May 1, 2011

Dear friends,

Welcome to May and welcome to the Observer’s first monthly commentary. Each month I’ll try to highlight some interesting (often maddening, generally overlooked) developments in the world of funds and financial journalism. I’ll also profile for you to some intriguing and/or outstanding funds that you might otherwise not hear about.

Successor to “The Worst Best Fund Ever”

They’re at it again. They’ve found another golden manager. This time Tom Soveiro of Fidelity Leveraged Company Stock and its Advisor Class sibling. Top mutual fund for the past decade so:

Guru Investor, “#1 Fund Manager Profits from Debt”
Investment News, “The ‘Secret’ of the Top Performing Fund Manager”
Street Authority, “2 Stock Picks from the Best Mutual Fund on the Planet”
Motley Fool, “The Decade’s Best Stock Picker”
Mutual Fund Observer, “Dear God. Not again.”

The first sign that something might be terribly amiss is the line: “Thomas Soviero has replaced Ken Heebner at the top” (A New Winner on the Mutual Fund Charts, Bloomberg BusinessWeek, 21 April 2011). Ken Heebner manages the CGM Focus (CGMFX) fund, which I pilloried last year as “the worst best fund ever.” In celebration of Heebner’s 18.8% annual returns over the decade, it was not surprising that Forbes made CGMFX “the Best Mutual Fund of the Decade.” The Boston Globe declared Kenneth “The Mad Bomber” Heebner “The Decade’s Best” for a record that “still stands atop all competitors.” And SmartMoney anointed him “the real Hero of the Zeroes.”

All of which I ridiculed on the simple grounds that Heebner’s funds were so wildly volatile that no mere moral would ever stay invested in the dang things. The simplest measure of that is Morningstar’s “investor returns” calculation. At base, Morningstar weights a fund’s returns by its assets: a great year in which only a handful of people were invested weighs less than a subsequent rotten year when billions have flooded the fund. In Heebner’s case, the numbers were damning: the average investor in CGMFX lost 11% a year in the same period that the fund made 19% a year. Why? Folks rushed in after the money had already been made, were there for the subsequent inferno, and fled before his trademark rebounds.

Lesson for us all: we’re not as brave or as smart as we think. If you’re going to make a “mad investment” with someone like “The Mad Bomber,” keep it to a small sliver of your portfolio – planners talk about 5% of so – and plan on holding through the inevitable disaster.

Perhaps, then, you should approach Heebner’s successor with considerable caution.

The new top at the top is Fidelity Advisor Leveraged Company Stock (FLSAX). Fidelity has developed a great niche investing in high-yield or “junk” bonds. They’ve leveraged an unusually large analyst staff to support:

Fidelity Capital and Income (FAGIX), a five-star high yield bond fund that can invest up to 20% in stocks
Fidelity Floating Rate High Income (FFRHX), which buys floating rate bank loans
Fidelity High Income (SPHIX), a four-star junk bond fund
Fidelity Focused High Income (FHIFX), a junk bond fund that can also own convertibles and equities
Fidelity Global High Income (no ticker), likely launch in June 2011
Fidelity Strategic Income (FSICX), which has a “barbell shaped” portfolio, which one end being high quality government debt and the other being junk. Nothing in-between.

And the Fidelity Leveraged Company Stock (FLVCX), which invests in the stock of those companies which resort to issuing junk bonds or which are, otherwise, highly-leveraged (a.k.a., deeply in debt). As with most of the Fidelity funds, there’s also an “advisor” version with five different share classes.

Simple, yes? Great fund, stable management, interesting niche, buy it!

Simple no.

Most of the worshipful articles fail to mention two things:

1. the fund thrives when interest rates are falling and credit is easy. Remember, you’re investing in companies whose credit sucks. That’s why they were forced to issue junk bonds in the first place. If the market force junk bonds constricts, these guys have nowhere to turn (except, perhaps, to guys with names like “Two Fingers”). The potential for the fund to suffer was demonstrated during the credit freeze in 2008 when the fund lost between 53.8% (Advisor “A” shares) and 54.5% (no-load) of value. Both returns place it in the bottom 2 or 3% of its peer group.

The fund’s performance during the market crash (October 07 – March 09) explains why it has a one-star rating from Morningstar for the past three years. Across all time periods, it has “high” risk, married recently to “low” returns. Which helps explain why . . .

2. the fund is not shareholder-friendly.People like the idea of high-risk, high-return funds a lot more than they like the reality of them. Almost all behavioral finance research finds the same dang thing about us: we are drawn to shiny, high-return funds just about as powerfully as a mosquito is drawn to a bug-zapper.

And we end up doing just about as well as the mosquito does. Morningstar captures some sense of our impulses in their “investor return” calculations. Rather than treating a fund’s first year return of 500% – when it had only three investors, say – equal to its fifth year loss of 50% – which it has 20,000 investors – Morningstar weights returns by the size of the fund in the period when those returns were earned.

In general, a big gap between the two numbers suggests either (1) investors rushed in after the big gains were already made or (2) investors continue to rush in and out in a sort of bipolar frenzy of greed and fear.

Things don’t look great on that front:

Fidelity Leveraged Company returned 14.5% over the past decade. Its shareholders made 3.6%.

Fidelity Advisor Leveraged Company, “A” shares, returned 14.9% over the past decade. Its shareholders, on average, lost money: down 0.1% for the same period.

Two other observations here: the wrong version won. For reasons unexplained, the lower-cost no-load version of the fund trailed the Advisor “A” shares over the past decade, 14.5% to 14.9%. And that little difference made a difference. $10,000 invested in the no-load shares grew to $38,700 after 10 years while Advisor shares grew to $40,100. little differences add up, but I don’t know how. Finally, the advisors apparently advised poorly. Here’s a nice win for the do-it-yourself folks buying the no-load shares. The advisor-sold version had far lower investor returns than did the DIY version. Whether because they showed up late or had a greater incentive to “churn” their clients’ portfolios, the advisor-led group managed to turn a great decade into an absolute zero (on average) for their clients.

“Eight Simple Steps to Starting Your Own Mutual Fund Family”

Sean Hanna, editor-in-chief at MFWire.com has decided to published a useful little guide “to help budding mutual fund entrepreneurs on their way” (“Eight Simple Steps,” April 21 2011). While many people spent one year and a million dollars, he reports, to start a fund, it can be a lot simpler and quicker. So here are MFWire’s quick and easy steps to getting started:

Step 1: Develop a Strategy
Step 2: Hire Expert Counsel
Step 3: Your Board of Directors
Step 4: The Transfer Agent
Step 5: Custodian
Step 6: Distribution
Step 7: Fund Accountant
Step 8: Getting Noticed

The folks here at the Observer applaud Mr. Hanna for his useful guide, but we’d suggest two additional steps need to be penciled-in. We’ll label them Step 0 and Step 9.

Step 0: Have your head examined. Really. There are nearly 500 funds out there with under $10 million in assets. Make sure you have a reason to be #501. Forty or so have well-above average five year records and have earned either four- or five-star Morningstar ratings. And they’re still not drawing investors.

Step 9: Plan on losing money. Even if your fund is splendid, you’re almost certain to lose money on it. Mr. Hanna’s essay begins by complaining about “the old boy network” that dominates the industry. Point well taken. If you’re not one of “the old boys,” you’re likely to toil in frustrated obscurity, slowly draining your reserves. Indeed, much of the reason for the Observer’s existence is that no one else is covering these orphan funds.

My suggestion: if you can line up three major investors who are willing to stay with you for the first few years, you’ll have a better chance of making it to Year Three, your Morningstar and Lipper ratings, and the prospect of making it through many advisors’ fund screening programs. If you don’t have a contingency for losing money for three to five years, think again.

Hey! Where’d my manager go?

Investors are often left in the dark when star managers leave their funds. Fund companies have an incentive to pretend that the manager never existed and certainly wasn’t the reason to anyone invested in the fund (regardless of what their marketing materials had been saying for years). In general, you’ll hear that a manager “left to pursue other opportunities” and often not even that much. Finding where your manager got to is even harder. Among the notable movers:

Chuck Akre left FBR Focus (FBRVX) and launched Akre Focus (AKREX). Mr. Akre made a smooth marketing move and ran an ad for his new fund on the Morningstar profile page for his old fund. Perhaps in consequence, he’s brought in $300 million to his new fund.

Eric Cinnamond left Intrepid Small Cap (ICMAX) to become lead manager of Aston/River Road Independent Value (ARIVX). Mr. Cinnamond’s splendid record, and Aston’s marketing, have drawn $60 million to ARIVX.

Andrew Foster left Matthews Asian Growth & Income (MACSX) after a superb stint in which he created one of the least volatile and most profitable Asia-focused portfolios. He has launched Seafarer Capital Partners, with plans (which I’ll watch closely) to launch a new international fund. In the interim, he’s posting thoughtful weekly essays on economics and investing.

If you’re a manager (or know the whereabouts of a vanished manager) and want, like the Who’s Down in Whoville to cry out “We are here! We are here! We are here!” then drop me a line and I’ll pass word of your new venue along.

The last Embarcadero story ever

It all started with Garrett Van Wagoner, whose Van Wagoner Emerging Growth Fund which returned 291% in 1999. Heck, all of Van Wagoner’s funds returned more than 200% that year before plunging into a 10-year abyss. The funds tried to hide their shame but reorganizing into the Embarcadero Funds in 2008, but to no avail.

In one of those “did you even blush when you wrote that?” passages, Van Wagoner Capital Management, investment adviser of the Embarcadero Funds, opines that “there are important benefits from investing through skilled money managers whose strategies, when combined, seek to provide enhanced risk-adjusted returns, lower volatility and lower sensitivity to traditional financial market indices.”

Uhh . . . that is, by the way, plagiarized. It’s the same text used by the Absolute Strategies Fund (ASFAX) in describing their investment discipline. Not sure who stole it from whom.

This is the same firm that literally abandoned two of their funds for nearly a decade – no manager, no management contract, no investments – while three others spent nearly six years “in liquidation”. Rallying, the firm reorganized those five funds into two (Market Neutral and Absolute Return). Sadly, they couldn’t then find anyone to manage the funds. On the downside, that meant they were saddled with high expenses and an all-cash portfolio during 2010. Happily, that was their best year in a decade. And, sadly, no one was there to enjoy the experience. Embarcadero’s final shareholder report notes:

While 2010 was difficult for the Funds, shareholders now have the benefit of new management utilizing an active investment program with expenses that are lower than previously applicable to the Funds. No shareholders remain in the Funds, and their existence will be terminated in the near future.

Uhh . . . if there are no shareholders, who is benefiting from new management? The “new management” in question is Graham Tanaka, whose Tanaka Growth Fund (TGFRX ) absorbed the remnants of the Embarcadero funds. TGFRX is burdened with high expenses (2.45%), high volatility (a 10-year beta of 140) and low returns (a whopping 0.96% annually over the decade). The sad thing is that’s infinitely better than they’re used to: Embarcadero Market Neutral lost 16.4% annually while Embarcadero Absolute Disast Return lost 23.8%.

Sigh: the Steadman funds (aka “Deadman funds” which refused, for decades, to admit they were dead), gone. American Heritage (a fund entirely dependent on penile implants), gone. Frontier Microcap (sometimes called “the worst mutual fund ever”), gone. And now, this. The world suddenly seems so empty.

Funds for fifty: the few, the proud, the affordable!

It’s increasingly difficult for small investors to get started in investing. Many no-load funds formerly offered low minimums (sometimes just $100) to entice new investors. That ended when they discovered that thousands of investors opened a $100 fund, adding a bit at first, then promptly forget about it. There’s no way that a $400 account does anybody any good: the fund company loses money by holding it (it would only generate $6 to cover expenses for the year) and investors end up with tiny puddles of money.

A far brighter idea was to waive the minimum initial investment requirement on the condition that an investor commit to an automatic monthly investment until the fund reached the normal minimum. That system helps enormously, since investors are likely to leave automatic plans in place long enough to get some good from them.

For those looking to start investing, or start their children in investing, look at one of the handful of no-load fund firms that still waives the minimum investment for disciplined investors:

Amana – run in accordance with Islamic investment principles (in practice, socially responsible and debt-avoidant), the three Amana funds ask only $250 to start and waive even that for automatic investors.
Artisan – one of the most distinguished boutique firms, whose five autonomous teams manage 11 domestic and international equity funds
Aston – which specializes in strong, innovative sub-advised funds.
Manning & Napier – the quiet company, M&N has a remarkable collection of excellent funds that almost no one has heard of.
Parnassus – runs a handful of solid-to-great socially responsible funds, including the Small Cap fund which I’ve profiled.
Pax World – a mixed bag in terms of performance, but surely the most diverse collection of socially-responsible funds (Global Women’s Equity, anyone) around.
T. Rowe Price – the real T. Rowe Price is said to be the father of growth investing, but he gave rise to a family of sensible, well-run, risk-conscious funds, almost all of which are worth your attention.

Another race to the bottom

Two more financial supermarkets, Firstrade and Scottrade, have joined the ranks of firms offering commission free ETFs. They join Schwab, which started the movement by making 13 of its Schwab-branded ETFs commission-free, TD Ameritrade (with 100 free ETFs, Vanguard (64) and Fidelity (31). The commissions, typically $8 per trade, were a major impediment for folks committed to small, regular purchases.

That said, none of the firms above did it to be nice. They did it to get money, specifically your money. It’s their business, after all. In some cases, the “free” ETFs have higher expenses ratios than their commission-bearing cousins. In some cases, additional fees apply. AmeriTrade, for example, charges $20 if you sell within a month of buying. And in some cases, the collection of free ETFs is unbalanced, so you’re decision to buy a few ETFs for free locks you into buying others that do bear fees.

In any case, here’s the new line-up.

Firstrade (no broad international ETF)
Vanguard Long-Term Bond (BLV)
Vanguard Intermediate Bond (BIV)
Vanguard Short-Term Bond (BSV)
Vanguard Small Cap Growth (VBK)
iShares S&P MidCap 400 (IJH)
Vanguard Emerging Markets (VWO)
Vanguard Dividend Appreciation (VIG)
iShares S&P 500 (IVV)
PowerShares DB Commodity Index (DBC)
iShares FTSE/Xinhua China 25 (FXI)

Scottrade (no international and no bonds)
Morningstar US Market Index ETF (FMU)
Morningstar Large Cap Index ETF (FLG)
Morningstar Mid Cap Index ETF (FMM)
Morningstar Small Cap Index ETF (FOS)
Morningstar Basic Materials Index ETF (FBM)
Morningstar Communication Services Index ETF (FCQ)
Morningstar Consumer Cyclical Index ETF (FCL)
Morningstar Consumer Defensive Index ETF (FCD)
Morningstar Energy Index ETF (FEG)
Morningstar Financial Services Index ETF (FFL)
Morningstar Health Care Index ETF (FHC)
Morningstar Industrials Index ETF (FIL)
Morningstar Real Estate Index ETF (FRL)
Morningstar Technology Index ETF (FTQ)
Morningstar Utilities Index ETF (FUI)

Four funds worth your attention

Really worth it. Every month the Observer profiles two to four funds that we think you really need to know more about. They fall into two categories:

Most intriguing new funds: good ideas, great managers. These are funds that do not yet have a long track record, but which have other virtues which warrant your attention. They might come from a great boutique or be offered by a top-tier manager who has struck out on his own. The “most intriguing new funds” aren’t all worthy of your “gotta buy” list, but all of them are going to be fundamentally intriguing possibilities that warrant some thought. This month’s two new funds are:

Amana Developing World (AMDWX) is the latest offering from the most consistently excellent fund company around (Saturna Capital, if you didn’t already know). Investing on Muslim principles with a pedigree anyone would love, AMDWX offers an intriguing, lower-risk option for investors interested in emerging markets exposure without the excitement.

Osterweis Strategic Investment (OSTVX) is a flexible allocation fund that draws on the skills and experience of a very successful management team. Building on the success of Osterweis (OSTFX) and Osterweis Strategic Income (OSTIX), this intriguing new fund offers the prospect of moving smoothly between stocks and bonds and sensibly within them.

Stars in the shadows: Small funds of exceptional merit. There are thousands of tiny funds (2200 funds under $100 million in assets and many only one-tenth that size) that operate under the radar. Some intentionally avoid notice because they’re offered by institutional managers as a favor to their customers (Prospector Capital Appreciation and all the FMC funds are examples). Many simply can’t get their story told: they’re headquartered outside of the financial centers, they’re offered as part of a boutique or as a single stand-alone fund, they don’t have marketing budgets or they’re simply not flashy enough to draw journalists’ attention. There are, by Morningstar’s count, 75 five-star funds with under $100 million in assets; Morningstar’s analysts cover only eight of them.

The stars are all time-tested funds, many of which have everything except shareholders. This month’s two stars are:

Artisan Global Value (ARTGX): Artisan is the first fund to move from “intriguing new fund” to “star in the shadows.” This outstanding little fund, run the same team that runs the closed, five-star Artisan International Value (ARTKX) fund has been producing better returns with far less risk than its peers, just as ARTKX has been doing for years. So why no takers?

LKCM Balanced (LKBAX): this staid balanced fund has the distinction of offering the best risk/return profile of any balanced fund in existence, and it’s been doing it for over a decade. A real “star in the shadows.” Thanks for Ira Artman for chiming in with a recommendation on the fund, and links to cool resources on it!

Briefly Noted:

Morningstar just announced a separation agreement with their former chief operating officer, Tao Huang. Mr. Huang received $3.15 million in severance and a consulting contract with the company. (I wonder if Morningstar founder Joe Mansueto, who had to sign the agreement, ever thinks back to the days when he was a tiny, one-man operation just trying to break even?) It’s not clear why Mr. Huang left, though it is clear that no one suggests anyone did anything wrong (no one “violated any law, interfered with any right, breached any obligation or otherwise engaged in any improper or illegal conduct”), he’s promised not to “disparage” Morningstar.

On April 26, Wasatch Emerging India Fund (WAINX) launched. The fund focuses on Indian small cap companies and has two experienced managers, Ajay Krishnan and Roger Edgley. Mr. Krishnan is a native of India and co-manages Wasatch Ultra Growth. Mr. Edgley, a native of England for what that matters, manages Wasatch Emerging Markets Small Cap, International Opportunities and International Growth. Wasatch argues that the Indian economy is roaring ahead and that small caps are undervalued. Since they cover several hundred Indian firms for their other funds, they’re feeling pretty confident about being the first Indian small cap fund.

I somehow missed the launch of Leuthold Global Industries, back in June 2010.

The Baron funds have decided to ease up on frequent traders. “Frequent trading” used to be “six months or less.” As of April 20, 2011, it’s 90 days or less.

You might call it DWS not-too-International (SUIAX). A supplement to the prospectus, dated 4/11/11, pledges the fund to invest at least 65% of its assets internationally, the same threshold DWS uses for their Global Thematic fund. Management is equally bold in promising to think about whether they’ll buy good investments: “Portfolio management may buy a security when its research resources indicate the potential for future upside price appreciation or their investment process identifies an attractive investment opportunity.” DWS hired their fourth lead manager (Nikolaus Poehlmann) in five years in October 2009, fired him and his team in April 2011, and brought on a fifth set of managers. That might explain why they trail 96% of their peers over the past 1-, 3-, and 5-year periods but it doesn’t really help in explaining how they’ve managed to accumulate $1 billion in assets.

Henderson has changed the name of two of its funds: Henderson Global Opportunities is now Henderson Global Leaders Fund (HFPIX) and Henderson Japan-Asia Focus Fund is now Henderson Japan Focus (HFJIX). Both funds are small and expensive. Japan posts a relatively fine annualized loss of 6% over the past five years while Global Leaders has clocked in with a purely mediocre 1.3% annual loss over its first three years of existence.

ING plans to sell their Clarion fund to CB Richard Ellis Group by July 1, 2011. ING Clarion Real Estate (IVRIX) will keep the same strategy and management team, though presumably a new moniker.

Loomis Sayles Global Markets changed its name to Loomis Sayles Global Equity and Income (LGMAX).

The portfolio-management team responsible for Aston/Optimum Mid Cap (ABMIX) left Optimum Investment Advisers and joined Fairpointe Capital. Aston canned Optimum, hired Fairpointe and has renamed the fund Aston/Fairpointe Mid Cap. There will be no changes to the management team or strategy.

Thanks!

Mutual Fund Observer has had a good first month of operation. That wouldn’t have been possible without the support, financial, technical and otherwise, of a lot of kind people. And so thanks:

To Roy Weitz and FundAlarm, who led the way, provided a home, guided my writing and made this all possible.
To the nine friends who have, between them, contributed $500 through our PayPal to help support us.
To the many people who used the Observer’s link to Amazon, from which we received nearly a hundred dollars more. If you’re interested in helping out, click on the “support us” link to learn more.
To the 300 or so folks who’ve joined the discussion board so far. I’m especially grateful for the 400-odd notices that let us identify problems and tweak settings to make the board a bit friendlier.
To the 27,000 visitors who’ve come by in the first month since our unofficial opening.
To two remarkably talented and dedicated IT professionals: Brad Isbell, Augustana College’s senior web programmer and proprietor of the web consulting firm musatcha.com and to Cheryl Welsch, better known here as Chip, SUNY-Sullivan’s Director of Information Technology. They’ve both worked long and hard under the hood of the site, and in conjunction with the folks here, to make it all work.

I am deeply indebted to you all, and I’m looking forward to the challenge of maintaining a site worthy of your attention.

But not right now! On May 3^rd I leave for a long-planned research trip to Oxford University. There I’ll work on the private papers of long-dead diplomats, trying to unravel the story behind a famous piece of World War One atrocity propaganda. It was the work of a committee headed by one of the era’s most distinguished diplomats, and it was almost certainly falsified. So I’ll spend a week at the school on which they modeled Hogwarts, trying to learn what Lord Bryce knew and when he knew it. Then off to enjoy London and the English countryside with family.

You’ll be in good hands while I’m gone. Roy Weitz, feared gunslinger and beloved curmudgeon, will oversee the discussion board while I’m gone. Chip and Brad, dressed much like wizards themselves, will monitor developments, mutter darkly and make it all work.

Until June 1 then!

David

Centaur Total Return Fund (TILDX)

By Editor

This profile has been updated. Find the new profile here.

Objective

The fund seeks “maximum total return” through a combination of capital appreciation and income. The fund invests in undervalued securities, included (mostly domestic) high dividend large cap stocks, REITs, master limited partnerships, royalty trusts and convertibles. The manager invests in companies “that it understands well.” The managers also generate income by selling covered calls on some of their stocks.

Adviser

T2 Partners Management, LP. T2, named for founders Whitney Tilson and Glenn Tongue, manages about $150 million through its two mutual funds (the other is Tilson Focus TILFX) and three hedge funds (T2 Accredited, T2 Qualified and Tilson Offshore). These are Buffett-worshippers, in the Warren rather than Jimmy sense. The adviser was founded in 1998.

Manager

Zeke Ashton, founder, managing partner, and a portfolio manager of Centaur Capital Partners L.P., has managed the fund since inception. Mr. Ashton is the the Sub-Advisor. Before founding Centaur in 2002, he spent three years working for The Motley Fool where he developed and produced investing seminars, subscription investing newsletters and stock research reports in addition to writing online investing articles. He graduated from Austin College, a good liberal arts college, in 1995 with degrees in Economics and German.

Management’s Stake in the Fund

Somewhere between $100,000 and $500,000 as of October 2009.

Opening date

March 16, 2005

Minimum investment

$1,500 for regular and tax-advantaged accounts, reduced to $1000 for accounts with an automatic investing plan

Expense ratio

2.00% after waivers on an asset base of $40 million, plus a 2% redemption fee on shares held less than a year.

Comments

Tilson Dividend presents itself as an income-oriented fund. The argument for that orientation is simple: income stabilizes returns in bad times and adds to them in good. The manager imagines two sources of income: (1) dividends paid by the companies whose stock they own and (2) fees generated by selling covered calls on portfolio investments.

The core of the portfolio are a limited number (currently about 25) of high quality stocks. In bad markets, such stocks benefit from the dividend income – which helps support their share price – and from a sort of “flight to quality” effect, where investors prefer (and, to an extent, bid up) steady firms in preference to volatile ones. About three-quarters of those stocks are domestic, and one quarter represent developed foreign markets.

The manager also sells covered calls on a portion of the portfolio. At base, he’s offering to sell a stock to another investor at a guaranteed price. “If GM hits $40 a share within the next six months, we’ll sell it to you at that price.” Investors buying those options pay a small upfront price, which generates income for the fund. As long as the agreed-to price is approximately the manager’s estimate of fair value, the fund doesn’t lose much upside (since they’d sell anyway) and gains a bit of income. The profitability of that strategy depends on market conditions; in a calm market, the manager might place only 0.5% of his assets in covered calls but, in volatile markets, it might be ten times as much.

The fund currently generates a lot of income but the reported yield is low because the fund’s expenses are high, and covering operating expenses has the first call on income flow. While it has a high cash stake (about 20%), cash is not current generating appreciable income.

The fund’s conservative approach is succeeded (almost) brilliantly so far. At the fund’s five year anniversary (March 2010), Lipper ranked it as the best performing equity-income fund for the trailing three- and five-year periods. At that same point, Morningstar ranked it in the top 1% of mid-cap blend funds. It’s maintained that top percentile rank since then, with an annualized return of 9.3% from inception through late November 2010.

The fund has achieved those returns with remarkably muted volatility. Morningstar rates its risk as “low” (and returns “high”) and the fund’s five-year standard deviation (a measure of volatility) is 15, substantially below its peers score of 21.

And, on top of it all, the fund has substantially outperformed its more-famous stable-mate. Tilson Focus (TILFX), run by value investing guru Whitney Tilson, has turned a $10,000 investment at inception into $13,100 (good!). Tilson Dividend turned that same investment into $16,600 (better! Except for that whole “showing up the famous boss” issue).

Bottom Line

There are risks with any investment. In this case, one might be concerned that the manager has fine-tuned his investment discipline to allow in a greater number of non-income-producing investments. That said, the fund earned a LipperLeader designation for total returns, consistency and preservation of gains, and a five-star designation from Morningstar. For folks looking to maintain their stock exposure, but cautiously, this is an awfully compelling little fund.

Fund website

Tilson mutual funds website

First Trust/Aberdeen Emerging Opportunity Fund (FEO), April 2011

By Editor

The fund has terminated in December 2022

Objective

To provide a high level of total return by investing in a diversified portfolio of emerging market equity and fixed-income securities. The fund does not short anything but they may use derivatives to hedge their risks.

Adviser

First Trust Advisors, L.P., in suburban Chicago. First Trust is responsible for 29 mutual funds and a dozen closed-end funds. They tend to be responsible for picking sub-advisers, rather than for running the funds on their own.

Manager

A large team from Aberdeen Asset Management, Inc., which is a subsidiary of Aberdeen Asset Management PLC. The parent firm manages $250 billion in assets, as of mid-210. Their clients include a range of pension funds, financial institutions, investment trusts, unit trusts, offshore funds, charities and rich folks, in addition to two dozen U.S. funds bearing their name. The management team is led by Devan Kaloo, Head of Emerging Markets Equity, and Brett Diment, Head of Emerging Market Debt for the Aberdeen Group.

Management’s Stake in the Fund

I can’t determine this. The reporting requirements for closed-end funds seem far more lax than for “regular” mutual funds, so the most recent Statement of Additional Information on file with the SEC appears to be four years old.

Opening date

August 28, 2006

Minimum investment

Like stocks and ETFs, there is no minimum purchase established by the fund though you will need to pay a brokerage fee.

Expense ratio

1.80% on assets of $128 million. This calculation is a bit deceiving, since it ignores the possibility of buying shares of the fund at a substantial discount to the stated net asset value.

Comments

In my September 2010 cover essay, I offered a quick performance snapshot for “the best fund that doesn’t exist.” $10,000 invested in a broad measure of the U.S. stock market in 2000 would have been worth $9,700 by the decade’s end. The same investment in The Best Fund That Doesn’t Exist (TBFTDE) would be worth $30,500, a return that beats the socks off a wide variety of superstar funds with flexible mandates.

TBFTDE is an emerging markets hybrid fund; that is, one that invests in both e.m. stocks and bonds. No mutual fund or exchange-traded fund pursues the strategy which is odd, since many funds pursue e.m. stock or e.m. bond strategies separately. There are, for example, eight e.m. bond funds and 32 e.m. stock funds each with over a billion in assets. Both asset classes have offered healthy (10-11% annually over the past decade) returns and are projected to have strong returns going forward (see GMO’s monthly “asset class return forecasts” for details), yet are weakly correlated with each other. That makes for a natural combination in a single fund.

Sharp-eyed FundAlarm readers (you are a remarkable bunch) quickly identified the one option available to investors who don’t want to buy and periodically rebalanced separate funds. That option is a so-called “closed end” fund, First Trust/Aberdeen Emerging Opportunity (FEO).

Closed-end funds represent a large, well-established channel for sophisticated investors. There are two central distinctions between CEFs and regular funds. First, CEFs issue a limited number of shares (5.8 million in the case of this fund) while open-ended funds create new shares constantly in response to investor demand. That’s important. If you want shares of a mutual fund, you can buy them – directly or indirectly – from the fund company that simply issues more shares to meet investor interest. Buying shares of a CEF requires that you find someone who already owns the shares and who is willing to sell them to you. Depending on the number of potential buyers and the motivation of potential sellers, it’s possible for shares of CEFs to trade at substantial discounts to the fund’s net asset value. That is, there will be days when you’re able to buy $100 worth of assets for $80. That also implies there are days when you’ll only be able to get $80 when you try to sell $100 in assets. The opposite is also true: some funds sell at a double-digit premium to their net asset values.

Second, since you need to purchase the shares from an existing shareholder, you need to work through a broker. As a result, each purchase and sale will engender brokerage fees. In general, those are the same as the fees the broker charges for selling an equivalent amount of common stock.

The systemic upside is CEFs is that they’re easier to manage, especially in niche markets, than are open-end funds. Mass redemptions, generally sell orders arriving at the worst possible moment during a market panic, are the bane of fund managers’ existence. At the exact moment they need to think long term and pursue securities available at irrational discounts, they’re forced to think short term and liquidate parts of their own portfolios to meet shareholder redemptions. Since CEF are bought and sold from other investors, your greed (or panic) is a matter of concern for you and some other investor. The fund manager is insulated from it. That makes CEF popular instruments for using risky strategies (such as leverage) in niche markets.

What are the arguments for considering an investment in FEO particularly? First, the management team is large and experienced. Aberdeen boasts 95 equity and 130 global fixed income professionals. They handle hundreds of billions of assets, including about $30 billion in emerging markets stocks and bonds. Their Emerging Markets Institutional (ABEMX) stock fund, run by the same equity team that runs FEO, has beaten 99% of its peers over the past three years (roughly the period since inception). Their global fixed income funds are only “okay” while their blended asset-allocation funds are consistently above average. Given that FEO’s asset allocation shifts, the success of those latter funds is important to predicting FEO’s success.

Second, the fund has done well in its short existence. Here’s a quick comparison on the fund’s performance over the past three years. The net asset value performance is a measure of the managers’ skill, the market performance reflects the willingness of investors to buy or sell as a discount (or premium) to NAV, while the FundAlarm Emerging Markets Hybrid returns represent a simple 50/50 split between T. Rowe Price Emerging Market Stock fund and Emerging Markets Bond.

	FEO at NAV	FEO at market price	FundAlarm E.M. Hybrid
2007	12.8	15.6	24
2008	(41)	(34)	(40)
2009	94	70	60
2010	29.5	23.5	15

FEO’s three-year return, through October 2010, is either 15.4% (at NAV) or 10.4% (at market price). That huge gap represents a huge opportunity, since shares in the fund have been available for discounts of as much as 30%, far above the 3-4% seen in calmer times. And both of those returns compare favorably to the performance of Matthews Asian Growth and Income (MACSX), a phenomenal long-term hybrid Asian investment, which returned only 3.5% in the same period.

Bottom Line

I would really prefer to have access to an open-end fund or ETF since I dislike brokerage fees and the need to fret about “discounts” and “entry points.” That said, for long-term investors looking for risk-moderated emerging markets exposure, and especially those with a good discount broker, this really should be on your due diligence list.

Fund website

First Trust/Aberdeen Emerging Opportunity

Fairholme Allocation (formerly Fairholme Asset Allocation), (FAAFX), April 2011

By Editor

At the time of publication, this fund was named Fairholme Asset Allocation.

Objective

The fund seeks long-term total return from capital appreciation and income by investing opportunistically and globally in a focused portfolio of stocks, bonds, and cash.

Adviser

Fairholme Capital Management. Fairholme runs the three Fairholme funds and oversees about 800 separate accounts. Its assets under management total about $20 billion, with a good 90% of that in the funds.

Manager(s)

Bruce Berkowitz.

Mr. Berkowitz was Morningstar’s Fund Manager of the Decade for 2000-2010, a distinction earned through his management of Fairholme Fund (FAIRX). He was also earning his B.A. at UMass-Amherst at the same time (late 1970s) I was earning my M.A. there. (Despite my head start, he seems to have passed me somehow.)

Management’s Stake in the Fund

None yet reported. Each manager has a huge investment (over $1 million) in each of his other funds, and the Fairholme employees collectively have over $300 million invested in the funds.

Opening date

December 30, 2010.

Minimum investment

$25,000 (gulp) for accounts of all varieties.

Expense ratio

1.01% on assets of $51.4 million, as of July 2023.

Comments

Fairholme Fund (FAIRX) has the freedom to go anywhere. The prospectus lists common and preferred stock, partnerships, business trust shares, REITs, warrants, US and foreign corporate debt, bank loans and participations, foreign money markets and more. The manager uses that flexibility, making large, focused investments in a wide variety of assets.

Fairholme’s most recent portfolio disclosure (10/28/10) illustrates that flexibility:

62% Domestic equity, with a five-year range of 48-70%
10% Commercial paper (typical of a money market fund’s portfolio)
6% Floating rate loans
6% Convertible bonds
5 % T-bills
3% Domestic corporate bonds
1% Asset backed securities (uhh… car loans?)
1% Preferred stock
1% Foreign corporate bonds
.3% Foreign equity (three months later, that’s closer to 20%)

On December 30, Fairholme launched its new fund, Fairholme Allocation (FAAFX). The fund will seek “long-term total return from capital appreciation and income” by “investing opportunistically” in equities, fixed-income securities and cash. Which sounds a lot like Fairholme fund’s mandate. The three small differences in the “investment strategies” section of their prospectuses are: the new fund targets “total return” while Fairholme seeks “long term growth of capital.” The new fund invests opportunistically, which Fairholme does but which isn’t spelled out. And the new fund includes “and income” as a goal.

And, oh by the way, the new fund charges $25,000 to get in but only 0.75% (after waivers) to stay in.

The question is: why bother? In a conversation with me, Mr. Berkowitz started by reviewing the focus for Fairholme (equity) and Fairholme Focus Income (income) and allowed that the new fund “could do anything either of the other two could do.” Which is, I argued, also true of Fairholme itself. I suggested that the “total return” and “and income” provisions of the prospectus might suggest a more conservative, income-oriented approach but Mr. B. dismissed the notion. He clearly did not see the new fund as intrinsically more conservative and warned that it might be more volatile. He also wouldn’t speculate on whether the one fund’s asset allocation decisions (e.g., to move Fairholme 100% to cash) would be reflected in the other fund’s. He suggested that if his two best investment ideas were a $1 billion stock investment and a $25 million floating rate loan, he’d likely pursue one for Fairholme and the other for Allocation.

In the end , the argument was simply size. While “bigger is better” in the current global environment, “smaller” can mean “more degrees of freedom.” The Fairholme team discovers a number of “small quantity ideas,” potentially great investments which are too small “to move the needle” for a vehicle as large as Fairholme (roughly $20 billion). A $50 million opportunity which has no place in Fairholme’s focus (Fairholme owns over $100 million in 17 of its 22 stocks) might be a major driver for the Allocation fund.

Finally, he meant the interesting argument that Allocation would be able to ride on Fairholme’s coattails. Fairholme’s bulk might, as I mentioned in the first Berkowitz piece, give the firm access to exclusive opportunities. Allocation might then pick up an opportunity not available to other funds its size.

Bottom Line

Skeptics of Fairholme’s bulk are right. The fund’s size precludes it from profiting in some of the investments it might have pursued five years ago. Allocation, with a similarly broad mandate and even lower expense ratio, gives Berkowitz a tool with which to exploit those opportunities again. Having generated nearly $200 million in investor assets in two months, the question is how long that advantage will persist. Likely, the $25,000 minimum serves to slow inflows and help maintain a relatively smaller asset base.

Fund website

Fairholme Funds, click on “public.”

Aston/River Road Independent Value Fund (ARIVX) – updated September 2012

By Editor

This profile was updated in September 2012. You will find the updated profile at http://www.mutualfundobserver.com/2012/09/astonriver-road-independent-value-fund-arivx-updated-september-2012/

Objective and strategy

The fund seeks to provide long-term total return by investing in common and preferred stocks, convertibles and REITs. The manager attempts to invest in high quality, small- to mid-cap firms (those with market caps between $100 million and $5 billion). He thinks of himself as having an “absolute return” mandate, which means an exceptional degree of risk-consciousness. He’ll pursue the same style of investing as in his previous charges, but has more flexibility than before because this fund does not include the “small cap” name.

Adviser

Aston Asset Management, LP. It’s an interesting setup. As of June 30, 2012, Aston is the adviser to twenty-seven mutual funds with total net assets of approximately $10.5 billion and is a subsidiary of the Affiliated Managers Group. River Road Asset Management LLC subadvises six Aston funds; i.e., provides the management teams. River Road, founded in 2005, oversees $7 billion and is a subsidiary of the European insurance firm, Aviva, which manages $430 billion in assets. River Road also manages five separate account strategies, including the Independent Value strategy used here.

Manager

Eric Cinnamond. Mr. Cinnamond is a Vice President and Portfolio Manager of River Road’s independent value investment strategy. Mr. Cinnamond has 19 years of investment industry experience. Mr. Cinnamond managed the Intrepid Small Cap (ICMAX) fund from 2005-2010 and Intrepid’s small cap separate accounts from 1998-2010. He co-managed, with Nola Falcone, Evergreen Small Cap Equity Income from 1996-1998. In addition to this fund, he manages six smallish (collectively, about $50 million) separate accounts using the same strategy.

Management’s Stake in the Fund

As of October 2011, Mr. Cinnamond has between $100,000 and $500,000 invested in his fund. Two of Aston’s 10 trustees have invested in the fund. In general, a high degree of insider ownership – including trustee ownership – tends to predict strong performance. Given that River Road is a sub-advisor and Aston’s trustees oversee 27 funds each, I’m not predisposed to be terribly worried.

Opening date

December 30, 2010.

Minimum investment

$2,500 for regular accounts, $500 for various sorts of tax-advantaged products (IRAs, Coverdells, UTMAs).

Expense ratio

1.42%, after waivers, on $616 million in assets.

Update Our original analysis, posted February, 2011, appears just below this update. It describes the fund’s strategy, Mr. Cinnamond’s rationale for it and his track record over the past 16 years.	September, 2012
2011 returns: 7.8%, while his peers lost 4.5%, which placed ARIVX in the top 1% of comparable funds. 2012 returns, through 8/30: 5.3%, which places ARIVX in the bottom 13% of small value funds.
Asset growth: about $600 million in 18 months, from $16 million. The fund’s expense ratio did not change.
What are the very best small-value funds? Morningstar has designated three as the best of the best: their analysts assigned Gold designations to DFA US Small Value (DFSVX), Diamond Hill Small Cap (DHSCX) and Perkins Small Cap Value (JDSAX). For my money (literally: I own it), the answer has been Artisan Small Cap(ARTVX).And where can you find these unquestionably excellent funds? In the chart below (click to enlarge), you can find them where you usually find them. Well below Eric Cinnamond’s fund. That chart measures only the performance of his newest fund since launch, but if you added his previous funds’ performance you get the same picture over a longer time line. Good in rising markets, great in falling ones, far steadier than you might reasonably hope for. Why? His explanation is that he’s an “absolute return” investor. He buys only very good companies and only when they’re selling at very good prices. “Very good prices” does not mean either “less than last year” or “the best currently available.” Those are relative measures which, he says, make no sense to him. His insistence on buying only at the right price has two notable implications. He’s willing to hold cash when there are few compelling values. That’s often 20-40% of the portfolio and, as of mid-summer 2012, is over 50%. Folks who own fully invested small cap funds are betting that Mr. Cinnamond’s caution is misplaced. They have rarely won that bet. He’s willing to spend cash very aggressively when there are many compelling values. From late 2008 to the market bottom in March 2009, his separate accounts went from 40% cash to almost fully-invested. That led him to beat his peers by 20% in both the down market in 2008 and the up market in 2009. This does not mean that he looks for low risk investments per se. It does mean that he looks for investments where he is richly compensated for the risks he takes on behalf of his investors. His July 2012 shareholder letter notes that he sold some consumer-related holdings at a nice profit and invested in several energy holdings. The energy firms are exceptionally strong players offering exceptional value (natural gas costs $2.50 per mcf to produce, he’s buying reserves at $1.50 per mcf) in a volatile business, which may “increase the volatility of [our] equity holdings overall.” If the market as a whole becomes more volatile, “turnover in the portfolio may increase” as he repositions toward the most compelling values. The fund is apt to remain open for a relatively brief time. You really should use some of that time to learn more about this remarkable fund.

Comments

While some might see a three-month old fund, others see the third incarnation of a splendid 16 year old fund.

The fund’s first incarnation appeared in 1996, as the Evergreen Small Cap Equity Income fund. Mr. Cinnamond had been hired by First Union, Evergreen’s advisor, as an analyst and soon co-manager of their small cap separate account strategy and fund. The fund grew quickly, from $5 million in ’96 to $350 million in ’98. It earned a five-star designation from Morningstar and was twice recognized by Barron’s as a Top 100 mutual fund.

In 1998, Mr. Cinnamond became engaged to a Floridian, moved south and was hired by Intrepid (located in Jacksonville Beach, Florida) to replicate the Evergreen fund. For the next several years, he built and managed a successful separate accounts portfolio for Intrepid, which eventually aspired to a publicly available fund.

The fund’s second incarnation appeared in 2005, with the launch of Intrepid Small Cap (ICMAX). In his five years with the fund, Mr. Cinnamond built a remarkable record which attracted $700 million in assets and earned a five-star rating from Morningstar. If you had invested $10,000 at inception, your account would have grown to $17,300 by the time he left. Over that same period, the average small cap value fund lost money. In addition to a five star rating from Morningstar (as of 2/25/11), the fund was also designated a Lipper Leader for both total returns and preservation of capital.

In 2010, Mr. Cinnamond concluded that it was time to move on. In part he was drawn to family and his home state of Kentucky. In part, he seems to have reassessed his growth prospects with the firm.

The fund’s third incarnation appeared on the last day of 2010, with the launch of Aston / River Road Independent Value (ARIVX). While ARIVX is run using the same discipline as its predecessors, Mr. Cinnamond intentionally avoided the “small cap” name. While the new fund will maintain its historic small cap value focus, he wanted to avoid the SEC stricture which would have mandated him to keep 80% of assets in small caps.

Over an extended period, Mr. Cinnamond’s small cap composite (that is, the weighted average of the separately managed accounts under his charge over the past 15 years) has returned 12% per year to his investors. That figure understates his stock picking skills, since it includes the low returns he earned on his often-substantial cash holdings. The equities, by themselves, earned 15.6% a year.

The key to Mr. Cinnamond’s performance (which, Morningstar observes, “trounced nearly all equity funds”) is achieved, in his words, “by not making mistakes.” He articulates a strong focus on absolute returns; that is, he’d rather position his portfolio to make some money, steadily, in all markets, rather than having it alternately soar and swoon. There seem to be three elements involved in investing without mistakes:

Buy the right firms.
At the right price.
Move decisively when circumstances demand.

All things being equal, his “right” firms are “steady-Eddy companies.” They’re firms with look for companies with strong cash flows and solid operating histories. Many of the firms in his portfolio are 50 or more years old, often market leaders, more mature firms with lower growth and little debt.

Like many successful managers, Mr. Cinnamond pursues a rigorous value discipline. Put simply, there are times that owning stocks simply aren’t worth the risk. Like, well, now. He says that he “will take risks if I’m paid for it; currently I’m not being paid for taking risk.” In those sorts of markets, he has two options. First, he’ll hold cash, often 20-30% of the portfolio. Second, he moves to the highest quality companies in “stretched markets.” That caution is reflected in his 2008 returns, when the fund dropped 7% while his benchmark dropped 29%.

But he’ll also move decisively to pursue bargains when they arise. “I’m willing to be aggressive in undervalued markets,” he says. For example, ICMAX’s portfolio went from 0% energy and 20% cash in 2008 to 20% energy and no cash at the market trough in March, 2009. Similarly, his small cap composite moved from 40% cash to 5% in the same period. That quick move let the fund follow an excellent 2008 (when defense was the key) with an excellent 2009 (where he was paid for taking risks). The fund’s 40% return in 2009 beat his index by 20 percentage points for a second consecutive year. As the market began frothy in 2010 (“names you just can’t value are leading the market,” he noted), he let cash build to nearly 30% of the portfolio. That meant that his relative returns sucked (bottom 10%), but he posted solid absolute returns (up 20% for the year) and left ICMAX well-positioned to deal with volatility in 2011.

Unfortunately for ICMAX shareholders, he’s moved on and their fund trailed 95% of its peers for the first couple months of 2011. Fortunately for ARIVX shareholders, his new fund is leading both ICMAX and its small value peers by a comfortable early margin.

The sole argument against owning is captured in Cinnamond’s cheery declaration, “I like volatility.” Because he’s unwilling to overpay for a stock, or to expose his shareholders to risk in an overextended market, he sidelines more and more cash which means the fund might lag in extended rallies. But when stocks begin cratering, he moves quickly in which means he increases his exposure as the market falls. Buying before the final bottom is, in the short term, painful and might be taken, by some, as a sign that the manager has lost his marbles. He’s currently at 40% cash, effectively his max, because he hasn’t found enough opportunities to fill a portfolio. He’ll buy more as prices on individual stocks because attractive, and could imagine a veritable buying spree when the Russell 2000 is at 350. At the end of February 2011, the index was close to 700.

Bottom Line

Aston / River Road Independent Value is the classic case of getting something for nothing. Investors impressed with Mr. Cinnamond’s 15 year record – high returns with low risk investing in smaller companies – have the opportunity to access his skills with no higher expenses and no higher minimum than they’d pay at Intrepid Small Cap. The far smaller asset base and lack of legacy positions makes ARIVX the more attractive of the two options. And attractive, period.

Fund website

Aston/River Road Independent Value

Vulcan Value Partners Small Cap Fund (VVPSX), April 2011

By Editor

Objective

Seeks to achieve long-term capital appreciation by investing primarily in publicly traded small-capitalization U.S. companies – the Russell 2000 universe – believed to be both undervalued and possessing a sustainable competitive advantage. They look for businesses that are run by ethical, capable, stockholder-oriented management teams that also are good at allocating their capital. The manager determines the firm’s value, compares it to the current share price, and then invests greater amounts in the more deeply-discounted stocks.

Adviser

Vulcan Value Partner. C.T. Fitzpatrick founded Vulcan Value Partners in 2007 to manage his personal wealth. Vulcan manages two mutual funds and oversees four strategies (Large Cap, Small Cap, Focus and Focus Plus) for its separate accounts. Since inception, all four strategies have peer rankings in the top 5% of value managers in their respective categories.

Manager

C.T. Fitzpatrick, Founder, Chief Executive Officer, Chief Investment Officer, and Chief Shareholder. Before founding Vulcan, Mr. Fitzpatrick worked as a principal and portfolio manager at Southeastern Asset Management, adviser to the Longleaf funds. He co-managed the relatively short-lived Longleaf Partners Realty fund. During his 17 year tenure (1990-2007), the team at Southeastern Asset Management achieved double digit returns and was ranked in top 5% of money managers over five, ten, and twenty year periods according to Callan and Associates.

Management’s Stake in the Fund

Mr. Fitzpatrick has over $1 million in each of Vulcan’s two funds. He also owns a majority of the Adviser. All of Vulcan Value’s employees make all of their investments either through the firm’s funds or its separate accounts.

Opening date

12/30/2009

Minimum investment

$5000, reduced to $500 for college savings accounts.

Expense ratio

1.25% on assets of $423 million, as of July 2023. There is no redemption fee.

Comments

Mr. Fitzpatrick is a disciplined, and bullish, value investor. He spent 17 years at Southeastern Asset Management, which has a great tradition of skilled, shareholder-friendly management. He left, he says, because life simply got too hectic as SAM grew to managing $40 billion and he found himself traveling weekly to Europe. (The TSA pat downs alone would cause me to reconsider the job.) While he was not one of the Longleaf Small Cap co-managers, he knows the discipline and has imported chunks of it. Like Longleaf, Vulcan runs a very compact portfolio of 20-30 stocks while many of the small-to-midcap peers holds 50-150 names. Both firms profess a long-term perspective, and believe that a five-year perspective gives them a competitive advantage when dealing with competitors who have trouble imagining “committing” to a stock for five months. Mr. Fitzpatrick’s description is that “We buy 900-pound gorillas priced like 98-pound weaklings. We have a five-year time horizon. Usually, our investments are out of favor for short-term reasons but their long-term fundamentals are sound.” They continue to hold stocks which have grown beyond the small cap realm, so long as those stocks continue to have a favorable value profile. As a result, both firms hold more midcap than small cap stocks in their small cap funds. Neither firm is a “deep value” purist, so the portfolios contain a number of “growth” stocks. And both firms require that everyone’s interests are aligned with their shareholders; the only investment that employees of either firm are allowed to make are in the firms’ own products. That discipline seems to work. It works for Longleaf, which has 20 years of top decile returns. It’s worked for Vulcan’s separate accounts, whose small cap composite outperformed their benchmark by index by 900 basis points a year; gaining 4% which the Russell Value index dropped 5%. And it’s worked so far for the Vulcan fund, which gained nearly 23% over the first 11 months of 2010. That easily outpaces both its small- and mid-cap peer groups, placing it in the top 10% of the former.

Bottom Line

Mr. Fitzpatrick is bullish on stocks, largely because so few other people are. Money is flowing out of equities, at the same time that corporate balance sheets are becoming exceptionally strong and bonds exceptionally unattractive. In particular, he finds the highest quality companies to be the most undervalued. That creates fertile ground for a disciplined value investor. For folks venturesome enough to pursue high quality small companies, Vulcan offers the prospects of a solid, sensible, profitable vehicle.

Fund website

Vulcan Value Partners Small Cap. You might browse through the exceptionally detailed discussion of their small cap separate accounts, of which the mutual fund is a clone. There’s a fair amount of interesting commentary attached to them.

Fact Sheet

RiverNorth DoubleLine Strategic Income (RNDLX), April 2011

By Editor

Objective

To provide both current income and total return. The fund has three distinct strategies, two overseen by DoubleLine, among which it allocates assets based on the advisor’s tactical judgment. The fund aims to be less volatile than the broad fixed-income market.

Adviser

RiverNorth Capital Management, LLC. RiverNorth, founded in 2000, specializes in quantitative and qualitative closed-end fund trading strategies and advises the RiverNorth Core Opportunity Fund (RNCOX) and a several hedge funds. They manage nearly $700 million for individuals and institutions, including employee benefit plans.

Manager

Patrick W. Galley and Stephen A. O’Neill, both of RiverNorth Capital and co-managers of the five-star RiverNorth Core Opportunity fund (RNCOX), and Jeffrey E. Gundlach. Mr. Gundlach ran TCW Total Return (TGLMX) from 1993 through 2009. For most trailing periods at the time of his departure, his fund had returns in the top 1% of its peer group. He was Morningstar’s fixed-income manager of the year in 2006 and a nominee for fixed income manager of the decade in 2009. Most of the investment staff from TCW moved to DoubleLine with him.

Management’s Stake in the Fund

None yet reported since the latest Statement of Additional Information precedes the fund’s launch. Mr. Galley owns more than 25% of the adviser and has between $100,000 and $500,000 in his Core Opportunity fund. Mr. Galley reports that “100% of our employees’ 401k assets [and] over 85% of the portfolio managers’ liquid net worth [is] invested in our own products.”

Opening date

December 30, 2010.

Minimum investment

$5000, reduced to $1000 for IRAs.

Expense ratio

1.28% on assets of about $1.3 Billion, as of July 2023.

Comments

Many serious analysts expect a period of low returns across a whole variety of asset classes. GMO, for example, forecasts real returns of nearly zero on a variety of bond classes over the next five years. Forecasts for equity returns seem to range from “restrained” to “disastrous.”

If true, the received wisdom — invest in low cost, broadly diversified index funds or ETFs — will produce reasonable relative returns and unreasonable absolute ones. A popular alternative — be bold, make a few big bets — might produce better returns, but will certainly produce gut-wrenching periods. And, in truth, we’re not wired to embrace volatility.

The folks at RiverNorth propose an alternative of a sort of “core and explore” variety. RiverNorth DoubleLine Strategic Income has three “sleeves,” or distinct components in its portfolio:

Core Fixed Income, run by fixed-income superstar Jeff Gundlach & co., will follow the same strategy as the DoubleLine Core Fixed Income (DLFNX) fund though it won’t be a clone of the fund. As the name implies, this strategy will be the core of the portfolio. With it, Gundlach is authorized to invest globally in a wide variety of fixed-income assets. The asset allocation within this sleeve varies, based on Mr. G’s judgment.
Opportunistic Income, also run by Mr. G., will specialize in mortgage-backed securities. Most analysts argue that this is DoubleLine’s area of core competence, and that it’s contributed much of the alpha to his earlier TCW funds.
Tactical Closed-end Fund Income, run by Patrick Galley and the team at RiverNorth, invests in closed-end income funds when (1) they fit into the team’s tactical asset allocation model and (2) they are selling at an unsustainable discount. As investors in the (five-star) RiverNorth Core Opportunity (RNCOX) fund know, CEFs often sell at irrational discounts to their net asset value; that is, you might briefly be able to buy $100 worth of bonds for $80 or less. RiverNorth monitors both sectors and individual fund discounts. It buys funds when the discount is irrational and sells as soon as it returns to a rational level, looking in an arbitrage gain which is largely independent of the overall moves in the market. Ideally, the combination of opportunism and cognizance of volatility and concentration risk will allow the managers to produce a better risk adjusted return (i.e., a higher Sharpe ratio) than the Barclays Aggregate.

The fund’s logic is this: Gundlach’s Core Fixed Income sleeve is going to be rock-solid. If either Gundlach or Galley sees a high-probability, high-alpha opportunity in their respective areas of expertise, they’ll devote a portion of the portfolio to locking in those gains. If they see nothing special, a larger fraction of the fund will remain in the core portfolio. While most of us detest market volatility, Galley and Gundlach seem to be waiting anxiously for it since it gives them an opportunity to reap exceptional profits from the irrationality of other investors. The managers report that their favorite time to buy is “when your hand is shaking [as] you are going to write the check.” The ability to move assets out of Core and into one of the other sleeves means the managers will have the money available to exploit market panics, even if investor panic means the fund isn’t receiving new cash.

The CEF strategy is distinguished from the RNCOX version, which slides between CEFs (when pricing is irrational) and ETFs (when pricing is rational). Based on the managers’ judgment that Mr. Gundlach can consistently add alpha over what comparable ETFs might offer (both in sector and security selection), Mr. Galley will slide his resources between CEFs (when pricing is irrational) and Core Fixed Income (when pricing isn’t).

While there’s no formal “neutral allocation” for the fund, the managers can imagine a world in which about half of the fund is usually in Core Fixed Income and the remainder split between the two alpha-generating strategies. Since the three strategies are uncorrelated, they offer a real prospect of damping the portfolio’s overall volatility while adding alpha. How much alpha? In early February, the managers estimated that their strategies were yielding between the mid single digits (in two sleeves) and low double-digits (in the other).

Bottom Line

In reviewing RiverNorth Core in 2009, I described the case for the fund as “compelling.” Absent a crushing legal defeat for Mr. Gundlach in his ongoing fight with former employer TCW, the same term seems to fit here as well.

I’ve been pondering a question, posed on the board, about a three fund portfolio; that is, if you could own three and only three funds over the long haul, which would they be? Given its reasonable expenses, the managers’ sustained successes, innovative design and risk-consciousness, this might well be one of the three on my list anyway.

Fund website

RiverNorth Funds

RiverNorth/DoubleLine Strategic Income

Fact Sheet

FPA Queens Road Value (formerly Queens Road Value), (QRVLX), April 2011

By Editor

At the time of publication, this fund was named Queens Road Value.

Objective

The fund seeks capital appreciation by investing in the stocks or preferred shares of U.S. companies. They look for companies with strong balance sheets and experienced management, and stocks selling at discounted price/earnings and price-to-cash flow ratios. It used to be called Queens Road Large Cap Value, but changed its name to widen the range of allowable investments. Nonetheless, it continues to put the vast majority of its portfolio into large cap value stocks.

Adviser

Bragg Financial Advisors, headquartered in Charlotte, NC. In particular, their offices are on Queens Road. Bragg has been around since the early 1970s, provides investment services to institutions and individuals, and has about $400 million in assets under management. It’s now run by the second generation of the Bragg family.

Manager

Steven Scruggs, CFA. Mr. Scruggs has worked for BFA since 2000 and manages this fund and Queens Road Small Cap Value (QRSVX). That’s about it. No separate accounts, hedge funds or other distractions. On the other hand, he has no research analysts to support him.

Management’s Stake in the Fund

As of the most recent Statement of Additional Information, Mr. Scruggs has invested between $10,000 and $50,000 in his fund. Though small in absolute terms, it’s described as “the vast majority of [his] investable assets.”

Opening date

June 13, 2002.

Minimum investment

$2500 for regular accounts, $1000 for tax-sheltered accounts.

Expense ratio

0.95% on assets of $19 million.

Comments

Steven Scruggs, and his investing partner Benton Bragg, are trying to do a simple, sensible thing well. By their own description, they’re trying to tune out the incessant noise – the market’s down, gold is up, it’s the “new normal,” no, it isn’t, Glenn Beck has investing advice, the Hindenburg’s been spotted, volumes are thin – and focus on what works: “over long periods of time companies are worth the amount of economic profits they earn for their shareholders.” They’re not trying to out-guess the market or make top-down calls. They’re mostly trying to find companies that will make more money over the next five years than they’re making now. When the stocks of those companies are unreasonably cheap, they buy them and hold them for something like 5-7 years. When they don’t find stocks that are unreasonably cheap given their companies’ prospects, they let cash (or gold, a sort of cash substitute) accumulate. As of the last portfolio disclosure, gold is about 3% and cash about 11% of the portfolio. The fund typically holds 50 or so names, which is neither terribly focused nor terribly dilute. He’s been avoiding big banks in favor of insurers. He’s overweighted technology, because many of those companies have remarkably solid financials right now. The manager anticipates slow growth and, it seems, mostly imprudent government intervention. As a result, he’s being cautious in his attempts to find high quality companies with earnings growth potential. All of this has produced a steady ride for the fund’s investors. The fund outperformed its peer group in every quarter of the 2007-09 meltdown and performed particularly well during the market drops in June and August 2010. And it tends to post competitive returns in rising markets. Its ability to handle poor weather places the fund near the top of its large-value cohort for the past one, three and five-year periods, as well as the eight-year period since inception.

Bottom Line

A fund for the times, or for the timid? It might be either. It’s clear that most retail investors have long patience (or courage) and are not willing to embrace high volatility investments. Mr. Scruggs ongoing skepticism about the market and economy, his attention to financially solid firms, and willingness to hold cash likely will serve such investors well.

Fund website

Queens Road Value Fund

Prospector Capital Appreciation (PCAFX), April 2011

By Editor

Objective

Seeks capital appreciation by investing globally in a combination of stocks and “equity-related securities,” though they have latitude to invest in a broad array of distressed debt. Their activities are limited to the U.S. “and other developed markets.” They look for firms with good long-term prospects for generating total return (appreciation plus dividends), good managers, good products and some evidence of a catalyst for unlocking additional value.

Adviser

Prospector Partners Asset Management, LLC . Prospector was founded in 1997 and manages about $2 billion in assets, including $70 million in its two mutual funds.

Managers

John Gillespie, Richard Howard and Kevin O’Brien. Mr. Howard, the lead manager, was the storied manager of the storied T. Rowe Price Capital Appreciation Fund (PRWCX, 1989-2001). Mr. Gillespie spent a decade at T. Rowe Price, including a stint as manager of Growth Stock (PRGFX, 1994-96) and New Media (1993-1997). Mr. O’Brien comanaged Neuberger Berman Genesis (NBGNX). All three have extensive experience at White Mountain Insurance, whose investment division has Buffett-like credentials.

Management’s Stake in the Fund

Each of the managers has over $100,000 invested in the fund and into their other charge, Prospector Opportunity, as well. The fund’s officers and board own 17% of the shares of PCAFX. Mr. Gillespie and his family own 20% and Mr. Howard owns almost 7%. They also own a majority of the advisor.

Opening date

9/27/2007

Minimum investment

$10,000 across the board.

Expense ratio

1.26% after waivers on assets of $28.3 million, plus a 2% redemption fee on shares held fewer than 60 days.

Comments

Most investors folks on two sorts of securities — stocks and bonds. The former provides an ownership stake in a firm, the latter provides the opportunity to lend money to the firm with the prospect of repayment with interest. There are, however, other options. One, called convertible securities, are a sort of hybrid. They have bond-like characteristics (fairly high payouts, fairly low volatility) but they are convertible under certain characteristics into shares of company stock. That conversion possibility then creates a set of equity-linked characteristics: because investors know that these things can become stock, their value risks when the value of the firm’s stock rises. As a result, you buy a fraction of the stock’s upside and a fraction of its downside with steady income to boot. The trick, of course, is making sure that the “fraction of upside” is greater than the “fraction of downside.” That is, if you can capture 90% of a stock’s potential gains with only half of its potential losses, you win. Successful convertibles investing is a tricky business, undertaken by durn few funds. The few that do it well have accumulated spectacular risk-adjusted records for their investors. These include Matthews Asian Growth & Income (MACSX), a singularly excellent play on Asian investing, T. Rowe Price Capital Appreciation (PRCWX), which consistently beats 98% of its peers over longer time frames, and, to a lesser extent, FPA Crescent (FPACX). You can now add Prospector Capital Appreciation to that list. Prospector’s prime charms are two: first, it has a sensible strategy for the use of convertibles. The fund starts its investment process by looking at the firm, then seeking convertibles which can offer a large fraction of the gains made by a firm’s stock with substantial downside protection. It buys common stock only if the firm is attractive but no convertible shares are to be had. Six of 10 largest buys in the first half of 2010 were convertibles. Because the market lately has favored lower-quality over higher-quality stocks, the fund has been able to add blue chip names, an occurrence which seems to leave him slightly dumb-struck: “we continue adding recognized high quality stocks to the portfolio . . . this seems almost surreal. We are used to buying mediocre companies that are getting better or good companies that few have heard of, not recognized quality.” At the moment (late 2010) about a quarter of the portfolio is in convertibles, about 13% in international stocks, a bit in bonds and cash, and the remainder in US stocks. The manager’s value orientation led him to include three gold miners in the top ten holdings but to avoid, almost entirely, tech names. The second attraction is the fund’s lead manager, Richard Howard. Mr. Howard guided T. Rowe Price Capital Apprecation is a spectacular performance over 12 years. He turned a $10,000 initial investment into $42,000, which dwarfed his peers’ performance (they averaged $32,000) and gave him one of the best records for any fund in Morningstar’s old “domestic hybrid” category. For much of that time, he kept pace with the hard-charging S&P500, lagging it in the bubble of the late 90s and making up much of the ground before his departure in August 2001. He posted only one small calendar-year losses in 12 years of management. He seems not to have lost his touch. The fund just passed its third anniversary and earned a five star rating from Morningstar, posting “high” returns for “average” risk. Moreover, he’s outperformed his old fund by about a third, lost noticeably less in 2008 and has done so with less volatility.

Bottom Line

Conservative equity investors should look seriously at funds, such as this, which seem to have mastered the use of convertible securities as a tool of risk management and enhanced returns. The investment minimum here is regrettably high and the expense ratio is understandably high. The primary appeal over Price Cap App is two-fold: Mr. Howard’s skills and the tiny asset base, which should give him the availability to establish meaningful positions in securities too small to profit the Price fund.

Fund website

Prospector Capital Appreciation homepage

Fact Sheet

Hussman Strategic International Equity (HSIEX), April 2011

By Editor

Hussman Strategic International Equity Fund was liquidated in June, 2023. Information in this profile is provided purely for archival purposes.

Objective

The fund seeks long term capital growth, but with special emphasis on defensive actions during unfavorable market conditions. The portfolio is a mix of individual securities, ETFs (up to 30% of the portfolio) and hedges. In the near term, the hedging strategy will focus on shorting particular markets; the fund can short individual ETFs but “the fund does not intend to use these hedging techniques during the coming year.” The portfolio balance is determined by the manager’s macro-level assessments of world markets. The fund may be fully hedged (that is, the amount long exactly matches the amount short), but it will not be net short.

Adviser

Hussman Econometrics Advisors of beautiful Ellicott City, Maryland. The advisor was founded in 1989 by John Hussman, who is the firm’s President and sole shareholder. Hussman also advises the Hussman Strategic Growth and Hussman Strategic Total Return funds but does not advise any private accounts. Together, those funds hold about $9 billion in assets.

Manager

John Hussman and William Hester. Hussman has a Ph.D. in economics from Stanford, a Masters degree in education and social policy and a B.A. in economics from Northwestern University. Prior to managing the Hussman Funds, he was a adjunct assistant professor of economics and international finance at the University of Michigan and its business school, an options mathematician at the Chicago Board of Trade, and publisher (since ’88) of the Hussman Econometrics newsletter. Mr. Hester has been Hussman’s Senior Research Analyst since 2003, and this will be his first stint at co-managing a fund.

Management’s Stake in the Fund

“Except for a tiny percentage in money market funds, all of Dr. Hussman’s liquid assets are invested in the Hussman Funds,” which translates to over a million in each of his two funds, plus sole ownership of the advisor. Likewise, “The compensation of every member of our Board of Trustees is generally invested directly into the Funds. All of these investments are regular and automatic.”

Opening date

December 31, 2009, sort of. The fund ran for nine months of road-testing, with only the manager’s own money in the fund. It opened to purchases by the public on September 1, 2010.

Minimum investment

$1,000 for regular, $500 for IRA/UGMA accounts and $100 for automatic investing plans.

Expense ratio

Capped at 2.0% through the end of 2012. The fund’s actual operating expenses are around 5.0%, measured against an in-house asset base of $7.5 million. The Strategic Growth Fund, of which this is an offshoot, has expenses around 1%. There’s a 1.5% redemption fee on shares held fewer than sixty days.

Comments

Dr. Hussman’s funds have drawn huge inflows in the past several years. Strategic Total Return (HSTRX) grew from under $200 million in June 2007 to $2.3 billion by June 2010. Strategic Growth (HSGFX) grew from $2.7 billion to $6.7 billion in the same period. The reason’s simple: over the past five years, they’ve made money. Total Return posted a healthy profit in 2008 (7%) and over the entire period of the market crash (an 8% rise from 10/07 – 03/09). In a crash where the Total Stock Market index dropped nearly 50%, Strategic Growth’s 5% decline became phenomenally attractive. And so the money poured in.

Presumably that track record will quickly draw attention, and assets, here.

Mr. Hussman’s success has been driven by his ability to make macro-level assessments of markets and economies, and then to position his funds with varying degrees of defensiveness based on those assessments. He has frequently been right, though that merely means he’s mostly been bearish.

Before investing in the fund, one might consider several reservations:

Mr. Hussman has relatively little experience, at least as measured by portfolio composition, in international investing. Non-U.S. stocks comprise only 5-6% of his other portfolios.
The other Hussman funds could, if Mr. H. found the case compelling, provide substantially more international exposure. At the very least, Strategic Growth’s portfolio contains no explicit limitation on the extent of international exposure in the portfolio.
Mr. Hussman himself is skeptical of the value of international investing. His argument in January 2009 was striking:

. . . the correlation of returns across various markets increases during recessionary periods. As I noted in November 2007 . . . global diversification is least useful when it’s needed most. And this data shows that not only does the correlation between US and international markets rise during recessions, but that global returns trail US returns during these periods. Lower returns with higher correlation. This data implies that the benefits of international investing and diversification come predominantly during periods of global expansion, and not during bear markets induced by recessions.
Assets under management are ballooning. $2 billion in new – read: “hot” – money in a single year is a lot for a small operation to handle (c.f. Van Wagoner funds), and there’s no immediate sign of a decrease. Encouraging still-more inflows comes at a cost.

Mr. Hussman has done good work. I’ve written, favorably and repeatedly, about his Strategic Total Return fund. I’ve invested in that fund. And I’ve been impressed with his concern about shareholder-friendly policies, including his own financial commitment to the funds. That said, Mr. Hussman has not – so far as I can find – made any public statements explaining the launch of, or reasons behind this new fund.

Bottom Line

I don’t know why you’d want to invest in this fund. The expenses are high, the existing funds can provide international exposure and the manager himself seems skeptical of the rationale for international investing. That’s not an argument that you should run away. It’s a simple observation that the particular advantages of this fund are still undefined.

Fund website

The Hussman Funds. Hussman’s 2009 critique of international investing is also available on his website.

Evermore Global Value “A” (EVGBX)

By Editor

This profile has been updated. Find the new profile here.

Objective

Evermore Global Value seeks capital appreciation by investing, primarily, in the stock of companies that are both undervalued and undergoing change and, secondarily, in securities of “distressed” companies or those involved in merger/arbitrage situations. It may invest in any country, any market capitalization, and any industry. It generally invests in mid- and large-capitalization companies. 40-100% of the portfolio will be non-US, with the option buying holding sovereign debt and participations in foreign government debt. It can short.

Adviser

Evermore Global Advisor, LLC. Evermore was founded in 2009 by two alumni of the Mutual Series funds, David Marcus and Eric LeGoff. They have two investment strategies, Global Value and European Value, which are packaged for individual and institutional investors through their two mutual funds, separately managed accounts, at least one hedge fund, and offshore funds for non-U.S. residents.

Manager(s)

David Marcus and Jae Chung. Mr. Marcus is co-founder, chief executive officer, and chief investment officer of Evermore Global and lead portfolio manager of the Funds. He’s had a varied and colorful career. He was a research analyst at Heine, the advisor to the original Mutual Series funds. He joined Franklin when the Mutual Series was acquired, and managed or co-managed Franklin Mutual European, Franklin Mutual Shares, and Franklin Mutual Discovery. He left Franklin in 2000 and managed a couple hedge funds and the family office for the Stenbecks, one of Sweden’s wealthiest families. Mr. Chung served as a research analyst (and, briefly, fund co-manager) during Mr. Marcus’s years at Franklin, then went on to work as a senior research analyst at Davis Advisors, advisers of a very fine group of value-oriented funds including Davis New York Venture Fund, as well as the Davis Global, International, and Opportunity Funds. He also ran several Asia-domiciled funds. Mr. Chung is a graduate of Yale University. They’re supported by one research analyst.

Management’s Stake in the Fund

As of December 11, 2009, Mr. Marcus had less than $50,000 in the fund and Mr. Chung had nothing. Given that the fund hadn’t yet been offered to the public, that’s not terribly surprising.

Opening date

December 30, 2009.

Minimum investment

$5000 for regular accounts $2000 for IRAs

Expense ratio

1.6% on assets of $22 million. The “A” shares carry at 5.0% front load but are available no-load, NTF from Schwab and Scottrade.

Comments

There are a few advisors that get active management consistently right. But they are few indeed. Getting it right requires not only skill and insight (knowing what to buy or sell), but also a fair amount of courage (being willing to act despite the risks). Large firms may have the insight (one imagines that Fidelity probably generates a fair number of intriguing leads) but they lack the courage. Their business model relies on steady inflows from retirement accounts – directly or through pension managers — and those folks are not looking for thrills. In addition to the ubiquitous market risk, such managers face what Jeremy Grantham calls “career risk.” One disastrous, or wildly premature, call leads to a billion in outflows and a quick trip to the unemployment line.

That leaves much of the hope for active management in the realm of smaller funds. Even here, some lack the fortitude. Many lack the skill.

There are a handful of investment families, though, that have made a long tradition of making bold moves and getting them right. The Acorn Fund (ACRNX) under Ralph Wanger was one. The Third Avenue Funds under Marty Whitman are another. But the poster child for aggressive value investing are the folks trained by the legendary Max Heine or Heine’s more legendary protégé Michael Price, jointly designated by Fortune (12/20/99) as two of the “Investors of the Century.” (Mr. Price alone carried, and deeply resented, Fortune’s designation as “The Meanest SOB on Wall Street.”) Mr. Price’s protégés include David Winters, manager of the phenomenally successful Wintergreen Fund (WGRNX) and many of the folks who went on to apply his discipline in running the Mutual Series funds.

Mr. Marcus, lead manager for Evermore Global Value, was another of Price’s students. He left the Mutual Series funds shortly after Mr. Price’s own departure, but in the wake of their firm’s acquisition by Franklin. He spent the next decade in Europe, working with one of Sweden’s wealthiest families and running hedge funds. At some point, he reputedly became nostalgic for the camaraderie he experienced at Mutual Series pre-Franklin, and resolved to work to recreate it.

Evermore’s investment discipline parallels Wintergreen’s and Mutual Series’. They look for deeply undervalued stocks, but they don’t take the “buy dirt cheap and wait to see what happens” approach. Many value managers are essentially passive; they buy, expecting or hoping for a turnaround, and sell quickly if “bad” becomes “worse.” The Price protégés look further afield – into distressed debt, “special situations,” bankruptcies, corporate spin-offs – and actively “assist” recalcitrant corporate managers unlock value. That willingness to pressure poorly run companies earned Mr. Price the “SOB” sobriquet. Mr. Winters puts a far more affable spin on the same strategy; he argues that even ineffective managers want to be effective but sometimes lack the will or insight. He helps provide both. Mr. Marcus seems intent on using the same strategy: “We often buy substantial stakes and, from time to time if necessary, use our influence to foster value creation.”

He imagines a compact (20-40 name) portfolio with low turnover (20% or so), roughly akin to Wintergreen’s. The fund’s asset allocation roughly matches that for Wintergreen and Mutual Global Discovery. From inception through the end of August 2010, the fund has performed in-line with its World Stock peers though it substantially outperformed them over the volatile summer months.

Bottom Line

The Heine/Price/Mutual Discovery lineage is compelling. The fact that they have Mr. Price as an advisor helps more. The Mutual Series managers, past and present, folks tend to embody the best of active management: bold choices, high conviction portfolios, and a willingness to understand and exploit parts of the market that few others approach. Evermore, for those who access the no-load shares, is priced more attractively than either Discovery or Wintergreen. For folks still brave enough to put new money in equities, this is a very attractive option.

Fund website

Evermore Global Advisors

Artisan Value (ARTLX), April 2011

By Editor

Objective

Multi-cap value equity. The managers have three broad criteria for equity selection: attractive valuation, sound financial condition and attractive business economics. The managers may invest in turnarounds, companies in transition, and companies that have experienced (short-term) earnings shortfalls. The minimum market cap $1.5 billion. While the primary focus is on U.S. companies, up to 25% of the portfolio can be invested in foreign firms.

Adviser

Artisan Partners, LP. Artisan manages $45 billion in eight mutual funds, including Opportunistic Value and separate accounts. Five of its seven existing funds are closed to new investors. Artisans’ managers are all co-owners of the advisory firm.

Managers

Daniel L. Kane, Thomas A. Reynolds IV, and Craig Inman.

Opening date

March 27, 2006

Minimum investment

$1000 for both regular and IRA accounts. The minimum is waived for investors establishing an automatic monthly investment of at least $50.

Expense ratio

1.06% on assets of $260 million, as of June 2023.

David’s comments

There are two concerns before investing in Opportunistic Value. First, is there any reason to believe that the managers have the expertise to invest large caps? That’s a good question and one for which there’s no immediate answer. And, second, with two closed funds and separate account assets already, are they overstretched? The fund assets sit around $5 billion, each has 50% turnover. That’s a lot of money, though certainly not beyond the range of what many multi-cap managers at smaller firms (Ron Muhlenkamp and four analysts handle over $3 billion, Wally Weitz handle $5 billion, the folks at Longleaf handle $9 billion). For both questions, the answer might be “a stretch but not necessarily overstretched.”

Weighed against that

(1) Artisan gets it right. Artisan has a great track record for new fund launches. The company launches a new fund only when two conditions are satisfied: it believes it can add significant value and it has a manager who has the potential to be a “category killer.” Almost all of Artisan’s new funds have had very strong first-year performance (their most recent launches – International Small Cap and International Value – finished in the top 1% and 24%, respectively) and above average long-term performance. All of the managers are risk-conscious, so even the “growth” managers tend toward the “value” end of the spectrum. Beyond that, Artisan tends to charge below average expenses, they don’t pay for marketing, and close their funds early.

(2) Satterwhite gets it right. Before joining Artisan in 1997, the lead manager – Scott Satterwhite – ran a very successful small-value portfolio called Biltmore (later, Wachovia) Special Values. His main charge at Artisan, Small Cap Value (ARTVX), tends to have modest volatility and above average returns. It tends to outperform its peers in rocky markets and trail only slightly in boisterous ones. His newer charge, Midcap Value (ARTQX) has had a phenomenal four-year history despite cooling over the past twelve months.

(3) A tested discipline should help them keep it right. Opportunistic Value will use the same stock selection criteria that have served the managers well for the past decade in their other two funds. As a result, there should be relatively few surprises in store.

Bottom line

For investors interested in a place on the “all cap” bandwagon, this is about as promising as a new offering can get.

Company link

http://www.artisanfunds.com/mutual_funds/artisan_funds/value.cfm

April 1, 2006
© Mutual Fund Observer, 2011. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact [email protected].

Ariel Focus (ARFFX), May 2006 (updated June 2023)

By Editor

. . . from the archives at FundAlarm

These profiles have not been updated. The information is only accurate as of the original date of publication.

Fund name

Ariel Focus (ARFFX)

Objective

Non-diversified, mid- to large-cap domestic value fund. Generally speaking, the fund will invest in 20 stocks with a market cap in excess of $10 billion each; half of those stocks will be drawn from the portfolios of Ariel Fund or Ariel Appreciation. Ariel funds favor socially-responsible company management; the firm avoids tobacco, nuclear power and handgun companies. Ariel argues that such corporations face substantial, and substantially unpredictable, legal liabilities.

Adviser

Ariel Capital Management, LLC. Ariel manages $19 billion in assets, with $8 billion in its two veteran mutual funds. Ariel provides a great model of a socially-responsible management team: the firm helps run a Chicago public charter school, is deeply involved in the community, has an intriguing and diverse Board of Trustees, is employee-owned, and its managers are heavily invested in their own funds. One gets a clear sense that these folks aren’t going to play fast and loose either with your money or with the rules.

Manager(s)

Investment team led by Charlie Bobrinskoy (Ariel’s Vice Chairman and Director of Trading, previously with Salomon/Citigroup), and Tim Fidler (Ariel’s Director of Research).

Opening date

It varies. The firm ran in-house money using this strategy from March 1 through June 29 2005. The fund was offered to Illinois residents and Ariel employees beginning June 30, 2005. It became available nationally on February 1, 2006.

Minimum investment

$1000 for regular accounts, $250 for an IRA. The minimum is waived for investors establishing an automatic monthly investment of at least $50.

Expense ratio

1.00% (after expense waiver) with assets of $41 million. Ariel estimates that first-year expenses would be 1.13% without the waiver. The waiver is active through September 2024.

Comments

This is the latest entrant into the “I want to be like Warren Buffett” sweepstakes. I had the opportunity to speak with Tim Fidler, one of the co-managers, and he’s pretty clear that Mr. Buffett provides the model for Ariel investing, in general, and Ariel Focus, in particular. The managers are looking for companies with a sustainable economic advantage — Mr. Buffett calls them companies with “moats.” Ariel looks for “high barriers to entry, sustainable competitive advantages, predictable fundamentals that allow for double digit earnings growth, quality management teams, [and] solid financials.” In addition, Ariel espouses a concentrated, low-turnover, low-price style. Mr. Fidler had been reading Artisan Opportunistic’s materials and was struck by many similarities in the funds’ positioning; he characterized his fund as likely “more contrarian,” which might suggest more patience and longer holding times. (Artisan Opportunistic was discussed in last month’s FundAlarm Annex.)

Ironically, for all of the Buffett influence, there’s no overlap between Buffett’s (i.e., Berkshire Hathaway’s) 32-stock portfolio and the 20 stocks in Ariel Focus.

What might drive your investment consideration with Ariel Focus? Two factors:

It’s a concentrated, non-diversified portfolio. That should, in theory, drive risk and return higher. In practice, the evidence for either proposition is mixed. There are four firms that each offer two funds with the same managers and the same value philosophy, one diversified and one focused. They are Oakmark/Select, Yacktman/Focused, ICAP Equity/Select, and Clipper/Focus (yes, I know, there’s been a recent manager change, but most of the three-year record was generated by the same management team). Generally speaking, the focused fund has exhibited higher volatility, but only by a little (the standard deviations for Oakmark and Oakmark Select are typical: 8.2% versus 8.9%). The question is whether you’re consistently paid for the greater risk,and the answer seems to be “no.” There’s only one of the four pairs for which the Sharpe ratio (a measure of risk-adjusted returns) is higher for the focused fund than for the diversified one. The differences are generally small but have, lately, favored diversification.
The fund is building off a solid foundation. In general, 50% of the Focus portfolio will be drawn from names already in Ariel or Ariel Appreciation. Those are both solid, low-turnover performers with long track records. Focus will depend on the same 15 person management team as Ariel; most of those folks are long-tenured and schooled in Ariel’s discipline. Their task is to apply a fairly straightforward discipline to a limited universe of new, larger stocks, about 90 companies, in all. If they’re patient, it should work out. And they do have a reputation for patience (their corporate motto, after all, is “slow and steady wins the race”).

Bottom line

If you believe in buying and holding the stocks of good, established companies, this is an entirely worthwhile offering. The advisor’s high standards of corporate behavior are pure gravy.

Company link

Ariel Focus (Ariel Web site)

May 1, 2006

Update

(posted September 1, 2008)

Assets: $40 million

Expenses: 1.25%

YTD return: (4.8%)(as of 8/29/08)

Ariel Focus has been slowly gaining traction. Its first year (2006) was a disaster as the fund trailed 97% of its peers and 2007 was only marginally better with the fund trailing 79% of its peers. 2008 has been a different story, with the fund now leading 97% of its peers. That performance has helped the fund move back to the middle of the pack, with a three-year annual return of 2.3%.

The managers attribute most of their recent success, which began in the second half of 2007, to the hard-hit financial sector. Financials helped ARFFX because (1) they didn’t own many of them and (2) the companies they did hold – Berkshire-Hathaway, JPMorgan, Aflac – weren’t involved in the most-toxic part of the mess. They were also helped by the managers’ skepticism about the durability of the commodity and oil bubble, which has helped its consumer holdings in the past several months.

Unfortunately the fund’s improving fortunes haven’t been enough to forestall layoffs at Ariel. The company is celebrating its 25th anniversary this year but the party’s a bit bittersweet since it’s accompanied by the loss of a contract to manage part of Massachusetts’ retirement fund and the laying off of 18 staff members.

Successor to “The Worst Best Fund Ever”

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Hey! Where’d my manager go?

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Four funds worth your attention

Briefly Noted:

Thanks!

Objective

Adviser

Manager

Management’s Stake in the Fund

Opening date

Minimum investment

Expense ratio

Comments

Bottom Line

Fund website

*The fund has terminated in December 2022*

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Adviser

Manager

Management’s Stake in the Fund

Opening date

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Expense ratio

Comments

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Fund website

Objective

Adviser

Manager(s)

Management’s Stake in the Fund

Opening date

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Expense ratio

Comments

Bottom Line

Fund website

Objective and strategy

Adviser

Manager

Management’s Stake in the Fund

Opening date

Minimum investment

Expense ratio

Update

Comments

Bottom Line

Fund website

Objective

Adviser

Manager

Management’s Stake in the Fund

Opening date

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Expense ratio

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Fund website

Objective

Adviser

Manager

Management’s Stake in the Fund

Opening date

Minimum investment

Expense ratio

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Fund website

Objective

Adviser

Manager

Management’s Stake in the Fund

Opening date

Minimum investment

Expense ratio

Comments

Bottom Line

The fund has terminated in December 2022