MJG & rjb,
Am I understanding correctly that both of you use a combination of actively managed funds as well as index funds? I've considered the merits of such a strategy in the past and am aware individuals such as Charles Schwab are advocates of the combination.

Hi Roy,
Yes, you are correct. I use a combination of actively managed funds as well as index funds. And like MJG, as time goes on, my percentage of indexed equity investments has been increasing and my percentage of actively managed equity investments has been decreasing.
And I plan to continue this, that is, use an increasingly larger percentage of indexed equity funds rather than actively managed equity funds. I'm particularly disenchanted with the negative tax implications of actively managed equity funds, that is to say, the fact that they distribute taxable capital gains.
And I'm increasingly overjoyed that the Vanguard Total Stock Market Index fund and Vanguard S&P 500 Index funds have not distributed any capital gains in over 10 years, and I only have to pay taxes on qualified dividends.
Last year was particularly distressing with respect to the large amount of taxable distributions from the actively managed equity funds (capital gains distributions........I'm not distressed by dividends, as if a company wants to pay dividends, that's great). To add insult to injury, on top of the generally large amount of taxable capital gains distributions from the actively managed stock funds, they generally underperformed the indexes by a significant amount. If you are going to distribute taxable capital gains to shareholders, at least outperform the indexes.
MJG has been partly instrumental in helping to change my thinking. I have read literally dozens of his posts where he has shown that skill is increasingly difficult to demonstrate in active fund managers, and luck often explains things when they do outperform the market.
I think Jack Bogle was 40 years ahead of his time. They called his S&P 500 index fund, which opened in 1976, "Bogle's Folly". No one wanted an "average" performance. Everyone wanted to pick funds that beat the market. But obviously all funds cannot beat the market, and after fund expenses, some of which show up in the expense ratio and some of which do not (such as brokerage fees, losses due to bid-ask spreads, losses due to the fund itself affecting the market price of the stock, etc), the vast majority do not.
And Bogle once speculated that taxes alone possibly subtracted about 2% per year from the returns on actively managed mutual funds versus index funds. I don't have a follow up on that, or data to know the true figure.
It's difficult to pick actively managed funds that are going to beat their respective index funds, in advance. It's very easy to pick them after the fact, retrospectively!! Even the pros can't do it well. And even equity mutual fund managers cannot do a good job picking funds that will beat their respective indexes.
Even Morningstar can't do it, in my opinion. Morningstar has a newsletter that may be called something like "Morningstar Fund Investor", and they have model portfolios. They have not beaten their respective indexes, and that newsletter is written by probably the top fund picker at Morningstar. He can't beat the market by choosing a portfolio of actively managed stock funds.
Anyway, yes, I own both actively managed and indexed equity funds, but am generally disenchanted with active management, primarily due to the fees involved. If there were no fees to actively managed funds, they would beat their respective indexes. Expenses are the reason they underperform as a group. It's not that the managers don't know what they are doing.......it's the fees involved, the expense ratio plus the other fees not found in the expense ratios.

take care Roy,
Happy Investing

For investors who desire a moderate allocation portfolio who do not desire to put in the effort to identify funds that have a history of doing better.......

Does investing in funds that have a history of doing better result in a portfolio that performs better in the future?
John Bogle is fond of saying that "past is not prologue"
And MJG has frequently posted about the lack of persistence in mutual fund performance, in other words, invest in a list of the best performers over the past 10 years, and it is not likely they will be in the list of best performers for the coming 10 years.
https://www.bogleheads.org/forum/viewtopic.php?uid=50214&f=10&t=156573&start=0
What Experts Say About "Past Performance"
Frank Armstrong, financial author: "Rating services such as Morningstar's 'Star Awards' or the 'Forbes Honor Roll' attest to the futility of applying past performance to tomorrow."
Barra Research: "There is no persistence of equity fund performance."
Jack Bogle: "The biggest mistake investors make is looking backward at performance and thinking it’ll recur in the future."
Burns Advisory tracked the performance of Morningstar's five-star rated stock funds beginning January 1, 1999. Of the 248 stock funds, just four still kept that rank after ten years.
Wm. Bernstein, author of The Four Pillars of Investing: "For the 20 years from 1970 to 1989, the best performing stock assets were Japanese stocks, U.S. small stocks, and gold stocks. These turned out to be the worst performing assets over the next decade."
Jack Brennan, former Vanguard CEO: "Fund ranking is meaningless when based primarily on past performance, as most are."
Andrew Clarke, author: "By the time an investment reaches the top of the performance tables, there's a good chance that its run is over. The past is not prologue."
Prof. John Cochrane, author: "Past performance has almost no information about future performance."
S.T.Coleridge: "History is a lantern over the stern. It shows where you've been but not where you're going"
Jonathan Clements, author & Wall Street Journal columnist: "Trying to pick market-beating investments is a loser's game."
Eugene Fama, Nobel Laureate: "Our research on individual mutual funds says that it's impossible to identify true winners on a reliable basis, even if one ignores the costs that active funds impose on investors."
Gensler & Bear, co-authors of The Great Mutual Fund Trap: "Of the fifty top-performing funds in 2000, not a single one appeared on the list in either 1999 or 1998."
Ken Heebner's CGM Focus Fund was the top U.S. equity fund in 2007. In November 2009, it ranked in the bottom 1% of its category.
Arthur Levitt, SEC Commissioner: "A mutual fund's past performance, which is the first feature that investors consider when choosing a fund, doesn't predict future performance."
Burton Malkiel, author of the classic Random Walk Down Wall Street: "I have examined the lack of persistency in fund returns over periods from the 1960s through the early 2000s.--There is no persistency to good performance. It is as random as the market."
Mercer Investment Consulting from a study of over 12,000 institutional managers: "Excellent recent performance not only doesn't guarantee future results but generally leads to under-performance in the subsequent period."
After fifteen straight years beating the S&P 500 Index, Bill Miller's Legg Mason Value Trust (LMNVX) is now (1/25/2015) in the bottom 1% of its category for 10-year returns .
Ron Ross, author of The Unbeatable Market: "Extensive studies by Davis, Brown & Groetzman, Ibbotson, Elton et al, all confirmed there is no significant persistance in mutual fund performance."
Bill Schultheis, adviser and author of The Coffeehouse Investor: "Using past performance numbers as a method for choosing mutual funds is such a lousy idea that mutual fund companies are required by law to tell you it is a lousy idea."
Standard & Poor's: "Over the 5 years ending September 2009, only 4.27% large-cap funds, 3.98% mid-cap funds, and 9.13% small-cap funds maintained a top-half ranking over the five consecutive 12-month periods."
Larry Swedroe, author of many finance books: "The 44 Wall Street Fund was the top performing fund over the decade of the 1970s. It ranked as the single worst performing fund of the 1980's losing 73%. -- If you are going to use past performance to predict the future winners, the evidence is strong that your approach is highly likely to fail."
David Swensen, Yale's Chief Investment Officer: "Chasing performance is the biggest mistake investors make. If anything, it is a perverse indicator."
Tweddell & Pierce, co-authors of Winning With Mutual Funds: "Numerous studies have shown that using superior past performance is no better than random selection."
Eric Tyson, author of Mutual Funds for Dummies (2010 edition): "Of the number one top-performing stock and bond funds in each of the last 20 years, a whopping 80% of them subsequently performed worse than the average fund in their peer group over the next 5 to 10 years! Some of these former #1 funds actually went on to become the worst-performing funds in their particular category."
Value Line selected Garret Van Wagoner "Mutual fund Manager of the Year" in 1999. In August 2009, Van Wagoner's Emerging Growth Fund was the worst performing U.S. stock fund over the past 10 years.
+++++++++++
along with MJG, I also hold actively managed funds. But I think one thing that needs to be talked about much more is the tax implications (the drop in performance) of all the taxable distributions that actively managed funds tend to make.
The Vanguard Total Stock Market Index fund and the Vanguard S&P 500 Index fund have not had a single capital gains distribution in more than 10 years. The only taxes you pay are on qualified dividends. This is a HUGE issue.
In the typical performance figures we see before tax returns. Would be interesting to see after tax returns, given a specified tax bracket. As we all know, you only keep the after tax returns.

Hi Ted,
Here Is It Is ... (was).
The Mutual funds held along with cost basis and their respective performance data was removed on Feburary 18; however, the performance data remains for the portfolio as a whole plus I added a blurb about my sleeve system.
Portfolio 2015 YTD (2.70%) .. 2014 (6.03%) .. 2013 (17.71%) .. 2012 (14.18)
(Data From Morningstar as of 2/20/2015)
Old Skeet's Portfolio Investment Sleeve Managment System
Here is a brief description of my sleeve system which I organized to help better manage the investments that were held in five accounts. The accounts consist of a taxable account, a self directed ira account, a 401k account, a profit sharing account and a health savings account plus two bank accounts. With this I came up with four investment areas. They are a cash area which consist of two sleeves … an investment cash sleeve and a demand cash sleeve. The next area is the income area which consists of two sleeves. … a fixed income sleeve and a hybrid income sleeve. Then there is the growth & income area which has more risk associated with it than the income area and it consist of four sleeves … a global equity sleeve, a global hybrid sleeve, a domestic equity sleeve and a domestic hybrid sleeve. An finally there is the growth area, where the most risk in the portfolio is found and it consist of four sleeves … a global sleeve, a large/mid cap sleeve, a small/mid cap sleeve and a specialty sleeve. Each sleeve consists of three to six funds (in most cases) with the size and the weight of each sleeve can easily be adjusted, from time-to-time, by adjusting the number of funds and the amounts held. By using the sleeve system one can get a better picture of their overall investment picture and weightings by sleeve and area. In addition, I have found it beneficial to xray each fund, each sleeve, each investment area, and the portfolio as a whole monthly. Again, weightings can be adjusted form time-to-time as to how I might be reading the markets and wish to weight accordingly. All funds pay their distributions to the cash area of the portfolio with the exception being those in my 401k, profit sharing, and health savings accounts where reinvestment occurs. With the other accounts paying to cash the cash area builds cash within the portfolio to meet the portfolio’s monthly cash distribution needs with the residual being left for new investment opportunity. In addition, most all buy/sell trades settle from, or settle to, the cash area.
Here is how I have my asset allocation currently broken out in percent ranges, by area. My neutral targets are cash 15%, income 30%, growth & income 35%, and growth 20%. I do an Instant Xray analysis of the portfolio monthly and make asset weighting adjustments as I feel warranted based upon my assesment of the market, my risk tolerance, cash needs, etc. Currently, I am neutral in the cash area, light in the income area and heavy in the equity area. I am thinking that once year end mutual fund capital gain distributions are paid out this will somewhat reduce the equity area and raise the cash area.
Cash Area (Weighting Range 5% to 25%)
Demand Cash Sleeve… (Cash Distribution Accrual & Future Investment Accrual)
Investment Cash Sleeve … (Savings & Time Deposits)
Income Area (Weighting Range 20% to 40%)
Fixed Income Sleeve: EVBAX, LALDX, THIFX, LBNDX, NEFZX & TSIAX
Hybrid Income Sleeve: AZNAX, CAPAX, FKINX, ISFAX, PASAX & PGBAX
Growth & Income Area (Weighting Range 25% to 45%)
Global Equity Sleeve: CWGIX, DEQAX, EADIX & PGUAX
Global Hybrid Sleeve: CAIBX, IGPAX & TIBAX
Domestic Equity Sleeve: ANCFX, CFLGX, FDSAX, INUTX, NBHAX, SPQAX & SVAAX
Domestic Hybrid Sleeve: ABALX, AMECX, DDIAX, FRINX, HWIAX & LABFX
Growth Area (Weighting Range 10% to 30%)
Global Sleeve: ANWPX, PGROX, THOAX, DEMAX, NEWFX & THDAX
Large/Mid Cap Sleeve: AGTHX, BWLAX, HWAAX, IACLX, SPECX & VADAX
Small/Mid Cap Sleeve: AJVAX, IIVAX, PCVAX & PMDAX
Specialty Sleeve: CCMAX, JCRAX, LPEFX, SGGDX & TOLLX
Total number of mutual fund investment positions currently held equal fifty three.
I wish all ... "Good Investing."
Old_Skeet

For those that have chosen, as I have, to run with a good number of funds, for me it is fifty two, you might enjoy reading about FMD Capital's sleeve system.
I have linked it below for your reading enjoyment.
http://fmdcapital.com/wp/wp-content/uploads/2013/09/FMD_Income-Investing.pdf
Old_Skeet

I used to find Kiplinger the best of the monthly finance (print-) mags, but the quality of their advice seems to have grown increasingly shoddy since the 2008 crisis. A couple impressions from the link:
a. The writer, Steve Goldberg (SG), observes T-rates are very low, and bonds are priced high. No argument there, rather, a question-- Is this news to anyone? It shouldn't be. But, OK, that is the underlying premise of the article. So how to react to this condition...
b. His suggestion? "Stick to bond funds with relatively short average maturities. If you’re willing to take some risk, buy funds that invest in some lower-quality corporate bonds." Hmm? SG doesn't seem to know/acknowledge the difference between owning bonds vs bond funds. (Or perhaps Kiplinger doesn't want their columnists to mention indiv bonds, as it might upset their mutual-fund advertisers?) -- An investor can invest in individual Treasurys -- perhaps in a bond ladder -- hold them to maturity and encounter no loss of principal.
Instead, he suggests short duration funds. This is a very, VERY crowded trade, as investors have been shoveling money into these for years --- The last time I looked (and its been a while) many of the holdings of short-duration funds were trading at premiums to par. The funds yield very little. Buying funds which hold bonds trading at premiums is a guaranteed drag on performance -- all dollar-good debt will move to par as it approaches maturity. Holding a bag of premium priced bonds is a good way to see your capital be whittled down.
Contining -- he suggests lower-quality corp bonds. That sound like junk. So SG cautions us to avoid Treasurys due to risk, but posits junk bonds as a less risky alternative.... Huh? Junk funds may/may not be a good bet here, that is not the argument I am making. Rather that as a "risk avoidance" strategy, it would not occur to me move from Treasurys to junk. Also, corporates, whether junk or IG are spread-products, their prices will not be immune to significant rate spikes in Treasurys. If (admittadly-) overpriced Treasurys suddenly and violenty sell-off, its is unlikely in the extreme that junk bonds will be a destination for capital wanting a "flight to safety"...
Another idea -- mine, not SG's--- online FDIC-insured banks can be found offering MMFs which yield ~ 1%, with NO duration risk. If the column's premise is "ways to downsize risk in your fixed-income allocation, Why doesn't SG mention those? --- Perhaps they don't advertise with Kiplinger?
SG is one more reason to avoid subscribing to Kiplinger.

hank, maybe this will assist you. From Siegel's book, latest edition. Looks like a read of Chapter 5 might clarify things for you even more. Hope this helps.
"Asset Returns Since 1802
Figure 1-1 is the most important chart in this book. It traces year by year how real (after-inflation) wealth has accumulated for a hypothetical investor who put a dollar in (1) stocks, (2) long-term government bonds, (3) U.S. Treasury bills, (4) gold, and (5) U.S. currency over the last two centuries. These returns are called total real returns and include income distributed from the investment (if any) plus capital gains or losses, all measured in constant purchasing power."
...................."The real return on fixed-income investments has averaged far less; on long-term government bonds the average real return has been 3.6 percent per year and on short-term bonds only 2.7 percent per year."
hank, note that the 3.6% and 2.7% correspond to the bonds and bills in his chart.
"The average real return on gold has been only 0.7 percent per year. In the long run, gold prices have remained just ahead of the inflation rate, but little more. The dollar has lost, on average, 1.4 percent per year of purchasing power since 1802, but it has depreciated at a significantly faster rate since World War II. In Chapter 5 we examine the details of these return series and see how they are constructed."
hank, regarding your comment: "Regarding investing in T-Bills, it's hard for me to understand how they would have approached gold's return through appreciation during the post-2000 time-frame"
I agree with you. From 2001 to 2011 gold had superb performance, and I'm sure Treasury bills did not even come remotely close. Siegel's data is the really long term......from 1802 thru 2012. He never suggested that there were not time periods of 10, 15, 20, 25 years, etc, where the results were not significantly different.
Take gold for example: it lost 90% of its purchasing power, that is to say, real return, from 1980 until it bottomed, somewhere around 2001. Even on a nominal basis it lost 70% (not taking inflation into account). Then from 2001 till 2011 it was probably the very best performing asset class, far better than stocks, bonds, "bills" [Treasury bills], etc.
Happy Investing

Note: The above data was taken from Jim Cramer's own website!
Just buying an S&P 500 index fund, you would have performed 36% better than enacting every single buy and sell of the Action Alerts PLUS portfolio, which is a paid service so you can constantly check your emails and make all the buys and sells.........so you can drastically underperform the market, and pay much higher taxes from all your buying and selling, versus say the Vanguard S&P 500 Index fund where you will only pay taxes on qualified dividends, as there has not been a capital gains distribution in more than 10 years.

Owned a few 1-oz K-Rands in the mid 80s. Beautiful coins. Had a slight reddish hue. I understand they add a bit of copper to harden them (unlike many other gold coins), as gold's a soft metal. Aesthetic value is very difficult to calculate and is in the eyes of the beholder. However, when you add-in the aesthetic value enjoyed in addition to the likely capital appreciation over time, I think it's a reasonable investment. I don't like the safety/security issues associated with such physical investments (assaying, storing, insuring, transporting, selling, etc.) Hell, I won't even wear a watch worth more than $25 in some locations I frequent. And than there's the ever present threat of government prohibition, restriction or regulation. For those reasons, we don't invest in physical pms or collectibles.
As far as owning the metal on paper, pms are just about the "rockiest" markets you can find. Prices are erratic and unpredictable. My experience is that it's a lot easier to lose money than to make money with them. I do own a small slice of PRPFX for diversity. The fund holds some gold and pms. That fund is one odd mix of assets, and I gravitate towards the "odd-man-out" type of investment for the sake of diversity (much to the chagrin of some formidable voices here).
There's a natural human tendancy to view the world through our own time-lense and to assume things will always remain the same. Based on most of our experience since around the mid 80s, equities appear the best alternative. Had you been investing in the 70s and early 80s you would likely have been looking more to hard assets as a safe haven or, believe it or not, at plain old cash. It was easy in the late 70's to pull in 15-20% annually simply by investing in money market funds. Who'd run the risk of buying equities with those types of returns on cash? Better be careful not to overlook bonds. Since long-term interest rates have been declining now for about 35 years, bonds have been great investments over that period. (Note to beginners: Interest rates do not always decline.)
I'd agree with another distinguished poster here that gold & commodities are not "winning" long term investments when held up against either equities or corporate bonds. The last two are growth-oriented and increase in value as the world's economies grow and prosper. Gold, on the other hand, tends to track both inflation and investor sentiment. (One component of that sentiment relates to perceived value of various paper currencies.) Since sentiment is difficult to define and quantitify, this probably accounts much for gold's erratic performance.

FYI: Pimco has been in the news for all the wrong reasons lately, after more than $100 billion of clients money followed Bill Gross out of the door. But come early February there are signs the bond giant is getting its act together.
While former CEO Bill Gross has moved down the street to run a new (much smaller) bond fund at Janus Capital Group Inc (NYSE:JNS), his old fund — Pimco Total Return (MUTF:PTTRX) — is doing just fine without him.
Regards,
Ted
http://learnbonds.com/pimco-total-return-gets-its-mojo-back/
Only The Institutional Shares are *****
PTTRX *****
PTTAX ***
PTTBX ***
PTTCX ***
PTTDX ****
PTTPX ***
PTTRX ****
PTRAX ****

This will be a flash-point for debate, I am sure.
It's rife with political undertones and speculation of conspiracies regarding re-distribution of wealth.
I recently enjoyed a conversation with a former Boeing executive about their lack of cap-ex...of not spending their free cash flow on new projects and attendant detriment to surrounding communities.
I consider Boeing (commercial) one of the greatest business entities of all time.
John Newhouse's 1982 book "The Sporty Game" describes how companies like Boeing “bet the company” every time they develop a new commercial aircraft.
An amazing book!
CEOs have a responsibility to invest their cash in projects that will increase return on capital...and if they can't, to give it back to shareholders. That shows fiduciary responsibility, no?
How about this, if the free cash went to dividends instead of share buy-backs, would that be more egalitarian?
This is a scary road to start going down.

@Catch
TRBUX actually returned .51% to investors over the past year.
The .35% ER is the result of a fee waiver. Otherwise, it would be .49%
Since the one year "yield" is posted as .66%, I'm not sure how they managed to return that .51% after expenses. Magic? Or perhaps a bit of capital appreciation.
By contrast, their Prime Reserve money market fund returned only .01% to investors over the past year,
I see two reasons for these funds coming out at this time.
First, they may forsee a rising rate environment (which Catch alludes to) in which even short-term bond funds will experience the size losses that conservative investors won't want to bear. Such an environment is, of course, alien to anyone under the age of 40 or 45.
Second, they want to gain experience running what is essentially a floating NAV money market fund, as the SEC has been pushing them to move in this direction with their traditional money market funds.

Is there that much benefit on holding these funds once you account for the ER over a money market fund? As mentioned already, the expense ratio eats up any interest/gains.

I have to wonder how Evered, Haywood, and Steinik, the International/Global team at Brown Capital, with a modest performance record, can become adept in the international small cap arena. I dare say that a comparison their qualifications to those of the teams at Grandeur Peak, Wasatach, or Seafarer would not lead an investor to the Brown fund. If Brown was bringing in a ringer, it might be a different story.

We owned this fund from almost its beginning, given Aronstein's track record and his innate sense of global macro themes. It did what we expected of it through third quarter of 2013, then it just went off the tracks. Aronstein admits they did not control their risk parameters. The fund was often early on its calls, but they were almost always proven right. Hard to put a finger on exactly what happened, but it is hard to overlook the takeover by Mainstay and the nearly quadrupling of assets from 2012-2013, driven by brokerage houses quick to jump on a hot fund. Given the kinds of macro themes the fund targeted, it seems that it would be difficult to employ cash in a fund that went from $882 million in 2011, to $4 billion in 2012, to almost $16 billion in 2013. Of course that is no longer a problem with the funds assets at $6 billion and dropping. Fortunately, most of our accounts in MFLDX were long-time and had some very nice gains. Notice I say HAD. After extensive reviews, including listening to management, we decided our original thesis for owning the fund was no longer valid. The fund is certainly capable of turning things around, but it no longer fit our risk parameters. Seldom have I seen a great fund implode quite like this one, but I have to wonder if performance would have been different had the fund remained independent.

http://www.sec.gov/Archives/edgar/data/1251896/000089418915000721/aegis_497e.htm
497 1 aegis_497e.htm SUPPLEMENTARY MATERIALS
AEGIS HIGH YIELD FUND
Class A (Ticker: AHYAX)
Class I (Ticker: AHYFX)
Supplement dated February 9, 2015
to the Summary and Statutory Prospectuses dated April 30, 2014
The Board of Trustees of The Aegis Funds (the “Trust”) has concluded that it is in the best interests of the Aegis High Yield Fund (the “Fund”) and its shareholders to cease Fund operations and wind down the Fund. At a meeting held on February 9, 2015, the Board of Trustees approved the closure of the Fund to all purchases, including purchases related to reinvestment of Fund distributions. The Board of Trustees has determined to close the Fund on or before April 30, 2015.
The Fund has been in a defensive position since December 17, 2014, and intends to remain in this position until the Fund is closed to facilitate anticipated redemptions. The Fund’s total net assets, which as of February 6, 2015 were approximately $16.8 million, are expected to decrease through the date of closing. Aegis Financial Corporation (the “Advisor”) has informed the Board of Trustees that it does not plan to extend the Fund’s current expense limitation agreement, pursuant to which the Fund’s “Total Annual Fund Operating Expenses After Fee Waiver and/or Expense Reimbursement” (not including Acquired Fund Fees and Expenses) are limited to 1.20% of the Class I shares’ average daily net assets and 1.45% of the Class A shares’ average daily net assets, past its current term, which expires April 30, 2015. As a result, after that date the Fund’s “Total Annual Fund Operating Expenses After Fee Waiver and/or Expense Reimbursement” (not including Acquired Fund Fees and Expenses) will increase.
Shareholders of the Fund may redeem their shares in accordance with the “How to Redeem Shares” section of the Prospectus. Redemption fees and contingent deferred sales charges (CDSC) will not be charged on shares redeemed beginning after market close on February 9, 2015. Unless a shareholder’s investment in the Fund is through a tax-deferred retirement account, a redemption is subject to tax on any taxable gains. Please refer to the “Tax Consequences of an Investment” section in the Prospectus for general information. You may find it advisable to consult your tax advisor about your particular situation, including the effects of a redemption of shares held through a tax-deferred retirement account.
If you have any questions or need assistance, please contact your financial intermediary or contact the Fund at 800-528-3780.
* * *
YOU SHOULD RETAIN THIS SUPPLEMENT WITH YOUR
SUMMARY PROSPECTUS AND PROSPECTUS FOR FUTURE REFERENCE.

Dear friends,
Rather more than 50 folks dialed in and participated on our call with Matthew and Ian today. I'm suffering from some combination of a major head cold, the side effects of the OTC meds I'm taking for it and the gallon or so of green tea with honey and lemon that I've chugged this morning, so I'm only guessing when I nominate these as highlights of the call.
The guys run two strategies for US investors. The older one, Global Innovators, is a growth strategy that Guinness has been pursuing for 15 years. The newer one, Dividend Builder, is a value strategy that the managers propounded on their own in response to a challenge from founder Tim Guinness. These strategies are manifested in "mirror funds" open to European investors. Curiously, American investors seem taken by the growth strategy ($180M in the US, $30M in the Euro version) while European investors are prone to value ($6M in the US, $120M in the Euro). Both managers have an ownership stake in Guinness Atkinson and hope to work there for 30 years, neither is legally permitted to invest in the US version of the strategy, both intend - following some paperwork - to invest their pensions in the Dublin-based version. The paperwork hang up seems to affect, primarily, the newer Dividend Builder (in Europe, "Global Equity Income") strategy and I failed to ask directly about personal investment in the older strategy.
The growth strategy, Global Innovators IWIRX, starts by looking for firms "doing something smarter than the average company in their industry. Being smarter translates, over time, to higher return on capital, which is the key to all we do." They then buy those companies when they're underpriced. The fund hold 30 equally-weighted positions.
Innovators come in two flavors: disruptors - early stage growth companies, perhaps with recent IPOs, that have everyone excited and continuous improvers - firms with a long history of using innovation to maintain consistently high ROC. In general, the guys prefer the latter because the former tend to be wildly overpriced and haven't proven their ability to translate excitement into growth.
The example they pointed to was the IPO market. Last year they looked at 180 IPOs. Only 60 of those were profitable firms and only 6 or 7 of the stocks were reasonably priced (p/e under 20). Of those six, exactly one had a good ROC profile but its debt/equity ration was greater than 300%. So none of them ended up in the portfolio. Matthew observes that their portfolio is "not pure disruptors. Though those can make you look extremely clever when they go right, they also make you look extremely stupid when they go wrong. We would prefer to avoid that outcome."
This also means that they are not looking for a portfolio of "the most innovative companies in the world." A commitment to innovation provides a prism or lens through which to identify excellent growth companies. That's illustrated in the separate paths into the portfolio taken by disruptors and continuous improvers. With early stage disruptors, the managers begin by looking for evidence that a firm is truly innovative (for example, by looking at industry coverage in Fast Company or MIT's Technology Review) and then look at the prospect that innovation will produce consistent, affordable growth. For the established firms, the team starts with their quantitative screen that finds firms with top 25% return on capital scores in every one of the past ten years, then they pursue a "very subjective qualitative assessment of whether they're innovative, how they might be and how those innovations drive growth."
In both cases, they have a "watch list" of about 200-250 companies but their discipline tends to keep many of the disruptors out because of concerns about sustainability and price. Currently there might be one early stage firm in the portfolio and lots of Boeing, Intel, and Cisco.
They sell when price appreciates (they sold Shire pharmaceuticals after eight months because of an 80% share-price rise), fundamentals deteriorate (fairly rare - of the firms that pass the 10 year ROC screen, 80% will continue passing the screen for each of the subsequent five years) or the firm seems to have lost its way (shifting, for example, from organic growth to growth-through-acquisition).
The value strategy, Dividend Builder GAINX is a permutation of the growth strategy's approach to well-established firms. The value strategy looks only at dividend-paying companies that have provided an inflation-adjusted cash flow return on investment of at least 10% in each of the last 10 years. The secondary screens require at least a moderate dividend yield, a history of rising dividends, low levels of debt and a low payout ratio. In general, they found a high dividend strategy to be a loser and a dividend growth one to be a winner.
In general, the guys are "keen to avoid getting sucked into exciting stories or areas of great media interest. We’re physicists, and we quite like numbers rather than stories." They believe that's a competitive advantage, in part because listening to the numbers rather than the stories and maintaining a compact, equal-weight portfolio both tends to distance them from the herd. The growth strategy's active share, for instance, is 94. That's extraordinarily high for a strategy with a de facto large cap emphasis.
For those interested but unable to join us, here's a link to the mp3.
I'd be delighted to hear others' reactions to the call.
David

Might start "taking" some money this year from some non IRA investments (67yo), figure 20 years of spending Money (should be easy), at same time have to still buy Roth Ira's as much as limited w2 income will allow,
Have developed a withdraw strategy that I have titled "thinning the herd" (patent pending): Really?
Bascially.... investments that are not holding their own (portfolio averages) will go first and thus lower in Gains with no taxes....Big gainers, steady earners and Roth money will be taken as tax schedules/rules will allow for min. payments to the Gov.(taxes) , Risk control will be mainly by Bond adjustments if Equities get into trouble... Spend less? probably not....
Not perfected but a starting plan for 2015....Will SEE

FYI; The trend of money flowing towards robo-advisers and passive asset allocators is one that is likely to continue in the current market environment. Amid the more recent backdrop of low volatility capital appreciation in stocks and bonds, it seems that the natural evolution is to put your portfolio on auto-pilot or give it to someone who is just going to rebalance it quarterly.
Regards,
Ted
http://investorplace.com/2015/02/vti-vxus-bond-gaa-4-etfs-can-hold-forever/print