequate form of risk control. We do not assume that politicians or central bankers have the ability to extend economic growth and the current profit cycle indefinitely. Moreover, we are not comforted or persuaded by the Federal Reserve’s quantitative easing or the perception of a “Bernanke Put.” We believe it is our fiduciary duty, not our government’s, to attempt to protect Fund shareholders from the risk of permanent capital loss.
The environment in the credit market has become exceptionally careless, in our opinion, with limited concern for interest-rate or credit risk. Investors in U.S. Treasuries are accepting considerable interest-rate risk for yields near or below the rate of inflation.
In conclusion, in addition to holding above average cash levels, we are attempting to limit operating and financial risk within the equity portfolio, with particular emphasis on reducing financial risk. Although we are aware that our defensive posture may expose the portfolio to the significant opportunity cost, we believe the pricing of risk will eventually improve and investors will be adequately compensated for remaining patient.
So, he's holding $418M in cash, or almost 57% of the AUM. Unfortunately, ASTON/River Road ARIVX charges 1.42 ER (or 1.17 for institutional ARVIX, but with a prohibitive $5M min). Mr. Cinnamond is kinda boxed-in since he believes, like the folks at Whitebox, that small caps are over-valued.
But the recent under-performance is not just due to being cash heavy, he has a couple high conviction (for ARIVX) holdings getting hammered: PAN AMERICAN SILVER PAAS, his top equity holding at just under 4%, down 13% YTD, along with AURICO GOLD AUQ at just under 2%, down 22%. Finally, CONTANGO OIL_GAS MCF, a lesser holding, down 10%.
Here's M* performance comparison past 3 months:
I own ARIVX...to Ted's consternation: "Why in the world would you be interested in ARIVX ?" he wrote on 16 Jan.
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Comments
Mike_E
I do appreciate cautious management and I certainly did not expect this fund to shoot fireworks but it is like an ice-box there. I can more cheaply put half the money in cash and invest the rest in another relatively conservatively managed fund and it will probably turn out to be more productive use of my money.
It is just 1.5% of my portfolio now.
Which is why I wanted own it. But I think Investor brings up key point. Should we really be paying 1.42 ER during risk-off periods?
If you are a momentum investor like R48 on M* forums, then it is fine to jump from one fund to another, otherwise it is detrimental to your returns jump the funds at the first sign of under performance.
This is also the reason why investor returns are abysmally low in comparison to total returns for most of the funds, especially volatile ones.
The issue is while it has very good risk adjusted returns most of it was excellent 2011. Than, he turned bearish waiting increasingly like Hussman. He will be right eventually.
Let's look at the fund right now. His performance has been worse than most bond funds. Downside is low but upside has been low too. Downside/upside ratio is barely above 1. Risk adjusted return is good but at the end of the day, you spend actual total return. The only way to take advantage of high sharpe is to lever up (i.e. borrow more money to buy more of this fund). Even so, margin interest would eat up the returns that are very low.
Basically, I sell this fund, with the proceeds, keep the 50% in cash or a fund like RPHYX and distribute the other portion in funds like GLRBX and wait until Mr. Cinnemon starts to find value again. So, far it looks like he is not going to find value until market corrects. That can be tomorrow which could be very unfortunate but I can deploy the other 50% and if it goes on like this for a while, maybe I can make some modest returns.
You never know. One thing, we can take solace from small caps being expensive or in bubble is that our allocation is relatively low to small caps unlike large caps, which were mostly impacted during tech bubble. Especially LG & LB categories.
ARTKX
GPGOX
AKREX
Perhaps some more, as I don't know what else you have.
Regards,
Ted
Art
Regards,
Ted
Performance Fund return Category Index
ARVIX YTD 0.55% (SCV Category Funds) 7.70%
ARVIX 1yr 5.23% (SCVCategory Funds) 15.25%
One Mr. Cinnamond certainly got right
David