Dear friends,
We had a nice talk with the Oakseed guys last night.
A recording of the call is available on Chorus Call's servers now, and we'll be moving it to our server at month's end. I was struck,particularly, that their singular focus in talking about the fund is "complete alignment of interests." A few claims particularly stood out:
- their every investable penny in is in the fund.
- they intend their personal gains to be driven by the fund's performance and not by the acquisition of assets and fees
- they'll never manage separate accounts or a second fund
- they created an "Institutional" class as a way of giving shareholders a choice between buying the fund NTF with a marketing fee or paying a transaction fee but not having the ongoing expense; originally they had a $1 million institutional minimum because they thought institutional shares had to be that pricey. Having discovered that there's no logical requirement for that, they dropped the institutional minimum by 99%.
- they'll close on the day they come across an idea they love but can't invest it
- they'll close if the fund becomes big enough that they have to hire somebody to help with it (no analysts, no marketers, no administrators - just the two of them)
Highlights on the investing front were two-fold:
first, they don't intend to be "active investors" in the sense of buying into companies with defective managements and then trying to force management to act responsibly. Their time in the private equity/venture capital world taught them that that's neither their particular strength nor their passion.
second, they have the ability to short stocks but they'll only do so for offensive - rather than defensive - purposes. They imagine shorting at an alpha-generating tool, rather than a beta-managing one. But it sounds a lot like they'll not short, given the magnitude of the losses that a mistaken short might trigger, unless there's evidence of near-criminal negligence (or near-Congressional idiocy) on the part of a firm's management. They do maintain a small short position on the Russell 2000 because the Russell is trading at an unprecedented high relative to the S&P and attempts to justify its valuations require what is, to their minds, laughable contortions (e.g., that the growth rate of Russell stocks will rise 33% in 2014 relative to where they are now.
Their
reflections of 2013 performance were both wry and relevant. The fund is up 21% YTD, which trails the S&P500 by about 6.5%. Greg started by imagining what John's reaction might have been if Greg said, a year ago, "hey, JP, our fund will finish its first year up more than 20%." His guess was "gleeful" because neither of them could imagine the S&P500 up 27%. While trailing their benchmark is substantially annoying, they made these points about performance:
- beating an index during a sharp market rally is not their goal, outperforming across a complete cycle is.
- the fund's cash stake - about 16% - and the small short position on the Russell 2000 doubtless hurt returns.
- nonetheless, they're very satisfied with the portfolio and its positioning - they believe they offer "substantial downside protection," that they've crafted a "sleep well at night" portfolio, and that they've especially cognizant of the fact that they've put their friends', families' and former investors' money at risk - and they want to be sure that they're being well-rewarded for the risks they're taking.
John described their approach as "inherently conservative" and Greg invoked advice given to him by a former employer and brilliant manager, Don Yacktman: "always practice defense, Greg."
When, at the close, I asked them what one thing they thought a potential investor in the fund most needed to understand in order to know whether they were a good "fit" for the fund, Greg Jackson volunteered the observation "we're the most competitive people alive, we want great returns but we want them in the most risk-responsible way we can generate them." John Park allowed "we're not easy to categorize, we don't adhere to stylebox purity and so we're not going to fit into the plans of investors who invest by type."
They announced that they should be NTF at Fidelity within a week. Their contracts with distributors such as Schwab give those platforms latitude to set the minimums, and so some platforms reflect the $10,000 institutional minimum, some picked $100,000 and others maintain the original $1M. It's beyond the guys' control.
Finally, they anticipate a small distribution this year, perhaps $0.04-0.05/share. That reflects two factors. They manage their positions to minimize tax burdens whenever that's possible and the steadily growing number of investors in the fund diminishes the taxable gain attributed to any of them.
We'll post a link to the .mp3 as soon as it becomes available.
As ever,
David
Comments
YTD 21.30% SEEDX 29.18% Category S&P 500 28.00% Percentile 93% 5
Regards,
Ted
At one point during the call, the PMs talked about being up 22% and under-performing?! They agreed to take that any day, as long as they protect on the down-side.
I too thought their "complete alignment" construct represents an industry best practice. Or, as Mr. Studzinkski touts, these folks have skin in the game. And maybe it's even better, since SEEDX is their only game. Their goal is not so much to make a living off the management fees from asset accumulation, but asset return growth. Similar, I think, to Stephen Dobson's philosophy with Bretton Fund.
Their stated performance goal is to beat S&P 500 "trough-to-trough, peak-to-peak."
I will take a closer look back at their two previous funds, see if it can add more perspective.
And, here's look at M* performance plot during same period:
Looks pretty impressive to me. During the call, Mr. Jackson and Mr. Park stated that SEEDX would reflect behaviors from both these legacy funds. That would be a very good thing.
Additionally, they mentioned it is their goal to be very tax sensitive and that their own money in the fund is in taxable accounts. Good to know.
I intend to invest when the Fidelity brokerage platform opens which they mentioned should be in a couple of weeks.
Thanks to the MFO team for hosting.
David
Thanks so much for the detailed analysis. Extremely helpful and I greatly appreciate it. A couple of questions. Did they address their thoughts on current market valuations? Also, I see they have the S&P 500 as their benchmark. Do they intend for this to be a U.S. focused equity fund or are they really a go anywhere type fund? thanks!
With respect to YTD performance, Schwab shows SEEDX $12,040.00 / S&P 500 TR $12,530 / Large Blend Category $12,464.
If the downside protection proves to be decent, seems to me to be a reasonable price to pay for only a $500 difference on appreciation.
They think that the small cap space is egregiously, unsustainably overvalued and they see few attractive opportunities in the emerging markets. Cash is growing as a result of two factors: continuing inflows and few stocks worth buying. They're not even reinvesting in most of the stocks already in their portfolio since so many have moved from "buy" to "hold" status.
The guys are adamant that they might end up anywhere and point to the fact that they've happily and confidently done it before: US microcaps, emerging markets, real estate, convertibles are all possibilities depending on where they find the best risk-adjusted returns.
I'll invite the guys to double-check the accuracy of my reporting here (something we routinely do before including a piece in the monthly update). If they want to amend my reading on valuations, I'll happily pass word along.
Hope that helps.
David
Automatic Investment Plan $100 Initial
Subsequent Investments $50
I listened to the call and was impressed with both managers and their explanations of their thought and investment processes.I personally see it as a Steve Romick (FPACX) style without the 14 $billion asset base.Up and down the capital structure of any sized publicly traded Co.across the globe.Will hold micro-caps when appropriate but will not hold Private Equity.Both repeatedly used the term "sleep well at night investment."
Full holdings as of 9/30/2013
https://dl.dropboxusercontent.com/u/13183794/Form N-Q/Oakseed Opportunity Fund Form N-Q September 30, 2013.pdf
TEVA 5% of holdings in the news today.11/20/2013 via Seeking Alpha
Teva surges on upgrade, merger rumors
Shares of Teva (TEVA +3.7%) are trading notably higher on the session.Helping the cause is Susquehanna, where analysts have upgraded the stock to Positive from Neutral.Price target is now $50 (from $43).Meanwhile, the rumor mill is alive with talk of a possible merger with either Mylan (MYL +0.8%) or Valeant (VRX +0.1%)."People are looking for the company to do something,” an S&P analyst quoted by Bloomberg says.
Regards,
Ted
Second, SEEDX is designed to be a concentrated fund with about 30 stocks. Picking the right stock and more importantly at the right price, is critical as part of the risk management. As the asset grows in the future, managing can only get harder, not easier without solid analyst support. Marketing and account effort can be outsourced.
As for disclosure, I invested with Greg Jackson and Mike Welsh since the inception of OAKGX. In the height of tech bubble (2000), these managers were GREAT! Sadly they left in 2006. For now I will wait and see for awhile...
It seems that a fund claiming as broad a mandate as they do could find a few places every year to drop a few million; and I, for one, am not adverse to a manager building up cash, although I do eventually come to wonder why I'm paying an ER on that portion of the fund. It would be reassuring, in this day of supercomputers and elegant software, if a fund would charge a significantly lower ER for their cash portion. I might even believe that our interests were aligned, were that the case. If I were already independently wealthy and investing my own money as well as that of my family and friends, I might consider such an approach.
But all you proselytizers (I had to look up the spelling) might want to ask yourselves why a fund that relies on word of mouth for advertising (although it does shyly mention all the other fund managers who have invested with them) charges a 12b 1 fee, albeit a modest one.
If you're completely baffled, you might even ask Messrs Jackson and Park.
Tangentially, as to picking fund bogeys, it might be helpful for the Great Owl to include a few lines representing the performance of indices composed of 60/40 and 80/20 US stocks and bonds (total market, or S&P and total market) and world stocks and bonds, if the numbers can be easily found. If it takes moderate effort to find/compute the numbers, you move that much closer to becoming a paid site with a worthwhile product. It would also be interesting for new stock or balanced funds to be measured against this standard, as well as the one they select.
On benchmarks, our prototype reports - the stuff Chip, Charles and Accipiter (CCA) are working on - include a medley of them.
David
The balance seems to be between making the fund accessible (which they're happy to do) and diverting their time and attention to beefing up assets (which they won't do because they don't enjoy the activity and it's not good for their shareholders). And so, they pursued the two share-class strategy: one with easy availability for folks who prefer supermarkets (albeit at the price of a marketing fee) and one with lower annual expenses (albeit with less convenience - either TF through a supermarket or a separate set of paperwork if you purchase it directly).
CCA are working on refining a fund screener. Depending on how you approach it, you'll end up with either compact tabular results (for multi-fund searches) or reports with a bit more explanatory text (for single fund searches). It's tricky and a bit demanding (both on the team and on the server) because we're trying to guide folks toward questions (roughly: what are the different ways of thinking about risk and how much of it will I be exposed to?) that other folks prefer to avoid. Part of the answer to that question will certainly require access to relevant benchmark data and we're looking at presenting a variety of them with each report.
Browsing Accipiter's threads, above, offer both a sneak peak and the opportunity to participate in shaping the process.
For what all of that is worth,
David