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David Snowball's August Commentary Is Now Available
A bit less commentary and rather more profiles this month.
I think the liquidity storm argument, which we've discussed here and which Ed mentions, is pretty interesting. Here's the gist of it: there are now ETFs which are themselves much more liquid than the stuff they invest in is.
Imagine an ETF that owns an apartment building and turnovers over all its shares every two days with a very small bid/ask spread. That's great until redemption orders greatly exceed purchase orders, at which point the question becomes, "who can I sell my apartment building to, at face value, by 4:00 p.m. today, in the face of a panic?"
That's an extreme illustration but the same dynamic is true for high yield bond ETFs. Those bonds don't actually trade all that other or all that smoothly. But the ETF does.
The traditional answer is: there are buyers with cash, waiting to swoop in. You might take a haircut, but you'll find a buyer. Mr. Rodriquez's argument is that the supply of buyers is becoming smaller (as assets flow into passive strategies that are always 100% invested) and less liquid (managers fear the drag of cash, so they don't hold it).
Optimists say there are plenty of active managers around, no worries! The tricky question is not whether there are any buyers, but how many buyers need to be present in order for the market to function? If I'm interested in buying a particular microcap but see no one else bidding (or if the bidders can absorb a small fraction of the offered supply), why wouldn't I wait and let it tumble?
He argues that such little hiccups might turn into major train wrecks if they trigger quant funds, including some highly-leveraged private funds, into initiating additional sales to fulfill stop-loss orders.
I haven't written anything myself about the argument, at least in our monthly issue, because I'm not confident that I know how much liquidity is available. One table in the 2016 ICI Factbook says that total cash in mutual fund portfolios is at its second-highest level ever. I have trouble taking that at face value since it seems inconsistent with the other trends we can document: fewer active managers, fewer absolute value/high cash stash funds, more reluctance to hold cash.
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Three quick profiles:
Evermore Global Value, which strikes me as being pretty much the epitome of what you hire an active manager to do. Mr. Marcus looks at investments in a fundamentally different way than does 99% of his peers, which leads to very, very different investments and results. There's a hint of activism to his approach: he not only identifies firms that have turnaround potential, but he also selectively supports the turnaround.
Moerus Worldwide Value, which takes a very different approach to valuing stocks than most. It manifests Marty Whitman's "safe and (ridiculously) cheap" mantra without, we're hoping, the sort of uber-concentration mistake that the octogenarian made. In speaking with Mr. Wadhwaney, I did get the sense that the team is structurally committed to managing risk at the portfolio level as well as the individual security level.
Shelton International Select Equity, which adopted the (broken) shell of WHV International Equity in 2016. The managers seem to have a distinctive approach (focusing on the lifecycle stages firms go through rather than their market cap, industry or whatever) that's worked well in private accounts for a decade. Whether you're impressed with their performance so far depends a lot on whether you look at when they took WHV over (February 2016) or when they completed the transition from the legacy portfolio to their own (July 2016). This latter feature is, of course, just an Elevator Talk. That is, a short feature designed to introduce both me and you to the strategy. Some E.T. funds eventually warrant full profiles, many don't. We'll see.
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Finally, Charles is offering the opportunity for folks with MFO Premium access (or folks interested in seeking it) to meet with him on the web (August 16 or 23) or in person (at Morningstar ETF) to figure out how to get the most from the system.
Nice job on the Evermore fund. I sit here wondering why I didn't put some $ into it when I first caught wind of it; value trap possibilities may have been the reason (?). Anyone here invested in it, with additional insights to offer?
From David's Commentary - "(Howard Marks') premise here is that investors make the greatest and safest returns on their investment when they are prepared to do what others do not want to do. He posits a situation, analogous to what we see today, where too much money with too little fear is chasing risky investments since the alternative is unappealing ...". -
Marks is an interesting bird. More impressive live (on Bloomberg) than in his writings, I think. I've been plodding through his The Most Important Thing on Audible. It's few hundred pages long, but with a tediously repetitious basic theme. That being: Adjust your risk appetite to market conditions. He's currently quite bearish. I enjoy the book, but listen mostly at bedtime and generally doze off after about 10 minutes.
His Oaktree Capital seems to specialize in distressed debt. I sense that they cater to very large and institutional investors. They have a high yield mutual fund - however I believe the minimum is quite high.
M* has the minimum for their high yield fund at 25K. Not exactly chump change, and might even be lower at various brokers, but it's probably doable for many folks here. But the 1.20 ER and 12(b)-1 fee on the investor class turns me off.
His Oaktree Capital seems to specialize in distressed debt. I sense that they cater to very large and institutional investors. They have a high yield mutual fund - however I believe the minimum is quite high.
If you're interested, you might look into RiverNorth/Oaktree High Income (RNOTX), which has a $5000 minimum and 1.7% expenses. It's the traditional RiverNorth model: a sub-adviser does their thing and RiverNorth supplements it with the CEF arbitrage strategy in the same asset class. It's been a mediocre performer so far, likely because the RiverNorth sleeve is expensive and only adds real value when markets are volatile, which hasn't been the case lately.
Oaktree's HY fund has 2 share classes: Institutional (.95 ER / $1 mil. minimum) and Advisor (1.20 ER / $25,000 minimum). The .25 12 (b-1) fee (mentioned by rforno) applies only to the Advisor class and accounts for all of its higher ER. Neither class appears to be front loaded.
Not something I'd be interested in at this juncture. Agree with rforno the ER is high - but not extraordinarily so for some of these specialty funds. For comparison, Price charges a .75 ER for its (now closed) PRHYX.
Thanks for the kind words. I'm hopeful of finishing the second edition (which expands the discussions of errors embedded in cross-cultural communication and technologically-mediated comm, both increasingly pressing in a globalized workplace) this fall. I'll certainly let folks know if I pull it off.
As to terriers there are, so far as I know, two types: Scottish and wannabees.
@Ben- Click on "resources" in the green band at the page top- there should be a link just to the right of the "Miscommunications in the Workplace" highlight box.
Thank you for the lecture on global warming: just what I want from an investing website.
"And EDF is reasonably compatible with my political philosophy. I’m a reasonably conservative guy who’d much rather encourage progress through conversation and cooperation with governments and corporations than engaging in histrionics and lawsuits"
Have you researched the Environmental Defense Fund? Their speciality is suing the govt for every environmental grievance imaginable. In just the last 9-yr period , they have initiated 67 lawsuits and spent over $69 million litigating the cases. This hardly sounds like conversation and cooperation.
The changes wrought by carbon emissions will affect every sector of the economy and all of life on earth, but especially the energy sector, the utility sector and yes, financial services, particularly insurers who already realize no matter what our president or his new EPA director claim that it is a dire threat to their businesses' risk modeling. Climate change is mutual fund related, and will affect financial market returns. Frankly, it is everything related. Even the military, historically the most politically conservative government entity, recognizes the threat climate change poses to national security: military.com/daily-news/2017/06/02/trump-may-doubt-climate-change-pentagon-sees-it-looming-threat.html
You may disagree with the tactics used by the EDF, but historically government and corporate leaders haven't addressed long-term issues like climate change effectively because they are compensated by short-term results. So cooperation may not be as effective as holding their feet to the fire via lawsuits. In any case the notion that such matters aren't worthy of discussion on an investment site is absurd. It will affect everyone's investments, even short-term via regulation globally or the lack thereof locally.
PK today: … it's important to realize that at this point the overwhelming majority of climate deniers are acting in bad faith. What do I mean? Dissent -- even from overwhelming scientific consensus -- is okay -- but only if you're honestly trying to get at the truth. They aren't. What we have instead are paid hacks for fossil fuels, rightwingers who refuse to acknowledge any problem requiring gov intervention .... And a significant number of snide types who feed their egos by being contrarian just for the sake of thumbing their nose at liberals. This amounts to a real axis of evil -- and it may end up dooming civilization.
Lewis, I am not a scientist, so I do not pretend to understand the science behind global warming. OTOH, I doubt anyone commenting on this board is anymore technically proficient about the subject either. People like to think of themselves as experts, linking to articles that just happens to support their viewpoint, as if they really know what they're talking about.
The guestion I grapple with is not whether the planet is warming, but what measures do we take to ameliorate it. Thoughtful people think about cost/benefit ratio of how far we go in arresting carbon emissions if it hinders economic growth or increases unemployment by raising the cost of energy, which has a pervasive effect on the economy. Trying to find the right balance is not climate denial or some right wing conspiracy, like many of the zealots on this subject would have you believe.
@lssegal +1!! The other important aspect is who bears the cost and who derives the benefits in many of these discussions. In many cases those who are most adamantly in favor are the ones who get a disproportionate share of the benefits and who want someone else to bear a disproportionate share of the cost. I'm not suggesting that's the case with climate change specifically but I think there's a good deal of truth behind the assertion.
Comments
I think the liquidity storm argument, which we've discussed here and which Ed mentions, is pretty interesting. Here's the gist of it: there are now ETFs which are themselves much more liquid than the stuff they invest in is. The traditional answer is: there are buyers with cash, waiting to swoop in. You might take a haircut, but you'll find a buyer. Mr. Rodriquez's argument is that the supply of buyers is becoming smaller (as assets flow into passive strategies that are always 100% invested) and less liquid (managers fear the drag of cash, so they don't hold it).
Optimists say there are plenty of active managers around, no worries! The tricky question is not whether there are any buyers, but how many buyers need to be present in order for the market to function? If I'm interested in buying a particular microcap but see no one else bidding (or if the bidders can absorb a small fraction of the offered supply), why wouldn't I wait and let it tumble?
He argues that such little hiccups might turn into major train wrecks if they trigger quant funds, including some highly-leveraged private funds, into initiating additional sales to fulfill stop-loss orders.
I haven't written anything myself about the argument, at least in our monthly issue, because I'm not confident that I know how much liquidity is available. One table in the 2016 ICI Factbook says that total cash in mutual fund portfolios is at its second-highest level ever. I have trouble taking that at face value since it seems inconsistent with the other trends we can document: fewer active managers, fewer absolute value/high cash stash funds, more reluctance to hold cash.
---
Three quick profiles:
Evermore Global Value, which strikes me as being pretty much the epitome of what you hire an active manager to do. Mr. Marcus looks at investments in a fundamentally different way than does 99% of his peers, which leads to very, very different investments and results. There's a hint of activism to his approach: he not only identifies firms that have turnaround potential, but he also selectively supports the turnaround.
Moerus Worldwide Value, which takes a very different approach to valuing stocks than most. It manifests Marty Whitman's "safe and (ridiculously) cheap" mantra without, we're hoping, the sort of uber-concentration mistake that the octogenarian made. In speaking with Mr. Wadhwaney, I did get the sense that the team is structurally committed to managing risk at the portfolio level as well as the individual security level.
Shelton International Select Equity, which adopted the (broken) shell of WHV International Equity in 2016. The managers seem to have a distinctive approach (focusing on the lifecycle stages firms go through rather than their market cap, industry or whatever) that's worked well in private accounts for a decade. Whether you're impressed with their performance so far depends a lot on whether you look at when they took WHV over (February 2016) or when they completed the transition from the legacy portfolio to their own (July 2016). This latter feature is, of course, just an Elevator Talk. That is, a short feature designed to introduce both me and you to the strategy. Some E.T. funds eventually warrant full profiles, many don't. We'll see.
----
Finally, Charles is offering the opportunity for folks with MFO Premium access (or folks interested in seeking it) to meet with him on the web (August 16 or 23) or in person (at Morningstar ETF) to figure out how to get the most from the system.
For what all of that is worth,
David
-
Marks is an interesting bird. More impressive live (on Bloomberg) than in his writings, I think. I've been plodding through his The Most Important Thing on Audible. It's few hundred pages long, but with a tediously repetitious basic theme. That being: Adjust your risk appetite to market conditions. He's currently quite bearish. I enjoy the book, but listen mostly at bedtime and generally doze off after about 10 minutes.
His Oaktree Capital seems to specialize in distressed debt. I sense that they cater to very large and institutional investors. They have a high yield mutual fund - however I believe the minimum is quite high.
M* has the minimum for their high yield fund at 25K. Not exactly chump change, and might even be lower at various brokers, but it's probably doable for many folks here. But the 1.20 ER and 12(b)-1 fee on the investor class turns me off.
For what interest that holds,
David
Not something I'd be interested in at this juncture. Agree with rforno the ER is high - but not extraordinarily so for some of these specialty funds. For comparison, Price charges a .75 ER for its (now closed) PRHYX.
As to terriers there are, so far as I know, two types: Scottish and wannabees.
Cheers!
David
"And EDF is reasonably compatible with my political philosophy. I’m a reasonably conservative guy who’d much rather encourage progress through conversation and cooperation with governments and corporations than engaging in histrionics and lawsuits"
Have you researched the Environmental Defense Fund? Their speciality is suing the govt for every environmental grievance imaginable. In just the last 9-yr period , they have initiated 67 lawsuits and spent over $69 million litigating the cases. This hardly sounds like conversation and cooperation.
https://nytimes.com/2017/08/07/climate/climate-change-drastic-warming-trump.html
The changes wrought by carbon emissions will affect every sector of the economy and all of life on earth, but especially the energy sector, the utility sector and yes, financial services, particularly insurers who already realize no matter what our president or his new EPA director claim that it is a dire threat to their businesses' risk modeling. Climate change is mutual fund related, and will affect financial market returns. Frankly, it is everything related. Even the military, historically the most politically conservative government entity, recognizes the threat climate change poses to national security: military.com/daily-news/2017/06/02/trump-may-doubt-climate-change-pentagon-sees-it-looming-threat.html
Since the threat is so dire, discussion of it belongs on an investing website. It is most certainly a long-term risk to the financial markets, so much so that the CEO of the world's largest money manager, BlackRock's Larry Fink, considers addressing it one of his priorities: https://fnlondon.com/articles/goldman-and-blackrock-chiefs-lead-finances-revolt-on-trumps-climate-call-20170602
You may disagree with the tactics used by the EDF, but historically government and corporate leaders haven't addressed long-term issues like climate change effectively because they are compensated by short-term results. So cooperation may not be as effective as holding their feet to the fire via lawsuits. In any case the notion that such matters aren't worthy of discussion on an investment site is absurd. It will affect everyone's investments, even short-term via regulation globally or the lack thereof locally.
https://pbs.twimg.com/media/DGuAoMGUAAAq0Lj.jpg:large
PK today:
… it's important to realize that at this point the overwhelming majority of climate deniers are acting in bad faith. What do I mean? Dissent -- even from overwhelming scientific consensus -- is okay -- but only if you're honestly trying to get at the truth. They aren't. What we have instead are paid hacks for fossil fuels, rightwingers who refuse to acknowledge any problem requiring gov intervention .... And a significant number of snide types who feed their egos by being contrarian just for the sake of thumbing their nose at liberals. This amounts to a real axis of evil -- and it may end up dooming civilization.
(Bf is mine.)
The guestion I grapple with is not whether the planet is warming, but what measures do we take to ameliorate it. Thoughtful people think about cost/benefit ratio of how far we go in arresting carbon emissions if it hinders economic growth or increases unemployment by raising the cost of energy, which has a pervasive effect on the economy. Trying to find the right balance is not climate denial or some right wing conspiracy, like many of the zealots on this subject would have you believe.
How about taking your personal sniper attacks off the forum.
https://en.wikipedia.org/wiki/I%27m_not_a_scientist
https://nytimes.com/2014/10/31/us/why-republicans-keep-telling-everyone-theyre-not-scientists.html
businessinsider.com/stephen-colbert-on-im-not-a-scientist-2014-11
People on this board are not mutual fund managers or financial academics yet they talk about mutual funds and financial studies all the time.
Regards,
Ted