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.
Support MFO
Donate through PayPal
David Snowball's November Commentary Is Now Available
I'm delighted that a number of folks joined us this month who we haven't heard from in a while.
Sam Lee reflected on the tiff involving Morningstar and the Wall Street Journal.
Mark Wilson shared some brief and welcome reflections on the capital gains season
Dennis Baran wrote a Launch Alert for American Beacon Shapiro Equity Opportunities Fund (SHXPX), which has a phenomenal track record as a private strategy
Likewise, I wrote one for Northern Trust Quality US E.S.G. (NUESX), a really low-cost, low minimum way to target two useful attributes at once: a high quality corporation and a record of avoiding problematic behavior.
Sean Stannard-Stockton participated in an Elevator Talk about his Ensemble Fund (ENSBX)
We profiled Fuller & Thaler Behavioral Small Cap Equity (FTHNX) and, in the process, get to play with Charles's rolling three year average metric to see how consistent the fund has been compared to its neighbors.
Charles debuted a new Premium correlation tool which allows you to identify category outliers; it's an interesting way to find out whether you need to discount a fund's ratings since there's a pretty good chance that a fund with no correlation to its peers or benchmark is probably miscategorized. It is, at the very least, driven by forces unrelated to those driving the category.
Ed vents, just a bit, about the cultural elements that permit sexual harassment in the financial services industry; he's not sure that we've seen the end of this one.
Hope you find some useful nuggets in their somewhere.
@David: Can you do something with Paul Katzeff. He's using our discussion board to promote himself. He never enters into any discussion, just a raw link to his IBD articles. When he first started this, I commented that it would look better if I or another MFO Member would link his articles so it wouldn't look so self promoting, but no to avail. Regards, Ted List Of Raw Links: https://www.mutualfundobserver.com/discuss/profile/discussions/2647/Paul_Katzeff
The Fuller & Thaler fund looks interesting but M* reports the fund was large cap blend at least through 2014 and only then became small cap blend sometime in 2015. From reading the annual report it sounds like it was an Allianz fund that Fuller & Thaler sub-advised and then I guess when they bought it or took it over for themselves they changed it to a small cap fund. It appears this happened in Q4 2015, but the "small cap" part of the name is less than a year old. The performance is still good but some of the statistical comparisons might not be completely fair considering the change in style. For instance, in Q3 2014 M*'s small cap blend category was down 6.75% while the fund was up 0.78%. That helps all the risk adjusted return metrics but unfortunately I think the fund was large blend and the S&P 500 was actually up 1.13% that quarter.
In "The Bottom Line", David said they communicate clearly. I went to their website and it's not clear they communicate at all. There are no commentaries and the only communication I found was in the annual report. Interestingly, there was nothing about the portfolio or what the managers think about the markets. There was a sentence or two that covered performance attribution, sector allocation hurt, stock selection was good so they outperformed the index in total, but almost all of the commentary was exactly what's in David's write-up- people make mistakes and they make more mistakes in small caps so they're trying to take advantage of that. They do post lots of news about Dr. Thaler on their website, even an article by someone named Lewis Braham, but I was hoping they'd provide at least a little insight into how they think about some specific examples from the portfolio.
I like the concept of the fund a lot. Can anyone suggest alternatives to compare and contrast where behavioral finance is a driving force in the fund?
Sorry, LLJB, I should have been clearer. I've been reading work on the adviser's site, which is more extensive. https://www.fullerthaler.com/news. They've run the strategy in several wrappers back for a couple decades. Microcap, if I recall correctly, is 17 years old.
The original adviser (Undiscovered Managers) sought out Fuller and Thaler based on their private work, that fund was then sold (perhaps twice?) before Fuller and Thaler moved from sub-adviser to adviser. The previous owner of the fund withdrew something like 90-95% of the fund's assets when it became independent, which allowed them to transition from a larger cap product (which the adviser wanted) to a small cap one (which they wanted). I'll see if I can extract more info about the small cap accounts.
I looked at this fund also and concluded it's worthwhile, but only in a tax-advantaged account. If distributions, predicted to be high this year for everyone, follow the fund's past behavior, there will be a big one in December. Turnover recently was 194%.
I had the same concern but spoke with the adviser about it. The turnover is a one-time event linked to the move from being an Allianz fund to being independent. Two factors: Allianz wanted large cap and they pulled all of their clients' assets out at the point of transition. F&T then made a special cap gains distribution so that the tax burden fell on the departing shareholders rather than the new ones. They now estimate 0% distribution this year with a small tax loss carryforward.
Based on the management of their small cap separate accounts, they anticipate turnover closer to 24%.
I've a few of thoughts regarding his suggestion to explicitly incorporate costs into star ratings.
Obviously costs are already implicitly incorporated, because costs affect performance, and performance is a key factor in calculating star ratings. So adding cost as an explicit factor would in a sense double count or increase the weight already given to cost. This may be a good idea, so long as it is not done to excess (a qualification that Sam also made). But ...
The fact that this suggestion arises highlights a different problem with the star ratings, or perhaps with human behavior. People are looking for single magic numbers - a final grade, as it were - that encapsulates everything. Not possible. Lipper takes a different approach, by giving ratings for performance, consistency, preservation, tax efficiency, and cost. None is elevated above the others. M* likewise rates cost (e.g. below average, low, etc.), but the star rating is presented as the gold standard. Maybe that's the more fundamental problem.
Finally, in a sense, M* used to incorporate at least one cost somewhat explicitly in its star rating calculation. It used to explicitly apply the front end load figure in calculating performance, which in turn fed into the star rating. It stopped doing this fairly recently; consequently you no longer see <fundTicker>.lw listings. I'm still not sure whether this is a good or bad change. But it does serve as evidence that M* is at least open to directly feeding costs into its calculations of star ratings.
With regard to Fuller, I would say looking at the Undiscovered Managers Behavioral Value Fund, which the shop also runs, is worth doing: morningstar.com/funds/xnas/ubvax/quote.html That fund admittedly has more of a value tilt than this one. One disappointing fact i think is that now that this fund is raking in assets, Fuller plans to launch new funds, which will probably have some overlap with this fund. It's rather annoying and will lead to perhaps some less conspicuous bloat and over-extension of the research/managerial team.
I'd hoped to include a link to your article in the profile, but my understanding is that a new agreement between Google and various publishers makes the paywall rather tighter. Is that about right?
On the asset bloat piece, they're already managing $9 billion in four small- to micro-cap strategies and one all-cap strategy. I'm not sure how much the inclusion of two funds will move that needle, especially since some managers move their smaller SMAs to their mutual funds.
No worries. I always enjoy your work. I'm not really sure about the paywall, though. I should keep better track of these things, but when it comes to those sort of details I'm often out of the loop. What I've seen is sometimes a Google link works and sometimes it doesn't. It may have something to do with how many free articles an individual has read on his computer at a particular publication, but I'm not sure.
My problem is that I subscribe, so the links always work for me. Apparently Google had enforced a "first click free" rule that said something like, "if someone Googles your exact article title, you need to let them in." If publishers didn't agree, they would "virtually disappear" from search results. Now publishers can enforce their paywalls while Google offers easy subscription payment; hit a paywall, click "subscribe" and your Google payment stuff does the rest.
@LLBJ: what you point out about FTHNX changing its stripes in 2015 does seem to be reflected in the massive distributions of $6.58 made that year while the NAV was between $16 and $20. If they were unloading large cap stocks that had appreciated, the distributions make sense. 2016 appears normal and if what @David found out is true, this year won’t be as bad as I had thought. Did you find out if the fund changed its name at the time it altered strategy? The whole thing seems strange to me.
The sister fund to FTHNX that Lewis linked too, run by the same team, UBVSX is a $6 billion (!) small cap fund. It's done well recently, but underperformed pretty significantly in 2007 & 2008.
@BenWP, from reviewing SEC filings I believe the strategy changed in October 2015. At that point the only name change was to replace AllianzGI with Fuller & Thaler. The name change to explicitly include "Small Cap" happened at the end of January this year. I believe the strategy actually changed in 2015 because the stocks in the portfolio before and after the change were very different, from clearly large cap names I recognized easily to mostly names that I didn't recognize or know are a lot lower on the capitalization spectrum. M* also changed the category designation, showing the portfolio in the small blend box of their 9 box in 2015 and which I assume relates to where they finished the year and then changing the category designation to small blend in 2016.
I'm not particularly concerned about turnover because I would buy it in my IRA if I decide to do that and their performance in the small blend category, albeit for just 2 years, might be even better than their previous performance. If you're willing to put any weight on 2 years and you're comfortable with the total assets chasing the strategy then it's pretty interesting. I normally compare small blend funds to my favorites, VVPSX, MSCFX and FSCRX as well as IWB rather than peers, which is an extension from what Sam Lee was talking about to include a few small cap funds I really like, have held and/or would like to hold (VVPSX), and these guys look great for the last 2 years. I think I'd like to see how they do in a more extended negative market because they haven't done anything special in the few isolated negative months in the last 2 years and they didn't do well against my comparisons in January 2016. Can't someone whip one of those up just for comparison's sake?
A concern about the Launch Alert for American Beacon Shapiro Equity Opportunities Fund: There is almost no relevant information about the fund besides the strategy seems to have done well for the past decade-plus. There is almost no one who is going to put money into such fund without knowing what is currently in it or at least some examples of what used to be in the strategy during certain time periods.
A concern about the Launch Alert for American Beacon Shapiro Equity Opportunities Fund: There is almost no relevant information about the fund besides the strategy seems to have done well for the past decade-plus. There is almost no one who is going to put money into such fund without knowing what is currently in it or at least some examples of what used to be in the strategy during certain time periods.
Thanks for your comments.
Because the funds only recently launched, we will not see relevant information until EOY 4Q2017. Most new funds will not have current information available immediately after launch, and so this is as expected.
On the other hand, while investors may be unwilling to invest in these funds without knowing what is currently in them, ten years of detailed quarterly commentary for both private strategies are available from the firm. These commentaries have significant explanatory depth and clearly communicate specific stock positions, the reasons for owning, selling, or holding them, how discrete segments of the portfolio are constituted, and how current market conditions affect their positioning and outlook -- in other words -- we know what has been in them from detailed facts about how the strategies are being managed, not only currently, but also historically.
This year the Observer has done three launch alerts of new funds that have begun from successful predecessor strategies. The ones from Shapiro are the fourth. The launch alerts are not recommendations to buy these funds but are intended to provide relevant background, such as composite strategies, so that we can decide what potential they may have for investment based on what is already known.
The 3Q2017 commentary of the Shapiro composite strategies was released October 26th. While they don't discuss the new funds, they do provide information about some specific holdings replete with their usual overall depth about the strategies -- a helpful analysis in seeing how the new funds may be invested.
Some thoughts on private account composite returns: I find them useful to a degree, but one has to take them with a grain of salt and understand the nuances of a fund's individual strategy as to whether that translates well into fund world. For instance, the more illiquid the strategy--small caps, high yield bonds--the less credence I would give to the private accounts composite returns because such accounts tend to have much stickier assets and don't have to deal with the daily ebb and flows of mutual fund cash flows on brokerage platforms which can wreak havoc with illiquid strategies. The same goes for low turnover versus high turnover strategies. Low turnover translates well I think into mutual fund format while high turnover which suffers more market impact costs as assets grow in the mutual fund format can cause the manager to lose its edge. Also, concentrated versus non-concentrated. A diversified strategy can absorb more assets than a concentrated one in a mf format. Finally, and very important is the lumpiness of composite private account returns. Some funds have excellent composite returns annualized over a number of years but if you look at the calendar year returns you'll notice that much of that performance is due to one really big year while the rest of the years are mediocre or sub-par. Look at those calendar year returns on the composite and notice the outliers and ask why. Also, look at how much assets the strategy had in those big blow out years and whether the returns are repeatable in a much larger bigger mutual fund format. In other words, the key question is--is this strategy scalable?
A concern about the Launch Alert for American Beacon Shapiro Equity Opportunities Fund: There is almost no relevant information about the fund besides the strategy seems to have done well for the past decade-plus. There is almost no one who is going to put money into such fund without knowing what is currently in it or at least some examples of what used to be in the strategy during certain time periods.
Thanks for your comments.
Because the funds only recently launched, we will not see relevant information until EOY 4Q2017. Most new funds will not have current information available immediately after launch, and so this is as expected.
On the other hand, while investors may be unwilling to invest in these funds without knowing what is currently in them, ten years of detailed quarterly commentary for both private strategies are available from the firm. These commentaries have significant explanatory depth and clearly communicate specific stock positions, the reasons for owning, selling, or holding them, how discrete segments of the portfolio are constituted, and how current market conditions affect their positioning and outlook -- in other words -- we know what has been in them from detailed facts about how the strategies are being managed, not only currently, but also historically.
This year the Observer has done three launch alerts of new funds that have begun from successful predecessor strategies. The ones from Shapiro are the fourth. The launch alerts are not recommendations to buy these funds but are intended to provide relevant background, such as composite strategies, so that we can decide what potential they may have for investment based on what is already known.
The 3Q2017 commentary of the Shapiro composite strategies was released October 26th. While they don't discuss the new funds, they do provide information about some specific holdings replete with their usual overall depth about the strategies -- a helpful analysis in seeing how the new funds may be invested.
Thank you, openice. I didnt know that the past commentaries were available. Such is sufficient to determine if a personal investment is warranted. Thank you for the knowledge.
Thank you, openice. I didnt know that the past commentaries were available. Such is sufficient to determine if a personal investment is warranted. Thank you for the knowledge.
Thanks for your cautionary remarks about composite returns -- well-taken. I also find these returns helpful but not definitive.
Here is a summary of what I learned from a call this morning with Louis Shapiro, one of the PMs-- what he said and what he's verified from my own research/assessment.
The managers have never had liquidity issues in the small cap composite despite having concentrated positions. At the same time, he acknowledges that liquidity could happen in the funds -- a point you raised. What they are hoping for is that the new funds will have sticker assets as well. (Of course, this is unknown,)
His feeling is based on holders in the composites having been long-term investors who have invested more when markets have done well and in those that have done poorly -- a conclusion I reached and brought to his attention after seeing the performance statistics for all their calendar years. He said that they will see how new fund investors react to dislocations in the markets and with more AUM in these funds.
Last, he feels that the new products are repeatable and scalable for those who are not chasing performance, who understand the strategies because they are clearly communicated, e.g., the funds do well in up markets but also see that most of the money is made when stocks fall out of favor for certain periods. (The practical qualifiers)
The funds are now available at Schwab:
SMID Funds: Basic and IRA-- SHDYX N Class $100 basic and IRA; SHDIX I Class 250K; SHDYX Y Class 100K
All-Cap Funds: Basic and IRA -- SHXPX N Class, SHXYX Y Class, and SHXIX -- Ibid.
So currently, the preceding is all I can write. I will remain cautious in view of what you've said and the summary above.
@Lewis I failed to mention that an analysis of their composite calendar returns do not show any lumpiness and that the reasons for their quarterly or annual individual stock losses are explained in detail.
Comments
I'm delighted that a number of folks joined us this month who we haven't heard from in a while.
- Sam Lee reflected on the tiff involving Morningstar and the Wall Street Journal.
- Mark Wilson shared some brief and welcome reflections on the capital gains season
- Dennis Baran wrote a Launch Alert for American Beacon Shapiro Equity Opportunities Fund (SHXPX), which has a phenomenal track record as a private strategy
- Likewise, I wrote one for Northern Trust Quality US E.S.G. (NUESX), a really low-cost, low minimum way to target two useful attributes at once: a high quality corporation and a record of avoiding problematic behavior.
- Sean Stannard-Stockton participated in an Elevator Talk about his Ensemble Fund (ENSBX)
- We profiled Fuller & Thaler Behavioral Small Cap Equity (FTHNX) and, in the process, get to play with Charles's rolling three year average metric to see how consistent the fund has been compared to its neighbors.
- Charles debuted a new Premium correlation tool which allows you to identify category outliers; it's an interesting way to find out whether you need to discount a fund's ratings since there's a pretty good chance that a fund with no correlation to its peers or benchmark is probably miscategorized. It is, at the very least, driven by forces unrelated to those driving the category.
- Ed vents, just a bit, about the cultural elements that permit sexual harassment in the financial services industry; he's not sure that we've seen the end of this one.
Hope you find some useful nuggets in their somewhere.David
Regards,
Ted
List Of Raw Links:
https://www.mutualfundobserver.com/discuss/profile/discussions/2647/Paul_Katzeff
In "The Bottom Line", David said they communicate clearly. I went to their website and it's not clear they communicate at all. There are no commentaries and the only communication I found was in the annual report. Interestingly, there was nothing about the portfolio or what the managers think about the markets. There was a sentence or two that covered performance attribution, sector allocation hurt, stock selection was good so they outperformed the index in total, but almost all of the commentary was exactly what's in David's write-up- people make mistakes and they make more mistakes in small caps so they're trying to take advantage of that. They do post lots of news about Dr. Thaler on their website, even an article by someone named Lewis Braham, but I was hoping they'd provide at least a little insight into how they think about some specific examples from the portfolio.
I like the concept of the fund a lot. Can anyone suggest alternatives to compare and contrast where behavioral finance is a driving force in the fund?
The original adviser (Undiscovered Managers) sought out Fuller and Thaler based on their private work, that fund was then sold (perhaps twice?) before Fuller and Thaler moved from sub-adviser to adviser. The previous owner of the fund withdrew something like 90-95% of the fund's assets when it became independent, which allowed them to transition from a larger cap product (which the adviser wanted) to a small cap one (which they wanted). I'll see if I can extract more info about the small cap accounts.
David
I had the same concern but spoke with the adviser about it. The turnover is a one-time event linked to the move from being an Allianz fund to being independent. Two factors: Allianz wanted large cap and they pulled all of their clients' assets out at the point of transition. F&T then made a special cap gains distribution so that the tax burden fell on the departing shareholders rather than the new ones. They now estimate 0% distribution this year with a small tax loss carryforward.
Based on the management of their small cap separate accounts, they anticipate turnover closer to 24%.
For what that's worth,
David
I've a few of thoughts regarding his suggestion to explicitly incorporate costs into star ratings.
Obviously costs are already implicitly incorporated, because costs affect performance, and performance is a key factor in calculating star ratings. So adding cost as an explicit factor would in a sense double count or increase the weight already given to cost. This may be a good idea, so long as it is not done to excess (a qualification that Sam also made). But ...
The fact that this suggestion arises highlights a different problem with the star ratings, or perhaps with human behavior. People are looking for single magic numbers - a final grade, as it were - that encapsulates everything. Not possible. Lipper takes a different approach, by giving ratings for performance, consistency, preservation, tax efficiency, and cost. None is elevated above the others. M* likewise rates cost (e.g. below average, low, etc.), but the star rating is presented as the gold standard. Maybe that's the more fundamental problem.
Finally, in a sense, M* used to incorporate at least one cost somewhat explicitly in its star rating calculation. It used to explicitly apply the front end load figure in calculating performance, which in turn fed into the star rating. It stopped doing this fairly recently; consequently you no longer see <fundTicker>.lw listings. I'm still not sure whether this is a good or bad change. But it does serve as evidence that M* is at least open to directly feeding costs into its calculations of star ratings.
That fund admittedly has more of a value tilt than this one. One disappointing fact i think is that now that this fund is raking in assets, Fuller plans to launch new funds, which will probably have some overlap with this fund. It's rather annoying and will lead to perhaps some less conspicuous bloat and over-extension of the research/managerial team.
I'd hoped to include a link to your article in the profile, but my understanding is that a new agreement between Google and various publishers makes the paywall rather tighter. Is that about right?
On the asset bloat piece, they're already managing $9 billion in four small- to micro-cap strategies and one all-cap strategy. I'm not sure how much the inclusion of two funds will move that needle, especially since some managers move their smaller SMAs to their mutual funds.
David
No worries. I always enjoy your work. I'm not really sure about the paywall, though. I should keep better track of these things, but when it comes to those sort of details I'm often out of the loop. What I've seen is sometimes a Google link works and sometimes it doesn't. It may have something to do with how many free articles an individual has read on his computer at a particular publication, but I'm not sure.
Best,
Lewis
Did you find out if the fund changed its name at the time it altered strategy? The whole thing seems strange to me.
I'm not particularly concerned about turnover because I would buy it in my IRA if I decide to do that and their performance in the small blend category, albeit for just 2 years, might be even better than their previous performance. If you're willing to put any weight on 2 years and you're comfortable with the total assets chasing the strategy then it's pretty interesting. I normally compare small blend funds to my favorites, VVPSX, MSCFX and FSCRX as well as IWB rather than peers, which is an extension from what Sam Lee was talking about to include a few small cap funds I really like, have held and/or would like to hold (VVPSX), and these guys look great for the last 2 years. I think I'd like to see how they do in a more extended negative market because they haven't done anything special in the few isolated negative months in the last 2 years and they didn't do well against my comparisons in January 2016. Can't someone whip one of those up just for comparison's sake?
Because the funds only recently launched, we will not see relevant information until EOY 4Q2017. Most new funds will not have current information available immediately after launch, and so this is as expected.
On the other hand, while investors may be unwilling to invest in these funds without knowing what is currently in them, ten years of detailed quarterly commentary for both private strategies are available from the firm. These commentaries have significant explanatory depth and clearly communicate specific stock positions, the reasons for owning, selling, or holding them, how discrete segments of the portfolio are constituted, and how current market conditions affect their positioning and outlook -- in other words -- we know what has been in them from detailed facts about how the strategies are being managed, not only currently, but also historically.
This year the Observer has done three launch alerts of new funds that have begun from successful predecessor strategies. The ones from Shapiro are the fourth. The launch alerts are not recommendations to buy these funds but are intended to provide relevant background, such as composite strategies, so that we can decide what potential they may have for investment based on what is already known.
The 3Q2017 commentary of the Shapiro composite strategies was released October 26th. While they don't discuss the new funds, they do provide information about some specific holdings replete with their usual overall depth about the strategies -- a helpful analysis in seeing how the new funds may be invested.
@lewis braham
Thanks for your cautionary remarks about composite returns -- well-taken. I also find these returns helpful but not definitive.
Here is a summary of what I learned from a call this morning with Louis Shapiro, one of the PMs-- what he said and what he's verified from my own research/assessment.
The managers have never had liquidity issues in the small cap composite despite having concentrated positions. At the same time, he acknowledges that liquidity could happen in the funds -- a point you raised. What they are hoping for is that the new funds will have sticker assets as well. (Of course, this is unknown,)
His feeling is based on holders in the composites having been long-term investors who have invested more when markets have done well and in those that have done poorly -- a conclusion I reached and brought to his attention after seeing the performance statistics for all their calendar years. He said that they will see how new fund investors react to dislocations in the markets and with more AUM in these funds.
Last, he feels that the new products are repeatable and scalable for those who are not chasing performance, who understand the strategies because they are clearly communicated, e.g., the funds do well in up markets but also see that most of the money is made when stocks fall out of favor for certain periods. (The practical qualifiers)
The funds are now available at Schwab:
SMID Funds: Basic and IRA-- SHDYX N Class $100 basic and IRA; SHDIX I Class 250K; SHDYX Y Class 100K
All-Cap Funds: Basic and IRA -- SHXPX N Class, SHXYX Y Class, and SHXIX -- Ibid.
So currently, the preceding is all I can write. I will remain cautious in view of what you've said and the summary above.