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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.

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our February 2014 issue is up

David_Snowball
edited February 2014 in Fund Discussions
Thought you might be interested. Both Edward Studzinski and Charles have cool and thoughtful essays. We bumped up the number of fund profiles to four. It would have been higher except for a couple non-responsive fund firms (I hate writing before I know the facts). I mumbled a bit about writing a book, shared the ARLSX call highlights and a few words from the managers of RiverPark Gargoyle Hedged Value, who'll be joining us on the February call.

As ever,

David

Comments

  • Old_Skeet
    I enjoyed the read. Thanks to you, Charles and others who make this board possible. Old_Skeet
  • CrashCrash
    Same here!
  • MarkM
    Enjoyed it likewise. But then, I've been around the block a few times also. Interesting days.
  • TedTed
    Dear David: Bruce who ?
    Regards,
    Ted
    One such person is my friend, Bruce, who had a thirty-year career on the “buy side” as both an analyst and a director of research at several well-known money management firms. He retired in 2008 and divides his time between homes in western Connecticut and Costa Rica.
  • Guy
    Great issue. Loved Ed's insightful essay!
  • CrashCrash
    "From Bruce’s perspective, too much money is chasing too few good ideas. This has resulted in what we call “style drift”. Firms that had made their mark as small cap or mid cap investors didn’t want to kill the goose laying the golden eggs by shutting off new money, so they evolved to become large cap investors. But ultimately that is self-defeating, for as the assets come in, you either have to shut down the flows or change your style by adding more and larger positions, which ultimately leads to under-performance."
  • David_Snowball
    Reply to @Ted: Mr. S. did not share his last name.
  • STB65
    I thought this was one of the better commentaries and quite tightly written.
    Only quibble is that I couldn't understand the 7.1% 1 yr gain for ARIVX. TDA says my gain over the past 2 - 3 yr is 0.3 total.

    While not a quibble, I've always thought that any micro- or small- cap funds I bought should be allowed to keep their winners as long as they wish. No point to sell a 3-bagger on its way to being a ten-bagger. I just want their new purchases to be in their original range, so I don't regard that as a change in investment style, and they will probably have to limit new money, but perhaps not as soon. I'm more interested in profits than style.

    Really liked the Great Owl segment. The results suggest that few of the new funds mentioned will meet the test of time, so it's OK with me if you don't strive too hard to meet your numbers of new funds to mention. You can revisit some (or all) choices from the same month 3 years ago and see if they still would be recommended.
  • CharlesCharles
    Hi STB65. Hmmm. I believe ARIVX has delivered about 7% per year pretty consistently since its inception 3 years ago. Numbers look right me, but if there is a mistake, we work to get it corrected:

    image
  • JohnChisum
    Thanks again David for another excellent commentary.
  • STB65
    OK, Charles, I think I give up. I tried to review my monthly reports from TDA on-line and found my original investment in 2012 of $7.5K. My "gain/loss" report on TDA is negative a few cents a share, which I thought represented my historical investment. As far as I can tell, my cost basis has been increased with each yearly dividend/cap gains distribution. While I thought I had added a $500 contribution sometime along the line, I can't find it; and my total holdings are a bit over $8K, so I made some small amount of money, even if TDA says I am currently negative. Guess I'd better learn to construct my own spreadsheets, but I really don't have the time to go back up to 10 years and enter data..
  • Kenster1_GlobalValue
    Great overall commentary David. And the Edward Studzinki piece was excellent and here's a portion worth repeating:
    From Bruce’s perspective, too much money is chasing too few good ideas. This has resulted in what we call “style drift”. Firms that had made their mark as small cap or mid cap investors didn’t want to kill the goose laying the golden eggs by shutting off new money, so they evolved to become large cap investors. But ultimately that is self-defeating, for as the assets come in, you either have to shut down the flows or change your style by adding more and larger positions, which ultimately leads to under-performance.

    I mentioned to Bruce that the other problem of too much money chasing too few good new ideas was that it tended to encourage “smart guy investing,” a term coined by a mutual friend of ours in Chicago. The perfect example of this was Dell. When it first appeared in the portfolios of Southeastern Asset Management, I was surprised. Over the next year, the idea made its way in to many more portfolios at other firms. Why? Because originally Southeastern had made it a very large position, which indicated they were convinced of its investment merits. The outsider take was “they are smart guys – they must have done the work.” And so, at the end of the day after making their own assessments, a number of other smart guys followed. In retrospect it appears that the really smart guy was Michael Dell.

    A month ago I was reading a summary of the 2013 annual investment retreat of a family office investment firm with an excellent reputation located in Vermont. A conclusion reached was that the incremental value being provided by many large cap active managers was not justified by the fees being charged. Therefore, they determined that that part of an asset allocation mix should make use of low cost index funds. That is a growing trend. Something else that I think is happening now in the industry is that investment firms that are not independent are increasingly being run for short-term profitability as the competition and fee pressures from products like exchange traded funds increases. Mike Royko, the Chicago newspaper columnist once said that the unofficial motto of Chicago is “Ubi est meum?” or “Where’s mine?” Segments of the investment management business seemed to have adopted it as well. As a long-term value investor in New York recently said to me, short-termism is now the thing.

    The ultimate lesson is the basic David Snowball raison d’etre for the Mutual Fund Observer. Find yourself funds that are relatively small and independent, with a clearly articulated philosophy and strategy. Look to see, by reading the reports and looking at the lists of holdings, that they are actually doing what they say they are doing, and that their interests are aligned with yours. Look at their active share, the extent to which the holdings do not mimic their benchmark index. And if you cannot be bothered to do the work, put your investments in low cost index vehicles and focus on asset allocation. Otherwise, as Mr. Buffet once said, if you are seated at the table to play cards and don’t identify the “mark” you should leave, as you are it.

    Edward Studzinski
  • Kenster1_GlobalValue
    edited February 2014
    Was he referring to Dodge & Cox here in the example of a large West Cost firm with an 80-yr history and disastrous 2008 meltdown?
    Bruce then mentioned another potentially corrupting factor. His experience was that investment firms compensate analysts based on idea generation, performance of the idea, and the investment dollars committed to the idea. This can lead to gamesmanship as you get to the end of the measurement period for compensation. E.g., we tell corporate managements they shouldn’t act as if they were winding up and liquidating their business at the end of a quarter or year. Yet, we incent analysts to act that way (and lock in a profitable bonus) by recommending sale of an idea much too early. Or at the other extreme, they may not want to recommend sale of the idea when they should. I mentioned that one solution was to eliminate such compensation performance assessments as one large West Coast firm is reputed to have done after the disastrous 2008 meltdown. They were trying to restore a culture that for eighty years had been geared to producing the best long-term compounding investment ideas for the clients. However, they also had the luxury of being independent.
  • David_Snowball
    Reply to @Kenster1_GlobalValue: Almost certainly, but I'll ask.

    David
  • Kenster1_GlobalValue
    edited February 2014
    Reply to @David_Snowball: Yeah sounds like it.
    OVER EIGHTY YEARS OF INVESTMENT EXPERIENCE
    Dodge & Cox was founded in 1930. We have a stable and well-qualified team of investment professionals, most of whom have spent their entire careers at Dodge & Cox. This group has worked together in consistently applying our investment philosophy over a period of many years. We believe that the experience and stability of our investment team enables us to build and retain deep institutional knowledge of individual companies and understanding of different markets.
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